Are aggressive investments in the region back in full force?

February 27, 2014 12:05 pm

With the region’s insurance industry still haunted by the crash of 2008, our sister publication, Policy, explores the variations in investment strategies since

The GCC region has reached a financial crossroad; a half-baked recovery from the crash of 2008 provides the motivation to ensure that similar mistakes are never repeated. For insurance, previous investment strategies seem foolish, yet the holistic de-risking of investment portfolios is yet to sweep the industry and several companies are still in danger of allowing their profits to depend on extremely volatile stratagems. The reality of post 2008 is that investment returns may not be sufficient for firms that have previously relied on the performance of financial market assets to meet their liabilities and support profitability targets. Companies in the GCC region usually do not have a dedicated asset liability management strategy to mediate volatility risk to meet future and current liquidity needs. Instead, they have often applied aggressive investment strategies with exposure to local equities and property (45 per cent and 35 per cent respectively of assets under management). On the other hand, investment portfolios of leading international insurers have more diversified asset allocations, with a significant portion on fixed income securities and international assets. In the GCC region, meanwhile, the lack of such investment strategies have negatively impacted business profitability from 2007 to 2011, returning a yield of only 3.3 per cent in 2011, when compared with 10.9 per cent recorded four years earlier, according to a A.T. Kearney report published in 2012. The crash of 2008 had a desolate affect on markets such as Dubai and Abu Dhabi, however the reality is that investment strategies that were previously adopted were proven unsustainable and damaging to the financial market as a whole. From this came a shift in approach and many in the industry claim that aggressive investment strategies are no more. Moreover, companies have proven this change and we see more conservative investments from insurance companies. Hazem Al Madi, CEO of Green Crescent, talks about whether companies have truly moved away from aggressive stratagems. “Yes, they are shifting, but whether they are staying away is another question and one that will have to be monitored,” says Al Madi. This is an important question, as investment has become one of the core activities of an insurance company. “It will be down to the higher management, its vision and mission that determines the investments adopted,” adds Al Madi. Speaking with Cyril Gourp, principle at A.T. Kearney, one gets a slightly less optimistic view. He says, “One of the things highlighted by the crash is that companies were investing without thinking about their obligations to policyholders.” He then goes on to admit that although diversification of portfolios is gaining momentum, there are still gaps and the UAE market is much more aggressive than other developed ones. He adds: “The year 2008 was a wake-up call for many in the region and some have really learned that aggressive strategies are just not adequate to meet direct liabilities.” Yet, according to Gourp, the industry still hasn’t reached the point of wholly de-risking portfolios to international standards and this takes us back to Al Madi’s previous comments regarding the importance of monitoring whether companies, in fact, do keep their backs turned to past strategies. The argument for more liquid portfolios is simple. It enables an insurance company to meet expense requirements quicker and set a firm path for a better interactive financial rating. Following investment catastrophes of the past six years, to the outside world, it seems almost alien to be avoiding liquid portfolios. Al Madi explains how new regulation mandates companies to split their portfolios proportionately. He says: “For example, companies can invest up to 25 per cent on real estate and ten per cent to 15 per cent in the stock market, with the rest on convertible bonds and fixed deposits.” Gourp, meanwhile, suggests: “Investment strategies should be split up across different business lines, for example medical portfolios should have different strategies as capital requirements are different.” Although regulators have attempted to mandate the make-up of a company’s portfolio, more needs to be done to educate the market on investment risks. There needs to be enough will from the market to develop and apply what Gourp labels “region-specific models that work for everyone” and, more importantly, the market. Moreover, one wonders what role regulators play in relation to investment. Previously, companies were not required to have specialist investment committees, as the senior management made all of the decisions, since regulators made efforts to try and manage companies that are adopting suicidal strategies. Putting in place portfolio requirements allowed regulators to split investments into three pools – real estate, the stock market, and fixed deposits and convertible bonds. Al Madi explains the importance in recognising the significance of proportionality. “Real estate has proven to be extremely volatile and, similarly, the stock market, which was hit the hardest during the recession, made it clear more so than ever that investment in fixed deposits and convertible bonds are more appropriate.” It seems that convertible bonds and fixed deposits, in fact, promote a culture of longevity and sustainability that the industry so desperately needs. It is difficult to be certain that companies have truly stepped away from kamikaze investment strategies and, at the same time, one cannot be blind to the nightmares of the 2008 crash that still haunt insurance companies today. As Gourp says: “Hopefully, the crash has worked as a wake-up call. Without doubt, the coming years will see further development in adapting low-risk investment profiles. For the short term, however, we are more likely to continue seeing companies depending on volatile returns, but in order for the industry to grow and progress, we are bound to see an investment shift towards fixed-income products.”