Strategy shift at top insurer LIC aids in lowering govt borrowing costs

Life Insurance Corp of India (LIC), the country's largest insurer, has stepped up federal and state debt purchases to reduce capital volatility, according to sources and market participants, also helping lower government borrowing costs.

The shift, previously unreported, has helped states reduce costs by more than 40 basis points (bps) over the past 15 months.

"LIC has been increasing their investment into state debt," confirmed a senior official from the state-run insurer, requesting anonymity as they were not authorised to speak to media.

LIC did not respond to an email sent by Reuters.

Continuous process

The shift began in fiscal 2023, not long after LIC went public.

LIC began shifting investments from its non-participating fund to debt from equity to reduce volatility in its solvency margin, said another person familiar with the matter, who also declined to be named.

Solvency margin, a key measure of capital, refers to the excess capital insurers maintain over claim amounts they may incur. 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.

Presently, more than 70 per cent of LIC's investments from its non-participating fund of Rs 13.5 trillion ($162.39 billion) is invested in debt, they said.

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

Market impact

A number of factors impact government borrowing costs, but the impact of LIC's shift has been the most visible, with states able to borrow longer-term funds cheaper.

The spread between state and federal debt has 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 Rs 3.58 trillion in April-September, with more than 50 per cent raised through 12-year to 30-year securities. Despite the higher supply, their yields have remained below the 10-year papers.

Borrowing from longer-term papers was at 46 per cent in the previous fiscal.

LIC has now also increased purchases of good quality corporate bonds issued in this quarter, said the LIC official quoted earlier.