Liability-driven investing (LDI) is a strategy designed to align investment portfolios with the specific cash flow needs of organizations. This approach is particularly effective in developed markets, where a wide array of financial instruments and deep liquidity are available. Tools such as interest rate swaps and inflation-linked securities enable precise hedging, allowing investors to meet their long-term obligations confidently.
However, in emerging markets like Nigeria, the landscape presents different challenges.
Here, LDI must be adapted to operate under constraints such as limited market depth and frequent policy changes. As a result, the focus of LDI shifts from sophisticated instruments to a disciplined approach centered on timing, currency exposure, and sensitivity to interest rates.
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Adapting LDI to emerging markets
In Nigeria, LDI strategies require a nuanced understanding of local market dynamics. While the primary goal remains to meet cash flow obligations reliably, execution relies on adaptability, patience, and a clear vision of structural limitations.
Navigating the Nigerian insurance landscape
Nigerian insurers managing products such as life insurance or annuities encounter unique challenges due to the volatile financial environment. The discipline inherent in LDI offers a framework to maintain stability amidst fluctuations caused by currency devaluations and regulatory shifts. In this context, the emphasis shifts from maximizing returns to ensuring that liabilities take precedence in decision-making.
Experience in the Nigerian insurance industry shows that the most resilient balance sheets adhere to this liability alignment, despite challenges such as weak data infrastructure and thin market liquidity. The following sections will explore how LDI principles are practically implemented in Nigeria, providing valuable insights that could apply to other emerging markets.
The structure of Nigerian insurance liabilities
Insurance liabilities in Nigeria can be categorized into several types: life obligations with predictable timing, general insurance reserves characterized by higher cash flow variance, and embedded guarantees sensitive to interest rates. Understanding these categories is crucial for developing effective LDI strategies.
The yield curve and its implications
A notable characteristic of the Nigerian market is its yield curve, which behaves in a segmented manner rather than as a smooth continuum. This segmentation is influenced by government borrowing patterns and the actions of the central bank. Federal Government of Nigeria (FGN) bonds, vital in the fixed-income market, are primarily issued with tenors ranging from two to thirty years, but their issuance can often be clustered.
The secondary market for these bonds remains shallow. As of mid-2025, over 60% of outstanding FGN bonds were held by pension funds, many designated as ‘held to maturity.’ Insurance companies encounter similar regulatory constraints, resulting in limited trading activity and reduced flexibility for portfolio rebalancing.
Moreover, frequent monetary policy changes can introduce significant market volatility. For example, a sudden benchmark interest rate hike in 2025 led to yield spikes of 200 to 300 basis points within a week. Such dynamics necessitate a careful reconsideration of LDI strategies and their execution.
Implementing effective LDI strategies
To construct an LDI-aligned portfolio in Nigeria, investors must balance creativity with practicality. The key is to design a portfolio that reflects available instruments, regulatory constraints, and realistic trading conditions. This often requires focusing on duration alignment around crucial tenors. For instance, a portfolio with a similar average duration to liabilities can still experience instability if it is concentrated in short-dated bonds while obligations peak around the ten-year mark.
However, in emerging markets like Nigeria, the landscape presents different challenges. Here, LDI must be adapted to operate under constraints such as limited market depth and frequent policy changes. As a result, the focus of LDI shifts from sophisticated instruments to a disciplined approach centered on timing, currency exposure, and sensitivity to interest rates.0
However, in emerging markets like Nigeria, the landscape presents different challenges. Here, LDI must be adapted to operate under constraints such as limited market depth and frequent policy changes. As a result, the focus of LDI shifts from sophisticated instruments to a disciplined approach centered on timing, currency exposure, and sensitivity to interest rates.1
However, in emerging markets like Nigeria, the landscape presents different challenges. Here, LDI must be adapted to operate under constraints such as limited market depth and frequent policy changes. As a result, the focus of LDI shifts from sophisticated instruments to a disciplined approach centered on timing, currency exposure, and sensitivity to interest rates.2
