Fitch Ratings has affirmed Norwegian life insurer Kommunal Landspensjonkasse’s (KLP) Insurer Financial Strength (IFS) rating at ‘A+’ and Issuer Default Rating (IDR) at ‘A’, both with Stable Outlook.
The affirmation follows KLP’s solid operating profitability during 2010. It also reflects Fitch’s view that KLP can withstand volatile market conditions to a greater extent than at the end of 2009, following the rebuilding of buffer capital in various forms during 2010.
KLP’s ratings continue to reflect its leading position within the Norwegian life insurance market for public pension schemes and the public ownership by Norwegian municipalities and counties, which have a statutory obligation to make equity contribution to the extent necessary to provide KLP with satisfactory financial strength. The ratings also reflect KLP’s low cost base, strong capital adequacy and a reduced level of interest rate risk following the upfront annual pricing for guarantees required by local insurance legislation.
Offsetting factors are the intensification of competition in the municipalities market in Norway, the degree of volatility that may follow the increased exposure to equities in the common portfolio (19% at year-end 2010) and the adverse claims environment affecting the non-life operations during 2010.
An important positive rating factor for Norwegian life insurers derives from the Insurance Act introduced in 2008, which reduces interest rate risk borne by life insurance companies as it requires insurers to price interest rate guarantees for defined benefit occupational pension products on an annual basis. In addition, KLP has the ability to annually price paid-up benefits in its core business of insuring public pension schemes, as opposed to private schemes (to which KLP has a small exposure), where more traditional profit-sharing rules apply. Nevertheless, earnings remain subject to investment returns being sufficient to cover minimum guaranteed rates.
Fitch notes that long-term interest rates in Norway increased in Q410, with 10-year government debt yielding 3.72%, returning to the same levels observed at the beginning of 2010. Fitch believes this is beneficial for Norwegian life insurers, as the exposure to a prolonged period of low interest rates would place greater pressure on investment income to match minimum guaranteed returns.
KLP’s capital adequacy was strong at year-end 2010, with the regulatory solvency margin ratio standing at 224% (2009: 175%). Supplementary reserves (a voluntary form of extra reserving buffer) totalled over NOK10bn, equal to 2.6 years of minimum guarantees, a level which Fitch views as strong.
Against these positive developments, the non-life result declined sharply to NOK78m in 2010 from NOK217m in 2009, as a result of a few large claims (mainly fire) which increased the claims ratio by around 25%. Fitch understands KLP has taken actions to improve risk controls to mitigate the risk of future underwriting losses of such a large scale.
KLP’s ratings could be downgraded if the willingness or ability to support from its public shareholders and clients is reduced and the company suffers from losses to the extent that buffer capital is depleted. KLP’s ratings are unlikely to be upgraded over the next 12-18 months given the company’s focus on the domestic Norwegian market and corresponding lack of geographical diversification.
KLP is one of Norway’s largest life insurance companies with total assets of NOK244bn at end-December 2010. 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 60%-owned by Norwegian municipalities and counties, 30% by the Norwegian government via state health enterprises, and 10% by public sector enterprises.
Source : Fitch Ratings Press Release
