Interim report, january - june 1998

INTERERIM REPORT, JANUARY-JUNE 1998* Sales for the first half of 1998 amounted to MSEK 42,151, and the operating result was MSEK 3,913 Sales up 13 per cent for the group and 22 per cent for Long-Term Savings Operating result on a par with the preceding year's record level, up 35 per cent on a moving twelve-month basis Increase in return on net asset value, to 22 per cent (21) Assets under management up 16 per cent, to SEK 548 billion Comments by Lars-Eric Petersson, President and CEO of Skandia: "It is gratifying to present an operating result for Skandia that is at the same high level as a year ago and at the same time be able to note that the restructuring programme decided on 18 months ago has been essentially completed. "In the Long-Term Savings business unit, the rate of growth and result trend remain good. On the whole we are pleased with our 22 per cent increase in sales, and in the important US market our sales advanced by 24 per cent. "Marketing of the newly formed company Skandia Kapitalförvaltning AB is in full swing. A number of business opportunities are being pursued and assignments have already been received. "The property & casualty insurance market is characterized by fierce competition. The strong investment return, combined with an improved technical result, has led to a better operating result than in the preceding year. "Finally, I would like to highlight a product for the future: As everyone is aware, the labour market is making demands for continuous competence development. Skandia is therefore launching a competence insurance product which will give employees and their employers an opportunity to develop new knowledge together. The insurance will be offered to Skandia's employees in Sweden during the autumn." GROUP Sales rose by 13 per cent during the first half of 1998 to MSEK 42,151. The increase for long-term savings business was 22 per cent. The operating result is on a par with the preceding year's result and amounted to MSEK 3,913 (3,980). The result is up 35 per cent on a moving 12-month basis. The return on net asset value was 22 per cent (21). The restructuring of the property & casualty insurance operations, which was announced in 1996, has now been completed in all essential respects with the sale of the Italian property & casualty insurance companies and Skandia International. BUSINESS UNITS Long-Term Savings Market and Sales Sales via Skandia AFS amounted to MSEK 31,973 (26,229), an increase of 22 per cent. At constant exchange rates, sales rose by 17 per cent. The strategy of offering a broader range of savings products without an insurance component has been successful. During the first half of the year these products accounted for 11 per cent of sales, or MSEK 3,585, which is more than a doubling compared with the first half of 1997. A strong second quarter in the USA contributed to sales growth of 24 per cent during the first half of the year, to MUSD 2,146 (1,737). New savings products accounted for 10 per cent of sales. In Sweden, sales growth was 25 per cent. Sales in the UK rose 5 per cent, with a higher portion of annual premium. Other markets in Europe showed strong sales increases. Switzerland, Germany and Austria together rose by 68 per cent. Sales are also rising fast in Japan. Sales of life assurance were down, mainly due to a significant shift in Spain from life assurance to unit linked assurance. On the whole, sales in Spain rose by 14 per cent. The international trend in fund-related savings is now taking hold in Spain. The newly started unit linked assurance company in Italy is doing well. The decision has been made to establish operations in Poland. Assets under management rose during the first half of the year by SEK 49 billion, or 21 per cent, to SEK 284 billion. Of this total, unit linked assurance accounted for SEK 228 billion, life assurance for SEK 35 billion, and other savings products for SEK 21 billion. Growth for other savings products since the start of the year was 34 per cent and pertains primarily to the USA, the UK and Switzerland. Operating Result and Profitability The operating result rose by 19 per cent to MSEK 1,387 (1,168). The result for unit linked assurance rose by 23 per cent due to good sales and fund growth, which contributes to greater fund-based fees. Life assurance business showed a lower booked result. This is due primarily to provisions for future bonuses to policyholders in Denmark, where priority will be given to sales of unit linked assurance products over traditional life products. The result rose by 16 per cent in the USA at constant exchange rates. The UK also showed a very strong result increase, which amounted to 21 per cent, due to greater sales of annual premium products. Sweden is showing continued good profitability. Savings Products Without Insurance Component Sales of savings products without an insurance component are not included in written premium in the profit and loss account and are thus reported separately in the group overview. Sales are reported as the net amount of savings and withdrawals. In addition, acquisition costs for this business are not deferred, which explains why the result for new savings products - after deducting all costs for marketing and system and product development - is negative. This is entirely in line with established plans. The assets built up in the business make up the base for future fees and earnings. Net Asset Value The return on net asset value - after interest expenses for borrowing and taxes - was 16 per cent (17). Property & Casualty Insurance Market and Sales Premiums written amounted to MSEK 10,178 (11,212). The decrease in written premium is mainly attributable to the sale of the Italian operations and to a decrease in NIG Skandia's premium income as a direct consequence of premium rate increases carried out in the private insurance segment in the strongly competitive UK market. In the Nordic market, which is characterized by continued fierce competition, premium income has risen. Premium increases have been effected in certain segments. The Marine&Energy Division continues to show falling premium levels. In Sweden, Skandia was the first of the major companies to offer private customers the opportunity to buy insurance via the Internet in certain segments, starting with motor and boat insurance. After the half-year mark NIG Skandia reached an agreement to acquire an insurance portfolio in the form of the company Hibernian UK, which conducts regional commercial insurance business. The acquisition gives NIG Skandia a better balance between commercial and private insurance. Operating Result and Profitability The operating result rose to MSEK 2,976 (2,880). The technical result before investment income improved during the second quarter. The return on the investments that have gradually been built up over the years through the positive cash flow in the property & casualty insurance operations, was at a continued high level compared with the preceding year. The return on capital employed was 28 per cent (32). Technical Result Before Investment Income The technical result before investment income improved to MSEK -842 (-961). The result improved significantly in Sweden during the second quarter due to fewer major claims. The improvement is also attributable to the UK and positive effects of businesses being discontinued. The claims trend continued to be very negative for commercial insurance in Norway, while the result in Denmark experienced a strongly negative impact from substantial reserve strengthening for medical malpractice insurance. The decision has been made to stop writing new medical malpractice insurance business. The technical result expressed as a percentage of net technical provisions was 5.2 per cent on a moving twelve-month basis. This can be viewed as an interest expense and can be compared with the investment return, which amounted to 14.7 per cent during the last twelve-month period. The average investment return during the last five years was 11.1 per cent. Investment Income Investment income is at a continued favourable level and amounted to MSEK 3,818 (3,841) as a result of a large portion of equities in the asset allocation and the favourable trend in the stock markets. The investment return for the period was 8.5 per cent (8.7), with a 20.1 per cent (25.2) return for the equities portfolio, which accounts for 33 per cent of total investments. As part of the adopted real estate strategy, during the first quarter certain properties in Sweden were sold, and during the second quarter all property holdings in Madrid were sold. The combined value of these divestments is MSEK 711, which is slightly higher than the book value. Asset Management Investment Strategy Skandia's investment strategy is to have a continued large portion of equities in the investment mix. As in 1997, the focus is to overweight holdings in the European markets. Holdings in the Asian markets, including Japan, remained negligible. Holdings in the USA are relatively underweighted. Skandia Kapitalförvaltning AB Skandia Kapitalförvaltning AB was formed to intensify the marketing of Skandia's asset management services to external clients. Managed Assets Assets under management in the group rose by SEK 76 billion to SEK 548 billion. Of this amount, 57 per cent is managed by Skandia's own asset management unit, while the remainder is invested through external managers. Managed assets comprise the group's investments (including Swedish Skandia Life's investments) and funds managed on behalf of customers. Other Operations SkandiaBanken SkandiaBanken's operating income decreased to MSEK 34 (55). The decrease is attributable to development costs for an Internet stock-trading service and the development of "Investeringstorget" - an investment marketplace for customers that will be introduced in autumn 1998. The number of customers has risen dramatically since the start of the year, amounting to 243,000, an increase of 46,300. Finance Companies The operating result for finance companies, pertaining mainly to operations that are being discontinued, was a surplus of MSEK 12 (1). Restructuring of the Group The reinsurance operations have now been divested through sales to Hannover Re and Fairfax Financial Holding. The transactions do not include any guarantee commitments from Skandia pertaining to technical provisions, but they are conditional on the customary regulatory approvals. Approval of the sale to Hannover Re was granted in June, and approval of the Fairfax transaction is expected to be granted in September. The transactions give rise to capital gains of at least MSEK 400, of which MSEK 250 pertains to 1997 and the remainder to 1998. In June an agreement was signed on the sale, as per 1 January 1998, of both of Skandia's Italian property & casualty insurance companies. The sale involves no guarantees from Skandia pertaining to technical provisions. Customary regulatory approval is expected to be received in August. Following a dissolution of the restructuring reserve, the sale entails a loss of MSEK 205 before taxes. The positive tax effect will be MSEK 309. In all essential respects, these changes mark the completion of Skandia's restructuring programme, which was announced in 1996. The remaining restructuring reserve of MSEK 45 will be used during the second half of 1998 for remaining measures in Sweden. Other Expenses Other expenses include joint-group management expenses, goodwill amortization, interest expenses for borrowing, and costs for testing and upgrading of IT systems ahead of the millennium shift. Since the group's profit-sharing system is based on the operating result and the price trend of Skandia's shares for the full year, no allocation was made at the half-year mark. Currency Effects Currency movements had a positive impact during the first half of the year. Premiums written and the operating result rose by 3 per cent and 2 per cent, respectively, after recalculation to higher average exchange rates compared with the preceding year. BALANCE SHEET AND NET ASSET VALUE Net asset value rose by 12 per cent during the first half of the year, to MSEK 25,501. Net asset value decreased by MSEK 384 during the second quarter as a result of the shareholder dividend. The solvency margin rose to 183 per cent, compared with 154 per cent at year- end 1997. Balance Sheet Total assets increased during the first half of the year by SEK 49.7 billion to SEK 340.4 billion. Long-Term Savings accounted for SEK 42 billion of this increase. Borrowing decreased by SEK 0.2 billion to SEK 7.3 billion, excluding the parent company's subordinated loans. These rose through the issue of SEK 0.8 billion and now amount to SEK 2.0 billion. Capital Employed The group's overall financing is called capital employed, which in addition to net asset value includes minority interests and the portion of borrowing used to finance investments in group companies. Capital employed rose during the first half of the year by SEK 3.3 billion to SEK 34.0 billion. During the first half capital contributions of SEK 0.4 billion were made to subsidiaries in the Long-Term Savings unit, while borrowing in these companies rose by SEK 0.3 billion. Stockholm, Sweden, 5 August 1998 Lars-Eric Petersson President and CEO For questions, please call: Ulf Spång, Chief Financial Officer, tel. +46-8-788 2905 Harry Vos, Head of Group Business Control, tel. +46-8-788 3643 Katarina Mohlin, Head of Corporate Communications, tel. +46-8-788 4886 The full pressrelease including tables and figures is ready for download at www.bit.se