Insurers' STRIPS trade value almost doubles in 10 months
Insurance companies' activity in India's government bond market continues at a tearing pace, with a particular type of favoured debt instrument seeing face value of trades surge 99% on-year from April to January, topping the ₹2 lakh crore mark.
The face value of trades of Separate Trading of Registered Interest and Principal Securities, or STRIPS, in the government bond market has risen to ₹2.32 lakh crore in the first ten months of the current financial year against ₹1.16 lakh crore the same time a year ago, Clearing Corporation of India (CCIL) data showed. For FY23, the face value of STRIPS trades was at ₹1.34 lakh crore.
«These (STRIPS) are suitable for the needs of insurance companies, as they enable them to manage their asset and liability risks. Life insurance companies, especially under traditional plans, have long-term liabilities, and instruments like long-term STRIPS help them reduce reinvestment risk and also increase the duration of their portfolios,» said Sachin Bajaj, executive vice president & head — investments, Max Life.
The STRIPS facility permits purchases and sales of a bond's coupon payments and principal amount as separate, individual securities. Essentially, the cash flows of a bond can be bought and sold.
One of the keys advantages of the STRIPS facility for insurers is the absence of 'reinvestment risk' or the possibility of investors not being able to deploy proceeds from bonds at a desirable rate of interest.
These individual securities in a STRIPS bond are free of reinvestment risk
