Warranty War Is Raging Anew

Far from being routed by the National Warranty bankruptcy scandal of 2003 or by the vigorous efforts of National's marketing twin sisters to re-enter the extended service coverage business, established and new providers are heating up the competition more aggressively than ever.

The battle for extended service contract policies intensifies even as more manufacturers increase their own powertrain warranties. General Motors Corp. Vice Chairman Robert Lutz says that's a reflection of today's powertrain reliability. At latest count, 10 automotive brands offer powertrain coverage up to terms of six to 10 years and distances of 70,000 to 100,000 miles on new vehicles.

The oldest independent provider of extended service contracts, Universal Underwriters, embarks on a growth mode with the goal of becoming No.1 in the non-automaker part of the business.

With an indirect reference to the insolvency last year of independent contract giant National Warranty, Universal's vice-president for auto dealer F&I products, Bill Stoothoof, announces a goal of raising service contract sales 40%-50% this year.

“Dealers are looking for a large, stable insurance company,” he says.

Universal, organized 82 years ago by a group of dealers as a garage, property and casualty insurer, sold $100 million in service contracts last year. It sees an expansion opportunity in the wake of the National Warranty collapse because of its history in the dealer arena as a claims payer and provider of such F&I products as credit insurance and guaranteed auto protection (GAP) plans, as well as extended service contracts.

National Warranty's demise hit about 5,000 dealers with unpaid claims last summer. Sandra and Susan Marino, twin sisters who drove the Lincoln, NB provider's sales and marketing, resurfaced at last month's NADA convention in Las Vegas as agents for a new warranty venture reportedly backed by $200 million in seed money.

Still another independent, Automobile Protection Corp (APC) madse inroads with an extended service contract plan in which coverage is furnished “free” for any new or used vehicle up to 100,000 or 75,000 miles, respectively.

Based in Norcross, GA, APC aims its product at retailers in brands whose powertrain coverage is identical to the basic three-year/36,000-mile or four-year/48,000-mile standard contracts on most GM, Ford and Japanese brands.

Under the APC plan, up to three more years and the longer mileage coverage is available on cars with 60,000-75,000 miles on their odometers; four more years with 40,000-60,000 miles; and five more years with 20,000-40,000 miles.

Charging dealers an average of $200 for the coverage, APC says the “Warranty Advantage” plan boosted the parent company's volume by 16% in 2003.

New-vehicle brands with lengthened powertrain warranties include Chrysler Group, 7 years/70,000-mile; Hyundai, 10 years/100,000 miles; Infiniti, 6 years/70,000 miles; Isuzu, 7 years/70,000 miles; Kia, 10 years/100,000 miles; Lexus, 6 years/70,000 miles; Mitsubishi (a new convert), 10 years/100,000 miles and Suzuki 7 years/70,000 miles.

Dealers who have reported sales increases with APC include Capital Lincoln Mercury-Mazda, Carey, NC, and Henna Chevrolet, Austin, TX. But Pacifico Mazda, Philadelphia, PA, dropped the program after four months of heavy promotion because it did not build traffic, according to general manager Bruce Blum.

National Warranty's rubout is not the first among independent providers.

Universal's draw to dealers is its role as an insurer for 7,800 of them, and its ownership by top-rated Zurich North America Insurance Company.

Contracts strong for megas

F&I yields per vehicles sold increased for all six publicly owned megadealer groups. Service contract sales, the strongest profit generator in F&I offices, are particularly strong.

“Vehicle buyers have become very protection-minded and receptive to purchases of extended service agreements, maintenance contracts and GAP coverage,” says Lithia Motors chairman and CEO Sidney B. DeBoer.

Lithia's F&I yield per vehicle retailed jumped 11.8% to $932.

Leading the pack of publicly owned groups is Houston-based Group 1 Automotive, with a $1,000 yield.

Group 1 President and CEO B.B. Hollingsworth Jr. says increased service contract fees of $17,170,000 for the quarter surpassed retail finance fees of $17,111,000.

Other public megas clustered in the $800-$900 range, with Charlotte, NC-based Sonic Automotive at $863; Stamford, CT-headquartered Asbury Automotive at $846; AutoNation, Inc., the largest group, of Fort Lauderdale, FL, a record $818; and UnitedAuto Group, of Bloomfield Hills, MI, $813.

“In a soft vehicle sales climate our F&I revenues and profits per vehicle sold were at all-time highs,” says Asbury President and CEO Kenneth B. Gilman. “Menu selling had a lot to do with it, as did intensified sales efforts at all of our dealerships.”