Q4 2023 Interim report KLP Group, sustainability and KLP

The investment result for customers was NOK 29.2 (-20) ¹ billion in 2023, and NOK 13.9 billion in the fourth quarter. The book return on the common portfolio was 6.4 per cent for the year, and 2.4 per cent for the fourth quarter. Actual financial income is NOK 42.7 billion in 2023, of which NOK 17.2 billion was earned in the fourth quarter.

Of the customers’ investment result, NOK 20 billion has been transferred to the customers’ premium fund, NOK 7.2 billion has been allocated to the customers’ buffer fund and NOK 2 billion has been used to strengthen the premium reserve in the Pension Scheme for Hospital Doctors. After many years of low interest rates where it has been necessary to build buffers, KLP now has financial strength commensurate with today’s interest levels. KLP is therefore transferring a historically large amount from surplus returns in 2023 to the premium fund. Good returns in KLP mean lower payments for pensions and more money for other purposes benefitting our customers. The customers are thus directly aware of the consequences of good results in KLP.

The risk result is an indication of whether disability and mortality in the insurance stock are developing as expected.

The total risk result for 2023 amounts to NOK 648 million. NOK 594 million has been transferred to the customers’ premium fund, while NOK 54 million has been used to strengthen the premium reserve in the Pension Scheme for Hospital Doctors.

In 2023, disability rates were higher than expected and the risk result for disability now amounts to NOK -280 million.

For KLP’s schemes as a whole, mortality has been higher than expected and the risk result for longevity is NOK 842 million. The risk result associated with survivors’ cover is NOK 85 million.

The mortality basis in the Pension Scheme for Hospital Doctors will be strengthened from 01.01.2024 after several years of negative results on longevity in this scheme. The conditions for women in this scheme to re-enter the labour market are also changing. The increase in the reserve amounts to NOK 2,528 million, and is included in the accounts for 2023.

The difference between the cost elements within premium income, withdrawals from management reserves and insurance-related operating expenses constitutes the administration result. The Company’s administration result shows a surplus of NOK 144 (-17) million so far this year, of which NOK -32 million fell in the third quarter. Insurance-related operating expenses came to NOK 1.5 (1.5) billion so far this year.

The profit to insurance customers amounts to NOK 29.8 (-19.3) billion, while the profit to the company is NOK 856 (897) million.

KLP’s total assets have increased by NOK 76.9 billion in the year to date and amount to NOK 787.2 billion. The premium reserve increased by NOK 55.0 billion to NOK 573.6 billion in the same period.

NOK 7.2 billion of the investment result for the year was allocated to the buffer fund. NOK 813 million has been transferred from the customers’ buffer fund to the customers’ premium fund, and NOK 343 million has been moved out of transferred contracts. In total, the buffer fund increased by NOK 6 billion in 2023 and amounts to NOK 108.2 billion after the fourth quarter. The fund is contract-based, and can be used to cover the shortfall in returns from the management of customer assets. The buffer fund is therefore important for financial strength and expected returns on customer funds in future periods.

Without applying transitional rules, the Company’s solvency capital requirement (SCR) is 350 per cent. This is a fall of 17 percentage points in the quarter, and is due to a reduction in interest rates in the fourth quarter.

KLP’s target is for capital adequacy to exceed 150 per cent. Solvency is well above this target and thus enables sound and stable management of customer funds in a multi-year perspective.

Premium income excluding premium reserves received on transfers in amounted to NOK 70.2 (50.1) billion at the end of the fourth quarter. Of this, premiums related to the regulation of accrued rights amount to NOK 40.1 (21.2) billion.

Pensions paid and other claims, excluding ceded premium reserves, amounted to NOK 26.1 (23.9) billion at the end of the fourth quarter.

The assets in the common portfolio totalled NOK 734.3 (660.4) billion:

Total exposure in shares and alternative investments, including equity derivatives, was 31.6 per cent at the end of the fourth quarter. The total return on shares and alternative investments was 4.2 per cent in the quarter. The return on KLP’s global equities was 7.5 per cent, while KLP’s Norwegian equity portfolio returned 2.4 per cent in the fourth 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. In the fourth quarter, the Norwegian krone strengthened against the US dollar and the euro, among other currencies. Currency hedging had a positive impact on the return on shares this quarter.

In total, short-term bonds achieved returns of 4.5 per cent in the fourth quarter. The money market return was 1.5 per cent for the quarter. Short-term bonds accounted for 11.5 per cent and money-market instruments 3.6 per cent of the assets in the common portfolio at the end of the quarter. Norwegian, Eurozone and US government interest rates all fell during the fourth quarter. KLP’s global government bond index achieved a currency-hedged return of 5.5 per cent in the quarter, while the return on the Norwegian government bond index was 4.2 per cent. Global credit margins were lower through the quarter. The quarterly return on KLP’s global credit bond index was 6.8 per cent, while the return on the Norwegian bond index was 4.7 per cent.

Investments in bonds recognised at amortised cost made up around 28.6 per cent of the common portfolio at the end of the quarter. Unrecognised decreases in value in the portfolio rose in the first quarter and amounted to NOK 8.0 billion at the end of the fourth quarter. The portfolio is well diversified and consists of securities issued by creditworthy borrowers. The return on investment measured at amortised cost was 0.6 per cent in the fourth quarter, and 3.2 per cent for the full year.

Property investments, including Norwegian and international real estate funds, made up 13.3 per cent of the common portfolio. Property values in the common portfolio were written down by NOK 6.7 billion in the fourth quarter. 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 3.2 per cent in the 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 82 billion. This is split between NOK 70.8 billion in loans to the public sector, NOK 2.8 billion in secured mortgage loans and NOK 0.2 billion in loans with government guarantees, with the remaining NOK 7.7 billion made up of direct lending. 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 1.3 billion at the end of the quarter. Returns in 2023 were 3.9 per cent.

The corporate portfolio covers assets financed by 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 fourth quarter, and 3.0 per cent for the year. The return is affected by write-downs on property.

The market situation for public-sector occupational pensions is stable, and customers with premium reserves totalling around NOK 2.1 billion decided to move their schemes away from KLP with effect from 1 January 2024.  

Operating profit before tax was NOK 273 (111) million at the end of the fourth quarter of 2023. The fourth quarter produced a profit of NOK 18 (62) million. The growth in profit in the quarter is mainly due to good financial results outweighing a weak result from insurance operations. Operating costs are lower than expected.

Premium volume stood at NOK 2,586 million at the end of the fourth quarter, an increase of NOK 294 million from the position at 31.12.2022. Premium income increased by NOK 305 million, or 13.9 per cent, in 2023, and amounts to NOK 2,505 million. The retail market shows growth of NOK 97 million, or 10.6 per cent, while the public-sector and corporate market shows growth of NOK 208 million, or 16.2 per cent. The solid growth in the public-sector and corporate market is due mainly to substantial premium increases in some high-risk segments.

The insurance result (premiums minus claims paid in 2023), was NOK 350 (442) million at 31.12.2023. Both the property and motor insurance sectors within the retail market produced weak results. Increased material costs resulting from higher inflation are contributing to this trend, but the Company is also seeing an increased claims rate in the motor segment. Over time, the Company’s premiums will be adjusted upwards to reflect the increased costs.

There was one large claim in the quarter. For the year, five individual claims and three natural peril events over NOK 10 million were reported. Reversal of previous years’ claims is still positive, and this year NOK 79 million has so far been taken to income, equivalent to 3.6 per cent of the reserves at the beginning of the year.

There were no large natural peril claims in the quarter. The Company’s share of the natural perils is estimated at NOK 114 million in 2023. Reinsurance covers NOK 56 million of this sum.

Net financial income at 31.12.3023 was NOK 313.3 (-95.6) million, representing a return of 5.5 (minus 1.7) per cent. Returns for the fourth quarter in isolation were NOK 128.7 (41.3) million, or 2.3 per cent. (0.8)

The Company’s financial position is good, with a solvency capital requirement (SCR) of 227 per cent at the end of 2023, compared to 222 per cent at the end of 2022 and 246 per cent after the third quarter of 2023.

KLP Kapitalforvaltning AS provides securities management in the KLP Group. It had a total of NOK 760 billion under management at the end of the fourth quarter, of which NOK 179 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 securities funds in 2023 amounted to NOK 13.9 billion, with a net gain of NOK 17.2 billion from customers external to the Group. The number of direct unit-holders at the end of the third quarter was 37,930.

KLP Kapitalforvaltning made a profit before tax of NOK 54.7 million in 2023.

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 fourth quarter, the KLP Banken Group achieved an operating profit before tax of NOK 285.4 (180.5) million, of which the second quarter in isolation accounted for NOK 82.3 (83.0) million. The change in 2023 is mainly related to increased net interest income in both business areas and reduced losses on financial instruments. Broken down by area, profits were NOK 199.4 (107.7) million in the retail market and NOK 86.0 (72.8) million in the public-sector market.

The KLP Banken Group’s lending balance as of 31 December 2023 was NOK 42.9 (42.4) billion. The split between the retail and public-sector markets was NOK 23.9 (23.3) billion and 19.0 (19.1) billion respectively.

KLP Banken manages NOK 2.8 (2.9) billion in mortgage loans and NOK 79.3 (75.6) billion in loans to public-sector borrowers and other businesses on behalf of KLP. 

Losses and loss provisions in the fourth quarter amount to NOK 0.9 (0.3) million in the retail market, a small reduction from the third quarter. The rise in interest rates has so far not resulted in a significant increase in mortgage losses, but persistent high inflation and interest rates could lead to a reduction in borrowers’ ability to repay their loans in the longer term . Nor have we experienced any losses related to public-sector lending in 2023.

From 2023 onwards, the KLP Group will present its accounts in accordance with the new accounting standard IFRS 17 Insurance Contracts. The new standard takes account of the fact that KLP is mutually owned, and that the policy-holders for public-sector occupational pensions are entitled to net assets in the Group. This means that, according to IFRS 17, the Group has no equity ² and the profit/loss will be zero.

The Group’s insurance liabilities related to contracts for public-sector occupational pensions amounted to NOK 762 billion at 31.12.2023. This is an increase of NOK 28 billion in the quarter, and NOK 75 billion in the year. Increases in the value of assets and premium payments are the main reasons for the growth.

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

Throughout 2023, the Board worked together with senior management on a new strategy for its corporate social responsibility work, one result of which was to set targets for key areas. The corporate responsibility strategy was formally adopted at the very end of the year, and we are now working to get it incorporated into the corporate strategy, and into the reporting.

The new Corporate Sustainability Reporting Directive (CSRD) is based around annual materiality assessments following the principle of double materiality. The rules enter into force for financial institutions on 01.01.2025, for the 2024 reporting year. As a natural extension of our corporate social responsibility strategy work, we are conducting a pilot test of sustainability reporting under the new Directive for the 2023 reporting year.

Due diligence assessments of publicly traded companies in the Gulf States (Saudi Arabia, Qatar, the United Arab Emirates and Kuwait) were completed, and it was announced that 11 companies would be excluded because of a high risk of human rights violations, particularly related to issues with authoritarian regimes that limit freedom of expression and political rights, particularly for critics and human rights activists. The companies excluded are within the building, construction and property sectors and telecommunications, where the risk is considered particularly high. KLP also excluded the oil company Saudi Aramco, due to a combination of close ties with dominant state owners and an active position contrary to KLP’s expectations for climate and energy transition plans.

In response to the war in Gaza, KLP is carrying out a special due diligence assessment of Israeli companies to pick up any possible involvement in human rights violations. We are also in regular contact with players such as Norwegian People’s Aid and the Norwegian Union of Municipal and General Employees on the ongoing war, as they have been reviewing the funds offered by Norwegian banks to their customers, to see whether these are invested in companies with activities in the occupied Palestinian territories. 

The non-life company has worked to make selected insurance products more sustainable, including meeting the criteria for sustainable non-life insurance in the EU taxonomy.

The non-life company is constantly working to reduce emissions and other environmental damage from claims settlements. The burnt-out Meierigården building in Porsgrunn was demolished in December with electric-powered machinery which reduces both greenhouse gas emissions and local air pollution from the work site.

• Barclays Capital Indices
• Bloomberg

Barclays Capital Indices have first priority (they cover foreign government and foreign credit respecitvely). Then comes Bloomberg based on Bloomberg’s pricing service Business Valuator Accredited in Litigation (BVAL). BVAL has verified prices from Bloomberg.