LIC eyes entry into bond forward rate agreement market by end of FY25

The move comes as the interest rate cycle is set to soften, with insurers offering more guaranteed-return products

State-owned Life Insurance Corporation of India (LIC), the country’s largest insurer, is set to enter the bond forward rate agreement (FRA) market by the end of the current financial year (FY25).

 

This move is aimed at mitigating risks in its non-participatory (non-par) segment, according to two sources familiar with the development.

 

“We have not undertaken trades yet in bond FRA, we are still in the process. But, we should mostly be ready and start trading by the end of FY25,” a source said.

 

The move comes at a time when the interest rate cycle is set to turn softer amid insurers offering more guaranteed return products.

 

Previously, LIC’s managing director (MD) and chief executive officer (CEO) Siddhartha Mohanty, during the insurers’ earnings call, had said LIC had received policy approval for derivatives.

 

FRAs are contracts between banks and insurance companies that enable insurers to lock in interest rates for a future date, protecting them from market volatility. By entering into such agreements, insurers can offer guaranteed returns to policyholders.

 

Bond market participants said that LIC’s entry into the market can lead to a significant increase in demand for longer-tenure bonds.

 

“This will certainly boost the demand for longer-tenure bonds because if they are going to go into FRA, they are going to buy first the long bonds and then convert them into FRA. So, somebody will buy it on their behalf and give them a product which is FRA,” said Vijay Sharma, senior executive vice-president at PNB Gilts.

 

LIC’s total assets under management (AUM) stood at Rs 53.59 trillion as of June 30, 2024. Government securities, including state government securities, comprised 60 per cent of the total AUM (approximately Rs 30 trillion).

 

“It (LIC) is the largest player in the life insurance space, and its new focus is on developing the non-par segment for which, as risk mitigation, it wants to enter the bond FRA. It also has a large appetite. So, if it enters the market, it will certainly boost demand,” said Ajit Banerjee, president & chief investment officer, Shriram Life Insurance Company.

 

“Now bond FRA is not limited to foreign banks, but some large private banks and public sector banks have entered the space,” he added.

 

The Centre had introduced the 50-year tenor security in its borrowing calendar for the second half of the previous financial year. It had fulfilled a long-standing demand by life insurance companies, particularly the LIC.

 

Before the introduction of the 50-year bond, the longest available government bond was the 40-year paper.

 

In the second half of the current financial year, the central government plans to borrow a gross Rs 6.61 trillion through government securities.

 Around 15.9 per cent of the amount will be allocated to 40-year securities and 10.6 per cent to 50-year securities. An email to LIC did not elicit a response till the time of going to press. 

 

STRATEGIC PLAN

- Comes at a time when the interest rate cycle is set to turn softer amid insurers offering more guaranteed return products 

- Move aimed at mitigating risks in their non-participatory (non-par) segment 

- Bond market participants said that LIC’s entry into the market can lead to a significant increase in demand for the longer tenure bonds