Q2 2022 Interim report KLP Group, sustainability and KLP

KLP achieved an investment result (the return in excess of that guaranteed by the Company to its customers) of NOK -20.4 (7.2) billion in the second quarter. The return on the common portfolio was minus 2.1 per cent in the year to date.

The risk events in the stock have been within expectations throughout the year and will vary from quarter to quarter. Net income was NOK 445 million in the second quarter and NOK 550 million for the year to date.

The Company’s administration result shows a deficit of NOK 22 (61) million so far this year, of which NOK 13 million fell in the second quarter. Insurance-related operating costs came to NOK 748 (625) million so far this year.

Total profit/loss to the Company stands at NOK 283 (984) million so far this year. The customer result is NOK -19.7 (7.2) billion for the year to date.

KLP’s total assets have increased by NOK 20.9 billion in the year to date, including NOK 17.1 billion in the second quarter, and amount to NOK 727.6 billion. The premium reserve increased by NOK 21.9 billion to NOK 508.1 billion in the same period.

The buffer fund has decreased by NOK 21.2 billion in the year to date, ending on NOK 105.0 billion after the second quarter.

Without applying transitional rules, the Company’s solvency capital requirement is 340 per cent. Taking account of the transitional arrangement for technical provisions, capital adequacy was 340 per cent.

KLP’s target is capital adequacy of at least 150 per cent without applying transitional rules. Capital adequacy is well over this target and reflects the Company’s good financial strength.

Premium income excluding premium reserves received on transfers in amounts to NOK 32.7 (33.6) billion at the end of the second quarter.

Pensions paid and other claims, excluding ceded premium reserves, amounted to NOK 11.7 (10.8) billion at the end of the second quarter.

The assets in the common portfolio totalled NOK 660.8 (626.3) billion and were invested as shown below:

Total exposure in shares and alternative investments, including equity derivatives, was 28.9 per cent at the end of the second quarter. The total return on shares and alternative investments was minus 6.8 per cent in the second quarter. KLP’s global shares produced a return of minus 10.6 per cent in the first half-year, while the Norwegian equity portfolio had a return of minus 7.7 per cent in the same period.

Short-term bonds accounted for 12.6 per cent and money-market instruments 1.6 per cent of the assets in the common portfolio as at 30 June. Norwegian, European and US government interest rates all rose during the second quarter. KLP’s global government bond index achieved a currency-hedged return of minus 4.7 per cent in the quarter, while the return on the Norwegian government bond index was minus 1.5 per cent. Increased global credit margins through the quarter brought a return of minus 7.1 per cent on KLP’s global credit bond index. Short-term bonds produced a total return of minus 4.0 per cent in the second quarter. The money market return was 0.0 per cent for the quarter.

Investment in long-term bonds and bonds held to maturity made up 29.2 per cent of the common portfolio at 30 June. Unrecognised decreases in value in the portfolio rose in the first quarter and amounted to NOK 12.3 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 15.4 per cent of the common portfolio. Property values in the common portfolio were adjusted upwards by NOK 5.6 billion in the second quarter. The sharp increase is partly due to high levels of activity in shopping centres and hotels after two years of pandemic, while rental prices for offices are also holding up well. Property investments in the common portfolio achieved a return of 7.8 per cent in the second quarter.

Lending in the common portfolio totals NOK 78.5 billion. This is split between NOK 66.7 billion in loans to the public sector, NOK 1.5 billion in loans with government guarantees and NOK 3.1 billion in secured mortgage loans, with the remaining NOK 7.2 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 1.4 billion at 30 June. The return in the year to date is 1.0 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 achieved a return of 0.9 per cent in the year to date.

The first half of 2022 produced a pre-tax operating profit of NOK 3.0 (225.9) million. After a negative first quarter, net income improved slightly and the result for the second quarter was NOK 27.3 (154.3) million. The profit development is mainly due to a good insurance result. Operating expenses were lower than expected and the Company has continued to reverse previous years’ reserves. The financial return is weak and negative as a result of the turbulence in financial markets in general.

Premium volume stood at NOK 2.237 billion at the end of the second quarter, an increase of NOK 213 million from the position at 31.12.2021. Premiums due have increased by 16.4 per cent, or NOK 234 million, compared with the same time in 2021. There is solid growth in all segments.

The insurance result was NOK 332 (289) million. One major claim was reported during the second quarter. Reversal of previous years’ claims is still positive, and this year NOK 96 million has so far been taken to income, equivalent to 5.0 per cent of the reserves at the beginning of the year.

Customer satisfaction surveys collected by KLP in the second quarter also show high and improved satisfaction in all customer segments.

Net financial income in the second quarter was NOK -112.2 (28.7) million, equivalent to minus 2.1 (2.6) per cent. Returns for the second quarter in isolation were NOK -63.8 (99.2) million, or minus 1.1 (1.9) per cent. So far this year, the equity portfolio has returned minus 14.1 (13.8) per cent. As of the first half-year, the Company’s investments in interest-bearing funds had a return of minus 5.8 (minus 0.1) per cent, while fixed income bonds returned 1.7 (1.6) per cent in the same period. The return on real estate investments was 9.5 per cent, after a write-up of NOK 52.5 million. The second quarter in isolation saw a return of minus 10.5 per cent on equities, minus 3.1 per cent on interest-bearing investments, and plus 0.9 per cent on long-term bonds.

The Company’s financial position is good, with a solvency capital requirement (SCR) of 225 per cent at the end of the second quarter of 2022, compared to 224 per cent at the end of 2021 and 222 per cent after the first quarter of 2022.

KLP Kapitalforvaltning provides securities management in the KLP Group. It had a total of NOK 621 billion under management at the end of the second quarter, of which NOK 126 billion was for 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 3.9 billion in the first half. External customers had positive net new subscriptions of NOK 7.2 billion in the first half.

The Company achieved a result before tax of NOK -29.8 million in the first half.

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 30 June, the KLP Banken Group had loans to customers totalling NOK 41.4 (38.2) billion. The split between the retail market and the public sector was NOK 23.1 (21.4) billion and 18.3 (16.8) billion respectively.

KLP Banken manages NOK 3.1 (3.1) billion in mortgage loans and NOK 73.1 (72.8) 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. KLP Banken has had a mortgage growth of NOK 1.0 (0.8) billion so far this year. New loans paid out also increased compared to last year.  

The KLP Banken Group had a pre-tax operating profit of NOK 42.5 (54.3) million at the end of the first half. The change is mainly due to a fall in the value of liquidity investments. Operating revenues as a whole have been strengthened in the period. Broken down by area, profits were NOK 21.8 (46.3) million in the retail market and NOK 20.7 (8.0) million in the public-sector market. After tax and estimate deviations, the Group’s total profit as at 30 June was NOK 62.9 (74.1) million.

In April, the latest working group report from the UN Intergovernmental Panel on Climate Change (IPCC) showed once again the seriousness of the world situation. The report states that it is not impossible to limit global warming to 1.5 degrees, but that we have very little time. The emissions peak must be reached by 2025, and the world must take forceful action as soon as possible. The report focuses on measures for emission reduction and climate solutions.

Together with Climate Futures at the Bjerknes Centre, KLP also organized “The Little Big Day of Emissions”. Over two days, a summary of the latest news in climate research was given, focusing on what is happening in the business sector and the growing net zero movement among financial operators and companies.

KLP supports the 1.5 degree target set out in the Paris Agreement and has adopted a net zero target for all investments by 2050. The combined strength of investors with net-zero ambitions has great potential, but there is a great need for standardisation. To contribute to this, KLP has become a member of the Partnership for Carbon Accounting Financials (PCAF), a global partnership with more than 270 financial institutions working for more harmonised measurement and reporting of greenhouse gas emissions in investment and lending portfolios. Membership of PCAF provides access to better climate data and to cooperation with other members. The collaboration can contribute to full transparency about actual emissions, better measurement methods and standardisation in the financial sector. This is crucial if the finance industry is to have a real impact on climate change.

The KLP Group’s business is divided into the five areas: public sector occupational pension/group life, non-life insurance, banking, asset management and other.

All business is directed towards customers in Norway.

This note gives a specification of the line "Net costs subordinated loan and hybrid Tier 1 securities" in the income statement.

The fluctuations in value change are predominantly due to the loans being denominated in foreign currency. The subordinated loan is issued in euros and the perpetual hybrid Tier 1 security are issued in Japanese yen.

Fair value is to be a representative price based on what the equivalent asset or liabilites would be sold for under normal market terms and conditions. A financial instrument is considered as being listed in an active market if listed prices are easily and regularly accessible from a stock exchange, dealer, broker, commercial group, pricing service or regulatory authority, and such prices represent actual transactions that occur regularly at arm’s length. If the market for the security is not active, or the security is not listed on a stock exchange or similar, the Group uses valuation techniques to determine fair value. These are based on information on transactions recently carried out on business conditions, reference to the purchase and sale of similar instruments and pricing by means of externally obtained interest-rate curves and interest-rate differential curves. Estimates are based to the greatest possible extent on external observable market data, and to a small degree on company-specific information.

In the case of this note, there are three different categories of financial instruments: balance sheet classification, accounts classification, and type of instrument. It is for this last category that information is provided about how fair value is derived.

The note shows financial liabilities the Group had at the end of the reporting period; where the majority is funding for KLP Bank Group.

The companies above are the issuers of the financial debt. Deposits belongs to KLP Banken AS.

Unrealised changes and realized gains / losses are reflected on the line "Net value changes on financial instruments" in the consolidated income statement.

The tables "Changes in level 3" shows changes in level 3 classified instruments in the period indicated.

Fair value shall be a representative price based on what a corresponding asset or liability would have been traded for on normal market terms and conditions. Highest quality in regard to fair value is based on listed prices in an active market. A financial instrument is considered as noted in an active market if noted prices are simply and regularly available from a stock market, dealer, broker, industry grouping, price setting service or regulatory authority, and these prices represent actual and regularly occurring transactions at arm’s length.

The table below specify the company’s financial obligations ranked by maturity. The amounts given are non-discounted contractual flows of cash.

The table above shows financial liabilities the Group has grouped by interest payments and repayment of principal, based on the date payment is due. Banking contains the largest proportion of the financial liabilities in the Group.

Liquidity risk is the risk that the Group will not be able to meet the financial obligations that it has. The risk that the Group would not have adequate liquidity to meet its current liabilities and current operations is very small since a major part of the Group’s assets is liquid. The Group has significant funds invested in the money market, bonds and shares that can be sold in the event of a liquidity requirement. The Group’s liquidity strategy involves the Group always having adequate liquid assets to meet the Group’s liabilities as they fall due without accruing significant costs associated with releasing assets.

Asset composition in the Group’s portfolios should be adequately liquid to be able to cover other liquidity needs that may arise. KLP Kapitalforvaltning manages the Group’s liquidity. Internal parameters have been established for the size of the liquidity holding. The Group’s risk management unit monitors and reports developments in the liquidity holding continuously. The Group Board determines an asset management and liquidity strategy annually. The liquidity strategy includes parameters, responsibilities, risk measurement and an emergency plan for liquidity management.

The major liabilities in the Group are insurance related and are mostly linked to pension obligations. These liabilities are fully funded and liquidity management are handled in the same manner as other liabilities.

The note shows the effect on profits if market interest rates were to increase by one percent, for fair value risk and variable interest risk.

Change in fair value (fair value risk) is shown in the first five columns and is calculated by the change in fair value of interest bearing instruments if interest rates had been one percent higher at the end of the period. The column change in cash flow shows the change in cash flows if the interest had been one percent higher over the year being reported on. The sum of these results reflects the overall effect that the scenario had given the group during the period being reported on.

The fair value risk applies to fixed interest securities were the market value of the securities is affected by market interest rates. Floating rate risk applies to securities with floating interest rates, where a change in market interest rates affects the cash-flow from the interest bearing securities.

The following securities are included in the note; securities measured at fair value through profit or loss (floating and fixed interest rates), investments held to maturity (only those with floating interest rates) and loans and receivables (only those with floating interest rates). The group has no securities classified as available for sale.

The Groups total interest rate risk is limited as a significant portion of the investments are bonds with fixed interest rates that are classified as held to maturity and loans and receivables, or fixed rate lending, measured at amortized cost. A change in market interest rate does not affect profit or loss for these assets.

Insurance contracts with guaranteed return does not change the accounting value even if interest rates change. Changes in interest rates also has no impact on the guaranteed return , but will have an impact on the achieved return to cover the guaranteed return . This is because that insurance funds partly invested in debt instruments whose cash flows should help to meet the guaranteed return.