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Data Dispatch: Rates Rise Prices Out 1 Million US Renters, But Housing Fundamentals Stay Strong

Energy

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

Ondeck Now Open To Exploring Deals, CEO Says

2018 US Insurtech Report

Banking & Financial Services
Data Dispatch: Rates Rise Prices Out 1 Million US Renters, But Housing Fundamentals Stay Strong

Highlights

A sharp spike in mortgage rates in the U.S. has made the typical mortgage unaffordable for more than 1 million renter households, but history and leading economists suggest rising rates will not dampen home prices.

Jun. 18 2018 — Through the first five months this year, mortgage rates in the U.S. have increased enough to push up payments by roughly $100 for the typical homebuyer, an amount large enough to price out 1.25 million renter households.

Banks and other companies dependent on mortgage revenue have reason for concern as analysts widely agree that the rate spike will slash refinancing volume. Rates for numerous products have been on the rise lately, a development likely to continue following the Federal Reserve's June 13 decision to hike rates. The jump in mortgage rates can exacerbate affordability issues in high-priced markets.

"There are always some people right on the margin, so changes in interest rates can make them realize they no longer qualify," said Lawrence Yun, chief economist for the National Association of Realtors. He said a 100-basis-point increase in rates would reduce sales by 7% assuming a static economy. However, since job growth and wage gains tend to accompany a rising-rate environment, the impact would likely be smaller.

While wages are rising, the recent increase in mortgage payments has been more dramatic. The typical mortgage payment increased 7.5% to $1,212 at the end of May from $1,127 at the beginning of the year, according to data from the National Association of Realtors and Ginnie Mae. In the latest jobs report released June 1, the Bureau of Labor Statistics reported that average hourly earnings increased by 2.7% year over year.

As a result, more than 1 million renter households are no longer able to afford a typical mortgage. In January, a mortgage required an annual income of $48,301 to be considered affordable. By May, the increase in rates means a household needs to earn $51,937 to afford the same mortgage. Assuming the households are uniformly distributed within the income bands in Census Bureau data, that represents roughly 1.25 million renter households.

But economists doubt the loss of some potential buyers will be sufficient to derail the appreciating housing market. Markets most affected by affordability issues tend to suffer from inventory shortages, so the loss of some qualified borrowers will have little impact, Yun said.

Further, even first-time buyers who might be more affected by the jump in mortgage rates are not necessarily priced out by the increase in rates. While many consumer advocates recommend a mortgage debt-to-income ratio of 28%, government regulations permit higher ratios and lenders are increasingly allowing adjustable-rate and other more flexible mortgages.

"You tend to get more relaxed lending standards during a period of higher interest rates," said Laurie Goodman, co-director of the Housing Finance Policy Center at the Urban Institute, a think tank. "The credit box is slowly expanding, and I think higher rates will make it expand even more."

While adjustable-rate products and the concept of marginal borrowers stretching finances might be reminiscent of subprime practices that triggered the 2008 credit crisis, consumers have much stronger balance sheets today. For example, debt loads peaked in 2007 when mortgage payments accounted for more than 7% of disposable income across the country. The figure as at the 2017 fourth quarter was 4.4%, which is the most recent data available, .

Further, Goodman said a borrower's residual income tends to be a better indicator of future performance than the cruder debt-to-income ratio. Goodman also pointed to increasing nontraditional sources of income, such as driving for Uber, that are generally not included in the income metrics that banks use to underwrite mortgages.

All told, economists think many of the 1 million renter households priced out of affordability can find alternatives to buy a house.

"For the buyer who drops out of the market, it's extremely important, but in the large, national market sense, the scale is small," said Mark Fleming, chief economist for First American Financial Corp., a real estate services company. Fleming agreed that a spike in rates will have little impact on home sales. He estimated that doubling the mortgage rate would reduce home sales by about 5%. He forecast that such a scenario would slow the increase in home prices, but that they would continue appreciating.

Sarah Mikhitarian, an economist for Zillow Group Inc., a real estate listings company, said supply-demand fundamentals will be the more significant factor for home prices and sales. She said rising rates will most affect high-priced markets such as the San Francisco metro area, but intense demand in those markets should offset any negative impact from higher rates. Rising rates could actually tighten supply without affecting demand, she said.

"We have this huge aging millennial population that is looking to buy homes, so there is a lot of demand," Mikhitarian said. "And [rising rates] could worsen the inventory issue because people who would have sold their home could hold on to it instead of purchasing another home."

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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 Amazon.com 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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Ondeck Now Open To Exploring Deals, CEO Says

Highlights

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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Insurance
2018 US Insurtech Report

Highlights

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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