Annual Report • Jan 31, 2016
Annual Report
Open in ViewerOpens in native device viewer
Saga plc Annual Report and Accounts for the year ending 31 January 2016
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.
02 Highlights
Achievements in the past year
33
A review of how our businesses are performing
08
Group Chief Executive Officer's Strategic Review
Delivering for our customers through strategic priorities
£176.2m 54.8% 2.3x from 2.6x 2.66m from 2.63m
13.3p from 8.6p 7.2p from 4.1p 2.51 from 2.63
£211.0m 5.2% £178.1m 9.3% 11.2m from 10.8m
Profit before tax Debt ratio (net debt to EBITDA) Active customers
Basic earnings per share Dividend per share Average number of products per customer
The importance of good corporate governance in the business
Shareholder information Glossary
HIGHLIGHTS OF OUR JOURNEY
14.9%
Core motor policies sold Read more on page 34
Core insurance policies sold Read more on page 34
2.3%
Core home insurance policies sold Read more on page 35
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
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.
Read more on page 34
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.
Read more on page 36
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.
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.
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.
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
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.
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
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
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
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
1 ONS population projections, CEBR analysis.
Profit growth, cash generation and sustainable shareholder returns
Go to page 19 for more information
Go to page 20 for more information
I am delighted to present a strong set of results in an important year in the history of Saga. This year marks the 65th anniversary of the foundation of our business when Sidney De Haan, the owner of the Rhodesia Hotel in Folkestone, started offering off-peak holidays to retired people. His insight into our customers' needs was the start of the Company you see today.
During all of our 65 years our focus on customer needs has been the driving force behind the growth of the business. They remain at the heart of everything we do and our model is underpinned by the provision of exceptional levels of customer service.
We benefit from a diverse and supportive shareholder base. I am delighted that many of our customers extended their affinity with the brand through their continued ownership of the Company. We have also been fortunate to attract a broad range of high-profile, long-term institutions to our share register. This combination supports our ability to deliver long-term sustainable returns and I would like to thank our shareholders for their ongoing support.
I am very pleased to announce that we have taken the decision to increase shareholder distributions through our progressive dividend policy. This is an important decision and one that reflects the Board's confidence in the sustainability of our dividend policy given our continued strong profit and cash performance, the evolution of our capital efficient model, and our plans to generate additional free cash flow.
Our proposed total dividend for the year of 7.2p equates to a payout ratio of 57% of net 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.
Go to page 50 for more information on our governance.
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.
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.
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.
We have successful pilots ongoing in new product areas.
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:
As a result of these changes we will generate additional free cash flow
in the future, enabling us to continue to deleverage and increase returns to shareholders through dividends more quickly than we had previously indicated.
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:
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.
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
Introducing our Executive Management Team
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
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.
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:
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.
10 20 30 40 18.1m 1993 15% 9% 7% 18% 8% 8% 18% 9% 8% 19% 10% 17% 11% 77% 39% 73% 2013-2033 Growth 29.1m 2033 26.7m 2023 c.7m increase 22.4m 2013 35% of the population 40% of the population 20.0m 2003
Age group
Source: CEBR (Centre for Economic and Business Research), based on the ONS wealth and assets survey
50-65 65-75 75+
(WAS), Ipsos MORI and ONS, Cebr Analysis.
0
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.
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 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.
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.
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.
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 longterm returns to shareholders via our progressive dividend policy.
l Broked and other – 77% l Manufactured – 23%
1 Manufactured is Trading Profit from AICL Underwriting, Cruising, Healthcare, Media and Central Costs, broked and other is Trading Profit from all other operations.
2 Excluding Central Costs.
Year ending 31 January 2016
£211.0m 5.2%
£176.2m 54.8%
Available operating cash flow
£178.1m 9.3%
Year ending 31 January 2017
Core insurance policies sold
2,908k 8.5%
Holiday passenger days
189k 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
Read more on page 18
Read more on page 19
Read more on page 20
Read more on page 20
Read more on page 21
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.
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:
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.
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.
Ashleigh Hatton, Performance Consultant, Performance Support Team, 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.
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.
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
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.
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.
Rebecca Johncock, Cruise Adviser, Saga Holidays
Saga's success relies upon having highly engaged employees committed to delivering exceptional service to our customers. Building exceptional engagement requires a positive highperforming 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.
John Freeman, Sales Adviser,
Retirement Villages
| Male | Female | |||||
|---|---|---|---|---|---|---|
| Actual | % | Actual | % | Total | ||
| Board1 | 7 | 78% | 2 | 22% | 9 | |
| Senior managers2 | 95 | 65% | 51 | 35% | 146 | |
| Employees3 | 1,980 | 44% | 2,499 | 56% | 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).
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.
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.
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.
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.
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.
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.
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.
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.
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.
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 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.
| Emissions source | 2015/16 Emissions |
2014/15 Emissions |
|---|---|---|
| Scope 1 | 96,026 tCO2e | 104,734 tCO2e |
| Scope 2 (location-based) | 6,235 tCO2e | 7,038 tCO2e |
| Total Scope 1 & 2 | 102,261 tCO2e | 111,772 tCO2e |
| tCO2e per £m revenue | 106.2 | 124.1 |
| Scope 2 (market-based)* | 1,078 tCO2 | n/a |
| Scope 3 | 1,637 tCO2e | 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.
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.
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:
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.
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.
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.
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.
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:
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.
We have low appetite for volatile earnings and have established limits representing the maximum amount of acceptable variation in earnings during our planning cycle.
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.
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:
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.
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.
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.
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.
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.
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.
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:
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.
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.
"Our risk appetite, reviewed annually, defines the amount and sources of risk which we are willing to accept in pursuit of our objectives."
| Principal risks and uncertainties |
Strategic priorities linkage and risk movement |
Specific concerns | Response/mitigation |
|---|---|---|---|
| IT systems and processes |
1, 2, 3, 4 | Failure of our core IT systems to deliver required performance stability and resilience |
We have allocated specific investment for refreshing our IT Infrastructure and strengthened our core IT team and processes |
| Inability to develop digital offerings sufficient to drive innovation and growth |
We have made a significant investment in digital innovations at Group and business levels |
||
| Cybercrime | 1, 2, 3, 4 | Cybercrime attacks prevent achievement of objectives |
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 |
| Database | 1, 2, 3, 4 | Breach/loss of sensitive data assets |
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 |
| Breach of data protection legislation |
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 |
||
| 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. |
| Principal risks | Strategic priorities linkage and |
||
|---|---|---|---|
| and uncertainties Operational efficiency/ change |
risk movement 1, 2, 3, 4, 5 |
Specific concerns Failure to accrue expected benefits from operational/ change initiatives |
Response/mitigation 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 |
| Failure to maintain shipping fleet at a level to meet both customer expectations and plan |
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 |
||
| Key innovation projects do not deliver expected results |
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 |
||
| New ship is delivered late or outside of budget |
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 |
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 |
|
| External regulatory landscape/ political change |
1, 2, 3, 4 | Breach of regulation governing our operations |
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 |
| Inability to respond to regulatory change affecting our business |
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 changes negatively impact our business models |
Political policy is constantly monitored for impact and active lobbying is undertaken to influence proposed change wherever appropriate |
| Principal risks | Strategic priorities linkage and |
||
|---|---|---|---|
| and uncertainties | risk movement | Specific concerns | Response/mitigation |
| Counterparty | 1, 2, 3, 4 | Financial failure of key partner |
We have agreed selection, monitoring and due diligence processes in place for all key partners/ suppliers |
| 1, 2, 3, 4 | Inability of key partner to provide appropriate service leading to reputational damage |
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 |
|
| 1, 2, 3, 4 | Key partnerships fail to produce anticipated benefits |
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 |
|
| Insurance landscape |
1, 2 | Inability to compete with insurance competitors |
Saga controls the underwriting process for both broking and insurance operations, thereby allowing them to compete on policy terms where appropriate |
| Rates in the motor insurance market do not move as expected |
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 |
||
| 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 |
||
| Conduct/ customers |
1, 2, 3, 4, 5 | 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 |
| Macroeconomic climate |
1, 2, 3, 4 | Changes in the macroeconomic climate impact our customers' inclination/capability to purchase our products and services |
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 |
| 1, 2, 3, 4 | Investments do not yield expected returns |
Saga manages its investment portfolio through an investment committee which ensures a spread of risk and optimal returns |
|
| Travel landscape | 3 NEW |
Increased product commoditisation prevents us from both meeting customer needs and achieving expected margins |
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 |
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
Performance
£118.3m
Performance
17.8%
Motor Underwriting: Combined Operating Ratio
3.5pts
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.
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:
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.
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.
Home Insurance: Core policies sold
Performance
2.3%
Home Insurance: Trading Profit
Performance
3.2%
Other Insurance: Core policies sold
Performance
11.3%
Other Insurance: Trading Profit
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.
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).
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).
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.
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.
Performance
9.9%
Ship passenger days:
339k
Performance
0.9%
Travel: Trading Profit
Performance
26.5%
Our travel business has continued to focus on growing profitability. We have delivered customer and profit growth across our tour operating and cruising businesses with overall revenue growing by 11.0% to £423.1m (2015: £381.3m) and Trading Profit up by 26.5% to £17.2m (2015: £13.6m). The business continues to be on track to deliver its objectives.
During 2015, our travel businesses were awarded 65 awards ranging from Saga's best specialist tour operator, award from the Times and Sunday Times to Destinology's Gold award for best medium sized luxury holiday company, in the British Travel Awards.
Within our tour operating businesses we have seen a shift in the mix of sales to longer-haul, higher-value products where we can provide our customers with both security and a highly differentiated product. The success of this shift is attributable to our ability to know more about our customers' wants and needs than any other provider, and to create affordable packages underpinned by excellent service.
We have grown customer numbers with a 9.9% increase in holiday passengers to 189k (2015: 172k).
Cruising remains a vital part of our travel offering through our two ships, the Saga Sapphire and Saga Pearl II. The business had another good year with load factors of 84.4% (2015: 84.9%) across both ships and a 0.9% increase in the number of ship passenger days to 339k (2015: 336k).
Whilst the announcement of the purchase of the new ship has caused much excitement amongst our customers, our immediate focus is on ensuring the maintenance of the customer experience and the high levels of satisfaction with customers' overall holiday experience which we have seen reach historic highs this year.
As part of this ongoing process, the Saga Sapphire will be in wet dock during the coming year for scheduled maintenance. As with the refit of Saga Pearl II last year, this will enhance our service capability and the proposition to customers on board. It will, however, mean we have one ship out of service for two months during the year, which, whilst budgeted, will hold back the total profit growth in the travel business for the coming year.
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
| Departure year |
2016/ 2017 |
Growth | 2015/ 2016 |
|---|---|---|---|
| Tour operating revenue |
£269.4m | 5.0% £256.5m | |
| Cruise revenue |
£71.2m | (2.2%) £72.8m |
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.
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.
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.
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.
Available operating cash flow
£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
| Income Statement | |||
|---|---|---|---|
| Group Income Statement | 12m to Jan 2016 |
Growth | 12m to Jan 2015 |
| Revenue | £963.2m | 7.0% | £900.5m |
| Trading EBITDA | £238.8m | 5.0% | £227.4m |
| Depreciation & amortisation (excluding acquired intangibles) | (£27.8m) | (£26.8m) | |
| Trading Profit | £211.0m | 5.2% | £200.6m |
| Non-trading costs | (£0.2m) | (£2.4m) | |
| Amortisation of acquired intangibles | (£6.3m) | (£2.2m) | |
| Net fair value gains / (losses) on derivatives | (£1.2m) | £2.9m | |
| Profit before interest, tax and IPO costs | £203.3m | 2.2% | £198.9m |
| Finance costs | (£24.0m) | (£23.0m) | |
| IPO expenses | (£3.1m) | (£50.0m) | |
| Exceptional debt costs | – | (£12.1m) | |
| Profit before tax from continuing operations | £176.2m | 54.8% | £113.8m |
| Tax expense | (£28.1m) | 2.6% | (£27.4m) |
| Loss after tax for the year from discontinued operations | (£6.9m) | (96.9%) | (£220.2m) |
| Profit / (loss) after tax | £141.2m | 205.5% | (£133.8m) |
| Basic earnings per share: | |||
| Earnings per share from continuing operations | 13.3p | 54.7% | 8.6p |
| Earnings / (loss) per share | 12.7p | 195.5% | (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 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.
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%).
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.
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.
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 | 12m to Jan 2016 |
Growth | 12m to Jan 2015 |
|---|---|---|---|
| Trading EBITDA | £238.8m | 5.0% | £227.4m |
| Less Trading EBITDA relating to restricted businesses | (£95.8m) | 21.6% | (£78.8m) |
| Intra-group dividends paid by restricted businesses | £59.0m | 122.6% | £26.5m |
| Working capital and non-cash items | (£3.7m) | (408.3%) | £1.2m |
| Capital expenditure funded with available cash | (£20.2m) | 51.9% | (£13.3m) |
| Available operating cash flow | £178.1m | 9.3% | £163.0m |
| Available operating cash flow % | 74.6% | 2.9% | 71.7% |
Available operating cash flow reconciles to net cash flows from operating activities as follows:
| 12m to Jan 2016 |
12m to Jan 2015 |
|
|---|---|---|
| Net cash flow from operating activities (reported) | £150.4m | £155.3m |
| Exclude cash impact of: | ||
| Trading of restricted divisions | (£61.5m) | (£53.2m) |
| Trading of discontinued operation | – | (£11.4m) |
| Cash released from restricted divisions | £59.0m | £26.5m |
| Non-trading costs | £13.4m | £7.2m |
| Interest paid | £21.6m | £19.7m |
| Tax paid | £15.4m | £9.6m |
| Debt issue costs | – | £22.6m |
| £47.9m | £21.0m | |
| Include capital expenditure funded | ||
| from available cash | (£20.2m) | (£13.3m) |
| Available operating cash flow | £178.1m | £163.0m |
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.
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 | 12m to Jan 2016 |
12m to Jan 2015 |
|---|---|---|
| Fair value of scheme assets | £218.6m | £212.3m |
| Present value of defined benefit obligation | (£237.4m) | (£252.7m) |
| Defined benefit scheme liability | (£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.
Since 31 January 2015, total assets and liabilities have reduced by £49.9m and £154.0m respectively, increasing overall net assets by £104.1m.
Total assets have reduced as a result of a decrease in cash and short-term deposits of £92.3m, a reduction in other financial assets (predominantly the investment portfolio) of £14.9m and the removal of £47.7m of assets held for sale as at 31 January 2015 resulting from the sale of the Allied Healthcare business on 30 November 2015. Offsetting this is an increase in reinsurance of assets of £43.0m due to large personal injury claims experience caused by a rise in the average cost of Periodical Payment Orders, an increase in trade and other receivables of £24.3m driven by insurance trading, and increased goodwill and acquired intangible fixed assets of £31.1m primarily relating to the acquisition of Bennetts.
The reduction in total liabilities reflects a £131.2m reduction in financial liabilities following the repayment of debt during the period, the removal of £47.7m of liabilities held for sale as at 31 January 2015 resulting from the sale of the Allied Healthcare business, and a £21.6m reduction in retirement benefit scheme obligations. Trade and other payables have increased by £32.9m reflecting accruals for initial costs relating to the build of the new ship, insurance trading and the acquisition of Bennetts.
| Segmental Performance Summary | 12m to Jan 2016 |
Growth | 12m to Jan 2015 |
|
|---|---|---|---|---|
| Revenue | Motor insurance | £318.7m | 2.1% | £312.0m |
| Home insurance | £99.8m | 8.7% | £91.8m | |
| Other insurance | £91.6m | 6.4% | £86.1m | |
| £510.1m | 4.1% | £489.9m | ||
| Travel | £423.1m | 11.0% | £381.3m | |
| Emerging businesses and central costs | £30.0m | 2.4% | £29.3m | |
| £963.2m | 7.0% | £900.5m | ||
| Trading Profit | Motor insurance | £118.3m | 17.8% | £100.4m |
| Home insurance | £64.1m | 3.2% | £62.1m | |
| Other insurance | £30.7m | (12.0%) | £34.9m | |
| £213.1m | 8.0% | £197.4m | ||
| Travel | £17.2m | 26.5% | £13.6m | |
| Emerging businesses and central costs | (£19.3m) | 85.6% | (£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.
| 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 | 950k | 26k | 262k | 1,238k | 14.9% | 947k | 22k | 108k | 1,077k |
| – add-ons | n/a | 1,195k | 280k | 1,475k | 4.8% | n/a | 1,324k | 83k | 1,407k |
| 950k | 1,221k | 542k | 2,713k | 9.2% | 947k | 1,346k | 191k | 2,484k | |
| Gross written premiums |
£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 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.
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 |
12m to Jan 2016 |
Growth | 12m to Jan 2015 |
|
|---|---|---|---|---|
| Net earned premium | A | £226.5m | (2.7%) | £232.8m |
| Instalment income | £4.4m | 22.2% | £3.6m | |
| Other income | £6.8m | 54.5% | £4.4m | |
| Revenue | £237.7m | (1.3%) | £240.8m | |
| Claims costs | B | (£179.8m) | (3.6%) | (£186.6m) |
| Reserve releases | C | £64.6m | 3.2% | £62.6m |
| Claims handling and regulatory fees | D | (£18.8m) | 8.7% | (£17.3m) |
| Total cost of sales | E | (£134.0m) | (5.2%) | (£141.3m) |
| Gross profit | £103.7m | 4.2% | £99.5m | |
| Total expenses | F | (£34.5m) | (13.8%) | (£40.0m) |
| Investment return | £13.6m | (12.8%) | £15.6m | |
| Trading Profit | £82.8m | 10.3% | £75.1m | |
| Reported loss ratio | (B+C)/A | 50.9% | (2.4%) | 53.3% |
| Expense ratio | (D+F)/A | 23.5% | (1.1%) | 24.6% |
| Reported COR | (E+F)/A | 74.4% | (3.5%) | 77.9% |
| Pure COR | (E+F-C)/A | 102.9% | (1.9%) | 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.
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.
| 12m to Jan 2016 | 12m to Jan 2015 | ||||||
|---|---|---|---|---|---|---|---|
| Ancillary UW |
Core Broking / Coinsured |
Total Home |
Growth | Ancillary UW |
Core Broking / Coinsured |
Total Home |
|
| Revenue | £18.2m | £81.6m | £99.8m | 8.7% | £15.8m | £76.0m | £91.8m |
| Gross profit | £13.2m | £80.8m | £94.0m | 7.7% | £12.5m | £74.8m | £87.3m |
| Operating expenses | (£3.8m) | (£26.2m) | (£30.0m) | 18.1% | (£0.8m) | (£24.6m) | (£25.4m) |
| Investment return | £0.1m | – | £0.1m | (50.0%) | £0.2m | – | £0.2m |
| Trading Profit | £9.5m | £54.6m | £64.1m | 3.2% | £11.9m | £50.2m | £62.1m |
| Number of policies sold: | |||||||
| – core | n/a | 1,287k | 1,287k | 2.3% | n/a | 1,258k | 1,258k |
| – add-ons | 546k | n/a | 546k | (7.0%) | 587k | n/a | 587k |
| 546k | 1,287k | 1,833k | (0.7%) | 587k | 1,258k | 1,845k | |
| Gross written premiums |
£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.
| 12m to Jan 2016 | 12m to Jan 2015 | |||||||
|---|---|---|---|---|---|---|---|---|
| Core UW |
Core Broking / Other |
Total Other Insurance |
Growth | Core UW |
Core Broking / Other |
Total Other Insurance |
||
| Revenue | £37.3m | £54.3m | £91.6m | 6.4% | £39.9m | £46.2m | £86.1m | |
| Gross profit | £4.2m | £54.1m | £58.3m | 7.8% | £7.9m | £46.2m | £54.1m | |
| Operating expenses | (£2.3m) | (£25.9m) | (£28.2m) | 28.8% | (£2.0m) | (£19.9m) | (£21.9m) | |
| Investment return | £0.5m | – | £0.5m | (66.7%) | £1.5m | – | £1.5m | |
| Joint venture | – | £0.1m | £0.1m | (91.7%) | – | £1.2m | £1.2m | |
| Trading Profit | £2.4m | £28.3m | £30.7m | (12.0%) | £7.4m | £27.5m | £34.9m | |
| Number of policies sold: | ||||||||
| – core | 28k | 355k | 383k | 11.3% | 34k | 310k | 344k | |
| – add-ons | n/a | 1k | 1k | (80.0%) | n/a | 5k | 5k | |
| 28k | 356k | 384k | 10.0% | 34k | 315k | 349k | ||
| Gross written premiums |
£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.
| Reserving | |||
|---|---|---|---|
| Reserve releases | 12m to Jan 2016 |
Growth | 12m to Jan 2015 |
| Motor insurance: | |||
| Core UW | £64.6m | 3.2% | £62.6m |
| Ancillary | £2.1m | 250.0% | £0.6m |
| £66.7m | 5.5% | £63.2m | |
| Home insurance | £0.2m | (87.5%) | £1.6m |
| Other insurance | £1.1m | (63.3%) | £3.0m |
| Total | £68.0m | 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.
12m to Jan 2016 12m to Jan 2015 Gross Reinsurance Assets Net Gross 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
Analysis of insurance contract liabilities at 31 January 2016 and 31 January 2015 is as follows:
* Includes amounts for reported claims that are expected to become Periodical Payment Orders.
The Group's total insurance contract liabilities net of reinsurance assets have reduced by £44.4m as at 31 January 2016 from the previous 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.
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 | <a< th=""> | Unrated | Total | </a<>Unrated | Total |
|---|---|---|---|---|---|---|---|---|
| Underwriting investment portfolio: | ||||||||
| Deposits with financial institutions | £30.0m | £140.3m | £243.3m | – | – | £413.6m | ||
| Debt securities | £85.2m | – | – | – | – | £85.2m | ||
| Money market funds | £75.9m | – | – | – | – | £75.9m | ||
| Hedge funds | – | – | – | – | £26.7m | £26.7m | ||
| Loan funds | – | – | – | – | £19.3m | £19.3m | ||
| Loan notes | – | – | – | – | £3.8m | £3.8m | ||
| Unlisted equity shares | – | – | – | – | £0.2m | £0.2m | ||
| Total invested funds | £191.1m | £140.3m | £243.3m | – | £50.0m | £624.7m | ||
| Hedging derivative assets | – | £10.1m | £9.9m | – | – | £20.0m | ||
| Total financial assets | £191.1m | £150.4m | £253.2m | – | £50.0m | £644.7m |
| At 31 January 2015 | AAA | AA | A | <a< th=""> | Unrated | Total | </a<>Unrated | Total |
|---|---|---|---|---|---|---|---|---|
| Underwriting investment portfolio: | ||||||||
| Deposits with financial institutions | £30.0m | £180.3m | £213.6m | £55.5m | – | £479.4m | ||
| Debt securities | £71.9m | – | – | – | – | £71.9m | ||
| Money market funds | £40.6m | – | – | – | – | £40.6m | ||
| Hedge funds | – | – | – | – | £33.8m | £33.8m | ||
| Loan funds | – | – | – | – | £19.6m | £19.6m | ||
| Equities | – | – | – | – | £8.7m | £8.7m | ||
| Total invested funds | £142.5m | £180.3m | £213.6m | £55.5m | £62.1m | £654.0m | ||
| Amounts owed by related undertakings under the previous group structure |
– | – | £5.6m | – | – | £5.6m | ||
| Total financial assets | £142.5m | £180.3m | £219.2m | £55.5m | £62.1m | £659.6m |
| 12m to Jan 2016 |
|
|---|---|
| Undertaking-specific parameters | |
| Solvency Capital Requirement (SCR) | £128.8m |
| Available capital | £219.6m |
| Surplus | £90.8m |
| Coverage | 170% |
The Group had its use of the Undertaking Specific Parameters route for Solvency II approved by its regulator, the Financial Services Commission in Gibraltar, during the year. Under Solvency II the Group had an SCR of £128.8m at 31 January 2016 and available capital is £219.6m, giving a coverage ratio of 170% and retaining its strong capital position.
The following table shows a range of impacts against the base Solvency II coverage ratio:
| Sensitivities | |
|---|---|
| Base Solvency II coverage | 170% |
| Interest rates +1% / -1% | +3%/-3% |
| Equities -15% | -2% |
| Credit spreads + 50bps/-50bps | -6%/+6% |
| 3 large losses of £10m each | -6% |
The travel business has had another strong year of trading, supported by the acquisition of Destinology in August 2014.
| 12m to Jan 2016 |
Growth | 12m to Jan 2015 |
|
|---|---|---|---|
| Revenue: | |||
| Holidays | £336.9m | 13.3% | £297.3m |
| Cruising | £86.2m | 2.6% | £84.0m |
| £423.1m | 11.0% | £381.3m | |
| Gross profit: | |||
| Holidays | £68.6m | 16.4% | £58.9m |
| Cruising | £17.3m | (2.8%) | £17.8m |
| £85.9m | 12.0% | £76.7m | |
| Operating expenses | (£69.1m) | 9.0% | (£63.4m) |
| Investment income | £0.4m | 33.3% | £0.3m |
| Trading Profit | £17.2m | 26.5% | £13.6m |
| Number of holidays passengers | 189k | 9.9% | 172k |
| Number of ship passenger days | 339k | 0.9% | 336k |
The holidays businesses generated a 13.3% increase in revenue to £336.9m (2015: £297.3m), £32.8m of which was attributable to the impact of Destinology being included for a full year. Gross profit increased by 16.4% to £68.6m (2015: £58.9m), around half of which was due to Destinology, and the number of passengers travelling increased by 9.9%, largely driven by the impact of Destinology.
The Saga Holidays and Titan businesses both delivered increases in revenue and gross profit, driven by a shift in product mix towards higher-value, higher-margin long-haul and third party cruise products.
Saga Cruising delivered revenue of £86.2m, 2.6% above the previous year (2015: £84.0m), driven primarily by improved yields. Ongoing investment in the ships and the Saga cruise customer experience resulted in a marginal decrease in gross profit of 2.7% to £17.3m (2015: £17.8m).
An overall 12.0% increase in gross profit was partially offset by a 9.0% increase in operating expenses, driven by the full year impact of Destinology. The Travel segment as a whole delivered a 26.5% increase in Trading Profit to £17.2m (2015: £13.6m).
| 12m to Jan 2016 |
Growth | 12m to Jan 2015 |
|
|---|---|---|---|
| Revenue | £30.0m | 2.4% | £29.3m |
| Gross profit | £13.6m | 1.5% | £13.4m |
| Operating expenses | (£31.7m) | 31.5% | (£24.1m) |
| Investment income | £0.2m | (33.3%) | £0.3m |
| Joint venture | (£1.4m) | n/a | – |
| Trading Loss | (£19.3m) | 85.6% | (£10.4m) |
Revenue from emerging businesses (which includes personal finance, continuing healthcare services, the media businesses and the retirement villages pilot) was up 2.4% to £30.0m (2015: £29.3m). These businesses delivered a 1.5% increase in gross profit to £13.6m (2015: £13.4m).
The overall Trading Loss from this segment was £19.3m (2015: £10.4m). £5.5m of the increase was due to the normalisation of listed company costs, with the balance being made up of additional Group costs, including the investment in the newly launched Saga Investment Services.
| 12m to | 12m to | ||
|---|---|---|---|
| Jan 2016 | Growth | Jan 2015 | |
| Revenue | £206.2m | (27.2%) | £283.2m |
| Gross profit | £57.0m | (31.7%) | £83.4m |
| Operating expenses | (£58.4m) | (24.4%) | (£77.2m) |
| Trading (Loss) / Profit | (£1.4m) | (122.6%) | £6.2m |
| Exceptional items | (£6.4m) | (23.8%) | (£8.4m) |
| Net finance expense on pension schemes | (£0.4m) | 33.3% | (£0.3m) |
| Loss before tax | (£8.2m) | 228.0% | (£2.5m) |
| Tax expense | £0.3m | (86.4%) | £2.2m |
| Loss after tax, before amortisation | (£7.9m) | 2,533.3% | (£0.3m) |
| Gain on disposal of discontinued operations | £1.0m | – | |
| Amortisation of associated intangible assets | – | (£10.4m) | |
| Loss on re-measurement of disposal group to fair value | – | (£209.5m) | |
| Loss after tax for the year from discontinued operations | (£6.9m) | (96.9%) | (£220.2m) |
On 30 November 2015, the Group completed the sale of the local authority section of the healthcare business, Allied Healthcare, resulting in a £1.0m gain on disposal. This was offset against a loss after tax for the period up to this date of £7.9m, resulting in a loss after tax for the year from discontinued operations of £6.9m.
During the year ending 31 January 2017 insurance profitability is expected to benefit from higher policy numbers, the positive impact of the panel and the ongoing benefits of efficiency improvements. This will be partially offset by the impact of the recently announced quota share arrangement. Reserve releases are expected to contribute materially during the year, but at a reduced level from the year ending 31 January 2016.
Growth in our tour operating businesses will be largely offset by the impact of the two-month wet dock for Saga Sapphire in the cruise business. Therefore, profitability for the travel business will be relatively flat year on year.
Subject to market conditions remaining materially consistent, the Group is therefore targeting PBT growth of between 5% and 7% for the year ending 31 January 2017. At the same time, the Group expects to delever further, benefiting from its strong solvency position in AICL, the initial benefits of the quota share arrangement and our prudent investment strategy.
The additional capital released gradually over the next few years from AICL will provide additional free cash flow and enable an increase in the dividend payout ratio to between 50% and 70% of net earnings, whilst retaining the Group's target debt range of 1.5x to 2.0x Trading EBITDA.
Jonathan Hill Group Chief Financial Officer 18 April 2016
The Strategic Report was approved by the Board and signed on its behalf by Lance Batchelor, Group Chief Executive Officer on 18 April 2016.
"This year is about ensuring that our governance framework supports and sets the tone for the strategic direction of the business."
D uring our second year as a public company, we have agreed a clear plan and operating model for the future (as outlined on pages 13-15). This year is about ensuring that our governance framework supports and sets the tone for the strategic direction of the business.
This corporate governance report explains how our processes not only ensure good stewardship and control, but also allow us to grow. The Audit, Risk, Remuneration and Nomination Committees (the 'Committees') have played an important role in allowing this to happen. Orna NiChionna became Risk Committee chair in June 2015, taking over from Ray King, who remains a Risk Committee member and chair of the Audit Committee.
The Group's risk management processes have been reviewed by the Risk Committee, which discussed our risk appetite and tolerance levels, and considered how these would affect our strategic direction. The principal risks and uncertainties analysis played an important part in the formulation of the viability statement (see page 69). The Audit Committee considered the approach taken and the viability statement itself (see page 53), and provided assurance that the relevant systems and processes were in place to ensure that the annual report as a whole is 'fair, balanced and understandable'. Details can be found in the Audit Committee Report on pages 70-73.
In the spirit of the Saga Way (see page 23), the Board is committed to ensuring that our brand and reputation for excellent customer service are never compromised. We are also focused on delivering the best service to our
shareholders and it is vital that our corporate governance procedures allow us to implement strategic decisions effectively. The composition of the Board will continue to support this.
There have been changes to the Board during the year and the Nomination Committee played an important role in helping us to identify the skill set we needed to achieve the right balance. This Committee also considered how we manage our talent and succession planning – for more details see pages 64-65.
Last year, I reported that Stuart Howard intended to retire at the Company's first AGM on 23 June 2015. In order for an effective handover to take place, Jonathan Hill joined as Group Chief Financial Officer Designate in April 2015, was appointed a Director on 29 April 2015, and took up the role of Group Chief Financial Officer following Stuart's retirement at the AGM. Jonathan's wealth of experience in senior financial operational and listed roles makes him a valuable addition to our leadership team. Since joining, Jonathan has demonstrated a passion for growth whilst focusing on a capital efficient model and high levels of cash generation. As projected at the time of listing, and following a 16 month handover period with Lance Batchelor, Group Chief Executive Officer, I transitioned from Executive to Non-Executive Chairman on 1 July 2015.
On 2 December 2015, as a result of the share placing undertaken by Acromas Bid Co Limited, Non-Executive Directors Charles Sherwood and Pev Hooper resigned from the Board. This was in accordance with the Relationship Agreement dated 8 May 2014 which required their resignation once the level of indirect shareholding of the Private
Equity Investor they represented fell below 10%.
Bridget McIntyre was appointed as an independent Non-Executive Director on 1 January 2016. Bridget has considerable insurance, management and financial management experience and I was delighted to welcome her to the Board. Her appointment enhances our insurance expertise and also brings a wealth of industry experience that I am sure will prove to be of great value to us.
These changes mean that we comply with the Code's recommendation that at least half of our Board members are independent Non-Executive Directors. For full details of Board composition see page 62.
We conducted our first Board and Committee evaluation during the year to ensure that our independent Non-Executive Directors had gained a good understanding of our business and our short and long-term strategic goals. I am pleased to say that the evaluation confirmed that this was the case. The exercise also identified areas on which to focus over the forthcoming year, including how we can ensure that Board meetings are structured to allow maximum time for debate and strategic discussion. A full explanation of the evaluation exercise can be found on page 63.
The Remuneration Policy was approved by our shareholders at our AGM: over 99% voted in favour. The full Remuneration Report can be found on pages 78-100.
The Board reviews our governance framework against best practice and regulatory requirements every year.
A summary of how we have complied with the Code is set out overleaf. Our approach to leadership and effectiveness is detailed on page 56-59 and 62-63 respectively, accountability on pages 66-69, and relations with shareholders on page 77.
Governance is integral to the success of our business. It is not just a case of 'ticking the box', but is viewed as a way of exploring opportunities and acting as a check and balance for decisions made.
This approach will support the Saga Model (outlined on page 13) and will allow us to provide differentiated products that our customers want, in a way they like, with outstanding service.
During the year, we introduced a Dividend Reinvestment Plan for those shareholders who wish to turn cash dividends into more shares. We also awarded eligible employees with free shares under the 2014 Share Incentive Plan to reward their hard work and allow them to share in our journey.
At our first AGM at our head office in Folkestone, Kent on 23 June 2015, all resolutions were passed with a significant majority and all Directors standing for re-election were reappointed. I look forward to this year's AGM – and also welcome comments from our shareholders at any time.
Andrew Goodsell Chairman 18 April 2016
The Board is committed to high standards of corporate governance and manages Saga's operations in accordance with the UK Corporate Governance Code 2014 (the 'Code'). A full version of the Code can be found on the Financial Reporting Council's ('FRC') website www.frc.org.uk. The Company complied with all of the provisions of the Code throughout the year, except for provisions A.3.1 and E.1.1.
A.3.1 The Code recommends that the chairman of the board should meet the independence criteria set out in the Code on appointment.
Andrew Goodsell acts as Chairman and was not independent on appointment, having previously been the Group Chief Executive and Executive Chairman. Andrew is responsible for the leadership and overall effectiveness of the Board and setting the Board's agenda. During the year, Andrew's responsibilities were aligned with those normally undertaken by a Non-Executive Chairman, as recommended by the Code. During the period that Andrew was Executive Chairman, Philip Green, our Senior Independent Director, had certain responsibilities which went beyond those contemplated in the Code, notably in relation to the appointment of independent Non-Executive Directors to the Committees.
The division of responsibilities between the Chairman, Group Chief Executive Officer and role of Senior Independent Director were reviewed and approved by the Board on 8 December 2015. This document is reviewed annually.
E.1.1 The Code recommends that the senior independent director should attend sufficient meetings with a range of major shareholders to listen to their views in order to help develop a balanced understanding of their issues and concerns.
Most contact with major shareholders has taken place via the Chairman, Group Chief Executive Officer and Group Chief Financial Officer and we consider this appropriate for this year. The Senior Independent Director has been available for meetings with our major shareholders but has not attended any during the year. Notwithstanding this, we have maintained an ongoing dialogue with our major shareholders and ensured their views are communicated to the Board. Details can be found on page 77 of this report.
The Directors have considered the viability of the Group over the five year period to January 2021 and have concluded there to be a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over this period.
The Directors have determined the five year period to January 2021 to be an appropriate period over which to assess the Group's viability, as this period:
In making this statement the Directors have considered the resilience of the Group, taking account of its current position, the principal risks facing the business in severe but plausible scenarios, and the effect of any mitigating actions. The Directors have considered each of the Group's principal risks and uncertainties detailed on pages 28-32 and the potential impact of these risks on the business model, future performance, solvency and liquidity over the period. The Directors have made a key assumption that it is reasonable to believe that debt funding to replace the existing senior bank facilities when they mature will be available in all plausible market conditions.
In accordance with the principles of the Code, the Board has established arrangements to evaluate whether the information presented in the annual report is fair, balanced and understandable. Having taken advice from the Audit Committee, the Board considers the annual report and accounts, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's position and performance, business model and strategy.
The Group's business activities, together with the factors likely to affect its future development and performance, its exposure to risk and its management of these risks, details of its financial instruments and derivative activities, and details of other financial and non-financial liabilities are described throughout the annual report (principal risks and uncertainties pages 28-32; Group Chief Financial Officer's review pages 38-49; accountability pages 66-69; Audit Committee report pages 70-73; Risk Committee report pages 74-76); and notes 17, 18 and 28.
The Group has access to sufficient cash and other financial resources together with a large renewing income stream from insurance policies and high-repeat purchase levels from customers of its other products, together with long-term contracts with a number of suppliers across different industries. As a consequence, the Directors believe that the Group is well placed to successfully manage its business risks.
The Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the forseeable future. It is therefore appropriate to adopt the going concern basis in preparing the financial statements.
Through the risk cycle detailed on page 68, the Board is able to confirm that it has carried out a robust assessment of the principal risks facing the Company, including those which would threaten our business model, future performance, solvency or liquidity.
The risk management process detailed on pages 66-69 was in place for the year under review and up to the date of approval of this report.
The Board has conducted a review of the effectiveness of Saga's risk management and internal control systems, including all material financial, operational and compliance controls, and concluded that these are acceptable.
The Company applied the main principles of the Code as follows:
A1 The role of the Board The Board met formally six times during the year. The schedule of matters reserved for the Board was reviewed on 24 September 2015. There is a governance structure throughout the Group, which sets out delegated authorities.
There is a clear division of responsibilities between the Chairman and Group Chief Executive Officer, as set out in the Explanations section above.
The Chairman sets the agendas for meetings, manages the meeting timetable (in conjunction with the Company Secretary) and facilitates open and constructive dialogue during the meetings, with particular focus on strategic issues. The Chairman promotes constructive relations between Executive and Non-Executive Directors.
The Non-Executive Directors provide objective, rigorous and constructive challenge to management and meet regularly without the Executive Directors. The Senior Independent Non-Executive Director acts as a sounding board for the Chairman and led an evaluation on the Chairman's performance.
The Nomination Committee is responsible for regularly reviewing the composition of the Board, considering succession planning and evaluating skills, knowledge and experience required in Board candidates.
The appointment of new Directors to the Board is led by the Nomination Committee and the process is such that candidates are selected on merit, but with regard for diversity. Further details of the activities of the Nomination Committee can be found on pages 64-65.
On appointment, Directors are notified of the time commitment expected from them. External directorships, which may impact on the existing time commitments of the Executive Directors, must be agreed beforehand with the Chairman.
A tailored programme is set up when a Director joins the Board and this is ongoing to ensure that Directors' skills and knowledge are regularly updated and refreshed.
The Chairman, in conjunction with the Company Secretary, ensures that all Board members receive accurate and timely information and are kept informed on all governance matters.
The Board conducted an annual evaluation of its own performance and that of its Committees and individual Directors, as set out on page 63.
All Directors are subject to shareholder annual re-election.
C1 Financial and business reporting The Strategic Report is set out on pages 01-49 (inclusive) and this provides information about the performance of the Group, the business model, strategy and principal risks and uncertainties relating to the Group's future prospects.
The Board sets out the Group's risk appetite and risk policy. The effectiveness of the Group's risk management and internal control systems is reviewed annually. The activities of the Risk Committee, which assists the Board with its responsibilities in relation to the management of risk, are summarised on pages 74-76.
The Board has delegated a number of responsibilities to the Audit Committee, which is responsible for overseeing the Group's financial reporting processes, internal controls and the work undertaken by the external auditors.
The Chairmen of the Risk and Audit Committees are Board members and provide regular updates to the Board regarding Committee business.
The Remuneration Committee is responsible for setting levels of remuneration which will attract, retain and motivate Board members. Remuneration is structured to link it to both corporate and individual performance, so that management's interests are aligned with those of shareholders and the long-term success of the Company.
Details of the work of the Remuneration Committee and Remuneration Policy can be found in the Directors' Remuneration Report on pages 78-100 (inclusive).
The Board actively engages with shareholders and values opportunities to meet with them. The Chairman has direct contact with our major shareholders and ensures that the Board is kept informed of shareholder views and that all Directors are in touch with shareholder opinion.
The Board see the AGM as an important opportunity to meet with shareholders. The Chairman and Chairs of each Committee are available for questions during the formal part of the business and the Board (and senior management) are available after the meeting.
Details of how the Board engages with shareholders can be found on page 77.
It is important that our leadership team supports the Saga Model, which helps deliver growth in our target markets. Our brand remains at the core of the Saga Model (see page 13). We recognise that to provide differentiated products via unique routes to market with outstanding levels of service we must empower our leaders.
Lance Batchelor, Group Chief Executive Officer, regularly hosts events with all senior management who either report to him or his direct reports. This group was instrumental in helping to develop the Saga Model and the Saga Way (see page 23). Culturally, the journey is shared across all employees, with clear and consistent messages set at executive level, to filter throughout the Group.
All Directors, members of the Group Executive Committee and persons discharging managerial responsibilities receive training on an ongoing basis, to ensure they remain aware of regulatory and statutory responsibilities. In addition, all independent Non-Executive Directors visit business areas so that they remain close to what Saga does, see how strategy works in action and how the discussion in the boardroom translates to the front line of the business. All Directors have visited all business areas, including our call centres and cruise ships.
The Board is responsible for, and provides, the overall direction for management, debating what our priorities are and setting Saga's values and standards. A fundamental part of this role is considering the balance of interests between our shareholders, our customers, our employees and the communities in which we work.
We also provide oversight and supervision of Saga's operations ensuring:
The Board has a clearly articulated set of matters which are specifically reserved to it and this is reviewed annually (the last review being 24 September 2015). These include:
the strategic direction of the overall business, objectives, budgets and forecasts, levels of authority to approve expenditure, and any material changes to them
the commencement, material expansion, diversification or cessation of any of Saga's activities
A review of our strategic objectives and financial performance takes place at each Board Meeting.
Details of the Board activities during the year can be found on page 59.
The Board is scheduled to meet at least six times a year and then meets on an ad hoc basis as necessary. During the year it met formally on six occasions. In addition, meetings were convened as necessary to approve strategic matters, and a strategy event was held in November where annual and five year plans for each of the businesses were presented to the Board and discussed.
| Member | Role | Attendance at Board meetings |
|---|---|---|
| Andrew Goodsell | Chairman (Board governance, performance and shareholder engagement) |
6/6 |
| Lance Batchelor | Group Chief Executive Officer (strategy and Group performance) | 6/6 |
| Jonathan Hill1 | Group Chief Financial Officer (Group financial performance) | 4/4 |
| Stuart Howard2 | Retired Group Chief Financial Officer | 3/3 |
| Non-Executive Directors: | ||
| James Arnell | Private Equity Investor appointed | 4/6 |
| Pev Hooper3 | Resigned (Private Equity Investor appointed) | 5/5 |
| Charles Sherwood3 | Resigned (Private Equity Investor appointed) | 5/5 |
| Independent Non-Executive Directors: | ||
| Philip Green | 6/6 | |
| Ray King | Assess, challenge and monitor Executive Directors' delivery | 5/6 |
| Bridget McIntyre4 | of the strategy (within risk and governance structures), financial | n/a |
| Orna NiChionna | controls and integrity of financial statements, and Board diversity | |
| Gareth Williams | 6/6 |
1 Jonathan Hill was appointed on 29 April 2015.
2 Stuart Howard retired at the AGM on 23 June 2015.
3 Pev Hooper and Charles Sherwood resigned on 2 December 2015.
4 Bridget McIntyre was appointed on 1 January 2016 and therefore did not attend any scheduled meetings during the year.
The Company Secretary attends all meetings as secretary to the Board. In addition, we also invite other executives and directors from around the Group, and external advisers, to provide insight into key strategic areas.
The Board is responsible for:
— strategic direction of the Group
See pages 64-65 for the Nomination Committee report. See pages 70-73 for the Audit Committee report.
See pages 74-76 for the Risk Committee report.
The Remuneration Committee Report is contained within the Directors' Remuneration Report on pages 78-100 and is incorporated into this Corporate Governance Statement by reference.
Our governance framework exists to support our strategy.
Andrew joined Saga in 1992 as Business Development Manager, Saga Services. He became Saga Group Business Development Director in 1995, Chief Executive of Saga Services and Saga Investment Direct in 1999, Deputy Group Chief Executive in 2001 and Chief Executive and Chairman in 2004. He has led two management buyouts at Saga. The second, in 2007, brought together Saga and the AA under the holding company Acromas Holdings. Andrew was Executive Chairman of the AA from 2007 until Acromas Holdings sold it in 2014; and Executive Chairman of Saga from 2007 until he became Non-Executive Chairman on 1 July 2015. He brings great experience of the Group to his Board role.
Committee membership: Nomination.
Lance joined Saga as Group Chief Executive Officer in March 2014. Prior to that he was CEO of Domino's Pizza Group plc from 2011-2014 and CEO of Tesco Mobile from 2008-2011. His earlier experience includes senior marketing roles at Procter & Gamble, Amazon.com and Vodafone. Lance's first career was as a Royal Navy submarine officer. He holds an MBA from Harvard Business School, and is a Trustee of the National Gallery. Lance has a wealth of senior operational experience in listed companies which he brings to his role at Saga.
Committee membership: Executive.
Jonathan joined Saga in April 2015 from Bovis Homes Group plc where he was Group Finance Director. Prior to that, he held various senior roles within TUI Travel and Centrica. Jonathan qualified as a Chartered Accountant at Price Waterhouse in London. He brings a wealth of senior financial operational and listed company experience to his role at Saga.
Committee membership: Executive.
Philip is currently Chairman of Carillion plc. He is also Chairman of BakerCorp, a US industrial services company owned by Permira, and Chairman Designate of Williams & Glyn. Previously, Philip was Chairman of Clarkson plc, Chief Executive of United Utilities Group plc and Chief Executive of Royal P&O Nedlloyd NV. His earlier business experience includes serving as Chief Operating Officer of Reuters Group plc and Chief Operating Officer of DHL for Europe and Africa. Philip is also the UK Prime Minister's adviser on corporate responsibility and Chairman of Sentebale, a charity set up by HRH Prince Harry. Philip was awarded a CBE in the 2014 Queen's Birthday Honours List. This was for services to business and to charity in the UK and South Africa. Philip brings his experience of running a variety of complex international organisations and acting as an Executive and Non-Executive Director of many public companies to the Board.
Nomination (Chairman), Audit, Remuneration and Risk.
Ray is currently Chairman of Rothesay Holdco UK Ltd and of its regulated subsidiary, Rothesay Life plc. He is also a Non-Executive Director of the Financial Reporting Council where he is a member of the Codes and Standards Committee and chairs the Audit and Assurance Council. Previously, he was Chief Executive of Bupa from 2008-2012, after serving as Group Finance Director from 2001-2008. Before Bupa, Ray was a Non-Executive Director of Friends Provident plc, Deputy Chief Executive of Parity Group plc, Director of Group Finance and Control at Diageo plc and Group Finance Director of Southern Water plc. In 2015, Ray resigned as a Reporting Panel Member of the Competition and Markets Authority and as a Non-Executive Director of Infinis Energy Plc. His financial experience
coupled with his knowledge of running a business similar to Saga, and his Non-Executive Director experiences including that of chairing audit committees, are all immensely helpful to the Board.
Audit (Chairman), Nomination, Remuneration and Risk.
Bridget is currently a Non-Executive Director of Adnams plc. Previously, she was Chief Executive of the RSA UK business and a Director of RSA Insurance Group plc having held senior roles at Aviva (and pre-merger Norwich Union). Bridget is also an associate with
the Chartered Institute of Management Accountants. Bridget brings in-depth insurance expertise as well as considerable general and financial management experience to the Board.
Audit, Nomination, Remuneration and Risk.
Orna is currently Senior Independent Non-Executive Director of Royal Mail plc. Previously, she was Senior Independent Non-Executive Director of HMV plc, Northern Foods plc and Bupa and a Non-Executive Director of the Bank of Ireland UK Holdings plc and Bristol & West plc. Orna is also currently the Deputy Chairman of the National Trust and a former Partner at McKinsey & Company. Whilst at McKinsey & Company, Orna's client portfolio included many consumer facing clients and she brings these skills to the Board along with her considerable experience in other Non-Executive Director roles.
Risk (Chairman), Audit, Nomination and Remuneration.
Gareth is currently a Non-Executive Director of YSC Limited and WNS (Holdings) Limited. Previously, he was Human Resources Director of Diageo plc and held a series of key positions in human resources at Grand Metropolitan plc. Gareth's contributions to the Board are on all aspects of human resources and his experience of working at Director level in a consumer facing organisation also allows him to contribute to all other subjects of debate.
Remuneration (Chairman), Audit, Nomination and Risk.
James has been a Partner at Charterhouse Capital Partners LLP since 1998. He was involved in the acquisition of Saga by the Charterhouse Funds in 2004 and in Charterhouse's investment in the Acromas Group in 2007. He has been a member of the Saga and Acromas Boards throughout the period of Charterhouse's investment. He is also a Non-Executive Director of various other companies and has been involved in Charterhouse's investments in the UK, France and Germany. James's role on the Board is to represent the views of Charterhouse, but his professional and business experiences also ensure that he makes a very valuable contribution.
The Board considers its overall size and composition to be appropriate, having regard in particular to the independence of character, integrity, differences of approach and experience of all the Directors. We give due regard to the benefits of diversity in its widest sense for the current and future Board composition, recognising that this is essential for effective engagement with our key stakeholders.
We consider that the skills and experience of our individual members, particularly in the areas of insurance, financial services, consumer services, brand management, corporate finance, mergers and acquisitions, and risk management, are fundamental to the pursuit of our strategic objectives. In addition, the quoted company experience of members of the Board in a variety of sectors and markets is invaluable to Saga.
The Board considers five of the Non-Executive Directors to be independent of Saga's executive management and free from any business or other relationships that could materially interfere with the exercise of their independent judgement. These directors are Philip Green, Ray King, Bridget McIntyre, Orna NiChionna and Gareth Williams. Although Philip Green serves on the Board of BakerCorp (a Permira portfolio company), the other Directors have concluded that he is of independent character and judgement (taking into account Philip's judgement, experience and challenging approach) and should be regarded as an independent director for the purposes of the Code.
Following a 16 month handover to Lance Batchelor, the Chairman transitioned to a Non-Executive Director on 1 July 2015. The Chairman was appointed a member of the Nomination Committee on 24 September 2015.
MWM Consulting, an external search agency, assisted in the recruitment process for an additional Non-Executive Director. A role description was developed to set out the capabilities required. After MWM Consulting had identified a list of potential candidates, a shortlist was selected for interview. After detailed interviews, thorough referencing and careful consideration of the skillset required to balance the Board and complement existing competencies Bridget McIntyre was selected and put forward for Board approval. Bridget was also appointed as a member of the Audit, Nomination, Remuneration and Risk Committees.
MWM Consulting has no other relationship with the Company.
Pursuant to the Relationship Agreement entered into between the Company and each of the Private Equity Investors (as defined and explained further on page 102) each Private Equity Investor appointed one Non-Executive Director to the Board. On 2 December 2015, Charles Sherwood and Pev Hooper resigned as Directors (as the interest of each of the Private Equity Investors who had appointed them fell below 10%).
Stuart Howard, our Group Chief Financial Officer, retired at the Company's first AGM, on 23 June 2015. As explained in last year's annual report, external search consultant, Russell Reynolds Associates, was engaged to conduct a confidential search for candidates after a competitive pitch process. We reviewed and developed a role description for the position and agreed the critical competencies required.
A wide range of candidates from a variety of national and multi-national companies, both publicly and privately owned, were put forward by Russell Reynolds Associates for consideration and a shortlist was agreed upon for interview. Detailed interviews and thorough referencing took place and the experiences and backgrounds of the potential candidates were considered against the key responsibilities and critical competencies. The recommendation was to appoint Jonathan Hill as Stuart's replacement. Jonathan joined the Group as Group Chief Financial Officer Designate on 7 April 2015, was appointed as a Director of the Board on 29 April 2015 and assumed the position of Group Chief Financial Officer at the close of the AGM on 23 June 2015.
Russell Reynolds Associates is a signatory to the Voluntary Code of Conduct for executive search firms and has no other connection to the Company.
All independent Non-Executive Directors attended strategy sessions for each of our businesses to understand the short and long-term goals of the Group. They continue to visit all areas of the business to gain first-hand experience of how Saga works, including listening to calls during visits to our call centres.
As Bridget McIntyre has recently joined the Board, this served as an opportunity to refresh our induction process. So that Bridget could familiarise herself with our strategy, competitive and industry environment, Group structure, governance and risk profile/appetite, we arranged for one-to-one sessions with chief executive officers and managing directors of all business areas, our Chief Marketing Officer, Company Secretary, General Counsel, Head of Compliance, Head of Internal Audit, Chief Risk Officer and Group HR Director. In addition, Bridget was provided with a comprehensive pack including Board and Committee meeting minutes, terms of reference, strategy papers, presentations on the Saga Way and the Saga Model, recent analyst and broker reports, and our policies and procedures.
The Board and its Committees undertook their first evaluation of their performance during the year. The evaluation was conducted internally with the support of Independent Audit Limited, using their online service, Thinking Board, which was used to bring rigour and an expert external perspective to the internal review. Independent Audit does not have any other connection to the Company.
The online tailored questionnaires were structured to provide Directors/ Committee members and attendees with an opportunity to express their views about:
The responses to the evaluation of the Board and its Committees were reviewed with the Chairman and then thorough reports prepared by the Company Secretary were considered by each Committee and the Board. Separate meetings were also held between the Chairman and individual Directors to discuss the Board's effectiveness and individual performance. The results of the evaluation indicated that the Board had now established a good understanding of the Group during the second year as a listed company, and that Directors had a good grasp of the business and subject knowledge. There are no significant concerns among the Directors about the Board's effectiveness although it was felt that more time could be spent on discussing strategic issues. It was agreed that the strategy awayday provided a very useful insight into each business area.
Board Committees were viewed positively. These were considered to be well chaired and organised, with the right level of strategic discussion and challenge at each. Each Committee agreed action points for 2016/17.
Looking ahead, the Board will:
The results of the evaluation of the Chairman's performance were considered by the Senior Independent Director and the Non-Executive Directors and were discussed between the Senior Independent Director and the Chairman.
In accordance with the Code, the Board will be undertaking an externally facilitated evaluation in 2016/17. This will include a review of progress made in the above areas.
The Directors are standing for election or re-election and at the AGM. Our view is that each of the Directors standing for election or re-election should be appointed, as we believe that they have the skills required for the Board to discharge its responsibilities, as outlined in each of their biographies set out on pages 60-61.
We have seen further changes to our Board composition this year. As communicated in last year's report, Jonathan Hill became Group Chief Financial Officer Designate on 7 April 2015 and a Board Director on 29 April 2015. Following Stuart Howard stepping down at the Company's 2015 AGM, Jonathan became Group Chief Financial Officer. Jonathan brings a wealth of senior financial, operational and listed company experience to his role.
I am also pleased to welcome Bridget McIntyre as an additional independent Non-Executive Director, following a comprehensive search. Bridget brings considerable general and financial management experience, gained within some of the UK's largest general insurers. She was also appointed as a member of the Audit, Risk, Remuneration and Nomination Committees. Andrew Goodsell was appointed as a Committee member with effect from 24 September 2015.
We have continued to engage with senior management and the business throughout the year.
Our role is to review Board composition, consider succession planning and evaluate skills required in Board candidates.
Committee members consist of five independent Non-Executive Directors and Andrew Goodsell. Bridget McIntyre was appointed as a Committee member with effect from 1 January 2016 so did not attend any meetings during the financial year.
During the year, the Committee met on four occasions and has also met twice since the year end.
| Member | Attendance |
|---|---|
| Philip Green (Chairman) | 4/4 |
| Ray King | 4/4 |
| Orna NiChionna | 4/4 |
| Andrew Goodsell | 2/2 |
| Gareth Williams | 4/4 |
The Company Secretary attends all meetings as secretary to the Committee. In addition, the Group Chief Executive Officer and Group HR Director attend by invitation.
Our terms of reference were reviewed by the Committee and subsequently approved by the Board on 24 September 2015. These explain our role and the authority delegated by the Board and are available on the Saga website at http://corporate.saga.co.uk/corporateinformation/corporate-governance and from the Company Secretary at the registered office.
At the centre of our remit is a detailed understanding of the Board's and the Board Committees' structure, size and composition. Changes to the Board composition throughout the year are explained in the Effectiveness section of the Corporate Governance Statement on pages 62-63.
Andrew Goodsell became Non-Executive Chairman on 1 July 2015, as projected when the Company listed and following a 16 month handover with Lance Batchelor. This change did not impact on the business. The 'Division of responsibilities between Chairman, Group Chief Executive Officer and Role of Senior Independent Director' document was amended and approved by the Board on 8 December 2015.
Our terms of reference say how we recruit and appoint Directors to the Board. We use open advertising or the services of external advisers to facilitate our search for the best possible candidates from a wide range of backgrounds, as appropriate.
We actively participated in the search for an additional Non-Executive Director. We were involved in the drafting of the role description (taking into account the balance of skills, time commitment, knowledge and experience required and considering diversity), timetable, interviews, shortlist and final recommendation in relation to the appointment.
We used MWM Consulting, an external consultant, to assist with the search. MWM Consulting has no other connection with the Company.
An overview of the Director induction process has been included in the Effectiveness section of the Corporate Governance Statement on pages 62-63.
We believe it is in the very nature of Saga to recognise the benefits that diversity brings. With this in mind our policy is to appoint the best possible candidate, who will be considered on merit and against objective criteria, rather than to set quotas for a particular aspect that may deflect us from achieving this fundamental target every time. At the date of this report, 22% of the Board is female.
Since the year end, a comprehensive talent review mapping exercise took place, which identified opportunities and recorded succession planning, including emergency successors, for executive and key roles across the business.
An evaluation of the Committee's effectiveness took place during the year, as part of the Board effectiveness review (for details see page 63). This was an internal review with the support of Independent Audit Limited. Members felt that the Committee worked well, with decisions being well thought through after robust discussion.
We also contributed to the Board evaluation in terms of Board composition. A full summary of the Board evaluation and action points is provided on page 63. A fully externally facilitated review will take place this year.
Looking ahead, we will:
Philip Green Chairman, Nomination Committee
The Board has ultimate responsibility for the Group's risk management and internal control, including setting of risk appetite. In accordance with section C 2.3 of the UK Corporate Governance Code the Board is responsible for reviewing the effectiveness of risk management and control systems, specifically that:
During 2015 the Board has directly, or through delegated authority to the Risk and Audit Committees, overseen and reviewed the development and performance of risk management
activities and practices and internal control systems in the Group. Specific details regarding the Risk and Audit Committees' involvement in the development and review of risk management and internal control systems are provided in the Risk and Audit Committee reports on pages 74-76 and 70-73 respectively.
Top down:
strategy – Group risk appetite – Principal risk oversight – Group compliance oversight
Bottom up:
– Business risk appetite definition and policy – Identification, assessment and mitigation of business
– specific risks – Upward reporting of key residual risks
– Group risk policy and
As a result of their consideration and contribution to risk management and internal control activities, the Board is satisfied that the risk management and internal control systems in place remain effective.
Saga's 'three lines of defence' risk governance model
The three lines of defence work as follows:
1st line of defence – Risk taking by management, in line with agreed risk appetite, risk policies and procedures. Various governance forums in each business review all risk exposures and risk mitigation activities on a regular basis, supported by the 2nd line of defence oversight functions. Consideration of business risks is a standing agenda item at each executive meeting within the Group.
2nd line of defence – Independent oversight provided by the various control functions, including risk, compliance and health and safety. Specific duties include advice on Group and business risk appetites, independent review of both the rating of key risks, and approach and adequacy of business risk management strategies. The 2nd line of defence is also responsible for reporting on the management of principal risks and uncertainties to the Risk Committee and Board.
3rd line of defence – Independent assurance on the operation and effectiveness of internal control throughout the Group, including consideration of the effectiveness of the risk management process. The 3rd line of defence reports to the Board by way of the Audit Committee.
Saga's spread and variety of business operations require risk and internal control issues to be considered at both specialist business level and aggregated Group level. Risk and internal control oversight is provided at all Committees and key concerns are raised to the Audit and Risk Committees and ultimately to the Board if required.
The financial crime, data and information security committee provides an additional forum to consider specialist risks arising in these areas.
The Group risk management cycle is an iterative cycle of activities, comprising the following:
Saga defines risk appetite as the amount and sources of risk which we are willing to accept in pursuit of our objectives. Group risk appetite is derived from our strategic objectives and is used as a measure against which all of our current and proposed activities are tested. Group risk appetites and tolerances are further defined within the Principal risks and uncertainties section (pages 28-32).
Business risk appetites are separately crafted, complementary to Group appetites but customised to reflect the specific needs and characteristics of each business. Business risk appetites may be different to Group appetites but cannot exceed them.
Group and business risk appetites are reviewed at least annually to ensure that they are aligned with any changes in strategy or specific strategic initiatives.
Saga has a Group risk policy, defining our risk management strategy, framework, governance structures, and detailed assessment and mitigation processes. Beneath this Group document, individual business policies are created, customised to reflect specific business characteristics but still consistent with the overall risk management framework. All risk policies are reviewed at least annually and approved at business or Group boards as appropriate.
All Saga businesses assess each risk for likelihood and impact. Most use a common risk assessment matrix, although several have a customised impact scale to reflect their size or the highly specialist nature of their risks. Each business then creates appropriate controls to manage such risks. Risks are rated on both an inherent and a residual basis and are rated on a red, amber, yellow and green scale.
Risk assessments are reviewed at business risk committees and the principal risks are subject to independent review by the Risk Committee.
Risk registers have been created for each business to capture their key risks, associated controls and incidents. These registers are typically sub-divided by function or business area. The highest rated residual risks in terms of impact and probability for each business are aggregated at Group level to produce a list of principal risks and uncertainties, assessed at residual level against Group risk appetite.
All business CEOs certified compliance with the risk management framework at the year end.
Reports on key risks and controls, and incidents, are presented to each governance forum meeting specified in the Committee structure, flow of risk, compliance and internal control information chart on page 66. In addition, checks against control effectiveness, and any exceptions or overdue actions are also considered. Each of these governance meetings is attended by key 1st and 2nd line of defence managers and the actions are minuted and followed up at the next meeting. Significant control weaknesses or failures are escalated to the individual business board in question or, if of sufficient scale and seriousness, to the Risk Committee. Each Group risk committee also considers cross-Group risks and incidents to ensure the risk of contagion is minimised.
Independent oversight of the risk management process, including key risks and their associated management, incidents and compliance, is provided by the Chief Risk Officer and the risk team, the compliance team, the Risk Committee and, ultimately, the Board.
All risk registers are independently reviewed by the risk team at least quarterly to test for completeness of risk and control capture, effective testing of key control measures, and recording and reporting of any exceptions and overdue actions.
All risk data, including risks, controls, control tests and incidents, is captured in an internet-enabled risk portal. This portal produces risk reports for all governance meetings.
Saga's internal audit function ('Internal Audit') provides independent assurance of the effectiveness of the risk management procedures at both Group and business levels.
Outputs from the risk management cycle are fed back to the Risk Committee to assist with necessary revision of the Group risk management policy and framework. They may also be used to inform future iterations of the Group's strategy.
A statement confirming that the Board is able to confirm that they have carried out a robust assessment of risks is contained on page 53.
Internal Audit acts as the 3rd line of defence within Saga's three lines of defence risk management framework. The objective of Internal Audit is to help protect the assets, reputation and sustainability of the organisation by
providing independent, reliable, valued and timely assurance to the Board and executive management. To preserve the independence of Internal Audit, the Head of Internal Audit's primary reporting line is to the Chairman of the Audit Committee, and the Internal Audit team is prohibited from performing operational duties for the business.
All activities of the Group fall within the scope of Internal Audit's remit and there are no restrictions on the scope of Internal Audit's work. Internal Audit fulfils its role and responsibilities by delivering the annual, risk-based audit plan. Each audit within the plan provides an opinion on the control environment and details of issues found. Internal Audit works with the businesses to agree remedial actions necessary to improve the control environment, and these are tracked to completion.
The Head of Internal Audit submits reports to, and/or attends, board and audit committee meetings for the subsidiary Saga businesses, as well as the Audit Committee meetings.
The Group maintains a control environment that is regularly reviewed by the Board. The principal elements of the control environment include comprehensive management and financial reporting systems and processes, defined operating controls and authorisation limits, regular Board meetings, clear subsidiary board and operating structures, and an Internal Audit function.
Internal control and risk management systems relating to the financial reporting process and the process for preparing consolidated accounts ensure the accuracy and timeliness of internal and external financial reporting.
The Group undertakes an annual strategy process which updates the plan for the next five years, and produces a detailed budget for the next financial year. Throughout each year, detailed reforecasts are performed by each area of the Group each month and are consolidated to provide an updated view of expected performance for the current year. Each reforecast covers the income statement, cash flow and balance sheet positions phased on
a monthly basis through to the end of the financial year.
Regular weekly and monthly reporting cycles allow management to assess performance, and identify risks and opportunities at the earliest opportunity. Trading performance is formally reviewed on a weekly basis by the management of the trading subsidiaries, and monthly by the management of the Group. Performance is reported to the Board at each Board meeting. Performance is assessed against budget and against the latest forecast expectations.
The Group has an established and wellunderstood management structure with documented levels for the authorisation of business transactions and clear bank mandates to control the approval of payments. Control of the Group's cash resources is operated by a centralised Treasury function.
Internal management reporting and external statutory reporting timetables and delivery requirements are well established and documented. Control of these is maintained centrally and communicated regularly.
The Group maintains computer systems to record and consolidate all of its financial transactions. These ledger systems are used to produce the information for the monthly management accounts, and for the annual statutory financial statements. The trading subsidiaries within the Group prepare their accounts under Financial Reporting Standard ('FRS') 101.
The accounts production process ensures that there is a clear audit trail from the output of the Group's financial reporting systems, through the conversion and consolidation processes, to the Group's financial statements.
An assessment period of five years was selected. This is consistent with our long-term financial planning horizon and importantly it embraces the construction of our new cruise ship which will become operational in 2019.
Our list of principal risks and uncertainties ('PRUs') derived from our robust review of risks was reviewed with risk owners, Group Finance and Group Risk to consider which risks
might threaten the Group's ongoing viability. These PRUs are given in the Strategic Report on pages 28-32. All of the PRUs have been considered and severe but plausible outcomes for each have been identified. The financial impact in terms of both profit and cash of each outcome has been quantified and a probability of occurrence assigned to it. Assessments of potential financial impact were derived from both internal calculation and examples of similar incidents in the public domain.
The three largest sensitivities in terms of financial impact were identified as the following:
Three scenarios were then modelled for the assessment period: the three largest sensitivities in terms of financial impact as if each were certain to occur independently; the expected financial impact for all sensitivities combined drawing on the assigned probability for each one; and a reverse stress test considering what PRU, or combination of PRUs might lead to breach of performance and cash flow solvency thresholds.
The outcome of this modelling confirmed that none of the top three PRUs would compromise the Group's viability either in isolation or in combination. The reverse stress test demonstrated that the likelihood of one or any combination of PRUs causing us to breach performance and insolvency thresholds was extremely remote.
As set out in the Audit Committee report on pages 70-73, the Directors have reviewed and discussed the rationale and conclusions of management's viability testing. The Director's viability statement is contained on page 53.
The Board's statement of review of the effectiveness of Saga's risk management and internal control systems is contained on page 53.
I am pleased to report on the activities of the Audit Committee during the Company's second year as a FTSE listed company. This report includes a summary of our work during the financial year, including the formulation of the new viability statement. We continue to work closely with the Risk Committee and refer matters to them for consideration where appropriate.
Our role is to monitor the integrity of the financial statements of the Group, review and report to the Board on significant financial reporting issues and judgements, and review and assess the adequacy and effectiveness of the Company's internal financial controls and other internal control systems.
All members are independent Non-Executive Directors. The Board is satisfied that I have recent and relevant financial experience. Bridget McIntyre was appointed as a Committee member with effect from 1 January 2016 so did not attend any meetings during the financial year.
During the year, the Audit Committee met on four occasions. It has also met twice since the year end and Bridget McIntyre attended both meetings.
| Member | Attendance |
|---|---|
| Ray King (Chairman) | 3/4 |
| Orna NiChionna | 4/4 |
| Philip Green | 4/4 |
| Gareth Williams | 4/4 |
The Company Secretary acts as secretary to the Committee and attends all meetings. In addition the Group Chief Executive Officer, Group Chief Financial Officer, Group Financial Controller, Chief Risk Officer ('CRO'), Head of Internal Audit and representatives from our external auditors attend by invitation. During the year, the Committee and I held private meetings with the Auditors and Head of Internal Audit.
Monitoring and reviewing the effectiveness of the Company's Internal Audit function, in the context of the Company's overall risk management system.
Receiving reports from the audit committees of subsidaries.
Reviewing the findings of the audit with the external auditors.
Our terms of reference were reviewed by the Committee and subsequently approved by the Board on 24 September 2015. These explain our role and the authority delegated to us by the Board and are available on the Saga website at http://corporate.saga.co.uk/corporateinformation/corporate-governance and from the Company Secretary at the registered office.
anti-corruption and anti-fraud), whistleblowing and non-audit fees.
— Received a report at each meeting in relation to whistleblowing and the proceedings of the Group financial crime, data and information security committee.
Our work, up to the date of this annual report in accordance with the revised Turnbull Guidance on Internal Control, published by the FRC, confirmed that no significant failings or weaknesses were identified. Where areas for improvement were identified, processes are in place to ensure that the necessary action is taken and that progress is monitored.
During the year we received presentations from the following business areas:
The interim and full year results were assessed, together with papers from management summarising the process of preparing the financial statements, the appropriateness and application of key accounting policies, and the areas of significant judgement, including how those judgements were made.
Key areas of significant judgement which we discussed were:
Reports were received from EY at the conclusion of their work on the interim and full year results and during the process of their audit. The reports on the full year results included specific focus on those areas identified as having significant audit risk or other audit emphasis.
At the request of the Board, the Committee has considered whether, in its opinion, this annual report and accounts is fair, balanced and understandable and whether it provides the information necessary for shareholders to assess the Group's performance, business model and strategy.
When forming our opinion we considered whether:
We advised the Board that we supported the statement made on page 53.
The Group's methodology for production of its viability statement is shown on page 69 and the viability statement itself on page 53.
Jointly with the Risk Committee we considered and approved the list of principal risks and uncertainties (see pages 30-32) and the methodology used to provide for an assessment of ongoing viability. We specifically considered:
On the basis of this, we confirmed to the Board that we felt it was reasonable for the Directors to make the viability statement on page 53.
A key part of our work is the oversight of the Internal Audit function. This includes reviewing the results of the internal auditor's work and the assurance from Internal Audit on its 3rd line of defence review of the functioning of the risk management framework. We also review and monitor management's responsiveness to the internal auditor's findings and recommendations. The function consists of 12 people with a broad range of skills; we also purchase audit skills externally for specialised audits.
We are satisfied that the Internal Audit function had the appropriate resources throughout the year.
Where Internal Audit reviews identify significant areas of business risk these are considered by the Risk Committee. Details of these can be found in the Risk Committee Report on pages 74-76.
Since the year end, KPMG has reviewed the effectiveness of the Company's Internal Audit function. The conclusion was that the function was competent, effective and well led, with strong alignment to principal risks. Focus on strategy for a period of longer than 12 months and more use of third party specialists where appropriate, were areas noted for development.
The independence of EY is reviewed by the Committee and confirmed by the Auditor throughout the year.
A robust non-audit fee policy is in place and is adhered to. This is reviewed annually and was last reviewed on 21 September 2015. This includes a list of non-audit services where we are satisfied EY can carry out those services without jeopardising their role as Auditor. There are clear approval levels where the Committee Chairman (or the whole Committee) is required to authorise assignments. Competitive tendering is used for substantial work.
The audit fees payable to EY in respect of the year ended 31 January 2016 were £1,055,000 (2015: £1,110,000) and non-audit service fees incurred were £176,200 (2015: £930,900). This equates to a non-audit to audit fee ratio of 0.17 (2015: 0.84). The 2015 fees include work necessary for listing the Company.
A summary of fees paid to the Auditor is set out in note 4a to the consolidated financial statements on page 137.
We discussed management's interactions with the audit partner during the year and impressions gained. We considered:
During the year, a review of EY's 2015 audit of the Company was completed by the Audit Quality Review team of the FRC. No significant issues were noted. The results of this review were discussed and minor improvements to the external audit process for future years were subsequently agreed.
The Committee is satisfied that the audit continues to be effective and provides an appropriate independent challenge to the Group's senior management.
At the AGM last year EY were re-appointed as our statutory auditors. The Committee believes the independence and objectivity of EY and the effectiveness of the audit process remain strong, and recommends the re-appointment of EY for the 2016/17 financial year. The Board has accepted and endorsed this recommendation.
EY were appointed as auditors of the principal trading companies within the Acromas group in September 2007 following a competitive audit tender process. They were then appointed as auditors of the Company on 24 September 2014. In accordance with the Competition and Markets Authority's order which requires FTSE 350 companies to tender the audit at least every ten years, the Group intends to undertake its next competitive tender process later this year for the financial year ending 31 January 2018.
An evaluation of the Committee's effectiveness took place during the year, as part of the Board effectiveness review (for details see page 63). This was an internal review with the support of Independent Audit Limited. The Committee received very positive feedback and it was felt that there was a strong relationship between the Executive Team and the Committee. A fully externally facilitated review will take place this year.
Looking ahead, we will focus on:
Ray King Chairman, Audit Committee
In June 2015 I took over from Ray King as Chairman of the Risk Committee and am pleased to present a summary of our work during the financial year to January 2016 to drive the further development of the Group's risk management systems. This year we focused on both enhancing our risk appetite statements and providing further granularity in our assessment of principal risks, and also looked at each of the various Group businesses in isolation, to understand and challenge their key risks, controls and mitigations. This consideration of risk at both business and Group level has provided us with the assurance that principal risks to strategy have been identified and are being managed appropriately.
Our role is to monitor the Group's risk and compliance management procedures (described on pages 66-69) and review principal business risks and compliance matters regularly on behalf of the Board. We seek to consider our risks on an individual and aggregated basis across our businesses.
All Committee members are independent Non-Executive Directors.
The Committee met four times during the year with members attending as shown below.
| Member | Attendance |
|---|---|
| Orna NiChionna (Chairman) | 4/4 |
| Philip Green | 4/4 |
| Ray King | 3/4 |
| Gareth Williams | 4/4 |
Bridget McIntyre was appointed as a Committee member with effect from 1 January 2016 so did not attend any meetings during the financial year.
The Company Secretary acts as secretary to the Committee and attends all meetings. The Group Chief Executive Officer, Group Chief Financial Officer, CRO and Head of Internal Audit attend by invitation. During the year the Committee and Chairman held private meetings with the CRO.
Keeping under review the effectiveness of the Group's risk management systems.
Reviewing the Group's capability to identify and manage new risk types and ensuring that a supportive risk management culture is embedded and maintained throughout the Group in conjunction with the Audit and Remuneration Committees.
Our terms of reference were reviewed by the Committee and subsequently approved by the Board on 24 September 2015. These explain our role and the authority delegated to us by the Board and are available on the Saga website at http://corporate.saga.co.uk/ corporate-information/corporategovernance and from the Company Secretary at the registered office.
Risk strategy, policy and appetite We reviewed risk management structures to ensure these met the needs of each business and fitted with the risk policy, appetite and monitoring procedures.
We carried out a robust assessment of the principal risks facing the Group, including those that would threaten our business model, future performance, solvency or liquidity.
We recognise the need to continually define risk appetites and tolerances. An evaluation of internal projects, activities, uncertainties and emerging risks concluded that the risk associated with the travel landscape needed to be added to the list of principal risks. Risk appetite and tolerance thresholds were reviewed to reflect individual probabilities over time more closely and to align these with the strategic timeframe.
The Group risk policy was changed to reflect the revised thresholds, likelihood and impact of incidents and we reviewed and approved this before it was signed off by the Board in December 2015. The revised policy was subsequently circulated to all directors and board attendees of all subsidiary companies and made available to all staff via the intranet.
An Internal Audit review on the effectiveness of the risk management framework took place in October 2015. This concluded that there is a wellestablished risk framework, with risk appetite clearly defined within risk policies and specific to each business area. Effective communication channels are in place and this is supplemented by comprehensive and consistent Board reports.
We have reviewed and approved the description of principal risks and the explanation as to how these are managed or mitigated is contained within this report. See:
These are designed to manage rather than eliminate risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss.
At each meeting, we considered a detailed risk report. This included a summary of each business's management monitoring. We worked with the CRO to facilitate each business area considering their strategies in the context of their risk framework to ensure that all forward-looking risks had been identified and considered.
All business CEOs certified compliance with the risk management framework at the year end.
Incidents are included in the risk reports. We reviewed and discussed these in order to identify causes, necessary action, lessons learned a nd monitoring requirements.
At each meeting, we review the status of the Group compliance monitoring plan for the regulated businesses (in financial services, travel and healthcare). We considered how risk would play a part in projects being considered, so that input in terms of risk appetite, policy and governance was received when it was needed. The new corporate governance requirements were discussed.
Each of our meetings includes a presentation from one or two of the business CEOs and key functional managers to discuss in detail the risk and compliance issues in their business, on a rotational basis and prioritised according to risk ratings in the Group's risk register.
The actions we took within reviews of individual businesses during the year were:
Since the year end, we have received presentations from AICL and regarding our insurance renewal, insurance platform and shipping.
An evaluation of the Committee's effectiveness took place during the year, as part of the Board effectiveness review (for details see page 63). This was an internal review with the support of Independent Audit Limited. The Committee received very positive feedback from Committee members and attendees and it was acknowledged that good progress had been made in
identifying key risks and establishing good reporting and relationships. A fully externally facilitated review will take place this year.
Looking ahead, we will remain focused on the risk processes within the business, with particular focus on:
We understand the importance of maintaining open and regular dialogue with our shareholders – many of whom are our loyal customers. We work hard to develop a relationship built on trust and welcome feedback throughout the year. We plan a shareholder communications strategy for the year. The AGM provides the opportunity for our shareholders to meet the Board and senior management of the Group.
Lance Batchelor, Group Chief Executive Officer and Jonathan Hill, Group Chief Financial Officer lead communications with our shareholders. Lance and Jonathan are assisted by the shareholders relations team led by our Director of Corporate Affairs.
We attach significant importance to the effectiveness of our communications with all of our shareholders and set ourselves the target of providing information that is timely, clear and concise.
Saga has a diverse shareholder register which is formed of both institutional and retail ownership, the latter numbering over 187,000. Saga also has a number of analysts following the Company so we arrange for a clear explanation of key strategic events and developments, including results and acquisitions announcements.
We communicate in the following ways:
In addition to the AGM, we arranged for:
telephone briefings in conjunction with key financial announcements
live and post-event webcasts of key presentations
The Director of Corporate Affairs reports on all shareholder and wider market matters and provides regular updates to the Chairman and Non-Executive Directors by way of face-to-face briefings, email updates and an Investor Relations Report, which is discussed at each Board meeting. This includes reference to the views of key shareholders, including their concerns, along with any new analyst research.
The Board is kept fully up to date on the views of shareholders and analysts through:
The AGM will be held on Tuesday 21 June 2016 at 11am at Enbrook Park, Sandgate, Folkestone, Kent CT20 3SE. The Chairman and Chairs of all Committees will be available to answer questions during the formal business of the meeting.
The Notice contains an explanation of business to be considered at the meeting. A copy is available on our website, http://corporate.saga.co.uk.
In the first full year of being a listed organisation, we have continued our momentum both in our financial performance and in the implementation of the strategic initiatives that we announced on IPO and in our first annual report.
Our goal as a Remuneration Committee last year was to formulate a Remuneration Policy and strategy which stimulates sustainable, value creating growth and performance for the business and rewards management accordingly. The Policy we put forward at last years' AGM received over 99% support (98.8% by independent shareholders) for which I would like to thank shareholders.
Even though there was strong support for the Remuneration Policy, the Committee reviews it annually to ensure that it still meets our goals. As a result of our review this year, we believe the policy continues to be fit for purpose and therefore will remain unchanged.
This report lays out the core principles of our Directors' Remuneration Policy and our practice over the past year. I trust we have done this with the transparency and clarity that aid your understanding of both our intent and our activity.
All Committee members are independent Non-Executive Directors. We held five meetings during the year.
| Member | Attendance |
|---|---|
| Gareth Williams (Chairman) | 5/5 |
| Philip Green | 5/5 |
| Ray King | 5/5 |
| Orna NiChionna | 5/5 |
Bridget McIntyre joined the Committee on 1 January 2016. No meetings were held following her appointment during the financial year.
The Committee receives assistance from the Group HR Director and Company Secretary, who attend meetings by invitation, except when issues relating to their own remuneration are being discussed. The Group Chief Executive Officer, Group Chief Financial Officer and the Chairman attend by invitation.
Our terms of reference were reviewed by the Committee and subsequently approved by the Board on 11 November 2015. They are available on our website, http://corporate.saga.co.uk/corporateinformation/corporate-governance and from the Company Secretary at the registered office.
The implementation of our strategy (as outlined on pages 14-15) has been substantiated in the key performance highlights of the year:
We reviewed the key components of remuneration.
— Reviewed base salary levels of the Executive Committee and the level of bonus payments.
Since the year end, we approved:
— Performance targets for the 2016 LTIP award, the details of which are provided on page 89.
An evaluation of the Committee's effectiveness took place during the year, as part of the Board effectiveness review (for details see pages 62-63). This was an internal review with the support of Independent Audit Limited. The evaluation was very positive and the conclusion was that the Committee had worked at the right level of challenge and independence. A fully externally facilitated review will take place this year.
Looking ahead we will focus on:
— Our core principles of remuneration ensuring they are deployed in all of our considerations and decisions on remuneration practice.
I hope that you find the information contained in this report helpful, thoughtful and clear. I welcome any feedback from the Company's shareholders and you can contact me at [email protected] if you have any questions or comments on this report. I look forward to hearing your views and will be available to answer any questions at the Company's AGM, where we will ask our shareholders to approve the Directors' Remuneration Report.
This report has been prepared in accordance with Schedule 8 to The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 as amended in 2013, the provisions of the current UK Corporate Governance Code (the 'Code') and the Listing Rules.
In this section, we summarise the purpose of our Remuneration Policy and its linkage to our corporate strategic objectives. We highlight the performance and remuneration outcomes for the 2015/16 financial year. More detail can be found in the Remuneration Policy Report and Annual Report on Remuneration.
The Group's strategy is laid out on pages 14-15. The key elements of the Company's strategy and how its successful implementation is linked to the Company's remuneration are set out in the following table.
| Strategic priorities | ||||||||
|---|---|---|---|---|---|---|---|---|
| Remuneration Policy | Unlocking growth in our core businesses of insurance and travel |
Investing in future growth |
Continued growth and long-term shareholder value creation |
Equity ownership and retention of shares |
Retain and reward Executive Team to deliver the strategy |
|||
| Fixed remuneration (salary, benefits and pension) |
— Delivered customer growth across all key insurance lines. |
— Announced our investment in new shipping |
— Model continues to generate strong cash flows. |
|||||
| The Company provides competitive levels to attract and retain talent required to successfully deliver on our business strategy. |
— Increased passengers in tour operating business. — Right team put in place to deliver multichannel. |
capacity. — Saga Investment Services up and running. — Successful pilots ongoing in new product areas. |
— Undertaken a review of the capital allocated to our underwriting business. — Disposed of Allied Healthcare. |
|||||
| Annual bonus metrics | ||||||||
| Maximum annual bonus opportunity is 150% of salary: |
Profit before tax growth. |
Group cash flow. The success |
Equity Ownership. Encouraged through |
|||||
| — two thirds of the total bonus to be paid immediately in cash — one third deferred into shares subject to a three year vesting period. |
An incentive to grow in the core markets is provided in the short term through the Profit before tax ('PBT') growth and cash flow targets in the Annual Bonus Plan. |
in maximising operational excellence will be reflected through increased profitability and cash flow. |
bonus deferral and shareholding requirements. |
The Remuneration Policy and strategy is designed to stimulate sustainable, value creating growth and performance for the business and rewards Executives' performance accordingly.
The Company's core principles of remuneration are to support:
The Committee will review annually the remuneration arrangements for the Executive Directors and the Executive Team drawing on trends and adjustments made to all employees across the Group and taking into consideration:
A summary of the approved Remuneration Policy is outlined below. There are no changes from the approved Policy. The full Policy as approved by shareholders on 23 June 2015 is available on our website at http://www.corporate.saga.co.uk.
| Element | Operation of element | ||||||
|---|---|---|---|---|---|---|---|
| Salary | The Remuneration Committee ensures that maximum salary levels are positioned in line with companies | ||||||
| Benefits | of a similar size to Saga in the FTSE 250. | ||||||
| Pension | When determining an appropriate level of salary, the Remuneration Committee considers: | ||||||
| — remuneration practices within the Group; — the general performance of the Group; — salaries within the ranges paid by the companies in the comparator group used for remuneration benchmarking; and — the economic environment. |
|||||||
| In general salary rises to Executive Directors will be in line with the rise to employees. | |||||||
| The Executive Directors receive family private health cover, death in service life assurance, a car allowance, subsistence expenses and staff discounts in line with other employees. |
|||||||
| The maximum contribution to an Executive Director's pension or salary supplement is 20% of gross basic salary. |
|||||||
| Annual bonus | The Remuneration Committee will determine the maximum annual participation in the Annual Bonus Plan for each year, which will not exceed 150% of salary. |
||||||
| The maximum value of deferred shares is 50% of the bonus earned, which vest after a minimum deferral period of three years based on continued employment. |
Governance
| Element | Operation of element | |||||
|---|---|---|---|---|---|---|
| Long Term | LTIP maximum grant is 200% of salary p.a. | |||||
| Incentive Plan ('LTIP') |
Awards will vest at the end of three years subject to the achievement of: | |||||
| — EPS performance which ensures the achievement of the annual profit performance targeted by the Annual Bonus Plan flows through to long-term sustainable EPS growth; and — TSR performance of the Company compared to the FTSE 250 (excluding real estate and equity investment trusts) which measures the success of the implementation of the Company's strategy in delivering an above market level of return. |
||||||
| The LTIP contains clawback and malus provisions. | ||||||
| Share Incentive Plan ('SIP') |
The purpose of the SIP is to encourage all employees to become shareholders in the Company and thereby align their interests with shareholders. |
|||||
| Minimum shareholding requirement |
The Remuneration Committee has adopted formal shareholding guidelines that will encourage the Executive Directors to build up, over a five year period and then subsequently hold, a shareholding equivalent to a percentage of base salary. |
|||||
| — Group Chief Executive Officer – 200% of salary; — Group Chief Financial Officer – 150% of salary. |
||||||
| Chairman & Non-Executive |
The fees for the Chairman and Non-Executive Directors are set at broadly the median of the comparator group used for Executive Director remuneration. |
|||||
| Director (NED) Fees |
In general the level of fee increase for the Non-Executive Directors will be set taking account of any change in responsibility and will take into account the general rise in salaries across the UK workforce. |
|||||
| The Company will pay reasonable expenses incurred by the Chairman and Non-Executive Directors and may settle any tax incurred in relation to these. |
| Percentage of maximum bonus earned/current |
|||||
|---|---|---|---|---|---|
| KPIs | Threshold | Target | Maximum | Actual | potential LTIP vesting |
| Annual Bonus Plan | |||||
| Group PBT | £166.0m | £172.9m | £177.4m | £176.2m | 89.6% |
| Group cash flow1 | 77.3% | 79.6% | 81.1% | 79.9% | 69.3% |
| Personal objectives | See pages 93-94 for details of the measures and performance for the year | ||||
| 2014 LTIP Award as at year end 31 January 2016 |
|||||
| EPS growth (p.a.) | 7% | – | 12% | 16.4% | 100% |
| TSR | Median | – | Upper quartile | Between Median and Upper quartile |
61% |
| 2015 LTIP Award as at year end 31 January 2016 |
|||||
| EPS growth (p.a.) | 7% | – | 12% | 16.1% | 100% |
| TSR | Median | – | Upper quartile | Between Median and Upper quartile |
41% |
Notes:
1 Defined as net available cash generation.
The indications for the LTIP performance are to the end of the current financial year. The actual level of performance and corresponding level of vesting will be dependent on the performance at the end of the relevant performance periods. The Committee has included this information to allow shareholders to see the potential value in the long-term remuneration over the next 3 years.
| Executive Directors1 | Period | Salary £ |
Taxable benefits £ |
Bonus £ |
LTIP £ |
Pension £ |
Other2 £ |
Other3 £ |
Total £ |
|---|---|---|---|---|---|---|---|---|---|
| Lance Batchelor | 2015/16 | 663,000 | 28,095 | 781,678 | – | 127,514 | – | – | 1,600,287 |
| (Group Chief Executive Officer) |
2014/15 | 556,667 | 13,225 | 655,958 | – | 102,852 | – | 4,000,000 | 5,328,702 |
| Jonathan Hill | 2015/16 | 334,246 | 19,748 | 325,699 | – | 74,680 | 190,000 | – | 944,373 |
| (Group Chief Financial Officer) |
2014/15 | – | – | – | – | – | – | – | – |
| Andrew Goodsell | 2015/16 | 330,422 | 18,261 | 389,567 | – | 232,481 | – | – | 970,731 |
| (Former Executive Chairman) |
2014/15 | 777,462 | 41,496 | 941,506 | – | 265,915 | – | 5,000,000 | 7,026,379 |
| Stuart Howard | 2015/16 | 196,992 | 6,837 | 193,545 | – | 156,573 | – | – | 553,947 |
| (Former Group Chief Financial Officer) |
2014/15 | 472,781 | 27,794 | 477,036 | – | 180,719 | – | 3,000,000 | 4,158,330 |
Notes:
1 Lance Batchelor was appointed the Group Chief Executive on 24 March 2014. 2014/15 salary, taxable benefits and pension provision pro-rated in accordance to time in role. Jonathan Hill was appointed the new Group Financial Officer Designate and joined Saga on 7 April 2015. Salary, taxable benefits, pension provision and bonus have been pro-rated with respect to time in the role. Andrew Goodsell transitioned from his role as Executive Chairman to Non-Executive Chairman on 1 July 2015. Stuart Howard stepped down from Board of Directors of the Company on 23 June 2015. Salary, benefits, bonus and pension pro-rated for time served in financial year as Executive Directors.
2 Buyout award of £190,000 was made to the Group Chief Financial Officer on recruitment in the form of Saga shares (101,932 based on Saga's closing share price on 7 April 2015 of 186.4p). The award will vest in two equal tranches on the first and second anniversary of the Group Chief Financial Officer's commencement of employment with Saga. In determining this amount the Committee applied the "buyout" element contained in the recruitment policy. The buyout of the outstanding Bovis awards held by the Group Chief Financial Officer were valued based on the publicly available information disclosed and took into account the vesting periods and probability of the performance conditions being satisfied at the date of cessation. This fair value was then discounted further to take into account the decreased probability of some of the longer term elements actually vesting. The discounted fair value was then converted in to a value of Saga shares which vest subject to continued employment. There are no further performance conditions attached to the vesting of these shares as the original performance conditions were taken into account in determining the buy-out value and therefore the imposition of additional performance conditions would in fact amount to a second set of performance conditions on vesting.
3 The former Executive Chairman and Group Chief Financial Officer were provided a one-off award on IPO ('IPO Award'). The shares under the IPO Awards were fully vested on IPO (with the sale restrictions on the shares lifted on 29 May 2015 in accordance with the lock up arrangements outlined in the IPO prospectus). The Group Chief Executive Officer was provided a share and cash award on IPO.
a. Share award consisted of a one-off award on IPO of market value share options (with an exercise price equal to Saga's share price on Admission of £1.85) with a face value of £4m. 25% will vest and become exercisable on the third anniversary of the award, 25% on the fourth anniversary and 50% on the fifth anniversary; this was part of the buyout on the recruitment of the Group Chief Executive Officer to compensate for awards lapsing on his ceasing employment with his former employer.
b. Cash award of £4m based on continued employment. 25% immediately on the IPO, 25% on the first anniversary of the award and 50% will be paid on the second anniversary; this was part of the buyout on the recruitment of the Group Chief Executive Officer to compensate for awards lapsing on his ceasing employment with his former employer.
For the full notes accompanying the single figure table, please see page 92 in the Annual Report on Remuneration.
The following charts show the 2015/16 actual remuneration (excluding one-off entitlements set out in the 'Other' column of the single total figure table) against the proposed Policy levels of remuneration for the Executive Directors.
Under the Policy, the remuneration payable to each of the Executive Directors is based on salaries at the start of 2015/16, under three different performance scenarios: (i) Minimum; (ii) Target; and (iii) Maximum. The elements of remuneration have been categorised into three components: (i) Fixed; (ii) Annual Bonus (Deferred Bonus); and (iii) LTIP. In addition, for the purposes of comparison we have included the actual single figure remuneration paid in 2015/16 (excluding one-off entitlements set out in the 'Other' column of the single total figure table).
| Element | Description | Minimum | Target | Maximum |
|---|---|---|---|---|
| Fixed1 | Salary, benefits and pension2 | Included | Included | Included |
| Annual Bonus | Annual bonus (including deferred shares) | No annual variable | 60% of maximum bonus |
100% of maximum bonus3 |
| LTIP | Award under the LTIP | No multiple year variable |
60% of the maximum award |
100% of the maximum award4 |
Notes:
2 Based on 2015/16 financial year benefit payments and pension.
3 Equating to 150% for the Group Chief Executive Officer and 125% for the Group Chief Financial Officer.
4 Equating to 200% for the Group Chief Executive Officer and 150% for the Group Chief Financial Officer.
5 Participation in the SIP has been excluded given the relative size of the opportunity levels.
In accordance with the regulations share price growth has not been included. In addition, dividend equivalents have not been added to deferred share bonus and LTIP share awards.
1 Group Chief Financial Officer's remuneration pro-rated for time served in role for the financial year has been used for the illustrations of actual provided.
The charts below set out the single figure of each Executive Director based on whether the elements remain 'at risk'. For example:
Figures have been calculated based on target performance (fixed elements plus 60% of maximum annual bonus and 60% of the maximum LTIP). The charts have been based on the same assumptions as set out above for the illustrations of the application of the Remuneration Policy.
Malus is the adjustment of unvested awards in specific circumstances. Clawback is the recovery of vested awards or payments in specific circumstances.
| Executive Directors | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Notice periods | Compensation | |||||||||
| Name | Date of service contract |
Nature of contract |
From Company | From Director | provisions for early termination |
|||||
| Lance Batchelor | 2 May 2014 | Rolling | 6 months | 6 months | None | |||||
| Jonathan Hill | 7 April 2015 | Rolling | 6 months | 6 months | None |
The Non-Executive Directors of the Company do not have service contracts. The Non-Executive Directors are appointed by letters of appointment. Each independent Non-Executive Director's term of office runs for a three year period.
The Company follows the UK Corporate Governance Code's recommendation that all directors of FTSE 350 companies be subject to annual re-appointment by shareholders.
The following table and chart sets out all subsisting interests in the equity of the Company held by the Executive and Non-Executive Directors:
| Shares held directly | Other shares held Options |
||||||||
|---|---|---|---|---|---|---|---|---|---|
| Director | Shareholding requirement (% salary) |
Current shareholding (% salary)1 |
Beneficially owned3 |
Deferred shares not subject to performance conditions |
LTIP interests subject to performance conditions Vested Unvested |
Outstanding interests in the Share Incentive Plan |
Shareholding requirement met? |
||
| Executive Directors | |||||||||
| Lance Batchelor | 200% | 36% | 15,392 | 105,121 | 1,313,761 | – 2,162,162 | 138 | No | |
| Jonathan Hill | 150% | 69% | 40,142 | 101,932 | 282,027 | – | – | 1,027 | No |
| Non-Executive Directors | |||||||||
| Jamie Arnell | – | – | – | – | – | – | – | – | n/a |
| Philip Green | – | – | 32,433 | – | – | – | – | – | n/a |
| Pev Hooper | – | – | – | – | – | – | – | – | n/a |
| Ray King | – | – | 27,027 | – | – | – | – | – | n/a |
| Orna NiChionna | – | – | 10,810 | – | – | – | – | – | n/a |
| Charles Sherwood | – | – | – | – | – | – | – | – | n/a |
| Gareth Williams | – | – | 32,433 | – | – | – | – | – | n/a |
| Bridget McIntyre | – | – | – | – | – | – | – | – | n/a |
| Andrew Goodsell2 | – | – | 2,815,702 | 150,882 | 210,214 | – | – | – | n/a |
Note:
1 Values not calculated for Non-Executive Directors as they are not subject to shareholding requirements.
2 Outstanding deferred bonus shares and LTIP in relation to his service as Executive Chairman. See page 90 for further details.
3 7,696 shares owned by Lance Bachelor's spouse. 7,747 shares owned by Jonathan Hill's spouse.
Executive Directors are required to build up their shareholdings over a reasonable amount of time, which would normally be five years, and then subsequently hold a shareholding equivalent to a percentage of base salary.
The number of shares of the Company in which current Directors had a beneficial interest and details of long-term incentive interests as at 31 January 2016 are set out below:
| Jonathan Hill | Shareholding requirement | ||||||
|---|---|---|---|---|---|---|---|
| Value of beneficially owned shares | |||||||
| Value of/gain on interests over shares (i.e. unvested/unexercised awards) | |||||||
| Lance Batchelor | Shareholding requirement | ||||||
| Value of beneficially owned shares | |||||||
| Value of/gain on interests over shares (i.e. unvested/unexercised awards) | |||||||
| % of salary | 0 | 100 | 200 | 300 | 400 | 500 | |
Notes:
– The closing share price of £1.961 as at 29 January 2016 has been taken for the purpose of calculating the current shareholding
– Value of/gain on interests over shares comprises unvested 2014 and 2015 LTIP awards. The one-off IPO share option award for
the Group Chief Executive Officer has an exercise price of £1.85, hence the gain on these awards on 31 January 2016 was £240,000.
– Unvested LTIP shares and options do not count towards satisfaction of the shareholding guidelines.
(i.e. value of beneficially owned shares and value of / gain on interests over shares) as a percentage of salary.
The Remuneration Committee proposes to implement the policy for the 2016/17 financial year as set out below:
| Element of remuneration | Implementation in 2015/16 | Implementation in 2016/17 | ||
|---|---|---|---|---|
| Salary | Lance Batchelor, Group Chief Executive Officer received a 2% increase 1 February 2015 (all employee rise 2.5%). As a result, his salary was £663,000. |
Executive Directors will receive a 2% increase on 1 February 2016 (all employee rise 2.5%). As a result, the salaries for the Executive Directors are: |
||
| Jonathan Hill joined the Company on 7 April 2015 as the Group Chief Financial Officer Designate. He became Group CFO on 23 June 2015. His base salary on joining the Company was £408,000. |
— Lance Batchelor: £676,260 — Jonathan Hill: £416,160 |
|||
| Benefit and pensions | The maximum employer pension contribution/ | No change in policy or levels: | ||
| salary supplement is 20% of salary. | — Lance Batchelor: 15% of salary | |||
| Executive Directors received the following: | supplement in lieu of pension; — Jonathan Hill: 15% of salary |
|||
| — Lance Batchelor: 15% of salary comprising of the employer contribution into the Saga Pension Scheme (DB) and a salary supplement in lieu of pension. — Jonathan Hill: 15% of salary comprising of the employer contribution into the Saga Pension Scheme (DB) and a salary supplement in lieu of pension. |
supplement in lieu of pension. | |||
| Annual Bonus Plan and Deferred Bonus Plan |
The annual bonus is paid in cash and deferred shares. |
No change in the annual bonus opportunities or deferral mechanics. |
||
| Maximum Annual Bonus Plan is 150% of salary. |
Two thirds of the total bonus to be paid immediately in cash and one-third deferred |
No change in the annual bonus performance measures. |
||
| Normal maximum bonus | into shares for three years. | |||
| opportunity as a percentage of salary: |
Change in the performance measures from 2014/15 (Group Trading EBITDA and Leverage |
|||
| — Group Chief Executive | ratio) to: | |||
| Officer – 150% — Group Chief Financial Officer – 125% |
— Group PBT – 60% — Group cash flow1 – 20% — Personal objectives – 20% |
| Element of remuneration | Implementation in 2015/16 | Implementation in 2016/17 | ||
|---|---|---|---|---|
| Long-Term Incentive Plan |
No change in the LTIP grant levels and no change to the performance measures from |
2016 LTIP awards: | ||
| Maximum value of LTIP grant is 200% of salary. |
2014 award. 2015 LTIP award: |
— No change in the LTIP grant levels. — No change to the performance measures or their weighting – 50% EPS growth and |
||
| Normal maximum LTIP award as a percentage of salary: |
— 50% EPS – EPS growth of 7% p.a. for 25% of this element of the award to vest with full vesting occurring for EPS growth of |
50% relative TSR. — The relative TSR comparator group and the vesting schedule for this element will remain unchanged from the 2015 award. |
||
| — Group Chief Executive Officer – 200% — Group Chief Financial Officer – 150% |
12% p.a. — 50% Comparative TSR performance of the Company compared to the FTSE 250 (excluding real estate and equity investment trusts) – 25% of this element of the award vesting for median TSR comparative performance with full vesting at upper quartile. |
— The Committee has reviewed the EPS performance target range in light of the Company's strategic plan over the next period, general market conditions and the range set by its FTSE 350 insurance peers and other FTSE 250 companies (in general the range set by these companies is annual EPS growth of 5%-12%). Therefore, taking into account these factors the Committee has determined to set the EPS range for the 2016 LTIP grant at EPS growth of 5%p.a. (threshold 25% vesting) to 12%p.a. (full vesting). The Committee believes that these targets are challenging over the next period and that by extending the vesting range this ensures the grant retains its incentive and retentive impact. The Committee will review the targets for the 2017 LTIP grant. |
||
| All employee share awards |
Saga continued to operate the Share Incentive Plan for all employees in 2015, with a free share award made in July 2015 of £300 to all eligible full-time employees. |
Saga will continue to provide all employees with the opportunity to participate in all employee equity arrangements. |
||
| Chairman & Non | Chairman Fees £275,000 | 2% rise (in line with Group employees) | ||
| Executive Fees | Board Fee £61,200 | for the Chairman fee and Board fee (no change in Committee Chair fee or |
||
| Committee Chair Fee £10,000 | Senior Independent Director fee). Chairman | |||
| Senior Independent Director Fee £20,000 | and Non-Executive fees will increase with effect from 1 June 2016: |
|||
| — Chairman fees £280,500 — Board fee £62,424 — Committee Chair fee £10,000 — Senior Independent Director £20,000 |
Note:
1 Defined as net available cash generation.
After 23 years with Saga, Andrew Goodsell retired from his role as Executive Chairman on 30 June 2015. Andrew was appointed Non-Executive Chairman of the Saga plc Board from 1 July 2015. He received no termination payments from the Company on his cessation of employment as the Executive Chairman. However, under the terms of the existing Deferred Annual Bonus Plan, Long Term Incentive Plan and Saga's policy around loss of office, as a good leaver he will receive the following:
| Plan Outstanding awards |
Committee Determination | ||||
|---|---|---|---|---|---|
| Deferred Annual Bonus Plan ("DBP") |
2014/15 DBP 150,882 Shares |
Andrew Goodsell has been treated as a good leaver under the terms of the Deferred Bonus Plan on his retirement from the Company as Executive Chairman. |
|||
| As a good leaver, all subsisting deferred share awards will vest in full on his ceasing to hold the office of Non-Executive Chairman or on the third anniversary of the date of grant of the awards whichever is the sooner. |
|||||
| Long Term Incentive Plan ("LTIP") |
2014 | Andrew Goodsell has been treated as a good leaver under the terms of the LTIP on his retirement from the Company as Executive Chairman. |
|||
| 210,124 Shares | |||||
| As a good leaver his award has been pro-rated to the amount of the vesting period completed on this date of cessation as Executive Chairman, the final payout will be based on Saga's achievement of the LTIP performance conditions at the end of the three year performance period. |
|||||
| IPO Award | 2014 | Andrew Goodsell has 12 months from the | |||
| 2,702,702 Shares | date of him ceasing to hold the office of Non-Executive Chairman to exercise these options, subject to the rules of the IPO Award. At the end of this period, any unexercised options would lapse. |
Under the terms of the Saga Annual Bonus Plan for the financial year February 2015 to January 2016, Andrew Goodsell will receive a bonus pro-rated to the number of months that he remained as Executive Chairman paid in cash.
The Remuneration Committee takes the views of the shareholders seriously and these views are taken into account in shaping remuneration policy and practice. Shareholder views are considered when evaluating and setting remuneration strategy and the Remuneration Committee welcomes an open dialogue with its shareholders on all aspects of remuneration.
The Director Remuneration Policy was put to a binding vote at the AGM on 23 June 2015. The Chairman's Annual Statement and the Annual Report on Remuneration were subject to an advisory vote. Below we outline the voting outcomes in respect of approving the Director Remuneration Report and approving the Director Remuneration Policy. Based on the overwhelming support received by shareholders both on the Policy and its implementation the Committee is comfortable that no changes are required to the Policy or its implementation for 2016/17.
| Resolution | Votes for |
% of votes cast |
Votes against |
% of votes cast |
Votes cast in total |
% of issued share capital voted |
Votes withheld |
|---|---|---|---|---|---|---|---|
| To approve the Directors' Remuneration Report |
814,029,424 | 98.38 | 13,430,293 | 1.62 | 827,459,717 | 74.01 | 1,463,379 |
| To approve the Directors' Remuneration Policy |
824,261,354 | 99.63 | 3,031,154 | 0.37 | 827,292,508 | 74.00 | 1,631,155 |
The table below sets out the single total figure of remuneration and breakdown for each Executive Director in respect of the 2015/16 financial year. Comparative figures for the 2014/15 financial year have also been provided. Figures provided have been calculated in accordance with the UK disclosure requirements: the Large and Medium-Sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 (Schedule 8 to the Regulations).
| Taxable | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Executive Directors1 | Period | Salary £ |
benefits2 £ |
Bonus £ |
LTIP £ |
Pension3 £ |
Other4 £ |
Other5 £ |
Total £ |
| Lance Batchelor | 2015/16 | 663,000 | 28,095 | 781,678 | – | 127,514 | – | – | 1,600,287 |
| (Group Chief Executive Officer) |
2014/15 | 556,667 | 13,225 | 655,958 | – | 102,852 | – | 4,000,000 | 5,328,702 |
| Jonathan Hill | 2015/16 | 334,246 | 19,748 | 325,699 | – | 74,680 | 190,000 | – | 944,373 |
| (Group Chief Financial Officer) |
2014/15 | – | – | – | – | – | – | – | – |
| Andrew Goodsell | 2015/16 | 330,422 | 18,261 | 389,567 | – | 232,481 | – | – | 970,731 |
| (Former Executive Chairman) |
2014/15 | 777,462 | 41,496 | 941,506 | – | 265,915 | – | 5,000,000 | 7,026,379 |
| Stuart Howard | 2015/16 | 196,992 | 6,837 | 193,545 | – | 156,573 | – | – | 553,947 |
| (Former Group Chief Financial Officer) |
2014/15 | 472,781 | 27,794 | 477,036 | – | 180,719 | – | 3,000,000 | 4,158,330 |
Notes:
1 Lance Batchelor was appointed the Group Chief Executive on 24 March 2014. 2014/15 salary, taxable benefits and pension provision pro-rated in accordance to time in role. Jonathan Hill was appointed the new Group Financial Officer Designate and joined Saga on 7 April 2015. Salary, taxable benefits, pension provision and bonus have been pro-rated with respect to time in the role. Andrew Goodsell transitioned from his role as Executive Chairman to Non-Executive Chairman on 1 July 2015. Stuart Howard stepped down from Board of Directors of the Company on 23 June 2015. Salary, benefits, bonus and pension pro-rated for time served in financial year as Executive Directors. See page 93 for breakdown of bonus payments made in the year.
2 The types of benefits provided are set out in the Remuneration Policy section of the report.
3 Reflects the value of the DB pension accrual in the year and the pension cash supplement – see table on page 95 for further details. 4 A buyout award of £190,000 was made to the Group Chief Financial Officer on recruitment in the form of Saga shares (101,932 based on Saga's closing share price on 7 April 2015 of 186.4p). The award will vest in two equal tranches on the first and second anniversary of the Group Chief Financial Officer's commencement of employment with Saga. In determining this amount the Committee applied the "buyout" element contained in the recruitment policy. The buyout of the outstanding Bovis Homes awards held by the Group Chief Financial Officer were valued based on the publicly available information disclosed and took into account the vesting periods and probability of the performance conditions being satisfied at the date of cessation. This fair value was then discounted further to take into account the decreased probability of some of the longer term elements actually vesting. The discounted fair value was then converted in to a value of Saga shares which vest subject to continued employment. There are no further performance conditions
attached to the vesting of these shares as the original performance conditions were taken into account in determining the buy-out value and therefore the imposition of additional performance conditions would in fact amount to a second set of performance conditions on vesting. 5 The former Executive Chairman and Group Chief Financial Officer were provided a one-off award on IPO ('IPO Award'). The shares under the IPO
Awards were fully vested on IPO (with the sale restrictions on the shares to be lifted on 29 May 2015 in accordance with the lock up arrangements outlined in the IPO prospectus). The Group Chief Executive Officer was provided a share and cash award on IPO.
a. Share award consisted of a one-off award on IPO of market value share options (with an exercise price equal to Saga's share price on Admission of £1.85) with a face value of £4m. 25% will vest and become exercisable on the third anniversary of the award, 25% on the fourth anniversary and 50% on the fifth anniversary; this was part of the buyout on the recruitment of the Group Chief Executive Officer to compensate for awards lapsing on his ceasing employment with his former employer.
b. Cash award of £4m based on continued employment: 25% immediately on the IPO, 25% on the first anniversary of the award and 50% will be paid on the second anniversary; this was part of the buyout on the recruitment of the Group Chief Executive Officer to compensate for awards lapsing on his ceasing employment with his former employer.
In respect of the 2015/16 financial year, the bonus awards payable to Executive Directors were agreed by the Remuneration Committee having reviewed the Company's results. Details of the targets used to determine bonuses in respect of the 2015/16 financial year and the extent to which they were satisfied are shown in the table below. These figures are included in the single figure table.
| Annual bonus value for Annual bonus value achieved (% of salary) threshold and Percentage of |
|||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Performance condition |
Weighting | Threshold performance required |
Target performance required |
Maximum performance required |
Actual performance |
maximum performance (% of max) |
maximum performance achieved |
Lance Batchelor |
Jonathan Hill |
Andrew Goodsell |
Stuart Howard |
| Group PBT | 60% | £166.0m | £172.9m | £177.4m | £176.2m 20%-100% | 89.6% | 80.6% | 66.6% | 80.6% | 67.2% | |
| Group cash flow1 |
20% | 77.3% | 79.6% | 81.1% | 79.9% 20%-100% | 69.3% | 20.8% | 17.2% | 20.8% | 17.3% | |
| Personal objectives |
20% See below for details of the 2015/16 personal objectives and their achievement |
0%-100% | 55.0% | 16.5% | 13.6% | 16.5% | 13.8% | ||||
| Total | 100% | 78.6% | 117.9% | 97.4% | 117.9% | 98.3% | |||||
| Total £ | 781,678 | 325,699 389,567 193,545 |
Notes:
1 Defined as net available cash generation.
2 Under the terms of the Annual Bonus Plan, 20% for each element is payable for achieving the threshold performance increasing to 60% for target performance and 100% for achieving maximum performance. Achievements between these points are calculated on a straight-line basis.
3 Bonus paid to Jonathan Hill is pro-rated for the number of months served in the performance year. The bonus paid for Andrew Goodsell and Stuart Howard pro-rated for the number of months served in the performance year as Executive Directors. Bonus as % of salary has been calculated based on pro-rated bonus received and the pro-rated base salaries.
The following table sets out the level of satisfaction of the personal objectives for the Group Chief Executive Officer and Group Chief Financial Officer as well as the former Group Chief Executive Officer and the former Group Chief Financial Officer:
| Name | Weighting | Objective | Details | Notes | ||
|---|---|---|---|---|---|---|
| Lance Batchelor | 10% | Customer numbers | Total customer numbers including: | Objective was partially | ||
| Group Chief Executive Officer |
(insurance plus passengers) |
— motor, home and other financial services insurance policy numbers — tour operator passenger numbers — shipping passenger days. |
achieved (growth in absolute customer numbers of 1.1% from prior year from 2.63m to 2.66m). |
|||
| 5% | Successful sale of Allied Healthcare |
Successful completion of the sale to Aurelius on 30 November 2015 at above minimum value set. |
The completion of the successful transaction results in the Committee viewing this objective as met. |
|||
| 5% | Successful launch of Saga Investment Services |
Successfully launched on time and on budget in November 2015. |
The Committee views this objective as partially met. |
|||
| The proposition has received high indicative satisfaction scores from potential consumers based on surveys conducted. |
||||||
| Compliance, audit and risk plans put in place which will ensure the robustness of the Company's governance structure. |
The overall performance against these personal objectives equated to 55% of the bonus for this element being achieved.
| Name | Weighting | Objective | Details | Notes | |||
|---|---|---|---|---|---|---|---|
| Jonathan Hill | 10% | Customer numbers | Total customer numbers including: | Objective was partially | |||
| Group Chief Financial Officer |
(insurance plus passengers) |
— motor, home and other financial services insurance policy numbers — tour operator passenger numbers — shipping passenger days. |
achieved (growth in absolute customer numbers of 1.1% from prior year from 2.63m to 2.66m). |
||||
| 5% | Successful launch of Saga Investment |
Successfully launched on time and on budget in November 2015. |
The Committee views this objective as being |
||||
| Services | The proposition has received high indicative satisfaction scores from potential consumers based on surveys conducted. |
partially met. | |||||
| Compliance, audit and risk plans put in place which will ensure robustness of the Company's governance structure. |
|||||||
| 5% | Risk Management | Managing the risk identification and mitigation process ensuring that Group and Divisional risk plans are in place and managed within the overall risk appetite as set by the Risk Committee. |
Process improvements made during the year and plans are in place resulting in a better balance of strategic and operational risk. |
||||
| The Committee views this objective as partially met. |
|||||||
| The overall performance against these personal objectives equated to 55% of the bonus for this element being achieved. | |||||||
| Andrew Goodsell Former Group |
10% | To support smooth hand-over to the new CEO to take over the leadership of the Saga business |
The Committee views this objective as met. |
||||
| Executive Chairman | 10% | Board Committees | To build an effective plc Board and effective | The Committee views this objective as met. |
|||
| The overall performance against these personal objectives equated to 55% of the bonus for this element being achieved. | |||||||
| Stuart Howard Former Group Chief |
10% | to take over the CFO functions | To support smooth hand-over to the new CFO | The Committee views this objective as met. |
|||
| Financial Officer | 10% | To manage all external relationships effectively, ensuring the The Committee views this Company as a listed entity becomes firmly established with objective as met. key parties |
|||||
| The overall performance against these personal objectives equated to 55% of the bonus for this element being achieved. |
The bonus of the 2015/16 financial year will be paid two thirds in cash and one third deferred in shares which will vest after three years based on continued employment.
The table below sets out the details of the long-term incentive awards granted in the 2015/16 financial year where vesting will be determined according to the achievement of performance conditions that will be tested in future reporting periods:
| Name | Award type |
Basis on which award made |
Face value of award |
Shares awarded |
Percentage of award vesting at threshold performance (%) |
Maximum percentage of face value that could vest (%) |
Performance conditions |
|---|---|---|---|---|---|---|---|
| Lance Batchelor LTIP | Annual | £1,326,000 | 611,059 | 25% | 100% | Relative TSR and EPS equally weighted |
|
| Jonathan Hill | LTIP | Annual | £612,000 | 282,027 | 25% | 100% | Relative TSR and EPS equally weighted |
The awards were granted on 30 June 2015; the face value is calculated with reference to the share price on 29 June 2015 of £2.17. The performance conditions are set out on page 89 in the Implementation of Remuneration Policy in the 2015/16 financial year. The awards will vest, subject to the level of performance achieved on 29 June 2018.
The following table provides the information required by Schedule 8 of the Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 (the 'Regulations') and gives details for each Executive Director of:
Neither of the Executive Directors has made additional voluntary contributions.
| Accrued pension | Single figure numbers | Extra information disclosed under 2013 Directors' Remuneration Regulations |
||||||
|---|---|---|---|---|---|---|---|---|
| Executive Directors | Age at 31/01/2016 |
Pensionable service at 31/01/2016 |
01/02/2015 | 31/01/2016 | Pension salary supplement1 |
Value x 20 over year (net of Director's contribution) |
Total pension benefits |
Normal retirement age |
| Lance Batchelor | 52 | 1 year, 9 months |
£1,939 | £4,334 | £79,614 | £47,900 | £127,514 | 65 |
| Jonathan Hill | 47 | 10 months | – | £2,000 | £34,680 | £40,000 | £74,680 | 65 |
Notes:
1 Pension salary supplement paid between the difference of the employer contribution into the Saga Pension Plan and 15% of the Executive Directors' base salary.
The table below sets out the single total figure of remuneration and breakdown for each Non-Executive Director:
| 2015/16 | 2014/15 | ||||||
|---|---|---|---|---|---|---|---|
| Non-Executive Director |
Fees | Taxable benefits |
Total | Fees1 | Taxable benefits |
Total | Roles |
| Philip Green | £91,050 | – | £91,050 | £60,692 | – | £60,692 Senior Independent Non-Executive Director, Nomination Committee Chairman |
|
| Ray King | £74,983 | – | £74,983 | £53,949 | – | £53,949 | Non-Executive Director, Audit Committee Chairman, Risk Committee Chairman (to 24 June 2015) |
| Orna NiChionna | £66,650 | – | £66,650 | £40,462 | – | £40,462 | Non-Executive Director, Risk Committee Chairman (from 24 June 2015) |
| Gareth Williams | £70,816 | – | £70,816 | £47,205 | – | £47,205 | Non-Executive Director, Remuneration Committee Chairman |
| Bridget McIntyre | £5,933 | – | £5,933 | – | – | – | Non-Executive Director |
| Andrew Goodsell2 | £160,416 | £26,810 | £187,226 | – | – | – | Non-Executive Chairman |
| James Arnell3 | £0 | – | £0 | £0 | – | £0 | |
| Charles Sherwood4 |
£0 | – | £0 | £0 | – | £0 | |
| Pev Hooper4 | £0 | – | £0 | £0 | – | £0 |
Notes:
1 Fees received for time served in financial year 2014/15.
2 The fees for Andrew Goodsell relate to the period from 1 July 2015 to 31 January 2016. In addition, he receives the following taxable benefits which are legacy arrangements from his employment as Executive Chairman:
a. A leased car and the associated fuel arrangement; b. Healthcare benefit.
3 James Arnell is a Non-Independent Non-Executive Director who does not receive a fee from Saga plc.
4 Charles Sherwood and Pev Hooper were Non-independent Directors who did not receive a fee from Saga plc and who left the Board on 2 December 2015.
| Non-Executive Directors | 2016/17 annual fee |
2015/16 annual fee |
|---|---|---|
| Chairman's fee | £280,500 | £275,000 |
| Board fee | £62,424 | £61,200 |
| Committee Chairmanship (per committee) | £10,000 | £10,000 |
| Senior Independent Non-Executive Director fee | £20,000 | £20,000 |
Notes:
Board fee to be increased from 1 June 2016.
Stuart Howard ceased employment with the Company on 30 June 2015. He received no termination payment from the Company on his cessation of employment.
He received an annual bonus, pro-rated for his time served during the 2015/16 financial year of £193,545 paid in cash – see page 94 for further details.
The table below provides details of the treatment of his outstanding and exercised share awards:
| Plan | Outstanding awards/awards exercised | Committee determination |
|---|---|---|
| Deferred Annual Bonus Plan ('DBP') |
2014/15 DBP 76,448 shares |
Stuart Howard has been treated as a good leaver under the terms of the DBP on his retirement from the Company. |
| As a good leaver, all subsisting deferred share awards vested in full on his cessation of employment. |
||
| Stuart Howard exercised his Deferred Annual Bonus shares on 4 December 2015. He exercised 76,448 shares. The share price on exercise was £2.015 equating to a gain of £154,043. |
||
| Long Term Incentive Plan ('LTIP') |
2014 106,482 shares |
Stuart Howard has been treated as a good leaver under the terms of the LTIP on his retirement from the Company. |
| As a good leaver his award has been pro-rated to the amount of the vesting period completed on this date of cessation as Group Financial Director; the final payout will be based on Saga's achievement of the LTIP performance conditions at the end of the three year performance period. |
||
| IPO Award | 2014 1,621,621 shares |
Stuart Howard has 12 months from 30 June 2015 in which to exercise these IPO Award options. |
Statement of Directors' shareholding and share interests See the tables on page 87.
Executive Directors may hold positions in other companies as Non-Executive Directors and retain the fees.
Lance Batchelor is a Trustee of the charity White Ensign Association and is a Trustee of the National Gallery; he does not receive a fee for either position.
The graph below shows the value of £100 invested in the Company's shares since listing compared with the FTSE 250 index. The graph shows the TSR generated by both the movement in share value and the reinvestment over the same period of dividend income.
The Remuneration Committee considers that the FTSE 250 is the appropriate index because the Company has been a member of this since listing. This graph has been calculated in accordance with the Regulations. It should be noted that the Company listed on 23 May 2014 and therefore only has a listed share price for the period of 23 May 2014 to 31 January 2016.
The table below sets out the total remuneration delivered to the Group Chief Executive Officer last year valued using the methodology applied to the single total figure of remuneration. The Group Chief Executive Officer joined the Company on 24 March 2014 therefore the remuneration shown is not for the full financial year. The Remuneration Committee believes that the remuneration payable in its earlier years as a private company to the Executive Chairman does not bear comparative value to that which has been and will be paid to the Group Chief Executive Officer. Therefore the Remuneration Committee has chosen to disclose remuneration for the Group Chief Executive Officer only for the two most recent financial years:
| Group Chief Executive | 2015/16 | 2014/15 |
|---|---|---|
| Total single figure | £1,600,287 | £5,328,702 |
| Annual bonus payment level achieved (percentage of maximum opportunity) | 78.6% | 80.7% |
| LTIP vesting level achieved (percentage of maximum opportunity) | n/a | n/a |
| Option vesting level achieved (percentage of maximum opportunity) | n/a | n/a |
There was no long-term incentive plan or share option plan operated prior to listing. It should be noted that £4m of the single total figure for 2014/15 related to the award granted on Admission, which was a one-off payment to compensate for awards lapsing on his ceasing employment with his former employer.
The table below sets out the relative importance of spend on pay in the 2015/16 financial year and 2014/15 financial year compared with other disbursements. All figures provided are taken from the relevant company accounts.
| Disbursements from profit in 2015/16 financial year |
Disbursements from profit in 2014/15 financial year |
Percentage | ||
|---|---|---|---|---|
| (£m) | (£m) | change | ||
| Profit distributed by way of dividend | 70.4 | Nil | 100% | |
| Total tax contributions1 | 61.6 | 51.6 | 19.4% | |
| Overall spend on pay including Executive Directors | 300.1 | 330.7 | 9.3% |
Note:
1 Total tax contributions include corporation tax, national insurance contributions, VAT and Air Passenger Duty.
The following table sets out the change in the remuneration paid to the Group Chief Executive Officer from 2014/15 to 2015/16 compared to the average percentage change for employees.
The Group Chief Executive Officer's remuneration disclosed in the table below has been calculated to take into account base salary, taxable benefits, excluding his pension, and annual bonus (including any amount deferred).
The employee pay has been calculated using the following elements: annual salary – base salary and standard monthly allowances; taxable benefits – car allowance and private medical insurance premiums; annual bonus – Company bonus, management bonus, commission and incentive payments.
It should be noted that the remuneration for 2014/15 has been annualised to allow a direct comparison with 2015/16 as the Group Chief Executive Officer was not appointed until 24 March 2014. The change in his taxable benefits is as a result of choosing to receive a Company car under the Car Policy instead of a cash based car allowance.
| Salary | Taxable benefits | Annual Bonus | |||||||
|---|---|---|---|---|---|---|---|---|---|
| 2015/16 | 2014/15 | Percentage change |
2015/16 | 2014/15 | Percentage change |
2015/162 | 2014/152 | Percentage change |
|
| Group Chief Executive Officer1 |
£663,000 | £650,000 | 2% | £28,095 | £15,870 | 77% | £781,678 | £787,150 | –0.7% |
| Average per employee3 |
£24,865 | £23,661 | 5% | £638 | £543 | 17% | £3,293 | £2,599 | 27% |
Notes:
1 The Group Chief Executive Officer was appointed on 24 March 2014 and was only in office for 10 months of 2014/15. His salary, taxable benefits, and bonus for 2014/15 have been included on an annualised basis to aid comparison.
2 The Group Chief Executive Officer's bonus for both years includes cash awards of £1,000,000 as part of his recruitment as compensation for awards lapsing on his ceasing employment with his former employer.
3 All values for 2014/15 have been adjusted to exclude the Group Chief Executive Officer who was previously included as part of this population.
Each year, prior to reviewing the remuneration of the Executive Directors and the members of the Executive Team, the Remuneration Committee considers a report prepared by the Group HR Director detailing remuneration practice across the Company. The report provides an overview of how employee pay compares to the market and any material changes during the year, and includes detailed analysis of basic pay and variable pay changes within the UK.
While the Company does not directly consult with employees as part of the process of reviewing executive pay and formulating the Remuneration Policy, the Company does receive an update and feedback from the broader employee population on an annual basis using an engagement survey which includes a number of questions relating to remuneration. The Company does not use remuneration comparison measurements.
The Group aims to provide a remuneration package for all employees that is market competitive and operates the same core structure as for the Executive Directors. The Group operates employee share and variable pay plans, with pension provisions provided for all Executive Directors and employees. In addition, any salary increases for Executive Directors are expected to be generally in line with those for UK based employees.
| Organisational level | Employee # | Maximum bonus award – cash |
Maximum bonus award – deferred shares |
Maximum LTIP award | SIP |
|---|---|---|---|---|---|
| Executive Directors | 2 | 100% | 50% | 200% | √ |
| Executive Team | 8 | 67% | 33% | 100% | √ |
| Directors | 16 | 60% | – | 60% | √ |
| Senior leadership | 50 | 40% | – | 40% | √ |
| Rest of employee population | 2,800 | Up to 40% | – | – | √ |
Following a selection process carried out by the Board prior to the IPO of the Company, the Committee has engaged the services of PwC as independent remuneration adviser.
During the financial year, PwC advised the Remuneration Committee on all aspects of the remuneration policy for Executive Directors and members of the Executive Team. PwC also provided the Company with tax and assurance work during the year. The Remuneration Committee reviewed the nature of the services provided and was satisfied that no conflict of interest exists or existed in the provision of these services.
PwC is a member of the Remuneration Consultants Group and the voluntary code of conduct of that body is designed to ensure objective and independent advice is given to remuneration committees. Fixed fees of £65,000 (2014/15: £57,500) were provided to PwC during the year in respect of remuneration advice received.
Gareth Williams Chairman, Remuneration Committee 18 April 2016
The Directors present their report together with the audited consolidated financial statements for the year ended 31 January 2016 in accordance with section 415 of the Companies Act 2006 which were approved by the Board on 18 April 2016.
The Directors' Report, together with the Strategic Report set out on pages 01-49 form the Management Report for the purposes of Disclosure and Transparency Rule ('DTR') 4.1.5R.
Information required to be part of this Directors' Report can be found elsewhere in the annual report as indicated in the table below and is incorporated into this report by reference:
The Group made a profit after taxation of £141.2m for the financial year ended 31 January 2016. The Board paid an interim dividend of 2.2p per share and proposes to pay, subject to shareholder approval at the 2016 AGM, a final dividend of 5.0p net per share in respect of the year ended 31 January 2016.
The going concern statement required by the Listing Rules and the UK Corporate Governance Code (the 'Code') is set out in the Compliance Statement on page 53.
The Board's statement regarding whether the information contained within the annual report is fair, balanced and understandable is contained on page 53.
| Information | Location in annual report |
|---|---|
| Likely future developments in the business of the Company or its subsidiaries |
Pages 01-49 |
| Corporate social responsibility | Pages 24-25 |
| Greenhouse gas emissions | Pages 26-27 |
| Employees (employment of disabled persons, employee engagement and policies) |
Page 23 |
| Corporate Governance Statement | Pages 50-77 |
| Directors' details (including changes made during the year) | Pages 57 and 60-63 |
| Related party transactions | Note 34 on page 172 |
| Employee share schemes (including long-term incentive schemes) |
Note 31 on pages 168-169 |
| Financial instruments: Information on the Group's financial instruments and risk management objectives and policies, including our policy for hedging |
Note 2.3 on pages 119-130 |
| Additional information | Pages 183-185 |
The Directors' viability statement is set out on page 53.
No political donations were made during the year.
A list of the Directors, their interests in its long-term performance share plan, contracts and ordinary share capital of the Company are given in the Directors' Remuneration Report on pages 78-100.
All Directors will seek re-election or election at the AGM in accordance with the Company's articles of association and the recommendations of the Code.
A Director may be appointed by ordinary resolution of the shareholders in a general meeting following nomination by the Board or a member (or members) entitled to vote at such a meeting. In addition, the Directors may appoint a Director to fill a vacancy or as an additional Director, provided that the individual retires at the next AGM.
A Director may be removed by the Company in certain circumstances set out in the Company's articles of association or by an ordinary resolution of the Company.
Pursuant to the Relationship Agreement entered into between the Company and each of the Private Equity Investors (as defined on page 103) each Private Equity Investor is entitled to appoint one Non-Executive Director to the Board for so long as it is entitled, either directly or indirectly through its voting rights in Acromas Bid Co Limited, to exercise or to control the exercise of the equivalent of 10% or more of the votes able to be cast on all or substantially all matters at general meetings of the Company.
Directors' indemnities
As at the date of this report, indemnities are in force under which the Company has agreed to indemnify the Directors, to the extent permitted by law and the Company's articles of association, in respect of all losses arising out of, or in connection with, the execution of their powers, duties and responsibilities, as Directors of the Company or any of its subsidiaries. No amount was paid under any of these indemnities or insurances during the year other than the applicable insurance premiums. Directors and officers liability insurance is in place as at the date of this report, at an amount which the Board considers adequate. This is subject to an annual review.
The Company's share capital (including movements during the year) is set out on page 167. At the date of this report the Company's issued share capital comprised a single class of share capital which is divided into ordinary shares of 1p each. As at 31 January 2016, 1,118,005,405 ordinary shares of 1p each have been issued, are fully paid up and quoted on the London Stock Exchange.
During the year, 7,300,000 additional shares were issued in connection with the Customer Offer and Employee Offer detailed in the prospectus published on 8 May 2014 in connection with the Company's initial public offering (the 'Prospectus'). Under the offer Eligible Customers and Eligible Employees were eligible to receive one free share for every twenty held (subject to certain conditions). Such shares rank pari passu with existing shares in the Company.
In accordance with DTR5, the Company has been notified of the following interests in 3% or more of the Company's total voting rights:
| Name | Ordinary shares | Percentage | of capital Nature of holding |
|---|---|---|---|
| Acromas Bid Co Limited ('ABCL') | 352,674,283 | 31.54 | Direct |
| HSBC Global Custody Nominees (UK Limited) |
34,367,968 | 3.07 | Direct |
| Majedie UK Income Fund, Majedie Asset Management UK Income Fund, Majedie Asset Management UK Equity Fund, Majedie UK Equity Fund, Majedie UK Trust, Discretionary Clients |
68,956,717 | 6.17 | Indirect |
| Pelham Long/Short Master Fund Limited |
69,056,048 | 6.22 | Equity swap |
On 27 February 2015, the Company was notified that ABCL had sold 111,000,000 shares (in aggregate), pursuant to transactions which took place on 26 and 27 February 2015. Following such transactions, ABCL held 688,974,283 ordinary shares, representing 62.03% of capital.
On 13 May 2015, the Company was notified that ABCL had sold 122,500,000 shares. Following the sale, ABCL held 566,474,283 ordinary shares, representing 51.00% of capital at 13 May 2015.
On 28 July 2015, the Company was notified that ABCL had sold 68,800,000 shares. Following the sale, ABCL held 497,674,283 ordinary shares, representing 44.51% of capital at 28 July 2015.
On 2 December 2015, the Company was notified that ABCL had sold 145,000,000 shares. Following the sale, ABCL held 352,674,283 ordinary shares, representing 31.54% of capital at 2 December 2015.
Information regarding other interests in voting rights provided to the Company pursuant to the FCA DTRs is published on the Company's website and a Regulatory Information Service. Notification was also received by the Company during the year that Goldman Sachs had a notifiable interest but this ceased to be a notifiable interest and is not included in the table above.
The Company has entered into an agreement with Acromas Bid Co Limited as its controlling shareholder as required under Listing Rule 9.2.2A R (2)(a), complies with the independence provisions set out in LR 6.1.4D R and has a constitution that allows for the election and re-election of independent Directors to be conducted in accordance with the election provisions set out in LR 9.2.2E R and LR 9.2.2F R.
As far as the Company is aware:
A number of agreements take effect, alter or terminate upon a change of control of the Company including following a takeover bid, for example insurance, commercial contracts and distribution agreements. The Group has a number of contracts and arrangements throughout the business where the legal risk arising out of a change of control is closely managed as part of the contractual governance process. Inevitably, there may be certain operational contracts that could provide for a period of disruption or higher operational charges if a change of control clause was invoked. However, at the current time, we are not aware of any critical or material contracts that pose such a threat.
The Senior Facilities Agreement and the financing agreements in relation to the new ship provides the Group with loan and revolving credit facilities for general financing purposes. In the event of a change of control the facilities would either require repayment or renegotiation. Further details on banking facilities are shown in note 28 to the consolidated financial statements.
The Relationship Agreement between the Company, Acromas Bid Co Limited (the 'Principal Shareholder') and certain funds managed or advised by Charterhouse Capital Partners, CVC Capital Partners and Permira (the 'Private Equity Investors') remains in force until the later of (i) each of the Private Equity Investors (together with its associates) ceases to be entitled to exercise or control the exercise, directly or indirectly, of 10% or more of the votes able to be cast on all or substantially all
matters at general meetings of the Company; and (ii) the Principal Shareholder (together with its associates) ceases to be entitled to exercise or control the exercise, directly or indirectly, of 30% or more of the votes able to be cast on all or substantially all matters at general meetings of the Company. There are also provisions that provide for the Relationship Agreement to be automatically terminated if the Company's shares cease to be listed on the premium listing segment of the Official List and traded on the London Stock Exchange plc's main market for listed securities. There are no provisions in the Relationship Agreement which allow the Principal Shareholder or the Private Equity Investor to terminate the agreement in the event of a change of control of the Company.
As a result of the share placing undertaken by ABCL on 2 December 2015, CVC Capital Partners and Permira's interests fell below 10% and the Private Equity Investment Directors nominated by them resigned from the Board.
The rules of the Company's employee share plans generally provide for the accelerated vesting and/or release of share awards in the event of a change of control of the Company.
The Company does not have any agreements with Directors or employees which would pay compensation in the event of a change of control.
Each Director is obliged to disclose any potential or actual conflict of interest in accordance with the Company's conflict of interest policy. The policy and declarations made are subject to annual review and Directors are required to update any changes to declarations as they occur. Internal controls are in place to ensure that any related party transactions are conducted on an arm's length basis.
A shareholders' resolution was passed at the AGM on 23 June 2015 which authorised the Company to make market purchases within the meaning of section 693 (4) of the Companies Act 2006 (the 'Act') (up to £1,110,705.41 representing 10% of aggregate nominal share capital of the share capital of the Company following Admission; subject to a minimum price of 1p and a maximum price of the higher of 105% of the average mid-market quotations for five business days prior to purchase or price of last individual trade and highest current individual bid as derived from the London Stock Exchange trading system).
The Company did not exercise this authority during the year ended 31 January 2016. The above authority will expire at the forthcoming AGM and a resolution to authorise the Company to make market purchases representing 10% of current nominal share capital will be proposed.
The Directors of the Company were also granted authority at the 2015 AGM to allot relevant securities up to a nominal amount of £3,698,649. This authority will apply until the conclusion of the
Governance
2016 AGM, where shareholders will be asked to grant the Directors authority (for the purposes of section 551 of the Act) to allot relevant securities (i) up to an aggregate nominal amount of £3,722,958; and (ii) comprising equity securities (as defined in the Act) up to an aggregate nominal amount of £7,445,916 (after deducting from such limit any relevant securities issued under (i) in connection with a rights issue). These amounts will apply until the conclusion of the AGM to be held in 2017, or, if earlier, 31 July 2017.
Special resolutions will also be proposed to give the Directors authority to make non pre-emptive issues wholly for cash in connection with rights issues and otherwise up to an aggregate nominal amount of £1,118,005.41 and to make market purchases. The authority to repurchase the Company's ordinary shares in the market will be limited to £1,118,005.41 and will set out the minimum and maximum price which will be paid.
The rights attached to the shares are governed by applicable law and the Company's articles of association (which are available at http://corporate. saga.co.uk/assets/downloads/ corporate-governance/saga-plcarticles-of-association.pdf).
Ordinary shareholders have the right to receive notice, attend and vote at general meetings; receive a copy of the Company's report and accounts and a dividend when approved and paid. On a show of hands, each shareholder present in person, or by proxy (or an authorised representative of a corporate shareholder), shall have one vote. In the event of a poll, one vote is attached to each share held.
The notice of the AGM (the 'Notice') states deadlines for exercising voting rights and for appointing a proxy/proxies.
No shareholder owns shares with special rights as to control.
Other than where imposed by law or regulations, or where the Listing Rules require certain persons to obtain clearance before dealing, there are no restrictions regarding the transfer of shares in the Company. The Company is not aware of any agreement which would result in a restriction on the transfer of shares or voting rights.
Any amendment to the Company's articles of association may only be made by passing a special resolution of the shareholders of the Company.
The Company does not have any branches outside of the UK.
There have been no important events affecting the Company or any of its subsidiary undertakings since 31 January 2016.
A resolution to re-appoint Ernst and Young LLP (who have indicated their willingness to act) as our Auditor will be proposed at the 2016 AGM.
Having made the requisite enquiries, so far as each of the Directors is aware, there is no relevant audit information (as defined by section 418(3) of the Companies Act 2006) of which the Company's Auditor is unaware and the Directors have taken all the steps they ought to have taken as Directors to make themselves aware of any relevant audit information and to ensure that the Company's Auditor is aware of that information.
The AGM will be held on Tuesday 21 June 2016 at 11am at Enbrook Park, Sandgate, Folkestone, Kent CT20 3SE. The Notice contains an explanation of special business to be considered at the meeting.
A copy of the Notice will be available on our website, http://corporate.saga.co.uk in due course.
As required under the Financial Conduct Authority ('FCA') Disclosure Rules and Transparency Rules ('DTRs'), the following statements are made by the Board regarding the preparation of the financial statements.
The process for producing the Company's annual report and accounts starts with clear direction for all those involved, so that the final document represents a balanced picture of our activities throughout the year and so that shareholders are given the information they need to assess the performance, business model and strategy.
The Directors are responsible for preparing the annual report and accounts in accordance with applicable law and regulations. Company law requires the Directors to prepare Group financial statements for each financial year. Under that law, the Directors are required to prepare Group financial statements under IFRSs as adopted by the European Union and applicable law. Under company law the Directors must not approve the Group financial
statements unless they are satisfied that, to the best of their knowledge, they give a true and fair view of the state of affairs of the Group and of the profit or loss of the Group for that period. In preparing the Group financial statements the Directors are required to:
The Directors are responsible for keeping adequate records that are sufficient to show and explain the Group's transactions and disclose with reasonable accuracy at any time the financial position of the Group and enable them to ensure that the Group
financial statements comply with the Companies Act 2006 and Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
The Directors are also responsible for preparing the Strategic Report, the Directors' Report, the Directors' Remuneration Report and the Corporate Governance Statement in accordance with the Companies Act 2006 and applicable regulations, including the requirements of the Listing Rules and the Disclosure and Transparency Rules.
Neither the Company nor the Directors accept (and hereby exclude) any liability to any person in relation to the annual report except to the extent that such liability is imposed by law and may not be validly excluded. Accordingly, any liability to a person who has demonstrated reliance on any untrue or misleading statement or omission shall be determined in accordance with section 90A and schedule 10A of the Financial Services and Markets Act 2000, as amended.
Each of the Directors, who were in office at the date of this report, whose names and responsibilities are listed on pages 57 and 60-61, confirm that, to the best of their knowledge:
By order of the Board
V Haynes Company Secretary 18 April 2016
Saga plc Company no. 08804263
In our opinion:
We have audited the financial statements of Saga plc for the year ended 31 January 2016, which comprise:
| Group | Company |
|---|---|
| — the consolidated income statement — the consolidated statement of other comprehensive income — the consolidated statement of financial position — the consolidated statement of changes in equity — the consolidated statement of cash flows — the related notes 1 to 36 to the consolidated financial statements. |
— the parent company balance sheet — the parent company statement of changes in equity — the related notes 1 to 6 to the parent company financial statements. |
The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and IFRSs as adopted by the European Union.
The financial reporting framework that has been applied in the preparation of the parent company financial statements is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice, FRS 101).
| Overview of our audit approach | ||||
|---|---|---|---|---|
| Materiality | Overall Group materiality of £9.0m (2015: £9.6m) which represents approximately 5% of profit before tax (2015: 5% of operating profit) from continuing operations. |
|||
| Audit scope | The divisions and entities where we performed full audit procedures accounted for 89% of the Group's profit before tax, 93% of the Group's revenue and 96% of the Group's total assets. |
|||
| Risk of material misstatement |
— Valuation of insurance contract liabilities — Valuation of goodwill — Revenue recognition. |
|||
| What has changed | Subsequent to the disposal of the Allied Healthcare business on 30 November 2015, we assigned the component a review scope given that 10 months of business performance has been consolidated in the Group's results. Destinology Limited was identified as a full scope component (specific scope in the prior period) as this is the first period in which the component has contributed 12 months' revenue to the Group. |
The table below shows the risks of material misstatement we identified that have had the greatest effect on the overall audit strategy, the allocation of resources in the audit and directing the efforts of the audit team. In addressing these risks, we have performed the procedures below which were designed in the context of the financial statements as a whole and, consequently, we do not express any opinion on these individual areas.
| Risk | Our responses to the risks | What we concluded to the Audit Committee |
|---|---|---|
| Refer to the Audit Committee Report (page 71), accounting policy note 2.3(q) and disclosure note 25. For insurance contracts, estimates have to be made both for the expected ultimate cost of claims reported at the reporting date and for the expected ultimate cost of claims incurred but not yet reported at the reporting date ('IBNR'). It can take a significant period of time before the ultimate claims cost can be established with certainty. Management makes judgement in respect of the trends in the frequency and severity of bodily injury claims, the propensity for large claims to settle as Periodical Payment Orders ('PPOs'), the Ogden discount rate and other regulatory developments. Management sets reserves at a level that includes a margin over the actuarial best estimate to take account of uncertainty that may impact the value of the insurance contract liabilities ultimately settled. Note 18(d) 'Insurance risk' provides further detail of these uncertainties and the process for establishing insurance contract liabilities. |
We understood, assessed and tested the design and operational effectiveness of key controls over the process applied by Management in establishing insurance contract liabilities, including controls over the completeness and accuracy of data used by the internal actuary to project the claims liabilities. Supported by our actuarial specialists, we: — obtained an understanding of the methodology and key assumptions applied by Management; — challenged the methodology and key assumptions against our knowledge of the sector and the Group's own claims experience; — performed independent actuarial projections on the motor classes which account for 95% of the gross insurance contract liabilities; — reconciled the claims data supporting the actuarial projections to source systems and, on a sample basis, verified the accurate recording of data against the underlying policy and claims documentation; and — assessed the level of reserve margin compared to market practice and prior periods, in the context of areas of uncertainty for which the margin is held; and — tested on a sample basis that the reinsurance recoveries were recorded in line with the underlying reinsurance contracts. |
Consistent with the prior period, our view is that the Saga best estimate is based on assumptions which are individually reasonable but contain degrees of caution when compared to our own assumptions. We consider that the recorded insurance contract liabilities as at 31 January 2016, including the margin and net of reinsurance, are within a reasonable range. In addition we consider that the disclosures made provide information that assists in understanding the uncertainty inherent in the valuation of insurance contract liabilities. |
| Risk | Our responses to the risks | What we concluded to the Audit Committee |
|---|---|---|
| Refer to the Audit Committee Report (page 71), accounting policy 2.3(g) and disclosure note 13. The goodwill recorded as at 31 January 2016 is £1,485m and is tested for impairment by Management by considering the recoverable amount of the goodwill as described in note 15. In determining the recoverable amount, judgement is applied by Management in deriving: — the forecast cash flows expected to arise from the approved five year plan and the underlying assumptions in setting the five year plan; — the pre-tax discount rates that reflect the market assessment of the time value of money and the risks specific to the cash flow estimates; and — the growth rate used to extrapolate cash flow projections beyond the five year plan period. |
Management's impairment assessment of the recorded goodwill value was performed as at 1 January 2016. We have evaluated and challenged this assessment, specifically: — we validated that the goodwill is appropriately allocated to the operating segments; — we validated that the cash flows underpinning the calculation were consistent with the five year strategic plan approved by the Board; — we challenged the reasonableness of growth forecasts during the five year plan period, having regard to back testing performed by Management to support the robustness of the forecast process; — we compared the pre-tax discount rate to the Group's weighted average cost of capital and to discount rates used by similar UK companies that operate in the financial services and travel industries; — we compared the long-term growth rates to economic and industry forecasts; and — we assessed the adequacy of sensitivity analysis performed by Management, stressing each of the above assumptions in isolation and in combination to best reflect what we considered to be reasonably foreseeable changes in the key assumptions. |
We have concluded that the recoverable amount of goodwill exceeds its carrying amount, with significant headroom remaining when key assumptions are stressed for what we considered to be cautious assumptions: — the allocation of goodwill to operating segments was appropriate and in line with the requirements of IAS 36; — the forecasts used were a reasonable basis upon which to perform the impairment review; — the pre-tax discount rate assumptions used were within our view of an acceptable range, and are consistent with comparator groups; and — the assumption for long-term growth was consistent with comparator groups and appropriate. |
| Risk | Our responses to the risks | What we concluded to the Audit Committee |
|---|---|---|
| Refer to accounting policy 2.3(a) and disclosure note 3. |
We considered the accounting policies for the revenue streams in the insurance |
There have been no material changes to the revenue |
| ISAs (UK & Ireland) presume there may be pressures or incentives on Management to commit fraudulent financial reporting through inappropriate revenue recognition to meet budgeted performance measures. |
and travel segments, having regard to the requirements of applicable revenue recognition standards, being IAS 18 'Revenue' and IFRS 4 'Insurance Contracts'. We tested the design and operating effectiveness of the controls in operation over |
recognition policies applied by Management during the period, and the source and contribution of each revenue stream is consistent with the prior period. |
| We have assessed the revenue streams in the insurance and travel segments as being most susceptible to manipulation through the application of inappropriate revenue recognition policies: — The insurance segment revenue |
the insurance and travel revenue recognition and recording processes. For the insurance segment we: — for a sample of contracts, re-performed earnings calculations to validate that |
We are satisfied that the consolidation adjustments to align the revenue recognition policies across the Group are appropriate. We concluded that revenue |
| consists primarily of revenue earned by the insurance intermediary and the insurance underwriter. The intermediary revenue from both external underwriters and the Group underwriter is recognised upon commencement of the policy period of risk, whereas the Group underwriter recognises revenue on an earned basis over the term of the policy. For policies underwritten by the Group underwriter and placed via the Group intermediary, consolidation adjustments are processed to ensure that the overall revenue recorded in respect of risks underwritten by the Group is recognised in accordance with the Group policy 2.3(a). — In the travel segment, revenue from tour operations is recognised on the passenger's date of departure and for cruise holidays, where the Group operates the cruise ship, revenue is recognised on a per diem basis over the duration of the cruise. There is a risk that revenue recognition is accelerated and recognised when holidays are booked or cash in respect of those bookings is received. |
insurance revenues were being recognised over the policy term; — inspected a sample of contracts with policyholders and underwriters to validate whether any contractual obligations to provide post-placement services were in place; — performed cut-off testing to confirm revenue had been recorded in the correct period; — reviewed the consolidation adjustments posted to eliminate the revenue transactions between the Group intermediary and Group underwriter; — challenged and corroborated reasons for variances from prior periods based on analytical procedures performed; and — tested a sample of manual journals for any indication of inappropriate revenue recognition. For the travel segment we: — performed detailed testing of a sample of transactions to confirm that the tour operator revenues and cruise holiday revenues were being recognised in line with the contract terms and applicable accounting policy; — performed cut-off testing to confirm revenue had been recorded in the correct period; — challenged and corroborated reasons for variances from prior periods based on analytical procedures performed; and — tested a sample of manual journals for |
has been recognised in the year in compliance with the Group's revenue recognition policies and relevant accounting standards. |
| any indication of inappropriate revenue recognition. |
In the prior year, our auditor's report included a risk of material misstatement in relation to discontinued operations and assets held for sale for the Allied Healthcare business. In the current year, this risk is no longer applicable as the sale of the Allied Healthcare business was completed on 30 November 2015.
Our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determine our audit scope for each entity within the Group. Taken together, this enables us to form an opinion on the consolidated financial statements. We take into account size, risk profile and changes in the business environment in assessing the level of work to be performed at each entity.
In assessing the risk of material misstatement to the Group financial statements, and to ensure we had adequate quantitative coverage of significant accounts in the financial statements, of the 31 reporting components (being statutory entities) of the Group, we selected 12 components covering entities within the United Kingdom and Gibraltar, which represent the principal trading entities within the Group.
We audited the complete financial information of seven components ('full scope components'), for four components ('specific scope components') we audited specific accounts within those components and for the remaining one component ('review scope component'), relating to the discontinued operation, we performed analytical review procedures. Our selections were based on the size or risk characteristics within the components and accounts that we considered had the potential for the greatest impact on the significant accounts in the financial statements.
Of the remaining 19 components that together represent 3% of the Group's profit before tax; we performed other procedures, including analytical review, testing of consolidation journals and intercompany eliminations to respond to any potential risks of material misstatement to the Group financial statements.
The charts below illustrate the coverage obtained from the work performed on continuing operations:
Subsequent to the disposal of the Allied Healthcare business on 30 November 2015, we assigned the component a review scope given that 10 months of business performance has been consolidated in the Group's results, contributing a loss equivalent to 5% of the Group profit before tax, and disclosed as a single item, 'loss from discontinued operations' on the face of the Consolidated Income Statement. Destinology Limited was identified as a full scope component (specific scope in the prior period) as this is the first period in which the component has contributed 12 months' revenue to the Group.
Other than the independant actuarial projections on the motor classes performed by our UK actuarial specialists, full scope audit procedures related to the underwriting component were performed by EY Gibraltar operating under our instruction. We determined the appropriate level of our involvement to enable us to determine that sufficient audit evidence had been obtained as a basis for our opinion on the Group as a whole. We reviewed the component team working papers and participated in their planning and execution of the audit in respect of the risks identified above. Audit procedures relating to the remaining components were performed directly by the primary audit team.
We apply the concept of materiality both in planning and performing our audit, and in evaluating the effect of identified misstatements on our audit and of uncorrected misstatements, if any, on the financial statements and in forming our opinion in the Audit Committee Report.
When establishing our overall audit strategy, we determined a magnitude of uncorrected misstatements that we judged would be material for the financial statements as a whole. We determined materiality for the Group to be £9m, which is approximately 5% of the Group's profit before tax from continuing operations. We have changed our basis of establishing materiality from operating profit in the prior year to profit before tax, as this is a key measure used by Management to reflect underlying segment performance in the current year; in the prior year profit before tax was distorted by the significant non-recurring expenses relating to the Initial Public Offering. During the course of our audit, we reassessed initial materiality and there was no change in final materiality from our original assessment at the planning stage.
On the basis of our risk assessments, together with our assessment of the Group's overall control environment and reflecting the fact that the Group is recently listed, our judgement is that overall performance materiality (i.e. our tolerance for misstatement in an individual account or balance) for the Group should be 50% of materiality, namely £4.5m.
Audit work at component locations for the purpose of obtaining audit coverage over significant financial statement accounts is undertaken based on a percentage of total performance materiality. The performance materiality set for each component is based on the relative scale and risk of the component to the Group as a whole and our assessment of the risk of misstatement at that component. In the current year, the range of performance materiality allocated to components was £0.9m to £3.4m.
We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £0.45m, which is set at 5% of planning materiality, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds.
We evaluate any uncorrected misstatements against both the quantitative measures of materiality discussed above and in the light of other relevant qualitative considerations in forming our opinion.
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group's and parent company's circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the annual report and accounts to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
As explained more fully in the Directors' Statements set out on page 104, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors.
This report is made solely to the Company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's members as a body, for our audit work, for this report, or for the opinions we have formed.
In our opinion:
| ISAs (UK and Ireland) |
We are required to report to you if, in our opinion, financial and non-financial information in the annual report is: |
We have no exceptions to report. |
||
|---|---|---|---|---|
| — materially inconsistent with the information in the audited financial statements; or — apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group acquired in the course of performing our audit; or — otherwise misleading. |
||||
| In particular, we are required to report whether we have identified any inconsistencies between our knowledge acquired in the course of performing the audit and the Directors' statement that they consider the annual report and accounts taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the entity's performance, business model and strategy; and whether the annual report appropriately addresses those matters that we communicated to the Audit Committee that we consider should have been disclosed. |
||||
| Companies Act 2006 reporting |
We are required to report to you if, in our opinion: — adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or — the parent company financial statements and the part of the Directors' Remuneration Report to be audited are not in agreement with the accounting records and returns; or — certain disclosures of Directors' remuneration specified by law are not made; or — we have not received all the information and explanations we require for our audit. |
We have no exceptions to report. |
||
| Listing Rules review requirements |
We are required to review: — the Directors' statement, set out on page 53, in relation to going concern; and — the part of the Corporate Governance Statement relating to the Company's compliance with the provisions of the UK Corporate Governance Code specified for our review. |
We have no exceptions to report. |
| ISAs (UK and Ireland) reporting |
We are required to give a statement as to whether we have anything material to add or to draw attention to in relation to: — the Directors' confirmation in the annual report that they have carried out a robust assessment of the principal risks facing the entity, including those that would threaten its business model, future performance, solvency or liquidity; — the disclosures in the annual report that describe those risks and explain how they are being managed or mitigated; — the Directors' statement in the financial statements about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them, and their identification of any material uncertainties to the entity's ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements; and — the Directors' explanation in the annual report as to how they have assessed the prospects of the entity, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the entity will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions. |
We have nothing material to add or to draw attention to. |
|---|---|---|
| ------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------- |
John Headley (Senior statutory auditor)
for and on behalf of Ernst & Young LLP, Statutory Auditor London 18 April 2016
| Note | 2016 £'m |
2015 £'m |
|
|---|---|---|---|
| Revenue | 3 | 963.2 | 900.5 |
| Cost of sales | 3 | (544.2) | (525.1) |
| Gross profit | 419.0 | 375.4 | |
| Administrative and selling expenses | 4 | (227.3) | (244.5) |
| 5 | 11.0 | 13.9 | |
| Investment income | 6 | (25.2) | (35.1) |
| Finance costs | |||
| Finance income | 7 | – | 2.9 |
| Share of (loss)/profit of joint venture | 36 | (1.3) | 1.2 |
| Profit before tax from continuing operations | 176.2 | 113.8 | |
| Tax expense | 9 | (28.1) | (27.4) |
| Profit for the year from continuing operations | 148.1 | 86.4 | |
| Loss after tax for the year from discontinued operations | 33 | (6.9) | (220.2) |
| Profit/(loss) for the year | 141.2 | (133.8) | |
| Attributable to: | |||
| Equity holders of the parent | 140.9 | (134.2) | |
| Non-controlling interests | 0.3 | 0.4 | |
| 141.2 | (133.8) | ||
| Earnings/(loss) per share: | |||
| Basic | 11 | 12.7p | (13.3p) |
| Diluted | 11 | 12.6p | (13.3p) |
| Earnings per share for continuing operations: | |||
| Basic | 11 | 13.3p | 8.6p |
| Diluted | 11 | 13.2p | 8.5p |
The notes on pages 118-175 form an integral part of these consolidated financial statements.
| Note | 2016 £'m |
2015 £'m |
|---|---|---|
| Profit/(loss) for the year | 141.2 | (133.8) |
| Other comprehensive income | ||
| Other comprehensive income to be reclassified to income statement in subsequent years |
||
| Exchange differences on translation of foreign operations | (1.2) | – |
| Net gain/(loss) on cash flow hedges | 16.6 | (3.0) |
| Associated tax effect | (3.0) | 0.7 |
| Net (loss)/gain on available for sale financial assets | (1.6) | 3.8 |
| Associated tax effect | 0.4 | (0.8) |
| 11.2 | 0.7 | |
| Other comprehensive income not to be reclassified to income statement in subsequent years |
||
| Re-measurement gains/(losses) on defined benefit plans 24 |
26.6 | (34.8) |
| Associated tax effect | (4.8) | 6.9 |
| 21.8 | (27.9) | |
| Total other comprehensive income/(losses) | 33.0 | (27.2) |
| Total comprehensive income/(loss) for the year | 174.2 | (161.0) |
| Attributable to: | ||
| Equity holders of the parent | 173.9 | (161.4) |
| Non-controlling interests | 0.3 | 0.4 |
| 174.2 | (161.0) |
The notes on pages 118-175 form an integral part of these consolidated financial statements.
| Note | 2016 £'m |
2015 £'m |
|
|---|---|---|---|
| Assets | |||
| Goodwill | 13 | 1,485.0 | 1,471.4 |
| Intangible fixed assets | 14 | 52.3 | 34.8 |
| Investment in joint ventures | 36 | 1.6 | 1.2 |
| Property, plant and equipment | 16 | 140.6 | 133.2 |
| Financial assets | 17 | 644.7 | 659.6 |
| Deferred tax assets | 9 | 22.1 | 22.9 |
| Reinsurance assets | 25 | 106.4 | 63.4 |
| Inventories | 20 | 4.9 | 5.3 |
| Trade and other receivables | 21 | 188.0 | 163.7 |
| Assets held for sale | 33 | – | 47.7 |
| Cash and short-term deposits | 22 | 106.5 | 198.8 |
| Total assets | 2,752.1 | 2,802.0 | |
| Liabilities | |||
| Retirement benefit scheme obligations | 24 | 18.8 | 40.4 |
| Gross insurance contract liabilities | 25 | 703.3 | 704.7 |
| Provisions | 26 | 4.0 | 5.9 |
| Financial liabilities | 17 | 580.5 | 711.7 |
| Current tax liabilities | 15.0 | 14.0 | |
| Deferred tax liabilities | 9 | 17.4 | 5.5 |
| Other liabilities | 27 | 133.3 | 129.3 |
| Trade and other payables | 23 | 191.6 | 158.7 |
| Liabilities held for sale | 33 | – | 47.7 |
| Total liabilities | 1,663.9 | 1,817.9 | |
| Equity | |||
| Issued capital | 29 | 11.2 | 11.1 |
| Share premium | 519.3 | 519.4 | |
| Retained earnings | 527.0 | 410.7 | |
| Share-based payment reserve | 17.7 | 40.7 | |
| Foreign currency translation reserve | (0.7) | 0.5 | |
| Available for sale reserve | 2.4 | 3.6 | |
| Hedging reserve | 11.3 | (2.3) | |
| Equity attributable to equity holders of the parent | 1,088.2 | 983.7 | |
| Non-controlling interest | – | 0.4 | |
| Total equity | 1,088.2 | 984.1 | |
| Total liabilities and equity | 2,752.1 | 2,802.0 |
The notes on pages 118-175 form an integral part of these consolidated financial statements.
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
| Attributable to the equity holders of the parent | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Issued capital £'m |
Share premium £'m |
Retained earnings £'m |
Share based payment reserve £'m |
Foreign currency translation reserve £'m |
Available for sale reserve £'m |
Hedging reserve £'m |
Total £'m |
Non controlling interests £'m |
Total equity £'m |
|
| At 1 February 2015 | 11.1 | 519.4 | 410.7 | 40.7 | 0.5 | 3.6 | (2.3) | 983.7 | 0.4 | 984.1 |
| Profit for the year | – | – | 140.9 | – | – | – | – | 140.9 | 0.3 | 141.2 |
| Other comprehensive income |
– | – | 21.8 | – | (1.2) | (1.2) | 13.6 | 33.0 | – | 33.0 |
| Total comprehensive income |
– | – | 162.7 | – | (1.2) | (1.2) | 13.6 | 173.9 | 0.3 | 174.2 |
| Bonus shares issued | 0.1 | (0.1) | – | – | – | – | – | – | – | – |
| Dividends paid (note 10) | – | – | (70.4) | – | – | – | – | (70.4) | (0.7) | (71.1) |
| Share-based payment charge (note 31) |
– | – | – | 2.8 | – | – | – | 2.8 | – | 2.8 |
| Exercise of share options | – | – | 11.1 | (12.9) | – | – | – | (1.8) | – | (1.8) |
| Issue of free shares (note 29) |
– | – | 12.9 | (12.9) | – | – | – | – | – | – |
| At 31 January 2016 | 11.2 | 519.3 | 527.0 | 17.7 | (0.7) | 2.4 | 11.3 | 1,088.2 | – | 1,088.2 |
| At 1 February 2014 | – | – | 1,118.7 | – | 0.5 | 0.6 | – | 1,119.8 | – | 1,119.8 |
| Loss for the year | – | – | (134.2) | – | – | – | – | (134.2) | 0.4 | (133.8) |
| Other comprehensive losses |
– | – | (27.9) | – | – | 3.0 | (2.3) | (27.2) | – | (27.2) |
| Total comprehensive losses |
– | – | (162.1) | – | – | 3.0 | (2.3) | (161.4) | 0.4 | (161.0) |
| Corporate restructuring | 8.0 | – | 1,516.1 | – | – | – | – | 1,524.1 | – | 1,524.1 |
| Dividends paid | – | – (2,063.0) | – | – | – | – (2,063.0) | – (2,063.0) | |||
| Issue of share capital | 3.0 | 547.0 | – | – | – | – | – | 550.0 | – | 550.0 |
| Costs associated with issue of share capital |
– | (27.6) | – | – | – | – | – | (27.6) | – | (27.6) |
| Issue of treasury shares | 0.1 | – | – | (0.1) | – | – | – | – | – | – |
| Share-based payment charge |
– | – | – | 41.8 | – | – | – | 41.8 | – | 41.8 |
| Exercise of share options | – | – | 1.0 | (1.0) | – | – | – | – | – | – |
| At 31 January 2015 | 11.1 | 519.4 | 410.7 | 40.7 | 0.5 | 3.6 | (2.3) | 983.7 | 0.4 | 984.1 |
The notes on pages 118-175 form an integral part of these consolidated financial statements.
| Note | 2016 £'m |
2015 £'m |
|---|---|---|
| Profit before tax from continuing operations | 176.2 | 113.8 |
| Loss before tax from discontinued operations | (7.2) | (222.4) |
| Profit/(loss) before tax | 169.0 | (108.6) |
| Depreciation, impairment and loss on disposal of property, plant and equipment | 23.4 | 20.1 |
| Amortisation and impairment of intangible assets | 14.1 | 22.1 |
| Share-based payment transactions | 1.1 | 41.8 |
| Transactions relating to disposal group held for sale | 7.3 | 209.5 |
| Finance costs | 25.2 | 35.1 |
| Finance income | – | (2.9) |
| Share of post-tax loss/(profits) of joint ventures | 1.3 | (1.2) |
| Interest income from investments | (11.0) | (13.9) |
| Movements in other assets and liabilities | (56.5) | (3.7) |
| 173.9 | 198.3 | |
| Interest received | 13.5 | 8.9 |
| Interest paid | (21.6) | (19.7) |
| Debt issue costs | – | (22.6) |
| Income tax paid | (15.4) | (9.6) |
| Net cash flows from operating activities | 150.4 | 155.3 |
| Investing activities | ||
| Proceeds from sale of property, plant and equipment | – | 0.2 |
| Purchase of property, plant and equipment | (33.8) | (26.4) |
| Net disposal/(purchase) of financial assets | 64.3 | (61.3) |
| 12 Acquisition of subsidiaries |
(26.7) | (14.3) |
| Disposal of subsidiaries | (8.2) | – |
| Investment in joint venture | (3.0) | – |
| Net cash flows used in investing activities | (7.4) | (101.8) |
| Financing activities | ||
| Payment of finance lease liabilities 28 |
(0.5) | (0.6) 1,250.0 |
| Proceeds from new borrowings 28 |
– (145.0) |
(550.0) |
| Net payment of borrowings 29 |
– | 550.0 |
| Proceeds from issue of share capital on flotation | ||
| Costs associated with issue of share capital on flotation | – | (26.2) |
| Net movement on balances with related undertakings | – | (4.1) |
| Net movement on balances with parent undertakings | – | 774.9 |
| Dividends paid | (70.0) | (2,063.0) |
| Net cash flows used in financing activities | (215.5) | (69.0) |
| Net decrease in cash and cash equivalents | (72.5) | (15.5) |
| Net foreign exchange differences | (1.0) | (0.2) |
| Cash and cash equivalents at the start of the period | 237.9 | 253.6 |
| 22 Cash and cash equivalents at the end of the period |
164.4 | 237.9 |
The notes on pages 118-175 form an integral part of these consolidated financial statements.
Saga plc (the 'Company') is a public limited company incorporated and domiciled in the United Kingdom under the Companies Act 2006 (registration number 8804263). Its registered office is located at Enbrook Park, Folkestone, Kent CT20 3SE.
The consolidated financial statements of Saga plc and the entities controlled by the Company (its subsidiaries, collectively 'Saga Group' or the 'Group') for the year ended 31 January 2016 were approved for issue by the Board of Directors on 18 April 2016.
Saga Group offers a wide range of products and services to its customer base which include general insurance products, package and cruise holidays, personal finance products, domiciliary care services, and a monthly subscription magazine. Accordingly, the Group segments its business into three trading segments – insurance, travel and emerging businesses and central costs (see note 3).
The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards ('IFRSs') as issued by the International Accounting Standards Board ('IASB') and adopted by the European Union, and with the Companies Act 2006.
The consolidated financial statements have been prepared on a going concern basis and on a historical cost basis except as otherwise stated.
The functional currency for all group entities is pounds sterling (£'m). The consolidated financial statements are also stated in pounds sterling (£'m).
IFRSs require the Directors to adopt accounting policies that are the most appropriate to the Group's circumstances. In determining and applying accounting policies, Directors and management are required to make judgements in respect of items where the choice of specific policy, accounting estimate or assumption to be followed could materially affect the Group's reported financial position, results or cash flows; it may later be determined that a different choice may have been more appropriate.
The preparation of financial statements in conformity with IFRSs requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. A discussion on the Group's significant accounting judgements and key sources of estimation uncertainty is detailed in note 2.5. Actual results could differ from those estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.
The principal accounting policies adopted, which have been applied consistently, unless otherwise stated, are set out in note 2.3 below.
The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries) made up to 31 January each year. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with an investee entity and has the ability to affect those returns through its power over the investee entity. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity.
Generally, there is a presumption that a majority of voting rights results in control. To support this presumption and when the Group has less than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including:
The Group reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated financial statements from the date the Group gains control until the date the Group ceases to control the subsidiary.
On acquisition, the assets, liabilities and contingent liabilities of a subsidiary are identified and measured at their fair values at the date of acquisition. Any excess of the cost of acquisition over the fair values of the identifiable net assets acquired is recognised as goodwill. Any deficiency of the cost of acquisition below the fair values of the identifiable net assets acquired (i.e. discount on acquisition) is credited to the income statement in the period of acquisition. The interest of non-controlling shareholders is stated at the non-controlling interest's proportion of the fair values of the assets and liabilities recognised. Profit or loss and each component of other comprehensive income are attributed to the equity holders of the parent of the Group and to non-controlling interests, even if this results in non-controlling interests having a deficit balance. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation.
The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate. Where a subsidiary which constituted a major line of business is disposed of or otherwise meets the requirements of IFRS 5 to be held for sale, it is disclosed as a discontinued operation.
A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction.
If the Group loses control over a subsidiary, it derecognises the related assets (including goodwill), liabilities, non-controlling interest and other components of equity while any resultant gain or loss is recognised in profit or loss. Any investment retained is recognised at fair value.
Revenue represents amounts receivable from the sale or supply of goods and services provided to customers in the ordinary course of business, and is recognised to the extent that it is probable that the future economic benefits will flow to the Group and the revenue can be reliably measured, regardless of when payment is received. The recognition policies for the Group's various revenue streams by segment are as follows:
Revenue is recognised in the income statement over the period matching the Group's obligation to provide services. Where the Group has no remaining contractual obligations, revenue is recognised immediately.
Insurance premiums received for risks underwritten by the Group are recognised on a straight-line time-apportioned basis over the period of the policy. Any changes to premium arising as a result of adjustments to the underlying risk notified by the policyholders are recognised over the remaining period of the policy from the effective date of notification.
Revenue received in connection with insurance policies not underwritten by the Group is recognised at the commencement of the period of risk.
Insurance premiums received for risks which are not underwritten by the Group are not recognised in the income statement, as these amounts are passed through directly to the relevant insurer. These amounts are, however, included in the calculation of Trading EBITDA %.
Insurance premiums and sales revenues received in advance of the inception date of a policy are treated as advanced receipts and included as other liabilities in the statement of financial position.
Premiums and sales revenue in respect of insurance policies underwritten by the Group which are live at the reporting date and which relate to the period after the reporting date are treated as unearned and included in insurance contract liabilities in the statement of financial position.
Income from credit provided to customers to facilitate payment of their insurance costs over the life of their policy is treated as part of the revenue from insurance operations and recognised over the period of the policy in proportion to the outstanding premium balance.
Revenue from tour operations and cruise holidays where the Group does not operate the cruise ship is recognised in full on the passenger's date of departure which represents the date upon which the revenue becomes fully non-refundable. Revenue in respect of cruise holidays where the Group operates the cruise ship is recognised on a per diem basis over the duration of the cruise reflecting the often longer durations of cruise holidays, and to facilitate more accurate matching of revenue with costs as they arise.
Revenue from sales in resort, for example for optional excursions, or on board a cruise ship operated by the Group, for example bar sales or optional excursions, is recognised as and when earned.
Revenue from tour operations received in advance of the date of departure, and the unearned element of cruise revenues not yet recognised on a per diem basis, are included as other liabilities in the statement of financial position.
Revenue from personal finance products is recognised when the customer contracts with the provider of the relevant personal finance product where the revenue comprises a one-off payment by the provider of the product.
Where the personal finance product is one that delivers a recurring income stream, for example ongoing investment, savings or lending products, revenues are recognised over the life of the product.
Revenue from healthcare operations is recognised when services are provided to customers. The point of supply is generally defined as the point at which a service user has received care services from the Group and which are usually provided on an hourly basis.
For the discontinued healthcare business, revenue for social care operations was recognised as a service user received care services, usually on a daily basis. For primary care operations, revenue was recognised on delivery of the contracted services, or on a time-elapsed basis for capacity-related contracts as the principal contractual obligation was to provide an agreed level of capacity over a fixed term. On longer-term contracts, revenue was recognised over the life of each contract in line with the pattern of delivery of the associated services.
Magazine subscription revenue is recognised on a straight-line basis over the period of the subscription. Revenue generated from advertising within the magazine is recognised when the magazine is provided to the customer. The element of subscriptions and advertising revenue relating to the period after the reporting date is treated as unearned and included within other liabilities in the statement of financial position.
Revenue from the sale of goods is recognised when the significant risks and rewards of ownership of the goods have passed to the buyer, usually on delivery of the goods.
Costs directly associated with the revenues generated by the Group's principal activities (excluding insurance underwriting) are recognised in the income statement on a basis consistent with the relevant revenue recognition policy.
Acquisition costs arising from the selling or renewing of insurance policies underwritten by the Group are recognised on a straightline time-apportioned basis over the period of the policy in which the related revenues are earned. The proportion of acquisition costs relating to premiums treated as unearned at the reporting date are deferred and included as other assets in the statement of financial position.
Claims costs incurred in respect of insurance policies underwritten by the Group include claims made for losses reported as occurring during the period together with the related handling costs, any adjustments to claims outstanding from previous periods, and a provision for the estimated cost of claims incurred during the period but not reported at the reporting date. Further detail is provided in note 25.
The Group undertakes a programme of reinsurance in respect of the policies which it underwrites. Outward reinsurance premiums are accounted for in the same accounting period as the related inward insurance premiums and are included as a deduction from earned premium, and therefore as a reduction in revenue.
The amount of any anticipated reinsurance recoveries is treated as a reduction in claims costs. Where this amount is material, it is reported separately in the statement of financial position.
Finance costs comprise interest paid and payable which is calculated using the effective interest rate method and recognised in the income statement as it accrues. Accrued interest is included within the carrying value of the interest bearing financial liability in the statement of financial position.
Other expenses are taken to the income statement as incurred and exclude intra-group transactions.
Investment income in the form of interest is recognised in the income statement as it accrues and is calculated using the effective interest rate method. Fees and commissions which are an integral part of the effective yield of the financial asset or liability are recognised as an adjustment to the effective interest rate of the instrument.
Investment income in the form of dividends is recognised when the right to receive payment is established. For listed securities, this is the date the security is listed as ex-dividend.
Realised and unrealised gains and losses on financial investments are recorded as finance income or finance costs in the income statement. Realised gains and losses on the sale of investments are calculated as the difference between net sales proceeds and the original or amortised cost and are recorded on the date of sale. Unrealised gains and losses, arising on financial assets measured at fair value through profit and loss which have not been derecognised as a result of disposal or transfer, represent the difference between the carrying value at the year end and the carrying value at the previous year end or the purchase value for investments acquired during the year, net of the reversal of previously recognised unrealised gains and losses in respect of disposals made during the year.
Current income tax assets and liabilities for the current period are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at the reporting date. Current income tax relating to items recognised directly in equity is recognised in equity and not in the income statement.
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.
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.
Transactions in foreign currencies are initially recorded by the Group at their respective functional currency spot rate at the date the transaction first qualifies for recognition. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency spot rate of exchange ruling at the reporting date. Differences arising on settlement or translation of monetary items are recognised in the income statement.
Non-monetary items that are measured at historical cost are translated using the exchange rate at the date of the initial transaction. Non-monetary items measured at fair value are translated using the exchange rate at the date when the fair value is determined. The gains or losses arising on translation of non-monetary items measured at fair value are treated in line with the recognition of gains or losses arising on a change in the fair value of the item (i.e. the translation differences on items whose fair value gain or loss is recognised in other comprehensive income or the income statement are also recognised in other comprehensive income or the income statement respectively).
The assets and liabilities of foreign operations are translated into pounds sterling at the rate of exchange prevailing at the reporting date and their income statements are translated at exchange rates prevailing at the dates of the transactions. The exchange differences arising on translation are recognised in other comprehensive income. On disposal of a foreign operation, the component of other comprehensive income relating to that particular foreign operation is recycled to the income statement.
Intangible assets acquired are measured on initial recognition at cost. Intangible assets acquired in a business combination are measured at their fair value at the date of acquisition and, following initial recognition are carried at cost less any accumulated amortisation and accumulated impairment losses. Internally generated intangibles, excluding internally developed software, are not capitalised and the related expenditure is reflected in the income statement in the period in which the expenditure is incurred.
The useful lives of intangible assets are assessed as either finite or indefinite. Estimated useful lives are as follows:
| Goodwill | Indefinite |
|---|---|
| Brands | 10 years |
| Customer relationships | over the life of the customer relationship |
| Contracts acquired | over the life of the contract |
| Software | 3-6 years |
Intangible assets with finite lives are amortised over their useful economic life on a basis appropriate to the consumption of the asset and are assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed at least at the end of each reporting period. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are considered to modify the amortisation period or method, as appropriate, and are treated as changes in accounting estimates. The amortisation expense on intangible assets with finite lives is recognised in the income statement in the expense category that is consistent with the function of the intangible assets.
Intangible assets with indefinite useful lives are not amortised, but are tested for impairment annually, either individually or at the cash generating unit ('CGU') level. The assessment of indefinite life is reviewed annually to determine whether the indefinite life continues to be supportable. If not, the change in useful life from indefinite to finite is made on a prospective basis.
Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in the income statement when the asset is derecognised.
Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred measured at acquisition date at fair value and the amount of any non-controlling interests in the acquiree. For each business combination, the Group elects whether to measure the non-controlling interests in the acquiree at fair value or at the proportionate share of the acquiree's identifiable net assets.
When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date.
Any contingent consideration to be transferred by the acquirer will be recognised at fair value at the acquisition date. Contingent consideration classified as an asset or liability that is a financial instrument within the scope of IAS 39 'Financial Instruments: Recognition and Measurement' is measured at fair value with the changes in fair value recognised in the income statement.
Any excess of the cost of acquisition over the fair values of the identifiable assets and liabilities is recognised as goodwill. If the cost of acquisition is less than the fair values of the identifiable assets and liabilities of the acquired business, the difference is treated as negative goodwill and is recognised directly in the income statement in the year of acquisition.
Acquisition-related costs are expensed as incurred and included in administrative expenses.
After initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is allocated to CGUs at the point of acquisition and is reviewed annually for impairment.
The Group undertakes a full impairment review of the carrying value of goodwill at each reporting date. The Group also assesses at each reporting date whether there is any indication that any other non-financial assets may be impaired. If such an indication exists, the recoverable amount is estimated and compared to the carrying amount. If the recoverable amount is less than the carrying amount, the asset is considered impaired and is written down to its recoverable amount and the impairment loss is recognised immediately in the income statement.
In assessing value in use, estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs of disposal, recent market transactions are taken into account. If no such transactions can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded companies or other available fair value indicators. The Group bases its impairment calculations on detailed budgets, plans and longterm growth assumptions, which are prepared separately for each of the Group's CGUs to which individual assets are allocated.
The Group participates in joint arrangements where control of the arrangement is shared with another party. A joint arrangement is classified as a joint operation or joint venture, depending on management's assessment of the legal form and substance of the arrangement.
The Group's share of assets, liabilities, revenue, expenses and cash flows of joint operations are included in the consolidated financial statements on a line-by-line basis, whereas the Group's investment and share of results of joint ventures are shown within single line items in the consolidated statement of financial position and the consolidated income statement respectively.
Property, plant and equipment are stated at cost, net of accumulated depreciation and impairment losses, if any. Where an item of property, plant and equipment comprises major components having different useful lives, they are accounted for separately. Likewise, when a major inspection or dry-docking of a cruise ship is performed, its cost is recognised in the carrying amount of the plant and equipment as a replacement if the recognition criteria are satisfied. All other repairs and maintenance costs are recognised in the income statement as incurred.
Assets in the course of construction at the balance sheet date are classified separately. These assets are transferred to other asset categories when they become available for their intended use.
Depreciation is charged to the income statement on a straight-line basis so as to write off the depreciable amount of property, plant and equipment over their estimated useful lives. The depreciable amount is the cost of an asset less its residual value. Land and assets in the course of construction are not depreciated. Estimated useful lives are as follows:
Buildings, properties and related fixtures:
| Buildings | 50 years |
|---|---|
| Related fittings | 3-20 years |
| Leasehold properties | over the period of the lease |
| Cruise ships | 2-15 years |
| Computers | 3 years |
| Plant, vehicles and other equipment | 3-10 years |
Costs relating to cruise ship mandatory dry-dockings are capitalised and depreciated over the period up to the next dry-docking where appropriate.
An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of an asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the income statement when the asset is derecognised.
Estimated residual values and useful lives are reviewed annually.
The Group classifies non-current assets as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use. To be classified as held for sale, an asset must be available for immediate sale in its present condition subject only to terms that are usual and customary for the sale of such assets, and the sale must be highly probable. Sale is considered to be highly probable when management is committed to a plan to sell an asset and an active programme to locate a buyer and complete the plan has been initiated at a price that is reasonable in relation to its current fair value, and there is an expectation that the sale will be completed within one year from the date of classification. Non-current assets classified as held for sale are carried on the Group's statement of financial position at the lower of their carrying amount and fair value less costs to sell.
Property, plant and equipment and intangible assets once classified as held for sale are not depreciated or amortised.
Discontinued operations are excluded from the results of continuing operations and are presented as a single amount of profit or loss after tax from discontinued operations in the income statement.
Financial assets are classified as financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments or available for sale financial assets. The Group determines the classification of its financial assets at initial recognition and they are accounted on a trade date basis. All financial assets are recognised initially at fair value plus, in the case of financial assets not recorded at fair value through profit or loss, transaction costs that are directly attributable to the acquisition of the financial asset.
The subsequent measurement of financial assets depends on their classification as described below:
Financial assets at fair value through profit or loss ('FVTPL') Financial assets at FVTPL are assets:
Derivative financial instruments not designated as hedging instruments and hedge funds are classified as FVTPL. Financial assets at FVTPL are stated at fair value, with any resultant gain or loss recognised through the income statement. The fair values are quoted market prices (where there is an active market) or are based on valuation techniques (where there is no active market or the securities are unlisted). Valuation techniques include the use of recent arm's length transactions, discounted cash flow analysis and other commonly used valuation techniques.
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial measurement, such financial assets are subsequently measured at amortised cost using the effective interest rate ('EIR') method, less impairment losses. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included in finance income in the income statement. The losses arising from impairment are recognised in the income statement in finance costs.
Available for sale financial investments include debt securities and money market funds. After initial measurement, available for sale financial investments are subsequently measured at fair value with unrealised gains or losses recognised as other comprehensive income in the available for sale reserve until the investment is derecognised, at which time the cumulative gain or loss is recognised in other operating income, or determined to be impaired, at which time the cumulative loss is reclassified to the income statement in finance costs and removed from the available for sale reserve. Interest income on available for sale debt securities is calculated using the EIR and is recognised in the income statement.
A financial asset is derecognised when the rights to receive cash flows from the asset have expired or when the Group has transferred substantially all the risks and rewards relating to the asset to a third party.
The Group assesses at each reporting date whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if there is objective evidence of impairment as a result of one or more events that have occurred after the initial recognition of the asset (an incurred 'loss event') and that loss event has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that debtors are experiencing significant financial difficulty, or where observable data indicates that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or other factors that correlate with defaults.
If there is objective evidence that an impairment loss on a financial asset or group of financial assets classified as loans and receivables has been incurred, the Group measures the amount of the loss as the difference between the carrying amount of the asset or group of assets and the present value of estimated future cash flows from the asset or group of assets, discounted at the effective interest rate of the instrument at initial recognition.
Impairment losses are assessed individually where significant, or collectively for assets that are not individually significant.
Impairment losses are recognised in the income statement and the carrying amount of the financial asset or group of financial assets is reduced by establishing an allowance for the impairment losses. If in a subsequent period the amount of the impairment loss reduces and the reduction can be ascribed to an event after the impairment was recognised, the previously recognised loss is reversed by adjusting the allowance.
When a decline in the fair value of a financial asset classified as available for sale has been recognised directly in equity and there is objective evidence that the asset is impaired, the cumulative loss is removed from equity and recognised in the income statement. The loss is measured as the difference between the amortised cost of the financial asset and its current fair value. Impairment losses on available for sale equity instruments are not reversed through the income statement, but those on available for sale debt instruments are reversed if there is an increase in fair value that is objectively related to a subsequent event. Subsequent increases in the fair value of available for sale debt instruments are all recognised in equity.
Financial liabilities are classified as financial liabilities at FVTPL, loans and borrowings, payables or as derivatives designated as hedging instruments in an effective hedge, as appropriate. The Group determines the classification of its financial liabilities at initial recognition.
All financial liabilities are recognised initially at fair value and, in the case of loans and borrowings, net of directly attributable transaction costs.
The Group's financial liabilities include trade and other payables, loans and borrowings and derivative financial instruments.
The measurement of financial liabilities depends on their classification as follows:
l. Financial instruments (continued)
ii) Financial liabilities (continued)
Subsequent measurement (continued)
Financial liabilities at FVTPL
Derivative financial instruments not designated as hedging instruments are classified as FVTPL. Financial liabilities at FVTPL are stated at fair value, with any resultant gain or loss recognised through the income statement.
After initial recognition, interest bearing loans and borrowings and other payables are subsequently measured at amortised cost using the EIR method. Gains and losses are recognised in the income statement when the liabilities are derecognised as well as through the EIR amortisation process.
Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included in finance costs in the income statement.
A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.
When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised in the income statement.
Derivatives are measured at fair value both initially and subsequent to initial recognition. All changes in fair value are recognised in the income statement. Derivatives are presented as assets when the fair values are positive and as liabilities when the fair values are negative. A derivative is presented as a non-current asset or a non-current liability if the remaining maturity of the instrument is more than 12 months and it is not expected to be realised or settled within 12 months.
The Group measures financial instruments, such as derivatives and financial instruments classified as available for sale and at FVTPL, at fair value at each reporting date.
Fair value is the price that would be required to sell an asset or to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either in the principal market accessible by the Group for the asset or liability or in the absence of a principal market, in the most advantageous market accessible by the Group for the asset or liability.
The fair values are quoted market prices where there is an active market or are based on valuation techniques when there is no active market or the instruments are unlisted. Valuation techniques include the use of recent arm's length market transactions, discounted cash flow analysis and other commonly used valuation techniques. An analysis of the fair values of financial instruments and further details as to how they are measured are provided below.
All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised within the fair value hierarchy based on the lowest level input that is significant to the fair value measurement as a whole.
For assets and liabilities that are recognised in the financial statements on a recurring basis, the Group determines whether transfers have occurred between levels in the hierarchy by reassessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.
The Group designates certain derivative financial instruments as cash flow hedges of certain forecast transactions. These transactions are highly probable to occur and present an exposure to variations in cash flows that could ultimately affect amounts determined in profit or loss.
Where a derivative financial instrument is designated as a hedge, the effective part of any fair value gain or loss on the derivative financial instrument is recognised directly in the hedging reserve. Any ineffective portion of the fair value gain or loss is recognised immediately within the income statement.
When a hedged forecast transaction subsequently results in the recognition of a financial asset or a financial liability, any associated cumulative gain or loss is removed from the hedging reserve and reclassified into the income statement in the same period in which the asset or liability affects profit or loss. When a hedged forecast transaction subsequently results in the recognition of a nonfinancial asset or non-financial liability, any associated cumulative gain or loss is removed from the hedging reserve and is included in the initial cost or other carrying amount of the non-financial asset or liability.
For foreign currency hedges, prospective hedge effectiveness testing is performed at the inception of the hedging relationship, and subsequently at each balance sheet date, through comparison of the projected fair values of the hedged forecast transaction and the hedging instrument using a combination of the hypothetical derivative approach and sensitivity analysis, as part of the dollaroffset method. Retrospective hedge testing is also performed at each reporting date using the dollar-offset method, by comparing the cumulative changes in the fair values of the forecast hedged transaction and the hedging instrument.
For fuel oil hedges, prospective hedge effectiveness testing is performed at the inception of the hedging relationship, and subsequently at each balance sheet date, using regression analysis. This method involves calculating the strength of the correlation between the price of the derivative and the price of the fuel oil being purchased. Retrospective hedge testing is also performed at each reporting date using the same technique.
When a hedging instrument no longer meets the criteria for hedge accounting, through maturity, sale, other termination, or the revoking of the designated hedging relationship, hedge accounting is discontinued prospectively. If the hedged forecast transaction is still expected to occur, the associated cumulative gain or loss remains in the hedging reserve and is recognised in accordance with the above policy when the transaction occurs. If the hedged transaction is no longer expected to occur, the cumulative unrealised gain or loss is recognised in the income statement immediately.
Leases under which substantially all of the risk and rewards of ownership are transferred to the Group are finance leases. All other leases are operating leases.
Assets held under finance leases are recognised at the lower of the fair value of the asset and the present value of the minimum lease payments within property, plant and equipment on the statement of financial position and depreciated over the shorter of the lease term or their expected useful lives. The interest element of finance lease payments represents a constant proportion of the capital balance outstanding and is charged to the income statement over the period of the lease.
Operating lease rentals are charged to the income statement on a straight-line basis over the lease term.
Income arising from operating leases where the Group acts as lessor is recognised on a straight-line basis over the lease term and included in operating income due to its operating nature.
Borrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalised as part of the cost of the respective asset. All other borrowing costs are expensed in the period in which they occur.
Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds.
Cash and short-term deposits in the statement of financial position comprise cash at bank and in hand and short-term deposits with a maturity of three months or less from their inception date.
For the purpose of the consolidated statement of cash flows, cash and cash equivalents consist of cash, short-term deposits as defined above and short-term highly liquid investments (including money market funds) with original maturities of three months or less which are subject to insignificant risk of change in value, net of outstanding bank overdrafts.
Inventories are stated at the lower of cost and net realisable value. Costs include all costs incurred in bringing each product to its present location and condition. Net realisable value is based on estimated selling price less any further costs expected to be incurred to completion and disposal.
Insurance contract liabilities include an outstanding claims provision, a provision for unearned premiums and, if required, a provision for premium deficiency.
The provision for outstanding claims is set on an individual claim basis and is based on the ultimate cost of all claims notified but not settled less amounts already paid by the reporting date, together with a provision for related claims handling costs. The provision also includes the estimated cost of claims incurred but not reported at the statement of financial position date, which is set using statistical methods. The outstanding claims provision is not discounted for the time value of money with the exception of claims settled on a periodical payment orders ('PPOs') basis.
The amount of any anticipated reinsurance, salvage or subrogation recoveries is separately identified and reported within trade and other receivables and insurance contract liabilities respectively.
Differences between the provisions at the reporting date and settlements and provisions in the following year (known as 'run off deviations') are recognised in the income statement as they arise.
The provision for unearned premiums represents that portion of premiums received or receivable that relates to risks that have not yet expired at the reporting date. The provision is recognised when contracts are entered into and premiums are charged, and is brought to account as premium income over the term of the contract in accordance with the pattern of insurance service provided under the contract.
At each reporting date, the Group reviews its unexpired risks and a liability adequacy test is performed to determine whether there is any overall excess of expected claims and deferred acquisition costs over unearned premiums. This calculation uses current estimates of future contractual cash flows after taking account of the investment return expected to arise on assets relating to the relevant insurance technical provisions. If these estimates show that the carrying amount of the unearned premiums (less related deferred acquisition costs) is inadequate, the deficiency is recognised in the income statement by setting up a provision for premium deficiency.
The Group provides benefits to employees (including Directors) 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 and Monte-Carlo 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 retained earnings in equity.
The dilutive effect of outstanding options is reflected as additional share dilution in the computation of diluted earnings per share.
During the year, the Group operated a number of defined benefit pension plans which require contributions to be made to separately administered funds. The cost of providing benefits under the defined benefit plans are determined separately using the projected unit credit valuation method.
Actuarial gains and losses arising in the year are credited/charged to other comprehensive income and comprise the effects of changes in actuarial assumptions and experience adjustments due to differences between the previous actuarial assumptions and what has actually occurred. In particular, the difference between the interest income and the actual return on plan assets is recognised in other comprehensive income.
Other movements in the net surplus or deficit, which include the current service cost, any past service cost and the effect of any curtailment or settlements, are recognised in the income statement. Past service costs are recognised in the income statement on the earlier of the date of plan curtailment and the date that the Group recognises restructuring-related costs. The interest cost less interest income on assets held in the plans is also charged to the income statement.
The defined benefit schemes are funded, with assets of the schemes held separately from those of the Group, in separate trustee administered funds. Scheme assets are measured using market values and scheme liabilities are measured using the projected unit actuarial method and are discounted at the current rate of return on a high-quality corporate bond of equivalent term and currency to the liability. Full actuarial valuations are obtained at least triennially and are updated at each reporting date. The resulting defined benefit asset or liability is presented separately after other net assets and liabilities on the face of the statement of financial position. The value of a pension benefit asset is restricted to the amount that may be recovered either through reduced contributions or agreed refunds from the scheme.
For defined contribution schemes, the amounts charged to the income statement are the contributions payable in the year.
Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where the Group expects some or all of a provision to be reimbursed, the reimbursement is recognised as a separate asset, but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the income statement net of any reimbursement. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as a finance cost.
A provision is recognised for onerous contracts in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it. The unavoidable costs reflect the least net cost of exiting the contract, which is the lower of the cost of fulfilling it and any compensation or penalties arising from failure to fulfil it.
The Group has ordinary shares that are classified as equity. Incremental external costs that are directly attributable to the issue of these shares are recognised in equity, net of tax.
The following is a list of standards and amendments to standards that are in issue but are not effective or adopted as at 31 January 2016. Comment on these new standards or amendments is as follows:
In July 2014, the IASB issued IFRS 9 'Financial Instruments' that will essentially replace IAS 39. The classification and measurement of financial assets and liabilities will be directly linked to the nature of the instrument's contractual cash flows and the business model employed by the holder of the instrument. The impact of this standard on the Group's financial statements is still being assessed. The standard is effective for annual periods beginning on or after 1 January 2018, although this is yet to be endorsed by the EU.
The objective of IFRS 15 is to establish the principles that an entity should apply to report useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from a contract with a customer. The impact of this standard on the Group's financial statements is still being assessed. The standard is effective for annual periods beginning on or after 1 January 2018, although this is yet to be endorsed by the EU.
IFRS 16 specifies how to recognise, measure, present and disclose leases, and will essentially replace IAS 17. The impact of this standard on the Group's financial statements is still being assessed. The standard was issued in January 2016 and is effective for annual reporting periods beginning on or after 1 January 2019, although this is yet to be endorsed by the EU.
These amendments to IAS 16 and IAS 38 provide additional guidance on how the depreciation or amortisation of property, plant and equipment and intangible assets should be calculated. The requirements of IAS 16 and IAS 38 are amended to clarify that depreciation and amortisation methods that are based on revenue are not appropriate. The amendment is effective for annual periods beginning on or after 1 January 2016 and will have no effect on the Group's financial statements.
The amendments reinstate the equity method as an accounting option for investments in subsidiaries, joint ventures and associates in an entity's separate financial statements. The amendments are effective for annual periods beginning on or after 1 January 2016, with earlier application being permitted and will have no effect on the Group's financial statements.
The amendments state that the acquirer of an interest in a joint operation in which the activity constitutes a business, as defined in IFRS 3, is required to apply all of the principles on business combinations accounting in IFRS 3 and other IFRSs with the exception of those principles that conflict with the guidance in IFRS 11. The amendments are effective for annual periods beginning on or after 1 January 2016, with earlier application being permitted and will have no effect on the Group's financial statements.
The amendments address the conflict between IFRS 10 and IAS 28 in dealing with the loss of control of a subsidiary that is sold or contributed to an associate or joint venture. The amendments are effective for annual periods beginning on or after 1 January 2016, with earlier application being permitted and will have no effect on the Group's financial statements.
The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below:
For insurance contracts, estimates have to be made both for the expected ultimate cost of claims reported at the reporting date and for the expected ultimate cost of claims incurred but not yet reported ('IBNR') at the reporting date. It can take a significant period of time before the ultimate claims cost can be established with certainty. For some types of policies, IBNR claims form the majority of the liability in the statement of financial position.
The ultimate cost of outstanding claims is estimated by using a range of standard actuarial claims projection techniques, such as Chain Ladder and Bornhuetter-Ferguson methods.
The main assumption underlying these techniques is that past claims development experience can be used to project future claims development and hence ultimate claims costs. As such, these methods extrapolate the development of paid and incurred losses, average costs per claim and claim numbers based on the observed development of earlier years and expected loss ratios. Historical claims development is mainly analysed by accident years, but can also be further analysed by geographical area, as well as by significant business lines and claim types. Large claims are usually separately addressed, either by being reserved at the face value of loss adjuster estimates or separately projected in order to reflect their future development. In most cases, no explicit assumptions are made regarding future rates of claims inflation or loss ratios. Instead, the assumptions used are those implicit in the historical claims development data on which the projections are based. Additional qualitative judgement is used to assess the extent to which past trends may not apply in future, (e.g. to reflect one-off occurrences, changes in external or market factors such as public attitudes to claiming, economic conditions, levels of claims inflation, judicial decisions and legislation, as well as internal factors such as portfolio mix, policy features and claims handling procedures) in order to arrive at the estimated ultimate cost of claims that present the likely outcome from the range of possible outcomes, taking account of all of the uncertainties involved.
The ultimate cost of claims is not discounted except for those in respect of PPOs. The valuation of these claims involves making assumptions about the rate of inflation and the expected rate of return on assets to determine the discount rate. Due to the size of PPO claims, the ultimate cost is highly sensitive to changes in these assumptions. The assumptions are reviewed at each reporting date.
Similar judgements, estimates and assumptions are employed in the assessment of the adequacy of provisions for unearned premium. Judgement is also required in determining whether the pattern of insurance service provided by a contract requires amortisation of unearned premium on a basis other than time apportionment.
The Group determines whether goodwill is impaired on an annual basis. This requires an estimation of the value in use of the CGUs to which goodwill is allocated. The value-in-use calculation requires the Group to estimate the future cash flows expected to arise from the CGUs at a suitable discount rate in order to calculate present value.
The cost of defined benefit pension plans and the present value of the pension obligation are determined using actuarial valuations. The actuarial valuation involves making assumptions about discount rates, expected rates of return on assets, future salary increases, mortality rates and future pension increases. Due to the complexity of the valuation, the underlying assumptions and its long-term nature, a defined benefit obligation is highly sensitive to changes in these assumptions. All assumptions are reviewed at each reporting date.
For management purposes, the Group is organised into business units based on their products and services. The Group has three reportable operating segments as follows:
In previous periods, the Group reported its activities in four operating segments comprising Financial services, Travel, Healthcare services, and Media and central costs. During the year, the Group has moved its personal finance activities from Financial services to leave Insurance, and combined these activities with Healthcare services and Media and central costs to comprise the Emerging Businesses and Central Costs segment. The Travel segment is unchanged.
Segment performance is primarily evaluated using the Group's key performance measure of Trading Profit. Items not allocated to a segment relate to transactions that do not form part of the on going segment performance or which are managed on a Group basis.
Transfer prices between operating segments are set on an arm's length basis in a manner similar to transactions with third parties. Segment income, expenses and results includes transfers between business segments which are then eliminated on consolidation.
Current taxes, deferred taxes and certain financial assets and liabilities are not allocated to segments as they are also managed on a Group basis.
| Insurance | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2016 | Motor insurance £'m |
Home insurance £'m |
Other insurance £'m |
Total £'m |
Travel £'m |
Emerging Businesses and Central Costs £'m |
Adjustments £'m |
Total £'m |
| Gross revenue | 342.7 | 173.6 | 152.2 | 668.5 | 423.1 | 30.0 | – | 1,121.6 |
| Inter-segment | – | – | – | – | – | 7.1 | (7.1) | – |
| Segment revenue | 342.7 | 173.6 | 152.2 | 668.5 | 423.1 | 37.1 | (7.1) | 1,121.6 |
| Third party premiums | (24.0) | (73.8) | (60.6) | (158.4) | – | – | – | (158.4) |
| Revenue | 318.7 | 99.8 | 91.6 | 510.1 | 423.1 | 37.1 | (7.1) | 963.2 |
| Cost of sales | (151.5) | (5.8) | (33.3) | (190.6) | (337.2) | (16.4) | – | (544.2) |
| Gross profit | 167.2 | 94.0 | 58.3 | 319.5 | 85.9 | 20.7 | (7.1) | 419.0 |
| Results | ||||||||
| Trading EBITDA | 121.7 | 66.5 | 32.2 | 220.4 | 30.2 | (11.8) | – | 238.8 |
| Depreciation | (1.9) | (1.0) | (0.8) | (3.7) | (10.0) | (6.3) | – | (20.0) |
| Amortisation of intangible | ||||||||
| assets | (1.5) | (1.4) | (0.7) | (3.6) | (3.0) | (1.2) | – | (7.8) |
| Trading profit/(loss) | 118.3 | 64.1 | 30.7 | 213.1 | 17.2 | (19.3) | – | 211.0 |
| Amortisation of acquired intangible assets | (2.5) | (3.7) | (0.1) | – | (6.3) | |||
| Exceptional expenses | (5.2) | 9.5 | (7.6) | – | (3.3) | |||
| Net fair value loss on derivative financial instruments | – | (1.2) | – | – | (1.2) | |||
| Net finance costs | – | – | – | (24.0) | (24.0) | |||
| Profit before tax from continuing operations | 205.4 | 21.8 | (27.0) | (24.0) | 176.2 | |||
| Total assets less liabilities | 372.1 | 29.2 | (242.6) | 929.5 | 1,088.2 |
All revenue is generated solely in the UK.
Cost of sales within the insurance segment comprises claims costs incurred on insurance policies underwritten by the Group (see note 3b). The costs of marketing, selling and administering the policies are deducted in arriving at Trading EBITDA.
| Insurance | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2015 | Motor insurance £'m |
Home insurance £'m |
Other insurance £'m |
Total £'m |
Travel £'m |
Emerging Businesses and Central Costs £'m |
Adjustments £'m |
Total £'m |
| Gross revenue | 341.3 | 173.5 | 143.4 | 658.2 | 381.3 | 29.3 | – | 1,068.8 |
| Inter-segment | – | – | – | – | – | 8.3 | (8.3) | – |
| Segment revenue | 341.3 | 173.5 | 143.4 | 658.2 | 381.3 | 37.6 | (8.3) | 1,068.8 |
| Third party premiums | (29.3) | (81.7) | (57.3) | (168.3) | – | – | – | (168.3) |
| Revenue | 312.0 | 91.8 | 86.1 | 489.9 | 381.3 | 37.6 | (8.3) | 900.5 |
| Cost of sales | (168.1) | (4.5) | (32.0) | (204.6) | (304.6) | (15.9) | – | (525.1) |
| Gross profit | 143.9 | 87.3 | 54.1 | 285.3 | 76.7 | 21.7 | (8.3) | 375.4 |
| Results | ||||||||
| Trading EBITDA | 104.2 | 64.5 | 36.2 | 204.9 | 26.0 | (3.5) | – | 227.4 |
| Depreciation Amortisation of intangible |
(1.5) | (0.6) | (0.5) | (2.6) | (9.3) | (5.4) | – | (17.3) |
| assets | (2.3) | (1.8) | (0.8) | (4.9) | (3.1) | (1.5) | – | (9.5) |
| Trading profit/(loss) | 100.4 | 62.1 | 34.9 | 197.4 | 13.6 | (10.4) | – | 200.6 |
| Amortisation of acquired intangible assets | – | (2.0) | (0.2) | – | (2.2) | |||
| Exceptional expenses | (0.1) | (1.1) | (51.2) | – | (52.4) | |||
| Net fair value gain on derivative financial instruments | – | 2.9 | – | – | 2.9 | |||
| Net finance costs | – | – | – | (35.1) | (35.1) | |||
| Profit before tax from continuing operations | 197.3 | 13.4 | (61.8) | (35.1) | 113.8 | |||
| Total assets less liabilities | 274.1 | (7.0) | (62.9) | 779.9 | 984.1 |
All revenue is generated solely in the UK.
Cost of sales within the insurance segment comprises claims costs incurred on insurance policies underwritten by the Group (see note 3b). The costs of marketing, selling and administering the policies are deducted in arriving at Trading EBITDA.
Total assets less liabilities detailed as adjustments relates to the following unallocated items:
| 2016 £'m |
2015 £'m |
|
|---|---|---|
| Goodwill (note 13) | 1,485.0 | 1,471.4 |
| Bank loans (note 28) | (547.7) | (692.2) |
| Deferred tax – non-pension scheme related | (7.8) | 0.7 |
| 929.5 | 779.9 | |
| a. Analysis of insurance revenue | ||
| 2016 | 2015 | |
| £'m | £'m | |
| Net earned premiums on insurance underwritten by the Group | ||
| Motor insurance |
260.9 | 270.0 |
| Home insurance |
18.2 | 16.4 |
| Other insurance |
36.6 | 39.3 |
| 315.7 | 325.7 | |
| Other income from insurance products | 194.4 | 164.2 |
| 510.1 | 489.9 | |
| b. Analysis of insurance cost of sales | ||
| 2016 £'m |
2015 £'m |
|
| Net claims incurred on insurance underwritten by the Group | ||
| Motor insurance |
134.8 | 143.3 |
| Home insurance |
7.0 | 4.5 |
| Other insurance |
33.1 | 31.5 |
| 174.9 | 179.3 | |
| Other cost of sales | 15.7 | 25.3 |
| 190.6 | 204.6 | |
| 4 Administrative and selling expenses | ||
| 2016 £'m |
2015 £'m |
|
| Staff costs (note 8) | 103.7 | 86.9 |
| Marketing and fulfilment costs | 54.9 | 44.8 |
| Lease rentals | 1.1 | 0.8 |
| Auditors' remuneration | 1.4 | 2.0 |
Other administrative costs 39.5 38.5
227.3 244.5
| Depreciation (note 16) | 9.3 | 7.4 |
|---|---|---|
| Amortisation of intangible assets (note 14) | 14.1 | 11.7 |
| Exceptional expenses | 3.3 | 52.4 |
| a. Auditors' remuneration: | |
|---|---|
| -- | ---------------------------- |
| 2016 £'m |
2015 £'m |
|
|---|---|---|
| Audit of the parent company and consolidated financial statements | 0.3 | 0.3 |
| Audit of subsidiary financial statements | 0.7 | 0.8 |
| Audit of prior year subsidiary financial statements | 0.2 | – |
| Audit-related assurance services | 0.2 | 0.2 |
| Corporate finance services | – | 0.6 |
| Other non-audit services | – | 0.1 |
| Total auditors' remuneration | 1.4 | 2.0 |
| 2016 £'m |
2015 £'m |
|
|---|---|---|
| Share-based payment costs (note 31) | 0.3 | 40.8 |
| Flotation and other costs | 2.6 | 9.2 |
| Restructuring costs | 1.3 | 1.0 |
| Acquisition of subsidiaries (note 12a) | 0.5 | 0.3 |
| Release of contingent consideration liability (note 12b) | (7.1) | – |
| Supplier insolvency | 4.7 | – |
| Impairment of property | 3.8 | – |
| Insurance claims | (3.1) | – |
| Other exceptional expenses | 0.3 | 1.1 |
| 3.3 | 52.4 |
Flotation and other costs comprise the cost of awards made at the time of the IPO and which vest over a period of time post-award.
Restructuring costs represent costs associated with restructuring and reorganising a number of Group operations and includes staff-related costs such as redundancy and other termination costs, together with various professional fees for advice and processes associated with the restructuring.
During the year, a significant supplier of legal services to our customers and our partner in the Saga Law Limited joint venture became insolvent and went into administration; this represents all costs incurred as a consequence and includes legal fees to put in place new arrangements, the cost of re-doing work by a replacement law firm, and lost profits from the joint venture.
Impairment of property represents the write-down of the carrying value of the Group's hotel in St Lucia following the decision to dispose of this asset (note 16) and includes the expected costs of disposal.
During the year, the Group received two amounts under insurance policies towards the cost of cancelled or curtailed cruises; the costs of these operational issues were treated as exceptional in prior periods.
| 2016 £'m |
2015 £'m |
|
|---|---|---|
| Investment income from insurance | ||
| Motor insurance |
13.9 | 15.6 |
| Home insurance |
0.1 | 0.2 |
| Other insurance |
0.5 | 1.5 |
| 14.5 | 17.3 | |
| Elimination of intra-group property rental income | (4.1) | (4.0) |
| Interest income from other segments | 0.6 | 0.6 |
| 11.0 | 13.9 |
| 2016 £'m |
2015 £'m |
|
|---|---|---|
| Interest and charges on debt and borrowings | 22.9 | 22.5 |
| Exceptional debt and borrowings costs | – | 12.1 |
| Net fair value loss on derivative financial instruments | 1.2 | – |
| Net finance expense on pension schemes | 1.1 | 0.5 |
| 25.2 | 35.1 |
| 2016 | 2015 | |
|---|---|---|
| £'m | £'m | |
| Net fair value gain on derivative financial instruments | – | 2.9 |
| – | 2.9 |
Amounts charged to the income statement for the year are as follows:
| 2016 £'m |
2015 £'m |
|
|---|---|---|
| Continuing operations | ||
| Wages and salaries | 106.9 | 91.2 |
| Social security costs | 9.2 | 7.9 |
| Pension costs (note 24) | 9.8 | 6.6 |
| 125.9 | 105.7 | |
| Discontinued operations | ||
| Wages and salaries | 164.2 | 211.7 |
| Social security costs | 9.6 | 12.9 |
| Pension costs (note 24) | 0.4 | 0.4 |
| 174.2 | 225.0 | |
| Total staff costs | 300.1 | 330.7 |
Staff costs in respect of continuing operations have been allocated £22.2m (2015: £18.8m) to cost of sales and £103.7m (2015: £86.9m) to administrative and selling expenses.
| 2016 | 2015 | |
|---|---|---|
| Insurance | 2,237 | 2,023 |
| Travel | 2,175 | 2,160 |
| Emerging Businesses and Central Costs | 735 | 677 |
| Continuing operations | 5,147 | 4,860 |
| Employees attributable to discontinued operations | 14,465 | 15,235 |
| Total staff numbers | 19,612 | 20,095 |
The number of employees in the travel segment includes 868 (2015: 848) crew who are employed indirectly via a manning agency.
The information required by the Companies Act 2006 and the Listing Rules of the Financial Conduct Authority is contained on pages 78-100 in the Directors' Remuneration Report.
Key management personnel are defined as those persons having authority and responsibility for planning, directing and controlling the activities of the Group and comprise the Directors of the Company and the Chief Executive Officers of the major businesses within the trading segments.
The amounts recognised as an expense during the financial year in respect of key management personnel are as follows:
| 2016 £'m |
2015 £'m |
|
|---|---|---|
| Short-term benefits | 6.9 | 6.9 |
| Share-based payments | 1.3 | 17.8 |
| Post-employment benefits | 0.1 | 0.1 |
| 8.3 | 24.8 |
The major components of the income tax expense are:
| 2016 £'m |
2015 £'m |
|
|---|---|---|
| Consolidated income statement | ||
| Current income tax | ||
| Current income tax charge | 32.7 | 29.9 |
| Adjustments in respect of previous years | (8.4) | – |
| 24.3 | 29.9 | |
| Deferred tax | ||
| Relating to origination and reversal of temporary differences | 3.1 | (2.0) |
| Effect of tax rate change on opening balance | 1.0 | – |
| Adjustments in respect of previous years | (0.3) | (0.5) |
| Tax expense in the income statement | 28.1 | 27.4 |
Reconciliation of tax expense to profit before tax multiplied by the UK corporation tax rate:
| 2016 £'m |
2015 £'m |
|
|---|---|---|
| Profit before tax | 176.2 | 113.8 |
| Tax at rate of 20.2% (2015: 21.3%) | 35.6 | 24.2 |
| Adjustments in respect of previous years | (8.7) | (0.5) |
| Rate change adjustment on temporary differences | (0.5) | 0.3 |
| Effect of tax rate change on opening balance | 1.0 | – |
| Expenses not deductible for tax purposes: | ||
| Other non-deductible expenses/non-taxed income |
0.7 | 3.4 |
| Tax expense in the income statement | 28.1 | 27.4 |
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%).
| Consolidated statement of financial position |
Consolidated income statement |
||||
|---|---|---|---|---|---|
| 2016 £'m |
2015 £'m |
2016 £'m |
2015 £'m |
||
| Excess of depreciation over capital allowances | 5.0 | 6.5 | (0.6) | (0.3) | |
| Intangible assets | (4.9) | (4.6) | 1.0 | 0.3 | |
| Retirement benefit scheme liabilities | 3.4 | 8.1 | (0.2) | (0.2) | |
| Effect of tax rate change | – | – | (1.0) | – | |
| Short-term temporary differences | 1.2 | 7.3 | (3.0) | 2.9 | |
| Losses available for offsetting against future taxable income | – | 0.1 | – | (0.2) | |
| Deferred tax (charge)/credit | (3.8) | 2.5 | |||
| Net deferred tax assets | 4.7 | 17.4 |
Reflected in the statement of financial position as follows:
| Net deferred tax assets | 4.7 | 17.4 |
|---|---|---|
| Deferred tax liabilities | (17.4) | (5.5) |
| Deferred tax assets | 22.1 | 22.9 |
| 2016 £'m |
2015 £'m |
|
Reconciliation of net deferred tax assets/(liabilities)
| 2016 | 2015 | |
|---|---|---|
| £'m | £'m | |
| At 1 February | 17.4 | 12.9 |
| Tax credit recognised in the income statement | (3.8) | 2.5 |
| Tax credit recognised in other comprehensive income | (7.4) | 6.8 |
| Deferred taxes acquired in business combinations | (2.7) | (4.0) |
| Deferred tax charge attributable to discontinued operations | 1.2 | 0.5 |
| Transferred to assets held for sale | – | (1.3) |
| At 31 January | 4.7 | 17.4 |
A reduction in the UK corporation tax rate from 21% to 20% took effect on 1 April 2015, and further reductions were enacted in the Finance Act 2015 to reduce the rate to 19% from 1 April 2017 and to 18% from 1 April 2020. A further reduction to 17% from 1 April 2020 was announced on 16 March 2016 but this has yet to be enacted. As a result, the closing deferred tax balances have been reflected at 18%.
The Group has tax losses which arose in the UK of £4.2m (2015: £4.9m) that are available indefinitely for offsetting against future taxable profits of the companies in which the losses arose.
Deferred tax assets have not been recognised in respect of these losses as they may not be used to offset taxable profits elsewhere in the Group, they have arisen in subsidiaries that have been loss-making for some time, and there are no other tax planning opportunities or other evidence of recoverability in the near future. If the Group were able to recognise all unrecognised deferred tax assets, the profit would increase by £0.8m.
| Declared during the year: | 2016 £'m |
2015 £'m |
|---|---|---|
| Final dividend for the year ended 31 January 2015: 4.1 pence per share | 45.8 | – |
| Interim dividend for the year ended 31 January 2016: 2.2 pence per share | 24.6 | – |
| 70.4 | – | |
| Proposed after the end of the reporting period and not recognised as a liability: | ||
| Final dividend for the year ended 31 January 2016: 5.0 pence per share | 55.9 | 45.8 |
With the exception of corporate restructuring dividends, no dividends were declared by the Company during the year ended 31 January 2015. The proposed dividend for the year ended 31 January 2016 is subject to approval by shareholders at the Annual General Meeting on 21 June 2016 and would be paid on 30 June 2016.
Basic EPS is calculated by dividing the profit after tax for the year attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the period. Diluted EPS is calculated by also including the weighted average number of ordinary shares that would be issued on conversion of all potentially dilutive options.
In accordance with the offer in the Prospectus, on 5 June 2015 the Group issued one free share for every twenty shares which were purchased in the IPO by Eligible Customers and Eligible Employees and held continuously for one year. No additional funds were raised through the issue of these shares and therefore they have been treated as if they existed in all prior periods; accordingly, the weighted average number of shares in these periods has been restated.
There have been no other transactions involving ordinary shares or potential ordinary shares between the reporting date and the date of authorisation of these financial statements.
The calculation of basic and diluted EPS is as follows:
| 2016 | 2015 | |
|---|---|---|
| £'m | £'m | |
| Profit/(loss) attributable to ordinary equity holders | 140.9 | (134.2) |
| Profit from continuing operations | 148.1 | 86.4 |
| Weighted average number of ordinary shares | 'm | 'm |
| Original shares | 800.0 | 800.0 |
| 297.3 million shares issued on 29 May 2014 | 297.3 | 202.0 |
| Free shares issued on 5 June 2015 | 7.3 | 6.6 |
| IPO share options exercised | 6.5 | 0.4 |
| Weighted average number for basic EPS | 1,111.1 | 1,009.0 |
| Dilutive options | ||
| IPO share options not yet exercised | 6.6 | 8.6 |
| Other share options not yet vested | 2.4 | 0.0 |
| Deferred Bonus Plan | 0.2 | 0.0 |
| Weighted average number for diluted EPS | 1,120.3 | 1,017.6 |
| Basic EPS | 12.7p | (13.3p) |
| Basic EPS for continuing operations | 13.3p | 8.6p |
| Diluted EPS | 12.6p | (13.3p) |
| Diluted EPS for continuing operations | 13.2p | 8.5p |
On 1 July 2015, the Group acquired a 100% shareholding in Bennetts Biking Services Limited ('Bennetts'), the UK's premier motorbike insurance specialist. Bennetts' customer base fits well with the core Saga demographic with the majority of customers being over 40 years of age, and significantly enhances Saga's existing portfolio of motorbike policies.
The acquisition cost of £26.3m was settled in cash. Transaction costs of £0.5m have been expensed and are included as part of the exceptional expenses within administrative and selling expenses. Cash of £0.4m was acquired with Bennetts, resulting in a net cash outflow of £25.9m.
The fair values of the identifiable assets and liabilities of Bennetts acquired on the date of acquisition were:
| £'m | |
|---|---|
| Assets | |
| Brand | 3.8 |
| Customer relationships | 3.9 |
| Contracts | 5.8 |
| Software | 1.6 |
| Trade and other receivables (gross and expected to be received) | 1.4 |
| Cash | 0.4 |
| Total assets | 16.9 |
| Trade and other payables | 1.5 |
|---|---|
| Deferred tax liability | 2.7 |
| Total liabilities | 4.2 |
| Total identifiable net assets at fair value | 12.7 |
|---|---|
| Goodwill arising on acquisition (note 13) | 13.6 |
| Purchase consideration transferred | 26.3 |
The goodwill arising on acquisition of £13.6m represents the fair value arising from the acquired management structure, strategic knowledge, capability and other synergies arising on acquisition.
From the date of acquisition, Bennetts contributed £10.5m of revenue and £0.4m to the Group profit before tax for the year ended 31 January 2016. Had these acquisitions occurred at the beginning of the financial year, contribution to Group revenue and profit before tax for the full year would have been £19.3m and £1.5m respectively.
On 13 August 2014, the Group acquired a 75% shareholding in Destinology Limited ('Destinology') with an option to acquire the remaining 25% shareholding at a later date. Accordingly, the subsequent purchase was considered to be a linked transaction and Destinology was consolidated as a 100% subsidiary.
The initial acquisition cost for the 75% shareholding of £23.0m was settled using £22.2m of cash held by the travel segment, with £0.8m deferred to be paid during the year ending 31 January 2016. The option to acquire the remaining 25% is effected by the Group and the other shareholders holding call and put options respectively, with the price to be paid determined by the profitability of Destinology in the 12 months ending 31 October 2015 or 31 October 2016.
The contingent consideration for the remaining 25% was valued upon a probability-weighted range of outcomes on acquisition at £6.2m, giving a total consideration of £29.2m:
| Purchase consideration | £'m |
|---|---|
| Cash settled on acquisition date | 22.2 |
| Deferred for one year (paid during the year ended 31 January 2016) | 0.8 |
| Contingent consideration in respect of remaining 25% shareholding | 6.2 |
| Total consideration | 29.2 |
The fair values of the identifiable assets and liabilities acquired totalled £16.2m generating goodwill on acquisition of £13.0m representing the fair value arising from the acquired management structure and their incumbencies along with their strategic knowledge and capability and other synergies arising on acquisition.
During the year, the range of outcomes for the price of the remaining 25% shareholding has been reassessed and the contingent consideration has been revalued at £1.
Goodwill has been allocated to CGUs on initial recognition and for subsequent impairment testing, and is allocated to the insurance and travel segments.
| Goodwill £'m |
|
|---|---|
| Cost | |
| At 1 February 2014 | 1,636.2 |
| Acquisition of a subsidiary (note 12b) | 13.0 |
| Reclassification to assets held for sale | (177.8) |
| At 31 January 2015 | 1,471.4 |
| Acquisition of a subsidiary (note 12a) | 13.6 |
| At 31 January 2016 | 1,485.0 |
| Impairment | |
| At 31 January 2015 and 31 January 2016 | – |
| Net book value | |
| At 31 January 2016 | 1,485.0 |
| At 31 January 2015 | 1,471.4 |
Goodwill deductible for tax purposes amounts to £nil (2015: £22.2m).
| Customer | |||||
|---|---|---|---|---|---|
| Contracts | Brands | relationships | Software | Total | |
| £'m | £'m | £'m | £'m | £'m | |
| Cost | |||||
| At 1 February 2014 | 81.1 | 1.4 | 19.1 | 58.7 | 160.3 |
| Additions | – | – | – | 8.6 | 8.6 |
| Acquisition of a subsidiary (note 12b) | – | 12.7 | 7.4 | 0.7 | 20.8 |
| Reclassification to assets held for sale | (81.1) | – | (19.1) | (6.7) | (106.9) |
| At 31 January 2015 | – | 14.1 | 7.4 | 61.3 | 82.8 |
| Additions | – | – | – | 16.5 | 16.5 |
| Acquisition of a subsidiary (note 12a) | 5.8 | 3.8 | 3.9 | 1.6 | 15.1 |
| Disposals | – | – | – | (5.4) | (5.4) |
| At 31 January 2016 | 5.8 | 17.9 | 11.3 | 74.0 | 109.0 |
| Amortisation and impairment | |||||
| At 1 February 2014 | 52.8 | 0.5 | 19.1 | 40.5 | 112.9 |
| Amortisation | 9.6 | 0.8 | 1.4 | 10.3 | 22.1 |
| Reclassification to assets held for sale | (62.4) | – | (19.1) | (5.5) | (87.0) |
| At 31 January 2015 | – | 1.3 | 1.4 | 45.3 | 48.0 |
| Amortisation | 0.8 | 1.6 | 3.9 | 7.8 | 14.1 |
| Disposals | – | – | – | (5.4) | (5.4) |
| At 31 January 2016 | 0.8 | 2.9 | 5.3 | 47.7 | 56.7 |
| Net book value | |||||
| At 31 January 2016 | 5.0 | 15.0 | 6.0 | 26.3 | 52.3 |
| At 31 January 2015 | – | 12.8 | 6.0 | 16.0 | 34.8 |
Contracts, brands and customer relationships assets acquired through business combinations have been reviewed for indicators of impairment (see note 15b).
The amortisation charge for the year is analysed as follows:
| 2016 | 2015 | |
|---|---|---|
| £'m | £'m | |
| Administrative and selling expenses (note 4) | 14.1 | 11.7 |
| Discontinued operations | – | 10.4 |
| 14.1 | 22.1 |
Goodwill acquired through business combinations has been allocated to CGUs on initial recognition. Additions to goodwill during the year relating to Bennetts have been allocated to a new CGU relating to the new subsidiary only. The carrying value of goodwill by CGU is as follows:
| 2016 £'m |
2015 £'m |
|
|---|---|---|
| Insurance, excluding Bennetts | 1,398.6 | 1,398.6 |
| Insurance, Bennetts | 13.6 | – |
| Travel, excluding Destinology | 59.8 | 59.8 |
| Travel, Destinology | 13.0 | 13.0 |
| 1,485.0 | 1,471.4 |
The Group has tested all goodwill for impairment at 31 January 2016. The impairment test compares the recoverable amount of the goodwill of each CGU to its carrying value. The goodwill associated with the Bennetts and Destinology businesses have been considered separately however as these businesses become more integrated into the overall insurance and travel businesses respectively, it is likely to be necessary to consider them as part of the insurance and travel CGUs.
The recoverable amount of each CGU has been determined based on a value-in-use calculation using cash flow projections from the Group's five year plan to 2020/21. Terminal values have been included using 3% as the expected long-term average growth rate of the UK economy, and calculated using the Gordon growth model.
The pre-tax cash flows of each CGU have been discounted considering the weighted average cost of capital of a market participant capable of acquiring a similar business. For the insurance and Bennetts CGUs, the discount rate has been assessed to be 8.9%, and for the travel and Destinology CGUs, it has been assessed to be 11.8%.
The value-in-use calculation is most sensitive to the assumptions used for growth and for the discount rate. Accordingly, stress testing has been performed on these key assumptions as part of the impairment test to determine whether any reasonably foreseeable change in any of the key assumptions would cause the recoverable amount of the CGU to be lower than its carrying amount.
To undertake the stress testing, terminal values were separately recalculated using 1.5% growth and nil growth, and the relevant discount rate was separately increased by 3%. No evidence of any impairment was seen under any of these stress test scenarios. Consequently, no impairment of goodwill has been recognised.
Separately identifiable intangible assets are valued and their appropriate useful lives established at the time of acquisition. The carrying values of these assets and their remaining useful lives are reviewed annually for indicators of impairment.
The Group has assessed the recoverable amount of intangible assets as at 31 January 2016 and concluded that no impairment is required.
| Freehold | Long leasehold |
Assets in the | ||||
|---|---|---|---|---|---|---|
| land & buildings £'m |
land & buildings £'m |
Cruise ships £'m |
course of construction £'m |
Plant & equipment £'m |
Total £'m |
|
| Cost or valuation | ||||||
| At 1 February 2014 | 58.4 | 7.4 | 80.3 | – | 56.0 | 202.1 |
| Additions | – | – | 5.2 | – | 14.2 | 19.4 |
| Disposals | (0.2) | – | – | – | (6.0) | (6.2) |
| Acquisition of a subsidiary (note 12b) | – | 0.2 | – | – | 0.2 | 0.4 |
| Reclassification to assets held for sale | – | – | – | – | (16.6) | (16.6) |
| At 31 January 2015 | 58.2 | 7.6 | 85.5 | – | 47.8 | 199.1 |
| Additions | – | 1.0 | 6.4 | 13.1 | 10.3 | 30.8 |
| Disposals | – | – | – | – | (4.0) | (4.0) |
| At 31 January 2016 | 58.2 | 8.6 | 91.9 | 13.1 | 54.1 | 225.9 |
| Depreciation and impairment | ||||||
| At 1 February 2014 | 7.6 | 1.3 | 18.0 | – | 35.4 | 62.3 |
| Provided during the year | 1.1 | 0.2 | 7.5 | – | 11.3 | 20.1 |
| Disposals | – | – | – | – | (6.0) | (6.0) |
| Reclassification to assets held for sale | – | – | – | – | (10.5) | (10.5) |
| At 31 January 2015 | 8.7 | 1.5 | 25.5 | – | 30.2 | 65.9 |
| Provided during the year | 0.9 | 0.2 | 8.5 | – | 10.4 | 20.0 |
| Impairment (note 4) | 3.4 | – | – | – | – | 3.4 |
| Disposals | – | – | – | – | (4.0) | (4.0) |
| At 31 January 2016 | 13.0 | 1.7 | 34.0 | – | 36.6 | 85.3 |
| Net book value | ||||||
| At 31 January 2016 | 45.2 | 6.9 | 57.9 | 13.1 | 17.5 | 140.6 |
| At 31 January 2015 | 49.5 | 6.1 | 60.0 | – | 17.6 | 133.2 |
The net book value of plant and equipment includes £2.2m (2015: £0.2m) in respect of plant and machinery held under finance lease agreements. The accumulated depreciation on these assets is £0.5m (2015: £0.3m).
The depreciation charge for the year is analysed as follows:
| 2016 £'m |
2015 £'m |
|
|---|---|---|
| Cost of sales | 10.7 | 9.9 |
| Administrative and selling expenses (note 4) | 9.3 | 7.4 |
| 20.0 | 17.3 | |
| Discontinued operations | – | 2.8 |
| 20.0 | 20.1 |
During the year the Group disposed of assets with a net book value of £nil (2015: £0.2m). There was no profit or loss arising on disposal (2015: £nil).
| a. Financial assets | |
|---|---|
| 2016 £'m |
2015 £'m |
|
|---|---|---|
| Fair value through profit or loss | ||
| Foreign exchange forward contracts | 3.3 | 1.5 |
| Loan funds | 19.3 | 19.6 |
| Hedge funds | 26.7 | 33.8 |
| Equities | – | 8.7 |
| 49.3 | 63.6 | |
| Fair value through the hedging reserve | ||
| Foreign exchange forward contracts | 16.7 | 4.1 |
| 16.7 | 4.1 | |
| Loans and receivables | ||
| Deposits with financial institutions | 413.6 | 479.4 |
| 413.6 | 479.4 | |
| Available for sale investments | ||
| Debt securities | 85.2 | 71.9 |
| Money market funds | 75.9 | 40.6 |
| Unlisted equity shares | 0.2 | – |
| Loan notes | 3.8 | – |
| 165.1 | 112.5 | |
| Total financial assets | 644.7 | 659.6 |
| Current | 288.8 | 234.4 |
| Non-current | 355.9 | 425.2 |
| 644.7 | 659.6 |
Debt securities, money market funds and deposits with financial institutions relate to monies held by the Group's insurance business and are subject to contractual restrictions and are not readily available to be used for other purposes within the Group.
| b. Financial liabilities | |
|---|---|
| 2016 £'m |
2015 £'m |
|
|---|---|---|
| Fair value through profit or loss | ||
| Foreign exchange forward contracts | 5.5 | 2.1 |
| Fuel oil swaps | 4.1 | 4.5 |
| 9.6 | 6.6 | |
| Fair value through hedging reserve | ||
| Foreign exchange forward contracts | 1.2 | 4.6 |
| Fuel oil swaps | 1.9 | 2.5 |
| 3.1 | 7.1 | |
| Loans and borrowings | ||
| Bank loans (note 28) | 547.7 | 692.2 |
| Obligations under finance leases and hire purchase | 2.2 | – |
| Bank overdrafts | 17.9 | 5.8 |
| 567.8 | 698.0 | |
| Total financial liabilities | 580.5 | 711.7 |
| Current | 27.8 | 21.1 |
| Non-current | 552.7 | 690.6 |
| 580.5 | 711.7 |
Financial instruments held at fair value are valued using quoted market prices or other valuation techniques.
Valuation techniques include net present value and discounted cash flow models, and comparison to similar instruments for which market observable prices exist. Assumptions and market observable inputs used in valuation techniques include foreign currency exchange rates and future oil prices.
The objective of using valuation techniques is to arrive at a fair value determination that reflects the price of the financial instrument at the reporting date which would have been determined by market participants acting at arm's length.
Observable prices are those that have been seen either from counterparties or from market pricing sources including Bloomberg. The use of these depends upon the liquidity of the relevant market.
The fair value and carrying value of financial assets and financial liabilities are materially the same. Financial instruments held at fair value have been categorised into a fair value measurement hierarchy as follows:
These are valuation techniques that are based entirely on quoted market prices in an actively traded market and are the most reliable. All money market funds and debt securities are categorised as Level 1 as the fair value is obtained directly from the quoted market price.
These are valuation techniques for which all significant inputs are taken from observable market data. These include valuation models used to calculate the present value of expected future cash flows and may be employed either when no active market exists or when there are quoted prices available for similar instruments in active markets. The models incorporate various inputs including the credit quality of counterparties, interest rate curves and forward rate curves of the underlying instrument.
All the derivative financial instruments are categorised as Level 2 as the fair values are obtained from the counterparty, brokers or valued using observable inputs. Where material, CVA/DVA risk adjustment is factored into the fair values of these instruments. As at 31 January 2016, the marked-to-market values of derivative assets are net of a credit valuation adjustment attributable to derivative counterparty default risk.
The fair values are periodically reviewed by the Treasury Committee.
These are valuation techniques for which any one or more significant inputs are not based on observable market data.
The following tables provide the quantitative fair value hierarchy of the Group's financial assets and financial liabilities:
| As at 31 January 2016 | As at 31 January 2015 | |||||||
|---|---|---|---|---|---|---|---|---|
| Level 1 £'m |
Level 2 £'m |
Level 3 £'m |
Total £'m |
Level 1 £'m |
Level 2 £'m |
Level 3 £'m |
Total £'m |
|
| Financial assets measured at fair value | ||||||||
| Foreign exchange forwards | – | 20.0 | – | 20.0 | – | 5.6 | – | 5.6 |
| Loan funds | – | 19.3 | – | 19.3 | – | 19.6 | – | 19.6 |
| Hedge funds | – | 26.7 | – | 26.7 | – | 33.8 | – | 33.8 |
| Equities | – | – | – | – | 8.7 | – | – | 8.7 |
| Debt securities | 85.2 | – | – | 85.2 | 71.9 | – | – | 71.9 |
| Money market funds | – | 75.9 | – | 75.9 | – | 40.6 | – | 40.6 |
| Unlisted equity shares | – | – | 0.2 | 0.2 | – | – | – | – |
| Loan notes | – | – | 3.8 | 3.8 | – | – | – | – |
| Financial liabilities measured at fair value | ||||||||
| Contingent consideration | – | – | – | – | – | – | 6.2 | 6.2 |
| Foreign exchange forwards | – | 6.7 | – | 6.7 | – | 6.7 | – | 6.7 |
| Fuel oil swaps | – | 6.0 | – | 6.0 | – | 7.0 | – | 7.0 |
| Assets for which fair values are disclosed | ||||||||
| Deposits with institutions | – | 413.6 | – | 413.6 | – | 479.4 | – | 479.4 |
| Liabilities for which fair values are disclosed | ||||||||
| Bank loans | – | 547.7 | – | 547.7 | – | 692.2 | – | 692.2 |
| Finance leases and hire purchase obligations | – | 2.2 | – | 2.2 | – | – | – | – |
| Bank overdrafts | – | 17.9 | – | 17.9 | – | 5.8 | – | 5.8 |
There have been no transfers between Level 1 and Level 2 and no non-recurring fair value measurements of assets and liabilities during the year (2015: none).
The unlisted equity shares represent the Group's investment in 'K' ordinary shares of Lyons Davidson LLP and have been valued considering the cost of the initial investment and the post-investment trading profits.
The loan notes represent two notes with a face value of £3.5m each which attract uncompounded interest at a rate of 5% and mature on 30 May 2018 and 30 May 2019. These notes are not actively traded in any market and have been valued by determining a market-participant discount rate including a credit valuation adjustment to allow for counterparty default risk, and discounting them to present value.
During the year ended 31 January 2016, the Group designated 294 foreign exchange forward currency contracts as hedges of highly probable foreign currency cash expenses in future periods. These contracts are entered into to minimise the Group's exposure to foreign exchange risk.
| Designated in the year | At 31 Jan 2016 | At 31 Jan 2015 | ||||
|---|---|---|---|---|---|---|
| Foreign currency cash flow hedging instruments | Volume | £'m | Volume | £'m | Volume | £'m |
| Euro (EUR) | 76 | 12.2 | 90 | 11.9 | 63 | (4.2) |
| US Dollar (USD) | 76 | 2.9 | 93 | 4.4 | 50 | 4.0 |
| Other currencies | 142 | (0.4) | 173 | (0.8) | 113 | (0.3) |
| Total | 294 | 14.7 | 356 | 15.5 | 226 | (0.5) |
Hedging instruments for other currencies are in respect of Australian dollars, Canadian dollars, Swiss francs, Japanese yen, New Zealand dollars, Norwegian krone, Swedish krona, Thai baht and South African rand.
The Group uses derivative financial instruments to mitigate the risk of adverse changes in the price of fuel. The Group enters into fixed price contracts (swaps) in the management of its fuel price exposures. These contracts are expected to reduce the volatility attributable to price fluctuations of fuel and are designated as cash flow hedges. Hedging the price volatility of forecast fuel purchases is in accordance with the risk management strategy outlined by the Board of Directors.
| Designated in the year | At 31 Jan 2016 | At 31 Jan 2015 | ||||
|---|---|---|---|---|---|---|
| Commodity cash flow hedging instruments | Volume | £'m | Volume | £'m | Volume | £'m |
| Hedging instruments | 44 | (1.9) | 44 | (1.9) | 36 | (2.5) |
The table below summarises the present value of the highly probable forecast cash flows that have been designated in a hedging relationship as at 31 January 2016. These cash flows are expected to become determined in profit or loss in the same period in which the cash flows occur.
| Determination period | EUR £'m |
USD £'m |
Other currencies £'m |
Currency hedges £'m |
Fuel hedges £'m |
Total £'m |
|---|---|---|---|---|---|---|
| 1 February 16 to 31 July 16 | 47.5 | 24.1 | 5.8 | 77.4 | 0.4 | 77.8 |
| 1 August 16 to 31 January 17 | 26.6 | 23.8 | 4.3 | 54.7 | 0.9 | 55.6 |
| 1 February 17 to 31 July 17 | 42.8 | 18.5 | 4.8 | 66.1 | 1.0 | 67.1 |
| 1 August 17 to 31 January 18 | 1.5 | 0.4 | 0.6 | 2.5 | 0.8 | 3.3 |
| 1 February 18 to 31 July 18 | 13.6 | – | – | 13.6 | – | 13.6 |
| 1 February 19 to 31 July 19 | 217.1 | – | – | 217.1 | – | 217.1 |
| Total | 349.1 | 66.8 | 15.5 | 431.4 | 3.1 | 434.5 |
The foreign currency hedge which will be determined in July 2019 of £217.1m relates to the delivery of the ship (note 32).
During the year, the Group recognised net gains of £6.3m (2015: £3.0m loss) on cash flow hedging instruments through other comprehensive income into the hedging reserve. Additionally, the Group recognised net gains of £10.3m through other comprehensive income into the hedging reserve, in relation to the specific hedging instrument for the acquisition of a new ship (note 32). The Group recognised a £0.3m loss (2015: £0.4m loss) though the income statement in respect of the ineffective portion of hedges measured during the period.
There has been no de-designation of hedges during the year ended 31 January 2016 as a result of cash flows forecast that are no longer expected to occur, or as a result of failed ineffectiveness testing. No amounts have been removed from the hedging reserve to be included in either profit or loss or in the carrying value of non-financial assets and liabilities.
The Group's principal financial liabilities comprise loans and borrowings and trade and other payables. The main purpose of these financial liabilities is to finance the Group's operations and to provide guarantees to support its operations. The Group's principal financial assets include debt securities, deposits with financial institutions, money market funds, loan funds and hedge funds. The Group also enters into derivative transactions such as foreign exchange forward contracts, fuel and gas oil swaps and interest rate swaps to manage its exposures to various risks.
The Group is exposed to market risk, credit risk, liquidity risk and insurance risk. The Group's senior management oversees the management of these risks, supported by the Group Treasury function and treasury committees within the key areas of the Group that advise on financial risks and the appropriate financial risk governance framework for the Group. The treasury committee ensures that the Group's financial risks are governed by appropriate policies and procedures and that financial risks are identified, measured and managed in accordance with the Group's policies and risk objectives. All derivative activities are for risk management purposes and are carried out by the Group's Treasury function. It is the Group's policy that no trading in derivatives for speculative purposes may be undertaken.
The Group manages concentration risk through a policy of diversification that is outlined in the Group Treasury Policy and approved by the Board. The policy defines the exposure limit to third party institutions based on the credit ratings of the individual counterparties, combined with the views of the Board. On a monthly basis, exposure to each counterparty is calculated and reported, and compliance with the policy is monitored.
The Board of Directors reviews and agrees policies for managing each of these risks, which are summarised below.
Market risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices. The Group is exposed to the following market risk factors:
The Group has policies and limits approved by the Board for managing the market risk exposure. These set out the principles that the business should adhere to for managing market risk and establishing the maximum limits the Group is willing to accept considering strategy, risk appetite and capital resources.
The Group has the ability to monitor market risk exposure on a daily basis and has established limits for each component of market risk.
The Group uses derivatives for hedging its exposure to foreign currency, fuel oil prices and interest rate risks. The market risk policy explicitly prohibits the use of derivatives for speculative purposes.
Foreign currency risk is the risk that the fair value of future cash flows of a financial asset or liability will fluctuate because of changes in foreign exchange rates. The Group's exposure to the risk of changes in foreign exchange rates relates primarily to the Group's operating activities (when revenue or expense is denominated in a different currency from the Group's presentation currency) and the Group's net investments in foreign subsidiaries.
The Group uses foreign exchange forward contracts to manage the majority of its transaction exposures. The foreign exchange forward contracts are not formally designated as hedging instruments and are entered into for periods consistent with the foreign currency exposure of the underlying transactions, generally from one to 24 months. The foreign exchange forward contracts vary with the level of expected foreign currency sales and purchases.
The following table demonstrates the sensitivity of the fair value of forward exchange contracts to a 5% change in US dollar and Euro exchange rates, with all other variables held constant. The Group's exposure to foreign currency changes for all other currencies is not material. The impact is shown net of tax at the current rate.
| Sensitivity of +/- 5% rate change in |
Effect on profit after tax and equity |
|
|---|---|---|
| 2016 | EUR – Trading | +/- £5.3m |
| EUR – New ship | +/- £12.3m | |
| USD | +/- £3.6m | |
| 2015 | EUR | +/- £3.7m |
| USD | +/- £3.7m |
The Group is affected by the price volatility of certain commodities. Its operating activities require the ongoing purchase of fuel and gas oil to sail its cruise ships and therefore require a continuous supply of fuel and gas oil. The volatility in the price of fuel and gas oil has led to the decision to enter into commodity fuel and gas oil swap contracts. These contracts are expected to reduce the volatility attributable to price fluctuations of fuel and gas oil. Managing the price volatility of forecast oil purchases is in accordance with the risk management strategy outlined by the Board of Directors.
The Group manages the purchase price using forward commodity purchase contracts based on a 24 month forecast of the required fuel oil supply.
The following table shows the sensitivity of the fair value of fuel oil swaps to changes in the US dollar exchange rate with all other variables held constant. The impact is shown net of tax at the current rate.
| Sensitivity of +/- 5% rate change in |
Effect on profit after tax and equity |
|
|---|---|---|
| 2016 | USD | +/- £0.8m |
| 2015 | USD | +/- £0.8m |
Interest rate risk arises primarily from medium and long-term investments in fixed interest securities. The market value of these investments is affected by the movement in interest rates. This is managed by a policy of holding all investments to maturity by closely matching asset and liability duration.
It is also ensured that the investment portfolio has a diversified range of investments such that there is a combination of fixed and floating rate securities, as well as other types of investments such as RPI linked securities and property.
Interest rate risk also arises in respect of the Group's borrowings where the interest rate attaching to those borrowings is not fixed. Where the Group perceives there to be a significant interest rate risk, it manages its exposure to such risks by purchasing interest rate caps to limit the risk. At 31 January 2016, interest caps are in place to cover a nominal value of interest payable of £510m, up to June 2016.
The following table shows the sensitivity of financial assets and liabilities to changes in the LIBOR rate. The impact is shown net of tax at the current rate.
| Sensitivity of +/- 0.25% rate change in |
Effect on profit after tax and equity |
|
|---|---|---|
| 2016 | LIBOR | +/- £0.6m |
| 2015 | LIBOR | +/- £0.7m |
Credit risk is the risk that a counterparty will not meet its obligations under a financial instrument or customer contract, leading to a financial loss. The Group is exposed to credit risk in relation to its financial assets, outstanding derivatives and trade and other receivables. The Group assesses its counterparty exposure in relation to the investment of surplus cash, fuel oil and foreign currency contracts, and undrawn credit facilities. The Group primarily uses published credit ratings to assess counterparty strength and therefore to define the credit limit for each counterparty in accordance with approved Treasury policies.
The credit risk in respect of trade and other receivables is limited as payment from customers is generally required before services are provided, with the exception of the healthcare services products.
Credit risk in relation to deposits and derivative counterparties is managed by the Group's Treasury department in accordance with the Group's policy. Investments of surplus funds are made only with approved counterparties and within credit limits assigned to each counterparty. Counterparty credit limits are reviewed on a regular basis, and updated throughout the year subject to approval of the Group Board. The limits are set to minimise the concentration of risks and therefore mitigate financial loss through any potential counterparty failure.
The Group is exposed to the risk of default on the reinsurance arrangements in its insurance business when amounts recoverable under those arrangements become due. Credit risk in respect of reinsurance arrangements is assessed at the time of entering into a reinsurance contract. The Group's reinsurance programme is only placed with reinsurers which meet the Group's financial strength criteria, with no single reinsurer holding more than 20% of the programme.
The Group's maximum exposure to credit risk for the components of the statement of financial position at 31 January 2016 and 31 January 2015 is the carrying amount except for derivative financial instruments. The Group's maximum exposure for financial guarantees and financial derivative instruments is noted under liquidity risk. None of the financial assets were impaired at the reporting date.
The Group's financial assets are analysed by Moody's rating as follows:
| Ratings analysis | ||||||
|---|---|---|---|---|---|---|
| 31 January 2016 | ||||||
| £'m | AAA | AA | A | < A | Unrated | Total |
| Debt securities | 85.2 | – | – | – | – | 85.2 |
| Money market funds | 75.9 | – | – | – | – | 75.9 |
| Deposits with financial institutions | 30.0 | 140.3 | 243.3 | – | – | 413.6 |
| Derivative assets | – | 10.1 | 9.9 | – | – | 20.0 |
| Loan notes | – | – | – | – | 3.8 | 3.8 |
| Loan funds | – | – | – | – | 19.3 | 19.3 |
| Hedge funds | – | – | – | – | 26.7 | 26.7 |
| Unlisted equity shares | – | – | – | – | 0.2 | 0.2 |
| 191.1 | 150.4 | 253.2 | – | 50.0 | 644.7 | |
| Reinsurance assets | – | 57.9 | 47.3 | – | 1.2 | 106.4 |
| Total | 191.1 | 208.3 | 300.5 | – | 51.2 | 751.1 |
b. Credit risk (continued)
| Ratings analysis (continued) | ||
|---|---|---|
| 31 January 2015 | ||||||
|---|---|---|---|---|---|---|
| £'m | AAA | AA | A | < A | Unrated | Total |
| Debt securities | 71.9 | – | – | – | – | 71.9 |
| Money market funds | 40.6 | – | – | – | – | 40.6 |
| Deposits with financial institutions | 30.0 | 180.3 | 213.6 | 55.5 | – | 479.4 |
| Derivative assets | – | – | 5.6 | – | – | 5.6 |
| Loan funds | – | – | – | – | 19.6 | 19.6 |
| Hedge funds | – | – | – | – | 33.8 | 33.8 |
| Equities | – | – | – | – | 8.7 | 8.7 |
| 142.5 | 180.3 | 219.2 | 55.5 | 62.1 | 659.6 | |
| Reinsurance assets | – | 33.0 | 29.5 | – | 0.9 | 63.4 |
| Total | 142.5 | 213.3 | 248.7 | 55.5 | 63.0 | 723.0 |
Liquidity risk is the risk that the Group, although solvent, either does not have available sufficient financial resources to enable it to meet its obligations as they fall due, or can secure them only at excessive cost. The Group's approach to managing liquidity risk is to evaluate current and expected liquidity requirements to ensure that it maintains sufficient reserves of cash or availability on its revolving credit facility. The Group manages its obligations to pay claims to policyholders as they fall due by matching the maturity of investments to the expected maturity of claims payments.
The table below analyses the maturity of the Group's financial liabilities on contractual undiscounted payments. The analysis of non-derivative financial liabilities is based on the remaining period at the reporting date to the contractual maturity date. The analysis of claims outstanding is based on the expected dates on which the claims will be settled.
| 31 January 2016 | Less than | 1 to 2 | 2 to 5 | Over 5 | ||
|---|---|---|---|---|---|---|
| £'m | On demand | 1 year | years | years | years | Total |
| Loans and borrowings | 17.9 | – | – | 555.0 | – | 572.9 |
| Interest on loans and borrowings | 0.6 | 16.9 | 17.0 | 21.0 | – | 55.5 |
| Insurance contract liabilities | – | 212.3 | 161.7 | 221.0 | 139.0 | 734.0 |
| Other liabilities | 129.7 | – | – | – | – | 129.7 |
| Trade and other payables | 191.6 | – | – | – | – | 191.6 |
| Derivative liabilities | – | 9.3 | 3.4 | – | – | 12.7 |
| 339.8 | 238.5 | 182.1 | 797.0 | 139.0 | 1,696.4 |
| 31 January 2015 £'m |
On demand | Less than 1 year |
1 to 2 years |
2 to 5 years |
Over 5 years |
Total |
|---|---|---|---|---|---|---|
| Loans and borrowings | 5.8 | – | – | 700.0 | – | 705.8 |
| Interest on loans and borrowings | 3.4 | 18.1 | 22.0 | 53.4 | – | 96.9 |
| Insurance contract liabilities | – | 187.5 | 186.7 | 236.2 | 125.7 | 736.1 |
| Contingent consideration | – | 6.2 | – | – | – | 6.2 |
| Other liabilities | 135.2 | – | – | – | – | 135.2 |
| Trade and other payables | 158.7 | – | – | – | – | 158.7 |
| Derivative liabilities | – | 12.0 | 1.7 | – | – | 13.7 |
| 303.1 | 223.8 | 210.4 | 989.6 | 125.7 | 1,852.6 |
Insurance risk arises from the inherent uncertainties as to the occurrence, cost and timing of insured events that could lead to significant individual or aggregated claims in terms of quantity or value. This could be for a number of reasons, including weatherrelated events, large individual claims, changes in claimant behaviour patterns such as increased levels of fraudulent activities, the use of PPOs, prospective or retrospective legislative changes, unresponsive and inaccurate pricing or reserving methodologies and the deterioration in the Group's ability to effectively and efficiently handle claims while delivering excellent customer service.
The Group manages insurance risk within its risk management framework as set out by the Board. The key policies and processes of mitigating these risks have been implemented which include underwriting partnership arrangements, reinsurance and excess of loss contracts, pricing policies and claims management, and administration policies.
The Group primarily underwrites motor insurance for private cars in the UK. The book consists of a large number of individual risks which are widely spread geographically which helps to minimise concentration risk. The Group has controls in place to restrict access to its products to only those risks it wishes to underwrite.
The Group has management information to allow it to monitor underwriting performance on a continuous basis and the ability to make pricing and underwriting changes quickly. The Group undertakes detailed statistical analyses of underwriting experience for each rating factor and combinations of rating factors to enable it to adjust pricing for emerging trends.
Reserving risk is the risk that insufficient funds have been set aside to settle claims as they fall due. The Group undertakes regular internal actuarial reviews and commissions external actuarial reviews at least once a year. These reviews estimate the future liabilities in order to consider the adequacy of the provisions.
Claims which are subject to PPOs are a significant source of uncertainty in the claims reserves. Cash flow projections are undertaken for PPO claims to estimate the gross and net of reinsurance provisions required. PPO provisions are discounted for future investment returns.
An important source of uncertainty is the risk of future legislative changes affecting bodily injury awards including the ongoing Ministry of Justice review of the discount rate.
The Group purchases reinsurance to reduce the impact of individual large losses or accumulations from a single catastrophe event. The Group purchases individual excess of loss protections for the motor portfolio to limit the impact of a single large claim. Similar protections are in place for all years for which the Group has written motor business. The Group has quota share reinsurance in place for third party branded motor business for drivers aged under 50.
Reinsurance recoveries on individual excess of loss protections can take many years to collect, particularly if a claim is subject to a PPO. This means that the Group has exposure to reinsurance credit risk for many years. Reinsurers are therefore required to have strong credit ratings and their financial health is regularly monitored.
The following table demonstrates the impact on profit and loss and equity of a 1 percentage point variation in the recorded loss ratio at 31 January 2016 and 31 January 2015. The impact of a 1% change in claims outstanding is also shown at the same dates. The impact is shown net of reinsurance and tax at the current rate.
| 2016 | 2015 | |
|---|---|---|
| Impact of 1 percentage point change in loss ratio | +/- £2.5m | +/- £2.6m |
| Impact of 1% change in claims outstanding | +/- £4.6m | +/- £3.9m |
| Impact of a 0.25 percentage point change in discount rate for PPOs | +/- £5.7m | +/- £9.0m |
Effective operational risk management requires the Group to identify, assess, manage, monitor, report and mitigate all areas of exposure. The Group operates across a range of segments and operational risk is inherent in all of the Group's products and services, arising from the operation of assets, from external events and dependencies, and from internal processes and systems.
The Group manages its operational risk through the risk management framework agreed by the Board, and through the use of risk management tools which together ensure that operational risks are identified, managed and mitigated to the level accepted, and that contingency processes and disaster recovery plans are in place. Regular reporting is undertaken to segment boards and includes details of new and emerging risks, as well as monitoring of existing risks. Testing of contingency processes and disaster recovery plans is undertaken to ensure the effectiveness of these processes.
All of the Group's operations are dependent on the proper functioning of its IT and communication systems; on its properties and other infrastructure assets; on the need to adequately maintain and protect customer and employee data and other information; and on the ability of the Group to attract and retain staff. Specific areas of operational risk by segment include:
The Insurance segment is required to comply with various operational regulatory requirements primarily in the UK but also within Gibraltar for its underwriting business. To the extent that significant external events could increase the incidence of claims, these would place additional strain on the claims handling function but any financial impact of such an event is considered to be an insurance risk.
The travel segment operates two cruise ships which are the Group's largest trading assets. Risk to the operation of these cruise ships arises from the impact of mechanical or other malfunction, non-compliance with regulatory requirements, and from global weather and socio-economic events. The tour holidays operated by the segment are also affected by global weather and socioeconomic events which impact either the Group directly or its suppliers.
The financial services product business is required to comply with various operational regulatory requirements in the UK.
The healthcare business provides a range of domiciliary services. Risk to the operation of this service arises mainly from the availability of appropriately skilled staff to deliver the level and standard of care required, and from the oversight of the delivery of these services.
A structured entity is defined as an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate to the administrative tasks only and the relevant activities are directed by means of contractual agreements. The Group has interests in unconsolidated structured entities as described below:
The nature and purpose of the hedge and bank loan funds is to diversify the investment portfolio and enhance the overall yield, whilst maintaining an acceptable level of risk for the portfolio as a whole.
The primary activity of the hedge funds is to invest in a wide range of securities and markets, and the funds may take a variety of positions in these markets. Bank loan funds invest in secured loans to companies rated below investment grade.
The nature and purpose of the money market funds is to provide maximum security and liquidity for the funds invested whilst also providing an adequate return. The money market funds used by the Group are all members of the Intitutional Money Market Funds Association. They are thus required to maintain specified liquidity and diversification characteristics of their underlying portfolios which comprise investment grade investments in financial institutions.
The Group invests in unconsolidated structured entities as part of its investment activities. The Group does not sponsor any of the unconsolidated structured entities.
At 31 January 2016, the Group's total interest in unconsolidated structured entities was £121.9m analysed as follows:
| Carrying value £m |
Interest income £m |
Fair value gains/ (losses) £m |
|
|---|---|---|---|
| Loan funds | 19.3 | 0.3 | (0.3) |
| Hedge funds | 26.7 | – | – |
| Money market funds | 75.9 | 0.3 | – |
These investments are typically managed under credit risk management as described in note 18. The Group's maximum exposure to loss on the interests presented above is the carrying amount of the Group's investments. No further loss can be made by the Group in relation to these investments. For this reason, the total assets of the entities are not considered meaningful for the purposes of understanding the related risks and so have not been presented.
| 2016 | 2015 | |
|---|---|---|
| £'m | £'m | |
| Raw materials | 0.9 | 0.9 |
| Work in progress | 0.1 | – |
| Finished goods | 3.9 | 4.4 |
| 4.9 | 5.3 |
| 2016 | 2015 | |
|---|---|---|
| £'m | £'m | |
| Trade receivables | 133.6 | 127.7 |
| Other receivables | 12.0 | 8.7 |
| Prepayments | 21.3 | 15.8 |
| Deferred acquisition costs | 16.6 | 9.3 |
| Other taxes and social security costs | 4.5 | 2.2 |
| 188.0 | 163.7 |
The ageing of trade receivables is as follows:
| Past due | |||||||
|---|---|---|---|---|---|---|---|
| Total £'m |
Neither past due nor impaired £'m |
< 30 days £'m |
30-60 days £'m |
61-90 days £'m |
91-120 days £'m |
> 120 days £'m |
|
| 2016 | 133.6 | 118.5 | 7.2 | 1.5 | 1.4 | 0.7 | 4.3 |
| 2015 | 127.7 | 116.7 | 3.8 | 1.5 | 1.0 | 0.8 | 3.9 |
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:
| Individually impaired £'m |
Collectively impaired £'m |
Total £'m |
|
|---|---|---|---|
| At 1 February 2014 | 0.7 | 8.3 | 9.0 |
| Charge for the year | 0.2 | 8.0 | 8.2 |
| Utilised in the year | – | (4.2) | (4.2) |
| Unused amounts reversed | – | (3.4) | (3.4) |
| 0.9 | 8.7 | 9.6 | |
| Reclassification to assets held for sale | (0.6) | – | (0.6) |
| At 31 January 2015 | 0.3 | 8.7 | 9.0 |
| Charge for the year | 0.2 | 7.5 | 7.7 |
| Utilised in the year | (0.1) | (3.5) | (3.6) |
| Unused amounts reversed | (0.1) | (4.5) | (4.6) |
| At 31 January 2016 | 0.3 | 8.2 | 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.
| 2016 | 2015 | |
|---|---|---|
| £'m | £'m | |
| Cash at bank and in hand | 36.9 | 66.5 |
| Short-term deposits | 69.6 | 132.3 |
| Cash and short-term deposits | 106.5 | 198.8 |
| Money markets funds | 75.9 | 40.6 |
| Bank overdraft | (18.0) | (5.8) |
| Cash held by disposal group | – | 4.3 |
| Cash and cash equivalents in the cash flow statement | 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.
| 2016 | 2015 | |
|---|---|---|
| £'m | £'m | |
| Trade payables | 104.3 | 84.8 |
| Other taxes and social security costs | 12.2 | 9.2 |
| Other payables | 18.9 | 24.5 |
| Assets in the course of construction | 13.1 | – |
| Accruals | 43.1 | 40.2 |
| 191.6 | 158.7 |
All trade and other payables are current in nature.
The Group operates retirement benefit schemes for the employees of the Group consisting of defined contribution plans and defined benefit 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.
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 | Saga scheme £'m |
Nestor schemes £'m |
Total £'m |
|---|---|---|---|
| Fair value of scheme assets | 218.6 | – | 218.6 |
| Present value of defined benefit obligation | (237.4) | – | (237.4) |
| Defined benefit scheme liability | (18.8) | – | (18.8) |
| At 31 January 2015 | Saga scheme £'m |
Nestor schemes £'m |
Total £'m |
|---|---|---|---|
| Fair value of scheme assets | 212.3 | 54.0 | 266.3 |
| Present value of defined benefit obligation | (252.7) | (68.7) | (321.4) |
| Defined benefit scheme liability | (40.4) | (14.7) | (55.1) |
| Reclassification to liabilities held for sale | – | 14.7 | 14.7 |
| (40.4) | – | (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.
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 | Total | |||||
|---|---|---|---|---|---|---|---|
| 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 |
Defined benefit scheme liability £'m |
|
| 1 February 2015 | 212.3 | (252.7) | (40.4) | – | – | – | (40.4) |
| Pension cost charge to income statement | |||||||
| Service cost | – | (8.8) | (8.8) | – | (0.1) | (0.1) | (8.9) |
| Net interest | 6.7 | (7.8) | (1.1) | 1.3 | (1.7) | (0.4) | (1.5) |
| Included in income statement | 6.7 | (16.6) | (9.9) | 1.3 | (1.8) | (0.5) | (10.4) |
| Benefits paid | (4.5) | 4.5 | – | (1.6) | 1.6 | – | – |
| Return on plan assets (excluding amounts included in net interest expense) |
(7.0) | – | (7.0) | (1.9) | – | (1.9) | (8.9) |
| Actuarial changes arising from changes in demographic assumptions |
– | (0.3) | (0.3) | – | 1.2 | 1.2 | 0.9 |
| Actuarial changes arising from changes in financial assumptions |
– | 27.5 | 27.5 | – | 5.3 | 5.3 | 32.8 |
| Experience adjustments | – | 0.3 | 0.3 | – | 1.5 | 1.5 | 1.8 |
| Sub-total included in other comprehensive income |
(11.5) | 32.0 | 20.5 | (3.5) | 9.6 | 6.1 | 26.6 |
| Contributions by employer | 11.1 | (0.1) | 11.0 | 12.4 | – | 12.4 | 23.4 |
| Movement in liabilities held for sale | – | – | – | (10.2) | (7.8) | (18.0) | (18.0) |
| 31 January 2016 | 218.6 | (237.4) | (18.8) | – | – | – | (18.8) |
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 | ||||||
|---|---|---|---|---|---|---|---|
| Defined | Defined | Defined | |||||
| Fair value of | Defined | benefit | Fair value of | Defined | benefit | benefit | |
| scheme assets |
benefit obligation |
scheme liability |
scheme assets |
benefit obligation |
scheme liability |
scheme liability |
|
| £'m | £'m | £'m | £'m | £'m | £'m | £'m | |
| 1 February 2014 | 171.2 | (186.1) | (14.9) | 48.3 | (57.7) | (9.4) | (24.3) |
| Pension cost charge to income statement | |||||||
| Service cost | – | (5.6) | (5.6) | – | (0.1) | (0.1) | (5.7) |
| Net interest | 7.6 | (8.1) | (0.5) | 2.1 | (2.4) | (0.3) | (0.8) |
| Included in income statement | 7.6 | (13.7) | (6.1) | 2.1 | (2.5) | (0.4) | (6.5) |
| Benefits paid | (3.3) | 3.3 | – | (2.8) | 2.8 | – | – |
| Return on plan assets (excluding amounts | |||||||
| included in net interest expense) | 29.7 | – | 29.7 | 2.9 | – | 2.9 | 32.6 |
| Actuarial changes arising from changes | |||||||
| in demographic assumptions | – | (0.4) | (0.4) | – | (0.9) | (0.9) | (1.3) |
| Actuarial changes arising from changes | |||||||
| in financial assumptions | – | (47.0) | (47.0) | – | (10.4) | (10.4) | (57.4) |
| Experience adjustments | – | (8.7) | (8.7) | – | – | – | (8.7) |
| Sub-total included in other | 26.4 | (52.8) | (26.4) | 0.1 | (8.5) | (8.4) | (34.8) |
| comprehensive income | |||||||
| Contributions by employer | 7.1 | (0.1) | 7.0 | 3.5 | – | 3.5 | 10.5 |
| Reclassification to liabilities held for sale | – | – | – | (54.0) | 68.7 | 14.7 | 14.7 |
| 31 January 2015 | 212.3 | (252.7) | (40.4) | – | – | – | (40.4) |
The major categories of assets in the Saga scheme are as follows:
| 2016 £'m |
2015 £'m |
|
|---|---|---|
| Equities | 42.0 | 62.7 |
| Bonds | 117.1 | 117.0 |
| Property | 23.8 | 20.2 |
| Hedge funds | 33.7 | – |
| Cash and other | 2.0 | 12.4 |
| Total | 218.6 | 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).
The principal assumptions used in determining pension benefit obligations for the Saga scheme are shown below:
| 2016 | 2015 | |
|---|---|---|
| Real rate of increase in salaries | 0% | 0% |
| Real rate of increase of pensions in payment | 0% | 0% |
| Real rate of increase of pensions in deferment | 0% | 0% |
| Discount rate – Pensioner | 3.6% | 2.9% |
| Discount rate – Non Pensioner | 3.8% | 3.2% |
| Inflation – Pensioner | 3.0% | 2.6% |
| Inflation – Non Pensioner | 3.2% | 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 | Discount rate | Future inflation | Life expectancy | Future salary | ||
|---|---|---|---|---|---|---|
| Sensitivity | +/- 0.25% | +/- 0.25% | +/- 1 year | +/- 0.5% | ||
| Increase | Decrease | Increase | Decrease | |||
| Impact £m | (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.
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.
The analysis of gross and net insurance liabilities is as follows:
| 2016 £'m |
2015 £'m |
|
|---|---|---|
| Gross | ||
| Claims outstanding | 561.6 | 552.4 |
| Provision for unearned premiums | 141.7 | 152.3 |
| Total gross liabilities | 703.3 | 704.7 |
| 2016 £'m |
2015 £'m |
|
|---|---|---|
| Recoverable from reinsurers | ||
| Claims outstanding | 101.6 | 60.2 |
| Provision for unearned premiums | 4.8 | 3.2 |
| Total reinsurers' share of insurance liabilities | 106.4 | 63.4 |
| 2016 £'m |
2015 £'m |
|
|---|---|---|
| Net | ||
| Claims outstanding | 460.0 | 492.2 |
| Provision for unearned premiums | 136.9 | 149.1 |
| Total net insurance liabilities | 596.9 | 641.3 |
| Reconciliation of movements in claims outstanding | 2016 £'m |
2015 £'m |
|---|---|---|
| Gross claims outstanding at 1 February | 552.4 | 566.9 |
| Less: reinsurance claims outstanding | (60.2) | (58.3) |
| Net claims outstanding at 1 February | 492.2 | 508.6 |
| Gross claims incurred | 219.3 | 182.9 |
| Less: reinsurance recoveries | (44.4) | (3.6) |
| Net claims incurred (note 3b) | 174.9 | 179.3 |
| Gross claims paid | (210.1) | (197.4) |
| Less: received from reinsurance | 3.0 | 1.7 |
| Net claims paid | (207.1) | (195.7) |
| Gross claims outstanding at 31 January | 561.6 | 552.4 |
| Less: reinsurance claims outstanding | (101.6) | (60.2) |
| Net claims outstanding at 31 January | 460.0 | 492.2 |
| Reconciliation of movements in the provision for net unearned premiums | 2016 £'m |
2015 £'m |
| Gross unearned premiums at 1 February | 152.3 | 161.4 |
| Less: unearned reinsurance premiums | (3.2) | (4.2) |
| Net unearned premiums at 1 February | 149.1 | 157.2 |
| Gross premiums written | 312.0 | 324.2 |
| Less: outward reinsurance premium | (8.5) | (6.6) |
| Net premiums written | 303.5 | 317.6 |
| Gross premiums earned | (322.6) | (333.3) |
| Less reinsurance premium earned | 6.9 | 7.6 |
| Net premiums earned (note 3a) | (315.7) | (325.7) |
Gross unearned premiums at 31 January 141.7 152.3 Less: unearned reinsurance premiums (4.8) (3.2) Net unearned premiums at 31 January 136.9 149.1
The profit on purchasing reinsurance in 2016 was £37.5m (2015: £4.0m loss).
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
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%).
these claims.
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 | (5.5) | – | (9.2) | (11.0) | (1.2) | (3.2) | (3.0) | 27.8 | ||
| 2010 | 202.1 | – | (4.3) | (4.0) | (5.5) | (3.1) | (2.1) | 183.1 | (166.7) | 16.4 |
| 2011 | 266.0 | (2.8) | (5.2) | (4.6) | (13.3) | (7.2) | 232.9 | (200.9) | 32.0 | |
| 2012 | 302.3 | (25.6) | (31.1) | (0.6) | (17.3) | 227.7 | (195.4) | 32.3 | ||
| 2013 | 315.4 | (14.6) | (22.9) | (19.8) | 258.1 | (200.4) | 57.7 | |||
| 2014 | 276.8 | (14.7) | (23.4) | 238.7 | (161.2) | 77.5 | ||||
| 2015 | 219.1 | 5.3 | 224.4 | (138.8) | 85.6 | |||||
| 2016 | 220.9 | 220.9 | (101.1) | 119.8 | ||||||
| 196.6 | 266.0 | 286.0 | 269.6 | 219.8 | 161.3 | 153.4 | 449.1 | |||
| Claims handling costs | 9.0 | 10.1 | 15.6 | 17.4 | 17.2 | 18.0 | 21.5 | 10.9 | ||
| 205.6 | 276.1 | 301.6 | 287.0 | 237.0 | 179.3 | 174.9 | 460.0 |
The development of the associated loss ratios on the same basis is as follows:
| Financial Year ended 31 January | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | ||
| Accident Year | ||||||||
| 2010 | 73% | 73% | 72% | 70% | 68% | 67% | 66% | |
| 2011 | 78% | 78% | 76% | 75% | 71% | 69% | ||
| 2012 | 76% | 70% | 62% | 62% | 57% | |||
| 2013 | 75% | 72% | 66% | 62% | ||||
| 2014 | 75% | 71% | 65% | |||||
| 2015 | 67% | 69% | ||||||
| 2016 | 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).
| 2016 | 2015 | |
|---|---|---|
| £'m | £'m | |
| Current | 2.5 | 4.8 |
| Non-current | 1.5 | 1.1 |
| At 31 January | 4.0 | 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.
| 2016 £'m |
2015 £'m |
|
|---|---|---|
| Advance receipts | 113.0 | 122.3 |
| Deferred revenue | 12.7 | 7.0 |
| Group relief payable (note 9) | 7.6 | – |
| 133.3 | 129.3 | |
| Current | 133.2 | 129.0 |
| Non-current | 0.1 | 0.3 |
| 133.3 | 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.
| 2016 | 2015 | |
|---|---|---|
| £'m | £'m | |
| Bank loans | 480.0 | 700.0 |
| Revolving credit facility | 75.0 | – |
| Accrued interest payable | 0.6 | 3.4 |
| 555.6 | 703.4 | |
| Less: deferred issue costs | (7.9) | (11.2) |
| 547.7 | 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.
| Ordinary shares | |||
|---|---|---|---|
| Number | Nominal value £ |
Value £'m |
|
| Allotted, called up and fully paid | |||
| At 1 May 2014 | 800,000,000 | 0.01 | 8.0 |
| Issue of share capital on flotation | 310,705,405 | 0.01 | 3.1 |
| As at 31 January 2015 | 1,110,705,405 | 0.01 | 11.1 |
| Free shares allotted – 5 June 2015 | 7,300,000 | 0.01 | 0.1 |
| As at 31 January 2016 | 1,118,005,405 | 0.01 | 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).
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.
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.
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.
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.
The Group has granted a number of different equity-based awards to employees and customers which it has determined to be share-based payments:
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.
The table below summarises the movements in the number of share options outstanding for the Group and their weighted average exercise price:
| IPO Options | LTIP | DBP | Other options | Employee free shares |
Total | |
|---|---|---|---|---|---|---|
| At 1 February 2015 | 12,593,090 | 3,884,866 | – | 2,162,162 | – | 18,640,118 |
| Granted | – | 2,879,089 | 332,541 | 201,484 | 398,774 | 3,811,888 |
| Forfeited | – | (1,259,776) | – | – | (21,022) | (1,280,798) |
| Exercised | (5,973,991) | – | (76,448) | – | (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 | £nil | £nil | £1.69 | £nil | £0.25 |
| Exercisable at 31 January 2016 | 6,619,099 | – | – | – | 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.
| CFO options | CMO options | LTIP – EPS tranche |
LTIP – TSR tranche |
Employee free shares |
|
|---|---|---|---|---|---|
| Black | Share price at date |
Black | Black | ||
| Model used | Scholes | of grant | Scholes | Monte-Carlo | Scholes |
| Dividend yield (%) | n/a | n/a | n/a | n/a | n/a |
| Risk-free interest rate (%) | n/a | n/a | 0.96% | 0.96% | n/a |
| Expected life of share option | 0.97/1.97 years | 2.81 years | 3 years | 3 years | 3 years |
| Weighted average share price (£) | £1.89 | £2.02 | £2.20 | £2.20 | £2.16 |
| Share price volatility | n/a | n/a | 27.8% | 27.8% | 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.
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:
| Land and buildings | Plant and machinery | |||
|---|---|---|---|---|
| 2016 £'m |
2015 £'m |
2016 £'m |
2015 £'m |
|
| Within one year | 1.0 | 2.1 | 0.8 | 0.3 |
| Between one and five years | 3.3 | 6.2 | 1.6 | 1.8 |
| After five years | 4.8 | 7.2 | – | – |
| 9.1 | 15.5 | 2.4 | 2.1 |
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:
| 2016 | 2015 | |
|---|---|---|
| £'m | £'m | |
| Within one year | 0.5 | 0.1 |
| Between one and five years | 1.7 | 0.1 |
| Total minimum lease payments | 2.2 | 0.2 |
| Less amounts representing finance charge | (0.4) | – |
| Present value of minimum lease payments | 1.8 | 0.2 |
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.
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.
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:
| 2016 £'m |
2015 £'m |
|
|---|---|---|
| Loss after tax, before amortisation of acquired intangibles | (7.9) | (0.3) |
| Amortisation of associated acquired intangible assets | – | (10.4) |
| Loss on re-measurement of disposal group to fair value | – | (209.5) |
| Gain on disposal of discontinued operations | 1.0 | – |
| (6.9) | (220.2) |
The impact of the discontinued operation on the reported earnings per share was as follows:
| 2016 | 2015 | |
|---|---|---|
| Basic and diluted earnings per share from discontinued operations | (0.6p) | (21.9p) |
The gain on disposal of Allied Healthcare is as follows:
| £'m | |
|---|---|
| Cash consideration received | 10.1 |
| Fair value of other consideration receivable | 3.8 |
| Pension scheme contribution | (9.2) |
| Net assets disposed (including cash of £2.5m) | (3.1) |
| Costs of disposal not previously provided for | (0.6) |
| 1.0 |
The results of Allied Healthcare for the period are as follows:
| 2016 £'m |
2015 £'m |
|
|---|---|---|
| Revenue | 206.2 | 283.2 |
| Cost of sales | (149.2) | (199.8) |
| Gross profit | 57.0 | 83.4 |
| Administrative and selling expenses | (55.7) | (74.4) |
| Trading EBITDA | 1.3 | 9.0 |
| Depreciation and amortisation | (2.7) | (2.8) |
| Exceptional expenses | (6.4) | (8.4) |
| Net finance expense on retirement benefit schemes | (0.4) | (0.3) |
| Loss before tax | (8.2) | (2.5) |
| Tax expense | 0.3 | 2.2 |
| Loss for the period from discontinued operations | (7.9) | (0.3) |
| Attributable to: | ||
| Equity holders of the parent | (8.2) | (0.7) |
| Non-controlling interest | 0.3 | 0.4 |
| (7.9) | (0.3) |
The net cash flows of Allied Healthcare during the period to disposal are as follows:
| 2016 £'m |
2015 £'m |
|
|---|---|---|
| Operating | (12.2) | 3.6 |
| Investing | 0.1 | (3.5) |
| Financing | 8.4 | – |
| Net cash (outflow)/inflow | (3.7) | 0.1 |
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).
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 | England | Regulated investment products |
| Acromas Holidays Limited | England | Tour operating |
| Acromas Insurance Company Limited | Gibraltar | Insurance underwriting |
| Acromas Shipping Limited | England | Cruising |
| Acromas Transport Limited | England | Tour operating |
| Bel Jou (St Lucia) Limited | St Lucia | Hotel operator |
| Bennetts Biking Services Limited | England | Insurance services |
| CHMC Limited | England | Motor accident management |
| Destinology Limited | England | Tour operating |
| Direct Choice Insurance Services Limited | England | Insurance services |
| Enbrook Cruises Limited | England | Cruising |
| MetroMail Limited | England | Mailing house |
| Premium Funding Limited | England | Insurance services |
| Saga Cruises IV Limited | England | Cruising |
| Saga Cruises Limited | England | Cruising |
| Saga Healthcare Limited | England | Provision of domiciliary care |
| Saga Mid Co Limited | England | Debt service provider |
| Saga Property Company (St Lucia) Limited | St Lucia | Property Investment |
| Saga Publishing Limited | England | Publishing |
| Saga Services Limited | England | Insurance services |
| Titan Transport Limited | England | Tour operating |
| Acromas Holidays (USA) Inc. | USA | Holding company |
| Allied Healthcare International LLC | USA | Holding company |
| Automobile Association Travel Limited | England | Holding company |
| CHMC Holdings Limited | England | Holding company |
| Saga 200 Limited | England | Holding company |
| Saga 300 Limited | England | Holding company |
| Saga 400 Limited | England | Holding company |
| Saga Establecimientos Hoteleros, S.L. | Spain | Holding company |
| Saga Group Limited | England | Holding company |
| Saga Holdings Limited | England | Holding company |
| Saga Hotels (Caribbean) Limited | St Lucia | Holding company |
| Saga Leisure Limited | England | Holding company |
| Saga Overseas SL | Spain | Holding company |
| Saga Properties (Caribbean) Limited | St Lucia | Holding company |
| Saga Properties Limited | England | Holding company |
| Acromas Travel Limited | England | Dormant company |
| All Canada Limited | England | Dormant company |
| Canadian Connections Limited | England | Dormant company |
| Confident Services Limited | England | Dormant company |
| Name | Country of registration | Nature of business |
|---|---|---|
| Connections Worldwide Holidays Limited | England | Dormant company |
| Country Cousins (Horsham) Limited | England | Dormant company |
| Driveline Europe Limited | England | Dormant company |
| Driveline Travel Limited | England | Dormant company |
| Enbrook Services Limited | England | Dormant company |
| Grand Touring Club (France) Limited | England | Dormant company |
| Grand Touring Club Limited | England | Dormant company |
| Grandstand Sports Tours Limited | England | Dormant company |
| Grandstand Worldwide Limited | England | Dormant company |
| Inter-Church Travel Limited | England | Dormant company |
| New Zealand Connections Limited | England | Dormant company |
| Patricia White's Personal Home Care Limited | England | Dormant company |
| PEC Services Limited | England | Dormant company |
| Saga (International) Holidays Limited | England | Dormant company |
| Saga 500 Limited | England | Dormant company |
| Saga Coach Holidays Limited | England | Dormant company |
| Saga Communications Limited | England | Dormant company |
| Saga Cruises BDF Limited | England | Dormant company |
| Saga Cruises II Limited | England | Dormant company |
| Saga Cruises III Limited | England | Dormant company |
| Saga Cruises V Limited | England | Dormant company |
| Saga Cruises VI Limited | England | Dormant company |
| Saga Digital Radio Limited | England | Dormant company |
| Saga Financial Limited | England | Dormant company |
| Saga Financial Planning Limited | England | Dormant company |
| Saga Flights.com Limited | England | Dormant company |
| Saga Holidays Limited | England | Dormant company |
| Saga Homes Limited | England | Dormant company |
| Saga Independent Living Limited | England | Dormant company |
| Saga Investments Limited | England | Dormant company |
| Saga Media Limited | England | Dormant company |
| Saga Personal Finance Limited | England | Dormant company |
| Saga Property Management Limited | England | Dormant company |
| Saga Radio (North West) Limited | England | Dormant company |
| Saga Retirement Housing Limited | England | Dormant company |
| Saga Rose Limited | England | Dormant company |
| Saga Ruby Limited | England | Dormant company |
| Saga Shipping Company Limited | England | Dormant company |
| Saga Tours Limited | England | Dormant company |
| Saga Ventures Limited | England | Dormant company |
| Name | Country of registration | Nature of business |
|---|---|---|
| Saga Vitamins Limited | England | Dormant company |
| Spirit Of Adventure Cruises Limited | England | Dormant company |
| Spirit Of Adventure Holidays Limited | England | Dormant company |
| Spirit Of Adventure Limited | England | Dormant company |
| Tailor-Made Travel Limited | England | Dormant company |
| Taylor Price Insurance Services Limited | England | Dormant company |
| The Classic Traveller Limited | England | Dormant company |
| Titan Aviation Limited | England | Dormant company |
| Titan Connections Limited | England | Dormant company |
| Titan Connections To Australia Limited | England | Dormant company |
| Titan Connections To Italy Limited | England | Dormant company |
| Titan Hitours Limited | England | Dormant company |
| Titan Investment Property Company Limited | England | Dormant company |
| Titan Music Productions Limited | England | Dormant company |
| Titan Personal Finance Limited | England | Dormant company |
| Titan Specialist Tours Limited | England | Dormant company |
| Titan Travel Holdings Limited | England | Dormant company |
| Titan Travel Limited | England | Dormant company |
During the year, the Group held an interest in two joint ventures:
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.
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.
| Note | 2016 £'m |
2015 £'m |
|---|---|---|
| Non-current assets | ||
| 2 Investment in subsidiaries |
2,100.6 | 2,099.2 |
| Current assets | ||
| 3 Debtors |
0.9 | 0.2 |
| 4 Creditors – amounts falling due within one year |
114.1 | 33.8 |
| Net current liabilities | (113.2) | (33.6) |
| Net assets | 1,987.4 | 2,065.6 |
| Capital and reserves | ||
| 5 Called up share capital |
11.2 | 11.1 |
| Share premium account | 519.3 | 519.4 |
| Profit and loss reserve | 1,439.0 | 1,494.3 |
| Other reserves | 17.9 | 40.8 |
| Total shareholders' funds | 1,987.4 | 2,065.6 |
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.
| Share | |||||
|---|---|---|---|---|---|
| Called up share |
Share premium |
Retained | based payment |
Total | |
| capital | account | earnings | reserve | equity | |
| £'m | £'m | £'m | £'m | £'m | |
| At 2 May 2014 | 8.0 | – | 3,531.6 | – | 3,539.6 |
| Issue of share capital on flotation | 3.0 | 547.0 | – | – | 550.0 |
| Costs associated with issue of share capital | – | (27.6) | – | – | (27.6) |
| Issue of treasury shares | 0.1 | – | – | – | 0.1 |
| Loss for the period | – | – | (768.8) | – | (768.8) |
| Dividends paid | – | – | (1,269.5) | – | (1,269.5) |
| Share-based payment charge | – | – | – | 41.8 | 41.8 |
| Exercise of share options | – | – | 1.0 | (1.0) | – |
| At 31 January 2015 | 11.1 | 519.4 | 1,494.3 | 40.8 | 2,065.6 |
| Loss for the financial year | – | – | (8.8) | – | (8.8) |
| Bonus shares issued | 0.1 | (0.1) | – | – | – |
| Dividends | – | – | (70.4) | – | (70.4) |
| Share-based payment charge | – | – | – | 2.8 | 2.8 |
| Exercise of share options | – | – | 11.0 | (12.8) | (1.8) |
| Issue of free shares (note 5) | – | – | 12.9 | (12.9) | – |
| At 31 January 2016 | 11.2 | 519.3 | 1,439.0 | 17.7 | 1,987.4 |
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:
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.
Investments in Group undertakings are stated at the lower of cost and net realisable value.
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.
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.
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.
| £'m |
|---|
| 3,539.6 |
| 544.8 |
| 41.2 |
| 4,125.6 |
| 1.4 |
| 4,127.0 |
| – |
| 2,026.4 |
| 2,026.4 |
| – |
| Net book value | |
|---|---|
| At 31 January 2016 | 2,100.6 |
|---|---|
| At 31 January 2015 | 2,099.2 |
See note 35 to the consolidated financial statements for a list of the Company's investments.
| 2016 | 2015 | |
|---|---|---|
| £'m | £'m | |
| Deferred tax asset | 0.3 | 0.1 |
| Other debtors | 0.6 | 0.1 |
| 0.9 | 0.2 |
All amounts above are due in less than one year.
| 2016 | 2015 | |
|---|---|---|
| £'m | £'m | |
| Amounts owed to Group undertakings | 109.7 | 31.1 |
| Other creditors | 4.4 | 2.7 |
| 114.1 | 33.8 |
| Ordinary shares | |||||
|---|---|---|---|---|---|
| Number | Nominal value £ |
Value £'m |
|||
| Allotted, called up and fully paid | |||||
| At 1 May 2014 | 800,000,000 | 0.01 | 8.0 | ||
| Issue of share capital on flotation | 310,705,405 | 0.01 | 3.1 | ||
| As at 31 January 2015 | 1,110,705,405 | 0.01 | 11.1 | ||
| Free shares allotted – 5 June 2015 | 7,300,000 | 0.01 | 0.1 | ||
| As at 31 January 2016 | 1,118,005,405 | 0.01 | 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.
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.
| Note | UK GAAP £'m |
FRS 101 Re-classification/ re-measurements £'m |
FRS 101 £'m |
|
|---|---|---|---|---|
| Fixed assets | ||||
| Investment in subsidiaries | 2,099.2 | 2,099.2 | ||
| Current assets | ||||
| Debtors | 0.2 | 0.2 | ||
| Creditors – amounts falling due within one year | (a) | (33.8) | – | (33.8) |
| Net current liabilities | (33.6) | (33.6) | ||
| Net assets | 2,065.6 | 2,065.6 | ||
| Capital and reserves | ||||
| Called up share capital | 11.1 | 11.1 | ||
| Share premium account | 519.4 | 519.4 | ||
| Retained earnings | (a) | 1,494.3 | – | 1,494.3 |
| Share-based payment reserve | 40.8 | 40.8 | ||
| Shareholders' funds | 2,065.6 | 2,065.6 |
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).
2016 Annual General Meeting – 21 June 2016
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
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.
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.
London EC1A 1HO Goldman Sachs
Peterborough Court 133 Fleet Street London EC4A 2BB
FTI Consulting 200 Aldersgate Aldersgate Street London EC1A 4HD
Ernst & Young LLP 1 More London Riverside London SE1 2AF
Freshfields Bruckhaus Deringer LLP 65 Fleet Street London EG4Y 1HT
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.
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.
Saga Plc Enbrook Park Sandgate Folkestone Kent CT20 3SE
Information made available on the Group's websites does not, and is not intended to, form part of these Results.
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
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
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
Board Saga plc Board of Directors
Claims frequency the number of claims incurred divided by the number of policies earned in a given period
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
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
DBP Deferred Bonus Plan
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
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
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
Expense ratio the ratio of expenses incurred in selling and administering insurance underwritten (numerator) to the net earned premium (denominator) in a given period
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
Group the Saga plc group
Holidays passengers the number of passengers that have travelled on a Saga, Titan or Destinology holiday in a given 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
Leverage ratio the ratio of net debt to Trading EBITDA
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
Net earned premium earned premium net of any outward earned reinsurance premium paid
Net interest expense finance costs less finance income
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
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
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
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
Building tools?
Free accounts include 100 API calls/year for testing.
Have a question? We'll get back to you promptly.