Credit Opinion: SpareBank 1 Gruppen AS - Investor Relations - IR ...

- Volatility of investment results, particularly with the life insurance business, which necessitated capital injectionsduring the crisis- Dependence on the distribution channels of the alliance- Lower coherence in the alliance as there is no joint and several liability guarantee- Potential departure of any member bank, although this at the moment is not considered likelyWhat to Watch for:- Any deterioration in the credit profile of the owners would likely be reflected in the issuer rating of the Group.- Seasonality of profitability in the P&C business given the frequent adverse winter weather in the Nordics.- Challenge of Solvency 2 implementation, particularly for the life business which has provided products withguaranteed returns.- Treatment of Paid up Policies within the life portfolio currently remains a concern for Norwegian life insurersRating OutlookThe long-term issuer rating (Baa2 stable) was affirmed with a stable outlook at Baa2 on 18 March 2013. At thesame time, the short-term issuer rating (P-2) was affirmed. This rating action follows the publication of the newlongevity tables by the Norwegian FSA on 08th March 2013(see relevant press release for further details).What Could Change the Rating - UpNot considered likely in the short term due to the ratings being on stable outlook. However, in the longer term,positive rating action could arise in the event of:- An upgrade in one of more of the owners' ratings- If the commitment from the owner banks were to be perceived as higher, and/or- If a sustained improvement in the financial performance of the group were to occur.What Could Change the Rating - Down- A downgrade in one of more of the owners' ratings- The commitment from the owner banks were to be perceived as lower, and/or- A deterioration in the financial performance of the group.Recent ResultsAt YE 2012, the group reported a post-tax profit of NOK 443mn (YE 2011: NOK 526mn), and a return on equity of8.7% (2011: 11.1%).Capital Structure and LiquidityThe majority of the group's borrowings are made by SpareBank 1 Gruppen AS. The group's refinancing risk islimited as the outstanding term of the debt is relatively long with a mixture of perpetual instruments and post 2015maturities, although we note that there is some refinancing need in 2013. The liquidation ranking is varied withmaterial amounts of senior, subordinate and junior subordinate in issue.Financial leverage was moderate at 15% at year-end 2011. In addition, Moody's assigns equity credit to thesupplementary and security provisions, with, in particular the supplementary reserves recovering in 2010 thanks tothe relative improvement in financial markets, at least as at YE 2010, although the securities adjustment reservedeclined materially in 2011. Furthermore, policyholder reserves continue to be lower than pre-crisis levels.Earnings cover is estimated to be good at 9x in 2011 (2007-11 5 year average of 10x), in line with the healthyprofitability of the company and the relatively modest levels of financial leverage. Nevertheless, Moody's notes thesubstantial volatility of the group's operating performance could pressurise earnings cover in future quarters, as