STOCKHOLM, Sweden, May 26, 2004 (PRIMEZONE) -- Skandia: INTERIM REPORT for the period January-March 2004*)
FIRST QUARTER 2004 Excluding discontinued operations
-- Higher growth.
-- Sales rose 48% (2%) in local currency, to SEK 25.3 billion.
-- New sales of unit linked assurance rose 21% (-9%) in local
currency.
-- Funds under management increased to SEK 351 billion (SEK 309
billion at the start of the year).
-- Improved result.
-- Result according to Swedish GAAP
-- The result before tax increased to SEK 293 million (72).
-- Earnings per share were SEK 0.30 (0.03).
-- Result according to embedded value method
-- The operating result increased to SEK 1,317 million (228).
-- The estimated profit margin for new sales of unit linked
assurance (according to embedded value accounting) increased from 14.5%
for the first quarter of 2003 to 16.5%. The profit margin for the full
year 2003, recalculated according to new assumptions, was 19.6%. The
lower margin during the first quarter is attributable to a changed
product mix, and in particular changes in the geographic composition of
business. Markets with a below-average profit margin showed stronger
growth (see also Section C).
-- However, the operational return on net asset value (according
to the embedded value method, before tax) for unit linked assurance
increased to 12.3%, compared with 11.3% for the full year 2003
(excluding one-time effects).
-- As previously reported, cash flow from operating activities was
charged with SEK 0.8 billion in one-time payments and amounted to SEK -
1.1 billion (-0.2). Despite the strong sales growth, the continuing cash
flow is thus in reasonable balance (see also p. 22).
-- The group's financial position improved.
-- Net asset value increased by 8% to SEK 33.0 billion.
-- Shareholders' equity increased by 12% to SEK 17.2 billion.
-- Borrowings decreased to SEK 3.6 billion (SEK 4.0 billion at the
start of the year). Liquid assets amounted to SEK 2.2 billion (SEK 2.2
billion at the start of the year).
-- The sale of If was carried out on 6 May 2004, which
strengthened the group's liquidity by a further SEK 4.5 billion.
FIRST QUARTER 2004 Including discontinued operations
-- Sales through March amounted to SEK 25,315 million (25,663), of which discontinued operations accounted for - (SEK 8,464 million). -- The result after tax (according to Swedish GAAP) was SEK 1,137 million (127). The result includes SEK 834 million (92) in items affecting comparability and the result for discontinued operations. The gain on the sale of the Japanese operation was SEK 834 million. -- Earnings per share were SEK 1.11 (0.12).
In 2004 discontinued operations pertain to the Japanese operation, while in 2003 they also pertain to the US operation and the banking operation in Switzerland.
Comments by Hans-Erik Andersson, President and CEO:
In the first quarter of 2004, the financial markets were characterized by relatively strong growth. Long-term bond rates and the world's stock markets performed well.
Skandia's sales increased by 48% (2%) in local currency to SEK 25.3 billion (17.2). Sales of both unit linked assurance and mutual funds show very high rates of increase, 43% and 107%, respectively. New sales of unit linked assurance rose by 21%.
In the UK the sales trend remained very positive and Skandia's multi- manager products are attracting considerable attention in a market characterized by a continued decline for traditional life assurance products. The quarter was also affected by increased interest in savings products towards the end of the British tax year.
In the Swedish market, Skandia's sales of unit linked assurance products were unchanged compared with the first quarter of 2003 at SEK 2.6 billion. Market share decreased to 23.4% in the face of fierce competition. We are not satisfied with this performance, and intensive efforts are under way to achieve a better coordination of the Swedish operations with a simplified customer interface.
The sales trend remained positive in the Europe & Latin America division. In Spain, however, sales were favourably affected by seasonal variations.
Good sales development combined with strong net flows have led to a 14% increase in funds under management to SEK 351 billion (309) since the start of the year.
The result according to Swedish GAAP shows improvements at all levels and amounts to SEK 293 million (72) before tax. Adjusted for one-time effects, performance compared with the final quarter of 2003 was also positive. In Sweden, both SkandiaLink and SkandiaBanken report a favourable earnings trend and the operations in the UK and Germany also show good results.
The operating result (according to the embedded value method) for unit linked assurance, increased by 60% to SEK 973 million, of which SEK 396 million (291) was generated from new business during the year and SEK 512 million (423) is return on value of contracts in force from previous years. The value of new business is gratifying in view of the changes carried out in product structure.
The profit margin for the quarter rose to 16.5% (14.5%). This improvement was affected by changes in the geographic composition of business and by the product mix. The operational return on net asset value before tax rose from 9.3% to 10.4%, and from 11.3% to 12.3% for unit linked assurance.
Cash flow from operating activities, excluding one-time payments, amounted to SEK -0.3 billion, which in view of the substantial sales increases must be regarded as relatively well-balanced. The financial position is good and after the end of the quarter liquidity was further strengthened by SEK 4.5 billion from the sale of If. As previously reported, Skandia will present its view of the capital situation and its financial targets in conjunction with the six-month report.
In summary, 2004 has started with a strong sales trend and good results. In the months ahead we will work hard to further improve our profitability and to improve our market position in Sweden. In this context it is a pleasure to be able to welcome Gert Engman as head of the Swedish operations. Another pleasing change in executive management is the appointment of Jennifer Rhule as head of human resources.
* * * * *
To facilitate comparisons, all data in this interim report is reported excluding the result for discontinued operations, unless stated otherwise.
The interim report is presented in five parts. Section A (Sales and funds under management) contains an account of sales during the period and funds under management, among other things. Section B presents a discussion of the result before tax in accordance with Swedish GAAP as set out in the Swedish Annual Accounts Act for Insurance Companies. The operating result according to the embedded value method is presented in section C. Cash flow and the balance sheet are discussed in section D. Section E describes events after the end of the period.
A. SALES AND FUNDS UNDER MANAGEMENT (tables on pp. 13-14, 21)
Sales rose to SEK 25.3 billion (17.2), an increase of 47% in Swedish kronor and 48% in local currency.
Sales of unit linked assurance in local currency rose 43%, to SEK 17.0 billion (12.1). New sales of unit linked assurance increased by 21% in local currency. Sales of mutual fund savings products increased by 107% in local currency, to SEK 6.9 billion (3.3).
UK
Sales in the UK (including Royal Skandia in the Offshore division) rose 79% to SEK 13.7 billion (7.8). Sales of unit linked assurance rose 76% in local currency, to SEK 11.0 billion (6.4). New sales of unit linked assurance rose 71%. Sales of mutual fund savings products rose 93%, to SEK 2.6 billion (1.4). Innovative product development has contributed to favourable growth in many product areas. The growth can also be credited to rising interest in multi-manager products, where Skandia is well- positioned. A general reduction in interest in the market for savings in traditional life assurance, in favour of unit linked assurance, also contributed to increased sales. In additional to these factors the end of the tax year in the UK also had some positive impact on sales, in contrast to previous years.
Sweden
Combined sales (excluding Skandia Liv) increased by SEK 1.2 billion compared with the preceding quarter. Sales decreased compared with the first quarter of 2003, to SEK 3.9 billion (4.2), due to lower direct sales of funds (including PPM pensions).
Sales of unit linked assurance rose 29% over the preceding quarter and were unchanged compared with the first quarter of 2003. Sales amounted to SEK 2.6 billion (2.6). New sales of unit linked assurance decreased by a combined total of 7% compared with the preceding quarter and by 22% compared with the first quarter of 2003.
The Swedish market is characterized by fierce competition, particularly in the corporate segment. The attention surrounding Skandia has also affected interest in the company's products. Despite this, new sales of unit linked assurance in the private market rose 7% compared with the preceding quarter and 9% compared with the first quarter of 2003. The competitive situation is expected to remain tough, and the work in the Swedish market on restoring confidence is expected to continue for some time.
Skandia's market share in unit linked assurance decreased to 23.4% (25.9% at the start of the year). In the life assurance market overall, Skandia's market share was 23.8% (25.1%).
Extensive work is being carried out to address the market situation. Activities in the Swedish operations, mainly in Skandia Liv, SkandiaLink, SkandiaBanken and Skandia Lifeline, are now being coordinated in a separate division. The aim is to achieve better coordination between the Swedish businesses and make it possible for customers to deal with one Skandia in a convenient manner.
Other markets
Sales for the Europe & Latin America division rose 34%, to SEK 5.7 billion (4.3). Sales increased in most markets. Sales of unit linked assurance rose 16%, while sales of mutual funds and related products rose 77%. New sales of unit linked assurance were essentially unchanged. The sales trend was particularly positive in Spain. Sales in Germany rose 17%.
The sales successes in Australia continue, and sales of mutual fund savings products more than quadrupled, to SEK 1.7 billion (0.4).
Sales of life assurance
Sales of traditional life assurance, mainly pertaining to the Spanish operation, fell by 11% in local currency, to SEK 243 million (276), due to lower interest in this savings form.
Funds under management
Fund values increased by 14%, net, to SEK 351 billion (309), compared with the start of the year. The increase is attributable to a continued positive net flow, totalling SEK 15.6 billion (9.5), and the stock market rise.
Payments to unit linked policyholders amounted to 10.7% of assets under management on a yearly basis (9.5% at the start of the year). Of this amount, surrenders accounted for 7.9 percentage points, compared with 7.1 percentage points at the start of the year. Most of this increase is attributable to changes in value and exchange rates.
B. RESULT ACCORDING TO SWEDISH GAAP (as set out in the Swedish Annual Accounts Act for Insurance Companies) (tables on pp. 13-17, 19, 24)
The result before tax increased to SEK 293 million (72). The result improvement is mainly attributable to unit linked assurance and SkandiaBanken. However, joint-group costs rose during the period. The return on shareholders' equity was 10%, compared with 9% for the full year 2003.
Unit linked assurance
The result before tax increased to SEK 426 million (250). The increase in sales and the stock market rise have had a positive impact on revenues in the form of fees. The gross contribution, which consists of fees after deducting necessary provisions for actuarial risks, increased to SEK 1,775 million (1,503). Cost-cutting measures have also contributed to the result improvement. Administrative expenses decreased to SEK 248 million (288). However, acquisition costs increased to SEK 1,503 million (1,194) as a result of rising sales volumes. These costs are to be covered by future fees and are deferred to a certain extent. Of total acquisition costs, 62% -- or SEK 927 million (679) -- were deferred. Amortization of deferred acquisition costs amounted to SEK 572 million (488). The change in deferred acquisition costs had a positive result impact in the amount of SEK 355 million (191).
Mutual fund savings products
The result improved but was negative, at SEK -42 million (-68). The strong growth entailed an increase in sales costs, which were charged against the result in the amount of SEK -95 million. Sales costs for mutual fund savings products are not deferred. In addition, the value of funds under management increased, entailing an increase in revenues in the form of fees, by SEK 105 million. In addition, cost-cutting measures have had a positive result impact.
Life assurance
The result, mainly pertaining to Spain, was SEK 27 million (32).
Other businesses
The result improved to SEK 67 million (-7).
The result for SkandiaBanken was SEK 89 million (27). The result improvement is mainly attributable to higher business volumes and the achievement of cost efficiency. The result is developing favourably in all Nordic markets. The Norwegian operation has achieved critical volumes and reported favourable result development. The operation in Denmark is still in the build-up phase, but is well on its way to achieving the necessary volumes and thus an improved result. In Sweden, business is developing better than anticipated for securities trading, among other areas. Lending increased by SEK 4.1 billion during the last twelve-month period, to SEK 30.9 billion. Deposits increased by SEK 2.4 billion, to SEK 39.1 billion.
The result for Bankhall amounted to SEK 3 million (21) before SEK 36 million (35) in goodwill amortization. The result has been charged with costs for development of operations in connection with coming deregulation in the market, as well as costs for systems development. In addition, the company's management functions were further strengthened in order to develop new business opportunities.
Cost-cutting
Extensive cost-cutting programmes were carried out in 2002 and 2003. The remaining provision for these programmes amounted to SEK 217 million as per 31 March 2004, entailing that SEK 94 million was utilized during the first quarter.
Joint-group expenses
Joint-group expenses, which include management costs for joint-group functions and structural costs, increased to SEK 185 million (135).
Management costs for joint-group functions are reported inclusive of deductions for contractually regulated contributions pertaining to distribution costs within the Swedish operations. These contributions are based on sales volume and the composition of in-force business, and have decreased due to the lower level of sales. The result during the first quarter was negatively affected in the amount of SEK -33 million (+28). Excluding these contributions, joint-group expenses amounted to SEK 152 million (163). Structural costs include costs for external consulting in connection with various ongoing investigations. Structural costs increased to SEK 27 million (3).
Discontinued operations
The result for discontinued operations was SEK 834 million (92) and pertains to the gain for 2004 on the sale of the Japanese operation.
C. RESULT ACCORDING TO THE EMBEDDED VALUE METHOD (tables on pp. 13-15, 18-20)
At the end of 2003 Skandia's embedded value calculations were adapted to new assumptions which better reflect the operations' economic conditions and level of earnings. These assumptions are applied for the continuing operations starting in the first quarter of 2004 and entail an increase in the current value of new business for the year and thus for the profit margin compared with the assumptions that applied for the first quarter of 2003. The comparison figures for the first quarter of 2003 have not been recalculated according to the new assumptions. During the first quarter, the return on the value of contracts entered into in previous years was negatively affected by the reduction of the interest rate used for present value discounting.
Group operating result
The group's operating result according to the embedded value method was SEK 1,317 million (228) and consists of the pre-tax result -- calculated in accordance with Swedish GAAP -- and the change in the surplus value of business in force for unit linked and life assurance. The surplus value of business in force pertains to the current value of estimated future operating surpluses.
Operating result, unit linked assurance
The operating result for unit linked assurance amounted to SEK 1,454 million (406). Financial effects affected the operating result positively in the amount of SEK 481 million (-203). Financial effects pertain to the change in the present value of future revenues caused by developments in the capital markets and the adjustment of the interest rate used in discounting to present values.
Result of operations, unit linked assurance
The result of operations, which consists of the operating result excluding financial effects in unit linked assurance, increased to SEK 973 million (609). The operational return (before tax) was 12.3%, compared with 11.3% for the full year 2003 (excluding one-time effects). The result of operations consists primarily of the following components:
Present value of new business for the year
The present value of new business for the year increased to SEK 396 million (291). Approximately half of the change is attributable to higher business volumes. The remaining increase is mainly attributable to the change in assumptions that was made at the end of 2003.
The estimated profit margin, measured as the present value of new business for the year expressed as a percentage of new sales for the year, thereby increased from 14.5%, as reported for the first quarter of 2003, to 16.5% for the first quarter of 2004.
The reported profit margin for the full year 2003 was 14.6%. Recalculated using the new assumptions, the profit margin for the full year 2003 was 19.6%, compared with 16.5% for the first quarter of 2004.
The decline is largely due to a change in the geographic composition of business. Markets with a below-average profit margin showed strong growth during the first quarter of the year. Another contributory factor to this decline was a change in the product mix. The profit margin in the UK was therefore essentially unchanged at 11.8% (11.9% at the start of the year). The profit margin for other businesses decreased to 23.1% (26.5% at the start of the year), mainly due to lower business volumes in Sweden.
Return on value of contracts in force from previous years
The present value of in-force contracts is indexed by one year's interest. This, together with the return on investments pertaining to unit linked assurance, increased to SEK 512 million (423).
Outcome compared with operative assumptions and change in operative assumptions
The result was positively affected by a total of SEK 81 million (-68). The outcome compared with operative assumptions was negatively affected in Sweden by a rise in surrenders. However, this was countered by a change in assumptions attributable to costs for fund management in the Swedish operations.
D. CASH FLOW AND BALANCE SHEET (tables on pp. 22-23, 25-26)
Cash flow from operating activities
Cash flow from operating activities was negative, at SEK -1.1 billion (- 0.2). As previously announced, a contractually regulated distribution agreement in the Swedish operations was settled in cash, which affected cash flow negatively in the amount of SEK -0.8 billion. The remaining negative cash flow was due to adjustment of accruals and other liabilities. Despite the strong sales development, cash flow from operating activities is in reasonable balance.
Following the prolonged stock market decline, revenues from funds under management have shown a continued recovery. Revenues follow the stock market trend with a slight time delay at the same time that the increase in sales has given rise to higher commission payments.
Cash flow from investing activities
The net inflow from investing activities amounted to SEK 1.7 billion (0.0), of which SEK 1.2 billion is attributable to the sale of the Japanese operation.
Cash flow from financing activities
Cash flow from financing activities was negative, at SEK -0.5 billion (0.2). Compared with the start of the year, borrowings decreased by SEK 0.4 billion through the repayment of loans.
Balance sheet
Total assets amounted to SEK 364.1 billion (SEK 340.6 billion at the start of the year). The group's borrowings amounted to SEK 3.6 billion, compared with SEK 4.0 billion at the start of the year. Liquid assets amounted to SEK 2.2 billion. Borrowings amounted to SEK 1.4 billion, net, after deduction for liquid assets. Unconditional, unutilized credit facilities amounted to SEK 4.4 billion, compared with SEK 3.9 billion at the start of the year.
Net asset value and shareholders' equity Net asset value increased by 8%, to SEK 32,964 million (SEK 30,478 million at the start of the year), corresponding to SEK 32 per share (30). Shareholders' equity increased by 12%, to SEK 17,222 million (SEK 15,381 million at the start of the year), corresponding to SEK 17 per share (15).
Currency effects
After currency hedges, net asset value and shareholders' equity were positively affected by currency movements in the amount of SEK 709 million and SEK 467 million, respectively, during the first quarter. Total assets increased by SEK 16 billion compared with the start of the year due to currency movements. Sales were affected positively in the amount of SEK 187 million by currency movements, while the operating result was essentially unchanged.
New accounting rules for pension commitments
Starting on 1 January 2004, Skandia is applying the Swedish Financial Accounting Standards Council's new recommendation RR29 -- Employee Benefits, based on IAS 19. The change mainly entails that calculations of defined-benefit pension plans take into account estimated future salary increases and inflation. The one-time effect of this change is applied directly against shareholders' equity in accordance with RR5 -- Reporting of Changes in Accounting Principles, and has no impact on cash flow or the profit and loss account. As a result of this change in accounting principle, shareholders' equity after tax increased by SEK 227 million on 1 January 2004. The change in principle did not have any major impact on the profit and loss account for the first quarter. Calculations of the group's defined-benefit pension plans are based on the situation as per 31 December 2003.
The calculation takes into account future salary increases and inflation, among other things. The calculation is based on the situation as per 31 December 2003 and includes -- among other things -- the following assumptions: -- Discount rate: 4.75% -- Rate of salary growth: 3.25% -- Inflation: 2% -- Anticipated long-term return on the assets managed to cover pension commitments: 5.50%
Transition to International Accounting Standards (IAS/IFRS)
Skandia's Annual Report for 2003, pp. 51-52, describes the estimated effects of the transition to IAS (IFRS). In March 2004, IASB published a new accounting standard, IFRS 4 -- Insurance Contracts. According to this standard, a large number of Skandia's unit linked assurance products will be reported as financial instruments with fees and expenses in the profit and loss account instead of paid-in premiums. In the future, deferred acquisition costs will continue to be reported as an asset and will be amortized. However, the rules for this are slightly different than previously. Work is under way on determining the size of deferred acquisition costs in accordance with IAS/IFRS. Work is also under way on determining any other adjustments of liabilities and provisions.
IASB has also published recommendations for certain adjustments of IAS 39, which concerns financial instruments. Neither this standard nor IFRS 4 have been approved by the EU.
E. EVENTS AFTER THE END OF THE PERIOD
On 6 May 2004 the proceeds from the sale of Skandia's 19.36% stake in If were received, generating a net contribution of SEK 4.5 billion in liquidity.
Stockholm, 26 May 2004 Hans-Erik Andersson President and CEO
For further information, please contact: Jan Erik Back, Chief Financial Officer, tel. +46-8-788 3720 Harry Vos, Head of Investor Relations, tel. +46-8-788 3643
This interim report has been prepared in conformity with the guidelines of the Swedish Financial Supervisory Authority and Swedish Financial Accounting Standards Council recommendation RR20 -- Interim Financial Reporting. Aside from an adaptation to new accounting recommendations of the Swedish Financial Accounting Standards Council, which took effect on 1 January 2004, the interim report has been prepared in accordance with the same accounting principles as in the 2003 Annual Report. The new recommendations have not had any material impact on the group's profit and loss account or balance sheet. In accordance with Swedish Financial Accounting Standards Council recommendation RR19 -- Discontinued Operations, the Japanese operation is reported separately (for 2003, discontinued operations pertain to the US and Japanese operations and the banking operation in Switzerland).
Financial calendar for Skandia: 13 August 2004, interim report January-June 2004 18 November 2004, interim report January-September 2004 22 February 2005, year-end report 2004
Skandia's published financial reports are available on Skandia's website: www.skandia.com. Skandia's website also provides links to the webcast of the conference call on Wednesday, 26 May 2004. In addition to the interim report, Skandia has also published the document Financial Supplement Q1 2004 on www.skandia.com, under "Investor Relations/Reports and Events/Interim Reports". This document can also be ordered by phone.
Skandia Insurance Company Ltd. Sveavagen 44 SE-103 50 Stockholm Tel. +46-8-788 10 00 www.skandia.com Public company (publ.) reg. no. 502017-3083
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