Sabre’s Results Present a Buying Opportunity for Admiral and Direct Line

Sabre reported results for the first half of 2022 that highlighted a difficult United Kingdom market. The key issue is claims inflation. While in 2021 claims inflation was 8%, this rose to 10% in the first quarter of this year and has now reached 12%. This is across car parts, labour, credit hire, and car values. Sabre has tried to offset this claims inflation through price increases ahead of the market, and this has led to a reduction in motor insurance policies count and gross written premiums. However, we think the real issue has come in the strengthening of reserves to support claims coming through. That has led to a nearly 27-percentage-point deterioration in the loss ratio. Where the top line declined by 10%, we think this strengthening of reserves is the cause of the 80% decline in pretax profit. Sabre’s shares fell by 40% in July 14 trading, with Admiral and Direct Line also falling by between 10% and 20% in an industry read-through. We are holding our fair value estimates for Admiral and Direct Line steady because if we push the motor insurance loss ratio up to 100% for this year, the change does not have a material impact on our fair value estimates. Our estimates already include a significant deterioration in this year’s loss ratio, 8 percentage points higher than last year. We have forecast further erosion of the loss ratio in 2023 before an improvement back to this year's elevated level. Our estimates include a deteriorating operating environment over three years.