Annual Report 2022KLP Group, Sustainability, 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.

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. The KLP Group has insurance- dominated activities and has deferred the implementation. The Group will adopt the standard for financial statements beginning after 01.01.2023. In the Groups’ note 37 the most important accounting principles according to the new standard are stated, and also include the transition effect for the Group as of 01.01.2023.

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.

Following amendments to the Annual Accounts Regulations for non-life insurance companies in August 2022, the Group’s non-life business was required to comply with IFRS 17 in its company accounts. Amendments were also made to the Annual Accounts Regulations for life insurance companies, where implementation of IFRS 17 was not permitted in the company accounts for the Group’s life business. This means that the principles applied in the company accounts for life insurance activities for consolidation purposes have changed to match the principles used in the consolidated financial statements.

Note 37 for the Group describes the key accounting principles under IFRS 17, along with the transitional effects the standard will have on the Group’s financial statements as of 1 January 2023.

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

In the insurance business, rules on a merged buffer fund covering all customers were introduced for municipal pension schemes from 01.01.2022 together with some other changes for guaranteed pension products. The new buffer fund replaces the earlier supplementary reserves and securities adjustment fund and amounts to 126 NOK million as at 01.01.2022. The buffer fund is included in the accounting line “Technical provisions – life insurance” in the balance sheet. In addition, 554 NOK million was transferred from the security adjustment fund to the risk adjustment fund. The latter is included in retained earnings in the balance sheet.

In 2021 and at the beginning of 2022, KLP was in discussions with the Financial Supervisory Authority of Norway on certain allocations that were made in the annual accounts for 2020. The annual accounts for 2021 showed these changes, and the effects were incorporated into the figures. In February 2022, KLP again received a letter from the FSA stating that its equity must contribute 20 per cent of the amount from the risk result from 2020 used to boost the reserves for increased longevity. This amounted to NOK 229 million, and is recognised directly in the balance sheet, split between equity and premium funds.

If the tax effect of the items posted directly to the Group’s equity for buffer funds and reserves is taken into account, postings directly to equity amounted to NOK 243 million as of 01.01.2022.

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 stated 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 had to be added to the return on customer funds. This did not accord with the Group’s practice, which is net accounting.

The requirement for gross recognition has been disputed, and the industry therefore asked the Ministry of Finance to clarify the issue. On 9 January 2023, the Ministry of Finance explained that there is insufficient legal basis for requiring pension schemes to include such management remuneration in their price tariffs.

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:

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 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 to 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

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 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.

The buffer fund is recognised under “To(-)/from supplementary reserves and buffer allocation - life insurance” in the income statement, and as technical provisions in the balance sheet. The buffer fund is a customer-allocated fund. In the event of excess returns, provisions can be made to the Fund, which can then be used to cover any shortfall in periods with poor returns.

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.

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 2.28 percent at the end of 2022.

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' buffer fund and/or from owners' equity. The Group 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 is 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.

The trend in insurance risk has been relatively stable over the last decade. Although there is some unpredictability associated with annual fluctuations and long-term developments, we generally use the insights gained from analyses in the future pricing of risk. Since the start of the coronavirus pandemic, it has been less clear that insights from recent history can tell us anything about the normal state of affairs. In the early phase of the pandemic, there was lower mortality in the population, but this increased towards the end of 2021 and into 2022.

For disability, there are a number of pandemic factors that could come into play. Some people are touched directly by the long-term effects of Covid-19, while others have suffered extra stress through two years of pandemic, such as workers in the health and care sectors, schools and kindergartens.

There has not been made any extra ordinary provisions in connections with the pandemic, but the development, especially related to disability, is being 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 Group (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.

The provision for unearned premiums constitutes the pro rata part of overdue premiums that is earned after closing the accounts.

The sensitivity overview is specified in detail in Note 8.

• 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).

When the Covid19 pandemic came, it brought great un uncertainty for commercial property market. However, the market quickly got used to the “new normal” and where the uncertainty for tenants, banks, investors and others has become known, accepted and handled such that various concerns have diminished significantly. The last couple of years 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 few 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.

Experience from earlier periods of financial turbulence and rapid changes in interest rates shows that the property market tended to “dry up” with few, if any, reference properties relevant to the Group’s portfolio being sold. It appears that parts of this history are repeating themselves, and there are far fewer reference transactions in the market that point with a reasonable degree of certainty to new and observable price levels for investment property of a type matching the Group’s portfolio. The external valuations in the marketplace also differ in their assumptions about the current prime yield, although most seem to congregate around roughly the same guesses as to the market picture. It is hard to believe that companies involved with offices, hotels and shopping centres will remain untouched by the economic situation. The immediate effect for landlords is a big upward movement in inflation-adjusted rents. The longer-term effect is uncertain.

• 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.

- INVESTMENTS HELD TO MATURITY

- BONDS CLASSIFIED AS LOANS AND RECEIVABLES

- DEBT INSTRUMENTS MEASURED AT FAIR VALUE

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:

• Bloomberg Barclays Indicies
• Bloomberg

Bloomberg Barclays Indicies 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 based 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 into account 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.

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

The fair value of these are 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. In addition prices are compared between different sources in order to spot any errors.

The following sources are used for Norwegian shares:

• Oslo Børs/Oslo Stock Exchange (primary source)
• Morgan Stanley Capital International (MSCI)
• Bloomberg

The following sources are used for foreign shares:

• Morgan Stanley Capital International (MSCI) (primary source)
• Bloomberg

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 price 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 based 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 priced based 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.

The trend in insurance risk has been relatively stable over the last decade. Although there is some unpredictability associated with annual fluctuations and long-term developments, we generally use the insights gained from analyses in the future pricing of risk. Since the start of the coronavirus pandemic, it has been less clear that insights from recent history can tell us anything about the normal state of affairs. In the early phase of the pandemic, there was lower mortality in the population, but this increased towards the end of 2021 and into 2022.

For disability, there are a number of pandemic factors that could come into play. Some people are touched directly by the long-term effects of Covid-19, while others have suffered extra stress through two years of pandemic, such as workers in the health and care sectors, schools and kindergartens.

In the non-life insurance business, claims provisions have expected future inflation for the next few years baked in. If inflation deviates from expectations, it will result in a settlement difference for previous years’ provisions and a profit difference on future years’ insurance results.
The premium level for the Company’s insurance contracts will be adjusted upwards at the next renewal, to take account actual inflation and any new estimates of future inflation. As non-life insurance has a relatively short settlement period and the contracts are of no more than one year’s duration, inflation risk is limited.

If actual inflation differs one year by +/- 100 bp from expectations,

• the settlement difference for previous claims years will be around +/- NOK 11 million.
• the profit difference for the coming claims year will be around +/- NOK 13 million.

A total of +/- NOK 24 million.

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 Group accepts in its portfolio. Risks are generally accepted from customers from within the Group’s primary target groups, provided that the scope of the cover falls within the standard products the Group 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.

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 31.083 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 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 2022, 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 have a satisfactory solvency margin 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.

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 main purpose of the European prudential framework for insurance companies, Solvency II, is to protect and safeguard the interests of insurance customers. The Group carries out quarterly calculations of financial strength in accordance with the provisions in the solvency regulations.

Details of Group’s solvency capital requirement, regulatory capital and solvency capital coverage are provided in Note 26. The solvency capital coverage ratio is well above the Company’s target of at least 150 per cent.

Several sensitivity analyses relating to solvency capital coverage have been carried out. It is estimated that the solvency capital coverage will increase by 6 percentage points if interest rates rise by 50 basis points, and fall by 10 percentage points if the rates fall by 50 basis points. A 25 per cent fall in the equity market reduces solvency capital coverage by slightly less than 4 percentage points. Here, the effect on solvency capital coverage is limited by the size of the buffer fund.

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. 38 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 26.1 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.