This Week’s Edition
Why are Homeowners Insurance Rates Rising?: Examining the increasing financial burden of being a homeowner.
Is Philip Morris Rebranding Addiction with ZYN?: The explosive emergence of oral nicotine pouches in the United States.
Other Interesting Data Findings: American household spending budgets; labor-replacing automation; trends in working from home.
Current Situation
As shown by the CME FedWatch Tool, there are two rate cuts projected by year end - one in September and the other in December. By June 2025, current probabilities show a target rate of 425-500, which equates to 4 rate cuts.
In the short term, tomorrow’s release of the Personal Consumption Expenditure (PCE) Price Index, the Federal Reserve’s preferred measure of inflation, is likely the most anticipated economic report, which may impact rate change probabilities.
For the stock market, NVIDIA’s annual shareholder meeting yesterday was a highlight as NVIDIA’s current market cap is greater than the United Kingdom’s latest GDP number. So far this year, for S&P indexes, the Information Technology (+28.4%) and Communications Services (+27.2%) indexes have shown great performance – as NVIDIA (+155.2%), Meta (+45.0%), and Alphabet (+31.5%) continue to outperform the broader market as measured by the S&P 500 Index (+14.8%).
On the real estate front, the 30 year fixed mortgage rate, as measured by Mortgage News Daily’s Daily Survey, increased to 7.06% after briefly dipping below 7% two weeks ago. On a national level, there is a 17% increase from last year in active listings as the median sales price has reached an all-time high of $396,000.
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Why are Homeowners Insurance Rates Rising?
Bankrate reports that the hidden costs of homeownership — including property taxes, homeowners insurance, energy costs, Internet and cable bills and home maintenance — is 26% higher today than in 2020.
The Larger Picture
This equates to $18,118 a year for a typical single-family home valued at $436,291, or a monthly amount of $1,510 in addition to mortgage payments. States with the largest percentage increases include Utah (44%), Idaho (39%), Hawaii (38%), Montana (36%), and Tennessee (36%).
A growing anxiety for homeowners is the rising cost of homeowners insurance. The Insurance Research Council (IRC) reports that the average expenditure on homeowners insurance increased from $508 in 2001 to $1,411 in 2021, or a 5% annualized rise.
Are these price hikes justified?
Overall, high inflation, catastrophe losses, and higher reinsurance have been recent contributors to this industry’s underperformance and rate hikes for customers.
The U.S. Property and Casualty (P&C) insurance market, which includes homeowners insurance, has historically underperformed in terms of rate of return against other industries — as shown in the graph below. The trend is under more pressure today as a May 2024 S&P report stated that the U.S. homeowners insurance industry posted its worst underwriting results in over a decade in 2023.
The goal of an insurance carrier is to generate high risk-adjusted returns and, in response to losses, increase premium rates and limit geographic exposure where returns are not desirable for the carrier.
Typically (and simplified), insurance carriers such as State Farm collect underwriting revenue from insurance premiums. Premiums then may be reinvested into fixed income instruments, such as government bonds, to generate investment income.
To mitigate risk, insurance carriers may purchase reinsurance. Reinsurance is the insurance for the insurance carrier. Through reinsurance, an insurance carrier like Allstate transfers their risk (their customers’ insurance policies) to a reinsurance company to limit losses from a high-risk geographical location.
From building materials and structures to the rating and proximity of the nearest fire station, there are many factors that influence the premium you pay for your homeowner’s insurance.
As shown in the graph below, insurance carriers have recently experienced significant “lag” in adjusting rates. Inflation costs have increased operating losses and rates were not increasing enough to cover these losses. To adjust to the higher operating losses caused by inflation and a higher frequency of catastrophic events, carriers have, in some cases, dramatically increased their premium rates.
A metric used to examine an insurance company’s operating performance is its loss ratio. This is calculated by dividing direct losses incurred by insurance carriers for paid out claims by premiums earned. A lower ratio indicates better operating performance for an insurance carrier, and vice versa.
In 2023, some homeowner insurers experienced higher ratios of this metric because of catastrophic events amid “inflation in the construction industry, building materials and home furnishings … [and] short-term supply imbalances for services and supplies in areas affected by catastrophes.”
For Allstate (ALL), which is the second largest provider of homeowners insurance in the U.S. (8.9% of the market) after State Farm (17.8%), catastrophe losses jumped a staggering 81.1% or $2.52 billion in 2023 compared to 2022 due to an increased number of wind/hail events and larger losses per event. The number of wind/hail related catastrophe loss events dramatically increased from 85 ($1.9 billion) in 2021 to 136 ($5.1 billion) in 2023.
In the first quarter of 2023, Gallagher, a global insurance broker, stated that an increase in U.S. Severe Convective Storm (SCS) activity resulted in an overall economic impact of greater than $13 billion and insured impact of greater than $10 billion — the most expensive first quarter in history for this type of catastrophe.
As a result of these catastrophe losses and high severity (higher cost of an insurance claim attributed to inflation), Allstate’s loss ratio jumped from 71.1 in 2022 to 85.4 in 2023.
The high number and impact of catastrophic losses in the first quarter of 2023 has contributed to de-exposure to certain geographical markets. Allstate no longer underwrites homeowners policies in California due to catastrophic risks, as well as economically disadvantageous state policies. Allstate has also ended new homeowners insurance business in Florida and is no longer renewing certain policies. The insurance industry in Florida incurred significant losses due to fraudulent schemes.
Reinsurance has also become a cost burden for insurance carriers. For Allstate, the total cost of their property catastrophe reinsurance programs jumped to over $1 billion during 2023 compared to $788 million during 2022.
For reference, Allstate identified the following categories and locations as the greatest areas of potential losses:
Wildfires — California, Hawaii, Colorado, Oregon and Texas
Hurricanes — Major metropolitan centers in counties along the eastern and gulf coasts of the United States
Wind/Hail, Rain and Tornado — Texas, Illinois, Georgia and Colorado
Earthquakes and fires following earthquakes —Major metropolitan areas near fault lines in the states of California, Oregon, Washington, South Carolina and Kentucky
So, what direction are homeowners insurance rates heading towards? Insurers remain discipline in protecting underwriting losses. In an first quarter 2024 insights report, Aon, a global insurance services firm, stated that rates are continuing to rise in natural catastrophe zones, however, “favored risks such as lower-hazard occupancy, well-engineered, and non-natural catastrophe exposed risks” now have “flat to-modestly-decreased pricing available.”
Ultimately, an insurance carrier is a for-profit business and, as a producer of insurance coverage, is passing costs onto their consumers for higher return of investment for their investors.
For the consumer, the hidden costs of homeownership should no longer be a forgotten consideration.
Will the costs associated with homeownership become an awakening to the dream of American homeownership? And, will the direct and indirect costs of weather and event phenomena in growing areas such as Florida and Texas impact home prices in the future?
Tip:
When purchasing a home, consider reviewing the Comprehensive Loss Underwriting Exchange (C.L.U.E.) loss history report. This report provides “a record of the type of loss on the home, the date of the loss and the amount and status of each claim—going back five years.” Information from this report is used to price your homeowners insurance policy.
One free report is permitted per year. Here is a link the provides more information: LexisNexis C.L.U.E. Auto & Property Reports
Is Philip Morris Rebranding Addiction with ZYN?
In April, multinational tobacco company Philip Morris International (PM) reported better than expected results and grew its total revenue by nearly 10% to $8.8 billion. The company attributed its positive performance to the “best-in-class economics of ZYN.”
During a series of investor presentations in September 2023, Philip Morris showcased its growing success and projections for ZYN, the most marketed oral nicotine pouch in the U.S.
Overall, Philip Morris’ ambition is to “replace every cigarette for all adults who would otherwise continue to smoke with science-based smoke-free products, as soon as possible.”
However, is the hugely attractive economics of ZYN a greater priority?
In 2022, this “best-in-class” economics led ZYN in the U.S. to have six times the financial returns of international cigarettes. Additionally, ZYN’s gross margin is nearly 80%. As of 2023, ZYN had an approximately 40% discount compared to the average price for cigarettes due to fewer imposed excise taxes.
Philip Morris describes ZYN as a $2 billion retail value brand in the U.S. within five years of national launch. As of 2022, the oral smoke-free share of the global nicotine industry was only 2%.
Labeling the U.S. nicotine pouch category “in its infancy”, the company estimates delivering “in the range of 800 million to 1 billion cans of nicotine pouches in 2026.”
As shown in the graph below, this is exceptional growth.
In the first quarter of 2024 alone, the shipment of ZYN nicotine pouches in the U.S. increased 80% to 131.6 million cans (+58.4 million cans) from the first quarter of 2023. In terms of revenue, Philip Morris’ Americas smoke-free revenue grew a staggering 53% (from $302 million to $462 million) - the largest percentage increase in all product categories.
In 2016, Swedish Match acquired the patent for ZYN. In the same year, Swedish Match introduced ZYN to the U.S. by market distribution in the Western United States. With less stringent marketing regulations compared to the tobacco market, ZYN has better ability to market and its efforts have included a pop-up store in the design of an modern, upscale coffee shop in Lincoln Park, Chicago. By 2019, ZYN was nationally launched in the U.S.
ZYN Consumers Factsheet
Average age of a ZYN consumer is 39 years old.
A third of consumers are women.
Average household income of $89 thousand.
Average weekly consumption per ZYN user is “a little bit over three cans.”
Oral nicotine pouches are placed in upper lips and contain crystalized nicotine and artificial flavor additives such as mint and wintergreen.
In 2023, Philip Morris completed its acquisition of Swedish Match for approximately $16 billion. Today, ZYN pouches are manufactured in Owensboro, Kentucky, and the company has invested a significant amount to increase its manufacturing capacity.
With the product’s launch in the western region of the U.S., ZYN volume as a percentage of industry cigarette volume grew from 1.2% in the fourth quarter of 2018 to 13.8% in the second quarter of 2023.
In 2023, the Western U.S. consumed an annual average of 18 nicotine pouch cans per legal age nicotine user, far above the Southern and Midwest regions (11 cans). With a two and a half year earlier launch date, it is expected that other regions of the U.S. will follow spiking usage seen in the West.
As the graph below shows, it is likely that this addictive product will continue to flourish in the U.S. market.
In context of all this data, is nicotine addiction simply being reincarnated because of a perceived lower-risk delivery method?
In an September 2023 Investor Day presentation, Philip Morris provided the following primary use of ZYN consumers before ZYN:
Traditional Oral: 36%
Cigarettes: 20%
Vape: 25%
Other Primary Uses before ZYN Include Cigars, Snus, OTP, Other Nicotine Pouch Brands: Unknown
A missing data point is how many people did not have a history of nicotine usage prior to ZYN.
As stated in the company’s 2023 Integrated Report, nicotine-contain products that do not involve combustion are addictive and not risk-free. The addictive nature of nicotine has clearly translated to higher usage of ZYN pouches as the company has indicated that consumers with longer usage consume more.
And, for the overall smoke free business, the company states that it is “volume growth prioritized over pricing.”
In a March 2023 study, the BMC Chemistry found “low levels of ammonia, chromium, formaldehyde, and nickel,” which are four harmful and potentially harmful compounds (HPHCs).
In March 2020, Philip Morris submitted a premarket tobacco application (PMTA) for ZYN and, although the FDA has not completed its review of the application, the company’s latest financial filing indicates that the “FDA has not taken enforcement action to prevent these ZYN products from being marketed or indicated that it intends to do so.”
Philip Morris developed ZYN Ultra, a moist version of ZYN, but was unable to file by the required September 2020 FDA deadline.
In need of independent research? Feel free to reply to this email.
3 Other Interesting Data Findings
45% of households expect to decrease discretionary spending over the next three months.
From TransUnion’s Quarter 2 2024 Consumer Pulse Study, 48% of Americans reported their household incomes didn’t keep up with the rate of inflation. 84% of consumers said inflation for everyday goods (groceries, gas, etc.) was among their top three concerns affecting household finances in the next six months.
Nearly 85% of large firms have implemented labor-replacing automation over the last 12 months.
The CFO Survey, conducted by Duke University and the Federal Reserve Banks of Richmond and Atlanta, shows that large firms are more focused on implementing labor-replacing automation than smaller firms. For example, 51% of large firms find automating tasks that are currently, or have historically been, completed by employees as either extremely or very important — versus 30% of small firms.
An estimated 69% of information (including tech) workers are now fully remote and hybrid workers.
From the WFH Research’s U.S. Survey of Working Arrangements and Attitudes June 2024 Updates, 13% of full-time employees were fully remote, 62% were full-time on site, and 26% were in a hybrid arrange (as of spring of 2024). Overall, 33.3% of workers desire fully remote jobs, versus 17.6% of workers who want fully onsite jobs.
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Disclaimer: All information provided is for educational and general informational purposes only and is subject to change without notice.
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