- Shares fall on disappointing outlook for insurance

- New one year product will dilute margins

- De-rating reflects concerns over earnings recovery

Shares in over 50’s services group Saga (SAGA) dropped as much as 4.5% to 159.5p following the release of a trading update to coincide with its AGM (annual general meeting).

The firm revealed a combination of headwinds for the insurance business is likely to overshadow the recovery already underway in travel.

Management guided towards £35 million to £50 million of underlying profit before tax in 2022-2023 against a £7 million loss last year.

INSURANCE LAGGING

The insurance business is facing a series of challenges, in part due to the implementation of the FCA’s pricing review.

This prevents insurers raising prices for customers who renew with them habitually while offering new customers more attractive rates.

Policies in force in motor and home insurance have fallen 4% since the start of the year while policy sales have fallen by 9% since the beginning of the year due to a drop in new business.

Management aims to return to growth in motor and home insurance with the launch of new motor products in the second half of this year.

This will include a multi-car policy and a new one-year standard policy, which between them are expected to become a significant proportion of sales.

Many of its customers are on fixed three-year rates which the firm introduced to grab market share, but with claims inflation continuing to rise it looks like this approach may have backfired.

Moreover, moving to a one-year product versus the existing three-year offering will drag margins down and stimie any recovery in the insurance business next year.

SMOOTH SAILING

The outlook for cruises is more encouraging with a first half load factor of 67%, set to increase to 83% for the second half.

The booked load factor for next year is 34%, which is described as being ahead of expectations.

Management is positive about the outlook for holidays with cancellations reported to have fallen to pre-pandemic levels.

The launch of the 2023/2024 season has experienced a more rapid uptake of post-launch bookings than in previous years.

Peel Hunt analyst Andreas van Embden suggests ‘Saga trades on 7x 2023 earnings per share, reflecting doubts about the earnings potential longer term’.

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Issue Date: 05 Jul 2022