HL SELECT UK INCOME SHARES

Introducing Sabre Insurance

Fund changes

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Charlie Huggins (CFA) - Fund Manager

5 November 2018

We recently added another new holding to the HL Select UK Income Shares portfolio, Sabre Insurance Group, which offers a very attractive yield of 6.6% (variable and not a reliable indicator of future performance). The holding accounts for around 3% of the fund’s value and has been funded by trimming existing positions.

Introducing Sabre

Sabre is a specialist UK motor insurer which targets non-standard risks (e.g. younger drivers, or students with no credit score) that mainstream insurers are reluctant or unwilling to take on.

Unlike many of its peers, Sabre is very disciplined in pricing its policies. In what insurers call soft markets, where there are lots of insurers competing for business and premiums are generally low, Sabre isn’t that competitive. Instead, they target growth in hard markets, where fewer insurers compete to write policies, premiums are higher, and underwriting standards tougher.

This means progress will likely be volatile, but on average they expect to achieve mid-to-high single digit premium growth through the cycle.

Sabre prices to 96% of the market, by quoting to almost all the brokers, such as Compare the Market. So they do write some standard risks but for the most part their prices are uncompetitive in this space.

It means they write more premiums in the non-standard segment, where Sabre are sometimes the only quote. They have a significant advantage over the competition in this part of the market because of the wealth of data they’ve built up over the best part of 20 years. This allows them a much better understanding of the risks they’re taking on.

Simple, focused and well-managed

Sabre’s underwriting margins are extremely attractive, the best we can recall seeing in the UK motor market, reflecting the fact that they focus on niche areas where there’s much less competition. Importantly, selling insurance to non-standard customers is not like lending money to sub-prime borrowers, for until the premium is paid, the cover is not provided.

About 30 million motor insurance policies are written each year. The non-standard part of the market that Sabre are currently playing in amounts to 2.5-3 million policies and out of that they have around 325,000 policies, giving them an overall market share of about 1%. As a result, they see plenty of room to grow.

The business runs a simple balance sheet with no debt and have one of the lowest expense ratios in the industry with only 150 staff at Headquarters, and all non-core functions outsourced. This means the business is very capital-light, scalable and highly cash generative, allowing the majority of earnings to be returned to shareholders.

The current yield is around 6.6% and we expect the dividend to grow over time, although remember dividends are variable and not guaranteed.

Overall, we view Sabre as a simple, focused and well-managed business. They know what they are good at and they stick to it. Management have decent equity stakes in the business so their interests should be aligned with our own. While this is a very competitive market, Sabre’s niche positioning and expertise combined with its proprietary data sets it apart, suggesting it should be able to sustain its industry-leading profitability.

How has this position been funded?

Our exposure to the utilities sector (National Grid and Pennon) has been reduced by around a fifth and we have reduced our REIT exposure (PHP and Tritax Big Box). We have also taken small slices out of a number of other positions, including Legal & General, Britvic and HSBC.

Why are we making this change now?

As explained above, we very much like the company’s market position and business model. The valuation also looked attractive to us. The company listed on the stock market less than 18 months ago so it isn’t particularly widely followed . The previous private equity owners recently sold off their remaining stake in the business , creating some pressure on the share price which we were able to take advantage of.

These changes help to diversify the fund’s sources of income making us less reliant on any one company or sector. Given Sabre’s very attractive yield, it also gives us more flexibility to add to lower yielding, but higher growth names in the future, while still maintaining an attractive income for our investors.

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for more information. Unless otherwise stated performance figures are from Bloomberg and estimates, including prospective yields, are a consensus of analyst forecasts from Bloomberg. They are not a reliable indicator of future performance. Yields are variable and not guaranteed.