Skandia Comes In from the Cold


Just three years ago, Skandia was the toast of Sweden. The insurance giant was wildly profitable. It had made successful forays outside its home market. And in the U.S., its variable annuities were dominating the insurance scene. As a result, Skandia's shares soared, making it Sweden's No. 2 company.

Then disaster struck. Declining stock markets took their toll. Under pressure, the company sold its U.S. unit, American Skandia, to Prudential Financial Inc. Making matters worse, Skandia's management practices were being questioned by the media.

Shareholders were shocked. Sweden was thought to be immune from corporate corruption, even in the wake of scandals like at U.S.-based multinational Enron, the failed energy giant. Indeed, according to Transparency International, a Berlin-based nongovernmental organization that tracks corruption, Sweden is one of the least corrupt places in the world. Yet suddenly, instead of being the toast of the town, Skandia looked like toast plain and simple.

REASONS TO BELIEVE. Skandia's fortunes, however, have reversed again in recent months. A big effort to reform itself appears to be paying off. Encouraged by a shakeup in management, surging sales, and the results of an internal investigation that blamed former executives for what has been widely characterized as excessive bonus payments and misuse of Skandia's corporate apartments, some now believe that the worst is over for the insurance company.

"Skandia has cleaned up sufficiently to be able to move on and start rebuilding," Richard Burden, an analyst at Goldman Sachs in London, told clients in a recent report (see BW Online, 12/15/03, "Skandia: "A Bit More Down to Earth").

While the share price - at $3.65 as of Dec. 12 -- has yet to reflect a renewed sense of optimism, investors have good reasons to be upbeat. Take Skandia's Swedish sales, which have risen every month since August. In November, they climbed 8% from the same month last year, to $121 million. What's more, Skandia should see "encouraging" sales in the fourth quarter as a whole, according to analysts at Bear Stearns in London. Commerzbank analysts expect to see an improvement in sales margins well into next year.

QUICK CHANGE ACT. The investment firms aren't the only ones who are impressed. Moody's Investors Service has also taken notice. The rise in sales, combined with a recent series of cost-cutting measures and an improvement in cash flow, led Moody's to upgrade Skandia's outlook to "stable" from "developing" on Dec. 10.

Company officials couldn't have been happier. "To me, it's a very positive outcome," Jan Erik Back, Skandia's chief financial officer, told BusinessWeek Online. "They feel the strategic review we've been through is taking effect."

Along with the jump in sales, one of the things that Moody's hinted it was impressed with was the rate at which Skandia enacted management changes. When allegations of wrongdoing surfaced last spring, the chief executive quickly resigned, and Skandia commissioned an independent investigation. Then, when the results of that inquiry were disclosed on Dec. 1, Chairman Bengt Braun stepped down.

NEW LINEUP. While Braun wasn't accused of doing anything wrong, he said he felt his presence would undermine Skandia's recovery, since he was a member of the board when the alleged improprieties took place. Bjorn Bjornsson, head of Skandia Liv, the life-insurance division, stepped up to the position. The final changeover will occur on Jan. 28, when a new board will be nominated at a special general meeting.

The independent investigation commissioned by Skandia last spring just released its report this month found that some former executives "conducted acts that are unsuitable, unethical, and in some cases probably illegal."

The report, by auditor Goran Tidstrom and attorney Otto Rydbeck, revealed that the executives didn't disclose about $81 million in bonus payments from 1997-2000. What's more, it said the former executives provided family members with corporate apartments redone with company money. The officials have denied wrongdoing.

FOCUS ON GROWTH. Those same execs are long gone from Skandia, providing it with a brighter outlook. Even questions about activities at the old U.S. unit, American Skandia, don't keep the bullish awake at night. Skandia recently told investors that Prudential (PRU), the unit's new owner, has received a regulatory request from the Securities & Exchange Commission relating to "the purchase and sale of mutual fund units."

Although Skandia no longer owns the unit, it might have to incur any costs relating to the inquiry. But insiders aren't worried. They say any costs relating to the issue would be insignificant. Analysts at Bear Stearns agree.

Meantime, Skandia's executives are looking forward to shifting their focus to expanding their business. In the months to come, they see growth coming from Australia, China, and Continental Europe. If they're right and business picks up in those areas, Skandia may soon recover to where it was just a few years ago. By Laura Cohn in London


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