Private debt
Why are residential mortgage and consumer loan pools attractive for insurers?
15 min read 17 Jul 20
Summary: Consumer finance is one of the largest and most diverse credit asset classes in Europe, and is particularly attractive for insurers subject to Solvency II. Yet, few insurance investors have any kind of direct exposure to the asset class, with the exception of Dutch residential mortgages. Here, we make the case for investing in pools of residential mortgages and consumer whole loans, and explore the specific benefits available to insurers.
We believe there is a great opportunity to invest in residential mortgage and consumer loan pools, not least due to relatively high and stable spreads, historically lower volatility and an illiquidity premium versus corporate bonds, but also because the asset class can provide investors with a scalable opportunity to diversify the core portion of the investment portfolio that is relatively unique.
Furthermore, for insurance investors, the capital treatment under the standard formula for investing in these assets is extremely favourable, which as a result could drive exceptional return on capital metrics.
The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested.