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US SEC rushes back to work as another shutdown looms on the horizon

2018 US Property Casualty Insurance Market Report

Credit Analytics Case Study Poundworld Retail Ltd

Opinion: Look Outside the US for Insurance Blockchain Projects

Street Talk Podcast

Street Talk Episode 23 - As More Banks Reach for Yield, Advisers Urge Caution


US SEC rushes back to work as another shutdown looms on the horizon

Wall Street's chief securities regulator is racing to address a backlog of submissions ahead of a February deadline that could once again partially close the agency's doors.

With the U.S. federal government reopened after the longest shutdown in its history, the SEC resumed normal operations Jan. 28. Now, the agency's staffers will have to sift through the hundreds of largely untouched registration statements, whistleblower tips and other filings that were submitted while most of the SEC's roughly 4,400 employees were furloughed.

"Thirty days is a long time for the SEC to not be at work, and the volume of materials that have probably flowed in during that period would be somewhat overwhelming," said Michael Liftik, a partner with Quinn Emanuel Urquhart & Sullivan LLP who previously served as deputy chief of staff for former SEC Chair Mary Jo White. "There's clearly going to be a massive triaging exercise."

To handle the backlog of filings, the SEC plans to tackle each one based on when it was submitted, several of the agency's divisions said in statements posted to the SEC's website. The SEC's Divisions of Investment Management, Trading and Markets and Corporation Finance said they would be willing to circumvent those plans in cases of "compelling circumstances."

But the SEC may only have a few weeks to take on the lion's share of those filings with its full staff.

On Jan. 25, President Donald Trump approved a plan to reopen the government for three weeks amid continued negotiations over funding for his proposed border wall. If a deal is not reached by Feb. 15 though, the government could again shutter, and the SEC could once again face a massive reduction to its staffing levels. The December 2018 shutdown forced roughly 94% of the SEC's staff to be furloughed, leaving the regulator with only 285 individuals.

"There's a real risk that things are going to be closing down again in the middle of February," said Gary Goldsholle, a partner at Steptoe & Johnson LLP and former deputy director of the SEC's Division of Trading and Markets. "If people are concerned about what might be happening on February 15th, they're going to rush to get things in as well."

One of the biggest points of contention on Wall Street about the shutdown surrounded the SEC's Division of Corporation Finance and its inability to provide insights to companies preparing for initial public offerings. That, several industry experts said, posed a threat to the handful of potentially historic IPOs slated for 2019.

Now, companies may try to accomplish as much of the IPO process as possible in the brief window of time the SEC is guaranteed to be open.

The rush to the public markets could also be accelerated by an approaching Feb. 14 deadline for companies to price their IPOs using third-quarter 2018 results. If they are unable to meet that deadline, those companies would have to refile updated financial statements with the SEC, which can be an "exhaustive" process, said John Reed Stark, a former SEC official who led the agency's Office of Internet Enforcement and now operates a cybersecurity consultancy business.

The shutdown also raised questions among lawmakers who worried that lacking resources at the SEC would infringe on the regulator's ability to properly monitor markets.

The SEC's Enforcement Division did have some employees on hand during the monthlong shutdown, but staffers will still likely need some time to build their investigations back up and explore recently filed whistleblower tips, complaints and referrals. Enforcement attorneys will also need to unfreeze the cases and investigations that were in process before the shutdown, which Stark said is "unprecedented" in the SEC's history.

"It's a tremendous, almost herculean, task that they have ahead of them with respect to the backlog," Stark said.

The SEC's staffers will likely be working with some degree of urgency in the coming weeks as they near another potential shutdown in February, said Quinn Emanuel's Liftik, who also worked as an enforcement attorney at the SEC. While the government shut down on various occasions during Liftik's nearly 10 years at the SEC, the agency never fully ran out of funding.

"Typically, the attitude of the staff was to put their heads down, do their work and not worry about the politics," he said of the times the SEC was facing a potential shutdown while he worked at the agency. "With this shutdown, that's probably harder to do. But I think the leadership will be signaling to their staff: Do the work that's on your plate, three weeks is a long time [and] don't worry about what's going on."


Insurance
2018 US Property Casualty Insurance Market Report

Highlights

S&P Global Market Intelligence’s 2018 US Property & Casualty Insurance Market Report offers a five-year outlook for the P&C sector, which should return to underwriting profitability for the first time since 2015.

Oct. 26 2018 — The federal tax reform President Donald Trump signed into law in December 2017 should help provide for an extended period of P&C industry profitability in 2018 and beyond as companies benefit from the lower corporate tax rate, but the impact is not limited to after-tax profitability. Actions by several prominent European-headquartered insurers to change the way certain of their U.S. business is reinsured materially impacted premium growth rates in the first quarter of 2018 and are likely to affect full-year results.

1 quarter does not a trend make

Historically strong results for the State Farm group in the first quarter
helped drive favorable comparisons in several key measures of underwriting profitability. To the extent the improvement continues for State Farm — the industry’s largest group based on direct premiums written — it could provide an additional tailwind for 2018 and beyond.

While there is a risk of recency bias in reading too much into a single quarter’s worth of data, the industry was already positioned for improved underwriting results in 2018. The second half of 2017 saw elevated catastrophe losses as the United States was hit by three landfall-making hurricanes and an unusual spate of fourth-quarter wildfires in California. Projected results for 2018 and subsequent years, all of which show combined ratios of less than 2017’s total of 103.5%, assume a normal catastrophe load.

Auto repairs in progress

Competition will remain intense in certain non-auto business lines given ample reinsurance capacity, high levels of industry capitalization and a macroeconomic environment that remains characterized by relatively slow growth in gross domestic product. Though modestly higher business volume driven by that economic expansion will help offset downward pressure on premiums, the industry will be challenged to achieve profitable top-line growth.

Trends in litigation will increasingly weigh on underwriting results in several business lines, including professional lines and the Florida homeowners business. They also could lead to greater demand for coverage, particularly for new and emerging risks.

The macro view

A rising federal funds rate and 10-year Treasury yields that have reached seven-year highs bode well for an industry that has long been suffering from low interest rates. And the relief cannot come quickly enough after the industry’s net yield on invested assets slipped to a new low of only 3.03% in 2017. Though projected results provide for increasing yields from that floor, the improvement will still take place gradually and is unlikely in and of itself to materially impact how companies are underwriting business

S&P Global Market Intelligence client? Click here to login and read the full 2018 US Property & Casualty Insurance 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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U.S. Insurance Market Report – Property & Casualty (June 2017)

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Credit Analysis
Credit Analytics Case Study Poundworld Retail Ltd

Highlights

Co-written by Elijah Harden, Risk Services

Aug. 29 2018 — Bankruptcy Summary

Poundworld Retail Ltd (Poundworld) is a discount store operator located in the United Kingdom that on June 11, 2018, while operating around 350 stores, filed for administration in order to work to find a buyer for the chain1. S&P Global Market Intelligence’s Fundamental Probability of Default (Fundamental PD) increased nearly fivefold from 1.69% (an implied credit score of ‘bb-’2), a level that was better than the median general merchandise store in the U.K., to 10.39% (an implied credit score of ‘ccc+’) between fiscal year (FY) 2015 and FY 2016. To summarize, the increased Fundamental PD is similar to a credit score decline from ‘bb-’ to ‘ccc+’. The following year between FY 2016 and FY 2017, the Fundamental PD increased nearly 72% from 10.39% to 17.84% (an implied credit score of ‘ccc-’).

As of the reporting date November 10, 2016 for the period ending March 31, 2016, 19 months before the company filed for bankruptcy, Poundworld fell into ‘ccc’ range and was unable to recover. Poundworld’s inability to recover was due to competing in an increasingly competitive discount retail environment where there was less foot traffic to traditionally populous town centers and exchange rate pressure due to importing goods while the pound was weaker than the dollar3. This resulted in increasingly narrow margins, higher leverage, and decreasing profitability.

Exhibit 1: Fundamental PD Escalation

Business Description

Poundworld operates a chain of discount department stores in the United Kingdom and sells products through its online shop. It offers food and drinks, cleaning and laundry products, health and beauty products, home products, garden and outdoor supplies, pet care products, electrical products, stationery items, toys, baby products, party and gift products, and leisure time products. Poundworld was founded in 1974 and is based in Normanton, United Kingdom.

Fundamental Probability of Default Analysis

The analysis of S&P Global Market Intelligence’s one-year Fundamental PD reveals Poundworld had consistent implied credit scores in the ‘single b’ range for 10 of its 13 reporting periods from FY 2005 to FY 20174. In the time after FY 2012 the volatility of the implied credit scores increased in response to the volatility of Poundworld’s net income. As recently as FY2015, Poundworld, with a PD of 1.69% (implied credit score of ‘bb-‘), sat in the top half of UK general merchandise stores. However, in FY 2016 the company fell into the worst 25% of its UK peers with a PD of 10.39% (implied credit score of ‘ccc+’), roughly a year and a half before filing for administration. Subsequently, in FY 2017, it approached the worst 10% of its UK peers with a PD of 17.84% (implied credit score of ‘ccc’). This shows a notable escalation in risk, both on an absolute basis and with respect to its peers.

The Fundamental PD as of August 16, 2017 for the reporting period ended March 31, 2017 (FY 2017) highlights business and financial risk were significant problems for the company with vulnerable and highly leveraged scores, respectively. The most noteworthy factors contributing to the increased PD were total revenue, profit margin (net income to total revenue), a ratio of how much of every dollar earned is kept within the company, and current liabilities to net worth, a measure of how leveraged the company is/how much debt is used to finance the business. Poundworld experienced a revenue growth rate decline of 57.15% between FY 2015 and FY 2016 from 22.32% to 9.56% with a subsequent decline of 40.88% ultimately ending with a profit margin of 5.65% by FY 2017. As revenue growth for Poundworld slowed, the company became exceedingly leveraged. The average current liability to net worth ratio between FY 2013 and FY 2017 was an extraordinary 667%, signaling the company was unable to pay off debt obligations that were due within a year. In addition to the increasing leverage, Poundworld was battling diminishing profit margins until they eventually became negative, with an average profit margin of -0.02% between FY 2013 and FY 2017. Poundworld’s illiquid position made the company particularly vulnerable to the other operating expenses which totaled approximately £9MM in FY 2016 and FY 2017, which only carried the company closer to the brink of bankruptcy.

Source: S&P Global Market Intelligence as of July 19, 2018. For illustrative purposes only.
Note: Current Liabilities to Net Worth ratio in FY 2017 is actually -1317%, but the model assumes the worst possible profile and assigns the value of 10842%

Source: S&P Global Market Intelligence as of July 19, 2018. For illustrative purposes only.

1 Unless otherwise noted, all information sourced from the S&P Capital IQ platform as of July 24, 2018.
2 S&P Global Ratings does not contribute to or participate in the creation of credit scores generated by S&P Global Market Intelligence. Lowercase nomenclature is used to differentiate S&P Global Market Intelligence PD scores from the credit ratings used by S&P Global Ratings.
3 Source: Financial Times, Poundworld files for bankruptcy, as published on June 11, 2018. https://www.ft.com/content/5f00154e-6d54-11e8-852d-d8b934ff5ffa
4 Source: S&P Capital IQ platform as of July 24, 2018.

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Credit Analytics Case Study The Bon-Ton Stores, Inc

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Credit Analytics Case Study: Carillion Plc

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Fintech
Opinion: Look Outside the US for Insurance Blockchain Projects

Aug. 28 2018 — Despite a wealth of conceptual applications for blockchain, U.S. insurers do not appear as engaged with the technology as their counterparts overseas. But if initiatives in Europe and Asia prove successful, U.S. insurers may plunge more deeply into the blockchain waters.

There is no shortage of thought experiments around how blockchain — and distributed ledger technology more broadly — will revolutionize the insurance industry. These include smart contracts, fraud detection, claims prevention, proof of insurance and product authentication. Insurers overseas have made significant progress with blockchain technology, including a consumer application for flight delay insurance and a commercial platform for marine insurance. But activity on the part of U.S. insurers is less apparent.

Conference calls provide a useful barometer for a company's interest in blockchain, as they indicate that executives are thinking about it. When startups try to introduce new technology, one of the common hurdles they cite is a lack of commitment from those with decision-making power at incumbent institutions.

When we published research in April on how U.S. financial services companies are using blockchain, we found roughly 40 transcripts since the start of 2015 from publicly traded U.S. banks that mentioned "blockchain," versus only three from insurance underwriters. Publicly traded banks greatly outnumber insurers in the U.S. But insurers also lagged broker/dealers and asset managers in terms of transcripts, and those sectors each have fewer publicly traded companies than insurance. For this piece, we expanded our transcript analysis to include global insurers, which offered a wealth of information. Many more European insurers discussed their projects than companies in other regions, despite there being about half as many publicly traded insurers in Europe as in the U.S. and Canada region.

One project that caught our attention in the European market was Axa's Fizzy. The flight insurance product uses smart contracts written to the Ethereum blockchain and automatically pays a claim if a passenger's flight is delayed more than two hours. Axa launched Fizzy in September 2017 and at the time offered coverage for only a few routes a day. As of mid-June 2018, Axa had expanded the app to 5% of worldwide routes. But merely the fact that it launched is noteworthy, as many projects from other companies, both in and outside the insurance realm, remain in proof-of-concept mode.

Ping is king

While European insurers collectively discussed blockchain on the most number of conference calls, Chinese insurer Ping An Insurance (Group) Co. of China Ltd. took the top spot in our ranking of individual insurers.

Ping An considers blockchain one of its five core technologies, as executives mentioned during an investor day in November 2017; the others are biometrics, big data, artificial intelligence and cloud computing. One of its main initiatives was the creation of a blockchain-as-a-service platform, which provides services to small and medium-sized enterprises that want access to the latest technology.

Come together

While they might not be as forthcoming about their internal projects, a number of U.S. insurers have discussed their membership in consortium initiatives. One of these is The Institutes RiskBlock Alliance, or RiskBlock for short, which works with underwriters and brokers to develop blockchain applications specifically for the insurance industry. Europe is also home to a consortium that has been generating buzz: Zurich-based B3i. Short for Blockchain Insurance Industry Initiative, B3i began as an industry collaboration but in March announced that it was becoming an actual legal entity, incorporating itself as B3i Services AG.

The bottom line

While it is possible that U.S. insurers are more secretive about their blockchain plans than other industries, they are more likely taking a wait-and-see approach. The fact that insurers in other areas of the world are experimenting with the technology and even launching apps supports this assessment.

Right now seems like a make-or-break moment for distributed ledger technology, as projects across multiple industries are going from proof-of-concept to live implementations. Perhaps if those bear fruit it will compel U.S. insurers to further embrace the technology.

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Listen: Street Talk Episode 23 - As More Banks Reach for Yield, Advisers Urge Caution

More banks are reaching further out the yield curve in their loan portfolios to meet customer demands but, increasingly, advisers believe institutions need to proceed with caution. In the episode, experts from PIMCO, Sandler O’Neill, Chatham Financial and PrecisionLender discuss rate risk and how banks focused on funding will ultimately prove the winners.

Street Talk is a podcast hosted by S&P Global Market Intelligence.

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