Description

Give me your tired, your uninsurables,
Your huddled masses yearning to drive a car,
The wretched refuse of your teeming shore.
Send these, the credit history-free, the CCJ-holders to me, I lift my pen so they can drive!
– Plaque absent at Sabre Insurance’s HQ

Sabre Insurance (“SBRE”) is a niche but very well-run UK car insurer whose shares are likely to return 50%-100% over the next two years due a combination of share price appreciation and dividends. After several years of pricing weakness, the UK car insurance market is finally hardening with insurers pushing through 20%+ price increases after a tough 2022 when the industry was forced to strengthen their provisions due to cost inflation. I think SBRE’s after-tax earnings will recover substantially in 2023 and may exceed £40mn again, which will be the catalyst for SBRE’s rerating absent a buyout by another insurance company.

A Niche, but Disciplined Car Insurer

SBRE is a very conservatively run UK car insurer which focuses on a small but profitable niche of “non-standard” risks, as Alejo alluded to in his writeup. SBRE is often the insurer of last resort, offering car insurance to those who cannot get cover elsewhere. As in most developed countries, it’s mandatory to have car insurance in UK to drive, but the big insurers generally shun tricky cases such as recent immigrants and others with no credit history, people with CCJs, etc. SBRE is the insurer that will provide insurance for these guys too, albeit at commensurate prices.

SBRE is highly conservative with regards to provisioning and pricing, which historically resulted in market leading combined ratios averaging less than 75% before 2022. SBRE’s conservative provisioning is evidenced in sustained 10pp provision releases in the past. However, after managing to IPO at the top of the previous pricing cycle in 2017, SBRE management has been enduring a softening market with sustained market share and policy count losses whilst keeping average gross policy prices pretty stable between 2017 and 2021. SBRE management somewhat half-heartedly pursued some adjacent markets (taxi, motorbikes) and maybe provisioned a bit less conservatively to maintain earnings stability, but all this changed in 2022: high inflation and a weaker GBP was taken as a pretext for a big reset, with management proactively strengthen provisions and leading the market to raise prices by more than 20%. Whilst the almost 100% combined ratio for 2022 is not pretty, I am fairly confident that these actions taken pave the way for a significantly better 2023.

Attractive Valuation & Capital Returns

Admittedly, SBRE doesn’t look that cheap at 3.5x TBV (1.1x BV due to legacy goodwill from the BC buyout) and negligible earnings in 2022. For me, these metrics mask the key attractiveness of SBRE’s business, namely being able to generate high RoTEs averaging 40%+ between 2018 and 2021. Given SBRE’s high returns on tangible equity / regulated capital base, even in a sustainedly high-inflation environment or after a disastrous year like 2022, it does not take long for SBRE to rebuild its capital base whereas other insurers may even need to raise additional capital.

SBRE has historically distributed capital in excess of their 160% solvency ratio to shareholders as dividends, so it is conceivable that the company will resume paying around £40mn in annual dividends from 2023 again as earnings recover. This would be clearly attractive given SBRE’s £250mn market cap at the moment. Management has bought some shares in October 2021 at £1.90 per share, and in discussions have left open the possibility to direct excess capital towards share buybacks instead of, or in combination with dividends.

Pricing has bottomed

Whilst SBRE’s bigger competitors were somewhat slow to raise prices in 2022H1, their positions have changed markedly during 2022H2. Some quotes:

Direct Line 2022Q4 update:

“Direct Line increased motor premiums by 25 to 30 per cent over 2022 to adjust for claims inflation”

Hastings, 2022Q3 update:

“Hastings has priced ahead of the market to combat claims inflation, which is estimated at 12% in Q3”

Admiral 2022Q2 update:

“Since March, Admiral has increased NB & RN prices by ~16% to account for inflation”

Insurance is and has always been a cyclical business and after a few lean years, I think we are headed for an upturn.

Key Risks

Foray into adjacent markets

Fast growing financials are always tricky, so hopefully management has not dug themselves too big a hole from the initiatives they launched during the softening cycle from 2017 to 2021.

Buyout by Competitors

In all fairness to management, they are not blind to the undervaluation of the shares and I believe they will not sell too cheaply.

Macro / Inflation

Whilst inflation is always problematic, given the high returns on capital, I believe SBRE shareholders will not be asked to contribute additional capital even if high inflation levels persisted.

Hardening Reinsurance Market

Frankly, this is going to take out a chunk of the price increases SBRE is putting through, but given historical underwriting performance, I hope that the reinsurers will be reasonable towards SBRE.

Disclaimers

The author and affiliates may or may not have material positions in issuers and securities mentioned in this note and will not be obligated to give notice of any changes in their views or positioning. You agree to hold the author harmless and to waive the right to any legal action against the author in relation to this note. The views expressed here reflect the author’s personal views about the issuers and securities and do not constitute investment advice. The author makes no representation or warranty, express or implied, regarding the accuracy, completeness or adequacy of the information. This note is for information purposes only and should not be construed as either projections or predictions. Before making any investment decision, you should seek independent investment, legal, tax, accounting or other professional advice as appropriate, none of which is offered to you by the author in this note. The author accepts no duty of care to you in relation to investments. Past performance cannot be relied on as a guide to future performance. You should not assume that the performance of any specific investment or investment strategy will be profitable or equal to corresponding past performance levels. Any investment or investment strategy can be impacted by numerous factors, including market and economic conditions, and may result in a loss to investors. As with any investment, there can be no assurance that any investment objectives or strategies will be achieved or that an investor will not lose a portion or all of its investment.

Catalyst

Earnings recovery in 2023, dividend increase, acquisition by a bigger insurer