Fitch Ratings-London-19 November 2015: 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, its strong capital adequacy, 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.
In 3Q15 low interest rates and falling equity markets resulted in weaker-than-expected operating profit for the quarter. KLP reported a negative value-adjusted return on its common investment portfolio for the quarter. As a result, financial buffers were weakened with the securities adjustment fund falling by NOK2.1bn to NOK17.5bn. KLP remains strongly capitalised in accordance with both the regulatory solvency margin and Fitch’s own assessment of capital adequacy. The regulatory solvency margin ratio was 245% at end-3Q15 (end-2014: 228%).
In Fitch’s opinion, the threat to profitability and capitalisation arising from a prolonged low interest rate environment is substantially mitigated by Norwegian life insurers’ ability to annually re-price the interest rate guarantees for existing defined-benefit schemes.
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.
KLP is one of Norway’s largest life insurance companies with total assets of NOK527bn at end-3Q15. 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 62%-owned by Norwegian municipalities and counties, 27% by the Norwegian government via state health enterprises, and 11% by public sector enterprises.
RATING SENSITIVITIES
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 business 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.
