AA slumps into red and warns on new insurance premium tax hit

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The AA posted a £63.6 million loss for the first half and said its turnaround could be held back by new insurance premium taxes and EU employment legislation.

It continued to lose personal members of its roadside assistance offering, down by 44,000 during the six months to the end of July, though it said this decline was slowing, while it also saw an increase in business customer numbers.

Interim results showed the group sank into the red against profits of £10.2 million a year earlier after a one-off refinancing charge of £87.4 million as it sought to scale back the size of its regular debt repayments.

Underlying earnings were also lower, down 5.9% to £199.2 million. The AA blamed marketing, technology and other costs as well as changes to its financial services offering and the impact of exchange rate moves on its Irish income.

Revenue fell 1.4% to £484.6 million with a fall in income from insurance services.

Shares dropped as much as 7% after the interim results.

Executive chairman Bob Mackenzie pointed to “two external factors” that could weigh on progress.

“First, the Government recently and unexpectedly decided to increase insurance premium tax by 58% from November - yet another imposition on the motorist in the UK,” he said.

This was likely to increase the “churn” of customers away from both the AA’s insurance and roadside assistance businesses.

“Secondly, EU legislation on holiday pay may increase operating costs,” he added.

Mr Mackenzie said that on the new insurance premium tax, the firm was “taking specific steps to protect profits which may affect revenue in the short term”.

The AA said trading was in line with expectations for the full year “reflecting the early phase of a major programme of modernisation and transformation”. The main benefits of this would not be seen until the second half of the 2017 financial year.

Mr Mackenzie said there were “early and positive signs” after an advertising campaign launched in the summer.

“This together with changes to our product offering, pricing and marketing, is showing encouraging new sales, improving new retention and slowing the decline in personal member numbers,” he said.

He said the group’s IT investment, the key step in transforming the business, was “firmly on track”.

The total number of roadside assistance members, at 3.73 million, was lower by 153,000, or 3.9%, year-on-year. The AA said the decline had slowed with numbers in the second quarter falling by 0.3% compared with the first.

Average income per personal member was 6.2% up year-on-year, but this growth was expected to be held back as renewal prices are cut to hold on to members.

Business customer numbers grew by 341,000 during the period to 9.98 million, a rise of 452,000 year-on-year.

The AA’s annual results for the year to the end of January showed pre-tax profits slumped by 68% to £61 million as the cost of servicing its debt mountain grew.

It also announced at the time a £935 million re-financing including a £200 million share placing and £735 million in new debt to replace expensive loan arrangements from the past, which it said would save it £45 million a year.

The AA floated on the stock market in June last year.