Strategic objectives and initiatives 11 Strategic objectives Key initiatives Invest in technology and people 1 Strengthen the AA as the pre-eminent Increase roadside membership through motoring services organisation in the UK leading service and loyalty Deliver a step-change in Digital capability 2 Evolve the Insurance Services and Financial Services business models to Reduce Group borrowings drive profitable growth and the associated interest costs Leverage the brand to capture the opportunity in the broader Motoring sector 3 Grow our B2B service offering through Revolutionise customer experience through greater integration with our partners investing in and embracing new technologies
The last nine months have focused on laying the 12 groundwork for the new AA Redesigned organisational structure, new executive team IT roadmap laid out; started investment in core systems Systematic capabilities and talent review Property review underway Investment in patrols and front line staff Governance and controls in place Premium listing and FTSE indexation confirmed Refinancing complete, and plan to pay dividend by end FY16 Solid progress to date
Now entering period of investment and consolidation 13 Core business performance flat Several years of under-investment by previous owners Period of investment and consolidation to position AA for renewed growth To be achieved through – Investment in brand marketing – Investment in IT systems and digital capability – Restructuring and cost initiatives – Investment in Membership growth and price – New business initiatives Refinancing to free up additional cashflow and facilitate dividends Investment creates longer term opportunities
Investment in IT infrastructure will deliver 14 system upgrades and on-going benefits to the AA De-risk infrastructure; operational stability and supported systems More efficient systems; less manual processing; higher productivity Flexibility and agility in commercial decision making Stronger CRM capabilities; opportunity for digital propositions and cross-sell Smoother, hassle-free experience for members Enhanced deployment and patrol support Enabler for further opex savings
Transformation investments 15 IT transformation to modernise the business and enhance customer experience – Transformation capex of £128m over 3 years – Impact on depreciation and opex – Thereafter facilitates cost savings and reduced capex Cost rationalisation expected to deliver £40m of cost savings in medium term – Phase 1 underway and expected to deliver £8m in FY17 Short term uplift in capex to facilitate transformation – Thereafter steady state IT capex of £10m pa (versus £30m pa) £10m investment in brand marketing in FY16 and beyond
The new AA 16 Transform the AA into a modern, technologically led Membership business Reinforce and develop our unrivalled brand building on our tradition of services Enhance and broaden the range of products and services available to our Members A membership club serving a broader range of UK motorists’ needs in the digital age
Financials Martin Clarke Chief Financial Officer
FY15 performance headlines 18 Revenue up 1.0% to £983.5m Trading EBITDA 1 up 1.7% to £430.1m Trading EBITDA margin up 30 bps to 43.7% Adjusted EPS 2 (before refinancing) of 23.3p (38.0p) Cash conversion 3 100% (102%) Dividends of c£50m expected to be recommended in respect of FY16
Summary financials 19 (£m) £968m £974m £984m £430m Revenue £423m £395m Trading EBITDA FY13A FY14A FY15A Trading 40.8% 43.4% 43.7% EBITDA margin Capital expenditure Change in working capital £99m Impact on cash flow 2 £0.4m £39m £32m (£3.7m) FY13A FY14A FY15A (£14.9m) FY13A FY14A FY15A % of 3.3% 4.0% 10.1% revenue Stable growth, high margins and low cash requirements Working Capital defined as stock, plus amounts due from debtors, less amounts due to creditors, deferred income and provisions for future costs, excluding balances relating to corporate income taxation, pensions, finance leases, deferred consideration and non-trading intercompany balances . Change in working capital derived from unaudited, non-statutory management information excluding the impact of exceptional items, restricted cash and pensions
Significant cash flow generation with exceptional cash 20 conversion rates Cash flow generation (£m) 102.4% 100.1% 93.9% Trading EBITDA¹ £430m £423m £395m Cash Conversion² FY13A FY14A FY15A Net cash flow from operating activities before tax and £371m £433m £431m exceptional items 3 Increasing EBITDA year on year Favourable working capital dynamics as a function of upfront payments by customers
Historical financial performance has been remarkably 21 stable through the economic cycle Trading revenue (£m) 1 +£90m £984m £979m £974m £971m +1.6% pa £943m £931m £893m FY09 FY10 FY11 FY12 FY13 FY14 FY15 Trading EBITDA (£m) +£96m £430m £423m £395m +4.3% pa £371m £369m £368m £334m FY09 FY10 FY11 FY12 FY13 FY14 FY15 Margin 37.4% 39.6% 39.3% 37.6% 40.7% 43.4% 43.7% 1. Trading revenue excludes certain transactions not related to ongoing segment performance and includes revenue from Insurance Underwriting activities which prior to FY13 included significant revenue from reinsurance activity within the Acromas group.
Refinancing objectives 22 Reduce overall cost of debt Increase average maturity Simplify debt structure Facilitate payment of dividends Reduce cost of debt and enable dividend
Refinancing overview 23 Raise £200m new equity to efficiently pay off balance of PIK Notes Issue £735m new high yield bonds to repay existing Class B Notes Repay £209m of Senior Term Facility from existing cash in WBS Impact – Reduced leverage – Reduced cash interest costs – Facilitates payment of dividends in respect of FY16 and thereafter
FY15 debt structure 24 Fixed interest rates (with LIBOR hedged for Senior Term Facility) Highly leveraged capital structure 3.98% 1 Interest 4.72% 6.27% 4.25% 3.78% 9.5% 9.5% 7.5 x gross debt / FY15 EBITDA rate High interest charges on PIK Effective 2019 2018 2025 2020 2019 2019 2019 and B notes at 9.5% maturity Blended interest cost of 5.9% Final 2019 2043 2043 2043 2043 2043 2019 Interest cover 2 2.3x maturity £3,218m £663m £655m £500m £500m £475m £259m £250m £175m Senior Class A1 Class A2 Class A3 Class A4 Class B PIK notes Cash Term notes notes notes notes notes Notes 1 Senior Term Facility at LIBOR + 2%. As a result of Facility certain hedging arrangements LIBOR is effectively fixed at 1.9797% until July 2018 and 2.9985% for the period between August 2018 and January 2019, such that if the Class A notes are rated “BBB - ” or above, the maximum Blended interest rate rate of interest payable until 31July 2018 is 3.9797% 5.9% including PIK 2 Trading EBITDA divided by cash finance costs excluding any early repayment fees 5.7% excluding PIK
Sources and uses 25 Sources £m Uses £m 735 New Class B PIK redemption 175 Equity placement 200 Class B redemption 655 Balance sheet cash used 209 STF partial redemption 209 Break costs on PIK 4 Break costs on B notes 60 New issuance fees 25 PLC non-ring fenced cash 16 Total sources 1,144 Total uses 1,144 Reduces interest charges and facilitates the paying of dividends
Resulting debt structure 26 Fixed interest rates (with LIBOR hedged for Senior Term Facility) Leverage 6.8x gross debt / FY15 3.98% 1 Interest 4.72% 6.27% 4.25% 3.78% 5.50% EBITDA rate Lower blended cost of debt at Effective 2019 2018 2025 2020 2019 2022 4.9% maturity Final 2019 2043 2043 2043 2043 2043 Average maturity extended to maturity 6 years £2,914m £735m £500m £500m £475m £454m £250m £50m Senior Class A1 Class A2 Class A3 Class A4 New Cash Term notes notes notes notes Class B Facility notes Note: 1 Senior Term Facility at LIBOR + 2%. As a result of certain hedging arrangements LIBOR is effectively fixed at 1.9797% until July 2018 and 2.9985% for the period between August 2018 and January 2019, such that if the Class A notes are rated “BBB - ” or above, the maximum rate of interest payable until 31 July 2018 is 3.9797%
Benefits of new capital structure 27 Reduced cash interest cost by £46.7m with corresponding EPS enhancement Since IPO gross debt reduced by £470m Near term maturities (pre 2020) reduced from 69% to 40% of outstanding debt WBS dividend gating covenants simplified – Removal of PIK notes sets gating covenant for dividends at <5.5x EBITDA / net senior debt (currently within this at 5.1x) Significant savings in interest charges and enabling meaningful dividend
Summary 28 The AA’s foundations are strong FY16 a year of transition, consolidation and investment Refinancing to create a stable medium-term capital structure Dividends of c£50m expected to be recommended in respect of FY16 Progressive dividend policy thereafter Strong cash flow will facilitate further substantial deleveraging in medium term
Roadside Assistance Mike Lloyd Commercial Director
At the core of the AA sits a robust and profitable 30 Member Roadside A ssistance business… Leader in Roadside Assistance Large base of 3.8m Members c40% market share in consumer market High customer satisfaction Customer loyalty leads to high renewals Revenue and Trading EBITDA 728 713 697 359 348 323 FY13A FY14A FY15A Revenue Trading EBITDA
An additional 9.6 million end customers are supported 31 through our B2B relationships Motor manufacturers Fleet and leasing Banking: Added Value Accounts 1 2 3 Provides Breakdown cover Provides Breakdown cover to Provides Breakdown cover with new and used car SMEs, commercial fleets and to Lloyds Banking Group and warranties sold by dealers leasing companies, and TSB Added Value Accounts corporate-owned van fleets (AVAs) Also provides vehicle fault and performance data Other services eg risk management Together, B2C and B2B cover 13.4 million customers
Roadside Assistance is at the AA’s core, with strong 32 strategic advantages to build from… Differentiation, high loyalty, economies of scale, high to replicate IP The UK’s most trusted commercial Brand1 Trusted brand Over 50% of households hold an AA product Customer loyalty Strong Membership retention Average tenure 11 years, 800k > 20 years 3.8m personal Members, 9.6m through B2B Market leadership Over 3,000 dedicated patrols 3.5m breakdowns attended pa Operational excellence Unique services and deployment IP Source: Y&R Brand Asset Valuator Survey (2014).
Roadside Assistance is at the core of the AA ’ s brand, 33 which is trusted and iconic in the UK UK’s 5 most trusted commercial brands 1 “Which?” Recommended Provider 75 1. 72 2. 69 3. 4. 5. The AA is still the mainstream breakdown provider of choice. Which?, 2014 Source: Y&R Brand Asset Valuator survey in 2014, Which? breakdown service providers review 2014 1 Excludes charities and armed forces.
Roadside Membership levels have been maintained 34 between 3.5m and 4.5 m since the 1970s AA Membership vs. GDP growth AA Members (m) UK GDP growth (%) 5.0 20% 4.0 15% Membership run-up and reduction following demutualisation 3.0 10% US savings Oil Early 1980s and loan crisis Financial crisis 2.0 5% recession crisis 1.0 0% 0.0 -5% 1975 1980 1985 1990 1995 2000 2005 2010 2015 Sources: Internal AA data; ONS
The AA has leading consumer and B2B market shares, 35 and the largest number of breakdowns Consumer market share B2B market share Breakdowns attended 3.5m AA Others 40% 19% B2B 2.3m 0.7m Consumer Motor Fleets AVA GF manufacturers 14% RAC 27% Sources: Lake Research “Road market share tracker( Sep -14); Internal AA data; Company Websites (RAC / GF)
Operational excellence is delivered by unique 36 technology, vehicles and highly skilled patrols Technical assets and expertise… …and high levels of customer service Unique deployment IP Modern multi-vehicle service technology 80% of breakdowns repaired at roadside AA “ moment of truth ” survey (%) Skilled and experienced colleagues 20% Average of 11 years tenure with the AA 26% 33% 68% 57% 50% Overall experience Service provided by Overall experience with the AA Patrol over the phone Excellent Very Good Source: AA Customer Survey
The Roadside business is facing two key linked 37 challenges, driven by historic investment horizons 1 2 Legacy of short-term decision Broad-based under-investment eg in making – across key marketing systems, brand and capabilities areas: – IT platform and CRM systems dated – Shorter-term pricing focus and constraining growth – Marketing investment cuts – No brand marketing – direct response focused – Limited product and service – Lack of digital investment innovation pipeline Fantastic underlying assets; brand, loyalty, leadership and operational scale Past profit growth drivers have been stretched as far as they can Need to reinvest to restart growth engine
The impact of the drivers of profit growth are being 38 seen in a decline in personal Members Income per Member AA share of voice in media Year on year change in personal Members 0.0% 22% £135 £126 £119 11% -2.3% -2.4% £113 4% 2% -4.5% FY12 FY13 FY14 FY15 2011 2012 2013 2014 FY12 FY13 FY14 FY15
Our priorities for the consumer Roadside business are 39 centered around three themes as a consequence Trade better Shorter-term Drive growth Drive immediate opportunities Drive growth in Members and to fund growth investment services per Member Longer-term Investment in innovation and More sophisticated value the AA brand management to drive strong marketing returns Change New systems to improve speed to market, learning, flexibility Add to commercial capabilities to deliver change Supported by investment in CRM systems, service innovation and the brand
We are focused on a number of plans to deliver EBITDA 40 gains to re-invest in growth Drive performance and deliver EBITDA to fund growth investment Key plans 1. Retention: 24 month retention improvement plan to step-change renewal performance 2. New Business: Sales channel optimisation applying strong analytics 3. Discounting: targeted reductions in discounting 4. Costs: reduce costs by shifting communication from paper and calls into digital channels
The focus on retention is already driving improvement 41 Stay AA re-launch in Save rate up 4 percentage points March Discount rate down 6 percentage points Feb Mar April May June July Aug Sept Oct Nov Dec Jan Discount rate Save rate Save rate up 4% points; discount rate down 6% points since re-launch
To stem the decline and drive growth in Member 42 numbers, we are investing in our proposition for Members Re-establish growth in the Membership by redeveloping the Membership proposition Key plans 1. Brand: Invest in the AA’s brand through re-starting our above-the-line advertising 2. Products: Innovation in products and services, developing and implementing a new product pipeline 3. Membership: Differentiate being a Member beyond breakdown integrating with broader AA services 4. Digital: New services, self-service and sales capabilities 5. Connected Car: Lead opportunities – accelerating trials and developing connected propositions
We will be investing c£10m in the brand to improve 43 key commercial metrics over the coming years AA media spend and share of voice Plans Broaden from only direct response marketing Invest c£10m in above-the-line marketing Additional capabilities created internally Effectiveness analysis used to determine 66% optimal spend going forward 57% 47% Benefits 31% Market share of new business and 22% 21% improved campaign efficiency 11% 4% 2% Rational and emotional impact on retention 2006 2007 2008 2009 2010 2011 2012 2013 2014 Employee engagement Total media spend AA Share of voice Sources: Ebiquity Media Tracking (TV, Press, Radio, Cinema, Outdoor), Road Brand Tracker Survey, IPSOS
In parallel, we are investing £22m over three years to 44 transform our digital capabilities… 1 Self-service 2 Sales From: No self-service, phone and paper based From: Old platform and To: Integrated multi- limited capabilities channel service To: Best-in-class digital sales Self-service Sales capabilities Lowering contact cost intelligently Step-change in digital sales performance AA digital platform 4 Digital platform Connect and From: Ageing platform 3 Content and services services To: Flexible low cost platform From: Broad, but fragmented content Lower maintenance, rapid To: UK’s digital motoring and travel hub digital development integrating Membership Services Retention and cross-sell shift
We are ramping up our investment in 45 the Connected Car… Membership in the modern world Selected plans Consumers Manufacturers Insurance Fleet Across four areas accelerated proposition development and trials Developments in each market area support the others Expanded operational investment in New partnerships eCall and bCall technology and capabilities Telematics Operational R&D
Finally, work is underway to upgrade our commercial 46 capabilities, the organisation and core systems Upgrade commercial capabilities, the organisation and core systems Key plans 1. CRM: new systems to help us talk to the right Members with the right messages in the best channel 2. Digital platform: new digital platform to enable new digital services, self-service and sales capabilities 3. Organisation: Investment in our people to strengthen our capabilities 4. Analytical capabilities: Commercial MI and improvements to enable us to drive stronger marketing and growth investment returns
Our aim is to transform the consumer Roadside 47 business over the next three years… Quicker to market with more targeted communications, offers and Agile investment in current and prospective Members Innovative Leading the market with stronger product and service innovation Dedicated to Re-invigorated membership proposition supported by stronger CRM and digital services Members Strengthened core Strengthened brand, operation, people, systems and digital assets platforms Supports rebalanced and more sustainable sources of profit growth
Summary 48 Strong underlying core – key strategic advantages in this market Past profit drivers not sustainable in the long-term (marketing cuts and pricing) Key areas of trading being driven to generate profit to re-invest Investment in brand, product and services, digital and Connected Car in plan – Progressively landing these investments of the next 3 years Expectation to halt, then reverse, decline in Membership numbers – Move to a more balanced and sustainable profit growth engine Built on unique assets – old and new
Service delivery Oliver Kunc Operations Director
AA Road operations – the largest in the UK 50 13.4m customers 3.5m breakdowns pa Over 3,000 AA patrols Breakdown patrols 2,032 Recovery patrols 452 Garage agents c350 Motorcycle patrols 20 Fuel Assist 59 Key Assist 15 Dedicated technicians 163 Other 360 (incl. Battery Assist, Glass, Home Emergency and Inspections)
12 separate operations supported, both B2C and B2B 51 Breakdown Motorcycle breakdown Recovery Motorcycle recovery Fuel Assist SORT Key Assist Accident management Battery Assist Vehicle inspections Glass Dealer audits
Motor manufacturers branded schemes including 52 dedicated programmes delivered by silver vans …including unbranded vans c30 manufacturers supported - c67% of the new car market… for key accounts
Strong position in Fleet and major Added Value Accounts 53 with Lloyds Banking Group and TSB Added Value Accounts (AVAs) Fleets Long term relationship with Lloyds Banking Pay for use and insured roadside cover Group and TSB provided to seven of top 10 UK leasing companies Providing various levels of roadside cover to around 4m customers Direct operational fleets Home emergency cover provided to Additional services include incident selected account holders management, accident / risk management and HGV
Operations is driven by four key strengths 54 1 2 3 4 Exceptional Deep Constant Commercial service expertise innovation focus Key pillars to our continued success
1. Exceptional service 55 Centralised operations in Oldbury Call handling 80% in 20 seconds App usage <1% 460 contact centre advisors Average call time <5 minutes Call to arrive time 45 minutes 150 teleworkers 320 service advisors New integrated app growing in usage in 2015 Prestige brands Volkswagen Group Police
2. Deep expertise 56 Leicester training centre Patrol repair rate c80% Dedicated B2B resource c140k jobs Self-managed recovery fleet Average patrol tenure 11 years Dedicated B2B resource International network (ARC) Fuel Assist Key Assist Battery Assist Special operations, Motorcycles , Glass, …
3. Constant innovation 57 Compact Recover Trailer (CRT) Bosch diagnostic systems Significant fleet upgrade Best diagnostics tool in market Speed of deployment Multi-year deal / exclusivity Safety improvements Retrofitted Flexibility eg motorbikes Bluetooth connected
4. Commercial focus 58 Tight operational and cost control Scale of business drives density of work, and cost efficiencies Proprietary deployment tool (AA Help) optimises service / efficiency mix Systems Flexibility to manage peaks in demand – and multi-skilled workforce and garaging controls Service expertise drives strong “tail” management Expertise improves repair rate, reduces “second resource” and improves fix time
The result is delighted customers… 59 Highest overall ratings… … and ahead on key metrics Which ? “Recommended Provider” for 4 years running 75 Highest test score for a major provider from ‘Which?’ every year since 2007 Highest scores for core performance (eg 72 call to arrive and Roadside repair rate)… …and highest scores for customer 69 satisfaction across both the 2013 and 2014 surveys The AA is still the mainstream breakdown provider of choice. Which?, 2014 Source: Which? breakdown service providers review 2014
…and ever more efficient delivery 60 Rolling 12 month inflation adjusted variable cost per case Indexed to 100 102 100 98 96 94 92 90 88 86 84 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Aug-14 Source: AA internal Data
There are a number of challenges… 61 CRM systems aging and require significant upgrade Previously stretched fleet renewal cycles Reduced investment in training in last 5 years Strong focus in recent years on improving “as is”; not modernising Investment to turn challenges into opportunities
…which we are turning into strategic opportunities 62 Investment in Modernise our systems and fleet for efficiency infrastructure and member experience Re-emphasise training and continue to improve service Patrol 2020 by the roadside Revolutionise the member’s breakdown experience Embrace digital through digital (mobile first) Commercial Trial and grow specialist services using opportunities our unique capabilities and infrastructure Invest in Invest in Connected Car to future-proof the operation Connected Car and continue to innovate
These will align with, and deepen, our strengths 63 1 2 3 4 Exceptional Deep Constant Commercial service experience innovation focus – Investment in front – Upgrade patrol – App development – Drive growth of end systems training existing commercial – Investment in areas – Refresh patrol – Recruitment and Connected Car – New B2B and B2C infrastructure; retention focus to driven operating technology and fleet identify and build model services expertise
Summary 64 Strong operating model – unique and at significant scale Challenging market with recent underinvestment Opportunity to strengthen core assets Investment focused on further building out existing strengths Modernisation is starting and will drive continuous evolution Opportunity to improve service, efficiency and commercial focus in the medium-term from a strong baseline
Membership Services Kirsty Ross Membership Services Director
Membership Services is a new team that generates 66 value for the AA in two distinct ways… 1 2 Value generated within own Value generated for AA group P&L by selling Membership by strengthening the products and services Roadside Member proposition Motoring Member Member Media Services acquisition retention Significant opportunities for growth in both areas
AA Media generates c50% of Membership Services 67 EBITDA, across 4 key divisions Publishing Hotel Services Digital Commercial “Car Essentials” c250 non-fiction titles Subscription income Advertising revenue across atlases, maps, from hotels, B&B, from Route Planner products eg European driving, travel, leisure caravan and campsites, breakdown kits Creation of digital and “AA Inspected” in return for an annual content eg eBooks Sold through major guides (eg hotels) AA inspector visit and retailers, AA webshop AA Guide profile Roadwatch traffic advice UK and International and Eurotunnel shop service Consultancy and training events
AA Motoring Services comprises 5 divisions, 68 as well as new growth areas eg Tyres Inspections and BCA assured Signs Warranties AA Cars History Checks 15pt car Sign production Warranty products Used-car site, with 154 point vehicle inspection and traffic eg Mechanical over 150k cars safety inspection pre-auction management for Breakdown and 2.5k dealers Car data checks events and Insurance AA technicians Launched in covering eg housing based at BCA B2B2C via dealers September 2013 outstanding developments sites finance, write-offs AA Tyres: New mobile tyres business launched in April ’15 New Business Service and Repair: eg Garage inspection program launched 2014
Membership Services has strengths that are unique in 69 many of the sectors in which we compete Stable and profitable portfolio of core Membership Services businesses Wide ranging experience and capabilities – “right to play” in broader Motoring Services AA reputation for trust unique in markets characterised by lack of transparency Proprietary sales channels not available to competitors eg Roadside Members Powerful historic position in navigation, travel and hotels Positive halo benefit on AA brand reputation and member proposition
There are also historical challenges, 70 which we are addressing Limited appetite to make investment with long-term paybacks in the past, resulting in some businesses lacking in scale Fragmented markets: need to be selective where and how we choose to operate Business models not evolved in Digital Age, new competitors in some markets Operated independently in the past, limiting connection to the broader AA Membership base
The opportunities and priorities are clear and consistent 71 across Membership Services 1 2 3 Build on the AA’s Build on the AA’s Leverage our investment in digital products and services reputation for trust to to enhance the grow in adjacent Member proposition markets Modernise the core; strengthen the AA proposition; grow in new markets
Investment in digital is key to future growth; 72 some progress to date – eg Route Planner in AA app 1 Now integrated with core breakdown app Simpler and cleaner layout and useability More frequent engagement with the app Future opportunity: over 50% of visitors to AA website come to read Media content Developments this year focused on Route Planner traffic and hotels and travel content
Work is underway to review the role of our unique 73 assets in the Member proposition 2 Publishing Car Essentials Hotels and Restaurants
There is potential to expand our reach through the car 74 ownership lifecycle 3 • Consumables and • Inspiration and car care research • Car wash and clean / • Valuation and valet inspection • Regular maintenance • Sale of previous car • Finance • Service and MOT • Selection and • Major repair work c£60bn purchase • Accidents • Warranty • etc … • etc … • Traffic • In-car connectivity • Parking • Route planning • Infotainment • Alternative mobility and navigation • En-route activities • etc … • Fuel pricing
The Motoring Services market is characterised by lack 75 of trust: an opportunity to leverage our brand 3 38% of consumers suspect there was a 83% of consumers are not confident in the problem with the used car they bought price they get at their garage “Have you ever bought a used car that you “The cost of Service and Repair was later suspected had any of the following ?” higher than I expected” Outstanding 59% finance Clocked In an accident Mechanical/ 38% other fault 23% 17% No issue Agree Unsure Disagree Source: AA Populus Panel 2013 and 2014
Put together, attractive opportunities to expand into 76 adjacent Motoring Services markets 3 Key opportunities: 1 Used Car Sales c£60bn broader Motoring Services Focus for today market – the AA currently focused Tyres on <10% of spend Car Inspections Garages – Services, Maintenance and Repair 2 Dealer Solutions Unique strength of the AA Brand in markets … with low customer trust Significant potential to build on existing assets in new markets
AA Cars is the 3rd largest used car dealer by stock, 77 with further headroom for growth 3 Largest used car dealers, by stock AA Cars USPs Selective dealer targeting Autotrader 404,613 Free comprehensive Car History Check Motors 255,774 Unique AA content AA Cars 162,769 Free breakdown cover Pistonheads 124,999 E&M 120,762 Selected growth plans Driving 115,259 Improve use of digital Sun Motors 112,600 Drive vehicle inspections RAC Cars 106,352 Open up new marketing channels What Car 50,900 Source: Company Websites
The UK tyre market is worth over £3bn pa, 78 and offers an attractive growth opportunity for the AA 3 Tyres are the 2nd most common AA Tyres: product and business model cause of breakdowns… innovation Market-leading proposition Battery 17% – Competitive price; AA quality Tyre 15% – Online / mobile booking process Engine – Next day service; to home or work Alternator And growing – as many new cars Cost efficient and lean Starter motor do not carry a – No fixed retail network spare tyre Clutch – Supply chain management Lights (interior) Agile delivery model Spark plugs – Collaboration with Mobile Tyre specialist Fuel pump (electrical) – Minimises execution risk… Cylinder head gasket – …whilst leveraging AA assets Other 0 10 20 30 Source: AA internal Data
Summary 79 Set up in 2014 to bring together the value-added services which the AA offers Members and strengthen the Membership proposition Two key business segments: Media and Motoring Services Pursuing several additional opportunities, in line with broader AA membership strategy – Implementing digital transformation – Adding value to the Membership proposition – Building on recent launches in adjacent markets Powerful existing assets, strong brand presence, particularly in the motoring market – A number of opportunities to drive significant growth in future
Insurance Janet Connor Managing Director Insurance
Formed in 1967, the AA is the 2nd largest home and 81 motor insurance broker The AA’s current business model Core insurance revenue breakdown Other (6%) Value-added broker model Motor / Home insurance underwritten by panel Motor Panel actively managed Home (55%) (39%) Insurance strengthens Road Membership base Scale in distribution Core insurance policies in force #9 personal lines broker in the UK by premium 3 of which #2 home insurance broker by policies in force 4 Roadside Product Policies 1 Members 2 #2 motor insurance broker by policies in force 4 Motor 635k 63% Home 907k 42% Sources: 1: AA Internal Data, for the 12 months to 31/01/15 2: % of Insurance Policy holders that are also Roadside Assistance Personal Members 3: Insurance Times 2014 survey 4: GFK February 2015
Insurance policies are underwritten by a broad panel 82 The AA’s panel model Brand and customers attractive for panel Strong and diversified set of panel Strong brand, frequent customer contact members Long history, high awareness and Large and specialist players participate consideration for different customer segments Extensive customer data and contact base Insurer provides net rate, the AA then Attractive risk-profile of Members creates a customer price Various commercial models across AA manages customer policy c20 products outside motor and home adminstration Outsourced – travel, pet, etc. Insurer manages the claims process Referral – learner drivers
The AA has high brand Consideration 83 Brand Consideration 1 Quote to Click conversion 2 for switching Motor Insurance by position on MoneySupermarket Dec 2010 Dec 2011 Dec 2012 Dec 2013 Dec 2014 AA Admiral Aviva 1st 2nd 3rd Direct Line Churchill Tesco Morethan RAC Post Office Hastings Direct AA Market Sources: 1: GFK FRS Motor Dec 2014 of top 15 brands 2: eBenchmarkers Autumn 2014
Exclusive Member and breakdown data will continue 84 to be at the heart of the AA insurance model We understand our customers … … facilitating customer engagement, sales and retention Used in relatively basic way today Cross-sell from and into Roadside 3.8m 3.5m Rates tailored for AA Members personal members breakdowns a year Efficiency in direct marketing Data protects profitability for insurer partners 2.5m 20m Opportunity to do more in future Further integration with Roadside to policy records vehicle records strengthen propositions and Membership Commercial agility driven through more sophisticated analytical techniques Source: AA internal Data
However, the AA has been challenged by a number 85 of developments in the broader market … Broader market development: – Importance of price comparison websites – Margin squeeze – Pace of regulatory change – Direct competition Customer decisions driven more and more by price, and less by brand Broker model challenged: – Limited view of end-to-end profitability – Adds cost into the value chain (already suffering from low margins) AA currently lacks pricing agility in an increasingly dynamic marketplace
… leading to a decline over the last seven years 86 Motor insurance policies in force (shown since 2010) c635k today c960k in 2011 2011 2012 2013 2014 2015 Motor insurance stabilised in FY15 through investment in pricing and marketing Source: AA Internal Data
The rise of Price Comparison Websites (PCWs) has led 87 to increased market commoditisation in personal lines Market growth of online and PCWs 1 Main factors driving Motor insurance % of new policies purchase decision 2 100 Cost of policy 80 85% 60 Features of policy 40 15% 20 Previous 0 knowledge / 1997 2000 2003 2006 2009 2012 2015 experience of company Other online Price Comparison Website (PCW) 12% Customers predominately buy through PCWs Very high elasticity of demand – especially around top ranking positions 3/4 of customers shop around, and 1/3 switch at renewal for cheaper price Sources: 1: FPK, Datamonitor, eBenchmarkers 2: GFK FRS Motor Dec 2014 – all policies, responses were all that apply
Price is a key driver, however, brand Consideration is 88 still important Share of new business vs. brand Opportunity for the AA Consideration in Motor Increasing conversion Brands Hastings Brand strength under-utilised due to outgrowing Consideration pricing Admiral Share of new business (%) However, extensive policy and customer Aviva data does give the AA ability to compete Tesco Future winners – AA well placed Relationship and niche portfolio owners Effective end-to-end claims management Analytics focused Providers not burdened by legacy systems Brands that underperform Consideration Brand Consideration (%) Source: GFK FRS Motor Dec 2014
Insurance is a highly fragmented value chain, 89 the AA currently only plays as a traditional broker Activities in personal lines insurance value chain Price Pricing New Policy Investment Lead comparison & Claims Sales business admin & & generation & under- handling fulfilment servicing solvency quotation writing Players: Google PCWs Broker Insurer Market fragmentation leads to inefficiency – many providers competing to make a return Market evolution has reduced the value added of the traditional broker model PCWs here to stay – model may be constrained
The AA has the opportunity to remain a broker, 90 and also take on the role of the insurer Activities in personal lines insurance value chain Price Pricing New Policy Investment Lead comparison & Claims Sales business admin & & generation & under- handling fulfilment servicing solvency quotation writing Players: Google PCWs Broker Insurer Make better use of unique data to drive more agile and competitive pricing for Members Broker will enable panel to price on own systems and make best use of data Improve customer experience and lower claims costs
Broker PLUS Insurer model builds on the AA’s 91 experience as a broker, it does not replace it Effective business model that maximises use of capital AND broker value New agile IT systems, integrated with AA and high-value external databases Newly built capabilities drive excellence in data mining and agile pricing Integrated policy and claims management, unencumbered by legacy systems Leveraging robust controls and governance, mitigating conflicts Experienced, proven team that has created and run successful operations Greenfield systems, new capabilities, combined with strong brand and proprietary customer data, provides significant medium-term growth opportunity
A minority of solvency capital will be provided through 92 an in-house underwriter Shared capital and risk model c25% of capital provided in-house Combining co-insurance/ re-insurance with in-house capital gives balance of strategic control, cost and risk Retains strategic benefits of 100% in-house model Mitigates need to share intellectual property Investment in solvency capital assures re-insurers, supporting access to competitive rates Mitigates risk and limits capital exposure in a cost effective manner
Using proprietary data with sophisticated analysis 93 Agile data, analysis and pricing model Internal AA data External Data Unique breakdown and Enrich analysis through Membership data addition of external public and government databases Advanced Consolidating broader data analytics sources that exist in the AA Enhance with additional vendor data sources to platform New scoring models, also provide unique blend and supporting management granular insights information and decision making Competitive advantage through unique insights, risk-modelling and pricing agility
Insurer and broker separate with new agile systems 94 Broker and insurer systems setup Broker IT system Insurer IT system AA quote and policy AA insurer quotes administration system Customer Data Insurer Data Broker enrichment enrichment pricing pricing + analytics Policy and claims administration system
An experienced and proven team has been 95 recruited to lead the insurer Craig Staniland CEO 30+ years experience in Insurance Previously MD, AXA Personal Lines Prior to that Founding Underwriting Director, Swiftcover and Head of Motor Underwriting, RBS Dominic Bird, Steve Gaywood, Tony Peppard Head of Pricing Head of Head of Claims Counter-Fraud 10 years experience 30+ years Claims and in Insurance Vehicle Management 15 yrs Counter-Fraud experience experience Previously Head of New Business Previously MD, AXA Previously Head of Pricing, Direct Line and Swiftcover Claims Counter-Fraud, AXA Group and MD, Churchill Personal Lines and Claims Services Group Head of Systems and Prior to that Data Analytics, Consultant, Innovation Conversant Towers Watson Data
Summary 96 Significant scale and experience as motor and home insurance broker Market conditions and model have led to customer decline AA brand and proprietary customer data provide a competitive advantage that has not been fully utilised to date New broker PLUS insurer model designed to capitalise on opportunity through more agile and competitive pricing Capital sharing model mitigates risks while retaining strategic control Experienced team building new capabilities and systems
Closing remarks Bob Mackenzie Executive Chairman
Closing remarks 98 A great, robust business, with strong assets at the core Work on the new AA has begun, after a period of under-investment Reshaped team and strategy for the future in place Near term focus on delivering IT and digital transformation Refinancing reduces interest cost by c£47m and enables payment of dividends Period of investment now to return the AA to growth in the medium-term
Q&A
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