Annual Report 2020

Changes have been made to IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies with regard to accounting estimates and errors, to ensure that materiality is defined consistently in standards and policies. The changes clarify when information is considered material and further guidance is included in IAS 1 concerning immaterial information. In particular, the changes clarify:

• that the concept of obscuring material information relates to situations in which the effect corresponds to the information having been omitted or misleading and that the entity must consider materiality in relation to the accounts as a whole, and
• the primary users of general-purpose financial statements, at whom the financial statements should be aimed, by defining these users as current and potential investors, lenders and other creditors who need to use general-purpose financial statements as supporting documentation for large parts of the financial information they require.

The IASB has published a revised conceptual framework that will be used to set standards with immediate effect. Key changes include:

• greater emphasis on the responsibilities of management with regard to the objectives of financial reporting
• reintroducing the idea of caution as a subset of neutrality
• defining a reporting entity, which may be a legal entity or part of an entity
• updating the definitions of assets and liabilities
• removing the probability threshold for recognition and adding guidance on exclusions
• providing more guidance on various measurement bases and
• emphasising that the statement of profit or loss is the key measure of performance and that revenue and costs in other comprehensive income (“OCI”) should be recycled when this strengthens relevance or provides a more credible reflection. No changes will be made to any of the current accounting standards.

IBOR reform/reference rate reform – changes to IFRS 7 and IFRS 9:

The IBOR reform affects a number of agreements that set interest rates according to a benchmark index. The changes to the regulations provide some easing arising from the benchmark interest rate reform. The easing relates to hedging accounting and means that the reform generally results in hedging accounts not being closed. Any ineffective hedging must still be recognised in profit and loss.

IFRS 9 Financial instruments, became operative from the 1st of January 2018 and covers classification, measurement and recognition of financial assets and liabilities, introduces new rules for hedge accounting, with a new impairment model for financial assets. Financial assets are classified into three categories:

• Amortized cost
• Fair value with value changes through profit or loss
• Fair value with value changes through other comprehensive income

The measurement category is decided on initial recognition. Classification depends on the company’s/group’s business model for managing its financial instruments and the characteristics of the individual instrument’s cash flows. The provisions in IFRS 4 Insurance Contracts give companies/groups with insurance-dominated operations two alternative temporary exceptions from the new requirements in IFRS 9.

The exceptions arise out of concerns that IFRS 9 comes into force before the new standard on insurance Contracts, IFRS 17.

1) Companies/groups with insurance-dominated operations are allowed, but not obliged, to apply the current rules for financial instruments (IAS 39) when drawing up IFRS accounts for the financial years 2018, 2019 and 2020. To be regarded as an insurance-dominated undertaking, the requirement is that the insurance liability must constitute at least 90% of the total liabilities, or at least 80% on condition that the undertaking is not involved in significant activities that are not related to insurance. To calculate whether the condition is met, figures for 31.12.2016 should be used.

For the KLP Group, 93.9% of the business is considered to be related to insurance, so the criterion for applying temporary exceptions is fulfilled. This is shown in the table below:

The KLP Group will make use of this temporary exception and will therefore not implement IFRS 9 before 01.01.2021 or later.

1) Groups with insurance activities which wish to implement IFRS 9 may elect to reclassify items between profit and loss and other income and expenses (other comprehensive income) in accordance with the rules under IFRS 4 for the financial years 2018, 2019 and 2020. The method allows differences in valuation between IAS 39 and IFRS 9 to be eliminated on selected financial assets.

The Group has not chosen to make use of this temporary exception.

In June 2020, amendments to IFRS 4 extending the temporary exemption to apply IFRS 9 were published. IFRS 9 will be introduced for all life and non-life activities on 01.01.2023.

Otherwise, there are no other IFRSs or IFRIC interpretations not yet in force that are expected to have a significant impact on the financial statements.

A limited change was made in IAS 1 Presentation of Financial Statements, specifying that debt must be classified as short-term or long-term debt based on the rights that exist at the end of the reporting period. The classification is unaffected by expectations for the entity or events after the balance sheet date (e.g. breach of borrowing terms). The changes also specify what IAS 1 means when it refers to the “settlement” of a commitment. It also specifies that breach of borrowing terms once the period has ended must be taken into account, even though no measurement is performed at this time. The changes may affect the classification of debt, particularly for entities that previously considered management’s intentions in determining the classification, as well as for certain debt items that can be converted to equity. The change must be applied retroactively in accordance with the main rule of IAS 8 Accounting Policies and will enter into force from 1 January 2023.

The new standard for insurance contracts, IFRS 17, was published by the IASB in 2017, but has not yet been approved by the EU. The standard will replace the current standard for insurance contracts, IFRS 4, and will be implemented from 1st of January 2023. The definition of what constitutes an insurance contract has not changed, although some clarifications have been made limiting what is considered to be a qualifying contract that is to be treated in accordance with IFRS 17. Unlike IFRS 4, IFRS 17 also contains rules on how insurance contracts are to be valued and presented. The standard describes a valuation model where the insurance liability is based on the expected present value of future cash flows, plus a risk margin and a profit margin. There are also simplified models available that can be used under certain conditions. The present value can be calculated by identifying the expected cash flows of the contract at a market rate. The risk margin must reflect non-financial risk that makes the insurer indifferent to entering into the contract. Any positive profit margin is capitalised and recognised through ordinary profit and loss as the entity is released from insurance risk. A negative profit margin (loss) is recognised in profit and loss immediately.

The standard assumes that insurance contracts that have approximately equal risk and are managed collectively as a portfolio are grouped according to whether they are profitable, loss-making or profitable with a risk of becoming loss-making. The maximum permitted difference in the issuance of the contracts included in a group is 12 months.

The general rating method is modified for certain contracts issued by life insurance companies where policyholders share the return from underlying assets. In this model, the company's share of changes in value in underlying items will be included in the profit margin.

A simplified premium allocation can be selected for the liabilities for the remaining coverage of short-term contracts, which are often issued by non-life companies.

The general rating method is modified for certain contracts issued by life insurance companies where policyholders share the return from underlying assets. In this model, the company's share of changes in value in underlying items will be included in the profit margin.

The standard requires retrospective application but allows certain simplifications where full retrospective application is practically impossible. There will be a high threshold for the use of simplifications.

In June 2020, an updated version of the standard was introduced, where the matter of significance for the group is that the mandatory implementation date has been changed to 01.01.2023.

The Group has started an extensive implementation project of IFRS 17. A preliminary survey of the Group’s insurance contracts has been carried out with a view to whether they are within the standard or not, which valuation model the various qualifying contracts belong to and how they should be grouped. The conclusions are working hypotheses that are being further worked on. It is thus not clear how the standard will affect the company's equity if it is implemented in the company accounts. It is nevertheless clear that it is considered that the new rules we affect the financial accounts and key figures for companies that issue insurance contracts or investment contracts with returns that are discretionary.

All entities in which the Group has decisive influence/control are considered subsidiaries. Control is normally achieved through ownership of more than half of the voting capital. The effect of potential voting rights that can be exercised or converted at the end of the reporting period is included in the assessment of control. Subsidiaries are consolidated from the date on which the Group takes over control and they are omitted from consolidation when that control ceases.

In accordance with the changed definition of control in IFRS 10, a large portion of KLP's investments in securities fund are consolidated in the Groups financial statements. KLP/Group has laid wait upon the following factors in assessing whether there is an obligation to consolidate:

• The Group takes the initiative for the securities fund and defines investment strategy, management fees etc. for the securities fund's byelaws
• The Group undertakes the management within the operating scope of the securities fund's byelaws
• The Group receives all management fees in the fund
• The Group exploits synergies is by undertaking management itself (except for certain "funds of funds")
• The Group has substantial ownership interest in the fund (usually more than 20 per cent)

Applying definition in IFRS 10 makes discretionary evaluations necessary. In the Group’s financial statements, such funds are 100 per cent consolidated in the balance-sheet where non-controlling ownership interests (minority shares in the Securities Fund) are included in the accounting item ‘Unit holders’ interest in consolidated securities funds. The minority's share of the mutual funds are in the financial statement classified as liabilities.

Purchase of subsidiaries is recognized in accordance with the purchase method. Acquisition cost is set at the same as fair value of assets provided by way of consideration for the purchase, equity instruments issued and liabilities assumed on transfer of control. The identifiable assets and liabilities of the acquired company are valued at fair value. If cost of acquisition exceeds fair value of identifiable net assets in the subsidiary, the excess is capitalized as goodwill. If the cost of acquisition is lower, the difference is taken to profit/loss on the date of acquisition.

Intercompany Group transactions and accounts between Group companies are eliminated. Where Group companies present accounts in accordance with principles other than those of the Group, these are converted to correspond to the Group's accounting principles before they are consolidated. The Group's accounts are presented in NOK and those of subsidiaries in foreign currency are translated to NOK at the exchange rate prevailing at the end of the reporting period. On consolidation of income statement items in foreign currency, average foreign exchange rates are used.

Associated companies are entities in which the Group has substantial influence without having control. If the Group is invested direct or indirect through a holding of 20 per cent or more, it is assumed that the Group has substantial influence unless stated otherwise. The following factors may be use to determine if the Groups has substantial influence:

• Representation in the board or similar organs in the invested company
• Participation in processes for determine principles, in ex. decisions regarding dividends
• Material transactions between the Group and the invested company
• Mutual exchange of key personnel, or
• Deliverance of important technical information

On the date of acquisition investments in associated companies are taken to account at cost of acquisition. The equity capital method is used for accounting in subsequent periods. This means that the Group's share of profit or loss in associated companies is taken to profit/loss and is added to the capitalized value together with owners' equity changes not taken to profit/loss. The Group does not take a share of the loss to profit/loss if this involves the capitalized value of the investment becoming negative unless the Group has assumed liabilities on behalf of the associated company.

Where necessary accounting principles in associated companies are changed to achieve harmonization with the Group's accounting principles.

Joint arrangements are investments in which the Group has joint control with another company. "Joint control" is the contractually agreed sharing of control of a joint arrangement, which exists only when decisions about the relevant activities require unanimity between the parties sharing control.

According to IFRS 11, investments in joint arrangements are to be classified either as joint operating arrangements or joint ventures, depending on the contractual rights and obligations of each individual investor. The Group has considered its joint arrangements and reached the conclusion that they are joint ventures.

On the date of acquisition investments in joint arrangements are recognized at cost of acquisition. The equity capital method is used for accounting in subsequent periods. This means that the Group's share of profit or loss in joint arrangements is taken to profit/loss and is added to the capitalized value together with owners' equity changes not taken to profit/loss. The Group does not take a share of the loss to profit/loss if this involves the capitalized value of the investment becoming negative unless the Group has assumed liabilities on behalf of the joint arrangement.

Where necessary accounting principles in associated companies and joint ventures are changed to achieve harmonization with the Group's accounting principles.

Some funds have been consolidated in the Group's financial statement because they are considered to meet the definition of IFRS 10. These funds are in total owned by parent company KLP.

The consolidated financial statements are presented in NOK, which is the functional currency of the parent company.

Transactions in foreign currency have been translated to NOK by using the exchange rate on the date of the transaction. Exchange-rate gains and losses on transactions in foreign currency are recognized through profit or loss. This also applies to translation of money items (assets and liabilities) at the end of the reporting period.

Translation differences on monetary items are included as part of the gain and loss on valuation at fair value. Translation differences associated with non-monetary items, such as shares at fair value through profit and loss, are included as an element of value change taken to profit/loss.

Entities that are consolidated and have functional currency other than the presentation currency are treated as follows:

• The financial position is translated at the exchange rate at the end of the reporting period
• The statement of income is translated at average exchange rate (if the average does not in general provide a reasonable estimate against use of the transaction rate, the transaction rate is used)
• Translation differences are taken to other comprehensive income.

Financial instruments are classified on first recognition in one of the following categories:

a) Financial assets at fair value through profit or loss

b) Lending and receivables recognized at amortized cost

c) Investments held to maturity recognized at amortized cost

a) Financial liabilities at fair value through profit/loss.

b) Other financial liabilities recognized at amortized cost

Within this category it may be mandatory or chosen to recognize attribution at fair value with value changes through profit or loss.

• Financial assets held for trading are assets acquired primarily with a view to providing a profit from short-term price fluctuations. The Group's derivatives are included in this category unless they are included as an element of accounting hedging in accordance with the rules on hedge accounting.
• Financial instruments and liabilities opted to be recognized at fair value with value changes through profit or loss are classified in this category if the financial instruments are either managed as a group, and where their earnings are assessed and reported to management on the basis of fair value, or if the classification eliminates or reduces accounting inconsistencies in measurement.

The financial assets include shares and units/holdings, bonds, certificates and lending whilst the financial liabilities cover debt to credit institutions and derivatives.

Lending and receivables are financial assets, with the exception of derivatives, with set or determinable payments, and that are not traded in an active market, with the exception of:

• Those which it is the Group’s intention to sell on a short-term basis or which it has earmarked at fair value via the income statement (profit/loss)
• Those which the Group has earmarked as available for sale
• Those from which the holder will probably not be able to recover its whole original investment, other than weakened creditworthiness, and which are to be classified as available for sale.

Lending and receivables at amortized cost comprise:

• Loans and receivables linked to investment business
• Other loans and receivables including receivables from policyholders.

Loans and receivables in the investment business include debt instruments classified as loans and receivables i.e. bonds that are not priced in an active market as well as lending to local authorities, enterprises and retail customers.

Financial assets held to maturity comprise financial assets that are not derivatives and that have set or determinable payments and a defined date of maturity and that the Group has the intention and the ability to hold to maturity with the exception of:

• Those the enterprise classifies on first recognition at fair value through profit or loss
• Those that the enterprise has earmarked as being available for sale
• Those that meet the definition of loans and receivables.

The category includes bonds recognized at amortized cost.

The category covers subordinated loans, covered bonds issued and debt to as well as deposits from customers.

Purchases and sales of financial instruments are recognized at fair value on the trading date, i.e. when the Group has committed itself to buy or sell that financial instrument. Direct costs of purchase are included in acquisition cost except for purchase costs associated with financial instruments at fair value through profit or loss. For these instruments, purchase costs are taken to expenses directly. Recognition of financial assets ceases when the Group is no longer entitled to receive the cash flow from the asset or the Group has transferred all risk and entitlements associated with its ownership. Recognition of financial liabilities ceases when the underlying obligation in the contract has been met, been cancelled or expired.

The principles for calculating fair value related to the various instruments are shown in Note 6.

Financial instruments not measured at fair value are measured at amortized cost using the effective interest rate method. The internal rate of return is set through discounting contractual cash flows over expected duration. The cash flows include setting-up charges and direct transaction costs as well as any residual value on expiry of the expected duration. Amortized cost is the present value of these cash flows discounted by the internal rate of return.

In assessing whether there is impairment in value of a financial asset, weight is attached to whether the issuer/debtor has significant financial difficulties and whether there is breach of contract, including default. An assessment is made of whether it is probable the debtor will be bankrupted, whether there is an active market for the asset because of financial difficulties, or whether measurable reduction is being seen in expected cash flow from a group of financial assets. The assessment is based exclusively on historical data: future events are not considered, regardless of the degree of probability.

If there is objective proof of impairment, write-down is carried out. The write-down is calculated by comparing the new, anticipated cash flows with the original cash flows discounted by the original effective interest rate (assets with fixed interest) or by the effective interest rate at the time of measurement (assets with variable interest). The write-down reduces the asset’s capitalized value and is included in the statement of income under "Current returns from financial assets".

Loss assessment and loss write-down is carried out quarterly on individual loans. Loans with unpaid repayments older than 90 days or credits with overdrafts older than 90 days are examined at the end of the reporting period. In addition continuous assessment is carried out of other lending engagements where there is objective proof of impairment.

Lending is also assessed by group. If there is objective proof of impairment in a group of loans, write-down is carried out.

Financial assets at fair value through profit or loss are recognized in the financial position statement either as "Lending local government, enterprises & retail customers at fair value through profit/loss", "Debt instruments at fair value through profit or loss" or "Equity instruments at fair value through profit or loss". Interest income and share dividend are included in the line “Net return on financial assets". For the banking business, interest income is included in the line "Net interest income banking". Other value changes are included in the line "Net return on financial assets"

Loans and receivables at amortized cost are presented in the financial position statement either as "Debt instruments classified as loans and receivables", “Loans to local authorities, enterprises and retail customers", “Receivables" or "Cash and bank deposits". Interest income is included in the line “Net return on financial assets". For the banking business, interest income is included in the line "Net interest income banking". Value changes that can be linked to objective indications of impairment as well as foreign exchange changes are included in the line "Net return on financial assets".

Financial assets held to maturity comprise bonds noted in an active market and are presented in the financial position statement as "Debt instruments held to maturity". Interest income in accordance with the effective interest rate method is included in the line "Net return on financial assets". Value changes that can be linked to objective indications of impairment as well as unrealized foreign exchange changes are included in the line "Net return on financial assets".

Liabilities to and deposits from customers are recognized at fair value in the financial position statement when the deposit has been recorded as transferred to the customer's account. In subsequent periods, liability to and deposits from customers with variable interest rates are accounted for at amortized cost in accordance with the effective interest rate method. The costs of interest are included in the line "Net interest income banking"

Subordinated loan is taken to account at fair value on subscription. On subsequent measurement subordinated loan is recognized at amortized cost using the effective interest rate method. The method is used to allocate the interest costs over a relevant period and is posted over income in the line "Interest costs and value change subordinated loan and hybrid Tier 1 securities". Subordinated loan in foreign currency is translated to NOK at the end of the reporting period. Value change as a result of the foreign exchange change is posted through income and included in the line "Interest costs and value change subordinated loan and hybrid Tier 1 securities".

Hybrid Tier 1 securities are recognized at nominal on date of issue and valued subsequently at amortized cost. For hybrid Tier 1 securities hedged against exchange and interest rate changes (fair value hedging), book value is adjusted on value change in hedged risk. The value change is posted through income in the line "Net costs subordinated loan and hybrid Tier 1 securities".

In the first instance covered bonds issued are recognized at fair value, i.e. nominal adjusted for any premium/discount on issue. On subsequent valuation the bonds are valued at amortized cost by the effective interest method. The costs of interest are included in the line "Net interest income banking" in the income statement.

Bonds issued with fixed interest are recognized in accordance with the rules on fair value hedging inasmuch as they are hedged against change in interest rate level.

Liabilities to credit institutions are capitalized at market value on take-up. On subsequent measurement fair value is used when this eliminates or reduces accounting inconsistency. The interest costs are included in the line "Net interest income banking" whereas other value changes are included in the line "Net value change on financial instruments" in the income statement.

In 2020, Bank of Norway issued extraordinary F-loans to banks on the basis of the financial negative consequences of the pandemic. The Group's banking business has taken advantage of F-loans from Bank of Norway in 2020. These loans have a fixed term and shall not be repaid before the due date of the loan. In the financial accounts, the loans are recognised on the line "debt to credit institutions".

Minority unit holders in the consolidated securities fund may ask to redeem their holdings, and as a result, the minority share of the funds is classified as a debt on the accounting line “Unit holders´ interest in consolidated securities funds”. The minority portion of value changes in securities funds is posted through profit and loss and included in the line “Change of value for unit holders in consolidated securities funds”.

Financial derivatives are capitalized at fair value at the time they are contracted. On subsequent measurement the derivatives are recognized at fair value and are presented as an asset if the value is positive and a liability if the value is negative. Recognition of associated gains and losses depends on whether the derivative has been identified as an accounting hedge instrument and in which type of accounting hedge the derivative is included.

For derivatives not included in accounting hedge relationships, gains and losses are recognized through profit or loss as they arise in the line for "Net value change on financial instruments". These are included in the category "Financial assets at fair value through profit or loss".

In two cases the Group has used accounting hedging (hedge accounting). In one case the hedge accounting is used on hedging of hybrid Tier 1 securities issued (the hedging object) against value changes resulting from changes in interest rates and exchange rates (fair value hedging). The hedging instrument is a combined interest rate and currency swap (CIRCUS). The hedge relationship is documented and the effectiveness of the hedging is measured continuously. In the second instance is fair value hedging of fixed interest lending. The hedge relationship is documented and its effectiveness is measured continuously.

Change in fair value of the hedging instrument is included in the income statement at the line for "Net value change on financial instruments". Value changes in the hedging object that can be attributed to the hedge risk are booked as a correction of the hedging object's capitalized value and included in the income statement at the line for "Net costs subordinated loan and hybrid Tier 1 securities" and "Net interest income banking". In those instances in which a security has inbuilt derivatives that are not separated out, the value of the derivative will be included in the security's value as a whole.

The Group's parent company is a mutual company owned by its customers. This means that customers participating in KLP's “Fellesordninger" (Joint Pensions - schemes for public sector occupational pensions) pay an owners' equity contribution on registration. The owners' equity contribution is set in proportion to the relative size of the customer measured in premium reserves.

The owners' equity contribution may be used to cover losses or deficits in current operation. It may only be repaid in connection with transfer of a customer's business from the Company after approval by the board of directors and in advance from the Financial Supervisory Authority of Norway. The member's share of the actual combined owners' equity contribution at the termination date calculated proportionately to the member's share of the Company's total premium reserves is subject to possible repayment.

Distribution of returns on owners' equity contributions depends on the Company's results.

The owners' equity contribution may not be traded.

The Group's retained earnings comprise the risk equalization fund, the natural perils fund, the revaluation fund and other retained earnings.

Ordinary company law rules apply for any distribution or use of retained earnings. Use of the risk equalization fund must be according the rules of The insurance act.

Premium income is taken to income by the amount falling due during the accounting year. Accrual of premiums earned is dealt with through provisions against unearned premiums. Reserves transferred in for the year are recognized through the income statement and included in the premium income. The share of the period's gross premium income accruing to reinsurers in connection with reinsurance is shown as a deduction from gross premium income.

Interest income and interest expenses associated with all interest-bearing financial instruments is and valued at amortized cost are taken to income using the effective interest rate method. Setting-up fees for lending are included in the amortization and taken to income over the loan's expected duration.

Interest income for fixed-income financial investments measured at fair value is classified as "Net return on financial assets". For the banking business the interest income is included in the line "Net interest income banking", whereas other value changes are classified as "Net value change on financial instruments".

Income from leasing of real estate is taken to income by straight line accrual over the duration of the lease. The income is included in the line "Net income from investment properties". Fees for asset management are taken to income in proportion to the management carried out for the period up to the end of the reporting period. The income is included in the line "Other income". Other services are taken to income by straight line over the contract period.

The Group offers products to its customers in the following sectors:

a) Group pension

b) Group life

c) Non-life insurance

From 1 January 2020, all future retirement pension accruals for members born in 1963 or later will take place through a premium scheme in which each year of work results in pension contributions in a similar manner to the national insurance scheme. For these age groups, flexible rules are also introduced from the same date concerning the withdrawal of the retirement pension and the right to combine work with pension payments without income reductions. Pensions accrued through the premium scheme are adjusted prior to the withdrawal of the pension in line with the changes to the basic pension. This is also in line with the regulations set down for the national insurance scheme. The premium scheme is also a performance-based pension scheme and premiums and provisions will be taken on the basis of an unchanged basis of calculation.

For the age groups born before 1963, the gross scheme based on linear earnings will be continued. This means that the individual's earned benefits at all times constitute the proportionate part of the benefits he or she will be entitled to through continued service until retirement age. The proportionate portion is shown as the ratio between the person's service period that he or she has already earned and the total period of service he or she will obtain on continued service until retirement age, however, so that the latter size cannot exceed 40 years when calculating the proportionate portion. The schemes are based on the final pay principle. Adjustment of current pensions in line with the National Insurance Scheme and the regulation of defined rights in line with the basic amount are part of the defined benefit plan's defined benefit plan.

The scheme's benefits are determined in accordance with current public occupational pension rules, which include, among other things, coordination with the National Insurance benefits for the old age pension to ensure a defined gross pension level.

The indexation of current pensions and accumulated pension entitlements is financed entirely by a special indexation premium. Some public sector peculiarities are not prefunded and are financed through single premiums at start-up and possibly through subsequent changes to the pension (guaranteed gross premium).

The net premium reserve in the pension schemes is set as a net single payment premium for the accumulated age, disability and survivors' pensions. In addition, an administration reserve has been set aside based on the Group’s actual costs involved in the payment of pensions.

The premium reserve also comprises allocations to insured events that have occurred but are not yet settled, including a qualifying-period provision for disability risks.

The technical insurance provisions in group life insurance are based on risk theory methods. The claims reserve includes provisions for the expected payments on insured events that have occurred but are not yet settled regardless of whether or not these have been reported.

Insurance contracts cover the customers' employees for occupational injury within the scope of the Occupational Injury Act and the Basic Collective Agreement for the Civil Service. In addition, insurance contracts are taken out covering employees for accidents during leisure time.

Insurance contracts covering the customer for accidents in spare time and for school pupils during school time.

Insurance contracts covering damage to customers' property and any loss incurred by the customer in the event of damage to or loss of the property. The product also includes mandatory natural disaster cover. The risk for the Company is reduced through taking reinsurance contracts covering compensation in excess of a certain amount per claim.

Insurance contracts covering damage occurring through use of the customers' motor vehicles. The risk for the Company is reduced through taking reinsurance contracts covering compensation in excess of a certain amount per claim.

Insurance contracts that cover damage incurred by third parties as a result of the customers' activities. The cover applies both for property claims and personal injuries.

Insurance contracts that cover customers for injury and loss arising during travel.

Insurance contracts that cover expenses related to accidents or serious illness and loss of income (disability pension).

Insurance contracts that cover the customer in the event of death and disability.

The risk for the Group is reduced by taking out reinsurance contracts covering payments in excess of a set amount per claim in all of the sectors mentioned above except for group life. The Group is at all times to have technical reserves fully covering the technical liability and other risk emanating from the insurance business. In all cases and at all times, the Group’s reserves are to meet the minimum requirement for reserves under regulation or law.

The Group's most important insurance funds are described below:

The premium reserve represents the actuarial cash value of pension entitlements accumulated on the date of calculation. The premium reserve also includes administration reserve in accordance with the Group's calculation base, as well as provisions for incurred, not yet settled insurance claims, including waiting period provisions for disability risk.

Supplementary reserves are presented in the income statement in the line “To supplementary reserves - life insurance" as obligatory reserves. Supplementary reserves are allocated to the customers conditionally and may be used to cover any shortfall in returns. Any negative return cannot be covered from supplementary reserves.

The premium fund contains premiums paid in advance and any surplus assets allocated to the individual customer’s premium fund accounts. Premium fund assets may be used to cover future premiums.

The securities adjustment fund is defined in Norwegian insurance legislation and is associated with the common portfolio in life insurance.

The securities adjustment fund comprises net unrealized gains associated with short-term financial assets. If net valuation reserves are negative, the securities adjustment fund is set at zero. Changes in the securities adjustment fund are taken through profit or loss.

Unrealized securities valuation reserves associated with short-term financial assets in foreign currency that can be ascribed to foreign exchange rate changes are not allocated to the securities adjustment fund if the investment is hedged against exchange rate changes. Foreign exchange rate changes linked to the hedging instrument are thus not allocated to the securities adjustment fund either but are taken directly to profit or loss.

For public service pension schemes, all new accruals will take place using the basic interest rate of 2.0 percent. Accruals prior to 1 January 2012 were made using a basic interest rate of 3.0 percent. The total average performance guarantee in the public group pension sector amounted to 2.36 percent at the end of 2020.

The price tariffs for disability are determined based experience in the Groups own population.

The price tariffs for mortality are equal to the calculation base K2013 with safety margins in accordance with the minimum standard laid down by the Financial Supervisory Authority of Norway. When it comes to the Pension Scheme for Nurses and the Joint Scheme for hospital doctors, a somewhat stronger basis is used.

Returns result of varieties on insurance contracts with returns guarantee. Returns result comprises actual return achieved less guaranteed return (base interest rate). A positive returns result is credited to the customer, whereas a negative returns result must be covered from the customers' supplementary reserves and/or from owners' equity. The Company invoices a special premium element (interest guarantee premium) to guarantee the interest guarantee. This premium element is included in the Group's/Company's results.

The risk result is an expression of the difference between mortality and disability in the insured population during the period in question relative to what is assumed in the Company’s price tariff. A positive risk result is returned to the customers, but it is possible to withhold up to half of a positive risk result in risk equalization funds. The risk equalization fund may only be used to cover subsequent risk result losses and may amount to a maximum of 150 per cent of risk premium for the year.

Any negative risk result must be covered by the risk equalization fund or owners' equity.

The administration result is a result of how the Company's actual expenses deviate from the premium tariff. The administration result is credited entirely to the Company.

• Currently applicable terms and conditions, contract expiry and assumed market rent
• Vacant areas with assumed market rent
• Parking income, parking area and number of places
• Estimated annual inflation
• Annual rent adjustment as a percentage of inflation
• General vacancy
• Normal annual operating costs
• Normal annual communal costs per square metre
• Upgrading costs per square metre on new lease
• Any further upgrading costs (year and amount)
• Number of months vacancy on each contract expiry
• Assumed final value Year 20
• Nominal return requirement

As part of the valuation, yield assessments are also carried out for the individual property and for the total portfolio. In addition to valuation using KLP Eiendom's value assessment model, external valuations are obtained for a selection of the properties. These are used to determine own calculation parameters and to quality-assure the internal valuations.

Minor changes in the return requirement will have relatively heavy impact on property values and it is also assumed that major changes in the “Assumed market rent" will also affect the accounting figures the most.

The sensitivity analysis below shows how the value of one of the Group's centrally located office properties in Oslo changes with certain changes in key parameters in the Group's valuation model. The analysis shows change in value (given as percentage change) for a given change in a parameter on the assumption that all other parameters stay unchanged. In reality there are interdependencies between several variables, so that a change in one parameter will be accompanied by change in one or more other parameters. The sensitivity figures given do not capture such relationships with other variables and are shown only for illustrative purposes. The effects of changes in parameters will vary somewhat from property to property.

In the analysis above the return requirement means the interest rate used in discounting future cash flows in the model. Market rent is understood as expected rent in the event of renegotiation of existing contracts or on change of tenant. Exit yield means the yield that is used to calculate the final value in the valuation model's final analysis period (Year 20).

The Covid 19 pandemic has created great uncertainty in the commercial property market. The uncertainties have been represented, among other things, by access to foreign capital, falling interest rates, changed borrowing and lending costs for banks, access to equity, altered investor behaviour etc. In addition, the pandemic has brought with it great uncertainty in the rental market, changes in the liquidity of tenants, short-term payment capacity, space requirements etc. Many of these factors have pulled in opposite directions, and the immediate effect has been that the risk premium has been an outgoing trend for several of the property categories in such a way that the falling interest rate situation has not become visible in valuations and actual completed transactions.

It is difficult to draw conclusions about the market in general terms due to an insufficient empirical basis, and it is the Group's view that some property categories in retail and shopping centres are in a historically demanding situation in terms of real cash flow in the short and medium term. It is emphasised that the valuations that have been made are perceived to be at a high level of uncertainty.

The insurance provisions are set at the right level of expectation, with addition of safety margins. In group pension public sector, the Group can add up to a half year’s risk result to the risk equalization fund. This fund can be used to meet unexpected fluctuations in risk results.

For disability risks in the collective pension sector, assumptions are used based on the group's disability experience. For other risk elements in the collective pension sector, the assumptions from the calculation basis K2013 are used, with safety margins, according to the minimum standard set by the Financial Supervisory Authority of Norway in 2013. For men, the Group uses its own life expectancy assumptions that assume a greater life expectancy improvement than K2013. In the Pension Scheme for Nurses, the same formulas and parameters are used but with an enhanced safety margin due to significantly longer life spans in these schemes. For the Pension Scheme for Hospital Doctors, K2013 is used with an enhanced safety margin for both genders.

We are currently in a special situation related to corona. At present, there is no excess mortality in the population as a result of the pandemic. If the pandemic should lead to lasting increased mortality, this will give higher risk results. At the same time, there are factors related to the pandemic situation that could affect withdrawals of disability pensions in 2021 and the next few years, such as:

• Layoffs and recessions
• Home office (physically and mentally)
• Extra work in health enterprises
• Lack of capacity of health workers in general
• After-effects of disease

Development in the Group's insurance risk is continuously monitored. Risk result and future expectations of development in insured risk are based on observations and prognoses set by the SSB (Statistic Central Bureau). These create the basis for pricing of the risk element in the premium.

In the sector for group pension, public sector the Group has a large population, which provides a high degree of predictability and stability in its tariffs. Normally they will therefore stay the same for several years at a time.

In the non-life insurance business, guidelines have been drawn up for the types of risk that the Company accepts in its portfolio. Risks are generally accepted from customers from within the Company’s primary target groups, provided that the scope of the cover falls within the standard products the Company offers. Premiums are differentiated based on the individual customer’s risk. In borderline cases, special decision procedures are followed before the risk can be taken on.

The way the insurance contracts have been established, the current risk is generally within the framework of the Group's risk-bearing capacity. Collective Pension Public only has products without the possibility to choose the scope of the insurance cover for the individual insured. Based on this limitation, the size of the company and resulting great risk-bearing ability, the overall assessment is that the need to have reinsurance in KLP is small. There is no reinsurance cover for collective pensions in KLP today.

The company reduces its underwriting risk, including concentration risk, by reinsurance cover that limits the company's retention per claim. Guidelines have been set to minimise counterparty risk in the reinsurance contracts in non-life insurance. A maximum limit is set for the individual reinsurer and a minimum level is defined for the reinsurers' credit ratings.

The effect of an immediate 20 per cent increase in the incidence of disability would, with current numbers be NOK 345 million on the risk result for the year. The effect on the premium reserve of a corresponding permanent change in the incidence of disability would be an increase of NOK 703 million.

An immediate 10 per cent reduction in mortality would, with current numbers, mean a negative effect of NOK 228 million on the risk result for the year. The effect on the premium reserve of a corresponding permanent change in mortality would be an increase of NOK 10.070 million.

The Group's large numbers within group public sector pensions help to stabilize the insurance risk and the claim estimates. Deviations are related primarily to non-insurable magnitudes that do not affect the result.

The table below shows the profit/loss effect of a 1 per cent change in costs, premium levels, claim payments and claims reserve:

Liquidity risk is the risk that the Group does not have sufficient liquidity to cover short-term debt, uncalled residual liabilities that may fall due and current operations without substantial extra costs arising in the form of price falls on assets that have to be realized. The liquidity strategy contains various requirements and limits in order to comply with the desired liquidity risk profile. In addition division of responsibilities and contingency planning are covered. The liquidity strategy is operated at the senior management level and the liquidity is managed internally in accordance with mandates.

Uncalled residual liability of NOK 27.659 million comprises mainly committed, not paid in sums against private equity and approved loans that have not been paid out. The total is specified in detail in Note 35 Contingent liabilities. The agreements govern solvency requirements among other things, so that the drawing can be approved for payment.

Market risk is the risk of losses resulting from changes in market prices of various assets such as shares, bonds, property and other securities. The market risk depends on how large an exposure there is to the various assets and on the volatility in the market prices. Developments in the Norwegian and international securities markets generally have major significance for the Group's results.

Risk of a fall in the value of various assets is the biggest financial risk in the short term. Of the risk concerning assets, equity exposure is the largest financial risk factor, but also the market risk associated with interest, credit (spread) and property has a significant loss potential. The Group's interest rate risk associated with a prolonged low interest rate level is however limited. With the current formulation of the rules, technical provisions are not affected by changes in market interest rates. On the liabilities’ future transition to market value, annual pricing of the interest rate guarantee will mean that the customers will bear the risk of the interest rate level being lower than the base interest rate. Since the Group mainly provides pension schemes to the public sector, the Group will price the interest rate guarantee right up until the insured dies, which means the interest rate risk arising from the insurance obligations is limited.

The Group exchange rate hedges the majority of international exposure. Financial hedging of currency exposure is done through derivatives. As a rule, all of the Group's fixed-income investments and property investments in foreign currency are hedged back to NOK. For equity investments in foreign currencies, the hedging ratio in 2020, except for the currency turmoil in March, was about 60 per cent with permissible fluctuations between 50 and 70 per cent.

All equity and interest rate exposures are included in a risk measurement system that enables simulation and monitoring of equity and interest rate risk across the portfolios. Active risk is managed through specifying a benchmark with the index for each portfolio.

To reduce the risk of negative results from asset management, the Group uses CPPI rules for customer portfolios for daily monitoring the market risk. This strategy helps to ensure that the risk is adjusted to the Group's risk capacity. The CPPI rules gives a return profile, which fits the overall target to protect owners' equity and preserve the risk capacity over time. In addition, the Group has a high proportion of long-term (hold-to-maturity) bonds and fixed-interest lending that contributes to stability in returns.

Derivatives are principally used for risk reduction for cost and time-effective implementation of changes in risk and for currency hedging.

Through the life company, the equity risk is by far the largest market risk in the Group. As measured by stress tests, this is in excess of 50 per cent. The rest of the market risk is spread equally between property risk, interest rate and credit risk. The fact that large parts of the interest rate and credit exposure are posted at amortised cost changes the relative picture of market risk. Equity and property risk then make up more than 80 per cent of the total market risk.

In connection with the parent company’s ( KLP) own risk and solvency assessment (ORSA), several scenario analyzes and forecasts for capital adequacy have also been carried out this year. Analysis shows that KLP will be well capitalized through the whole forecast period (2025). In scenarios with negative market development it is presumed that KLP according to internal rules will reduce the allocation in shares in the common portfolio. These scenarios also show how the ancillary own funds (Group 2) will contribute in situations with low reserves so that the capital adequacy not will be reduces below the target ratio of 150 per cent.

The European rules for calculation of solvency margin, SCR ratio, main target is to protect and ensure the interest of the insurance customers. The Group performs quarterly calculations of the SCR ratio.

According to the standard method of calculation in Solvency II, the Group has a solvency capital coverage of 264 per cent, which is slightly higher than at the end of 2019 when it stood at 253 per cent. The solvency capital coverage is well above the Group’s target of 150 per cent. The regulatory minimum requirement is 100 per cent.

Several sensitivity analyses linked to solvency capital coverage have been carried out. The solvency capital is calculated to increase by 10 percentage per 50 basis points interest rate increase, and to be reduced by 10 percentage per 50 basis points interest rate decrease. This may be considered low, at least compared to private occupational pensions, and is mainly due to the fact that public-sector occupation pensions avoid the problem of paid-up policies. A 25 per cent fall in the stock market reduces capital adequacy by something under 50 percentage points when the rules are taken into account. This is a significant drop, but the level of capital adequacy will still be above the level at which action has to be considered.

Previous estimates have shown that, with the safety margins in the Company’s tariffs and with the current level in the risk equalisation fund, solvency capital coverage is not very sensitive to changes in longevity and disability risk.

Emphasis is placed on diversification of credit exposure to avoid concentration of credit risk against individual debtors. To monitor credit risk in lending and investments a special credit committee has been established, meeting regularly. The limits for credit risk against the individual debtor are set by the committee. Changes in debtors' credit assessments are monitored and followed up.

The Group has good balance between Norwegian bonds and international bonds and has a portfolio of exclusively good credit notes. 400 per cent of the Group's total credit exposure is invested with issuers with an AA- rating or better. The Group has a separate international government bonds portfolio and the element of government bonds is also substantial in the Norwegian bonds portfolio.

The Group has a lending portfolio of high quality, with limited credit risk and historically very low losses. In the main, the Group provides loans secured on housing with a loan-to-value ratio of less than 80 per cent, loans to local authorities and loans with local authority guarantees. Lending secured through mortgages on housing amounts to NOK 21.1 billion. The value of the mortgages represents a greater value than the lending since a large part of the mortgages were established earlier in time and the price rise in housing in recent years has been substantial.

The Group has limited concentration risk. Because no exposures exceed the threshold values defined in the Solvency II regulations, the Group has no capital requirements for concentration risk under the standard method. The way in which the fixed interest and equity portfolios are managed will generally help to limit concentration risk through extensive use of index management. The Group sets explicit limits for lending which restrict concentration on specific individuals and groups. Sector concentration is monitored via monthly and quarterly reporting.

Although the Group’s investments are well diversified, there is a clear preponderance of investments in Norway. This is a deliberate and a natural consequence of dealing mainly with public-sector occupational pensions.