Early renewal of property cover was a winning gamble for Harrah's

<b>Even though Harrah's suffered $1.3 billion in losses<br>from hurricanes in 2005, the company was able to<br>obtain "huge capacity" by renewing its policies before<br&/ <b>Even though Harrah's suffered $1.3 billion in l

After Harrah's Entertainment Inc. suffered $1.3 billion in hurricane losses during 2005, its vp of risk management, Lance J. Ewing, took a gamble by renewing his property program quickly.

Renewing in December 2005, rather than just extending Harrah's existing coverage for six months, spared his company from renewing during the worst part of the hard property catastrophe insurance market that followed the devastating 2005 hurricane season.

It was a decision made while Mr. Ewing combined two insurance programs after Harrah's June 2005 acquisition of Caesars Entertainment Inc., where he had been the risk manager. The decision allowed him to obtain "huge capacity" before the market constricted after insurers and reinsurers counted their losses from hurricanes Katrina and Rita, which battered Harrah's hotels and casinos on the Gulf Coast, Mr. Ewing said.

And Mr. Ewing was able to get the coverage for 18 months rather than the normal 12-month policy period.

"We thought that would buy us more time to let things shake out and get us through another wind season," said John J. Bullock, Mr. Ewing's property broker and president of Willis of Mississippi Inc., a Pascagoula, Miss.-based unit of Willis Group Holdings Ltd.

"And as it turned out, that was the right decision," Mr. Bullock said. "In being early, we were able to garner the capacity we needed. Secondly, we got the broadest terms and conditions available post-Katrina, Wilma and Rita."

Before Mr. Ewing's renewal decision, several property insurance experts recommended extending Harrah's existing policies rather than renewing quickly, Mr. Bullock said.

They suggested that new capacity might enter the market and ease the capacity crunch that followed the hurricanes, Mr. Bullock said. By extending Harrah's policies for six months, Harrah's could then tap that possible new capacity, they said.

"We talked, 'Should we wait or move forward fast?"' Mr. Bullock said. "We agreed we should move ahead and be the first large account in the post-Katrina market and try and garner as much capacity as we could to replace the program that we had."

Messrs. Ewing and Bullock believed that by acting early, before insurers began to feel the entire pain of post Katrina reinsurance renewals, Harrah's would gain an advantage.

"You had to think which (alternative) was better, and how much capacity was available," Mr. Ewing said. "And as it turned out, we made the right choice, because the amount of capacity shrank dramatically in the next six months."

At January renewals in 2006, the property market was still evaluating the impact of the storms, but by midyear 2006, catastrophe risks were seeing steep price hikes and sharply reduced capacity from underwriters.

Harrah's normally renewed it property policies in March, Mr. Ewing said, and Caesars normally renewed in June. But in anticipation of the merger's closing, Mr. Ewing had extended Caesars' policies so that they would renew on Dec. 1, 2005.

After he arrived at Harrah's, Mr. Ewing whittled the two companies' insurers from 70 to 42, and he knew he would move for a Dec. 1 renewal date for the new combined program.

"The question was do we just go back to the carriers and say, 'Look you are not taking that big of a risk on catastrophic loss because hurricane season is over...just run (our insurance coverage) until June,"' Mr. Ewing said. "Then there might be more capacity in the marketplace. Nobody knew what the insurance carriers or the reinsurers were going to do. So we debated, (do we) go back to the carriers and say 'Give us an extension until June 1 and we will come back at this,' or let's grab (the available capacity) now."

Grabbing the available capacity paid off.

But Harrah's purchasing clout and Mr. Ewing's relations with several insurers also played a role in convincing them to provide Harrah's with the limits it obtained under the 18-month property policy, Mr. Bullock said.

Mr. Bullock called obtaining the coverage a benefit from "rolling our sleeves up early, putting our noses to the grindstone, and begging and borrowing any amount of capacity we could get."