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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.

M&G Investments 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.

This paper focuses on the case for investing in pools of residential mortgages and consumer whole loans, and explores the specific benefits available to insurers subject to Solvency II, who are looking to make a strategic allocation to the asset class over the long term.

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