India's Insurance Giant Turns To Wall Street Banks To Hedge Risk

Life Insurance Corp. of India is working with some of Wall Street’s largest banks to hedge its liabilities, according to people familiar with the matter.  

The nation’s largest insurer has entered into $1 billion worth of bond forward rate agreements with banks including JPMorgan Chase & Co. and Bank of America Corp. over the past two months, the people said, asking not to be identified as they are not authorized to speak publicly.

In November, LIC announced plans to enter the bond derivatives market and conducted a few small trades earlier this year. Since then, it has stepped up its activity — its recent deals have accounted for 38% of the total $2.6 billion in forward rate agreement volumes since May, according to data on the Clearing Corp. of India’s website.

This surge highlights the growing sophistication of India’s financial players. As more Indian families invest in financial markets, insurers like LIC — which oversees $630 billion in assets — are driving demand for diverse investments and hedging options. FRAs, in particular, have become popular as they allow insurers to lock in future bond yields and shield them from falling interest rates that could reduce their income.

Officials at the LIC and Bank of America did not respond to requests for comment made via email and phone, while a spokesperson for JPMorgan Chase declined to comment. 

In FRA, an insurer agrees to buy a bond at a set price on a future date. The counterparty — typically a bank — takes on the risk of bond price changes and receives a premium in return. To manage this risk, banks often buy long-term bonds that match the terms of the contract.

LIC’s growing activity in this market has boosted the demand for long-term bonds, the people said. In fact, the last two auctions for these bonds have seen the highest bid-to-cover ratios of the current fiscal year that began April 1, according to data compiled by Bloomberg.