Saga
Annual Report 2016

Plain-text annual report

Building on our momentum Saga plc Annual Report and Accounts for the year ending 31 January 2016 Welcome to Saga plc’s annual report and accounts. Saga exists to make the lives of retired people better. In the 65 years since Saga was founded, we have become the leading provider of services for customers aged 50 and over. We have achieved this by listening carefully to them, and by understanding their specific needs better than anyone else. We try to put our customers first in everything we do. We want to do the same in this annual report. It tells you what we’ve been busy with in the past year, where the business is today, and where we are going next. By listening to our customers and meeting their needs, we believe we will grow Saga and deliver real value to our shareholders. In this report 02 Highlights Achievements in the past year 08 Implementing our clear strategy for growth Group Chief Executive Officer’s Strategic Review 33 Divisional review A review of how our businesses are performing 16 Delivering our priorities Delivering for our customers through strategic priorities Financial highlights from continuing operations Operational highlights Trading Profit Available operating cash flow Contactable people on the database £211.0m 5.2% Profit before tax £178.1m 9.3% 11.2m Debt ratio (net debt to EBITDA) Active customers from 10.8m £176.2m 54.8% Basic earnings per share 2.3x Dividend per share from 2.6x 2.66m from 2.63m Average number of products per customer 13.3p from 8.6p 7.2p from 4.1p 2.51 from 2.63 22 Our culture drives our performance The importance of good corporate governance in the business Strategic Report 02 Highlights of our journey 04 Our business at a glance 06 Chairman’s Statement 08 Group Chief Executive Officer’s Strategic Review 11 Our target market overview 13 Our business model 14 Our strategy 16 Our strategic priorities 22 Our resources and relationships 28 Our principal risks and uncertainties 33 Divisional Review 38 Group Chief Financial Officer’s Review Governance 50 Corporate Governance Statement 50 Chairman’s Statement 52 Compliance Statement 56 Leadership 60 Board of Directors 62 Effectiveness 64 Nomination Committee Report 66 Accountability 70 Audit Committee Report 74 Risk Committee Report 77 Relations with shareholders 78 Directors’ Remuneration Report 78 Annual statement 80 At a glance 82 Directors’ Remuneration Policy 92 Annual Report on Remuneration 101 Directors’ Report 106 Independent auditor’s report Financial statements 113 Consolidated income statement 114 Consolidated statement of comprehensive income 115 Consolidated statement of financial position 116 Consolidated statement of changes in equity 117 Consolidated statement of cash flows 118 Notes to the consolidated financial statements 176 Company financial statements 178 Notes to the Company financial statements Additional information 183 Shareholder information 184 Glossary WWW.SAGA.CO.UK ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 SAGA PLC 01 Strategic ReportHIGHLIGHTS OF OUR JOURNEY A year of progress We delivered both customer and profit growth during the year. 14.9% Core motor policies sold Read more on page 34 8.5% Core insurance policies sold Read more on page 34 02 SAGA PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 2.3% Core home insurance policies sold Read more on page 35 Anne Ware, Travel Sales Adviser, Saga Holidays 9.9% Number of holidays passengers Read more on page 36 3.5pts Motor combined operating ratio Read more on page 34 339k Ship passenger days delivered on our award winning cruise ships Read more on page 36 ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 SAGA PLC 03 Strategic Report OUR BUSINESS AT A GLANCE Saga celebrates its 65th anniversary this year, and has become the UK’s leading business focusing purely on the over 50s. Business areas Insurance Our award winning insurance business is the largest part of the Group, providing tailored products and services ranging from motor to pet insurance to over 2m customers per year. Operations • Insurance • Underwriting Read more on page 34 Travel Our award winning travel business is at the heart of the Saga brand, taking over 250,000 passengers a year all over the world on package holidays, escorted tours and cruises. Operations • Saga Cruises • Saga Holidays • Titan • Destinology Read more on page 36 Emerging businesses Emerging businesses includes our personal finance, homecare, publishing and printing operations as well as new development areas for the long-term growth of the business. Operations • Personal finance • Saga Investment Services • Homecare: Saga Homecare, Patricia White’s, Country Cousins, Saga SOS • Saga Publishing • MetroMail • Retirement villages Read more on page 37 04 SAGA PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 The Saga Model What differentiates Saga and what makes customers choose us over other providers. The Saga Model drives our ongoing success: A great brand: a trusted brand with 97% recognition amongst the UK’s over 50s, allowing us to provide added value, fairly priced products across multiple categories. Investment case Targeting a growth demographic The over 50s are the fastest growing demographic in the UK. In 2013 there were 22.8m over 50s1, a number that is forecast to grow by 27.6% to approximately 29.1m by 20331, meaning they will represent 40% of the UK’s population1. The 65-75 and 75+ segments are predicted to increase at an even greater rate over the same period, by approximately 34% and 70% respectively1. This is important, as those aged 65 or over are particularly strong contributors to the success of the Group. Go to page 11 for more information A strong, capital efficient business model Saga is focused on the development of products and services specifically for our customers. We then find the best way to create those products, be it in-house or teaming up with a best in class partner to produce them to our exacting standards. Differentiated products: we listen to our 2.7m customers and the 11.2m people on our database to gain insight and tailor products and services specifically for them. Unique route to market: direct access to 11.2m individuals through our database across multiple channels. Outstanding service: our customers know what good service looks like, expect the best, and recognise it when they get it. In a majority of cases, Saga uses third party providers, meaning we have very little capital at risk and are afforded some protection against the impact of market conditions. In the year to January 2016, 77% of all our trading profit was generated by activities where we had no capital at risk. Go to page 13 for more information Consistent financial delivery and cash generation Group profits have grown year-on-year for the past five years. Our capital efficient business model also means we are highly cash generative, with the majority of our profit after tax converted into cash after tax. This gives us the flexibility to continue to grow whilst paying down debt and growing long-term returns to shareholders via our progressive dividend policy. Go to page 40 for more information Growth potential in the core businesses of insurance and travel Our award winning core businesses of insurance and travel are well placed to grow from relatively modest shares of the market for the UK’s over 50s. We have delivered growth across our core business this year and have a clear strategy in place for growth in the future. Go to page 34 for more information Growth options for the future We are continuing to identify and assess new development areas for the long-term growth of the business. Our activities include the development of our recently launched investment management business, Saga Investment Services, and our ongoing pilots in homecare and retirement villages. Go to page 37 for more information Profit growth, cash generation and sustainable shareholder returns 1 ONS population projections, CEBR analysis. Our strategy 1. Unlocking growth in core businesses of insurance and travel Go to pages 8,19 and 20 for more information 2. Investing in future growth Go to pages 8, and 20 for more information 3. Maintaining our simple and efficient operating model Go to page 8 for more information Strategic priorities for the coming year 1. Becoming an ever more 4. Investing for future growth customer-centric organisation Go to page 20 for more information Go to page 18 for more information 2. Growing our insurance businesses 5. Developing our people Go to page 19 for more information Go to page 21 for more information 3. Growing our travel businesses Go to page 20 for more information ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 SAGA PLC 05 Strategic Report CHAIRMAN’S STATEMENT Strategic and financial delivery leading to enhanced shareholder returns Andrew Goodsell Chairman 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. 06 SAGA PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 Governance highlights We built on the governance structure established last year – our governance framework supports and sets the tone for the strategic direction of the business. Our processes ensure good stewardship whilst allowing us to grow. First AGM held in June 2015 – all resolutions passed with a significant majority and all directors standing for re-election re-appointed. We now comply with the Corporate Governance Code 2014 ('the Code') recommendation that half of the Board are independent Non-Executive Directors. We conducted our first Board and Committee evaluation exercise and agreed action plans to focus on areas of development. Go to page 50 for more information on our governance. Hazel Matthius, Cruise Adviser, Saga Holidays Our proposed total dividend for the year of 7.2p equates to a payout ratio of 57% of net earnings1, 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. Andrew Goodsell Chairman 18 April 2016 1 57% of net earnings excluding the one-off benefit of tax losses acquired from Acromas. ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 SAGA PLC 07 Strategic Report GROUP CHIEF EXECUTIVE OFFICER’S STRATEGIC REVIEW Implementing our clear strategy for growth 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. 3. Maintaining our simple and efficient operating model — Our model continues to generate strong cash flows. — We have undertaken a review of the capital allocated to our underwriting business. — We have disposed of a non-core asset, Allied Healthcare. 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. 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. “ We have continued to grow our core businesses and invest in future growth whilst maintaining our efficient operating model.” 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. 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. 08 SAGA PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 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 Lance Batchelor Group Chief Executive Officer 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 Go to page 18 for more information. 2. Growing our insurance businesses Go to page 19 for more information. 3. Growing our travel businesses Go to page 20 for more information. 4. Investing for future growth Go to page 20 for more information. 5. Developing our people Go to page 21 for more information. ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 SAGA PLC 09 Strategic Report GROUP CHIEF EXECUTIVE OFFICER’S STRATEGIC REVIEW CONTINUED 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 delever our plans for future growth. 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 The right mix Introducing our Executive Management Team 1. Karen Caddick Group HR Director 2. Jules Christmas Group IT Director 3. Roger Ramsden Chief Executive, Insurance 4. Andrew Button Chief Executive, AICL 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. Lance Batchelor Group Chief Executive Officer 18 April 2016 5. Jonathan Hill Group Chief Financial Officer 6. Lance Batchelor Group Chief Executive Officer 7. Matt Atkinson Group Chief Marketing Officer 8. Nici Audhlam-Gardiner Managing Director, Saga Investment Services 9. Andrew Strong Chief Executive, Travel and Wealth Management 4 7 1 2 6 8 3 9 5 10 SAGA PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 MARKET OVERVIEW Overview of our target market As pointed out in the investment case on page 5, the over 50s are the fastest growing demographic in the UK. The over 50s are also the most affluent and influential individuals in the UK with varied, complex and evolving needs and a very clear view on what good customer service looks like. They own 68%1 of the UK’s household wealth and account for nearly 40%1 of the UK’s household expenditure. We work constantly to understand and cater for this group and provide products and services across multiple categories including insurance, travel, personal finance and publishing. Macro conditions While the over 50s are not immune to macro events, they tend to be more resilient during times of economic stress. This is because they tend to rely on pensions, savings and pools of acquired assets. This is especially true for the ABC1 households, which form the core of Saga’s target customer base. Factors which further enhance this economic resilience include: — Low debt levels — Fewer fixed costs — Younger members of this group benefiting from inheritance from the older ones Projected growth of the UK’s over 50s 35% of the population 40% of the population 1993 2003 2013 2023 2033 2013-2033 Growth i n c r e a s e c . 7 m 26.7m 10% 10% 29.1m 12% 73% 11% 39% 20.0m 8% 8% 22.4m 8% 9% 18.1m 7% 9% 15% 18% 18% 19% 17% 77% 40 30 20 10 0 Age group 50-65 65-75 75+ Our core businesses of insurance and travel are, however, linked to the economic cycle, and there is a possibility for altered behaviour amongst our customers depending on the stage of the cycle. In suppressed economic conditions for example, the frequency and severity of motor insurance claims have a tendency fall as people drive less. Whilst we have not seen this from our customer base in the past twelve months, the opposite can also be true, with increasing economic activity and lower fuel prices leading to more miles being driven and an increase in the frequency and severity of motor insurance claims. During a longer downturn, as consumers come under increasing pressure, some may choose to downgrade their level of insurance cover, or withdraw from certain insurance products entirely. In the travel sector, consumers may choose to travel less or purchase cruises and holiday packages with lower price tags. Given its entirely discretionary nature, some consumers may cease to take cruises or holidays altogether. Source: CEBR (Centre for Economic and Business Research), based on the ONS wealth and assets survey (WAS), Ipsos MORI and ONS, Cebr Analysis. 1 CEBR (Centre for Economic and Business Research), based on the ONS wealth and assets survey (WAS), Ipsos MORI. ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 SAGA PLC 11 Strategic Report MARKET OVERVIEW CONTINUED Saga however does have the advantage of only focusing on serving the needs of the over 50s, allowing us to differentiate our offering from competitors who need to provide products and services that work for customers of all ages. This, in combination with our focus on growth across the Group, means we are in a strong position to leverage our model to continue to grow profitably our market share throughout all our operating divisions, and capitalise on the new opportunities we identify. During a period of strong economic activity, demand for discretionary style products, such as all our travel products, and some insurance products, such as private medical and home insurance, may increase. Consumers’ appetite for more sophisticated products with superior levels of cover may also increase. Similarly, consumers will tend to opt for more expensive holidays, or take more holidays on an annual basis. Regulatory and political change The over 50s in the UK are highly influential politically, as they tend to form a larger proportion of the active electorate than other segments of the population. We aim help our customers by engaging on the issues that impact them most. Where relevant, we aim to provide new products and services that support them following times of regulatory change, such as Saga Investment Services. Saga as a regulated business Saga operates in regulated sectors, notably in financial services and travel. The regulatory environment is continuously evolving and Saga maintains excellent relationships with its regulators in order to ensure that we remain abreast of any changes that could impact our operations. We take our responsibility towards our customers seriously and strive to go the extra mile for them. We recognise that some may need extra help. This additional support ranges from contacting those who haven’t changed their policy details for a number of years, in order to make sure their insurance needs haven’t changed, to identifying vulnerable customers and providing them with a dedicated team to assist with any claim they might make. The competition for customers Saga operates across multiple sectors, but we have modest market shares in all of our sectors and compete with multiple providers. Whilst we have a strong position and are growing customer numbers, we do not have a monopoly when it comes to the UK’s over 50s, whose substantial buying power is attractive to all market participants. 12 SAGA PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 OUR BUSINESS MODEL The Saga Model The Saga Difference Saga exists to make the lives of retired people better. At the heart of our business model, therefore, is our drive to know more about our customers’ wants and needs than anyone else so we are best placed to serve them. Based on our insight, we design the products and services that our customers want. We then decide the best way to produce them, either in-house or through a third party provider. This decision is based upon a number of factors including: the best outcome for the customer, how best to access specialist skills and knowledge, and the best use of capital. Where third parties are used, our partners sign up to provide a Saga product, designed and tailored specifically for our customers and delivered to Saga specified levels of customer service. In a majority of cases, Saga uses third party providers, meaning we do not have any capital at risk. One of our core skills is the ability to manage our partners’ provision of products and services to Saga customers. We constantly monitor customer service feedback and quality and will, where necessary, change providers to ensure customers receive the Saga experience however they interact with us. These products and services are delivered, through The Saga Model, the things that define our business: A great brand: a trusted brand with 97% recognition amongst the UKs over 50s, allowing us to provide added value, fairly priced products across multiple categories. Differentiated products: we listen to our 2.7m customers and the 11.2m people on our database to gain insight and tailor products and services specifically for them. Unique route to market: direct access to 11.2m individuals through our database across multiple channels. Outstanding service: our customers know what good service looks like, expect the best, and recognise it when they get it. Saga’s flexible and capital efficient model has a strong track record of resilience and growth. It allows us to access the very best providers of products and services in any given market, to enter new markets very quickly and, with no capital at risk in the majority of cases, provides some protection against the impact of market conditions. The breadth of our offering also provides protection against product specific risks, allowing us to focus our resources on the areas of the business that have the most potential for growth. Our capital efficient business model also means we are highly cash generative, with the majority of our profit after tax converted into cash. This gives us the flexibility to continue to grow whilst paying down debt and growing long- term returns to shareholders via our progressive dividend policy. Source of Trading Profit1 l Broked and other – 77% l Manufactured – 23% 23% 77% 1 Manufactured is Trading Profit from AICL Underwriting, Cruising, Healthcare, Media and Central Costs, broked and other is Trading Profit from all other operations. Trading Profit by Division2 l Home insurance – 27% l Motor insurance – 50% l Other insurance – 13% l Holidays – 5% l Cruising – 3% l Emerging businesses – 2% 3% 2% 5% 27% 13% 50% 2 Excluding Central Costs. ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 SAGA PLC 13 Strategic Report OUR STRATEGY Clear strategy KPIs Strategic delivery Year ending 31 January 2016 1. Unlocking growth in our core businesses of insurance and travel 2. Investing in future growth 3. Maintaining our simple and efficient operating model Active customers 1. Unlocking growth in our 2.66m 2.63m core businesses of insurance and travel Average number of products 2.51 Trading Profit 2.63m £211.0m 5.2% Profit before tax £176.2m 54.8% — Delivered customer growth across all of our key insurance lines, supported by our expanded insurance footprint through the motor panel launch. — Increased passengers in our tour operating business and increased the utilisation of our ships. — Put the right team in place to make more of our database and deliver our multi-channel marketing activities. 2. Investing in future growth — Announced our investment in new shipping capacity which will significantly change the profit trajectory of our travel business once delivered. — Saga Investment Services up and running ahead of the key end of tax year period. — Successful pilots are ongoing in new Earnings per share product areas. 13.3p from 8.6p Dividend per share 7.2p Available operating cash flow £178.1m Debt ratio 2.3x 75.6% 9.3% from 2.6x 3. Maintaining our simple and efficient operating model — Model continues to generate strong cash flows. — Undertaken a review of the capital allocated to our underwriting business. — Disposed of a non-core asset, Allied Healthcare. 14 SAGA PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 Measuring success Strategic priorities Year ending 31 January 2017 i S t r a t e g c R e p o r t Core insurance policies sold 1. Becoming an ever more 2,908k Holiday passenger days 189k 8.5% 9.9% Core trading profit from insurance and travel £230.3m 9.1% SIS up & running by key tax season Announced investment in new shipping capacity Motor panel launched 5 underwriters in place Quota share signed post year end 75% of risk in AICL reinsured customer-centric organisation Read more on page 18 2. Growing our insurance businesses Read more on page 19 3. Growing our travel businesses Read more on page 20 4. Investing for future growth Read more on page 20 Sale of Allied Healthcare 5. Developing our people Read more on page 21 ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 SAGA PLC 15 Delivering our Our strategy has been developed to deliver long-term shareholder value through growth in the core businesses and capitalising on the long-term value identified in our new business opportunities. These are our strategic priorities for the coming year. They build on our achievements so far and are the next step in the long-term delivery of our strategy. DELIVERING OUR PRIORITIES CONTINUED 1. Becoming an ever more customer- centric organisation Over 65 years, we have built up a very deep understanding of our customers and our target demographic. Traditionally, this insight has been used to develop products and gauge important characteristics of the customer, such as propensity to buy travel products and renewal dates for insurance policies. With our new marketing team in place, we have the capability to do much more with the data we have at our disposal. Our aim is to make Saga a truly customer-centric organisation, allowing us to respond even more effectively to our customers’ wants and needs and help them to put more of Saga in their lives. At the heart of these plans is an understanding of how our customers are changing and how we are adapting to meet their needs. By focusing on the way a customer’s life changes up to and in retirement, we have an opportunity to build on our current strong position to ensure our relevance and appeal to our target market in the future. Our plan for delivery is multi-faceted and includes: — 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. Understanding the customer has always been at the heart of what we do in order to provide leading products and services. Our renewed focus on the customer’s journey towards retirement gives us the opportunity to enhance this approach to help ensure Saga remains the UK’s chosen provider for customers that are in, or thinking about, retirement, well into the future. 18 SAGA PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 Ashleigh Hatton, Performance Consultant, Performance Support Team, Saga Holidays 2. Growing our insurance businesses As the largest part of the business by customer numbers and earnings, our insurance operations play a vital role in the delivery of growth across the Group. Our business model provides us with the flexibility to balance growth in customer numbers and profit across our insurance business, depending on market conditions or our strategic aims. To deliver long-term growth for the Group, we have targeted growth in customer numbers and have delivered policy growth across all of our major insurance lines in the past year. We will continue to build our insurance customer base and encourage loyalty amongst these customers with the aim of increasing the average number of products held, both within our insurance business and across the Group. Much of this growth will be driven by the development of the motor insurance panel, allowing us to provide competitive quotes for a broader range of customers than we could in the past. Additionally, we will continue to improve our product propositions through enhanced customer insight and understanding, allowing us to further differentiate our products from the broader marketplace. Finally, we are focusing on engaging with our customers on a multi-channel basis to ensure our customers receive the same Saga experience regardless of how we interact. We are therefore working across the Group to ensure a joined up, easy, personal and engaging customer experience through whichever channel (in person, by phone, by letter or digitally) our customers are most comfortable with. ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 SAGA PLC 19 Strategic Report DELIVERING OUR PRIORITIES CONTINUED 3. Growing our travel businesses Matt Shearman, Holiday Sales Adviser, Saga Holidays Our travel business lies at the heart of our brand. It enables customers to experience Saga levels of service and dedication in a unique way that many of our competitors are unable to replicate. Growth across the travel business will come from the delivery of more targeted and sophisticated products, making Saga’s travel offerings more contemporary through the development of new and differentiated propositions. We will work to leverage these new propositions through marketing initiatives that help to attract new customers, particularly through the enhanced use of digital channels as our target customers become more digitally active. Within our cruising business, we will maintain the highest possible standards of customer experience on both the Saga Sapphire and the Saga Pearl II. 4. Investing for future growth The majority of our short-term growth will come from continuing to unlock the potential in our core businesses of insurance and travel. At the same time, however, we are putting in place the building blocks that will support Saga’s long-term growth plans. Some of these opportunities are well progressed; others are potentially exciting but may not progress beyond the pilot stage. As always, we monitor progress extremely carefully to ensure that we can deliver a product or service that fits within The Saga Model and surprises and delights our customers. New ships: In September 2015 we announced our decision to enhance our excellent cruise business by updating our shipping capacity. In the year ahead we will be working alongside our partner Meyer Werft to finalise the design of the ship to ensure its delivery in 2019. The new ship will be transformative for the operating efficiency and profitability of our cruising business. We expect cruises on the new ship to be on sale from 2017. Saga Investment Services: With high street banks and independent financial advisers continuing to withdraw from the advisory space in the face of increased regulatory pressures, we identified a significant gap in the market for quality financial advice from a trusted provider. In November 2015 we launched Saga Investment Services, our investment management joint venture with Tilney BestInvest, to fill this gap. The business offers everything from SIPPs to a personal advisory relationship, with all products transparently and fairly priced. Our aim is to grow Saga Investment Services to become, in time, a meaningful contributor to our earnings. New opportunities: We continue to identify gaps in the market where the UK’s over 50s could be better served through the implementation of the Saga Model. We test these opportunities through a series of pilots such as the ones we are currently running in private pay homecare and retirement villages. This allows us to gauge their potential before slowly scaling the business up into a meaningful profit contributor. In the coming year we will continue to asses our current pilots and, subject to them proving their viability on a larger scale, start to expand them further. 20 SAGA PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 5. Developing our people Our people are central to everything we do and as such, their ongoing development plays a key role in the successful delivery of our strategy. We now have a strong team in place throughout the business and last year we started to put in place the tools we need to support their development and enhance their engagement, ensuring we maximise the talent we have. The implementation of ‘The Saga Way’ will continue, making it a key responsibility for every leader within the business. We will also increase our investment in leadership and management capability across our Executive Team, our top team and all senior leaders within the business. Mackenzie Carne, Service Delivery Development Team Assistant, Saga Insurance ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 SAGA PLC 21 Strategic Report OUR RESOURCES AND RELATIONSHIPS Our culture drives our performance Rebecca Johncock, Cruise Adviser, Saga Holidays O ur values inform who we are and how we work – they are brought to life every day by our people. There are a number of key assets, beyond the financial, which are vital to the functioning of our business and the delivery of our strategy. Brand 65 years ago our founder, Sidney De Haan, identified that retired people had different travel needs. Ever since, Saga has continued to focus on understanding their wants and needs. We have used this insight to create a range of high-quality products and services, which have delivered sustained growth. This is aided by the high regard and warmth felt for the Saga brand. Saga is now one of the UK’s most recognised and trusted consumer brands and is synonymous with the over 50s market. We are known for quality products and services, and excellence in customer service. We achieve high levels of repeat business and acquire new customers without needing to rely heavily on costly third party advertising. Our focus on a personal, more direct approach is appreciated by our customers, as is the fact that people can deal with us in the way that suits them. 22 People Saga’s success relies upon having highly engaged employees committed to delivering exceptional service to our customers. Building exceptional engagement requires a positive high- performing culture and at Saga we see  this as a key priority of leadership. In 2015 we were delighted to see a significant improvement in our employee engagement levels which are now over 80%, above the UK norm, and we have plans to improve this further. We made big strides forward in 2015 in building a comprehensive employee communication strategy. We have a suite of two-way communication forums to ensure we are really listening to the views and opinions of our people on how we can continue to improve Saga for staff and customers. We also made significant improvements to our employee benefits with an issue of free shares to all of our people in July 2015 to enable them to share in our success and also to align them with our continued growth and profitability. We also launched a new Share Incentive Plan and we are delighted with participation levels. Strong alignment of our employees with our business success is really important to us. In 2015 we also launched the ‘Saga Way’, which crystallises the culture we want at Saga with a strong emphasis on exceptional customer care and giving our people a strong voice in ensuring that we consistently deliver. Our culture is focused on allowing people to be brave, challenging ourselves to deliver the best customer service throughout Julie Birchmore, Holiday Sales Adviser, Saga Hoidays our business and supporting each other to do our best work. Building this high-performance and high-support culture is a key part of every leader’s responsibility at Saga. We continue to invest in our leadership and management capability. In 2015 we improved our approach to reviewing talent at all levels of our business. We have clear plans in every team to accelerate development and allow people to fulfil their potential. We are also focused on enabling people to develop across different parts of our Group, because we know that this diversity of experience is great for our people and our customers. The Saga Way Academy continues to deliver high-quality training, linked to our business plans, for all of our employees. Diversity and having an employee base that brings different perspectives, backgrounds and ways of thinking is very important to our business and we aim to make this easier to deliver by providing flexible working. We help people to grow through biannual performance development reviews and career planning discussions – the latter have just been introduced this year. Our open and supportive culture also encourages people to speak up if they have issues that they want to raise, and we support this with whistleblowing arrangements that are regularly communicated. Our goal is to be the best employer in the South East and beyond and we have strong leadership commitment with a clear plan to deliver this. ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 SAGA PLC 23 Strategic Report OUR RESOURCES AND RELATIONSHIPS CONTINUED Gender diversity January 2016 Board1 Senior managers2 Employees3 Male Female Actual % Actual 7 95 1,980 78% 65% 44% 2 51 2,499 % 22% 35% 56% Total 9 146 4,479 1 Directors of the Company including executive and non-executive. 2 All divisional Board Directors, and employees with strategic input and influence. 3 All Saga employees (including Directors and senior managers). John Freeman, Sales Adviser, Retirement Villages Human rights Saga conducts business in an ethical and transparent way. Policies to support recognised human rights principles include those on non-discrimination, health and safety and environmental issues. Saga has a zero tolerance approach to bribery and corruption. Health and safety Saga is committed to protecting the health, safety and welfare of employees, customers and anyone affected by our operations. We have a positive health and safety culture and seek to continuously improve health and safety performance. We meet our obligations through the development and implementation of suitable policies and procedures. Beyond this, everyone in Saga has a personal responsibility for health and safety and for performing the activities they undertake in a safe manner and this is regularly communicated. Community and social Saga is a major employer in Thanet, Folkestone, Hastings and Redhill. We recognise our responsibilities to the communities from which we draw potential recruits and also aim to be a good neighbour to local residents. We have made donations to Safer Kent, a local crime prevention charity, and provided raffle prizes for local community groups. The Saga Pavilion is used by local organisations, which this year have included the Children’s Trust, the MS Society, orchestral and choral societies and sports associations. At the weekend the Enbrook Park HQ car park is open for those visiting local shops, and the farmers’ market uses the site twice a month. The grounds and woods at our sites are well maintained and open to the public. A new public footpath has been created through Enbrook Park and a local Scout group has established various habitats to encourage wildlife. Saga has a strong social commentary and campaigning aspect to its brand reflecting and giving voice to the concerns of the nation’s over 50s. This is achieved through a mix of published research, public policy campaigns and news commentary. This builds a reputation for being an insightful and trusted voice with the media and policy makers for the concerns of those approaching or in retirement. During the 2015 General Election, all party leaders were interviewed in Saga Magazine and the Prime Minister launched his manifesto for older people at an event for Saga customers at our Hastings office. The Saga Respite for Carers Trust provides holidays for family carers, and the Saga Charitable Trust, which celebrated its 30th anniversary in 2015, supports projects in countries that our holiday customers visit. Keely Berwick, Holiday Sales Adviser, Saga Holidays 24 SAGA PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 Our people and customers also donated significant sums towards helping victims of the Nepal Earthquake in April 2015 and Saga Charitable Trust provided matching funding. A £50,000 donation to the Gurkha Welfare Trust was made by Saga Charitable Trust at last year’s AGM. As one of the inaugural signatories of the Ministry of Defence’s Corporate Covenant, Saga has shown a strong commitment to staff who are in the reserve forces and for service families. We also support local air, sea and army cadets and hold an Annual Armed Forces Day staff BBQ that has raised money for: the Royal British Legion; the Soldiers, Sailors, Airmen and Families Association; and Help for Heroes. Our contact centres were used for both Comic Relief and Children in Need – which saw teams from around the Company manning the phones to take donations. Supplier partnerships These relationships are fundamental to our business model. We work very closely with our suppliers to deliver the products and services to the standard our customers expect. Once we have designed and tested products and services, we decide how best to source them for our customers – in-house or from a third party. We are not a commission-based business. We design bespoke products ourselves then look for the best possible partners to supply them, comparing them for service and value. Over time we can move if more appropriate, or better, partners become available. Our partners work with us in this way because it is a mutually advantageous relationship – they benefit from our brand, customer knowledge and access to an attractive target market. Saga, and its customers, benefit from our partners’ expertise and resources. This also means that we maintain responsibility for delivery and continue to own the relationship with our customers, ensuring we can manage the customer experience at all times. Database and technology Our multiple customer interactions across a broad range of products and services over many years have enabled us to develop a sophisticated proprietary Group Marketing Database. Data security and the threat of cybercrime are key issues and these are covered in the Principal Risks and Uncertainties section on pages 28-32. Ships Our ships are subject to an ongoing programme of refurbishment and refits to ensure a continued safe and efficient operation and an environment that meets our customers’ exacting standards and expectations. The cruise experience is the embodiment of Saga’s focus on the needs of our customers and gives us an opportunity to connect with customers in a way that none of our financial services competitors can hope to achieve. Environment The Group is sensitive to its environmental impact and aims to operate in a manner that minimises negative impact, such as waste sent to landfill, and invests in activities which have a positive impact on the environment, such as improved energy efficiency. We strive for continuous improvement of our operations to reduce any potential impact our business may have on the environment. Saga promotes green travel options and has a network of Saga minibuses that take people to and from its sites, and we also promote a cycle to work scheme. This database now contains highly relevant data for 11.2m people and 9.1m households, covering over 50% of over 50s households and over 60% of over 50s ABC1 households in the UK. Saga has a consistent focus on data collection and we are constantly re-confirming the data we gather through over 128m interactions per year. By selling products and services directly to customers, we capture information at every point of contact and build a view of the customer and changes in behaviour over time. Our data analysts are then able to perform sophisticated analysis such as customer segmentation and propensity modelling, resulting in targeted marketing. This allows us to introduce appropriate products and services to customers in a highly efficient manner with relatively low customer acquisition costs. Importantly, our database is exclusive to us: we do not share the information with third parties for marketing purposes. Our main IT systems are developed, supported and maintained in-house, as many of the systems are a key source of our competitive advantage. Most of our operating systems are adapted to each business segment, so application support is administered by decentralised segment-specific support functions. In contrast, most of our IT infrastructure, such as telephony switches, data networks and server rooms, are maintained by centralised support functions. ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 SAGA PLC 25 Strategic Report OUR RESOURCES AND RELATIONSHIPS CONTINUED Greenhouse gas emissions report This section has been prepared as per Section 7 of The Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013. During the the year ending 31 January 2016, the Group emitted a total of 102,261 tCO2e from fuel combustion (Scope 1 direct) and electricity purchased for our own use (Scope 2 indirect). This is equivalent to 106.2 tCO2e per £m revenue. We voluntarily report Scope 3 emissions arising from business travel, which contribute 1,637 tCO2e. The table below shows our greenhouse gas (GHG) emissions for the year ended 31 January 2016. Greenhouse gas emissions in tonnes of carbon dioxide (tCO2) or carbon dioxide equivalent (tCO2e) Emissions source Scope 1 Scope 2 (location-based) Total Scope 1 & 2 tCO2e per £m revenue Scope 2 (market-based)* Scope 3 2015/16 Emissions 2014/15 Emissions 96,026 tCO2e 6,235 tCO2e 102,261 tCO2e 106.2 1,078 tCO2 1,637 tCO2e 104,734 tCO2e 7,038 tCO2e 111,772 tCO2e 124.1 n/a 1,694 tCO2e * Employee FTE Emissions from the consumption of electricity outside the UK and emissions from purchased electricity calculated using the market-based approach using supplier-specific mission factors are reported in tCO2 rather than tCO2e due to the availability of emission factors. Methodology We quantify and report our organisational greenhouse gas emissions in alignment with the GHG Protocol, which includes alignment with the new Scope 2 Guidance. The UK Government 2015 Conversion Factors for Company Reporting have been utilised in order to calculate Scope 1, Scope 2 (Location-based) and Scope 3 emissions from corresponding activity data. Reporting boundaries and limitations We consolidate our organisational boundary according to the operational control approach and have adopted a materiality threshold of 5% for GHG reporting purposes. Due to poor data accuracy and a lack of operational control, emissions from non-owned buildings fall outside of the organisational boundary and are reasonably estimated to fall below the 5% materiality threshold. Similarly, emissions from diesel combustion within building generators are reasonably estimated to be less than 5% of our total footprint and have not been included in our disclosure. The GHG sources that constitute our operational boundary for the 2015-16 reporting period are: — Scope 1: Natural gas combustion within boilers, marine fuel combustion within ships, road fuel combustion within vehicles, fuel combustion within non-road mobile machinery and fugitive refrigerants from air-conditioning equipment — Scope 2: Purchased electricity consumption for our own use — Scope 3: Business travel from grey fleet Assumptions and estimations During the year Bennett’s was acquired and Allied Healthcare was sold. Emissions have been calculated for these entities pro rata. In some cases, where data is missing, values have been estimated by extrapolation of available data from the reporting period or data from 2014 as a proxy. — No data was available for Allied Healthcare’s business travel, so an estimate has been calculated from the previous year’s data. — Where the fuel type information was not available, it has been assumed to be diesel for the purpose of emissions calculations. Total location-based emissions (2015/16) 1. Scope 1 – 92% 2. Scope 2 – 6% 3. Scope 3 – 2% 2 13 6% 2% 92% 26 SAGA PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 Scope 2 emissions by methodolgy 7000 6000 5000 4000 3000 2000 1000 0 6,235 tCO2e 1,078 tCO2e Location- based 2015-2016 Market- based 2015-2016 Dual reporting of Scope 2 emissions The new Scope 2 Guidance in the GHG Protocol requires that we quantify and report Scope 2 emissions from purchased electricity consumption for our own use using two different methodologies: the location-based method, using average emissions factors for the country in which the reported operations take place, and the market-based method, which uses the actual emissions factors of the energy procured. This is known as dual reporting. Please see below for further details of these methodologies. The graph below shows the Group’s Scope 2 emissions from purchased electricity, which have been calculated using the two different methodologies. Saga purchases electricity for the majority of their buildings from a 100% renewable supply from Haven Power. The remainder of the UK electricity is supplied by SSE which has a cleaner fuel mix than the UK average. The dual reporting of our emissions in this way demonstrates the impact that selecting these suppliers has on our greenhouse gas emissions, and that we are making efforts to reduce our climate impact through the purchase of electricity generated from cleaner sources. Improving performance We have continued to monitor and measure our carbon impact in 2015-16 following our first annual emissions report last year. In 2015, Saga was short-listed by the Carbon Disclosure Project (CDP) in the category of ‘Best first time responder’ and we aim to further improve our score. We have taken steps to improve our energy and carbon performance: as part of compliance with the UK Energy Savings Opportunities Scheme (ESOS), we have identified a number of measures to further reduce energy use in buildings and ships in particular and are in the process of implementing the next steps to realise these savings. Total emissions for the year ending 31 January 2016 have reduced compared with the year ending 31 January 2015 by approximately 8%. This is largely due to an 8% reduction in the emissions associated with Marine Fuel, which contribute over 87% of Saga’s Scope 1, 2 & 3 total emissions. Within the two cruise ships that we own and operate, Saga have been implementing a number of fuel efficiency measures, these include designing itineraries at lower speeds, reducing the use of stabilisers, and replacing lightbulbs with LEDs. There has also been an annual reduction in building energy consumption, which can partly be attributed to the sale of Allied Healthcare, as well as a reduction in the use of road fuel. ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 SAGA PLC 27 Strategic Report OUR PRINCIPAL RISKS AND UNCERTAINTIES Strong risk management at the heart of our approach Risk governance We have agreed with the Board systems and processes to govern our approach to risk management. These systems specifically encompass: ensuring an effective risk assessment and management system is in place; agreeing the principal risks and uncertainties the business should accept in pursuit of its strategic objectives and regularly reviewing the status of these; ensuring a suitable risk culture is embedded throughout Saga; and frequently assessing the effectiveness of the Group’s risk management systems, including essential levels of internal and external risk communication. Our approach and these processes are set out in more detail in the Accountability section of our Corporate Governance Statement on pages 66-69 of this annual report. We believe that enhanced sustainability and shareholder value will come through achieving the optimum balance between risk and reward. Our four divisions face a range of risks and uncertainties that could impact their strategic objectives, some common to the Group as a whole and others unique to the particular business or operation. It is therefore imperative to have a risk management policy and framework capable of assessing and monitoring these risks and uncertainties individually and in aggregate against an agreed risk appetite to ensure management within agreed tolerances. Risk appetite Our risk appetite, reviewed annually, defines the amount and sources of risk which we are willing to accept in pursuit of our objectives. We express our overall attitude to risk using the following dimensions: Financial strength We aim to maintain an appropriate buffer of capital resources within the Group and, where relevant, within our legal entities, to ensure that we are able to absorb reasonable operational variation and meet regulatory thresholds. Earnings volatility We have low appetite for volatile earnings and have established limits representing the maximum amount of acceptable variation in earnings during our planning cycle. Conduct/reputation We recognise that our continued success depends on maintenance of our brand, and reputation for quality service. We therefore have zero appetite and a very low tolerance for brand and reputation risks and will look wherever possible to eliminate them. We have zero appetite and very low tolerance for systemic unfair customer outcomes as a result of failures in the product, marketing, sales or service delivery systems and processes, or cultural shortcomings. Customer growth Our goal is to know as many of our target customers as possible so we have low appetite for actions or events which lead to a low growth or reduction in the number of our customer contacts. We further describe our attitude towards the following main categories of risk that we encounter through carrying out our business: Market risk We seek some market risk through our investment activity and seek to earn returns commensurate with our risk appetite. We have limited appetite for foreign exchange risk, commodity price movements and interest rate movements and actively manage these to reduce risk where possible. Credit risk Our practice of working with external counterparties, such as intermediaries, risk management activity (such as reinsurance and hedging) and deposit making introduce elements of credit risk. We have a low appetite for credit risk but are prepared to accept it to some extent where it is necessary to achieve our business objectives. Liquidity risk Through our daily operations we are exposed to needs for liquidity and we have a low appetite for this risk. We will therefore accept, but actively seek to manage, liquidity risk to ensure a minimum financial buffer is maintained in pursuit of our objectives. 28 SAGA PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 “ Our risk appetite, reviewed annually, defines the amount and sources of risk which we are willing to accept in pursuit of our objectives.” Health and safety We have zero appetite and a low tolerance for health and safety risks and we will do all that is reasonably practicable to prevent personal injury and danger to the health of our employees, customers, and others who may be affected by our activities. Cyber security We recognise the need to utilise technology to achieve our business objectives. We are, however, focused on maintaining a robust and secure IT environment, with particular attention being paid to avoiding loss of customer, employee and other business confidential data, and interruption of customer service. We therefore have zero appetite and very low tolerance for risks that could breach our security measures and threaten the security of our systems and data. Separate risk appetite statements and risk tolerance thresholds have also been created for each business in Saga, customised to their business needs and complementary to the Group’s tolerances. Risk appetite statements and risk tolerances are central to our decision making processes and are a point of reference for all significant investment decisions. Insurance risk We actively seek measured amounts of insurance risk in business lines where we have appropriate expertise and expect to be appropriately rewarded for accepting the risk. We will accept limited insurance risk for personal injury risks that we feel we have the expertise to underwrite and manage and will accept non-life insurance risks that we have the relevant expertise in. Strategic risk We operate in a dynamic business environment and accept that we are exposed to a number of strategic risks. We will actively seek to grow our business in areas which present sustainable growth opportunities and where we have demonstrable expertise. Mergers and acquisitions risk We aspire to levels of business growth which may require us to consider merger and acquisition opportunities from time to time. Where these arise in areas where we have expertise we will consider them and establish suitable risk tolerances in each case. Operational risk We actively seek some logistical risks where we believe that we have expertise and will be rewarded for taking them. We have a very low appetite for risks which threaten our reputation and will only engage in regulated activities where we have the expertise to manage them effectively. We define our risk appetite for certain specific areas of operational risk as follows: ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 SAGA PLC 29 Strategic Report OUR PRINCIPAL RISKS AND UNCERTAINTIES CONTINUED Principal risks and uncertainties IT systems and processes Strategic priorities linkage and risk movement 1, 2, 3, 4 Cybercrime 1, 2, 3, 4 Specific concerns Response/mitigation Failure of our core IT systems to deliver required performance stability and resilience Inability to develop digital offerings sufficient to drive innovation and growth Cybercrime attacks prevent achievement of objectives We have allocated specific investment for refreshing our IT Infrastructure and strengthened our core IT team and processes We have made a significant investment in digital innovations at Group and business levels We have strengthened our Cybercrime team during 2015. There has been significant expenditure over the past two years to ensure the IT network is well protected and cyber awareness and information security training has been rolled out to all staff Extensive investment has been made in improving information security countermeasures in 2015. An external review/benchmarking of information security plans has been undertaken, and further budget has been allocated for continuous improvement in 2016 We have dedicated data protection resources, processes and systems in place to ensure data is stored securely and handled correctly. We have contingency processes in place in the unlikely event of a data breach. We are also preparing to make any further improvements necessary to comply with the new European Union data protection regulations Database 1, 2, 3, 4 Breach/loss of sensitive data assets Breach of data protection legislation People 5 Our culture does not deliver the Saga brand we aspire to We have redefined our brand and cultural values and cascaded these throughout the Group We do not attract and/or retain the right people to achieve our objectives Our people strategy has been further developed to enhance our management of attraction and retention issues and to develop further our pipeline for future talent at all levels. 30 SAGA PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 Strategic objectives 1. Becoming an ever more customer-centric organisation (read more information on page 18) 2. Growing our insurance businesses (read more information on page 19) 3. Growing our travel businesses (read more information on page 20) 4. Investing for future growth (read more information on page 20) 5. Developing our people (read more information on page 21) Strategic priorities linkage and risk movement 1, 2, 3, 4, 5 Principal risks and uncertainties Operational efficiency/ change Specific concerns Response/mitigation Failure to accrue expected benefits from operational/ change initiatives Failure to maintain shipping fleet at a level to meet both customer expectations and plan Key innovation projects do not deliver expected results New ship is delivered late or outside of budget Operational and change initiatives are reviewed at all governance and trading meetings and mitigating steps taken where appropriate. Specific governance structures have been established for key change projects such as delivery of our new ship and our recently introduced motor panel We have developed a ‘beyond compliance’ maintenance programme covering all aspects of our ships overseen at Group level and reported weekly via our governance structure. Regular refits and overhauls ensure our ships are resilient and offer the quality of product our customers expect We have created a dedicated change management function in 2015 to ensure change is managed consistently and effectively. We are also allocating senior management to key innovation projects to ensure speedy delivery of essential change We have appointed a class-leading shipyard to complete the build and recruited an experienced New Build Director to ensure appropriate project control and governance Business interruption 1, 2, 3, 4 Reputational damage arising from ineffective mishandling of interruption incidents We have fully tested and documented business continuity plans in place to address all aspects of potential interruption scenarios 3 Loss arising from shipping technical failure or maritime incident 1, 2, 3, 4 Breach of regulation governing our operations External regulatory landscape/ political change Inability to respond to regulatory change affecting our business Political changes negatively impact our business models We have developed a ‘beyond compliance’ maintenance programme covering all aspects of our ships overseen at Group level and reported weekly via our governance structure Dedicated Compliance teams are embedded in all regulated businesses and are responsible for monitoring compliance performance. Teams exist at Group level to ensure Group compliance with key legislation such as the Health and Safety at Work etc. Act 1974 Saga has a diversified business model to lessen the potential impact of changes affecting one product or service. Emerging and horizon compliance risks are tracked by the dedicated Business Compliance teams and raised at all governance forums Political policy is constantly monitored for impact and active lobbying is undertaken to influence proposed change wherever appropriate ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 SAGA PLC 31 Strategic Report OUR PRINCIPAL RISKS AND UNCERTAINTIES CONTINUED Principal risks and uncertainties Strategic priorities linkage and risk movement Counterparty 1, 2, 3, 4 1, 2, 3, 4 Specific concerns Response/mitigation Financial failure of key partner Inability of key partner to provide appropriate service leading to reputational damage We have agreed selection, monitoring and due diligence processes in place for all key partners/ suppliers Saga controls its third party supply quality through contractual terms and agreed service level agreements. Adherence to these documents is monitored through internal and external audits, customer ‘moments of truth’ surveys and customer complaint review We have established governance structures with our key suppliers and joint venture partners to ensure performance to meet our own and our customers’ expectations are achieved Saga controls the underwriting process for both broking and insurance operations, thereby allowing them to compete on policy terms where appropriate We have introduced a motor panel arrangement, increasing competitiveness and reducing risk, and we have also conducted a reappraisal of AICL risk appetite to consider non-standard risks where they are understood 1, 2, 3, 4 Key partnerships fail to produce anticipated benefits Insurance landscape 1, 2 Inability to compete with insurance competitors Rates in the motor insurance market do not move as expected Conduct/ customers 1, 2, 3, 4, 5 Macroeconomic climate 1, 2, 3, 4 1, 2, 3, 4 Travel landscape 3 NEW Claims experience is adverse compared with current best-estimate assumptions We adopt strict underwriting criteria to price our risks, and review our claims and reserve development frequently. We also purchase reinsurance to reduce claims volatility Our behaviour results in poor/unacceptable outcomes for customers Saga's governance structure is built on the premise of customer dedication with regular consideration of customer satisfaction throughout the organisation Changes in the macroeconomic climate impact our customers' inclination/capability to purchase our products and services Investments do not yield expected returns Increased product commoditisation prevents us from both meeting customer needs and achieving expected margins The impact of external economic factors on costs and customer demand are closely monitored throughout the Group and necessary changes are made to products and services regularly Saga manages its investment portfolio through an investment committee which ensures a spread of risk and optimal returns Significant work has been undertaken in 2015 to create customisable products to meet customers’ needs. A review has been undertaken to indentify further efficiencies in our business model Failure to create expected customer demand for future shipping capacity Our ‘beyond compliance programme aims to ensure that our existing ships meet current customer requirements and engender future customer loyalty 32 SAGA PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 DIVISIONAL REVIEW We have continued to build strong momentum across all of our divisions Insurance 34 Travel 36 Emerging businesses 37 ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 SAGA PLC 33 Strategic Report DIVISIONAL REVIEW CONTINUED Insurance At a glance Our award winning insurance business is the largest part of the Group, providing tailored products and services ranging from motor to pet insurance to over 2m customers per year. Motor Insurance: Core policies sold 1,238k Performance 14.9% Motor Insurance: Trading Profit £118.3m Performance 17.8% Motor Underwriting: Combined Operating Ratio 74.4% Performance 3.5pts 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 3.5pts 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. 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 11.2m 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 34 SAGA PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 Home Insurance: Core policies sold 1,287k Performance 2.3% Home Insurance: Trading Profit £64.1m Performance 3.2% Other Insurance: Core policies sold 383k Performance 11.3% Other Insurance: Trading Profit £30.7m Performance 12% The arrangement is with NewRe, a subsidiary of Munich Re, the world’s biggest reinsurance group, and will cover 75% of the risk of new policies written by AICL, from 1 February 2016 for a period of three years with the option of a further three years. The terms of the arrangement we have signed, with a market-leading reinsurer, is 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. ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 SAGA PLC 35 Strategic Report DIVISIONAL REVIEW CONTINUED Travel At a glance Our award winning travel businesses is at the heart of the Saga brand, taking over 250,000 passengers a year all over the world on package holidays, escorted tours and cruises. 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. 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. Holidays passengers: 189k Performance 9.9% Ship passenger days: 339k Performance 0.9% Travel: Trading Profit £17.2m Performance 26.5% 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). 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 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). Departure year Tour operating revenue Cruise revenue 2016/ 2017 Growth 2015/ 2016 £269.4m 5.0% £256.5m £71.2m (2.2%) £72.8m 36 SAGA PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 Emerging businesses At a glance Emerging businesses includes our personal finance, homecare, publishing and printing operations as well as new development areas for the long-term growth of the business. 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. ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 SAGA PLC 37 Strategic Report GROUP CHIEF FINANCIAL OFFICER’S REVIEW Strong financial performance Jonathan Hill Group Chief Financial Officer Trading Profit Available operating cash flow £211.0m £178.1m 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. 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 38 SAGA PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 Trading Profit £211.0m Available operating cash flow £178.1m Income Statement Group Income Statement Revenue Trading EBITDA Depreciation & amortisation (excluding acquired intangibles) Trading Profit Non-trading costs Amortisation of acquired intangibles Net fair value gains / (losses) on derivatives Profit before interest, tax and IPO costs Finance costs IPO expenses Exceptional debt costs Profit before tax from continuing operations Tax expense Loss after tax for the year from discontinued operations Profit / (loss) after tax Basic earnings per share: 12m to Jan 2016 £963.2m £238.8m (£27.8m) £211.0m (£0.2m) (£6.3m) (£1.2m) Growth 7.0% 5.0% 12m to Jan 2015 £900.5m £227.4m (£26.8m) 5.2% £200.6m (£2.4m) (£2.2m) £2.9m £203.3m 2.2% £198.9m (£24.0m) (£3.1m) – (£23.0m) (£50.0m) (£12.1m) £176.2m 54.8% £113.8m (£28.1m) (£6.9m) 2.6% (£27.4m) (96.9%) (£220.2m) £141.2m 205.5% (£133.8m) Earnings per share from continuing operations Earnings / (loss) per share 13.3p 12.7p 54.7% 195.5% 8.6p (13.3p) 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. ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 SAGA PLC 39 Strategic Report GROUP CHIEF FINANCIAL OFFICER’S REVIEW CONTINUED 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 Cash Flow Trading EBITDA Less Trading EBITDA relating to restricted businesses Intra-group dividends paid by restricted businesses Working capital and non-cash items Capital expenditure funded with available cash Available operating cash flow Available operating cash flow % 12m to Jan 2016 Growth 12m to Jan 2015 £238.8m 5.0% £227.4m (£95.8m) £59.0m 21.6% (£78.8m) 122.6% £26.5m (£3.7m) (408.3%) (£20.2m) £178.1m 74.6% 51.9% 9.3% 2.9% £1.2m (£13.3m) £163.0m 71.7% Available operating cash flow reconciles to net cash flows from operating activities as follows: Net cash flow from operating activities (reported) Exclude cash impact of: Trading of restricted divisions Trading of discontinued operation Cash released from restricted divisions Non-trading costs Interest paid Tax paid Debt issue costs Include capital expenditure funded from available cash Available operating cash flow 12m to Jan 2016 12m to Jan 2015 £150.4m £155.3m (£61.5m) (£53.2m) – £59.0m £13.4m £21.6m £15.4m – £47.9m (£11.4m) £26.5m £7.2m £19.7m £9.6m £22.6m £21.0m (£20.2m) (£13.3m) £178.1m £163.0m 40 SAGA PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 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): Saga Scheme Fair value of scheme assets Present value of defined benefit obligation Defined benefit scheme liability 12m to Jan 2016 12m to Jan 2015 £218.6m £212.3m (£237.4m) (£252.7m) (£18.8m) (£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. ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 SAGA PLC 41 Strategic Report GROUP CHIEF FINANCIAL OFFICER’S REVIEW CONTINUED Segmental performance Segmental Performance Summary Revenue Motor insurance Home insurance Other insurance Travel Emerging businesses and central costs Trading Profit Motor insurance Home insurance Other insurance Travel Emerging businesses and central costs 12m to Jan 2016 £318.7m £99.8m £91.6m £510.1m £423.1m £30.0m £963.2m £118.3m £64.1m £30.7m £213.1m £17.2m (£19.3m) Growth 2.1% 8.7% 6.4% 4.1% 12m to Jan 2015 £312.0m £91.8m £86.1m £489.9m 11.0% £381.3m 2.4% 7.0% 17.8% 3.2% (12.0%) £29.3m £900.5m £100.4m £62.1m £34.9m 8.0% £197.4m 26.5% 85.6% £13.6m (£10.4m) £211.0m 5.2% £200.6m 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 12m to Jan 2016 12m to Jan 2015 Core UW Ancillary Broking / Other Total Motor Growth Core UW Ancillary Broking / Other Total Motor Revenue £237.7m £35.0m £46.0m £318.7m 2.1% £240.8m £35.2m £36.0m £312.0m Gross profit £103.7m £31.9m £31.6m £167.2m 18.0% £99.5m £31.1m £11.1m £141.7m Operating expenses (£34.5m) (£6.0m) (£22.3m) (£62.8m) 10.4% (£40.0m) (£8.2m) (£8.7m) (£56.9m) Investment return £13.6m £0.3m – £13.9m (10.9%) £15.6m – – £15.6m Trading Profit £82.8m £26.2m £9.3m £118.3m 17.8% £75.1m £22.9m £2.4m £100.4m Number of policies sold: – core – add-ons Gross written premiums 950k 26k n/a 1,195k 950k 1,221k 262k 280k 542k 1,238k 14.9% 947k 22k 108k 1,077k 1,475k 2,713k 4.8% 9.2% n/a 1,324k 83k 1,407k 947k 1,346k 191k 2,484k £226.1m £39.6m £62.2m £327.9m 7.5% £235.0m £37.9m £32.0m £304.9m 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 42 SAGA PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 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. Motor Core Underwriting P&L Net earned premium Instalment income Other income Revenue Claims costs Reserve releases Claims handling and regulatory fees Total cost of sales Gross profit Total expenses Investment return Trading Profit Reported loss ratio Expense ratio Reported COR Pure COR 12m to Jan 2016 Growth 12m to Jan 2015 A £226.5m (2.7%) £232.8m £4.4m £6.8m £237.7m (£179.8m) £64.6m (£18.8m) (£134.0m) £103.7m (£34.5m) £13.6m £82.8m 50.9% 23.5% 74.4% B C D E F (B+C)/A (D+F)/A (E+F)/A (E+F-C)/A 102.9% 22.2% 54.5% £3.6m £4.4m (1.3%) £240.8m (3.6%) (£186.6m) 3.2% 8.7% (5.2%) 4.2% (13.8%) (12.8%) 10.3% (2.4%) (1.1%) (3.5%) (1.9%) £62.6m (£17.3m) (£141.3m) £99.5m (£40.0m) £15.6m £75.1m 53.3% 24.6% 77.9% 104.8% 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. ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 SAGA PLC 43 Strategic Report GROUP CHIEF FINANCIAL OFFICER’S REVIEW CONTINUED 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 Revenue Gross profit Operating expenses Investment return Trading Profit Number of policies sold: – core – add-ons Gross written premiums 12m to Jan 2016 Ancillary UW Core Broking / Coinsured Total Home £99.8m £94.0m £81.6m £80.8m (£26.2m) (£30.0m) – £0.1m £54.6m £64.1m 1,287k n/a 1,287k 1,287k 546k 1,833k £18.2m £13.2m (£3.8m) £0.1m £9.5m n/a 546k 546k Total Home £91.8m £87.3m 12m to Jan 2015 Ancillary UW Core Broking / Coinsured £76.0m £74.8m £15.8m £12.5m (£0.8m) £0.2m (£24.6m) (£25.4m) – £0.2m £11.9m £50.2m £62.1m n/a 587k 587k 1,258k n/a 1,258k 1,258k 587k 1,845k Growth 8.7% 7.7% 18.1% (50.0%) 3.2% 2.3% (7.0%) (0.7%) £21.4m £153.8m £175.3m (3.7%) £22.1m £159.9m £182.0m 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. 44 SAGA PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 Other insurance Revenue Gross profit Operating expenses Investment return Joint venture Trading Profit Number of policies sold: – core – add-ons Gross written premiums 12m to Jan 2016 12m to Jan 2015 Core UW Core Broking / Other Total Other Insurance £37.3m £54.3m £91.6m £4.2m (£2.3m) £0.5m £54.1m £58.3m (£25.9m) (£28.2m) – £0.1m – £0.5m £0.1m Growth 6.4% 7.8% 28.8% (66.7%) (91.7%) Core UW Core Broking / Other £39.9m £7.9m (£2.0m) £1.5m £46.2m £46.2m (£19.9m) – – £1.2m Total Other Insurance £86.1m £54.1m (£21.9m) £1.5m £1.2m £2.4m £28.3m £30.7m (12.0%) £7.4m £27.5m £34.9m 28k n/a 28k 355k 1k 356k 383k 1k 384k 11.3% (80.0%) 10.0% 34k n/a 34k 310k 5k 315k 344k 5k 349k £6.0m £119.0m £125.0m 3.6% £6.6m £114.1m £120.7m 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 Reserve releases Motor insurance: Core UW Ancillary Home insurance Other insurance Total 12m to Jan 2016 Growth 12m to Jan 2015 £64.6m 3.2% £62.6m £2.1m 250.0% £0.6m £66.7m £0.2m £1.1m £68.0m 5.5% £63.2m (87.5%) (63.3%) £1.6m £3.0m 0.3% £67.8m 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. ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 SAGA PLC 45 Strategic Report GROUP CHIEF FINANCIAL OFFICER’S REVIEW CONTINUED Analysis of insurance contract liabilities at 31 January 2016 and 31 January 2015 is as follows: 12m to Jan 2016 Gross Reinsurance Assets Net Gross 12m to Jan 2015 Reinsurance Assets Net Reported claims £341.5m (£70.7m) £270.8m £330.6m (£45.9m) £284.7m Incurred but not reported* £209.2m (£30.9m) £178.3m £211.5m (£14.3m) £197.2m Claims handling provision £10.9m – £10.9m £10.3m – £10.3m Total claims outstanding £561.6m (£101.6m) £460.0m £552.4m (£60.2m) £492.2m Unearned premiums £141.7m (£4.8m) £136.9m £152.3m (£3.2m) £149.1m Total £703.3m (£106.4m) £596.9m £704.7m (£63.4m) £641.3m * 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 year end, driven by an £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. At 31 January 2016 AAA AA A 120 days £’m 7.2 3.8 1.5 1.5 1.4 1.0 0.7 0.8 4.3 3.9 154 ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 SAGA PLC 157 Financial statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 21 Trade and other receivables (continued) As at 31 January 2016, impairment provisions totalling £8.5m (2015: £9.0m) were made against trade receivables with an initial value of £141.3m (2015: £136.7m). The movements in the provision for impairment of receivables are as follows: At 1 February 2014 Charge for the year Utilised in the year Unused amounts reversed Reclassification to assets held for sale At 31 January 2015 Charge for the year Utilised in the year Unused amounts reversed At 31 January 2016 Individually impaired £’m Collectively impaired £’m 0.7 0.2 – – 0.9 (0.6) 0.3 0.2 (0.1) (0.1) 0.3 8.3 8.0 (4.2) (3.4) 8.7 – 8.7 7.5 (3.5) (4.5) 8.2 Total £’m 9.0 8.2 (4.2) (3.4) 9.6 (0.6) 9.0 7.7 (3.6) (4.6) 8.5 See note 18 on credit risk of trade receivables, which explains how the Group manages and measures credit quality of trade receivables that are neither past due nor impaired. 22 Cash and cash equivalents Cash at bank and in hand Short-term deposits Cash and short-term deposits Money markets funds Bank overdraft Cash held by disposal group Cash and cash equivalents in the cash flow statement 2016 £’m 36.9 69.6 106.5 75.9 (18.0) – 2015 £’m 66.5 132.3 198.8 40.6 (5.8) 4.3 164.4 237.9 Included within cash and short-term deposits are amounts held by the Group’s travel and insurance businesses which are subject to contractual or regulatory restrictions. These amounts held are not readily available to be used for other purposes within the Group and total £92.1m (2015: £85.2m). Cash at bank earns interest at floating rates based on daily bank deposit rates. Short-term deposits are made for varying periods of between one day and three months, depending on the immediate cash requirements of the Group, and earn interest at the respective short-term deposit rates. 23 Trade and other payables Trade payables Other taxes and social security costs Other payables Assets in the course of construction Accruals All trade and other payables are current in nature. 2016 £’m 104.3 12.2 18.9 13.1 43.1 191.6 2015 £’m 84.8 9.2 24.5 – 40.2 158.7 158 SAGA PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 155 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 24 Retirement benefit schemes The Group operates retirement benefit schemes for the employees of the Group consisting of defined contribution plans and defined benefit plans. a. Defined contribution plans There are a number of defined contribution schemes in the Group. The total charge for the year in respect of the defined contribution schemes was £1.3m (2015: £1.3m). The assets of these schemes are held separately from those of the Group in funds under the control of Trustees. b. Defined benefit plans The Group operates a funded defined benefit scheme, the Saga Pension Scheme (‘Saga scheme’), which is open to new members who accrue benefits on a career average salary basis. The assets of the scheme are held separately from those of the Group in independently administered funds. The scheme is governed by the employment laws of the UK. The level of benefits provided depends on the member’s length of service and salary at retirement age. The scheme requires contributions to be made to a separately administered fund which is governed by a Board of Trustees, and consists of an equal number of employer and employee representatives. The Board of Trustees is responsible for the administration of the plan assets and for the definition of the investment strategy. The long-term investment objectives of the Trustees and the Group are to limit the risk of the assets failing to meet the liabilities of the scheme over the long term, and to maximise returns consistent with an acceptable level of risk so as to control the long-term costs of the scheme. To meet those objectives, the scheme’s assets are invested in different categories of assets, with different maturities designed to match liabilities as they fall due. The investment strategy will continue to evolve over time and is expected to match to the liability profile increasingly closely. The pension liability is exposed to inflation rate risks and changes in the life expectancy for pensioners. As the plan assets include investments in quoted equities, the Group is exposed to equity market risk. During the year, the Group operated two other funded defined benefit schemes, the Nestor Healthcare Group Retirement Benefits Scheme and the Healthcall Group Limited Pension Scheme (‘Nestor schemes’), which provide benefits based on final salary and are closed to new members. Both of these schemes were part of the liabilities held for sale and were disposed of when the Group completed the sale of the local authority section of the healthcare business, Allied Healthcare, on 30 November 2015. The fair value of the assets and present value of the obligations of the defined benefit schemes are as follows: At 31 January 2016 Fair value of scheme assets Present value of defined benefit obligation Defined benefit scheme liability At 31 January 2015 Fair value of scheme assets Present value of defined benefit obligation Defined benefit scheme liability Reclassification to liabilities held for sale Saga scheme £’m 218.6 (237.4) (18.8) Saga scheme £’m 212.3 (252.7) (40.4) – (40.4) Nestor schemes £’m – – – Nestor schemes £’m 54.0 (68.7) (14.7) 14.7 – Total £’m 218.6 (237.4) (18.8) Total £’m 266.3 (321.4) (55.1) 14.7 (40.4) The present values of the defined benefit obligation, the related current service cost and any past service costs have been measured using the projected unit credit method. 156 ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 SAGA PLC 159 Financial statements     NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 24 Retirement benefit schemes (continued) b. Defined benefit plans (continued) The following table summarises the components of the net benefit expense recognised in the income statement and amounts recognised in the statement of financial position for the schemes for the year ended 31 January 2016: Saga scheme Nestor schemes Fair value of scheme assets £’m Defined benefit obligation £’m Defined benefit scheme liability £’m Fair value of scheme assets £’m Defined benefit obligation £’m Defined benefit scheme liability £’m Total Defined benefit scheme liability £’m 1 February 2015 212.3 (252.7) (40.4) Pension cost charge to income statement Service cost Net interest Included in income statement Benefits paid Return on plan assets (excluding amounts included in net interest expense) Actuarial changes arising from changes in demographic assumptions Actuarial changes arising from changes in financial assumptions Experience adjustments Sub-total included in other comprehensive income Contributions by employer Movement in liabilities held for sale 31 January 2016 – 6.7 6.7 (4.5) (7.0) – – – (11.5) 11.1 – (8.8) (7.8) (16.6) 4.5 (8.8) (1.1) (9.9) – (0.3) (0.3) 27.5 0.3 32.0 (0.1) – 27.5 0.3 20.5 11.0 – 218.6 (237.4) (18.8) – – 1.3 1.3 (1.6) – – (40.4) (0.1) (1.7) (1.8) 1.6 (0.1) (0.4) (0.5) – (8.9) (1.5) (10.4) – – – – (3.5) 12.4 (10.2) – 1.2 5.3 1.5 9.6 – (7.8) – 1.2 5.3 1.5 6.1 12.4 (18.0) – 0.9 32.8 1.8 26.6 23.4 (18.0) (18.8) – (7.0) (1.9) – (1.9) (8.9) 160 SAGA PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 157     NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 24 Retirement benefit schemes (continued) b. Defined benefit plans (continued) The following table summarises the components of the net benefit expense recognised in the income statement and amounts recognised in the statement of financial position for the schemes for the year ended 31 January 2015: Saga scheme Nestor schemes Fair value of scheme assets £’m Defined benefit obligation £’m Defined benefit scheme liability £’m Fair value of scheme assets £’m Defined benefit obligation £’m Defined benefit scheme liability £’m Total Defined benefit scheme liability £’m 1 February 2014 171.2 (186.1) (14.9) 48.3 (57.7) (9.4) (24.3) – 7.6 7.6 (3.3) (5.6) (8.1) (13.7) 3.3 (5.6) (0.5) (6.1) – – 2.1 2.1 (2.8) (0.1) (2.4) (2.5) 2.8 (0.1) (0.3) (0.4) – (5.7) (0.8) (6.5) – 29.7 – 29.7 2.9 – 2.9 32.6 Pension cost charge to income statement Service cost Net interest Included in income statement Benefits paid Return on plan assets (excluding amounts included in net interest expense) Actuarial changes arising from changes in demographic assumptions Actuarial changes arising from changes in financial assumptions Experience adjustments Sub-total included in other comprehensive income Contributions by employer Reclassification to liabilities held for sale – – – 26.4 7.1 – (0.4) (0.4) (47.0) (8.7) (52.8) (0.1) – (47.0) (8.7) (26.4) 7.0 – 31 January 2015 212.3 (252.7) (40.4) The major categories of assets in the Saga scheme are as follows: Equities Bonds Property Hedge funds Cash and other Total – – – 0.1 3.5 (54.0) – (0.9) (0.9) (1.3) (10.4) (10.4) – (8.5) – 68.7 – – (8.4) 3.5 14.7 – 2016 £’m 42.0 117.1 23.8 33.7 2.0 218.6 (57.4) (8.7) (34.8) 10.5 14.7 (40.4) 2015 £’m 62.7 117.0 20.2 – 12.4 212.3 Equities, bonds and hedge funds are all quoted in active markets whilst property is not. The main categories of assets in the Nestor schemes at 31 January 2015 were equities (£26.9m), bonds (£23.7m), insurance policies (£3.2m) and cash (£0.2m). 158 ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 SAGA PLC 161 Financial statements     NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 24 Retirement benefit schemes (continued) b. Defined benefit plans (continued) The principal assumptions used in determining pension benefit obligations for the Saga scheme are shown below: Real rate of increase in salaries Real rate of increase of pensions in payment Real rate of increase of pensions in deferment Discount rate – Pensioner Discount rate – Non Pensioner Inflation – Pensioner Inflation – Non Pensioner 2016 0% 0% 0% 3.6% 3.8% 3.0% 3.2% 2015 0% 0% 0% 2.9% 3.2% 2.6% 2.9% Mortality assumptions are set using standard tables based on specific experience where available and allow for future mortality improvements. The Saga scheme assumption is that a member currently aged 60 will live on average for a further 29 years if they are male and on average for a further 31 year if they are female. A quantitative sensitivity analysis for significant assumptions as at 31 January 2016 and their impact on the net defined benefit obligation is as follows: Assumptions Sensitivity Impact £m Discount rate +/- 0.25% Future inflation +/- 0.25% Life expectancy +/- 1 year Future salary +/- 0.5% Increase Decrease Increase Decrease (13.6) 14.7 9.2 (9.4) +/- 6.9 +/- 0.0 Note: a negative impact represents an increase in the net defined benefit liability. The sensitivity analyses are based on a change in an assumption while holding all other assumptions constant. When calculating the sensitivity of the defined benefit obligation to significant actuarial assumptions the same method has been applied as when calculating the pension liability recognised within the statement of financial position. The expected contribution to the Saga scheme for the next year is £11.0m and average duration of the defined benefit plan obligation at the end of the reporting period is 22 years. Formal actuarial valuations take place every three years for the scheme. The assumptions adopted for actuarial valuations are determined by the Trustees and are agreed with the Group and are normally more prudent than the assumptions adopted for IAS 19 purposes, which are best estimate. Where a funding deficit is identified, the Group and the Trustees may agree a deficit recovery plan. 162 SAGA PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 159       NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 24 Retirement benefit schemes (continued) b. Defined benefit plans (continued) The latest valuation of the Saga scheme was at 31 January 2014. Further to this valuation, a recovery plans is in place for the scheme. Under the agreed recovery plan, the Group made an additional payment of £2.0m during the year ended 31 January 2016, and will make further payments of £2.0m in each of the next nine years, with the last payment being made by 28 February 2024. The total expected contributions in the year ending 31 January 2017 are £11.0m. 25 Insurance contract liabilities and reinsurance assets The analysis of gross and net insurance liabilities is as follows: Gross Claims outstanding Provision for unearned premiums Total gross liabilities Recoverable from reinsurers Claims outstanding Provision for unearned premiums Total reinsurers’ share of insurance liabilities Net Claims outstanding Provision for unearned premiums Total net insurance liabilities 2016 £’m 2015 £’m 561.6 141.7 703.3 2016 £’m 101.6 4.8 106.4 552.4 152.3 704.7 2015 £’m 60.2 3.2 63.4 2016 £’m 2015 £’m 460.0 136.9 596.9 492.2 149.1 641.3 160 ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 SAGA PLC 163 Financial statements       NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 25 Insurance contract liabilities and reinsurance assets (continued) Reconciliation of movements in claims outstanding Gross claims outstanding at 1 February Less: reinsurance claims outstanding Net claims outstanding at 1 February Gross claims incurred Less: reinsurance recoveries Net claims incurred (note 3b) Gross claims paid Less: received from reinsurance Net claims paid Gross claims outstanding at 31 January Less: reinsurance claims outstanding Net claims outstanding at 31 January Reconciliation of movements in the provision for net unearned premiums Gross unearned premiums at 1 February Less: unearned reinsurance premiums Net unearned premiums at 1 February Gross premiums written Less: outward reinsurance premium Net premiums written Gross premiums earned Less reinsurance premium earned Net premiums earned (note 3a) Gross unearned premiums at 31 January Less: unearned reinsurance premiums Net unearned premiums at 31 January The profit on purchasing reinsurance in 2016 was £37.5m (2015: £4.0m loss). 2016 £’m 552.4 (60.2) 492.2 219.3 (44.4) 174.9 2015 £’m 566.9 (58.3) 508.6 182.9 (3.6) 179.3 (210.1) (197.4) 3.0 1.7 (207.1) (195.7) 561.6 (101.6) 460.0 2016 £’m 152.3 (3.2) 149.1 312.0 (8.5) 303.5 552.4 (60.2) 492.2 2015 £’m 161.4 (4.2) 157.2 324.2 (6.6) 317.6 (322.6) (333.3) 6.9 7.6 (315.7) (325.7) 141.7 (4.8) 136.9 152.3 (3.2) 149.1 164 SAGA PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 161     NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 25 Insurance contract liabilities and reinsurance assets (continued) Discounting Claims outstanding provisions are calculated on an undiscounted basis, with the exception of PPOs made by the courts as part of a bodily injury claim settlement. Claims outstanding provisions for PPOs are discounted at a rate of -1.5% (2015: -1.5%) representing the Group’s view on long-term carer wage inflation less the expected return on holding the invested financial assets associated with these claims. The value of claims outstanding before discounting was £734.0m (2015: £736.1m) gross of reinsurance and £539.0m (2015: £599.1m) net of reinsurance. The period between the balance sheet date and the estimated final payment date was calculated using Ogden life expectancy tables, with appropriate adjustments where necessary for impaired life. The average life expectancy from PPO settlement date to the final PPO payment was 42 years (2015: 47 years) and the rate of investment return used to determine the discounted value of claims provisions was 2.0% (2015: 2.0%). Analysis of net claims incurred: claims development tables The following table details the Group’s initial estimate of ultimate net claims incurred over the past five years and the re-estimation at subsequent financial period ends. The table details the net incurred claims (net of reinsurance recoveries) on an accident year basis. Financial Year ended 31 January 2010 £'m 2011 £'m 2012 £'m 2013 £'m 2014 £'m 2015 £'m 2016 £'m Total £'m Claims paid £'m Claims outstanding £'m Accident Year 2009 and earlier 2010 2011 2012 2013 2014 2015 2016 (5.5) 202.1 – – 266.0 (9.2) (11.0) (4.3) (2.8) (4.0) (5.2) (1.2) (5.5) (3.2) (3.1) (4.6) (13.3) (3.0) (2.1) (7.2) 302.3 (25.6) (31.1) (0.6) (17.3) 315.4 (14.6) (22.9) (19.8) 276.8 (14.7) (23.4) 219.1 5.3 220.9 183.1 232.9 227.7 258.1 238.7 224.4 220.9 (166.7) (200.9) (195.4) (200.4) (161.2) (138.8) (101.1) Claims handling costs 9.0 10.1 15.6 17.4 17.2 18.0 21.5 205.6 276.1 301.6 287.0 237.0 179.3 174.9 196.6 266.0 286.0 269.6 219.8 161.3 153.4 The development of the associated loss ratios on the same basis is as follows: 27.8 16.4 32.0 32.3 57.7 77.5 85.6 119.8 449.1 10.9 460.0 Accident Year 2010 2011 2012 2013 2014 2015 2016 Financial Year ended 31 January 2010 2011 2012 2013 2014 2015 2016 73% 73% 78% 72% 78% 76% 70% 76% 70% 75% 68% 75% 62% 72% 75% 67% 71% 62% 66% 71% 67% 66% 69% 57% 62% 65% 69% 70% Favourable claims development over the year has resulted in a £68.0m reduction in the net claims incurred in respect of prior years. Against this, the insolvency of a significant legal services supplier has required an increase in prior year net claims of £0.5m to be created; the cost of this has been included as part of the total exceptional expense (note 4b). 162 ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 SAGA PLC 165 Financial statements                   NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 26 Provisions Current Non-current At 31 January 2016 £’m 2.5 1.5 4.0 2015 £’m 4.8 1.1 5.9 Provisions primarily comprise amounts payable for the return of insurance commission in respect of policies cancelled mid-term after the reporting date, credit hire claims handling provision, and fleet insurance at the estimated cost of settling all outstanding incidents at the reporting date. These items are reviewed and updated annually. 27 Other liabilities Advance receipts Deferred revenue Group relief payable (note 9) Current Non-current 2016 £’m 2015 £’m 113.0 122.3 12.7 7.6 7.0 – 133.3 129.3 133.2 0.1 133.3 129.0 0.3 129.3 Advance receipts comprises amounts received within the travel segment for holidays and cruises with departure dates after the reporting date, and insurance premiums and sales revenues received in the insurance segment in respect of insurance policies which commence after the reporting date. Deferred revenue represents the unearned elements of revenue relating to the media business. The amount comprises subscriptions for magazines to be delivered after the reporting date and revenue for advertising to be included after the reporting date. 28 Loans and borrowings Bank loans Revolving credit facility Accrued interest payable Less: deferred issue costs 2016 £’m 2015 £’m 480.0 700.0 75.0 0.6 555.6 (7.9) 547.7 – 3.4 703.4 (11.2) 692.2 In April 2014, the Group entered into a Senior Facilities Agreement and drew £1,250.0m. At the end of May 2014, it used the receipt of £550.0m from the Group’s flotation to reduce the outstanding principal to £700.0m. The debt matures in April 2019, and interest is incurred at a variable rate of LIBOR plus 2.25%. Interest rate caps are in place which cap LIBOR at 3.0% on a notional debt of £510.0m through to June 2016. The Group is required to comply with a leverage covenant on a quarterly basis and had significant headroom against this covenant at 31 January 2016. Under the facilities, the Group has access to a multi-currency revolving credit facility of £150.0m. During the year, the Group repaid £220.0m of its Senior Facilities Agreement, and at 31 January 2016 had drawn £75.0m of its £150.0m revolving credit facility. The Group incurs commitment fees on undrawn facilities and interest at a rate of LIBOR plus 2.25% on drawn facilities. During the year, the Group charged £21.8m (2015: £34.6m) to the income statement in respect of fees and interest associated with the Senior Facilities Agreement.  166 SAGA PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 163     NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 29 Called up share capital Allotted, called up and fully paid At 1 May 2014 Issue of share capital on flotation As at 31 January 2015 Free shares allotted – 5 June 2015 As at 31 January 2016 Ordinary shares Nominal value £ Number 800,000,000 310,705,405 1,110,705,405 7,300,000 1,118,005,405 0.01 0.01 0.01 0.01 0.01 Value £’m 8.0 3.1 11.1 0.1 11.2 On 29 May 2014, Saga plc was admitted to the London Stock Exchange, and issued 297,297,297 shares, raising £550m of funds which were utilised to repay part of the Group’s bank debt (note 28). The share premium arising on this transaction was £547.0m. On the same date, the Group issued 13,408,108 shares into the associated Employee Benefit Trust predominantly in respect of the share options issued to certain Directors and employees on the same date (see note 31). a. Bonus issue – free shares As part of the IPO, an offer was made to customers and employees of the Group under which they would receive one free share for every twenty shares purchased in the IPO and held continuously for a period of one year following flotation. On 5 June 2015, 7,300,000 shares were issued in respect of this bonus offer. b. Employee Benefit Trust The Employee Benefit Trust purchased 13,408,108 shares at their nominal value of £134,000 during the year ended 31 January 2015. There were no associated transaction costs. During the year, employees exercised options over 5,973,991 (2015: 539,320) of these shares which were transferred from the Employee Benefit Trust into the direct ownership of the employee. The remaining 6,619,099 shares have been treated as treasury shares at 31 January 2016. 30 Capital management The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. For the purposes of the Group’s capital management, capital includes issued capital, share premium and all other capital reserves attributable to the equity holders of the parent. The Group operates in a number of regulated markets and includes subsidiaries which are required to comply with specific requirements in respect of capital or other resources. The Group’s financial services businesses are regulated primarily by the Financial Services Commission (‘FSC’) in Gibraltar and by the Financial Conduct Authority (‘FCA’) in the UK; and the capital requirements of its travel businesses are regulated by the Civil Aviation Authority (‘CAA’) in the UK. It is the Group’s policy to comply with the requirements of these regulators in respect of capital adequacy or other similar tests at all times. No changes were made to the objectives, policies or processes for managing capital during the years ended 31 January 2016 or 31 January 2015, other than those driven from changes to the requirements of the various regulators, notably the European Union’s Solvency II Directive for insurance companies. The Group’s regulated underwriting business is based in the Gibraltar and regulated by the FSC. The underwriting business is required to comply with various tests to ensure that it has a sufficient level of capitalisation. Under Solvency I, the FSC required the underwriting business to hold solvency capital of at least twice the required minimum margin (‘RMM’), and at 31 January 2015, capital was approximately 277% of the RMM. The Group has monitored its compliance with this and other tests throughout the year. 164 ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 SAGA PLC 167 Financial statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 30 Capital management (continued) Solvency II incorporates a fundamental change to the capital adequacy regime for the European insurance industry and establishes a revised set of capital requirements and risk management standards with the aim of increasing protection for policyholders. The new regime became effective on 1 January 2016. The Group monitored its ability to comply with the requirements of Solvency II throughout the year and received approval from the FSC for the Undertaking of Specific Parameters route prior to the effective date. Under Solvency II AICL remains well capitalised, and at 31 January 2016, available capital was £219.6m against a Solvency Capital Requirement of £128.8m giving 170% coverage. The Group’s regulated insurance distribution businesses are based in the UK and regulated by the FCA. Due to the nature of these businesses, the capital requirements are significantly less than the underwriting business but the Group is required to comply with the Adequate Resources requirements of Threshold Condition 4 of the FCA Handbook. The Group undertakes a rigorous assessment against the requirements of this Condition on an annual basis and, as a consequence of this, calculates and holds an appropriate amount of capital in respect of these businesses. The Minimum Regulatory Capital requirement of these businesses at 31 January 2016 was £6.1m. The regulated travel businesses are required to comply with two main tests based on liquidity and leverage and are measured against agreed covenants on the last day of each quarter in respect of these tests. The Group monitors its compliance with these tests on a monthly basis including forward-looking compliance using budgets and forecasts. At 31 January 2016, the travel businesses had good coverage against both covenants. 31 Share-based payments The Group has granted a number of different equity-based awards to employees and customers which it has determined to be share-based payments: a. Share options and free shares offer granted at the time of the IPO  On 29 May 2014, share options over 13,132,410 shares were granted to certain Directors and employees with no exercise price and no service or performance vesting conditions. There are no cash settlement alternatives.  Eligible customers and employees who acquired their shares under the Customer or Employee Offers in the Prospectus received one bonus share for every twenty shares they acquired and held continuously for one year to 29 May 2015. As these are bonus shares, there was no exercise price and no cash settlement alternative. b. Long-Term Incentive Plan (‘LTIP’) and Deferred Bonus Plan (‘DBP’)  The LTIP is a discretionary executive share plan under which the Board may, within certain limits and subject to applicable performance conditions, grant options over shares in Saga plc. These options are 50% linked to a non-market vesting condition, EPS, and 50% linked to a market vesting condition, TSR.  On 30 June 2014 and 2 December 2014, options over 4,015,508 shares were issued which vest and become exercisable on the third anniversary of the grant date.  On 30 June 2015, options over 2,879,089 shares were issued which vest and become exercisable on the third anniversary of the grant date.  On 9 June 2015, options over 332,541 shares were issued under the DBP to the Executive Directors reflecting their deferred bonus in respect of 2014/15, which vest and become exercisable on the third anniversary of the grant date. Following cessation of employment of S M Howard on 30 June 2015, the options allocated to him became exercisable immediately. c. Other share options  On 29 May 2014, share options over 2,162,162 shares were issued to the Chief Executive Officer. Vesting occurs 25% on the third anniversary of the IPO, 25% on the fourth anniversary of the IPO and 50% on the fifth anniversary of the IPO, subject to continuing employment. The award will be equity settled and has no cash alternative. The exercise price of the share options is £1.85.  On 29 April 2015, options over 101,932 shares were issued to the Chief Financial Officer which vest in two equal tranches on the first and second anniversary of his appointment, subject to continuing employment.  On 2 December 2015, options over 99,552 shares were issued to the Chief Marketing Officer which vest on the second anniversary of his appointment, subject to continuing employment. d. Employee free shares  On 8 July 2015, 398,774 shares were awarded to staff eligible on the anniversary of the IPO at £nil cost. These shares become beneficially owned over a three year period from allocation subject to continuing employment.  168 SAGA PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 165   NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 31 Share-based payments (continued) The table below summarises the movements in the number of share options outstanding for the Group and their weighted average exercise price: At 1 February 2015 12,593,090 3,884,866 – 2,162,162 – 18,640,118 IPO Options LTIP DBP Other options Employee free shares Total Granted Forfeited Exercised – – 2,879,089 332,541 201,484 398,774 3,811,888 (1,259,776) – (5,973,991) – (76,448) – – (21,022) (1,280,798) (3,542) (6,053,981) At 31 January 2016 6,619,099 5,504,179 256,093 2,363,646 374,210 15,117,227 Exercise price £nil Exercisable at 31 January 2016 6,619,099 £nil – £nil £1.69 £nil £0.25 – – 4,209 6,623,308 Average remaining contractual life 8.3 years 1.9 years 2.4 years 2.5 years 2.3 years 5.0 years Average fair value at grant £1.85 £1.97 £2.10 £1.86 £2.16 £1.90 The following information is relevant in the determination of the fair value of options granted during the year under the equity- and cash-settled share based remuneration schemes operated by the Group. Model used Dividend yield (%) Risk-free interest rate (%) Expected life of share option Weighted average share price (£) Share price volatility CFO options CMO options Black- Scholes n/a n/a Share price at date of grant n/a n/a 0.97/1.97 years 2.81 years £1.89 n/a £2.02 n/a LTIP – EPS tranche LTIP – TSR tranche Employee free shares Black- Scholes Monte-Carlo n/a 0.96% 3 years £2.20 27.8% n/a 0.96% 3 years £2.20 27.8% Black- Scholes n/a n/a 3 years £2.16 n/a As historical data for the Group’s share price is not available, the Group has estimated the Company’s share price volatility as an average of the volatilities of its TSR comparator group over a historical period commensurate with the expected life of the award immediately prior to the date of the grant. For future valuations, at a date when sufficient Saga share price data becomes available, the Group intends to estimate the Company volatility directly from this data. The total amount charged to the income statement in the year ended 31 January 2016 is £2.8m (2015: £41.8m). This has been charged to administrative and selling expenses (£2.5m) and exceptional expenses (£0.3m) (note 4b). The Group did not enter into any share-based payment transactions with parties other than employees during the current period. 166 ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 SAGA PLC 169 Financial statements       NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 32 Commitments and contingencies a. Operating lease commitments — Group as lessee The Group has entered into commercial leases on certain land and buildings and plant and machinery. There are no restrictions placed upon the Group by entering into these leases. Future minimum rentals payable under non-cancellable operating leases as at 31 January are as follows: Within one year Between one and five years After five years Land and buildings Plant and machinery 2016 £’m 1.0 3.3 4.8 9.1 2015 £’m 2.1 6.2 7.2 15.5 2016 £’m 0.8 1.6 – 2.4 2015 £’m 0.3 1.8 – 2.1 b. Finance lease and hire purchase commitments The Group has finance leases and hire purchase contracts for various items of plant and machinery. These leases have terms of renewal and no purchase options. Renewals are at the option of the specific entity that holds the lease. Future minimum lease payments under finance leases and hire purchase contracts together with the present values of the net minimum lease payments are as follows: Within one year Between one and five years Total minimum lease payments Less amounts representing finance charge Present value of minimum lease payments 2016 £’m 0.5 1.7 2.2 (0.4) 1.8 2015 £’m 0.1 0.1 0.2 – 0.2 c. Commitments On 21 December 2015, the Group contracted with Meyer Werft GmbH & Co. KG to purchase a new cruise ship for delivery in July 2019, with an option to purchase a second similar cruise ship for delivery in 2021. The new ship will replace one of the Group’s existing two ships. The first stage payment for the new ship is included within trade and other payables and will be made in February 2016. Three similar stage payments will be made during the construction period (24 months, 18 months, and 12 months prior to delivery) funded via cash resources of the Group. The remaining element of the contract price is due on delivery of the ship, and the Group entered into appropriate financing for this on 21 December 2015. As at 31 January 2016, the capital amount contracted but not provided for in the financial statements in respect of the ship amounted to £280.1m (2015: £nil). The financing represents a 12 year fixed rate sterling loan, backed by an export credit guarantee. The loan value of approximately £245m will be repaid in 24 broadly equal instalments, with the first payment 6 months after delivery. The effective interest rate on the loan (including arrangement and commitment fees) is 4.29%. On the date the finance was entered into, the Group purchased Euro currency forwards totalling £273.2m to lock the cost of the ship. These have been designated as cash flow hedges and remain outstanding as at 31 January 2016 (note 17d). The Group has an option to purchase a second ship for the same price within the contract; the option must be exercised by 21 December 2017. The Group may be released from this option at any time although should the option to purchase not be exercised, a fee would become payable. The likelihood of incurring such a fee is considered extremely remote. 170 SAGA PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 167   NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 32 Commitments and contingencies (continued) d. Contingent liabilities At 31 January 2016, the Group had secured £31.8m (2015: £31.0m) of financial bonds and other guarantees on a revolving credit facility provided to Saga Mid Co Limited. If these bonds were called, the facility would be treated as drawn and recognised as a liability on the Group’s balance sheet. The revolving credit facility is secured by a floating charge over the Group’s assets. The Association of British Travel Agents regulates the Group’s UK tour operating business and requires the Group to put in place bonds to provide customer protection. These bonds are included within the financial bonds described above. 33 Discontinued operations and assets held for sale On 30 November 2015, the Group completed the sale of the local authority section of the healthcare business, Allied Healthcare. The impact of the discontinued operation on the profit for the year is as follows: Loss after tax, before amortisation of acquired intangibles Amortisation of associated acquired intangible assets Loss on re-measurement of disposal group to fair value Gain on disposal of discontinued operations The impact of the discontinued operation on the reported earnings per share was as follows: Basic and diluted earnings per share from discontinued operations The gain on disposal of Allied Healthcare is as follows: Cash consideration received Fair value of other consideration receivable Pension scheme contribution Net assets disposed (including cash of £2.5m) Costs of disposal not previously provided for 2016 £’m (7.9) – – 1.0 (6.9) 2015 £’m (0.3) (10.4) (209.5) – (220.2) 2016 2015 (0.6p) (21.9p) £’m 10.1 3.8 (9.2) (3.1) (0.6) 1.0 168 ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 SAGA PLC 171 Financial statements         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 33 Discontinued operations and assets held for sale (continued) The results of Allied Healthcare for the period are as follows: Revenue Cost of sales Gross profit Administrative and selling expenses Trading EBITDA Depreciation and amortisation Exceptional expenses Net finance expense on retirement benefit schemes Loss before tax Tax expense Loss for the period from discontinued operations Attributable to: Equity holders of the parent Non-controlling interest The net cash flows of Allied Healthcare during the period to disposal are as follows: Operating Investing Financing Net cash (outflow)/inflow 2016 £’m 2015 £’m 206.2 283.2 (149.2) (199.8) 57.0 (55.7) 83.4 (74.4) 1.3 (2.7) (6.4) (0.4) (8.2) 0.3 (7.9) (8.2) 0.3 (7.9) 2016 £’m (12.2) 0.1 8.4 (3.7) 9.0 (2.8) (8.4) (0.3) (2.5) 2.2 (0.3) (0.7) 0.4 (0.3) 2015 £’m 3.6 (3.5) – 0.1 34 Related party transactions During the year ended 31 January 2016, the Saga Group agreed terms for the utilisation under the group relief rules of corporation tax losses from Acromas SPC Co Limited and Acromas Mid Co Limited, indirect investees in the Group, at a cost of 50% of the tax affected face value. Amounts payable by the Group in respect of the surrender of these tax losses of £7.6m were unpaid at 31 January 2016 (see note 9). G Williams, an independent Non-Executive Director of Saga plc, serves on the board of WNS (Holdings) Limited, a company which Acromas Insurance Company Limited, a subsidiary of Saga plc, traded with during the year. WNS (Holdings) Limited provides claim handling management services to Acromas Insurance Company Limited and during the year ended 31 January 2016 earned fees of £3.5m (2015: £5.8m); further payments to WNS (Holdings) Limited in respect of repair costs on claims handled totalled £40.2m (2015: £41.9m). As at 31 January 2016, amounts owing to WNS (Holdings) Limited for fees and repair costs were £1.5m (2015: £3.7m). 172 SAGA PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 169 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 35 Subsidiaries The entities listed below are subsidiaries of the Company or Group. All of the undertakings are wholly owned and included within the consolidated financial statements. Name Country of registration Nature of business Acromas Financial Services Limited Acromas Holidays Limited Acromas Insurance Company Limited Acromas Shipping Limited Acromas Transport Limited Bel Jou (St Lucia) Limited Bennetts Biking Services Limited CHMC Limited Destinology Limited Direct Choice Insurance Services Limited Enbrook Cruises Limited MetroMail Limited Premium Funding Limited Saga Cruises IV Limited Saga Cruises Limited Saga Healthcare Limited Saga Mid Co Limited Saga Property Company (St Lucia) Limited Saga Publishing Limited Saga Services Limited Titan Transport Limited Acromas Holidays (USA) Inc. Allied Healthcare International LLC Automobile Association Travel Limited CHMC Holdings Limited Saga 200 Limited Saga 300 Limited Saga 400 Limited Saga Establecimientos Hoteleros, S.L. Saga Group Limited Saga Holdings Limited Saga Hotels (Caribbean) Limited Saga Leisure Limited Saga Overseas SL Saga Properties (Caribbean) Limited Saga Properties Limited Acromas Travel Limited All Canada Limited Canadian Connections Limited Confident Services Limited England England Gibraltar England England St Lucia England England England England England England England England England England England St Lucia England England England USA USA England England England England England Spain England England St Lucia England Spain St Lucia England England England England England Regulated investment products Tour operating Insurance underwriting Cruising Tour operating Hotel operator Insurance services Motor accident management Tour operating Insurance services Cruising Mailing house Insurance services Cruising Cruising Provision of domiciliary care Debt service provider Property Investment Publishing Insurance services Tour operating Holding company Holding company Holding company Holding company Holding company Holding company Holding company Holding company Holding company Holding company Holding company Holding company Holding company Holding company Holding company Dormant company Dormant company Dormant company Dormant company 170 ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 SAGA PLC 173 Financial statements       NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 35 Subsidiaries (continued) Name Connections Worldwide Holidays Limited Country Cousins (Horsham) Limited Driveline Europe Limited Driveline Travel Limited Enbrook Services Limited Grand Touring Club (France) Limited Grand Touring Club Limited Grandstand Sports Tours Limited Grandstand Worldwide Limited Inter-Church Travel Limited New Zealand Connections Limited Patricia White's Personal Home Care Limited PEC Services Limited Saga (International) Holidays Limited Saga 500 Limited Saga Coach Holidays Limited Saga Communications Limited Saga Cruises BDF Limited Saga Cruises II Limited Saga Cruises III Limited Saga Cruises V Limited Saga Cruises VI Limited Saga Digital Radio Limited Saga Financial Limited Saga Financial Planning Limited Saga Flights.com Limited Saga Holidays Limited Saga Homes Limited Saga Independent Living Limited Saga Investments Limited Saga Media Limited Saga Personal Finance Limited Saga Property Management Limited Saga Radio (North West) Limited Saga Retirement Housing Limited Saga Rose Limited Saga Ruby Limited Saga Shipping Company Limited Saga Tours Limited Saga Ventures Limited Country of registration Nature of business England England England England England England England England England England England England England England England England England England England England England England England England England England England England England England England England England England England England England England England England Dormant company Dormant company Dormant company Dormant company Dormant company Dormant company Dormant company Dormant company Dormant company Dormant company Dormant company Dormant company Dormant company Dormant company Dormant company Dormant company Dormant company Dormant company Dormant company Dormant company Dormant company Dormant company Dormant company Dormant company Dormant company Dormant company Dormant company Dormant company Dormant company Dormant company Dormant company Dormant company Dormant company Dormant company Dormant company Dormant company Dormant company Dormant company Dormant company Dormant company 174 SAGA PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 171 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 35 Subsidiaries (continued) Name Saga Vitamins Limited Spirit Of Adventure Cruises Limited Spirit Of Adventure Holidays Limited Spirit Of Adventure Limited Tailor-Made Travel Limited Taylor Price Insurance Services Limited The Classic Traveller Limited Titan Aviation Limited Titan Connections Limited Titan Connections To Australia Limited Titan Connections To Italy Limited Titan Hitours Limited Titan Investment Property Company Limited Titan Music Productions Limited Titan Personal Finance Limited Titan Specialist Tours Limited Titan Travel Holdings Limited Titan Travel Limited Country of registration Nature of business England England England England England England England England England England England England England England England England England England Dormant company Dormant company Dormant company Dormant company Dormant company Dormant company Dormant company Dormant company Dormant company Dormant company Dormant company Dormant company Dormant company Dormant company Dormant company Dormant company Dormant company Dormant company 36 Investment in joint ventures During the year, the Group held an interest in two joint ventures: a. Saga Law Limited The Group held a 49% interest in Saga Law Limited, a company registered in England and Wales, up to 23 November 2015. This was accounted for using the equity method in the consolidated financial statements. The joint venture contributed a share of profit of £0.1m after tax. b. Saga Investment Services Limited The Group holds a 50% interest in Saga Investment Services Limited, a company registered in England and Wales. This is accounted for using the equity method in the consolidated financial statements. The joint venture contributed a share of a loss of £1.4m after tax. The investment has a carrying value of £1.6m as at 31 January 2016. 172 ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 SAGA PLC 175 Financial statements COMPANY FINANCIAL STATEMENTS OF SAGA PLC COMPANY FINANCIAL STATEMENTS OF SAGA PLC BALANCE SHEET BALANCE SHEET Non-current assets Investment in subsidiaries Current assets Debtors Creditors – amounts falling due within one year Net current liabilities Net assets Capital and reserves Called up share capital Share premium account Profit and loss reserve Other reserves Total shareholders’ funds Company number: 08804263 Signed for and on behalf of the Board on 18 April 2016 by L H L Batchelor Group Chief Executive Officer J S Hill Group Chief Financial Officer The notes on pages 178-182 form an integral part of these financial statements. Note 2016 £’m 2015 £’m 2 2,100.6 2,099.2 3 4 5 0.9 0.2 114.1 (113.2) 33.8 (33.6) 1,987.4 2,065.6 11.2 519.3 11.1 519.4 1,439.0 1,494.3 17.9 40.8 1,987.4 2,065.6 176 SAGA PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 173     COMPANY FINANCIAL STATEMENTS OF SAGA PLC COMPANY FINANCIAL STATEMENTS OF SAGA PLC STATEMENT OF CHANGES IN EQUITY STATEMENT OF CHANGES IN EQUITY Called up share capital £’m Share premium account £’m Retained earnings £’m At 2 May 2014 Issue of share capital on flotation Costs associated with issue of share capital Issue of treasury shares Loss for the period Dividends paid Share-based payment charge Exercise of share options At 31 January 2015 Loss for the financial year Bonus shares issued Dividends Share-based payment charge Exercise of share options Issue of free shares (note 5) At 31 January 2016 Share- based payment reserve £’m – – – – – – Total equity £’m 3,539.6 550.0 (27.6) 0.1 (768.8) (1,269.5) 41.8 – – 3,531.6 – – – (768.8) (1,269.5) 547.0 (27.6) – – – – – – 1.0 41.8 (1.0) 519.4 1,494.3 40.8 2,065.6 – (0.1) – – – – (8.8) – (70.4) – 11.0 12.9 – – – 2.8 (12.8) (12.9) (8.8) – (70.4) 2.8 (1.8) – 8.0 3.0 – 0.1 – – – – 11.1 – 0.1 – – – – 11.2 519.3 1,439.0 17.7 1,987.4 174 ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 SAGA PLC 177 Financial statements       NOTES TO THE COMPANY NOTES TO THE COMPANY FINANCIAL STATEMENTS FINANCIAL STATEMENTS 1 Accounting policies a. Accounting convention These financial statements were prepared in accordance with Financial Reporting Standard 101 ‘Reduced Disclosure Framework’ (‘FRS 101’) and in accordance with applicable accounting standards. The financial statements are prepared under the historical cost convention, as modified by derivative financial assets and financial liabilities measured at fair value through profit or loss, and in accordance with the Companies Act 2006. The Company’s financial statements are presented in sterling and all values are rounded to the nearest million pounds (£’m) except when otherwise indicated. The Company transitioned from previously extant United Kingdom Generally Accepted Accounting Practice (‘UK GAAP’) to FRS 101 for all periods presented. Transition reconciliations showing all material adjustments are disclosed in note 6. The accounting policies which follow set out those policies which apply in preparing the financial statements for the year ended 31 January 2016. The Company has not presented its own profit and loss account as permitted by section 408(3) of the Companies Act 2006 (the ‘Act’). The loss included in the financial statements of the Company, determined in accordance with the Act, was £8.8m (2015: £768.8m). The Company has taken advantage of the following disclosure exemptions under FRS 101: a) b) c) d) e) f) g) h) i) The requirements of IFRS 7 ‘Financial Instruments: Disclosures’. The requirements of paragraphs 91-99 of IFRS 13 ‘Fair Value Measurement’. The requirement in paragraph 38 of IAS 1 ‘Presentation of Financial Statements’ to present comparative information in respect of paragraph 79(a)(iv) of IAS 1. The requirements of paragraphs 10(d), 10(f), 16, 38A, 38B-D, 40A-D, 111 and 134-136 of IAS 1 ‘Presentation of Financial Statements’. The requirements of IAS 7 ‘Statement of Cash Flows’. The requirements of paragraphs 30 and 31 of IAS 8 “Accounting policies, Changes in Accounting Estimates and Errors”. The requirements of paragraph 17 of IAS 24 ‘Related Party Disclosures’. The requirements in IAS 24 ‘Related Party Disclosures’ to disclose related party transactions entered into between two or more members of a group, provided that any subsidiary which is a party to the transaction is wholly owned by such a member. The requirements of IFRS 1.6 and IFRS 1.21 on the comparative period for first time adopters of IFRS. Investments in subsidiaries are accounted for at the lower of cost and net realisable value and reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. b. Investments Investments in Group undertakings are stated at the lower of cost and net realisable value. c. Deferred tax Deferred tax is provided using the liability method on temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes at the reporting date. Deferred tax liabilities are recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses, can be utilised. 178 SAGA PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 175 NOTES TO THE COMPANY FINANCIAL STATEMENTS CONTINUED 1 Accounting policies (continued) c. Deferred tax (continued) The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Unrecognised deferred tax assets are reassessed at each reporting date and are recognised to the extent that it has become probable that future taxable profits will allow the deferred tax asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited in other comprehensive income, in which case the deferred tax is dealt with in other comprehensive income. Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority. d. Share-based payments The Company provides benefits to employees (including Directors) of Saga plc and its subsidiary undertakings, in the form of share-based payment transactions, whereby employees render services as consideration for equity instruments (equity-settled transactions). The cost of equity-settled transactions is measured by reference to the fair value on the grant date and is recognised as an expense over the relevant vesting period, ending on the date on which the employee becomes fully entitled to the award. Fair values of share-based payment transactions are calculated using Black-Scholes modelling techniques. In valuing equity-settled transactions, assessment is made of any vesting conditions to categorise these into market performance conditions, non-market performance conditions and service conditions. Where the equity-settled transactions have market performance conditions (that is, performance which is directly or indirectly linked to the share price), the fair value of the award is assessed at the time of grant and is not changed, regardless of the actual level of vesting achieved, except where the employee ceases to be employed prior to the vesting date. For service conditions and non-market performance conditions, the fair value of the award is assessed at the time of grant and is reassessed at each reporting date to reflect updated expectations for the level of vesting. No expense is recognised for awards that ultimately do not vest. At each reporting date prior to vesting, the cumulative expense is calculated, representing the extent to which the vesting period has expired and, in the case of non-market conditions, the best estimate of the number of equity instruments that will ultimately vest or, in the case of instruments subject to market conditions, the fair value on grant adjusted only for leavers. The movement in the cumulative expense since the previous reporting date is recognised in the income statement, with the corresponding increase in share-based payments reserve. Upon vesting of an equity instrument, the cumulative cost in the share-based payments reserve is reclassified to reserves. 176 ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 SAGA PLC 179 Financial statements     NOTES TO THE COMPANY FINANCIAL STATEMENTS CONTINUED 2 Investment in subsidiaries Cost At 2 May 2014 Additions Capital contributions arising from share-based payments At 31 January 2015 Capital contributions arising from share-based payments At 31 January 2016 Amounts provided for At 2 May 2014 Amounts provided in the period At 31 January 2015 Amounts provided in the year At 31 January 2016 Net book value At 31 January 2016 At 31 January 2015 See note 35 to the consolidated financial statements for a list of the Company’s investments. 3 Debtors Deferred tax asset Other debtors All amounts above are due in less than one year. 4 Creditors – amounts falling due in less than one year Amounts owed to Group undertakings Other creditors £’m 3,539.6 544.8 41.2 4,125.6 1.4 4,127.0 – 2,026.4 2,026.4 – 2,026.4 2,100.6 2,099.2 2015 £'m 0.1 0.1 0.2 2015 £'m 31.1 2.7 33.8 2016 £'m 0.3 0.6 0.9 2016 £'m 109.7 4.4 114.1 180 SAGA PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 177       NOTES TO THE COMPANY FINANCIAL STATEMENTS CONTINUED 5 Called up share capital Allotted, called up and fully paid At 1 May 2014 Issue of share capital on flotation As at 31 January 2015 Free shares allotted – 5 June 2015 As at 31 January 2016 Number Ordinary shares Nominal value £ 800,000,000 310,705,405 1,110,705,405 7,300,000 1,118,005,405 0.01 0.01 0.01 0.01 0.01 Value £’m 8.0 3.1 11.1 0.1 11.2 On 29 May 2014, Saga plc was admitted to the London Stock Exchange, issuing 310,705,405 £0.01 shares, raising £550m of funds to clear existing bank debt (note 28 to the consolidated financial statements). The share premium arising on this transaction was £547.0m. On 5 June 2015, the Company issued 7.3 million free shares as part of the offer during the IPO. 6 Transition to FRS 101 For all periods up to and including the year ended 31 January 2015, the Company prepared its financial statements in accordance with previously extant UK GAAP. These statements, for the year ended 31 January 2016, are the first the Company has prepared in accordance with FRS 101. Accordingly, the Company has prepared individual financial statements which comply with FRS 101 applicable for periods beginning on or after 1 February 2014 and the significant accounting policies meeting those requirements are described in the relevant notes. In preparing these financial statements, the Company has started from an opening balance sheet as at 1 February 2014, the Company’s date of transition to FRS 101, and made those changes in accounting policies and other restatements required for the first-time adoption of FRS 101. As such, this note explains the principal adjustments made by the Company in restating its balance sheet as at 1 February 2014 prepared under extant UK GAAP and its previously published UK GAAP financial statements for the year ended 31 January 2015. 178 ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 SAGA PLC 181 Financial statements NOTES TO THE COMPANY FINANCIAL STATEMENTS CONTINUED 6 Transition to FRS 101 (continued) Reconciliation of equity as at 31 January 2015 Fixed assets Investment in subsidiaries Current assets Debtors Note UK GAAP £’m 2,099.2 FRS 101 Re-classification/ re-measurements £’m FRS 101 £’m 2,099.2 0.2 0.2 Creditors – amounts falling due within one year (a) (33.8) – (33.8) Net current liabilities Net assets Capital and reserves Called up share capital Share premium account Retained earnings Share-based payment reserve Shareholders’ funds (33.6) 2,065.6 11.1 519.4 (a) 1,494.3 40.8 2,065.6 (33.6) 2,065.6 11.1 519.4 – 1,494.3 40.8 2,065.6 a. Employee benefits Holiday pay accrual – On transition to FRS 101, a holiday pay accrual has been accounted for of £15,000 at 31 January 2015 (£nil at 1 February 2014). 182 SAGA PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 179     SHAREHOLDER INFORMATION Financial calendar 2016 Annual General Meeting – 21 June 2016 Final dividend dates Announcement date – 19 April 2016 Ex-dividend date – 12 May 2016 Record date – 13 May 2016 Last day for DRIP elections – 5 June 2016 Payment date – 30 June 2016 Shareholder information online The Company will publish annual reports, notices of shareholder meetings and other documents which we are required to send to shareholders (‘shareholder information’) on a website. Consenting shareholders will be notified either by post or email if preferred each time the Company publishes shareholder information. This allows us to increase speed of communication, reduce our impact on the environment and keep costs to a minimum. You can change your communication preference via the Saga Shareholder Services Portal www.sagashareholder. co.uk or by contacting Saga Shareholder Services. In order to register on the portal you require your 11-digit investor code (‘IVC’). You can find your IVC on recent communications such as your share certificate. The Saga Shareholder Services Portal allows you to manage your shareholding easily and securely online. You can also change your personal details, view your holding and get an indicative valuation, view dividend information, register proxy voting instructions, reinvest your dividends to buy additional Saga plc shares, buy and sell shares and register bank details so that dividends can be paid directly to your account. Shareholder fraud Shareholders are advised to be wary of any unsolicited advice or offers, whether over the telephone, through the post or by email. If any such unsolicited communication is received please check the company or person contacting you is properly authorised by the Financial Conduct Authority (‘FCA’) before getting involved. Fraudsters use persuasive and high-pressure tactics to lure investors into scams. They may offer to sell shares that turn out to be worthless or non-existent, or to buy shares at an inflated price in return for an upfront payment. While high profits are promised, if you buy or sell shares in this way you may potentially lose your money. 5,000 people contact the FCA about share fraud each year, with victims losing an average of £20,000. For more information, or if you are approached by fraudsters, please visit the FCA website www.fca.org,uk/ consumers/scams, where you can report and find out more about investment scams. You can also call the FCA Consumer Helpline on 0800 111 6758. If you have already paid money to share fraudsters you should contact Action Fraud on 0300 123 2040. Advisers Corporate brokers and financial advisers Bank of America Merrill Lynch 2 King Edward Street London EC1A 1HO Goldman Sachs Peterborough Court 133 Fleet Street London EC4A 2BB Media relations advisers FTI Consulting 200 Aldersgate Aldersgate Street London EC1A 4HD Independent auditors Ernst & Young LLP 1 More London Riverside London SE1 2AF Legal advisers Freshfields Bruckhaus Deringer LLP 65 Fleet Street London EG4Y 1HT Information for investors Information for investors is provided on the internet as part of the Group’s corporate website which can be found at htlp://corporate.saga.co.uk. Registrars Capita Asset Services For shareholder enquiries contact: Saga Shareholder Services The Registry 34 Beckenham Road Beckenham Kent BR3 4TU Shareholder Helpline: 0800 015 5429 – calls to Freephone numbers will vary by provider. If you are outside the United Kingdom call +44 203 471 2272 – calls outside the United Kingdom will be charged at the applicable international rate. Lines are open are open 9am to 5.30pm, Monday to Friday, excluding public holidays in England and Wales. enquiries@sagashareholder.co.uk Registered office Saga Plc Enbrook Park Sandgate Folkestone Kent CT20 3SE Corporate websites Information made available on the Group’s websites does not, and is not intended to, form part of these Results. ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 SAGA PLC 183 GLOSSARY ABC1 households social grading based on a system of demographic classification used in the UK, as defined by Experian Mosaic data Accident year the financial year in which an insurance loss occurs Active customer a customer that has purchased an insurance policy in the last twelve months, or a holiday in the last three years, or has a live personal finance product or Saga Magazine subscription Add-on an insurance policy that is actively marketed and sold as an addition to a core policy AGM Annual General Meeting AICL Acromas Insurance Company Limited Available operating cash flow net cash flow from operating activities after capital expenditure but before tax and interest paid and exceptional expenses, which is available to be used by the Group as it chooses and is not subject to regulatory restriction Average number of products held the average number of Saga products held by each active customer as at a certain date. Active customers include those customers who hold an insurance product, have taken a holiday in the last three years or have a live personal finance or Saga Magazine product Combined operating ratio the ratio of the claims costs and expenses incurred in selling and administering insurance underwritten (numerator) to the net earned premium (denominator) in a given period. Can otherwise be calculated as the sum of the loss ratio and expense ratio Companies Act the UK Companies Act 2006, as amended from time to time Company Saga plc Contactable households the number of households that are recorded on the proprietary Group Marketing Database, with a household being defined as a single person or couple living at the same address Contactable people the number of people that are recorded on the Group’s proprietary marketing database that have not opted out of all marketing preferences Continuing operations operations that are not classified as discontinued Core policy an insurance policy that is actively marketed and sold on its own Expense ratio the ratio of expenses incurred in selling and administering insurance underwritten (numerator) to the net earned premium (denominator) in a given period Financial Conduct Authority (FCA) the independent UK body that regulates the financial services industry, which includes general insurance FTE (Full Time Equivalent) the number of full-time and part-time employees expressed as an equivalent number of full-time employees GHG Protocol a global standard for how to measure, manage, and report greenhouse gas emissions Gross revenue statutory accounting revenue plus any net premiums paid to third party insurers who underwrite insurance sold by the Group Gross written premiums the total premium charged to customers for an insurance product, excluding Insurance Premium Tax but before the deduction of any outward reinsurance premiums, measured with reference to the cover start date of the policy DBP Deferred Bonus Plan Group the Saga plc group Discontinued operations operations divested or those that have been classified as held for sale whose trading activities relate to a separate line of business or geographical area Holidays passengers the number of passengers that have travelled on a Saga, Titan or Destinology holiday in a given period Board Saga plc Board of Directors Claims frequency the number of claims incurred divided by the number of policies earned in a given period DTRs (Disclosure Rules and Transparency Rules) rules published by the UK Financial Conduct Authority relating to the disclosure of information by a company listed in the UK Claims reserves accounting provisions that have been set to meet outstanding insurance claims, IBNR and associated claims handling costs Code the UK Corporate Governance Code published by the UK Financial Reporting Council from time to time setting out guidance in the form of principles and provisions to address the principal aspects of corporate governance Earned premium insurance premiums that are recognised in the income statement over the period of cover to which the premiums relate, deferred on a 365ths basis Earnings per share from continuing operations (basic) profit after tax from continuing operations attributable to ordinary shareholders divided by the weighted average number of ordinary shares outstanding during the period IASB International Accounting Standards Board IBNR (incurred but not reported) a claims reserve provided to meet the estimated cost of claims that have occured, but have not yet been reported to the insurer IFRS International Financial Reporting Standards IPO (Initial Public Offering) the first sale of shares by a previously unlisted company to investors on a securities exchange 184 SAGA PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING 31 JANUARY 2016 Leverage ratio the ratio of net debt to Trading EBITDA Net interest expense finance costs less finance income LIBOR London inter-bank offered rate Liquidated damages payments received in respect of the early termination of management and franchise contracts, where applicable Load factor in relation to cruise ships, the number of passenger days travelled divided by the maximum number of passenger days that could be travelled, in a given period Loss ratio a ratio of the claims costs (numerator) to the net earned premium (denominator) in a given period LR (Listing Rules) a set of mandatory regulations set from time to time by the UK Financial Conduct Authority and applicable to a company listed in the UK LTIP Long-Term Incentive Plan Malus an arrangement that permits the forfeiture of unvested remuneration awards, in circumstances the Company considers appropriate M&A Mergers and Acquisitions Net claims the cost of claims incurred in the period less any claims costs recovered under reinsurance contracts and after the release of any claims reserves Net debt bank debt and borrowings, excluding any overdrafts held by restricted trading subsidiaries, net of available cash Ogden discount rate the discount rate set by the relevant government bodies, the Lord Chancellor and Scottish Ministers, and used to calculate lump sum awards in bodily injury cases Operating profit profit before interest payable, tax, exceptional expenses and fair value gains and losses on derivative financial instruments PBT profit before tax PMI private medical insurance Policies sold the number of core and add-on insurance policies sold to customers in a given period, measured by reference to the cover start date of the policy PPO (Periodical payment order) claims payments as awarded under the Courts Act 2003. PPOs are used to settle large personal injury claims, and they generally provide claimants who require long-term care with a lump sum award plus inflation-linked annual payments RDR 1 and RDR 2 residence, domicile and the remittance basis UK tax rules Reinsurance contractual arrangements where an insurer transfers part or all of the insurance risk written to another insurer, in exchange for a share of the customer premium RMM (required minimum margin) a measure used under Solvency I to assess the minimum level of solvency capital an insurance underwriter must retain Net earned premium earned premium net of any outward earned reinsurance premium paid RPI Retail Price Index Ship passenger days the total number of days passengers have travelled on a ship, or ships, in a given period SIP Share Incentive Plan SIPP self invested personal pension Solvency capital/Solvency II insurance regulations designed to harmonise European Union insurance regulation. Primarily this concerns the amount of capital that European insurance companies must hold under a measure of capital and risk. Solvency II came into effect on 1 January 2016 TBI Tilney Bestinvest tCO2e tonnes of carbon dioxide equivalent, which is a measure that allows comparison of the emissions of other greenhouse gases relative to one unit of CO2 Trading EBITDA earnings before interest payable, tax, depreciation and amortisation, exceptional expenses and fair value gains and losses on derivative financial instruments Trading profit Trading EBITDA less depreciation and amortisation, excluding amortisation of acquired intangibles TSR (total shareholder return) the theoretical growth in value of a shareholding over a period, by reference to the beginning and ending share price, and assuming that dividends, including special dividends, are reinvested to purchase additional units of the equity Unearned premium an amount of insurance premium that has been written but not yet earned UW underwriting Designed and produced by Luminous www.luminous.co.uk Saga plc Enbrook Park Sandgate Folkestone Kent CT20 3SE S a g a p l c A n n u a l R e p o r t a n d A c c o u n t s f o r t h e y e a r e n d i n g 3 1 J a n u a r y 2 0 1 6