Saga plc (SAGA) Earnings Call Transcript & Summary

Good morning, everybody, and welcome to Saga's full year results for the year ended January 2024. For those of you who haven't met yet, I'm Mike Hazell, Group CEO. I'm joined today by Mark Watkins, our Group CFO; and Steve Kingshott, CEO of our Insurance business who will update on Insurance later in this presentation. Firstly, let me draw out some key threads that I'll cover off in more detail as we go through this presentation. Taking the year as a whole, we've had -- we've delivered a fantastic set of results, having successfully delivered a profit outturn that is more than double that of the prior year and ahead of expectations. Strong cash generation has also resulted in a significant reduction in net debt, which fell by around GBP 75 million across the year. This has been driven by strong performances in our Cruise and Travel businesses where customer demand for our unique offering has translated into significant increase in profits. This year, we have placed a renewed focus on our Money business, increasing the number of products that we have to offer our customers and establishing solid foundations for growth in that business. Our Insurance business continued to be challenged by market conditions. This has impacted our competitiveness and in turn, the number of policies that we sold. We understand the drivers of this performance, and we're taking action to address that. We're encouraged by the recent performance of our Insurance underwriting business, which having applied material price increases over the past 18 months is now on a much stronger footing. We've also moved towards a leaner central operating model, delivering GBP 12 million of in-year cost efficiencies, supported by our decision to exit some smaller loss-making activities. All of this has been delivered alongside further progress in our customer and data strategy. We're focused on growing the number of customers we serve and deepening the connection we have with those customers and we're making great strides in that area. To support our strategic initiatives, we are also accelerating our capital-light partnership strategy. I believe that the right partnerships in the right area to really amplify our growth ambitions and reduce our debt. We've previously spoken about potential opportunities in Ocean Cruise. And now we're exploring similar opportunities across our Insurance business. Meanwhile, our Money business is fundamentally already a partnership model. I'll present some more detail later on these partnership opportunities. When I joined Saga last year, I had clear views about the strength of the business I had joined and the brand. Since then, these opinions have only strengthened. And it's clear to me that Saga is a business with solid foundations in place, a trusted brand, brilliant colleagues and a large and loyal customer base. Across the group, we have a database containing 9.6 million customers, covering a significant proportion of our target over 50s demographic. It's this wealth of data and insight that has driven the performance across each of our core businesses. Cruise was the outstanding performer with a boutique ocean and river offer continuing to resonate with our customer base. Load factors and per diems were materially up in Ocean Cruise with both revenue and passenger numbers in our River Cruise operations also growing significantly. You'll see later that bookings for the year ahead are also very strong. In Travel, increased passenger numbers driven by our product set and improvements to our operational efficiency meant that we returned to profitability for the first time since the pandemic. Our Money business is now well set for growth. And we have worked with a number of experts, expert partners, to launch a series of new and well-received products across that area. Challenging conditions in Insurance have resulted in further decline, impacting both margins and policy numbers. Steve will take you through the drivers of this shortly and the actions that we are taking to address them. It is important that we strike the right balance between short-term profitability and market competitiveness. The latter being the key to driving customer volumes that are ultimately necessary to deliver long-term sustainable growth. We are already seeing the early signs that the actions we are taking to rebalance that business are having the desired effect. With that, I'll now hand over to Mark to talk you through the financials.

Thanks, Mike, and good morning, everybody. It's a pleasure to be here today and great to see some familiar faces in the audience. I'll spend the next few slides covering the financial results for the year ended 31st January 2024 and an outlook for the year ahead. Just to remind everybody, the group adopted IFRS 17 at the start of last year. And while it changes the presentation and timing of the result, there is no change to the underlying economics of the business. You'll see that the '22, '23 comparatives have been restated throughout. As you can see, we delivered a strong set of results for the year with an improvement across all of our key metrics. Underlying revenue, which is net of reinsurance premiums and exclude some accounting adjustments and one-off items, is 13% higher than it was in the prior year. Underlying PBT under both the previous IFRS 4 and the current IFRS 17 is more than double '22, '23. This reflects positives from Ocean Cruise performance beating our guidance, significant growth across River Cruise and Travel and lower central costs. However, these were partially offset by a lower results from Insurance. The group's loss before tax is materially lower than in the prior year, and this reflects exceptional and one-off items that sit below the line. The most material of these one-off items is an insurance goodwill impairment of GBP 104.9 million, reflecting the impact of historical action to focus on value. In addition, there were restructuring costs of GBP 40.3 million arising from the move to a leaner operating model, the exit of some of our smaller loss-making activities and the rationalization of our property portfolio. Significant growth in available operating cash flow of GBP 88.9 million was driven by the underlying trading results and a positive onetime benefit from River and Cruise and Travel moving to a 70% escrow arrangement in the first half of the year. The significantly improved cash flow drive the deleveraging with a GBP 74.5 million reduction in net debt and an improved trading EBITDA. The combination of these resulted in total leverage of 5.4x, down from 7.5x in the prior year. Now turning to the profit contribution from each of our business units. Our Cruise and Travel businesses delivered a strong result with GBP 40 million of underlying PBT, returning to profit for the first time since the end of the pandemic. This has been possible because of the high level of demand from our customers particularly in our Cruise business. Our Insurance businesses had a challenging time. Underlying claims inflation has had a profound impact on both our broking and underwriting businesses with the impact being particularly felt across our 3-year fixed-price products in Motor and Home. I'll cover these businesses in more detail in a few slides' time. Other businesses returned to profit following the exit of our smaller loss-making activities and central costs reflect significant savings following efficiencies gained from the move to a leaner central operating model, which was delivered in the second half of last year. Turning now to each of our core businesses in a bit more detail, and we'll start with Ocean Cruise. The first thing to say about our Ocean Cruise business is that we have, for the first time, not only hit, but exceeded the financial target of GBP 40 million EBITDA, excluding overheads per ship that was set when we invested in the new vessels with each ship delivering GBP 45 million. This is a fantastic achievement, especially given that this business was loss-making only last year following some residual pandemic impacts at the first -- in the first half of '22, '23. Underlying revenue growth of 28% reflects a strong load factor of 88% and per diems of GBP 331. And looking ahead to what this means for '24, '25 and beyond, we have a strong pipeline of bookings displaying further growth potential. Load factors for '24, '25 are already 78% with the ships almost fully booked for Q1 and into Q2. The per diems of GBP 367 are 9% higher than the prior year, reflecting the continued investment in the customer proposition being met with exceptional demand. River Cruise while smaller than Ocean is also doing well, having also returned to profit this year. The revenue increase of 52% was driven by a 43% increase in passengers. We're introducing load factors and per diems as new metrics for this business. And for '23, '24, the load factor was 85% and the per diem was GBP 285. Again, looking forward, there is potential to take this even further with a load factor of 72% already 6 percentage points ahead of the prior year and the per diem of GBP 339, 13% ahead. There is a similar story in Travel. We have seen a 22% increase in passengers and an 18% increase in the revenue per passenger, driving revenue growth of 44%. At an underlying PBT level, this revenue growth translated into an improvement of GBP 5.6 million, taking the business from a loss of GBP 4.1 million to a profit of GBP 1.5 million. Further growth is expected into '24, '25 as forward bookings show encouraging signs with revenue 12% ahead of the same point last year. Conditions in Insurance continue to be challenging. Broking was impacted primarily through increased net rates from underwriters in response to the prolonged high claims inflation. As a result, the written underlying PBT was GBP 34.4 million compared with GBP 66.5 million in the prior year. This graph shows the material drivers of the movements. And as you can see, the decline in underlying PBT is almost entirely driven by motor with the other products broadly flat. While the contribution from motor new business was higher with increased margins offsetting lower volumes, the motor renewals contribution was GBP 31 million lower. This is a combination of lower volumes of around 13% and a significantly lower margin, arising from underwriters -- underwriting rates increasing faster than customer pricing particularly for our 3-year fixed price products. The contribution from home was GBP 1.6 million lower, reflecting increased new business margins, offset by a 6% fall in policy sales. Private Medical Insurance or PMI, benefited from the one-off contribution from Bupa in the first half. The increase in operating expenses reflects the full year impact of the cost of living support provided to colleagues, which was in part offset by some operational efficiencies. In underwriting, we're beginning to see the green shoots as the significant price increases applied and claims mitigation actions taken throughout the past 18 months begin to flow through to the results. This can be seen in underlying revenue, which was 7% higher than the prior year despite the number of earned policies being almost 19% lower. There was also a reduction in the combined operating ratio, net of reinsurance, which is now 117.1%, 3.4 percentage points lower than the year before. Looking ahead, we're confident that our pricing is adequate and as a result, we're now achieving our target loss ratios. Turning now to look at the group's cost base. Underlying marketing costs reduced by GBP 1.5 million or GBP 4.2 million after excluding the written to earned adjustment. This reflects an increase across Cruise and Travel to support the increased customer demand, alongside an increase in Insurance, which reflects an investment in colleague cost of living support, partially offset by some operational efficiencies. These are, however, offset in part by significant cost savings within our central functions, in line with the guidance given at the half year as we delivered efficiencies and moved to a leaner operating model. In addition, the changes in core admin costs, we saw a year-on-year reduction from the exit of some of our smaller loss-making activities and a slight increase in the written-to-earned adjustment within Insurance. During the year, we made significant progress with continuing to reduce our level of debt. Net debt reduced by GBP 74.5 million with GBP 143.8 million of available operating cash flow, only partially offset by debt servicing and restructuring costs. The increase in cash generation arising from GBP 101.2 million improvement in Cruise and Travel cash flows, albeit around GBP 20 million of that relates to the one-off benefit from moving to a 70% escrow arrangement. Cash flows from our Insurance business were, however, lower due to the trading conditions covered earlier. At the year-end, net debt was GBP 637.2 million as you can see on the next slide. Presented here is the expected organic deleveraging profile over the next couple of years. The range of expected outcomes is represented by the shading area at the top of each bar. Net debt reduction remains the group's #1 priority. '23, '24 benefited from some onetime cash positives, and we expect '24, '25 to return to a more normal cash generation profile with an expected further reduction in net debt, even in our downside scenarios. We expect to repay the GBP 150 million bonds maturing in May through a combination of available cash and drawing from the GBP 85 million debt facility from Roger De Haan. As we continue with our deleveraging plans, we're grateful for the continued support from Roger, who recently extended the maturity of his facility to April 2026. This change provides us with a runway to fully explore the partnership opportunities that Mike mentioned briefly, and we'll talk about in more details later. So what does this all mean for the coming year? We expect to continue to see growth in Ocean Cruise as we continue to maximize the load factor and per diems, which after a certain point dropped through entirely to the bottom line. This will lead to growth in revenue, EBITDA and underlying PBT. In River Cruise, the introduction of our new ship, Spirit of the Douro, last month means we also expect continued growth here. As a rough guide, each of our new river ships is expected to generate an incremental GBP 1 million to GBP 1.5 million of underlying PBT per year. Growth in passenger numbers and revenue is expected to continue in Travel, supporting a significant increase in underlying PBT. The challenges in Insurance are suspected to continue at least in the short term. However, we are taking steps to stabilize the business and ultimately return to growth. This means that we're entering a transitional period with lower Motor and Home broking margins as we invest in price to slow the decline in policy sales. Steve will cover this in more detail in a moment, but underlying PBT for Insurance broking in the short term is expected to be materially lower than '23, '24. Insurance underwriting is now on a stronger footing, having applied the significant price increases over the past 18 months. As these continue to flow through, this is expected to drive a return to profitability and a continued reduction in the combined operating ratio. The outcome of all of this is that we expect group underlying PBT to be broadly flat year-on-year with growth in Cruise and Travel, offsetting the lower Insurance outlook and of course, a reduction in net debt. With that, I'll hand you over to Steve, who's going to cover Insurance in a bit more detail.

Thank you, Mark, and good morning, everybody. I wanted to begin by taking a step back and reiterating the clear underlying strength of Saga Insurance. At its heart, Saga Insurance is a profitable business with a number of clear and differentiating attributes. These attributes set us apart from our competition in the over 50s market and provide the basis for future opportunities. Key to this is the fundamental strength of the Saga brand amongst our loyal over 50s customer base, with whom we have an 81% retention rate in Motor and Home and more than 88% prompted brand awareness across the group. This is supported by our significant group customer database of 9.6 million customers, 6.9 million of which we are able to contact about our insurance products. In addition, we know that Saga customers do not shop on price alone, and we offer products that differentiate us from our competitors. For example, our 3-year fixed products account for 41% of our motor book and 51% of our home book. And our Travel and Private Medical products include product features that reflect the insight that we have into older customer needs. In Insurance broking, we have a strong distribution network, insuring more than 1.5 million customers. As for underwriting, we are now on a much stronger footing, having repriced our portfolio and implemented claims cost reduction actions. Our underwriting and pricing capabilities also enable us to tailor our risk selection and net pricing to reflect our over 50s target market. And of course, all of these attributes are brought together by the focus on service from our colleagues who cater for the very specific requirements of our customer base. Before we move on, given the much improved position and outlook for our Insurance business, I'll focus on our Insurance Broking business and the actions we're taking to address our challenges in the next few slides. While Saga has very clear points of differentiation, our Insurance Broking business has been affected by the specific and well-publicized issues that the industry has faced over the past 2 years. The FCA's regulatory changes introduced in January 2022 led to a reduction in our price competitiveness. Our margins on Motor and Home business were affected by the increase in new business pricing being offset by our reduction in renewal pricing. In addition, from the second half of 2022, the exceptionally high inflation in motor claims experienced across the market was passed on to us in net rate increases from our panel insurers. Our margins were further impacted by our 3-year fixed product, which we were unable to reprice during the fixed period. We also reduced our marketing spend and held back our investment plans to manage our short-term profitability. Against this backdrop, our strategy has been to maintain a disciplined approach to retail pricing to protect margins in the short term. As the charts on the right show, this has had the effect of reducing our customer and policy numbers as well as profitability. This left us with a reduced customer base to manage alongside a relatively fixed cost base. Before I talk about the actions we're taking to address these challenges, I wanted to talk you through the impact of our 3-year fixed price policies in more detail specifically. Our 3-year fixed price Motor and Home policies introduced in 2019 ahead of the FCA changes are a prime example of how we differentiate ourselves within a commoditized market. The products resonate well with our demographic who are less likely to buy on price alone and value price certainty along with peace of mind and the value of Saga Insurance service. However, it is a product which has been significantly impacted by the inflationary and regulatory backdrop, which I've described. As this chart shows, the business we wrote in early 2021 was adequately priced when looking forward across the period of the fix. As inflation increased beyond the expected levels, new policies were underpriced as inflation far exceeded expectations in the following years. This affected some business written in 2021 and throughout 2022. Looking at where we are now with the 3-year fixed product, much of the pressure on margins from that inflationary impact is now starting to reduce. New and refixed policies are being repriced with prudent inflation assumptions, and we expect all of the policies that were written pre-inflation to have been repriced fully by the middle of the year. We have been prudent in our inflation assumptions. And while there will be some profit drag into '24, '25, the easing pressure on margins from 3-year fixed has given us the headroom to take action on pricing to stabilize the Insurance business. So why shift our focus to protecting our scale as well as our margins now? The short answer is that the change of approach I've described would not have been possible before now. During that period of volatility, we made the decision to protect short-term profitability. Now that we're beginning to see some stability emerging in the market, it is right that we begin to focus on the longer-term outlook and take decisions to recover the volumes lost during that volatile period. Given the improving market conditions we've begun to observe in motor pricing and the easing pressure on 3-year fixed price margins, now is the right moment for us to change approach and begin to rebalance protection of our margins with customer growth. We're now focused on this longer-term view, switching our approach to focus even more on protecting existing customers by improving our competitive position so that we can grow customer numbers to ensure the sustainability of the business. With this, our approach is split into two parts. Firstly, short-term stabilization and then preparing for growth in the longer term. On short-term stabilization we have, over the past few months taken clear steps to steady the business. Firstly, we've taken action in broking across all our products, particularly in Home and Motor to sharpen our competitive position. This not only protects our existing business but also stimulates new business, which will slow the decline in policy sales. To date, the impact of these changes is tracking in line with our expectations with improvements seen across conversion, retention and margin. We've also begun to increase our marketing spend and are investing further in our marketing tools to more effectively target customers. This has led to increasing lead volumes aligned to our marketing spend efficiency and short-term payback targets. In addition, we remain focused on keeping tight control of costs across our operational and nonoperational functions. We also remain focused on offering differentiated products. And we'll be launching a new travel product designed to meet the specific needs of our customer base in the second quarter. Finally, continued development of our partnerships across all our products remains a key part of our insurance plans. We've worked closely with Collinson to develop that new Travel product I just mentioned. And you may recall that we recently partnered with Bupa for Private Medical Insurance. We also extended our relationship with Ageas who now partner with us for both Motor and Home insurance on our panels. If I now move to preparing the business for long-term growth, our focus is very clearly on scaling the business. And as part of this, we're exploring further options for partnership models in insurance. This is consistent with our group strategy to move towards a capital-light business model and follows the move to explore similar partnership arrangements in Ocean Cruise. We believe this will enable us to improve the efficiency of our customer service while, at the same time, crystalizing value, reducing debt and enhancing long-term shareholder returns. There are clearly a range of options available, and while it's too early to comment on any potential avenues, we'll keep you updated on progress. So to conclude, the actions we are taking are absolutely the right ones and we're taking them at the right time for Saga. The easing margin pressure on 3-year fixed policies gives us the headroom to make these changes. And we're already seeing encouraging signs that it is working. While we are entering a transitional period with lower profitability in the near term, the rebalancing of price and margin to grow the customer base is necessary for both short-term stability and long-term sustainability. Looking further ahead, I'm very confident for the future prospects of Saga Insurance, which includes the exploration of potential partnership opportunities. Saga has an outstanding brand, a loyal customer base and a differentiated product set, leaving us very well placed as we target future growth. I'll now hand over to Mike.

Thanks, Steve. As I mentioned earlier, Saga is a business with solid foundations in place. While this represents a good platform, our success lies in building on these fundamentals. I'm focused on achieving a clear vision for Saga to be the largest and most trusted brand for older people in the U.K. To that end, we've tightened our strategic priorities to better deliver our growth plans while staying consistent with our previously stated goals. We'll maximize our core businesses, we'll reduce our debt through capital-light growth and we'll grow our customer base and deepen the relationships that we have with those customers. Now taking each of those in turn. We've already covered a lot of the more quantitative progress that we've made across each of our businesses. However, it's important that we also focus on some of the broader achievements and successes this year. In Cruise, not only have we delivered excellent financial results, but our customer satisfaction measured through a transactional Net Promoter Score or TNPS increased by 16 points, reflecting particularly the improvements made to our River Cruises. Building on the strong demand for our River Cruises, we are continuing to expand our river fleet with our third purpose-built ship expected in 2025. Unlike Ocean Cruise, access to future river ships is not capital constrained and is therefore a significant growth opportunity as we go forward. Looking to the current year, our focus is on continuing to maximize the load factors and per diems across River and Ocean Cruise while exploring potential partnership opportunities that could support our strategic ambitions going forward. In Travel, our unique offering continues to be recognized industry-wide, and we were proud to receive 28 wins at the recent British Travel Awards. We've also been making changes behind the scenes with the development and launch of a new website that brings together all our Travel products into one place, together with our investment in our contact centers that enable us to service a greater volume of inquiries that ultimately translates into increased sales. Together with our fantastic customer proposition, these improvements have been key to the significantly improved Travel revenue performance this year. In Insurance, we've been equally busy as well as supporting new partnerships for Bupa, for PMI and Ageas for our motor panel, we've navigated regulatory change, improved our fraud detection capabilities and continued to enhance our operating systems. Steve has already set out in detail what '24, '25 looks like, but fundamentally, for Insurance, it's about positioning that business for long-term growth. Partnerships will be an important part of amplifying that growth. Finally, we've made great progress in positioning Saga Money for growth. Alongside the launch of new products that I mentioned earlier, we've also developed a new website and continue to grow our sector-leading TNPS, which now stands at 72 compared to 64 in the prior year. We see great potential in this relatively immature area of our business, and we will continue to build customer awareness around these great products and potential products in the future and potential new products in the future that uniquely serve the needs of our customers. Success for Saga need not be capital intensive. And we remain focused on adopting capital-light strategies wherever it makes sense to do so. Not only will this approach enable Saga to significantly reduce its net debt, but it will allow us to more fully leverage the Saga brand and drive future growth. We believe there are partnership opportunities elsewhere in our business to support our strategic plans. In Cruise, we are continuing to explore partnership opportunities for our Ocean Cruise business. We have an incredibly popular customer offer, and our two ships are now nearing capacity. It is, therefore, right for us to consider options that would harness this success, reduce capital intensity and open the path to future capacity to satisfy the ongoing strong demand. While we are taking action in Insurance to stabilize and then grow that business, there remain long-term opportunities within our value chain to draw on partner capabilities and infrastructure to support our growth ambitions. Again, deliverable through capital-light means consistent with our deleveraging strategy. It is by no means certain that we'll ultimately pursue any of these opportunities and indeed, it is unlikely that we would need or want to pursue all of them. Each opportunity is therefore being reviewed in terms of its fit with our strategic objectives and the quality of the potential partnerships available. Once we have considered these range of opportunities, we'll choose the path that best supports our strategic priorities and delivers the greatest value to shareholders. Customers are at the heart of Saga. And we've built our business on understanding those customers and meeting their needs. Continuing to deepen our relationship with customers has been a real focus for us this year and will be a key driver of future growth. The Saga brand is a powerful tool in doing this. 88% of people surveyed over the age of 50 already have an awareness of Saga and what we have to offer. We also get great feedback from our customers and exceptional loyalty. As you can see, on average, we have an astonishing 13-year relationship with our customers, and this is even higher at 17 years for our most loyal cohort. Maximizing the volume and quality of data we hold on this group allows us to better understand them and ultimately serve their unique needs. As a reminder, we already have almost 10 million people over 50 on our database. And while there are 26 million people in the U.K., 26 million older people in the U.K. that fall into our age group, this represents around 77% of our target market. There is a real opportunity to broaden our reach and convert even more of these individuals into regular customers with more frequent engagement. Our website is, of course, one way of doing this. And we've recently developed new functionality that allows more than -- more of the 15 million visitors to that site each year to sign up for email updates, providing interesting articles and offers across a range of our products. The Saga Magazine is also a fantastic asset, and something that I'm sure you will have all heard of, but may not be overly familiar with. Saga's Magazine is the U.K.'s best-selling subscription-only monthly magazine with over 120,000 subscribers and industry-leading retention rate of just under 80%. Alongside this, we are bringing the successful elements of Saga Exceptional into our core publishing business, including our weekly digital newsletters, These newsletters provide relevant and insightful content across a range of travel, money and magazine topics. When combined, those newsletters reach more than 1.2 million subscribers each week. While the frequency of engagement is important, we're also focused on enhancing the quality and depth of our customer interactions. Our customers are very engaged with our content. Our e-mail activity benefits from strong opening rates with over 2/3 being read and our relatively new newsletter strategy is already delivering open rates in excess of 50%. To further complement the success of our magazine and newsletters, next month, we are launching a new magazine website within saga.co.uk, and that will provide more fantastic content to our readers, creating a single hub for our customers and meeting a range of their lifestyle needs. We expect this to drive further customer engagement and increase the traffic to Saga's website, all of this with the objective of understanding our customers more, deepening our engagement with those customers and enabling us to better deliver products and services that meet their needs. I just want to pause on this page and highlight the fantastic work that our magazine colleagues do. The magazine is constantly being nominated for awards. It is both a brilliant product but also a key channel of communication to our customers, and they love it. There are copies available here today, and I really recommend that you take one home and have a look. So in conclusion, this has been a year of great progress, where we have more than doubled profitability and further reduced debt. Our Cruise and Travel businesses have performed particularly strongly and continued to generate high levels of demand. In Insurance, we are tackling the challenging market conditions and have a plan that will stabilize that business and lay the foundations for future growth. Meanwhile, the work we're doing across Money and our publishing businesses and in data, place us in a good position to extend our customer reach and leverage our brand. We are exploring several partnership opportunities and believe these could support us in driving our business forward and contribute even further to our debt reduction activities. I'd like to thank all of my colleagues for their continued hard work and their -- and all of our customers for their ongoing loyalty. I've met a lot of our customers in my short time here and they really are a special group, and I'm proud of what Saga means to them. I remain confident that we have the right strategy, a powerful brand and a compelling set of products and services. These things combined will deliver the long-term strategic success for Saga. We'll now move to questions. First, taking questions in the room before moving to online. Thank you.

It's Nick Johnson from Numis. I've got a few questions. I think I'll just ask some in order to save trying to remember them. So firstly, on Cruise. Just wondering if you can talk about what the cost inflation outlook is in the Cruise business? I think if I heard correctly, you said that all the revenue growth in bookings should drop to the bottom line. Did I hear that correctly? Just some color on the outlook for costs on Cruise.

I'll give you a couple of stats, and then I'll ask Mark to cover in more detail. I think the key point with Cruise, it's operating of a pretty fixed cost base. And therefore, the more that we drive load factors and per diems, that revenue growth just drops largely through to the bottom line. It doesn't really materially impact the fixed cost base. Mark can give you some more color on that. It's worth also pointing out that we heavily hedge our fuel costs in advance. So the year ahead is now substantially hedged. So any volatility in the fuel prices will be sheltered from the -- because of that hedging. Do you want to give any more on that?

No sort of material builds on that. I think looking backwards, clearly, we've experienced some inflationary pressures within all of the businesses and all of the cost bases. I think we are through most of that headwind, as you can see from the kind of headline inflation numbers. As Mike says, we're hedged on fuel for all of this year and part of next year. So -- and we forward buy things like currency as well. So from a kind of macro input cost, we're hedged. But Mike's right, incremental revenue drops to the bottom line.

Second question is on the underwriting AICL. So I think you took a GBP 11 million dividend out of AICL in the year despite making a small loss. Just wondering what the TNAV of AICL is now after that dividend? And what the solvency ratio is? Sorry if that's in the statement, but I haven't seen it.

Do you want to take that? Or there is a bit to hand to Steve?

I'll handle the solvency ratio. The TNAV, probably get back to you. Solvency ratio is 154% affected by some of the property valuations and deferred tax asset, but it's strong.

Yes, we'll come back to you on that.

Next was on the price -- the investment in price you're making in the Insurance business. Obviously, that's clearly to -- as you say, to stabilized policy sales. Just wondering if any of that price investment will have an impact on the profitability of AICL, what combined ratio are you sort of looking to get to in the underwriting business?

Fine. So I'll just set that up a bit, and then I'll have Steve give a bit more color. But just a reminder, what we've been doing. So for the last couple of years, been a very volatile market, and it's right that we've protected our profitability. But that protection of profitability has led to decreased competitiveness that we're now addressing. And the fallout from that has been the declining volumes that we've been updating on. So as we go forward, we can expect those volumes to stabilize, but the consequences are in the short term that, that investment in price will stabilize volumes but reduce profits. AICL is turning around. We've passed a lot of price increases through in that business now. So it's well set for growth. So I think we can now take comfort that's on an upward trajectory, and we've taken the right actions on the broking business to then set that on a path for growth going forward. So anything you want to add to that, Steve?

Just a couple of things, Nick. The combined operating ratio is heading very rapidly into a far more favorable place. I don't want to share the number, but it's set into the right place purely as the significant rate action we've taken over the last 18 months earns through into the business. And we're already at our target loss ratio for AICL right now. So that's where we are.

So looking forward, the price action is on the retail side of things in the broker rather than changing the price that AICL charges to the broker?

Broadly, the work in AICL is done. And we're fortunate in that our panel partners on motor, in particular, on SSL, their pricing work is done as well. So we're also -- we're already beginning to see some reductions, not some slowing down of the net rate increases passed to us by our panel insurers, and AICL would be one of them.

And lastly, on home, I think the commentary suggests that inflation is picking up quite a bit in home and so I think some of the peers have sort of flagged that as well. Is that the same playbook as motor last year? And what lessons we learned from your experience in the motor business as you confront inflation in home potentially this year?

Yes. I think the -- to tie it up. Look, the actions we're taking are across all of our insurance products, but there will be puts and takes as we go through that because different products will require different balancing and positioning. But as a reminder, I think the market overall is coming out of a significant period of volatility, hasn't completely washed through and therefore, puts us in a more confident position to take the actions now that probably weren't available over last couple of years. Do you want to talk about home specifically?

You're right, Nick, home inflation is beginning to pick up. It's nowhere near the same sort of levels as motor was. Remember, motor inflation was partly to do with the inflation impact on the supply chain, paint all of those things that we know about. But it all -- it was also about unwinding from COVID and the increase in frequency. That meant that our motor insurers were slower, I think, to realize the full extent of the issues and then to price for them. In home, I wouldn't say that's the case. The point of knowledge is earlier and the action is earlier.

I think the key thing that I'd want you to take away over and above all of that is the actions we've taken -- we are taking, we can see the effects already. It is early days, but it gives us confidence that we're taking the right actions, and we're seeing the benefit of it.

Andreas van Embden, Peel Hunt. Just taking to the Insurance business. If I understand correctly, it's probably -- the price changes are going to be more within the broking business, i.e., your commission structure rather than the underwriting pricing. How significant are those changes in the commission structure going to be? And what distribution channel are you sort of targeting with the renewed commission structure? And the second question on Insurance is, what's the price elasticity within the motor broking business? If you reduce your end pricing by 1 percentage point, how much extra volume do you think you can generate through your motor broking channel? And then maybe two questions on the financials. Your base case for '24, 25 in terms of underlying PBT is around GBP 40 million to -- around the same as last year. Within your severe plausible scenario -- stress scenario, what range around that are you assuming on the downside and potentially upside? And the second question is on cash flow. If I look at your cash flow statement, the available cash, including Cruise was GBP 144 million. You mentioned GBP 20 million was one-off. So you've got GBP 124 million left over. Do you expect that cash flow also to remain sort of relatively stable in 2024, '25?

Okay. So I'll ask Steve to comment on Insurance in a second. And Mark, if you can be ready for the finance questions there. So just to manage expectations, we're obviously not going to give specific guidance as to the actions that we're taking in terms of price and indeed, the implication that has for margin. But I think if you look at the overall guidance that we're giving for next year, which is around the ongoing strong growth that we expect to see through Travel and Cruise, that will be offset by the drop in Insurance profitability that we've guided to, give you a rough idea as to the quantum that we're expecting to see down for Insurance and up for our Travel businesses. I think on the basis that we can then give you some color that we expect volumes to stabilize, then I think you can probably do the math beyond that without us giving the specific guidance as to exactly what we'll be doing because we'll maintain some flexibility and approach as we go through -- through that period. And I'm sure -- Steve, I'm not sure how much you can say on more on that, but please do add and then perhaps comment on the market elasticity promoter.

Yes. We still play and intend to play across all of the distribution channels for both home and motor. So that's price comparison websites. It's our database and it's our other direct marketing group search engine optimization, all of those things. We understand in a lot of detail what the different economics of those channels are and so we fix our retail margin expectation and our commission expectation, recognizing the costs to distribute through each of those channels. That remains unchanged. I'm not able to give commission specifics by channel at this stage, but hopefully that brings to life the dynamic. On the elasticities, again, I'd hesitate to share those in detail, if I'm honest. They vary between new and renewal business, as you'd expect. And therefore, we optimize our prices based on the elasticity that we've got. The most important thing, I would say, is in the assumptions we made around new business conversion, retention and margin as we made those price investments, they're all outperforming our initial expectations. So we're getting our elasticity assumptions pretty much right.

We've got a couple more on the financials.

So just picking up on the severe but plausible downside case. So I think it would be wrong to give specific ranges in terms of plus or minuses there. But to give you some kind of comfort in terms of how we've approached that, we've looked at it based on risks and opportunities in relation to every single one of our business units. And so it is a downside. It is a material downside to our base case assumptions. And then we've looked to sort of stresses up and down based on those risks as well to kind of come back to a central scenario. And clearly, we look at liquidity through that reasonable worst-case scenario. So we plan for that effectively to come true and also build in some headroom for sort of unknown unknowns. So it is, as the name suggests, a severe, but plausible downside that we've considered.

If I could just add to that. I think it's important, as you say, we manage the business to a forecast. We finance the business to a severe, but plausible downside to make sure we've got the full flexibility to cope with a full set of sensible downside scenarios. But we aim to beat our forecast as opposed to coming on the severe but plausible downside and encouragingly, performance in the early months of where we are so far is just doing that. So we're confident with what we've seen so far that we're performing where we would expect to be. And so the severe but plausible downside scenarios are just that rather than being something that we manage specifically to, but it's good that we build the liquidity to cope with it in the event that we need it.

And then just your final point in terms of cash flow for the year ahead. And I think just looking at the cash flow that's been delivered last year, there were some things in there that are not going to recur going forward. So we received GBP 10 million worth of cash collateral on the last working day of the year, last year. So that was an upside that we were not anticipating and that related to collateral that we have to post for the Travel businesses. Clearly, looking forward, as Steve just said, solvency -- the solvency position of AICL is lower this year than it was last year. So therefore, dividends from AICL will probably be lower going forward than the GBP 14 million we received last year. And then obviously, moving from 100% to 70% cash collateral within the Travel ring fence also had a GBP 20 million upside on the cash flow to Jan '24. Now offsetting some of those one-offs was the fact that we spent GBP 28.8 million of cash on restructuring costs last year. So we would not expect all of those costs -- all of those restructuring costs to continue next year either. So there were some positive one-offs, but there were also some restructuring costs, which we would not expect to continue next year.

But I think the strong performance in the final month or 2 of the year has brought forward cash flows into last year that would have otherwise come through into the start of this year and therefore, the overall deleveraging comes through. The shape of just looks slightly different across the start of this year versus the end of last year, but it largely will end up in the same place point being the business continues to delever.

It's Rahim Karim from Investec. Three questions, if I may. If I understood correctly, one of the rationales for the extension of the Chairman's facility was to enable the full exploration of the partnerships. I guess I'm trying to understand the timeline that you're looking to execute those partnerships on and therefore, should I connect those two and say, you're going to take 12, 18 months to explore those in full before we hear about them? Or is that the wrong interpretation? The second question I had was just on the pricing power that you have in Cruise. Clearly, very strong momentum in per diems, both last year and year-to-date. How much of that has been just general pricing environment and inflation in the economy and enabling you to push that through? And how much of it is upsell, cross-sell and sustainable longer-term price increases? And what do you think is the right kind of number for us to be thinking about on a 2- to 3-year view? And then the final question. You've talked about in Insurance Broking, looking to build -- rebuild volumes for the long-term profile of the business. Should we be looking at the profitability 2 or 3 years ago and aiming of that in terms of where you hope to take the business or take the business back to? And if so, what timeline should we anticipate a recovery back to kind of GBP 70 million of underlying profit -- PBT also? And I guess one of the reasons I'm asking that is just to try and calibrate the uplift in profits that you talk about in terms of recovery post next year from an underlying level for the group as a whole.

Okay. I will talk to the first couple of questions there. And then Mark, if you can just think about what we may or may not want to talk about in terms of future Insurance profits. So look, the extension of the loan from the Chair goes without saying, you should see that as a very positive sign. Roger continues to be very supportive of the business. And so we're very grateful for his ongoing support. I wouldn't read into that, that it's therefore going to take longer to deliver the things that we are looking at delivering. Those remain a priority, and we're looking at those things now. But I think you should read it as Roger is more comfortable with his position and his extent, the maturity of that for his continued support. Meanwhile, the partnerships work that we're exploring, we do that work now. As a reminder, the underlying business is performing well. We continue to generate strong cash flows. So absent any partnerships, the performance will come through anyway. But we think that now is the time to accelerate that partnership strategy, and that's very much an objective for this year. Quite what we land and when you'll have to leave that for us to come back to you with. But, no, I wouldn't connect the two as oh, that must take a while. Therefore, Roger has extended facility. The two are related in so much as Roger is looking at what we can -- what we are doing and take comfort that we're doing all the right things and therefore, he is willing to extend his facility on that basis. In terms of pricing across Cruise and what's driving that, it is a combination of us putting more value into our cruise proposition and therefore, generating value for our customers that are then willing to pay for. That's been a significant part of what we've been doing and what we'll continue to do. So a lot of that is self-driven value levers. There's always going to be an element of inflation, but that is a much smaller part of our driver of per diems. I don't know if you want to comment any more on that, Mark, but please do comment on Insurance profitability to the extent you're comfortable.

So you'll appreciate the insurance market is pretty volatile. So making multiyear predictions, it would be a bit of a fool's errand. So what I would say is growth within our expectations will largely come through volumes over the next few years. I think to the point Steve made earlier, what we are seeing in trading today would support the actions we have taken are having the desired impact in terms of the business. And what we can see today is we would expect that to continue certainly through this year and hopefully into future years.

It's Marcus Rivaldi from Jefferies. I've got a couple of questions, please. Again, back to Insurance profitability, I'm afraid. Could you just help explain a bit more this guidance around materially lower underlying PBT in broking on a written basis for the coming year. And come back to also some of the comments you made about the competitiveness of your product. Is it the fact that you're just working with a very aggressive or uncompetitive group of insurers and when it comes to pricing versus the broader market? I mean, the whole market has repriced substantially on the back of inflation. Is it a function that your insurers are just ramping up pricing that much more than everybody else, which is having the issues when it comes to volumes? Secondly, on the partnership process, are you guiding, Mike, that you're effectively running both processes in parallel now, so Cruise partnerships and Insurance partners in parallel. And then when you've got a better view of where the current law of the land is on -- across both of those, you will make a decision about which way you want to take. You talked about maybe using one or other options or maybe not to go forward on deleveraging the business. And then finally, just a simple question, but you talked in the release about having the cash available to repay the '24 maturity. But can we just say definitively that, that will mature as expected in May?

Okay. So I'll ask Mark to comment on the bond repayment plans in a moment, but obviously very comfort on that, so no big surprises on that. Mark, I'm going to ask you to just try and help with a little bit of guidance on the extent of the insurance profitability drop weighed against what we can help on the upside coming through on Travel, just try and relay that again, if we can. And then Steve, can give us some color on the market dynamics in that. But covering off the partnership piece. Yes, look, we are running and having discussions across Ocean Cruise and Insurance simultaneously. And then the answers will fall off the back of those discussions as to what we do and to what extent across both of those businesses. So it could be combinations within, or it could be one or other. And there are a range of different partnership shapes and sizes you can do across both of those businesses. So we're exploring a full suite of options. Importantly though, when we look at partnerships, it's important to remember, these are partnerships. So we will continue to offer the full suite of products that we do today. But we're looking for where partnerships can help us deliver our strategic ambitions in those business and hopefully release some capital where it makes sense to do so. Do you want to quickly cover off the bond repayment and then any guidance we can give?

Yes, sure. So bond repayment, I think, is a straightforward answer, yes, we will repay that through available cash and drawing of Roger's facility. I think on guidance, we've guided to group PBT being broadly flat year-on-year. And I think obviously, there's positives from Cruise, River's and Travel. And the way to think about it is that clearly, the booking profile is supportive of you doing the math in terms of what the profitability should be there. But we are talking material step-ups in the profitability of those businesses and then clearly, the offset is Insurance Broking.

Why don't we let Steve just talk a little bit about the market and the pricing timing versus the low volumes.

So in terms of what happened to us last year, I think your question, Marcus, was around did we have panel insurers that we're pushing rate harder than the rest of the market. The short answer to that is no. And they were pushing significant amounts of rate, but it wasn't out of kilter with what we were hearing elsewhere. We weren't an outlier in that respect. And as I said to Nick earlier, that work is done, and we can see that coming through in the net rate inflation plans over the first few months of the year and going into the future. The other thing to remember is we couldn't pass those price increases on for a significant proportion of our book on the 3-year fixed. So that had an enhanced impact on our margins. So that's why we fell perhaps more than we did. So what does the future hold? The future holds pretty much a return to net rate environment in line with the rest of the market and a significantly reduced effect of the 3-year fixed.

And then just picking up, I guess, on the broking profitability point. I think there's two aspects to it. One is the physical change in pricing to become more competitive. And then there is a secondary impact of effectively that increased proportion of new business within the book, and therefore, it carries greater new business strain as those marketing costs were incurred.

Any other questions in the room? Over to you, Emily online.

Thanks, Mike. Ruchi Gupta from Western Asset Management has four questions. Firstly, please, could you provide color on developments with respect to your Cruise business, for which there were reports that the interested partners were asked to submit proposals post Easter?

Okay. So I'm not going to give a running commentary on the work we're doing in Ocean Cruise, but that is a process is ongoing. And I think we probably said as much, we're exploring partnership opportunities. There are a range of discussions happening, and we'll update you in due course when we're able to.

Thanks, Mike. The second question is, in your report, you mentioned a range of options are currently being explored, including potential partnership arrangements, which would release capital and enable the group to restructure its debt, new liquidity facilities and an evaluation of corporate refinancing. Please, could you provide more color on what you mean by restructure its debt.

Okay. So fundamentally, to remind where we are, our businesses are performing well. We're generating a lot of cash that is enabling us to reduce our debt, starting with the repayment of the bond next month. As we go forward, the business will continue to generate cash and that will contribute to the deleveraging and the repayments of our debt, both Roger's facility and the 2026 bond maturity. The work we're doing on partnerships will help both of those things because it will accelerate the performance and drive growth in our businesses, but we also expect to be able to release capital from those businesses that would also go towards debt reduction. So ultimately, the paragraph referred to there is fundamentally about reducing and repaying our debt. That's all, as simple as that.

The next question is, when are your fixed price Insurance policies rolling off? Can you provide us to what percentage of fixed policies roll off each year from now?

So we've got a slide that's hopefully helping that in the presentation. But Steve, do you want to add any color to that? .

Not really other than to say that the impact in '23, '24 will be significant. The impact this year will be significantly lower than it was in '23, '24. And by '25, '26, we will have totally offset the drag effect of the underpriced 3-year fixed business as we've been repricing it progressively the new business and refixes.

Finally, from Ruchi, can you please recount the one-off elements of cash flow in full year 2024 and for this year?

Do you want to take that?

Yes, sure. So as I said, there was a one-off upside of GBP 10 million relating to an after cash collateral that was returned last year. It was broadly GBP 20 million from moving to 100% -- moving from 100% cash collateral down to 70% within the CAA ring fence. And then AICL's dividend last year was GBP 14 million, and it's expected to be lower in the year to come.

So those are the one-off upsides.

And then we incurred GBP 28 million of restructuring costs last year, which we would not expect to reoccur this year.

Thank You. there are no further questions from online.

Okay. So if there's no further questions in the room, then we'll bring this meet to a close. And nice to see you all, and thank you for joining us.