Recently, Skandia Insurance Company Ltd. (Skandia) has been the subject of a media debate about the findings from independent investigative panels.

At the Annual General Meeting for Skandia Insurance Co Ltd. (parent company) in April 2003, the shareholders requested a review of (i) transactions between Skandia and Skandia Liv, (ii) the principles of the embedded value method, and (iii) the principles, practices and decision-making processes in regard to compensation of company officials and board members. The Board of Skandia therefore commissioned a special investigation into certain, specifically indicated areas, for the purpose of restoring confidence in Skandia. The special investigative panel was headed by Attorney Otto Rydbeck of Setterwalls in cooperation with Authorized Public Accountant Göran Tidström of PriceWaterhouseCoopers.

A separate independent investigative panel was appointed in March 2003 by the Board of Skandia Liv. The panel were to examine business dealings and thereby elucidate the working relationship between Skandia Liv, with its responsibility to the life assurance policyholders, and its parent company Skandia, with its responsibility to the shareholders. Skandia Liv’s board established an investigative panel consisting of Jan Ramberg, Professor Emeritus, Ulla Nordin Buisman, Authorized Public Accountant, and Lennart Låftman, B.Sc. Econ.


The independent investigative panel of Skandia Liv examined a number of business transactions including the sale of Skandia Asset Management (SAM) to Den norske Bank (DnB). The panel presented its findings at the end of September 2003. In its examination, the investigative panel did not find any evidence that the Parent Company improperly profited at the expense of Skandia Liv. However, it ascertained that Skandia Liv’s management, during the period up until the 2002 Annual General Meeting, was clearly lacking in independence in relation to the Parent Company.

Skandia Liv’s board agreed in all essential respects with the assessments and conclusions reported by the independent investigation. In May 2003 the board adopted strict and detailed guidelines for transactions and other relations between Skandia Liv and Skandia. In view of the investigative panel’s findings, Skandia Liv’s board immediately decided to implement changes in relevant parts of its work procedures.


3.1 The Report

The investigative panel of Skandia presented its findings at the end of November 2003.

3.2 Transactions between Skandia and Skandia Liv

The investigative panel did not find any evidence that the Parent Company improperly profited at the expense of Skandia Liv, but that the board of Skandia Liv was clearly lacking in independence. The panel thus came to the same conclusion as the Skandia Liv panel in these respects.

In the media demands have been brought forward requiring that Skandia should transfer funds to Skandia Liv and thereby compensate the policy holders for the losses that Skandia Liv has endured. Upon the instruction of the Board of Skandia the investigation therefore included a legal analyses into whether it would be possible for Skandia Liv or it policy holders to claim compensation from Skandia and whether Skandia can opt to voluntarily compensate Skandia Liv and thereby indirectly its policy holders.

Although the legal situation is not unambiguous it is likely that Skandia cannot freely transfer funds to Skandia Liv. The main reason for this is that although Skandia is the sole shareholder of Skandia Liv it cannot receive dividend from Skandia Liv. Skandia Liv is a limited insurance company (Sw: livförsäkringsaktiebolag) and its articles of association does not permit it to distribute dividend to its shareholders. This shall be considered in light of the fact that the purpose of the business of Skandia is to increase the value to its shareholders. Therefore, since Skandia cannot receive dividend from Skandia Liv a transfer of funds most likely presupposes that the transfer increases the value of the shares of Skandia Liv or is of corporate benefit to Skandia.

If however, Skandia in contravention with the articles of association had received dividend or any benefit that could be compared to dividend from Skandia Liv Skandia would be under an obligation to repay such funds. But the investigative panel did not find that Skandia had received any dividend. Furthermore, the review did not find support for any valid claim by either Skandia Liv or its policy holders against Skandia as a shareholder of Skandia Liv.

3.3 The Principles of the Embedded Value Method

Part of the review aimed at examining Skandia’s principles and use of the embedded value method in its reporting. The review established that the reporting of Skandia has been focused on the embedded value results and that a better balance between statutory accounts and reporting of cash flow and embedded value should be taken. Furthermore, the panel found the reporting at times to have been confusing.

In summary the review resulted in the following recommendations for the board of Skandia in its future use of embedded value results in its reporting.

(a). The differences between the results according to embedded value and statutory reporting should be described.

(b). The assumptions for calculations of embedded value should be accounted for and changes in assumptions from year to year should be explained.

(c). The definitions of KPI and the method used for annual result should not be changed from year to year.

(d). The Board should in connection with the presentation of the annual report be informed of the reasons for changing of assumptions for embedded value calculations.

3.4 Bonus Arrangements

The review included the principles and practices of bonus arrangement for the executive management. The review has shown that the targets for bonus payments for the managing director have not been agreed in writing, that they often have been too easy to reach or ambiguous. Furthermore, some targets have related to circumstances outside the managing director’s control. The review has also indicated that contrary to what must be considered as prudent the bonus targets for the managing director have not been decided by the Board and the resolutions of the remuneration committee in these respects have not been evidenced in minutes. These past practices have been criticised by the panel and the actions in relation to the implementation of the bonus arrangement for the managing director of the then chairman Lars Ramqvist have been found blameworthy.

Incentive Programs

In 1997 Skandia introduced an incentive plan for key personnel that was named "Sharetracker". Participants in the plan were granted phantom options that would give the right to an annual cash payment corresponding to the increase in value of the same number of Skandia shares. The annual payment should not, however, exceed the individual’s an annual salary. Remaining amounts would instead be increased by an annual interest of 8 percent and be paid subsequent years. The outcome of the plan was limited to an amount corresponding to 15 percent annual increase of the shares. The limit was, however, removed shortly after the plan was resolved upon by the Board.

A separate incentive plan was implemented for key employees of Skandia AFS (the business unit for long-term savings). The plan was called "Wealthbuilder" and was primarily intended to include key personnel in the US and UK. The result of the plan was based upon the annual increase of value of Skandia AFS. The value of Skandia AFS was calculated as the total of embedded value and the value of goodwill. The value of goodwill was determined as the value of new businesses for one year increased by a factor of ten. The total result of the plan should not exceed SEK 300 million for its duration (i.e. the years 1998 and 1999).

A stock option plan that would replace both the Sharetracker and the Wealthbuilder was scheduled to be resolved upon by an extraordinary annual meeting of Skandia in January 2000. However, after discussing the proposed plan with some of the major Swedish shareholders of Skandia the Board decided to cancel the annual meeting. Part of the management put extraordinary pressure on the Board to implement a new incentive plan without delay and the Board resolved to prolong the term of the Sharetracker and Wealthbuilder until they were replaced by a new incentive plan. The terms of both programs were thus extended until 15 May 2000, when the annual general meeting resolved to implement a stock-option plan for the years 2000-2002.

According to the stock-option plan 2000-2002 participants were granted options which gave a right to subscribe to the same number of Skandia shares for a price which corresponded to the market price at the time of grant. All employees would be granted a fixed number of stock options and approximately 200 key employees of Skandia would receive an individual grant.

In 2003 a similar stock-option plan was implemented by the annual general meeting. The strike price was however slightly higher as it was determined as the market price at the time of grant with an increase of ten percent.

3.5 The Outcome of the Incentive Plans

The participants of the 2000-2002 plan will not receive any positive outcome of their participation until the market price for Skandia stock exceeds SEK 52.60. The strike price for the stock option of the 2003 plan is set at SEK 20.33 and the term is seven years.

The results of Sharetracker and Wealthbuilder for their initial terms and especially for the extension into the first four and a half months of the year 2000 were exceptional.

In May 2000 the Board became aware of the remarkably high outcome of the Sharetracker for the first few months of that year. The Board then instructed the Compensation Committee to find a way to lock in the outcome of the Sharetracker and link a future payment to the Skandia stock. The compensation committee presented a plan to the board of directors which would achieve the given objectives to a lower cost on behalf of Skandia.

The renegotiation of the outcome of the Sharetracker included new pension benefits for the executive management instead of cash payments of part of their share of the Sharetracker for the year 2000. The review has revealed that cost for the new pension benefits were approximately SEK 70 million higher than what had been presented for the board.

The review has also shown that the outcome of the Sharetracker for the year 2000 has not been correctly accounted for in the annual report and that local incentive plans have not been accounted for at all notwithstanding the considerable amounts that have been paid out under such plans.

The review has shown that participants of the Wealthbuilder took part in the drafting of the plan rules and also in the calculation of the outcome. This practice has given case for criticisms by the panel. The review has shown that the Board has not been aware of the details of the calculations of the outcome of Wealthbuilder and its connection to embedded value and value of new businesses.

The Board decided to prolong the Sharetracker and the Wealthbuilder on unchanged terms. Notwithstanding this, the rules for the prolonged period for Wealthbuilder did not contain any limitation of the outcome for that period. Furthermore, although the cash payment to the participants of the Wealthbuilder for the initial two years was limited to SEK 300 million, the outcome in excess of the established limit for this period was paid together with the payment of the outcome for the year 2000. The rules for the prolongation of the plan were drafted as an amendment to the original plan rules for Wealthbuilder and was signed by Lars-Eric Petersson. The investigation has indicated that Lars Erik Petersson thereby exceeded his authority since the board had not decided to amend the rules of the Wealthbuilder. The total payment under the Wealthbuilder amounted to SEK 663 million for the year 2000.

The full amount paid out under the plan was not included in the reports. The reported amount, however, exceeded the limit of the plan about SEK 550 million. It is the opinion of the investigative panel that the auditors and the board members that were part of the auditing committee should have raised this issue in the auditing committee and the board when the report indicated that the limit had not been applied.

The review further indicated that some persons that received payment under the Wealthbuilder were aware that the total amount paid under the plan exceeded the limitation amount and that any payment in excess of the limitation amount would require a resolution by the board of directors. These persons must also have been aware that no such resolution had been taken. Under such circumstances Skandia could request repayment of amounts paid in excess of the cap to from these persons.

It is also possible that Lars Erik Petersson will be required to compensate Skandia for the damage caused by his actions to amend the plan rules of Wealthbuilder without the proper authority and to effectuate payments exceeding the limit to the participants of the Wealthbuilder.

3.7 Residential Apartments

Another issue that has been the object of extensive debate in the media is the offering of residential leases in buildings owned by Skandia Liv to the executive management of Skandia and their family members. The review has covered the past practices in this respect.

The possibility to offer leases for residential apartments in the recruitment or maintaining of executive management has been found to be legitimate, provided there are proper guidelines in relation thereto. After receiving criticism in the media that residential leases also had been offered to family members of the executive management or board members Skandia has amended its guidelines in this respect.

The justification of offering residential lease to key personnel as part of a recruitment process does not apply to members of the Board and their family members. Therefore, the review has given cause to criticism of Lars Ramqvist’s as well as Lars-Erik Petersson’s and Ola Ramstedt’s actions in relation to leases offered to the son of the chairman Lars Ramqvist.

Furthermore, the review has revealed that Skandia has covered excessive refurbishing costs in relation to residential apartments, which rightly should have been carried by the individuals leasing the apartments. These issues are now subject of police investigations.


The findings of the investigative panel underline the importance of having an independent active board of directors to review the actions of the executive management and independent active auditors. It also highlights the need for clear guidelines in relation to compensations and benefits to the executive management.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.