Q1 2022 Interim Report KLP Group, Sustainability and KLP

Premium income excluding premium reserves received on transfers in amounts to NOK 7.1 (7.0) billion at the end of the first quarter.

Pensions paid and other claims, excluding ceded premium reserves, amounted to NOK 5.8 (5.3) billion for the first quarter.

The assets in the common portfolio totalled NOK 662.5 (603.1) billion and were invested as shown below:

Total exposure in shares and alternative investments, including equity derivatives, was 30.1 per cent at the end of the first quarter. The total return on shares and alternative investments was minus 3.2 per cent in the quarter. The return on KLP’s global equities was minus 4.9 per cent, while KLP’s Norwegian equity portfolio returned plus 4.7 per cent in the first quarter.

Short-term bonds accounted for 13.1 per cent and money-market instruments 2.3 per cent of the assets in the common portfolio as at 31 March. Norwegian, European and US government interest rates all rose during the first quarter. KLP’s global government bond index achieved a currency-hedged return of minus 4.6 per cent in the quarter, while the return on the Norwegian government bond index was minus 3.3 per cent. Increased global credit margins through the quarter brought a return of minus 6.7 per cent on KLP’s global credit bond index. Short-term bonds produced a total return of minus 4.6 per cent in the first quarter. The money market return was 0.1 per cent for the quarter.

Investment in long-term bonds and bonds held to maturity made up 28.4 per cent of the common portfolio at 31 March. Unrecognised decreases in value in the portfolio rose in the first quarter and amounted to NOK 4.2 billion at the end of the first quarter. The portfolio is well diversified and consists of securities issued by creditworthy borrowers. The return measured at amortised cost in the first quarter was 0.8 per cent.

Property investments, including Norwegian and international property funds, made up 14.0 per cent of the common portfolio. Property values in the common portfolio were adjusted upwards by NOK 486.9 million in the quarter. Property investments in the common portfolio achieved a return of 1.4 per cent in the first quarter.

Lending in the common portfolio totals NOK 77.9 billion. This is split between NOK 65.8 billion in loans to the public sector, NOK 2.1 billion in loans with government guarantees and NOK 3.1 billion in secured mortgage loans, with the remaining NOK 6.9 billion made up of other secured loans. The lending portfolio is of high quality, with no losses on municipal loans and very modest provisions for losses on mortgage loans. Unrecognised decreases in value in the lending portfolio (fixed-interest loans) totalled NOK 615 million at 31 March. The return for the first quarter was 0.5 percent.

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

The corporate portfolio is managed with a moderate-risk long-term investment horizon, with the object of stable returns. Investments in the corporate portfolio achieved a return of 0.6 per cent in the first quarter.

The first quarter produced a pre-tax operating profit of NOK -24.3 (71.6) million. The weak result is mainly due to a negative trend in the financial markets in the quarter. The insurance result is better than expected so far this year, largely due to the small number of large claims and continued reversal of previous years’ reserves.

As a result of tendering procedures in the fourth quarter of 2021, the Company saw weaker growth going into this year than in previous years. Volume growth so far this year is NOK 85 million, and premium volume was NOK 2,105 (1,887) million at the end of the first quarter. Premiums due increased by 9.1 per cent, or NOK 96 million, compared with the same time in 2021. For the public-sector and corporate markets, premiums increased by 8.9 per cent, while the corresponding increase for the retail market was 10.2 per cent.

One claim in excess of NOK 10 million was reported in the first quarter. A further six claims were reported in the range between NOK 3 and 10 million. These claims total NOK 29 million.

Reversal of previous years’ claims is still positive, and this year NOK 33 million has so far been taken to income, equivalent to 1.7 per cent of the reserves at the beginning of the year.

Net financial income in the first quarter was NOK -49.3 (29.5) million, equivalent to minus 0.9 (0.6) per cent. Overall, the equity portfolio had a negative quarterly return of minus 4.1 per cent. The quarter has been marked by turbulence in the international equity market, while the Norwegian equity portfolio returned 1.5 per cent. The Company’s investments in interest-bearing funds also had a negative return of minus 2.8 per cent, largely as a result of higher interest rates and increased credit premiums. The Company’s long-term bonds had a yield of 0.8 per cent. The return on property investments was 3.6 per cent, after a write-up of NOK 18.4 million on real estate assets.

The solvency margin (SCR) saw a marginal change from 224 per cent at year-end to 222 per cent at the end of the first quarter.

KLP Kapitalforvaltning provides securities management in the KLP Group. It had a total of NOK 646 billion under management at the end of the first quarter, of which NOK 135 billion was for external customers. The majority of the assets are managed on behalf of KLP and its subsidiaries.

There were zero net new subscriptions to the KLP funds in the first quarter. External customers had positive net new subscriptions of NOK 4.5 billion in the quarter.

The Company achieved a result before tax of NOK -17.5 million in the first quarter.

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

As of 31 March, the KLP Banken Group had loans to customers totalling NOK 40.6 (37.6) billion. Mortgage loans in the retail market and public-sector loans totalled NOK 22.6 (20.9) billion and 18.0 (16.7) billion respectively.

KLP Banken manages NOK 3.0 (3.2) billion in mortgage loans and NOK 72.6 (72.6) billion in loans to public-sector borrowers and other businesses on behalf of KLP.

The Bank’s mortgage products are aimed at the target group of members of the KLP pension schemes. So far this year, the retail market in KLP Banken has seen stronger growth in mortgages, which increased by NOK 0.5 billion compared to NOK 0.3 billion last year. New loans paid out also increased compared to last year.  

Lending volume to the public-sector market on KLP Banken’s balance sheet increased by NOK 0.2 (0.9) billion through the quarter. Loans to public-sector borrowers managed on behalf of KLP increased by NOK 0.1 (1.1) billion in the same period. Managed loans to other businesses, mainly in other currencies, decreased by NOK 0.1 billion in the first quarter, to NOK 6.3 billion.

The Bank’s lending margins are heavily affected by market turbulence and rising interest rates. This hits both lending areas. KLP Banken has chosen to keep lending rates on mortgages unchanged for a time. This has helped to drive growth, but also contributed to lower margins in the first quarter compared to last year. In the public-sector market, margins have remained at an almost normal level. The Bank’s operating income, in the form of net interest income, was NOK 72.1 (75.7) million at the end of the first quarter.

KLP Banken’s liquidity is invested in other banks and in interest-bearing securities. The portfolio of interest-bearing securities and bank deposits amounts to NOK 8.3 (5.5) billion.

The Bank’s net gain/loss on financial instruments mainly comprises accounting effects of loan buybacks and changes in the value of its securities holdings. In all, financial instruments produced total expenses of NOK -10.1 (14.5) million to the end of the quarter. The recognised expense in the quarter is mainly due to increased credit risk premiums in the market reducing the market value of the Bank’s securities holdings. Realised costs make up a negligible proportion of this.

The KLP Banken Group’s external financing consists mainly of deposits and bonds. Deposit growth so far this year is NOK 0.5 (0.3) billion. On the reporting date, deposits from individuals and companies amounted to NOK 13.4 (12.1) billion and debt from securities issues came to NOK 31.9 (27.1) billion. The securities debt is mainly covered bonds issued by KLP Kommunekreditt AS and KLP Boligkreditt AS.

Operating expenses and depreciation amounted to NOK 64.0 (60.6) million in the first quarter.

In the year to date, losses and loss provisions in the retail market amounted to NOK 0.1 (-0.5) million. Positive figures here mean that the reversal of previous loss provisions on credit cards and mortgages is higher than new losses and loss provisions. Nor have we experienced any losses related to public-sector lending in the year to date.

The KLP Banken Group had a pre-tax operating profit of NOK 18.3 million (48.6) in the first quarter. Broken down by area, the pre-tax profit was NOK 8.3 (41.8) million from the retail market and NOK 10.0 (6.8) million from the public-sector market. Most changes in the value of liquidity investments are recorded in the retail market. The Group’s total comprehensive income for the first quarter was NOK 56.2 (69.8) million.

At the end of February, Russia invaded Ukraine and so started a war that concerns the whole world. When Russia annexed the Crimea back in 2014, KLP and the KLP funds introduced a precautionary approach to investments in Russia. KLP froze four companies at that time, and has been underinvested in Russia since then. At the end of February, KLP decided to apply its exclusion policy and withdraw all investments in Russian companies. This involves 22 different companies in all, and about a third of the shares in these – those listed in London – have already been sold. Divestment from the Moscow Stock Exchange will be completed when the exchange opens and in line with what the sanction rules allow.

For KLP as a responsible investor, voting at general meetings is an important way of influencing companies in which we are invested. In the first quarter, KLP updated the voting guidelines for KLP and the KLP funds to reflect changes made by NUES (the Norwegian Corporate Governance Committee) in 2021. Recommendations on ownership, corporate governance and control from the local government organisation KS have also been incorporated.

The expansion of renewable energy and sustainable infrastructure is crucial to achieving the goals set out in the Paris Agreement. In the first quarter, KLP invested in a new Nordic renewables company, where the principal shareholders are HitecVision and TrønderEnergi. The company will have operations throughout the Nordic region related to energy production, electrification and energy efficiency.

KLP Banken issued three new green loans in the first quarter, totalling NOK 8.1 million. These went to two projects within waste management and improved recycling rates, and one to install solar panels in commercial premises.

If the world is to attain the 1.5 degree target laid down in the Paris Agreement, change is needed in a number of sectors. Through the ‘Green Shipping Programme’, KLP helped develop common guidelines for standardising criteria for green loans in shipping. Financial institutions should only provide green loans to projects directly linked to emission targets in line with the Paris Agreement, and the companies must make contractual commitments to meet the emission targets specified in the loan agreement.

Before Christmas, KLP Eiendom obtained BREEAM In-Use certification for one of its buildings at Tjuvholmen in Oslo. The certification process has produced good results, including a reduction in energy consumption (a big financial saving at today’s electricity prices), and reduced emissions from the property.

In the first quarter, KLP Skadeforsikring launched two fire prevention projects which will both help to increase the life of the buildings. One is in cooperation with the fire service in Gudbrandsdalen and Innlandet, and the other is being run in partnership with NTNU, the Norwegian Institute for Air Research, the Norwegian Asthma and Allergy Association, and several municipalities.

One of KLP’s working environment networks that has made great improvements is the merged SOP (Central Operations) department at Akershus University Hospital. The project focuses on measures to prevent sickness absence, and to create a shared culture and an inclusive workplace environment. By strengthening the leadership role in the management team, the project has helped to increase employee involvement and improve the training of new hires. The project has raised people’s awareness of their own working environment and how they can help to improve it, and contributed to greater safety and transparency in the workplace.

The global economy has been heavily affected by the war in Ukraine and rising commodity prices. This has resulted in some big falls in the equity market and higher interest rates. KLP has solid financial buffers which safeguard customers’ savings in periods of negative market movements.