Insurance costs continue to rise, Morgan Stanley lowers profit expectations for the transportation industry.

Morgan Stanley lowered profit expectations for all transportation companies on Tuesday, citing rising insurance costs. Morgan Stanley still believes that, as the threat of large jury awards remains, truck capacity will be most affected. The company stated that long-term costs for jury awards and insurance companies are higher than general inflation levels, leading to continued cost inflation. In the fourth quarter of last year, several transportation companies reported that insurance costs dragged down profits. J.B. Hunt Transport Services, Inc. (JBHT.US) said that insurance costs in the fourth quarter dragged down earnings per share by 43 cents, resulting in an actual loss of $53 million for the quarter, although less severe than the $64 million loss in the same period last year, still higher than historical levels. Higher premiums and higher claims expectations were the main causes behind the decline in earnings. The company mentioned that despite implementing several risk reduction measures, insurance premiums for this year have been raised by 50% to 60%. Schneider National, Inc. (SNDR.US) expects full-year earnings for 2024 to be approximately 11% lower than the results for 2023. The company cited factors such as rising insurance and claims costs as negative factors, leading to performance guidance below expectations. Morgan Stanley analyst Ravi Shanker stated in a report, "The societal inflation dynamic indicates that this inflation, even if not accelerating, will continue because the sector faces pressures not only from higher jury awards and settlements but also a chain reaction from higher insurance premiums." He lowered average earnings per share expectations for all companies for 2025 and 2026 by 3%. He acknowledged that for most transportation companies, insurance costs account for only 1% to 5% of total operating costs (this proportion is higher for direct shipping companies). His basic assumption is that, although some companies report higher increases, future cost increases will reach up to 15%. The increased costs will be fully absorbed by transportation companies unless they can pass them on in the form of higher rates, which is a daunting task as the bidding season has been tougher than anticipated. Shanker's bear case scenario shows a 35% increase in insurance costs, resulting in a 10% decrease in earnings per share. He mentioned that this situation could come with a decrease in stock valuation multiples. Knight-Swift Transportation Holdings Inc. (KNX.US) stated in a conference call last month that they will be exiting a third-party insurance joint venture. The department providing liability insurance for small transportation companies incurred a $72 million operating loss in the third quarter. The decision was made due to claims exceeding expectations, and insurance companies not paying premiums. The loss in the department may have been a factor in the sudden departure of their CEO on Tuesday. Morgan Stanley's profit downgrade for third-party logistics companies ranked second highest. Although brokers are not responsible for transportation, they are often named in lawsuits because they are typically the largest party in the transaction and the most financially stable. Freight broker Landstar System, Inc. (LSTR.US) mentioned in their fourth quarter conference call on February 1st that cost pressures are a concern. The company stated that their annual liability insurance renewal this year will be over $30 million, compared to about $8 million in 2019. Shanker stated that the soaring insurance costs have contributed to the recent freight upcycle, characterized by tight capacity and rising freight rates. He said, "Cost pressures have been overlooked as capacity and freight rates have surged." However, with interest rates at low levels, and insurance costs continuing to rise, he noted that this issue is no longer "being swept under the rug". He believes that higher insurance costs may lead to further consolidation among transportation companies, especially smaller operators lacking scale and risk mitigation plans. This could mean more mergers and acquisitions opportunities for larger carriers and brokers, gaining market share. A survey by the bank showed that most operators expect insurance costs to increase by 10% to 30%, with premium increases in the double digits. The survey indicated that large companies face more severe claims costs, "as they are often targets of lawsuits." Among the companies surveyed, not a single one, even those with strengthened safety programs, expected costs to decrease.