Accurate risk assessment and prudent risk management are top priorities at Prosper. To demonstrate that commitment, we encourage investors to compare actual losses to the estimated loss we originally provide for our Notes. In this blog, we provide investors with detailed data and charts showing actual risk performance by Prosper Rating, as well as a comparison to those original expectations.
We use a disciplined, conservative approach to set our risk policies, which includes reviewing loan performance on an ongoing basis, making adjustments as necessary, and incorporating an expectation of economic deterioration as a margin of safety. The result has been charge-off rates that have met expectations, and in many cases losses have been lower than estimates. When losses come in below estimates, Prosper investors earn more than the original estimated return on their Notes — and attain best-in-class average actual returns of 10.6%*.
The graphs below show Cumulative Dollar Charge-Offs by Prosper Rating for loans booked from July, 2009 through June 2010 with performance as of July 31, 2011. Graphs are shown for:
- “Original” – Prosper Rating at origination; this is the expectation of performance set with investors when they first invested in the loan.
- “Current” (Retroscored) – The chart shows the same loans grouped by the Prosper Rating they would be assigned if they were originated today.
We show these graphs to allow comparison between loan performance under both the “Original” and “Current” credit policies by Prosper Rating, and to help investors understand the conservatism and accuracy of today’s credit policy.
The dotted lines represent estimated losses at loan origination, and the solid lines represent actual losses; both are color-coded by Prosper Rating group. (Click the graph to enlarge.)
As shown above:
- The two graphs tell a similar story: Overall charge-off rates for all Prosper Ratings have been excellent — all are within the range or below expectations, exhibiting the conservatism of the credit policy.
- The 2009 vintages for AA-E are running very close to expectation (note the tight fit between the solid and dotted lines for these Prosper Ratings). For these same Ratings, 2010 vintage performance is even better, where solid lines appear below the dotted lines. Changes were made in 2010 to tighten eligibility criteria for these Prosper Ratings.
- To date, the HR Prosper Rating has consistently performed better than expectations.
To deliver these results, we review actual losses on a monthly basis and analyze any material variances from estimates. We also take into account the economic environment and, to the extent we conclude that variances are likely to continue, we adjust estimates to include a margin of safety. This helps ensure that loss estimates are as up-to-date and accurate as possible – so that we may deliver the consistent risk-adjusted returns that Prosper investors have experienced for more than two years now.
To view more detailed graphs showing loan performance by individual Prosper Ratings and for first and second loans, download our detailed loan performance graphs.
Note: Diversification is an important component of any portfolio, and Prosper recommends that investors have at least 100 Notes in their portfolio to safeguard their returns against individual losses. Please see our perspective on why and how to diversify your Prosper investment.
* Net Annualized Returns represent the actual returns on Borrower Payment Dependent Notes (“Notes”) issued and sold by Prosper since July 15, 2009. To be included in the calculation of Net Annualized Returns, Notes must be associated with a borrower loan originated more than 10 months ago; this calculation uses loans originated through August 31, 2010. To calculate Net Annualized Returns, all payments received on borrower loans corresponding to eligible Notes, net of principal repayment, credit losses and servicing costs for such loans, are aggregated then divided by the average daily amount of aggregate outstanding principal for such loans. To annualize this cumulative return, the cumulative number is divided by the dollar-weighted average age of the loans in days and then multiplied by 365. Net Annualized Returns are not necessarily indicative of the future performance of any Notes. All calculations made as of June 30, 2011.