* Gulf insurers had invested little in bonds
* High-grade supply has been very small
* Surge of issuance driven by cheap oil
* UAE rule change fuels insurers' shift to bonds
* Invest AD launches new GCC debt-based product
By Davide Barbuscia
DUBAI, May 23 Regulatory change and surging
high-grade debt issuance by governments are encouraging Gulf
insurance companies to invest in bonds, bringing the region
closer to investment patterns in developed economies.
Traditionally, Gulf insurers have shown little interest in
bonds, partly because of a lack of supply of highly rated debt
issued by governments or blue-chip corporates.
Equities and real estate account for most of United Arab
Emirates insurers’ portfolios; bonds comprised about 11 percent
of listed UAE insurers' assets in 2016, and only a small portion
of that was investment grade, according to Moody’s.
In Saudi Arabia, insurers traditionally invest in
shorter-term money market funds or fixed bank deposits. By
contrast, many European insurers allocate more than 70 percent
of their funds to bonds.
The pattern in the Gulf is changing, however, as governments
of the six Gulf Cooperation Council (GCC) nations issue an
unprecedented amount of bonds to cover budget deficits caused by
low oil prices.
Most of the new debt is rated investment grade, such as
Saudi Arabia's $17.5 billion debut sale of conventional bonds
last October - the largest-ever emerging market bond sale - and
its issue of $9 billion of Islamic bonds last month.
"Some UAE insurance companies are slowly increasing their
investments into fixed income, and we expect allocations towards
fixed income overall to increase slightly this year," said Emir
Mujkic, associate director of insurance ratings at Standard &
In Saudi Arabia, the move toward bonds has begun but has not
progressed as far; some insurers invested in April's 11.3
billion riyal ($3.0 billion) sukuk issue by national oil giant
Saudi Aramco, for example.
So far, the volume of high-grade, local-currency bond
issuance in Saudi Arabia remains small, limiting insurers'
opportunities to invest.
"There is interest but at this stage, given the low supply
in the local market, the shift is minimal," said Mujkic.
However, Saudi authorities are keen to develop the domestic
bond market to reduce companies' near-complete dependence on
bank loans, while Saudi state firms need to raise money as they
receive less support from their cash-strapped government. So the
supply of corporate debt in the kingdom is expected to grow.
In a sign of insurers' rising interest in bonds, Abu
Dhabi-based Invest AD Asset Management, in partnership with
Swiss bank Julius Baer, said this month it was launching an
investment product for institutions that was based on high-grade
The product provides exposure to U.S. dollar conventional
bonds and sukuk with a weighted average portfolio rating of A-
minus and above.
Mohammed al-Hashemi, executive director at Invest AD Asset
Management, said increased GCC bond issuance across a range of
ratings and maturities in the past year had broadened the
"This in turn will encourage innovation and the creation of
a wider variety of financial instruments and structured
products, from a variety of issuers, with regional fixed income
as the underlying asset class,” he said.
Hashemi said Invest AD's new product was also spurred by
regulatory change in the GCC. In the UAE, for example, rules
issued in early 2015, and now being implemented gradually, limit
exposure of insurers' balance sheets to various asset classes.
"Insurance companies will be shifting towards higher-rated
bonds which have lower capital charges under the new
regulations. Some insurers we speak to want to divest some of
their BBB-rated bonds in favour of instruments rated in the A
range," said Mujkic.
Mohammed Ali Londe, assistant vice president for regional
insurance at Moody’s, said GCC insurers were smarting from 2015,
when plunging oil prices triggered a tumble in local equity
markets that damaged their balance sheets.
Now, "the abundance of issuance from sovereigns and
corporates has given insurers a pool of assets in which to
invest which simply wasn’t available before," he said.
"We now expect insurers to subscribe to fixed income
exposure gradually, while gradually divesting from riskier
assets, which will mean improved asset quality, higher liquidity
and more stable profitability for the sector."
(Editing by Andrew Torchia and Raissa Kasolowsky)