Member Info for Value_Wise

Apologies was missing my first para in the previous post (Not So Nimble!!)
Read a balanced review of Saga by Edmund Jackson on the Interactive Investor site that supported my scepticism of the Saga Insurance business. My car was insured by Saga last year(from August) but they were more expensive by far than other offers on comparison sites even though I fit their target market. The three year fixed was pushed hard in their mailings, a product I am not interested in. The business has strong competitors like Admiral and has challenges building scale.

Borrowing from Edmund:?

* Total retail broking earned fell 10% to £37.9 million, significantly offset by an 11% rise in underwriting revenue to £31.1 million. Total insurance therefore eased 1.4% to £69.0 million.?

* The three-year fixed has competition and in any case, a Saga target customer is nimble enough with a computer mouse and a comparison site to search for the best deals annually. It kind of blunts the story about a captive customer base and ability to sell insurance directly.

?* Release of reserves on the underwriting side - £18m in the first half for Saga- has saved the insurance business across the industry. This will not last as Saga confirmed in the Q&A to the Investor Meet Company presentation.
So, questions remain as to the retention of insurance undewriting at Saga .
?
?Dont get me wrong, I still hold the shares on the basis that cash flow from insurance gives the company time to build up cash from Cruise but the enthusiasm for more than £5 or 6 may need to be curbed.

Borrowing from Edmund:?

* Total retail broking earned fell 10% to £37.9 million, significantly offset by an 11% rise in underwriting revenue to £31.1 million. Total insurance therefore eased 1.4% to £69.0 million.?

* The three-year fixed has competition and in any case, a Saga target customer is nimble enough with a computer mouse and a comparison site to search for the best deals annually. It kind of blunts the story about a captive customer base and ability to sell insurance directly.

?* Release of reserves on the underwriting side - £18m in the first half for Saga- has saved the insurance business across the industry. This will not last as Saga confirmed in the Q&A to the Investor Meet Company presentation.
So, questions remain as to the retention of insurance undewriting at Saga .
?
?Dont get me wrong, I still hold the shares on the basis that cash flow from insurance gives the company time to build up cash from Cruise but the enthusiasm for more than £5 or 6 may need to be curbed.

Good luck getting 3-4x. The management track record is not great. A lot of hope riding on the ex owner coming back in.

Anyone know why it has just fallen? Is it to do with disappointment on the UK travel restrictions or possible return of lock downs?

Since the floatation, management has struggled to define the business proposition. It has added and dropped products to cross sell, lost market share and is hindered by lack of investment in technology. A high debt burden reduced flexibility.

Meanwhile, the insurance world has changed. IMotor is in a structural decline with driverless cars coming into view. That is likley to lead to consolidation while there is still some time. The distribution has changed with the advent of Price Comparison Websites (PCW) making selling direct a challenge. The Over 50s client base is growing more adept at using this medium to buy insurance, a commodity, and will shop for the best deal. [Btw, I ended up being a Saga customer last September but only found out afgter I had bought a policy using Go Compare. Again btw, I am in the Saga target client base}.
To assure you, I am on your side as a buyer of the Stock, I bought more stock last week at 260p. My hope is that RDH will focus the business, selling off parts that dont fit the proposition of serving the over 50s for travel and leisure . Going back to the roots. Underwriting motor insurance is not necessary but building the saga brand is importance. The equity raise gives time to re-focus, reduce debt and get the ships sailing. That gives me a target price of £5.30. You will see that i do not recognise the insurance business at goodwill value because I doubt if some one will buy it for a 9.9% return unless there are huger synergies to get it to a mid-teens return.

I am sure, and hope, we will continue to engage in this discussion and learn from each other.
Regards
ValueWise

Banburyboy
Apologies for not coming back to you on the 5% point improvement in loss ratio. The loss ratio for 6 m July 2020 was 85.6%. This is the Claims Costs in the period divided by the premiums of £95.2m. The TU says there is a 5% improvement to the current year loss ratio when compared to the first half of the year. So, for the year ending jan 20, the loss ratio has fallento 80.6%. This is not surprising givenreduced vehicle usage and lower claims frequency. But not all of this will fall to the bottom line since the lower usage and lower frequency of claims is industry wide and results in lower premiums. There is a give back to customers and this lower ratio will not reflect fully in profitability.

On page 14 of the Capital Raise document, Saga state clearly that "the financial statement for the six months ended 31 July 2020 do not reflect the recent decrese in the frequency of motor claims, which is due to a sharp reduction in miles driven by the Group's customers during the Covid 19 lockdwon period. The Group decided not to recognise the benefit of this decrease because of uncertainty over the current pricing and claims outlook". The last sentence of this paragraph finishes with " The Group intends to return a portion of this benefit to customers."

So, the lower loss ratio will have some positive efefct on the profitability of the underwriting business but perhaps not as much as the improvement in loss ratio would indicate. The uncertainty in their statement comes from the fact that returning the benefit is a universal practice. i think I mentioned that GEICO, one of the largest motor insurers in the US and oened by Berkshire Hathaway is giving back. The leaders in the UK market such as Admiral and Hastings, will probab;y set the standards and Saga will have to follow.

I hope this helps. As to my measured approach, i prefer to take a balanced view. The history of saga since the IPO is not great from a shareholder perspective. Hence, my point on drawing attention to the declining free cash flow. This can be explained by a continual struggle to deliver agaiunst expectations. You can read this in the press reports since the business floated in 2014 and the Saga of the floatation where the company was hyped up as a consumer growth business with a niche client base portrayed as its moat. Private equity pushed this line selling at a huge premium to the net asset value resulting in goodwill of over £1bn. They got away with this by selling a chunk to the loyal customer base rather than institutions. Enjoy the cruise and buy the shares has not led to a good financial outcome for the IPO investors. In any case, no surprise that there was a large goodwill write off in 2019/20 as the company was overvalued. (

To be continued

Roxbury House
You might wish to append the following data to your market value record for Saga and look at the multiple of Market Value to Free Cash Flow. That might explain the steady decline in market value since the IPO.

Roxburyhouse
You might append the following data on Net Operating Cash Flow, Capital expenditure and Free Cash Flow to your table of market values and see how the multiple of Market Value to Free Cash Flow has declined. That might explain why the share price has fallen steadily since the IPO.

£m NOCF Capex FCF
2012 218.5 44.4 174.1
2013 234.5 45.2 189.3
2014 174.2 20 154.2
2015 155 26.4 128.6
2016 150 33.8 116.2
2017 139 43.9 95.1
2018 135 82.5 52.5
2019 148 63 85
2020 91.9 295 -203.1

JoeNinety
Btw, I had the same feeling looking at the brochure prices.

Apologies for the typos. fat finger, never learned typing.

Banburyboy
Been a busy day so I am just sitting down to pasrse the Saga TU. Here are thoughts on one item that item that you have commented on, and that is the cash position. My tracking shows that in Seeptember , after the equity raise, Saga had cash of £62m. At end December, available cash is £51m. That means £11m used in three months or so. they have used £3.7m per month assuming insurance is self sufficient. However, the TU says their cash burn rate was at the lower end of £6m-£8m per month and that could be the case for the six month period.

How do I get to £62m at end September? The Available Cash at end July was £28.8m, In the equity raise document they said, the end August cash was £26m and that they will increase cash by £36m from the equity raise after paying £64m of the Term Loan and £40m RCF. So I get to £62m.

So liquidity available end December is £100m RCF, £10m overdraft and £51m cash, at otal of £161m, down from £172m in Septembe. This is still plenty to absorb a cash burn of £8m for 17 months, i.e through May 2022 including a £20m debt repayment (approx.).

Seekeing another waiver on the Ship Facilities, even though it could be due to abundance of caution, is a sign of uncertainty as to when cruising may start and with what load factors.
Will follow up with the loss ratios.

Hi Spkr
Do you know what these after hours trades represent? i have seen them often and while I do n ot know teh detailed mechanics, I think they have to do with net settlement of trades conducted by dark pools during the day or else ETF related trades.Not sure whether they signal a buy or sell sentiment. Would love to learn more .
Regards
ValueWise

Banburyboy
I need to do more work and will do so. The 1% sales growth does not sound great in the context of a 3% target and I think £71 per policy is unchanged from the interim numbers. One of the challenges judging trends now is that Saga is reporting some data for the year and not the second half. I want to know whether there is an improvement in trends from strategic objectives and whether RDH is having an impact. It is early days for any RDH effect to show in ghe numbers as yet bjut there could be strategic and organisation decisions where there could be some visibility.
Seeking a waiver on debt repayment after one waiver already does sound like a cash flow concern and the market has picked up on it. See headlines on twitter.

Banburyboy
The lower loss ratio results from fewer people driving, hence fewer claims which for Saga is in line worth the market. I look at the loss ratio on aperiod basis before releases from prior years.

AICL does most of the inflow of Motor business. Only 29% is undwerwritten by the third party panel. Retention of risk is lower and net of reinsurance. My conhectutre in previous exchanges with you was that the premiums for motor insurance are under pressure due to competition in a market where demand is lower due to people driving less.

The benefit of lower losses is going to be passed on to the policyholders as Saga has stated already. It is an universal industry practice. For example, GEICO the Warren Buffett entity in the US is also doing this.

The update was surprising in that Saga is seeking a further waiver of repayments on teh shipping debt. That must means that while bookings look great, there is danger of cancellations and further delays. Also, Saga may not be geting to the load factors assumed of 80%.

Another potential risk built in to the report was the mention of teh forthcoming FCA review of existing vs new premiums. It should the non-fixed part of the business but the TU is silent on the dimension of the issue for them.

I am not surprised by the dip and planning to buy at 260p although management transparency continues to make me uncomfortable.

Banbury Boy
No worries. I have gained great insight from you and other posters on this BB. It is the first time I have engaged on a BB and I did so because the posts are helpful in the analysis . The anecdotes of personal expereience with Saga such as the ones today from BradSmith and Olderand wiser are invaluable. They help to understand the business.

I hope this exchange will continue. On to the subject matter:
a. I have studied Saga's history since its listing in 2014 and based on this I view their insurance business with some scepticism. They have been losing market share as the likes of Admiral and Hastings have grown. Now they are desperate to retain customers. The investments in digitalisation are being made but could be too late. Their Over 50s client base seems to be quite adept at getting on to a Price Comparison Site and getting the best deal.
b. Your approach to using Goodwill from the accounts is novel and I am intrigued by it. I have taken it seriously, studied it and discussed it with people in the insurance industry. What you say
seems to make sense but he market value of around £350m says that people are discounting the goodwill of £900m. That tells me that the discount rate used by people from the outside is higher than the one used by Saga. I also note that Saga was massively overvalued when it floated in 2014 as the business was characterised as a consumer growth business rather than insurance and a lot of the buyers were its own customers. You can see this in the reports around the time the company was sold back on to the market by the three PE investors.
c. I use a sum of the parts approach based on multiple of EBITDA or forward earnings deriving this from history, comparable busineses or comparable transactions for the Insurance and Travel businesses.

To be transparent, I am long Saga between 245 and 260p. I should have looked at it earlier when fellow investors brought it to my attention in September 2020 but passed based on an iompression gained over the years that this was a troubled business sold by private equity like the AA and the cruise part. That was stupid of me. I value the stock at 500p, so will buy more on a dip whic. h may well occur if the newsflow on the vaccine or resumption of cruising is negative.

JL5006 and rupans
Thanks you for the details of the 3 year fixed. Management has touted this product as an innovation but for the P&L of the company and the shareholder this is a pitfall.

"The 3 yr was less than the current annual - which was inflated and reduced to prior year then less."

This is more evidence of weakness on the Insurance side. Hope they can sell the underwriting for good value and cut debt.

jL5006 not sure I have understood you 100% but here are my thoughts on the much touted three year fixed.
a. I think Saga launched the product to stop loss of customers in renewals as competition was pulling them away and discounting was not helping.
b. Fixing is a call on where premiums might go in the future. the policyholder loses if premium fall further. Fixing also involves carrying risk on the insurer for a longer time. So a policy holder may not fix if he/she thinks that premiums could fall or may not fix if they dont like to take the credit risk of the insurer for three years. I grant you that i think few people should worrk about the credit risk as the UK insurers are highly regulated and monitired againts tight capital adequacy rules.
c. I understand that the three year fixed product has an option built into it where the policyholder can exit the product if rates fall. On the other hand, Saga cannot raise premiums if premiums rise.

I have not seen the detailed policy terms so you may know better.

Banburyboy
I would not be surprised if Saga announce the sale or the intention to sell th underwriting business. This is not a strategic part of their core proposition. It is regulated and ties up capital. the underwriting is not great with a Combined ratio before prior year releases exceeding 100%.

The sale , if it happens, will help to reduce debt and allow Saga to deploy capital towards rejuvenating its brand and building up the Travel operations that formed the root of the company.

The insurance business is under pressure from competition

Sorry Millionaire106, have you forgotten around £900m debt that you need to subtract from the Enterprise Value which is what you get when you use the EV:EBITDA multiple. I think your approach gets to £6, not £12. There is ofcourse the question whether the Insurance business is worth £1bn.

Banburyboy who has excellent knowledge of Saga, has used the implied goodwill number from the interims of £900m but that is based on a return of 9.9%. A buyer is likely to demand a higher return and not pay that goodwill amount. It is the cost of capital of Saga, not the buyers target return.
At the other end , Hastings, sold for £1.67bn, an implied EV:EBITDA (Adhusted Operating Profit) multiple of 17.5x . That is huge but if you look closely, Hastings had 11% share of the UK car insurance and even greater share of the PCW market through which close to 99% of car insiurance is bought. Also, they mostly an underwriter vs a Broker (as Saga is) and their underwriting with a Combined Ratio at 97% was profitable. Saga's Combine ratio exceeded was 101% in 2019. So Saga would not command a multiple like Hastings did.

Dont get me wrong, i am a buyer and believe the stock can double from here but would be cautious on a greater than £6 projection.

Banburyboy
Thank you very much for the very clear explanation of how you got to £900m for the prudent value of the Insurance business.

Banburyboy thank you for your very knowledgeable and insightful posts that are very helpful to someone less familiar with teh Saga case. Actually, the whole Saga Chat on LSE is instructive and exemplary thanks to you, Pokerchips, Roxburyhouse, Doofus and many others.
It was interesting that you estimated teh minimum value of the Insurance business as £900m. The goodwill attributed to it in the interims is £718m. What am I missing?

Roughly speaking, I have taken the Retail Broking (£44.8m) and Underwriting EBITDA (£28.3m) from the Interims to estimate an annual EBITDA for Insurance of £146m. At an EV/EBITDA of 5x (I assume this is reasonable given a commoditised P&C business with some differentiation as it focuses on the over 50s ), I get an Enterprise Value of £730m.

With respect to the Trading Update, do you not fear disappointment as Saga may have sold more policies but premiums are being subjected to greater competition. The Insurance CEOs seems to have been pushed out by RDH as Doofus comments but it could also be due to a failure to hit Direct Sales and profit targets. I am a Motor customer but tumbled into being one from the GoCompare site. It was quite undifferentiated.

Regardless of any fears that Insurance may be underperforming, I agree that it is not broken and will not be debilitating. The investment case really rests on the Cruise business. I estimate that if £80m EBITDA were to be delivered, the 12m EBITDA would be £212m on which I place a 5.9x multiple (same as Saga pre-COVID as of 31 January 20). This implies a value of 430p after subtracting net debt of £646m. It could be higher than this but not much due to the capital increase unless the Insurance business miraculously shows much higher growth in EBITDA.

Welcome your thoughts and other posters

That was quick. Anyone have a clue why