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Best of Howard Stutz

Gaming Guru

Howard Stutz

Casinos Looking for Answers

6 September 2005

MISSISSIPPI -- While the Gulf Coast casinos either destroyed or heavily damaged by Hurricane Katrina were all covered by some form of business interruption and property damage insurance, it is unclear if the individual policies will keep their corporate owners from having to pay out of pocket to rebuild their multimillion-dollar gambling halls.

The 12 casinos in the Mississippi communities of Biloxi and Gulfport and the four casinos in the New Orleans area were either devastated beyond repair or suffered varying degrees of structural and interior damage from the hurricane's 145-mph winds and 30-foot storm surge.

Insurance adjusters so far have been unable to assess the viability of the individual casinos. But casino company officials said Thursday they are hopeful their insurance policies will help mitigate any costs.

The question, however, is how long it will take to rebuild the communities and bring the casinos back up to speed.

A typical business interruption policy, normally part of a business's overall commercial insurance package, kicks in after five days and has a 12-month cap.

"Generally, they are not open-ended," said Nicole Mahrt, the western region public affairs director for the American Insurance Association in Sacramento, Calif. "Some businesses will negotiate policies that are longer in length. It will depend on the contract."

Business interruption insurance covers a company's lost net income, temporary relocation expenses and on-going payroll expenses. The damaged casinos also, most likely, had property damage insurance.

"Business interruption insurance is not a blank check and it doesn't pay for everything," Mahrt said. "The insurance is based on what the company has lost."

Gaming analysts have been unable to determine if casino companies' insurance policies will cover their rebuilding costs.

"They haven't disclosed their long-term impact, frankly, because they don't know it yet," said Brian Gordon of Las Vegas-based Applied Analysis, a Las Vegas-based financial consulting firm. "It's an unknown timeline for redevelopment right now."

Harrah's Entertainment, which has three closed casinos in the affected markets, said the company estimates its uninsured operating loss from the closure will be approximately 0.5 percent of its annual earnings before interest, taxes, depreciation and amortization, which was $1.2 billion last year before its purchase of Caesars Entertainment.

Pinnacle Entertainment, which has shuttered casinos in New Orleans and Biloxi, has not divulged its insurance coverage.

In a note to investors this week, J.P. Morgan gaming analyst Harry Curtis said MGM Mirage has a $15 million combined deductible policy covering both property and business interruption at the company's Beau Rivage in Biloxi. But he believes the total expenditures to repair the damaged property will be much higher.

Penn National Gaming, which has two devastated and closed Mississippi properties, Casino Magic in Bay St. Louis and Boomtown Biloxi, said in a statement that the company carries business interruption and property damage insurance for both casinos with an overall limit of $400 million.

The business interruption insurance component of this policy limit for both affected properties is approximately $58 million and is subject to a five-day deductible. The deductible for property damage is $6 million at the Casino Magic and $3.5 million at Boomtown.

"An uncertainty has been how, and to what extent, casino operators will recognize or receive insurance proceeds," Curtis said. "According to one of our industry financial contacts who has experienced business interruption, total closure of a building is a fairly simple insurance claim. His experience was that insurance companies were good at funding business interruption and damage claims, and reimbursement typically occurs until business levels normalize."

Curtis said the major question is how long it will take for the casinos to recover. If it's longer than a year, when most business interruption insurance policies expire, will the insurers allow more time?

Curtis said that some insurance companies have funded marketing expenses to help rejuvenate the demand for a business.

Deutsche Bank gaming analyst Marc Falcone said he thought the companies' insurance packages would be adequate, "which in some cases could exceed the current market value of the properties.

For the most part Thursday, gaming companies were more focused on helping employees in affected markets.

MGM Mirage spokesman Alan Feldman said the company is still working to ensure that its 2,800 Beau Rivage employees receive their normal paychecks by Monday. The company established a communications system where employees can contact the company and make arrangements for payment.

"That's been our sole focus these past few days, to make sure our employees get their paychecks," Feldman said. "After that, we'll start discussing the next steps."

Harrah's, which has set up a fund to ensure employees at its three affected casinos are paid through the next 90 days, created relief centers at the Grand Casino in Tunica, Miss., and the company's Harrah's property in Lake Charles, La. In Tunica, the company is working with the American Red Cross and is providing housing in its convention center for 400 displaced residents, mostly non-employees.

Penn National, which has 2,000 affected employees, is setting up a system to provide payroll and benefits.

The American Gaming Association said Thursday it had set up the Gaming Industry Katrina Relief Fund to help affected gaming employees in Mississippi and Louisiana. The association will ask members to donate during the upcoming Global Gaming Expo in Las Vegas.