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Fears of growth slowdown slash UK motor insurer Sabre's share price

Fears about premium income growth amid increasing competition in the U.K. motor insurance market sent recently listed Sabre Insurance Group Plc's share price crashing more than 13% on March 22, analysts said. But they also said the sharp drop was unfounded.

The share price fall sent Sabre's shares to their lowest-ever closing level, below the 250 pence per share where they finished in their first few days on the market in December 2017. It followed full-year 2017 results that topped analyst expectations but included a warning on the motor insurance pricing environment.

One analyst, Berenberg's Iain Pearce, called the reaction from investors "a bit silly," saying in an interview that the drop was down to "people misinterpreting how growth affects [Sabre's] earnings and what is going on in the market". Peel Hunt analyst Andreas van Embden said: "The market is probably focusing too much on the premium number and not enough on the fact that capital was up much stronger than I expected at the end of 2017."

Lower expectations

Sabre reported a combined ratio, which measures underwriting profitability, of 68.5% — far lower than its U.K. motor insurance peer group, which includes Direct Line Group, Hastings, Esure and Admiral. It also reported a solvency coverage ratio of 160%, at the top end of its target range of 140% to 160%.

"They were slightly ahead of my numbers and slightly ahead of what other analysts were predicting as well," Pearce said.

But alongside the results, Sabre said uncertainty around where the U.K. personal injury discount rate, known as the Ogden rate, would be set, coupled with industrywide reductions in personal injury claims, had sparked "competitive pricing pressure" in the last few weeks of 2017 and the first two months of 2018. This, in turn had triggered a "modest reduction" in premium income compared with the equivalent period in 2017.

Sabre reported gross written premium of £210.7 million in 2017, up from £196.6 million a year earlier.

The company added that it had since cut prices to take account of the reduction in personal injury claims and as a result had seen premium income return to the levels seen in the same period of 2017. But investors were spooked by the talk of competition and slowing growth, analysts said.

Sabre finished down 13.36% to 240 pence, putting it close to its initial public offering price of 230 pence.

Numis Securities analyst Nick Johnson said in an interview: "The main thing the market has been focused on is the outlook commentary. [Sabre] has mentioned that income was down modestly in the first couple of months in the year. It has since stabilized, as they say, but that has naturally brought down growth expectations for 2018."

Johnson added that Sabre's comments would not necessarily affect other U.K. motor insurers' share prices, as what they said on competition "is consistent with what the other companies have said as well. It is more a case of Sabre falling into line with other companies in the sector."

Peel Hunt's Van Embden noted that there had also been a "cautious tone" from Hastings and Admiral about growth and said "that concern is spilling over into Sabre as well."

Praise for discipline

While investors punished Sabre, analysts praised the insurer for being disciplined on pricing, and not cutting prices further simply to show premium growth. The U.K. motor insurance market is expecting benefits from the government's plans to crack down further on whiplash claims and increase the Ogden rate from its current level of negative 0.75%. The U.K. government introduced a bill to the House of Lords on March 20 aimed at making these changes.

Companies could pre-empt the positive effects of the changes by cutting rates more aggressively, but Sabre said it had opted not to do so.

"Very wisely they are sticking to underwriting quality and not growing for the sake of growth," Van Embden said. He noted that other companies that had chosen to scale their business up or down depending on the underwriting margin they can make had been "punished" by investors, and said "there is an obsession in some quarters of insurance stock investors with the top line."

Pearce added: "It feels to us like companies are taking very different views of where these regulatory changes are going to come out, and what effect they are going to have on pricing, with some being much more aggressive than others. Sabre are sensibly on the cautious side of that."

Sabre CEO Geoff Carter told analysts at a conference March 22 that it was "great news that the ambition continues" to implement the Ogden and whiplash measures.

"It does feel like we are at headline stage rather than detail and our view is detail is all important in understanding how this may run through, so we watch with interest how that might develop, but at this stage we are not really calling too many benefits we bake in at this point," he added.