Since the credit crisis, investments of Dutch insurers in mortgages have grown. Mortgage investments with longer fixed-interest periods offer insurers relatively high returns and reduce the maturity mismatch with their liabilities. Derivatives such as interest rate swaps further hedge the interest rate risk as they increase in value due to the declining interest rates.
Mortgages and derivatives constitute 21% of the balance sheet total
With a balance sheet total of approximately EUR 550 billion, the insurance sector is one of the largest institutional investors in the Netherlands. Figure 1 shows the percentages for the various assets in the balance sheet total of the insurance sector.
Since 2008, the combined share of mortgage loans and derivatives in the balance sheet total has increased from 9% to more than 21%. Between 2008 and 2019, the share of derivatives went up from 2.8% to 8.9%. In the same period, mortgage loans increased from 5.9% to 12.3% of the balance sheet total. Equity holdings and the other assets (deposits and liquid assets, reinsured technical provisions and non-financial assets) declined in these years, to 5.1% and 11.6%, respectively. Representing more than 40% of the balance sheet total, bonds remain the largest asset class, in which investments in government bonds have gained ground since 2008 (25.8%; +1.5 percentage points) compared to corporate bonds (14.6%; -1.5 percentage points).
Search for yield, maturity mismatch and hedging risks
Since 2008, insurers have invested more heavily in mortgages with long fixed-interest periods, which carry relatively high interest rates and thus offer higher returns. In the third quarter of 2019, approximately 90% of their outstanding amount of mortgage loans consisted of Dutch mortgages, which have relatively long fixed-interest periods. These mortgages have the added advantage of helping them reduce the mismatch with the increased insurance liabilities. In particular for life insurers prevailing low interest rates lead to a mismatch with the assets on their balance sheets. Life insurers also have relatively long maturities for their liabilities, which strongly increase in an environment of persistently low interest rates. The increase of derivatives in the balance sheet total is almost entirely attributable to life insurers and is largely the result of revaluations of forward rate agreements. These go up in value with declining interest rates.
DNB Statistics (under Theme - Insurers)