Description

Overview:

Sabre Insurance Plc is a UK private motor insurance underwriter. It was founded in 1982 and over the last decade, it has built a strong track record in underwriting performance, with a Loss Ratio of 53% on average since 2008.

There are 251 million shares, for a current market cap of £653 million. There is no debt in the balance sheet and the company had £23 million in cash at the end of 2018.

Last year, the group had an average of 348k policy holders and generated £210 million in Gross Written Premiums.

Their main focus is underwriting of non-standard risks, with an average of 96% of total revenues generated from pure underwriting activities on average over the last decade (the remainder being investment returns, instalment income and other income)

70% of policies (by Gross Written Premium) are distributed through insurance brokers and 30% via Direct Brands such as Go Girl, Insure2Drive and Drive Smart.

Sabre uses Excess of loss reinsurance with an attachment point of £1 million.

They have 154 employees, of which 47 are in underwriting and actuarial functions, 76 in claims handling and the rest in management and business support functions.

The bulk of the company revenues come from pure underwriting, with only about 3% coming from ancillary activities. Sabre distributes its policies via a panel of ca. 1,100 independent insurance brokers (70% of total distribution) and via its Direct Brands (30% of total distribution) Both channels use price comparison websites (PCWs), with 88% and 53% of the Direct and Broker channel premium respectively purchased through PCWs as of June 2017.

From 2008 until the end of 2018, in-force policies grew from 149k to 348k, a 9% annual average. Similarly, Gross Written Premiums grew from £87 million in 2008 to £211 million at the end of 2017, an 11% average growth rate. Average premiums at the end of 2018 were £601. In 2016, average premiums were £630, compared to a market average of £471 (ABI), which is consistent with the group’s bias towards the higher premium (non-standard) segment of the market. While average premium growth has been 0% over the last decade, there have been wide fluctuations in this metric, reflecting market dynamics. For example, in 2009, the average premium was £586 (lowest) and in 2011 it was £802 (highest) More recently, management has mentioned average premiums of £650 as of 1H18. These figures are still significantly higher than the ABI market average, but lower than the confused.com market index, which has average premiums at £774 as of 1Q19

Sabre’s expense ratio was 22% in 2018 and has been 20% on average over the last decade.

Reserve releases have been 13.1% of Net Earned Premiums on average over 2013-2018. These releases add up to £124 million, or 18% of the current market cap.

Over the last 18 years, the group has paid out £355 million in dividends and share buybacks, approximately 53% of the current market cap. Since 2013, dividend payments add up to £222 million, 34% of the market cap.

Business model

Sabre operates a fairly simple motor insurance business. They do not use Quota Share or Co-insurance to leverage capital requirements, and write business only when they think they can achieve an 80% combined ratio or better, which is a very high threshold. The implication of this combined ratio target is that they need to exert high levels of discipline when deciding which risks to cover and must by definition grow at lower rates when the risks available are not attractive.

They do not have market share targets and have reiterated their expectation that they can grow at high single digits over a market cycle, which they believe tends to last for 5-7 years. The implication of this was clear in their maiden results as a listed company in early 2018, when the stock fell over 13% on the day as a result of limited growth in in-force policies and premiums.

Also, Sabre generates very little revenues from ancillary products or instalment payments, which means they don’t separate their underwriting from their retail activities. They give underwriters full control on the underwriting price and this is the price they charge their broker network. Hence pricing is the main tool at their disposal to ensure profitability.

Sabre provides quotes in response to nearly all the requests it receives across the risk spectrum. Given that few of their peers are willing to provide quotes in higher premium segments of the market (non-standard risks), a larger portion of these risks end up choosing Sabre. This results in Sabre’s book having a bias towards this segment of the population.

They have a lean operation, with operating expenses representing 10% of their Net Earned Premiums. By outsourcing functions they deem as non-critical, they can focus on ensuring that prices charged are appropriate for the level of risk assumed and then that the claims process is quick, fair and in-line with their profitability expectations, they are very thorough in their claims handling process and ruthless when it comes to fraud and non-disclosed risks (they will pay claims but if there are non-disclosed risks they will make sure the customer matches what would have been an appropriate price for its risk, see post here for example: https://forums.moneysavingexpert.com/showthread.php?t=4916193). They pay around 35k claims per year.

They leave a fat risk margin above their best ultimate loss ratio estimates (on average, this risk margin has been ca. 9% over the 7 years to end 2016), such that they can release reserves and are appropriately covered for any eventuality, and also, by paying for Excess of Loss above £1 million, they mitigate their fat tail exposure and help maintain margins.

By focusing on simple underwriting, the company is not exposed to non-underwriting risks and thus has minimal investment risk, low counterparty risk and low operational risk. At the end of 2018, 81% of Sabre’s Solvency Capital Requirement (SCR) consisted of underwriting risk. Total SCR was £61 million in 2018, on £133 million of net insurance liabilities. This allows the company to operate an efficient balance sheet and generate high returns on capital (Return on Capital has been 83% on average from 2010 – 2018, and 57% in 2018).

The business is highly cash generative and management believes in distributing capital back to shareholders that is not needed. They aim to operate with a Solvency Coverage Ratio of 140-160% (but before being public, they were at 115%) and to pay out 70% of earnings in regular dividends, leaving room for special distributions when appropriate.

Over the last 18 years, the group has paid out £355 million in dividends and share buybacks, £222 in the last six years alone.

Reinvestment needs are limited, and other than capital retained for regulatory purposes, shareholders should expect to be rewarded via dividends and special capital distributions.

Unit Economics:

They have historically earned £84 - £206/policy over the last decade (£141 on average). Profits are volatile, which is normal in an insurance business, but high profitability has always been maintained. On average, operating margins have been 28% per annum.

History of the business:

Source: 2017-11 (Sabre) IPO Prospectus

In November 2001, Norwich Union Insurance Limited, part of the Aviva Group, concluded their review of Sabre’s business: "A thorough review of Sabre has been completed over the past year. Sabre is most active in the non-comprehensive specialist motor sector where it operates as an independent company and brand. As such we concluded that best value could be created by the sale of the business. We are delighted to work with a knowledgeable buyer committed to maintaining the business in its current form - so preserving continuity for intermediaries, customers and staff. We remain committed to the non-standard motor market.” The acquirers were BDML Group Limited, owned by Keith Morris and Angus Ball. They paid £13.5 million in exchange for net assets of £23.4 million in February 2002. During the FY 2002, BDML achieved £20.2 million in pre-tax profits (including £9.7 million of negative goodwill write-downs during the year resulting from the acquisition of Sabre’s business). Also, as explained in BDML’s 2002 Group accounts[1], Sabre’s business contributed £10.7 million to that year’s operating cash flows.

In 2003, Gross Written Premium was £63.9 million and the Combined Ratio fell to 90% (2002’s figure undisclosed). In 2004, Combined Ratio continued improving to 85% on flat Grosss Written Premiums, they explained: “written premiums were little changed compared to 2003, reflecting our firm approach to premium setting as rating strength in the market starts to erode”. In 2005, Gross Written Premiums fell by 14% as “premium rates were held firm in a weak market”. Most importantly, they wrote: Sabre is “committed to maintaining underwriting discipline through the underwriting cycle, even if this means losing market share”. During that year, BDML Holdings sold their interest in other business subsidiaries to focus entirely on developing the Sabre opportunity and changed their name to Binomial Group Limited. They returned to growth in 2006 whilst improving their combined ratio further to 77%. Since then, combined ratio has been below 85% every year.

By 2012, Direct brands represented 22% of Gross Written Premiums after being introduced in 2010.

In 2013, BC Partners acquired the entire shareholding in Binomial Group Limited, with the prior shareholders in Binomial remaining as significant investors and active members of the management team, which ensured continuity of the business model.

In 2015, Geoff Carter joined as COO and James Ockenden took over as Chief Actuary from Angus Ball, CEO (and major shareholder of the original BDML Group that bought Sabre in 2002). In 2016, Adam Westwood, Financial Controller at the time, and Mr Ockenden were appointed to the Board of Directors.

During 2017, there were rumours that Qatar Re and private equity firm Centerbridge were partnering to bid for Sabre for ca. £600 million, and that they were competing with Warburg Pincus in the process. The sale didn’t materialize and 4 major banks participated in taking the company public in late 2017 (Berenberg, Barclays, Numis and Peel Hunt), raising £316 million for selling shareholders and valuing the company at £575 million.

BC Partners has since exited their entire stake and the free float is ca. 90% of outstanding shares.

During 2018, they maintained underwriting discipline in a very competitive market. Both GWP and in-force policies remained flat as a result.

Today, Sabre has 0.9% of the UK private motor insurance market by volume (policy count) and ca. 2% by premium value (£ million)

Market Position

The non-standard risk market represents ca. 30% of the total. There are about 37.5 million registered vehicles in Great Britain of which 31 million are private cars. The non-standard risk segment represents approximately 3 million of these. Sabre has 3% of this market. They believe their addressable market is between 5-10% of the total number of policies in the UK, judging from how often they are the cheapest price on their broker business (5-10% of the time) and back-solving from the quotability of other insurers in the market (60% on average)

Valuation:

This is a niche, highly disciplined insurance operation, not a high growth business. It is not a compounder, but rather a cash cow. Since 2013 the annual dividend yield has been approximately 6%. The current market couldn’t be softer in the UK, with competition coming from all sides putting a cap on premiums while at the same time, severity has offset the benefits of lower frequency driving claims inflation into the high-single digits.

The market as a whole operates at an underwriting loss and price comparison websites have allowed for very efficient price discovery, which makes it difficult to pass on price increases without losing competitiveness. Low cost and good underwriters who can remain disciplined will be the beneficiaries of a market hardening. When and how pronounced that hardening will be is anyone’s guess, but I reckon it will come.

I’d expect investors in Sabre today should be able to realize high single to low double digit returns over the medium term when the market turns without factoring any significant improvement in premiums, much growth in in-force policies or better loss ratios. If any of those were to occur, returns should be incrementally better.

Risks:

• Low barriers to entry: brokers who are suffering from price comparison websites have been recently setting up MGAs to underwrite some risk themselves. While it’s very hard to quantify it, current market conditions indicate that significant underwriting capacity is still entering the market. Reinsurers are still very happy to support this, as motor insurance risk carries lower risk weightings under existing regulatory regimes. As with any commodity, it’s a matter of time for the excess capacity to withdraw. Larger players have shown willingness to be more disciplined recently: Hastings is an example. Sabre is another one, albeit their impact is minimal.

• Fraud detection capabilities: historically they’ve been good at identifying fraud, but they may need to invest a lot more (and they are) in data analytics to be able to prevent fraud earlier in the underwriting process and not at the claim level.

• An acquisition. Should this business be listed? They were owned by private equity and were almost sold to another private equity before going after an IPO route. Bain acquired eSure in 2018 last year, so there’s a precedent. A high cash generative business, with no debt on the balance sheet and an excellent track record of profitability, a perfect takeover candidate?

[1] https://beta.companieshouse.gov.uk/company/03675407/filing-history?page=4

Catalyst

- Time

- UK motor insurance market hardening