Enjoy the summer sunshine now because a visit with German policymakers has a few European analysts fearing a cold and expensive winter. Also, we think investors have yet to factor higher future costs into commercial insurer stocks.
The European energy and utilities teams met with German policymakers last week and came away with a bearish picture of a gas supply crisis in the making. Germany took steps last week to reduce gas demand in order to boost winter storage to 90%, but even if successful, a full disruption of gas supply from Russia would be severe, especially for German industry. And though bringing back coal plants is part of the short term solution, the government remains committed to coal phase-out by 2030 and committed to renewables, especially onshore/offshore wind and solar. Parliament is currently debating legislation that would shorten the wind permitting process. Head of European Energy Equity Research Chris Kuplent continues to believe liquefied natural gas (LNG) will be tighter for longer and Europe gas prices higher for longer too.
US Insurance Analyst Josh Shanker examines how inflation is a much bigger potential balance sheet problem for US commercial Property & Casualty (P&C) insurers than for personal lines P&C. Personal lines insurers are seeing inflation now as high prices for autos, auto repair and homes have already impacted margins significantly relative to pre-Pandemic. But pricing gets passed through fairly quickly and higher prices can allow scale underwriters with superior distribution to gain share. Meanwhile, though commercial P&C stocks have generally kept pace with personal lines peers, commercial insurers have a multi-year backlog of unpaid claims and current underwriting comprises inflation sensitive payments that will be made long into the future. Wages, medical care, legal bills and jury awards could eventually inflate and this comes after a decade in which commercial insurers benefitted from what had been overestimated inflation rates.
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