Skandia and Storebrand

Skandia and Storebrand Launch the Premier Nordic Property & Casualty Group Storebrand and Skandia announce the launch of a New Group encompassing their Property and Casualty businesses which will form the premier Nordic P&C group ("Newco"). Newco has been established as a merger of equals, and Skandia and Storebrand each have 50 percent of the voting rigths. The economic ownership has been agreed as 56 per cent for Skandia and 44 percent for Storebrand. The structure has been designed to accommodate additional partners in due course. The Boards of Storebrand and Skandia consider the terms of the exchange to be fair and reasonable and expect a positive value impact. * Newco will create the premier Nordic P&C company with combined 1997 pro forma P&C insurance premiums of approximately SEK 22.9 bn (NOK 22.3 bn.), Q:3 1998 pro forma total assets of SEK 51 bn (NOK 50 bn) andQ:3 1998 equity capital of approximately SEK 10.9 bn (NOK 10.6 bn). * Newco's combined skill base will enable it to develop new products and service offerings faster than what has been possible up to now. This innovativeness will benefit existing and new customers. Furthermore, the creation of Newco will result in efficiency improvement that will increase its strength to the benefit of customers * Newco will be an integrated Nordic P&C organization capable of attracting, retaining and developing highly skilled personnel and management. Newcos position and growth prospects will increase longer term job security and career prospects for the employees. * Coordination of activities will create economies of scale, lower per unit cost and increased resources for continuing investments in product and service development as well as alternative distribution to the benefit of customers and shareholders. The result will be the creation of a Nordic champion with the ability to participate in the continuing European restructuring. * Newco is expected to yield annual cost savings of MSEK 450 (MNOK 440) realized over the course of 3 years. With a continuing convergence of the Nordic insurance markets, additional savings are expected to be captured. * Newco will initiate a branding review and adopt a co-branding strategy utilizing the strong brands of the owners. * It is the intention of Skandia and Storebrand to seek a stock exchange listing for Newco. * Newco is aiming at further expantion on the Nordic market with special focus on the Finnish and Danish markets. * Newco will have an estimated 1998 pro forma Nordic market share in P&C insurance of 19 per cent, with a customer base of about 4 million. The market share for Newco in the Norwegian market will be discussed with the authorities. Newco is prepared to take required actions. * Newco will be a Nordic company with its headquarter in Stockholm. The Private Division will be managed from Oslo, the Industrial Division will be managed from Stockholm and the Marine & Energy business will be managed from Norway. Comments on the New Group Sven Söderberg, Chairman of the Board, Skandia "The Swedish and Nordic insurance markets have, over the past century, experienced two consolidation phases. Skandia, in its present form, was created through the merger of five independent regional Swedish insurance groups during the 1960's. With the introduction of new technology, regulatory harmonization on a European and international level, introduction of a common currency, a second consolidation wave has been triggered. Today, the Swedish, Norwegian, Finnish and Danish markets are being transformed into a Nordic one, creating demands for economies of scale over and beyond what can be achieved in national markets. The formation of Newco is a natural and logical step in response to changing competitive dynamics. Hence, the Nordic market will play an interesting and decisive role in the European perspective." Jon R. Gundersen, Chairman of the Board, Storebrand "Time has arrived for consolidation of the Nordic Property & Casualty insurance industry. To grow in an industry under consolidation requires geographic expansion. Newco represents an opportunity to position our P&C business as a leading force in the Nordic and European insurance market. Furthermore, the transaction creates significant value for Storebrand and Skandia shareholders in light of the scope for synergies now and in the future as our presence in other Nordic countries is strengthened." Åge Korsvold, Chief Executive Officer, Storebrand "By joining forces with Skandia we reconfirm our long-term belief in P&C as an attractive industry with significant growth and value creation prospects. With Newco we will create a Nordic champion which will benefit our customers through improved service and expanded product and market coverage . Newco also enhances the career opportunities for the employees of both companies." Lars-Eric Petersson, Chief Executive Officer, Skandia "Skandia and Storebrand will create a new force in the converging Nordic markets for non-life products. Newco´s combined strength and market coverage will provide a solid foundation for continued growth and expansion in the Nordic region. To fully capitalize on Newco's Nordic platform, ambitious growth targets, through either internal means or through deepened cooperation with national P&C companies, will be set for Finland and Denmark." Questions regarding this press release can be directed to: Försäkringsaktiebolaget Skandia: Ulf Spång, Chief Financial Officer Phone: +46-8-788 29 05 Harry Vos, Group Controller Phone: +46-8-788 36 43 Birgitta Hammarström, Press Officer, Phone +46-8-788 27 55 Storebrand: Jack Frostad, Head of Corporate Information Phone +47-22-315757 Christian Storm, Chief Financial Officer Phone +47-22-311085 Jon Hippe, Executive Vice President Phone +47-22-311685 Media and Analyst Conferences: Press conferences will be held today in: @ Oslo at 11:00 at Felix Conference Center, Bryggetorget 3, Oslo (Aker Brygge) @ Stockholm at 15:00 at Skandiasalen, Sveavägen 44, Stockholm Analyst conference: @ A teleconference for analysts and journalists will be held today at 17:00. Further information will be sent out this morning. @ BACKGROUND TO NEWCO Market development and rationale The structure of the financial services markets is changing. First, regulatory harmonization, new technology, and alternative distribution methods, are converting previously national markets into a Nordic and, in the longer term, a pan-European one. Secondly, with the business going electronic, information based competitive strategies are becoming the norm. Finally, the increasing use of technology is transforming the cost structures of financial services firms into fixed cost systems. With increasing resources invested in IT based product development, alternative distribution, predictive modelling and customer databases, the need for economies of scale and scope has risen. In the future, achieving low unit costs, and efficient service delivery, will require a higher premium volume and a larger customer base than what has been available in the rather small individual Nordic countries. A pan-Nordic strategy will offer fundamental advantages for P&C companies in Sweden, Norway, Finland and Denmark. Newco is a natural and logical combination, making it possible to achieve benefits above what would have been possible through the existing Nordic P&C business in Skandia and Storebrand as a stand-alone. Specifically, Newco will capture incremental cost savings and revenue growth and provide a vehicle for cooperation or organic growth in Finland and Denmark. Benefits of Newco Cost reductions Newco will facilitate coordinated production, underwriting, marketing, product development and sharing of support functions such as treasury, risk management, finance, procurement and IT services on a Nordic basis. In addition, operational focus will, in itself, contribute to a reduced expense ratio. The cost savings expected to flow from Newco have been estimated to MSEK 450 (MNOK 440) by the year 2003, with approximately MSEK 110 (MNOK 108) flowing from production, MSEK 85 (MNOK 83) from distribution, MSEK 30 (MNOK 29) from claims handling, MSEK 75 (MNOK 73) from administration and MSEK 150 (MNOK 147) from support functions and other sources. The expected normalized savings amount to approximately 8 per cent of the total Nordic 1998 pro forma expense base. Over time, additional savings are expected to be realized through product standardization, system integration, coordinated marketing, distribution and shared development cost. In conjunction with the formation of Newco, reserves will be set aside to cover costs incurred as a result of the integration process. Market position Newco will service Storebrand's and Skandia's leading position in the Nordic P&C market while creating the critical mass required to successfully compete with large European insurers that have entered or may enter the Nordic arena. Noteworthy, however, is that the largest European insurance groups are still some 6-8 times larger than Newco. Based on pro forma 1998 figures, Newco will hold a 19 per cent share of the Nordic P&C insurance market. The combination of Storebrand's and Skandia's marine and energy lines will represent a formidable global competitor. Newco will, consequently, serve Skandia's and Storebrand's leading Nordic market position and provide a platform for further penetration of the Finnish and Danish markets. Service and product offering to customers Newco's strategy will provide clients with customized, flexible and innovative insurance solutions at competitive prices. The Merger will further contribute to an even more rapid product and service development process. By using the best service and product standards of each country, the foundation has been created for an even better value proposition. With a combined customer base of 4 million and a premium volume of SEK 22,9 billion (NOK 22.3 billion), economies of scale and scope will be achieved, ensuring low per unit costs and a rapid product development pace to the benefit of Skandia's and Storebrand's P&C customers. Benefits to employees The prospects for the majority of employees in their respective P&C business lines will be improved because of the enhanced position and growth prospects of Newco. However, the merger will initially result in overlapping functions and work processes. As a result, a certain reduction of staffing levels will be required. This will mainly be achieved through natural attrition. Over the longer term, however, job security and career prospects will improve. Strategy Newco will be a focused Nordic leader with regards to production, administration, marketing, customer service, and product development in the Nordic markets for P&C products. More specifically, Newco's strategic aim is to fully utilize market opportunities, economies of scale and skill transfer made possible by a pan-Nordic presence. Newco will not participate in the international reinsurance market. Brand name and marketing Storebrand and Skandia realize that substantial values are incorporated in each company's brand names. As a consequence, the business operations will continue to trade under existing brand names and identities in each respective market. A major branding review will be initiated, involving all business lines. This review will be extended to consider the branding options and the values, which are to be retained and augmented to build and enhance the new branding proposition. The review will take into account revenue as well as cost reduction targets. Newco will create additional resources to develope Skandia's and Storebrand's position in the Nordic market for P&C products. Distribution alliances will be sought to further strengthen the sales effectiveness of the new organization. Additional partners will be sought. Coordination of the two groups call and service centers and Internet solutions will contribute to improved service levels. IT supported product development will receive additional resources. In the opinion of the Boards, Newco will positively contribute to the value of the companies' brand names. Dividend policy and financial goals Newco will establish a dividend policy which will provide an efficient capital structure in the company and which offers the shareholder a competitive total return on capital through continuous cashflows and increase in value. The profitability objective is that the long-term return over the cycle should equal the yield of a ten year Swedish government bond plus 6 percentage points. Return is defined as the operating result after paid tax divided by average net asset value. The rate of capital return will be determined by taking into account capital efficiency in the Group. This implies that the retained result after tax will normally be limited to a level necessary in order to secure the target solvency margin. Personnel issues and one-time charges The number of employees of Newco will, initially, amount to approximately 5900. Merger related personnel reductions will occur during the 3 year period following the formation of Newco. To the extent possible, natural attrition will be used to reach Newco's headcount target. Integration A joint Executive Committee ("the Committee") has been established to prepare for the integration of Skandia's and Storebrand's P&C operations. A prime objective of the the Committee will be the timely and effective implementation of processes and activities ensuring the realization of planned savings targets. More specifically, the Committee will establish and oversee the work of several action groups; each with its own mandate, targets, time plans and activity programs. The working groups will be staffed by key personnel in Storebrand's and Skandia's P&C businesses. The objective is to identify and take advantage of best practices and processes in each respective company, ensuring the creation of an even more effective and efficient common organization. Listing of Newco In order to keep the best management in Newco and reduce the capital committed to it by Skandia and Storebrand, a stock market listing for a significant part of the share capital will be sought. The parties have not yet decided on the precise timing of a prospective listing, but the aim is to seek a listing within two years after completion. Board and Executive Management The Board of the New Group will consist of six members. The new Board will consist of Åge Korsvold, Chairman Grete Faremo Idar Kreutzer Johan Fredrik Odfjell Lars-Eric Petersson Ulf Spång Group Executive Management Bo Ingemarson, Chief Executive Officer Hans-Erik Andersson Knut W. Francke Gunn Ovesen Messrs Andersson and Francke have been appointed Head of Industry and Private respectively. Additions to the Executive Management will be made in due course. Choice of legal domicile The decision to legally domicile in Sweden was based on advice of independent advisors and has not been a negotiation topic. Incorporating in Sweden will provide maximum operating and capital efficiency to the New Group. The aim of the new structure and integration process is to build on the best work practices of each respective company, thereby ensuring the creation of an even more competitive common organization. Terms of Newco @ Capital of 56/44 per cent for Skandia and Storebrand respectively @ Votes of 50/50 per cent for Skandia and Storebrand respectively @ Conversion of voting rights to reflect capital ownership in case of listing or other ownership changes Regulatory approval and tax implications The formation of Newco is conditional upon regulatory approval. The formation of Newco will also be evaluated by the relevant competition authorities. Newco's European market share would be 0.9 percent based on a total European gross premium of SEK 2,390 billion. The corresponding Nordic market share would be 19 percent based on a gross premium volume of about SEK 110 billion. The structure of Newco is designed to give the group maximum flexibility and competitiveness. The untaxed reserves of Newco will be small, implying the ability to consolidate the group's position. Financial position of Newco Pro forma accounting procedures The objective of the pro forma accounting procedures detailed below is to provide an overview of the organisational structure of Newco. For this purpose, the synergies and restructuring costs have not been taken into consideration. A pro forma Profit and Loss Statement has been drawn up covering the period 1 October 1997 up to and including 30 September 1998, i.e. a rolling 12-month accounting period. The Balance Sheet has been prepared as per 30 September 1998. A pro forma Profit and Loss Statement and Balance Sheet have additionally been drawn up for the 1997 year of operations. These accounting records reflect the merger principles and have been prepared in conformity with the Swedish Accounts Act for Insurance Companies. The pro forma accounts quote amounts in SEK. Profit and Loss Statement The technical results before investment return transferred from the financial operations, have been obtained from the respective companies' accounts. Under Norwegian accounting standards, claims handling expenses are considered an operating expense whereas under Swedish standards it is included in the claims incurred. Therefore operating expenses and cost of claims are not consistently calculated and the sums do not represent the sums under Swedish accounting. The technical results however, should be broadly the same. To the technical results has been added an amount equivalent to 4.7 per cent of the technical provisions less net deferred acquisition costs and net outstanding receivables. The investment return is based on a pro forma capital structure as defined below. It is estimated that the investment assets will generate a weighted investment return amounting to 4.7 per cent on an annual basis. The tax rate has been estimated at 28 per cent. The technical result of Storebrand has been converted to SEK at an exchange rate of 1,052 (SEK/NOK) (1,077). Balance Sheet The solvency margin has been estimated at 55 per cent, i.e. shareholders' equity and any untaxed reserves, including deferred taxes, constitutes 55 per cent of the net premium income. At the outset Newco will operate with minimal untaxed reserves, which will build up over time. In order to simplify the pro forma statements of account, the technical provisions and deferred acquisition costs have been reported at net values, i.e. each item has been reported less reinsurers' share. Moreover, receivables from the insurance operations have been reported at net values. The net technical provisions include reserves amounting to SEK 2 billion (NOK 2 billion) for operations in run-off. The mandatory provision in Norway to the natural perils reserve has been included in the technical provisions. The balance sheet of Storebrand has been converted to SEK at an exchange rate of 1,054 (SEK/NOK) (1,070) Miscellaneous Skandia and Storebrand intend to consolidate their respective holdings in Newco by way of the equity method. SEK Million Skandia Storebrand Newco Newco P&C P&C SEK Million Skandia Storebrand Newco Newco P&C Pro forma income statement 1997-12-31 1997-10-01 - 1998-09-30 Gross premium written 13596 9326 22922 22278 Ceded premiums -1983 -1125 -3108 -3208 Net premium written 11613 8201 19814 19070 Change in provisions for -154 -340 -494 -85 unearned premiums Net premiums earned 11459 7861 19320 18985 Claims incurred -10156 -6079 -16235 -16517 Operating expenses -2600 -2054 -4654 -4410 Allocated investment income 1090 541 1631 1580 Technical result -207 269 62 -362 Investment income, non- 282 209 491 499 technical Other income 0 Other expenses 0 Interest expenses 0 Amortization of goodwill 0 Restructuring expenses 0 Operating result 75 478 553 137 Taxes -21 -133 -154 -40 Minority result 0 Profit/loss for the financial 54 345 399 97 year SEK Million Skandia Storebrand Newco Newco SEK Million Skandia StorebrandNewco Newco P&C Pro forma balance sheet 1998- 1997 09-30 Investments 30637 15958 46595 45692 - whereof NIG 1431 0 1431 1444 Insurance receivables, net 759 1933 2692 1998 Other assets, net 382 112 494 0 Deferred acquisition costs, 553 509 1062 963 net Total assets 32331 18512 50843 48653 Shareholders' equity 6387 4523 10910 10456 Shareholders' contribution 1431 0 1431 1444 (NIG) Minority interest 0 0 0 Provision for deferred tax 0 0 0 liability Technical provisions, net 24513 13989 38502 36509 Debt 0 0 0 Restructuring provisions 0 0 0 Other provisions and 0 0 244 liabilities, net Sharehold. eq., provisions & 32331 18512 50843 48653 liabilities SEK Million Skandia StorebrandNewco Newco P&C P&C Key ratios 1997 Ceding rate (%) 14.6% 12.1% 13.6% 14.4% Claims ratio, net (%) 88.6% 77.3% 84.0% 87.0% Cost ratio, net (%) 22.7% 26.1% 24.1% 23.2% Combined ratio, net (%) 111.3% 103.5% 108.1% 110.2% Insurance margin (%) -1.8% 3.4% 0.3% -1.9% RoE (%) 0.8% 7.6% 3.7% 0.9% Pro forma investm return 4.7% 4.7% 4.7% 4.7% (weighted average) (%) Solvency margin (%) 55% 55% 55% 55% Definitions Solvency Margin Risk bearing capital in relation to risk- bearing premium. Return on shareholders' Equity Profit/loss before tax less 28 per cent tax in relation to shareholders' equity. Insurance margin Technical result in relation to net premiums earned Claims ratio, net Claims incurred in relation to net premiums earned Expenses ratio, net Operating expenses in the insurance business in relation to net premiums earned Combined ratio, net Claims incurred plus operating expenses in the insurance business in relation to net premiums earned Condensed time table Press conference Oslo February 22, 11:00 Press conference Stockholm February 22, 15:00 Analyst meetings (conference call) February 22, 17:00 D. Carnegie AB and Merrill Lynch International have acted as advisors to Skandia. Warburg Dillon Read and Sundal Collier have acted as advisors to Storebrand. Oslo and Stockholm, February 22, 1999 Skandia Storebrand Board of Directors Board of Directors ------------------------------------------------------------ Please visit http://www.bit.se for further information The following files are available for download: http://www.bit.se/bitonline/1999/02/22/19990222BIT00040/bit0001.doc