Auto Insurance Industry: Long-Term Challenges
Portfolio Manager Rob Almeida talks with our Jeff Cho about the challenges that impact the auto insurance industry.
Title: Auto Insurance Industry: Long-Term Challenges
Abstract: MFS Portfolio Manager Rob Almeida talks with Research Analyst Jeff Cho about the long-term structural challenges that could impact the auto insurance industry.
Rob Almeida: Hi. My name's Rob Almeida. I'm an institutional portfolio manager here at MFS, specifically working on our US large and mid-cap growth equities strategies. I'm thrilled to be joined by our financial sector services leader, Jeff Cho. He's been an analyst at MFS now since 2008. Today, we're going to be talking about the auto insurance industry. There are some undercurrents, as you and your team were discussing that perhaps present some long term structural challenges or risks.
Jeff Cho: Shared vehicles, Uber, telematics, aggregators, and longer term, automous vehicles. That is a potential risk to not only returns, growth, and the risk profile of a lot of these companies.
Rob Almeida: The Uber one, or the shared vehicle dynamic is probably fairly obvious, fewer drivers. What's telematics?
Jeff Cho: Telematics is a way for insurance companies to monitor your behavior while you're driving. You can put a device in your car right now and the insurance companies will monitor how fast you drive, how long you drive, what time you drive, and actually how hard you brake. They can monitor whether you're a good driver or a bad driver, and based upon that analysis, they'll give you a discount or raise your prices up higher.
Rob Almeida: What exactly do you mean by aggregators?
Jeff Cho: One way to think about aggregators is it's an internet platform that allows you to compare prices across multiple carriers and immediately see where you get the best price and the best value. What the fear is right now is that these aggregators will compress pricing down on an industry that is already pretty competitive. When you think about auto insurance, it's a pretty competitive commodity-type product.
Rob Almeida: We have a commodity-type product, potentially long term under pressure because of fewer drivers, and aggregators, internet platforms that can bring transparency, competition and price deflation along with telematics that you described earlier that could substantially change future cash flows longer term.
Jeff Cho: What I worry about, when I think about valuation, I think about stocks. There's three things that I really focus on always. I look at growth. I look at returns. I look at the risk, the risk profile where you can think about as the cost of capital in the company. When I break down those four structural long term challenges within the industry, I start with Uber, shared vehicles. Right? If people start using more of that and don't get driver's licenses and don't buy auto insurance, growth is going to slow within the industry. When you think about telematics, same thing. If people start using telematics and the good drivers start subsidizing bad drivers, we may get premier shrinkage meaning growth will continue to slow. On the aggregator side, you may get increased competition, now pricing is getting compressed and your returns are going to come down. The last one, autonomous vehicles, a lot of people that we talk to in the industry, say autonomous vehicles is a matter of when, not if. Overall, when you think about the long term duration of growth for this industry, it may be negative for a very, very long time.
Rob Almeida: Maybe best case scenario, we have long term margin compression. Worst case scenario we have pretty significant value erosion in these names.
Jeff Cho: Potentially. That's why there's a big debate right now in the industry of whether you think about short term increasing your profitability versus that long term potential degradation of returns and growth in the industry.
Rob Almeida: Which, is what we talk about so much internally here. The market's very short term, linear way to think about companies and stocks. It's more important than ever to really look at long term look. You just describe the auto insurance.
Jeff Cho: Absolutely. I think it's a balance of both and you look at it. That's what we try to do every single day here at MFS.
The views expressed are those of the speakers and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation to purchase any security or as a solicitation or investment advice from the Advisor.