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SRISK The Future Of Stress Testing


Power Forecast Briefing: Fleet Transformation, Under-Powered Markets, and Green Energy in 2018

Nexstar Buys WGN For A Song; Divestiture Of WGN, Stakes In Food Channels Likely

2018 US Insurtech Report

Ondeck Now Open To Exploring Deals, CEO Says

Credit Analysis
SRISK The Future Of Stress Testing

Jun. 01 2017 — The 2008 financial crisis highlighted the threat of systemic risk: the risk generated by the interconnectedness of financial institutions (FIs). It also emphasised the importance of monitoring FIs that are considered ‘too big to fail’. As a result, financial regulators resolved to monitor the capital levels of Systemically Important Financial Institutions (SIFIs) to make sure they could cope with the risk that a future stress event could cause.

In July 2013, the Financial Stability Board published a list of systemically important banks and insurers based on a range of criteria including size, complexity, and interconnectedness. However, these underlying indicators are only backward-looking, whereas systemic risk is also driven by dynamic and forward- looking factors. New analytical tools based on publicly available market and accounting data are a useful complement to capital requirements that regulators propose.

What is SRISK?

SRISK is a measure developed by the Volatility Institute of the NYU- Stern School of Business, which provides insight into the direction and magnitude of stress events. SRISK measures how much capital an FI would need to raise in order to operate normally when faced with a crisis event (defined as a percentage drop in the global equity market over a certain period). A high value signifies elevated risk in terms of capital shortfall. Each individual firm’s value is determined by its size, leverage and level of interconnectedness, and, in aggregate, SRISK represents a stress test on the financial system.

SRISK in action

Several remarkable political events transpired in the second half of 2016:

  • Britain chose to leave the European Union
  • Donald Trump won the U.S. presidential election
  • The Italians voted ‘No’ in the constitutional referendum

The remaining 2017 political calendar, including the upcoming general election in the United Kingdom and the parliamentary election in France, demonstrates a pressing need to try to forecast the effect these stress events may have on the stability of financial markets. The following examples illustrate how applying SRISK’s methodology makes it possible to quantify the impact of these systemic risk events:


As the first phase of post-Brexit risk peaked at the end of July 2016, of all the financial institutions in Europe, it was the banks which experienced the highest SRISK values. Four of the top ten were British, three were French, and the others were German, Spanish, and Italian. There was greater diversity among U.S. FIs: the top ten consisted of five banks, four insurance firms, and one investment manager.

Examining the change in SRISK value between May 2016, the month before the Brexit vote, and the end of July 2016, Lloyds reported the biggest jump, likely due to its level of exposure to the U.K. economy, but insurers AXA and Allianz, and financial services group ING also experienced significant increases. Analysis of the underlying indicators used to measure SRISK revealed the main drivers for these changes were a decrease in equity values and higher risk caused by market volatility and correlation.

Despite the increase in systemic risk following the Brexit vote, U.S. and European FIs showed resilience when coping with the fallout. However, continuing uncertainty around Brexit may generate systemic risk in the future, so it is worth monitoring closely. The General Election on June 8, 2017 will provide insight on the U.K. position going into the Brexit negotiations.

The U.S. presidential election

S&P Global Market Intelligence and the NYU V-Lab measured the change in SRISK values of FIs across the Americas between the end of October 2016 (days before the election) and the start of April 2017. Interestingly, the SRISK value fell for five of the top 10 firms due to a greater increase in market capitalisation relative to risk, while the market value for all 10 firms rose. This was in response to the prospect of deregulation and higher interest rates. Optimism and more risk taking after the election led to elevated trading revenues, possibly explaining why SRISK values for firms like JP Morgan declined significantly.

When the time period was shortened to a month after the election, the results were different. Seven out of the top 10 SRISK contributors were Latin American banks, with five from Brazil. However, by the start of April 2017, just one of these Latin American banks, Bank of Bradesco, was featured in the top ten. It could be argued that Trump’s election didn’t increase systemic risk among FIs in the Americas overall, although the possibility of deregulation in the financial services industry could lead to greater risk in the future.

The Italian referendum

SRISK values peaked a week after the referendum in December 2016 when the total capital shortfall in the Italian banking system hit $147.486 billion. Banca Monte dei Paschi di Siena ranked fourth in systemic risk among Italian firms, primarily due to its very high leverage. This Bank was the only FI to fail the last round of the European Banking Authority stress tests. The SRISK value for the rest of the top ten had improved by the end of the month.

The capital shortfall had dropped to pre-referendum levels of $95.541 billion at the beginning of April 2017. However, the top three FIs-- Unicredit, Intesa and Assicurazioni Generali-- accounted for 74% of the total systemic risk in the country, although only Unicredit features on the Financial Stability Board’s SIFI list. While the Italian referendum didn’t have a major impact on systemic risk, the concentration of SRISK among three FIs may be a cause for concern from a domestic standpoint.

The recent and upcoming French elections

The results of the 2017 French Presidential election have significant implications for the global economy and, particularly, for the future of the European Union. Emmanuel Macron’s decisive win on May 7, 2017 may have reduced EU-related risk, as the goals of his administration are to:

  • Liberalize the economy via streamlining labour laws and supporting small businesses
  • Propose reforms for the governance of a more integrated Eurozone
  • Unite a deeply divided country

However, the ability of Macron’s party, En Marche, to reform France will depend on the upcoming legislative election, which will take place in the country on June 11 and 18. Currently, the likelihood of winning an absolute majority for En Marche looks slim, so a coalition will probably be required. A divided government may notably impede Macron’s policy making and implementation, creating risks for France and the Eurozone.

Heightened economic uncertainty pending the outcome of the parliamentary election in June means that SRISK values are expected to change significantly during this period. Close monitoring of SIFI’s SRISK values could provide early indications of impending trouble for markets.


Global political uncertainty has highlighted a need for a forward-looking and dynamic tool, such as SRISK, able to quantify and provide insight into how FIs will contribute to systemic risk.

Our SRISK analysis of Brexit, the Trump election, and the Italian Referendum has shown a temporary but material increase of aggregate systemic risk in the wake of these events. However, with uncertainty remaining over Brexit negotiations, fluid U.S. policy, and the upcoming French legislative election, there is no doubt that SRISK has a valuable part to play in how these political events will impact market stability.

For further information on the methodology behind SRISK and how it was applied to these scenarios, please read the full report.

Watch: Power Forecast Briefing: Fleet Transformation, Under-Powered Markets, and Green Energy in 2018

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Technology, Media & Telecom
Nexstar Buys WGN For A Song; Divestiture Of WGN, Stakes In Food Channels Likely

Dec. 10 2018 — Walt Disney Co.'s pending acquisition of much of 21st Century Fox Inc. certainly raised the bar for cable network valuations — at 15.4x cash flow — and the divestiture of the regional sports networks may see another double-digit-multiple transaction with Inc. in the mix of buyers. Another deal, Nexstar Media Group Inc.'s pending acquisition of Tribune Media Co., sees stakes in three cable nets going to the buyer for single-digit multiples (6.9x).

The deal follows the collapse of Sinclair Broadcast Group Inc.'s deal to buy the company, which is now being litigated. We think that Nexstar is getting quite a deal on the cable network assets and will likely flip them for a quick profit.

When Discovery Inc. agreed to buy Scripps Networks Interactive Inc. in July 2017, the domestic cable networks were valued at $10.14 billion, or 10.5x cash flow, with Food Network (US) valued at $4.5 billion (Scripps owned 68.7%) and Cooking Channel (US) (also at 68.7%) valued at $525 million.

In the current transaction, the valuations come to $3.47 billion and $323 million, respectively. Thus, if Nexstar can get Discovery Communications to pay at least what it paid in the Scripps transaction, Nexstar may make a quick profit. Granted, minority interests typically trade at a discount. Scripps Networks Interactive, however, has tried for years to cut a deal to buy out the minority stake and it may be willing to strike a deal at a higher price to put this issue behind it.

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2018 US Insurtech Report


S&P Global Market Intelligence’s 2018 US Insurtech Market Report projects that U.S. private auto insurance premiums written via the direct-to-consumer channel will exceed $90 billion by 2022. The report also examines startup funding trends and identifies other business lines that could be ripe for insurtech disruption.

Nov. 30 2018 — U.S. insurance technology startups are numerous and still very much in their early years. As is common with an emerging fintech segment, investor and public interest in the space is high despite the risky nature of startup investing. The insurtech space had a recent gauge of public investor interest with the IPO of lead aggregator EverQuote. While the IPO priced above its expected range, the stock’s performance since then has been lackluster, a disappointing sign for others looking to go public. But many startups are still many years away from that goal, and there might be more investor appetite for different business models. Unlike Netflix and other companies that have caused wholesale disruption in various industries, many insurtech startups are working with incumbents rather than trying to replace them. Incumbents are avid investors in insurtech companies, and the digital agency model relies heavily, for now at least, on partnerships with established underwriters. Of the different insurtech business models, digital agencies and underwriters continue to attract the most funding and therefore form the focus of our report. Though many facets of their business model are not revolutionary, they have added meaningful innovation in some key areas. Certain business lines appear more ripe for innovation than others. In private auto, for instance, the direct distribution model already has a firm foothold and therefore seems less vulnerable to disruption by startups. S&P Global Market Intelligence projects that premiums written in the direct response channel will exceed $90 billion by 2022 and that they will account for more than 30% of overall U.S. auto premiums. But if the direct model can be applied to other lines, such as small business insurance or life insurance, that might produce a more dramatic challenger to the incumbent writers of those lines.

Early days

Interest in the U.S. insurtech space has spiked in recent years, fed by a large crop of startup companies. It is too early to assess how successful most insurtech startups and their investors will be as many companies are only a few years old at this point. In S&P Global Market Intelligence’s coverage universe, the median age of U.S. insurtech companies — based on the year they were founded — is seven years. But the recent spate of startups is even younger than that. The years 2015 and 2016 were a particularly bountiful time; companies founded in those two years alone account for roughly 22% of the coverage universe.

Appetite for disruption

One of the textbook examples of industry disruption is Netflix, which drastically reshaped the distribution of entertainment, first through its DVD mail service and again through its on-demand streaming service. These changes brought about the demise of in-store video rental giant Blockbuster, which reportedly had the chance to buy Netflix for only $50 million in 2000.

We do not foresee the same kind of seismic changes coming for much of the U.S. insurance industry, since the fundamental distribution model is not changing. The startups covered in this report — both digital agents and fullstack companies — are proponents of the direct distribution model, selling policies directly to consumers via their websites and/or mobile apps. But this is far from a novel concept. Areas of the insurance industry have embraced online, direct-to-consumer distribution for some time.

S&P Global Market Intelligence client? Click here to login and read the full 2018 US Insurtech Market Report

The projections reflect various assumptions regarding premiums, losses and expenses. They are a product of a sum-of-the-parts analysis of individual business lines that is informed by third-party macroeconomic forecasts, historical trends and recent market observations that include first-quarter 2017 statutory results and anecdotal commentary about market conditions. Projected results are displayed on a total-filed basis and are not intended for application to individual states, regions or companies. S&P Global Market Intelligence reserves the right to update the projections at any time for any reason.

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Ondeck Now Open To Exploring Deals, CEO Says


OnDeck has never done an acquisition, but M&A is a possibility now that the company is generating cash, Chairman and CEO Noah Breslow said.

Breslow expects there to be consolidation across online lending companies in the near future.

OnDeck plans to launch a new product line, such as a business credit card or an equipment financing product, by year-end.

Nov. 30 2018 — Noah Breslow has been at the helm of On Deck Capital Inc. since June 2012, overseeing the company's initial public offering and several profitable quarters. The online lender has originated more than $10 billion in small-business loans and is one of the largest players in the industry.

In addition to originating its own loans, OnDeck recently launched ODX, a new subsidiary focused on a platform-as-a-service product for banks. OnDeck has operated that sort of white-label partnership with JPMorgan Chase & Co. for several years and will launchoperations with PNC Financial Services Group Inc. in 2019.

Now, the lender is open to doing deals, Breslow said. He sat down with S&P Global Market Intelligence in Las Vegas to talk about his company's future product plans and the broader online lending marketplace.

The following is an edited transcript of that conversation.

OnDeck CEO Noah Breslow
Source: OnDeck

S&P Global Market Intelligence: How do you view the current state of the online lending marketplace?

Noah Breslow: What you're seeing in that market is a bit of survival of the fittest. Many smaller companies are probably going to be sold in the next couple of years.

The advantages in the business go to those with scale: You can raise capital on the best terms, you collect the most data, so you can make the best decisions when you build your models, and you can reach more small-business owners more efficiently.

That being said, do you foresee being an acquirer?

We're open to it. We haven't acquired a company in 11 years of doing business. One of the advantages of now being profitable and generating cash is we can look around the market.

But we're designing our core business model so we don't need to acquire to hit our targets. Anything we do in the M&A sphere will be additive, and it will not be aggressive M&A. It's going to be reasonable bets to have a nice return or nice synergies, if we do it.

Is OnDeck considering starting other products outside of small business lending?

Not at this time. We focus on trying to be the best small-business lender in the world, but that can mean a lot of different products over time.

Today we have a term loan and a line of credit product. We've talked about four other products that our customers use: equipment financing, invoice factoring, Small Business Administration lending and small-business credit cards. Those are all fair game for us over the next couple of years.

We're on track to announce our third major product by the end of the year. One of those four will probably be picked.

Why is OnDeck focusing on small business lending rather than other offerings?

It's where underwriting is not commoditized. Student lending and personal lending are based on FICO. You can go to 10 different websites and get identical products.

In small business lending, the intellectual property around the OnDeck score is unique.

I like being able to differentiate in that way. It creates a sustainable advantage for our business, whereas if we were just using FICO to underwrite, anyone can buy that and get into the market.

OnDeck's white-label product lets banks use its technology to streamline their own lending process. In those partnerships, do you face regulatory restrictions with the use of alternative data in underwriting models?

When we're partnering with banks, it's critical that the bank has a lot of control over the credit model and the data being used for decisioning.

The model we use with JPMorgan Chase was jointly developed between OnDeck and Chase, so obviously Chase was very comfortable data. The model we're using with PNC is more of PNC's design, and we're advising on its creation. In both cases, we're using data that's right down the middle of the fairway — business credit, business cash flow and evaluating the business owner — but nothing too esoteric.

In our own business at OnDeck, we can use more alternate data because we don't have the same modeled governance that a bank might have.

Are you using machine learning to synthesize data sources and create new models based on alternative data?

Some players out there have tried to go purely digital and almost let the computer decide how to make the decision. We don't believe in that.

We have a hybrid model, where people with a lot of commercial underwriting experience are working in concert with advanced modeling techniques to get the result.

OnDeck's charge-off rates have declined year over year in 2018. Is there correlation between these lower rates and your updated models using more alternative data?

Our credit models have improved over the last year, and alternative data definitely contributes.

Many of our improvements in the last year have been structural or operational. I view the modeling improvements as even more upside potential from here.

We noticed after we loaned our first billion dollars that our credit models got a step-function better. Now, with $10 billion under our belts, it's again happening. We can do a lot of data-driven decision-making about who we approve and who we decline on many years of history now.

It starts to become more powerful. That's why you see these scaled-up companies like American Express or Discover Financial or Capital One. They're reaping the benefits of decades of lending, and hopefully we'll be in the same place.

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