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Climate, Catastrophe Bonds, and Condos

Updated: Jan 4

A tornado

For high net worth multifamily investors, the insurance landscape is not just shifting— it's transforming. From the challenges of climate change to the introduction of innovative financial tools, these changes carry profound implications for the multifamily real estate market. Let's delve deeper, incorporating insights from recent industry analyses.

Understanding the Insurance Challenges

Climate Change and Natural Disasters:

Natural disasters, amplified by climate change, are becoming more frequent. Severe thunderstorms in the U.S. alone accounted for 68% of global insured losses in the first half of 2023. This has prompted insurance companies to retreat from high-risk areas, leading to a spike in policy non-renewals and cancellations. In California, the repercussions are evident with a 774% increase in canceled homeowner policies from 2015 to 2021.These cities, with their unique characteristics and high rental rates, present a compelling case for the changing dynamics of the American housing landscape.

The E&S Evolution:

With traditional insurance becoming harder to obtain, especially in states like California and Florida, homeowners and businesses are increasingly turning to excess and surplus lines (E&S). The rise of E&S is a response to threats like wildfires, leading to a reduced capacity in the admitted market. An analysis by S&P Global Market Intelligence highlighted that E&S direct written premiums in the U.S. surged by 27.6% year over year during the first six months of 2022, reaching $37.60B.

The Emergence of Catastrophe Bonds:

Catastrophe bonds (cat bonds) are a novel financial solution designed to address the limitations of traditional insurance. They allow insurers to transfer specific risks, such as those from natural disasters, to investors, thereby creating a balance of complexity and opportunity. The market for cat bonds has grown significantly, with a notable surge in risk-adjusted property-catastrophe prices and a current market value exceeding $4B. These bonds are gaining traction among diverse investors, including hedge funds and the ultra-rich, as they offer attractive returns and diversification benefits, although they also entail the risk of total principal loss.

How cat bonds work is integral to understanding their role in the insurance sector. Insurers issue these bonds through special-purpose entities to raise capital from investors. In return, investors receive interest payments. However, if a predefined catastrophe occurs, the principal invested can be converted to aid the insurer in covering the losses, leading to a potential loss for the investor. This mechanism enables the sharing of the financial burden of natural disasters between insurers and investors, making cat bonds a pivotal tool in the evolving landscape of home insurance and risk management. The significance of these bonds is underscored by the 33% surge in risk-adjusted property-catastrophe prices as of June 1, 2023.

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The Home Insurance Bubble:

The U.S. home insurance market is showing signs of a potential bubble. The volatile environment raises questions about the industry's resilience, which could impact property values and investor returns. Homes in high-risk areas face potential value drops of 12%-48% if they lose insurance coverage.

Insured losses trend

Insurtechs' Roller Coaster Ride:

Insurtechs experienced significant ups and downs in 2022. Companies like Root Inc. faced challenges, with its stock value plummeting by 91.5% by the end of 2022. Similarly, Lemonade Inc. reported a net loss of $241.3M for the full year 2021, almost double the loss from the previous year.

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Multifamily Real Estate: Charting the Course

Insurance Costs and Availability:

The re-evaluation of high-risk zones by insurance companies might lead to soaring premiums for multifamily properties. This retraction can also impact property values significantly.

Property Valuations:

Risk awareness is shaping buyer decisions, leading to a preference for safer properties. This shift can influence the ROI for multifamily real estate investors.

Risk Management with Cat Bonds:

Understanding cat bonds and similar insurance alternatives is now essential. The spike in reinsurance costs underscores the need for adept risk management in this fluid scenario.

Strategic Investment Decisions:

Multifamily investors should consider revising their strategies, possibly focusing on areas less vulnerable to climate-related disasters or those with strong insurance frameworks.

Guidelines for Investors

  • Stay Updated: Periodically assess insurance trends and their potential repercussions on property values.

  • Diversify Your Portfolio: Consider diversifying investments across regions to balance risks.

  • Consult the Experts: Engage with industry professionals for invaluable insights.

Key Takeaways

  • Recognizing the Challenges: The insurance domain is contending with monumental challenges, primarily due to the rising severity and frequency of natural disasters, intensified by climate change.

  • Adapting Strategically: The pullback from high-risk zones and the advent of cat bonds are revolutionizing the insurance sector, demanding astute adaptation by investors.

  • Managing Risks: Grasping the intricacies of novel insurance tools and staying updated is pivotal for efficient risk management.

  • Valuation Impacts: The changing insurance scene can sway property valuations, thereby influencing ROI.

Final Thoughts

For passive multifamily investors, the key lies in being proactive, well-informed, and adaptable. By tweaking strategies and staying abreast of developments, investors can not only protect their assets but also seize new opportunities in this ever-evolving landscape.

Be Bold, Be Great, and Keep Pushing Forward!

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P.S. If one of your priorities, like mine, is building and preserving your wealth through multifamily real estate investments, click here to discuss how we can partner together.



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About Ellie Perlman

Ellie Perlman

Ellie Perlman is the founder of Blue Lake Capital, a commercial real estate investment firm specializing in multifamily investing throughout the United States. At Blue Lake Capital, Ellie partners with both institutional and individual investors to grow their wealth by achieving double-digit returns by investing alongside her in exclusive multifamily deals they usually don't have access to.

A defining factor of Blue Lake Capital’s strategy is founded in utilizing machine learning/artificial intelligence throughout the course of all acquisitions and asset management. This advanced technology enables the company to produce accurate and data-driven forecasting for all assets on a market, property, and even tenant basis. In doing so, Blue Lake is able to lead commercial investments with the full capabilities of today’s technology.

Blue Lake Capital is the sponsor of REady2Scale, a podcast that highlights the assets, processes, and strategies for the multiple approaches to successful real estate investing.

Ellie started her career as a commercial real estate lawyer, leading real estate transactions for one of Israel’s leading development companies. Later, as a property manager for Israel’s largest energy company, she oversaw properties worth over $100MM. Additionally, Ellie is an experienced entrepreneur who helped build and scale companies by improving their business operations.

Ellie holds a Masters in Law from Bar-Ilan University in Israel and an MBA from MIT Sloan School of Management.

You can read more about Blue Lake Capital and Ellie Perlman at


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