Sabre broken by inflation

Motor vehicle insurance specialist Sabre Insurance (SBRE) did a decent job of 'kitchen-sinking' most of the bad news on inflation prior to its half-year results – Sabre had already revealed that its inflation assumptions for this year were out of sync by some order of magnitude – that left the field clear for the market to jump on any shred of good news to bid up the price of the shares. And Lo, it was so, with the company predicting a rapid return to profitability next year, with the effects of inflation limited to 2022. This prompted a more than 7 per cent share price rally on the day.

In preparation for this, the current half-year results were about resetting everyone’s expectations for the year and keeping control over the company’s regulatory capital. For example, the big cut in the dividend will mean that management keeps the core solvency II ratio in the 160 per cent range, in line with its long-term target. For current investors, the hope is that Sabre will make a better job of matching premium price increases with inflation in the car market come 2023. The problem for Sabre, and the rest of the sector, is that the rapid rise in inflation has affected claims in process, as well the new claims made during the year. This drove the company’s loss ratio to an unusually high 71.6 per cent – around 48-50 per cent would be considered usual.

Broker Numis has Sabre on a forward price/earnings ratio of 26 for 2022, falling to 11 based on a recovery in earnings next year. We await better times and move to hold. Hold.

Last IC View: Under review, 15 July 2022