Checking the Boxes: Why Mortgage Loans Fit Insurance Balance Sheets

January 19, 2026

3 min read

For insurance investors, privately originated mortgage loans may have much to offer.

Insurance companies have long invested in residential mortgages for income and diversification. Many—particularly in the United States—have often done so indirectly via mortgage-backed securities issued by US government-sponsored housing enterprises (GSEs). We think privately originated whole loans offer a more potent mix of strong return potential and capital efficiency.

Investments in US non-agency mortgages today are more often available in whole loan form, and lending continues to migrate from commercial banks to asset managers and other private lenders. A supportive macroeconomic backdrop, marked by a chronic US housing shortage and high borrower equity also helps to fortify the credit fundamentals of these assets.

As we see it, investors who currently lack the ability to invest directly in residential loans will find it difficult to capitalize on this increasingly attractive credit opportunity that offers high yield potential while satisfying key regulatory requirements.

Why Residential Loans Make Sense for Insurers

Private loans offer key benefits for insurance company balance sheets, including:

Low Risk-Based Capital Requirements: For life insurers, the ability to hold less capital against these assets frees up resources for other uses. In Europe, residential mortgages that meet specific requirements, such as loan-to-value ratios below 60%, may get more favorable treatment, including a 0% capital charge, under the Solvency II standard formula.

Stable and Predictable Accounting: Insurers can account for the loans at an amortized cost—the loan’s original cost adjusted for repayments and interest—rather than their market value. That comes with several advantages. For example, a rise in interest rates would not show up as a reduction in statutory capital.

Federal Home Loan Bank (FHLB) Pledgeability: Loans can be used as collateral with the FHLB, providing insurers with liquidity and access to stable, low-cost funding.

Unlike public mortgage-backed securities, private whole loans also often come with more robust underwriting standards. They have the potential to enhance income generation, too, by offering a high yield premium over comparable public loans while helping to diversify exposure to corporate credit and commercial real estate (Display). And insurers can select individual loans in relation to their credit requirements.

Residential Loans’ Attractive Investment Characteristics

Source: AllianceBernstein (AB)

At the same time, banks and the GSEs have retreated from this type of financing. That has helped to widen yield spreads on these assets and deepen the opportunity set for private credit providers, who can step in to finance originations or acquire existing loans in bulk purchases.

Scale and Sourcing Ability Matter

But doing this well requires a robust platform with the ability to source a large volume of loans from multiple channels while building and managing relationships with a network of partners.

For example, managers with strong sourcing and underwriting capabilities can acquire pools of newly originated or seasoned loans at a discount and repackage them into portfolios that meet specific insurer requirements. This might mean excluding mortgages with loan-to-value ratios above and FICO scores below certain thresholds.

An asset manager may also opt to enter into forward-flow arrangements with many partners. These agreements would supply either daily flow or a predetermined number of new mortgages from a bank or a private lender for a certain time, providing insurers with a steady pipeline of loans.

Private lenders also have the ability to set the terms on the loans they originate or acquire, which enables them to deliver high-credit-quality loans to prime borrowers with attractive yields that meet insurance companies’ risk and return requirements.

Diversification and Cash Flow

The potential advantages for insurers, in our view, are many. They include diversified exposure across the US mortgage market, predictable cash flow and coupons that range anywhere from 3% to 8%, depending on loan type and credit quality.

Whole mortgage loans also have the potential to diversify insurers commercial real estate and corporate credit holdings.

The size of this market requires the ability to analyze loans against a vast historical database and model multiple potential outcomes—from prepayments to defaults and beyond. That puts a high premium on underwriting skill that underpins security selection and pricing.

Convexity—Why it Matters

There’s one more feature associated with these loans that we think makes them a good fit for insurance balance sheets: a more balanced convexity profile. Agency mortgage-backed securities issued by Fannie Mae and Freddie Mac—once the mortgage mainstay of insurance company balance sheets—came with high negative convexity. That was mostly a function of prepayment risk—when interest rates declined, borrowers refinanced their loans, and the securities were often paid off prematurely.

Non-agency residential mortgages often behave differently. Pacing of deployment, prepayment restrictions, smaller balances, borrower “rate locks” and other common features of “non-qualifying” loans all have the potential to mitigate negative convexity in large pools of non-qualifying and seasoned loans.

Residential mortgage loans offer insurers a combination of yield, diversification, capital efficiency and liquidity that we think is difficult to replicate elsewhere in private credit. In a market shaped by structural housing undersupply, strong borrower credit and expanding non-agency issuance, we believe residential mortgages present a timely and scalable opportunity.

The views expressed herein do not constitute research, investment advice or trade recommendations, do not necessarily represent the views of all AB portfolio-management teams and are subject to change over time.

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