Q1 2024 Interim report KLP Group and KLP

• Return of 3.0 per cent on the pension assets in the common portfolio in the first quarter.
• Total profit on the customer portfolio amounts to NOK 18.7 billion after the first quarter.
• Satisfactory volume growth in banking and asset management
• Increased claims payments in non-life insurance

15 February this year marks 75 years since the directors of the Union of Norwegian Cities (Norges Byforbund) and the Norwegian Association of Rural Municipalities (Norges Herredsforbund) decided to establish a joint local government pension fund, KLP. The aim was to establish a pension scheme for small municipalities with few employees. KLP has gradually expanded its offering in response to its owners’ wishes, and now provides services in the areas of non-life insurance, banking and asset management in addition to public-sector occupational pensions. We are now Norway’s largest pension company.

At the end of the first quarter of 2024, the Group had total assets of NOK 1,066 billion.

The market situation for public-sector occupational pensions is stable, and customers with premium reserves totaling around NOK 2.1 billion decided to move their schemes out of KLP with effect from 1 January 2024. KLP places great emphasis on close consultation with its customers to further develop service concepts and online solutions with good pension guidance. Efforts have been made in recent years to renew and further develop our pension systems. All benefits now fall within the new system, which enhances the customer experience and provides valuable guidance to the individual employee, as well as immediate responses to most pension applications.

Storebrand has filed a complaint against Norway with the ESA, alleging that KLP is receiving unlawful state aid, and that Norwegian municipalities and health trusts have breached the rules on public procurement. The government has rejected both complaints. KLP has provided relevant information to shed light on the complaint cases when this has been requested. The complaints are still being processed by the ESA, and no formal action has been initiated on either of them. In both cases, as part of its information gathering, the ESA has made its preliminary assessments and asked for the government’s comments on these.

The first quarter of 2024 shows a profit/loss before tax and other provisions of NOK -117.7 (+99.3) million. The insurance result is weaker than expected, which is largely down to an increase in property claims within all segments. A rise in natural perils claims also affects the accounts. On the other hand, financial income is higher than expected.

Volume growth so far this year is NOK 146 million, and premium volume was NOK 2,731 (2,456) million at the end of the first quarter of 2024. The increase is primarily due to increased premiums, both generally and in particular segments. Premium income increased by 12.2 per cent, or NOK 77 million, compared with the same time in 2023. For the public-sector and corporate markets, premiums increased by 11.1 per cent, while the corresponding increase for the retail market was 14.1 per cent.

In the first quarter, three claims over NOK 20 million were reported, all within the company's retention amount. Together, these claims reduce net profits by NOK 132 million. There were also 16 claims in the NOK 2-20 million range, with total payments of NOK 96 million. The results are also affected by a major weather event, storm Ingunn, where the costs to the company run to NOK 25 million.

Reversals of previous years’ claims are still slightly negative, and NOK 4.4 million have been recognised so far this year, equivalent to 0.2 per cent of the reserves at the beginning of the year.

KLP Kapitalforvaltning AS provides securities management in the KLP Group. It had a total of NOK 799 billion under management at the end of the first quarter, of which NOK 203 billion was for external customers.

Net new subscriptions to the KLP funds were NOK 4.7 billion in the first quarter. External customers had positive net new subscriptions of NOK 5.7 billion in the quarter.

The company achieved a result before tax of NOK 11.9 million in the first quarter.

KLP Banken finances mortgages and other credit to private customers (retail market) as well as loans to municipalities, county authorities 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.

The company achieved a pre-tax operating profit of NOK 75.1 (53.1) million in the first quarter. The change is mainly related to increased net interest income and gains on financial instruments.

Broken down by area, profits were NOK 51.1 (35.4) million in the retail market and NOK 24.0 (17.7) million in the public-sector market.

Persistent high interest rates contributed to increased earnings on the Bank’s lending, which is financed with equity. The Bank’s operating income, in the form of net interest income, was NOK 126.6 (110.2) million in the first quarter.

Losses and loss provisions taken to profit/loss total NOK -1.1 (0.3) million so far in 2024. . The rise in interest rates has so far not resulted in a significant increase in mortgage losses. Nor have we experienced any losses related to public-sector lending in 2024.

KLP Banken had loans to customers of NOK 42.8 (42.7) billion at 31 March 2024. The split between the retail and public-sector markets was NOK 24.1 (23.3) billion and 18.7 (19.4) billion respectively.

KLP Banken manages a mortgage portfolio worth NOK 2.7 (2.9) billion and NOK 78.6 (74.1) billion in loans to public-sector borrowers and other businesses financed with pension assets placed in public-sector occupational pension funds.

The Bank’s mortgage products are aimed at members of the KLP pension schemes. Net mortgage growth in the first quarter was NOK 209 (71) million, which is significantly higher than at the same time last year.

Lending volume to the public-sector market on KLP Banken’s balance sheet has decreased in 2024 by NOK 0.3 (increase of 0.2) billion. Loans to public-sector borrowers financed with pension assets placed in public-sector occupational pension funds increased by NOK 1.5 (0.5) billion in the same period.

KLP is a mutual insurance company which produces consolidated financial statements in accordance with IFRS Accounting Standards®. These accounting rules reflect the fact that KLP is a mutual insurance company where all value creation accrues to policyholders. This means that the Group generally sets aside all of the profit as a liability to policyholders, and its equity is normally zero. However, some technical equity may still arise if assets or liabilities have been measured at anything other than fair value in the balance sheet, as the liability to policyholders is based on the fair value of net assets. The equity will then represent the difference between book value and fair value, and the change in the measurement difference will be posted as a net gain/loss.

In the first quarter, the Group generated a net profit to policyholders of NOK 19.8 billion. This is mainly due to a significant appreciation of the assets.

The best estimate of the insurance liability associated with public-sector occupational pensions was reduced from NOK 377.7 to 366.0 billion in the quarter. This is mainly due to increased interest rates, as well as a change in estimates of future cash flows.

Liabilities to policyholders in public-sector occupational pension schemes, by virtue of their ownership role (residual value), grew from NOK 355.9 to 387.5 billion. The main reason for the increase is good returns and a change in the best estimate as described above.

KLP sent out consultation notes on the proposal for a new Public Procurement Act concerning our roles as a provider of public-sector occupational pensions and non-life insurance to the public sector. Our response to consultation dealt with the rules for weighting climate and environment in public procurement procedures. For public-sector occupational pensions, we commented on the committee’s proposal to withdraw the requirement for a 30 per cent weighting of climate and environment as an award criterion. We believe that for public-sector occupational pensions, it will be complicated for individual purchasers to set appropriate requirements in the award criteria, and we are therefore pleased to find that climate and the environment can be addressed by way of guiding criteria drawn up by the Norwegian Agency for Public and Financial Management (DFØ). KLP commented that the purchasing rules relating to climate and the environment should have a wider focus than simply cutting emissions, such as measures to adapt to climate change.

KLP has responded to the consultation from the Pension Office on how the new rules relating to climate and the environment should be applied in practice in tendering procedures for public-sector occupational pensions. KLP believes there will be a greater impact if measures addressing climate and the environment are included as minimum requirements in the tender specifications for bidders in the competitive procedure, rather than the general rule of at least a 30 per cent weighting in the award criteria. We are concerned at the lack of standardisation which would allow providers to be compared in a uniform way, and a lack of individual indicators to capture the need for change that the pension capital can help to address, and feel that qualification requirements for a transition strategy and measures will produce a greater climate and environmental impact.

Under the auspices of UN Global Compact Network Norway, KLP has contributed to an expert group which has produced a guide to a sustainable transition for Norwegian businesses. The aim of the guide is to help Norwegian companies to make a start on the transition work to achieve their sustainability goals and maintain a competitive and profitable business. The guide was launched in March 2024 and can be accessed here (in Norwegian).

KLP has started to explore the role the company can play in promoting sustainable working conditions. In the first quarter, we partnered with “Fremtidens helsetjenester” (Health services of the future), which is a collaborative project involving several municipalities. KLP hosted the Public Health Forum in February, and has run workshops on working conditions in various counties, as well as two webinars with over 1,000 participants from municipalities across Norway.

Ahead of the general meeting season, KLP has updated the list of companies where it intends to vote against resolutions from the board of directors. This includes the companies in the portfolios that produce the biggest emissions without having a credible transition plan, and companies that pose a high risk of contributing to tropical deforestation, but lack basic risk management procedures.

During the year, KLP has followed up on all the companies where it voted against the board of directors in 2023. Out of 46 companies where we voted against the board because of inadequate transition plans, 15 have improved these plans and their boards will have the support of KLP going forward. The corresponding figures for improvements in the management of deforestation risk are four out of 22.

By the end of the first quarter, KLP had initiated 74 company dialogues and voted at almost 1,200 general meetings both in Norway and abroad. The substance of the company dialogues in the first quarter included the management and reporting of deforestation risk, follow-up of companies with high emissions that lack climate transition plans, and responsible tax practice. During the first quarter, KLP excluded two companies for breaches of its exclusion criteria related to coal. One company was reinstated as it no longer breaches our criteria for coal. At the end of the quarter, a total of 796 companies were excluded.

KLP wants to ensure that good ideas can be pursued locally and to create jobs in Norway. By investing in innovation liked to Norwegian research institutions, we aim to contribute to local value creation and the green transition in Norway. In the first quarter, KLP increased its investments in an early-stage growth fund which focuses on companies that make a positive contribution to sustainable development.

An important part of KLP’s climate goal of net zero emissions is to increase our climate-friendly investments. Climate-friendly investments are investments that contribute directly to emission reductions or otherwise contribute to the green transition in Norway and around the world. KLP aims to increase its climate-friendly investments by a further NOK 6 billion each year

KLP’s climate-friendly investments have accumulated over time, and accounted for 11.4 per cent of its financial assets at the end of the first quarter of 2024. This includes investments in renewable energy and infrastructure investments needed for the green transition. We also invest in technological solutions such as zero-emission ferries, and particularly in energy-efficient green buildings in KLP’s large portfolio of commercial buildings in Norway, Sweden and Denmark.

In the first quarter, these investments increased by around NOK 2.4 billion. The increase comes mainly from KLP’s investment in the green transition within express boats and ferries, which make a significant contribution to reducing greenhouse gas emissions from the transport sector. We have also increased our investments in several mutual funds that invest in renewable energy around the world. See Appendix A at the back of the quarterly report for a definition of the sustainability indicators.

KLP achieved very good results in 2023 and this is continuing into 2024. These are uncertain times, and KLP’s owners have chosen to build up financial buffers so the pension funds can be managed effectively even through financially troubled times.

The disability figures increased during the pandemic, and it is unclear whether this will persist or fall back to pre-2020 levels. KLP will monitor developments in case there is a need to strengthen the disability tariff.

We may expect an increase in public-sector occupational pensions put out to tender. We will maintain our efforts to be the best provider to the Norwegian local government and healthcare sector. We will continue to focus on delivering great services to our customers and being a responsible and sustainable player in the market.

The financial statements in this interim report show the Kommunal Landspensjonskasse (KLP) group financial statements and parent company financial statements for the period 01.01.2024 – 31.03.2024. The accounts have not been audited.

The consolidated financial statements for KLP have been prepared in accordance with IFRS® accounting standards, as approved by the EU, with additions set out in the Norwegian Regulations on annual accounts for insurance companies. The part of the interim report that relates to the Group financial statements has been prepared in accordance with IAS 34 Interim financial Reporting.

All amounts are presented in NOK millions without decimals unless indicated otherwise.

No other changes have been made to the accounting principles that affect the interim financial statements as of 31.03.2024. Refer to the Group’s annual report for 2023 for a more detailed description of accounting principles.

The interim financial statements do not contain all the information required for complete annual financial statements, and this interim report should be read in conjunction with the annual financial statements for 2023. The annual report can be retrieved from www.klp.no.

In preparing the interim financial statements, we have exercised discretion and used estimates and assumptions that affect the accounting figures. Actual figures may differ from the estimates used.

The measurement of insurance contracts under IFRS 17 uses a number of new parameters that are fraught with considerable uncertainty. The most important for the various business areas are:

• All cash flows arising from the insurance contracts that are within the contract limit are included in the measurement of the insurance contract. Future cash flows are calculated using assumptions of future annual wage growth/adjustment derived from a projection of the NAM (Norwegian Aggregate Model). The model produces a macro projection of key economic variables year by year based on the economic situation at the measurement date.
• The cash flow calculations use best estimates of mortality and disability.
• The cash flows are discounted with an interest rate curve that takes account of the time value of money and any financial risk that is not included in the estimated cash flows. The interest rate curve is based on the EIOPA interest rate curve with an illiquidity mark-up.
• The risk adjustment for non-financial risk is based on the risk appetite in the life insurance business and a 98 % confidence level and amounts to 8.4 % of the insurance liability in 2024.

• The claims provisions are estimated from the company’s historical payment patterns.
• The claims provisions are discounted with an interest rate curve that takes account of the time value of money and any financial risk that is not included in the estimated payments. The interest rate curve is based on the EIOPA interest rate curve with an illiquidity mark-up.

Insurance income under IFRS 17 corresponds to pro-rata premiums earned, adjusted for seasonal variations.

• Seasonal variations are estimated from the historical variation in the company’s history of claims received through the year.

The risk adjustment is derived from the company’s risk appetite. The risk adjustment represents an addition to technical provisions so there is a 75 % probability that they will be sufficient to cover all insurance obligations. The risk adjustment for non-financial risk is based on the risk appetite in the non-life insurance business and a 75 % confidence level and amounts to 4.1 % of the insurance liability in 2024.

Kommunal Landspensjonskasse offers group public sector occupational pensions. This segment is followed up according to NGAAP, which deviates from the IFRS Accounting Standards used in the group. Adjustments have therefore been entered in the elimination column to make the total reconcileable to the consolidated accounts.

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

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

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

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

Expected cash flows from the insurance contracts will mature at various times in the future. The future cash flows are therefore discounted to the value on the balance sheet date with an interest rate curve that is determined on the balance sheet date. The discount curve for IFRS 17 is generally determined according to the same principles as the curve EIOPA calculates for Solvency II purposes. The main difference is that EIOPA's estimate for volatility adjustment is replaced with an estimate for the illiquidity spread in the bond market, and this is calibrated to the illiquidity degree of the KLP's obligation. Selected values of discounting curves for IFRS 17 are listed below:

Future cash flows within the contract boundary are calculated with assumptions about annual future salary growth/regulation as stated in the table below. The salary growth curve is projected by the NAM model (Norwegian aggregate model), which makes a macro projection of key economic figures (salary growth, inflation, etc.) year by year.

For insurance contracts with a right to residual value, interest rate changes will have a major impact on the best estimate of the pension liabilities.