- Shares slide 35% as first half earnings tumble
- Higher claims inflation and lower volumes to continue
- 2022 full-year outlook and dividend cut
Shares in UK motor insurer Sabre (SBRE) careered 35% lower to 126p after the firm posted much worse than expected earnings for the six months to June and warned its full year results would also miss forecasts.
First half profit after tax was £3.5 million compared with a consensus forecast of £14.7 million and a figure of £18 million last year.
Gross written premiums for the first half were up 17.4% at £91.8 million as the firm pushed through average price increases of 19% in order to prioritise margins over volume.
However, cost inflation in insurance claims is running well above estimates meaning that rather than posting a combined ratio of 70% to 80%, Sabre's first half ratio was 98.9%.
Moreover, management is guiding to a full year combined ratio in the mid-90% area.
The combined ratio is calculated as expense claims and costs divided by the earned premium and is a simplified way of measuring an insurance company's profitability and financial health.
Lower profits mean a reduction in this year’s payout with management suggesting it expects to pay a dividend but at a significantly lower level than previously hoped.
INFLATION AND LOWER VOLUMES
Sabre estimates that claims inflation is currently running at 12% compared with high single digits at the end of 2021 and 10% in May 2022.
To compensate for the marked increased in the cost of claims, the firm has gradually increased its core motor premium rates over the course of the first half.
As a result, the volume of motor policies has fallen by an estimated 7% during the first half.
This toxic combination of escalating claims inflation and declining volumes has resulted in the marked deterioration in the combined ratio.
EXPERT VIEW
Peel Hunt analyst Andreas can Embden believes ‘it will take time for the additional rate increases which Sabre is putting through to fully offset the acceleration in claims inflation.
'As such the 2023 combined ratio will remain elevated at (87% and worsening versus our previous 78.7% estimate), albeit it will improve from 2022 levels. It will only be in 2024 that the combined ratio will normalise back to 80%.
'This leads us to a 40% cut in 2023 estimates of profit before tax to £34 million and 14% to 2024 estimates to £61 million.’
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