The profitability of our businesses largely depends on a variety of factors including social, economic and demographic trends (including, in the life insurance business, mortality and morbidity trends), policyholder behavior (including surrender and persistency rates), court decisions, changes in laws and regulations, inflation, investment returns and underwriting expenses. We make assumptions about these factors in estimating our risk exposures, determining the pricing of our products, establishing (re)insurance and employee benefits reserves and reporting capital levels and business results (using such industry measures of value as NBV or European Embedded Value (“EEV”)). These assumptions are based on various modeling techniques (e.g., scenarios, predictive, stochastic and/ or forecasting), using both proprietary and third-party models, data analytics and related analyses. Model outputs and related analyses are subject to various assumptions, uncertainties, model errors and the inherent limitations of any statistical analysis (including availability, use, accuracy and relevance of historical, internal and industry data) and incorporate numerous assumptions and forecasts about market conditions (such as interest rates, inflation and currency exchange rates), capital requirements, loss frequency and severity, and policyholder behavior. The use of such models can also be affected by operational risks, including input, data and human error. Adverse experience relative to such assumptions, use of and reliance on inaccurate or incomplete models, or inherent product defects may result in an increase in the pricing of our insurance products or the need for us to strengthen our product reserves, which may in turn have an adverse eff ect on our results of operations and financial position, or lead to litigation.
The occurrence of natural or man-made disasters, including those resulting from changing weather patterns and climatic conditions, could adversely aff ect our financial condition, profitability and cash flows
In 2018, we acquired XL Group, a leading Property & Casualty Commercial lines insurer and reinsurer with a significant specialty platform and a strong presence in North America, Europe, Lloyd’s and Asia-Pacific. XL Group’s operations are significantly exposed to natural and man-made catastrophes and, as a result, our overall exposure to such events has increased compared to prior years, particularly in the United States and in the reinsurance sector.
Catastrophic events, whether natural or man-made, such as hurricanes, tornadoes, windstorms, hailstorms, earthquakes, volcanic eruptions, freezes, floods, explosions, wildfires, pandemic diseases, terrorist attacks, cyber events, systemic cyber failures, military actions, and power grid and other core infrastructure (e.g., telephony or Internet infrastructures) failures could result in substantial volatility in or adversely aff ect our operations, results, financial condition, cash flows or solvency position, including as a result of claims occurring at higher levels or materially earlier than anticipated; losses resulting from disruptions in our operations or failures of our counterparties to perform; or declines in value of our investment portfolio. We monitor the evolution of these risks closely and generally seek to manage our exposure to them through individual risk selection, modelling and monitoring overall exposures and risk accumulation, purchase of third-party reinsurance, risk transfer transactions to capital markets and use of available data in estimating potential catastrophic risks. There can be no assurance, however, that we will be able to adequately anticipate such evolution, as a single catastrophic event, an accumulation of losses resulting from several events or an unusual frequency of smaller losses in a particular period may affect multiple geographic areas and lines of business, and the frequency or severity of catastrophic events could exceed our estimates. Accounting principles and rules preventing (re)insurers to reserve for catastrophic events until they occur may also augment the impact of such events.
Over the past several years, changing weather patterns and climatic conditions, including as a result of global warming, have added to the unpredictability, frequency and severity of natural disasters and created additional uncertainty as to future trends and exposures. In particular, the consequences of climate change might significantly impact the insurance and reinsurance industry, including with respect to risk perception, pricing and modelling assumptions, and the need for new insurance products, all of which may create unforeseen risks not currently known to us.
The Property & Casualty insurance and reinsurance businesses are cyclical, which may impact our results
Historically, Property & Casualty insurers and reinsurers have experienced significant fluctuations in operating results due to volatile and sometimes unpredictable developments, many of which are beyond the direct control of the insurer/ reinsurer, including competition, frequency or severity of loss events, levels of underwriting capacity by region or product line, general economic conditions and other factors, including the development of the insurance-linked securities market and other alternatives to traditional Property & Casualty insurance and reinsurance products. Changes in customer expectations for appropriate premium levels, the frequency or severity of claims or other loss events, including losses incurred by our ceding insurers, or other factors aff ecting the Property & Casualty insurance business may have an adverse eff ect on our results of operations and financial condition.
We employ a range of risk mitigation strategies, including reinsurance for own account and capital markets solutions (such as catastrophe bonds), in order to avoid or limit losses and liabilities. The failure of any of our r isk m anagement strategies could result in significant losses and have a material adverse impact on our financial condition, results of operations, and cash flows.
We use derivatives (including equity futures, treasury bond futures, interest rate swaps and swaptions, equity options and variance swaps) to hedge certain, but not all, risks under guarantees provided to our clients, including the guarantees on variable annuities. On a substantial part of the in-force portfolio and for all new vintages of business, these hedging instruments are coupled with volatility risk mitigation techniques.
Interruptions or disruptions of our systems, technologies and networks, or those of our third-party providers (including thirdparty providers deemed critical to our principal activities), or a failure to maintain the availability, integrity or confidentiality of sensitive data residing on such systems or technologies, or transmitted through these networks, could potentially result in financial loss, impairment to our liquidity, a disruption of our businesses, legal claims, regulatory sanctions or damage to our reputation, any of which could materially adversely aff ect our results of operations or financial condition.
For additional information on the risks relating to the protection of personal data, see the paragraph below “The evolving and complex regulatory environment surrounding data protection and transfer in the European Union could increase our costs and adversely impact our business”.
Inadequate or failed processes, controls or systems, human factors or external events may adversely aff ect our profitability, reputation or operational eff ectiveness
Operational risk is inherent in our business and can manifest itself in various ways, including business interruption, poor vendor performance or default (including under significant outsourcing arrangements), systems malfunctions or failures, computer viruses, hacking incidents and/or other unauthorized access to our websites and/or systems, misappropriation of sensitive information, corruption of data or operational disruption, regulatory breaches, human errors, defective products, external fraud, natural or man-made disasters and terrorist attacks. We are also exposed to risks arising from potential failures in, or non-compliance with, Group and entity policies concerning such matters as internal controls and procedures and financial reporting policies, as well as from employee misconduct or negligence and fraud. While we take measures to manage such risk, operational risk is part of the business environment in which we operate and we may incur losses from time to time due to these types of risks, as well as impairments to our liquidity, disruption of our businesses, legal claims, regulatory sanctions or damage to our reputation. The risk of operational failure or termination of any of the clearing agents, exchanges, clearing houses or other financial intermediaries we use to facilitate our securities transactions could have similar adverse eff ects.
Our business is highly dependent on the eff ective operation of our information technology, telecommunications, electronic data and other operational systems. We rely on these systems to perform necessary business functions, including providing insurance quotes, processing applications and claims, providing information and support to customers and distributors, administering complex products, conducting actuarial analyses and keeping financial records. We also use computer systems to store, retrieve, evaluate and utilize significant amounts of sensitive customer, employee and company data and information, including proprietary and confidential information. Some of these systems, in turn, rely on third-party systems. Systems failures or outages could compromise our ability to perform necessary business functions in a timely manner, which could harm our ability to conduct business and hurt our relationships with our customers and business partners. In the event of a disruption, our systems may be inaccessible, and our employees unable to perform their duties, for an extended period of time.
From time to time, we may also consider acquisitions of or investments in other companies, including through joint ventures. Any such acquisition or investment may be subject to approvals from regulatory authorities in certain countries, including as a result of foreign investment regulations and controls, which may lead to the transfer of certain assets or branches of activity and/or commitments or restrictions aff ecting the conduct of our business.
The insurance and reinsurance industry faces disruptive competitive challenges from the emergence of new actors, such as financial technology companies, or fintech, and insurance technology companies, or insurtech, which generally benefit from less extensive regulatory requirements (including less strict capital requirements) as well as from data synergies or technological innovation. In addition, development of alternative distribution channels for certain types of insurance and securities products, including through the Internet, may result in increasing competition as well as pressure on margins for certain types of products. Continued consolidation of the insurance and reinsurance sector may also result in increased competition.
In addition, the rapid increase in the nature, volume and availability of data in recent years, whether resulting from connected customers, so-called “big data”, “blockchain”, cloud computing, personalization of genetic data, asymmetric information with respect to genetic testing, artificial intelligence or otherwise, may have unanticipated and adverse impacts on our business, for example by changing the nature of insurance underwriting and pricing; by allowing customers and competitors to tailor coverage in ways that we do not currently off er; or by potentially exposing us to increased “moral hazard” in business lines where we are unable for regulatory or other reasons to adjust pricing or coverage to reflect individual risk profiles. While data-driven changes in the industry are at an early stage and diff icult to predict, they could adversely impact our business going forward, including through the expense and eff ort that we will need to incur in order to ensure that our employees, systems and processes are able to eff iciently adapt to and manage such changes as they arise.
In addition, part of our (re)insurance business is underwritten by third parties under contractual arrangements which typically authorize such third parties to bind us to new policies and to renew policies, within the terms of our licenses and subject to various contractual obligations and restrictions. If these third parties do not abide by the terms of our licenses and breach their contractual obligations to us, we could be subject to fines, penalties, injunctions or other similar restrictions for breach of outsourcing/licensing requirements and be liable under the policies issued by breaching third parties.
The AXA Group’s Solvency II ratio is sensitive to capital market conditions (including the level of interest rates, the level of equity markets and foreign exchange impacts) as well as other economic factors generally. For additional information on the sensitivity of our Solvency II ratio to capital market conditions, please refer to the AXA Group’s SFCR, available on AXA’s website (www.axa.com) (1).
Additional regulatory developments regarding solvency capital requirements, including changes to the Solvency II framework, may adversely aff ect our prudential regime as well as increase associated costs. There can be no assurance that contingency plans developed by management will be eff ective to achieve their objectives and any failure by us and/or our (re)insurance subsidiaries to meet minimum regulatory capital requirements and to maintain regulatory capital at competitive levels could have a material adverse eff ect on our business, liquidity, credit ratings, results of operations and financial position.
Regulatory and other legal and contractual restrictions may limit our ability to transfer funds freely, either to or from all our subsidiaries. In particular, our principal (re)insurance subsidiaries are subject to restrictions on the amount of dividends and debt repayments that can be paid to us and our aff iliates. Financial covenants in letters of credit and revolving credit facilities of our subsidiaries may also restrict their ability to declare and pay dividends.
Moreover, our status as an Internationally Active Insurance Group (“IAIG”) under the Common Framework for the Supervision of IAIGs (the “ComFrame”) developed by the International Association of Insurance Supervisors (“IAIS”) could, in case of adoption of implementing legislation in relevant jurisdictions, result in the imposition of similar or other restrictions on the transfer of funds, including intra-group financing arrangements, which could negatively impact the fungibility of our capital. These factors may adversely impact our liquidity position and capacity to pay dividends.
The AXA Group operates in 62 countries around the world and our operations are subject to a wide variety of insurance and other laws and regulations. Our regulatory environment is evolving rapidly and supervisory authorities around the world are assuming an increasingly active and aggressive role in interpreting and enforcing regulations in the jurisdictions in which we do business, resulting in significant compliance challenges. While M anagement cannot predict whether or when future legislative or regulatory proposals may ultimately be enacted and the final form they will take, certain of these proposals, if enacted, could have a material adverse impact on our business activities, results of operations and financial condition. We expect that new laws and regulations will increase the cost of doing business, including our operating costs, as well as our legal and compliance costs.
In recent years there also has been an increase in legislative and regulatory initiatives and enforcement actions in the areas of financial crime compliance, anti-money laundering, international trade sanctions and anti-bribery laws and regulations (including the US Foreign Corrupt Practices Act, the UK Bribery Act of 2010, the French Sapin II Act of 2016, and the various implementing measures of Directive 2015/849 of May 20, 2015, as amended, including enhanced control on transactions involving high risk countries and requirements regarding disclosure of beneficial ownership) and consumer protection (including Directive (EU) 2016/97 of January 20, 2016 on insurance distribution (as amended, the “IDD”), Directive 2014/65/EU of May 15, 2014 on markets in financial instruments (as amended, “MiFID II”) and Regulation (EU) No. 1286/2014 of November 26, 2014 on key information documents for packaged retail and insurance-based investment products (as amended, the “PRIIPs Regulation”)). Regulatory authorities have also proposed reforms to and potential changes aff ecting interest rate, equity, foreign exchange rate and other types of indices (also known as “benchmarks”), such as Libor and Euribor. Implementation of these and any future regulations, amendments to existing regulations, or future or revised guidance issued by regulatory authorities (such as European Securities and Markets Authority , EIOPA, the AMF and the FCA) may increase our legal and compliance costs, limit or restrict our ability to do business or expose us to civil, criminal or regulatory actions, proceedings or sanctions, which may adversely impact our brand or reputation.
In addition, the applicable accounting standards, particularly IFRS as developed by the International Accounting Standards Board (“IASB”), are in a state of constant evolution, and the resulting changes could significantly impact insurers and other financial institutions, including AXA, that prepare their consolidated accounts in accordance with IFRS. In particular, IFRS 17 – Insurance Contracts, which will replace IFRS 4, may significantly aff ect the accounting treatment of policyholder liabilities. Subject to adoption by the European Union, IFRS 17 is scheduled to become eff ective for annual periods beginning on or after January 1, 2021. Given the interaction between financial assets and technical insurance liabilities, entities issuing insurance contracts within the scope of IFRS 4 may, under certain criteria, defer the implementation of IFRS 9 – Financial Instruments, until the effective date of IFRS 17, but no later than January 1, 2021. The Group is eligible for this temporary exemption and decided to apply it. On November 14, 2018, the IASB voted to propose a one-year deferral to January 1, 2022 of (i) the eff ective date of IFRS 17 and (ii) the expiry date of the temporary exemption from applying IFRS 9. This deferral and other proposed amendments to IFRS 17 remain subject to the final approval of IASB and their adoption by the European Union. The implementation of these standards within the Group is in progress, and M anagement is currently assessing the impact of their adoption.
The global nature of our business exposes us to a wide variety of local political, regulatory, business and financial risks and challenges, and our exposure to such risks may increase as a result of our recently acquired XL business, which may aff ect the demand for our products and services, the value of our investment portfolios, the levels of capital and surplus that we are required to hold, and the credit quality of our counterparties.
These risks include, for example, political, social or economic instability in the countries in which we operate, including the risk of nationalization, expropriation, price controls, capital controls, restrictions on foreign trade and investment (such as changes to authorized levels of foreign ownership, which may aff ect our ability to conduct business in certain countries through joint ventures), fluctuations in foreign currency exchange rates, credit risks of our local borrowers and counterparties, lack of local business experience in certain markets, risks associated with exposure to insurance industry insolvencies through policyholder guarantee funds or similar mechanisms and, in certain cases, risks associated with the potential incompatibility with foreign partners, especially in countries in which we are conducting business through joint ventures or other entities that we do not control.
Certain of these lawsuits and investigations seek significant or unspecified amounts of damages, including punitive damages, and certain of the regulatory authorities involved in these proceedings have substantial powers over the conduct and operations of our business. The introduction of a class action system in France in 2014 and similar developments in certain other European jurisdictions and at the EU level have increased, and are likely to continue to increase litigation risks and costs. For additional information, please refer to Section 6.3 “General Information – Regulation and Supervision” of this Annual Report.
The evolving and complex regulatory environment surrounding data protection and transfer in the European Union could increase our costs and adversely impact our business
Regulation (EU) 2016/679 of April 27, 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data (as amended, the “GDPR”) entered into force on May 25, 2018. GDPR significantly modified the EU data protection framework and, in particular,
In addition, there is a risk that data collected by the Group and its third-party service providers is not processed in accordance with notifications made to, or obligations imposed by, data subjects, regulators or other counterparties or in compliance with GDPR and other applicable law. The Group’s IT and other systems may also in the future be subject to hacking and unauthorized intrusions, such as physical or electronic break-ins, unauthorized tampering or security breaches or other intentional or unintentional acts by parties acting from within or outside the Group, which could result in sensitive data (including customer and employee data) being stolen, lost or misused. Negligence or failure to implement and follow internal Group policies, in particular regarding encryption of data, or perform adequate internal data collection/processing controls may also facilitate hacking and other intrusions and result in breaches of GDPR and other applicable laws.
In this context, AXA has (i) put in place a control framework with three lines of defense with boundaries between each of them clearly defined and (ii) established four key functions.
3rd line of defense responsible for providing independent assurance on the eff ectiveness of the overall control environment
The four key functions are: ■ the risk-management function is responsible for coordinating the second line of defense, ensuring that the risk appetite is implemented with respect to all risks, and in charge of the design, implementation and validation of AXA Group economic capital model which is the basis for the Group Solvency II internal model (“Internal Model”), the documentation of the Internal Model and any subsequent changes made to it as well as the analysis of the performance of this model and the production of summary reports thereof. The holder of the riskmanagement function, including the internal control function, at Group level is the Group Chief Risk Off icer and Head of the Group Insurance Off ice; ■ the compliance function (the “Compliance function”) is responsible for advising on compliance with laws, regulations and administrative provisions regarding insurance, reinsurance,
■ propriety, taking into account reputation, financial soundness and personal characteristics such as integrity and transparency (proper).
Furthermore, appointments to any of these positions must be notified to the French Autorité de contrôle prudentiel et de résolution (“ACPR”), through a formal process, including submission of a detailed questionnaire addressing the fitness and propriety of each person, as well as detailed background information.
The Board of Directors is responsible for ensuring that an appropriate and eff ective system of internal control and Risk Management is in place across the Group. In this context, it can undertake all controls and verifications as it deems appropriate.
The Board of Directors has established three Committees to assist it in fulfilling its responsibilities: an Audit Committee, a Finance Committee and a Compensation & Governance Committee. All the Board Committees constitute an important part of the Group’s overall internal control environment, and play a major role in reviewing internal control and Risk Management related issues.
The Audit Committee (i) considers the Group’s internal control systems and procedures for Risk Management with a view to obtaining reasonable assurances as to their eff ectiveness and consistent application, and (ii) monitors the Group’s major risk exposures and sensitivities (insurance and operational), the results of the risk assessments performed, and the steps management has taken to monitor that such exposures remain within the risk appetite set by the Group.
The Finance Committee examines any subject relating to the financial management of the Group and in particular the policy on financial Risk Management (including management of foreign exchange and interest rates exposure), the issues relating to the liquidity and financing of the Group, the capital and solvency.
The ARCC reports back to the Management Committee on a regular basis. The ARCC also reviews and discusses the proposed agenda items for the Audit Committee and Finance Committee with a view to ensuring that these agendas include the appropriate items.
The control framework with three lines of defense has been designed to ensure that the risks that the AXA Group may face are systematically identified, measured, managed and controlled.
When appropriate, this role leads to the implementation of decisions that aff ect the Group’s risk profile, helping to monitor the solvency position and manage the volatility of the Group’s earnings through improved understanding of the risks taken and optimization of capital allocation.
The ERM framework is based on the following five pillars, cemented by a strong risk culture: of Risk Management at AXA
5. Proactive Risk Management: Chief Risk Officers are responsible for early detection of risks. This is ensured through challenge of and constant dialogue with the relevant business and supported by the AXA Group’s emerging risks management framework.
The Group Compliance Chief Off icer reports to the Group Deputy Chief Executive Off icer & Group General Secretary.
The Compliance section of the Group Standards contains standards and policies on significant risk areas affecting compliance activities and sets out the high-level controls and monitoring principles to which the entities must adhere. Adherence to the Standards and Policies (e.g. Anti-Money Laundering, Sanctions, Anti-Bribery) is mandatory.
The Global Head of Internal Audit reports to the Chairman of the AXA Group Audit Committee with an administrative reporting line to the Group Chief Executive Off icer.
A report is issued at the conclusion of each audit assignment to the relevant senior management. The results of the audits and resolution status of internal audit issues are presented to the relevant Audit Committee and Executive Management Committee on a regular basis.
Governance: The Group Governance Standards require, among other things, the Boards of AXA’s main subsidiaries to establish an Audit Committee. The Audit Committees have a critical role in reviewing financial results and other financial information prepared by the management of these subsidiaries, financial reporting and control processes, critical accounting policies, specific accounting issues, key risks and systems of internal control, fraud and similar issues.
Chief Executive Off icers are required to certify annually to the Group Chief Executive Off icer that to the best of their knowledge their entities comply with the Standards. Entity Boards must be formally informed of the Annual Certifications, together with any material breaches, areas of non-compliance and corresponding mitigation plans in order to monitor progress of remedial actions.
Risk Management: Risk Management is a local responsibility, in accordance with GRM standards and guidelines. The roles and responsibilities of local Risk Management teams are validated jointly by the Executive Committees of local entities and the Group’s Chief Risk Off icer to ensure the alignment of central and local interests.
The minimum missions required for local Risk Management teams are: ■ coordinating the second line of defense locally (which covers among others Compliance, Internal Control, Security) through a specific system of governance framework; ■ ensuring that the risk appetite is implemented with respect to all risks consistently with the Group’s risk appetite, with enhanced reporting, risk limits and decision processes; ■ providing a second opinion on key processes, such as the definition of characteristics for new products before launch, reserves, ALM studies & asset allocation and reinsurance strategies; ■ with respect to the Internal Model, local Risk Management teams are responsible for checking the adequacy of the local risk profile, and for implementing, testing and validating the Internal Model.
Local Chief Risk Off icers head the local Risk Management teams within each operational entity, and report both to their local Chief Executive Off icer and to the Group Chief Risk Off icer. They are independent from operations and Internal Audit Departments. Local Chief Risk Off icers regularly report to the local Board of Directors (or to a sub-committee) on Risk Management matters.
Internal Control: Internal Control is a local responsibility in accordance with Internal Control Standard and Policy. Entities are expected: ■ to define and document their controls and control procedures covering all important risks and processes (First Line responsibility); ■ to regularly verify and challenge the effectiveness of the control environment (Second Line responsibility); ■ to implement a comprehensive monitoring and reporting on internal control deficiencies at a senior level of the organization to ensure that these are rectified in an adequate and timely manner.
The PBRC Department within the Group Finance Department is responsible for consolidation, management reporting, as well as actuarial indicators and the economic balance sheet. These missions are performed for regular closings, forecasts and strategic plan exercises. PBRC works with local PBR units within the Finance Departments of Group subsidiaries.
■ fostering convergence of accounting and financial reporting processes, systems and organizations for insurance activities in Europe.
PBRC has defined and implemented a set of policies and procedures to ensure that the consolidation process leading to the consolidated financial statements is timely and accurate. This consolidation process is based on the following: Definition of standards and use of a centralized information system
The IFC program is based on the Group’s IFC Standard, which is an internal control and governance standard based on the “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). It is designed to ensure consistency and quality in AXA Group’s financial reporting, and provide an overall framework for the annual IFC program precising the scope of application and governance.
The entities in IFC scope are required to document their significant processes and key controls, as well as the rationale of how the associated risk of material misstatement due to error or fraud can be reduced to an acceptable level. This is performed under the supervision of the Chief Financial Off icer, sponsor of the IFC program. The independent Internal Financial Control function, anchored within Risk Management for most entities, is in charge of testing the design and operational eff ectiveness of those key controls, and ensuring that identified control deficiencies are remediated.
eff ectiveness of disclosure controls and procedures and ICOFR at companies under his/her responsibility (with specific disclosure of any significant deficiencies or material weaknesses). In addition, as part of this “sub-certification” process, these executives are required to review and comment on a number of cross-sectional disclosures in the Registration Document relating to risk and other matters; 4. Chief Financial Off icer Sign-Off Certificates on notes to the Consolidated Financial Statements: PBRC provides Chief Financial Officers with the contribution of the entities under their responsibility to the Consolidated Financial Statements in order to facilitate their certification on the accuracy and completeness of the information in the Registration Document of the Group.
The Group has established a comprehensive system of internal control procedures and mechanisms that management believes appropriate and adapted to its business and the global scale of its operations.
Under Solvency II, the Group and certain of its subsidiaries (i.e. all insurance and reinsurance entities in the European Economic Area and insurance and reinsurance entities outside the European Economic Area that are within the scope of the Internal Model) are each required to produce an ORSA report which is filed with the applicable national supervisor. At Group level, the Group Chief Risk Off icer is responsible for developing the ORSA policy, implementing the ORSA process and coordinating the ORSA reporting.
The Group ORSA report is reviewed annually by the Solvency II Committee and then presented, first, to the ARCC and the Audit Committee of the Board of Directors, and finally to the Board of Directors, which approves the conclusions of the Group ORSA report and authorizes its filing with the ACPR.
Beyond the annual ORSA report, a quarterly assessment is performed to update the Group’s risk profile against Risk Appetite limits and adapt management actions accordingly. This information is reported to the Finance Committee of the Board of Directors and to the ARCC which regularly reviews all material audit, risk and compliance issues faced by the Group.
ORSA encompasses processes to identify, assess, monitor, manage and report the short to medium term risks to which the Group is exposed and to ensure the adequacy of the level of own funds within the Group solvency targets, taking into account the Group’s risk profile, approved risk appetite limits and business strategy. As an important component of the Risk Management system, it is intended to give a comprehensive and complete vision of the risks embedded in the businesses of the Group on a continuous basis.
■ risk assessment and review of strategic risk, reputation risk, regulatory risk and emerging risk.
AXA continues to review regularly the scope, underlying methodologies and assumptions of the Internal Model and will adjust its SCR accordingly. In addition, AXA’s Internal Model has been and may be revised from time to time in accordance with applicable regulations. However, any significant change to the Internal Model would be subject to the prior approval of the ACPR, which may require adjustments to the level of SCR. In addition, the Group monitors EIOPA’s work program which, through its objectives, is also expected to continue to carry out consistency reviews of European insurers’ internal models. Such review may lead to further regulatory changes to increase convergence and to strengthen oversight of cross-border groups, as well as changes to internal models and Solvency II capital requirements.
The Group’s main goal in using its Internal Model as opposed to the Solvency II standard formula is to better reflect the Group’s risk profile in its SCR. This is reflected through several objectives: ■ taking into account local specificities – The Group is a global company, and caters to a wide range of insurance markets with a variety of products off ered targeting certain demographics and with diff ering risk exposures. It is therefore appropriate, to the extent possible, to calibrate stresses specific for these risk profiles and to allow for the benefits of diversification of risks which arise as a result of being spread over these markets;
■ addressing shortcomings inherent to the standard formula – Based on its expertise, the Group can improve on the approach of the standard formula, which is naturally constrained by its general scope and which does not cover all measurable risks, and have models more appropriate to the scope of the Group; and
■ allowing for better evolution of the model over time – As the Group’s experience increases, business expands to new markets and product innovations create diff erent risks to consider, the flexibility of an internal model allows the specificities of these developments to be reflected.
The SCR, calculated on the basis of the Internal Model, represents the value at risk of Group Eligible Own Funds at the 99.5th percentile over a one-year horizon. In other words, the Solvency Capital Requirement is the capital needed to sustain an extreme shock likely to occur with a 0.5% probability. It aims at including all measurable risks (market, credit, insurance and operational) and reflecting the Group’s diversified profile.
These analyses quantify, for instance, the potential impact on the AXA Group’s Solvency II ratio of (i) financial shocks on corporate bond and sovereign spreads, on interest rates, and on equity and (ii) a wide range of shocks reflecting historical stress events (such as the 2008-2009 financial crisis, the 2011 financial crisis, the 1918 Spanish flu and the 1999 Lothar & Martin storms).
These sensitivity analyses do not take into account preemptive management actions that might be taken to mitigate the eff ects of the defined shocks, nor indicate a probability of occurrence, but, are designed: ■ to demonstrate that the AXA Group Solvency ratio is resilient to a wide range of shocks; ■ to ensure through the risk appetite framework that the management reviews and acknowledges the risks that arise in their company, understands the consequences of an adverse development of these risks, and have action plans that can be implemented in case of unfavorable developments; and
The Solvency II ratio as of December 31, 2018, published on February 21, 2019 was estimated at 193% (2), compared to 205% as of December 31, 2017 and remains within AXA’s target range of 170-220%.
(2) The Solvency II ratio is estimated primarily using AXA’s internal model calibrated based on an adverse 1/200 years shock and assuming equivalence for AXA Equitable Holdings, Inc. in the US. As in previous disclosures all AXA US entities are taken into account assuming US equivalence. The solvency capital requirement in respect of the entities that were part of the XL Group (“XL entities”) as at December 31, 2018 was calculated in accordance with the equivalence regime, based on the Bermudian Standard Formula SCR, plus a 5% add-on required by the AXA Group’s lead supervisor (ACPR), as a transitional measure. For additional information, please refer to Section 4.2 “Internal control and Risk Management - Internal Model” of this Annual Report. The Solvency II ratio will be finalized prior to the publication of the AXA Group’s SFCR currently expected to be on May 23, 2019.
The Group validation policy is supplemented by local validation policies specifying the local validation activities and responsibilities.
Risk Management performs regular integrated validation activities, described in the Internal Model validation policy, mostly organized around: ■ validation of the model structure, modelling choices, parameters and assumptions; and
Apart from this fully integrated validation, sanctioned by Chief Risk Off icer’s review and sign-off , a comprehensive independent review process has been defined and implemented to provide adequate comfort to AXA Group Management and Board of Directors that the model and its outputs meet a “fit for purpose” standard.
The independent reviews are performed by the following two internal teams: ■ IFC teams, at local and Group level, responsible for assessing the eff ectiveness of internal control framework over Solvency II, on the basis of the testing of processes and controls over the EOF and STEC, at least annually; and
The AXA Group, as an insurance group, follows an investment strategy mainly driven by Asset Liability Management (“ALM”). The overall objectives of all investment decisions made within the Group are to meet the Group’s obligations and commitments to policyholders, to protect the solvency of the Group’s entities, and to generate superior return over time.
Local investment & ALM activities are steered by local CIOs. Local CIOs manage local portfolios, aiming at an optimized risk-return ratio, maintain reporting lines to the Group, and manage close relationships with asset managers and local stakeholders. Moreover, they are responsible for the investment performance and for implementing and executing a sound Asset Liability Management.
In order to eff iciently coordinate local and global investment processes, decisions within the Group’s investment community are taken by two main governance bodies: ■ the Group Investment Committee, which is chaired by the Group Chief Financial Officer. This Committee defines the Group’s investment strategy, steers tactical asset allocation, evaluates new investment opportunities and monitors the Group’s investment performance; and
At the entity level, each insurance company has a local Investment and ALM Committee whose terms of reference are approved by the local Executive Committees.
For a large proportion of its assets, the Group utilizes the services of asset managers to invest in the market: ■ local AXA companies assign the day-to-day management of their asset portfolios primarily to AXA’s Asset Management subsidiaries, i.e. AXA Investment Managers, Architas and AB. Local CIOs continuously monitor, analyze, and challenge asset managers’ performances; and
A wide variety of Risk Management techniques are used to control and mitigate the market risks to which the Group is exposed. These techniques, used primarily in all operating subsidiaries, include: ■ local risk appetite governance and processes, including functional limits on market risks defined locally and approved by the local Board or Executive Committee; ■ Asset Liability Management (ALM), i.e. defining an optimal strategic asset allocation with respect to the liabilities’ structure in order to reduce the risk to a desired level; ■ a disciplined investment process, requiring for any sophisticated investment a formal thorough analysis by the Investment Department, and a second opinion by Risk Management; ■ hedging of financial risks when they exceed the tolerance levels set by the Group. Operational management of derivatives is based on stringent rules and is mainly performed by AXA SA for the holding company activities and Group asset managers, AXA Investment Managers and AB for operating units as well as AXA Bank Belgium and AXA US for the hedging program of Variable Annuities’ guarantees; ■ a regular monitoring of the financial risks on the Group solvency ratio; and
Synthetic reports, including information about hedging strategies, are sent to and reviewed by the Finance Committee of AXA’s Board of Directors five times a year.
AXA Group analyzes sensitivities to movements in interest rates and equity markets looking at two diff erent measures: ■ sensitivities of the Group Eligible Own Funds (EOF), as described below; ■ sensitivities of Group Solvency II ratio (please refer to Section 4.2 “Internal control and Risk Management” of this Annual Report (1).
■ Other adjustments between IFRS TNAV and Group EOF unrestricted Tier 1 (€+4.2 billion), notably the treatment of XL insurance subsidiaries under the equivalence regime (€+4.4 billion).
Group EOF are then the sum of unrestricted Tier 1, restricted Tier 1, Tier 2 and Tier 3.
2018 interest rate sensitivities for Life & Savings business (% of L&S EOF) of 3% to upward 50 bps and -5% to downward 50 bps show an asymmetry mainly driven by guaranteed interest rates having higher value when interest rates decrease, while higher reinvestment returns would need to be shared with policyholders limiting shareholders’ gains in a higher rate environment. However this classical pattern is not followed everywhere, as for certain type of business with significantly low interest rate guarantees, the EOF behaves more like a portfolio of fixedincome assets. In addition, higher interest rates aff ect the value both positively through higher investment rate and negatively through lower starting value of fixed income assets and higher discount rates for future profits. For diff erent product types these interactions produce diff erent results.
2018 equity market sensitivities for Property & Casualty business (% of P&C EOF) of 3% to 25% higher value and -3% to 25% lower value reflect the impacts on equities including derivatives on equities.
■ France: 24% of Group assets at the end of 2018 (26% in 2017): In France, AXA was exposed to exchange-rate risk for a total amount of €19,424 million at the end of 2018 (€18,751 million in 2017) held both directly and indirectly through investment funds partly invested in foreign currencies (US Dollar: €16,134 million versus €14,884 million in 2017, Pound Sterling: €2,781 million versus €2,581 million in 2017 and Japanese Yen: €248 million versus €261 million in 2017). This exposure allows AXA France to diversify its investments and enable policyholders to benefit from the performance of international financial markets. AXA France offsets its exposure to exchange-rate risk by using foreign exchange forwards and other derivatives (notional of €15,632 million versus €15,815 million in 2017).
■ Europe: 30% of Group assets at the end of 2018 (32% in 2017): Switzerland
In Switzerland, AXA entities are exposed to exchange-rate risk through their investments in foreign currencies (mainly Euro and US Dollar) due to limited investment possibilities in the Swiss market. A major portion of the exposure is hedged back into Swiss Francs with foreign exchange swaps, options and forwards. At the end of 2018, Switzerland foreign exchange exposure amounted to €24,473 million (€33,188 million in 2017) which represented 28% of total assets (38% of total assets in 2017), of which €21,838 million were hedged (€29,568 million in 2017).
In Belgium, AXA held investment s in foreign currency for €1,771 million in 2018 both directly and indirectly through physical assets. These investments are mainly in US Dollar for €1,116 million and in Pounds Sterling for €374 million. The exchange-rate exposure on Assets is hedged for €1,315 million using mainly foreign exchange forwards, c ross c urrency s waps and c ollar options strategies.
In the United Kingdom, AXA is exposed to exchange-rate risk through its AXA Insurance and AXA PPP Healthcare subsidiaries, which operate in Pound Sterling, and through AXA Ireland which operates in Euro. It has diversified its investment portfolios in line with Asset Liability Management objectives. AXA UK held investments denominated in foreign currencies for €4,078 million (€3,745 million in 2017) mainly in US Dollar (€2,496 million), with further UK exposure to the Euro (€1,097 million) and exposure to Pound Sterling (€264 million) in Ireland. This exposure is held both directly and indirectly through investment funds (CLO funds, Alternative Credit funds, Assets Backed Securities, Commercial Real Estate loans and other investment funds). Of this exposure, €3,535 million is hedged through foreign exchange forwards, options or cross currency swaps, with a further €374 million of exposure hedging liabilities held within the business.
In Spain, AXA entities held investments in foreign currency for €907 million in 2018 (€864 million in 2017), directly and indirectly through physical assets. These investments are mainly in US Dollar €760 million (€764 million in 2017). Exchange-rate risk exposure is hedged for a notional amount of €908 million using mainly foreign exchange forwards and currency swaps.
In Italy, AXA held investments in foreign currency for €1,111 million in 2018 (€1,422 million in 2017) both directly and indirectly through physical assets. These investments are mainly in US Dollar for €913 million (€1,218 million in 2017). The overall exchange risk exposure is managed within the FX limits approved in the correspondent Local Investment Committees. Unhedged e xchange-r ate exposure amounts to €158 million.
■ Asia: 8% of Group assets at the end of 2018 (8% in 2017): Japan
These investments are mainly in US Dollar €14,064 million (€12,802 million in 2017), in order to take advantage of the US bond market which is more developed than the HK bond one notably in terms of liquidity and available maturities. Exchangerate risk exposure is hedged using foreign exchange forwards and cross currency swap for a notional amount of €5,684 million.
■ AXA XL: 7% Group assets at the end of 2018 (1 % in 2017): XL Group
In the course of its business, AXA Corporate Solutions Assurance carries some insurance liabilities denominated in foreign currencies, particularly in US Dollar (€1,192 million at the end of 2018 versus €1,193 million in 2017) and, to a lesser extent, Pound Sterling (€397 million at the end of 2018 versus €372 million in 2017). AXA Corporate Solutions Assurance carries assets denominated in foreign currencies to ensure balance sheet congruence. The congruence between the Company’s foreign currency assets and liabilities is regularly adjusted.
■ Transversal and Central Holdings: 6% of Group assets at the end of 2018 (7 % in 2017): AXA SA & other Central Holdings
At December 31, 2018, the main hedging positions of AXA SA were as follows: Foreign currency hedging
These limits aim at managing the default risk of a given issuer, depending on its rating and on the maturity and seniority of all bonds issued by the issuer and held by the AXA Group (corporate, Government agency and sub sovereign).
At December 31, 2018, the breakdown of the debt security portfolio (€467 billion) by credit rating category was as follows: BBB
(a) Includes mainly European institution issuers (European Investment Bank, European Union, European Financial Stability Facility, Eurofima).
(1) This figure represents an accounting view i.e.100% of assets held directly and in consolidated investment funds “Core Investment Portfolios”, and excluding credit derivatives in non-consolidated investment funds, in line with Note 20 to the Consolidated Financial Statements. The Group holds €17.2 billion (notional amount) of credit derivatives as total exposure including consolidated investment funds “Satellite Investment Portfolios” (€0.5 billion).
Credit risk relating to CDOs is monitored separately, depending on the tranches held, and regardless of the type of assets held (debt securities or credit derivatives).
At December 31, 2018, the breakdown of counterparty exposure coming from OTC derivatives by rating was as follows (positive fair value net of collateral received): A+
The breakdown of all reserves ceded to reinsurers by reinsurer rating as of December 31, 2018 (€27.1 billion) was as follows: A
The “other” caption relates to reserves ceded to reinsurance pools, reserves ceded to reinsurers with which the AXA Group does limited business (not in the top 50) and reinsurers not rated by the main rating agencies.
At December 31, 2018, total invested assets of Banking activities amounted to €35.8 billion (€33.0 billion in at December 31, 2017).
Liquidity is a key dimension of the Risk Appetite Framework allowing the AXA Group to ensure that both AXA SA and the local entities have at all times suff icient liquidity buff er to withstand a severe shock. The objective is achieved through the monitoring of the liquidity adequacy across the AXA Group on the basis of a metric called “Excess Liquidity”, i.e. the diff erence between liquidity resources and liquidity needs calculated under severe stress conditions and over diff erent time horizons: 1 week, 1 month, 3 months and 12 months.
For each time horizon, the post-stress liquidity resources available and the post-stress liquidity needs (i.e. net outflows) to be paid are projected to measure the excess liquidity. The stressed conditions are calibrated so as to reflect extreme circumstances (e.g. distressed financial markets, confidence crisis towards the Group, natural catastrophes). The approach is prudent as it is assumed that all events occur simultaneously.
Information in this section should be read in conjunction with the paragraph “Pricing and underwriting-related risks” in Section 4.1 “Risk factors” of this Annual Report.
• fluctuation of payments around their statistical average; ■ catastrophe risks embedding both natural disasters such as climatic events (including windstorms, hurricanes, floods or hailstorms), tectonic ones (earthquakes, volcanoes) and manmade ones, such as terrorist attacks.
Insurance risks for Life & Savings, Health and Property & Casualty businesses are covered through 4 major processes, defined at Group level but performed jointly by central and local teams: ■ implementing a product approval process, which entails risk controls on new products that complement underwriting rules and product profitability analyses; ■ optimizing of reinsurance strategies in order to limit the Group’s peak exposures thereby protecting its solvency by reducing volatility and to mitigate risk within the Group to benefit from diversification; ■ reviewing technical reserves including a roll forward analysis; and
In Life & Savings, as well as Health, the Product Approval Process is managed at local level for all traditional products meeting Group’s minimum requirements, which allows maintaining time-to-market product launches. For sophisticated products, local entities require Group’s approval before launch to ensure all long-term commitments are monitored at Group level and benefit from the Group expertise on enhanced or specific guarantees.
Regarding the Property & Casualty exposures, ad hoc concentration risk studies are developed to ensure no single-peril event, natural (such as windstorm, earthquake, hurricane or typhoon) or manmade (such as cyber risk), is likely to aff ect the Group above the set tolerance levels.
For the Life & Savings, Health and Property & Casualty operations, reinsurance programs are set up as follows: ■ Group’s operating entities reinsurance capacity are set in alignment with Group Standards and with their local risk appetite limits; ■ their risks are modeled through in-depth actuarial analyses conducted on each portfolio; specifically for Property & Casualty natural catastrophe modelling, via the Group economic capital model, GRM uses several models both internal and external for assessing the risk associated with the main natural perils (e.g. storms, floods, earthquake). Since 2015, the Group has strategically developed a strong in-house expertise of development and validation of natural catastrophe models to cope with their dynamic nature in the context of global climate change.
Following the closing of the acquisition of the XL Group in September 2018, the 2019 renewal has been achieved in common to ensure that Group protections are in place at 1/1 for the main lines of business (CAT covering direct business and XL Re; property per risk, International Liability and Marine for Direct business) where risk accumulation may exist and diversification gains are material.
The structures of these Group covers are designed to adequately protect the Group in compliance with the Group risk appetite framework. In order to protect the Group, specific covers are arranged through either the traditional reinsurance market or the financial one through securitization (cat bonds and Insurance Linked Securities).
Finally, in addition to the analyses described above, AXA regularly monitors its exposure to its main reinsurers, to ensure that consolidated limits remain within Group risk tolerance (see Section 4.4 “Credit Risk – Receivables from reinsurers”).
Operational entities specifically monitor their reserve risks. Claims reserves are estimated and booked on a file by file basis by the claims handlers. Additional reserves are also booked the local entities.
■ contribute to the effective implementation of the riskmanagement system, in particular with respect to the risk modelling underlying the calculation of the capital requirements.
The Group Actuarial Function Holder reports to the Group Chief Risk Off icer and Head of Group Insurance off ice.
The Group’s Property & Casualty (excluding Health) technical reserves represented 14% of the Group’s total technical reserves at the end of 2018 (9% at the end of 2017). Their breakdown by line of business was as follows: ■ 26 % at the end of 2018 (38 % at the end of 2017) of the Group’s Property & Casualty reserves cover Motor insurance business; ■ 9 % at the end of 2018 (11 % at the end of 2017) of the Group’s Property & Casualty reserves cover Property insurance business; ■ 11 % at the end of 2018 (17% at the end of 2017) of the Group’s Property & Casualty reserves cover Liability insurance business; ■ 6 % at the end of 2018 (2% at the end of 2017) of the Group’s Property & Casualty reserves cover Specialty insurance business; ■ 12 % at the end of 2018 of the Group’s Property & Casualty reserves cover Reinsurance business; ■ 36 % at the end of 2018 (33% at the end of 2017) cover the other lines of business.
The Group’s Life & Savings technical reserves (excluding Health) represented 81 % of the Group’s total technical reserves at the end of 2018 (86 % at the end of 2017). Their breakdown by product type was as follows: ■ 20% at the end of 2018 (20% at the end of 2017) of the Group’s Life & Savings technical reserves cover separate-account products that do not materially aff ect AXA’s risk exposure (UnitLinked ). On these products, the underlying financial market performance is mostly passed on to the policyholders. This category also includes products that may provide a standalone guarantee on invested capital in the event of death. Overall, they present only a limited market risk for the Group through reduction of shareholders’ value; ■ 11% at the end of 2018 (12% at the end of 2017) of the Group’s Life & Savings technical reserves cover separate-account products with related interest-rate or equity guarantees provided by the insurance companies, called Variable Annuities.
• biometric risks (e.g. longevity/mortality) and policyholder behaviours (notably lapses and annuity election rates), are regularly monitored. The hedging programmes embed dynamic policyholder behaviours to a range of possible market situations; ■ 16% at the end of 2018 (16% at the end of 2017) cover savings products without guaranteed cash values upon surrender; ■ 18% at the end of 2018 (20% at the end of 2017) are related to savings products off ering one-year guaranteed rates that are updated every year. The risks arising from a sustained fall in interest rates in the financial markets are limited for these types of products. Hedging programs have been implemented to cover long-term fixed maturities from the risk of an increase in interest rates; ■ 35% at the end of 2018 (31% at the end of 2017) cover other products like Protection . These reserves cover surrender guarantees and, in some cases, a guaranteed long-term rate. Related risks are managed in the following ways: • products that are not surrender-sensitive are usually backed by fixed-income investments with maturities and interest rates generally suff icient to cover guaranteed benefits, so as to reduce as much as possible the reinvestment risk,
The Group’s Health technical reserves represented 5% of the Group’s total technical reserves at the end of 2018 (5% at the end of 2017). Technical reserves for Health Life-like contracts (i.e. contracts with long-term guarantees or coverage and/or surrender value) represented 94% of the Group’s Health technical reserves at the end of 2018 (stable since 2017).
Information in this section should be read in conjunction with the paragraph “Operational-related risks” in Section 4.1 “Risk factors” of this Annual Report.
AXA Group’s Operational risk framework provides for the deployment of a common system, dedicated operational risk teams and a common operational risk typology classifying operational risks into seven risk categories: internal fraud, external fraud, employment practices and workplace safety, clients, products and business practices, damages to physical assets, business disruption and system failures and execution, delivery and process management. Its implementation is not limited to insurance activities. It encompasses all AXA entities, including insurance companies, banking activities, AXA asset managers and internal service providers consistent with AXA policy on operational Risk Management.
In 2018, the Group Operational Risk Profile is reasonably well spread out with all seven operational risk categories covered and the main risks being the following: ■ compliance risk due to increases in legislation and regulation remains a top concern and is under the close monitoring of Group Compliance; ■ transaction capture, execution and maintenance risk is still a major one and relates to process error, failure, and/or misperformance; ■ external fraud & system security risk continues also to be a top priority. AXA Group’s exposure to cyber risk is still high with more and more new technology into AXA Group’s products and services. Information on cyber risks should be read in conjunction with the paragraph “Operational-related Risks” in Section 4.1 “Risk factors” of this Annual Report.
A strategic risk is the risk that a negative impact (current or prospective) on earnings or capital, material at the Group level, arises from (a) a lack of responsiveness to industry changes or (b) adverse business decisions regarding: ■ significant changes in footprint, including through disposals or acquisitions; ■ changes in product off ering and client segmentation; ■ changes in distribution model (channel mix including alliances/partnerships, multi-access and digital distribution).
Given the nature of strategic risks, there is no capital charge assessment but a strong strategic Risk Management framework to anticipate and mitigate these risks. Group Risk Management is involved at early stage in major strategic projects (e.g. large M&A projects). The Group governance standards require among other things a Risk Management second opinion on key processes, including significant transactions and strategic plans. Furthermore, the ORSA report provides an assessment on the overall solvency needs which include the Solvency II ratio projection made until the strategic plan horizon and in stress scenarios as detailed in Section 4.2. “Internal control and Risk Management - Own Risk and Solvency Assessment (“ORSA”) ” of this Annual Report.
AXA Group has defined a global framework with a two-fold approach to reactively protect and proactively identify, monitor, manage and mitigate reputational issues to not only minimize value destruction, but also to build and maintain brand equity and trust among stakeholders.
For further information on the sustainability risks to which the AXA Group may be exposed, please refer to the paragraph “Sustainability Risk Assessment” in Section 7.1 “Introduction” of this Annual Report.
For further information on the regulatory environment in which AXA Group operates including regulatory risks, please refer to the paragraph “Regulatory-related risks” in Section 4.1 “Risk factors” of this Annual Report.
AXA Group has established processes to qualify emerging risks which could develop over time and become significant. The emerging risk framework encompasses a network of circa 100 people within the AXA Group (based in insurance, bank, Asset Management and supporting entities such as AXA IT Services) which allows expertise to be shared within the business (including underwriting) and risk communities and ensures adequate underwriting policies are defined.
(b) Includes assets backing contracts where the financial risk is borne by policyholders with Guaranteed Minimum features. (c) As of December 31, 2018, amounts included the assets relating to the Group Life portfolio in Switzerland, AXA Life Europe and AXA Wealth Management (HK) Limited for which the disposals processes were not finalized at year-end.
As of December 31, 2017, amounts included the assets of AXA Wealth Management (HK) Limited and Germany pension business ProbAV Pensionskasse AG for which the disposals processes were not finalized at year-end.
Share capital and capital in excess of nominal value 26,044 25,033
Liabilities arising from insurance contracts where the financial risk is borne by policyholders (b) 146,058 159,702
Liabilities arising from investment contracts with no discretionary participating features and where the financial risk is borne by policyholders 11,747 12,260
14 LIABILITIES ARISING FROM INSURANCE AND INVESTMENT CONTRACTS 678,219 656,938 15 Liabilities arising from banking activities (a) 36,054 32,898 16 Provisions for risks and charges 11,363 11,901 19 Deferred tax liabilities 4,621 5,784
Minority interests of consolidated investment funds and puttable instruments held by minority interest holders 6,796 8,756
Other payables 17,048 14,503 5 Liabilities held for sale (c) 24,718 4,419
Gross written premiums 96,309 92,050 Fees and charges relating to investment contracts with no participating features 249 211 Revenues from insurance activities 96,558 92,261
Net revenues from banking activities 484 496 Revenues from other activities 5,832 5,792
Change in goodwill impairment and other intangible assets impairment and amortization (6,441) (114) Other income and expenses (90) (187) Other operating income and expenses (104,603) (124,857)
Net consolidated income - Minority interests (2,513) 394 27 Earnings per share 0.79 2.50
Reserves relating to changes in fair value through shareholders’ equity (4,584) 1,377
Items that may be reclassified subsequently to Profit or Loss (3,031) (3,557)
Net gains and losses recognized directly through shareholders’ equity (2,747) (3,172)
Note: A mounts are presented net of impacts of shadow accounting and its eff ects on policyholder participation, deferred acquisition costs, and value of business in force. (a) Mainly undated subordinated debts (TSS, TSDI) (see Note 13.1.1).
(b) Including changes in ownership interest in consolidated subsidiaries without losing control. (c) Includes the first time application impact of IFRS 15 Revenue from Contracts with Customers. AXA has chosen to adopt the new standard through the cumulative eff ect approach meaning the cumulative eff ect was recognised as an adjustment to the opening balance of retained earnings in 2018. Therefore there is no restatement of comparative information for the year 2017.
Others (including impact on change in scope) (b ) - - - - -
Change in goodwill impairment and other intangible assets impairment (b) 6,323 -
Change in fair value of investments at fair value through profit or loss 12,596 (20,054)
Adjustment of non cash balances included in the operating income before tax 11,750 5,468
Investment expense (excluding interests on financing and undated subordinated debts, margin calls and others) (4,130) (3,818)
Net cash provided by other assets and liabilities (f) (3,603 ) 1,593
Net cash impact of transactions with cash impact not included in the operating income before tax 12,617 18,937
Disposal of subsidiaries and aff iliated companies, net of cash ceded 71 (12)
Sales of investment properties held directly or not (f) 2,718 2,549
Sales and/or repayment of loans and other assets (f) (h) 26,105 30,863
Net cash related to sales and repayments of investments (f) (g) (h) 113,550 133,579
Net cash related to purchases and issuance of investments (f) (g) (h) (109,535) (145,299)
Net cash related to sales and purchases of tangible and intangible assets (447) (348)
Net interest margin of hedging derivatives on financing debt 56 -
CASH AND CASH EQUIVALENT AS OF JANUARY 1 (j) 23,196 25,734
CASH AND CASH EQUIVALENT AS OF DECEMBER 31 (j) 30,556 23,196
(g) Includes equity instruments held directly or by consolidated investment funds as well as non consolidated investment funds. (h) Includes sales/purchases of assets backing insurance & investment contracts where the financial risk is borne by policyholders. (i) Includes net cash impact of interest margin relating to hedging derivatives on financing debt. ( j) Net of bank overdraft s.
December 8, 2016 Collection of amendments to IFRS in response to issues that are not part of a major project.
The consolidated financial statements are prepared in compliance with IFRS and interpretations of the IFRS
Interpretations Committee that are endorsed by the European Union before the balance sheet date with a compulsory date of January 1, 2018. The Group does not use the “carve out” option allowing not to apply all hedge accounting principles required by IAS 39.
Contracts that are issued more than one year apart should not be in the same group.
For these contracts, the CSM is adjusted for (i) changes in the variable fee (entity’s share in underlying items that corresponds to the revenue of the insurer), (ii) for the time value of money and (iii) for eff ect of changes in financial risks not arising from underlying items (such as options and guarantees).
In addition, a simplified Premium Allocation Approach (PAA) is permitted for the measurement of the liability for the remaining coverage if it provides a measurement that is not materially diff erent from the general model or if the coverage period is one year or less. With the PAA, the liability for remaining coverage corresponds to premiums received at initial recognition less acquisition costs. However, the general model remains applicable for the measurement of incurred claims.
In terms of presentation, the amounts recognized in the statements of financial performance have to be disaggregated into: ■ an insurance service result, comprising insurance revenue and insurance service expenses (i.e. incurred claims and other incurred insurance service expense); ■ and insurance finance income or expenses.
At a Board meeting on November 2018, the IASB tentatively decided to propose an amendment of the IFRS 17 eff ective date to reporting periods beginning on or aft er January 1, 2022. This is a deferral of 1 year compared to the previous date of January 1, 2021. This decision should be confirmed through amendments.
The IASB is currently reviewing stakeholder concerns as well as implementation challenges and is considering whether there is a need to amend the Standard. For any proposed amendments to IFRS 17, the Board will follow its normal due process for standardsetting, including developing an Exposure Draft . The Exposure Draft is expected at the end of the first half of 2019.
The implementation of IFRS 9 and the examination of its potential impact on the Group’s consolidated financial is in progress.
The published eff ective date of IFRS 9 is January 1, 2018.
In addition, amendments to IFRS 9 – Financial Instruments: Prepayment Features with Negative Compensation, published on October 12, 2017, and endorsed by the European Union changes the initial IFRS 9, in regards of the classification of financial assets with prepayment features that may result in negative compensation.
June 7, 2017 January 1, 2019* Clarification how the recognition and measurement requirements of IAS 12 –Income Taxes are applied where there is uncertainty over income tax treatments.
October 12, 2017 January 1, 2019* Clarification that a company applies IFRS 9 –Financial Instruments to long-term interests in an associate or joint venture to which the equity method is not applied but that in substance form part of the net investment in the associate or joint venture (long-term interests).
February 7, 2018 January 1, 2019* The amendments clarify the accounting when a plan amendment, curtailment or settlement occurs. Indeed, if a plan amendment, curtailment or settlement occurs, the current service cost and the net interest for the period aft er the remeasurement are determined using the assumptions used for the remeasurement. Amendments also clarify the effect of a plan amendment, curtailment or settlement on the requirements regarding the asset ceiling.
Conceptual Framework March 29, 2018 January 1, 2020* The revised Conceptual Framework, includes: ■ a new chapter on measurement; ■ guidance on reporting financial performance; ■ improved definitions of an asset and a liability, and guidance supporting these definitions; and ■ clarifications in important areas, such as the roles of stewardship, prudence and measurement uncertainty in financial reporting.
October 22, 2018 January 1, 2020* The amendments: ■ confirm that a business must include inputs and a process; ■ narrow the definitions of a business; and ■ add an optional concentration test that permits a simplified assessment of whether an acquired set of activities and assets is not a business.
IAS 1 - Presentation of financial statements & IAS 8 - Accounting policy changes Definition of Material
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
Other identifiable intangible assets such as the value of customer relationships should be recognized. The value of customer relationships intangible represents the value of future cash flows expected from renewals and the cross-selling of new products to customers known and identified at the time of the acquisition.
PUT OVER MINORITY INTERESTS When control over a subsidiary is acquired, a put option may be granted to minority shareholders. However, the recognition of the puttable instruments as a liability depends on the contractual obligations.
INTRA-GROUP TRANSACTIONS Intra-group transactions, including internal dividends, payables/ receivables and gains/losses on intra-group transactions are eliminated: ■ in full for controlled subsidiaries; and
In addition, the transfer of consolidated shares, between two consolidated subsidiaries but held with different ownership percentages, should not impact the Group net income. The only exception would be any related tax and policyholders’ participation recorded in connection to the transaction, which are maintained in the consolidated financial statements. These transfers also have an impact on Group shareholders’ equity (with a balancing entry recorded in minority interests). This impact is identified in the “other” changes of the consolidated statement of shareholders’ equity.
The consolidated financial statements are presented in Euro million, the Euro being the Group’s presentational currency.
represent consensus prices, i.e. using similar models and inputs resulting in a very limited dispersion.
Liquidity may be defined as the possibility to sell or dispose of the asset in the ordinary course of business within a certain limited time period at approximately the price at which the investment is valued. Liquidity for debt instruments is assessed using a multi-criteria approach including the number of quotes available, the place of issuance and the evolution of the widening of bid ask spreads.
Fair values of assets and liabilities that are not traded in active market mainly based on observable market data are disclosed as level 2 in the Notes to the financial statements.
Valuation techniques may be used when there is little observation of transaction prices as an inherent characteristic of the market, when quotes made available by external pricing providers are too dispersed or when market conditions are so dislocated that observed data cannot be used or need significant adjustments. Internal mark to model valuations are therefore normal market practices for certain assets and liabilities inherently scarcely traded or exceptional processes implemented due to specific market conditions.
Fair value approach is based on risk neutral valuation techniques that include discounted cash flows taking into account: ■ the current shareholders’ net asset value plus future profitability of the business in force: • the current shareholders’ net asset value is adjusted to take into account any diff erence between the basis of cash flows projections used in the value of business in force calculations and IFRS,
• the profitability of business in force is determined using the embedded value methodology, which is an industryspecific valuation method, consistent with the principles of discounted earnings, as the value of business in force results from the projection of distributable earnings. The Group uses however both market consistent risk neutral approaches and traditional discounted cash flows projections;
■ the profitability of future new business: • the value of new business is computed either on the basis of multiples of a standardized year of new business contribution (present value of projected future distributable profits generated from business written in a year) or on a projection of each of the expected annual future earnings when multiples are not appropriate. Main assumptions include, expenses, cost of capital, future investment margins, financial market volatility, first assessed on a risk free basis (basic test) and then on the basis of illustrative investment assumptions suitable for a traditional embedded value approach if the previous recoverable value is lower than the carrying amount,
• the value in use approach uses cash flow projections based on business plans approved by management covering up to five years and discounted using a risk adjusted rate. Cash flows beyond that period are extrapolated using a steady growth rate and a terminal value.
The value of purchased insurance contracts and investment contracts with discret ionar y part icipating features recognized in a business combination (see paragraph 1.3.2) is amortized as profits emerge over the life of the contracts’ portfolio. In conjunction with the liability adequacy test (see paragraph 1.14.2), VBI is subject to annual recoverability testing based on actual experience and expected changes in the main assumptions.
1.7.3 Deferred Acquisition Costs (DAC) relating to insurance contracts and investment contracts with discretionary participating features – rights to future management fees, also known as Deferred Origination Costs (DOC) relating to investment contracts with no discretionary participating features
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 approach used for DAC and DOC.
Investments include investment in real estate properties and financial instruments including equity instruments, debt instruments and loans.
Investment in real estate properties that totally or partially back liabilities arising from contracts where the financial risk is borne by policyholders is recognized at fair value with changes in fair value through profit or loss.
At inception, the option to designate financial investments and liabilities at fair value with change in fair value recognized through income statement is mainly used by the Group in the following circumstances: ■ financial investments when electing the fair value option allows the Group to solve accounting mismatch, and in particular: • assets backing liabilities arising from contracts where the financial risk is borne by policyholders,
IMPAIRMENT OF FINANCIAL INSTRUMENTS AXA assesses at each balance sheet date whether a financial asset or a group of financial investments at (amortized) cost or designated as available for sale is impaired. A financial asset or group of financial investments is impaired when there is objective evidence of impairment as a result of one or more events and this event has an impact on the estimated future cash flows of the asset(s) that can be reliably estimated.
For equity instruments classified as available for sale, a significant or prolonged decline in the fair value below its carrying value is considered as indication for potential impairment, such as equity instruments showing unrealized losses over a 6 months period or more (prior to the closing date), or unrealized losses in excess of 20% of the net carrying value at the closing date. If such evidence exists for an available for sale financial asset, the cumulative loss – measured as the diff erence between the acquisition cost and the current fair value, less any impairment on that financial asset already booked in the income statement – is removed from shareholders’ equity and an impairment is recognized through the income statement. Equity instruments
impairment recognized in the income statement cannot be reversed through the income statement until the asset is sold or derecognized.
Methods for calculating the net book value of assets sold (average cost, first-in first-out, etc.) depend on local Assets and Liabilities Management (ALM) strategies as these strategies have been set up to take into account specific commitments to policyholders. These methods may diff er within the Group provided that they are used consistently at each entity level.
1.9 ASSETS BACKING LIABILITIES ARISING FROM CONTRACTS WHERE THE FINANCIAL RISK IS BORNE BY POLICYHOLDERS
Assets backing liabilities arising from insurance or investment contracts where the financial risk is borne by policyholders are presented in a separate aggregate of the balance sheet so that they are shown in a symmetrical manner to the corresponding liabilities. This presentation is considered more relevant for the users and consistent with the liquidity order recommended by IAS 1 for financial institutions, since the risks are borne by policyholders, whatever the type of assets backing liabilities (investment in real estate properties, debt instruments or equity instruments, etc.). Details of these assets are provided in the Notes.
The Group documents, at inception, the hedge relationship, as well as its Risk Management hedging objectives and strategy. The Group also documents the hedge eff ectiveness, both at inception and on an ongoing basis, indicating the actual or expected eff iciency level of the derivatives used in hedging transactions in off setting changes in the fair values or cash flows of hedged underlying items.
FAIR VALUE HEDGE Changes in the fair value of derivatives designated and qualifying as fair value hedge are recorded in the income statement, together with any changes in the fair value of the hedged asset or liability. Therefore, the gain or loss relating to any ineff ective portion is directly recognized in the income statement.
CASH FLOW HEDGE The eff ective portion of changes in the fair value of derivatives designated and qualifying as cash flow hedge is recognized in shareholders’ equity. The gain or loss relating to any ineff ective portion is recognized in the income statement. Cumulative gain or loss in shareholders’ equity is recycled in the income statement when the hedged underlying item impacts the profit or loss for the period (for example when the hedged future transaction is recognized). When a hedging instrument
For the statement of financial position, derivatives are presented alongside the underlying assets or liabilities for which they are used, regardless of whether these derivatives meet the criteria for hedge accounting.
The purpose and condition of the use of derivatives within the Group are detailed in Note 20.
These comprise assets, particularly buildings or operations, intended to be sold or discontinued within twelve months. Subsidiaries held for sale remain within the scope of consolidation until the date on which the Group loses eff ective control. The assets and activities (assets and liabilities) concerned are measured at the lower of net carrying value and fair value net of selling costs. They are presented in separate asset and liability items on the balance sheet. The liabilities of subsidiaries (excluding shareholders’ equity) held for sale are entered separately on the liability side of the consolidated balance sheet, with no netting against assets.
Undated subordinated debt and any related interest charges are classified either in shareholders’ equity (in the “other reserves” aggregate) or as liabilities depending on contract clauses without taking into consideration the prospect of redemption under economic constraints (e.g. step up clauses or shareholders’ expectations).
Any financial instrument issued by the Group with an equity component (for example certain options granted to convert the debt instrument into an equity instrument of the Company) and a liability component (a contractual obligation to deliver cash) is classified separately on the liability side of the balance sheet with the equity component reported in Group shareholders’ equity (in the “other reserves” aggregate). Gains and losses relating to redemptions or refinancing of the equity component are recognized as changes to shareholders’ equity.
Part of the policyholders participation reserve is included in future policy benefits reserves, according to contractual clauses. Except when these guarantees are covered by a Risk Management program using derivative instruments (see next paragraph), guaranteed minimum benefits reserves relating to contracts where the financial risk is borne by policyholders (insurance contracts because they include such guarantees or investment contracts with discretionary participating features), are built over the life of the contract based on a prospective approach: the present value of future benefit obligations to be paid to policyholders in relation to these guarantees is estimated on the basis of reasonable scenarios. These scenarios are based on assumptions including investment returns, volatility, surrender and mortality rates. This present value of future benefit obligations is reserved as fees are collected over the life of the contracts.
For example, for contracts with discretionary participating features, when unrealized gains or losses are recognized, a deferred participating liability (DPL) or asset (DPA) is recorded. The DPL or DPA corresponds to the discretionary participation available to the policyholders and is generally determined by applying on the basis of estimated participation of policyholders in unrealized gains and losses and any other valuation diff erence with the local contractual basis.
When a net deferred participation asset is recognized, the Group uses liquidity analyses performed by the entities to assess the
capacity to hold assets showing unrealized loss position, if any, generating such debits. The Group then performs projections to compare the value of assets backing policyholders’ contracts with expected payments to be made to policyholders.
■ the extent to which resulting gains/losses may be allocated/ charged to policyholders, i.e. profit sharing between policyholders and shareholders.
The Group assumes and cedes reinsurance in the normal course of business. Assumed reinsurance refers to the Group’s acceptance of certain insurance risks that other companies have underwritten. Ceded reinsurance refers to the transfer of insurance risk, along with the related premiums, to other reinsurers who will share in the risks. Indeed, in the normal course of business, the Group seeks to reduce the potential amount of loss arising from claims events by reinsuring certain levels of risk assumed in various areas of exposure with other insurers or reinsurers.
commissions recorded thereon are earned) on a monthly prorata basis over the period the reinsurance coverage is provided. Ceded unearned reinsurance premiums represent the portion of premiums ceded applicable to the unexpired term of policies in force. Reinstatement premiums ceded are recognized at the time a loss event occurs where coverage limits for the remaining life of the contract are reinstated under pre-defined contract terms and are fully earned when recognized. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. Provisions are made for estimated unrecoverable reinsurance.
If the Group determines that reinsurance contracts do not meet the insurance contracts classification contract and/or principally transfers financial risk, the agreement is recorded using the deposit method of accounting. Deposits received are included in payables and deposits made are included within receivables. As amounts are paid or received, consistent with the underlying contracts, the deposit assets or liabilities are adjusted as appropriate.
The measurement of deferred tax liabilities and deferred tax assets reflects the expected tax impact, at the balance sheet date. That would follow the way the Group expects to recover or settle the carrying amount of its assets and liabilities. When income taxes are calculated at a diff erent rate if dividends are paid, deferred taxes are measured at the tax rate applicable to undistributed profits. The income tax consequences of dividends are only accounted when a liability to pay the dividend is recognized.
Pensions and other post-retirement benefits include the benefits payable to AXA Group employees after they retire (retirement compensation, additional pension benefit, health insurance). In order to meet those obligations, some regulatory frameworks have allowed or enforced the set up of dedicated funds (plan assets).
Defined benefit plans: an actuarial assessment of the commitments based on each plan’s internal rules is performed. The present value of the future benefits paid by the employer, known as the DBO (Defined Benefit Obligation), is calculated annually on the basis of long-term projections of rate of salary
It should be noted that, all cumulative past actuarial gains and losses on all employee benefit plans were recognized in retained earnings as of January 1, 2004, AXA Group’s transition date.
The cost of the traditional formula of Shareplan is valued according to the specific guidance issued in France by the ANC (Autorité des normes comptables). The cost of the leveraged formula plan is valued by taking into account the five-year lockup period for the employees (as in the traditional plan) but adding the value of the advantage granted to the employees by enabling them to benefit from an institutional derivatives-based pricing instead of a retail pricing.
Gross written premiums correspond to the amount of premiums written by insurance and reinsurance companies on business incepted in the year with respect to both insurance contracts and investment contracts with discretionary participating features, net of cancellations and gross of reinsurance ceded. For reinsurance, premiums are recorded on the basis of declarations made by the ceding company, and may include estimates of gross written premiums. Any subsequent diff erences arising on such estimates are recorded in the period they are determined. For multi-year reinsurance treaties which are payable in annual installments, generally, only the initial annual installment is included as premiums written at policy inception due to the ability of the reinsured to commute or cancel coverage during the term of the policy. The remaining annual installments are included as premiums written at each successive anniversary date within the multi-year term.
1.19.2 Fees and revenues from investment contracts with no discretionary participating features
Changes in unearned premium reserves net of unearned revenues and fees include both the change in the unearned premiums reserve reported as a liability (see “Unearned premiums reserves” in paragraph 1.14.2) and 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 paragraph 1.14.2) and investment contracts with no discretionary participating features (see paragraph 1.14.3 “Unearned fees reserves”).
Subsequent events relate to events that occur between the balance sheet date and the date when the financial statements are authorized for issue: ■ such events lead to an adjustment of the consolidated financial statements if they provide evidence of conditions that existed at the balance sheet date; ■ such events result in additional disclosures if indicative of conditions that arose after the balance sheet date, and if relevant and material.
AXA SA and Other Holdings France AXA Parent company Parent company
AXA Aurora Vida, S.A. de Seguros Relution 99.83 99.83 99.97 99.82
The Gulf Region AXA Cooperative Insurance Company 50.00 34.00 50.00 34.00
As of December 31, 2018, 31 consolidated real estate companies corresponded to a total of €12,798 million invested assets (€10,469 million at the end of 2017), mainly in France, Germany, Switzerland and Japan.
MAIN SUBSIDIARIES WITH MINORITY INTERESTS As regards main subsidiaries with minority interests (other than investment funds and real estate companies): ■ the financial information of AXA Equitable Holdings, Inc. is available in Part II – Item 8. Financial Statements and Supplementary Data of its Annual Report for the year ended December 31, 2018, which is filed with the SEC; ■ summarized financial information for AXA MPS is as follows (including AXA and external share but excluding goodwill related to AXA’s holdings and before intercompany eliminations with other companies of the Group): Main changes in scope of consolidation are detailed in Note 5.
Net consolidated income – Minority Interests 68 91 Minority interests 1,044 1,139 Dividends paid to minority interests (84) 0 Cash and cash equivalents 184 275 Total investments 25,985 25,841 Other assets 1,780 1,738 Total Assets 27,949 27,854
AXA SPDB Investment Managers Company limited Relution 39.00 38.11 39.00 38.00 International Reso Garantia (RGI Holdings B.V.) (Russia) 39.34 39.34 39.34 39.34 Bharti AXA Life (India) 49.00 49.00 49.00 49.00 Bharti AXA General Insurance Company Limited (India) 49.00 49.00 49.00 49.00 AXA Middle East SAL (Lebanon) 51.00 51.00 51.00 51.00 AXA Mansard Insurance plc (Nigeria) 77.79 77.79 77.79 77.79 Other AXA Investment Managers Asia Holdings Private Limited Relution 49.00 47.89 49.00 47.75 Kyobo AXA Investment Managers Company Limited Relution 50.00 48.86 50.00 48.72
Note 2.1 ). Other funds are not consolidated because they are not controlled or under significant influence. By nature, and notably because of the power of decision usually given to the asset managers (internal or external to AXA), most of these funds are structured entities.
Information on these unconsolidated investment funds are provided in diff erent sections of this Annual Report: ■ Section 1.1 “Key figures”: • AXA’s total assets under management including assets managed on behalf of third parties; ■ Section 2.3 “Activity report”; ■ Section 5.6 “Notes to the consolidated financial statements”: • Note 9 “Investments” with the breakdown of investments and detail on non-consolidated investment funds in Note 9.8,
Following the completion of the acquisition of XL Group on September 12, 2018, the financial reporting has been aligned and retroactively restated in this Annual Report under seven segments. The CEOs supervising the main geographies (respectively CEO of AXA France, CEO of AXA in Europe, CEO of AXA in Asia, CEO of AXA XL, CEO of AXA US, CEO of International) are members of the Management Committee.
The results of operating activities and non-operating activities are presented on the basis of 7 segments: France, Europe, Asia, AXA XL, the United States, International and Transversal & Central Holdings.
France: The France market consists of Life & Savings and Property & Casualty activities, AXA Banque France and France holdings.
The intersegment eliminations include only operations between entities from diff erent countries and operating activities. They mainly relate to reinsurance treaties, assistance guarantees recharging, asset management fees and interests on loans within the Group.
Revenues from insurance activities 25,119 36,633 9,002 6,298 12,508 6,259 1,236 (497) 96,558 96,558 Net revenues from banking activities 124 23 - - - 327 - 11 484 -
Revenues 25,249 36,942 9,003 6,298 16,598 6,648 3,159 (1,023) 102,874 98,435 Change in unearned premiums net of unearned revenues and fees (47) (99) (199) (222) 12 (128) 24 6 (653) (653) Net investment income (b) 4,630 5,976 1,426 396 3,514 556 132 (51) 16,579 15,338
Net realized gains and losses relating to investments at cost and at fair value through shareholders’ equity 579 1,157 142 68 (30) 37 26 3 1,982 1,953
Net realized gains and losses and change in fair value of other investments at fair value through profit or loss (c) (2,872) (1,507) (750) (81) (7,613) (26) (255) (1) (13,104) (12,871)
Net investment result excluding financing expenses 1,857 5,169 678 322 (4,167) 503 (127) (49) 4,186 3,228 Technical charges relating to insurance activities (20,126) (31,711) (6,624) (4,854) (6,778) (4,281) (971) 276 (75,069) (75,069)
Net result from outward reinsurance (249) (344) (1) 123 7 (228) 207 200 (285) (75,069)
Change in goodwill impairment and other intangible assets impairment - (41) (16) (12) (6,335) (37) (1) - (6,441) (1,898)
Net income from operating activities before tax 2,349 3,341 1,194 (365) (4,673) 492 (808) (0) 1,530 5,515 Income tax (709) (696) (200) (81) 53 (89) 249 - (1,474) (942)
Net operating income 1,640 2,645 994 (447) (4,620) 402 (559) (0) 55 4,573 Net loss on held for sale Group Life porfolio in Switzerland (d) - (428) - - - - - - (428) (428)
Fees and charges relating to investment contracts with no participating features 1 128 40 - - 42 - - 211 211
Revenues from insurance activities 24,507 35,910 9,020 2,518 12,955 6,668 1,215 (530) 92,261 92,261 Net revenues from banking activities 125 26 - - - 318 - 27 496 -
Revenues 24,638 36,198 9,022 2,518 17,026 7,047 3,153 (1,053) 98,549 94,072 Change in unearned premiums net of unearned revenues and fees (120) (75) (24) 8 (108) (67) (13) (6) (405) (405) Net investment income (c) 4,369 5,829 1,393 189 310 534 181 (136) 12,668 11,717
Net realized gains and losses relating to investments at cost and at fair value through shareholders’ equity 668 1,036 203 41 (125) 17 (60) 2 1,781 1,833
Net investment result excluding financing expenses 6,868 7,142 2,754 180 16,937 761 (60) (135) 34,449 33,751 Technical charges relating to insurance activities (24,764) (33,165) (8,939) (1,794) (28,345) (5,049) (974) 346 (102,684) (102,684)
Change in goodwill impairment and other intangible assets impairment - (55) (17) - (9) (32) (1) - (114) (107)
Net income from operating activities before tax 1,968 3,356 1,291 103 1,374 408 (815) (0) 7,686 7,184 Income tax (542) (825) (257) (42) 278 (96) 401 - (1,083) (646)
Please refer to pages 197 to 201 of Section 4.3 “Market risks”, subsections “Interest rates & equity risks related to the operating activities of Group subsidiaries” and “Exchange-rate risk related to the operating activities of Group subsidiaries”.
Please refer to pages 202 to 205 of Section 4.4 “Credit risk” subsections “Invested assets: A central monitoring of counterparty exposure”, “Credit derivatives”, “Counterparty risk arising from over-the-counter (OTC) derivatives”, “Receivables from reinsurers: rating processes and factors” and “Bank credit activities”.
Please refer to pages 208 to 211 of Section 4.6 “Insurance risks”, subsections “Product approval”, “Exposure Analysis”, “Ceded Reinsurance” and “Technical reserves”.
Note: Goodwill related to entities accounted for using the equity method is not presented in this table (see Note 10). (a) Restated: as per the new governance. (b) Reallocation from former AXA Direct Cash Generating Units to Property & Casualty (P&C) business impacting the Cash Generating Units of France , Belgium , Italy, Spain ,
MAIN ASSUMPTIONS For the cash generating units (CGUs) within the Property & Casualty business segment, as well as AXA IM, the value in use approach uses cash flow projections based on business plans approved by management covering up to five years and discounted using a risk adjusted rate. Cash flows beyond that period are extrapolated using sustainable perpetual growth rates assumed to be achievable over the long term to derive a terminal value. The earnings included in the business plan of each CGU are agreed with AXA Management and defined locally considering best estimate operating assumptions, including expense and loss ratios, investment income, economic capital, premium rates and taxes, all compliant with the requirements of supervisory authorities.
The calculation of the best estimate liabilities involves the use of operational and economic assumptions. Operational assumptions include demographic factors, such as mortality, morbidity and lapse/surrender rates, expenses allowance and taxation, all compliant with the requirements of supervisory authorities. Future cash flows are discounted using reference rates that are compliant with EIOPA specifications of using swap rates adjusted for credit and volatility risk. The table below shows the adjustments in basis points by currency: Reference Yield Curve (in bps) EUR GBP USD JPY CHF HKD
In the case of AXA Belgium, the recoverable value has been derived using Traditional Embedded Value (TEV) equivalent to a real world approach where the risk allowance is implicit to the discount rate as the projected cash flows are not risk-adjusted. The discount rate used to determine the recoverable value of AXA Belgium was 5.3%.
On September 12, 2018, AXA announced that it had completed the acquisition of 100% of XL Group Ltd, following the announcement on March 5, 2018, that AXA had entered into an agreement to acquire XL Group Ltd. The completion of the transaction followed the fulfilment of customary closing conditions, including approval by XL Group shareholders and obtention of all necessary regulatory approvals.
Acquired assets and liabilities were previously valued using US GAAP. They were adjusted to fair value in the opening balance sheet and integrated within Consolidated Financial Statements at year-end based on IFRS accounting policies. In accordance with IFRS 3 – Business Combinations, adjustments can be made within twelve months of the acquisition date if new information becomes available to complete the initial accounting.
Assets and liabilities fair valued at the acquisition date: (in Euro million) At the acquisition date
The XL Group acquisition led to the recognition of a goodwill of €7,354 million which mainly represents expected synergies and other customer-related items that could not be measured reliably or recognized separately.
They are assessed by modelling more than 50 years of discounted cash flows expected from renewals, considering recent historical results.
XL GROUP ESTIMATED IFRS REVENUES AND NET INCOME FOR 2018 2018 revenues and net income for the acquired XL Group assuming the acquisition took place as at January 1, 2018 would respectively amount to €13,786 million and €-550 million.
On October 1, 2018, AXA Germany increased its ownership in Roland Rechtsschutz from 41% to 60%.
In accordance with IFRS 3 – Business Combinations, adjustments can be made within twelve months of the acquisition date if new information becomes available to complete the initial accounting.
AXA Equitable Holdings, Inc. (“AEH”) was successfully listed on the New York Stock Exchange in May 2018. The total proceeds of the Initial Public Offering (“IPO”), the secondary offering, related share buy back and the Mandatory Exchangeable Bonds amounted to USD 5.8 billion: ■ IPO proceeds amounted to USD 3.1 billion (€2.6 billion) with the sale of 24.5% of AEH’s outstanding shares at USD 20 per share combined with the exercise of the over-allotment options granted to underwriters, i.e. an additional 20.6 million AEH shares (3.7% of AEH’s outstanding shares); ■ proceeds from the secondary offering of AEH shares (“secondary offering”) amounted to USD 1.2 billion (€1.0 billion) with the sale of 10.4% of AEH’s outstanding shares at USD 20.25 per share; ■ proceeds from the sale of AEH shares to AEH (“share buy back”) amounted to USD 0.6 billion (€0.5 billion) with a dilution of 2.2% of AXA Group participation in AEH; and
The impacts related to the aforementioned transactions in shareholder’s equity are detailed below: (in Euro million) Group share Minority interests
Reserves relating to the change in fair value of financial instruments available for sale (259) 259
Reserves relating to the change in fair value of hedge accounting derivatives (cash flow hedge) 35 (35)
The Mandatory Exchangeable Bonds will mature on May 15, 2021, unless early exchanged in full at the option of AXA for 7.7% of AEH’s outstanding shares (subject to anti-dilution adjustments). At maturity, the Mandatory Exchangeable Bonds will be exchanged into a minimum of 6.5% of AEH’s outstanding shares (subject to anti-dilution adjustments) if the AEH share price is greater than or equal to USD 23.50 per share, and a maximum of 7.7% of AEH’s outstanding shares (subject to antidilution adjustments) if the AEH share price does not exceed the IPO price.
For the recoverability test, evidence from comparable IPOs indicates that share prices remain highly volatile for a period of time following the IPO date. As a result and given the short period of time since the IPO in May 2018 and the secondary off ering in November 2018, AXA did not consider the AEH share price as of
December 31, 2018 as indicative of the value-in-use methodology to be applied for the purpose of evaluating goodwill recoverability at year-end. Rather, management estimated a prospective valuein -use of AEH under multiple scenarios. This estimate was based on the following assumptions: ■ future operating earnings of AEH for both the Life and Asset Management segments; ■ price-to-book ratios of comparable Life insurers and comparable asset managers.
Any further potential divestment of AXA Group’s equity participation in AEH will depend on a number of factors, including but not limited to the macroeconomic environment, the liquidity and performance of the United States equity markets as well as the reflection of both the strategy of AEH’s management and AEH’s performance in its share price. These factors may also separately impact the consolidated value of AXA Group’s remaining stake in AEH and as a result adversely impact the consolidated results of the Group as well as the AXA share price.
On April 10, 2018, AXA announced that it had entered into an agreement with its main occupational benefits foundations (1) to convert their business model from a full-value insurance (2) model to a semi-autonomous model (3). The operations aff ected by these expected disposals were treated as held for sale in AXA’s consolidated financial statements as of December 31, 2018.
(1 ) Collective group pension schemes, which are managed by an independent Board.
(2 ) Contract covering the whole off er: guaranteed savings and annuity benefits, death and disability benefits, and administration services.
(3 ) Contract covering death and disability benefits, and administration services.
As of December 31, 2018, Other Comprehensive Income of invested assets in scope of the transaction was nil.
As of December 31, 2018, the consolidated statement of income includes a net income impact of €-428 million mainly explained by the VBI impairment related to the aforementioned disposal.
On August 1, 2018, AXA announced that it has received an irrevocable off er from Cinven for the sale of AXA Life Europe. The sale is expected to take place in the first semester of 2019. The completion of the transaction is subject to customary closing conditions, including the receipt of regulatory approvals. The operations aff ected by this expected disposal were treated as held for sale in AXA’s consolidated financial statements as of December 31, 2018.
As such the major classes of assets and liabilities (net of intercompany balances with other AXA entities) presented as held for sale related to: ASSETS
As at December 31, 2018, o ther c omprehensive i ncome in scope of the transaction was €+63 million.
As of December 31, 2018, the consolidated statement of income includes an exceptional impact of €-18 million.
On December 22, 2017, AXA announced that it had entered into an agreement with Jeneration Holdings Limited to sell its Swiss Privilege franchise in Hong Kong, AXA Wealth Management (HK) Limited.
At this time, the completion of the transaction is subject to customary closing conditions, including the receipt of regulatory approvals.
On October 31, 2018, AXA announced that it had completed the sale of its occupational pensions portfolio in Germany (ProbAV Pensionskasse AG) to Frankfurter Leben-Gruppe. The net income impact of the sale was €+35 million gain.
(a) Mainly related to the VBI impairment related to the Group Life portfolio in Switzerland classified as held for sale. (b) Mainly reclassification to assets held for sale of AXA Wealth Management (HK) Limited for which the disposal process was not finalized at year-end.
The change in Value of non-life Business In-force (“VBI”) was as follows (see Note 5.3.1): (in Euro million) 2018
Deferred Acquisition Costs and equivalent net carrying value as of January 1 22,183 698 23,355 777
Amortization and impairment for the period of Life DAC (1,700) (140) (1,883) (94)
Deferred Acquisition Costs and equivalent net carrying value as of December 31 25,791 625 22,183 698 o f which shadow accounting on DAC (488) - (1,769) -
(a) Relating to contracts subject to IFRS 4, i.e. insurance contracts and investment contracts with discretionary participating features. (b) Applicable to investment contracts with no discretionary participation features (IAS 39). (c) In 2018, includes the reclassification of AXA Life Europe to held for sale and AXA Wealth Management (HK) Limited for which the disposal process was not finalized at year end.
Deferred Acquisition Costs and equivalent 25,791 625 22,183 698 of which shadow DAC (488) - (1,769) -
Unearned revenues and unearned fees reserves 2,464 258 2,316 282 of which shadow unearned revenues reserves (278) - (403) -
(a) Relating to contracts subject to IFRS 4, i.e. insurance contracts and investment contracts with discretionary participating features. (b) Applicable to investment contracts with no discretionary participation features (IAS 39).
Other intangible assets represented €5,041 million net value as of December 31, 2018, and mainly included: (in Euro million) Gross value
Intangible assets recognized in business combinations mainly include value of distribution agreements and customer related intangibles, including €1,926 million (net carrying value) assets with indefinite useful life.
Other intangible assets recognized in business combinations and other business operations totaling €1,641 million were identified at the date of the acquisition of XL Group. They mainly included €1,144 million relating to the distribution network and €427 million attributable to Lloyd’s syndicate capacity intangibles, that were already recognized in XL Group accounts before the acquisiton: ■ the distribution network represents the future profitability of XL Group existing non-syndicate business, based on customer relationships at the acquisition date; ■ the Lloyd’s syndicate capacity represents the value of the broker relationship and indefinite license that allows XL Group to transact business in the Lloyd’s market.
These intangible assets are amortized over the residual life of the contracts except the Lloyd’s syndicate capacity that is deemed to have an indefinite useful life.
Debt instruments held to maturity - - Debt instruments available for sale 394,649 394,649 55.86% Debt instruments designated as at fair value through profit or loss (c) 36,059 36,059 5.10% Debt instruments held for trading 210 210 0.03% Debt instruments (at cost) that are not quoted in an active market (d) 9,346 9,193 1.30%
Equity instruments available for sale 15,131 15,131 2.14% Equity instruments designated as at fair value through profit or loss (b) 7,815 7,815 1.11% Equity instruments held for trading 43 43 0.01%
(a) Includes infrastructure investments. (b) Assets measured at fair value under the fair value option. (c) Includes assets measured at fair value notably under the fair value option. (d) Eligible to the IAS 39 – Loans and receivables measurement category. (e) Mainly relates to mortgage loans and policy loans.
Investment in real estate properties at amortized cost (a) 31,296 21,645 3.04%
Debt instruments designated as at fair value through profit or loss (c) 34,746 34,746 4.88%
Debt instruments available for sale 360,667 394,649 394,649 41,324 7,342 337,654 380,710 380,710 47,362 4,306
Equity instruments available for sale 13,341 15,131 15,131 2,275 485 13,931 18,461 18,461 4,688 159
Non consolidated investment funds available for sale 96 98 98 2 - 95 110 110 15 0
Debt instruments available for sale 364,895 398,833 398,833 41,417 7,479 341,853 384,927 384,927 47,506 4,432 Debt instruments (at cost) that are not quoted in an active market 10,131 10,284 10,131 224 71 9,155 9,347 9,127 279 87 Equity instruments available for sale 14,371 16,597 16,597 2,726 500 14,775 19,534 19,534 4,945 187 Non consolidated investment funds available for sale 6,870 7,523 7,523 744 90 8,096 9,228 9,228 1,242 109
The table below sets out the debt instruments portfolio by issuer type, excluding macro-hedging derivatives but including the eff ect of related hedging derivatives (IAS 39 qualifying hedges or economic hedges). Details of the eff ect of derivatives are also provided in Note 20.3.
(a) Includes debt instruments issued by companies in which a State holds interests. (b) Includes fixed maturity investment funds and debt securities related to reverse repo.
Additional information on the credit risk associated with debt instruments is provided in Note 4 “Financial and insurance Risk Management”.
Loans from activities other than insurance and banks 86 86 125 125 Total excluding the impact of derivatives 33,608 31,789 30,522 28,734
Debt instruments (at cost) that are not quoted in an active market and loans and debt instruments backing contracts where the financial risk is borne by policyholders are excluded from the table below. Most of the debt instruments and loans held by the Group are fixed-rate instruments (i.e. exposed to fair value interest rate risk).
Including the eff ect of derivatives (also detailed in Note 20.3) and equity instruments of real estate companies, the breakdown by industry of equity instruments owned across the Group is as follows: (in Euro million) Financial
The breakdown of transferred financial assets/liabilities not qualifying for derecognition was as follows: (in Euro million)
Other non consolidated investment funds 6,511 90 6,602 7,345 46 7,391
Derivatives related to non consolidated investment funds 23 - 23 (88) - (88)
Debt instruments (at cost) that are not quoted in an active market (c) 10,131 (0) 10,131 1 10,131 9,156 (0) 9,155 (28) 9,127
Non consolidated investment funds available for sale 7,785 (915) 6,870 654 7,523 9,180 (1,084) 8,096 1,133 9,228
(a) Asset value including impact of discounts/premiums and accrued interests, but before impairment and revaluation to fair value of assets available for sale. (b) Asset value including impairment, discounts/premiums and accrued interests, but before revaluation to fair value of assets available for sale. (c) Revaluation to fair value for instruments at cost related to the application of hedge accounting. (d) Including policy loans.
Impairment – Non consolidated investment funds 1,084 186 (41) - (314) 915
The breakdown by valuation method of investments recognized at fair value including derivatives (also detailed in Note 20.3 and Note 20.5), but excluding the assets backing contracts where the financial risk is borne by policyholders is as follows: (in Euro million)
Other assets held by consolidated investment funds designated as at fair value through profit or loss 1,135 6,765 7,125 15,025 15,033 3,297 6,136 5,875 15,309 15,339
ASSETS CLASSIFICATION Fair values determined in whole directly by reference to an active market relate to prices which are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency which represent actual and regularly occurring market transactions on an arm’s length basis, i.e. the market is still active. Such assets are categorized in the level 1 of the IFRS 13 fair value hierarchy.
• values provided at the request of the Group by pricing services and which are not readily publicly available; ■ assets measured on the basis of valuation techniques including a varying degree of assumptions supported by market transactions and observable data.
The common characteristic of level 2 and 3 assets is that their markets are considered as inactive. Their value is generally based on mark to market basis, except when there is no market or when the market is distressed, in which case a mark to model approach is used. Assets not quoted in an active market which are marked to market mainly using observable inputs are classified in level 2. Assets not quoted in an active market for which fair value determination is not mainly based on observable inputs are classified as level 3. For all assets not quoted in an active market/ no active market and for which a mark to model approach is used, the classification between level 2 and level 3 depends on the proportion of assumptions used supported by market transactions and observable data (market observable inputs): ■ assumed to be used by pricing services or; ■ used by the Group in the limited cases of application of mark to model valuations.
The identification of level 3 assets among assets not quoted in an active market involves a significant level of judgment. The following are considered as observable: inputs provided by external pricing services, information observable obtained from specialized data providers, rating agencies, external surveys. The extent to which such data are external to the Group and not assessed by internal valuation teams is one of the main criteria applied in assessing whether data are observable or not. Should those data be significantly adjusted or would they be outdated because of the lack of newly available factors, such inputs would be deemed unobservable. Another area of judgment is the assessment of the significance of an input against the fair value measurement in its entirety. As a result, a diff erent cut between observable and unobservable data and variances in the weighting of the significance of each input against the fair value measurement in its entirety could produce a different categorization.
Investment in real estate properties at amortized cost - 29,660 420 30,080 30,042 - 32,028 (0) 32,028 32,074
TOTAL FAIR VALUE OF INVESTED ASSETS AT AMORTIZED COST 269 68,214 40,022 108,506 108,021 343 66,677 39,589 106,609 105,351
9.12 DISCLOSURES ABOUT THE TEMPORARY EXEMPTION FROM IFRS 9 9.12.1 Solely Payments of Principal and Interest (SPPI) test
IFRS 9 defines the terms “principal” as being the fair value of the financial asset at initial recognition, and the “interest” as being compensation for (i) the time value of money, and (ii) the credit risk associated with the principal amount outstanding during a particular period of time.
The debt instruments accounted for fair value through other comprehensive income under IAS 39 are potentially eligible to SPPI test whereas it is not applicable for the debt instruments accounted for fair value through profit and loss.
Debt instruments (at cost) not quoted in an active market (0) (0) 9,345 (69) 0 0 8,378 11
Equity instruments available for sale 15,170 (2,564) - - 18,445 1,039 - -
Non consolidated investment funds available for sale 7,419 (242) - - 9,116 207 - -
Debt i nstruments available for sale 3 (0) 4,298 (64) 34 4 4,303 (76)
Debt instruments (at cost) not quoted in an active market 0 0 938 (0) 0 0 997 0
Equity instruments available for sale 1,466 228 - - 1,073 17 - -
Debt i nstruments held to maturity 0 0 0 0 0 0 0 (0)
Debt i nstruments available for sale 4,787 (179) 396,351 (9,114) 5,308 (108) 381,648 (3,709)
Debt instruments (at cost) not quoted in an active market (0) (0) 10,283 (69) 0 0 9,375 11
Equity instruments available for sale 16,635 (2,337) - - 19,518 1,055 - -
The tables below set out the gross carrying amount and the fair value (excluding the impact of derivatives) information on credit risk exposure for financial assets that pass the SPPI test: For debt instruments, the credit risk information is available by rating grades (1).
Debt Instruments held to maturity 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Debt Instruments available for sale 86,520 118,467 89,844 91,777 4,141 5,602 396,351 82,732 118,280 81,080 89,333 4,782 5,442 381,648
Total Fair value of debt instruments that pass the SPPI test 86,587 120,201 90,945 94,093 4,555 10,253 406,634 83,788 119,308 81,624 91,819 5,179 9,305 391,023
Total Gross Carrying amount of loans that pass the SPPI test 13,393 31,549 15,796 60,738 11,875 28,291 16,690 56,857
Total Fair value amount of loans that pass the SPPI test 13,077 33,175 16,594 62,847 11,832 29,881 17,600 59,314
Below are detailed the gross carrying value and the fair value of loans that pass the SPPI test for which the credit risk based on: A) RATING GRADES: Loans at cost
Total amount of loans that pass the SPPI test and for which credit risk information is based on scoring 31,549 33,175 28,291 29,881
Fair value of loans that pass the SPPI test 90 days and more past due 56 43 62 42 Total amount of loans that pass the SPPI test and for which credit risk is provided on the basis of past due information 15,796 16,594 16,690 17,600
I Note 10 Investments accounted for using the equity method 10.1 BREAKDOWN OF INVESTMENTS ACCOUNTED FOR USING THE EQUITY METHOD
Krungthai AXA Life Insurance Company Ltd 181 - 32 12 0 224
Bharti AXA General Insurance Company Limited 25 - 1 (1) (0) 25
Kyobo AXA Investment Managers Company Limited 33 - 4 0 (3) 34
AXA SPDB Investments Managers Company Limited 22 - 13 (2) (2) 32
Total assets (including cash and cash equivalents) 7,543 1,407 6,387 1,586
As of December 31, 2018, the Group share of interest in both Krungthai AXA Life Insurance Company Ltd. and AXA Tian Ping was of 50.0%.
Under IAS 39, all financial assets of Krungthai AXA Life Insurance Company Ltd. are accounted for at fair value through profit and loss and consequently the SPPI test (Solely Payments of Principal and Interest) is not applicable.
The table below sets out the result of the SPPI test (Solely Payments of Principal and Interest) for the assets not currently designated as at fair value with change in fair value through income statement as of December 31, 2018. The amounts exclude the impact of derivatives.
Fail the SPPI t est Pass the SPPI t est Fail the SPPI t est Pass the SPPI t est
Equity instruments available for sale 371 (43) - - 355 25 - -
Non consolidated investment funds available for sale 1,036 (69) - - 925 18 - -
Premiums earned not yet written 5,592 - 5,592 5,592 5,534 - 5,534 5,534
Receivables arising from direct insurance and inward reinsurance operations 25,776 (517) 25,259 25,259 16,792 (432) 16,360 16,360
Receivables from brokers and general agents 5 (3) 3 3 9 (5) 4 4
(a) Fair value is assessed as being equal to net carrying value given the nature of such assets. (b) Including €905 million deposits in the central banks in 2018 and €708 million in 2017.
As of December 31, 2018, total consolidated net cash and cash equivalents amounted to €30,556 million, net of €773 million bank overdraft s classified under “Other debt instrument issued and bank overdraft s” in the consolidated statement of financial position.
Net cash and cash equivalents increased by €7,360 million compared to 2017 mainly due to: ■ Switzerland (€+4,167 million) temporary cash position in the context of Group Life portfolio disposal; ■ AXA XL (€+3,030 million) related to the acquisition of XL Group; ■ France (€+2,366 million) mainly related to regular insurance activities (€+1,620 million) and dividends received from real estate funds (€+497 million); ■ AXA SA (€+409 million) mainly from the proceeds coming from the disposal of the AXA Equitable Holdings, Inc. shares, additional loans granted by subsidiaries, dividends received, the issuance of subordinated debt at the end of March 2018, partly off set by the acquisition of XL Group, the dividend paid, and the repayment of undated subordinated debt; ■ AXA Life Europe (€-1,040 million) reclassified as assets held for sale; ■ Germany (€-556 million) mainly due to a loan granted to AXA SA (€-300 million); ■ The United States (€-546 million) mainly related to regular insurance activities.
Net cash used in investing activities was €-12,337 million in 2017, mainly reflecting: ■ €-11,721 million of net cash used in purchases and sales of financial invested assets; ■ €-256 million of net cash impact of assets lending/borrowing collateral receivables and payables.
Net cash relating to financing activities was €+3,919 million in 2018 mainly driven by: ■ sale of interests in subsidiaries without change in control €+4,097 million, mostly related to the partial disposal of AXA Equitable Holdings, Inc .; ■ subordinated debt issued €+5,685 million and repayment of financing debt €-1,681 million and undated subordinated debt €-665 million in 2018; ■ dividends payments of €-3,414 million.
Net cash relating to financing activities was €-6,111 million in 2017 mainly driven by: ■ subordinated debt issued €+946 million and repayment of financing debt €-1,832 million and undated subordinated debt €-330 million in 2017; ■ dividends payments of €-3,098 million.
As of December 31, 2018, the carrying value of treasury shares and related derivatives amounted to €1,038 million. There was no AXA shares held by consolidated Mutual funds not backing contracts where financial risk borne by policyholders.
As of December 31, 2018, 1.9 million treasury shares backing contracts where financial risk is borne by policyholders held in consolidated investment funds were not deducted from shareholders’ equity. Their total estimated historical cost was €33 million and their market value €35 million at the end of December 2018.
As of December 31, 2018 and December 31, 2017, undated subordinated debt recognized in shareholders’ equity broke down as follows: (in million)
SHARE CAPITAL AND CAPITAL IN EXCESS OF NOMINAL VALUE During 2017, the following transactions had an impact on AXA’s share capital and capital in excess of nominal value: ■ a capital increase of €443 million from the employee share off ering (December 2017) of 19.6 million shares; ■ a capital increase of €133 million due to exercise of stock options; ■ share-based payments for €37 million; ■ a capital decrease of €688 million for 27.5 million shares in order to eliminate the dilutive effect of share-based compensation schemes (AXA SA’s stocks options, performance shares plans and share plan).
DIVIDENDS PAID On April 26, 2017, Shareholders’ Meeting, shareholders approved a dividend distribution of €1.16 per share corresponding to €2,808 million with respect to the 2016 financial year.
RESERVES RELATED TO CHANGES IN FAIR VALUE OF AVAILABLE FOR SALE FINANCIAL INSTRUMENTS INCLUDED IN SHAREHOLDERS’ EQUITY The decrease of gross unrealized gains and losses on assets available for sale totaling €-11,702 million, of which €8,971 million decrease in unrealized capital gains on debt securities which was mainly driven by corporate spreads widening, and to a lower extent by interest rates increase in the United States.
Shadow accounting on Value of purchased Business In force (159) (178)
Unrealized gains and losses (net of tax) - Assets available for sale 11,863 16,174
Unrealized gains and losses (net of tax) - Equity accounted companies (32) 20
Minority interests’ share in unrealized gains and losses (c) (42) (215)
(a) Unrealized gains and losses on total available for sale invested assets including loans and assets held for sale. (b) Net of shadow accounting on unearned revenues and fees reserves and held for sale activities. (c) Including foreign exchange impact attributable to minority interests. (d) Group share.
On December 31, 2018, most of the unrealized gains on assets available for sale are related to Life & Savings activities.
Shadow accounting on Deferred Acquisition Costs (b) (217) - (68) (77)
Minority interests’ share in unrealized gains and losses (c) (6) 0 - (0)
UNREALIZED GAINS AND LOSSES (NET GROUP SHARE) (e) 2,535 691 500 2,087
Unrealized gains and losses (net of tax) 100%, closing 11,831 16,194
(b) Including foreign exchange impact attributable to minority interests. (c) Group share. (d) Including unrealized gains and losses on assets held for sale operations.
The change in Group share translation reserves €1,869 million was mainly driven by Japan (€+495 million), Switzerland (€+404 million), the United States (€+368 million), Asia (€+175 million), partly offset by International Market (€79 million).
EMPLOYEE BENEFITS ACTUARIAL GAINS AND LOSSES The total impact of employee benefits actuarial gains and losses amounted to €+253 million (of which Group share was €+608 million and minority interests were €-355 million) as of December 31, 2018.
The positive impact in equity arising from employee defined benefits obligation was mainly explained by: ■ an overall increase in discount rate assumptions used to value liabilities in diff erent countries (an increase in discount rate per reference to financial conditions entails a decrease in defined benefit obligation thus, a gain on liabilities); ■ an update of longevity assumptions in Switzerland (adoption of the latest Continuous Mortality Investigation Projection Model - CMI) ; partly off set by: ■ losses on plan assets backing the defined benefit obligation mainly in the United Kingdom, the United States and Switzerland.
CURRENCY TRANSLATION RESERVE The total impact of foreign exchange rate movements was €-4,933 million (of which €-4,588 million from Group share and €-346 million from minority interests) as at December 31, 2017.
The positive impact in equity of actuarial gains and losses arising from employee defined benefits obligation was mainly explained by: ■ the outperformance of plan assets covering employee’ defined benefit pension plans (mainly in the United Kingdom) compared to the discount rate; ■ the revisited alternative approach (stochastic model) used to derive the pension increase assumptions and the update of mortality assumption (mainly in the United Kingdom); ■ the expected decrease in conversion rate at retirement, decrease in crediting rate assumption and revisited demographic assumptions; partially off set by: ■ net experience losses mainly driven by the decrease in discount rates (mainly in the United Kingdom and the United States) and other parameters aff ecting the defined benefit obligation.
■ transactions with minority interests’ holders, mainly included: • increase in minority interests following the IPO of the United States and the Second Off ering of AXA Equitable Holdings, Inc. for €+6,463 million (see Note 5.3.3),
• equity component of Mandatory Exchangeable Bonds for €+607 million (see Note 5.3.3),
• minority interests qualified as equity resulting from the consolidation of a new investment fund and capital addition to existing consolidated investment funds for €+532 million.
• minority interests qualified as equity resulting from the consolidation of a new investment funds and capital addition to existing consolidated investment funds for €+682 million,
14.1.1 Segment breakdown of liabilities arising from insurance and investment contracts (gross and reinsurers’ share)
Reinsurers’ share in insurance and investment contracts’ liabilities (E) 4,773 1,138 264 1,980 3,905 1,055 (34) 13,081
(a) Restated: as per the new governance. (b) Other liabilities was comprised of Unearned revenue and unearned fee reserves, liabilities arising from policyholders’ participation and other obligations, and derivatives instruments relating to insurance and investment contracts.
Liabilities arising from insurance contracts 333,688 103,327 437,015 334,913 66,216 401,129
Liabilities arising from insurance contracts where risk is borne by policyholders 146,058 - 146,058 159,702 - 159,702
Liabilities arising from investment contracts with discretionary participating features 34,225 - 34,225 33,199 - 33,199
Liabilities arising from insurance contracts, including those where the financial risk is borne by policyholders, as disclosed in the total (A) of Note 14.1.1, were split by as follows: (in Euro million)
Liabilities arising from insurance contracts (A) 333,688 103,327 437,015 334,913 66,216 401,129 of which measured at current assumptions (c ) 14,123 - 14,123 13,427 - 13,427
Reinsurers’ share in future policy benefit reserves 9,525 (6) 9,519 5,697 (5) 5,693
Reinsurers’ share in claims reserves (a) 2,072 10,670 12,742 1,897 3,952 5,849
Reinsurers’ share in other reserves 633 (11) 622 632 (22) 611
Reinsurers’ share in liabilities arising from insurance contracts (D) 12,280 13,358 25,637 8,272 4,730 13,002
Sub-total Reinsurers’ share in liabilities (F = D+E) 12,280 13,358 25,638 8,272 4,730 13,003
Note: Liabilities relating to unearned revenues and fees (see Note 7.3), to policyholder participation (see Note 14.9), and derivative instruments (see Note 20.4) are excluded from the table above. Reinsurers’ share in insurance contracts liabilities relating to policyholders’ participation (€23 million in 2018 and €10 million in 2017), as well as derivative instruments (none in 2018 and 2017) are excluded from the table above.
(a) Includes reserves for claims handling expenses. (b ) Notably includes non-life annuities mathematical reserves. (c ) See Note 1.14.2 – Reserves measured according to the option off ered by IFRS 4.24 for selective re-measurement of reserves at current market assumptions.
Liabilities arising from investment contracts with discretionary participating features (A) 34,225 33,199 of which measured at current assumptions (b) - -
Liabilities arising from investment contracts with no discretionary participating features (B) 4,837 2,900
Liabilities arising from investment contracts where the financial risk is borne by policyholders (C) 14,532 15,896
Reinsurers’ share in liabilities arising from investment contracts with no discretionary participating features (F) - -
(a) Includes reserves for claims handling expenses. (b) See Note 1.14.2 – Reserves measured according to the option opened by IFRS 4.24 for selective re-measurement of reserves at current market assumptions.
The table below gives detailed information on claims reserves in Property & Casualty presented in Note 14.2: (in Euro million)
The table below gives detailed information on reinsurers’ share in claims reserves in Property & Casualty presented in Note 14.2: (in Euro million)
Reinsurers’ share in claims reserves as of January 1 3,952 4,475
Reinsurers’ share in claims reserves as of December 31 10,670 3,952
The table below gives detailed information on change in liabilities arising from insurance and investment contracts in Life & Savings presented in Note 14.2 (C): (in Euro million)
Technical reserves as of January 1 (a) 494,615 51,995 546,610 508,096 50,358 558,454
Collected premiums net of loadings on premiums (+) 48,423 5,421 53,844 48,217 5,146 53,364
Unit-Linked technical reserves value adjustment (+/-) (10,344) (791) (11,135) 17,991 386 18,377
In 2018, the change in scope of consolidation totaled €19,717 million mainly due to the reclassification in held for sale of the Group Life portfolio in Switzerland for €17,111 million and AXA Life Europe for €5,108 million, partly offset by the acquisition of XL Group for €3,064 million.
In 2017, the change in scope of consolidation tota led €2,926 million, mainly due to the classification in held for sale due to the planned sale of ProbAV Pensionskasse AG in Germany for €3,016 million as well as AXA Wealth Management (HK) Limited in Hong Kong for €914 million, partly off set by €1,097 million related to a change in reserve classification at AXA France.
Reinsurers’ share in technical reserves as of January 1 (a) 8,272 69 8,342 9,483 93 9,576
Reinsurers’ share in collected premiums net of loadings on premiums (+) 1,110 25 1,135 1,240 7 1,247 Reinsurers’ share in surrenders, maturities and other claims and benefits paid net of charges and penalties (-) (872) (17) (889) (732) (15) (747) Reinsurers’ share in change in reserves relating to technical and actuarial items (+/-) (b) 913 12 925 (1,275) (13) (1,288) Change in scope of consolidation and change in accounting principles (c) 2,651 - 2,651 193 - 193 Impact of foreign currency fluctuation 206 1 207 (636) (3) (638) Reinsurers’ share in technical reserves as of December 31 (a) 12,280 91 12,371 8,272 69 8,342
(a) Includes: future policy benefit reserves (including shadow accounting reserves), unearned premium reserves, unexpired risk reserves, claims reserves, claims expense reserves, other policy benefit reserves. Excludes: unearned revenue and unearned fee reserves, liabilities from policyholder participation.
The table below gives detailed information on liabilities arising from investment contracts presented in Note 14.3 (D).
Note: This information is presented net of the impact of derivatives, which is described in Note 20.4.1. (a) In accordance with IFRS 4 which allows, under certain conditions, to continue to use a previous accounting policy for liabilities arising from contracts with discretionary participating features.
IFR S 15 (Rights to future management fees also known as Deferred Origination Costs “DOC”) – see Note 1.7.3 and Note 7.
Therefore, too many uncertainties remain outstanding to define how to determine the fair value of participating contracts. As a result, fair value or value ranges for investment contracts with discretionary participating features cannot be reliably disclosed.
The loss reserve development table shows movements in loss reserves between 2008 and 2018, based on previously applied accounting standards. All contracts concerned are insurance contracts as defined by IFRS.
The second line titled “Gross reserves for unpaid claims and claim expenses developed in 2018 adjusted for changes in exchange rates and scope of consolidation” indicates the amount that would have been developed initially at the booking date, had the exchange rates for the current year been used (for reserves recognized by AXA Group entities that do not use the Euro as their functional currency) and assuming an identical scope of consolidation to that used for the last diagonal of the table.
The second part of the table entitled “Reserve re-estimated” shows, for a given column N, an estimate of the final cost of liabilities carried as of December 31 of year N in respect of all years of occurrence prior to and including N, at each future period end. The final cost estimate varies year on year as information relating to losses still outstanding becomes more reliable.
(b) Following the disposal of Canadian operations, amounts in its respect were not reported for the current year while previously disclosed amounts were unchanged. (c) The comparative information related to previous periods was restated for the implementation of IFRS 10 and 11.
Due to the uncertainty surrounding asbestos claims, it is not possible to determine their future cost with the same degree of certainty as for other types of claims. Although AXA considers its reserves for asbestos claims to be adequate, it is possible that, under some adverse scenarios, they may turn out to be insuff icient to cover future losses.
Claims reserves at end of year 560 432 878 832 of which Reported claims 164 129 140 129 of which IBNR claims 397 303 738 704
Reserves adequacy ratios 3-Year survival ratio excluding commutations (a) 15 years 15 years 28 years 30 years
TOTAL LIABILITIES ARISING FROM POLICYHOLDER PARTICIPATION AND OTHER OBLIGATIONS 40,625 44,409
The deferred policyholder participation and other obligations liabilities and deferred policyholder participation assets include the impact of shadow accounting (see definition in Note 1.14.2) mainly in relation to unrealized gains and losses on invested financial assets available for sale as described in Note 13.2.1, but also with regard to other temporary diff erences not necessarily linked to financial assets. Note 13.2.1 also contains a focus on jurisdictions with significant portions of participating business and where required minimum local policyholders’ share in the entities’ results are significant. This Note discloses for such jurisdictions unrealized gains and losses related to available for sale investments and related shadow accounting adjustments. The decrease in deferred policyholders’ participation liabilities mainly relates to a decrease in unrealized gains on assets available for sale in Germany and France. The increase in deferred policyholders’ participation assets was attributable to Hong Kong.
In Property & Casualty business, most reserves (94 % as of December 31, 2018) are not discounted, with the exception of disability annuities and workers’ compensation liabilities that are deemed structured settlements and where the discount rate is revised regularly. Undiscounted reserves are not sensitive to interest rate risks in the financial statements.
Discount rate are qualified as locked-in when those used in the first recognition of the technical liabilities remain unchanged in the subsequent years and are qualified as unlocked when updated in subsequent years.
Life & Savings - locked-in discount rate (a) 262,164 1.80% 271,906 1.87%
This following table shows the reconciliation of previous table with the consolidated S tatements of F inancial position (chapter 5.1): In accordance with IFRS 7, the Group discloses, in Note 4 of its consolidated financial statements, quantitative sensitivities of the Group EOF (Eligible Own Funds) (as defined in the Section 4.3 “Market risks”) to interest risk and equity price risk.
The estimated impact of the unlocking of discount rates relating to Life & Savings reserves was €634 million reserve decrease for 2018 (compared to €745 million reserve decrease for 2017) gross of policyholders’ participation, tax impacts and other shadow accounting impacts and was included in the income statement of the period.
The risk of GMDB and GMIB features to AXA are related to the unhedged portion of the benefits and to the policyholder behaviour becoming materially different from the expected behavior. Reserves are established for these features on the basis of actuarial assumptions related to projected benefits and related contract charges. The determination of estimated GMDB and GMIB liabilities is based on models which involve numerous estimates and subjective judgments, including those regarding expected market rates of return and volatility, policyholder behaviour assumptions and GMIB election rates. There can be no assurance that ultimate experience will not diff er from management’s estimates. In addition to providing for risk through establishing reserves, AXA also manages the risk through a combination of reinsurance programs and active financial Risk Management programs including derivatives.
Liabilities arising from insurance contracts (as per Note 14.2) 437,015 401,129
Liabilities arising from investment contracts with discretionary participating features (as per Note 14.3) 34,225 33,199
I Note 15 Liabilities arising from banking activities 15.1 BREAKDOWN OF LIABILITIES ARISING FROM BANKING ACTIVITIES
Macro-hedge derivatives and other derivatives relating to liabilities arising from banking activities (227) (227) (334) (334)
The Group applies the IFRS 13 fair value hierarchy as described in Note 1.5. The valuation method of liabilities arising from banking activities excluding derivatives (detailed in Note 20.5) are as follows: ■ banking liabilities issued at fair value – Retail customers (€2,125 million as of December 31, 2018): • €914 million as of December 31, 2018 (€1,361 million as of December 31, 2017) based upon market prices that are available in active markets and are considered as level 1 fair values,
• €504 million fair values as of December 31, 2018 (€541 million as of December 31, 2017) mainly based on non-observable market data inputs and are considered to be level 3 fair values; ■ retail customers (€21,560 million as of December 31, 2018), Corporate customers (€5,272 million as of December 31, 2018), and Interbanking refinancing (€1,517 million as of December 31, 2018), are not traded in active markets and quoted prices are not available. Given the short maturities of main liabilities arising from banking activities (see Note 15.2), the carrying amounts may be considered as reasonable proxies for fair values. Thus, the fair value of amounts displayed above for these instruments are considered to be level 3 fair values; ■ other liabilities arising from banking activities relate to bonds issued with fair values mainly based on observable market data inputs. As such, the fair values of these liabilities are considered as level 2 instruments.
As of December 31, 2018, debt relating to investments under lending agreements and equivalent in banking activities was €431 million whereas it amounted to €383 million as of December 31, 2017.
The table below sets out the contractual maturities of liabilities arising from banking activities. These contractual maturities are mostly classified under the category “12 months or less”. Consequently, the diff erence between maturities based on contractual cash flows in comparison with the carrying values is not significant.
TOTAL LIABILITIES ARISING FROM BANKING ACTIVITIES 26,702 6,557 2,795 36,054 22,677 7,661 2,559 32,898
Changes in provisions for risks and charges (excluding employee benefits and share-based compensation) are set out below: (in Euro million) 2018 2017
Impact of change in scope of consolidation and other changes 106 295
Subordinated Notes, 5.25% due 2040 (in Euro) 1,300 1,300 Subordinated Notes, 5.125% due 2043 (in Euro) 1,000 1,000 US registered redeemable subordinated debt, 8.60% 2030 (in US$) 1,064 1,052 US registered redeemable subordinated debt, 7.125% 2020 (in £) 363 366
Derivative instruments hedging financing debt (included in the table above) are commented in Note 20.
For the sensitivity to movements in interests rates, please refer to page 197 of the “Interest rates & Equity risk related to the operating activities of Group subsidiaries” Section 4.3 “Market risks”.
Derivatives on financing debt instruments issued (a) (1) (1) (42) (42)
The fair value of financing debt as of December 31, 2018, excluding accrued interests, was €16,361 million, including related hedging derivative instruments. The fair value increased by €6,619 million compared to December 31, 2017, mainly driven by the issuance of new financing debt instruments in AXA Equitable Holdings,
Contractual cash flows of financing debt by contractual maturity as of December 31 12 months or less More than 1 year up to 5 years More than 5 years Total contractual cash flows
Debts relating to investments under total return swap agreement (“TRS”) 4,365 3,608
Payables arising from direct insurance and inward reinsurance operations 10,307 9,318
Minority interests in funds under this caption totaled €6,796 million as of December 31, 2018, a decrease of €1,960 million compared to December 31, 2017, mainly coming from France.
As of December 31, 2018, other debt instruments issued and bank overdraft s excluding total return swap agreement (“TRS”) totaled €2,739 million, a decrease of €304 million compared to December 31, 2017, mainly due to the decreased in other debt instruments issued.
18.3 FAIR VALUE MEASUREMENT OF OTHER DEBT INSTRUMENTS ISSUED AND BANK OVERDRAFTS (OTHER THAN FINANCING DEBT)
The fair value of other debt instruments issued and bank overdraft s excluding total return swap agreement (“TRS”) was €2,739 million as of December 31, 2018. Among the elements included in the preceding table, fair value is only calculated for other debt instruments issued.
As of December 31, 2018, payables arising from direct insurance and inward reinsurance operations as disclosed in the Note 18.1, totaled €10,307 million, an increase of €989 million compared to December 31, 2017, mainly related to the XL Group acquisition.
As of December 31, 2018, payables arising from direct outward reinsurance operations totaled €11,488 million, an increase of €5,318 million compared to December 31, 2017, mainly related to the XL Group acquisition.
Collateral debts relating to investments under a lending agreement or equivalent 25,433 7,381 - 32,814
Other debt instruments issued, notes and bank overdraft s excluding TRS – Carrying value 2,306 194 543 3,043
Collateral debts relating to investments under a lending agreement or equivalent 25,394 2,468 539 28,401
The income tax charge was split as follows: (in Euro million) December 31, 2018 December 31, 2017
TOTAL INCOME TAX FROM LOSS ON HELD FOR SALE GROUP LIFE PORTFOLIO IN SWITZERLAND (110) -
The reconciliation between the theoretical tax charge (pre-tax profit multiplied by the applicable tax rate in France for the period concerned) and the eff ective tax charge was as follows: (in Euro million) December 31, 2018 December 31, 2017
Impact of rates diff erence on notional tax charges 311 (420)
Impact of diff erences in tax rate and impact of taxes not linked to pre-tax income 11 26
Impact of diff erences in tax rates and tax bases 240 (539)
Tax losses of prior years used in the current year without DTA recognized previously (20) (26)
Impact of adjustments, decrease in value and other items (95) (431)
In the table below, the net deferred tax position corresponds to the diff erence between Deferred Tax Assets (DTA) and Deferred Tax Liabilities (DTL) carried on the Group’s consolidated statement of financial position. Note that the breakdown of DTA/
The change from net liability position €-4,947 million in 2017 to €-3,706 million in 2018 mainly came from the decrease in unrealized capital gains on fixed-income assets.
Recognized deferred tax assets (DTA) on tax loss carried forward by maturity and expiration date
The tables below are broken down (i) in the first part the maturity by which the Group expects to use the DTA accounted at yearend and the corresponding tax losses carried forward, (ii) in the second part, the “expiration date” of the DTA, i.e. the latest date at which the Group could use them.
DTA recognized on tax losses carried forward 6 1 0 12 2 10 11 72 809 923
This Note includes all types of derivatives including derivative instruments held by consolidated investment funds in the “Satellite Investment Portfolio” (see Note 1.8.2) which are recognized at fair value in accordance with the IFRS hierarchy as described in Note 1.5, but excluding derivative instruments that meet the definition of shareholders’ equity instruments (see Note 13 for details).
Maturity of notional amount as of December 31, 2018 (a) Notional amount Positive fair value Negative fair value Net fair value
The notional amount of derivatives which is used to express the volume of instruments outstanding and to provide a basis for comparison with other financial instruments most certainly overstates the level of activity and does not directly measure risk as it greatly exceeds the possible credit and market loss that could arise from such transactions. It does not represent the amounts that are eff ectively exchanged by the parties, and thus is not a measure of the Group’s exposure to derivative instruments. For example, the Group is exposed to credit risk in respect of its counterparties to the derivative instruments, but is not exposed to credit risk on the entire notional amounts. AXA actively manages counterparty risk generated by derivatives through a specific Group-wide policy. This policy includes a limit framework and an exposure monitoring process. Limits are specifically set for each authorized counterparty, based on an internal scoring system. This policy also includes daily to weekly collateralization for the majority of the Group’s exposure. The total net collateral given communicated for all derivative instruments including those related to derivatives held within investment funds of the “Satellite Investment Portfolio” (see Note 1.8.2) was €-0.5 billion as of December 31, 2018 (€1.0 billion at the end of 2017). This net total includes amounts recognized in the Consolidated Statement of Financial Position and unrecognized commitments received or given disclosed in Note 29.
For further detail on Asset Liability Management governance, please refer to page 193 of Section 4.2 “Internal control and Risk Management”.
As of December 31, 2018, the notional amount of hedging derivative instruments as defined by IAS 39 (fair value hedge, cash flow hedge and net investment hedge) of the Group was €87.3 billion versus €78.1 billion at the end of 2017. The net fair value recorded was €-1,097 million as of December 31, 2018, versus €-1,111 million at the end of 2017.
One of the main objectives of currency derivatives instruments is to limit variations in net foreign currency-denominated assets resulting from movements in exchange rates in order to protect partially or in full the value of AXA’s net foreign-currency investments in its subsidiaries and thus reduce the variability of Group consolidated shareholders’ equity against currency fluctuations, but also of others key indicators such as liquidity, gearing and solvency ratios. Notional amount of derivatives used by the Company to hedge the foreign currency exposure increased from €27.0 billion at the end of 2017 to €36.0 billion at the end of 2018.
A description of exchange-rate risk related to the operating activities of Group subsidiaries and the Company is included in Section 4.3 “Market risks” with amounts of exposures to exchange-rate risk and corresponding hedges.
The Group, as part of its investment and credit Risk Management activities, uses strategies that involve credit derivatives, which consist mainly of Credit Default Swaps (CDS). These instruments are used as an alternative to corporate bonds portfolios, when coupled with government debt instruments, but also as a protection on single names or specific portfolios.
The impact of derivative instruments is presented in the consolidated statement of financial position within their related underlying financial assets (and liabilities see Note 20.4.). The table below sets out the impact of derivative instruments on the related underlying assets.
Assets backing contracts where the financial risk is borne by policyholders 160,176 (0) 160,176 - - - 160,176 (0) 160,176
Macro-hedge and other derivatives 0 792 792 (0) (6) (1) 0 792 792
Assets backing contracts where the financial risk is borne by policyholders 174,923 80 175,003 - - - 174,923 80 175,003
Liabilities arising from insurance contracts 437,015 (812) 436,204 401,129 (1,109) 400,020
Liabilities arising from insurance contracts where the financial risk is borne by policyholders 146,058 (0) 146,058 159,702 (0) 159,702
Liabilities arising from banking activities 36,281 (227) 36,054 33,232 (334) 32,898
Derivative instruments relating to financing debt, operating debt and other financial liabilities - (324) - (324) - (698) - (698)
Derivatives on Liabilities arising from banking activities and Payables 3 (170) 1 (166) 2 (262) (17) (277)
Net value of derivative instruments – liabilities (B) 10 (2,295) 1 (2,285) 20 (3,872) (17) (3,869)
(a) Restated: as per the new governance. (b) Net of intercompany eliminations.
Given the Group’s scale and diversity, none of its client s accounts for more than 10% of its business.
Revenues from non-insurance contracts including revenues from other activities (€5,832 million), fees & charges relating to investment contracts with no participating features (€249 million), and commissions from banking activities (€138 million) correspond to the following type of services: (in Euro million)
(a) Restated: as per the new governance. (b) Net of intercompany eliminations and aft er deduction of the value related to the shares eliminated in consolidation. (c) Including assets held for sale.
Gross revenues Liabilities arising from insurance contracts of which fees, commissions and other revenues 392 353 - 21. 4 NET REVENUES FROM BANKING ACTIVITIES
Net interests revenues 391 401 Net commissions 93 95 Net revenues from banking activities 484 496
Investment in real estate properties at amortized cost 888 574 0 (258) 1,204 Investment in real estate properties as at fair value through profit or loss 57 - 21 - 78 Investment in real estate properties 945 574 21 (258) 1,281
Debt instruments held to maturity - - - - Debt instruments available for sale 10,796 58 (321) (53) 10,480 Debt instruments designated as at fair value through profit or loss (b) 981 - (933) - 48 Debt instruments held for trading 18 - (10) - 8 Non quoted debt instruments (amortized cost) 220 (2) - - 218
Equity instruments available for sale 653 1,253 (116) (764) 1,026 Equity instruments designated as at fair value through profit or loss (c) 551 - 143 - 694 Equity instruments held for trading 3 - 1 - 4
Non consolidated investment funds held for trading 11 - (1) - 11
Loans designated as at fair value through profit or loss - - - - -
Assets backing contracts where the financial risk is borne by policyholders - - 19,215 - 19,215
Commissions received from/paid to reinsurers 117 90 88 322 7 122 107 (26) 828
NET RESULT OF REINSURANCE CEDED (249) (344) (1) 123 7 (228) 207 200 (285)
Premiums ceded and unearned premiums ceded (1,682) (721) (489) (969) (559) (790) (147) 502 (4,855)
Claims ceded (including change in claims reserves) 1,221 320 322 577 849 511 86 (290) 3,597
Change in deferred acquisition expenses and equivalents (b) (1,312) - - (1,312) (1,252)
Charges relating to owner occupied properties 525 213 2 740 766
Expenses increased by €1,25 3 million compared to December 31, 2017. On a constant exchange rate basis expenses increased by €1,757 million.
On a constant exchange rate basis, insurance activities expenses increased by €1,510 million, mainly from: ■ AXA XL (€+1,252 million) mainly due to the acquisition of XL Group completed on September 12, 2018 (€+1,250 million); ■ Asia (€+188 million) notably in Hong Kong mainly from higher expenses in coinsured business; ■ Europe (€+85 million) mainly from higher restructuring costs in Belgium and Spain.
Partly off set by: ■ France (€-119 million) mainly from lower commissions in line with lower revenues in the Credit & Lifestyle Protection business.
The cost of the contributions paid was recognized as an expense in the income statement, and amounted to €183 million in 2018 (€157 million in 2017). The 2018 cost included €17 million of expenses for defined contribution plans in force at XL Group since the acquisition date.
The defined benefit pension plans within AXA are mostly final salary pension plans or based on a cash balance formula, which provide with members, benefits in the form of a guaranteed level of lump-sum payable at retirement age or pension payable for life. The level of benefits is generally based on members’ length of service and their salary in the final years leading up to retirement.
In Switzerland, the benefit plan is a Swiss contribution-based plan classified as a defined benefit plan under IAS 19 because of financial guarantees, risks related to the mortality and disability coverage.
Benefit payments in the United Kingdom, the United States and Switzerland are from trustee-administered funds and plan assets held in trusts are governed by local regulations and practices.
The Board of trustees, generally composed of representatives of the Company and plan participants in accordance with the respective plan’s regulations is responsible for the governance of the plans including investment decisions and contribution schedules in order to meet the existing minimum funding requirement or funding regime objective, jointly with AXA at local level.
In the United Kingdom, the main defined benefit plan was closed to new members on August 31, 2013 and members who were part of the defined benefit sections had the option to participate in the defined contribution sections.
In the United States, AXA US discontinued benefit accruals under its defined benefit pension plans aft er December 31, 2013, and provided a company defined contribution plan for services aft er January 1, 2014.
Following the acquisition of XL Group and the full consolidation of Roland Rechtsschutz, AXA assumed additional liabilities and plan assets associated with further defined benefit plans in the United Kingdom, the United States and Germany. Main pension plans are closed to new entrants, partially funded, governed by local regulations and trustees. XL Group also maintains deferred cash awards which are qualified as other long-term benefits under IAS 19.
The assumptions used to value defined benefit plans are consistent with the economic and financial conditions in the countries where they are located. The weighted-average financial assumptions used by AXA for pension plans in the principal r egions and countries were as follows: DECEMBER 2018 ASSUMPTIONS
Salary increase for future years 2.5% 1.7% 0.0% 6.3% 2.3% 3.5%
For any given plan, the discount rate is determined at the closing date using market yields for the corresponding currency on high quality corporate bonds with consideration of AA-rated bonds, depending on the plan’s duration and the maturity profile of the defined benefit obligation.
Significant demographic assumptions used by AXA are mortality tables in the measurement of the Group’s obligations under its defined benefit schemes. These assumptions are oft en set based on actuarial advice in accordance with published statistics and experience in each country. Translated into average remaining life expectancy at retirement age (between 60 and 65 in average), the mortality assumptions would give: ■ 22.65 years for male and 25.17 years for female retiring at end of December 2018; ■ 24.68 years for male and 27.24 years for female retiring at end of December 2028 (i.e. 10 years aft er the reporting date).
Change in benefit obligation Defined Benefit Obligation at the beginning of the year 20,497 22,132 566 645 21,062 22,777
Actuarial (gains) and losses arising from changes in demographic assumptions (158) (198) (3) (3) (161) (201) Actuarial (gains) and losses arising from changes in financial assumptions (579) (166) (31) 17 (610) (149) Benefits paid by plan assets and by separate assets (636) (644) (1) (1) (637) (645) Benefits directly paid by the employer (300) (310) (44) (38) (344) (348)
Net transfer In/(Out) (including acquisitions, disposals and reclassifications) (c) 161 (0) 67 0 228 (0)
Defined Benefit Obligation at the end of the year (A) 19,754 20,497 622 566 20,376 21,062 Change in plan assets Fair value of plan assets at the beginning of year 12,420 12,436 5 6 12,425 12,442 Interest income on plan assets 217 227 0 0 217 227 Actual return on plan assets, excluding interest income (279) 657 (0) (1) (279) 657
Net transfer In/(Out) (including acquisitions, disposals and reclassifications) (c) 72 (0) - - 72 (0) Benefits paid by plan assets (515) (510) - - (515) (510) Amount paid in respect of settlements (b) (226) - - - (226) -
Fair value of plan assets at the end of the year (B) 12,139 12,420 5 5 12,145 12,425 Change in separate assets Fair value of separate assets at the beginning of year 1,281 1,204 - - 1,281 1,204 Interest income on separate assets 12 11 - - 12 11 Actual return on separate assets, excluding interest income (36) 94 - - (36) 94
Fair value of separate assets at the end of the year 1,233 1,281 - - 1,233 1,281 Change in the cumulative eff ect of asset ceiling Cumulative eff ect of asset ceiling at the beginning of the year 17 18 - - 17 18 Interest cost on asset ceiling 0 0 - - 0 0 Changes in the asset ceiling, excluding the interest cost 1 (0) - - 1 (0)
Cumulative eff ect of asset ceiling at the end of the year 19 17 - - 19 17 Funded status
Cumulative impact of asset ceiling (19) (17) - - (19) (17) Liability and asset recognized in the statement of financial position (excluding separate assets) Net position (excluding separate assets) (7,633) (8,094) (617) (560) (8,250) (8,654) Fair value of separate assets at the end of the year 1,233 1,281 - - 1,233 1,281 Net balance sheet position (including separate assets) (6,400) (6,813) (617) (560) (7,017) (7,373)
(a) In 2018, this amount mainly reflected a plan amendment in Belgium. In 2017, this amount included a plan amendment eff ect in Japan.
A surplus (including any minimum funding requirement eff ect) is recognized to the extent that it is recoverable, either through future contribution reductions or a refund to which AXA has an unconditional right, including the ability to use the surplus to generate future benefits.
The annual expense for employee pension and other benefits recorded in the income statement (included in Note 26.1.), for the years ended December 31, 2018 and 2017 is presented below: (in Euro million)
Interest income on plan assets (217) (227) (0) (0) (217) (227)
Interest income on separate assets (12) (11) - - (12) (11)
Defined pension and other benefits expense (Service Cost + Net Interest Cost/Income) 332 339 46 21 378 359
26.2.6 Change in the liability (net of plan assets but excluding separate assets and assets within the insurance General Accounts backing employee benefits) recognized in the statement of financial position
DESCRIPTION OF THE RELATIONSHIP BETWEEN SEPARATE ASSETS (OR REIMBURSEMENT RIGHTS) AND RELATED OBLIGATIONS Separate Assets amounted to €1,233 million as of December 31, 2018 (€1,281 million as of December 31, 2017) mainly in France and Belgium. This represents the fair value of assets backing Defined Benefit Obligations covered by both (i) insurance policies written within the Group that provide direct rights to the employees and (ii) insurance policies with related parties that are outside the scope of consolidation. Under these circumstances, these assets are not considered as Plan Assets that would be deducted from the pensions’ Defined Benefit Obligation (DBO), but represent reimbursement rights accounted for as Separate Assets under IAS 19. Insurance assets or liabilities (within the Group) and pension obligations remain on the balance sheet.
Similarly in some other countries (mainly in Switzerland), although non-transferable insurance policies related to Defined Benefit Obligations between entities within the Group are effectively backed by General Account assets (available to general creditors in case of bankruptcy), they are not taken into consideration in the pension asset disclosures.
The presentation required by IAS 19 seems to imply that such DBOs are not covered by corresponding assets.
Fair value of Separate Assets at the end of the year 1,233 1,281 - - 1,233 1,281 Net balance sheet position at the end of the year (6,400) (6,813) (617) (560) (7,017) (7,373)
In Switzerland, the presentation of the pension liability reflects the fact that the assets covering a large part of the retirees do not qualify as pension assets defined under IAS 19 (not taken into consideration in the pension asset disclosures as described in Note 26.2.6) because managed internally by the insurance company and not handled by a third party. However, legally, the sole purpose of these assets is the coverage of the liabilities of the pension fund. This means that under statutory (and legal) requirements, the pension fund of AXA Switzerland is not underfunded and therefore there is no requirement of additional contributions from AXA.
In Germany, there is no requirement to fund employee defined benefit obligation.
In summary, considering both the Swiss case (and other entities in a similar case) and Separate Assets, the net economic situation of the funding for defined benefit plans is the following: (in Euro million)
Statement of financial position liability (a) (7,633) (8,094) (617) (560) (8,250) (8,654)
Assets other than plan assets (b) 2,701 2,767 - - 2,701 2,767
From year N+11 until the last benefit payments is paid 21,311 506
As pension liabilities have a long-term nature, a mix of equity instruments, debt instruments and real estate investments is used in Plan Assets.
Defined benefit plans expose AXA mainly to market investment risk, interest rate risk, inflationary risk and longevity risk: ■ a decline in asset market value (equity, real estate, alternatives etc.) will immediately increase the balance sheet liability and the near-term cash flows for countries where there is minimum funding requirements; ■ a decrease in corporate bond yields will result in an increase in plan liabilities even if this eff ect will be partially off set by an increase in the value of the plans’ bonds; ■ and an increase in inflation rate or an increase in life expectancy will result in higher plan liabilities thus, an increase in future employer contributions in countries where there is minimum funding requirements.
INVESTMENT POLICIES AND STRATEGIES USED BY ENTITIES/TRUSTEES TO MANAGE RISKS In most countries, Trustees or Investment Committees set the general investment policies and guidelines regarding the allocation of plan assets in accordance with the long term horizon of the benefit plans. The investment strategy is reviewed regularly, following actuarial valuations of the funded benefit plans.
In 2015, the UK pension scheme entered into a longevity swap transaction with the aim of economically hedging longevity risk inherent within the pensioner population of the Scheme.
Statement of financial position reconciliation Net position (excluding Separate Assets) (a) (8,250) (8,654)
(a) Net position (excluding Separate Assets) for pension benefits and other benefits as reported in Note 26.2.6. (b) Included in the net position above but the contribution held for sale operations is stated on separate asset and liability items on the statement of financial position. (c) It corresponds to a liability of €8,716 million as of December 31, 2018 (€9,075 million as of December 31, 2017) included in the statement of financial position under the caption “provision for risks and charges”, and an asset of €40 million included in the statement of financial position under the caption “other receivables” .
AXA Group S hareplan 3.0 8.9 ■ Classic Plan 0.3 0.2 ■ Leverage Plan 2.7 8.7
AXA Retirement Performance Shares 14.0 14.0 AXA Financial share-based compensation instruments (0.1) 1.9
AXA SA STOCK OPTIONS Executive officers and other key employees may be granted options on AXA ordinary shares under employee stock option plans. These options may be either subscription options involving newly issued AXA ordinary shares or purchase options involving AXA treasury shares. While the precise terms and conditions of each option grant may vary, options are currently (i) granted at a price not less than the average closing price of the ordinary share on the Paris Stock Exchange during the 20 trading days preceding the date of grant, (ii) valid for a maximum term of ten years, and (iii) vest in instalments of 33.33% per year on each of the third, fourth and fift h anniversaries of the grant date.
The option pricing assumptions and fair value at grant date for plans issued in 2018, 2017, 2016, and 2015 are as follows: Assumptions (a)
(a) Assumptions at grant date, in average weighted by grants of the year. (b) The options with market performance criteria were valued at €1.17 per option granted in 2018 and €1.66 per option granted in 2017, based on the Monte-Carlo model. The options without performance criteria were valued at €1.27 per option granted in 2018 and €1.96 per option granted in 2017, based on the Black & Scholes model. (c) Based on an estimated pre-vesting annual lapse rate of 0% for options granted from 2016.
The total cost is amortized over the vesting period and an estimated pre-vesting lapse rate of 0% is applied over the remaining vesting period. On that basis, the expense recognized in profit or loss for the year ended December 31, 2018 was €3.7 million (€4.5 million for the year ended December 31, 2017).
AXA GROUP SHAREPLAN AXA off ers its employees the opportunity to become shareholders through a special employee share off ering. In countries that meet the legal and fiscal requirements, two investment options are available: the traditional plan and the leveraged plan.
In 2018, the AXA Group off ered its employees to subscribe to a share off ering, at a price of €18.56 per share for the traditional plan (discount of 20% to the reference price of €23.19 representing the average over the twenty trading days ending on
The table below shows the main features of the plan, the amounts subscribed, valuation assumptions, and the cost of the plan for 2017 and 2018: Traditional Leveraged Traditional Leveraged
[B] Cost of the lock-up for the employee 19.40% 5.85% 19.61% 8.95%
As voted by the Shareholders’ Meeting of April 27, 2016, AXA’s Board of Directors is authorized to grant R etirement P erformance
Since 2016 grants, aft er the three- year performance period, the P erformance S hares definitively acquired are subject to (i) an additional restriction on transfer period of two years following the performance period and (ii) an obligation to hold the shares until retirement, provided that the beneficiaries may sell their shares for diversification purposes (following the three-year performance period and two-year restriction on transfer period), as long as the sale proceeds are invested in a long-term savings plan until the beneficiary’s retirement.
Main share-based compensation plans issued by AXA subsidiaries are described below: AXA INVESTMENT MANAGERS SHARE-BASED COMPENSATION PLANS AXA Investment Managers grants Performance Shares to certain key employees as part of its overall LTI policy that also includes DIP (Deferred Incentive Plan). The Investment Managers Performance Shares incentive plan is a long term award plan in which participants are allocated AXA Investment Managers shares or, more specifically rights to acquire shares upon completion of a specified vesting period depending on applicable local regulations, and subject to fulfilment of certain performance conditions. The performance condition is based on the achievement of Actual AXA Investment Managers Underlying Earnings Group share versus budgeted and/or investment performance conditions.
AB SHARE-BASED COMPENSATION PLANS AB grants Restricted AB Holding Units and options to acquire AB Holding Units, which are valued and booked according to IFRS principles.
Most of the awards granted since 2016 contained the same conditions as awards amended in 2011, resulting in the immediate recognition of the cost of these awards instead of an amortization over a maximum of four years.
Under the Incentive Compensation Program, AB made awards in December 2018 aggregating €155.2 million (€148.8 million in December 2017) of which €140.0 million in the form of Restricted AB Holding Units (€135.1 million in 2017), elected in December 2018 and representing 6.2 million restricted AB Holding Units year-end awards (6.1 million in 2017).
Net income per ordinary share takes into account interest payments related to undated subordinated debt classified in shareholders’ equity, preferred shares and mandatory exchangeable bonds.
Net income including impact of undated subordinated debt A 1,878 5,980
Weighted average number of ordinary shares (net of treasury shares) – opening 2,383 2,419
BASIC NET INCOME PER ORDINARY SHARE C = A/B 0.79 2.50
Fully diluted – weighted average number of shares (c) D 2,389 2,404
Commitments granted by the Company to its subsidiaries are disclosed in Appendix III of this Annual Report “AXA parent C ompany financial statements: Subsidiaries and participating interests”.
The Company, from time to time, makes capital contributions, loans, other extensions of credit, or otherwise provides liquidity and capital resources to its subsidiaries and aff iliates for various
To the best of the Company’s knowledge, based on information reported to it: ■ on December 31, 2018, there were no loans outstanding from the Group to the Company’s two corporate off icers or to any member of the Company’s Board of Directors; ■ various members of the Company’s Board of Directors as well as various other executive off icers and directors of other AXA Group companies may, from time to time, purchase insurance, wealth management or other products or services off ered by AXA in the ordinary course of its business. The terms and conditions of these transactions are substantially similar to the terms and conditions generally available to the public or to AXA employees in general. In addition, certain members of the Board of Directors are corporate off icers, directors or have interests, directly or indirectly, in companies that may have agreements or enter into transactions from time to time with AXA Group entities including extensions of credit, loans (including investments in loans to French midcap companies developed by AXA France with banking partners) purchases of securities (for their own account or for third parties), underwriting of securities and/or furnishing of other types of services or goods. These agreements or deals are generally fully negotiated and performed on arm’s length terms and conditions.
Pledged securities and collateralized commitments received totaled €32,625 million at the end of 2018, and mainly consisted of: ■ mortgage security collateral taken for loans totaled €21,331 mil l ion, mainly f rom A X A Bank Belgium (€21,234 million); ■ collaterals for reinsurance operations totaled €5,531 million mainly from the United States (€2,517 million), France (€2,128 million), AXA Global Re (€620 million) and AXA XL(€213 million); ■ collateral for derivatives totaled €3,291 million mainly from AXA Bank Belgium (€976 million), Germany (€962 million), Belgium (€569 million), France (€335 million) and Spain (€191 million) from an increase in collaterals deposit according to the variations of the derivatives in order to cover the risk of the counterparty; ■ security reverse repurchase agreements and similar operations totaled €2,323 million mainly in Germany (€1,681 million) and Japan (€438 million).
Pledged securities and collaterized commitments 38,444 4,057 116 3,514 46,131 36,914
Guarantee commitments given totaled €11,796 million at the end of 2018, and mainly consisted of (i) guarantees related to financial obligations (€4,254 million) notably from AXA XL (€2,560 million), AXA Bank Belgium (€846 million) and AB (€736 million), (ii) guarantee commitments given to credit institutions related to loans (€ 1,654 million) from AXA SA, and
(iii) guarantees in case of insolvency and defaults (€1,412 million) notably from AXA Bank Belgium (€1,231 million) and France (€179 million).
Letters of credit given totaled €133 million at the end of 2018 and were mainly from Turkey (€72 million) and AXA XL (€23 million).
In most cases, the amounts available for distribution from AXA’s insurance subsidiaries and joint ventures are limited to net income for the year and retained earnings calculated in accordance with the statutory accounting policies used by the subsidiaries to prepare their local financial statements. Further restrictions may be imposed by the local insurance regulators in countries where AXA operates. In some cases, amounts available for distribution are also subject to regulatory capital adequacy tests or the approval of an independent actuary or subject to individual provisions contained in a company’s bylaws.
63, rue de Villiers – 92208 Neuilly-sur-Seine Cedex, represented by Mr. Xavier Crépon, first appointed on February 28, 1989. The current appointment is for a term of 6 years, until the General
Messrs. Jean-Claude Pauly and Maxime Simoen, first appointed on June 8, 1994. The current appointment is for a term of 6 years, until the General Shareholders’ Meeting called to approve the financial statements for the fiscal year 2021.
Mr. Patrice Morot : 63, rue de Villiers – 92208 Neuilly-sur-Seine, first appointed on April 25, 2018 . 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 2023 .
Meeting of the shareholders called to approve the financial statements for the fiscal year 2021.
Statutory audit and certification of local and consolidated financial statements 3 7 9 68% 3 6 9 72%
(a) Fees for other services paid to Statutory Auditors mainly relate to (i) other insurance assignments – agreed upon procedures on financial information, insurance services over regulatory information, comfort letters, SSAE16/ISAE3402 reports, insurance reports on EOF and SFCR, and due diligences, (ii) tax services – out of France such as tax compliance services, and (iii) other permitted advisory services.
External audit fees are also paid by certain Aff iliates and Mutual funds which are not required to be included in the table above.
AXA SA is involved in lawsuits, investigations and other actions arising in the various jurisdictions where it does business, including the following: In 2007, AXA SA completed the squeeze out of the minority shareholders at two German subsidiaries, AXA Konzern AG (“AKAG”) and Kölnische Verwaltungs-AG für Versicherungswerte (“KVAG”). Following the effective date of these squeeze out transactions in July 2007, certain former AKAG and KVAG shareholders brought proceedings in Germany alleging that the cash compensation off ered by AXA SA was not adequate. In the first half of 2016, an initial expert valuation report was delivered to the court based on recent precedents in other German minority buy-out transactions and recommending a significant increase in the cash compensation to be paid to minority shareholders. In addition, interest will be payable on any additional amount finally decided. AXA SA has appointed an independent expert to challenge this report and submitted its statement in February 2017. A court-appointed expert provided a revised report in response to AXA’s expert in November 2018. A first instance decision is expected at the end of 2019, at the earliest and an appeal decision would not be rendered before 2021. Consequently, the financial impact of this matter cannot be estimated with any certainty at this time.
In the United States, certain AXA subsidiaries are involved in a number of lawsuits (both class actions and individual litigations), investigations and other actions in various states and jurisdictions where they do business. A detailed description of significant matters involving AXA Equitable Holdings, Inc. and its subsidiaries (including AllianceBernstein LP) is included in the a nnual r eports on Form 10-K for the year ended December 31, 2018 and subsequent reports on Form 10-Q, respectively, of AXA Equitable Holdings, Inc. (Securities and Exchange Commission (“SEC”) file no. 001-38469) and AllianceBernstein LP (SEC file no. 000-29961) filed with the SEC (collectively, the “Subsidiary SEC R eports”). The Subsidiary SEC R eports are publicly available and M anagement encourages readers of the Consolidated Financial Statements to consult the Subsidiary SEC R eports for a full description of all the various litigations and related matters in which these subsidiaries are involved. Copies of the Subsidiary SEC R eports can be obtained through the SEC’s website (www. sec.gov).
AXA EQUITABLE LIFE INSURANCE COMPANY In August 2015, a class action (O’Donnell) was filed against AXA Equitable Life Insurance Company (“AXA Equitable Life”) in Connecticut state court. This action was brought on behalf of all persons who purchased variable annuities from AXA Equitable Life which were subject to the volatility management strategy and suff ered losses as a result. The complaint asserts a claim for breach of contract and alleges that AXA Equitable Life implemented the volatility management strategy in violation of applicable law. Damages sought are not quantified and are diff icult to estimate. The case was removed from the Connecticut state court to the US District Court for the District of Connecticut and subsequently transferred to the US District Court for the Southern District of New York (“SDNY”). This case was dismissed in March 2017 by the SDNY and, on appeal, the US Court of Appeals for the Second Circuit reversed the trial court’s decision with instructions to remand the case to the Connecticut state court. The case was transferred in December 2018 and is currently pending before the Connecticut state court. AXA Equitable Life believes that it has strong defenses to these claims and will defend the O’Donnell matter vigorously.
AXA FRANCE A class action was brought against AXA France and AGIPI (a French insurance association) on October 28, 2014 by a French consumer association, CLCV. This action alleges that AXA France and AGIPI breached their contractual obligation to maintain a 4.5% interest rate on certain life insurance contracts (CLER) subscribed by policyholders prior to June 1995. The class action complaint cites seven individual cases and is brought on behalf of all similarly situated policyholders. AXA France believes that it has strong defenses to these claims and will defend this matter vigorously.
AXA CORPORATE SOLUTIONS ASSURANCE Enedis (formerly ERDF, a subsidiary of Électricité de France, the primary electric utility in France) has notified claims for coverage under a professional liability policy underwritten by AXA Corporate Solutions Assurance (“AXA CS”). The underlying liabilities in question arise out of a series of lawsuits (more than 500 individual suits) brought against Enedis by local electricity producers in France engaged in production of solar/green energy. These local producers allege financial losses due to Enedis’s delay in processing their applications to be connected
to the public grid within the statutory period, resulting in their inability to profit from attractive buyback rates under certain French government Decrees promulgated in 2006 and 2010 (the “Decrees”). AXA CS was joined to proceedings, as insurer, in over 200 cases. AXA CS pleaded the illegality of the Decrees as its defense and in September 2016, the Court of Appeal of Versailles referred the question as to the legality of the Decrees to the European Court of Justice (“ECJ”) which rendered a decision in favor of the arguments raised in March 2017. Since 2017, the courts continue to dismiss cases based on this ECJ ruling.
Although the outcome of any lawsuit cannot be predicted with certainty, particularly in the early stages of an action, M anagement believes that the ultimate resolutions of the matters described above are not likely to have a material adverse effect on the consolidated financial position of the Group, taken as a whole. In addition, as of December 31, 2018, to the Company’s knowledge, there were no other governmental, judicial or arbitration proceedings, either pending or threatened, that may have, or have had a significant impact on the financial situation or profitability of the Company or the Group over the past 12 months. However, due to the nature of such lawsuits and investigations and the frequency of large damage awards and regulatory sanctions in certain jurisdictions (particularly the United States) that bear little or no relation to actual economic damages incurred by plaintiffs or the underlying regulatory violations, M anagement cannot make an estimate of loss, if any, or predict whether or not these matters, individually or in the aggregate, will have a material adverse eff ect on the Group’s consolidated results of operations in any particular period.
I Statutory Auditors’ report on the C onsolidated F inancial S tatements For the year ended December 31, 2018
In our opinion, the consolidated financial statements give a true and fair view of the assets and liabilities and of the financial position of the Group as at December 31, 2018, and of the results of its operations for the year then ended in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union.
We conducted our audit engagement in compliance with independence rules applicable to us, for the period from January 1, 2018 to the date of our report and specifically we did not provide any prohibited non-audit services referred to in Article 5 (1) of Regulation (EU) No. 537/2014 or in the French Code of Ethics (Code de déontologie) for Statutory Auditors.
In accordance with the requirements of Articles L.823-9 and R.823-7 of the French Commercial Code (Code de commerce) relating to the justification of our assessments, we inform you of the key audit matters relating to risks of material misstatement that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period, as well as how we addressed those risks.
Our audit approach to the risk relating to the valuation of Life & Savings future policy benefit reserves, including deferred acquisition costs, covering contracts with long-term financial guarantees was as follows: ■ we assessed the compliance of the methodology applied by the Group with current accounting standards; ■ we updated our knowledge of the procedures implemented for measuring future policy benefit reserves covering these contracts as well as the models used to calculate the reserves and where applicable the IT systems used to process the technical data and integrate that data into the accounting system; ■ we assessed the design of the control system and tested the eff ectiveness of the controls we deemed key to our audit; ■ we tested, on a sample basis and based on our risk assessment, the calculation models applied to estimate the future cash flows used to determine the future policy benefit reserves and for the liability adequacy tests; ■ we applied procedures to test the reliability of the underlying data used in the models and reserve calculations; ■ we assessed the assumptions used by management and the sensitivity of the models to the assumptions; ■ we applied analytical procedures with a view to identifying and analyzing any material unusual and/or unexpected changes.
CONSOLIDATED FINANCIAL STATEMENTS 5 5.7 REPORT OF THE STATUTORY AUDITORSON THE CONSOLIDATED FINANCIAL STATEMENTS
Measurement of claim reserves in the Property & Casualty line of business (See Notes 1.14.2, 5.3.1 and 14 to the consolidated financial statements)
New in 2018 and important to this key audit matters are the initial opening balance sheet reserves for the XL Group acquisition for €38,650 million, as stated in Note 5.3.1 to the consolidated financial statements, including the exposure to catastrophe events in the business written through XL Group.
– the IT systems used to process the technical data and integrate that data into the accounting system; ■ we applied procedures to test the reliability of the underlying data; ■ we applied procedures (including monitoring the change in loss ratios) to analyze the significant changes that took place over the reporting period; ■ we assessed the outcome of the accounting estimates made the previous year with a view to assessing the reliability of the process used by management to calculate these estimates; ■ our work also consisted in assessing the statistical methods and actuarial inputs applied, as well as of the assumptions used, with respect to the applicable regulations, market practices, and the economic and financial context of the AXA Group; ■ focusing on those classes of business where reserve estimates present a higher risk of uncertainty and judgement, we undertook an independent evaluation of the reserves for certain insurance risk categories with a view to providing a basis for our professional judgment and our assessment of the estimates used by the Group.
At December 31, 2018, the Group’s statement of financial position showed goodwill with a net carrying amount of €16,770 million.
As stated in Note 1.7.1 to the consolidated financial statements, goodwill corresponds to the excess of the cost of the business combination over the net identifiable assets acquired and liabilities assumed on the acquisition date. Goodwill is allocated to the cash generating units (CGUs) of the activities into which that business was incorporated. An impairment test of goodwill is performed at least once a year to ensure that the net carrying amount does not exceed the recoverable amount and there is no risk of impairment
Adverse developments in the expected return on businesses to which goodwill has been allocated, whether due to internal or external factors related to the economic and financial environment in which those businesses operate, can have a significant impact on the recoverable amount and require the recognition of an impairment loss.
This is especially the case for the goodwill on the Life & Savings and AB CGU in the United States, for which the Group determined, in the second half of 2018, the net carrying amount exceeded the recoverable amount based on value in use. As a result, the Group fully impaired the Life & Savings and AB CGU goodwill, which led to implies an additional impairment of € 6,329 million at 2018 year-end closing.
Accordingly, we deemed the measurement of the recoverable amount of goodwill to be a key audit matter.
When determining the fair value of intangible assets, including the XL Distribution Network and the Syndicate Capacity, the valuations were primarily based on discounted cash flow models. Key assumptions for the amortizable intangible XL Distribution Network included future attrition rates, loss ratios and underwriting expense ratios, as well as the discount rate. Key assumptions for the non-amortizable Syndicate Capacity included the discount rate and future return on syndicate capacity. Other assumptions include long-term future growth rates and the expected level of required capital.
Any significant changes in these key assumptions may give rise to material changes in the fair value of the acquired intangible assets, which directly impacts the goodwill recognized.
Accordingly, we deemed the accounting for the acquisition and the purchase price allocation to the assets and liabilities of the acquired company to be a key audit matter because: (a) the acquisition is very significant, (b) there are critical accounting estimates and judgements involved in the identification and valuation of intangible assets acquired, in particular for those amounts valued using projections of future ratios or amounts, and (c) the determination of the nature and life of the intangibles requires judgement and can have implications for future statements of income.
We performed the following for the key assumptions used in assessing the fair value of the XL Distribution Network and Syndicate Capacity intangible assets that used discounted cash flow models: ■ for the XL distribution network, we obtained relevant historical data on attrition rates, loss ratios, and underwriting expense ratios; ■ for the Syndicate Capacity, we obtained relevant company historical data on return on syndicate capacity, long-term growth rates, and required capital; ■ we compared future assumptions to these historical data and to other external information such as that from other companies in the same industry and business lines; ■ we involved our valuation experts where we deemed necessary to evaluate the methodologies used to determine the fair values of the acquired assets and assumed liabilities, including the intangibles; ■ we compared the discount rate used to historical rates in acquisitions and external sources; ■ we performed sensitivity analysis around the key assumptions to ascertain that selected adverse changes to key assumptions would not cause the carrying amount of intangible assets to exceed the recoverable amount.
We attest that the consolidated declaration of extra-financial performance provided for in Article L.225 102-1 of the French Commercial Code is included in the management report, it being specified that, in accordance with the provisions of Article L.823 10 of the Code, the information contained in this statement has not been the subject of verifications of fairness or consistency of our means with the consolidated financial statements and must be reported by an independent third party.
As specified in Article L.823-10-1 of the French Commercial Code (Code de commerce), our statutory audit does not include assurance on the variability of the Company or the quality of the aff airs of the Company.