Immediate annuity ALM

Yes, you would allow for expected defaults on corporate bonds via a deduction in asset cashflows. You would then use those reduced asset proceed amounts to match against the liability cashflows. In other words, you would need a slightly higher holding of corporate bonds in order to match the liability cashflows than you would if you ignored future defaults. The liability cashflows used for the ALM exercise would be based on best estimates (of the annuity benefit payments and expenses).

This is basically the same as using the MA in the liability valuation rather than using the full corporate bond yield. This is because the ‘extra’ amount of corporate bonds that you would need to hold in order to allow for some of the coupons & redemption amounts not to be received (due to defaults) is equivalent to the ‘extra’ liability that you get if you discount at actual corporate bond yield minus allowance for default risk, rather than at actual corporate bond yield.