Saga Regulatory News (SAGA)

22 September 2017

Saga plc

Interim Results for the six months ended 31 July 2017

Continued underlying profit growth with increased dividend; launch of membership scheme

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

Financial highlights

· Consistent growth of 5.5% in underlying profit before tax, supported by 10.4% growth in our retail broking and travel businesses

· Profit before tax of £103.0m reflects costs associated with the successful refinancing and net fair value losses on derivatives

· Sustained cash generation, leading to further deleveraging to 1.8x

· 11.1% growth in the interim dividend to 3.0p

Operational and divisional highlights

· Saga Possibilities launched to all our customers with a range of exclusive benefits

· Launch of our new 'keep doing' brand identity

· High demand for Spirit of Discovery supports our decision to invest in our cruise capacity with the purchase of our second new ship, Spirit of Adventure, for earlier delivery in August 2020

· Retail broking profit growth of 4.7% to £70.9m (H1 2016: £67.7m) with a strong performance in motor broking

· Underwriting profit before tax of £46.8m (H1 2016: £49.1m) driven by lower reserve releases as previously guided

· Strong travel profit growth of 63% to £11.9m (H1 2016: £7.3m)

· Marketing and operational efficiencies reducing operating costs

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

"Saga is on track to deliver a fourth consecutive year of growth. Underlying profits are up again and so is our dividend. Our retail broking and travel divisions are performing well. Saga's new ship, Spirit of Discovery, will arrive in June 2019, and pre-sales are very strong. Our confidence in demand has supported our decision to purchase our second new ship, Spirit of Adventure, and to bring forward delivery to August 2020.

I'm delighted to announce the launch of Saga Possibilities, our new membership programme, available to all Saga customers. Saga Possibilities is a critical new offering that will allow us to thank and encourage our customers to enjoy more of what Saga can offer.

I believe that these results continue to demonstrate that Saga is growing, has good momentum, and is on track to deliver in line with expectations for the full year."

END

An interim results presentation to analysts will be held at 09.30 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: 020 3059 8125, all other locations: + 44 20 3059 8125

For further information please contact:

Saga plc

Mark Watkins, Investor Relations Director Tel: 07738 777 479

Email: mark.watkins@saga.co.uk

MHP

Tim Rowntree/Simon Hockridge/Reg Hoare Tel: 020 3128 8789

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 the Saga Magazine.

Group Chief Executive's Review

Overview

I am very pleased that we have delivered another consistent financial performance in the first half of the year with robust profit growth in our retail broking and travel businesses. Underlying profit before tax grew by 5.5% to £110.2m, generating £89.6m of available operating cash flow4. This allowed us to further reduce our debt ratio to 1.8x net debt to EBITDA, within our guided range of 1.5x to 2.0x. Our continued confidence in the business's operational performance has allowed us again to increase our interim dividend by 11.1% to 3.0p.

I am delighted with the great progress that we have made on our strategic priorities and in particular on our customer-focused strategy, with the launch of our new membership scheme and our new brand identity, providing a strong platform to drive loyalty through an enhancement of the Saga offering and our members' experience.

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4 Free cash flow generated before deducting tax payments, investing and financing cash flows and after deducting capital expenditure (see “Cash flow & liquidity” section later in this report for more information)

Launch of Saga Possibilities and new brand identity

The team has done an exceptional job to launch Saga Possibilities, available to all our customers, each of whom will become members and get access to a range of exclusive benefits, including:

· Exclusive offers from carefully chosen partners - for example, Nuffield Health, Apple, Majestic, and Prezzo;

· Events and experiences - money-can't-buy experiences; and

· Access to the Saga Possibilities community - providing access to useful guides and sound advice.

Saga Possibilities is designed to say thank you to our members and we are committed to developing the scheme over time. Membership represents a fundamental change in the way in which we develop and create a beneficial long-term relationship with our customers, one that rewards loyalty and incentivises them to hold more products with us.

We see Saga Possibilities as critical to how we engage with our members and the scheme will provide us with a truly unique proposition in readiness for the new General Data Protection Regulations coming into effect in May 2018. We fully support the introduction of this new data protection legislation, which will enable consumers to better control their personal data and how it is used. We see this as an opportunity to engage with our members and ensure that we are providing them with the information they want, in the way that they want it.

The launch of Saga Possibilities has also coincided with the launch of our new brand identity. The new look brings to life our new 'keep doing' ethos. 'Keep doing' is about celebrating what's at the heart of Saga's purpose and our members' needs; their desire to lead a rich and full life, full of experiences and opportunities. Saga's role is to create products and services that enable our members to make the most out of life.

While the number of High Affinity Customers ("HACs") has reduced by 1% to 477k, this has been offset by a 4% increase in the revenue per HAC driven by our focused marketing activity and new product propositions. We are confident that the combination of our new brand identity and Saga Possibilities will provide a more powerful toolkit that will help us to reward, retain and grow our HACs and the 2.3 average products they hold over the long term.

Growing our core businesses

Our retail broking and travel businesses have increased profit before tax by 10.4% to £82.8m.

The motor insurance market has seen a period of change with the new FCA regulations, increase in insurance premium tax and the changes to the Ogden rate. In this changing market our retail broking business has delivered a strong written performance from a stable number of Saga policies, supported by the competitive pricing of AICL.

The UK home insurance market continues to be highly competitive and we have seen the same flat premium environment that the wider market has experienced. Despite these conditions, the efficiency of our panel has helped us to maintain our margins on slightly lower policy levels.

Our in-house underwriter, AICL, has again delivered a strong underwriting performance, generating profit before tax of £46.8m, driven by a 1.7 percentage point improvement in the pure combined operating ratio5 to 97.1%, offset by lower reserve releases as previously guided.

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Investing in future growth

Our new cruise ship, Spirit of Discovery, is now at an advanced stage of design with construction due to begin in February 2018. She will be delivered in June 2019 for her maiden cruise. We launched the first 19 cruises to our advanced registered members on 18 July, having generated over 18,000 advanced and pre-registrations by this date. Our calls with the advanced registered members are converting into sales at around 80% and as at 18 September we had booked 6,449 passengers.

The strong demand for Spirit of Discovery has given us the confidence to approve Spirit of Adventure, our second new ship, and to bring forward delivery to August 2020. This decision to further invest in our shipping capacity will complete the transformation of our cruise business for us and our members.

Our emerging businesses continue to be exciting areas for the future. The healthcare pilot has developed well and we now have scalable systems and processes that are enabling us to expand the operations within Hertfordshire.

We continue to believe that a wealth management offering is important for our members. To better serve them we have restructured our joint venture with our partner, Tilney, to a lower cost commercial model.

Efficient operating model

We have made considerable progress in investing in operational systems of our businesses during the first half of 2017. The new claims management platform is now live and is delivering a significantly improved claims experience for our members, at a lower overall cost. Development of the new policy platform for our retail broking business is also progressing well and we expect this to go live during the first half of 2018 for our motor products.

Summary and outlook

We have made exciting progress in developing the business, especially with the launch of Saga Possibilities and our new brand identity. With our enhanced proposition and improving capability, we can really focus on our members' needs, particularly our HACs, to create value going forward.

We have delivered a consistent financial performance in the first half of the year, and are confident that we are on track to meet our expectations for the full year.

Chief Financial Officer's Review

I am pleased to report that the Group has delivered another strong financial performance, with underlying profit before tax, 5.5% higher at £110.2m. Strong cash flows and conversion have enabled us to continue to deleverage to 1.8x from 1.9x at the start of the year. Based on these results and our positive expectations for the business, we are proposing to increase our interim dividend by 11.1% to 3.0p (2016: 2.7p).

Income Statement

Revenue decreased by £1.8m to £435.4m (H1 2016: £437.2m) due to the accounting for the quota share agreement in motor insurance. Excluding the impact of the quota share, underlying revenue increased by 2.3%. Total customer spend with Saga increased by 3.6% to £617.1m (H1 2016: £595.8m), which includes gross written premiums and insurance premium tax for all insurance policies sold.

Trading Profit increased by 4.9% to £123.8m (H1 2016: £118.0m) with the current period benefiting from a strong performance in retail broking and travel offset by the expected decline in reserve releases from our underwriter. Depreciation and amortisation increased by £1.0m due to the planned investment in software within our insurance business and the maintenance of the Saga Sapphire in the prior period.

Underlying profit before tax increased by 5.5% to £110.2m (H1 2016: £104.5m) with the benefit of lower net finance costs and amortisation of acquired intangibles offset by the increases in non-trading costs and the pension charge from IAS19R. The increase in non-trading costs was largely due to the costs associated with moving the joint venture with Tilney to a commercial arrangement.

Profit before tax from continuing operations decreased to £103.0m (H1 2016: £109.9m) due to derivative losses that have impacted the business with the weakening of sterling and one-off costs associated with the unamortised facility fees of our previous banking facilities.

Finance costs

Net finance costs in the period were £6.3m (H1 2016: £8.7m), with the reduction due to lower interest costs on lower average borrowings.

In May, the Group refinanced its existing credit facilities, which were due to expire in April 2019. The refinancing has strengthened the Group's balance sheet by extending the maturity profile and increasing the diversity of the sources of its borrowings. As part of the refinancing, the Group incurred £4.3m of one-off non-cash costs associated with the write-off of unamortised facility fees of the previous banking facilities.

Tax expense

The Group's tax expense for the period was £19.6m (H1 2016: £22.0m) representing a tax effective rate of 19.0% (H1 2016: 20.0%).

Earnings per share

The Group's basic earnings per share were 7.5p (H1 2016: 7.9p).

Dividends

The Directors have proposed an interim dividend of 3.0p per share. The dividend will be paid on 17 November 2017 to shareholders of ordinary shares on the register at the close of business on 13 October 2017.

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 23 October 2017.

Cash flow and liquidity

The Group delivered a strong cash flow performance in the six months to 31 July 2017, achieving available operating cash flow of £89.6m, 63.7% of Trading EBITDA. This cash flow decreased by £7.7m on the previous period, which was driven by a lower dividend paid from AICL and an increase in capital expenditure on IT systems. Within the Travel business, we are retaining profits to make stage payments for Spirit of Discovery, with £13.2m paid in the six months to 31 July 2017 (H1 2016: £13.4m).

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

Financing

Continued strong cash flows have enabled the Group to continue to deleverage to a debt ratio of 1.8x (Jan 2017: 1.9x). The Group's net debt is made up as follows:

The Group intends to target a debt ratio (net debt to Trading EBITDA) of between 1.5x and 2.0x over the medium term. The delivery of the first new ship is expected in June 2019 and the Group is on track to reduce its debt to the lower end of this range before any debt associated with this ship is drawn down. While the debt associated with the new ships will move the debt ratio above 2.0x, it is expected to return to the target range within twelve months.

Pensions

Over the six month period, the valuation of the Group's pension scheme has strengthened on an IAS19R basis by £5.1m to a deficit of £8.6m (31 January 2017: deficit £13.7m):

The strengthening has been driven by a £14.5m increase in the fair value of the scheme assets to £291.3m (January 2017: £276.8m); this was partly offset by an increase in the scheme liabilities of £9.4m to £299.9m (January 2017: £290.5m), which was driven by a continued fall in corporate bond yields over the period partly offset by a decrease in the expectation of the future rate of inflation and an update to the latest mortality data resulting in lower life expectancies.

Net assets

Since 31 January 2017, total assets have increased by £9.9m and liabilities have decreased by £15.9m, increasing overall net assets by £25.8m.

The increase in total assets is the result of an increase in property, plant and equipment of £10.5m, primarily due to the second stage payment for the new ship being paid in July 2017 of £13.2m, and an increase in trade and other receivables of £9.5m, partly offset by a decrease in financial assets of £47.3m, due to the maturation of some of the Group's deposits with financial institutions in cash, with a corresponding increase in cash and short-term deposits of £35.8m.

With regard to liabilities, there was a £40.9m reduction in gross insurance contract liabilities due to lower total claims outstanding, a £5.2m decrease in trade and other payables, and a £5.1m reduction in pension scheme obligations. This was partly offset by a £36.4m increase in other liabilities due to a higher deferred revenue driven by the seasonality of the Travel business.

Segmental Performance

Total revenue for the insurance businesses decreased by 10.3% to £192.8m (H1 2016: £214.9m) due to the accounting for the quota share agreement in motor insurance, which required £61.0m (H1 2016: £47.9m) of earned premiums ceded under the agreement to be accounted for as a deduction from revenue. Travel revenue increased by 9.7% to £228.2m from strong growth in both the tour operations and cruise businesses.

The retail broking business increased profit before tax by 4.7%, with a particularly strong performance in motor broking. Underwriting profit reduced by £2.3m as a result of reducing reserve releases. Travel increased profits by 63.0%, due to strong trading and less ship maintenance days during the period compared with last year. Emerging businesses and central costs saw a slightly reduced loss before tax excluding the accelerated debt write-off cost of £4.3m following the refinancing of the Group's debt. Lower finance costs were largely offset by a £1.9m increase in the IAS19R pension charge for the period.

Retail Broking

Although total revenue within our retail broking business was down 4.4% to £144.9m (H1 2016: £151.5m), profit before tax increased by 4.7% to £70.9m (H1 2016: £67.7m) due to strong profit growth in the motor broking business.

Motor broking revenue decreased by 3.7% to £62.7m (H1 2016: £65.1m) reflecting a positive trading environment that saw written revenue per policy increase strongly, offset by the deferral of revenue associated with an increase in our in-house underwriter's ("AICL") share of broker revenue in the current period even with a lower share of the number of policies sold, and the impact of the introduction of the arrangement fee in November 2015. AICL has become more competitive on the panel as a result of a comparatively smaller impact to pricing following the Ogden rate change in February 2017, relative to other motor panel insurers.

Following our strategic decision to close our Direct Choice brand, motor core policies sold decreased by 42k. The number of Saga motor policies sold was consistent year-on-year.

Motor broking operating expenses decreased by 14.3% to £35.5m, reflecting improved efficiency of marketing spend and programmes to deliver operational efficiencies across the broking business, the deferral of acquisition costs associated with policies underwritten by AICL, and savings associated with the closure of our Direct Choice brand. As a result, profit before tax from motor broking increased by 15.4% to £25.5m (H1 2016: £22.1m).

With ongoing challenges in the home market, we have chosen to reduce the number of core policies sold but improve the profit per policy. This has led to a small reduction in profit before tax to £28.6m (H1 2016: £29.7m).

Revenue from other insurance lines decreased by 6.6% to £39.7m (H1 2016: £42.5m), mainly due to a reduction in travel policies. This was driven by higher net rates in Q1 2017, due to the impact of foreign exchange rate movements making us less competitive in the market. This disadvantage has now unwound. We delivered a marginal uplift in profit before tax to £16.8m (H1 2016: £15.9m) with robust trading in private medical insurance.

Insurance Underwriting

Excluding the impact of the quota share agreement, underwriting revenue decreased by 2.2% to £108.9m (H1 2016: £111.3m) as AICL underwrote a lower number of policies, with external panel members winning a greater share compared with H1 in the prior year. The underwriting business delivered an improved pure combined operating ratio of 97.1% (H1 2016: 98.8%).

Investment income was down by £1.8m at £5.7m (H1 2016: £7.5m) due to a lower yield on a smaller investment portfolio. As historic fixed income investments have matured, the funds have been reinvested at current market rates and total investments have reduced, as surplus solvency capital has been released driven by continued favourable claims experience.

Favourable experience in small and large personal injury claims enabled the business to release £39.0m of reserves held in respect of previous accident years. These have reduced by £2.2m from H1 in the prior year.

The lower level of reserve releases has resulted in a 4.7% decrease in profit before tax to £46.8m (H1 2016: £49.1m).

Reserving

Although the positive experience on large and small personal injury claims has enabled reserve releases totalling £39.0m, there has been no deterioration in the underlying reserve margin held over best estimate claims reserves year-on-year.

Analysis of insurance contract liabilities at 31 July 2017 and 31 Jan 2017 is as follows:

1 excludes funds-withheld quota share agreement

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

The Group's total insurance contract liabilities net of reinsurance assets have reduced by £41.4m as at 31 July 2017 from the previous year end, driven by a £47.3m reduction in IBNR claims reserves, £3.9m less in unearned premium reserve, offset by an increase of £9.8m in reported claims reserves. The reduction in IBNR claims reserves was mainly due to favourable experience on large and small personal injury claims.

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 £45.6m compared with the year end, from £546.8m as at 31 January 2017 to £501.2m as at 31 July 2017. As at 31 July 2017, 94% of the financial assets held by the Group were invested with counterparties with a risk rating of A or above, which is in line with the previous year and reflects the stable credit risk rating of the Group's counterparties.

Solvency Capital

Under Solvency II the Group had an SCR of £84.3m at 31 July 2017 (Jan 2017: £102.9m) and available capital was £142.1m (Jan 2017: £146.7m), giving a coverage ratio of 169% (Jan 2017: 143%). Solvency coverage has improved since the previous year end due to continued favourable claims experience and as the benefit of the funds-withheld quota share arrangement feeds through.

Travel

The travel business has had another strong period of trading, having achieved growth in both revenue and profit before tax excluding derivatives, which are up 9.7% and 63.0% respectively.

The tour operations business generated a 7.6% increase in revenue to £183.4m (H1 2016: £170.5m) from a modest increase in passengers to 96k (H1 2016: 95k). The increased spend per passenger has primarily been driven by the foreign exchange impact of weak sterling, but also a continued shift in product mix towards higher value long-haul, river cruise and third party cruise products. Gross profit margin percentage was impacted by the foreign exchange changes which were offset by operational savings. Profit before tax from tour operations increased by 8.8% to £7.4m at a stable profit margin of 4.0% (H1 2016: 4.0%).

Saga Cruising delivered revenue of £44.8m (H1 2016: £37.5m), reflecting an increase in passenger days of 29k. The Saga Pearl was out of operation for scheduled maintenance for 21 days in February, compared with 63 days of maintenance on the Saga Sapphire in the comparable period.

The Group's business case for the purchase of Spirit of Adventure, our second new ship, remains primarily based on margin improvement, resulting from the increased efficiency of operating new capacity. The Group's financial projections for the second new ship generate an ungeared IRR in the low to mid‐teens, comfortably above the Group's cost of capital.

Profit before tax from the cruising business was £4.5m (H1 2016: £0.5m), led by the increase in passenger days and lower fuel prices, being offset by initial marketing spend for the Group's new ship that is under construction, the Spirit of Discovery.

Our tour and cruises businesses are almost fully sold for the year, giving us further confidence of delivering increased profits for the full year. We also expect to be approaching our target to double the EBITDA of the travel business in the five years to 31 January 2020 one year early.

Emerging Businesses and Central Costs

Revenue from emerging businesses (which includes personal finance, healthcare services, retirement villages and the media businesses) increased to £13.4m (H1 2016: £12.8m), which delivered an improved profit before tax of £0.5m (H1 2016: £0.3m loss).

Central costs were £11.0m (H1 2016: £9.9m), which includes a £1.6m increase in non-trading costs, mainly due to the costs associated with moving the joint venture with Tilney to a commercial arrangement. The Group saw a £1.9m increase in the IAS19R pension charge due to prevailing market conditions, particularly in the bond market, as at 1 February 2017. This was offset by lower debt service costs, driven by the refinancing of the Group's borrowings and lower levels of debt, which led to a £2.4m reduction in finance costs to £6.3m (H1 2016: £8.7m). This resulted in an underlying loss before tax from central costs of £19.9m (H1 2016: £19.3m).

Financial outlook and guidance

We expect underlying profit before tax to grow in line with our expectations supported by the current trading environment for insurance, our expected uplift in travel profits and lower finance costs offset by lower reserve releases and by higher IAS19R pension costs. Our tax rate will be close to the underlying corporation tax rates for the full year. We also expect positive cash flow to enable us to move further down within our leverage range of 1.5 to 2.0x.

Condensed consolidated income statement

for the period ended 31 July 2017

Condensed consolidated statement of comprehensive income

for the period ended 31 July 2017

Condensed consolidated statement of financial position

as at 31 July 2017

Condensed consolidated statement of changes in equity

for the period ended 31 July 2017

Condensed consolidated statement of cash flows

for the period ended 31 July 2017