July 18, 2024 • 47 mins
Since 2016, the CRE insurance market has faced turbulence due to natural disasters and rising capital costs. This week's episode with Ted Brown, President and Partner at Lockton Companies, breaks down the impact of skyrocketing insurance rates on deals. Ted explains how underwriters initially priced for low catastrophe risk, but consecutive severe weather events led to increased rates. However, there is a silver lining! Tune in to find out when he believes rates will stabilize.
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Episode Transcript
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Rachel Oh (00:04):
Welcome to Peaks and Portfolios presented by Peck
Companies, your go-to podcastfor all things commercial real
estate investment.
I'm Rachel oh, and togetherwe're diving into current events
, trends, issues andopportunities impacting the CRE
investment space, fromdissecting the latest market
moves to sharing insights ontoday's commercial real estate
(00:26):
landscape.
It's time to maximizeportfolios here in the peaks of
the Mountain West and beyond.
Okay, welcome everybody.
Thank you for joining us today.
We're so excited about thisweek's episode, primarily
because I actually have my guestin the room with me, which I
never do.
So welcome, ted.
Thank you so much for joiningus.
(00:47):
All the way from the big stateof Colorado.
We've invited Ted today becauseone of the things that we're
finding in real estate as we doour underwriting, is the cost of
insurance and how it'simpacting our investments.
Soaring insurance rates arekilling deals, if you will.
In real estate, and if you lookat the past decade, the average
insurance costs have actuallydoubled over the past year, so
(01:11):
that spike has slowed down sales.
It's impacting the way weunderwrite and I imagine many of
our listeners are alsoexperiencing this and you know,
at PEG.
It's impacting the way we lookat different states.
For example, we're pretty heavyin Texas and Florida, so I know
you're going to talk about thata little bit more, but that has
impacted the way we look atthose states, and so we wanted
(01:33):
to dive into the insurance spacetoday, and you were so gracious
enough to join us.
We're super excited to have TedBrown.
So Ted Brown is the presidentand partner at Lockton Companies
, and where is Lockton based?
Ted Brown (01:46):
So Lockton's, based in Kansas City.
Rachel Oh (01:48):
Okay, yeah.
Ted Brown (01:49):
And I'm president of the West Series of Lockton, so
pretty much everything west ofDenver.
Rachel Oh (01:56):
Oh, okay, awesome, yeah, no, I saw that in your bio
and it looks like during yourtenure and your role, the
company's significantly grown.
Yes, and they attribute, atleast in the bio, much of that
to you.
So congratulations on yoursuccess, and Lockton is super
lucky to have you.
Ted Brown (02:11):
Thank you.
I'm lucky to be here.
It's been a fabulousorganization.
They've supported me every stepof the way, yeah.
Rachel Oh (02:18):
I'll admit, when I think of insurance it's kind of
like ho-hum, boring, boom, youknow State Farm, little sign.
But you are kind of a cowboy,kind of a southern kid.
Tell me a little bit about howyou got into insurance in the
first place and how it's morphedinto what you do today.
Ted Brown (02:34):
Yeah, no good question.
Yeah, I don't think there's nota whole lot of people that when
they're growing up say, Ireally want to go into insurance
.
Yeah, but yeah, I was working inthe outdoor industry before
Lockton and ran a small part ofWL Gore Gore-Tex Fabrics, and I
wanted to get back to Coloradoand my wife and I were excited
(02:57):
to do that.
I was actually looking to gointo commercial real estate and
had asked for some introductionsfrom some folks I knew at
Lockton and they said, well, whydon't you come talk to us?
And I said I don't want to sellinsurance.
That sounds horrible.
And I learned a lot about thecompany in particular, but also
the industry and how complicatedit is and it's a global
(03:19):
financial marketplace just likeother financial marketplaces,
and pretty blown away at howdynamic it is and so it's.
Yeah, it's been almost 18 yearssince I've been there.
Rachel Oh (03:30):
Wow, you grew up at.
Lockton Pretty much.
Yeah yeah, that's amazing.
You know again a superimpressive background.
I think something that might behelpful to our listeners too is
that we just recently partneredup with Lockton, so you folks
are our insurance partner, andfrom what I hear, that might be
helpful to our listeners too isthat we just recently partnered
up with Lockton, so you folksare our insurance partner, and
from what I hear, that should besuper accretive to the company
(03:51):
as well as our investments, sowe're super excited.
Ted Brown (03:54):
If I do my job, it will be.
Rachel Oh (03:55):
Yeah, yeah.
So, as we jump into this today,the two main areas of insurance
that we're going to be coveringis liability versus property.
Do I have that right, ted?
Ted Brown (04:04):
Yeah, the difference is property is going to be
property, it's, you know,anything that can burn down or
experience, you know, physicaldamage associated with, you know
, with natural catastrophe, fire, water leakage, etc.
Liability is going to be eitherconstruction defect or it's,
you know, on the developmentside, or it's going to be slip
(04:25):
strips and falls at propertylevel.
So residents that are suingproperty owners those types of
losses.
Rachel Oh (04:35):
So so let's start with property.
It sounds like there's somegood news today.
Ted Brown (04:40):
There is some good news.
Things are headed in the rightdirection.
Rachel Oh (04:43):
No, I really love that.
So let's, let's kind of seguethen into that today.
Like again, my experience withinsurance is quite limited, just
as a you know, your typicalauto, home life, whatnot.
But then of course, in my rolehere at PEG, I am starting to
see the impacts that insurance.
I mean insurance just seems tobe a little tiny line item, and
now that has significantly grown.
Seems to be a little tiny lineitem, and now that is
(05:06):
significantly grown, and I'm nowstarting to hear the analysts
kind of, you know, pause andtalk about well, now it's
doubled here or tripled here andthat's impacting this and cause
.
You know we'll be like well,why are the distributions lower
than they used to be?
Well, it's because theinsurance dah, dah, dah.
And again, I'm talkingprimarily like Texas and Florida
, but I'd love for you to maybejust give us a primer on the
overall insurance market today,like how does it work and how
does it specifically impact realestate?
Ted Brown (05:29):
Yeah, I appreciate that and I think I'll talk a
little bit about where we are inthe market cycle.
Yeah, and it is a cycle.
Rachel Oh (05:35):
Yeah, so you know, for listeners, it's not forever,
this will change and it'salready yeah, there's already
good news in the market rightnow, but it is cyclical.
Ted Brown (05:45):
It's driven by equity , just like the real estate
industry is, and so if you lookat kind of the anatomy of a
market cycle, what happens isprofitability is impacted and
that results in a constrictionof capacity and loss-prone
industries, like a lot of realestate asset classes.
You see a restriction incapacity.
Rachel Oh (06:05):
What do you mean by restriction in capacity?
Ted Brown (06:07):
It starts really with the reinsurance marketplace.
So if you look at, kind of, thebottom of the market was about
2016, 2017, that we hadn't had anatural disaster for about five
years prior to that and ratesreally cascaded down.
Underwriters were pricing forcatastrophes that weren't really
(06:28):
happening.
And so they were really justpricing for a fire risk for the
most part.
And then we started to haveyear after year after year of
natural disasters and over thatfive-year period you had a whole
lot more rooftops going in,getting built in cat-prone areas
, yeah, but then also severeweather events that are outside
(06:50):
of just hurricanes, so you had,you know, a lot of hail exposure
, start to crank up, convectivestorms, a wind, tornado.
Rachel Oh (06:58):
We had a hail storm just two weeks ago.
Ted Brown (07:00):
It's a big one, I mean in the middle of nowhere.
Yeah, okay, yeah.
Rachel Oh (07:06):
So Mother Nature is basically driving up insurance,
is what you're saying.
Ted Brown (07:08):
Well, for property that's a big factor in all of it
.
And liability we can talk aboutin a minute.
But the property marketplace,when we started to have all
those losses, the propertycarriers were trying to catch up
those losses.
The property carriers weretrying to catch up and you had a
(07:29):
number of severe weather eventsto where the reinsurance
marketplace was affected andreinsurance affects the cost of
capital for all the commercialcarriers.
So you know commercial carriersjust like PEG does you know
they insure.
So you know they'll have anattachment point.
you know on their book ofbusiness that they'll buy
insurance for and so when thereinsurance market is affected
(07:52):
then the cost of capital goes upfor the commercial carriers.
So year after year of thoseevents and again going back to
capital and equity, if you lookat the S&P during that time, the
average return is over the lastseven years probably 13.5%, 14%
.
Sure Insurance has been about7% return on equity during that
(08:15):
time.
And so until carriers have beenable to get to a certain level
of profitability, to where theirreturn on equity is creeping up
towards 10, 12 percent, youdon't see a turn in the
marketplace.
So over the last couple ofyears, that's why rates have
continued to go up and capacityfor specifically multifamily or
(08:40):
wood frame construction you knowthat really lags the market
that constricted, so it was asupply and demand issue.
You had a ton of demand and notas much supply, and so the
pricing continued to go up.
And now the carriers on theproperty side have finally
gotten to a point where they'remaking a profit, got it?
(09:01):
So that's when you start to seethe tipping point in the market
, which this was the longesthard market, I think.
Rachel Oh (09:09):
So basically you're saying from 2015 to now.
Ted Brown (09:12):
About 2016, 2017.
Rachel Oh (09:14):
2016 to now is where it's just been.
Ted Brown (09:16):
Been going up every year.
Rachel Oh (09:17):
Wow.
Ted Brown (09:18):
Yeah, and so that tipping point.
We've all been waitinganxiously for that, as brokers
for sure that's starting to come.
So last year, without a majorhurricane, it was still a $130
billion loss year, mostly due tonatural events.
(09:40):
So hail, tornado, flood, thosetypes of events and the carriers
were still able to beprofitable.
So they've gotten to a level ofdurability where they can absorb
that loss and still make money,and so they're hovering at
profitability levels that areencouraging and we're starting
(10:02):
to see on the property side,rates come down.
So reinsurance again affectscost capital for the carriers.
You have a big reinsurancetreaty renewal around the first
of the year.
Those were very favorable.
So the carriers if you look back12 months prior the reason why
(10:23):
we saw another huge jump inrates in 2023 was just because
of reinsurance.
It wasn't necessarily becauseof all the underlying factors.
It was because they weregetting to a point of
profitability.
Then Ian hit and thereinsurance market was hammered
and so they had to pass on thoseincreases.
(10:43):
Those get passed on thecommercial carriers, then they
get passed on to you all Right.
And we have to deliver that badnews.
So 2024 should be good news then2024, yeah, we're starting to
see rates level off and startingto see carriers open up
capacity more, more incatastrophic areas, write more
(11:06):
loss-prone asset classes likemultifamily or wood frame
hospitality, and that's, youknow, a sign that you know their
appetite's growing and they'regoing to grow their
profitability through volume,not necessarily through you know
the management of expense.
So they're looking to expandthat capacity and grow.
(11:28):
I was in London two weeks agoand you know the underwriters
there.
Very stark difference from evensix months prior when I was
there.
They're more aggressive, theywant to write more real estate
business and so it's all.
It's all positive.
I think we've, you know we'rewe're seeing a good trend there.
Rachel Oh (11:50):
The liability marketplace is where property
was about 12 to 18 months agookay, so they're lagging, then
it's going to take them a minuteto catch up exactly and the
liability marketplace is.
Ted Brown (12:05):
It's not driven by natural disasters, it's driven
by you know the tort environmentand you know certain
jurisdictions, and so wouldCalifornia.
California is one, Atlanta is atough one.
States like Texas and Floridacan be pretty tough from a mass
tort perspective, and that'swhat's driving a lot of this is
(12:26):
that you have, for the firsttime in history, private equity
is funding mass tort.
It's, you know, a severalhundred billion dollar industry
at this point, and so you have alot of capital going to
plaintiff's attorneys andfunding mass litigation, mass
lawsuits and mass tort.
Rachel Oh (12:46):
I'm sorry, private equity is funding torts in the
US.
Ted Brown (12:50):
Yeah, that's a very profitable industry.
Rachel Oh (12:53):
Yes, I guess I just wasn't aware.
Interesting, okay, so they'reincentivized to drum up these
lawsuits just everywhere becausethey've got capital funding
behind them.
Ted Brown (13:04):
In certain jurisdictions.
Rachel Oh (13:05):
That's where a lot of that money is funneled OK so
it's not just the random ladythat gets scorched by a
McDonald's coffee cup.
Ted Brown (13:14):
No, it's not.
But, there's more and more.
Rachel Oh (13:18):
So it's much more complicated.
Obviously it's much more.
Ted Brown (13:21):
It is.
I think there's other factorsas well, social inflation being
one of them.
Yeah, the cost of health care,the cost of defense.
Rachel Oh (13:27):
I was going to say it's got to be health care, it's
got to be a big piece of it,and then, I'm sorry, you said
defense, yeah.
Cost of defense yeah, okay.
Ted Brown (13:34):
So obviously you know going up no-transcript.
(13:54):
Yeah, and so those are allcoming through the system.
Now You're seeing those claimsgo through the roof.
And so you know, with liability, you know you have primary,
then you have, you know,umbrella, you have access, et
cetera.
Well, umbrella and excesscoverage was really just there
for catastrophic stuff, but overthe last 10 years it keeps.
(14:19):
You know these, because of thetort environment, because of
social inflation, theserun-of-the-mill cases are
settling for much higher dollaramounts than they have
historically and it'spenetrating into those umbrella
and excess layers.
Those layers then becomeworking layers.
They're not just there forcatastrophic cases and claims,
(14:40):
and so they've had to try andcatch up to that market as well.
And you see the restriction ofcapacity, yeah, and you see the
supply-demand curve change andthere's a ton of demand and not
enough supply, so pricing goesup.
Rachel Oh (14:55):
Okay.
And until they find a way to beprofitable short of tort reform
carriers are going to have to—I was going to say, unless you
change that like, it seems likeit'll always be.
Whereas natural disasters mayebb and flow and costs may ebb
and flow, but does tort casesebb and flow?
I?
Ted Brown (15:12):
guess you could say they could based upon local
elections.
Rachel Oh (15:17):
Oh, true, true, true true.
Ted Brown (15:18):
But right now, you know it's not a red or blue
state issue.
Well, you know it's not a redor blue state issue.
Some of the red estates arereally tough from a tort
perspective and litigationperspective, and same with some
blue states, and so it's reallyyou can drill down to certain
(15:41):
cities, certain jurisdictionsthat are— they just have a
history of tort.
Yeah, they're really tough, andthe plaintiff's bars in those
jurisdictions do a great job.
You know pushing for massivesettlements, and so they get
them.
Rachel Oh (15:53):
Wow, okay, wow, I just learned a ton.
I had no idea.
Okay, so then you haveliability on one end.
You've got the property on theother end, the property is
starting to ease up, which isobviously, you know, happiness
to my ears.
Tell me then, you know, let'stalk a little bit about.
Just when I look at, myreadership is typically, you
(16:15):
know, investors that are similarto us.
Tell me a little bit about,like, how does it work, state by
state across the union.
Ted Brown (16:20):
You have to look at it through a couple of different
lenses across the union.
You have to look at it througha couple of different lenses.
One is you have to break itdown by asset class and
construction type from aproperty perspective.
So if you think about what'sgoing to lag the market from a
construction type, it's going tobe wood frame, because it burns
down and can blow over.
And so if you overlay wood frame, whether that's hospitality,
(16:44):
whether that's multifamily, andyou put that in, you know, gulf
Coast, texas or in Florida,that's going to be what lags the
market.
When the market's correcting,that's still going to be.
You know, those are theconstruction types that are
going to have a hard timecatching up to the market.
If you have noncombustibleconstruction, so masonry,
non-combustible concrete steel.
Rachel Oh (17:06):
Which is super expensive, by the way.
Ted Brown (17:08):
Super expensive.
Rachel Oh (17:09):
That's right?
Ted Brown (17:10):
Well, but with the cost of insurance.
That's something that realestate owners, investors, need
to think about is okay, whilewood frame may be less expensive
to build, while wood frame maybe less expensive to build.
What's the cost of that over aseven-year hold period compared
to?
The cost of like-edge steel orconcrete.
Rachel Oh (17:33):
Okay.
So, Ted, as we look across theUS right now, what are the key
states that are driving costs ininsurance premiums right now?
Ted Brown (17:42):
Yeah, there's a number of different factors.
You have factors affectingliability that could be
state-specific, jurisdictionallydriven.
Then you have property and thatcan be driven by weather events
, natural catastrophes, crime,etc.
So, going back to your question, what are the states that are
driving this?
(18:02):
You know Florida's tough, it'schanging.
We're, you know, getting better.
Rachel Oh (18:06):
And I feel like Florida has a lot to do with
floods, right.
Isn't that a big piece of it.
Ted Brown (18:10):
Yeah, when you have a hurricane, you know wind is a
big issue.
But storm surge, flood, youknow that's what is kind of you
know the thing that sticksaround the longest and really
causes a lot more damage.
So you can have, you know greatconstruction type.
That is just fine, you know,from a wind perspective.
(18:33):
But then you know you have anentire parking garage get
flooded and you know their HVACgoes out or you know, whatever
that might be, and so I thinkyou know a lot of real estate
developers are getting smarterabout how they build in
cap-prone areas and they'redoing a lot to mitigate loss.
But you know, the Gulf Coast,texas and Florida.
(18:53):
Certain parts of Florida, notall of it, although it gets a
bad rap.
There's certain parts that youknow are a little bit safer than
others.
You know those are tough states.
You go up the Atlantic Coast,south Carolina, in parts of
North Carolina, up into Virginia.
That can be kind of tough.
But the entire state of Texasis really the toughest from a
(19:17):
natural catastrophe standpoint,or not just from a weather event
standpoint, because if you lookat like the DFW Metroplex for
example, you know there'ssomething like 20,000 units that
are getting delivered thereover the next you know I can't
remember what it is.
12 to 18 months and that's a lotmore rooftops, and you have
(19:39):
historic freezes happening andwe're staring at you know the
predictions are this is going tobe one of the most active
hurricane seasons we've had.
But again, good news in themarket.
According to a lot ofunderwriters, they can sustain a
couple of major events andstill be profitable.
Rachel Oh (19:58):
And still be profitable.
Interesting Because they'vecharged us that much in premiums
.
Correct To offset.
Yes, interesting.
Ted Brown (20:05):
Again, it's a cycle.
Rachel Oh (20:07):
It is.
Ted Brown (20:09):
Just like real estate .
You know there's a cycle.
I mean we're in a developmentcycle right now.
Yeah, it's not exactlyfavorable.
That'll come back around.
Rachel Oh (20:17):
So it sounds like, then, from what you're saying,
it's brisk building activity,along with weather.
Those are the only two thingsyou've really mentioned.
Anything else that impacts whatmakes?
Ted Brown (20:28):
like for example.
Rachel Oh (20:29):
You know I'm living here in Salt Lake City.
Ted Brown (20:31):
One of the safest places.
We have nothing going on.
Rachel Oh (20:33):
I mean knock on wood, although right now they are
earthquake proofing.
You know all the temples andwhatnot, and so I think if you
are a believer, like God mustknow something we don't know.
But my point is and then I grewup in Seattle and I don't feel
like anything- happened thereeither.
Ted Brown (20:54):
So are those.
So you're saying like a state,like a Utah is just yeah, A
state like Utah, I mean you takea earthquake out of it.
Rachel Oh (20:57):
It's, it's very, because we're on a fault
technically, but I mean,nothing's well, we had that tiny
little one during COVIDrandomly.
Yeah, you all did that's right.
Yeah, like a tiny little.
Yeah, yeah, it was like a 2.3or something like that.
Ted Brown (21:11):
Something little yeah weirdly, and that's, you know
like.
The bigger concern is when doesthe next big quake come?
Rachel Oh (21:19):
Sure.
Ted Brown (21:20):
And so you know the good thing about development
that's been going on is a lot ofthat is pretty durable
construction from a quakeperspective, you know, and
that's being driven by equityinvestors, that's being driven
by lenders.
That's you know.
If you're developing that's,you know they're going to want
to see.
You know the right quakefitting and the right secondary
(21:43):
characteristics that you know gointo our underwriting.
That you know help preventmajor damage in a quake.
But you know I think yeah, forthe most part, it's construction
type and it's going to beweather, it's going to be
natural disasters.
During COVID we saw civilcommotion, civil unrest be a
(22:03):
factor that was something new.
Rachel Oh (22:05):
Oh yeah, all the looting and all the Fires arson.
Ted Brown (22:07):
So crime does have an effect on property, although
not quite as much as liability.
But the industry had a bigbuilder's risk loss in the Bay
Area a building that was, Ithink, 80, 90% complete and due
to hot works the entire thingburned down.
And you know those are.
(22:28):
Those are major losses as well.
So there's a lot of factorsLike arson or sorry.
What do you?
Rachel Oh (22:32):
mean.
Ted Brown (22:33):
No, they were welding , I believe.
Rachel Oh (22:35):
Oh, and then it caught fire.
Okay.
And I could be wrong.
Ted Brown (22:41):
Ouch, that sounds horrible what happened, yeah.
So there's factors like thatand that that has to go into
pricing as well.
Right, because still one of themain causes of loss in the
insurance industry is fire,especially for wood frame.
But from a state perspective,texas is bad, florida is bad,
(23:03):
but going to Colorado Coloradois not really favorable right
now from a wind or I mean, sorry, from a hail perspective.
Parts of the Midwest are tough,but you know, you get into
Pacific Northwest and it's alittle bit safer.
Yeah, you get into, you knowparts of the Midwest, and things
soften up a little bit.
You know the upper Midwest.
(23:24):
Then you get out towards youknow New York and into New
England and you know you're kindof the liability markets.
Really what's going to kill youout there?
Rachel Oh (23:33):
Yeah.
Ted Brown (23:33):
But you know, from a property perspective it's.
Rachel Oh (23:37):
Pretty chill yeah.
Ted Brown (23:38):
It's not too bad so, but a lot of it, a lot of it's
going to be driven byconstruction type these days.
Rachel Oh (23:44):
Gotcha, you know that's super interesting and, of
course, very relevant to PEG.
So tell me a little bit aboutyour partnership with PEG and
how that like.
So, for example, one of thethings that I noticed we have a
large pension fund that partnerswith us and when we were
working on a large portfolio,they said, hey, we have a good
relationship with so-and-soinsurance company.
(24:04):
We want to introduce you tothem and see if you can't get
favorable rates, which we did,and we were able to insure that
entire portfolio through thatgroup.
And you know that wasn'tsomething we'd really had before
because I think we were moreone-off deals and now we have
larger portfolios and et cetera.
And then I know this move topartner with Lockton is big for
PEC.
It's a big thing.
(24:24):
I think it's going to help uson the bottom line.
So just help me yeah, okay,good.
So help me to understand, like,how that symbiotic relationship
will ultimately impact ourinvestors.
Like how does that, how is thata creative to the real estate
investment overall?
Ted Brown (24:40):
Yeah, I mean, I think you know the best, the best
client relationships andpartnerships is when there's a
couple of different things inplay.
One, a mutual understanding ofwhat's driving the market.
You have to have a partnershipin this type of relationship and
if you're just pounding thetable and you know upset about
rates, then it's hard to thinkcritically and strategically
(25:03):
about you know okay, what's ourlong-term plan here?
How do we create?
you know, some durability andyou know, okay, what's our
long-term plan here, how do wecreate.
You know some durability andyou know from a program
architecture standpoint how dowe make sure that you know
you're beating the market orthat you're financing risk to
level out?
You know the market impact thatyou know the market different
market cycles can have, andthat's one thing that Pegs you
(25:26):
all have done an amazing job atreally you know, learning,
listening and being interestedin the different strategies and
solutions that go along withthat.
I think also another big part ofit is you all embrace data and
you embrace analytics and that's, at the end of the day, you
know what drives a lot of theunderwriting decisions.
Rachel Oh (25:47):
Right.
Ted Brown (25:48):
And so an understanding of your own
exposure, understanding howyou're underwritten in the
marketplace.
Then you can make informeddecisions on what you do long
term.
And that's another big factorin the relationship.
But I think there's also analignment of values between our
two firms.
(26:09):
You all are looking at yourinvestments from a long-term
perspective.
You're looking at your companyfrom a long-term perspective,
and so are we, and that allowsus to come together and be
thoughtful, be strategic and puttogether the best programs,
best solutions that will helpyour insurability and
competitiveness in themarketplace.
(26:30):
So your investors will benefitfrom that partnership, because
the things that we're talkingabout are things that are going
to.
You know, when the market'sgoing up, you're not going to
pay as much.
When the market's going down,you're going to be some of the
first to attract that capital.
Rachel Oh (26:45):
Yeah, no, I love that You're going to be some of the
first to attract that capital.
Yeah, no, I love that.
And again, I love that Iappreciate you mentioning values
, because values is definitelyprobably the most important
thing to peg is making sure wealign with the right groups that
share the same values.
And from my short interactionwith you, I definitely feel like
I can see why we're partneringwith Lockton.
Likewise, that makes me feelgood because, again, when we're
(27:08):
pitching to our investors andthat's what my group does we
like to try to be as holistic aspossible.
So I mean, let's face it, ourreturns are good, they're strong
, but there are lots of othergroups that have good, strong
returns, and so how do wedifferentiate ourselves?
And I think this is as I'mlistening to you, my wheels are
turning.
I'm listening to you, my wheelsare turning.
It's, like you know, we cantalk about these kinds of things
, because insurance does impactthe overall bottom line in
(27:29):
partnering with a group like youfolks and helping us to be more
competitive in the marketplace.
I think will be reallyinteresting.
So it's just another thing Ican, like you know, add to my
value proposition, which.
Ted Brown (27:37):
I love which I love, so this is great.
Rachel Oh (27:40):
OK, so as we look ahead into the future, let's
talk a little bit, then, abouthow do we then forecast for this
.
So we now know.
On liability, you said it'sabout 12, 18 months lagging
behind the property.
We feel like property isgetting to a tipping point, but
you know we have largeportfolios and we have big
strategies, and so it's just anongoing forward thinking process
(28:01):
.
How do you Sigurd or how areyou going to be guiding us as we
forecast specific to insuranceand the way we insure our
different properties andinvestments?
Ted Brown (28:10):
Yeah.
So the thing that you all andother investors need to think
about is yeah, at the end of theday, insurance carriers are
they really just want to pay thebig claims?
Right, they don't want to paythe day-to-day claims.
And if you're just tradingdollars with insurance carriers
and you know one year they'regoing to win and another year
(28:30):
you're going to win and, yeah,that's an unsustainable, you're
just going to ride the waves ofthe market and you have bad
losses one year, your rates aregoing to go up.
You have good losses.
The next year maybe they stayflat, maybe they go down in the
soft market.
So how do you look at that?
Over a longer period of time,you have to finance risk, so you
(28:53):
have to get the carriers out ofattritional losses.
So if you're having a bunch ofsmall fires every year, that's
what eats away at the carrier'sprofitability and, ultimately,
what leads to increased rates ifyou're just looking at an
individual risk basis.
So with you all you know makingsure that we understand clearly
(29:17):
the loss picture and this isfor all real estate investors,
operators, owners understandingthe loss picture.
What's driving your losses,what's driving your exposure?
How are you underwritten by themarketplace?
And then you can start to lookat all right, how can we finance
risk?
You know, over a period of timethat's going to make us more
(29:41):
attractive.
So there are multiple differentrisk finance mechanisms that
we're looking at for you all andthat we look at for all of our
clients.
You can look at plus aggregateprograms on a property basis,
which is basically a largedeductible that's capped and
that you fund for thatdeductible.
Rachel Oh (30:02):
Got it.
Ted Brown (30:03):
And then if you reach it, if you reach a million
dollars, so we cover all thelittle things.
Rachel Oh (30:09):
We're going to be covering all the little things
so that it's not going to bechipping away at the way a
carrier looks at you.
Ted Brown (30:13):
Yeah, If you're having a million dollars in
losses a year, carriers areprobably charging, which I hope
we're not, by the way.
Rachel Oh (30:19):
No, you're not Okay.
Ted Brown (30:20):
Just as an example, but if you are, you know
carriers are going to charge you$1.7 to $2 million to insure
that.
Rachel Oh (30:30):
Okay.
Ted Brown (30:30):
So why trade dollars?
Rachel Oh (30:32):
with them.
Why don't?
Ted Brown (30:33):
you finance for that, then you're funding a million
dollars.
Yeah, if you pay it, you knowgreat, you know then carriers
aren't paying that.
If you don't, you keep thatmoney.
Rachel Oh (30:46):
Got it.
Ted Brown (30:47):
Right.
Then you can start to look atmore sophisticated risk finance
mechanisms.
You can look at captivesolutions.
Yeah, so there's multiple waysin which you can seed captives
and you can do that throughrenter's insurance programs, you
can do that through securitydeposit programs and that allows
you to build up retainedearnings in a captive and then,
(31:10):
once those retained earnings getto a certain point, then you
can expand into other areas thatmight be a little bit riskier.
Maybe on development, it'sthrough subcontractor default
insurance and you can reinsureyour deductible there through a
captive and you build up thatfurther retained earnings.
And then now all of a suddenyou've got a.
You know your captive has apretty robust balance sheet.
(31:31):
Then you can take biggertranches of risk.
Rachel Oh (31:34):
Got it.
Ted Brown (31:34):
Okay.
So there's ways in which youknow, over time you have to have
kind of an immediate, mid andlong-term strategy around risk
finance.
But if you do that, then overthe long-term you're going to
outperform the market and you'regoing to be more aggressive on
the deals that you're competingon, You're going to generate
(31:54):
higher returns and you're goingto attract more capital.
Rachel Oh (31:58):
More capital, which is what I need, just like the
insurance industry.
So interesting.
I did not think you were goingto say that Somehow.
I thought it was some othervoodoo magic, but it sounds like
it's super practical.
Ted Brown (32:09):
Yeah, it's pretty simple.
Rachel Oh (32:10):
I mean it's kind of the way I approach my health
insurance.
Right, it's very similar, yeah,very similar.
Ted Brown (32:16):
It's not complicated and I think you know the
insurance industry is a prettytraditional industry.
I mean up until you knowpre-COVID, I mean going over to
London Lloyd's of London, youstill had, you know,
underwriters sitting out withyou know, outside the boxes with
their files and waiting in lineto go and negotiate the deals,
(32:37):
and you know all of that.
And now you're seeing anevolution in the insurance
industry.
Ai is driving a lot of that.
So there's a lot more.
Rachel Oh (32:45):
How is AI driving that I'm so curious that, so
there's a lot more.
How is AI driving that I'm socurious.
Yeah, so you know AI algorithms?
Ted Brown (32:51):
Yeah, there's, you know, the carriers that have
done it well, the brokers thathave done it well, been
aggregating data for a while,okay, and now that data is
starting to tell a story.
Rachel Oh (33:00):
Yeah.
Ted Brown (33:00):
Now you're getting machine learning involved.
You know predictive analyticsthat are going to be able to
tell you things like okay, well,you know, if you build light
gauge steel versus wood frame,what could that effect be in a
hardening market or in asoftening market?
And we're starting to buildsolutions that can tell us that
(33:23):
Underwriters are using it tounderwrite and we're using it to
advise.
So it's not a complicated deal,but it has also been a pretty
slow industry to adapt andbecause of that there's a lot of
uninformed insurance buyers outthere.
Rachel Oh (33:40):
Yeah.
Ted Brown (33:40):
Because they don't understand it and it's been hard
to understand, but at the endof the day, it's all about how
many losses you're having.
Right Versus how much premiumyou're paying.
How can you get the carriersout of that Finance, that risk
on your?
Own if you're able to, and thencarriers win, you win.
Rachel Oh (33:58):
Yeah, no, I imagine our underwriting team, because
if you think about that, it'snot that they're generalists,
but they have to know a littlebit of everything in order to
plug in the right assumptions.
And I imagine with insuranceit's probably a line item, like
I said.
They probably like okay, well,who's the lowest, you know who's
the cheapest, or whatever, andjust plug that person in, we're
going to use them and withoutmaybe taking a step back and
(34:19):
thinking through theimplications of such and what
does that?
Ted Brown (34:21):
really garner you and then in the end, are you paying
more because you didn'tconsider this, this, this so,
and that can be a decentshort-term solution, yeah, for a
lot of companies, but when themarket's fluctuating, yeah,
you're gonna end up riding it.
So taking a longer termstrategic view of of risk is
ultimately what's going to payoff yeah and those are the
(34:42):
clients that that end up doingwell in tougher markets
Interesting, so insurance is astrategy.
Absolutely.
Rachel Oh (34:50):
So then, is insurance like so, like debt is something
where you have you know terms,you know whatnot.
Is insurance like that Meaning,if we have existing insurance
policies with certain propertiesor portfolios, are we able to
exit those, or are they like?
You know, do you have to and Ishould know more than this, but
I just don't?
So, as an advisor, you know, doyou have to and I should know
more than this, but I just don'tlike so, as an advisor, would
(35:10):
you?
are you going to come?
I imagine you're coming inlooking at our portfolio as a
whole and, hey, these are theareas where we feel like you can
, we can, we would suggest someimprovement and you know, and is
it nimble enough where you canchange things?
Sure, yeah, it is.
Ted Brown (35:38):
You have to look at it again through a couple
different lenses Most insurancecontracts are going to have
90-day minimum earned, so you'renot going to.
You know, once's earned oncehurricane season's over.
So if you make a switch afterthat, you're not going to get
any return premium for you knowthe hurricane exposure that was
insured during that time, and sothere's different windows of
(36:00):
time, depending on how thecontracts are written, that
allow you some flexibility andthe ability to be more nimble.
That allow you some flexibilityand the ability to be more
nimble.
Yeah, there's also timing withthe marketplace.
Yeah.
So right now we're moving inthe right direction.
From a property standpoint, wewant to harness that.
Consolidation is important.
When the market was shiftingabout three years ago, we
(36:23):
started to look at clientportfolios and 75% of the time
and you know, scale one out.
So your economies of scale aregoing to help you, but there's
25% of the time where it madesense to break things up.
Rachel Oh (36:38):
Interesting.
Ted Brown (36:38):
Well, so when you break things up you're dealing
with, you know different carrierpartners that you know will do
smaller regional deals.
They lag the market as well.
So the excess and surplus linesmarkets right now are doing
better.
Certain standard insurancecarriers, travelers, jobs.
Rachel Oh (36:59):
AMTs of the world.
Ted Brown (37:00):
They're doing better.
And then some of those regionalcarriers are still.
They're kind of lagging, so youknow, that you know, piecing
things together may have workeda couple of years ago, but now,
because of where the market'sheaded from a property
standpoint, those economies ofscale are generating better
results these days.
Rachel Oh (37:21):
Interesting.
Wow, ok, now I love that.
It brings up probably mybiggest exposure was again the
largest portfolio we had everraised for and where there was
the most impact because it wasan acquisition portfolio.
So typically we do development.
This was an acquisitionportfolio.
You've got aging assets, so youknow the sounds like we have
(37:44):
the benefit of partnering with agroup like Lockton.
But as asset managers, whenwe're training our analysts and
underwriting teams, whatinformation would be like if you
could say, hey, as you'reunderwriting these, consider
these things too.
Like what?
And that could be market driven, could be not just specific
insurance, but tell me what aresome things that you would
suggest to them that can helpthem in their underwriting, as
(38:04):
they're evaluating again bothdevelopment and acquisitions.
Ted Brown (38:09):
Yeah, I'd say that you know you want to let data
drive your decision making.
So really understanding therisk and exposure for you know
different assets and making surethat you're making informed
decisions.
You mentioned this earlier.
Right, you know, sometimes thecheapest solution might present
itself, but sometimes thecheaper solutions don't actually
(38:30):
address the exposure that youneed and I can see that, yeah,
we earn a lot of businessbecause of that.
So I think understanding theexposure basis is probably the
most important thing andunderstanding what's driving
either cost or loss or you knowyour exposure.
If you look at development, youknow construction type is going
to be a big one, populationdensity is going to be another,
(38:53):
jurisdictions are going to beanother.
So you know Oakland, forexample, a lot of population
density, also a lot of crime,and that's where we saw a lot of
arson occur.
Same with certain parts of LA,and so that's going to factor
into builder's risk, which isproperty insurance for
development.
Then you have constructiondefect, which you know.
(39:15):
Again, certain states are goingto have, you know, tougher
construction defect laws thanothers.
So understanding what theconstruction defect laws are in
the states that you're workingin is really important.
And then how do you addressthat exposure?
So liability is going to be onthe construction defect side on
(39:37):
anything that happens from athird-party standpoint.
That's going to drive liabilityexposure.
The construction type, likewe've talked about, is very
important.
Rachel Oh (39:47):
No wood, that's what I've learned.
No, I'm just kidding.
We do a lot of wood, by the way.
Ted Brown (39:53):
Yeah you do, and a lot of our clients do, because
it's the least expensive way tobuild something.
Rachel Oh (40:00):
Well, height too right, like it's easier, like
most areas are zoned for certainheight restrictions and so
oftentimes it's just an easierlike we're not really this high
rise state, at least our areas.
Of course now we're doing moresignificant building outside the
state.
But yeah, I mean I hear stickconstruction all the time, but
(40:21):
earlier you had said that itdoesn't really matter because
there could be other factorsthat impact.
Ted Brown (40:25):
It does matter, but there are other factors that
impact it, that we can considerat least.
Yeah, I mean you look atlike-gauge steel, like-gauge
steel.
There's some incrediblecompanies out there that are
doing that, have really amazingtechnology from like H-Steel
perspective Build I think it'sBYLD is one of them that you
know their technology.
(40:45):
Basically, you know input inthe architectural you know
drawings, and it comes up with apackage that is already pre-cut
, pre-fabricated, that it justgets assembled on site, and so
it's not just the cost of thematerial.
Rachel Oh (41:04):
It's also the cost of labor and what goes into it.
Well, labor is expensive.
Labor is very expensive.
I mean, I think labor is one ofthe biggest things that impacts
everything that we do,including down to operations,
not just the building phase.
Ted Brown (41:16):
No, it's management.
Yeah, it's all the things.
Yeah, you know that.
You know some of that labor iscontract labor, you know we're
subcontractors, some might beyour own employees.
Rachel Oh (41:26):
Yeah.
Ted Brown (41:27):
You know that's another factor, but you know, I
think from a construction typeperspective there are a lot of
things that can influence thingspositively in terms of the
evolutions that are happening inthat marketplace.
So, you know, you look at core,core plus construction.
You know high rise construction, I mean those are going to be
easy to ensure.
(41:47):
Yeah.
Rachel Oh (41:47):
They're going to be safe.
They're easy for us tounderwrite as well.
Ted Brown (41:50):
Yeah, exactly.
Rachel Oh (41:51):
Well, at least in terms of longevity and in the
investment, yeah, okay, great.
So, as we kind of wrap thingsup, what are the lessons that
you and your company havelearned, probably in this last
period, as I think you called itthe hardening market or, you
know, as we're kind of, at leaston the property side, coming
out of it a bit and you're kindof looking at liability, but
(42:12):
what are some lessons learnedand takeaways and advice you
would give to real estateinvestors today?
Ted Brown (42:17):
Yeah, so I think we've talked about a lot of it,
but letting data informdecisions around risk is really
important and it's not a blackbox.
It's fairly simple tounderstand what's driving
exposure and therefore cost,making sure that you're taking a
long-term view not just of theway that your program is
(42:40):
architected, but also of therelationships in the industry.
You know the underwriters don'twrite a portfolio like yours to
make money in one year.
Rachel Oh (42:51):
No.
Ted Brown (42:52):
They're doing it from a long-term perspective.
Rachel Oh (42:53):
Yeah.
Ted Brown (42:54):
And so sitting with those underwriters, sitting with
those executives andunderstanding how their business
works ultimately helps createthe best carrier partnerships
out there.
Because, when we look at all ofour benchmarking data, you know
, yes, people that arecontrolling risk, that's
something else that we can talkabout briefly.
(43:15):
But people that are financingrisks, yep, they certainly see
better rates.
But the people that have stuckwith historic relationships over
time, those are the ones thathave beat the fluctuation in the
markets, and so you know if—andwe have some clients—.
Rachel Oh (43:34):
And that's a risk control.
It sounds like from kind ofwhat you're saying.
Ted Brown (43:37):
No, Not necessarily.
No, risk control is separate.
That's what you have to do tocontrol risk.
So you know what are you doingto control fire?
What are you doing to controlwater?
Damage water leakage, all thosethings.
How are you controlling thecost of claims?
That's very important, but allof that gets funneled into that
relationship.
Okay, and unless you're sittingin front of those underwriters
(43:58):
telling that story yeah talkingabout all the things that you're
going to do to improve your,your exposure base yeah you're
not really going to.
You're not going to see thebenefit of it.
It's just going to be in a, inan underwriting submission.
So at the end of the day, thisis a relationship driven
industry.
Rachel Oh (44:14):
It is people industry and like all industries are, is
what I'm learning everyonethat's coming here.
That's end of the day.
This is a relationship-drivenindustry.
Ted Brown (44:22):
It is.
Rachel Oh (44:22):
It's a people industry, like all industries
are, is what I'm learningEveryone that's come in here.
That's one of the themes I hearand I would not have.
Ted Brown (44:26):
I mean, I see that insurance now, but I don't think
I would have thought that, yeah, it's critical and the clients
that have that philosophy andthat take a long-term view of
their business and the carrier'sbusiness, then those are the
ones that find alignment withcarrier partners and that's
critical.
But you've got to do the stuffon the other end to control
(44:49):
losses and going back totechnology.
There's great technology outthere that, from a leak
detection standpoint, waterdamage is a huge cause of loss.
Rachel Oh (45:00):
Yeah.
Ted Brown (45:00):
From a fire standpoint, from then also
controlling the claims.
So, making sure that you're not, you know, looking to inflate
claims just to make money makingsure that you're controlling
those costs, because those costsgo into your loss experience.
Your loss experience is what'sgoing to be used to underwrite.
Yeah and you're going to end uppaying for it one way or
(45:20):
another, and so making sure thatyou have good alignment with
those carrier partners around.
All right, this is what we'regoing to do.
This is our litigation strategy.
This is what we're going to dofrom a loss control standpoint.
This is how we're going tohandle claims.
That's where the rubber meetsthe road for them.
Ultimately you can't doanything about a hurricane.
Rachel Oh (45:38):
You can't do anything about hail.
But if we have all thosecontrols in place or policies,
or we've thought it through, andwe have those mitigation things
, then that's what you're saying.
Ted Brown (45:48):
It's additive to just the hard numbers.
That's right.
It's blocking and tackling.
Rachel Oh (45:52):
Okay, yeah, I, blocking and tackling.
Okay, yeah, I like that.
But I think I think the otherthing that I've learned is that
it is cyclical.
Okay, I'm glad that you saidthat it will get better.
I feel like in at least inconstruction, we've kind of
accepted the fact thatconstruction costs are here to
stay, like it is not going, likethis is the new norm.
We know that interest rates, ina way, are cyclical, but we
don't see any reprieve there.
(46:13):
But the fact that you'retelling me the insurance costs
are cyclical, that's like musicto my ears.
Yeah, that's amazing, yeah.
Ted Brown (46:19):
Well, I think I mean interest rates.
I think it was Citibank or oneof the big banks just said that
they expect over the next 12 to18 months 200 basis points and
rate cuts.
I mean that's cyclical in apositive direction.
So it's all cyclical.
Rachel Oh (46:37):
I would love 200 bps.
Repeat that's awesome, yeah,okay, let's make that happen.
What can you do to that?
I can't control that.
Come on, come on, ted.
Okay, well, awesome, well, Ilove that.
I appreciate your time andhelping us to better understand
insurance as it relates tocommercial real estate and the
(46:58):
investment side.
I've learned a ton, and Iimagine our listeners have as
well.
Ted Brown (47:02):
Thank you for having me.
I hope I was helpful.
Rachel Oh (47:03):
I very much appreciate it.
So, again, from the peaks ofthe Mountain West, I am Rachel
oh, host of Peaks and Portfoliosby Pet Companies.
Thank you again, ted, forjoining us and for all those who
joined in, and we'll see youall next time.
Welcome to Peaks and Portfolios presented by Peck
Companies, your go-to podcastfor all things commercial real
estate investment.
I'm Rachel oh, and togetherwe're diving into current events
, trends, issues andopportunities impacting the CRE
investment space, fromdissecting the latest market
moves to sharing insights ontoday's commercial real estate
(00:26):
landscape.
It's time to maximizeportfolios here in the peaks of
the Mountain West and beyond.
Okay, welcome everybody.
Thank you for joining us today.
We're so excited about thisweek's episode, primarily
because I actually have my guestin the room with me, which I
never do.
So welcome, ted.
Thank you so much for joiningus.
(00:47):
All the way from the big stateof Colorado.
We've invited Ted today becauseone of the things that we're
finding in real estate as we doour underwriting, is the cost of
insurance and how it'simpacting our investments.
Soaring insurance rates arekilling deals, if you will.
In real estate, and if you lookat the past decade, the average
insurance costs have actuallydoubled over the past year, so
(01:11):
that spike has slowed down sales.
It's impacting the way weunderwrite and I imagine many of
our listeners are alsoexperiencing this and you know,
at PEG.
It's impacting the way we lookat different states.
For example, we're pretty heavyin Texas and Florida, so I know
you're going to talk about thata little bit more, but that has
impacted the way we look atthose states, and so we wanted
(01:33):
to dive into the insurance spacetoday, and you were so gracious
enough to join us.
We're super excited to have TedBrown.
So Ted Brown is the presidentand partner at Lockton Companies
, and where is Lockton based?
Ted Brown (01:46):
So Lockton's, based in Kansas City.
Rachel Oh (01:48):
Okay, yeah.
Ted Brown (01:49):
And I'm president of the West Series of Lockton, so
pretty much everything west ofDenver.
Rachel Oh (01:56):
Oh, okay, awesome, yeah, no, I saw that in your bio
and it looks like during yourtenure and your role, the
company's significantly grown.
Yes, and they attribute, atleast in the bio, much of that
to you.
So congratulations on yoursuccess, and Lockton is super
lucky to have you.
Ted Brown (02:11):
Thank you.
I'm lucky to be here.
It's been a fabulousorganization.
They've supported me every stepof the way, yeah.
Rachel Oh (02:18):
I'll admit, when I think of insurance it's kind of
like ho-hum, boring, boom, youknow State Farm, little sign.
But you are kind of a cowboy,kind of a southern kid.
Tell me a little bit about howyou got into insurance in the
first place and how it's morphedinto what you do today.
Ted Brown (02:34):
Yeah, no good question.
Yeah, I don't think there's nota whole lot of people that when
they're growing up say, Ireally want to go into insurance
.
Yeah, but yeah, I was working inthe outdoor industry before
Lockton and ran a small part ofWL Gore Gore-Tex Fabrics, and I
wanted to get back to Coloradoand my wife and I were excited
(02:57):
to do that.
I was actually looking to gointo commercial real estate and
had asked for some introductionsfrom some folks I knew at
Lockton and they said, well, whydon't you come talk to us?
And I said I don't want to sellinsurance.
That sounds horrible.
And I learned a lot about thecompany in particular, but also
the industry and how complicatedit is and it's a global
(03:19):
financial marketplace just likeother financial marketplaces,
and pretty blown away at howdynamic it is and so it's.
Yeah, it's been almost 18 yearssince I've been there.
Rachel Oh (03:30):
Wow, you grew up at.
Lockton Pretty much.
Yeah yeah, that's amazing.
You know again a superimpressive background.
I think something that might behelpful to our listeners too is
that we just recently partneredup with Lockton, so you folks
are our insurance partner, andfrom what I hear, that might be
helpful to our listeners too isthat we just recently partnered
up with Lockton, so you folksare our insurance partner, and
from what I hear, that should besuper accretive to the company
(03:51):
as well as our investments, sowe're super excited.
Ted Brown (03:54):
If I do my job, it will be.
Rachel Oh (03:55):
Yeah, yeah.
So, as we jump into this today,the two main areas of insurance
that we're going to be coveringis liability versus property.
Do I have that right, ted?
Ted Brown (04:04):
Yeah, the difference is property is going to be
property, it's, you know,anything that can burn down or
experience, you know, physicaldamage associated with, you know
, with natural catastrophe, fire, water leakage, etc.
Liability is going to be eitherconstruction defect or it's,
you know, on the developmentside, or it's going to be slip
(04:25):
strips and falls at propertylevel.
So residents that are suingproperty owners those types of
losses.
Rachel Oh (04:35):
So so let's start with property.
It sounds like there's somegood news today.
Ted Brown (04:40):
There is some good news.
Things are headed in the rightdirection.
Rachel Oh (04:43):
No, I really love that.
So let's, let's kind of seguethen into that today.
Like again, my experience withinsurance is quite limited, just
as a you know, your typicalauto, home life, whatnot.
But then of course, in my rolehere at PEG, I am starting to
see the impacts that insurance.
I mean insurance just seems tobe a little tiny line item, and
now that has significantly grown.
Seems to be a little tiny lineitem, and now that is
(05:06):
significantly grown, and I'm nowstarting to hear the analysts
kind of, you know, pause andtalk about well, now it's
doubled here or tripled here andthat's impacting this and cause
.
You know we'll be like well,why are the distributions lower
than they used to be?
Well, it's because theinsurance dah, dah, dah.
And again, I'm talkingprimarily like Texas and Florida
, but I'd love for you to maybejust give us a primer on the
overall insurance market today,like how does it work and how
does it specifically impact realestate?
Ted Brown (05:29):
Yeah, I appreciate that and I think I'll talk a
little bit about where we are inthe market cycle.
Yeah, and it is a cycle.
Rachel Oh (05:35):
Yeah, so you know, for listeners, it's not forever,
this will change and it'salready yeah, there's already
good news in the market rightnow, but it is cyclical.
Ted Brown (05:45):
It's driven by equity , just like the real estate
industry is, and so if you lookat kind of the anatomy of a
market cycle, what happens isprofitability is impacted and
that results in a constrictionof capacity and loss-prone
industries, like a lot of realestate asset classes.
You see a restriction incapacity.
Rachel Oh (06:05):
What do you mean by restriction in capacity?
Ted Brown (06:07):
It starts really with the reinsurance marketplace.
So if you look at, kind of, thebottom of the market was about
2016, 2017, that we hadn't had anatural disaster for about five
years prior to that and ratesreally cascaded down.
Underwriters were pricing forcatastrophes that weren't really
(06:28):
happening.
And so they were really justpricing for a fire risk for the
most part.
And then we started to haveyear after year after year of
natural disasters and over thatfive-year period you had a whole
lot more rooftops going in,getting built in cat-prone areas
, yeah, but then also severeweather events that are outside
(06:50):
of just hurricanes, so you had,you know, a lot of hail exposure
, start to crank up, convectivestorms, a wind, tornado.
Rachel Oh (06:58):
We had a hail storm just two weeks ago.
Ted Brown (07:00):
It's a big one, I mean in the middle of nowhere.
Yeah, okay, yeah.
Rachel Oh (07:06):
So Mother Nature is basically driving up insurance,
is what you're saying.
Ted Brown (07:08):
Well, for property that's a big factor in all of it
.
And liability we can talk aboutin a minute.
But the property marketplace,when we started to have all
those losses, the propertycarriers were trying to catch up
those losses.
The property carriers weretrying to catch up and you had a
(07:29):
number of severe weather eventsto where the reinsurance
marketplace was affected andreinsurance affects the cost of
capital for all the commercialcarriers.
So you know commercial carriersjust like PEG does you know
they insure.
So you know they'll have anattachment point.
you know on their book ofbusiness that they'll buy
insurance for and so when thereinsurance market is affected
(07:52):
then the cost of capital goes upfor the commercial carriers.
So year after year of thoseevents and again going back to
capital and equity, if you lookat the S&P during that time, the
average return is over the lastseven years probably 13.5%, 14%
.
Sure Insurance has been about7% return on equity during that
(08:15):
time.
And so until carriers have beenable to get to a certain level
of profitability, to where theirreturn on equity is creeping up
towards 10, 12 percent, youdon't see a turn in the
marketplace.
So over the last couple ofyears, that's why rates have
continued to go up and capacityfor specifically multifamily or
(08:40):
wood frame construction you knowthat really lags the market
that constricted, so it was asupply and demand issue.
You had a ton of demand and notas much supply, and so the
pricing continued to go up.
And now the carriers on theproperty side have finally
gotten to a point where they'remaking a profit, got it?
(09:01):
So that's when you start to seethe tipping point in the market
, which this was the longesthard market, I think.
Rachel Oh (09:09):
So basically you're saying from 2015 to now.
Ted Brown (09:12):
About 2016, 2017.
Rachel Oh (09:14):
2016 to now is where it's just been.
Ted Brown (09:16):
Been going up every year.
Rachel Oh (09:17):
Wow.
Ted Brown (09:18):
Yeah, and so that tipping point.
We've all been waitinganxiously for that, as brokers
for sure that's starting to come.
So last year, without a majorhurricane, it was still a $130
billion loss year, mostly due tonatural events.
(09:40):
So hail, tornado, flood, thosetypes of events and the carriers
were still able to beprofitable.
So they've gotten to a level ofdurability where they can absorb
that loss and still make money,and so they're hovering at
profitability levels that areencouraging and we're starting
(10:02):
to see on the property side,rates come down.
So reinsurance again affectscost capital for the carriers.
You have a big reinsurancetreaty renewal around the first
of the year.
Those were very favorable.
So the carriers if you look back12 months prior the reason why
(10:23):
we saw another huge jump inrates in 2023 was just because
of reinsurance.
It wasn't necessarily becauseof all the underlying factors.
It was because they weregetting to a point of
profitability.
Then Ian hit and thereinsurance market was hammered
and so they had to pass on thoseincreases.
(10:43):
Those get passed on thecommercial carriers, then they
get passed on to you all Right.
And we have to deliver that badnews.
So 2024 should be good news then2024, yeah, we're starting to
see rates level off and startingto see carriers open up
capacity more, more incatastrophic areas, write more
(11:06):
loss-prone asset classes likemultifamily or wood frame
hospitality, and that's, youknow, a sign that you know their
appetite's growing and they'regoing to grow their
profitability through volume,not necessarily through you know
the management of expense.
So they're looking to expandthat capacity and grow.
(11:28):
I was in London two weeks agoand you know the underwriters
there.
Very stark difference from evensix months prior when I was
there.
They're more aggressive, theywant to write more real estate
business and so it's all.
It's all positive.
I think we've, you know we'rewe're seeing a good trend there.
Rachel Oh (11:50):
The liability marketplace is where property
was about 12 to 18 months agookay, so they're lagging, then
it's going to take them a minuteto catch up exactly and the
liability marketplace is.
Ted Brown (12:05):
It's not driven by natural disasters, it's driven
by you know the tort environmentand you know certain
jurisdictions, and so wouldCalifornia.
California is one, Atlanta is atough one.
States like Texas and Floridacan be pretty tough from a mass
tort perspective, and that'swhat's driving a lot of this is
(12:26):
that you have, for the firsttime in history, private equity
is funding mass tort.
It's, you know, a severalhundred billion dollar industry
at this point, and so you have alot of capital going to
plaintiff's attorneys andfunding mass litigation, mass
lawsuits and mass tort.
Rachel Oh (12:46):
I'm sorry, private equity is funding torts in the
US.
Ted Brown (12:50):
Yeah, that's a very profitable industry.
Rachel Oh (12:53):
Yes, I guess I just wasn't aware.
Interesting, okay, so they'reincentivized to drum up these
lawsuits just everywhere becausethey've got capital funding
behind them.
Ted Brown (13:04):
In certain jurisdictions.
Rachel Oh (13:05):
That's where a lot of that money is funneled OK so
it's not just the random ladythat gets scorched by a
McDonald's coffee cup.
Ted Brown (13:14):
No, it's not.
But, there's more and more.
Rachel Oh (13:18):
So it's much more complicated.
Obviously it's much more.
Ted Brown (13:21):
It is.
I think there's other factorsas well, social inflation being
one of them.
Yeah, the cost of health care,the cost of defense.
Rachel Oh (13:27):
I was going to say it's got to be health care, it's
got to be a big piece of it,and then, I'm sorry, you said
defense, yeah.
Cost of defense yeah, okay.
Ted Brown (13:34):
So obviously you know going up no-transcript.
(13:54):
Yeah, and so those are allcoming through the system.
Now You're seeing those claimsgo through the roof.
And so you know, with liability, you know you have primary,
then you have, you know,umbrella, you have access, et
cetera.
Well, umbrella and excesscoverage was really just there
for catastrophic stuff, but overthe last 10 years it keeps.
(14:19):
You know these, because of thetort environment, because of
social inflation, theserun-of-the-mill cases are
settling for much higher dollaramounts than they have
historically and it'spenetrating into those umbrella
and excess layers.
Those layers then becomeworking layers.
They're not just there forcatastrophic cases and claims,
(14:40):
and so they've had to try andcatch up to that market as well.
And you see the restriction ofcapacity, yeah, and you see the
supply-demand curve change andthere's a ton of demand and not
enough supply, so pricing goesup.
Rachel Oh (14:55):
Okay.
And until they find a way to beprofitable short of tort reform
carriers are going to have to—I was going to say, unless you
change that like, it seems likeit'll always be.
Whereas natural disasters mayebb and flow and costs may ebb
and flow, but does tort casesebb and flow?
I?
Ted Brown (15:12):
guess you could say they could based upon local
elections.
Rachel Oh (15:17):
Oh, true, true, true true.
Ted Brown (15:18):
But right now, you know it's not a red or blue
state issue.
Well, you know it's not a redor blue state issue.
Some of the red estates arereally tough from a tort
perspective and litigationperspective, and same with some
blue states, and so it's reallyyou can drill down to certain
(15:41):
cities, certain jurisdictionsthat are— they just have a
history of tort.
Yeah, they're really tough, andthe plaintiff's bars in those
jurisdictions do a great job.
You know pushing for massivesettlements, and so they get
them.
Rachel Oh (15:53):
Wow, okay, wow, I just learned a ton.
I had no idea.
Okay, so then you haveliability on one end.
You've got the property on theother end, the property is
starting to ease up, which isobviously, you know, happiness
to my ears.
Tell me then, you know, let'stalk a little bit about.
Just when I look at, myreadership is typically, you
(16:15):
know, investors that are similarto us.
Tell me a little bit about,like, how does it work, state by
state across the union.
Ted Brown (16:20):
You have to look at it through a couple of different
lenses across the union.
You have to look at it througha couple of different lenses.
One is you have to break itdown by asset class and
construction type from aproperty perspective.
So if you think about what'sgoing to lag the market from a
construction type, it's going tobe wood frame, because it burns
down and can blow over.
And so if you overlay wood frame, whether that's hospitality,
(16:44):
whether that's multifamily, andyou put that in, you know, gulf
Coast, texas or in Florida,that's going to be what lags the
market.
When the market's correcting,that's still going to be.
You know, those are theconstruction types that are
going to have a hard timecatching up to the market.
If you have noncombustibleconstruction, so masonry,
non-combustible concrete steel.
Rachel Oh (17:06):
Which is super expensive, by the way.
Ted Brown (17:08):
Super expensive.
Rachel Oh (17:09):
That's right?
Ted Brown (17:10):
Well, but with the cost of insurance.
That's something that realestate owners, investors, need
to think about is okay, whilewood frame may be less expensive
to build, while wood frame maybe less expensive to build.
What's the cost of that over aseven-year hold period compared
to?
The cost of like-edge steel orconcrete.
Rachel Oh (17:33):
Okay.
So, Ted, as we look across theUS right now, what are the key
states that are driving costs ininsurance premiums right now?
Ted Brown (17:42):
Yeah, there's a number of different factors.
You have factors affectingliability that could be
state-specific, jurisdictionallydriven.
Then you have property and thatcan be driven by weather events
, natural catastrophes, crime,etc.
So, going back to your question, what are the states that are
driving this?
(18:02):
You know Florida's tough, it'schanging.
We're, you know, getting better.
Rachel Oh (18:06):
And I feel like Florida has a lot to do with
floods, right.
Isn't that a big piece of it.
Ted Brown (18:10):
Yeah, when you have a hurricane, you know wind is a
big issue.
But storm surge, flood, youknow that's what is kind of you
know the thing that sticksaround the longest and really
causes a lot more damage.
So you can have, you know greatconstruction type.
That is just fine, you know,from a wind perspective.
(18:33):
But then you know you have anentire parking garage get
flooded and you know their HVACgoes out or you know, whatever
that might be, and so I thinkyou know a lot of real estate
developers are getting smarterabout how they build in
cap-prone areas and they'redoing a lot to mitigate loss.
But you know, the Gulf Coast,texas and Florida.
(18:53):
Certain parts of Florida, notall of it, although it gets a
bad rap.
There's certain parts that youknow are a little bit safer than
others.
You know those are tough states.
You go up the Atlantic Coast,south Carolina, in parts of
North Carolina, up into Virginia.
That can be kind of tough.
But the entire state of Texasis really the toughest from a
(19:17):
natural catastrophe standpoint,or not just from a weather event
standpoint, because if you lookat like the DFW Metroplex for
example, you know there'ssomething like 20,000 units that
are getting delivered thereover the next you know I can't
remember what it is.
12 to 18 months and that's a lotmore rooftops, and you have
(19:39):
historic freezes happening andwe're staring at you know the
predictions are this is going tobe one of the most active
hurricane seasons we've had.
But again, good news in themarket.
According to a lot ofunderwriters, they can sustain a
couple of major events andstill be profitable.
Rachel Oh (19:58):
And still be profitable.
Interesting Because they'vecharged us that much in premiums
.
Correct To offset.
Yes, interesting.
Ted Brown (20:05):
Again, it's a cycle.
Rachel Oh (20:07):
It is.
Ted Brown (20:09):
Just like real estate .
You know there's a cycle.
I mean we're in a developmentcycle right now.
Yeah, it's not exactlyfavorable.
That'll come back around.
Rachel Oh (20:17):
So it sounds like, then, from what you're saying,
it's brisk building activity,along with weather.
Those are the only two thingsyou've really mentioned.
Anything else that impacts whatmakes?
Ted Brown (20:28):
like for example.
Rachel Oh (20:29):
You know I'm living here in Salt Lake City.
Ted Brown (20:31):
One of the safest places.
We have nothing going on.
Rachel Oh (20:33):
I mean knock on wood, although right now they are
earthquake proofing.
You know all the temples andwhatnot, and so I think if you
are a believer, like God mustknow something we don't know.
But my point is and then I grewup in Seattle and I don't feel
like anything- happened thereeither.
Ted Brown (20:54):
So are those.
So you're saying like a state,like a Utah is just yeah, A
state like Utah, I mean you takea earthquake out of it.
Rachel Oh (20:57):
It's, it's very, because we're on a fault
technically, but I mean,nothing's well, we had that tiny
little one during COVIDrandomly.
Yeah, you all did that's right.
Yeah, like a tiny little.
Yeah, yeah, it was like a 2.3or something like that.
Ted Brown (21:11):
Something little yeah weirdly, and that's, you know
like.
The bigger concern is when doesthe next big quake come?
Rachel Oh (21:19):
Sure.
Ted Brown (21:20):
And so you know the good thing about development
that's been going on is a lot ofthat is pretty durable
construction from a quakeperspective, you know, and
that's being driven by equityinvestors, that's being driven
by lenders.
That's you know.
If you're developing that's,you know they're going to want
to see.
You know the right quakefitting and the right secondary
(21:43):
characteristics that you know gointo our underwriting.
That you know help preventmajor damage in a quake.
But you know I think yeah, forthe most part, it's construction
type and it's going to beweather, it's going to be
natural disasters.
During COVID we saw civilcommotion, civil unrest be a
(22:03):
factor that was something new.
Rachel Oh (22:05):
Oh yeah, all the looting and all the Fires arson.
Ted Brown (22:07):
So crime does have an effect on property, although
not quite as much as liability.
But the industry had a bigbuilder's risk loss in the Bay
Area a building that was, Ithink, 80, 90% complete and due
to hot works the entire thingburned down.
And you know those are.
(22:28):
Those are major losses as well.
So there's a lot of factorsLike arson or sorry.
What do you?
Rachel Oh (22:32):
mean.
Ted Brown (22:33):
No, they were welding , I believe.
Rachel Oh (22:35):
Oh, and then it caught fire.
Okay.
And I could be wrong.
Ted Brown (22:41):
Ouch, that sounds horrible what happened, yeah.
So there's factors like thatand that that has to go into
pricing as well.
Right, because still one of themain causes of loss in the
insurance industry is fire,especially for wood frame.
But from a state perspective,texas is bad, florida is bad,
(23:03):
but going to Colorado Coloradois not really favorable right
now from a wind or I mean, sorry, from a hail perspective.
Parts of the Midwest are tough,but you know, you get into
Pacific Northwest and it's alittle bit safer.
Yeah, you get into, you knowparts of the Midwest, and things
soften up a little bit.
You know the upper Midwest.
(23:24):
Then you get out towards youknow New York and into New
England and you know you're kindof the liability markets.
Really what's going to kill youout there?
Rachel Oh (23:33):
Yeah.
Ted Brown (23:33):
But you know, from a property perspective it's.
Rachel Oh (23:37):
Pretty chill yeah.
Ted Brown (23:38):
It's not too bad so, but a lot of it, a lot of it's
going to be driven byconstruction type these days.
Rachel Oh (23:44):
Gotcha, you know that's super interesting and, of
course, very relevant to PEG.
So tell me a little bit aboutyour partnership with PEG and
how that like.
So, for example, one of thethings that I noticed we have a
large pension fund that partnerswith us and when we were
working on a large portfolio,they said, hey, we have a good
relationship with so-and-soinsurance company.
(24:04):
We want to introduce you tothem and see if you can't get
favorable rates, which we did,and we were able to insure that
entire portfolio through thatgroup.
And you know that wasn'tsomething we'd really had before
because I think we were moreone-off deals and now we have
larger portfolios and et cetera.
And then I know this move topartner with Lockton is big for
PEC.
It's a big thing.
(24:24):
I think it's going to help uson the bottom line.
So just help me yeah, okay,good.
So help me to understand, like,how that symbiotic relationship
will ultimately impact ourinvestors.
Like how does that, how is thata creative to the real estate
investment overall?
Ted Brown (24:40):
Yeah, I mean, I think you know the best, the best
client relationships andpartnerships is when there's a
couple of different things inplay.
One, a mutual understanding ofwhat's driving the market.
You have to have a partnershipin this type of relationship and
if you're just pounding thetable and you know upset about
rates, then it's hard to thinkcritically and strategically
(25:03):
about you know okay, what's ourlong-term plan here?
How do we create?
you know, some durability andyou know, okay, what's our
long-term plan here, how do wecreate.
You know some durability andyou know from a program
architecture standpoint how dowe make sure that you know
you're beating the market orthat you're financing risk to
level out?
You know the market impact thatyou know the market different
market cycles can have, andthat's one thing that Pegs you
(25:26):
all have done an amazing job atreally you know, learning,
listening and being interestedin the different strategies and
solutions that go along withthat.
I think also another big part ofit is you all embrace data and
you embrace analytics and that's, at the end of the day, you
know what drives a lot of theunderwriting decisions.
Rachel Oh (25:47):
Right.
Ted Brown (25:48):
And so an understanding of your own
exposure, understanding howyou're underwritten in the
marketplace.
Then you can make informeddecisions on what you do long
term.
And that's another big factorin the relationship.
But I think there's also analignment of values between our
two firms.
(26:09):
You all are looking at yourinvestments from a long-term
perspective.
You're looking at your companyfrom a long-term perspective,
and so are we, and that allowsus to come together and be
thoughtful, be strategic and puttogether the best programs,
best solutions that will helpyour insurability and
competitiveness in themarketplace.
(26:30):
So your investors will benefitfrom that partnership, because
the things that we're talkingabout are things that are going
to.
You know, when the market'sgoing up, you're not going to
pay as much.
When the market's going down,you're going to be some of the
first to attract that capital.
Rachel Oh (26:45):
Yeah, no, I love that You're going to be some of the
first to attract that capital.
Yeah, no, I love that.
And again, I love that Iappreciate you mentioning values
, because values is definitelyprobably the most important
thing to peg is making sure wealign with the right groups that
share the same values.
And from my short interactionwith you, I definitely feel like
I can see why we're partneringwith Lockton.
Likewise, that makes me feelgood because, again, when we're
(27:08):
pitching to our investors andthat's what my group does we
like to try to be as holistic aspossible.
So I mean, let's face it, ourreturns are good, they're strong
, but there are lots of othergroups that have good, strong
returns, and so how do wedifferentiate ourselves?
And I think this is as I'mlistening to you, my wheels are
turning.
I'm listening to you, my wheelsare turning.
It's, like you know, we cantalk about these kinds of things
, because insurance does impactthe overall bottom line in
(27:29):
partnering with a group like youfolks and helping us to be more
competitive in the marketplace.
I think will be reallyinteresting.
So it's just another thing Ican, like you know, add to my
value proposition, which.
Ted Brown (27:37):
I love which I love, so this is great.
Rachel Oh (27:40):
OK, so as we look ahead into the future, let's
talk a little bit, then, abouthow do we then forecast for this
.
So we now know.
On liability, you said it'sabout 12, 18 months lagging
behind the property.
We feel like property isgetting to a tipping point, but
you know we have largeportfolios and we have big
strategies, and so it's just anongoing forward thinking process
(28:01):
.
How do you Sigurd or how areyou going to be guiding us as we
forecast specific to insuranceand the way we insure our
different properties andinvestments?
Ted Brown (28:10):
Yeah.
So the thing that you all andother investors need to think
about is yeah, at the end of theday, insurance carriers are
they really just want to pay thebig claims?
Right, they don't want to paythe day-to-day claims.
And if you're just tradingdollars with insurance carriers
and you know one year they'regoing to win and another year
(28:30):
you're going to win and, yeah,that's an unsustainable, you're
just going to ride the waves ofthe market and you have bad
losses one year, your rates aregoing to go up.
You have good losses.
The next year maybe they stayflat, maybe they go down in the
soft market.
So how do you look at that?
Over a longer period of time,you have to finance risk, so you
(28:53):
have to get the carriers out ofattritional losses.
So if you're having a bunch ofsmall fires every year, that's
what eats away at the carrier'sprofitability and, ultimately,
what leads to increased rates ifyou're just looking at an
individual risk basis.
So with you all you know makingsure that we understand clearly
(29:17):
the loss picture and this isfor all real estate investors,
operators, owners understandingthe loss picture.
What's driving your losses,what's driving your exposure?
How are you underwritten by themarketplace?
And then you can start to lookat all right, how can we finance
risk?
You know, over a period of timethat's going to make us more
(29:41):
attractive.
So there are multiple differentrisk finance mechanisms that
we're looking at for you all andthat we look at for all of our
clients.
You can look at plus aggregateprograms on a property basis,
which is basically a largedeductible that's capped and
that you fund for thatdeductible.
Rachel Oh (30:02):
Got it.
Ted Brown (30:03):
And then if you reach it, if you reach a million
dollars, so we cover all thelittle things.
Rachel Oh (30:09):
We're going to be covering all the little things
so that it's not going to bechipping away at the way a
carrier looks at you.
Ted Brown (30:13):
Yeah, If you're having a million dollars in
losses a year, carriers areprobably charging, which I hope
we're not, by the way.
Rachel Oh (30:19):
No, you're not Okay.
Ted Brown (30:20):
Just as an example, but if you are, you know
carriers are going to charge you$1.7 to $2 million to insure
that.
Rachel Oh (30:30):
Okay.
Ted Brown (30:30):
So why trade dollars?
Rachel Oh (30:32):
with them.
Why don't?
Ted Brown (30:33):
you finance for that, then you're funding a million
dollars.
Yeah, if you pay it, you knowgreat, you know then carriers
aren't paying that.
If you don't, you keep thatmoney.
Rachel Oh (30:46):
Got it.
Ted Brown (30:47):
Right.
Then you can start to look atmore sophisticated risk finance
mechanisms.
You can look at captivesolutions.
Yeah, so there's multiple waysin which you can seed captives
and you can do that throughrenter's insurance programs, you
can do that through securitydeposit programs and that allows
you to build up retainedearnings in a captive and then,
(31:10):
once those retained earnings getto a certain point, then you
can expand into other areas thatmight be a little bit riskier.
Maybe on development, it'sthrough subcontractor default
insurance and you can reinsureyour deductible there through a
captive and you build up thatfurther retained earnings.
And then now all of a suddenyou've got a.
You know your captive has apretty robust balance sheet.
(31:31):
Then you can take biggertranches of risk.
Rachel Oh (31:34):
Got it.
Ted Brown (31:34):
Okay.
So there's ways in which youknow, over time you have to have
kind of an immediate, mid andlong-term strategy around risk
finance.
But if you do that, then overthe long-term you're going to
outperform the market and you'regoing to be more aggressive on
the deals that you're competingon, You're going to generate
(31:54):
higher returns and you're goingto attract more capital.
Rachel Oh (31:58):
More capital, which is what I need, just like the
insurance industry.
So interesting.
I did not think you were goingto say that Somehow.
I thought it was some othervoodoo magic, but it sounds like
it's super practical.
Ted Brown (32:09):
Yeah, it's pretty simple.
Rachel Oh (32:10):
I mean it's kind of the way I approach my health
insurance.
Right, it's very similar, yeah,very similar.
Ted Brown (32:16):
It's not complicated and I think you know the
insurance industry is a prettytraditional industry.
I mean up until you knowpre-COVID, I mean going over to
London Lloyd's of London, youstill had, you know,
underwriters sitting out withyou know, outside the boxes with
their files and waiting in lineto go and negotiate the deals,
(32:37):
and you know all of that.
And now you're seeing anevolution in the insurance
industry.
Ai is driving a lot of that.
So there's a lot more.
Rachel Oh (32:45):
How is AI driving that I'm so curious that, so
there's a lot more.
How is AI driving that I'm socurious.
Yeah, so you know AI algorithms?
Ted Brown (32:51):
Yeah, there's, you know, the carriers that have
done it well, the brokers thathave done it well, been
aggregating data for a while,okay, and now that data is
starting to tell a story.
Rachel Oh (33:00):
Yeah.
Ted Brown (33:00):
Now you're getting machine learning involved.
You know predictive analyticsthat are going to be able to
tell you things like okay, well,you know, if you build light
gauge steel versus wood frame,what could that effect be in a
hardening market or in asoftening market?
And we're starting to buildsolutions that can tell us that
(33:23):
Underwriters are using it tounderwrite and we're using it to
advise.
So it's not a complicated deal,but it has also been a pretty
slow industry to adapt andbecause of that there's a lot of
uninformed insurance buyers outthere.
Rachel Oh (33:40):
Yeah.
Ted Brown (33:40):
Because they don't understand it and it's been hard
to understand, but at the endof the day, it's all about how
many losses you're having.
Right Versus how much premiumyou're paying.
How can you get the carriersout of that Finance, that risk
on your?
Own if you're able to, and thencarriers win, you win.
Rachel Oh (33:58):
Yeah, no, I imagine our underwriting team, because
if you think about that, it'snot that they're generalists,
but they have to know a littlebit of everything in order to
plug in the right assumptions.
And I imagine with insuranceit's probably a line item, like
I said.
They probably like okay, well,who's the lowest, you know who's
the cheapest, or whatever, andjust plug that person in, we're
going to use them and withoutmaybe taking a step back and
(34:19):
thinking through theimplications of such and what
does that?
Ted Brown (34:21):
really garner you and then in the end, are you paying
more because you didn'tconsider this, this, this so,
and that can be a decentshort-term solution, yeah, for a
lot of companies, but when themarket's fluctuating, yeah,
you're gonna end up riding it.
So taking a longer termstrategic view of of risk is
ultimately what's going to payoff yeah and those are the
(34:42):
clients that that end up doingwell in tougher markets
Interesting, so insurance is astrategy.
Absolutely.
Rachel Oh (34:50):
So then, is insurance like so, like debt is something
where you have you know terms,you know whatnot.
Is insurance like that Meaning,if we have existing insurance
policies with certain propertiesor portfolios, are we able to
exit those, or are they like?
You know, do you have to and Ishould know more than this, but
I just don't?
So, as an advisor, you know, doyou have to and I should know
more than this, but I just don'tlike so, as an advisor, would
(35:10):
you?
are you going to come?
I imagine you're coming inlooking at our portfolio as a
whole and, hey, these are theareas where we feel like you can
, we can, we would suggest someimprovement and you know, and is
it nimble enough where you canchange things?
Sure, yeah, it is.
Ted Brown (35:38):
You have to look at it again through a couple
different lenses Most insurancecontracts are going to have
90-day minimum earned, so you'renot going to.
You know, once's earned oncehurricane season's over.
So if you make a switch afterthat, you're not going to get
any return premium for you knowthe hurricane exposure that was
insured during that time, and sothere's different windows of
(36:00):
time, depending on how thecontracts are written, that
allow you some flexibility andthe ability to be more nimble.
That allow you some flexibilityand the ability to be more
nimble.
Yeah, there's also timing withthe marketplace.
Yeah.
So right now we're moving inthe right direction.
From a property standpoint, wewant to harness that.
Consolidation is important.
When the market was shiftingabout three years ago, we
(36:23):
started to look at clientportfolios and 75% of the time
and you know, scale one out.
So your economies of scale aregoing to help you, but there's
25% of the time where it madesense to break things up.
Rachel Oh (36:38):
Interesting.
Ted Brown (36:38):
Well, so when you break things up you're dealing
with, you know different carrierpartners that you know will do
smaller regional deals.
They lag the market as well.
So the excess and surplus linesmarkets right now are doing
better.
Certain standard insurancecarriers, travelers, jobs.
Rachel Oh (36:59):
AMTs of the world.
Ted Brown (37:00):
They're doing better.
And then some of those regionalcarriers are still.
They're kind of lagging, so youknow, that you know, piecing
things together may have workeda couple of years ago, but now,
because of where the market'sheaded from a property
standpoint, those economies ofscale are generating better
results these days.
Rachel Oh (37:21):
Interesting.
Wow, ok, now I love that.
It brings up probably mybiggest exposure was again the
largest portfolio we had everraised for and where there was
the most impact because it wasan acquisition portfolio.
So typically we do development.
This was an acquisitionportfolio.
You've got aging assets, so youknow the sounds like we have
(37:44):
the benefit of partnering with agroup like Lockton.
But as asset managers, whenwe're training our analysts and
underwriting teams, whatinformation would be like if you
could say, hey, as you'reunderwriting these, consider
these things too.
Like what?
And that could be market driven, could be not just specific
insurance, but tell me what aresome things that you would
suggest to them that can helpthem in their underwriting, as
(38:04):
they're evaluating again bothdevelopment and acquisitions.
Ted Brown (38:09):
Yeah, I'd say that you know you want to let data
drive your decision making.
So really understanding therisk and exposure for you know
different assets and making surethat you're making informed
decisions.
You mentioned this earlier.
Right, you know, sometimes thecheapest solution might present
itself, but sometimes thecheaper solutions don't actually
(38:30):
address the exposure that youneed and I can see that, yeah,
we earn a lot of businessbecause of that.
So I think understanding theexposure basis is probably the
most important thing andunderstanding what's driving
either cost or loss or you knowyour exposure.
If you look at development, youknow construction type is going
to be a big one, populationdensity is going to be another,
(38:53):
jurisdictions are going to beanother.
So you know Oakland, forexample, a lot of population
density, also a lot of crime,and that's where we saw a lot of
arson occur.
Same with certain parts of LA,and so that's going to factor
into builder's risk, which isproperty insurance for
development.
Then you have constructiondefect, which you know.
(39:15):
Again, certain states are goingto have, you know, tougher
construction defect laws thanothers.
So understanding what theconstruction defect laws are in
the states that you're workingin is really important.
And then how do you addressthat exposure?
So liability is going to be onthe construction defect side on
(39:37):
anything that happens from athird-party standpoint.
That's going to drive liabilityexposure.
The construction type, likewe've talked about, is very
important.
Rachel Oh (39:47):
No wood, that's what I've learned.
No, I'm just kidding.
We do a lot of wood, by the way.
Ted Brown (39:53):
Yeah you do, and a lot of our clients do, because
it's the least expensive way tobuild something.
Rachel Oh (40:00):
Well, height too right, like it's easier, like
most areas are zoned for certainheight restrictions and so
oftentimes it's just an easierlike we're not really this high
rise state, at least our areas.
Of course now we're doing moresignificant building outside the
state.
But yeah, I mean I hear stickconstruction all the time, but
(40:21):
earlier you had said that itdoesn't really matter because
there could be other factorsthat impact.
Ted Brown (40:25):
It does matter, but there are other factors that
impact it, that we can considerat least.
Yeah, I mean you look atlike-gauge steel, like-gauge
steel.
There's some incrediblecompanies out there that are
doing that, have really amazingtechnology from like H-Steel
perspective Build I think it'sBYLD is one of them that you
know their technology.
(40:45):
Basically, you know input inthe architectural you know
drawings, and it comes up with apackage that is already pre-cut
, pre-fabricated, that it justgets assembled on site, and so
it's not just the cost of thematerial.
Rachel Oh (41:04):
It's also the cost of labor and what goes into it.
Well, labor is expensive.
Labor is very expensive.
I mean, I think labor is one ofthe biggest things that impacts
everything that we do,including down to operations,
not just the building phase.
Ted Brown (41:16):
No, it's management.
Yeah, it's all the things.
Yeah, you know that.
You know some of that labor iscontract labor, you know we're
subcontractors, some might beyour own employees.
Rachel Oh (41:26):
Yeah.
Ted Brown (41:27):
You know that's another factor, but you know, I
think from a construction typeperspective there are a lot of
things that can influence thingspositively in terms of the
evolutions that are happening inthat marketplace.
So, you know, you look at core,core plus construction.
You know high rise construction, I mean those are going to be
easy to ensure.
(41:47):
Yeah.
Rachel Oh (41:47):
They're going to be safe.
They're easy for us tounderwrite as well.
Ted Brown (41:50):
Yeah, exactly.
Rachel Oh (41:51):
Well, at least in terms of longevity and in the
investment, yeah, okay, great.
So, as we kind of wrap thingsup, what are the lessons that
you and your company havelearned, probably in this last
period, as I think you called itthe hardening market or, you
know, as we're kind of, at leaston the property side, coming
out of it a bit and you're kindof looking at liability, but
(42:12):
what are some lessons learnedand takeaways and advice you
would give to real estateinvestors today?
Ted Brown (42:17):
Yeah, so I think we've talked about a lot of it,
but letting data informdecisions around risk is really
important and it's not a blackbox.
It's fairly simple tounderstand what's driving
exposure and therefore cost,making sure that you're taking a
long-term view not just of theway that your program is
(42:40):
architected, but also of therelationships in the industry.
You know the underwriters don'twrite a portfolio like yours to
make money in one year.
Rachel Oh (42:51):
No.
Ted Brown (42:52):
They're doing it from a long-term perspective.
Rachel Oh (42:53):
Yeah.
Ted Brown (42:54):
And so sitting with those underwriters, sitting with
those executives andunderstanding how their business
works ultimately helps createthe best carrier partnerships
out there.
Because, when we look at all ofour benchmarking data, you know
, yes, people that arecontrolling risk, that's
something else that we can talkabout briefly.
(43:15):
But people that are financingrisks, yep, they certainly see
better rates.
But the people that have stuckwith historic relationships over
time, those are the ones thathave beat the fluctuation in the
markets, and so you know if—andwe have some clients—.
Rachel Oh (43:34):
And that's a risk control.
It sounds like from kind ofwhat you're saying.
Ted Brown (43:37):
No, Not necessarily.
No, risk control is separate.
That's what you have to do tocontrol risk.
So you know what are you doingto control fire?
What are you doing to controlwater?
Damage water leakage, all thosethings.
How are you controlling thecost of claims?
That's very important, but allof that gets funneled into that
relationship.
Okay, and unless you're sittingin front of those underwriters
(43:58):
telling that story yeah talkingabout all the things that you're
going to do to improve your,your exposure base yeah you're
not really going to.
You're not going to see thebenefit of it.
It's just going to be in a, inan underwriting submission.
So at the end of the day, thisis a relationship driven
industry.
Rachel Oh (44:14):
It is people industry and like all industries are, is
what I'm learning everyonethat's coming here.
That's end of the day.
This is a relationship-drivenindustry.
Ted Brown (44:22):
It is.
Rachel Oh (44:22):
It's a people industry, like all industries
are, is what I'm learningEveryone that's come in here.
That's one of the themes I hearand I would not have.
Ted Brown (44:26):
I mean, I see that insurance now, but I don't think
I would have thought that, yeah, it's critical and the clients
that have that philosophy andthat take a long-term view of
their business and the carrier'sbusiness, then those are the
ones that find alignment withcarrier partners and that's
critical.
But you've got to do the stuffon the other end to control
(44:49):
losses and going back totechnology.
There's great technology outthere that, from a leak
detection standpoint, waterdamage is a huge cause of loss.
Rachel Oh (45:00):
Yeah.
Ted Brown (45:00):
From a fire standpoint, from then also
controlling the claims.
So, making sure that you're not, you know, looking to inflate
claims just to make money makingsure that you're controlling
those costs, because those costsgo into your loss experience.
Your loss experience is what'sgoing to be used to underwrite.
Yeah and you're going to end uppaying for it one way or
(45:20):
another, and so making sure thatyou have good alignment with
those carrier partners around.
All right, this is what we'regoing to do.
This is our litigation strategy.
This is what we're going to dofrom a loss control standpoint.
This is how we're going tohandle claims.
That's where the rubber meetsthe road for them.
Ultimately you can't doanything about a hurricane.
Rachel Oh (45:38):
You can't do anything about hail.
But if we have all thosecontrols in place or policies,
or we've thought it through, andwe have those mitigation things
, then that's what you're saying.
Ted Brown (45:48):
It's additive to just the hard numbers.
That's right.
It's blocking and tackling.
Rachel Oh (45:52):
Okay, yeah, I, blocking and tackling.
Okay, yeah, I like that.
But I think I think the otherthing that I've learned is that
it is cyclical.
Okay, I'm glad that you saidthat it will get better.
I feel like in at least inconstruction, we've kind of
accepted the fact thatconstruction costs are here to
stay, like it is not going, likethis is the new norm.
We know that interest rates, ina way, are cyclical, but we
don't see any reprieve there.
(46:13):
But the fact that you'retelling me the insurance costs
are cyclical, that's like musicto my ears.
Yeah, that's amazing, yeah.
Ted Brown (46:19):
Well, I think I mean interest rates.
I think it was Citibank or oneof the big banks just said that
they expect over the next 12 to18 months 200 basis points and
rate cuts.
I mean that's cyclical in apositive direction.
So it's all cyclical.
Rachel Oh (46:37):
I would love 200 bps.
Repeat that's awesome, yeah,okay, let's make that happen.
What can you do to that?
I can't control that.
Come on, come on, ted.
Okay, well, awesome, well, Ilove that.
I appreciate your time andhelping us to better understand
insurance as it relates tocommercial real estate and the
(46:58):
investment side.
I've learned a ton, and Iimagine our listeners have as
well.
Ted Brown (47:02):
Thank you for having me.
I hope I was helpful.
Rachel Oh (47:03):
I very much appreciate it.
So, again, from the peaks ofthe Mountain West, I am Rachel
oh, host of Peaks and Portfoliosby Pet Companies.
Thank you again, ted, forjoining us and for all those who
joined in, and we'll see youall next time.
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