April CPI：Decelerating Inflation Trends Are a Mixed Blessing for P&C Insurers

DeutscheBankResearch NorthAmerica UnitedStates Financial Insurance/Nonlife Industry AprilCPI Date 15May2024 MarketUpdate DeceleratingInflationTrendsAreaMixedBlessingforP&CInsurers MotorVehicleInsurancePriceIncreasesWellAboveClaimsInflation Motorvehicleinsurancepricesrose22.6%year-over-yearinApril,accordingtothelatestConsumerPriceIndex(CPI)reportpublishedthismorningbytheUSBureauofLaborStatistics.Thismarksaslightincreasefromthe22.2%reportedinMarchandremainswellaboveourproxyforcostofclaims,whichweestimaterose4.1%YoYinApril(2.8%formotorvehiclesparts&services,and5.4%formedicalcareservices).Inotherwords,fromaninsurer'spointofview,pricescontinuetoincreasefasterthan(loss)costs,whichisgoodforshareholders. CaveMontazeriResearchAnalyst +1-212-250-2798 Distributedon:15/05/202420:26:11GMT Figure1:MotorVehicleInsurancePriceIndexvs.DriversofLossCosts 25% 20% 15% 10% 5% 0% −5% −10% −15% Apr−12Apr−13Apr−14Apr−15Apr−16Apr−17Apr−18Apr−19Apr−20Apr−21Apr−22Apr−23Apr−24 MedicalServicesVehicleParts&ServicesMotorVehicleInsurance Source:BloombergFinanceLP,USBureauofLaborStatistics,DeutscheBank. Lookingatthedetails,wenoteareturntothedowntrendinVehicleParts&Servicescostinflation(thedottedlightbluelineinthechart).ThisisprimarilydrivenbyanaccelerationinUsedCarsandTruckspricedeclines,offsetbyhigherMotorVehicleBodyWorkandRepairs.MedicalCarecosts(thesoliddarkbluelineinthechart) DeutscheBankSecuritiesInc. IMPORTANTRESEARCHDISCLOSURESANDANALYSTCERTIFICATIONSLOCATEDINAPPENDIX1.DeutscheBankdoes andseekstodobusinesswithcompaniescoveredinitsresearchreports.Thus,investorsshouldbeawarethatthefirmmayhaveaconflictofinterestthatcouldaffecttheobjectivityofthisreport.Investorsshouldconsiderthisreportasonlyasinglefactorinmakingtheirinvestmentdecision.MCI(P)041/10/2023. 7T2se3r0Ot6kwoPa continuetorise,drivenbyhigherHospitalServicescosts. Motorvehicleinsurance'scontributiontotheCPIreportisup5xoverthepast2years,andcontributed58bpstowardsthe3.4%headlineCPIprint(beforeseasonaladjustment)inMarch. TheseasonallyadjustedCPIindexformotorvehicleinsuranceisup47%overthepast5years,and+72%sincetheCovidtrough.Motorvehicleinsurance'srelativeimportanceintheCPIreportiscurrentlyhigherthanthatofcategoriessuchasfood,apparel,electricity,andtuition/childcare.Thatlevelofpriceincreaseisprobablynotsustainable,especiallyifcostinflationcontinuestorunwellbelowpricing.ThiswashighlightedbyChrisSwift,CEOofTheHartford,duringitsmostrecentconferencecall:"autorenewalwrittenpriceincreasesofnearly26%havelikelypeaked,givenourviewofmoderatinglosstrendsfortheremainderoftheyear." PersonalLinesTrendingintheRightDirection WhileCPIdataservesonlyasaproxyforinsuranceratesandclaimstrends,webelievethattoday'sreportisanotherpositiveindicatorforthenon-lifeinsurancecompaniesundercoveragethathaveunderwritingexposuretoAutoInsurance:Hartford(Holdrated,$101.33),Travelers(Holdrated,$217.59),Chubb(Buyrated, $253.16),andAIG(Buyrated;$79.44). Wemaintainaconstructiveoutlookonthebroadernon-lifeinsurancesectorinthemediumterm,bothpersonalandcommerciallines.Ourconfidencestemsfromtheexpectationthatpriceswillcontinuetoincreaseatafasterpacethanlosscosts.Weprefercompaniesthathavemanagedtheircasualtyreservesconservatively,byrecognizingbadnewsearly,andfavorabledevelopmentsslowly. SectorRotationHeadwinds Today'sCPIreportcoincidedwithcoolingretailsalesnumbers,causingarepricingofthefixedincomecurve.ThebondmarketisnowanticipatingtwoFedcutsthisyear,withthefirstpotentiallyoccurringasearlyasSeptember.Thisexpectationhaspromptedasectorrotationwithinthefinancialsector,fromthemoredefensiveP&Csectortohigherbetaandmorerate-sensitiveindustrygroupslikeREITsandBanks. Thistrendhasbeenunderwayforafewweeksnow,sincetheFedmoreorlessshutthedooronthepossibilityofasoonerratehike.Today'sdataprovidesthemarketwithadditionalvalidationthatcutsarecomingandthattheycouldoccurearlierthansomeexpect.Forthatreason,webelievethattherisk-rewardislikelyskewedtothedownsideinthenearterm,butwearenotfundamentallyconcernedwiththeimpactofratecutsontheP&Csector,providedthattherate-cuttingcycleisshallow(ourbasecase)anddoesnotsignificantlyaffectnetinvestmentincome. Appendix1 ImportantDisclosures *Otherinformationavailableuponrequest *PricesarecurrentasoftheendoftheprevioustradingsessionunlessotherwiseindicatedandaresourcedfromlocalexchangesviaReuters,Bloombergandothervendors.OtherinformationissourcedfromDeutscheBank,subjectcompanies,andothersources.Fordisclosurespertainingtorecommendationsorestimatesmadeonsecuritiesotherthantheprimarysubjectofthisresearch,pleaseseethemostrecentlypublishedcompanyreportorvisitourglobaldisclosurelook-uppageonourwebsiteathttps://research.db.com/Research/Disclosures/EquityResearchDisclosures.Asidefromwithinthisreport,importantriskandconflictdisclosurescanalsobefoundathttps://research.db.com/Research/Disclosures/Disclaimer.Investorsarestronglyencouragedtoreviewthisinformationbeforeinvesting. AnalystCertification Theviewsexpressedinthisreportaccuratelyreflectthepersonalviewsoftheundersignedleadanalystaboutthesubjectissuersandthesecur