Market Overview

EFG Predicts Increased Focus on F&I and Service Drive to Foster Customer Loyalty

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- Rising Vehicle Prices, Manufacturer Incentives, Strained Profit
Margins, Consumer Communication, and Growth Potential in Auto Finance
Make the List -

EFG Companies, the innovator behind the award-winning Hyundai
Assurance program, announced its 2018 predictions and recommendations
for the retail automotive and powersports F&I markets today. These
insights, formed through thousands of conversations with the nation's
leading dealership principals and lenders, reflect another year of
cautiousness on the horizon. However, there are many options for
dealers, lenders, and agents to successfully navigate an uncertain
business climate for a prosperous 2018. For more information, visit
http://bit.ly/Intel2018.

"2017 has been one eventful year. We've seen three rate increases so far
from the Federal Reserve. The CFPB's influence has been curtailed by
Congress and the current Administration. While new unit sales have
flattened, the effects of the hurricanes in Southeast Texas, Florida and
Puerto Rico - and the California wildfires - loom large," said John
Pappanastos, President and CEO, EFG Companies. "For the retail
automotive and powersports industries, we're still seeing a holding
pattern. 2018 sales volumes are expected to be roughly the same as 2017,
barring any significant economic fluctuations. The challenges and
opportunities ahead will largely revolve around customer retention,
building up the service bay, and leveraging changing consumer trends to
foster market differentiation."

Utilizing its 40-year history in the F&I industry, EFG Companies offers
the following predictions for 2017:

Marginal Uptick in Unit Sales, Strained Profit Margins, and Increased
Focus on Customer Retention for Retail Automotive

Manufacturers learned a big lesson in 2017. Today's consumers want SUVs
and CUVs. As manufacturers update their vehicle line-up, we should see
slightly more new unit sales in 2018 than we did in 2017, but not
significantly. The trend of rising vehicle prices will only continue.
Combined with manufacturer incentives, dealer front-end margins will
continue to be strained. As such, dealers will increase their focus on
their F&I operations from both an up-front profit and a customer
retention standpoint. Expect dealers to retool their product menus and
F&I pay plans based on products that encourage consumers to return for
service. In addition, dealers will put an even greater emphasis on their
service drive to better utilize their time with the customer and enhance
their ongoing communication. In this same vein of consumer
communication, we're seeing more dealers becoming open to listing F&I
product benefits online as a way to speed up the F&I process, increase
consumer interest in available benefits, and increase product
penetration rates.

John Stephens, Executive Vice President, Dealer Services

Acquisitions and Engagement Will Be the Name of the Game for Agents

Going into a second year of relatively flat unit sales, agents are
already becoming much more engaged with dealerships on a day-to-day
basis, and are focusing more of their efforts on increasing their
dealership client base. In their acquisitions efforts, agents will be
much more circumspect and selective when it comes to approaching
dealers. There will be an increased competition among agents for those
higher-volume dealerships, which will force agents to differentiate
themselves based on more than just products. Strategic agents will take
a more engaged approach to both servicing and acquiring clients,
identifying needs, providing training, product menu updates, pay plan
guidance, recruiting support, pre-owned inventory analysis, and even
providing compliance services. This holistic approach will separate the
high performing agents from their peers.

Adam Ouart, Vice President, Agency Services

Growth Potential for Lenders Who Leverage Today's Economic and
Consumer Trends

Even with rising delinquencies and flat vehicle sales, economic
indicators continue to be strong. As more consumers delayed making their
next vehicle purchase in 2017, the pent-up demand will begin to unfurl
in 2018 – especially as SUVs hit the market. With this in mind, there is
growth potential for the auto lending environment in 2018. To get in
front of more consumers, we'll see lenders increasing their
direct-to-consumer auto lending marketing spend. They'll also shore up
their dealership relationships by buying more aggressively when
possible, scheduling ongoing in-dealership meetings at least once a
week, and reviewing profit metrics with dealership leadership once a
quarter. In addition, lenders will evaluate other solutions to both
protect their loan portfolios and enhance their market differentiation
for consumer protection products.

Brien Joyce, Vice President, Specialty Services

Growth Challenges Continue for Powersports Dealers

The powersports industry saw similar challenges as the automotive
industry in 2017. Unit volume did not hit projections and we're seeing
more dealers sell inventory at or below costs just to keep it moving. To
recoup this lost profit margin in 2018, dealers will be evaluating how
to drive as much traffic their way as possible, and how to increase
customer retention. We will see more powersports dealers use F&I
products to meet both goals. They'll focus their product menus and pay
plans around those products that differentiate them in their given
market and encourage repeat business in the service bay. In addition,
consumer demand for pre-owned inventory will continue to be higher than
demand for new, as consumers are still wary of an uncertain economy. For
this reason, dealers will utilize strategic CPO programs to
differentiate themselves and increase their back-end profit.

Glenice Wilder, Vice President, Powersports

More Proactive Reinsurance Positions Ahead

Hurricanes Harvey, Irma and Maria, along with the California fires, have
taken a toll on dealer reinsurance positions. Right now, dealers are
still working to understand how much these catastrophic events
undermined their positions. In 2018, they will need to apply the lessons
learned from 2017 to rebuild and better insulate their positions for the
future. One of the biggest take-aways from 2017 is that when a dealer
decides to take part in a reinsurance position, they are acting as an
insurance provider. Yes, reinsurance is a wealth management tool, but
the key word in reinsurance is "insurance." With reinsurance, dealers
are insuring that they will cover the risk of an adverse event. In the
case of GAP, they are insuring against a total loss. Unlike service
contracts, GAP losses are impacted by both single event losses, such as
vehicle theft, and catastrophic losses, wherein one event i.e., "Harvey"
results in a significant number of total losses. With reinsurance
companies, there will always be claims and dealers need to be prepared
to take losses, including catastrophic losses, based on the makeup of
their portfolio. As far as the immediate need of recouping losses from
2017 GAP claims, dealers need to take a long-term approach. If dealers
try to recover the entire amount in 2018, the necessary price increase
for product sales may price them out of the market. A better approach
will be to plan to recover the amount lost over a span of three to five
years, so as to stay competitive with product pricing. In addition,
dealers need to re-evaluate how they buffer against future catastrophic
events. The best way to do this is to understand your market and the
likelihood of a catastrophic event, then price F&I products accordingly.
For example, dealers operating in areas where hurricanes occur
frequently should have higher F&I prices than those who operate in areas
where there is little chance for a natural disaster.

Rick Christensen, Vice President, Product Development

About EFG Companies

EFG Companies drives the industry's highest-reported compliant F&I
profitability through its distinct engagement model in which the company
operates as an extension of the dealer's management team. EFG addresses
total dealership performance, and its client satisfaction Net Promoter
score is higher than national corporate leaders such as Southwest
Airlines, USAA Banking and Finance, and Nordstrom. Learn more about EFG
at: www.efgcompanies.com.

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