Moody's has placed the insurance financial strength rating of Life Insurance Corporation of India (LIC) (Baa2 / stable) under review for possible downgrade.
This review reflects Moody's revised assessment of the linkage between the credit profiles of sovereigns and financial institutions globally, which is discussed in the rating implementation guidance "How Sovereign Credit Quality May Affect Other Ratings" published on 13 February, 2012.
Moody's believes 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.
As such, LIC's rating needs to reflect more closely the risk that the company shares with the Indian sovereign (Baa3 / stable).
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.
As of 31 December 2011, government securities and government guaranteed bonds represented 54% (INR6.0 trillion, or approximately USD111 billion) of the insurer's total cash and invested assets (excluding unit-linked invested assets), and 764% of adjusted shareholders' equity.
Almost 100% 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% owned by the Indian government in March 2012.
During the review, Moody's will assess the degree to which LIC's standalone credit profile correlates with the Indian sovereign. The review will focus on assessing :
Direct exposure to domestic sovereign
Debt, relative to its adjusted shareholders' equity
Diversification, in terms of revenue and earnings generation
Degree of dependence on India's underlying economic environment
In addition, Moody's will review the strength of the guarantee provided by the sovereign to LIC's policyholders and its linkage to sovereign's credit profile.
The methodologies used in this rating were Moody's Global Rating Methodology for Life Insurers published in May 2010, and Government-Related Issuers: Methodology Update published in July 2010.