In the realm of investment strategies, liability-driven investing (LDI) often finds its roots in well-established, developed markets. Here, investors have access to a plethora of financial instruments, allowing them to hedge effectively and fulfill long-term commitments with assurance. However, the landscape shifts dramatically when attention turns to frontier and emerging markets, such as Nigeria. In these regions, LDI is shaped by unique challenges that require a shift in approach and mindset.
While the primary aim of LDI remains consistent—to meet cash flow obligations reliably—the methodology diverges significantly. In Nigeria, market volatility, limited instrument availability, and regulatory uncertainties necessitate a disciplined approach focused more on timing and currency exposure rather than sophisticated derivatives.
The practical application of LDI in Nigeria
Implementing LDI principles in Nigeria entails reinterpreting established methods within the constraints of an unpredictable market. Investors in this environment must concentrate on aligning their portfolios with cash flow commitments, which may include life insurance policies, general reserves, and other liabilities sensitive to interest rates. This adaptation underscores the importance of discipline in investment decision-making.
Understanding Nigeria’s unique market landscape
Nigeria’s financial scene presents a segmented yield curve, influenced by government borrowing, institutional demand, and actions from the central bank. The primary fixed-income instrument, the Federal Government of Nigeria (FGN) bonds, comes in maturities ranging from two to thirty years but tends to cluster in issuance. As of 2025, pension funds dominate the market, holding over 60% of outstanding FGN bonds, many classified as ‘held to maturity.’ This concentration stifles trading activity and flexibility for insurance companies, which, like pension funds, are subject to regulatory constraints.
Frequent shifts in monetary policy introduce additional layers of volatility. Changes in interest rates and open market operations can cause yield fluctuations of 200 to 300 basis points within mere weeks. For instance, earlier in the year, a surprise increase in the monetary policy rate saw the yield on ten-year FGN bonds soar from 16.8% to 22.6% almost overnight. Such dynamics have profound implications for LDI strategies.
Key considerations for successful LDI implementation
For those seeking to establish an LDI-aligned portfolio in Nigeria, creativity is essential. The availability of financial instruments, regulatory limitations, and realistic trading conditions shape the architecture of these portfolios. Duration alignment is critical; insurers must ensure that the average duration of their assets corresponds with the timing of their liabilities. Discrepancies in this alignment can lead to instability in net asset value, particularly if an insurer’s portfolio is overly concentrated in short-duration bonds while their liabilities peak at longer tenors.
Managing foreign obligations and currency risks
Insurers with foreign exposure, particularly those dealing with offshore reinsurers, benefit from maintaining reserves in US dollars or using instruments that yield dollar-linked cash flows. Given Nigeria’s limited options for foreign exchange hedging, mismatches in currency can introduce significant risks that are difficult to mitigate. This reality necessitates a strong emphasis on scenario testing as an integral part of risk management practices.
The Nigerian insurance sector has increasingly adopted stress testing to anticipate and navigate the volatile landscape shaped by shifts in yield, foreign exchange rates, and inflation. By incorporating regular stress scenarios into investment governance, institutions can craft responsive LDI strategies rather than static allocations. This proactive approach enhances adaptability and resilience in the face of unpredictable market conditions.
Foundational pillars of LDI strategy in Nigeria
The experience of Nigerian institutions illustrates that success in LDI is not merely a function of access to complex financial instruments. Instead, it hinges on the discipline to align investments with obligations amid volatility and uncertainty. By focusing on the relationship between promises made and capital available, even in challenging environments, insurers can achieve solvency and stability. Ultimately, the essence of LDI lies in maintaining alignment under constraints rather than relying on sophistication.