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Unit 17: Credit Rating

Notes
In the wake of the financial crisis, a number of companies in the banking and insurance
sector across the world have faced downgrades, either due to their exposure to Lehman
Brothers and AIG or to reflect heightened industry risk following the turmoil in the
global financial markets.

Foreign companies such as Allianz, Prudential Financial Inc, AXA, AEGON, Sun Life
Financial, Aviva, BNP Paribas, Fortis and ING have all reported some kind of exposure to
either Lehman Brothers or AIG or both.
So far, the ratings of AIG and its subsidiaries and Fortis' Asian subsidiary have been
downgraded.

All these companies are stake holders in Indian insurance companies and hold about 26
per cent stake each.
But, according to analysts, this is unlikely to affect the credit ratings of these insurance
companies at least in the short term.
Strong Parentage
"Most of these companies have strong parents and their ratings are unlikely to be revised
in the near term," said Mr Subroto Ray, Head Corporate Sector Ratings, ICRA.
"In the short-term, these relatively new insurance companies are well capitalised, well
managed and have good solvency margins, much more than the requirements specified
by the IRDA. All the foreign partners have already brought in capital commensurate with
their equity stake," said Mr Rajesh Mokashi, Executive Director, Care Ratings.
But this situation could change in the long term if the foreign partners are unable to bring
in more capital for fuelling the expansion plans of companies.

"In the long term, if the foreign partner is unable to bring in the required capital, the
Indian partner always has the option to buy him out or look for another partner. Besides,
the insurance companies even have the option of listing themselves on the bourses to
raise funds," Mr Mokashi added.

The global financial crisis could lead to a change in the foreign ownership of many domestic
insurance companies, said Mr Ashu Dutt, MD, Asia Financial Services Practice, Northbridge
Capital.

As India and China are considered among the fastest growing markets in the world, other
companies would be keen on entering the sector and would look for tie-ups with companies
here.
Contd...

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