Interim report January-September 1999

INTERIM REPORT For the period January - September 1999* Sales increased 77 per cent, to SEK 95 billion Sales in the USA doubled, to USD 7.2 billion Operating result for the core businesses tripled, to SEK 3.7 billion Assets under management increased 32 per cent compared with September 1998, to SEK 691 billion Comments by Lars-Eric Petersson, President and CEO: "We continue to achieve strong sales growth in our most important markets. In the USA, we have more than doubled our volumes. Italy continues to be a great success, but also markets that are important for the future, like Germany and Japan, are exhibiting increasing growth rates. "Continuing expansion of our distribution network has top priority. In view of that, it is a particular pleasure to welcome First Union as a new distributor in the US market. Our offering of fund products in the US market has also been expanded through the inclusion of MFS. MFS sells mutual fund shares worth approximately USD 30 billion per year. "The process for combining and integrating the new property & casualty company if.is progressing as scheduled. Skandia owns 42 per cent of the combined company until the planned initial public offering. "The shareholding in Pohjola has appreciated significantly in value for Skandia, and the disposal of the holding has released in excess of SEK 4 billion in capital. "The transformation of Skandia from a traditional insurance company to a 'personal financial services' company is largely complete. The Internet and applications based on Internet technology will constitute an increasingly important part of the continuing development of our businesses." OVERVIEW The operating result for the core businesses increased by SEK 2,491 million, to SEK 3,651 million, and the return on net asset value, before tax, was 22 per cent (10) on a full-year basis. Sales for Long-Term Savings increased 75 per cent. Due to continued strong growth in sales as well as assets under management, the operating result for Long-Term Savings, after financing costs, increased to SEK 2,653 million (1,380). On 13 October 1999 the Finnish insurance group Sampo purchased Skandia's shares in Pohjola Group Insurance Corporation. Investment income for the parent company, totalling SEK 1,379 million, pertains to the return on funds released in connection with the formation of the new, jointly owned Nordic property & casualty (P&C) insurance operation. Investment income includes the result from the sale of the shareholding in Pohjola. Assets under management have increased by 32 per cent since September 1998, and by SEK 94 billion since year-end 1998 (16 per cent), to SEK 691 billion. Of this, SEK 365 billion consists of assets under external management, mainly relating to Long-Term Savings. The P&C operating result was SEK 447 million (-720). The result improvement is mainly attributable to a better return on investments. However, the P&C result for the year was adversely affected by poorer claims experience. The operating result including income from associated holdings in P&C insurance, amounted to SEK 3,925 million (311). The return on total net asset value, including P&C insurance, was 28 per cent on a moving 12-month basis. CORE BUSINESSES Long-Term Savings Market and Sales Sales totalled SEK 93,551 million (53,565), an increase of 75 per cent. At constant exchange rates the increase corresponds to 70 per cent. Sales of unit linked assurance increased by 57 per cent. Sales of other savings products (without an insurance element) tripled to more than SEK 25 billion. Sales of life assurance decreased, which is in line with the current strategy. Sales for American Skandia continued to develop very favourably and increased 102 per cent. Sales of variable annuities increased by 59 per cent, while sales of other savings products increased by 414 per cent. The sales increase is primarily a result of a broader product offering and an increase in the number of distributors. In addition, the investment management company Massachusetts Financial Services (MFS) will be introduced in American Skandia's product offering. MFS, which has been operating since 1924, sold more than USD 30 billion in fund products in 1998. MFS has a strong competitive position among investment managers, who constitute American Skandia's most important distribution channel. Sales for the British operation increased 32 per cent. The continued healthy sales development in markets outside the UK contributed to the increase. Sales of unit linked assurance products grew by 27 per cent, while sales of other savings products increased by 51 per cent. The Italian operation continues to grow at a very fast pace, and sales totalled SEK 4,035 million (218). After 18 months in business the company is among the ten largest unit linked assurance companies in Italy, based on sales. In Sweden, sales increased by 15 per cent, and in Germany sale increased by 19 per cent. In Japan, sales increased by 66 per cent. Assets under management increased 26 per cent, or SEK 84 billion, to SEK 409 billion, during the first nine months of the year. The breakdown of assets under management is as follows: unit linked assurance SEK 328 billion, other savings products SEK 50 billion, and life assurance SEK 31 billion. Payments to unit linked policyholders amounted to 7.9 per cent of technical provisions on a moving twelve-month basis (7.5 per cent at year-end 1998). Surrenders accounted for 6.4 percentage points of the total (6.0 percentage points at year-end 1998), which is well within the limits of underlying assumptions. For other savings products, payments to policyholders through withdrawals from funds amounted to SEK 3,156 million (2,714). Operating Result and Profitability Unit Linked Assurance The operating result for unit linked assurance increased by 81 per cent to SEK 2,943 million (1,627). The result was favourably affected by the increase in sales. However, the result improved at a faster pace than premiums written, despite a negative impact during the third quarter of factors beyond Skandia's control, such as higher interest rates and a less favourable stock market climate. Performance and profitability of new business improved and are generating higher margins, mainly due to improved productivity, but also to a favourable product mix. The profitability of business written prior to 1999 also improved. Growth in the value of funds under management exceeded underlying assumptions, which had a positive result impact. The profit recognition of value created by this appreciation is spread out over a three-year period. This is done to reflect the operation's long-term result and profitability development. The retained equalization amount was SEK 1,405 million as per 30 September, compared with SEK 926 million at year-end 1998. Life Assurance The operating result for life assurance was SEK 114 million (9). Other Savings Products For non-insurance savings products, sales totalled SEK 25,714 million (8,353) and withdrawals SEK 3,156 million (2,714). Acquisition costs are not yet deferred, which explains why the result - after deducting all costs for marketing as well as systems and product development - is negative. This is entirely in line with adopted plans. The assets being built up in the operations form the foundation for future revenues. Net Asset Value and Return The operating result, after deducting financing costs, increased 92 per cent to SEK 2,653 million (1,380). The return on net asset value, after financing costs and taxes, was 17 per cent (13). Asset Management Assets under management, including assets from companies in the Skandia group, external clients, and fund management, increased 6 per cent, to SEK 293 billion, compared with year-end 1998. Commissions from asset management are partly fixed and partly performance related, and are determined on an annual basis in arrears. The operating result amounted to SEK 75 million. During its first year in operation since the start in October 1998, Skandia Asset Management has received 25 management assignments from external institutional investors. Investment Income Investment income for the parent company amounted to SEK 1,379 million and pertains to returns on funds released in connection with the formation of the new, jointly owned P&C insurance company if.. The parent company's investment assets amount to SEK 7.0 billion. Investment income includes the dividend as well as the value appreciation of the shareholding in Pohjola, which has been valued at the sales price. Investment Strategy In its asset management assignments, Skandia strives to maintain a balanced portfolio of fixed-income securities, equities and real estate. In P&C insurance, the objective is to achieve a good return over the medium term on technical provisions, without allowing fluctuations in the return during each moving twelve-month period to become excessively large. Equities accounted for 31 per cent of total invested assets. The equities portfolio is dominated by shareholdings in European and Nordic companies. Real estate holdings decreased in accordance with the current strategy through disposals totalling SEK 1.3 billion. Businesses SkandiaBanken SkandiaBanken's operating result amounted to SEK 80 million (64). The earnings increase is attributable to a rise in business volume, not least through stock trading on the Internet. Deposits increased nearly 15 per cent compared with year-end 1998, to SEK 13.2 billion. SkandiaBanken's business is based on telephone and Internet service. Lifeline During the spring, product development and marketing of the Lifeline concept was intensified. This has entailed, among other things, the launch of a new, unique medical insurance plan - Skandia Preferred Health Care. Development and distribution of products are Lifeline's principal focus. This work is proceeding well. During October, an agreement has been reached regarding the sale of the Workline corporate health clinics, which is an important step in the refocusing of Lifeline's business. Skandia Marknad AB As from 1 January 1999, the group's distribution resources in Sweden and Denmark are gathered in the company Skandia Marknad AB (Skandia Marketing). Operations developed well during the company's first nine months. Finance Companies The operating result for finance companies, which pertains mainly to operations that are being discontinued, was SEK 18 million (16). Group Expenses Group expenses comprise management and structural costs, as well as goodwill amortization. Also included is a SEK 300 million provision for a particular, performance-based bonus programme, which was set up in 1998 for employees of the Long-Term Savings unit. Exchange Rate EffectsExchange rate movements had a positive impact during the period. Sales for Long-Term Savings and the operating result for the group both increased 5 per cent after recalculation to higher average exchange rates compared with the preceding year. Sensitivity Analysis A detailed sensitivity analysis is presented in the 1998 Annual Report. Exposure to property & casualty insurance has decreased, and consequently the risk profile for the group has changed. A simplified sensitivity analysis is provided on page 10. PROPERTY & CASUALTY INSURANCE A new, Nordic P&C organization is being formed through the combination of Pohjola's, Storebrand's and Skandia's P&C insurance operations into the jointly owned P&C insurance company if.. Operations are developing according to plan. Skandia's share of if. will be 42 per cent until the initial public offering, which is planned to take place no later than during the first half of 2001. The combination of the operations in if. is unconditional between the parties, but is subject to customary regulatory approvals. Market and Sales The P&C insurance market is characterized by continued fierce competition. Written premiums were higher due to increases in premium rates in certain segments, such as motor third-party liability insurance, as well as commercial insurance in Norway. Marine&Energy showed a continued decline in premium levels. Operating Result and Profitability The P&C operating result includes Skandia's former P&C operation for January and February. As from 1 March, the operating result includes 56 per cent of the combined operation with Storebrand. As from 1 July it includes 42 per cent of the combined operations with Storebrand and Pohjola. In both cases Skandia's interest is reported in accordance with the equity method. NIG Skandia's entire operating result is included for the period January- September. Despite a weak development of the technical result, the P&C operating result increased to SEK 447 million (-720), as a result of higher investment income. Technical Result Before Investment Income The technical result was weak due to high claim costs in industrial and private lines. Investment Income Total investment income amounted to SEK 3,502 million (667). The return on the equities portfolio improved significantly compared with the same period in 1998, when stock markets performed poorly. Investment assets amounted to SEK 41.3 billion (44.5). Total investment return was 7.2 per cent. BALANCE SHEET AND NET ASSET VALUE Total assets increased by SEK 22.6 billion to SEK 397.3 billion. Long-Term Savings accounted for an increase of SEK 69 billion. The new P&C operation is reported as an associated holding in accordance with the equity method, which has resulted in a decrease in total assets of approximately SEK 30 billion. External borrowings increased by SEK 4.4 billion to SEK 11.5 billion, excluding the parent company's subordinated loans. Net asset value amounted to SEK 25,557 million (year-end 1998: 24,833). Capital employed in the group, which in addition to net asset value consists of borrowings to finance investments in subsidiaries, amounted to SEK 38.0 billion (33.0). Of total capital employed, SEK 21.4 billion (17.8) pertains to Long-Term Savings, while SEK 7.1 billion pertains to the financing of Skandia's share of the if... P&C operation, including SEK 1.6 billion attributable to NIG Skandia. The definite capital structure of the new P&C operation will be set once customary regulatory approvals have been received. Stockholm, 27 October 1999 Lars-Eric Petersson President and CEO For questions, please call: Ulf Spång, Chief Financial Officer, tel. +46-8-788 2905 Harry Vos, Head of Group Business Control, tel. +46-8-788 3643 Financial calendar for Skandia: 16 February 2000, Year-end report for financial year 1999 6 April 2000, Annual General Meeting ------------------------------------------------------------ Please visit http://www.bit.se for further information The following files are available for download: http://www.bit.se/bitonline/1999/10/27/19991027BIT00370/bit0001.xls Tables and Figures http://www.bit.se/bitonline/1999/10/27/19991027BIT00370/bit0002.doc http://www.bit.se/bitonline/1999/10/27/19991027BIT00370/bit0003.pdf