MESSAGE FROM SVP, DAN LENCZNER

As we have all seen, Covid-19 is having a significant impact on the U.S. economy and every industry including the automotive business. At Assurant, we have been working diligently to determine and prepare for the significant near-term impact to clients, their customers and the industry. The government’s social distancing regulations are directly impacting OEMs and dealers, who have either voluntarily or been required to shut down production and close or limit hours at retail locations.

To keep you informed, we’re providing some information and insights to help you be better prepared and positioned to help your customers. Our team, now all working from home, has analyzed current data and past trends to understand the effects on dealership sales and service. And it’s our goal is to pass on as much of this information to you as possible.

Prolonged social distancing combined with a weak macro environment will pressure all aspects of the franchised dealer business model:

• Current forecasts suggest the 2020 US new vehicle SAAR falling 15-35% y/y
• Volume to decline 80-90% over near-term as showrooms remain closed and social distancing discourages shopping
• According to Bank of America, as of March 30th, new car showrooms are closed in 14 US states (representing 42% of new car sales) with more closures coming as new states implement stay-at-home measures
• Potential for a sharp rebound in 2H20 as stimulus supports demand

• Used expected to outperform new in a weak economy
• Potential for pent-up demand as average age of light vehicles is now 11.8 years
• Dealers’ used/new unit sales ratios have steadily increased and recently reached or exceeded parity at many of the large dealer groups, positioning them better than previous recessions/recoveries.
• Low oil prices may support demand for SUVs, which are an increasing portion of off-lease volumes
• JD Power estimates that 1.8M vehicles will come off-lease in the next quarter with 50% of lessees purchasing creating a need for replacement vehicles for the remaining 50%

• OEMs just rolled out aggressive financing terms to stimulate demand, while government stimulus and low interest rates should also result in attractive consumer offers.
• High unemployment or deteriorating credit metrics may pressure loan approval rates
• VSCs will remain an important profit lever for dealer groups with a variety of potential tailwinds & headwinds impacting attach rates
• Potential VSC tailwind
  + Dealers focus on F&I attach rate (Sonic sells used cars at a slight loss to generate F&I revenues)
  + Greater mix of used vs. new car sales which carry higher attach rates
  + Increased consumer interest in wallet protection (programs that protect their personal financial exposure)
• Potential VSC headwinds
  - Increasing share of online sales could pressure attach rates
  - Potential reliance on 3rd party lenders that offer competing products
  - OEMs could extend warranty terms if they think it will help stimulate demand by addressing total cost of ownership

• Dealer service centers are deemed essential services and remain open, but P&S volumes will likely decline significantly due to less miles driven and less interest in non-essential repairs
• Morgan Stanley reported that dealers are seeing P&S revenue at 30% of normal levels.
• The last full week of March, Assurant claims call volumes were down 30%
• P&S volume is correlated to miles driven but people tend to drive less during recessions, and given today’s social distancing and extreme unemployment, people will drive even less than in a typical recession

• Prolonged social distancing could be an inflection point in digital shopping behavior
• With showrooms closing, dealers are focused on generating volumes via omnichannel capabilities, and they’re refining delivery, F&I, and other processes to improve the digital customer experience

• Ongoing friction with OEM incentive programs designed to promote dealer volumes vs. profitability
• With showrooms closing and sales plummeting, OEMs could push to eliminate or weaken dealer franchise laws to allow them to sell directly to consumers and circumvent dealer networks entirely

• Investments in AV development are likely the first to decline due to much longer payback period.
• Waymo and other tech companies may benefit as they continue to invest through the cycle
• EVs and connectivity solutions are higher OEM priorities and any funding declines will likely depend on the severity and duration of the current economic downturn.
• In response, we could see OEM’s revisit partnerships (Cruise/Softbank), strategic alliances, or consolidation scenarios

With the social distancing guidelines now extended through the end of April, a return to business-as-usual is still at least a month away. I hope you’ve found this information helpful and remain committed to providing you with updates as the situation evolves. If you have any questions, please let me know. We’re all in this together and at Assurant we’re working to help you move forward.

Best,

Dan Lenczner