By David Bull
Feb 3 - (The Insurer) - Analysts from BofA Securities have said that the US tariffs on Mexican imports announced by the Trump administration are likely to impact auto loss cost trends, making it less likely carriers will cut prices.
The White House announced that President Trump is implementing a 25 percent additional tariff on imports from Canada and Mexico as well as a 10 percent tariff on Chinese imports, in response to what it claimed to be a national emergency related to “illegal aliens and drugs”.
In a note Monday, BofA Securities analyst Josh Shanker said: “The announced US tariffs on Mexican imports is likely to impact the cost of auto parts and auto collision loss trends. The potential… auto insurers will seek to cut prices seems less likely with higher auto repair costs seemingly looming.
“Higher auto loss costs may cause margins to contract, but they likely mean a less competitive marketplace and higher prices.”
The analyst noted that the US imported $65bn in vehicle parts and $93bn in vehicles from Mexico in 2023.
“While the causes of 2022-2024 automobile insurance inflation are many, among the key drivers was the sharp rise in used cars/parts during 2020-2021 as the demand for mobility surged during the pandemic in concert with tariffs, inflation and supply chain disruption.
“Higher vehicle and parts costs will likely translate into rising loss trends for auto physical damage severity, though we expect there would be a lag between the implementation of tariffs and the rise in costs,” he commented.
In the note, Shanker added that the main bear thesis for auto insurers is that the business is currently “over-earning” after several years of price increases, and was poiosed to enter a phase of heightened competition including price-cutting.
“Notwithstanding the fact that notable auto insurance price cutting has not occurred since the mid-1950s, the uncertainty around what tariffs means for the future loss trends could likely blunt the impulse to reduce pricing.
“It is very easy to cut prices, but increasing prices in the more populous states generally involves the approval of local regulators. The price increases of the past three years were arguably hard-won, and the auto insurers may not be so quick to give them up, in our view,” he commented.
The note continued by suggesting that margins for auto insurance are currently at or near the peak.
It suggested that used parts inflation would likely contribute to a deterioration of current auto insurance underwriting margins, but it does not appear as if auto insurers are currently being valued with the assumption that current margins will be sustained, based on historically low price-to-earnings multiples.
“Margin deterioration would not impact our view of fair value, while changes in the trajectory for growth would. In our view, the biggest risk to the growth outlook for Allstate and, in particular, Progressive is sustained disinflationary pressures that level the playing field between those companies with sophisticated auto insurance pricing algorithms, and those that do not.
“Loss cost trend uncertainty, we believe, fuels market share transfer toward sophisticated, economies-of-scale leaders,” Shanker continued.
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