Why did the Sabre Insurance share price just crash 40%?

Inflationary costs have hit the Sabre Insurance share price, as H1 profits plunge. And the contagion is spreading to others in the sector.

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The global economic crisis has put the insurance sector under pressure in 2022. But I wasn’t expecting to see a 40% one-day crash for the Sabre Insurance (LSE: SBRE) share price. Yet that’s what happened by early afternoon Thursday, in response to first-half figures.

The update opened with a headline announcing “strong progress against core strategic initiatives“. So what was the bad news hiding behind it?

Share price plunge

The Sabre share price had been picking up a bit in 2022, following on from a previous year of weakness. But then this happened, as the share price chart shows.

It’s all down to plummeting profits in the half, as the motor insurer reported inflationary pressure on its cost of claims.

The “extraordinary inflationary pressures” spoken of have led Sabre to change its strategy. It’s putting up prices in an effort to support profitability, at the expense of pursuing new customers to grow the business.

The bottom line is not pretty, with H1 profit after tax plunging to £3.5m. That’s after an £18m profit in the same period the previous year, and a profit of £30m for the whole of 2021.

Contagion

The surprise news has already sent ripples through the motor insurance sector. At the time of writing, the Direct Line Insurance Group share price has dipped by 10%. And Admiral Group shares are down a heftier 14%.

Sabre said it continues “to expect to pay a dividend for 2022, albeit at a reduced level, before returning to more normal levels in 2023.

I’m not quite sure what normal levels mean, or whether this will instil any real confidence in investors. Sabre’s dividend did yield 4.6% last year. But the annual payments had been falling for a couple of years as earnings had been declining.

Rapid rebound?

So what next? Chief executive Geoff Carter said: “We believe that taking prudent and assertive action now, in conjunction with our normal pricing discipline, means that we are protecting the underlying profitability of the business, and will allow a rapid rebound to our expected levels of performance.”

So is Sabre Insurance an attractive recovery buy now, in the hope that these expected levels of performance will return?

Well, Sabre shares had been on a price-to-earnings (P/E) ratio of about 15. And in the current market, I can’t help seeing that as a bit high. Direct Line, by comparison, is on a multiple of approximately 10, while Admiral is down closer to seven.

Watching the sector

What the P/E might turn out like when full-year earnings are out is the big unknown. And it’s going to be very hard for investors to work out any kind of objective valuation until then.

Meanwhile, I’m sure all eyes will be peeled for first-half results from Sabre’s motor insurance rivals. Direct Line has first-half results due on 2 August. And Admiral is set to deliver its H1 figures the following week, on 10 August.

So what’s my take on the Sabre Insurance share price slump? Right now, it’s just too hard to form an opinion on whether it’s overdone and whether I’m looking at a recovery candidate. I’m just going to keep watching.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Admiral Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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