Royal Skandia’s statement under current market situation

The current volatile markets conditions are understandably causing widespread nervousness. I wanted to write to you to explain the impact of these, in relation to Skandia.

Skandia’s business model is almost exclusively built around providing investors access to a wide range of funds from third party fund managers. As a result we do not rely heavily on borrowing or the use of derivatives like some more traditional insurance companies. Skandia is not a bank, and makes no loans to customers. We therefore have no direct involvement with the primary driver of the credit crunch. In addition, Skandia’s minimal exposure to with-profit and guaranteed products removes solvency risk arising from market declines. Skandia remains profitable.

Looking specifically at Royal Skandia, its robust business model and tight control on costs is evidenced by an 11% increase in profits for the first half of 2008, supported by strong new business flows.

Our parent group, Old Mutual, for the six months ending 30th June, reported a profit from continuing operations (IFRS basis) of GBP 835 million and the Board declared a 6.5% dividend increase which reflects its confidence in the Group’s underlying progress and capital strength.

WHAT ARE THE EFFECTS ON SKANDIA’S CUSTOMERS?

Recent events, coupled with a slowdown in the global economy, have resulted in a period of heightened stock market volatility which in the short term has adversely affected the value of many funds.

Investors have units in these funds, where the value is set either day-to-day or periodically based on the market value of the underlying investments e.g. stocks and shares, property and bank deposits. As the market moves so does the unit price – the value can go up or down. It is important to note that any current investment loss is ‘crystallised’ only when an investor sells their stake in the funds when switching into alternative funds or turning their units into the cash value on the day of sale.

Royal Skandia’s customers are protected against Royal Skandia going into liquidation through the Isle of Man’s Life Assurance (Compensation of Policyholders) Regulations 1991. This covers investors in policies issued by any Isle of Man authorised life company. This means that policyholders will be compensated in the unlikely event that any life company is unable to meet its liabilities.

Under the compensation policyholders will receive up to 90% of the liability of the insurer arising under their policy. This compensation does not apply to losses arising from general market or investment risk on the assets held within the policy – if the provider of such investments fails this compensation does not cover such losses.

The compensation available under the Life Assurance compensation scheme is also often confused with the compensation that may arise under the Banking Business (Compensation of Depositors) Regulations 1991.This covers depositors in respect of sterling and foreign currency deposits made with Isle of Man banking institutions.

In the unlikely event of a banking institution becoming insolvent depositors will receive compensation of 75% of the first £20,000 of a deposit – that is £15,000.

Note – for deposits made by RSLAL in relation to policies this would cover only the first £20,000 of the total deposits across all policies made by RSLAL with an institution. It does not extend to each deposit in relation to individual policies.
We have attached documents entitled ‘Why choose Royal Skandia on the Isle of Man’ and ‘policyholder protection – Isle of Man’.

IN THE UNLIKELY EVENT THAT SKANDIA OR OLD MUTUAL FAIL, ARE THE ASSETS HELD IN MY SKANDIA PRODUCT RING FENCED FROM THE COMPANIES’ ASSETS?

It is a legal requirement that the assets of an insurance company (shareholder assets) are held separately from the assets of policyholders. This ring fencing prevents an insurer taking or using policyholder assets should it fail or seek to avoid failure. Extract from Insurance Act 1987 (Isle of Man)

Part II Records, Accounts, Solvency, etc. section 15.

• (1) Every authorised insurer carrying on long term business shall keep its accounts in respect of such business separate from any accounts kept in respect of any other business.
  
  (2) All receipts of such an insurer’s long term business shall be carried to, and form part of, a special fund with an appropriate name (in this Act referred to as a ‘long term business fund’).
• 
  
• (3) Such an insurer shall maintain books of account and other records such that
• (a) the assets in its long term business fund; and
• (b) the liabilities of its long term business can be readily identified at any time.

PORTFOLIO BOND ASSETS ARE HELD WITH AN EXTERNAL CUSTODIAN. WHAT HAPPENS IF THIS CUSTODIAN FAILS?

It is a legal requirement that assets held by a custodian on behalf of others (for example Royal Skandia) are ring fenced. In other words, these assets must be held separately from the custodians own assets. Therefore should the custodian fail, a client’s assets should be safe.

Should a custodian fail there may however being a delay in being able to deal on the assets during any initial litigation or insolvency proceedings.

SKANDIA FUNDS LINK TO THE FUNDS OF A WIDE RANGE OF FUND GROUPS. WHAT HAPPENS IF ONE OF THESE GROUPS FAILS?

The unit price of the relevant Skandia fund would be affected as the price reflects the value of its underlying assets. Skandia does not provide any guarantees.

In summary, we have a solid business with a clear strategy that continues to operate well throughout these difficult markets. In addition we have a strong balance sheet and capital position.

As always, we appreciate your continued support.

Very best regards

David Macdonald
Head of Sales – Asia
Royal Skandia Life Assurance Limited