Analyzing credit risk
Optimizing opportunities
Why Asset Management
Firms Rely On
Moody’s KMV
Working with you.
Whether managing mutual funds, hedge funds, institutional accounts or any other type of
investment, portfolio managers need quality information and reliable credit risk tools to:
Th e N e e d f o r C r e d i t R i s k Ma n a g e m e n t
Enhance investment returns by identifying improving
n
The ever-changing investment marketplace offers
a broad array of opportunities across a number of
asset classes — from traditional debt instruments
to structured products. Regardless of investment
orientation, understanding and managing credit risk
is fundamental to making investment decisions and
determining fair pricing.
or deteriorating credits, performing “rich/cheap” analyses
and “stress testing” portfolios across industries, sectors
and indices.
Provide a structured, unbiased framework to
highlight relative value opportunities and examine
fundamental assumptions.
n
Conduct thorough capital and credit structure analysis
n
of complex deals such as structured products and
leveraged buyouts to determine the accuracy of implied
value and identify capital structure arbitrage.
Identify riskiest exposures and provide early warnings
n
of credit deterioration in their own portfolios and with
counterparties, through continued monitoring and
surveillance of credit quality.
Track, monitor and report risks in portfolios, and in
n
those of clients.
Hedge appropriately against downside risk and
n
generate additional income through the purchase and/or
sale of structured credit products, a growing business
among asset managers seeking to increase absolute returns.
RESULTS FOR OUR ASSET MANAGEMENT CLIENTS
Moody’s KMV serves more than
1,800 clients in 85 countries,
including some of the world’s
best-known institutional
money managers, mutual fund
companies and hedge funds.
Our clients best demonstrate
how our credit risk solutions
help manage their portfolios
and those of their clients.
“ MKMV forms an integral
part of Pioneer’s investment
process. In particular,
MKMV is an input into
credit risk assessment,
applied as part of a wider
quantitative screening tool,
incorporated within relative
value analysis and overall
helps to shape portfolio
construction and bottom-up
security selection.”
Francesco Sandrini
Senior Vice President
Head of Financial Engineering
Pioneer Global
Asset Management
“ Being a global corporate
bond investor with an intense
focus on name diversification,
Moody’s KMV plays a vital
role in our investment
process. Their tools help
us in finding deteriorating
credits and identifying
relative value opportunities.”
“ Moody’s KMV helps us
identify anomalies in
the capital markets and
is a valuable tool in our
investment process.”
Michael Fischer
Head of Quantitative Research
CQS
Arne W. Eidshagen
CFA
Portfolio Manager
KLP Asset Management
Moody’s KMV solutions are used by asset
management firms to bring greater transparency
to credit risk exposures and enhance relative
value pricing capabilities that, in turn, improve
investment returns.
ILLUMINATING RISK AND RETURN
Working with us.
Moody’s KMV is the global standard in
credit risk management. We transform vast
amounts of data and cutting-edge models
into enterprise-class solutions that cut
across the credit risk spectrum.
As the industry leader, our clients gain a critical competitive advantage
through our deeper, consistent and reliable insight. We provide
professional consulting, thought leadership, client service and expert
training that keep our clients “ahead-of-the-curve” in implementing
credit strategies.
We offer asset managers a number of credit risk solutions to manage
both individual and portfolio counterparty risk. Clients rely on us because
we offer:
n
n
n
n
n
“Moody’s KMV is the top risk
management systems vendor
of the past 20 years.”
Risk magazine
A dedicated team of sales and credit risk specialists who
understand the needs of the asset management business.
Superior quantitative metrics to conduct in-depth
analyses and manage credit risk exposures.
Models built upon the largest, most robust collection of
public and private company default information available
anywhere in the world.
Valuation tools from an independent source of credit risk
analysis to enhance pricing for investment decisions.
Internet solutions that can be immediately utilized as well
as enterprise-class systems that can be implemented in as
little as six months.
ASSET MANAGEMENT FIRMS
Moody’s KMV offers asset management
firms a range of solutions that cut across
the credit risk spectrum.
SIN G L E - R I S K A S S E S S M E N T
VALUATION
Our
solutions.
PORTFOLIO RISK MANAGEMENT
MOODY’S KMV:
A UNIQUE COMP E T I T I V E A D V A N T A G E
Moody’s KMV solutions measure and identify key
Moody’s KMV offers a number of tools that enable
Moody’s KMV has a comprehensive methodology for
EDF %
35%
credit risk drivers. These are available via XML
asset managers to evaluate credit risk within
measuring and benchmarking credit portfolio risks.
20%
to facilitate an efficient way to perform multiple
individual instruments and at the portfolio level.
market scenario analyses.
solution that offers insights into the contribution of
individual exposures to portfolio risk; credit migration
analysis and risk/return analysis for hedges and trades;
full portfolio loss and value distributions, both in
absolute terms and relative to a benchmark; Monte
Carlo-based calibrations drawn from the world’s
richest credit data sources; and scenario analysis to
stress-test a portfolio and perform what-if analyses.
RiskFrontier covers a wide range of asset classes,
including loans, bonds, credit default swaps, CDO
tranches and equity.
updates on Moody’s KMV EDF™ (Expected Default
Frequency) measures and implied ratings for more than
30,000 public companies globally. It is also available
through a data file service format for use within client
proprietary systems allowing further data manipulation
and customization to suit individual client needs.
leverages default, migration, and correlation modeling;
calculates “fair value,” first-dollar-loss probability,
loss severity, and the internal rate of return for both
cash flow and synthetic CDO tranches. By utilizing
industry-leading pricing techniques, it computes breakeven spreads and hedge ratios for the protection against
movements in the underlying collateral or index.
Moody’s KMV RiskCalc® is an Internet tool that
Loan Valuation Web Service™ is an Internet tool
combines financial statement information and market
data with in-depth knowledge of default drivers to
produce EDF measures and implied ratings for private
companies in country-specific models.
that allows investors to use EDF measures and LGD
data to mark their loan portfolios for pricing or
fair valuation.
PROFESSIONAL SERVICES
CreditEdge® Plus is an Internet tool for calculating
Moody’s KMV also provides consulting services
daily EDF implied spread values. In addition to
single-risk management assessment, it provides a “fair
valuation” pricing framework for evaluating loan, bond
and credit default swap (CDS) instruments and can be
used to perform stress tests and sensitivity analyses on
entire portfolios. CreditEdge Plus is available with both
data file service and XML features.
that help clients customize their credit risk
Moody’s KMV LossCalc™ is an Internet tool that
offers predictive estimates of loss given default (LGD)
for bonds, loans and preferred stocks. It is powered
by market and security level information on rated and
unrated public and private firms. LossCalc is available
through a data file service format for use within client
proprietary systems allowing further data manipulation
and customization to suit individual client needs.
5
RiskFrontier™ is a “next generation” enterprise-class
CDO Analyzer™ is a downloadable solution that
CreditEdge® is an Internet tool providing daily
10
management processes.
Ca-C
2
Illustration:
Defaulted company EDF measure versus
industry group median EDF measure
1.0
.5
Caa
.20
.10
.05
.01
07/12/06 08/23/06
10/04/06
11/15/06
12/27/06
02/07/07
03/21/07
05/02/07
06/13/07
Sample Company EDF
Industry Peer Group EDF
Data: Moody’s KMV database, used for all of our models, is
the most comprehensive in the industry containing information
on both public and private institutions around the world. The
Moody’s KMV CRD® (Credit Research Database) of private
company data is routinely cleansed and filtered to ensure that
only the highest quality data is used in our solutions.
EDF measures: Moody’s KMV is the inventor of EDF
(Expected Default Frequency) measures. More granular and
mathematical than ordinal ratings, clients consider EDF
measures to be the most powerful and forward-looking in the
industry for forecasting default probabilities. The most recent
model version (EDF 8.0) comprises more than 30,000 public
companies globally, scoring them daily on a scale of .01 to 35
percent, as determined by enterprise value, enterprise volatility
and liability structure. Private company EDF measures are
built on financial statement data reflecting a number of
variables including profitability, activity, leverage, liquidity,
size, growth variables and debt coverage.
B
Baa
A
Aa
Aaa
North and South America
+1 (866) 321-MKMV (6568) or +1 (415) 874-6000
Europe, the Middle East and Africa +44 (20) 7280-8300
Asia-Pacific
+852 3551-3000
Japan
+81 (3) 3218-1160
E-mail
info@mkmv.com
www.moodyskmv.com
Copyright © 2007 Moody’s KMV Company. All rights reserved. Unless otherwise designated,
all trademarks are owned by MIS Quality Management Corporation and used under license.
Analyzing credit risk
Managing Portfolios
Why Banks
Rely On Moody’s KMV
Working with you.
As banks strive to maintain regulatory compliance, improve their capital management and
maximize performance, they require tools to help them:
THE NEED FOR CREDIT RISK MANAGEMENT
n
Is there a business that understands the importance
of credit risk management better than a bank?
Accuracy and consistency in credit risk management
are the linchpins of success or failure in the world of
banking. It is fundamental to ensuring that a bank’s
balance sheet not only meets regulatory standards
but that it is optimized to generate more income
and deliver profitable results.
of enterprise-wide capital to improve overall portfolio
performance and shareholder value.
n
Today’s global marketplace has exacerbated this
need as major corporations and small-and mediumsized enterprises alike now experience the free flow
of capital across borders and the impact of foreign
market interdependence on their business cycles.
These factors have sharpened the need for banks to
understand more complex credit risk issues and have
inspired regulators to raise the bar for credit standards
that ensure global comparability.
Identify the riskiest credit exposures and
concentrations to provide early warnings of credit
deterioration in loan books and investment portfolios.
n
Anticipate changes in the credit environment to modify
underwriting and portfolio parameters.
n
Ensure the performance accuracy of internal
rating models.
n
Conduct stress tests to determine how well portfolios
can withstand various stress scenarios
n
“Better risk management may be
the only truly necessary element
of success in banking.”
Alan Greenspan, October 2004
Calculate economic capital to maximize the efficient use
Make efficient and informed risk-based pricing
decisions for all bank products from corporate loans
to structured credits.
Basel II
In 2002, Basel II set forth recommendations on
capital adequacy and the development of an
efficient framework to support analytical integrity
on a global basis. Since then, Moody’s KMV has
helped banks around the world comply with these
guidelines to facilitate regulatory approval. Our
solutions help banks in developed economies and
emerging markets achieve best practices in credit
risk management.
IMPROVING CAPITAL MANAGEMENT
Working with us.
Moody’s KMV is the global standard in
credit risk management. We transform vast
amounts of data and cutting-edge models
into enterprise-class solutions that cut
across the credit risk spectrum.
For more than 20 years, we have helped banks manage credit risk — the
most fundamental element of their business — and have received multiple
awards for our industry leadership. We provide professional consulting,
thought leadership, client service and expert training that keep our clients
“ahead-of-the-curve” in implementing their credit strategies.
RESULTS FOR OUR BANKING CLIENTS
Moody’s KMV serves more
than 1,300 banks in more
than 85 countries, from global
institutions and regional money
centers to small community
organizations. Our clients best
demonstrate how we serve a
broad spectrum of credit risk
needs to improve business
operations and results.
“ Most of our investors are
happy if they see that you
assessed the portfolio with
RiskCalc because it is one of
the best known products in
the market, not just locally
but in the rest of Europe and
Asia as well.”
Michael Auracher
Head of the Structured
Solutions Group
HSBC Trinkaus & Burkhardt AG
“ Our partnership with
Moody’s KMV has more
than paid for itself. It has
enabled us to make better
and faster lending decisions
that are good for the Bank
and good for our customers.
As a result, we are a better
financial partner to the
residents and businesses
in our community.”
“ We’re in a partnership with
Moody’s KMV and it’s been
very beneficial to us. I think
this gives us a tremendous
competitive advantage. It’s
everything we’ve hoped it
would be.”
Dr. Terry Benzschawel
Head of Credit Modeling Group
Citi Markets and Banking
Tom Sommer
Senior Vice President and
Chief Credit Officer
Central Valley Community Bank
Banking clients work with us because we offer:
n
A dedicated team of professionals focused strictly on the
unique needs of the banking industry.
The Benefits of Economic Capital
n
n
Models built upon the largest, most robust collection of
public and private company default information available
anywhere in the world.
n
“Moody’s KMV is the top risk
management systems vendor
of the past 20 years.”
n
Superior methodologies to evaluate probabilities of
default and loss given default, from loan origination to
portfolio management.
Risk magazine
n
n
n
n
Valuation tools from an independent source of credit risk
analysis to enhance pricing insights on bank loans and
other instruments.
Portfolio management capabilities that measure and
benchmark credit portfolio risk as well as calculate
economic capital on an enterprise-wide basis.
Consulting capabilities to plan, develop and implement
customized credit risk systems, as well as validate and
calibrate existing internal models.
Internet solutions that can be immediately utilized as well
as enterprise-class systems that can be implemented in as
little as six months.
A client reported loan loss savings of roughly
six times the cost of purchasing portfolio
management tools over a three-year period.
As a result, the bank was able to originate three
times as many loans on the same capital base.
A client eliminated “non-core” customers, which
reduced the size of its portfolio by 35% and
economic capital by 70%. This significantly
increased returns and the capacity to use the
bank’s balance sheet more profitably.
Moody’s KMV helps banks build new
internal ratings-based credit risk models as
well as validate and calibrate their existing
models to assess single obligor credit risk,
monitor holdings and maximize overall
portfolio performance.
Moody’s KMV offers banks a range
of solutions that cut across the credit
risk spectrum.
Our
solutions.
BANKS
DAT A C O L L E C T I O N & A N A L Y S I S
VALUATION
Moody’s KMV solutions help banks to easily collect and
effectively analyze data.
Moody’s KMV offers solutions in determining the value of
loans, bonds and credit default swap instruments.
RiskAnalyst™ is a tool that provides a foundation for
CreditMark® is an Internet solution that provides a robust
developing an internal rating system. It improves the speed,
accuracy and consistency of data capture, analytics and the
storage of borrower and facility information. Through its
rating module, RiskAnalyst stores industry templates and
scorecards so all credit data can reside within one platform.
mark-to-market platform to accurately value thousands of
credit instruments on a daily basis by combining their terms
and conditions with valuation models, market data and
portfolio information.
CreditEdge® Plus is an Internet tool that provides a “fair-
Moody’s KMV solutions measure and identify key risk
drivers. These are available via XML to facilitate an
efficient way to perform multiple scenario analyses.
Moody’s KMV RiskCalc® is an Internet solution that
PORTFOLIO RISK MANAGEMENT
delivers country-specific models utilizing financial statement
information and market data with in-depth knowledge of
default drivers to produce Moody’s KMV EDF™ (Expected
Default Frequency) measures and implied ratings for small
and medium enterprises.
CreditEdge® is an Internet tool that compiles data from a
variety of forward-looking, timely sources and delivers daily
EDF measures and implied ratings on more than 30,000
corporate firms globally. It is available through a data file
service format for use within client proprietary systems
allowing further data manipulation and customization to suit
individual client needs.
MOODY’S KMV:
A UNIQUE COMP E T I T I V E A D V A N T A G E
EDF %
35%
Moody’s KMV provides consulting services that
help clients customize their credit risk management
programs. Clients can benefit from three areas
of expertise:
20%
10
5
Ca-C
2
Advisory Services provides counsel on how best to
Illustration:
Defaulted company EDF measure versus
industry group median EDF measure
optimize a client’s credit risk management practices from
risk evaluation to active portfolio management.
1.0
.5
Caa
.20
valuation” pricing framework for evaluating loan, bond
and credit default swap (CDS) instruments facilitating a
relative value credit risk comparison to existing marketplace
valuations. It is also available with both data file service and
XML features and provides the ability to perform stress tests
and sensitivity analyses on entire portfolios.
SIN G L E - R I S K A S S E S S M E N T
PROFESSIONAL SERVICES
Moody’s KMV also provides tools for analyzing credit
portfolio risk.
RiskFrontier™ is a “next-generation” enterprise-class solution
that measures credit portfolio risk, concentrations and
the management of economic capital. Covering a wide
range of asset classes, including loans, bonds, credit default
swaps, CDO tranches, and equity, it offers insights into the
contribution of individual exposures and concentrations
to portfolio risk; risk/return analysis for hedges and trades;
full portfolio loss and value distributions, both in absolute
terms and relative to a benchmark; and Monte Carlo-based
calibrations drawn from the world’s richest credit data
sources. RiskFrontier is used to perform routine portfolio
analysis and reporting; conduct scenario analyses for stress
testing; support capital allocation and pricing decisions,
and manage strategic portfolio planning.
DealAnalyzer® is a solution that evaluates a prospective
loan in the context of an institution’s current portfolio
to facilitate credit risk capital allocation and diversification
at the origination level.
Modeling Services develops models and provides the
.10
validation and calibration of internal credit risk models.
.05
Implementation Services works with clients to plan
software customization and the installation of credit risk
management solutions into their existing systems.
.01
07/12/06 08/23/06
10/04/06
11/15/06
12/27/06
02/07/07
03/21/07
05/02/07
06/13/07
Sample Company EDF
Industry Peer Group EDF
Data: Moody’s KMV database, used for all of our models, is
the most comprehensive in the industry containing information
on both public and private institutions around the world. The
Moody’s KMV CRD® (Credit Research Database) of private
company data is routinely cleansed and filtered to ensure that
only the highest quality data is used in our solutions.
EDF measures: Moody’s KMV is the inventor of EDF
(Expected Default Frequency) measures. More granular and
mathematical than ordinal ratings, clients consider EDF
measures to be the most powerful and forward-looking in the
industry for forecasting default probabilities. The most recent
model version (EDF 8.0) comprises more than 30,000 public
companies globally, scoring them daily on a scale of .01 to 35
percent, as determined by enterprise value, enterprise volatility
and liability structure. Private company EDF measures are
built on financial statement data reflecting a number of
variables including profitability, activity, leverage, liquidity,
size, growth variables and debt coverage.
B
Baa
A
Aa
Aaa
North and South America
+1 (866) 321-MKMV (6568) or +1 (415) 874-6000
Europe, the Middle East and Africa +44 (20) 7280-8300
Asia-Pacific
+852 3551-3000
Japan
+81 (3) 3218-1160
E-mail
info@mkmv.com
www.moodyskmv.com
Copyright © 2007 Moody’s KMV Company. All rights reserved. Unless otherwise designated,
all trademarks are owned by MIS Quality Management Corporation and used under license.
Managing Credit Risk Maximizing Performance
Why Corporations
Rely On Moody’s KMV
Working with you.
The adoption of meaningful credit risk programs can shape greater consistency, assist
hedging strategies and improve capital management across an organization to substantially
increase firm value. As corporations seek to enhance business performance and, in some
cases, address regulatory compliance, they require credit risk solutions to:
THE NEED FOR CREDIT RISK MANAGEMENT
In today’s marketplace, corporations experience the
free flow of capital across borders and the impact of
foreign market inter-dependence on their business
cycles. As boundaries disappear, corporate executives
require quality information and sophisticated analytical
tools to measure and manage their credit risk.
From pre-screening customers and suppliers to
diversifying an overall portfolio of business exposures,
credit risk solutions need to cut across a worldwide
horizon. And because one event can devastate
business performance and negatively impact
a company’s stock price, corporate executives
recognize that early-warning indicators of
deteriorating credits are the best defense.
n
Identify high-risk exposures or the weak financial
condition of counterparties that are crucial to their
business process.
n
Introduce efficiency and consistency to distill financial
data and execute a meaningful scale to measure credit risk
across the firm.
n
Anticipate changes in the credit environment when
addressing new business scenarios in light of changing
market dynamics.
n
Qualify new customers and suppliers both on a regional
and global basis.
n
Address credit reserve parameters to strengthen fiscal
responsibility and improve overall performance.
RESULTS FOR OUR CORPORATE CLIENTS
Moody’s KMV serves more than
1,800 clients in 85 countries,
including major corporations
across a variety of industries
ranging from technology and
energy to healthcare and large
industrials. Our clients best
demonstrate how we serve a
broad spectrum of credit risk
needs to improve business
operations and results.
“ With approximately 15
internal entities creating
risk with over 600
counterparties, we needed
a rapid, market-based view
of an organization’s financial
strength. We selected
Moody’s KMV CreditEdge
because it includes daily
market measures, rather
than relying solely on
financial information that
can be three months old
at best. CreditEdge has
significantly improved the
efficiency and accuracy of
our credit review process.”
“ By using Moody’s KMV
RiskCalc, we gain significant
value in two ways:
improvement in the overall
quality of our credit risk
management process
across the company and
the continuous expansion
of our global credit risk
analysis knowledge.”
Zhe Nie
Analyst
Essent Energy Trading B.V.
“ Our internal risk policy is
built around Moody’s KMV
EDFs. A customer is placed
on ‘pre-pay’ status once an
EDF goes above 1.00%. We
reduced exposure to Dana
Corporation over six months
prior to their March 2006
default, saving our company
over $2 million in credit
losses. We also saved
time and legal costs by not
having to be a claimant in
their bankruptcy.”
Energy Company
F. Scott Wilkerson
Director of Enterprise
Credit Risk Management
NiSource Inc.
MAKING CORPORATIONS MORE COMPETITIVE
Working with us.
Moody’s KMV is the global standard in
credit risk management. We transform vast
amounts of data and cutting-edge models
into enterprise-class solutions that cut
across the credit risk spectrum.
As the industry leader, our clients gain a critical competitive advantage
through our deeper, consistent and reliable insight. We provide
professional consulting, thought leadership, client service and expert
training that keep our clients “ahead-of-the-curve” in implementing
credit strategies.
Corporations choose to work with Moody’s KMV because we offer:
n
n
n
n
n
n
“Moody’s KMV is the top risk
management systems vendor
of the past 20 years.”
Risk magazine
A dedicated team of sales and credit risk specialists
focused exclusively on corporate clients.
Industry-leading models supported by robust data that
forecast default probabilities and provide implied ratings.
Valuation tools from an independent source of credit risk
analysis to enhance pricing insights on credit instruments.
Portfolio management capabilities that measure
and benchmark credit portfolio risk to justify credit
capital reserves.
Consulting capabilities to plan, develop and implement
customized credit risk models and systems.
Internet solutions that can be immediately utilized as well
as enterprise-class systems that can be implemented in as
little as six months.
Moody’s KMV offers corporations credit risk
solutions that enhance shareholder value.
We provide early warning indicators of
customer and supplier credit quality that
bring greater efficiency and consistency to
the management process.
CORPORATIONS
Moody’s KMV offers corporations
a range of solutions that cut across
the credit risk spectrum.
DAT A C O L L E C T I O N & A N A L Y S I S
VALUATION
Our
solutions.
PROFESSIONAL SERVICES
MOODY’S KMV:
A UNIQUE COMP E T I T I V E A D V A N T A G E
Moody’s KMV solutions easily collect and score
Moody’s KMV offers a tool to price credit risk
Moody’s KMV provides consulting services for
EDF %
35%
financial data.
with efficiency.
the development and customization of credit risk
20%
management systems. Clients can benefit from three
10
RiskAnalyst™ is a system that provides a foundation
CreditEdge® Plus is an Internet tool that provides
for internal credit ratings. It improves the speed,
accuracy and consistency of capturing, analyzing
and storing financial and non-financial information
on counterparties.
a framework for evaluating credit pricing and
facilitating a comparison to existing marketplace
valuations. It is also available through a data file
service and XML formats for use within client
proprietary systems.
SIN G L E - R I S K A S S E S S M E N T
Implementation Services works with clients to plan
Advisory Services provides counsel on how best to
measuring and benchmarking credit portfolio risks.
optimize a client’s credit risk management practices
from risk evaluation to active portfolio management.
available via XML to facilitate an efficient way to
EDF measures and implied ratings on more than
30,000 publicly traded firms globally. It is available
through a data file service for use within client
proprietary systems allowing further data manipulation
and customization to suit individual client needs.
RiskFrontier™ is a “next-generation” enterprise-class
solution that offers insights into the contribution
of individual exposures; concentration risks from
industries and geographies; hedging strategies;
capital reserve adequacies; and the potential level of
catastrophic losses. By performing routine portfolio
analysis and reporting, as well as scenario analyses for
stress testing, RiskFrontier supports capital allocation
and pricing decisions for strategic portfolio planning.
Caa
.20
.10
.05
.01
07/12/06 08/23/06
Moody’s KMV has a comprehensive methodology for
CreditEdge® is an Internet tool that delivers daily
.5
validation and calibration of internal credit risk models.
identify and measure key risk drivers. These are
utilizes financial statement information and market
data with in-depth knowledge of default drivers to
produce Moody’s KMV EDF™ (Expected Default
Frequency) measures and implied ratings on private
companies in country-specific models.
1.0
software customization and the installation of credit
risk management solutions into their existing systems.
customers, Moody’s KMV solutions help them
Moody’s KMV RiskCalc® is an Internet tool that
Illustration:
Defaulted company EDF measure versus
industry group median EDF measure
Modeling Services develops models and provides the
PORTFOLIO RISK MANAGEMENT
Ca-C
2
As corporations consider extending credit to
perform multiple scenario analyses.
5
areas of expertise:
10/04/06
11/15/06
12/27/06
02/07/07
03/21/07
05/02/07
06/13/07
Sample Company EDF
Industry Peer Group EDF
Data: Moody’s KMV database, used for all of our models, is
the most comprehensive in the industry containing information
on both public and private institutions around the world. The
Moody’s KMV CRD® (Credit Research Database) of private
company data is routinely cleansed and filtered to ensure that
only the highest quality data is used in our solutions.
EDF measures: Moody’s KMV is the inventor of EDF
(Expected Default Frequency) measures. More granular and
mathematical than ordinal ratings, clients consider EDF
measures to be the most powerful and forward-looking in the
industry for forecasting default probabilities. The most recent
model version (EDF 8.0) comprises more than 30,000 public
companies globally, scoring them daily on a scale of .01 to 35
percent, as determined by enterprise value, enterprise volatility
and liability structure. Private company EDF measures are
built on financial statement data reflecting a number of
variables including profitability, activity, leverage, liquidity,
size, growth variables and debt coverage.
B
Baa
A
Aa
Aaa
North and South America
+1 (866) 321-MKMV (6568) or +1 (415) 874-6000
Europe, the Middle East and Africa +44 (20) 7280-8300
Asia-Pacific
+852 3551-3000
Japan
+81 (3) 3218-1160
E-mail
info@mkmv.com
www.moodyskmv.com
Copyright © 2007 Moody’s KMV Company. All rights reserved. Unless otherwise designated,
all trademarks are owned by MIS Quality Management Corporation and used under license.
Managing Capital
Enhancing Returns
Why Insurance
Companies Rely On
Moody’s KMV
Working with you.
From life, and property and casualty, to reinsurance and monolines, insurance companies
need quality information and reliable credit risk tools that help them better manage both the
investment and liability management requirements of their businesses. Specifically, effective
credit risk management can help to:
THE NEED FOR CREDIT RISK MANAGEMENT
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Who understands the importance of managing risk
better than an insurance company?
From the threat of natural disasters to the uncertainties
of credit and equity markets, insurance companies
routinely deal with a number of risky “unknowns”
that can significantly affect their success. Credit risk
demands the full attention of insurance companies
because it impacts both sides of their balance sheet.
As a result, meaningful credit risk management
strategies are required to:
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Manage Investments: Diversify risk and enhance returns.
This is especially important as all types of insurance
companies move more aggressively from traditional fixed
income investing to more active participation in highyield and structured credit products such as credit-linked
notes, credit default swaps and synthetic collateralized
debt obligations (CDOs).
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Manage Liabilities: Improve risk-based pricing and
capital allocation decisions to optimize results within
regulatory constraints. Specific to property and casualty
and specialty providers, Moody’s KMV can help insurers
better understand the credit risk exposures embedded in
their product lines that lead to better pricing, collateral
setting and portfolio management.
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Build a structured, unbiased framework to highlight
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Basel II and the European Union’s Solvency II initiative,
Identify riskiest exposures and provide early warnings
which are likely to influence similar standards throughout
the world.
of credit deterioration in their insured exposures and
investment portfolios through continued monitoring
and surveillance of credit quality.
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Enhance investment returns by identifying improving
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Hedge appropriately against downside risk and
generate additional income through the purchase and/or
sale of structured credit products, an option that is being
used more frequently by insurance companies.
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Calculate economic capital to maximize the efficient
use of enterprise-wide capital to improve overall
portfolio performance and shareholder value, assuring
that the company will be able to confidently sustain
financial “shocks” brought about by excessive claims
or market conditions.
Qualify prospects and improve policy pricing through
the use of fair and accurate credit assessments.
or deteriorating credits, performing “rich/cheap” analyses
and “stress testing” portfolios across industries, sectors
and indices.
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Implement risk-based approaches prompted by
opportunities and examine fundamental assumptions.
More effectively manage the correlation between
the financial health of a client and the probability
of future claims.
Anticipate broader changes in the credit environment
in light of changing market indicators.
“INSURANCE” FOR MANAGING CREDIT RISK
Working with us.
Moody’s KMV is the global standard in
credit risk management. We transform vast
amounts of data and cutting-edge models
into enterprise-class software solutions that
cut across the credit risk spectrum.
As the industry leader, our clients gain a critical competitive advantage
through our deeper, consistent and reliable insight. We provide
professional consulting, thought leadership, client service and expert
training that keep our clients “ahead-of-the-curve” in implementing
credit strategies.
RESULTS FOR OUR INSURANCE CLIENTS
Moody’s KMV serves more than
1,800 clients in 85 countries,
including life insurance, property
and casualty, and reinsurance
companies. Our clients best
demonstrate how we serve a
broad spectrum of credit risk
needs to improve business
operations and results.
“ Moody’s KMV provides
us with user-friendly,
customizable tools that will
serve as the foundation of our
group’s credit management
processes worldwide,
enabling us to make more
informed decisions regarding
economic capital allocation.”
Raj Singh
Credit Risk Officer
Allianz Group
“ Spurred on by Solvency II,
insurance companies are
refining their approach to
managing credit risk. As a
result, some insurers’ credit
risk management methods
are beginning to converge
with those favoured by banks.
Insurers such as Swiss Re,
Munich Re and ING Insurance
were early adopters of credit
portfolio modelling practices,
and have put in place
measurement tools such
as Moody’s KMV Portfolio
Manager, a credit portfolio
risk measurement tool.
Companies like ours,
with a strong focus on
economic capital, started,
like banks, to look at credit
portfolio management in the
late 1990s as a way to identify
and measure risk from an
economic point of view,
instead of from a regulatory
or a rating agency point
of view.”
Davide Crippa
Head of Credit Solutions
Portfolio Management
and Analytics
Swiss Re
Insurance companies rely on Moody’s KMV because we offer:
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“Moody’s KMV is the top risk
management systems vendor
of the past 20 years.”
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Risk magazine
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A dedicated team of sales and credit risk specialists who
understand the needs of the insurance industry.
Models built upon the largest, most robust collection of
public and private company default information available
anywhere in the world.
Correlated default analysis is critical to insurance
companies that are required to maintain high
quality agency ratings. With the breadth and depth
of our data, Moody’s KMV provides a portfolio
modeling and correlation framework that stands
without peer, and is recognized as “best of class”
in default analysis.
Superior methodologies to evaluate probabilities of default
and loss given default from underwriting decisions through
to portfolio management.
Valuation tools from an independent source of credit
risk analysis to enhance pricing insights on policies
and investments.
Portfolio management capabilities that measure and
benchmark credit portfolio risk as well as calculate
economic capital on an enterprise-wide basis.
Consulting capabilities to plan, develop and implement
credit risk models and systems.
Internet solutions that can be immediately utilized
as well as enterprise-class systems that can be
implemented in as little as six months.
Moody’s KMV provides insurance companies with
solutions that assist in accurately measuring
and managing credit risk to enhance value and
maximize returns. In addition, Moody’s KMV helps
insurance companies deploy an economic capital
framework to maintain a competitive edge while
satisfying regulatory requirements.
INSURANCE COMPANIES
Moody’s KMV offers insurance companies
a range of solutions that cut across the
credit risk spectrum.
INVESTMENT MANAGEMENT
Our
solutions.
LIABILITY MANAGEMENT
MOODY’S KMV:
A UNIQUE COMP E T I T I V E A D V A N T A G E
Moody’s KMV provides a suite of proven credit
risk solutions to improve portfolio performance
and enhance investment returns. Credit risk
management tools offered by Moody’s KMV include:
CreditEdge Plus is an Internet tool that delivers daily
®
Moody’s KMV EDF™ (Expected Default Frequency)
measures and implied ratings on more than 30,000
publicly traded firms globally and provides a “fair
valuation” pricing framework for evaluating bond and
CDS instruments. It also performs stress tests and
sensitivity analyses on entire portfolios.
Moody’s KMV RiskCalc® is an Internet tool that
combines financial statement information and market
data with in-depth knowledge of default drivers to
produce EDF measures for private companies in countryspecific models. RiskCalc is also used to arrive at implied
ratings for private companies and “shadow ratings” for
unrated collateralized debt/loan obligation assets.
Moody’s KMV LossCalc™ is an Internet tool that offers
predictive estimates of loss given default (LGD) for
bonds, loans and preferred stocks.
Loan Valuation Web Service™ is an Internet tool that
allows investors to use EDF measures and LGD data to
mark their loan portfolios for pricing or fair valuation.
CDO Analyzer is a downloadable solution that
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leverages default, migration and correlation modeling;
calculates “fair value,” first-dollar-loss probability,
loss severity, and the internal rate of return for both
cash flow and synthetic CDO tranches. By utilizing
industry-leading pricing techniques, it computes breakeven spreads and hedge ratios for the protection against
movements in the underlying collateral or index.
RiskFrontier™ is a “next-generation” enterprise-
class solution that measures credit portfolio risk,
concentrations and the management of economic
capital. Covering a wide range of asset classes, including
loans, bonds, credit default swaps, CDO tranches,
and equity, it offers insights into the contribution of
individual exposures and concentrations to portfolio
risk; risk/return analysis for hedges and trades; full
portfolio loss and value distributions, both in absolute
terms and relative to a benchmark; and Monte Carlobased calibrations drawn from the world’s richest credit
data sources. RiskFrontier is used to perform routine
portfolio analysis and reporting; conduct scenario
analyses for stress testing; support capital allocation
and pricing decisions, and manage strategic portfolio
planning.
In addition to the tools that calculate probability
EDF %
35%
of default, Moody’s KMV offers a framework that
20%
can help insurance companies to manage the data
10
5
required for their credit risk management system:
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Illustration:
Defaulted company EDF measure versus
industry group median EDF measure
RiskAnalyst is a tool that provides the foundation
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1.0
.5
for developing an internal rating system. It improves
the speed, accuracy and consistency of data capture,
analytics and the storage of financial and non-financial
information on counterparties.
PROFESSIONAL SERVICES
Moody’s KMV offers services that help clients
customize their credit risk management systems.
Clients can benefit from three areas of expertise:
Advisory Services provides counsel on how best to
optimize a client’s credit risk management practices
from risk evaluation to active portfolio management.
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Sample Company EDF
Industry Peer Group EDF
Data: Moody’s KMV database, used for all of our models, is
the most comprehensive in the industry containing information
on both public and private institutions around the world. The
Moody’s KMV CRD® (Credit Research Database) of private
company data is routinely cleansed and filtered to ensure that
only the highest quality data is used in our solutions.
Modeling Services develops models and provides the
EDF measures: Moody’s KMV is the inventor of EDF
validation and calibration of internal credit risk models.
(Expected Default Frequency) measures. More granular and
mathematical than ordinal ratings, clients consider EDF
measures to be the most powerful and forward-looking in the
industry for forecasting default probabilities. The most recent
model version (EDF 8.0) comprises more than 30,000 public
companies globally, scoring them daily on a scale of .01 to 35
percent, as determined by enterprise value, enterprise volatility
and liability structure. Private company EDF measures are
built on financial statement data reflecting a number of
variables including profitability, activity, leverage, liquidity,
size, growth variables and debt coverage.
Implementation Services works with clients to plan
software customization and the installation of credit
risk management solutions into their existing systems.
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North and South America
+1 (866) 321-MKMV (6568) or +1 (415) 874-6000
Europe, the Middle East and Africa +44 (20) 7280-8300
Asia-Pacific
+852 3551-3000
Japan
+81 (3) 3218-1160
E-mail
info@mkmv.com
www.moodyskmv.com
Copyright © 2007 Moody’s KMV Company. All rights reserved. Unless otherwise designated,
all trademarks are owned by MIS Quality Management Corporation and used under license.