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Shares in Saga, the over-50s insurance and holiday specialist, dived almost 40% to hit a record low of 65p after it reported lower profits and warned that earnings would be hit next year.

A “fundamental” rethink will see Saga make changes to its insurance business that are set to cut profit margins. Saga, which has just over two million customers, also cut the dividend payout to shareholders.

The company added it had written down the value of its business by £310m. Saga, which said it faced “increasing challenges” in its markets, reported a 5.4% fall in underlying profits to £180m for the year to 31 January.

For the current financial year, it is expecting profits to fall to between £105m and £120m. After dropping to 65p, Saga’s shares had recovered slightly to 70p by midday on Thursday.

Saga’s insurance business – along with many other firms in the sector – relied on selling cheap deals to new customers, and rebuilding profits as they renewed their policies.

Customers are increasingly using price comparison websites to take out insurance policies, where the price of the product matters more than having a strong brand – effectively “commoditising” insurance.

However, Saga said it would try to move away from cheap introductory deals, and offer fixed rates for three years.

Lance Batchelor, Saga chief executive of Saga, told the BBC: “Over the past decade our insurance business has been in decline, whereas the other, cruise, side has been flourishing.

“We are now making a change to the way we sell insurance, with the launch of our three-year fixed-price offering for home and motoring insurance.”

Saga did better in its travel division, where underlying pre-tax profits rose by 2.4% to £21.1m, although it said “Brexit was putting a clear dampener on customers’ willingness to commit to holidays in 2019”.

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