Interim reportQ2 2021 – KLP AND KLP GROUP

The KLP Group is made up of the following companies: Kommunal Landspensjonskasse (KLP) and its subsidiaries KLP Banken, KLP Skadeforsikring, KLP Kapitalforvaltning, KLP Forsikringsservice and KLP Eiendom.

At the end of the second quarter of 2021, the Group had total assets of NOK 870.5 billion, an increase of NOK 57 billion in the quarter.

The Group’s total comprehensive income was NOK 994 (113)¹ million after the second quarter.

Pension schemes within the public sector are offered and administered by the Group’s parent company, Kommunal Landspensjonskasse. Out of KLP’s total assets of NOK 692.9 billion, NOK 633.6 billion is linked to insurance obligations within public-sector occupational pensions.

KLP achieved an investment result – the return in excess of that guaranteed by the company to its customers – totalling NOK 7.2 (3.4) billion during the first half of the year. The value-adjusted return on the common portfolio was 2.9 per cent in the second quarter and 4.4 per cent for the year to date, while the book return was 1.1 per cent in the second quarter and 2.6 per cent in the year to date.

The risk events in the stock are within expectations throughout the year and will vary from quarter to quarter. Net income was NOK 102 million in the second quarter and NOK 293 million for the year to date.

The Company’s administration result shows a surplus of NOK 61 (64) million so far this year, of which NOK 20 million fell in the second quarter. Insurance-related operating costs came to NOK 625 (601) million so far this year.

Total profit/loss to the Company stands at NOK 984 (112) million for the year to date. The customer result is NOK 7.2 (3.5) billion so far this year.

KLP’s total assets increased by NOK 42.2 billion in the second quarter and amount to NOK 692.9 billion. The premium reserve increased by NOK 25.0 billion to NOK 477.7 billion in the same period.

The securities adjustment fund increased by NOK 11.1 billion in the quarter, to NOK 67.7 billion after the second quarter.

Without applying transitional rules, the Company’s solvency capital requirement (SCR) is 282 per cent. Taking account of the transitional arrangement for technical provisions, capital adequacy was 332 per cent. KLP’s target is capital adequacy of at least 150 per cent without applying transitional rules. Capital adequacy is well over this target and reflects the Company’s good financial strength.

Premium income excluding premium reserves received on transfers in amounts to NOK 33.6 (14.3) billion at the end of the second quarter.

Pensions paid and other claims, excluding ceded premium reserves, amounted to NOK 10.8 (10.2) billion for the year to date.

The assets in the common portfolio totalled NOK 626.3 (574.9) billion and were invested as shown below:

Total exposure in shares and alternative investments, including equity derivatives, was 28.1 per cent at the end of the second quarter. The total return on shares and alternative investments was 5.8 per cent in the quarter. The return on KLP’s global equities was 6.8 per cent, while KLP’s Norwegian equity portfolio returned 5.6 per cent in the quarter.

Short-term bonds accounted for 16.5 per cent and money-market instruments 2.4 per cent of the assets in the common portfolio at the end of the second quarter. Both Norwegian and US interest rates fell during the quarter, while European rates were more or less unchanged. KLP’s global government bond index achieved a currency-hedged return of 0.5 per cent in the quarter, while the return on the Norwegian government bond index was 0.4 per cent. Global credit margins were approximately 9 basis points lower at 30 June compared to the previous quarter. The quarterly return for KLP’s global credit bond index was 2.5 per cent. In total, short-term bonds achieved returns of 1.5 per cent in the second quarter. The money market return was 0.2 per cent for the quarter.

Investment in long-term bonds and bonds held to maturity made up 28.3 per cent of the common portfolio at 30.06. Unrecognised added values in the common portfolio amounted to NOK 10.3 billion at 30.06. The portfolio is well diversified and consists of securities issued by creditworthy borrowers. The return measured at amortised cost in the second quarter was 0.9 per cent.

Property investments, including Norwegian and international real estate funds, made up 13.3 per cent of the common portfolio. Property values in the common portfolio were adjusted upwards by NOK 1.9 billion in the quarter. Property investments in the common portfolio achieved a return of 4.2 per cent in the first half-year.

Lending in the common portfolio totals NOK 75.8 billion. This is split between NOK 63.3 billion in loans to the public sector, NOK 2.2 billion in loans with government guarantees and NOK 3.1 billion in secured mortgage loans, with the remaining NOK 7.2 billion used for other purposes. The lending portfolio is of high quality, with no losses on municipal loans and very modest provisions for losses on mortgage loans. Unrecognised added values in the lending portfolio (fixed-interest loans) totalled NOK 777 million at 30.06.2021. Returns were 0.8 per cent so far this year.

The corporate portfolio covers the placement of owners’ equity and subordinated loans/hybrid Tier 1 and Tier 2 securities.

The corporate portfolio is managed with a moderate-risk long-term investment horizon, with the object of stable returns. Investments in the corporate portfolio achieved a return of 1.7 per cent in the year to date.

Since 13 March 2020, employees of KLP and its subsidiaries have been working partly from home. Operationally, this has worked well and no particular issues affecting normal operations have been reported.

It is too early to say how Covid-19 and the pandemic situation will affect the drawing of disability pensions in KLP’s membership base over time. Historical figures up to 2019 indicate that we have margins built into the calculation basis for disability. Because of the uncertainty surrounding disability going forward, most of these margins will be retained until further notice.

The first half of 2021 produced a pre-tax operating profit of NOK 225.9 (18.2) million. After a good first quarter, net income improved further and the result for the second quarter was NOK 154.3 (144.3) million. The change is mainly due to an improved insurance result and a satisfactory financial return throughout the period. Operating expenses were lower than expected and the Company has continued to reverse previous years’ reserves.

Premium volume stood at NOK 1,957 million at the end of the second quarter, an increase of NOK 155 million from the position at 31.12.2020. Although the general premium level is still rising, the company sees a need for further increases in some areas. Premiums due have increased by 12.7 per cent, or NOK 161 million, compared with the same time in 2020. Growth is high both in the public-sector and corporate markets and in the retail market.

The insurance result was NOK 289 (190) million. One major claim was reported during the second quarter. NOK 140 million has been set aside for this so far, with NOK 98 million covered by reinsurance. Reversal of previous years’ claims is still positive, and this year NOK 78 million has so far been taken to income, equivalent to 3.5 per cent of the reserves at the beginning of the year.

In this year’s survey by the Norwegian Insurance Brokers’ Association, KLP Skadeforsikring’s web portal was judged to do the best job of addressing customers’ needs. Customer satisfaction surveys collected by KLP in the second quarter also show high and improved satisfaction in all customer segments.

Net financial income in the first half-year was NOK 128.7 (31.9) million, representing a return of 2.6 (0.8) per cent. Returns for the second quarter in isolation were NOK 99.2 (136.1) million, or 1.9 (3.0) per cent . So far this year, the equity portfolio has returned 13.8 percent. As of the first half-year, the Company’s investments in interest-bearing funds had a return of -0.1 per cent, while fixed income bonds returned 1.6 per cent in the period. The return on real estate investments was 3.9 per cent, after a write-up of NOK 12 million. The second quarter in isolation saw a return of 7.3 per cent on equities, 1.1 per cent on interest-bearing investments, and a 0.9 per cent on long-term bonds.

The Company’s financial position is good with a solvency capital requirement (SCR) of 252 per cent at the end of the second quarter of 2021, compared to 237 per cent at the end of 2020 and 238 per cent after the first quarter of 2021.

KLP Kapitalforvaltning provides securities management in the KLP Group. It had a total of NOK 628 billion under management at the end of the first half-year, of which NOK 121 billion came from external customers. The majority of the assets are managed on behalf of KLP and its subsidiaries.

Net new subscriptions to the KLP funds were NOK 12.6 billion in the first half. Of this, external customers had net new subscriptions of NOK 6.6 billion.

The Company achieved a result before tax of NOK 24.6 million in the first half-year.

The KLP Banken Group finances mortgages and other credit to individual customers (retail market) as well as loans to municipalities, county municipalities and companies that provide public services (public-sector market). The lending business is financed by way of deposits from private customers and companies, loans from the securities market and owners’ equity. The Bank also manages lending financed through pension assets held by KLP.

As of 30 June 2021, the KLP Banken Group had loans to customers totalling NOK 38.2 (37.5) billion. The split between the retail market and the public sector was NOK 21.4 (20.1) billion and 16.8 (17.4) billion respectively.

KLP Banken manages NOK 3.1 (3.3) billion in mortgage loans and NOK 72.4 (76.8) billion in loans to public-sector borrowers and other businesses.

So far in 2021, the retail market in KLP Banken has seen weaker growth in mortgages than last year, increasing by NOK 0.7 (1.7) billion. Total new payments are at the same level as last year, so redemptions have increased. The Bank’s mortgage products are aimed at the target group of members of the KLP pension schemes. 

Lending volume to the public-sector market on KLP Banken’s balance sheet fell in the first half by NOK 0.9 (0.7) billion. Loans to public-sector borrowers managed on behalf of KLP increased by NOK 1.1 (0.7) billion in the same period. Managed loans to foreign debtors in other currencies decreased by NOK 2.5 billion so far this year to NOK 7.4 billion.

The Bank’s lending margins were relatively stable through the first half despite low interest rates and increasing competition in both lending areas. The Bank’s operating income, in the form of net interest income, was NOK 152.8 (136.0) million at the end of the first half-year.

KLP Banken’s liquidity is invested in other banks and in interest-bearing securities. The portfolio of interest-bearing securities amounts to NOK 5.1 (4.4) billion.

The Bank’s net gain/loss on financial instruments mainly includes the effects of changes in the value of its securities holdings and loan buybacks. In all, financial instruments produced total expenses of NOK -18.6 (-16.1) million in the first half.

In 2020, KLP Banken AS used an extended right to take out F-loans with Norges Bank. The scheme will be discontinued in 2021. Outstanding F-loans at the end of the second quarter were reduced to NOK 0.7 billion. The borrowing is secured by deposits of securities for a corresponding amount.

The KLP Banken Group’s external financing consists mainly of deposits and bonds. Deposit growth in the first half-year was NOK 0.9 (0.5) billion. On the reporting date, deposits from individuals and companies amounted to NOK 12.6 (12.2) billion and debt from securities issues came to NOK 29.2 (26.0) billion. The securities debt is mainly covered bonds issued by KLP Kommunekreditt AS and KLP Boligkreditt AS.

For the first half of the year, losses and loss provisions in the retail market amounted to NOK -1.2 (-2.9) million. This is mainly a loss on credit cards. The pandemic has so far resulted in lower loan losses than feared. In the credit card business, outstanding volume has also declined. Nor have we experienced any losses related to public-sector lending in 2021.

The KLP Banken Group had a pre-tax operating profit of NOK 54.3 (39.8) million at the end of the second quarter. Broken down by area, profits were NOK 46.3 (30.0) million in the retail market and NOK 8.0 (9.8) million in the public-sector market.

As more and more people are vaccinated, society is moving towards a gradual opening-up after a long period marked by strict infection control measures in connection with Covid-19. Although things are starting to return to normal, working from home will also be part of KLP’s operations going forward. The company is aware of how this may effect the working environment in KLP.

The global economy is also affected by the pandemic and is expected to produce good growth as more and more people are vaccinated. The financial markets have largely priced this into their expectations, so they could quickly react negatively to bad news related to the pandemic. KLP has high a high level of preparedness and good financial strength to enable it to handle such fluctuations.

This note gives a specification of the line "Net costs subordinated loan and hybrid Tier 1 securities" in the income statement.

The fluctuations in value change are predominantly due to the loans being denominated in foreign currency. The subordinated loan is issued in euros and the perpetual hybrid Tier 1 security are issued in Japanese yen.

Fair value is to be a representative price based on what the equivalent asset or liabilites would be sold for under normal market terms and conditions. A financial instrument is considered as being listed in an active market if listed prices are easily and regularly accessible from a stock exchange, dealer, broker, commercial group, pricing service or regulatory authority, and such prices represent actual transactions that occur regularly at arm’s length. If the market for the security is not active, or the security is not listed on a stock exchange or similar, the Group uses valuation techniques to determine fair value. These are based on information on transactions recently carried out on business conditions, reference to the purchase and sale of similar instruments and pricing by means of externally obtained interest-rate curves and interest-rate differential curves. Estimates are based to the greatest possible extent on external observable market data, and to a small degree on company-specific information.

In the case of this note, there are three different categories of financial instruments: balance sheet classification, accounts classification, and type of instrument. It is for this last category that information is provided about how fair value is derived.

The note shows financial liabilities the Group had at the end of the reporting period; where the majority is funding for KLP Bank Group.

The companies above are the issuers of the financial debt. Deposits belongs to KLP Banken AS.

Unrealised changes and realized gains / losses are reflected on the line "Net value changes on financial instruments" in the consolidated income statement.

The tables "Changes in level 3" shows changes in level 3 classified instruments in the period indicated.

Fair value shall be a representative price based on what a corresponding asset or liability would have been traded for on normal market terms and conditions. Highest quality in regard to fair value is based on listed prices in an active market. A financial instrument is considered as noted in an active market if noted prices are simply and regularly available from a stock market, dealer, broker, industry grouping, price setting service or regulatory authority, and these prices represent actual and regularly occurring transactions at arm’s length.

The table below specify the group´s financial obligations ranked by maturity. The amounts given are non-discounted contractual flows of cash.

If the minority interests are taken out of account, derivatives maturing within one month are reduced with NOK 97 million, payables to credit institutions maturing within one month are reduced with NOK 740 million and derivatives maturing between 1 to 12 months are reduced with NOK 1 016 million. Total amount of the financial liabilities for the Group are after these adjustments NOK 86 844 million.

If the minority interests are taken out of account, derivatives maturing within one month are reduced with NOK 65 million, payables to credit institutions maturing within one month are reduced with NOK 241 million and derivatives maturing between 1 to 12 months are reduced with NOK 457 million. Total amount of the financial liabilities for the Group are after these adjustments NOK 81 914 million.

If the minority interests are taken out of account, derivatives maturing within one month are reduced with NOK 29 million, payables to credit institutions maturing within one month are reduced with NOK 140 million, derivatives maturing between 1 to 12 months are reduced with NOK 1 million. Derivatives maturing between 1 to 5 years and 5 to 10 years, increased by NOK 2 million in both periods. Total amount of the financial liabilities for the Group are after these adjustments NOK 85 306 million.

The table above shows financial liabilities the Group has grouped by interest payments and repayment of principal, based on the date payment is due. Banking contains the largest proportion of the financial liabilities in the Group.

Liquidity risk is the risk that the Group will not be able to meet the financial obligations that it has. The risk that the Group would not have adequate liquidity to meet its current liabilities and current operations is very small since a major part of the Group’s assets is liquid. The Group has significant funds invested in the money market, bonds and shares that can be sold in the event of a liquidity requirement. The Group’s liquidity strategy involves the Group always having adequate liquid assets to meet the Group’s liabilities as they fall due without accruing significant costs associated with releasing assets.

Asset composition in the Group’s portfolios should be adequately liquid to be able to cover other liquidity needs that may arise. KLP Kapitalforvaltning manages the Group’s liquidity. Internal parameters have been established for the size of the liquidity holding. The Group’s risk management unit monitors and reports developments in the liquidity holding continuously. The Group Board determines an asset management and liquidity strategy annually. The liquidity strategy includes parameters, responsibilities, risk measurement and an emergency plan for liquidity management.

The major liabilities in the Group are insurance related and are mostly linked to pension obligations. These liabilities are fully funded and liquidity management are handled in the same manner as other liabilities.