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Saga - Insurance pricing sees profits slip

Nicholas Hyett | 27 September 2018 | A A A
Saga - Insurance pricing sees profits slip

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Underlying profits before tax fell 3.7% in the first half to £106.8m, as tougher pricing in the insurance market saw revenue fall 1.7%.

The Saga board has approved an interim dividend of 3p per share, in line with the previous year.

The shares fell 1.8% in early trading.

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Our view

Saga's an unusual animal - what other company would combine cruise ships and motor insurance?

Uniting the eclectic product offering is a focus on the over 50s. Many in that age bracket are asset rich with comfortable pensions, and an ageing population means the category is growing.

Historically Saga's brand awareness among that demographic has been high. That's allowed it to cross-sell its wide variety of services. However, recent trends haven't been so positive.

Although the average number of Saga products per customer has continued to rise, the number of customers has actually been shrinking. Price cuts in the insurance business have helped to reverse the trend, but our concern is the current generation of 50-somethings don't feel the same attachment to Saga as previous cohorts.

Flagging customer numbers has led the group to budget an extra £10m a year for marketing, it clearly feels its position is under threat. Initiatives include a recently launched membership scheme, and a focus on High Affinity Customers who hold multiple products - although both of these really target increased cross-selling rather than new customer acquisition.

At present, cross-selling opportunities are driven by two significant divisions - Insurance and Travel. Travel (cruise ships and tour operating) may be the more high profile, but Insurance, particularly Motor, is the money spinner.

Recent initiatives have shifted underwriting risk onto third party insurers and increased broking fees. This has freed up capital and improved earnings quality in the insurance business - a trend Saga hopes will continue.

In the long run, Saga is looking to expand its range of services to include investment services and financial advice, with home care and retirement villages also in the pipeline. If it can get customer numbers moving back in the right direction, the Saga of tomorrow could look markedly different from the insurance-focused business of today.

Until then the insurance business is providing the cash flows behind the dividend. Analysts are forecasting a prospective yield of 7.1% next year.

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Half Year Results

The retail insurance broking business saw trading EBITDA (earnings before, tax, depreciation and amortisation - a key measure of cash profits) fall 10.1% to £69.1m.

That was largely driven by a 5.3% fall in revenue, as the group cut prices to reverse recent falls in customer numbers. Customer numbers have now returned to the level they were at in the first half of 2017, after a 19% increase in Motor and Home new business.

The group's own underwriter AICL delivered a strong underwriting performance with a combined operating ratio of 61.5%, broadly in line with last year. Trading EBITDA slipped slightly to £46.1m, down 2.5% on the previous year. The division's Solvency Capital ratio fell 15 percentage points to 156% at the period end following surplus capital releases.

Trading EBITDA fell 2.8% in Travel to £21m as expenditure on Saga's new cruise ship 'Spirit of Discovery' weighed on available cash. Revenues and underlying profits were broadly flat year-on-year.

Taken together, Emerging Businesses and Central Costs saw Trading EBITDA losses decline from £4.5m last year to £3m. Revenue from emerging businesses rose 16.4% to £15.6m.

Some 44% of Saga customers now hold more than one Saga product. Within emerging businesses, the 300,000 Saga Magazine customers have a particular tendency to hold more than one product.

Net debt to EBITDA remained unchanged at 1.8 times.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.