In 2015, Abu Dhabi’s insurance sector regulator, the Insurance Authority, placed restrictions on how insurance companies invest their assets, limiting their exposure to particular asset classes and foreign markets.
For example, whereas before the change insurance companies had a high exposure to real estate, they are now limited to investing no more than 30 per cent in this asset class. Their exposure to international equities has also been limited to a maximum of 20 per cent of their assets.
Two years on and [i3] Insights speaks to Anil Dixit, Senior Vice President, Investments at the Abu Dhabi National Insurance Company on how this has changed the firm’s portfolio and how it responds to the current investment challenges thrown up by rising yields in bond markets.
Can you tell me a little bit about your career background and how you got involved in the investment industry?
I joined Allianz, the German insurer, after finishing my MBA from Manchester Business School. After more than a decade with Allianz, I moved to Abu Dhabi National Insurance Company for a new challenge. With a finance major in my MBA, joining the investment world was a natural progression and also my area of interest.
Recently introduced financial regulations restrict the maximum weightings to various asset classes and the allocation to international investments. Has this significantly changed the allocations in the investment portfolio?
We are primarily a United Arab Emirates (UAE) insurer and our endeavour is to invest a significant portion of our assets within the same geography as we believe there are attractive investment opportunities in the UAE.
That said, we also look to diversify geographically to the extent allowed by regulation in order to capture investment returns that are uncorrelated to the economic situation in the UAE.
In the current environment of low yields and potentially rising interest rates globally, where do you look for investment returns?
It is necessary to widen the investible universe beyond the traditional asset classes and also important to be nimble. It is possible to harvest investment returns through uncorrelated asset classes without inordinately sacrificing liquidity.
How do you manage your investments versus your liabilities? Is there complete matching of liabilities or more a liability-aware framework of investing?
Asset-liability management and liquidity are both important factors in our asset allocation decisions. These are balanced with our overall return objectives to try and achieve an optimal risk-adjusted return.
What are some of the key domestic economic challenges in regards to the portfolio?
The relatively small domestic debt market is a key challenge and is one of the factors that leads to relatively higher cash levels compared to other insurance markets.
How do you balance the efficient use of risk capital and investment objectives?
As an insurer rated A- by Standard & Poor’s, the amount of risk capital used by investment assets has always been a factor in our asset allocation strategy. Our approach to this is to allocate a certain risk budget, in discussion with our Investment Committee, that can be potentially used by the investment portfolio.
With this top-down assessment, we allocate capital to various strategies/asset classes that can generate our required portfolio return. As with all asset allocation strategies, this is an iterative process.
Although many institutional investors aim to take a long-term investment horizon, it seems investment horizons tend to get increasingly shorter, even among insurers.
What time horizon do you aim for in your investment strategy?
Insurers who use asset-liability matching as a factor in their investment strategies will always have restrictions on how much they can deviate from a certain duration threshold.
We allocate a small portion of our investment portfolios to slightly more tactical alpha-generation strategies. Our aim is to build a portfolio that delivers steady returns regardless of economic climate.
What is your view on active management versus passive investing and how is this reflected in the portfolio?
We don’t believe these are mutually exclusive decisions while implementing an investment strategy. If liability cash flows are precisely known with very little deviation expected, it is possible to construct an asset portfolio that matches closely the liabilities and with significantly lower cost.
However, for more dynamic businesses and particularly for alpha generation a combination of active and passive is required. More importantly, we believe focus on correlations between asset classes is equally important to use as a factor in investment allocations rather than a simplistic active versus passive choice.
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[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.
Restrictions on Insurance Investments
In 2015, the Abu Dhabi Insurance Authority introduced investment restrictions that limit the allocations insurance companies can make to various asset classes.
Insurers can invest a maximum of 30 per cent in domestic equity instruments, including both listed and unlisted companies in the United Arab Emirates (UAE). There is also a maximum of 10 per cent per single stock, fund or instrument.
Insurance companies can invest a maximum of 20 per cent of their funds in foreign equity investments, again with a maximum of 10 per cent exposure to a single counterparty.
They can allocate up to 100 per cent to government securities or instruments issued by the UAE, with a maximum of 25 per cent per security.
They can also invest in loans secured by life policies issued by the company to a maximum of 30 per cent and up to 30 per cent in secured loans and deposits with non-lenders.
Insurers can invest a maximum of 30 per cent of their assets in real estate, while they can allocate only 1 per cent to financial derivatives.
For the full regulations, please see: http://www.ia.gov.ae