Global credit rating agency Moody’s on Monday downgraded the country’s leading financial institution, Life Insurance Corporation of India (LIC), following its recent investments in the oil and gas giant ONGC as well as a number of state-owned banks.

LIC lost its higher rating as Moody’s downgraded it from Baa2 to Baa3, although it kept the outlook stable.

“LIC’s increased investment in ONGC and increasing investment in public sector banks are credit-negative,” Moody’s Investors Service analyst and assistant vice-president for financial institutions group Stella Ng said, adding that its overexposure to the state-run banks is also a concern.

Ms. Ng, however, added that the agency “sees no change to LIC’s rating after sovereign rating action and therefore retain our stable outlook for the company.”

The downgrade relates to LIC’s foreign currency insurance financial strength rating and concludes the review for possible downgrade initiated on April 30, 2012.

LIC could not be immediately contacted for the reaction to the downgrade.

This revision comes in the context of an ongoing global review by Moody’s, affecting financial institutions, whose ratings are higher than the rating of the government where they are domiciled.

Giving the rationale for the downgrade, Moody’s said, “It reflects our assessment that LIC’s creditworthiness is highly correlated with that of the government’s credit strength, considering (a) the extent to which its business depends on the domestic economy; (b) the limited degree of cross—border diversification within its operation; (c) its significant level of balance-sheet exposure to domestic sovereign debt, relative to its capitalisation; and (d) the absence of strong foreign ownership.”

Last month, S&P had warned of a sovereign downgrade while revising downward the country’s credit rating close to junk status at BBB—.

Reportedly, under the government order, LIC had picked over 90 per cent of the 5 per cent follow-on offer from the ONGC in early March for a premium. Since then, the oil major’s scrip has been trading very low.

During the January-March quarter of the last fiscal, LIC was again forced to increase stakes in state-owned banks such as Syndicate Bank, Bank of Maharashtra and IOC among others, as the cash-starved government did not have the funds to pick stakes as part of the fund infusion into banks.

Accordingly, LIC’s stake in many banks is above the IRDA-mandated 10 per cent, and closer to 15 per cent.

Moody’s said since LIC is 100 per cent owned by the government and generates almost all its premia from within the country, it reflects the corporation’s concentration in one market and its high reliance on the domestic economy, apart from its exposure to an evolving operating environment.

“Therefore, there is little reason to believe that LIC will be insulated from any government debt crisis, if it were to occur,” Moody’s said.

“LIC has meaningful and rapidly increasing direct or indirect exposures to the government through its holdings of government securities and its equity investments in government—related entities, including banks and corporations,” it said.

As of December 31, 2011, the ratio of government securities to adjusted shareholders’ equity in LIC was 764 per cent (excluding unit—linked invested assets), said the agency, adding therefore it considers the lower rating, which is now positioned at the rating of the government, as more appropriate to capture the credit profile of the corporation.

The agency further said these rating actions derive from our updated assessment of the linkage between the credit profiles of sovereigns and other institutions domiciled within the sovereign, which is discussed in the rating implementation guidance.

In addition, the government guarantees all of LIC’s policy liabilities, including associated declared bonuses, as prescribed in the LIC Act. Thus, Moody’s views that LIC’s credit strength is very much closely linked to the sovereign, which justifies the insurer’s current rating.

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