F&I profits expected to drop in 2023, analysts predict

Record-high levels of finance and insurance profits could see a slowdown next year, some industry experts predict.

An October J.P. Morgan report estimated F&I gross-profit-per-vehicle among the six major publicly traded dealership groups would drop slightly in 2023, but not below pre-pandemic levels.

The financial institution's industry analysts project this year's average F&I gross profit of $2,300 for the group would drop about 8.7 percent to $2,100 at the end of next year — but far above the $1,700 seen in 2019. J.P. Morgan projected further deterioration to $2,050 in 2024 and to $2,000 in 2025.

Daniel Imbro, a managing director for financial services firm Stephens Inc. agreed today's record F&I profits are not here to stay.

"The F&I per unit is down modestly next year," Imbro told Automotive News. "Across the industry, F&I has probably peaked."

Over the last two years, vehicle values rose and gave dealers larger commission from F&I sales. At the same time, interest rates dropped and strengthened consumer wallets during the pandemic. This lowered the financing cost per vehicle and gave car buyers more discretionary income to buy more insurance products, Imbro said.

"Especially on the used-vehicle side, we're expecting used-vehicle prices to be down 10 percent next year. The average loan value will shrink so smaller commission from loans will be generated," Imbro said. "As rates have risen, more of that monthly budget will be accounted for by financing for the vehicle but lower [F&I] product attachment."

Lease penetration dipped during the pandemic to about 20 percent with most consumers choosing to buy instead of lease, Imbro said. The people choosing to buy a vehicle were "much more likely to buy insurance and more warranty protection for their car, another tailwind for F&I," he said.

Automakers' recent pickup in zero-percent financing offers is another sign that "affordability is becoming an issue for vehicles, so that's going to put downward pressure" [on F&I sales], Imbro said. "Vehicle prices will be down next year because of consumer wallets being stretched, so some incentives are coming back. If prices are down generating smaller loans, that will make smaller commission for F&I products."

Mike Buckingham, managing director of data aggregator Power Information Network Auto Finance in Troy, Mich., said F&I gross profits could drop but felt increased vehicle sales would counter a decline.

"We can see some slight dropping, but at the same time we see sales increasing and vehicles becoming more available," Buckingham told Automotive News. "Per-unit [F&I income] may drop slightly, but if you look at sales we see them booming. That will tend to offset the overall F&I income per dealership group, whereas the per-unit may drop slightly."

The publicly traded dealership groups have been "on a tear" with F&I income on a per-vehicle unit basis, Buckingham said, adding that as vehicle prices, monthly payments and interest rates rise, "that's going to put a little squeeze on margin per unit."

As monthly payments start to go up, that's where consumers might hold back on F&I product purchases, he said.

Despite lower vehicle sales since 2019, data from Richardson, Texas, technology provider StoneEagle shows F&I income has steadily been rising. The data comes from more than 7,000 U.S. dealerships that use StoneEagle's F&I software.

Over the last four years, F&I product profit-per-vehicle went from $826 in 2019 to $1,240 through October of this year.

And overall F&I profit-per-vehicle grew from $1,381 in 2019 to $1,957 through October 2022.

During the nearly four-year timeframe, average total F&I income per dealership during that period increased more than 42 percent despite the overall number of vehicles sold falling 8 percent, according to StoneEagle.

"F&I product providers have done a great job of providing quality products that deliver value, and dealers have not only continued to sell but also to branch out and grow sales for non-[vehicle service contract] and GAP products," StoneEagle CEO Cindy Allen told Automotive News.

As evidence, the company's numbers show from January 2019 through October 2022, F&I revenue from products sold accounted for a larger percentage of overall F&I profit than finance reserve.

In the first 10 months of 2019, F&I product revenue accounted for 60.3 percent of overall F&I profit, and that percentage for the first 10 months of 2022 rose slightly to 62.4 percent.

"While market dynamics continue to provide opportunity for dealers to drive solid revenue from finance reserve, the trend is growth in the F&I product revenue share of the pie," Allen said.

For now, the current F&I boom was evident in the third-quarter results from the six publics.

All six showed a year-over-year increase in same-store average F&I gross profit per vehicle, and five out of the six collected more than $2,000 in F&I profit on each vehicle. AutoNation Inc. was closing in on nearly $2,800 per vehicle.

At least one of the six giants has predicted their numbers could go even higher.

Asbury Automotive Group CEO David Hult, whose company reported $2,254 in same-store F&I profit on each vehicle during the third quarter, said rising vehicle costs of sale have produced larger dealer reserves and product sales, and a sudden drop in costs could hinder F&I.

But electrification, more expensive vehicles and "the propensity of consumers to spend on products" offered room for F&I growth, he said.

F&I results wouldn't jump significantly higher, Hult said, but "I think there's room to improve a little bit more."

John Huetter contributed to this report.