III- PERSONS RESPONSIBLE FOR THE UPDATE OF THE ANNUAL REPORT AND INDEPENDENT AUDITORS 122 3.1. Person responsible for the update of the Annual Report and person responsible for investor information 122 3.1.1. Person responsible for the Annual Report (Document de référence) and update thereof 3.1.2. Statement of person responsible 122 3.1.3. Person responsible for investor information
ASSET MANAGEMENT. Asset Management underlying earnings were Euro 154 million, up 30%, benefiting from higher average Assets Under Management, fuelled by solid net inflows of Euro 16 billion12, and cost-control. Total AUM for Asset Management at the end of June 2005, was Euro 809 billion, up 5%13 at constant exchange rates versus December 31, 2004.
Net Income, Group share 1H’05 net income of Euro 2,274 million increased by 31% (or 33% at constant exchange rates) driven by the increase in adjusted earnings. The lower impact from exceptional operations was more than offset by (1) higher profit on financial assets under Fair Value option and derivatives and (2) the nonrecurrence of half-year 2004 goodwill impairment in our Netherlands P&C operation.
Total unrealized capital gains attributable to shareholders reached Euro 10.1 billion as of 6/30/05 of which - Euro 7.5 billion of fair value of invested assets recorded through shareholders’ equity, as mentioned above, - Euro 1.1 billion of unrealized capital gains on real estate and loans (not recorded through shareholders’ equity), stable from December 31, 2004, - Euro 1.5 billion of unrealized gain on Alliance Capital investment (not recorded through shareholders’ equity), up Euro 0.5 billion from December 31, 2004.
Certain statements contained herein are forward-looking statements including, but not limited to, statements that are predications of or indicate future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties and can be affected by other factors that could cause actual results and AXA’s plans and objectives to differ materially from those expressed or implied in the forward looking statements (or from past results). These risks and uncertainties include, without limitation, the risk of future catastrophic events including possible future weather-related catastrophic events or terrorist related incidents. Please refer to AXA's Annual Report on Form 20-F and AXA’s Document de Reference for the year ended December 31, 2004, for a description of certain important factors, risks and uncertainties that may affect AXA’s business. AXA undertakes no obligation to publicly update or revise any of these forward-looking statements, whether to reflect new information, future events or circumstances or otherwise.
(b) Excluding net realized capital gains and change in fair value of assets under fair value option and derivatives, net banking revenues and total consolidated revenues would respectively amount to €200 million and €36,473 million for the period of June 30, 2005.
Group underlying earnings reached €1,761 million, up +26% or €+363 million. At constant exchange rates, the growth was €+393 million, attributable to all operational segments except International Insurance as AXA RE was unfavorably impacted by major losses in the first half of 2005: Life & Savings underlying earnings were up €+183 million. In the United States, incremental underlying earnings coming from Mony was €64 million (or €61 million at current exchange rate). Underlying earnings also included non-recurring impacts in Japanese earnings for €47 million (reported improvement was €+43 million): mainly a positive tax impact (€193 million), reflecting the improvement in recoverability of tax losses carried forward, partly offset by additional VBI and DAC amortization due to a change in future investment assumptions (€-136 million net of tax). Excluding Mony and Japan, underlying earnings were up €+76 million, mainly attributable to France (€+31 million to €249 million), the United States (€+25 million), and Germany (€+15 million to €15 million). The improvement was mainly the result of (i) higher Fees and Revenues (€+261 million), pulled up by France, the US, and the UK, (ii) an improved net technical margin (€+28 million), partly offset by (iii) higher expenses (€-205 million), mainly in the US, UK, and France, and (iv) a decrease in investment margin (€-31 million) , primarily in the US.
tax benefit, the non-recurrence of the 2004 interest charge on the ORAN issued for Mony financing (€10 million), and a tax saving of €8 million related to withholding taxes on dividends received, (ii) partly offset by AXA Financial Holdings (€-18 million at constant exchange rate to €-43 million) due to higher net interest expense principally related to the MONY acquisition.
(ii) Higher result (excluding exchange rates) on financial assets accounted for under Fair Value Option and derivatives (€+135 million to €119 million). This trend was mainly attributable to Life & Savings, Property & Casualty, and Holdings operations.
In Holdings operations (€+48 million to €26 million), AXA SA and other French Holdings showed positive change in fair value of derivatives (iii) Lower goodwill and other related intangible impacts (€+34 million to €-4 million), as Half-
Income tax expenses increased by €4 million to €-120 million as the higher taxable result was partly offset by reduced tax rate.
The underlying cost income ratio has increased from 109.6% to 114.5% in 2005, due to lower business written in the with profit funds.
Adjusted earnings increased by €78 million or €79 million on a constant exchange rate basis to €51 million. This increase was much stronger than the underlying increase due to the negative impact in 2004 adjusted earnings of the transfer of ownership of the Isle of Man subsidiary.
Underlying cost income ratio increased from 74.4% to 76.9% mainly reflecting lower net investment income.
Expenses increased by €5 million to €35 million as lower expenses were more than offset by a lower policyholder bonus rate applied to expenses (similarly to technical items)
Fees & revenues were up by €7 million to €53 million in line with volume growth.
Net technical margin decreased by €9 million to €13 million, reflecting (i) a lower release of insurance reserve on an old-generation guaranteed index-linked product in Italy (€-6 million) and (ii) a €3 million lower mortality margin as a result of a slight deterioration of frequency and average costs on traditional products over the period mainly in Spain.
Underlying earnings increased by €1 million to €25 million as a result of the evolutions mentioned above.
The underlying cost income ratio improved from 47.0% to 46.1% driven by lower expenses reflecting timing differences on expenditure.
Income tax expenses increased by €20 million to €-116 million in line with increased taxable result.
- Other lines (8% of total gross revenues) decreased by 5.9 % mainly due to continued reduction in assumed business.
As a result, the combined ratio improved by 2.5 points to 96.7%.
Adjusted earnings increased by €94 million to €143 million resulting from the improvement of underlying earnings and €56 million higher capital gains, as 2004 experienced realized losses (mainly a negative currency impact on foreign government bonds: €12 million net of tax) whereas realized gains on equities (€+24 million to €36 million) and fixed maturities (€+18 million to €7 million) were recorded in 2005. In 2005, gross capital gains amounted to €41 million.
CANADA Gross revenues increased by €42 million (+11.3%) to €413 million, or €28 million (+7.6%) on a comparable basis. This was mainly due to (i) the positive impact of a strong inflow of policies issued for a set tariff over a 18 to 24 months period (€+19 million) and (ii) increased revenues (€+10 million) in commercial lines as a result of both rate and volume increases.
Underlying earnings group share 55 75 88 Net capital gains attributable to shareholders net of income tax 10 14 19 Adjusted earnings group share 64 88 107 Profit or loss (excluding change) on financial assets (under FV option) & derivatives 1 2 2
Assets under Management (“AUM”) increased by €31 billion from year-end 2004 to €427 billion at the end of June 2005 as net positive long-term inflows (€4 billion), a positive exchange rate impact (€48 billion) and a slightly favorable market impact (€1 billion) more than offset the €22 billion decrease in AUM related to the sale of the Cash Management Services to Federated Investors.
Adjusted earnings increased by €15 million to €102 million or up €20 million at constant exchange rate basis driven by higher underlying earnings and higher net capital gains (€+2 million)
Net income increased by €15 million to €7 million resulting from favorable impact of the change in fair value of macro-hedge derivatives (€10 million compared to €-2 million in 2004).
The Holding company activities consist of AXA’s non-operating companies, including mainly AXA parent company, AXA France Assurance, AXA Financial, AXA Asia Pacific Holdings and AXA UK Holdings.
On a comparable basis means that the data for the current year period were restated using the prevailing foreign currency exchange rate for the same period of prior year (constant exchange rate basis) and eliminated the results of acquisitions, disposals and business transfer (constant structural basis) and of changes in accounting principles (constant methodological basis), in one of the two periods being compared.
Underlying Investment margin includes the following items: (i) Net investment income (ii) Interests and bonuses credited to policyholders and unallocated policyholder bonuses (and the change in specific reserves purely linked to invested assets returns) related to the net investment income.
Underlying Expenses are: (i) Acquisition expenses, including commissions and general expenses allocated to new business, related to insurance products as well as to other activities (e.g., mutual fund sales), (ii) Capitalization of acquisition expenses linked to new business: Deferred Acquisition Costs
Consequently, after the merger, AXA’s consolidated shareholders’ equity would be reduced by an amount comprised between 0.8 and 0.9 billion euros31.
On November 3, 2005, AXA announced the launch of a securitization transaction of part of its French individual motor insurance portfolio. This transaction, truly innovative by the nature of the securitized portfolio, aims at transferring to the financial markets the deviation of the cost of claims above a certain level, in relation to AXA France IARD‘s motor insurance portfolio, which is characterized by high claims frequency and low claims severity.
Since the creation in 1988 of the French securitization vehicle, the Fonds Commun de Créances (FCC) – a debt mutual fund - securitization has been used by French banks as an alternative source of financing, risk transfer and capital management.
New business growth was particularly strong during the third quarter (approximately +10%), notably in Japan, the United Kingdom, Belgium, Hong-Kong, the United States and Australia.
Germany new business was down 23%45, following the strong Life new business boom in 2004 in connection with the reduction of tax privileges, partly offset by the growth in Investment & Savings unit-linked products (+17%). The Health market continued to be negatively impacted by higher social contribution limits introduced at the beginning of 2004 and the continued uncertainty over the potential changes in the Health regulatory environment.
Other Lines (7% of P&C premiums) revenues increased by 1% as the planned reduction of assumed business in Germany was more than offset by UK Health growth.
AXA GROUP Revenues 9M 04 French GAAP/IFRS Reconciliation – Comparison 9M 04 vs. 9M 05 9M 04 9M 05 IFRS revenue change Euro million
Aventis, and director of Sanofi-Aventis 07/2002-04/2005 Chairman and Chief Executive Officer of Vivendi Universal Since April 2005 Chairman of the Vivendi Universal Supervisory Board
1995 – 1997 Chairman, France 1997 – 1998 Chief Executive Officer– South West Europe 1999 – 2000 Chairman EMEA (except Germany) 2000 Chairman EMEA (Europe, Middle East and Africa) Member of the Extended Management Board of SAP AG April 2002 Chairman, Global Field Operations of SAP AG
Ezra Suleiman 1973 – 1979 Professor at the University of California, Los Angeles 1985 – 1998 Chairman of the Commission "Europe", Fullbright Commission 1990 – 1999 Chairman of the Programm Jury - L'Union Européenne, Institut d'Etudes
Officer of AXA Equitable Life Insurance Company Since July 2001 Member of the AXA Management Board
Since February 2003 : Member of the AXA Management Board, in charge of Finance, Control and Strategy
Vice-Chairman of the Supervisory Board of AXA Vice-Chairman of the Management Board of Aventis
Chairman of AXA UK Plc (United Kingdom) Chairman of Fox-Pitt, Kelton Group Limited (United Kingdom) Director or member of the Supervisory Board, Pinault-Printemps-Redoute, Swiss Re Capital Markets Limited (United Kingdom), Binley Limited (United Kingdom), CX Reinsurance (United Kingdom)
Exercise of stock subscription warrants 2.3.3. Self holding shares and Treasury shares as of June 30, 2005
Where financial information in this update of the Annual report and/or in the 2004 Annual Report is not extracted from the Company’s audited accounts, information (other than information which is expressed to have been derived from a source external to the Company) is derived from unaudited Group accounts and data.
Controlled investment funds minority interests liability 4 051 3 223 - Other debt instruments issued and bank overdrafts (6) 8 215 7 784 5 830 4 518 Payables arising from direct insurance and inward reinsurance operations 4 090 3 863 6 062 6 714 Payables arising from outward reinsurance operations 4 304 3 588 1 376 1 598 Payables arising from banking activities 11 783 12 285 12 220 11 563
Net cash provided by operating activities 10 090 9 905 (-) Purchase of subsidiaries and affiliated companies, net of cash acquired (381) (1 478) (+) Disposal of subsidiaries and affiliated companies, net of cash ceded 166 256 (-) Purchase of shares of affiliated companies (18) (45) (+) Disposal of shares of affiliated companies - 261
(7) Under French GAAP, liabilities arising from contracts with financial risk borne by the policyholders are shown within insurance contacts.
According to IFRS, embedded derivatives in financial assets should be separated and accounted for at fair value with change in fair value in P&L if the host contract is not accounted for with the same method and derivatives are not clearly and closely related to the host contract. So far, total embedded derivatives in invested assets which are not accounted for at fair value through P&L in accordance with this method is not material at the Group level.
These gross up adjustments have no impact on opening shareholders' equity.
Share capital and capital in excess of nominal value 18 062 (442) 17 620 Reserves relating to the change in FV of financial instruments available for sale - 3 925 3 925 Reserves relating to the change in FV of hedge accounting derivatives (cash flow hedge) - 41 41 Reserves relating to revaluation of tangible assets - - -
are non-monetary assets, and changes in fair value of available-for-sale equity securities are recorded in the revaluation reserve within shareholders' equity.
1.2. Full year 2004 IFRS information 1.2.1. Scope of consolidation a) Consolidated companies
The main changes in the scope of consolidation in 2004 were the entries of Oudinot Participation in France and AXA America Holding Inc. in the United States, as part of the restructuring of the US reinsurance business. The main removals from the scope of consolidation arose from the disposal of Unirobe’s brokerage business in the Netherlands, the disposal of building society AXA Bausparkasse in Germany and the disposal of AXA Belgium’s Luxembourg subsidiary Créalux.
Amortization of the value of purchased business in force and other intangible assets (468) - - - - - - (468)
Investment property at fair value through Profit & Loss 4 550 4 550 1,15% 0 0 0,00% 4 550 4 550 1,1%
Investment property at amortized cost 9 321 (1 324) (253) 7 744 10 375 Investment property at fair value 4 550 4 550 Macro hedge and speculative derivatives 0 0
Excluding equity-accounted mutual funds (which have a total value of €1,437 million), mutual funds not controlled by AXA were broken down as follows: f) Investment backing contracts where the financial risk is borne by policyholders
AXA INSURANCE HONG-KONG 14 0 0 (0) (1) 13 AXA INSURANCE SINGAPORE 37 0 6 (1) 0 42 ARGOVIE 29 (1) 2 0 (3) 26 BANQUE DE MARCHES ET D'ARBITRAGE 9 0 0 0 (0) 9 CFP - Crédit 32 0 1 0 0 33 AXA GENERAL INSURANCE HK 58 0 9 (5) (7) 55 AXA INSURANCE INVESTMENT HOLDING 5 0 0 (2) 2 5 HILO DIRECT SA DE SEGUROS Y REASEGUROS 21 0 0 0 (21) 0 AXA OYAK (3 Turkish entities) 59 (4) 21 0 (5) 71 AXA Asia Pacific Holdings associates 52 0 3 2 (37) 20 Other 29 14 12 0 (1) 55 TOTAL 345 9 55 (6) (73) 330 * : includes dividend distribution
TOTAL LIABILITIES ARISING FROM INSURANCE CONTRACTS, NET OF REINSURANCE CEDED 253 644 31 765 8 178 293 587
Ceded net pure premiums 421 0 421 Ceded claims paid (406) 0 (406) Reinsurers' share of change in future policy benefits reserve (1) 35 0 35 Ceded technical income and others 49 0 49 Transfers (2) 0 0 0 Change in scope of conso, portfolio transfers and change in accounting principles 393 0 393 Impact of foreign currency fluctuation (198) 0 (198)
Other provisions for risks and charges included €120 million in France, €119 million in the United Kingdom, €101 million at Compagnie Financière de Paris and €95 million in the United States.
The fair value of non-subordinated debt instruments and bank overdrafts was €7,792 million at December 31, 2004. The difference between total fair value and carrying value results mainly from Alliance Capital's fixed-rate bond debt.
Valeur au bilan Alliance Capital Fixed maturities "Senior", 5,625%, expiration date 2006 293
Debt instrument owed to credit institutions at cost 4 924 4 928 Debt instrument owed to credit institutions held as trading - Debt instrument owed to credit institutions designated as at fair value through P&L - Debt instrument owed to credit institutions 4 924 4 928
1.2.16. Derivative instruments a) Derivatives instruments: maturity & notional amount b) Derivatives instruments subject to hedge accounting and other derivatives
Derivatives instruments used in hedge in net investment in a foreign operation
Loans at fair value through profit and loss 374 - 3 377 - - - - 374 - 3 377
Financial investments backing contracts when financial risks is borne by plicyholders 112 380 - 8 112 387 112 380 - 8 112 387
Fees and charges relating to investment contracts with no participating feature - - -
Net change in assets backing contracts where the financial risk is borne by policyholders (unit-linked) 10 543 - 10 543
Change in claims reserve (224) 58 (166) Change in future policy benefits (5 096) 43 (5 053) Change in liabilities arising from contracts where the financial risk is borne by policyholders (unit-linked) (9 717) (7) (9 723)
Change in unearned premiums net of unearned revenues and fees 318 (137) 181
Reinsurer's share in claims paid (1) 659 690 742 (192) 1 900
In a less significant extent, AXA issued in 2004 a Performance Units plan. During the vesting period the performance units initially granted are subject to non-market performance criteria. The value of each performance unit corresponds to an average price of the AXA share before the settlement which is cash-settled in most cases. The total cost for 2004 performance units recorded in earnings for the year ended December 31, 2004 is € 5.1 million.
In December 2004, AXA France granted a one-off stock option plans for its agents generaux. Options are 4 year life and vest immediately. The exercise price is €17.77 and the amount of options granted is 3 million. This plan was valued using the AXA Group plan methodology. The total cost for this AXA France share option plan recorded in earnings for the year ended December 31, 2004 is € 6.9 million; because of the immediate vesting this is the full cost over its life.
Other non-cash items included in income from operating activities (85) Adjustments linked to non monetary items and to investing and divesting activities included in the income from operating activities (3 976)
In accordance with European Union directives, insurance companies organized in European Union member countries are required to maintain minimum solvency margins which must be supported by capital, retained earnings and reserves and, in France or in certain other countries (as approved by local regulators), unrealized capital gains on marketable securities and real estate as reported in regulatory filings. AXA’s insurance operations in countries outside of the European Union are also subject to capital adequacy and solvency margin regulations. At December 31, 2004, management believes AXA’s subsidiaries are in compliance with all applicable solvency and capital adequacy margin requirements.
As recommended by IAS 1, the assets and liabilities are presented in the Balance sheet in increasing order of liquidity which is more relevant than the current/ non current classification for financial institutions. The expenses are presented in the income statement by function which is the classification generally used by insurance industry.
Foreign currency transactions are translated into euro using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at closing date exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except where hedge accounting is applied as explained in section 9.
Other intangible assets include software developed for internal use. The associated direct costs are capitalized and amortized on a straight-line basis over their estimated useful life.
For assets accounted for at amortized cost, including loans and assets classified as “held to maturity”, impairment test is first performed at individual level. If there is no evidence of impairment at this level, then a collective assessment is made for groups of assets with similar risks.
Net investment hedge The accounting of hedges of net investments in foreign operations is similar to accounting of cash flow hedges. Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognised in equity; the gain or loss relating to the ineffective portion is recognised immediately in the income statement. Gains and losses accumulated in equity are included in the income statement on disposal of the foreign operation.
The Group issues contracts that transfer insurance risk or financial risk or both. Insurance contracts, including assumed reinsurance treaties, are those contracts that contain significant insurance risk. Such contracts may also transfer financial risk from the policyholders to the insurer. Investment contracts are those contracts that have financial risk with no significant insurance risk.
Deferred income tax assets and liabilities are recorded on the basis of temporary differences between financial statement carrying amounts and income tax balances of assets and liabilities, and for net operating loss carry forwards, if any. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Therefore, the valuation allowances are recorded for deferred tax assets that are not expected to be recovered.
Minority interests share in net consolidated result 78 33 1 129 (31) (6) - 205
Investment property at amortized cost 10 146 7 523 1,74% 84 62 0,61% 10 230 7 586 1,71% Investment property at fair value through Profit & Loss 4 827 4 827 1,11% - - 0,00% 4 827 4 827 1,09% Macro hedge and speculative derivatives - - 0,00% - - 0,00% - - 0,00%
Write back following recovery in value Other (2) June 30 th, 2004
Financing debts owed to credit institutions at cost 17 17 17 17 Financing debts owed to credit institutions held as trading - - - Financing debts owed to credit institutions designated as at fair value through P&L - - - Derivatives on financing debt owed to credit institutions (1) - - - Financing debt owed to credit institutions 17 17 17 17
(1) Financing debt and Payables arising from banking activities issued are disclosed in the balance sheet net of the impact of derivatives. As a result, the amount shown in the column "value including effect of derivatives" is their net book value.
Liabilities arising from insurance contracts 241 730 81 (85) 241 726 227 843 22 (40) 227 825 Liabilities arising from insurance contracts where the financial risk is borne by policyholders 83 632 0 0 83 632 73 578 0 0 73 578