Saga : Preliminary Results

12 April 2018

Saga plc

Preliminary Results for the full year ended 31 January 2018

Increase in underlying profit and dividend; with early signs of progress on long term growth initiatives

Saga plc ('Saga' or 'the Group'), the UK's specialist in products and services for life after 50, announces its preliminary results for the twelve months ended 31 January 2018.

Financial highlights

1Alternative performance measure - refer to the glossary at the back for definition and explanation

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

· Growth in Underlying Profit Before Tax of 1.4%

· Robust performance in our Retail Broking insurance business despite challenging trading conditions; and growth in Travel

· Reduction in profit before tax to £178.7m reflects costs associated with the successful refinancing, cost savings and net fair value losses on derivatives

· Continued strong cash generation which has supported deleveraging to 1.7x

· Full year dividend increased to the level of 9.0p, reflecting our confidence in the future cash generation of the business

Operational and divisional highlights

· Written profit growth in Retail Broking of 4.3%, including a 37.3% increase in motor partially offset by an 8.8% fall in home

· Earned Retail Broking profit was 5.7% lower, reflecting lower written to earned benefit

· Strong profit growth of 36.9% in the Travel business

· Positive performance in Underwriting: profit before tax of £79.2m, driven by excellent claims management and the ongoing positive experience in small and large personal injury claims

· £10m of cost savings delivered to fund targeted investment in customer growth

· Construction has commenced on our new cruise ship, 'Spirit of Discovery' and delivery of our second new cruise ship, 'Spirit of Adventure', has been brought forward to August 2020

· Strong demand for 'Spirit of Discovery' continues; we have achieved over 50% of our sales target for the first 9 months from June 2019, at attractive yields

· Investment in future growth across the Group including the ongoing renewal of our IT capabilities, demonstrated by the successful launch of our new broking platform, Guidewire

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

'In a challenging market we have delivered a set of full year results which is in line with the rebased profit expectations set at the end of 2017. We have also continued to develop our strategy for long term growth. We have achieved a modest increase in underlying profits and have remained highly cash generative. We have increased the dividend given our confidence in the stability of our highly cash generating model.

Our membership scheme, Possibilities, now has over half a million members and I am confident that the Group has a significant opportunity to attract, retain and grow a core customer base that has a high affinity with the brand.

In December we outlined our plans to further invest in growing our customer base and, having seen some initial momentum in new business, the early signs are promising. While this investment will contribute to a small decrease in profitability compared to last year, I am confident that we have put in place the right investment to drive the Saga business forward.'

END

A preliminary results presentation to analysts and investors will be held at 09.45 at the offices of Numis, 10 Paternoster Square, London, EC4M 7LT. The presentation will be broadcast via a webcast and a conference call for registered participants. Registration for the webcast can be completed athttp://corporate.saga.co.uk/. The conference call can be accessed on:UK: 020 3936 2999, all other locations: +44 20 3936 2999. Participant Password: 547534.

For further information please contact:

Notes to editors

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

Chairman's statement

I would like to thank our shareholders, both institutional and retail, for their ongoing support and forbearance this year and to welcome those who have joined us.

At the end of 2017 we took steps to rebase our profit expectations, implement £10m of annualised savings from across the Group at a one off cost of £5m, and increase our targeted spend by £10m a year to grow customer numbers. This had a significant impact on our share price and Lance and Jonathan have been working to rebuild the market's confidence in Saga.

Due to the challenging markets in which our core businesses of retail insurance and travel operate, we delivered growth in Underlying Profit Before Tax³ of 1.4% to £190.1m and in Underlying Earnings Per Share³of 0.7% to 13.8p. Profit before tax and earnings per share from continuing operations declined by 7.6% and 7.8%, respectively due to costs associated with our refinancing, the £10m annualised savings, and fair value movements on derivatives.

We have continued to be highly cash generative, resulting in a further deleveraging and enabling us to reduce our net debt to Trading EBITDA ratio to 1.7 times.

We have delivered on our dividend policy again this year, increasing our dividend to 9.0p. The decision to increase the dividend to this level reflects the Board's ongoing confidence in the stability of our highly cash generative model.

Our customers and their changing needs remain central to everything we do at Saga and we have built strong platforms and systems in 2017 that will help us interact differently and more efficiently with our 500,000 plus members going forward.

After 26 years with Saga, 14 of which as Chairman, I will retire from the Board on 30 April 2018. I welcome Patrick O'Sullivan as my successor and wish him success as he takes over the stewardship of this great British company.

I am hugely proud of Saga. Our employees have incredibly high standards and a passion for delivery and customer service that I have not seen elsewhere. I would like to thank them all - past and present - for everything they have done to make my time at Saga so enjoyable and to make Saga the great business it is. I wish Lance, the Board and the management team every success in the next stage of its evolution.

³Alternative performance measure - refer to the glossary at the back for definition and explanation

Group CEO's statement

Overview

This is Saga's fourth set of results as a public company. It has been a challenging few months during which the share price has been under real pressure. This is in contrast to the four years since IPO, in which we have achieved a great deal.

We came to market with a target to grow profits every year and reduce the £700m of inherited bank debt. We set out a strategy that replaced riskier and more capital-intensive underwriting earnings with earnings from broking and travel. As part of this we needed to grow profits in the broking business, especially via the motor panel; grow profits in the travel business; and deliver growth in emerging businesses.

We have made good progress in achieving these objectives while also upgrading most of our IT platforms. However, while we have achieved excellent growth in earnings in our travel business, we have not delivered the expected profit uplift in broking.

In recent years, we achieved profit growth from a static customer base. In December 2017 we announced our decision to increase our targeted spend by £10m a year to allow us to focus on growing our customer numbers. While it will have an impact on profitability in 2018/19, I am confident that this investment will lead to a larger customer base and a return to sustainable profit growth.

In addition to the targeted investment and enhancements to our platform, our new membership scheme, Possibilities,increases our ability to attract, target and retain people who are likely to develop a high affinity with our brand. It will also help the broader business, and particularly the Retail Broking business, to grow customer numbers.

Early signs show these initiatives are working: in the first two months of the year there has been a 14% increase in the volume of new business in Retail Broking.

A membership scheme to reward our loyal customers

The launch of our new membership scheme, Possibilities, in September was a significant achievement for the Group. Eighty percent of customers who have been invited to join the scheme have signed up and we now have over half a million active members.

After a successful launch, the Group is now ready to drive a fundamental change in how we interact with our customers which will reward loyalty and encourage the take up of multiple Saga products.

Increased product holdings by HACs

The number of products held by High Affinity Customers ('HACs') has increased to 1,143k (1,129k in 2017) due to a combination of a slightly lower number of HACs (471k versus 483k in 2017) offset by a higher number of average products of 2.4 (versus 2.3 in 2017). Our new product propositions and marketing activity have also driven a 5.5% increase in revenue per HAC.

Spirit of Discovery and Spirit of Adventure

We are now just over a year away from the delivery of Spirit of Discovery. We have achieved over 50% of our sales target for the first 19 cruises, at per diems that continue to be in line with our expectations.

The highlight of the year for me was the decision to invest further in our shipping capacity. Our second new ship, the Spirit of Adventure, will be delivered in August 2020. Having two new efficient ships will significantly change the profit trajectory of our Travel business.

Systems improvements

We continue to renew and refresh our systems to enhance our customers' experience and to provide efficient operating platforms across the Group. Important achievements which position us well for the next phase of our development include:

· our new claims platform was launched in the first half of the year. It is delivering an enhanced customer experience at a reduced cost;

· work throughout the year culminated in the launch of our broking platform, Guidewire, in April 2018; and

· we started work on a new reservation system for our tour operating business which will be used for reservations from FY 2020.

Summary and outlook

I am a passionate believer in the uniqueness of the Saga model. The fundamentals have not changed: we are focused on an attractive and growing demographic which has strong loyalty to the Saga brand and we continue to evolve our products and services to ensure that they remain relevant to our customers.

A comprehensive overhaul of our systems, a clear focus on the development of our offering, and progress in developing our retail broking model, give us a strong foundation from which to increase customer engagement and retention. We are also beginning to see the benefits of our targeted investment in retail broking and travel. These early signs, together with the arrival of our new ships in 2019 and 2020, give me confidence in our ability to return the business to sustainable profit growth.

Divisional review

Insurance Retail Broking

Our Retail Broking business provides tailored products and services that are underwritten by our panels of underwriters or via a solus arrangement.

Our in-house insurer AICL sits on our motor and home panels and competes for that business with other panel members on equal terms.

Our travel insurance and private medical insurance are underwritten through solus arrangements with third party insurers.

When underwritten by a third party, the product is manufactured as a Saga product and we manage the customer relationship.

Motor broking

Our motor broking business performed strongly during the year, delivering a 37.3% increase in written PBT to £39.0m (2017: £28.4m). This was despite a fall in persistency to 65.4% (2017: 69.2%) as a result of the introduction of new FCA renewal wording, an increase in IPT and a more competitive trading environment in the last quarter of 2017. During this period we have focused on value over volume which has resulted in written profit per core policy increasing by 46.2% to £30.4 (2017: £20.8) and a 3.4% reduction in our Saga branded policies sold.

Profit before tax decreased by £2.8m to £42.4m (2017: £45.2m) as a result of a lower written to earned adjustment. We continue to benefit from our transition to a capital light broker model driving a positive written to earned adjustment of £3.4m (2017: £16.8m). This resulted from the expansion of the panel and the outsourcing of the underwriting for add-ons.

Home broking

The UK home insurance market has remained competitive throughout the year. We have continued to experience the same flat premium environment as the wider market. In response, we chose to maintain the quality of our home business. Where we believe prices in the market are unprofitable we are prepared to lose business and this has resulted in a reduction in the number of core policies sold. Core policies reduced to 1,186k (2017: 1,254k) and profit per policy declined by 3.5% to £44.7. Profit before tax was £56.6m (2017: £61.2m).

The efficiency of our panel continues to enable us to access a competitive cost of underwriting, and this is key to maintaining our margins in a challenging environment.

Other broking

Our other insurance broking business is primarily comprised of private medical insurance ('PMI') and travel insurance. These products have been designed our customers and play an important role in deepening our relationship with them.

Our PMI business performed strongly, both in terms of new policies and renewals.

Demand for travel insurance was weaker in the first quarter due to higher net rates from our underwriting partner. These stemmed from unfavourable foreign exchange movements in Q1 2017, which have now normalised.

Profit before tax was broadly in line with the prior year at £31.2m (2017: £31.6m).

Gary Duggan joined Saga in September as part of our succession planning for the Retail Broking business, and became CEO of Saga Services in January. Gary brings a wealth of experience in running and growing broking businesses at GE, Barclays and most recently as Managing Director of BGL's General Insurance partnerships business. He is focused on driving growth in the broking business by:

· Continuing to drive the efficiency and footprint of our panels;

· Focusing on increasing customer acquisition and retention; and

· Maintaining our efficient operating model.

Current trading in Retail Broking

The decision to invest in targeted marketing spend to return our customer base to growth is working well and motor and home new business volumes increased in the year to date by 17.7% and 9.2% respectively.

In the motor broking market, the strong price inflation we saw in 2017 has eased due to the expectation that the Ogden discount rate review and the implementation of proposed whiplash reforms put a downward pressure on retail pricing.

Our third party panel members currently underwrite 24.4% of net premiums. Since the panel was established two and a half years ago, we have seen a steady progression in panel share, apart from in H1 2017, when the cautious approach to pricing by external underwriters meant that AICL's share temporarily increased. The growth recovered in H2 2017 and we expect this to continue as we progress through the year.

Trading conditions continue to be challenging within the home insurance market but we have seen some signs of premium inflation, reflecting the backdrop of claims inflation. While we expect another tough year in this market, our targeted marketing spend and a focus on increasing home and motor cross product holdings by our high affinity and potential high affinity customers are expected to provide some opportunities for policy count growth.

Other insurance has been resilient. PMI continues to benefit from the ongoing concerns about NHS funding and travel insurance remains stable.

Insurance underwriting

Our in-house underwriter AICL retains its competitive advantage and has a high panel share of older, lower risk drivers. Its focus on these drivers, along with its ongoing efficient management of small and large personal injury claims, has led to a strong underwriting result. Profit before tax was £79.2m (2017: £77.1m).

AICL targets a 3% return on net premiums and a strong return on equity, which it has consistently delivered over many years. Claims inflation continues to be in the mid-single percentages reflecting a higher average claims cost, partially offset by a lower frequency of claims. The average claims cost has been driven by the depreciation of sterling and an increase in theft costs. Our excellent claims management and our claims experience continues to be very positive for small and large personal injury claims. This has enabled us to maintain reserve releases at roughly the same level year-on-year. However, we continue to expect a circa £10-15m decline in reserve releases in the coming year.

We have a 75% quota share arrangement with NewRe which expires on 31 January 2019. The new arrangement with both NewRe and HannoverRe will provide three years' cover on a rolling basis. It will cover 80% of the downside risk of all motor policies written from February 2019 up to 120% loss ratio cap.

This agreement is a testament to the stability and high quality of our underwriting business.

Travel

Our award winning travel business is at the heart of the Saga brand. During the year, we took more than 208,000 passengers all over the world on package holidays, escorted tours and cruises.

The travel business achieved growth in both revenue and Underlying PBT⁴ of 3.9% and 36.9%, respectively, and remains on track to grow PBT by four to five times over the five years from January 2017. Profit before tax was £18.1m, reflecting the net fair value loss on derivatives.

Tour operating

The tour operating businesses delivered another year of earnings growth: Underlying PBT⁴ increased 20.0% to £13.8m (FY 2017: £11.5m). We continue to see a shift in the mix of sales towards higher value, long-haul, river cruise and third-party cruise products. The trend to higher value products has been offset by a slight decline in passengers during the year, primarily due to flight cancellations following the collapse of Monarch Airlines.

Our tour operating business is comprised of four product segments: Go for it; Discover; Unwind; and Stay & Explore. We remain focused on leveraging our deep customer insight in the development of highly differentiated holidays and guided tours tailored to meet the needs of our travel customers.

Cruising

Saga Cruising is an integral component of our brand and delivers the most differentiated customer experience of all our products.

Underlying Profit before Tax⁴for our two cruise ships, Saga Sapphire and Saga Pearl II, increased by £3.2m to £6.6m (2017: £3.4m). This was driven by favourable fuel hedges and a 7% increase in passenger days as both ships required fewer maintenance days: a 19 day dry dock of the Pearl in April 2017 and a 20 day dry dock of Sapphire in November 2017, compared to a 63 day wet dock for Sapphire in the prior year.

4Alternative performance measure - refer to the glossary at the back for definition and explanation

Current trading

Our travel business has excellent visibility of bookings in the year ahead due to our customers' preference to book holidays in advance. In both tour operating and cruising, we have already secured the majority of our FY 2019 sales targets.

Overall profitability for the travel business is expected to step forward again year on year. Growth in forward travel reservations combined with our cost reductions will be partially offset by incremental marketing.

The incremental marketing investment in tour operations has led to an increase in revenue in the year to date of 0.7%.

There are no scheduled days in dock for our shipping fleet this year, increasing the number of days at sea. This benefit will be partially offset by a year on year increase in fuel costs because we will not benefit from the excellent forward acquired fuel rates we enjoyed in FY 2018.

Booked revenue has increased by £23.6m year on year for 2019/20 departures. This is due to the Spirit of Discovery having achieved over 50% of our sales target for her first 19 cruises at attractive per diem rates.

Emerging businesses

Our emerging businesses include our personal finance, healthcare, retirement villages and media operations. These businesses provide long-term growth opportunities to the Group. Profit before tax was £0.7m (2017: £0.8m) from the cluster of businesses.

Saga Money is made up of a variety of products, including credit cards, equity release, savings, loans and wealth management. We believe that a money proposition is an important part of our offering and we continue to explore ways to bring innovative products to our customers.

During the year we have restructured our joint venture with our partner, Tilney, to a lower cost commercial model.

Saga operates a number of brands within the homecare sector. We continue to strengthen our domiciliary care pilot in Hertfordshire to ensure we have a scalable and repeatable model before we roll it out to other areas.

Chief Financial Officer's Review

I am pleased to report that the Group has delivered a robust financial performance. Underlying Profit Before Tax is 1.4% higher at £190.1m. Strong cash flows and conversion have enabled us to continue to deleverage to 1.7x from 1.9x at the start of the year. Net debt has reduced from £464.9m to £432.0m. Based on these results and the stability of our highly cash generative model, we propose to increase our final dividend to 6.0p, leading to growth in the full year dividend of 5.9% to 9.0p per share. Profit before tax from continuing operations has decreased by 7.6% to £178.7m (2017: £193.3m).

Income Statement

¹ Alternative performance measure - refer to the glossary at the back for definition and explanation

² Pension charge IAS19R includes the additional non-cash pension current service cost in excess of employer contributions made in the year and the non-cash pension interest cost that are both required under IAS19R

³ Net finance costs excludes net fair value gains / (losses) on derivatives and has been restated to exclude IAS19R pension interest cost

Revenue decreased by 1.3% to £860.1m (2017:£871.3m). Saga's total customer spend ¹ increased by 2.3% to £1,209m (2017: £1,182m). This includes gross written premiums and insurance premium tax on all insurance policies sold.

Trading Profit grew by 1.0% to £216.2m (2017: £214.0m). A strong performance in Travel was offset by a decline in the written to earned benefit in Retail Broking. Depreciation and amortisation increased by £0.8m due to the planned investment in software within our insurance business and the maintenance of the Saga Sapphire in the prior year.

Underlying Profit Before Tax increased by 1.4% to £190.1m (2017: £187.4m). The benefit of lower net finance costs and amortisation of acquired intangibles was offset by an increase in the pension charge under IAS19R and higher non-trading costs. The increase in pension charge was due to the effect of low corporate bond yields as at 1 February 2017 driving down the discount rate used in the accounting valuation of the pension current service cost for the year.

Profit before tax from continuing operations was £178.7m for the year. This is a decrease of 7.6% due to the derivative losses that impacted the business following the weakening of sterling, the one-off costs associated with the unamortised facility fees of our previous banking facilities and the one-off restructuring costs incurred as a result of a review of the Group's cost base. This was partially offset by a one-time £4.0m profit impact in the prior year from the change in the Ogden discount rate from 2.5% to -0.75% that was announced by the UK Government on 27 February 2017.

Net finance costs

Net finance costs in the year were £12.5m (2017: £16.7m). This reduction has been achieved through the Group obtaining an overall lower average cost of debt following the refinancing of its debt earlier in the year along with lower average borrowings during the year. The cost of the external bank debt is now linked to the Group's leverage ratio and the continuing deleveraging has enabled the Group to be charged interest at the low end of the range.

Tax expense

The Group's tax expense for the year was £33.6m (2017: £36.0m) representing an effective tax rate of 18.8% (2017: 18.6%). The current year benefited from a lower corporation tax rate. The prior year benefited from a £2.7m one-off positive impact from the utilisation of tax losses brought forward from the Allied business that was disposed of on 1 December 2015. Going forward, the tax charge is likely to be more in line with the underlying corporation tax rate.

Discontinued operations

The loss after tax from discontinued operations is in relation to the sale of Allied Healthcare in the year ended 31 January 2016. The Group received deferred consideration in the form of two loan notes with face value of £3.5m each which attract uncompounded interest at a rate of 5% due to mature on 30 May 2018 and 30 May 2019. In the year to 31 January 2018, following an impairment review, management no longer consider the loan notes to be recoverable and as such have impaired the loan notes to £nil.

Earnings per share

The Group's underlying basic earnings per share from continuing operations were 13.8p (2017: 13.7p). The Group's basic earnings per share were 12.3p (2017: 14.1p), with basic earnings per share from continuing operations for the same period of 13.0p (2017: 14.1p).

Dividends

In determining the level of dividend in any year in accordance with the policy, the Board also considers a number of other factors that influence the proposed dividend. These include but are not limited to:

· the level of available distributable reserves

· future cash commitments and investment needs, including Saga's new ships

· availability of cash resources

· consideration of prevailing risks and uncertainties as documented on pages 24 to 29 of the Annual Report and Accounts.

Reflecting Saga's strong cash generation and confidence in the business, the Directors have proposed a final dividend of 6.0p per share. Combined with the interim dividend of 3.0p per share, this will deliver a total dividend for the financial year ended 31 January 2018 of 9.0p per share (2017: 8.5p). This equates to a payout ratio of 65% compared with the Group's underlying basic earnings per share from continuing operations.

Looking ahead the Board is committed to a long-term sustainable dividend policy. The increase in the dividend to this level reflects our ongoing confidence in the stability of our highly cash generative model.

Saga plc has £1,249.2m of distributable reserves at 31 January 2018 available for distribution to support the dividend policy. The distributable reserves of Saga plc are equal to the balance of the retained earnings reserve of £1,249.2m as at 31 January 2018. If necessary, its subsidiary companies hold significant reserves from which a dividend can be paid to support Saga plc's dividend policy. Subsidiary distributable reserves are available immediately with the exception of companies within the Travel and Underwriting segments, which require regulatory approval before any dividends can be declared and paid.

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 receiving a cash payment. The last date for shareholders to elect to participate in the DRIP will be 4 June 2018. The record date will be 18 May 2018 and the final dividend will be paid on 29 June 2018. Payment of the final dividend of 6.0p per share remains subject to shareholder approval at the Company's 2018 Annual General Meeting.

Cash flow and liquidity

Available operating cash flow is made up of the unrestricted cash flows of the retail broking and emerging businesses and central costs, plus any dividends paid by our restricted businesses, underwriting and travel.

The Group delivered a strong cash flow performance in the year to 31 January 2018, achieving an available operating cash flow of £175.5m, 70.2% of Trading EBITDA. This cash flow decreased by £42.1m on the previous period, which was primarily driven by a more normalised dividend paid from AICL, as the initial reduction in solvency capital from the introduction of the quota share in the prior year reduces. The reduction in the working capital outflow is due to the decrease in the written to earned adjustment.

¹ Alternative performance measure - refer to the glossary at the back for definition and explanation

² Restated to exclude IAS19R pension service costs

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

Financing

In May 2017, the Group refinanced its bank facilities with the launch of a debut £250m seven year senior unsecured bond, a £200m five year term loan facility and a £100m five year revolving credit facility. The refinancing strengthened the Group's balance sheet by extending the maturity profile and increasing the diversity of its sources of borrowings. The overall level of indebtedness did not change.

Continued strong cash flows have enabled the Group to continue to deleverage to a debt ratio (net debt to Trading EBITDA) of 1.7 from 1.9. The Group's net debt is made up as follows:

¹ Refer to note 13 of the financial statements for information as to how this reconciles to a statutory measure of cash

Pensions

Over the year, the valuation of the Group's pension scheme has strengthened on an IAS19R basis by £6.7m to a deficit of £7.0m (January 2017: deficit £13.7m):

The strengthening has been driven by a £30.5m increase in the fair value of the scheme assets to £307.3m (January 2017: £276.8m). This was partially offset by an increase in the scheme liabilities of £23.8m to £314.3m (January 2017: £290.5m), driven by a fall in corporate bond yields over the period.

Net assets

Since 31 January 2017, total assets and liabilities have reduced by £55.0m and £83.3m respectively, increasing overall net assets by £28.3m.

The decrease in total assets is as a result of a decrease in financial assets of £85.8m, which coincides with the release of surplus solvency capital from the Group's underwriting business and a decrease in cash and short-term deposits of £25.5m. This was partly offset by an increase in intangible fixed assets of £7.4m due to increased investment in IT systems, and an increase in trade and other receivables of £11.3m. The latter was primarily due to an increase in prepayments, which includes significant commitment fees on the two new ships and an increase in property plant and equipment of £31.9m, which includes the second and third stage payments for the Spirit of Discovery of £13.2m and £13.9m respectively and the first stage payment for the Spirit of Adventure of £15.2m.

The reduction in total liabilities reflects a £20.6m reduction in financial liabilities following the repayment of debt during the year, enabled through continued positive cash generation and the release of surplus solvency capital. This was coupled with an associated £60.3m reduction in gross insurance contract liabilities in line with further positive claims experience throughout the year.

Segmental performance

⁵Please refer to page 19 for details of how this Alternative Performance Measure is calculated and defined.

Total revenue for the retail broking businesses on a written basis decreased by 1.3% to £275.4m (2017: £279.1m). This was mainly due to ongoing challenges in the home market and a reduction in travel polices. Revenue from the written to earned ('WTE') adjustment has decreased by 61.3% to £7.2m (2017: £18.6m). This was mainly due to a reduction in the motor WTE adjustment. The WTE adjustment is required when the Group underwrites the portion of policies that it sells in its broker business to spread the broker revenue earned on those policies, and associated direct costs, over the period of cover.

Revenue for the underwriting business decreased by 12.0% to £98.8m (2017: £112.3m), due to the accounting for the quota share agreement in motor insurance, which required £126.6m (2017: £110.5m) of earned premiums ceded under the agreement to be accounted for as a deduction from revenue. The net impact on profit of the quota share was a £2.1m cost (2017: £1.6m cost). Travel revenue increased by 3.9% to £448.8m, due to revenue growth in both the tour operations and cruise businesses.

Underlying Profit Before Tax in the retail broking insurance business on a written basis has increased by 4.3%, primarily due to higher average revenues per policy in motor. Underwriting profit increased by £2.1m, from an increase in investment return. Travel underlying profits increased by 36.9%, due to higher average revenues and less ship maintenance days during the year compared with last year. Emerging businesses and central costs saw a 6.8% decrease in its underlying loss before tax reflecting the reduction in finance costs and central cost base, partially offset by an increase in the IAS19R pension charge.

Motor broking

Gross written premiums increased by 1.7%, with core policies lower by 6.2% offset by an increase in average gross written premiums of 7.9%.

Gross written premiums from business underwritten by third party underwriters increased by 4.3% to £102.1m (2017: £97.9m), as the number of policies underwritten by third parties increased by 4.3ppt to 17.0% (2017: 12.7%). Gross written premiums from business underwritten within the Group increased by 0.5% to £223.8m (2017: £222.6m) due to an increase in average premiums partially offset by a decrease in the number of policies sold. The discontinuation of the Direct Choice brand impacted both policies and gross written premiums. Saga branded policies reduced by 3.4%.

Written broker revenue has increased by 17.2% to £42.3m (2017: £36.1m) reflecting a positive trading environment that saw written revenue per policy increase strongly with premium inflation increasing ahead of the claims inflation during the year. When excluding the discontinued Direct Choice brand, broker revenue increased by 23.0% to £41.5m (2017: £33.7m).

Written instalment revenue has increased by £2.4m to £7.1m (2017: £4.7m) following the insourcing of the Bennetts debtor book during the prior year and an increase in the number of Saga customers paying by instalments coupled with higher premiums. Written add-on revenue has decreased by £3.7m to £28.9m (2017: £32.6m) due to the reduction in core policies and a decrease in add-on penetration.

Overall, this has led to written revenue increasing by 5.2% to £117.8m (2017: £112.0m).

Written marketing expenses have decreased by 15.6%, reflecting a reduction in aggregator volumes and improved efficiency of marketing spend. Written operating expenses have decreased by 1.5% as a result of programmes to deliver operational efficiencies across the broking business and savings associated with the closure of the Direct Choice brand. As a result, underlying written profit before tax has increased by 37.3% to £39.0m (2017: £28.4m).

The profit impact of the WTE adjustment has decreased by £13.4m to £3.4m (2017: £16.8m) with a £6.6m increase in the deferral of broker revenue on policies associated with AICL, driven by an increase in average premiums and £6.5m due to the introduction of the arrangement fee in November 2015 accelerating earnings in the prior year only.

Home broking

The ongoing challenges in the home market have reduced revenues and underlying profits in our home broking business. Core policies have fallen by 5.4% which has led to decreases in earned revenue and earned profit to £85.0m and £56.6m respectively (2017: £89.8m and £61.2m).

The positive home WTE adjustment in the current and prior year reflects the standard accounting treatments, as the group has moved towards a capital light broking model whereby add-ons were fully outsourced to a third party underwriter. These benefits will no longer occur in future years and we expect there to be no home WTE adjustment going forward.

Other insurance broking

Revenue from other broking decreased by 5.2% to £76.2m (2017: £80.4m), mainly due to a reduction in travel policies. This was driven by higher net rates in Q1 2017, due to the impact of foreign exchange rate movements, which made us less competitive in the market. This disadvantage has now unwound. Private medical insurance revenue also decreased due to lower average broker revenues. This resulted in a decrease in Underlying Profit Before Tax of 1.3% to £31.2m (2017: £31.6m).

Insurance underwriting

Underwriting P&L

Excluding the impact of the quota share agreement and the Ogden rate change, underwriting revenue increased by 0.9% to £225.4m (2017: £223.5m), while AICL underwrote a lower number of policies, as a result of external panel members winning a greater share compared with the prior year, this was more than offset by an increase in revenue per policy. The underwriting business delivered an improved pure combined operating ratio of 97.7% (2017: 99.6%).

Investment return increased by £1.5m to £16.2m (2017: £14.7m) with a profit from the sale of some bonds was partially offset by a lower yield on a smaller investment portfolio. The lower yield resulted from historical fixed income investments that have matured and the funds have been reinvested at current market rates. Total investments have reduced as surplus solvency capital has been released, which has been driven by continued favourable claims experience and an increase in the number of accident years covered by the quota share agreement.

Despite the lower level of underlying reserve releases, profit from underwriting activity has increased to £79.2m (2017: £77.1m).

Reserving

Excellent claims management and favourable claims development experience during the twelve months to 31 January 2018 has resulted in a reduction in the reserves required in respect of prior year claims. This has been driven by the experience on large and small personal injury claims and has enabled reserve releases on motor totalling £64.0m during the year. There has been no deterioration in the underlying reserve margin held over best estimate claims reserves year-on-year in percentage terms.

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

Analysis of insurance contract liabilities at 31 January 2018 and 31 January 2017 is as follows:

¹excludes funds-withheld quota share agreement

²includes 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 £63.0m as at 31 January 2018 from the previous year end driven by a £12.0m reduction in reported claims reserves, a £38.6m reduction in IBNR claims reserves and a £12.8m reduction in unearned premium reserve. The reduction in IBNR claims reserves was mainly due to favourable experience on large and small personal injury claims.

Investment portfolio

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

The amount held in invested funds decreased by £71.5m compared with the previous year, from £546.8m as at 31 January 2017 to £475.3m as at 31 January 2018. As at 31 January 2018, 91% of the financial assets held by the Group were invested with counterparties with a risk rating of A or above, which is broadly in line with the previous year and reflects the stable credit risk rating of the Group's counterparties.

Solvency capital

¹ The amounts shown for 12m to Jan 2018 are estimated and unaudited

Under Solvency II the Group had an SCR of £79.9m at 31 January 2018 (2017: £102.9m), benefiting from the claims experience and the impact of the quota share agreement. Available capital was £137.0m (2017: £146.7m), giving a coverage ratio of 171% (2017: 143%).

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

Travel

The travel business has had another strong year of trading having achieved growth in both revenue and profit, which are up 3.9% and 36.9% respectively.

The tour operations business generated a 2.9% increase in revenue to £360.4m (2017: £350.1m) from a decrease in passengers to 184k (2017: 190k). Approximately half of the decrease in passengers was due to the cancellations following the Monarch insolvency. The increased spend per passenger has primarily been driven by the foreign exchange impact of weak sterling, but also a continued shift in product mix towards higher value long-haul, river cruise and third party cruise products. Gross profit margin was impacted by cost associated with the Monarch insolvency and adverse foreign exchange movements but was more than offset by operational savings. Underlying Profit Before Tax from tour operations increased by 20.0% to £13.8m at an increased profit margin of 3.8% (2016: 3.3%). The insolvency of Monarch had a profit impact of approximately £2.0m during the year.

Saga Cruising delivered a 7.9% increase in revenue to £88.4m (2017: £81.9m) reflecting an increase in passenger days of 22k, in part driven by an increase in capacity days. The Saga Pearl was out of operation for scheduled maintenance for 19 days in April 2017 and the Saga Sapphire had a scheduled maintenance of 20 days in November 2017. This compared with 63 days of maintenance on the Saga Sapphire in the prior year.

Underlying Profit Before Tax from the cruising business almost doubled to £6.6m (2017: £3.4m), led by the increase in passenger days, lower fuel prices, and improved operating efficiency, partly offset by initial marketing spend for the Spirit of Discovery, due for delivery in June 2019.

On the 20 September 2017, the Saga plc Board approved the purchase of the second cruise ship, Spirit of Adventure, with an earlier delivery date of August 2020, and the Group exercised the option in December 2017. The financing for Spirit of Adventure represents a 12 year fixed rate sterling loan at an overall cost of approximately 3.3% per annum fixed, backed by an export credit guarantee. The loan value of approximately £295m will be repaid in 24 broadly equal instalments, with the first payment is due 6 months after delivery. On the date the finance was entered into, the Group purchased Euro currency forwards totalling £211.5m which represents 72% of the cost of the ship.

Emerging businesses and central costs

Revenue from emerging businesses (which includes personal finance, healthcare services, retirement villages and the media businesses) increased by 2.9% to £28.0m (2017: £27.2m), which delivered a broadly stable profit of £0.7m (2017: £0.8m).

Central costs reduced to £22.4m (2017: £25.2m) due to cost savings initiatives. The Group saw a £4.0m increase in the IAS19R charge due to prevailing market conditions, particularly in the bond market, as at 1 February 2017. This was offset by lower debt service costs, driven by lower levels of debt, which led to a £4.2m reduction in net finance costs to £12.5m (2017: £16.7m). This resulted in a loss from central costs of £40.4m (2017: £43.4m).

Previous trading guidance

On 6 December 2017, the Group published a Trading update stating that the Group's growth in Underlying PBT was expected to be between 1% and 2% for the year ended 31 January 2018. Within the Chief Financial Officer's review for the year ended 31 January 2017, the following statement was made in respect of the year ended 31 January 2018: 'The Group is aiming to deliver ongoing consistent profit growth this year'. The Group's published Underlying PBT within this Annual Report and Accounts for the year ended 31 January 2018 is £190.1m which represents 1.4% growth.

Financial outlook and guidance

During the year ending 31 January 2019, written profits from insurance broking are expected to be relatively flat with lower costs and improvements in net revenues will be offset by an incremental investment of approximately £5m in policy growth. There will be a negative movement in the written to earned accounting adjustment of approximately £10m.

For tour operating, higher revenues are expected to drive incremental profit, but the additional investment of approximately £5m in passenger growth for 2019/20 will mean that profit will be relatively stable year on year. While cruise has more capacity days to sell with no dry docks this year, the hedging on fuel and foreign exchange for the current year are less advantageous than last year, therefore cruise profits will also remain flat year on year.

Lower costs and a limited IAS19R pension charge in central costs will provide a profit improvement year on year.

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

Reserve releases are expected to reduce this current year by c£10-15m.

Subject to market conditions remaining materially consistent, the Group is aiming to deliver Underlying Profit approximately 5% lower than in the year to 31 January 2018.

While the Group's leverage reduced materially in the year to 31 January 2018, the rate of any reduction is expected to be lower this year due to our profit guidance.

Consolidated income statement

for the year ended 31 January 2018

Consolidated statement of comprehensive income

for the year ended 31 January 2018

Consolidated statement of financial position

as at 31 January 2018

Consolidated statement of changes in equity

for the year ended 31 January 2018

Consolidated statement of cash flows

for the year ended 31 January 2018