Irish luxury hotel groups turn to insurance to mitigate acquisition risks

Out-Law Analysis | 18 Dec 2019 | 10:57 am | 2 min. read

While big ticket luxury hotel transactions show no signs of slowing down in Ireland, acquirers of these properties are increasingly turning to warranty and indemnity (W&I) insurance to guard against some of the potential risks.

Irish hotel room occupancy rates remain in excess of 75% and spas in luxury hotels continue to perform well - even if, according to the 2019 Crowe Irish Hotel Industry Survey, Ireland's seven-year period of double digit profit growth has recently come to an end. Profit levels and average room rates have continued to increase across all Irish regions although the rate of increase has slowed, partly due to increased costs and a drop in large music events in Dublin in 2019 when compared to the previous year.

Pinsent Masons has advised on a number of hotel acquisitions including Deka Immobilien and NH Hotel Group's recent takeover of Dublin's five-star Marker Hotel, showing the market's continuing appetite for significant transactions of this type. John Heaver of Savills, who has acted on a number of luxury hotel deals in the UK and Ireland, agrees: "Demand for the sector from domestic and international investors is robust, with an under-supply of stock, an outlook for growth and opportunity to diversify portfolios".

Dorian Rees

Associate

W&I insurance allows sellers to achieve a clean exit while offering buyers A-rated cover for transactional risks.

However, a luxury hotel is more than just bricks and mortar, and acquisition usually comes with a large underlying business ecosystem of employees, customer and supplier contracts, finance contracts, IT, insurance contracts, health and safety systems and banking facilities. Virtually all of these areas are critical to the success of the business. W&I insurance, the use of which is growing across the UK and Ireland, allows sellers to achieve a clean exit while offering buyers A-rated cover for transactional risks.

Daniel Stock of Howden M&A, which brokers W&I insurance on hotel acquisitions across Europe, says: "With more insurers in the market than ever before, the cost of placing W&I insurance has reduced materially over the last few years. Lower costs and greater competition has resulted in insurers taking on more risk and competing on the quality of the underwriting process."

The potential danger posed by cyber attacks is an area of increasing concern for the owners and acquirers of luxury hotels, but one which can be mitigated by the right W&I insurance policy. Hotels naturally hold a large volume of guests' personal data such as names and addresses and credit card details. Biometric identification is also increasingly being used, for example fingerprint scanners used to allow guests to order extra food, drinks or spa treatments easily.

The penalties can be substantial. The Marriott hotel group was recently fined nearly £100 million by the UK Information Commissioner's Office (ICO) after admitting that the personal data of 339 million guests including dates of birth, passport numbers and credit card details was stolen by hackers.

Alongside the increased use of W&I insurance, Stock says that buyers are increasingly taking out tax risk insurance to cover off identified tax liabilities.

"Now, parties are using tax insurance solutions in place of escrows, price chips or broad seller indemnities," he says. "Sellers are generally willing to contribute to the cost of such policies if it means avoiding the real risk of a price reduction.

Stock says that, as with W&I insurance policies, the cost of these products has reduced considerably over the last two years making them a far more affordable solution for parties.

Dorian Rees is a mergers and acquisitions expert at Pinsent Masons, the law firm behind Out-Law and advised on the Marker Hotel transaction.