Q2 2023 Interim report KLP Group, sustainabilityand KLP

KLP achieved an investment result (returns in excess of the guaranteed average rate of return) of NOK 21.2 (-20.4) billion in the second quarter. The return on the common portfolio was 4.2 per cent for the year to date.

The risk events in the stock have been within expectations throughout the year and will vary from quarter to quarter. The risk result totalled NOK 199 (445) million in the second quarter, and NOK 270 (550) million so far this year.

The Company’s administration result shows a surplus of NOK 62 (-22) million so far this year, of which NOK 8 million fell in the second quarter. Insurance-related operating costs came to NOK 761 (748) million so far this year.

Total profit/loss to the Company stands at NOK 892 (283) million for the year to date. The customer result is NOK 21.3 (-19.7) billion so far this year.

KLP’s total assets have increased by NOK 78.4 billion in the year to date and amount to NOK 788.7 billion. The premium reserve increased by NOK 41.4 billion to NOK 559.9 billion in the same period.

The buffer fund amounts to NOK 101.9 billion after the second quarter. There is also a positive interim profit of NOK 21.3 billion in the customer result.

Without applying transitional rules, the Company’s solvency capital requirement (SCR) is 330 per cent.

KLP’s target is a capital adequacy of at least 150 per cent. Solvency is well above this target and is an important prerequisite for sound capital management over time.

Premium income excluding premium reserves received on transfers in amounts to NOK 51.0 (32.7) billion at the end of the second quarter.

Pensions paid and other claims, excluding ceded premium reserves, amounted to NOK 12.7 (11.7) billion at the end of the second quarter.

The assets in the common portfolio totalled NOK 701.9 (660.8) billion and were invested as shown below:

Total exposure in shares and alternative investments, including equity derivatives, was 32.4 per cent at the end of the second quarter. The total return on shares and alternative investments was 4.8 per cent in the quarter. The return on KLP’s global equities was 6.3 per cent, while KLP’s Norwegian equity portfolio returned 1.6 per cent in the second quarter.

The currency hedging ratio for equities in developed markets and the most liquid currencies in emerging markets was between 50 and 70 per cent. For the second quarter, the Norwegian krone depreciated against the US dollar and the euro, among other currencies. The depreciation of the krone had a positive impact on the return on shares in the unsecured portfolios.

Short-term bonds accounted for 11.0 per cent and money-market instruments 1.4 per cent of the assets in the common portfolio at the end of the quarter. Norwegian, Eurozone and US government interest rates all rose during the second quarter. KLP’s global government bond index achieved a currency-hedged return of minus 1.5 per cent in the quarter, while the return on the Norwegian government bond index was minus 2.7 per cent. Global credit margins fell slightly through the quarter. The quarterly return on KLP's global credit bond index was minus 0.6 percent, while the return on the Norwegian bond index was minus 2.2 percent. Short-term bonds produced a total return of minus 1.0 per cent in the second quarter. The money market return was 1.0 per cent for the quarter.

Investments in bonds recognised at amortised cost made up around 28.8 per cent of the common portfolio at the end of the quarter. Unrecognised decreases in value in the portfolio amounted to NOK 16.5 billion at the end of the second quarter. The portfolio is well diversified and consists of securities issued by creditworthy borrowers. The return measured at amortised cost in the second quarter was 0.8 per cent.

Property investments, including Norwegian and international property funds, made up 14.6 per cent of the common portfolio. Property values in the common portfolio were adjusted downwards by NOK 2.6 billion in the first half-year. The write-downs are based on higher required rates of return due to higher interest rates. Property investments in the common portfolio achieved a return of minus 0.8 per cent in the first half-year. The returns include currency hedging and property funds. There is still uncertainty associated with the effects of the various factors that influence the property market, including interest rates, required rate of return, inflation and costs.

Lending in the common portfolio totals NOK 79.7 billion. This is split between NOK 68.4 billion in loans to the public sector, NOK 0.8 billion in loans with government guarantees and NOK 2.9 billion in secured mortgage loans, with the remaining NOK 7.7 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 2.0 billion at the end of the quarter. Returns so far this year are 1.7 per cent

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 objective of stable returns. Investments in the corporate portfolio returned 0.6 percent in the second quarter, and 1.5 percent so far this year, pulled down by higher required rates of return due to higher interest rates which resulted in real estate write-downs.

At KLP, one of the industry's most comprehensive technology initiatives is under way, where we are establishing a new digital solution for retirement that provides new and better services to employers and their employees. In order to succeed, significant changes are being made in technology, business processes and organisation. We are establishing new concepts for retirement on a platform with a focus on automation, self-service and efficient case management. KLP is also adopting new cloud-based services, and through a new data platform, we are increasingly utilising our unique insight into public-sector occupational pensions in our corporate governance and service development.

As from the first half of 2023, all old-age pensions in KLP are being handled through the new digital solution. Employees who are to receive an old-age pension now receive an answer in seconds, and more than 70 per cent of all old-age pension applications are processed completely automatically. The vast majority of employees can also simulate their expected retirement pension on KLP's secure web pages. In this way, it will be easy for the employee to see how much more pension they will receive by working a little longer and/or working in a 100 per cent position. Contributing to a better understanding of people's own pension finances and making well-informed choices through guidance is an important contribution to KLP's work on corporate social responsibility. In the second quarter, we introduced the AFP benefit, which is now also handled automatically, and work is ongoing on the latest payments of disability and survivors' pensions, as well as a new old-age pension for those born after 1963.

The need for skilled professionals in the local government and healthcare sector is only expected to increase as the population steadily ages, and it is difficult to recruit and retain staff. So it is more important than ever for employees in the local government and healthcare sector to be enabled to work as much as possible for as many years as possible while they are of working age. KLP shares knowledge and experience of working life in order to contribute to health-promoting workplaces and a positive social development among our owners.

Twelve new projects have been launched in KLP’s working environment network in 2023. The intention is to apply good project processes, share experience within the network, and make gains in the form of reduced sickness absence, stable staffing and better services.

The first half of 2023 produced a pre-tax operating profit of NOK 189.5 (88.2) million. The second quarter also yielded a good result, with a profit of NOK 90.2 (31.3) million . The growth in profits is mainly due to solid financial returns and the reversal of previous years' reserves. Operating costs are also lower than expected.

Premium volume stood at NOK 2,534 million at the end of the second quarter, an increase of NOK 242 million from the position at 31.12.2022. Premium income increased by NOK 159 million, or 14.8 per cent, to reach NOK 1,230 million. The retail market shows growth of NOK 45 million, or 9.7 per cent, while the public-sector and corporate market shows growth of NOK 115 million, or 18.5 per cent. The solid growth in the public-sector and corporate market is due to substantial premium increases in some high-risk segments.

Insurance income less claims expenses was NOK 183 (332) million at 30 June. Both the property and motor insurance sectors produced weak results. Increased material costs resulting from higher inflation are a factor in this trend. Over time, the Company's premiums will be adjusted upwards to reflect the increased costs.

Reversals of previous years’ claims are still positive, and this year NOK 51 million has so far been taken to income, equivalent to 2.4 per cent of the reserves at the beginning of the year.

There was a major natural disaster in the first half-year, with a gross claim against the Natural Perils Pool of NOK 900 million.  The Company's share of this claim is NOK 45 million.

Net financial income in the first half-year was NOK 197.0 (-112.7) million, representing a return of 3.6 (minus 2.1) per cent. Returns for the second quarter in isolation were NOK 47.2 (-63.5) million, or 0.9 (minus 1.1) per cent. So far this year, the equity portfolio has returned 16.5 (minus 14.1) per cent. As of the first half-year, the Company’s investments in interest-bearing funds had a return of minus 1.6 (minus 5.8) per cent, while fixed income bonds returned 1.7 (1.7) per cent in the same period. The return on real estate investments was 3.6 per cent, after a write-down of NOK 22 million in the quarter. The company's real estate investments have nevertheless been written up by NOK 10 million so far this year. The second quarter in isolation saw a return of 6.6 per cent on equities, minus 0.1 per cent on interest-bearing investments, and a 0.9 per cent on long-term bonds.

The Company’s financial position is good, with a solvency capital requirement (SCR) of 222 per cent at the end of the second quarter, compared to 222 per cent at the end of 2022 and 215 per cent after the first quarter of 2023.

KLP Kapitalforvaltning AS provides securities management in the KLP Group. It had a total of NOK 688 billion under management at the end of the first half-year, of which NOK 163 billion came from external customers. The majority of the assets are managed on behalf of KLP and its subsidiaries.

Net new subscriptions to the KLP funds were NOK 6.3 billion in the first half. External customers had positive net new subscriptions of NOK 8.1 billion in the first half.

The Company achieved a result before tax of NOK 3.5 million in the first half-year.

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. 

At the end of the second quarter, the KLP Banken Group achieved an operating profit before tax of NOK 121.5 (42.5) million, of which the second quarter in isolation accounted for NOK 68.3 (24.2) million. The change is mainly related to increased net interest income in both business areas and reduced losses on financial instruments. Broken down by area, profits for the second quarter were NOK 87.5 (21.8) million in the retail market and NOK 34.0 (20.7) million in the public-sector market.

The KLP Banken Group's lending balance as of 30 June 2023 was NOK 42.9 (41.4) billion. The split between the retail and public-sector markets was NOK 23.5 (23.1) billion and 19.4 (18.3) billion respectively.

KLP Banken manages NOK 2.9 (3.1) billion in mortgage loans and NOK 74.7 (73.1) billion in loans to public-sector borrowers and other businesses on behalf of KLP. 

The KLP Group is owned by policy-holders drawing public-sector occupational pensions. All value creation therefore accrues to current or future policy-holders drawing to public-sector occupational pensions. That means that these policy-holders are entitled to the residual interest consisting of the net assets of the business. The residual interest due to policy-holders is shown as a debt to the insured and not as equity. This is as specified in the IFRS 17 accounting standard, which KLP is applying in its consolidated financial statements from 2023 onwards.

Of the Group's insurance liabilities related to public-sector occupational pensions of NOK 707 billion as at 30.06.2023, NOK 343 billion is made up of residual interest belonging to the policy-holders. The remainder of the insurance liability consists of the best estimate of discounted future receipts and payments related to the insurance contracts plus risk adjustment.

Refer also to Note 37 to the 2022 financial statements for a further description of the transition to IFRS 17.

Voting at general meetings is one of the important tools KLP uses in exercising its ownership, and the second quarter of the year is known as the high season for general meetings. As well as following the Company's usual voting policies, KLP has chosen to vote against the boards of 68 companies with high greenhouse gas emissions or a high risk of contributing to deforestation, where the companies do not demonstrate sufficient willingness or ability to manage risk and the negative impacts of their activities.

KLP has also raised shareholder motions together with several other investors on better tax reporting for three oil and gas companies. The results show that a number of investors are keen to contribute to improvements in this area. In Norway, we have observed a clear effect from the discussions we had with selected companies earlier this year, where almost 50 per cent of these companies have improved the documentation for general meetings and adapted to our expectations.

The transition to a more eco-friendly economy is crucial if we are to halt and reverse the loss of nature and biodiversity. Many companies, including KLP, are working to understand how they can implement and help to achieve the aims of the UN Biodiversity Agreement. KLP has participated in a project on nature risk in Norwegian industry. The work resulted in a guide to the work on nature risk, to serve as an aid to companies that want to make a start on the eco-friendly transition, and makes suggestions for sources for analysis and the steps that need to be taken to get there.

Green ports can play an important role in the transition to an emission-free society. Together with others, KLP has prepared a proposal for what the criteria for accelerating the green transition in the port sector might be. The report was launched in April.

The non-life company has been working on studies of how sustainability can be strengthened in the insurance products, initially for real estate, and how these products can be adapted to the EU’s taxonomy criteria. There is also a focus on repairs and reuse to contribute to the transition to a more circular economy. Among other things, a pilot has been started on the reuse and repair of home electronics. KLP has also held a seminar for insurance brokers focusing on sustainability.

The world is still marked by heightened geopolitical tension and war in Ukraine. Higher inflation and interest rates may pose challenges to the global economy, but they could also provide good opportunities for generating surplus returns in excess of the surplus beyond the annual interest guarantee for KLP.

• Fixed-income securities and other debt instruments measured at amortised cost
• Lending to local government, enterprises & retail customers measured at amortised cost
  - Liabilites to and deposits from customers
• 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
• Fixed-income securities and other debt instruments measured at fair value
• Lending local government, enterprises & retail customers at fair value through profit/loss
• Derivatives (assets and liabilites)
• Debt to credit institutions (liabilites)
• Subordinated loan capital (liabilities)

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.

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 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. 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 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 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.