JF2209: Rising Insurance Rates With Bryan Shimeall #SituationSaturday
Bryan is a former real estate builder/developer and is now working with Multifamily Risk Advisors insuring units across the country. He was a previous guest on episode JF1595 and In today’s episode Bryan will be sharing info on how insurance rates are rising at historical levels and the rates are killing many new deals and hammering the profitability of existing assets at renewal. He will also discuss effective strategies to navigate the insurance market.
Bryan Shimeall Real Estate Background:
- Former real estate builder/developer
- Joined Multifamily Risk Advisors 6 years ago; they insure about 200k units across the country
- Based in Gainesville, FL
- Say hi to him at: www.tbmins.com
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Best Ever Tweet:
“Losses, roof, and wiring, if those three things are positive I can get any property written pretty quickly ” – Bryan Shimeall
Theo Hicks: Hello, Best Ever listeners and welcome to the best real estate investing advice ever show. I’m Theo Hicks and today, we’re talking with Bryan Shimeall. Bryan, how are you doing today?
Bryan Shimeall: I’m doing great, Theo. How are you doing?
Theo Hicks: I’m doing great as well. Thanks for asking and thanks for joining us again. So Brian is a repeat guest. His first episode was Episode 1595, so make sure you check that out. Today being Saturday it’s going to be Situation Saturday, so we’re gonna talk about a sticky situation that our guest was in, but that you are probably in. But before we get into that, a little bit about Brian. He’s a former real estate developer and builder. He joined Multifamily Risk Advisors six years ago; it is an insurance company. They insure about 200,000 units across the country. He’s based in Gainesville, Florida, and his website is tbmins.com, which is in the show notes as well. So Brian, before we get into this sticky situation, do you mind telling us a little bit more about your background and what you’re focused on today?
Bryan Shimeall: Absolutely. As you alluded to there, I have sat on the other side of the table for a lot of years as an insurance buyer. I had grown up a pretty good-sized custom home building business with a little bit of light development. For the most part, I was doing custom homes, investing in real estate in a variety of different ways. And then along came ’08, and along came kids, and I started looking for other things to do and tried to parlay a lot of my real estate experience into the insurance world with a focus on real estate, which is what I’ve done.
So yeah, I understand the perspective of both being someone who sells insurance and someone who buys insurance. I can understand the complications a lot of people encounter and the difficulty a lot of times in understanding.
Theo Hicks: Perfect. Let’s talk about one of these potential difficulties. So we’re recording this in the beginning of August 2020. We’re still in the midst of the coronavirus pandemic, and as anyone who’s investing knows, insurance rates are going up. So the situation is increasing insurance rates, and then Bryan’s gonna go over the solution. But before we talk about any potential solutions, can you let us know what’s going on in the insurance industry? Why are the rates going up? When are people going to be affected by these rate hikes? How long are people gonna be affected by these rate hikes? Things like that.
Bryan Shimeall: Absolutely. If we would have done this podcast pre COVID, pre quarantine, a lot of the things that you’d be hearing, you would have also been hearing then. So my point being is that COVID has definitely not helped matters with the insurance markets or any industry, but definitely not the insurance market. I don’t think anybody completely knows the fallout from that. I think, in general, it serves everyone a good purpose to understand where rates were historically, where they got to and now, where they’re trending. For a lot of years there, we sat in what we call the soft market in the insurance industry, and that was the carriers were almost fighting for business if it was a buyers market. Most of my clients were grabbing the OMs off of deals and using whatever number the seller used the previous year for their own underwriting of their deal. As much as we did preach against that, for a lot of different reasons at that time, frankly, it usually was somewhat accurate.
And then about a year, a year and a half ago, the market really started firming up, driven by losses. Weather losses, GL claims across the board… Habitational insurance, whether you’re talking about property insurance to the casualty side with your general liability, it fell out of favor with most insurance carriers. A lot of the [unintelligible [00:07:31].17] specialize in providing coverage, and they just haven’t been profitable for a lot of years. So the market really started firming up. Rates started going up. People started getting increases, which was really had been due. People had not been experiencing that for seven, eight years before that. And along with the hard market, everybody’s always concerned about price.
But talking about sticky situations, it’s now a seller’s market. And the insurance carriers, the underwriters are being extremely picky with what assets they’re willing to insure and what assets they won’t. Their non-renewing, many properties that they currently insure, for a variety of reasons. It could be losses. You’ve sustained a sizable loss at a property, I would say the probability is you could probably see a cancellation from that, come renewal. So you get out in front of an [unintelligible [00:08:21].04]. As far as new deals that you’re looking at, the underwriters are looking at a variety of factors – the age of the building, the roof age, the wiring, its location, crime scores. They are really picking and choosing what they want.
In a lot of situations, especially if you’re buying a property that’s got a lot of deferred maintenance on it, it has a lot of loss, maybe it’s located in a poor area, you honestly might only be left with a couple of carriers, if any, quite frankly. But at best, maybe a couple of carriers that are willing to offer coverage on that, and they’re going to do that at the price that they’re comfortable with. And I can tell you that rarely ever is an insurer comfortable with the price that they’re throwing out there.
It’s a difficult, difficult time right now; there’s no doubt about it. I mean, there’s ways to navigate it and things you can do. These markets do go up and down. I always say that we’re a little bit like the stock market. The difference being the stock market fluctuates on a daily, weekly basis. Insurance markets tend to take a direction over a course of a year. They don’t make sudden, quick jumps, but once they take the directions, it’s like a big battleship. They continue to head that way for a period of time, and that’s what’s going on now.
And then you bring up where we are to date now with the quarantine. Again, I don’t think anybody knows the fallout from that, but between the riots that have gone on, civil disturbances, just the cost of litigating a lot of business income claims on COVID that are pretty clearly in most policies excluded in terms of coverage, it’s nonetheless going to shove cost into the industry. And the way that the insurance industry responds to that is they raise rates to cover that cost. So I don’t want to definitely start the show off and be a downer or anything like that… But if you’re looking at a new deal now or you’re renewing portfolio or properties, insurance is something that you most definitely want to get out in front of, because it can kill a deal right now, or it can really hurt the profitability on your portfolio.
Theo Hicks: So is there a number or a percentage that you would say insurance has gone up? Or is it going to be very deal-specific, property-specific?
Bryan Shimeall: It is very deal-specific. I would say, in general, if you’ve had a property or portfolio that’s been pretty loss-free, performed pretty well for the insurance carrier, you could be looking at single-digit increases… If the property’s got a little bit of loss or maybe it’s got some age or factors they don’t like, you could be looking anywhere from a 10% to 20% increase across the board. If you’ve sustained significant loss in a property – it could be a weather claim on a roof, it could be a large slip and fall claim on the GL, you could start seeing some rather substantial increases.
But it is situational too. So many times, if you were paying a lower rate than you probably should have been, if you’ve been grandfathered under a policy and then paying some pretty aggressive rates, you might see a really large increase. It might not feel good, but compared to the market, you’re probably not that bad. The flip side is, maybe you’re [unintelligible [00:11:13].02] in any place and quite the right spot and you were paying a little bit more than you should have last year, then you might start seeing a little bit less of an increase. It may not feel so bad for it. So it’s situational.
It’s definitely geographical driven. The Midwest right now, Texas, Oklahoma, Missouri, they are just getting killed with hail claims, and that’s probably the most difficult market. Out here in Florida, in the catastrophic market, which historically people talk about being very difficult… It is; there’s just not a lot of carriers that do it. But in terms of increases and in terms of placing insurance in a catastrophic area, believe it or not, it’s really not my most difficult market right now, compared to a lot of other places.
Theo Hicks: Something interesting you said was a COVID-related. The businesses that are impacted by COVID like retail businesses that shut down. Is that something that you see insurance companies attempting to take into account when they’re doing policies now, but also in the future? So I own a restaurant. Is my insurance going to likely go up a lot for that reason?
Bryan Shimeall: I think I understand what you’re getting at. It depends if you’re focusing on a premium or a rate. And what I mean by that is this. So many different types of industry– we’re outside of multifamily right now when you’re talking about restaurants, for example. The actual premium is a factor of the revenues. Or for example, work comp related policies would be based on payroll. So that’s one of the factors, multiplied by a rate, and then that will equal your insurance premiums. So my point is that, yeah, I think across the board, you’re going to see rate increases go up. Maybe not on the workers’ comp side, but property rates, liability rates, auto rates… There could be some argument that there’s a lot less cars on the road, maybe auto rates don’t go up as much. But I would pretty much assume that the rates themselves are going up. Now, if your payroll’s down, if your revenue’s down, you might not see your premium increase that much. But yes, in general, the answer to that question is yes. I just had to give a little clarification to it.
Theo Hicks: So we should be thinking about insurance, not as a flat rate, but as a percentage of income. Let’s say like a multifamily investor. So I’m just transitioning to multifamily. When I’m underwriting new deals now, am I setting it based off of a percentage of income? Or am I reaching out to you and saying, “Hey, here’s the situation. What’s my premium going to be”?
Bryan Shimeall: Well, if you look at multifamilies, you look at it from a per-unit basis. And yes, you could correlate to a variety of other figures, but day to day, you want to look at multifamily from a per door basis. And yes, your per door costs are going up almost across the board universally, across the industry, without a doubt.. Then if you begin to look at other asset classes, whether you’re talking about industrial or retail, those are really based primarily upon the values of the buildings. Well, multi families too, but at the end of the day, you could look at that as a percentage of that.
Theo Hicks: So what would be your piece of advice? What should I be doing when it comes to insurance for a new deal. If I got a new deal, and I look at the OM, and I’ve got a number… You said before, people were just using the OM, which obviously you don’t want to do, but it was fine, because they weren’t going up that much. Whereas now, when I’m underwriting a deal, I can put aside the other expenses, talk about specifically about insurance. What should I do?
Bryan Shimeall: I would say, right out of the gate, with us specializing in real estate, with a particular focus on habitational, we’re one of the few that truly specialize in it. So what I mean by that is most people do what I do. They cover a variety of different industries, and they try to do the best job they can. Our focus is more centric as to what’s going on in the real estate industry, which gives us some unique knowledge. It also allows us to provide some pretty unique services. And what I mean by that, to your question is, we try to become part our clients’ due diligence team. So if you’re looking at a new deal– let’s look at multifamily. First thing we’re going to ask, “Where’s the OM on the deal?” The OM’s going to supply all the information we need that tells us the physical characteristics of the building – the age, the location, the number of units, the square footage, all of these things go into helping the carriers come up with their rate on a property. So the OEM helps us tremendously.
I also like to get hold of things like rent rolls. We can even be looking at vacancy rates. So we can either navigate it if there’s a vacancy issue with the carrier, or really try to push it as a positive. But if you get 95%, 98% rented out, we’d like to leverage that as much as we can with the carriers, and that all comes out of the rent rolls.
Most importantly right now I think are losses. It’s finding– the most difficult part of my job, without a doubt, is my clients collecting accurate and complete loss information. What I mean by accurate and complete is, the losses need to be generated by the carrier; even the seller’s losses, because the rate you pay is going to be based upon the seller’s losses, and we can talk about that later, but that is just the fact.
You need up to date losses, meaning the losses have been generated by the carrier in the last 30 to 60 days, so the new carrier is confident that they’re looking at an accurate picture of if the loss history has been on it. The most difficult part of my job as obtaining these losses.
A lot of time my clients, especially new clients, they just don’t really understand the importance of this. It is funny, it’s because it’s one of the easiest things that you can get. If the seller wants to transact the property on a new deal, all they have to do is just send an email to their agent and say, “Give me five years. If you can’t get it, three years is the minimum. But as much as I can, give me five years of loss history for the property insurance and for the GL insurance.” It’s 30-second email, and you should have it within 24 to 48 hours. That gives all carriers a clear picture of what’s occurred on the property. And again, with this being a hard market — because they’re not giving you a whole lot of leeway with that. If there’s a missing year here or they’re dated, they might just decide not to quote. Or if they do decide to quote it, they might factor in some for the unknown there if they do it. So the losses are big.
So getting to my point about being part of the due diligence team – we work hand in hand with clients on the front end, help them collect all this information we can so we can paint the best possible picture we can to the carrier. And also, during this process, we can give you an accurate indication of what the insurance costs are going to be for your own underwriting. So if there’s any retrading in the deal or something like that… I had a deal a couple of years ago where I had the same conversation with clients begging for losses, please get the losses. Oh, we can’t get them. Finally, it was like “Well, he said no losses.” And well, I could base our estimate on that. And then lo and behold, when we finally needed the losses… It was a week before closing, and they finally had to present the losses. There had been $3.5 million to $4 million worth of loss on the property. And the insurance rate went from $375 a door to $500. I think $60, $70 a door is just substantial. The client ended up having to walk away from the money they put down, because they couldn’t qualify for the loan. And that’s probably a worst-case scenario that could happen, but it absolutely can happen. There’s no getting around these losses.
Another big factor, too, is consulting with our clients on some physical characteristics of the building that not only affect insurance premiums, but also might affect capital expenditures that you have to undertake on a property. Specifically, that usually revolves around roofs and wiring. This one’s a little tough to maybe wrap your head around, so if I’m not clear, get me to clarify a little bit. But your insurance carrier wants to know the age of the roof. But believe it or not, they’re willing to offer coverage, pretty much, on a property, regardless of the age of the roof. But they might only be willing to do that by factoring in depreciation. So what I mean by that is this. If it’s got a 20, 25-year-old roof on it, they might give you coverage on it, but if there ever comes to be a claim, they’re gonna factor in depreciation. So there’s going to be almost no coverage for the roof.
As opposed to not factoring in depreciation, which is called replacement cost, which they are willing to do, most carriers… I mean, everyone’s different. But for the most part, if that roof is 15 years of age or less, then you can get replacement costs. So if the roof blows away the first day you insure it, they’re going to come up with a brand new roof on it for you, and they’re not going to factor in depreciation. So our clients would be fine with the depreciation factor. The problem is that Fannie and Freddie aren’t. So there’s at least two deals a week that I look at to where it needs new roofs, some of the roofs are 20 years old, they’re going with agency financing on it, and we have to have the same conversation and say, “Look, you’re gonna have to fix these roofs.” And then you get into the quandary of “Well, can they do it in the first 30 days of ownership? Does the seller need to do it before you can buy?” And with the market getting more difficult and more difficult, most of these conversations are, “Hey, this seller might have to replace them.” And so he could be neck deep into a deal and only come to find out at the 11th hour that you’ve got a roof problem. Fannie and Freddie do not give a waiver one that; it doesn’t happen. Never got one, never will.
Some carriers have a little bit of leeway with it, but their leeway is so tiny on it. It’s not good. And with regards to it– I’m probably talking too much about it, but so many people waiting on the PCA. But I will tell you, every PCA I’ve ever read, whoever goes out there, will never state the exact age of the roof. They allude to estimated ten years of life remaining, estimated 15 years a life remaining. And if the lender or the carrier or somebody finds out what the true roof age is, it can give you problems. So just as important as losses, find out who knows roofs were last replaced, because it’s a big, big deal.
And then wiring doesn’t have near the lender problems that roofs do. But your wiring is either copper, and you have no problem with any carrier. It’s aluminum, which means you can have a lot of problems with carriers. There’s only a few willing to do it. And then you can have remediated aluminum, which opens our world up a little bit. If it’s truly remediated aluminum, then we can most likely handle that with the carriers. But time and time again, if you just verbally asked the seller, “Hey, has the wiring been remediated?” “Yes, it’s been remediated.” The next thing you know, you own the property, then out comes the insurance carrier to inspect it and they come to find out it hasn’t been remediated or it hasn’t been remediated properly. The problem is now you own it, and now you’re in a situation where it’s a known condition. And really, people don’t have much choice other than to remediate it, which again, it can be a large capital expenditure.
I would also say Stab-Lok panels – I don’t know if you’ve ever heard of those, but Stab-Lok panels is an old electrical panel that went through a lot of lawsuits, a lot of claims, and a lot of carriers just will not cover Stab-Lok panels. A lot of times, I see people that buy properties, and the next thing you know, they have the Stab-Lok panels. So losses, roofs and wiring, if those three things are positive, I can get any property written pretty quickly. But lacking any one of those pieces of information can make it real difficult.
Theo Hicks: Perfect, Bryan. Well, thanks for walking us through all the current state of the insurance industry, about how rates are going up, and the types of things we need to do when we’re looking at new deals, and making sure we have a specialized real estate insurer on our due diligence team, so we’re not screwing ourselves over after we acquire the property.
So thanks for joining us. Thanks for going over this with us. Again, Bryan’s website is tbmins.com, and is also in the shownotes. Best Ever listeners, as always, thank you for listening. Have a best ever day and we’ll talk to you tomorrow.
Bryan Shimeall: Thank you.
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