goeasy Ltd

TSX:GSY

Earnings Call Transcript

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the goeasy Fourth Quarter 2020 Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference may be recorded. [Operator Instructions] I would like to hand the conference over to your speaker today, Farhan Ali Khan. Please go ahead.

[Farhan Ali Khan]

Thank you, operator, and good morning, everyone. My name is Farhan Ali Khan, the company's Senior Vice President of Corporate Development and Investor Relations, and thank you for joining us to discuss goeasy Ltd.'s results for the fourth quarter and full year ended December 31, 2020. The news release, which was issued yesterday after the close of market, is available on GlobeNewswire and on the goeasy website. Today, Jason Mullins, goeasy's President and Chief Executive Officer, will review the results for the fourth quarter and provide an outlook for the business. Hal Khouri, the company's Chief Financial Officer, will also provide an overview of our capital and liquidity position. Jason Appel, the company's Chief Risk Officer, is also on the call. After the prepared remarks, we will then open the line for questions from investors. Before we begin, I remind you that this conference call is open to all investors and is being webcast through the company's investor website and supplemented by a quarterly earnings presentation. For those dialing in directly by phone, the presentation can also be found directly on our investor site. All shareholders, analysts and portfolio managers are welcome to ask questions over the phone after management has finished the prepared remarks. The operator will poll for questions and will provide instructions at the appropriate time. Business media are welcome to listen to this call and to use management's comments and responses to questions and any coverage. However, we would ask that they do not quote callers unless that individual has granted their consent. Today's discussion may contain forward-looking statements. I am not going to read that full statement, but we'll direct you to the caution regarding forward-looking statements included in the MD&A. I will now turn the call over to Jason Mullins.

[Jason Mullins, President & CEO]

Thanks, Farhan, and welcome to today's call, everyone. We had a strong finish to 2020, in a year that highlighted the resilience of our customer, our team and our business model. During the fourth quarter, we continued to experience an improving level of demand for consumer credit as provincial stay at home orders remained at more moderate levels through most of the quarter and typical seasonal trends began to emerge throughout the holidays further fueled by our integrated media campaign. This step-up in overall demand led to an increase in both originations and the growth in our loan portfolio. After being down 38% in the second quarter and then flat to 2019 in the third quarter, loan originations in the fourth quarter lifted to a record $334 million, up nearly 7% compared to the same period in 2019. The improvement in loan originations resulted in loan growth of $64 million, bringing our total portfolio at year-end to just shy of $1.25 billion in consumer loans. Our omni-channel business model has allowed us to continue originating and serving customers digitally when regional health and safety protocols limit our in-branch activity. As we highlighted last quarter, we have also experienced continued growth in the proportion of new customers being acquired through our point-of-sale channel. Whether through our frictionless full credit spectrum offering with Affirm, formerly PayBright or directly through our own platform, over 22% of the customers we acquired in the fourth quarter came into the business through financing an in-store or online purchase. Our next-generation credit models, which leverage consumer banking data have also helped us issue over 1,500 loans since September to consumers without qualifying credit files. Serving the new Canadian and student segments is just another way for us to fulfill our purpose of helping those that are unable to access credit from traditional banks. Revenue for the fourth quarter was a record $173 million, an increase of 5% over 2019. As Canada continued to adjust to life in a pandemic, more of our consumers return to work and the volume of loan protection plan claims wound down further, finishing the year close to pre-COVID levels. As a result, we experienced another sequential lift in the total portfolio yield to 46.6%. As closures and restrictions continue to come and go across various regions and industry sectors, we are leveraging our ability to dynamically adjust our credit tolerance and underwriting practices. As time has passed, this has led to an improving mix in the quality of our originations which will bode well for the long-term performance of our portfolio. The weighted average credit quality of our customers continues to gradually improve, supported by over 12.5% of the portfolio now being secured. The improving credit mix, combined with a moderate use of the loan protection insurance program, continued government support and reduced overall living expenses have contributed to another quarter of strong credit performance. The net charge-off rate for the fourth quarter was 9%, down from 13.3% in the fourth quarter of 2019. As noted earlier, while loan protection continues to act as a resource for some of our customers, claims levels have continued to return to more normal levels. During the second quarter, total loan protection claims payments made on behalf of borrowers was $21.7 million, declining to $14.6 million in the third quarter, which was followed by a further decline in the fourth quarter to $8.1 million. As of year-end, the proportion of insured customers on an active claim was down over 90% from the peak of the pandemic. We are incredibly proud that over the course of 2020, this valuable ancillary product served to help over 15,000 of our customers maintain their credit with over $50 million in payments having been made on their behalf by the third-party insurer. Consistent with the past few quarters, we've also experienced the proportion of customers utilizing our borrower assistance programs, such as payment deferrals or loan extensions, and the payment performance on our loans remain at or better than pre-COVID levels. We believe these trends highlight both the stability of our customers' cash flow in the current environment as well as the improving credit quality of the portfolio that we are carrying out of this recession. While we have continued to experience improvement in the underlying credit performance of the portfolio, we also acknowledge that there remains uncertainty about another wave of the pandemic, the speed of vaccine distribution and the timing and pace of the economic recovery. As such, we have further refined our use of probability-weighted economic scenarios to determine the appropriate loan loss provision allowance that would barely account for the future expected credit losses under a variety of more stressed circumstances. As a result, our allowance for future credit losses was held broadly flat at 10.08% compared to 10.03% in the previous quarter. As the business grows, we continue to benefit from the scale and operating leverage of our platform. Operating income for the fourth quarter was $61.3 million, up 32% from $46.5 million in the fourth quarter of 2019, while the operating margin for the business was 35.4%, up from 28.1% in the prior year. As previously announced, we also completed the sale of our minority equity interest in PayBright, becoming an investor and commercial partner with Affirm who is regarded as one of North America's most innovative and consumer-focused buy now, pay later platforms. The genesis of this transaction began in September 2019 when we entered into a strategic partnership and made a $34 million investment in PayBright. After several years of exploring and testing a variety of potential prime-focused point-of-sale lending partnerships, we felt PayBright was the platform with the strongest technology, best management team and greatest potential for future growth. While our investment was fueled by the commercial benefits of offering a [ set of ] nonprime financing offer through their platform, we have confidence in the future value of the company. In December, PayBright announced that its shareholders had reached a definitive agreement to sell 100% of the company's shares to Affirm, which subsequently closed on January 1 of this year. Under the terms of the sale, we received consideration of CAD 23 million in cash, 655,000 common shares on Affirm, subject to a customary lockup agreement and 468,000 common shares held in escrow, subject to revenue performance achieved in 2021 and 2022. After considering the likelihood of achieving the contingent equity, we recorded a total consideration of $56 million as of December 31, 2020, resulting in a total unrealized fair value gain of $21.7 million during the year, of which the impact in the fourth quarter was an after-tax gain of $13.9 million. With an estimated $30 billion of originations occurring at the point-of-sale for everyday purchases each year, we remain enthusiastic about our partnership and investment in Affirm, and we believe we offer the leading and frictionless, full credit spectrum point-of-sale payment solution in Canada. In total, net income in the fourth quarter was a record $48.9 million, up from $6.7 million in the same period of 2019, which resulted in diluted earnings per share of $3.14, up from $0.46 in the fourth quarter of 2019. Return on equity was 45.8%, up from 8% in the fourth quarter of 2019. After adjusting for the $13.9 million after-tax fair value gain related to the sale of our equity investment in PayBright and adjusting for the onetime $16 million after-tax charge associated with the refinancing of the company's notes completed in the fourth quarter of 2019, adjusted net income was a record $35 million, up 55% from $22.6 million in 2019, resulting in adjusted diluted earnings per share of $2.24, up 55% from $1.45 in the fourth quarter of 2019. Adjusted return on equity was 32.8% in the quarter, up from adjusted return on equity of 27% in 2019. While 2020 was filled with unexpected adversity, our team rose to the challenge, and I'm incredibly proud of their efforts. For the full year, we funded just over $1 billion in loan originations, down slightly from $1.1 billion in 2019, despite the significant change in demand driven by the pandemic and better than most of our peer group in North America. Revenue for the full year, which was partially impacted by lower commissions related to higher levels of loan protection insurance claims was $653 million, up 7% compared with $609 million in the same period of 2019. Operating income for the full year was $216 million compared with $169 million in 2019, an increase of $47.6 million or 28%. Adjusted net income for the full year of 2020 was $118 million and adjusted diluted earnings per share was $7.57, increases of 47% and 46% compared to the adjusted net income of $80.3 million and adjusted diluted earnings per share of $5.17 in 2019. Based on the 2020 adjusted earnings, the increasing level of cash flow produced by the business and the confidence in our continued growth and access to capital going forward, the Board of Directors has approved an increase to the annual dividend from $1.80 per share to $2.64 per share, an increase of 47%. This marks the seventh consecutive year of an increase in the dividend to shareholders. I'll now pass it over to Hal to discuss our balance sheet and capital position before providing some comments on our outlook.

[Hal Khouri, CFO & Executive VP]

Thanks, Jason. During the fourth quarter, we continued to strengthen our balance sheet and liquidity position, while currently investing in our business and returning capital to shareholders. To help simplify and highlight the free cash-generating capability of our portfolio, we have begun to publish a new non-IFRS measure in our disclosures, which is the cash provided by operating activities before the net growth of the consumer loan portfolio. In essence, this figure represents the amount of free cash we produce each period if we are a whole loan portfolio flat. From this figure, we can then invest that free cash into incremental growth in consumer loans, invest in new businesses or initiatives, reduce our debt or return capital to shareholders through dividends or share repurchases. The cash provided by operating activities before the net growth of consumer loans receivable portfolio in the fourth quarter was $40.9 million, an increase of 89% from the $21.7 million in the fourth quarter of 2019. For the full year, the cash generated before net growth was $211 million, an increase of 74% over the $121 million in 2019. Looking to our funding. We also made additional enhancements to our balance sheet with the addition of a new securitization facility structured and underwritten by National Bank. The new facility, which will be collateralized by our consumer loans will have an initial term of 3 years and interest on advances will be payable at the rate of 1 month CDOR plus 295 basis points. Based on the current 1 month CDOR rate of 0.43% as of December 31, 2020, the interest rate would be 3.38%. As usual, we also intend to establish an interest rate swap agreement to generate fixed rate payments on the amounts we draw in order to mitigate the impact of interest rate volatility at approximately a cost of 26 basis points. Based on the cash at hand at the end of the year and the borrowing capacity under our 2 revolving facilities, we had approximately $403 million in total liquidity, which we estimate would fund the organic growth of the business through to the third quarter of 2023. Given the cash flows I highlighted earlier, we also estimate that once our existing available sources of capital are fully utilized, we could continue to grow the loan portfolio by approximately $150 million per year solely from internal cash flows. With the launch of securitization, we have also lowered our funding costs. At year-end, our fully drawn weighted average cost of borrowing reduced to 4.8%, down from 5.5% in the prior year, with incremental draws on our revolving credit facilities currently bearing rates of approximately 3.6%. As Jason noted earlier, the sale of our minority equity interest in PayBright to Affirm closed subsequent to year-end, in which we received a combination of cash and shares in Affirm, a portion of which are subject to a standard lockup agreement and a portion that are held in escrow, subject to PayBright's revenue performance. In early January, Affirm, then listed on the NASDAQ Exchange, and our shares became public equities. It is our common practice that when we have exposure to market volatility, such as currency or interest rate risk, we enter into hedging arrangements. Following the IPO of Affirm, we entered into a 6-month total return swap agreement to substantively hedge our market exposure related to the 655,000 common shares, which represent the noncontingent portion of the equity consideration we received were approximately 58% of our total investment in Affirm. The total return swap effectively results in the economic value for that portion of our shares being settled in cash and maturity for a fixed price of USD 108.87 per share, net of applicable fees. As was noted, we continue to remain enthusiastic about our partnership in Affirm and the prospective value of our remaining investment. When factoring in the gains recorded in the quarter and the cash produced by the business, we've continued to reduce our leverage position. As at year-end, our net debt to net capitalization declined to 64%, comfortably below our target of 70%. And the equity on our balance sheet improved to over $444 million. With a lower level of leverage and significant liquidity on hand, our balance sheet remains well positioned to support our ambitious growth plans. Lastly, as we've previously mentioned, we continue to use a portion of our free cash to invest in repurchasing our shares, while we believe that they are below the intrinsic value of our company and can produce an attractive return for our shareholders. During the quarter, we invested approximately $5.5 million to repurchase 80,000 common shares at a weighted average price of $68.44. This brought our total share repurchases year-to-date through our normal course issuer bid to 768,000 shares at a weighted average price of $55.18 were a total of $42 million worth of stock. When compared with the $24 million in dividends paid throughout the year, we returned approximately $66 million in capital to shareholders. I'll now pass the call back over to Jason for some comments on our outlook.

[Jason Mullins, President & CEO]

Thanks, Hal. We are incredibly proud of the work our team did in 2020, but we continue to believe we are just getting started. It is still early days in the execution of our plan to become the largest and best-performing nonprime lender in our industry. We continue to be guided by the 4 key pillars of our strategy, including expanding our product range, developing our channels of distribution, increasing our geographic footprint and delivering a best-in-class customer experience that has helped over 60% of our customers improve their credit score and 1 in 3 graduate to prime credit within 12 months of borrowing from us. While 2020 presents a new round of challenges as we navigate through the second and possibly third wave of the pandemic, we remain optimistic about the growth prospects in-store and the expectation of vaccine distribution and a gradual economic recovery. In our release yesterday evening, we provided a new updated outlook which contains a forecast for the next 3 years. During that period, we expect to organically grow the loan portfolio by roughly 60% to approximately $2 billion in 2023. In 2021, we expect to finish this year with a consumer loan portfolio of between $1.45 billion and $1.55 billion by year-end. We also plan to reignite our accelerated retail expansion plan with specific focus on the Quebec market and urban centers with the opening of 20 to 25 more locations this year. The total annualized portfolio yield in 2021 is forecast to be between 44% and 46%, then continue to slowly decline over the next several years as we diversify our product range, expand into Quebec and progressively lower the cost of borrowing for our customers. We are also pleased with the improvements we have made to the credit quality of our business. We expect that as the environment normalizes, the net charge-off rate in the portfolio will be sustainably stronger going forward than it was pre-COVID with a loss rate of between 10.5% and 12.5% on an annualized basis. The strength of our internal cash generation will lead to a gradual delevering of our balance sheet, while the business continues to reap the benefits of scale and the operating margin and corresponding profitability expand. To drive this growth, we will continue to invest in our business. During the year, we will spend approximately 4% of our revenues on marketing and advertising as we aim to build the most well-known and trusted brand in the nonprime lending market. And including our real estate expansion and technology enhancements combined, we will invest approximately $25 million in capital expenditures to strengthen our platform and provide new sources of growth that will help sustain our long track record of performance. We will remain focused on 3 key strategic initiatives. First, we continue to focus on developing our point-of-sale business in partnership with Affirm and directly with select retail merchants, who'll work to onboard new partners, further optimize the technology platform and expand into new verticals. We expect the contribution of new customers from this channel to continue building, and we are experiencing progressively stronger conversion into our other lending products. Our second major initiative will be to launch and begin optimizing our direct-to-consumer auto secured loan product. We estimate that there is over $13 billion of nonprime auto loan originations annually and we think there is an opportunity to create a better car financing experience for these consumers. By allowing them to get preapproved for financing and then guiding them to a network of prescreened dealers or online auto inventory, we will seek to give the customer more control and a less stressful and confusing car buying journey. Further, we can allow customers with existing vehicles to provide them as security, leading to a larger loan and a lower interest rate. We plan to issue our first auto loan by the end of the second quarter, then use our test and learn philosophy to trial and optimize the product before we begin to scale it up. Third, we remain on track to launch our new cloud-based core lending platform we've named [ Fusion ]. We believe new technologies will allow us to innovate, improve our customer experience and operate more flexibly. The introduction of a best-in-class, fully cloud-based SaaS lending solution will provide us with the platform to scale the enterprise for many years into the future. We expect to complete the configuration and migration to the new platform for testing and rollout over the course of the summer months. Lastly, while our published forecasts only contemplate the organic growth of our business, with our multiproduct omni-channel lending platform and a very well-capitalized balance sheet, we will continue to seek strategic acquisition opportunities that can drive revenue synergies, earnings accretion and long-term value to shareholders. So with 2020 now well underway, our portfolio is continuing to perform well. Although the second wave of the pandemic meant the return of stay at home orders, many of those restrictions have already begun to ease. With sales volume steadily building, we expect to grow the consumer loan portfolio during the first quarter between $25 million and $40 million. We expect the total yield generated on the loan portfolio to step down slightly to between 44% and 45% in the first quarter, then step back up slightly in Q2. And turning to credit, we continue to expect credit losses to gradually normalize to the long-term rates provided earlier. However, our consumer payment and default trends continue to perform very well in the meantime. Based on the current collection, repayment and delinquency trends, we would expect our net charge-off rate in the first quarter to finish between 9% and 10%. In closing, I want to thank our customers, our business partners and our 2,000 passionate team members that are inspired to help everyday Canadians improve their credit and get back to prime rates. After one of the most challenging years in generations for much of the world, we are grateful to be building such a strong and resilient business that serves a critical need in our financial system. The fundamentals of our business and the confidence in our strategy, are stronger than ever. With those comments complete, we will now open the call for questions.

[Operator]

[Operator Instructions] Our first question coming from the line of Gary Ho with Desjardins Capital.

[Gary Ho, Analyst]

Maybe first question is for Jason Mullins. Can you give us an update on that auto loan product launch and the other one that you mentioned, the point-of-sale expansion as well as how much of this is attributable to the loan book growth for '21 and '22?

[Jason Mullins, President & CEO]

Yes, sure. Thanks, Gary. So as we've done in the past, once we have communicated and plan to proceed with the launch of a product, we do assume some contribution from those new products once they're being prepared to be launched in our plans. However, as you also know, we use a fairly methodical test and learn strategy where we're much more conservative and modest about our growth expectations, particularly in the early years. So we've got some assumption embedded into these forecasts, but we've certainly not been aggressive with how much we expect to come from a brand-new product that still is to be trialed and learned from. As I suggested, we're well on track to having the product live in test by the end of the second quarter. So we'll be doing at least some lending of that product by then. I suspect that from our past experience with new product launches, it will be quite slow for at least the first 6 to 12 months relative to the size of our book, that is while we tweak and adjust and learn about the experience, and then we'll be able to make it more meaningful, hopefully, in the following years. Point-of-sale is a little bit different. We're already well-tested there, so we're moving much more quickly. I think the thing to note about a point-of-sale that was highlighted, I believe, in the last quarter as well was the average loan size of that point-of-sale loan is often very small, much, much smaller than our other products. And so as we noted, it contributes quite a healthy proportion of new customers. It just doesn't necessarily show up as a big dollar originations or big loan book, it really shows up in the assumptions for the growth of these other products as those customers often convert into other loans. So that's how we built the plan.

[Gary Ho, Analyst]

Got it. That's helpful. And then the other one on M&A that you just mentioned, what are you seeing in the landscape? Anything that's interesting? And are valuations still reasonable on targets that you're targeting today?

[Jason Mullins, President & CEO]

Yes. So I mean, we've continued to keep our eyes and ears open. We know we've got a very focused strategy for what we would consider in that it has to be complementary, it has to be strategic, it has to be something that would allow us to leverage our platform, it has to be something that would allow for revenue synergies. We're not looking to just cut some back-office costs and merge another business of a similar nature, we're looking for something that we can actually cross-sell and drive real revenue synergies, too. There are opportunities out there. But like we said before, we remain quite disciplined about making sure it's the right opportunity, and we're paying the right price, and it's truly accretive to our business. And so as you noted, with valuations being higher, it just requires that much more work and that much more discipline to make sure that if you are going to pursue an investment through an acquisition, that it's absolutely the right deal. So we continue to keep our eyes and ears open. There's some choices in Canada, albeit they're more limited. And as we said in the past, we're also always keeping our eyes open for something that could be very strategic, potentially in another market as well. So we'll continue to keep everybody posted as we as we move forward.

[Gary Ho, Analyst]

Okay. Perfect. And then my next question is maybe for Jason Appel. Just on the 3 scenario model that you use for assessing your allowance, can you walk me through whether there were changes in the probability rates in the quarter, so from Q3 to Q4? And second, what are the indicators you need to see to move to a more neutral or optimistic bucket?

[Jason Appel, Executive VP & Chief Risk Officer]

Great question, Gary. Thanks. So I mean, part of the fundamentals of how the provision uses, the information has not changed. I think it's just important to ground and produce a baseline in that respect. We still rely on the 4 macroeconomic indicators of changes in unemployment, inflation, GDP and oil. And we see those quarterly forecasts now through a series of models that then we weighed, as you've indicated. In terms of whether or not the weighting moved from quarter-to-quarter, I would say the weighting changes were very modest. We tend to maintain a fairly conservative slant, as you would appreciate, toward the future loan loss provision, if only because we're not out of the pandemic. We're in the middle of the second wave, the prospect of a third wave is still upon us. And as a result, we made very modest changes to the weightings, and that's primarily the main reason why the overall provision rate didn't substantively move. It only moved 5 bps quarter-on-quarter. And I'd say that as we start to emerge out of this second wave, and hopefully, if there's not a third wave, by all other things being equal, we would expect the provision to start to improve with time. And that improvement would likely be gradual as we continue to normalize our loss performance. So bottom line, while overall weightings did not change appreciably, only modestly, and we continue to keep a very close eye on that as we head into the next quarter.

[Gary Ho, Analyst]

Okay. Great. That's helpful. And then if I can sneak one more in. Hal, thanks for the new free cash flow metric. Just curious, the $211 million for 2020, why would that number be the same for fiscal '21? When I look at your 3-year outlook, wouldn't that slightly increase given the higher loan book? Can you kind of walk me through the puts and takes?

[Hal Khouri, CFO & Executive VP]

Yes. I mean it's really a product of the cash flow that's being generated on the book, Gary. And the payments that we're experiencing on the book continue to be quite strong. The premise on this one here in terms of that key statistic is that it actually incorporates a view prior to issuance of new gross receivables. So you've got to contemplate that effectively as a flat growth trajectory as well in those numbers.

[Jason Appel, Executive VP & Chief Risk Officer]

Yes, Gary, I just -- I would add to that. In terms of looking at it on a year-on-year basis, 2020, as you know, was buoyed by the fact that we had an unusually lower level of loan losses, a full point or so below the commercial forecast we've provided. We also, as you know, spend less on marketing and advertising because there was periods of time with less consumer demand. So as you think about this year, where we're going to be more ambitious about growth and making more investments in the business to fuel that growth, that just means that the rate of growth of the actual operating cash flow from the business doesn't step up as much in comparison with the prior year. So it's a little bit more of 2020 being a little bit more abnormally inflated from the strong cash generation due to lower growth as opposed to a change in the performance of the business.

[Operator]

Our next question coming from the line of Etienne Ricard with BMO Capital.

[Etienne Ricard, Analyst]

First on credit quality, could you provide an update on how your underwriting standards have changed sub the pandemic and sequentially during the last quarter? And what percentage of the portfolio has been originated since March of last year?

[Jason Appel, Executive VP & Chief Risk Officer]

Etienne, it's Jason. I can take that one. If I think about the changes we've made on the underwriting front, those have been dynamically changing now since back in March, where we modify the degree of supporting documentation and validation that we do all the way down to an industry sector level. So for example, as you can appreciate, just the take one, certain industries, particularly affected by travel. We are obviously much more stringent when it comes to our approvals and the type of information and support levels we would see in order to grant a loan or increase on top of an existing loan. And as various provinces or even regions within provinces have moved into various forms of lockdown, we have tailored those underwriting protocols at the industry sector level within those regions, depending on the severity of those lockdowns. And that would really be a function more of the types of businesses, whether or not they were closed outright, available for things like curbside pickup, available for things where their capacity limits would allow. And like I said, we have those varying now by province, and in some cases, take Ontario as an example, within various regions within provinces at various levels. To answer your second question, in terms of the percentage of the book that's been originated since last year, that number probably sits at about 65% to 70%, give or take, a few percentage points. That's obviously owing to the fact that we've seen a robust improvement in overall consumer demand. And as we've made no surprise to the fact that we obviously -- we lend to existing customers where their circumstances warrant and their credit is appropriate. So the combination of both new customer growth through POS as well as existing lending growth with our existing customers has turned about 65% of our originations since the start of last year.

[Jason Mullins, President & CEO]

And Etienne, just -- I would add to that. So I think trying to maybe understand your question a little deeper and sort of what are some of the drivers that cause the credit quality of the book to be better coming out versus going in, the way to think about it is there's a few dynamics that are at play here. As the loan portfolio has turned over during that period that Jason described, because we've had much tighter employment verification underwriting in place, the remaining book that we now have is going to sit largely in the hands of the consumers that are in the most stable jobs and in the most stable industries where they experienced the least amount of potential unemployment simply because all of those areas that were more exposed, we were not lending to during that period because we were more cautious based on their industry sector. So that's one reason. The second reason is that over the course of an economic downturn, prime lenders almost always tighten their credit criteria, which means the credit quality of the customers that you bring in, if you look at them by a mix of credit quality, usually are progressively better during an economic downturn, such that when you exit it, the overall credit quality of the customer and the book is also better. And we've seen that in the past, when you look at historical recessionary events at our peer group, that the losses usually in the years subsequent to a recession are usually quite strong, thanks to that turnover in the portfolio and the credit quality. So those are some of the factors as to why as you turn over that portfolio during a period where you're being tighter on credit quality, as are your prime lenders that sit up above you in the spectrum, the nonprime lenders portfolio overall tends to improve.

[Etienne Ricard, Analyst]

Appreciate the details. Coming back on the auto lending opportunity, I'm wondering how much overlap is there between your average unsecured borrower and the target market you have in -- for auto loans? And how easy or more complicated could that make marketing for you?

[Jason Mullins, President & CEO]

Yes. So we don't have absolute perfect data, but we estimate that between 70% to 80% of our customers have cars and have car financing at a given point in time. So the way we think about this product is it's a very, very natural extension of our suite because as far as potential new products are concerned, it's really the next one in line where the existing customer that we market, service and acquire is going to be most commonly using. So I don't think we're going to see a ton of cannibalization, if you will. Customers, like I said, that come to us for those other products still finance their vehicles separate and distinct from the other products they borrow from us. Inevitably, there will be some level. Presumably, there are some customers who may borrow an unsecured loan from us and did use it to go buy a vehicle, for example, or a private sale car. So we think there will be a little bit, but we think it's fairly minor just because of what we know about our existing customers that hold those other products and their propensity to still finance cars. So -- and the second part of your question around marketing, we're going to continue to drive forward our strategy of promoting our business as a full suite financial institution. Promoting it no differently than a bank would promote their business to a prime borrower, which is that we are a lending institution where you can come for access to any of your borrowing needs. What's a little bit unique and different about this product is that the market and the consumer is most often familiar with getting their auto financing when they go to the dealer to go shopping. So the subtle nuance here is that we will be in our marketing campaigns promoting the fact that you can come get preapproved for your financing and then go buy your vehicle and that will put you in a better position. You have more time to consider the financing transaction, more time to consider which vehicle you buy, more choices to where you buy it from, more ability to negotiate the best deal for yourself, more ability to neglect taking add-ons that you don't necessarily want from the dealer. So we're really just trying to transform the experience of the nonprime borrower, it's a little more appropriate for their circumstances. And so it's just a matter of continuing that strategy of promoting our entire range of products as we build out that full suite financial institution concept.

[Etienne Ricard, Analyst]

All right. Perfect. One last question on my end. From an industry perspective, it seems that installment lending has outpaced credit cards, for example, or lines of credit. So I'd like to get your thoughts on the different drivers of this trend as to why installment loans are gaining traction relative to other options.

[Jason Mullins, President & CEO]

Yes. So I mean I'll tell you some of what we think is behind that. So what we've seen is a couple of things. One, some of that installment loan trends relative to the other revolving products has been driven by the rapid growth in the buy now, pay later point-of-sale finance market. If you look at that particular form of financing, those industry participants like Affirm, like a PayBright that have offered a installment product, a pay as you go, buy now, pay later program have had in that subsector the greatest growth in success globally and especially within North America for the last number of years. So that's a big driver of installment. When we look at the demographics of the customer, the younger demographic tends to prefer installment products as opposed to revolving products. We've seen that in surveys we've done that they have a bias towards fixed payments where they can build an easier to manage budget. And they have a lot of fear of having at the risk of getting trapped into a cycle of debt from the attractiveness and appeal of a minimum payment on a credit card. So it's not that credit cards and revolving products don't still serve a key purpose. They do, and they may be in the future of our product suite, a part of that offering for certain customers. But by and large, I think a combination of point-of-sale and demography have driven more of an appetite towards installments. The last thing I would add is that the other kind of just overall consumer trends that I think we've all seen is the subscription model. We've seen it in television. We've seen it in radio, seen it in fitness. And so the consumer is progressively becoming more conditioned to the idea of simply putting all of their life's obligations on regular and frequent installments that they can build into their budget. So I think you also end up with some of the cause of the trend being a by-product of what they experienced in the other parts of their life outside of their purely financial transactions by way of those subscription trends as well. So those would be some of the things we think are part of the drivers behind what creates a different trend for installment than perhaps, say, some of the other products.

[Jason Appel, Executive VP & Chief Risk Officer]

Just to add to that, Etienne, it's Jason here. I think the other thing we would add is that installment products offer a certain degree of predictability when it comes to payment certainty. It's not that you can't get that on credit cards, but credit cards don't force you to pay anything other than the minimum payment, which is often a very, very small fraction of what is actually outstanding. The beauty of an installment product is that it obligates the customer to a fixed payment that progressively pays down the loan within a periodic duration of time whereas in the revolving products, be they credit cards or line of credit, while they give customer tremendous flexibility and serve a purpose, they don't necessarily enforce a certain payment type or frequency. And for the consumer who's, in some cases, caught off guard and not in a position to have full control over their finances, that's where that product can sometimes lead them astray and put them in that so-called cycle of debt. And I think under the current circumstances, having a finite fixed payment set up for them in an installment type product has just that much more appeal under the current circumstances. So I would just have you think on that one as well.

[Operator]

Our next question coming from the line of Stephen Boland with Raymond James.

[Stephen Boland, MD & Equity Research Analyst]

Just two quick questions. The first one is just on the loan protection plan. Your partner, I guess I'm trying to get an idea of the tenure of your partnership with the insurance company because, obviously, it's been a difficult year for them in terms of paying out claims. And I believe it comes out of a sort of a shared pool. But I mean, is there any renegotiation anticipated there? Or is that an annual policy or a multiyear policy that you have or are in agreement with them?

[Jason Mullins, President & CEO]

Yes. So it's a multiyear agreement. We still have some time left on that agreement, and we regularly speak to our partner about the renewal of those programs. The relationship is incredibly strong. The insurer is doing incredibly well. If you look at the latest quarter and annual financial release by Assurant, they saw a substantial increase in overall profitability in 2020 to the extent that they were very active themselves with dividends, buybacks and other things of that nature. So they're financially very sound. Our program is built with the expectation and anticipation that it's going to be a long-term arrangement and that within that long term arrangement, there will inevitably be some type of economic shock or event that is likely to cause periodic pressure on unemployment, but that's overall expected and, therefore, embedded into the commercial terms. As of all of the conversations we've had with them progressively throughout this entire period, at no point have they or we felt there's any need to change pricing, or nor have they or we felt there's any need to not to renew and extend our agreement with them when it does come up for its next renewal. So we feel very confident in that partnership in that program, and it is really well built to be quite resilient through events like this.

[Stephen Boland, MD & Equity Research Analyst]

Okay. That's good news. And just going back to the auto loan product, I know it hasn't been launched yet, but I understand the front end of the program. I guess the part I'd like a little bit more information on is what if there is a delinquency after the person purchases the car or there is even a default where they're not paying you back at all? Do you have recourse to repossessing the vehicle or what's the back end of the product, I guess?

[Jason Mullins, President & CEO]

Yes. So we would follow a very typical servicing arrangement. So once the customers purchase the vehicle, as you've noted, we would register a lien on that vehicle so that it does act as security. In the event we're unable to work with the customer to find a appropriate way for them to handle any type of financial challenge they run into, then they have the opportunity to surrender the vehicle and surrender the security, possibly have it sold and be able to move themselves into another vehicle. And in the most unfortunate circumstances, it does potentially require that we actually have to recoup the vehicle. Much like we do with our unsecured legal practice, our home equity secured recovery practices, we employ a very customer-centric model. We don't, in this example, intend to put switches into vehicles that will turn them off or those kinds of things. Just like on our home equity product, we very, very, very rarely ever have to actually go do a foreclosure or power of sale on a property. We have found that we're usually quite successful in working with the customer to find an arrangement that is suitable. But the reality is, is that there are times where you have to exercise on your rights to the security, and you will have to recollect the vehicle from the customer. Having said that, what I would say is having done collections on secured products like this for a long time. The vast majority of the time, the customer is quite cooperative and voluntary in surrendering, if you will, the security that's been pledged on a loan product. It's more cooperative than often people might think it would be, but it does happen.

[Stephen Boland, MD & Equity Research Analyst]

Okay. And will that lien be put on at the time of purchase? I mean they buy it one day, and it gets -- they sell it the next day and take the cash and not pay you back. Like is that part of the -- will that be done upfront or -- if the person goes into delinquency?

[Jason Mullins, President & CEO]

Yes. No, the lien on the asset is put on it right upfront. So they won't be able to change ownership of the vehicle based on a lien that we've applied. So as soon as it's purchased, it would be just like the way -- same from that perspective, car buying experience that any of us would have had in the past, which is at the time that you are buying the vehicle, if you are using financing to make the purchase, then there is a lien applied on the vehicle at the time that the ownership is transferred.

[Operator]

[Operator Instructions] Our next question coming from the line of Jaeme Gloyn with National Bank.

[Jaeme Gloyn, Analyst]

First question is related to the advertising spend in the quarter. And if you could talk about how you're approaching advertising in the upcoming quarters, should we expect to see a little bit higher there? And what does this say about customer acquisition costs in this environment? Are you seeing any shifts in that aspect of the business?

[Jason Mullins, President & CEO]

Yes, sure. So as noted in the prepared remarks, we intend to spend approximately 4% over the course of the year of our revenues on marketing and advertising. That's pretty consistent for the most part with the past. We'll obviously choose to increase that discretionary expense at times if we think it's worth spending additional marketing dollars because we believe there is further demand we could capture at a good cost of acquisition that generates a sufficient return. The pace of that advertising spend will look fairly similar to past years in which we generally tend to spend more in the second and fourth quarters as the spring and holiday season tend to be when we see demand spike. And then softer level of spend in the first and third quarters, particularly the first quarter this year, given the current pandemic environment. Ultimately, when demand is lower, your cost of acquisition is higher, unless you choose to just spend less and accept less growth. So naturally, at the moment, when we're dealing with a lower level of overall demand, it's that much more important we get our ads and our brand in front of the eyeballs of the consumers that do need access to credit. And so often, we are willing to pay a little more to get a customer at that moment in time. We're in a fortunate position where we've got a healthy lifetime value. We can afford to periodically spend a little more to get a customer. And we know very much what each loan and each customer is worth to us. So we're able to self impose our own guardrails as to how much it makes sense to spend to acquire a customer in order to still remain appropriately profitable and generate an appropriate return. I suspect that if you think about our commentary on the forecast, we should hopefully see that as we hit the second quarter and the spring months. There'll be a combination of the benefit of lockdown measures. There'll be a combination of the benefit of warming weather. And hopefully, if things fall through, the benefit of a progressive distribution of the vaccine, and we should see demand and growth really start to pick up in a more meaningful manner at that time. And if it prolongs, then it might be closer to summer before we see that. It's hard to predict, but we've tried to create a set of projections that we think have some guardrails and some boundaries that hopefully adequately capture the varying potential scenarios that we might see unfold with respect to demand.

[Jaeme Gloyn, Analyst]

Great. And then with respect to the point-of-sale and buy now, pay it later markets, when do you expect you'll be in a position to -- or can you disclose the share of the total book today, share of originations? What you're baking into your forecast with respect to point-of-sale and buy now, pay it later with the relationship with Affirm? And is there is there anything with respect to U.S.-based originations that's baked into the forecast at this point given that relationship?

[Jason Mullins, President & CEO]

Yes, great question. So we have not yet and don't have any near-term plan to break out origination dollars or the consumer loan book at that level. However, there's a couple of reasons for doing that beyond just the normal answer of it being more disclosure and more for our competitors to pry at. Beyond that, the other primary reasons is that I don't think it necessarily is incredibly instructive. We have disclosed, as mentioned in the prepared remarks, that about 20% so of our new customers we acquire are coming from point-of-sale. So that's a very important and helpful reference point, I think. We've disclosed that of our point-of-sale business, the mix between what we do through our partnership with Affirm and what we do directly with other merchants and other verticals that they may not be in is pretty proportionately split. So we've shared that as well. The reason it's not necessarily super instructive beyond that is that, today, when a customer takes a point-of-sale loan, we then offer them shortly thereafter those other products. And so in some cases, you have a customer who is taking a very small point-of-sale loan and then within a few months, sometimes even a few days, they are retiring that loan and converting over into another product. And therefore, the origination dollars and the consumer loan book on that point-of-sale product would appear very inconsequential. However, that acted as a very meaningful source of customer acquisition. So we'll probably continue to, as this channel builds, progressively provide incrementally more information that helps people understand how it's going. But those are some of the reasons why we've sort of chosen to provide what we've provided so far. And as I said before, it is embedded into our assumptions that it will continue to grow and expand. But we think we've been very reasonable with those assumptions. To the last part of your question, no, we have not embedded in an assumption for any growth outside of Canada nor any acquisition assumptions for that matter. We're early days in working with Affirm as a new partner. Things are going well. We hope to continue to build that relationship. And certainly in the event we were to go to another market, they would be a great partner to perhaps work with in other countries as well. And we know that they've got an ambitious international growth plan, Canada was their first acquisition in an international market, they plan to go into other countries, including expansion into Europe. And so that partnership, obviously then will just lend itself well for those opportunities down the road.

[Jaeme Gloyn, Analyst]

Okay. Great. Just one quick follow-up. The customers that are acquired through the point-of-sale channel, do you -- what level of conversion is typical that you've experienced so far in that channel?

[Jason Mullins, President & CEO]

So what we're seeing is that over the course of a year, we would expect about 1/4 to 1/3 of them to convert into at least 1 other product.

[Operator]

And I'm showing no further questions at this time. I would now like to turn the call back over to our speakers for any closing remarks.

[Jason Mullins, President & CEO]

All right. Thanks, everyone. Well, if there's no formal questions, we appreciate you joining the call today, and we look forward to updating you on our next quarterly release when we release Q1 results in May. Have a fantastic day, everyone. Thank you.

[Operator]

Ladies and gentlemen, that does conclude our conference call today. Thank you for your participation. You may all disconnect.