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Jumbo Shrimp operates ten (10) restaurants (all leased restaurants - no owned buildings) in the coastal area of South Carolina

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Jumbo Shrimp operates ten (10) restaurants (all leased restaurants - no owned buildings) in the coastal area of South Carolina. The restaurants specialize in local seafood and organically grown fruits and vegetables purchased from local farmers. The business has been operating for 20 years.

Jumbo has 25 employees at its business office in Beaufort, and +/– 50 employees per restaurant (525 total), mostly in food prep and service. The restaurants operate from 8:00 am to 10:00 pm each night.

However, the highest grossing restaurant (by 50%), located on the beach in a trendy area with a high-income demographic, stays open until 2:00 am.

Jumbo earned a net profit of $12M ($1M for nine restaurants and $3M for the 2 am location) last year on total revenues of $55M ($5M for each of the nine restaurants and $10M for the 2 am location).

Each of the 10 restaurants has $1.5M worth of contents (tenants’ improvements, equipment, stock and

furnishings).

The president of Jumbo Shrimp compiled a list of situations that could conceivably force the company to require financing over the next twelve months:

1 Climate changes to local waters could reduce the availability of seafood due to migration pattern changes. This has occurred twice in the last 20 years (ten years ago and five years ago), and both times the disruption lasted for eight weeks and affected all ten restaurants -total lost revenue for all ten at $5M each time.

2 A major hurricane in the Beaufort area could close the highest grossing restaurant for six to

12 months. The last major hurricane occurred 20 years ago, but there have been two minor

hurricanes (ten years ago and five years ago) in the area since that time and the highest

grossing restaurant was closed for six months each time. Revenue lost was $7.5M ten

years ago and $3M five years ago.

3 A restaurant fire would close a location for six to 12 months. This occurred to one of the

restaurants (not largest) ten years ago and was out of business for 12 months. Lost

revenue $5M. Claim paid by insurer for contents (tenants’ improvements, freezers, table

and chairs usual to a restaurant) and revenue (profit) lost. Claim paid $1.5M for contents

and $1M for business interruption.

4 The restaurant business is highly competitive, especially on the beach, and the public

could lose interest in Jumbo Shrimp, causing revenues to drop. Two new fancy restaurants

are opening in the next twelve months - on the beach. Sales are projected to reduce by

$2M per year (for the beach restaurant) once those restaurants open.5 Employees injured on the job lead to lost productivity and workers compensation claims

expenses. Each year, five employees in each of the restaurants go off work for at least ten

days each, equaling 500 total lost labour days. Each ten-day loss is $2K paid by WCB.

6 A patron injured on premises or sickened from eating poorly prepared food could sue the

company. One restaurant was sued last year when someone had bad seafood due to a

failed freezer. He was off work for one month. The insurer paid a $300K claim (legal liability

loss for injury).

7 Spoilage and shrinkage consume about 5 percent of the produce ($16,500,000 of produce

purchased each year) before it can be sold. Last year their freezer failed and contributed to

the insurance claim in 6. Freezer replacement cost $50,000 and $150,000 in food wasted -

no boiler and machinery insurance claimed.

8 Employee theft from the cash registers and/or pilferage from the inventory can reduce

company profitability. One year ago, an employee stole $200K in cash from the office

location. No insurance purchased.

9 Jumbo has a $20M bank loan that it must refinance now or six months from now. Interest

rates will increase and result in materially higher loan payments. The current five-year loan

rate is 2.50% and will increase to between 5.50% (if refinanced today) and 7.50% (six

months from now) at the end of the term of the loan. The five-year rate for both cases is

required for Jumbo due to contractual obligations in the shareholder agreement. $500K has

been spent on interest payments each year for the last 4.5 years.

10 Jumbo operates ten delivery trucks that pickup and deliver produce and seafood to each of

the restaurants on a daily basis. Each delivery truck averages 2,000 miles per week. Each

truck hits one of their buildings at least once per year causing damage to only the truck box

for $5K ($50K in total damage to owned vehicles). Five of their trucks hit other vehicles

each year averaging $5K in physical damage to third-party vehicles ($25K total damage

each year). They do not have collision coverage on the trucks but they have $1M legal

liability coverage for each truck (PLPD).

Annual Costs (you can assume other details based on the information below - list your

assumptions)

? Insurance Premiums - $1.55M total and $75K in self-insured claims and $50K in liability

deductibles.

? $500K premium - Broad Form Property Insurance (contents), $1K deductible for all losses except

Hurricane. Hurricane deductible is 5% of loss incurred. $15M total limit of insurance for all 10

restaurants ($1.5M each). Replacement Cost included.

? $250K premium - Business Interruption Coverage (Profits). $1M limit for each of the smaller

restaurants and $3M for the best performing restaurant. $12M total limit.? $350K premium - Commercial General Liability Insurance $10M limit, $10K deductible.

? $50K premium - Umbrella Policy $20M Excess of $10M underlying, Self-Insured Retention $10K -

Total Liability limit $30M (CGL and Umbrella).

? $100K Premium - Fleet Auto Insurance. PLPD insured. No physical damage for vehicles.

? $300K Premium - Workers Compensation Insurance for all 525 employees.

? $75K Self-Insurance payments per year for the truck operations ($50K for physical damage and

$25K for damage to others) per year.

? $50K paid in any given year for small slip and fall claims not paid by the insurance company.

Uninsured and NOT part of the self-insurance program claims last five years:

Theft from office $200K last year.

Freezer Failure last year - $50K for freezer and $150K lost produce).

Interest rate budget

$500K for current year.

TASKS TO COMPLETE FOR ASSIGNMENT

TASK 1: Using all the situations above, analyze the risks and develop risk financing strategies for

all ten situations to the best benefit of Jumbo Shrimp. Show your work to demonstrate what you

learned from the course. You can assume some facts but must state the assumed facts in your answer.

You cannot assume facts that preclude you answering the question. Explain why each financing

strategy is best for Jumbo Shrimp for each of the ten risks that you will be using for the case

study.

TASK 2: Also, using the Prouty Method, rate the impact (frequency x severity = impact) of each

risk from most important (#1) to the least impactful (#10). Which risks are the most important for

Jumbo Shrimp to focus on and why?

TASK 3: Develop a Risk Matrix (heat map) as an appendix to your case study. The heat map must

be a minimum of 5 rows x 5 columns. Each axis must show the frequency and severity (give a

scale to the dollar amount). We suggest completing the full heat map and considering it closely to

prioritize risk.

Full detail is required for each of the ten risks. Up to 10 marks are given for each of the risks, and a

further 10 marks can be earned from the Prouty Approach matrix (110 total marks).