Saga profits fade less than feared as customer numbers rise

Profits wilted a little at Saga in the first half of the year as the over-50s services provider kept up investment in new customer acquisition and its insurance business was crimped by the competitive market.

While an underlying profit before tax of £106.8m in the six months ended 31 July was down 3.7% on a year ago it was 5% ahead of the average analyst forecast, even though the tougher insurance market contributing to revenue falling 1.7% to £430.6m.

With strong cash generation of £89.5m and the investment driving customer numbers back to where they were before December's profit warning, directors approved an interim dividend of 3p per share, in line with the previous year.

Customer numbers were driven by a 19% increase in new business from Motor and Home insurance broking, though the more competitive pricing backdrop meant acquiring customers came at a higher cost so this did not translate into profitability. Moreover, investment was poured into new business and improved retention in insurance, balanced by a strong underwriting performance.

Retail broking profits were 6.2% lower at £63.4m due to the investment in new business.

Growth motor new business helped drive the third-party share of policies to 22.0% from 14.9%, with 67% of new business growth from the sprightly under-65s segment.

After a positive first half for home insurance, the company said it was now seeing "upward pressure on net rates" after the adverse weather conditions seen at the start of the year, which is "expected to impact broker revenue and profitability in the second half".

Despite this, retention rates for motor and home have recovered from the second half of last year and Saga has been able to continue writing new business on "attractive terms", resulting in total core policies sold being flat yer on year and up 6.8% against the second half.

Underwriting PBT of £45.6m was down from £47m a year ago but with reported combined operating ratio of 61.5% versus 61.2% and reserve releases of £38.0m.

The travel business delivered flattish PBT of £12.0m but saw "encouraging demand" for the new cruise ship, Spirit of Discovery, with over 64% of sales target for the first 19 cruises already achieved at "attractive rates".

Construction is on track, said chief executive Lance Batchelor, with keel laying this summer, ahead of a maiden cruise next year.

"The group is benefitting from lower operating expenses across the business, reflecting a more efficient operating structure and investment in our IT systems," he said.

After an initial drop, shares in Saga rose 2.3% to 128.9p by late morning.

Analyst Nicholas Hyett at Hargreaves Lansdown said Saga was having to fight harder to win customers. "That’s being partly offset by some good cost control, with admin and selling costs down 5%, but price cuts are still denting profits."

"Motor insurance is a cyclical sector, and pricing pressure waxes and wanes over time – but Saga usually escapes the worst of it thanks to its targeted and loyal customer base of 50+ customers. It’s a worrying sign that doesn’t seem to be the case this time, although with 44% of Saga customers holding more than one Sag product, it looks like the group still has a hard core of dedicated fans.”

Analysts at Bernstein said core policy numbers in motor and home were basically in line with its forecast.

"We had been slightly worried going into results because of the tough conditions in motor insurance, with Hastings, Direct Line and Esure (prior to the Bain offer) all down 15-20% this year, but these numbers give us reassurance in our thesis."

Bernstein said a short-term negative today was the cautious outlook for the second half in the broking business, with Saga reporting increasing margin pressure on net rates in home following the adverse weather in H1, which is "expected to impact broker revenue and profitability in the second half", while Motor also faces a headwind from lower average premium in H2.

Broker Peel Hunt said the recent string of new management appointments and improved governance "should put Saga back on track to rebuild what we believe is an attractive and distinct affinity broker model".

The shares are undervalued, Peel Hunt believes, trading at 9 times full year EPS and offering a 7% yield.