Q2 2024 Interim report KLP Group and KLP

• Return on the common portfolio of 1.5 per cent in the second quarter and 4.6 per cent in the year to date.
• Moderate risk result due to increase in disability payments
• Premium income used to finance adjustments to pension obligations in line with wage growth and changes in the basic amount (G) came to NOK 21.7 billion in the second quarter, compared to NOK 36.0 billion for the same period last year
• The accrued pension rights that KLP manages on behalf of its customers exceeded NOK 600 billion in the second quarter
• The solvency margin for the Group is 283 per cent.

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 second quarter of 2024, the Group had total assets of NOK 1,079 billion.

The market situation for public-sector occupational pensions is stable. 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 second quarter of 2024 shows a profit/loss before tax and other provisions of NOK 181.3 (90.2). million The insurance result was good in the second quarter, with no large natural perils claims.No other major claim events were reported in the period. Dissolution of previous years’ reserves also had a positive effect. Financial income amounted to NOK 74.8 (47.2) in the quarter, representing a return of 1.2 per cent.

The profit for the year to date before tax and other provisions amounts to NOK 63.7 (189.5) million as of 30.06.24. This is less than expected and is due to the weak first quarter results.

Volume growth so far this year is NOK 165 million, and premium volume was NOK 2,750 (2,534) million at the end of the second quarter of 2024. The increase is primarily due to increased premiums. Premium income increased by 11.0 per cent, or NOK 135 million, compared with the same time in 2023. For the public-sector and corporate markets, premiums increased by 9.3 per cent, while the corresponding increase for the retail market was 13.6 per cent.

No claims over NOK 20 million were reported in the second quarter, but three such claims have been filed so far this year, with a total provision of NOK 163 million. There were also 30 claims in the NOK 2-20 million range, with total payments of NOK 152 million; 16 of these claims were filed in the first quarter. The result as at 30.06 is also affected by a major natural event in the first quarter, storm Ingunn, where the Company’s costs came to NOK 28 million after an upwards adjustment of NOK 3 million during the second quarter.

Reversals of previous years’ claims are positive, and NOK 62 million have been recognised so far this year, equivalent to 2.6 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 818 billion under management at the end of the first half-year, of which NOK 214 billion came from external customers. The majority of the assets are managed on behalf of KLP and its subsidiaries.

Net new subscriptions to KLP funds came to NOK 6.8 billion in the second quarter, and NOK 11.6 billion for the year to date. External customers had positive net new subscriptions of NOK 7 billion in the quarter, and NOK 12.7 billion in the year to date.

KLP Kapitalforvaltning achieved a profit before tax of NOK 53.1 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.

The KLP Banken Group had a pre-tax operating profit of NOK 166.9 (121.5) million in the second quarter. The change is mainly related to increased net interest income and gains on financial instruments.

Broken down by area, profits were NOK 121.9 (87.4) million in the retail market and NOK 45.0 (34.1) 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 254.6 (220.8) million in the second quarter. At the end of the quarter, the income statement includes a net gain on changes in the value of financial instruments of NOK 5.9 (-9.3) million. This profit/loss effect is mainly related to changes in the market value of the bank’s liquidity investments. Realised income makes up a negligible proportion of this.

Operating expenses and depreciation amounted to NOK -140 (-133.4) million in the second quarter.

Losses and loss provisions taken to profit/loss total NOK 0.0 (-0.4) 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.

The KLP Banken Group's lending balance as of 30 June 2024 was NOK 42.6 (42.9) billion. The split between the retail and public-sector markets was NOK 24.4 (23.4) billion and 18.2 (19.4) billion respectively.

The Bank’s mortgage products are aimed at the target group of members of the KLP pension schemes. Net mortgage growth in the second quarter was NOK 536 million, which is significantly higher than at the same time last year (NOK 168 million).

Lending volume to the public-sector market on KLP Banken’s balance sheet has decreased in 2024 by NOK 0.7 (increase of 0.3) billion. Loans to public-sector borrowers managed on behalf of KLP increased by NOK 1.8 (1.0) billion in the same period.

KLP Banken manages NOK 2.7 (2.9) billion in mortgage loans and NOK 79.7 (74.7) billion in loans to public-sector borrowers and other businesses on behalf of KLP.

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. Changes in measurement difference amounted to NOK 953 million in the second quarter, NOK 179 million so far this year. Equity totals NOK -2,556 million, which corresponds to unrecognised increases in the value of the Group’s assets of NOK 2,556 million.

In the second quarter, the Group achieved a profit reserved for policyholders of NOK 12.3 billion, and the figure for the year to date is NOK 32.1 billion. This is mainly due to an appreciation of the assets.

The best estimate of the insurance liability associated with public-sector occupational pensions was increased from NOK 366.0 to 367.2 billion in the quarter.

Liabilities to policyholders in public-sector occupational pension schemes, by virtue of their ownership role (residual value), grew from NOK 387.5 to 397.9 billion in the quarter.

Along with many other Norwegian financial institutions, KLP has committed to complying with the Paris Agreement. If we are to achieve the climate targets and stop global warming, the whole of the global economy has to move towards zero emissions. In this perspective, all actors are small with limited individual influence. Through proposed updates to climate targets and initiatives, KLP will help to accelerate the pace of change within realistic limits, but we depend on everyone moving in the same direction to achieve our goals.

In light of this, KLP decided in May to update the climate strategy for the investment portfolio with quantitative targets for the short, medium and long term, along with measures that make it realistic to achieve the targets. To achieve the 2030 targets, we are putting forward an overall package of actions:

1. Influencing work: Bilaterally and as a contributor to broad investor cooperation
2. Long-term bonds: Companies with science-based transition plans aligned with to 1.5°C emissions paths will be prioritised for new investments
3. Equities and short-term bonds: Risk-based divestment from companies that are poorly adapted to the climate transition in selected high-emission sectors
4. Direct investments in climate and nature solutions

It is proposed to implement these measures in stages through to 2030, with a flexibility to cater for KLP's financial objectives and management practice. The four measures together are considered both necessary and sufficient for us realistically to achieve the proposed climate targets in the short and long term. The proposed allocation measures are judged to be both efficient and cost effective, viewed against KLP’s climate targets and management of climate risk, while contributing to the transition in the real economy.

In the second quarter, KLP focused on voting at general meetings and scrutinising companies for any involvement in rights violations in war and conflict situations.

The second quarter of the year is known as the high season for general meetings, and voting at these meetings is one of the key tools KLP uses in exercising its ownership. In the second quarter, we voted for 5,324 general meetings in Norway and around the world. We have supported a number of shareholder proposals related to topics such as climate lobbying, due diligence on human rights and climate transition plans. KLP has also promoted shareholder proposals together with other institutional investors for better tax reporting and reporting of compliance with employee rights, particularly the right to unionise.

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 second quarter, KLP increased its investments in several of the seed funds in which we are already invested.

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 11.9 per cent of its financial assets at the end of the second 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 second quarter, these investments increased by around NOK 6.8 billion. The increase comes mainly from KLP’s investment in long-term bonds in the renewable energy sector as well as green bonds in Norway. 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.

For the fourth year running, KLP and AFF (the Administrative Research Institute at the Norwegian School of Economics) celebrated “Future leaders in the Norwegian local government and healthcare sector”. This year saw 90 leaders nominated, all young people at the start of their management careers. Of these, three were selected as winners, based on the way they stood out from the crowd in their style of leadership and the feedback they get from their colleagues.  

With this award, KLP and AFF promote leaders in the public sector – a group that is in great demand in today’s labour market. As the pension company for the Norwegian local government and healthcare sector, we believe it is important for us to support the work of developing good managers, so the prize is a chance to take part in AFF’s renowned Solstrand management programme, Accelerate.

Eli Arnstad was elected to the Board at the Corporate Assembly in April. She replaces Ingunn Trosholmen, who stepped down from the Board in October 2023.

KLP has achieved good results so far in 2024. However, 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.

KLP is prepared for increasing tendering activity. 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 in the next 75 years too.

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 – 30.06.2024. 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 30.06.2024. 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.

A new accounting standard for presentation and disclosures in financial statements, IFRS 18, has been published by the IASB in April 2024. This new standard will replace IAS 1 Presentation of Financial Statements. If endorsed by the EU, the standard will be effective for annual reporting periods beginning on or after 1 January 2027. IFRS 18 is not expected to have a significant impact on the group's financial reporting. KLP does not plan to early implement the standard.

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.