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Feb 7 (The following statement was released by the rating agency)
Fitch Ratings has affirmed Norwegian life insurer Kommunal Landspensjonkasse's (KLP) Insurer Financial Strength (IFS) rating at 'A+' and its Issuer Default Rating (IDR) at 'A', with Stable Outlooks.
KEY RATING DRIVERS
The ratings reflect the group's ownership structure and importance in the Norwegian life market, as well as its market-leading position in the occupational pension market for public sector entities in Norway. KLP is a mutual organisation whose policyholders and clients are the municipalities and counties in Norway. These entities legally cannot default on their obligations, rely on 'AAA' state support, if required, and have a statutory obligation to support KLP if necessary. Fitch views the ownership structure and potential support as key factors underpinning KLP's ratings.
The ratings are also supported by KLP's solid operating performance and strong capital adequacy in 2013, as well as Fitch's expectations that the company will continue to show resilience to competitive and volatile market conditions. KLP is strongly capitalised in accordance with both the regulatory solvency margin and Fitch's own assessment of capital adequacy. The regulatory solvency margin ratio was 224% at end-3Q13 (end-2012: 233%).
The threat to profitability and capitalisation arising from a prolonged low interest rate environment is, in Fitch's opinion, substantially mitigated by the ability of life insurers in Norway to re-price annually the interest rate guarantees for existing defined-benefit schemes.
Fitch views KLP's track record of stable profitability favourably, with the group generating net profit in each of the past five years. In 2013, two competitors announced that they will pull out of the insured public sector pension scheme sector over a period of three years. As a result, a total of 42 municipalities transferred their pensions to KLP on 1 January 2014, and a further six will transfer on 1 July 2014, meaning that KLP's already strong market position has improved further.
Fitch believes that KLP is also making progress in increasing reserving levels based on the new mortality assumptions and minimum security margins implemented by the Norwegian regulator on 1 January 2014. Fitch expects that KLP will be able to fully meet the enhanced reserving requirements and views its exposure to longevity risk as manageable.
Negative rating factors include KLP's limited geographical diversification and growing interest by municipalities to set up proprietary pension schemes. KLP's customers will have the opportunity to establish their own pension funds, which will pose the biggest challenge to the company over the medium term. The performance of KLP's non-life business remained weak but improved from 2012 with enhanced risk management and actions over underwriting controls. Its combined ratio for 9M13 improved to 101.4%, from 107.8% in 2012 and 118.1% in 2011. The agency expects this trend to continue and that non-life operations will be supportive of KLP's ratings in the medium term.
An upgrade is unlikely unless KLP can greatly enhance the scale and profitability of its non-life operations, while maintaining or improving its strong group capital position.
KLP could be downgraded upon a loss of support from local authorities or if a material number of its municipal clients set up proprietary schemes. In addition, a material depletion of capital strength, to a level at which supplementary reserves are insufficient to fund one year of minimum investment guarantees, could also contribute to a downgrade.
KLP is one of Norway's largest life insurance companies with total assets of NOK375bn at end-3Q13. The company provides pension, financing and insurance services to the local government sector and state health enterprises as well as to businesses in the public and private sectors. KLP is 58%-owned by Norwegian municipalities and counties, 27% by the Norwegian government via state health enterprises, and 15% by public sector enterprises.