SOUTHFIELD, Mich. -
After being delayed because of the coronavirus pandemic, Credit Acceptance Corp. plans to return from Memorial Day weekend and share its first-quarter results on Wednesday.
 
Earlier this week, the subprime auto finance company gave a glimpse of how it’s navigated through the crisis when chief executive officer Brett Roberts completed his annual letter to shareholders.
 
“This year’s letter was nearly complete when I started to take notice of a new virus that had been causing considerable damage in China and was starting to spread to other countries. At that time, experts were not overly concerned about the impact in the United States but by late February, we were starting to prepare a contingency plan just in case, hoping that plan would not be necessary,” Roberts wrote.
 
“The new virus began to spread rapidly in the United States soon after and we began to implement our plan. By March 17, almost all of our team members were working from home, many for the first time. After spending March and April in crisis mode, I am now getting back to finishing this letter,” he continued.
 
While all sorts of businesses and companies have been impacted by the crisis — leading to nearly 39 million workers applying for unemployment benefits — Roberts explained how Credit Acceptance is built to handle significant economic shocks.
 
“In some respects, our business is well suited to survive an event like this,” Roberts wrote in the document. “First, our revenue is generated from our loan portfolio, which includes new loans as well as those originated in the past that still have a balance outstanding. Should new loan originations sharply decline as a result of this crisis, our revenue would not decline in the same proportion immediately, but would instead decline gradually over time. This consistent revenue stream helps us to avoid making drastic reductions in expenses that could be damaging to our business and culture long term.
 
“Second, we have historically been conservative,” Roberts continued. “We have kept our profit margins strong and have used a modest amount of debt to fund our loan originations. Having strong profit margins and using debt modestly means we have what we believe to be a large margin of safety. We can absorb a much greater decline in our critical business metrics as compared to many other companies and still live to fight another day.
 
“Finally, we have an important product and an amazing culture,” he went on to say. “Our people are our biggest strength and this has never been more evident than during this challenging period.”
 
So is Credit Acceptance simply swimming freely through COVID-19? Not necessarily as Roberts acknowledged.
 
“However, this crisis also presents significant challenges. Our customers are individuals who are considered to be high risk from a credit perspective; many of them have been severely impacted or are likely to be impacted in the future by this crisis,” he wrote.
 
“Our future profitability is largely a function of how much cash we collect from our loan portfolio, an amount we do not know with certainty, even in the best of times. The COVID crisis makes our prediction of loan cash flows even more uncertain,” Roberts continued.
 
“While our experience during the 2007-2009 financial crisis provides us with some relevant experience, there can be no assurance the impact of this crisis will mirror that one,” he added. “Although we have a long history of meeting challenges successfully, the current crisis will very likely be the toughest one yet.”
While the COVID-19 outbreak might be the most difficult hurdle for Credit Acceptance in its existence that goes back to the 1970s, Roberts reiterated four success factors he believes to position the company for success, including:
 
— Developed the ability to offer financing for consumers, regardless of their credit history, while maintaining an appropriate return on capital. The company said it took years to develop the processes and accumulate the customer and contract performance data that it use to make profitable loans in our segment of the market.
 
— Understand the daily execution required to successfully service a portfolio of retail installment contracts to customers in its target market. Credit Acceptance said there are many examples of companies in the subprime auto finance industry that “underestimated the effort involved and produced poor financial results.” Approximately 40% of Credit Acceptance’s team members work directly on some aspect of servicing its portfolio, “and we are fortunate to have such a capable and engaged group.”
 
— Learned how to develop relationships with dealers that are profitable. Credit Acceptance explained that forging a profitable relationship requires the company to select the right dealer, align incentives, communicate constantly and create processes to enforce standards. In subprime, Credit Acceptance believes the dealer has significant influence over contract performance. “Learning how to create relationships with dealers who share our passion for changing lives has been one of our most important accomplishments,” the company said.
 
— Developed a strong management team. Because the company has been successful at retaining its managers, Credit Acceptance highlighted that they become stronger each year as they gain experience with the business. Credit Acceptance’s senior management team, consisting of 29 individuals, averages 16 years of experience with the company. “While we have added talent selectively over the past few years, the experience of our team is a key advantage,” the company said. “Our success in growing the business while simultaneously improving our returns on capital could not have occurred without the dedication and energy of this talented group.”
 
Roberts closed his letter by mentioning Credit Acceptance has now been working remotely for the past 10 weeks, crediting chief information officer Noah Kotch and the company’s IT for putting the necessary measures in place.
 
“I am very proud of how our team members have responded to the challenges created by this crisis,” Roberts wrote. “Many of our team members have children who are home from school not to mention having to deal with many other distractions caused by this crisis and yet they have consistently made their work responsibilities a priority. We have continued to execute all critical operational functions at a high level and have provided outstanding service to our customers and dealers throughout this period.
 
“Our guiding principle during this time has been to ‘look out for each other,’” Roberts continued. “We have used this principle as a basis for every decision we have made so far. Our goal is to survive this crisis and move forward to accomplish the long-term goals that we have established. We expect to confront many difficulties. While I can’t predict the ultimate outcome, I can promise that these challenges will be met by a determined group of 2,012 individuals working together, looking out for each other and motivated to achieve a successful outcome. I am grateful for all of them.”