Sabre Insurance’s profit warning yesterday was an unwelcome surprise for the motor insurance sector, says Berenberg, but does not mean the sector is broken.
While high inflation is affecting used car prices, hire car costs, wages and reinsurance, Berenberg suggests the risks are manageable though investors will be concerned more profit warnings are on the way.
Admiral and Direct Line both tumbled alongside Sabre on Thursday, but Berenberg believes that in the case of Direct Line at least that presents a buying opportunity.
“Direct Line remains a well-run business with all of the capabilities to perform in the UK personal lines markets.
“Moreover, should weaker companies in the market face financial difficulties in 2022, this will likely reduce competition in the market and we would expect the larger, more dominant companies, such as Direct Line and Admiral, to capitalise.
Its recommendation on Direct Line is upgraded to buy with a price target of 209p.
Admiral is also a buy, but Berenberg says that having issued a trading update around this time last year if it is going to issue a warning it will be soon or alternatively the fact it hasn’t yet suggests the date for a warning is passing.
“No news over the next week would be a huge buying signal.” said the broker which has a price target of 2,903p.
Sabre, meanwhile, faces an issue of rebuilding credibility with investors, as the investment case it put forward, of conservative underwriting, is difficult to argue.
Its next job will be to prove to investors that it can grow profitably when market conditions improve, adds the broker while reserving is also a big uncertainty.
“Reserving additions were the key driver of Sabre’s earnings miss; however, the company now feels it has an appropriate buffer for the inflationary environment. “
'Hold' Sabre with a price target of 123p is the broker’s view.