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Seven Details from OneMain Financial's IPO

Adam Rust's picture

Posted October 24, 2014

- - 1) Sixty percent of personal loans originated by OneMain are actually roll-overs and another fifteen percent are made to former borrowers. While the latter hints of customer satisfaction, the former is a warning flag for future regulatory attention. If that many borrowers are rolling over to a new loan term, then how many are actually renewing more than once? How many people are spending more than ten years indebted to Citi's OneMain Financial unit?  The company appears to have systems in place designed to generate more renewals: "Renewals are primarily generated through our branch lead management system and supported by marketing campaigns."

2) More than one in five of their loans are secured by an automobile. 

3) Sixty-five percent of their borrowers opt to purchase credit insurance.  OneMain offers insurance from Citi Assurant Services. The plaintiff in a lawsuit filed in West Virginia says that loss ratios on credit insurance sold by OneMain ranged from fifteen to twenty-five percent over a fourteen-year period.  

4) The average amount of a loan in their portfolio at the end of June 30th was $6,189, with an average term of 5.1 years. With an average income of $45,000, the typical borrower has a DTI of 4.7 percent.

5) In a prior assignment, OneMain's Chief Risk Officer worked for The Associates. 

6) At the end of June, OneMain had $8.2 billion in personal loans on its balance sheet. More than $700 million of those were to borrowers living in North Carolina. The average credit score of their borrowers was 630. 

7) OneMain's overall cost of debt was 3.69 percent in 2013. In 2014, they issued two rounds of notes to investors with combined yields of 2.59 and 3.12 percent. 

About credit insurance

OneMain customers can buy credit life, credit disability, credit involuntary unemployment insurance along with home and auto club memberships.

A large share of the insurance sold through OneMain Financial and offered by Citi Assurant Services serves as a means of payment protection. While the insurance is purchased by the borrower, the benefits accrue to both borrower and lender. For a lender, the sale of credit insurance which is unrelated to a collateralization is actually a way to mitigate default risk. Although it isn't booked that way, those premiums are essentially a way to fund a loan loss reserve account. In its IPO, Citi says as much:

"CAS has historically provided a number of benefits to us, including: incremental returns derived from underwriting and investment income, incremental loss mitigation as a result of claims paid and back-up liquidity in the event of an adverse situation through utilization of excess surplus in the insurance companies." 

If Citi/OneMain could sell enough premiums to cover the entirety of their expected losses, then it would be a great deal. As it is, though, this is even better. If the plaintiff's loan loss ratio numbers are correct, then CAS can cover losses expected from four loans with the sale of every single credit insurance premium. With a loss ratio of 25 percent, then three in four sales is pure margin. With a loss ratio of 15 percent, there is pure margin on five of every six policies sold.