Borrowers Feel the Inflation Pinch – Your Portfolio May Feel the Pain

State National’s CPI Program Minimizes Borrower Noise and Protects Your Portfolio Better Than Any Other — Bar None. “The stock market is a device for transferring money from the impatient to the patient.” – Warren Buffett It’s human nature to want to cut and run when stock market values start dropping. When markets are on the climb, people are eager to participate, but feel real loss when unrealized gains take a dip. This reaction is understandable; you’re not alone if you question whether or not your stock market investments will yield long-term gains for you when the economy shifts and uncertainty rises. When you see your stocks or 401K dropping in value it can be easy to overreact in a way that is detrimental to your long-term interests. But we can learn from those who act impulsively — 66% of investors report regret of impulsive or emotional investing decisions! How Does This Apply to a Lender's Portfolio? What does maintaining a stock portfolio have to have to do with maintaining a strong loan portfolio? Well, when you apply Buffet’s maxim to the performance of your CPI program in today’s economic environment, the same principle applies: An economy with rapidly rising inflation and increasing debt is erosive to personal balance sheets. In this kind of environment, which is the type we are experiencing currently, it’s likely you will see increased CPI activity in your loan portfolio — but that doesn’t mean your CPI program isn’t working. In fact, it means just the opposite — your CPI program is indicating there is a fundamental shift in your loan portfolio! In more typical economic conditions, the proactive measures employed by high-quality providers keep friction to a minimum, while poorly designed or maintained portfolio protection programs can result in continuous borrower noise. However, an uptick in a well-run program's CPI activity is an early indication of external economic shifts. This reflects changes in the financial circumstances of your borrower base and indicates your loan portfolio is mirroring increased risk exposure. Consumer Budget Woes Can Mean Friction for You In 2022 alone, prices for housing, transportation, fuel/energy, and food have increased by 15-50%. In order to compensate for these higher prices, consumers are looking for ways to stretch their dollars. While some might be able to make ends meet by reducing discretionary expenses, those without sufficient discretionary income are making hard choices. One of the ways consumers may attempt to cut household expenses is by reducing their auto insurance coverage — and in some cases dropping their private insurance coverage entirely. In 2021 the Insurance Research Council reported that 1 in 8 drivers was uninsured, with some states seeing uninsured driver rates of 1 in 4 or even 1 in 3! What to Expect Auto Insurance Rates Are Rising and Will Continue to Rise Many auto insurers have already started to submit state filings for increased rates. Bankrate shares data from S&P Global Market Intelligence that shows the average rate increase filing for auto insurance is about 4.9% this year. This is a direct result of inflation and the increased cost of car ownership, including the cost to repair and replace vehicles. “In the past two years, we have seen an unprecedented increase in new and used auto prices, and lenders have reacted by increasing loan terms from 72 months to 84 months to even 96 months. Current economic actions are working to bring auto prices down, and when this happens, lenders will have auto loan portfolios with loan-to-values that are upside down, exposing them to much greater risk of loss” —John Pearson, EVP of Sales More Consumers Will Fall, or Continue to Fall, Into Debt The government’s stimulus checks have run out, as have the grace periods many financial institutions implemented at the beginning of the pandemic. Nearly a quarter of American households report no emergency savings. At the same time, many individuals have returned to work and are again bearing the costs of gas, transportation, childcare, and time needed to go into the office. Prices will continue to rise and as a result of this 43% of American consumers expect to add to their debt in the second half of the year. A Continued Increase in Uninsured Borrowers With the state of our economy, an increasing number of consumers are actively choosing to reduce insurance coverage and will likely continue to make difficult financial choices over the coming months. This makes portfolio protection with robust tracking and proactive verification more necessary now than ever. When these measures are combined with a comprehensive multichannel notification system that reaches uninsured or underinsured borrowers early, and an insurance program that provides them with coverage, you can ensure both your loan portfolio and your borrowers will be protected. Maintaining Your Competitive Edge During Auto Industry Inflation Practical Next Steps Under these conditions, the comprehensive tracking and protection offered by State National provides greater benefit than ever, because the services we provide allow lenders to address borrower payment issues proactively. Tracking also gives you an early warning that a borrower’s credit may be slipping, which can be an early indicator of a borrower in distress. This gives you an opportunity to reach out and help them by offering additional support and guidance. For borrowers who choose to reduce their private coverage or let their policy lapse, State National provides increased communication and activity on your behalf and, if necessary, allows you to insure their loans to protect your financial institution. Yet, State National’s comprehensive, proactive verification leaves your larger, compliant borrower population undisturbed. High-Quality Protection Safeguards Everyone And it’s not just uninsured or underinsured borrowers who are protected — these comprehensive measures serve to protect both those who are compliant and non-compliant, as well as your customer base as a whole. All of your customers benefit when your institution keeps losses to a minimum and protects insured borrowers from the consequence of uninsured ones — because when lenders have to increase their interest rates to cover the increasing charge-offs for uninsured borrowers, all borrowers pay more. Rising interest rates also make the lender less competitive in the marketplace and fewer loans means less interest income to offset losses. At low levels, this isn’t an issue, but in high-loss environments it can create a downward spiral, where fewer loans lead to higher interest rates, which leads to fewer loans… How State National Reduces Borrower Noise Why a Program With State National Is the Smart Choice InsurTrak: Fully Transparent and Immediate Access to Real-Time Data – InsurTrak is the industry’s only system built from scratch specifically for CPI. It’s your single sign-on, real-time source of truth for insurance tracking, claims, and reporting, resulting in maximum ease, speed, and transparency. Your loan portfolio data is at your fingertips, accessible instantly, all in one place. Additionally, you can access borrower phone call recordings and check statuses directly on InsurTrak, 24/7. Flawless EDI Verification – State National has always been a leader in EDI verification. We currently receive EDI auto transactions from over 650 insurance carriers directly or through trading partners. We can integrate with any insurer using the EDI exchange, either directly or through a third party. We verify over 70% of loans using EDI, and we make it a priority to ensure this functionality always runs smoothly, with no glitches, errors, or downtime. Comprehensive Web-Based Robotic Automated Processing (WRAP) – Our AI-based WRAP process saves your financial institution money and your employees time. WRAP uses custom-programmed software bots and machine learning to automatically extract borrowers’ insurance information and update it in InsurTrak — without any human effort or intervention. All uninsured new loans and policy cancellations also go through WRAP to find valid insurance before any notifications are ever sent to a borrower. This revolutionary AI automation means increased speed and accuracy and a dramatic reduction in borrower noise. A Truly Interactive Text Messaging Program – In addition to our other various notification methods, custom two-way texting is another platform for reaching your borrowers. While other CPI providers may offer a limited text solution or hand you off to another company, we are the only one in the industry who truly takes the work out of your hands by setting up and running the program on your behalf. Borrowers can always upload their insurance online from their mobile devices, or simply respond to the text with an image of their insurance information. Our texting program is highly secure and fully compliant with all regulations, and there is no extra cost to you, now or later. QR Codes – This notification feature makes it even more convenient for borrowers to respond. Now on all paper notices mailed to borrowers, personalized QR codes embedded with the recipient’s account details take them straight to MyLoanInsurance.com where they can view an educational video customized to their specific situation and easily remedy any impairment. In addition, lender-specific QR codes are also available that go directly to your branded MyLoanInsurance.com site. These can be placed on your website, loan closing paperwork, or anywhere you want to remind borrowers they need to send in their insurance information. More Claim Dollars, Delivered Faster – Our claims process is quick and painless because we are the insurance carrier. No paperwork is required for most claims, and we pay 20% more in claims than our competitors, with the fastest turn time in the industry. Our exclusive InstaClaim technology processes and pays some claim types automatically, in under 10 seconds. Simply put: No other provider has the ability to offer this kind of speed and ease. Backed By Parent Company Markel – Both State National and Markel have been proudly rated “A” (Excellent) by AM Best for many decades and are regarded as industry leaders. Because State National owns all aspects of service delivery for portfolio protection, a program with us delivers the best of both worlds — the specialized, personalized, relationship-driven service and leading-edge innovation that has been our hallmark for 50 years, plus the well-capitalized backing of a $55 billion Fortune 500 company. Our combined tenure, strength, and expertise translates to unmatched peace of mind and security for our partners. State National has pioneered a culture of continuous improvement for the past half century. Our unwavering commitment to investment in technology and service delivery helps ensure we have the ability to best serve our partners in both good times and challenging times, and we can help your business weather any economic storm. “The key to everything is patience. You get the chicken by hatching the egg, not by smashing it.” – Arnold H. Glasgow So remember — when times seem uncertain and it’s tempting to make short-term decisions that won’t pay off in the long run, the best thing you can do to keep your loan portfolio’s collateral and borrowers protected is to stay the course and think big picture. Keep in mind that all providers must deal with the same economic factors; those offering less-specialized, lower-quality programs not only won’t escape today’s inflationary effects, they’ll be hit even harder by them — which means so will your financial institution. Protect your loan collateral and your borrowers in the smartest and most thorough way possible by maintaining a reliable, transparent CPI program with the only provider who has specialized in guiding lenders through times of economic volatility for half a century — State National Companies. Have a question? We are here to help!

Using Change To Accelerate Innovation and Drive Success

Tracking Alone Is Not Enough

The Difference Is in the Details: State National’s Dedicated & Proactive Relationship Service Model

Now, more than ever, it is critical to protect your auto loan portfolio with GAP Vehicle values have been at historic highs for the past year If you considered purchasing a vehicle this summer, you likely experienced some degree of sticker shock. New and used vehicle prices skyrocketed earlier in 2021 and are only now showing signs of a slight slowdown. How did we get to the point where Edmunds.com reported the average trade-in value of used vehicles was up 75.6% Year-Over-Year (YOY) in June? Simply stated, it all began last year. The manufacturing shutdowns of early 2020 left dealers with low inventory levels as shelter-in-place orders lifted and consumers, armed with stimulus funds and a desire to spend, went auto shopping in droves. The resulting low dealer inventories meant that would-be new car buyers were often forced to consider used vehicle options instead. Both new and used vehicles prices started rising in response to this unusual surge in demand. Despite seeing some stabilization of vehicle pricing in late 2020, things took a turn for the worse this year due to the global shortage of microchips. According to TrueCar, a Consumer Reports partner, there still remains an inadequate allocation of microchips for automobile manufacturers, exacerbating the inventory shortages that began in 2020. With inventory down as much as 50% in some areas, willing and able consumers are paying significantly more, with 20% of all new car purchases in May 2021 transacting at amounts above MSRP. This phenomenon has not been limited to new car purchases only — CNBC shared earlier this month that the average price of a used vehicle was up 21% YOY with a 10% increase from Q1 2021 to Q2 2021. What does the future hold for car values? July witnessed a slight reduction in the rate at which vehicle prices were increasing YOY. However, Carvana’s CEO, Ernie Garcia, warns that the cost of used cars will not normalize until manufacturers can produce inventory at pre-2020 levels. Supply chain challenges are likely to cause “some lasting” impact on used car prices, said Garcia on an August 6th CNBC’s Squawk Box. Black Book, in their 2021 Vehicle Depreciation Report, paints a slightly less optimistic picture, projecting “residual forecasts to return to pre-COVID 19 valuation levels in 3 years.” How will this valuation normalization impact lending portfolios? For a variety of reasons, many consumers found themselves paying in excess of MSRP or NADA for a vehicle over the past 18 months. This reality will not change overnight — it will take the automobile manufacturers replenishing and maintaining inventory levels on a consistent basis for prices to normalize. Whether that be in 2022, or in 3 years as predicted by Black Book, the reset of vehicle valuations has the potential to negatively impact your auto loan portfolio. Black Book’s annual vehicle depreciation rates averaged approximately 13% for each of the 9 years prior to 2020, when it dropped to just 2%. As vehicle valuations fall back in line with more historic depreciation models, loans already on the books as well as loans written through the remainder of 2021 will reflect inflated sales prices. In the event of a future theft or total loss at a time when vehicle values are back to pre-COVID-19 levels, primary carrier Actual Cash Value (ACV) settlements will result in unprecedented deficiency balances. And that is where GAP can help. Essential protection for you and your borrowers GAP has always been an important risk management tool. However, in today’s economy when vehicles are still selling above MSRP or NADA, it is especially important to lenders and borrowers alike for collateral to be protected against the changes in valuation expected over the next several years. Private Passenger Auto carriers settle total loss claims based on the ACV of the vehicle immediately prior to the loss, regardless of the original sales price. Inflated sales prices mean inflated loan balances on the date of loss, resulting in increased deficiency balances — the exact thing GAP is designed to protect. Not only will your potential charge-offs be reduced with GAP protecting your collateral, but your borrowers will also be better positioned to finance their replacement vehicle without the burden of having to satisfy a large deficiency balance on their original loan. How State National's GAP is different The State National GAP product provides unparalleled flexibility in the marketplace, primarily given our unique position as the direct sales force, underwriter, and program administrator. With options to protect amounts up to 150% of MSRP or NADA, you won’t need to worry about future deficiency balances resulting from today’s extraordinary market conditions. Additionally, you can rest easy knowing your pricing is not inflated to cover agent costs or, worse yet, that you will be part of an across-the-board rate adjustment because another lender’s program is not performing as expected. If you’re looking for the most efficient GAP claim submission process (it’s true — we really do not require any supporting documentation to initiate a GAP deficiency balance claim) and fastest claim settlement time (2 to 3 days, on average), isn’t it time you consider State National for your GAP Program? Contact us today to start protecting your consumer loan portfolio from the effects of inflated auto prices — driving a more positive experience for you and your borrowers. Contact us today to receive more information about GAP from State National. Francine Gagliano, State National Director of Client Services 817-265-2000 x1247 or fgagliano@statenational.com