Quarterly Report 4/2006. Quarterly Report Profit and loss account Balance Notes

Transcription

1 Quarterly Report 4/2006 Quarterly Report Profit and loss account Balance Notes

2 SOLID PROFITS AND STRENGTHENED MARKET POSITION KLP achieved value-adjusted profits of BNOK 3.7 during the fourth quarter and BNOK 7.1 for the year, Book profits were BNOK 2.7 during the fourth quarter and BNOK 5.1 for the year This provides a basis for substantial return of surpluses to the customers Premium Fund. Value-adjusted return on capital in 2006 was 7.6 per cent and book return on capital was 6.6 per cent. In terms of customers, KLP has achieved the best result for 10 years. Strong growth in total assets of 12.5 per cent to BNOK 176. Good results for KLP Skadeforsikring. Profit/loss During 2006 Kommunal Landspensjonskasse (KLP) has achieved good results. At the end of the year total assets had increased to BNOK (BNOK 156.6). This equates to growth over the year of 12.5 per cent which is the highest for five years. Profit/loss Result Quarter MNOK Premiums excl inward transfers Netet inward/outward transfers Net financial income Claims excl. outward transfers Insurance provisions Of wich: - net inward/outward transfer premium reserve etc Other ins. rel income/costs Reinsurance Operating costs Value -adjusted result To(-)/from(+) securities adjust. fund Profit before allocs and tax Cost of taxes Profit after tax, before allocs Proposed allocations To supplementary reserves To customers premium fund To owners equity Total allocations During the fourth quarter KLP had value-adjusted profits of MNOK (MNOK 2 568) and MNOK for the year (MNOK 7 087). Profit for the year before allocations was MNOK (MNOK 3 725). During the fourth quarter, net financial income was MNOK (MNOK 3 663) and for the year, MNOK (MNOK ). Good Norwegian and international equity markets and a strong property market throughout the year created the basis for high added value. During the fourth quarter, premium income amounted to MNOK (MNOK 2 383) and for the year, MNOK (MNOK ). The strong increase during the quarter was because the adjustment premium was brought to book during the fourth quarter, as opposed to the third quarter last year. KLP s management costs as a percentage of average total assets were 0.36 per cent during 2006, level with the previous year. KLP has markedly lower operating costs than the other life companies. Financial solidity and capital-related matters At the end of the fourth quarter KLP had total solidity capital of BNOK 24.8, an increase of BNOK 6.5 on the previous year. The Securities Adjustment Fund increased during 2006 by MNOK to MNOK 7 934, an increase of 33 per cent from During 2006 Supplementary Reserves have been strengthened by MNOK and at the end of the year amounted to MNOK All capital requirements show a satisfactory margin and capital adequacy has been further strengthened to 14.1 per cent (12.1 per cent) against the regulatory requirement of 8 per cent. At the end of the year the company had a Standard & Poor s credit rating of A with stable outlook. The Board of Directors assesses the Company s capital situation as very satisfactory. Asset management Book return on capital was 6.6 per cent at the end of the fourth quarter (5.7 per cent) and value-adjusted return on capital was 7.6 per cent (8.0 per cent). Developments in the financial markets during the fourth quarter have been strong. The positive trends that have characterised global equity markets through most of 2006 continued for the remainder of the year. On the other hand continuing economic growth has led to increased interest rates. This is accompanied by price depreciation in Interest-bearing investments like bonds 1) The figures in brackets show the corresponding period the year before.

3 Value-adjusted return Per cent Value-adjusted 2005 Value-adjusted Q1 Q2 Q3 Q The return on the lending portfolio was 3.9 per cent for the year (3.9 per cent) whereas the property portfolio produced a return of 14.8 per cent for the year (16.1 per cent). The value of the Company s property holdings was adjusted upwards by MNOK 754 during the fourth quarter and by MNOK 975 in total in This is largely due to an improved rental market and increased market prices for property. Other financial assets mainly comprised short-term investments linked to the management of securities. and certificates. KLP has increased its proportion of equities by 2.8 percentage points during the fourth quarter. Over the year, investment in the Norwegian shares market has been increased and at the end of 2006 Norwegian shares represented 13.0 per cent of the equities portfolio against 9.6 per cent the year before. Investments in shares have produced a return for the year of 17.1 per cent (21.2 per cent). Total exposure to the equity market including share derivatives represented 27.2 per cent (22.6 per cent) of financial assets. For the year, KLP s portfolio of short-dated bonds and money market instruments produced a return of 1.5 per cent (2.7 per cent) whilst the portfolio of hold-to-maturity bonds produced a return of 5.6 per cent (5.7 per cent). The average remaining duration in the hold-tomaturity portfolio was 5.9 years (6.0 years) at the end of the year. Allocation by asset class MNOK %age MNOK %age Short-term bond/certs HTM bonds Lending Short-term shares (*) Property Other fin. assets Financial assets Other assets Total assets * Shares incl. derivatives 27.2 % 22.6 % Since 2002 KLP has maintained an investment policy placing emphasis on social responsibility and sustainability. KLP excludes companies that can be associated with breaches of UN norms and follows the recommendations of the Norwegian Ministry of Finance s Ethical Council, which also apply for the Norwegian Government Pension Fund-Global. This means that in its investment policy KLP takes account of human rights, employee rights, environmental matters and business ethics. At the end of the fourth quarter a total of 40 companies were excluded from KLP s investment portfolio: that is two fewer than after the third quarter. The pension market In total during 2006 KLP has entered into 135 new pension/customer relationship agreements nationally. Of these, 42 were hive-offs from existing customers. The number of municipal customers choosing to move from KLP has declined sharply and the Company won the tender competition for a municipality that is coming back to KLP after five years with a competing provider. Seen in total this is the Company s best sales result for more than 10 years. The net move reserves are MNOK 722. Of these, MNOK 470 represents reserves linked to deferred entitlements associated with customers who moved from KLP before In accordance with those rules applicable before 2004, reserves linked to deferred entitlements (pension entitlements without further accumulation) were not moved together with other reserves on change of pension provider. KLP Skadeforsikring (Non-life insurance) In the fourth quarter, KLP Skadeforsikring AS achieved profits before tax of MNOK 15.7 (MNOK 10.9) and, for the year, MNOK 62.3 (MNOK 70). For the year, claims and costs as a percentage of premiums on own account (combined ratio) were 96.4 per cent (86.2 per cent). The Company s technical results are good and show a stable trend. As a result of a conscious strategy to exploit the Company s risk bearing ability on the primary business, insurance, the Company maintains careful and long-term risk exposure of its financial assets in which interest-bearing investments comprise a substantial proportion. In the current interest rate climates, financial returns are moderate. KLP Kapitalforvaltning (Asset management) KLP Kapitalforvaltning ASA delivered good results on most of its products during the fourth quarter. The actively managed Norwegian products (shares, bonds and money market) ended the year ahead of their respective reference indexes. In addition the capital management company delivered returns on products with a passive strategy entirely in line with the market returns. Regulatory framework The capital adequacy rules for insurance companies have changed so that there is greater similarity between these regulations and the regulations in the standard method for credit risk that applies for credit institutions and securities enterprises. The new rules provide a higher degree of differentiation of risk than the old regulations and mean a strengthening of KLP s capital adequacy.

4 Future outlook KLP will continue to increase the Company s risk capital to maintain solvency and risk-bearing capability. This provides the basis for competitive asset management with high added value and security for the owners equity. KLP also expects to continue its strategy of returning surpluses to its customers. The new Norwegian Insurance Act will come fully into effect on 1 January KLP has initiated important processes in good time to be able to give our customers good service and an interesting product portfolio under the new Act. Provisional allocation of the annual profits. Book profits before supplementary reserve provisions and transfer to the premium fund amounted to MNOK (MNOK 3 725). For the fourth consecutive year KLP delivers solid returns. In the context of the sound financial position KLP has achieved, the Board of Directors considers it appropriate to propose an increase in the proportion of the surplus to be transferred to the customers premium fund. The Board of Directors therefore proposes that MNOK be allocated to supplementary reserves (MNOK 1 278) and MNOK to the customers premium fund (MNOK 2 310). The surplus, MNOK 169, will go to strengthening the owners equity fund. Rising interest rates benefit pensions savings and assure pension customers good and stable returns. KLP will continue to prioritise work associated with optimal composition of the investment portfolio. Further diversification and dynamic adjustment of the portfolio are essential to achieving good returns. Oslo, 2 March 2007 The Board of Directors of Kommunal Landspensjonskasse

5 Kommunal LANDSPENSJONSKASSE PROFIT and loss account 4TH QUARTER th Quarter Year Profit and loss account Premiums excl. inward transfers Net inward/outward transfers Net financial income Claims excl. outward transfers Change in insurance provisions of which: - net inward/outward transfers premium reserves etc Other insurance-related income/expenses Reinsurance Operating expenses Value-adjusted profits To (-)/from (+) securities adjustment fund Profits before tax, allocations and change in supplementary reserves Cost of taxes Profits after tax, before allocations and change in supplementary reserves BALANCE sheet Bonds and other fixed-return securities (short-term) Bonds held-to-maturity Lending Shares (short-term) Property Other financial assets Other assets Total assets Owners equity Perpetual Subordinated Notes (Tier 1 capital) Subordinated loan capital Securities adjustment fund Insurance provisions Liabilities Total equity and liabilities

6 Kommunal LANDSPENSJONSKASSE NOTES 4TH QUARTER 2006 Note 1 Accounting principles This report shows the company accounts for Kommunal Landspensjonskasse (KLP), which is the parent company of the Group. The report shows the accounts for the period , as well as profits development for the period (4th quarter). These accounts should be seen as an interim report for the 4th quarter and not the annual report for The accounts have not been audited. The interim accounts largely follow the same principles as the annual accounts for 2005 and should be read in conjunction with them. Amended accounting principles are linked to the following matters: Lending The Loss Regulations of 1991 have been replaced by new regulations on the accounting treatment of lending. In accordance with the new regulations lending is to be valued at actual value when it is initially brought to book and thereafter at amortised cost using the effective interest rate method. Previously lending was valued at nominal value. Setting-up charges, as previously, are brought to book as income directly inasmuch as they do not exceed the administrative costs associated with the setting-up of the lending. Instalment fees are considered insignificant and are not taken into account in the amortisation. Thus the balance sheet value is, as previously, the same as nominal value, for loans at both fixed and variable interest rates. The exception is doubtful loans, where the loss is now calculated by comparing the new, anticipated cash flow with the original cash flow discounted by the original effective interest rate. Previously this discounting effect was not taken into account in estimating the loss. For a loan to be considered doubtful there must be objective proof of default. This has involved an insignificant adjustment of the loss provisions compared to previously. The effect of implementation of the new principles on lending is, in sum, so insignificant that it was considered unnecessary to re-work the comparison figures. Note 2 Period-dependent matters Adjustment of future pension liabilities and financing of these as a result of the pay and G settlement. The increase in insurance liabilities arising from the annual upward adjustment (G adjustment) as well as the pay settlement for occupationally active members is financed by a discrete indexation premium. This indexation premium and the increase in insurance liabilities are brought to account at the same time when the effect is known. The annual indexation premium was brought to book as income during the fourth quarter as MNOK The effect of the provisions was thus also brought to book in the 4th quarter. In 2005 this was brought to book in the 3rd quarter with an indexation premium of MNOK being taken to income at the same time as the reserves were strengthened by the effect from the pay and G settlement. Note 3 Currency hedging - shares In February 2006 it was decided to increase the proportion of currency hedging for shares from 80 % to 90 %. During the 4th quarter the proportion of currency hedging for shares has gradually increased to 94 %. Note 4 Property KLP s property investments comprise properties organised through AS / ANS (limited companies / liable companies with unlimited liability) in the property fund. Property (real estate) is valued at fair value. The properties organised as AS / ANS are valued in accordance with KLP s valuation model as at This model is described in detail in the KLP annual accounts for 2005, Note 17. These property investments have been written up by MNOK during the 4th quarter. The main reason for the write-up is that rental levels have risen further, something confirmed through agreement of new leases during the period. G is the Norwegian National Insurance grunnbeløpet or basic amount

7 Kommunal LANDSPENSJONSKASSE NOTES 4TH QUARTER 2006 Property investments made as part of property funds are valued at market value based on reporting from the funds, or at expected long-term returns if the fund is a new start-up. This has resulted in a small value adjustment during the period. During the period January 2007 until mid-february 2007 KLP invested a further MNOK in property in Norway through purchase of hotel buildings at Værnes and industrial buildings in Oslo through the wholly owned subsidiary KLP Eiendom AS. Note 5 Conditional liabilities Conditional liabilities as at are linked to the following: Committed, not paid-up capital Private Equity Partnerships: MNOK Committed, not paid-up capital Real Estate Funds: MNOK Total MNOK Note 6 Subordinated loan On 7 April 2006 KLP took up a subordinated loan of M 300 nominal. The loan is perpetual but KLP is entitled to redeem the loan after 10 years. The loan is listed on the LSE and forms part of the Company s risk capital at MNOK as at The book value of the loan was MNOK as at Note 7 Change in Group structure On KLP formed the company KLP Pensjonsforsikring AS. The company is wholly owned by Kommunal Landspensjonskasse (KLP) and KLP has injected MNOK 50 as equity in the company. The company became operational on 1 October On KLP bought 100 % of the company KLP Eiendom Holding AS for NOK Note 8 Change in comparison figures KLP has changed its accounting treatment of administration costs property for property investments organised as AS / ANS. These are now shown in the accounts as administration costs whereas they were previously expressed as deductions from the incomes from the property companies. This has been accompanied by the following changes in the accounts MNOK Income from buildings and other properties 18.3 Administration costs associated with buildings and other properties Net effect on profit/loss 0.0 It is emphasised that these administration costs have been reported in the calculation of administration profit/loss and interest profit/loss previously despite the accounts not having reflected this attribution, see Note 4, 1) in KLP s annual report for Note 9 Events after the balance sheet date Net repayment of premium reserves and owners equity of about MNOK 741 represents the balance of transfers relating to customers moving. Of the premium reserves MNOK 470 represents transfer of deferred entitlements linked to customers who moved from KLP before The transfer will not be reflected in the accounts before 2007.

8 Kommunal LANDSPENSJONSKASSE NOTES 4TH QUARTER 2006 Note 10 Reconciliation of equity movements NOK mill Equity at Paid-up equity contributed Paid-up equity repaid Allocated from annual profits Equity at end of period Note 11 Key figures NOK mill. Q Q Q Q Q Q Q Q Premiums excl. inward transfers Net inward/outward transfers Net financial income Claims excl. outward transfers Change in insurance provisions Other insurance-related income/expenses Reinsurance Operating expenses Value-adjusted profit/loss To (-)/from (+) securities adjustment fund Profits before tax, allocations and change in supplementary reserves Cost of taxes Profits after tax, before allocations and changes in supplementary reserves Note 12 Cumulative results, quarterly figures Return on capital I (year to date) 6.6 % 3.9 % 2.4 % 1.5 % 5.7 % 3.9 % 2.5 % 1.3 % Return on capital II (year to date) 7.6 % 4.4 % 1.8 % 2.1 % 8.0 % 5.4 % 3.1 % 1.1 % Return on capital III (year to date) 5.2 % 3.2 % 0.2 % 1.4 % 7.5 % 5.5 % 3.7 % 0.7 % Capital adequacy 14.1 % 15.9 % 15.8 % 11.7 % 12.1 % 12.9 % 13.2 % 13.6 % Return on capital I: The book financial income for the year after the allocation to/ transfer from the securities adjustment fund Return on capital II: The book financial income for the year before the allocation to/ transfer from the securities adjustment fund Return on capital III: As return on capital II with the addition of unrealised changes during the accounting period in the value of bonds held to maturity

9 MAIN OFFICE: KLP Insurance Karl Johans gate 41 B Oslo Telephone: Fax: REGIONAL OFFICE: KLP Insurance Vågsalmenningen 16 Bergen Telephone: Fax: POSTAL ADDRESS: P.O. Box 1733 Vika N-0121 Oslo