Saga Regulatory News (SAGA)

4 April 2019

This announcement contains inside information

Saga plc

Preliminary Results for the full year ended 31 January 2019

Saga to refocus on its heritage as a direct to consumer brand with membership at its core

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 2019.

Lance Batchelor, Group Chief Executive Officer, said:

"Over recent years Saga has faced increasing challenges from the commoditisation of the markets in which we operate, especially in Insurance. This has had an impact on both customer numbers and profitability. Although Underlying Profit Before Tax for the 2018/19 financial year is in line with our expectations, the long-term challenges we face and the results demonstrate that Saga cannot grow without a clearly differentiated offering to its customers.

In response, today we are launching a fundamental change to the Group's strategy to return the whole business to its heritage as an organisation that offers differentiated products and services. This will give our customers and members a compelling reason to come to us and stay with us.

As a first step, we are announcing the launch of a new approach to Insurance. This focuses on direct channels and products that offer attractive innovative features, moving the conversation from price to value. Our new three-year fixed price insurance offering is a powerful indication of our change in approach.

As a result of lower margins in Insurance, a change in approach to renewal pricing, lower reserve releases and investment in new products, Underlying Profit Before Tax for the 2019/20 financial year is expected to be between £105m-120m. Therefore, we have taken the difficult decision to reduce our final dividend and write down goodwill. The fundamental changes we are making are essential to address the long-term challenges facing our business. They will support future growth in customers and profits, and generate attractive cash flows for Saga."

Financial highlights

1 Alternative performance measure - refer to the glossary on pages 55-56 for definition and explanation

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

Performance in 2018

· Underlying Profit Before Tax down 5.4% at £180.3m reflecting strong reserve releases but disappointing Retail Broking result

- Retail Broking down 19.1% at £105.8m

- Underwriting up 9.3% at £86.7m, supported by underlying reserve releases of £78m

- Travel up 2.4% at £21.1m, with strong forward bookings in Cruise

- Emerging businesses and central costs (excluding finance costs) improved by 21.5% to (£21.6m)

· Loss before tax of (£134.6m) after Goodwill impairment of £310m

· Available operating cash flow £180.6m

· Net debt reduced to £391.3m with net debt to trading EBITDA at 1.7x

· Proposed full year dividend reduced to 4.0p with expected future payout of approximately 50%

Strategic Change

· Fundamental shift in strategy to address long term challenges

· Saga to refocus on its heritage as a direct to consumer brand with membership at its core, providing differentiated products and services that customers can't get elsewhere

· Launch of new Insurance approach focused on growing direct channels, with the launch of a 3 year fixed price proposition, and with a new approach to renewal pricing

· Accelerating transformation of Tour Operations

· Continue the Cruise transformation

· Investment behind new products and membership to build on early signs of traction

· 2019/20 Underlying profit before tax expected to be £105-£120m due to a reduction in reserve releases, as well as a decline in Broking gross margins (less marketing costs) from £80 to between £71-£74 per policy

· Action on dividend and amendments to banking facilities provide robust balance sheet to support strategic change

END

A presentation to analysts and investors on the preliminary results and the change in strategy will be held at 09.00 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 3936 2999, all other locations: +44 20 3936 2999. Participant Password: 484709.

For further information please contact:

Saga plc

Mark Watkins, Investor Relations Director Tel: 07738 777 479

Email: mark.watkins@saga.co.uk 

MHP Communications

Tim Rowntree/Simon Hockridge 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 publishing. www.saga.co.uk

Chairman's statement

Strategy

Over the following pages we set out fundamental changes to our strategy. This will see Saga return to its heritage as a company that delivers high quality, differentiated products and services that our customers cannot get elsewhere.

Performance in 2018

Results for last year are in line with our expectations. While we are reporting another very strong year from Insurance Underwriting, Retail Broking has been disappointing. Travel maintained profitability but parts of Tour Operations remain under pressure. At a time when our target demographic market continues to grow overall, our volumes have declined.

Your Board believes that the new strategy responds to these challenges.

Dividend and Goodwill impairment

In the near-term, a combination of margin pressures and other factors mean that profitability will be significantly below that of recent years and also below our previous expectations. As a result we have had to make some difficult decisions.

The Board has proposed a final dividend per share of 1.0p and a full year dividend per share of 4.0p, compared to 6.0p and 9.0p respectively in the prior year. We are targeting a sustainable payout ratio of around 50% of earnings over the next few years.

We have also re-assessed the carrying value of the goodwill relating to the Group's Insurance operations. This has resulted in a non-cash impairment charge of £310.0m, representing 22% of the Insurance goodwill, and has led to an overall loss before tax for the financial year 2019/20 of £134.6m and a loss after tax of £162.0m.

While the decisions to reduce our dividend and impair Insurance goodwill are disappointing, the Board believes that these actions are essential to address our challenges, allow for the product investments needed and enable the Group to return to sustainable growth.

Changes to the Board

A number of changes have been made to the Board this year. I joined as Chairman in May, replacing Andrew Goodsell who served as Chairman since 2004.

James Quin replaced Jonathan Hill as Chief Financial Officer in January 2019. He brings with him extensive insurance experience and he will be key in delivering the new strategy.

Julie Hopes joined the Board in October 2018. Julie has taken over the Chair of our Retail Broking business from Bridget McIntyre, who retired from the Board in October 2018. Julie's experience in Insurance will be invaluable as we continue to develop this part of our business. Eva Eisenschimmel joined the board in January 2019. Eva will work with us to make sure our customers are at the heart of everything we do. Gareth Hoskin joined the Board in March 2019. Once approved, Gareth will act as Chair for Acromas Insurance Company Limited, our in-house underwriter.

I would like to express my sincere appreciation for the contribution of those who left the Board during the year and extend a warm welcome to those who have joined us.

The future

While there are challenges to address, the business is well positioned to grow. We have 2.1m customers and offerings in Cruise, PMI, Savings and Lifetime Mortgages that are excellent examples of what we are aiming for. We are launching new products in Insurance, the first of which are home and motor products that include a three year fixed price offer. Our Travel strategy is to become a specialised operator, focusing on Cruise and differentiated experiences in Tour Operations. While it's early days for our Membership programme, we now have 1.1m members, a strong proposition and are seeing a steady increase in the level of member engagement.

It has been a challenging and pivotal year for the business. On behalf of the Board, I wish to thank all of our employees sincerely for their exceptional effort in helping us reset our direction, and for their advocacy of our customers. Without them, we could not look forward to the future with confidence.

Getting back to growth will require exceptional commitment and execution from everyone at Saga. From what I have seen since I joined, I am confident the business will rise to the challenge.

Group CEO's statement

Summary

A lot has been achieved in the five years since Saga's IPO: net debt has been reduced by more than £300m; our old IT platforms have been largely replaced; a new cruise ship has been designed and built and another is coming; our Membership programme has been launched and over a million members have signed up; and the Travel division has grown from £5m to over £20m in Underlying Profit Before Tax.

I also want to be clear about what we have not addressed. If we look back to what made the company successful, it was products specifically designed for our demographic, that were competitively priced and built great brand loyalty. Since then Saga has been focused overly on the short term. At the same time, in the more commoditised parts of the insurance and travel markets, our customers are now able to buy basic and cheap products very easily on-line. The end result has been a steady decline in the number of customers over a period in which our demographic has grown.

The last year brought the long term trends Saga has been grappling with even more sharply into focus. Our Insurance business in particular has been facing new challenges. Although we saw another very strong result from our Underwriting business and good progress in Cruise in 2018, results in Retail Broking have been below our expectations. And while Tour Operations maintained profitability, parts of that business are under pressure both in terms of volumes and margins.

In response, we are making a bold and fundamental change to our strategy to return the whole business to our heritage. That is, an organisation offering differentiated products and services that will give our customers and members a compelling reason to come to us and stay with us:

· We are changing our approach to selling insurance. This will move our Insurance business from one that, like the majority of the industry, wins new customers on price and recoups initial losses through increased renewal pricing. Instead, we will offer a differentiated insurance product on the basis of unique and attractive features. The significance of this change should not be underestimated in today's insurance market.

· Our Cruise offering is a brilliant example of a product that is already highly differentiated and competitively priced. The transition to two new ships and resultant upgrade in the offering is an example of how we are changing Saga. We need to do the same thing in Tour Operations, and move faster to become a differentiated, niche provider of great customer experiences. This might mean that overall volumes remain at current levels, but we expect our margins to increase in line with those of best in class specialist travel companies, reflecting the quality of the product.

· We will invest more in supporting our new product propositions. We have started this and are seeing some green shoots from our first TV advertising campaign.

· And we will wrap all of this in our Membership proposition, Saga Possibilities, to help us build loyalty and multi-product holdings, and as a means of attracting new customers.

The combination of pressures on the Insurance business and investment to support this change in approach mean that our profitability will, in the near-term, be significantly below the level of recent years. As a result, we have had to make some difficult decisions. We have reduced the dividend and impaired the goodwill on our balance sheet, and we are reporting a loss for the 2018/19 financial year.

This is painful in the short term but I firmly believe it is the right course of action for both customers and shareholders in the longer term. It also ensures we have a robust balance sheet to support growth in customers, profits and attractive cash flows.

I will now explain the background to our performance and the actions we are taking in more detail.

A fundamental shift in our Retail Broking business

Our broking business has experienced some significant challenges over the past five years. These include:

· the increasing dominance of price comparison sites;

· the impact of regulatory changes;

· under investment in our direct proposition; and

· insufficient investment in marketing.

The result has been a decline in profit and policies.

Although we held policy numbers flat in 2018/19, we acquired an increasing number of customers from price comparison sites, and direct new business declined from 67% to 51% of total new business volumes. This business is more expensive to acquire than direct and has lower profit margins.

It is clear that to grow customers and profitability we need to give our customers more reasons to come to Saga direct; and to remain with us. We also anticipate a significant industry response to the regulatory focus on renewal pricing. We are taking steps to show customers the benefit of loyalty through our change in approach. This move is an essential step towards creating the right perception of Saga Insurance among our customers.

The first major step will be the launch of a highly differentiated home and motor insurance product that guarantees the same premium for three years providing there are no claims in the period, and that there is no change to insurance premium tax. This will only be available to customers who come to us direct. We have been piloting this since November and have sold over 5,000 policies to new customers. It has proved to be extremely popular: over 60% of those offered it have opted for the fixed price insurance.

We are also changing our approach to renewal pricing. This is in recognition of the fact that the industry is going to go through a period of major change. We also want to encourage our customers to see more of a benefit in remaining with Saga for the long term.

The change in strategy is expected to create a platform for future growth in policies and profits. In the near term, however, the combination of margin pressures, the change in approach to renewal pricing and our investment in new propositions will lead to a decline in broking profitability compared to 2018/19.

Our Travel Strategy

In 2018, the Travel division had its fifth successive year of profit growth, beating £21m Underlying Profit Before Tax for the first time. However, Brexit is putting a clear dampener on customers' willingness to commit to holidays in 2019.

We have seen the extraordinarily rapid build, to schedule, of Spirit of Discovery, our first ever purpose built cruise ship during 2018. Spirit of Discovery will carry her first passengers in July 2019. Our second new ship, Spirit of Adventure, is due to be delivered in summer 2020. Forward bookings for both ships are on track. They are each expected to deliver c.£40m EBITDA per annum. This will be transformational for the future profit trajectory of our Travel business.

Our strategy in Tour Operations will be to accelerate our move away from undifferentiated, low value products, such as short haul, to higher value, more differentiated segments such as escorted tours, third party cruises and river cruises. We are starting to renew our river ship fleet, and have recently ordered two purpose built vessels on long-term lease agreements. While we do not expect significant growth in Tour Operating revenues, this forward transformation is expected to lead to improved margins in the next few years.

Our Membership Strategy

Our Membership programme, Saga Possibilities, launched in Autumn 2017. We have over one million members and the number is growing every week. We will continue to build our Membership proposition and engagement as we seek to make that our key route to customers.

The next phase will focus on increasing the engagement of existing members, growing member numbers, and cross-selling through the Membership programme. A recent trial to sell Travel to Insurance customers via Membership generated c. 900 passengers in 100 days, 34% of whom were first time buyers. We will seek to build on this in 2019. The bigger Possibilities becomes, the better the deals and opportunities we will be able to find for our members.

It is still early days, but the initial signs, evidenced by the launch of Dining Possibilities in October, are that we have started to see engagement increase.

The Saga Brand

We have an exceptionally high level of prompted brand awareness: 87% of our target market knows Saga. For many of our customers, this translates to strong brand affinity, trust in our products and a high level of repeat bookings in Travel, and retention in Insurance. However, we need to improve brand consideration (people who know the brand and are more likely to buy a Saga product) and our new strategy is designed to do this.

Offering such new and unique products allows us to do something we haven't done for many years. We launched some new television adverts at the end of last year that we will continue to run in 2019. Advertising is important both to drive sales of our new Insurance and Cruise services, but also to ensure that our potential customers appreciate that we are doing things differently.

The early impact of our higher profile has been encouraging. The combination of new product offerings and increased advertising is expected to deliver further benefits.

Looking Forward

The Group strategy is to focus Saga on its heritage as a direct to consumer brand with membership at its core. We want to be known as a company that delivers highly differentiated, competitively priced products to our customers and members. The fundamental change in strategy in Insurance is a significant start in the execution of that strategy and is the culmination of much work behind the scenes.

We proved in 2018 that our Cruise strategy is working and we will accelerate our efforts in Tour Operations to match the progress we've made in Cruise.

We will continue to build our Membership proposition and engagement as we seek to make that our key route to customers.

I would like to thank the many people across the business who have helped us develop our new strategy over the past six months. I am confident that the far reaching changes set out above are both essential and bold enough to address the long-term challenges we have faced. I am also confident that these changes will give our customers and members a compelling reason to come to us and stay with us.

Operating and Financial Review

The Group has reported Underlying Profit Before Tax of £180.3m, a decrease of 5.4% in comparison to the prior year. While this is in line with previously issued guidance, and Underlying Profit Before Tax of the Travel division is in line with expectations, Insurance results have been mixed. Specifically, Underwriting has benefitted from an exceptionally high level of reserve releases but this has been offset by reduced profitability from the Retail Broking business.

Given the long-term trends faced by the business, and the more recent challenges in Retail Broking, the Board and the management team have undertaken a thorough review of the outlook and strategy for the Group. This review has led to two main conclusions:

· The Group needs to refocus its strategy, returning to Saga's heritage as a direct to consumer brand with membership at its core.

· Due to the ongoing pressures on broking margins and anticipated reductions in renewal pricing, the future profitability of Retail Broking, and the Group as a whole, will in the near-term be significantly lower than previously projected.

The reduction in earnings expectations for Retail Broking has led to a re-assessment of the carrying value of the goodwill relating to the Group's Insurance operations, resulting in a non-cash impairment charge of £310m, and leading to an overall loss before tax of £134.6m, and a loss after tax of £162m.

The Group reassessed the level of the dividend and future dividend policy, considering projected debt levels over the next five years. While Saga continues to benefit from a highly cash generative business model, and a secure and long-term capital structure, action is being taken now to retain the Group's financial strength and flexibility. This has led the Board of Directors to propose a reduction in the final dividend per share from 6.0p to 1.0p, which reduces the full year dividend per share from 9.0p to 4.0p. The Group is now targeting a payout ratio of around 50% of earnings over the next few years.

While these are difficult steps, the Group starts the 2019/20 year with a clear direction and is investing to support its new strategy. 

Operating Performance

Group Income Statement

3 The Group has adopted IFRS 15 Revenue from Contracts with Customers and IFRS 9 Financial Instruments and is reporting its performance for the twelve months to 31 January 2019 against a restated comparative period for the 12 months to 31 January 2018 under these new standards. For further details, see note 2.2 on pages 30-35

4 Revenue is stated net of ceded reinsurance premiums earned on business underwritten by the Group of £136.0m (2018: £139.9m).

5 Net finance costs exclude net fair value gains / (losses) on derivatives and IAS19R pension interest costs

The Group's business model is based on providing high-quality and differentiated products to its target demographic, predominantly focused on Insurance and Travel.

The Insurance business operates mainly as a broker, sourcing underwriting capacity from selected third-party insurance companies, and, for motor and home, also from the Group's in-house underwriter. Travel is comprised of Tour Operating and Cruising. The Cruise business is undergoing a significant transformation, with the replacement of its two existing ships over the next 18 months. Emerging Businesses are at an earlier stage of development, and principally comprise Personal Finance and domiciliary Healthcare. 

Revenue

Revenue decreased by 2.2% to £842m (2018: £860m) due to a decrease in Retail Broking revenues, as lower margin new business policies replaced higher margin renewal policies, partially offset by increases in Cruising revenue. Total customer spend1 with Saga was broadly stable at £1,210m (2018: £1,209m). This includes gross written premiums and insurance premium tax.

Total customer spend1 reconciles to revenue as follows:

Underlying Profit Before Tax1

Underlying Profit Before Tax decreased by 5.4% to £180.3m (2018: £190.6m).

This was primarily due to a £24.9m reduction in Retail Broking, resulting from a decline in margins and a £8.0m reduction in the written to earned benefit, offset by a £7.4m increase in Underwriting, and a £5.9m improvement in Emerging Businesses and Central Costs.

Net finance costs in the year were £11.7m, a decrease of 6.4% on the previous year (2018: £12.5m). This was due to an increase in capitalised borrowing costs, due to down-payments on the new cruise ships.

Loss before tax from continuing operations

Loss before tax from continuing operations was £134.6m for the year, mainly resulting from the £310m impairment of goodwill relating to the Group's Insurance operations. In addition, a review of the residual values of the two existing cruise ships at 31 January 2019 has resulted in a non-cash impairment charge of £5.9m. The prior year included costs associated with the unamortised facility fees of previous banking facilities and one-off restructuring costs.

Tax expense

The Group's tax expense for the year was £27.4m (2018: £33.9m) representing an effective tax rate of 19.4% before the impairment of goodwill and release of associated deferred tax (2018: 18.7%). The increase in the effective tax rate is due to one-off corporation and deferred tax releases in the prior year.

Discontinued operations

The loss after tax from discontinued operations in the prior year related to the impairment of all remaining deferred consideration from the sale of Allied Healthcare, which completed in the year ended 31 January 2016.

Earnings per share

The Group's underlying earnings per share from continuing operations were 13.1p (2018: 13.8p). The Group's earnings per share were a loss of 14.5p (2018: profit of 12.5p). Earnings per share from continuing operations for the same period of a loss of 14.5p (2018: profit of 13.1p).

Retail Broking

The Retail Broking business provides tailored insurance products and services, principally motor, home, private medical and travel insurance. Its role is to price the policies and source the lowest cost of risk, whether through the panel of home and motor underwriters or through solus arrangements for private medical and travel insurance. The Group's in-house insurer, Acromas Insurance Company Limited (AICL), sits on the motor and home panels and competes for that business with other panel members on equal terms. If underwritten by a third party, the product is presented as a Saga product and the Group will always manage the customer relationship.

Retail Broking profit before tax on a written basis (which excludes the impact of the written to earned adjustment) reduced to £106.6m from £123.5m, and on an earned basis (which includes the impact of the written to earned adjustment) reduced to £105.8m from £130.7m. As previously indicated, prior year results on an earned basis benefitted from a £7.2m 'written to earned' accounting adjustment that was one-off in nature.

The reduction in profit before tax on a written basis was due to a £24.6m reduction in written gross profit, after also deducting marketing expenses. This was partially offset by a £7.7m improvement in other operating expenses, as the Group achieved cost saving targets. The reduction in written gross profit, after marketing expenses, is due mainly to home and motor insurance (£19.1m), with a lower impact from other business (£5.5m). The decline in other broking is due to recognition of a one-off loss on a specific contract.

The lower gross margin, after marketing expenses, on home and motor insurance is due to a £11m decline in Saga branded new business profitability, a £5m reduction in Saga branded renewal profitability, and a £3m decline in Bennetts and Direct Choice. The decline in renewal profitability was expected and is mainly a function of a decline in the size of the renewal book due to lower new business sales in the prior year, as well as a reduction in motor insurance persistency.

During the 2018/19 year, the Group consciously sought to increase Saga branded home and motor new business to stabilise the overall policy count after several years of decline. While this was broadly achieved, the cost of doing so was significantly higher than expected. This was mainly because of an increase in lower-margin business sourced from price comparison websites, a decline in motor direct new business, an increase in customer acquisition costs and competitive market conditions, among other factors.

The challenges across the Broking business are not new and have in practice been building in recent years. Nonetheless, the experience of the last 12 months has demonstrated that these challenges require a fundamental change of approach. While a further reduction in margins is expected from 2018/19 levels in the next year, the Group is now implementing a detailed strategic plan that will create a stronger platform for future growth in both policy count and profits.

6 Combined buildings and contents home core policies count as one policy

7 Combined buildings and contents home core policies count as two policies

8 Third-party underwriter's share of the motor panel for Saga branded policies

Motor Broking

Gross written premiums decreased by 2.1% due to a 3.4% reduction in core policies, partially offset by an increase in average gross written premiums. Gross written premiums from business underwritten by AICL decreased by 13.8% to £219.0m (2018: £254.0m), reflecting the growing maturity of the panel.

Written gross profit minus marketing expenses was £86.7m (2018: £97.8m), contributing £70/policy (2018: £76/policy). The decline was due to the higher proportion of new business in the overall motor book, together with lower profitability of new business. The lower profitability of new business was due to: a higher proportion of new business from price comparison websites; the impact of GDPR on direct channels; and a highly competitive market. This impact was partially offset by a stable contribution from the renewal book; with a small increase in profit per policy offset by a lower number of renewal policies as persistency reduced to 62.0% (2018: 65.4%).

Written marketing expenses have increased by 19.4%, reflecting an increase in new business volumes and a change in mix towards price comparison websites. This has led to marketing costs per policy increasing to £17 compared to £14 in the prior year.

Overall written Underlying Profit Before Tax has decreased by 11.5% to £34.8m (2018: £39.3m).

The reduction in the written to earned adjustment in the current period is due to the Group no longer underwriting any add-on motor products following the outsourcing of the underwriting of these products at the end of 2016.

Home Broking

Gross written premiums decreased by 1.8% due to lower average gross written premiums on a stable number of core policies.

Written gross profit minus marketing expenses was £67.4m (2018: £75.4m), on a per policy basis this was £99/policy (2018: £111/policy). The decline was due to lower margins on the renewal book as net rates increased and a higher proportion of new business. As was the case with the motor product, the highly competitive market, change in channel mix and an increase in the acquisition costs from direct channels impacted new business profitability.

Written marketing expenses have increased by 18.3%, reflecting an increase in new business volumes, a change in mix towards price comparison websites and an increase in acquisition costs for direct business. This has led to marketing costs per policy increasing to £10 compared to £9 in the prior year.

The reduction in the written to earned adjustment in the current period is due to the Group no longer underwriting any add-on home products following the outsourcing of the underwriting of these products at the end of 2016.

Other Broking

Other insurance broking business is primarily comprised of private medical insurance (PMI) and travel insurance. These products have been designed for Saga customers and play an important role in deepening the Group's relationship with them.

The Group incurred a £5.1m loss on the Private Medical Insurance product, as a result of the adverse impact of prior year claims experience on profit share arrangements. Increasing claims frequency also had a smaller impact on current year trading. Following changes to policy terms, including an approach that improves customer outcomes and usually reduces costs, claims experience has now improved. As a result, this charge is not expected to recur.

Travel insurance profitability was marginally up against the prior year due to a higher contribution per policy, offset by lower policy volumes. This was due to lower new business volumes in an extremely competitive market.

Other revenue includes the results of the credit hire business, which has performed well in the year.

Insurance underwriting

The Group's in-house underwriter AICL continues to play an important role on the motor panel, providing a source of competitively priced risk, primarily focused on lower risk drivers. AICL also underwrites a portion of the home panel, although all the risk in the home insurance business is passed on to a third-party insurance company.

Excluding the impact of the quota share reinsurance agreement, Underwriting revenue decreased by 8.2% to £207.0m (2018: £225.6m) as AICL wrote a lower number of policies, as external panel members won a greater share compared with the prior year.

Also excluding the impact of the quota share, the Underwriting business saw an increase in the pure combined operating ratio to 99.7% (2018: 97.8%). This was due to higher than average returns on profit and loss sharing agreements in the prior year.

Reserve releases of £77.9m (2018: £60.0m) have resulted in a reported combined operating ratio of 62.0% (2018: 71.2%), excluding the impact of the quota share treaty. The Group retains economic interest in motor reserve releases. To the extent they are commuted under the quota share arrangement they are recognised within 'other revenue' as a profit share.

The high level of reserve releases in both financial years is due to continued strong claims management and favourable claims development experience. In particular, experience on large and small personal injury claims has been very positive.

In addition, £30m of the reserve releases in the year have arisen from recognition of improved development patterns within the actuarial 'best estimate' reserving methodology (2018: £20m). While there has been no change in the reserve margin held over best estimate in percentage terms, the declining level of absolute reserves, the changes made to best estimate reserving, and the unusually low level of large reported losses in the year mean that it is highly unlikely that reserve releases will continue at 2017/18 or 2018/19 levels.

The release of prior year reserves for home and other insurance, and the strengthening of reserves in the prior year for these lines of business, are in respect of products sold by third parties for which the Group has in place profit and loss sharing agreements such that the associated impact on profit is negligible.

The investment return decreased by £6.5m to £9.9m (2018: £16.4m). This was largely due to a profit on sale of bonds in the prior year, coupled with a lower yield on a smaller investment portfolio. The lower yield resulted from historical fixed income investments that have matured, as the funds are reinvested at current market rates. Total investments have reduced as surplus solvency capital has been released, which is due to continued favourable claims experience.

Travel

The Travel business has had another solid year of trading. It achieved growth in both revenue and profit, which are up by 1.9% and 2.4%, respectively.

The Tour Operations business generated revenue of £360.8m (2018: £360.5m) with 5.1% higher gross margin per passenger offsetting 4.3% lower departing passenger numbers. The product range offered in the year has been rationalised to reduce short haul stays in favour of higher margin escorted touring, river and ocean cruise products. Gross profit margin was 19.5% (2018: 19.4%). The marketing spend within Tour Operations increased by £0.9m compared to the previous year to drive passenger bookings in 2019, partly offset by other operating cost efficiency savings.

Underlying Profit Before Tax from Tour Operations is slightly higher than the prior period at £14.2m (2018: £14.1m), with a stable net profit margin of 3.9%.

The Saga Cruise business delivered a 9.5% increase in revenue to £96.6m (2018: £88.2m) reflecting an increase in passenger days of 11k including fewer maintenance days and an increase in per diems as demand for Saga Pearl II in her final year was higher than expected. There were no scheduled maintenance days in the year compared with 19 days of maintenance on the Saga Pearl II and 20 days of maintenance on the Saga Sapphire in the prior year.

Underlying Profit Before Tax from the Cruise business was £6.9m (2018: £6.5m). Revenue per diem improvements have offset £2m of additional fuel costs, net of fuel hedges, arising from higher market prices in the year. The increased marketing spend was expected and supports demand for the new ships. This was offset by cost savings from operational efficiencies.

Forward Travel sales

Tour Operations booked revenue for 2019/20 is currently 3.4% down on prior year and has been impacted by the recent market weaknesses particularly in short haul holidays. Brexit uncertainty has been a significant contributor to this shortfall and booked revenues were 7.6% down in the 12 weeks to 23 March 2019. However, the mix of business continues to move to higher margin and more differentiated products, notably escorted tours, rivers and third party ocean cruising.

Cruise ticket revenues and passengers for 2019/20 departures are up 17.7% and 17.8%, respectively. This reflects the requirement to fill the additional capacity of the first new ship, Spirit of Discovery, as the Saga Pearl II exits service. The increase in capacity days is 19% weighted to quarters 3 and 4 as the business sees the full impact of the larger new 999 berth vessel.

Emerging Businesses and Central Costs

Revenue from Emerging Businesses (which includes Personal Finance, Healthcare Services and the Media businesses) increased by 17.1% to £32.8m (2018: £28.0m), which was largely due to increased revenue from the Group's mailing business.

Profit from Emerging Businesses improved by £2.3m to £3.1m (2018: £0.8m), which was mainly due to £2.2m of losses in the prior year from the impairment of the discontinued Investment Services joint venture.

Central operating expenses increased to £30.4m (2018: £24.9m) reflecting higher depreciation and amortisation from the investment in IT platforms over the past two years, increased investment in Membership, and also due to a significantly reduced management bonus payout for the 2017/18 financial year.

Following the restructuring programme at the end of 2017, the central cost base reduced by £5m, and those savings were passed on to the trading divisions in the form of lower recharges for shared services.

Central costs also include some one-time impacts in both years. For the 2018/19 year this relates to a one-off £3.9m profit on disposal from the sale of one of the Group's properties. The preceding year was adversely impacted by an exceptional £5.5m IAS19R pension charge following the completion of the triennial review of the Group's defined benefit pension scheme.

Cash flow and liquidity

Available operating cash flow1 is made up of the unrestricted cash flows from Retail Broking, Emerging Businesses and Central Costs, plus any dividends paid by restricted businesses, AICL and Travel. As well as a regulatory restriction on the cash within the Travel business, the initial instalments for the Spirit of Discovery and Spirit of Adventure have until now been funded from Travel cash. Therefore, until both ships are delivered, Travel is not expected to contribute to the Group's available operating cash flow.

The Group delivered a strong cash flow performance in the year to 31 January 2019, achieving an available operating cash flow of £180.6m, 78.1% of Trading EBITDA1. Operating cash flow increased by £5.1m compared to the previous year, due to increased dividends from AICL and a positive working capital inflow that is expected to reverse in the 2019/20 financial year. This was partially offset by the reduction in available Trading EBITDA, which is due to reduced earnings from the Retail Broking business.

As a result of the high level of underwriting profitability, AICL dividends increased from £70m in the year to 31 January 2018 to £85m in the last financial year. Although AICL's solvency II coverage remains strong at 148% (2018: 171%), reduced levels of reserve releases will lead to a reduction in future dividend payouts.

Offsetting this was a £6.5m subordinated loan to the Travel business to maintain its regulatory solvency capital whilst investment in the new ships continues. The Group injected a further £25m of cash into the Travel business in February 2019 to support the funding of the two ships.

Available Cash Flow

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

Trading EBITDA reconciles to (loss) / profit after tax as follows:

9 Pension charge IAS19R includes the additional non-cash pension service costs in excess of employer contributions made in the year and the non-cash pension interest cost that are both required under IAS19R 

Balance Sheet

Goodwill

The Group has tested all goodwill for impairment at 31 January 2019. The impairment test compares the recoverable amount of the goodwill of each cash generating unit (CGU) with its carrying value. The goodwill associated with the Bennetts and Destinology businesses have been considered separately, as these businesses represent separate CGUs.

The recoverable amount of each CGU has been determined based on a value-in-use calculation using cash flow projections from the Group's five year plan to 2023/24, and after allowing for certain stress test scenarios.

Based on this analysis, the Group remains comfortable that there is headroom over and above the carrying value of the goodwill of Bennetts, and for the Travel Operations.

However, based on the new plans for the Insurance business, excluding Bennetts, there has been a material reduction in the carrying value of the business compared to the valuations undertaken in previous years. In addition, once certain stress scenarios are considered in relation to the insurance cash flows, for example, relating to the selected risk discount rate, as well as the expected return from new strategic investments, the Group has determined that the recoverable amount of the goodwill of the Insurance business, excluding Bennetts, is below the previous carrying value. The Group's results therefore include an impairment of the insurance goodwill, excluding Bennetts, in the amount of £310m.

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 £82.3m compared with the previous year, to £392.8m as at 31 January 2019 (2018: £475.1m). As at 31 January 2019, 99% of the financial assets held by the Group were invested with counterparties with a risk rating of BBB or above, which is broadly in line with the previous year and reflects the stable credit risk rating of the Group's counterparties. In February 2018, the Group made changes to its investment policy which has resulted in more BBB rated invested funds and a reduction in the number of unrated invested funds.

Insurance reserves

Analysis of insurance contract liabilities at 31 January 2019 and 31 January 2018 is as follows:

10 Excludes funds-withheld quota share agreement (please refer to note 15 on page 51 for further detail)

11 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 £87.4m as at 31 January 2019 from the previous year end due to a £23.5m reduction in reported claims reserves, a £46.1m reduction in IBNR claims reserves and a £16.4m lower unearned premium reserve. The reduction in IBNR claims reserves is mainly due to favourable experience on large and small personal injury claims, as well as the recognition of improved development patterns within actuarial 'best estimate' reserving methodology.

Financing

Continued strong cash flows have enabled the Group to continue to maintain a stable debt ratio of 1.7x compared to 31 January 2018. The Group's net debt has decreased by £40.7m to £391.3m from £432.0m as at 31 January 2018. It is made up as follows:

12 Refer to note 22 of the financial statements for information as to how this reconciles to a statutory measure of cash

The Group has extended the term of the revolving credit facility to May 2023.

The Group has amended the covenants in the revolving credit facility and term loan. The new financial covenants will be tested against the Group earnings and net debt excluding the earnings and debt associated with the new Cruise ships. On this basis the net debt to EBITDA covenant is 3.5x until August 2021 and 3.0x thereafter.

The Group has committed to an additional financial covenant that the Cruise cash flows will meet the Cruise debt service costs. This will only be tested if the Group (ex-Cruise) is within 0.5x of the Group covenant.

There are no financial covenants associated with the corporate bond.

Pensions

Over the year, the valuation of the Group's pension scheme has strengthened on an IAS19R basis by £4.2m to a deficit of £2.8m (2018: deficit £7.0m):

The strengthening has been driven by a £5.1m increase in the fair value of the scheme assets to £312.4m (2018: £307.3m). This was partially offset by an increase in the scheme liabilities of £0.9m to £315.2m (2018: £314.3m), driven by a slight fall in corporate bond yields over the period. This also includes the Group's estimate of the cost of equalising Guaranteed Minimum Pensions, which served to increase the scheme liabilities by £0.1m.

Net assets

Since 31 January 2018, total assets and liabilities have reduced by £345.5m and £84.3m respectively, resulting in an overall decrease in net assets of £261.2m.

The decrease in total assets is the result of a £310m impairment of goodwill and a decrease in financial assets of £87.3m, which coincides with the release of surplus solvency capital from the Group's underwriting business. This was partly offset by an increase in property plant and equipment of £20.5m, primarily due to the fourth stage payment for the Spirit of Discovery of £13.4m and the second stage payment for the Spirit of Adventure of £15.5m, and an increase in cash and short-term deposits of £39.7m as the Group held surplus cash in advance of making the third stage payment for the Spirit of Adventure in early February 2019.

The decrease in total liabilities reflects a £90.8m reduction in gross insurance contract liabilities in line with further positive claims experience in the year, and a decrease in financial liabilities of £11.5m as a result of a decrease in bank overdrafts. This was partially offset by an increase in trade and other payables of £21.8m due to an increase in policies underwritten by third-party underwriters.

Regulation

The Group operates within an evolving regulatory landscape. Aspects of this, such as GDPR, cover all of Saga's business. Other aspects cover the Group's Insurance, Travel and Personal Finance operations.

For the Insurance business in particular, the last year has been very active. The UK Financial Conduct Authority (FCA) has implemented new requirements relating to how retail general insurance products are sold, and has launched an extensive market study into industry pricing practices.

As other insurers have noted, the insurance market is very competitive with high levels of switching and significant introductory discounts which lead to people shopping around for the best deal. For those customers who don't shop around it is crucial that insurers have active pricing processes. Saga has had these measures in place for several years and increasing numbers of long-standing customers have seen their renewal premium either frozen or reduced as a result.

Saga welcomes the approach of the FCA and expects this to lead to a significant change across the industry in the coming years. As a business which is focused on direct distribution channels, with a higher number of older customers, and with a strategy that is increasingly focused on rewarding customer loyalty, the Group is anticipating implementing further changes on a proactive basis. These steps are expected to reduce the near-term profitability of the Retail Broking business.

Brexit

At the date of finalising this report there is considerable uncertainty as to how - and even whether - the UK will exit from the EU, or at least as to when Brexit will take effect and on what terms. There is corresponding uncertainty as to the impact on Saga. The potential impacts on the Group of Brexit, and more specifically a hard Brexit, have been considered. Working groups have been held throughout the year to identify, assess and - where possible - implement mitigations for the risks of a hard Brexit. The range of scenarios considered include the additional administration processes and costs associated with running a travel tour operating business, supply chain delays for motor repairs and prolonged disruption to local roads caused by delays at the Port of Dover and Eurotunnel. The immediate impact has been a decline in forward bookings in our Tour Operations business as Brexit uncertainty impacts consumer willingness to commit to holidays in 2019. The Group will continue to monitor political developments, and adapt mitigation plans accordingly.

Dividends

In light of the challenges in the recent financial year and revised earnings projections for the next five years, the Board has undertaken a detailed evaluation of the dividend policy.

Within this assessment, the Board has taken account of several positive factors. Specifically, Saga's business model remains highly cash generative, absolute levels of leverage have been reduced successfully since the 2014 IPO, and none of the Group's debt is due to mature for another 3 years. This is further supported by recent changes to the terms of the covenants within the term loan and revolving credit banking facility, which provide the Group with greater financial flexibility.

At the same time, while operating results for the 2018/19 financial year have in the aggregate been in line with expectations, the Group expects a significant reduction in Underlying Profit Before Tax for 2019/20, both in absolute terms and when compared to previous projections. This is mainly attributable to a change in the profitability of Retail Broking, which is likely to be significantly lower than was previously expected.

As explained above, this is primarily a reflection of existing margin pressures and expected reductions in renewal pricing. The shortfall in comparison to previous plans is not due to Underwriting, where a decline in reserve releases was already anticipated.

Further, while the Board has a high level of confidence in the revised strategy, and a level of prudence has been factored into plan projections, the future dividend policy needs to balance cash returns to investors with the objective of maintaining a stable and secure balance sheet.

This is particularly important given the increase in debt that will result from the addition of two new ships. While cruise cash flows are expected to cover debt and interest repayments on the ships, and to enable a resumption of capital repatriations from the Travel business from the end of the 2021/22 financial year.

In balancing these objectives, the Board is of the view that a medium-term payout ratio of around 50% is appropriate. This will offer an attractive dividend for investors, while maintaining a 'peak' debt to EBITDA ratio of below 4x with Cruise on a pro-forma basis, and reducing the overall Group leverage ratio to 2x over the next few years.

The Board is also of the view that a proactive approach to managing leverage is important, leading to a proposal to reduce the final dividend per share from 6.0p to 1.0p.

Financial priorities for 2019/20

As a result of lower margins in Insurance, a change in approach to renewal pricing, lower reserve releases and investment in new products, underlying profit before tax for the 2019/20 financial year is expected to be between £105-120m. The Group's new strategy will set a platform for renewed growth in both customers and profits.

The key priority for the Group is the implementation of the direct strategy in Retail Broking, including additional marketing spend and the launch of the new three year fixed price product. This is expected to be evident in lead-indicator KPIs such as mix of business, and in take-up of 'premium' products. Higher policy numbers are expected from 2020/21 due to growth in new business and improved customer retention. Gross margins per policy are projected to be fairly stable in motor, but to reduce in home.

Although reserve releases are likely to be significantly lower in Underwriting than in 2018/19, continued strong claims management and favourable claims experience is expected to support a further positive contribution in the next few years. In the medium term, the anticipated reported combined ratio, before the impact of the quota share, will be around 97%, subject to normal large loss volatility. Work is underway to widen the AICL underwriting 'footprint'.

In common with the experience of the travel industry as a whole, bookings at the start of this year have been impacted by various factors, including uncertainties relating to Brexit. Beyond this short-term issue, the focus of the business will be on moving away from undifferentiated, low value products (for example, short haul) to higher-margin, more differentiated products, such as escorted tours and river cruise. This is expected to lead to modest growth in passenger numbers, but a significant improvement in margins.

Cruise bookings and per diem rates remain in line with expectations for both 2019/20 and 2020/21 departures. Each new ship is expected to generate EBIDTA of £40m, and profit before tax of £20m. This should lead to materially higher cruise earnings in the next two years.

The Group continues to focus on improving efficiency and expects to hold overhead costs as broadly flat in absolute terms, other than a modest investment to support the growth of the healthcare business.

Consolidated income statement

for the year ended 31 January 2019

Revenue of £841.5m (2018: £860.2m) is stated net of ceded reinsurance premiums earned on business underwritten by the Group of £136.0m (2018: £139.9m).

Consolidated statement of comprehensive income

for the year ended 31 January 2019

Consolidated statement of financial position

as at 31 January 2019