Interim report january–june 2005*)

FIRST-HALF RESULT ACCORDING TO IFRS STRONGLY AFFECTED BY ONE-TIME EFFECTS

- The result for the period was SEK -1,047 million (1,290). Goodwill in Bankhall was written down by SEK -1,135 million. The result was charged with SEK -471 million for discontinued operations. The result for the first half of 2004 was favourably affected by SEK 833 million pertaining to the sale of the Japanese operation. - Revenues rose 15%, to SEK 7,829 million (6,821). Expenses increased to SEK -8,401 million (-6,487). Excluding the goodwill write-down of SEK -1,135 million, expenses rose 12%. - Earnings per share before dilution were SEK -1.03 (1.26), of which SEK -0.46 (0.81) pertained to discontinued operations. The return on shareholders’ equity was -9% (7%). - Cash flow from operating activities (excluding changes in deposits and lending in the banking operation) amounted to SEK -0.2 billion (- 1.6). IMPROVED EMBEDDED VALUE RESULT FOR UNIT LINKED ASSURANCE DURING FIRST- HALF - The group’s result of operations (including financial effects) was SEK 2,129 million (1,937). - The result of operations for unit linked assurance increased to SEK 2,320 million (1,860). - The present value of new business (VNB) for unit linked assurance grew by 34% in local currency, to SEK 1,082 million (812). VNB for the second quarter alone was up slightly compared with the same period a year ago. - The calculated profit margin for new sales increased during the first half of the year to 19.2% (17.2%). During the second quarter alone, the profit margin was 14.9% (17.8%). The decline is mainly due to the dramatically changed market conditions for the German operation. The profit margin increased in Sweden and was essentially unchanged in the UK. - Net asset value per share increased to SEK 31.19, compared with SEK 29.44 at the start of the year. RATE OF GROWTH FOR OPERATIONS INCREASED DURING SECOND QUARTER - Premiums and deposits rose 24% in local currency during the first half of the year. New sales of unit linked assurance rose 20% in local currency. New sales during the second quarter rose 25%. - The UK showed continued growth with an increase in new sales. - Actions taken in Sweden are beginning to generate results. During the second quarter, new sales of unit linked assurance rose 27% compared with the same period a year ago. - In Germany, operations have moved into a transitional period following a period of exceptional demand. - Funds under management grew by 17% in local currency, to SEK 481,641 million as per 30 June 2005, thanks to a larger inflow and favourable growth in value. Comments by Hans-Erik Andersson, President and CEO: Our rate of growth increased further during the second quarter. The favourable financial markets notwithstanding, this demonstrates that our strategy and business concept work. As I have said many times in the past, we have an attractive geographic composition of business, which gives stability and growth potential. Now as Germany moves into a transition period following a period of unprecedented growth, our other markets are picking up the slack. It is particularly gratifying that the Swedish operation is showing a significant recovery following a prolonged downturn. We were cautiously optimistic already after the first quarter, and now that sales have risen for three consecutive quarters – toward ever higher levels month by month – it appears we have turned the corner. Our banking business also continues to perform well, both in customer numbers and deposits and lending. Clearly it can be held that the recent sales successes in Germany are attributable to external factors. But it’s not that simple. Germany is an example of an operation in which we have fully capitalised on market conditions. Thanks to the recent sales boost, the operation has reached such a level of funds under management that the cost situation for the operation as a whole has improved considerably, which exceeded our expectations. This in turn has set the stage for investments in new product segments. Granted, this put a dent on the profit margin during the second quarter, but from an overall perspective, earnings and profitability in Germany are very satisfactory. The UK, Asia Pacific & Offshore division continued to show robust growth during the second quarter, and our market positions improved further. Our Offshore business grew the fastest during the second quarter, at the same time that the new line of unit linked bonds as well as an array of new pension products in the UK made a strong contribution to the sales growth. This strengthens our position in the market, not least in view of coming changes in the UK pensions market in 2006. Bankhall’s performance has naturally been a disappointment, even though we share that development with other players engaged in distribution. However, we must adapt the operation to today’s conditions, which have changed dramatically compared with when the acquisition was made public in December 2001. We previously reported that Bankhall’s business plan would be overhauled in 2005. Following an in-depth analysis, our conclusion is that anticipated future profits and synergies are considerably lower than what was originally anticipated. Another problem area from the past is American Skandia. Even though the preliminary settlement that has now been reached with respect to market timing will eventually affect cash flow and thus in a way hit Skandia harder than the goodwill charges taken for Bankhall, it is positive that we can hopefully put this behind us. Winding up old obligations is both resource-intensive and costly. The more time and energy we can focus on developing our business, the greater opportunities we have to achieve our mission of creating long- term value-added. Our business has good prospects for continued growth, albeit over the long term at a lower level than thus far this year. We have successively created value-added in our underlying business in recent years. Our earnings performance and profitability – especially in our core unit linked assurance business, but also in our mutual fund and banking operations – have improved over time. More important, we have identified potential for further earnings and profitability improvements in a number of areas. As earlier, I am convinced that we are on track toward further strengthening Skandia’s position in the growing market for long-term savings. This interim report is presented in four sections: A. Group overview B. Results per business segment C. Results per division D. Other tables A. GROUP OVERVIEW Results per business segment According to IFRS According to embedded value method Result of Profit before tax operations1) Operating result1) 2005 2004 2005 2004 2005 2004 SEK million Q2 Q2 Q2 Q2 Q2 Q2 Unit linked 313 211 1,150 886 2,080 650 assurance Mutual -13 -55 -13 -55 -13 -55 funds Life -4 15 -5 11 5 11 assurance Banking 52 167 52 167 52 167 Other -1,134 -9 -1,134 -9 -1,134 -9 businesses Joint functions -172 -181 -172 -181 -172 -181 2) Total -958 148 -122 819 818 583 According to IFRS According to embedded value method Result of Profit before tax operations1) Operating result1) 2005 2004 2005 2004 2005 2004 SEK million 6 mos. 6 mos. 6 mos. 6 mos. 6 mos. 6 mos. Unit linked 895 494 2,320 1,860 3,593 2,105 assurance Mutual -29 -86 -29 -86 -29 -86 funds Life -3 45 -5 37 0 37 assurance Banking 148 208 148 208 148 208 Other -1,110 -4 -1,110 -4 -1,110 -4 businesses Joint functions -473 -323 -473 -323 -473 -323 2) Total -572 334 851 1,692 2,129 1,937 Results per division According to IFRS According to embedded value method Result of Profit before tax operations1) Operating result1) 2005 2004 2005 2004 2005 2004 SEK million Q2 Q2 Q2 Q2 Q2 Q2 UK, Asia Pacific & -1,113 5 -742 275 -416 280 Offshore Europe & Latin 44 9 333 269 417 184 America Nordic 262 263 438 404 968 248 Group -151 -129 -151 -129 -151 -129 functions3) Total -958 148 -122 819 818 583 According to IFRS According to embedded value method Result of Profit before tax operations1) Operating result1) 2005 2004 2005 2004 2005 2004 SEK million 6 mos. 6 mos. 6 mos. 6 mos. 6 mos. 6 mos. UK, Asia Pacific & -822 142 -241 801 106 855 Offshore Europe & Latin 218 45 844 438 971 431 America Nordic 498 394 714 700 1,518 898 Group -466 -247 -466 -247 -466 -247 functions3) Total -572 334 851 1,692 2,129 1,937 1) For definitions please see page 25. 2) Joint functions include joint-group expenses, costs for the divisions that are not distributed among the business segments, and joint-group financial result. 3) Group functions include joint-group expenses, joint-group financial result and unallocated result for business segments. Second quarter alone Result according to IFRS The result for the period was SEK -1,470 million (79) and was affected by two large one-time items. Goodwill in Bankhall was written down by SEK -1,135 million. The result was also charged with costs of SEK -471 million (-1) for discontinued operations. Discontinued operations pertain mainly to a provision for market timing in the USA, totalling SEK -507 million, net after tax and currency hedging. Earnings per share before dilution were SEK -1.44 (0.07). The result before tax excluding profit/loss items pertaining to discontinued operations, was SEK -958 million (148) for the second quarter. Revenues rose 19%, to SEK 4,073 million (3,422), mainly due to an increase in fee revenue from customers and higher investment returns. Expenses excluding goodwill charges rose 19%, to SEK -3,896 million (- 3,274), mainly due to higher costs for sales commissions and higher claim costs from risk insurance. As previously reported, Bankhall’s business plan has been subject to a close review. A new business plan has now been drafted which takes into account lower earnings expectations from certain business lines – particularly mortgages and general insurance – lower margins, and reduced synergy value following delays to depolarisation and more onerous regulations. As a result of these factors taken together, the decision has been made to write down goodwill pertaining to Bankhall by SEK -1,135 million. Following this write-down, goodwill in Bankhall as per 30 June 2005 was SEK 350 million. Skandia believes that the remaining goodwill is justifiable by an overall estimation of anticipated earnings under the new business plan and the value of the company’s strategic position in the UK market for distribution of insurance products. Bankhall is taking active steps to improve profitability. Its regulated network (ISL) has been closed, costs are being reduced and new revenue streams are being developed with multi-tie scheduled for launch during the third quarter of 2005. In addition, management has been realigned with a new CEO, Peter Mann, appointed in August 2005. Result according to embedded value method The operating result improved to SEK 818 million (583), despite goodwill charges of SEK -1,135 million. Financial effects made a positive contribution of SEK 930 million (-236) to this total. During the second quarter, fund growth exceeded underlying assumptions due to the strong trend in the stock market. This resulted in positive financial effects of SEK 728 million, compared with SEK 388 million during the first quarter of the year. Changes in financial assumptions, mainly pertaining to fund growth and the discount rate, contributed SEK 202 million, compared with SEK -45 million during the first quarter. However, the group’s result of operations decreased due to the goodwill write-down, to SEK -122 million (819). The profit margin for new sales of unit linked assurance was 14.9%, compared with 17.8% for the second quarter of 2004. The profit margin increased for the Nordic division, while it was unchanged for the UK, Asia Pacific & Offshore division. The Europe & Latin America division showed a narrower margin. The decline for the Europe & Latin America division is attributable to the dramatically changed market conditions in Germany, which had a directly negative impact of 2.5 percentage points on the group’s profit margin during the quarter (see also page 13). A shift has occurred in the geographic composition of business, toward markets with lower profit margins. Skandia’s total premiums increased during the period to SEK 32,852 million, compared with SEK 23,427 million during the same period a year ago. Unit linked premiums in local currency rose 44%, to SEK 22,618 million (15,677). New sales of unit linked assurance rose 25% in local currency. The increase is mainly attributable to the UK, Asia Pacific & Offshore division, and to Sweden in the Nordic division. According to preliminary market statistics, Skandia’s market share in traditional life and unit linked assurance increased during the second quarter. The Swedish Insurance Federation will be publishing definitive quarterly statistics at the end of August/early September 2005. First half of the year Result according to IFRS The result before tax (excluding the result of discontinued operations) was SEK -572 million (334). The result was hurt by the write-down of goodwill. Profit increased for unit linked assurance business, while for mutual fund savings products as well, profit improved compared with the first half of 2004. Revenues Total revenues rose 15% to SEK 7,829 million (6,821). Of this total, fees from customers accounted for SEK 5,336 million (4,423), which means that the rate of growth remains over 20% compared with the corresponding period a year ago. A continued net inflow of funds under management, together with the growth in value of funds, has led to an increase in fund-based fees from both unit linked assurance and mutual funds. Premium-based fee revenue also continues to rise for unit linked assurance business. In certain countries, premium-based fees are charged on multi-year contracts, i.e., contracts in which premiums are paid in periodically over several years. Premium-based fees already paid in are deferred in their entirety and amortised over the life of the respective contracts. The increase in premium-based fee revenue also resulted in an increase in deferred fee income. Premiums attributable to risk insurance rose 9% to SEK 1,474 million (1,353). Net investment income totalled SEK 870 million (631). The increase is mainly attributable to higher returns in life assurance stemming from lower interest rates and higher returns on own investments. Revenues in the banking operation also increased due to greater volumes, and net interest income was SEK 561 million (497). Expenses Total expenses increased due to a write-down of goodwill. Expenses excluding goodwill charges rose 12%, to SEK -7,266 million (-6,487). Life assurance claims incurred rose 21%. This is mainly due to the fact that insurance provisions increase in pace with reductions in market interest rates. In addition, certain retroactive provisions were made for risk insurance business during the second quarter. Insurance commissions paid rose 15%, to SEK -2,914 million (-2,525), mainly due to higher new sales of unit linked assurance, but also to an increase in mutual fund deposits. The change in deferred acquisition costs and accrued commission expense increased as a natural consequence of this, to SEK 1,112 million (999). Skandia is continuing its work on controlling costs. Administrative expenses rose 5% and included a provision for Value Added Taxes (see further under ”Disputes”). This provision was increased by SEK -53 million during the second quarter and now totals SEK -158 million. Excluding the VAT provision, administrative expenses were essentially unchanged. Result for the period The result for the period was SEK -1,047 million (1,290). This figure includes SEK -471 million (833) pertaining to discontinued operations and a goodwill write-down of SEK -1,135 million (-) pertaining to Bankhall. The amount pertaining to discontinued operations includes a net charge of SEK -507 million for market timing sanctions in the USA and supplemental proceeds of SEK 36 million from the sale of Skandia Asset Management. Profit for the preceding year was favourably affected in the amount of SEK 833 million for the sale of the Japanese operation. The return on shareholders’ equity decreased to -9% (7%). The policyholder tax is charged to policyholders in the form of fees. In the company’s income statement this is reported under ”Policyholder tax charge”. The group’s combined tax charge, including the policyholder tax, increased to SEK -996 million (-518). Balance sheet and shareholders’ equity Total assets increased to SEK 489.6 billion, compared with SEK 407.8 billion at the start of the year, mainly due to an increase in unit linked assurance assets, growth in the value of other investments, and continued volume growth in the banking operation. Shareholders’ equity amounted to SEK 11,408 million, compared with SEK 12,348 million at the start of the year. Borrowings amounted to SEK 4.0 billion, and were thus at the same level as at the start of the year. The debt-equity ratio was unchanged compared with the start of the year, at 21%. According to IFRS, certain fund holdings may need to be consolidated, even though all assets belong to the holders of the fund units. On account of this, the funds’ holdings of shares in Skandia Insurance Company Ltd (publ.) are reported as treasury shares, which have been eliminated against shareholders’ equity. This adjustment reduced shareholders’ equity as per 30 June 2005 by SEK 521 million, even though no economic exposure exists. The corresponding adjustment at the start of the year was SEK 504 million. Skandia continues to monitor the development of industry practice with regard to this matter. The group’s outstanding defined-benefit pension plan obligations are recalculated to new assumptions at the end of each year. If the current discount rate and inflation anticipations remain at year-end, Skandia estimates that shareholders’ equity could decrease by SEK 70-100 million. Cash flow Cash flow from operating activities, excluding changes in deposits and lending in the banking operation, amounted to SEK -0.2 billion (-1.6). The decrease in cash flow from operating activities compared with the first quarter is mainly due to differences in the timing of incoming and outgoing payments of policyholder taxes. Cash flow from operating activities during the first half of 2004 was negatively affected in the amount of SEK -0.8 billion by the cash settlement of a distribution agreement with Skandia Liv. Cash flow from investing activities amounted to SEK 0.5 billion (2.5). Cash flow from investing activities in the preceding year was favourably affected in the amount of SEK 1.2 billion by the sale of the Japanese operation, and in the amount of SEK 4.5 billion from the sale of If. Cash flow from financing activities in the preceding year was affected in the amount of SEK 1.0 billion in loan repayment. During the second quarter of 2005, SEK 0.4 billion (0.3) was paid out in shareholder dividends. Disputes As reported in a press release on 17 June 2005, Skandia has approved a settlement by American Skandia with the US Securities Exchange Commission and the New York Attorney General’s Office totalling USD 95 million for market timing. The parties are still awaiting the drafting of final agreement documentation and approval by the SEC’s board. Skandia has made a provision of SEK -507 million, net after tax and currency hedging, with respect to this settlement. In the first-quarter interim report for 2005, Skandia reported that the National Tax Board has questioned Skandia’s handling of Value Added Taxes on services pertaining to the operation of the group’s IT environment. Skandia has now filed an appeal of the advance ruling by the Council on Advance Tax Rulings referred to in the report. A ruling is expected in 2006. A provision was made for reasons of prudence. This provision was increased by SEK -53 million during the second quarter and now amounts to SEK -158 million. A consumer organisation in Austria, Verein für Konsumenteninformation ("VKI"), has filed suit against Skandia’s subsidiary in Austria, Skandia Leben AG, as well as against several other insurance companies in the Austrian market. VKI has petitioned the court to rule that the general terms and conditions of insurance contracts used by Skandia Leben and the other insurance companies do not contain sufficiently clear stipulations on the calculation of fees and costs. Skandia and the other insurance companies have aggressively contested VKI’s suit. At present it is not possible to judge what financial impact this dispute could have on Skandia Leben, however, it could be material. No provision has been made for this dispute. The status of other disputes is discussed in the 2004 Annual Report and 2004 year-end report. No material changes have taken place which give rise to any changes in these descriptions. Disputes pertaining to current operations are handled within the respective divisions. Disputes stemming from historic events are being handled by Björn Björnsson, Vice Chairman of Skandia, by direction of Skandia’s board. Premiums and deposits Skandia’s total premiums and deposits increased to SEK 59,874 million (48,742) during the first half of the year. This represents an increase of 23% in Swedish kronor and 24% in local currency. For unit linked assurance, premiums and deposits rose 29% in local currency, to SEK 41,496 million (32,567). New sales of unit linked assurance increased by 20% in local currency, to SEK 5,628 million (4,733). Mutual fund deposits increased to SEK 17,069 million (15,146). Sales of life assurance were down slightly compared with a year ago, which is in line with the strategy for the Spanish operation, where efforts are being focused on unit linked assurance instead of traditional life assurance. The performance by division is commented on in a separate section. Funds under management Unit linked funds under management increased by 22%, to SEK 361,258 million, compared with SEK 295,473 million at the start of the year. Deposits, together with changes in value, amounted to SEK 65,459 million. Currency effects amounted to SEK 22,265 million (-4,808). Payments to unit linked policyholders amounted to 11.1% of funds under management on a yearly basis. Surrenders accounted for 9.0% of this total, compared with 7.3% at the start of the year and 7.2% during the corresponding period a year ago. The increase in surrenders is associated with customers’ withdrawals in connection with the changed inheritance and gift tax legislation in Sweden. Funds under management for mutual fund business also increased, to SEK 120,383 million, compared with SEK 95,495 million at the start of the year. Deposits, together with changes in the value of mutual funds, amounted to SEK 21,105 million. Consolidated income statement 2005 2004 2004 SEK million Note 6 mos. 6 mos. 12 mos. REVENUE Fee income 5,336 4,423 9,182 Change in deferred fee income (DFI) -663 -422 -869 and fee income receivable (FIR) Net premiums 1,474 1,353 2,978 earned Net investment 870 631 1,424 income Net interest income, 561 497 1,021 banking Share of profit/loss of 1 -2 -3 associates Other income 250 341 693 Total revenue 7,829 6,821 14,426 EXPENSES Net claims -1,472 -1,198 -3,138 incurred Commission -2,914 -2,525 -5,707 expenses Change in deferred acquisition costs (DAC) and 1,112 999 2,416 accrued commission expense (ACE) Administrative 1 -3,582 -3,402 -7,352 expenses Other expenses 2 -1,370 -173 -1,459 Interest -175 -188 -373 expenses Total expenses -8,401 -6,487 -15,613 Profit/loss -572 334 -1,187 before tax Policyholder 992 641 1,409 tax charge Taxes 3 -996 -518 -859 Profit / loss for the period -576 457 -637 from continuing operations Profit / loss for the period from 4 -471 833 834 discontinued operations Profit / loss -1,047 1,290 197 for the period Attributable to: Equity holders of the parent -1,051 1,292 249 company Minority 4 -2 -52 interest Earnings per share *): Continuing and discontinued operations Basic -1.03 1.26 0.24 Diluted -1.03 1.26 0.24 Continuing operations Basic -0.57 0.45 -0.57 Diluted -0.57 0.45 -0.57 Discontinued operations Basic -0.46 0.81 0.81 Diluted -0.46 0.81 0.81 Weighted number of shares, thousands*) Basic 1,024,398 1,023,930 1,024,052 Diluted 1,029,933 1,029,192 1,028,636 Number of shares, end of period, thousands*) Basic 1,024,551 1,024,172 1,024,250 Diluted 1,030,085 1,029,434 1,028,835 *)For definitions please see page 25. 1) Administrative expenses Personnel expenses -1,935 -1,839 -3,775 Other administrative -1,873 -1,671 -3,751 expenses Depreciation -154 -117 -310 Expense recharges 380 225 484 Total -3,582 -3,402 -7,352 2) Includes a write-down of goodwill in Bankhall, totalling SEK -1,135 (-) million as per June 2005 and SEK -1,072 million as per December 2004. 3) Includes current, deferred and policyholder tax. 4) Profit / loss for the period from discontinued operations American Skandia market timing * -507 - - Skandia Asset Management (SAM) supplementary purchase price 36 - - Skandia Japan - 833 834 Total -471 833 834 * Of which: Settlement of market timing investigation -673 Legal expenses pertaining to market timing -22 Profit / loss before tax -695 Deferred tax pertaining to market timing 188 Profit / loss after tax -507 Consolidated Income Statement – quarterly analysis 2005 2005 2004 2004 2004 SEK million Q2 Q1 Q4 Q3 Q2 REVENUE Fee income 2,708 2,628 2,427 2,332 2,284 Change in deferred fee income (DFI) -339 -324 -266 -181 -189 and fee income receivable (FIR) Net premiums 775 699 925 700 705 earned Net investment 510 360 426 367 142 income Net interest income, 304 257 267 257 271 banking Share of profit/loss of -1 2 0 -1 0 associates Other income 116 134 174 178 209 Total revenue 4,073 3,756 3,953 3,652 3,422 EXPENSES Net claims -887 -585 -1,180 -760 -475 incurred Commission -1,541 -1,373 -1,854 -1,328 -1,312 expenses Change in deferred acquisition costs (DAC) and accrued commission 578 534 885 532 514 expense (ACE) Administrative -1,829 -1,753 -2,278 -1,672 -1,833 expenses Other expenses -1,259 -111 -1,181 -105 -81 Interest -93 -82 -100 -85 -87 expenses Total expenses -5,031 -3,370 -5,708 -3,418 -3,274 Profit/loss -958 386 -1,755 234 148 before tax Policyholder 356 636 615 153 58 tax charge Taxes -397 -599 -266 -75 -126 Profit/loss for the period from -999 423 -1,406 312 80 continuing operations Profit/loss for the period from -471 - 0 1 -1 discontinued operations Profit/loss -1,470 423 -1,406 313 79 for the period Attributable to: Equity holders -1,472 421 -1,369 326 73 of the parent Minority 2 2 -37 -13 6 interest Earnings per share: Continuing and discontinued operations Basic -1.44 0.41 -1.34 0.32 0.07 Diluted -1.44 0.41 -1.34 0.32 0.07 Continuing operations Basic -0.98 0.41 -1.34 0.32 0.07 Diluted -0.98 0.41 -1.34 0.32 0.07 Per-share data 1) Moving 12-month figures 2005 2004 2004 2005 6 mos. 6 mos. 12 mos. June Result of 0.83 1.66 1.11 0.28 operations per share (EV) before dilution, SEK Earnings per -0.57 0.45 -0.57 -1.58 share before dilution (IFRS), SEK 2) Earnings per -0.57 0.45 -0.57 -1.58 share after dilution (IFRS), SEK 2) Shareholders' 11.56 13.71 12.51 - equity per share (IFRS), SEK Net asset 31.19 30.52 29.44 - value per share (EV), SEK Average share 37.01 30.88 29.77 32.75 price, SEK Closing share 42.90 31.20 33.10 - price, SEK Key ratios, IFRS 1) Moving 12-month figures 2005 2004 2004 2005 6 mos. 6 mos. 12 mos. June Return on -9 7 -4 -12 shareholders' equity (IFRS), % 3) Return on -6 6 -3 -9 capital employed (IFRS), % 3) Debt-equity 21 23 21 21 ratio, % Fixed charge 8 4 1 2 cover, % Equity ratio, 11 14 13 11 % Key ratios, embedded value method 1) Moving 12-month figures 2005 2004 2004 2005 6 mos. 6 mos. 12 mos. June Present value 1,082 812 1,870 - of new business unit linked, SEK million Growth in 33 N/A 11 N/A present value of new business unit linked, %4) Profit margin 19.2 17.2 18.8 - new sales, unit linked, % Operational 4 7 3 1 return on capital employed (EV), % 3) Operational 4 8 3 1 return on net asset value (EV), % 3) Return on net 9 9 3 3 asset value (EV), % 3) Solvency 1) Parent company 2005 2004 SEK million 30 Jun. 31 Dec. Capital base 7,915 7,651 Solvency margin 649 604 1)For definitions please see page 25. 2)The key ratios are calculated excluding discontinued operations. 3) The 6-month key ratios for 2005 and 2004 have been recalculated on a full-year basis. 4)Growth in the present value of new business for 6 months 2005 includes a positive one-time effect of SEK 200 million. B. RESULT PER BUSINESS SEGMENT Result according to IFRS Unit linked assurance Profit before tax increased to SEK 895 million (494). This improvement can be credited to a large increase in the most important revenue source – customer fees. Revenues in the form of fees rose 19%, to SEK 3,917 million (3,278). All divisions are contributing to the increase in both premium- and fund-based revenues. Improved net investment income also contributed to the revenue increase. The increase in new sales led to a 16% rise in commissions paid, to SEK 2,551 million (2,203). Profit experienced a favourable one-time effect of approximately SEK 80 million during the first quarter, attributable to a change in deferred acquisition costs in Germany. Administrative expenses rose 4%, to SEK -1,521 million (-1,464). Profit during the second quarter was charged with higher costs – partly retroactive – for risk insurance in the UK. Mutual funds A continued result improvement was reported for mutual fund business. Several operations are still in the build-up phase, and full cost coverage has therefore not yet been achieved. The result before tax was SEK -29 million (-86). Thanks to a higher inflow of funds under management, revenues – mainly in the form of fund-based fees – rose to SEK 1,043 million (757), an increase of 38%. Commissions rose 16%, to SEK -395 million (-341). Administrative expenses rose 6%, to SEK -507 million (-477). In Australia, mutual fund deposits stabilised during the second quarter, and the deficit is narrowing in pace with higher fund values and fee revenue. In the UK, which has the greatest share of funds under management, the result has improved and is now just under break-even. Life assurance Life assurance premiums, primarily in Spain, decreased slightly to SEK 445 million (476). The net result before tax was hurt by lower market interest rates and amounted to SEK -3 million (45). Assets in the life operations increased slightly, mainly due to positive changes in value, and amounted to SEK 12,272 million (11,699). Banking Profit before tax for the banking operation was SEK 148 million (208) for the first half of the year. Excluding one-time items in the preceding year, profit improved by 14%, to SEK 148 million (130). Profit for the first half of 2004 was favourably affected in the amount of SEK 78 million by one-time items, mainly capitalisation of compensation for vehicle financing contracts and repayment of Value Added Tax. The profit improvement is mainly attributable to an increase in net interest income derived from higher business volumes. Measurement of interest rate derivatives at fair value in accordance with IFRS gives rise to certain volatility in the result for 2005. Profit for the second quarter was negatively affected in the amount of SEK -20 million, while profit for the first quarter was positively affected in the amount of SEK 6 million. Excluding one-time items in the preceding year, operating revenues improved by 12%, to SEK 701 million (627). Operating expenses rose 11%, to SEK -553 million (-497). The increase pertains mainly to operating and transaction costs associated with the lending and deposit activities, and higher marketing costs. The share of doubtful debts in relation to lending volume is 0.07%, compared with 0.08% as per 31 December 2004. Lending increased by 11%, to SEK 40.4 billion, compared with SEK 36.5 billion at the start of the year. Lending to the general public accounts for 97% of total lending and mainly concerns loans in the household market. The remainder concerns short-term lending to credit institutions. SkandiaBanken launched a new mortgage loan ”ladder” during the second quarter. The response has been positive, with a marked rise in the number of new credits. Deposits rose 17%, an increase of SEK 6.9 billion, to SEK 47.4 billion. Other businesses The “Other businesses” segment includes Bankhall and the Private Healthcare and Group business in the Nordic division. Bankhall reported an operating loss of SEK -18 million (4). In addition, goodwill was written down by SEK -1,135 million (-). For further commentary on Bankhall, see the UK, Asia Pacific & Offshore section. Profit for Skandia's Private Healthcare and Group business improved to SEK 42 million (-3). For comments, see the Nordic section. Joint functions Joint functions include joint-group expenses, costs for the divisions that are not distributed among the product segments, and the joint-group financial result. The group’s administrative expenses, excluding a provision for VAT, decreased to SEK -218 million (-284). The result was hurt by lower earnings from fixed-income investments and currency effects. Result before tax – Joint functions 2005 2004 SEK million 6 mos. 6 mos. Joint-group management -376 -284 expenses of which provision for -158 - VAT Structural costs -102 -56 Joint functions in 2 -68 Sweden Joint-group financial 3 85 result Total -473 -323 Income Statement – business segments Unit linked Other Mutual Life Joint assurance funds assurance Banking businesses functions Eliminations Total 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 SEK million mos. mos. mos. mos. mos. mos. mos. mos. mos. mos. mos. mos. mos. 6 mos. mos. mos. REVENUE Fee income 3,917 3,278 1,043 757 27 29 175 193 294 267 -120 -101 5,336 4,423 Change in deferred fee income and fee -633 -407 -30 -30 15 -663 -422 income receivable Net premiums 739 621 445 476 290 256 0 1,474 1,353 earned Net investment 413 251 53 34 361 236 -40 -27 41 20 268 862 -226 -745 870 631 income Net interest income, 561 497 561 497 banking Share of profit/loss of 1 -1 -1 1 -2 associates Other income 17 -1 3 25 4 5 42 220 227 1 48 250 341 Total revenue 4,453 3,742 1,069 786 838 755 701 705 551 502 563 1,177 -346 -846 7,829 6,821 EXPENSES Net claims -488 -363 -792 -652 -192 -183 - - incurred 1,472 1,198 Commission - - -395 -341 -23 -26 -46 -45 -18 -20 15 119 95 - - expenses 2,551 2,203 2,914 2,525 Change in deferred acquisition costs (DAC) and accrued commission 1,087 965 25 33 1 1,112 999 expense Administrative - - -507 -477 -25 -30 -437 -428 -310 -302 -717 -707 -65 6 - - expenses 1,521 1,464 3,582 3,402 Other expenses -12 -89 -216 -83 1 -1 -9 1 - -1 - -173 1,134 1,370 Interest -73 -94 -5 -4 -2 -1 -61 -25 -7 -2 -319 -807 292 745 -175 -188 expenses Total expenses - - - -872 -841 -710 -553 -497 - -506 - - 346 846 - - 3,558 3,248 1,098 1,661 1,036 1,500 8,401 6,487 Profit / loss 895 494 -29 -86 -3 45 148 208 - -4 -473 -323 0 0 -572 334 According before tax 1,110 to IFRS Change in surplus values of business in force, 2,698 1,611 3 -8 2,701 1,603 including financial effects Operating 3,593 2,105 -29 -86 0 37 148 208 - -4 -473 -323 0 0 2,129 1,937 result 1,110 According to Financial - -245 -5 - -245 embedded effects 1,273 1,278 value- Result of 2,320 1,860 -29 -86 -5 37 148 208 - -4 -473 -323 0 0 851 1,692 method operations 1,110 Result according to embedded value method The group’s operating result (including goodwill charges) increased to SEK 2,129 million (1,937), mainly due to large financial effects during the second quarter of 2005, primarily in the Swedish operations. Financial effects refer to the effect on embedded value caused by the fact that changes in the financial markets differ from the underlying assumptions on fund growth and interest rates, and to changes in financial assumptions. The group’s result of operations (operating result excluding financial effects) was SEK 851 million (1,692). The result of operations for unit linked assurance improved to SEK 2,320 million (1,860). The increase is attributable to improvements in all divisions except the Nordic division, where the result was down slightly compared with the first half of 2004. Trading analysis, unit linked assurance, according to embedded value method 2005 2004 2004 SEK million 6 mos. 6 mos. 12 mos. Total annualised 5,628 4,733 9,951 new sales 1) Present value of new business for 1,082 812 1,870 the year Return on value of contracts in force from 1,166 1,027 2,114 previous years 2) Outcome compared with operative -88 -200 -382 assumptions Change in operative 222 245 -295 assumptions Value-added from 2,382 1,884 3,307 operations Business start- ups and other -39 -26 -80 overheads 3) Restructuring -23 2 -47 costs Result of operations, unit 2,320 1,860 3,180 linked assurance Financial effects 1,273 245 700 4) Operating result, unit linked 3,593 2,105 3,880 assurance Profit margin, 19.2% 17.2% 18.8% new sales 5) 1) Periodic premiums recalculated to full-year figures plus 1/10 of single premiums during the period. 2) Of which, financing costs SEK -30 million as per June 2005, SEK -21 million as per June 2004 and SEK -41 million as per December 2004. 3) Value of business in force (VBIF) is not calculated on Business start-ups and other overheads. 4) The effect on embedded value attributable to the fact that the change in the financial markets differs from the assumptions on fund growth and interest rate levels. 5) Present value of new business for the year in relation to total annualised new sales. Trading analysis, unit linked assurance Operating result The operating result was SEK 3,593 million (2,105). The stock market trend was positive in most countries during the first half of the year, which contributed to a sharp rise in financial effects – especially in the Swedish operations – which totalled SEK 1,273 million (245). Result of operations The result of operations, which consists of the operating result excluding financial effects for unit linked assurance, increased to SEK 2,320 million (1,860). During the first half the result was favourably affected by the high level of new sales in Germany stemming from a change in tax legislation at year-end 2004. Royal Skandia and Italy also contributed to the increase in the result of operations. The result of operations amounted to SEK 1,150 million during the second quarter, which was level with the preceding quarter. The result of operations consists primarily of the following components: Present value of new business for the period The present value of new business (VNB) increased to SEK 1,082 million (812). All divisions contributed to the increase. VNB for the second quarter was SEK 436 million, compared with SEK 416 million for the corresponding period a year ago and SEK 646 million for the preceding quarter. During the first quarter, VNB experienced a positive one-time effect of approximately SEK 200 million from strong new sales in Germany in late 2004/early 2005. New sales in Germany dropped sharply during the second quarter, at the same time that costs were incurred to realign the operations toward other customer segments. This led to a sharp decline in VNB during the second quarter in Germany. In Sweden, greater new sales of the “kapitalpension” product – and also occupational pensions – contributed to an increase in VNB compared with the preceding quarter. Operations in the UK also contributed to the increase. The actions taken in the Swedish operations have begun to yield results in the form of rising new sales and an increase in VNB. Cost-cutting and higher retrocessions from fund companies are also contributing to improved VNB. The present value of new business was negatively affected by the changes in assumptions at year-end 2004 regarding the conversion of policies to paid-up status and the elimination of premium-based fees. Profit margin, new sales The calculated profit margin increased to 19.2% (17.2%). The profit margin improved, most notably for the Nordic division, but also for the UK, Asia Pacific & Offshore division. The profit margin for the Europe & Latin America division narrowed slightly due to the changed market conditions in Germany. During the second quarter, the profit margin for the group fell to 14.9%, compared with 17.8% for the same quarter a year ago. This was mainly attributable to the decline in new sales in the German operation. Skandia’s German operation, like the market as a whole, is currently in a transitional period following the high level of new sales during the preceding quarters. These were driven by exceptional demand ahead of changes in tax legislation after year-end. New sales were halved in Germany compared with the second quarter of 2004 at the same time that marketing costs have risen. The transitional period entails that costs during the second quarter are high in relation to the considerably lower volume of new sales during the second quarter. This had a negative 2.5 percentage point impact on the group’s profit margin. The combined cost overrun in Germany that affected VNB and thus the profit margin was SEK 73 million, of which SEK 24 million is attributable to a time-lag in paid commissions. Of the remaining SEK 49 million, approximately a third is directly attributable to investments in new product segments. The goal is to gradually increase new sales in other customer segments and thereby restore balance. While the cost overrun attributable to VNB was high, the German operation has achieved a volume of funds under management that entails significantly positive result effects for the existing book of business. The outcome compared with assumptions was positive at SEK 27 million, and changed assumptions regarding retrocessions from fund companies amounted to SEK 92 million. Return on value of contracts in force from previous years The surplus value of unit linked assurance consists of discounted values of anticipated future cash flows from in-force contracts. The present value of in-force contracts thereby increases by one year’s interest annually. This amount also includes the return on investments pertaining to unit linked assurance, which increased compared with a year ago, to SEK 1,166 million (1,027). Outcome compared with operative assumptions The outcome compared with operative assumptions was negative, but improved to SEK -88 million (-200) compared with a year ago. Surrenders in the Swedish operation, prompted by changes in inheritance and tax legislation and the introduction of the new ”kapitalpension” product, are at a high level. The effect of these market changes is expected to subside during the remaining part of the year. Conversion of policies to paid-up status is showing a gradual decline, but still exceeds underlying assumptions. The result for the UK, Asia Pacific & Offshore division was affected by higher – partly retroactive – provisions for risk insurance. Change in operative assumptions Changes in assumptions amounted to SEK 222 million (245). Changes in assumptions were mainly attributable to the second quarter of 2005 and pertained primarily to higher retrocessions from fund companies and necessary adjustments in the embedded value model. Life assurance The result of operations according to the embedded value method was SEK -5 million (37). C. RESULTS per DIVISION UK, Asia Pacific & Offshore division The UK, Asia Pacific & Offshore division includes the operations in the UK, Royal Skandia, Ir eland, Switzerland, Liechtenstein, Australia and China. The unit linked operations in Norway and Finland are conducted as branches of Skandia UK. Results – UK, Asia Pacific & Offshore According to IFRS According to the embedded value method Result of Profit before tax operations 1) Operating result 1) 2005 2004 2005 2004 2005 2004 SEK 6 mos. 6 mos. 6 mos. 6 mos. 6 mos. 6 mos. million Unit linked 353 218 934 877 1281 931 assurance Mutual -22 -80 -22 -80 -22 -80 funds Life - assurance Banking - Other -1153 4 -1153 4 -1153 4 businesses Joint - functions Total -822 142 -241 801 106 855 1) For definitions, please see page 25. 2) Includes a write-down of goodwill in Bankhall, totalling SEK -1 135 (-) million as per June 2005. Key ratios 1) – UK, Asia Pacific & Offshore Moving 12-month figures 2005 2004 2004 2005 6 mos. 6 mos. 12 mos. Jun. Premiums and deposits, SEK 38,517 31,480 65,087 72,124 million New sales, unit linked, 3,569 2,888 5,982 6,663 SEK million Present value of new business, 433 346 684 771 unit linked, SEK million Growth in present value of new 25 N/A 39 N/A business, unit linked, % Profit margin new sales, 12.1 12.0 11.4 - unit linked, % Capital employed 8,318 N/A 8,060 - (IFRS), SEK million Return on capital -17 N/A -14 - employed (IFRS), % 2) Capital employed 16,445 N/A 15,043 - (EV), SEK million Oper. return on capital -2 N/A 13 - employed (EV), % 2) Assets under management, 345 255 276 - SEK billion 1) For definitions, please see page 25. 2) The 6-month key ratios for 2005 have been recalculated on a full-year basis. Products and markets Premiums and deposits amounted to SEK 38,517 million (31,480) during the first half of the year, an increase of 24% in local currency. Of this, unit linked assurance accounted for SEK 29,466 million (22,356) and mutual funds for SEK 9,051 million (9,124). New sales of unit linked assurance rose 25% in local currency during the first half of the year, to SEK 3,569 million (2,888). New sales of unit linked bonds in the UK rose 25% in local currency as unit linked multi-manager products continue to gain strength in the market. New sales also rose in the Pensions product area, by 18% in local currency. This growth has been driven by a range of new initiatives ahead of announced changes in the UK pensions market in April 2006. Skandia’s new Self Invested Personal Pension (SIPP), launched at the beginning of 2005, has been well-received by the market. Royal Skandia’s new sales rose 38% in local currency. In the UK, increases in inheritance tax liabilities continue to drive demand for compliant offshore tax solutions. Growth was also driven by rising institutional sales via private banks. In addition, there was significant sales growth across the broader offshore markets, especially in South America, the Middle East, and Europe. New sales in Switzerland rose 62% in local currency, driven by the new ”kapitalpension” product. In Australia, mutual fund deposits decreased by 3% in local currency against high comparative performance in the first half of 2004. Result according to IFRS Excluding the goodwill write-down, profit before tax was SEK 313 million (142), mainly due to higher profits from unit linked assurance business in the UK and Royal Skandia. Revenues in the form of fees have increased – both premium- and fund-based revenues. However, profit before tax (excluding the goodwill write-down) was down during the second quarter compared with the first quarter. This is mainly due to certain adjustments in the model for distributing revenues over time according to IFRS. The result including the goodwill write-down of SEK -1,135 million was SEK -822 million (142). The return on capital employed for the division was 9% excluding the goodwill write-down and -17% including the goodwill charge. Bankhall’s earnings deteriorated during the second quarter, and the company reported a loss of SEK -18 million (4) for the first half of the year, excluding goodwill charges. The result was adversely impacted by one-off restructuring costs of approximately SEK 11 million. Revenues were broadly stable, while expenses have risen. In addition, profit was charged with a further goodwill write-down for Bankhall. See also page 5. The result for mutual fund savings products remains negative, however, an improvement has been noted in both Australia and the UK. Result according to embedded value method The operating result for unit linked assurance increased to SEK 1,281 million (931), of which financial effects accounted for SEK 347 million (54). The result of operations increased to SEK 934 million (877), and the profit margin was 12.1% (12.0%). The increase in the result of operations is mainly attributable to higher VNB and a higher return on the value of contracts in force from previous years. These positive effects were partly offset by one-off restructuring costs and costs for retroactive adjustments of fees and deposits. The profit margin during the second quarter was level with the preceding quarter. The operational return on capital employed according to the embedded value method was 8% excluding the goodwill write-down and -2% including the goodwill charge. Europe & Latin America division The Europe & Latin America division includes the operations in Spain, Italy, Germany, Austria, France, Portugal, Poland, Mexico, Colombia and Chile, and Global Funds. Results – Europe & Latin America According to IFRS According to the embedded value-method Result of Profit before tax operations 1) Operating result 1) 2005 2004 2005 2004 2005 2004 SEK 6 mos. 6 mos. 6 mos. 6 mos. 6 mos. 6 mos. million Unit linked 250 40 878 441 1000 434 assurance Mutual -27 -38 -27 -38 -27 -38 funds Life -5 44 -7 36 -2 36 assurance Banking - - Other -1 -1 -1 businesses Joint - - functions Total 218 45 844 438 971 431 1) For definitions please see page 25. Key ratios 1) – Europe & Latin America Moving 12-month figures 2005 2004 2004 2005 6 mos. 6 mos. 12 mos. Jun. Premiums and deposits, SEK 13,675 10,615 21,291 24,351 million New sales, unit linked, 1,020 878 2,212 2,354 SEK million Present value of new business, 354 233 795 916 unit linked, SEK million Growth in present value of new 52 N/A 31 N/A business unit linked, %2) Profit margin new sales, 34.7 26.5 35.9 - unit linked, % Capital employed 3,069 N/A 3,190 - (IFRS), SEK million Return on capital 11 N/A -4 - employed (IFRS), % 3) Capital employed 6,677 N/A 6,206 - (EV), SEK million Oper. return on capital 19 N/A 10 - employed (EV), % 3) Assets under management, 84 65 70 - SEK billion 1) For definitions please see page 25. 2) Growth in the present value of new business for 6 months 2005 includes a positive one-time effect of SEK 200 million. 3) The 6-month key ratios for 2005 have been recalculated on a full- year basis. Products and markets Premiums and deposits totalled SEK 13,675 million (10,615), an increase of 27% in local currency. Unit linked premiums rose 16% in local currency, to SEK 6,280 million (5,421). New sales of unit linked assurance increased by 16% in local currency, to SEK 1,020 million (878). Mutual fund deposits totalled SEK 6,457 million (4,502), an increase of 39% in local currency. The German market is currently in a period of transition to new market conditions following a period of exceptional demand stemming from changes in tax legislation, which had a strongly positive impact on new sales during the fourth quarter of 2004 and first quarter of 2005. Skandia has also felt the effects of this and showed as sharp decline in new sales of unit linked assurance in Germany during the second quarter of the year. However, new sales showed a positive trend on a monthly basis during the second quarter and a higher share of occupational pensions contracts. In addition, distribution via Independent Financial Advisers showed signs of recovery toward the end of the second quarter. Skandia’s strong growth in France continued, and new sales rose 123% in local currency. Capacity has been strength­ened both in Skandia’s own organisation and in external distribution channels, and after only three years of doing business in France, Skandia has achieved a market share of slightly more than 3% in the IFA segment. Italy noted a favourable trend in premiums and deposits during the second quarter. Italy’s regulatory authority, ISVAP, has ruled that retrocessions from fund companies are to be credited to customers and not to the product suppliers, which will apply for new contracts written after 1 September 2005. Skandia estimates that the company will be able to compensate for this through price adjustments and that VNB will not be affected by this change in rules. In Austria, Skandia Leben AG, along with most other insurance companies, has been sued by a consumer organisation in Austria. See also the section on disputes. The sharp rise in mutual fund deposits is largely attributable to Spain and Colombia. In Spain, two large distributors have begun selling Skandia’s fund products, with the greatest contribution during the second quarter. Mutual fund deposits in Spain during the first half of the year increased by SEK 1,533 million, to SEK 3,713 million. Result according to IFRS Profit before tax amounted to SEK 218 million (45). The increase is largely attributable to a strong result for unit linked assurance in Germany during the first quarter, which was favourably affected by a deferral of acquisition costs attributable to the high level of new sales in late 2004/early 2005. Several other markets also made a significant contribution to the improved result. The return on capital employed decreased compared with the first quarter, mainly due to debt repayment in Germany using funds generated from the larger customer base. The return on capital employed was 11%. Result according to the embedded value method The operating result for unit linked assurance rose 130%, to SEK 1,000 million (434), of which financial effects accounted for SEK 122 million (-7). The result of operations was SEK 878 million (441), an increase of 99%. Changes in operative assumptions and the operative outcome compared with assumptions, mainly in Germany and Austria, affected the result of operations favourably in the amount of SEK 313 million during the first half of the year. The value of new business was exceptionally strong during the first quarter, but substantially lower during the second quarter. The German operation is currently being conducted under entirely different conditions in the wake of the previous exceptional demand. New sales fell sharply during the second quarter at the same time that costs were maintained at first-quarter levels. The reason for the latter is that investments have been made in product development and marketing for continued initiatives in new product segments. This relationship explains the drop in the profit margin, which was 35% for the first half of the year, compared with 52% for the first quarter. However, the underlying profit margins in the German operation are only marginally affected by the shift towards occupational pensions. The operational return on capital employed according to the embedded value method was 19% for the first half of the year and 23% for the first quarter. Nordic division The Nordic division includes the operations in Sweden and Denmark, as well as SkandiaBanken's operations in Sweden, Norway and Denmark. Results – Nordic According to IFRS According to the embedded value-method Result of Profit before tax operations 1) Operating result 1) 2005 2004 2005 2004 2005 2004 SEK 6 mos. 6 mos. 6 mos. 6 mos. 6 mos. 6 mos. million Unit linked 284 223 500 529 1304 727 assurance Mutual 20 32 20 32 20 32 funds Life 2 1 2 1 2 1 assurance Banking 148 208 148 208 148 208 Other 42 -3 42 -3 42 -3 businesses Joint 2 -67 2 -67 2 -67 functions Total 498 394 714 700 1518 898 1) For definitions please see page 25. Key ratios 1) – Nordic Moving 12-month figures 2005 2004 2004 2005 6 mos. 6 mos. 12 mos. Jun. Premiums and deposits, SEK 7,682 6,647 11,653 12,688 million New sales, unit linked, 1,039 967 1,757 1,829 SEK million Present value of new business, 295 233 391 453 unit linked, SEK million Growth in present value of new 27 N/A -35 N/A business unit linked, % Profit margin new sales, 28.4 24.1 22.3 - unit linked, % Capital employed 4,585 N/A 4,698 - (IFRS), SEK million Return on capital 16 N/A 8 - employed (IFRS), % 2) Capital employed 12,965 N/A 12,040 - (EV), SEK million Oper. return on capital 8 N/A 2 - employed (EV), % 2) Assets under management, 392 359 366 - SEK billion 3) 1) For definitions please see page 25. 2) The 6-month key ratios for 2005 have been recalculated on a full-year basis. 3) Includes Skandia Liv in the amount of SEK 270 billion (249). Products and markets The Nordic division showed strong gains during the second quarter compared with a year ago, both in respect of total premiums and new sales. Unit linked assurance Premiums and deposits for the Nordic division rose 16%, to SEK 7,682 million (6,647). Unit linked premiums increased by 20% in local currency. New sales of unit linked assurance in Sweden showed a breakthrough during the second quarter. New sales of unit linked assurance during the second quarter amounted to SEK 552 million (439), an increase of 26% compared with 2004. New sales increased for the third consecutive quarter, but this is the first time in a long time that new sales exceeded the corresponding year-earlier period. New sales from Private customers rose 75% and can mainly be credited to the new “kapitalpension” product. Accumulated new sales of “kapitalpension” unit linked plans totalled SEK 145 million during the first half of the year. In the key Commercial segment, new sales rose 13%, which is a sign that the completed action programme is beginning to generate results. During the first half of the year, new sales amounted to SEK 1,039 million, compared with SEK 967 million during the first half of 2004 – an increase of 7%. In the Private Healthcare and Group business unit, premiums during the first half totalled SEK 0.3 billion, an increase of 10% compared with the same period in 2004. Result according to IFRS Profit before tax improved to SEK 498 million (394), mainly due to improved profits in unit linked assurance and Private Healthcare and Group business. Virtually all costs for joint functions have been distributed among the product areas, which did not take place to the same extent a year ago. Unit linked assurance revenues have increased due to growth in fund- based fees. Premium-based fees were eliminated in the Swedish operation in 2004. Profit also improved for the risk portion of unit linked assurance pertaining to waiver of premium protection. Profit for the banking operation amounted to SEK 148 million (208). Results of this operation are commented in section B on page 11. The earnings improvement for Private Healthcare and Group business is explained by higher investment returns and growth in premium revenue. The improvement is mainly attributable to Group business, however, profit for Private Healthcare business also improved – mainly in the Danish branch, where growth in premiums combined with lower claim costs led to an improved result. The return on capital employed was 16%. Result according to embedded value method The operating result for unit linked assurance was SEK 1,304 million (727), of which financial effects accounted for SEK 804 million (198). The result of operations for unit linked assurance decreased slightly, to SEK 500 million (529). The present value of new business for the period has increased. This can be attributed to higher new sales during the period and higher profitability per contract stemming from the actions taken in the Swedish operations. Higher retrocessions from fund companies, cost-cutting and a slight increase in fixed fees per contract had a positive result impact and have offset the reduction of premium-based fees on customers’ existing contracts. The result was adversely affected by an increase in surrenders attributable to the change in inheritance and gift taxation, in connection with a reallocation of savings assets to “kapitalpension” products. The conversion of policies to paid-up status also hurt the outcome compared with assumptions in the embedded value calculation, even though this effect markedly subsided during the second quarter. Taken together, the outcome compared with operative assumptions was SEK -175 million (-96), of which SEK -145 million was attributable to surrenders of inheritance- and gift tax–related endowment plans. Change in assumptions during the first half of 2005 amounted to SEK 68 million (73). The operational return on capital employed according to the embedded value method was 8%. Group functions Group functions include joint-group expenses, the joint-group financial result and undistributed results from the business segments. The group’s administrative expenses, excluding the provision for VAT, decreased to SEK -218 million, compared with SEK -284 million a year ago. Result before tax – Group functions 2005 2004 SEK million 6 mos. 6 mos. Joint-group management -376 -284 expenses of which provision for -158 - VAT Structural costs -102 -56 Unallocated result, 9 8 business segment Joint-group financial 3 85 result Total -466 -247 ******************************************************** Stockholm, 22 August 2005 Hans-Erik Andersson President and CEO ----------------------------- Review Report(direct translation of the Swedish Review Report) We have reviewed the interim report of Skandia Insurance Company Ltd (publ.) for the period January–June 2005. The interim report is the responsibility of the Company’s management. Our responsibility is to issue a report on the interim report based on our review. Our review has been conducted in accordance with the recommendation issued by the Swedish Institute of Authorised Public Accountants. This recommendation requires that we plan and perform the review to obtain moderate assurance as to whether the interim report is free from material misstatement. A review is limited primarily to inquiries of the company personnel and analytical procedures applied to financial data and thus provides less assurance than an audit and, accordingly, we do not express an audit opinion. Based on our review, nothing has come to our attention that causes us to believe that the interim report does not comply with the requirements of the Swedish Securities and Clearing Operations Act, the instructions and general guidelines of the Swedish Financial Supervisory Authority on annual accounts for insurance companies and IAS 34. Göran Engquist Svante Forsberg Anders Engström Authorised Public Authorised Public Authorised Public Accountant Accountant Accountant Appointed by the Swedish Financial Supervisory Authority _____________________ Skandia Insurance Company Ltd (publ.) Sveavägen 44 SE-103 50 Stockholm Tel. +46-8-788 10 00 www.skandia.com Public company (publ.), reg. no. 502017-3083 D. OTHER TABLES CONSOLIDATED BALANCE SHEET 2005 2004 SEK billion Note 30 Jun. 31 Dec. ASSETS Intangible assets Goodwill 0.6 1.6 Other intangible assets 0.1 0.2 Reinsurers' share of insurance 0.8 0.7 provisions Deposits held with cedents 2 3.8 3.5 Deferred acquisition costs 1 18.6 16.3 Deferred tax 0.6 1.0 asset Surplus in defined benefit pension 0.5 0.5 plans Property and equipment 0.5 0.5 Investment properties 2 0.0 0.0 Loans and advances 2 51.7 45.5 Investments in associates 2 0.1 0.1 Other investments 2 24.9 21.4 Investments for the benefit of 361.2 295.5 policyholders Assets, consolidated mutual funds 3 14.4 10.0 Current tax 0.5 0.4 asset Other receivables 4.5 3.7 Other prepayments and accrued income 5.0 4.9 Cash and cash 1.8 2.0 equivalents TOTAL ASSETS 489.6 407.8 EQUITY AND LIABILITIES Equity attributable to equity 11.3 12.3 holders of parent Minority interest 0.1 0.1 Total equity 11.4 12.4 Liabilities Subordinated loans 4 0.8 0.8 Insurance provisions 5 16.6 15.5 Liability for linked investment 362.7 296.8 contracts Liabilities consolidated mutual 3 14.9 10.5 funds Deposits received from reinsurers 0.1 0.1 Provisions for pensions 0.3 0.3 Deferred tax liability 1.6 1.9 Deferred fee income 6 16.4 14.7 Other provisions 1.3 1.3 Deposits and borrowings from the 47.4 40.5 public Other interest bearing liabilities 4 3.9 3.9 Current tax 0.8 0.4 liabilities Derivative liability 0.9 0.3 Other payables 7.0 5.8 Other accruals and deferred income 3.5 2.6 TOTAL EQUITY AND LIABILITIES 489.6 407.8 NOTES TO THE BALANCE SHEET 2005 2004 Note SEK billion 30 Jun. 31 Dec. Deferred 1 acquisition costs (DAC) Opening balance 16.3 14.3 Capitalisation of 2.4 4.9 acquisition costs Amortisation of deferred -1.3 -2.3 acquisition costs Deferred acquisition costs - -0.5 in divested companies Impairment of deferred 0.0 0.0 acquisition costs Exchange 1.2 -0.1 differences Closing balances 18.6 16.3 Of which, unit 18.0 15.7 linked assurance Of which, mutual 0.6 0.6 funds 2 Investments Unit linked 13.3 10.4 assurance Mutual funds 0.3 0.3 Life assurance 11.9 11.1 Banking 51.6 44.5 Other businesses 3.4 4.2 and group functions Total 80.5 70.5 3 Pertains to consolidation of funds in which the ownership exceeds 50%. For additional explanation, please refer to the accounting policies according to IFRS. Subordinated loans 4 and other interest- bearing liabilities Subordinated loans 0.8 0.8 Bonds, non-banking 2.4 2.2 Financial 0.8 1.0 reinsurance Financing 4.0 4.0 Bonds in bank 0.0 0.0 Other financial 0.7 0.7 liabilities Total 4.7 4.7 Change in bonds Opening balance 2.2 3.1 New debt issued 0.3 0.9 Repurchases and -0.1 -1.8 maturities Currency conversion 0.0 0.0 Closing balances 2.4 2.2 5 Insurance provisions Unit linked 3.7 3.1 assurance Life assurance 12.0 11.5 Other businesses 0.9 0.9 Total 16.6 15.5 6 Deferred fee income (DFI) Opening balance 14.7 13.0 Capitalisation of 1.9 4.2 fees Amortisation of -1.3 -2.4 deferred fees Exchange 1.1 -0.1 differences Closing balances 16.4 14.7 Of which, unit 15.7 14.1 linked assurance Of which, mutual 0.7 0.6 funds Restructuring 7 reserves (SEK million) Balance per 31 311 December 2003 Provision for 308 restructuring costs Utilisation of restructuring -228 reserve Balance per 31 391 December 2004 Utilisation of restructuring -101 reserve Additional 4 provision Reclassification -54 Exchange 6 differences Balance per 30 June 246 2005 CHANGE IN EQUITY 2005 2004 2004 SEK million 30 Jun. 30 Jun. 31 Dec. Opening shareholders' 15,958 15,381 15,381 equity according to Swedish GAAP Opening minority interest 73 122 122 according to Swedish GAAP Change in accounting -3,688 -2,811 -2,811 policies1) Translation differences 41 - - relating to these changes Opening shareholders' 12,384 12,692 12,692 equity according to IFRS Dividend 2) -362 -307 -307 New issue3) 6 9 13 Change in surplus value of owner- -1 2 -8 occupied properties Share-based 3 5 8 payments Change in cash- - - 57 flow hedges Recognition of actuarial gains and losses from post- employment - - -30 defined benefit plans Sales and purchases of treasury shares held to cover investment 7 -201 -248 contracts 4) Translation 418 213 10 differences Profit /loss for -1,047 1,290 197 the period Closing balance 11,408 13,703 12,384 1) See also section on IFRS reconciliation. 2) Including dividend to minority of SEK 3 million as at 30 June 2005. 3) New share issue in connection with stock option programme. 4)Certain funds in which Skandia has invested for the benefit of policyholders are consolidated. These funds may have invested in Skandia shares. In such case, these are to be eliminated against shareholders' equity. The effect of purchases and sales of shares in Skandia that have taken place during the period, together with the changes in the share price, makes up an explanatory item in the change in shareholders' equity. CAPITAL EMPLOYED 2005 2004 2004 SEK million 30 Jun. 30 Jun. 31 Dec. Equity 11,408 13,703 12,384 Treasury shares held to cover 521 466 504 investment contracts 1) Subordinated 849 849 849 loans Other financing 3,186 3,610 3,357 2) Capital employed 15,964 18,628 17,094 IFRS Surplus value of business in force 20,116 17,222 17,339 after deferred tax Capital employed 36,080 35,850 34,433 embedded value 1) Number of repurchased shares for the 12,144 14,945 15,231 benefit of policyholders, thousands 2) Including financial reinsurance, excluding deposits from public NET ASSET VALUE Unit linked Life assurance Total 2005 2004 2005 2004 2005 2004 SEK 30 Jun. 31 Dec. 30 Jun. 31 Dec. 30 Jun. 31 Dec. million Equity 8,661 7,308 540 533 9,201 7,841 Surplus value of business in force 20,183 17,407 -67 -68 20,116 17,339 after deferred tax Less: minority -43 -43 -43 -43 interests Embedded 28,844 24,715 430 422 29,274 25,137 value Equity, mutual 495 374 funds Less: minority interests -42 -33 mutual funds Equity, 2,269 2,120 banking Equity, other -1,510 -325 businesses Equity, group 952 2,374 functions Treasury shares held to cover investment 521 509 contracts Net asset 31,959 30,151 value RECONCILIATION OF NET ASSET VALUE According to embedded value According to method IFRS Unit linked Life Other Total assurance segments 2005 2004 2005 2004 2005 2004 2005 2004 SEK million 30 31 30 31 30 31 30 Jun. 31 Dec. Jun. Dec. Jun. Dec. Jun. Dec. Opening 24,715 22,418 422 352 5,014 6,339 30,151 29,109 balance Profit/loss for the period from 805 1,119 0 -5 -1,381 -1,751 -576 -637 continuing operations Profit / loss for the period from -507 834 36 0 -471 834 discontinued operations Change in surplus value of business in 1,926 1,553 4 -24 0 0 1,930 1,529 force after deferred tax Change in surplus value of business in force -405 0 0 0 -405 in discontinued operations Transfer of proceeds from 507 -1,222 -507 1,222 0 0 discontinued operations Capital contributions/ 40 548 0 101 -34 -636 6 13 New issue Dividend -28 -331 -307 -359 -307 Change in surplus value of owner- 1 1 -11 -2 2 -1 -8 occupied properties Share-based 3 8 3 8 payments Change in cash-flow 0 57 0 57 hedges Recognition of actuarial gains and losses 0 -30 0 -30 from post- employment defined benefit plans Translation 1,358 -131 31 6 -109 61 1,280 -64 differences Less: minority 0 3 -4 49 -4 52 interests Closing 28,844 24,715 430 422 2,685 5,014 31,959 30,151 balance NEW SALES AND PROFIT MARGIN, UNIT LINKED ASSURANCE PER GEOGRAPHIC SEGMENT Present value of new business for the Profit margin, Annualised new sales year new sales 2005 2004 2004 2005 2004 2004 2005 2004 2004 SEK 6 mos. 6 mos. 12 6 mos. 6 mos. 12 6 mos. 6 mos. 12 mos. million mos. mos. UK, Asia Pacific & 3,569 2,888 5,985 433 346 684 12,1% 12,0% 11,4% Offshore 1) Europe & Latin 1,020 878 2,212 354 233 795 34,7% 26,5% 35,9% America Nordic 1,039 967 1,757 295 233 391 28,4% 24,1% 22,3% 2) Total 5,628 4,733 9,951 1,082 812 1,870 19,2% 17,2% 18,8% 1) Of which, 3,404 2,795 5,786 411 333 662 12,1% 11,9% 11,4% UK 2) Of which, 984 918 1,668 284 223 377 28,9% 24,3% 22,6% Sweden STATEMENT OF CASH FLOWS 2005 2004 2004 SEK billion 6 mos. 6 mos. 12 mos. Cash flow from operating activities before changes in lending/ -0.2 -1.6 -2.2 deposits to and from the public and investments in banking operations2) Change in lending/ deposits to and from the public and -0.3 -0.4 -0.7 investments in banking operations Cash flow from -0.5 -2.0 -2.9 operating activities Cash flow from investing 0.5 2.5 3.7 activities 3) Cash flow from -0.4 -1.2 -1.3 financing activities Net cash flow for the -0.4 -0.7 -0.5 period 1) Cash and cash equivalents 2.0 2.5 2.5 at the start of the period Exchange rate differences 0.2 0.1 0.0 in cash and cash equivalents Cash and cash equivalents 1.8 1.9 2.0 at the end of the period 1) Net cash - -0.3 -0.3 flow from discontinued operations: 2) During the first quarter of 2004, as previously reported, a contractually regulated distribution agreement was settled in cash, which affected cash flow from operating activities negatively in the amount of SEK -0.8 billion. 3) During first half of 2004, cash flow from investing activities includes the proceeds from the sale of If, totalling SEK 4.5 billion, and from the Japanese operation, totalling SEK 1.2 billion, net, after deducting for costs. STOCK OPTIONS In March 2005, 42,500 B options from the 2003 programme were subscribed by Skandia employees. The subscription price was SEK 20.33 per share, and Skandia thus received SEK 864 thousand. In June 2005, 151,200 A options and 100,000 B options from the 2003 programme were subscribed by Skandia employees. In connection with this, Skandia Umbrella Trust subscribed for 49,031 A options to cover social security costs. The subscription price was SEK 20.33 per share, and Skandia thus received SEK 6,104 thousand. In May 2005, all of the 984,150 outstanding A options in the 2002 programme expired. At the same time, the remaining 170,700 A options in the 2000 programme and the remaining 182,100 A options in the 2001 programme expired. For further information on the stock option programmes for the years 2000–2003, please refer to the 2004 Annual Report. EXCHANGE RATES 2005 2005 2004 2004 2004 SEK 30 Jun. 31 Mar. 31 Dec. 30 Sep. 30 Jun. EUR Closing 9.45 9.15 9.03 9.04 9.16 rate EUR Average 9.16 9.09 9.13 9.16 9.18 rate GBP Closing 14.00 13.31 12.76 13.17 13.66 rate GBP Average 13.36 13.10 13.40 13.56 13.56 rate USD Closing 7.81 7.04 6.65 7.28 7.53 rate USD Average 7.12 6.87 7.32 7.47 7.46 rate Average rates indicate the average rates for the period 1 January through the respective book-closing dates in 2005 and 2004. Skandia share data Skandia’s share price closed at SEK 42.90 on 29 June 2005, compared with SEK 35.90 at the end of March 2005. This corresponds to an increase of 19.5% during the second quarter of 2005. During the same period, the Stockholm Stock Exchange’s SAX index gained 6.1%. The highest and lowest prices paid during the second quarter were SEK 44.00 and SEK 33.30, respectively. Skandia’s shares are listed on the Stockholm Stock Exchange and London Stock Exchange. Trading volume in Skandia’s shares during the second quarter was 805 million shares, and the market capitalisation was SEK 44.0 billion on 29 June 2005. [REMOVED GRAPHICS] Skandia’s largest shareholders as per 29 July 2005 Name Share capital and Number of shares voting rights, % Fidelity mutual funds 5.0 51,525,466 Burdaras HF 3.6 36,633,500 Nordea mutual funds 3.5 35,701,422 Cevian Capital LP 3.4 34,508,400 Second National Swedish 3.2 32,806,673 Pension Fund SHP/SPP mutual funds 2.6 26,226,192 Robur mutual funds 2.5 26,017,232 SEB mutual funds 2.1 21,787,180 SEB-Trygg Försäkring 1.7 17,434,700 Nordea Bank 1.6 16,577,100 Total, 10 largest 29.2 299,217,865 shareholders Total, others 70.8 725,325,280 Total shares 100.0 1,024,543,145 Glossary Key ratios Annualised new sales: Periodic premiums recalculated to full-year figures, plus 1/10 of single premiums during the period. Acquisition costs: Acquisition costs include all costs, internal as well as external, that arise in connection with the sale of unit linked assurance and mutual fund savings products. Acquisition costs are to be capitalised (deferred acquisition costs) and amortised according to a schedule that corresponds to the product's economic life. Assets under management: The sum of customers' invested assets and the group's own investment assets, including investment assets in Skandia Liv. Capital base: For a life assurance operation, the capital base consists of shareholders’ equity, untaxed reserves and certain subordinated loans, less goodwill and other intangible assets. Capital employed (IFRS):Equity, reversal of eliminations of treasury shares held for the benefit of policyholders, borrowings, subordinated loans and financial reinsurance. Capital employed (EV): Capital employed (IFRS) plus surplus values of business in force after deducting deferred tax. Change in surplus values of business in force, including financial effects: Change in surplus values of business in force, before tax, including revenues and expenses pertaining to policyholder tax. Change in operative assumptions (EV): Assumptions that have been made are compared regularly with actual experience and adjusted when necessary. A positive result entails that previous assumptions have been conservative. Embedded value (EV): Embedded value is an alternative method for reporting the value development of long-term savings contracts. For further information, please see Skandia’s 2004 Annual Report, pp. 108- 111. Fee income:Revenues derived from the policyholders are charged in the form of fees over the entire lifetime of contracts in force. These fees are charged in various forms – usually based on the value of the underlying funds in the contract (fund-based fees), or initially during the early years of a contract based on the size of the premiums paid in (premium-based fees). Fees paid in to Skandia initially upon the sale of a contract are distributed over a period of time. Such fees are treated as deferred income which is dissolved and recognised as revenue over the life of the contract. Financial effects (EV): Refers to the deviation of the present value of future revenues from assumptions on fund growth and interest rates, caused by changes in the financial markets. Funds under management: Customers' invested assets in unit linked assurance and mutual funds. Net asset value (EV): Equity less minority share as per the balance sheet, reversal of eliminations of treasury shares held for the benefit of policyholders and surplus values of business in force after deducting deferred tax. Net effect of policyholder tax: The net sum of income and expenses in the income statement attributable to policyholder tax. Number of shares outstanding: In calculations of key ratios and information on the number of shares, consideration has not been given to shares that can be considered to have been repurchased due to consolidation of certain fund holdings. As stated in the accounting policies, Skandia consolidates funds in which the company’s ownership stake is more than 50%. The shares in Skandia owned by these funds are formally to be considered as treasury shares. Skandia does not treat these shares as treasury shares, since they make up part of the investment assets for which the policyholders bear the investment risk. A technical reduction of the number of shares would not give a true and fair view of the key ratios per share in Skandia. They have therefore not reduced the number of shares outstanding in calculations of key ratios per share. Information on the number of shares in funds that are consolidated is provided in connection with the table showing capital employed. The change in the number of shares outstanding is due to the fact that Skandia issues new shares when employees exercise their stock options to subscribe for new shares. Operating result (EV): Profit / loss before tax (IFRS) adjusted to include the change in surplus value of business in force (VBIF) including financial effects, and revenues and expenses related to the policyholder tax. Outcome compared with operative assumptions (EV): Assumptions that have been made are compared regularly with actual experience. A positive result entails that the actual outcome for the period was better compared with previous assumptions for new as well as existing business. Paid-up policy: Insurance contract with terminated premium contributions but no repurchase of fund value. Premiums and deposits: Inflows from customers. Pertains to premiums for insurance contracts and deposits toward financial contracts (unit linked assurance and mutual fund savings products), but not deposits in bank accounts. Corresponds to the previously reported sales figures. Premiums earned: Written premium attributable to the period, i.e., premiums written less outward reinsurance premiums, adjusted for the unearned portion of premiums. Present value of new business for the year (EV): Discounted value of revenues and expenses in unit linked assurance during the term of an insurance policy for contracts written during the period. Profit / loss before tax (IFRS): Profit/loss before company tax, revenues and expenses related to the policyholder tax, and profit/loss from discontinued operations. Result of operations (EV):The operating result (EV) excluding financial effects. Solvency margin: The solvency margin is the minimum permissible level of the capital base by law. The solvency margin is calculated based on the nature and scope of business. Surplus value of business in force (VBIF) (EV): The present value of calculated future surpluses from the annual fees paid by policyholders according to contracts in force. The group’s operating result includes the change in these surplus values for the period. Surrenders: Premature termination of savings due to full repurchase, partial repurchase, premium reduction, conversion to paid-up policy status or transfer Earnings per share (IFRS): Profit/loss for the period attributable to the parent company’s shareholders, divided by the average number of shares outstanding during the period. The dilutive effect is only calculated if the key ratio deteriorates. Equity ratio (IFRS): Equity in relation to total assets, excluding investments where the policyholders bear the investment risk, liabilities on consolidated funds, and reinsurance assets in unit linked assurance. Debt-equity ratio (IFRS): Borrowings and financial reinsurance in relation to the sum of equity, reversal of eliminations of treasury shares held for the benefit of customers, subordinated loans, borrowings excluding borrowings in bank and financial reinsurance, less intangible assets. Fixed charge cover (IFRS): Profit / loss before tax (IFRS) for the period, including reversal of interest expenses for borrowings, subordinated loans, financial reinsurance and write-down of goodwill, in relation to interest expenses for borrowings, subordinated loans and financial reinsurance for the period. Growth in present value of new business (EV): The present value of new business for the period in relation to the present value of new business for the comparison period. Operational return on capital employed (EV): The result of operations for the period excluding interest expenses for loans, less standard tax (30%), in relation to average capital employed during the period. Operational return on net asset value (EV): The result of operations for the period excluding minority share, less standard tax (30%), in relation to average net asset value during the period. Operational return per share (EV): Result of operations for the period excluding minority share, divided by the average number of shares outstanding during the period. Profit margin, new sales (EV): The present value of new business for the period in relation to annualised new sales for the period. Return on capital employed (IFRS): Profit/loss for the period excluding profit/loss from discontinued operations and interest expenses after standard tax (30%) for borrowings, subordinated loans and financial reinsurance, in relation to average capital employed (IFRS) during the period. Return on net asset value (EV): Operating result for the period excluding minority share, less current and deferred tax, in relation to average net asset value during the period. Return on shareholders’ equity (IFRS): Profit/loss for the period attributable to the parent company’s shareholders, excluding profit/loss from discontinued operations, in relation to average shareholders’ equity, excluding minority interests during the period. RECONCILIATION OF EQUITY FROM SWEDISH GAAP TO IFRS 2004 2004 2004 2004 2003 SEK million 31 Dec. 30 Sep. 30 June 31 Mar. 31 Dec. Restatement 6,560 6,280 6,139 6,026 5,911 of deferred acquisition costs Restatement -1,052 -869 -873 -868 -880 of accrued commission expenses Deferral of -14,701 -13,842 -13,555 -13,296 -13,022 fee income Restatement 3,821 3,237 3,140 3,076 3,044 of fee income receivable Change in 695 741 792 751 681 insurance provisions due to more realistic assumptions Restatement 500 388 340 481 382 of investments to fair value Treasury -504 -436 -459 -400 -258 shares held to cover investment contracts Goodwill 12 131 88 44 - amortisation discontinued Surplus in -30 - - - 315 defined- benefit pension plans Cash-flow 58 58 - - - hedge accounting Fair value 11 - - - - hedge accounting Other 15 15 1 8 6 adjustments Total changes -4,615 -4,297 -4,387 -4,178 -3,821 before tax Tax effect of 927 1,097 1,090 1,089 1,010 the above Adjustment to -3,688 -3,200 -3,297 -3,089 -2,811 equity Shareholders' 15,958 17,099 17,041 17,222 15,381 equity under Swedish GAAP Minority 73 88 97 111 122 interest under Swedish GAAP Total equity 16,031 17,187 17,138 17,333 15,503 under Swedish GAAP Adjustment to -3,688 -3,200 -3,297 -3,089 -2,811 equity Translation 41 -46 -138 -179 - differences Total equity 12,384 13,941 13,703 14,065 12,692 under IFRS RECONCILIATION OF PROFIT/ LOSS FROM SWEDISH GAAP TO IFRS 2004 2004 2004 2004 2004 SEK million 12 mos. 9 mos. 6 mos. 3 mos. Q2 Restatement 649 369 227 115 112 of deferred acquisition costs Restatement -172 11 7 12 -5 of accrued commission expenses Deferral of -1,679 -820 -533 -274 -259 fee income Restatement 776 193 96 31 65 of fee income receivable Change in 13 60 111 70 41 technical provisions due to more realistic assumptions Restatement 118 6 -42 99 -141 of investments to fair value Goodwill 12 131 88 44 44 amortisation discontinued Expensing of -8 -7 -5 -2 -3 share-based payments Fair value 11 - - - - hedge accounting Policyholder -361 -98 -41 -46 5 tax Other 0 -4 -7 3 -10 adjustments Total changes -641 -159 -99 52 -151 before tax Shareholder 213 100 32 36 -4 tax effects on the above Total -428 -59 -67 88 -155 adjustment of profit/loss Profit/loss 674 1,695 1,384 1,137 247 attributable to parent company's shareholders under Swedish GAAP Profit/loss -49 -33 -27 -14 -13 attributable to minority interests under Swedish GAAP Profit/loss 625 1,662 1,357 1,123 234 under Swedish GAAP Total -428 -59 -67 88 -155 adjustment of profit/loss Profit/loss 197 1,603 1,290 1,211 79 under IFRS RECONCILIATION OF CASH FLOW FROM SWEDISH GAAP TO IFRS 2004 2004 2004 2004 2004 SEK billion 12 mos. 9 mos. 6 mos. 3 mos. Q2 Total cash -0.2 -0.6 -0.6 -0.1 -0.5 flow under previous GAAP Adjustments1) -0.3 0.0 -0.1 0.0 -0.1 Total cash -0.5 -0.6 -0.7 -0.1 -0.6 flow under IFRS 1) Adjustments arise on account of the fact that according to IFRS the banking operation is consolidated line by line and there is thereby fully included in the group's cash flow. Accounting policies (IFRS) 1. Basis of preparation Up to and including 31 December 2004, Skandia has prepared its primary financial statements in conformity with the Swedish Annual Accounts Act for Insurance companies, the guidelines of the Swedish Financial Supervisory Authority, and to the extent that no conflict has arisen in this context, also in accordance with the recommendations from the Swedish Financial Accounting Standards Council (SFASC). From 1 January 2005, the consolidated financial statements will be prepared in accordance with International Financial Reporting Standards (IFRS) endorsed by the European Commission. The report has been prepared in conformity with the guidelines in IFRS 34 Interim Financial Reporting. The consolidated financial statements have also been prepared in accordance with the Swedish Annual Accounts Act for Insurance Companies, chapter 7, and the guidelines of the Swedish Financial Supervisory Authority FFFS 2004:21, chapters 7 and 8. In addition to this, SFASC recommendations RR 30 – "Complementary reporting standards for groups" and RR 31 – "Interim financial reporting for groups" have been applied in preparation of the consolidated financial statements. EC Regulation 1606/2002 requires companies incorporated in a member state with securities admitted to a regulated market to prepare their accounts in accordance with IFRS as adopted by the Commission. The Commission has adopted almost all extant standards. However, in preparing these accounts, Skandia has made the following assumptions about future adoption: · Although not yet considered by the Commission, that it will adopt the amendments issued by the IASB in December 2004 to IAS 19 Employee Benefits, in due course; and · The Commission has adopted a modified version of IAS 39 which differs from that issued by the IASB. The so-called 'carve-out' makes two changes: ­ it broadens the range of situations in which hedge accounting is permitted. Skandia has not taken advantage of these provisions; and ­ it removes the option to measure financial liabilities at fair value in situations not already allowed by the EC’s own accounting directives. In the case of Skandia, however, the only liabilities that have been measured at fair value are those permitted by Swedish law and the Insurance Accounts Directive. · The IASB issued a preliminary draft of the new approach of the fair value option during the first quarter 2005. Skandia is monitoring the development of these changes, as they are expected to be implemented and endorsed by the EU in autumn 2005, with potential effect as from 1 January 2006. In Skandia’s 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 in this report. The transition to IFRS will be accounted for in accordance with IFRS 1 First-Time Adoption of International Financial Reporting Standards, with 1 January 2004 as the date of transition. The disclosures required by IFRS 1 concerning the transition from Swedish GAAP to IFRS are given on page 26. The main changes in accounting policies as a consequence of the transition from Swedish GAAP to IFRS are described below in section 2. A full set of accounting policies is available at www.skandia.se. The explanations and reconciliations in this report relate to the consolidated accounts for Skandia. Outstanding issues One issue for the industry as a whole, including Skandia, concerns the reporting of certain fund holdings. A consequence of IAS 27 is that funds controlled by Skandia are to be consolidated, even though all of the assets belong to the owners of the fund units. Policyholders choose to invest in various funds; in practice this is done in such way that Skandia's unit linked company buys units in the fund chosen by the customer. Skandia can thereby – on behalf of its customers – be classified as the owner of a majority stake in the fund. Even though Skandia does not have any controlling influence over these investments, Skandia can be forced to consolidate the funds in which its ownership stake exceeds 50%. If this takes place, the fund's holdings of stock in Skandia Insurance Company Ltd can be considered as repurchased equity capital instruments (treasury shares). In such case, these are to be eliminated against shareholders' equity. Such an adjustment would give rise to a reduction of equity in the accounting, even though there is no economic exposure. In this interim report, Skandia has chosen to consolidate these funds. Consequently, shares held by the funds in Skandia are considered to be treasury shares and are eliminated against equity. The amounts are disclosed in the Swedish GAAP - IFRS reconciliations on page 26. Changes in the value of unit linked funds and the corresponding change in unit linked liabilities are offset on the face of the income statement. The substance of the transaction is that the changes in value belong solely to the policyholders. Therefore Skandia believes that including these changes in value separately on the face of the income statement would detract from users' ability to understand the transactions and assess Skandia's performance and future cash flows. Skandia believes that that offsetting is the best presentation. Skandia is monitoring developments within the industry with the intention of taking a conclusive stance on these outstanding issues in 2005. 2. Significant changes in Skandia’s accounting policies 2.1 Transitional arrangements The rules for first time application of IFRS are set out in IFRS 1 First Time Adoption of International Financial Reporting Standards”. In general, a company is required to determine its accounting policies in accordance with IFRS and apply these retrospectively to determine its opening balance sheet under IFRS. The standard allows several optional exemptions to the requirements for retrospective implementation. Skandia has opted to take advantage of the following exemptions: a) IFRS 3 Business Combinations Skandia has chosen not to apply IFRS 3 retrospectively to its past business combinations. Instead the standard will be applied prospectively from 1 January 2004. The consequences of this will be as follows: - the classification of former business combinations will be maintained; - there will be no re-measurement of original “fair values” as determined at the time of the business combination; and - the carrying amount of goodwill in the opening IFRS balance sheet will be equal to the carrying amount under previous GAAP. From the date of transition goodwill will no longer be amortised, but will be tested for impairment at the date of transition. b) IAS 21 Effects of Changes in Foreign Exchange Rates Any translation differences on translation of foreign operations that arise from 1 January 2004, the date of transition to IFRS, will be presented as a separate component of equity. According to IFRS 1, translation differences that existed at the date of transition did not need to be reported separately. Skandia therefore is reporting only translation differences that arose after 1 January 2004 separately. c) IFRS 2 Share-Based Payment The exemption in IFRS 1 will be applied. Skandia will apply IFRS 2 to all stock options granted after 7 November 2002 and which were not vested as per 1 January 2005 (the effective date of IFRS 2). d) IAS 19 Employee Benefits With effect from 1 January 2004, Skandia will apply the Swedish Financial Accounting Standards Council’s new recommendation RR 29, which is based on IAS 19. The key change relates to the recognition on the balance sheet of a defined benefit asset and liability which represents the difference between the defined benefit obligation and the fair value of plan assets. The calculation of the defined benefit obligation is based on the defined benefit structure as at 31 December 2003. The standard will not be used retrospectively. Instead, the exemption in IFRS 1 is applied. This means that all cumulative actuarial gains and losses at the date of transition 1 January 2004 are recognised. e) IAS 39 Financial Instruments: Recognition and Measurement Certain assets are designated as “fair value through profit and loss” at the date of transition as allowed by IFRS 1. In addition, IFRS 1 has a number of mandatory exceptions to the requirement for retrospective application. The following exceptions will affect Skandia: ­ Hedge accounting Hedging relationships that were designated as hedges under previous GAAP, but which did not qualify for hedge accounting under IAS 39, will be treated in accordance with the requirements of IAS 39 relating to the discontinuance of hedge accounting. The hedge and the underlying items are measured in accordance with these principles for financial instruments. ­ Accounting estimates Accounting estimates recognised under IFRS that were made under previous GAAP are not adjusted except for changes in accounting policies or if there is objective evidence of an error. 2.2 Insurance and investment contracts The main changes in Skandia's financial statements result from the consequences of application of IFRS 4, "Insurance contracts" to unit linked assurance (or savings) contracts and mutual funds. The most significant changes are set out below and relate to the unbundling of unit linked savings contracts into insurance contract components and investment components, where the latter comprise a financial instrument and an investment management service contract. Below is a further description of this unbundling of contracts and other effects arising from application of IFRS 4. a) Classification of contracts and unbundling According to IFRS 4, an insurer should classify all its contracts individually as either insurance contracts or investment contracts. Contracts with insignificant transfer of insurance risk from the policyholder to the company are classified as investment contracts and should be accounted for as financial instruments under IAS 39 Financial Instruments: Recognition and Measurement and IAS 18 Revenue. Contracts that contain significant insurance risk are classified as insurance contracts. The insurer has the option to unbundle certain contracts, if those contracts contain both insurance components and investment components, and the investment component can be measured independently from the insurance component. For its unit linked contracts, Skandia has decided to apply this approach. The unbundled components are separately classified and accounted for as insurance contracts and investment contracts. Under Swedish GAAP, all contracts are accounted for as insurance contracts, following the definition of an insurance contract under Swedish GAAP, and no unbundling is done. b) Insurance contracts Insurance contracts comprise the unbundled insurance component in unit linked contracts, health & protection business and traditional life business with or without discretionary participating features. In accordance with IFRS 4, current Swedish GAAP accounting will be used, with a few exceptions. These exceptions include: - Excessively prudent provisions will be released, which will reduce the technical provisions. - For traditional life contracts, the liability will be discounted using market interest rates. Under previous GAAP, the discount rate was established by the local regulator. Incremental costs directly attributable to securing the insurance contracts will be capitalised as a deferred acquisition cost asset (DAC) and will be amortised as an expense over the life of the contract. The same DAC methodology is used for the insurance contracts and for the investment contracts. More detail has been provided in section c) on DAC and DFI. Any embedded derivative that forms part of an insurance contract and is itself an insurance contract will not be separated from the host contract and will thus not be separately valued. c) Investment contracts As noted above, investment contracts are accounted for under IAS 39 and IAS 18. The accounting for these unbundled unit linked contracts is as follows: On inception of such contracts, amounts received from and payable to the holders of the contracts are accounted for as deposits received under investments for the benefit of policyholders and as balances payable in respect of liability for linked investment contracts, and are not included in premiums and claims in the income statement. Upon disposal, amounts paid are accounted for as decrease of unit linked liabilities in the balance sheet. Embedded derivatives in investment contracts will be separated and measured at fair value. The pattern of recognising front-end fee income will differ to previous GAAP. Fees charged for managing investment contracts will be recognised as revenue as the investment management services are provided, following the explicit guidance in IAS 18. Front-end fees will be deferred through the creation of a new balance sheet item called deferred fee income (DFI), and this will be released to income as the services are provided. This means that fees and charges that are taken initially and in addition to regular fund charges are deferred. Incremental costs directly attributable to securing contracts will be recognised as an asset, deferred acquisition costs (DAC). DAC exists under current GAAP, but only for insurance contracts and has a broader definition in terms of costs that can be deferred. In contrast to current GAAP, the definition of DAC under IFRS excludes non- incremental acquisition costs. Under IFRS, the asset is amortised as an expense as the services are provided. Skandia generally assumes equal service provision over the lifetime of the contract and as such, DFI and DAC will be amortised linearly over the expected life of the contract. The previous practice followed by Skandia was to limit DAC amortisation period to maximum 10 years. The IFRS conversion will lead to an increase in DAC due to the longer amortisation period. There will also be a change in the accounting for mutual funds. The accounting should be consistent with the method for the savings part of the unit linked contracts, which entails an increase of DFI and DAC on these contracts. In cases where it is clear that for a certain portfolio of investment contracts, the expected future revenue is lower than the expected variable future costs of meeting the obligations under the contract, a provision for onerous contracts will be established as required by IAS 37 Provisions, Contingent Liabilities and Contingent Assets. 2.3 Investments at fair value a) Fair value of bonds Under previous GAAP, bonds were valued at amortised cost. Under IFRS, most bonds will be measured at fair value, leading to an increase in equity upon conversion. Skandia has chosen to classify some bonds in the banking business as "Held to maturity", and these will be valued at amortised cost. b) Fair value of derivatives In some cases, Skandia will not fulfil the requirements for hedge accounting under IFRS. The derivatives previously accounted for under hedge accounting will be valued at fair value and hedge accounting will be discontinued as required under IAS 39. 2.4 Goodwill Under IFRS, goodwill will no longer be amortised. Instead, goodwill will be tested for impairment annually. This change in policy has no impact on opening equity, as goodwill in the opening balance sheet is fixed at the amount recognised under previous GAAP, subject to a mandatory impairment test on first-time adoption. 2.5 Share-based payment Skandia offered stock option programmes to employees on four different occasions during 2000-2003. In accordance with IFRS 2 Share-Based Payment, only programmes issued after 7 November 2002 must be accounted for in accordance with IFRS, if they had not been vested before 1 January 2005. Skandia offered one programme in February 2003. This programme included two types of options, of which one type (B-options) had not been vested by 1 January 2005. These options are the only ones to be accounted for under IFRS 2. Under previous GAAP, stock options were not expensed. Instead there were extensive disclosure requirements covering all effects of the stock options. In accordance with the requirements of IFRS 2, stock options will be expensed. The expense is calculated as the market value of the options at issue date. The expense will be recognised over the vesting period. The vesting period is the period that the employees have to remain in the service of Skandia in order to be allowed to exercise the options. The expense will be adjusted for the actual number of outstanding options. IFRS 2 has no effect on opening equity since the expense is only an adjustment between net income and restricted equity. 2.6 Consolidated accounting As stated in section 1, Skandia consolidates funds in which the company's ownership stake is more than 50%. These fund holdings are consolidated like other investments for the benefit of policyholders on a separate line, called "Assets in consolidated mutual funds". The liability to minority interests in funds is reported under the heading "Liabilities in consolidated mutual funds". The imbalance that arises between these two lines pertains to the elimination of the shares that the consolidated funds own Skandia, i.e., treasury shares. As before, the consolidated accounts do not include the wholly owned company Livförsäkringsaktiebolaget Skandia (Skandia Liv) and its subsidiaries. Skandia Liv’s operation is run on a mutual basis and its result is returned in its entirety to the policyholders of Skandia Liv. Skandia cannot exercise control over Skandia Liv due to restrictions in Swedish legislation. Consequently, Skandia Liv is not consolidated. 2.7 Cash flow The banking operation is now consolidated line by line instead of on separate lines as previously. As a result of this consolidation, the definition of cash flow has changed. In connection with the transition to IFRS, changes in investments in the operations have also been classified as part of cash flow from operating activities instead of as a part of cash flow from investing activities as previously. Investments in investment assets are an integral part of operations, as inflows in both the insurance and banking operations must in large part be invested in accordance with the operating rules. Changes in investment assets in the group, which are not used directly in the group’s operations, are reported under the heading “Cash flow from investing activities”.