UK motor insurer Sabre became one of the first casualties of the worsening inflationary squeeze on the sector as it warned of a profit hit from rising costs, sending its shares down more than a third and dragging bigger rivals lower.
In a half-year trading update on Thursday, London-listed Sabre said the annual increase in the cost of claims was running at about 12 per cent. That means it is paying more for parts, labour and replacement cars, among other items.
The company said these “extraordinary inflationary pressures” had prompted it to put prices up rather than chase new customers, meaning that the level of motor premiums it gathered in the period was about a tenth lower than the same time last year.
Due to rising claims costs and setting aside more in reserves, Sabre expected the combined operating ratio — an important measure of profitability that shows costs and claims as a proportion of premiums — to rise to the mid-90s, in percentage terms, for the full year.
That compares with a more profitable 79 per cent in 2021. This year’s dividend is expected to be reduced, before returning to “more normal levels” next year.
Sabre chief executive Geoff Carter said that “taking prudent and assertive action now” to recognise the inflation impact would protect the underlying profitability of the business and “allow a rapid rebound”.
The company’s shares plunged 36 per cent in early trading. Shares in other motor insurers were also hit, with Admiral’s stock losing almost 8 per cent and Direct Line down 5 per cent.
Analysts at Barclays said the level of claims inflation should be “a negative surprise for all motor insurers, and a market hardening should follow”, as it trimmed its earnings targets for the group. Sabre, it said, was “the first listed insurer to ring the alarm” in light of inflationary pressures by revising its outlook and “acting early on reserving”.
Sabre’s update adds to earlier warnings from insurance executives about the threat from rising prices. Direct Line said in May that intensifying inflation was not being reflected in market prices, the main reason why it did not “push hard” for new business during the first quarter.
Investors will be keenly watching insurers’ half-year results next month to gauge the profit impact for the larger groups. Surging second-hand car prices were weighing on insurers’ profits even before the Ukraine war exacerbated the inflation threat.
Overall, the motor sector is heading for an underwriting loss this year and next, according to forecasts from EY. The consultancy warned this month that insurers had been “caught cold” about how bad inflation turned out to be, adding to challenges from a reform to pricing rules and accident frequency rising again after pandemic lockdowns.
Source: Economy - ft.com
