Structural and regulatory challenges ahead for AA, says Credit Suisse
Structural and regulatory challenges lie ahead for the AA, Credit Suisse said on Friday, as it downgraded the insurer and roadside assistance company to 'neutral' from 'underperform' and slashed the target price to 70p from 110p.
The bank highlighted three recent news headlines: the Citizens Advice Bureau’s super-complaint to the Competition and Markets Authority about loyal customers paying more, the FCA pricing discrimination investigation and the little known AA Local Driver Membership offer - from £45 for under 20 miles coverage - which it reckons changes the risk profile of the AA.
CS said the most worrying of the three is the CAB's super-complaint which, although not referencing the roadside offering, has a clear read-across as loyal customers who stay with the AA for longer are paying significantly higher rates than new customers.
"With an average tenure of around 12 years and around 710k members having been with the AA for over 20 years, the implications of a negative CMA review could be material," it said.
"We do not believe that corrective actions will be demanded straight away but, in our view, pricing is likely to change proactively to address the issues raised." CS expects the average price per roadside policy to drop by 1% to 3% between 2020 and 2022 as the company rebalances its price points to benefit loyal customers.
CS said the best case scenario for the AA is that either the CMA disagrees and believes that loyal members are not discriminated against as they have the opportunity to switch providers, or that Roadside Assistance is not referenced and any negative fallout does not permeate across.
The worst case scenario could require restitution, like in the PPI example, a cap placed on loyalty premiums going forwards and widespread reductions in service fees to correct the previous overcharging.
At 1045 GMT, the shares were down 5.2% to 102.75p.