Zanders), a double-coated, wood-free paper made of 50% recycled and de-inked fibers and 50% chlorine-free bleached pulp.
In tro du ct io n he decoupling of the real economy and the financial markets, a trend that began in 2000 and grew throughout 2001, became fully apparent in 2002. It is ironic that, as talk of sustainable development - the duty of present generations to ensure that their practices do not harm the prospects of future generations – grows, the world’s financial markets appear to be more than ever engaged in short-term and shortsighted thinking.
Increasingly, securities analysts focus on quarterly earnings and under 12-month forecasts. Institutional investors, whose obligations are primarily long term or very long term, are forced to report on how their investments perform over three months, six months or a year. And it is speculation – orchestrated by hedge funds and traders with sophisticated financial tools and utterly disconnected from underlying business development – which brings wealth or ruin. Regulators believe they are protecting themselves and the economy by pushing for a marked to market basis of valuation, which not only fails to capture economic reality, it also creates volatility and ultimately deprives the markets of all meaning.
disappointing earnings on the part of a banking subsidiary or deterioration in underwriting results – the entire industry feels the backlash immediately. And since shortterm bad news is in steady supply, from asbestos claims to flooding in Germany and severe storms across Europe, and often gets more media coverage than is warranted, the insurance industry has suffered. On the other hand, investors are overlooking information that determines the sector’s ability to create lasting value, such as the fact that the need for savings and retirement products is growing steadily and that the need for risk protection is stronger than ever.
This is why, despite the remarkable turnaround in underwriting results, spectacular reductions in operating expenses, and an improvement in the property-casualty loss ratio in 2002, AXA’s stock performance is far less impressive than its economic performance would lead us to expect. And in economic terms, AXA is clearly in good shape: revenues are growing, cash flows are basically positive across the board, and earnings are on the rise.
This performance owes everything to the remarkable job done by those who work for AXA. Unfortunately, until the markets come to their senses – in other words, until they reestablish contact with the real economy –
this performance will not be reflected, as it ought to be, in AXA’s share price.
What were the key events of 2002 for the AXA Group?
Henri de Castries: Last year was one of unprecedented turbulence in the financial markets, after a year that was already difficult. Due to a number of major natural disasters, the property-casualty insurance loss experience remained high. At the same time, the global financial crisis worsened, and stock market indices plummeted to levels not seen in five years – twenty years in the case of Japan. Severe and prolonged equity market depreciation had an adverse impact not only on our client’s portfolios, but also on the assets of our businesses.
But despite the distressed and uncertain economic backdrop, AXA demonstrated its resilience and its ability to take swift action. All of our people worked hard to achieve our objective of operational excellence, and we began to see the concrete results of their efforts in 2002.
Do the difficulties of the last two years threaten the financial protection and wealth management business? How should we be looking at the future?
On the contrary, our customers are increasingly conscious of the risks to which they are exposed and their protection needs. Increasingly, our customers understand the importance of setting aside savings to prepare for their retirement and of being adequately protected against material losses. In a word, our customers need our advice and our solutions now more than ever.
Second, we were right to concentrate on large markets in which we have the most solid competitive strengths.
• We exceeded the cost savings target set after the events of September 11, 2001.
• Our balance sheet is strong and we continue to reduce our long-term debt level.
Overall, 2002 was a year of genuine progress for AXA, and should encourage us to make further efforts to improve. Indeed, we can and we must.
H. de C.: If they are overused, flavor-of-the-month terms like sustainable development can easily be stripped of their force and meaning. Nevertheless,
After all, our business is really about sustainable development: it requires that we successfully juggle long-term vision, a focus on prevention, and the desire to help our customers prepare for their future.
50 million individuals and businesses have placed their trust in us: • to insure their property (vehicles, housing, equipment), • to provide health and personal protection coverage for their families or employees, • to manage their personal or corporate assets.
employees and distributors worldwide working to deliver the right solutions and top quality service.
Our commitments Through our stakeholder commitments, AXA supports sustainable development in the communities in which we do business.
Environment At AXA, we seek to play an active role in protecting the environment by making available our environmental risk management capability, and by promoting environmentally sound practices in the workplace.
Shareholders At AXA, we seek to satisfy our shareholders by achieving operating performance that ranks among the best in the industry, and by furnishing complete and accurate financial information.
Civil Society At AXA, we seek to live up to our responsibilities to civil society by participating in the life of the community through acts of corporate philanthropy, and by sharing our professional expertise and capacity for innovation.
In 1992, AXA took control of the Equitable Companies Incorporated following the demutualization of Equitable Life.
Mutual Holdings recently changed its name to AXA Asia Pacific Holdings Ltd.
AXA Financial, which is now a 100% owned subsidiary of AXA.
(1) In this annual report: • the “Company” refers to the holding company AXA, organized under the laws of France, • “AXA” refers to the Company and its direct and indirect subsidiaries.
Implementing the principles of corporate governance has been a priority at AXA for many years. Because its stock is publicly traded on the New York Stock Exchange, AXA is subject to the provisions of the Sarbanes Oxley Act, which was passed in the United States in 2002. Accordingly, AXA has made the adjustments required to bring the Company into compliance with the Act. AXA has also reviewed its rules of corporate governance in light of the recommendations contained in the Bouton Report.
It functions in accordance with a set of written operating procedures.
– Françoise Colloc’h (59), Head of Human Resources, Brand and Communications.
– Christopher Condron (55), Head of the Insurance in the United States and Alliance Capital.
– François Pierson (55), Head of the Insurance in France, Large Risks and Assistance.
On the recommendation of the Selection Committee, the Supervisory Board, at its meeting held on February 26, 2003, completed the Management Board by appointing the following members for same term of the other Management
Board members: – Claude Brunet (45), Head of Transversal Operations and Projects.
Members of the Management Board are devoting their time exclusively to the management of the Group and only
The 17 members of the Group’s Executive Committee conduct quarterly business reviews (QBR), during which the prior period’s performance is examined. These reviews were introduced in 2000 to provide a clear and consistent framework for: – reviewing operational performance and monitoring the progress of key projects using quantifiable standards of measurement defined in collaboration with the Management Board; – assessing the progress of transversal projects; – exchanging ideas and information concerning key strategy orientations.
Executive Committee Bruce Calvert Chairman and Chief Executive Officer of Alliance Capital (United States)
Christopher Condron Member of the Management Board, Chief Executive Officer of AXA Financial (United States)
Claus-Michael Dill Chairman of the Management Board of AXA Konzern (Germany)
Jean-Raymond Abat1 Chief Executive Officer of AXA Seguros (Spain) and head of the Mediterranean region
Claude Brunet Member of the Management Board in charge of Transversal Operations and Projects
Supervisory Board must also appoint the Chairman and members of the Management Board and supervise executive management.
Article 12 of the Company’s articles of incorporation and bylaws specifies the subjects for which the Supervisory
– the implementation of all stock option plans (purchase and subscription),
– proposals to amend the bylaws submitted to a vote of the shareholders assembled in an extraordinary meeting,
– proposed appropriations of earnings and determination of the dividend for the year ended submitted to a vote of the shareholders assembled in an ordinary meeting,
The Supervisory Board meets five or six times per year. Its members receive documentation prior to each meeting.
In 2002, the Supervisory Board met five times and the global attendance rate was 86%.
The Supervisory Board understands the importance of self-review. To this end, members were asked to complete a survey in November of 2002. In their replies, members stressed the quality of their exchanges with the Management
David Dautresme, Michel François-Poncet, Henri Hottinguer, Gérard Mestrallet, Edward Miller and Alfred von
Acting on the recommendation of the Selection Committee, the Supervisory Board has decided: – to recommend that the Management Board ask the shareholders to reappoint the mandate of Messrs Jean-René
The Company considers that the most pertinent basis of measurement with respect to the independence of the members of the Supervisory Board is their independence with respect to the management function exercised by the
Acting on the recommendations of the Selection Committee, the Supervisory Board has reviewed the status of all its members for compliance with the recommendations contained in the Bouton Report on corporate governance in publicly traded companies and, for members of the Audit Committee, with the provisions of the Sarbanes Oxley Act.
According to the criteria set forth in the Bouton Report, 9 of the 13 Supervisory Board members are independent: Messrs Thierry Breton, Jacques Calvet, David Dautresme, Anthony Hamilton, Henri Hottinguer, Gérard Mestrallet,
Members of the Supervisory Board (as of the annual general shareholders’ meeting held on April 30, 2003): Claude BEBEAR (67)
Chairman and CEO of Vivendi Universal; Member of the Board of Directors of Aventis, EADS (Netherlands), AXA Financial (United States), Mutuelles AXA and Cap Gemini; Chairman of the Supervisory Board of Vivendi Environnement and Groupe Canal+.
Senior Advisor, Lazard Frères; Chairman of Parande Développement (Groupe Euris); Member of the Board of Directors or Supervisory Board of Lazard Frères Banque, Casino, Club Méditerranée and AXA Investment Managers.
Chairman of Fox Pitt, Kelton Group Limited (UK), Fox Pitt, Kelton Nominees Limited (UK), AXA UK Plc (UK) and AXA Equity and Law (UK); Member of the Board of Directors or Supervisory Board of AXA Financial (United States), Fox-Pitt Kelton Limited (UK), PinaultPrintemps -Redoute and Swiss Re Capital Markets Limited (UK).
Chairman and CEO of Financière Hottinguer; Chairman of the Supervisory Board of Crédit Suisse Hottinguer and Emba NV (Netherlands); Vice Chairman of Gaspee (Switzerland); Chairman of the Board of Directors of Hottinguer Capital Corp. (US); Chairman and CEO of Sofibus; SEVP and member of the Board of Directors of Intercom; Member of the Board of Directors of Finaxa, AXA France Iard, AXA France Vie and AXA France Collectives.
Chairman and CEO of Schneider Electric; Member of the Board of Directors or Supervisory Board of Finaxa, Vivendi Universal, Norbert Dentressangle Group and Mutuelles AXA.
Chairman and CEO of Suez; Chairman of the Board of Tractebel (Belgium) and Société Générale de Belgique (Belgium); Vice Chairman of Hisusa (Spain) and Sociedad General de Aguas de Barcelona (Spain); Member of the Board of Directors or Supervisory Board of St-Gobain, Crédit Agricole S.A., Taittinger and Pargesa Holding S.A. (Switzerland).
Chairman of Lazard Paris (SAS); Chairman of the Supervisory Board of Eurazeo; member of the Board of Directors or Supervisory Board of Saint Gobain, Pinault-Printemps-Redoute, Cap Gemini Ernst & Young and Sofina (Belgium).
(*) The most recent request that Supervisory Board members adjust their shareholdings in light of stock price trends was made in August 2002. Such requests are made from time to time.
(1) Independent. (2) Shareholders will be asked to consider reelection at the Annual General Meeting on April 30, 2003. (3) Shareholders will be asked to consider his appointment at the Annual General Meeting on April 30, 2003.
In 1990, AXA established special Committees to implement its principles of corporate governance.
In January 1997, when AXA adopted its current structure of corporate governance (by a Management Board and a
Supervisory Board), the Supervisory Board formally set up four special Committees, whose Chairmen and members it appoints and whose rights and duties it specifies.
Committee Chairmen are asked to report on completed committee work at the next scheduled Supervisory Board meeting.
The general principles pertaining to the role, organization and operating procedures of sub-committees are set forth in the Supervisory Board’s internal regulations.
It also examines the financial documents issued by the Company in connection with the closing of the accounts for each reporting period,
– may request internal and external audits where necessary and reports the findings to the Supervisory Board.
– holds separate meetings with the head of Group Internal Audit as often as required,
– is consulted on the selection and replacement of Group and subsidiary independent auditors,
– assesses the disinterestedness of independent auditors by examining their relationships with the AXA Group and, in particular, by verifying the accuracy and completeness of invoices submitted for audit work.
The principal subjects considered by the Audit Committee in 2002 are indicated below: – annual and interim financial statements,
– methodology for calculating allowances to reserves for other-than temporary depreciation,
– reviews all proposed material financial transactions involving AXA that are put forward by the Management Board,
The primary subjects considered by the Finance Committee in 2002 are indicated below: – AXA’s financial structure,
– the restructuring of the banking division and the integration of Banque Directe,
The Compensation Committee has four members, three of whom are independent: Messrs Henri Hottinguer
The Compensation Committee: – recommends to the Supervisory Board the compensation levels of members of the Management Board, the amount of directors’ fees paid to Supervisory Board members - subject to the approval of the shareholders - as well as proposed grants of AXA stock options to members of the Management Board (which may either be subscription or purchase options),
The primary subjects considered by the Compensation Committee in 2002 are indicated below: – compensation paid to members of the Management Board and the Executive Committee,
– total number of stock options to be granted to employees of the AXA Group, the allotment of stock options to members of the Management Board, information on the allotment of stock options to Group employees by operating unit.
Executive compensation consists of both a fixed and a variable component. The fixed component is calculated on the basis of local market conditions, within the top quartile range. The variable component is linked to the global financial performance of AXA, local company performance, and individual performance, weighted to take into account individual levels of responsibility. The portion of the variable component tied to individual performance objectives comprises the principal component of annual compensation, in such a way that, if these objectives are met, compensation will be situated within the upper range of the going market rate.
The increase in the variable component paid in 2003 in respect of 2002 for 12 of the 17 Executive Committee members reflects: – an improvement in Group earnings (in 2001, the variable component was lower for some members); – a change in duties that led to membership on either the Executive Committee or the Management Board, placing the individuals in question in a higher compensation bracket.
Fixed Variable compo- Directors’ Benefits Total Variable Total Variable Total component nent earned in fees in kind compensation component compensation component compensation for 2002 2002 and paid paid in 2002 paid in respect for 2001 paid in for 2000, paid paid in 2002 in 2003 2002 of 2002 paid in 2002 2002 paid in 2003 in 2001
L. Owen (Australia) (8) 526,313 not established 0 157,786 not established 789,469 1,473,568 626,021 1,176,051
(1) C. Brunet joined the AXA Group on April 2, 2001 and was appointed to the Management Board on February 26, 2003. His compensation for 2001 reflects nine months of service.
(5) Compensation and benefits paid to J.-R. Abat include benefits paid in respect of his expatriate status in Spain. (6) D. Holt joined the AXA Group on September 4, 2001. Consequently, his compensation for 2001 reflects four months of service. (7) N. Moreau was appointed to the Executive Committee since February 26, 2003. (8) Compensation paid to L. Owen reflects the benefits earned in connection with his expatriate status in Australia. Variable compensation levels for 2002 will be established in the second quarter 2003.
(9) S. Tulin opted for the deferred payment of 25% of the fixed and variable components of his compensation. The amounts indicated reflect the full amount of his compensation. In addition, the amount of compensation paid in respect of 2001 includes a one-off amount of 8,960,000 euros paid in connection of the buyout of minority interests in AXA Financial and 335,979 euros paid in connection with the cancellation of his options in AXA Financial.
Due to the different tax systems in countries where AXA’s executive officers are located, it is difficult to make meaningful comparisons of compensation and benefits earned by Executive Committee members. For information, the relevant marginal tax rates are as follows: Germany: 49.60%1; Australia: 47%; Belgium: 60%; the United States: 45.01% and 43.12% (respectively, for New York and Philadelphia); France: 59.58%, including an additional 10% for social taxes; the United Kingdom: 40%.
The members of the Supervisory Board do not receive remuneration, with the exception of a fee for attending meetings.
The amount of directors’ fees paid to AXA’s Supervisory Board members is detailed in the table above on Supervisory
– a portion of the remainder is distributed among the members of the Supervisory Board in proportion to their actual attendance at the meetings of the Supervisory Board,
In light of the importance of their role, the proportion of directors’ fees paid to the members of the Audit Committee has been increased.
The Supervisory Board gives its prior authorization to implement stock subscription or stock purchase options.
As of December 31, 2002, 2,648 AXA employees had been granted stock options.
In general, stock options are granted during the first quarter of the year, before the restricted period of 10 trading days prior and after the publication of the annual financial statements.
At the end of each half-year period, the members of the Supervisory Board are also required to inform the Chairman of the Supervisory Board of any transactions made in Company securities. The Company pools the information to file a declaration to the securities markets regulator, the Commission des Opérations de Bourse (COB). This declaration does not include personal identifiers. Each member of the Supervisory Board is also required to inform the Company of any situation concerning him or her that could create a conflict of interest with the Company or companies of the
Most of AXA’s principal operating subsidiaries have developed code of ethics that complies with local regulatory and statutory requirements.
Through its stakeholder commitments, AXA supports sustainable development in the communities in which it does business.
EMPLOYEES: AXA seeks to contribute to the satisfaction and fulfillment of them by promoting respect and empowerment in the workplace, and by providing regular training and development opportunities.
SUPPLIERS AND NON-EXCLUSIVE DISTRIBUTORS: AXA seeks to maintain quality relationships with them by adhering to a clearly defined code of conduct, and by promoting ongoing dialogue.
CIVIL SOCIETY: AXA seeks to live up to our responsibilities to them by participating in the life of the community through acts of corporate philanthropy, and by sharing our professional expertise and capacity for innovation.
You will find social and environmental data concerning AXA in the Management Board report prepared for and submitted at the Annual General Meeting of April 30, 2003. This document is available from AXA headquarters on request. In addition, the AXA Group activity report for 2002 is mainly devoted to best sustainable development practices adopted by AXA subsidiaries.
SHARES The AXA stock is listed on Euronext Paris SA on the Premier Marché (continu A), Euroclear France code: 12062 and, since June 25th 1996, on the New York stock exchange under American Depositary Shares (ADS) representing one
Shares created since January 1st 2003 by exercise of convertible or subscription bonds are listed au comptant on the Premier Marché until they are assimilated after the 2002 dividend cutting off on May 7th 2003.
Number of bonds in circulation at February 15, 2002 165 euros 1,524,489,945 euros 14 years, 10 months and 21days from Fabruary 9, 1999: 1.01 share for 1 bond in total a January 1, 2004 at 230.88 euros per bond, i.e. 139.93% of the notional amount
– at any time through open market purchase or over the counter,
– At any time, by issuer agreement, at 230.88 euros if the number of bonds in circulation is below 10% of the number of bonds issued.
165.50 euros 1,099,999,722 euros 16 years, 10 months and 13 days from Fabruary 17, 2000: 1.01 share for 1 bond in total a January 1, 2017 at 269.16 euros per bond, i.e. 162.63% of the notional amount
– by issuer agreement, in cash, from January 1, 2007 at a price with a gross 6.00% actuarial yield, if the Company's share average over 10 consecutive days is above 125% of the anticipated repayment price,
Convertible subordinated bonds AXA 1999/2014 are listed au comptant on the Premier Marché of the Paris stock exchange.
AXA Convertible Bonds (2.5% 1999-2014) transactions Calendar Highest stock price Lowest stock price Period Volume (in euros) (in euros)
Convertible subordinated bonds AXA 2000/2017 are listed au comptant on the Premier Marché of the Paris stock exchange.
– phase II (December of 2002): a second issue, open to all Group employees through voluntary contributions.
A total of 27,173,513 new shares were issued, each with a par value of 2.29 euros. These shares began earning dividends on January 1, 2002.
As of December 31, 2002, AXA employees owned 70,076,322 shares, i.e. 3.98% of the Group’s capital and 4.17%
The global financial market conditions in 2002 were a bleaker version of 2001. The stock market performance deteriorated for the third consecutive year, more or less on a worldwide basis. The MSCI World total return index lost 25%
Iraq all combined to depress markets. In Europe, the Stoxx 50 fell by 35%, with the German DAX down 44%, the
French CAC 40 down by 34% and the UK FTSE 100 down by 25%. In Japan, the Nikkei closed down 19%, having reached a 19-year low in mid-November. In the US, the Dow Jones fell by 17%, the wider S&P 500 fell by 23% and the technology heavy Nasdaq by 22%.
(down just 14.5% and 19.9% respectively)1. The worst affected sectors included technology (– 56.9%) and insurance
The diversification of AXA’s revenue base, both in geographic and product terms enabled the Group to report a growth in revenues of 4.6% on a comparable basis compared to 2001. Strong Life & Savings growth in the US and Japan offset weaker sales in France and the UK, which nevertheless demonstrated strong growth in Property & Casualty revenues. The benefit of this diversification also showed through at an underlying earnings level, with Property &
AXA’s full year earnings were announced on February 27, 2003. Net income of €949 million was ahead of market expectations. Overall, the market was impressed by the 10% improvement in underlying earnings, which demonstrated that AXA has a strong operational story. The expense reduction of €966 million was well ahead of the original target.
INSTITUTIONAL INVESTORS AXA aims to develop and maintain a close relationship with its investors.
The publication of its interim and annual results is followed by a series of roadshows in all the major financial centres of the world, where the executives of AXA meet with the major shareholders of the Group. In 2002, more than 375 meetings, in fifteen countries, took place with investors. In addition to these meetings, a number of presentations are dedicated to major institutional shareholders which include; presentation of results twice a year, presentation of embedded value, presentations of the different Group activities; in the US, France and the UK, as well as presentations at 16 insurance industry conferences.
All Group communication – press releases, results presentations, conference presentations etc. are available on the
Group website at www.axa.com. Presentations of the results are webcast and also accessible by conference call.
As members of this club, shareholders receive: – The Shareholders’ Circle newsletter, published to coincide with the publication of interim and annual earnings releases and the annual general meeting,
The percentage on thhe left represents the economic interest and the percentage on the right represents the percentage of control. (a) Holding company that owns The Equitable Life Assurance Society of the United States. (b) Holding company that owns AXA France Vie, AXA France IARD, AXA France Collectives and Direct Assurance. (c) Holding company that owns The National Mutual Life Association of Australasia.
(d) New corporate name as at November 15, 2002 (formerly AXA Corporate Solutions).
* * December 31, 2000 financial data (as reported) have been presented under a new base of presentation following the implementation of new French Regulations effective January 1, 2001.
**** Since 2000, the operating results of AXA Group have been presented on a basis referred to as “Adjusted Earnings”, which represent AXA’s consolidated net income before the impact of exceptional operations and amortization of goodwill. Underlying Earnings correspond to “Adjusted Earnings” excluding net investment gains attributable to shareholders and the cost of September 11th events. Adjusted Earnings and Underlying Earnings are non-GAAP measures, which management believes provides a meaningful understanding of the results. It should be noted that “Adjusted Earnings” and “Underlying Earnings” as defined, may not be comparable with similarlytitled measures reported by other companies as it is not defined under either French GAAP or U.S. GAAP.
ADJUSTED EARNINGS (GROUP SHARE) (b) 1,357 1,201 2,292 2,540 Adjusted earnings per ordinary share (basic) (c) 0.78 0.70 1.51 1.67 Adjusted earnings per ordinary share (diluted) (c) 0.78 0.70 1.44 1.60
Impact of exceptional operations 235 – 1,431 1,643 Goodwill amortization (Group share) (643) (681) (279) (279) NET INCOME (GROUP SHARE) 949 520 3,444 3,904 Net income per ordinary share (basic) (c) 0.55 0.30 2.27 2.57 Net income per ordinary share (diluted) (c) 0.55 0.32 2.15 2.44
(c) 2000 per share data are restated to take account of the 4-for-1 stock split approved by the shareholders on May 9, 2001.
Represented by Net Income, group share (in million euros) 949 520 3,904
At December 31, At December 31, At January 1, At December 31,
– Belgium (including AXA Bank Belgium) (e) 5,973 5,695 5,695 5,381
Other Financial Services (excluding AXA Bank Belgium) (e) 480 622 864 836
Personnel of non-consolidated companies or companies accounted for using the equity method are not included in the above table. Personnel of companies proportionally consolidated are included, pro-rata, in accordance with the percentage of consolidation.
Fitch emphasizes that these ratings reflect its view of AXA’s strong competitive position as one of the world’s largest providers of insurance and financial services, benefiting from an exceptional geographic diversification and key competitive advantages provided by its size as well as by a unified brand name. Fitch also underlines the excellent quality of the management team, who demonstrated in 2002 its capability to react to a difficult environment, reducing costs and improving non-life profitability.
Affected by both the downturn of the equity markets over the past 18 months and a number of large claims in 2001,
Standard & Poor’s emphasized that these ratings are based on the Group’s extremely strong business position, strong operating performance, and very strong capitalisation and financial flexibility.
“Embedded Value” (EV) is a valuation methodology often used for long term insurance business. It attempts to measure the present value of cash available to shareholders now and in the future. This value can be considered in two pieces: 1) “Adjusted Net Asset Value” (ANAV) which measures the current balance sheet wealth and 2) “Present Value of Future Profits” (PVFP) which measures the present value of future shareholder profits for business currently in the portfolio.
EV is not an estimate of AXA’s “fair value”, regardless of how one might define “fair value”. It does not include the value of business to be sold in the future, nor make full allowances for value across a range of different scenarios.
on new business, and also the upfront costs associated with acquiring new business (often called “strain”). Therefore
2002 2001 Change Change on a constant (%) exchange rate (%)
Life NB APE (c) Margin 14.4% 17.0% (2.6 pts) – (a) In this section, “Life” will refer to the whole “Life & Savings” activities at the Group. (b) New Business Contribution. (c) New Business Annalyzed Premiums Equivalent.
“Annualized Premium Equivalent” (APE) is a measure of new business volume which includes sales of regular recurring premium business at 100% but sales of single premium business at only 10%. The “APE Margin” is the ratio of NBC
AXA publishes PVFP only for its life and savings business. AXA's ANAV calculation does include elements for all of its business.
The other ANAV includes unrealized capital gains or losses including those on investment management companies: Alliance Capital (market value basis with control premium) and AXA Investment Managers (estimated value based on third-party assets under management). Other ANAV also includes the value embedded in undiscounted policy liabilities, and intangible assets are not eliminated.
– expenses are adjusted for non-recurring expenses and one-time strategic spending,
– no benefit from future mortality improvement on Life business is included, while annuity business does have an allowance for the costs of longevity increasing,
– a weighted average equity return of 7.7%, and risk-free return of 4.6%.
Euro per share difference from the base case): Sensitivities PVFP Impact NBC Impact
Upward parallel shift of 100 bp in reinvestment rates 0.42 0.02 Downward parallel shift of 100 bp in reinvestment rates (0.63) (0.02) 100 bp increase in the discount rate (0.69) (0.08) 10% decrease in lapse rates 0.38 0.05 10% permanent decrease in expenses 0.45 0.03 10 bp increase in general account spread 0.40 0.02 100 bp increase in asset return for unit-linked business 0.20 0.03 Life mortality improvement 50 bp per year(a) 0.12 0.01 10% higher equity markets at start of the projection 0.47 0.04 10% lower equity markets at the start of the projection (0.44) (0.04) 100 bp increase in total asset return in all future years 1.96 0.10 100 bp decrease in total asset return in all future years (2.42) (0.11) 100 bp increase in Japan discount rate (0.06) (0.02)
Based on available information at December 31, 2001, AXA was the French, European and world’s largest insurance group1, with consolidated gross revenues of €74.7 billion for the year ended December 31, 2002. AXA is also one of the world’s largest asset managers, with total assets under management as at December 31, 2002 of €742 billion, including assets managed on behalf of third party clients of €376 billion. Based on available information at December 31, 2001, AXA was the world’s 6th largest asset manager2 with total assets under management of €910 billion.
AXA operates primarily in Western Europe, North America and the Asia Pacific region and, to a lesser extent, in other regions including the Middle East, Africa and South America. AXA has five operating business segments: Life &
Savings, Property & Casualty, International Insurance (including reinsurance), Asset Management, and Other Financial
Consolidated gross premiums, Adjusted earnings and Net income Years ended December 31,
Consolidated gross premiums and financial services revenues 74,727 100% 74,832 100% 79,971 100%
Adjusted earnings from operating segments 1,701 100% 1,519 100% 2,234 100%
(a) Proforma New French GAAP as if New French GAAP had been applied since January 1, 2000. (b) Gross premiums received from policyholders in respect of Life & Savings products which are classified as “universal life” or
“investment contracts” (including separate account (unit-linked) products) for U.S. GAAP, are recorded as revenue under French GAAP. Under U.S. GAAP, such amounts received are recorded as deposits, and only the policy-related fees charged to the policyholders for costs of insurance, administration, investment management, etc, are recorded as revenue.
The table below presents the total assets managed by AXA’s entities, including those assets managed on behalf of third parties (fair value): The table below presents AXA’s consolidated gross premiums and financial revenues by segment for each of its major geographic markets for the years indicated: (in euro millions)
AXA 275,531 287,728 305,546 Separate (unit-linked) account assets 90,458 115,723 117,261 Subtotal 365,989 403,451 422,807 Managed on behalf of third parties 375,567 506,546 471,674 TOTAL 741,556 909,997 894,481
Breakdown of AXA’s gross premiums and financial services revenues Years ended December, 31
AXA Bank Belgium 70% 68% 6% Other financial services and real estate companies 5% 7% 0% (a) Represents the 71% equity interest held in Donaldson, Lufkin & Jenrette that was sold on November 3, 2000.
Life & Savings Gross premiums and financial services revenues Years ended December 31, Gross insurance liabilities
Of which Australia and New Zealand 4% 2,018 2,587 2,399 8,232
The table below presents the Life insurance markets in which AXA operates ranked by worldwide gross premiums in 2001, along with AXA’s ranking (by market share).
In addition to the principal markets discussed above, AXA offers Life, Health and Retirement products in other countries in Europe (Netherlands, Luxembourg, Italy, Spain, Portugal, Austria, Hungary, Switzerland and Turkey), Morocco,
Canada, Australia, New Zealand, Hong Kong, Singapore, and China, as well as other countries in South America,
Africa, the Middle East and the Asia Pacific region. The products offered in these markets are offered through various distribution channels, including general agents, salaried sales forces, bank networks, financial advisers and brokers.
– changes in regulations that may affect the policy charging structure relating to commission and administrative charges.
Total includes: Separate account (unit-linked) contracts 30% 14,344 16,767 19,612 90,011
“With-profit” contracts held in the fund as recommended by the company’s actuary and approved by its board of directors. The regular bonuses are designed to provide a return to the policyholder through a periodic increase in benefits and are credited to the policyholder at regular intervals. Regular bonuses represent a partially smoothed return of investment income, but do not reflect the return earned by the insurance company in any one period. Once credited, regular bonuses are guaranteed to be paid at maturity, death or as otherwise specified in the policy. Terminal bonuses, which are not guaranteed in advance of payment, are designed to provide policyholders with their share of total investment performance (including investment income and realized and unrealized investment gains or losses) and other experience of the participating (“With-profit”) fund (including expenses, mortality experience and income taxes). Terminal bonuses can represent a significant portion of the total amount paid at maturity (often exceeding 50%) or upon surrender prior to maturity. The amount of terminal bonus to be paid is determined at the discretion of management.
Over the past few years, AXA’s Life & Savings operations have experienced significant growth in savings-related unitlinked products. This growth has been notable in Europe and in the Asia / Pacific region and is attributable to (i) an increase in consumer awareness of such products, (ii) government initiatives to move away from state funded pensions to private funded pensions and (iii) favorable financial market performance up to 2000. A similar trend also existed in the U.S. Life & Savings operations. However, due to a significant shift in product mix, as a result of deterioration in the global financial market performance since 2001, gross premiums on such business have decreased from €19.6 billion in 2000 to €14.3 billion in 2002. However, AXA believes it will experience growth in this product area again once financial markets recover and demonstrate sustainable performance.
DISTRIBUTION AXA distributes its Life & Savings products through a number of channels that vary from country to country including notably exclusive agents, independent brokers, salaried sales forces, direct marketing (including internet sales) and specialized networks (including banks and other financial services providers). In Europe, the same distribution channels are used by both AXA’s Life & Savings operations and its Property & Casualty insurance operations.
The distribution channels used by AXA’s principal Life & Savings operations, based on consolidated gross premiums from new business for the year ended December 31, 2002, are presented below: During 2002, several brokers in Belgium became bancassurance distributors and consequently have been reclassified from "Agents and direct sales force" to "Other networks, including direct marketing, corporate partnerships and bank networks".
Based on gross premiums from new business in 2002: Other networks, including
Agents and direct Intermediaries, independent direct marketing, corporate sales force advisers and brokers partnerships and bank networks
(a) In 2001, the split of premiums by networks for France was based on New Business. Based on gross premiums, it should have been 58% for the “Agents and direct sales force”, 34% for the “Intermediaries, independent advisers and brokers” and 8% for “Others”.
(a) AXA Life Insurance Co. and AXA Group Life Insurance Co. (formerly known as Nichidan Life) include the former operations of
Nippon Dantai that were acquired in March 2000. Given that these operations have a September 30 year-end, only six months of results were reported in 2000 as compared to a full year in 2001.
Property & Casualty AXA’s Property & Casualty segment offers a range of personal and commercial insurance products. The Property &
Casualty segment accounted for €15.9 billion, or 21% of AXA’s consolidated gross premiums and financial services revenues for the year ended December 31, 2002 (2001: €15.9 billion or 21% respectively).
MARKET In 2002, the Property & Casualty market continued to grow with increases in premium rates that allowed companies to partly compensate (i) the unfavorable effects of further claims deterioration from numerous and significant climatic events, such as floods, mainly in France, Central Europe, the United Kingdom and Italy, and (ii) the increased cost of reinsurance following the impact of the U.S. terrorist attacks on September 11, 2001.
AXA’s principal Property & Casualty insurance subsidiaries are set out below: – France: AXA France IARD (a result of a merger in 2002 between AXA Assurances IARD, AXA Courtage IARD and
Hungary, Canada, Morocco, Turkey, Japan, Singapore, and Hong Kong, as well as other countries in South America, the Middle East, Africa. The products offered in these markets are offered through various distribution channels, including brokers and direct sales force.
COMPETITION The nature and level of competition vary among the countries in which AXA operates. Overall, the Property & Casualty insurance industry in each of AXA’s principal markets is highly competitive, with surplus underwriting capacity leading to low premium rates. The principal competitive factors are as follows: – price,
– changes in regulations, which may affect premium rates charged or claims settlement costs paid, and
Based on worldwide gross property & casualty premiums written in 2001 Country statistics (a) AXA (b)
(a) Source: Swiss Re Sigma report 6/2002 “World insurance in 2001”, measured in U.S. dollars. (b) In general based on 2001 market data for each specific country or an estimate for 2002. (c) Based on 2000 gross Property & Casualty premiums written in Germany, AXA is ranked as follows: second in liability insurance
(8.4% market share), seventh in homeowners’ insurance (4.9% market share), fourth in automobile insurance (4.5% market share). (d) The UK product lines, based on gross earned premiums, are ranked as follows: fourth in personal automobile insurance (5.2%
market share), fifth in homeowners/domestic property insurance (4.1% market share), fifth in commercial vehicle (4.5% market share) and third in total commercial property (8.3% market share).
PRODUCTS AXA’s Property & Casualty insurance operations offer a broad range of products including automobile, homeowners /
household, property and general liability insurance for both personal and commercial customers, the latter specifically focusing on small to medium-sized companies.
Casualty operations. The distribution channels used by AXA’s Property & Casualty operations, based on gross written premiums for the year ended December 31, 2002, are presented below: CEDED REINSURANCE AXA’s Property & Casualty insurance operations use various types of reinsurance, primarily to limit their maximum exposure to catastrophic events, environmental pollution risks and certain other types of risks. Certain insurance exposures are ceded internally to AXA Cessions, which organizes external reinsurance programs. Total gross premiums ceded by the Property & Casualty operations to third party reinsurers in 2002 was €1,146 million (2001: €1,178 million).
Based on gross written premiums in 2002 General agents Intermediaries, Direct sales Other networks, including
AXA’s International Insurance segment business is primarily conducted by AXA Corporate Solutions, which includes both reinsurance activities (AXA Corporate Solutions Reinsurance) and large risks insurance (AXA Corporate Solutions
– AXA announced that it would (i) cease underwriting and renewing contracts on life and non-life reinsurance businesses through its U.S. subsidiaries, and (ii) cease U.S. financial guarantee reinsurance activities carried by
– A separate service company called AXA Liabilities Managers was created to manage the discontinued insurance business, that is, business in “run-off”. Previously, these operations were managed within the AXA Corporate
– AXA Corporate Solutions Insurance focuses its activities on large risk Property & Casualty insurance business for large corporate clients in Europe, as well as in the marine and aviation lines for all clients on a worldwide basis.
International Insurance Gross premiums and financial services segment Gross insurance liabilities
AXA Corporate Solutions 93% 5,335 5,288 3,297 12,141 Of which large risks insurance 31% 1,762 1,698 1,097 5,473 Of which Reinsurance
MARKET AND COMPETITION In the worldwide reinsurance market in 2002, operating conditions were increasingly competitive as a result of (i) the exceptional claims experience in 2001 resulting from the U.S. terrorist attacks on September 11, 2001 and (ii) the continued deterioration in world financial markets. As a result, many competitors took action in order to increase profitability and solvency by increasing premiums, increasing the amount of the deductible paid by the cedant, and tightening of underwriting policies. These conditions are expected to persist in 2003.
In 2002, the large risks insurance market has experienced a similar effect to that of the reinsurance market, with a number of large claims (specifically in property and aviation business), and the unfavourable performance of financial markets.
As in 2001, 2002 was characterised by (i) an increasing demand for risk management and financial analysis, (ii) a demand for risk transfer product such as financial hedgings and special purpose vehicles, and (iii) a global concentration of suppliers (predominantly global insurance brokers and international insurance groups).
The market conditions are expected to tighten significantly in 2003, especially in the general liability product area where legal instability remains high in some countries.
PRODUCTS The table below presents the International Insurance segment’s gross written premiums and gross insurance liabilities by major product for the periods and as at the dates indicated: (in euro millions, except percentages)
AXA CORPORATE SOLUTIONS INSURANCE These operations underwrite large insurance risks for large national and international corporations. The products cover property damage, third party lisibility, marine, aviation and transport; construction risk; financial risk; and directors and officers liability. AXA Corporate Solutions Insurance also offers loss-prevention and risk management services.
CEDED REINSURANCE AXA Corporate Solutions reviews its exposures to ensure that the risks underwritten are diversified geographically and by line of business in order to avoid risk of concentration. Exposure to single events is limited through reinsurance outwards to third-party reinsurers (retrocession contracts). In 2002, AXA Corporate Solutions and its subsidiaries ceded €1,712 million (2001: €1,600 million) to third-party reinsurers (through retrocession agreements). Of this amount in 2002, approximately €767 million, or 45% of total reinsurance ceded to third parties, were placed externally by
Contribution to AXA’s consolidated gross premiums and financial services revenues 3,411 3,730 2,984
Management activities is a key part of AXA’s financial services strategy, which seeks to capitalize on existing strengths and to expand the client base. This strategy is founded on the belief that its Asset Management expertise will enable
The Asset Management segment accounted for €3.4 billion, or 5% of AXA’s consolidated gross premiums and financial services revenues for the year-ended December 31, 2002 (2001: €3.7 billion or 5%, respectively).
AXA has Asset Management specialists in each of its major markets: Western Europe, the United States and the Asia /
ALLIANCE CAPITAL Alliance Capital, through its parent company Alliance Holding, is a subsidiary of AXA Financial and is a leading global investment management firm in the U.S. Alliance Capital provides diversified investment management and related services to individual investors, private clients and to a variety of institutional clients, including Equitable Life (one of
Alliance Capital’s largest institutional clients) as well as unaffiliated entities such as corporate and public employee pension funds, endowment funds, and U.S. and foreign governments.
In 2000, Alliance Capital acquired the business of Sanford C. Bernstein Inc., which complemented Alliance Capital’s growth equity investment orientation, with a highly regarded value equity investment capability, institutional research capabilities and a strong private client business portfolio. In connection with this acquisition, AXA Financial agreed to provide liquidity to the former shareholders of Sanford C. Bernstein who received private Alliance Capital units over an eight-year period following a two-year lockout period. After the completion of this lockout period in October 2002, AXA Financial acquired 8.16 million of the former Bernstein shareholders’ units. The outstanding 32.6 million
Alliance Units may be sold to the AXA Financial at the prevailing market price over the remaining 7 years of the original eight-year period, ending in 2009. Generally, not more than 20% of the original Units issued to the former Bernstein shareholders may be put to AXA Financial in any one annual period.
As at December 31, 2002, Alliance Capital had €369 billion of assets under management, including €322 billion of assets managed on behalf of third party clients (2001: €517 billion and €452 billion, respectively).
AXA IM is one of the largest Asset Management companies based in Europe.
As mentioned before, the assets supporting AXA’s insurance operations (included within the three segments: the Life
& Savings segment, the Property & Casualty segment and the International Insurance segment) consist of a diversified portfolio of investments. These assets are managed principally by AXA’s Asset Management entities: Alliance Capital and AXA Investment Managers: these assets consist of (i) general account assets whereby the insurer generally bears the investment risk and reward, and (ii) separate account (unit-linked) assets, whereby the investment risk and reward is principally transferred to the policyholder.
AXA routinely monitors and evaluates the status of its investments in light of current and anticipated future economic conditions and trends, and other factors. The strategic allocation of assets is generally determined through assetliability analyses for both Life & Savings and Property & Casualty businesses. The strategy may differ across the geographical territories and the different lines of businesses depending on the existing investment mix, the availability of alternative investment vehicles and the underlying nature and duration of the in-force insurance contracts.
At December 31, 2002, based on total invested assets, the net book value of the insurance-related invested assets supporting the general account Life & Savings operations, including those specific assets allocated to the UK withprofit business, primarily consisted of fixed maturity investments and equity investments excluding equity holdings in fixed maturity-based mutual funds of 63% and 16%, respectively (2001: 58% and 21%, respectively). At such date, the insurance-related invested assets supporting the Property & Casualty operations primarily consisted of fixed maturity investments and equity investments excluding equity holdings in fixed maturity-based mutual funds of 49%
The following table presents AXA’s consolidated insurance-related invested assets, including cash and cash equivalents, by insurance segment at December 31, 2002.
Net carrying Market Net carrying Market Net carrying Market Net carrying Market Net carrying Market value (a) value value (a) value value (a) value value (a) value value (a) value
Of which equity holdings in fixed maturity-based mutual funds 13,418 13,278 2,906 2,902 201 264 16,526 16,444 – –
(d) Refer to note 3 to AXA’s consolidated financial statements included in this annual report that set out the investment valuation methodology.
AXA did not have any other equity and / or fixed maturity investment in any one issuer that was in aggregate 10%
AXA’s fixed maturity and equity investments, are predominantly publicly traded. In respect of these investments, 86% (versus 89% in 2001) of the fixed maturity investments and 90% (versus 94% in 2001) of the equity investments are held by AXA’s principal insurance operations in France, the United States, the United Kingdom, Germany, Belgium and Japan.
Derivatives. AXA uses derivative instruments to minimize adverse fluctuations in equity prices, interest rates, foreign exchange rates and equity prices. The basis for which AXA manages these risks, the sensitivities associated with managing these types of risks, and the potential impact on the AXA consolidated financial results are set out in further detail in note 29 to the consolidated financial statements included in this annual report.
Fixed maturity investments: Related assets at year end 129,019 123,296 112,203
Equity investments (including trading accounts): Related assets at year end 48,175 54,950 54,345
Other assets, cash and cash equivalents: Related assets at year end 11,233 11,828 22,062
Total invested assets: TOTAL INVESTED ASSETS AT YEAR END 219,518 222,830 225,351
(a) The investment yields were calculated on a constant structual basis using the average net carrying value of invested assets (for each category) in the period. The 2000 investment yield data excluded the realized gains on the sale of DLJ and the realized losses and valuation allowances in respect of the U.S. high-yield bond portfolio. The realized gains were net of realized losses and included the net change in valuation allowances on impaired assets as well as the unrealized gains and losses on investments carried at market value, notably the assets supporting the UK “With-profit” contracts.
Total invested assets: TOTAL INVESTED ASSETS AT YEAR END 32,721 33,083 32,434
(a) The investment yields were calculated on a constant structual basis using the average net carrying value of invested assets (for each category) in the period. The realized gains were net of realized losses and included the net change in valuation allowances on impaired assets.
Fixed maturity investments: Related assets at year end 5,206 4,506 4,688
Equity investments (including trading accounts): Related assets at year end 1,554 1,779 1,613
Other assets, cash and cash equivalents: Related assets at year end 1,897 1,597 1,181
Total invested assets: TOTAL INVESTED ASSETS AT YEAR END 9,388 8,249 7,894
However, establishment of claims reserves consists of uncertainties: given a segment, futur claims payments can exceed claims reserves amount.
AXA continually reviews the adequacy of the established claims reserves, including emerging claims development, and actual claims experience compared to the original assumptions used to estimate initial gross claims reserve. Based on current information available in the preparation of the consolidated financial statements included in this annual report, AXA considers that these provisions are sufficient.
The Property & Casualty loss reserves that were excluded from the Loss Reserve Development Table represented 12.9% of total gross Property & Casualty insurance liabilities at December 31, 2002 (2001: 13.5%). For further information, refer to the "Reconciliation of Loss Reserves to Consolidated Financial Statements" table following the
The upper portion of the table entitled “paid (cumulative)” represents the cumulative amount paid as of the end of each succeeding year with respect to the original gross claims reserve liability reported. The lower portion of the table entitled “Reserve re-estimated” represents the previously recorded liability as adjusted (that is, re-estimated)
based on claims experience as of the end of each succeeding year. The estimate is increased or decreased, as more information becomes known in future periods relating to unsettled claims. For example, the gross claims reserve as at December 31, 1994 was originally €5,595 and increased by €9,872 million to €15,467 million primarily due to the
The majority of the business of the Property & Casualty insurance operations is short tail and, therefore, losses develop and are paid relatively quickly. In 2002, approximately 38% of the claims reserves were paid in the year that the claim event occurred (2001: 42%).
In respect of the direct insurance business in 2002, there were no reportable changes in the claims payment patterns.
In addition, (i) there have been no significant changes in assumptions during the current year and (ii) there have been certain unfavorable developments in the United Kingdom due to reserve strengthening (€262 million).
Eight years later 11,915 11,663 12,166 Nine years later 11,264 11,652 Ten years later 11,228
Initial net claims reserves in excess of (less than) re-estimated net claims reserves: 850 1,077 1,295 2,189 2,450 2,595 2,644 2,966 3,062 4,216 3,758 Paid (cumulative) at: Seven years later 915 932 1,106 1,759 Eight years later 982 991 1,156 Nine years later 1,030 1,032 Ten years later 1,066
Reserve re-estimated at: Four years later 1,222 1,428 1,643 2,818 2,844 3,045 3,643 Five years later 1,374 1,403 1,653 2,755 2,754 2,941 Six years later 1,348 1,413 1,681 2,678 2,612 Seven years later 1,366 1,473 1,622 2,558 Eight years later 1,444 1,422 1,552 Nine years later 1,399 1,360 Ten years later 1,344
Cumulative redundancy (deficiency) from the initial gross claims reserves in excess of (less than) re-estimated gross claims reserves (403) (176) (56) (107) 34 (61) (583) (559) (606) (54)
Re-estimated net claims reserves: 1,070 993 1,173 1,819 1,839 2,005 2,507 2,637 2,552 3,469
(c) Includes the claims reserves of Abeille Re acquired in 1995. (d) In 2001, the claims reserve of AXA Corporate Solutions Reinsurance were adversely affected by the September 11th attacks.
Claims reserves, including other reserves, gross of reinsurance 45,731 48,927 (a) Represents disability claims and construction reserves.
A summary of the amounts invested in significant transactions is provided below.
In 2000: – AXA Nichidan. In order to develop its activity on the strategic Asian market, AXA has acquired over 95% of Nippon
Dantai Life Insurance Company Ltd. (“Nippon Dantai”). As a result of this acquisition, AXA increased significantly its presence in the Japanese Life & Savings insurance market as Nippon Dantai was the 13th largest Life insurance company and the 2nd largest stock life (non mutual) insurance company in Japan at that time. Following this acquisition, Nippon Dantai has been absorbed by AXA Insurance Holding Co. Ltd., its activity being split between
– Sanford Bernstein. Alliance Capital Management L.P. (“Alliance Capital”), a subsidiary of AXA Financial, has acquired Sanford C. Bernstein, Inc., a U.S.-based Asset manager with assets under management of approximately
Holdings, previously named Sun Life & Provincial Holdings. Based in London, GRE’s insurance operations were located in the United Kingdom, Ireland and Germany. Pursuant to this acquisition, AXA has reinforced its presence in these countries, especially on the Health, Property & Casualty market in the UK.
In 1997, Compagnie UAP. AXA acquired Compagnie UAP (a French holding company for a group of insurance and financial services companies) through a public exchange offer. This acquisition increased significantly AXA’s operations on the Life & Savings as well as on the Property & Casualty markets in Western Europe.
In 1995, AXA Asia Pacific Holdings (previously National Mutual Holdings). AXA acquired a controlling equity interest in National Mutual Holdings (renamed AXA Asia Pacific Holdings), in connection with the demutualization of its subsidiary National Mutual Life Association of Australasia (“National Mutual Life”).
In 1991, AXA Financial, Inc. (previously Equitable Holdings Companies Inc.). AXA invested U.S.$1 billion in
Under the terms of the agreement, AXA retained some of Banque Worms’ business assets, including those related to discontinued businesses, as well as the majority of its investment securities portfolio. In addition, AXA has provided a guarantee to Deutsche Bank covering certain losses that may occur on potential non-performing loans issued by
AXA from time to time considers opportunities that will increase the size and geographical diversity of its worldwide operations in Insurance and Asset Management.
tra te gy an d Ca pi ta l R es ou rc es
Liquidity and capital resources Over the past several years, AXA has expanded its Insurance and Asset Management operations through a combination of acquisitions, joint ventures, direct investments and internal growth. This expansion has been funded primarily through a combination of (i) proceeds from the sale of non-core businesses and assets, (ii) dividends received from operating subsidiaries, (iii) proceeds from the issuance of convertible debt securities and other debt securities, as well as borrowings (including debt issued by affiliates), and (iv) the issuance of ordinary shares.
The Company and each of its major operating subsidiaries are responsible for financing their operations. The Company, as the holding company for the AXA Group, increasingly arranges for and participates in financing the operations of certain subsidiaries. Certain of AXA’s subsidiaries, including AXA France Assurance, AXA Financial, AXA Asia Pacific
does not believe that such restrictions constitute a material limitation on its ability to meet its obligations or pay dividends.
AXA’S INSURANCE OPERATIONS The principal sources of funds for AXA’s insurance operations are premiums, investment income and proceeds from sales of invested assets. The major uses of these funds are to pay policyholder benefits, claims and claims expenses, policy surrenders and other operating expenses and to purchase investments. The liquidity of insurance operations is affected by, among other things, the overall quality of AXA’s investments and the ability of AXA to realize the carrying value of its investments to meet policyholder benefits and insurance claims as they come due.
AXA’s investment strategy is designed to match the net investment results (the investment yield) and the estimated duration of its investments with expected payments on the insurance contracts.
PROPERTY & CASUALTY AND INTERNATIONAL INSURANCE The liquidity needs can be affected by actual claims experience if significantly different from the estimated claims experience (see “Description of business - Claims Reserves”).
Insurance cash flows are generally positive and can be slightly negative in the case of exceptional events. A portion of the assets are invested in liquid, short duration bonds and other listed securities in order to avoid additional liquidity risk that may arise from such events. In the event of large catastrophic or other losses, AXA’s Property & Casualty operations would be able to liquidate a certain amount of their investment portfolios. In periods in which there is unfavorable market performance, the extent to which investments are liquidated to pay one claim increases, as the market value of these investments would be lower.
ASSET MANAGEMENT AND FINANCIAL SERVICES OPERATIONS. The principal sources of liquidity relating to these operations are operating cash flows, proceeds from the issuance of ordinary shares (where applicable), credit facilities and other borrowings from credit institutions.
On a consolidated basis, the aggregate principal payments required to be made on subordinated and nonsubordinated debt instruments issued for 2003 and the four years thereafter amounted to €761 million in 2003, €695 million, €756 million, €404 million, €237 million and €10,129 million in 2008 and thereafter. Amounts owed to credit institutions are generally payable on demand, except those of the Company. Off-balance sheet commitments are discussed in Note 30 to the consolidated financial statements.
SUBORDINATED DEBT At December 31, 2002, the Company (statutory accounts) had outstanding subordinated debt of €7,486 million, before taking into account a €289 million reduction for the impact of foreign exchange derivative instruments.
On a consolidated basis at December 31, 2002, AXA’s total outstanding subordinated debt totaled €8,589 million, after taking into account all intra-group eliminations, or €8,300 million after taking into account a €289 million decrease relating to foreign exchange derivative instruments (December 31, 2001: €9,061 million after taking into account all intra-group eliminations, or €8,868 million after taking into account a €193 million decrease relating to foreign exchange derivative instruments).
The decrease of €568 million in 2002 was mainly due to the impact of foreign currency fluctuations on non-euro denominated subordinated debt. Indeed, a significant amount of such debt outstanding is denominated in U.S. dollars, and to a lesser extent, in sterling pounds and yens and during 2002, the euro significantly strengthened against these currencies.
At December 31, 2002, the potential number of ordinary shares that would be issued upon conversion of AXA's total outstanding subordinated convertible debt in accordance with the terms and conditions of the debt would be 64.0 million (2001: 64.0 million).
NON-SUBORDINATED DEBT INSTRUMENTS ISSUED At December 31, 2002, the Company (statutory accounts) had non-subordinated debt instruments issued and outstanding of €1,392 million, or a decrease of €692 million from €2,084 million at December 31, 2001. All of such debt outstanding of the Company at December 31, 2002 and 2001 was classified as financing debt.
On a consolidated basis as at December 31, 2002, AXA's total outstanding issued non-subordinated debt obligations amounted to €4,682 million, or a decrease of €1,275 million from €5,957 million, after excluding accrued interest at
These funds, combined with dividends received from the Company’s subsidiaries, were used to refinance existing short-term debt, in particular the Company’s outstanding commercial paper at December 31, 2001 of approximately €826 million. In addition, of the amounts drawn by the Company on its EMTN program during 2002, approximately €79 million was attributed to other AXA Group entities and as such, is eliminated in consolidation.
– In 2002, AXA has changed the presentation of certain debts that were issued by the Company on behalf of certain other financial services subsidiaries in France and Germany. This has resulted in €162 million being reclassified from “financing debt” of the Company to “operating debt” in addition to an increase in operating debt of €70 million resulting from a reclassification from “Payables (other)” arising from non-insurance activities; – A €240 million decrease in the amount outstanding under Alliance Capital’s commercial paper program; and
AMOUNTS OWED TO CREDIT INSTITUTIONS On a consolidated basis at December 31, 2002, amounts owed by the Company and its subsidiaries to credit institutions totaled €5,016 million as compared to €6,608 million at December 31, 2001, or a decrease of €1,592 million. Of the total amounts owed to credit institutions outstanding at December 31, 2002, financing and operating debts (including bank overdrafts), represented €304 million and €4,712 million, respectively. The decrease of €1,592 million was attributable primarily to the following items: – AXA Bank Belgium uses different financing instruments, primarily repurchase agreements, in order to manage the liquidity position of the bank. Due to varying requirements of the bank for additional liquidity and given repurchase agreements are short-term in nature, the bank, from time to time, will borrow money to meet its financing needs.
For further information refer to Note 22 to the consolidated financial statements.
AXA’s ordinary shares and two-for-one split of AXA’s American Depository Shares (ADS). As a result, the ratio of AXA
– Since 1994, AXA has regularly offered shares to its employees. In 2002, AXA employees invested a total of €255 million in the employee stock ownership program (€13 million on July 30, 2002 and €242 million on
AXA employees held approximately 4% of AXA ordinary shares (including ADSs) compared to 2.3% at
– Approximately 0.8 million ordinary shares were issued in connection with the exercise of AXA share options in 2002
In addition in 2002, the number of AXA ordinary shares held in treasury remained stable. As at December 31, 2002, AXA
DIVIDENDS RECEIVED Dividends paid to the Company from its affiliates were approximately €1,481 million (2001: €1,882 million and 2000: €1,520 million), of which approximately €387 million were in currencies other than the euro (2001: €410 million and 2000: €350 million). The net decrease of approximately €400 million in dividends received during 2002 related principally to (i) a decrease in dividends received from AXA Konzern AG (Germany) of €176 million due to an exceptional dividend paid in 2001, and (ii) a decrease in dividends from AXA Belgium SA and AXA UK Holdings plc of €140 million and €150 million, respectively, which was only partly offset by an increase in the dividend received from AXA Financial of €103 million to a total of €302 million.
The Company anticipates that cash dividends received from operating subsidiaries will continue to cover its operating expenses including planned capital investment in existing operations, interest payments on its outstanding debt and borrowings, and dividend payments during each of the next three years. AXA expects that anticipated investments in subsidiaries and existing operations, future acquisitions and strategic investments will be funded from available cash flow remaining after payments of dividends, debt service and operating expenses, proceeds from the sale of non-strategic assets and businesses and future issues of debt and equity securities.
USES OF FUNDS AXA’s debt activities in 2002 were primarily used for general corporate purposes and refinancing of existing debt, consistent with the type of activity undertaken in 2001.
In respect of the Company, interest paid in cash in 2002 was €564 million or €311 million after taking into consideration derivative instruments used to hedge the Company’s interest commitments (2001: €635 million or €606 million, respectively; 2000: €267 million or €227 million, respectively). Annual interest expense of the Company is expected to be approximately €350 million, net of interest received on derivative instruments during each of the next three years. On a consolidated basis, total interest paid in cash in 2002 was €894 million or €641 million after taking into consideration derivative instruments used to hedge interest commitments (2001: €913 million and 2000: €713 million).
Dividends paid to AXA shareholders in 2002 totaled €971 million in respect of the 2001 financial year, or €0.56 per ordinary share (2001: €0.55 per ordinary share on a post 4-for-1 stock split basis was paid in respect of the 2000 financial year). All dividends in respect of the financial years ended in 2001 and 2000 were paid in cash.
The new requirements are regulated in France by the Commission de Contrôles des Assurances and at December 31, 2002, AXA has complied with these requirements.
In an effort to protect and enhance shareholder value, AXA actively manages its exposure to market risks. Primary responsibility for risk management, including market risk, lies with local subsidiaries, which have the best knowledge of their products, clients and risk profile. This approach allows subsidiaries to react in a timely manner to changes in financial markets, insurance cycles, and the political and economic environment in which they operate.
Because of the nature of its operations, AXA’s exposure to market risk is minimized. AXA’s geographic diversification reduces the impact of local economic and insurance cycles on its global financial condition and earnings. Furthermore, a large proportion of AXA’s operations involve products for which most of investment risk and reward is transferred to policyholders.
They define strategic asset allocation policy, which is implemented and governed through investment management contracts. Insurance subsidiaries are also responsible for monitoring and auditing the investment policy carried out on their behalf.
– The consolidation of market risks and their movement at Group level.
AXA’s principal subsidiaries conduct this type of analysis in accordance with homogeneous stochastic modeling methods. The following calculations are made for the principal product ranges: – The amount of assets required to meet obligations.
– The value generated by insurance products, which is measured by weighing the risk to assets and liabilities.
An Economic Capital Steering Committee makes strategic decisions in connection with this project, audits outcomes, and submits reports to the Management Board and the Finance Committee of the Supervisory Board.
2. Analysis of the ability to satisfy capital adequacy and net income requirements over the short and medium term.
These measurements, which are based primarily on local and consolidated capital adequacy and solvency margin requirements, are intended to ensure the optimal use of capital resources at all times.
– The equity and real estate price risk reduces the level of unrealized capital gains and available surpluses.
The policies put in place to manage these risks are adapted to each product type (the percentages provided below are based on management data): 1. 20% of AXA’s life insurance reserves cover separate account (unit-linked) products that do not affect AXA’s risk exposure, since the underlying financial market performance is fully credited to policyholders. In cases where these products include interest-rate guarantees, an investment partner manages them within the separate account.
– products that pay benefits in the form of annuities are mostly reinsured,
– in the United Kingdom, derivatives are used to manage risk relating to contracts that offer guaranteed account values,
– Surrender options on annuities are partially covered by interest rate caps and floors.
4. 49% of AXA’s life insurance reserves cover other products, both surrender guarantees and, in some cases, a longterm interest-crediting rate. Related risks are managed in the following ways: – products that are not surrender sensitive are backed by fixed-income investments whose maturities and rates are sufficient to cover guaranteed benefits while avoiding the reinvestment risk,
Property and Casualty operations The obligations of property and casualty insurance companies are not particularly dependent on asset values.
– Lower yields on fixed-income investments increase the value of bond portfolios, and therefore present no material risk, with the exception of certain contracts (disability and worker’s compensation income) that provide guaranteed rates.
Property and casualty company investments are managed on the basis of these risk factors. Contracts that offer guaranteed payout rates are backed by fixed-income investments that fully cover the reinvestment risk. A portion of investments is in highly liquid assets, to ensure the payment of exceptional benefits and claims that may arise.
Once these factors have been taken into account, sufficient leeway exists for diversified investments (real estate or equity securities) that offer a natural hedge against inflation.
Holding companies The following risks are managed at the holding company level: – foreign exchange rate risk, resulting from a mismatch between the currency in which the asset is stated and its financing,
– Market risks (foreign exchange rate and interest rate) can be managed through the use of derivatives. With the exception of certain transactions carried out by AXA Bank Belgium, all of AXA’s derivatives are acquired and handled through specialist teams at AXA Investment Managers and Alliance Capital. (see Note 29).
– AXA manages its liquidity risk conservatively, by maintaining: – high levels of committed credit facilities,
SENSITIVITY TESTING AXA performs sensitivity analyses to quantify the exposure of certain financial instruments to interest rate risk, equity price risk and foreign currency exchange rate risk. Such sensitivity analyses quantify the potential loss in terms of estimated fair value of future earnings under certain scenarios of reasonably possible adverse changes in financial markets. Financial instruments within the scope of the analyses include fixed maturity and equity securities, mortgage loans, policy and other loans, debt and other borrowings, derivatives and technical provisions. In accordance with
SEC (Securities and Exchange Commission) regulations, real estate assets are not included in the scope of analysis.
Such analyses include AXA’s material insurance operations and holding companies in France, the United States, the
For participating life insurance contracts, the fair value attributed to provisions is considered to be (a) the fair value of the assets designated to support such policies or (b) the future cash flows discounted using the guaranteed minimum interest rate, if any, whichever is higher. For savings contracts (interest rate sensitive), a discounted cash flow method was used: these fair values were not significantly affected by market changes, as future crediting rates can be adjusted, subject to guaranteed minimum interest rates, if any, to reflect market changes.
(net of changes in liabilities) related to insurance contracts offering guaranteed returns, which were included for the first time in the interest rate sensitivity analysis. These portfolios, which are invested in assets with shorter durations
(primarily fixed-maturity securities), are consequently less sensitive to changes in interest rates on matching liabilities.
For insurance contracts whose crediting rates are the minimum guaranteed rates, a 100 basis point increase would not necessarily lead to higher interest crediting rates. The fall in asset values at year-end 2002 due to the euro’s appreciation against other currencies reduced sensitivity to a subsequent rise in interest rates.
The change in scope relating to the aforementioned business reorganization in France, which generated a larger decrease in fair values in 2002 than in 2001.
In the last four years, the potential loss from the stock market fluctuations was larger than the loss resulting from interest rate changes. The impact of interest rate fluctuations on interest sensitive investments was partially offset by fair value changes in the related insurance liabilities. The impact of stock market declines on equity securities was accompanied by much smaller changes in the estimated fair value of insurance liabilities (except for participating life contracts and separate account contracts). The difference is even greater for property and casualty operations, since their insurance liabilities are not affected by equity price fluctuations and their investment portfolios are proportionately more invested in equities than life insurance investment portfolios.
Sensitivity to exchange rate fluctuations In order to calculate the largest potential exposure to foreign currency fluctuations, all material combinations of foreign currency fluctuations were analyzed. The scenario that resulted in the most adverse scenario for AXA in terms of French
Limitations to sensitivity testing The results of the analyses presented above must be examined with caution.
These analyses do not consider that active asset liability management strategies are in place to minimize the exposure to market fluctuations. As market indices fluctuate, these strategies may involve selling investments, changing investment portfolio allocation, and adjusting bonuses credited to policyholders. In addition, these sensitivity analyses
– the assumption that interest rates in all countries move identically and that all global currencies move in tandem with the euro,
Given the nature of its core business activities, AXA monitors three major types of counterparties, using methods that are adapted to each type: – Detailed concentration analyses are conducted by each insurance subsidiary on its investment portfolio (bonds and equities). In addition, AXA regularly conducts such analyses at the consolidated level on all asset portfolios, with the exception of real estate investments, to measure its global exposure by counterparty and by counterparty rating, sector and geographic region. At December 31, 2002, 94% of the issuers in the corporate bond portfolio were investment grade issuers (with ratings of BBB or higher). Of these, 66% had ratings of A or higher. These analyses also enable AXA to assess the degree and quality of its global diversification of assets for particular asset classes
(type of issuer, sector of activity, etc.) and to take any measures that may be required to adjust its holdings on the basis of global aggregate concentrations.
Total commitment to any one counterparty or group of counterparties is analyzed at six-month intervals1 for the bond and equity portfolio, and limits per counterparty are established to minimize the default risk.
Committee, examines the situation and issues a decision on any measures to be taken.
Cessions, an AXA subsidiary in charge of placing the Group’s property and casualty insurance with external reinsurers
(see Insurance Risks). This risk is monitored by comparing the various financial strength ratings available on various reinsurers as well as by conducting in-depth analyses of the recoverability of receivables in the event of reinsurer insolvency. In particular, rates of recovery include underlying collateral that may have been provided as a guarantee by AXA’s reinsurers. The security committee meets monthly and decides on any actions that are to be taken with the aim of limiting AXA’s exposure to the risk of default on the part of any of its reinsurers.
These analyses are conducted by counterparty, based on the latter’s financial strength ratings.
INSURANCE RISK The insurance risk is defined as exposure to potential losses generated by contracts for which actual experience shows adverse deviation from assumptions made with respect to the loss experience, lapse and loading rates used to price the contracts in question.
Insurance risks are monitored locally by each subsidiary as well as at the global level.
Global: Monitoring takes three principal forms at the global level: – Reinsurance placement is handled centrally for AXA’s property and casualty insurance portfolios through AXA
Cessions, an AXA subsidiary. Prior to cession, in-depth actuarial analyses and modeling are conducted on each portfolio to optimize the quality and cost of reinsurance cover. Portfolio modeling measures risks related to frequency as well as to specific types of natural catastrophe (storms, flooding, earthquakes), and provides guidance for determining the most appropriate reinsurance cover for each portfolio and for each type of risk in light of objectives and capital allocation constraints.
– AXA’s global insurance department conducts periodic reviews of insurance reserves and of the assumptions used by subsidiaries to establish them.
OPERATING RISKS Guided by the principles set forth by the Basel Committee on banking supervision, AXA defines operating risk as “direct or indirect loss resulting from inadequate or failed internal processes, people and systems, or from external events.”
– Risks specifically related to the outsourcing of certain activities to external suppliers.
– Coordination at the global level of initiatives relating to the prevention, detection and transmission of incidents involving money-laundering.
– The extension of the network of anti money-laundering correspondents to all AXA subsidiaries, whatever their line of business (modeled on the Tracfin network set up in France).
– Systematic cross-checking of nominative lists provided by officials appointed to coordinate the combat against the financing of terrorism.
AXA, due to its activity of acquiring and managing equity interests in insurance companies, is considered to be an insurance group (société de groupe d’assurance) by virtue of Article L.322-1-2 of the French Insurance Code (the
Commission française de Contrôle des Assurances), which ensures compliance with the relevant legal and regulatory provisions of the French insurance code.
is listed on two different exchanges, it is subject to two sets of securities law and rules of corporate governance, which may differ in certain respects. In addition, AXA prepares its consolidated financial statements in accordance with accounting principles generally accepted in France (which we refer to in this report as French GAAP), and then reconciles this information with accounting principles generally accepted in the United States of America (US GAAP).
International Chamber of Commerce in Paris relating to the sale by various AXA Group companies in 1999 of
PanEurolife, a life insurance company incorporated in Luxembourg. Nationwide is seeking cancellation of the sale and/or damages after PanEurolife was investigated by the French judicial system for money laundering.
German subsidiaries have contributed €11.3 million to the fund. For France and Belgium, a global settlement is currently in the final phases of negotiation. AXA’s French subsidiaries also contributed €3.5 million (out of a total of €10.7 million paid by French insurers) to the “Fonds pour la Mémoire,” a French government Holocaust related initiative. AXA’s Belgian subsidiaries also contributed €3.6 million (out of the €10 million paid by Belgian insurers) to a fund set up by a similar body in Belgium.
Armenia In February 2002, Armenian genocide survivors (1915) and their descendants filed a class-action suit against AXA
In the opinion of management and to the best of the Company’s knowledge, none of the matters set forth above is likely to have a material adverse effect on the consolidated financial position or results of operations of AXA taken as a whole.
SOCIAL AND ENVIRONMENTAL RISKS With respect to its employment practices, AXA’s key challenge is to retain employees and position itself as an employer that is able to attract top talent. In addition, employee morale in the workplace can have an impact on employee motivation, which in turn may have an impact on the ability of staff to deliver quality service to customers.
With respect to environmental risks, AXA’s core business activities are globally non-polluting. Known risk factors that could be classified as environmental in nature primarily relate to workplace health and safety. They cover such matters as the presence of asbestos on AXA’s operating premises or the presence of Legionella in water and air conduits.
AXA has defined and implemented a strict health and safety policy to combat these environmental risks, which complies with local legislation and in some cases goes beyond what is required by law. One such example is the
Finally, as part of its corporate program insurance initiatives, AXA plays an active role in raising client awareness of the importance of prevention in dealing with environmental risks. The quality of measures put in place to prevent incidents from occurring and to reduce their impacts when they do occur are the cornerstones of the process of setting up industrial risk insurance programs.
IT risks are covered under comprehensive policies that include machine breakdown as well as the provision of gross replacement and other costs required to restore normal operation.
AXA’s carries a D&O liability policy that combines coverage suited to countries whose legal system is based on common law and those whose legal system is based on civil or codified law. Consequently, its directors and officers are protected against legislation and regulations in force in the various countries in which AXA operates.
Market conditions in 2002 FINANCIAL MARKETS If 2001 was the downside extension of 2000, 2002 looked very much to have provided more of the same. Indeed, for the third year in a row, virtually all of the world’s equity markets fell sharply. And while government bonds continued to outperform generally, long-term yields fell substantially in 2002 – which was not the case in 2001.
2001 had been strongly impacted by a recession, the bursting of the speculative bubble around technological stocks and the terrorist attacks of September 11, 2001. 2002 saw the delayed fallout of these events, but also a series of corporate bankruptcy scandals, accompanied by fraud in the most spectacular cases. The ensuing crisis of trust that the latter unleashed extended to the entire corporate world, to corporate accounts and accounting, and to corporate earnings. Last but not least, the looming threat of conflict in Iraq kept geopolitical tensions high.
STOCK MARKETS In this sharp context, and despite the global economic recovery (GDP1: +1.7% versus 1.1% in 2001) led by U.S. GDP
fell by 24.5%, the FTSE Eurotop 50 by 32%, the Nikkei by 18.63%, and the Topix by 18%. Wall Street did not escape unscathed either, with the Standards & Poors 500 losing 23% on the year, close to the global average decline of 25.2% for the MSCI World Index (Morgan Stanley index, a market capitalization index designed to measure global developed market equity performance).
BOND MARKETS The performance of government bonds was impressive in 2002. The yield on the 10-year U.S. Treasury went from 5.02% at year-end 2001 (it was 5.10% at year-end 2000) to 3.85% on December 30, 2002. The 10-year Bund ended the year at 4.19%, versus 4.98% on December 31, 2001 (and 4.84% at the end of 2000), while the 10-year UK treasury bond stood at 4.43% at year-end, compared with 5.07% one year earlier. The 10-year French OAT yield fell from 5.071% to 4.27% in 2002, while the 10-year JGB (Japan Government Bond) went from 1.35% at year-end 2001
LIFE & SAVINGS 2002 was similar to 2001 as Life & Savings markets in which AXA operates were adversely affected by the continued decrease in the global stock markets. Consequently, as noted in 2001, the consumer demand for unit-linked products was mediocre in most countries and encouraged consumers to be more cautious; this resulted in a return to more traditional financial protection products with fixed and guaranteed investment returns.
United States. U.S. investors faced a difficult and unsettling year as the equity markets continued its decline; interest rates were lowered to provide economic stimulus and concerns with corporate improprieties and economic growth continued. In the Life insurance market, there was a shift in sales away from variable universal (equity-linked) Life insurance (down 20% in the first nine months of 2002) to universal (fixed interest rate) and term Life insurance (up 33% and 16% respectively, in the first nine months of 2002). In the annuity market, sales of variable annuity/savings products were up 7% in the first nine months of 2002 while fixed annuity sales increased by 60% in the first nine months of 2002. Management believes that continued market uncertainty has increased the need for financial advice.
(4.0 point decrease of in-force business), the share of foreign Life insurers in the Japanese market reached 14%, a 3-point increase compared to 2001. AXA Japan retained the 12th position in the Japanese Life insurance industry with 1.8% market share at end of March 2002 (on total asset base).
Hong Kong. The Hong Kong Life insurance market continued to experience strong growth fuelled by the aggressive entry of the major banks. This is being driven by investors’ needs for advice in order to establish alternative wealth creation strategies following the property market downturn and low interest rate environment. In 2002, the Hong Kong economy has been weak and consumer confidence has been depressed by the slow economic recovery. The Hong
PROPERTY & CASUALTY In 2002, the Property & Casualty market continued growing, with further significant rates increases allowing insurance companies to partly compensate the unfavorable effects of the further claims deterioration after numerous and significant climatic events, mainly in France, Central Europe, United Kingdom and Italy, and the increased reinsurance cost following the September 2001 terrorist attacks.
Germany. Having reached a growth rate of 2.7% in 2001 (after 1.4% in 2000 which was preceded by four declining years), the market growth stabilized around 3% in 2002. The motor lines (about 43% of the total gross premiums written in the German Property & Casualty market) grew 2.9% in 2002 and 5% in 2001. Significant premium rate increases took place in the commercial lines, as insurers are no longer willing to accept the substantial underwriting losses of recent years, especially after the U.S. terrorist attacks in September 2001. As in previous years, major losses and cumulated losses are still affecting the German Property & Casualty insurance industry (e. g. the flood in Central
– Continued rapid increase in claims costs on injury classes of business (motor and liability).
– A substantial increase in reinsurance premiums in response to September 11 and resulting capacity constraints in reinsurance markets.
Commercial rates have increased dramatically in non-motor lines. In liability lines rate increases across the market have been in excess of 40% with increases in Property up to 20% compared to 2001. In personal lines, motor rates have increased by around 4% reflecting the continuing competitive nature of this market and signaling the peak of the cyclical motor market. Household rates have increased by 6%.
Belgium. A strong competition prevails the Belgian saturated market for Property & Casualty insurance products.
Northern Italy. In Portugal, the Property & Casualty market grew by 10% to €3,845 million2. Motor line increased by 7.7% to €1,810 million (representing 47% of total Property & Casualty business). Workers compensation grew 8.4%
INTERNATIONAL INSURANCE On the reinsurance side, the huge claims experience in 2001 (September 11th events), the financial market crisis as well as some actors being hit by claims on previous underwriting years for long tail business have resulted in major difficulties for some reinsurers and in hardening market conditions in 2002 (rate increases, deductible increases, more stringent wording) that are anticipated to tighten further, an even more selective way, in 2003. However reinsurance has not been hit by exceptional claims in 2002, as it was the case in previous years.
The large risks insurance market has experienced similar effect of 2001 large claims and of current financial crisis, mainly in property and aviation business. The market conditions are expected to tighten significantly in 2003 especially in general liability where legal instability remains high in some countries.
ASSET MANAGEMENT Asset Management business conditions were difficult in 2002 as stock markets around the world continued to suffer significant losses, reducing the market value of assets under management. The depressed markets also caused outflows in equity investments and in money market, partially offset by strong fixed income inflows. The decrease in average assets under management and the change in product mix impacted negatively the fees collected by Asset
It included €–72 million of liquidity risk reserve (€–47 million net Group share), maintained in Group consolidated accounts for French regulatory reasons, relative to French Insurance companies, and despite the fact that analyses performed did not demonstrate any liquidity risk on assets in portfolio.
SIGNIFICANT ACQUISITIONS AND DISPOSALS In 2002, the focus was given to organic growth and to the improvement of operational performance.
In Australia, AXA Asia Pacific Holdings Limited (AXA APH) purchased ipac Securities Limited for €118 million plus an element of deferred earn-out based on the achievement of performance hurdles. The related goodwill was €101 million. ipac is one of the most respected and leading wealth management advisory businesses in Australia, managing approximately €3.7 billion at the end of December 2002 for over 20,000 retail and wholesale clients.
DISPOSALS In Australia, AXA APH sold AXA Health Insurance Pty Limited, its private health insurance arm, to Macquarie Bank
Limited (Macquarie). The disposal is consistent with the Group’s strategic direction to focus its growth on wealth management. The sale price, underwritten by Macquarie, is €343 million including a pre-completion dividend. The realized capital gain on sale is €87 million net Group share.
In France, on August 7, 2002, AXA and Crédit Foncier de France (CFF) reached an agreement with GECINA, under which their stakes (32% and 21%, respectively) in SIMCO, a property company listed on the Premier Marché of
The sale was concluded on November 15, 2002 and generated a net profit of €115 million in French insurance companies (of which €113 million on French Life & Savings companies). Following the operation, the share of AXA
Group in GECINA is 6.18% (of which 4.95% on French insurance and financial services companies).
(1) CECEI: “Comité des Etablissements de Crédit et des Entreprises d’Investissement”.
AXA issued under its €3.0 billion Euro Medium Term Note Program (“EMTN”), a U.S.$ 100 million bond due 2004, a €200 million bond due 2004 and a €200 million bond due 2005. These operations were used to refinance existing debts.
CAPITAL OPERATIONS The AXA Group has for several years offered its employees, in and outside France, the opportunity to subscribe for shares issued by way of capital increase reserved for employees. In 2002, employees invested 255 million euros
(respectively €13 million in July 2002 and €242 million in December 2002). The 2002 offerings led to the issuance of 27.2 million additional shares, bringing the total number of shares in issue to 1,762 million as at December 20, 2002.
Versicherung AG, the first Life and fourth Non-Life Insurer in this country, for the sale of its business. This transaction has been signed by both parties in December 2002, but is still subject to the approval of local regulators. The estimated amount of the realized capital gain to be accounted for in 2003 is €45 million.
In Australia, on November 29, 2002, AXA Asia Pacific Holdings Limited announced that it had signed a memorandum of understanding to sell its 50% stake in Members Equity Pty Ltd for €51 million. The transaction was finalized early in 2003, at which time the realized capital gain on sale, of €11 million Group share will be booked in the Group consolidated accounts.
Life & Savings 48,586 48,399 5.5% 45,997 Property & Casualty 15,948 15,896 5.7% 15,579 International Insurance 5,762 5,678 4.6% 3,651 Asset Management 3,411 3,730 (7.2%) 2,984 Other Financial Services 1,020 1,128 (9.9%) 11,760 TOTAL 74,727 74,832 4.6% 79,971
UK (–6.5%), strongly impacted by declining markets driving customers away from unit-linked product sales. This trend was accelerated in the UK by the withdrawal from the “With-profit” bond market in July 2002.
International Insurance revenues (representing 8% of total consolidated revenues) showed an increase of +4.6%, mainly in AXA Corporate Solutions (+4.1%), due to the favorable impact of rate increases, partly offset by a decrease in Reinsurance, mainly due to 2001 non-recurring premiums (September 11, 2001 reinstatement premiums).
Capital (–8.4%), where the drop in markets induced lower asset under management. Despite these unfavorable effects, overall, the Group’s asset managers collected €7.8 billion of net new money.
(b) Pro forma New French GAAP according to the new French Regulations that became effective on January 1, 2001, as if New French GAAP had been in force since january 1, 2000.
(d) The change in fair value of separate accounts had adversely impacted the net investment result for €–17,576 million in 2002, €–11,613 million in 2001 and €–4,713 million in 2000.
(e) The variation is mainly due to the impact of September 11, 2001 events in 2001 and to 1999 storms in 2000. (f) In 2000, the exceptional items included: – the consolidated net realized gain on the sale of Donaldson, Lukfin & Jenrette (“DLJ”), which totaled €2,004 million net Group share (€2,071 million net Group share and net of realized and unrealized losses on Credit Suisse group shares received in respect of that transaction of €67 million); – realized losses and valuation allowances of €236 million (net Group share) relating primarily to the Equitable Life high yield bond portfolio as a result of broad weaknesses in credit markets from a slowing economy during the third and fourth quarter of 2000, coupled with a review of investment strategy following AXA’s acquisition of the minority interests in AXA Financial; and
– provision of €125 million recorded during the period in connection with the sale of Banque Worms, which was completed in April 2001.
The 2002 net income Group share included €235 million exceptional operations relating to: – the capital gain realized on the sale of AXA Asia Pacific Health activities (€87 million), and
Excluding these items, the increase was €+194 million, mainly as a result of improved adjusted earnings.
– The cost of September 11th 2001 terrorist attacks was €–561 million in 2001. A further €–89 million was accounted for in International Insurance in the first half of 2002 due to the complexity of the claims and the time lag in reporting the information to the ceding company.
(b) Pro forma New French GAAP according to the new French Regulations that became effective on January 1, 2001, as if New French GAAP had been in force since January 1, 2000.
International Insurance. Adjusted earnings improved by €+229 million, mainly as a result of the lower cost in 2002 compared to 2001 of September 11, 2001 terrorist attacks (€–89 million compared to €–515 million in 2001). Excluding
Holdings. Adjusted earnings decreased by €–26 million. Excluding a sharp decrease in net capital gains (€–145 million), earnings improved by €+119 million, mainly as a result of (i) a strong improvement in the Parent Company
CONSOLIDATED SHAREHOLDERS’ EQUITY At December 31, 2002, consolidated shareholders’ equity totaled €23.7 billion. The movement in shareholders’ equity since December 31, 2001 is presented in the table below: Number of ordinary Shareholders’ equity shares outstanding
At December 31, 2002 (before net income of the period) 22,762 1,762.2
Excluding for both years the impact of September 2001 events and net gains and losses attributable to shareholders, the EPS amounted to €0.97 in 2002, compared to €0.89 in 2001, showing a +9% improvement.
Life & Savings The following tables present the consolidated gross revenues, adjusted earnings and net income attributable to AXA’s
NET INCOME 1,063 922 1,802 (a) Before intercompany transactions. (b) Pro forma New French GAAP according to the new French Regulations that became effective on January 1, 2001, as if New
French GAAP had been in force since January 1, 2000. (c) The change in fair value of separate accounts had adversely impacted the net investment result for €–17,576 million in 2002, €–11,613 million in 2001 and €–4,713 million in 2000.
The Life & Savings contribution to 2002 group net income amounted to €1,063 million, increasing by €+141 million as compared to 2001.
The increase mainly derived from higher adjusted earnings by €+142 million, resulting from opposite trends as improvements in France (€+87 million), Japan (€+53 million) and the UK (€+182 million) were partly offset by Belgium
Contribution to consolidated gross revenues 48,586 48,399 45,997 (a) Gross written premiums, plus fees, commissions and other revenues.
Gross written premiums were down by –5% on a comparable basis as financial markets remained negatively oriented, an unfavorable environment for individual savings unit-linked sales.
Group retirement premiums (7% of gross written premiums) were up 9% as the level of renewal premiums from large clients remained high. Group unit-linked premiums (34% of group retirement) significantly increased (+17%)
Investment margin increased by €5 million in 2002 as compared to 2001, mainly as a result of: – An improved investment income (€+93 million or +3%) as income improved on fixed maturities (€+88 million), as the result of an increased asset base, on real estate (€+36 million), due to a higher yield (4.3% in 2002 as compared to 3.5% in 2001) and on equities (€+16 million). These increases were partly offset by a decrease in income from cash and cash equivalents (€–59 million), due to the combined impact of a reduced allocation to this asset class and of the decrease in short term interest rates.
– The decrease is attributable to fees and revenues on unit-linked savings products (€–92 million or –37%) as a consequence of a –56% decrease in premiums and of a –8% decrease in average unit-linked policyholders’ reserve.
French equity market index (CAC 40) as these reserves are mostly invested in balanced funds.
Underlying earnings increased by +25% to €355 million in 2002 as compared to €284 million in 2001. This increase mainly reflects the improvement of the cost base and the adjustment of policyholders’ dividends in a context of volatile financial markets.
Gross revenues were up €1,084 million compared to full year 2001, or a 15% increase on a constant exchange rate basis, including a significant increase in the second half of 2002, up 23%, compared to the 8% growth recorded in the first half of 2002. The combined two main insurance business lines (investment & savings and life, which totaled 88%
Investment margin decreased by €–147 million in 2002 as compared to 2001,or a decrease of €–117 million on a constant exchange rate basis.
Interest and bonus credited decreased by €–18 million as the impact of lower credited rates in life and annuity business was substantially offset by higher general account balances and higher amounts credited on Wind-up annuities, primarily due to capital gains on real estate.
higher GMDB claims, (iii) higher claims experience in reinsurance assumed product lines and (iv) an increased accrual for litigation partially offset by the absence of claims associated with the September 2001 terrorist attacks and an increase in surrender charges.
Expenses decreased by €–248 million in 2002 as compared to 2001, or a decrease of €–173 million on a constant exchange rate basis. The decrease in expenses was principally due to (i) overall net cost reductions of €175 million, in particular lower salary expense and consulting fees, and (ii) absence of a €118 million charge for severance costs related to staff reductions incurred in 2001. These decreases in expenses were partially offset by increased amortization of IT expenses net of capitalization of €81 million and higher qualified pension plan expenses of €39 million, including the impact of reducing the expected long-range return on assets from 10.25% as of January 1, 2001 to 9.0% as of January 1, 2002.
The underlying cost income ratio (which excludes capital gains and losses and the impact of the terrorist attacks in 2001) was 86% versus 84% in 2001.
Adjusted earnings increased by €2 million in 2002 as compared to 2001, or an increase of €31 million on a constant exchange rate basis. The increase is primarily due the impact of cost reductions and lower tax expense partially offset by lower investment margin, fees and revenues and technical margin.
Gross revenues (17% of total Life & Savings): Total revenues fell by 6.5% to €8,362 million. Excluding Health (14%
– Investment & Savings (78% of total UK Life & Savings revenues): Premium revenues are 8% lower than last year on a constant exchange rate basis, with new business APE1 down 6%. Stock markets suffered increased volatility and sharp falls during the second half of 2002, depressing consumer confidence in equity backed products and resulting in reduced sales of traditional investment products. Additionally, consistent with its long held strategy of prudent financial management of its financial strength, AXA withdrew from the “With-profit” bond market in July.
– Life (8% of total UK Life & Savings revenues): Total life premiums are down 7% predominantly due to our exit from the mortgage endowment market.
(1) Excluding a non-recurrent bulk transfer in the first half 2001.
Life & Savings operating income: Investment margin decreased by €–10 million in 2002 as compared to 2001, or €–8 million on a constant exchange rate basis. In line with other UK companies, “With-profit” bonus rates have been cut to reflect poor stock market performance in recent years. This reduced profit by €–60 million in 2002, as the profit recorded from UK participating funds represents 10% of the bonuses declared in the period. However this is offset by: €+22 million of additional income arising in 2002 from the finalization on January 1, 2002 of the transfer of
+30 million increase in investment income on shareholder assets following the capital restructuring of the
Fees and revenues decreased by €– 43 million in 2002 as compared to 2001, or €–39 million on a constant exchange rate basis, mainly attributable to unit-linked business: €–20 million decrease in fees earned on account balances due to the decline in the stock market during the second half of 2001 and throughout 2002, offset by increased business in-force.
(i) a decrease in unit-linked new business fuelled by a lack of consumer confidence in the stock market, and (ii) changes to pension product design following the introduction in 2001 of stakeholder pensions.
Expenses, net of policyholder allocation1 decreased by €–54 million in 2002 as compared to 2001, or €–49 million on a constant exchange rate basis. Expenses decreased by €–67 million due to a reduction in costs: (i) €26 million savings on general expenses, and (ii) a reduction in the level of investment on strategic initiatives to reengineer systems and processes to face the new competitive environment (€48 million in 2002 as compared to €89 million incurred in 2001). The reduction in expenses was offset by increased amortization of DAC and Value of Business In-force as a result of changes in the long-term assumptions on the level of stock markets.
Health operating income: The Health operating income reported by AXA PPP healthcare increased by €37 million in 2002 as compared to 2001, or €38 million on a constant exchange rate basis. This improvement is explained by an increase in the underwriting result of €+53 million reflecting positive prior year claim reserve development, improved claims frequency, and the absence of an industry levy to fund UK insurance company insolvencies, and strong expense control (€+12 million). However, the favorable results were partly offset by an unfavorable change in investment result of €–27 million attributable to a reduction in realized gains net of valuation allowances on equities.
Income tax expense decreased by €128 million in 2002 as compared to 2001 on a current and constant exchange rate basis. The distribution tax that was previously recorded on the inherited estate attributed to AXA was released with a positive impact of €111 million as, in accordance with the scheme governing the financial reorganization, the
Since 2001, AXA Japan has refined the presentation of its hedging transactions. In order to fairly reflect the evolution of Japanese operations, the following commentaries are based on a comparable presentation of hedging transaction impacts for 2001 and 2002.
as AXA increased its participation in several large contracts. Individual premiums decreased by 4%, reflecting the focus of the distribution channels on the more profitable products, most notably Health.
(€21 million) by 1.0%, driven by a 12% growth in whole Life, offset by a 9% decrease in endowment as there was a shift in focus towards more profitable traditional products.
– Health: Premiums increased by 7% as the sales forces focused on sales of medical whole Life products (+35%), which presently offer higher margins.
Investment margin increased by €+290 million on constant exchange rate (€+297 million on current exchange rate)
(a) In Japan, AXA closes its books at September 30. Each year, earnings reported reflect the following period: from October 1st of previous year to September 30th of the current year. (b) Pro forma New French GAAP as if New French GAAP had been in force since January 1, 2000.
AXA Japan registered losses resulting from anticipated conversions of customers from its medical term product in 2003. Significant competition in this sector has resulted in the company offering new products with reduced premiums to certain customers. The mortality margin, net of bonus, slightly increased with improved morbidity on Health products.
Expenses gross of DAC and VBI amortization increased by €–30 million on constant exchange rate or +3.3% (a decrease by €+52 million on current exchange rate) to €–845 million. This increase was primarily due to higher commissions (€–36 million) resulting from the combination of higher new business, change in product mix and revision of commission scales. On a constant exchange rate basis, non-commission expenses slightly decreased by €+6 million to €–437 million. Expenses, net of DAC and VBI amortization reduced by €+32 million on constant exchange rate or –3.7% (€–106 million on current exchange rate) to €–759 million in 2002, reflecting lower VBI amortization primarily due to the change in expected gross profits on the medical term business.
Tax increased by €–101 million on constant exchange rate (€–91 million on current exchange rate) to €–100 million, mainly from the large increase in operating income before tax and the strengthening of the valuation allowance on tax assets by €–40 million.
Adjusted earnings for the year ended September 30, 2002 amounted to €–45 million, an increase of €+49 million on constant exchange rate, which resulted primarily from lower equity valuation allowances, mitigated by the costs of the hedging strategy. Underlying earnings were down by €–140 million to €–45 million mainly as a result of lower surrender margin and reduced investment income.
– Life (54% of total gross written premiums): Revenues were slightly up (+0.4%), entirely driven by the continuing shift in product mix towards unit-linked Life premiums (10% of Life revenues compared to 8% last year), which grew by 24%.
– Health (22% of total gross written premiums): Gross written premiums increased by 13% due to continuous premium adjustments, strong new business (+24%) as well as higher customer loyalty, thus largely outperforming the estimated market growth of 5%.
ADJUSTED EARNINGS (0) 21 46 (a) Pro forma New French GAAP as if New French GAAP had been in force since January 1, 2000. (b) Excluding health business.
As a result of the improved investment margin and reduced expenses, the cost income ratio decreased from 86.9%
in 2001 to 85.1% in 2002. Excluding capital gains and losses attributable to shareholders, the underlying cost income ratio decreased even further from 89.5% in 2001 to 71.2% in 2002 mainly due to the above mentioned shift from capital gains in 2001 to capital losses in 2002.
The Health operating income increased by €+4 million to €23 million as compared to 2001. This positive development was primarily due to the improvement of the expenses and the technical margin which overcompensated the decreasing investment result.
Gross written premiums went down by –3% from a record period a year ago (+53%).
– Investment & Savings (83% of Life & Savings gross written premiums). Premiums decreased by –4% to €1,353 million. A +6% increase in group life, due to a good level of new business, was more than offset by a –7% premium decrease in individual life. The decline in individual premiums was due to a –38% decrease in unit-linked contracts caused by difficult market conditions. The decline in unit-linked premiums was partly offset by higher sales in non unit-linked products, in particular of “Opti-Deposit” policies (15% of non unit-linked individual premiums), a product with minimum guaranteed return launched in November 2001. The premiums from the major product “Crest” (mostly single premiums) decreased by –16%, compared to a record level of premiums in 2001. This was driven by lower guaranteed rate conditions. However these premiums still represented 67% of non unit-linked individual premiums.
– Lower other net capital gains (€–26 million), most of which on bonds, following 2001 bonds portfolio restructuring.
– Higher net investment income (€+22 million) in relation to a higher level of technical reserves (+13%).
(a) Pro forma New French GAAP as if New French GAAP had been in force since January 1, 2000.
Fees and revenues decreased by €–5 million to €128 million, on the back of lower unit-linked sales.
The net technical margin was almost stable down to €38 million.
Income tax expenses decreased by €61 million, as a result of a lower taxable income, driven by lower capital gains on bonds, and the fact that valuation allowances on equity are not tax deductible. The tax result was also impacted by discrepancies in the tax allocation between the Life and Property & Casualty segments1.
Underlying earnings increased by €8 million to €55 million mostly driven by the lower tax charge. Before tax impacts underlying earnings are mainly negatively impacted by the decrease of the spread between investment income and interest credited.
Contribution to consolidated gross revenues 5,877 6,517 5,682 (a) Includes 15 months of activities for Australia / New Zealand and Hong Kong.
(c) Includes 15 months of activities for Australia / New Zealand and Hong Kong.
Total adjusted earnings2 for the Life & Savings and Health businesses were €58 million (Group share) compared to €29 million (Group share) for the 15 months to December 2001. Restating 2001 to be on a comparable basis1, total
Life & Savings and Health 2001 adjusted earnings were €45 million (Group share).
– Total adjusted earnings for the Life & Savings business increased by €44 million over the twelve months to
(Figures below reflect an analysis of result evolution at 100% on a constant exchange rate basis).
– Fees and revenues improved by €42 million to €420 million reflecting the expansion of financial advisory businesses, in particular with the acquisition of Sterling Grace in November 2001 (contributing fees of €33 million) and ipac Securities in August 2002 (with fees of €12 million).
– The combined effect of the above analysis, most notably the improved technical margin and expense levels, explained the significant reduction in the cost income ratio from 114% to 81%. For the same reasons, the underlying cost income ratio excluding net realized capital gains and losses decreased from 147% to 78%.
– The tax benefit decreased to €17 million mainly due to improved profitability before tax and the booking in 2001 of a €13 million non-recurring tax benefit associated with the liquidation of a subsidiary.
– Health adjusted earnings decreased by €30 million (on a constant exchange rate basis) to €9 million. The activities of AXA Health, which was sold in 2002, contributed only eight months result to the AXA Group result1. Additionally, in 2001, the adjusted earnings benefited from the claims free period that existed under the incentives provided by the Government to encourage new members, reflecting the deterioration in the combined ratio from 86% in 2001 to 91% at the time of sale.
Adjusted earnings2 were €33 million compared €37 million for the 15 months to December 2001. Restating 2001 to be on a comparable calendar basis, adjusted earnings were €17 million.
(1) The realized capital gain on sale being recorded in AXA Asia Pacific Holdings. (2) AXA China Region is part of the AXA Asia Pacific group and is 51.66% owned by AXA and all related figures are provided at Group share.
The cost income ratio has increased from 42% to 97%. This is mainly due to the above mentioned substantial decrease in investment margin. Excluding realized capital losses, the cost income ratio would amount to 86%.
In the Health business, adjusted earnings decreased by €3 million to a loss of €–3 million. This was mainly due to a strong rise in health care costs as a result of the Dutch Government initiatives in order to improve the health care system.
SPAIN Gross written premiums increased by €320 million to €845 million, or +61.0% as compared to 2001, primarily due to large group single premium contracts relative to pension funds outsourcing, as well as the good performance of the agent network.
Adjusted earnings increased by €8 million as compared to 2001 to €30 million, mainly as a result of investment margin growth (€7 million post-tax) which reflected both (i) higher net realized capital gains (€+12 million post-tax)
following the sale of several real-estate properties partly offset by the valuation allowances on equity securities, and
(ii) the fact that 2001 investment margin included the release of deferred policyholders bonus following an asset/liability matching review (€7 million post-tax). Excluding net capital gains, underlying earnings decreased by €4 million to €13 million, 2001 earnings included the release of deferred policyholders bonus mentioned above.
Portugal Gross written premiums declined by 4% to €129 million on a comparable basis driven by the poor development of unit-linked products in a very difficult financial market environment as well as the termination of the BBVA bankinsurance agreement.
Adjusted earnings deteriorated by €9 million mainly as a result of higher valuation allowances on impaired equities
Singapore Adjusted earnings1 were a loss of €–3 million Group share, compared to €–2 million Group share for the restated 12 months to December 31 2001. The current period result included valuation allowances on impaired securities of €–2 million (net of tax and policyholder rights).
Property & Casualty The tables below present the gross premiums and net income attributable to AXA’ s Property & Casualty segment for the periods indicated.
The Property and Casualty contribution to 2002 Group net income amounted to €–19 million, down by €–71 million, as compared to published 2001 net income. Restated for the UK Discontinued business now transferred to the
International Insurance segment, the decrease was €–90 million, and mainly derived from lower adjusted earnings by €–109 million.
In all major countries, earnings benefited from a better operational performance, with improved combined ratios, but were also negatively impacted by the lower level of net realized gains following the decline in global markets.
Equity in income (loss) of unconsolidated entities 19 5 5 1
The net current accident year loss ratio improved by 2.3 points to 78.7% in 2002 as compared to 81.0% in 2001.
Loss reserve development totaled €–6 million in 2002 as compared to €–45 million in 2001. In 2001, the French
Expenses, other than claims management expenses, decreased by €10 million to €–1,037 million. Distribution expenses increased by €–16 million, attributable to the growth in earned premiums partly offset by product mix.
The combined ratio significantly improved to 102.9% as compared to 107.3% in 2001 as the result of improvements in all accident years loss ratio and in expense ratio.
– A marginal decrease of investment income yield (–0.2% or €–22 million) mainly due to lower dividends on equities.
Income tax expenses were down by €12 million from €–124 million in 2001 to €–113 million in 2002 due to the decrease in pre-tax income, the tax rate remaining stable at 32%.
Adjusted earnings decreased by €–29 million to €237 million in 2002 from €266 million in 2001 due to the €–198 million decrease in net investment gains partly offset by the €169 million improvement in net technical result.
Underlying earnings strongly increased as compared to 2001 by €109 million to €188 million primarily as the result of the increase in net technical result.
– Commercial (27% of total gross written premiums): premiums increased by 1.3% on a comparable basis due to rate increases, partly offset by a restrictive underwriting and re-underwriting strategy.
The Net technical result showed an improvement of €278 million to €665 million.
– Current accident year loss ratio: The improvement of the current accident loss ratio of –4.5 points was primarily due to commercial lines following the portfolio-restructuring program and the lower number of large claims (impact of –2 points). Personal lines contributed to the development of the loss ratio by +0.6 point as a result of heavy storms and floods in 2002, while a continuously positive development was experienced in motor. Further improvement in the other segments, like assumed business and fine art, led to a decrease in the net loss ratio by –3.1 points. This decrease is partially explained by the September 11 U.S. terrorist attacks (–1.7 point). The total impact of the storms and floods on the current accident year loss ratio (personal and commercial lines) amounted to 4.8 points.
ADJUSTED EARNINGS (28) 85 44 (a) Pro forma New French GAAP, as if New French GAAP had been in force since January 1, 2000.
Net investment result decreased by €–138 million to €245 million as a result of (i) a lower net investment income by €–33 million mainly due to lower dividend income and lower bond yields, as well as (ii) net capital gains and losses, which decreased by €–105 million to €–55 million (capital loss in 2002). A valuation allowance on equity securities of €29 million was booked at year-end 2002.
(ii) the decline in the investment result. These effects were partly offset by an improved net technical result and a successful decrease in expenses. As a result of this improvement in the net technical margin, the decline of dividend income and bond yields as well as the increase in income tax expenses, underlying earnings decreased by €59 million from €77 million to €18 million.
– Commercial lines (50.2% of gross revenues) increased by +26% as AXA gained a number of large property accounts, benefiting from capacity constraints amongst some of its competitors and rate increases of up to 25%. The liability portfolio benefited from significant rate increases (between 25% and 45%) with very limited exposure growth.
The current accident year loss ratio net of reinsurance improved by 4.7 points to 72.5% in 2002, despite a €32 million pre-tax charge for severe weather-related losses during 2002. This positive trend reflects: – A 7-point and 5-point improvement across personal and commercial motor respectively due to the focus of new business and customer retention activities on more profitable business and the implementation of new pricing models for Intermediary business.
– A 5-point improvement in commercial property driven by strong rating increases and a change in business mix partially offset by commission rate increases.
– The positive trends are offset by a deterioration of 8 points across liability lines as a result of (i) the rapid rise in the cost of care (ii) increases in life expectancy; and (iii) ongoing increases in legal fees in the increasingly litigious environment. Further rating actions have been taken to address profitability on these lines of business.
Property & Casualty operations - United Kingdom FY FY 2001 FY 2001 FY
The all accident year loss ratio net of reinsurance improved by 0.7 point to 78.7%. The positive effect of the current year was partly offset by prior year negative development, principally in respect of the increasing cost of large injury losses in the liability account. The prior year negative development follows a case-by-case review of large claim liabilities on personal injury classes during the second half-year.
– The reduction in underlying expenses was partially offset by the investment of €–51 million (1.9 point of expense ratio), which commenced in 2002 in the “First Choice” business transformation program and a reduction of €–43 million in the level of deferred acquisition costs resulting from the overall reduction in expenses and the change in business mix towards commercial business which carries higher commission rates and lower expense rates.
– The earned commission rate increased by 1.8 point to 21.3% from 2001 representing an increase of €69 million or €76 million on a comparable basis. This was primarily driven by the growth of our largely intermediated commercial business, especially the higher commission ratio commercial property account offset by lower loss ratios and by the growth of the personal travel and creditor classes of business, which are also offset by lower loss ratios.
The improvement in the net technical result offset by a deterioration in the expense ratio led to a stabilization of the combined ratio at 115.2%. Including Health activities, which are up to now presented within the Life & Savings segment, the 2002 combined ratio would have amounted to 108.6%, compared to 110.2% in 2001.
Investment income decreased by €–7 million, or €–5 million on a comparable basis, due to falling interest rates and a decline in the value of our equity portfolio, partly offset by higher equity yields and a switch from equities to cash and bonds. Net capital gains reduced by €–66 million or €–67 million on a comparable basis, from a loss of €–1million in 2001 to €–68 million in 2002 due principally to a reduction of equity exposures and the decline in global stock markets. The valuation allowance on equity securities decreased by €15 million to €115 million in 2002.
The income tax benefit increased by €10 million, or €11 million on a comparable basis, mainly reflecting the positive tax effect of the decrease in the operating income partly offset by the one-off tax provision release of €+23 million in 2001.
Adjusted earnings decreased by €–83 million in 2002 as compared to 2001, or €–85 million on a comparable basis, reflecting the lower investment result.
Underlying earnings decreased by €–36 million, or €–38 million on a comparable basis.
Gross written premiums increased by +5% to €1,401 million, with growth in both commercial and personal lines.
household deteriorated as it suffered from storms in February and October 2002.
ADJUSTED EARNINGS (29) (5) 200 (a) Pro forma New French GAAP, as if New French GAAP had been in force since January 1, 2000.
As a result, the combined ratio (all lines, workers’ compensation included) decreased by 6.8 points to 109.8%.
Workers’ compensation excluded, the combined ratio decreased by 5.4 points to 107.4%
Underlying earnings increased by €53 million to €58 million, mainly as a result of (i) a better technical result and (ii)
ITALY Gross revenues decreased by 5.0% from last year to €1,027 million, driven by a loss of contracts on personal motor
(62% of total premiums) following continuing portfolio cleansing measures and premium rate increases to improve profitability.
Adjusted earnings reached €42 million, up by €48 million from last year. This increase reflected (i) a €23 million gain from further improvement in combined ratio to 104.5% (versus 108.5% in 2001), mainly driven by the actions on motor mentioned above and cost cutting (expense ratio down by 1.9 point to 23.9%), (ii) a €15 million increase in net investment result, as a consequence of higher realized capital gains on bonds (€+31 million) and real estate (€+15 million) compensated by higher losses and valuation allowances on equity securities (€–10 million and €–21 million respectively), and (iii) a €9 million tax benefit deriving from the legal restructuring of AXA subsidiaries in Italy.
and (ii) the strong development in mechanical warranties (multiyear contracts) by +49.5%.
Adjusted earnings amounted to €19 million, an increase of €1 million on a constant exchange rate basis as compared to 2001. Excluding the adverse impact of (i) the €8 million write-off of deferred information technology development costs and (ii) the €4 million lower capital gains, earnings increased by €13 million. The expense ratio improved by 3.4 points to 29.7% due to the significant impact on expenses of the cost reduction project launched in 2001 as well as additional general cost containment combined with the increased level of premiums. Excluding the IT write-off, the improvement was 4.9 points. On the other hand, the loss ratio deteriorated by 1.5 point to 73.5% as compared to 2001 as the excellent results in Quebec were more than offset by the difficult situation prevailing in the Ontario motor industry. As a result, the combined ratio improved by 1.9 point to 103.2% (a 3.4 points improvement excluding the IT write-off).
IRELAND Gross written premiums increased by €62 million (+13%) to €554 million in 2002 as compared to 2001 reflecting increases of 12% in personal lines business (79% of gross written premiums) and 14% in commercial lines business
There was also an improvement in the net investment result, mainly explained by a €6 million increase in realized capital gains, net of impairment.
THE NETHERLANDS Gross written premiums decreased by –3.6%. In the authorized agents portfolio, premiums written in this portfolio have increased by €7.7 million. A decrease in premium of €12 million was shown in the agents portfolio, which was negatively influenced by the insufficient performance in the first half year of 2002.
–6.3 points to 36.5% attributable to lower management expenses following the restructuring of the internal organization. The combined ratio stood at 118.8% in 2002 as compared to 140.8% in 2001.
Underlying earnings amounted to €–1 million as compared to €+4 million in 2001, or a €–5 million decrease, mainly explained by €–5 million net Group share of non recoverable deferred tax asset.
Portugal Gross written premiums amounted to €320 million showing a 1% decrease as compared to 2001 as a result of a
Adjusted earnings declined by €6 million to €–4 million driven by higher valuation allowances on impaired equity securities (€6 million post-tax) and lower realized capital gains on fixed maturities (€5 million post-tax). Underlying earnings increased by €6 million to €9 million as a result of a 3.7 points improvement in combined ratio to 101.0%
Switzerland Gross revenues increased by +17% to €89 million mainly due to the acquisition of the Northern portfolio, or +2.5%
Adjusted earnings decreased by €–19.5 million to €–19 million in 2002 as compared to full year 2001.
An adjusted earnings loss of €25 million, improved by €21 million compared to 2001, reflecting mainly the improvement of both the loss ratio (from 76% in 2001 to 72% in 2002) and the expense ratio driven by higher productivity leading to a decrease in personnel expenses, more cost-efficient acquisition of insurance contracts and savings in IT costs. In total the combined ratio improved from 184% to 146% in 2002. Continuing losses reflect the fact that
Direct Japan has not yet reached its critical mass (operations commenced in mid-1999).
International Insurance segment The following table present the gross premiums and net income for the International Insurance segment for the periods indicated: M an ag em en t R
FY FY 2001 FY 2001 FY 2002 (Pro forma) (b) (Published) 2000
NET INCOME (176) (406) (386) 97 (a) Pro forma New French GAAP, as if New French GAAP had been in force since January 1, 2000. (b) Discontinued business transferred from Property & Casualty segment.
AXA CORPORATE SOLUTIONS Note: The mother and reinsurance company AXA Corporate Solutions has changed its name back to AXA RE with effect November 15th 2002 while its subsidiary and large risk insurance company AXA Corporate Solutions Assurance keeps its denomination. This change is not reflected in this publication and will be in future AXA publications.
Insurance benefits and claims, net of reinsurance ceded (b) (5,224) (5,510) (3,043)
NET INCOME (168) (357) 118 (a) Before intercompany transactions. (b) Reinsurance technical commissions have been posted in insurance claims instead of insurance acquisition expenses, in 2001. (c) Pro forma New French GAAP, as if New French GAAP had been in force since January 1, 2000.
Consolidated gross revenues were €5,235 million in 2002 of which €22 million of fees and commissions. Gross revenues are stable compared to 2001: – Reinsurance (66% of gross revenues): Premiums decreased by 2% to €3,472 million with a strengthening in Property line. Property & Casualty lines (90% of reinsurance activity) decreased by 4% mainly due to (i) a stringent underwriting accompanying the retrocession market upturn, (ii) a voluntary drop in proportional treaties in casualty motor business and cancellations in other lines. These downward trends are partly offset by the significant revisions of 2001 premiums on proportional treaties (in property and motor) due to the cautiousness of last year estimates.
– For Reinsurance business, it increased by €73 million to €873 million in 2002, with a net attritional loss ratio improving by 2 points down to 72% in 2002. The improvement of 2002 underwriting year loss ratio came from (i) the market rate increase and (ii) the absence of significant attritional loss in the year and was partly offset by the 2002 earning impact of less profitable treaties underwritten in 2001 such as whole accounts in marine. Commissions paid to ceding companies remained stable at €615 million.
– For Insurance business, the net attritional margin on the current accident year increased by €136 million to €295 million in 2002, with a net attritional loss ratio improving by 6 points down to 76% in 2002. Such improvement is the effect of the portfolio recovery together with the premium rate increase mainly in Property & Casualty lines.
Other technical items improved by €288 million as a result of the following: – Major losses adversely impacted 2002 with a total estimated cost net of reinsurance of €133 million compared to €992 million in 2001 mainly coming from September 11 events (€762 million net of reinsurance gross of tax). The
European floods occurred in August 2002 were the most significant claim of the year with an estimated cost net of reinsurance of €107 million.
As a result, the net technical margin increased by €496 million to €46 million in 2002 with a 15-point improvement in the claims ratio for all accident years (net of reinsurance) to 99.4% in 2002. Excluding September 11 U.S. terrorist attacks, this ratio would be lowered by 4 points down to 95% versus 91% in 2001 mainly due to loss reserves adjustments on prior years.
General expenses increased by €23 million to €528 million mainly due to variation in scope and restructuring provisions. Adjusted for (i) a €14 million change in scope (principally AXA Germany’s large risks portfolio partly renewed by AXA Corporate Solutions) and (ii) €31 million variation in extraordinary items including 2002 provisions for restructuring (mainly linked to U.S. strategic decisions) and provisions for departures, the administrative expenses decreased by €7 million or –2%. On the other hand, the acquisition expenses decreased by €15 million or –6% (the evolution of brokerage commissions being not strictly in line with premiums).
Excluding the cost of September 11 U.S. terrorist attacks and net realised capital gains, underlying earnings amounted to €–67 million in 2002 as compared to €110 million in 2001.
Adjusted earnings decreased by €12 million to €+1 million in 2002 as compared to 2001. The deterioration was mainly due to strengthening of bad debt provisions.
OTHER (EXCLUDING UK DISCONTINUED BUSINESS) Adjusted earnings from the other transnational Insurance operations increased by €43 million to a €3 million losses in 2002 as compared to 2001. This improvement was primarily due to Saint Georges Re. A €+3 million net gain was recorded in 2002, or an increase by €+36 million as compared to 2001, mainly explained by (i) the losses related to the GRE businesses in run-off accounted last year (€34 million), and (ii) €+4 million realised capital gains in real estate in 2002.
Assets under Management (“AUM”) decreased by €144 billion to €369 billion at December 31, 2002, a decrease of €–69 billion, or –15% on a constant exchange rate basis, mainly due to the negative impacts of equity market depreciation (€–65 billion). Net outflows totaled €4.5 billion and were attributable to outflows in retail of €12.7 billion
(of which €6.5 billion in net cash management outflows), partially offset by private clients and institutional net new money of €4.2 billion and €4.0 billion.
Operating income decreased by €208 million, or –21% on a constant exchange rate basis (€–173 million), as a result of lower revenues (€–281 million), partly offset by lower interest and administrative expenses (€108 million). As a result, the operating cost income ratio1 increased by 4.5 points from 66.3% in 2001 to 70.8% in 2002.
(€–67 million), reflecting the impact of lower revenues and average AUM due to the declining market environment.
(1) The operating cost income ratio is computed after exclusion of distribution commissions from revenues and general expenses. (2) On October 2, 2000, Alliance Capital acquired Sanford C. Bernstein, Inc. and the purchase price consisted of cash and 40.8 million newly issued private units in Alliance Capital. As a result, AXA Financial’s ownership interest in Alliance Capital decreased by 10.5 points (from 63.3% to 52.8%) and the Group recorded a dilution gain of €928 million ($872 million). In conjunction with the acquisition, AXA Financial provided redemption rights to the former shareholders of Sanford C. Bernstein, Inc., after a two-year lockout period, to allow the 40.8 million private units of limited partnership interest to be sold to AXA Financial over the subsequent eight-year (generally not more than 20% of such units may be sold to AXA Financial in any one annual period). As a result of this contingency, the dilution gain of €928 million that should have benefited to AXA was offset by a provision recorded for a similar amount.
Asset Under Management (“AUM”) declined by €9 billion to €268 billion at December 31, 2002 (–0.4% on a comparable basis), with net new money inflows (€12 billion) more than offset by market depreciation (€–13 billion)
Gross revenues, including those earned from AXA insurance companies eliminated in consolidation, reached €820 million, –1.4% on a comparable basis. Restated from intra-group transactions, gross revenues decreased by –1.4%
on a comparable basis to €633 million. Most of the decrease relates to lower management and front-end fees collected by AXA IM on behalf of some unit-linked and retail products external distributors. Excluding those fees retroceded to distributors, net revenues increased by 11% on a comparable basis to €563 million. This increase is mainly driven by net management fees (up €+27 million or +5%), stemming from higher average AUM (+1.2%, at €274 billion) and from a favorable change in product mix towards higher-fee products, combined with higher real estate transaction fees (up €+20 million), while performance fees grew by €5 million, notably from AXA Rosenberg.
Administrative expenses, excluding commissions paid to third parties agents, increased by €57 million, i.e. increased by €40 million on a current scope basis. This increase is principally due to higher personnel expenses by €24 million in relation with business growth, and to higher marketing costs by €6 million. The main other changes are an increase in premises by €4 million and in depreciation by €5 million, offset by €7 million lower consulting fees and by €5 million lower IT expenses.
Consequently, adjusted earnings increased by €5 million in 2002 as compared to December 2001.
ADJUSTED EARNINGS 63 58 48 (a) Pro forma New French GAAP, as if New French GAAP had been in force since January 1, 2000.
NET INCOME 119 97 121 (a) Pro forma New French GAAP, as if New French GAAP had been in force since January 1, 2000.
AXA Banque adjusted earnings decreased by €18 million as compared to full year 2001 mainly due to (i) the transfer of the securities management activity outside the Group in July 2001 (€–8 million decrease in revenues compared to 2001) and to (ii) the losses linked to Banque Directe (€–4.5 million loss for the four last months of year 2002 as well as integration costs for €–2.3 million.
AXA BANK BELGIUM Net sales of AXA savings products increased by €445 million as compared to 2001, mainly attributable to deposit accounts, which benefited from pricing actions.
Gross sales in third parties’ products decreased due to weak stock markets. Net sales of loans increased by €538 million or +74% in 2002 following the decrease of the registration fees and the development of the sales through the brokers’ network.
OTHER Subgroup CFP revenues decreased by –32.5% to €58 million, or –40.5% on a comparable basis. CFP revenues
revenues) decreased by –36% mainly due to lower loan interests and to lower credits granted.
Adjusted earnings increased by €44 million to €98 million in 2002, mainly attributable to a favourable run-off development (€+26 million). Holding SOFFIM also recorded a capital gain of €12.3 million net of tax on the sale of
Holding Company activities The Holding Company activities consist of AXA’ s non-operating companies, including mainly AXA Parent Company,
OTHER FRENCH HOLDING COMPANIES The €–51 million decline in adjusted earnings of other French holdings companies mainly derived from lower net realized capital gains, €103 million in 2002 against €135 million in 2001.
FOREIGN HOLDING COMPANIES AXA FINANCIAL INC. Adjusted earnings decreased by €2 million in 2002 as compared to 2001. On a constant exchange rate basis, adjusted earnings decreased by €7 million due to higher realized capital losses.
AXA UK HOLDINGS Adjusted earnings decreased by €–27 million in 2002 as compared to 2001 due to the interest expense of increased borrowings to fund UK operations and to a lower level of realized gains on equities.
OTHER FOREIGN HOLDING COMPANIES German Holding companies: Adjusted earnings deteriorated by €–28 million to a loss of €–87 million in 2002 primarily due to revised German tax rules regarding the use of tax credits from dividends received (additional tax burden of €–29 million).
Belgium Holding companies. Results 2002 adjusted earnings increased by €9 million mainly due to a tax settlement and to the booking in 2001 of a depreciation on real estate activities that was reversed in 2002.
Perspectives 2003 has started with a further decline of world equity markets arising from uncertainties in relation to a potential war in Iraq and its international ramifications, the weakness of the economic recovery in the United States and the worrying economic outlook in Japan and Germany.
UNDERLYING EARNINGS Underlying earnings correspond to adjusted earnings excluding (i) net realized capital gains attributable to shareholders and (ii) the impact of September 11, 2001 terrorist attacks.
GAAP measures as used to prepare the statements of income in accordance with French GAAP. As a result, the operating income under margin analysis is equal to that reported in AXA’s statements of income for the segment.
(iii) The “Investment margin” represents the net investment result in the statements of income and is adjusted to take into account the policyholders’ participation (see above) and to exclude the loading on (or contractual charges included in) unit-linked business, which are included in “Fees and revenues”.
(iii) Valuation allowance & release in respect of impaired invested assets,
Net technical result is the sum of the following components: (i) Mortality / morbidity margin: The amount charged to the policyholder in respect of mortality / morbidity for the related period less benefit claims. It is equal to the difference between income for assuming risk and the actual cost of benefits, including changes in valuation assumptions and additional reserves for mortality risk. This margin does not include the claims handling costs and change in claims handling cost reserves,
(iii) DAC: amortization of acquisition expenses on current year and prior years new business. This amortization also includes the impact of interest capitalized and is net of the corresponding change in URR in the period,
LIFE & SAVINGS EXPENSE RATIO Three types of expense ratio are calculated: (i) Ratio of gross operating expenses to total gross insurance reserves: gross operating expenses / total gross insurance reserves, where: – gross operating expenses are total expenses excluding (1) expenses related to mutual fund business (mainly fees paid to the sales force), (2) deferral or amortization of deferred acquisition costs (DAC), and (3) amortization of value of purchased Life business in-force (VBI); they include capitalization and amortization of software expenses,
(ii) Cost income ratio: expenses / operating margin, where: – Expenses are total expenses, excluding expenses related to mutual fund business (mainly fees paid to the sales fore), gross of deferral and amortization of deferred acquisition costs (DAC) and gross of amortization of value of purchased Life business in-force (VBI),
– “Underlying” operating margin is the sum of (i) Investment margin excluding net capital gains / losses attributable to shareholders; (ii) Fees and revenues, and (iii) Net technical margin (items as defined in the margin analysis).
PROPERTY & CASUALTY Net investment result includes the following items: (i) Net investment income,
All accident years loss ratio (Property & Casualty) net of reinsurance, is the ratio of: (i) (all accident years claims charge gross of reinsurance + claims-handling costs + result of reinsurance ceded on all accident years), to
Net technical margin includes: (i) earned premiums, net of reinsurance (cession / retrocession and covers),
(ii) claims charge all accident years, net of reinsurance, including major losses,
(iii) commissions (fixed commissions, sliding scale commissions as well as profit commissions), (a) paid to the ceding companies and (b) received from the reinsurance companies,
Operating cost income ratio: operating expenses over gross revenues (including performance fees).
12. Receivables and payables from insurance and reinsurance activities 13. Cash and cash equivalents 14. Deferred acquisition costs 15. Shareholder’s equity 16. Minority interests 17. Mandatorily Convertible bonds and notes 18. Subordinated debt 19. Insurance liabilities 20. Provisions for risks and charges 21. Non-subordinated debts instruments issued 22. Amounts owed to credit institutions 23. Segment information and technical results 24. Net investment result 25. Reinsurance 26. Operating charges 27. Income taxes 28. Net income per ordinary share 29. Financial instruments 30. Off balance sheet commitments 31. Related party transactions 32. Consolidated statement of cash-flows 33. Dividend restrictions and minimum capital requirements 34. Condensed consolidated U.S. GAAP financial statements
(a) The December 31, 2000 financial statement data, as reported, have been presented under a new basis of presentation following the implementation of new French Regulations effective January 1, 2001.
Minority interests’ share in retained earnings brought forward 2,444 3,024 1,578
Minority interests’ share in net income for the financial year 368 385 2,124
Payables arising from non-insurance activities 26,313 26,541 29,340 21 Non-subordinated debt instruments issued 4,682 6,140 6,897 22 Amounts owed to credit institutions 5,018 6,609 9,412
Revenues from banking activities 1,012 1,127 11,754 23 Gross premiums and financial services revenues 74,727 74,832 79,971
(c) Adjusted earnings represents AXA’s consolidated net income before goodwill amortization and exceptional operations. Adjusted earnings is a non-GAAP measure, which management believes provides a meaningful understanding of the results. It should be noted that “Adjusted earnings” as defined may not be comparable with similarly-titled measures reported by other companies as it is not defined under either French GAAP or U.S. GAAP.
(d) The exceptional operations included: In 2002: – the realized capital gain on the sale of AXA Australia Health activities (National Mutual Health Insurance – €87 million Group share), – an exceptional profit of €148 million in Alliance Capital due to the partial release (€277 million) of the provision set up in 2000 to offset the dilution gain recorded when acquiring Sanford C, Bernstein, Inc, This release was due to the buy-back of 8,16 million private units in Alliance Capital to the former shareholders of Sanford Bernstein, after these shareholders exercised thier liquidity put options. This operation generated and additional goodwill for €122 million that was entirely amortized during the year (€129 million).”
Note to the consolidated financial statements Preliminary note: in the present notes, “the Company” refers to AXA SA, the holding company, and “AXA” refers the
Europe, in Northern America and in the Asia / Pacific region. To a lesser extent, AXA is also present in the Middle-
and “Other Financial Services”. An additional “Holdings” segment includes all non-operational activities.
IMPACT OF DECLINE IN STOCK MARKETS AXA, like many investors, has experienced for the third year in a row a significant decline in stock markets. In 2002, the CAC index declined –33.7%, the Dow Jones –17% while the Nikkei fell –18.6%. As a consequence, AXA has recorded valuation allowances for impaired equity securities of €912 million with an impact on net Group share earnings of €–614 million. These valuation allowances also include a liquidity risk reserve for €72 million (€47 million net Group share) for specifically French regulatory reasons and in spite of surveys demonstrating a sufficient asset liquidity.
1.2.2 DISPOSALS In Australia, the sale of AXA Health Insurance Pty Limited was finalized in the second half of the year 2002. The realized capital gain on the sale was €87 million net Group share and was recorded as an exceptional operation in the 2002 consolidated accounts.
(1) Source: FFSA 2001 (based on total revenues). (2) Source: Citygroup (based on 2001 assets under management).
AXA’s consolidated financial statements are prepared as at December 31. Certain entities within AXA have a reporting year-end that does not coincide with December 31, in particular AXA Life Japan and its insurance subsidiaries, which have a September 30 financial year-end. Prior to 2001, AXA Asia Pacific Holdings and its subsidiaries also had a financial year ending September 30, however, the financial year-end was changed to December 31 in 2001. Therefore,
Assets and liabilities of subsidiaries denominated in non-euro currencies, being the functional currency of the local subsidiary, were translated into euro using year-end spot foreign exchange rates. Revenues and expenses transacted in foreign currencies were translated into euro using the average exchange rate for the accounting period. The impact of foreign exchange rates is recorded within consolidated shareholders’ equity.
France (referred to as “French GAAP”). French GAAP is based on the: – French Law of January 3, 1985 and its decree of application regarding consolidation; and
– Regulations issued by the French Accounting Regulations Committee (“Comité de la Réglementation Comptable”)
3.3. CHANGES IN ACCOUNTING PRINCIPLES Effective from January 1, 2002, AXA complies with the regulation no. 2000-06 issued by the French Accounting
Regulations Committee (“Comité de la Réglementation Comptable”) in respect of liabilities. This new regulation did not impact AXA’s consolidated financial statements.
(n° 2000-05) for preparing and presenting consolidated financial statements of French insurance companies, and (ii)
Companies in which AXA exercises significant long-term influence, that is, affiliated companies, are accounted for as an investment using the equity method of accounting. Significant influence is presumed when AXA directly or indirectly holds 20% or more of the voting rights or when significant influence is exercised through an agreement with other shareholders. Certain entities are also accounted for as investments under the equity method if their contribution to revenue, net income or net financial position is not significant.
contracts, are included in the calculation of AXA’s controlling interest but are excluded from the calculation of the percentage of ownership interest.
Valuation of assets acquired and liabilities assumed At the first consolidation, the identifiable assets and liabilities of the acquired company are recorded at their estimated fair value. However, the insurance liabilities are maintained at the predecessor’s carrying value if the measurement basis is consistent with AXA’s accounting principles. In conjunction with purchase accounting relating to acquired life insurance operations, an asset is recorded corresponding to the present value of estimated future profits emerging on purchased life insurance business in-force at the date of acquisition (also referred to as value of purchased Life insurance business in-force or VBI). The present value of future profits is estimated using actuarial assumptions based on anticipated experience determined as of the purchase date using a discount rate that includes a risk premium.
Acquisitions of minority interests In respect of acquisitions of minority interests of an existing consolidated entity, the portion of assets acquired and liabilities assumed are maintained at their carrying values at the date of acquisition and not adjusted to reflect their estimated fair values.
Determination of purchase price The purchase price includes the direct costs and external fees related to the transaction, including the costs of settling or exchanging outstanding employee share options of the target company (applicable to all acquisitions including acquisitions of minority interests). If the transaction is based in a foreign currency, the impact of the foreign currency is included in the purchase price at the date of the transaction or the initial date of the transaction (if it occurs over a period of time).
Goodwill The difference between the purchase price and the net assets acquired represents goodwill. If goodwill is positive, goodwill is recorded as an asset.
Investment Results” below). Any remaining goodwill would have been recorded as a goodwill asset and amortized.
This prior treatment was not subject to a retroactive adjustment upon adoption of the new French Regulations in 2001.
However, acquisitions can be accounted for using the derogatory method detailed in article n° 215 of the new regulation
When an asset is disposed of internally and not intended for durable holding within AXA’s assets: – the tax corresponding to the realized capital gain or loss is eliminated upon consolidation through a deferred tax posted to the balance sheet,
– the same applies to the potential policyholders benefit in respect of the disposal gain (a deferred policyholder’s benefit is then posted to the balance sheet).
equity (and presented separately in the statement of shareholders’ equity as “effect of restructurings”).
3.5.1. GOODWILL The goodwill amortization period is dependent on the type of business activity acquired, and whether the segment to which it was allocated can be considered as significant at the Group level. The amortization period generally does not exceed 30 years for insurance operations, including banks and asset management companies whose principal activity is the management of assets on behalf of insurance companies of AXA. For Asset Management operations that manage assets on behalf of third parties, the goodwill amortization period does not exceed 20 years, or five years for brokerage operations.
However, no exceptional amortization charge is recorded if the amount is less than the cumulative amortization charge over a period equal to 1/5th of the initial amortization period and (i) there is an intention to hold the interest in the Company, and (ii) based on available information it is more likely than not that deterioration is not definitive.
Value of purchased Life insurance business in force (“VBI”) The VBI, in respect of acquired Life insurance companies, is determined based on profits emerging over the contract period and is amortized over the life of the relevant contracts. VBI is subject to annual recoverability testing based on actual experience and expected trends with respect to the principal assumptions used to calculate the VBI.
Other intangible assets Other intangible assets include principally certain costs associated with developing software for internal use are capitalized and amortized on a straight-line basis over the estimated useful life of such assets (in general not to exceed five years).
3.5.3. INVESTMENTS FROM INSURANCE, BANKING AND OTHER ACTIVITIES In general, the accounting for investments is described below.
– Real estate investments are stated at historical cost less accumulated depreciation and any valuation allowances.
– Fixed maturity securities are stated at amortized cost less valuation allowances. A valuation allowance is recorded for a decline in the value of a specific fixed maturity security that is deemed to be other-than-temporary whereby the amount may not be fully recoverable.
– Equity securities are stated at historical cost less any valuation allowances for declines in the estimated fair values of specific equity investments that are deemed to be other-than-temporary.
Due to the significant deterioration in the markets during 2002, the 30% criterion was applied. Certain equity securities that do not fall under this criteria may be also subject to a valuation allowance if the decline in value is determined to be durable based on specific facts and circumstances of the issuer or if a security (in an unrealized loss position)
The valuation allowance recorded for equity securities that are determined to have a durable impairment is equal to the difference between the net carrying value and the recoverable value at year-end. The recoverable value is not, except in circumstances, the market value at year-end but rather a value determined based on the net worth, future cash flows and specific considerations relating to the industry sector/activities of the issuer. The investments that are intended to be held for business purpose are not subject to a valuation allowance if there are no indications that the fall in value is linked to the issuer; in other cases of long-term holding intention, the recoverable value is the greater of market value at year-end or the value determined above. In the contrary, if it is determined before year-end that the security will be sold shortly after year-end, the recoverable value is the market value and for other securities the value is the greater of the average market value in the last month before the year end or the market value at year end.
– Mortgage loans on real estate are stated at outstanding principal balances, net of unamortized discounts and valuation allowances. Impairment measurement is based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent.
Investments for certain activities are stated at fair value with the change in fair value included in income under “net investment result”. The activities in which investments can be valued at fair value are set out below: – invested assets in respect of separate account (unit-linked) contracts and invested assets supporting the UK
3.5.4. OTHER ASSETS Real estate (property) owned and occupied by AXA is included under the balance sheet caption “Other assets” and depreciated on a straight-line basis over the estimated useful life of the buildings, ranging from 20 to 50 years. This includes materials, fixtures and equipment that are depreciated on a straight-line basis over the estimated useful life for each asset.
3.5.6. REINSURANCE CEDED UNDER NON-PROPORTIONAL TREATIES Ceding of insurance to reinsurers and of reinsurance to reinsurers (the latter called, “retrocession”) are accounted for in the balance sheet and statements of income in a manner consistent to the accounting for the underlying direct insurance contract and takes into account contractual clauses.
Employee benefit liabilities are either in defined contribution plans and / or defined benefit plans.
– Defined benefit plans are characterized by an actuarial assessment of the commitments based on each plans’ internal rules. The present value of the future benefits paid by the employer, PBO (Projected Benefit Obligation), is calculated based on long-term projections (salary increase rate, inflation rate, mortality, turnover, pension indexation and remaining service lifetime).
Unearned premium reserves An unearned premium reserve is established and represents the portion of gross premiums written which has not yet been earned in the period. A portion is included in income over the periods benefited, as the portion of the unearned premium reserve earned in the period is calculated on a pro rata basis in proportion to the insurance still in force at period-end. The deferred acquisition costs related to such contracts are included as an asset under the heading
Insurance liabilities For traditional life insurance contracts (that is, those contracts with significant mortality risk), the liability for future policy benefits is calculated in accordance with the applicable regulatory principles of each country on the basis of actuarial assumptions as to investment yields, mortality, morbidity and expenses, using a prospective approach.
If the contracts include a minimum guaranteed rate of return, the insurance liability will also include a provision necessary to cover the guarantee in the event that the future returns are insufficient.
The liability for savings contracts or other investment contracts, in which there is minimal mortality or morbidity risk and that are not separate account (unit-linked) contracts, is determined using the retrospective method. Under this method, the liability represents an account balance based on the premiums received to date plus any interest or bonus credited to the policyholders less policy charges, such as, for insurance administration and surrenders. In respect of participating life insurance contracts, whether allocated or not, the future policy benefit liability includes a value attributable to anticipated participation rights arising from the operating results or net investment return for the period.
The method in determining the insurance benefits is in line with the preferred method set out in the new French
Regulations effective from January 1, 2001, in particular, the discount rates used by the group are, in effect, lower than the expected future investment yield recommended in the Regulations.
Specific to future policy benefits on the UK “With-profit” contracts and as a result of AXA Equity & Law’s plan of financial reorganization completed in 2001 (see “Changes in accounting principles under French GAAP” above), the future policy benefits for such contracts include 100% of the “Fund for Future Appropriation” (FFA), which principally covers the future terminal bonuses according to the terms of these contracts. The FFA and, therefore, the future policy benefits vary with the change in market value of the assets supporting the participating “With-profit” funds.
Reserves for guarantees in respect of separate account (unit-linked) contracts in respect of direct insurance and reinsurance activities are determined using a prospective approach. The current value on future benefit obligations to be paid to the policyholder in the event that the guarantee is triggered is estimated based on reasonable scenarios.
The assumptions include an investment return and related volatility, surrender rates and mortality. This current value of future benefit obligations is set up as a provision such that the total average cost of the guarantees is recognized over the contract life.
Provisions for future negative margins can be recorded by each insurance company based on local regulatory requirements (for example, the premium deficiency reserve). To be maintained at the consolidation level, this provision must be necessary from an economic point of view. In the case of life insurance companies, this provision must consider the insurer’s recoverability of VBI and DAC.
Claims reserves include unexpired risk provisions, equalization provisions as set out below: – Equalization provisions are determined based on local regulation in certain of the countries in which AXA operates and, principally, relate to catastrophe risks, such as hail, storms, floods, nuclear accidents, pollution liability and terrorist attacks.
3.6.3. PROVISION FOR LIQUIDITY RISK A provision for liquidity risk must be recorded as a liability by an insurance company if there is a risk of liquidity, principally in the case of a large contract surrender, and if the total net book value of investments (excluding fixed maturity investments) of such company is greater than its total market value.
3.6.5. CAPITALIZATION RESERVE In France, increases and decreases in capitalization reserve are accounted for in the local statutory accounts and are eliminated in preparing consolidated accounts. A deferred tax charge is recorded if there is a strong probability that this reserve will be released. In the event that the entity is a Life insurance company, this will also include a deferred policyholder participating benefit.
3.7. DERIVATIVE INSTRUMENTS Derivative instruments are accounted for according to the opinion of the French standard setter (Comité de
– realized investment gains and losses net of valuation allowances for investment impairment, and
Company stock are accounted for as an investment in equity securities if the treasury shares are held to stabilize the
3.10.1. OPTIONS TO SUBSCRIBE FOR SHARES (INCREASES AXA’S CAPITAL) For share option plans issued by AXA (the Company) that do not provide a guarantee of liquidity given by AXA (the
Company) to the employee, in principle, an expense is not recorded. For share option plans issued by AXA entities other than AXA (the Company) in which the grant provides an advantage to the employees (the exercise price is less than the market price at the date the number of options and the exercise price are known), a liability is recorded on a systematic basis over the vesting period.
The activities of Banque Directe have been merged with AXA Banque. The activities of ipac Securities Limited have been integrated within the AXA Australia New Zealand sub-group at acquisition date.
Other 2002 changes are detailed in the schedules presented in paragraph 4.2.
4.1.2. PRINCIPAL CHANGES IN CONSOLIDATION IN 2001 The principal change in the scope of consolidation in 2001 was the sale of Banque Worms to Deutsche Bank that was completed on April 2, 2001. Since January 1, 2001, Banque Worms is not consolidated anymore.
Parent and holding Change Voting Ownership Voting Ownership companies in scope rights interest rights interest
AXA Conseil Iard Merger with AXA Assurances IARD – – 100.00 100.00
AXA Conseil Vie Merger with AXA Assurances Vie – – 100.00 100.00
PPP Lifetimecare Merger with AXA Sun Life – – 100.00 99.99
E-business AXAUK Merger with AXA UK Plc – – 100.00 99.99
AXA Minmetals Assurance Co Ltd (Chine) Deconsolidated (*) – – 51.00 38.75
AXA Aurora SA Iberica de Seguros y Reaseguros 99.68 99.68 99.68 99.68
Banque des Tuileries Merger with Compagnie Financière de Paris – – 100.00 100.00
AXA France Finance Merger with AXA Banque – – 100.00 99.97
AXA Investment Managers (including AXA Rosenberg) 109 – 7 (9) –
Financial reorganization AXA Equity & Law – 451 10 (11) –
6.2. AXA FINANCIAL – BUY-OUT OF MINORITY INTERESTS (2000) The aggregate purchase consideration was €11,213 million and included the following items: – €3,868 million, representing the value of the 25.8 million ordinary shares issued by AXA at a price of €149.90 per share at December 22, 2000, being the closing date of the initial offer period, and
Had no goodwill been charged directly to retained earnings and reserves, additional goodwill amortization of €92 million would have been recorded against income in future periods.
US$122 million amortized completely in 2002 (€127 million at 2002 closing exchange rate).
6.6. AXA CHINA REGION – BUY-OUT OF MINORITY INTERESTS (2000) In November 1999, AXA Australia purchased the minority interests in AXA China Region for €519 million. The excess purchase price over the carrying value of the portion of net assets acquired totaled €300 million and is being amortized over 20 years and is consistent with the estimated useful life used in the accounting for the acquisition of AXA Asia
Property & Casualty claims reserves. Consequently, an exceptional amortization of goodwill of €446 million (€259 million, net Group share) was recorded as a charge against French GAAP income in 1999.
In 2000 there was deterioration in the claims ratios relating to the former GRE Property & Casualty insurance portfolios in the United Kingdom and Ireland from the pre-acquisition period. As a result, the opening balance sheet of GRE
At December 31, 2002, the gross goodwill asset was €289 million, accumulated amortization was €63 million (of which €10 million represented an amortization charge in 2002) and, therefore, goodwill net of accumulated amortization totaled €226 million. Had no goodwill been charged directly to retained earnings and reserves, additional goodwill amortization of €53 million would have been recorded against income.
The notional amortization in 2002 was €156 million and included €11 million for the Royale Belge, €53 million for the UAP and €92 million for the AXA Financial.
7. Value of purchase life business in force At December 2002, the value of purchase Life business in force (acquired in external growth operations) totaled €3,224 million.
VBI of €466 million was recorded. In March 2000, AXA acquired AXA Nichidan.
8. Investments 8.1. DETERMINING FAIR VALUE The accounting of principles applicable to investments are decribed below: – For publicly traded fixed maturities and equity investments, estimated fair value is determined using quoted market prices.
– Real estate investments are subject to periodic valuations conducted by qualified external appraisers based on local legal requirements. Such expert valuations are based on a number of techniques including comparative studies and capitalization of income.
– Equity holdings in fixed maturity-based mutual funds 16,526 16,444 40 49 16,566 16,493
Mortgages, policy and other loans 18,362 18,265 19,004 226 170 179 18,588 18,434 19,183 Invested assets excluding investments
Invested assets Gross Net Gross Net Gross Net carrying carrying Fair carrying carrying Fair carrying carrying Fair value value value (a) value value value (a) value value value (a)
Equity securities and holdings in mutual funds 66,061 64,537 65,981 614 562 605 66,674 65,098 66,586
Mortgages, policy and other loans 23,001 22,907 23,215 244 219 219 23,246 23,127 23,434
The treasury shares held at December 31, 2002 are to cover the potential ordinary shares to be issued upon conversion of outstanding share options in AXA ordinary shares (in the form of AXA ADS’s) by employees of AXA Financial, Inc.
Listed companies: Banque de Crédit Marocain 115 90 567 84 2001 12.31.01 10.6%
Unlisted companies : Investment holdings under €50 million each and affiliated companies 2,040 1,736
(b) Allocated to UK “With-profit” business trading 10,859 (c) Other trading securities 1,922 Total fixed maturities 156,069 Total equity investments (including holdings in mutual funds) (a) Available for sale 45,361 3,713 (2,291) 45,273 (b) Allocated to UK “With-profit” business trading 19,792 (c) Other trading securities 1,522 Total equity investments (including holdings in mutual funds) 66,586 Investment in participating interests 6,317 TOTAL 228,972
(1) The realization of unrealized gains and losses upon disposal of the investments may give rise to an allocation to participating insurance contracts, minority interests and tax.
(2) After reclassifications from unrealized gains to unrealized losses on equity and fixed maturity securities for €–557 million and €+119 million respectively.
8.5. INVESTMENT VALUATION ALLOWANCE Investment valuation allowances, which have been deducted in arriving at investment net carrying values as presented in the consolidated balance sheet, and changes are shown below.
Balance at Balance at January 1, Other December 31, 2002 Additions Deductions changes (b) 2002
(a) Includes provisions on assets from banking activities, (b) “Other changes” relate principally to changes in scope of consolidation and foreign currency fluctuations. They include U.S.
Balance at Balance at January 1, Other December 31, 2000 Additions Deductions changes (b) 2000
The increase and decrease in provisions for valuation allowances presented in the tables above are included in the net investment result. 2002 was affected by the deterioration of the stock markets and, consequently, valuation allowances on equity securities increased. Other provisions relate to (i) financial services operations (included in bank operating expenses) and to (ii) provisions on non-listed securities (mainly in Germany).
Note 3-5 on accounting principles) are presented in the table below. “Holdings in other mutual funds” were essentially represented by investments of the French Life insurance companies in mutual funds that invest predominantly in real estate.
At December 31, At December 31, Separate account (unit-linked) assets 2002 2001
Carrying value Carrying value contribution at January Change Other at December to Net 1, 2002 in scope changes (a) 31, 2002 income
AXA Seguros affiliates: – Hilo Direct de seguros y reaseguros – 39 – 39 4
For the years ended December 31, 2002, 2001 and 2000, AXA received cash dividends from companies accounted for by the equity method of €46 million, €63 million and €4 million, respectively. The decrease in dividends received in 2002 related to the dividends paid by the Australian entities following negative level of result in 2001.
Receivables Payables Gross book Carrying value Provisions value Deposits and guarantees 4,408 – 4,408 1,730 Current accounts from other companies 2,190 (62) 2,128 2,975 Policyholders, brokers, general agents 4,477 (260) 4,217 2,951 Estimated premiums not yet recorded 2,769 – 2,769 – Other 536 (54) 481 643
ta te m en ts 15. Shareholder’s equity The movement in consolidated shareholder’s equity since December 31, 2000 is presented in the table below: (in euro millions, except number of shares in millions)
(AXA Equity & Law Inherited Estate) – – – (79) – (79) – Conversion of 4,5% mandatorily convertible bonds at maturity 28.7 66 254 – – 320 – “Squeeze out merger in the buyout of minority interests in AXA Financial, Inc.”) 19.7 45 692 – – 737 – Employee stock purchase program
The €–228 million decrease in 2001 primarily related to the deconsolidation of AXA Millésimes (€–135 million) and of real estate companies in Australia and New Zealand as well as to the exercise of Alliance Capital stock options of €22 million
(decreasing AXA’s ownership interest from 52.64% at December 31, 2000 to 52.28% at December 31, 2001).
In 2002, the principal change of €113 million is attributable to the increase in Group’s interest in Alliance Capital by 3.4% (from 52.3% to 55.7%) as 8.16 million units were bought back from former Sanford Bernstein shareholders.
ta te m en ts 18. Subordinated debt At December 31, 2002 the subordinated debt totaled €8,300 million (2001 : €8.868 million).
At December 31, 2002 the aggregate maturities of subordinated debt based on required principal payments at maturity for 2003 and the following four years totaled €59 million in 2003, €40 million in 2004, €401 million in 2005, nil in 2006 and 2007, and €7,800 million in 2008 and thereafter.
In 2002, the impact of foreign exchange rates (€–582 million) accounts for most of the €–568 million decrease compared to 2001.
19. Insurance liabilities The table below presents the insurance liabilities by segment: (in euro millions at December 31,)
Less reinsurance ceded on: – Claim reserves and other reserves 400 397 2,405 2,775 3,333 4,243 6,138 7,415
Total reinsurance ceded on insurance liabilities 3,812 4,042 2,512 2,940 3,586 4,609 9,910 11,591
Reinsurance ceded on separate account (unit-linked) liabilities 20 28 – – – – 20 28
TOTAL INSURANCE LIABILITIES, NET OF REINSURANCE CEDED 304,096 336,127 29,100 30,140 10,057 9,544 343,253 375,811
– UK “With-profit” business liabilities 30,745 35,041 (a) Transfers as at January 1, 2002 of UK discontinued business from “Property & Casualty” to “International Insurance” for €988 million.
In prior years, AXA has issued insurance policies and assumed reinsurance for cover related to environmental pollution and asbestos exposure. The insurance companies have been and continue to be involved in disputes regarding policy coverage and judicial interpretation of legal liability for potential environmental and asbestos claims. AXA has received and continues to receive notices of potential claims asserting environmental and asbestos losses under insurance policies issued or reinsured by AXA. Such claim notices are frequently merely precautionary in nature.
Under insurance and reinsurance contracts related to environmental pollution and asbestos, AXA paid claims and legal costs of approximately €45 million in 2002 (2001: €77 million and 2000: €67 million). At December 31, 2002,
AXA has made cumulative payments relating to such contracts of €377 million (2001: €332 million).
At December 31, 2002 and specific to environmental pollution and asbestos claims, AXA had insurance claim reserves for €909 million of which (i) reported insurance and reinsurance claims of €350 million (2001: €349 million) and (ii)
additional reserves for incurred but not reported (IBNR) claim liabilities of €559 million (2001: €577 million). The IBNR
& Casualty Insurance & Casualty Insurance & Casualty Insurance Gross claims reserves to be paid, January 1 25,162 11,841 24,012 8,602 23,007 8,194 Changes in scope of consolidation, portfolio transfers and change in accounting principles (a) (1,619) 1,136 191 (9) 706 271 Impact of foreign currency fluctuations (b) (479) (1,345) 58 235 11 51
Gross claims reserves to be paid, December 31 23,730 11,533 25,162 11,841 24,012 8,602
I) DEFERRED TAX An analysis of deffered tax is given below: On a constant exchange rate basis, the decrease in the net deferred tax balance between 2001 and 2002
Financial employees at the time of the minority interest buy-out. The corresponding tax credit has been repaid in 2002 (€–78 million).
At December 31, 2002 At December 31, 2001 Net Deferred Net Deferred Net Deferred Net Deferred Tax Asset(a) Tax Liability Tax Asset Tax Liability
They include the benefits payable to AXA Group employees when they retire (departure compensation, pension complement, medical cover, long-service benefits). In order to cover those commitments, some regulators have allowed or imposed the establishment of dedicated funds. The funding and implementation methods are specific to each country and each fund.
– actuarial gain or losses (change in long term assumptions, change in staff, ...),
Recorded in the balance sheet for plans: With a positive net position (Asset) 2,029 1,758 – –
(fully funded) by assets. (b) i.e. not yet recorded in financial statements.
Provisions Provisions established established in purchase Other in purchase Other accounting provisions Total accounting provisions Total
The low level of additional provision recorded in 2002 is directly related to the low level of significant acquisitions.
Most of the additional provisions recorded in 2002 were in respect of “end-of-career” measures in France (€15 million)
and in Germany (€8 million). Other allowances are from the United Kingdom (€4 million in respect of the “First Choice”
project of which €2 million were used in 2002) and to Australia / New Zealand following the acquisition of ipac
– The remaining €583 million balance of the provision set-up in 2000 to offset the dilution profit realized by AXA
– The remaining €236 million balance on the provisions recorded in 2000 in connection with the sale of Banque Worms.
AXA SA operating debts on behalf of its French and German subsidiaries 232 –
(a) Since January 1, 2002, accrued interest are no longer included in “non-subordinated debt instruments issued”, but are included in “accrued expenses”.
– the partial repayment of AXA Financial Senior Obligations (€–53 million) partly compensated by a new €532 million issued under the Company’s Euro Medium Term Note Program (“EMTN”),
– Repayment of commercial paper (issued end of 2000) refinanced by AXA.
22. Amounts owed to credit institutions The movement of amounts owed to credit institutions in 2002 (€–1,591 million) is mainly due to the decreasing operating debt of AXA Banque (lower financing needs in 2002), CFP Crédit and AXA Bank Belgium (principally on deposit accounts).
In 2001, the movements were linked to the repayment of committed credit facilities for €3.0 billion by the Company.
Other credit lines 254 145 Other entities 50 100 OPERATING DEBT 3,635 4,735 Other financial services in France
Compagnie Financière de Paris 93 422 AXA Banque 408 758 AXA France Finance – 50
The following table presents AXA’s consolidated gross premiums and financial services revenues by segment: Fin an cia l S
Total gross written premiums include: – Separate account (unit-linked) contracts 14,344 16,767 19,612 90,011 – UK “With-profit” business 3,128 3,443 2,383 30,745
TOTAL Gross written premiums 15,936 15,894 15,579 31,612 Other revenues 12 2 – –
Equity in income from affiliated entities (7) 19 (1) – 14 (2) – 23
Change in unearned premium reserve (2) (115) (238) – – – – (355)
Equity in income from affiliated entities 16 5 – (4) – – – 17
Change in unearned premium reserve (32) (207) (195) – – – (5) (439)
Bank operating expenses – – – – (6,529) – 19 (6,509)
Net change in separate account (unit-linked) assets (17,576) – (17,576) (11,613) (4,713)
Net investment result included in technical result 999 – 999 1,551 1,882
Net investment result included in technical result 340 – 340 378 501
Other revenues, net of benefits, claims and other deductions 24 27 1
Mortgage, policy and other loans 1,528 1,790 1,575 – – – 7 14 8 (178) (82) (86) 1,357 1,722 1,496
Mortgage, policy and other loans (108) (129) 17 – – (41) (12) (25) 1 – – – (120) (154) (23)
Mortgage, policy and other loans (106) (125) 17 (1) (4) 0 (0) – (0) (108) (129) 17
As in 2001, the global stock markets experienced significant deterioration in 2002, with two significant impacts on the net investment result: – The change in market value in assets supporting the separate account (unit-linked) contracts had a negative impact of €17.6 billion on the net investment result in Life insurance companies (2001: negative impact of €11.6 billion and 2000: negative impact of €4.7 billion).
– In addition, the net investment result for the Life & Savings segment included a realized loss and investment valuation allowance related to the high-yield bond portfolio in the U.S. operations. As a result of broad weaknesses in the credit market from a slowing economy during third and fourth quarter 2000, a loss of €604 million was recorded
(€236 million net Group share and net of the impact on deferred acquisition costs).
25. Reinsurance The components of reinsurance ceded as presented in the consolidated statements of income, are summarized as follows: (in euro millions)
Insurance benefits and claims ceded 885 762 713 840 1,003 1,101 716 2,338 1,709 (110) (47) (52) 2,331 4,056 3,471
26. Operating charges The analysis of operating charges below does not include operating charges in respect of banking activities, which are presented separately in the statements of income.
The classification of operating charges corresponds to the principal function to which the charge relates. Financial services-related charges incurred by the insurance companies are included under “administrative expenses”.
Life & Property & Insu- Total Mana- Financial Holding elimi- TOTAL Savings Casualty rance Insurance gement Services companies nations
TOTAL BEFORE INTER-SEGMENTS ELIMINATIONS (7,030) (5,606) (1,227) (13,862) (2,454) (4,745) (123) 415 (20,770)
Including: (a) Represents total acquisition expenses as presented in the statements of income including amortization expense for value of purchased life business in-force (VBI) and the change in deferred acquisition costs (DAC) net of changes in unearned premium reserves.
(b) Before amortization of value of purchased business in-force, the change in deferred acquisition costs and the change in unearned premium reserves.
(c) Such costs are included within “insurance benefits and claims” in the consolidated statements of income. (d) Such costs are included within “net investment result” in the consolidated statements of income.
Belgium (– 314), the United States (– 300), Spain (– 254) and Germany (– 248) following restructuring measures taken in 2001 and 2002.
COMPENSATION OF THE MANAGEMENT AND OFFICERS “Executive Officers” aggregate remuneration in relation to their services1 amounted to €30 million (€11 million for the
Management Board and €19 million for the Executive Committee). The members of the Supervisory Board do not receive remuneration with the exception of a fee for attending meetings, which totaled less than €1 million.
The provisions for income taxes are different from the amounts determined by multiplying income before income tax expense by the French statutory income tax rate (35.43% in 2002, 36.43% in 2001 and 38 % in 2000). The sources of differences from the statutory rate and the tax effect of each are as follows: In 2001, the income tax expense was affected by the German tax reform: from January 1st, 2002 realized gains on equity securities are no longer subject to tax. Consequently, the deferred tax liability that had been recorded on unrealized capital gains at the time of acquisition was released. The total release of deferred tax liability amounted to €221 million (100%). In addition, a deferred tax asset (€130 million) had been recorded on non tax-exempt provisions for run-off financial services and €63 million had been utilized on Sicher Direct fiscal losses in Germany.
Deferred tax charges results from changes in temporary differences in the basis of assets and liabilities for financial reporting and income tax purposes. These differences are explained in the table below: Certain companies in AXA Group are subject to examination by tax authorities from time to time. The Company evaluates the related reserves as appropriate.
United Kingdom (€309 million vs. €99 million in 2001), Australia / New Zealand (€39 million) and Morocco (€37 million).
Income tax expense at French statutory base rate (609) (340) (3,331)
Impact of difference between the statutory tax rate and the effective tax rate (7) 309 463
AXA share over the period. The effect of convertible bonds (number of shares and income) is integrated in the calculation if it actually generates a dilution of the net income per share.
NET INCOME AND ADJUSTED EARNINGS ATTRIBUTABLE TO ORDINARY SHARES AND POTENTIALLY
29. Financial instruments AXA uses derivatives instruments primarily for non-trading purposes and from time to time will also trade in derivative instruments as discussed further below.
At December 31, 2002, the notional amount of all derivative instruments, for trading and non-trading purposes, totaled €177.4 billion (2001: €101.8 billion). The estimated net fair value of these derivative instruments at December 31, 2002 totaled €1,044 million (2001: €157 million). The use of credit derivatives across the Group is limited to the management of a small portfolio of credit default swaps written in prior years by AXA Corporate Solutions. However, at December 31, 2002, the overall impact on AXA’s consolidated financial condition and operating result was not material.
At December 31, 2002, the notional amount and net fair value of derivative instruments used by AXA’s operations for non-trading purposes totaled €153,445 million and €962 million respectively (2001: €102,006 million and €118 million respectively). The impact on AXA’s consolidated net income was a gain of €119 million (net Group share) in 2002
At December 31, 2002 approximately 50% of the derivative instruments used for non-trading purposes consisted of swap contracts, principally interest rate swaps. The other types of derivative instruments used in AXA’s hedging strategies consisted of interest rate caps and floors and non-foreign currency related forward / future contracts as discussed below.
– Interest rate caps and floors are option-like agreements where the seller agrees to pay to the counterparty an amount equal to the differential, based on a notional amount, between the interest rate of the specified index and the interest rate cap or floor. The notional amount and net fair value of such instruments as at December 31, 2002 was €25,259 million and €–230 million (2001: €21,880 million and €–112 million). The net impact on income for 2002 was a charge of €295 million net Group share (2001: a charge of €59 million). These types of derivatives are used predominantly by AXA’s U.S. and French Life & Savings operations to hedge interest crediting rates on products with guaranteed rates of return and other interest-sensitive products. Income and expense resulting from these hedges are generally reflected as an adjustment to interest credited to policyholders’ account balances. Any net premium paid on such contracts is amortized on a straight-line basis over the life of the contracts.
Principal commitments received are detailed as follow: – Commitments to finance and guarantees: As an insurance company, AXA has a number of credit facilities from financial institutions. In 2001, commitments to finance and guarantees did not include AXA Financial’s and Alliance
Guarantees are down €283 million compared to 2001 and are mainly received by AXA Belgium and AXA Bank
Belgium. Those guarantees are mainly third-party guarantees and mortgages on buildings for customers’ loans.
AXA Crédit (France) and AXA Bank Belgium, AXA provides financial guarantees and commitments to finance to its customers. In 2002, there was a significant decrease (€–311 million) in such commitments related principally to
– Letters of credit: Commitments given under letters of credit as at December 31, 2002 primarily related to AXA’s insurance operations, in particular, AXA Corporate Solutions (€1,261 million). Such commitments were given in 2001 in connection with future claims settlements arising from the U.S. terrorist attacks on September 11, 2001 and are therefore decreasing in 2002.
The scheme governing the financial re-organisation of AXA Sun Life in 2001 (the “Scheme”) details arrangements under which assets from the inherited estate, attributed to AXA through the re-organisation, may be transferred on a temporary, or permanent, basis to the “With-profit” funds as required to support the capital requirements of these funds, as determined under the Scheme. In the case of a temporary transfer, assets and related investment income remain attributable to AXA as they will be returned when they are no longer required to support the capital requirements of the
To comply with French regulatory requirements on assets representing technical commitments, in the first half of 2002,
This operation led to replace a balance sheet receivable by cash and cash equivalents of €250 million. In respect of
this 5-year operation, AXA France Assurance has given a guarantee limited to €230 million, to cover any default risk from AXA Collective’s delegates in charge of the recovery of these debts.
In addition and in connection with Alliance Capital’s acquisition of Sanford C. Bernstein in October 2000, AXA Financial,
Inc. agreed to provide liquidity to the former shareholders of Sanford C. Bernstein who received 40.8 million of private
Alliance Capital units. After the completion of this lockout period in October 2002, Sanford C. Bernstein’s former shareholders exercised their options and AXA Financial acquired 8.16 million of their units. The remaining 32.6 million private Alliance Capital units can be sold at market price to AXA Financial, Inc. over the seven coming years but not more than 20% of such units may be sold to AXA Financial in any one annual period.
The technical results are shared between entities in proportion of their written premiums. The global written premiums
(Mutual and Limited Company) recorded in the agreement amounted to €1,262 million in 2002 (of which €1,123 million attributed to the Limited Company), €1,127 million in 2001 (of which €1,003 million attributed to the Limited Company), and €986 million (of which €868 million attributed to the Limited Company) in 2000.
Finaxa has granted AXA a non-exclusive license to use the AXA trademark in the jurisdictions in which AXA currently has operations and in any additional jurisdictions in which the AXA trademark is registered and agreed not to grant licenses to use the AXA trademark to any other company or partnership unless (i) that company or partnership holds an ownership interest in Finaxa or (ii) Finaxa and / or AXA hold, directly or indirectly, an interest in that company or partnership.
Adjustments to reconcile net income to net cash provided by operating activities: Net investment gains/losses (a) 3,343 1,811 (10,256)
Net change in banking activities including broker-dealer receivables & payables 1 (187) 1,457
Cash flows from investing activities (b): Maturities and sales: Purchases: Loans and other (8,531) (8,892) (16,418)
Cash and cash equivalents end of year (net) 16,515 16,018 26,065 (a) Includes the realized gain on the sale of Donaldson, Lufkin & Jenrette in 2000 of €3,407 million of which €1,336 million was attributed to minority interests.
(f) Net of bank overdrafts. In the balance sheet, bank overdrafts are isolated in “Amount owed to credit institutions”. Cash and cash equivalents are presented gross of these bank overdrafts, and amounted to €17,592 million at December 31, 2002, €17,646 million at December 31, 2001 and €28,728 million at December 31, 2000.