LDI in Frontier Markets: Building Resilience, the Nigeria Case Study
Liability-Driven Investing (LDI) is often associated with developed markets, where deep liquidity and a wide range of derivatives allow investors to hedge with precision and meet long-term obligations confidently. Products such as inflation-linked securities, interest rate swaps, and long-duration corporate bonds make it easier to align portfolios with actuarial forecasts and regulatory requirements.
In frontier and emerging markets, however, the same philosophy operates under tighter constraints. When market depth is limited and policy shocks are frequent, as in Nigeria, LDI becomes less about instruments and more about discipline. It relies on timing, currency alignment, and interest rate sensitivity rather than on complex financial instruments. The goal is the same everywhere: to meet cashflow obligations reliably. However, in frontier markets, like Nigeria, success depends on adaptability, patience, and structural foresight.
Matching Timing with Obligations
In practice, applying LDI in emerging markets means translating familiar principles into a far less forgiving environment. The objectives are the same, matching timing, currency exposure, and interest rate sensitivity to future obligations, but the execution relies on discipline rather than derivatives. Investors must work within a narrow set of instruments and use judgment where models and hedges fall short.
For Nigerian insurers, particularly those managing life or annuity products, this discipline provides stability amid frequent liquidity shocks, currency devaluations, and shifting regulations. LDI keeps liabilities — not returns — at the center of decision-making.
In my experience across actuarial and investment functions in Nigeria’s insurance sector, the strongest balance sheets consistently maintained this liability alignment, even when data infrastructure is weak and market liquidity thin.
The following sections outline how Nigerian institutions have applied LDI principles in practice — lessons that hold value for other frontier and emerging markets as well.
Mapping the Liability Terrain
Nigerian insurance liabilities come in several forms: life obligations with actuarially predictable timing, general insurance reserves with higher variance in cashflow timing, and embedded guarantees with interest sensitivity.
Three primary dimensions define the liability structure:
- Timing: Life and annuity obligations often extend across five-to-30 years. General insurance liabilities may require settlement within six-to-24 months. Cashflow projections must distinguish between these timelines and adjust for reinsurance recoveries and expense provisions.
- Currency: Currency alignment remains a foundational principle. The Central Bank of Nigeria’s exchange rate management framework experienced a series of adjustments between 2020 and 2025, including a move from a managed peg to a more market-reflective rate. The naira depreciated from ~₦380/USD in 2020 to above ₦1,500/USD by Q1 2025, a decline of over 290% (source: CBN, 2025). For insurers with foreign-currency liabilities, holding naira assets introduces unrecoverable mismatches.
- Interest Rate Sensitivity: Duration, convexity, and key rate duration (KRD) tools help estimate how liabilities will reprice under shifting yield curves. KRD has been instrumental in identifying exposures to specific tenors, such as the five-year or 10-year points. This granularity is essential in Nigeria, where non-parallel curve shifts are common.
Navigating Nigeria’s Market Architecture
Nigeria’s yield curve is not a smooth continuum of maturities and pricing. Rather, it behaves as a segmented curve, shaped by government borrowing patterns, institutional demand, and central bank policy actions. Federal Government of Nigeria (FGN) bonds, issued by the Debt Management Office (DMO), dominate the fixed-income space. These instruments offer tenors between two and 30 years, but issuance is often clustered.
The secondary market is shallow. As of mid-2025, pension funds held over 60% of outstanding FGN bonds, and a substantial portion were marked as “held to maturity” (PenCom, 2025). Insurance companies, facing similar regulatory treatment under Nigeria’s National Insurance Commission (NAICOM) rules, also maintain low trading activity. This limits portfolio rebalancing flexibility.
Monetary policy changes frequently introduce short-term volatility. Open market operations (OMOs), cash reserve debits, and sudden benchmark interest rate changes have led to 200-to-300-basis points yield spikes over a single week. For example, in this year’s first quarter, the 10-year FGN bond yield rose from 16.8% to 22.6% following a surprise monetary policy rate hike and liquidity sterilization campaign (BusinessDay, 2025).
These dynamics have three implications for LDI strategy:
- Parallel duration matching strategies can produce unintended mismatches during non-parallel curve shifts.
- Active KRD management, even in the absence of derivatives, allows better immunization.
- Segmenting portfolios between matching and return-seeking buckets improves resilience.
Building the LDI Portfolio Under Constraint
Constructing an LDI-aligned portfolio in Nigeria requires practical creativity. Portfolio architecture depends on instrument availability, regulatory constraints, and realistic trading liquidity.
Core instruments for Nigerian LDI include:
| Asset Class | Key Role in LDI | Observations |
| FGN Bonds | Matching long-term liabilities | Most liquid and regulatory-compliant, but clustered issuance |
| Treasury Bills / Short-Term Deposits | Matching short-term reserves | High yield variability; useful for P&C claims buffers |
| Corporate Bonds | Yield enhancement | Scarce issuance, low liquidity; requires strong credit analysis |
| Subnational / Infrastructure Bonds | Long-term exposures | Offers tenor extension; often illiquid post-issuance |
| Equities | Return-seeking only | Highly volatile; not relevant for matching unless insurer writes index linked products |
| Alternatives (PE, Infrastructure Debt) | Enhancing long-dated portfolios | Useful for illiquid liabilities; governance-dependent |
Duration alignment is most effective when structured around key tenors. In practice, an allocation with similar average duration to liabilities may still result in NAV instability if the asset portfolio is concentrated in short-dated bonds while liabilities peak at the 10-year mark.
Insurers with foreign obligations, such as those paying offshore reinsurers, benefit from maintaining US dollar reserves or instruments with US dollar-linked cashflows. Given Nigeria’s limited FX hedging instruments, currency mismatches often introduce downside risks that are unable to be hedged.
Managing Volatility Through Structured Scenario Analysis
Scenario testing has become a core risk management tool in Nigerian insurance asset and liability practices. Volatility in yields, FX, and inflation is both frequent and severe. Each episode, whether from policy, geopolitical, or supply-side shocks, tests an institution’s positioning.
Incorporating regular stress testing into investment governance cycles produces tangible advantages. The most effective institutions model quarterly scenarios across:
- Interest rate shocks: +300bps parallel and non-parallel shifts, with attention to short-end dislocations.
- FX devaluations: Simulated 20–30% shifts, benchmarked against historical CBN adjustments.
- Liquidity events: Disruptions in the repo market or increased capital call requirements.
- Inflation surprises: Fuel subsidy reforms or FX passthroughs that affect claim cost models.
By integrating scenario results into board-level dashboards and investment policy triggers, insurers create an adaptive LDI process rather than a static allocation exercise.
The Institutional LDI Playbook
Based on current regulatory frameworks, market structure, and operational experience, the following LDI strategy pillars serve as a robust foundation:
- Begin with actuarial mapping: Use internal and external actuarial tools to define projected cashflows, claim lag structures, and expense ratios.
- Match key rate durations, not averages: Allocate assets with exposures tied to the same tenors where liabilities concentrate. This approach addresses Nigeria’s curve segmentation.
- Separate matching from yield-seeking pools: Designate a portion of AUM as the liability immunization portfolio and manage return-seeking positions independently.
- Prioritize currency alignment: Use USD or FCY-denominated assets only against FCY-denominated liabilities. For naira liabilities, remain hedged through local instruments.
- Run Quarterly Stress Tests: Build resilience by integrating base-case and adverse scenarios into asset allocation reviews.
- Monitor Solvency & Regulatory Compliance: NAICOM and PenCom provide strict guidelines on admissible assets, duration gaps, and credit exposure. Compliance supports operational continuity.
Discipline Over Complexity
Across frontier markets, success in LDI is not defined by access to complex instruments but by the discipline to stay aligned with obligations when conditions are volatile and imperfect. Nigeria’s experience shows that when investors focus on matching promises with capital, even without precision tools, solvency and stability can still be achieved. The essence of LDI is not sophistication, but alignment under constraint.
If you liked this post, don’t forget to subscribe to the Enterprising Investor.
All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
Image credit: ©Getty Images / Ascent / PKS Media Inc.
Professional Learning for CFA Institute Members
CFA Institute members are empowered to self-determine and self-report professional learning (PL) credits earned, including content on Enterprising Investor. Members can record credits easily using their online PL tracker.
