Information on IFRS effects for 2004 and format for 2005 interim reports

On 1 February 2005 Skandia held an IFRS (International Financial Reporting Standards) briefing for institutional investors and financial analysts. That presentation is available at www.skandia.com. Today Skandia is releasing a report showing its income statements and balance sheets as well as a reconciliation of shareholders’ equity and the result for 2004 recalculated in accordance with IFRS. Currently there are a number of unclear points within the industry regarding a final version of IAS 39 and the interpretation of a number of standards. The report thus contains figures that may be subject to change. The report has not been examined by the company’s auditors. Transition to IFRS The report contains income statements and balance sheets for 2004 recalculated to IFRS as well as new accounting policies. The report also includes a reconciliation of the recalculation of shareholders’ equity and profit for the year. As previously announced, the effect of the transition to IFRS on shareholders’ equity is negative. Only a minor change has taken place compared with the effects presented on 1 February. Shareholders’ equity as per 1 January 2004 decreases by SEK 2.6 billion, and shareholders’ equity as per 31 December 2004 decreases by SEK 3.2 billion, to SEK 12.9 billion. The result for the full year 2004 decreases by SEK 641 million before tax and by SEK 428 million after tax. The combined effect on shareholders’ equity and the result is essentially unchanged compared with what was previously announced by the company: • The date for recognition of the revenues from unit linked assurance contracts is pushed further ahead in time, mainly due to the deferral of fees already paid in. This has no effect on cash flow from the contracts. Initial revenues and expenses are deferred over the life of the existing contracts. This entails, among other things, that initial fees already paid in by customers are to be deferred over the life of the respective contracts. However, not all initial costs will be deferred, which puts an extra burden on the income statement during periods of strong expansion. • Reporting of mutual funds will be done in the same way as for unit linked assurance, which entails that deferred acquisition costs and prepaid fees will also be reported for this business. • IFRS entails a change in accounting policies and format. However, neither the business fundamentals, product cash flow nor financial flows in the company are affected. • Embedded value reporting is not affected by IFRS. • The Board has decided to adapt Skandia’s dividend policy starting in 2005. The intent of the change is to keep the dividend unaffected by the change to IFRS. The most significant changes in connection with the transition to IFRS are described below: 1. Valuation Recognition of revenues from unit linked assurance business The date for recognition of the revenues from unit linked assurance contracts is pushed further ahead in time. Revenues are deferred over the life of the individual contracts. This entails, among other things, that initial fees already paid in by customers are to be deferred over the life of the respective contracts. This gives rise to a new balance sheet item, called “deferred fee income” (DFI). In addition, fees charged during the initial years of existing contracts will also be deferred. This gives rise to a receivable, called “fee income receivable” (FIR). The combined deferral of initial fees has a negative impact on shareholders’ equity as per 1 January 2004 of SEK -10.0 billion, net before tax. The effect on the result for the full year 2004 is expected to amount to SEK -903 million before tax. Reporting of expenses for unit linked assurance business Acquisition costs are also to be deferred over the life of the contracts. Accordingly, the amortisation period for deferred acquisition costs (DAC) has been extended compared with previous accounting policies. In addition, acquisition costs incurred during the initial years of existing contracts will also be deferred. This gives rise to a liability, called “accrued commission expense” (ACE). The combined deferral has a positive effect on shareholders’ equity as per 1 January 2004 of SEK 5.0 billion, net before tax. The effect on the result for the full year 2004 is expected to amount to SEK 477 million before tax. Mutual funds Deferral of revenues and expenses for mutual funds will be handled in the corresponding manner. The effect of this involves smaller amounts and is included in the above. Other Starting on 1 January 2004, goodwill is no longer amortised. However, tests are performed to see if there is a need to recognise impairment. To the extent that technical provisions have been too conservative in accordance with previous principles, these have been dissolved. This has a positive effect on shareholders’ equity as per 1 January 2004. For traditional life assurance contracts, the liability to policyholders is discounted using a market interest rate, which leads to a decrease in shareholders’ equity in connection with the transition to IFRS. Previously, the discount rate was set by the regulatory authorities. At the same time, bonds in traditional life business are measured at fair value, which leads to an increase in shareholders’ equity in connection with the transition to IFRS. 2. Presentation Income statement, balance sheet and cash flow All unit linked assurance contracts are broken down into two parts: one pertaining to savings and another pertaining to insurance risk. For the savings portion, paid-in premiums from customers will not longer be reported as written premium, while payments to customers will not longer reported as claim costs. This results in a clearer presentation of the company’s revenues and expenses at the same time that the income statement obtains a new format. Inflows from customers are reported in the balance sheet as an increase of unit linked assurance assets, and amounts paid out are reported as a decrease. These inflows and outflows will be specified in the table entitled “Change in funds under management”. The income statement and balance sheet will also be changed in that the bank operation will be consolidated line by line instead of as previously on separate lines. This consolidation results in a change in the definition of cash flow from operating activities. Classifications and concepts in the income statement may be changed due to the ongoing development of new reporting formats according to the IFRSs and the development of industry practice. Taxes The policyholder tax is charged to policyholders in the form of fees. This is reported as a revenue item in the company’s income statement. When the tax falls due for payment, this must be reported under the heading “Taxes” according to IFRS. To be able to differentiate the policyholder tax from the company’s (shareholder) tax, the policyholder tax is reported on a separate line. This gives rise to a new result measurement called “Profit before shareholder tax and after policyholder tax”. Segments • Business segments – In connection with the transition to IFRS, certain reclassifications have been made of the structure for reporting by business segment. The bank operation has been broken off from “Other businesses” under “Other” and is reported as a separate business segment. The mutual fund business in SkandiaBanken has been reclassified from “Bank operations” to “Mutual funds”. Certain group functions were previously classified as “Other businesses” under the “Other” business segment. These pertain primarily to the group’s treasury function, investment income from joint-group assets and costs for the divisions which were not allocated among the respective segments. These functions are now included together with joint-group costs under the “Joint functions” segment. The “Other businesses” business segment now includes only Bankhall and the disability and health insurance operations in the Nordic region. The result for Bankhall also includes a write-down of goodwill, which was charged against the fourth quarter in the amount of SEK 1,072 million. • Geographic segments – The reporting of the result per division includes the segment “group functions”, which mainly includes the group’s treasury function, investment income from joint-group assets and joint-group expenses. Embedded value (EV) Embedded value reporting is not affected by the transition to IFRS. The embedded value method is used by most European life assurance companies and is regarded within the industry to be a vital complement to reporting in accordance with IFRS. Result concepts In future interim reports, Skandia will primarily be communicating the following result concepts: Reporting method Result concept IFRS Profit before shareholder tax and after policyholder tax Embedded value Result of operations 1) Operating result 2) 1) Consists of the operating result excluding financial effects. 2) Consists of the result before shareholder tax and after policyholder tax according to IFRS, plus the change in surplus value of unit linked business in force (including financial effects). Outstanding issues One issue for the industry as a whole, as well as for Skandia, concerns the reporting of certain fund holdings. A consequence of IAS 27 is that funds that are considered controlled by Skandia according to the rules, might need to be consolidated, even though all of the assets belong to the owners of the fund units. The policyholders choose to invest in various funds. In practice, this is handled by Skandia’s unit linked assurance companies, which purchase units in the funds chosen by the customers. Thus Skandia, on behalf of its customers, can appear as the owner of a majority stake in a fund. Even though Skandia does not have a controlling influence over such investments, Skandia could be forced to consolidate funds in which its ownership exceeds 50%. If this happens, the funds’ holding of shares in Skandia Insurance Company Ltd could be considered to be repurchased treasury shares, which are to be eliminated against shareholders’ equity. The market value of these shares amounted to SEK 273 million as per 31 December 2003 and SEK 541 million as per 31 December 2004. Such an adjustment would give rise to a decrease in equity for accounting purposes, even though there is no financial exposure. Skandia is monitoring the development of industry practice in order to be able to make a decision on this issue in 2005. Fund holdings have not been consolidated in this report. In our opinion, the proposal from IASB pertaining to the restricted fair value option in IAS 39 will not change the valuation of Skandia’s financial instruments compared with what is presented today. Interim reporting in 2005 Preliminary tables for the financial information that will be provided in 2005 are available today at www.skandia.com. As previously, all of these tables will be published in a Financial Supplement at www.skandia.com in connection with Skandia’s quarterly reports. A selection of these tables will be included in Skandia’s interim reports in 2005. Skandia’s interim reports will begin with an overview of the group’s result and position according to IFRS and the embedded value method. This will be followed by a consolidated income statement prepared in accordance with IFRS. The report will then continue with information on the result per product area and per division, all presented in accordance with IFRS and the embedded value method. The reports will also include a trading analysis for unit linked assurance in accordance with the embedded value method. Skandia’s interim report for the first quarter of 2005 will be released on 31 May 2005. In the future, Skandia’s interim reports will no longer be printed and will only be distributed electronically. Persons who wish can receive information via e-mail, and as previously, reports will be available at www.skandia.com. Skandia shareholders who are affected by this change will receive further information by post. In view of the fact that market statistics in certain markets are made available prior to the release of Skandia’s quarterly book-closings, the decision has been made that Skandia in 2005 will present the group’s sales figures approximately six weeks after the respective quarterly closing. Sales figures for the first quarter will be released on 12 May 2005. Skandia will no longer publish financial effects releases prior to the release of its interim reports. The pages that follow include the income statements and balance sheets as well as a reconciliation of shareholders’ equity and the result for 2004 recalculated in accordance with IFRS, along with Skandia accounting policies in accordance with IFRS. For questions regarding this press release, 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 Eva Groth, Assistant Head of Investor Relations, tel. +46-8-788 16 90