Skandia: Interim Report for the Period January - September 2002
STOCKHOLM, Sweden, Oct 30, 2002 (PRIMEZONE) -- Skandia, for the period January - September 2002(1):
-- Favourable solvency position due to limited exposure to guarantees
-- Borrowings decreased by SEK 6.2 billion. Strong cash position
-- The group's operating result for the period was SEK -2,309 million
(- 4,686)
-- Net asset value SEK 34.5 billion (34.9)
For third quarter
-- The profit margin for unit linked assurance rose by 2.2 percentage
points compared with the second quarter, to 11.9%
-- Sales increased by 3% during the third quarter compared with the
same period a year ago
-- The result of operations for the third quarter was SEK 44 million
(604)
-- The operating result for the third quarter was SEK -2,669 million
(-3,738)
Comments by Lars-Eric Petersson, President and CEO: In recent times we have witnessed a global stock market decline that can be matched only by the 1930s. This has a negative impact on all companies that work with consumer financial products, and Skandia is no exception. However, during the first nine months of 2002 we made considerable progress in reinforcing our financial and market positions, as follows:
-- The profit margin for unit linked assurance increased to 11.9% in
the third quarter.
-- The group actively limits its exposure to guarantees within its
worldwide product range, compared with the rest of the market.
-- We have prudently strengthened the valuation of our deferred
acquisition costs in the U.S. operations.
-- The capital of the U.S. operations has been strengthened by USD
255 million, placing American Skandia in the highest category of
capital guidelines for life insurers in the U.S. market.
-- The parent company will become an operating company by transfer of
the Swedish unit linked portfolio to the parent, thereby improving
the group's rating outlook.
-- The group had an improved cash flow position for the first nine
months of 2002. Substantial cost cutting programmes across all
operations will, everything else equal, contribute approximately
SEK 1 billion to our operating result for the full year 2003.
(1) Does not include Livforsakringsaktiebolaget Skandia Insurance
Skandia, which is run on a mutual basis. Company Ltd.
(publ.)
All return measurements for shareholders'
equity, net asset value and capital employed Domicile:
as per September 2002 pertain to moving Stockholm, Sweden
twelve-month figures. All comparison figures
pertain to September 2001 unless stated
otherwise. Reg. no:
502017-3083
Despite the sharp decline in worldwide markets, the prospects for the group are undiminished. We are managing the business to deliver increased value for the shareholders even if the present market conditions persist for some time.
OVERVIEW
The continued uncertainty and decline in the world's stock markets is affecting the insurance industry as a whole as well as demand for long- term savings. Sales of unit linked assurance outside the USA were unchanged and amounted to SEK 40.6 billion (40.7). Sales in the USA are dominated by single-premium products, which have been affected by the stock market decline to a greater extent. Total sales therefore decreased to SEK 92.3 billion (104.1). However, total sales increased during the third quarter by 3% compared with the same period a year ago. The profit margin rose for the fourth consecutive quarter, to 10.1% (9.6%), mainly due to cost reductions.
Sales of mutual fund savings products decreased by 22%, to SEK 21.7 billion.
Funds under management have decreased by 22% since the start of the year, to SEK 487.7 billion, of which 8 percentage points are attributable to translation to lower exchange rates. The MSCI World Index showed a decline of 26% for the period. Net flows in funds under management remained positive, at SEK 33.9 billion.
During the last two years, cost-savings of approximately SEK 800 million have been effected in the USA, and the number of employees has decreased by approximately 450 positions. In addition to this, continuous review is being conducted of cost levels in all units, which is expected to yield further cost reductions of SEK 1,200 million in 2003.
The result of operations for the group decreased to SEK 1,389 million (2,746). The result decline is attributable to the falling stock market and lower sales volumes, but also to changes in customers' savings behaviour toward lower exposure to the stock market. Investment income has increased despite the falling stock markets, which is an expression of the group's limited risk exposure in this respect. The operational return on net asset value was 8% (13%).
The operating result, which includes financial effects and items affecting comparability, amounted to SEK -2,309 million (-4,686). Financial effects attributable to the trend in the capital markets were negative during the period, at SEK -5.7 billion. The sale of Skandia Asset Management was completed during the second quarter, generating a capital gain of SEK 2.0 billion.
A sharper focus on capital efficiency and cash management has yielded positive effects. The group's financial position and liquidity are favourable. Cash flow has improved compared with a year ago. Liquid assets increased during the third quarter by SEK 0.9 billion. Solvency capital in the group as well as in the subsidiaries is more than adequate. Borrowings have decreased by SEK 6.2 billion since the start of the year.
The continued sharp decline in the stock market during the third quarter has had a negative impact on the future earnings ability in the form of lower fees and higher costs for guaranteed minimum death benefits. In the light of the current market conditions, Skandia has decided to write- down its deferred acquisition costs in the US operation during the third quarter in the amount of SEK 1,279 million. This write-down relates to a reduction of annual fund growth to 8% for future years. This adaptation affects the result after tax and shareholders' equity by SEK 831 million. However, the write-down has no effect on the operating result, net asset value or cash flow. Nor does it have any effect on the capital requirement of the US operation.
INSURANCE AND SAVINGS PRODUCTS
Market and Sales
Unit Linked Assurance
Sales of unit linked assurance outside the USA were unchanged compared with September 2001. New sales decreased by 17% (new sales defined by the industry-wide definition as periodic premiums recalculated to full- year figures plus 1/10 of single premiums during the period).
Sales have stabilized in the British operation. Sales decreased by 5% in local currency, mainly due to weak market conditions. However, sales for the third quarter increased by 13% in local currency compared with the third quarter of 2001. New sales decreased by 12% in local currency, but only by 4% in the third quarter, compared with the third quarter of 2001.
Sales in Sweden decreased by 7%. Skandia is the market leader, and according to the most recent available statistics, Skandia's market share increased further during the first half of 2002, to 33%. New sales decreased by 32%. This is mainly attributable to the substantial inflow from individual contracts in the collective pensions segment during the same period a year ago.
In Germany, sales increased by 19% in local currency. Sales are derived solely from products with annual premium, which are contributing to stable development. In Japan, sales reached record levels and increased by 335% in local currency. Skandia opened its operation in France at the end of June.
Sales in the USA decreased by 10% in local currency. The market and customers' behaviour have been negatively affected by the stock market decline during the last two years. Sales have stabilized since the third quarter of 2001, and sales for the third quarter of 2002 were 13% higher than for the same period a year ago. The market share has increased successively and was 3.3% during the third quarter.
Surrenders increased in the U.S. operation on a moving 12-month basis to 12.6% of assets under management (9.2% at year-end 2001). Surrenders increased in the USA during the third quarter due to the current market situation, which is prompting customers to reduce their exposure to the stock market.
For the group excluding the USA, payments to policyholders amounted to 9.1% of assets under management on a moving 12-month basis (7.7% at year- end 2001). Surrenders accounted for 7.2 percentage points of this total, compared with 6.0 percentage points at year-end 2001. The percentage increase is explained by a decrease in fund values.
Mutual Fund Savings Products Compared with the same period a year ago, sales decreased by 22%, to SEK 21.7 billion. For the third quarter, sales were down 12% compared with the same period in 2001.
Sales in the USA decreased by 49% in local currency. In the U.K., however, sales increased by 12%. Sales in the German market are showing continued strong development and increased by 69% in local currency.
Life Assurance Sales of traditional life assurance, pertaining mainly to the Spanish operation, increased slightly. However, assets under management decreased to SEK 13.9 billion, compared with SEK 15.4 billion at year- end 2001.
Result and Profitability
Unit Linked Assurance
The result for newly written business during the third quarter was the highest of the last five quarters due to cost-cutting measures and the underlying good profitability of products. The result for newly written business for the year, however, was slightly lower than a year earlier due to lower sales volumes.
The profit margin was 10.1% (9.6%) and has increased in most markets. In the U.K. the profit margin strengthened during the period as a result of effective cost control and a better product mix. In Sweden the profit margin remained at a satisfactory level. In the USA the new product offering and cost-cutting measures are making a positive contribution to margin development, and the profit margin increased for the fourth quarter in a row. For other markets as well, the margin increased on the whole compared with a year earlier. The operation in Japan is now showing a positive profit margin due to the strong sales increase.
The result of operations decreased to SEK 2,042 million (2,962). The decline and uncertainty in the financial markets have had a negative impact on customers' savings behaviour. This led to an increase in surrenders in the USA during the third quarter, which is the main reason for the poorer outcome compared with underlying assumptions.
A change in the investment policy toward an even lower investment risk is expected to lead to slightly lower investment returns in the future, particularly in the USA. The present value of this has had a negative impact on changes in operative assumptions.
Mutual Fund Savings Products The result was SEK -236 million (-10). The mutual fund savings products business is in the build-up stage in most markets, which is giving rise to development costs. The poorer result is also attributable to the stock market decline, which has led to lower fees from funds under management.
Life Assurance
The result for life assurance was SEK 114 million (86).
BUSINESSES
SkandiaBanken's result decreased to SEK 17 million (55) and was charged with costs for marketing in Denmark, among other things. The action programme that is currently being implemented is expected to lead to earnings improvements of approximately SEK 300 million. SkandiaBanken grew its customer base during the period by 122,000, to 1,243,000 customers.
Earnings generated by the group's treasury operations increased, as did the group's investment income. The result for Businesses was charged with costs for the group's Global Business Development unit and start-up costs for the banking business in Switzerland. The bank opened for business in August. The result of operations for Bankhall, the distribution network in the UK, was SEK 62 million before goodwill amortization of SEK 100 million.
Group Expenses Group expenses comprise management and structural costs. Continued adaptations to the prevailing market conditions gave rise to higher structural costs. Further adaptation of the group's organization is taking place continuously, which will lead to additional cost reductions. Starting in 2002, goodwill amortization is allocated to the respective business units.
Exchange Rate Effects
Sales were negatively affected by SEK 2,682 million and the operating result positively by SEK 199 million. Total assets have decreased by SEK 56 billion since the start of the year as a result of currency movements.
BALANCE SHEET AND NET ASSET VALUE
During the first quarter, Skandia carried out the acquisition of Bankhall, a network of Independent Financial Advisers in the UK. This resulted in a SEK 3.0 billion increase in goodwill. Goodwill decreased by SEK 1.0 billion through the sale of Skandia Asset Management.
The decision has been made to transfer the unit linked assurance portfolio of SkandiaLink Livforsakringsaktiebolaget to the parent company, Skandia Insurance Company Ltd. This will make the parent company an operating company once again, with the same operational focus as the rest of the group. In connection with this transfer, Standard & Poor's revised its CreditWatch implications for Skandia's senior debt rating from negative to positive. Standard & Poor's has announced that this could entail an upgrading of Skandia's long-term counterparty credit rating from "triple-B" to "single A minus."
Skandia today owns 19% of If, which means that If is no longer reported in accordance with the equity method. Consequently, If's continuing result is no longer included in Skandia's result. During the third quarter a capital injection of SEK 0.2 billion was made to If. Skandia conducts regular market valuations of its holding in If, which is reported in the balance sheet as an investment asset valued at SEK 3.0 billion.
Borrowings have decreased, and liquidity is good. Unconditional, unutilized credit facilities amounted to SEK 11.8 billion, compared with SEK 9.4 billion at the start of the year. Net asset value amounted to SEK 34.5 billion (SEK 37.2 billion at year-end 2001). Shareholders' equity amounted to SEK 20.1 billion, compared with SEK 20.5 billion at the start of the year. Shareholders' equity in the group has increased by SEK 2.0 billion since 1999, i.e., before the stock market began declining.
Risk Exposure and Solvency Capital To underscore the importance of the subsidiary American Skandia and its position in the group, during the third quarter a capital infusion of USD 255 million was made to the company. This recapitalization was made by converting intra-group loans of USD 135 million to equity and contributing additional equity of USD 120 million. This additional capital provided American Skandia Life Assurance Corporation with approximately 643% of risk based capital (RBC) as established by the National Association of Insurance Commissioners. This RBC places American Skandia Life Assurance Corporation in the highest category of capital guidelines for life insurers as measured by the major rating agencies.
Skandia has a restrictive investment and risk policy. Consequently, exposure to credit losses in Skandia's own bond portfolio is very limited. Similarly, the portion of equities and equity funds in the portfolio is very low. In a declining stock market, ordinarily the need of risk and solvency capital in the insurance operations rises. However, Skandia has consciously limited its risk undertaking in the insurance operations with respect to guaranteed commitments, at the same time that its investment risk is low. For example, Skandia's guarantees pertaining to mortality risks in the US market are considerably lower than what is generally offered in the market. Products with guaranteed yields are not included in our product range. If necessary, Skandia's capacity to provide its operations with additional solvency capital and financing is good.
Borrowing and Liquidity Cash flow from operating activities improved compared with a year earlier. The stock market decline entails lower revenues in the form of fees, however, this been offset by cost-cutting measures and lower acquisition costs. Cash flow was changed with approximately SEK 0.5 billion in costs for newly started businesses. In the US operation, cash flow from operating activities was positive, in the amount of SEK 0.1 billion.
Borrowings have decreased by SEK 6.2 billion since the start of the year, mainly due to the repayment of SEK 5.4 billion in loans, but also to exchange rate effects of SEK 0.8 billion. Borrowings are thus at the level they were at in March 2000. Subordinated loans totalling SEK 850 million have been floated which, along with debt repayment, have contributed to an improvement in the group's core debt leverage.
The net flow from acquisitions and sales of businesses was positive in the amount of SEK 2.0 billion.
Stockholm, 30 October 2002
Lars-Eric Petersson
President and CEO
For questions, please contact:
Jan Erik Back, Chief Financial Officer, tel. +46-8-788 3720
Michael Wolf, Chief Investment Officer, tel. +46-8-788 4559
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 Recommendation RR20 of the Swedish Financial Accounting Standards Council. Aside from an adaptation to new accounting recommendations of the Swedish Financial Accounting Standards Council, which took effect on 1 January 2002, the interim report has been prepared in accordance with the same accounting principles as in the 2001 Annual Report. The new recommendations have not had any material impact on the group's profit and loss account or balance sheet.
Financial calendar:
13 November 2002, October sales release12 February 2003, Year-End Report 2002
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, 30 October 2002. In addition to the interim report, Skandia has also published the document Financial Supplement Q3 2002 on www.skandia.com, under Investor Relations/Reports and Events/Interim Reports.
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