Saga PLC (LON:SAGA) slashed its dividend after swinging to a 2019 loss and warned that it expects weaker margins in the insurance business to hit next year’s results.
In late-afternoon trading, shares were down 36% to 68.3p
The company, which provides insurance, holidays, healthcare and financial services to people aged over 50, said it made a loss before tax of £134.6mln in the year to 31 January 2019, compared to a £180.9mln profit before tax a year ago.
The loss reflected a £310mln impairment charge in the insurance operations. Saga also took a £5.9mln impairment in its travel business related to the Saga Pearl II and Saga Sapphire cruise ships leaving service in April 2019 and June 2020.
Weak performance in retail broking
Excluding items, underlying pre-tax profit fell to £180.3mln in the year to 31 January 2019 from £190.6mln a year ago, led by a 19.1% decline in retail broking.
Revenue decreased by 2.2% to £842mln due to a drop in retail broking revenues as lower margin new business policies replaced higher margin renewal policies.
Total customer spending including net premiums paid to insurance underwriters and insurance premium tax was flat at £1.2bn.
A consumer switch towards price comparison sites and regulatory changes have hit retail broking margins in recent years.
While the travel business delivered its fifth consecutive year of underlying profit growth, it has seen demand slow as consumers hold off on booking holidays until there is more clarity on Brexit uncertainty.
The travel division achieved a 1.9% increase in revenue and a 2.4% in underlying pre-tax profit in 2019, driven by a strong performance in cruises.
New insurance strategy to knock profits lower
Saga is taking action to overhaul the insurance business with extra marketing spend and the launch of a new three-year fixed price product to lure in more customers.
As a result, broking gross margins will fall from £80 to between £71-£74 per policy.
Chief executive, Lance Batchelor, said the new strategy for insurance will focus on direct channels and products that "offer attractive innovative features, moving the conversation from price to value".
Due to lower margins in insurance, changes to renewal pricing, lower reserve releases and investment in new products, the company expects underlying pre-tax profit in 2020 to fall to £105-£120mln.
Given the profit warning, Saga decided to cut its 2019 dividend to 4p per share from 9p per share.
“In the near-term, a combination of margin pressures and other factors mean that profitability will be significantly below that of recent years and also below our previous expectations,” Saga chairman Patrick O’Sullivan said.
“As a result, we have had to make some difficult decisions.”
Peel Hunt keeps 'buy' rating
Peel Hunt said the market has already been discounting a disappointing near-term outlook but the shares will clearly weaken as the new strategy is assessed.
The broker maintained a 'buy' rating and target price of 180p.
"Saga struggles to execute a clear path to profitability of a business that is fundamentally attractive," it said.