TD Cowen's transportation team, led by managing director Jason Seidl, has turned negative on freight brokers after a phone call with an unidentified "trucking insurance agency executive" painted a sobering picture of rising premiums in the wake of the Montgomery decision, according to a report from the investment bank. "Commentary from our call keeps us negative on the brokers," TD Cowen said, with the negative outlook covering RXO (NYSE: RXO), C.H. Robinson (NASDAQ: CHRW) and Landstar (NASDAQ: LSTR).
The Montgomery decision from May removed liability and negligence protection for brokers that had been provided by several court decisions involving an interpretation of the Federal Aviation Administration Authorization Act (F4A). According to TD Cowen, the decision — combined with a $600 million nuclear verdict against C.H. Robinson in the case of Lipe vs. Lupus Superior — has thrown the insurance market into volatility over the past three to four months, Seidl said.
Premium Inflation and Tripling Costs
TD Cowen reported that an unidentified "top 10" freight broker recently saw its liability insurance triple on renewal. TD Cowen said, "we estimate that large brokers currently have (approximate) mid-teens rate and mid-20's rate (increases)…that imply material premium inflation." The guest commentator said there is likely to be "sizeable inflation" in premiums.
The report offered a specific example: "a large broker which the agent secured coverage for saw premium costs increase from $3 million to $10 million in their excess coverage layer above the $15 million primary layers."
| Metric | Data |
|---|---|
| Premium increase at a "top 10" broker | Tripling on recent renewal |
| Excess coverage cost for one large broker | $3 million to $10 million (above $15 million primary layers) |
| Large-broker rate increases | Mid-teens to mid-20s percentage range |
| Underwriters in broker auto liability | About 10, expected to fall to 8 |
| Active brokers in the industry | Roughly 22,000; top 100 control 84% |
A Shrinking Insurance Market
TD Cowen said there are only about 10 underwriters involved in broker auto liability, a number that will likely decrease to eight. "Exits have already begun with two observed recently," the report said. Reinsurance appetite has also diminished "with some recent exits," and "underwriters are still in early stages of pricing and could see more inflation ahead as they analyze loss rates and risk."
Volatility Mirrors Insurer Uncertainty
Seidl said the insurance executive told him that post-Montgomery, which came down May 14, "everything went ballistic." Rates then fell, "then post the Lipe case (which produced its nuclear verdict in late July), everything started going haywire again." Seidl told FreightWaves this seesawing is "a clear sign that the insurers aren't yet comfortable with the amount of liability they're taking on, because they're trying to assess it themselves and it's quickly developing. So it matters when you renew."
Consolidation Ahead
The guest executive added his voice to the view that Montgomery and the associated higher insurance and vetting costs will reduce the number of 3PLs operating in the market. "Our panelist believes that over time we should expect industry consolidation among freight brokers," the TD Cowen report said. "With roughly 22K brokers in the industry, the top 100 control 84%; smaller carriers will likely face unsustainable insurance headwinds in the coming years." Shippers are going to look closer at their carriers or the brokers that hire them, the insurance executive said, according to TD Cowen.
Investor Takeaway
For finance executives and investors tracking freight brokers, the report's numbers provide a concrete measure of the insurance inflation now hitting the sector. With a top 10 broker seeing premiums triple, excess coverage costs jumping from $3 million to $10 million, and the underwriter pool shrinking from about 10 toward eight, TD Cowen's negative outlook on RXO, C.H. Robinson and Landstar reflects the expectation that these cost pressures will weigh on broker earnings.
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