Moody's places LIC under watch for a possible downgrade due to increasing exposure to public sector

MUMBAI: Moody's has placed Life Insurance Corporation's rating under watch due to its increasing exposure to public sector. The global ratings agency has put the insurance financial strength rating of LIC, which is currently at Baa2/stable, under review for a possible downgrade.

The review for downgrade reflects the corporation's direct exposure to Indian sovereign risk in terms of its investment portfolio and business profile, Moody's said.

"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," the rating company said. Issuers with these characteristics are unlikely to have standalone credit assessments above the sovereign, it said.

LIC has been increasing its exposure to public sector banks through equity investment, in addition to purchase of shares in ONGC, which is 69.14% owned by the Indian government, said Moody's.

In the last quarter of fiscal 2011-12, LIC invested nearly Rs 22,000 crore in public sector companies, out of its total equity investment of Rs 45,000 crore. These included companies such as ONGC and Punjab National Bank. In FY12, LIC invested about Rs 1 lakh crore in government securities.

In India, investing in public sector is considered safe, while this may not be true for other countries," said a senior LIC executive. "The investment guideline stipulates 50% in public sector papers and we are at 54%. We are writing to Moody's explaining our stance."

As per investment guidelines, insurance companies have to invest 50% of traditional portfolio in government securities, 35% in other approved securities and infrastructure, while 15% in other than approved securities.

Meanwhile, Moody's has also placed ICICI Bank, HDFC Bank and Axis Bank under review for a downgrade of their financial strength rating as the lenders are currently above India's sovereign debt rating.

The review will take into account the banks' cross-border diversification of operations and their domestic sovereign debt holdings, among other factors, Moody's said in a statement on Monday.