July 29, 2010

INDS Signs with Virginia Surety:

One of the largest vehicle service contract administrators has selected one of the largest service contract underwriters to help it diversify and expand.

This week, the Virginia Surety Co. Inc., part of The Warranty Group, announced the signing of a deal with Interstate National Dealer Services Inc. to become its underwriter for vehicle service contracts.

Mike Frosch, president and chief operating officer of The Warranty Group, North American Operations, and senior vice president of Virginia Surety, said the companies have long been aware of each other. "They're certainly a well-known industry leader," he said. "We've had a relationship with the principals of the company for quite some time," Frosch added, although this is the first time they've signed a formal deal with each other.

Breanne Morley, senior vice president of client relations at Interstate National Dealer Services Inc., said the attraction was mutual. "The management of Interstate has had a long relationship with the management over at Virginia Surety," she said. "Gosh, I've known Mike [Frosch] for probably seven years now. And we've been talking to them for probably the last two years, trying to see what we can do together. And it finally came together this year."

Previous Relationships

Interstate has been in business for 30 years, and over the course of that period has worked with several other underwriters. An underwriting relationship with Dealers Assurance Company continues, Morley said, but a relationship with General Fidelity Insurance Company does not, having fallen victim to parent company Bank of America's decision to exit the business.

"So it was just perfect timing for us to go with Virginia Surety, which has a great reputation out in the marketplace," she said. "And they have various ancillary products -- not only extended service contracts -- that we're going to partner with."

Morley said it's highly likely that Interstate will stick to automotive-related businesses, although Virginia Surety and its parent The Warranty Group are also into everything from home warranties to travel accident insurance. Other automotive-related programs offered by The Warranty Group and its affiliates include theft deterrence, tire and wheel hazard, guaranteed asset protection (GAP), protective sealants, pre-paid maintenance, and limited warranty programs for certified pre-owned vehicles.

Virginia Surety, meanwhile, also underwrites service contracts for numerous other companies besides those owned by The Warranty Group, including American Guardian Warranty Services Inc., Mitsubishi Motor Sales of America Inc., Yamaha Motor Corp. USA, GreenUmbrella.com Inc., Preferred Warranties Inc., and the Penn Warranty Corp.

Benefits of Insurance Backing

Jude Tuma, president of Penn Warranty, noted that his company, which specializes in the administration of vehicle service contracts for independent dealerships, signed on with Virginia Surety just a few months ago, in February.

"So far, it's been spectacular," Tuma said. "Generally, the reaction has been very positive." Dealers were already comfortable with Penn Warranty doing business as a self-insured company, but now they're even more comfortable knowing there's an admitted carrier in the transaction.

More than anything, what Virginia Surety has done is given Penn Warranty more credibility, more legitimacy, and more market access with both state insurance regulators and financial companies. "We are now licensed in 40 states," Tuma said, "up from 22 just four months ago."

Last month, Penn hired two new salespeople to help it open up in North Carolina, and this month the company is opening up in Georgia. And when it comes to financing a vehicle purchase, and wrapping the service contract cost into the loan, now more banks are willing to do business with Penn, knowing there's an A- rated underwriter standing behind the company.

Most consumers, however, still don't really understand the difference, he said. "But with the demise of a couple of auto warranty companies, I'm sure a few consumers would be more interested in the viability of the company they're buying the warranty or service contract from."

Auto dealers, and by extension also their customers, do seem to respond well to reassurances based upon longevity, he added. "Longevity shows that you've gone through several cycles -- not just economic cycles, but also industry cycles. And it's a testament to how well you've performed in the marketplace. So it certainly matters."

Diversify & Expand

Interstate was already doing business more or less nationwide and already had underwriters in place, so this deal is unlikely to produce quite as massive nor as swift a benefit as did the deal with Penn. Still, the benefits are expected to accrue on both sides of the deal.

Morley said right now Interstate is looking to diversify, both in terms of its product offerings as well as its distribution channels. For instance, it's beginning to look at financial institutions and credit unions as possible alternative sales channels to the dealerships. "We've made great headway in that marketplace over the last 18 months or so," she said.

And then the merger between Interstate National Dealer Services and National Warranty Corp. last year formed the core of a new holding company called Interstate National Corp., which has given the company an opportunity to spread not only geographically but also in terms of product line.

National Warranty was historically very strong in the Pacific Northwest. Interstate, after moving its headquarters from Long Island to Atlanta, is now better able to recruit and train people from the Southeastern states. And Atlanta, with the addition of Interstate's employees to the local talent pool, is turning into something of a hub for the service contract industry.

Right now, Morley said, around 60% of Interstate's business goes through auto dealers. Around 15% to 20% of the business is direct-to-consumers through brands such as Warranty Direct and the Provida Group, another member of the new holding company. Another 10% or so comes in through direct marketing channel partners, she said.

St. Louis Cowboys

Direct sales, Morley said, suffered greatly from all the bad publicity that surrounded the "expiring warranty" scams of 2008 and 2009. But then about a year ago, as the St. Louis Cowboys began to go out of business and the unsolicited telemarketing calls diminished, the direct channel once again became viable for the legitimate practitioners.

"That channel had kind of gone down for us," she said, "but then in the last year it has really just taken off again. It's been increasing on a monthly basis, that channel." As the bad publicity died down, she said, there was still that underlying trend at work: People are keeping their cars longer, and they still want the protection of a legitimate service contract.

Morley said she's also seen customers become sharper with their questions, probably because of all the bad publicity. "We answer their questions," she said. "People are more educated today. And so they ask the questions about insurance, and things like that. And we're very forthcoming as to who the insurer is for the product, the rating of the insurer, and the financial stability of our company and our partners."

Good Cowboys vs. Bad Cowboys?

So how can you tell the difference? Whether you're an auto dealer looking for an administrator/underwriter partner or a consumer looking for an extended warranty, how can you tell the good from the bad?

Morley suggested to first look for some longevity. Interstate has been around for more than 30 years. The Warranty Group has been around in different forms for more than 45 years. "I don't think you'll find too many standalone administrators that have been around for that long," she said.

Second, they should ask about claims payments, and look at the terms and conditions of the actual contracts to see how and when claims are paid, and when they're denied. This is a bit more subjective, but what's she's suggesting is to get a feel for whether the company is open to talking about it. "We're very transparent," she suggested. "There's nothing to hide with us."

The respect between Interstate and Virginia Surety seems to be mutual. "They're definitely a best of breed solution out there in the market," Frosch said. "They meet the criteria that makes sense for us: a high-quality, high caliber organization. And we just started down the path."

Vertical Integration

Frosch said he fully expects Interstate to look for ways to leverage the width and the breadth of The Warranty Group's product line. "If you look at The Warranty Group in its entirety, it's a completely integrated solution," he said. "We own the underwriter. We own our own admin capability. We own our own marketing, and our own compliance. So within that, we're able to literally create a diversity in our offerings, depending on what a client needs. So we have full-service offerings where we'll provide all of those offerings. But because we're a fully-integrated stack -- a fully-integrated solution -- we also have the ability to work with clients to pick and choose the pieces that they're looking for.

"In the Interstate example, they're a third-party administrator. They're doing the sales and marketing. And they're looking for a quality underwriter to back and support the program," Frosch concluded.

This year, Frosch said, is turning out to be encouragingly positive, despite all the bad publicity heaped upon the industry last year in the wake of the "expiring warranty" scam. Frosch said he thinks one big reason for that is because the business model that Interstate and Virginia Surety pursue is vastly different from the misleading telemarketing practices favored by the St. Louis Cowboys.

"It's had no impact on our business, because that's a business that we were not pursuing," he said. "The things that were taking place, and how it was reflected in the media -- it's just a very different scenario than organizations that are compliant, organizations that are seeking quality underwriting, and organizations that want to be there to take care of the customer as the contract earns and matures over time."

Flight to Quality

Frosch said he continues to see two big trends affecting business conditions in the industry. "One is the flight to quality: Organizations looking for a steady and stable partner. It in no way benefits any company or consumer as you see some companies who have switched programs constantly," he said. Instead, what he said he thinks clients want to see is some longevity and stability in their business partners.

The other trend is globalization. Companies that have done well in the North American market are now looking for opportunities in additional countries and regions, he said.

"We have operations throughout Latin America, throughout Europe, Asia, Pacific Rim, and all of North America," he said. "We operate in 60 countries, and we have brick and mortar in 33 countries -- full claims service, full underwriting, full marketing, and full compliance on a global basis. So as you see multinational organizations looking for custom solutions, we're a very viable and logical choice for these companies."

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