Insurance challenges, Monarch collapse hit Saga

Specialist in products and services for life after 50, Saga, issued a trading update for the period from 1 August to 5 December on Wednesday, reporting that growth in underlying profit before tax was expected to be between 1% and 2% for the year to 31 January 2018.

The FTSE 250 company said that had been impacted by “more challenging trading” in insurance broking during the period, and the Monarch Airlines administration which affected its tour operations business.

For the full year, the written profit of Saga’s retail broking business was expected to be ahead year-on-year, with a “strong performance” in motor partially offset by a challenging trading environment in home and travel insurance.

Earned profit for retail broking was expected to be marginally lower than the prior year, due to a lower written to earned benefit.

Saga said its in-house underwriter continued to have an “excellent experience” in small and large personal injury claims, and the company now expected reserve releases to be at a similar level to the previous year.

Its travel segment continues to trade well, the board said, and was expected to be “strongly ahead” of the prior year.

However, the tour operations business had been impacted by the collapse of Monarch Airlines, with an approximate one-off cost of £2m.

“During the period, we have completed a review of our operating structure which will realise approximately £10m of annualised savings next year,” the board said in its statement.

“We expect to incur a one-off cost of circa £4 million relating to these changes, excluded from underlying profit before tax.”

Since IPO, the company said it had been investing in its “capabilities”, with its new claims platform now live and its broking platform in the final stages of testing.

The renewal of its shipping fleet was also underway.

“We have launched our motor panel and our membership program, Possibilities,” the board said.

“We have improved our ability to attract, retain and grow our high affinity customers.

“With greater customer insight and a stronger business platform, now is the right time for us to make targeted marketing investments to grow the business.”

As a result, Saga said it intended to increase our annual customer acquisition spend by £10m starting next year.

The company said it also expected an increase in the profitability of its broking and travel businesses next year, including the approximately £10m of annualised savings from the actions taken in the current year.

Offsetting that would be a lower level of written-to-earned benefit and a decline in reserve releases.

Those headwinds, and the board’s decision to invest an additional £10m into customer acquisition, was expected to result in underlying profit before tax for next year being approximately 5% lower than the current year.

The board still expected the current year dividend to be in line with its expectations, and it said it remained “fully committed” to the stated dividend policy.

“Our transition towards a capital light broker model has involved the introduction of the motor panel and the transfer of broked add-ons to third parties from our in-house provider,” the board explained.

“These changes and the introduction of an arrangement fee in 2015 have resulted in a benefit from recognising these revenues on a written basis.”

The benefit in the year to 31 January 2017 was £19.9m , and that was expected to decline by £10m in the current year, and then not recur.

In its underwriting business, the board said that whilst the in-year profitability of its underwriter continued to perform as expected, the level of reserve releases related to historical claim years was expected to decline by between £10m and £15m next year.

With the additional investment in customer acquisition, Saga said it expected numbers of retail broking policies and holiday passengers to return to growth going forward.

The board said it was still on track to achieve its goal of increasing the profit before tax of its travel segment by between four and five times by the year ended 31 January 2022.

“Against a backdrop of some challenging trading conditions in our final quarter, we continue to develop the business for the long term,” said CEO Lance Batchelor.

“With greater customer insight and a stronger business platform, now is the right time for Saga to invest in growing the customer base and the business.

“We are confident that the actions taken will ultimately see a better quality of earnings and profit growth across the business, supporting our progressive dividend policy for the benefit of our shareholders.”