February 27, 2024

Morgan Stanley cuts earnings expectations amid surging insurance costs


Morgan Stanley cut earnings estimates for all the transportation companies it covers on Tuesday, citing rising insurance costs. It continues to believe the truckload space will be the most impacted as large jury verdicts remain a threat.

The firm said both nuclear verdicts and a prolonged period of insurance companies incurring costs above general inflation are reasons the cost line will remain bloated. During the fourth quarter, several carriers called out insurance expenses as a drag on earnings.

J.B. Hunt Transport Services (NASDAQ: JBHT) said the line item was a 43-cent drag on its $1.47 earnings-per-share result in the fourth quarter. An annual true-up of $53 million in the period was less severe than the $64 million incurred in the prior-year quarter, but still elevated to historical comparisons. Higher premiums and the expectation for much higher claim payouts were the culprits.

The company said premiums have reset between 50% and 60% higher this year despite the installation of several risk-mitigation programs.

Schneider National’s (NYSE: SNDR) full-year 2024 earnings outlook is approximately 11% lower than its 2023 result (at the midpoint of the new guidance range). It cited headwinds from higher insurance and claims expenses, among other items, for the lower-than-expected forecast.

“The social inflation phenomenon points to this inflation being persistent if not accelerating as the space will see pressure not only from higher jury awards and settlements but also the knock-on effects of higher premiums,” Morgan Stanley analyst (NYSE: MS) Ravi Shanker said in the report.

He cut EPS estimates for all companies by an average of 3% for 2025 and 2026. Mid-single-digit percentage cuts were made to the TL-centric companies he follows.

He acknowledged that insurance expense accounts for just 1% to 5% of total operating costs for most transportation companies (toward the higher end for TL carriers). His base case assumes 15% cost inflation in the line item moving forward even though some companies have reported higher increases. The increased costs will be fully absorbed by carriers unless they are able to pass them through in the form of higher rates, which is a tough task as bid season has been tougher than expected so far.

Shanker’s bear case showed insurance costs increasing by 35%, which would result in a 10% EPS reduction. He said such a scenario would likely accompany a reduction in valuation multiples applied to the stocks.

Knight-Swift (NYSE: KNX) said on its fourth-quarter call last month it was exiting a third-party insurance venture. The unit, which brokers liability coverage to small carriers, booked another operating loss in the quarter, this time $72 million. Higher-than-expected claims and carriers not paying their premiums were the reasons for the decision.

The losses in the unit could have also been a contributing factor to the abrupt departure of its CEO on Tuesday.

3PLs saw the second-highest earnings cut from Morgan Stanley. While brokers don’t haul the freight, they are usually named in lawsuits as they are often the largest party to the transaction and have the deepest pockets.

Freight broker Landstar System (NASDAQ: LSTR) flagged the cost line as a concern on its Feb. 1 fourth-quarter call. It said its annual liability coverage renewal would be more than $30 million this year compared to approximately $8 million in 2019.

Shanker said a spike in insurance costs contributed to the recent freight upcycle, which was marked by tight capacity and higher rates. He said the cost line was overlooked “as rates and margins soared.” However, with rates at depressed levels and insurance costs continuing to step higher, he said the line item is no longer “back of mind.”

He believes higher insurance costs could lead to further consolidation among transportation companies, especially among small operators that lack scale and risk-mitigation programs. That likely means more M&A opportunities, and market share, for large carriers and brokers.

A survey performed by Morgan Stanley showed most operators expect insurance costs to increase between 10% and 30%, with premiums alone increasing by low-double-digit percentages. The survey showed claims expense has been more severe at large companies, “given their propensity to be targets for lawsuits.”

No company surveyed, even those with enhanced safety programs in place, are expecting a decline in costs.

More FreightWaves articles by Todd Maiden


Source link

In this article:
Share on social media: