Over the past few months, the United Auto Workers (UAW) union, representing nearly 150,000 employees at General Motors, Ford Motor Company, and Stellantis (the conglomerate that owns the Chrysler and Jeep brands), has worked on negotiating a new labor agreement that would increase salaries and benefits for its employees over the next several years. With the current contract set to expire today, the union may go on strike, which could ripple across the industry.
Some experts warn that the strike may disrupt supply chains and increase prices for new and used cars. The strike could also pressure auto insurers that have had to cope with higher car and replacement parts prices for several years. You'll want to monitor the negotiation and potential strike if you own investments in auto insurers like Progressive (PGR +3.28%) and Allstate (ALL +2.14%). Here's why and what you can do about it.
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Key Data Points
What the UAW is negotiating for
The UAW is a labor union formed in 1935 that primarily represents over 391,000 workers in the U.S. in auto, auto parts, healthcare, and higher education. In recent months, the union has negotiated with the three major U.S. auto manufacturers as its current four-year deal ends in mid-September. The negotiations come when labor union support is near a historical high point. According to a poll by Gallup, 71% of Americans approve of labor unions, the highest measure Gallup has recorded since 1965.
UAW President Shawn Fain has asked for a 40% wage increase over five years, cost of living adjustments, and reinstated pensions (to name a few of the demands) for its current members. Automakers made counteroffers to the union's proposals, but Fain rejected them, saying they didn't come close to meeting the union's demands.
Fain said he hopes to make a deal before the Sept. 15 deadline and could be more flexible in union demands to make a deal. The UAW could call for its employees to strike if the two sides cannot agree on a new deal before the contract deadline.
How a possible strike could impact supply chains
JPMorgan Chase analyst Jimmy Bhullar said, "A strike would disrupt supply chains, cut new vehicle production, and drive an uptick in used car values." The impact could lead to a shortage of cars, a common theme during the pandemic.
Car prices have been falling in recent months. According to the Manheim used vehicle index, the cost of all vehicles was down 7.7% in August compared to the same month last year. Despite the recent price declines, used vehicles are still up more than 36% from pre-pandemic levels.
Image source: Getty Images.
Auto insurers could face even more pressure on their underwriting profits
Used car shortages and higher associated prices significantly affected auto insurers following the pandemic. That's because the higher car prices raise the cost of replacement vehicles if an insured customer totaled their car. Not only that, but other supply chain issues increased the cost of auto parts, raising the cost of auto repairs, too.
If the union workers strike, insurers could face another wave of rising costs driven by higher car prices. It would come at a time when auto insurers have posted their most extensive underwriting loss in 12 years, according to S&P Global Market Intelligence. Property and casualty insurers had a net underwriting loss of $7.3 billion in the first quarter. Last year, they had a net profit of $4.3 billion.
What investors should do
The news about the potential auto workers' strike shouldn't alter your view on insurance stocks, and you definitely shouldn't rush for the exits if you own them. The ramifications could have an industrywide impact on all insurers. Insurers have pricing power primarily because they offer a product that is always in demand, so if claims costs rise, it could ultimately result in higher premiums customers pay in the long run.
No one can predict if a deal will happen today or if auto workers will be on strike by this time next week. Given that uncertainty, what you can do is maintain a long-term investment perspective and stay diversified across insurance stocks. Life insurers like Aflac can be solid, and excess and surplus insurers like Kinsale should continue leveraging their expertise to deliver market-beating returns.
It's also a reminder to invest in quality companies at the top of their game. Progressive has an auto-heavy insurance business and has done a stellar job of underwriting profitable policies for decades despite broader industry challenges over the years. If the stock does dip from this news, it could be an excellent opportunity to scoop up some shares.
