Half-year Report 2023

Accelerating growth at target margins

Sabre Insurance Group plc (the "Group" or "Sabre"), one of the UK's leading Motor insurance underwriters, reports its half-year results for the six months ended 30 June 2023.

KEY HIGHLIGHTS

‒     Continued execution of core strategy to focus on margins, with growth as an output

‒     Core Motor Vehicle book continues to grow strongly, with improving profitability

‒    Pricing and underwriting actions reflected in net loss ratio improvements across core Motor Vehicle and Motorcycle products compared to the full year 2022, partially offset by underperformance of the developing Taxi product

‒     Solvency coverage is strong and will remain above our preferred operating range after the payment of the proposed interim dividend

‒      Interim dividend of 0.9p announced in-line with policy

‒   Figures quoted below are on an IFRS 17 basis, with reserve discounting changing current and past period profits. Further discussion on this can be found in the CFO review

OUTLOOK

‒     Premium growth expectations in core Motor Vehicle business increased to between 25% and 30% higher than 2022 based on current run-rates

‒   Guidance for reduction in gross written premium across Taxi and Motorcycle reiterated as we maintain our underwriting discipline. We expect the reduction across these two products to be in the region of 20%

‒     Overall, expect gross written premium for the full year to be 15% to 20% ahead of 2022 with further growth anticipated in 2024

‒     Expense ratio strain in H1 due to low earned premium and one-off development costs expected to improve in H2

‒    Combined operating ratio guidance at the upper end of 85% to 90% range. This reflects the net effect of performance of the Taxi product and additional growth strain. This also reflects the positive impact of discounting under IFRS 17, and is supported by an emerging strong profit from July, with further improvement expected in 2024 and beyond

‒     Strong growth at attractive margins this year will support profit growth in future periods

Geoff Carter, Chief Executive Officer of Sabre, commented:

"I am pleased with the position we find ourselves in at the half year point, and believe our long-term strategy of disciplined pricing, early assertive corrective actions when required and a tight focus on emerging claims trends continues to prove its value. In a challenging year for the wider market, we continue to anticipate a strong result in our core Motor Vehicle book.

The half year results are in line with our expectations and support our full year projections.

It is useful to consider our portfolio of products in three categories - Established, Maturing and Developing.

In our established Motor Vehicle product account, we are having an excellent year. We took early pricing action in response to inflation and are now reaping the rewards as others in the market continue to catch up. Our year-on-year weekly premium levels have increased from around +20% at Q1 to circa +50% at the end of June. Crucially, this is being achieved despite implementing a significant rate increase to ensure we cover future claims inflation (still assessed as circa 10%) and move our margin back towards our historic levels.

Our Motorcycle product is maturing well. As expected, premium levels are slightly reduced as underwriting actions last year continue to take effect. We nonetheless anticipate a profitable contribution in 2023 and, having optimised our rates, we are now reviewing additional distribution opportunities.

The Taxi product is still in development phase. Underwriting action was required in the first half of the year to get performance to our required levels and new business is now being written in line with our profit targets. Premium volumes are still being restricted due to market dynamics while the combination of low premium and immature claims means the Taxi business is not likely to deliver a meaningful contribution to profit until 2024. We are, however, satisfied with the way this product is evolving.

Inflation continues to be a factor across the industry, as is a lack of certainty on smaller personal injury claims given legal reviews. We are pleased (and relieved) that this seems to have been more widely recognised by competitors in 2023, resulting in elevated levels of price increases. The market now appears to be pricing in a far more rational way, although we continue to believe that more rate increases are required to get to a sustainable position.

Our new Direct IT platform was delivered on time, and on budget - thanks to our numerous Sabre colleagues who have been so committed to the platform's delivery. This will now allow us to enhance our Direct product customer service proposition whilst also reducing costs.

Looking forward we are anticipating a good year in 2023 with a combined ratio within the expected range, supported by an emerging strong profit from July. On an undiscounted basis, our expected combined ratio for 2023 has edged up slightly from previous guidance, reflecting performance on Taxi and we have the - entirely welcome - challenge of additional first year growth strain on high levels of new business.

I am confident that we will benefit from continued improvements in 2024 as our excellent core Motor Vehicle performance earns through and as the Motorcycle and Taxi products mature into profitable positions."

There will be a call for analysts and investors at 0930hrs on Thursday, 3 August 2023. For details, please contact sabre@teneo.com or find registration link here: https://www.sabreplc.co.uk/investors/results-centre/

ENQUIRIES

Sabre Insurance Group (investor.relations@sabre.co.uk)

Geoff Carter, Chief Executive Officer  

Adam Westwood, Chief Financial Officer          

Teneo (020 7353 4200)

James Macey White

Eleanor Pomeroy

DIVIDEND CALENDAR

2023 Interim Dividend Payment Dates

FORWARD-LOOKING STATEMENTS DISCLAIMER

Cautionary statement

This announcement may include statements that are, or may be deemed to be, "forward-looking statements". These forward-looking statements may be identified by the use of forward-looking terminology, including the terms "believes", "estimates", "plans", "projects", "anticipates", "expects", "intends", "may", "will" or "should" or, in each case, their negative or other variations or comparable terminology, or by discussions of strategy, plans, objectives, goals, future events or intentions. These forward-looking statements include all matters that are not historical facts and involve predictions. Forward-looking statements may and often do differ materially from actual results. Any forward-looking statements reflect Sabre's current view with respect to future events and are subject to risks relating to future events and other risks, uncertainties and assumptions relating to Sabre's business, results of operations, financial position, prospects, growth or strategies and the industry in which it operates.

Forward-looking statements speak only as of the date they are made and cannot be relied upon as a guide to future performance. Save as required by law or regulation, Sabre disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements in this announcement that may occur due to any change in its expectations or to reflect events or circumstances after the date of this announcement.

The Sabre Insurance Group plc LEI number is 2138006RXRQ8P8VKGV98 

The first half of 2023 has shown continued momentum in market pricing, which has allowed for significant year-on-year growth in core Motor Vehicle premium, particularly from late March. This growth has been achieved despite allowing for inflationary price increases. Clearly, this additional premium will need to 'earn' through, and therefore will enhance future profits rather than having an immediate impact on the current period.

Having reported our results on an IFRS 17 basis, the combined operating ratio has been restated and now includes the impact of discounting. We have also presented a new key performance indicator ("KPI"), net profit margin, which includes instalment income within the denominator and is therefore more representative of the total insurance profitability. We have not set targets against this KPI at this stage as we continue to monitor how this interacts with the previously reported combined operating ratio targets.

The combined operating ratio for the first half of the year has been negatively impacted by an increased expense ratio resulting from low earned premium (resulting from low written premium in the preceding period) set against some one-off expenditure related to the implementation of the new IT developments and the office refurbishment, along with the usual H1 expense strain of staff bonuses. Whilst the core Motor Vehicle book has performed well, and the Motorcycle book has improved, Taxi loss ratio also continues to be a drag on the overall combined operating ratio.

The prior-year comparative profit, as restated under IFRS 17, includes a significant benefit from discounting, given the combined impact of growing claims reserves and rapidly increasing discount rates.

Solvency coverage is strong and will remain above our preferred operating range after the payment of the £2.25m proposed interim dividend.

Where relevant, the figures above present revenue items as restated under IFRS 17. Gross written premium is unchanged against IFRS 4. Insurance revenue is equivalent to net earned premium plus instalment income, which previously was recorded separately. Net earned premium is below that in the comparative period as it primarily reflects premium written in the preceding period.

Improvements in overall market pricing have allowed for a recovery in both market share and total premium written in the core Motor Vehicle book. This is somewhat offset by expected reductions in Motorcycle volumes. In the two months since our AGM trading update, core Motor Vehicle gross written premium has been over 40% ahead of the same period last year. This rapid growth will earn through over the next year, which should enhance overall earnings.

Other income remains proportionate to the amount of Direct business earned, which decreased vs H1 2022. Investment returns are improving, albeit slowly, as the portfolio churns naturally into new assets purchased at higher yields.

The Group recorded a net loss ratio of 62.0% in H1 2023. This represents an improvement in net loss ratio across Motor Vehicle and Motorcycle, with the most material benefit coming from the improvement in Motor Vehicle net loss ratio. The overall effect of discounting is a reduction in net loss ratio across all periods against the undiscounted figures.  However, the prior-year loss ratio is negatively impacted by discounting in the periods presented. Our expense ratio has increased from 27.3% in H1 2022 to 31.8% in H1 2023, with the restatement to an IFRS 17 basis having minimal impact. This increase is primarily due to a decrease in earned premium set against inflation in expenses. We have incurred one-off expenses in H1 2023 of circa £790k which relate to the development of the new Direct platform, Insurer Hosted Pricing solution and much needed building refurbishment. Individually, these costs are not particularly material, but the impact is felt more heavily against the relatively low earned premium.

Whilst market practice varies, we have always reported an 'all-in' expense ratio. If we were to exclude non-directly attributable expenses from our key ratios, our combined ratio for H1 2023 would be 75.4% which is 18.4% lower than our reported 'all-in' combined operating ratio. We do not believe that excluding non-directly attributable operating expenses from our key ratios truly reflects the cost of running the business and will continue to include all expenses in our key ratios to reflect the performance of the business more accurately.

We continue to report undiscounted net loss and combined operating ratios as these present the most easily comparable performance measures year-on-year.

Earnings per share for the current and comparative period are calculated on the basis of the current capital structure. Diluted Earnings per share for H1 2023 is 1.52p compared to 2.67p for the comparative period in 2022, reflecting differences in profit after tax. The difference between basic and diluted earnings per share reflects the maximum dilution effect of share awards which have been granted but which have not vested.

The Group continues to hold a low-risk investment portfolio and sufficient cash to meet its future claims liabilities. The Group operates a 'buy-and-hold' strategy in which a proportion of the portfolio is invested in investment-grade corporate bonds, in order to achieve a steady return on invested capital while maintaining a majority of government-backed assets. The size of the overall invested portfolio has remained consistent with the prior reporting period, while the amount of cash held remains high, reflecting the continued importance of maintaining strong liquidity in the current environment.

The Group's insurance liabilities continue to reflect the underlying profitability and volume of business written. The Group continues to hold excess-of-loss reinsurance contracts across its entire book at an excess of £1.0m per claim. Note that these liabilities are now shown on a discounted basis in-line with the financial statements.

Leverage

The Group continues to hold no external debt. All of the Group's capital is considered 'Tier 1' under Solvency II. The Directors continue to hold the view that this currently allows the greatest operational flexibility for the Group.

Dividends

Where the Board believes that the Group holds capital which it considers surplus to the Group's requirements, the Group would intend to return such surplus capital to shareholders. This assessment is generally made at year-end, with capital distributed via a special full-year dividend. Under normal circumstances, the Board considers a Solvency II capital coverage ratio within the range of 140% to 160% to be appropriate, and will consider this when determining the potential for special dividends. The Board may revise the Group's dividend policy from time to time as it considers appropriate.

The Board has declared an ordinary interim dividend of 0.9p per share (HY 2022: 2.8p) in line with the Group's policy to pay an interim dividend equal to one third of the previous year's ordinary dividend.

A new accounting standard for insurance contracts, IFRS 17, came into force for periods beginning on or after 1 January 2023. Therefore, these interim accounts and all subsequent financial statements are presented on this basis. All comparative information has been restated on this basis. There is significant technical disclosure included within these Interim Accounts (and subsequent Annual Report and Accounts) which covers the transition to the new standard.

In order to assist with understanding the impact of this transition, I include some additional high-level summary information here.

Overall impact of transition

Because the Group provides non-life insurance policies of one year or under, and meets certain other relevant criteria, a 'simplified' approach can be applied, which is the 'Premium Allocation Approach' ('PAA'). This is in contrast to the more complex 'General Measurement Model' ('GMM') which is applied by default where the PAA is not appropriate.

Because the PAA is being applied, the general recognition and measurement of premium income and claims expense is similar to that under the previous standard (IFRS 4). There are some key differences, which are explained below.

‒   Under IFRS 4, when an insurance policy was sold a 'gross written premium' was recognised to the full amount of the premium, and an 'unearned premium reserve' ('UPR') was created equal to the value of the premium, which was then unwound over the life of the policy (typically one year) over which time the revenue would be recognised to the profit and loss account. Under IFRS 17, a 'liability for remaining coverage' ('LRC') is calculated on writing a policy. Under the PAA, this LRC is exactly analogous to the UPR. As such, the pattern of revenue generated by a policy is the same under IFRS 17 and IFRS 4 in most cases.

‒   Under IFRS 17, premium is presented as part of 'net insurance revenue' on the face of the profit and loss account. Given the above, this is analogous to net earned premium under IFRS 4, except that it also includes all other income related to the policy, which primarily includes instalment interest on monthly payments.

‒   In calculating loss ratio, expense ratio and combined operating ratio, we use 'net insurance revenue' less non-premium income as the denominator. This means that the denominator in these ratios is equivalent to that under IFRS 4.

‒   We have also introduced a new key performance indicator (profitability ratio) which uses 'net insurance revenue' as the denominator, as we believe this will be consistent with the approach taken by peers, and reflects the true profitability of products sold.

‒   Under IFRS 17, there is no 'risk margin' applied to reserves, which was a discreet amount of additional reserve booked by management to allow for uncertainty in the reserving method used. Instead, a 'risk adjustment' is applied to the best estimate reserve held. In practice, this is similar to the risk margin applied under IFRS 4, however more disclosure is required as to the derivation of the risk adjustment and the confidence interval that it represents.

‒   Under IFRS 17, the 'liability for incurred claims' (i.e. the balance held against claims incurred but not yet paid) is required to be discounted. This is similar to treatment on the Group's regulatory balance sheet, but different to the previous standard (IFRS 4) where non-life reserves were not discounted.

(1) See Note 2.3.1 IFRS 17 "Insurance Contracts"

(1) See Note 2.3.1 IFRS 17 "Insurance Contracts"

(1) See Note 2.3.1 IFRS 17 "Insurance Contracts"

(2) The description of the line item has been updated. The change in description has had no impact on the components of the balances.

‒   Receivables (31 December 2022: Loans and other receivables)

‒   Other assets (31 December 2022: Prepayments, accrued income and other assets

‒   Payables (31 December 2022: Trade and other payables)

‒   Other liabilities (31 December 2022: Accruals)

(1) See Note 2.3.1 IFRS 17 "Insurance Contracts

1.   GENERAL INFORMATION

The condensed consolidated interim financial statements comprise the results and balances of the Group for the six-month period ended 30 June 2023, the comparative period for the six months ended 30 June 2022 and the year ended 31 December 2022. The information in the condensed consolidated interim financial statements is unaudited and does not constitute statutory accounts as defined in s.434 of the Companies Act 2006. The independent auditor's report on the Group accounts for the year ended 31 December 2022 is unqualified, does not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report and does not include a statement under s.498(2) or (3) of the Companies Act 2006.

2.   ACCOUNTING POLICIES

2.1. Basis of preparation

The condensed consolidated interim financial statements have been prepared and approved by the Directors in accordance with UK-adopted International Accounting Standard 34 ('Interim Financial Reporting'). As required by the Disclosure Guidance and Transparency Rules of the Financial Conduct Authority, these interim financial statements have been prepared applying the accounting policies and presentation that will be applied in the preparation of the annual financial statements of the Group and will be prepared in accordance and fully comply with UK-adopted international accounting standards, comprising International Accounting Standards ('IAS') and International Financial Reporting Standards ('IFRSs'). The annual financial statements were prepared in accordance with the going concern principle using the historical cost basis, except for those financial assets that have been measured at fair value.

The Group has applied IFRS 17 from 1 January 2023, restating the opening and closing balance sheet positions for 2022. For details on new accounting policies, significant judgements and estimates, refer to Notes 2.3.1 and 3. As a consequence the restated figures have been labled as unaudited.

The condensed consolidated financial statements values are presented in Pounds Sterling (£) rounded to the nearest thousand (£'k), unless otherwise indicated. The Group does not consider it is exposed to material seasonal volatility in its financial results.

2.2. Going concern

Having assessed the Group's forecasts, projections and principal risks of the Group over the full duration of the planning cycle, the Directors have a reasonable expectation that the Group will continue in operational existence for a period of not less than twelve months. Accordingly, the results for the period ended 30 June 2023 have been prepared on a going concern basis.

The Group's principal risks and uncertainties are outlined on pages 19 to 28 of the 31 December 2022 Annual Report and Accounts and have not changed since the last reporting date. The principal risks are:

-   Insurance risk

-   Operations

-   Finance and Capital

-   Governance and Compliance

-   People

-   Macro risks

-       Economic disruption

-       Climate and ESG

2.3. New and amended standards and interpretations adopted by the Group

Amendments to IFRS

The following amended IFRS standards became effective for the year ended 31 December 2023:

-   Deferred Tax related to Assets and Liabilities arising from a Single Transaction (Amendments to IAS 12)

-   Definition of Accounting Estimates (Amendments to IAS 8)

-   Disclosure of Accounting Policies (Amendments to IAS 1 and IFRS Practice Statement 2)

-   IFRS 17 "Insurance Contracts"

-       Amendments to IFRS 17

-       Initial Application of IFRS 17 and IFRS 9 - Comparative Information

In these financial statements, the Group has applied IFRS 17 "Insurance Contracts" for the first time from 1 January 2023. The Group had not elected to defer the implementation of IFRS 9 and has implemented IFRS 9 from 1 January 2020.

Other than IFRS 17 "Insurance Contracts" which is discussed below, none of the amendments have had a material impact to the Group.

2.3.1 IFRS 17 "Insurance Contracts"

IFRS 17 "Insurance Contracts" replaced IFRS 4 "Insurance Contracts" for annual periods starting on 1 January 2023.

The Group has restated comparative information for 2022 applying the transitional provision in Appendix C to IFRS 17. The nature of the changes in accounting policies can be summarised, as follows:

2.3.1.1 Changes to classification and measurement

The adoption of IFRS 17 did not change the classification of the Group's insurance contracts as insurance contracts.

Under IFRS 4, the Group was permitted to account for insurance contracts using its previous accounting policies under 'old' UK GAAP. However, IFRS 17 establishes specific principles for the recognition and measurement of insurance contracts issued and reinsurance contracts held by the Group.

IFRS 17 prescribes a comprehensive model, the general model, which requires entities to measure an insurance contract at initial recognition as the total of the fulfilment cash flows (comprising the estimated future cash flows, an adjustment to reflect the time value of money and an explicit risk adjustment for non-financial risk) and the contractual service margin. The fulfilment cash flows are remeasured on a current basis each reporting period. The unearned profit (contractual service margin) is recognised over the coverage period.

IFRS 17 also provides a simplification to the general model, the premium allocation approach ("PAA"). This simplified approach is applicable for certain types of contracts, including those with a coverage period of one year or less. The liability for remaining coverage is similar to the IFRS 4 premium reserve profile recognised over time. The principles of the general model remain applicable to the liability for incurred claims.

Under IFRS 17, the Group's insurance contracts issued and reinsurance contracts held are all eligible to be measured applying the Premium Allocation Approach. The PAA simplifies the measurement of insurance contracts in comparison with the general model in IFRS 17.

The measurement principles of the PAA differ from the 'earned premium approach' used by the Group under IFRS 4 in the following key areas:

-   the liability for remaining coverage reflects premiums received less deferred insurance acquisition cash flows less amounts recognised in revenue for insurance services provided

-   measurement of the liability for remaining coverage involves an explicit evaluation of risk adjustment for non-financial risk when a group of contracts is onerous in order to calculate a loss component (previously these may have formed part of the unexpired risk reserve provision)

-   measurement of the liability for incurred claims (previously claims outstanding and incurred-but-not-reported (IBNR) claims) is determined on a discounted probability-weighted expected value basis, and includes an explicit risk adjustment for non-financial risk. The liability includes the Group's obligation to pay other incurred insurance expenses

-   measurement of the asset for remaining coverage (reflecting reinsurance premiums paid for reinsurance held) is adjusted to include a loss-recovery component to reflect the expected recovery of onerous contract losses where such contracts reinsure onerous direct contracts

The Group allocates the acquisition cash flows to groups of insurance contracts issued or expected to be issued using a systematic and rational basis. Insurance acquisition cash flows include those that are directly attributable to a group and to future groups that are expected to arise from renewals of contracts in that group. Where such insurance acquisition cash flows are paid (or where a liability has been recognised applying another IFRS standard) before the related group of insurance contracts is recognised, an asset for insurance acquisition cash flows is recognised. When insurance contracts are recognised, the related portion of the asset for insurance acquisition cash flows is derecognised and subsumed into the measurement at initial recognition of the insurance liability for remaining coverage of the related group.

For an explanation of how the Group accounts for insurance and reinsurance contracts under IFRS 17, see Note 3.

There has been no change in the Group's segments or how the Group reports on these segments internally.

2.3.1.2 Changes to presentation and disclosure

For presentation in the statement of financial position, the Group aggregates insurance and reinsurance contracts issued and reinsurance contracts held, respectively and presents separately:

-   portfolios of insurance contracts issued that are assets

-   portfolios of insurance contracts issued that are liabilities

-   portfolios of reinsurance contracts held that are assets

-   portfolios of reinsurance contracts held that are liabilities

The portfolios referred to above are those established at initial recognition in accordance with the IFRS 17 requirements.

The line item descriptions in the profit or loss account and statement of other comprehensive income have been changed significantly compared with the previous accounting basis. Previously, the Group reported the following line items:

-   Gross written premium

-   Net written premium

-   Changes in unearned premium reserves

-   Gross insurance claims

-   Net insurance claims

Instead, IFRS 17 requires separate presentation of:

-   Insurance revenue

-   Insurance service expenses

-   Allocation of reinsurance premiums

-   Amounts recoverable from reinsurers for incurred claims

-   Insurance finance income/(expenses) for insurance contracts issued

-   Reinsurance finance income/(expenses) for reinsurance contracts held

The Group provides disaggregated qualitative and quantitative information about:

-   amounts recognised in its financial statements from insurance contracts

-   significant judgements, and changes in those judgements, when applying the standard

2.3.1.3 Transition

Changes in accounting policies resulting from the adoption of IFRS 17 have been applied using a full retrospective approach. Under the full retrospective approach, at 1 January 2022, the Group:

-   has identified, recognised and measured each group of insurance and reinsurance contracts as if IFRS 17 had always applied

-   Has identified, recognised and measured assets for insurance acquisition cash flows as if IFRS 17 has always applied. However no recoverability assessment was performed before the transition date. At transition date, a recoverability assessment was performed and no impairment loss was identified

-   derecognised any existing balances that would not exist had IFRS 17 always applied

-   recognised any resulting net difference in equity (see Statement of Changes in Equity)

Defined IFRS 17 terms:

Contractual service margin - A component of the carrying amount of the asset or liability for a group of insurance contracts representing the unearned profit the entity will recognise as it provides insurance contract service under the insurance contracts in the group.

Coverage period - The period during which the entity provides insurance contract services. The period includes the insurance contract services that relate to all premiums within the boundary of the insurance contract.

Fulfilment cash flows - An explicit, unbiased and probability-weighted estimate (i.e. expected value) of the present value of the future cash outflows minus the present value of the future cash inflows that will arise as the entity fulfils insurance contacts, including a risk adjustment for non-financial risk.

Liability for incurred claims ("LIC") - An entity's obligation to:

a)   Investigate and pay valid claims for insured events that have already occurred, including events that have occurred but for which claims have not been reported, and other incurred insurance expenses; and

b)   Pay amounts that are not included in (a) and that relate to:

i. insurance contract services that have already been provided; or

ii. any investment components or other amounts that are not related to the provision of insurance contract services and that are not in the liability for remaining coverage

Liability for remaining coverage ("LRC") - An entity's obligation to:

a)   investigate and pay valid claims under existing insurance contracts for insured events that have not yet occurred (i.e. the obligation that relates to the unexpired portion of the insurance coverage); and

b)   pay amounts under existing insurance contracts that are not included in (a) and that relate to:

i. insurance contract services not yet provided (i.e. the obligations that relate to future provision of insurance contract services); or

ii. any investment components or other amounts that are not related to the provision of insurance contract services and that have not been transferred to the liability for incurred claims

2.4.       New and amended standards and interpretations not yet effective in 2023

A number of new standards and interpretations adopted by the UK which are not mandatorily effective, as well as standards' interpretations issued by the IASB but not yet adopted by the UK, have not been applied in preparing these financial statements. The Group does not plan to adopt these standards early; instead it expects to apply them from their effective dates as determined by their dates of UK endorsement. The Group is still reviewing the upcoming standards to determine their impact:

-   IFRS 10 and IAS 28: Amendment: "Sale or Contribution of Assets between an Investor and its Associate or Joint Venture" (IASB effective date: optional)