This facility is expected to allow insurance companies to manage cash flows and align their income from investments with future pay-outs to policyholders.
STRIPS allows bond traders to strip principal and coupon payments and sell them separately. That means, the cash flows of a bond can be bought and sold.
The Reserve Bank of India’s decision to allow STRIPS in state government bonds is poised to revolutionize cash flow management for insurers. This move enables insurers to sell near-term asset inflows, aligning investment income with long-term policy payouts. STRIPS in state bonds offer a yield advantage and reduce reinvestment risk, making them attractive for long-term investors.
“Insurance companies have long-term liabilities in our books, with little need for cash in the near term. STRIPS enables us to sell our near-term asset inflows, allowing better matching of our asset and liability cash flows,” said Churchil Bhatt, executive vice president-investment at Kotak Mahindra Life Insurance Company.
“STRIPS in state bonds add a dash of yield uptick to the already existing dual benefits of the product, namely additional duration and reduction in reinvestment risk,” he added.
STRIPS are bought at a deep discount and redeemed at face value, making them attractive to long-term, hold-to-maturity investors such as insurers, pension funds and passive debt funds. A key appeal of STRIPS in state bonds is their 30- to 40-basis-point yield pickup over STRIPS in central government securities (G-sec), along with the same sovereign backing, said Venkatakrishnan Srinivasan, managing partner, Rockfort Fincap, a fixed-income institutional advisory firm.In a notification on Thursday, the RBI said all fixed-coupon bonds issued by state governments with a residual maturity of up to 14 years and a minimum outstanding of Rs1,000 crore are eligible for STRIPS. However, these securities must be eligible for meeting the bank’s statutory liquidity ratio requirements.Insurance companies have seen higher demand over the past few years for long-term products offering guaranteed returns. These companies look to deploy the inflows in such products in long-term assets like G-Secs and state bonds.
According to bond market participants, STRIP has been permitted in eligible central government securities since April 2010. Extension of STRIPS will also help insurers reduce reinvestment risk, referring to the possibility of investors not being able to deploy proceeds from bonds at a desirable rate of interest.
Transaction volumes in STRIPS have increased in recent years. According to data published by Clearing Corporation of India, the face value of STRIPS trades in G-secs rose to ₹2.47 lakh crore in FY25 from ₹38,383 crore pre-Covid in FY20.
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