Saga Regulatory News (SAGA)

19 April 2016

Saga plc

Preliminary Results for the year ended 31 January 2016

Customer and profit growth and increased proposed dividend payout

Saga plc ("Saga" or "the Group"), the UK's leading provider of products and services primarily tailored for the over 50s, announces its final results for the financial year ended 31 January 2016.

Financial highlights - continuing operations1

· Robust growth in profits

· Strong free cash flow, leading to continued reduction in leverage

· Increase in proposed full year dividend to 7.2p, resulting in payout ratio of 57%2 of net earnings (PY: 49.5%)

· Expectation of increased future free cash flow with lower capital required for underwriting, supporting higher dividend payout guidance of 50% to 70%

Operational Highlights

Insurance:

· Underlying growth in core insurance policies of 3.1%3

· Successful launch of the motor insurance panel, with four 3rd party insurers now participating

· Continued strong performance in motor insurance underwriting

· Review of capital in motor underwriting complete, with decision made to reduce capital deployed through quota share arrangement agreed with NewRe

· Strong capital position under Solvency II with Solvency Capital Ratio of 170%

Travel:

· Continued customer and profit growth across the travel businesses

· Work underway to design and build the next generation of Saga cruise ship, for delivery in 2019

Other:

· Increase in number of active customers, supported by further growth in Saga database

· Saga Investment Services successfully launched and growing through tax year-end

· Sale of Allied Healthcare completed

1 On 15 January 2015, the Group announced its intention to divest the local authority section of its healthcare business, Allied Healthcare and subsequently completed the sale of the business on 30 November 2015. Accordingly, this has been treated as a discontinued operation and is not included in the analysis.

257% of net earnings from continuing operations excluding the one off benefit of tax losses acquired from Acromas.

3Excluding Bennetts

Group Outlook

· Expectation of steady profit before tax growth and ongoing customer growth, assuming a continuation of materially consistent market conditions.

· Higher dividends enabled by improved free cash flow and reduced capital requirements in underwriting business.

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

"The last year saw significant progress in delivering the strategy we set out in early 2015. Our core insurance and travel businesses maintained their strong growth trajectory and were enhanced by new and improving products, new routes to market and the ability to target a broader range of customers. Meanwhile, we advanced the roll-out of exciting new platforms for Saga, such as Saga Investment Services.

"I'm delighted that we are able to propose an increased dividend for the year that is above expectations as well as committing to a higher future payout range. This commitment is supported by our confidence in the Group's continued strong profit and cash generation performance and the successful evolution of our model towards less capital intensive activities, delivering a higher quality earnings stream. It's particularly pleasing to do so while also deleveraging and making important investments in new cruise capacity.

"I look ahead to the next period for Saga with a great deal of confidence. The year ahead will see a renewed focus on our customers and further developing the Saga brand. Whilst the customer has always been at the heart of the Saga proposition, there is more we can do to enhance our approach and build stronger relationships. We will therefore be looking closely at the whole customer journey with a view to putting more of Saga into our customers' lives."

END

A presentation to analysts will be held at 09.30 at the offices of Bank of America Merrill Lynch, 2 King Edward St, London EC1A 1HQ. There will be a live webcast of the analyst presentation for registered participants. Registration can be completed at corporate.saga.co.uk/. The webcast will be also accessible via the Saga website following the presentation.

For further information please contact:

Saga plc

Tim McCall, director of corporate affairs

Tel: 07753 561862

Email: tim.mccall@saga.co.uk

Duncan Browne, investor relations manager

Tel: 07766755765

Email: duncan.browne@saga.co.uk

Paul Green, director of communications

Tel: 01303 776023 / 07714 414859

Email: paul.green@saga.co.uk

FTI Consulting

Paul Marriott / Ed Berry / Tom Blackwell

Tel: 020 3727 1341 / 1046 / 1051

Email: paul.marriott@fticonsulting.com 

edward.berry@fticonsulting.com 

tom.blackwell@fticonsulting.com

Notes to editors

Saga is a leading provider of products and services primarily tailored for customers over the age of 50 in the UK. The Saga brand has been carefully developed over the past 60 years to become one of the most recognised and trusted brands among UK consumers aged over 50. Saga is synonymous in the UK with the over 50s market and is recognised for its high quality, award winning products and services. These include cruises and holidays, insurance, personal finance and the Saga Magazine.

saga.co.uk

Chairman's Statement

I am delighted to present a strong set of results in an important year in the history of Saga. This year marks the 65th anniversary of the foundation of our business when Sidney De Haan, the owner of the Rhodesia Hotel in Folkestone, started offering off-peak holidays to retired people. His insight into our customers' needs was the start of the Company you see today.

During all of our 65 years, our focus on customer needs has been the driving force behind the growth of the business. They remain at the heart of everything we do and our model is underpinned by the provision of exceptional levels of customer service.

We benefit from a diverse and supportive shareholder base. I am delighted that many of our customers extended their affinity with the brand through their continued ownership of the Company. We have also been fortunate to attract a broad range of high-profile, long-term institutions to our share register. This combination supports our ability to deliver long-term sustainable returns and I would like to thank our shareholders for their ongoing support.

I am very pleased to announce that we have taken the decision to increase shareholder distributions through our progressive dividend policy. This is an important decision and one that reflects the Board's confidence in the sustainability of our dividend policy given our continued strong profit and cash performance, the evolution of our capital efficient model, and our plans to generate additional free cash flow.

Our proposed total dividend for the year of 7.2p equates to a payout ratio of 57% of net earnings4 an increase on last year and higher than market expectations. We are also increasing our target payout range going forward from 40%-60% to 50%-70% of net earnings. The dividend will be paid on 30 June 2016 to holders of ordinary shares on the register at the close of business on 13 May 2016.

The new team members we have welcomed during the past twelve months, both to the plc Board and our Executive Team, have had a marked impact on the thinking and leadership within the business. I would like to take this opportunity to thank them all for their input so far and to thank the entire plc Board for their invaluable contribution throughout the year.

Finally, I would like to thank all of our employees. The energy and commitment of the whole team at Saga, led so effectively by our Group Chief Executive Officer, Lance Batchelor, is the driving force behind our ongoing success and without them we could not maintain the exacting standards our customers expect on a day to day basis.

457% of net earnings from continuing operations excluding the one off benefit of tax losses acquired from Acromas.

Group CEO Statement

Overview

In our second set of preliminary results, I am again pleased to be able to report that we have succeeded in delivering on our objectives of growing customer numbers and profits.

Growing customer numbers across all core areas of the business is a key element in our long-term success. Sustainable growth of our customer base enables us to build long-term relationships and we know that the longer customers spend with us, the more they benefit from our growing range of products and services.

Financially, we have grown Trading Profit by 5.2% to £211.0m, profit before tax by 54.8% to £176.2m and basic earnings per share by 54.7% to 13.3p. Furthermore, our available operating cash flow is up by 9.3% to £178.1m and our net debt to EBITDA ratio has reduced to 2.3x.

This performance, alongside our plans to generate additional free cash flow in the future, has enabled us to propose a significant increase in the dividend paid to shareholders and increased the range for future dividends. This is a meaningful change, and one that signals our commitment to driving shareholder returns through sustainable dividends going forward.

Clear strategy and delivery

Everything we have achieved this year has been a result of the successful implementation of the clear strategy for growth we laid out in early 2015. Put simply we have continued to grow our core businesses and invest in future growth whilst maintaining our efficient operating model.

1. Unlocking growth in our core businesses of insurance and travel

· We have delivered customer growth across all of our key insurance lines, supported by our expanded insurance footprint through the motor panel launch.

· We have increased passengers in our tour operating business and increased passenger days on our ships.

· We have put the right team in place to make more of our database and deliver our multi-channel marketing activities.

2. Investing in future growth

· We have announced our investment in new shipping capacity which will significantly change the profit trajectory of our travel business once delivered.

· Our investment management joint venture, Saga Investment Services, was up and running ahead of the key end of tax year period.

· We have successful pilots ongoing in new product areas.

3. Maintaining our simple and efficient operating model

· Our model continues to generate strong cashflows.

· We have undertaken a review of the capital allocated to our underwriting business.

· We have disposed of a non-core asset, Allied Healthcare.

Generating additional free cash flow

During the year we carried out a full review of our approach to pricing underwriting risk and the deployment of capital within our underwriter, AICL. The review looked at pricing and capital allocated to AICL when placed against the Group's ongoing aim of balancing short-term earnings growth, investment for future growth and generating additional free cash flow to enable enhanced returns to shareholders. As a result of this, we:

· launched a panel in our motor business to allow us to offer competitive products to a broader range of customers without putting additional capital at risk;

· entered into a quota share arrangement with NewRe, a subsidiary of Munich Re, the world's biggest reinsurance group, to allow capital to be gradually released from the underwriter; and

· priced underwriting risk to better reflect our excellent underwriting performance, increasing competitiveness in our core market and accelerating cash and profit generation.

As a result of these changes we will generate additional free cash flow in the future, enabling us to continue to deleverage and increase returns to shareholders through dividends more quickly than we had previously indicated.

Strategic priorities for the coming year

To deliver long-term, sustainable value for our shareholders we aim to achieve the right balance between short-term earnings growth, medium-term customer growth, capital allocation and returns to shareholders via dividends. To continue to deliver this, our strategic objectives for the coming year are:

1. Becoming an ever more customer-centric organisation: Whilst the customer has always been at the heart of the Saga proposition, there is more we can do to enhance our approach and build stronger relationships with our target customers. This will happen through:

· Customer insight: as the meaning of retirement changes for our customers, we need to understand that change more than anyone else and remain relevant to the changing needs of our customers and differentiate accordingly.

· The customer journey: moving from a very successful, direct marketing model to a multi-channel model that simplifies the customer journey. We can personalise the customer experience, develop a deeper understanding and deliver more efficient and personalised communications.

· Helping the customer to 'put more of Saga in their lives': We will work to create a customer view of relationships with Saga to help identify and reward those who engage with Saga on multiple levels, improving the average product holding per customer.

· The brand: the Saga brand is a vital part of the Saga business with 97% recognition amongst the UK's over 50s. We will continue to increase our relevance to our target customers and help shift recognition and awareness into conversion.

2. Growing our insurance businesses: We will continue to drive growth in our core insurance products, maintaining a flexible approach to sourcing underwriting. Our motor panel, launched during 2015, allows us to offer competitive products to a broader section of our target marketplace. We will continue improving our product offerings through the use of customer insight, encouraging customer loyalty and exploring how to enhance multi-product holdings.

3. Growing our travel businesses: We will work to ensure that Saga Holidays' product offerings remain relevant to our customers through the development of new propositions. We will also ensure we continue to deliver the highest possible standards of customer service on our ships, maintaining the quality of our cruise offering ahead of the arrival of our new ship in 2019. 

4. Investing for future growth: We aim to grow Saga Investment Services whilst continuing to improve and broaden our existing financial services offering to make our customers' lives better in retirement. We will continue to develop our existing pilots in homecare and retirement villages. We have made good progress with the design of the new ship and will work to ensure its delivery in mid-2019 and expect it to be on sale from 2017.

5. Developing our people: Our people are central to everything we do by ensuring our customers receive the Saga experience throughout the business. We will continue to strengthen the team we have in place by supporting their development and enhancing their engagement.

Strong senior team

During the year we completed a number of new senior hires including: Jonathan Hill, Group Chief Financial Officer; Matt Atkinson, Group Chief Marketing Officer; Karen Caddick, Group Human Resources Director; and Nici Audhlam-Gardiner, Managing Director of Saga Investment Services.

The skills brought to the business by these new team members, combined with the existing talent across the Group, have allowed us to apply new thinking to our operating model, look for new opportunities and attain deeper customer understanding.  

I welcome them all to the business and I am confident that we now have in place the right team to deliver our plans for future growth.

Divisional Review

Insurance

Our insurance model allows our retail broker, Saga Services, access to the highest quality and most cost-efficient source of underwriting available in the market, whether that be AICL, a panel of providers or a solus relationship with a third party. This flexibility provides us with a number of levers to operate effectively across our full portfolio of products to capitalise on, or protect against, market conditions. This year, this has allowed us to deliver both profit and customer growth across all of our major product lines.

Motor insurance

The UK motor insurance market remains very competitive. Our experience across the book supports the market view that premiums continued to fall during the first quarter of 2015 but, since then, there have been sustainable increases in market premiums, particularly from the fourth quarter of 2015 onwards.

We have worked to capitalise on our competitive advantages within the motor insurance market to continue to grow the business. These include: a low cost of acquisition due to our brand and database covering 11.2 m of the UK's over 50s; a differentiated retailer, Saga Services, with access to our newly launched panel of underwriters; the participation on the panel of our own experienced in-house underwriter, AICL, with a clear focus and data-driven insight into a relatively low risk section of the market; and an efficient and effective claims management function.

We have grown our core motor policies to 1,238k (2015: 1,077k), with 3.1% underlying policy growth and 128k policies added through our Bennetts acquisition. We delivered a 17.8% increase in Trading Profit to £118.3m (2015: £100.4m).

In particular, this customer and profit growth has been driven by two factors:

1. Our approach to pricing risk in AICL: By better reflecting our excellent underwriting performance in AICL's risk pricing, our retail broker has been able to be more competitive, particularly in a rising premium environment.

2. The successful launch of our motor panel: Access to the panel has allowed our retail broker to increase its competitiveness outside of AICL's traditional target market of lower risk drivers. The panel, launched in late summer, has five underwriters and we expect to add a further two during this year. The panel will continue to increase in efficiency as new underwriters join. However, we are already starting to see the benefits with around one quarter of net premium being underwritten by the panel during January 2016.

Overall, we are pleased with the balance we have achieved between profit growth and customer growth in the year, and, with the enhanced supply chain provided by the panel, our retail broker remains well placed to capitalise on its competitive advantages.

Motor underwriting

Within our underwriter, AICL, we continue to see a relatively stable claims frequency and personal injury claims cost. This claims experience has contributed strongly to our combined operating ratio, which has improved by 3.5% to 74.4% (2015: 77.9%).

Given this positive underwriting performance, we have been able to price risk from AICL very competitively in a rising price environment, while maintaining our prudent approach to underwriting. This more competitive approach to pricing means that in future more profit will be realised in the current year, while historic reserve releases will reduce over time.

AICL remains a critical part of our business. Its clear focus and data-driven insight in a relatively low risk section of the market has made a significant contribution to the Group's earnings since its formation. Equally, our ongoing ability to act as underwriter and participate on our motor panel is a vital element of delivering the motor panel's long-term success.

Following a review of the use of capital in AICL, we entered into a quota share arrangement with NewRe, a subsidiary of Munich Re, the world's biggest reinsurance group. This covers 75% of the risk of the motor policies within AICL, from 1 February 2016 for a period of three years with the option of a further three years. The terms of the arrangement, with a market-leading reinsurer, are testament to the quality of the Saga underwritten book, and our historic performance.

With the expected reduction in policies written by AICL with the future growth in the motor panel, our previously announced lower risk investment policy going forward and our quota share arrangements, we expect the amount of capital within AICL to reduce gradually over time.

Importantly, capital that will be gradually released from the underwriter will allow us to increase our free cash flow and reduce the capital at risk, while increasing the resilience of earnings by increasing the percentage that comes from broking activities.

Home insurance

The market for home insurance continues to be highly competitive and we have seen the same fall in average premiums that the wider market has experienced.

The increasing competitive tension provided by our panel and our use of the 'Saga Factor', has led to a reduction in the net rate at which we can source underwriting for these policies, enabling us to maintain our margin in this area despite falling market rates. This has allowed us to increase our competitiveness and grow core policy numbers.

We saw a limited number of claims in relation to the flooding that took place in the UK this winter and our focus was on working with our partners on the panel to support any customers who were affected during a difficult time. However, it is worth reiterating that our insurance model in home, with the use of the panel and co-insurance/re-insurance of the risk underwritten by AICL, means our short-term earnings are protected in situations such as this.

As a result, we have grown both profits and core policy numbers within our home insurance business. Our core home policies have grown by 2.3% to 1,287k (2015: 1,258k) and we have delivered a 3.2% increase in Trading Profit to £64.1m (2015: £62.1m).

Other insurance

Within other insurance we have continued to deliver a strong performance through growing customer numbers in this segment's core products of private medical insurance ('PMI') and travel insurance.

PMI remains an important area for us and we continue to grow policy numbers by evolving and enhancing our product to ensure its relevance to our target customer base.

Our travel insurance product has again performed very strongly in the past year, partly as a result of developing new routes to market. This is an important source of income for the Group and as importantly, it remains a key source of new names onto the database, adding more than 158k names during the period.

During the course of the year, our external Saga Legal Services partner, Parabis Law LLP, filed for insolvency. While disruptive to our business, our focus throughout has been on ensuring that any impact on our customers was minimised. We have established relationships with new partners, which will enable us to continue to develop an offering in this area.

Investment in marketing for Saga Legal Services at the start of the year and the negative financial impact of the Parabis insolvency resulted in Trading Profit in Other Insurance reducing to £30.7m (2015: £34.9m).

Current trading

Trading across the insurance businesses has started well and is line with our expectations.

Our experience suggests that recent strong price increases in the UK motor market appear to be sustainable and our claims experience has continued to be positive. With the continued development of our motor panel and competitive pricing from AICL, we are well placed to grow customer numbers and profit in the current market conditions during the coming year. We are mindful of the impact of Insurance Premium Tax increases and the effect on market churn.

While the UK home insurance market remains highly competitive, our proactive management of the home insurance panel leaves us well placed in this area despite there being limited signs of premium increases across the market.

Within other insurance, we have seen continued strong performance in private medical insurance. Recent geopolitical turbulence in traditional winter sun destinations has had an impact on demand for our single trip travel insurance policies in the early part of the year. However, demand for our annual travel insurance policies remains strong and we expect a continued robust operating performance within our other insurance business.

Travel

Our travel business has continued to focus on growing profitability. We have delivered customer and profit growth across our tour operating and cruising businesses with overall revenue growing by 11.0% to £423.1m (2015: £381.3m) and Trading Profit up by 26.5% to £17.2m (2015: £13.6m). The business continues to be on track to deliver its objectives.

During 2015, our travel businesses were awarded 65 awards ranging from Saga's, best specialist tour operator, award from the Times and Sunday Times to Destinology's Gold award for, best medium sized luxury holiday company, in the British Travel Awards.

Tour operating

Within our tour operating businesses we have seen a shift in the mix of sales to longer-haul, higher-value products where we can provide our customers with both security and a highly differentiated product. The success of this shift is attributable to our ability to know more about our customers' wants and needs than any other provider, and to create affordable packages underpinned by excellent service.

We have grown customer numbers with a 9.9% increase in holiday passengers to 189k (2015: 172k).

Cruising

Cruising remains a vital part of our travel offering through our two ships, the Saga Sapphire and Saga Pearl II. The business had another good year with load factors of 84.4% (2015: 84.9%) across both ships and a 0.9% increase in the number of ship passenger days to 339k (2015: 336k).

Whilst the announcement of the purchase of the new ship has caused much excitement amongst our customers, our immediate focus is on ensuring the maintenance of the customer experience and the high levels of satisfaction with customers' overall holiday experience which we have seen reach historic highs this year.

As part of this ongoing process, the Saga Sapphire will be in wet dock during the coming year for scheduled maintenance. As with the refit of Saga Pearl II last year, this will enhance our service capability and the proposition to customers on board. It will, however, mean we have one ship out of service for two months during the year, which, whilst budgeted, will hold back the total profit growth in the travel business for the coming year.

Current trading

Trading in Tour Operating for the year ending 31 January 2017 has been positive and we are around three quarters sold for the year. As expected our cruise revenue is lower than last year's position, given the Sapphire wet dock. As we are over 90% sold, we have good visibility on the outturn for the year.

Trading to week ending 9 April 2016

Emerging businesses

Saga Investment Services

We launched Saga Investment Services, our investment management joint venture with Tilney Bestinvest, in November 2015 to support those customers who have previously been ignored by the investment management industry. It has been quite an achievement by the team to get the business up and running with such a strong proposition in less than a year.

Other personal finance

Our high quality personal finance business also continues to make good progress. We have 130k savings account customers, provided 10k new Saga Credit Cards and £227m was spent on our cards by 167k customers.

Homecare and retirement villages

Our private homecare trial continues to make progress in Hertfordshire. During the year we have focused on ensuring the offer is right for customers, as well as testing the economics before we expand it further. We are continuing to assess the opportunity around retirement villages in the UK.

Conclusion

I am pleased that we have grown customer numbers, profits and dividends whilst continuing to delever.

With increasing insurance customer numbers supported by the motor panel and the ongoing growth of our travel businesses, we expect to continue to deliver steady growth in Group earnings before the delivery of our new ship in 2019. Additionally, as our model evolves, with increased free cash flow resulting from lower capital in our underwriter, we expect to be able to pay higher dividends combined with ongoing reductions in our leverage.

The continued evolution of our model will position us to generate high quality and more resilient earnings, further supporting our enhanced dividend policy going forward.

In light of the ongoing debate surrounding the result of the UK's forthcoming referendum on membership of the European Union, because of the Group's diverse nature, we believe the result of the EU referendum is unlikely to have a material impact on the business. We are, however, continuing to monitor the situation closely.

We have a clear strategy in place to continue to grow our underlying businesses and we have made a positive start to the current year.

Chief Financial Officer's Review

In my first set of preliminary results, I am pleased to be able to report that the Group has delivered a strong financial performance, with a 5.0% growth in Trading EBITDA and a 5.2% growth in Trading Profit. Robust cash flows have enabled us to further deleverage to 2.3x from 2.6x at the start of the year. Based on these results and our future expectations for the business, we have significantly increased our dividend to 7.2p per share for the full year.

Income Statement

Revenue from continuing operations increased by 7.0% to £963.2m (2015: £900.5m), Trading EBITDA grew by 5.0% to £238.8m (2015: £227.4m) and Trading Profit by 5.2% to £211.0m (2015: £200.6m).

Profit before interest, tax and IPO costs increased by 2.2%, reflecting several factors: amortisation of acquired intangibles increased by £4.1m as a result of the full year impact of Destinology, acquired part way through 2014, and the acquisition of Bennetts on 1 July 2015; a £4.1m decrease in year-on-year derivative fair value movements taken to profit and loss; offset by a £2.2m reduction in non-trading costs.

The non-trading costs recognised by the Group in the year comprised £4.7m of costs relating to the administration of our legal services provider (Parabis Law LLP), £3.8m associated with the write-down of the carrying value of the Bel Jou hotel, £0.7m of restructuring costs and £0.5m of costs incurred with the acquisition of Bennetts. These were offset by a £2.6m positive settlement of a legal dispute related to one of the ships and a £7.1m release of the contingent consideration associated with the acquisition of Destinology.

While Destinology has delivered solid profits, the results for the year are below those expected at the time of acquisition, due to significantly more competition in the Middle East market (a major destination for Destinology) and slower development of customer growth, with new marketing initiatives yet to fully deliver. A new Managing Director and strengthened marketing resource are in place to enhance returns from Destinology.

Profit before tax from continuing operations for the year was £176.2m, an increase of 54.8%, due in part to the material one-off IPO and exceptional debt costs incurred in the previous year.

Finance costs

Finance costs in the year were £24.0m, which comprised £18.7m of interest costs on debt and borrowings, £3.2m of amortisation of debt issue costs, £1.1m of finance charge associated with pension schemes and a £1.0m charge associated with the unwinding of the discount on the deferred consideration associated with Destinology. This compares with £23.0m in the previous year, which comprised £20.1m of interest costs on debt and borrowings, £2.4m of amortisation of debt issue costs and £0.5m finance charge associated with pension schemes.

Tax expense

The Group's tax expense for the year was £28.1m (2015: £27.4m) representing a tax effective rate of 15.9%. This included a £7.6m benefit from the utilisation under the group relief rules of tax losses from Acromas, which arose when Saga was a part of the Acromas Group. Excluding the impact of the Acromas tax losses, the underlying tax effective rate was 20.3% (2015: 24.1%).

Earnings per share

Group basic earnings per share were 12.7p (2015: loss per share of 13.3p) with Group basic earnings per share from continuing operations for the same period of 13.3p (2015: 8.6p). The earnings performance for the previous year was impacted by the Group's IPO and exceptional debt costs.

Dividends

The Directors have proposed a final dividend of 5.0p per share, which, combined with the interim dividend of 2.2p per share, will deliver a total dividend for the financial year ending 31 January 2016 of 7.2p per share (2015: 4.1p). This equates to a payout ratio of 57% compared with the Group's basic earnings per share from continuing operations (excluding the one-off benefit of Acromas tax losses) (2015: 49.5% pro rata for the period post IPO).

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 2016.

Cash flow and liquidity

The Group maintained a strong cash flow performance in the year to 31 January 2016, achieving an available operating cash flow of £178.1m, 74.6% of Trading EBITDA. This cash flow increased by £15.1m on the previous period, which was driven by a higher payout from increased profits in the travel and AICL restricted businesses.

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 debt ratio to 2.3x from 2.6x. As at 31 January 2016, net debt was £547.7m, comprising £480.0m of gross debt and £75.0m of drawn revolving credit facility, offset by £7.3m of available cash. This compared with net debt as at 31 January 2015 of £582.4m, comprising £700.0m of gross debt offset by £117.6m of available cash.

As communicated at the time of the interim results, it is the Group's intention to reduce the debt ratio (net debt to Trading EBITDA) to between 1.5x and 2.0x in the medium term. The delivery of the new ship is expected in mid-2019 and the intention is to target the lower end of this range before any debt associated with the ship is drawn down, with the Group remaining within this target range after the delivery of the new ship.

Pensions

Over the year, the valuation of the Group's pension scheme has improved on an IAS19 basis by £21.6m to a deficit of £18.8m (January 2015: deficit £40.4m):

The improvement has been driven by a £15.3m reduction in the present value of obligations to £237.4m (January 2015: £252.7m) and a £6.3m increase in the fair value of the scheme assets. The significant decrease in the present value of future obligations has been driven by an increase in the discount rate applied reflecting an increase in corporate bond yields.

Net assets

Since 31 January 2015, total assets and liabilities have reduced by £49.9m and £154.0m respectively, increasing overall net assets by £104.1m.

Total assets have reduced as a result of a decrease in cash and short-term deposits of £92.3m, a reduction in other financial assets (predominantly the investment portfolio) of £14.9m and the removal of £47.7m of assets held for sale as at 31 January 2015 resulting from the sale of the Allied Healthcare business on 30 November 2015. Offsetting this is an increase in reinsurance of assets of £43.0m due to large personal injury claims experience caused by a rise in the average cost of Periodical Payment Orders, an increase in trade and other receivables of £24.3m driven by insurance trading, and increased goodwill and acquired intangible fixed assets of £31.1m primarily relating to the acquisition of Bennetts.

The reduction in total liabilities reflects a £131.2m reduction in financial liabilities following the repayment of debt during the period, the removal of £47.7m of liabilities held for sale as at 31 January 2015 resulting from the sale of the Allied Healthcare business, and a £21.6m reduction in retirement benefit scheme obligations. Trade and other payables have increased by £32.9m reflecting accruals for initial costs relating to the build of the new ship, insurance trading and the acquisition of Bennetts.

Segmental performance

Total revenue for the insurance businesses increased by 4.1% to £510.1m (2015: £489.9m), driven by strong growth in home insurance and the inclusion of Bennetts. Travel revenue increased by 11.0% to £423.1m, largely driven by a full year contribution from Destinology, which contributed £32.8m.

The insurance and travel businesses saw increases in Trading Profit of 8.0% and 26.5% respectively. These were partially offset by an additional £8.9m Trading Loss in emerging businesses and central costs, £5.5m of which reflects the increased central administrative costs as a result of becoming a plc, with part of the balance being the Group's ongoing investment in the newly launched Saga Investment Services.

Motor insurance

The prior period has been restated to reclassify certain overhead costs as cost of sales on a consistent basis with the current period. The total Trading Profit of £100.4m is unchanged.

The motor market remained highly competitive, with average premiums continuing to fall at the start of year before increasing from the second quarter of 2015. Against this backdrop, we have grown both customer numbers and profits by increasing our competitiveness through capitalising on our underwriting performance and the initial impact of the new motor panel. Underlying core policy volumes excluding Bennetts were up 3.1% in the year.

Overall motor revenue grew by 2.1% to £318.7m (2015: £312.0m). Revenue and gross written premiums from core underwritten policies decreased during the year as a whole, reflecting the fact that premiums were falling or only starting to recover when a number of these policies were written. This was offset by a £10m increase in revenue from Broking and Other due to the inclusion of Bennetts from 1 July 2015 and the initial impact of the motor panel.

Overall, the positive claims experience within the core business has enabled a growth in Trading Profit of 17.8% despite ongoing challenging market conditions.

Motor underwriting

The profitability of the core underwritten motor business has improved, as lower net earned premiums are more than offset by improved claims experience, increases in other income streams and lower operating expenses.

The prior period has been restated to reclassify £10.0m of prior year reserve releases from current year claims costs following a review during the period, and to align the presentation of costs between claims, claims handling and total expenses on a consistent basis with the current period.

Net earned premiums were 2.7% lower due to falling or flat premiums during part of the year and a reduction in underwriting for the AA motor business. This was partially offset by a £2.4m increase in other income from the introduction of broker arrangement fees and a limited increase in administrative charges.

The Group has not seen the increase in claims frequency that is being reported elsewhere in the market, with frequency being broadly flat across accidental damage, third party damage and personal injury claims. As previously reported, this is largely a result of the characteristics of the Group's current customer base, with the majority of customers being retired, therefore lessening the impact of recent falls in fuel costs and economic growth.

Claims severity during 2015 has also been broadly stable across accidental damage and small personal injury claims, with the Group not currently experiencing the inflation in personal injury claims costs reported elsewhere. The Group has continued to maintain strong levels of retention within the Ministry of Justice Portal, in addition to its significant and ongoing focus on effective management of these types of claims.

The Group has seen a marginal increase in third party damage severity, chiefly driven by increases in at-fault repair costs that have been seen across the market following the Coles v Hetherton judgment.

The combined operating ratio, at 74.4% has improved by 3.5 percentage points, partially as a result of the £2.0m increase in reserve releases reflecting an improvement of claims experience on large and small personal injury claims. The pure combined operating ratio improved by 1.9 percentage points as a result of a reduction in operating expenses as a greater share of indirect costs were allocated to the home and other insurance segments during the year to reflect the relative revenues of the businesses.

Investment return decreased by 12.8%, which was driven primarily by lower returns on mark-to-market elements of the portfolio as a result of the recent turmoil in global markets.

Home insurance

The home insurance market has remained highly competitive over the last year, as continuing benign weather conditions have reduced claims costs across the industry resulting in a third consecutive year of falling premiums.

Despite these market conditions, the efficiency of the home panel has allowed the Group to continue to improve the net rates it receives from its underwriters to grow core policy numbers, increase revenue by 8.7% to £99.8m (2015: £91.8m) and Trading Profit by 3.2% to £64.1m (2015: £62.1m).

Operating expenses were up £4.6m as improved revenues relative to motor resulted in a greater proportion of indirect costs being allocated to home.

Other insurance

Revenue in other insurance lines grew by 6.4% to £91.6m (2015: £86.1m), driven by an increase in travel insurance volumes and improved margins on private medical.

Trading Profit was down £4.2m due to an increased allocation of indirect costs in line with relative revenues across the Insurance business, an increase in marketing investment in Legal Services and the impact of the administration of Parabis Law LLP.

Insurance underwriting

Reserving

The prior period has been restated to reclassify £10.0m of prior year reserve releases from current year claims costs following a review during the period.

Favourable claims development experience during the twelve months to 31 January 2016 has resulted in a reduction in the reserves required in respect of prior year claims. This has been driven by large and small personal injury claims and by other classes and resulted in a materially consistent level of reserve releases totalling £68.0m during the year. There has been no deterioration in the reserve margin year-on-year.

Analysis of insurance contract liabilities at 31 January 2016 and 31 January 2015 is as follows:

* 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 £44.4m as at 31 January 2016 from the previous yearend, driven by a £18.9m reduction in IBNR claims reserves, £13.9m less reported claims reserves and a £12.2m reduction in unearned premium reserve.

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 £29.2m compared with the previous year, from £654.0m as at 31 January 2015 to £624.8m as at 31 January 2016. As at 31 January 2016, 92% of the financial assets held by the Group were invested with counterparties with a risk rating of A or above, which is up 10 percentage points on the previous year and reflects the improved credit risk rating of the Group's counterparties.

Solvency capital

The Group had its use of the Undertaking Specific Parameters route for Solvency II approved by its regulator, the Financial Services Commission in Gibraltar, during the year. Under Solvency II the Group had an SCR of £128.8m at 31 Jan 2016 and available capital is £219.6m, giving a coverage ratio of 170% and retaining its strong capital position.

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, supported by the acquisition of Destinology in August 2014.

The holidays businesses generated a 13.3% increase in revenue to £336.9m (2015: £297.3m), £32.8m of which was attributable to the impact of Destinology being included for a full year. Gross profit increased by 16.4% to £68.6m (2015: £58.9m), around half of which was due to Destinology, and the number of passengers travelling increased by 9.9%, largely driven by the impact of Destinology.

The Saga Holidays and Titan businesses both delivered increases in revenue and gross profit, driven by a shift in product mix towards higher-value, higher-margin long-haul and third party cruise products.

Saga Cruising delivered revenue of £86.2m, 2.6% above the previous year (2015: £84.0m), driven primarily by improved yields. Ongoing investment in the ships and the Saga cruise customer experience resulted in a marginal decrease in gross profit of 2.7% to £17.3m (2015: £17.8m).

An overall 12.0% increase in gross profit was partially offset by a 9.0% increase in operating expenses, driven by the full year impact of Destinology. The Travel segment as a whole delivered a 26.5% increase in Trading Profit to £17.2m (2015: £13.6m).

Emerging businesses and central costs

Revenue from emerging businesses (which includes personal finance, continuing healthcare services, the media businesses and the retirement villages pilot) was up by 2.4% to £30.0m (2015: £29.3m). These businesses delivered a 1.5% increase in gross profit to £13.6m (2015: £13.4m).

The overall Trading Loss from this segment was £19.3m (2015: £10.4m). £5.5m of the increase was due to the normalisation of listed company costs, with the balance being made up of additional Group costs, including the investment in the newly launched Saga Investment Services.

Discontinued operations

On 30 November 2015, the Group completed the sale of the local authority section of the healthcare business, Allied Healthcare, resulting in a £1.0m gain on disposal. This was offset against a loss after tax for the period up to this date of £7.9m, resulting in a loss after tax for the year from discontinued operations of £6.9m.

Financial outlook and guidance

During the year ending 31 January 2017 insurance profitability is expected to benefit from higher policy numbers, the positive impact of the panel and the ongoing benefits of efficiency improvements. This will be partially offset by the impact of the recently announced quota share arrangement. Reserve releases are expected to contribute materially during the year, but at a reduced level from the year ending 31 January 2016.

Growth in our tour operating businesses will be largely offset by the impact of the two-month wet dock for Saga Sapphire in the cruise business. Therefore, profitability for the travel business will be relatively flat year on year.

Subject to market conditions remaining materially consistent, the Group is therefore targeting PBT growth of between 5-7% for the year ending 31 January 2017. At the same time, the Group expects to delever further, benefiting from its strong solvency position in AICL, the initial benefits of the quota share arrangement and our prudent investment strategy.

The additional capital released gradually over the next few years from AICL will provide additional free cash flow and enable an increase in the dividend payout ratio to between 50% and 70% of net earnings, whilst retaining the Group's target debt range of 1.5x to 2.0x Trading EBITDA.

Consolidated income statement

for the year ended 31 January 2016

Consolidated statement of comprehensive income

for the year ended 31 January 2016