Motor insurers hit by ‘extraordinary inflationary pressures’

Surging inflation knocked the insurance sector on Thursday when a warning about the rising cost of car parts and repairs triggered a sell-off.

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’s shares plunged about 40 per cent by afternoon trading in London, and sent a shockwave through the sector. Admiral’s stock lost almost 14 per cent and Direct Line was down 10 per cent.

“I haven’t seen inflation like this since I was at school [in the 1980s],” said Sabre chief executive Geoff Carter. “This is unprecedented in most people’s working lives.”

Supply-chain pressures are making this worse as garages struggle to get parts. A car that might have been in the garage for two or three days might now be there for two or three weeks, he said, sending hire costs much higher.

The company said these “extraordinary inflationary pressures” had prompted it to increase prices 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.

In the trading statement, Carter said taking “taking prudent and assertive action now” to recognise the inflation impact would protect the underlying profitability of the business and “allow a rapid rebound”.

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”.

Judging the read-across for other companies, Citi analysts said: “It is clear that staying ahead of accelerating inflation . . . is problematic for all players.”

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.

Accident frequency is rising again after pandemic lockdowns and insurers have struggled to push premiums high enough following a January pricing reform.

“I think the problem is the market is intensely price-competitive,” Carter said. “It is very difficult for anyone to increase their prices if others don’t follow.”