AA provides roadside recovery and insurance broking services and started underwriting insurance in February.

Car insurance prices have been weak in recent years, but have started to rise in the past few quarters, due in part to a rise in insurance premium tax.

The AA has passed the tax rise, to 10 percent from 6 percent, onto customers, Executive Chairman Bob Mackenzie said.

But he added: "It has made price increases very difficult."

Investment in IT, marketing and diagnostic technology also contributed to the drop in earnings, AA said, though analysts at Cenkos saw "improvement in customer trends once the IT transformation kicks in".

Trading earnings before interest, tax, depreciation and amortisation, the company's preferred measure of performance, fell to 415 million pounds ($591 mln) in the financial year to end-January from a year earlier, in line with expectations in a company-supplied poll.

Revenue fell 0.4 percent to 963 million pounds, slightly below a forecast 977 million pounds.

AA, which listed in 2014, paid its first dividends in the 2015 financial year. Star fund manager Neil Woodford has a 10 percent stake in the firm.

The firm said it would pay a final dividend of 5.5 pence a share and total dividend of 9 pence per share.

AA's shares fell 0.99 percent to 260.3 pence per share by 0822 GMT, compared with a 0.5 percent fall in the FTSE 250 <.FTMC> index.

(Reporting by Carolyn Cohn, editing by Sinead Cruise and Susan Fenton)