Troy’s global income portfolios are among funds feeling the crashing share prices of UK motor insurers after a string of profit warnings in the sector. 

James Harries, manager of £224m Securities Trust of Scotland (STS ), is one of those hit after he recently swapped pharmaceutical giant GSK (GSK) for Admiral (ADM) in the trust and similarly-run £807m Trojan Global Income fund. 

Admiral shares have sunk 25% in less than a week as part of a sector-wide selloff sparked by smaller rival Sabre (SBRE) warning that rising costs will lead to a punishing 70% decline in its profit this year.

The small-cap insurer said its annual cost of claims would increase by 12% in a half-year trading update on Thursday, pointing to inflationary factors such as used car prices, hire car costs, wage inflation and reinsurance costs. In response, the shares have dived 43% since

Peer Direct Line (DLG) became the second name to issue a profit warning this morning, leading to another round of share selling. The company cited inflation as claims costs and car parts prices soared. Its own shares are down 23% in a week, including a fresh 13.6% fall today. 

The negative updates have created concern that Admiral, the largest name in the sector, could soon follow suit with downgrades of its own. 

‘[Sabre’s profit warning] led investors to become concerned about Admiral’s ability to release reserves which is a big driver of the group’s profit. Uncertainty has never been higher in UK motor insurance,’ said Berenberg analyst Thomas Bateman

‘However, we believe some of Sabre’s issues are company-specific. If Admiral does not profit warn soon, the lack of news would be a clear buying signal,’ he added.

In the latest factsheets for Securities Trust of Scotland and Trojan Global Income, Harries discussed the Admiral trade, describing it as an ‘excellent business’ and an expert ‘in underwriting a specific cohort of the population, that being young men in fast cars.’

This specific data set affords accurate pricing risk which, in turn, supports underwriting profit over the cycle. 

‘Costs are contained, giving the company a very attractive return profile. All of this together means the company has limited capital requirements and is, therefore, able to pay a healthy dividend,’ Harries (pictured below) said.

Harries added Admiral to the 2.5%-yielding trust’s portfolio in April, according to Morningstar data, at an ‘attractive valuation of 12.8 times price to earnings ratio’. 

That followed an already very significant fall in the stock. The insurers’ shares, today trading at around £17.50 and on a 7.4% historic yield, have more than halved in value from a peak close to £36 last August after lower mobility during the Covid-19 pandemic had clamped down on claims. 

Speaking on the Funds Fanatic Show podcast last week, Harries reiterated Admiral’s attractive valuation and emphasised his reasons for buying it. Following the recent share price fall, Troy Asset Management declined to comment further. 

On the other hand, the managers of the Gresham House UK Multi Cap Income fund Ken Wotton and Brendan Gulston told Citywire last week they had added to Sabre, which they prefer to Admiral because of its ‘proprietary data set’ that ‘informs their ability to underwrite price appropriately for drivers that are harder to insure’. 

‘Sabre has a very strong competitive advantage around the data technology. They’re one of the few insurance businesses that have their own proprietary data set which is actually genuinely valuable and informs their ability to underwrite price appropriately for drivers that are harder to insure,’ Gulston (pictured below) said.

‘The Admirals and Hastings’ focus on the mass market, which is easier to price, but their margins are very thin if not negative. Sabre makes proper decent margins on the core underwriting.’ 

Other funds with more than 2.5% exposure to Admiral include the Argonaut Absolute Return fund managed by Barry Norris, the Liontrust Income fund managed by Robin Geffen, and the Trojan Ethical Income fund managed by Hugo Ure, according to Morningstar data. 

Year to date, Securities Trust of Scotland has recorded net asset value (NAV) falls of 1.3% and its shares have slipped 1.8%, versus the MSCI World’s drop of 8.3%, according to broker Numis. The shares are trading at a narrow 0.9% discount to NAV, helped by the board’s zero discount policy. 

Since Troy Asset Management took over the mandate from Martin Currie in November 2020, the portfolio has returned 14.4%, beating the Lipper Global - Equity Global Income index by 1.2%, according to the June factsheet.