Here’s what owners have been doing to manage premiums and what they think rates will look like in 2024.
NATIONAL
REPORT – Amidst the current hurricane season and other recent
weather-related tragedies in Hawaii and California, hotel owners say they were
already battling a seismic surge in property insurance rates affecting their
bottom line and the amount of insurance they can get. Experts say this
trend probably isn’t changing anytime soon.
This year, property insurance rates have been rising rapidly
because of a perfect storm of factors, ranging from record inflation to a string
of weather-related catastrophic events in 2022 to replacement costs going
through the roof for both labor and materials.
Jeff Donnelly, CFO of Maryland-based DiamondRock Hospitality, a REIT that
owns 36 hotels and resorts throughout the U.S., said premiums went up 50%
year-over-year. But he added that DiamondRock was in a better
position than others.
Jeff Donnelly, DiamondRock Hospitality
“When we were renewing in early April, the feedback from the
insurers, as well as the brokers, was that, effectively, capacity was dwindling
every week… as more and more people were claiming insurance,” Donnelly said.
In 2019, DiamondRock announced that it had settled claims
for two properties for $248.19 million. Most of that claim was for its
Frenchmen’s Reef Marriott Resort & Space property in St. Thomas, which was
hit by back-to-back hurricanes (Irma and Maria) in 2017.
Maryland-based Pebblebrook Hotel Trust, a REIT that owns 47
hotels and resorts in the U.S., is still repairing its LaPlaya Beach Resort
& Club in Naples from damage suffered from Hurricane Ian last
September.
Let me give you a term that was used a lot during our renewal: double-double-half. That means double the cost, double the deductible, and half the coverage. That was a very general but pretty good baseline for a lot of people of what they experienced. If you did better than that, that’s great.
Raymond Martz
Pebblebrook CFO Raymond Martz said the damage to LaPlaya, already over $75
million, means the hotel won't fully open until later this year. He said the company's property insurance costs went up 55% to 60%
year-over-year when it renewed in June. Still, Martz said it could
have been worse.
“There are a number of owners that we know that had
increases of 100% or more,” Martz said. “Let me give you a term that was used a
lot during our renewal: double-double-half. That means double the cost, double
the deductible, and half the coverage. That was a very general but pretty good
baseline for a lot of people of what they experienced. If you did better than
that, that’s great.”
For companies like DiamondRock and Pebblebrook, getting
property insurance is incredibly complicated, as they are getting coverage for
the entire portfolio of properties, not just one at a time. It’s an intricate
setup, described as a Tetris board or quilt, where dozens of insurers will each
cover a piece of the company’s insurance loss puzzle.
The amount of insurance coverage that companies can get is decided by a group of insurers. Both Donnelly and Martz said building relationships with the same
insurers has helped them greatly.
“The longer your relationship goes on, I think they gain
greater comfort with you, and they perceive you to be of lower risk,” Donnelly
said. “So there is a trade-off that if you’re the new guy on the street, and
you’re an unknown quantity, there can be a significant price difference,
particularly this year."
They said the process is a lot better for companies with larger portfolios.
Raymond Martz, Pebblebrook Hotel Trust.
“The vast majority of our carriers stuck with us this year.
It’s why relationships matter… Those owners or operators that treat insurance
carriers as commodities got burned this year,” Martz said. “The smaller and
medium-sized owners and operators, those are ones that got hurt more.”
And with the amount of insurance limited, that means
companies are on the hook for damages above that.
“So even though your costs went up 100%, you’re, in reality,
taking on a lot more potential risk,” Martz said. “Because if there’s a storm,
you’re not going to have coverage because you’re essentially self-insured.”
Tough choices for owners
Sean Murphy, senior director/vice president of Hospitality
at Arthur J. Gallagher, said his clients have been seeing significant property
insurance increases this year, with 20% to 30% increases at a minimum and some well
over 100%. He said the property insurance rate market was starting to rise in
the second half of last year. Then, events like Hurricane Ian last September
caused the rate increases to accelerate even more.
He said that creates some untenable choices for smaller
companies.
“There’s just not enough money to spend to buy the
insurance,” Murphy said. “So while it may be available, it’s available at a
cost that’s not sustainable for the business.”
Companies trying to figure out how to mitigate this rising
cost often have to make challenging decisions about how much insurance is
enough.
“There’s been a lot of discussions that have been made in
terms of overall limit purchase,” Murphy said. “Where it was nice to buy in
past years, for example, $250 million worth of insurance... This year, the
discussion is, ‘Well, maybe I can’t get $250 million, and the price to get to
$150 million is really challenging. Do I need $150 million? How much am I
willing to take on to my balance sheet?”
Martz said changing the amount of property insurance
coverage also requires conversations with bank lenders.
“If there’s a problem, you pick up the phone and call your
banker and say, ‘Hey, I have a problem.’ It’s what we did during the pandemic,
and bankers work with us and our covenants… because it’s a relationship, and
they have the leeway to do that.”
Sean Murphy, Arthur J. Gallagher.
But Martz said it’s a completely different situation if
hotel owners are in Commercial Mortgage-Backed Securities (CMBS), where debt is
packaged in a pool of loans and finding a central point of contact is
difficult. Generally, the answer to whether companies can make changes is "no." And
this creates further issues with potential transactions.
“If you have some CMBS debt currently, you have a headache to
deal with… It just creates another headwind,” Martz said. “We look at selling
properties, we take all these factors into consideration, because if it’s a
one-off buyer, we know it’s going to be harder for them to get financing, to
get insurance, all those factors that may cause a risk to the transaction. So, that’s why we scrutinize the potential buyers for our assets because it matters
now, especially when you get the challenging period we’re in right now.”
What owners are doing
While these increases represent a fraction of overall costs
(Donnelly said property tax increases represent about 1% of DiamondRock’s
revenue), they are still creating sizable challenges for hotel owners, which
require them to find ways to mitigate these increases with savings
elsewhere.
So how are hotel owners curbing costs and making changes to
their properties that insurers like, potentially saving on future property tax
increases?
Donnelly said owners can work on “hardening the asset,”
which means investing in their properties that make them more impervious to
damage. That includes strapping roofs or ensuring your hotel has backup power.
Other types of insurance, like parametric, insure a policyholder from a
specific kind of event by paying a set amount based on the magnitude.
“There’s other strategies that work in an expensive market,”
Donnelly said. “But if [property insurance rates] get cheaper again, it’s
probably not as financially viable to do it.”
Incidents that affect property insurance rates aren’t
isolated to places in coastal areas like Florida and California. Extreme
weather events happen all over the country, whether it be wildfires in Hawaii,
record cold in Boston or extended freezing temperatures in Texas. There is also now a need at all properties for terrorism insurance.
I think it gives us some pause to say, ‘If we are going to add an extra property in that market, it’s got to be truly exceptional.’ And it begs the question of whether you would sell another one to buy another one… But I wouldn’t say it’s a hard no. I think there’s a bit of a higher standard that it has to cross over.
Jeff Donnelly
Hawaii, for example, has historically been a low-risk and
profitable market for insurance carriers, the New York Times reported. Still,
recent wildfires could change that as the damages start to be assessed.
Last week, Moody’s Risk Management Solutions said its early
estimates of the total cost of payouts from the Hawaii fires was between $4-6
billion.
In addition, general liability insurance is also on the rise
in this inflationary environment because, as Murphy said, “what a slip-and-fall
cost five years ago is not nearly what it costs today.”
Future hard to forecast
The future of property insurance rates is hard to forecast,
but there’s little room for optimism in the short term. Many said this period
is reminiscent of the period after Hurricane Katrina in 2005 when insurance
rates spiked and remained higher for years.
“There’s a lot of factors that go into it. And certainly,
the next couple of months will tell us once we get through the peak of hurricane
season… but I would say that we don’t expect rates to subside,” Murphy said.
“You may see that they stabilize next year, but what stabilization feels like
may mean rates will still increase as long as we’re in this inflationary
environment… I think 2024 could be a challenging year.”
Property insurance in riskier markets also can potentially
have an impact on the transactions hotel owners make in the future.
“I wouldn’t do a red line and say we stay away from them,
but I’m mindful of our exposure in those markets,” Donnelly said. “I think it
gives us some pause to say, ‘If we are going to add an extra property in that
market, it’s got to be truly exceptional.’ And it begs the question of whether
you would sell another one to buy another one… But I wouldn’t say it’s a hard
no. I think there’s a bit of a higher standard that it has to cross over.”