Long-term stochastic credit modelling for Matching Adjustment portfolios

This report presents some long-term credit modelling analysis estimating the probabilities of various bond strategies earning realised returns to maturity that exceed their associated Matching Adjustment (MA) discount rate. 

This analysis can support the MA attestation – in particular the requirement to attest that the MA can be earned by the MA portfolio with a high degree of confidence. A long-term stochastic credit modelling capability can also be used more widely in the management of MA business – for example, in the analysis of future capital distributions and returns on capital, Own Risk and Solvency Assessments (ORSAs), and so on.

Some highlighted results

Figure 1 shows the probability distribution of the annualised realised return for a portfolio of 1,000 15-year BBB-rated zero-coupon bonds under buy-and-hold and annual credit-rebalancing strategies.

Figure 1: Cumulative probability distribution of the 15-year annualised realised return for a portfolio of 15-year BBB-rated bonds

Figure 2 shows the probability of the realised corporate bond portfolio return exceeding the MA discount rate under a buy-and-hold strategy.

Figure 2: Probability of realised portfolio returns exceeding the MA discount rate for the buy-and-hold strategy