Hurricane Insurance and Related Accounting Matters
The Company maintains an aggregate of $400 million of property insurance, including business interruption coverage. This insurance is comprised of multiple layers of coverage underwritten by 11 separate carriers or syndicates, all of which are currently rated A- or better by a major rating agency. The insurance provides $400 million of coverage per occurrence for a “Weather Catastrophe Occurrence” and at least $100 million on an annual basis for flood coverage. As previously disclosed, the Company was preliminarily advised by one of its carriers (Westport Insurance Corporation) that it believes that Hurricane Katrina was a flood occurrence. The Company intends to vigorously oppose any effort by any of its insurance carriers to limit their obligations under the policies by improperly characterizing the losses sustained by the Company. Westport has since paid the Company the entire $25 million of coverage under the policy underwritten by that carrier and agreed that such payment does not diminish the Company’s flood coverage under that carrier’s policy. The Company has reserved all rights to sue that or any other carrier for “bad faith” or any other reason in asserting its full rights under law and under its insurance policies.
At this time, the Company intends to file both a property damage and business interruption insurance claim related to its Casino Magic Biloxi property. In accordance with GAAP, the Company wrote down by $57.6 million the book value of assets that were impaired by the storm, and recorded a corresponding insurance receivable. Such amount is based on the book value of property as built or acquired many years ago and depreciated since its construction or acquisition. This has no relevance to the actual insurance claims, which are based on the cost in future periods of building a new property of like kind and quality to the property that was destroyed. Management expects its ultimate insurance claim and recovery will be significantly larger than the insurance receivable shown on the Company’s balance sheet. The book receivable also includes an expected claim for expenses incurred in Biloxi during the storm-affected period, but not for the anticipated lost profits at that property. The Company has business interruption insurance, but accounting principles do not permit recognition of the lost profits until the ultimate resolution of such claims with the insurance carriers.
The Company is continuing to evaluate the full effects of both hurricanes and the financial impact on its Boomtown New Orleans and L’Auberge du Lac properties in relation to the relevant insurance deductibles. It is not yet clear whether the Company’s losses in each case exceed the insurance deductibles. Consequently, the financial results for each location do not reflect any anticipated insurance recovery of any type for the three and nine months ended Sept. 30, 2005. The results at each of these properties were, however, depressed by the repair and maintenance costs related to the storms, payroll costs during their closure periods, and other related costs, totaling approximately $2.2 million in the quarter, exclusive of lost profits. To the extent such losses exceed the insurance deductible, the Company intends to pursue such losses, as well as claims for lost profits and property damage, from its carriers.