Saga Regulatory News (SAGA)

29 March 2017

Saga plc

Preliminary Results for the full year ended 31 January 2017

Consistent financial performance: membership based on customer insight to be launched in 2017

Saga plc ("Saga" or "the Group"), the UK's specialist in products and services for life after 50, announces its preliminary results for the twelve months ended 31 January 2017.

Financial highlights

· Consistent delivery of profit growth

o Underlying profit before tax, excluding derivative gains and the Ogden discount rate impact increased by 5.6%

· Sustained cash generation, leading to further deleveraging

o Now within medium-term target range of between 1.5 and 2.0 times

· 18.1% growth in proposed full year dividend, equating to a payout ratio of 62%4 (FY 2016: 57%5)

Divisional Highlights

Retail broking

· Strong performance in competitive environment with significant improvement in motor

· Motor panel performing as expected

· Broking profit per customer grew 5.7% to £46.0 (FY 2016: £43.5)

Insurance underwriting

· Continued strong performance in motor underwriting

· Profit before tax (excluding Ogden impact) of £77.1m (FY 2016: £84.1m) with lower reserve releases

· Impact of change in Ogden discount rate from 2.5% to -0.75% of £4m

· Positive capital release from underwriter

Travel

· Profit growth across travel business, despite scheduled maintenance of Saga Sapphire

· Robust trading performance and visibility for FY 2018 departures, with current reservations 8% ahead of prior year

· New cruise ship on track for delivery in June 2019

Customer work

· Enhanced customer understanding assisting retention and acquisition

· Driving proposition development across all divisions

· Identification of c.500k High-affinity Customers ("HACs")

· Launch of the Saga membership scheme, 'Saga Possibilities' later this year

Commenting on the results, Lance Batchelor, Group Chief Executive Officer, said:

"For the third successive year since IPO, we have delivered a strong set of financial results. Underlying profit before tax1 is up 5.6%, consistent with our ongoing objective of delivering consistent, sustainable profit growth. Debt is down sharply, and I am very pleased that the dividend has again materially increased.

Our performance has continued to prove the strength of the Saga business model, which builds multi-decade relationships with our target demographic through a range of excellent products and services. This breadth allows us to deliver consistently for our shareholders, despite the ebbs, flows and challenges in the insurance and travel markets.

We have progressed our intensive work to better understand which Saga customers are our most valuable, and how we can best reward and retain them, as well as nurture the next generation. We know more about Saga's core customers than ever before, which is leading to more efficient acquisition, retention and up-sell of our products. It means we can better help our customers to enjoy their retirement to the full.

The new financial year will be a busy and exciting one. In the second half, we will launch our membership scheme, "Saga Possibilities", allowing us to deepen our relationship with our customers and find a variety of ways to thank them for their loyalty. In future, I will normally refer to "Saga Members" rather than customers, a significant shift after 65 years of Saga history.

Also in 2017, we will finalise the design details of our first purpose built ship, Saga's "Spirit of Discovery". We will start selling cabins later this year for her first season, summer 2019.

Our confidence in continuing to deliver a consistent financial performance in 2017 is strong. We have started the financial year well, and I look ahead with a great deal of optimism for the business."

END

A preliminary results and capital markets presentation to analysts and investors will be held at 09.45 at the offices of Numis, 10 Paternoster Square, London, EC4M 7LT. The presentation will be broadcast via a webcast and a conference call for registered participants. Registration for the webcast can be completed at http://corporate.saga.co.uk/. The conference call can be accessed on: UK: 0203 059 8125, all other locations: +44 203 059 8125

For further information please contact:

Saga plc

Mark Watkins, Investor Relations Director Tel: 07738 777 479

Email: mark.watkins@saga.co.uk

Duncan Browne, Head of Investor Relations Tel: 07710 440 528

and Financial Media Email: duncan.browne@saga.co.uk

Paul Green, Director of Communications Tel: 01303 776023 / 07714 414859

Email: paul.green@saga.co.uk

MHP

Tim Rowntree/Simon Hockridge/Reg Hoare Tel: 020 3128 8100

Email: saga@mhpc.com 

Notes to editors

Saga is a specialist in the provision of products and services for life after 50. The Saga brand is one of the most recognised and trusted brands in the UK and is known for its high level of customer service and its high quality, award winning products and services including cruises and holidays, insurance, personal finance and publishing. saga.co.uk

1Profit before tax excluding derivatives and Ogden impact

2 Net cash flow from operating activities after capital expenditure but before tax and interest paid and non-trading items

3 Bank debt and borrowings, excluding any overdrafts held by restricted trading subsidiaries, net of available cash

4 Based on profit after tax excluding derivatives and Ogden impact

5 Excluding the one-off impact of Acromas tax losses

Chairman's statement

I am delighted to present another strong set of results.

We have continued to deliver on our progressive dividend policy this year, increasing our dividend by 18.1% to 8.5p. This equates to a payout ratio of 62%7 of net earnings, compared to 57%8 in the previous year. Last year, we increased our target payout range from 40%-60%, to 50%-70% as a sign of our confidence that we will continue to deliver strong financial performance. This year's decision to increase the dividend again reflects the Board's ongoing confidence in the sustainability of our dividend policy, which is supported by a strong track record of profit growth and cash generation through our capital efficient model.

Financially, we have again delivered growth in underlying profit before tax of 5.6% to £187.4m and basic earnings per share by 6.0% to 14.1p. Furthermore we have continued to be highly cash generative, resulting in a further deleveraging such that our net debt to EBITDA ratio has reduced to 1.9 times.

Our focus on customer need has been the driving force behind the growth of the business. Our customers remain at the heart of everything we do and it is a great credit to the company that so many continue to support us through sustained ownership of our shares. The management team has done a lot of work throughout the year to deepen our understanding of our customers. This is helping us to interact differently and more efficiently with both existing and prospective customers.

I would like to thank all of our shareholders, both institutional and retail for their ongoing support and to welcome those who have joined us during the year, including the many new institutional investors on our register. 

I would also like to thank our employees. Their dedication to customer care and innovation enable us to deliver the exacting standards our customers value so highly.

The Saga Board is a strong group of individuals who have brought relevant and valuable experience and skills to bear in shaping Saga's thinking and strategy. We continue to be confident in Saga's ability to deliver long-term sustainable returns for our shareholders by delivering consistent profitable growth with a capital efficient model.

Our Group Chief Executive, Lance Batchelor, continues to effectively deliver on the execution of our strategy. Lance leads a strong Executive Team which comprises a mix of new hires and established staff. Their energy, commitment and focus on key strategic deliverables throughout the year have had a marked impact on our results.

7 Based on profit after tax excluding derivatives and Ogden impact

8 Excluding the one-off benefit of Acromas tax losses 

Group CEO's statement

Overview

I am very pleased that we have again delivered consistent profit growth in line with our stated targets. We have achieved this alongside some important strategic developments, particularly the work we have done to enhance our understanding of our customers and to develop our vision for building future value by improving our customers' experience. 

Same clear strategy

We have continued to deliver on the clear strategy for sustainable earnings growth that we laid out in early 2015. This strategy has remained consistent and is focused on:

1. Becoming increasingly customer-centric.

2. Growing profits in our insurance and travel businesses.

3. Investing for future growth.

4. Maintaining our efficient operating model.

5. Developing our people.

Customer work

Our growing understanding of our customers has provided us with a unique opportunity to use our rich proprietary data to interact with them more efficiently to better understand what they want and to deliver it right across the business. We are also able to identify customers who are more likely to have an affinity with the brand over time, and to use our marketing resources more effectively by targeting and rewarding those customers who are, or have the propensity to be Higher-affinity Customers. 

Through this work, we have identified a core group of c.500k HACs that form around 20% of our customer base, and have contributed around 80% of customer value over the last three years. This HAC group has the following key characteristics, all of which deliver greater lifetime value to Saga. They:

· buy premium versions of what we sell;

· have higher retention levels; and

· have a higher propensity to buy multiple products across the Group, holding an average of 2.1 core products each. 

We now fully understand the journeys by which these customers have developed a high affinity for Saga and the reasons why certain customers have not. This means that we are now in a position to improve the efficiency and effectiveness of our direct marketing model to better identify and target existing or potential HACs.

Historically, we have managed a highly effective product marketing approach, evidenced by our industry leading customer acquisition costs in insurance. This marketing was based on average returns. By looking at it from the viewpoint of customer affinity, rather than by value of product, we can significantly refine this model to increase efficiency. 

Just as importantly, we have been able to identify customers who have an affinity with the brand but who currently have neither the long tenure, nor multiple product holdings. By considering their purchasing propensities, we can ensure that we approach and market to them in a way that optimises the likelihood of them developing an affinity with Saga. 

We have made a key improvement to our systems capability which will enable us to do this. In our core insurance and travel businesses, we have two excellent acquisition machines, whose demographic focus means we are constantly 'touching' current and new, potentially high-affinity, customers. The improved capability enables us to monitor in real time what customers are doing and, just as importantly, what they have done while journeying through any of our systems, both online and through our call centres. It will also enable us to automatically offer the customer the right product based on their history and their propensity to buy.

Membership

Saga's brand is synonymous with life after 50 in the UK. Thanks to the consistent delivery of tailored products, underpinned by exceptional service over many decades, customers often refer to being 'Saga members' without ever having run an official membership scheme. 

Utilising the customer work we will create a membership scheme that rewards and incentivises our customers both to stay with Saga and deepen their relationship with us. The scheme, which will launch in the second half of the year, is open to all existing Saga customers and will be named "Saga Possibilities". Its mission statement is to: "Help you, our Members, get more out of Saga and do more of the things that matter most to you".

Saga Possibilities will be structured around four key components:

· Experiences: provide members with a constant stream of inspiring products and experiences they can try.

· Expertise: the go-to place for the over 50's for subject matter expertise, providing information, inspiration and insight on topics that matter most.

· Everyday: to make the little things in life more enjoyable, easier and better value.

· Enhanced Saga products: every product and service that Saga sells will have extra enhancements for our members.

We believe that the combination of our increasing customer insight, data capability and membership will be extremely powerful, helping us to focus our efforts on rewarding, retaining and growing our target customer base and deepening our relationship with them. Our goal is therefore to grow the number of products held by HACs by 20% over the next 5 years.

Divisional review

Retail broking

Our retail broking business provides tailored products and services, ranging from motor to pet insurance, to millions of customers each year. Its role is to develop tailored products, price them to the customer and then source the cheapest cost of risk. This is achieved through our panels of third party insurers, which operate across both our motor and home businesses, or through solus arrangements, for example in travel or private medical insurance. Our in-house underwriter, AICL, sits on both motor and home panels and competes for the business on equal terms. If underwritten by a third party, the product is manufactured as a Saga product, and the customer interaction will always be managed by us. This approach to sourcing underwriting gives us the flexibility to operate a portfolio of products that takes advantage of, or protects against, prevailing market conditions at any given time. Overall, the business performed strongly, with profit before tax increasing by 9.1% to £138.0m (2016: £126.5m).

Motor broking

We have delivered a strong improvement in motor broking profitability, growing profit before tax by 58% to £45.2m (2016: £28.6m). This was driven by a combination of improved yield management, improved efficiencies in marketing and operations and the benefit of the motor panel. 

The introduction of the motor panel in summer 2015 has driven £3m of additional profit in the year, with around 30% of net premium for renewal policies being placed with third party underwriters by the end of the year. These policies tend to be for younger, higher risk drivers, meaning we are able to achieve a higher margin in our broking business without the need for holding capital in our underwriter.

The enhancement of our customer understanding is assisting in focusing retention and acquisition efforts on customers who are expected to add the greatest value to the Group. We have focused a greater marketing effort during the year on these core customers.

Home broking

The UK home insurance market continues to be highly competitive, with limited evidence of premium inflation in the market. Despite these difficult conditions, we chose to maintain policy volumes with a small reduction in profits. Profit before tax decreased to £61.2m (2016: £63.4m). 

The combination of the panel, including our underwriter, participating on a no risk basis through our co-insurance and reinsurance arrangements, enables us to access a competitive cost of risk with no downside underwriting risk.

Other broking

Within other insurance (primarily private medical insurance ('PMI') and travel insurance), customer numbers have been stable and profit before tax was £31.6m (2016: £34.5m). 

PMI performed strongly, with high levels of persistency and robust demand. As part of our ongoing drive to enhance the customer proposition, we have continued to improve the GP fast-track service and have extended the GP helpline facility. These popular initiatives are not widely available, and demonstrate our knowledge of our customer base, and our expertise in delivering bespoke products that particularly appeal to our demographic. 

In travel insurance, we saw some weakening of demand in the latter part of the year, and some pressure on net rates, as the effects of the currency move worked through. The differentiated aspects of our travel insurance product range have ensured that our offering has remained popular with customers. This includes a recent add-on that significantly reduces the cost of car insurance, and access to our travel hub.

Both our travel insurance and PMI products play an important role in the Group's customer acquisition strategy, allowing us to reach high quality customers with the resources and time both to travel and invest in their health. We are applying our new customer insight in a way that is already enhancing cross-sell between our insurance and travel businesses.

Current trading in retail broking

Given our varied retail broking product lines, we always experience varying market conditions in different businesses. Overall, we have seen a very positive start to the year on motor premiums, with strong upwards movement on new business. This is currently running in excess of claims inflation, and sets us on a strong footing to improve motor broking profits during the year. We have recently started to see the effects of the Ogden rate change being reflected in premiums across the market and affecting the net rates on the panel. However, this will take time to work through.

Home has continued to be difficult, with limited sign of premium inflation against a backdrop of claims inflation. Therefore, we expect another tough year for this market, particularly given the benign weather conditions over the winter period.

Private medical insurance is progressing well. Concerns over the NHS, and its ongoing funding, are leading to higher levels of interest and quotes. We expect this to continue, but with demand increasing on the private sector, we may see the emergence of increasing claims frequency and, thus, inflation. 

Travel insurance demand is stable. We are starting to see the impact of sterling depreciation, which is filtering through to higher prices and may suppress demand going forward.

Overall, we remain positive on trading for our retail broking business for the coming year.

Insurance underwriting

AICL, our underwriter, retains its competitive advantage and high panel share of older, lower risk drivers; as a result, it remains a vital part of the Group. Its rigorous focus on these drivers, along with ongoing efficient management of claims, has led to an excellent underwriting result. AICL targets a 3% return on net premiums and a strong return on equity, which it has consistently delivered over many years. The excellent management of claims costs has also delivered a high level of reserve releases. Profit before tax was £73.1m (2016: £84.1m), with the reduction due to reducing reserve releases and the first year of cost associated with our new quota share arrangement. 

AICL's high quality book has a track record of generating consistent earnings for the Group. The implementation of the quota share arrangement with NewRe, covering 75% of the downside risk of all motor policies written from 1 August 2015 for accidents occurring from 1 February 2016, has decreased our ongoing capital requirements for this business, lowering both risk and volatility. This has given us further confidence that AICL can continue to provide a solid contribution to our earnings in the future.

Reserve releases

With our clear targeted returns within AICL, the net pricing provided to the retail broking business provides flexibility in pricing to customers, and retains a large proportion of the Group's earnings within broking activities.

We have seen a decrease in reserve releases from £68.0m to £63.0m (excluding the Ogden effect) during the year. We expect the importance of reserve releases in Group earnings to decline gradually over coming years.  

Ogden discount rate change

On 27 February 2017, the government announced the reduction in the Ogden discount rate, used to value long term liabilities, from 2.5% to minus 0.75%. Within the existing reserve surplus, AICL had already assumed a significant reduction in this rate. When combined with the relatively low frequency and severity of claims for our underwritten drivers, the net additional impact on the Group was limited to £4m.

Travel

This year, our multi award winning travel business took over 211,000 customers around the world, as well as taking home 65 awards at the UK travel awards and continuing to receive exceptionally high levels of positive feedback from customers. The business maintained its trajectory of profitable growth, and is expected to approach its stretch target of doubling EBITDA to £40m one year early by the end of FY 2018. Overall, profit before tax excluding derivatives in travel increased by 10.4% to £14.9m (2016: £13.5m). Our new target is to grow profit before tax in the travel business by four to five times over the next five years.

Tour operating

We have delivered excellent earnings growth within our tour operating business, with profit before tax increasing by 32% to £11.5m (2016: £8.7m). We continue to see a shift in the mix of sales to longer-haul, higher-value products, as customers look beyond some of the more traditional holiday destinations. This demonstrates that our customers continue to value the security that products such as our river cruising and guided holidays offer - highly differentiated and tailored for the needs of our demographic.

The customer focused approach is key here, and, based on deep customer insight, we have developed four thematic product segments that we can apply and then tailor to the majority of our customer base. These are: Go For It, Discover, Unwind and Stay and Explore. By broadening our offering within these categories, we are also succeeding in attracting younger, first time buyers to the brand. 

The profile of these customers tends to be higher value, making them a natural fit for cross-selling and our membership scheme. Combined with the optimised digital approach the travel business is taking with its online offering, this is providing a quality customer acquisition route as part of the Group's wider strategy.

Cruising

Cruising remains essential to Saga's brand and customer offering. Our two cruise ships, the Saga Sapphire and Saga Pearl II, had another good year, with exceptionally high customer satisfaction levels. We have significantly improved the yield management of our ships. While load factors have reduced marginally to 82%, we have increased the per diem rates by 8% through various value enhancements to the cruise product offering, including free wine with lunch and dinner, a newly established cruise services team and other enhancements to the customer experience.

We continued to invest in the resilience of the cruise ships, with the scheduled maintenance of the Saga Sapphire during the year impacting profit by c.£5m, as expected.

We remain very excited about the prospects for the new ship, with the project on track. As part of the design project, we are undertaking significant customer research. The results so far have proven hugely helpful and informative to both product and proposition design, and will ensure that the experience remains relevant for customers well into the future.

The first itineraries for the new ship will be going on sale later this year. We have already had over 10,000 customers register their interest in our new ship with over 50% securing their place on the first set of itineraries with payment of a deposit. Indeed, these 10,000 registered customers would equate to filling our first 12 cruises.

Current trading

Our travel business has excellent visibility due to our customers' propensity to book holidays far in advance. In both tour operating and cruising, we have already secured the substantial majority of our FY 2018 sales targets. Reservations for departures in FY 2018 as at 18 March 2017 are 8% ahead of the comparable reservation position one year ago. As previously noted in our post-Brexit poll, less than 1% of our customers said that they were reconsidering their future holiday plans as a result of the referendum result, and general economic confidence amongst our customers remains strong.

Cruise capacity is 5% higher year on year, with the 63 days of Sapphire wet dock in 2016/17 being followed by two dry docks in 2017/18, meaning that 41 days of trading will be given to further ship investment in 2017/18.

Emerging businesses - continuing to invest for future growth

Saga is learning its way into three new categories, all of which have the capacity to contribute materially for us in future: money, health and retirement villages.

Money: this business is made up of a variety of products - credit cards, equity release, savings, loans and wealth management. The team is working on some exciting new products for test in 2017, based on our clear understanding of what our customers want.

Healthcare: Saga operates a number of brands in the homecare sector, where we look after people in their own home. Fastest growing is Saga homecare, which operates in a trial area around Hertfordshire. During 2017, we will be cautiously expanding the area covered and the number of Saga customers we serve.

Retirement villages: since 2015, we have worked closely with Wadswick Green in Wiltshire, helping them meet Saga customers and explain the benefits of dedicated village living to them. This relationship has been mutually successful, and we are now considering expansion deeper into the category.

Conclusion - the Saga investment case

With a clear strategy in place to continue to drive profit growth through the core businesses, and enhance the value of our most loyal customers, we have made a positive start to the current year, and I would like to touch again on the key takeaways that make Saga a strong investment case:

How we are different:

· Our focus on an older and growing demographic

· Our strong customer relationships and brand loyalty leads to better customer acquisition and retention

· Multiple businesses with tailored, differentiated offerings means the business is less exposed and carries less risk

The model works

· We have consistently delivered steady earnings growth over time

· We have demonstrated another year of strong earnings growth and cashflow

Confidence in future delivery

Our existing strategy is robust. The in-depth work we have undertaken to better understand our customers has provided the logical next step in the evolution of our model. We are now in a position to use our enhanced insight, data capability and membership scheme to become a more efficient organisation, ensuring:

· We retain and deepen our customer relationships with:

o increased persistency

o better cross-sell

o low acquisition costs

· We improve new customer targeting:

o more efficient acquisition spend

· We generate increased profits at lower risk, with lower capital

o higher quality of earnings

We are already seeing the benefits of this work in our current business performance. These early signs of successful implementation have further increased our confidence that we can continue to leverage Saga's differentiated model to drive increased customer engagement and loyalty. This gives us further confidence to deliver consistent, sustainable earnings growth through increased efficiency and customer value across the business.

Chief Financial Officer's Review

I am pleased to report that the Group has delivered another strong financial performance, with profit before tax from continuing operations 9.7% higher at £193.3m. Excluding derivatives and the one-off impact of Ogden rate change, profit before tax increased by 5.6%. Strong cash flows have enabled us to further deleverage to 1.9x from 2.3x at the start of the year, with net debt reducing from £547.7m to £464.8m. Based on these results and our positive expectations for the business, we are proposing to increase our final dividend to 5.8p, leading to growth in the full year dividend of 18.1% to 8.5p per share.

Income Statement

9 Earnings before interest payable, tax, depreciation and amortisation, non-trading items and fair value gains and losses on derivative financial instruments

Revenue from continuing operations decreased by 9.5% to £871.3m (2016: £963.2m), due to the accounting for the new funds-withheld quota share agreement in motor insurance. Our total customer spend with Saga increased by 4.7% to £1,182m (2016: £1,129m), which includes gross written premiums and insurance premium tax for all insurance policies sold.

Trading EBITDA grew by 3.1% to £246.1m (2016: £238.8m), with the current period incurring a profit impact of approximately £5m from the scheduled Saga Sapphire maintenance. Trading Profit increased by 0.9% to £213.0m (2016: £211.0m), with depreciation and amortisation increasing by £5.3m due to investment in the ongoing maintenance of both ships and in software. Now that the impact of IPO expenses seen in previous years has diminished, and the amortisation of intangibles acquired with the Destinology and Bennetts businesses has reached a steady state, profit before tax has replaced Trading Profit as the Group's key performance measure.

Profit before tax, excluding derivatives and the Ogden rate change impact, increased by 5.6% to £187.4m (2016: £177.4m), benefiting from a decrease in finance costs of £6.8m as a result of high levels of cash generation enabling continued deleveraging and a reduction in LIBOR, coupled with a £1.4m reduction in non-trading costs.

Profit before tax from continuing operations for the year was £193.3m, an increase of 9.7%, which was further impacted by gains on derivative instruments that do not meet the criteria to qualify as hedges for accounting purposes and a £4.0m profit impact from the change in the Ogden discount rate from 2.5% to -0.75% that was announced by the UK Government on 27 February 2017.

Net finance costs

Finance costs in the year were £17.2m (2016: £24.0m), with the reduction due to lower interest costs on lower average borrowings, a lower charge associated with the pension scheme and the ending of the charge associated with the unwinding of the discount on the deferred consideration associated with Destinology.

Tax expense

The Group's tax expense for the year was £36.0m (2016: £28.1m) representing a tax effective rate of 18.6% (2016: 15.9%). The current year benefited from a £2.7m one-off positive impact from the utilisation under group relief rules of tax losses brought forward from the Allied business that was disposed of on 1 December 2015. The prior year benefitted from a £7.6m one-off reduction in the tax expense due to the utilisation under group relief rules of tax losses from Acromas, which arose when Saga was a part of the Acromas Group. Going forward the tax charge is likely to be more in line with the underlying corporation tax rate.

Earnings per share

The Group's basic earnings per share were 14.1p (2016: 12.7p), with basic earnings per share from continuing operations for the same period of 14.1p (2016: 13.3p).

Dividends

The Directors have proposed a final dividend of 5.8p per share, which, combined with the interim dividend of 2.7p per share, will deliver a total dividend for the financial year ending 31 January 2017 of 8.5p per share (2016: 7.2p). This equates to a payout ratio of 62%10 compared with the Group's basic earnings per share from continuing operations, excluding derivatives and the Ogden rate impact (2016: 57% excluding the one-off benefit of Acromas tax losses).

Saga offers a share alternative in the form of a dividend re-investment plan ("DRIP") for those shareholders who wish to elect to use their dividend payments to purchase additional Shares in the Group, rather than receive a cash payment. The last date for shareholders to elect to participate in the DRIP will be 5 June 2017.

Cash flow and liquidity

The Group delivered an excellent cash flow performance in the year to 31 January 2017, achieving an available operating cash flow of £217.6m, 88.4% of Trading EBITDA. This cash flow increased by £39.5m on the previous period, driven by a higher payout from AICL as a result of the historical, strong underlying solvency capital position and the initial impact of the quota share on solvency capital. The working capital outflow in the current year included the payment to Acromas for tax losses recognised in the prior year.

10 Based on profit after tax excluding derivatives and Ogden impact

Available operating cash flow reconciles to net cash flows from operating activities as follows:

Financing

Continued strong cash flows have enabled the Group to reduce its ratio of net debt to Trading EBITDA to 1.9 from 2.3. As at 31 January 2017, net debt was £464.8m, comprising £380.0m of gross debt and £100.0m of drawn revolving credit facility, offset by £15.2m of available cash. This compared with net debt as at 31 January 2016 of £547.7m, comprising £480.0m of gross debt and £75.0m of drawn revolving credit facility, offset by £7.3m of available cash.

It is the Group's intention to maintain a debt ratio of between 1.5 and 2.0 up to the delivery of the first ship expected in mid-2019. The Group is on track to reduce its debt to the lower end of this range before any debt associated with the ship is drawn down.

Pensions

Over the year, the valuation of the Group's pension scheme has strengthened on an IAS19R basis by £5.1m to a deficit of £13.7m (January 2016: deficit £18.8m).

The strengthening has been driven by a £58.2m increase in the fair value of the scheme assets to £276.8m (January 2016: £218.6m). . This was largely offset by an increase in the scheme liabilities of £53.1m to £290.5m (January 2016: £237.4m), driven by a fall in corporate bond yields over the period and an increase in the expectation of the future rate of inflation.

Net assets

Since 31 January 2016, total assets and liabilities have reduced by £53.3m and £160.3m respectively, increasing overall net assets by £107.0m.

Total assets have reduced primarily as a result of a decrease in financial assets of £44.4m, which coincides with the release of surplus solvency capital from the Group's underwriting business.

The reduction in total liabilities reflects a £90.7m reduction in financial liabilities following the repayment of debt during the period, enabled through continued positive cash generation and the release of surplus solvency capital. This was coupled with an associated £61.0m reduction in gross insurance contract liabilities in line with further positive claims experience throughout the year, and a reduction in trade and other payables of £9.1m reflecting a reduction in accruals for costs relating to the build of the new ship and non-trading costs that were paid during the year.

Segmental performance

Total revenue for the insurance businesses decreased by 19.6% to £410.0m (2016: £510.1m), due to the accounting for the quota share agreement in motor insurance, which required £110.5m of earned premiums ceded under the agreement to be accounted for as a deduction from revenue. The net impact on profit of the quota share was a £1.6m cost. Travel revenue increased by 2.1% to £432.0m, as the impact of the Saga Sapphire scheduled maintenance was more than offset by strong revenue growth in tour operations.

The retail broking insurance business increased profit before tax by 9.1%, with a particularly strong performance in motor broking. Underwriting profit reduced by £7.0m, as a result of reducing reserve releases and the cost of quota share. Travel increased profits by 10.4%, even after the effect of the Sapphire scheduled maintenance, which had a profit impact of around £5m. Emerging businesses and central costs saw an 8.8% decrease in losses before tax reflecting the reduction in finance costs.

Retail broking

Overall revenue from retail broking grew by 13.7% to £297.7m (2016: £261.9m), despite a competitive motor market and a home market with limited inflation. Overall profit before tax grew by 9.1% to £138.0m (2016: £126.5m). Across each of our products, we have balanced volume and profit to deliver this strong result.

The results for motor broking reflect the benefit of the number of initiatives that have been implemented during 2015 and 2016, with growth in both revenue and profit before tax, which increased by £38.0m and £16.6m respectively.

The introduction of the motor panel in summer 2015 contributed £3m of additional profit in the year, with around 30% of net premium for renewal policies being placed with third party underwriters by the end of the year. Given the different risk profile of drivers underwritten by external underwriters, these policies had an average gross written premium significantly higher than those underwritten in-house, generating an additional net revenue and profit per policy. The written to earned benefit associated with the growth in the motor panel contributed an additional £4m of profit.

Improved yield management contributed additional profit of £4m, with modest growth in Saga core motor policies being achieved with a lower level of discounting. The full year impact of Bennetts, acquired on 1 July 2015, contributed an additional £2m profit, coupled with £4m of further written to earned benefit largely driven by the introduction of the arrangement fee in November 2015.

In a home market with stable average customer premiums and modest claims inflation increasing net rates, we chose to maintain volumes at a similar level, leading to consistent revenues of £89.8m (2016: £90.0m), with a small reduction in profit to £61.2m (2016: £63.4m).

Revenue and profit before tax from other insurance lines was £80.4m and £31.6m respectively (2016: £82.4m and £34.5m), with higher revenues from both private medical and travel insurance being offset by revenue in the prior year from the legal services product, which was discontinued at the end of 2015, and a decrease in credit hire and repair income. Core policies decreased slightly to 381k (2016: 383k), which was mainly due to a reduction in pet insurance policies sold. Profit was impacted by a more challenging travel market towards the end of the year, with net rate pressure becoming prevalent due to the depreciation of sterling.

Insurance underwriting

Underwriting P&L

Excluding the impact of the new funds-withheld quota share agreement that became effective from 1 February 2016 and the impact of the Ogden rate change, underwriting revenue decreased by 10.0% to £223.5m (2016: £248.2m). This was due to the introduction of the motor panel, which has resulted in the likelihood of higher risk, higher premium motor policies now being underwritten by third-party underwriters, and which has led to in a fall in both AICL's earned policy volumes and average earned premiums. This in turn has resulted in lower claims costs, which, coupled with favourable claims experience, decreased by 11.2% to £195.9m (2016: £220.6m).

Favourable experience in small and large personal injury claims enabled the business to release £63.0m of reserves held in respect of previous accident years, £5.0m lower than the previous year.

When excluding the effect of the reserve releases and the impact of the quota share, the underwriting business delivered a broadly stable pure combined operating ratio11 of 99.6%.

The reduced level of reserve releases, combined with the net cost of the new quota share agreement of £1.6m, for which there was no comparable cost in the prior year, has resulted in a decrease in the underlying profit before tax from underwriting activity to £77.1m (2016: £84.1m). The Ogden rate change had an additional net profit impact of £4.0m, reducing the reported profit before tax from underwriting to £73.1m.

11The ratio of the claims costs (excluding reserve releases) and expenses incurred to underwrite insurance (numerator) to the revenue earned by AICL (denominator) in a given period.

Reserving

Favourable claims development experience during the twelve months to 31 January 2017 has resulted in a reduction in the reserves required in respect of prior year claims. This has been driven by the experience on large and small personal injury claims and has enabled reserve releases totalling £63.0m during the year, offset by a £3.1m increase in prior year reserves that was required as a result of the Ogden discount rate change. There has been no deterioration in the underlying reserve margin held as a proportion of best estimate claims reserves year-on-year.

Analysis of insurance contract liabilities at 31 January 2017 and 31 January 2016 is as follows:

* includes amounts for reported claims that are expected to become periodical payment orders.

** excludes funds-withheld quota share agreement

The Group's total insurance contract liabilities net of reinsurance assets have reduced by £52.1m as at 31 January 2017 from the previous year end, driven by a £27.6m reduction in reported claims reserves, £15.3m less in unearned premium reserve and a £8.3m reduction in IBNR claims reserves.

Investment portfolio

The majority of the Group's financial assets are held by its underwriting entity and represent premium income received and invested to settle claims and to meet regulatory capital requirements. The maturity profile of the invested financial assets is aligned with the expected cash outflow profile associated with the settlement of claims in the future.

The amount held in invested funds decreased by £77.9m compared with the previous year, from £624.7m as at 31 January 2016 to £546.8m as at 31 January 2017. As at 31 January 2017, 94% of the financial assets held by the Group were invested with counterparties with a risk rating of A or above, which is up 2 percentage points on the previous year and reflects the improved credit risk rating of the Group's counterparties.

Solvency capital

Under Solvency II the Group had an SCR of £102.9m at 31 Jan 2017 (2016: £128.8m), benefiting from the claims experience and the initial impact of the quota share agreement. Available capital was £146.7m (2016: £219.6m), giving a coverage ratio of 143% (2016: 170%). The reduction of SCR has enabled the Group to release a significant amount of capital from the underwriter. Even with the effect of Ogden, the coverage ratio remains robust.

The following table shows a range of impacts against the base Solvency II coverage ratio:

Travel

The travel business has had another strong year of trading. Despite having lower capacity days in Cruising due to scheduled maintenance of the Saga Sapphire in the first half of the year, the business has achieved growth in both revenue and profit before tax excluding derivatives, which are up 2.1% and 10.4% respectively.

The tour operations business generated a 3.9% increase in revenue to £350.1m (2016: £336.9m) from 190k passengers (2016: 189k). This reflects a continued shift in product mix towards higher value, higher margin long-haul river cruise and third party cruise products.

Profit before tax from tour operations grew by 32.2% to £11.5m. This was due to three factors. Firstly, the increased revenue generated greater margin. Secondly, a programme of back office redesign and cost control initiatives enabled the business to mitigate any cost inflation and hold its operating expenses flat. Finally, the prior year included a trading loss associated with the Bel Jou hotel that was sold on 20 July 2016. Overall profit margin improved to 3.3% (2016: 2.6%).

Saga Cruising delivered revenue of £81.9m (2016: £86.2m). The Saga Sapphire was out of operation for scheduled maintenance for 63 days between April and June, which impacted revenue and profit by approximately £9m and £5m respectively. Offsetting this was an improvement in yields, enabled through various value enhancements to the cruise product offering, including free wine with lunch and dinner, a newly established cruise services team and other enhancements to the customer experience. Profit before tax from the cruising business was £3.4m (2016: £4.8m).

Emerging businesses and central costs

Revenue from emerging businesses (which includes personal finance, healthcare services, retirement villages and the media businesses) decreased by 2.3% to £29.3m (2016: £30.0m), although these businesses delivered a 5.1% increase in gross profit to £14.3m (2016: £13.6m).

The overall loss before tax from this segment reduced by 8.8% to £42.6m (2016: £46.7m). This was due to a reduction in finance costs due to lower levels of debt and a decrease in LIBOR, and a reduction in the non-trading items due to IPO expenses in the prior year, offset by an increase in operating expenses reflecting the increased level of investment in the healthcare, personal finance and retirement villages businesses.

Financial outlook and guidance

During the year ending 31 January 2018, profits from insurance broking are expected to increase with improved yield management, operational and marketing efficiencies and the ongoing positive impact of the motor panel.

With the strong growth in revenue on forward travel reservations combined with the additional positive effects of the efficiency initiatives, profitability for the travel business is expected to step forward strongly year on year, primarily within the tour operating businesses. The uplift in Cruise capacity and profit will be limited due to two dry docks taking place in the current year, leading to 41 days when the ships are out of service.

With average net debt expected to be significantly lower year on year, finance costs are expected to reduce again in the coming year.

Reserve releases are expected to reduce again this year and increased investments will be made in membership and our future insurance broking platform.

Subject to market conditions remaining materially consistent, the Group is aiming to deliver ongoing consistent profit growth this year.

While the Group's leverage reduced significantly in the year to 31 January 2017, this benefited from the one-off move towards a sustainable, longer term solvency ratio level and therefore the rate of leverage reduction will be lower in the coming year. The Group is retaining the target debt range of 1.5 to 2.0 times Net Debt to Trading EBITDA, consistent with the dividend payout ratio of 50% to 70% of net earnings.

Consolidated income statement

for the year ended 31 January 2017

Consolidated statement of comprehensive income

for the year ended 31 January 2017

Consolidated statement of financial position

as at 31 January 2017

Consolidated statement of changes in equity

for the year ended 31 January 2017

Consolidated statement of cash flows

for the year ended 31 January 2017

Notes to the consolidated financial statements

1 Corporate information

Saga plc (the 'Company') is a public limited company incorporated and domiciled in the United Kingdom under the Companies Act 2006 (registration number 8804263) The Company is registered in England and its registered office is located at Enbrook Park, Folkestone, Kent, CT20 3SE.

The consolidated financial statements of Saga plc and the entities controlled by the Company (its subsidiaries, collectively 'Saga Group' or 'the Group') for the year ended 31 January 2017 were approved for issue by the Board of Directors on 28 March 2017 and will be made available on the Company's website in due course.

2.1 Basis of preparation

The results in this preliminary announcement have been taken from the Group's 2017 Annual report and accounts. The consolidated financial statements have been prepared and approved by the Directors in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and as endorsed by the European Union (EU), and those parts of the Companies Act 2006 applicable to those reporting under IFRS.

The basis of preparation, basis of consolidation and summary of significant accounting policies applicable to the Group's consolidated financial statements can be found in the notes to the consolidated financial statements in the 2017 Annual report and accounts.

The preliminary announcement for the year ended 31 January 2017 does not constitute statutory accounts as defined in section 434 of the Companies Act 2006. The consolidated financial statements for the full year ended 31 January 2017 have been audited by Ernst & Young LLP (EY). Their report was unqualified and did not contain any statement under section 498(2) or section 498(3) of the Companies Act 2006.

2.2 Summary of significant accounting policies

There have been no significant changes to the accounting policies of the Group during the year ended 31 January 2017, except for changes required to appropriately reflect the contractual terms of the new quota share reinsurance agreement in motor insurance that became effective from 1 February 2016. Full details of the accounting policies of the Group can be found in the Annual report and accounts for the year ended 31 January 2017 available at www.corporate.saga.co.uk.

Notes to the consolidated financial statements (continued)

2.3 Standards issued but not yet effective

The following is a list of standards and amendments to standards that are in issue but are not effective or adopted as at 31 January 2017. Comment on these new standards or amendments is as follows:

i. IFRS 9 'Financial Instruments'

In July 2014, the IASB issued IFRS 9 'Financial Instruments' that will essentially replace IAS 39. The classification and measurement of financial assets and liabilities will be directly linked to the nature of the instrument's contractual cash flows and the business model employed by the holder of the instrument. The Group has begun work to determine the full impact of this standard on the Group's financial statements. Our initial assessment is that the standard is likely to enable a greater proportion of derivatives to qualify for hedge accounting, and so reduce the volatility of derivative gains and losses in the Group's income statement. Besides from this, the Group believes that the standard is unlikely to have a significant effect on the recognition, measurement and presentation of its other financial instruments. The standard is effective for annual periods beginning on or after 1 January 2018, and was endorsed by the EU on 22 November 2016.

ii. IFRS 15 'Revenue from Contracts with Customers'

The objective of IFRS 15 is to establish the principles that an entity should apply to report useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from a contract with a customer. The Group has begun work to determine the full impact of this standard on the Group's financial statements.

Our initial assessment is that the standard will be unlikely to have a material impact on the Group's financial statements. For insurance brokerage, the majority of the Group's performance obligations are discharged when arranging cover for its customers, which is on or just before the cover start date of the policy and is when the Group currently recognises the associated revenue. Revenue from insurance underwriting is out of scope and so is unaffected by this standard. For tour operations, the majority of the Group's performance obligations are discharged on the customer's departure date, which is when the Group currently recognises the associated revenue. For Cruising, revenue is currently recognised on a straight-line basis over the duration of each cruise, and this is likely to remain appropriate under the new standard. The standard is effective for annual periods beginning on or after 1 January 2018, and was endorsed by the EU on 22 September 2016.

iii. IFRS 16 'Leases'

IFRS 16 specifies how to recognise, measure, present and disclose leases, and will essentially replace IAS 17. The impact of this standard on the Group's financial statements is still being assessed. The standard was issued in January 2016 and is effective for annual reporting periods beginning on or after 1 January 2019, although this is yet to be endorsed by the EU.

iv. Amendments to IAS 12 'Recognition of Deferred Tax Assets for Unrealised Losses'

The amendments to IAS 12 clarify the recognition of deferred tax assets for unrealised losses related to debt instruments measured at fair value. The amendment is effective for annual periods beginning on or after 1 January 2017, with earlier application being permitted, although this is yet to be endorsed by the EU and will have no effect on the Group's financial statements.

v. Amendments to IAS 7 'Disclosure Initiative'

The amendments require an entity to provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes. The amendments are effective for annual periods beginning on or after 1 January 2017, with earlier application being permitted, although this is yet to be endorsed by the EU and will have no effect on the Group's financial statements.

Notes to the consolidated financial statements (continued)

2.3 Standards issued but not yet effective

vi. Clarifications to IFRS 15 'Revenue from Contracts with Customers'

The amendments provide some illustrative factors that an entity might consider in making the assessment as to whether promised goods or services are distinct. The amendments are effective for annual periods beginning on or after 1 January 2018, with earlier application being permitted, although this is yet to be endorsed by the EU.

vii. Amendments to IFRS 2 'Classification and Measurement of Share-based Payment Transactions'

The amendments to IFRS 2 clarify the accounting for the effects of vesting and non-vesting conditions on cash-settled share-based payments, the classification of share-based payment transactions with net settlement features for withholding tax obligations and the accounting for a modification to the terms and conditions of a share-based payment that changes the transaction from cash-settled to equity-settled. The amendments are effective for annual periods beginning on or after 1 January 2018, with earlier application being permitted, although this is yet to be endorsed by the EU and will have no effect on the Group's financial statements.

viii. Amendments to IAS 40 'Transfers of Investment Property'

The amendments to IFRS 40 clarify that an entity can only reclassify a property to / from investment property when, and only when, there is evidence that a change in the use of the property has occurred. The amendments are effective for annual periods beginning on or after 1 January 2018, with earlier application being permitted, although this is yet to be endorsed by the EU and will have no effect on the Group's financial statements.

Notes to the consolidated financial statements (continued)

2.4 Significant accounting judgements, estimates and assumptions

The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below:

i) Valuation of insurance contract liabilities

For insurance contracts, estimates have to be made both for the expected ultimate cost of claims reported at the reporting date and for the expected ultimate cost of claims incurred but not yet reported ('IBNR') at the reporting date. It can take a significant period of time before the ultimate claims cost can be established with certainty. For some types of policies, IBNR claims form the majority of the liability in the statement of financial position.

The ultimate cost of outstanding claims is estimated by using a range of standard actuarial claims projection techniques, such as Chain Ladder and Bornhuetter-Ferguson methods.

The main assumption underlying these techniques is that past claims development experience can be used to project future claims development and hence ultimate claims costs. As such, these methods extrapolate the development of paid and incurred losses, average costs per claim and claim numbers based on the observed development of earlier years and expected loss ratios. Historical claims development is mainly analysed by accident years, but can also be further analysed by geographical area, as well as by significant business lines and claim types. Large claims are usually separately addressed, either by being reserved at the face value of loss adjuster estimates or separately projected in order to reflect their future development. In most cases, no explicit assumptions are made regarding future rates of claims inflation or loss ratios. Instead, the assumptions used are those implicit in the historical claims development data on which the projections are based. Additional qualitative judgement is used to assess the extent to which past trends may not apply in future, (e.g. to reflect one-off occurrences, changes in external or market factors such as public attitudes to claiming, economic conditions, levels of claims inflation, judicial decisions and legislation, as well as internal factors such as portfolio mix, policy features and claims handling procedures) in order to arrive at the estimated ultimate cost of claims that present the likely outcome from the range of possible outcomes, taking account of all of the uncertainties involved.

The ultimate cost of claims is not discounted except for those in respect of periodical payment orders ('PPOs'). The valuation of these claims involves making assumptions about the rate of inflation and the expected rate of return on assets to determine the discount rate. Due to the size of PPO claims, the ultimate cost is highly sensitive to changes in these assumptions. The assumptions are reviewed at each reporting date.

Similar judgements, estimates and assumptions are employed in the assessment of the adequacy of provisions for unearned premium. Judgement is also required in determining whether the pattern of insurance service provided by a contract requires amortisation of unearned premium on a basis other than time apportionment.

ii) Goodwill impairment testing

The Group determines whether goodwill is impaired on an annual basis. This requires an estimation of the value in use of the CGUs to which goodwill is allocated. The value in use calculation requires the Group to estimate the future cash flows expected to arise from the CGUs at a suitable discount rate in order to calculate present value.

iii) Valuation of pension benefit obligation

The cost of defined benefit pension plans and the present value of the pension obligation are determined using actuarial valuations. The actuarial valuation involves making assumptions about discount rates, expected rates of return on assets, future salary increases, mortality rates and future pension increases. Due to the complexity of the valuation, the underlying assumptions and its long term nature, a defined benefit obligation is highly sensitive to changes in these assumptions. All assumptions are reviewed at each reporting date.

Notes to the consolidated financial statements (continued)

3 Segmental information

For management purposes, the Group is organised into business units based on their products and services. The Group has three reportable operating segments as follows:

· Insurance: the segment primarily comprises general insurance products. Revenue is derived primarily from insurance premiums and broking revenues. This segment is further analysed into four product sub-segments:

o Motor broking

o Home broking

o Other insurance broking

o Underwriting

· Travel: the segment primarily comprises the operation and delivery of package tours and cruise holiday products. The Group owns and operates two cruise ships and throughout the year owned and operated one hotel. All other holiday products are packaged together with third party supplied accommodation, flights and other transport arrangements.

· Emerging Businesses and Central Costs: the segment comprises the Group's other businesses and its central cost base. The other businesses primarily include the financial services product offering including the wealth management joint venture, the domiciliary care services offering, a monthly subscription magazine product and the Group's internal mailing house.

Segment performance is primarily evaluated using the Group's key performance measure of profit before tax. Items not allocated to a segment relate to transactions that do not form part of the on-going segment performance or which are managed on a Group basis.

Transfer prices between operating segments are set on an arm's length basis in a manner similar to transactions with third parties. Segment income, expenses and results includes transfers between business segments which are then eliminated on consolidation.

Current taxes, deferred taxes and certain financial assets and liabilities are not allocated to segments as they are also managed on a group basis.

Notes to the consolidated financial statements (continued)

3 Segmental information (continued)