STOCKHOLM, Sweden, Feb. 1, 2005 (PRIMEZONE) -- Today, 1 February 2005, Skandia will hold a briefing for institutional investors and financial analysts to provide an overview of how Skandia's financial reporting will be impacted by the introduction of International Financial Reporting Standards (IFRS). The presentation will provide background to the development of the IFRS requirements, the changes in accounting principles for Skandia and our current understanding of the impact on formats, opening equity as per 1 January 2004 and net income for the first half of 2004.
Currently there are a number of unclear points regarding the final version of certain IFRSs and interpretations of a number of principles. Therefore, this press release and the presentation specify figures that are unaudited and may be changed.
Overall effect on shareholders' equity and result
The total effect on shareholders' equity of the transition to IFRS is expected to be SEK -2.7 billion as per 1 January 2004, i.e., a reduction of 17%. Shareholders' equity is thereafter calculated at SEK 12.7 billion. The result for the first half of the year is estimated to decrease by SEK 240 million before tax and by SEK 170 million after tax.
-- The date for recognising earnings from contracts is pushed
back further in time, mainly due to the deferral of fees
already received. This has no impact on cash flow from the
contracts. Initial income and expenses are deferred over the
lives of the contracts.
-- IFRS entails a change in accounting principles and format.
However, the economics of the business, cash flow and
financial flows in the company are not affected.
-- Embedded value accounting is not affected by IFRS.
-- IFRS in itself will not affect the dividend. Following its
meeting on the year-end closing, the Board will submit a
dividend proposal to the Annual General Meeting for a
decision.
-- According to the current rules and taking the IFRS requirements
into account, the group's solvency capital remains at a high
level.
The rating agency Moody's has issued the following statement with respect to the introduction of IFRS:
"Skandia will be affected by the change to IFRS accounting which could negatively impact reported shareholders' equity, although it does not impact embedded value accounting and does not change economic fundamentals."
"Skandia Insurance Company Ltd, A3 Insurance Financial Strength Rating -- outlook stable" Source: Moody's Global Credit Research Credit Opinion of 9 December 2004.
The following changes in accounting principles have the greatest impact on Skandia:
Later recognition of fees already received
The major part of a unit linked contracts consists of savings. For this part of the contracts there will be significant changes in the accounting. The most important effect is that front-end fees for unit linked contracts are to be deferred according to different principles under IFRS. This entails, among other things, that front-end fees already paid by customers are to be deferred over the life of the contract. This gives rise to a new balance sheet item -- ``Deferred Fee Income" (DFI). In addition, front-end fees that have not yet been paid in will be taken up as a receivable and then deferred. The overall effect of this is a deferral in the recognition of fees. Recognition of income will thus be more conservative compared with the previous principles. The above entails a negative impact on shareholders' equity as per 1 January 2004, net of receivable in the amount of SEK -10.0 billion before tax. The result impact for the first half of 2004 is estimated to be SEK -500 million before tax.
Extension of the amortisation period for acquisition costs
Variable acquisition costs incurred in connection with the writing of contracts will continue to be deferred as "Deferred acquisition costs" (DAC). As previously, about 60% of the company's acquisition costs will be deferred. Since acquisition costs shall also be deferred over the life of the contract, the amortisation period for DAC is being extended compared with the current principles. This entails a positive impact on shareholders' equity as per 1 January 2004, net of accrued commissions, in the amount of SEK 5.0 billion before tax. The effect on the result for the first half of 2004 is estimated to be positive by SEK 220 million before tax.
Change in accounting for mutual funds
There will also be a change in the accounting for mutual funds. The accounting should be consistent with the method for the savings part of unit linked contracts, with means a rising of the (DFI) and (DAC) on these contracts. This entails a minor impact on shareholders equity and result. Which is included in the above.
Goodwill will no longer be amortised
Goodwill will no longer be amortised. Instead, the value of goodwill is to be tested for impairment annually. Such testing is already conducted today in accordance with current accounting principles. The change entails an improvement in the result for the first half of 2004 in the amount of SEK 78 million before and after tax.
Other changes in accounting principles, mainly consisting of a dissolution of technical provisions, affect opening shareholders' equity in 2004 positively in the amount of SEK 1.4 billion before tax and the result. The effect on the result for the first half of 2004 is estimated to be negative in the amount of SEK -40 million before tax.
The tax effects on all changes in shareholders' equity are expected to be positive by SEK 0.9 billion as per January 2004.
Greater transparency
Under IFRS, all contracts should be classified, for accounting purposes, as either insurance contracts or investment contracts, depending on the risk content of the respective contract. Regardless of classification, Skandia has chosen to use a uniform principle for all unit linked contracts. This means that the contracts have been unbundled into an investment component and an insurance component. For the investment component, paid-in premiums will no longer be reported as premium income, and payments to customers will not be reported as claims. Instead, fees from these contracts will be reported as the company's revenue. This means that the income statement will have a different presentation. In Skandia's opinion this provides greater transparency and a better opportunity to explain earnings from the business. The accounting becomes more transparent at the same time that the accounting of contracts is more conservative. Skandia will continue to comment on and report sales trends.
Outstanding issues
One issue for the industry as a whole, including Skandia, concerns the reporting of certain fund holdings. According to IAS 27, funds controlled by another company shall be consolidated, even though all of the assets belong to the owners of the fund units. Policyholders choose to invest in various funds; in practice this is done in such way that Skandia's unit linked company buys units in the fund chosen by the customer. Skandia can thereby -- on behalf of its customers -- be classified as the owner of a majority stake in the fund.
Even though Skandia does not have any controlling influence over these investments, Skandia can be forced to consolidate the funds in which its ownership stake exceeds 50%. If this takes place, the fund's holdings of stock in Skandia Insurance Company Ltd can be considered as treasury shares. In such case, these are to be eliminated against shareholders' equity. Skandia estimates this effect to be SEK 300 million as per 31 January 2003 and SEK 500 million as per 30 June 2004. Such an adjustment would give rise to a reduction of equity in the accounting, even though there is no economic exposure.
Embedded value (EV)
Like most other European insurance companies, Skandia will continue to report EV as supplementary information to the IFRS reporting. The company supports and adapts its practices to the joint European Embedded Value principles (EEV) developed by the CFO Forum with the purpose of increasing comparability and uniformity in EV reporting. The CFO Forum is a group of CFOs from 20 of Europe's largest insurance companies (see www.cfoforum.nl).
Skandia will be presenting additional IFRS information as follows:
-- 28 February 2005, Year-End Press release 2004
The presentation of the year-end results for 2004 in accordance with Swedish GAAP will include the corresponding reconciliations as in today's presentation. The 2004 Annual Report will also include an IFRS section with a more technical description of the changes in accounting principles.
-- 28 April 2005, IFRS effects on full-year 2004
The impact of IFRS on the income statement and balance sheet for the full year 2004 will be presented on 28 April. Quarterly income statements and balance sheets for 2004 will be presented.
-- 31 May 2005, result for first quarter of 2005
Skandia's first financial report presented in accordance with IFRS will be the interim report for the period ended 31 March 2005.
In addition, Skandia will be providing information as follows:
-- An analyst meeting will be held in London on 28 February 2005
in connection with the 2004 Year-End Report.
Today's presentation will be held from 9.30--11.30 a.m (GMT) at the City Presentation Centre, 4 Chiswell Street, London EC1Y 4UP. For those who cannot attend have the opportunity to follow the meeting via a live webcast on Skandia's website, www.skandia.com. A recorded version of the meeting will then be available on Skandia's website during the afternoon.
For further information, please contact: Jan Erik Back, Chief Financial Officer, tel. +46-8-788 37 20 Harry Vos, Head of Investor Relations, tel. +46-8-788 36 43
Enclosure: Appedix
Appendix to press release
Transitional arrangements The rules for first time application of IFRS are set out in IFRS 1 "First time adoption of International Financial Reporting Standards". In general a company is required to determine its accounting principles in accordance with IFRS and apply these retrospectively to determine its opening balance sheet under IFRS. The standard allows several optional exemptions to the requirements for retrospective implementation. Skandia will take advantage of the following exemptions:
a) IFRS 3 -- Business Combinations
Skandia has chosen not to apply IFRS 3 retrospectively to its past business combinations. Instead the standard will be applied prospectively from 1 January 2004. The consequences of this will be as follows: -- the classification of former business combinations will be maintained; -- there will be no re-measurement of original "fair values" as determined at the time of the business combination; and -- the carrying amount of goodwill in the opening IFRS balance sheet will be equal to the carrying amount under previous GAAP. From the date of transition goodwill will no longer be amortised, but will be tested for impairment at the date of transition.
b) IAS 21 -- The effects of changes in foreign exchange rates
Any translation differences on translation of foreign operations that arise from 1 January 2004, the date of transition to IFRS, will be presented as a separate component of equity. Translation differences that arose prior to 1 January 2004 will be set to zero as allowed under IFRS1.
c) IFRS 2 -- Share-based payments
The exemption in IFRS 1 will be applied. Skandia will apply IFRS 2 to all share options granted after 7 November 2002 and which were not vested as per 1 January (the effective date of IFRS2).
d) IAS 19 -- Employee benefits
With effect from 1 January 2004, Skandia will apply the Swedish Financial Accounting Standards Council's new recommendation RR 29, which is based on IAS 19. The key change relates to the recognition on the balance sheet of a defined benefit asset and liability which represents the difference between the defined benefit obligation and the fair value of plan assets. The calculation of the defined benefit obligation is based on the defined benefit structure as at 31 December 2003. The standard will not be used retrospectively. Instead, the exemption in IAS 19 is applied. This means that all cumulative actuarial gains and losses at the date of transition 1 January 2004, are recognised.
e) IAS 39 -- Financial instruments: Recognition and measurement
Certain assets will be designated as "fair value through profit and loss" at the date of transition as allowed by IFRS1.
In addition, IFRS1 has a number of mandatory exceptions to the requirement for retrospective application. The following exceptions will affect Skandia:
f) Hedge accounting
Hedging relationships that were designated as hedges under previous GAAP, but which did not qualify for hedge accounting under IAS 39, will be treated in accordance with the requirements of IAS 39 relating to the discontinuance of hedges accounting.
g) Accounting estimates
Accounting estimates recognised under IFRS that were made under previous GAAP are not adjusted except for changes in accounting policies or if there is objective evidence of an error.
Preliminary change in opening equity, 1 January 2004 SEK
billion
Restatement of deferred acquisition costs 5.0
Deferral of fee income -10.0
Reduction in technical provisions due to more realistic
assumptions 0.7
Restatement of investments to fair value 0.4
Surplus in defined-benefit pension plans 0.3
Total changes before tax -3.6
Tax effect of the above 0.9
Adjustment to equity -2.7
Total equity under Swedish GAAP 15.4
Adjustment to equity -2.7
Total equity under IFRS(a) 12.7
(a) Total equity including minority interests under IFRS 12.8
Preliminary change in net income, 1 January 2004 -- 30
June 2004 SEK
million
Restatement of deferred acquisition costs 220
Raising of deferred fee income -500
Other adjustments 40
Total changes before tax -240
Tax effect of the above 70
Adjustment to net income -170
This information was brought to you by Waymaker http://www.waymaker.net
The following files are available for download:
http://wpy.waymaker.net/client/waymaker1/WOLReleaseFile.aspx?id=68168&fn=wkr0001.pdf