Customers AXA seeks to build close and lasting relationships with its customers by offering expert advice and a full range of adapted solutions, and by adhering to the highest standard of professional ethics. Suppliers AXA seeks to maintain quality relationships with its suppliers and other business partners by adhering to a clearly defined code of conduct, and by promoting ongoing dialogue.
AXA Stock and Employee Stock Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Investment Strategy and Capital Ressources . . . . . 128
Organization of Risk Management at AXA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140
Auditors Report on consolidated financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300
Adoption of New International Accounting Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 321
Management Board’s Report on the Parent Company Financial Statements . . . . . . . . . . . . . . 324
Financial Results over the Past Five Years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 333
Summary of share option plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 348
■ Underlying Earnings €2 billion (+ 30% at constant exchange rates)
•To provide health and personal protection coverage for their families or employees,
■ 20,000 employees donating their time and skills to community organizations.
In last year’s letter, I alerted readers to the growing fissure between the financial markets and the real economy.
In particular, I noted that the adoption of mark-tomarket or fair value methodology for calculating the carrying values of assets and liabilities posed a serious problem, as illustrated: ■ in the near term by other than temporary asset impairments, ■ in the future by International Accounting Standards. Unfortunately, the trend observed in prior years continued unabated in 2003, sealing the divorce between the world’s financial spheres and underlying economic activity. Too many investors continued to focus on increasingly short-term performance, their eyes riveted to the arbitrary stock price fluctuations that they themselves were creating. In the meantime, businesses – whose leaders must stay focused on the medium- and long-term outlook of their industries and their markets – were more in need than ever of stable investors capable of understanding a sustainable growth strategy, and consequently willing to accept greater earnings fluctuation in the very short run.
They will continue to make positive strides in 2004, delivering what shareholders, clients and the community as a whole have come to expect from AXA.
But I would be remiss if I failed to once again warn that the current direction the International Accounting Standards are taking poses a real danger to our industry. While nobody seriously contests the need for convergent accounting standards to enable meaningful financial statement comparisons across geographic boundaries, it is equally clear that the underlying principles must correspond to the economic reality of the business in question.
The impasse into which talks between bankers, insurers and the IAS Board seem to be headed is therefore cause for concern. The dogma of “full fair market value” offers more in the way of ideological content than good economic sense. At AXA, we believe that the value of any asset should be determined over a medium to long-term horizon that matches the duration of the obligations insurers have contracted with respect to their clients. Adopting a “mark to market” approach to valuation for annual financial disclosures would only serve to widen the gap between financial market reality and the economic environment in which businesses actually operate. The financial community needs to wake up to the fact that it will be the first to suffer the negative consequences if this approach is adopted.
At AXA, we believe that the value of any asset should be determined over a medium to long-term horizon that matches the duration of the obligations insurers have contracted with respect to their clients.
We have just weathered three years of extreme turbulence, exacerbated by the largest insurance loss in history, financial market meltdown and interest rate collapse. What, if anything, have we learned from the crisis years and how do things look going forward?
Over of the last three or four years, we have heard, successively, that: ■ Those who fail to opt for a bank-insurance strategy by aligning with or acquiring banks will fail to capture wealth management business.
■ Given the inherently low profitability of the propertycasualty insurance business, the best course of action is to exit from this market and focus on life insurance or financial services.
Our business : the Financial Protection and wealth management business allows us to support and cover our clients – individuals and businesses – as they navigate in a world where both risks and the need for protection and sound advice are growing.
We managed to achieve both a substantial reduction in unit costs (savings of 1.2 billion euros in two years) and a marked improvement in technical results (a combined ratio of 101 in 2003, compared with more than 110 in 2001), resulting in strong growth in underlying earnings and without hurting sales performance: in 2003 AXA picked up market share practically across the board. In addition, by developing better instruments for measuring capital adequacy requirements we were able to protect our financial strength rating and better allocate capital resources, which also helped to strengthen our competitive edge.
The third lesson, and probably the most important one, is that people and effective teamwork are critical drivers of success. It is when times get tough, as they did recently, that people really show what they’re made of. AXA has come out of this difficult period stronger than ever, not only because of its human talent, but also because of the way AXA people pulled together and rose to the challenges at hand.
Today, we are a motivated team of people united behind the AXA banner.
H. de C.: Although the environment is showing some signs of improvement, the recovery remains hesitant. We aren’t worried, though, precisely because our core business is about dealing with risks.
We plan to stay the course strategically while stepping up our efforts in three areas: ■ We need to continue to increase the pace of organic growth while making further efforts to improve technical results. We will do so by focusing on service quality improvements. Our organizations are still overly bureaucratic. They need to become more efficient and we must have the courage to change them. ■ We need to make further efforts to truly respond to the needs of our clients. The work we have done over the last three years to increase our customer knowledge should begin to pay off now in the form of more needs driven products and services that can help our customers be life confident. Our people are aware of the importance of listening to what our clients are telling us, and are ready to provide the level of advice and service they expect from AXA.
History and development AXA1 originated from several French regional mutual insurance companies, known collectively as “les Mutuelles Unies”: In 1982, les Mutuelles Unies took control of Groupe Drouot and following this transaction the new Group began operating under the name of AXA.
In 1999, the Equitable Companies Incorporated adopted the name AXA Financial, Inc. (“AXA Financial”).
Mutual Holdings changed its name to AXA Asia Pacific Holdings Ltd.
In 2001 and 2002, AXA acquires two financial advisory networks in Australia, Sterling Grace and Ipac Securities, as well as a banking platform, Banque Directe in France. AXA also continued to streamline its portfolio of business, selling its health business in Australia and insurance operations in Austria and Hungary, and reorganizing its reinsurance business.
Then, in 2003, following the exit of the Group of its activities of bank-insurance in Chile during the previous year,
Corporate Governance Implementing sound corporate governance principles 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 adopted in the United States in 2002. Accordingly, AXA has made various adjustments necessary 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 and of the provisions of the “Sécurité Financière” Law of
An Executive Committee assists the Management Board in the performance of its duties. In addition, the Supervisory
SUPERVISORY BOARD The following chapters “Supervisory Board” and “Supervisory Board Committees” correspond to the first part of the Supervisory Board Chairman’s Report (the conditions relating to the preparation and organization of the Board), prepared in accordance with the French Financial Security Act of August 1, 2003. The second part (Internal Control
In the discussion below relating to the Supervisory Board, the sections on the Board’s and Committees composition have been updated, to reflect: – the re-elections and new appointments that will be presented to a vote of AXA’s shareholders on April 21, 2004; – the positions held by each member; – the modifications of Committee composition that occured at the beginning of 2004.
Article 12 of the Company’s articles of incorporation and bylaws, along with the Supervisory Board’s internal regulations, specify the following matters that require prior approval of the Supervisory Board: – the issuance of securities with a direct or indirect claim on the equity capital of the Company; – proposed stock repurchase programs submitted to a vote of the shareholders assembled in an ordinary meeting; – financing operations with a material impact on the Company’s financial position; – business acquisitions with a value of over €500 million; – agreements to form strategic partnerships; In tro du ct ion
– proposals to amend the Company’s bylaws submitted to a vote of the shareholders in an extraordinary meeting; – appropriations of earnings and dividends for the previous year proposed to shareholders in an ordinary meeting; – interim and final dividend payment dates.
Operating Procedures The principles governing the operation, organisation and remuneration of the Supervisory Board are specified in its internal regulations.
This documentation always includes information on: – the Group’s operations, as presented in a quaterly report of the Management Board’s, a press review and a share price performance report,
– reports from committee meetings that have occurred since the last Supervisory Board meeting.
Along with the agenda, this documentation may also contain information on issues relating to the Group’s operating procedures, consisting either of presentations concerning an operating company’s strategy and priorities, or specific presentations (brand, transversal projects, etc.).
Training courses and specific meetings are organised for members of the Supervisory Board as necessary.
Certain members of the Supervisory Board have requested and received training in the Group’s various business areas and have attended presentations on certain Group companies. In 2003, Thierry Breton and Ezra Suleiman, in particular, benefited from this additional information.
To ensure that their interests and those of the Group are aligned, members of the Supervisory Board are required to own shares in the Company, the value of which must be at least equal to the amount of directors’ fees they receive in the course of any given year.
Composition At December 31, 2003, the Supervisory Board consisted of 13 members, elected by the shareholders assembled in an ordinary meeting, including four members who are not French nationals.
Acting on the recommendation of the Selection Committee, the Supervisory Board has decided to recommend that the Management Board ask the shareholders to reappoint Claude Bébéar for an additional term of four years.
As of December 31, 2002, share ownership by current and former Group employees, exceeded 3% of AXA’s total outsanding ordinary shares. The Management Board, with the prior authorization of AXA’s Supervisory Board and in accordance with French law, has therefore decided to propose that the Annual Shareholders’Meeting of April 21, 2004 amend the articles of incorporation and bylaws of AXA.The purpose of the amendment is to enable the Annual
Sharholders’ Meeting to elect a member of the AXA Supervisory Board for a four-year term, to represent the Group’s employee shareholders.
The Board makes particular efforts to gauge the independence of each Supervisory Board member with respect to the general management functions carried out by the Management Board.
Acting on the recommendations of its Selection Committee, the Supervisory Board has reviewed the status of all of its members for compliance with the recommendations contained in the Bouton report on corporate governance in publicly traded companies and the Sarbanes-Oxley Act for the composition of the Audit Committee.
Name Office of AXA shares in 2004 for 2003 in 2003 for 2002 (and age) presently held held at 12/31/2003 (in €, gross) (in €, gross)
COMPOSITION OF THE SUPPERVISORY BOARD AT DECEMBER 31, 2003, UNCHANGED AT THE BEGINNING OF 2004: (1) Independent according to criteria of Bouton Report. (2) Shareholders will be asked to consider reelection at the Annual General Meeting on April 12, 2004.
Chairman of Fox Pitt, Kelton Group Limited (UK); AXA UK Plc (UK) and AXA Equity and Law (UK); Director or member of the Supervisory Board of AXA Financial (United States); PinaultPrintemps -Redoute, Swiss Re Capital Markets Limited (GB), Binley Limited (GB) and CX Reinsurance.
Chairman of Lazard Frères (SAS); Director or member of the Supervisory Board of Eurazeo, Compagnie de Saint Gobain, Pinault Printemps Redoute, Cap Gemini Ernst &Young and Sofina (Belgium).
Professor of Politics and Chair of the Committe for European Studies, Princeton University; Associate professor, Institut d’Etudes Politiques, Paris.
As well as regular dialogue between the directors concerning the operations of the Board, the Board carried out a self-review procedure in late 2002 comprising individual interviews and a specially devised questionnaire.
– the preparation and implementation of succession plans for Management Board members, and the division of powers between these members,
– accounts and budgets. The Board examined the various options for closing the Company’s 2002 accounts, and in a subsequent meeting examined the 2002 financial statements and results of both the Group and AXA SA. It examined the interim financial statements for 2003, and was presented with a report by the Audit Committee on the financial statements, in addition to a report by the outside auditors,
– progress in implementing the Group’s transversal projects and the results of the Group cost-cutting programme,
The general principles pertaining to the role, organisation and operating procedures of each Committee are set forth in the Supervisory Board’s internal regulations.
– controls the appointment of the company’s outside auditors and approves audit programs, findings and recommendations, and any actions taken in light of these recommendations. The Group’s Management Board and outside auditors are entitled to refer matters to the Committee concerning any event that exposes the AXA Group to a significant risk,
– examines the accounting rules in force at AXA and reviews any proposed changes,
– examines the programme and objectives of AXA’s Internal Audit Department as well as the reports issued by this division or by audit firms. It may request any internal or external audits it deems necessary and monitors the exercise of internal controls,
– deals with any issue that needs examining in its opinion, and reports the findings to the Supervisory Board.
– controls the appointment of Group outside auditors and is consulted as to subsidiary outside auditors,
– assesses the independence of outside auditors by examining their relationships with the AXA Group and, in particular, by verifying the accuracy and completeness of invoices submitted for audit work.
Finance Committee The Finance Committee had six members at December 31, 2003, four of whom are independent: Claude Bébéar
The Committee met three times in 2003. The global attendance rate was 80%.
– reviews all proposed material financial transactions involving AXA that are proposed by the Management Board,
Selection Committee The Selection Committee had four members at December 31, 2003, two of whom are independent in accordance with the Bouton criteria: Jean-René Fourtou (Chairman), Gérard Mestrallet, Michel Pébereau and Bruno Roger.
The Committee held two meeting in 2003. The global attendance rate was 67%.
– is notified of the appointments of AXA’s principal executives and officers, in particular members of the Executive
The Selection Committee used the services of a specialist outside consultant, which helped in its search for new
Compensation Committee The Compensation Committee had four members at December 31, 2003, three of whom are independent in accordance with the Bouton criteria: Henri Hottinguer (Chairman), David Dautresme, Jean-René Fourtou and
The Committee held five meetings in 2003. The attendance rate was 80%.
The Compensation Committee: – recommends to the Supervisory Board the compensation levels of Management Board members, 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,
– reviews all Management Board recommendations as regards the compensation principles and procedures relating to AXA executives and proposed grants of stock options to AXA employees,
– the 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 and information on the allotment of stock options to Group employees by
In its work on management compensation, the Compensation Committee referred to comparative studies carried out by a specialist outside consultancy.
MANAGEMENT BOARD The Management Board is AXA’s governance body responsible for day to day operations and management decisions.
Current members of the Management Board are: – Henri de Castries (49), Chairman.
Françoise Colloc'h retired at the end of May 2003. Her duties were assumed by Claude Brunet.
Stanley Tulin Vice Chairman and Chief Financial Officer of AXA Financial (United States).
Christopher Condron Member of the Management Board, Chief Executive Officer of AXA Financial (United States).
Les Owen Managing Director of AXA Asia Pacific Holdings (Australia) Head of Asia Pacific business unit (excluding Japan).
SUBSIDIARIES Implementing the principles of corporate governance is a priority at AXA.
EXECUTIVE REMUNERATION AND INCENTIVES The general principles of the executive remuneration policy have been regularly presented to the Remuneration
Committee of the Group Supervisory Board. This policy applies to all executives and is implemented country by country under the supervision of the boards and remuneration committees of Group companies, taking into account local rules and practices. The concrete application of these principles is reviewed and approved on a regular basis by the
The remuneration of Management Board members is fixed by the Supervisory Board, based on the Remuneration
– Variable remuneration for the year 2001 paid in 2002 : € 635,817
– Variable remuneration for the year 2002 paid in 2003 : €1,353,487
– Finally, their individual performance assessed against specific objectives set at the beginning of the year.
This table also allows for comparisons between compensation earned in respect of 2003 with that paid in 2002 and 2003.
Fixed Variable Directors’ Benefit Total Variable Total Variable Total component component fees in kind compensation component compensation component compensation for 2003 paid for 2003 (€) paid in 2003 paid in respect paid paid paid paid in in 2003 (€) 2003 (€) (€) of 2003 (€) in 2003 (€) in 2003 (€) in 2002 (€) 2002 (€)
Executive Committee Members 0(1) C. Brunet was appointed member of the Management Board on February 26, 2003. 0(2) D. Duverne was appointed member of the Management Board on February 26, 2003. 0(3) C. Condron opted for the deferred payment of 25% of the fixed and variable components of his compensation. The amounts indicated reflects the full amount of this compensation.
0(4) J.R. Abat was appointed member of the Executive Committee on February 26, 2003. 0(5) Compensation and benefits paid to J.R. Abat include benefits paid in respect of his expatriate status in Spain. 0(6) B.Calvert’s variable remuneration is paid during the year it relates to (the remuneration paid in 2002 has been restated consequently) 0(7) Compensation and benefits paid to P. Donnet include benefits paid in respect of his expatriate status in Japan. 0(8) N. Moreau was appointed member of the Executive Committee on February 26, 2003. 0(9) Compensation and benefits paid to L. Owen include benefits paid in respect of his expatriate status in Australia. (10) S. Tulin opted for the deferred payment of 25% of the variable components of his compensation. The amounts indicated reflects the full amount of this compensation.
DIRECTORS’ FEES PAID TO SUPERVISORY BOARD MEMBERS The members of the Supervisory Board do not receive remuneration, with the exception of a fee for attending meetings.
The amount of directors’ fees to be paid is determined by the shareholders in accordance with the Company’s articles of incorporation and bylaws and distributed by the Supervisory Board to its members for their Board and Committee duties as follows: – half of the amount of directors’ fees is distributed evenly among the members of the Supervisory Board as the fixed component,
Number of shares owned as of December 31, 2003 (excluding AXA Actionnariat mutual funds)
The Supervisory Board gives its prior authorization, within the global cap approved by the shareholders meeting, to implement subscription or purchase options programs.
AXA has decided so far to grant subscription options, with the exception of options granted to employees of its US
Stock options have a 10-year life, are granted at fair market value with no discount and are progressively exercisable, in general by third between 2 and 4 years from grant.
In the United States, options may be granted during the year to new hired or new promoted employees or when performance measures justifying options grants are available after the first quarter of the year.
Options pools allocated to each business unit are essentially based on their contribution to the Group results during the previous year.
Individual options grants are determined by the following criterias: – criticality of the job ➱ role,
In 2003, AXA stock options have been granted as follows: – 10,879,297 subscription options at a price of €10.96 granted to 1,950 employees outside the US, representing 0.6% of the share capital,
As of December 31, 2003, 3,079 AXA employees outside the US and 6,532 employees in the US1 had been granted stock options.
STOCK OPTIONS GRANTED TO EXECUTIVE COMMITTEE MEMBERS (options allotted but not yet exercised as of December 31, 2003)
STOCK OPTIONS GRANTED AND EXERCISED BY DIRECTORS, OFFICERS AND EMPLOYEES IN 2003
AXA STOCK OPTIONS AXA ADR OPTIONS OPTIONS OPTIONS OPTIONS GRANTED EXERCISED GRANTED EXERCISED
Stocks options granted or exercised by the first 10 beneficiaries Number of options Weighted (outside the Management Board) during 2003 granted or exercised average price
PERFORMANCE UNITS As from 2004, the stock option program will be partially replaced by a performance unit program.
Performance units are intended to: – Reward and retain the best talent by linking them to both the intrinsic performance of the AXA Group and their business unit, and to the performance of the AXA share over the medium term (3 to 5 years),
– Reduce shareholders’ dilution by granting smaller volumes of stock options.
The grant criteria for performance units are the same as for stock options.
– The value of each performance unit corresponds to the average opening price of the AXA share during the 20 trading days preceding the end of the 3-year period.
In particular, internal control efforts focus on compliance with management policy, the safeguarding of assets, the prevention and detection of fraud and errors, the accuracy and completeness of accounting information and the timely
production of reliable accounting and financial information. Like any audit system, AXA’s internal control procedures do not provide an absolute guarantee that all risks in a company of AXA’s scale can be eliminated. Responsability for internal control rests with the Management Board.
THE MANAGEMENT BOARD’S ROLE AND SUPERVISORY FUNCTIONS The role of the Management Board and the Executive Committee are described in the previous section.
Each year, as part of a rigorous, interactive process, the Group’s main entities present the following information concerning each of their business lines (property/casualty insurance, life insurance, asset management, banking), with a rolling three-year outlook: – analysis of strategic positions (threats, opportunities and strategy),
This procedure enables the Group’s management to exert upstream control over its main subsidiaries’ strategies, action plans and resources, and to set targets consistent with its ambitions.
Meetings are attended by members of the Management Board along with the CEO, CFO and BSD (business support and development) team, which role is described below.
The entity presents the key points concerning its business development, with the help of a document prepared and distributed in advance, and answers questions posed by the Management Board members. The conclusions of the discussion are recorded at the end of the meeting.
The Management Board devises a list of transversal themes at the start of the year. In addition, before each QBR, it formulates questions specific to each entity. These transversal themes and specific questions are formulated in a plan drawn up by the Management Board.
A summary of conclusions and decisions to be implemented is distributed before each QBR, and acts as a reference base for the following QBR.
The role of BSD (Business Support and Development) As stated previously, the Group has a decentralised organisation based on nine Business Units.
team is involved in preparing QBRs and analysing areas in which activities are not going according to plan.
BSD officers also sit on local companies’ Board of Directors and are involved in significant Business Unit projects, such as acquisitions, partnerships and restructuring.
– Investor relations, making the connection between internal production of financial statements and the markets.
The PBRC’s main tasks are as follows: – establishing and distributing consolidation standards and Group reporting standards, and managing the worldwide network of PBRC teams,
– co-ordinating the production of AXA’s Document de Référence filed with the AMF,
In the Finance Department, financial and accounting information is consolidated in accordance with French accounting standards. It is reviewed taking into account a complementary economic analysis.
This function is split between the subsidiaries, which are responsible for consolidating and controlling the financial information produced in their consolidation sub-group, and the PBRC, which is responsible for reviewing this information and producing Group consolidated financial statements and the related summaries.
– downstream of the consolidation and audit process, it has responsibility for reviewing financial and accounting information produced by subsidiaries and for reviewing and checking the various finished products, including the
– it is also in charge of monitoring and resolving technical issues specific to the holding company.
The consolidation system is managed and updated by a dedicated team. Financial accounting data that comply with the Group’s accounting standards and that reflect consolidation rules under French accounting standards are entered into the system locally.
The Group complies with French accounting standards and regulations as regards its French GAAP consolidated financial statements. The Group’s accounting standards are set out formally in the Group’s consolidation guidelines.
Once a year, these guidelines are updated by a team of experts from the PBRC, reviewed and validated by the outside auditors and distributed to the Group’s subsidiaries. These experts are also responsible for the correct application of accounting standards in interim and full-year financial statements, as illustrated in particular in the accounting principles published in the Document de Référence.
– the analysis of results, shareholders’ equity and the main balance sheet captions,
In all cases, procedures are based on the teamwork described above, along with close collaboration with the outside auditors, which generally works as follows: – all changes in accounting standards and/or regulations – i.e. new demands made by the French regulators – are anticipated in collaboration with accountants and outside auditors. Rule changes are implemented after the accounting approach adopted by the AXA Group and its outside auditors has been approved,
– the main audit issues are addressed and resolved in the phase prior to accounts closing through closing meetings with local and central auditors,
– the auditing of financial and accounting data is finalised at the accounts closing stage in meetings attended by local and central auditors and local and central finance teams. All of these meetings give rise to a detailed audit report.
In addition, the Finance Committee validates the risk analysis methods, measurement standards and action plans that allow the Group to maintain a solid financial position. It also sets the boundaries for the DCFG (Direction Centrale des Finances du Groupe) team’s actions.
Each subsidiary’s finance department is in charge of producing regulatory information, and of liaising with the local regulatory authorities.
Liquidity is managed prudently. The cash position is managed optimally, debt facilities are kept long-term and to a large extent subordinated, and a significant amount of unused confirmed medium-term credit facilities is maintained.
Debt ratios, particularly gearing and interest cover ratios, are managed so that they remain compatible with the Group’s financial solidity rating targets, even in adverse circumstances of rising interest rates and falling profits.
AXA’s consolidated debt position – comprising the repayment schedule and debt service costs – is managed on the basis of a three-year plan, and is compared with those of our main rivals.
DCFG has devised formal principles for managing and measuring resources in terms of interest rate and exchange rate risk, in order to have a standardised consolidated position. In doing this, it relies on information transmitted by subsidiaries. An accounting reconciliation is carried out in every half-year period.
Financial and accounting information is monitored in different ways depending on the medium used, in order to enhance the information in both qualitative and quantitative terms.
Information issued using these media is produced by the Financial Communication department, and is intended to give a clear and intelligible overview of the company’s activity during a given period. It is reviewed and validated by the Finance Department and the Legal Department. It is then submitted for approval to the Management Board, and press releases concerning financial statements are reviewed by the Supervisory Board. The outside auditors also review press releases concerning annual and half-year accounts closings.
– Risk Management Department: provides the Group with systems and methods for ensuring optimal risk management,
– group Internal Audit Department: gives the Management Board and the Supervisory Board’s Audit Committee an objective and independent view of the quality of internal audit within the Group.
Management of legal risks The Legal Department, together with the Management Board, ensures the legal security of operations carried out by the Group and its management. It takes an overall view of all litigation involving the Group, and helps to devise procedures implemented within AXA.
Procedures are regularly reviewed and adjusted on the basis of experience acquired.
AXA’s Code of Ethics supplements the codes in force within the Business Units. In particular, and in accordance with local regulations, these codes cover the methods used to market the Group’s products and services and its selling practices.
These commitments are governed by the Supervisory Board’s internal regulations, which set an authorised annual limit, along with limits for each type of commitment. They are also subject to a specific procedure. The Legal Department is in charge of supervising these commitments, and particularly analysing their legal nature, organising their prior validation by management and monitoring their execution. Most of these commitments are granted to subsidiaries and relate to loan guarantees on behalf of other Group entities or third parties.
DCFG is in charge of determining the required amount of committed credit facilities. At the consolidated level, it also ensures that contract terms are favourable to the Group and, in particular, that they do not contain any significant constraints that may result in resources becoming payable in advance of their scheduled maturity.
Detailed information about off-balance sheet commitments can be found in the notes to the Company’s annual financial statements.
Risk management The Risk Management Department’s task is to define the methods and tools used to identify, measure and monitor risks, in order to ensure optimal risk management. In certain cases, its role is to implement decisions that affect the
The Group’s risk management efforts are coordinated by a central team, which is supported by local risk management teams within each Group operating entity. These efforts cover asset and liability risks, including asset/liability mismatch risks, and there are plans to extend them to cover operating risks.
– credit and concentration risks in the Group’s asset portfolios (equities and bonds) are managed by the Risk
Operating entities define their needs depending on cost constraints and risk exposure reduction targets. With the exception of some optional reinsurance operations that are still carried out directly by various subsidiaries, risks are ceded through AXA Cessions, which operates directly in the reinsurance market. AXA Cessions has a great deal of expertise, particularly in carrying out actuarial analyses of the Group’s exposure to catastrophic risks. AXA
– Operating entities, which develop and maintain the software used in their activities.
The Management Board approves the IT security policy and the continuity plans, and is kept informed of progress with implementation.
The Group’s internal audit team ensures the effectiveness and efficiency of the AXA Group’s internal audit systems on behalf of the Management Board and the Audit Committee. It covers all Group subsidiaries, companies, activities and projects. The team makes a constant contribution to the sustained improvement in AXA’s control over all risks that affect its activity and organisation.
AXA’s Internal Audit organisation is based on a central Group internal audit team, along with internal audit teams within Group subsidiaries. AXA’s overall internal audit system is co-ordinated and supervised by the Group internal audit team. This team operates mainly in two ways: – functional management of internal audit teams within operating entities,
Local internal audit teams are placed under the responsibility of a director, who generally reports directly to his CEO
– It carries out strategic internal audits, which are intended to determine whether operating entities’ managers are effectively fulfilling their planning, organisation, steering and monitoring roles. Potential improvements to AXA entities’
Local internal audit teams focus mainly on identifying risks facing their units, and on evaluating monitoring systems that would help them to control them. Their on-the-ground experience makes their efforts more effective.
Internationally, internal audit is a profession that has its own organisation, i.e. the Institute of Internal Auditors or IIA.
The IIA has drawn up standards for the professional practice of internal audit. These standards have been adopted by the Group internal audit team.
Determining the main risks faced by a business is a crucial part of the internal audit planning process, and ensures that internal audit assignments focus on the risky areas. Risk assessment and internal audit planning carried out by all local internal audit teams is subject to a planning review covering all audit teams. Results are collated into an overall report that is submitted to the Management Board and the Audit Committee.
The Management Board and Audit Committee also approve the Group’s internal audit plan. Plans drawn up by operating entities are approved by their general managements and internal audit committees. Each unit presents monitoring reports on these plans to the General Management and the Audit Committee. The implementation of recommendations made in internal audit reports is also monitored within each unit by the General Management and the Audit
This is a free translation into English of the report issued in the French language and is provided solely for the convenience of English speaking readers. This report includes information specifically required by French law. This report should be read in conjunction with, and construed in accordance with, French Law and professional auditing standards applicable in France.
Our role is to report the matters we have revealed on the information and representations contained in the Chairman’s report on internal control procedures pertaining to the preparation and treatment of accounting and financial information allowing to establish the consolidated financial statements in accordance with the French accounting principles.
In accordance with the generally accepted standards of our profession in France, we have read the aims and general organization of internal controls, as well as the internal control procedures pertaining to the preparation and treatment of accounting and financial information, as presented in the Chairman’s Report.
Since this is the first year in which the requirements of Act no. 2003-706 dated August 1, 2003 are being applied, and absent a body of recognized practice as regards the content of the Chairman’s report, no assessment is given in the latter as to the scope and efficiency of the internal control procedures relative to the preparation and treatment of accounting and financial information allowing to establish the consolidated financial statements in accordance with the French accounting principles. Accordingly, this same limitation applies to the scope of our own works and the content of our report.
Apart from the limitation expressed above, and on the basis of our works, we have no particular matter to report on the information and representations concerning the Company’s internal control procedures relative to the preparation and treatment of accounting and financial information allowing to establish the consolidated financial statements in accordance with the French accounting principles contained in the report of the Chairman of the Supervisory Board, which was prepared in accordance with the requirements of the last paragraph of Article L.225-68 of the Commercial Code.
on the Premier Marché until they are assimilated after the payment of the 2003 dividend planned on May 3rd 2004.
BONDS REDEEMABLE IN SHARES OR IN CASH [OBLIGATIONS REMBOURSABLES EN ACTIONS OU EN NUMÉRAIRE (ORANs)]
AXA decided to finance the contemplated acquisition of MONY by AXA Financial for an amount of Euro 1.4 billion, described in the Note d’Opération which received the COB visa n° 03-807, by issuing ORANs which are bonds redeemable either in shares or in cash. The ORANs were issued upon the exercise of warrants allocated free of charge by AXA to its shareholders.
Further to the free allocation of 1,763,924,947 warrants, 16 warrants giving right to subscribe to one bond redeemable in shares or cash (ORAN) for a nominal value of 12.75 euros per bond (i.e. nominal value 12.75 euros), the conversion ratio of the convertible bonds issued by AXA in February 1999 and February 2000 (AXA 2.5% 2014 and AXA 3.75%
Number of bonds in circulation as of January 31st, 2004 165 euros 1,524,489,945 euros from February 9, 1999: 4.06 shares for 1 bond redemption on January 1, 2004 at 230.88 euros per bond, i.e. 139.93% of the nominal amount
– the Company may purchase the notes on any Stock Exchange or otherwise in accordance with applicable law, including by way of tender for purchase or exchange,
– 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 from February 17, 2000: 4.06 shares for 1 bond redemption on January 1, 2017 at 269.16 euros per bond, i.e. 162.63% of the nominal amount
– the Company may purchase the notes on any Stock Exchange or ortherwise in accordance with applicable law, including by way of tender for purchase or exchange,
– 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 3.75% 2017 are listed au comptant on the Premier Marché of the Paris stock exchange.
In the countries that met the legal and tax requirements, two investment options were proposed in 2002: – the traditional plan, available in 29 countries,
– 159 million euros in the investment leverage plan (versus 214 euros million in 2002).
A total of 15,131,000 new shares of stock were issued, each with a par value of 2.29 euros. These shares began earning dividends on January 1, 2003.
financial statements. For the Euro-zone, 2003 GDP grew 0.6% while the US showed GDP growth of 4.3% for the year. Business and consumer sentiment surged during the year as many companies’ earnings came in ahead of expectations and M&A activity picked up.
In Europe, the Stoxx 50 rose by 11%, with the German DAX up 37%, the French CAC 40 up 16% and the UK FTSE
100 up 14%. In Japan, the Nikkei closed up 24%. In the US, the Dow Jones was up 25%, the wider S&P 500 rose by 26% and the technology heavy Nasdaq by 50%.
The European insurance sector, with the Stoxx Insurance up 10%, performed in line with the market during 2003, after two years of strong underperformance. US/International plays, such as AXA, were among the top performers among large-cap European insurers, on the back of a resurgence of the asset gathering theme.
The following items negatively affected the insurance sector during 2003: – Capital Adequacy
On the other hand, a number of trends emerged that positively affected insurers’ performance in 2003: – Equity Market Upturn
Investment markets ended the year meaningfully higher than where they started. As a result, higher fees on asset management and equity market-sensitive products were earned. In addition, concerns on solvency, policy guarantees, and asset impairment charges were eased.
(i) a positive pricing cycle, (ii) a relatively benign weather-related claim environment, and (iii) higher underwriting discipline at most players.
S&P noted a much improved credit regime in 2003 during which 126 companies defaulted on $63 billion of debt, compared with 235 companies which defaulted on $182 billion of debt during 2002. The global default rate in 2003 was 1.84% compared with the peak of 3.76% in 2002. Although default rates are still above average, rating agencies expect default rates to lower and recovery rates to increase over 2004.
The insurance sector had a strong start to the year. The sector continues to rise as investors are more optimistic regarding underlying profitability. In addition, the sales outlook seems to be improving. Consolidation is expected to continue as scale is becoming increasingly important and as weaker players are set to reconsider their overall international strategy. In 2004, investors seem to be shifting their attention towards profitability and growth.
However, the regulatory environment continues to cloud the picture. The UK is troubled with accounting changes, realistic balance sheet solvency measures, depolarization, and Sandler pricing. Germany, with its announced tax changes, and the US, with its mutual fund investigations, also weigh on the sector.
From December 31, 2003 to February 26, 2004, AXA is up 9% outperforming the Stoxx Insurance Index up 8%, the
Stoxx 50 index up 4% and the CAC 40 up 4%.
AXA has a highly diversified shareholder base. Committed to building and maintaining a relationship based on trust and accessibility with both individual and institutional investors, AXA offers timely, relevant information and dedicated staff to respond to their requests.
AXA meets regularly with institutional shareholders. In 2003, nearly 400 meetings with these investors were held in the world’s largest financial marketplaces. While generally scheduled to coincide with the publication of interim and annual financial statements, meetings are also held from time to time to present a particular business area or AXA
For AXA’s individual shareholders – 95 per cent of whom are French nationals – inserts concerning major AXA Group events are published in the business and economic press. Nearly a thousand individual shareholders attented AXA’s annual shareholders’ meeting in 2003.
Source : Thomson Financial 2003 Ownership Analysis 20.2% Mutuelles AXA and FINAXA
Those who wish to receive more detailed information on a regular basis may join the AXA Shareholders’ Circle, in which registered shareholders are enrolled automatically.
Members of the Circle receive: – The Shareholders’ Circle newsletter, which is published when interim and annual earnings are disclosed and following shareholders’ meetings.
– Special mailings on major Group events, such as the Mony transaction in 2003.
AXA also has an individual shareholders’ committee (the CCAI), which meets to discuss ways in which the information made available to shareholders can be improved. One-third of the committee’s fifteen members, who are chosen from among the Shareholders’ Circle, are replaced every two years. In 2003, the committee met twice with Group senior executives and once with representatives of AXA’s individual investor relations team.
Work undertaken by the CCAI is partly determined on the basis of satisfaction surveys administered to AXA’s individual shareholders.
Individual investors can also contact members of the dedicated team in Paris for information on AXA in general or on a particular transaction in progress.
All official disclosures produced by the financial communications and individual investor relations teams are available at www.axa.com: press releases, visual aids from earnings presentations and outside speaking engagements,
Total consolidated gross premiums and financial services revenues in 2003: €71.6 billion
Total assets under management as at December 31, 2003: €775 billion
49% Alliance capital 13% Separate account assets 50% Managed on behalf of third parties 38% AXA Investment
CONTRIBUTION TO CONSOLIDATED UNDERLYING EARNINGS, ADJUSTED EARNINGS AND NET INCOME GROUP SHARE
Cost of September 11th events – (89) (561) Net investment gains attributable to shareholders (585) (240) 229
a) Combined ratios are presented including UK Health activities and excluding UK Discontinued business, which has been transferred to International Insurance segment.
b) Underlying earnings are adjusted earnings, excluding net capital gains attributable to shareholders and claims associated with September 11, 2001 terrorist attacks. Adjusted earnings represent net income before the impact of exceptional operations and goodwill amortization. Adjusted and underlying earnings are non-GAAP measures, which may not be comparable to similarly titled measures reported by other companies. Management uses these non-GAAP measures as key indicators of performance in assessing AXA’s various businesses and believes that the presentation of these measures provides useful and important information to shareholders and investors as measures of AXA’s financial performance.
c) Please refer to page 60 for further details. d) Starting in 2003, new business contributions are converted in Euro using average exchange rates over the year instead of year-end exchange rates. 2002 numbers have been restated accordingly.
Gross (a) Net (a) on a current on comparable (in euro millions) basis basis
(a) The exchange rates presented correspond to the year-end exchange rate and average exchange rate for a September 30 financial year.
Adjusted earnings per ordinary share (basic) (b) 0.82 0.78 0.70 Adjusted earnings per ordinary share (diluted) (b) 0.81 0.78 0.70 Return on Equity 6.3% 5.7% 4.9%
(b) Per share data are restated to take account of the 4-for-1 stock split approved by the shareholders on May 9, 2001.
Share price as at December 31, (in euros) 17.0 12.8 23.5
Represented by Net Income, Group share (in euro millions) 1,005 949 520
Dividends (a) : – gross per share, including tax credit (in euros) 0.57 0.51 0.84
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. (a) The personnel at January 1, 2003 are included on a constant structural basis in relation to personnel at December 31, 2002.
The Company’s principal insurance subsidiaries Standard & Poor’s 02/19/04 AA- Stable
Fitch 12/22/03 F-1 2003 2002 Change Change on a constant (in euro millions) (%) exchange rate (%)
“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.
ANAV from one year to the next. NBC can be measured before or after cost of capital, and Axa discloser both.
Other ANAV 7,260 (a) “Other adjustments” are 1) Unrealized capital gains or losses which are included in the PVFP calculation, 2) Adjustments from GAAP to Statutory basis for life businesses, 3) Value embedded in undiscounted Property & Casualty and International liabilities, and 4) Adjustment of employee benefit accounts : for Life business establishing liability equal to unfunded status and for other eliminating any accounting asset.
The Other ANAV includes unrealized capital gains or losses including those on our investment management companies: Alliance Capital (market value basis with no control premium) and AXA Investment Managers (estimated value based on third-party assets under management). Other ANAV also includes the value embedded in our undiscounted policy liabilities, and intangible assets are not eliminated.
The PVFP calculation of necessity involves many assumptions about the future. Our major assumptions include: – Discount rate generally based on risk premium of 250 basis points over the risk free rate (higher in Asia / Pacific), with a resulting weighted average of 7.1%.
The following table is a summary of key assumptions for 2002 and 2003, showing the impact of Japan separately because of its unusual economic conditions: Post-tax discount rate Pre-tax risk free rate Pre-tax equity return
Upward parallel shift of 100 bp in reinvestment rates 0.48 0.01
Downward parallel shift of 100 bp in reinvestment rates (0.83) (0.03)
Life mortality improvement (50 bp per year ) 0.05 0.01 10% higher equity markets at start of the projection 0.44 0.05 10% lower equity markets at the start of the projection (0.45) (0.05)
100 bp increase in total asset return in all future years 1.79 0.11 100 bp decrease in total asset return in all future years (excluding Japan) (1.85) (0.07)
Japan 100bp decrease of total asset return in all future years (0.59) (0.03)
The economic assumptions, risk discount rate and allowance for the cost of capital are reasonable for this purpose.
The estimates of value are based on common actuarial practice with regard to embedded value methodology and assumptions, and do not attempt to develop “fair values” or to interpret proposed IASB accounting standards.
Tillinghast also performed limited high-level checks on the results of the calculations and discovered no material issues.
Doing Business Responsibly: AXA’s Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
HELPING ECONOMIES GROW AND REDUCING RISK Like insurance, the financial protection and wealth management business is a key driver of economic and social progress.
Sumerian traders (3 100 BC to 1 BC), who assumed the risk of their caravan trade, invented the first insurance pool.
The essence of the insurance contract is mutuality. When divided among many individuals, each of whom pays a specified amount – known as a premium – for protection against an identified risk, compensation for an individual loss does not fall heavily on the actual victim, whether a person or a business.
Promoting Responsible Risk Coverage Much of what we think of as insurance expertise lies in the ability of professional underwriters to assess individual risks. The underwriting policy of the insurance company can have an impact on actual practice, particularly in the case of commercial insurance clients. The emergence of a steady stream of new risks, combined with the growing complexity of conventional risks, makes the task of underwriting particularly difficult. Well aware of the responsibility that this power to influence entails, AXA’s insurance subsidiaries are committed to enforcing underwriting policies that contribute to sustainable development for society as a whole.
At the same time, AXA is fully aware of the responsibilities that go with leadership, and extends coverage to companies operating in industries that pose potential risks to society, provided that the latter are controllable if the appropriate protective and preventive measures are taken.
Encouraging Prevention AXA accordingly plays an important risk management role with respect to its commercial insurance clients.
On the other hand, AXA will generally extend coverage to companies that adopt a responsible approach to risk management, and that are willing to enforce whatever preventive/protective measures may be required. In fact, premiums and deductibles are determined in part on the basis of the level of prevention and protection in place.
“At AXA Corporate Solutions, it is company policy to deny insurance coverage to vessels that are unable to prove to the company’s satisfaction that they are fully compliant with regulations and standards in force.
After the Prestige oil spill occurred, we immediately activated a crisis unit to examine all oil tankers in our portfolio of in force business.
On the basis of this investigation, we decided that all business written involving fleets whose oil tankers are more than fifteen years old (all of which are single-hull vessels) would be subject to a full preliminary review by a committee of four experts.
Insurers see prevention as an integral part of their business. Customers and society as a whole benefit from this expertise, because both the magnitude and frequency of risks are reduced. And companies like AXA benefit from a better claims experience and hence improved underwriting results.
Combating Money Laundering AXA rolled out its first set of internal AML procedures in the early 1990s. They were inspired by earlier regulations passed in France and the United Kingdom to prevent “dirty” money (i.e. the proceeds of illegal activities such as the trade in drugs and child labor) from being recycled back into the legitimate economy.
legislation. They describe the standards and procedures relating to reporting and organization that apply to all AXA
All of AXA’s life, savings and asset management subsidiaries must appoint an AML manager, whose role is to discourage, identify and, when necessary, put an end to all such illicit activities within the company’s scope of operations.
The AXA Group Audit Department set up a dedicated unit in late 2001 to provide web-based support and information to local AML managers. This team relays information and international regulatory updates and produces an annual
“AXA Corporate Solutions insures our corporate motor fleet. In 2001, the company provided us with information on the risk factors to which our company and its employees were exposed, even though Cofiroute had not experienced any serious or traumatic accidents up to that point. After thoroughly reviewing our claims history, AXA gave us a detailed description of how our employees actually behaved behind the wheel and how we could improve their safety. With the help of AXA Corporate Solutions, we launched a prevention plan in late 2001 that produced immediate results: by the end of 2002, we had reduced the number of reported claims by twenty percent. Although our claims frequency was quite low (0.13 in casualty insurance), we decided to focus our efforts on reducing property-casualty claims in 2003.
Determined to pursue this preventive approach and motivated by the desire to set the example – which is only natural considering that our job is to operate the road infrastructure in France – our chairman and CEO Dario d’Annunzio formally adopted a road safety policy on December 16, 2003, co-signed by Rémy Heitz, inter-ministerial head of road safety policy, and
Gilles Evrard, professional risk manager for the French national health insurance fund for salaried employees.”
In addition, AXA subsidiaries in France are working to provide training for all employees and distributors who may be directly impacted by the issue of money laundering. The global aim is to train all AXA France employees and distributors by June of 2004. Some 150 internal instructors are offering classroom training to 10,000 employees.
For individuals whose potential for direct contact is much lower – some 15,000 employees and distributors – training is provided via an e-learning module.
“In line with AXA’s policy and reflecting local legislation, AXA UK has introduced an AML policy that has been implemented by all of our operating units. Each operating unit has devised a process that enables employees to report suspicions to a designated
AML officer. In addition, all employees have received training that covers their responsibilities under AXA’s AML policy.
AXA Insurance, AXA PPP and AXA Life have introduced transaction monitoring to identify suspicious activity. At AXA Insurance and AXA PPP, this entails keeping tabs on cancellations of commercial and personal lines early in the life of the policy. At AXA
Life, all cancellations and surrenders of single premium investment products (investment bonds and mutual funds) are monitored.
All operating units review their activity and share best practices at quarterly AML forums organized by AXA UK. Finally, AXA Life attends several industry benchmarking forums and sits on the Money Laundering Committee of the Association of British Insurers.”
Responsible Investment In 2003, AXA Investment Managers decided to incorporate the criteria used to manage SRI (Socially Responsible
Particularly sensitive to the notion of corporate citizenship, AXA Investment Managers was a European pioneer in the field of SRI. In France, AXA Investment Managers formed a dedicated SRI unit in 1998, and has held regular client seminars on the subject since 1999.
AXA Investment Managers has also developed EasyETF Aspi Eurozone, a tracker that replicates Vigeo’s ASPI index.
CAPITAL SOCIALEMENT SOLIDAIRE is an investment vehicle that was developed to meet the socially responsible investment needs of a number of complementary, employer-sponsored retirement savings schemes available to French employees.
“We rate the companies we analyze on the basis of a thorough financial and social research process that includes face-to-face encounters with management. The decision to integrate a stock into an SRI portfolio reflects our belief in the company’s ability to comply with sustainable development principles while also generating a sustained profit.”
Pascale Sagnier, Head of SRI Fund Management at AXA Investment Managers Paris“ “
Responsible Proxy Voting As an asset manager, AXA is also responsible for exercising proxy voting rights at annual shareholder meetings. It votes in accordance with the interests of its clients, which include encouraging good corporate governance practices, which AXA believes contribute to maximizing shareholder value over time.
Committees comprised of senior fund managers from AXA IM’s London and Paris offices supervise the company’s voting policy on the equities under management.
British Insurers (ABI), a leading authority on corporate governance issues. Thomas O’Malley, head of corporate governance at AXA IM, serves on both committees.
Thomas O’Malley, Corporate Governance Officer at AXA Investment Managers“ “AXA IM’s approach is based on a set of clear guidelines that inform our voting decisions. They clarify our expectations for the companies in which we invest on behalf of clients and explain our voting decisions. We feel they have an obligation to protect the interests of their shareholders, which means adopting best local practices of corporate governance. In France, AGF (Association
The voting policy adopted by AXA IM recognizes the differences in corporate governance practice between markets in which it invests. It expects companies to meet or exceed local “best practice” standards or to explain satisfactorily why specific company factors mean that these should not apply – “comply or explain.” It regards transparency as an important theme in good governance – shareholders need full information on which to judge company performance and call directors to account. Board structure, defense of shareholder rights and the link between executive compensation and value creation are key issues in the policy.
The company has formed Proxy Voting Committees, whose members include investment professionals and a representative of the corporate legal department, to ensure that its proxy voting policies are carried out.
Now that objective has been met, AXA REIM France and building management specialist Altys, already ISO 14000 certified for some of the sites under management, are working together to promote quality by adopting the highest environmental standards.
AXA REIM France is among the five largest owners of privately held forests in France. It has mandated the management of the 22,000 hectares it owns to Société Forestière de la Caisse des Dépôts, a specialist in the field that follows sustainable forest management guidelines for individual tree maintenance, respect for biodiversity and natural landscapes, the conservation of ecological landmarks and water, soil quality maintenance, and rational cutting methods.
In 2003, this sustainable management model was the first in France to obtain ISO2001 certification from AFAQ, France’s leading national compliance assessment organization.
ASSISTING PEOPLE An extension of the insurance business, assistance involves the provision of in-kind services in the event of certain mishaps. Services provided range from vehicle breakdown assistance and home repairs to medical repatriation for policyholders who fall ill or have an accident while traveling abroad.
AXA Assistance offers AXA clients and those of other companies – credit cardholders, for example – an additional level of service that responds to the growing demand for ease and rapidity following an insurable loss.
AXA Assistance currently offers services in more than thirty countries, and can repatriate those in need from any country in the world.
French multinational, EMC will soon be providing training in pre-hospital emergency medical care for physicians in
EMC also provides occupational medical care for the employees of its corporate clients, under which care is offered not only to expatriates but also to local workers. The structures and methods developed by EMC meet Western standards of care and focus on prevention and early diagnosis.
UNEP (United Nations Environment Programme) Finance Initiative – UN – (2002)
EMC sets up temporary onsite medical facilities for its own clients and for the World Bank. In this capacity, it ensures the health and safety of workers assigned to the Chernobyl nuclear power plant.
EMC’s expertise also extends to the creation of health plans for employees working worldwide. In the case of one such client, a multinational oil company, the project mobilized the equivalent in person hours of sixteen months of half-time work onsite.
In its three years of operation, this lean structure with highly sophisticated medical skills has participated in several projects aimed at improving medical care for disadvantaged groups in developing countries.
DOING BUSINESS RESPONSIBLY: AXA’S COMMITMENTS The AXA Group today is the result of series of mergers involving much older insurance companies that began in France in the 1980s and then entered the international arena. From the outset, the Group has built its corporate culture on the notion of what is now often referred to as corporate citizenship.
Henri de Castries, Chairman and CEO of AXA since 2000, cultivates this heritage. He has taken the concept a step further by establishing Stakeholder Commitments, a set of guidelines applicable to AXA operations worldwide.
Thanks to the dedication and involvement of members of the AXA Executive Committee, these commitments were finalized in 2003. They offer a succinct presentation of the spirit of responsibility and empowerment that characterize AXA’s relationships with its key stakeholders: customers – shareholders – employees – suppliers – community and environment.
Members of the AXA Executive Committee have also appointed a sustainable development manager for their operating units, responsible for devising action plans designed to ensure compliance with AXA’s Stakeholder Commitments. They form a sustainable development network, coordinated at the corporate level. In June of 2003, the first seminar for members of the network was held to devise the first set of action plans.
Group’s potential for organic growth is thus high, provided that both the service quality and products delivered meet or exceed the expectations of customers. Moreover, satisfied customers enhance the company’s image, thereby increasing its ability to attract new ones.
– Constantly strive to ensure that its employees and networks of advisors are close to customers and available.
The French government sponsored the country’s first nationwide Sustainable Development Week from June 2 to 6, 2003. Naturally, AXA operating units in France were active supporters of the weeklong series of events. In addition to a used computer drive benefiting elementary schools, AXA took advantage of the opportunity to raise employee awareness of the importance of sustainable development and AXA’s Stakeholder Commitments. A contest was held to solicit easy to implement ideas that would serve as tangible examples of these commitments. More than 200 employees came forward with suggestions, which covered areas from waste reduction to investment portfolio management. The best ideas were incorporated into the sustainable development action plans devised by AXA’s operating units in France.
In 2002, AXA embarked on a program of continuous process, whose aim is to enable AXA organizations to respond to customer needs and expectations in optimal fashion.
To acquire more precise information about customer needs and expectations, which may differ from one country or region to the next, AXA conducts regular Customer Scope surveys to measure satisfaction. Developed by AXA in 1999 for use by its subsidiaries, the survey contains a series of questions that pertain to various business lines or segments. Questionnaires are sent on a regular basis to representative samples of customers.
The results of these surveys are used locally to identify and address customer concerns through targeted actions.
At the same time, customer satisfaction and retention are top strategic priorities for AXA as a whole. For this reason, the global level of customer satisfaction has been identified as one of AXA’s Key Performance Indicators (KPIs) and is measured from year to year.
Based on the voice of the customer – that is, what the customer says he or she wants and needs – AXA Way is of critical importance in executing business strategy. The program provides a detailed and rational method for bringing about significant improvements in the quality of the service delivered, while empowering employees to make the necessary changes.
As Henri de Castries has said, “this is a powerful tool that harnesses all of the internal energies we have to mobilize in order to step up the pace of our quest for operational excellence.”
In the interest of harmonizing the ethical rules that govern AXA’s customer relationships, a compliance guide has been developed for the Group as a whole.
Compliance Guide is based on the following fundamental principles: Qualified advice: we undertake to advise our customers after listening to them and making a personalized and thorough preliminary analysis of their real needs.
Fairness: we undertake to manage faithfully the accumulated benefits and entitlements of our customers, and to manage impartially all conflicts of interests that arise between AXA customers.
AXA provides its customers with avenues such as dedicated complaint departments for expressing and resolving disputes that may arise with the company.
As AXA’s initial interface with customers, distributors must meet the tough challenge of providing consistently highquality advice and customer service.
Their high professional standards have contributed to making AXA a global leader in financial protection and wealth management, with approximately 50 million customers worldwide. Their energy and ability to perform are critical drivers of underlying earnings growth, which is a key factor in shareholder satisfaction.
Recognizing the pivotal role of distributors, AXA has made it a priority to ensure that they are given the opportunity to continuously enhance their level of expertise and capacity to deliver optimal customer service. Distributor training programs are rolled out locally, favoring a focus on relevant needs and issues.
Excellence in Customer Service: Awards That Went to AXA in 2003
■ AXA Australia’s ipac Securities outranked 124 other firms in a 2003 survey on the quality of financial planning advice conducted by the Australian Consumers Association (ACA) and the Australian Securities & Investments Commission (ASIC).
The judges were impressed by the company’s comprehensive product range, and the high level of services provided by the
■ For the second year running, AXA Investment Managers was singled out as the French asset management firm of the year by the UK publication Financial News.
■ In France, the publication Le Revenu gave first and second place awards to AXA Investment Managers for the performance of certain equity funds.
Inspired by the Customer Scope survey, the more recent Agent Scope was developed to help AXA companies identify what distributors need in order to improve customer service and sales performance. In 2003, the survey was run as a pilot by AXA subsidiaries in France, Germany and the United States.
The questionnaire was devised on the basis of interviews conducted with local distributors in these markets, which revealed that the issues are similar from one country to the next.
As the survey is rolled out more broadly, other interviews will be conducted to ascertain whether and how questions should be adapted to address local issues.
To ensure absolute confidentiality, surveys are processed by an outside provider. The results of these surveys are used locally to draw up action plans aimed at improving the relationship between the company and the distributor, which ultimately leads to better service for end customers.
Our Challenges In a service industry, where patent protection is non-existent and innovations are rapidly copied, a company’s most valuable assets are the men and women it employs. Its greatest source of strength is their expertise and motivation.
AXA’s biggest challenge, therefore, is to develop human resource and employment practices that attract and retain the best and the brightest in the market.
But AXA must also ensure that its workforce receives the ongoing training needed to constantly build competency and expertise. In addition, the quality of the workplace and employee morale must be monitored on a regular basis.
Consistent with its aim of becoming a top player in the Asia-Pacific life insurance market by developing its financial advisory services platform, AXA Asia Pacific Holdings acquired the wealth management advisor ipac Securities Limited in 2002. ipac, which analyzes customer lifestyles to develop solutions for reaching short- and long-term financial planning needs, has separate sales development and CRM teams.
Although compliant with both the UN’s universal declaration of human rights and ILO regulations, AXA recognizes that as a provider of financial protection and wealth management solutions, it is not directly exposed to serious social problems such as child labor and slavery. With respect to issues that are relevant to its operating environment, therefore,
Because French law prohibits the compilation of statistics based on racial or ethnic origin, AXA uses gender equality as an indicator of equality of opportunity in the workplace.
Men and women are equally represented in AXA’s total workforce. However, women are over-represented in nonmanagement positions, are less present than men at the middle-management level, and under-represented in senior management jobs. In France, the current gender imbalance in management stems in part from past educational practice. Until recently, women were not generally channeled into the kind of training that leads to the top jobs in the insurance industry. This situation is evolving, however, and change is beginning to be felt within AXA (see below).
invented the “union voucher,” a check sent to Group employees in France to be submitted to the labor union of his or her choice. The aim of this gesture is to improve both the impact and the quality of the labor-management dialogue.
The dialogue with personnel representatives is organized and conducted at the local level. In addition to regularly scheduled meetings, opportunities for encounters may be provided when events – such as restructuring – require additional discussion.
AXA’s European Works Council (EWC) plays a role that extends well beyond what is required by law. The EWC, which brings together personnel representatives from AXA’s principal European subsidiaries, was created to promote information, dialogue and consultation on strategic, economic and employment issues that affect Group operations in Europe.
AXA France counted 443 disabled workers among its employees in 2002, 3.5 percent of the total workforce. In 2003, it entered into a four-year agreement with trade unions to promote the hiring of disabled workers. Under the terms of this agreement, which also covers previously hired disabled employees, AXA France agrees to increase the number of disabled staff to 5 to 6 percent of the total workforce over the next four years. AXA will also offer work study/apprentice contracts to the disabled and occupational training. Efforts will also be made to tailor job requirements to the special needs of the disabled, provide better access to work facilities, and adapt workstations and work scheduling. “Mission Handicap” has been formed to ensure enforcement of the agreement.
AXA seeks to enhance employee motivation and performance in line with company-level strategic objectives and in accordance with AXA values: professionalism – innovation – pragmatism – team spirit – integrity. In support of these aims, the AXA management style encourages: Quality information on key priorities: Employees are kept informed of the strategies, objectives and results of the
Group, their company and their work unit. In this respect, internal communications plays a key role in devising and disseminating published information resources and holding local meetings. Leaders, the Group’s internal magazine for employees, is published in nine languages.
What is your assessment of the quality of the dialogue between AXA and the European Works Council (EWC)?
The EWC’s employment sub-committee submitted a white paper that reviewed practices at AXA’s European subsidiaries and concluded that, while far from being completely satisfactory, AXA’s commitments to employees are globally honored. Unlike many other companies, AXA has not outsourced this activity.”
Since 1995, the year in which the AXA Manager seminar was launched, 90% of the target has completed this management seminar (19,000 senior and middle managers).
Employees are asked to respond to each question based on a five-point scale of satisfaction.
Detailed feedback from Scope is provided to all levels of management – the Group, the company and the work unit, with the aim of revealing organizational strengths and weaknesses. Local action plans drawn up on the basis of these results seek to improve employee satisfaction by addressing concerns and improving workplace efficiency and the quality.
Given the high response rate for this type of survey, Scope results are considered to be an accurate barometer of employee satisfaction.
N.B. A score above 40 can be considered a strength for the organization. Conversely, a score below 25 constitutes a weakness.
In 2002, AXA Tech employees gave the company a relatively low empowerment score (20). The company – founded in January of 2002 to provide IT infrastructure services to AXA businesses worldwide – responded by setting up voluntary focus groups comprised of five to ten employees each in the United States, the United Kingdom and France. Their mission was to gain a deeper understanding and insights into areas highlighted by the Scope results, and to develop recommendations for improvement. Their suggestions were reviewed by management and translated into a global action plan.
Judging from the results of Scope 2003, the focus group process was effective: AXA Tech’s empowerment score increased by 16 points, while its overall satisfaction rate was up by 18 points.
AXA inherited the company that would become AXA Business Services when it acquired Guardian Royal Exchange in 1999. Today, this shared-services platform meets the back-office processing needs of AXA subsidiaries operating in the United Kingdom, Australia and Japan.
AXA Business Services has two sites in Bangalore, India. Its 800 employees provide back-office services that were previously outsourced locally to external suppliers.
Turnover at the company is eight percent, compared to the national average of thirty percent.
– Change during the year (external recruitment - departures) + 26
Sales force 3.2% (a) Basis of calculation: 86% of non-sales staff. (b) Basis of calculation: 60% of sales staff. (c) Basis of calculation: 77% of non-sales staff.
Our Challenges With annual procurement costs of close to four billion euros and relationships with more than 40,000 suppliers and sub-contractors worldwide, the purchasing process is critical for the Group.
– Objectivity/Neutrality. AXA employees are prohibited from accepting gifts, entertainment or substantial value from existing or potential vendors that could cast doubt on their ability to make independent judgments.
– Transparency/Traceability. All relevant factors with respect to a purchasing decision must be recorded and kept on file at least until the end of the amortization period for the property in question.
This Code, or an amended version of it, is disseminated to and signed by all employees involved in the local procurement process.
Under the program, procurement departments identify their key suppliers, and assign each one with a single contact at AXA. Through monthly face-to-face meetings, supplier and account manager are able to discuss issues related to the relationship and expected level of service.
AXA has identified 15,000 regular active suppliers. A thousand of them are considered to be key, either because they provide a mission critical service or product or because the volumes involved are significant. Information on these mission-critical suppliers has been put into a shared database to facilitate oversight.
It is important for AXA to ensure that the suppliers with whom it has developed and maintains lasting relationships believe that their own business development, as well as the quality of their service or product, is related to social and environmental responsibility.
AXA’s Commitments to the Community – Develop philanthropic initiatives that are related to our core business.
The first chapter of AXA Atout Cœur was created in France in 1991. Initially, its role was to serve as a relay between charitable organizations in need of financial and human resources and
Most of AXA’s subsidiaries staff and operate a local AXA Hearts in Action chapter.
The AXA Foundation is the philanthropic arm of the Group’s US-based subsidiary, AXA Financial. At the initiative of
The scholarship fund addresses a serious issue: college tuition costs in the US are rising three times faster than the average American household income, and many families lack the resources to finance higher education for their children.
Founded in 1963, the Special Olympics are the official world games for athletes with learning disabilities. Last year’s games took place in Ireland, and AXA did not pass up the opportunity to lend its support.
Roughly – AXA Hearts in Action volunteers in Ireland joined the 30,000 volunteers from across the Emerald Isle who took part, raising funds for the games as well as working in a volunteer capacity during the event. In all, AXA employees raised more than 20,000 euros, sponsoring visiting athletes from France, El Salvador and Finland.
Every year, AXA Achievement grants university scholarships to more than 100 high school seniors selected solely on the basis of their achievements both inside the classroom and outside. Scholarship of America, an independent expert, selects the winning students.
AXA Art is the AXA Group subsidiary that insures fine art and art exhibits. As a leading art insurer, AXA Art is naturally committed to supporting initiatives and research aimed at preserving and restoring artwork. All of AXA Art’s subsidiaries take part in the AXA Art Restoration and Conservation program, which each year selects and finances one project involving the development of new restoration and/or conservation techniques.
While AXA Art derives a direct business benefit from this initiative, it also shares the fruits of this research with the community at large.
The project is a natural extension of initiatives already undertaken by local AXA Art companies. In the US, for example,
As mentionned in this present Annual Report, prevention and protection are critical components of AXA’s core business and responsible risk underwriting. They can help to reduce the frequency and magnitude of risks for the mutual benefit of the community and the insurer.
AXA Belgium has also taken steps to reduce the frequency and severity of road accidents involving young drivers.
At the same time, the company seeks to improve the access of this at-risk group to affordable insurance. AXA Belgium has also developed a series of half-day defensive driving courses for young drivers that mix classroom learning with hands-on exercises. Although participants pay for the training, those who complete the program qualify for a lower insurance premium rate.
In France, where insurance carriers are required by law to devote 0.5% of their third-party automobile liability premiums to prevention initiatives, more substantial resources are available for prevention efforts.
Since 1998, AXA France has used its earmarked funds for AXA Prévention, an organization that currently has eight full-time staff members, four of which are regional representatives. Primarily, the organization seeks to reduce the risk of road accidents by promoting greater public awareness of the importance of safe driving practices.
Each year, AXA Prévention partners with the road safety and prevention community (state and local government, firefighters and physicians) to sponsor nationwide and local prevention initiatives.
More recently, AXA Prévention launched a nationwide campaign to fund the lion’s share of the cost of a driver-training program for young drivers. Drivers who complete the training pay lower premiums. A similar offer is being developed for the employees of AXA’s corporate clients who use vehicles for business travel.
In 2003, AXA France distributed road safety guides produced by AXA Prévention to improve road safety by reminding drivers of a few simple rules of conduct.
Using visual humor as illustration, the guide contains numerous tips on safe driving: information on the dangers of drinking and driving, the consequences of not buckling up, the folly of driving while talking on the telephone, and the need for frequent breaks.
A total of 500,000 guides have been distributed to customers and employees.
Our Challenges Protecting the environment is one of our most critical obligations to future generations. While AXA does not contribute directly to serious environmental pollution, the Group could play a significant indirect role in protecting the environment through its environmental insurance business and the quality of its underwriting policy in this area.
In keeping with its commitment to supporting the financial protection and wealth management needs of its customers,
Most of the Group’s property-casualty insurance companies that underwrite commercial risks have adapted their environmental insurance organization to the level of local market sophistication. In Germany, where legislation was adopted several years requiring businesses to take out insurance against environment impairment, AXA has a dedicated team of specialists.
AXA companies in France, Spain and Italy – three countries that have reinsurance pools for environmental risks (Assurpol in France, Perm in Spain and Inquinamento in Italy) – are also advanced practitioners of environmental risk management.
AXA Corporate Solutions (AXA CS) manages the risks of corporations with more than 5,000 employees. It insures the most serious environmental risks for the largest companies in Europe. AXA Corporate Solutions underwriting guidelines for environmental risks are based on thorough knowledge of the client and long-term experience of its operating facilities. Risk assessment visits are conducted every year when the contract comes up for renewal.
As a matter of principle, AXA Corporate Solutions analyzes all types of risk, with the possible exception of petrochemicals. The limited number of players in the market makes mutualizing the risk extremely difficult.
The risk assessment visit, often conducted at the initiative of AXA Corporate Solutions, serves to estimate the potential risks to which the client is exposed, and to identify potential sources of improvement in site management.
If the risk audit reveals failure to comply with regulations or the existence of a serious environmental risk, AXA’s environmental underwriters inform company management and decline coverage.
This happens only rarely, however. AXA Corporate Solutions usually issues specific recommendations and works with the client to establish a timetable for implementing preventive measures. AXA will extend coverage and/or reduce the premiums as the situation improves.
Environmentally sound management of operating facilities, until recently the result of one-off initiatives, is now part of a formal policy that concerns AXA companies worldwide.
AXA Australia Saves Money and Trees Introduced in 2002 to reduce the company’s paper consumption, the 3R Program (reduce, reuse and recycle) has led to a number of innovations and investments on the part of the company; from the installation of two-sided printers and recycle bins to a new paper procurement policy that limits purchases to products cultivated using sustainable forestry management methods.
An Intranet site was developed and rolled out in France in January of 2003. Ultimately, it will be used to extend environmental reporting to AXA’s operating facilities worldwide.
The reporting for 2003, which was conducted in January of 2004, covered the Group’s operating sites in France and
The 2002 Environmental Report on the Group’s French operating sites revealed several significant sources of improvement. A substantial volume of waste was not sorted for recycling, and no AXA operating site was using renewable energies. In response to these findings, AXA France focused its 2003 action plan on these two issues.
Bids were solicited for battery sorting, and the project was officially launched during France’s first Sustainable
Development Week. Between June and December of 2003, roughly 55,000 batteries (1,300 kilograms) were collected for recycling.
– Paper (not incl. cardboard) in cubic m. 5,776 5,813 1% 9,401
AXA: How does AXA stack up as a socially responsible enterprise?
By CoreRatings The rating assesses how well the company is managing the investment risk arising from its material environmental, social, employment and ethical impacts.
By sam (Sustainable Asset Management) The scores reflect the company’s performance across economic, environmental and social criteria compared to its industry average, best and worst performing company in the DJSI World and DJSI STOXX in the company industry.
& Casualty, International Insurance (including reinsurance), Asset Management, and Other Financial Services. In addition, various holding companies within the AXA Group conduct certain non-operating activities. The tables below summarize certain key financial data by segment for the periods and as at the dates indicated.
Net income 1,005 949 520 (a) 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.
Total gross premiums and financial services revenues (in euro millions) 71,628 74,727 74,832 Life & Savings 65% 65% 65%
AXA Bank Belgium 64% 70% 68% Other financial services and real estate companies 4% 5% 7% (a) In 2001, AXA Asia Pacific Holdings (the parent company of National Mutual Funds Management) and Alliance Capital
Management entered into an asset management joint venture agreement. The activities of National Mutual Funds Management that were not part of the joint venture agreement are closely aligned to those reported in the Australia / New Zealand life operations of the Life & Savings Segment, and hence reclassification to this segment was made effective January 1, 2002. Due to the immaterial impact on the AXA Group accounts, prior period results have not been restated to reflect this change in classification.
Life & Savings Segment AXA’s Life & Savings segment offers a broad range of life insurance products including retirement and life products as well as health insurance products for both individuals and groups (that is corporate clients), with an emphasis on savings related products including separate account (unit-linked) products. The Life & Savings Segment accounted for €46.8 billion or 65% of AXA’s consolidated gross premiums and financial services revenues for the year ended
The table below summarizes AXA’s Life & Savings gross premiums and gross insurance liabilities by geographic region for the periods and as at the dates indicated: MARKET 2003 was a year of recovery for the European and U.S. markets, as financial markets were less volatile. Investors responded favorably to this recovery and the availability of products with features offering guarantees and in certain countries the decrease in unit linked gross premiums started to slow down. In the United Kingdom, sales of “With-
Profit” Bonds collapsed in 2003 following the withdrawal from the “With-Profit” bond market in July 2002.
In each of its principal markets, AXA operates through well-established life insurance companies. AXA’s principal life insurance subsidiaries are set out below: – Europe: France: AXA France Vie (a result of a merger in 2003 between AXA France Vie and AXA France Collectives),
– North America: United States: The Equitable Life Assurance Society “AXA Financial” and its insurance and distribution subsidiaries and affiliates
The table below presents the life insurance markets in which AXA operates ranked by worldwide gross premiums in 2002, along with AXA’s ranking (by market share).
Based on worldwide gross Life insurance premiums in 2002 Country statistics (a) AXA (b)
– Changes in regulations that may affect the policy charging structure relating to commission and administrative charges, and
The table below presents consolidated gross written premiums (after intersegment elimination) and gross insurance liabilities by major product for the periods and as at the dates indicated for AXA’s Life & Savings segment.
(a) Since January 1, 2003 UK Health business is presented in the UK Property & Casualty segment (€1,134 million of gross revenues in 2002).
Certain of AXA’s Life & Savings products provide features, which enable the policyholders to participate in the excess assets over the liabilities (the surplus) of the life company issuing the contract through an interest or bonus crediting rate. AXA offers participating contracts in most of its principal Life & Savings operations. The policyholder may participate in the investment return and/or in part of the operating profits earned by the life insurance company. The nature and extent of participation by the policyholder vary from country to country. Therefore, such participations, including policyholder participations on UK “With-Profit” business (explained below), are treated as dividends that may either increase the present value of future policy benefits or be paid in cash to the policyholder in the year the bonus is credited.
AXA as the shareholder, less a portion allocated to the “With-Profit” policyholders in the form of a reorganization bonus, based on the number of eligible policyholders that elected in favor of this plan.
VARIABLE LIFE AND ANNUITY PRODUCTS Variable life and variable annuity product benefits may be linked to investments supporting such contracts, referred to in this annual report as “separate account (unit-linked) contracts” or “unit-linked contracts”. In general, the investment risk (and reward) is transferred to the policyholder while the life company earns fee income from managing the separate account assets. However, there may be certain types of variable products that offer guarantees, such as guarantees of minimum income benefits or death benefits.
The table below summarizes AXA’s consolidated gross premiums and financial services revenues (after intersegment eliminations) and claims reserves for the Property & Casualty segment for the periods and as at the dates indicated.
Years ended December 31, liabilities (in euro millions, except percentages) 2003 2002 2001 at December 31, 2003
AXA’s principal Property & Casualty insurance subsidiaries are set out below: France: AXA France IARD, Direct Assurance IARD, and Natio Assurance,
In addition to the principal markets discussed above, AXA offers personal and commercial Property & Casualty insurance products in the following countries: Italy, Spain, Netherlands, Portugal, Luxembourg, Switzerland, Canada, Morocco,
Turkey, Japan, Singapore, and Hong Kong, as well as other countries manly in the Middle East. The products offered in these markets are offered through various distribution channels, including brokers and direct sales force.
(a) Source: Swiss Re Sigma report 6/2003 “World insurance in 2002”, measured in U.S. Dollars. (b) In general based on 2002 market data for each specific country or an estimate for 2003. (c) Based on 2002 gross Property & Casualty premiums written in Germany, AXA is ranked as follows: (group ranking without international insurance): third in liability insurance (7,3% market share), fifth in homeowners’ insurance (4,9% market share), sixth in automobile insurance (4,1% market share).
Years ended December 31, Insurance reserves (in euro millions, except percentages) 2003 2002 2001 at December 31, 2003
(a) Since January 1, 2003, UK Health business is presented under lines “Other” (€1,036 millions od gross revenues in 2003).
International Insurance Segment AXA’s International Insurance segment business is primarily conducted by AXA RE for the reinsurance activities and
– AXA Liabilities Managers manage the internal Property & Casualty run off portfolios either located in AXA RE, AXA
Belgium, and AXA UK or corresponding to stand-alone Run-off companies of the (‘Other transnational activities’)
The International Insurance segment accounted for €4.0 billion, or 6% of AXA’s consolidated gross premiums and financial services revenues for the year ended December 31, 2003 (2002: €5.8 billion or 8%, respectively).
For the ten-year loss development of AXA’s International Insurance claims reserves, see “Property and Casualty claims reserves” included at the end of this section of the annual report.
MARKET AND COMPETITION On the Reinsurance side, after the large claims experience and the financial market crisis in 2001, a progressive stabilization of prices is under way. The bulk of AXA RE’s portfolio – Property, Marine and Aviation – showed stable rates and no excess capacity. The rest of the portfolio – Motor and Casualty– benefited from additional rate increases. The share of non-proportional business is growing again. Competition amongst reinsurers is coming from the growing size of Bermudian companies. Similar to 2002, the reinsurance business in 2003 had not been adversely affected by exceptional claims.
On the Large Risks Insurance market, in the context of a favorable claims experience, further rate increases and restructuring of large Corporate Insurance programs (through franchise agreements and other contract clauses) were conducted, especially in liability, and to a lesser extent in property, motor and marine. Only the aviation market softened, in the context of a reduced airlines activity.
Years ended December 31, at December 31, 2003 (in euro millions, except percentages) 2003 2002 2001
AXA CORPORATE SOLUTIONS ASSURANCE - LARGE RISK INSURANCE ACTIVITY These operations underwrite large insurance risks for large national and international corporations. The products cover property damage, third party liability, marine, aviation and transport; construction risk; financial risk; and directors and officers liability. AXA Corporate Solutions Assurance also offers loss-prevention and risk management services.
AXA ASSISTANCE AXA provides assistance services primarily through AXA Assistance. The services include medical aid for travelers and automobile-related road assistance. The clients include insurance companies, credit card companies, tour operators and automobile manufacturers.
DISTRIBUTION AXA RE and AXA Corporate Solutions Assurance distribute their products principally through insurance and reinsurance brokers.
CEDED REINSURANCE AND RETROCESSIONS AXA Corporate Solutions Assurance and AXA RE review their exposures to ensure that the risks underwritten are diversified geographically and by line of business in order to avoid risk of concentration.
– In 2003, AXA Corporate Solutions Assurance ceded €664 million premiums (2002: €632 million) to third-party reinsurers.
Furthermore, approximately €671 million, or 54% of total reinsurance ceded to third parties, were placed externally by AXA Cessions on behalf of AXA’s insurance subsidiaries (2002: €767 million).
Asset Management Segment After a slow start to the year, a steep recovery in equity markets in 2003 provided a positive background for the industry, as demonstrated by the S&P 500, which advanced by nearly 29% during the year. Those investors, who either left or reduced their activity in equity markets during the past few years, began to return or increase their activity, albeit cautiously. In the second half of the year, market timing and late trading investigations carried out by regulatory authorities, in particular the U.S. SEC and the Office of the New York Attorney General became a focal point for both
US retail investors and the investment management companies offering mutual funds.
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 AXA to benefit in the future from the expected growth in savings-related products in the markets in which it operates. The Asset Management segment accounted for €2.9 billion of AXA’s gross premiums and financial services revenues for the year-ended December 31, 2003 (2002: €3.4 billion).
AXA’s principal Asset Management companies are Alliance Capital Management (“Alliance Capital”) and AXA
Investment Managers. The Asset Management companies manage assets on behalf of retail investors, private clients and institutional clients as well as on behalf of companies affiliated with AXA.
AXA has Asset Management specialists teams in each of its major markets: Western Europe, the United States and the Asia / Pacific region.
The Asset Management industry remains highly fragmented, with no single competitor or small group of competitors, dominating the worldwide market. AXA’s Asset Management operations are subject to substantial competition in all aspects of its business due, in part, to the relatively low barriers to entry. The competitive factors include the range of investment products offered, the investment performance of such products and the quality of services provided to clients.
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.
Assets Management Segment (in euro millions, except percentages) 2003 2002 2001
In September 2003, it was publicly reported in the United States that the Office of the New York State Attorney General
As at December 31, 2003, Alliance Capital had €376 billion of assets under management, including €327 billion of assets managed on behalf of third party clients (2002: €369 billion and €322 billion, respectively). Excluding exchange rates impact, assets under management at Alliance Capital were up +23% (€475 billion in 2003, compared to €387 billion in 2002).
Other Financial Services Segment The operations in the Other Financial Services segment are conducted primarily in Belgium and in France. For the year ended December 31, 2003, the Other Financial Services segment accounted for €0.8 billion, or 1% of AXA’s consolidated gross premiums and financial services revenues (2002: €1.0 billion or 1%, respectively).
Crédit provides short-term loans to customers of AXA’s French insurance operations.
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.
The following table presents AXA’s consolidated insurance-related invested assets, by insurance segment at
(in euro millions, Net carrying Market Net carrying Market Net carrying Market Net carrying Market Net carrying Market except percentages) value (a) value value (a) value value (a) value value (a) value value (a) value
Total equity investments, including holdings in mutual funds 50,672 50,391 9,743 9,490 1,408 1,359 61,823 61,240 27% 25%
Of which allocated to UK “With-Profit” business-trading (b) 27,335 27,335 – – – – 27,335 27,335 12% 11%
(a) Amounts are net of valuation allowances. For details on valuation allowances see note 8 to AXA’s consolidated financial statements. (b) These amounts exclude separate account (unit-linked) assets and investments in affiliated companies accounted for under the equity method. Assets allocated to UK with-profit business are carried at estimated fair value in the consolidated balance sheet of AXA. (c) Trading securities are carried at estimated fair value and represent assets that support insurance liabilities, in which the value of such liabilities is determined in part in reference to the market value of such assets.
In 2003, Insurance-related invested assets included Government bonds (36% versus 37% in 2002), investments in financial services companies (stable at 21%) and in other companies (32% versus 33% in 2002), as well as mutual funds (11%
Overall, the fixed maturity and equity investments together with real estate, mortgages and loans are concentrated in the local markets in which AXA’s principal subsidiaries operate.
Fixed maturity investments: Related assets at year end 127,503 129,019 123,296
Other assets and cash and cash equivalents: Related assets at year end 10,416 11,233 11,828
Other assets and cash and cash equivalents: Related assets at year end 3,931 3,282 2,529
The process of estimating the original gross claims reserve is based on information available at the time the reserve was originally established. However, claims reserves are subject to change due to the number of variables which affect the ultimate cost of claims, such as (i) development in claims between the amount estimated and actual experience; (ii) changes arising from the occurrence of large natural catastrophes late in the financial year for which limited information may be available at year end; (iii) judicial trends; (iv) regulatory changes; and (v) inflation and foreign currency fluctuations.
In addition, certain AXA Property & Casualty operations are required by local regulations, in the countries in which they operate to establish equalization reserves specific to catastrophe risks.
The loss reserve development table presents the claims reserve development for calendar years 1993 through 2003, as determined in accordance with French GAAP. The top line entitled “gross reserves for unpaid claims and claims expenses” represents the original gross claims reserve liability reported at the balance sheet date for the year indicated.
The upper portion of the table entitled “paid (cumulative)” represents the cumulative amount paid as of the end of each 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 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 €9,742 million to €15,337 million primarily due to the UAP acquisition in 1997.
By the end of 2003, cumulative amounts paid was €9,079 million and the original gross claims reserve had been re-estimated to be €11,835 million at December 31, 2003. The “cumulative redundancy (deficiency)” for each year represents the aggregate amount by which the original gross claims reserve liability as of that year-end has changed in subsequent periods.
The majority of the business of the Property & Casualty insurance operations is short tail and, therefore, losses develop and are paid relatively quickly. In 2003, approximately 39% of the claims charges were paid in the year that the claim event occurred (2002: 37%).
At December 31, (in euro millions except percentages) 1993 1994 1995 1996 1997 (a) 1998 1999 (a) 2000 2001 2002 2003 Gross reserves for unpaid claims and claims expenses developed initially (b) 4,932 5,595 5,712 5,847 20,371 20,941 26,656 26,916 28,636 28,465 27,825 Gross reserves for unpaid claims and claims expenses developed in 2003 (b) 13,713 15,337 15,083 19,206 22,208 23,013 26,063 26,995 27,287 27,302 na Paid (cumulative) at: Eight years later 8,850 9,079 9,660 Nine years later 9,084 9,079 Ten years later 9,050
Cumulative redundancy (deficiency) from the initial gross reserves in excess of re-estimated gross reserves: (a) AXA acquired Compagnie UAP (“UAP”) on January 1, 1997 and Guardian Royal Exchange (“GRE”) in May 1999. The impact in term of gross reserves relative to the scope entry of those two Property & Casualty subsidiaries was, at time of acqusition, €13,7 billion in 1997 and €5,6 billion in 1999.
(b) In 2003, the company AXA Corporate Solutions Insurance US was transferred from the AXA Corporate Solutions Assurance to AXA RE.
Initial net claims reserves in excess of (less than) re-estimated net claims reserves: 1,141 1,361 2,256 2,521 2,668 2,782 3,088 3,163 4,302 3,834 3,347 Paid (cumulative) at: Eight years later 991 1,156 2,000 Nine years later 1,032 1,288 Ten years later 1,212
Cumulative redundancy (deficiency) from the initial gross claims reserves in excess of (less than) re-estimated gross claims reserves (183) (62) (77) 86 46 (425) (407) (374) 174 208
(c) Includes the claims reserves of Abeille Re acquired in 1995. (d) In 2001, the claims reserve of AXA Corporate Solutions Reinsurance was adversely affected by the September 11th attacks. (e) In 2003, the company AXA Corporate Solutions Insurance US was transferred from AXA Corporate Solutions Assurance to AXA RE.
RECONCILIATION OF LOSS RESERVES DEVELOPED TO CONSOLIDATED FINANCIAL STATEMENTS The following table reconciles the gross insurance liabilities, that is, the gross claims reserves including claim expenses, in the loss development tables presented above to that presented in the AXA’s consolidated financial statements (refer to Note 19).
Investment Strategy SIGNIFICANT ACQUISITIONS In 2002 and in 2001, AXA has undertaken no major acquisitions.
On January 2, 2001, so as to finalize the exchange offer realized in December 2000 on the shares held through AXA
Financial minority interests, AXA Merger Corp., the entity created to manage the acquisition process, has been absorbed.
On this occasion, the shares still held by the public have each induced a 35.75 dollars cash payment and a conversion into 0.295 “AXA American Depositary Share” (ADS), thus producing a 737 million euros increase in AXA
Dantai Life Insurance Company Ltd. (“Nippon Dantai”). As a result of this acquisition, AXA increased significantly its presence in the Japanese life and 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
AXA has thus acquired the minority interests in AXA UK Holdings (43.8%), previously named Sun Life & Provincial
Holdings, in the United Kingdom, in AXA Financial, Inc. (39.9%) in the United States and in AXA China Region
In 1998, Royale Belge and ANHYP. AXA has acquired the remaining 51% minority interests in Royale Belge
Belgian bank, ANHYP, through a public acquisition offer. In January 2000, ANYHP was merged with AXA’s existing
In 1997, Compagnie UAP. AXA has 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 and savings as well as on the property and 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
SIGNIFICANT DIVESTITURES Over the past years, AXA has also sold a number of non-strategic assets and operations that are summarized below: – In 2001, Banque Worms (France). The sale of Banque Worms to Deutsche Bank was completed on April 2 2001.
Under the terms of the agreement, AXA has 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 Banque Worms.
AXA keeps considering opportunities that will increase the size and geographical diversity of its worldwide operations in insurance and asset management.
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 organic 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 subordinated convertible debt securities, other subordinated debt securities and borrowings (including debt issued by subsidiaries), and (iv) the issuance of ordinary shares.
The Company and each of its major operating subsidiaries are responsible for financing their operations. The
The financing needs of asset management subsidiaries arise from their activities, which require working capital, in particular to finance prepaid commissions on some mutual fund-type products.
SOURCES OF LIQUIDITY At December 31, 2003, AXA’s consolidated balance sheet included cash and cash equivalents of €19.4 billion (2002: €18 billion), excluding bank overdrafts of €1.0 billion in 2003, (2002: €1.1 billion). The Company statutory accounts had cash and cash equivalents of €1.851 billion at December 31, 2003, versus €195 million a year earlier. This increase was primarily due to €1.4 billion from the investment of funds raised through the issue of ORANs (bonds redeemable in shares or cash) in the fourth quarter of 2003, intended to finance the contemplated acquisition of MONY in the
As part of its risk management, AXA has for a number of years paid constant attention to contractual clauses, particularly those that may cause debts to become repayable before due date. A large proportion of AXA’s debts consists of subordinated bonds that do not feature any early redemption clauses, except in the event of liquidation. Early redemption clauses (puts, default triggers, rating triggers) are in general avoided by AXA. However, when market practice makes them unavoidable, AXA has a centralised method of monitoring these clauses. To date, AXA is not exposed to early redemption clauses that could have a significant impact on its financial position.
SUBORDINATED DEBT At December 31, 2003, the Company (statutory accounts) had outstanding subordinated debt of €8,119 million, or €7,592 million taking into account a €527 million reduction for the impact of foreign exchange derivative instruments.
Term Note) programme, AXA issued $500 million (€396 million) of fixed-rate undated subordinated bonds in May 2003, and €500 million of perpetual bonds through private placement in the second half of 2003. In addition, there was new subordinated debt issued by AXA Bank Belgium, aiming at refinancing loan production. This increase was partly offset by the repayment of AXA Japan’s external debt (€144 million) and a positive impact from foreign exchange derivatives (€238 million) due to the strengthening of euro against other currencies.
NON-SUBORDINATED DEBT INSTRUMENTS At December 31, 2003, the Company (statutory accounts) had outstanding non-subordinated debt instruments of €3,423 million, an increase of €1,457 million from €1,966 million at December 31, 2002. Most of this outstanding debt at December 31, 2003 and 2002 was classified as financing debt. The increase in 2003 was mainly due to the issue of €1,406 million of ORAN bonds.
– Operating debt decreased by €297 million, mainly as a result of a €316 million fall in operating debt in AXA Banque which, after the absorption of Banque Directe, became a net lender in the market. As a result, AXA Banque repaid its debts without raising new funds in the market. This decrease was partly offset by an increase in other operating debts, particularly following the entry of Vendôme Haussmann into the scope of consolidation, leading to an increase of €95 million.
– AXA Banque’s operating debt fell by €142 million, and Colonia Bausparkasse’s by €160 million, mainly due to the reduction in regulatory liquidity requirements for real estate companies introduced early 2003.
ISSUANCE OF ORDINARY SHARES On May 9, 2001, in AXA’s annual general meeting of shareholders, shareholders approved a four-for-one split of AXA’s ordinary shares and two-for-one split of AXA’s American Depository Shares (ADS). As a result, the ratio of AXA ADSs to AXA ordinary shares changed from one ADS representing one-half of an ordinary share to one ADS representing one ordinary share.
In 2003, the number of AXA ordinary shares held in treasury fell slightly, by 0.8 million with respect to December 31, 2002 (1.3 million shares were sold and 0.4 million acquired during 2003). At December 31, 2003, AXA held approximately 29.6 million of its ordinary shares at a book value of €473 million (2002: €489 million), or 1.8% of the total outstanding ordinary shares (unchanged relative to 2002). These shares are allocated principally to the AXA Financial stock-option program, where options have been granted to AXA Financial employees to acquire AXA ADSs.
The Company is not subject to restrictions on dividend payments, provided that its accumulated profits are sufficient to cover them. However, some subsidiaries, particularly insurance companies, are subject to restrictions on the amount of dividends they can pay to shareholders. For more information on these restrictions, see Note 34 to the consolidated financial statements.
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 flows 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 Interest paid by the Company in 2003 totalled €487 million (2002: €564 million, 2001: €635 million) or €252 million after derivative instruments used to hedge the Company’s financial charges (2002: €311 million, 2001: €606 million).
Dividends paid to AXA shareholders in 2003 totalled €599 million in respect of the 2002 financial year, or €0.34 per ordinary share, versus €0.56 per share paid in respect of the 2001 financial year (€971 million in total). All dividends in respect of the financial years ended in 2002 and 2001 were paid in cash.
If Solvency I rules, which are deemed to be effective as of January 1, 2004, were applied, AXA’s European consolidated solvency margin would be 205% based on December 31, 2003 estimates.
Organization of Risk Management at AXA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140
By facilitating a more accurate assessment of risk exposure, these systems and tools help to reduce earnings volatility and to optimize the allocation of capital by the Group to its various businesses.
The Risk Management department performs these tasks using a uniform set of techniques including stochastic models.
These modeling techniques provide a more refined and exhaustive analysis and assessment of AXA’s risk exposure thanks to the large number of scenarios examined in this type of approach. These tools complement the more classical deterministic forecasting tools used.
Market risks MARKET RISKS – ASSET LIABILITY MANAGEMENT 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, rests with the Group’s local subsidiaries, which have the best knowledge of their products, policyholders 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.
Furthermore, a large portion of AXA’s life operations involve products for which most of the investment risk and reward belong to its policyholders.
– An Investment Committee, made up of managers from the financial and operational sides of the insurance company and also, in certain cases, representatives of its board of directors, approves investment strategy and assesses the quality of the results obtained.
– Asset management specialists, primarily AXA subsidiaries (AXA Investment Managers and Alliance Capital), are responsible for day-to-day management of investments. Processes have been put in place in the company to manage investments without surpassing agreed-upon risk tolerance thresholds stipulated by the insurance company in the relevant investment management agreement.
These investment processes are part of a broader framework introduced at Group level, which includes: – defined standards for managing investments and assessing asset liability mismatching risk.
The Risk Management department performs detailed annual analyses using consistent methods and scenarios that are deterministic or stochastic. These particularly important analyses are carried out for all the Group’s main subsidiaries.
For the main product lines, they indicate: – the amount of assets required to meet obligations.
This information is compiled for AXA’s insurance operations and for the Group, which allows the monitoring of strategic asset allocation. Aside from the specific conclusions for each product line and each unit, the analysis indicate that
Updates of the position on the asset side, as well as occasional studies of specific issues are carried out in addition to the annual analyses. The allocation of surplus assets is simulated and analyzed to ensure that the assets are allocated in the most efficient manner by each of the Group's subsidiaries.
In addition, AXA’s insurance operations are subject to local regulatory requirements in most jurisdictions in which
AXA operates. These local regulations prescribe: – the type, quality and concentration (counterparty, geographic location and type) of investments,
– the level of assets to be maintained in the local currency in order to cover insurance liabilities in that local currency
– A rise in yields on fixed-income investments reduces the value of fixed-income portfolios and could have an adverse impact on the solvency margin and the surrender level on certain contracts, if competitive pressures lead to higher rates of policyholder profit participation on new contracts.
The policies put in place to manage these risks are tailored to each product type. The percentages provided below relating to the allocation of life insurance reserves by product type and thus AXA’s obligations to its policyholders are produced from management data: 1. 22% of AXA’s life insurance mathematical reserves cover separate account (unit-linked) products that do not affect
In cases where these products include interest-rate guarantees, they are usually managed by a financial partner within the separate account. Consequently, they do not present any market risk.
2. 10% of AXA’s life insurance mathematical reserves cover separate account products that include guaranteed interestcrediting rates granted by the Insurance companies. Suitable risk management policies have been put in place: – in the United-States, dynamic hedging programs are implemented using derivatives to cover guaranteed minimum death benefits (GMDB); products that pay benefits in the form of annuities are partially reinsured, and will be included in the dynamic hedging programs.
When the risk of transfer to products that offer guaranteed interest-crediting rates are deemed material, hedging programs that use derivatives are put in place.
– In the UK, surrender options on annuities are followed through specific studies and partially covered by interest rate options.
5. 39% 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 usually backed by fixed-income investments whose maturities and interest rates are generally sufficient to cover guaranteed benefits so as to reduce the reinvestment risk to the extent possible; – other products are managed with the surplus required to cover guarantees; – hedging programs that make use of derivatives are put in place as needed to hedge lower (floor) or higher (cap)
All products that involve hedging programs using derivative instruments are designed with the help of dedicated teams at AXA IM and Alliance Capital.
PROPERTY AND CASUALTY OPERATIONS The obligations of Property and Casualty insurance companies are almost entirely independent of asset values.
Consequently, market fluctuations are fully reflected in their net asset value. The principal market risk factors are as follows: – Lower yields on fixed-income investments increase the value of bond portfolios, and therefore generally do not present a material risk, with the exception of certain contracts (disability and worker’s compensation income) that provide guaranteed rates.
Once these factors have been taken into consideration, some leeway exists for diversified investments (real estate or equity securities) that offer a natural hedge against inflation and optimises the yields while minimising profitability risks.
– risk resulting from any restrictions on pay-outs of dividends or reserves introduced by the authorities in the countries where AXA operates. This risk appears to be moderate, however, given the location of AXA’s main operations
For the purpose of optimizing investment performance and financial control, the Finance Department has introduced formal management standards, as well as guidelines for monitoring and assessing financial risks in order to measure the positions of each unit in a consistent manner.
The Risk Management norms have been reviewed and validated by the Management Board. The strategies implemented are also presented on a regular basis to the Finance Committee of AXA’s Supervisory Board.
The methods used to monitor the holding companies’ market risks are predicated on common and uniform indicators: – variability analysis, which measures the change in interest expense over the duration of the strategic plan following a 1% rise in short term interest rates,
Monthly reporting that consolidates the interest rate, foreign exchange and liquidity exposure, as well as the interest expense of holding companies is produced by the Finance Department. It draws on the reports submitted by subsidiaries, which are responsible for the quality of the data. These figures are reconciled with the accounts once every six months. Consolidated reports are submitted regularly to the Finance Committee of AXA’s Supervisory Board.
– AXA holds significant liquidity amounting to €19.4 billion at 31 December 2003. Around 50% of this liquidity is managed within the GIE AXA Trésorerie Europe, which was specifically set up to centralize management of the liquidity held by units operating within the euro zone This GIE reflects the solid liquidity position of the Group, since it had an average cash balance of around €8.8 billion in 2003, which was invested in a highly liquid portfolio with a very short life (63 days at year-end 2003).
Assets and liabilities sensitive to market risks and included in this analysis are equities, bonds, loans, financial debts, derivative instruments and technical reserves. Real estate investments are excluded from this analysis. Similarly, unitlinked activities (assets and liabilities) are excluded from the analysis because the exposure of the Group is limited as the policyholders support the risks on asset value fluctuations (both increase and decrease).
United Kingdom, Belgium, Germany, Australia and Japan. At December 31, 2003, these subsidiaries represented more than 90% of AXA’s consolidated invested assets and technical reserves of its insurance operations.
The purpose of such analysis is to measure the sensitivity of fair values of both assets and liabilities to interest rate and equity market fluctuations. Sensitivities presented are estimation of the net impact of fluctuations in both assets and liabilities fair values.
– For non-participating life insurance contracts, as well as for Property & Casualty contracts, fair values of liabilities
SENSITIVITY TO INTEREST RATE RISK The purpose of these analyses is to estimate changes in the fair value of assets and liabilities in the event of a 100 basis point increase or decrease in the yield curves in the country in which each subsidiary operates. As at December 31, 2003, the estimated potential exposure resulting from a 100 basis point upward shift in the yield curve would result in an estimated net fair value loss for all items within the scope of the analysis of approximately € 0,5 billion, compared with a net fair value decrease of €0,4 billion in 2002. This stability is attributable largely to the absence of changes in portfolio structure between 2002 and 2003, as well as in the general conditions prevailing on the bond markets between year-end 2002 and year-end 2003.
SENSITIVITY TO EQUITY PRICE FLUCTUATIONS As at December 31, 2003, the estimated potential exposure to a 10% and a 20% decline in value of the world’s stock markets would result in an estimated fair value loss for all items within the scope of the analysis of approximately €1,6 billion
SENSITIVITY TO EXCHANGE RATE FLUCTUATIONS In order to calculate AXA’s largest potential exposure to foreign currency fluctuations, fluctuations of the major foreign currencies were analyzed in terms of their impact on the Group earnings. The scenario that resulted in the most adverse effects for AXA was a decline in all currencies against the euro.
– On the other hand, 2003 net income is largely affected by a substantial negative contribution to Group net income from operations in the yen zone. This factor largely accounts for the weaker exposure of Group net income to strengthening of the euro against all other currencies.
– The results of the sensitivity analysis do not reflect the impact of minority interests and tax,
Taken together, these factors limit the ability of these analyses to accurately predict the actual trend in fair values of assets and liabilities and AXA's future earnings.
Based on management data at December 31, 2003, 60% of the fixed maturity investments held are government bonds or similar securities. 93% of the corporate bond portfolio were rated as “investment grade” (with ratings of
BBB or higher) and 67% had ratings of A or higher. The remaining 7% of the corporate bond portfolio which are
“not investment grade” includes 5% of non rated securities and 2% with a rating lower or equal to BB.
An ad hoc committee was set up to manage the risk of reinsurer insolvency. The committee is evaluating the quality of the reinsurers with which AXA does business according to objective criteria and determining admissible commitments. The committee is run by AXA Cessions, the 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. The teams in charge of the Group reinsurance program analyse this information to add a credit risk dimension in their reinsurance placement program and risk transfer to the reinsurers. The security committee meets monthly and decides on any action to be taken with the aim of limiting
LONG-TERM OUTLOOK The evolution and increase in risks caused by climatic change and, more specifically, by the phenomenon of global warming, represent a major challenge for all human activities and particularly insurance operations.
Global warming is now proven beyond doubt, although experts disagree on its scale and pace. Greenhouse gas emissions are the principal human cause. In very concise terms, global warming leads to higher maximum and minimum temperatures, with more hot days (heat waves) and fewer cold days (severe cold spells), as well as heavier and more frequent precipitation (storms, cyclones, etc.). These phenomena have already been observed and are set to become more prevalent, albeit to different extents, across almost all land surfaces on the planet.
Aside from the immediate destruction caused mainly by flooding (and to a lesser extent by drought), climate change will have major implications for a large number of human activities: – Agriculture: higher risks of damage to certain crops. Reduction in agricultural returns. Faster soil erosion. Cattle more fragile and subject to a higher heat-related mortality rate.
These changes already affect and are likely to impact a large number of insurance sectors (property, agricultural, business interruption, civil liability, marine and aviation, life, health, etc.). The insurance sector thus faces major challenges in the coming years in the form of potential increase in property and casualty claims, the emergence of new liability claims and growing uncertainties about the size of maximum possible losses, which have become harder to assess and to predict on the basis of past events. Furthermore, certain key economic sectors, which work together with the insurance sector, are set to undergo radical changes owing notably to the future constraints related to greenhouse gas emissions laid down in the Kyoto protocol.
By seeking to develop these solutions and actively contributing to the overall debate about these issues, AXA, along with other major market players, intends to promote a better understanding and a better forecasting of the risks resulting from global warming.
LIFE AND SAVINGS OPERATIONS The mortality/longevity are the main risks covered by Life and Savings contracts mainly for annuity products or contracts including an annuity option.
Claims have to be provided for as soon as they have been incurred or when reported. Additional reserves for claims incurred but not reported (IBNR) should be booked. They are estimated by the operational entities using several actuarial methods.
In view of these analyses, the operational entities of the Group set up their reinsurance cover with AXA Cessions in line with the identified needs. AXA Cessions is then in charge of the direct placement of the reinsurance cover of a certain number of risks. It also set up an internal 'pool' for the risks that are not directly ceded. This pool mainly deals with Property & Casualty and natural catastrophe risks, and enables the Group to diversifies its risks by mutualising the risks borne by its various operational entities. This pool is then reinsured (retention levels and scope of cover), to allow for a more efficient and less costly cover.
Operational Risk Guided by the principles set forth by the Basel Committee on banking supervision, AXA defines operational risk as direct or indirect loss resulting from inadequate or failed internal processes, people and systems, or from external events.
AXA has classified its operational risks as follows: – Business interruption due to an external (disaster, etc.) or internal event,
– Risks specifically related to the outsourcing of certain activities to external suppliers,
Using the typology provided above, AXA subsidiaries perform annual operating risk audits to identify and evaluate the level of risk to which they are exposed. AXA’s Group Management Audit Department is responsible for centralizing key audit findings.
On this basis, AXA develops quantification methods to estimate the capital allocation needed to cover operating risks based on models inspired by those proposed by the Basel Committee for banking supervision. These efforts are due to be continued during 2004.
The review and assessment include product development and pricing, underwriting, claims management, calculation of reserves, etc.
MONEY-LAUNDERING AND CORRUPTION AXA’s initiatives to combat money-laundering and corruption are described in the section entitled “AXA, a responsible company” of this Annual Report.
(the “Commission française de Contrôle des Assurances des Mutuelles et des institutions de prévoyance -CCAMIP”), which ensures compliance with the relevant legal and regulatory provisions of the French insurance code.
AXA is also subject to regulations pertaining to the additional supervision of insurance groups. As such, the Group computes an adjusted solvency margin calculations based on consolidated financial statements, which must be submitted annually to the “Commission française de Contrôle des Assurances”.
RISK RELATED TO THE US STOCK MARKET LISTING AXA is listed on the Paris Bourse and, since August 1996, on the New York Stock Exchange (“NYSE”). Because AXA, as all other non-US issuers, is listed on two different exchanges, it is subject to two sets of securities law, accounting and corporate governance rules, which may differ in certain respects. 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 (US GAAP).
The use of these two sets of accounting principles may result in significant differences. In addition, the non-US issuers listed on the NYSE (like US issuers) are subject to the Sarbanes Oxley Act, which was adopted in the US in July 2002.
In particular, the Sarbanes Oxley Act requires that both the CEO and the CFO certify AXA’s consolidated financial statements, and contains requirements concerning corporate governance. Specialist teams at AXA ensure that the Group is compliant with these regulations through specific and targeted analyses and reports.
LITIGATION AXA and its subsidiaries are involved in a number of lawsuits arising out of their business activities, including in the
US, where class-action lawsuits are among those in progress. It is hard to predict with any certainty the potential damages or compensation that AXA and its subsidiaries may ultimately have to pay with respect to these lawsuits, especially in the US where punitive damages awarded under US law may bear little relation to the prejudice actually suffered by the plaintiff. To date, none of these lawsuits has resulted in a judgement are settlement against AXA or its subsidiaries likely to have a material adverse effect on the consolidated financial position of AXA and its subsidiaries taken as a whole. Based on information currently available to it, AXA’s Management does not expect that any of these lawsuits are likely to have a material adverse effect on the consolidated financial position of AXA
PanEurolife In January 2002, Nationwide, a US-based insurance company, commenced an arbitration proceeding before the
Holocaust Since 1998, AXA has pursued research efforts in France, Germany and Belgium to identify unpaid life insurance policies issued to Holocaust victims. On August 25, 1998, AXA and five other European insurers signed a Memorandum of
Understanding with certain US insurance regulators and non-governmental Jewish organizations agreeing to the establishment of the International Commission on Holocaust Era Insurance Claims (“ICHEIC”). The ICHEIC established a claims and valuation process designed to settle valid claims.
and certain of its subsidiaries in the Federal Court of Los Angeles (in the US state of California). In their suit, the descendants allege that insurance companies currently owned by AXA issued insurance policies between 1880 and 1930 and did not pay related benefits. They are seeking damages.
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 business or consolidated financial position of AXA and its subsidiaries taken as a whole.
Environmental risks are limited because AXA’s core business activities are globally non-polluting. This said, AXA’s environmental initiatives are described in the “Sustainable development” section of this document.
AXA’S GENERAL POLICY CONCERNING THE INSURANCE OF TRANSFERABLE RISKS This policy is underpinned by two objectives inspired by the decentralized manner in which AXA’s insurance operations and management services units are managed.
(relating to property, equipment and personnel). A Group Company can insure Property & Casualty risks, which are mainly related to domestic risks. A number of entities chose to be insured by an insurer outside the Group.
For risks that concern all AXA subsidiaries, Group-wide programs have been set up to provide protection against high magnitude risks that are common to various insurance operations.
AXA Asia Pacific Holdings, which already had adequate coverage adapted to the specific features of these particularly sensitive markets.
Insurance and Asset Management markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159
World Index1`posting a gain of 30.3%. The first solid steps in a synchronized global recovery led by the United States, combined with the recovery in corporate earnings, helped the world’s stock markets to turn the corner. The recovery began in March, after the US and its allies commenced military operations in Iraq. On the currency front, the US
dollar pursued throughout 2003 the downward slide it began in 2002. The euro was once again the strongest of the world’s main currencies in 2003.
STOCK MARKETS The recovery was overall after the lowest points reached in March. In local currency terms, the US S&P 500 advanced by 26.3%, while the Japanese Nikkei was up 24.4%. In Europe, the Stoxx 50 rose by 16%, the CAC 40 by 16% and the FTSE 100 index by 13.6%, while the German DAX was up 37%.
BOND MARKETS The performance of bonds markets was quite low in 2003. The yield on the US 10-year T-bond went from 3.85 to 4.25%, the German Bund from 4.20 to 4.25, the British gilt from 4.43 to 4,80, the French OAT from 4.27 to 4.25 and the Japanese JGB from 0.90 to 1.35.
(1) Morgan Stanley Index, a market capitalization index designed to measure global developed market equity performance.
In Austria/Hungary, AXA Konzern had announced on December 18, 2002 the terms of its discussions with UNIQA
On July 1, AXA Germany sold its stake (49.9%) in Colonia Re J.V. to General Re. This agreement ends a fruitful period of collaboration with General Re in Germany, which lasted more than 8 years through a joint venture agreement and is in line with AXA Germany's strategy to focus on its core business. Proceeds from the sale were €701 million. In full-year 2003 accounts, the related capital gain amounts to €11.3 million.
Issuance of undated subordinated notes On May 7, 2003 AXA issued U.S.$500 million of undated subordinated callable fixed rate notes under its existing €5.0 billion Euro Medium Term Note program. The notes were issued at an issue price of 100% and bear interest at the rate of 7.10% per annum, payable quarterly in arrear. The Company may, at its option and in certain circumstances redeem the notes, at par on or after November 7, 2008 or prior to this date in the event of certain tax or regulatory events.
CAPITAL OPERATIONS The AXA Group has for several years offered to its employees, in and outside France, the opportunity to subscribe for shares issued by way of capital increase reserved for employees. In 2003, employees invested €188 million (respectively €13 million in July and €175 million in December). The 2003 offerings led to the issuance of 15.1 million shares.
At December 31, 2003, the total number of shares in issue amounts to 1,778 million, and employee shareholders represent approximately 4.8% of the outstanding share capital of AXA as compared to 4% as of December 31, 2002.
Crédit Agricole shares received in the offer have been completely sold, enabling AXA to achieve a further small capital gain (€8 million gross of tax).
In January and February 2004, AXA made private placements of USD 375 million under its €5.0 billion Medium Term
Insurance and Asset Management markets LIFE & SAVINGS France. 2003 was a year of recovery for the French Life & Savings markets. Although not as strong as during 1999
United States. In 2003, U.S. investors responded favorably to the recovery in the equity market and the availability of products with features offering guarantees. Interest rates remained low and provided economic stimulus. In the
Life sales were down 37% from 2002. The Variable Life business generally lags the movement in the equity market.
United Kingdom. New annualized business (new regular premiums plus 10% of single premiums) fell in 2003 in contrast to growth of 2.3% in 2002 and 14.1% in 2001. This was largely the result of continued adverse stock-market performance in the early part of the year coupled with stock-market volatility even as the markets began to recover.
HM Treasury will define the product design for the new suite of “Sandler” products, including a price cap. The Treasury has indicated that it will not announce its thinking until the FSA has concluded work on reviewing the sales process, which is unlikely before May 2004. The industry has lobbied the Treasury very hard to increase the 1% price cap proposed by Sandler.
reached the 10th position in the Japanese Life insurance industry with a 3.1% market share (based on premium income).
Australia. In Australia and New Zealand, the savings related investment sector continued to be the growth area due to the ageing population and continued government support for self-funded retirement. Retail savings and investment sectors were adversely impacted in the first half-year due to the war in Iraq. This investor uncertainty was reflected in the move from equities and growth products to more defensive income style products over the year. Despite this uncertainty preliminary findings indicate that the retail managed fund market is estimated to have grown by 13%.
Region experienced growth in sales, with a 23% increase (9 months to September) of individual life new business.
Germany. In Life & Savings, new business of regular premiums grew by 13.3% to €8.0 billion, while single premiums increased by 12.3% to €8.3 billion. In 2003, in line with the increase in the maximum contribution to the state pension scheme, new business for individual endowment products increased significantly (€2.6 billion, + 30.8%) whereas annuity products, grew only by 15.2% (€2.7 billion). Increased awareness for the need of private pension schemes has also pushed sales of single premiums group annuity products (€2.4 billion, + 37.3%). While the state funded individual pensions products (so-called Riester products) still remain far below expectations, representing less than 2% of regular premiums new business, there is strong increase in demand for product of “Pensionskasse” (group pension funds). All in all, premium growth is expected to be at 3.6% in 2003, this excludes group pension business for which market figures are not available.
Belgium1. The trend noted in 2001 strengthened in 2003: unit-linked sales plummeted 47% in 2003 after falling by 16% in 2001 and 32% in 2002. Consumers turned to safer insurance products with guaranteed rates (+ 25% in 2001,
(1) Figures are estimated based on September 30, 2003 (no more recent available data). (2) ICEA January 2004.
(+ 7% for each year). In commercial lines, the main factor for this improvement was the increase in rates notably as regards the liability and industrial property risks, as the claims charges remained at a high level and reinsurance costs significantly increased. Although to a lesser extent, growth was also significant for personal lines, as the number of contracts increased and rates moderately increased.
Casualty business with €8.9 billion gross written premiums (+ 6.5%).More restrictive underwriting clauses as well as the absence of natural disaster year-to-date, have led to a substantial reduction in claims expenditures. General
Liability lines showed a 3.6% increase in gross written premiums to €4.0 billion. In accident, gross written premiums increased by 2.8% to €2.9 billion.
United Kingdom. The UK market has enjoyed a positive underwriting environment throughout 2003 with hard market conditions in Commercial lines in the first three quarters driving double digit growth across AXA’s SME market.
Competition increased in the fourth quarter particularly in Commercial Motor and Property classes. Rating increases on Liability classes continued to be strong across the year with increases of up to 35%. In Personal Lines Motor rates increased by 0.5%, as the market cycle turned downwards, and Household by 3%. Across the year, most carriers will also have benefited from the benign weather experienced in 2003 with no major weather events.
Belgium1. The Belgian Property & Casualty market grew by 6% in 2003 (against 7% in 2002). This significant increase, compared to an average annual growth of 3% for the last 10 years, is primarily due to the motor line by + 5% (accounting for 36% of total Property & Casualty) and household (+ 8% in 2003), and both benefited from rates increases. The
Party Liability cover. After a 4% to 5% increase in average premium in February, most companies left their tariffs unchanged. Motor third-party liability grew by 7.4% in 2003 while other lines grew by 6.4%3. Agency networks continued to dominate the market, maintaining their 85% market share in 2003 against direct underwriters (mainly in motor)
Workers compensation, which totaled 20% of the P&C insurance market, grew by 2.6% to €0.8 billion4.
(1) Figures are estimated based on September 30, 2003 (no more recent available data). (2) ICEA January 2004. (3) ISVAP: Sept. 2003 (Istituto per la vigilanza sulle assocurazioni private / insurance controller. (4) Source Portuguese Insurance Associations.
Consolidated gross revenues for the full-year 2003 were €71,628 million, down by – 4.1% on a current basis, mainly as a result of the significant appreciation of the Euro mainly against US dollar, Yen and British pound (€–5.5 billion impact or – 7.4 bpts). Other scopes differences compared to the same period last year (sale of AXA Austria, AXA
Life & Savings revenues growth was + 8.5%, with positive performance recorded in most countries, in particular in the United States (+ 29.1%), Belgium (+ 25.9%), Germany (+ 9.2%), France (+ 4.4%) and Japan (+ 6.2%), while the
July 2002, followed by significant reductions in the overall With-Profit bond market. AXA responded to this by focusing on cautious investment products, which continue to drive sales performance in unsettled market conditions, and this resulted in higher sales of unit-linked bonds. AXA has begun to enhance its product range and will continue to mobilize its sales force to mitigate these market conditions in the mid term. New business on an Annual Premium
Equivalent basis (APE1) in the second half of the year 2003 was 12% higher than in the same period in 2002. The
US revenues were still pulled up by the strong sales of the Variable Annuity Accumulator Series launched in April 2002, despite large Institutional Separate Account premiums related to Equitable Life benefit plans registered in 2002
(excluding this item, revenues grew by + 35%). Belgium and Germany benefited from a high level of sales on nonunit linked products, interest-linked products in Belgium and group pension funds in Germany (newly established
“Pensionskasse”). Japan revenues growth was driven by continued conversions progress, higher margin individual health sales, strategic bancassurance agreements, partly compensated by lower Group pension transfers. France benefited from a growth in individual general accounts premiums and new Group business. Apart from the UK trend,
(a) Net of intercompany transactions. (b) Percentages are on constant methodology, constant exchange rates, constant structural basis (“constant scope”).
Solutions Assurance also showed a – 3.9% decrease, reflecting lower premiums on Aviation, reduced exposure to selected business lines, and a decrease in property line following the reshuffling of the UK portfolio, only partly offset by the growth in the Casualty line due to rates adjustments and new business.
Asset management fees, commissions and other revenues were nearly flat at – 0.3%, both in Alliance Capital (–
0.4%) and AXA Investment Managers (+ 0.5%), recovering on the second half of the year due to stronger equity markets.
The net income Group share for the Full Year 2003 reached €1,005 million, or a €+56 million increase compared to Full Year 2002.
– An exceptional profit in Germany Holdings operations (€17 million net of goodwill impact) as a result of the release of a provision set-up when acquiring German operations in 1997; this release was due to the disposal of
(a) 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.
(b) For the periods ended December 31, 2003, 2002, and 2001, the change in fair value of separate accounts had impacted the net investment result for respectively Euro + 14,949 million, Euro – 17,576 million and Euro – 11,613 million and benefits and claims respectively.
Goodwill amortization group share decreased by €50 million, or €17 million on a constant exchange rate basis.
This decrease was mainly attributable to non-repeated impacts of goodwill amortization in 2002 (full amortization of Banque Directe goodwill in 2002 [€13 million], and exceptional amortization on ex-GRE entities [€22 million]), partly offset by higher amortization in AXA Financial following the exercise of stock options (€–14 million).
Adjusted earnings were up by €+93 million to €1,450 million, mainly as a result of a significant improvement in underlying earnings, the non-repeated 2002 impact of the cost of September 11, 2001 events, partly offset by lower net capital gains and losses.
LIFE & SAVINGS At €898 million, adjusted earnings decreased by €–469 million, of which €–305 million were attributable to United
(€89 million), (ii) higher underlying earnings in both reinsurance and large risks businesses (€+219 million or €+229 on a constant exchange rate basis), and (slightly lower net capital gains (€–13 million).
ASSET MANAGEMENT Adjusted earnings decreased by €–110 million to €148 million, or €–90 million on a constant exchange rate basis, mainly as a result of the charge for legal proceedings and mutual fund matters (gross 100% impact of €–292 million, and net group share impact of €–104 million or €–124 million on a constant exchange rate basis).
(1) At constant exchange rate (€-133 million impact) and after reclassification of UK health 2002 underlying earnings (€+91 million), presented from January 1, 2003 in Property & Casualty segment (previously under the Life & Savings segment), and exclusion of 2002 underlying earnings of Australian Health activities (€–11 million) sold in August 2002 and Austrian/Hungarian L&S (€–2 million) sold as at January 1, 2003.
(2) Including UK health activities. (3) At constant exchange rate basis and after reclassification of UK health 2002 underlying earnings (€+91 million), presented from January 1, 2003 in Property & Casualty segment (previously under the Life & Savings segment), and exclusion Austrian/Hungarian P&C (€–1 million) sold as at January 1, 2003.
CONSOLIDATED SHAREHOLDERS’ EQUITY At December 31, 2003, consolidated shareholders’ equity totaled €23.4 billion. The movement in shareholders’ equity since December 31, 2002 is presented in the table below: CREATION OF SHAREHOLDER VALUE
FY FY FY Var. FY 2003/ Var. FY 2002/ (in euro millions except percentages) 2003 2002 2001 FY 2002 FY 2001 Average Shareholder’s equity 22,958 23,643 24,323 – –
– Capital increases (to employees) 189 15.1 – Exercise of share options 8 0.8 – Cash dividend (680) – – Impact of foreign exchange fluctuations (985) – – Other (a) 154 –
(a) Underlying earnings per Ordinary Share (Underlying EPS) represents the AXA’s consolidated Adjusted Earnings, excluding the impact of September 11 attacks and net capital gains attributable to shareholders, divided by the average number of outstanding ordinary shares.
NET INCOME 671 1,012 1,063 899 922 (a) Before intercompany transactions. (b) UK Health business has been transferred to UK Property & Casualty segment. Consequently FY 2002 and FY 2001 has been restated excluding UK Health business.
(c) For the periods ended December 31, 2003, 2002, and 2001, the change in fair value of separate accounts had impacted the net investment result for respectively €+14,949 million, € – 17,576 million and €– 11,613 million and benefits and claims respectively.
NET INCOME 671 1,012 1,063 900 922 (a) UK Health business has been transferred to UK Property & Casualty segment. Consequently FY 2002 and FY 2001 has been restated excluding UK Health business.
Investment margin increased by €48 million in 2003. Investment income grew by €19 million to €3,079 million as a result of the increase in average general account reserves partly offset by a decrease in fixed interest and cash yields. Net capital gains and losses were up €32 million to €121 million in 2003. Excluding a €109 million capital gain on the sale of Crédit Lyonnais shares in 2003 and a €107 million gain on the sale of the French listed real estate
SIMCO in 2002, realized capital gains and losses increased by €166 million, mainly on equities. These increased gains were largely offset by an increase of €136 million in valuation allowances at €–160 million. Amounts credited to policyholders were stable (€–3 million), as a consequence of increased investment income, net realized capital gains and increased average general account reserves, partly offset by a decrease in average rates credited to individual savings policyholders (from 4.7% to 4.2% in line with the 0.4 point decrease of the interest rate credited on the main products).
Expenses net of DAC and VBI marginally increased at €1,471 million. Excluding the impact already mentioned on the fees & revenues margin, expenses would have decreased by €25 million, driven by lower management expenses attributable to the continuous effort to reduce the cost base (€+44 million), partly offset by higher commission to agents and brokers (€–23 million) as a result of higher sales.
The underlying cost income ratio improved by 1.7 point to 76.0% driven by the improved investment margin.
Income tax expense was up €77 million as a result of the increase in income taxable at the full rate, a lower proportion of income being taxed at a nil rate or a reduced rate (20%).
Investment margin increased by €58 million in 2003 as compared to 2002, or by €178 million on a constant exchange rate basis.
Fees and revenues decreased by €–78 million in 2003, or an increase of €88 million on a constant exchange rate basis, mainly due to higher fees earned on separate account business. The increase in fees earned on separate account business was attributable to positive net cash flows and the higher average separate account balances.
DAC reactive and an increase in expenses, net of DAC capitalization, of €23 million.
Underlying cost income ratio increased to 86.7% versus 86.0% in 2002, as the strong improvement in revenues is more than offset by higher commission on the back of very strong sales in 2003.
Income tax expense increased by €210 million in 2003, or €240 million on a constant exchange rate basis. The increase is principally due to (i) the absence of the €152 million benefit recognized in 2002 resulting from the favorable treatment of certain tax matters related to separate account investment activity and (ii) the impact of higher pre-tax income, partially offset by (iii) a €29 million reduction resulting from a review of the deferred tax positions related to periods subsequent to the acquisition of a majority ownership in The Equitable Companies Inc. by AXA in 1992.
Adjusted earnings increased by €10 million in 2003, or an increase of €115 million on a constant exchange rate basis. The increase is primarily due to (i) higher investment and technical margins, (ii) higher fees and revenues, partially offset by (iii) higher DAC amortization, (iv) higher pension expenses and (v) higher tax expense.
– Unit linked premiums now account for 72% in 2003 compared to 51% in 2002 as a consequence of a 27% yearly sales increase reflecting the focus on cautious investment products.
– €+32 million increased investment income on shareholder assets following the capital restructuring of the AXA
– In line with market trends, “With-Profit” bonus payments have reduced with an impact of €–19 million on shareholder profits.
Life & Savings Operations - United Kingdom FY 2002 FY 2001
ADJUSTED EARNINGS 43 290 348 137 167 Average exchange rate : 1.00 € = £ 0.69 0.63 0.63 0.62 0.62
(a) UK Health business has been transferred to UK Property & Casualty segment. Consequently FY 2002 and FY 2001 have been restated excluding UK Health business.
(1) Annual Premium Equivalent (APE) representing total regular premiums plus 10% of single premiums.
– €–16 million reduction in fees earned on account balances due to the impact of the decline in the stock market throughout 2002 and early 2003, partially offset by new business net inflows.
Expenses, net of policyholder allocation1 have reduced by €+48 million in 2003 or €+6 million on a constant exchange rate basis.
Excluding net capital gains and losses attributable to shareholders (mainly related to Crédit Lyonnais), underlying earnings decreased by €316 million in 2003, or €319 million on a constant exchange rate basis, to €–27 million due to non recurring reserves strengthening and 2002 tax benefits.
Gross written premiums decreased by 5% to €6,078 million or increased by 6% on constant exchange rate basis.
– Health (20% of gross written premiums): Premiums were up by 49% to €1,188 million. Excluding conversions, premiums were up 7%, as the sales force focused on sales of Medical Whole Life products (+ 28%), which offer high margins, despite lower renewals in Medical Term reflecting the increased competition.
Fees and revenues decreased by €73 million or increased by €32 million or + 3% on constant exchange rate due to a continuing shift in product mix towards higher margin products, especially in Health. Although the overall surrender rate has been constantly reducing over the year due to management actions, some surrenders of medical term and endowment products resulted in lower fees and revenues.
Underlying cost income ratio improved by 15.2 points to 88.9% mainly due to the sharp increase in technical margin.
Adjusted earnings declined €179 million (€206 million on constant exchange rate) to €–224 million. This decrease was primarily attributable to asset impairments (€–249 million net of tax and DAC/VBI reactivity) and a €161 million increase in the valuation allowance on AXA Japan's deferred tax asset. These were partly offset by a €119 million higher technical margin, higher capital gains on equities and investment income due to higher asset base.
Gross written premiums rose by 9%, mainly due to Investment & Savings and Health.
Investment & Savings (19% of gross written premiums): Revenues increased by 27%, mainly driven by non unit-linked premiums. This premium growth was due to a distinct increase in new business strongly supported by the newly established “Pensionskasse” (group pension funds). Unit-linked business significantly increased, while still representing only a small portion of Investment & Savings premiums (4% versus 3% in the prior year).
Health (23% of gross written premiums): Gross written premiums increased by 15%, outperforming the estimated market growth of 7%. This growth was due to strong new business (+ 23%), continuous premium adjustments as well as lower lapse ratio.
Given the highly regulated policyholder participation rates, the whole margin analysis is presented net of policyholder participation.
Due to the continued weak stock market, and in connection with a low fixed interest environment, the investment margin decreased by €73 million to €–37 million in 2003. The investment portfolio has been restructured so that the downside risk on the equity exposure has been reduced. This was simultaneously accompanied by a restructuring of the bond portfolio to better match asset liability duration. As a result of this investment strategy, valuation allowances on equity securities and bonds (€–647 million, compared to €–77 million in 2002), have partially been offset by realized capital gains of €125 million, compared to capital losses €–48 million in 2002. The overall negative impact was to a large extent offset by lower policyholder participation.
products, and (ii) the increase in all pension products premiums following the raising of the authorized maximum contribution under the state pension scheme.
Expenses rose by €–4 million. Gross of policyholder participation, commission expenses net of DAC increased by €–35 million exclusively attributable to the strong new business growth. Excluding (i) restructuring provisions
(€6 million) and (ii) an exceptional write down of receivable against a deficient broker (€10 million), non-commission expenses decreased by €14 million as a result of effective cost cutting.
Adjusted earnings decreased by €–26 million, down to €–26 million, mainly due to the decrease in investment margin
(€66 million group share), partly offset by lower taxes (€38 million group share).
Individual Life and Savings (79% of gross written premiums). Premiums increased by 27% to €1,626 million mainly due to non unit-linked products (+ 45%), primarily driven by the main interest-linked products Crest (+ 55%) and
The investment margin decreased by €59 million to €2 million, partly due to valuation allowances on equity securities for €171 million, as compared to €112 million in 2002, and lower realized capital gains and losses (€–51 million to €+29 million including €+14 million realized gains on Crédit Lyonnais shares). Excluding these impacts
The net technical margin was up by €12 million to €50 million, as a result of a better mortality margin in Group Life and the absence of any mortality bonus charge in 2003.
Income tax expenses increased by €27 million to €51 million, mainly due to (i) a higher taxable income (of which net capital gains and losses on equity securities are excluded), (ii) the implementation in 2003 of the taxation of dividends, partially offset by (iii) a 6 point decrease of the local tax rate to 33.99%.
Adjusted earnings decreased by €63 million to €–55 million mainly as a result of higher net capital losses driven by valuation allowances.
(€32 million), a higher net technical margin (€12 million) and lower costs (€10 million), which are offset by a higher tax charge (€17 million).
Total gross revenues of €1,702 million were in line with last year on a comparable basis2. Gross written premiums decreased by 1.9% on last year to €1573 million. Improvements in group pensions and individual life volumes have been offset by falls in retirement income following tactical price increases. Fee revenues from mutual fund and advice business, the key growth areas for the Australian market, increased by 5% to €129 million on a comparable basis due to higher retail product sales and growth in ipac advice business.
Net mutual retail fund sales of €898 million were 39% higher on a comparable basis. This was largely due to an increase in unit trusts sales due and well perceived AXA mutual funds products.
– The technical margin grew by €3 million to €18 million. The increase was largely due to mortality improvements on risk business, partly offset by a decrease in the income protection margin following a return to a normalized claims pattern, consistent with expectations.
– The income tax benefit increased by €15 million to €28 million consistent with the movement in taxable income.
(1) The AXA Asia Pacific Group is 51.6% owned by AXA. (2) Excluding AXA Health Insurance sold in August 2002 and including an additional eight months of ipac revenues in 2002 (acquired in August 2002) and on a constant exchange rate basis.
(3) The investment margin includes the contribution of equity accounted subsidiaries held by policyholders’ fund. (4) The AXA Asia Pacific Group is 51.6% owned by AXA.
THE NETHERLANDS Gross revenues decreased by 16.3% to €768 million. Life insurance (63 % of total gross revenues) decreased by 16.3% to €484 million due to the weak investment climate and high premium income in 2002 from a non unit-linked
Investment product. Gross revenues on Health business decreased by 16.4% to €284 million due to the declining share in a relatively large fronting contract.
The underlying cost income ratio improved by 17 points to 69.5%.
ITALY Gross written premiums grew by 3% to €566 million. Agents significantly increased their contribution (+ 13%), thus compensating a drop in the bank-insurance production caused by a six-month delay in renewing the main bank distribution agreement.
These negative impacts (€–31 million) were partly compensated by a €18 million improvement in the technical margin
(2002 was negatively impacted by a €7 million strengthening of insurance reserves on an old-generation guaranteed index-linked product; 2003 notably benefited from €8 million release following the recovery of the underlying asset values).
The underlying cost income ratio improved by 35 points to 51% driven by the year-on-year change in index-linked insurance reserves.
Adjusted earnings decreased by €1 million compared to 2002 to €29 million. This evolution was mainly due to lower net capital gains (€–10 million) as AXA Seguros benefited last year from large realized capital gains on real estate.
Underlying earnings increased by €9 million to €22 million mainly as a result of (i) higher revenues on fixed maturities, induced by larger in force business from the large pension funds underwritten last year, (ii) higher fees and revenues following a favorable change in product mix and (iii) a one-time tax credit.
Accordingly, the underlying cost income ratio improved by 3 points to 84%.
Adjusted earnings grew by €7 million to €7 million as 2002 earnings were impacted by valuation allowance on equities.
Underlying earnings decreased by €2 million to €7 million mainly as a result of higher interest credited to policyholders reflecting the change in product mix.
Switzerland Gross revenues increased by 12% on a comparable basis to €88 million, resulting from a better product positioning, customers anticipating legal decision to reduce Individual Life technical rates and marketing initiatives with the distribution networks.
Underlying earnings increased by €2 million, mainly attributable to higher fees and revenues.
Property & Casualty Segment The tables below present the gross premiums and net income attributable to AXA’s Property & Casualty segment for the periods indicated.
Equity in income (loss) of unconsolidated entities 24 19 19 5 5
NET INCOME 448 33 (19) 94 52 (a) Before intercompany transactions. (b) UK Health business transferred from Life & Savings segment. Consequently FY 2002 has been restated including UK Health business. (c) (i) UK Discontinued business has been transferred to International Insurance segment.
Contribution to consolidated gross revenues 17,098 17,082 15,948 17,036 15,896 (a) Gross written premiums, plus fees, commissions and other revenues. (b) UK Health business transferred from Life & Savings segment. Consequently FY 2002 has been restated including UK Health business. (c) (i) UK Discontinued business has been transferred to International Insurance segment.
(ii) UK Health business transferred from Life & Savings segment. Consequently FY 2001 has been restated including UK Health business.
(b) (i) UK Discontinued business has been transferred to International Insurance segment. (ii) UK Health business transferred from Life & Savings segment. Consequently FY 2001 has been restated including UK Health business.
The net technical result improved by €98 million to €1,011 million.
Current accident year loss ratio improved from 78,7% in 2002 to 78,4% in 2003. The positive claims frequency trend in personal motor was partly offset by the occurrence of large claims in industrial risks as well as significant weather-related events and the increase in reinsurance costs of commercial lines.
The expense ratio improved by 0.5 point to 23.5% as a consequence of increased volumes coupled with the continued effort made to control the cost base.
The combined ratio improved by 1.4 point to 101.5% as a result of better all accident years loss ratio and expense ratio.
Net investment result decreased by €41 million, mainly as a result of lower net capital gains and losses
Income tax expenses were down by €16 million to €96 million as pre-tax income marginally increased while earnings taxed at a reduced rate (20%) were higher in 2003 than in 2002.
Adjusted earnings increased by €29 million to €266 million due to the improvement in the net technical result
Underlying earnings increased by €28 million to €216 million primarily as a result of the improvement in the combined ratio.
– Commercial (27% of gross written premiums): premiums slightly improved as rate increases were partly offset by portfolio pruning.
– Current accident year loss ratio: The 10.2 point improvement to 76% was partly driven by restructuring efforts in motor and tariff increases. In addition, 2003 has not been affected by large natural catastrophes.
Expense Ratio increased by 1.2 point to 31.5%. In 2002, expenses included a provision for early retirement for €41 million, while 2003 included a €50 million provision for rental risk, and an additional €18 million early retirement provision. Excluding these items, the expenses are stable.
As a result, the net combined ratio showed a significant improvement from 107.3% to 101.0%.
Tax expenses increased by €12 million despite negative operating income due to the improved technical result and due to the fact that capital gains and losses and asset impairments on equities are fiscally non deductible.
Gross revenues decreased by – 5% to €3,676 million. On a comparable basis, gross revenues increased by + 4%
with general insurance revenues up + 6% and Health revenues stable.
– Commercial lines revenues (40% of gross revenues) increased by + 16% on a comparable basis, notably following successful rate increases and new business acquisitions in commercial property (+ 17%). Both Workers' compensation (+ 24%) and liability (+ 19%) recorded strong rate increases on stable volumes.
The net technical result increased by €153 million, or €255 million at constant exchange rate, to €1,013 million.
Property & Casualty Operations - United Kingdom FY 2002 FY 2001
The expense ratio increased slightly to 31.0% (or a €+53 million increase mainly following the growth in volume)
These movements led to a 5 points improvement in the net combined ratio to 102.9%.
Net investment result increased by €22 million, or €31 million on a comparable basis to a profit of €92 million in 2003, resulting from (i) a higher investment income, up €14 million as a result of interest generated on positive cashflows and (ii) €+17 million higher net capital gains and losses reflecting lower impairment charge on equity securities, which has an impact of €88 million. This was partly offset by higher losses of €72 million following equity securities sell-down and the non-recurring large gain realized in 2002 on the sale of Willis shares.
Adjusted earnings increased by €146 million in 2003, or €147 million on a comparable basis to a profit of €9 million mainly reflecting the large improvement in the combined ratio. Underlying earnings increased by €128 million, or €135 million on a comparable basis to a profit of €71 million.
Gross written premiums increased by 1% to €1,413 million, driven by personal lines.
Personal lines (63% of gross written premiums): premiums increased by 1%. Motor grew by +4% mainly due to rate increases. Household decreased by -1% despite rate increases due to the loss of a bancassurance agreement.
The current year loss ratio improved by 6.3 points to 82.4% due to (i) a lower claim frequency for most lines and
As a result, the combined ratio in 2003 decreased by 6.0 points to 103.8%.
Income Tax Expense increased by €12 million to €56 million, as a result of (i) a higher taxable income (of which net capital gains on equity securities are excluded), (ii) the implementation in 2003 of the taxation of dividends, partially offset by (iii) a 6 points decrease of the local tax rate to 33.99%.
Adjusted earnings increased by €24 million from last year to €65 million, mainly driven by (i) a 0.9 point gain in the combined ratio to 103.7% (€+4 million), due to further improvement in claims experience following portfolio cleaning measures and tariff increases (–1.8 point on loss ratio), but partly offset by a 0.9 point increase in expense ratio notably driven by a higher average commission rate and (ii) a €29 million increase in exceptional tax gains, driven by the release of the residual allowance on tax loss carry-forward, reflecting the restored profitability of the motor line, and by a higher tax benefit from the legal restructuring of AXA subsidiaries in Italy. In addition, the net investment result decreased by €11 million, as a result of lower investment revenues (€–7 million) reflecting the impact of the lower yield on the bonds portfolio, and the reduction in net capital gains (€–4 million) attributable to the large realized gains on bonds and real estate in 2002, while 2003 benefited from lower valuation allowances on equity securities and the sale of the Crédit Lyonnais shares.
SPAIN Gross written premiums grew by 9% to €1,165 million mainly driven by the increase in (i) personal motor (+ 6%)
following tariff increases, (ii) commercial property (+ 54%) and mechanical warranties (multiyear contracts, + 34%)
CANADA Gross revenues increased by 9% to €761 million on a comparable basis. The growth was principally due to increases in premium rates in all lines of business following the hardening of the Canadian market, with the most important increases in Ontario's motor business (+ 28%) and in commercial lines (from + 5% to + 50%).
Adjusted earnings amounted to €37 million, an increase of €21 million on a constant exchange rate basis, mainly as a result of the 4.2 points reduction of the combined ratio to 99.0%. Following the implementation of various underwriting actions and increased premium rates, the loss ratio improved by 1.8 point to 71.7 % despite the difficult situation prevailing in the Ontario motor line. The expense ratio improved by 2.4 points to 27.3 % due to continued general cost containment, to increased 2003 premiums and to the inclusion in 2002 of an €11 million information technology (IT) write-off. Excluding the IT write-off, the combined ratio improved by 2.7 points.
Underlying earnings reached €35 million, up by €22 million on a constant exchange rate.
Adjusted earnings increased by €59 million to €118 million, explained by a significant improvement in the net technical result. This was primarily attributable to a 10.5 points reduction in the loss ratio to 70.4% in 2003 resulting from the lower motor claims frequency and a strong improvement in the profitability of household business due largely to the absence of any significant weather catastrophes in the current year, together with favorable movement in prior year claim reserves. The expense ratio remained stable reflecting tight cost control despite reduced average premiums.
THE NETHERLANDS Gross revenues increased by + 3.8% as a result of lower premiums from Agents (€7 million) and an increase
Adjusted earnings (excluding Unirobe) increased by €14 million to a €3 million loss. The combined ratio improved by – 7.3 points to 111.5% mainly due to (i) the – 4.2 points improvement of the loss ratio resulting from the positive impact of rate increases and pruning measures partially offset by the negative impact of the new allocation of expenses
Underlying earnings improved by €1 million as a result of (i) higher dividends received from the equity portfolio, (ii)
Adjusted Earnings improved by €15 million to €11 million as 2002 was negatively impacted by strong valuation allowances on equity securities. Underlying earnings increased by €4 million to €13 million, following the 1.4 point improvement in combined ratio (to 99.7%), as a result of a reduction in average claims cost and claims frequency. This improvement was partly offset by the impact of the net deferred tax position of the regulatory decrease in tax rate.
Switzerland Gross revenues decreased by – 13.5% on a comparable basis, to €87 million due to lower revenues from legal cancellations on the Northern portfolio, portfolio pruning, strict underwriting and interruption of the special lines and international transport business.
Turkey Adjusted and underlying earnings reached €4 million from €1 million last year, driven by an improvement in the combined ratio from 104.7% to 101.1% attributable to cost-cutting efforts and tighter management of insurance recoveries.
International Insurance Segment The following table present the gross premiums and net income for the International Insurance Segment for the periods indicated: Consolidated Gross Revenues (a)
NET INCOME 142 (176) (176) (406) (386) (a) (i) Run off entities transferred from AXA Corporate Solution Assurance to other transnational activities.
(ii) Transfer of AXA Corporate Solutions Assurances US from AXA Corporate Solution Assurance to AXA RE. (b) (i) Discontinued business transferred from Property & Casualty segment.
(ii) Run off entities transferred from AXA Corporate Solutions Assurance to other transnational activities. (iii) Transfer of AXA Corporate Solutions Assurance US from AXA Corporate Solutions Assurance to AXA RE.
FY FY 2002 (in euro millions) 2003 Pro forma(b) As published
Attritional all accident year loss ratio (a) (b) 75.1% 74.1% 75.3%
Operating Income 171 (60) (64) (a) Net of ceded reinsurance (cession and retrocession). (b) Attritional data exclude (i) major losses in claims charge and (ii) covers'cost in ceded premiums. (c) (Attritional claims charge and major losses cost on all accident years) divided by (net earned premiums, net of all reinsurance costs including covers).
(d) Pro forma on the attritional ratios take into account (i) the transfer of AXA Corporate Solutions Insurance US from AXA
Corporate Solutions Assurance to AXA RE, (ii) the creation of a specific account to track premium revisions on prior years, and (iii) a refined allocation of prior years results from reinsurance between premiums and claims impacts.
(e) Pro forma on the loss ratio and the expense ratio takes into account a methodological change in the allocation of prior results from reinsurance between premiums and claims impacts.
Gross revenues strongly decreased by – 18% on a comparable basis down to €+1,918 million, in line with the strategic repositioning of the company. This evolution was mainly driven by lower current year Property & Casualty net written premiums (83% of reinsurance activity) which decreased by – 27% on a comparable basis, including a – 42%
decrease on proportional business at €393 million, in line with AXA Re’s stringent underwriting policy aiming at (i)
– 2003 major losses cost decreased by €+25 million, at €–50 million.
– the technical result on prior years improved by €+275 million, mainly due to the fact that 2002 accounted for (i)
Overall, the claims ratio for all accident years (net of reinsurance) improved by – 10.2 points to 91.1% in 2003. Excluding the September 11th terrorist attacks, this improvement would be – 4.8 points.
General expenses decreased by €+75 million to €–233 million, essentially driven by a €+56 million reduction in acquisition expenses.
As a result, the net combined ratio (including Life) improved by – 10.7 points to 103.4%. The Non-Life combined ratio improved by 17.9 points to + 98.2%.
Income tax expense amounted to €-18 million in 2003, or a €–61 million additional charge as compared to 2002, resulting from a higher taxable income.
(1) Restatements compared to figures published in 2002 are due to a refined allocation of earned premiums between current and prior years, minor accounting impacts due to the separation of AXA Corporate Solutions into two separate segments (AXA RE and AXA Corporate Solutions Assurance), and the entrance of ACS Insurance Company in the AXA RE scope in 2003.
(ii) Transfer of AXA Corporate Solutions Insurance US from AXA Corporate Solution Assurance to AXA RE.
Attritional all accident year loss ratio (a) (b) – – 74.5%
(f) 2002 as published expense ratio was based on net of reinsurance earned premiums, whereas 2003 and pro forma 2002 expense ratios are based on gross earned revenues.
The net technical result on current accident year improved by €152 million to €147 million, mainly due to strict underwriting policies applied throughout all branches, the restructuring of the UK portfolio and a lower claims charge for large losses (€+63 million). Accordingly, the current accident year loss ratio improved by 10.2 points at 90.2%.
The net technical result on previous accident years, €14 million, decreased by €–50 million, as 2002 had been positively impacted by the review of file by file cases.
Accordingly, the net technical result (including fees) increased by €101 million to €160 million with a 6.4 points improvement in the claim ratio for all accident years (net of reinsurance) to 89.9%.
Income tax expenses were €–11 million, as compared to a €1 million tax benefit in 2002, in line with the result improvement partly offset by the recognition of a deferred tax asset in the UK (€+10 million) consistently with improved profit prospects.
AXA ASSISTANCE Underlying earnings increased by €8 million to €16 million in 2003, explained by (i) non-recurring 2002 significant bad debt provisions, and (ii) the improvement of technical margins. Adjusted earnings improved by €13 million to €14 million due to the same factors and to foreign exchange losses in 2002.
Asset Management Segment The asset management segment includes third-party asset management and asset management on behalf of AXA
insurance companies. The tables below present the revenues and the net income for the Asset Management
Fees, commissions and other revenues were down €487 million as compared to 2002, or €–12 million on a constant exchange rate basis (– 0.4%), due to lower institutional research fees and distribution revenues, partially offset by higher performance fees from strong investment returns. Institutional research services fees decreased by 9% due to lower NYSE transaction volumes and pricing pressures.
(net of incentive compensation and state tax) recorded at the end of September and December 2003 (€243 million at current exchange rate), partially offset by lower promotion expenses.
Administrative expenses, excluding commissions paid to third party agents, reached € 448 million, decreasing by €20 million, or increasing by €6 million on a constant exchange rate basis.
Other Financial Services Segment The tables below present the revenues and the net income for the Other Financial Services segment for the periods indicated: Consolidated Gross Revenues FY FY FY
GERMAN BANKS Expenses increased by €2 million due to one-off items: €3 million for restructuring provision and €3 million for project costs. This increase was partly offset by improved operating margins leading to a decrease in adjusted and underlying earnings of €2 million down to €0 million.
AXA BANK BELGIUM Net sales of AXA savings products increased by €+52 million, as the yield curve favored the attractiveness of shortterm savings products.
Net sales of loans increased by €820 million due to sustained demand in the context of low interest rates and an increased contribution of the broker’s network.
Adjusted earnings increased by €32 million to €68 million, as compared to 2002 mainly due to higher capital gains
(€63 million) of which €+13 million from the sale of Crédit Lyonnais shares, partly offset by the effect of low longterm interest rates on bond portfolio and higher pension costs.
Excluding the capital gain on the sale of Crédit Lyonnais shares, underlying earnings increased by €18 million to €54 million.
AXA France Assurance, AXA Financial, AXA Asia Pacific Holdings and AXA UK Holdings.
AXA (THE PARENT COMPANY) Despite lower management expenses, €–10 million, 2003 adjusted earnings decreased by €63 million, mainly as a result of (i) an increase in financial charges by €62 million due in part to a shift from variable rates funding to fixed rates in order to protect future financial charges, and (ii) a decrease in net capital gains by €25 million, partly offset by an increase in dividends received from non-consolidated entities by €+8 million.
OTHER FOREIGN HOLDING COMPANIES German Holding companies: Adjusted earnings improved by €69 million to a loss of €–18 million in 2003 due to
Re (€+10million), (ii) lower valuation allowances (€+5million), (iii) higher dividends (€+7 million) and increased interest revenues (€+2 million), (iv) lower interest expenses (€+9 million). In addition, tax charges were lower by €35 million mainly as a result of a deferred tax asset impairment recorded in 2002 (€–29 million) due to the change in fiscal regime regarding the use of tax credits on dividends received. Underlying earnings increased by €+49 million to €–30 million.
Perspectives The economic recovery, mainly in the US with positive signs in Europe and to a lesser extent in Japan, should enhance
In Property and Casualty and International Insurance, a continued strict underwriting coupled with moderate rate increases in most territories and further efficiency gains should foster a continuation of the trend of improved technical results, barring any major catastrophic losses. On this basis, the Property & Casualty combined ratio target has been reset to range of 98% to 102% depending on the cycle.
Adjusted earnings per share (adjusted EPS) represents the AXA’s consolidated net income before the impact of exceptional operations and amortization of goodwill, divided by the weighted average number of outstanding ordinary shares.
UNDERLYING EARNINGS Underlying earnings correspond to adjusted earnings excluding (i) net realized capital gains attributable to shareholders and (ii) the impact of September 11th, 2001 terrorist attacks.
LIFE & SAVINGS MARGIN ANALYSIS Even though the presentation of Margin Analysis is not the same as the Statement of Income, it is based on the same
GAAP measures as used to prepare the Statement on Income in accordance with French GAAP. As a result, the operating income under Margin Analysis is equal to that reported in AXA’s Statement of Income for the segment. There are certain material differences between the detailed line-by-line presentation in the Statement of Income and the components of Margin Analysis as set out below.
(i) Gross premiums (net of deposits), fees and other revenues are allocated in the Margin Analysis based on the nature of the revenue between “Fees and Revenues” and “Net Technical Margin”.
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,
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,
– Gross insurance reserves are total insurance liabilities, gross of reinsurance, including benefit and claims reserves, unearned premiums reserves, and separate account liabilities.
(ii) Underlying cost income ratio: expenses / “underlying” operating margin, where: – Expenses are total expenses, excluding expenses related to mutual fund business (mainly fees paid to the sales force) net of Participating Benefits, 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).
Expense ratio is the ratio of: (i) Expenses (excluding claims handling costs but including non recurring expenses), to
Current accident year loss ratio (Property & Casualty) net of reinsurance, is the ratio of: (i) (current year claims charge gross of reinsurance + claims-handling costs + result of reinsurance ceded on current accident year), to
All accidents year 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
Major losses are defined as any event whose net ultimate cost is greater than $50 million; the Net “Ultimate” Cost is the result of the claim cost (net of reinsurance) minus the reinstatement premiums (net of reinsurance).
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,
Operating Cost Income Ratio: operating expenses over net revenues (including performance fees).
NOTE TO THE CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . 223 03. Accounting policies and consolidation method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225 07. Value of purchase life insurance business in force . . . . . . . . . . . . . . . . . . . . . . . . . . . 250 09. Separate account (unit-linked) assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 257 10. Assets from the banking sector and other activities. . . . . . . . . . . . . . . . . . . . . . . . . . 257 11. Investments in affiliated companies (equity method) . . . . . . . . . . . . . . . . . . . . . . . . . 258 12. Receivables and payables from insurance and reinsurance activities . . . . . . . . . . . . 260 20. Provisions for risks and charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 267 22. Non-subordinated debts instruments issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 275 23. Amounts owed to credit institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 277 24. Segment information and technical results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 278 28. Net income per ordinary share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 289 33. Consolidated statement of cash-flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 298 34. Dividend restrictions and minimum capital requirements. . . . . . . . . . . . . . . . . . . . . . 299 35. Condensed consolidated U.S. GAAP financial statements . . . . . . . . . . . . . . . . . . . . 299
(in euro millions) 2003 2002 2001 07 Value of purchased life business inforce 2,814 3,224 3,739