Exhibit

During 2018, we completed our 26^th full year as a public company. Over those 26 years, GAAP net income per share (diluted) has grown at a compounded annual rate of 21.2%, with an average annual return on equity of 23.2%. We have done even better over the last 17 years: GAAP net income per share (diluted) has grown at a compounded annual rate of 26.1%, with an average annual return on equity of 28.3%.



	GAAP net income per share (diluted)			Year-to-year change in GAAP net income per share		Return on equity¹
1992	$	0.20				24.1	%
1993	$	0.29		45.0	%	25.6	%
1994	$	0.49		69.0	%	31.5	%
1995	$	0.68		38.8	%	21.5	%
1996	$	0.89		30.9	%	18.7	%
1997	$	0.03		-96.6	%	0.6	%
1998	$	0.53		1,666.7	%	9.5	%
1999	$	(0.27	)	-150.9	%	-3.9	%
2000	$	0.51		—		9.1	%
2001	$	0.57		11.8	%	9.1	%
2002	$	0.69		21.1	%	10.1	%
2003	$	0.57		-17.4	%	7.5	%
2004	$	1.40		145.6	%	18.4	%
2005	$	1.85		32.1	%	21.8	%
2006	$	1.66		-10.3	%	20.2	%
2007	$	1.76		6.0	%	23.1	%
2008	$	2.16		22.7	%	22.2	%
2009	$	4.62		113.9	%	35.6	%
2010	$	5.67		22.7	%	34.8	%
2011	$	7.07		24.7	%	40.0	%
2012	$	8.58		21.4	%	37.8	%
2013	$	10.54		22.8	%	38.0	%
2014	$	11.92		13.1	%	37.0	%
2015	$	14.28		19.8	%	35.4	%
2016	$	16.31		14.2	%	31.1	%
2017	$	24.04		47.4	%	36.9	%
2018	$	29.39		22.3	%	31.7	%

Compound annual growth rate 1992–2018				21.2	%

Credit Acceptance works with car dealers nationwide to enable them to sell vehicles to consumers who wish to finance their vehicle purchase. We allow the dealer to finance any customer, regardless of his or her credit history. This gives the dealer the ability to sell a vehicle to a customer that, without us, the dealer would have to turn away. The incremental sale creates incremental profit for the dealer, and the potential for incremental repeat and referral business.

Our company, like most of our competitors, is an indirect auto finance company, which means the financing contract is originated by the auto dealer and immediately assigned to us in exchange for compensation. The transaction between the dealer and the consumer is technically not a loan, but instead something called a retail installment contract. However, for simplicity and to conform to the language we use in our disclosures, I will refer in this letter to retail installment contracts as loans and to indirect auto finance companies as lenders.

The auto finance market is large and fragmented, with over $1.2 trillion in outstanding balances as of December 31, 2018. We compete with banks, credit unions, auto finance companies affiliated with auto manufacturers, and independent auto finance companies. Our approach to the market is unique for two reasons. First, every customer, regardless of credit history, is offered an opportunity to purchase a vehicle. Second, for most of the vehicle sales we finance, the dealer shares in the cash flows from the loan. (Dealers are compensated by receiving 80% of all net collections throughout the life of a loan.) This is a critical element of our success as it creates an alignment of interests. The dealer benefits if the loan is repaid and the customer’s credit is reestablished. Therefore, the dealer has an incentive to sell a vehicle at a price the customer can afford and a vehicle that will last the term of the loan. In addition, the dealer has an incentive to help the customer after the sale if there are issues with the vehicle.

Credit Acceptance was founded in 1972 by our former Chairman of the Board, Don Foss. From 1972 through the early 1990s, there were very few companies attempting to serve the market segment that Don had identified. As a result, during this period we had an almost unlimited opportunity to write new business at very high levels of profitability. Following our initial public stock offering in June of 1992, our business grew rapidly. Over the next four years, earnings per share (diluted) grew at a compounded annual rate of 45.2% per year, from $0.20 in 1992 to $0.89 in 1996.

But our reported results during this period did not reflect the true economic performance of our business, which was rapidly deteriorating. Following our initial public offering, we began to see a dramatic increase in competition, in part inspired by our prior success. In 1993 and 1994, the loans we were originating were still very profitable. But by the end of 1995, this was no longer true. Because we did not have the right tools in place to monitor the profitability of the loans we were originating, we continued to grow rapidly in 1995, 1996 and most of 1997.

During the third quarter of 1997, we installed a new system that provided us with the data we needed to begin forecasting the future cash flows expected from each loan. While our initial efforts at forecasting were not perfect, obtaining this new capability was a key milestone in our history. But before we could take full advantage of it, we first had to repair the damage caused by our prior mistakes. In the third quarter of 1997, we recorded a $60.0 million charge to reflect our revised estimate of the cash flows our loan portfolio would generate. The charge caused a loss of $27.7 million for the quarter. I and Doug Busk, who is still a key member of our leadership team, traveled all over the country meeting with lenders and rating agencies to explain what had occurred and plead for mercy. It was a humbling experience and one I promised myself I would not repeat. While our lenders agreed to waive our covenant violations, it was clear the period of easily accessible capital had come to an end. Our share price, which had peaked at $28.75 per share in October of 1995, had fallen to a low of $3.00 per share in October of 1997.

We spent much of 1998 and 1999 reducing our debt balances and using the insights we had learned from our new system to invest our existing capital in loans that would be more profitable. We eliminated unprofitable dealer relationships and began to establish advance rates on new loans that reflected the cash flows we were forecasting from those loans. (An advance is the amount paid to dealers when loans are originated.) We made steady progress, greatly assisted by the fact that many of our competitors had made even worse mistakes and were forced to exit our market entirely.

Our mistakes from the past, however, were not yet behind us, and in 1999 we recorded an additional $60.8 million charge reflecting even lower estimated cash flows for loans originated in 1995–1997 than we had recorded previously. This charge caused a loss for the third quarter of 1999 of $33.6 million and a loss of $12.6 million for the year, a result which would have been worse if not for a $10.0 million after-tax gain from the sale of a credit reporting business we had acquired in 1996. The loss made 1999 the only unprofitable year in our history. While this disappointing result made our job of obtaining additional capital more difficult, this obstacle was less important than it had been in 1997. We had repaid a significant portion of our debt and were more focused on investing the capital we did have at a higher rate of return.

Another important milestone occurred in 1999. Tom Tryforos joined our Board. My relationship with Tom goes back to the early 1990s. Tom invested in Credit Acceptance shortly after our initial public offering and shrewdly sold his investment as competition in our market began to intensify. He was able to exit with a nice profit on his investment. I spent a fair amount of time in investor relations during this period and, although I was inexperienced, I was smart enough to recognize that Tom was different from any other investor I had met. He had an annoying knack of asking questions that I realized were of critical importance but that I had never thought to ask myself. I lost contact with him for a few years after he sold his position, but he resurfaced again in 1997 after our share price had dropped. He had decided to reinvest, and I began speaking to him on a regular basis. I took the opportunity to learn as much as I could from Tom, and his influence made a significant difference not only in my career but also in the Company’s success in the years that followed. The Company’s relationship with Tom was formalized in July of 1999, when he joined our Board. Not only was Tom still asking all the right questions, but he was now helping us find the answers. One of the first changes he made as a Board member was to establish a minimum required return on capital. The message was clear: If we couldn’t earn more than our cost of capital, we needed to give that capital back to shareholders. This message got our attention, since at the time we weren’t meeting his minimum requirement.

In 2000, we continued to focus on improving our return on capital. By the end of 2000, we had undergone a dramatic transformation. From 1992 until 1997, the amount of capital we required increased at a remarkable rate. At year-end 1992, we had had $42 million in capital invested. By year-end 1997, that number had grown to $641 million. Over that same period, we had gone from writing loans that produced returns on capital in excess of 20% to writing those that barely earned a return at all. By the end of 2000, invested capital had declined to $414 million, but for the first time in many years, the return on capital of the loans we originated during the year exceeded our cost of capital. By only investing our capital when we could earn an appropriate return, we went from consuming capital rapidly to generating excess capital, which we used to continue repaying outstanding debt. After showing a loss of $12.6 million in 1999, or $0.27 per share (diluted), we reported earnings for 2000 of $22.5 million, or $0.51 a share (diluted).

With Tom’s help, we found another important way to use our capital: We began to repurchase our shares. From August of 1999, when our share repurchase program began, through the end of 2000, we repurchased over 3.8 million shares of stock at an average price of $5.24. Based on our share price today, the shares we repurchased for just over $20 million during that period are now worth over $1.7 billion. Tom earned his Board fees that year, which at the time were $1,500 per quarter.

In 2001, we began to grow our loan volumes again. By this time, we had transformed our sales force from a small team located at our headquarters to a much larger, field-based team located in the markets we served. During that year, we implemented our Internet-based loan origination system, called CAPS, which enabled us to greatly simplify our program and make it easier for dealers to use. CAPS allowed us to implement even more precise pricing based on the individual characteristics of each application we received, and allowed us to provide offers to the dealer much faster. Perhaps most important, CAPS made it easier for us to experiment, and we began piloting different requirements for new loans, including writing longer-term loans than we had previously. In 2001, we grew loans receivable by 21.8% and we reported earnings of $24.7 million, or $0.57 a share.

I was named CEO in January of 2002. Over the next 17 years, GAAP net income per share (diluted) increased at a compounded annual rate of 26.1%. We faced challenges during this period, many of which related to the impact of competitive and economic cycles. I will discuss these cycles in more detail in the next section. But over the last 17 years, we succeeded in spite of the challenges. We continued to focus on investing our capital wisely, and consistently earned a return on capital well above its cost, even in years when our loans performed worse than we expected. We gave even more attention to our core business, exiting several non-core businesses that we had started prior to 2002. We continued to use excess capital to repurchase stock, buying approximately 29.9 million shares from 2001 to 2018. But mostly, we focused on applying the many lessons we had learned over the years to improve our product and our culture. Today, we have a product that provides enormous benefits to our dealers and our customers, and a culture that attracts talented people to our company and enables them to perform to their potential. Our work environment has been recognized for each of the last six years by Fortune magazine in its annual list of 100 Best Companies to Work For.

We have gone through several cycles of competition. From 1972 through the early 1990s, we had very little competition. This changed following our initial public offering in 1992, as I described earlier. In late 1997, competition retreated when capital became unavailable. But competition started to return in 2003. The environment became increasingly difficult as it became easier for competitors to obtain capital. The cycle came to a halt toward the end of 2007, when capital markets tightened as result of the global financial crisis.

In contrast to the poor results we delivered during the first cycle, we produced very good ones during the 2003–2007 cycle. We had improved many important aspects of our business between the first and second cycles, including our ability to predict loan performance, deploy risk-adjusted pricing, monitor loan performance and execute key functions consistently.

As a result of the increasingly difficult competitive environment, and our reluctance to increase the money we advanced to dealers for the loans (since larger advances would have diminished our margin of safety), volume per dealer declined 41.7% from 2003 to 2007. In order to grow, we focused on increasing the number of active dealers. This strategy was successful—the number of active dealers in 2007 was triple the number in 2003, and GAAP net income per share (diluted) more than tripled, to $1.76 in 2007 from $0.57 in 2003.

The cycle ended in late 2007. In contrast to the first cycle, which ended when capital providers understandably lost confidence in the industry as a result of poor financial results, this cycle ended for reasons that had little to do with anything that occurred in our industry. Instead, this cycle ended as a result of the global financial crisis triggered by the collapse of the housing market. Capital again began to retreat from our industry, and many of our competitors either exited the market entirely or dramatically reduced originations. Competition began to return to our market in 2010, but the environment nevertheless remained favorable in that year and in 2011. As a result, we made considerable progress during the 2007–2011 period. The following table compares the results from each of the two periods:

Although we had success during both periods, GAAP net income per share grew more rapidly during the 2007–2011 period. While the number of active dealers grew more slowly than it had in 2003–2007, the lack of significant competition allowed us to reduce advance rates and dramatically improve per unit profitability. Our performance during this period was even more impressive when you consider it occurred in a difficult economic environment and during a period when we were capital-constrained because of the disruption the global financial crisis had caused in the capital markets.

The favorable competitive environment began to change rapidly starting in 2012 as capital returned to our market. By 2013, the number of vehicles financed for customers with subprime credit scores—one indicator of the degree of competition—had surpassed the comparable number in 2007, the last year of the prior cycle. Since 2013, the environment has continued to be challenging.

As we did in the 2003–2007 cycle, we have again focused on growing our profits by growing the number of active dealers. This strategy has become more difficult with time due to the challenge of increasing a larger active dealer base at the same rate. When the last cycle started, in 2003, we had only 950 active dealers. By 2011, the number had grown to 3,998. Despite the much larger dealer base, our strategy has again produced impressive growth in GAAP net income per share, although it has been slower in the 2011–2018 period than in the prior two periods. The table below updates the previous table with the results for 2011–2018:



	Active dealers				GAAP net income per share (diluted)
Period	Start of period	End of period	Compound annual growth rate		Start of period		End of period		Compound annual growth rate
2003–2007	950	2,827	31.3	%	$	0.57	$	1.76	32.6	%
2007–2011	2,827	3,998	9.1	%	$	1.76	$	7.07	41.6	%
2011–2018	3,998	12,528	17.7	%	$	7.07	$	29.39	22.6	%

The current cycle has now lasted longer than either of the prior two cycles. As of the date of this letter, it is hard to see anything on the horizon that will cause this current cycle to end. The longer the cycle continues and the larger our active dealer base becomes, the more difficult it will be to grow active dealers. This is seen in our results for the last two years, when the number of active dealers grew at the single-digit rates of 9.6% in 2017 and 8.5% in 2018. I discuss this challenge in more detail in a later section.

From 1972 through 1991, the United States experienced two significant increases in the unemployment rate. The first occurred in 1974–1975 and the second in 1980–1982. However, the information we accumulated during these periods was largely anecdotal, as we did not capture loan performance data during this early stage of the Company’s development.

We began to capture loan performance data in 1991 (although we did not have the tools to adequately assess this data until 1997). The period from 1991 through April of 2008 was a time of relatively stable unemployment levels. The only significant increase in unemployment rates occurred in 2001. But that was a year in which we made major changes to our origination systems and loan programs that made it harder for us to draw clear conclusions from what we observed. As a result, prior to the most recent economic downturn, we had only a limited ability to predict the impact of sharply rising unemployment rates on our loan portfolio. One conclusion we did draw (from the limited information we had accumulated for the period 1972 through April 2008) was that our loans would likely perform better than many outside observers would expect. However, that conclusion was far from certain.

The most recent financial crisis began to unfold in 2007. Adding to the challenge was the fact that 2007 was also a period of intense competition within our industry. As I discuss in more detail in a later section, loans originated during highly competitive periods tend to perform worse. From April 2008 through October 2009, the national unemployment rate increased from 5.0% to 10.0%. This combination of events—intense competition, followed by severe economic deterioration—provided a perfect test of our business model, one that would confirm either our views or the views of skeptics. We believe that our financial results during the financial crisis demonstrate that we passed the test with flying colors. GAAP net income per share (diluted) rose 22.7% in 2008 and 113.9% in 2009.

We did experience deterioration in our loan performance, but it was modest. In contrast, many of our competitors experienced a much greater fall-off in their loan performance and reported poor financial results. Because our competitors generally target low levels of per loan profitability and use debt much more extensively than we do, any adverse change in the economic environment is likely to have a much more damaging impact on their results than on ours.

The capital markets became less accessible as 2008 progressed, however. As a result, we began to slow originations growth through pricing changes which began in March and continued throughout the remainder of 2008. During 2009, we continued to slow originations based on the capital we had available. We originated $619.4 million of new loans, 21.2% less than in 2008. While we would have preferred a higher level of originations, we did not have access to the new capital we would have required on terms that we found acceptable.

Our access to capital improved at the end of 2009, and since that time capital has been readily available. However, we believe we are well positioned should capital become more difficult to obtain. Since 2009, we have taken several steps to improve our position: We have (1) completed five offerings of senior notes, three series of which are currently outstanding and which provide us with $950.0 million of long-term debt capital; (2) lengthened the terms of our asset-backed financings; (3) increased our revolving credit facilities from $540.0 million at the end of 2009 to $1.3 billion currently; and (4) lengthened the terms of these facilities so the earliest date they mature is April 2020. We maintain a considerable amount of available borrowing capacity under our revolving credit facilities at all times: As of the date of this letter, we have $1.2 billion of such unused capacity.

Lengthening the term of our debt facilities, issuing higher-cost long-term debt and keeping available a significant portion of our revolving credit facilities increase our funding costs and reduce short-term profitability. However, these steps greatly improve our ability to fund new loans should capital markets become inaccessible. While we were able to produce outstanding results during the financial crisis, we believe the steps we have taken will allow us to do even better should a similar crisis occur in the future.

While accessing capital will at times be challenging, we believe we offer our lenders an extremely secure investment. The combination of our high returns on capital, conservative use of debt and unique risk-sharing arrangement with our dealers means our lenders enjoy a large margin of safety. We have a long, public track record of predicting the performance of our loans with reasonable precision. (I will discuss that record in detail in a later section.) Importantly, because of their large margin of safety, our lenders do not require anything close to our historical level of forecasting precision in order for their loans to us to remain secure. Simply put, we need to recover only slightly more than half of our forecasted cash flows in order for our lenders to be repaid 100% of their loans to us, including interest.

Our reported financial results include both GAAP and adjusted numbers. The adjusted results reflect the following: (1) adjustments to modify our GAAP-based finance charge revenue (“floating yield adjustment”), (2) adjustments to normalize tax rates and eliminate the one-time impact of the 2017 Tax Cuts and Jobs Act (“income tax adjustment”) and (3) adjustments to modify the GAAP treatment of a debt refinancing (“senior notes adjustment”). All three of these are explained below. In addition, the adjusted results reflect (1) adjustments to make our program fee revenue comparable across time periods and (2) adjustments to eliminate non-recurring expenses and discontinued operations. These last two categories of adjustments are combined in the next two tables under the heading “other adjustments.” They have had no impact on results since 2012 and are explained in prior-year letters.

The purpose of this adjustment is to modify the calculation of our GAAP-based finance charge revenue so that both favorable and unfavorable changes in expected cash flows from loans receivable are treated consistently. To make the adjustment understandable, we must first explain how GAAP requires us to account for finance charge revenue, which is our primary revenue source.

The finance charge revenue we will recognize over the life of the loan equals the cash we collect from the loan (i.e., repayments by the consumer), less the amounts we pay to the dealer (advance + dealer holdback). In other words, the finance charge revenue we will recognize over the life of the loan equals the cash inflows from the loan less the cash outflows to acquire the loan. This amount, plus a modest amount of revenue from other sources, less our operating expenses, interest and taxes, is the sum that will ultimately be paid to shareholders or reinvested in new assets.

Under our current GAAP accounting methodology, finance charge revenue is recognized on a level-yield basis. That is, the amount of loan revenue recognized in a given period, divided by the loan asset, is a constant percentage. Recognizing loan revenue on a level-yield basis is reasonable, conforms to industry practice, and matches the economics of the business.

Where GAAP diverges from economic reality is in the way it deals with changes in expected cash flows. The expected cash flows from a loan portfolio are not known with certainty. Instead, they are estimated. From an economic standpoint, if forecasted cash flows from one loan pool increase by $1,000 and forecasted cash flows from another loan pool decrease by $1,000, no change in our shareholders’ economic position has occurred.¹ GAAP, however, requires the Company to record the $1,000 decrease as an expense in the current period (recorded as a provision for credit losses²), and to record the $1,000 favorable change as income over the remaining life of the loan pool.

The floating yield adjustment reverses the GAAP-caused distortion by treating both favorable and unfavorable changes in expected cash flows consistently. That is, both types of changes are treated as adjustments to our loan yield over time. In addition, the floating yield adjustment has the benefit of simplifying our adjusted financial results by eliminating the provision for credit losses, which is both volatile and not well understood by analysts who cover our stock.

The purpose of this adjustment is to report adjusted results using a 37% income tax rate for 2001–2017 (37% was our long-term effective tax rate for those years), and a 23% income tax rate for 2018. For most years, the required adjustment is modest. However, in 2017, our reported GAAP net income included $99.8 million attributable to a one-time benefit related to the enactment of the Tax Cuts and Jobs Act in December of 2017. As a result of the Act, which reduced our federal tax rate from 35% to 21%, we revalued our net deferred tax liability with a corresponding reduction to our income tax expense. The adjustment of $102.4 million shown in the table below for 2017 reverses the impact of the deferred tax liability revaluation and includes other adjustments necessary to record our income tax expense at 37% of our pre-tax earnings.

On January 22, 2014, we issued $300 million of 6.125% senior notes due 2021 (the “2021 notes”). On February 21, 2014, we used the net proceeds from the 2021 notes, together with borrowings under our revolving credit facilities, to redeem in full the $350 million outstanding principal amount of our 9.125% senior notes due 2017 (the “2017 notes”).

Under GAAP, the redemption of the 2017 notes was considered an extinguishment of debt. For the quarter ended March 31, 2014, our GAAP financial results included a pre-tax loss of $21.8 million on extinguishment of debt. In addition, the quarter included $1.4 million of additional interest expense caused by the one-month lag from the issuance of the 2021 notes to the redemption of the 2017 notes. These two items collectively reduced 2014 consolidated net income by $14.6 million, or $0.62 per diluted share.

Under our non-GAAP approach, we deferred the two items as debt-issuance costs, and are recognizing them ratably as interest expense over the term of the 2021 notes. The non-GAAP approach records the net benefit of the refinancing—i.e., the lower interest cost of the 2021 notes less the cost of paying off the 2017 notes early—over the period the 2021 notes will be outstanding.



($ in millions)	GAAP net income		Floating yield adjustment			Senior notes adjustment			Income tax adjustment			Other adjustments			Adjusted net income		Year-to-year change
2001	$	24.7	$	1.2		$	—		$	2.0		$	(1.1	)	$	26.8
2002	$	29.8	$	2.8		$	—		$	2.9		$	(4.5	)	$	31.0	15.7	%
2003	$	24.7	$	1.4		$	—		$	5.7		$	5.6		$	37.4	20.6	%
2004	$	57.3	$	(0.1	)	$	—		$	(1.8	)	$	(3.2	)	$	52.2	39.6	%
2005	$	72.6	$	(2.2	)	$	—		$	0.1		$	(7.3	)	$	63.2	21.1	%
2006	$	58.6	$	0.4		$	—		$	(1.7	)	$	4.4		$	61.7	-2.4	%
2007	$	54.9	$	3.6		$	—		$	(1.2	)	$	4.4		$	61.7	0.0	%
2008	$	67.2	$	13.1		$	—		$	0.4		$	2.1		$	82.8	34.2	%
2009	$	146.3	$	(19.6	)	$	—		$	(1.8	)	$	0.1		$	125.0	51.0	%
2010	$	170.1	$	0.5		$	—		$	(10.4	)	$	0.3		$	160.5	28.4	%
2011	$	188.0	$	7.1		$	—		$	(1.3	)	$	0.3		$	194.1	20.9	%
2012	$	219.7	$	—		$	—		$	(3.5	)	$	—		$	216.2	11.4	%
2013	$	253.1	$	(2.5	)	$	—		$	(2.3	)	$	—		$	248.3	14.8	%
2014	$	266.2	$	(6.0	)	$	12.5		$	(1.0	)	$	—		$	271.7	9.4	%
2015	$	299.7	$	12.9		$	(2.0	)	$	(0.8	)	$	—		$	309.8	14.0	%
2016	$	332.8	$	28.1		$	(2.1	)	$	1.8		$	—		$	360.6	16.4	%
2017	$	470.2	$	34.1		$	(2.1	)	$	(102.4	)	$	—		$	399.8	10.9	%
2018	$	574.0	$	(24.4	)	$	(2.5	)	$	7.4		$	—		$	554.5	38.7	%
Compound annual growth rate 2001–2018																	19.5	%



	GAAP net income per share (diluted)		Floating yield adjustment per share (diluted)			Senior notes adjustment per share (diluted)			Income tax adjustment per share (diluted)			Other adjustments per share (diluted)			Adjusted net income per share (diluted)		Year-to-year change
2001	$	0.57	$	0.03		$	—		$	0.05		$	(0.03	)	$	0.62
2002	$	0.69	$	0.06		$	—		$	0.07		$	(0.11	)	$	0.71	14.5	%
2003	$	0.57	$	0.03		$	—		$	0.13		$	0.13		$	0.86	21.1	%
2004	$	1.40	$	—		$	—		$	(0.04	)	$	(0.09	)	$	1.27	47.7	%
2005	$	1.85	$	(0.06	)	$	—		$	—		$	(0.18	)	$	1.61	26.8	%
2006	$	1.66	$	0.01		$	—		$	(0.05	)	$	0.13		$	1.75	8.7	%
2007	$	1.76	$	0.11		$	—		$	(0.04	)	$	0.15		$	1.98	13.1	%
2008	$	2.16	$	0.42		$	—		$	0.01		$	0.07		$	2.66	34.3	%
2009	$	4.62	$	(0.62	)	$	—		$	(0.06	)	$	0.01		$	3.95	48.5	%
2010	$	5.67	$	0.02		$	—		$	(0.35	)	$	0.01		$	5.35	35.4	%
2011	$	7.07	$	0.26		$	—		$	(0.04	)	$	0.01		$	7.30	36.4	%
2012	$	8.58	$	—		$	—		$	(0.13	)	$	—		$	8.45	15.8	%
2013	$	10.54	$	(0.11	)	$	—		$	(0.09	)	$	—		$	10.34	22.4	%
2014	$	11.92	$	(0.27	)	$	0.56		$	(0.04	)	$	—		$	12.17	17.7	%
2015	$	14.28	$	0.62		$	(0.10	)	$	(0.03	)	$	—		$	14.77	21.4	%
2016	$	16.31	$	1.37		$	(0.10	)	$	0.09		$	—		$	17.67	19.6	%
2017	$	24.04	$	1.74		$	(0.11	)	$	(5.23	)	$	—		$	20.44	15.7	%
2018	$	29.39	$	(1.25	)	$	(0.13	)	$	0.38		$	—		$	28.39	38.9	%
Compound annual growth rate 2001–2018																	25.2	%

As the second table shows, adjusted net income per share (diluted) increased 38.9% in 2018. Since 2001, adjusted net income per share (diluted) has increased at a compounded annual rate of 25.2%. While this compounded annual rate is very similar to the one for GAAP net income per share (diluted) of 26.1%, in certain years the adjustments led to significant differences between GAAP and adjusted results.

In both 2017 and 2018, adjusted net income per share was lower than GAAP net income per share. In 2017, the income tax adjustment ($5.23) and the senior notes adjustment ($0.11) reduced adjusted net income per share, while the floating yield adjustment ($1.74) had the opposite impact. A comparison of our GAAP and adjusted results in 2017 illustrates why we think adjusted results are a more accurate representation of our business performance. First, the income tax adjustment eliminated the gain related to the revaluation of our deferred tax liability described above. While the gain was real, since it reflects lower taxes we will now pay in the future, it is non-recurring and unrelated to our business performance. The senior notes adjustment ($0.11) was modest but reflects a consistent treatment for the costs associated with the early redemption of our senior notes in 2014.

The floating yield adjustment for 2017 increased adjusted net income per share (diluted) by $1.74. In my explanation above of the floating yield adjustment, I used an example where the estimated cash flows from one dealer pool increase by $1,000 and those from another pool decrease by the same amount. If this occurs, GAAP requires a provision expense to be recorded in the current period even though our economic position is unchanged.

This example is very similar to what occurred in 2017. Approximately 42.0% of our dealer pools experienced an unfavorable change in cash flow estimates during 2017, totaling $67.3 million, while the remaining 58.0% experienced a favorable change, totaling $61.7 million. The net impact of these changes was a decrease in our expected cash flows of $5.6 million. This unfavorable change represents a reduction in revenue that we expect to realize over time through cash collections on our loan portfolio. Our adjusted results record this reduction in revenue in a logical and straightforward manner—over the life of the expected cash flows at a constant yield. In contrast, our GAAP results, through the asymmetrical treatment of individual loan pools, reflect this overall unfavorable change by recording a current-period provision expense of $103.4 million.¹

In 2018, adjusted net income per share was lower than GAAP net income per share by $1.00. The senior notes adjustment ($0.13), for the same reason as in 2017, and the floating yield adjustment ($1.25), for reasons I will discuss next, reduced adjusted net income per share while the income tax adjustment ($0.38) had the opposite impact. (The income tax adjustment was necessary to adjust our tax rate to 23%, which we now estimate to be our long-term effective tax rate).

So why did the floating yield adjustment reduce adjusted net income per share in 2018 while it increased it in 2015–2017? The reason is that it’s a timing adjustment, so the cumulative impact over time will be zero. Since the floating yield adjustment increased adjusted net income in 2015–2017, it had to have the opposite impact at some point in the future. In 2018, we had a favorable change in our cash flow estimates and a GAAP provision for credit losses that was lower than it had been in the two preceding years. When that pattern occurs, GAAP results will typically be higher than adjusted results.



($ in millions)	Adjusted net income		Imputed cost of equity²			Economic Profit			Year-to-year change
2001	$	26.8	$	(30.0	)	$	(3.2	)
2002	$	31.0	$	(35.6	)	$	(4.6	)	—
2003	$	37.4	$	(34.5	)	$	2.9		—
2004	$	52.2	$	(34.4	)	$	17.8		513.8	%
2005	$	63.2	$	(34.5	)	$	28.7		61.2	%
2006	$	61.7	$	(29.6	)	$	32.1		11.8	%
2007	$	61.7	$	(27.2	)	$	34.5		7.5	%
2008	$	82.8	$	(35.8	)	$	47.0		36.2	%
2009	$	125.0	$	(45.9	)	$	79.1		68.3	%
2010	$	160.5	$	(47.8	)	$	112.7		42.5	%
2011	$	194.1	$	(51.0	)	$	143.1		27.0	%
2012	$	216.2	$	(56.6	)	$	159.6		11.5	%
2013	$	248.3	$	(75.1	)	$	173.2		8.5	%
2014	$	271.7	$	(87.5	)	$	184.2		6.4	%
2015	$	309.8	$	(93.2	)	$	216.6		17.6	%
2016	$	360.6	$	(113.8	)	$	246.8		13.9	%
2017	$	399.8	$	(142.8	)	$	257.0		4.1	%
2018	$	554.5	$	(214.1	)	$	340.4		32.5	%

Compound annual growth rate 2003–2018									37.4	%

²We determine the imputed cost of equity by using a formula that considers the risk of the business and the risk associated with our use of debt. The formula is as follows: average equity x {(the average 30-year Treasury rate + 5%) + [(1 – tax rate) x (the average 30-year Treasury rate + 5% – pre-tax average cost-of-debt rate) x average debt / (average equity + average debt x tax rate)]}.



($ in millions)	Adjusted average capital invested			Adjusted return on capital		Adjusted weighted average cost of capital		Spread
2001	$	469.9		7.7	%	8.4	%	-0.7	%
2002	$	462.0		7.9	%	8.9	%	-1.0	%
2003	$	437.5		9.7	%	9.0	%	0.7	%
2004	$	483.7		12.3	%	8.6	%	3.7	%
2005	$	523.4		13.7	%	8.3	%	5.4	%
2006	$	548.5		13.9	%	8.1	%	5.8	%
2007	$	710.1		11.9	%	7.0	%	4.9	%
2008	$	975.0		11.3	%	6.4	%	4.9	%
2009	$	998.7		14.6	%	6.7	%	7.9	%
2010	$	1,074.2		17.7	%	7.2	%	10.5	%
2011	$	1,371.1		16.8	%	6.4	%	10.4	%
2012	$	1,742.8		14.7	%	5.5	%	9.2	%
2013	$	2,049.2		14.1	%	5.7	%	8.4	%
2014	$	2,338.1		13.2	%	5.3	%	7.9	%
2015	$	2,831.9		12.7	%	5.0	%	7.7	%
2016	$	3,572.0		11.9	%	5.0	%	6.9	%
2017	$	4,276.4		11.2	%	5.2	%	6.0	%
2018	$	5,420.9		12.5	%	6.2	%	6.3	%

Compound annual growth rate 2001–2018	15.5		%

Since 2003, the first year Economic Profit was a positive number, we have grown Economic Profit at a compounded annual rate of 37.4%. However, the rate of growth has slowed. From 2003 to 2011, Economic Profit grew at a compounded annual rate of 62.8%. From 2011 to 2018, it grew at only 13.2%. We have continued to grow adjusted average capital rapidly, with compounded annual growth of 15.3% from 2003 to 2011 and 21.7% from 2011 to 2018. In addition, our results have been helped by a lower weighted average cost of capital, which declined 20 basis points from 2011 to 2018. However, our return on capital has declined each year from 2011 to 2017. In 2018, with assistance from a lower federal tax rate, the adjusted return on capital improved to 12.5%. While this improved return enabled us to grow Economic Profit by 32.5% last year, the positive impact of a lower tax rate on the rate of Economic Profit growth is not something that is likely to occur again in the near future. Our adjusted pre-tax return on capital, perhaps a better measure of business performance last year given the change in tax rates, declined from 17.7% in 2017 to 16.2% in 2018.¹

Our challenge continues to be that of growing a larger capital base at a rapid rate while contending with a difficult competitive environment. While we have succeeded in growing adjusted average capital, we have been required to accept a lower return on capital in order to do so. To be fair, my starting point for the above comparison is 2011, when our return on capital was unsustainably high as a result of a favorable competitive environment. And it is worth noting that our current after-tax return on capital is still a very attractive return for a consumer finance company. But it is also clear that we will need to find other ways to grow adjusted average capital if we are to achieve higher levels of Economic Profit in the future.

Using Economic Profit as our primary financial performance measure creates an incentive to keep our return on capital well above our weighted average cost of capital. As the spread between the return on capital and the weighted average cost of capital narrows, the break-even level of growth required to offset a further narrowing increases. For example, in 2011, when the spread between the adjusted return on capital and weighted average cost of capital was 10.4%, a 100-basis-point reduction in this spread would have required growth in average capital of 10.6% in order to achieve an equivalent amount of Economic Profit (10.4% / (10.4% – 1.0%) – 1). Today, that same 100-basis-point reduction in the spread would require growth of 18.9% (6.3% / (6.3% – 1.0%) – 1). This means that today, in contrast to 2011, we have limited ability to generate Economic Profit growth by pricing our product more aggressively. Pricing more aggressively would undoubtedly generate more volume and faster growth in average capital, but the reduction in our return on capital would, based on our current calculations, mean an overall reduction in the amount of Economic Profit we would be generating on new loans.

Given the current competitive environment and challenge of growing a larger capital base, it is unrealistic to expect us to achieve the same rate of growth in Economic Profit that we have achieved since 2003. However, we do think additional gains are possible. To the extent such gains occur, we expect they will be a direct result of our daily efforts to improve our product and our culture. What we won’t do is take risks that we think are unwise in an effort to grow beyond the natural constraints that are part of any business. We will continue to focus on what we know best and we will continue to invest your capital in ways we believe make sense. What we can’t invest with a margin of safety we will return to you.

At loan inception, we use a statistical model to estimate the expected collection rate for each loan. The statistical model is called a credit scorecard. Most consumer finance companies use such a tool to forecast the performance of the loans they originate. Our credit scorecard combines credit bureau data, customer data supplied in the credit application, vehicle data, dealer data, and data captured from the loan transaction such as the initial loan term or the amount of the down payment received from the customer. We developed our first credit scorecard in 1998 and have revised it several times since then. An accurate credit scorecard allows us to properly price new loan originations, which improves the probability that we will actually realize our expected returns on capital.

Subsequent to loan inception, we continue to evaluate the expected collection rate for each loan. Our evaluation becomes more accurate as the loans age, since we use actual loan performance data in our forecast. By comparing our current expected collection rate for each loan with the rate we projected at the time of origination, we are able to assess the accuracy of that initial forecast.

The following table compares, for each of the last 18 years, our most current forecast of loan performance with our initial forecast:



	December 31, 2018, forecast		Initial forecast		Variance
2001	67.3	%	70.4	%	-3.1	%
2002	70.4	%	67.9	%	2.5	%
2003	73.7	%	72.0	%	1.7	%
2004	73.0	%	73.0	%	0.0	%
2005	73.6	%	74.0	%	-0.4	%
2006	70.0	%	71.4	%	-1.4	%
2007	68.1	%	70.7	%	-2.6	%
2008	70.4	%	69.7	%	0.7	%
2009	79.6	%	71.9	%	7.7	%
2010	77.7	%	73.6	%	4.1	%
2011	74.7	%	72.5	%	2.2	%
2012	73.8	%	71.4	%	2.4	%
2013	73.5	%	72.0	%	1.5	%
2014	71.7	%	71.8	%	-0.1	%
2015	65.4	%	67.7	%	-2.3	%
2016	64.2	%	65.4	%	-1.2	%
2017	65.5	%	64.0	%	1.5	%
2018	65.0	%	63.6	%	1.4	%

Average¹	68.9	%	68.2	%	0.7	%

Loan performance can be explained by a combination of internal and external factors. Internal factors include the quality of our origination and collection processes, the quality of our credit scorecard, and changes in our policies governing new loan originations. External factors include the unemployment rate, the retail price of gasoline, vehicle wholesale values, and the cost of other required expenditures (such as for food and energy) that impact our customers. In addition, the level of competition is thought to impact loan performance through something called adverse selection.

Adverse selection as it relates to our market refers to an inverse correlation between the accuracy of an empirical scorecard and the number of lenders that are competing for the loan. Said another way, without any competition it is relatively easy to build a scorecard which accurately assesses the probability of payment based on attributes collected at the time of loan origination. As competition increases, creating an accurate scorecard becomes more challenging.

To illustrate adverse selection, we will give a simple example. Assume that the scorecard we use to originate loans is based on a single variable, the amount of the customer’s down payment, and that the higher the down payment, the higher the expected collection rate. Assume that for many years, we have no competitors and we accumulate performance data indicating that loans with down payments above $1,000 consistently produce the same average collection rate. Then assume that we begin to compete with another lender whose scorecard ignores down payment and instead emphasizes the amount of the customer’s weekly income.

As the new lender begins to originate loans, our mix of loans will be impacted as follows: We will start to receive loans for borrowers with lower average weekly incomes as the new lender originates loans for borrowers with higher weekly incomes—i.e., borrowers whose loans we would have previously originated. Furthermore, since our scorecard only focuses on down payment, the shift in our borrower mix will not be detected by our scorecard, and our collection rate expectation will remain unchanged. It is easy to see that this shift in borrower characteristics will have a negative impact on loan performance, and that this impact will be missed by our scorecard.

Loans originated in 2005, 2006 and 2007 performed worse than our initial forecasts by 40, 140 and 260 basis points, respectively. Since these loans were made in a highly competitive period and serviced during a severe economic downturn, this result is not surprising. What is noteworthy, however, is that the underperformance was modest. To put the underperformance in perspective, we estimate that a 100-basis-point change in our collection forecast impacts the return on capital by 40–60 basis points. As a result, loans originated during this period were still very profitable, even though they performed worse than we had forecast.

Loans originated in 11 of the 18 years performed better than or as well as our initial forecasts. The performance of loans originated in 2009 and 2010 exceeded our initial forecasts by 770 and 410 basis points, respectively. These large positive variances were due to reductions we made in our initial forecasts during this period based on our concerns about how the economic environment might impact loan performance. In retrospect, our adjustments were too large, and the loans originated during those two years performed better than we had forecast. It is instructive that our largest forecasting errors over the past 18 years have occurred because we were too pessimistic about loan performance, not because we were too optimistic—a result which we do not believe is typical in our industry.

The most recent forecast for 2012 loans exceeded our initial estimate by 240 basis points. As competition intensified, the variance declined and then turned negative from 2013 to 2016, with 2015 loans performing worse than our initial forecast by 230 basis points. As we observed this trend playing out in 2016, we made several adjustments to our initial forecast intended to eliminate the unfavorable variance. So far, the adjustments appear to have had the intended impact, with a positive 150-basis-point variance on 2017 originations and a positive 140-basis-point variance on 2018 originations. Because of the lag between the time the loan is originated and the time when the true performance of the loan becomes clear, we are continually monitoring loan performance and reacting to what we observe. During periods of intense competition, when adverse selection is most severe, it is critical to evaluate the performance of our loan portfolio as objectively as possible. Downward adjustments of our initial forecast have an adverse impact on origination volumes, since the amount we advance to the dealer for each loan is based on the amount of cash flows we expect. The slower rate of originations growth we experienced in 2016 and 2017 was due, in part, to the changes we made in our initial forecasts.

Although evaluating the performance of our loans is important, we realize that expecting to predict the future with exacting precision is unrealistic. For that reason, we maintain a significant margin of safety. The return on capital we expect to earn on new originations is well above our cost of capital. Although 2015 and 2016 loans have performed worse than we forecasted at origination, they will still be very profitable. An unfavorable variance simply means that our pricing was somewhat less than perfect—we wrote a greater number of loans in 2015 and 2016 at lower per unit profitability than we would have with perfect foresight. The amount of Economic Profit generated (which is unit volume multiplied by Economic Profit per loan) was less than it would have been with a perfectly accurate forecast.



	Unit volume	Year-to-year change
2001	61,928
2002	49,801	-19.6	%
2003	61,445	23.4	%
2004	74,154	20.7	%
2005	81,184	9.5	%
2006	91,344	12.5	%
2007	106,693	16.8	%
2008	121,282	13.7	%
2009	111,029	-8.5	%
2010	136,813	23.2	%
2011	178,074	30.2	%
2012	190,023	6.7	%
2013	202,250	6.4	%
2014	223,998	10.8	%
2015	298,288	33.2	%
2016	330,710	10.9	%
2017	328,507	-0.7	%
2018	373,329	13.6	%

Compound annual growth rate 2001–2018		11.1	%

Since 2001, unit volumes have grown at a compounded annual rate of 11.1%. In 2018, unit volumes increased 13.6%. While this rate was higher than it was in the prior two years, growth declined as the year progressed, with unit volumes increasing by 18.5%, 19.8%, 9.4% and 5.9% for quarters 1 through 4, respectively. Active dealer growth remained relatively consistent throughout the year, but volume per dealer declined during the third and fourth quarters.



	Active dealers	Year-to-year change		Unit volume per dealer	Year-to-year change
2001	1,180			52.5
2002	843	-28.6	%	59.1	12.6	%
2003	950	12.7	%	64.7	9.5	%
2004	1,212	27.6	%	61.2	-5.4	%
2005	1,759	45.1	%	46.2	-24.5	%
2006	2,214	25.9	%	41.3	-10.6	%
2007	2,827	27.7	%	37.7	-8.7	%
2008	3,264	15.5	%	37.2	-1.3	%
2009	3,168	-2.9	%	35.0	-5.9	%
2010	3,206	1.2	%	42.7	22.0	%
2011	3,998	24.7	%	44.5	4.2	%
2012	5,319	33.0	%	35.7	-19.8	%
2013	6,394	20.2	%	31.6	-11.5	%
2014	7,247	13.3	%	30.9	-2.2	%
2015	9,064	25.1	%	32.9	6.5	%
2016	10,536	16.2	%	31.4	-4.6	%
2017	11,551	9.6	%	28.4	-9.6	%
2018	12,528	8.5	%	29.8	4.9	%

We have grown the number of active dealers in 15 of the last 17 years. In 2002 and 2009, the number of active dealers decreased as capital constraints required us to restrict the number of new dealer enrollments. As mentioned previously, we face two challenges in growing our active dealer base. First, increased competition makes it more difficult to enroll new dealers and more difficult to retain those who have already enrolled, since they have more alternatives to choose from. Second, as the number of active dealers increases, it becomes harder to grow at the same rate. As a result of these challenges, active dealer growth has slowed. From 2010 to 2016, we grew active dealers at a compounded annual rate of 21.9%. In contrast, active dealers grew 9.6% in 2017 and 8.5% last year.

In response to the challenges we face, in 2016 we began to aggressively expand the size of our field sales force. In December 2015, we had 246 field sales representatives, called market area managers (“MAMs”). By December 2018, we had increased the number to 393. While the expansion hasn’t been effective enough at this stage to reverse the slowing growth in active dealers, we are hopeful the results will improve. The results of a prior sales force expansion provide grounds for optimism.

The prior expansion started in 2010. From December 2009 to December 2012, we increased the number of MAMs by 120%. During the same period, active dealers per MAM declined by 24%. From 2012 to 2015, we increased the number of MAMs more modestly as we focused on improving MAM productivity. By December 2015, the number of active dealers per MAM had increased by 60% from December 2012, a result that was 22% higher than the level achieved in December 2009, before the expansion began. While the expansion was ultimately very successful, it was a long and difficult process.

This latest expansion, although not perfectly comparable, is following a similar trend. From December 2015 to December 2018, the number of MAMs increased by 60%. During the same period, active dealers per MAM declined by 13%. In 2019, we expect to continue to increase the number of MAMs, but the increase will be modest. As in the prior expansion, we will focus primarily on MAM productivity. Achieving productivity gains equivalent to those recorded during the prior expansion will be challenging. First, the competitive environment is more difficult. Second, at some point, as we add MAMs, we will experience diminishing returns. However, we are optimistic that some level of productivity gains can be achieved and that the number of active dealers will increase as a result.

After peaking in 2003 at 64.7 loans, volume per dealer declined in 11 of the next 15 years, a result we attribute to the challenge of achieving the same productivity per dealer as the number of dealers increases. In 2010 and 2011, volume per dealer increased due to a favorable competitive environment. (While the environment was favorable in 2008 and 2009 as well, we were capital-constrained, which caused us to reduce volume per dealer through pricing.) In 2015, volume per dealer also increased, a result we attribute to several changes we made to our program in that year, including offering longer loan terms and implementing an electronic contracting solution. The electronic contracting solution simplifies our origination process for the dealer and enables us to fund our dealers more rapidly, since they no longer need to send us a hard copy of the loan documents.

After declining in 2016 and 2017, volume per dealer improved in 2018, by 4.9%. However, as stated above, the trend worsened during the latter part of the year. In the first and second quarters, volume per dealer increased by 5.8% and 5.9%, respectively, from the same periods of the prior year. But in the third quarter, volume per dealer declined by 2.9%, and then in the fourth quarter, it declined by 6.1%. We have been unable to identify any specific internal or external variables that would explain the favorable trend experienced in the first half of the year or the unfavorable trend experienced in the second half of the year. That leaves changes in the competitive environment as the most likely reason for the variation in results.

We have two programs: the Portfolio program and the Purchase program. The Portfolio program, which we have offered since the late 1980s, has produced over 83% of our unit volume since 2005. This program provides dealers with a cash payment at the time the loan is originated (the “advance”) and additional payments over time based on the performance of the loan (the “dealer holdback”). There are several aspects of the Portfolio program that we believe are advantageous. First, as described earlier, paying the dealer based on the performance of the loan creates an alignment of interests. Second, the dealer holdback provides a layer of protection in case our actual collection results are less than we forecasted. If that occurs, we offset a significant portion of the shortfall by reducing our dealer holdback liability. Finally, if loan performance is equal to or better than our expectations, the dealer ultimately makes more money using the Portfolio program as compared to the Purchase program. We love it when our dealers experience a financial reward for helping the customer succeed.

The Purchase program is a more traditional indirect auto finance product in that the dealer receives only a single payment at loan origination in exchange for assigning the loan to us. There is no financial incentive for the dealer tied to the performance of the loan, and we are not insulated from credit risk. With Purchase loans, if actual collections are less than we forecasted, our revenue is impacted by the full amount of any shortfall.

Given the advantages of the Portfolio program, we strongly prefer to invest in it as much of our capital as possible. However, because it generates high returns on capital, in most periods we have been unable to grow the program rapidly enough for it to absorb all of the capital generated. We developed the Purchase program both to attract dealers who have historically not been interested in our Portfolio program, and to gain an additional way to invest capital at attractive returns.



	Total			Portfolio program			Purchase program
Consumer loan assignment year	Unit volume	Year-to-year change		Unit volume	Year-to-year change		Unit volume	Year-to-year change
2005	81,184			73,708			7,476
2006	91,344	12.5	%	87,519	18.7	%	3,825	-48.8	%
2007	106,693	16.8	%	87,872	0.4	%	18,821	392.1	%
2008	121,282	13.7	%	85,092	-3.2	%	36,190	92.3	%
2009	111,029	-8.5	%	96,076	12.9	%	14,953	-58.7	%
2010	136,813	23.2	%	124,388	29.5	%	12,425	-16.9	%
2011	178,074	30.2	%	164,653	32.4	%	13,421	8.0	%
2012	190,023	6.7	%	177,985	8.1	%	12,038	-10.3	%
2013	202,250	6.4	%	189,101	6.2	%	13,149	9.2	%
2014	223,998	10.8	%	203,155	7.4	%	20,843	58.5	%
2015	298,288	33.2	%	260,604	28.3	%	37,684	80.8	%
2016	330,710	10.9	%	260,026	-0.2	%	70,684	87.6	%
2017	328,507	-0.7	%	238,313	-8.4	%	90,194	27.6	%
2018	373,329	13.6	%	260,302	9.2	%	113,027	25.3	%

Compound annual growth rate 2005–2018		12.5	%		10.2	%		23.2	%

Purchase loans have been profitable each year, including those years impacted by the financial crisis. However, we recognize that if collections fall short of our forecast, the impact on profitability will be much greater with Purchase loans than with Portfolio loans. In other words, while Purchase loans have been very profitable historically, they are more risky.



	Portfolio program						Purchase program
	Forecasted collection percentage as of ¹						Forecasted collection percentage as of ¹
Consumer loan assignment year	December 31, 2018		Initial forecast		Variance		December 31, 2018		Initial forecast		Variance
2005	73.6	%	74.0	%	-0.4	%	75.7	%	74.7	%	1.0	%
2006	69.9	%	71.3	%	-1.4	%	75.6	%	74.0	%	1.6	%
2007	68.0	%	70.2	%	-2.2	%	68.6	%	72.7	%	-4.1	%
2008	70.8	%	70.2	%	0.6	%	69.7	%	68.8	%	0.9	%
2009	79.3	%	72.1	%	7.2	%	80.8	%	70.5	%	10.3	%
2010	77.6	%	73.6	%	4.0	%	78.7	%	73.1	%	5.6	%
2011	74.6	%	72.4	%	2.2	%	76.3	%	72.7	%	3.6	%
2012	73.7	%	71.3	%	2.4	%	75.9	%	71.4	%	4.5	%
2013	73.4	%	72.1	%	1.3	%	74.3	%	71.6	%	2.7	%
2014	71.6	%	71.9	%	-0.3	%	72.6	%	70.9	%	1.7	%
2015	64.6	%	67.5	%	-2.9	%	69.5	%	68.5	%	1.0	%
2016	63.3	%	65.1	%	-1.8	%	66.8	%	66.5	%	0.3	%
2017	64.8	%	63.8	%	1.0	%	67.0	%	64.6	%	2.4	%
2018	64.7	%	63.6	%	1.1	%	65.6	%	63.5	%	2.1	%

Average²	68.7	%	68.3	%	0.4	%	69.2	%	67.2	%	2.0	%

¹The forecasted collection rates presented for Portfolio loans and Purchase loans reflect the loan classification at the time of assignment. Under our Portfolio program, certain events may result in dealers’ forfeiting their rights to dealer holdback. We transfer the dealers’ loans from the Portfolio loan portfolio to the Purchase loan portfolio in the period this forfeiture occurs.

The table shows that over the last 14 years, Purchase loans have performed modestly better than Portfolio loans, as indicated by their weighted average variances (of 200 basis points and 40 basis points, respectively). Purchase loans did perform worse than Portfolio loans in 2007, but we have made changes to our Purchase program since that time based on what we have learned.

In recent years, we have experienced rapid growth in Purchase loans as we have expanded our eligibility criteria and increased the amount we pay the dealer for the loans. We believe our current pricing still leaves us with a significant margin of safety and allows us to invest additional capital at attractive returns. If the competitive environment improves, we expect we will have more opportunity to invest our capital in Portfolio loans. If we do, we will likely reduce the portion of our capital invested in Purchase loans.

We have used excess capital to repurchase shares when prices are at or below our estimate of intrinsic value (which is the discounted value of future cash flows). As long as the share price is at or below intrinsic value, we prefer share repurchases to dividends for several reasons. First, repurchasing shares below intrinsic value increases the value of the remaining shares. Second, distributing capital to shareholders through a share repurchase gives shareholders the option to defer taxes by electing not to sell any of their holdings. A dividend does not allow shareholders to defer taxes in this manner. Finally, repurchasing shares enables shareholders to increase their ownership, receive cash or do both based on their individual circumstances and view of the value of a Credit Acceptance share. (They do both if the proportion of shares they sell is smaller than the ownership stake they gain through the repurchase.) A dividend does not provide similar flexibility.

At times, it will appear we have excess capital but we won’t be active in repurchasing our shares. This can occur for several reasons. First, the assessment of our capital position involves a high degree of judgment. We need to consider future expected capital needs and the likelihood that this capital will be available. Simply put, when our debt-to-equity ratio falls below the normal trend line, it doesn’t necessarily mean we have concluded that we have excess capital. Our first priority is always to make sure we have enough capital to fund our business, and such assessments are always made using conservative assumptions. Second, we may have excess capital but conclude our shares are overvalued relative to intrinsic value or are trading at a level where we believe it’s likely they could be purchased at a lower price at some point in the future. The assessment of intrinsic value is also highly judgmental. Fortunately for shareholders, we have two members of our Board, Tom Tryforos and Scott Vassalluzzo, who have had long and remarkable careers in investing in equities and are perfectly suited for the task of assessing the value of our business. My track record is less impressive. For reasons I can’t defend, I have often argued on the side of waiting for a lower price. After many years of being wrong, I have learned to defer to Tom and Scott on this topic. The final reason we may be inactive in repurchasing shares has been the most common one over the years. We have often found ourselves with excess capital at a time when the share price was attractive, but we were in possession of material information that had not yet been made public. During such periods, we suspend our share repurchases until the information has been disclosed.

Unless we disclose a different intention, shareholders should assume we are following the approach outlined in this section. Our first priority will be to fund the business. If we conclude we have excess capital, we will return that capital to shareholders through share repurchases. If we are inactive for a period, shareholders should not assume that we believe our shares are overvalued.

Our core product has remained essentially unchanged for 46 years. We provide auto loans to consumers regardless of their credit history. Our customers consist of individuals who have typically been turned away by other lenders. Traditional lenders have many reasons for declining a loan. We have always believed that a significant number of individuals, if given an opportunity to establish or reestablish a positive credit history, will take advantage of it. As a result of this belief, we have changed the lives of millions of people.

In 2001, we established several long-term goals. One of these was to reach a $100 share price. The share price at year-end 2001 was $8.90, and our track record up to that point caused many to be skeptical. Some thought the goal was unrealistic. Some thought it was impossible. And some thought we were joking. I remember a conversation with a friend of mine who was a retired stock analyst. When I told him about the goal, he laughed out loud.

Another goal we set in 2001 was to be named as one of Fortune magazine’s 100 Best Companies to Work For. We wanted to create a culture that would attract great people and provide them with an environment that would enable them to do their best work. Tying the goal to Fortune’s 100 Best Places to Work list gave us a way to measure our progress. We made the list in 2014 for the first time and have now appeared on it for six consecutive years.

Our progress in creating shareholder wealth and in creating a Great Place to Work are not unrelated accomplishments. Creating a business that generates financial success over a long period of time is difficult. It requires the development of a product that addresses a real need, that solves a real problem. It requires the product to be offered for a price that people are willing to pay. And, when you operate in a highly competitive market as we do, it requires a solution that is superior to the ones offered by everyone else.

In our case, we also need to be able to overcome some natural disadvantages that are inherent in our position in our market. We compete with banks that have a significant cost-of-funds advantage through low-cost deposits. We compete with much larger companies that have an advantage due to economies of scale. And we compete with credit unions that aren’t required to earn a profit. Our only advantage is our people. Our success at creating a great culture is what has enabled us to attract, retain and motivate a large number of truly exceptional people. I am referring here to both the executive leadership team and the many people at all the other levels of our organization who have year-in and year-out met the many challenges we have faced. It is because of them that we have been able to accomplish so much over a long period of time, and I am grateful for their efforts.



($ in millions)	GAAP net income		Floating yield adjustment			Senior notes adjustment			Income tax adjustment			Other adjustments			Adjusted net income		Imputed cost of equity			Economic Profit
2001	$	24.7	$	1.2		$	—		$	2.0		$	(1.1	)	$	26.8	$	(30.0	)	$	(3.2	)
2002	$	29.8	$	2.8		$	—		$	2.9		$	(4.5	)	$	31.0	$	(35.6	)	$	(4.6	)
2003	$	24.7	$	1.4		$	—		$	5.7		$	5.6		$	37.4	$	(34.5	)	$	2.9
2004	$	57.3	$	(0.1	)	$	—		$	(1.8	)	$	(3.2	)	$	52.2	$	(34.4	)	$	17.8
2005	$	72.6	$	(2.2	)	$	—		$	0.1		$	(7.3	)	$	63.2	$	(34.5	)	$	28.7
2006	$	58.6	$	0.4		$	—		$	(1.7	)	$	4.4		$	61.7	$	(29.6	)	$	32.1
2007	$	54.9	$	3.6		$	—		$	(1.2	)	$	4.4		$	61.7	$	(27.2	)	$	34.5
2008	$	67.2	$	13.1		$	—		$	0.4		$	2.1		$	82.8	$	(35.8	)	$	47.0
2009	$	146.3	$	(19.6	)	$	—		$	(1.8	)	$	0.1		$	125.0	$	(45.9	)	$	79.1
2010	$	170.1	$	0.5		$	—		$	(10.4	)	$	0.3		$	160.5	$	(47.8	)	$	112.7
2011	$	188.0	$	7.1		$	—		$	(1.3	)	$	0.3		$	194.1	$	(51.0	)	$	143.1
2012	$	219.7	$	—		$	—		$	(3.5	)	$	—		$	216.2	$	(56.6	)	$	159.6
2013	$	253.1	$	(2.5	)	$	—		$	(2.3	)	$	—		$	248.3	$	(75.1	)	$	173.2
2014	$	266.2	$	(6.0	)	$	12.5		$	(1.0	)	$	—		$	271.7	$	(87.5	)	$	184.2
2015	$	299.7	$	12.9		$	(2.0	)	$	(0.8	)	$	—		$	309.8	$	(93.2	)	$	216.6
2016	$	332.8	$	28.1		$	(2.1	)	$	1.8		$	—		$	360.6	$	(113.8	)	$	246.8
2017	$	470.2	$	34.1		$	(2.1	)	$	(102.4	)	$	—		$	399.8	$	(142.8	)	$	257.0
2018	$	574.0	$	(24.4	)	$	(2.5	)	$	7.4		$	—		$	554.5	$	(214.1	)	$	340.4



($ in millions)	GAAP average capital invested¹		Floating yield adjustment		Senior notes adjustment			Deferred debt issuance adjustment²		Income tax adjustment			Other adjustments			Adjusted average capital invested
2001	$	466.2	$	3.4	$	—		$	0.6	$	—		$	(0.3	)	$	469.9
2002	$	457.1	$	5.8	$	—		$	0.5	$	—		$	(1.4	)	$	462.0
2003	$	430.3	$	7.9	$	—		$	1.7	$	—		$	(2.4	)	$	437.5
2004	$	476.5	$	8.7	$	—		$	1.8	$	—		$	(3.3	)	$	483.7
2005	$	519.4	$	7.5	$	—		$	1.0	$	—		$	(4.5	)	$	523.4
2006	$	548.0	$	5.5	$	—		$	2.0	$	—		$	(7.0	)	$	548.5
2007	$	706.1	$	8.2	$	—		$	1.7	$	—		$	(5.9	)	$	710.1
2008	$	960.7	$	13.8	$	—		$	2.9	$	—		$	(2.4	)	$	975.0
2009	$	983.6	$	13.2	$	—		$	2.9	$	—		$	(1.0	)	$	998.7
2010	$	1,057.3	$	5.2	$	—		$	12.2	$	—		$	(0.5	)	$	1,074.2
2011	$	1,346.0	$	9.4	$	—		$	16.0	$	—		$	(0.3	)	$	1,371.1
2012	$	1,715.3	$	11.1	$	—		$	16.4	$	—		$	—		$	1,742.8
2013	$	2,024.5	$	9.9	$	—		$	14.8	$	—		$	—		$	2,049.2
2014	$	2,324.8	$	6.7	$	(7.0	)	$	13.6	$	—		$	—		$	2,338.1
2015	$	2,792.8	$	7.0	$	14.7		$	17.4	$	—		$	—		$	2,831.9
2016	$	3,513.1	$	29.6	$	12.7		$	16.6	$	—		$	—		$	3,572.0
2017	$	4,200.2	$	51.6	$	10.6		$	18.1	$	(4.1	)	$	—		$	4,276.4
2018	$	5,425.8	$	80.8	$	9.7		$	22.4	$	(117.8	)	$	—		$	5,420.9

²The deferred debt issuance adjustment reverses the impact of the reclassification of deferred debt issuance costs from other assets to GAAP average debt as a result of the adoption by the Financial Accounting Standards Board of Accounting Standards Update (ASU) No. 2015-03, as amended by ASU No. 2015-05. The net effect of this adjustment is to report adjusted average capital on the same basis as reported in historical shareholder letters.



	GAAP return on capital³		Floating yield adjustment		Senior notes adjustment		Deferred debt issuance adjustment²		Income tax adjustment		Other adjustments		Adjusted return on capital
2001	7.3	%	0.2	%	0.0	%	0.0	%	0.4	%	-0.2	%	7.7	%
2002	7.7	%	0.5	%	0.0	%	0.0	%	0.6	%	-0.9	%	7.9	%
2003	6.9	%	0.2	%	0.0	%	0.0	%	1.3	%	1.3	%	9.7	%
2004	13.5	%	-0.3	%	0.0	%	0.0	%	-0.3	%	-0.6	%	12.3	%
2005	15.6	%	-0.6	%	0.0	%	0.0	%	0.0	%	-1.3	%	13.7	%
2006	13.3	%	-0.1	%	0.0	%	0.0	%	-0.3	%	1.0	%	13.9	%
2007	11.0	%	0.4	%	0.0	%	0.0	%	-0.2	%	0.7	%	11.9	%
2008	9.8	%	1.2	%	0.0	%	0.0	%	0.0	%	0.3	%	11.3	%
2009	17.0	%	-2.2	%	0.0	%	0.0	%	-0.2	%	0.0	%	14.6	%
2010	18.9	%	0.0	%	0.0	%	-0.2	%	-1.0	%	0.0	%	17.7	%
2011	16.7	%	0.4	%	0.0	%	-0.2	%	-0.1	%	0.0	%	16.8	%
2012	15.1	%	-0.1	%	0.0	%	-0.1	%	-0.2	%	0.0	%	14.7	%
2013	14.5	%	-0.2	%	0.0	%	-0.1	%	-0.1	%	0.0	%	14.1	%
2014	13.1	%	-0.3	%	0.5	%	-0.1	%	0.0	%	0.0	%	13.2	%
2015	12.5	%	0.4	%	-0.1	%	-0.1	%	0.0	%	0.0	%	12.7	%
2016	11.3	%	0.7	%	-0.1	%	0.0	%	0.0	%	0.0	%	11.9	%
2017	13.0	%	0.7	%	-0.1	%	-0.1	%	-2.3	%	0.0	%	11.2	%
2018	12.8	%	-0.6	%	-0.1	%	0.0	%	0.4	%	0.0	%	12.5	%



	GAAP weighted average cost of capital⁴		Floating yield adjustment		Senior notes adjustment		Deferred debt issuance adjustment²		Income tax adjustment		Other adjustments		Adjusted weighted average cost of capital⁵
2001	8.4	%	0.0	%	0.0	%	0.0	%	0.0	%	0.0	%	8.4	%
2002	8.9	%	0.0	%	0.0	%	0.0	%	0.0	%	0.0	%	8.9	%
2003	9.0	%	0.0	%	0.0	%	0.0	%	0.0	%	0.0	%	9.0	%
2004	8.6	%	0.0	%	0.0	%	0.0	%	0.0	%	0.0	%	8.6	%
2005	8.3	%	0.0	%	0.0	%	0.0	%	0.0	%	0.0	%	8.3	%
2006	8.1	%	0.0	%	0.0	%	0.0	%	0.0	%	0.0	%	8.1	%
2007	7.0	%	0.0	%	0.0	%	0.0	%	0.0	%	0.0	%	7.0	%
2008	6.4	%	0.0	%	0.0	%	0.0	%	0.0	%	0.0	%	6.4	%
2009	6.7	%	0.0	%	0.0	%	0.0	%	0.0	%	0.0	%	6.7	%
2010	7.3	%	0.0	%	0.0	%	-0.1	%	0.0	%	0.0	%	7.2	%
2011	6.5	%	0.0	%	0.0	%	-0.1	%	0.0	%	0.0	%	6.4	%
2012	5.6	%	0.0	%	0.0	%	-0.1	%	0.0	%	0.0	%	5.5	%
2013	5.7	%	0.0	%	0.0	%	0.0	%	0.0	%	0.0	%	5.7	%
2014	5.2	%	0.1	%	0.0	%	0.0	%	0.0	%	0.0	%	5.3	%
2015	5.0	%	0.0	%	0.0	%	0.0	%	0.0	%	0.0	%	5.0	%
2016	4.9	%	0.1	%	0.0	%	0.0	%	0.0	%	0.0	%	5.0	%
2017	5.1	%	0.1	%	0.0	%	0.0	%	0.0	%	0.0	%	5.2	%
2018	6.3	%	0.1	%	0.0	%	-0.1	%	-0.1	%	0.0	%	6.2	%

⁴The weighted average cost of capital includes both a cost of equity and a cost of debt. The cost of equity capital is determined based on a formula that considers the risk of the business and the risk associated with our use of debt. The formula utilized for determining the cost of equity capital is as follows: (the average 30-year Treasury rate + 5%) + [(1 – tax rate) x (the average 30-year Treasury rate + 5% – pre-tax average cost-of-debt rate) x average debt / (average equity + average debt x tax rate)].



($ in millions)
GAAP pre-tax return on capital ⁶	2018			2017
GAAP net income	$	574.0		$	470.2
Add: GAAP provision for income tax	181.1			113.6
Add: GAAP interest expense (pre-tax)	156.6			120.2
GAAP pre-tax income plus interest expense	$	911.7		$	704.0

GAAP average debt	$	3,617.4		$	2,926.7
GAAP average equity	1,808.4			1,273.5
GAAP average capital invested	$	5,425.8		$	4,200.2
GAAP pre-tax return on capital	16.8		%	16.8		%


Adjusted pre-tax return on capital ⁶	2018			2017
Adjusted net income ⁷	$	554.5		$	399.8
Add: Adjusted provision for income tax ⁸	165.6			234.8
Add: GAAP interest expense (pre-tax)	156.6			120.2
Add: Senior notes adjustment (pre-tax)	3.3			3.3
Adjusted net income plus interest expense (pre-tax)	$	880.0		$	758.1

Average adjusted capital invested ⁷	$	5,420.9		$	4,276.4
Adjusted pre-tax return on capital	16.2		%	17.7		%


•	We have developed the ability to offer financing for consumers, regardless of their credit history, while maintaining an appropriate return on capital. It took years to develop the processes and accumulate the customer and loan performance data that we use to make profitable loans in our segment of the market.


•	We have strengthened our focus on our core business. At times in our history, our focus had been diluted by the pursuit of other, non-core opportunities. Today, we offer one product and focus 100% of our energy and capital on perfecting this product and providing it profitably.


•	We have developed a high-quality field sales force. Our sales team provides real value to our dealers. Team members act as consultants as we teach dealers how to successfully serve our market segment.