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Memento Mori! – Obituary of the GCC Insurance Industry Asset Allocation

In Ancient Rome, when the Roman General paraded the streets after a victory, standing behind the General was a slave who would continuously whisper into the General’s ears the words ‘Memento Mori’. Roughly translated to English, ‘Memento Mori’ means ‘Remember you’re human, and remember you must die, stay humble and plan’. The reason for saying this was so that the General realizes that even if he has been a victor today, he should remember that he could fall or be brought down. I wish someone had whispered in the ears of the Insurance Industry Portfolio managers way back in 2007 and 2008, the same thing.

Here’s why!

I was reading a really interesting report compiled by a Alpen Capital - UAE on the state of the UAE Insurance Industry and also the Takaful Industry in GCC and came across some amazing nuggets of information.

The report states and I quote

  • All insurance companies in the UAE surveyed, other than XYZ Insurance Company, have adopted very aggressive investment strategies, with an average of 65%+ of Premiums invested in equities and real estate, mostly locally
  • To break it down further, in 2008, the Investment profile of UAE Insurers read as follows – 41.7% in Securities, 34% in Liquid Investments and 23.5% in Real Estate/ properties
  • Contrary to insurers in developed markets, the UAE peer group has a very high exposure to regional equity and real estate markets.This has resulted in high volatility in investment returns
  • A whooping majority of companies in the UAE has a proportion of over 80% of their investments in ‘risky’ asset classes, some of them going more than 90-95% in high risk assets

So virtually, if you had made any investments into a Insurance company’s stock in UAE, you were virtually investing into nothing more than a highly toxic Mutual Fund with a cocktail of ridiculous investments.

The world over there is regulation that binds Insurance companies to adopt more traditional strategies of investment methods offering assured yet non-extravagant returns. Most Insurance Industry portfolio managers do not even know how to spell equity and only understand Fixed income investment vehicles, while here in UAE and GCC, we have Insurance industry portfolio managers who don’t know anything other than Equity.

US, UK, European and several Asian Countries have regulations which prohibit Insurance premium investments beyond High/Low grade Govt Bonds, Corporate bonds, Cash and short term investments and miniscule amounts of PE/ RE. Life Insurance Industry is even more regulated world over and the composition of High grade fixed income instruments and cash as a major component in the asset allocation mix.

I fail to understand the thought process behind these Investment managers to invest in Equity and Real estate in such high concentration. Portfolios require short term liquidity to cover early surrender of policies, where were they planning to cough up the money from if they had investments over 30% in Real Estate? Did they never visualize a world where they could face defeat? I can understand that if this were a pension fund, they could have strategy like Warren Buffet to hold stocks forever to squeeze stupendous amounts of returns after something like 20 years of holding it.

With the way, the local equity and real estate markets moved between 07/08 and now, I would presume these ‘smart’ insurance fund investment managers have been napalm bombed into Kingdom Kong already.

Who is to blame out here – Regulator, Insurance Industry associations, Company Owner/ Senior management, a virus in the computer? I don’t know and honestly I don’t want to know, all I hope is that whoever was responsible comes out of this alive and safe.

Memento Mori…Memento Mori…Sorry General, I said it too late. You’ve already been wiped out I guess

(Peter Pan has not formally asked permission from the Alpen Capital to use the information on this blog, but since the blog is available on public domain, have used the data. All views expressed here are purely personal)

Disclosure: No Positions