UK Edition
Questor: buy Sabre for its sharp focus on profitability and underwriting nous
Selling your main product at a loss doesn’t sound like a great business model – but it’s what most car insurers do. They have to compete hard for business in a market where there are dozens of options, easily accessible via comparison websites.
So insurers put up with selling their core policies at a loss and try to recoup their money by selling add-ons such as legal and breakdown cover.
But one car insurance company does things differently.
Sabre, which listed on the main market in December last year, is able to sell its policies profitably because it focuses on niche areas such as high-value cars owned by young drivers. There is much less competition here because the mass-market insurers lack the specialised tools and expertise to price each risk accurately – the key to profitability for car insurers.
Sabre has a proprietary database with 15 years’ worth of information about cars and drivers, which its team of experienced underwriters uses to calculate the correct premiums. And this is where the company’s strong culture comes into its own. It has an excellent record of retaining staff, such as its all-important actuaries: 76 of its 153 employees have been with the company for more than 10 years and another 34 for more than five.
- Reader service: Easily manage your investments with the online platform AJ Bell Youinvest
“Other firms have tried to develop this kind of business model but you need to commit a lot of capital,” said Tommy Bryson, co-manager of the Kempen Sustainable European Small-Cap fund, which recently bought a stake in Sabre. “We think its competitive advantage is sustainable in the medium term.”
One measure of the success of Sabre’s approach is found in its “combined ratio”, which combines an insurer’s general costs of doing business with the costs of paying claims. A figure of 100pc means that these costs consume an insurer’s entire premium income.
“Sabre’s peers had a ratio of 106pc in 2017, proving the loss-making nature of their core policies,” Bryson said. “By contrast, Sabre’s ratio was 69pc in 2017.” Questor’s homespun interpretation of this figure is that it indicates a profit margin of about 30pc.
- Read Questor’s rules of investment before you follow our tips. See Questor's tips every day at twitter.com/DTquestor
The company’s combined ratio has averaged 72pc over the past 10 years and the board has a policy of not allowing it to exceed 80pc. The happy consequence is that the company generates “too much capital”, Bryson said. It solves this “problem” by paying generous ordinary and special dividends: analysts’ projected yield for the current year, before taking any specials into account, is 5.6pc.
Another sign that the shares are not highly valued is a price-to-earnings ratio of 12.5pc for 2018 on an “adjusted” basis. Analysts’ consensus forecasts are for relatively stable earnings over the next two years on a per-share basis.
“The high yield reflects investors’ current scepticism about the company,” Bryson said. “Some suspect that high profits are down to a reluctance to pay out on claims but in fact customer satisfaction is high. We see the firm as a misunderstood small-cap gem.”
Other attractions include share ownership on the part of the management team, their reluctance to chase sales growth at the expense of profitability and a lack of interest in acquisitions.
Yesterday Sabre’s previous private equity owners said they would sell almost all of their remaining stake. This is likely to depress the price, so watch for a good time to buy.
Questor says: buy
Ticker: SBRE
Share price at close: 274p
Update: Clarkson
When we last looked at Clarkson, the venerable shipping broker, in April, the shares had fallen to £25.40 from a high of £34.50 after a profit warning.
We advised readers to hold in view of the cyclical nature of the business, its strong balance sheet and intention to pay rising dividends. Interim results last month showed falls in profits and sales but the market had been warned and the shares rose.
- Questor archive: telegraph.co.uk/questor
Montanaro Asset Management, whose faith in the firm prompted our original tip in November 2016, said after the results: “Management are encouraged by the recent better trading conditions. The shares are trading on 23 times 2019 earnings and growth in earnings per share is expected to be around 22pc. The investment case is unchanged.”
Montanaro has recently increased its holding.
Questor says: hold
Ticker: CKN
Share price at close: £28.10