The group’s insurance business is once again proving to be a problem. Over the past few years, Saga has tried to re-align its insurance arm, in an attempt to make the business stand out in an extremely competitive market.
Unfortunately, it looks as if the company isn’t doing enough to retain customers. Despite an increase in the number of over-50s looking for insurance cover in the UK, Saga has lost 500,000 annual customers over the past decade.
Asleep at the wheel
It seems to me as if management has been asleep at the wheel here. Saga does have a strong brand, but this brand does not seem to be appealing enough to convince customers to choose the company over lower-cost competitors. And the firm is paying the price.
Management now seems to have woken up to the threat and is taking action. The company plans to slash the prices of its insurance offering, reducing the average margin per insurance product from £80 to £70 over the next two years. According to forecasts, this will hit profits significantly. Its own numbers suggest underlying pre-tax profit in the year to January 2020 is likely to be between £105m and £120m, down from £180.3m.
As well as warning on profits, the company also announced last week that it was reducing its dividend by more than 50% to 4p and it is taking a £310m goodwill impairment.
Saga has clearly messed up with the insurance business, although one area of the group that is showing growth is its travel business. Profits at the travel division increased by 2% last year, which is a plus.
However, this isn’t enough to convince me that the Saga share price can make a successful comeback. Cutting prices might bring customers back to the insurance business, but lower rates mean lower profit margins, which means the company is going to have to attract even more customers to return to the level of profitability it earned in the past.
What’s more, I think the group needs a management refresh as the current CEO, Lance Batchelor who has been with the enterprise since 2014, seems to be wholly responsible for Saga’s mistakes and lack of direction over the past few years. That being said, there is some fresh blood in the management team. The company recently replaced its chairman and finance director. Only time will tell if this is enough.
The bottom line
So overall, I don’t think the Saga share price will be heading back to a golden age any time soon.
The company may be taking action to try and retain customers, but this seems to be too little too late, and with profits set to fall by as much as 42% over the next two years, I think it could be some time before earnings rise to a level that justifies a higher share price.
Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.