Global agency Moody's on Monday said it is reviewing rating of state-owned LIC for a possible downgrade over its huge exposure to government bonds.
"Moody's has placed the insurance financial strength rating of Life Insurance Corporation of India (LIC) (Baa2/ stable) under review for possible downgrade," Moody's Investors Service said in a statement.
It said that the credit quality of financial institutions, with high levels of domestic sovereign debt holdings, and low geographically diversified revenue and earnings sources, is closely linked to the sovereign's credit strength.
"Issuers with these characteristics are unlikely to have standalone credit assessments above the sovereign," Moody's Investors Service added. LIC enjoys Moody's Baa2 rating with a stable outlook, which is higher than the agency's Baa3 sovereign rating for India. Baa3 represents the lowest investment grade rating.
The review of LIC, the statement said, reflects Moody's revised assessment of the linkage between the credit profiles of sovereigns and financial institutions globally.
"Moody's says that the review for downgrade reflects LIC's direct exposure to the Indian sovereign risk in terms of its investment portfolio and business profile," it added. As of 31 December 2011, government securities and government guaranteed bonds represented 54 per cent (Rs 6 lakh crore, or about USD 111 billion) of the insurer's total cash and invested assets.
"Almost 100 per cent of its net premiums earned are from India. Furthermore, LIC has been increasing its exposure to public sector banks through equity investment, in addition to the purchase of shares in Oil and Natural Gas Corporation Ltd which is 69.14 per cent owned by the Indian government in March 2012," the statement added.
A parliamentary panel last week asked the insurance regulator IRDA to inquire whether LIC has breached the investment norms while buying ONGC shares during the stake auction. It is mandatory for insurance companies in India to invest a large percentage of income in government papers. Fully owned by government, LIC is the country's largest life insurance company.
The Moody's announcement come close on the heels of lowering of rating outlook of 11 Indian financial institutions by Standard and Poor's.