Interim Report for the period January - September 2003

INTERIM REPORT for the period January - September 2003 *) To facilitate comparisons, all information in this interim report is reported excluding the result for discontinued operations, unless stated otherwise. THIRD QUARTER 2003 IN SUMMARY A. BUSINESS DEVELOPMENT · Sales amounted to SEK 18,952 million (18,425). Sales rose 11% in local currency. · New sales rose 7% in local currency. · Compared with the second quarter of 2003, sales decreased by 3% in local currency, mainly due to seasonal variations. B. OPERATING RESULT according to the embedded value method · The group's operating result, excluding financial effects and items affecting comparability, was SEK 491 million (546). Financial effects amounted to SEK 168 million (-898), and items affecting comparability in the form of restructuring costs amounted to SEK -389 million (-). · The group's operating result, including financial effects and items affecting comparability, was SEK 270 million (-352). C. RESULT according to Swedish GAAP · The result before tax and items affecting comparability was SEK 171 million (-19). Items affecting comparability amounted to SEK -389 million (-). D. CASH FLOW · Cash flow from operating activities improved slightly, to SEK - 0.5 billion (-0.8), compared with SEK -0.8 billion for the second quarter of 2003. · JANUARY - SEPTEMBER 2003 IN SUMMARY A. BUSINESS DEVELOPMENT · Sales amounted to SEK 56,087 million (56,974). Sales rose 6% in local currency. · New sales of unit linked assurance decreased by 2% in local currency. · The net inflow in funds under management was SEK 34.3 billion (35.0). B. OPERATING RESULT according to the embedded value method · The group's operating result, excluding financial effects and items affecting comparability, was SEK 1,621 million (1,724). · The group's operating result including financial effects and items affecting comparability was SEK 1,570 million (1,929). · The operating result includes SEK -435 million in items affecting comparability (2,016) and SEK 384 million (-1,811) in financial effects. · The profit margin for newly written unit linked assurance business for the year was 13.6% (13.6%). C. RESULT according to Swedish GAAP · The result before tax and items affecting comparability was SEK 383 million (352). Items affecting comparability amounted to SEK -435 million (2,016). · Earnings per share were SEK -0.09 (2.71). · The return on shareholders' equity, including items affecting comparability, was -1% (18%). Excluding items affecting comparability, the return was 3% (7%). D. CASH FLOW AND BALANCE SHEET · Cash flow from operating activities amounted to SEK -1.6 billion (-0.5). · Borrowings decreased by SEK 5.4 billion, to SEK 4.2 billion, compared with the start of the year. After deduction for liquid assets, borrowings amounted to SEK 2.2 billion, net. · Net asset value was SEK 26,645 million (27,033 at year-end 2002). · Shareholders' equity amounted to SEK 13,983 million (15,238 at year-end 2002). JANUARY - SEPTEMBER 2003 Including discontinued operations · Sales through September amounted to SEK 66,780 million (92,306), including SEK 10,693 million (35,332) for discontinued operations. Sales excluding discontinued operations rose 6% in local currency. · The result after tax was SEK -216 million (207). The result includes items affecting comparability and the result for discontinued operations, together totalling SEK -562 million (-541). · Earnings per share were SEK -0.21 (0.20). Comments by Leif Victorin, President and CEO: · During the autumn, markets around the world were characterized by weak yet stable signs of recovery. The same can be said to summarize the trend in Skandia's key markets. Following a weak start of the year, sales - including new sales - have improved quarter-for-quarter and were also higher compared with the third quarter a year ago. Skandia's strong development in continental Europe continues, with Germany and Italy at the forefront. In the UK, where the life assurance industry has been experiencing a difficult period, we have capitalized on the rising interest in equity-related products. It is also worth noting that in terms of sales, Skandia has succeeded in maintaining its positions in Sweden, despite the intensive media debate on confidence there. · Skandia has kept a sharp focus on reducing costs during the past year. Following the completion of a SEK 1 billion cost-cutting programme, this work has continued at an undiminished pace and with a high level of ambition. The effects of this are now beginning to show in the continuing result. It is especially gratifying to note that the impact of the measures we have carried out to date can be clearly seen in improved margins during the third quarter in the UK. · Cash flow has improved compared with the second quarter of 2003, but is still not satisfactory. However, I expect that as the effects of continued cost-cutting and changes in product design begin to surface, this will gradually lead to a better balance in cash flow and the continuing result. · Immediately after the Annual General Meeting this past spring, Skandia's board set in motion a strategic review of the company, its markets and its products. This work has now been completed. Strategic courses of action have been carefully considered, and today we have a very solid and well grounded idea about the wealth of opportunities that Skandia has for profitable growth through its own strength. The review of our markets and products has played an important role in this respect. Implementation of the measures identified in this review are in the advanced stages, and I believe above all that the focus on products with shorter pay-off times and sustainable growth will generate positive effects in the coming quarter. · Today Skandia is a company that has been thoroughly analysed, and I am very happy with our chosen path. Using this strategic review as a springboard for the future, the Board has now named Hans-Erik Andersson as Skandia's new, permanent CEO, and I extend him a warm welcome as I hand him the baton. The interim report is presented in five parts. The section on Business Development (A) contains an account of sales during the period and funds under management, among other things. The operating result for unit linked assurance according to the embedded value method and the result for the other business areas are presented in section B. The Result section (C) includes a discussion of the result before tax in accordance with Swedish GAAP as set out in the Swedish Annual Accounts Act for Insurance Companies. Cash flow and the balance sheet are discussed in section D. Section E describes events after the end of the period. A. BUSINESS DEVELOPMENT Sales and Funds Under Management (tables on pp. 14-16) THIRD QUARTER 2003 During the third quarter, sales rose 11% in local currency compared with the same period a year ago, to SEK 18,952 million (18,425). In the UK, as in many other markets, the market for traditional life assurance has been hurt by the stock market decline in recent years, which has resulted in falling bonus rates for policyholders. This has led to rising interest during the year in equity-related products. Sales increased by 10% in the UK and by 21% for the Offshore Division. In Sweden, traditional life assurance has been the subject of scrutiny and extensive criticism. Despite the negative publicity, sales in the key unit linked assurance product segment were largely unchanged. Sales for the mutual funds product area rose by 107%, however. Sales in continental European markets rose 41% as a result of an attractive product offering and rising interest in the stock market. Sales in Japan continued to fall due to changes in the product offering and a change in the sales focus of the single-largest distributor of Skandia's products. Skandia Australia sold its first products in July 2001, and the company has already achieved a sizeable market position in its market segment. Sales in Australia rose by nearly 400%. In Latin America, sales fell by 12%. Third Quarter Compared with Second Quarter 2003 Compared with the second quarter of 2003, sales decreased by 3% in local currency, mainly due to seasonal variations. JANUARY - SEPTEMBER 2003 Combined sales in local currency increased by 6%, to SEK 56,087 million (56,974). The decrease in Swedish kronor is attributable to currency movements. Sales, Unit Linked Assurance Sales of unit linked assurance rose 4% in local currency, to SEK 39,743 million (40,576). New sales decreased by 2% in local currency (new sales defined by the industry-wide definition as periodic premiums recalculated to full-year figures plus 1/10 of single premiums during the period). The market conditions in the UK improved gradually during the period. However, sales decreased by 8% in local currency, to SEK 12,018 million (14,427). For the Royal Skandia offshore operation, on the other hand, sales rose by 21% in local currency, to SEK 9,014 million (8,249). New sales in the UK and for Royal Skandia's offshore operation decreased on the whole by 7% in local currency. Sales in Sweden fell by 9%, to SEK 6,549 million (7,204). New sales decreased by 10% due to lower sales of single-premium products in the private market and to a generally weak market. The corporate market is stable, however. The market share as per 30 September 2003 was 26% on a moving 12 month basis, compared with 29% on 31 December 2002. The market share for the third quarter of 2003 was at the same level as for the second quarter. Sales in Germany rose 23% in local currency, to SEK 1,697 million (1,382). New sales increased by 30% in local currency. Italy is showing continued sales success through the launch of new products, and sales rose to SEK 4,211 million (1,136). Sales in the other European markets increased to SEK 3,391 million (2,358). Sales in Japan decreased to SEK 1,860 million (4,798) due to a change in the sales focus of the single-largest distributor of Skandia's products. Sales, Mutual Fund Savings Products (Including Direct Sales) Compared with the same period a year ago, total sales rose 11% in local currency and amounted to SEK 15,211 million (15,131). This includes direct sales in Sweden, which increased by 20%, to SEK 2,301 million (1,918), with deposits via the Premium Pension Authority accounting for a one-time effect during the first quarter of 2003. Sales in the UK decreased by 23% in local currency, to SEK 5,069 million (7,230). Sales have developed particularly well in Australia, as well as in Spain. Sales, Life Assurance Sales of traditional life assurance, mainly pertaining to the Spanish operation, fell 14% in local currency, to SEK 773 million (928). Funds Under Management Fund values increased by 17%, net, compared with the start of the year, to SEK 299,413 million. Fund values are now at the same record level reported at the end of 2001. The increase is attributable to a continued positive net flow, totalling SEK 34.3 billion (35.0). Fund values also increased as a result of the stock market rise and decreased as a result of a recalculation to lower exchange rates. Payments to unit linked policyholders amounted to 8.9% of assets under management (8.1% at year-end 2002) on a yearly basis. Of this amount, surrenders accounted for 6.8 percentage points, compared with 6.4 percentage points at year-end 2002. The increase is attributable to surrenders in specific product areas, where customers have chosen to cancel their accounts for rational reasons - primarily the stock market decline. B. RESULT AND PROFITABILITY (according to the embedded value method) (tables on pp. 14-15, 17-19 and 28-29) THIRD QUARTER 2003 Result of Operations The result of operations for the group (operating result excluding financial effects and items affecting comparability) amounted to SEK 491 million (546). The result decline is mainly attributable to unit linked assurance. Operating Result The operating result (result before tax including the change in surplus value of unit linked business) including financial effects and items affecting comparability was SEK 270 million (-352). Financial effects were positive, at SEK 168 million (-898). Items affecting comparability totalled SEK -389 million and pertained to restructuring costs for measures taken in the Swedish and British operations. JANUARY - SEPTEMBER 2003 The result of operations for the group (operating result excluding financial effects and items affecting comparability) amounted to SEK 1,621 million (1,724). The operational return on net asset value was 8% (10%). The operating result (result before tax including the change in surplus value of unit linked business) including financial effects and items affecting comparability was SEK 1,570 million (1,929). Financial effects pertain to the change in the present value of future revenues caused by developments in the capital markets. Financial effects had a positive impact on the operating result in the amount of SEK 384 million (- 1,811). EXCHANGE RATE EFFECTS Sales were negatively affected by SEK 4,025 million, and the operating result was affected only marginally by exchange rate effects. Total assets decreased by SEK 21 billion compared with the start of the year as a result of currency movements. Operating Result, Unit Linked Assurance The result of operations decreased to SEK 2,107 million (2,233). Following a weak start to the year, new sales showed a gradual recovery. Combined with cost-cutting measures, this entailed that the present value of new business for the year essentially stayed at the same level as a year earlier, at SEK 871 million (930). The estimated profit margin for newly written business was 13.6% (13.6%). In Sweden the profit margin was essentially unchanged at 16.6%. Cost- savings offset the effect of lower sales volumes. In the UK the profit margin fell to 8.4% (11.4%). Lower sales resulted in poorer cost coverage, particularly during the first quarter of 2003. Measures taken to further adjust the cost level to the prevailing market conditions gave rise to an improvement in the profit margin during the third quarter. In other markets, the profit margin increased on the whole to 19.0% (13.9%). Greater sales have contributed to improved cost coverage. The return on the value of contracts sold in previous years was unchanged at SEK 1,315 million (1,347). The actual outcome compared with operative assumptions and the change in operative assumptions together totalled SEK 18 million (9). The outcome compared with operative assumptions was adversely affected by a one-time affect caused by changed legislation in Italy and to some extent by surrenders in specific product segments, among other things. On 24 September 2003, Skandia's board released a report prepared by Tillinghast Towers Perrin (Tillinghast) of Skandia's embedded value methodology, assumptions and calculations as at 30 June 2003. The review by Tillinghast shows that the embedded value numbers reported by Skandia are conservative in a number of areas. If this conservatism was eliminated, this would have increased the embedded value reported as per 30 June 2003 by approximately SEK 1.7 billion. In addition, bringing the risk discount rates closer to levels generally used by other companies publishing embedded value would add another SEK 0.6 billion. As is Skandia's normal practice, embedded value assumptions will be reviewed at year-end, at which time the Board will consider appropriate adjustments taking into account the Tillinghast review. Result, Mutual Fund Savings Products The result was SEK -152 million (-201). Revenues from funds under management have been hurt for some time by the prolonged stock market decline. The result improvement can be credited to cost-cutting measures and the recent rise in the stock market. Sales costs for mutual fund savings products are not deferred. Result, Life Assurance The result for life assurance, mainly pertaining to Spain, was SEK 44 million (114). Result, Other Businesses The result of operations for SkandiaBanken improved to SEK 132 million (17). The earnings improvement is mainly attributable to cost reductions and operational restructuring, but also to an improvement in net interest income. However, commission income decreased due to lower sales by the Advisory Business unit. Loan losses increased to SEK -31 million (-2), due to changed rules for making provisions compared with earlier years, which had entailed a dissolution of possible loan losses. However, loan losses remain low and amount to 0.11% (0.01%) of average lending volume. Deposits amounted to SEK 39.6 billion (35.6). Investment income decreased to SEK 35 million (108). The result for "other businesses" was charged with costs for the group's Global Business Development unit, which is being discontinued. The continuing result for Bankhall, a distribution network in the UK, amounted to SEK 50 million (62) excluding goodwill amortization of SEK 102 million (100). Since Skandia's acquisition of Bankhall, the number of Bankhall-affiliated IFAs has increased by approximately 15%, to 7,000. Bankhall is now the leading provider of support to IFAs in the British market. Cost-Cutting The decision was made in 2002 on a programme designed to cut costs by SEK 1 billion on a yearly basis. This programme has been carried out and entailed cuts of SEK 350 million in the unit linked assurance operations, SEK 300 million at SkandiaBanken Sweden, and SEK 350 million for projects and joint-group expenses. The number of employees has decreased by approximately 400 as a result of these measures. The cost of the programme amounted to SEK 360 million, which resulted in a provision for restructuring costs during the fourth quarter of 2002. The remaining provision for these restructuring costs amounted to SEK 179 million as per 30 September 2003. During the third quarter of 2003, the decision was made to implement additional cost-cutting measures that are expected to entail annual cost reductions of approximately SEK 200 million, with full effect in 2004. As a result, the number of employees will decrease by approximately 300. This gave rise to provisions of SEK 364 million for restructuring costs during the third quarter, including approximately SEK 50 million for severance pay and pension provisions for senior executives. The work on reducing costs is continuing in the Swedish operations and IT organization, as well as with respect to joint-group expenses. Joint-Group Expenses Joint-group expenses, which include management costs for joint-group functions and structural costs, increased to SEK 462 million (390). Structural costs, amounting to SEK 97 million (80), include costs for external advice in connection with the review of the group's strategy. These costs also include costs of SEK 33 million stemming from previous employment contracts in connection with the change of the group's CEO. Management costs for joint-group functions amounted to SEK 365 million (310). These costs are covered in part through a contribution from the Swedish operations which is governed by an agreement. This contribution varies along with sales volume. Lower sales volumes entail poorer coverage of management costs, which explains why management costs have increased compared with the preceding year, despite cost-cutting measures. C. RESULT (according to Swedish GAAP) (tables on pp. 18-19 and 22-25) JANUARY - SEPTEMBER 2003 The result before tax and items affecting comparability, was SEK 383 million (352). Items affecting comparability amounted to SEK -435 million (2,016). (See also table on p. 29.). The stock market rise during past quarter is now beginning to have a positive effect on fees which, together with cost-cutting measures, is having a stabilizing effect on the result. The result for the period after tax was SEK -89 million (2,764). In addition, the result after tax for discontinued operations was SEK -127 million (-2,557). Earnings per share were SEK -0.09 (2.71). The return on shareholders' equity, excluding items affecting comparability, was 3% on a moving 12-month basis (7%). The return on shareholders' equity including items affecting comparability was -1% (18%). Discontinued Operations Discontinued operations pertain to American Skandia and the banking operation in Switzerland. As previously announced, the decision was made during the third quarter of 2003 to wind up the banking operation in Switzerland, and the office was closed on 20 November 2003. The remaining part of Prudential Financial Inc.'s (USA) acquisition of American Skandia was settled on 9 September 2003. The result before tax for discontinued operations includes SEK -252 million (-109) for the bank in Switzerland and SEK 125 million (-2,599) for American Skandia (see also table on p. 29). Unit Linked Assurance (Income and Expense Analysis Table, pp. 18-19) The result before tax was SEK 869 million (861). In the unit linked assurance operations, continuing revenues - consisting mainly of fees on funds under management and paid-in premiums (gross contribution) - increased to SEK 4,743 million (4,543). The increase in revenues reflects the stock market trend and sales recovery during the second and third quarters of 2003. Acquisition costs include all costs, both internal and external, that arise in connection with the sale of unit linked assurance products. Acquisition costs that are deferred (deferred acquisition costs) are amortized according to a schedule that corresponds to the estimated economic life, normally 10 years. Acquisition costs increased as a result of higher sales volumes - with a higher share of regular-premium products - and amounted to SEK -4,068 million (-3,988). Skandia has a restrictive policy compared with its industry peers for deferral of these costs. When sales began to pick up during the second quarter of 2003, this resulted in higher acquisition costs, which are only partially deferred during the term of the contracts. This initially is having a dampening effect on the result. Of the acquisition costs for unit linked assurance, approximately 63% - or SEK 2.5 billion - were deferred. Amortization of deferred acquisition costs amounted to SEK 1.6 billion. The change in deferred acquisition costs thus amounted to SEK 911 million (1,105). During the first quarter of 2002, the method for deferring these costs was adjusted, which had a favourable effect on the result during the first quarter of 2002. Administrative expenses for unit linked assurance amounted to SEK -835 million (-890). D. CASH FLOW AND BALANCE SHEET Cash Flow from Operating Activities During the Third Quarter of 2003 Cash flow was negative in the amount of SEK 0.5 billion, compared with a negative cash flow of SEK 0.8 billion during the second quarter. The negative cash flow is partly due to a time lag in the settlement of outstanding balance sheet items. Revenues from funds under management have begun rising again, however, they follow the stock market trend with a slight time delay at the same time that the increase in sales gave rise to higher commission payments. Extensive work is being conducted to ensure that the initially negative cash flow which - by definition - arises in connection with the sale of unit linked assurance products, is covered more quickly by future fees and with a higher degree of certainty. This work has top priority and will - in pace with product development - lead to a better balance in cash flow from operating activities. Cash Flow from Operating Activities, January-September 2003 Cash flow from operating activities amounted to SEK -1.6 billion (-0.8). Most of the negative cash flow pertains to the settlement of outstanding balance sheet items. In addition, cash flow from operating activities was slightly negative. Cash Flow from Investing Activities The net inflow, after deducting costs for and settlement of internal loans in connection with Prudential Financial's acquisition of American Skandia, amounted to SEK 4.2 billion. Investments in investment assets amounted to SEK 1.9 billion during the period. Cash Flow from Financing Activities Borrowings decreased by SEK 3.4 billion through the repayment of loans. Realized currency hedges made a positive contribution of SEK 0.9 billion to cash flow. The shareholder dividend amounted to SEK 0.3 billion. Balance Sheet Total assets amounted to SEK 320.6 billion (SEK 490.1 billion at year- end 2002). The decrease is due to American Skandia, which is no longer consolidated in the group, and currency movements. The group's borrowings amounted to SEK 4.2 billion, compared with SEK 9.6 billion at the start of the year. Liquid assets amounted to SEK 2.0 billion. Borrowings amounted to SEK 2.2 billion, net, after deduction for liquid assets. Unconditional, unutilized credit facilities amounted to SEK 4.3 billion, compared with SEK 10.4 billion at the start of the year. The level of credit facilities has been decreased - and thus also the cost for these - and adjusted to the changed need for borrowing. Skandia owns 19.36% of If P&C Insurance. The book value was unchanged compared with year-end 2002, at SEK 3.0 billion. If reported a result before tax of SEK 1,860 million for the period January-September 2003 (- 2,684). The combined ratio for the insurance operations improved to 98.5% (104.3%). Skandia's share of If's net asset value amounted to SEK 3.6 billion. Net Asset Value and Shareholders' Equity Net asset value was SEK 26,645 million (SEK 27,033 million at year-end 2002), corresponding to SEK 26 per share (26). Shareholders' equity amounted to SEK 13,983 million (SEK 15,238 million at year-end 2002), or SEK 14 per share (15). Net asset value and shareholders' equity were affected by the strengthening of the Swedish krona in the amount of SEK -1,095 million and SEK -733 million, respectively. The group's investments in foreign subsidiaries are partially hedged. This offset the negative effect of the stronger krona by SEK 534 million. New Accounting Rules for Pension Commitments Starting in 2004, a new recommendation, RR 29, takes effect for accounting of employee benefits. This entails, among other things, a change in how certain pension commitments are to be calculated and disclosed. The one-time effect of this change is to be reported directly against shareholders' equity. A preliminary estimation shows that Skandia's pension commitments are fully covered by existing provisions. The amount reported as per 1 January 2004 may need to be changed due to changes in interest rates and in the value of underlying assets during the final quarter of 2003. E. EVENTS AFTER THE END OF THE PERIOD On 14 November 2003 it was announced that Hans-Erik Andersson has been named President and CEO of Skandia. Hans-Erik Andersson will take office on 1 January 2004, succeeding Leif Victorin. Stockholm, 24 November 2003 Leif Victorin President and CEO For further information, please contact: Jan Erik Back, Chief Financial Officer, tel. +46-8-788 3720 Harry Vos, Head of Investor Relations, tel. +46-8-788 3643 This interim report has been prepared in conformity with the guidelines of the Swedish Financial Supervisory Authority and Swedish Financial Accounting Standards Council Recommendation RR20, Interim financial reporting. Aside from an adaptation to new accounting recommendations of the Swedish Financial Accounting Standards Council, which took effect on 1 January 2003, the interim report has been prepared in accordance with the same accounting principles as in the 2002 Annual Report. The new recommendations have not had any material impact on the group's profit and loss account or balance sheet. In accordance with Swedish Financial Accounting Standards Council Recommendation RR 19, Discontinued operations, the US operation and the Swiss banking operation are reported separately. Financial calendar: 27 February 2004, year-end report for the 2003 financial year 15 April 2004, Annual General Meeting Skandia's published financial reports are available on Skandia's website: www.skandia.com. Skandia's website also provides links to the webcast of the conference call on Monday, 24 November 2003. In addition to the interim report, Skandia has also published the document Financial Supplement Q3 2003 on www.skandia.com, under "Investor Relations/Reports and Events/Interim Reports". This document can also be ordered by phone. Skandia Insurance Company Ltd. Sveavägen 44 SE-103 50 Stockholm Tel. +46-8-788 10 00 www.skandia.com Public company (publ.) reg. no. 502017-3083 ------------------------------------------------------------ This information was brought to you by Waymaker http://www.waymaker.net The following files are available for download: http://www.waymaker.net/bitonline/2003/11/24/20031124BIT00020/wkr0001.doc The full report http://www.waymaker.net/bitonline/2003/11/24/20031124BIT00020/wkr0002.pdf The full report

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