Underlying Net Technical result includes the following components: (i) Mortality/morbidity margin: The amount charged to the policyholder in respect of mortality/morbidity for the related period less benefit and claims. It is equal to the difference between income for assuming risk and the actual cost of benefits, including changes in valuation assumptions and additional reserves for mortality risk. This margin does not include the claims handling costs and change in claims handling cost reserves.
(iii) Policyholder bonuses if the policyholder participates in the risk margin.
(ii) Capitalization of acquisition expenses linked to new business: Deferred Acquisition Costs (DAC)
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 excluding the recurring interest credited to the insurance annuity reserves] to,
AXA RE Covers are specific reinsurance treaties, bought to protect all or a portion of the company’s portfolio against major losses. If such losses do not occur over the insured period, a profit commission (or “noclaim bonus”) is paid to the ceding company. In
retrocession and covers). (ii) Claims charge all accident years, net of reinsurance, including major losses.
(iii) Commissions (fixed commissions, sliding scale commissions as well as profit commissions), (a) paid to the ceding companies and (b) received from the reinsurance companies.
Consolidated Balance Sheet / p. 232 Consolidated Statement of Income / p. 235 Statement of consolidated cash flows / p. 236
7 Value of purchased business in force (a) 2,623 3,123 2,993 2,814 8 Deferred acquisition costs and equivalent (b) 15,475 13,008 11,954 10,993
Receivables arising from direct insurance and inward reinsurance operations 9,713 8,167 10,318 11,372
All financial amounts are shown net of derivatives impact (please refer to Note 20). (g) Includes long term assets, i.e. when maturity is above 1 year. (h) Includes short term assets, i.e. when maturity is below 1 year.
Share capital and capital in excess of nominal value 18,120 19,385 19,719 18,056
Total liabilities arising from insurance contracts (b) 339,088 301,421 371,287 347,564
Liabilities arising from investment contracts where the financial risk is borne by policyholders (c) 48,549 39,127 – –
Derivatives relating to insurance and investment contracts (148) (32) – –
Payables arising from direct insurance and inward reinsurance operations 4,680 3,863 6,062 6,714
Liabilities held for sale or relating to discontinued operations – – – –
(*) French GAAP information is disclosed under the IFRS presentation format. (a) Also includes liabilities arising from contracts with Guaranteed Minimum features.
Liabilities arising from insurance contracts with financial risk borne by the policyholders 92,888 73,578
Total Liabilities arising from contracts with financial risk borne by the policyholders 141,437 112,705 113,929 101,004
Total Liabilities arising from insurance and investment contracts 280,017 260,374 257,358 246,560
(*) French GAAP information is disclosed under the IFRS presentation format.
CONSOLIDATED STATEMENT OF INCOME (in euro millions, except EPS which is in euros)
Change in fair value of financial instruments at fair value through profit & loss 16,008 12,588 11,449
(*) French Gaap information is disclosed under the IFRS presentation format. (a) Excludes insurance and banking activities.
Net realized gains or losses attributable to shareholders include: – i) realized capital gains and losses (on assets not designated under fair value option or trading assets) ii) change in impairment valuation allowance, iii) foreign exchange rates impacts (including derivatives and except the ones mentioned above) net of tax, – related impact on policyholder participation net of tax (life business), – DAC and VBI amortization or other reactivity to those elements if any (life business).
(+/–) Net capital gains / (losses) from investing activities (3,921) (3,668) (+) Net amortization expense 831 649 (+) Net change in valuation allowances 214 455 (+) Change in deferred acquisition costs (1,538) (1,548) (+) Change in insurance liabilities and financial liabilities related to investment contracts 31,103 24,702 (+) Net allowance to other provisions (23) (37) (–) Dividends recorded in profit & loss during the period (1,781) (1,344) (–) Interests recorded in profit & loss during the period (12,975) (10,786) (+) Change in fair value of financial instruments accounted for at fair value trough profit & loss
Adjustments linked to non monetary items and to investing and divesting activities included in the income from operating activities (3,986) (4,635)
(+) Deposit accounting (Net cash) 1,201 924 (+) Dividends and interim dividends collected 1,801 1,386 (+) Interests collected 13,184 10,697
(+/–) Change in operating receivables and payables (965) 1,326 (+) Net cash provided by other assets and liabilities 5,246 4,766 (–) Tax expenses paid (1,132) (882)
Net cash related to transactions with shareholders (1,170) 1,412 (+) Cash provided by financial debts issuance 301 791 (–) Cash used for financial debts repayments (3,072) (2,048) (–) Interest on financing debt paid (excluding accrued interest) (725) (775)
(a) The statement of cash flows does not include cash flows relating to investment funds in a “satellite block” (see section 1.7.2 of the note on “Accounting policies and methods” or cash flows relating to cash backing contracts where the financial risk is borne by the policyholder (unit-linked contracts).
(in euro millions, except for number of shares and nominal value)
NB : amounts are presented net of impacts of shadow accounting and of its effects on policyholder’s benefit, deferred acquisition costs, and value of business in force. (a) Mainly equity components of compounded financial instruments (i.e. for example convertible bonds). (b) Actuarial gains and losses accrued since January 1, 2004.
AXA, a French “société anonyme” (the “Company” and, together with its consolidated subsidiaries, “AXA” or the “Group”), is the holding (parent) company for an international financial services group focused on financial protection, insurance and asset management. AXA operates principally in Western Europe, North America and Asia-Pacific. The list of entities included in the scope of the AXA’s consolidated financial statements is provided in note 3 of the notes to the consolidated financial statements.
AXA operates in the following primary business segments: – Life & Savings, – Property & Casualty, – International Insurance, including reinsurance, and – Asset Management and Other Financial services.
AXA has its primary listing on the Eurolist Paris stock exchange and has been listed since August 1996 on the New York Stock Exchange (“NYSE”).
1.2. General accounting principles 1.2.1. Basis for preparation AXA’s consolidated financial statements are prepared as at December 31. Certain entities within AXA have a reporting year-end that does not coincide with December 31, in particular AXA Life Japan and its subsidiaries, which have a September 30 financial yearend.
The financial statements for the period ended December 31, 2005, since they concern the first period in which IFRS have been applied, comply with IFRS 1 (First-time adoption of IFRS).
Standards published but not effective The Group has not elected for early adoption of IFRS 7 (Financial instruments: disclosures) or the amendment to IAS 1 (Capital disclosures).
Preparation of financial statements The preparation of financial statements in accordance with IFRS requires the use of estimates and assumptions. It requires a degree of judgment in the application of Group accounting principles described below. The main balance sheet captions concerned are goodwill (impairment tests described in section 1.6.1), the value of purchased business in force, deferred acquisition costs, a limited portion of assets stated at fair value, liabilities relating to the insurance business, retirement benefit commitments and items related to equity-based compensation. The principles set out below specify the measurement methods used. These methods, along with key assumptions where required and where meaningful and useful, are discussed in greater depth in the notes to the concerned asset and liability captions.
As recommended by IAS 1, assets and liabilities are generally classified globally on the balance sheet in increasing order of liquidity, which is more relevant for financial institutions than a classification between current and non-current items. As for most insurance companies, expenses are classified by nature in the income statement.
All amounts on the balance sheet, statement of income, statement of consolidated cash flows, consolidated statement of shareholders’ equity and in the notes are expressed in millions of euros, and rounded up to the nearest whole unit, unless otherwise stated.
1.2.2. First-time adoption of IFRS AXA Group transition date is 1 January 2004. The Group prepared its opening IFRS balance sheet at that date. The Group’s IFRS adoption date is January 1, 2005.
backed by acquired receivables proceeds – known as Collateralized Debt Obligations or CDOs.
Companies in which AXA directly or indirectly holds 20% or more of the voting rights and for which AXA and other shareholders have contractually agreed to exercise joint controlling influence are known as joint ventures. Joint ventures are proportionately consolidated.
Companies in which AXA exercises significant longterm influence, that is associated companies, are accounted for as an investment using the equity method of accounting. Significant influence is presumed when AXA directly or indirectly holds 20% or more of the voting rights or when significant influence is exercised through an agreement with other shareholders. The AXA’s share of the associates’ postacquisition profits or losses is recognized in the income statement, and its share of post-acquisition movements in reserves is recognized in reserves through “Other reserves”.
In connection with a business combination, only restructuring costs that can be measured reliably and which correspond to an existing liability of the acquired company prior to the acquisition date are included in a restructuring provision recognized in the balance sheet of the acquired company as of the acquisition date.
The cost of an acquisition is measured as the fair value of the assets received, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus external fees directly attributable to the acquisition. External fees related to the business combination include the costs of settling or exchanging the target company’s outstanding employee share options (applicable to all acquisitions including acquisitions of minority interests). If the transaction is done in a foreign currency, the foreign exchange rate used is the one on the date of the transaction or on the initial date of the transaction (if it occurs over a period).
Goodwill The excess of the cost of acquisition over the net fair value of the assets, liabilities and contingent liabilities
acquired represents goodwill and is recorded as an asset. Goodwill arising on the acquisition of a foreign entity is recorded in the local currency of the acquired entity and translated into euros at the closing date.
Revisions can be made to goodwill within twelve months of the acquisition date, if new information becomes available. Goodwill is allocated across segments (“Life & Savings”, “Property & Casualty”, “International Insurance” including reinsurance and “Other Financial Services”) to cash generating units corresponding (i) to the companies or portfolios of business acquired in respect of their market image and share or their expected profitability, and (ii) to the entities within the AXA Group that will benefit from the synergies of the combination with the activities acquired. This allocation of goodwill is used both for segment reporting and for impairment testing.
operates) different from the presentation currency of the Group are translated into the presentation currency as follows: (i) for each balance sheet presented, assets and liabilities of subsidiaries denominated in non-euro currencies are translated into euro using spot foreign exchange rates at the date of that balance sheet; (ii) income and expenses for each income statement are translated at average exchange rates for each period presented, and
Foreign currency transactions are translated into euro using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at closing date exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the income statement, except where hedge accounting is applied as explained in section 1.9.
The variable costs of acquiring insurance contracts and investment contracts with discretionary participating features, primarily related to the production of new business, are specifically identified and deferred by establishing an asset (DAC). This asset is amortized based on the estimated gross profits emerging over the contract term. In conjunction with the liability adequacy test (see section 1.11.2) this asset is tested for recoverability: estimates of gross profits are reviewed at the end of each accounting period and any amount not deemed recoverable from future estimated gross profits is recorded as a charge against income.
For investment contracts without discretionary features, a similar asset is created (DOC) but limited to incremental costs directly attributable to the right to provide asset management services. This asset is amortized in proportion of all estimated level fees collected over the life of the contracts. The amortization of DOC is reviewed at each closing date to reflect changes in assumptions and experience. This asset is also tested for recoverability. DAC and DOC are reported gross of unearned revenues and fees reserves. These unearned revenues and fees reserves are separately recognized as liabilities and are amortized over the contract term using the same amortization basis used for DAC and DOC, respectively.
Investments include investment in real estate properties and financial instruments including equity securities, fixed maturities, and loans.
1.7.1. Investment properties Investment properties (excluding investment properties backing totally or partially liabilities arising from
If, in subsequent periods, the difference between the appraised value and the net carrying value reaches 15% or more, previously recorded valuation allowances are reversed to the extent of the difference between a) the net carrying value and b) the lower of the appraised value and the depreciated cost (before impairment).
are accounted for at fair value with changes in fair value recorded in profit or loss.
Classification Depending on the intention and ability to hold the invested assets, they are classified in the following categories: – assets held to maturity, accounted for at amortized cost; – loans & receivables (including unquoted debt instruments) accounted for at amortized cost; – trading assets and assets designated (option) at fair value with change in fair value through profit or loss; – available for sale assets accounted for at fair value with changes in fair value in shareholder’s equity.
– as assets of the “Satellite Investment Portfolios” reflecting tactical asset allocation based on active management with total return objective.
Securities within “Core Investment Portfolios” are classified as “available for sale” unless involved in a qualifying hedge relationship or more broadly in the case when electing fair value option is appropriate to reduce accounting mismatch. The securities held in the “Satellite Investment Portfolios” are accounted for at fair value through profit or loss.
Impairment measurement of loans is based on the present value of expected future cash f lows, discounted at the loan’s effective interest rate, on the loan’s observable market price or the fair value of the collateral if the loan is collateral-dependent.
1.8. Assets backing liabilities arising from contracts for which the financial risk is borne by policyholders
Derivatives are initially recognized at fair value on the date at which a derivative contract is entered into and are subsequently re-measured at their fair value. The unrealized gains and losses are recognized in the profit & loss account unless they are in a qualifying hedge relationship further described below. The Group designates certain derivatives as either: (i) hedges of the fair value of recognized assets or liabilities or of a firm commitment (fair value hedge); or (ii) hedges of
1.10.2. Deeply subordinated debts Deeply subordinated debts are classif ied in shareholders’ equity (“other reserves”) since, like for ordinary shares, they do not result in an obligation to transfer cash or other assets.
Insurance contracts, including assumed reinsurance contracts, are those contracts that have significant insurance risks. Such contracts may also transfer financial risk from the policyholders to the insurer. Investment contracts are those contracts that have financial risk with no significant insurance risk.
A number of insurance and investment contracts contain a discretionary participating features (DPF). These features entitles the holder to receive, as a supplement to guaranteed benefits, additional benefits or bonuses: – that are likely to be a significant portion of the total contractual benefits; – whose amount or timing is contractually at the discretion of the Group; and – contractually based on performance of contracts, or return on assets, or profit or loss of the company, fund or other entity that issues the contract.
In some insurance or investment contracts, the financial risk is borne by policyholders. Such kind of contracts usually comprises unit-linked contracts.
The two last categories are presented on a single line on the face of the balance sheet: “Liabilities arising from investment contracts where the financial risk is borne by policyholders”.
Part of the provision for policyholder bonuses is included in mathematical reserves, to the extent to which bonuses are incorporated for life contracts that pay policyholders bonuses based on the profits generated on these contracts.
Except in cases where these guarantees are covered by a risk management program using derivative instruments (see next paragraph), guaranteed benefits relating to contracts where the financial risk is borne by the policyholder and classified as insurance contracts due to the existence of these guarantees or as investment contracts with discretionary participation, reserves are booked progressively and based on a forward-looking approach. The present value of future benefit obligations to be paid to policyholders in the event that the guarantee is triggered is estimated on the basis of reasonable scenarios. These scenarios’ assumptions include investment returns and related volatility, surrender rates and mortality. This present value of future benefit obligations is provisioned such that the average total cost of guarantees is recognized as fees emerge over the life of the contracts.
Some guaranteed benefits such as guaranteed minimum death or income benefits (GMDB or GMIB), or certain performance guarantees proposed by reinsurance treaties, are covered by a r isk management program using derivative instruments. To reduce the accounting mismatch between the value of liabilities and the value of hedging derivatives, AXA has chosen to use the option allowed under IFRS 4.24 to revalue its provisions. This revaluation is carried out at each accounts closing based on guarantees’ projections reflecting interest rates and other market assumptions. The revaluation’s impact in the current period is recognized through income, symmetrically to the impact of the revaluation of hedging derivatives. This change in accounting principles was adopted in the changeover to IFRS on January 1, 2004 for contract portfolios covered by the risk management program at that date. All contract portfolios covered by the risk management program after this date are revalued on the same terms that applied on the date on which the program was first applied.
Insurance claims and claims expenses (Non life insurance) The claims reserves are determined on a basis to cover the total cost of settling an insurance claim, except for disability annuities, for which the payments are fixed and determinable, the claims reserves are not discounted.
The claims reserves include the claims incurred and reported in the accounting period, claims incurred but not reported (“IBNR”) in the accounting period and costs associated with the claims settlement management. The claims reserve is based upon estimates of the expected losses and unexpired
risks for all lines of business taking into consideration management’s judgment on the anticipated level of inflation, regulatory risks and the trends in cost and frequency of claims, actual against estimated claims experience, other known trends and development, and local regulatory requirements.
Shadow accounting and Deferred Participating Liability (DPL) or Deferred Participating Asset (DPA) In compliance with the option offered by IFRS 4, shadow accounting is applied to insurance and investment contracts with discretionary participating features. Shadow accounting affects technical provisions, deferred acquisition costs and value of business in force to reflect the impact of unrealized gains or losses on the measurement of these insurance liabilities or assets in the same way as a realized gain or loss does. When unrealized capital gains of the assets are recognized, a deferred participating liability (DPL) is recorded. The DPL corresponds to the discretionary participating features available to the policyholders and is fully classified as liabilities arising from policyholders’ participation, with no allocation to any equity component. Consequently, AXA does not need to check that the liability recognized for the whole contract is not less than the amount that would result from applying IAS 39 to the guaranteed element. The DPL is calculated by applying a participation rate to the unrealized gains or losses. The participation rate considered is the best estimate based on constructive obligations.
Liability adequacy test At each balance sheet date, liability adequacy tests are performed at each consolidated entity level to ensure the adequacy of the contract liabilities net of related DAC and VBI assets. In performing these tests, entities group contract together considering the manner in which they are acquired, serviced and have their profitability measured. Entities use current best estimates of all future contractual cash flows and claims handling and administration expenses, as well as those resulting from embedded options and guarantees and investment income from the assets backing such liabilities. Risks (insurance risk, asset return risk, inflation risk, persistency, adverse selection…) directly related to the contracts that might make the net l iabil it ies inadequate, are considered.
Any deficiency is immediately charged to profit or loss, initially by writing off DAC or VBI and by subsequently establishing a provision for losses arising from the liability adequacy test. In the specific case of non life insurance contracts, an unexpired risk provision is established for contracts on which the premiums are expected to be insufficient to cover expected future claims and claims expenses.
closely related to the host insurance contract or do not meet the definition of an insurance contract.
Provisions for unearned fees Fees received at the start of an investment contract without discretionary participation features to cover future services are recognized as liabilities and taken to income based on the same amortization pattern as the one used for deferred origination costs (see 1.6.4).
The Group enters into contracts with reinsurers, under which the Group is compensated for losses on one or more contracts issued by the Group. These contracts that meet the classification requirements for insurance contracts are accounted for in a manner consistent with the accounting for the underlying direct insurance contracts and take into account contractual clauses.
1.14. Other liabilities 1.14.1. Income Taxes Current income tax expense (benefit) is recorded in earnings on the basis of amounts estimated to be payable or recoverable as a result of taxable operations for the current year based on the relevant local tax regulation.
1.14.3. Share-based compensation plans Group’s compensation plans are predominantly equity-settled plans.
Cash settled-plans are valued at fair value remeasured at each balance sheet date with any change in fair value recognized in the Income Statement.
1.15.2. Other provisions and contingencies Provisions are recognized when the Group has a present obligation (legal or implicit) as a result of past events, under which it is more likely than not that an outflow of resources will be required to settle the obligation, and the amount of the provision has been reliably estimated.
Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the obligation at the balance sheet date, discounted at the market risk-free rate of return for long term provisions.
1.16.3. Change in unearned premiums reserves net of unearned revenues and fees Change in unearned premiums reserves net of unearned revenues and fees include the change in the unearned premium reserve reported as a liability (see “Unearned Premium Reserve” above) along with the change in unearned revenues and fees. Unearned revenues and fees correspond to upfront charges for future services recognized over the estimated life of insurance and investment contracts with discretionary participating features (see Unearned revenues reserves in section 1.11.2) and investment contracts with no discretionary participating features (see section 1.11.3 Unearned fees reserves).
1.16.6. Net investment result excluding financing expenses The net investment result in respect of insurance activities includes: – Investment income from the insurance-related invested assets, net of depreciation expense on real estate investments (depreciation expense on real estate not held for investment is included in administrative expenses); this item includes the interests calculated using the effective interest method for the assets with fixed maturity and dividends received on equity instruments,
– Financial charges and expenses, – Realized investment gains and losses net of valuation allowances for investment impairment, and – Unrealized investment gains and losses on invested assets valued at fair value with change in fair value recognized through Profit or Loss.
In respect of banking activities, interest income and financial charges including interest expenses are included in net revenues from banking activities and bank operating expenses, respectively.
Group is adopting IFRS as if they had always existed, except in cases where prospective adoption is authorized. AXA has selected the following options regarding its first-time adoption of applicable IFRS standards at January 1, 2004: – adoption of IFRS 4, IAS 32, IAS 39 and IFRS 2 as of 2004 (see below for the adoption of the fair value option); – recognition in opening shareholders’ equity of past actuarial losses on benefit plans granted to employees; – no restatement of business combinations prior to January 1, 2004; – cumulative translation reserve reset to zero; – recognition at fair value at January 1, 2004 of investment properties carried at cost and whose fair value at January 1, 2004 was lower than their carrying value. This fair value becomes their presumed cost in accordance with IFRS 1.
2.2. First Time application impacts at January 1, 2004 2.2.1. Assets
ASSETS – JANUARY 1, 2004 French IFRS FTA IFRS GAAP* impact
Reinsurer’s share in insurance and investment contracts liabilities 8,489 – 8,489
Receivables arising from direct insurance and inward reinsurance operations 11,372 (1,771) 9,601
Assets held for sale and relating to discontinued operations – 132 132
LIABILITIES – JANUARY 1, 2004 French IFRS FTA IFRS GAAP* impact
Liabilities arising from insurance contracts 246,560 (29,706) 216,853 Liabilities arising from insurance contracts where the financial risk is borne by policyholders (a) (h) 101,004 (36,001) 65,003 Total liabilities arising from insurance contracts (b) 347,564 (65,707) 281,857
Minority interests of controlled investment funds and puttable instruments held by minority interests holders (f) – 4,298 4,298 Other debt instruments issued, notes and bank overdrafts (g) 4,518 1,492 6,010 Payables arising from direct insurance and inward reinsurance operations 6,714 (1,662) 5,051 Payables arising from outward reinsurance operations 1,598 1,900 3,498 Payables arising from banking activities 11,563 111 11,674 Payables – current tax position 388 105 493 Derivatives relating to other financial liabilities – 2 2
IFRS: (*) French GAAP information is disclosed under the IFRS presentation format.
(d) Also includes liabilities arising from deferred policyholder’s participation. (e) Financing debts balances are shown net of effect of derivative instruments.
2.2.3. Shareholder’s equity The reconciliation between shareholders’ equity reported at December 31, 2003 from French GAAP
Share capital and capital in excess of nominal value 18,056 (486) 17,570
Reserves relating to the change in FV of financial instruments available for sale – 4,213 4,213
Reserves relating to the change in FV of hedge accounting derivatives (cash flow hedge) – 45 45
2.2.4. Main differences in accounting principles between French GAAP and IFRS The main differences in accounting principles between French GAAP and IFRS are set out below. In addition to the impact resulting from changes to valuation principles, which affect various components of opening shareholders’ equity, numerous balance sheet items are affected by changes in presentation with no impact on net asset value. They include notably the presentation of unearned fees and revenues as liabilities instead of being deducted from deferred acquisition costs, the gross up of deferred tax impact of values of purchased business in force, etc.
The book value of minority interests liable to be bought out under the put granted to former shareholders of Sanford C. Bernstein was €387 million at January 1, 2004. The buyout commitment was stated as an off-balance sheet commitment under French GAAP. Under IFRS, these minority interests are recognized under “Minorities in controlled funds and other commitments to buy out minority interests”, in an amount of €895 million. The balancing entry for the difference between book value and fair value of this liability at the start of the period is recorded under goodwill (€508 million). This adjustment has no impact on minority interests in Group shareholders’ equity at the start of the period.
Net impact of impairment of available for sale assets (with change of fair value in shareholders’ equity) (1,445)
(a) This figure represents the valuation difference between French and IFRS accounting principles.
Real estate Investment properties (excluding investment properties totally or partially backing contracts with financial risk borne by the policyholder) and owner-occupied properties remain accounted for at amortized cost under IFRS. The component approach which was optional under French GAAP until 2004 has been adopted under IFRS.
These gross up adjustments have no impact on opening shareholders’ equity.
Net impact on shareholders’ equity Overall, the impact on shareholders’ equity of adjustments to existing deferred acquisition costs (DAC) and life value of business in force (VBI) was €–127 million.
Impact of shadow accounting on deferred acquisition costs and value of business in force On the balance sheet, amortization of Deferred Acquisition Costs and equivalent and Value of purchased business in force is also affected by IFRS restatements (“reactivity” impacts). The recognition of available-for-sale assets at fair value through shareholders’ equity, for example, caused accelerated amortization of these two captions through shareholders’ equity, with a reduction in corresponding assets (DAC and VBI) and a reduction in the revaluation reserve for available-for-sale securities (“shadow DAC” and “shadow VBI”) totaling €634 million for DAC and €380 million for VBI. In addition, DAC and VBI reactivity impacts were also recorded in relation to profit & loss adjustments (retained earnings in opening balance sheet): €38 million for DAC and €297 million for VBI.
(ii) SHADOW ACCOUNTING AND DEFERRED POLICYHOLDER BONUSES In compliance with the possibility offered by IFRS 4, shadow accounting rules are applied, for insurance and investment contracts with discretionary participating features, on insurance liabilities, deferred acquisition costs and value of business in force to reflect unrealized losses and gains attributable to policyholders (Cf. see additional amortization impacts mentioned above : DAC and VBI reactivity). This mechanism is identical in principle to the notion of
deferred policyholder bonuses under French GAAP, and is also applied to temporary differences generated by differences between the two sets of standards and recognized through profit & loss (retained earnings in the opening balance sheet). The participation rate considered is the local best estimate rate based on constructive obligation.
(iii) IDENTIFICATION AND VALUATION OF EMBEDDED DERIVATIVES Similarly to embedded derivatives in financial assets (according to IAS 39), embedded derivatives in insurance and investment contracts should be separated and accounted for at fair value with change in fair value recorded through profit & loss (according to IFRS 4) if they do not meet the following criteria of exclusion: – they are clearly and closely related to the host contracts; – they are explicitely excluded from IFRS 4 scope
So far, embedded derivatives in insurance and investment contracts which need to be accounted for at fair value through profit & loss do not seem to be material at Group level.
(e) Employee benefits As mentioned in section 2.1 above, in accordance with the exemption offered by IFRS 1, the Group has chosen to recognize in opening shareholders’ equity actuarial gains and losses arising from differences with respect to estimates and changes in assumptions, which were not recognized through profit & loss under French GAAP. This net cumulative adjustment arising from changes in assumptions, to align to IFRS, reduced opening shareholders’ equity by €2,062 million, mainly stemming from the United Kingdom and the United States.
(f) Share-based compensation The plans set up by the Group mainly involve direct remuneration in the form of shares, not cash. The main adjustment related to the release of a reserve established for this purpose under French GAAP, resulting in a limited impact on opening shareholders’ equity (€+103 million). Only options granted after 7 November 2002 and not fully vested at January 1, 2004 are recognized under IFRS. Options are stated at fair value on the grant date, and changes in fair value until the vesting date are recognized as expenses over the vesting period.
(g) Treasury shares Under French GAAP, treasury shares are accounted for as an investment in equity securities if they are held to stabilize the Company’s share price in the market, to be attributed to employees in connection with share purchase programs, or to back contracts where financial risk is borne by policyholders. Under IFRS, these treasury shares are eliminated against shareholders’ equity. The net impact on opening
2.3. First time application impacts at December 31, 2004 2.3.1. Reconciliation between income statements at December 31, 2004 a) Statement of income presentation under IFRS Reclassifications The column showing the impact of transition to IFRS also contains reclassifications due to changes in presentation between French GAAP and IFRS. For example: – The notion of net banking revenues is used under
– On the other hand, financing debt expenses are isolated in a specific sub-total under IFRS, while they were netted in the net investment result under French GAAP. The same presentation change is applied for other debt expenses, which were netted in the net investment result under French GAAP but are now included in the Other income and expenses sub-total in the IFRS income statement.
– Depreciation of VBI resulting from acquisitions is now isolated in a specific caption under IFRS.
The reconciliation between full year 2004 earnings reported under French GAAP and earnings for the same period under IFRS is as follows:
Change in goodwill impairment (i) (1,031) 995 (36) Result from discontinued operations net of tax – – – Net consolidated income 2,840 1,371 4,211
(c) Includes impairment write back on sold invested assets. (d) Excludes impairment write back on sold invested assets.
(e) Includes changes in liabilities arising from insurance contracts and investment contracts (with or with no participating features) where the financial risk is borne by policyholders as a counterpart of change in fair value of financial instruments at fair value through profit & loss. (f) Includes acquisition costs and change in deferred acquisition costs relating to insurance contracts and investment contracts with discretionary participating feature as well as change in rights to future management fees relating to investment contracts with no discretionary participating features. (g) Notably includes financial charges in relation to other debt instruments issued and bank overdrafts. (h) Net balance of income and expenses related to derivative instruments on financing debt (however excludes change in fair value of these derivative instruments). (i) Includes change in impairment and amortization of intangible assets as well as negative goodwill.
Notes on income statement reconciliation and impacts on shareholders’ equity at December 31, 2004
– Additional restructuring charges relating to the acquisition of MONY in the second half of 2004 (€–146 million net impact for the full-year 2004), which are not recognized in the subsidiary’s opening balance sheet under IFRS, contrary to French GAAP.
SCOPE OF CONSOLIDATION Impact of adjustments to the scope of consolidation became positive at the end of the period as a result of better financial markets, increasing the amount of adjustments on assets held by consolidated funds. These differences affect either income or the revaluation reserve within shareholders’ equity, depending on the designation of assets held within the funds.
Under IFRS, the liability remaining from the exercise of these put options is recorded on the balance sheet under “Minorities interests of controlled investment funds and other puttable instruments held by minority interests” ($672 million, equal to €494 million at the end of 2004). Under French Gaap this liability was recorded under “Minority interest” corresponding to the percentage ownerships of net assets at that date. The counterpart of the difference between these amounts is recorded as goodwill for €298 million (equal to $406 million)
– The recognition under IFRS of the appreciation in value during the period of derivative instruments at AXA SA that are not used for hedging purposes in the meaning of IAS 39 (€+307 million in full-year 2004, gross of tax effects). These derivative instruments were not revalued under French GAAP.
– The increased impact during the period of revaluing assets recognized at fair value through profit & loss.
– The net impact of “natural hedging” on Japanese bonds against currency risk was not significant in 2004. However, presentation-wise, this net impact was split and thus affected two separate lines of the
Net impact of impairment of available for sale assets (with change of fair value in shareholders’ equity) (b) (1,105) (1,445)
For information: In this section, the impact of recognizing derivatives and net hedging includes the revaluation of underlying items when appropriate in the cases of hedge accounting under the IAS 39 or in the cases of “natural hedging” (use of the fair value option to value the underlying item or selective use of current interest rates for insurance contracts).
– The change in fair value of non-derivative trading assets or assets recorded using the fair value option. Part of these changes in value reduces the impact of derivative instruments.
income statement: (i) Net realized investments gains and loss (arising from rollover of derivative instruments) and (ii) Change in fair value of financial instruments recognized at fair value through profit & loss (due to the revaluation of derivatives not yet exercised and especially the change in fair value of bonds hedged for currency risk).
On the line “Change in fair value of financial instrument recognized at fair value through profit & loss” (a) (264) 497 233
INSURANCE & INVESTMENT CONTRACTS Acquisition costs relating to investment contracts without discretionary participating features are partly replaced by “rights to future management fees”. This reduction is offset by lower DAC and VBI amortization charge following the write off in the opening balance sheet of balances related to investment contracts without discretionary participating features. As a result, the cumulative impact on shareholders’ equity of adjustments to DAC and VBI was €–249 million at
SHARE-BASED COMPENSATION The additional gross charge corresponding to sharebased compensation is recognized under Administrative expenses. It totaled €65 million net at
Note 3: Scope of consolidation 3.1. Consolidated companies 3.1.1. Main fully consolidated companies
AXA General Insurance Hong Kong Ltd Fully consolidated since January 1, 2005 (formerly equity-accounted) 100.00 100.00 100.00 100.00
AXA Insurance Singapore Fully consolidated since January 1, 2005 (formerly equity-accounted) 100.00 100.00 100.00 100.00
AXA Kranken Versicherung AG 99.69 91.91 99.69 91.81 (a) The interest in AXA Asia Pacific Group is 52.95%, with a direct stake of 51.6% and 1.35% owned by AXA APH Executive Plan (newly consolidated under IFRS).
Epargne Croissance Merger with AXA Assurance Maroc – – 99.59 50.79
AXA Oyak Hayat Sigorta AS Fully consolidated since January 1, 2005 (formerly equity-accounted) 100.00 50.00 100.00 50.00
International Insurance Change in scope December 31, 2005 December 31, 2004 (Entities having Worldwide Activities) Voting Ownership Voting Ownership rights interest rights interest
English & Scottish Merger with AXA Global Risk UK (included in AXA Corporate Solutions Assurance sub-group) – – 100.00 100.00
Other Financial Services Change in scope December 31, 2005 December 31, 2004 Voting Ownership Voting Ownership rights interest rights interest
The main changes in the scope of consolidation in 2005 were the entries of Framlington Group Limited in the United Kingdom acquired by AXA Investment Managers (AXA IM) and Seguro Directo in Portugal.
The main removal from the scope of consolidation arose from the disposal of Advest, a subsidiary of the AXA Financial Group (US Life & Savings).
a) Investments funds and other investments Funds and other investments consolidated by AXA are as follows: Consolidated mutual funds represent total investments of €67,549 million at end 2005 (€55,434 million at December 31, 2004). 99% of this amount come from 230 funds, mainly in France, the United Kingdom, Belgium, Australia/ New-Zealand, the Netherlands, Germany and Japan.
The 9 consolidated CDOs represented total investments of €1,806 million (€1,871 million at
In most investment funds (mainly open-ended mutual funds), minority interests do not meet the definition of equity capital. They are therefore presented as liabilities on the balance sheet under “Minorities in controlled funds and other commitments to buy out minority interests”. At December 31, 2005, minority interests in controlled funds totaled €4,326 million 3.1.2. Proportionally consolidated companies
Life & Savings and Property & Casualty Change in scope December 31, 2005 December 31, 2004 Voting Ownership Voting Ownership rights interest rights interest
b) Equity-accounted mutual funds and real estate entities At December 31, 2005, equity-accounted real estate companies and mutual funds represent total assets of €234 million and €1,346 million respectively, mainly in France and the United States.
3.3. Consolidated entities relating to specific operations Certain entities have been set up for specific, often one-off, operations. The main consolidated companies in this category are as follows.
Acacia The Acacia SPV is consolidated within the operations of AXA France Vie. The main impact of this is a €250 million increase in the AXA Group’s other liabilities, and a parallel increase in receivables resulting from insurance operations.
Securitization of the French motor insurance portfolio On December 9, 2005, AXA announced the closing of the €200 million securitization of its French motor insurance portfolio. This operation, launched on
November 3, 2005, was the first ever securitization of a low claim severity, high claim frequency insurance portfolio. Through securitization, AXA has transferred to the financial markets the deviation of the cost of claims on the securitized insurance portfolio above a certain threshold for four consecutive and independent annual periods. The transaction was oversubscribed and had an average margin per tranche of 28bp over Euribor 3 month rates, in line with similarly rated synthetic bank securitizations. Since the threshold for transferring risk to the financial markets was not reached, the recognition of this operation in AXA’s consolidated financial statements mainly involves the consolidation of the vehicle carrying the portion subscribed by AXA, and the recognition on the balance sheet under other liabilities of a €200 million deposit received from reinsurers.
Life & Savings Segment’s products and services. AXA offers a broad range of Life & Savings products including individual and group savings retirement products, Life and Health products. They comprise traditional term and whole life insurance, immediate annuities and investment products (including endowments, savings-related products, such as variable life and variable annuity products).
Property & Casualty Segment’s products and services. Include a broad range of products including mainly motor, household, property and general liability insurance for both personal and commercial customers (commercial cutomers being mainly small to medium size companies). In some countries, this segment includes Health products.
International Insurance Segment’s products and services. Operations in this segment are principally focused on Reinsurance, Large risks, and Assistance. The reinsurance operations (AXA RE) principally focus on property damage, marine and aviation property, and third party liability. The offered insurance products, which specifically relate to AXA Corporate Solutions Assurance, include coverage to large national and international corporations mainly relating to property damage, third party liability, marine, aviation and transport, construction risk, financial risk, and directors and officers liability.
Asset Management Segment’s products and services. Incorporate diversified asset management (including mutual funds management) and related services to a variety of institutional clients and individuals, including AXA’s insurance companies.
(a) Also includes changes in liabiities arising from insurance contracts and investment contracts where the financial risk is borne by policyholders.
Fees and charges relating to investment contracts with no participating feature 509 – – – – – – 509
Net realized investment gains and losses 2,889 499 133 33 (3) 5 – 3,557 Change in fair value of financial instruments at fair value through profit & loss 16,006 82 (6) 11 (40) (43) (3) 16,008 Change in financial instruments
Net result from outward reinsurance (7) (581) 317 – – – 130 (141) Bank operating expenses – – – – (61) – – (61)
Change in tangible assets impairment (4) (1) 3 (0) (0) (0) – (3)
Other operating income and expenses (72,144) (18,259) (4,096) (2,825) (457) (479) 492 (97,769)
Change in goodwill impairment (70) – – – – – – (70) Result from discontinued operations net of tax – – – – – – – –
Net result from outward reinsurance 17 (663) (401) – – – (15) (1,063) Bank operating expenses – – – – (104) – 2 (101)
All of the following sections form an integral part of the Group financial statements. They appear in the Risk Factors and Investment and Financing Policy sections of this document as follows: 5.1. Risk Management organization
Additionnal information about the Group’s exposure to those risks and related comments are included in the notes describing related balance sheet headings.
Please refer to pages 127 to 132, section “Liquidity and capital resources” (except for the paragraph “Solvency Margin” pages 131 and 132).
Of wich: (a) Following a revaluation of deferred tax assets booked at the time of the Nippon Dantaï acquisition, goodwill was reduced by an equivalent amount (€70 million).
Goodwill presented in the tables above also include the balancing entry for the revaluation of minority interests relating to buyout commitments recognized as liabilities under the “Minorities in controlled funds and other minority interests buy out commitments” caption. These amounts relating to the Sanford C. Bernstein put totaled €559 million at December 31, 2005, €298 million at December 31, 2004 and €508 million at January 1, 2004.
Of wich: (a) Gross value of goodwill is presented net of accumulated amortization under French GAAP as of December 31, 2003.
AXA Equity & Law 366 – – – 11 – 377
Guardian Royal Exchange (excluding Albingia) 338 – – – 6 – 344
Guardian Royal Exchange (Albingia) 346 – – – – – 346
AXA Equity & Law 367 – – – (0) – 366
SLPH (AXA UK Holdings) 1,482 – – – (8) – 1,474
Guardian Royal Exchange (excluding Albingia) 339 – – – (0) – 338
AXA Financial, Inc. – – – – – – – –
Sanford C. Bernstein – – – – – – – –
Of which: Life & Savings – – – – – – 70 70
Guardian Royal Exchange (Albingia) – – – – – – – –
Of wich: Life & Savings – – – – – – – –
Goodwill is mainly attributable to the following operations and entities: Acquisition of Framlington (2005) On October 31, 2005, AXA Investment Managers (AXA IM) acquired the Framlington Group for £207.8 million (€303 million). This transaction led to the recognition of £130 million of intangible assets (€189 million before amortization) and goodwill of £97.2 million (€142 million).
At December 31, 2005, this goodwill had a net value of €142 million.
Financial. This transaction gave rise to a goodwill of US$672 million (€541 million) under French GAAP.
In 2005, AXA Financial sold its Advest Group Inc. subsidiary (part of the MONY group) for $400 million.
Financial Reorganization of AXA Equity & Law – AXA UK (2001) As a result of AXA Equity & Law’s financial reorganization, AXA acquired a portion of the surplus assets held in the participating (“WithProfit ”) fund and related future benefits based on the percentage of policyholders who elected in favor of the plan. This acquisition was carried out via the payment of an incentive bonus of approximately £260 million plus £18 million of direct expenses associated with the transaction (a total of approximately €451 million based on the average £/€ exchange rate for the period).
At December 31, 2005, this goodwill had a net value of €377 million.
At January 1, 2004, the net book value of this goodwill was €4,100 million under French GAAP. With the adoption of IFRS, the goodwill was adjusted for unrealized foreign exchange gains and losses, since goodwill must be recorded in the local currency of the acquired entity. The new goodwill figure became $3,801 million.
Sanford C. Bernstein Transaction (2000) The total purchase price was U.S.$3.5 billion (€4.0 billion) and consisted of U.S.$1.5 billion in cash and 40.8 million newly issued private units of Alliance Capital. The cash was funded by AXA Financial through a financing agreement whereby, in June 2000, AXA Financial purchased units in the limited partnership Alliance Capital Management L.P. for an aggregate purchase price of US$1.6 billion, and as a result recorded goodwill of €583 million. Added to the €3,689 million recorded at the time of the acquisition, the total goodwill linked to the acquisition of Sanford C. Bernstein amounted to €4,272 million.
Minority Interests’ Buyout – Sun Life & Provincial Holdings (Subsequently Renamed AXA UK Holdings) (2000) The total cost of the acquisition of the 44% minority interests in Sun Life & Provincial Holdings (SLPH) amounted to £2.3 billion (approximately €3.7 billion). The goodwill recorded was €1,971 million.
At January 1, 2004, the net book value of this goodwill was €1,660 million under French GAAP. With the adoption of IFRS, the goodwill was adjusted for unrealized foreign exchange gains and losses, since goodwill must be recorded in the local currency of the acquired entity. The new goodwill figure is made up of £959 million relating to UK entities, U.S.$114 million relating to US entities and €31 million relating to French entities.
At December 31, 2005, this goodwill had a net value of €1,525 million.
At December 31, 2005, the net value of this goodwill was €1,273 million.
Minority Interests’ Buyout – AXA China Region (2000) The total transaction (buyout of 26% minority interests) amounted to €519 million and resulted in a goodwill of €300 million.
In 2004, goodwill was written down by €33 million in relation to the Netherlands P&C business. Goodwill was reduced by a further €18 million following the disposal of Unirobe in early 2004.
Decrease following the transfer of portfolios as “held for sale” – –
Impacts on VBI of changes in scope and portfolios transfers – 694
Net deferred acquisition costs relating to Life & Savings (a) 13,958 11,729
DAC = Deferred Acquisition Costs. (a) Applicable to Life & Savings insurance contracts and investment contracts with Discretionary participation features according to IFRS 4.
Amounts net of cumulated amortization. (b) Applicable to investment contracts with no Discretionary participation feature.
Deferred Rights to future Deferred Rights to future Acquisition management Acquisition management Costs Life & fees (b) Costs Life (a) fees (b)
Decrease following the transfer of portfolios as “held for sale” – – – –
DAC and similar costs capitalization for the period 2,251 309 2,207 250
The value of Life & Savings deferred acquisition costs and similar costs, net of amortization and reserves for unearned revenues and fees, was as follows: (in euro millions)
Deferred Rights Deferred Rights Acquisition to future Acquisition to future Costs Life & management Costs Life & management Savings (a) fees (b) Savings (a) fees (b)
DAC net of amortization 13,068 960 10,962 692 of which shadow DAC (889) – (767) –
DAC = Deferred Acquisition Costs. (a) Applicable to Life & Savings insurance contracts and investment contracts with Discretionary participation features according to IFRS 4. (b) Applicable to investment contracts with no Discretionary participation features (IAS 39).
– In other cases, fair value is estimated based on financial and other information available in the market, or estimated discounted cash flows, including a risk premium.
Investment properties at amortized cost 11,256 7,832 1.71% 357 314 3.12% 11,613 8,146 1.74% Investment properties at fair value through profit & loss (c) 4,979 4,979 1.08% – – – 4,979 4,979 1.06% Macro hedge and speculative derivatives – – – – – – – – –
Equity securities available for sale 27,680 27,680 6.03% 571 571 5.67% 28,251 28,252 6.02% Equity securities at fair value through profit & loss (c) 18,804 18,804 4.09% 48 48 0.48% 18,852 18,852 4.02% Equity securities held for trading 101 101 0.02% 308 308 3.06% 409 409 0.09%
Non controlled investment funds available for sale 3,221 3,221 0.70% 201 201 1.99% 3,422 3,422 0.73% Non controlled investment funds at fair value through
Fixed maturities held to maturity – – – – – – – – – Fixed maturities availables for sale 164,650 164,650 41.76% 6,577 6,577 58.02% 171,227 171,227 42.2% Fixed maturities at fair value through profit & loss (c) 41,886 41,886 10.62% 1,197 1,197 10.56% 43,083 43,083 10.6% Fixed maturities held for trading 4 4 0,00% 1,620 1,620 14.29% 1,624 1,624 0.4% Non quoted fixed maturities (amortized cost) 26 23 0.01% 2 2 0.02% 29 26 0.00%
Equity securities available for sale 22,249 22,249 5.64% 642 642 5.66% 22,891 22,891 5,6% Equity securities at fair value through profit & loss (c) 16,847 16,847 4.27% 39 39 0.34% 16,886 16,886 4.2% Equity securities held for trading 258 258 0.07% 96 96 0.85% 354 354 0.1%
Non controlled investment funds available for sale 2,920 2,920 0.74% 65 65 0.58% 2,985 2,985 0.7% Non controlled investment funds at fair value through
Other assets held by consolidated investment funds designated as at fair value through profit & loss 596 596 0.15% – – – 596 596 0.1% Macro hedge and speculative derivatives (242) (242) (0.06%) 536 536 4.73% 294 294 0.1%
(a) Mainly includes Policy loans. (b) Excluding investments backing contracts where the financial risk is borne by policyholders. (c) Use of fair value option. NB: Each investment caption is disclosed net of hedge derivatives (IAS 39) and economic hedge derivatives which are recognized as hedge in the meaning of IAS 39 (excluding macro hedge derivatives and other derivatives).
Gross value Impair- Accumulation Carrying Fair value (b) Gross value Impair- Accumulation Carrying Fair value (b)
(gross of ment (a) impairment (a) value (b) (gross of ment (a) impairment (a) value (b)
Investment property at amortized cost 319 (5) (0) 314 357 78 – (17) 61 82
Investment property at amortized cost 9,970 (1,479) (345) 8,146 11,613 9,321 (1,324) (253) 7,744 10,375
(a) Excludes potential effect of hedging derivatives, other derivatives, macro hedge and speculative (section 20.3.). (b) Includes potential effect of hedging derivatives and other derivatives (excluding macro hedge and speculatives).
(a) Includes mainly change in scope of consolidation and change in exchange rates. (*) Of which €100 million relating to investment properties at amortized cost presented net of impairment in 2004.
Non consolidated investment funds at fair value through profit & loss 1,917 1,917 2,093 2,093
Non quoted fixed maturities (amortized cost) 2 2 2 – – 2 2 2 – –
Other assets held by consolidated investment funds designated as at fair value through profit & loss – – – –
Amortized Fair Net book Unrealized Unrealized Amortized Fair Net book Unrealized Unrealized cost (a) value value (b) gains losses cost (a) value value (b) gains losses
Fixed maturities available for sale 181,085 195,190 195,190 15,335 1,104 159,077 171,227 171,227 13,078 928
Equity securities available for sale 23,357 28,251 28,252 8,357 252 18,466 22,891 22,891 4,673 248
Non consolidated investment funds at fair value through profit & loss 1,990 1,990 2,138 2,138
(a) Gross of impairment – including amortization, premium and accumulated amortization. (b) Net of impairment which are detailed in section 10.8.
(a) Excludes potential effect of hedging derivatives, other derivatives, macro hedge and speculative (section 20.3.). Fair value is equal to carrying value.
Net carrying amount by maturity as of December 31, 2005 12 months or less More than 1 year More than 5 years Total net carrying up to 5 years value
Loans at fair value through profit & loss (a) – – – –
TOTAL – Invested financial assets exposed to cash flow interest rate risk 1 3 10 13
Net carrying amount by maturity as of December 31, 2004 12 months or less More than 1 year More than 5 years Total net carrying up to 5 years value
TOTAL – Invested financial assets exposed to cash flow interest rate risk 1 3 8 13
The breakdown by industry sector of equities owned across the whole Group is as follows: Finance Consumer Energy Communications Industrial Utilities Basic Technology Other TOTAL Materials
Excluding equity-accounted mutual funds (which had a total value of €1,081 million at the end of 2005 and €1,437 million at the end of 2004), the breakdown of mutual funds not controlled by AXA is as follows: NON CONTROLLED INVESTMENT FUNDS December 31, 2005
Non controlled investment funds trading mainly holding equity securities – – 22 –
Non controlled investment funds mainly holding equity securities 1,743 – 98 –
Non controlled investment funds mainly holding fixed maturities 1,062 – – –
Other non controlled investment funds available for sale 1,228 1,037 198 198
Other non controlled investment funds at fair value through profit & loss 129 – – –
Other non controlled investment funds held for trading – – – –
Fair value (a) Amortized cost Fair value (a) Amortized cost Fair value (a) Amortized cost Fair value (a) Amortized cost 22 – – – – – – –
10.8. Financial assets subject to impairment 10.8.1. Breakdown of financial assets subject to impairment (excluding investment properties)
Impairment – non controlled investment funds 166 10 (66) – 8 118
Net book value Cost before Impairment Cost after Revaluation to Net book value (Carrying value) impairment and impairment but fair value (Carrying value)
revaluation to before revaluation fair value (a) to fair value (b)
Impairment – non controlled investment funds 280 13 (122) – (4) 166
Financial assets available for sale 200,709 26,198 226,907 171,325 25,308 196,632
January 1, 2005 Acquisitions & Contribution to Currency Other changes (a) December 31, Disposals net income translation 2005 impact
In 2004, “other changes” notably included Australian entities and a change in consolidation method (following a buyout of minority interest) for Direct Seguros, which is now fully consolidated (€–21 million impact).
– Hong Kong Non life companies (€–68 million), – Singapore Non Life companies (€–42 million).
January 1, 2004 Acquisitions & Contribution to Currency Other changes (a) December 31, Disposals net income translation 2004 impact
Receivables arising from direct insurance and inward reinsurance operations 10,064 (350) 9,714 9,714 8,460 (294) 8,167 8,215
14.1. Impact of transactions with shareholders 14.1.1. Change in shareholder’s equity group share for 2005 a) Share capital and capital in excess of nominal value In 2005, the following operations had an impact on AXA’s nominal share capital and capital in excess of nominal value: – The AXA-FINAXA merger led to a net reduction of €940 million, including an €88 million reduction in the nominal share capital.
– The December 2005 capital increase reserved for employees led to an increase of €303 million, including a €37 million increase in the nominal share capital.
– The buyback of AXA shares led to a net reduction of €512 million, including a €45 million reduction in the nominal share capital.
– Other transactions, particularly bond conversions and capital gains on AXA shares, led to an increase of €46 million.
b) Treasury shares At December 31, 2005, the Company and its subsidiaries owned around 36 million AXA shares, an increase of €272 million with respect to December 31, 2004. The increase was due in particular to the purchase of €307 million of AXA shares by AXA Financial during the year, mainly relating to the exercise of call options acquired in 2004 in order to hedge purchase option plans for AXA Financial employees. At December 31, 2005, the carrying value of such shares and related derivatives was €658 million, representing 1.92% of outstanding ordinary shares.
– other capital increases arising from exercises of stock options, totaling €11 million, including a €3 million increase in the nominal share capital.
At December 31, 2004, the carrying value of such shares was €386 million, representing 1.29% of outstanding ordinary shares. These shares were intended in particular to hedge purchase options plans (options to buy AXA American Depositary Shares or ADSs) for AXA Financial Inc. employees. In 2004, AXA Financial bought purchase options on approximately 26 million AXA ADSs to improve the hedging of AXA Financial employees purchase option plans. The option premium of €42 million (euro value at December 31, 2004 of the premium paid and deducted from shareholders’ equity) was included in the value of treasury shares at the end of the period.
c) Super subordinated debt The change in other reserves was mainly due to a €625 million issue of deeply subordinated perpetual notes through the Euro Medium Term Notes (EMTN) program.
Unrealized gains and losses (net of tax) – 100% 8,365 5,832
Minority interests share in unrealized gains and losses (c) (220) (205)
b) Reserve related to the hedging of a net investment in foreign operations and translation reserve Currency translation impacts were €–724 million, and mainly attributable to the United States (€–826 million, principally due to the differential between the 2004 and 2003 closing USD/EUR exchange rates 1.36 USD for 1 euro at the end of 2004 compared to 1.26 USD for 1 euro at the end of 2003), and Japan (€–126 million), partly offset by the change in fair value of currency hedges set up by the Company to hedge net investments in foreign operations (€+341 million).
(a) Transfer of result induces by disposal of financial assets, impairment write-back following reevaluation, or tranfer of expenses following impairment charge during the period, and fixed maturity securities discount premiums impacts.
b) Reserve related to the hedging of a net investment in foreign operations and translation reserve The impact of exchange rate movements (€+1,428 million) was mainly attributable to the United States (€+1,671 million, principally due to the differential between the 2005 and 2004 closing USD/EUR exchange rates,1.18 USD for 1 euro at the end of 2005 compared to 1.36 USD for 1 euro at the end of 2004), Australia (€+99 million) and Canada (€+97 million), partly offset by the change in fair value of currency hedges set up by the Company to hedge net investments in foreign operations (€–576 million impact).
c) Employee benefits actuarial gains and losses The main contributors to the €–415 million change in actuarial gains and losses on employee benefit liabilities were the UK (€–131 million), Germany (€–128 million) and the United States (€–95 million). Additional information about employee benefits is provided in Note 26.2.
c) Employee benefits actuarial gains and losses The main contributors to the €–319 million change in actuarial gains and losses on employee benefit liabilities were the UK (€–185 million) and the United States (€–83 million). Additional information about employee liabilities is provided in Note 26.2.
– Dividends paid to minority interests (€–359 million). – Change in translation reserve (€+230 million). – Change in the scope of consolidation (€+23 million), notably from previously equity-accounted Turkish entities.
14.3.2. Change in minority interests for 2004 The €–35 million change in minority interests in 2004 was mainly due to the buyout of minorities in AXA RE Finance from BNP Paribas (€–43 million).
Liabilities arising from insurance contracts, including those where the financial risk is borne by policyholders, was split as follows by segment: Note 15: Liabilities arising from insurance and investment contracts 15.1. Liabilities arising from insurance contracts (gross and reinsurers’ share)
Liability adequacy test reserve 21 – – 21 16 – – 16
Liabilities arising from insurance contracts 198,332 35,998 11,870 246,201 183,962 33,525 10,356 227,843 Of which measured at current market assumptions (c) – – 163 163 – – 237 237 Future policy benefits reserve 92,803 – – 92,803 73,496 – – 73,496 of which IBNR 6 – – 6 – – – –
Reinsurers’ share in other reserves 140 37 – 177 93 20 – 113 Reinsurers’ share in liabilities arising
Of which measured at current market assumptions (c) – – – – – – – – Reinsurers’ share in future policy benefits reserve 10 – – 10 12 – – 12 Reinsurers’ share in Unearned premium reserve (a) – – – – 2 – – 2 of which IBNR – – – – – – – – Reinsurers’ share in other reserves – – – – – – – – Reinsurers share in liabilities arising from insurance contracts where the financial risk is borne
Liabilities arising from investment contracts, including those where the financial risk is borne by policyholders, was split as follows by segment: (in euro millions)
Liability adequacy test reserve – – – – Other reserves 21 21 – – Liabilities arising from investment contracts with discretionary participating feature 32,890 32,890 31,662 31,662 Of which measured at current market assumptions (b) – – – – Future policy benefits reserve 925 925 869 869 Claims reserve (a) 1 1 – – Other reserves – – – – Liabilities arising from investment contracts with no discretionary participating feature 926 926 869 869 Future policy benefits reserve 48,298 48,298 38,926 38,926
Insurance liabilities relating to with-profit insurance contracts excluding the FFA (Fund for Future Appropriation)
amounted to €9,986 million at December 31, 2005, compared to €10,274 million at December 31, 2004.
Claims reserve as of January 1 23,708 8,890 32,599 23,082 9,719 32,801
Claims handling cost reserve as of January 1 891 257 1,148 841 227 1,068
Claims reserve measured at current value as of January 1 – – – – – –
Gross claims reserve as of January 1 (a) 24,599 9,147 33,747 23,923 9,946 33,869
Loss reserve development (prior years) (634) 199 (435) (562) (101) (663)
Impact of foreign currency fluctuation 324 622 946 (169) (415) (584)
Claims reserve as at December 31 25,614 10,366 35,980 23,708 8,890 32,599
Claims handling cost reserve as of December 31 988 257 1,245 891 257 1,148
Claims reserve measured at current value as of December 31 – – – – – –
(a) Excluding “other insurance liabilities” (mainly mathematical annuity reserves), which totaled €3 billion in 2004 and €2.9 billion in 2005. (b) Excluding claims handling cost reserve.
In Property & Casualty activities, changes in the scope of consolidation amounted to €697 million, mainly due to: – The change in consolidation method (full consolidation instead of equity-method) in Turkey (€82 million), Hong Kong (€116 million) and Singapore (€63 million),
– The transfer of the disability business from the Life & Savings segment to the Property & Casualty segment in the Netherlands (€60 million).
Reinsurers’ share in total claims expense 305 1,265 1,570 216 476 692
Reinsurers’ share in claims payments (337) (832) (1,169) (667) (595) (1,262)
Change in scope of consolidation and change in accounting method (546) (97) (644) 11,212 1,833 13,045
(a) Interests credited, policyholders’ bonus, adjustments on contracts where the financial risk is borne by policyholders. (b) Internal transfers AXA.
Change in the scope of consolidation mainly related (i) in 2004 to the inclusion of MONY in the United States
Reinsurers’ share of change in future policy benefits reserve (a) 47 – 47 35 – 35
Ceded technical income and others 91 1 92 49 – 49
Impact of foreign currency fluctuation 356 – 356 (198) – (198)
Reinsurers’ share in future policy benefits reserve as of December 31 3,720 21 3,741 3,391 – 3,391
(Non Unit Linked) – Liabilities arising from: Investment contracts with Discretionnary Participation Features (DPF) measured according to existing accounting policies (a) 32,890 31,662
Investment contract with no Discretionnary Participation Features (DPF) measured at amortized cost 219 140
Investment contract with no Discretionnary Participation Features (DPF) measured at fair value 707 730
(Unit Linked) – Liabilities arising from contracts where financial risk is borne by policyholders : Investment contract with Discretionnary Participation Features (DPF) measured according to existing accounting policies (a) & (c) 9,712 8,436
Features in investment contracts with Discretionnary Participation Features (DPF) measured with current assumptions (b) – –
Investment contract with no Discretionnary Participation Features (DPF) measured at current unit value (d) 38,836 30,691
(“DOC”) – See section 1.2.5. NB: Informations above are presented net of impacts of derivatives, detailed in section 20.4.1.
The loss reserve development table indicates movements in loss reserves between 1995 and 2005, based on previously applied accounting standards, in accordance with IFRS 4. All contracts concerned are insurance contracts as defined by IFRS. The first row represents loss reserves recorded in the balance sheet in the year the loss occurred. The first section of the table entitled “Cumulative payments” details the cumulative amount of payments, at the end of each year, in relation to the initial reserve that was booked. The second part of the table entitled “Reserve reestimated ” gives the adjustment to the initial loss experience reserve at the end of each year. The final cost estimate varies as information relating to losses still outstanding becomes more reliable. The initial loss reserve at December 31, 1996 was €5,847 million. This reserve increased by €12,781 million to €18,628 million following the acquisition of UAP in 1997. At the end of 2005, cumulative payments totaled €12,473 million, and the initial loss reserve was re-estimated at €16,188 million at December 31, 2005. The surplus (shortfall) of the initial reserve with respect to the re-estimated gross final cost for each year represents the cumulative change in the initial loss reserve with respect to the reestimated final cost at December 31, 2005.
Loss reserve development table : Property & Casualty and international insurance (excluding AXA RE)
(b) AXA acquired Compagnie UAP (“UAP”) on January 1, 1997. The operations of AXA and UAP were integrated in 1998. At the date of acquisition, UAP had net reserves of €13.7 billion. The outstanding claims reserves and claim expenses of UAP’s Property & Casualty operations are included in the year end reserves as at December, 31, 1997 and after. Cumulative payments and reserve development for the 1998 year and after include the development of the integrated Property & Casualty liabilities of AXA, including UAP, as loss development data specific to UAP are not available and there is no reasonable basis of allocating cumulative payments and reserves re-estimated between AXA and UAP post-acquisition.
15.6.2. Loss Reserve Development Table: AXA RE (in euro million except percentages)
Re-estimated net claims reserves 1,736 1,714 1,804 2,299 2,394 2,253 3,001 2,334 2,692 2,605
(d) In 2001, the claims reserve of AXA RE were adversely affected by the September 11 attacks. (e) In 2004, the companies AXA Corporate Solution Insurance US, AXA RE P&C Insurance company and AXA RE P&C Reinsurance company were transferred from AXA RE to the Other transnational activities. The reserves of AXA Corporate Solution Insurance US were presented on an occuring year basis and included in Property & Casualty loss reserve development table (excluding AXA RE). The reserves of AXA RE P&C Insurance company and AXA RE Reinsurance company were presented on an underwriting year basis and included in AXA RE loss reserve development table.
TOTAL GROSS CLAIMS RESERVES December 31, 2005 December 31, 2004 Gross claims and other reserves developed Property & Casualty and International Insurance (excluding AXA RE) (a) 31,168 29,128 AXA RE (a) 4,253 3,314 Total gross claims and other reserves developed 35,421 32,442 Other reserves (b) 4,752 4,350 Total gross claims and other reserves excluding Life & Savings Segment 40,173 36,792 (a) Total gross claims and other reserves developed are presented on the loss reserve development basis: The reserves of AXA Corporate Solution Insurance US were included in
Property & Casualty and International Insurance loss reserve. The reserves of AXA RE P&C Insurance company and AXA RE Reinsurance company (€409 million) were included in AXA RE loss reserve development table.
In prior years, AXA issued insurance policies and accepted reinsurance for cover related to environmental pollution and asbestos exposure. Its insurance companies have been and continue to be involved in disputes regarding policy coverage and judicial interpretation of legal liability for potential environmental and asbestos claims. AXA has received, and continues to receive, claim notices as both insurer and reinsurer. Such claim notices are frequently merely precautionary in nature. There are significant uncertainties that affect the insurance companies’ ability to estimate future losses for these types of claims and there are a number of issues now being litigated, which may ultimately determine whether and to what extent insurance coverage exists. However, the AXA Group still carries out regular actuarial reviews to ensure that loss provisions relating to these risks are adequate. Under insurance and reinsurance contracts relating to environmental pollution and asbestos, AXA paid claims and legal costs of €69 million in 2005 (including
In the tables presented in section 15.9.1 and 15.9.2, liabilities arising from Life & Savings insurance and investments contracts exclude contracts where financial risk is borne by policyholders. These liabilities are not exposed to interest-rate or duration risk, excepted unit-linked contracts with performance guarantees. Subsidiaries hold unit-linked assets backing the corresponding liabilities arising from these contracts. Occasional mismatches result solely
Carrying value by contractual maturity as of December 31, 2005 Total net carrying Less than 1 year More than 1 year More than 5 years, Whole life value as of up to 5 years but shorter than for life December 31, 2005
Carrying value by contractual maturity as of December 31, 2004 Total net carrying Less than 1 year More than 1 year More than 5 years, Whole life value as of up to 5 years but shorter than for life December 31, 2004
As shown in the table below, 97% of Life & Savings reserves (excluding unit-linked contracts) are discounted.
By convention, contracts with zero guaranteed rates are deemed non-discounted, except for products offering guaranteed rates updated annually and for one year: these contracts are presented in discounted reserves.
The rates presented in the table below correspond to weighted average rates for the whole of the portfolio under consideration. They should be analyzed with caution. For contracts with guaranteed rates that are revised annually, rates are crystallized at the closing date. The risk factors associated to the contracts are detailed in Note 5.
Carrying value Average discount Carrying value Average discount rate % rate % Life & Savings – locked-in discount rate (a) 193,557 3.40% 179,722 3.52% Life & Savings – unlocked discount rate 30,615 3.17% 29,119 3.33% Life & Savings – undiscounted reserves 7,976 7,653 Sub-total Life & Savings 232,148 216,494 Discounted reserves – locked-in discount rate (a) 2,082 3.57% 1,468 4.50% Discounted reserves – unlocked discount rate 844 2.17% 845 2.31% Undiscounted reserves 44,942 41,568 Sub-total – Property & Casualty and International Insurance 47,868 43,881 TOTAL INSURANCE AND INVESTMENT CONTRACTS 280,017 260,375
15.9.3. Major business areas The tables in section 21.2. set out the Group’s major insurance business areas, and show the Group’s high level of diversification.
Enhanced guaranteed death and lifetime annuity benefits associated with unit-linked contracts are commonly referred to as GMDBs and GMIBs, respectively. GMDB features provide a guaranteed death benefit which may be larger than the contract account balance of the unitlinked contract, depending on performance of the unitlinked assets. GMIB features provide a guaranteed lifetime annuity which may be elected by the contractholder after a stipulated waiting period, and which may be larger than what the contract account balance could purchase at then-current annuity purchase rates.
Provisions for risks and charges include the following items: Comments on provisions relating to employee benefits can be found in Note 26 “Employees”.
Guaranteed annuity purchase rates provide contractholders with a guarantee that at a future date the amount accumulated within their contract will be able to purchase a lifetime annuity at currently defined rates. The risk to AXA in these features is either that longevity will improve significantly so that contract-holders electing to exercise this benefit will live longer than assumed in the guaranteed purchase rates, or that investment returns during the payout period will be lower than assumed in the guaranteed purchase rates. Reserves are established for these features on the basis of actuarial assumptions related to projected benefits and related contract charges. The determination of this estimated liability is based on models which involved numerous estimates and subjective judgments, including those regarding expected rates of return and volatility, contract surrender rate, mortality, and benefit election rates. There can be no assurance that ultimate experience will not differ from management’s estimates. In addition to providing for risk through establishing reserves, AXA also manages these risks through asset-liability management programs including interest rate floors to protect against declines in the interest rate environment.
Write back after final cost review (4) (5) – – (145)
Restructuring Lawsuits Liability Contingent Other provisions provisions contingency warranty liabilities relating for risks and provisions provisions to business charges combinations
Impact of change in scope of consolidation and changes in accounting method 5 – – (3) (133)
Changes in provisions for risks and charges are set out below:
MONY Life 11.25% Surplus Notes 2 1 AXA Bank Belgium 378 339
Euro Medium Term Notes, 6.0% due through 2013, and BMTN 1,041 1,183 Other – 5 Derivatives on financing debt instruments issued (a) (199) (289) AXA Financial 1,187 1,256
Senior notes MONY, 8.35%, due 2010 285 253 MONY Group Inc. notes, due 2005 – 210 Derivatives on financing debt instruments issued (a) (11) 4 AXA UK Holdings 225 219 GRE: Loan Notes, 6.625%, due 2023 225 219 Derivatives on financing debt instruments issued (a) – – AXA Equitable 566 498
Financing debt decreased by €424 million in 2005, or by €989 million at constant exchange rates. Movements in exchange rates therefore had a €565 million impact, mainly on AXA SA perpetual subordinated bonds and redeemable subordinated notes denominated in foreign currencies. The overall decrease was principally due to a decrease in subordinated debt (€–662 million), arising mostly from: – the exercise by AXA SA of an early redemption clause on the €500 million of subordinated perpetual debt securities issued in March 2005, and the redemption of other subordinated debt lines (€90 million); – the maturing of AXA Financial’s senior bonds (€294 million); – partially offset by the change in fair value of hedging derivative instruments (€68 million impact).
Financing debts owed to credit institutions at cost 17 17 17 17
Information on the fair value figures presented in the sections above is provided in addition to information on carrying values and should be used with caution. As a matter of facts, these estimates are based on snapshots taken on accounts closing dates of parameters such as interest rates and spreads, which in fact fluctuate over time, and resulting in instantaneous values, and because there are many possible methods of making these estimates.
The fair value of subordinated convertible bonds is equal to the quoted price for these instruments at the end of the period. Reported fair value therefore includes the value of the conversion option, which is included as a component of equity.
The tables below set out the contractual maturities of financing debt and other non-subordinated debt instruments issued by the Group, as well as bank overdrafts. Effective maturities may differ from those presented, mainly because some instruments include clauses allowing early redemption, with or without penalty.
In 2004, two put options granted to former Sanford C. Bernstein shareholders were exercised, representing a net asset value of €168 million (16.32 million shares). This increased the Group’s ownership interest in AllianceBerstein (ex. Alliance Capital) by 5.8 points, from
Movements in the “Minorities in controlled funds and other puttable instruments held by minority interests holders” caption depend on: – Changes in minority interests in controlled funds and changes in their fair value. An identical change in invested assets held by these funds is also recorded.
Minority interests in funds under this caption totaled €4,326 million at December 31, 2005 (2004: €3,223 million).
Other puttable instruments held by minority interest also included in this caption totaled €789 million at
18.3. Non-subordinated debt instruments issued and bank overdrafts (other than financing debt)
“Senior” notes 5.625%, expiration date 2006 345 293 French Bank 5 8 AXA Banque 5 8 Derivatives on other issued debt (other than financing debt) – French Bank – – AXA SA debts subscribed on behalf of French, English and German subsidiaries 186 215 CDOs (Collateralized Debt Obligations) and Real Estate vehicles 1,684 1,422 CDO ARIA2 tranche A-23E7 48 – CDO ARIA2 tranche A-23U7 93 – Derivatives on other debt instrument issued (other than financing debt) – CDO (Collateralized Debt Obligations) – –
Derivatives on financing debt instruments issued (other than financing debt) – Other financial services – – Other 13 – Other 13 – Derivatives on other issued debt (other than financing debt) – All units – – OTHER FINANCIAL DEBT INSTRUMENTS ISSUED (OTHER THAN FINANCING DEBT) 2,410 2,196 CDO (Collateralized Debt Obligations) 284 403
Derivatives on other issued debt (other than financing debt) – CDO (Collateralized Debt Obligations) – – Other financial services in France 50 91 AXA Banque 50 91 Derivatives on other issued debt (other than financing debt) – Other financial services in France – – Other financial services in Germany 215 301 AXA Vorsorgebank 215 301 Derivatives on other issued debt (other than financing debt) – Other financial services in Germany – – Other financial services in Belgium 4,563 4,128 AXA Bank Belgium 4,563 4,128 Derivatives on other issued debt (other than financing debt) – Other financial services in Belgium – –
At December 31, 2005, other debt instruments issued and bank overdrafts totaled €8,411 million, up €627 million, or €516 million at constant exchange rates. This increase was mainly due to: – a €435 million increase at AXA Bank Belgium as part of liquidity management in banking activities, – €141 million (or €130 million at constant exchange rates) relating to customer deposits with Sterling Grace1,
– an increase of €98 million (or €68 million at constant exchange rates) in bank overdrafts,
– the entry in the scope of consolidation of the real estate company European Office Income Venture (€177 million).
These movements were partly offset by: – lower debts at CDO Jazz 1 (€119 million), in line with lower volume of managed assets backing these credit lines,
The fair value of other debt instruments issued and bank overdrafts was €8,426 million at December 31, 2005. The difference between total fair value and carrying value results mainly from AllianceBernstein’s fixed-rate bond debt and AXA SA debt subscribed on behalf of French, English and German subsidiaries.
DEBT INSTRUMENTS ISSUED AND BANK OVERDRAFTS (OTHER THAN FINANCING DEBT) 8,411 7,783
Including debt at fair value through profit & loss 1,637 1,600
The fair value option is used to measure debts other than financing debts stated at fair value through profit & loss included in the table above.
Debt instruments issued designated as at fair value through profit & loss 726 782 1,508 1,600 – 1,600
Debt owed to credit institutions held as trading – – – – – –
18.4. Payables arising from direct insurance, inward reinsurance operations and direct outward reinsurance operations
Payables to policyholders, brokers and general agent 3,494 3,494 3,119 3,119
Payables arising from direct insurance and inward reinsurance operations 4,680 4,680 3,863 3,863
Payables arising from direct outward reinsurance operations 3,507 3,507 3,588 3,588
Other debt instruments issued, notes and bank overdrafts 4,932 965 1,886 7,783 Excludes the impact of derivatives (detailed in note 20.4.).
The income tax charge was split as follows: (in euro millions)
The deferred tax amount due on foreign income for €103 million (2004: €436 million) includes €395 million of policyholder tax (2004: €–28 million).
The applicable tax rate breaks down as follows: (in euro millions)
Net income, gross of tax expense and before equity in income from affiliated companies 6,066 5,971 Notional tax rate 34.93% 35.43% Notional tax charge 2,119 2,115
Impact of rate differences on notional tax charge (117) (149) Impact of the change in tax rates (26) (17) Income taxable at different tax rates 318 34 Impact of change in tax rates 175 (132)
– Deferred tax through reserves relating to the Fair Value adjustment of Available for Sales assets (2,557) (2,243)
– Deferred tax through reserves relating to gains and losses on defined benefits pension plans 369 140
This note excludes derivative instruments that meet the definition of equity instruments, detailed information on which is provided in Note 14, and derivative instruments held by consolidated investment funds in the “satellite investment portfolio” as defined in section 1.7.2., which are recognized at fair value in accordance with IAS 39. It includes however all other type of derivative instruments.
NB: This table includes all derivatives (assets and liabilities), i.e. hedge, macrohedge and other, asset and liability positions.
N.B.: €4,612 million of notional value on credit derivatives correspond to consolidated CDOs.
Notional amount Positive fair value Negative fair value Net fair value Change in Dec. 31, 05 Dec. 31, 04 Dec. 31, 05 Dec. 31, 04 Dec. 31, 05 Dec. 31, 04 Dec. 31, 05 Dec. 31, 04 fair value
Notional Fair Notional Fair Notional Fair Notional Fair Notional Fair amount value amount value amount value amount value amount value
Derivative instruments Derivative instruments Derivative instruments Macro hedges and Total used in fair value hedging used in a cash flow used in hedge of other derivative instruments relationship hedging relationship net investment in not qualifying under a foreign operation IAS 39 but used as economic hedges
Put sold – – – – – – – – – –
The note 5 of current notes to Financial Statements refers to risk management within the Group, and describes its main principles and axes. In general, derivatives are used by the various entities and by the Company for economic hedging purposes, with the exception of certain credit derivatives. However, the notion of hedge accounting within the meaning of IAS 39 only applies to a small portion of derivatives used by the Group. The overall objectives of the economic hedging implemented by AXA are described briefly below, along with details of any items that qualify for hedge accounting in the meaning of IAS 39.
In the tables above, the fourth column includes derivatives that do not form part of a hedging relationship as defined by IAS 39, but whose objective is nevertheless to provide economic hedging of a risk, with the exception of certain credit derivatives. They include “macro-hedging” derivatives as defined by the IASB in its amendment to IAS 39.
AXA uses derivative instruments mainly to manage its financial exposure in terms of interest rates and foreign currency risks.
AXA primarily uses derivative instruments for hedging purposes to manage risk, mainly interest rate and foreign currency risks. The risk management and associated economic hedging strategies are defined and managed by AXA’s local operations in line with accounting regulations. Such economic hedging strategies include (i) managing interest-rate exposures on fixed-maturity investments, long-term debt and guaranteed interest rates in insurance contracts, (ii) managing foreign-currency exposures on foreign-currency denominated investments and liabilities, and (iii) managing liquidity positions (including the ability to pay benefits and claims when due) in connection with asset-liability management and local regulatory requirements for insurance and banking operations.
At December 31, 2005 and based on notional amounts, (i) more than 52% of the derivative instruments used for hedging purposes consisted of swap contracts (55% at December 31, 2004), (ii) almost 33% were option products (mainly caps, floors and collars) (30% at December 31, 2004), (iii) around 10% of derivative instruments used for hedging purposes consisted of futures / forwards (principally other than foreign currency instruments) versus 14% at the end of 2004 and (iv) just under 5% corresponded to credit derivatives, compared to 1% at December 31, 2004. Credit derivatives are alternative option to investing in fixed maturities issued by private sector companies.
AXA uses primarily (i) interest-rate swap contracts to manage cash flows on interest received or paid, and (ii) currency swap contracts to manage foreigncurrency denominated cash flows or investments. On a consolidated basis, the notional amount of such instruments at December 31, 2005 was €108,315 million (2004: €104,238 million), and their market value was €1,656 million (2004: At December 31, 2005, interest-rate swap contracts accounted for 72% of swaps used by AXA (versus 74% at the end of 2004). They are used in particular by (i) the Company (notional value of €31,612 million compared to €24,210 million at the end of 2004) to limit its risk exposure to interest-rate on debt issued or amounts borrowed, (ii) AXA Bank Belgium (notional value of €28,283 million versus €40,330 at the end of 2004) to hedge interest-rate risk exposures arising in the context of its ordinary banking activities, in order to achieve an appropriate interest-rate spread between its interest-earning assets and interest-bearing liabilities and (iii) AXA Japan (€7,402 million versus €577 million at the end of 2004) to limit its risk exposure to interest-rate on its invested assets (bonds held directly and through consolidated mutual funds).
Currency swaps constitute another part of AXA’s hedging strategies to manage foreign-currency cash flow exposures, and are primarily used by AXA (the Company), with €17,156 million at the end of 2005 (2004: €12,050 million) and AXA Japan €5,057 million (2004: €5,540 million), mainly to limit the exposure of its euro and US dollar bond portfolio.
The notional amounts of swaps used in fair value hedge relationships totaled €9,327 million at December 31, 2005, including €6,523 million at AXA Japan (mainly including €3,726 million of interestrate swaps and €2,554 million of currency swaps), €1,932 million of interest-rate swaps at the Company and €737 million of interest-rate swaps at AXA Bank Belgium.
The notional amounts of swaps used in cash flow hedge relationships totaled €1,050 million, including €521 million of interest-rate swaps in Belgium (Life & Savings business) and €466 million of interest-rate swaps at the Australian holding company.
b. Options The options portfolio consists mainly of caps and floors. Caps and floors are option-like agreements where the seller agrees to pay to the counterparty an
Caps and floors are used predominantly by AXA’s US and French Life & Savings operations to hedge interest rates on contracts with guaranteed rates of return.
Non-foreign currency related forward and future contracts accounted for 80% of these instruments (based on notional amounts at December 31, 2005), compared to 53% at end 2004.
Additionally, AXA’s US insurance operations use forward and futures contracts for the dynamic risks management program associated with the guaranteed minimum benefits on unit-linked retirement savings products.
AXA Japan also uses forward foreign currency contracts to hedge exchange-rate risk arising from its investments in US and European fixed-maturity bonds. In accordance with IAS 21 and IAS 39, some or all of the currency translation difference relating to these bonds is accounted for in income and offsets most of the change in fair value of associated derivative instruments, which is also taken to income. The economic effect of this hedging is therefore reflected without the need to use hedge accounting as defined by IAS 39. The notional amount of contracts subject to fair value hedge accounting at December 31, 2005 was €795 million at AXA Japan, out of a total notional amount of €12,312 million.
As a result, for 96% of these contracts’ notional value, derivatives were used as part of a nonqualifying hedge relationship as defined by IAS 39 at the end of 2005 (92% at end 2004).
At December 31, 2005, the notional amount and the net fair value of these derivatives were €9,771 million and €–12 million, respectively (2004: €2,393 million and €37 million, respectively). Use of these
Fixed maturities at fair value through profit & loss 43,403 – 10 43,413
Equity securities at fair value through profit & loss 18,804 – – 18,804
Non controlled investment funds available for sale 3,132 – 89 3,221
Loans at fair value through profit & loss 125 – – 125
Insurance Net value Impact of Impact of Net Value excluding effect derivative instruments other derivative including effect of hedging value (a) subject to hedge instruments (c) of derivatives (d)
Investment property at amortized cost 7,683 – – 7,683 Investment property at fair value through profit & loss 4,550 – – 4,550 Macro hedge and speculative derivatives – – – – Investment property 12,233 – – 12,233 Fixed maturities held to maturity – – – – Fixed maturities available for sale 164,184 (153) 619 164,650 Fixed maturities at fair value through profit & loss 41,907 – (21) 41,886 Fixed maturities held for trading 4 – – 4 Non quoted fixed maturities (amortized cost) 23 – – 23
Equity securities available for sale 22,221 7 21 22,249 Equity securities at fair value through profit & loss 16,847 – (1) 16,847 Equity securities held for trading 258 – – 258
Non controlled investment funds available for sale 2,921 – (1) 2,920 Non controlled investment funds at fair value through profit & loss 2,093 – – 2,093 Non controlled investment funds held for trading 199 – 33 232 Non controlled investment funds 5,213 – 32 5,245 Other investments (f) 596 – – 596 Macro hedge and speculative derivatives – – (242) (242)
Net Impact of Impact of Value Net Impact of Impact of Value carrying derivative other including carrying derivative other including value instruments derivative effect of value instruments derivative effect of subject instruments derivatives subject instruments derivatives to hedge to hedge accounting accounting
Liabilities arising from insurance contracts where the financial risk is borne by policyholders 92,888 – – 92,888 73,578 – – 73,578
Liabilities arising from investment contracts where the financial risk is borne by policyholders 48,549 – – 48,549 39,127 – – 39,127
Value before Impact of Impact of Value Value before Impact of Impact of Value effect of derivative other including effect of derivative other including derivative instruments derivative effect of derivative instruments derivative effect of instruments subject instruments derivatives instruments subject instruments derivatives to hedge to hedge accounting accounting
Financing debt owed to credit institutions 17 – – 17 17 – 4 22
(b) Other debts are presented excluding effect of derivatives on the face of the balance sheet. (c) Derivative instruments used in hedge of net investment in a foreign operation, and not attached to a debt on the face of the balance sheet.
Note 21: Revenues by segment and net revenues from banking activities 21.1. Total revenues
Other countries 4,498 4,326 PROPERTY & CASUALTY 18,874 17,852 of which direct premiums 18,588 17,521 of which reinsurance assumed 244 288 of which revenues from other activities 43 42
Other countries 5,174 4,262 INTERNATIONAL INSURANCE 3,813 3,363 of which direct premiums 1,711 920 of which reinsurance assumed 1,957 2,320 of which revenues from other activities 145 123
AXA RE 1,451 1,056 AXA Corporate Solution Assurance 1,605 1,506 AXA Cessions 60 94 AXA Assistance 549 467
Life contracts (including endowment contracts) 11,775 97,217 280 11,891 86,801 1
Fees and charges relating to investment contracts with no participating features 509 – (c) 39,762 417 – (c) 31,560
Fees, commissions and other revenues 1,111 – – 824 – –
– Asset backing contracts where financial risk borne by policyholders (unit-linked) (a) 13,216 92,888 48,549 7,696 73,578 39,137
(a) Relates to contracts where the financial risk is borne by policyholders. (b) Excludes liabilities relating to unearned revenues and fees, and policyholder bonuses, along with derivatives relating to insurance and investment contracts. (c) Relates to liabilities arising from investment contracts without discretionary participation and investment contracts without discretionary participation where the financial risk is borne by policyholders.
Change in fair value of financial instruments at fair value through profit & loss 7 (17)
Net investment Net realized Change in fair Change in Net investment income investment value of financial financial result gains and losses instruments at instruments fair value through impairment profit & loss Investment property at amorthized cost 513 190 – (19) 684 Investment property at fair value through profit & loss 283 99 375 – 757
Non controlled investment funds held for trading – 3 1 – 4
Net investment Net realized Change in fair Change in Net investment income investment value of financial financial result gains and losses instruments at instruments fair value through impairment profit & loss Investment property at amortized cost 521 345 – (90) 776 Investment property at fair value through profit & loss 255 106 403 – 764
(a) Including fixed maturities held by consolidated investment funds designated as at fair value through profit & loss. (b) Including equity securities maturities held by consolidated investment funds designated as at fair value through profit & loss.
Changes in fair value of financial instruments designated as at fair value through profit & loss, relating to available-for-sale equities and fixed maturities, correspond to the change in fair value of underlying items in fair value hedges (as defined by IAS 39) in Japan.
Life & Savings Property & International Inter-segment Total Casualty Insurance eliminations
The significant improvement in the result of reinsurance ceded in 2005 was mainly attributable to the International Insurance operations along with the Property & Casualty operations. These movements were mainly due to the following factors: – The significant improvement in the result of reinsurance ceded in 2005 in the International Insurance operations (€317 million compared to €–401 million in 2004) mainly occurred at (i) AXA RE (up €+436 million), due to strong loss recovery following major losses in 2005 (particularly Hurricanes Katrina, Rita and Wilma), and (ii) AXA Corporate Solutions Assurance (up €+182 million) due to stronger current loss recovery and improved reinsurance results for previous periods.
Financing debt expenses (€602 million in 2005 and €583 million in 2004) include income and expenses relating to hedging derivative instruments on financing debt, mainly for AXA SA (€176 million in 2005 and €248 million in 2004).
Life & Property & International Total Asset Other Holdings Inter-segment TOTAL TOTAL
(a) Includes all acquisition expenses relating to insurance and investment contracts before capitalization/amortization of deferred acquisition costs and equivalents. (b) Change (capitalization and amortization) in deferred acquisition costs relating to insurance and investment contracts with discretionnary participation features and changes in net rights to future management fees relating to investment contracts with no discretionnary participation features.
Banking expenses – – – – – 61 – – 61 –
(a) Including redundancies and early retirement costs (inception = set up of the plan), and participation paid to employees in France.
Defined contribution plans The cost of the contributions paid is an expense in the statement of income, and amounted to €72 million for the year ended December 31, 2005.
Net periodic benefit cost – assumptions at beginning of year 2005
Net periodic benefit cost – assumptions at beginning of year 2004
26.2.1. Annual change in pension plan liabilities The yearly evolution of the PBO (Projected Benefit Obligation) is made based on the following items: – Service cost (representing the increase in the PBO
26.2.2. Balance sheet information The balance sheet information for employee benefits captures the difference between the Projected Benefit Obligation (“PBO”) and the market value of the corresponding invested plan assets. When this difference is positive a contingency and loss reserve is booked within the balance sheet liability. When it is negative, a prepaid asset is recorded in the balance sheet.
In addition, in accordance with IAS 39 a category of assets referred to as “separate assets” are also recorded in the balance sheet. IFRS created the concept of separate assets which are assets that are
The table presented below presents the change in benefit obligation and the change in plan assets associated with pension plans and other benefit plans sponsored by AXA along with an analysis of separate assets as of December 31, 2005.
Benefits directly paid by the employer – (104) – – Effect of foreign currency fluctuation 513 (199) 113 (39) Benefit obligation, end of year (A) 11,421 9,573 716 581
Effect of foreign currency fluctuation 135 (14) – – Fair value of plan assets, end of year (B) 4,693 3,869 14 9
Liability and assets recorded excluding separate assets Plans with a positive net position (Asset) 1 3 – – Plans with a negative net position (Liability) (6,655) (5,669) (703) (572) Net position (excluding separate assets) (6,654) (5,666) (703) (572)
Economic net funding position including separate assets Net position (excluding separate assets) (6,654) (5,666) (703) (572) Fair value of separate assets, end of year 2,697 2,265 – – Economic net funding position (including separate assets) (3,957) (3,401) (703) (572)
For pension plans where the fair value of plan assets exceeds the benefit obligation, the aggregate fair value of plan assets and aggregate benefit obligation were €36 million and €35 million respectively as of
For pension plans where benefit obligation is in excess of the fair value of the plan assets, the aggregate fair value of plan assets and aggregate benefit obligation were €4,658 million and €11,387 million respectively as of December 31, 2005.
Net periodic benefit cost 257 265 66 33 26.2.4. Net economic funding position evolution The evolution of the net economic position from January 1, 2005 to December 31, 2005 captures both the evolution of the liability recorded in the Group accounts and the evolution of the separate assets. It is presented below: (in euro millions)
December 31, 2005, the cumulative impact since first time application amounted €–736 million.
As pension liabilities are of a long-term nature, a mixture of bond, equity, and real estate investments are used in the plan assets. It should be noticed that the percentage of equity is higher in the Anglo-Saxon countries where the investment strategy is often determined by Plan trustees. This mixture has some degree of volatility of returns, but over the long-term is expected to provide a higher return than pure bond investments. Higher return is consistent with experience in the past, but may not be the case in the future.
The asset mixture is maintained close to the target level, with minor fluctuations over time due to the shifting market values of assets. The asset mix at the end of year 2006 should be very similar to the one presented above at the end of year 2005.
26.2.7. Other employment benefits AXA provides certain medical and life insurance benefits (“post-retirement benefits”) to qualifying employees, managers and agents who retire after having met certain age and service requirements. The life insurance benefits are related to age and salary at retirement. The expected costs of providing post-retirement benefit are accrued during the period that the employees earn such benefits. AXA has made post-retirement benefits payments of €39 million for the year ended
The total employee share-based compensation cost recorded in earnings for the year ended December 31, 2005 was €115.7 million.
AXA Performance Shares (2005) 5.9 – AXA Performance units plans 14.8 5.1 2004 equity grants 0.7 – 2005 equity grants 1.1 –
AXA Financial Share based compensation instruments 39.4 23.5 AXA Financial SAR 29.0 13.0 AXA Financial Restricted Shares and PARS 10.4 10.4
AXA SA SHARE OPTIONS Executive officers and other key employees may be granted options to purchase ordinary shares of AXA
In respect of share option plans issued by AXA for AXA ordinary shares, the number of share options
Total number of options 67.2 59.8 34.5 30.9 outstanding and the number of share options exercisable at December 31, 2005 are set out below.
Outstanding at year end 31.2 20.5 16.89 14.26 number of share options exercisable at December 31, 2005 are set out in the two tables below: (in millions)
The Black-Scholes option pricing model was used in determining the fair values of the AXA SA share options. The effect of expected early exercise is taken into account through the use of an expected life assumption based on historic data. The AXA SA volatility assumption is estimated using the implied volatility which is checked against an analysis of the historical volatility to ensure a reasonable assumption for the option term is used. The expected AXA SA dividend yield assumption is based on the average market consensus. Risk-free interest rate is based on the Euro government bond benchmark curve for appropriate term. The option pricing assumptions and fair values for plans issued in 2005 and 2004 are as follows: Outstanding options Exercisable options Number Exercise price Number Exercise price
Amortizing this equity-settled plan expense against the vesting period and applying a 5% pre-vesting estimation of forfeiture rate, the total cost for the AXA SA share options recorded in earnings for the year ended December 31, 2005 is €30.4 million (€6.3 million for the 2003 grants, €12,6 million for the 2004 grants and €11.5 million for the 2005 grants). Among the 2005 grants, a €3.3 million cost is dedicated to the AXA SA options issued for AXA Financial employees.
AXA ADR SHARE OPTIONS The US Holding Company can grant options to purchase AXA ADRs. The options are issued at the fair market value of the AXA ADRs on the date of grant. Options granted prior to 2004 and vested over a 3 year period with one third vesting on each anniversary date. However, beginning with new grants in 2004, new stock option awards generally vest over a 4 year period with one third vesting on each of the second, third and fourth anniversaries of the grant. Options currently issued and outstanding have a 10-year contractual term from their date of grant.
A summary of the activity for the option of the Holding Company’s plans is presented below, including information about options outstanding and exercisable at December 31, 2005.
AXA ADR stock-option plans Options Weighted price (in millions) (in USD)
For grants after November 7, 2002, information is as follows: (in millions)
AXA ADR plans after November 7, 2002 Outstanding options Exercisable options
Weighted average fair value per option at grant date in USD 5.65 4.44
Amortizing this equity-settled plan expense against the vesting period and applying a 5% pre-vesting estimation of forfeiture rate, the total cost for the AXA ADR Share Options recorded in earnings for the year ended December 31, 2005 was €12.7 million. From 2005 on, there are no more AXA ADR grants, and US employees are granted with AXA SA stock options.
AXA GROUP SHAREPLAN AXA offers its employees the opportunity to become shareholders through a special equity issue reserved for them. In the countries that meet the legal and tax requirements, two investments options are proposed: the traditional plan and the leverage plan. In the traditional plan, the employee invests funds in AXA shares, at a discount to the market price for unrestricted shares. These shares are normally only available after a 5 year period of restriction. In the leverage plan, an independent bank completes the employee investment so that the total investment is a multiple of the cash paid by the employee. This total sum is invested in AXA shares at a discount to market price. After a period of 5 years, the employee will get a percentage of any gains on the total investment, with a floor of the initial investment.
Assumptions used in order to value the Group Shareplan 2005 are as follows: – 5 years borrowing rate: 7.16 % for classic plan and 7.62% for leverage plan. The different rates on classic and on leverage plan are due to the calculation as the weighted average of borrowing rates according to the subscription countries. In 2004, the borrowing rate was 7.37%.
The total cost for the AXA Group Shareplan recorded in earnings for the year ended December 31, 2005 is €10.5 million (€1.7 million for the classic plan and €8.8 million for the leverage plan). The shares are considered to vest immediately, so the full cost is reflected in the current period.
In 2005, and in France only, have been granted Performance Shares.
Performance shares are similar to Performance Units, but in this case, the employee is granted with an equity settled payment, instead of a cash settle payment. In France, most of the Performance Units that were granted in 2004 have been turned into Performance Shares.
AXA Asia Pacific Holding share option plan To a less significant extent, AXA APH grants share options on APH share with both market and nonmarket performance conditions which are valued according to the Australian local IFRS. The total cost for this AXA APH share option plan recorded in earnings for the year ended December 31, 2005 was €2.0 million.
In 2005: – Short-term employee benefits: remuneration paid to members of the Management Board in respect of 2005 totaled €12.4 million, including fixed salary, bonuses, directors’ fees and benefits in kind.
– Long-term employee benefits: amounts provisioned and recognized by AXA SA and its subsidiaries for the payment of pensions or retirement benefits to its corporate officers (members of the Management Board, Chairman of the Supervisory Board and the employees’ representative on the Supervisory Board) totaled €29.4 million.
At December 31, 2005, the Group employed 78,800 salaried employees on a full-time equivalent basis (2004: 76,339).
The increase in headcount was mainly due to: – the full consolidation of the Hong Kong, Singapore and Turkish entities, which were previously accounted for under the equity method,
– entities dependent from the UK, including AXA Business Services in India, along with hiring in sales, marketing and distribution departments in UK entities.
The Company calculates a basic net income per ordinary share and a diluted net income per ordinary share: – The calculation of the basic net income per ordinary share assumes no dilution and is based on the weighted average number of ordinary shares outstanding for the period.
In 2005, the merger between FINAXA and AXA caused the number of AXA shares in issue to decrease by 1.6 million (weighted average number). Previously, AXA had bought back 2.6 million of its own shares between November and December 2005. FINAXA stock options were converted into AXA stock options on
Taking into account AXA’s average stock price, 29 million of the shares relating to stock options were not included in the calculation of the weighted average number of shares on a fully diluted basis.
As a result, along with the dilutive effect of convertible bond plans, the fully diluted number of shares at December 31, 2005 was 1,954 million.
In addition, to finance the MONY acquisition, ORAN bonds had been redeemed on July 22, 2004 through the issue of one ordinary AXA share (at a price of €12.75 versus the market price of €17.08) per ORAN, leading to the issue of 110,245,309 new AXA shares.
Weighted average number of ordinary shares (net of treasury shares) – opening 1,884 1,748
NET INCOME PER ORDINARY SHARE C = A / B 2.22 2.07
FULLY DILUTED – WEIGHTED AVERAGE NUMBER OF SHARES D 1,954 1,934
According to IAS 24, parties are considered to be related parties if one of them can control or is deemed to have a significant influence on the other during the financial and operating decisions making process.
In 2005, the Company or one of its subsidiaries has been party to the following transactions with related parties, which may be deemed to have been either material to AXA or the related party in question or unusual in their nature or conditions.
Groupement d’intérêt économique (GIE) From time to time AXA and some of its affiliates enter into partnerships that perform various common services for their members and allocate associated costs and expenses among its members. These partnerships are governed by the French law applicable to “Groupement d’Intérêt Economique” (GIE). The expenses invoiced to entities through the GIE may be calculated and split according to particular cost drivers. In 2005, expenses invoiced by GIEs to the Company, its subsidiaries and affiliates amounted to €371 million.
Certain of the costs and expenses of operating the Life & Savings business and the Property & Casualty business in the Company’s French insurance subsidiaries (other than commissions) are shared by these subsidiaries and the Mutuelles AXA and allocated among them through a GIE.
The Property & Casualty insurance business generated in France by insurance brokers is underwritten through a coinsurance arrangement between AXA France IARD, a Property & Casualty insurance subsidiary of the Company, and AXA Courtage Assurance Mutuelle, one of the Mutuelles AXA engaged in the Property & Casualty business.
Loans/Guarantees/Capital Contributions The Company, from time to time, makes capital contributions and/or loans to its subsidiaries and affiliates to finance their business operations. As at December 31, 2005, the aggregate amount outstanding in respect of loans made by the Company to its subsidiaries or affiliates was approximately €2.5 billion. This amount represents approximately forty separate loans originated at different times and bearing interest at varying rates that generally reflected prevailing market rates at the respective dates such loans were originated. In order to facilitate certain intra-group financing arrangements, support credit ratings of its subsidiaries, and/or to promote efficient use of the Group’s capital resources generally, the Company, from time to time, guarantees repayment of loans extended from one of its subsidiaries to another and/or guarantees other obligations of its subsidiaries. As of December 31, 2005, the principal amount of such intra-group loans guaranteed by the Company was €1,874 million and the aggregate liabilities covered by the other guarantees extended to its subsidiaries was approximately €2,709 million. The beneficiaries of these guarantees are generally required to compensate the Company at a negotiated rate based on prevailing market rates and conditions for guarantees of a similar nature. In addition, from time to time, the Company provides comfort or similar letters to rating agencies and/or regulators for the benefit of its subsidiaries for various business purposes, including facilitating specific transactions, achieving target ratings levels and, more generally, helping develop the business of these subsidiaries. At December 31, 2005, there were no loans outstanding from the Company to any members of AXA’s Management Board or Supervisory Board. For additional information concerning commitments and guarantees given by the Company, see Note 29 “Contingent assets and liabilities and unrecognized contractual commitments”.
As part of its strategy of externalizing commitments relating to its employees’ post-employment benefits, AXA France has taken out contracts with AXA Assurances Vie Mutuelle. Premiums paid in respect of these contracts totaled €100 million in 2004 and €137 million in 2005.
Off-balance sheet commitments received by AXA totaled €30,440 million at December 31, 2005, an increase of €5,780 million compared to 2004. The increase was mainly due to collateralized commitments (up €4,050 million), guarantee commitments (up €1,157 million) and financing commitments (up €459 million). These commitments break down as follows: Financing commitments received totaled €8,280 million at December 31, 2005 and consisted mainly of: – AXA SA credit lines (€6,218 million), – commitments relating to the €360 million of commercial paper issued by Alliance Capital in 1998, with an extension of €85 million in 1999 and a cash facility of around €488 million,
– bank credit facilities granted to AXA Life Japan as part of its Life & Savings operations (€433 million),
Guarantee commitments totaled €3,985 million and consisted mainly of guarantees received from customers of Life & Savings entities (€1,379 million) and banking entities (€2,335 million) in the form of third-party pledges and mortgages on buildings that provide security for loans.
– mortgage security interests received from AXA Bank Belgium customers on home loans and other business loans (€11,364 million).
– €312 million of loans of securities to third parties by French life insurance companies, a fall of €35 million.
The decline was due to the reclassification of other commitments as guarantee commitments relating to French banking customers (€–899 million), offset by an increase in broker commitments and forward currency transactions (€+422 million) at AXA RE.
Commitments on sales currently processed – 257 – – 257 262
The Group’s total given commitments increased to €25,693 million. This increase resulted from a rise in pledged assets and collaterized commitments (up €4,988 million) and other commitments (up €1,003 million), partly offset by a decrease in financing commitments (down €662 million).
Guarantee commitments totaled €6,506 million at December 31, 2005. – Guarantee commitments given to credit institutions totaled €2,317 million at December 31, 2005. They consisted mainly of €1,552 million of collateral and pledges given by AXA SA to credit institutions, €477 million of capital financing commitments given by AXA Financial to Limited Lartnership, a €82.5 million financial guarantee given by the German holding companies to a real-estate company and €106 million of collateral given by AllianceBernstein to a commercial bank in 2002 to guarantee some of Sanford C. Bernstein's commitments.
Pledged assets and collateralized commitments given totaled €10,428 million at December 31, 2005. These consisted mainly of the following items: – €420 million of securities pledged as part of derivatives transactions, €4,030 million of securities given as guarantees for cash deposits received in securities lending transactions, and €573 million securities given as guarantees for short-term securities borrowing by Japanese entities. Commitments were also received on these products.
Overall, pledged assets and collaterized commitments given increased by €4,988 million due to the €4,218 million guarantee on securities lending transactions by Japanese entities, and the €582 million increase in commitments given by AXA Bank Belgium.
– €247 million of commitments given by the French Property & Casualty business, including €212 million of pledges.
AXA has issued the following subordinated convertible debt instruments: (i) €1,524 million at 2.5% issued in February 1999 and due in 2014, and (ii) €1,099 million at 3.75% issued in February 2000 and due in 2017. At maturity, if such debt instruments are not converted into ordinary shares of AXA, they will be redeemed by AXA at a price in excess of the original issue price. This difference totaled €1,176 million at December 31, 2005 and is
amortized in line with the effective interest rate on each convertible bond.
The plan governing the financial reorganization of AXA Sun Life in 2001 (the “Plan”) details arrangements under which assets from the inherited estate, attributed to AXA through the reorganization, may be transferred on a temporary or permanent basis to the “With-Profits” funds as required to support the capital requirements of these funds, as determined under the Plan. In the case of a temporary transfer, assets and related investment income remain attributable to AXA since they will be returned when they are no longer required to support the capital requirements of the “With-Profits” funds, under the stringent tests set out in the Plan. If all or part of the assets transferred are unlikely to be returned in the foreseeable future (taking into consideration the duration of in-force “WithProfits ” policies), then the relevant part of the transfer would be designated permanent. Only a permanent transfer to the “With-Profits” funds would result in a charge against the profit & loss account. The maximum amount that could be transferred under the Plan is capped at the market value of surplus assets in the non-profit funds, which was £1.7 billion (€2.4 billion) at December 31, 2005, before taking into account the transfer described below.
The clauses of the memorandum were disclosed to the Autorité des Marchés Financiers on December 16, 2005, and stipulate preferential terms for the sale or purchase of AXA and BNP Paribas shares. In substance, they provide for the maintaining of stable cross-shareholdings between the two groups: – the AXA Group commits to retain at least 43,412,598 BNP Paribas shares, – the BNP Paribas Group commits to retain at least 61,587,465 AXA shares.
In addition, both groups have granted reciprocal call options in the event of a change in control of either group.
On January 9, 2006, AXA published the offer document regarding the voluntary public offer to the minority holders of shares in AXA Konzern AG to acquire their ordinary non-par value bearer shares (“Ordinary Shares”) as well as the preferred non-voting non-par value bearer shares (“Preferred Shares”) in AXA Konzern AG, against payment of cash consideration of €129.30 per Ordinary Share and per Preferred Share.
In January 2006, AXA pursued its share purchase program to control dilution arising from 2005 sharebased compensations and employees’ Shareplan program and purchased 9.4 million of shares for a total amount of €0.25 billion.
On February 21, 2006, AXA Asia Pacific Holdings reached an agreement with National Australia Bank to purchase 100% of MLC Hong Kong and MLC Indonesia for €357 million.
This is a free translation into English of the statutory auditors’ report issued in the French language and is provided solely for the convenience of Englishspeaking readers. The statutory auditors’ report includes information specifically required by French law in all audit reports, whether qualified or not, which is presented below in the opinion on the financial statements. This information includes an explanatory paragraph discussing the auditors’ assessments of certain significant accounting and auditing matters. These assessments were considered for the purpose of issuing an audit opinion on the consolidated financial statements taken as a whole, and not to provide separate assurance on individual account captions or information taken outside of the consolidated financial statements.
The consolidated financial statements are the responsibility of the Management Board. Our role is to express an opinion on these financial statements based on our audit. These statements have been prepared for the first time using the IFRSs as adopted by the European Union. For the sake of comparison, 2004 financial information has been restated using the same rules.
1. Opinion on the consolidated financial statements We conducted our audit in accordance with the professional standards applicable in France; those standards require that we plan and perform the audit to obtain reasonable assurance that the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the management as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
2. Justification of our assessments In accordance with the requirements of Article L.823-9 of the French Commercial Code relating to the justification of our assessments, we would like to bring the following matters to your attention: – Certain consolidated balance sheet items that are specific to insurance and reinsurance business are estimated on the basis of statistical and actuarial data, such as actuarial reserves, deferred acquisition costs and their amortization, and the value of business in force. The methods and assumptions used to calculate the carrying values of these items are described in notes 1.6.2, 1.6.4 et 1.11 of the notes to the consolidated financial statements. We have assessed the reasonableness of the assumptions used to calculate these values, particularly with respect to the Group’s experience and its regulatory and economic environments. We also assessed the overall consistency of these assumptions.
We have assessed whether the valuation approaches used rely on assumptions that are consistent with the forecasts that emerge from the strategic plans established by the AXA Group.
– Deferred tax assets are tested at each closing for recoverability.
We have assessed the consistency of the assumptions used with the tax projections that emerge from the strategic plans drawn up by the AXA Group.
– Financial assets are recognized and measured using the methods described in note 1.7.2 to the financial statements.
3. Specific verification We have also verified, in accordance with professional standards, accounting practices applicable in France, the information given in the Management Board’s annual report on Group operations. We have no matter to report with regard to its fair presentation and conformity with the consolidated financial statements.
Parent Company / p. 400 Embedded value / p. 413 Salaried employees / p. 418 Significant event known sebsenquently at the year end closing / p. 419
Net income for the year ended December 31, 2005 was €1,137 million, compared with €519 million for the year ended December 31, 2004.
Dividends received from subsidiaries amounted to €1,420 million, an increase of €450 million from the previous year.
AXA Financial has not paid a dividend for two years, using its cash flow mainly to redeem debts, relating in particular to the financing of MONY acquisition in 2004.
Financial income fell by €10 million to €369 million which was impacted by the following: – Interest on cash declined by €13 million, due mainly to the non-recurrence of financial income related to short term investment of proceeds received from ORAN (bonds redeemable in shares or cash) during the first half of 2004.
– Revenues from swaps fell by €16 million mainly attributable to following factors: •New foreign exchange hedges were implemented, mainly in US dollar, via cross currency swaps aiming at protecting the Group’s consolidated shareholder’s equity against currency fluctuations. These new hedges caused net swap income to fall by around €45 million.
– Partially offsetting by an increase in loan income, €16 million, of which €25 million increase due to financial income on loans granted in 2004 to finance the MONY acquisition.
Operating expenses rose by €33 million to €197 million, mainly due to initiatives business and increasing costs in connection with the preparation of the Sarbanes-Oxley 404 attestation of effectiveness of internal controls due for year-end 2006.
Allowances to provisions for contingent liabilities totaled €109 million, up from €89 million in 2004. This figure mainly consisted of provisions on redemption premiums payable on bonds convertible into AXA shares, which totaled €87 million, a similar amount to that set aside in 2004.
The total income tax benefit was €623 million versus €30 million in 2004. This figure mainly represents tax due from companies included in the tax consolidation group, which totaled €522 million whereas no tax is due by the tax consolidation group, because of tax losses in 2005. These losses were mainly caused by the sharp reduction in unrealized foreign exchange gains within the Company, which are taxed in advance. This reduction arose from the 2005 dollar’s strengthening against the euro, compared to its decline in 2004.
Assets Intangible fixed assets totaled €324 million. This amount included the AXA brand contributed by FINAXA as result of the merger. The brand is valued at €307 million based on brand royalties billed to Group subsidiaries and to the Mutuelles AXA.
– This decrease was partially offset by a restructuring in Asia; AXA SA bought €29 million of AXA Insurance
Singapore shares, previously held by AXA Investment Holding Singapore, which is being liquidated.
Receivables from subsidiaries fell by €551 million, from €3,034 million in 2004 to €2,483 million in 2005. In 2004, AXA SA granted loans of €675 million to subsidiaries to finance the MONY acquisition. In 2005, these loans were either redeemed or refinanced within the group.
Other financial assets totaled €106 million at December 31, 2005, compared to €16 million at December 31, 2004. The Company set up a liquidity agreement on its stock in 2005. At the end of the year, AXA owned 0.6 million of its own shares, bought for €18 million. Uninvested available amounts under this liquidity agreement totaled €79 million at year-end, and are invested in a money-market mutual fund.
Liabilities Shareholders’ equity, before 2005 net income and after payment of dividends in respect of the prior year was €26,924 million. This represents a fall of €930 million, which was due to: – the merger with FINAXA, which had a €–781 million impact, caused principally by: • the €–1,223 million impact from exchangeable bonds issued by FINAXA, which were used to buy AXA shares, partly offset by,
• the €307 million value of the AXA brand, as stated in the merger agreement,
Other shareholders’ equity includes deeply subordinated notes and amounted to €892 million as opposed to €628 million in 2004. The €264 million increase was mainly due to the €250 million issue of deeply subordinated notes in January 2005 as part of the €8 billion EMTN (Euro-Medium Term Notes) program.
Subordinated debt was €8,214 million, down €289 million relative to the €8,503 million figure at the end of 2004. In 2005, the Company exercised an early redemption clause on the €500 million of subordinated perpetual debt securities issued in March 2000, and on other subordinated debt lines for €90 million. Exchange rate effects, mainly dollar-related, increased debt by €301 million.
Unrealized foreign exchange gains were €461 million in 2005, compared to €746 million at December 31, 2004. This item reflects positive impacts derived from the revaluation of denominated foreign currency assets and liabilities at the balance sheet exchange rate. The sharp fall in 2005 was due to the dollar strengthening against the euro.
Appropriation of earnings The amount available for the appropriation of earnings stands at €3,165,643,248: – net income for the year €1,136,542,567 – retained earnings €2,029,100,681
In order to further protect the group net asset denominated in US$, AXA SA implemented $1,5 billion of foreign exchange hedges.
Outlook The company will continue its activity as a holding company in 2006.
December 31, 2005 Net carrying Net carrying Gross Amortizations Net value as value as carrying and provisions carrying at December 31, at December 31, value value 2004 2003
Net book value on the sale of fixed assets (29) (12,038) (171)
Sale or decrease in fixed assets – Tangible fixed assets 3 – 1
Share capital Other Percentage Gross Book Value shareholders’ of capital of securities held equity held
AXA EQUITY AND LAW PLC 1 1,544 99.96% 1,133 107 cheapside EC2V 6DU LONDON
(a) For Insurance companies: gross written premiums For real estate companies: rental revenues For holding companies: dividends For financial services companies: gross banking revenues
Net Book Value Loans and cash Guarantees and Last closing Last closing Dividends Closing date and of securities held advances given commitments revenues result received other observations by the company given available (a) available still outstanding by the company
AXA PORTUGAL COMPANHIA DE SEGUROS 37 42 83.01% 72 Praca Marquês de Pombal, 14 - 1058-801 Lisbonne 9, avenue de Messine - 75008 Paris 25 boulevard du Souverain - 1170 BRUXELLES
Cœur Défense - Tour B - La Défense 4 - 100 Esplanade du Général de Gaulle - 92932 PARIS LA DÉFENSE
B. General information about other units and participating interests 1) Subsidiaries not shown in section A a) French subsidiaries (total) 100 b) Foreign subsidiaries (total) 208 2) Participating interests not shown in section A a) in French companies (total) 39 b) in foreign companies (total) 59
For real estate companies: rental revenues For holding companies: dividends For financial services companies: gross banking revenues
01/01/2001 01/01/2002 01/01/2003 01/01/2004 01/01/2005 12/31/2001 12/31/2002 12/31/2003 12/31/2004 12/31/2005 1 - CLOSING BALANCE SHEET SUMMARY
b) Ordinary shares (numbers in million) 1,734 1,762 1,778 1,908 1,872 c) Bonds mandatorily convertible into ordinary shares 2 - INCOME STATEMENT SUMMARY
(a) Dividend of €0.88 per share proposed to the shareholders meeting on May 4, 2006, based on 1,871,605,004 outstanding shares.
“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. “European Embedded Value” (EEV) is a refinement of this methodology based on Principles issued by the CFO Forum of European insurers, which AXA adopted during 2005. AXA publishes EEV only for its life and savings business. The value can be considered in two pieces, 1) “Adjusted Net Asset Value” (ANAV) which measures the current balance sheet wealth, 2) “Value of Inforce” (VIF) which measures the present value of future shareholder profits for business currently in the portfolio, adjusted for the cost of holding capital that can not be distributed while the business is in force.
Euro million, except when otherwise noted Group share traditional EEV EEV Change Change at Change at
Constant scope eliminates the impact of acquisitions/divestitures in 2004 and 2005.
The ANAV can be further segmented into two pieces: 1) the Required Capital which represents an amount consistent with obtaining a AA rating at each operation, net of implicit items that can support capital requirements, and 2) the Free Surplus, which represents the excess of ANAV over the Required Capital.
– No productivity gains in the future are assumed, while inflation averaging 2.15% was assumed in both 2004 and 2005.
– Some benefit from future mortality improvement on Life business is included only in US and Japan, while annuity business does have an allowance for the costs of longevity increasing in all markets.
– A weighted average tax rate of 34.0% in 2004 and
As describe above, the VIF valuation under AXA’s market-consistent framework does not depend on assumed future asset returns, but rather on the actual risk-free yield curves observable in the market on each valuation date. The VIF valuation also depends on stochastic projections of multiple scenarios, rather than a single scenario. For comparison to traditional Embedded Values and other techniques, AXA performs a calculation that determines the “Implied Risk Discount Rate” (IDR) which would equate the cashflows from a single scenario with “real world” economic assumption to the VIF. The following table summarizes the “real world” assumptions for 2004 and 2005 used in determining the IDRs: FI Return Equity Return Cash Return Real Estate Return
The following table presents an analysis of the movement of EEV between 2004 and 2005: VIF Risk Discount Rate NBV Risk Discount Rate
Underlying performance from existing business considers the movements in EEV related to the business inforce at the beginning of the year, excluding the investment impacts that are shown below. The total operating performance of €1,961 million is analyzed in several components: – Expected return on VIF (Unwind of IDR) of €1,956 million is the mechanical effect of rolling forward the beginning of year VIF at the prior year Implied Risk Discount Rate (the unwind calculation is based on IDR multiplied by VIF + Required Capital).
Underlying Return on Life & Savings EEV of €3,100 million is the combination of the New Business Value and the underlying performance from existing business as just outlined. It represents 12% of the Opening Life & Savings EEV.
Current year investment experience of €401 million includes 1) the variance in experience during 2005 from that expected in the illustrative real world investment scenario at the end of 2004, and 2) the change in value created by reflecting yearend 2005 yield curves and investment conditions in the EEV rather than those of yearend 2004.
Exchange rate movements impact of €1,452 million is predominantly due to the strengthening of the US dollar versus the Euro. This amount does not reflect the impact of AXA’s foreign currency hedging program which is in the Holdings segment.
Closing Life & Savings EEV of €29,489 million is the total value at the end of the year, representing the prior year balance, plus Total Return, plus capital flows and the exchange rate impact.
Estimated downward parallel shift of 50 bp in risk-free rates (961) (86)
10% higher value of equity markets at start of projection 1,634 85 10% lower value of equity markets at start of projection (1,770) (90)
Overall and permanent decrease of 10% in expenses 1,124 108 5% lower mortality rate for annuity business (111) (1)
An independent actuarial consultancy, Tillinghast, was hired by AXA to perform a review, and has issued the following statement of opinion: “Tillinghast has assisted AXA in developing the methodology and reviewing the assumptions used in the embedded value at December 31, 2005, and the 2005 new business value for the principal life operations of the AXA Group. Our review included the analysis of movement in embedded value from December 31, 2004, and the sensitivities shown above.
The methodology and assumptions used also comply with the EEV Guidance (noting the disclosed exception concerning the treatment of affiliated investment management companies).
Tillinghast has also performed limited high-level checks on the results of the calculations and has confirmed that any issues discovered do not have a material impact on the disclosed embedded values, new business values, analysis of movement, and sensitivities. Tillinghast has not, however, performed detailed checks on the models and processes involved.
– Belgium (including AXA Bank Belgium) (c) 4,969 4,814 4,814 4,787
(a) The personnel at January 1, 2005 are included on a constant structural basis in relation to personnel at December 31, 2005: – Change in consolidation method in Turkey, Hong Kong and Singapore P&C (from equity method to full consolidation) as at January 1st, 2005. Those entities represent 996 salaried employees. – Salaried employees adjustment in Avenssur (France).
Starting January 1st 2004, (i) Italy, Spain and Portugal activities (previously under “Other countries”) are now reported as one geographical region “Southern Europe” and (ii) UK Property & Casualty segment is now presented including Ireland, which was previously under “Other countries”).
AXA initiated in 2006 a strategic review regarding the future of its reinsurance activity, currently underwritten by AXA Re and reported in the “International Insurance” segment. On April 7, 2006, AXA announced the receipt of a binding offer for the business of AXA RE from Paris Re Holdings Limited. Paris Re Holdings Limited is a newly-created company sponsored by a consortium of international investors led by Trident III, L.P., a fund managed by Stone Point Capital LLC, and in which AXA would take participation between 5% and 10%. Other lead investors include Hellman & Friedman, Vestar Capital Partners, Crestview Capital Partners, ABN Amro and New Mountain Capital.
To the best of my knowledge, and after having taken all reasonable steps to this effect, I hereby certify that the information contained in this registration document (document de référence) is in accordance with the facts and contains no omissions likely to affect its global meaning.
The historical financial information presented in this document is discussed in a report issued by the statutory auditors, which appears on pages 397-398.
Denis Duverne Member of the Management Board, in charge of Finance, Control and Strategy
Membership in a professional body : PricewaterhouseCoopers Audit is registred as an independent auditor with the Compagnie Régionale des Commissaires aux Comptes de Versailles.
MAZARS & GUÉRARD: 39, rue de Wattignies – 75012 Paris, represented by Patrick de Cambourg and Jean-Claude Pauly, first appointed on June 8, 1994. The current appointment is for a term of 6 years, until the annual general meeting of the shareholders called to approve the financial statements for the fiscal year 2009.
Membership in a professional body : Mazars & Guérard is registred as an independent auditor with the Compagnie Régionale des Commissaires aux Comptes de Paris.
Patrick Frotiée: 63, rue de Villiers – 92208 Neuilly-surSeine, first appointed on May 17, 1995. The current appointment is for a period of 6 years, until the annual general meeting of the shareholders called to approve the financial statements for the fiscal year 2005. The re-election of Mr Patrick Frotiée as Alternate Auditor, for a six-year term, is proposed to the General Meeting of shareholders on May, 4th 2006.
Table of compensation paid to independent auditors in 2005 and 2004
Information Items – Annex 1 of the Commission Regulation n° 809/2004 3. Selected financial information............................................................................................................................................................................................ 12 to 15 4. Risk factors ............................................................................................................................ 133 to 155, 285, 308 to 309, 310, 341 and 346 5. Information about the issuer 5.1. History and development of the issuer....................................................................................................................................... 4 to 5 and 76 5.2. Investments.................................................................................................................................................................................................................. 126 and 165 6. Business overview........................................................................................................................................................................ 99 to 120 and 159 to 163 7. Organizational structure 7.1. Brief description of the Group .................................................................................................................................................................................... 6 to 7 7.2. List of significant subsidiaries........................................................................................................................................................................ 272 to 278 8. Property, plants and equipment .................................................................................................................................................................................................... n/a 9. Operating and financial review .................................................................................................................................................................................. 168 to 225 10. Capital resources 10.1. Capital resources.................................................................................................................................................... 238 to 241 and 322 to 325 10.2. Sources and amounts of cash flows..................................................................................................................... 236 to 237 and 321 10.3. Borrowing requirements and funding structure.................................................................... 127 to 130 and 339 to 346 10.4. Restrictions on the use of capital resources............................................................................................................................................... 128 10.5. Anticipated sources of funds needed..................................................................................................................................................................... 93 11. R&D, patents and licenses................................................................................................................................................................................................................ n/a
Pursuant to AMF regulations no. 211-1 to 211-42, this shelf registration document was registered with the Autorité des Marchés Financiers (AMF) on April 13, 2006. It may be used in connection with a financial transaction only if accompanied by a transaction memorandum registered with the Autorité des Marchés Financiers.
Person responsible and the independent auditors Person responsible for the Annual Report 422