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Saga - conditions tough as turnaround plan gets underway

Nicholas Hyett | 19 June 2019 | A A A
Saga - conditions tough as turnaround plan gets underway

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Saga says it's making progress in implementing its new strategy despite challenging insurance and travel markets. Sales of the new three-year insurance products are in line with expectations, although weakness in the travel market is expected to negatively impact results.

The shares fell 4.5% in early trading.

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Our view

Despite falling 19%, insurance broking still accounted for 59% of Saga's profits in 2018. Add in the underwriting business, and insurance accounts for virtually all of Saga's profits.

Unfortunately the group's struggled to hold on to customers. Increased price transparency and ease of switching has made general insurance an increasingly commoditised sector. Recent attempts to restore policy numbers have seen Saga turn to price comparison websites to pick up business, denting margins on the new business it is able to win.

We've worried for some time that Saga's brand didn't have the same resonance with the younger end of it 'over 50s' customer base. Without brand loyalty Saga is just another insurer, and there's little reason to pay a premium for a generic product. It doesn't help that Saga' travel business has been caught up in industry-wide weakness following the increase in political uncertainty.

CEO Lance Batchelor has decided enough is enough. Going forwards Saga will focus on its direct to consumer business, investing in the brand and encouraging drivers to come direct for insurance. That's easier said than done though. New product innovation and a marketing surge may help to some degree - but they're also going to hit profits next year.

That's led to the decision to slash the dividend, despite debt continuing to fall. It's painful for investors, but Saga urgently needs to address the falling customer numbers, especially as its business model is increasingly built on cross-selling services.

Non-insurance products like cruises are actually performing relatively well - securing niche positions in their respective markets and with healthy levels of demand. Saga's 1.1m strong membership programme is lending a helping hand. Unfortunately it's all a side show if the insurance continues to struggle.

Only time will tell if the groups attempts to revamp its insurance offering are enough to attract premium customers back. But with the company currently trading on a PE ratio of just 4.5 times - investors are clearly not optimistic, and we can see why.

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AGM Trading Update

Overall retail broking policy volumes fell 6.2% to 753,000 - reflecting lower travel insurance volume and increased focus on value in motorcycle insurance broking.

Saga has sold over 60,000 of its new three-year, fixed priced insurance policies with around half being new business. More than half of all new direct customers have chosen fixed price products - in line with the group's expectations. The new product launch has led to a slight increase in the proportion of business written on a direct basis - although core own brand Home and Motor policies remain flat at 564,000.

Gross margins across the home and motor business remain in line with guidance.

Competition in the travel market have negatively impacted Saga's Tour Operating business, with revenues down 4% compared to the same period last year. Margins are also expected to impacted by competitive discounting.

The Cruise business has been more robust, with bookings for 2020/21 broadly on track. However, the cruise business is still expected to report a loss of around £3m in the first half - as costs associated with the launch of new ships increase.

During the period Saga announced a partnership with Goldman Sachs to focus on long-term savings.

The 'Possibilities' membership scheme now has 1.1m members, with engaged members rising 15% to 208,000.

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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.

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