LIC's strategy shift helps reducing government borrowing costs: Report

Life Insurance Corp of India (LIC) boosted its federal and state debt purchases to reduce capital volatility, reported Reuters citing sources. The move also helped in reducing government borrowing costs.

According to the news agency, the shift in strategy helped states in reducing costs by more than 40 basis points (bps) over the past 15 months.

"LIC has been increasing their investment into state debt," a senior official from the state-run insurer confirmed to Reuters, requesting anonymity as they were not authorised to speak to the media. The shift in strategy began in fiscal year 2023.

Strategy shift to continue for two-three years

The plan to shift is a “continuous process” and will be done gradually for next two or three years, sources told the news agency.  However, there is no clarification about the level to which LIC intends to take its debt investments to.

The strategy shift is aimed to reduce volatility in its solvency margin. LIC began shifting investment from its non-participating fund to debt from equity to reduce volatility, another person familiar with the matter told Reuters.

Solvency Margin refers to the excess capital insurers maintain over claim amounts they may incur. It acts as a key measure of capital. This usually comes out of funds derived from non-participating policies.

The plan to shift is a "continuous process" and will be done gradually, they said, declining to specify to what level LIC intends to take its debt investments. However, they added the shift will continue for two or three years.

At present, more than 70% of LIC's investments from its non-participating fund of 13.5 trillion rupees is invested in debt.

Most insurers keep debt levels at above 90% in their non-participating book to cushion their solvency margin and their liability to policyholders, Suresh Ganapathy, analyst at Macquarie Capital Securities told Reuters.

Market impact

There has been a significant impact of LIC's strategy shift on borrowing costs. The report says that thestates are able to borrow longer-term funds at cheaper value.

There was also a reduction in the spread between state and federal debt. It was narrowed to nearly 30 bps in July-September from 45 bps a year ago. The spread for longer-term debt has also narrowed to 10-15 bps from 30 bps.

The mild inversion in bond yields have "persisted for some time now" due to "continuous absorption by insurance companies, led by LIC," said a senior state-run bank treasury official.

Indian states raised 3.58 trillion rupees in April-September, with more than 50% raised through 12-year to 30-year securities. Despite the higher supply, their yields have remained below the 10-year papers. In the previous financial year, borrowing from longer-term papers was at 46%. LIC has now also increased purchases of good quality corporate bonds issued in this quarter, an LIC official said earlier.

(With inputs from Reuters)