The country’s largest insurer – which has a total asset under management (AUM) of ₹53.5 lakh crore including 40% in government bond books – is geared up to soon enter either the market for bond forward rate agreements (FRA) or actual bond forwards and has been making market enquiries about the matter, multiple bank treasury executives told ET.
Agencies“There had been talks of LIC carrying out bond FRAs for a few months, but now they are poised to finally enter the market,” one of the sources said. “They have recently carried out a test bond FRA trade too. Given the sheer size of LIC’s book, any participation from them gives a boost to demand for long-term government bonds.”
The bond FRA instrument makes use of a derivative transaction through which insurance companies lock in a particular rate of interest from a government bond to hedge certain long-term liabilities.
Commenting on the matter exclusively to ET, LIC managing director and CEO Siddhartha Mohanty said the insurer has received policy approval for derivatives.At present, most bond FRA trades are executed by foreign banks.Bond FRA trades currently have an outstanding of close to ₹3 lakh crore, with the transactions steadily growing since they started around three-and-a-half years ago, a senior executive at a multinational bank said.Trades Soar
What the bond FRA does is provide insurers with a fixed return from a government bond, which could be bought by the insurance company later. Foreign banks have been using their own funds to buy bonds on behalf of insurance companies and then hedging that exposure in the market.
From March 15 to July 31, 2024, the total notional amount of bond FRA trades including buy and sell transactions was at ₹43,001 crore, Clearing Corporation of India (CCIL) data showed. CCIL started publishing the data in March.
In December last year, the Reserve Bank of India (RBI) released draft directions for bond forwards.
Bond forwards, which are not dissimilar to bond FRAs, permit one counterparty to buy a specific debt instrument from another counterparty on a particular future date and at a price decided at the time the contract is struck. The central bank is yet to release final directions.
“Other insurers were carrying out bond FRAs for the past three years, but LIC had stayed away,” one of the banking sources cited above said. “Before the RBI released draft norms, the product was in a regulatory grey zone and LIC has strong scrutiny, given its position as the largest PSU insurer. It took time for them to gain internal clearances, but now it can enter the market.”
An insurance executive said that when LIC enters the bond forward market, it could create an impact due to its large liabilities. “This might disrupt the market balance, especially if many participants join in, leading to a reduction in forward spreads,” he said.
LIC’s Non-Par Push
Over the past few years, as insurance companies have increasingly been offering guaranteed return products, their demand for government bonds has also increased. The nature of the guaranteed return products being offered by insurers requires them to guard against interest rate fluctuations.
LIC has been working to increase the sale of non-participating products that do not share profits with policyholders.
Over the past year, LIC’s share of non-participating policies in its individual business has jumped to 23.94% from 10.22%. For the quarter ended June 2024, LIC held a 39.27% market share in individual business and a 76.59% share in group business.
LIC’s total premium income for the quarter was ₹1.13 lakh crore, up from ₹98,363 crore in the year-ago quarter. Within the individual business, participating policies made up 76.06% of the annualised premium equivalent (APE) at ₹5,132 crore, while non-participating policies accounted for 23.94% at ₹1,615 crore.
LIC’s AUM increased to ₹53,58,781 crore as of June 30, 2024. Of this ₹15 lakh crore were in equities and the remaining in debt including central, state government bonds, infrastructure, corporate bonds and other investments.