TEXT-S&P revises Kommunal Landspensjonskasse to negative
Overview -- Kommunal Landspensjonskasse's narrow focus on the Norwegian defined benefit occupational pension sector makes it highly exposed to low interest rates, longevity risk, and a new tax regime. -- We consider that these pressures could prospectively impair KLP's operating performance and capitalization. -- We are therefore revising our outlook on KLP to negative from stable, but are affirming the ratings at 'A-'. Rating Action On Dec. 13, 2012, Standard & Poor's Ratings Services revised the outlook on Kommunal Landspensjonskasse (KLP) to negative from stable. At the same time, we affirmed the 'A-' long-term counterparty credit and insurer financial strength ratings and the junior subordinated debt ratings at 'BBB'. Rationale The outlook revision reflects our view of the effect of continued low interest rates, ongoing longevity risks, and the recently introduced tax regime. We consider that these factors could prospectively weigh on KLP's capitalization and earnings. On Sept. 30, 2012, KLP had total assets of Norwegian krone (NOK) 323.6 billion, of which NOK291.3 billion related to the defined-benefits (DB) business; at year-end 2011, total assets stood at NOK291.8 billion. KLP's DB business primarily comprises guaranteed returns (average guarantee rate at year-end 2011: 3.1%) to its customers. The central policy rate in Norway is currently well below KLP's average guarantee rate. Persistent long-term interest rates in Norway could therefore be a significant threat to KLP's profitability. While the company has expanded into other products (non-life insurance, bank, asset management, defined-contribution pensions), the DB business is still its core business and provides most of its business and strategic focus. As a life insurance company, KLP is exposed to the longevity risk that can result from improving mortality rates. The Norwegian statistical agency, Statistics Norway, is in conversation with the regulator, which is expected to mandate the use of new mortality tables in 2013. KLP's capital for longevity risk equals 17% of the level of capital required according to Standard & Poor's capital model. We anticipate that the company will strengthen its reserves over several years. The strengthening of reserves is expected to affect KLP's embedded value, but the size of the effect is not yet clear. Under the tax regime that came into effect in 2012, realized income/loss from equities in the EU area have become taxable. We expect that KLP's significant tax losses carried forward will shield gains over the ratings horizon. However, we expect the new tax regime to have an impact on capitalization, as measured by Standard & Poor's risk-based capital model. The magnitude of the impact is still unclear. In 2011, KLP's strategy of focusing on municipalities meant that it acquired four clients and more than NOK3 billion in assets from its competitors. This trend continued in 2012, when 13 municipalities moved to KLP, and the company gained about NOK4 billion of additional assets. We think that low interest rates pose a risk to this strategic focus as new business margins for this business could be lower than those for previous years' new business. Outlook The negative outlook reflects our view of the pressures on profitability caused by low interest rates, changes to longevity reserves, and the new tax regime, as well as uncertain new business margins. We may take negative rating action on KLP if: -- We see increased risk that low interest rates will persist over the long term, especially if combined with other negative macroeconomic factors. -- KLP's capital adequacy weakens below the 'A' level. -- We consider that the impact of change in longevity rates due to be announced in early 2013 could contribute to a weakening of KLP's capital position. -- We consider the changes to be announced in early 2013 to be immaterial, but anticipate that KLP will need to fund future longevity reserve increases. -- We expect that new business profitability is relatively weak for the rating level (below 1% of the present value of new business premium). We may change the outlook back to stable if: -- There is evidence that interest rates are likely to increase within the medium term, or if we think that KLP has raised prices by an amount large enough to offset the impact of the low interest rates. -- We anticipate that the impact of the change in longevity rates to be announced in early 2013 is immaterial, and material changes to reserves remain unlikely within the ratings horizon. -- We see KLP continue to consolidate its position in the Norwegian public pensions sector, while exhibiting strong new business margins. Related Criteria And Research All articles listed below are available on RatingsDirect on the Global Credit Portal. -- Principles Of Credit Ratings, Feb. 16, 2011 -- Management And Corporate Strategy Of Insurers: Methodology And Assumptions, Jan. 20, 2011 -- Refined Methodology And Assumptions For Analyzing Insurer Capital Adequacy Using The Risk-Based Insurance Capital Model, June 7, 2010 -- Methodology: Credit Stability Criteria, May 3, 2010 -- Holding Company Analysis, June 11, 2009 -- Understanding Standard & Poor's Rating Definitions, June 3, 2009 -- Evaluating Insurers' Competitive Positions, April 22, 2009 -- Investments, April 22, 2009 -- Financial Flexibility, April 22, 2009 Ratings List Ratings Affirmed; CreditWatch/Outlook Action To From Kommunal Landspensjonskasse Counterparty Credit Rating A-/Negative/-- A-/Stable/-- Financial Strength Rating A-/Negative/-- A-/Stable/-- Junior Subordinated BBB Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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