Saga takes a new twist

Saga (SAGA) did not have a good pandemic, it is fair to say, as the silver-haired hordes who buy its cruises and insure their cars and homes with the company cut back on travel of all sorts. The first half of the year had seemed like an opportunity to rebuild the company’s earnings, but headwinds hitting its insurance business have scuppered any notion of recovery. The deteriorating outlook for premiums meant the company had to write-down nearly £270mn of goodwill, which was behind the reported loss. The market reaction was brutal, and the shares lost 20 per cent on results day to cap a long string of losses.

The issue over declining margins per policy were highlighted in the last trading update, but the market seems to have been surprised by the extent of the problem, particularly the size of the write-down. This reflected rapidly deteriorating markets conditions and meant that the outlook for underlying profits for the full year will now be £20mn-£30mn, rather the £35mn-£50mn range that had been forecast by management. Saga is still writing new business; policies were up 3 per cent compared with last year, but less profitably. Furthermore, although current retention rates improved by two percentage points to 83 per cent, Saga appears to have been caught out in its insurance division by the inability to charge higher premiums to loyal customers.

Saga does have the possibility of turning the business around, but it must be of some concern to investors that it has not managed the switchover to managing higher customer retention rates as successfully as its peers. It now must prove that it can manage its debt pile before a change in view. Hold.

Last IC View: Hold, 237p, 23 Mar 2022