Q3 2022 Interim report KLP Group, Sustainability, KLP

KLP achieved an investment result (the return in excess of that guaranteed by the Company to its customers) of NOK -27.3 (9.3) billion in the year to date. The return on the common portfolio was minus 2.6 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. Net income was NOK 413 million in the third quarter and NOK 963 million for the year to date.

The Company’s administration result shows a surplus of NOK 56 (159) million so far this year, of which NOK 78 million fell in the third quarter. Insurance-related operating costs came to NOK 1.1 (0.9) billion so far this year.

Total profit/loss to the Company stands at NOK 473 (1,229) million for the year to date. The customer result is NOK -26.3 (9.5) billion for the year to date.

Total exposure in shares and alternative investments, including equity derivatives, was 29.1 per cent at the end of the third quarter. The total return on shares and alternative investments was minus 2.2 per cent in the third quarter. KLP’s global shares produced a return of minus 3.2 per cent in the quarter, while the Norwegian equity portfolio had a return of minus 5.9 per cent in the same period.

Short-term bonds accounted for 12.3 per cent and money-market instruments 2.1 per cent of the assets in the common portfolio as at 30 September. Norwegian, European and US government interest rates all rose during the third quarter. KLP’s global government bond index achieved a currency-hedged return of minus 4.1 per cent in the quarter, while the return on the Norwegian government bond index was minus 0.2 per cent. Increased global credit margins brought a quarterly return of minus 5.2 per cent on KLP’s global credit bond index. Short-term bonds produced a total return of minus 2.7 per cent in the third quarter. The money market return was 0.4 per cent for the quarter.

Investment in long-term bonds and bonds held to maturity made up 29.1 per cent of the common portfolio at 30 September. Unrecognised decreases in value in the portfolio rose in the first quarter and amounted to NOK 13.9 billion at the end of the third quarter. The portfolio is well diversified and consists of securities issued by creditworthy borrowers. The return measured at amortised cost was 0.8 per cent in the third quarter and 2.5 per cent for the year to date.

Property investments, including Norwegian and international property funds, accounted for 15.3 per cent of the common portfolio. Property values in the common portfolio were adjusted upwards by NOK 0.2 billion in the third quarter. The total write-up so far this year is NOK 5.8 billion, partly due to the fact that shopping centres and hotels are seeing a high level of activity after two years of pandemic and that rental prices for offices remain good. Property investments in the common portfolio achieved a return of 0.9 per cent in the third quarter.

Lending in the common portfolio totals NOK 79.0 billion. This is split between NOK 67.1 billion in loans to the public sector, NOK 1.5 billion in loans with government guarantees and NOK 3.0 billion in secured mortgage loans, with the remaining NOK 7.4 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 1.7 billion after the third quarter. The return in the year to date is 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 achieved a return of 0.5 per cent in the third quarter, and 1.4 per cent for the year to date.

The third quarter of 2022 produced a pre-tax operating profit of NOK -49.8 (343.9) million. Profit performance in the third quarter was negative, mainly due to weak financial results and one large claim. Operating costs are lower than expected and the Company has continued to reverse previous years’ reserves, although the reserves were increased in the third quarter to cover delayed effects of Covid-19. For the third quarter in isolation, the profit was NOK 52.8 (118.0) million.

Premium volume stood at NOK 2,258 million at the end of the third quarter, an increase of NOK 234 million from the position at 31.12.2021. Premiums due have increased by 15.2 per cent, or NOK 256 million, compared with the same time in 2021. There is solid growth in all segments.

The insurance result was NOK 413 (446) million at 30 September. One large claim was raised in the third quarter, which is also the largest in the Company’s history. Reversal of previous years’ claims is still positive, and this year NOK 100 (101) million has so far been taken to income, equivalent to 5.2 (5.5) per cent of the reserves at the beginning of the year.

We face major challenges in the waste management segment and the Company is preparing several measures in connection with the main renewal strategy. Waste disposal is an important social responsibility for the municipalities, which KLP Skadeforsikring has a duty to support by providing the necessary insurance. Despite longstanding efforts to prevent fires, there is still a level of insurance risk that could be unacceptable in the long term. The Company has initiated discussions with key stakeholders in this area, and will continue this dialogue in the future.

Net financial income at 30 September was NOK -138.1 (173.9) million, representing a return of minus 2.5 (3.4) per cent. Returns for the third quarter in isolation were NOK -25.1 (45.2) million, or minus 0.4 (0.9) per cent. So far this year, the equity portfolio has returned minus 16.2 (15.8) per cent. At the end of the quarter, the Company’s investments in interest-bearing funds had a return of minus 7.6 (0.0) per cent, while fixed income bonds returned 2.5 (2.5) per cent in the same period. The return on real estate investments was 10.1 (6.7) per cent, after a write-up of NOK 53.9 million. The third quarter in isolation saw a return of minus 2.4 per cent on equities, minus 1.9 per cent on interest-bearing investments, and plus 0.8 per cent on long-term bonds.

The Company’s financial position is good, with a solvency capital requirement (SCR) of 219 per cent at the end of the third quarter, compared to 224 per cent at the end of 2021 and 225 per cent after the second quarter of this year.

KLP Kapitalforvaltning provides securities management in the KLP Group. It had a total of NOK 616 billion under management at the end of the third 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 2 billion in the first three quarters of the year. External customers had positive net new subscriptions of NOK 9 billion in the same period.

KLP Kapitalforvaltning achieved pre-tax income of NOK 11.2 million in the third quarter and NOK -18.6 million for the year to date.

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’s total lending as of 30 September amounted to NOK 42.1 (38.2) billion. The split between the retail market and the public sector was NOK 23.4 (21.4) billion and 18.7 (16.8) billion respectively.

KLP Banken manages NOK 3.0 (3.0) billion in mortgage loans and NOK 73.5 (74.6) 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. KLP Banken has had a mortgage growth of NOK 1.3 (0.7) billion so far this year. Disbursements of new loans show a slightly lower volume than at the same time last year, but the proportion of redemptions has also decreased.        

The KLP Banken Group had a pre-tax operating profit of NOK 97.5 (93.8) million at the end of the third quarter. Operating revenues as a whole have strengthened so far this year compared with last year, but a decline in the value of liquidity investments has had a greater impact on this year’s accounts than last year. Broken down by area, profits were NOK 57.9 (76.9) million in the retail market and NOK 39.6 (16.9) million in the public-sector market. After tax and estimate deviations, the Group’s total profit at the end of the third quarter was NOK 105.2 (89.9) million.

In the third quarter, climate-friendly investments increased by more than NOK 2.6 billion. At the end of the quarter, the value of KLP’s climate-friendly investments was almost NOK 59.6 billion.

The transition of energy production towards renewables is essential to reduce greenhouse gas emissions and to reach the 1.5 degree target in the Paris Agreement. In August, PwC launched its updated Climate Index, which shows that KLP, together with nine other Norwegian companies, can demonstrate emission cuts in line with the Paris Agreement and good climate reporting.

In September, KLP decided to exclude two US refugee reception companies for violations of human rights and workers’ rights at their centres. The violations include unacceptable living conditions, lack of health care for inmates with life-threatening illnesses, working conditions akin to slavery, and sexual assault.

The financial statements in this interim report show the Kommunal Landspensjonskasse (KLP) group financial statements and parent company financial statements for the period 01.01.2022 – 30.09.2022. The accounts have not been audited.

That part of the interim report that relates to the Group financial statements has been prepared in accordance with IAS 34 Interim financial Reporting.

The same accounting principles and calculation methods have been used in the interim financial statements as in the last annual financial statements, unless stated otherwise.

The interim financial statements do not contain all the information required of complete financial statements, and this interim financial report should be read in the context of the annual financial statements for 2021. The annual financial statements are available at KLP’s website klp.no.

In preparing the interim financial statements, management has exercised discretion and used estimates and assumptions that affect the accounting figures. Actual figures may deviate from estimates used.

Kommunal Landspensjonskasse offers group public sector occupational pensions.

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 mutual funds both to retail customers and to institutional customers. The securitiy management has a socially responsible profile.

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

Instruments at this level obtain fair value from listed prices in an active market for identical assets or liabilities that the entity has access to at the reporting date. Examples of instruments at Level 1 are stock market listed securities.

Instruments at this level obtain fair value from observable market data. This includes prices based on identical instruments, but where the instrument does not maintain a high enough trading frequency and is corresponding therefore not considered to be traded in an active market, as well as prices based on assets and price-leading indicators that can be confirmed from market information. Example instruments at Level 2 are fixed income securities priced on the basis of interest rate paths.

Instruments at Level 3 contain no observable market data or are traded in markets considered to be inactive. The price is based generally on discrete calculations where the actual fair value may deviate if the instrument were to be traded. The instruments covered at Level 3 in the Group include unlisted shares and Private Equity.

Valuations related to items in the various levels are described in Note 9. For description of the pricing of investment property, please see the annual financial statements.

No sensitivity analysis has been carried out on securities included in Level 3. A sensitivity analysis for investment property is available in the annual report. A change in the variables of the pricing is considered of little significance. On a general basis, a 5 percent change in the pricing would produce a change of NOK 7 547 million as of 30.09.2022.

With regard to transferring securities between the levels, a limit is set for the number of trading days and the amount of trading for shares by separating Level 1 and Level 2. The general principles related to the distribution between levels basically concern whether the asset or liability is listed or not and whether the listing can be stated to be in an active market. As regards shares, there is a further distinction between trading days and amount of trading which separates out listed securities that do not form part of an active market. The values at the end of the reporting period provide the basis for any movement between the levels.

In the 3rd quarter, NOK 1 188 million in stocks moved from Level 1 to Level 2, NOK 307 million moved from Level 1 to Level 3, NOK 1 308 million moved from level 2 to level 1 and NOK 2 million moved from level 2 to level 3 This is due to changes in liquidity.