Interim report June 2000

INTERIM REPORT For the period January - June 2000* * Sales increased by 78 per cent, to SEK 111 billion * Record sales in all markets * The operating result for the core businesses rose by 61 per cent, to SEK 3,602 million * The group's operating result increased by SEK 1,042 million, to SEK 3,704 million * Assets under management increased by SEK 122 billion since the start of the year, to SEK 955 billion Comments by Lars-Eric Petersson, President and CEO: "Sales increased by nearly 50 billion kronor during the first half of the year, to more than 111 billion kronor. The period was characterized by uncertainty and turbulence in the world's stock markets. The year started out with strong stock markets, which gave way in the second quarter to an equivalent downturn. Despite the turbulence during the period, however, Skandia achieved record sales in all markets. "The operative result for the savings businesses is growing faster than sales and increased by more than 115 per cent. "We are also pleased to note improved profit margins in all our major markets. Monthly changes in sales volumes can result in upward as well as downward swings in the profit margin, which makes it important to follow the long-term trend. "The result of the property & casualty insurance company If was hurt by higher claims and a weak investment return. "The dispute around Pohjola's participation in If has been successfully resolved. The work is now focused on realizing the identified synergies and on preparing the operation for broadened ownership. "The build-up of our distribution power is developing well, and we are rapidly extending our exploitation of the Internet and how it will develop our businesses." OVERVIEW The operating result for the core businesses increased to SEK 3,602 million (2,236). The return on net asset value for the core businesses, before tax, was 29 per cent on a moving twelve-month basis (29 per cent for the full year 1999). Sales for Long-Term Savings rose 79 per cent, to SEK 109,929 million (61,402). The operating result for Long-Term Savings more than doubled, to SEK 3,913 million (1,814). Assets under management increased by SEK 122 billion (15 per cent) since the start of the year, to SEK 955 billion. Of this amount, SEK 552 billion consists of assets under external management in Long-Term Savings. The operating result including property & casualty insurance was SEK 3,704 million (2,662), and the return on the group's adjusted net asset value, after tax, was 27 per cent on a moving 12-month basis (24 per cent for the full year 1999). The 2000 Annual General Meeting approved a new stock option programme, which took effect on 15 May 2000. The incentive programmes from previous years were extended until 15 May 2000. The cost of these extended programmes, SEK 620 million, has been charged in its entirety against the half-year result. CORE BUSINESSES Long-Term Savings Market and Sales Sales totalled SEK 109,929 million (61,402), an increase of 79 per cent. At constant exchange rates the increase was 72 per cent. All markets reported record sales, which more than doubled in many cases. Sales of unit linked assurance increased by 80 per cent during the first half of the year (74 per cent at constant exchange rates). Sales of mutual fund savings products (without an insurance element) rose 89 per cent, to SEK 32,531 million. At constant exchange rates the increase was 81 per cent. For mutual fund savings products, payments to policyholders through fund withdrawals amounted to SEK 6,032 million (1,973). The increase in withdrawals is attributable to the sharp rise in sales as well as profit- taking following strong gains in the value of funds. Managed assets passed the SEK 100 billion mark for the first time, increasing by 33 per cent since the start of the year. USA Skandia's sales during the first half of the year rose 63 per cent, to USD 7,702 million. Of this total, sales of variable annuities rose 56 per cent, to USD 5,081 million, while sales of mutual fund savings products rose 78 per cent, to USD 2,621 million. A generally weak stock market, interest rates, and seasonal fluctuations dampened sales of mutual fund savings products during the second quarter compared with the first quarter. Skandia strengthened its position in the variable annuities market during the first half of the year. Assets under management increased during the first half of the year by 13 per cent, to USD 39 billion. UK Strong sales in the British market, together with continued sales successes in markets outside the UK, contributed to a 110 per cent sales increase, to GBP 2,069 million (985). Unit linked sales rose 117 per cent, while sales of mutual fund savings products increased by 94 per cent. New sales of unit linked assurance rose 99 per cent. Assets under management increased during the first half of the year by 19 per cent, to GBP 13 billion. Sweden Interest in mutual funds and unit linked assurance has risen sharply. Sales increased by a total of 103 per cent, to SEK 5,808 million (2,867). Growth was strong for both unit linked assurance and mutual fund savings products. New sales of unit linked assurance rose 129 per cent. On a moving twelve-month basis, SkandiaLink's market share, measured as the net flow into the Swedish fund market, increased to 12 per cent, compared with 8 per cent at the start of the year. Assets under management increased during the first half of the year by 15 per cent, to SEK 37 billion. New Markets In Japan, sales amounted to SEK 388 million (91), an increase of 262 per cent in local currency. The increase is mainly attributable to the launch of a new variable annuity product. In Germany, sales amounted to SEK 565 million, an increase of 100 per cent in local currency. The unit linked market is growing fast, and unit linked assurance now accounts for 20 per cent of the total life market, compared with 5 per cent five years ago. Recently adopted changes in the tax code are expected to contribute further to the rising interest in equity-related products. The effort to market unit linked assurance in Spain resulted in a 57 per cent rise in sales, in local currency, to SEK 1,669 million. Sales of traditional life assurance in Spain decreased as a result of a strategic shift in focus towards unit linked assurance products. Assets Under Management Assets under management increased during the first half of the year by SEK 82 billion (16 per cent), to SEK 604 billion, broken down as follows: unit linked assurance SEK 489 billion, mutual fund savings products SEK 100 billion, and life assurance SEK 15 billion. Payments to Policyholders Payments to unit linked policyholders amounted to 7.7 per cent of technical provisions on a moving twelve month basis (6.9 per cent for the full year 1999). Surrenders accounted for 6.4 percentage points of this total (5.7), which is well within the limits of underlying assumptions. Operating Result and Profitability Unit Linked Assurance The operating result for unit linked assurance more than doubled, to SEK 3,876 million (1,788). Earnings growth exceeded growth in premiums. Costs for asset management and surrenders were lower than underlying assumptions, which had a positive result impact. Due to achieved economies of scale, the profit margin for new business improved in essentially all markets during the first half of the year compared with the full year 1999, especially in the USA. The result for newly written business increased to SEK 1,428 million (709), which led to an improvement in the profit margin, expressed as a percentage of new sales, from 12.3 per cent for the full year 1999 to 14.3 per cent. The change in the profit margin between the first and second quarters, from 16.0 per cent to 14.3 per cent, is mainly attributable to two factors: 0.5 percentage points of the change is explained by strong growth during the second quarter in markets with lower profit margins, while 1.0 percentage point is due to a slight decline in sales at the same time that overall costs were unchanged. The latter factor is unavoidable in comparisons of individual quarters. The accumulated growth in the value of funds under management is spread out over a three-year period. This is done to better reflect the operation's long- term result and profitability development. The accumulated equalization amount as per 30 June was SEK 1,686 million, compared with SEK 3,423 million at the start of the year. This decrease corresponds to the linear dissolution of earlier provisions and the somewhat lower growth in value compared with underlying assumptions for the first six months of the year. Mutual Funds Operations have now reached break-even and therefore showed a positive result of SEK 21 million (-67) for the first half of the year. Life Assurance The operating result for life assurance was SEK 16 million (93). Net Asset Value and Return The operating result, after deducting financing costs, rose 116 per cent to SEK 3,913 million (1,814). The return on net asset value, after financing costs and taxes, was 30 per cent (15) on a moving twelve-month basis. Asset Management Assets under management, consisting of assets from companies in the Skandia group, external clients, and fund management, increased during the first half of the year by SEK 39 billion to SEK 355 billion. The number of assignments from institutional investors continues to rise. Assets under management include SEK 37 billion in managed mutual fund assets, an increase of SEK 8 billion since the start of the year. Commissions from asset management are partly fixed and partly performance- related, the latter being ultimately determined in proportion to the achieved annual return. The result amounted to SEK 49 million (51) after interest expenses and goodwill amortization. Investment Income Investment assets in the parent company amounted to SEK 5 billion after investments in core businesses and repayment of debt. The return on these assets was SEK 304 million. Businesses SkandiaBanken SkandiaBanken's operating result was SEK 40 million (42). SkandiaBanken's business is based on Internet and telephone service. The result was favourably affected by an increase in revenue from Internet-based stock trading and fund commissions, which compensated for higher costs for investments in a new stock trading system and start-up costs in Norway, where the bank already has approximately 30,000 customers. Deposits in SkandiaBanken increased to SEK 13.5 billion. The bank has a total of approximately 350,000 customers. Lifeline Lifeline sells health and medical insurance products, and Competence Insurance, among other things. Demand for these products has risen considerably. To meet this rise in demand, agreements were signed with an additional two hospitals in Sweden, and cooperation agreements were signed with ten medical centres in Norway. Operations are developing favourably. Lifeline's result increased to SEK 26 million (18). Skandia Marketing Ltd. Skandia Marketing distributes savings and insurance products for Skandia and If in the Swedish and Danish markets. Business is developing well, and the result increased to SEK 40 million (23). Other Companies The operating result for other companies, including finance companies that are being wound up, was SEK 62 million (38). Group Expenses Group expenses comprise management and structural costs, as well as goodwill amortization. The extended incentive programmes from 1999 were expensed in the half-year accounts in the amount of SEK 620 million. For the chief executive officer the maximum compensation payable from the extended incentive programme is limited to one year's salary, i.e., SEK 6 million, and is not payable until after three years and only then in relation to the price development of Skandia's stock. In addition, the CEO's terms of retirement have been adapted to the terms of retirement that apply for other senior executives in the group, entailing a lifetime pension from 57 years of age in an amount equivalent to 60 per cent of salary. Provisions for this are being made through Skandia's pension foundation and therefore will not affect the group's result. Exchange Rate Effects Exchange rate movements had a positive impact during the period. Sales for Long-Term Savings increased by 7 per cent, and the operating result for the group increased by 5 per cent after recalculation to higher average exchange rates compared with the preceding year. PROPERTY & CASUALTY INSURANCE During the second quarter Pohjola's Annual General Meeting voted to break off the cooperation agreement concerning If P&C Insurance. On 30 June a settlement was reached between Pohjola, Skandia and Storebrand, concerning the subsequent dispute that arose. The operating result for property & casualty insurance amounted to SEK -212 million (426), corresponding to 56 per cent of If's result. The result was affected by continued strong competition, unfavourable claims experience, and downward pressure on investment returns caused by the trend in the financial markets. Pohjola's decision to withdraw from the cooperation in If has and will not have any result impact. During the second quarter, If paid a dividend which for Skandia's part amounted to SEK 1.9 billion. This dividend is associated with the sale of Vesta Skadeforsikring in 1999. Following the dividend, Skandia's equity share in the property & casualty operations of If amounts to SEK 4.4 billion, compared with SEK 6.5 billion at the start of the year. In April the final regulatory approval was received for the sale of NIG Skandia, which entailed a SEK 314 million increase in capital gains. BALANCE SHEET AND NET ASSET VALUE Total assets increased by SEK 52.8 billion compared with the start of the year, to SEK 541.3 billion. Long-Term Savings accounted for an increase of SEK 58.4 billion. External borrowings decreased by SEK 0.5 billion to SEK 8.5 billion, excluding the parent company's subordinated loans. Net asset value amounted to SEK 31,585 million (SEK 29,220 million at the start of the year). Capital employed in the group, which in addition to net asset value consists of borrowings to finance investments in subsidiaries, amounted to SEK 40.0 billion (37.5). Of these funds, SEK 29.6 billion (23.5) pertains to Long-Term Savings, while SEK 4.4 billion pertains to the financing of Skandia's share of the P&C insurance operations in If. Stockholm, 9 August 2000 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: 11 September, August sales 10 October, September sales 1 November, interim report January-September 2000 10 November, October sales 11 December, November sales ------------------------------------------------------------ This information was brought to you by BIT http://www.bit.se The following files are available for download: http://www.bit.se/bitonline/2000/08/09/20000809BIT00100/bit0001.doc The full report http://www.bit.se/bitonline/2000/08/09/20000809BIT00100/bit0002.pdf The full report