While publicly available data is not available for GAP writers, it is clear of that 2011 will go down as a profitable year for GAP Insurance.

This is due to two factors: the lower leverage permitted by the credit markets and the high value of used cars.

How does GAP work?

Why do these factors have such an impact on the results for GAP insurance? Remember that GAP covers the difference between the book value and the loan value. Therefore the book or actual cash value of the vehicle acts like a very high deductible in a traditional insurance policy.

When customers are allowed to finance more for their vehicle, this increases the loan value and therefore increases the GAP severity.

Also, when a claim is submitted, the increase in used car prices means that the auto insurance policy will pay more for their vehicle since it is worth more in the marketplace.

Because GAP covers the difference between these amounts, it is very sensitive to changes in these values. For example, a 10 percent increase in used car prices might imply a 40 percent reduction in GAP losses.

Trends in Financing

First and most important the availability for consumers to finance more than the MSRP of the vehicle is still under pressure.

The financial crisis of 2008 caused the banks to restrict the amount of financing for vehicle purchases. While there is some evidence that banks are increasing the amount that they will finance, restrictions that were instituted in 2008 have not been fully removed.

For the F&I industry, this is been a benefit and a detriment. While the lower leverage ratios are a benefit to the GAP underwriters, the lack of additional funds for the consumer may limit some F&I product purchases.

As we move into 2012, we expect to see further loosening of the loan-to-MSRP ratio requirements. However the extent of this will obviously be determined by the market and the general economic recovery as well as the banks appetite for risk.

The Manheim Used Vehicle Value Index

The other factor that has favorably impacted losses is the strong pricing in the used car market.

As you can see from the graph, the index of used vehicle values is at or near an all-time high.

The index is published monthly by Manheim Consulting and is available on their website at www.manheimconsulting.com.

The index is based to January 1995 where January 1995 is equal to a value of 100.

The transactions that make up the index represent a substantial portion of the used vehicle market and are compiled from auction sales of mostly late model used cars.

Recently we spoke with Tom Webb, chief economist of Manheim consulting and the author of this index, about what he sees as the future direction of used vehicle values.

We wanted to know his thoughts on why the market for used cars was so strong. He said that the increase in used car values was not only due to increased demand for used cars but also a reduction in the supply of late model used cars.

This reduction in supply is due to a number of factors. First, the new vehicle sales in 2008 and 2009 were much lower so this has led to a corresponding decrease in the availability of late model used cars from those model years.

Second, the number of vehicles purchased by rental car companies decreased in 2008 and 2009 so there are less late-model used cars from that source as well.

In addition, vehicle manufacturers were less likely to lease their cars in 2008 and 2009 over concern about the amount of residuals for those deals. Since leasing will generate a late model used car sale a few years down the road, the decline in leasing during this period is reflected in fewer vehicles for sale now.

Also, the number of repossessions has declined recently from 2008 and 2009 further restricting the supply.

Finally, there were certain issues with particular makes models that impacted their supply in 2011.

For example, the Japanese earthquake in 2011 severely impacted the supply of certain models for Honda dealers. There was a corresponding increase in the value of the used cars for those models.

What should we expect in 2012?

First we will expect that rental market sales will go up in 2012 as purchases made over the last year begin to find a way into the used vehicle market.

It would also expect that the supply disruptions in 2011 will not continue into 2012. Therefore those models that were impacted by this distraction would probably see declines in the used car prices.

Leasing is again popular due to the strong residuals and corresponding low lease payments. This will generate future supply in the marketplace.

But the biggest question is the sales and supply of new vehicles.

There’s no doubt that the automobile manufacturing business model has changed over the past five years, for example, there was a profitable year in 2011 with 13 million vehicles sold versus severe losses in past years with sales much higher.

Under the new business model, it appears that new car inventories on dealer lots have declined substantially. Due to this lack of supply at the lot, some consumers may be opting for late model used vehicles

Whether automakers continue to limit the supply of new automobiles to ensure profitability per unit or return to a model of a large number of vehicles produced is an unanswered question.

In addition to GAP, other products are being introduced which capitalize on the high value of used cars. These include trade in value protection.

Whether these products remain viable in the future will depend on the relative high value of used cars.

Based on all these factors we would expect that 2012 would remain a profitable year for GAP underwriters. But we also would expect that 2011 was the “low water mark” for losses.

Underwriters should remain diligent in monitoring both the credit market and the used car market for future direction of their results.

Ally Financial Inc. debuted in five markets yesterday a new financing product that offers the benefits of leasing, but provides the advantages of owning a vehicle at a fixed rate and payment. The difference is that buyers who opt for the program can sell their vehicle back to Ally at the 48th month at a pre-determined price.

Called Ally Buyer’s Choice, the financing option was introduced more than a year ago to the Canadian Market in response to the Bank Act, which prevents banks there from offering leasing. Now Ally is bringing it to the U.S. market, introducing it yesterday at General Motors and Chrysler dealerships in California, Florida, Illinois, New York and Texas, according to F&I and Showroom magazine.

“As a bank, you can’t lease in Canada. So, what gave rise to it up there is we were looking for something that would allow us to have the benefits of leasing in a financing arrangement,” said Tim Russi, executive vice present for Ally’s North American Operations. “After we saw how the program performed up there, we thought there would be a reasonably-sized opportunity in the U.S. [market] to provide the product.”

As for the 48-month sell option, Russi said the predetermined value is calculated the same way Ally sets its lease residuals. He added that loan terms do not factor into the calculation, as two people who finance the same vehicle at different terms will get the same amount back if opt for the sell option. As for how the company landed on month 48 for the sell option, Russi said that’s the average life of the company’s financing arrangement.

The main thrust of the product is to eliminate consumer fears of making a large purchase in these still-unsettling economic times, Russi said. But the product also aims to reduce consumer buying cycles, drive floor traffic, and, maybe, help dealers replenish their used-vehicle inventory. He also noted another possible advantage to the program.

“We don’t do a lot of 84 [months], but we’d like to see 84 with this type of structure,” said Russi. “But if you’re a consumer who is signing up for 84 months’ worth of payment, you’d love to drop that term and have an idea of the value you can get out with.”

Russi added that dealers were trained on a new calculator the company developed to help them structure deals under the new program. He added that if the value of the vehicle is higher than the predetermined price at the 48th month, the owner can opt to sell the vehicle on his or her own or continue making payments.

“I think dealers see the value in it because it gives them another way to meet consumers’ needs and overcome some of their fears in making a large purchase,” Russi said. “For the consumer, there might be a lot of reasons why [he or she] may need to get out of the deal — it could be an employment- or a family-related [reason]. So, this just provides the consumer with certainly in that they can sell their vehicle to us at a set price if [he or she] needs to.”

An increase in floor traffic and a strong closing ratio indicate that new-vehicle sales in March will improve 11 percent from the year-ago period, according to CNW’s Retail Automotive Summary.

The recent earthquake and tsunami disaster in Japan, however, is expected to impact the tight supply chain of Toyota, Nissan and Honda, reported F&I and Showroom. Disruptions to this chain could occur within the next 45 days and impact vehicles built in Japan and shipped to the United States, as well as vehicles assembled in the United Stated with critical imported components, wrote CNW’s Art Spinella.

Despite Japan’s natural disaster and the potential negative effects on the industry worldwide, there were some positive signs in the opening days of March. Floor traffic is up 13.7 percent and closing ratios are up 1.22 percent this month compared to the year-ago period. As a result, same-store sales are up 13.77 percent compared to the year-ago period.

In addition, the CNW Jitters Index continues to fall, dropping 1.1 percent in March and indicating that consumers seem more at ease with their economic issues, according to Spinella.

These positive consumer and industry trends will help push new-vehicle sales to 1.2 million units in March, an improvement of 11 percent from the year-ago period and resulting in the best March since 2008. However, the industry will still fall below the 1.67 million units recorded in 2000 when the industry sold more than 17 million units.

Credit scores continue to drop in March, following a steady decline since January of last year. “The finance industry continues to approve loans for what were just a year ago marginal buyers,” Spinella wrote.

The average FICO score for new-car buyers is 685, including leasing and balloon-note options.

The share of new-vehicle buyers with FICO scores of 670 or less is forecasted to reach 12.78 percent of total loan approvals in March.

Subprime loan approvals improved in March for new and used vehicles. On the new-car side, subprime approvals increased 28.5 percent compared to the year-ago period.

Cash deals continued to decline, while leasing gained some ground in February, according to Spinella.

Leasing accounted for 23.81 percent share of new-vehicle deals and cash accounted for 6.89 percent of deals. Finance accounted for a majority of deals, with a share of 69.29 percent.

Looser credit is expected to help used-vehicle sales improve in March, making the first quarter of 2011 the best one since 2008, according to Spinella.

Total used-vehicle sales are forecasted to reach 2.5 million in March, an increase of 5.5 percent from the year-ago period. The improvement is spread across all channels. Franchised dealers, independent dealers and private-party sales are expected to jump 0.5 percent, 10.7 percent and 5.4 percent, respectively.

Year-to-date sales are expected to reach 6.3 million units, compared to the year-ago result of 5.9 million units.

The average FICO score of used-vehicle buyers continued to fall in March and is expected to reach 615. Nearly 39 percent of used-vehicle buyers are expected to fall below 670.

Despite the positive trends in used-vehicle sales, early March data shows that the combination of a tightened used-vehicle supply and high consumer traffic may cause a shift in the mix of vehicles available. One reason for this shift is gas prices, which may send consumers to the “car side,” Spinella suggests.

“While this will have little impact on casual sales, it will definitely affect franchised and independent dealerships that now have to beware of overloading lots with trucks or being forced to lower truck prices to facilitate a sale,” Spinella writes.

Wolters Kluwer Financial Services is now offering captive finance companies, lenders and auto dealerships universal closed-end motor vehicle lease agreements for all 50 states.

Wolters Kluwer’s universal close-end motor vehicle lease agreements are designed to meet Regulation M requirements and any other state and federal requirements on auto leasing. Offered in both print and e-form, the contracts are suitable for transactions with equal monthly payments or single payment. Additionally, the contracts are customizable, allowing captives and lenders the ability to include products and features unique to their leasing programs.

These lease agreements help ensure auto leases are in compliance with current federal and state-specific regulatory requirements, while also helping simplify leasing and back-office processes.

By relying on Wolters Kluwer Financial Services’ standard lease documents, captives and lenders can significantly lower costs associated with monitoring regulatory changes and developing and producing their own lease contracts. For dealerships, a universal lease agreement allows them to simplify and eliminate the programming and inventory costs they incur when using lease agreements from multiple providers.

The contracts are maintained by Wolter Kluwer’s compliance experts, who monitor legislative and regulatory changes affecting the indirect lending finance industry in 51 U.S. jurisdictions, and are protected by the company’s limited compliance warranty.

“Our indirect lending business was created to help lenders and dealerships comprehensively address various aspects of regulatory compliance,” said Lee Domingue, CEO of indirect lending at Wolters Kluwer Financial Services. “This offering is yet another example of that commitment. By providing an industry standard for auto lease contracts, we can help lease companies, lenders and dealers simplify the leasing process for their organizations and the customers they serve.”

DETROIT – Chrysler Group has taken another step toward reviving its leasing business by signing an agreement to offer leasing through US Bank, Automotive News reported.

The automaker announced the arrangement in an e-mail to dealers. Dealers now can offer customers two leasing options: U.S. Bank and Ally Financial.

The company is offering leasing only on select models using either finance source: the Chrysler 300 and Town & Country; the Dodge Charger, Grand Caravan, Journey and Nitro, and the Jeep Wrangler and Liberty.

“Starting today, your customers now have a choice of finance sources to lease select vehicles. Special lease rates and residuals are now available through US Bank,” the e-mail said. It is signed by Fred Diaz, Ralph Gilles, Michael Manley and Olivier Francois, CEOs of the Ram, Dodge, Jeep and Chrysler brands, respectively.

“While Ally remains our preferred lender, this new relationship with US Bank will now give your customers a choice in lenders and will continue to allow you to write your leasing deals at the most competitive rates and residuals available in the market today,” the message said.

Ally has financed about 50 percent of all Chrysler Group’s retail sales so far this year, according to a company statement.

The move comes a month after Ally Bank announced it was opening leasing to a wider range of customers. Ally lowered the FICO score threshold for lease customers to 620 from 660. A 660 score is on the lower end of prime credit, while a 620 score is on the upper end of subprime.

Chrysler has gradually been rebuilding its leasing business after it collapsed during the credit crisis of 2008. In 2006, when Chrysler Financial was still Chrysler’s captive finance company, leases accounted for about 22 percent of the automaker’s new-vehicle sales transactions. After Chrysler Financial left the leasing business in 2008, along with most of Chrysler’s lenders, the percentage of leases plummeted to under 1 percent of all sales by mid-2009.

Leasing has slowly come back since then, accounting for between 4 and 6 percent of Chrysler sales now.

FARMINGTON HILLS, Mich. — Mercedes-Benz Financial is enhancing its lease vehicle turn-in process, called First Class Finish, by providing new software for its dealers hand-held Dynamic PDA (personal data assistant).

Mercedes-Benz USA provided the Dynamic PDAs to all dealers in 2009. They have been using the device for various services, such as a pre-delivery inspection of each vehicle before it is ready for sale. Each dealer has received one to four PDAs, depending on the size of the dealership.

The new software for the PDAs is the first step in several technological enhancements for First Class Finish since the customer and dealer-friendly initiative was launched last year.

Now, when a customer brings a leased vehicle to the dealership at the end of its term, a dealership representative can use the PDA to scan the vehicle identification number (VIN) and start final inspection, the first step in the new lease vehicle turn-in process which takes about 15 minutes, compared to 30 minutes in the prior process.

“This technology is beneficial to both the customers and the dealers because it eliminates paper forms for the dealer and is a much faster and efficient process for busy customers,” said Jeff Gartland, director of remarketing for Mercedes-Benz Financial. “We see a great opportunity to end the paper process and replace it with a green process that benefits everybody.”

First Class Finish was rolled out to Mercedes-Benz dealers in the second quarter of 2009. The new process eliminates the vehicle’s final inspection by an independent third party and brings clarity to the customer through increased communication with the dealer.

The First Class Finish process:

• Adds a brief pre-inspection at the originating dealership around 90 days before the end of the lease term
• Allows final inspection at any Mercedes-Benz dealership at the end of the term
• Provides final documentation and billing to the customer on the spot, not several weeks after turning in the vehicle
• Gives the customer an explanation of all applicable charges
• Gives the dealer the opportunity to pre-inspect the vehicle, discuss the condition with the customer and determine the customer’s future intentions
• Gives customers a preview of brand new product at the dealership
• Informs customers if they qualify for loyalty pull-ahead programs which may waive the remaining obligation on their current lease.

“The best case scenario that benefits the customer, dealer and Mercedes-Benz Financial is if the customer comes in for the pre-inspection, discovers that they qualify for a pull-ahead loyalty program and they drive home in a brand new vehicle,” Gartland said.