Auto Extended Service Administrators

I am a huge advocate of sharing information that educates the public as to what a service or product truly is so that they can make decisions based on fact . I found an extremely comprehensive explanation as to what an “Administrator is  in the Automotive service contract arena from warranty week :

At long last, the pie is ready. It’s taken almost four months to conclude our travelogue of the extended warranty industry with a graphic depicting the size of the industry and the major players in it. By the amount of email requesting extended warranty market numbers, this pie is hopefully being delivered right on time.

Just as in previous editions we’ve sized the product warranty industry to be in the neighborhood of $25 billion per year, in this edition we’re suggesting that extended warranties generate in the vicinity of $15 billion per year in premiums paid. Not all that money goes to the actual administrators and underwriters of the policies, however. In fact, we’re estimating that roughly half is kept by the actual sellers — the retailers and dealers in the world of warranty. Only $7.5 billion passes through to the administrators, we estimate.

Now here’s the problem. Some of the market participants are seller, administrator, and underwriter wrapped all into one. Others are both administrator and underwriter. And still others are underwriters only, or administrators only. We don’t want to miss any money flowing through the extended warranty industry, but we also don’t want to double-count any premiums paid.

Administrators Only

The charts below list only the administrators. Or more precisely, they list independent administrators, sellers/administrators/underwriters, and administrators/underwriters. Missing from the list are underwriters-only such as the American International Group Inc. (AIG). The Great American Insurance Group, which stands behind administrators such as NEW, Warrantech, and the Warranty Corporation of America, also owns an auto warranty administrator called Premier Dealer Services Inc. Also included are dual administrators/underwriters such as the Assurant Group and the Aon Warranty Group. Perhaps in Version 2.0 we’ll include three pie charts: for sellers, administrators, and underwriters.

Readers who for one reason or another are reading Warranty Week without graphics can take a look at the online edition at http://www.warrantyweek.com/archive/ww20050119.html or at the missing pie chart athttp://www.warrantyweek.com/library/ww20050119/admin.gif. A reader of the plain text edition reported that the charts in the past two weekly columns were rendered unreadable by his email program. Readers with similar problems can email the editor for copies of the PowerPoint and Excel files used to create this week’s graphics. All readers are invited to comment or criticize this work, which we present to you as simply Version 1.0 of an ongoing project.

Extended Warranty Administrators
Estimated Market Shares, 2004
Version 1.0

Total = $7.5 billion

Source: Warranty Week

The big surprise is probably the companies with the largest slices of the pie. Of course, these are estimates, but we’re estimating that Ford and Dell are the only two companies bringing in more than a billion dollars a year through the sale of extended warranties. We don’t think there is a third. And we’re using their own disclosures to arrive at those estimates. In the fiscal year ended Jan. 31, 2004, Dell reported $912 million in recognized income from the sale of extended warranties. For the first six months of fiscal 2005, the company reported $585 million in recognized revenue. It doesn’t take a degree in astrophysics to multiply that figure by two and add a bit for good luck.

The Ford estimate is more open to debate. The company hasn’t mentioned extended warranties in its quarterly financial statements since way back in the first quarter of 2003. Back then, perhaps inadvertently, the company disclosed that it recognized $299 million in extended warranty revenue during the quarter. Once again, it isn’t rocket science to multiply that figure by four to arrive at an annual amount. And remember, what we’re saying here is that even if there’s been no growth at all for Ford or its subsidiary Automobile Protection Corp. in the past seven quarters, it’s still the biggest player around when it comes to the sale of extended warranties. We just didn’t think anybody would believe that a company could hide $1.2 billion in insurance sales and be the biggest player in a business few people know they’re even a part of.

Actually, it makes perfect sense that the largest players in the extended warranty business are manufacturers from the passenger car and computer industries. These are the largest slices of the product warranty business too, accounting for 40.5% and 20.5% of the pie served in last week’s edition of Warranty Week. Interestingly, Ford and Dell also are the respective number two players in those sectors to GM and HP. In this pie, things are different.

Insurance Companies

Somewhat smaller slices are assigned to the well-known major players. Assurant and Aon are virtually tied for third and fourth place. If we were to set aside the manufacturers who also sell extended warranties, they’d be virtually tied for the lead. They’re also both major players in the general insurance industry, as is the parent of CNA National Warranty Corp. In fact, the only extended warranty administrators in the pie chart which are neither manufacturers nor insurance companies are NEW Customer Service Companies Inc. (an independent administrator and a new sponsor of this newsletter), American Home Shield (part of the ServiceMaster Company), and Cross Country Home Services (part of the privately-held Cross Country Group).

Both AHS and Cross Country are the major players in the emerging home warranty industry, which is really a misnomer for a corner of the insurance business that covers the major systems and appliances in a home, but not the home itself. The actual roof, walls, and foundation are covered by a new home warranty in the case of new construction, or a plain old homeowner’s insurance policy in the case of an existing home. Aon and Assurant are also players in home warranties, but for AHS and Cross Country Home Services it’s their main focus.

General Motors Corp., through its subsidiaries GMAC Insurance Holdings Inc. and Universal Warranty Corp., also is a major player in the extended warranty business, but the only documentation we can find to support such a theory is a disclosure made almost a year ago by the General Motors Acceptance Corp. Again, perhaps inadvertently, the company disclosed that it recognized $392 million in extended warranty revenue for calendar 2003. Assuming a bit of growth puts GMAC in the neighborhood of $400 million and 5.3% market share for 2004. We could be high; we could be low. We can only hope the company repeats its disclosures in the 2004 annual report. By the way, as a point of law, FASB FIN 45 also requires the full disclosure of “any liability associated with extended warranties.” For the most part, this requirement is ignored by most public companies.

Then there are the private companies, which are not required to say anything, and in practice say little about their warranty businesses. JM Family Enterprises Inc., parent of the family-owned Jim Moran & Associates Inc. and the JM&A Group, and a cousin of Century Warranty Services Inc., is perhaps the most curious of the pie slices. Its operations, concentrated in southern Florida, extend to not only actual auto dealerships, but also to the sale of vehicle service contracts. Being a family-owned business, the company does not reveal much about its finances. But it claims to be a $7.7 billion enterprise, and it claims to have sold 1.7 million service contracts in 2002. It claims to sell finance and insurance products to and through some 1,600 dealerships, in addition to those it owns.

The List Gets Longer?

There are dozens of other administrators as well as other self-administering manufacturers on our list, but unfortunately they didn’t fit well into the pie chart. We’re tracking 45 extended warranty administrators in all, and suspect we’re still missing quite a few. We also know of several more manufacturers, especially in the medical equipment field, who sell their own extended warranties. In the future, we expect numerous additional manufacturers to jump into the field, especially once they understand how well Ford, Dell, Kodak, Gateway, Apple, and others have done for themselves in this industry. As we find them, we’ll add them into the database for Version 2.0 of this market study.

In the consumer electronics and automotive extended warranty sectors, manufacturer involvement currently seems to be more of the exception than the rule. Typically, even in cases where a manufacturer brands its own offering, as do Philips North America and Sony Electronics, scratch the surface and you’ll find an independent administrator (in these two cases, Service Net Solutions LLC, profiled in the Nov. 23 edition). We think the reason has something to do with the manufacturer not wanting to compete with its dealers/retailers (who might sell a competing brand of service contracts). It may also have something to do with geography, with the sale of extended warranties governed by 50 different state laws and the manufacturers of audio and video equipment for the most part being based in Europe or East Asia.

Below is a longer list of 22 administrators, bringing us down to the $50 million and sub-one percent market share level. As they get smaller, we suspect our own errors of estimation get larger. Here’s two homework assignments for our subscribers: first, who’s missing from the table below, and second, who’s much larger or much smaller than is estimated below? You can respond here without any fear of being named publicly, although the substance of your comments may appear in future editions with the names changed to protect the innocent. ”

For more information beyond what is contained in this piece contact us or go to our many sites and Social Networking sites!

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