Insurers buying into STRIPS may lead to softer G-Sec yields

economictimes.indiatimes.com:

insurers to better manage their long-term liabilities is reporting a volume surge, pointing to the likelihood of lower borrowing costs for the Centre — and the broader economy — as insurance companies buy into the instrument for its inherent structural flexibility. Latest data published by the Clearing Corporation of India, which hosts the trading platform for government bonds, showed transactions in Separate Trading of Registered Interest and Principal Securities, or STRIPS, surged over three-fold in the first quarter of the current fiscal year.

The STRIPS product, which permits purchases and sales of a bond's coupon payments and principal amounts as separate, individual securities, is favoured by insurance companies as the nature of the instrument helps them adroitly manage their liabilities that are usually long-term in nature. For the past few years, particularly since the Covid crisis, insurance products have seen greater demand, while products such as long-term income-related plans have gained popularity.

«For life insurance companies, especially in the traditional funds, which is your whole-life policies, guaranteed funds, and annuities etc, the liabilities are very long-dated. So, the STRIPS give us a long-duration asset where the cash flows are back-ended, which gels very well with future liabilities that are likely to be paid out,» said Mihir Vora, chief investment officer of Max Life Insurance.Booming Trade In April-June, the face value of total STRIPS trades including coupon and principal strips, was at ₹91,978.42 crore as against ₹26,349.18 crore the same time a year ago.