Over-50s travel and insurance company Saga lost a third of its value this morning after it said it was more than halving its dividend as it crashed to a £134.6m loss.
Its share price plunged 35 per cent to 68p after its shock announcement.
Saga warned that in the short term its profitability would be “significantly below that of recent years and also below our previous expectations”, blaming a combination of “margin pressures and other factors".
Saga fell to a £134.6m loss before tax. The insurer said it was writing down £310m of goodwill, representing 22 per cent of its insurance goodwill.
It also said it was cutting its dividend, with a final dividend of 1p per share and a full year dividend of 4p, compared to 6p and 9p respectively the previous year.
It forecast underlying profit for 2019-20 of between £105m and £120m, down from £180.3m in its latest results and £190.6m the previous year.
It said this was a result of lower margins in insurance, a change in approach to renewal pricing, lower reserve releases and investment in new products.
Why it's interesting
The company said it was launching a new strategy to return the business to its roots in response to the pressures it faces.
It said it would change its approach to insurance, moving from a business that wins new customers on price and recoups losses through increased renewal prices, to a business that “will offer a differentiated insurance product on the basis of unique and attractive features”.
It is launching a home and motor insurance product that guarantees the same premium for three years providing there are no claims in the period, available only to customers who come directly to Saga.
It also said it was changing its approach to renewal pricing, as a response to regulatory pressure and recognition of the fact “the industry is going to go through a period of major change”.
Tom Stevenson, investment director at Fidelity Personal Investing, said: “Saga is proof positive that when an investment looks too good to be true it probably is. The insurance to cruises group’s dividend yield of nearly eight per cent looked unsustainable and it was. Today’s results have thrown the divi out with the kitchen sink of a £310m goodwill write-off. Four years after its flotation at nearly twice the current share price, the company is starting over.
“The company admits that it has got a lot wrong in recent years. It has squandered its strong brand recognition among its target market of over-50s, trying and failing to compete in a highly competitive and commoditised insurance market when it should have focused instead on what it could do differently. That’s the new approach and investors must hope that after a disastrous start as a publicly-quoted company, the new Saga ends better than the last one."
Numis analysts said: "The pressure on broking earnings is worse than we had feared, as evidenced by the strategy rethink announced today. However, we think the company’s realisation that it needs to change its model to compete effectively in today’s insurance marketplace offers some hope that insurance broking profits can be stabilised at the lower level now expected for January 2020, albeit with significant execution risk. Rollout off the new cruise ships remains a key driver of medium term profit growth."
What Saga said
Chief executive Lance Batchelor said: "Over recent years Saga has faced increasing challenges from the commoditisation of the markets in which we operate, especially in Insurance. This has had an impact on both customer numbers and profitability. Although underlying profit before tax for the 2018/19 financial year is in line with our expectations, the long-term challenges we face and the results demonstrate that Saga cannot grow without a clearly differentiated offering to its customers.
"In response, today we are launching a fundamental change to the group's strategy to return the whole business to its heritage as an organisation that offers differentiated products and services. This will give our customers and members a compelling reason to come to us and stay with us."