What is the expected credit loss embedded in your bond portfolio?
To answer this question for our insurance clients, SAA utilizes a dynamic financial model to estimate probabilities of likely credit losses.
During this analysis, SAA applies historical average credit default and recovery rates to individual securities in order to estimate annualized dollar credit exposure. Each simulation has 10,000 iterations and integrates default variables and average recovery rates via Moody’s.
Additionally, a contingent claim approach is instituted to determine a range of adverse, annualized dollar-credit exposure and book income impact to our insurance clients.
A Portfolio Credit Review is especially important for companies subject to IFRS 9 on Financial Instruments. Given new requirements, these insurers must have a reserve for bond losses. There are embedded losses which now must be considered in the financials. Our overview of these IFRS 9 changes can be found here.
SAA’s Portfolio Credit Review identifies potential credit losses and analyzes:
- Expected Loss Summary
- Default Rates
- Security-Level Model Correlation
- Book-Yield Impact
- View Sample PDF