Interim report, january - september 1998

INTERIM REPORT, JANUARY-SEPTEMBER 1998* Sales up 26 per cent for Long-Term Savings ¤Unchanged technical result for Property & Casualty Insurance despite fierce competition ¤Change in value of investment assets MSEK -713 ¤Assets under management up 11 per cent, to SEK 524 billion ¤Operating result MSEK 311 (5,817) Comments by Lars-Eric Petersson, president and CEO of Skandia: "Despite a turbulent stock market during the autumn, it is gratifying to note that sales of unit linked assurance and other savings products reached new record levels. This applies, above all, to the US market, but also to the UK and Sweden. We anticipate a continued good sales trend and our expansion plans for new markets are intact. "In the area of property & casualty insurance, the stock market decline as per 30 September sharply reduced reported investment income. During the last five- year period our equities portfolio has generated an average return of 14.4 per cent. "It is important to note that Skandia's sales in its growth areas are strong. This creates the foundation for future, long-term results." GROUP Sales rose 17 per cent during the period to MSEK 64,969. The increase for Long-Term Savings was 26 per cent. The operating result was MSEK 311 (5,817). The main reason for the decline is that investment income including changes in value was SEK 5.0 billion lower than in the same period in 1997. On a moving twelve-month basis the operating result decreased to MSEK 504 (5,442). BUSINESS UNITS Long-Term Savings Market and Sales Sales during the period January-September totalled MSEK 50,851 (40,426), an increase of 26 per cent compared with the same period a year ago. During the third quarter a new record level was achieved in the USA as well as in the UK and Sweden. At mid-year the corresponding increase was 22 per cent. Other savings products (savings products without an insurance component) are growing successfully and sales amounted to MSEK 5,639, which is more than a doubling compared with the same period in 1997. At current exchange rates, sales in the area of long-term savings rose 21 per cent. Sales in the USA rose 25 per cent to MUSD 3,500 (2,800). Sales of variable annuities rose 13 per cent, and sales of new savings products without an insurance component doubled several times over. In Sweden, sales growth was 26 per cent. Sales in the UK rose 11 per cent in local currency. New sales of annual-premium products increased by 57 per cent. Other markets in Europe showed strong sales increases. Sales in Switzerland, Germany and Austria together increased by 52 per cent at constant exchange rates. Sales are also rising rapidly in Japan and Italy. New operations have been established in Poland and Denmark. In the market segment consisting of life assurance outside Sweden, sales increased by 16 per cent due to a strong third quarter. Assets under management increased during the first nine months of the year by SEK 42 billion (+18 per cent) to SEK 276.6 billion. Of this total, unit linked assurance accounted for SEK 217.2 billion, life assurance for SEK 37.2 billion, and other savings products for SEK 22.2 billion. Payments to unit linked policyholders amounted to 7.7 per cent of technical provisions (7.0 per cent at mid-year 1998). Of this amount, surrenders accounted for 6.1 per cent (5.7), which is within the limits of adopted assumptions. The increase is primarily attributable to an ageing portfolio and to the fact that certain policies allow for withdrawals of the funds' excess returns. Operating Result and Profitability The operating result for unit linked assurance and savings products increased to MSEK 1,605 (1,525). The operating result for life assurance was MSEK 9 (180). The trend in the financial markets during the third quarter had a MSEK 293 negative effect on the result, of which MSEK 156 pertained to unit linked assurance and MSEK 137 to life assurance. On account of the assumptions about fund growth that are used in the USA and Sweden for calculation of embedded value, the stock market decline as per 30 September had only a marginally negative impact on the result. At constant exchange rates the result rose by 2 per cent in the USA and by 33 per cent in Sweden. However, the UK was affected to a greater extent by the stock market decline, which explains the result for the British operations, which in other respects are showing very positive development and whose sales reached a record level. Other Savings Products For savings products without an insurance component, deposits totalled MSEK 8,353 (4,375) and withdrawals MSEK 2,714 (1,882) for the period. Acquisition costs are not deferred, which explains why the result for other savings products - after deducting all costs for marketing and system and product development - is negative. This is entirely in line with set plans. At the same time, the assets built up in the business form the foundation for future revenues and earnings. Net Asset Value The long-term target for return on net asset value - after interest expenses and taxes - is 15 per cent. During the period it was 13 per cent (17). The change is entirely attributable to the stock market decline. Property & Casualty Insurance Market and Sales Premiums written amounted to MSEK 14,118 (15,218). The decrease in written premium is mainly attributable to the sale of the Italian operations and to a decline in the British market. In the Nordic market, which is characterized by continued fierce competition, premium income increased. The trend in premium income is positive in the private insurance segment in Sweden and Norway. Premium rate increases have been carried out in certain segments. Marine&Energy continued to show falling premium levels. Operating Result and Profitability The technical result before investment income was on a par with the preceding year. Investment income including changes in value in the equities portfolio totalled MSEK 667, which is MSEK 4,955 lower than the preceding year. The operating result thereafter amounted to MSEK -720 (+4,210). Technical Result Before Investment Income The technical result before investment income was MSEK -1,387 (-1,412). In Sweden the trend was favourable with respect to claim costs as well as operating expenses, and in Norway the result for private insurance developed well. However, the claims trend for business insurance in Norway remained negative. Premium rate increases have been carried out. Marine&Energy reported a strong result despite continued pressure on premiums. The result in Denmark improved during the third quarter. However, the substantial reserve strengthening in the half-year accounts for medical malpractice insurance pulled down the overall result. No new medical malpractice business is being written. The technical result expressed as a percentage of net technical provisions averaged 5.4 per cent for the past 5 year period. This can be viewed as an interest expense and can be compared with the total yield, which amounted to 9.2 per cent for the past five year period. Investment Income Investment income was affected by the unfavourable market conditions for the group's equities management as per 30 September and amounted to MSEK 667 (5,622) during the first nine months of the year. The total yield was 2.3 per cent, and the total yield of the equities portfolio was -5.2 per cent. During the last five years the average total yield of the equities portfolio was 14.4 per cent. Asset Management Investment Strategy Skandia strives to have a balanced portfolio of fixed-income securities, equities and real estate. The objective is to achieve a good return over the medium term on the technical provisions for property & casualty insurance, without allowing the fluctuations in the return during each moving twelve- month period to become excessively large. At the beginning of the third quarter the portion of equities in the portfolio was reduced somewhat to lower the short-term investment risk. This, combined with declines in value as per 30 September, entailed a decrease in the equities allocation to 27 per cent, which is the same level as in September 1997. Exposure to the Asian markets, including Japan, is very limited and non- existent with respect to Russian and Latin American markets. The 1997 Annual Report describes the risk elements in Skandia's asset management (p. 21). The dramatic changes in the stock markets as per 30 September were the entirely decisive reason why the changes in value in the equities portfolios led to a drop in reported investment income. At the end of the period the value of the equities portfolio was SEK 11.9 billion. A general increase or decrease of 10 per cent would affect reported investment income by approximately SEK 1.2 billion. Managed Assets Assets under management in the group increased by SEK 52 billion to SEK 524 billion. Of this amount, 57 per cent is under Skandia's own asset management, while the remainder is invested through external managers. Managed assets comprise all the group's investments (including Swedish Skandia Life's investments) and funds managed on behalf of customers. Other Operations SkandiaBanken SkandiaBanken's operating income amounted to MSEK 64 (95) after fully expensed development investments for an Internet stock-trading service and for the build-up of "Investeringstorget" - a customer investment marketplace that will be introduced in November 1998. In September SkandiaBanken was named as Sweden's best Internet bank by the personal investment magazine Privata Affärer. In addition, for the third year in a row, SkandiaBanken Fonder was named Fund Manager of the Year by the personal savings magazine Sparöversikt. Finance Companies The operating result for finance companies, pertaining mainly to operations that are being discontinued, was a surplus of MSEK 16 (7). Restructuring of the Group The reinsurance operations have now been divested through sales to Hannover Re and Fairfax Financial Holdings. The transactions were completed in late September and early October, respectively, and do not include any guarantee commitments from Skandia pertaining to technical provisions. The transactions gave rise to capital gains of MSEK 475, of which MSEK 250 pertained to 1997 and the remaining MSEK 225 was reported in 1998. The sale of both of Skandia's Italian property & casualty insurance companies is now also completed. The sale involves no guarantees from Skandia pertaining to technical provisions. Following a dissolution of the restructuring reserve, the sale entailed a loss of MSEK 205 before tax. The positive tax effect will be MSEK 309. These sales mark the conclusion of the restructuring programme that was announced in 1996, and the restructuring reserve provision made then has been fully utilized. Other Expenses Other expenses include joint-group management expenses, goodwill amortization, interest expenses, 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 year's result and the price trend of Skandia's shares for the full year, no allocation has been made. Currency Effects Currency movements had a positive impact during the first nine months 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 Total assets increased during the first nine months of the year by SEK 38.7 billion to SEK 329.4 billion. Long-Term Savings accounted for SEK 32 billion of this increase. Borrowing increased by SEK 0.1 billion to SEK 7.6 billion, excluding the parent company's subordinated loans. These increased through the issue of SEK 0.8 billion and now amount to SEK 2.0 billion. During the year Skandia Insurance Company Ltd. acquired the outstanding minority interest in Skandia Investment AB from Skandia Life Insurance Company Ltd., which decreased the minority interest in the balance sheet by SEK 0.4 billion. Net asset value amounted to MSEK 22,323. The solvency margin was 158 per cent, compared with 154 per cent at year-end 1997. Financial Information The year-end report for 1998 will be released on 18 February 1999. Stockholm, Sweden, 26 October 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 ------------------------------------------------------------ Please visit http://www.bit.se for further information The following files are ready for download: http://www.bit.se/bitonline/1998/10/26/19981026BIT00250/Eng3Q98.doc http://www.bit.se/bitonline/1998/10/26/19981026BIT00250/skandia.pdf Tables http://www.bit.se/bitonline/1998/10/26/19981026BIT00250/bit0001.xls Figures and tables