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Letter to the Editor

Insurance Auto Auctions Reports Higher Net Earnings but Lower Revenues in Q1

Revenues for the quarter were $56.0 million compared with $69.2 million in the first quarter of 2002. The decline in revenues was primarily due to the company's continued shift away from vehicles sold under the purchase agreement method. The purchase agreement method accounted for 8 percent of the total vehicles sold this quarter versus 13 percent for the same quarter one year earlier. Under the purchase agreement method, the entire purchase price of the vehicle is recorded as revenue, compared to the lower-risk, consignment fee-based arrangements, where only the fees collected on the sale of the vehicle are recorded as revenue. Fee income in the first quarter increased to $42.7 million versus $41.5 million in the first quarter of last year.

Tom O'Brien, Chief Executive Officer, said, "We are pleased to announce our fifth consecutive quarter of solid earnings results, which were significantly improved over earnings from the first quarter of last year. This improvement is directly attributable to the strategic initiatives we executed in 2002. As we anticipated, volume sold in the first quarter was down on a year-over-year basis primarily due to an aggressive reduction in inventory levels during the first quarter of last year. It is encouraging, however, to see that volume coming in during the first quarter was higher than a year ago.

"With the business process re-engineering and purchase agreement initiatives already behind us, during the first quarter we focused more of our attention on the new company-wide IT system and strategic expansion," said O'Brien. "We are now in a better position to cost-effectively grow the business than ever before, and we believe growth opportunities exist for IAA in the quarters ahead.

"The implementation of the new system progressed through the first quarter, as we continue to improve performance and enhance the user experience," O'Brien said. "As of today, we have a short list of conversions remaining: four major markets, our national network and two of our acquisitions. Our employees and customers have become more comfortable with the system's functionality and continue to be pleased with the benefits of this new technology. We are on plan and on target to complete the implementation of the new system in the second quarter, and are excited about the positive financial and customer service impacts it should have after that. "We remain focused on preserving and deploying capital in ways that provide the best return for our shareholders. As a result, strategic expansion continued to be an area of focus for IAA in the first quarter. We cost-effectively opened two new facilities in Dothan, Alabama and Little Rock, Arkansas and acquired two branches in Buffalo and Rochester, New York. Each of these new facilities leverages the Company's existing regional coverage. We also acquired the Wichita Insurance Pool in the first week of April," said O'Brien.

O'Brien continued, "At the same time we make these growth initiatives compete with the opportunity to buy back stock at compelling prices. To this end, IAA repurchased over 750,000 shares of Common Stock in the open market or in block transactions during the month of March. The Board of Directors and senior management believe our long-term outlook remains bright. Therefore, the Board of Directors recently increased the previously approved share repurchase authorization by 750,000 shares, giving us the capacity and the necessary authorizations to purchase an additional 1.5 million shares."

O'Brien concluded, "We remain confident in our ability to further increase efficiencies throughout the company in addition to recognizing opportunities to grow the business. Our earnings outlook for the year has not changed, as we continue to expect diluted earnings per share of $0.75 or more in 2003. Much of the work has been done to transform the company and our goal remains the same -- to make IAA a stronger and more efficient organization by improving our service offering and creating an operating platform that will drive increased market share and profitability in the future."

IAA also announced that Peter H. Kamin, Partner of ValueAct Capital Partners, has been named the company's new Chairman of the Board, replacing former Chairman, Joseph F. Mazzella, effective with the end of the current term. Mazzella recently announced his intention not to stand for re-election to IAA's Board in order to be able to devote his full time to his new position of General Counsel at Highfields Capital Management, L.P. Kamin became a Director of the Company in February 2001 and was previously a Director from January 1999 through October 2000.

O'Brien said, "We are very pleased to announce the appointment of Peter Kamin as our new Chairman. He brings with him a strong financial background and a wealth of investment world experience. ValueAct has been a strategic investor in IAA for more than two years, and Peter's experience and commitment to the company will be instrumental as we continue to cost-effectively grow the business going forward. While we are disappointed to see Joe leave, we greatly appreciate his leadership over the past two years as well as his vital contribution to the Company's turnaround efforts and strong corporate governance program. We wish him well in his new endeavor."

Insurance Auto Auctions, Inc., founded in 1982, provides automotive total loss and specialty salvage services and currently has 71 sites across the United States.

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