GMAC: Used-Vehicle Originations Up 50 Percent Over Last Year
NEW YORK — GMAC Financial Services reported second-quarter net income of $293 million, compared to $787 million in 2006. According to officials, strong performance in GMAC's global automotive finance and insurance businesses offset losses in the real estate finance business.
GMAC's second-quarter net income generated by auto finance, insurance and other operations, excluding Residential Capital, came in at $547 million, more than twice the earnings generated by these same operations in the second quarter of 2006, executives highlighted.
Meanwhile, ResCap incurred a net loss of $254 million in the second quarter, bringing GMAC's consolidated net income to $293 million. The year-over-year net income comparison was affected by a $259 million gain on the sale of an equity interest in a regional homebuilder in the second quarter of 2006.
"GMAC consolidated net income of $293 million in the second quarter reflects a marked improvement from the $305 million consolidated net loss incurred in the first quarter this year," officials said.
"The large favorable swing in GMAC's earnings from the prior quarter stemmed from the considerable improvement in ResCap's performance, with second quarter losses at a much-reduced level. Although severe illiquidity in the nonprime mortgage market placed increasing pressure on asset valuations, aggressive measures undertaken to reduce ResCap's nonprime exposure rendered the company less vulnerable in the second quarter to continued weakness in the market," executives explained.
Eric Feldstein, GMAC chief executive officer, said, "The net losses incurred by ResCap continue to constrain GMAC's bottom-line profitability. But we are encouraged to see that the aggressive risk-mitigation initiatives implemented in the first half of this year have reduced ResCap's losses quickly and significantly despite increasing challenges in the U.S. mortgage market.
"Meanwhile, we are pleased with the continued strong performance of GMAC's global auto finance and insurance operations, where second quarter earnings more than offset ResCap losses," Feldstein pointed out. "Operating trends in the auto finance and insurance business units remained favorable with a year-over- year increase in net margins, an improvement in auto lease residual performance, stable credit losses near historical lows and an increase in insurance underwriting profitability."
Discussing liquidity, officials said GMAC and ResCap both maintained strong liquidity through the second quarter. GMAC's consolidated cash and certain marketable securities totaled $17.5 billion, up from $12.8 billion on March 31. Of GMAC's consolidated cash and certain marketable securities, ResCap held $3.7 billion at the end of the second quarter, up from $2.6 billion as of March.
GMAC and ResCap, in aggregate, completed more than $8.5 billion of unsecured funding in the second quarter, executives reported. Additionally, in June, both GMAC and ResCap announced the renewal of five syndicated committed drawable bank facilities totaling approximately $20 billion.
Continuing on, executives said GMAC's global automotive finance unit earned net income of $382 million in the second quarter of 2007, a substantial increase relative to the $137 million of net income in the second quarter of 2006.
Performance was driven by improved margins in North America, strong lease residuals and stable credit performance. The year-over-year variance also reflects favorable mark-to- market effects on risk management activities related to certain callable debt, according to the company.
Moreover, executives said new-vehicle financing originations increased year-over-year with $14 billion in retail and lease contracts for the second quarter of 2007 versus $13 billion in the second quarter of 2006.
Used-vehicle originations increased about 50 percent in the second quarter of 2007 to $2.1 billion versus $1.4 billion in the year-ago period.
"In addition to maintaining a strong relationship with General Motors and its dealers, GMAC has made incremental progress in expanding its auto financing capability beyond the GM network," officials said.
"Achievements year-to-date include enrolling 2,400 diversified dealers to participate in retail programs through GMAC's national brand, originating more than $500 million in new wholesale assets from diversified sources and growing revenues through expanded access and services of SmartAuction, GMAC's web-based wholesale remarketing program," they added.
More specifically, Feldstein said, "GMAC's auto finance business provided another quarter of robust performance, more than doubling earnings from the prior year. We are pleased with results in the quarter and are excited about various opportunities to further grow the business through diversification of our revenue base and through expansion overseas.
"In North America, we are making steady progress on diversification efforts by meeting dealer demands to grow our used vehicle financing business and by expanding our dealer network beyond GM franchises with wholesale and retail asset origination activities," he continued.
"While these efforts represent a relatively small part of our overall revenue, we are encouraged by our ability to successfully leverage our strong auto finance capabilities into this new arena," Feldstein said. "Moreover, with a broad footprint overseas in key growth markets, GMAC continues to realize higher financing revenue on higher asset levels across our international operations."
GMAC's insurance business earned record second quarter net income of $131 million, an increase from $80 million in the prior-year period. The gain was due to favorable underwriting results primarily driven by lower loss experience on vehicle service contracts and dealer inventory insurance, the company reported.
The combined ratio improved significantly to 90.2 percent in the second quarter of 2007 versus 96.2 percent in the year-ago period.
Written revenue came under pressure in the second quarter due to constrained pricing in the competitive U.S. insurance market. This was partially offset by continued growth in international markets, both organically and through new business initiatives, officials explained.
In June, GMAC acquired the United Kingdom-based automotive insurance business, Provident Insurance. This business will provide GMAC another outlet in the U.K. automotive insurance market with potential to expand throughout Europe.
The insurance investment portfolio totaled about $7.4 billion at June 30, with more than 90 percent of the investment portfolio in fixed income securities and approximately 10 percent in equity securities.
As for ResCap, it recorded a net loss of $254 million for the quarter, compared to net income of $548 million in the year-ago period. The decline in financial performance is due predominantly to continued pressure in the nonprime sector of the U.S. residential finance business, officials said.
"ResCap's second quarter loss of $254 million marked a vast improvement from the $910 million loss incurred in the first quarter," executives highlighted.
ResCap said it significantly curtailed its nonprime loan origination activities with second quarter production of about $700 million, down from $3.3 billion in the prior quarter. At the same time, U.S. prime loan production in the second quarter amounted to $26.5 billion, just shy of the prior quarter's volume, while its U.S. servicing portfolio increased marginally during the period to $425 billion.
ResCap's business lending activities and international business activities both posted modest profits in the second quarter, according to the company. The health capital and resort finance business generated strong operating results, partially offset by higher loss provisions on loans to specific homebuilders in view of the softening U.S. housing market.
In the international arena, total loan production increased to $7.7 billion in the second quarter, up from $6.5 billion last quarter and up from $6.7 billion in the year-ago period.
In the U.K., ResCap reduced its second quarter loan production in light of narrowing margins in the marketplace. However, the international business overall continued to expand profitably, while pursuing attractive growth opportunities in Continental Europe, Latin America, Canada and Australia, executives explained.
In April, GMAC injected $500 million of equity into ResCap to bolster the company's capital position, bringing the total equity contributed to $1 billion year-to-date. As of June 30, ResCap's equity stood at $7.5 billion, an increase from $7.2 billion in the first quarter.
"The actions undertaken by ResCap to overcome various challenges in this market have translated to a significantly improved second quarter operating performance," Feldstein said. "Nonetheless, we expect widespread weakness in the U.S. housing market and mortgage industry to persist in the second half of 2007.
"Therefore, in order to further improve ResCap's results over the coming months, we intend to restrict origination of mortgage products with limited market liquidity; we will step up our remediation and loss-mitigation efforts; we will further reduce our nonprime mortgage exposure; and we will continue to right-size ResCap's structural cost base in line with lower industry volume," he added.
"We remain optimistic about the long-term prospects of ResCap's fundamental business strengths, its large-scale mortgage production and servicing platforms, its broad international presence, and its diverse product mix. And we believe ResCap's strong liquidity position, sound capital base and the capabilities of its team will enable the company to take advantage of these competitive strengths as industry consolidation continues," Feldstein said.
Looking forward, officials said GMAC's prospects for the long-term remain favorable. Global automotive finance is poised to maintain its leadership position in the marketplace and leverage its core capabilities to further grow the business.
Outlook for the insurance business remains strong with a highly competitive combined ratio and with strategic initiatives underway to expand the business globally. At ResCap, despite challenging conditions in the U.S. mortgage market, the company expects continued improvement in earnings performance in the second half of the year.