Annual report 2021 KLP Group, Sustainability and KLP

IFRS 9 Financial Instruments entered into force on 1 January 2018; it covers the classification, measurement and recognition of financial assets and liabilities, and introduces new rules for hedge accounting and a new impairment model for financial assets. Financial assets are classified into three categories:

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

The measurement category is decided on initial recognition. The classification depends on the business model used by the company/group to manage its financial instruments and the characteristics of the cash flows for the individual instruments. Companies/groups with insurance-dominated activities are granted two alternative temporary exemptions from the new requirements in IFRS 9 under provisions in IFRS 4 Insurance Contracts.

Companies/groups with insurance-dominated activities are allowed, but not obliged, to defer the implementation of IFRS 9 until the first financial year starting on or after 1 January 2023, i.e. at the same time as IFRS 17.

To be regarded as an insurance-dominated entity, the insurance liability must constitute at least 90% of the total liabilities, or at least 80% provided that the entity is not involved in significant activities that are not related to insurance. To calculate whether the condition is met, available 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 the temporary exemption is satisfied. This is shown in the table below:

The KLP Group has made use of this temporary exemption, and so has not implemented IFRS 9.

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 in IFRS 4 for the financial years 2018, 2019, 2020 and 2021. This 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.

The Group is working on a project to implement IFRS 9 Financial Instruments, and to see what effects the transition to new rules from 01.01.2023 will have.

The new accounting standard for insurance contracts, IFRS 17, was published by the IASB in 2017 and approved by the EU on 23 November 2021. The standard will replace the current standard for insurance contracts, IFRS 4, and will be mandatory from 01.01.2023. The definition of what constitutes an insurance contract has not changed, but there have been some clarifications that limit the qualifying contracts to be handled according to IFRS 17. Unlike IFRS 4, IFRS 17 also contains rules on how insurance contracts should be assessed and presented, as well as extensive new note requirements.

1. The present value of the future cash flows of insurance contracts (probability-weighted and taking account of time value)
2. A risk adjustment for non-financial risk, and
3. Unearned profits (service margin).

For each period, the calculation of future cash flows (a) and the adjustment for non-financial risk (b) should be based on current estimates. This means estimates that reflect the conditions and expectations for the future at the measurement date. The present value is calculated using market-based discount rates.

The adjustment for non-financial risk should reflect the compensation required by the company for bearing the non-financial risk arising from the uncertain amount and timing of the cash flows. Non-financial risk means any risk associated with insurance contracts that is not financial risk, including insurance risk, the risk of the policy-holder cancelling the contract and the risk of unexpected increases in administrative costs for services associated with the contracts.

The profit element of the contracts is calculated at the time of establishment as unearned profit and is included as a component of the insurance obligation. This component is reduced as profits are recognised where the company has provided services under the insurance contracts. Any negative profit margin (loss) is applied to the profit figure immediately.

There are also simplified models (the premium allocation method) which can be used under certain conditions. In order to qualify for the simplified method, the coverage period must be within 12 months or it must be shown that the result will not be significantly different from the general valuation model in IFRS 17.

• Liabilities for remaining coverage
• Liabilities for claims incurred

Liabilities for remaining coverage are calculated as the portion of premiums received but not recognised, adjusted for any amortisation of establishment costs and any financing component (not required for coverage periods of one year or less).

Liabilities for claims incurred are calculated by discounting future cash flows and adjusting for non-financial risk. The discount rate used must be consistent with the market.

The standard requires insurance contracts with approximately equal risk managed collectively as a portfolio to be grouped according to whether they are profitable, unprofitable, or profitable with a risk of becoming unprofitable. There may be no more than 12 months difference in the issuance of the contracts included in a group. However, in the EU/EEA area, voluntary exemptions have been granted to allow the contracts to be grouped by year if certain conditions are met.

The standard requires retrospective application but allows certain simplifications if full retrospective application is not practicable. There should be a high threshold for using the simplifications.

Since 2018, the Group has made thorough preparations for implementing IFRS 17, and has spent considerable resources on this. Presentation and measurement of the insurance obligations in the consolidated financial statements will be affected by the implementation of IFRS 17, but it is too early to quantify the impact. A major consequence for mutual insurers like KLP is that the standard states that the residual interest in the company is owned by its customers (policy-holders) as opposed to non-mutual companies which are owned by third parties. As a result, mutual companies will not initially have equity in accounts prepared according to IFRS 17.

The Group’s main product, public-sector occupational pensions (OfTP), is classed as an insurance product under IFRS 17. The OfTP contracts are currently classed as ‘contracts with direct participation features’. This entails valuation using the ‘variable fee approach’ (VFA). For the Group’s non-life insurance activities, we expect all products to qualify for the simplified method (premium allocation approach), and that this method will be used. Provisions for unexpired risks will change, as under IFRS 17, the provisions are based on the present value of future cash flows rather than unearned premiums as they are now.

The standard is complex, and it is not yet clear how the overall standard will affect the Group’s financial position.

A limited change has been made in IAS 1 Presentation of Financial Statements which specifies that liabilities should be classified as current or non-current based on the rights that exist at the end of the reporting period. The classification is unaffected by the expectations of the entity or events after the balance sheet date (for example a breach of loan terms). The changes also specify what IAS 1 means when it refers to the 'settlement' of a liability. It is also specified that breaches of loan terms at the end of the period should be taken into account even if no rating is made at that time. The changes may affect the classification of debt, especially for entities that previously assessed the management’s intentions in order to determine the classification, as well as for some debt items that can be converted into equity. The change has to be applied retrospectively in accordance with the main rule in IAS 8 Accounting Principles, and will come into effect on 1 January 2023.

On 7 April 2021, the Financial Supervisory Authority of Norway sent an identical letter to all life insurance companies and pension funds concerning pension providers’ treatment of remuneration paid to asset management companies and other managers of mutual funds. In the letter, the FSA states that the management fee paid by a fund to the management company and other managers must be taken into account when determining the price tariff and included in the pension provider’s expenses (gross accounting). The corresponding amount is added to the return on customer funds.

This is not consistent with the Group’s practice, and a change is expected to have a significant impact on costs in the life insurance business. However, it is unclear which limitations apply to costs to be grossed, so the impact has not been quantified.

Requirements for gross accounting are disputed, and the industry has asked the Ministry of Finance to clarify the matter. KLP has chosen to continue with net accounting pending clarification from the Ministry of Finance.

The areas where the Group has changed accounting principles resulting in changes in reported figures in relation to previous periods are discussed in section 2.1.1 a). The table below summarises the ways in which these changes have affected the accounting figures:

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:

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 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:

1. Group pension
2. Group life
3. Non-life insurance

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 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:

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 2.32 percent at the end of 2021.

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.

2.16 SURPLUS FUNDS ALLOCATED TO CUSTOMERS

Profit to customers are added to premium funds, and are included as part of the insurance obligations as the balance sheet date.

The biggest insurance risk in the Group is the risk of incorrect estimation of life expectancy. In determining the premium tariffs, the Group uses its own analyses of its policy-holders and analyses of the entire Norwegian population. Uncertainty over future life expectancy, which is based on estimates far ahead in time, provides a similar risk of a charge against equity capital because of the need for higher provisions, to cover payment over a longer period of time.

There will also be insurance risk linked to disability, but this risk is considerably lower. Uncertainty in calculating probabilities of disability may, as with increased longevity, result in decreased profit for owners, but here there is more scope for adjusting premiums, given that disability pensions have a shorter time horizon for the payments.

Insurance risks linked to mortality are considerably lower and must be seen in relation to insurance risks related to longevity. Increased mortality will result in a negative risk result for the risk of death, but will be counterbalanced by a positive risk result for longevity. The insurance benefits for spouse and child pensions, which make up the risk result for death, are also considerably lower than the benefits for old-age pensions (longevity risk).

Calculations of insurance provisions in the collective pension insurance sector are based on assumptions of disability risk based on KLP’s experience from its own insured population. For the other risk elements, including longevity risk, the assumptions from the K2013 calculation base are used with the contingency margins set by the Financial Supervisory Authority of Norway (FSA of N).

In calculating technical provisions in the public sector occupational pensions, provisions are made for claims incurred but not finally settled. The provisions are set using statistical models. The models take account of experience based on reported changes in the insurance population.

We are currently in a special situation related to the corona pandemic. Currently there is no excess mortality in the population as a result of the pandemic. If the pandemic leads to a sustained increase in morality, this will result in a higher risk result. At the same time, there are factors surrounding the pandemic situation that could affect the withdraw of disability pension int the next few years, such as:

• Layoffs and downturns
• Home office (physical and mental)
• Extra work in the health trusts
• Lack of capacity for health workers in general
• After-effect illness

There hast not been made any extra ordinary provisions in connections with the pandemic, but the development, especially related to disability, is been closely monitored.

In calculating technical provisions in the non-life insurance industry individual claim provisions are made for all reported but not settled claims (RBNS). The provisions are continuously adjusted as claims are processed. All open claims should have a special assessment at least once a year. Provision for claims incurred but not yet reported to the Company (IBNR) is made using statistical models. The models take account of the historic reporting pattern in the different risk groups.

In non-life insurance, measurements and adjustments are also made of the total claim provisions (RBNS+IBNR) so the total level of provision is measured against changes in risk elements such as claim frequency, major claim occurrence, population mix and population size. The claims provisions are assessed at the expectation level, i.e. they contain no contingency margins. Claim provision is not discounted.

The claims reserve includes a provision for future indirect claims-handling expenses (also referred to as unallocated loss adjustment expenses - ULAE). This is estimated based on the magnitude of RBNS and IBNR.

In addition, no extraordinary provisions have been made relating to the pandemic. There is increased uncertainty associated with the pandemic, especially in the occupational injury sector. Going forward, the situation will be closely monitored, and the level of premiums and provisions will be assessed on an ongoing basis.

The sensitivity overview is specified in detail in Note 9.

• 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).

After a long period of Covid19 pandemic where the uncertainty for tenants, banks, investors and others has become known, accepted and handled, various concerns have diminished significantly. A significant number of transactions have been carried out at sharp prices, and the risk premium has also fallen significantly in smaller cities and for somewhat more secondary locations. This has led to a strong pricing of objects that have been traded. At the same time, it is experienced that tenants write contracts on a large scale, and the length of the contracts is as it was before. To the extent that the tenants will need a different space requirement in the future, there are no signs so far that it has had a negative effect on the interest in writing contracts that are both long and for large areas - at strong prices.

After a long time in the home office, it can also look like there is a pent-up "need for travel" where interest and desire to travel appear strong. This was seen in periods of the year that were more like "normal", before the Omikron variant again entailed travel restrictions. This is perceived in the affirmative for the belief that large parts of the hotel market will return to more normal conditions again, although it is still somewhat uncertain how quickly this will happen.

In trade, the picture is still demanding, but very varied. Many of the support measures have now been phased out, at the same time as one experiences that the situation for part of the industry is demanding.

• Investments held to maturity
• Bonds classified as loans and receivables
• Other loans and receivables
• Liabilites to and deposits from customers
• Subordinated loan capital (liabilities)
• Other debt issued (liabilities)

Financial instruments not measured at fair value are measured at amortised cost by using the effective interest rate method. The internal rate of exchange is determined by discounting contractual cash flows over their expected term. The cash flows include arrangement/up-front fees and direct transaction costs as well as any residual value on the expiry of the expected term. Amortised cost is the present value of these cash flows discounted by the internal rate of interest. This note contains information about the fair value of the financial instruments that are measured at amortised cost.

• Equity instruments
• Debt instruments at fair value
• Derivatives (assets and liabilites)
• Debt to credit institutions (liabilites)

Below is a list of which types of financial instrument come under the various accounts categories, and how fair value is calculated.

Foreign fixed-income securities are generally priced based on prices obtained from an index provider. At the same time, prices are compared between several different sources to spot any errors.

The following sources are used:

• Barclays Capital Indices
• Bloomberg

Barclays Capital Indices have first priority (they cover foreign government and foreign credit respecitvely). Then comes Bloomberg based on Bloomberg’s pricing service Business Valuator Accredited in Litigation (BVAL). BVAL has verified prices from Bloomberg.

Nordic Bond Pricing is used as the primary source for pricing Norwegian Government Bonds. Prices are compared with prices from Bloomberg in order to uncover any errors.

Norwegian fixed-income securities except government are mainly priced directly on prices from Nordic Bond Pricing. Securities that are not covered by Nordic Bond Pricing are priced theoretically. The theoretical price is based on the assumed present value on the sale of the position. A zero-coupon curve is used for discounting. The zero-coupon curve is adjusted upwards by means of a credit spread, which is to take account of the risk the bond entails. The credit spread is calculated on the basis of a spread curve taking account of the duration of the bond. Nordic Bond Pricing is the main source of spread curves. They provide company-specific curves and curves for Norwegian savings banks, municipalities and energy. Savings banks have various spread curves based on total assets. For companies where Nordic Bond Pricing do not deliver spread curves, the Group use spread curves from three Norwegian banks. When spread curves are available from more than one of these banks, an equal-weighted average is used. If a bond lacks an appropriate spread curve, spread from a comparable bond from the same issuer is used.

Fair value is calculated on the same general principles as those applying for Norwegian fixed-income securities described above.

The fair value of these is considered as being approximately the same as the book value since the terms and conditions of the contract are continually revised in accordance with changes in the market rates. 

Receivables are valued by means of a valuation model using relevant credit premium adjustments obtained in the market. For guaranteed loans fair value is calculated as discounted cash flow based on the same interest-rate curves as direct loans, but the credit margin is adjusted to market values for the appropriate combination of guarantee category and type of guarantee. The guarantor is either a state, municipality or a bank.

The principles for calculating fair value are subject to the loans having fixed-interest rates or not. Fair value of fixed-rate loans is calculated by discounting contractual cash flows by the market rate including a relevant risk margin on the reporting date. The fair value of loans with no fixed rate is approximately equal to book value since the terms and conditions of the contract are continually revised in accordance with changes in the market rates

Liquid shares are generally valued on the basis of prices from an index provider. At the same time, prices are compared between different sources in order to spot any errors.

As far as possible, The Group uses the Norwegian Mutual Funds Association’s industry recommendations. This basically means the following:

The last price traded has key priority. If the last price traded is outside of the bid/offer price in the market, the price is adjusted accordingly. This means that if the last price traded is below the offer price, the price is adjusted upward to the offer price. If it is above the bid price, it is adjusted downward to the bid price.

In cases where there is very little information about the shares, a discretionary assessment is carried out, such as a fundamental analysis of the company, or a broker assessment.

Most of the investment in Private Equity goes through funds. The funds’ fair value is to be based on reported market values that follow from the International Private Equity and Venture Capital Valuation Guidelines (’IPEV Guidelines). These guidelines are established by the European Venture Capital Association (EVCA) and are based on the principle of approximate market assessment of the companies. Fair value is calculated on the basis of the funds’ reported market value adjusted for payments in and out during the period between the fund’s last reported market value and the period being reported on for the Group. Direct investments in Private Equity are treated in the same way as with current stocks, but valuation can be daily, quarterly or yearly. In cases where it's possible to obtain information on what co-investments are priced within the funds, it will be considered in the valuation process. Other direct investments are valued based on either cost prices, reported market values from companies or available trading prices.

All futures contracts for KLP are traded on the stock exchange. Bloomberg is used as a prices source. Prices are also obtained from another source in order to check that Bloombergs’ prices are correct. Reuters acts as a secondary source.  

Bloomberg is used as a source for pricing options traded on the stockmarket. Reuters is a secondary source.

Interest-rate swaps are valued in a model that takes observable market data such as interest-rate curves and relevant credit premiums into account .

FX-swaps with a one-year maturity or less are priced on curves that are built up from FX swap-points obtained from Reuters. The market is not considered particularly liquid for FX-swaps with a maturity of more than one year and basis-adjusted swap curves are used for pricing purposes.

Placements with credit institutions are made as short-term deposits. Fair value is calculated by discounting contractual cash flows by market rate including a relevant risk margin on the reporting date. Deposits are prices on swap curves.

The observable price is used as the fair value of loans listed on an active stock exchange. In the case of other loans that are not part of an active market the fair value is based on an internal valuation model based on observable data.

Fair value in this category is determined on the basis of internal valuation models based on external observable data.

Fair value in this category is determined on the basis of internal valuation models based on observable data.

All deposits are without fixed-rate interest. The fair value of these is considered as approximately equal to book value since the contractual terms are continually revised in accordance with the market rate.

The tables below give a more detailed specification of the content of the different classes of assets and financial liabilities.

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 have over time been 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.

In the non-life insurance business, the pandemic has led to increased uncertainty, especially within occupational injuries. In the time ahead, the situation will be closely monitored, and the level of premiums and provisions will be assessed on an ongoing basis.

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 28,754 million comprises mainly committed, not paid in sums against private equity,real estate funds and approved loans that have not been paid out. The total is specified in detail in Note 34 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.