Moody's Corporation · NYSE:MCO
Moody's — Technical Presentation (May 2020)
26 slides from Moody's's technical presentation, May 27, 2020
Slide 1: Navigating an Insurance Company's Credit Portfolio Through COVID-19
Navigating an Insurance Company’s Credit Portfolio Through COVID-19 Amnon Levy, PhD, Portfolio Research | Tim Daly, Strategic Account Management May 2020 Masha Muzyka, Enterprise Risk Solutions - Moderator
Slide 2: Goals for Today
Goals for Today Discuss approaches for assessing credit impact of COVID pandemic Review historical experience of fiscal and monetary measure impact Propose an approach for measuring combined impact of the pandemic and counteracting stimulus on credit portfolios Live Q&A
Slide 3: Today's Speakers
Today’s Speakers Amnon Levy Tim Daly Masha Muzyka Head of Portfolio Management Head of Strategic Accounts- Enterprise Risk Solutions North America Moderator Tools to Navigate COVID-19 May 2020 3
Slide 4: New Global Challenge - The Restart
New Global Challenge- The Restart How does one navigate a credit portfolio through continued uncertainty? » How quickly will economies rebound from eased restrictions? » How long will financial market volatility threaten growth? » Does the US have additional fiscal space for more stimulus? » How wil
Slide 5: Challenge: How Do You Manage Risk into the Next Normal?
Challenge: How Do You Manage Risk into the Next Normal? Uncertainty likely to persist MEASURING & DRIVERS ECONOMIC IMPACT MANAGING RISK » Epidemiological – progression of » Depends on extent, timing, and » Measurement requires timely the epidemic interaction of drivers assessment of current environm
Slide 6: Empirical Patterns: How has COVID-19 impacted industries so far?
Empirical Patterns How has COVID-19 impacted industries so far? Industries Most Impacted by COVID-19 Industries with Mild Impact to COVID-19 10% Median Default Probability* 14% Median Default Probability* 9% AIR TRANSPORTATION MEDICAL SERVICES MINING APPAREL & SHOES 12% PHARMACEUTICALS REITS 8% TELE
Slide 7: Understanding the Challenges
Understanding the Challenges Credit measures don’t lend themselves to COVID 19 Traditional Internal Ratings » Rely on fundamental name-level analysis » Cannot be updated as frequent as virus evolution » How do you incorporate past events into your forward looking view Who needs help? Loss Forecastin
Slide 8: Timely and Dynamic Analytics and Data
Timely and Dynamic Analytics and Data Requirements for navigating this uncertain environment 1 Granular, quantitative and repeatable current internal credit rating for benchmarking or overlay 2 Assessment of trajectories that consider: – Epidemiological paths – severity, length of economic shutdown
Slide 9: Economic Impact Defined by Broad Brush Scenarios
Economic Impact Defined by Broad Brush Scenarios Require Industry Overlay Model US UNEMPLOYMENT RATE CROSS-SECTIONAL COVID-19 OVERLAY MODEL S1 - Upside, 10th Percentile 20 Baseline S3 - Downside, 90th Percentile S4 - Downside, 96th Percentile 15 10 5 Range 0 across industries Source: Moody’s Analyti
Slide 10: New Analytics and Data to Navigate COVID-19
New Analytics and Data to Navigate COVID-19 Naïve models calibrated to historic dynamics will be misleading Increase in Expected Loss Under COVID-19 Scenario* x OIL REFINING COVID-19 CCAR-style stress test with overlay model x COVID-19 CCAR-style stress test with no overlay model HOTELS & Preserving
Slide 11: Incorporating Epidemiological Dynamics
Incorporating Epidemiological Dynamics Similarities across segments after controlling for variation in epidemiology EDF CREDIT MEASURE WINDOWS FOR DIFFERENT COUNTRIES (Global Sample of ~ 46,000 Firms) BASED ON DAILY COVID-19 CASES 6000 7-day Moving Average of Canada 5000 Daily # New Cases China 4000
Slide 12: Remarkable Fiscal and Monetary Response
Remarkable Fiscal and Monetary Response With economic policy uncertainty hitting record highs COVID-19 FISCAL ACTION COMPARED TO THE GREAT RECESSION ECONOMIC POLICY UNCERTAINTY INDEX Source: Moody’s Analytics As reported by FRED Economic Data (https://fred.stlouisfed.org/series/USEPUINDXD). Tools to
Slide 13: Quantifying Targeted Stimulus Across Segments
Quantifying Targeted Stimulus Across Segments Aid Directly Targeting Corporate Segments Aid to Individuals – Consumer Behavior Changes Industries Most Severely Impacted by COVID-19 CONSUMER FOOD & BEVERAGE PRODUCTS AUTOMOTIVE CABLE TELEVISION OIL REFINING RETL/WHSL RETL/WHSL CONSUMER OIL, GAS & COAL
Slide 14: Quantifying Program Impact
Quantifying Program Impact Bailout passed Historically, fiscal and monetary programs range in timing and the mechanisms that support targeted segments. - 2001 Airline bailouts took several weeks to be understood with $15B bailout on September 22nd. NOTE Impact of fiscal policy can be quantified – si
Slide 15: COVID-19 Analytics and Data
COVID-19 Analytics and Data ASSESSING WHAT HAS HAPPENED SO FAR CURRENT INTERNAL RATING Elevated : ASSESSMENT Cross IndustryCOVID-19 Cross-Sectional COVID-19 Overlay OverlayModel Model - default probabilities - expected loss MOST RECENT, REASONABLE, AND Varying performance of WELL-UNDERSTOOD CREDIT A
Slide 16: Current Internal Rating Assessment
Current Internal Rating Assessment Average ratings anchored off of Dec 31, 2019 using Cross-Sectional COVID-19 Overlay Investment Grade Portfolio High-Yield Internal Rating Estimated Internal Rating Internal Rating Estimated Internal Rating Assessment Assessment Jun. 30, 2020 Jun. 31, 2020 Industry
Slide 17: Projected Segment NAIC Rating Composition
Projected Segment NAIC Rating Composition Along Moody’s S3* Scenario with Cross-Sectional Overlay 100% Launch-off Projected Segment Rating Composition 80% 60% 40% 20% 0% Portfolio Portfolio Portfolio Portfolio Portfolio Oil & Gas Oil & Gas Oil & Gas Oil & Gas Oil & Gas Pharma'l Pharma'l Pharma'l Pha
Slide 18: Projections with Cross-Sectional and Fiscal & Monetary Overlays
Projections with Cross-Sectional and Fiscal & Monetary Overlays Moody’s S3* Economic Scenario - Dec. 31, 2019 Launch-off 20% Default Probability 15% 10% 5% 0% 80% 70% OTTI –Probability** 60% 50% 40% 30% *Moody’s S3 Economic Scenario Represents a 20% 90th% Downside: Consumer confidence and 10% spendi
Slide 19: Similar Business Models, but Differentiated Impact
Similar Business Models, but Differentiated Impact Fair Value Spread Projection Yum Brands Owner of KFC, Pizza Hut, Taco Bell and other fast food chains. Fair Value Spread Fair Value Spread, 1Y Measure Cyclicality parameter: 29% Yum Brands, S4 - Downside, 96th Percentile Sc. 1.40% Over 50,000 locati
Slide 20: Fast Food versus Sit-Down Restaurants
Fast Food versus Sit-Down Restaurants Fair Value Spread Projection Fair Value Spread 1.50% Yum Brands 1.00% Owner of KFC, Pizza Hut, Taco Bell and other fast food chains. Fair Value Spread, 1Y Measure 0.50% Small increase in EDF from December 2019 to May 2020. 0.00% S3 - Downside, 90th Percentile Sc
Slide 21: Current Internal Rating Assessment
Current Internal Rating Assessment API schematics aligned with internal system entry points USER INPUTS INTERMEDIATE OUTPUTS FINAL OUTPUTS Counterparty/Instrument Dec. 31st – Current exposure amount – Exposure (dollar or percentage) to each internal rating category – Name for entities with publicly
Slide 22: Projected Ratings and Loss Measures
Projected Ratings and Loss Measures API schematics aligned with internal system entry points USER INPUTS INTERMEDIATE OUTPUTS FINAL OUTPUTS Counterparty/Instrument Current – Current exposure amount – Exposure (dollar or percentage) – Name for entities with publicly to each internal rating category t
Slide 23: Beyond COVID-19: Preparing for the Unknown Unknowns
Beyond COVID-19 Preparing for the “Unknown Unknowns” » Navigating the uncertainty of COVID-19 is causing a re-evaluation of common risk factors. » Exposure to climate risk – supply chain risk driven by common exposure to typhoon risks off the coast of Malaysia » Emerging concentration risks are shif
Slide 24: Key Take Aways
Key Take Aways Managing credit portfolios in the current environment is a challenge we’ve never experienced. Requires a unique data set and analytics updated frequently Across a range of economic paths, inclusive of fiscal stimulus actions With multiple applications to help insurance companies manag
Slide 25: moodysanalytics.com
5) Better Mooby s Faster Decisions ANALYTICS moodysanalytics.com
Slide 26: Tools to Navigate COVID-19 May 2020
© 2020 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liabilit