Q3_2021 Interim Report KLP Group, Sustainability and KLP

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 third quarter, the Group had total assets of NOK 872.5 billion, an increase of NOK 1.9 billion in the third quarter and NOK 65.3 billion so far this year.

The Group’s total comprehensive income was NOK 1.2 (0.9) billion¹ after the third 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 694.5 billion, NOK 634.1 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 9.3 (6.8) billion after the third quarter. The value-adjusted return on the common portfolio was 1.1 per cent in the third quarter and 5.6 per cent for the year to date, while the book return was 0.9 per cent in the third quarter and 3.5 per cent in the year to date.

The risk events in the stock have been within expectations throughout the year but will vary from quarter to quarter. Net income was NOK 332 million in the quarter and NOK 625 million so far this year.

The Company’s administration result shows a surplus of NOK 159 million so far this year, of which NOK 98 million fell in the quarter. Insurance-related operating costs came to NOK 891 (825) million so far this year.

Total profit/loss to the Company stands at NOK 1.2 (0.9) billion for the year to date. The customer result is NOK 9.5 (7.0) billion so far this year.

KLP’s total assets increased by NOK 1.7 billion in the third quarter and amount to NOK 694.5 billion. The premium reserve increased by NOK 4.7 billion to NOK 482.4 billion in the same period.

The securities adjustment fund increased by NOK 0.9 billion in the quarter, to NOK 68,6 billion after the third quarter.

Without applying transitional rules, the Company’s solvency capital requirement (SCR) is 289 per cent. Taking account of the transitional arrangement for technical provisions, capital adequacy was 326 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 41.2 (26.2) billion at the end of the quarter.

Pensions paid and other claims, excluding ceded premium reserves, amounted to NOK 16.3 (15.3) billion for the year to date.

The assets in the common portfolio totalled NOK 644.2 (582.1) billion and were invested as shown below:

Total exposure in shares and alternative investments, including equity derivatives, was 27.9 per cent at the end of the third quarter. The total return on shares and alternative investments was 2.1 per cent in the quarter. The return on KLP’s global equities was 0 per cent, while KLP’s Norwegian equity portfolio returned 4.3 per cent in the quarter.

Short-term bonds made up 14.5 per cent and money-market instruments 4.1 per cent of the assets in the common portfolio at the end of the third quarter. Norwegian and US interest rates rose slightly during the quarter, while European rates were more or less unchanged. KLP’s global government bond index achieved a currency-hedged return of 0 per cent in the quarter, while the return on the Norwegian government bond index was minus 0.8 per cent.

The quarterly return for KLP’s global credit bond index was 0 per cent. In total, short-term bonds achieved returns of 0 per cent in the third quarter. The money market return was 0.1 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 September. Unrecognised added values in the common portfolio amounted to NOK 7.8 billion at 30 September. The portfolio is well diversified and consists of securities issued by creditworthy borrowers. The return measured at amortised cost in the third quarter was 0.8 per cent.

Property investments, including Norwegian and international real estate funds, made up 13.0 per cent of the common portfolio. Property values in the common portfolio have been adjusted upwards by NOK 731 million in this quarter and NOK 2.7 billion so far this year. Property investments in the common portfolio achieved a return of 6.0 per cent in the year to date.

Lending in the common portfolio totals NOK 77.7 billion. This is split between NOK 64.9 billion in loans to the public sector, NOK 2.2 billion in loans with government guarantees and NOK 3.0 billion in secured mortgage loans, with the remaining NOK 7.5 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 459 million at 30 September. Returns were 1.2 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 2.5 per cent in the year to date.

Several of the Company’s customers have considered putting their pension schemes out to tender this year. Good and close customer follow-up which emphasises competence, quality and the benefit of being an owner in your own company has been a big reason why few customers have chosen to put their pensions provision out to tender.

KLP is in the middle of a major IT development programme which will also improve the way the Company works. The programme spans 5 years and, among other things, it will modernise the Company’s systems for pension processing, improve usability for customers and pensioners, and increase efficiency and reduce costs over time.

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 the Company has adequate 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 third quarter produced a pre-tax operating profit of NOK 343.9 (97.2) million. After a good first half, net income improved further and the result for the third quarter was NOK 118.0 (79.1) million. The change is mainly due to a good insurance result and a satisfactory financial return through the period. Operating expenses were lower than expected and the Company has continued to reverse previous years’ reserves.

Premium volume stood at NOK 1,984 million at the end of the third quarter, an increase of NOK 182 million from the position at 31.12.2020. The overall premium level is still rising, which is expected to continue in the upcoming tendering season. Premiums due have increased by 12.9 per cent, or NOK 193 million, compared with the same time in 2020. Growth is good in all of the Company’s segments.

The insurance result was NOK 446 (296) million. One major claim was reported during the third quarter. NOK 75 million has been set aside for this so far, with NOK 39 million covered by reinsurance. Reversal of previous years’ claims is still positive, and this year NOK 101 million has so far been taken to income, equivalent to 5.5 per cent of the reserves at the beginning of the year.

Net financial income after the third quarter was NOK 173.9 (103.4) million, representing a return of 3.4 (2.3) per cent. Returns for the third quarter in isolation were NOK 45.2 (71.5) million, or 0.9 (1.5) per cent. So far this year, the equity portfolio has returned 15.8 per cent. As of the third quarter, the Company’s investments in interest-bearing funds had a return of 0 per cent, while fixed income bonds returned 2.5 per cent. The return on real estate investments was 6.9 per cent, after a write-up of NOK 26 million.

The third quarter in isolation saw a return of 0.4 per cent on equities, 0 per cent on interest-bearing instruments, 0.8 per cent on long-term bonds and 3.0 per cent on property investments.

The Company’s financial position is good, with a solvency capital requirement (SCR) of 267 per cent at the end of the third quarter, compared to 237 per cent at the end of 2020 and 252 per cent after the second quarter.

KLP Kapitalforvaltning provides securities management in the KLP Group. It had a total of NOK 648 billion under management at the end of the third quarter, of which NOK 124 billion came from external customers. The majority of the assets are managed on behalf of KLP and its subsidiaries. Net subscription in the KLP funds was NOK 8.9 billion in the first three quarters of the year, most of which, NOK 8.3 billion, came from external customers.

The Company achieved a pre-tax profit of NOK 53 million at the end of the third quarter.

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 September, the KLP Banken Group had loans to customers totalling NOK 38.2 (37.5) billion. Mortgage loans in the retail market and public-sector loans totalled NOK 21.4 (20.6) billion and 16.8 (16.9) billion respectively.

KLP Banken manages NOK 3.0 (3.3) billion in mortgage loans and NOK 74.6 (73.2) billion in loans to public-sector borrowers and other businesses.

In 2021, the retail market in KLP Banken has seen weaker growth in mortgages compared to last year’s strong performance, increasing by NOK 0.7 (2.3) billion. Total new payments are at the same level as last year, but redemptions have increased. The Bank’s mortgage products are aimed at members of the KLP pension schemes. 

Lending volume to the public-sector market on KLP Banken’s balance sheet decreased by NOK 0.7 (0.2) billion, while loans to public-sector borrowers managed on behalf of KLP increased by NOK 2.6 (6.2) billion in the same period. Managed loans to foreign debtors, mainly in other currencies, decreased by NOK 1.9 (0.6) billion so far this year, to NOK 8.0 billion.

The Bank’s lending margins have been relatively stable so far this year 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 232.8 (229.3) million at the end of the third quarter.

KLP Banken’s liquidity is invested in other banks and in interest-bearing securities. The portfolio of interest-bearing securities amounts to NOK 5.3 (4.8) billion.

The Bank’s net gain/loss on financial instruments mainly includes the effects of loan buybacks and changes in the value of its securities holdings. In all, financial instruments produced total expenses of NOK -23.5 (-21.7) million to the end of the quarter.

The KLP Banken Group’s external financing consists mainly of deposits and bonds. Deposit growth so far this year is NOK 0.8 (0.6) billion. On the reporting date, deposits from individuals and companies amounted to NOK 12.8 (12.0) billion and debt from securities issues came to NOK 29.5 (26.2) billion. The securities debt is mainly covered bonds issued by KLP Kommunekreditt AS and KLP Boligkreditt AS.

In 2020, KLP Banken AS used the extended right to take out emergency ‘F-loans’ from Norges Bank. This scheme is now closed, and KLP Banken has no outstanding F-loans at the end of the third quarter.

Operating expenses and depreciation amounted to NOK 172.8 (160.4) million as of the third quarter.

Losses and loss provisions in the retail market amount to NOK 1.3 (4.2) million so far in 2021. These are mainly losses on credit cards. The pandemic has not led to increased losses on mortgages. Nor have we experienced any losses related to public-sector lending.

The KLP Banken Group had a pre-tax operating profit of NOK 93.8 (101.8) million at the end of the third quarter. Broken down by area, profits were NOK 76.9 (71.2) million in the retail market and NOK 16.9 (30.5) million in the public-sector market.

KLP has long expressed support for the Paris Agreement and the 1.5 degree target. In September, we launched KLP’s roadmap to net zero emissions in 2050. KLP has developed its own framework based on internationally established standards and best practice. The roadmap describes how KLP will work towards and measure the company’s contribution to achieving the targets set out in the Paris Agreement, and how KLP will assess every investment against an emission path that is compatible with the 1.5 degree target. This means that KLP will set specific climate targets for the portfolio, as well as applying best practice in terms of assessment methods and the use of climate data for different types of investments. Transparency about companies’ net zero targets is important, and the whole KLP roadmap can be accessed at www.klp.no/klima.

Climate change and weather events are becoming increasingly important from an insurance perspective. Over the summer, KLP Skadeforsikring ran a pre-project focusing on mapping the Company’s own climate risk, looking at this in relation to the non-life company’s positioning with the municipalities, assessing future reporting requirements, and clarifying responsibilities within the organisation and possible changes as a result. Among other things, the pre-project recommends that the Company should analyse the identified climate risks in more depth, and that this should be included together with weather and climate forecasts in strategy work, product development, risk management, internal control and customer relations. In positioning itself with the municipalities, the Company should further develop its work on systematic safety management.

Together with DNB, KLP has carried out an analysis of climate risk in the shipping sector. Work on the report started through the Green Shipping Programme, which KLP is part of. The climate risk analysis has been developed from the perspective of banking and investment management. The report looks at how climate policy and energy prices will impact profitability in the maritime sector in the future.

In July, KLP decided to exclude 16 companies with links to Israeli settlements on the West Bank. KLP has reconsidered its position since the UN High Commissioner for Human Rights published a list of companies with activities linked to the Israeli settlements in the occupied Palestinian territories.  These settlements are seen as a breach of international law, and KLP’s assessment is that there is an unacceptable risk that the excluded companies could be contributing to violations of human rights in war and conflict situations through their affiliation with the Israeli settlements in the occupied West Bank. KLP has clear expectations of companies that it invests in, and these exclusions are based on due diligence. KLP held investments totalling NOK 275 million in the companies at the time of the decision.

Andøy municipality is an example of a client that has participated in KLP’s working environment network since 2019 with a project to reduce sickness absence in the municipality. The aim of the project has been to increase the quality of services offered by the municipalities, including reducing sickness absence by 20 per cent and saving temporary staffing costs as a result. The municipality can point to good results, and since the project was completed, some departments have reduced sickness absence by 30 per cent over one year, with an overall decrease of 15 per cent for all departments. KLP sees this as an important contribution to establish these networks, which increases competence and insight that can improve working conditions, reduce sick leave and prevent disability.

A joint effort among the Norwegian finance industry is working to change the regulation for guaranteed products. There are several changes, but most important for public-sector occupational pensions is the proposition to establish a common buffer fund, that replaces todays supplementary reserves and securities adjustment fund. The buffer fund will be distributed by agreement and will be transferred in full if the pension scheme should move. This change is welcomed by many and is essential for putting an end to unreasonable transfer of value between clients and freeing of buffers - compared to today’s regulation for transfer. A final decision on a common buffer fund is expected before the New Year.

In Norway, a large proportion of the population is now fully vaccinated and society is largely open after a long period characterised by strict infection control measures in connection with Covid-19. Many of KLP’s employees are now back in the office, but working from home will also be part of life for KLP going forward. We are constantly reviewing how this solution affects day-to-day operations and KLP’s employees.

The global economy has also been affected by the pandemic, and is expected to produce good growth as more countries return to normal. 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 a high level of preparedness and good financial strength to enable it to handle such fluctuations.

The financial statements in this interim report show the Kommunal Landspensjonskasse (KLP) group financial statements and parent company financial statements for the period 1 January 2021 – 30 September 2021. The accounts have not been audited.

That part of the interim report that relates to the Group financial statements has been prepared in accordance with IAS 34 Interim financial Reporting.

The same accounting principles and calculation methods have been used in the interim financial statements as in the last annual financial statements, unless stated otherwise.

The interim financial statements do not contain all the information required of complete financial statements, and this interim financial report should be read in the context of the annual financial statements for 2020. The annual financial statements are available at KLP’s website klp.no.

In preparing the interim financial statements, management has exercised discretion and used estimates and assumptions that affect the accounting figures. Actual figures may deviate from estimates used.

The life insurance business continuously follows up the risks related to disability and whether the disability provisions need to be strengthened. When determining conditions for disability, experience data up to and including 2020 is used, including margins that take into account the uncertainty related to covid-19. No disability provisions have been made related to covid-19 beyond this.

A possible effect of covid-19 is lower employment rates, recession and increasing disability in society as a result of this. The Group consider this risk to be lower for the public sector.

There is also increased uncertainty associated with the pandemic in the occupational injury industry, but no extraordinary provisions have been made here either.

In September, the Norwegian Accounting Standards Board published updated guiding assumptions for pension liabilities. In relation to the assumptions used as at 31.12.2020, the discount rate for corporate bonds was changed from 1.7% to 1.9%. At the same time, wage growth was changed from 2.25% to 2.50%, the National Insurance Scheme's basic amount (G) was changed from 2.0% to 2.25% and pension adjustment was changed from 1.24% to 1.50%. In total, these changes result in a NOK 266 million increase in recognised pension liabilities for the Group as at 30.09.2021.

Kommunal Landspensjonskasse offers group public sector occupational pensions.

KLP Bedriftspensjon AS offers products to enterprises within both the public and private sectors. The business was sold in 2020.

KLP Skadeforsikring AS offers property and personal injury products to employers within the public and private sectors. In addition a broad specter of standard insurance products is offered to the the retail market.

KLP’s banking business embraces the companies KLP Banken AS and its wholly-owned subsidiaries: KLP Kommunekreditt AS and KLP Boligkreditt AS. The banking business covers services such as deposits and lending to the retail market, credit cards, as well as lending with public sector guarantee.

Asset management is offered from the company KLP Kapitalforvaltning AS. The company offer a broad selection of securities mutual funds both to retail customers and to institutional customers. The securities management has a socially responsible profile.

Other segments comprises KLP Forsikringsservice AS which offers a broad specter of services to local authority pension funds.

Instruments at this level obtain fair value from listed prices in an active market for identical assets or liabilities that the entity has access to at the reporting date. Examples of instruments at Level 1 are stock market listed securities.

Instruments at this level obtain fair value from observable market data. This includes prices based on identical instruments, but where the instrument does not maintain a high enough trading frequency and is corresponding therefore not considered to be traded in an active market, as well as prices based on assets and price-leading indicators that can be confirmed from market information. Example instruments at Level 2 are fixed income securities priced on the basis of interest rate paths.

Instruments at Level 3 contain no observable market data or are traded in markets considered to be inactive. The price is based generally on discrete calculations where the actual fair value may deviate if the instrument were to be traded. The instruments covered at Level 3 in the Group include unlisted shares and Private Equity.

Valuations related to items in the various levels are described in Note 9. For description of the pricing of investment property, please see the annual financial statements.

No sensitivity analysis has been carried out on securities included in Level 3. A sensitivity analysis for investment property is available in the annual report. A change in the variables of the pricing is considered of little significance. On a general basis, a 5 percent change in the pricing would produce a change of NOK 5 900 million as of 30.09.2021.

With regard to transferring securities between the levels, a limit is set for the number of trading days and the amount of trading for shares by separating Level 1 and Level 2. The general principles related to the distribution between levels basically concern whether the asset or liability is listed or not and whether the listing can be stated to be in an active market. As regards shares, there is a further distinction between trading days and amount of trading which separates out listed securities that do not form part of an active market. The values at the end of the reporting period provide the basis for any movement between the levels.

In the 3rd quarter, NOK 546 million in stocks moved from Level 1 to Level 2, NOK 34 million moved from Level 1 to Level 3, NOK 1 963 million moved from level 2 to level 1 and NOK 1 million moved from level 2 to level 3. This is due to changes in liquidity.