-- 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-'.
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'.
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.
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
-- We consider the changes to be announced in early 2013 to be
immaterial, but anticipate that KLP will need to fund future longevity reserve
-- 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
-- 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 Affirmed; CreditWatch/Outlook Action
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