Saga plc (SAGA) Earnings Call Transcript & Summary

Welcome to the Saga Interim Results Presentation for the 6 months to end of July 2022. I'm Euan Sutherland, Group Chief Executive; and I'm joined by James Quin, our Group CFO; and John Constable, our CEO of Saga Travel Group. I will give you an overview of the first half, then James will cover the usual financials. John will then update you on the great progress that he is making to grow our touring and holidays business. And finally, I'll give you a brief update on our strategy. I'm pleased to report that for the first half of the 2022-'23 financial year, Saga generated an underlying profit before tax of GBP 14 million, well ahead of consensus, compared with an underlying loss of GBP 2.8 million in the prior year. We expect to report underlying profit of between GBP 20 million and GBP 30 million at the year-end. Insurance market was challenged in the market, which is adjusting to the changes post FCA market study and experiencing high levels of claims inflation. We're approaching this market with pricing discipline and at the same time, we developed new products to meet the changing consumer demand. After allowing for the GBP 269 million impairment of Insurance goodwill, the group reported a loss before tax of GBP 257.5 million. That said, we achieved a much improved result within the Cruise and Travel businesses, as our businesses returned to more operating conditions and also growth in our personal finance business, Saga Money, following the relaunch of our new equity release product. We continue to have significant available cash of GBP 179 million following the resumption of our Ocean Cruise debt repayments earlier this year. Our strategy is to create the largest and fastest-growing commercial network for older people in the U.K., using the largest active pool of the most insightful data, building Saga into The Superbrand for this group. We aim to serve our customers not only once or twice a year with major purchases, but also once or twice a week with Saga Media and our new innovation. This combined business will drive significant revenue and profit growth, and the early steps are all well underway. On other metrics, customer Net Promoter Score is back in growth, our strengthened management team is in place and colleague engagement has grown again. So in more detail on the first half. Within our Cruise business, we're on track to achieve our 75% target load factor on Ocean Cruise, and we've enhanced our River Cruise operations. Half 1 load factor at 66% was impacted by COVID, while per diems were strong at GBP 318. Guest satisfaction was high despite COVID protocols and is increasing as we enter the second half, while the proportion of first-time buyers with Saga also remained high at 36%. Load factor for half 2 is forecast at 84%, with per diems expected to be at least GBP 320. In our Travel business, we've begun to see demand grow again, and we've launched a series of new products with more to come over the next few months. There's a significant innovation opportunity in the capital-light touring and holidays market, and the new team is making Saga Travel group more digital with greater customer choice, and lots more of that from John later. And Insurance overall policies in force grew by 3% in the first half, led by a resurgence of the travel insurance sales, while the motor insurance market continues to be challenging. We maintained a disciplined approach, protecting our margins rather than reducing pricing to win business. As a result of this, our Motor and Home policy sales were 8% lower than in the prior year. Our margin per policy was in line with 2020-'21 at GBP 74, and our direct share was 50%. Reserve releases in the first half were GBP 18 million and the combined operating ratio was 110%. I'll now hand over to James to cover more of the financial detail.

Good morning. I'm going to spend a few minutes providing an overview of our results and on the outlook for the second half of the year. Although both Insurance and Travel markets have been challenging in the first half, as expected, we returned to an underlying profit. The improvement from an underlying loss of GBP 3 million to an underlying profit of GBP 14 million is due to the resumption of Cruising and reduced loss from Saga Travel, also evidenced by a 65% increase in total revenue. This was partially offset by lower insurance profitability. This reduction in insurance profitability has led us to reevaluate the carrying value of goodwill associated with the Insurance business, as a result of which we've taken an impairment charge in the first half of GBP 269 million. This is based on prudent assumptions about the future cash generation of the Insurance business. There were no material other non-operating items. Available operating cash of GBP 31.5 million was around GBP 10 million below the level of the prior period, which included significant positive working capital movements in both Cruise and Insurance. After taking into account interest payments and non-operating cash flows, debt -- net debt reduced by GBP 8 million compared to the position at the 31st of January 2022, and return to an underlying profit has led to an improvement in the overall group leverage ratio. On the next slide, I set out underlying profit before tax by business unit. The Insurance result reduced from a profit of GBP 69 million to GBP 52 million, mainly due to a GBP 15 million reduction in underwriting profits, which I will come back to shortly. For the Cruise and Travel businesses, losses reduced from GBP 51 million in the prior period to GBP 12 million in the first half. In the first half of the prior year, we were largely in suspension mode. We restarted Cruise last June, and we started to see a significant pickup as well in River Cruise and Saga Travel. Our goal now is to continue the recovery from the pandemic and get these businesses back into profit. Net Central Costs increased, mainly due to lower recharges to the business units and higher interest costs following the bond refinancing last July. I'll go into more detail on the moving parts of retail broking results on the next slide. Motor and Home written profits reduced by GBP 6.4 million for the first half, with the renewals contributing -- reducing by GBP 9.7 million post implementation of the new pricing regime, partially offset by a GBP 3.3 million improvement in new business profits. The average margin per policy across Motor and Home of around GBP 74 was broadly in line with the prior period. This, however, is somewhat distorted by a significant reduction in new business sales, and on a like-for-like basis in terms of mix, the average margin in the first half would have been around GBP 5 lower. Partly offsetting the reduction in Motor and Home profits, sales of travel insurance have picked up strongly, and that led to a GBP 4.8 million increase in travel insurance contribution. This has been a challenging period for the industry, and on the next slide, I set out the impact this is likely to have on our future earnings, and what we are doing to reposition the Insurance business. While our customer retention levels have been good and improving, new business volumes for Motor and Home in the first half were significantly lower than the prior period, with Motor new business half the level of 2021 and Home new business sales down by around 20%. This is a function of a very competitive market for new business and different pricing strategies between Insurance competitors. For us as well, we have been mindful of our waiting to our 3-year fixed product and the need to think ahead in pricing at a time of high inflation. Given the new regulatory regime, we need to stay disciplined in how we price this product since cutting prices to win new business would mean also cutting price for new customers, too. The impact this has had on in-year profit is limited, so it's even post the pricing reforms, our margins on new business are low given the acquisition costs incurred to get the business on our books. However, lower new business sales in the current year obviously also means lower renewals in future years. And so over time, a material reduction in new business will impact on profits, particularly given the large element of our costs are fixed. We have, therefore, assessed our options here, considering also various scenarios for how the competitive environment for the industry will evolve. Our response has been built around the need to have a wider range of products, and in particular, to launch a new standard product aimed at a lower price point in the market. This, we believe, will, over time, enable us to build our new business volumes back to previous levels, albeit at a lower margin than the level we had previously anticipated. Forward-looking predictions here are not easy, but looking ahead to the '23-'24 year, we quantified the margin impact in our July trading statement at around GBP 15 per policy on average, which equates to a roughly GBP 20 million impact on profit before tax. This reduction in profit before tax has also led us to reevaluate the carrying value of insurance goodwill. Based on our revised projections and incorporating some fairly significant downside scenarios, we have taken a GBP 269 million impairment of goodwill in our first half results. On the next slide, I set out the underwriting results for the first half of the year. AICL profit before tax reduced from GBP 31 million to GBP 16 million due to a significant change in the current year combined ratio, which moved from 88% in the prior period to 110% in the first half of 2022. We expect the second half to be at a similar level. While the prior year benefited from much-reduced motor claims frequency in February and March 2021, the current year has been impacted by a significant increase in claims inflation, which I will come back to shortly. In terms of reserve movements, we've taken steps to align our best estimate reserves with the levels we expect to hold post the implementation of IFRS 17. This was an expected step, and as a result, we expect to see much lower basis reserve changes in the future than in the past. This is consistent with our previous indication that we would expect the reported combined ratio, including reserve releases, to be around 97%. Our overall reserve margin, that is the level of reserves held above best estimate, reduced slightly during the period, mainly due to our release of a prudent provision established against the 2020-'21 accident year. We continue to have a healthy level of reserve margin, incorporating also updated assumptions for future claims inflation within our reserves. Clearly, for all insurers, claims inflation has been a challenge. And I set out on the next slide what we have seen and the impact this is expected to have on us. In our trading update in July, we signaled that claims inflation was running at high single digits. Since then, we have seen a level of further increase, and we now estimate claims inflation to be running at around 13%. We have also seen some second-order consequences of current economic challenges in terms of extended repair times, scarcity and cost of labor and longer periods of credit hire, which have changed and extended claims settlement patterns and put further pressure on our current year results. Our base case assumption now is that this level of inflation may increase above 13% for a short period before starting to reduce down to more normal levels. We're responding to this in AICL by increasing net rates to enable us to achieve technical profitability hurdles, and we've also reevaluated our reserving to reflect these updated assumptions as to both current and prospective inflation. In addition to pricing, we are taking extensive mitigation actions to manage claims costs and improve the customer experience, including transition to a new network repair partner in the second half. One question I'm expecting people have is on what this means for our 3-year fixed product. Naturally, there is some level of margin impact in a period of higher inflation, but we see our 3-year margins as remaining robust even in the current environment. That is partly a function of the fact that it is, by its nature, a higher-margin product. But more importantly, we have been consistent in using prudent assumptions for inflation in our pricing and planning. In terms of financial impact, we've considered the current inflationary environment in our assessment of insurance goodwill. In terms of the current year, this is the reason for the change in our underlying profit before tax forecast from a range of GBP 35 million to GBP 50 million to GBP 20 million to GBP 30 million. Overall, for Insurance, this has been a challenging period, but these challenges are evident across many of our competitors, too. This is, by its nature, a cyclical business, and the key point for us is to remain disciplined, to be agile in how we respond during this phase of the cycle. Turning now to our Cruise and Travel operations. As mentioned earlier, we've seen a significant reduction in the loss from our Travel operations during the first half as the businesses have started to recover from COVID suspensions. In Ocean Cruise, our load factor for the first half was 66%, broadly consistent with the results for the second half of last year. The early part of the '22-'23 year was fairly challenging, with an adverse impact from COVID on 2 cruises in March and April, and then the impact of Ukraine impacting demand for departures to the Baltics. These factors are expected to be temporary, and we expect the load factor to be close to our run rate level of around 85%, as a result of which we see a full year load factor of around 75%, consistent with our July trading update. Bookings for next year are also strong, with a booked load factor of 42%. While lower than the 60% level of 1 year ago, that figure benefited significantly from bookings rolled over from 2020 and 2021. In terms of Travel and River cruise, we had around 27,000 passengers traveling with us in the first half compared to around 1,000 in the first half of 2021-'22. That has enabled us to report a significantly lower loss than in the prior period. As also indicated in our trading update from July, we expect the Travel and Rivers businesses to report a small loss for the year, but with every expectation that we'll be back in profit from next year. On the next few slides, I'll provide an update on changes in net debt in the first half. Operating cash, excluding Cruise and Travel, was GBP 31 million in the first half. Below the GBP 52 million in the prior period, which benefited from around GBP 12 million working capital inflow in relation to Insurance. Cash support to River Cruise and Travel significantly improved, from a cash contribution of GBP 20 million in the prior period to GBP 13 million in the current year as the losses in this business reduced. Ocean Cruise was also positive, including the interest cost on the ship debt. In aggregate, net debt reduced by GBP 8 million in the first half despite the challenging backdrop, and we expect a similar level of reduction in the second half. Looking beyond this year, I set out an update of our expected net debt trajectory on the next slide. Our financial modeling includes prudent allowance for downside risks to Cruise and Insurance based on certain adverse scenarios. We've updated these scenarios and now include a less severe downside for Travel, albeit we also include a lower expectation for the Insurance business based on the current operating environment and outlook. In aggregate, we expect the pace of deleveraging to be slightly slower than previously projected. And then maybe 2025 or 2026, until we achieve our goal of reducing net debt to below 3.5x EBITDA. Nonetheless, we will continue to maintain significant liquidity ahead of our 2024 bond maturity, our debt's reducing and will continue to reduce over time. I appreciate that there's always a lot of information to digest in these presentations, so we've included in the appendix a summary of our guidance for the '22-'23 financial year. With that, I'll hand over to John, who will talk you through the plans for the Saga Travel group.

Thank you, James, and good morning. I'm delighted to share with you the plans for our Travel business after taking responsibility for the business unit around 6 months ago, following 30 years in the Travel industry, and most recently with Helloworld based in Melbourne, Australia. We have looked at how we can transform Saga to be the travel provider for the experienced traveler. We know that in the U.K., there are 15.8 million travelers over the age of 50. And before the pandemic, they were traveling on average 3.3 trips per year. Our biggest opportunity is changing the perception so that Saga is a brand for me, with Travel paying a large part in our journey becoming a Superbrand for the older people. We already have an extensive escorted touring program, but for us, bringing wider product range by our digital and more dynamic platform is essential for the growth journey. We spent time talking to our customers and gaining insight into their travel requirements. What is loud and clear is that the historic offering, whilst enjoyed, is narrow, and widening it along with introducing increased flexibility makes it much more attractive. Flexibility and the move away from everything organized tested well with a younger customer group, but it was very clear that the support of our brand whilst traveling adds real confidence and trust. No matter what happens, someone will be there to support. When specifically talking through some of our new product ideas, the remarks from both customers and non-customers have been extremely positive and really demonstrate that we're addressing the opportunity of turning Saga into the go-to travel brand for this group. We know that our customers are very positive about the support Saga offers whilst traveling, so we stepped this up to a new level. No matter what is booked, all of our customers will have access to our exceptional departure experience, which now includes home pickup, lounge access at all U.K. airports, fast track security, where possible, allowing customers to relax prior to their departure, local representative service whilst traveling, along with 24/7 access to our support center, giving customers peace of mind that they are well supported. Leveraging our own transport service to deliver this, our research tells us this new offering is something our customers truly value. Simplifying our operating model has been and continues to be a key focus. We've made great inroads already, removing complications with our systems so that we have an operating model that can be easily scaled. We've also introduced for the first time outsourced non-customer-facing capability to allow us to handle back office processes efficiently and build on learnings from the last few years to be in a place to scale fast should we need to for unexpected administration volumes. Our local travel adviser model, which is to launch in the next quarter, is an exciting new offering that will bring the planning process closer to our customers with the community of experts that, again, can provide support to our contact centers should it be needed. In June, we launched our enhanced touring offering, allowing both our Titan and Saga customers to benefit from 134 touring itineraries, our largest offering of tours to date. We've also reviewed our hosted hotel stays program and focused it on products that our customers want, including new levels of flexibility around excursions. As mentioned earlier, we know there is a large market opportunity both in Europe and long haul and have developed a curated range of products that connect to dynamic air and land content to deliver a more flexible and tailor-made product range for our customers. We have a goal to grow our Travel business to over 300,000 passengers via increased activity with our growing consented database through digital media and light direct mail as the key demand drivers versus our historic costly and static brochures. Tailor-made by Saga is our new product range launching today. This new and exciting range allows us to bring products to our customers in a style they want, creating their holiday how they want it and when they want to travel. The curated product range brings an exciting new categories to life in a way that we can continue to build on dynamically rather than waiting for annualized brochure cycles. October, we'll see the launch of a weekly flash sale product, which again brings a level of flexibility in terms of departure dates and durations, but will really support our customers who want to and can travel at short notice for incredible value. We also recently launched a new look website that brings some of this range to life and will continue to be built upon. Many of our products are also bookable online, and we will enhance this over the coming few months with more products becoming fully bookable. We talked to both our customers and non-customers to inform our product development. In Touring, it was clear that it appeals to those who want an adventurous experience where everything is taken care of, and with a general focus on destinations where customers are not confident to arrange themselves or travel independently. Importantly, our tour managers pay a large part in our customers' intent to repeat bookings. We are reviewing in development our recruitment and training of this important community of colleagues, along with adding digital tools that will enhance our customers' experience on tour. We will continue to keep touring product market leading through innovation and introduction of flexibility along with increasing distribution to some already-identified international markets. One of our early innovations is our exciting new premium jet touring service. This new product allows customers to experience interesting places in a luxurious and hassle-free way to travel. No flight longer than 5 hours, enough time to relax and enjoy a world-class meal, direct to your next destination, with the airport experience mirroring that of traveling by private jet. This new product has only been on sale for 2 months and today is 70% sold. We are now planning a series of jet tours to launch shortly with contribution of GBP 2 million to GBP 3 million in profit on an annual basis from '24-'25. Innovation is key to attracting new customers and keeping our valued existing customers engaged with our brand. We have already identified some new areas of development that will not only include expansion of destinations that we serve, but categories such as the experience gap year, traveling with purpose. And indeed, with the growing trend of families enjoying holiday time together, a multigenerational holiday offering is currently being developed. This thinking puts our customers at the heart of product on the back of detailed insight and research with our insights team at the Big Window, and the model allows for continued development of the range. As we move through the coming years, we will deliver a fully personalized proposition, which not only adds value with our unique exceptional departure experience that pivots our current model, creating breadth relevant to the older generation. This will shift our mix as we go forward, whilst continuing to grow both our escorted touring and hosted hotel stays program, our tailor-made holidays offers a new category with significant growth opportunity. I'll now hand back to Euan.

Thank you, John. And now, to update briefly on our strategy. Our aim is to become the largest and fastest-growing commercial network for older people in the U.K. by leveraging the largest active pool of the most insightful data on our customers. Saga will become The Superbrand, famous for delivering exceptional experiences every day, building confidence and connections with our customers. Our formula for every colleague inside our business is simple, E-cubed equals R-squared. Delivering exceptional experiences every day will result in customers returning and recommending us. Our priority is to add to our largely once-a-year product sales opportunity with higher frequency and higher engagement products and services for our experienced customers. This means Saga will be an important part of our customers' lives every day. In March 2022, we set out our approach, which we believe will achieve just that. This growth plan will see us focused on the following 3 priorities: maximizing our existing businesses of Cruise, Travel, Money and Insurance; step changing our ability to scale the business while lowering our debt; and creating The Superbrand for older people. This is underpinned by our passion for creating exceptional experiences every day for our customers and for our colleagues. Our commitment, energy and enthusiasm for this plan remains despite short-term headwinds facing the wider economy and the Insurance industry, in particular. To help navigate how we see the strategy evolving for Saga, we've laid out how to think about the next year, the next 5 years and 10-year periods on this slide. The pie chart represents the scale and proportion of PBT in our businesses over time. Today, our business is dominated by Insurance in PBT terms, and therefore, it's clearly an important source of profit and cash. The Insurance market has lower growth expectations, increasing regulation and generally lower frequency, lower engagement customers than our other Saga businesses. We are changing the mix and the scale of what we do. As we rebuild the Saga business and become The Superbrand for older people, we will grow Other Businesses on the base of earnings from Insurance, while still growing our broking business. The shape and size of our business will, therefore, change. This is evident next year with significant PBT growth in Cruise and in Travel, balancing lower growth expectations in Insurance. We are resourced in our new markets of media and money, and have refocused back on customers and our database as part of our core DNA. In the next 5 years, the next pie chart along on this slide, the changing shape of Saga PBT is cemented further as we move towards a more capital-light model. Cruise and Travel will have driven significant growth in revenues and profit, accounting for more than 50% of our group PBT by 2027, while we scale the Media and Money businesses. This will still be built on the base of Insurance, which, by 2027, will represent just less than 50% of our PBT. Looking ahead to years 5 to 10, we will leverage the growth across all of our businesses to drive daily products and services to our customers. With larger businesses in Cruise and Travel, we see Media scaling to become a significant contributor to PBT, alongside a bigger Money business, and Insurance still growing will represent 1/3 of the PBT in the group. Throughout this period and starting in quarter 4 this year, we build our customer lifetime value model based on maximizing our customer database. The strategy evolution will see a significantly stronger, more sustainable and highly engaged business, with loyal customers purchasing regularly from us as we develop and achieve exceptional experiences for them every day. The scale of the pie chart shows our ambition for PBT growth, and this growth starts from here. So it's good early progress in half 1, and we're making progress towards this in the first half of the year. Customer NPS has improved again to 50, up 3 percentage points year-on-year. Colleague engagement has improved again to 8 out of 10. And we've recruited new leaders in Saga Money, Saga Media and in Data. Our recently-launched weekly email magazine has topped over 500,000 readers every week and is growing. And in our latest research, we've identified 8 distinct customer segments that categorize the population of people over 50. The people within each segment have different attitudes towards aging, the use of technology, what they class as good value, and importantly, how they see Saga. In support of this, we've been proactively obtaining consent from customers to contact them with new products and offers. Volumes of consent and re-consent for the first half of the year were more than 350% higher than the previous year, which puts us on track to deliver over 3 million new product consent by the end of the year. A key metric we will use to measure our success in becoming a Superbrand is our ability to sell multiple products to a single customer, what we're calling cross-selling. This represents a significant opportunity for Saga as we continue to enhance our data and our insights. We've included our current cross-sell performance within Insurance and Cruise here as a starting point. So overall, a good first half for our long-term goals. So what's next for 2022-2023? Looking forward to our outlook for the second half, we captured the key points here. Cruise is set for a strong second half, with load factor forecast to be 84% and a full year on plan for the 2023-'24 pipeline is building well. We are excited about the relaunch of Travel, with touring and holidays in growth for the second half and into '23-'24. In Insurance, we'll be implementing a new retail pricing system for Home, which will allow us to optimize our customer pricing. Jerry is preparing his plans for Saga Money, and we expect to see early innovation through the second half of this year. The Saga Media team are in place, and we will update the market in detail on the strategy for this business at the Capital Markets event in January. Consent capture is on track to grow the database by 3 million product consents this year, and we'll begin our work on customer lifetime value in quarter 4. Insights is taking new segmentation to all businesses in the second half, along with delivering an all-colleague insight program to improve everyone's understanding of our key customer needs. And given the inflationary pressure on household budgets, all frontline colleagues have been awarded a top-up pay award to ensure they have had, on average, an 11% pay rise this year, while all managers below leadership group have received a 7.5% rise. So in conclusion, while it's clear that we cannot control some of the challenges within the broader external environment, I'm confident that we're in a strong position to navigate them, while evolving the business plan for long-term profit growth. With the launch of our new growth plan, our strengthened leadership team and our exceptional colleagues, we will return Saga to sustainable growth. We expect to see further growth in '23-'24 from our Cruise and Travel businesses, while we stabilize the Insurance business and begin to scale up Saga Media and Saga Money. The team is in place to lead our strategy and to grow our customer numbers, revenue and profit from here to build the largest and fastest-growing commercial network of The Superbrand for older people. Thank you. And I take your questions from the room first, and then move up on to those online. Thank you.

Ben Cohen, Investec here. I just had a couple of questions on the Cruise and Travel. You set out, I guess, some new plans in terms of Travel. What does that mean in terms of revenue growth and the kind of margin that you think you're going to be able to earn across the division, maybe in the context of how you've done historically pre-COVID? And a similar question really in terms of Cruise. You clearly have ambitions to earn more profit from that business. You have 2 cruise ships. Can you talk about how you see that scaling? And maybe also you could address the risks around inflation and how you're dealing with those?

Sure. Thanks, Ben. I'll get John to come in and give some more detail on the Travel plan as he's here. But I guess, standing back from both businesses, they are completely new businesses coming out of the pandemic. So brand-new ships on Ocean, brand-new ships on River, brand-new product set within touring and within holidays, so it's actually -- we've called it an evolutionary change. It's quite a revolution in terms of their customer attractiveness. Revenue and margin growth in Ocean and Rivers is pretty significant, as we've shown in the pie chart evolution in the middle of the pack. That's driven by a lot of confidence in the load factor and per diems that we're achieving this year post the pandemic. I think it's fair to say that looking at the competitor data that we can see, that Saga Cruising has probably had the most successful return to service of any cruise line partly to do with the technology and the hardware, both in terms of its capability and also in terms of its size. So we have more space per customer than pretty much any other cruise line, apart from the very top-end cruise lines. So confidence in the Cruise business delivering the revenue and margins in the 5-year plan and becoming a very significant part of the group PBT growth. We also come away from some of the margin drags that we've had, the COVID protocol drags, the single household travel to the port drag, so there's some pretty significant costs that we've had to bear in the last year or so post-pandemic. In terms of inflation on Cruise, we're hedged on fuel and all dollar exposures through to the end of '23. We've also -- we're also hedged on fuel into the beginning of 2024. So a lot of that business is within our sight. On other consumables, on board that option, then we are successfully taking price with an increase in per diems with great value for money for our customers to offset that inflation, so we're in a pretty good place. In headline terms, and I'll get John to comment in detail about Travel. I think it is a radically new business. And if you go on to the web today, you will see a very different business, customer-centric, digital, a much wider product set that we'll see lots of innovation. John has talked about a couple of those innovations, which are already starting to bear fruit. We are seeing increased cost pressures through the travel industry. We are successfully passing those on as we add a premium element to our business. But it's very difficult for us to compare pre-pandemic product offer, which was largely brochure-based static, to a new digital setup. And perhaps, John, you want to...

Yes. Thank you, Euan. I think -- I mean, in terms of our revenue growth going forward, I think we're very confident with the numbers we have in our 5-year plan, which are largely centered around the product that we have, the touring product and the hosted hotel stays. The growth opportunity beyond that is in the tailor-made, where we will see actually the transactional margins slightly lower than we see our touring model. However, the volumes will heavily compensate from that. And then on top of that, we have our private jet touring program, which we think will add a significant chunk to revenues as well.

Alex Evans, Credit Suisse. So firstly, just on combined ratio guidance. You're saying sort of broadly flat full year, does that mean you're seeing sort of an underlying improvement or that's what you're penciling in, and then you have the impact of earned premiums coming down. So actually, you're a little bit more optimistic relative to where you are at the moment? And then secondly, just on where your guidance sits relative to peers. You're at the top end of where they've been pacing a little bit more optimistic in the second half, given used car prices are coming down. Could you just explain sort of why you're seeing less geared to that? And the rationale change or the rationale behind changing of your network repair? Is there something that's been going on there? And then finally, just on the E-cubed equals R-squared, how does that translate to Insurance? Obviously, that's one of the biggest parts of earnings, but isn't this about being price competitive and especially in these markets?

Great. Thank you. There's lots in there. Let me kind of start from the bottom and work up, and bring James in on the core operating ratio. The -- so E-cubed equals R-squared, this is about giving our customers the safety and security of having a great quality service. As part of that, it's obviously value for money. It's a key consideration, especially within Motor. If you look into some of our other Insurance products, Home, PMI, et cetera, it is about the service as well as the price. Our NPS in claims is amongst the highest in the market today, so we would point to that. There is a program on ops improvement that's been underway for the last year, which is coming through and improving our customer contact, digital journeys as well as off-line journeys, too. So a big investment and move to deliver the E-cubed to R-squared promise to our customers and Insurance to as a company-wide initiative. Do you want to pick up the operating ratio point and the repair network?

Yes. So I think in terms of the second half, the current year combined ratio will probably be similar. So less -- so when I was talking about the sort of what we expect in the second half, it was just the current year rather than all in combined ratio. So I think we will see lower reserve releases in the second half relative to the first half, but the current year combined ratio will be about the same.

Is that -- does that not imply so improvement because you're earning through decreases in written premiums that you've already had?

Yes. So it's just the pace at which the earned premium changes, so the vast majority of -- 2 things really. One is the net rate increases that we're putting through. We are sort of bleeding them in over the second half. So it's not like we've gone all in, in September or whatever in terms of repricing the book. So we're putting through steady price increases by the end of the year. We'll get the technical profitability to be where it should be, so that's probably the reason I think that you see that the second half combined ratio would still be similar into the current year versus the first half. It should be a little bit better, to be fair, but it will be in the ballpark. I think the question versus peers, is that in terms of inflation, current year combine ratio or inflation or...

Inflation guidance of what people have said, roughly 10% to 12% at recent 1H. Obviously, you've moved up to 13%.

So there may be a timing element in that. I think -- I mean, in a sense, calling it at 13%, I mean, there's an element of slightly spurious -- I mean, this is not a precise science. There's a range around inflation as it happens at the moment because we're obviously living in real time. So our sense is that it is a bit higher than we thought it was back in June and July, which is why the change in guidance. And I think what our assumption is as well as being a bit higher, it will probably go on for a bit longer as well. So rather than having a sort of short-term spike of around 10% and then coming down, our assumption is that it will stay reasonably high through this year and possibly into next year. So it's more about the persistency of it, I think, than the absolute level. And in terms of the change in the repair network, this was -- it was just a contract that was up for renewal. We went out to tender, and we have selected a new network repair mainly based on customer service.

And that's happening now. So that will be in by November, and the used car price reduction is factored in as well.

If I could just follow up on reserve releases, if that's okay? So I think you had a 12% reserve strengthening relative to 2022 accident year. How do you view that in the second half? If you're saying inflation might be increasing more, what are the assumptions on wages that you have and where were they before that?

So what we've looked to do is to take a prospective view of where we think inflation is going as well as just react to what we see today. So the reserve strengthening that you see on the last accident year is effectively that in a prospective sense. So thinking ahead as to what we think inflation is running at and will continue to run at, in terms of what we think those claims will then settle at. So it is trying to think ahead rather than just respond to what we might be seeing today.

Yes. Just on cash flow and liquidity, the Insurance business has been giving you good dividends over the last few years. You managed to get another GBP 15 million out of the sort of capital of the Insurance business in the first half. As you should have gradually progressed towards that 97% combined ratio, what was the scope for the Insurance business to be able to support the cash of the group going forward via dividends? And assuming that it's going to come down, what are your plans to replenish that? Is that all going to come from the Travel, maybe Tour business, or do you have other options to replace that? And on the cash injections in Travel, they've been high over the last few years. There's another sort of GBP 13 million in the first half. Are you planning further cash injections into Travel going forward? Or is this now sort of this is done, and going forward, those cash injections should disappear? And then finally on growth. Are you still assuming Saga as a group, so a very high level will be able to grow its customer numbers in line with the demographic? Is that still an ambition?

Perhaps if I just pick that one up. Then there's quite a lot on cash and liquidity, James, do you want to pick those up? We -- so we've been investing in the database over the last couple of years. We've done all the technical changes. We have a new Chief Data Officer starting on Monday. We are very confident that we can increase the Saga database ahead of the growth in the demographic. Demographic is growing at about 2% per annum at the moment. The move into Media and the concept called Saga Village, which is an online community platform, which we'll talk about probably at the next update. Early pilots in that and early numbers indicate a very rich opportunity in increasing both customer numbers and the frequency and engagement of customer interactions. So building out subscription models as well as capturing customer eyeballs and customer interest up to daily from the once or twice a year. So within that, that business, as you probably saw on the pie chart again, has lower PBT deliverables in the next few years, but a very significant PBT deliverable as you go further out. It's because we capture the audience first, we drive revenue in second, and then we absolutely monetize the profitability out of that. The Media model, which is the main driver of that, will drive profitability as well as customer numbers through advertising revenue, affiliate revenues, brand revenues and events, very similar to some of the other digital media players in the market today. The particular area that we believe that we can win is that nobody is really pointing at our demographic with a particular set of offers that is right for them. So -- and answer in short term to your kind of can we grow the customer database, we're pretty confident that we've got measures in place now that will grow it and grow it ahead of a demographic. On cash and liquidity, do you want to...

Yes. So you're right. I mean, I think cash dividends from AICL will -- I mean, they're going to track earnings within some tolerance levels. So once we're down to the sort of more run rate levels that we've been pointing to, then cash dividends from AICL will also be in line, I would say, with that sort of level of earnings. Cash injections into Travel have been, I think, in some respects, a function of us restarting the business. And I mean, as you probably know, we are within a trust setup, which means that all cash that comes in from customers is essentially parked in a separate trust, and we can't touch that essentially until we get customers to come back from holiday. What that means is the business sort of ramps up. There is -- there has been a small, I would say, essentially working capital absorption within that business. But I certainly don't see that as an ongoing feature. And certainly, as we look into next year, that business needs to essentially translate profits into distributable earnings. So it would be nice to see some cash coming back out, put it that way.

It's Nick Johnson from Numis. A few questions, please. Firstly, on claims inflation. You say you've looked ahead on this as best you can. Just wondering if you factored in the impact of weak sterling on car parts, et cetera? Sorry to ask that. Second question on Cruise. Wonder if you could just say what level of repeat book -- sorry, repeat customers you're seeing for '23-'24 in Ocean Cruise? Thirdly, on Motor, you said that the direct share is 50%, which is I'm guessing probably a bit lower than you'd like it to be. Perhaps if you could just talk a bit about the channel dynamics at the moment? And then lastly, on Motor, just wondering what you could -- sorry, what you're seeing on market pricing in Motor at the moment? Are you seeing a rational response to inflation in the market, or are prices lagging? I guess your panel gives you quite a good insight into market behavior.

Great. Thanks. Perhaps I work from the bottom up. So the latest intelligence on Motor market pricing around the panel, et cetera, is that we are seeing some movement in the last 3 months, so a more rational response to that. Some of that is coming through already, some of that we think is going to continue to come through. So from what we can see and what Steve and the team in Insurance can see, that is starting to come through. On direct share, you're right. We wanted to be more than 50%. We do our best work when we have a direct relationship with all of our customers in all of our businesses. So rebuilding that direct share back up beyond 50% is definitely the intent, and is something that Steve has very much front and center of his plans. Cruise repeat customers versus new customers, about 60-40, so we're seeing a kind of consistent repeat customer, about 60% new customers, around 40% coming through, which is pretty healthy. As we go further out, we're seeing our new customers becoming repeat customers. So there's a healthy pipeline also between those 2 dynamics. On claims inflation, weak sterling, have we built into the model...

We've already foreseen sterling where it is. But I mean, I think when we were looking ahead, we were, I think, trying to be quite prudent. So while I don't think we necessarily had the pound at GBP 1.07 or GBP 1.08, wherever it is right now, I think overall, we were being reasonably prudent about what we expected from here. So we actually did expect inflation to go up in the short term before it comes down again. So I would never want to say we've got it covered, but I think we have looked, too, I think, ahead.

Great. Emily, shall we go to questions from online? Sorry, we've got one more here, then we'll go there.

Can I just -- sorry. Can I ask you that if you have any conversation with the rating agencies post your July update and this current update? And also, if you could throw light on how you see your capital structure look like? I know you have put in a debt leverage reaching 3x to 3.5x in January '25 and '26, but what are your thoughts on the capital structure to fund your E3 is equal to R-square business model?

James, you want to pick up the rating agency?

Yes. So we did have conversations with the rating agencies a few -- looking at current treasurer, about a couple of months ago, I think, from memory.

We spoke to them last time we updated the RCF amendment, where we [indiscernible].

I think you need a mic actually, Mark. Sorry, you have to do that again because people online won't be able to hear.

So last time we spoke to the rating agencies and gave them a full updates was when we did the RCF amendment earlier this year. We -- clearly, every time we do a public announcement, we'll update our banks and the rating agencies. And so after this half year update, we'll give them another full update as well.

So yes. I mean, we haven't had a conversation with them since, obviously, we published the results today. But I mean, the reason they're pretty up to speed with everything else that has been happening. I think in terms of the capital structure, I mean, clearly, we've been pretty consistent for several years now in saying that the goal here is clearly to get the debt down to lower levels. And obviously, I think also recognizing that at the point in time where we took delivery of the ships, the debt was going to peak. And as you can see, over the next couple of years in our debt chart, getting the ship debt down to a lower level is obviously something that we're fully committed to, and most of that comes from the cash that comes from running the ships. And then clearly, the goal is to run with less than GBP 400 million of gross debt as well. So I mean, I think that is the goal. I mean, I think -- and clearly, that takes precedence over dividends until we've got the net debt down to meaningfully lower levels.

Great. Thanks. Let's go to the online questions, Emily.

We've had a couple of questions about the 2024 bond. The first is from [ Juan Carrion ] from Mirabaud, who asks us to confirm our intention to redeem the '24 bond maturity with balance sheet cash? Then on the same topic, [ Mark Dow ] from Bluebay asked how we'd refinance the 2024 bond, assuming that the high-yield bond market would be shut?

So yes, we are still intending to pay down that bond from cash. We've got plenty of available cash today, and businesses back into growth. So yes, that's quite a bit away and still confident in doing that. Any more detail do you want to add to that?

No. I mean I think, clearly, we're talking about something which is 18 months away, so.

Fantastic. The next question from [ Juan ] is, given that the 2024 bonds trade materially below par, why not repurchase at least a portion in the open market?

So this is something that we thought about doing, and it is an option available to us. I think there's a bit -- there's a question about whether people would be willing to sell at the current prices, so I don't -- I mean, the current prices, I mean, they are indicative prices. Bonds don't trade very much, so whether they're trades that you could also transact at, I think, is a bit of a debate. I think the broader point, though, is that, again, I'd almost go back to the previous point. I think over the -- there is a short-term high level of liquidity we have, which takes us through next year into 2024. There's sort of an opportunistic step we could take. We might take it, I'm not saying we will, not saying we won't. But I think that in a sense, it's a relatively short-term point.

Marcus Rivaldi from Jefferies has 2 questions. The actual movement in available cash to July '22 was better than previously guided. Please could you explain where the positive cash variance came from? And is there any guidance you can provide on the trajectory of available cash to full year and beyond?

Yes. Okay. I would say we will probably be a bit -- we were a bit prudent and a bit cautious in our trading update when it came to cash. Cash movements in months can be a little bit volatile. We essentially had some working capital inflows during July, which meant that the closing cash was a touch better than we'd anticipated. In terms of the cash in the second half of the year, so we said net debt will probably come down by a similar order of magnitude relative to the first half. And in the second half of the year, we've got about GBP 30 million of ship debt, which is due for repayment. So I think within that, you can probably see what we expect in terms of net cash. And net cash will be a little bit lower than it was at the end of July, but net debt -- ship debt will be GBP 30 million lower as well.

Marcus' next question is, are there any comments you can provide on how resilient spending from your target customer base is expected to be to the cost of living crisis?

So I guess the things that we would point to as evidence is the current demand on Cruise for Ocean and Rivers, and also the increasing demand that we're getting through the new holidays and Travel businesses. To point to some detail in there, as we've talked about in the presentation, load factors are strong, and we have moved ahead of our plan on per diems to cope with rising inflation. So within relatively higher-priced products, we're seeing very strong demand so far from our Cruise business. I mean looking at the trading numbers from yesterday, if you want to take a micro view of it, we took GBP 1 million yesterday. We paused a little bit with the state funeral, because lots of our customers were clearly wanting to take time to do that. There's always a worry when you have any interruption in any trading pattern that those customers won't come back. We're looking at the numbers yesterday, we had a very strong day. It's only a day, but is not untypical of what we were seeing before, and we expect that to continue through. I think there's a general point in terms of there are concerning pressures on household budgets for everybody going forward into this winter, but there's also a lot of interest rate activity, too, which generally tends to benefit our customers, who have a lot of savings and they're using those savings to deploy into experiences in travel. I guess that a hard point to point to is that the Titan business was out on plan in terms of timing with the same number of trading weeks year-on-year. This year, as would be in a normal trading year, is bang on plan. And that's a -- and that's taking account of general price inflation in that market, too. The Saga Holidays and Saga touring businesses, we delayed the number of trading weeks because we were changing into the new format, so it's technically behind where it was in previous years. But if you look at the curve on that chart, it's looking reasonably positive. John, anything else you want to...

No. I think the only thing I would add to that is also what we've seen in terms of the transactions on the new jet tour, which is super high premium and super, to Euan's point, that there is savings and things that people are wanting to invest in great experiences going forward.

Yes. Well, I think there is a consumer trend to I want to experience more holidays of a lifetime, cruise of a lifetime. I will spend more of what has been pent-up savings through the pandemic. I mean, the jet tour is a good example, it's GBP 28,000 per person for a 21-day tour. It's the most premium product that we've ever launched. It was clearly a big step to take. It takes off next September, so plenty of time to fill the jet. Actually, the jet is going to be filled in the next couple of weeks really, so that's why we're looking to extend that product. So at the moment, we're not seeing customer demand impacted by the inflationary pressures on household budgets.

Mishu Heatman from Dhara Heatman has a number of questions. However, conscious of timing, I'll just ask the 2 priorities. What is the current solvency ratio for the underwriter? How much of this has been impacted by the reversion to a more normal combined ratio? And what of this was driven by a decline of financial assets?

James, do you want to pick that one up?

Yes. I don't have the precise numbers to hand, but it's pretty healthy. So it's over 180%. And the -- I mean, the decline in our financial assets, obviously -- I mean we don't invest in equity, so that has no impact. We are invested obviously in bonds, but the bonds have a -- are obviously matching at liabilities, and the two move more or less in tandem. So the change in the inflation rate hasn't -- obviously, the reduction in the value of the bonds is also matched by a reduction in the value of the liability. So it hasn't had a very big impact. In fact, it's actually been slightly positive.

Fantastic. The next question is for the Cruise business. With pre-cancellation load factor of 71%, how much of this is limited by resourcing? For example, with current staffing and access to provisions, can you run the larger new ocean vessels at 80% occupancy?

We can run it at 100% occupancy. And actually, we've had a couple of cruises in the last couple of weeks, which were 95%, 97% load factors. We also had one of our highest customer service NPS scores off that Cruise as well. So -- and we have really tested these ships at maximum capacity. We have very loyal colleagues. We've tried to do the right thing for all colleagues in terms of this inflationary environment that's been passed on to the cruise crew as well. We took care of them during the pandemic, so they all came back to us. So we are fully crewed up. We have full capacity. We have flexible sourcing for food and beverage around the world. We tend to stock up where we go, so it's not all based on U.S. imports or anything like that. So we are fully capable of filling those ships and servicing them very effectively, so there's no concern on that.

Thank you. There are no more questions from online.

Okay. Great. Thank you very much, everyone, for coming along. I know there's a big event on some new IFRS 17 to go to, so I won't keep you from that. But thank you for coming along. Thanks.