Q3 2024 Interim reportKLP Group and KLP

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 third quarter of 2024, the Group had total assets of NOK 1,128 billion.

In September 2024, KLP launched a new pension calculator that enables members born in 1963 or later to simulate their pension based on the new rules on public-sector occupational pensions introduced in 2020. The calculator enables users to simulate various pension components at different times, including pensions from KLP, NAV, other pension companies, private savings and other income. KLP is the first pension provider to offer such a comprehensive solution. The pension calculator is very accurate for those parts of the pension that are covered, although some points still have to be clarified in light of ongoing rule changes.

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 third quarter of 2024 produced a pre-tax profit of NOK 131.8 (65.4) million. The insurance result was good in the third quarter, with no large natural perils or other lafge claims in the period. Reversals of previous years’ reserves pushed profits up by NOK 9.9 (54.0) million. Financial income was higher than expected by NOK 134 (-12) million, representing a return of 2.2 per cent. Profit before tax at 30.09.2024 was NOK 195.5 (254.9) million. This is slightly better than expected.

Volume growth so far this year is NOK 217 million, and premium volume was NOK 2,790 (2,575) million at the end of the third quarter of 2024. The increase is primarily due to increased premiums. Premium income increased by 10.2 per cent, or NOK 189 million, compared with the same time in 2023. For the public-sector and corporate markets, premiums increased by 7.9 per cent, while the corresponding increase for the retail market was 13.5 per cent.

No claims over NOK 20 million were reported in the quarter, but three such claims have been filed so far this year, with total provisions of NOK 163 million. There were also 50 claims in the NOK 2-20 million range, with total payments of NOK 260 million; 13 of these claims were filed in the third quarter. The results as of 30 September are also affected by a major weather event in the first quarter, storm Ingunn, where the costs to the company run to NOK 28 million.

Reversals of previous years’ claims in the quarter are positive, and NOK 71.5 (105.3) million have been recognised so far this year, equivalent to 3.0 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 859 billion under management at the end of the third quarter, of which NOK 226 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 1.1 billion in the third quarter. External customers had net new subscriptions of around NOK 3 billion in the quarter. Net new subscriptions to the KLP funds amounted to NOK 12.7 billion so far this year, with a net gain of NOK 15.8 billion from external customers.

KLP Kapitalforvaltning achieved a pre-tax profit of NOK 81.5 million at the end of the third quarter.

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 87.7 (81.6) million in the third quarter. The profit so far this year is NOK 254.7 (203.1) million. The change is mainly related to increased net interest income and gains on financial instruments.

Broken down by area, profits were NOK 192.1 (139.0) million in the retail market and NOK 62.6 (64.1) million in the public-sector market.

Persistent high interest rates contributed to increased earnings on part of the Bank’s lending which is financed with equity. The Bank’s operating income, in the form of net interest income, was NOK 385.8 (339.7) million at the end of the third quarter.

At the end of the quarter, the income statement includes a net gain on changes in the value of financial instruments of NOK 5.8 (-2.9) 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 -208.0 (-199.6) million as of the third quarter

Losses and loss provisions taken to profit/loss total NOK -0.1 (-1.0) million so far in 2024.The high interest rates have 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 manages lending on its own account and loans financed by KLP totalling NOK 124 (122) billion. On its own balance sheet, the KLP Banken Group had loans to customers totalling NOK 42.2 (43.1) billion at 30 September 2024. The split between the retail market and public-sector markets was NOK 24.2 (23.7) billion and 18.0 (19.4) billion respectively.

KLP Banken manages NOK 2.8 (2.9) billion in mortgage loans and NOK 79.5 (76.3) 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. Net total mortgage growth as of the third quarter is NOK 348 (406) million.

Lending volume to the public-sector market on KLP Banken’s balance sheet has decreased by NOK 1.0 (0.2) billion so far this year. Loans to public-sector borrowers managed on behalf of KLP increased by NOK 1.5 (2.9) billion. New payments of public-sector loans so far in 2024 amount to NOK 4.5 (5.4) billion for KLP and KLP Banken together.

The KLP Banken Group’s external financing consists of bonds and deposits. Deposit growth so far this year is 11.6 per cent, reflecting the bank’s investment in attractive deposit products. This has brought the bank very strong growth in new deposit and retail banking customers. Fixed-interest deposits for retail customers were launched in the second quarter.

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 differences amounted to minus NOK 38 million in the third quarter and NOK 547 million so far this year. Equity totals minus NOK 2,594 million, representing unrecognised increases in the value of the Group’s assets of NOK 2,594 million.

In the third quarter, the Group saw an incease in the value of net assets reserved to policyholders of NOK 20.0 billion, and the total increase so far this year is NOK 52.2 billion. However, net assets belonging to policy-holders (residual value) decreased from NOK 397.1 billion to NOK 381.5 billion in the quarter. The reason for the reduction is that the best estimate of the insurance liability has increased, mainly because lower discount rates produce a bigger liability.

An important measure to achieve KLP’s climate goal of net zero emissions is to increase climate-friendly investments. Climate-friendly investments are investments that contribute directly to emission reductions or otherwise contribute to the green transition. 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 12.5 per cent of its financial assets at the end of the third quarter.  

In the third quarter, these investments increased by around NOK 4.5 billion. This increase is mainly due to investments in a number of mutual funds which invest in renewable energy around the world, energy producers and grid operators, and green bonds in Norway. See Appendix A at the end of the quarterly report for definitions of the sustainability indicators.

An example of a climate-friendly investment in the third quarter is KLP’s recently signed agreement with Norfund to invest a total of NOK 50 million in power lines in India. As one of the world’s largest countries, with a rapidly growing economy, India needs more energy. Today, around 70 per cent of its electricity comes from coal, with a negative impact on air quality in India and on CO₂ emissions. The investment will contribute to the country’s transition from coal to renewable energy, and help in the development of the Indian energy infrastructure which is needed for that transition.

In the third quarter, we have given a number of talks and participated in panel discussions on responsible investments, climate, renewable energy and human rights in conflict areas.

We are seeing increased interest in the way KLP deals with companies involved in war and conflict, often specifically related to the war in the Middle East. This in turn comes up in more and more talks and presentations. So far this year, we have had over 160 diiscussions with companies we are invested in, 42 of them in the third quarter.

During the third quarter, KLP excluded eight new companies for breaches of its exclusion criteria relating to human rights, including in war and conflict situations, corruption, coal, severe environmental damage, oil sands and weapons. One company was reinstated as it no longer breaches our criterion for coal. At the end of the quarter, a total of 830 companies were excluded from the investment universe.

Young utopia is a project aimed at strengthening young people’s faith in the future, and their ability to imagine a future that they want and see what is needed to bring about such a future in their communities. Both primary schools and municipal councils are engaged in the project, which is exploring how today’s young people can contribute to societal development in the Norwegian local government sector.

Throughout the year, students have worked on defining key values that they want to see more of in their communities. They have now entered seventh grade, and the first time they met was in September, at KLP’s offices in Oslo.

When they return home, they will prioritise and further develop their vision and projects. Finally, they will present these to their local councils to provide inspiration and suggestions.

The project is headed by KLP, and is a collaboration with the Bjørvikaforeningen, MUNCH, Deichmann, the Norwegian National Opera & Ballet, the Local Community Association and Nord University/Bodø Capital of Culture. The work will be documented in a report from Nord University. It will include a reusable methodology for children and young people to think about the future, using art and culture.

Egil Matsen stepped down from the Board in the third quarter. Substitutes will be elected at the corporate assembly on 14 November.

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.

As ever, we will strive to be the best provider of public-sector occupational pensions to the Norwegian local government and healthcare sector and ensure that employees’ pension assets are managed in a sustainable and secure way for the days ahead.

The financial statements in this interim report show the Kommunal Landspensjonskasse (KLP) group financial statements financial statements for the period 01.01.2024 – 30.09.2024. 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 30.09.2024. 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 comprise 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.

The table below shows the consequence for the group's residual value of a change in the standard assumptions used in the best estimate. Sensitivity related to costs is also included in the overview. The residual value consists of the part of the insurance liability that is not included in the best estimate or the risk adjustment.