21 May 2019
Allianz Africa CIO: investing in nascent capital markets
Channels: SAA/ALM, Managers, Outsourcing, Risk, Governance, Regulation
People: Jens Köke
In London to speak at the 2019 Africa Financial Services Investment Conference, Allianz chief investment officer for Africa Jens Köke, took the time between two meetings for a quick coffee – double expresso – with Insurance Asset Risk. Interview by Vincent Huck
It is fair to say Allianz harbours high hopes for its business in Africa, and it has not been afraid to put its money where its mind is.
In the past two years alone, it officially launched in Morocco after buying operations from Zurich, and in Nigeria by acquiring Ensure Insurance. Further M&A saw it spend $81m building a stake in reinsurer Africa Re. It bolstered staffing through senior appointments in Senegal and in Ghana. And its most senior employee - group chief executive Oliver Baete – told a conference in South Africa in 2017 that, “while traditional markets such as Europe are struggling with their digital transformation process, Africa is digital by nature.” That plays into a major disruption that all underwriters are keen to grasp.
For providing €588m of revenues in 2018 – just 0.5% the €130.6bn group-wide total of the German giant, one might argue that the continent ‘punches above its weight’, in prominence.
The €1bn ($1.12bn) general account that backs Allianz’s work in Africa also pales in comparison to the group’s total €1.9trn of assets. But one might contend that here, too, the continent punches above it weight – in terms of investment challenges.
Identifying and surmounting them, to build a successful investment strategy, is the job of the regional chief investment officer, Jens Köke.
The challenges are in large part due to Allianz Group’s asset liability management (ALM) policy which requires the investments to be made in the same currency as the liabilities are issued.
But the first challenge that Köke addresses over his coffee is regulation, and in particular the admissibility of assets.
“We are typically constrained to investing in liquid assets, cash or real estate,” he says.
Under regulations common to Western and Central Africa, rules inherited from the French and called CIMA (Conférence Interafricaine des Marchés d'Assurances), Köke cannot invest the African general account into loans to cover technical reserves. The only exception are loans with a government guarantee.
Köke can see many European insurers shifting their investments from public to private markets, and notes: “We would also like to benefit from [the illiquidity premium] in Africa specifically because we face the issue of underdeveloped capital markets across the continent.”
The immaturity, or non-existence of some markets taken for granted in Europe, is a second impediment that Köke must contend with.
Except for Morocco and South Africa, the continent has practically no corporate bond market, he says. “To diversify the portfolios, we would like to invest across borders, to invest not only in government bonds but also in corporate bonds. That would not only be beneficial from our standpoint, but it would contribute to the development of the local economies.”
Allianz Africa is not sitting back and quietly waiting for markets to develop of their own accord. Working with a South African asset manager and a Western European bank, it is trying to develop a solution to invest in corporate loans that are not backed by a government. “It is an innovative solution trying to circumvent the obstacles and make [the instruments] admissible for us,” Köke says.
In some cases, capital markets exist, but they may not offer the kind of instruments that Allianz Africa’s life operation needs in order to match its liabilities.
“The duration mismatch is very difficult to close,” Köke says. “For the P&C portfolios it is possible because the liabilities are short in nature, but for the life portfolios we cannot. We have an open duration gap.”
The longest government bond maturity in West Africa is 10 years, from Cote d'Ivoire, but otherwise Köke says Africa’s sovereign paper is restricted to the shorter end of the yield curve. Countries like Congo or Madagascar are unlikely to issue government bonds with a life to maturity of three years, he says.
Allianz Africa is trying to develop solutions with its banking partners to address this. For example, COFINA [Compagnie Financière Africaine] - one of Africa’s banks - has issued securitised bonds with an 18-month life. Allianz Africa is now working with the bank to produce longer-dated bonds and maybe even a split issue, with a two year bond Allianz Africa could use for its P&C portfolios, plus a longer-dated bond of five years, to cover its life portfolios.
The field of infrastructure, where life insurers elsewhere in the world are lapping up longer-dated allocations for their long-term obligations, presents challenges peculiar to insurers like Allianz in Africa.
Köke says too much capital is flowing into Africa through the development finance institution (DFIs), depressing returns available from big-project investments such as infrastructure and renewables. “Returns from [them] are shrinking because this capital from development institutions is chasing projects and sometimes bidding against each other,” Köke says. “It makes it difficult for private investors.”
Over-exposure to cash and term deposits
As a result of such nascent corporate bond markets, loans being inadmissible and government bonds being restricted to the short end of the yield curve, Allianz Africa’s asset allocation is very heavily focused on investments paying fixed interest. That may sound like the case in Europe, but unlike in Europe, Allianz Africa’s allocation is mainly to cash and term deposits.
Half the portfolio sits in these, while the other half is in government bonds, real estate Allianz uses itself, investment property, and “a limited equity exposure in countries like Morocco where there is a capital market”, Köke says.
Morocco represents one third of the African assets.
Beyond the difficulties that regulation and underdeveloped financial markets pose for working with capital, Köke says it is very difficult to transfer capital from Central Africa - for example Cameroon – to Western Africa.
It is an issue per se, and also prevents him from diversifying the portfolio in a search for higher yields at lower risk.
And he must face the challenge of human capital, too. Basic recruitment criteria are a fluency in French and English, and good understanding of international companies.
“There aren’t a lot of people who meet these criteria,” Köke says. “We are supporting them with training programmes to help them understand the group culture and expectations.”
Regional set up
Allianz Africa has created regional hubs for decision-making and expertise in Casablanca (Morocco), Abidjan (Côte d'Ivoire) and Nairobi (Kenya).
The centre in Casablanca, from which Köke reports to the Allianz Group CIO, centralises all finance functions including investments, controlling, accounting, and risk planning.
Scarcity of resources in individual countries mean it wouldn’t make economic sense to run investment operations in each African country separately, he says.
Asked if he is free from the group to make investment decisions independently, Köke points to the clear and stringent corporate rules book by which Allianz entities must implement for investments.
“We have tied the hands of our entities in the 17 countries,” he says. “For any investment they conduct, they have to ask for approval if it is not a local government bond or just a cash deposit. We are doing it in line with the group rules, and we do the ALM analysis in cooperation with Allianz Group in Munich.”
As for himself, Köke is free to make buying proposals to the regional investment committee, however this is limited to traded assets, namely fixed income including government bonds.
“I can decide on those, together with my investment team. If it is for larger amounts, I need to seek approval,” he says.
Unlisted investments are outsourced to an asset manager. For example, last year Allianz Africa increased its allocation to the Meridiam Infrastructure Africa fund, of which it now holds 20%. “They are doing the selection and evaluation of infrastructure projects – they’ve invested in airports from Madagascar, hospitals in Cote d'Ivoire or a port in Gabon.”
The regional investment committee has the responsibility of picking the third-party asset manager, adhering as ever to the group’s “stringent” guidelines.
As part of his role of regional CIO, Köke also has the responsibility to look for opportunities in Africa that might be interesting to Allianz units in Europe.
The European subsidiaries have a different risk profile, presenting yet more, different challenges for Köke to handle. And the group’s currency-matching policy means euro-denominated liabilities need euro-based assets. The main challenge, he says, is to find the right assets or the competitive asset managers to source those assets.