December 13, 2012 / 5:10 PM / 5 years ago

TEXT-S&P revises Kommunal Landspensjonskasse to negative

     -- 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'.

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 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 All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at Use the Ratings search box located in the left 
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