Auto insurance may become more expensive if the United Auto Workers (UAW) decide to strike against the Detroit-Three automakers. This development is concerning for auto-insurance stocks and has raised questions about the connection between strikes and insurance costs. However, a closer look at recent history reveals the underlying reasons for this potential price hike.

According to the Bureau of Labor Statistics, new and used car prices have risen by approximately 47% compared to pre-pandemic levels. One of the contributing factors to this increase is the limited supply of cars in the market. Prior to the pandemic, Americans purchased approximately 17 million units annually, but this number has dropped to around 15 million units. As a result, there is a scarcity of available cars. Benchmark analyst Mike Ward highlights that "U.S. light-vehicle dealer inventory ended July at 1.79 million units," which is the highest level since April 2021. However, it still falls short by approximately 1 million units compared to typical levels.

The rising prices of cars have a ripple effect on the cost of parts and repairs, consequently increasing auto-insurance rates. In July, insurance rates surged by nearly 18% year over year, and they are now approximately 25% higher than pre-pandemic levels.

Such substantial growth in car prices and insurance rates has had a detrimental effect on the profit and loss statements of auto insurers. Allstate, for example, experienced a significant decline in operating-profit margins, dropping from about 15% in the fourth quarter of 2019 to a negative 4% in the fourth quarter of 2022. In the second quarter of 2023, their operating-profit margins were approximately negative 8%, as reported by FactSet.

As insurance price increases are just beginning to catch up with these challenges, another threat looms with the UAW potentially striking against all three Detroit-based automakers: General Motors, Ford Motor, and Stellantis (parent company of Chrysler). If a new labor deal is not reached by midnight on September 14, this strike could exacerbate the already precarious situation faced by auto insurers.

In conclusion, the potential strike by the United Auto Workers against the Detroit-Three automakers poses a significant risk to auto insurance. The increase in car prices and subsequent rise in insurance rates have already impacted insurers' profit margins. This additional threat further complicates an already challenging environment.

Auto Insurance Industry Faces Potential Strike Impact

A potential strike by the United Auto Workers (UAW) poses a significant threat to auto insurers, according to J.P. Morgan analyst Jimmy Bhullar. In a recent report, Bhullar emphasized the disruptive effects a strike would have on supply chains, new vehicle production, and used car values.

The repercussions of a strike could set off a domino effect similar to the challenges faced during the post-pandemic period. As supply dwindles, car prices are likely to rise again, leading to higher insurance rates as companies struggle to bear the increasing costs.

Among the insurers most affected by a potential strike are Allstate and Progressive (PGR), although Bhullar remains optimistic about both companies' prospects, rating their shares as a Buy. He has set a price target of $154 for Allstate and $146 for Progressive. As of Wednesday's close, the respective share prices stood at $107.93 and $134.84.

As fears of a strike loom, automaker stocks have experienced an average decline of 8% over the past month. In contrast, the S&P 500 only saw a marginal slip of about 1%. Insurance stocks, however, do not seem to have been directly impacted. Allstate's stock has dipped approximately 3%, while Progressive's shares have risen by about 6% over the same period.

Investors are eagerly awaiting a rebound in insurer profitability. Allstate's stock has fallen by around 14% over the past year, while Progressive's shares have shown modest growth of 6%, trailing behind the Nasdaq Composite's gain of approximately 18%.

Analysts on Wall Street anticipate a shift in margins for auto insurers. They project that Allstate will achieve operating profit margins of 1% and 5% in the third and fourth quarters, respectively. Similarly, Progressive's operating-profit margins are predicted to reach 6% in the third quarter and 7% in the fourth quarter of 2023, a significant increase from the 2% recorded in the second quarter.

While the insurers may eventually see improvements, drivers should anticipate higher insurance rates. The prospect of a strike is unfavorable for both groups involved.

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