Insurers eye investment in India’s first 50-year bonds

Insurance sector players in India are prepared to grab a share of the country’s debut 50-year bond offering as the government begins selling long-term securities worth ₹10,000 crore ($1.2 billion) on Friday.

According to a Bloomberg report, insurers, including Bajaj Allianz Life Insurance Co. Ltd and HDFC Life Insurance Co. Ltd, are anticipating strong demand for bonds as they are looking to lock in higher yields to take care of long-term commitments like claim settlement or benefits to policyholders.

The government issues long-term bond instruments such as 50-year bonds and provides periodic interest payments at a fixed or floating rate every six months, and these bonds are redeemable after 50 years, in this case, in 2073. 

Sharing how these long-term debt instruments will help insurers manage interest rate risks better for their portfolios, Sampath Reddy, chief investment officer at Bajaj Allianz, said, “All of us would want to buy some of those 50-year bonds to cover the asset-liability mismatch.”

According to a survey done by the Swiss Re Institute, India is set to become the sixth largest insurance market by 2032, with total insurance premiums—life and nonlife—expected to grow by 14% per annum in local currency terms. The growth in the insurance market in India will be supported by the expanding middle class and changing landscape for India’s sovereign debt market.

Despite record borrowing by the government, India’s yield curve has been nearly flat as insurers have stepped up purchases of long-term bonds, said the news report. 

The yield on the 50-year note is likely to be close to 7.54%—a yield rate offered on a 40-year bond, according to HDFC Life and Kotak Mahindra Life Insurance Ltd. It is anticipated that Indian authorities may try to increase the tenure of debt sold. In such cases, yields may decline after these bonds get included in JPMorgan Chase & Co’s emerging market index next year.

Earlier, the government had unveiled its plan to sell Rs ₹6.5 trillion ($78 billion) of bonds in the second half of this fiscal year, from October 2023 to February 2024.

Latest finance ministry data revealed that insurers’ holdings of government bonds rose to 26% at the end of March 2022, up from $23% in 2018, as they provide an effective hedge to insurers and non-banking finance companies. During this duration, banks’ ownership of long-term bonds dropped to 38% from 43% in the period. 

Badrish Kulhali, head of fixed income at HDFC Life said, “The key buyers over here definitely are insurance companies because the way we look to buy government securities is to try and match tenure of our liabilities with tenure of assets.”