AA..L Regulatory News (AA.)

AA Bond Co Limited

SUPPLEMENTAL INVESTOR REPORT

18 January 2021

AA Bond Co Limited (the "Issuer") has made available certain updated information on 18 January 2021. Through this supplemental investor report (the "Supplemental Investor Report"), the Issuer is providing this information publicly.

FORWARD-LOOKING STATEMENTS

This Supplemental Investor Report includes statements that are, or may be deemed to be, "forward-looking statements" within the securities laws of certain applicable jurisdictions. These forward-looking statements can be identified by the use of forward-looking terminology, including the terms "aim", "anticipate", "assume", "believe", "contemplate", "continue", "could", "estimate", "expect", "forecast", "intend", "likely", "may", "might", "plan", "positioned", "potential", "predict", "project", "remain", "should", "will" or "would", or, in each case, their negative, or similar expressions, identify certain of these forward-looking statements. Other forward-looking statements can be identified in the context in which the statements are made. These forward-looking statements include all matters that are not historical facts and include statements regarding the intentions, beliefs or current expectations of our management concerning, among other things, the results of operations, financial condition, liquidity, prospects, growth, strategies of the Holdco Group and/or the AA plc Group (as context requires) and the industry in which we operate. Forward-looking statements appear in a number of places in this Supplemental Investor Report, including, without limitation, in the sections entitled "Risk Factors", "Management's Discussion and Analysis of Financial Condition and Results of Operations", "Industry" and "Business" and include, among other things, statements relating to:

· our strategy, outlook and growth prospects, including our plans to increase the sale of our products and services through cross-selling and up-selling to our existing customers;

· risks related to the recent outbreak of COVID 19;

· our operational and financial targets;

· our results of operations, liquidity, capital resources and capital expenditure;

· our cost-saving programmes;

· our financing plans and requirements;

· our planned investments;

· future growth in demand for our products and services;

· general economic trends and trends in the markets in which we operate;

· the impact of regulations and laws on us and our operations;

· our retention of personal members, business customers and business partners;

· the competitive environment in which we operate and pricing pressure we may face;

· our plans to launch new or expand existing products and services; and

· the outcome of legal proceedings or regulatory investigations.

By their nature, forward-looking statements involve known and unknown risks, uncertainties and other factors because they relate to events and depend on circumstances that may or may not occur in the future. We caution you that forward-looking statements are not guarantees of future performance and that our actual financial condition, results of operations and cash flows, and the development of the industry in which we operate, may differ materially from (and be more negative than) those made in, or suggested by, the forward-looking statements contained in this Supplemental Investor Report. In addition, even if our financial condition, results of operations and cash flows and the development of the industry in which we operate are consistent with the forward-looking statements contained in this Supplemental Investor Report, those results or developments may not be indicative of results or developments in subsequent periods. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we can give no assurance that they will materialise or prove to be correct. Because these forward-looking statements are based on assumptions or estimates and are subject to risks and uncertainties, the actual results or outcome could differ materially from those set out in the forward-looking statements as a result of, among others:

· the outbreak of COVID-19 and changes in the economic conditions in the United Kingdom (including as a result of COVID-19 and/or Brexit);

· the loss or impairment of our favourable brand recognition;

· the operational failure of our IT and communication systems or the failure to develop our IT and communication systems;

· the loss of key contractual relationships with certain business partners;

· increased competition within our business segments;

· existing competition within the insurance broking and underwriting markets;

· changes in the competitive landscape within the insurance industry, and changes relating to our insurance panel members;

· failure to renew existing contracts or enter into new contracts with suppliers;

· litigation (including in connection with roadside injuries or death) or regulatory inquiries or investigations;

· the failure to comply with data protection laws and regulations or failure to secure and protect personal data;

· a lack of price harmonisation across our personal member and business customer base or changes in the levels of price discounts or churn;

· our ability to achieve cost savings and control or reduce operating costs;

· failure of internal control processes;

· severe or unexpected weather, which may increase our operating costs;

· changes within the vehicle market, including the average age of vehicles on the road, extended manufacturer guarantees and reduced vehicle use;

· failure to protect our brand and other intellectual property rights from infringement;

· our ability to successfully manage risks and liabilities relating to acquisitions and integrate any future acquisitions or consummate disposals in the future;

· our ability to retain or replace senior management and key personnel;

· union relations, strikes, work stoppages or other disruptions in our workforce;

· adverse changes in the laws and regulations governing our business;

· risks relating to our pension schemes;

· risks relating to the financing structure;

· risks relating to our financial profile;

· factors affecting our leverage, our ability to service our debt and our structure;

· risks relating to security, enforcement and insolvency; and

· risks relating to taxation.

Additional factors that could cause our actual results, performance or achievements to differ materially include, but are not limited to, those discussed under "Risk Factors". The factors described above and others described under the caption "Risk Factors" should not be construed as exhaustive. Due to such uncertainties and risks, you are cautioned not to place undue reliance on such forward-looking statements, which speak only as at the date of this Supplemental Investor Report. We urge you to read this Supplemental Investor Report, including the sections entitled "Risk Factors", "Management's Discussion and Analysis of Financial Condition and Results of Operations", "Business" and "Industry" for a more complete discussion of the factors that could affect our future performance and the industry in which we operate.

These forward-looking statements speak only as at the date of this Supplemental Investor Report. We expressly undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, other than as required by law or regulation. Accordingly, prospective investors are cautioned not to place undue reliance on any of the forward-looking statements herein. In addition, all subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by the cautionary statements referred to above and contained elsewhere in this Supplemental Investor Report, including those set forth under the caption "Risk Factors". 

USE OF CERTAIN TERMS IN THIS SUPPLEMENTAL INVESTOR REPORT

Unless otherwise indicated or the context otherwise requires, references in this Supplemental Investor Report to:

• "AA" or "AA plc Group" refers to AA plc and its subsidiaries.

• "Borrower" refers to AA Senior Co Limited.

• "Class A Notes" refers to the Issuer's £500,000,000 aggregate principal amount of 6.27% Sub-Class A2 Notes, the £700,000,000 aggregate principal amount of 2.88% Sub-Class A5 Notes, the £250,000,000 aggregate principal amount of 2.75% Sub-Class A6 Notes, the £550,000,000 aggregate principal amount of 4.88% Sub-Class A7 Notes, the £325 million aggregate principal amount 5.50% Sub-Class A8 Notes and/or any other Class A Notes issued by the Issuer.

• "Class A IBLA" refers to an initial and any additional loan agreement (on substantially the same terms as the initial Class A IBLA) entered into between the Issuer, the Borrower, the Issuer and Deutsche Trustee Company Limited (in its capacity as both the Issuer Security Trustee and the Obligor Security Trustee), as amended from time to time.

• "Class B Notes" refers to the £570,000,000 aggregate principal amount of 5.50% Sub-Class B2 Notes and/or any other Class B Notes issued by the Issuer.

• "CRM" refers to "customer relationship management".

• "Holdco" refers to AA Intermediate Co Limited.

• "Existing Liquidity Facility" refers to a liquidity facility pursuant to a liquidity facility agreement dated 2 July 2013 and renewed on 23 June 2014, 29 April 2015 and 10 June 2016.

• "Obligor" means the Borrower and each member of the Holdco Group that is party to the common terms agreement and the security trust and intercreditor deed, each dated 2 July 2013, as an obligor in accordance with the terms of the WBS programme transaction documents.

• "Security Group" means Topco and each subsidiary of Topco.

• "Security Group Companies" means each of the Issuer, Topco and each member of the Holdco Group and Security Group Company means any of them.

• "Existing Senior Term Facility" refers to £199,666,667 senior term facility entered into on 2 July 2018 pursuant to the Senior Term Facility Agreement.

• "Existing Senior Term Facility Agreement" refers to the senior term facility agreement entered into on 2 July 2018.

• "Existing Working Capital Facility" refers to the working capital facility of an aggregate facility amount of up to £60 million entered into on 2 July 2018 pursuant to the Working Capital Facility Agreement.

• "Existing Working Capital Facility Agreement" refers to the working capital facility agreement entered into on 2 July 2018.

• "Solvency II" refers to the EU Solvency II Directive (2009/128/EC).

• "Topco" refers to AA Mid Co Limited.

• "UK" refers to the United Kingdom.

• "VAT Group" means a group for the purposes of sections 43 to 43D of the Value Added Tax Act 1994 and the Value Added Tax (Groups: Eligibility) Order 2004.

• "WBS" refers to an investment grade secured corporate financing commonly referred to as a "whole business securitisation".

• "we", "us", "our" or "Holdco Group" with respect to historical results of operations, including business operations, refer to AA Intermediate Co Limited and its subsidiaries as a whole or to any one or more of its subsidiaries when discussing future results of operations, including business operations, provided that in the section entitled "Business", the terms "we", "us", "our" the "AA", or the "AA plc Group" refer to AA plc and its subsidiaries as a whole as we manage our business operations by reference to the AA plc Group as a whole and not just the Holdco Group.

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

The Issuer is a special purpose company and was formed on 14 May 2013 for the purpose of issuing the Class A Notes and Class B Notes and lending the proceeds thereof to the Borrower. The Issuer has not engaged in any activities other than those related to its formation and the issuance and redemption of Class A Notes and Class B Notes and certain ancillary arrangements.

Unless otherwise indicated, this Supplemental Investor Report presents (i) the audited consolidated financial statements of Holdco as at and for each of the years ended 31 January 2019 and 2020, which have been prepared in accordance with International Financial Reporting Standards issued by the International Accounting Standards Board ("IASB") as adopted for use by the European Union ("IFRS"), and audited by Holdco's independent auditors, PricewaterhouseCoopers LLP, as set forth in their audit report; (ii) the audited consolidated financial statements of Holdco as at and for the year ended 31 January 2018, which have been prepared in accordance with IFRS and audited by Holdco's independent auditors for that year, Ernst & Young LLP, as set forth in their audit report; and (iii) the unaudited consolidated interim financial statements of Holdco as at and for the nine months ended 31 October 2020, which have been prepared in accordance with International Accounting Standard 34 "Interim Financial Reporting" ("IAS 34") and included elsewhere in this Supplemental Investor Report. With regard to the consolidated historical financial, operating and other data presented in "Selected Financial and Operating Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations", as well as in this section "Presentation of Financial and Other Information", references to "we", "us", "our", "Holdco" or "Holdco Group" are to Holdco and its subsidiaries, including the Issuer.

The financial information as at and for each of the years ended 31 January 2018, 2019 and 2020, has been extracted or derived without material adjustment from the audited consolidated financial statements of Holdco as at and for each of the years ended 31 January 2018, 2019 and 2020, respectively. The unaudited financial information as at and for the nine-month period ended 31 October 2020 has been extracted or is derived without material adjustment from our unaudited consolidated interim financial statements for the nine months ended 31 October 2020 included elsewhere in this Supplemental Investor Report. The unaudited financial information for the nine month period ended 31 October 2019 has been extracted or is derived without material adjustment, from the prior period comparative information in our unaudited consolidated interim financial statements for the nine months ended 31 October 2020 included elsewhere in this Supplemental Investor Report.

The unaudited consolidated interim financial statements of Holdco as at and for the nine months ended 31 October 2020 include a discussion of material uncertainties that may cast significant doubt on the Group's ability to continue as a going concern. The Sub-Class A5 Notes have a maturity date of 31 January 2022. We intend to refinance the Sub-Class A5 Notes prior to their maturity date. Holdco's directors have considered factors affecting the ability of the feasibility of refinancing the Sub-Class A5 Notes prior to their maturity date, along with the projected cash flows, for a period of one year from the date of issue of the unaudited consolidated interim financial statements as at and for the nine months ended 31 October 2020 and have concluded that they have confidence that the Group will have sufficient funds to continue trading for this period and will be able to secure financing so as to be able to continue to meet its liabilities as they fall due. However, the refinancing of the Sub-Class A5 Notes is not committed at the date of issue of the unaudited consolidated interim financial statements as at and for the nine months ended 31 October 2020. In addition, the Acquisition by the Consortium remains subject to a court sanction hearing and to regulatory approval. Both of these circumstances indicate that material uncertainties exist that may cast significant doubt on the Group's ability to continue as a going concern for a period in excess of a year from the date of issue of the unaudited consolidated interim financial statements as at and for the nine months ended 31 October 2020.

Certain unaudited financial data of the Holdco Group in this Supplemental Investor Report has been presented for the twelve months ended 31 October 2020. The unaudited financial data has been calculated by (i) adding (a) the unaudited consolidated financial data for the nine months ended 31 October 2020, derived from the unaudited consolidated interim financial statements as at and for the nine month period ended 31 October 2020 or our accounting records or management reporting, as applicable, and (b) the consolidated financial data for the year ended 31 January 2020, derived from the audited consolidated financial statements as at and for the year ended 31 January 2020 or our accounting records or management reporting, as applicable, and (ii) subtracting the unaudited consolidated financial data for the nine months ended 31 October 2019, derived from the unaudited comparative financial information as at and for the nine month period ended 31 October 2019 presented in the unaudited consolidated interim financial statements as at and for the nine month period ended 31 October 2020 or our accounting records or management reporting, as applicable. The unaudited financial data for the twelve months ended 31 October 2020 has not been audited or reviewed by our auditors, is not required by or presented in accordance with IFRS or any other generally accepted accounting principles and has been prepared for illustrative purposes solely for the purpose of this Supplemental Investor Report. Such financial information is not necessarily representative of our results of operations for such period or any future period or any financial position at any past or future date.

For the year ended 31 January 2020, the Holdco Group adopted IFRS 16 "Leases", which replaced IAS 17 "Leases". The Holdco Group has not restated comparative information for prior periods, as permitted under the specific transition provisions in the standard. The reclassifications and adjustments arising from the new leasing rules are therefore recognised in the opening statement of financial position on 1 February 2019. Therefore, the financial information presented for the years ended 31 January 2018 and 2019 may not be comparable to the financial information presented for the year ended 31 January 2020. (See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Recent Accounting Pronouncements-IFRS 16-Leases").

For the year ended 31 January 2019, we decided to present lease capital repayments net of proceeds from sale of fixed assets in order to better reflect the commercial terms of leased assets in the cash flow statement in the 2019 unaudited comparative financial information included within the audited consolidated financial statement of Holdco as at and for the year ended 31 January 2020. Therefore, the financial information presented for the year ended 31 January 2018 may not be comparable to the financial information presented for the years ended 31 January 2019 and 2020. (See "Management's Discussion and Analysis of Financial Condition and Results of Operations -Liquidity and capital resources-Cash flows").

The financial statements of the Holdco Group are presented in pounds sterling.

None of the historical financial information used in this Supplemental Investor Report has been audited in accordance with auditing standards generally accepted in the United States of America ("U.S. GAAS") or auditing standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"). In addition, there could be other differences between the auditing standards issued by the Auditing Practices Board in the United Kingdom and those required by U.S. GAAS or the auditing standards of the PCAOB. Potential investors should consult their own professional advisers to gain an understanding of the historical financial information contained in this Supplemental Investor Report and the implications of differences between the auditing standards noted herein.

Non-GAAP Financial Measures

 We present in this Supplemental Investor Report various financial measures of the Holdco Group that are not measures of financial performance or liquidity under IFRS, including the following.

· Trading Revenue, which we define as revenue excluding exceptional items, as reported in our historical consolidated financial information.

· Trading EBITDA, which we define as profit after tax as reported, adjusted for depreciation, amortisation, exceptional operating items, share-based payments, pension service charge adjustments, net finance costs, contingent consideration remeasurement and tax expense. Contingent consideration remeasurement was not included in our definition of Trading EBITDA in the year ended 31 January 2018. The pension service charge adjustment relates to the difference between the cash contributions to the pension scheme for ongoing contributions and the calculated annual service cost. Share-based payments charges result from grants under the long term incentive schemes for staff and management. We present Trading EBITDA on both a segmental and a consolidated basis. See "Note 1-Basis of Preparation", "Note 2-Segmental Information" and "Note 3-Adjusted Performance Measures" to our audited consolidated financial statements as at and for the year ended 31 January 2020.

· Trading EBITDA margin, which we define as Trading EBITDA as a percentage of revenue.

· Net cash flow from operating activities before tax and exceptional operating items, which we define as the cash generated from operating activities before taxation and adjusting operating items and excluding discontinued operations, as reported in the most recent publicly available financial statements.

· Free cash flow, which we define as net cash flow before payment of dividends, bond buy-backs and refinancing costs.

· Cash conversion, which we define as net cash flows from operating activities less capital expenditure, expressed as a percentage of Trading EBITDA.

See "Selected Consolidated Financial and Operating Data".

The non-GAAP financial measures presented herein are not recognised measures of financial performance under IFRS, but measures used by management to monitor the underlying performance of our business and operations. In particular, the non-GAAP financial measures should not be viewed as substitutes for net profit/(loss) for the period, profit/(loss) before taxation, operating income, cash and cash equivalents at period end or other income statement or cash flow items computed in accordance with IFRS. The non-GAAP financial measures do not necessarily indicate whether cash flow will be sufficient or available to meet our cash requirements and may not be indicative of our historical operating results, nor are such measures meant to be predictive of our future results.

We have presented these non-GAAP measures in this Supplemental Investor Report because we consider them to be important supplemental measures of our performance and believe that they are used by investors comparing performance between companies. Since not all companies compute these or other non-GAAP financial measures in the same way, the manner in which our management has chosen to compute the non-GAAP financial measures presented herein may not be comparable with similarly defined terms used by other companies. The non-GAAP financial measures have certain limitations as analytical tools and should not be considered in isolation from the other financial information presented herein. Some of these limitations are:

· they do not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;

· they do not reflect changes in, or cash requirements for, our working capital needs;

· they do not reflect the significant interest expense, or the cash requirements necessary, to service interest or principal payments on our debts;

· although depreciation and amortisation are non-cash charges, the assets being depreciated and amortised will often need to be replaced in the future; and

· the fact that other companies in our industry may calculate the non-GAAP measures differently from the way we do may limit their usefulness as a comparative measure.

Rounding

Certain numerical information and other amounts and percentages presented in this Supplemental Investor Report may not sum due to rounding. Accordingly, certain figures in this Supplemental Investor Report have been rounded to the nearest whole number.

Currency Presentation

In this Supplemental Investor Report, unless otherwise indicated, all references to "£", "pound", "pounds", "pounds sterling", "sterling" and "GBP" are to the lawful currency of the United Kingdom, all references to "€", "euro", "euros" and "EUR" are to the single currency of the Member States of the European Union participating in the European Monetary Union and all references to "$", "US dollar", "US dollars" and "USD" are to the United States dollar, the lawful currency of the United States of America.

INDUSTRY AND MARKET DATA

In this Supplemental Investor Report, we rely on and refer to information regarding our business and the markets in which we operate and compete. Certain economic and industry data, market data and market forecasts set forth in this Supplemental Investor Report were extracted from market research, governmental and other publicly available information, independent industry publications and reports prepared by international consulting firms. These external sources include the UK Department for Transport, the Office for National Statistics and Old Street Data Science and industry data provided by third-parties, some of which was commissioned on our behalf.

While we have accurately reproduced such third-party information, neither we nor the Initial Purchasers have verified the accuracy of such information, market data or other information on which third parties have based their studies. As far as we are aware and are able to ascertain from information published by these third parties, no facts have been omitted that would render the reproduced information inaccurate or misleading. Market studies are frequently based on information and assumptions that may not be exact or appropriate, and their methodology is by nature forward-looking and speculative. Furthermore, the markets in which we operate and compete may have shifted or changed since the date that each industry report was prepared and in particular, the industry reports may not contemplate the effects of COVID-19. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

This Supplemental Investor Report also contains estimates of market data and information derived therefrom that cannot be gathered from publications by market research institutions or any other independent sources. Such information is prepared by us based on third-party sources and our own internal estimates, including studies of the market that we have commissioned. In many cases, there is no publicly available information on such market data, for example, from industry associations, public authorities or other organisations and institutions. We believe that our estimates of market data and information derived therefrom are helpful to give investors a better understanding of the industry in which we operate as well as our position within the industry. Although we believe that our internal market observations are reliable, our own estimates are not reviewed or verified by any external sources. While we are not aware of any misstatements regarding the industry or similar data presented herein, such data involves risks and uncertainties and is subject to change based on various factors, including those discussed under the heading "Risk Factors".

TRADEMARKS AND TRADE NAMES

We are the registered owner of, or have rights to, certain trademarks or trade names that we use in conjunction with the operation of our business. Solely for convenience, trademarks and trade names referred to in this Supplemental Investor Report may appear without the "®" or "™" symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent possible under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. Use or display by us of other parties' trademarks, service marks or trade names is not intended to and does not imply a relationship with, or endorsement or sponsorship by us of, the trademark, service mark or trade name owner. Each trademark, trade name or service mark of any other company appearing in this Supplemental Investor Report is the property of its respective holder.

RISK FACTORS

The occurrence of any of the events discussed below could materially adversely affect our business, financial condition and results of operations. The risks described below are not the only ones we believe we are exposed to. Additional risks that are not currently known to us, or that we currently consider to be immaterial (based on our regular risk assessment), could significantly impair our business activities and have a material adverse effect on our business, financial condition and results of operations.

This Supplemental Investor Report also contains forward-looking statements that are based on assumptions and estimates and are subject to risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors, including, but not limited to, the risks described below and elsewhere in this Supplemental Investor Report. See "Forward-Looking Statements".

RISKS RELATING TO OUR BUSINESS AND INDUSTRY

The outbreak of COVID-19 (as defined below) has had, and is likely to continue to have, a material impact on our business and results of operations.

In late 2019, a novel strain of coronavirus was identified in the city of Wuhan in Hubei province in China ("COVID-19") and has since spread globally to the point that on 11 March 2020 the World Health Organisation labelled the outbreak a pandemic. The COVID-19 pandemic resulted in a broad range of prophylactic measures being adopted by governments around the world aimed at mitigating the further spread of the virus. Key aspects of these measures included restrictions on travel and the closure of national borders, as well as the imposition of quarantines, stay-at-home orders, workplace closures, curfews, limitations on building occupancies and other social distancing measures.

From March 2020 to July 2020, the UK government imposed a lockdown (the "first lockdown"), which closed non-essential businesses and required residents of the UK to remain at home (with certain prescribed exceptions). Consequently, domestic travel in the UK decreased, and as a result, demand for our roadside assistance services during the early stages of the lockdown decreased significantly. Although demand for roadside assistance later rebounded as lockdown restrictions were lifted and road travel increased, additional lockdowns including the national lockdown from 5 November 2020 to 2 December 2020 (the "second lockdown"), the introduction of Tier 4 stay-at-home restrictions on 20 December 2020 and the national lockdown announced on 4 January 2021 (the "third lockdown" and together with the first lockdown and second lockdown, the "lockdown periods") could result in decreases in road travel and demand for our roadside assistance services.

Although there was a reduction in demand for roadside assistance services during the lockdown periods, we provide an essential service, and our number one priority is to protect the health and wellbeing of our staff, members, customers and suppliers. Our patrols continued to respond to breakdowns throughout the lockdown periods, taking extra care to follow health advice and the latest safety guidelines. We have also ensured that our Insurance segment customers have been able to service their insurance policies and make claims.

In response to the COVID-19 pandemic, we initiated a number of actions across our Roadside and Insurance businesses to ensure continuity of our operations and services. For example, we implemented an extensive programme of home working which enabled temporary closures of all our offices, with the exception of our emergency contact centre in Oldbury. We also introduced additional online resources for customers to access our services in order to minimise the risk of customers not being able to contact us in the event of an emergency. However, due to some limitations in being able to implement working from home rapidly, reduced staffing at some of our contact centres made the timely response to all incoming enquiries challenging at the beginning of the lockdown. Increased wait times to receive assistance can negatively impact the experience of our customers across the Roadside and Insurance segments. While we encouraged use of our online resources and were transparent about the potential for reduced call centre capacity due to the pandemic, there can be no guarantee that the increase in wait times did not adversely affect our personal members' and business customers' perception of our services.

During the lockdown periods, our driving instructors were unable to conduct lessons as the AA and British School of Motoring ("BSM") businesses (together, the "Driving Schools" business) suspended lessons from the commencement of the initial lockdown until 4 July 2020 in England. Furthermore, trading in the AA Cars and AA Prestige businesses in particular has decreased as a result of the COVID-19 pandemic. After the first lockdown restrictions eased, we started to see growth towards pre-COVID-19 levels in these businesses. However, the further lockdown periods also necessitated the suspension of driving lessons for segments of our Driving Schools business and reduced trading for AA Cars and AA Prestige. There remains a risk that continuing or new lockdown restrictions in the future, as well as the longer term economic impact of COVID-19, may adversely affect these businesses and our results of operations generally.

In addition to the direct impact that COVID-19 preventative measures have had, and may continue to have, on our business, travel restrictions and broader concerns regarding the pandemic may result in significant shifts in the behaviour of personal members and business customers as people are prevented from and/or actively avoid travelling for fear of spreading COVID-19. Furthermore, the rising prominence of remote working as a result of workplace closures and quarantines may cause a shift away from business-related travel in the future. In each scenario, people are potentially driving less and therefore, demand for our services may be negatively impacted to the extent these trends continue, which in turn would adversely affect our revenue and results of operations. While we continue to monitor and adjust our operations across the Holdco Group in an effort to minimise the impact on our revenue and cash flow, there can be no guarantee that these measures will prove effective or will materially reduce the adverse effects COVID-19 has on our results of operations.

It is impossible to predict the full impact of the COVID-19 pandemic on our operations going forward due to a variety of variables including (but not limited to) the ongoing third lockdown, the trajectory of new cases in the UK and abroad, the length of time that preventative measures are maintained, the efficacy of various governmental stimulus packages, the timeframe for approval and widespread distribution of COVID-19 vaccines and the extent to which people's behaviours and work patterns are permanently impacted (e.g. continued prominence of remote working even if an effective vaccines are distributed resulting in fewer car journeys). Therefore, we cannot reasonably estimate the impact of the COVID-19 pandemic on our business and results of operations. To the extent the COVID-19 pandemic adversely affects our business, liquidity and results of operations, it may also have the effect of intensifying many of the other risks described in "Risk Factors", such as those relating to our high level of indebtedness, our need to generate sufficient cash flows to service our indebtedness and our ability to comply with the covenants contained in the agreements governing our indebtedness. 

We operate almost exclusively in the UK and difficult conditions in the UK economy (including as a result of COVID-19 or Brexit) may have a material adverse effect on our business, prospects, financial condition and results of operations.

The Holdco Group operates almost exclusively in the UK and will be required to do so in the future in accordance with the terms governing certain of our indebtedness. This means our success is closely tied to general economic developments in the UK and cannot be offset by developments in other markets. Negative developments in, or the general weakness of, the UK economy and, in particular, higher unemployment, lower household income and lower consumer spending may have a direct negative impact on the spending patterns of personal members and business customers, both in terms of the services they subscribe for and the amount of insurance and other products they purchase. Any negative economic developments in the UK could reduce consumer confidence, and thereby could negatively affect earnings and have a material adverse effect on our business, prospects, financial condition and results of operations.

The COVID-19 pandemic has created significant uncertainty in the UK economy and global financial markets. For example, according to the UK Office for National Statistics, UK GDP is estimated to have contracted by 20.4% in the first two quarters of 2020 (representing the largest contraction in the UK economy since record-keeping began) See "-The outbreak of COVID-19 (as defined below) has had, and is likely to continue to have, a material impact on our business and results of operations". In response to the COVID-19 pandemic, many UK companies have furloughed or laid off employees to cope with workplace closures and decreased consumer spending, which in turn can result in lower household income, further depress consumer spending and negatively impact the spending patterns of personal members and business customers.

In addition, any deterioration in the UK economic and financial market conditions as a result of COVID-19 or otherwise may:

· cause financial difficulties for our suppliers and business partners, which may result in their failure to perform as planned and, consequently, create delays in the delivery of our products and services;

· result in inefficiencies due to our deteriorated ability to forecast developments in the markets in which we operate and failure to adjust our costs appropriately;

· cause reductions in the future valuations of our investments and assets and result in impairment charges related to goodwill or other assets due to any significant underperformance relative to our historical or projected future results or any significant changes in our use of assets or our business strategy;

· result in new, increased or more volatile taxes, which could negatively impact our effective tax rate, including the possibility of new tax regulations, interpretations of regulations that are stricter or increased effort by governmental bodies seeking to collect taxes more aggressively; and

· result in increased customer requests for reduced pricing and reduced renewal rates if these requests for reduced pricing are not granted.

A worsening of economic conditions within the United Kingdom may lead to a decrease in subscribers to our roadside assistance services, our insurance products and generally result in personal members and business customers terminating their relationship with us. Therefore, a weak economy or negative economic development could have a material adverse effect on our business, prospects, financial condition and results of operations.

Spending on recreational travel and roadside assistance services is discretionary and price-sensitive. Conditions reducing disposable income or consumer confidence, such as those caused by COVID-19 or an increase in interest rates (which, among other things, could cause consumers to incur higher monthly expenses under mortgages), unemployment rates, direct or indirect taxes, fuel prices or other costs of living, may therefore lead to customers reducing or stopping their spending on recreational travel and roadside assistance services or opting for lower-cost products and services. These conditions may be particularly prevalent during periods of economic downturn or market volatility and disruption, such as amidst the present COVID-19 pandemic. Furthermore, in circumstances where all travel is curtailed (including for business), as was the case during the UK COVID-19 lockdown between March 2020 and July 2020, demand for roadside assistance services may be similarly diminished.

On 23 June 2016, the UK held a referendum on its membership in the EU, in respect of which a majority of those who voted in the referendum voted in favour of the UK leaving the EU ("Brexit"). On 29 March 2017, the UK government invoked Article 50 of the Lisbon Treaty to begin the process of formally leaving the EU, and on 31 January 2020, the UK withdrew from membership in the EU and entered into a transition period which expired on 31 December 2020. During the transition period, the majority of rights and obligations associated with membership in the EU continued to apply to the UK. On 24 December 2020, the EU and UK announced that they had reached an agreement in principle on future relations between the EU and the UK (the "EU-UK Trade and Cooperation Agreement"). On 31 December 2020, the UK implemented the EU-UK Trade and Cooperation Agreement, which entered into force provisionally on 1 January 2021. Despite the implementation of the EU-UK Trade and Cooperation Agreement, there remains significant uncertainty as to how the agreement will affect relations between the UK and the EU, including the legal rights and obligations for businesses in certain services industries not covered by the EU-UK Trade and Cooperation Agreement. Such uncertainty could negatively impact business and consumer confidence in the UK, which could lead to reduced levels of travel, and leisure travel in particular.

Brexit could also disrupt the ability of AA Underwriting Insurance Company Limited ("AAUIC"), a Gibraltar company that is part of the AA plc Group and which participates in our insurance underwriting panel, to access the UK market through its Solvency II passporting rights as well as other non-UK domiciled members of our insurance underwriting panels. The UK government consulted in 2020 on the Gibraltar Authorisation Regime ("GAR") to deliver on the UK government's commitment to enable Gibraltar-based financial services firms to continue accessing the UK market after the expiration of the transition period. Existing transitional arrangements have already been extended until 31 December 2021 and are expected to remain in place until the permanent arrangements of the GAR are implemented. As the UK government is still negotiating the future relationship between the UK and the EU following Brexit, the full potential impact of Brexit on the UK in general and on our business in particular is unclear.

A significant amount of EU law in matters ranging from employment law to data protection to competition and financial regulation is currently embedded in UK law either as a result of EU regulation directly applicable in the UK or from UK regulations implementing EU directives. Accordingly, it is also unclear what impact Brexit will have on the UK legal and regulatory landscape, which could in turn have a significant impact on the Holdco Group. There may also be consequences for EU nationals working for the AA. Although it is not possible to fully predict the effects of an exit of the UK from the EU, it could have a material adverse effect on, amongst other things, all of the companies in the Holdco Group and particularly those that conduct regulated business in the UK, as well as the arrangements between the UK and the EU regarding taxation. As a result, the exit of the UK from the EU may have a material and adverse effect on our business, prospects, financial condition and results of operations.

Given that the transition/implementation period has ended, subject to the terms of the EU-UK Trade and Cooperation Agreement, EU law will cease to apply in the UK. However, many EU laws have been transposed into English law and these transposed laws will continue to apply until such time that they are repealed, replaced or amended. Over the years, English law has been devised to function in conjunction with EU law (in particular, laws relating to financial markets, financial services, prudential and conduct regulation of financial institutions, financial collateral, settlement finality and market infrastructure). As a result, depending on the final trade arrangements to be put in place, substantial amendments to English law may occur and may diverge from the corresponding provisions of EU law applicable after the transition/implementation period.

To the extent that the performance of the UK economy declines, does not improve or improves only over an extended period of time, our business, prospects, financial condition and results of operations may be materially and adversely affected. 

Maintaining favourable brand recognition is essential to our success, and failure to do so could have a material adverse effect on our business, prospects, financial condition and results of operations.

Our brand name, the "Automobile Association" or the "AA", enjoys a high degree of familiarity and awareness in the UK. We depend on the integrity of our brand and our reputation for quality of service for our business to command a price premium for our roadside services, and we believe favourable recognition of our brand is important to maintaining a key position in an industry where trust and confidence with customers are paramount. See "Business-Our Strengths". In order to maintain the value of our brand and to continue to enjoy its high degree of familiarity and awareness in the UK, we currently need to maintain a high level of investment in our brand and brand recognition. Given its importance to maintaining a key position in our industry and our price premium, failure to invest heavily in our brand and brand recognition, now or in the future, may have a material adverse effect on our business, prospects, financial condition and results of operations. Factors affecting brand recognition are often outside our control, and our efforts to maintain or enhance favourable brand recognition, such as making significant investments in marketing and advertising campaigns, may not have their desired effects. We are also exposed to possible brand damage from poor performance, whether perceived or actual, in terms of customer service, whether at the roadside, as part of our insurance offering or otherwise. We are exposed to the risk that litigation, employee misconduct, operational failures, the outcome of regulatory or other investigations or actions, the reputations and actions of our business partners, press speculation and negative publicity, among others, whether or not founded, could damage our brand and our reputation. By virtue of the fact that we have such a highly visible and widely recognised brand, we are particularly exposed to mistakes or misconduct, or allegations thereof, by our mechanics and other employees, contractors, agents or suppliers (including panel insurers). Furthermore, any decline in favourable perception of our roadside assistance business could have an adverse impact on the reputation of our other business lines, and vice versa. A decline in favourable perception of our brand could also impact our ability to attract or retain personal members or business customers, which may have a material adverse effect on our business, prospects, financial condition and results of operations.

Our operations are highly dependent on the proper functioning of information technology ("IT") and communication systems. The failure or unavailability of such systems or our inability to keep pace with developments in technology and implement new systems effectively could harm our reputation, result in the loss of personal members and business customers and have a material adverse effect on our business, prospects, financial condition and results of operations.

We rely heavily on our operational processes and in-house IT and communication systems to conduct our business, including for purposes of maintaining accurate customer service and records, managing our financial operations, managing our fleet of service vehicles, managing our mobile applications and locating personal members and business customers experiencing automobile breakdowns. These systems may not operate as expected or may not fulfil their intended purpose. This may result in our operations being inefficient, ineffective or inaccurate and, in turn, adversely affect the overall operational and financial performance of our business. Any IT or related systems inefficiencies could also result in an inability to provide our services in a timely manner, which in turn could cause material damage to our brand and reputation and adversely affect our competitive position.

Our call centre operations could be disrupted due to loss of physical infrastructure, insufficient staff or other reasons, including failures of third-party suppliers. If our personal members or business customers experience a lack of quality service or reliability, our reputation could be damaged significantly and personal members and business customers may be reluctant to employ our services, which could result in the loss of existing personal members and business customers and a decline in revenue. As a result, any inability on our part to successfully complete and implement our IT updates on time, either under existing programmes or in connection with future investment planned under our strategy, or subsequent failure to maintain and improve our IT and communication systems and infrastructure, or any service disruption, reliability or quality issues and their consequences could have a material adverse effect on our business, prospects, financial condition and results of operations.

We have put in place business continuity procedures, including security measures to protect against IT and related systems failure or disruption. However, these procedures may not be adequate to ensure that we are able to carry on our business in the ordinary course if our IT systems fail or are disrupted. For example, if sufficient control and security measures are not in place, unauthorised persons could access, change and corrupt data on our servers. See also "-Risks Relating to our Business and Industry-We collect extensive non-public data from personal members, customers, business contacts and employees, and the failure to adequately maintain and protect such information, including from unauthorised attempts to access our IT systems, or failure to comply with applicable data protection law, could have a material adverse effect on our business, prospects, financial condition and results of operations". Furthermore, insurance coverage may prove inadequate to compensate for losses from a major business interruption. See also ""-Risks Relating to our Business and Industry-Our insurance coverage may not be adequate to cover all possible losses that we may incur and there can be no guarantee that we will be able to maintain the required level of insurance coverage on acceptable terms and/or at an acceptable cost".

We continue to invest in our IT infrastructure as part of our strategy. If we are unable to further complete the replacement or upgrade of these systems, or if once replaced or upgraded, our systems do not perform as anticipated, this could have a material adverse effect on our business, prospects, financial condition and results of operations. Our strategy also involves expanding our use of applications and other digital interfaces through which we interact with members and business customers, and any failures or perceived inefficiencies associated with these systems could negatively impact the perception of our business and value proposition. We will need to maintain our commitment to developing, upgrading and enhancing our IT and communications systems and adapting our services, products and infrastructure in order to meet evolving market trends and consumer demands and keep pace with new IT developments.

We also may not be able to anticipate new technological developments requiring additional investment and innovation in the future or have the resources to acquire, design, develop, implement or utilise, in a cost-effective manner, IT and communications systems that provide the capabilities necessary for us to compete effectively. Furthermore, any delays or difficulties in implementing new or enhanced systems may keep us from achieving the desired results in a timely manner, to the extent anticipated, or at all, and we may also be unable to devote adequate financial resources to develop or acquire new technologies and systems in the future. Any failure to adapt to technological developments could have a material adverse effect on our business, prospects, financial condition and results of operations.

Our business relies on key contractual relationships with certain business customers, and the loss of any such business customers could have a material adverse effect on our business, prospects, financial condition and results of operations.

We have a number of important business partner accounts within our B2B business. Our ten largest business partners accounted for 15% of our total revenue for the twelve months ended 31 October 2020, of which the single largest partner is Lloyds Banking Group. The future loss of one of our business contracts to a competitor, failure to find a replacement contract at acceptable terms upon termination, or the renewal of those contracts on less advantageous terms, could have a material adverse effect on our business, prospects, financial condition and results of operations. Furthermore, our business partners may also face financial or commercial difficulties, the consequences of which could also materially adversely affect our business and reputation.

Increased competition, including new business models, as well as competitive pressures from new technologies in the automobile industry and distribution channels may have a material adverse effect on our business, prospects, financial condition and results of operations.

We may face increased competition and price pressure in the markets in which we operate, which may result in downward pressure on our pricing and a loss of market share, which could, in turn, materially adversely affect our business, prospects, financial condition and results of operations. Where our competitors lower their prices to gain market share, this may create pricing pressure that could force us to also lower our own prices.

We believe that price is an important competitive factor for all our business segments. Our competitors may seek to compete aggressively on the basis of pricing in order to protect or gain market share. Furthermore, the internet has increased pricing transparency and price pressure within our markets by enabling customers to more easily obtain and compare prices being offered by companies operating in these markets. Price transparency requirements have been introduced for consumers in our Insurance and Roadside segments. This transparency may further increase the prevalence and intensity of price competition in our industry and potentially lead to consumer pressure or further regulatory intervention in the insurance services market. To the extent that we match any reduction in pricing by our competitors, our business, prospects, financial condition and results of operations could be materially adversely affected. In addition, to the extent that we do not match or remain within a competitive margin of our competitors' pricing, or if we otherwise seek to implement price increases, we may lose market share and experience a decline in revenue, which could have a material adverse effect on our business, prospects, financial condition and results of operations.

In addition, our competitors, including the Insurance segment and within the B2C division of our Roadside segment, could develop different models, including smartphone based or other pay as you go operations that may increase competition and could have a material adverse effect on our business, prospects, financial condition and results of operations.

Consumer behaviour and attitudes, technological changes, regulatory and legislative changes and other factors also affect competition. Generally, we could lose market share, incur losses on some or all of our activities and experience lower growth if we are unable to offer competitive, attractive and innovative products and services that are also profitable and if we do not choose the right marketing approach, product offering or distribution strategy, fail to implement such strategies successfully or fail to successfully anticipate, adapt or adhere to such demands and changes. For example, we have invested in growing our connected car offering in order to provide a more digitally enabled service to current and future members, including our Smart Breakdown proposition. However, major car manufacturers are also undertaking similar initiatives and are able to integrate their proprietary connected car offering directly into the user interface of their vehicles. There can be no assurance that our connected car offering can successfully compete with other alternatives and customers may prefer a more integrated connected car offering rather than one that requires installation of third-party technology into their vehicles.

Competitive pressures from new technologies and distribution channels may require changes to our and our business partners' operations, including IT and communication systems and functionality, and we may not be able to effectively respond to these new developments in a timely or appropriate manner. New technological developments such as autonomous vehicles and increased numbers of electric vehicles may also have an impact on all areas of our business in the future. For example, while autonomous and electric vehicles may have reliability and mechanical issues, it is possible that most faults for such vehicles will be linked to their technology and such issues may be outside the scope of our experience and capability. Any failure by us to adapt to service autonomous and electric vehicles may lead to a reduction in members and manufacturer contracts. While we continue to invest in equipping our patrols with the latest technology to help them diagnose and repair faults in electric vehicles, there can be no guarantee that the training and repair capabilities of our patrols in respect of electric vehicles will be sufficient to ensure we retain and grow our market share as the prominence of these vehicles increases in the future. In addition, significant increases in autonomous vehicles could lead to changes in motor insurance legislation which could adversely impact the wider motor insurance market as well as lead to reductions in demand for motor insurance coverage as damage or injury risk is reduced. This could adversely impact the value and revenue from our motor insurance book.

Our insurance broking business faces significant competition from competitors who may be larger and have access to greater financial or other resources, including global, national and local insurance companies.

We compete with global, national and local insurance companies, including direct writers of insurance coverage, as well as non-insurance financial services companies, such as banks, many of which offer alternative products or more competitive pricing for segments of the insurance market in which we operate. While we maintain diversified panels of insurance underwriters for motor and home insurance, many of our competitors are larger than us and have greater financial, technical and operating resources. The general insurance industry is highly competitive on the basis of price, service and coverage and many distribution channels within the insurance industry have been undergoing significant changes. If our competitors price their premiums at a lower level than us and we meet their pricing, this may have a material adverse effect on the commissions we receive in connection with our broking activities. If we fail to meet their pricing, we may lose market share and experience a decline in revenue. In addition, if competitors attract current or potential policyholders away from us in areas in which we compete or wish to compete, our operating performance may be materially and adversely affected.

In addition, insurance panel members could increase their prices, fail to maintain their competitive positions or withdraw from our panel, which may impact our ability to compete with the rest of the market and negatively impact our sales volumes and profitability, or we could be forced to re-broke policies if one of our underwriters were to fail, which could negatively impact our profitability. The AA plc Group's in-house underwriter increasingly makes up a higher proportion of the policies underwritten by our insurance underwriter panel. As at 31 October 2020, the in-house underwriter had a 51% share of total motor and home insurance policies. Whilst we operate a competitive panel where all members on the panel, including the in-house underwriter, compete on the same basis, other panel members may leave the panel or change their pricing for certain customers as a result of the increased proportion of policies underwritten by the in-house underwriter, which would reduce our overall competitiveness in the motor and home insurance market. A higher share of policies underwritten by the in-house underwriter could also lead to increased regulatory scrutiny.

Additionally, if our underwriting partners fail to resolve insurance claims in a timely or satisfactory manner, this may negatively impact our reputation, and we may be exposed to litigation with respect to any such claims. While we regularly monitor the creditworthiness of our third-party underwriting panel members to limit the potential risk of failure and any adverse impact on our customers, the failure of any one or more of our panel members could harm our reputation, sales and profitability. Any of the events above could have a material adverse effect on our business, prospects, financial condition and results of operations.

We are exposed to further changes in the competitive landscape within the insurance industry, including increased competition from other distribution channels (particularly price comparison websites), the long-term implications of which are not yet fully understood.

Competition for general insurance products has intensified through the development of alternative distribution channels, such as price comparison websites ("PCWs"), including Moneysupermarket.com, Gocompare.com, Confused.com and Comparethemarket.com. PCWs are intermediaries that present multiple insurance quotes to a given buyer, allowing the buyer to make a comparison between insurance offerings based on a single set of information provided to the PCW. PCWs had approximately 85% of the new business market for motor insurance in the UK in the nine months ended 31 October 2020, and the long-term implications of the growth in PCWs cannot be predicted. There is potential for PCWs to increase their market penetration, including in other insurance products, such as home insurance. A movement of customers to PCWs and away from our marketing channels could result in greater pricing pressure, as well as a reduction in our share of the insurance brokerage market or reduction in the effectiveness of our marketing efforts. In addition, we could experience greater competition in the brokerage business of our Insurance segment if PCWs seek to act as insurance brokers themselves by administrating customer policies.

We depend on suppliers to provide many of our products and services and we may not be able to renew or extend existing contracts or enter into new contracts with suppliers, which could result in increased customer churn or have other effects that could in turn have a material adverse effect on our business, prospects, financial condition and results of operations.

The successful implementation of our business strategy depends, in part, on our success at renewing or entering into new contracts with suppliers of products and services on favourable terms. For example, we lease substantially all the vehicles that make up our operational fleet within our Roadside segment. In addition, we are reliant on one parts supplier for the provision of parts for use by our patrol force. Our ability to renew our existing contracts with suppliers of products and services, or enter into new contractual relationships, either on commercially attractive terms, or at all, depends on a range of commercial and operational factors and events which may be beyond our control. Furthermore, in the past we have been required to replace suppliers of products and services as a result of their insolvency. In the event that a supplier of products or services decides to terminate its relationship with us, our personal members and business customers may choose to obtain similar service offerings from alternative sources or providers. Our inability to maintain our existing contracts and agreements with suppliers of the various products and services which we rely upon, or to enter into new contracts on commercially favourable terms, could lead to reduced sales, lower margins and a loss of existing personal members and business customers. It could also make it difficult for us to attract new personal members and business customers, which could have a material adverse effect on our business, prospects, financial condition and results of operations.

Litigation, roadside injuries or death or regulatory inquiries or investigations could have a material adverse effect on our business, prospects, financial condition and results of operations.

From time to time, we may become involved in litigation, and we may not be successful in defending ourselves against such litigation. Any such claims would harm our reputation or have a material adverse effect on our business, financial condition and results of operations. We are exposed to potential claims for personal injury and property damage resulting from the provision and use of our Roadside services. For example, we have had a number of claims relating to personal injury and property damage from employees, personal members and other third parties. We are also exposed to workers' compensation claims and other employment related claims by our employees. In addition, we may be subject to disputes arising out of contracts, including joint ventures. For example, the former shareholders of one of our former joint ventures have made various allegations including fraudulent misrepresentation by members of the Holdco Group and have threatened litigation. While we do not see any merit in these claims and are prepared to fully defend any claim that the former shareholders of the former joint venture may choose to bring, such litigation may allege a material amount in damages. The defence of any of these claims may be time consuming and expensive. If the outcome of any such claims is unfavourable to us, we could suffer damage to our reputation and our business, prospects, financial condition and results of operations may be materially adversely affected. While we currently maintain motor liability coverage for bodily injury (including death) and property damage arising from or in connection with the services provided by our patrols, we do not have specific reserves for potential litigation matters unless it is probable that settlement of an amount that can be reliably estimated will be required and our current liability coverage may not be sufficient to cover all claims. In addition, our insurance premiums may increase in the future, and we may not be able to renew our motor liability coverage on commercially acceptable terms or at all. Furthermore, although our customer call centre provides roadside assistance to personal members with safety instructions in the event of a breakdown, in the past personal members have been accidentally injured or killed by passing vehicles while waiting on the roadside. Accidents such as these could expose us to civil suits, significant damages claims and liabilities and harm our reputation.

We may also be subject to regulatory and governmental inquiries and investigations. The impact of litigation and regulatory inquiries and investigations may be difficult to assess or quantify. Even if a civil litigation claim or regulatory investigation or claim is meritless, does not prevail or is not pursued, any negative publicity arising in connection with any inquiries and litigation or regulatory investigation affecting our business could adversely affect our reputation. Litigation and regulatory investigations may also result in substantial costs and expenses and divert the attention of our management. In addition to pending matters, future litigation and regulatory investigations could lead to increased costs or interruption of our normal business operations, which may have a material adverse effect on our business, prospects, financial condition and results of operations. See "-Risks Relating to Regulatory and Legislative Matters-We are subject to complex laws and regulations that could materially and adversely affect the cost, manner and feasibility of doing business".

On 7 March 2018, we received notification that former Executive Chairman, Bob Mackenzie, who was dismissed for gross misconduct on 1 August 2017, had on 6 March 2018 issued a claim form in the High Court, Chancery Division against AA plc, its subsidiary Automobile Association Developments Limited (together, the "Companies") and personally against a number of their directors (existing and former) and the former Company Secretary. In November 2018, the claim against all the directors and the former Company Secretary was dismissed in full and Mr. Mackenzie was ordered to pay their costs. The majority of Mr. Mackenzie's claim arises from his exclusion from a share option scheme which, in any event, lapsed for all participants without any payment in June 2019. However, Mr. Mackenzie has also issued an amended claim which includes a new claim for personal injury allegedly suffered as a result of stress arising from his role as CEO and Chairman. The Companies have filed a full defence in relation to Mr. Mackenzie's amended claim. After further discussion with external counsel the Companies have decided to apply for a strike-out application in relation to the entirety of Mr. Mackenzie's claims against them. This application was filed in May 2020 and the Companies have been given a court date in March 2021 in respect of this. We anticipate Mr. Mackenzie will proceed with the claim against the Companies but maintain that it is not necessary for the AA plc Group or the Holdco Group to make a financial provision as we expect the defence will prevail. While we expect to be successful in rigorously defending these claims, there can be no guarantee with respect to the outcome of any such litigation. In the unlikely event that the outcome of this litigation is not in our favour, this may have a material adverse effect on our business, prospects, financial condition and results of operations.

We collect extensive non-public data from personal members, customers, business contacts and employees, and the failure to adequately maintain and protect such information, including from unauthorised attempts to access our IT systems, or failure to comply with applicable data protection law, could have a material adverse effect on our business, prospects, financial condition and results of operations.

We regularly collect, process, store and handle non-public data (including name, address, age, bank and credit card details and other personal data) from our personal members, customers, business contacts and employees as part of the operation of our business, and therefore we must comply with data protection laws in the UK and to the extent applicable, the European Union ("EU"). Those laws impose certain requirements on us in respect of the collection, use and other processing of personal data. For example, under UK and EU data protection laws and regulations, when collecting personal data, certain information must be provided to the individual whose personal data is being collected (referred to under those laws and regulations as a "data subject". This information includes the identity of the data controller, the purpose(s) for which the personal data is being collected and other relevant information relating to the processing of that personal data. There is a risk that personal data collected by us may not be processed in accordance with notifications made to both data subjects and regulators. In some cases, the consent of those data subjects may also be required to process the personal data for the purposes notified to them. Failure to comply with data protection laws could potentially lead to regulatory censure, fines, civil and criminal liability, reputational and financial costs. In addition, the laws that would be applicable to such a failure are rapidly evolving and may become more burdensome and costly to our operations. The scope of the notification made to, and consents obtained from, data subjects may limit our ability to deal freely with the personal data in our databases. It may not be possible for us to lawfully use that personal data for purposes other than those notified to data subjects, or (where relevant) for which they have provided consent.

We are also exposed to the risk that the personal data we process could be wrongfully accessed or used, whether by employees or third parties, or otherwise lost or disclosed or processed in breach of applicable data protection law. For example, in 2017 a third-party provider of services to the AA plc Group had incorrectly configured a server and this exposed data for approximately 91,500 customers. The vulnerability in the third party's systems were remediated promptly once identified and an exercise was undertaken to communicate with the affected customers. The matter was also reported to the UK Information Commissioner's Office ("ICO") and the FCA, although it did not arise in the AA plc Group's regulated business. In addition, we have identified unauthorised access to our networks and servers in the past as a result of phishing and other malicious internet-based activity targeting our data and IT systems, and we cannot guarantee protection against future unauthorised attempts to access our IT systems from both internal and external intruders. While these past incidents were detected and we have taken considerable efforts to remediate any deficiencies in our IT systems to prevent future unauthorised access, there can be no assurance that our systems will not be targeted in the future or that we will be able to detect and/or remedy any such incidents immediately upon occurrence. Furthermore, publicised breaches of our IT systems, whether or not resulting in unauthorised access to or loss of data, could result in significant reputational harm and have a material adverse effect on our existing and prospective customers' perception of our business. As IT security threats continue to evolve, we must invest significant resources to continuously modify and enhance our information security and controls and to investigate and remediate any security vulnerabilities. The time and expense associated with ongoing information security improvement and monitoring activities diverts resources and management time away from other important aspects of our operations.

Given further investment in IT infrastructure will continue as part of our strategy, we may be particularly susceptible to unauthorised attempts to access our IT systems during such investment and development processes. Unauthorised access to our IT systems may result in the theft, corruption or loss of data belonging to us or our customers. In addition, employees with access to confidential customer information may intentionally, or accidentally, alter, destroy, steal, or lose such information. Theft or loss of data may result in such data being made public or sold or disposed of to third parties who may seek to use such data for identity theft or other criminal activities. If we, or any of the third-party service providers that process personal data on our behalf, fail to process, store or protect personal data that we control in a secure manner or if any theft or loss of that personal data were otherwise to occur, we could face liability under data protection laws. This could also result in damage to our brand and reputation, as well as the loss of new or existing personal members or customers, any of which could have a material adverse effect on our business, prospects, financial condition and results of operations.

The General Data Protection Regulation ("GDPR") began to apply from 25 May 2018 and introduced significant changes to data protection law. In particular, the GDPR contains much higher penalties for breaches, new obligations for data processors, increased accountability, expanded rights for data subjects and an extended territorial scope. A major multi-disciplinary project was put in place in connection with the changes, with a GDPR compliance programme implemented across the AA plc Group. However, further changes may be required in respect of the way we collect, store and otherwise process personal data as the market adjusts to the developing interpretation and application of the legislation. Any future changes to data protection regulations may be significant or costly and may have a material adverse effect on our business, prospects, financial condition and results of operations.

On 31 January 2020 the UK withdrew from membership in the EU and on 31 December 2020 the UK's Brexit transition period ended with the UK and the EU implementing the EU-UK Trade and Cooperation Agreement. See "-Risks Relating to our Business and Industry-We operate almost exclusively in the UK and difficult conditions in the UK economy (such as those resulting from COVID-19) may have a material adverse effect on our business, prospects, financial condition and results of operations." The GDPR (as it was applied at the end of the transition period) was incorporated into UK law at the end of the transition period under the UK Data Protection Act 2018 and certain UK Brexit-related regulations. As a result of the UK's exit from the EU, the UK is now a third country for the purpose of the GDPR rules regarding personal data exports from the EEA, meaning that in the absence of an "adequacy" finding from the European Commission, organisations exporting personal data from the EEA to the UK may be required to implement additional safeguards in respect of any such data exports, for example standard contractual clauses or Binding Corporate Rules. The EU-UK Trade and Cooperation Agreement includes a bridging mechanism under which the UK will be deemed not to be a third country for these purposes, such that additional safeguards will not be required, for an interim period of up to 4 months from the Agreement coming into force (potentially extendable by two further months), provided that during this interim period the UK does not exercise certain powers within its data protection laws without EU agreement, and the UK does not change its data protection laws. This interim period is intended to give the European Commission time to perform an "adequacy" assessment in respect of the UK. If the European Commission does not make an "adequacy" finding in respect of the UK by the end of the interim period or an "adequacy" finding is made and subsequently revoked, we may be required by the GDPR to implement additional safeguards in respect of any data transfers we make from the EEA to the UK, which might impose an additional administrative and cost burden on our business. Under UK data protection laws, the EEA is considered to be an "adequate" destination for exports of personal data from the UK, and so UK data protection law does not currently require additional safeguards in respect of any such data exports.

We offer different prices to different types of customers, and the lack of price harmonisation within our personal member and across our business customer base may have a material adverse effect on our business, financial condition and results of operations.

As part of our efforts to attract new customers and personal members and to achieve a high degree of cross-penetration between our business segments, we may offer discounts to certain customers in respect of our Roadside, Insurance or Financial Services products. There is a risk that market pressure from our customers who do not subscribe to products and services across our segments (and therefore do not receive discount rates) may force us to amend our pricing plans. In addition, we regularly offer lower introductory prices to attract new personal members and subsequently receive requests from existing personal members to lower their membership fees accordingly. A significant change in the number of existing customers requesting price reductions or a significant number of customers declining to renew their products upon the expiration of their introductory offer rates could have a material adverse effect on our business, prospects, financial condition and results of operations.

In addition, our business model distinguishes between personal members, who subscribe for roadside assistance coverage directly through a membership agreement with us, and business customers, who receive roadside assistance coverage indirectly as a complementary "add-on" to the products they purchase from our business partners. If the availability of roadside assistance coverage becomes more prevalent as an add-on product such as with motor insurance which is becoming increasingly prevalent, we could potentially see a migration of our personal members to the lower-margin business customer book or to a third-party provider, which could also have a material adverse effect on our business, prospects, financial condition and results of operations.

In 2018, a super complaint was made to the Competition and Markets Authority ("CMA") in relation to pricing practices in a number of markets, including motor and home insurance. The FCA initiated a data request to home and motor insurers, brokers and PCWs to better understand pricing practices in the home and motor insurance markets. In October 2019, the FCA published an interim report on a number of potential remedies for pricing practices in those markets. The FCA published the final report of its market study into the pricing of home and motor insurance in September 2020. See "-Risks Relating to Regulatory and Legislative Matters-We are subject to complex laws and regulations that could materially and adversely affect the cost, manner and feasibility of doing business".

We seek to reduce and control our operating costs and we may not be successful in such efforts, which could have a material adverse effect on our business, prospects, financial condition and results of operations.

We continuously review our operating costs to ensure that we are operating efficiently. Cost control initiatives include headcount reductions, business process re-engineering and internal reorganisation, as well as other expense controls. While we aim to implement and maintain cost savings through restructuring and pursuing additional cost efficiencies, we may be unable to effectively control or reduce costs. Even if we are successful in these initiatives, we may face other risks associated with our plans, including declines in employee engagement, the level of customer service we provide, the efficiency of our operations and the effectiveness of our internal controls. In addition, our ability to implement operating cost reductions could be hampered by the Independent Democratic Union (the "IDU") through industrial action. Any of these risks could have a material adverse impact on our business, prospects, financial condition and results of operations.

As part of our response to COVID-19, we incurred increased operational costs to enable us to respond quickly to government guidance to enable a home working model to be adopted, and where required, to ensure that our offices remained COVID-19 safe for employees who remained in offices and in the field. Although the bulk of these costs were incurred at the start of the pandemic, continuing government guidance around COVID-19 safe working environments could continue to have an adverse impact in respect of being able to control operating costs in the future.

Breakdown of internal controls could have a material adverse effect on our business, prospects, financial condition, results of operations and/or our ability to meet legal and regulatory requirements.

Any errors (including accounting errors), or breakdowns in internal control processes (including failures to establish and maintain effective internal controls), could result in operational losses and impact our ability to detect and prevent fraud. In addition, it is expected that ongoing and future changes to our operations and organisation will place additional demands on our internal processes and infrastructure, including our accounting systems and internal controls over financial reporting. To meet these demands, we will need to invest money and senior management time on an ongoing basis toward strengthening our financial and management information systems, improving control processes, and, where appropriate, identifying and correcting any deficiencies in the design or operating effectiveness of our accounting systems and internal controls over financial reporting. While we have established a governance and controls team who manage our controls framework, any failure to detect or correct deficiencies in our internal controls, or any insufficiency or breakdown in internal controls, could have a material adverse effect on our reputation, business, prospects, financial condition, results of operations and/or our ability to meet legal and regulatory requirements.

Severe or unexpected weather conditions or poor maintenance of the roads could have a material adverse effect on our business, prospects, financial condition and results of operations.

Severe or unexpected weather conditions, including extremes in temperature, heavy rain, snowfall, hail or high winds and the impact of these and underinvestment on the condition on our roads, tend to increase the volume of calls to our roadside assistance centres. Although we receive a certain amount of payment-for-use revenue with regards to our business contracts, many of our contracts are for a fixed annual fee, and the increase in our costs are likely to be greater than the increase in payment-for-use revenue received as a result of increased call-outs during times of severe weather or if cars are damaged by poorly maintained roads. Repercussions of severe or unexpected weather conditions or high call outs may also include an inability to respond quickly and efficiently to calls from our personal members and business customers, loss of productivity and even necessary curtailment of services. Any delay in our performance or disruption of our operations due to such conditions could have an adverse effect on our reputation, result in an increase in customer complaints and decrease the demand for our services, which would have a material adverse effect on our business, prospects, financial condition and results of operations.

Our personal membership numbers could decline, or our business mix could change if there is a decrease in the average age of vehicles used in the UK or the overall size of the UK car parc, if service intervals or manufacturer guarantees are extended or if vehicles are used to a lesser extent.

As vehicles get older, the likelihood of breaking down generally increases. Therefore, a decrease in the average age of vehicles in the UK could lead to a decline in demand for our roadside assistance products and services. Similarly, a decline in the number of vehicles on the UK's roads could adversely impact demand for our services and our ability to grow our membership base. Annual new car registrations in the UK have fallen each year since 2016, as a result of weak business and consumer confidence, general political and economic instability and uncertainty over clean air zones. Despite the decline in new car registrations, according to the UK Department for Transport, the size of the UK car parc has continued to grow, with the average age of the UK car parc increasing to 8.3 years as at 31 December 2019 (the oldest average age of the car parc since 1994). However, as older cars are retired from the UK car parc, to the extent annual new car registrations in the UK do not increase, the UK car parc could begin to shrink and reduce our pool of potential roadside assistance customers. For a variety of reasons beyond our control, as discussed below, changing customer demand and an evolving technological landscape could result in a shrinking UK car parc and/or decreased prevalence of breakdowns which could have a material adverse impact on demand for our services, our results of operations and financial condition.

Technological and qualitative improvements of some motor vehicle components as well as the increased reliability of modern cars can reduce the likelihood of motor vehicles breaking down, which can also lead to a decrease in demand for our roadside assistance services by both our personal members and business customers. As more people replace older cars with more reliable versions, the number of mechanical failures will likely reduce over time, which may further lead to a decrease in demand for our roadside assistance services. A decrease in demand for our roadside assistance services may lead to certain of our business partners declining to renew their contracts with us. In addition, in the event automobile manufacturers continue to expand the scope of their warranties and roadside assistance coverage beyond current limits (for example, as a result of changes in the legal environment), engage in greater promotion of roadside assistance at the point of service in their dealerships, or improve vehicle technologies so as to identify potential breakdowns before they occur, demand from business customers for our roadside assistance products and services may be negatively impacted.

Changes in car ownership models, for example due to increased car-pooling or car renting may lead to a reduction in vehicle use or ownership, which in turn could lead to a reduction in the number of customers who require our roadside assistance services. Reduced vehicle use or vehicle ownership may also result from rising costs (for example, higher petrol prices, higher petrol taxes and higher insurance prices), a significant deterioration in economic conditions, any future new vehicle incentives, changes in travelling or commuting behaviour (including due to COVID-19 or the increased use of public transport, car sharing services or mobile-based cab hailing services) or growing environmental concerns. See "Industry" for further information. In addition, a decline in demand for our roadside assistance services could impact or alter the mix of our product and services offerings. Any such decline in demand could have a material adverse effect on our business, prospects, financial condition and results of operations. Following several years of steady decline due to the impact of competition and regulation, the paid membership base returned to growth during the second half of the financial year ended 31 January 2020. Due to COVID-19 and the lockdown restrictions in place across the UK during the first half of the year ending 31 January 2021, we observed an initial decline in new member volumes which caused the paid membership base to fall by 2% in the six months ended 31 July 2020 and 0.9% in the nine months ended 31 October 2020. Following the gradual lifting of the lockdown restrictions in June 2020 and our new above the line marketing campaign, we have seen a steady pick up in new member volumes. If, however, the decline continues (due to the uncertainty caused by the third lockdown announced on 4 January 2021 or otherwise), including at an increased rate in the future, this could have a material adverse effect on our business, prospects, financial condition and results of operations.

We may not be able to protect our brand and related intellectual property rights from infringement or other misuse by others and we may face claims that we have infringed the trademarks or other intellectual property rights of others.

The AA brand is one of the key assets of our business. We rely primarily on trademarks and similar intellectual property rights to protect our brand. The success of our business depends on our continued ability to use our existing trademarks in order to increase brand awareness and, in particular, to develop our presence and activity in those markets where we are new entrants. Policing unauthorised use of our proprietary intellectual property rights can be difficult and expensive, and we cannot be sure that the steps we have taken to protect our trademarks and other intellectual property rights will preserve our ability to enforce those rights or prevent unauthorised use, infringement or misappropriation by third parties. Additionally, legal remedies available to us may not adequately compensate us for any damages we suffer as a result of such unauthorised use. Accordingly, any material infringement or misuse of our intellectual property could have a material adverse effect on our business, prospects, financial condition and results of operations.

Moreover, we have in the past faced and may, in the future, face claims that we have infringed the trademarks or other intellectual property rights of others, including in those markets where we have not historically been active. Intellectual property litigation may be expensive and time consuming, and may divert managerial attention and resources from our business objectives. Successful infringement claims against us could result in significant monetary liability. Such claims could also delay or prohibit the use of existing, or the release of new, products, services or processes, and the development of new intellectual property. We could be required to obtain licences to the intellectual property that is the subject of the infringement claims, and resolution of these matters may not be available on acceptable terms within a reasonable timeframe or at all. Generally, intellectual property claims against us and any inability to use our trademarks could have a material adverse effect on our business, prospects, financial condition and results of operations, and such claims may result in a loss of intellectual property protections relating to our business.

We may make acquisitions or disposals in the future, which transactions may not achieve the expected results or may expose us to contingent or other liabilities and may have a material adverse effect on our business, prospects, financial condition and results of operations.

We have from time to time considered, and intend to continue to consider opportunistic strategic transactions, which could involve acquisitions or disposals of businesses or assets and could result in shifts in the current mix of our product and services offerings. For any acquisitions which we identify, we will need to conduct appropriate due diligence, including, as appropriate, an assessment of the adequacy of claims reserves, an assessment of the recoverability of reinsurance and other balances, enquiries with regard to outstanding litigation and consideration of local regulatory and taxation matters. Consideration will also need to be given to potential costs, risks and issues in relation to the integration of any proposed acquisitions with our existing operations. However, the due diligence undertaken may not be accurate or complete, and such due diligence may not identify or mitigate all material risks to which the entity being acquired is exposed, including contingent or unanticipated liabilities. In addition, the integration of any proposed acquisition may not be successful or in line with our expectations and may pose a disruption to our ongoing business. We also may not obtain appropriate or adequate contractual representations, warranties and indemnities in connection with any acquisition. We may also provide representations, warranties and indemnities to counterparties on any disposal, which have in the past and may in the future result in claims being asserted against us by the applicable counterparties. Any acquisitions or dispositions of businesses or assets and shifts in the current mix of our product and services offerings may divert managerial attention and resources from our business objectives.

If we enter into strategic transactions in the future, related accounting charges may affect our business, financial condition and results of operations, particularly in the case of any acquisitions. Any acquisition or disposal may result in changes to our capital structure, including the incurrence of additional indebtedness or the refinancing of our outstanding indebtedness, as applicable. There can be no guarantee that we will be able to identify appropriate acquisition targets or opportunities for disposals in the future and, even if we identify an attractive opportunity, we may not be able to complete the acquisition or disposal successfully based on limited financial resources or onerous regulatory requirements. Losses resulting from acquisitions or disposals could damage our brand and reputation and could have a material adverse effect on our business, prospects, financial condition and results of operations.

Our operations are dependent on our ability to retain and attract qualified and reliable personnel including our senior management team.

We rely on a number of key employees, both in our management and our operations, with specialised skills and extensive experience in their respective fields. Attracting and retaining key members of senior management and key operational expertise are vital to the success of our business and operations. The departure of, or difficulty in replacing, senior managers or individuals with key operational expertise in the future, including in connection with the Acquisition, could have a material adverse impact on key decision-making and the development of our business and operations over both the short and the medium term. We also believe that the growth and success of our business will depend on our ability to attract highly skilled, qualified and reliable personnel with specialised know-how in automotive services, as well as those with IT and other specialist skills. Although we place emphasis on retaining and attracting talented personnel and invest in extensive training and development of our employees, we may not be able to retain or hire such personnel in the future. In particular, the automobile market is characterised by frequent technical advances and increases in the complexity of existing components. Certain models of vehicles and automotive components may have technical equipment so complex or innovative that they can be maintained only by persons with special training relating to those particular model vehicles. The expense of this specialisation could result in higher costs for us or in decreased demand for our roadside assistance services if it becomes no longer economically feasible for us to offer repair services for particular models or components, which could have a material adverse effect on our business, financial condition and results of operations.

In addition, the Financial Conduct Authority (the "FCA") have the power to approve and regulate individuals under the senior managers and certification regime in the insurance and financial intermediation businesses, respectively, who have significant influence over the key functions of an insurance business or financial intermediation business, such as governance, finance, audit and management functions. The FCA also has the power to regulate individuals in the financial intermediation business who deal with customers, such as those providing advice to customers on certain insurance and financial products. The FCA (as applicable) may not approve individuals for such functions unless the respective regulator is satisfied that they have appropriate qualifications and experience and are fit and proper to perform those functions. The FCA may also withdraw approval for individuals whom it deems no longer fit and proper to perform those functions. The majority of our regulated business is subject to FCA regulation and our inability to attract and retain, or obtain FCA approval for, directors and highly skilled personnel in our businesses subject to the authority of the FCA could adversely affect our competitive position, which could in turn have a material adverse effect on our business, financial condition and results of operations.

Our business requires the work of many employees and any disruption in our workforce could have a material adverse effect on our business, financial condition and results of operations.

As at 31 October 2020, approximately 90% of the Holdco Group's employees were covered by a collective bargaining agreement which is in place with the IDU, a union historically dedicated to AA employees, but more recently representing non-AA employees as well. In addition, we are required to consult with our employee representatives, on various matters, including restructurings, acquisitions and divestitures. To the extent we choose to change working practices or aspects of our patrol force employment contracts, we will be required to consult the IDU.

In March 2020, we concluded our 60-day pension consultation with around 2,800 members through their IDU/management representatives in respect of our proposal to close the CARE section of the AA UK Pension Scheme (as these terms are defined below) and as a result the closure took effect from 31 March 2020. Decisions such as this can negatively impact employee relations and morale. While we believe the closure of the CARE section was handled in a manner satisfactory to the stakeholders involved, there can be no assurances that this and similar decisions impacting employees will not have an adverse effect on employee relations and our business. See "-Risks Relating to our Pension Schemes and Post-Retirement Medical Plan" for more information.

Although we strive to maintain good relationships with our employees and the IDU, such relationships may not continue to be cooperative. We may be affected by strikes or other types of conflict with labour unions and employees in the future, which could impair our ability to deliver the services we provide and result in a substantial loss of revenue and damage to our reputation. Strikes and industrial actions could also be initiated by the workforce of one of our service providers or other third parties that could affect our business. The terms of existing or renewed collective bargaining agreements could also significantly increase our costs (for example, through increased wages) or negatively affect our ability to increase operational efficiency, which may in turn have a material adverse effect on our business, prospects, financial condition and results of operations.

Our insurance coverage may not be adequate to cover all possible losses that we may incur and there can be no guarantee that we will be able to maintain the required level of insurance coverage on acceptable terms and/or at an acceptable cost.

We have insurance coverage under various insurance policies for, among other things, property damage, our technical and office equipment and stock, our patrol vehicles, as well as coverage for business interruption, terrorism and directors and officers. We also have insurance policies covering employer and public liability, as well as for errors and omissions that may occur when broking insurance (professional indemnity insurance, which is required under the FCA regulatory regime). However, we do not have insurance coverage for all potential interruptions of operations because in our view, these risks cannot be insured or can only be insured on unreasonable terms. For example, there is no insurance coverage against the risk of failure by personal members to pay or against cyber security-related losses. Similarly, lost revenue or increased operating costs resulting from COVID-19 are not covered by our insurance policies.

Moreover, we can provide no assurances that losses will not be incurred or that claims will not be filed against us which go beyond the type and scope of the existing insurance coverage.

In addition, insurance may not be available to us on commercially acceptable terms or at all in the future, or we may experience material increases in the costs of such insurance. Any increase in the number of claims or amount per claim or increase in the cost of insurance could materially and adversely affect our results of operations.

Certain types of risks and losses (such as losses resulting from epidemics and pandemics, including COVID-19, war, nuclear radiation, radioactive contamination and heaving or settling of structures) may be or become either uninsurable or uneconomical to insure or may not be covered by our relevant existing or future insurance policies. Other risks might become uninsurable (or uneconomical to insure) in the future. The occurrence of significant uninsured or uninsurable losses could materially and adversely affect our business, financial condition and results of operations.

Risks Relating to Regulatory and Legislative Matters

We are subject to complex laws and regulations that could materially and adversely affect the cost, manner and feasibility of doing business.

The industries in which we operate are materially affected by government regulation in the form of national and local laws and regulations in relation to health and safety, the conduct of operations and taxation. We are subject to prudential and consumer protection measures (including competition regulation) imposed by a number of insurance and financial services regulators and competition authorities, including the European Commission, the CMA and HM Treasury. In the UK, the FCA is the primary regulator of the insurance intermediation, consumer credit intermediation and mortgage intermediation sectors. The FCA also has concurrent competition law powers. Each has prescribed certain rules, principles and guidance with which we and others in the insurance and financial services industries must comply. Such rules require, among other things, high level standards on the establishment and maintenance of proper systems and controls and minimum "threshold conditions" that must be satisfied for a firm to remain authorised, as well as rules on the conduct of business and treating customers fairly.

The FCA may find that we have failed to comply with applicable regulations, including consumer credit regulations, have not sufficiently responded to regulatory inquiries or have not undertaken corrective action as required. Our roadside assistance business is currently operated under an exclusion from requiring insurance business authorisation. Any change in law, regulation or in interpretation of law or regulation could result in this business needing to be carried out by a regulated insurer which could significantly increase the costs of the business. In each case, regulatory proceedings could result in a public reprimand, substantial monetary fines or other sanctions which could have a material adverse effect on our business, prospects, financial condition and results of operations.

Furthermore, the use of continuous payment methods in both the Roadside and Insurance segments contributes to our high levels of retention. Although continuous payment methods are designed to serve a specific customer need and are a common market and banking practice, regulation of their use by the FCA, the Payment Systems Regulator or another comparable regulatory authority, or the regulation of how and when we communicate with current and potential personal members and customers, could have a material adverse effect on our business, prospects, financial condition and results of operations.

Our operations are also subject to various laws and regulations relating to health and safety, employment, environmental and other matters. If we fail to comply with any such laws or regulations, we could be subject to sanctions such as mandatory shut-downs, damages, criminal prosecutions and injunctive action.

In addition, changes in governmental laws and regulations, as well as maintaining compliance with required standards, may also significantly increase our costs, the price of membership and access to our services. For example, Directive (EU) 2016/97 (the "Insurance Distribution Directive") came into effect on 1 October 2018, replacing Directive (EU) 2002/92 (as amended) (the "Insurance Mediation Directive"), which related to consumer protection when buying insurance. In the U.K. the majority of the Insurance Distribution Directive provisions have been transposed by the FCA by way of amendments to the FCA's Handbook of Rules and Guidance. The Insurance Distribution Directive has wider application than the Insurance Mediation Directive and covers organisational conduct and business requirements for insurance and reinsurance entities and introduces requirements in new areas such as product oversight and governance. In addition, the senior managers and certification regime came into effect on 10 December 2018 for insurers and from December 2019 for FCA solo-regulated firms and is comprised of a senior manager regime, a certification regime and conduct rules which replaced the previous approved persons regime and senior insurance managers regime. The regulatory regime aims to (i) ensure regulated firms have a clear and effective governance structure and (ii) enhance the accountability and responsibility of certain senior people at such firms. See "Regulatory Overview-Insurance Distribution Directive" and "Regulatory Overview-Senior Managers and Certification Regime".

In September 2020, the FCA published its report of its market study into the pricing of home and motor insurance. The FCA is seeking views on its proposals by 25 January 2021. It will consider all the feedback and intends to publish a policy statement and new rules next year along with its response to the consultation feedback. The FCA is concerned that these markets are not working well for consumers and is proposing significant reform of these markets through measures which seek to enhance competition, ensure consumers will receive fair value, and increase trust in these markets. The FCA is proposing that when a customer renews their home or motor insurance policy, they pay no more than they would if they were new to their provider through the same sales channel. For example, if the customer bought the policy online, they would be charged the same price as a new customer buying online. Insurance companies would be free to set new business prices but would be prevented from gradually increasing the renewal price to consumers over time, other than changes in line with customers' risk. For existing consumers, their renewal price would be no higher than the equivalent new business price. The FCA is also consulting on other new measures to further boost competition and deliver fair value to all insurance customers, including product governance rules requiring firms to consider how they offer fair value to all insurance customers over the longer term, requirements on firms to report certain data sets to the FCA so that it can check the rules are being followed, and making it simpler to stop automatic renewal across all general insurance products.

As the FCA has not yet published its final policy statement, it is currently not possible to predict the effect of any such proposals on our business. The proposed package of measures include measures relating to price regulation, auto-renewal, strengthened product governance and proposed new reporting requirements. Potential remedies imposed by the FCA, including auto-renewal, product governance and reporting remedies could apply to the general insurance market, and pricing remedies could apply to the home and motor insurance market. While our Roadside business would not be directly affected, the pricing remedy as proposed would apply to additional products sold alongside home or motor insurance. Roadside is sold as a standalone product at the same time as home and motor insurance but is not connected with the home or motor insurance. However, there is a risk that Roadside sold at the same time as home or motor insurance might be deemed as an additional product and subject to the pricing remedy, potentially resulting in material adverse effects on our profitability and results of operations.

We are subject to risks in connection with the interpretation of employment laws including in relation to the calculation of employee holiday pay.

We are subject to risks in connection with changes to employment laws whether by government legislation or by decisions of the courts that are changing the interpretation of existing legislation which impacts businesses in the UK. For example, case law in connection with the calculation of holiday pay in the area of employment law is creating a potential cost exposure for employers throughout the UK. The case law relates to the interpretation and application of the Working Time Regulations 1998 ("WTR") in the UK which govern the statutory holiday entitlement and the minimum amount of statutory holiday pay that employees are entitled to. The law does not apply to holiday pay for contractual holiday in excess of the minimum statutory entitlement. In accordance with UK law, historically, pay for statutory holidays has corresponded to basic pay only; overtime, commission and other pay components have been excluded from the calculation of "normal working hours" and a "week's pay" for the purposes of calculating statutory holiday pay entitlement. However, the European Court of Justice ("ECJ") has held that, in accordance with European law (EU Working Time Directive (2003/88/EC)), all components of pay that are intrinsically linked to the tasks that employees are required to perform under their contracts should be included in the calculation, such as commission and, possibly, overtime. Employers now have to include commission, non-guaranteed (mandatory) overtime and other variable pay in the calculation of holiday pay for salaried staff.

The Employment Appeals Tribunal ("EAT") decision in Fulton v. Bear Scotland Ltd in November 2014 confirmed that UK law could be interpreted consistently with the ECJ principles described above in respect of non-guaranteed overtime. As well as payments for future holiday, employees could claim back pay for prior, wrongly calculated holiday pay as unlawful deductions from wages. The EAT decision states that a historic claim for a series of deductions can only go back until the point where there is a three month gap between deductions. This test is complex to apply in practice, and it is difficult to estimate with precision what the cost of such claims for the Holdco Group could be; however, potential historic liability for backdated claims could be material. Regulations have come into force which: (i) from 1 July 2015, limit back pay claims to no more than two years; and (ii) clarify that the rights to holiday pay under WTR are non-contractual (and hence avoid the possibility of a county court claim with six year limitation). On 7 October 2016 in British Gas Trading Ltd v. Lock, the Court of Appeal upheld the EAT's decision confirming that 4 weeks' statutory holiday pay under the WTR should include results-based commission in accordance with the requirements of EU law.

These changes and other changes in employment law could create additional costs for businesses, including ours, that operate overtime and commission by increasing the cost of paid statutory holiday, which in turn could have a material adverse effect on our business, prospects, financial condition and results of operations.

Risks Relating to our Pension Schemes and Post-Retirement Medical Plans

We are exposed to various risks in connection with the funding of our pension commitments under the AA UK Pension Scheme, our principal defined benefit plan, the AA Ireland Pension Scheme and our post-retirement medical scheme, which could have a material adverse effect on our business, prospects, financial condition and results of operations.

The Holdco Group operates two funded defined benefit pension schemes: (i) the AA UK Pension Scheme; and (ii) the AA Ireland Pension Scheme. The AA UK Pension Scheme has defined benefit sections that are closed to new entrants but were open to future accrual for existing members on a final salary and a career average revalued earnings ("CARE") basis until 1 July 2017 and on a CARE-only basis until 31 March 2020. Following the sale of AA Ireland, the Holdco Group continues to retain the AA Ireland Pension Scheme, which is closed to new entrants and future accrual of benefits, having transferred it to an English subsidiary, AA Corporation Limited. In March 2020, we concluded our 60-day pension consultation with around 2,800 members through their IDU/management representatives in respect of our proposal to close the CARE section of the AA UK Pension Scheme and as a result the closure took effect from 31 March 2020. Closure of the CARE section is expected to protect against ongoing build-up of defined benefit risk for the Holdco Group and reduce pension cash costs by approximately £4 million per annum. The consultation resulted in a temporary enhancement to the defined contribution scheme being agreed for affected employees which will cost approximately £11 million over three years starting from 1 April 2020.

Valuations of all UK defined benefit plans are required to be conducted on at least a triennial basis in accordance with legislative requirements, and the trustees and employers of the applicable plan will be required to agree a recovery plan which seeks to pay off any funding deficit disclosed in the context of such valuations over an agreed period of time. The "funding deficit" will be the estimated shortfall in scheme assets compared with the amount required, on an actuarial calculation based on assumptions agreed between the employer and trustees in the context of the relevant valuation, to make provision for the scheme's liabilities. In addition, each valuation determined the cash contributions agreed with the trustees to cover the AA's share of the costs relating to CARE benefits that were accruing to employees. We are legally required to meet these monthly contributions, along with any agreed deficit repair contributions, scheme running costs and scheme levies, all of which are payable prior to our debt servicing obligations. Accordingly, we are exposed to the risk that our pension funding commitments may increase over time in the context of subsequent valuations of the AA UK Pension Scheme (though we believe closure of the CARE section will help to offset such increases), which could have a material adverse effect on our business, prospects, financial condition and results of operations.

The triennial actuarial valuation for the AA UK Pension Scheme was carried out as at 31 March 2019 and the valuation was concluded in February 2020 (the "2019 Valuation"). The 2019 Valuation resulted in a significant reduction to the technical provisions deficit of 64%, from £366 million as at 31 March 2016 (the "2016 Valuation") to £131 million as at 31 March 2019. An "accounting" deficit of £104 million was recorded in the financial statements of the Holdco Group as at 31 January 2020 under IFRS (down from £167 million as at 31 January 2019). The 2016 Valuation disclosed assets of approximately £1,835 million and the 2019 Valuation disclosed assets of approximately £2,404 million.

In conjunction with agreeing the triennial valuation as at 31 March 2013 (the "2013 Valuation"), we implemented an asset backed funding structure (the "ABF") in November 2013 with the trustee of the AA UK Pension Scheme (the "AA UK Pension Trustee"). This provides the AA UK Pension Scheme with an inflation-linked income stream over 25 years, through an interest in a Scottish limited partnership. The aggregate total of the monthly payments due from the ABF to the AA UK Pension Scheme in the year to 31 January 2020 was £14 million. The ABF is intended to address the funding deficit disclosed in the 2013 Valuation over a 25 year period.

Typically, funding deficits are addressed over a much shorter period than 25 years and, in order to secure the AA UK Pension Trustee's agreement to the longer 25 year term under the ABF, the AA UK Pension Trustee has been granted first-ranking security (through the ABF structure) over our brands for a debt claim of £200 million. The ABF income stream and security are provided through the AA UK Pension Trustee's interest in a Scottish limited partnership which holds a loan note issued by the company that owns the AA plc Group's brands ("IP Co"). The royalties payable by the AA plc Group to IP Co for the use of the AA plc Group's brands fund the loan note payments due from IP Co to the Scottish limited partnership (which in turn fund the payments from the Scottish limited partnership to the AA UK Pension Trustee). The loan note payments due from IP Co are secured by a first ranking charge over the AA plc Group's brands, for an amount equal to £200 million. If the loan note payments, which are payable prior to our debt servicing obligations, are not made to the Scottish limited partnership to enable the payment of the AA UK Pension Trustee's return it will have the right to enforce the £200 million first ranking security interest over our brands against IP Co at the instruction of the AA UK Pension Trustee and if the security is enforced, the AA UK Pension Trustee's claim (through the ABF) will rank ahead of other claims on the security. If the security claims were enforced and all or some of our brands were disposed of by the AA UK Pension Trustee, it could have a material adverse effect on our business, prospects, financial condition and results of operations, as well as our ability to service our debt obligations.

Under the 2016 Valuation, the recovery plan extended through to 2038 in respect of the ABF and a nine-year plan of incremental funding was implemented to repair the higher 2016 Valuation deficit (as compared to the 2013 Valuation), taking into account the continued funding of the previous deficit. As part of the valuation as at 31 March 2019, a new recovery plan has now been put in place and agreed with the AA UK Pension Trustee. The new recovery plan assumes that the AA UK Pension Scheme's technical deficit will be fully repaid in July 2025, which is one year earlier than previously planned in terms of the additional funding element and 13 years earlier in terms of the ABF. To do this, the Holdco Group has committed to paying an additional (above the ABF payments) £10 million per annum from April 2020 to March 2021, £11 million per annum from April 2021 to March 2022 and £12 million per annum from April 2022 to July 2025. From 1 February 2020, the AA UK Pension Trustee will also meet its own costs of running the scheme. However, neither the new recovery plan nor the closure of the CARE section guarantee that the funding deficit with respect to the AA UK Pension Scheme will not increase in the future and this may result in materially higher payments being required to be paid to the AA UK Pension Scheme to address such increased deficit.

On 24 November 2020, the AA plc, Basing Topco and the AA UK Pension Trustee entered into a memorandum of understanding relating to the impact of the Acquisition on the AA UK Pension Scheme (the "MoU"). The AA UK Pension Trustee confirmed under the MoU that (based on the information it had received at the date thereof) it did not consider that the Acquisition would result in a detriment to the AA UK Pension Scheme and accordingly no mitigation was required in respect of the Acquisition, though each party thereto acknowledged the continued reliance of the AA UK Pension Scheme on the AA plc's covenant. The following was agreed under the MoU (subject to the AA UK Pension Trustee completing its confirmatory due diligence) for the period from the date of execution to 24 November 2025:

· Except where pre-agreed circumstances apply, there will be no changes to the current contributions payable to the AA UK Pension Scheme, including under the AA UK Pension Scheme's next triennial actuarial valuation which is expected to be as at 31 March 2022 (the "2022 Valuation"). The pre-agreed circumstances include lower than expected investment returns, unexpected changes to inflation, the discount rate or demographic conditions, and clarifications of the benefits payable. If these pre-agreed circumstances apply, there will be good faith discussions and agreement about any further cash contributions required beyond the five-year term of the MoU.

· In the absence of a material adverse event or a request from the AA plc or Basing Topco, the AA UK Pension Trustee will not bring forward the 2022 Valuation.

· Except where there has been a material adverse change in circumstances or pre-agreed excepted circumstances apply, the agreed actuarial assumptions under the MoU will be used for the purposes of the 2022 Valuation.

· If any changes are required to be made to the actuarial assumptions, these will not, where possible, overall increase the AA UK Pension Scheme's "technical provisions" and if required to increase by law, the AA UK Pension Trustee will work in good faith and collaboratively with the sponsoring employer of the AA UK Pension Scheme, which is Automobile Association Developments Limited (the "Employer"), to seek its agreement to revising the technical provisions appropriately.

· It was confirmed under the MoU that there are no current plans to remove the current AA UK Pension Trustee nor any of its directors nor an intention to direct the Employer to do this and that the current chair of the AA UK Pension Trustee will remain in place until at least completion of the 2022 Valuation.

· The AA UK Pension Trustee confirmed its willingness to engage, in good faith, with Basing Topco or the AA plc on any future pensions de-risking proposals initiated by them.

· Certain assurances were given to the AA UK Pension Trustee concerning the AA plc Group's indebtedness and future payment of dividends and monitoring fees.

· The AA UK Pension Trustee will consult in good faith with the AA plc Group before making any changes to AA UK Pension Scheme's actuarial factors from those currently used.

· The MoU sets out certain agreed information sharing provisions.

The MoU is not legally binding, but sets out a statement of the current intentions of the parties thereto. The parties have agreed to work in good faith to enter into a legally binding agreement on the basis of the terms set out in the MoU, but there can be no guarantee that an agreement on substantially the same terms as the MoU will become legally binding on the parties. Furthermore, the MoU does not bind the regulator of occupational pension schemes in the UK (the "UK Pensions Regulator"), which could seek to re-open discussions on the terms set out in the MoU under certain circumstances. As a result, it is possible that the arrangements contemplated by the MoU may be subject to change in the future.

We also operate an unfunded post-retirement medical scheme (the "AAPMP"). The AAPMP provides private healthcare cover to retired AA pensioners and their dependents. The scheme, which is closed to new entrants, but remains open to active participants, is unfunded, and as at 31 October 2020 showed a liability of £45 million. This liability could materially increase depending on, among other factors, the longevity of scheme participants, material changes in claims behaviour and the rate of inflation in the costs of providing these healthcare benefits, which could have a material adverse effect on our business, prospects, financial condition and results of operations.

The assets of the AA UK Pension Scheme and the AA Ireland Pension Scheme are invested in various investment vehicles which are susceptible to market volatility, interest rate risk and other market risks, any of which could result in decreased asset value and a significant increase in our net pension obligations.

The assets of the AA UK Pension Scheme and the AA Ireland Pension Scheme are invested predominantly via externally managed funds and insurance companies. The AA UK Pension Trustee and the AA Ireland Pension Trustee, in consultation with us, prescribe the investment strategy in relation to the assets of the AA UK Pension Scheme and the AA Ireland Pension Scheme, respectively. The assets may be invested in different asset classes including equities, fixed-income securities, real estate and other investment vehicles. The values attributable to the externally invested pension plan assets are subject to fluctuations in the capital markets that are beyond our influence. Unfavourable developments in the capital markets could result in a substantial coverage shortfall for these pension obligations, resulting in a significant increase in our net pension obligations. In addition, deterioration in our financial condition could lead to an increased funding commitment to the trustees, which could further exacerbate any financial difficulties we could face at such time. Any such increases in our net pension obligations could adversely affect our financial condition due to increased additional outflow of funds to finance the pension obligations. We are also exposed to risks associated with longevity, interest rate and inflation rate changes in connection with our pension commitments, as a decrease in long-term interest rates and/or an increase in longevity or in inflation could have an adverse effect on our contribution requirements in respect of the AA UK Pension Scheme and the AA Ireland Pension Scheme.

In certain circumstances we may be required to fully fund the AA UK Pension Scheme on a "buy-out" basis, which could have a material adverse effect on our business, prospects, financial condition and results of operations.

Typically, the ongoing "funding" basis for a pension scheme, such as the AA UK Pension Scheme, is agreed between the AA UK Pension Trustee and the Employer subject to the UK Pensions Regulator's powers to intervene and determine such basis). However, in certain circumstances, a so-called "section 75 debt" payment can be triggered, which is calculated by reference to the deficit on a "buy-out" basis, broadly the cost of purchasing annuities and deferred annuities with an insurer. The deficit on a buy-out basis is often significantly in excess of the funding deficit. The deficit of the AA UK Pension Scheme on a buy-out basis was estimated as part of the most recent completed triennial valuation to be £1,481 million as at 31 March 2019. AA Senior Co Limited provides a guarantee under a pension agreement dated 1 July 2013 (the "AA UK Pension Agreement") in relation to, broadly, the difference between the section 75 debt and the AA UK Pension Trustee's £200 million first ranking security interest over the AA plc Group's brands (provided through the ABF), and this guarantee is effective on enforcement of the security. Accordingly, if a section 75 debt is triggered, it could have a material adverse effect on our business, prospects, financial condition and results of operations.

A section 75 debt could be triggered in relation to the AA UK Pension Scheme if it is wound up or certain insolvency events occur in relation to the Employer. The AA UK Pension Trustee can trigger a wind-up of the AA UK Pension Scheme if the Employer terminates its liability to contribute to the AA UK Pension Scheme or ceases to carry on its undertaking and a successor has not assumed the role of sponsoring employer, which is subject to AA UK Pension Trustee consent. The UK Pensions Regulator has powers to trigger a wind-up in relation to the AA UK Pension Scheme in certain circumstances. Insolvency events which trigger a section 75 debt include the appointment of an administrative receiver and the entry by a company into administration. A section 75 debt can also be triggered in relation to multi-employer pension schemes where one employer exits the scheme, but the AA UK Pension Scheme is currently a single employer scheme.

Where a section 75 debt is triggered as a result of an insolvency event, the pension scheme may be transferred to the Pension Protection Fund (the "PPF"). Entry into the PPF is subject to certain conditions, including an assessment as to whether the pension scheme's assets are sufficient to provide benefits of at least the level of compensation which would be provided by the PPF and is determined during the course of a PPF assessment period (if so, the scheme will not transfer). The PPF will assume responsibility for an eligible scheme where the assets of the scheme are not sufficient to provide PPF level benefits, unless the relevant insolvency practitioner issues a "scheme rescue" notice (for example, because the relevant company is rescued and the business continues with the pension scheme in place or because another entity agrees to assume responsibility for the pension liabilities). Where a scheme rescue notice is issued, no section 75 debt in relation to the scheme will be payable as a result of the insolvency. In the absence of a scheme rescue notice, the section 75 debt would become payable and, as this is likely to be significant, this means a substantial unsecured claim would arise in relation to the Employer and AA Senior Co Limited pursuant to the AA UK Pension Agreement.

A section 75 debt is an unsecured debt. However, the AA UK Pension Trustee's indirect £200 million first ranking security interest over the AA Group's brands (through the ABF) is enforceable by the Scottish limited partnership in certain circumstances, including in the event of a section 75 debt being triggered (where, as a result of insolvency, the debt becomes payable because there is no scheme rescue). Accordingly, if the security is enforced, the first £200 million of the AA UK Pension Trustee's claim will rank ahead of other claims.

The UK Pensions Regulator has power in certain circumstances to issue contribution notices or financial support directions which, if issued, could result in us incurring significant liabilities.

Under the Pensions Act 2004, the UK Pensions Regulator may issue a contribution notice requiring contributions to be paid into the relevant scheme by an employer in a UK defined benefit pension scheme or any person who is "connected with" or is an "associate of" an employer in a UK defined benefit pension scheme. A contribution notice may be issued if the UK Pensions Regulator is of the opinion that (i) the relevant person has been a party to an act, or a deliberate failure to act, which had as its main purpose (or one of its main purposes) the avoidance of pension liabilities or (ii) the relevant person has been a party to an act, or a deliberate failure to act, which has a materially detrimental effect on a pension plan without sufficient mitigation having been provided. Directors of the participating employer are also potentially subject to the UK Pensions Regulator's power to issue a contribution notice.

If the UK Pensions Regulator considers that the employer participating in a UK defined benefit pension scheme is "insufficiently resourced" or a "service company", it may impose a financial support direction requiring any person associated or connected with that employer, to put in place financial support in relation to the relevant pension scheme. An employer is insufficiently resourced if, broadly, the employer has insufficient assets to meet 50% of the deficit on a buy-out basis and any person or persons who is or are "connected with" or an "associate of" the employer has (or together have) sufficient assets to meet the shortfall between the employer's assets and 50% of the deficit on a buy-out basis.

The terms "associate" and "connected person", which are taken from the Insolvency Act 1986, are widely defined and could cover our significant shareholders and others deemed to be shadow directors.

Entities in the AA plc Group may also be associated and connected with employers in other UK defined benefit pension schemes operated in groups in which our significant shareholders (or former significant shareholders) have a prescribed shareholding. Accordingly, entities in the AA plc Group could be required by the UK Pensions Regulator to make a contribution to, or to put in place financial support for, any UK defined benefit pension schemes operated in such groups, in certain circumstances (for up to the level of any relevant pension scheme's buy-out deficit).

The UK Pensions Regulator may, however, only issue contribution notices or financial support directions where it believes it is reasonable to do so. In relation to financial support directions and contribution notices, the UK Pensions Regulator determines reasonableness by having regard to a number of factors, non-exhaustive lists of which are set out in legislation (and include for example, the relationship which the person has or has had with the employer, the value of any benefits received directly or indirectly by that person from the employer, any connection or involvement which the person has or has had with the scheme and the financial circumstances of the person).

The UK Parliament is expected to strengthen the powers of the UK Pensions Regulator and to introduce new criminal offences in relation to UK defined benefit pension schemes

The UK Parliament is currently debating the Pension Schemes Bill (the "Bill"). Two new criminal offences of "risking accrued scheme benefits" and "avoidance of employer debt" are proposed, each carrying a maximum criminal penalty of seven years in prison and/or an unlimited fine (together with a civil penalty of up to £1 million). Both of these offences are very broad in their scope. In addition, the way that the offences have been framed in the Bill means that these offences target a wider range of parties than just those connected to the pension scheme's sponsoring employer, such as directors, as they are drafted to apply to any person. Acts of third parties, including banks, investors, and commercial counterparties, as well as acts of pension scheme trustees and professional advisers, could all fall within the scope of these new criminal offences. Unless a person has "reasonable excuse", criminal liability could be imposed (however, the Bill includes no further details on how the "reasonable excuse" requirement would operate). In addition, if the Bill becomes law, the circumstances in which the Pensions Regulator can make connected third parties liable for pension scheme deficits by issuing a contribution notice will be significantly widened. There will also be new requirements to give advanced notification and provide statements to the Pensions Regulator about the impact of certain corporate activity on a pension scheme, and failure to comply with these requirements could result in new civil penalties of up to £1 million. The Bill is expected to become law in the first or second quarter of 2021.

Strengthening of the regulatory funding regime in the UK or Ireland could impose increased pension funding requirements.

Strengthening of the regulatory funding regime for pensions in the UK or Ireland (whether due to changed regulatory guidance, or imposed by local law or European Union law and which, in the case of Ireland, could include the introduction of statutory debts for the recovery of a shortfall in funding, equivalent to the concept of section 75 debts under UK law or the introduction of regulatory powers, equivalent to the UK Pensions Regulator's powers to impose liability for underfunded defined benefit schemes on third parties) could increase requirements for cash funding of pensions, demanding more financial resources to meet governmentally mandated pension requirements.

New funding provisions under the Bill, and a new Pensions Regulator Code (the "PRC") for funding of defined benefit pension schemes in the UK (currently under consultation), which are expected to come into force by the end of 2021, may have significant consequences for the outcome of future valuations of the AA UK Pension Scheme. These new provisions are intended to encourage funding of UK defined benefit pension schemes up to a level at which the scheme will have a low dependency on future support from their employers. This approach will comprise the long-term funding target for such pension schemes, over a 15-20 year period in most cases. The PRC is also expected to shorten the length of deficit recovery plans, with a 3-5 year recovery period expected to be appropriate for the majority of schemes going forward. The Bill also introduces powers for the UK government to make parts of the new Code of Practice (e.g. the length of recovery plans) legally binding.

The realisation of any of the foregoing risks could require us to make significant additional payments to meet our pension commitments, which could have a material adverse effect on our business, prospects, financial condition and results of operations.

We are exposed to the risk that our liability for our post-retirement medical plan could materially increase, which could have a material adverse effect on our business, prospects, financial condition and results of operations.

There is a possible need to review the AA UK Pension Scheme's approach to "equalising" certain pension benefits earned before 1 April 1992.

The AA plc Group has been informed by the AA UK Pension Trustee of a possible need to review the AA UK Pension Scheme's approach to "equalising" certain pension benefits earned before 1 April 1992, so that the benefits earned by male and female members are equal. This requirement is common to most UK defined benefit pension schemes. In simple terms, this requires some pre-1992 pensions to be treated as if payable from a more generous age of 60, rather than the AA UK Pension Scheme's normal retirement age of 65. Action was taken in 1992 to put in place a mechanism for equalisation of these benefits, but the AA UK Pension Trustee has raised questions about the effectiveness of the mechanism used.

This is a highly technical matter that relates only to the benefits of members who joined certain sections of the AA UK Pension Scheme before 1 November 1987 and remained in service after 17 May 1990. At this early stage of our analysis we consider the scope of potentially impacted benefits to be limited to those accrued in the period 17 May 1990 to 31 March 1992. A detailed legal analysis will be needed to determine whether any additional liabilities need to be recognised by the AA plc Group or whether the existing methods used by the AA UK Pension Trustee to equalise benefits are in fact valid. Without this detailed analysis, as well as obtaining scheme information dating back to the 1990s, making a reliable estimate of the potential impact is extremely difficult due to the range of possible conclusions (including a scenario where no additional liability is recognised). Given the need for this extensive legal analysis and information collation, a reliable estimate is unavailable at this stage. There is a risk this could have a material adverse effect on our business, prospects, financial condition and results of operations. This matter is separate to equalisation in respect of "guaranteed minimum pensions", for which an accounting allowance has been made.

Risks Relating to our Financial Profile

We will require a significant amount of cash to meet our obligations under our indebtedness and sustain our business operations, and our ability to do so will depend on many factors beyond our control.

Our ability to meet our obligations under our indebtedness, including making principal, interest and other payments when due under facilities agreements, the Class A IBLAs, the Class B IBLAs, the Topco Payment Undertaking, the Class A Notes and the Class B Notes as well as our ability to fund our ongoing business operations, will depend upon our future operating performance and our ability to generate cash, which, in turn, will be affected to some extent by general economic conditions and by financial, competitive, legislative, regulatory and other factors, including those factors discussed in these "Risk Factors" and elsewhere in this Supplemental Investor Report, many of which are beyond our control.

The future performance of our business and results of operations may not be similar to our historic performance or results of operations described in this Supplemental Investor Report. Accordingly, we cannot provide any assurance that our business will generate sufficient cash flows from operations, that currently anticipated cost savings, revenue growth and operating improvements will be realised or that future sources of debt or equity financing will be available on favourable terms, or at all, in an amount sufficient to enable us to service our indebtedness or to fund our other liquidity needs. If, at the maturity of any of our indebtedness, we do not have sufficient cash flows from operations and other capital resources to repay such debt obligations or if we are otherwise unable to fund our other ongoing liquidity needs, we may be required to undertake alternative financing plans, such as refinancing or restructuring our debt, selling assets, reducing or delaying capital investments or raising additional debt or equity financing in amounts that could be substantial or on unfavourable terms.

Our access to debt, equity and other financing as a source of funding for our operations and for refinancing maturing debt will also be subject to many factors, many of which are beyond our control. The type, timing and terms of any future financing will depend on our cash needs and the prevailing conditions in the financial markets, including in the corporate bond, term loan and equity markets. We cannot assure you that these conditions will be favourable at the time any refinancing is required to be undertaken or that we will be able to complete any such refinancing in a timely manner or on favourable terms, if at all. For example, interest rate fluctuations, an economic downturn, changes in the UK regulatory environment or other industry developments which weaken the strength of our competitive position or prospects could increase our cost of borrowing or restrict our ability to obtain debt, equity and other financing. The creditworthiness of many financial institutions may be closely interrelated as a result of credit, derivative, trading, clearing or other relationships among the institutions. As a result, concerns about, or a default or threatened defaults by, one or more financial institutions could also lead to significant market-wide liquidity and credit problems, including losses or defaults by other institutions. This may adversely affect the financial institutions, such as banks and insurance providers, with which we interact on a regular basis, as well as cause disruptions in the capital or credit markets (similar to the global credit crisis that began in the second half of 2008), and therefore could adversely affect our ability to raise needed funds or access liquidity.

If we are unable to refinance all or a portion of our indebtedness or obtain such refinancing on terms which are acceptable to us, we may be forced to sell assets. If assets are sold, the timing of the sales and the amount of proceeds that may be realised from those sales cannot be guaranteed and the terms of our indebtedness will limit our ability to pursue these and other measures.

Our inability to generate sufficient cash flows to satisfy our debt obligations or to refinance our indebtedness on acceptable terms, or at all, would materially and adversely affect our business, financial condition and results of operations, as well as our ability to pay the principal and interest on our indebtedness. Any failure to refinance our indebtedness on or prior to the applicable maturity date may result in us defaulting on such indebtedness or a Share Enforcement Event in case of a Class B IBLA. The occurrence of any such default or Share Enforcement Event could result in the enforcement of the collateral granted to secure the applicable indebtedness.

There are circumstances that indicate material uncertainties exist that may cast significant doubt on our ability to continue as a going concern.

The unaudited consolidated interim financial statements of Holdco as at and for the nine months ended 31 October 2020 include a discussion of material uncertainties that may cast significant doubt on the Group's ability to continue as a going concern. The Sub-Class A5 Notes have a maturity date of 31 January 2022. We intend to refinance the Sub-Class A5 Notes prior to their maturity date. Holdco's directors have considered factors affecting the ability of the feasibility of refinancing the Sub-Class A5 Notes prior to their maturity date, along with the projected cash flows, for a period of one year from the date of issue of the unaudited consolidated interim financial statements as at and for the nine months ended 31 October 2020 and have concluded that they have confidence that the Group will have sufficient funds to continue trading for this period and will be able to secure financing so as to be able to continue to meet its liabilities as they fall due. However, the refinancing of the Sub-Class A5 Notes is not committed at the date of issue of the unaudited consolidated interim financial statements as at and for the nine months ended 31 October 2020. In addition, the Acquisition by the Consortium remains subject to a court sanction hearing and to regulatory approval. Both of these circumstances indicate that material uncertainties exist that may cast significant doubt on our ability to continue as a going concern for a period in excess of a year from the date of issue of the unaudited consolidated interim financial statements as at and for the nine months ended 31 October 2020. See Note 1 to the unaudited consolidated interim financial statements as at and for the nine months ended 31 October 2020, included elsewhere in this Supplementary Investor Report.

RECENT DEVELOPMENTS

COVID-19 pandemic

From March 2020 to July 2020, in response to the COVID-19 pandemic, the UK government imposed a lockdown which closed non-essential businesses and required residents of the UK to remain at home (with certain prescribed exceptions). Consequently, domestic travel in the UK, and as a result demand for our core Roadside services fell during the early stages of the lockdown but such demand progressively improved once the national lockdown restrictions were removed in June 2020, a testament to the resilience of our business model and the essential nature of our services. Overall breakdowns attended decreased by 11% for the nine months to 31 October 2020 compared to the prior period while paid personal members fell by 0.9% during the same period due to the decline in new business sales during the first lockdown. The relatively limited decline in paid personal members for the nine months to 31 October 2020 reflects a rebound in sales after a 2% decline in paid personal members for the six months to 31 July 2020. Consumer retention rates remained broadly steady. Our Insurance segment continued to deliver strong rates of policy growth despite the impact of COVID-19 with motor and home policy volumes increasing by 10% between 31 January 2020 and 31 October 2020. However, following increases in cases of COVID-19 in the United Kingdom, the UK government introduced additional lockdowns including the national lockdown from 5 November 2020 to 2 December 2020 (the "second lockdown"), the introduction of Tier 4 stay-at-home restrictions on 20 December 2020 and the national lockdown announced on 4 January 2021 (the "third lockdown" and together with the first lockdown and second lockdown, the "lockdown periods"). See "Risk Factors-Risks Relating to Our Business and Industry- The outbreak of COVID-19 (as defined below) has had, and is likely to continue to have, a material impact on our business and results of operations."

Our first priority in response to the COVID-19 pandemic is to protect the health and wellbeing of our staff, customers and suppliers. To this end we initiated a number of actions across the business to maximise business continuity, including emergency protocols to control decision-making, setting up homeworking for the vast majority of staff in less than three weeks, establishing safe working protocols for all staff and procuring required personal protective equipment.

To minimise the impact of COVID-19 on our results of operations, we executed a number of short-term measures that resulted in the deferral and reduction of a range of operating costs across the Holdco Group. These measures included no pay rises and a suspension of our normal bonus scheme, a general hiring freeze and tight cost control across the business. At the AA plc level, we implemented a 15% reduction to the base salary for the board of directors for three months. We also applied for the UK government furlough scheme for those parts of our business where it has been necessary for us to adjust to reduced levels of workload during the lockdown, though the majority of our workforce continued to provide services to our customers. As of November 2020, almost all of our staff had come off the furlough scheme. However, as a result of the further lockdown periods, the number of our employees on furlough increased in December 2020 and may continue to increase as a result of the third lockdown.

Current trading

Our core operations continue to perform resiliently despite the ongoing challenges presented by COVID-19, and our number one priority remains the well-being of our staff, members, customers, and suppliers. While the enforcement of tiered lockdowns from October 2020 has to date had limited impact to our core roadside assistance and insurance operations, the trading environment for our smaller businesses, including Driving Schools, remains challenging. During November and December 2020, we continued to trade in line with expectations. Following the surge in COVID-19 cases over December 2020, the UK government announced the third lockdown on 4 January 2021, which is likely to have a similar impact to our trading performance as announced earlier in 2020. Given the benefits of the swift actions we have taken during the year and our confidence in our ability to adjust to further volatility in the trading environment, we and the AA plc Group currently reiterate our previous expectations of delivering a robust performance in the year ending 31 January 2021, with results of both the Holdco Group and the AA plc Group expected to come in only slightly below those of the prior year.

SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

The selected consolidated historical financial data of Holdco as at and for each of the financial years ended 31 January 2018, 2019 and 2020 has been derived from Holdco's audited financial statements as at and for each of the years ended 31 January 2018, 2019 and 2020, as prepared in accordance with IFRS. The selected unaudited consolidated historical financial data of Holdco as at 31 October 2020 and for the nine months ended 31 October 2019 and 2020 has been derived from Holdco's unaudited consolidated interim financial statements as at and for the nine months ended 31 October 2020, as prepared in accordance with IAS 34, and included elsewhere in this Supplemental Investor Report.

The results of operations for prior periods are not necessarily indicative of the results to be expected for any other period. The selected consolidated financial data should be read in conjunction with discussed in "Risk Factors", "Presentation of Financial and Operating Data", "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the audited consolidated financial statements and unaudited consolidated interim financial information.

Selected Consolidated Income Statement Data

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Selected Consolidated Statement of Financial Position Data

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(1) Amounts owed by parent undertakings represent the net amount of balances owed by companies within the AA plc Group but outside of the Holdco Group, to the Holdco Group. As at 31 October 2020, individual entities within the AA plc Group but outside of the Holdco Group owed £1,215 million (31 January 2020: £1,214 million; 31 January 2019: £1,214 million; 31 January 2018: £1,214 million) to the Holdco Group.

(2) Amounts owing to parent undertakings represent the net amount of balances owed by companies within the Holdco Group to AA plc Group companies that are not part of the Holdco Group. As at 31 October 2020 individual entities within the Holdco Group owed £71 million (31 January 2020: £48 million; 31 January 2019: £34 million; 31 January 2018: £22 million) to AA plc Group companies that are not part of the Holdco Group.

Selected Consolidated Cash Flow Data

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(1) Starting with the year ended 31 January 2019, we present lease capital repayments net of proceeds from sale of fixed assets in order to better reflect the commercial terms of leased assets. Therefore, the financial information presented for the year ended 31 January 2018 may not be comparable to the financial information presented for the years ended 31 January 2019 and 2020.

(2) In the year ended 31 January 2018, we presented this line item as acquisitions and disposals, net of cash acquired or disposed of.

Selected Other Financial Data

(1) We define Trading EBITDA as profit after tax as reported, adjusted for depreciation, amortisation, exceptional operating items, share-based payments, pension service charge adjustments, net finance costs, contingent consideration remeasurement movements and tax expense. The pension service charge adjustment principally relates to the difference between the cash contributions to the pension scheme for ongoing service and the calculated annual service cost. Share-based payments charges result from grants under the long-term incentive schemes for staff and management. See Notes 2 and 3 to our audited consolidated financial statements as at and for the years ended 31 January 2018, 2019 and 2020 and our unaudited consolidated interim financial statements as at and for the nine months ended 31 October 2020, included elsewhere in this Supplemental Investor Report. Trading EBITDA for the year ended 31 January 2020, for the nine months ended 31 October 2020 and for the twelve months ended 31 October 2020 reflect the implementation of IFRS 16. Trading EBITDA of the Holdco Group for the year ended 31 January 2020 increased by £3 million as a result of the adoption of IFRS 16 (this increase was recognised in the Roadside segment).

We define Trading EBITDA margin as Trading EBITDA as a percentage of revenue. For the year ended 31 December 2018, Trading EBITDA margin was calculated as Trading EBITDA as a percentage of Trading Revenue, which excludes revenue from adjusting operating revenue items. Trading Revenue for the year ended 31 December 2018 was £946 million as compared to total revenue of £947 million. There was no difference between Trading Revenue and revenue for the other periods under review.

The reconciliation of profit to Trading EBITDA is set forth below.

(2) We define net cash flow from operating activities before tax and exceptional operating items as the net cash generated from operating activities before taxation and cash flows from exceptional items as reported in the most recent publicly available financial statements. The reconciliation of operating profit to net cash flow from operating activities before tax and exceptional operating items is set forth below.

(a) Other adjustments include share-based payments, remeasurement of contingent consideration and working capital adjustments for adjusting operating items.

(3) We define free cash flow as net cash flow before payment of dividends, bond buy-backs and refinancing costs. The reconciliation of net increase/(decrease) in cash and cash equivalents to free cash flow is set forth below.

(4) Financial information presented for the twelve months ended 31 October 2020 has been computed by adding the number for the nine months ended 31 October 2020 to the number for the year ended 31 January 2020 and subtracting from the resulting total the number for the nine months ended 31 October 2019, in each case, in the relevant line item.

(5) Working capital movement reflects the aggregated impact of (i) increases/decreases in trade and other receivables, (ii) increases/decreases in trade and other payables and (iii) increases/decreases in provisions.

(6) We define cash conversion as net cash flows from operating activities less capital expenditure, expressed as a percentage of Trading EBITDA.

Revenue by Segment

(a) We recorded £1 million in exceptional revenue in the year ended 31 January 2018 for duplicate breakdown cover release. See Note 5 to Holdco's audited consolidated financial statements as at and for the year ended 31 January 2018.

Trading EBITDA by Segment

The reconciliation of operating profit before adjusting items to Trading EBITDA for each of our segments is set forth below.

Selected Operational Data

We use several key operating measures, including number of Roadside paid personal members, number of Roadside B2B or business customers, breakdowns attended, average income per paid personal member and per business customer, Insurance policy numbers in force and average income per policy, to track the financial and operating performance of our business. None of these terms are measures of financial performance under IFRS, nor have these measures been audited or reviewed by an auditor, consultant or expert. All these measures are derived from our internal operating and financial systems. As defined by our management, these terms may not be directly comparable to similar terms used by competitors or other companies.

The following table sets forth our key operating measures as at and for the periods indicated.

(1) Number of paid personal members represents the number of Roadside personal members (excluding free members) on the specified date.

(2) Number of business customers represents the number of Roadside business customers on the specified date.

(3) Millions of breakdowns attended is for the nine months ended 31 October 2019 and 2020, respectively.

(4) For each of the periods under review, average income from paid personal members represents the average income generated from a Roadside paid personal member, which is calculated by dividing (i) revenue generated over the prior 12 month period from the sale of memberships and revenue from the sale of parts and additional services to Roadside personal members by (ii) the total number of paid personal members on the specified date.

During the nine month period ended 31 October 2020, we implemented a new basis for calculating average income per paid personal member. The old basis presented average income per paid personal member as a proportion of closing paid personal membership holdings while the new basis presents the figure as a proportion of the average paid personal membership holdings over the relevant period. The figure presented for the twelve months ended 31 October 2020 is calculated on this new basis.

(5) Average income per business customer represents the average income generated from a Roadside business customer, which is calculated by dividing (i) revenue generated over the prior 12 month period from Roadside business customers by (ii) the total number of business customers on the specified date.

(6) Policy numbers in force represents the total number of motor and home insurance policies in force, sold by the Insurance Brokering business, for the prior 12 month period and excludes Financial Services. These figures were restated in the year ended 31 January 2018.

(7) Average income per insurance policy is calculated by dividing (i) revenue from motor and home insurance policies from the prior 12 month period by (ii) the total number of motor and home policies in force, on the specified date. These figures were restated at the end of the year ended 31 January 2018.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of financial condition and results of operations is intended to convey management's perspective on the Holdco Group's operating performance and financial condition during the periods under review, as measured in accordance with IFRS and other relevant measures. This disclosure is intended to assist readers in understanding and interpreting Holdco Group's consolidated financial statements and accompanying notes and you should read this discussion in conjunction with them. A summary of the critical accounting estimates that have been applied to Holdco's consolidated financial statements is set forth below under the heading "-Critical Accounting Estimates and Judgements". You should also review the information in the section "Presentation of Financial Information". This discussion also includes forward-looking statements which, although based on assumptions that we consider reasonable, are subject to risks and uncertainties which could cause actual events or conditions to differ materially from those expressed or implied by the forward-looking statements. For a discussion of risks and uncertainties facing us as a result of various factors, see "Forward-looking Statements" and "Risk Factors".

Some of the measures used in this Supplemental Investor Report are not measurements of financial performance under IFRS, and should not be considered as an alternative to cash flow from operating activities as a measure of liquidity or an alternative to gross profit or operating profit for the period as indicators of our operating performance or any other measure of performance derived in accordance with IFRS.

Unless otherwise indicated, we present the consolidated financial information and results of operations of Holdco and its subsidiaries and when discussing historical results of operations in this "Management's Discussion and Analysis of Financial Condition and Results of Operations", "we", "our", "us", or the "Holdco Group", and other similar terms, are generally used to refer to the business of Holdco and its subsidiaries as a whole, and the terms the "AA" or "AA plc Group" refer to AA plc and its subsidiaries as a whole.

Overview

The AA is the largest roadside assistance provider in the UK, representing approximately 41% of the consumer market as of September 2020, approximately 51% of the manufacturer segment as of October 2020, approximately 58% of the UK's fleet and leasing companies as of November 2020, approximately 47% of the Added Value Account segment as of October 2020, approximately 10% of breakdown assistance provided through insurance policies, as of September 2020 and a greater share of the high value market than all other providers combined. During the year ended 31 January 2020, the AA responded to an average of approximately 9,400 breakdowns a day. With more than 115 years of operating history, the AA is one of the most widely recognised and trusted brands in the UK. In addition, we have successfully leveraged this brand to become a leading provider of insurance broking services and driving services.

We have a strong and diversified customer base, including approximately 12.0 million paid personal members and business customers as at 31 October 2020, which we estimate to mean that approximately 46% of UK households subscribed to at least one AA product.

On 21 February 2018, the AA announced its new business strategy to invigorate the AA by putting service, innovation and data at its heart. The new business strategy is intended to deliver targeted investment in our people, our products, our systems and our operations as we build on the solid foundation that our investments since the IPO have created and address the challenges we face. The objectives are: (i) innovate and grow Roadside; (ii) accelerate growth in Insurance; (iii) deliver operational and service excellence; and (iv) nurture a high-performance culture. For further details, see "-Our Strategic Objectives", below. In line with the focus of our strategy announced in February 2018, our products and services are split into two core segments, Roadside and Insurance. The Roadside segment consists of our B2C, B2B and Driving Services divisions. The Insurance segment consists of AA Cars and the Insurance Broker and Financial Services partnership with the Bank of Ireland.

The results for the twelve months ended 31 October 2020 and for the year ended 31 January 2020 reflect the outcomes of the business strategy update.

In the twelve months ended 31 October 2020, the Holdco Group generated revenue of £946 million and Trading EBITDA of £344 million, representing a Trading EBITDA margin of 36.3%. (compared to £967 million and £343 million, respectively, in the year ended 31 January 2020, which represented a Trading EBITDA margin of 35.4%).

Presentation of Financial Information

The discussion below relates to the results of Holdco and its consolidated subsidiaries for the years ended 31 January 2018, 2019 and 2020 and for the nine months ended 31 October 2019 and 2020. These differ in certain respects from the results announced by AA plc and its subsidiaries in respect of these periods. Among other things, (a) the financial results of (i) the entities currently engaged in insurance underwriting (including AA Underwriting Insurance Company Limited and AA Reinsurance Company Limited, which was subsequently sold on 21 May 2020) and (ii) TVS Auto Assist (India) Limited, which conducted our joint venture in India and was subsequently sold on 30 March 2018 and (b) certain administrative costs that only relate to entities outside the Holdco Group, are included in the consolidated financial statements of AA plc but excluded from those of Holdco.

Except as otherwise indicated, financial data for the years ended 31 January 2018, 2019 and 2020 are derived from our audited consolidated financial statements for each of the years ended 31 January 2018, 2019 and 2020 while the unaudited consolidated interim financial data for the nine months ended 31 October 2019 and 2020 are derived from our unaudited consolidated interim financial statements as at and for the nine months ended 31 October 2020.

For the year ended 31 January 2020, we adopted IFRS 16 "Leases", which replaced IAS 17 "Leases". We have not restated comparative information for prior periods as permitted under the specific transition provisions in the standard. The reclassifications and the adjustments arising from the new leasing rules are therefore recognised in the opening statement of financial position on 1 February 2019.Therefore, the financial information presented for the years ended 31 January 2018 and 2019 may not be comparable to the financial information presented for the year ended 31 January 2020. (See "-Recent Accounting Pronouncements-IFRS 16 -Leases").

For the year ended 31 January 2019, we decided to present lease capital repayments net of proceeds from sale of fixed assets in order to better reflect the commercial terms of leased assets in the cash flow statement in the 2019 unaudited comparative financial information included within the audited consolidated financial statement of Holdco as at and for the year ended 31 January 2020. Therefore, the financial information presented for the year ended 31 January 2018 may not be comparable to the financial information presented for the years ended 31 January 2019 and 2020. (see "-Liquidity and capital resources-Cash flows").

Segmental Reporting

The Group has two reportable segments - Roadside and Insurance. Head office costs have been allocated to these two key segments as these costs directly support the operations of these segments. Head Office costs are predominantly allocated on a percentage of revenue basis.

The two reportable operating segments are as follows:

· Roadside: This segment is the largest part of the AA business. The AA provides a nationwide breakdown service, sending patrols out to members stranded at the side of the road, repairing their vehicles where possible and getting them back on their way quickly and safely. In addition, this segment includes the AA and BSM driving schools and DriveTech (which provides driver training and educative programmes), which are collectively referred to as Driving Services. Roadside is comprised of (i) the B2C and B2B divisions (referred to collectively as "Roadside Assistance" in the Holdco Group's financial statements for the year ended 31 January 2018 and 2019), the revenue of which is primarily generated by roadside membership subscriptions, and (ii) Driving Services (referred to as "Roadside other" in the Holdco Group's financial statements for the year ended 31 January 2020), the revenue of which is primarily generated from the DriveTech and Driving Schools businesses. See "Business-Our Products and Services-Roadside" and Note 2 in each of the Holdco Group's financial statements for the years ended 31 January 2018, 2019 and 2020.

· Insurance: Insurance is comprised of (i) the Insurance Brokering business, the revenue of which is primarily generated by arranging motor and home insurance for customers and (ii) the AA Cars and intermediary Financial Services business, through which we offer AA-branded loans, savings accounts and car finance products to both members and non-members in partnership with the Bank of Ireland as well as an online used car platform. See "Business-Our Products and Services-Insurance" and Note 2 in each of the Holdco Group's financial statements for the years ended 31 January 2018, 2019 and 2020. At an AA plc Group level "Insurance" includes "insurance underwriting", but this does not form part of Insurance for the purposes of this "Management's Discussion and Analysis of Financial Condition and Results of Operations" since it does not form part of the Holdco Group. Insurance underwriting is discussed in "Business" in the context of how the Holdco Group sits within the wider AA plc Group.

During the period from 1 February 2020 to 31 October 2020 and reflecting the way that the Holdco Group will be managed going forwards, the Holdco Group has determined that its AA Cars business, which has a growing car financial service offering, should be included within the Insurance segment, having previously been included in the Roadside segment. This has been reflected in the below analysis of segmental performance and corresponding comparatives for the nine months ended 31 October 2020.

Key Factors affecting results of Operations

Set forth below is a description of certain of the key factors that have affected our results of operations in the years ended 31 January 2018, 2019 and 2020 and which may impact our business in the future.

COVID-19 pandemic

From March 2020 to July 2020, in response to the COVID-19 pandemic, the UK government imposed a lockdown which closed non-essential businesses and required residents of the UK to remain at home (with certain prescribed exceptions). Consequently, domestic travel in the UK, and as a result demand for our core Roadside services fell during the early stages of the lockdown but such demand progressively improved once the national lockdown restrictions were removed in June 2020, a testament to the resilience of our business model and the essential nature of our services. Overall breakdowns attended decreased by 11% for the nine months to 31 October 2020 compared to the prior period while paid personal members fell by 0.9% during the same period due to the decline in new business sales during the first lockdown. The relatively limited decline in paid personal members for the nine months to 31 October 2020 reflects a rebound in sales after a 2% decline in paid personal members for the six months to 31 July 2020. Consumer retention rates remained broadly steady. Our Insurance segment continued to deliver strong rates of policy growth despite the impact of COVID-19 with motor and home policy volumes increasing by 10% between 31 January 2020 and 31 October 2020.

To minimise the impact of COVID-19 on our results of operations, we executed a number of short-term measures that resulted in the deferral and reduction of a range of operating costs across the Holdco Group. These measures included no pay rises and a suspension of our normal bonus scheme, a 15% reduction to the board's base salary for three months, a general hiring freeze and tight cost control across the business. We also applied for the UK government furlough scheme for those parts of our business where it has been necessary for us to adjust to reduced levels of workload during the lockdown, though the majority of our workforce continued to provide services to our customers. As of November 2020, almost all of our staff had come off the furlough scheme. The number of our employees on furlough increased in December 2020 and may continue to increase as a result of the third lockdown.

Looking ahead, COVID-19 continues to create uncertainty in the macro environment, particularly as a result of the third lockdown, and we remain cautious about the first half of 2021. However, given the benefit of the actions already taken in 2020 and our flexibility to adjust to further changes in trading, we remain committed to serving the needs of our customers during this challenging time.

Member loyalty and retention rates

Our results are impacted by the levels at which we are able to successfully retain customers across our various segments. We depend on maintaining a high degree of customer loyalty in order to help sustain our high customer retention rates. High retention rate levels, in turn, provide us with insight into future profit and cash flow performance and, when combined with our multi-year business contracts, are a source of stability and strong profit margins. As the cost to retain a personal member is typically lower than the cost of attracting a new personal member, our operations depend on our managing and monitoring factors that affect customer retention rates, including the price of our products and services and the level of benefits offered. We believe that our ability to sustain high levels of customer service and the integrity of the AA brand is fundamental to our ability to control customer turnover. From January 2018 to January 2019 we experienced a small decline in paid personal membership mainly due to the discontinuation of the free-to-paid insurance channel from December 2015 and the rephasing of our marketing campaign. However, the paid personal membership base returned to growth during the second half of the year ended 31 January 2020, resulting in a membership base that grew by 0.2% in the year ended 31 January 2020. Our customer retention rate remained broadly flat at 80% for the year ended 31 January 2020. During the nine months ended 31 October 2020, the paid membership base fell by 0.9% with the customer retention rate flat at 80%. This was due to the early impact of the UK first lockdown in March 2020 which limited driving on Britain's roads and led to an initial decline in new member volumes. Following the gradual lifting of the first lockdown in June 2020 and our marketing campaign "That Feeling" which launched in July 2020, we have seen a steady improvement in new business volumes. However, the effect of the uncertainty caused by the third lockdown announced on 4 January 2021 remains to be seen.

Pricing and competition

The level of our revenue depends on our ability to correctly price our products and services. We aim to manage the pricing of our products and services for both new and existing customers across our various segments in order to provide customers with quality products and services at an attractive price, while seeking to maximise the long-term value of our customer base. We must also price our products correctly in light of the specific competitive environment.

Within Roadside, we offer a range of products and services at different price points for new and existing personal members and business customers. As price competition in the market for roadside assistance services has historically been less intense relative to the broader insurance market, we have had a greater degree of control with respect to our pricing policies and product packages as compared to the insurance market, where the level of price competition is high, and PCWs have intensified price pressure. Within the Roadside B2C division, we set our personal member renewal pricing policies and service levels based on information obtained from our analysis of our extensive customer database and by our customer service teams. We offer discounts to attract new personal members and we offer a combination of discounts and enhanced service packages to existing personal members in order to foster long-term memberships. Our ability to effectively implement personal member discounts and enhanced service packages at the time of renewal, in particular, while implementing sustainable long-term pricing and price increases, where appropriate, is an important factor in limiting customer turnover which impacts our results of operations. The level and duration of our customer retention programs may increase our costs and the sustainability of our renewal prices may impact future revenues.

Pricing within our Insurance segment is principally determined by the members of our insurance underwriting panel. We then add our brokerage commission, as appropriate, to the premiums provided by underwriters. The levels of brokerage commissions and policy volumes we are able to achieve will depend on the premiums that we receive from underwriters on our panel. Underwriter premiums will vary for a number of reasons, including underwriters' experience in managing past claims or prospective claim estimates, changes in their underwriting strategy and policies and targeted underwriting returns. In terms of new business activities, our sales conversion depends on the relative competitiveness of our underwriting premiums compared to other participants in the motor and home insurance market. This is particularly the case for sales volumes generated via PCWs. Our income from motor and home insurance customers is also dependent on the level of commission we are able to sustain from our renewing customers. If underwriters' prices increase year-on-year, customers are more likely to cancel their existing insurance policies, seek insurance from other providers and consequently, we may experience lower customer retention rates and brokerage commissions. Conversely, if underwriters' prices decrease year-on-year, we may experience higher customer retention rates and higher levels of income from brokerage commissions.

We have the ability to influence insurance pricing by providing members of our insurance underwriting panel with certain risk-related information, including proprietary data we collect in connection with the Roadside business and external data such as credit scores. In addition, we have also benefitted from improved pricing agility following the installation of insurer hosted pricing ("IHP") with six of our motor panel members, including AA plc's in-house underwriter. This information in turn allows motor insurers to more accurately tailor policies to address individual risks. Looking ahead, we will continue with the rollout of IHP across our motor and home panel members and further invest in our pricing systems to enhance our competitiveness. Over the long-term, the provision of proprietary data to our insurance underwriting panel (including AA plc's in-house insurance underwriter) may offer us a competitive advantage with regards to certain customers. However, the provision of proprietary information to panel members can also result in reductions in commissions, personal injury referral fees and finance income from motor insurance customers if our insurance underwriting panel declines to offer competitive rates to individuals that typically attract higher premiums.

In addition, in October 2019 the FCA published its interim report on insurance pricing practices, which raised concerns with practices in the motor and home insurance markets. The FCA published the final report of its market study in September 2020 and is seeking views on its related proposals by 25 January 2021. The ultimate outcome of this exercise may impact our insurance pricing practices. See "Risk Factors-Risks Relating to Regulatory and Legislative Matters-We are subject to complex laws and regulations that could materially and adversely affect the cost, manner and feasibility of doing business".

Attracting new customers, cross-selling and up-selling

Our business depends on our ability to attract new customers, as well as to cross-sell and up-sell our range of products and services among our existing customer base. We rely on our brand, customer database, online presence and call centres to attract new customers through a range of marketing activities. Changes in customer responsiveness to our marketing activities, changes in customer purchasing patterns as well as our ability to respond to such changes or changes in our ability to convert customer leads into actual sales, impact the size of our customer base and our financial results. Additionally, the increasing prominence of PCWs is shifting customers away from our marketing channels and as a result can impact the effectiveness of various marketing channels over time.

We rely on cross-selling insurance services products to our Roadside personal members and similarly on cross-selling roadside assistance memberships to our insurance customers. In addition, we cross-sell products within our Insurance segment (for example, the sale of home insurance to a motor insurance customer) and up-sell products to our existing customers (for example, the sale of additional levels of roadside assistance cover to personal members). Our ability to successfully cross-sell and up-sell supports cost-effective growth in income per customer and per policy and impacts our results of operations. Our cross-sell rate into our Roadside business was 35% in the six month period ended 31 July 2020.

Roadside assistance breakdown volume

One of our key factors affecting results of operations in Roadside is the volume of breakdown calls that we service. Although call volume is relatively stable over time and we have developed sophisticated planning tools to match our resources to expected workload volumes, demand may fluctuate from period to period based on certain factors (see "-COVID-19 Pandemic" above), including the following:

Weather

We experience increased demand for roadside assistance during periods of adverse weather conditions. While both our personal member and business customer pricing models assume a reasonable number of bad weather days, extended periods of adverse weather conditions or extreme heat, cold or flooding have a negative impact on our operating margins as, in such circumstances, our operating costs increase. The increased costs are, however, offset in part by the associated increased revenue from business partners who pay for our roadside assistance services based on usage by business customers. We estimate that approximately 80% of our business partner revenue is derived from contracts that take into account the volume of breakdowns. Breakdowns resulting from adverse weather conditions in geographically remote areas may be incrementally more expensive to service but are less likely to occur in high volumes. In circumstances where we are required to rely on a contracted third-party garage network during peaks in demand, we incur additional incremental costs due to charges paid to these garages, which are partially offset by a corresponding increase in income from pay-for-use business customers. The impact of adverse weather conditions on our results of operations is mitigated by the economies of scale we have achieved across Roadside which help to make our incremental cost per breakdown relatively predictable, despite the occasional weather-related increase in our cost base.

Customer Usage and Change in Product Mix

Changes in driving preferences may affect our results of operations. In 2011, our roadside business experienced lower call volume during periods where fuel prices remained relatively high, which we believe was the result of personal members and business customers driving less frequently in order to use less fuel. By contrast, in periods of economic austerity, drivers may retain older vehicles for longer periods of time, potentially leading to increased breakdown call volumes since older vehicles tend to break down more frequently than new vehicles. New technological developments and changes in the market such as the increase in electric vehicles, autonomous vehicles and changes in ownership models could also impact on the type of breakdowns we attend. For example, electric vehicles have heavier wear and tear on tyres resulting in an increase in this type of call out while autonomous vehicles may exhibit faults mostly linked to their technology and outside the scope of our experience and capability. As a result of these emerging trends, we have invested in growing our connected car offering in order to bolster customer use and appeal to younger customer segments by moving from reacting to breakdowns to predicting and preventing them such as through our Smart Breakdown proposition. We have also started to expand our product offering, including in areas such as service, maintenance and repair ("SMR") through our AA Prestige platform (see "-Business Acquisitions and Disposals") and Smart Care proposition, and to enhance our claims and accident management capabilities so that we are able to deliver better customer outcomes, drive daily utility and as a result capture more of the car ownership value chain.

Cost structure

Cost of sales

Operational costs are predominantly attributable to "front line" costs (such as staff costs, vehicle, fuel, tooling and equipment costs, third-party garaging and parts costs). We can adjust resources to respond to increases in demand in the short-term through the use of third-party garages and in the medium-term through increases or decreases in patrol headcount. Historically, we have hedged fuel costs annually in advance of each upcoming financial year based on our 12-month usage forecast to mitigate the impact of diesel price volatility. We have hedged approximately 100% of our fuel forecast to 31 January 2022.

In addition, we incur staff and other costs in connection with the operation of service delivery call centres that answer roadside assistance calls and dispatch our patrols. Cost of sales also includes the direct costs of delivering our range of other services to personal members and business customers, and franchisee and training delivery costs which are part of our Driving Services business.

During the lockdown, we attended a lower volume of breakdowns which in turn meant that we incurred lower third-party garaging and patrol-related costs such as overtime.

Administrative and marketing expenses

We incur costs through the operation of our sales and customer service call centres for both Roadside and Insurance. Our primary costs are staff costs, with a proportion of staff costs relating to incentive payments made for achieving customer service benchmarks and sales and retention targets in compliance with regulatory requirements. The bulk of our other non-operational costs relate to staff costs incurred in connection with the management of our business segments or the provision of centralised functions, including technology systems, human resources, head office and other support functions.

Headcount costs also include ongoing pension contributions to the AA UK Pension Scheme, the levels of which are set as part of a triennial scheme valuation process. For more information see "Business-Employees and Pension Obligations".

In the year ended 31 January 2020, we invested £61 million in marketing, including advertising, in order to strengthen the AA brand. We use a variety of marketing techniques, including internet search engine advertising, direct mailings, press advertising campaigns, television and radio campaigns and payments to PCWs. Marketing costs per customer acquired are carefully monitored by sales channel to help ensure that appropriate returns are achieved, as compared against our internal measures of customer value.

Recent Accounting Pronouncements

IFRS 9 - Financial instruments

On 1 February 2018, we adopted IFRS 9 "Financial Instruments" which replaced IAS 39 "Financial Instruments: Recognition and Measurement". The effect of adopting IFRS 9 on the carrying amount of financial liabilities at 1 February 2018 relates solely to new requirements relating to non-substantial modifications of borrowings and loans. As part of the refinancing of existing debt, in prior years we performed a modification of borrowings, which is treated as a non-substantial modification under IFRS which does not result in an extinguishment of debt. The existing borrowings and loans are not derecognised, but the carrying value is adjusted.

Under IAS 39, modifications were accounted for by discounting the remaining cash flows of the modified debt at a revised effective interest rate. Under IFRS 9, remaining cash flows should be discounted at the original effective interest rate, leading to an immediate gain or loss being recognised in the income statement.

On transition to IFRS 9, using the original effective interest rate, the new carrying value of the borrowings was £13 million lower than the old carrying value as a result of the lower interest rates on the refinanced debt. This gain was recognised as a decrease in the opening balance of borrowings and loans and an increase in opening retained earnings at 1 February 2018.

The adoption of IFRS 9 has resulted in a taxable gain of £13 million, less the associated £2 million of tax, being posted to reserves. As the restatement is taxable in the year of change the £2 million is represented in the reserves movement as a deferred tax charge.

IFRS 15 - Revenue from contracts with customers

On 1 February 2018, we adopted IFRS 15 "Revenue from Contracts with Customers". There have been no changes to the measurement of revenue as a result of this standard.

IFRS 16 - Leases

On 1 February 2019, we adopted IFRS 16 "Leases" which replaced IAS 17 "Leases".

On adoption of IFRS 16 we recognised lease liabilities in relation to leases which had previously been classified as operating leases under the principles of IAS 17. These liabilities were measured at the present value of the remaining lease payments, discounted using the lessee's incremental borrowing rate as at 1 February 2019. As a result, we recognised additional lease liabilities on 1 February 2019 of £25 million, bringing total lease liabilities to £86 million, of which £52 million were current lease liabilities and £34 million were non-current lease liabilities. As at 31 October 2020, we had total lease liabilities of £49 million as calculated in accordance with IFRS 16.

The associated right-of-use assets for property leases were measured on a retrospective basis as if the new rules had always applied. Other right-of-use assets were measured at the amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognised in the statement of financial position as at 31 January 2019. The change in accounting policy resulted in an increase in right-of-use assets recognised in the statement of financial position on 1 February 2019 of £88 million. In addition, the change in accounting policy affected the following items in the statement of financial position on 1 February 2019: (i) property, plant and equipment decreased by £66 million, (ii) lease incentive accrual decreased by £2 million, (iii) onerous lease provision decreased by £1 million and (iv) lease liabilities increased by £25 million. The net impact on retained earnings on 1 February 2019 was £0.

Trading EBITDA of the Holdco Group for the year ended 31 January 2020 increased by £3 million as a result of the adoption of IFRS 16 (this increase was recognised in the Roadside segment).

Strategic Initiatives

We have four primary strategic objectives, which were announced on 21 February 2018 as part of our strategy update:

· innovate and grow Roadside;

· accelerate the growth of Insurance;

· deliver operational and service excellence; and

· nurture a high performance culture.

The implementation of our primary strategic objectives is ongoing and we believe that good progress has been made in each of the areas described above. For further information see "Business-Our Strategic Objectives".

Business Acquisitions and Disposals

In recent years, we have undertaken several strategic acquisitions and disposals. These activities were aimed at realigning our business to focus on core offerings and also to invest in complementary businesses.

On 29 March 2019, we completed the sale of 51% of the share capital of AA Media Limited, which produces atlases, maps and travel guides and manages a hotels rating business and a merchandising portfolio, for cash consideration of £1 million to Enthuse Group as part of a joint venture partnership. AA Media Limited will continue to use the AA brand under a brand licensing agreement.

On 1 February 2019, we completed the purchase of the entire share capital of Prestige Motor Care Holdings Limited (together with its subsidiaries, "AA Prestige") and its three wholly owned subsidiaries (Prestige Fleet Servicing Limited, Prestige Car Servicing Limited and Prestige Motor Care Limited) for cash consideration of £11 million. AA Prestige is a technology-led supplier of SMR services to fleet and leasing companies. The acquisition allows us to build a presence in SMR services and is also expected to deliver synergies from the integration of our and AA Prestige's garaging networks.

On 1 March 2018, we completed the purchase of the entire share capital of Used Car Sites Limited ("AA Cars") for consideration in the form of a payment of £15 million to the former owners and £11 million deferred consideration. We had assumed control of AA Cars on 1 October 2017. AA Cars operates a used car listing site, which we believe positions us to expand our loan offering into the used car market.

In January 2018 we completed the sale of our home emergency services consumer book (which contains policies for emergency repairs to boilers, heating systems and other domestic installations) to HomeServe. The sale was conducted as part of our strategy to focus on the Roadside and Insurance businesses. We continue to provide home emergency services cover as add-ons to other home insurance policies with claims fulfilment services outsourced to AXA.

The Acquisition

On 25 November 2020, the AA announced that its board of directors had reached agreement on the terms of a recommended cash acquisition pursuant to which Bidco will acquire the entire issued and to be issued ordinary share capital of AA plc. Prior to this announcement, Bidco had been granted access to the AA's senior management for the purposes of due diligence. However, because of the nature of the public offer process, the restrictions on physical meetings due to COVID-19 and the evolving market and regulatory environment in which the AA operates, it was not possible for the AA plc Group to provide Bidco with sufficient access or detailed information at a business unit or key function level to enable Bidco to complete detailed plans or intentions regarding the impact of the Acquisition on the AA plc Group, its business, operations or employees. Furthermore, the impact of COVID-19 on the wider UK economy, and the continued uncertainty it has created for many UK businesses, including the AA's, has meant that, until there is further clarity on when national and regional lockdowns and other restrictions will end, finalising Bidco's strategic plans for the AA plc Group will need to take place over a longer period of time than would otherwise have been the case. Therefore, the ultimate impact of the Acquisition and Bidco's strategic plans on the Holdco Group's results of operations cannot be predicted.

Key Operating Measures

We use several key operating measures, including number of Roadside paid personal members, number of Roadside business customers, breakdowns attended, average income from paid personal members, average income from business customers and policy numbers in force, to track the financial and operating performance of our business. None of these terms are measures of financial performance under IFRS, nor have these measures been audited or reviewed by an auditor, consultant or expert. All these measures are derived from our internal operating and financial systems. As these terms are defined by our management, these terms may not be directly comparable to similar terms used by competitors or other companies.

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(1) Number of paid personal members represents the number of Roadside personal members (excluding free members) on the specified date.

(2) Number of business customers represents the number of Roadside business customers on the specified date.

(3) For each of the periods under review, average income from paid personal members represents the average income generated from a Roadside paid personal member, which is calculated by dividing (i) revenue generated over the prior 12 month period from the sale of memberships and revenue from the sale of parts and additional services to Roadside personal members by (ii) the total number of paid personal members on the specified date.

During the nine month period ended 31 October 2020, we implemented a new basis for calculating average income per paid personal member. The old basis presented average income per paid personal member as a proportion of closing paid personal membership holdings while the new basis presents the figure as a proportion of the average paid personal membership holdings over the relevant period. The figure presented for the twelve months ended 31 October 2020 is calculated on this new basis.

(4) Average income per business customer represents the average income generated from a Roadside business customer, which is calculated by dividing (i) revenue generated over the prior 12 month period from Roadside business customers by (ii) the total number of business customers on the specified date.

(5) Policy numbers in force represents the total number of motor and home insurance policies in force, sold by the Insurance Brokering business, for the prior 12 month period and excludes Financial Services. These figures were restated in the year ended 31 January 2018.

(6) Average income per insurance policy is calculated by dividing (i) revenue from motor and home insurance policies from the prior 12 month period by (ii) the total number of motor and home policies in force, on the specified date. These figures were restated at the end of the year ended 31 January 2018.

Roadside

Our Roadside customers comprise both personal members, who enter into membership agreements directly with us, and business customers, who receive cover indirectly as an "add-on" or a complementary service to the products and services (such as added value bank accounts) they purchase from our business partners.

Our number of Roadside paid personal members and business customers decreased by 29 thousand (or 0.9%) and by 206 thousand (or 2.3%), respectively, from 3,215 thousand paid personal members and 9,048 thousand business customers at 31 January 2020 to 3,186 thousand paid personal members and 8,842 thousand business customers at 31 October 2020. The number of new paid personal members decreased as compared to 31 January 2020, due to the early impact of the UK lockdown restrictions in March 2020 which limited driving on Britain's roads and led to an initial decline in new member volumes. Following the gradual lifting of the lockdown restrictions in June 2020 and our marketing campaign "That Feeling" which launched in July 2020, we have seen a steady pick-up in new member volumes. The number of business customers decreased primarily due to the significant reduction in demand for new cars caused by COVID-19, which, in turn led to a significant decline in new car registrations for Original Equipment Manufacturer ("OEMs"). The decline was also attributable to the anticipated decline in the number of Added Value Accounts ("AVAs") with our existing banking partners.

Average income per paid personal member decreased by £1 from £165 for the twelve months ended 31 October 2019 to £164 for the twelve months ended 31 October 2020, primarily due to a higher proportion of members from our cross-sell channels, in particular through our insurance business, which have a lower average income per member as well as reduced revenue from European breakdown cover due to the lockdown travel restrictions. Average income per business customer increased slightly from £22 in the twelve months ended 31 October 2019 to £23 in the twelve months ended 31 October 2020, principally due to lower customer holdings as well as the benefit of higher pay-for-use income and additional income generated from the broad range of technical services that we are able to provide during lockdown.

Our number of Roadside paid personal members and business customers increased by 8 thousand (or 0.2%) and decreased by 745 thousand (or 7.6%), respectively, from 3,207 thousand paid personal members and 9,793 thousand business customers at 31 January 2019 to 3,215 thousand paid personal members and 9,048 thousand business customers at 31 January 2020. The increase in paid personal members was principally due to the benefit of additional and sustained marketing spend, increased cross-sell rates from our Insurance and Driving Schools platform, as well as targeted investment in our differentiated proposition. The decline in business customers was principally due to our decision not to renew our contract with Groupe PSA as well as the decline in the number of AVAs with our banking partners and the reduction in new car registrations across the automotive sector.

The average income per paid personal member increased by 1.9% from the year ended 31 January 2019 to the year ended 31 January 2020, principally as a result of inflationary price increases, improved product mix and the increase in the proportion of new personal members taking up monthly subscriptions. Average income per business customer increased by 4.8% from the year ended 31 January 2019 to the year ended 31 January 2020. This increase was primarily due to our decision not to renew our contract with Groupe PSA.

Our number of Roadside Assistance paid personal members and business customers decreased by 82 thousand (or 2.5%) and 135 thousand (or 1.4%), respectively, from 3,289 thousand paid personal members and 9,928 thousand business customers at 31 January 2018 to 3,207 thousand paid personal members and 9,793 thousand business customers at 31 January 2019. The decline in paid personal members was principally due to a decline in retention rates to 80%, as well as the impact of regulatory pressures and continued competitor activity. The decrease in the number of business customers reflects the anticipated decline in the number of AVAs with our banking partners and the reduction in new car registrations across the automotive sector.

The average income per paid personal member increased by 3.2% from the year ended 31 January 2018 to the year ended 31 January 2019, principally as a result of the increase in the proportion of new personal members taking up monthly subscriptions and improved product mix. Average income per business customer increased by 5.0% from the year ended 31 January 2018 to the year ended 31 January 2019. This increase was due to new contract wins and the additional revenue recognised under our pay-for-use contracts.

Insurance

In Insurance, we offer motor, home and other insurance policies to both Roadside personal paid members and non-members. We act as a broker for insurers, selling policies to customers for the insurance underwriters on our panel. The AA plc Group launched its own insurance underwriter in January 2016 to complement the Holdco Group's existing broker operations. However, the information presented in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" relates only to the Insurance Brokering activities of the Holdco Group.

Our number of motor and home insurance policies in force increased by 220 thousand policies, or 13.2%, from 1,664 thousand policies in force in the nine months ended 31 October 2019 to 1,884 thousand policies in force in the nine months ended 31 October 2020. This increase was driven by the additional investment in marketing to new business customers, particularly in motor, supported by the growth of the AA plc's in-house underwriter as well as the benefit of ongoing investment in pricing systems to enhance the competitiveness of the Insurance Brokering business.

Our number of motor and home insurance policies in force increased by 152 thousand policies, or 9.7%, from 1,561 thousand policies in force in the year ended 31 January 2019 to 1,713 thousand policies in force in the year ended 31 January 2020. This increase was driven by growth of the AA plc Group's in-house underwriter as well as the benefit of ongoing investment in systems, including IHP for the Insurance Brokering business.

Our number of motor and home insurance policies in force increased by 114 thousand policies, or 7.9%, from 1,447 thousand policies in force in the year ended 31 January 2018 to 1,561 thousand policies in force in the year ended 31 January 2019. The increase was principally due to increased marketing spend in order to acquire new customers and the growth in the AA plc Group's in-house underwriter.

Key Profit and Loss Account Items

The following is a discussion of our key profit and loss account items. For additional information, see Note 1 to our audited consolidated financial statements as at and for the years ended 31 January 2018, 2019 and 2020.

Revenue

Roadside revenue is primarily generated through the sale of roadside assistance memberships and related products to personal members and through payments for usage of our roadside service by business customers under multi-year contracts. We also generate revenue through our SMR proposition, which was increased by the AA Prestige acquisition in 2019 (see "-Business Acquisitions and Disposals"). Our Driving Services sub-division primarily derives revenue from the Driving Schools business via franchise fees paid by driving instructors and lesson fees paid by motorists and from the DriveTech business via fees for driver training and education courses and corporate fleet training services.

Insurance revenue is primarily generated through commissions earned on the sale and administration of motor insurance and home insurance policies and ancillary add-on products, as well as commissions received through our partnership with Bank of Ireland UK for the sale of savings accounts and loan products as well as marketing and product development services. For the nine months ended 31 October 2020 we report the results of the AA Cars business within the Insurance segment (having previously been included in the Roadside segment) and we will continue to report AA Cars results on this basis going forward. We also generate revenue from charging third-party garages access to our online used car platform provided by AA Cars.

We include certain adjusting operating items within revenue depending on the nature of the adjustment.

Revenue is measured at the fair value of the consideration receivable less any discounts and excluding value added tax and other sales related taxes.

Roadside membership subscriptions and premiums receivable on underwritten insurance products are apportioned on a time basis over the period where the Holdco Group is liable for risk cover as the relevant performance obligations are settled over time. The unrecognised element of subscriptions and premiums receivable, relating to future periods, is held within liabilities as deferred income.

Commission income from insurers external to the Holdco Group is recognised at the commencement of the period of risk on a point in time basis.

Where customers choose to pay by instalments, the Holdco Group charges interest based on the principal outstanding and disclosed interest rate and recognises this income over the course of the loan.

For all other revenue, this income is recognised on a point in time basis at the point of delivery of goods or on the provision of service, or over time where the service is provided over more than one day. This includes work which has not yet been fully invoiced, provided that it is considered to be fully recoverable.

Cost of sales

Cost of sales includes the operational costs within Roadside, which includes patrol salaries, vehicle costs (including depreciation), garaging fees, fuel, parts costs, costs of answering and responding to roadside service related calls and the management of service delivery activities. Furthermore, cost of sales includes costs relating to our driving school vehicle fleet, driving school course instructor fees, preparing and providing our driving courses to corporate fleet customers as well as the cost of running our SMR garage network. We also include certain adjusting operating costs within cost of sales depending on the nature of the cost.

Administrative and marketing expenses

Administrative and marketing expenses includes our personnel costs relating to sales and service call centres, as well as back-office staff. Administrative and marketing expenses also include marketing costs such as internet search fees, mailshots, television campaigns and press advertising, along with head office costs. Other administrative and marketing expenses include adjusting operating items such as redundancy payments resulting from significant restructuring activities. Amortisation of software, property rental and facilities costs, the cost of the corporate insurance programme and other office costs such as stationery are also included in our administrative and marketing expenses.

Administrative expenses also include property costs as well as head office and back-office functions, such as finance, human resources, legal and IT support and development.

Share of profits in joint venture and associates

Share of profits in joint venture and associates consists of revenue generated by our investments in ARC Europe S.A. ("ARC"), Drvn Solutions Limited (formerly Intelematics Europe Limited), AA Law Limited and AA Media Limited. ARC provides roadside assistance to certain of our personal members and business customers while travelling in certain European countries. In turn, we provide reciprocal roadside assistance services to ARC customers while they are travelling within the UK. AA Law Limited is a joint venture with Lyons Davidson (an English law firm) providing advice relating to personal injury claims to customers. Drvn Solutions Limited is a joint venture which provides our connected car technology. AA Media Limited is a joint venture partnership with Enthuse Group and produces atlases, maps and travel guides and manages a hotels rating business and a merchandising portfolio. AA Media Limited uses the AA brand under a brand licensing agreement.

For more information regarding our joint ventures and associates, see Note 15 to the audited consolidated financial statements for the year ended 31 January 2020.

Finance costs

Finance costs consist primarily of interest on external borrowings and interest incurred on finance lease agreements. In addition, the unwinding of discounts on provisions (including pension provisions), amortisation of debt issue fees, foreign exchange differences, penalties on early repayment of debt and the transfer from the cash flow hedge reserve following the extinguishment of cash flow hedges are included within finance costs.

Finance income

Finance income consists primarily of interest income relating to general corporate cash balances and foreign exchange differences.

Tax expense

Taxation is the corporate tax charge for the year after taking any deferred tax into consideration. Our effective tax rate for the year ended 31 January 2020 was 18.8%.

Adjusting operating items

In assessing whether a cost is adjusting in nature, we consider, among other factors, its size, likelihood of recurrence and whether it is closely linked to our ongoing trading activities. Adjusting operating items are reflected in the line item that most closely reflects their nature. Administrative and marketing expense adjusting operating items have historically included: (i) pension past service cost and the closure of a pension scheme, (ii) impairment of intangible fixed assets, (iii) strategic review projects, (iv) conduct and regulatory costs, (v) legal disputes, (vi) impairment of investment in joint venture, (vii) gain on disposals on non-current assets, (viii) corporate transactions, (ix) customer compensation, (x) additional onerous property costs, and (xi) costs directly related to our response to COVID-19, including emergency IT expenditure relating to setting up home working, offset by any revenue received from the UK government's furlough scheme .

In the year ended 31 January 2017, we recognised a £10 million provision to cover potential refunds in respect of a limited number of customers who we identified as having duplicate levels of roadside assistance cover through both their personal membership and an added value account held with our banking partners. By 31 January 2018, we had utilised £8 million of this provision and released £1 million, and the remaining £1 million was utilised in the year ended 31 January 2019.

Prior to the year ended 31 January 2020, adjusting operating items were previously referred to as exceptional operating items. Costs that are directly attributable to the issue and repayment of loan notes are either included in finance costs or in borrowings as debt issue fees.

Trading EBITDA

Trading EBITDA, which we define as profit after tax as reported, adjusted for depreciation, amortisation, adjusting operating items, share-based payments, pension service charge adjustments, net finance costs, contingent consideration remeasurement and tax expense. The pension service charge adjustment relates to the difference between the cash contributions to the pension scheme for ongoing contributions and the calculated annual service cost. Share-based payments charges result from grants under the long-term incentive schemes for staff and management.

The table below sets forth the reconciliation of profit for the period to Trading EBITDA for the periods indicated.

Consolidated Results of Operations for the Nine Months Ended 31 October 2019 and 2020

Revenue

Our revenue decreased by £21 million or 2.9% from £724 million in the nine months ended 31 October 2019 to £703 million in the nine months ended 31 October 2020. The decrease in revenue was primarily due to the impact of COVID-19, which limited trading activity for a number of our smaller Roadside businesses (as discussed further below), though the Insurance segment continued to deliver resilient performance in the period.

The table below sets forth, for each of the periods indicated, our revenue by segment, both in pounds sterling and as a percentage of consolidated revenue.

Roadside. Roadside revenue decreased by £21 million, or 3.4%, from £619 million for the nine months ended 31 October 2019 to £598 million for the nine months ended 31 October 2020. This decrease was primarily due to the impact of COVID-19 on the smaller Roadside businesses, particularly the Driving Schools and DriveTech businesses, where, respectively, franchise fees were waived for 14 weeks to support instructors during the lockdown and fewer speed awareness courses were provided. There was a small decline in revenue generated by the B2C core Roadside business reflecting lower membership volumes.

Insurance. Insurance revenue remained flat at £105 million for the nine months ended 31 October 2020. This was driven by the strong performance of the new Accident Assist business which offset the anticipated decline in commissions due to ongoing investment in marketing and the decision to absorb certain administration fees to help customers during the lockdown as well as low trading activity in the AA Cars business.

See Note 2 to the unaudited consolidated interim financial statements for the nine months ended 31 October 2020 included elsewhere in this Supplemental Investor Report for further information regarding performance of the constituent Roadside and Insurance divisions.

Cost of sales

Our cost of sales decreased by £17 million, or 6.0%, from £284 million in the nine months ended 31 October 2019 to £267 million for the nine months ended 31 October 2020. This decrease was primarily driven by lower breakdown volumes from reduced traffic during the lockdown period.

Administrative and marketing expenses

Our administrative and marketing expenses increased by £3 million, or 1.1%, from £263 million in the nine months ended 31 October 2019 to £266 million for the nine months ended 31 October 2020. This increase was primarily driven by higher amortisation and depreciation from the increased IT capital expenditure in previous years, partially offset by reduced marketing expenses (particularly during the lockdown period).

Operating profit

Our operating profit decreased by £7 million, or 4.0%, from £177 million in the nine months ended 31 October 2019 to £170 million for the nine months ended 31 October 2020. This decrease was primarily driven by decrease in gross profit resulting from the decreases in revenue and cost of sales noted above as well as £3 million increase in administrative and marketing expenses due largely to the increase in amortisation and depreciation costs.

Net finance costs

Our net finance costs increased by £16 million, or 13.8%, from £116 million in the nine months ended 31 October 2019 to £132 million for the nine months ended 31 October 2020. This increase was principally due to £20 million of one-off adjusting finance costs relating to the refinancing of £325 million in principal amount of Sub-Class A5 Notes in February 2020 as well as the higher overall interest rate on the new borrowings, partially offset by a reduction in pension finance costs and lower amortisation of debt issue fees.

Tax expense

Our tax expense decreased by £3 million, or 25.0%, from £12 million in the nine months ended 31 October 2019 to £9 million for the nine months ended 31 October 2020. This decrease was primarily driven by the lower profitability before tax in the period. The tax charge in the nine months ended 31 October 2020 consisted of a current tax charge of £5 million (nine months ended 31 October 2020: £9 million) and a deferred tax charge of £4 million (nine months ended 31 October 2020: £3 million).

Trading EBITDA

Our Trading EBITDA increased by £1 million, from £246 million in the nine months ended 31 October 2019 to £247 million in the nine months ended 31 October 2020, primarily the result of the resilience of our Roadside segment.

The table below sets forth, for each of the periods indicated, our Trading EBITDA by segment, both in pounds sterling and as a percentage of consolidated Trading EBITDA.

Roadside. Roadside Trading EBITDA increased by £8 million, or 3.9%, from £205 million in the nine months ended 31 October 2019 to £213 million in the nine months ended 31 October 2020. Roadside Trading EBITDA margin increased from 33.1% in the nine months ended 31 October 2019 to 35.6% in the nine months ended 31 October 2020. The increase in Roadside Trading EBITDA and Trading EBITDA margin was primarily due to the operational resilience of our core Roadside businesses and our ability to act swiftly to protect profitability during the lockdown.

Insurance. Insurance Trading EBITDA decreased by £7 million, or 17.1%, from £41 million in the nine months ended 31 October 2019 to £34 million in the nine months ended 31 October 2020. Insurance Trading EBITDA margin decreased from 39.0% in the nine months ended 31 October 2019 to 32.4% in the nine months ended 31 October 2020. The decrease in Insurance Trading EBITDA and Trading EBITDA margin was primarily due to our continued investment in accelerating the growth in policies, leveraging our strong brand and large distribution platform in an effort to deliver future value and Trading EBITDA growth.

Consolidated Results of Operations for the Years Ended 31 January 2019 and 2020

Revenue

Our revenue increased by £7 million, or 0.7%, from £960 million in the year ended 31 January 2019 to £967 million in the year ended 31 January 2020, reflecting the increase in Insurance segment revenue.

Roadside. Roadside revenue remained flat at £841 million, with the benefit of higher B2C revenue and the acquisition of AA Prestige offsetting the lower B2B revenue on pay-for-use contracts and the impact of the 51% disposal of AA Media Limited during the year ended 31 January 2020.

Insurance. Insurance revenue increased by £7 million, or 5.9%, from £119 million in the year ended 31 January 2019 to £126 million in the year ended 31 January 2020. This increase was primarily driven by growth in the motor and home insurance policy books, reflecting the benefit of ongoing investment in systems (including IHP for the Insurance Brokering business).

See Note 2 to the audited consolidated financial statements for the year ended 31 January 2020 for further information regarding performance of the constituent Roadside and Insurance divisions.

Cost of sales

Our cost of sales decreased by £10 million, or 2.6%, from £390 million in the year ended 31 January 2019 to £380 million in the year ended 31 January 2020. This decrease was primarily driven by the lower workload from the decrease in breakdowns in the year ended 31 January 2020 as compared to the prior year, and therefore reduced third-party garaging costs, as well as the disposal of 51% of AA Media Limited during the year ended 31 January 2020.

Administrative and marketing expenses

Our administrative and marketing expenses decreased by £21 million, or 5.9%, from £353 million in the year ended 31 January 2019 to £332 million in the year ended 31 January 2020. This decrease was primarily driven by the adjusting pension past service cost of £22 million in the prior year relating to the guaranteed minimum pension equalisation, which following a UK High Court ruling in 2018 required all relevant UK pension schemes to make one-off adjustments to equalise benefit payments for males and females. Although this adjustment of the past service cost has been made, guaranteed minimum pension equalisation has yet to be implemented by the AA UK Pension Scheme.

Operating profit

Our operating profit increased by £38 million, or 17.5%, from £217 million in the year ended 31 January 2019 to £255 million in the year ended 31 January 2020. This increase was primarily driven by the decreases in administrative and marketing expenses and cost of sales and the increase in revenue.

For a discussion of the contingent consideration remeasurement gain and the other adjusting operating item costs, see Notes 20 and 5, respectively, to the audited consolidated financial statements for the year ended 31 January 2020.

Finance costs

Our finance costs decreased by £12 million, or 7.2%, from £167 million in the year ended 31 January 2019 to £155 million in the year ended 31 January 2020. This decrease was primarily driven by the one-off finance costs of £13 million in the year ended 31 January 2019 related to the prior year refinancing.

Finance income

Our finance income increased by £1 million from £0 in the year ended 31 January 2019 to £1 million in the year ended 31 January 2020. This increase was primarily driven by higher cash balances from the cash generation during the period.

Tax expense

Our tax expense increased by £9 million from £10 million in the year ended 31 January 2019 to £19 million in the year ended 31 January 2020. This was primarily driven by higher profitability. The tax charge in the year ended 31 January 2020 consisted of a current tax charge of £15 million (year ended 31 January 2019: £8 million) and a deferred tax charge of £4 million (year ended 31 January 2019: £2 million).

Trading EBITDA

Our Trading EBITDA increased by £6 million, or 1.8%, from £337 million in the year ended 31 January 2019 to £343 million in the year ended 31 January 2020. The increase was primarily driven by the Roadside segment, as discussed further below.

The table below sets forth, for each of the periods indicated, our Trading EBITDA by segment, both in pounds sterling and as a percentage of consolidated Trading EBITDA.

An analysis of our Trading EBITDA by segment is set forth below:

Roadside. Roadside Trading EBITDA increased by £5 million, or 1.8%, from £285 million in the year ended 31 January 2019 to £290 million in the year ended 31 January 2020. Our Roadside Trading EBITDA margin increased from 33.9% in the year ended 31 January 2019 to 34.5% in the year ended 31 January 2020. The increase in Roadside Trading EBITDA was primarily driven by the improved performance of our B2C business which delivered higher average income per paid member as well as lower spend on third-party garages and the additional £3 million benefit of the transition to IFRS 16 (see Note 1.3(w) to the audited consolidated financial statements for the year ended 31 January 2020. The increase in Roadside Trading EBITDA margin reflects the improvement in average income per paid member and garage spend during the year ended 31 January 2020.

Insurance. Insurance Trading EBITDA increased by £1 million, or 1.9%, from £52 million in the year ended 31 January 2019 to £53 million in the year ended 31 January 2020. Our Insurance Trading EBITDA margin decreased from 43.7% in the year ended 31 January 2019 to 42.1% in the year ended 31 January 2020. The increase in Trading EBITDA was primarily driven by increased Insurance segment revenue resulting from the increase in policy volumes as a result of the increased acquisition marketing spend over the two years to 31 January 2020. The decrease in Trading EBITDA margin was primarily driven by ongoing investment in marketing needed to position the business for long-term growth.

Consolidated Results of Operations for the Years Ended 31 January 2018 and 2019

Revenue

Our revenue increased by £13 million, or 1.4%, from £947 million in the year ended 31 January 2018 to £960 million in the year ended 31 January 2019. Revenue for the year ended 31 January 2018 includes the release of £1 million from the adjusting operating revenue provision relating to refunds to customers that may have had duplicate breakdown cover. Trading Revenue, which excludes revenue from adjusting operating revenue items, increased by £14 million, or 1.5%, from £946 million in the year ended 31 January 2018 to £960 million in the year ended 31 January 2019. The increase in both revenue and Trading Revenue was primarily driven by the strong performance of Roadside.

Roadside. Roadside Trading Revenue increased by £28 million, or 3.4%, from £813 million in the year ended 31 January 2018 to £841 million in the year ended 31 January 2019. This increase was primarily driven by additional pay-for-use revenue in the B2B category as a result of higher demand for services during the year due to adverse weather as well as the benefit of consolidating the results of AA Cars, which we acquired in March 2018.

Insurance. Insurance Trading Revenue decreased by £14 million, or 10.5%, from £133 million in the year ended 31 January 2018 to £119 million in the year ended 31 January 2019. This decrease was primarily driven by lower revenue from the home emergency services consumer business, which we sold in January 2018.

See Note 2 to the audited consolidated financial statements for the year ended 31 January 2019 for further information regarding performance of the constituent Roadside and Insurance divisions.

Cost of sales

Our cost of sales increased by £34 million, or 9.6%, from £356 million in the year ended 31 January 2018 to £390 million in the year ended 31 January 2019. This increase was primarily driven by additional strategic operational investments in additional patrols and call centre agents and higher costs from the additional demand for services in the Roadside business due to adverse weather.

Administrative and marketing expenses

Our administrative and marketing expenses increased by £75 million, or 27.0%, from £278 million in the year ended 31 January 2018 to £353 million in the year ended 31 January 2019. This increase was primarily driven by the pension past service cost of £22 million relating to a one-off service cost associated with the guaranteed minimum pension equalisation required following a court ruling requiring all companies to equalise pensions for men and women, compared to the pension past service credit of £34 million in the prior year, arising from the benefit changes to the AA UK Pension Scheme.

Operating profit

Our operating profit decreased by £96 million, or 30.7%, from £313 million in the year ended 31 January 2018 to £217 million in the year ended 31 January 2019. This decrease was primarily driven by the increase in administrative and marketing expenses and the increase in cost of sales, as described above.

Finance costs

Our finance costs remained flat at £167 million for the year ended 31 January 2019 from £167 million for the year ended 31 January 2018, primarily driven by lower interest costs on external borrowings and finance expenses on defined benefit pension scheme being offset by higher amortisation of debt issue fees and debt repayment premium and penalties following the refinancing in the year ended 31 January 2019 where we partially repaid the Sub-Class A3 Notes and repaid amounts drawn under the Existing Senior Term Facility.

Finance income

Our finance income decreased by £1 million from £1 million in the year ended 31 January 2018 to £0 in the year ended 31 January 2019. This decrease was primarily driven by lower cash balances.

Tax expense

Our tax expense decreased by £21 million from £31 million in the year ended 31 January 2018 to £10 million in the year ended 31 January 2019. This was primarily driven by the decrease in profits before tax of £97 million which accounts for £19 million of tax at the effective rate of tax of 20.0%.

Trading EBITDA

Our Trading EBITDA decreased by £56 million, or 14.2%, from £393 million in the year ended 31 January 2018 to £337 million in the year ended 31 January 2019. The decrease, which was in line with management expectations, reflects the outcomes of the business strategy announced on 21 February 2018, in particular the strategic investments in our people, operations and systems to position the business for long-term growth as well as the impact of higher third-party garaging costs due to the higher demand for our roadside assistance service.

The table below sets forth, for each of the periods indicated, our Trading EBITDA by segment, both in pounds sterling and as a percentage of consolidated Trading EBITDA.

Roadside. Roadside Trading EBITDA decreased by £37 million, or 11.5%, from £322 million in the year ended 31 January 2018 to £285 million in the year ended 31 January 2019. Our Roadside Trading EBITDA margin decreased from 39.6% in the year ended 31 January 2018 to 33.9% in the year ended 31 January 2019. The decrease in Trading EBITDA and Trading EBITDA margin was driven by additional planned strategic operational expenditure investments including recruitment of additional patrols and call centre agents, as well as increased third-party garaging costs resulting from the higher demand for services during the year due to adverse weather.

Insurance. Insurance Trading EBITDA decreased by £19 million, or 26.8%, from £71 million in the year ended 31 January 2018 to £52 million in the year ended 31 January 2019. Our Insurance Trading EBITDA margin decreased from 53.4% in the year ended 31 January 2018 to 43.7% in the year ended 31 January 2019. The decrease in Trading EBITDA and Trading EBITDA margin was primarily driven by a planned increase in marketing spend in order to acquire new customers and the sale of the home emergency services consumer book in January 2018.

Liquidity and Capital Resources

Net cash flows from operating activities before tax and adjusting operating items were £230 million in the nine months ended 31 October 2020 and £336 million in the year ended 31 January 2020. Our free cash flow (net cash flow before payment of dividends, bond buy-backs and refinancing costs) was £68 million in the nine months ended 31 October 2020.

The Holdco Group had a cash and cash equivalents balance of £156 million at 31 October 2020 and £94 million at 31 January 2020, invested in money market funds designated as low volatility net asset value or with investment grade-rated banks, giving overnight access and high liquidity.

Our primary sources of liquidity within the Holdco Group are currently cash from operations and the £60 million Existing Working Capital Facility. For a description of the material terms of our long-term financing arrangements, see "Description of Certain Financing Arrangements".

On 23 April 2020, we drew down in full our £200 million Existing Senior Term Facility. The proceeds from this were used to complete the refinancing of the remaining £200 million Sub-Class A3 Notes due on 31 July 2020. It is expected that on or prior to the Effective Date, the Existing Senior Term Facility will be refinanced with the £150,000,000 New Senior Term Facility, with the remaining £49,666,667 outstanding under the Existing Senior Term Facility being repaid from cash on hand at the Holdco Group. It is expected that the New Senior Term Facility will be on substantially the same terms as the Existing Senior Term Facility with the exception of certain commercial terms, including commitment, tenor, margin, commissions and fees, as further described in "Description of Certain Financing Arrangements-New Senior Term Facility Agreement".

On 5 February 2020, the Group issued £325 million of Sub-Class A8 Notes which are due in 2027 in exchange for £325 million of Sub-Class A5 Notes which were due in January 2022.

On 8 February 2019, we drew down £15 million of the Existing Working Capital Facility and repaid this amount on 22 March 2019. Our intention is to use the Existing Working Capital Facility or New Working Capital Facility (as applicable) only for short-term periods to manage short-term variations in cash flows. It is expected that on or prior to the Effective Date, the Existing Working Capital Facility will be refinanced with the up to £55.7 million New Working Capital Facility. See "Description of Certain Financing Arrangements-New Working Capital Facility Agreement".

The Holdco Group is required to hold segregated funds as "restricted cash" in order to satisfy regulatory requirements governing our run-off insurance underwriting entities. These restricted cash balances were £8 million as at 31 January 2020. In December 2019, the Holdco Group entered into a sale and purchase agreement to sell these entities, which were ultimately sold in May 2020 following receipt of regulatory approval. At completion, these companies had no live policies and were in run-off. See "Business-Our Products and Services-Insurance underwriting". In addition, at 31 January 2020, the Holdco Group had an additional restricted cash balance of £32 million held in a separate bank account due to a requirement under the terms of the Holdco Group's debt documents (July 2019: £0). The requirement is to deposit a calculated amount of "excess cash" at the period end when within an "accumulation period" (the twelve months before which any borrowings become due). This applied to the Sub-Class A3 Notes which were due on 31 July 2020. On 31 July 2020, we completed the refinancing of the £200 million outstanding Sub-Class A3 Notes using the £200 million proceeds from drawing down the Existing Senior Term Facility. Therefore, as it was no longer required, the excess cash was returned to available cash on 31 July 2020.

For further information on cash and cash equivalents, see Note 14 of our unaudited consolidated interim financial statements for the nine months ended 31 October 2020 and Note 18 of our audited consolidated financial statements for the year ended 31 January 2020. 

Cash flows

The following table sets forth the principal components of our cash flows for the years ended 31 January 2018, 2019 and 2020 as well as for the nine months ended 31 October 2019 and 2020.