AA (AA.) has been backed into a corner, forced to disappoint shareholders in the short term in the hope of securing the long-term viability of its operations. That means pumping more cash into the business in an attempt to reverse the continued decline in membership numbers, while making its insurance products more competitive in a crowded marketplace. To fund these aims, the annual dividend will be cut to 5p a share for its January 2018 year-end, and to 2p a share in 2019, remaining at that level until profit and free cash flow enable a change in policy. That’s a heavy drop from the 9.3p paid for 2017.
Cash profits are expected to come in at between £335m and £345m this year, down from a consensus expectation of £387m. Profitability will take a £12m hit from the decline in personal membership and business customers, as well as increased insurance premium tax. However, an uplift in the motor insurance book is expected to offset around £9m of this.
Additional capital expenditure of £26m is planned in the hope of kick-starting growth. Attracting new members has not been too much of an issue – paid new membership has risen almost a quarter since the 2014 IPO – but keeping hold of them has proved more difficult. New chief executive Simon Breakwell is pinning his hopes on digital improvements. By improving the breakdown app – only used by 30 per cent of members at present – he hopes to not only reduce call centre costs, but attract a broader range of customers beyond its traditional over 50s base.
Around £35m has already been earmarked for improving its ‘Stay AA’ customer retention system, including helping it get better at getting in touch with members ahead of their renewal date. It also plans to roll out its ‘Car Genie’ telematics product, with a view to launching a ‘connected car’ digital offering, the latter would allow members to monitor the health of their vehicle and gain access to faster and more competitive insurance quotes, with the AA gaining more customer data.
Management is also hoping that investing in insurer hosted pricing systems – where rates are held by the insurer as opposed to an intermediary-controlled software house – will enable the AA to not only give more competitive quotes, but start offering insurance to non-members. They’re used by just five of the 12 members of insurers on its in-house underwriting panel at present. The group also wants to do more business through this channel, rather than third-party brokers.
