STOCKHOLM, Sweden, Feb. 13, 2002 (PRIMEZONE) -- Skandia: Year-End Report 2001(*)
-- Sales amounted to SEK 138 billion (207)
-- New sales of unit linked assurance decreased by 22%
-- New sales outside the USA decreased by 5%
-- Cash flow from operating activities improved by SEK 2.7 billion
-- The result of operations for the core businesses was SEK 1,250
million for the fourth quarter, compared with SEK 604 million for
the third quarter
-- The group's operating result was SEK 3,597 million for the fourth
quarter, compared with SEK -4,392 million for the third quarter.
The operating result for the full year was SEK -2,104
million (8,029)
-- Assets under management increased by 2%, to SEK 1,013 billion
-- The Board proposes a dividend of SEK 0.30 per share
Comments by Lars-Eric Petersson, President and CEO:
The uncertainties in the world economy and the extraordinary events during the past year have had a major impact on the capital markets and thus on growth for equity-related savings. The stock market trend in 2001 was characterized by sharp declines in practically all markets. In the longer perspective, however, it is the underlying structural need for modern savings products that confirms our commitment to our business model and points to favourable development for Skandia's business around the world.
Obviously, Skandia has felt the impact of the turbulence and uncertainty in the capital markets, particularly in the USA. Despite this, in 2001 Skandia recorded its second-best year ever in terms of new business, thanks in large part to our geographic expansion. Due to previous years' strong sales and thereby a substantial build-up of assets under management, we enjoyed a significant improvement in operating cash flow during the year, pushing cash flow into positive territory during the fourth quarter.
Against the poor market conditions Skandia continues to focus its operations with a view to improve efficiency and to position itself to take full benefit of when market conditions improve. Product development is equally important in a declining market, which explains our relentless innovation of new products in our various markets, particularly in the USA. During the year we enhanced our distribution capacity in the UK, we continued to reduce our exposure to property & casualty insurance, and we successfully negotiated the sale of our Nordic asset management operations.
Skandia today is a dramatically different company than it was five years ago, and I am confident that our business model will achieve superior returns for shareholders. During the course of 2002, the systematic work on refining our business, coupled with innovative product development and global distribution strength, will set the stage for positive sales and earnings growth.
Overview
The stock market decline during the year, and especially during the third quarter, has had a negative impact on sales, assets under management and the result. The fourth quarter showed a significant recovery, however.
Despite the turbulence in the financial markets, the group's net asset value as well as assets under management were at the same level as at year-end 2000.
Investment of unit linked assurance capital is determined by the policyholders. Therefore, Skandia has no direct investment or market risk. Since contracts in force span long periods of time, sharp swings in the financial markets during a short period of time indirectly affect the present value of future fees. The recovery of the financial markets during the fourth quarter entailed that the financial effects during the fourth quarter were positive, in the amount of SEK 2.3 billion, compared with SEK -4.3 billion during the third quarter. As a result of the market trend especially during the third quarter, the negative financial effects on the result for the full year amounted to SEK -5.1 billion (+0.1).
The group's operating result for the full year amounted to SEK -2,104 million (8,029), and the return on the group's adjusted net asset value, after tax, was -2% (21). The operating result for the fourth quarter was SEK 3,597 million, compared with SEK -4,392 million for the third quarter.
The result of operations for the core businesses for the full year (operating result for the core businesses, excluding financial effects in unit linked assurance) was positive, amounting to SEK 3,996 million (5,652), and the operational return on net asset value was 12% (20). The result of operations for the fourth quarter was SEK 1,250 million, compared with SEK 604 million in the third quarter.
Sales of single-premium products have been affected the most by the stock market climate. Consequently, sales of mutual fund savings products decreased to SEK 34,831 million (55,812). The market climate also affected sales of unit linked assurance, which decreased by 33% to SEK 93,502 million (140,224). However, new sales of unit linked assurance decreased by only 22%, due to strong development for annual- premium products. Outside the USA new sales decreased by 5%.
The result for newly written unit linked assurance business decreased to SEK 1,381 million (2,243). The profit margin was negatively affected, as lower volumes - particularly in the USA - gave rise to poorer cost coverage. This development was countered by continuous adaptation of cost levels. During the fourth quarter this led to a slight improvement in the profit margin in the USA compared with the third quarter. At the same time, product development was further intensified.
Skandia's share of If's result during the first nine months of the year amounted to SEK -1,015 million (-554). A valuation of Skandia's holding in If as per 31 December 2001 indicates that there was no further impact on the reported result during the fourth quarter. In this valuation, all effects of changes in the ownership structure have been taken into account.
Insurance and Savings Products
Market and Sales
Unit Linked Assurance
New sales during the year decreased by 5% outside the USA, and for the group as a whole the decrease was 22% (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). Due to the focus on pension products, new sales of annual-premium products increased by 15%. Measured in terms of new sales, the markets in the USA, the UK and Sweden account for 28%, 34% and 23% of total, respectively, while other markets account for 15%.
Sales in the USA consist mainly of single-premium variable annuities, which were strongly affected by the stock market decline. Moreover, Skandia has intentionally limited its risk by refraining from competing with products on the market that include generous guarantee commitments. New sales decreased by 52% in local currency. New products were successfully launched in 2001, and a new product platform was introduced in early 2002.
Following the record year in 2000, new sales in the UK decreased by 18% in local currency. However, a 38% drop in sales of single-premium policies was offset to a significant degree by a 19% rise in sales of annual-premium policies - mainly pension plans.
New sales in Sweden decreased by 4%. Success for pension products compensated for the decline in single-premium products in the private market. Skandia's market position improved strongly for the second year in a row.
In Germany, new sales rose 25% in local currency at the same time that the market position is strengthening. A number of new distribution agreements have been signed. Changes in the tax code and Germany's pension reform will further contribute to greater sales of equity- related savings products. Unit linked assurance is expected to account for a growing share of the German life assurance market. Skandia's sales success is continuing in Japan, as evidenced by a 56% rise in new sales, among other things.
Skandia's distribution capacity has strengthened considerably here, as well. New sales in Italy, Spain and Denmark were hurt by the turbulence in the stock markets, however, new sales rose in Austria.
Assets under management increased by 0.5%, to SEK 504 billion. Payments to policyholders are well within underlying assumptions and amounted to 9.8% (9.5), expressed as a percentage of assets under management at the start of the year. Surrenders accounted for 8.3 percentage points of this total, compared with 8.0 percentage points in 2000.
Mutual Fund Savings Products
Sales were strongly affected by the stock market decline and decreased to SEK 34,831 million (55,812). However, assets under management increased by 5%, to SEK 113 billion. Net inflows also remained positive, amounting to SEK 12,994 million (42,645).
Sales totalled SEK 20,819 million (36,365) in the USA and SEK 8,063 million (13,349) in the UK. Germany showed continued strong growth in sales volumes.
Operating Result and Profitability
Unit Linked Assurance Investment of unit linked assurance capital is determined by the policyholders. Therefore, Skandia has no direct investment or market risk. Since contracts in force span long periods of time, sharp swings in the financial markets during a short period of time indirectly affect the present value of future fees.
The negative financial effects on the operating result are primarily caused by the impact of the stock market trend on the present value of future fees compared with Skandia's fund growth assumption of approximately 6% per year. However, the unit linked assurance operation is long-term, and therefore the result effect described above will be permanent only under the condition that the stock markets do not recover.
The result of operations was SEK 4,341 million (6,026). The result was indirectly affected by the stock market decline due to lower sales volumes. The result for new business during the year thereby decreased to SEK 1,381 million (2,243). Lower volumes give rise to poorer cost coverage, which explains the lower profit margin. The profit margin was 9.2%. This can be compared with a profit margin for 2000 which, with comparable assumptions, amounted to 14.2%.
The profit margin declined slightly during the fourth quarter compared with third quarter due to a change in both the product mix and the geographic composition of business. Measures are being taken in a number of markets to adjust the cost level and thereby improve margins.
In the USA the profit margin improved slightly during the fourth quarter compared with the third quarter. The cost-savings now implemented in the USA will have an effect starting in 2002.
The outcome compared with operative assumptions and the change in operative assumptions remained positive. A drop in surrenders, lower fund management costs and higher additional premiums contributed to the positive trend. Over time these result items should not have any material impact on the operating result.
Mutual Fund Savings Products The negative result trend is attributable to substantial investments in infrastructure and new product development. The result was SEK -28 million (12).
Life Assurance The result was SEK 111 million (83).
Investment Income The parent company's investment assets of SEK 6.7 billion include SEK 3.2 billion on deposit for the acquisition of Bankhall. The return on the parent company's investment assets was SEK 96 million (232).
Businesses
SkandiaBanken SkandiaBanken's operating result was SEK 79 million (109). The result was charged with costs for IT infrastructure and intensified marketing in connection with establishment in new markets. Skandia Marketing is now included in SkandiaBanken. Deposits in SkandiaBanken increased to SEK 28.3 billion. The bank has a total of 600,000 customers, an increase of 50% since the start of the year, including 30,000 customers from the acquisition of Din Bank AS in Denmark. The number of online customers has risen by 124%, to 321,000.
Asset Management Assets under management, consisting of assets from companies in the Skandia group, external clients, and fund management, amounted to SEK 363 billion (361). Assets under management include SEK 40 billion in managed mutual fund assets (37).
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 17 million (174) after interest expenses and goodwill amortization.
Skandia Netline Skandia Netline provides products in the areas of Health Care, Group Insurance, Pension Administration and Knowledge Management. The result was affected by product development costs and decreased to SEK 15 million (52).
Other Companies The operating result for other companies in the group was SEK -175 million (31). The result was charged with approximately SEK 120 million in development costs for the banking operation in Switzerland, which was granted a licence in July.
Group Expenses Group expenses comprise management and structural costs, and goodwill amortization.
Exchange Rate Effects After recalculation to higher average exchange rates compared with the preceding year, sales increased by SEK 11,810 million, while the operating result for the group decreased by SEK 409 million. Total assets increased by SEK 50 billion during the year as a result of changed exchange rates.
Property & Casualty Insurance
The result trend in 2001 for the Nordic property & casualty insurance company If was unsatisfactory. Investment income was hurt by the stock market trend, at the same time that claims - including reserve strengthening - were high. Cash flow and operating expenses developed favourably, however. During the first nine months of the year, Skandia's share of If's result was negative and amounted to SEK -1,015 million. On 11 November, If acquired Sampo P&C, and at the same time Varma-Sampo Mutual Pension Insurance Company acquired 10% of If through a new issue. Skandia Liv also acquired 10% of If from Skandia. Skandia now owns 19% of If.
Balance Sheet and Net Asset Value
Total assets increased by SEK 21.4 billion, to SEK 610.6 billion. Unit linked assurance and mutual fund savings products accounted for an increase of SEK 2.7 billion, and the bank operations accounted for an increase of SEK 14.8 billion.
Net asset value amounted to SEK 37,236 million (37,031). Capital employed in the group, which in addition to net asset value consists of borrowings to finance investments in subsidiaries, amounted to SEK 51.5 billion (45.6). Of these funds, SEK 47.1 billion (41.4) pertains to the core businesses, while SEK 4.4 billion pertains to the financing of Skandia's share of the P&C insurance operations in If. Borrowing for the acquisition of Bankhall is not included in capital employed.
Borrowing and Liquidity
Cash flow from operating activities improved during the year by SEK 2.7 billion. External borrowings increased during the year by SEK 8.5 billion, including funds held on deposit for the acquisition of Bankhall. Assuming all other factors are unchanged, external borrowings will decrease by approximately SEK 5 billion during the first half of 2002.
Excluding Bankhall, the increase in borrowings during the year, totalling approximately SEK 5.3 billion, is attributable essentially to investments in associated companies, subsidiaries and the bank operations, altogether amounting to approximately SEK 2 billion; an increase in investment assets, totalling SEK 0.9 billion; and exchange rate effects of SEK 1.9 billion. Granted, unutilized credit facilities on the balance sheet date amounted to SEK 9.4 billion. In pace with the decrease in borrowing, unutilized credit facilities will return to the former level of SEK 13.1 billion. Liquidity remains good.
Significant Post-Balance Sheet Events
If P&C Insurance On 11 November it was announced that If P&C Insurance would be merging with Sampo's property & casualty insurance operation. The necessary regulatory approvals were received at the end of 2001, and as a result of this, the deal was finalized on 2 January 2002. This entailed a strengthening of If's capital base, among other things through a capital contribution of SEK 558 million from Skandia. To further broaden If's ownership base, a new issue was directed at Varma-Sampo Mutual Pension Insurance Company, which became a new owner. Varma-Sampo thereby acquired a 10.06% holding in If. In connection with this, Skandia also sold 10.06% of its holding in If to Skandia Liv, at the same terms that applied for Varma-Sampo. Skandia's holding in If thereafter amounts to 19.36%.
Bankhall On 19 December it was announced that Skandia was making an offer valued at SEK 3.2 billion for the British company Lynx Group plc and its subsidiary Bankhall. Skandia's intention with the acquisition is to take over Bankhall, the UK's largest provider of services to Independent Financial Advisers. On 4 February it was announced that more than 90% of the shareholders had accepted the offer, which means that the deal will be completed.
Skandia Asset Management On 8 January 2002 it was announced that Skandia is selling its asset management operation, Skandia Asset Management, to Den norske Bank. The purchase price is SEK 3.2 billion, with a capital gain of approximately SEK 2 billion. The deal is contingent upon customary regulatory approval.
The Board of Directors proposes a dividend of SEK 0.30 for the 2001 financial year, and 22 April 2002 as the record date for payment of the dividend. If the Annual General Meeting decides in favour of this proposal, dividends are expected to be sent out from VPC on 25 April 2002.
The Annual General Meeting of Skandia Insurance Company Ltd. (publ.) will be held on Wednesday, 17 April 2002, at 4.30 p.m. Location: Folkets Hus, Stockholm.
In connection with the Annual General Meeting, shareholders are invited to attend an information and question & answer session with Skandia's Group Management Team. The information and question & answer session will be held from 1.00 p.m. - 2.30 p.m. on Wednesday, 17 April 2002, at Folkets Hus in Stockholm.
The Annual Report is scheduled for distribution by mail to shareholders in late March and can be ordered from Skandia using one of the following alternatives: by phone, +46-8-788 10 00, by fax, +46-8-788 26 85, or via the Internet at http://www.skandia.com.
This year-end report has been prepared in conformity with the guidelines of the Swedish Financial Supervisory Authority and Recommendation RR20 of the Swedish Financial Accounting Standards Council. The year-end report has been prepared in accordance with the same accounting principles as in the 2000 Annual Report.
Financial Calendar for Skandia:
17 April 2002, Annual General Meeting 26 April 2002, interim report January-March 2002 8 August 2002, interim report January-June 2002 30 October 2002, interim report January-September 2002
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 analyst and press conference on Wednesday, 13 February 2002.
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