It does not fall within the scope of our assignment to ascertain the potential existence of other agreements and commitments but rather, on the basis of the information that was supplied to us, to inform you, the shareholders, of the relevant features of those agreements of which we have been informed. It is not our responsibility to express an opinion on the utility or merits of such agreements. Pursuant to Article R-225-58 of the French Commercial Code, you are asked to form an opinion on the relevance of such agreements for the purpose of approving them.
We performed our work in accordance with the professional standards applicable in France: those standards require that we plan and perform the review to check whether the evidence supporting the information in our possession is consistent with that information.
Agreements and commitments approved in prior fiscal years that remained in force in 2007: Pursuant to Article R.225-57 of the French Commercial Code, we have been informed that the following commitments and regulated agreements, approved in prior fiscal years, remained in force in 2007: With France Telecom
AXA Technology Services (as the Principal), AXA (as the Guarantor) and France Telecom entered into an agreement on December 15, 2003, after the Supervisory Board granted its authorization on December 10, 2003. This agreement entrusts the management of all AXA Group communications networks worldwide to a single global provider, and contains a clause committing to expenditures totaling approximately 280 million euros over the term of the agreement (six and a half years starting from July 1st, 2003). It also provides for a contract performance guarantee from AXA to France Telecom on behalf of AXA Technology Services, the amount of which is capped at 50 million euros, and the term of which is the term of the aforementioned agreement.
On December 15, 2005 and after authorization on June 29, 2005 by the AXA Supervisory Board, the AXA Group (AXA and its subsidiaries) and the BNP Paribas Group entered into an agreement that replaces the one in force since September 12, 2001 (and amended on October 26, 2004). The new agreement contains provisions in terms of minimal and stable cross-shareholdings (the AXA Group undertakes initially to hold at least 43,412,598 shares of BNP Paribas stock; the BNP Paribas Group undertakes initially to hold at least 61,587,465 shares of AXA stock; these amounts will be adjusted thereafter to reflect the impact of capital transactions, including but not limited to free allotments of stock or share tenders involving the same company (stock splits or regrouping, etc.), and capital increases involving either BNP Paribas or AXA), and also provides for a reciprocal repurchase option in the event of a hostile takeover on either AXA or BNP Paribas. In force for a period of five years as of the date of signature, this agreement is renewable automatically for an initial period of two years and for successive periods of one year thereafter, unless one of the two parties decides to terminate beforehand, in which case it is required to give three months notice prior to the next renewal date.
On May 15, 2006, and after authorization on December 21, 2005 by the AXA Supervisory Board, the AXA Group (the AXA Mutuelles, AXA and its subsidiaries) and the Schneider Group entered into an agreement that provides for the maintenance of minimal cross-shareholdings. Under the terms of this agreement, the AXA Group undertakes to hold at least 2,583,300 shares of Schneider stock and the Schneider Group undertakes to hold at least 8,816,681 shares
calendar period closing High (€) (a) closing low (€) (a) intraday High (€) intraday low (€)
(a) Following the issue of new shares with preferential subscription rights made by AXA in June 2006 (see Euronext notice n° 2006-1670 published on June 14, 2006), historical share prices have been adjusted on the basis of the theoretical value of the right (see Euronext notice n° 2006-1719 published on June 16, 2006).
The Bank of New York serves as depositary with respect to the Company’s ADSs traded on the NYSE. Each ADS represents the right to receive one ordinary share.
The table below sets forth, for the periods indicated, the reported high and low prices (closing and intraday) in U.S. dollars for the Company’s ADSs on the NYSE: calendar period closing High ($) closing low ($) intraday High ($) intraday low ($)
We cannot assure you of the market price of the Company’s ordinary shares or ADSs, and past price is no indication of future performance. We urge you to obtain current market quotations for these securities.
— Risks related to ownership of AXA ADSs or ordinary shares 174
4.2 qUANTITATIvE AND qUALITATIvE DISCLOSURES ABOUT MARKET RISK AND RISK FACTORS
RISKS RELATINg TO ThE FINANCIAL MARKETS A decline or increased volatility in the securities markets may adversely affect our business and profitability
The level of volatility in the financial markets in which we invest and the overall investment returns earned in those markets substantially affect our profitability. Our investment returns, and thus our profitability, may be adversely impacted from time to time by conditions affecting our specific investments and, more generally, by securities market, real estate market and other market fluctuations. Our ability to make a profit on insurance products and investment products, including fixed and guaranteed products, depends in part on the returns on investments supporting our obligations under these products, and the value of specific investments may fluctuate substantially depending on the foregoing conditions. Certain types of insurance and investment products that we offer may expose us to risks associated with fluctuations in financial markets, including certain types of interest sensitive or variable products such as guaranteed annuities or variable annuities, which have crediting or other guaranteed rates or guaranteed minimum benefits not necessarily related to prevailing market interest rates or investment returns on underlying assets. AXA uses hedging techniques to manage its exposure under certain of these guarantees. Increased volatility in the financial markets may increase the cost of these hedges and/or negatively affect AXA’s ability to hedge certain of these risks which may adversely affect our profitability.
The growth of our asset management business depends to a significant extent on factors such as investment returns and risk management. Poor performance in the financial markets, in general, and/or specific events or conditions that significantly increase volatility, reduce the availability of credit, adversely affect liquidity or otherwise impair normal functioning of the financial markets, such as the “sub-prime” crisis that has been adversely affecting the global credit and equity markets since mid-2007, may adversely affect the value of the assets we manage, as well as our ability to accumulate and retain those assets since clients may choose to withdraw assets under management in these circumstances. These trends may, in turn, adversely impact the revenues and profits that we earn from management of those assets and could have a material adverse effect on our financial condition and results of operations.
During periods of declining interest rates, life insurance and annuity products may be relatively more attractive to consumers, resulting in increased premium payments on products with flexible premium features, and a higher percentage of insurance policies remaining in force from year-toyear. During a low interest rate period, our investment earnings may be lower because the interest earnings on our fixed income investments will likely have declined in parallel with market interest rates which would also cause unrealized losses on our assets recorded at fair value under IFRS. In addition, mortgages and fixed maturity securities in our investment portfolios will be more likely to be prepaid or redeemed as borrowers seek to borrow at lower interest rates. Consequently, we may be required to reinvest the proceeds in securities bearing lower interest rates. Accordingly, during periods of declining interest rates, our profitability may suffer as the result of a decrease in the spread between interest rates charged to policyholders and returns on our investment portfolios.
Conversely, in periods of increasing interest rates, surrenders of life insurance policies and fixed annuity contracts may increase as policyholders choose to forego insurance protection and seek higher investment returns. Obtaining cash to satisfy these obligations may require us to liquidate fixed maturity investments at a time when market prices for those assets are depressed because of increases in interest rates. This may result in realized investment losses. Regardless of whether we realize an investment loss, these cash payments would result in a decrease in total invested assets, and may decrease our net income. Premature withdrawals may also cause us to accelerate amortization of deferred policy acquisition costs, which would also reduce our net income.
The profitability of our spread-based businesses depends in large part upon our ability to manage interest rate spreads, and the credit and other risks inherent in our investment portfolios. For example, in Japan, the movements in rates over the last decade have had a significant impact on many Japanese life insurers, including our Japanese life insurance subsidiaries, which issued long-term policies and contracts with guaranteed fixed rates during periods of significantly higher interest rates but that now operate (and invest their assets) in Japan’s low interest rate deflationary environment which has resulted in “negative spread” on certain of these guaranteed rate policies and contracts.
While we monitor and manage risks of this nature carefully, we cannot guarantee that we will successfully manage our interest rate spreads or the potential negative impact of those risks.
While AXA seeks to manage its exposure to foreign currency fluctuations through hedging, fluctuations in the exchange rates may have a significant impact on AXA’s results of operations and cash flows. For example, continued strength of the Euro against the US dollar and other major currencies in 2008 and future periods may adversely affect AXA’s results of operations and the price of its securities.
The Company’s insurance subsidiaries are subject to the regulatory capital requirements in the jurisdictions where they do business, which are designed to monitor capital adequacy and to protect policyholders. The level of an insurer’s required capital is impacted by many factors including, but not limited to, business mix, product design, sales volume, invested assets, liabilities, reserves and movements in the capital markets, including interest rates and equity markets. Regulatory capital requirements may increase, possibly significantly, during periods of declining equity markets and/or lower interest rates. Management monitors capital requirements on an ongoing basis and believes that the Company’s insurance subsidiaries have (or have the ability to access) the necessary capital resources to support their business. However, to the extent such capital requirements are not met, our business and results of operations could be adversely affected. Insurance laws provide insurance regulators the authority to require various actions by, or take various actions against, insurers whose regulatory capital levels fail to meet statutory minimums, including the authority to limit or prohibit the issuance of new business.
we may not be able to sustain the growth of our insurance and asset management businesses
The strong growth of our insurance and asset management businesses in recent years, both organically and through acquisitions, may not be sustainable in future years. Increased volatility in the financial markets and reduced availability of credit since mid-2007 coupled with slowing economic growth, the risk of recession, and increasingly negative consumer sentiment in certain of our major markets pose significant risks to our ability to achieve the growth targets we have established as part of the Company’s Ambition 2012 plan and to our ability to continue growing through acquisitions. In addition, our ability to sustain growth consistent with these targets may be adversely affected by regulatory changes, including changes in the tax laws applicable to our Life & Savings products and operations. The Group has implemented global product “reuse” initiatives designed to drive product innovation and reuse of successful products, such as our “accumulator” line of annuity products, across major markets where we operate around the world. Our Life & Savings products often involve complex features and guarantees that are not easily translated and transposed into the legal, regulatory and tax regimes across multiple jurisdictions. Our inability to successfully execute these product reuse initiatives in a timely manner could adversely affect the growth of our Life & Savings business.
assumptions may lead to changes in the insurance provisions over time. Furthermore, some of these assumptions can be volatile. For example, our NBV is sensitive to interest rate movements and, consequently, incorrect assumptions about future interest rates may have a significant impact on our NBV and a corresponding impact on the trading price of our securities.
If our established loss reserves for our property & Casualty and International Insurance businesses are insufficient, our earnings will be adversely affected
In our Life & Savings businesses, our earnings depend significantly upon the extent to which our actual claims experience is consistent with the assumptions we use in setting the prices for our products and establishing the liabilities for obligations for technical provisions and claims. AXA uses both its own experience and industry data to develop estimates of future policy benefits, including information used in pricing the insurance products and establishing the related actuarial liabilities. However, there can be no assurance that actual experience will match these estimates. To the extent that our actual benefits paid to policyholders are less favorable than the underlying assumptions used in initially establishing the future policy benefit reserves, or events or trends cause us to change the underlying assumptions, we may be required to increase our liabilities, which may reduce our net income. For example, certain variable annuity products issued or reinsured by certain of our subsidiaries contain guaranteed minimum death benefit (“GMDB”) and guaranteed minimum income benefit (“GMIB”) features. The determination of GMDB and GMIB liabilities is based on models that involve numerous estimates and subjective judgments, including those regarding expected market rates of return and volatility, GMIB election rates, contract surrender rates and mortality experience. Determination of liabilities for our other lines of Life & Savings business, such as our annuity business, as well as our disability income business, also involve numerous assumptions and subjective judgments as to mortality and morbidity experience, investment returns, expenses, policy surrender rates, policy lapse rates, and other matters. There can be no assurance that the actual experience on these products will not differ, upwards or downwards, from management’s estimates. In addition, certain acquisition costs related to the sale of new policies and the purchase of policies already in force have been recorded as assets on our balance sheet and are being amortized into income over time. If the assumptions relating to various factors, including the future
profitability of these policies (such as future claims, investment income and expenses) and policy lapses and surrenders are not realized, the amortization of these costs could be accelerated and may even require write-offs due to unrecoverability. These factors could have a material adverse effect on our business, results of operations and financial condition.
Unpredictable events, such as hurricanes, windstorms, hailstorms, earthquakes, fires, explosions and floods, as well as other natural or man-made disasters, including acts of terrorism, have the potential to adversely affect our operating results. Over the past several years, changing weather patterns and climatic conditions, such as global warming, have added to the unpredictability and frequency of natural disasters in certain parts of the world and created additional uncertainty as to future trends and exposures. We generally seek to reduce our exposure to these events through individual risk selection, monitoring risk accumulation and purchase of reinsurance. We have experienced in the past, and could experience in the future, material losses from such disasters and catastrophic events, which are inherently unpredictable and which could have a material adverse effect on our financial position and results of operations.
A downgrade in the claims paying ability and credit strength ratings of AXA could adversely impact our business and results of operations
Claims paying and credit strength ratings have become an increasingly important factor in establishing the competitive position of insurance companies. Rating agencies review their ratings, and their rating methodologies, periodically and our current ratings may not be maintained in the future. A downgrade or the potential for a downgrade in these ratings could adversely affect our business and results of operations, including through a reduction in the number of new insurance policies that we underwrite and/or an increase in surrender or termination rates of our policies already inforce, as well as the costs to us of obtaining reinsurance. A downgrade in our ratings may also adversely affect our cost of raising debt.
Reinsurance may not be adequate to protect us against losses and we may incur losses due to the inability of our reinsurers to meet their obligations
In the normal course of business, AXA seeks to reduce losses that may arise from catastrophes or other events that cause unfavorable underwriting results through reinsurance. Under the reinsurance arrangements, other insurers assume a portion of the losses and related expenses; however, we remain liable as the direct insurer on all risks reinsured. Consequently, ceded reinsurance arrangements do not eliminate our obligation to pay claims and we are subject to our reinsurers’ credit risk with respect to our ability to recover amounts due from them. Although we evaluate periodically the financial condition of our reinsurers to minimize our exposure to significant losses from reinsurer insolvencies, our reinsurers may become financially unsound by the time their financial obligation becomes due. The reinsurance market has become increasingly concentrated following recent mergers and acquisitions, which have reduced the number of major reinsurance providers. The inability of any reinsurer to meet its financial obligations to us could negatively impact our results of operations. In addition, the availability, amount and cost of reinsurance depend on general market conditions and may fluctuate significantly. Reinsurance may not be available to us in the future at commercially reasonable rates and any decrease in the amount of our reinsurance will increase our risk of loss.
Our hedging programs may be inadequate to protect us against the full extent of the exposure or losses we seek to mitigate
We use derivatives, including exchange traded equity futures contracts, interest rate swaps and floor contracts, to help reduce the economic impact of, among other things, unfavorable changes in GMDB, GMIB and WBL exposures due to movements in the equity and fixed income markets. The operation of our hedging program is based on models involving numerous estimates and subjective judgments, including among others, mortality, lapse rates, election rates, volatility and interest rates. There can be no assurance that ultimate actual experience will not differ materially from our assumptions, which could adversely impact results of
operations and financial condition. For example, if there are extreme or unanticipated levels of volatility in the market and/ or if interest rates remain at significantly low levels, we could experience losses associated with product guarantee features. Similarly, we could also experience losses to the extent that the separate account investment options under perform the corresponding indices used in our hedging program.
Changes in tax laws and regulations, including elimination of tax benefits for our products, may adversely affect sales of our insurance and investment advisory products, and also impact our deferred tax assets
The property & Casualty insurance business is cyclical, which may impact our results
The Property & Casualty insurance business is cyclical. Although no two cycles are the same, these cycles have typically lasted for periods ranging from two to six years. Periods of intense price competition due to excessive underwriting capacity, periods of shortages of underwriting capacity permitting more favorable rates, consequent fluctuations in underwriting results and the occurrence of other losses characterize the conditions in these cycles. Historically, Property & Casualty insurers 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, including competition, frequency or severity of catastrophic events, levels of capacity, general economic conditions and other factors. This may cause a decline in revenues during certain cycles if we choose not to reduce our Property & Casualty product prices in order to maintain our market position and profitability. We may therefore experience the effects of such cyclicality, changes in customer expectations of appropriate premium levels, the frequency or severity of claims or other loss events, or other factors affecting the Property & Casualty insurance business, which could have an adverse effect on our results of operations and financial condition.
We are subject to detailed and comprehensive regulation and supervision in all the jurisdictions in which we operate. Our insurance operations are subject to insurance laws and regulations, which are generally intended to protect policyholders, not our shareholders or creditors. Changes in existing insurance laws and regulations may materially affect the way in which we conduct our business and the products we offer. In addition, changes in pension and employee benefit regulation, social security regulation, financial services regulation, taxation and the regulation of securities products and transactions may also adversely affect our ability to sell new policies or our claims exposure on existing policies. Our asset management operations are also subject to extensive regulation in their respective jurisdictions. These regulations are primarily intended to protect investors in the securities markets or investment advisory clients and generally grant supervisory authorities broad regulatory powers. Changes to these laws and regulations may adversely affect our asset management operations. We are also subject to increasing regulation under various laws and regulations governing the solvency of insurers and other financial institutions including with respect to such matters as capital adequacy, intra-group transactions, “doublegearing ” of capital at multiple levels within a consolidated group (e.g. at the consolidated Group, holding company and operating company levels). As a large, multinational financial services provider we are also increasingly subject to detailed and comprehensive regulations governing such matters as money laundering, “know your customer,” prohibited transactions with countries or counterparties subject to sanctions, and bribery and other anti-corruption measures.
We have been named as defendants in numerous lawsuits (both class actions and individual lawsuits) and involved in various regulatory investigations and examinations and may be involved in more in the future. These actions arise in various contexts including in connection with our activities as an insurer, securities issuer, employer, investment advisor, investor and taxpayer. Any one or a combination of this lawsuits or regulatory investigations could have a material adverse effect on our financial condition and results of operations.
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. Due to the nature of certain of these lawsuits and investigations, we cannot make an estimate of loss or predict with any certainty the potential impact of these suits or investigations on our business, financial condition or results of operations. Please see Part V — Note 30 “Litigation” and the “Additional Factors which may affect AXA’s Business” included in the Part II, Section 2.2 of this Annual Report for additional information on these matters.
Increased geopolitical risks following the terrorist attacks in the United States and elsewhere and any future terrorist attacks may have a continuing negative impact on certain of our businesses
We offer our products and services in Europe, North America, the Asia/Pacific region, the Middle East and Africa through wholly-owned and majority-owned subsidiaries, joint ventures, companies in which we hold non-controlling equity stakes, agents and independent contractors. Our international operations expose us to different local political, regulatory, business and financial risks and challenges which may affect the demand for our products and services, the value of our investment portfolios, the required levels of capital and surplus, and the credit quality of local counterparties. These risks include, for example, political, social or economic instability in countries in which we operate, 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 set up in foreign markets and, in certain cases, risks associated with the potential incompatibility with foreign partners, especially in countries in which we are conducting business through entities we do not control. Our expansion in emerging markets requires us to respond to rapid changes in market conditions in these countries. Our overall success as a global business depends, in part, upon our ability to succeed in different economic, social and political conditions. We may not continue to succeed in developing and implementing policies and strategies that are effective in certain locations where we do business.
Inadequate or failed processes or systems, human factors or external events may adversely affect our profitability, reputation or operational effectiveness
OThER RISKS RELATINg TO OUR OpERATIONS As a holding company, we are dependent on our subsidiaries to cover our operating expenses and dividend payments
The U.S. Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) and the related regulations subsequently implemented by the SEC and the NYSE required changes to some of our accounting and corporate governance practices, including the requirement to issue a report on our internal controls over financial reporting as required by Section 404 of the Sarbanes-Oxley Act. We expect that compliance with these rules and regulations will continue to require significant management attention and will continue to require significant expenditures for accounting, legal and other services. In addition, because Section 404 of the Sarbanes-Oxley Act requires our auditors to audit and issue an attestation report on our internal controls over financial reporting each year, undertaking significant internal restructurings (such as information technology restructurings), corporate development activities or other initiatives that may affect our internal control environment, may become more difficult and costly. This may have an adverse effect on our business and/ or our ability to compete with our competitors that are not subject to the Sarbanes-Oxley Act. Our inability to achieve or maintain compliance with Section 404 and other provisions of the Sarbanes-Oxley Act and related rules and regulations may have a material adverse effect on us including on our reputation and image in the global marketplace.
In recent years, we have completed a number of acquisitions around the world, such as the acquisition of Winterthur Group from Crédit Suisse completed on December 22, 2006. We may make further acquisitions in the future. Growth by acquisition involves risks that could adversely affect our operating results, including the substantial amount of management time that may be diverted from operations to pursue and complete acquisitions. Our acquisitions could also result in the incurrence of additional indebtedness, costs, contingent liabilities, and impairment and amortization expenses related to goodwill and other intangible assets, all of which could materially adversely affect our businesses, financial condition and results of operations. Future acquisitions may have a dilutive effect on the ownership and voting percentages of existing shareholders. We may also finance future acquisitions with debt issuances or by entering into credit facilities, each of which could adversely affect our businesses, financial condition and results of operations. The businesses we have recently acquired include Life & Savings, Property & Casualty, Asset Management, distribution businesses and retail banking operations. There could be unforeseen liabilities that arise out of the businesses we have acquired and may acquire in the future which may not be covered by, or exceed the amounts of any indemnities provided to us by the sellers.
Our acquisitions may cause integration issues and we may not achieve the level of synergies anticipated
We may face difficulties in managing and integrating the operations and personnel we acquire. Significant delays in completing the integration of acquired companies may cause us to lose key employees and/or customers of these companies. We may also experience difficulties in rationalizing and integrating the information technology (“IT”) systems of acquired companies, including accounting information systems, with our existing IT systems. Delays and unforeseen costs in the integration process would require extensive management attention and resources and could jeopardize the timely production of the financial information required for inclusion in the consolidated financial statements and the timely reporting to relevant regulatory authorities. These integration issues may prevent us from achieving the level of synergies forecast.
For example, our ability to achieve the synergies announced in connection with the Winterthur acquisition depends on AXA’s ability to execute the market-by-market integration of Winterthur in an efficient and timely manner and on a number of other factors, including the ability to achieve projected synergies in IT, reinsurance, human resources and various other areas.
We may, from time to time, retain insurance or reinsurance obligations and other contingent liabilities in connection with our divestiture, liquidation or run-off of various businesses. For example, on December 21, 2006, we completed the disposition of AXA RE’s business, our reinsurance subsidiary, but retained the risk related to adverse deviation of claims reserves for all accident years prior to January 1, 2006.
Our business depends significantly on effective information systems, and we have many different information systems for our various businesses. We must commit significant resources to maintain and enhance our existing information systems, and develop new ones in order to keep pace with the evolving information technology, industry and regulatory standards and customer preferences. If we do not maintain adequate information systems, we may not be able to gather and rely on adequate information to base our pricing, underwriting and reserving decisions. We may also have difficulties in attracting new customers and preserving our existing customer base. In addition, underperforming information systems could cause us to become subject to a higher number of customer, provider and agent disputes, may increase our litigation and regulatory exposure and make us incur higher administrative expenses, including remediation costs.
Significant shareholders of AXA may have interests conflicting with your interests
ordinary shares on Euronext Paris which may consequently cause the trading price of AXA ADSs in the United States to also decline; — the U.S. dollar equivalent of the proceeds that a holder of AXA ADSs would receive upon the sale in France of any AXA ordinary shares withdrawn from the depositary; and
The holders of AXA ADSs may not be able to exercise their voting rights due to delays in notification to and by the depositary
The depositary for the AXA ADSs may not receive voting materials for AXA ordinary shares represented by AXA ADSs in time to ensure that holders of AXA ADSs can instruct the depositary to vote their shares. In addition, the depositary’s liability to holders of AXA ADSs for failing to carry out voting instructions or for the manner of carrying out voting instructions is limited by the Deposit Agreement governing the AXA ADR facility. As a result, holders of AXA ADSs may not be able to exercise their right to vote and have limited recourse against the depositary or AXA if their shares are not voted according to their request.
The holders of AXA ADSs in the United States may not be able to participate in offerings of rights, warrants or similar securities to holders of our ordinary shares on the same terms and conditions as holders of our ordinary shares
In the event that we offer rights, warrants or similar securities to the holders of our ordinary shares or distribute dividends payable, in whole or in part, in securities, the Deposit Agreement provides that the depositary (after consultation with AXA) shall have discretion as to the procedure to be followed in making such rights or other securities available to ADR holders including disposing of such rights or other securities and distributing the net proceeds in U.S. dollars to ADR holders. Given the significant number of AXA ADR holders in the U.S., AXA generally would be required to register with the SEC any public offering of rights, warrants or other securities made to its ADR holders unless an exemption from the registration requirements of the U.S. securities laws is available. Registering such an offering with the SEC can be a lengthy process which may be inconsistent with the timetable for a global capital raising operation. Consequently, we have in the past elected and may in the future elect not to make such an offer in the U.S., including to our ADR holders in the U.S. and rather only conduct such an offering in an “offshore” transaction in accordance with “Regulation S” under the U.S. Securities Act of 1933, as amended. Therefore, there can be no assurance that our ADR holders will be able to participate in such an offering in the same manner as our ordinary shareholders.
Our ADSs and ordinary share price could be volatile and could drop unexpectedly and you may not be able to sell your ADRs or ordinary shares at or above the price you paid
The price at which our ADSs and ordinary shares will trade may be affected by a large number of factors, some of which will be specific to us and our operations and some of which will be related to the insurance industry and equity markets generally. As a result of these factors, you may not be able to resell your ADSs or ordinary shares at or above the price which you paid for them. In particular, the following factors, in addition to other risk factors described in this Section, may have a significant impact on the market price of our ADSs or ordinary shares: — investor perception of our Company, including actual or anticipated variations in our revenues, earnings or other operating results; — announcement of intended acquisitions, disposals or financings or speculations of such acquisitions, disposals or financings; — changes in our dividend policy, which could result from changes in our cash flow and capital position; — sales of blocks of our shares by significant shareholders; — hedging activities on our shares; — a downgrade of our credit or financial strength ratings, including placement on credit watch, or rumors of such downgrades; — actual or potential litigation involving us or the insurance or asset management industries generally; — changes in financial estimates and recommendations by securities research analysts; — fluctuations in foreign exchange rates and interest rates; — the performance of other companies in the financial services’ sector; — regulatory developments in the principal markets in which we operate; — international or local political, economic and market conditions; and — unforeseen events such as natural disasters or terrorist attacks and other developments stemming from such events and the uncertainty related to these developments.
As a “foreign private issuer,” AXA is exempt from certain rules under the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”), that impose certain disclosure obligations and procedural requirements for proxy solicitations under Section 14 of the Exchange Act. In addition, AXA’s officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and the rules under the Exchange Act with respect to their purchases and sales of AXA ordinary shares and ADRs. Moreover, AXA is not required to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act, and for years ended December 31, 2007 and thereafter, AXA will no longer be required to reconcile its IFRS financial statements to US GAAP provided that AXA continues to publish its primary IFRS financial statements in accordance with IFRS as published by the IASB. In addition, AXA is not required to comply with Regulation FD, which restricts the selective disclosure of material information. Accordingly, there may be less publicly available information concerning AXA than there is for U.S. public companies.
These systems and tools allow optimal management of risks taken by the Group and, by facilitating a more accurate assessment of risk exposure, help to reduce earnings volatility and to optimize the Group’s allocation of capital to its various businesses.
— Identifying and assessing operational risk. — Managing information systems: projection, simulation, risk assessment, consolidation and reporting.
GRM, under the authority of the Group Chief Risk Officer, is responsible for defining AXA’s standards as regards main risks. This includes developing and deploying tools for assessing and managing risk.
LOCAL TEAMS Local Risk Management teams are in particular in charge of applying AXA risk management standards and implementing the minimum requirements set by GRM.
The Risk Management departments of operational entities are managed by local Chief Risk Officers, who report directly to local CFOs. The roles and responsibilities of local Risk Management departments are formally approved by the executive committees of Group entities. These roles and responsibilities comply with the Group’s Risk Management priorities (see section “Risk Management principles and priorities” above) and consist of: — Leading efforts to determine the Economic Capital of local entities and developing the necessary tools. The Risk
— Controlling the implementation of ALM policies, and in particular monitoring the strategic asset allocation of local entities (see section “Management processes”).
— Implementing pre-launch product approval procedures, and in particular reviewing risk-adjusted profitability analyses (see section “Pre-launch product approval and exposure monitoring”).
— Identifying, quantifying and monitoring the main operational risks (see section “General principles”).
— Hedging of financial risks when they exceed the tolerance levels set by the Group. This includes Variable Annuities’ guaranteed benefit hedging. All products needed to set up hedging programs involving derivative instruments are executed with the assistance of the Group’s specialist asset management teams (AXA Investment Managers and AllianceBernstein).
— Reinsurance is also used in GMIB (Guaranteed Minimum Income Benefit) products, to mitigate financial risks.
— Exposure analyses are carried out to monitor certain specifically identified risks.
AXA’s exposure to market risk is reduced by its broad range of operations and geographical positions, which provides good risk diversification. Furthermore, a large portion of AXA’s Life & Savings operations involve unit-linked products, in which most of the financial risk is borne directly by policyholders
— A decline in equity and real estate prices may reduce the level of unrealized capital gains and therefore solvency margins, as well as available surpluses.
— Exposure to foreign-exchange risk is generally limited for the Group’s Life & Savings companies. Foreign-currency commitments are matched to a large extent by assets in the same currency.
The percentages provided below, relating to the breakdown of life insurance reserves by product type and thus by AXA’s obligations to its policyholders, are derived from management data: — 30% at the end of 2007 (30% at the end of 2006 and 29%
— 8% at the end of 2007 (7% at the end of 2006 and 9% at the end of 2005) of the Group’s Life & Savings technical reserves cover separate-account products with related interest-rate guarantees provided by the insurance company. Suitable risk management policies have been put in place: • Derivatives are used as part of the dynamic management of risks related to guaranteed benefits on separateaccount savings products, in order to cover guaranteed minimum death benefits, guaranteed minimum withdrawal benefits and guaranteed minimum income benefits. In the United States, derivatives are used to help reduce the economic impact of, among other things, unfavorable changes in GMDB, GMIB and WBL exposures due to movements in the equity and fixed income markets.
• When these separate account products show a material risk of transfer to products that offer guaranteed-rate annuities, hedging programs that use derivatives are also put in place.
• Annuities in the payout phase are usually backed by fixedincome assets with maturities that match the underlying payout schedules, thereby avoiding reinvestment and liquidity risks.
— Foreign-exchange rate risk is relatively limited as commitments in foreign currencies are largely backed by assets in the same currencies.
Management processes involve three stages : — The first consists of defining general ALM organizational principles, allowing the most effective investment strategy. — The second involves implementing investment processes and precise governance principles. — The third consists of asset management companies applying the investment strategy.
— Validation of these strategic allocations by the entity’s risk management unit and investment committee.
— Implementation of these strategic allocations by insurance companies through the definition of management contracts with asset management companies and not related to the unit linked business of the entities.
— Tactical allocation and stock selection by asset management companies as part of management contracts and not related to the unit linked business of the entities.
Long-term analysis is carried out in order to model commitments resulting from insurance policies and to define asset allocation so that these commitments can be met with a high degree of confidence while maximizing the expected return.
The process is based primarily on monitoring and analyzing local and consolidated capital adequacy and solvency margin requirements. It is intended to ensure that AXA complies with its regulatory commitments and makes optimum use of capital resources at all times.
In addition, AXA’s insurance operations are subject to local regulatory requirements in most jurisdictions in which AXA operates. These local regulations prescribe: — The category, nature and diversification (by issuer, geographical zone and type) of investments.
— The minimum proportion of assets invested in the local currency taking into account technical commitments denominated in this currency (congruence rule).
— As part of an ongoing capital allocation process, subsidiaries perform twice-yearly simulations on the various regulatory constraints applicable to them using extreme scenarios for assets (in terms of both the market value of equity securities and interest rate trends). The Group Central Finance Department consolidates these models, enabling it to assess the extent of each subsidiary’s financial flexibility. The results are presented to the Finance Committee of AXA’s Supervisory Board on a regular basis.
The investment committees of significant entities include representatives of the AXA Group, and of GRM in particular.
Operational entities produce an asset allocation statement every quarter, to ensure that strategic allocations are being implemented. This allows regular monitoring of certain key ALM indicators such as the duration and convexity of fixed income portfolios.
MARKET RISKS: FINANCIAL RISKS RELATINg TO ThE MANAgEMENT OF hOLDINg COMpANIES’ FOREIgN EXChANgE EXpOSURE AND DEBT The main financial risks relating to the management of foreign’s exposure and debt are as follows: — Interest-rate risk. — Exchange-rate risk. — Liquidity risk.
The Group Central Finance Department produces monthly reporting data that consolidate interest rate, foreign exchange and liquidity exposures, as well as the interest expenses of holding companies. It bases its analyses on reports submitted by subsidiaries, which are responsible for the quality of the data. This consolidated reporting includes medium-term forecasts.
In addition, the risk resulting from possible dividend restrictions or limitations on the ability to reduce shareholders’ equity in the countries where AXA operates is also monitored. The Group’s operating subsidiaries must comply with local regulations, particularly minimum solvency requirements. As a result, internal dividend pay-outs must take into account these constraints and possible future regulatory changes.
DEFINITION: interest-rate risk may result from: — a mismatch between types of interest rates (fixed versus floating), — a mismatch between floating rate benchmarks, — a mismatch between floating rate renewal dates.
POLICY: the policy is defined in order to monitor and limit the potential medium-term variation in interest expenses and consequently to protect future levels of interest expenses, regardless of movements in interest rates.
ASSESSMENT: — Variability analyses assess the change in interest expenses over the duration of the strategic plan resulting from a 1% rise in interest rates.
— Interest-rate sensitivity analyses assess changes in the value of interest-rate positions by currency and by maturity following a 1% upward shift in the yield curve.
Furthermore, the Group’s liquidity profile is strengthened by the following factors: — The Group’s financial strength gives it broad access to various different markets via standardized debt programs: for example, at the end of 2007, €5 billion (€3 billion at the end of 2006) of commercial paper and a €12 billion (€12 billion at the end of 2006) program under EMTN documentation.
In the insurance companies (including Winterthur subsidiaries) that accounted for 90% of Group assets at December 31, 2007 (90% at the end of 2006), assets and liabilities with foreign currency exposure were generally matched or hedged.
In the UK, the Life & Savings segment is exposed to exchange-rate risk in both non-profit and With-Profit funds. The exposure in the non-profit funds arises mainly through foreign-currency investments in Group companies with a market value of €868 million (€889 million in 2006), of which €175 million of fixed maturity holding in AXA Belgium (€177 million in 2006) is hedged. The majority of other investments held in the non-profit funds in currency, market value of €161 million (€135 million in 2006), is hedged through foreign exchange derivative instruments.
The UK non-profit funds have Euro denominated Credit Default Swaps in place with a nominal value of €199 million (nil in 2006).
These countries accounted for 90% at the end of 2007 (94% at the end of 2006) of the Group’s Life & Savings companies’ assets.
— property & Casualty business (9% of Group assets both at the end of 2007 and 2006): In France, AXA is exposed to exchange-rate risk through the units it owns in certain investment funds partly invested in foreign currencies mainly US dollar (€492 million vs. €649 million in 2006) and to a lesser extent Pound Sterling and Japanese Yen in order to diversify its investments. It controls and limits its exposure to exchange-rate risk by using foreign exchange derivatives (forwards €867 million vs. €1,021 million in 2006).
In Belgium, AXA manages a US dollar run-off portfolio, which is fully hedged with investments in the same currency amounting to around €110 million (€130 million at the end of 2006).
In the UK and Ireland, AXA is exposed to exchange-rate risk through its AXA Insurance subsidiary, which operates in pound sterling but has diversified its investment portfolio in line with its ALM objectives. At December 31, 2007, AXA Insurance managed around €86 million (€146 million in 2006) of directly owned foreign-currency investments. The UK and Ireland P&C segment also has investments totalling €184 million (€113 million in 2006) of CDO equity and Currency funds which predominately invest in foreigncurrency investments, equal to around 3.1% (1.7% in 2006) of its investment portfolio. The UK has Euro denominated Credit Default Swaps in place with a nominal value of €285 million (nil in 2006). In addition, AXA UK’s Irish subsidiary also operates in Northern Ireland, and so manages a portfolio of pound sterling policies in an amount of €140 million (€134 million in 2006), hedged with investments in the same currency of €150 million (€137 million in 2006).
These countries accounted for 77% at the end of 2007 (78% at the end of 2006) of the Group’s Property & Casualty companies’ assets.
— International Insurance business (2% of Group assets at the end of 2007 and 3% at the end of 2006): In the course of its business, AXA Corporate Solutions Assurance carries insurance liabilities, some of which are denominated in foreign currencies, particularly in US dollar (€984 million at the end of 2007 versus €1,118 million at the end of 2006) and, to a lesser extent, pound sterling (€590 million at the end of 2007 versus €607 million at the end of 2006). The company carries assets denominated in foreign currencies to ensure the balance sheet congruence. The congruence between the company’s foreign-currency assets and liabilities is regularly adjusted, but is subject to unpredictable loss occurrence and the corresponding movements in reserves.
— As regards holding companies (6% of Group assets at the end of 2007 and 6% at the end of 2006), AXA SA has, since 2001, adopted a hedging policy on net investments denominated in foreign currencies, which aims at protecting the group’s consolidated shareholders’ equity against currency fluctuations, using cross-currency swaps and foreign-currency debt.
• £1.9 billion or €2.6 billion (£1.2 billion or €1.8 billion at the end of 2006) in respect of the UK business, mainly in the form of debt,
• CHF5 billion or €3 billion in respect of the Switzerland business. As of January 1, 2007, AXA SA’s activities in Switzerland following the acquisition of the Winterthur Group were hedged in an amount of CHF5 billion.
AXA SA’s assets accounted for most of the assets of Group holding companies at the end of 2007.
These analyses quantify the potential impact on the Group of positive and adverse changes in financial markets.
The AXA Group analyses sensitivity to movements in interest rates and equity markets in three main ways: — It analyses the sensitivity of European Embedded Value
(EEV) in the Life & Savings business. — It analyses the sensitivity of the fair value of assets less liabilities for the Property & Casualty business. — It analyses the sensitivity of the fair value of Group debt to movements in interest rates.
These analyses cover AXA SA, which carries most of the Group’s debt, along with the largest subsidiaries in France, the USA, the UK, Belgium, Switzerland, Germany, Mediterranean Region (Spain, Portugal, Italy, Morocco, Turkey and Greece), Australia, Hong-Kong and Japan. These analyses also include the Winterthur Group. At December 31, 2007, these subsidiaries represented more than 95% of AXA’s consolidated invested assets within its insurance operations.
Net unrealized capital gains, not included in shareholders’ equity 683 1,394 2,077 545 1,338 1,882
Unrealized capital gains projected in Life & Savings VIF & other stat-GAAP adjustments (599) — (599) (2,508) — (2,508)
Group EV = Life & Savings EEV + Other Business TNAV at December 31 38,490 (3,650) 34,840 38,390 (2,758) 35,632
The schedule above shows the reconciliation of Group EV to IFRS Shareholders’ equity. The Life & Savings ANAV is derived by aggregating the local regulatory (statutory) balance sheets and reconciling with the Life & Savings IFRS shareholders’ equity on the following main adjustments: — Addition of unrealized capital gains/losses not included in
— Elimination of the value of intangibles. — Subtraction of unrealized capital gains included in the projection of future cash-flows (VIF).
— Adjustment for the differences between AXA’s consolidated accounting basis and local regulatory bases.
Adding the Life & Savings VIF to the Life & Savings ANAV completes the Life & Savings EEV. The “TNAV” for other-than-life business is reflecting the consolidated IFRS shareholders’ equity adjusted for the elimination of all intangible assets and all perpetual debt (TSS/TSDI) that are treated as equity in IFRS. The TNAV for other-than-life business is adjusted also for any unrealized capital gains or losses not already included in equity and the impact of the mark to market of debt.
As noted in the definitions, these calculations reflect discount rate changes in Life & Savings as well as changes to the value of fixed-income assets, but no changes in value for asset classes such as equities or real estate are assumed to accompany the reference interest rate movements (although for Life & Savings future returns are impacted as these equal the risk-free rate on average across scenarios in the market consistent valuation). In reality, changes in value of other asset classes would probably lead to different results than shown here. It is also possible that a gradual movement in rates would produce different results than a sudden shock.
— Downward parallel shift of 100 basis points in reference interest rates is the same as above but with a shift downward. Where the shift of 100 basis points would drop rates below 0%, they are floored at zero.
— 10% higher value of equity markets at the start of the projection simulates a shock to the initial conditions just for equities. This means changes to current market values of equities, with related possible changes to projected capital gains/losses and/or fee revenues. Policyholder and management behavior is adjusted to be consistent with these conditions.
— 10% lower value of equity markets at the start of the projection same as above but a decrease.
Interest rate sensitivities for Other-Than-Life business of —4% to upward 100bp and 4% to downward 100bp (2006: —3% and 4%) reflect mainly the net of tax impacts on fixedincome assets (—5% to upward), offset somewhat by debt and derivatives on the debt (+1% to upward). The majority of other-than-life reserves are not sensitive to interest rate changes.
NATURAL RISKS: CLIMATE ChANgE The changing and growing risks caused by climate change and, more specifically, by global warming, represent a major challenge for all human activities and particularly insurance operations.
Controlling exposure and insurance risk > 4.2 qUANTITATIvE AND qUALITATIvE DISCLOSURES ABOUT MARKET RISK AND RISK FACTORS
These changes already affect and will affect in future a large number of insurance sectors (property, agricultural, business interruption, civil liability, marine and aviation, life, health, etc.). The insurance sector thus faces major challenges in the coming years in the form of potential increases in property and casualty claims, the emergence of new liability claims and growing uncertainties about the size of maximum possible losses, which have become harder to assess and to predict on the basis of past events. Furthermore, certain key economic sectors, which work together with the insurance sector, are set to undergo radical changes, due in particular to future greenhouse gas emission constraints laid down in the Kyoto protocol, which came into force on February 16, 2005.
Gradual premium rate adjustments will be required to widely reflect these risk factors, but are not likely to be sufficient to cover risks underwritten in the most exposed areas to flood or cyclone.
pANDEMIC / EXTREME MORTALITy RISK Recent developments relating to bird flu have attracted increasing attention to risks associated with pandemics. Although assessing pandemic risks involves a significant amount of various assumptions, it generates increasing interest and requires the development and implementation of an appropriate risk management strategy.
As a result, and as part of its mortality risk management, AXA issued in 2006 a bond on which the redemption amount depends on general mortality thresholds. This instrument was created by AXA Cessions and transformed where needed by AXA Cessions into reinsurance capacity for AXA Group subsidiaries.
pRE-LAUNCh pRODUCT AppROvAL AND EXpOSURE MONITORINg Risks relating to new product launches, particularly underwriting, pricing and ALM risks is managed on a gross basis (before taking into account reinsurance), primarily by
— All significant Individual Life & Savings products must go through this process.
A uniform Group-wide framework for quantifying all risks has been developed by GRM using stochastic modeling tools factoring in asset and insurance risks. This framework includes pricing control systems used by insurance operations as part of their product development process, such as those described in the previous section.
In addition to these exposure analyses, additional studies are undertaken to model Life & Savings risks (mortality, longevity, long-term care etc.).
Reinsurance purchasing is an important part of the Group’s insurance activities and risk management. For the Property & Casualty and Life & Savings operations, reinsurance programs are set up as follows: — Reinsurance placement is mainly handled centrally by AXA Cessions. Prior to ceding risks, in-depth actuarial analyses and modeling are conducted on each portfolio by AXA Cessions and GRM to optimize the quality and cost of reinsurance cover. These analyses are performed in collaboration with the technical and reinsurance departments of Group operational entities. They measure frequency risks as well as specific severity risks (natural catastrophe, storms, flooding, earthquakes). They provide guidance for determining the most appropriate reinsurance cover (retention levels and scope of cover) for each portfolio and for each type of risk in accordance with objectives and capital allocation constraints.
GRM has an annual review program to ensure the validity and coherence of the models used within the Group, in accordance with actuarial principles and accounting rules in force.
They also depend on economic, social and environmental factors, as well as on the legislative and political context, which are important variables in terms of reserves. Assumptions are made following discussions with claims managers, pricing actuaries, underwriters and other specialised departments. These discussions lead to the definition of reasonable estimate ranges.
Information in this section (except the Credit Derivatives pie chart) should be read in conjunction with note 4 to the Consolidated Financial Statements included in Part V of this Annual Report and is covered by the Statutory Auditor’s Report on the Consolidated Financial Statements.
These tools allow GRM to ensure compliance with limits. The ALM Supervisory Committee is regularly kept informed of the work performed.
These tools also enable coordinated contingency measures to be taken for the most sensitive counterparties.
At December 31, 2007, the breakdown of the fixed maturity portfolio (€303.2 billion) by credit rating category was as follows: BB and lower
At December 31, 2006, the breakdown of the fixed maturity portfolio (€298.3 billion) by rating was: 40% in AAA, 26% in AA, 22% in A, 9% in BBB, 1% in BB and lower, and 1% in other.
Credit risk diversification and analysis policies, particularly using credit ratings, are implemented by investment departments and monitored by Risk Management teams.
At December 31, 2007, the nominal amount of positions taken through credit derivatives was €19.5 billion including €4 billion of CDSs held though CDOs and €15.5 billion (or €13.7 billion net of hedges) of CDSs.
The breakdown of these CDS’s underlying bonds by rating (resulting from management information) is as follows: A
(a) Mainly consumer loan ABS (plus some leases ans operating ABS assets).
The negative mark-to-market evolution of the ABS assets over the year 2007 was evaluated at €—1.5 billion (of which €—0.7 billion was in the income statement and €—0.8 billion was in shareholders’ equity), or €—0.6 billion net of policyholders participation, tax and VBI/DAC reactivity, of which €—0.3 billion was in the income statement and €—0.3 billion was in shareholders’ equity.
Note that MBIA reinsures 100% of all credit insurance risks (excluding cumulative losses between $0 and $13 million (ca 0.12%) and between $110 and $200 million (ca 1.05% and 1.9%) reinsured to other third party reinsurers) on a diversified portfolio of wrapped US municipal bonds underwritten by AXA RE (prior to its run-off). The main characteristics of this portfolio are : — 5,000+ different issues (83% AA & A, all investment grade)
— Portfolio underwritten between 1998 and 2004, — No default since inception.
The Group’s top 50 reinsurers accounted for 78% of reinsurers’ share of insurance and investment contract liabilities in 2007.
RISK FACTORS, CERTAIN DISCLOSURES ABOUT MARKET RISKS AND RELATED MATTERSPART IV
AXA has classified its operational risks as follows: — Internal fraud.
MONEy LAUNDERINg AND TERRORIST FINANCINg RISK AXA is firmly committed to combating money laundering and terrorist financing. This commitment is enshrined in a charter first drawn up in 2002, which was approved by the Management and Supervisory Boards. In line with this charter, each entity is required to introduce procedures
Operational risks > 4.2 qUANTITATIvE AND qUALITATIvE DISCLOSURES ABOUT MARKET RISK AND RISK FACTORS
based on certain general principles, on top of applicable local regulations, and to appoint an anti-money laundering officer. The “know your customer” principle is crucial in this respect, and is fundamental to all transactions. The Group Charter is reviewed and adjusted on a regular basis by taking into account international legal and regulatory developments.
LEgAL AND ARBITRATION pROCEEDINgS Please see Part V — Note 30 “Litigation” of this Annual Report.
Environmental risks are limited because AXA’s core business activities are generally non-polluting.
AXA Cessions is mandated to buy certain types of group-wide insurance coverage for risks shared by all entities. These policies, covering directors and officers’ liability, professional liability and fraud, are set out below.
All AXA Group programs are arranged through AXA Cessions in consultation with local entities and the approval of the Management Board.
For further information on the dividends declared and paid in the most recent five years and on the Company’s dividend policy, see Part II “The AXA Group: Our global business operations, recent financial performance and financial condition”, “Dividends” Section and Part VI “Certain additional information”, “Dividends” Section of this Annual Report.
SIgNIFICANT ChANgES For a description of certain developments since the date of the annual financial statements included in this Annual Report, please see Part V — Note 29 “Subsequent events” of this Annual Report.
CONSOLIDATED STATEMENT OF RECOGNIZED INCOME AND EXPENSE FOR THE PERIOD 204
— Note 10: Investments in associates consolidated by equity method 267
— Note 14: Liabilities arising from insurance and investment contracts 282
— Report of Statutory Auditors on the consolidated financial statements 376
Assets backing contracts where the financial risk is borne by policyholders (e) 182,827 176,562 141,410 9 Investments from banking and other activities 13,703 16,295 10,084 10 Investments in associates — Equity method 147 144 208
All financial amounts are shown net of derivatives impact (please refer to note 19). (a) Amounts gross of tax.
(b) Amounts gross of unearned revenue reserves and unearned fee reserves. (c) Financial assets excluding loans and assets backing contracts where the financial risk is borne by policyholders. Includes fixed maturities, equities, controlled and non controlled investment funds.
Shareholders’ equity – Group share 45,642 47,225 36,525 13 Total minority interests and shareholders’ equity 48,913 50,166 39,288
Liabilities arising from insurance contracts where the financial risk is borne by policyholders (a) 113,654 108,984 92,888
Liabilities arising from investment contracts with no discretionary participating features 1,452 1,121 926
Liabilities arising from investment contracts where the financial risk is borne by policyholders (c) 69,587 67,673 48,549
14 Liabilities arising from insurance and investment contracts 556,892 560,602 448,208 15 Provisions for risks and charges 8,654 8,845 8,761
Other debt instruments issued and bank overdrafts (g) (i) 6,260 8,711 8,411
(a) Also includes liabilities arising from contracts with Guaranteed Minimum features. (b) Amounts shown gross of reinsurers’ share in liabilities arising from contracts.
(c) Liabilities arising from investment contracts with discretionary participating features and investment contracts with no discretionary participating features where the financial risk is borne by policyholders.
(f) Mainly comprises minority interests of controlled mutual funds puttable at fair value — also includes put options granted to minority shareholders. (g) Includes effect of derivative instruments (please refer to note 19).
(h) As described in note 1.12.2, the adoption in 2006 of FRS 27 in the United Kingdom led to adjustments to 2005. The effect of these adjustments is set out in note 14. (i) From January 1, 2006 on, liabilities relating to securities sold under repurchase agreements in the Belgian banking business have been presented as payables resulting from banking operations instead of debt instruments issued (other than financing debts) and bank overdrafts. The amount at stake at December 31, 2005, was €3,242 million. (j) As described in note 1.11.2, perpetual subordinated notes were reclassified under shareholders’ equity in 2006 with retrospective application to 2005. Details are provided in note 13. (k) In accordance with IFRS 3, i.e. within 12 months following the acquisition date, the Group has adjusted certain items impacting the allocation of Winterthur purchase price.
Liabilities arising from insurance contracts where the financial risk is borne by policyholders
Total Liabilities arising from contracts where the financial risk is borne by policyholders
Total Liabilities arising from insurance and investment contracts 352,283 357,088 281,910
(h) As described in note 1.12.2, the adoption in 2006 of FRS 27 in the United Kingdom led to adjustments to 2005. The effect of these adjustments is set out in note 14. (k) In accordance with IFRS 3, i.e. within 12 months following the acquisition date, the Group has adjusted certain items impacting the allocation of Winterthur purchase price.
Change in unearned premiums net of unearned revenues and fees (k) (612) (452) (472)
(a) Excludes insurance and banking activities. (b) Net of investment management costs.
(f) Includes acquisition costs and change in deferred acquisition costs relating to insurance contracts and investment contracts with discretionary participating features as well as change in net rights to future management fees relating to investment contracts with no discretionary participating features.
(g) Notably includes financial charges in relation to other debt instruments issued and bank overdrafts. (h) Includes net balance of income and expenses related to derivatives on financing debt (however excludes change in fair value of these derivatives). (i) Includes change in goodwill impairment, negative goodwill, as well as amortization and impairment of intangible assets created during business combinations. (j) As described in note 1.11.2, perpetual subordinated notes were reclassified under shareholders’ equity in 2006 with retrospective application to 2005. Details are provided in note 13. (k) As described in note 1.12.2, the adoption in 2006 of FRS 27 in the United Kingdom led to adjustments to 2005. The effect of these adjustments is set out in note 14. (l) As described in note 1.10, the contribution of discontinued operations is stated on a separate line of the income statement.
Net increase / (write back) in impairment on investments, tangible and other intangible assets 963 174 212
Net increase / (write back) in other provisions (d) 26 59 (23)
Adjustment of balances included in operating income before tax for reclassification to investing or financing activities
Dividends recorded in profit and loss during the period (2,543) (2,014) (1,765)
Net cash impact of transactions with cash impact not included in the operating income before tax 17,967 17,188 13,239
Net cash related to changes in scope of consolidation (540) (6,732) (653)
Sales of equities and non controlled investment funds (f) (g) 34,258 18,890 18,605
Net cash related to sales and repayments of financial assets (f) (g) (h) 144,955 107,292 101,578
Purchases of equity securities and non consolidated investment funds (f) (g) (33,114) (19,829) (18,650)
Purchases of investment properties held directly or not (f) (1,292) (1,575) (991)
Purchases and/or issues of loans and other assets (f) (h) (44,917) (27,574) (20,688)
Net cash related to purchases and issuance of financial assets (f) (g) (h) (168,108) (132,768) (119,622)
Increase in collateral payable / Decrease in collateral receivable 5,766 9,714 7,720
Net cash impact of assets lending / borrowing collateral receivables and payables 5,477 6,359 6,054
Other investing cash impact and non cash adjustment (15) (34) (401)
Other financing cash impact and non cash adjustment 4 8 (32)
Net impact of foreign exchange fluctuations and reclassification on cash and cash equivalents (494) (649) 71
Cash and cash equivalents as at December 31 (a) 17,192 19,831 20,640
(a) The “Cash and cash equivalents” balances shown in the statement of consolidated cash flows do not include cash balances of consolidated investment funds from the Satellite Investment Portfolio (see note 1.7.2). As described in note 1.19, the “Cash and cash equivalents” item in the statement of consolidated cash flows excludes cash backing contracts where the financial risk is borne by policyholders (unit-linked contracts). The effect on the 2006 cash flow statement is as follows : — a €1,008 million decrease of the “Purchase of subsidiaries and affiliated companies, net of cash acquired” item corresponding to the cash backing unit-linked contracts of Winterthur entities acquired during the period; — a €238 million increase of the “Sales and/or repayment of loans and other assets” item; — a €350 million decrease of the “Purchases and/or issues of loans and other assets” item; As a consequence of the three impacts detailed above, the “Net cash provided by investing activities” shows a decrease of €1,120 million. The “Net impact of foreign exchange fluctuations and reclassification on cash and cash equivalents” item has also been decreased by €6,839 million. The impact on the closing position of “Cash and cash equivalents” as at December 31, 2006 is a decrease of €7,959 million. (b) Includes the capitalization of premiums/discounts and related amortization as well as amortization of investment and owner occupied properties (held directly). (c) Includes the impact of reinsurance. This item also includes the change in liabilities arising from contracts where the financial risk is borne by policyholders. (d) Mainly includes changes in provisions for risks and charges, provisions for bad debts/doubtful receivables and change in impairment of assets held for sale. (e) Also includes changes relating to repository transactions and equivalent for banking activities. (f) Includes corresponding derivatives.
(i) Also includes issuance and repayments of perpetual debts. (j) Includes the net cash impact of interest margins relating to hedging derivatives on financing debts.
Cash and cash equivalents as at December 31 18,684 21,169 21,402
Cash and cash equivalents as at December 31 (b) 17,192 19,831 20,640
Investment Portfolio (see note 1.7.2). As described in note 1.19, the “Cash and cash equivalents” item in the statement of consolidated cash flows excludes cash backing contracts where the financial risk is borne by policyholders (unit-linked contracts).
Consolidated Statement of recognized income and expense for the period > CONSOLIDATED FINANCIAL STATEMENTS
Total recognized income and expense for the period (SORIE) 2,433 4,758 8,400
Split between : Group share in the total recognized income and expense for the period (SORIE) 1,942 4,198 7,683
Minority interests’ share in the total recognized income and expense for the period (SORIE) 490 560 717
The consolidated statement of shareholders’ equity is presented in note 13.
AXA operates in the following primary business segments: — Life & Savings, — Property & Casualty, — International Insurance, — Asset Management, — Banking.
The consolidated financial statements were finalized by the Management Board on March 17, 2008 and examined by the Supervisory Board on March 19, 2008.
AXA’s consolidated financial statements are prepared as at December 31. However, certain entities within AXA have a reporting year end that does not coincide with December 31, in particular AXA Life Japan, which has a September 30 financial year end.
The consolidated financial statements were prepared in accordance with IFRS standards and IFRIC interpretations that were definitive and effective as at December 31, 2007, as adopted by the European Commission before the balance sheet date. However, the Group does not use the “carve out” option to avoid applying all the hedge accounting principles required by IAS 39. As a consequence, the consolidated financial statements also comply with IFRS as issued by the Internationl Accounting Standards Board (“IASB”).
IFRS 7 — Financial Instruments: Disclosures and the amendment to IAS 1 — Capital Disclosures, both published in August 2005 and applicable from January 1, 2007, relate to additional information provided in the notes to the full-year consolidated financial statements on the Group’s financial instruments, insurance contracts and capital. These two standards have no impact on the Group’s income or financial position.
IFRIC 10 — Interim Financial Reporting and Impairment states that impairment cannot be released when a company, in its interim financial statements, has recognised a loss of value on goodwill, an unlisted equity instrument or a financial asset recognised at cost. This interpretation is consistent with the accounting principles previously applied by the Group.
The amendment to IAS 23 — Borrowing Costs, published on March 29, 2007 and applicable from January 1, 2009, makes it compulsory to capitalise borrowing costs and removes the option to expense these costs. The amendment excludes eligible assets measured at fair value from the revised standard’s scope of application. This amendment is not expected to have a significant impact on the Group’s consolidated financial statements.
The Group has not elected for early adoption of IFRIC 14 — IAS 19 — The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction, published on July 4, 2007 and applicable to full-year reporting periods starting on or after January 1, 2008 . The impact of this interpretation on the consolidated financial statements is estimated to be immaterial.
There are no standards or interpretations published by the IASB and effective as at January 1, 2007 or not yet effective, but not yet endorsed by the European Commission, which are applicable to the Group.
The preparation of financial statements in accordance with IFRS requires the use of estimates and assumptions. It requires a degree of judgment in the application of Group accounting principles described below. The main balance sheet captions concerned are goodwill (in particular impairment tests described in section 1.6.1), the value of acquired business in force, deferred acquisition costs and equivalent, certain assets accounted at fair value, liabilities relating to the insurance business, pension benefit obligations and balances related to share-based compensation. The principles set out below specify the measurement methods used for these items. These methods, along with key assumptions where required, are discussed in greater depth in the notes relating to the asset and liability items concerned where meaningful and useful.
All amounts on the consolidated balance sheet, consolidated statement of income, consolidated statement of cash flows, consolidated statement of recognized income and expense for the period and in the notes are expressed in Euro million, and rounded up to the nearest whole unit, unless otherwise stated.
The AXA Group’s transition date is January 1, 2004. The Group prepared its opening IFRS balance sheet at that date. The Group’s IFRS adoption date is January 1, 2005.
AXA chose to not restate past business combinations based on the option available in IFRS 1. As a result, past business combinations prior to January 1, 2004 are accounted for on a previous GAAP basis in the IFRS financial statements, except: — goodwill has been denominated in the functional currency of the acquired entity under IFRS since January 1, 2004 (transition to IFRS), and
— any item recognized under previous GAAP that did not qualify for recognition as an asset or liability under IFRS was reclassified into goodwill.
All cumulative past actuarial gains and losses on all employee benefit plans were recognized in retained earnings as of January 1, 2004.
Investment funds and real estate companies are either fully consolidated or proportionately consolidated or accounted for under the equity method, depending on which conditions listed above they satisfy. For fully consolidated investment funds, minority interests are recognized at fair value and shown as liabilities in the balance sheet if the companies’ instruments can be redeemed at any time by the holder at fair value. Investment funds accounted by equity method are shown under the balance sheet caption “Invested financial assets”.
1.3.2. Business combinations: purchase accounting and goodwill including minority interests buyout
Valuation of assets acquired and liabilities assumed of newly acquired subsidiaries and contingent liabilities
Other intangible assets such as the value of customer relationships are recognized only if they can be measured reliably. The value of customer relationships intangible in this case 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. These projections include assumptions regarding claims, expenses and financial revenues, or they can be estimated on the basis of the new business value. In line with accounting practices in force before the adoption of IFRS, which may continue to be applied under IFRS 4, future premiums relating to acquired business may be recognized in the “Value of purchased business in force” item.
The excess of the cost of acquisition over the net fair value of the assets, liabilities and contingent liabilities acquired represents goodwill. Goodwill arising from the acquisition of a foreign entity is recorded in the local currency of the acquired entity and is translated into Euro at the closing date.
If, after the period of twelve months, a deferred tax asset, initially considered as not recoverable, finally meets the recognition criteria, the corresponding tax benefit is recorded in the consolidated statement of income; however, the impact is offset by a reduction in goodwill through net income.
In the event of a minority interests buyout of a subsidiary, the new goodwill is recognized as the difference between the price paid for the additional shares and the shareholders’ equity acquired (including changes in fair value posted through equity).
When the contract involves an unconditional commitment exercizable by the option holder, it is recognized as a liability. Since the balancing entry to this liability is not specified by current IFRS, and since IFRIC’s Agenda Committee decided in 2006 not to take any position on the accounting treatment of these transactions, the Group’s method is (i) to reclassify minority interests from equity to liability, (ii) to re-measure this liability at the present value of the option price and (iii) to recognize the difference as an addition to goodwill. Similarly, subsequent changes in the liability will be recorded against goodwill.
In the event of an internal sale of an asset that is not intended to be held on the long term by the Group, deferred tax is recognized, as the current tax calculated on the realized gain or loss is eliminated. The income statement impact of the potential policyholders’ participation resulting from this transaction is also eliminated, and a deferred policyholders’ participation asset or liability is posted to the balance sheet.
The results and financial position of all Group entities that have a functional currency (i.e. the currency of the primary economic environment in which the entity operates) different from the Group presentational currency are translated as follows: — assets and liabilities of entities in a functional currency different from Euro are translated at the closing rate; — revenues and expenses are translated at the average exchange rates over the period; — all resulting foreign exchange differences are recognized as a separate component of equity (translation differences).
At the local entity level, foreign currency transactions are translated in the entity functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at closing rates
of monetary assets and liabilities denominated in foreign currencies are recognized in the income statement, except where hedge accounting is applied as explained in section 1.9.
Foreign exchange differences arising from the translation of a net investment in a foreign subsidiary, borrowings and other currency instruments qualifying for hedge accounting of such investment are recorded in shareholders’ equity under translation differences and are recycled in the income statement as part of the realized gain or loss on disposal of the hedged net investment.
Foreign exchange differences arising from monetary financial assets available for sale are recognized as income or expense for the period in respect of the portion corresponding to amortized cost. The residual translation differences relating to fair value changes are recorded in shareholders’ equity.
1.5. SEGMENT REPORTING The segmental analysis provided in AXA’s Annual Report and Financial Statements reflects both business lines (primary business segment) and geographical zones; it is based on five business lines: Life & Savings, Property & Casualty, International Insurance, Asset Management and Banking. An additional “Holdings” segment includes all non-operational activities.
Goodwill is considered to have an indefinite useful life and is therefore not amortized. Impairment tests are performed at least annually. Impairment of goodwill is not reversible.
AXA performs an annual impairment test of goodwill based on cash generating units, using a multi-criterion analysis with parameters such as the value of assets, future operating profits and market share, in order to determine any significant adverse changes. The analysis assumes a long-term holding, and excludes parameters affected by short-term market volatility. It also considers the interdependence of transactions within sub-groups. Within each cash generating unit, a comparison is made between net book value and the recoverable value (equal to the higher of market value and value in use). Value in use consists of the net assets and expected future earnings from existing and new business, taking into account the cash generating units’ future cash flows. The value of future expected earnings is estimated on the basis of the Life insurance and investment contracts embedded value figures published by AXA or similar calculations for other activities. Market values are based on various valuation multiples.
The value of purchased insurance contracts and investment contracts with discretionary participating features recognized in a business combination (see section 1.3.2) is amortized as profits emerge over the life of the contracts’ portfolio. In conjunction with the liability adequacy test (see section 1.12.2), VBI is subject to annual recoverability testing based on actual experience and expected changes in the main assumptions.
Other intangible assets include softwares developed for internal use for which direct costs are capitalized and amortized on a straight-line basis over the assets’ estimated useful lives.
1.6.4. Deferred acquisition costs (DAC) relating to insurance contracts and investment contracts with discretionary participating features — 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.
Investment properties (excluding investment properties totally or partially backing liabilities arising from contracts where the financial risk is borne by policyholders and from “With-Profit” contracts) are recognized at cost. The properties components are depreciated over their estimated useful lives, also considering their residual value if it may be reliably estimated.
In case of unrealized loss over 15%, an impairment is recognized for the difference between the net book value of the investment property and the fair value of the asset based on an independent valuation. Furthermore, at the level of each reporting entity, if the cumulated amount of unrealized losses under 15% (without offsetting with unrealized gains) represents more than 10% of the cumulated net cost of real estate assets, additional impairment are booked on a line-by line approach until the 10% threshold is reached.
Investment properties that totally or partially back liabilities arising from: — contracts where the financial risk is borne by policyholders, — “With-Profit” contracts where dividends are based on real estate assets, are recognized at fair value with changes in fair value flowing in the statement of income.
At inception, the option to designate financial assets 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 assets 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; • assets included in hedging strategies set out by the Group for economical reasons but not eligible for hedge accounting as defined by IAS 39; • debts held by structured bond funds controlled and consolidated by the Group and made up of CDOs (Collateralized Debt Obligations).
— portfolios of managed financial assets whose profitability is valued on a fair value basis: mainly securities held by consolidated investment funds, managed according to the Group risk management policy (“Satellite Investment Portfolio”, see definition below).
In practice, assets held through consolidated investment funds are classified: — either as assets of the “Core Investment Portfolios” which include assets backing liabilities arising from insurance and investment contracts, managed according to AXA’s ALM strategy; — or as assets of the “Satellite Investment Portfolios”, reflecting the strategic asset allocation based on a dynamic asset management aimed at maximizing returns.
Underlying financial instruments held in the “Core Investment Portfolios” are classified as available-for-sale unless involved in a qualifying hedge relationship or more broadly when electing the fair value option reduces accounting mismatch. As specified above, the financial instruments held in the “Satellite Investment Portfolios” are accounted for at fair value with changes in fair value recognized through income statement.
For debt instruments classified as “held to maturity” or “available for sale”, an impairment based on fair value is recorded through the income statement if future cash flows may not be fully recoverable due to a credit event relating to the instrument issuer. A downgrade of an entity’s credit rating is not, of itself, evidence of impairment. If the credit risk is eliminated or improves, the impairment may be released. The amount of the reversal is also recognized in the income statement.
Methods for calculating the net book value of assets sold (average cost, first-in first-out, etc.) depend on local ALM strategies as these strategies have been set up to take into account specific commitments to policyholders. These methods may differ within the Group provided that they are used consistently at each entity level.
In the event of a discontinuation of operations representing either a business line, a main and distinct geographical
region or a subsidiary acquired solely with a view to reselling, their after-tax contribution is stated on a separate line of the income statement. For comparison purposes, the same applies to the presentation of income statements relating to previous periods that are included in the financial statements. This separate line also includes the post-tax gain / loss recognized on the disposal of the discontinued operation at the date of loss of control.
Perpetual debts and any related interest charges are classified either in shareholders’ equity (in the “other reserves” aggregate) or as liabilities depending on contract clauses.
Following the publication of the IFRIC Agenda Committee’s IFRIC Update in November 2006, based on the IASB’s intervention on the matter, the Group reconsidered its accounting treatment of perpetual subordinated notes. Although interests remain due at settlement date, instruments classification must be performed on a going concern basis. Only contractual obligations should be taken into consideration and not the prospect of redemption under economic constraints, (e.g. step up clauses or pressure from shareholders to pay a dividend). Taking into account the clarification, the Group has reclassified these instruments in 2006, previously recognized as liabilities and interest charges recognized in the statement of income, in shareholders’ equity. This change in accounting treatment has been applied retrospectively to all periods presented at the end of 2006.
Any financial instrument issued by the Group with an equity component (for example an option 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.
1.12. LIABILITIES ARISING FROM INSURANCE AND INVESTMENT CONTRACTS 1.12.1. Contracts classification
The Group issues contracts that transfer an insurance risk or a financial risk or both.
In some insurance or investment contracts, the financial risk is borne by policyholders. Such contracts are usually unitlinked contracts.
— liabilities arising from investment contracts with no discretionary participating features,
Part of the policyholders participation reserve is included in future policy benefits reserves, according to contractual clauses.
The purpose of claims reserves is to cover the ultimate cost of settling an insurance claim. Claims reserves are not discounted, except when relating to disability annuities.
Claims reserves include the claims incurred and reported, claims incurred but not reported (IBNR) as well as claim handling costs. Claims reserves are based on historical claim data, current trends, actual payment patterns for all insurance business lines as well as expected changes in inflation, regulatory environment or anything else that could impact amounts to be paid.
In compliance with IFRS 4 option, shadow accounting is applied to insurance and investment contracts with discretionary participating features. Shadow accounting is applied to technical liabilities, acquisition costs and value of business in force to take into account unrealized gains or losses on insurance liabilities or assets in the same way as it is done for a realized gain or loss of invested assets. 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 determined by applying an estimated participation rate to unrealized gains and losses.
Unrealized gains and losses on assets classified as trading or designated at fair value through profit or loss, along with any other entry impacting the income statement and generating a timing difference, are accounted in the statement of income with a corresponding shadow entry adjustment in the statement of income. The shadow accounting adjustments relating to unrealized gains and losses on assets available-forsale (for which change in fair value is taken to shareholders’ equity) are also booked through shareholders’ equity.
At each balance sheet date, liability adequacy tests are performed in each consolidated entity in order to ensure the adequacy of the contract liabilities net of related DAC and VBI assets. To perform these tests, entities group contracts together according to how they have been acquired, are serviced and have their profitability measured. Entities also use current best estimates of all future contractual cash flows as well as claims handling and administration expenses, and they take into account embedded options and guarantees and investment yields relating to assets backing these contracts. Contract specific risks (insurance risk, asset return risk, inflation risk, persistency, adverse selection etc.) directly related to the contracts that might make the net liabilities inadequate, are also considered.
Any identified deficiency is charged to the income statement, initially by respectively writing off DAC or VBI, and subsequently by establishing a LAT provision for losses arising from the liability adequacy test for any amount in excess of DAC and VBI. For non-life insurance contracts, an unexpired risk provision is accounted for contracts on which the premiums are expected to be insufficient to cover expected future claims and claims expenses.
Embedded derivatives that meet the definition of an insurance contract or correspond to options to surrender insurance contracts for a set amount (or based on a fixed amount and an interest rate) are not separately measured. All other embedded derivatives are bifurcated and booked at fair value when material if they are not considered as closely related to the host insurance contract and/ or do not meet the definition of an insurance contract.
1.14. FINANCING DEBTS Financing debts issued to finance the solvency requirements of an operational entity or to acquire a portfolio of contracts are isolated in a specific balance sheet aggregate.
Deferred tax assets and liabilities emerge from temporary differences between the accounting and fiscal values of
assets and liabilities, and when applicable from tax loss carryforwards. Deferred tax assets are recognized to the extent that it is probable that future taxable profit will be available to offset the temporary differences. Therefore, deferred tax assets that are not expected to be recovered are derecognized.
Defined contribution plans: payments are made by the employer to a third party (e.g. pension trusts). These payments free the employer of any further commitment, and the obligation to pay acquired benefits to the employees is transferred. The contributions paid by the employer are recorded as an expense in the income statement and no liability needs to be recorded once contributions are made.
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 increase, inflation rate, mortality, staff turnover, pension indexation and remaining service lifetime. The amount recorded in the balance sheet for employee benefits is the difference between the Defined Benefit
The AXA Shareplan issued under specific French regulatory framework includes two options: traditional and leveraged option. The cost of the traditional option Shareplan is valued according to the specific guidance issued in France by the CNC (Conseil National de la Comptabilité). The cost of the leveraged option plan is valued by taking into account the fiveyear lock-up 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.
Provisions are recognized when the Group has a present obligation (legal or implicit) as a result of past events, when
Amounts collected as premiums from investment contracts with no discretionary participating features are reported as deposits net of any loadings and policy fees. Revenues from these contracts consist of loadings and policy fees relating to underwriting, investment management, administration and surrender of the contracts during the period. Frontend fees collected corresponding to fees for future services are recognized over the estimated life of the contract (see “Unearned fees reserves” section 1.12.3).
Investment contracts with no discretionary participating features fall within the scope of IAS 39. Deposit accounting applies to these contracts, which involves the following: — the Group directly recognizes the consideration received as a deposit financial liability rather than as revenues, — claims paid are recognized as withdrawals, with no posting in the income statement apart from potential fees.
The Group unbundles the deposit component of contracts when required by IFRS 4, i.e. when both the following conditions are met : — the Group can measure separately the “deposit” component
Changes in unearned premiums reserves net of unearned revenues and fees include both the change in the unearned premium reserve reported as a liability (see “Unearned premium reserves” in section 1.12.2) along with the change in unearned revenues and fees. Unearned revenues and fees correspond to upfront charges for future services recognized over the estimated life of insurance and investment contracts with discretionary participating features (see “Provisions for unearned revenues” in section 1.12.2) and investment contracts with no discretionary participating features (see section 1.12.3 “Provisions for unearned fees”).
Revenues from other activities mainly include: — insurance companies revenues from non insurance activities, notably commissions received on sales or distribution of financial products,
The net investment result includes: — investment income from investments from non banking activities, net of depreciation expense on real estate investments (depreciation expense relating to owner occupied properties is included in the “administrative expenses” aggregate); this item includes interest received calculated using the effective interest method for debt instruments and dividends received on equity instruments,
— realized investment gains and losses net of releases of impairment following sales,
— Such events result in additional disclosures if indicative of conditions that arose after the balance sheet date, and if relevant and material.
From 2007 on, the “Holding companies” segment (that includes all non-operational activities), also includes some financial vehicles including certain Special-Purpose Entities such as consolidated CDOs, formely disclosed as part of the segment “Others Financial Services” which has been renamed “Banking”. This change has been applied retrospectively to previous years presented.
Royale Belge Investissement Merged with AXA Luxembourg SA — — 100.00 99.92
AXA PPP Group Plc Merged with PPP Healthcare Limited — — 100.00 99.99
AXA-MPS Vita Acquired 50.00 + 1 voting right 50.00 — —
AXA-MPS Danni Acquired 50.00 + 1 voting right 50.00 — —
The main changes to the Group scope of consolidation in 2007 are described below.
Alexander and Layton Blackham) in the United Kingdom, — Alpha Insurance in Greece, — kyobo Automobile Insurance in South Korea, — AXA-MPS Vita and Danni in Italy, — ELLA Bank in Hungary. The cumulative opening balance sheet for the main entities acquired over the period is shown in Note 5.
Winterthur’s U.S. Property and Casualty subsidiary, which was acquired at the end of 2006 with the intention to sale it within the following 12 months, was consolidated at December 31, 2006 and classified under “Assets held for sale”. The sale was closed during the first half of 2007 and the subsidiary is no longer part of the scope of consolidation.
Consolidated investment and investment funds Consolidated investment funds represented total invested assets of €110,162 million at the end of 2007 (€98,124 million at the end of 2006 and €78,812 million at the end of 2005), corresponding to 294 funds, mainly in France, the United Kingdom, Switzerland, Germany, Japan, Australia and the Mediterranean Region, and in majority relating to the Life & Savings segment.
The 35 consolidated real estate companies corresponded to total invested assets of €9,226 million at the end of 2007 (€9,425 million at the end of 2006 and €6,977 million at the end of 2005), mainly in France and Germany.
The 6 consolidated CDOs represented total investments of €1,024 million at the end of 2007 (€1,410 million at the end of 2006 and €1,806 million at the end of 2005). These CDO’s are consolidated in AXA‘s Balance Sheet in line with IFRS rules even though AXA‘s investments in these CDO’s assets represented only approximately €212 million out of the €1,024 million.
Given the nature of the Group activities (no securitization of AXA’s own invested assets) the current market conditions did not lead to the consolidation of off balance sheet special purpose vehicles originated by the Group.
Companies consolidated by equity method listed below exclude investment funds and real estate entities : Change in scope
AXA Mimmetals Assurance Co Ltd Newly consolidated 51.00 39.47 — —
Investment funds and real estate entities consolidated by equity method At December 31, 2007, real estate companies consolidated by equity method represented total assets of €538 million (€693 million at the end of 2006, including €298 million relating to real estate companies arising from the Winterthur acquisition and €234 million at the end of 2005) and investment funds consolidated by equity method represented total assets of €1,234 million, mainly in France and the United States (€1,376 million at the end of 2006 and €1,346 million at the end of 2005).
Matignon Finances AXA set up an intra-group financing and cash management company. This company entered the scope of consolidation in 2005.
The Asset Management segment’s include diversified asset management (including investment fund management) and related services, which are provided to a variety of institutional investors and individuals, including AXA’s insurance companies.
Reinsurer’s share in insurance and investment contracts liabilities 4,846 2,349 4,380 — — — (261) 11 315
Assets held for sale including discontinued operations 680 — — — — — — 680
(a) In accordance with IFRS 3, i.e. within 12 months following the acquisition date, the Group has adjusted certain items impacting the allocation of Winterthur purchase price. (b) Including cash and cash equivalents, deposits and guarantees, various debtors and assets covering employee benefit liabilities. (c) Including SPEs and CDOs previously disclosed in the Other Financial services segment which has been renamed “Banking”.
Other countries and other transnational activities 37,767 10,403 16,173 9,235 18,949 39,947 (17,517) 114,956
Unearned revenues and unearned fees reserves 2,232 — — — — — — 2,232
Liabilities arising from policyholder’s participation 19,121 205 — — — — (4) 19,322
Liabilities arising from investment contracts (b) 100,856 — 543 — — — — 101,399
Unearned revenues and unearned fees reserves 2,080 — — — — — — 2,080
Derivatives relating to insurance and investment contracts (130) — (33) — — — — (163)
Liabilities from held for sale including discontinued operations — 1,812 — — — — — 1,812
Unearned revenues and unearned fees reserves (d) 1,726 — — — — — — 1,726
Net result from outward reinsurance 32 (599) (555) — — — 74 (1,047)
Result from discontinued operations net of tax — — — — — 480 — 480
(a) Including SPEs and CDOs previously in the Other Financial Services segment which has been renamed “Banking”.
Fees and charges relating to investment contracts with no participating features 608 — — — — — — 608
Net revenues from banking activities — — — — 394 4 (22) 376
Change in unearned premiums net of unearned revenues and fees (229) (139) (84) — — — — (452)
Net realized investment gains and losses 3,443 594 132 50 — 6 — 4,225
Change in fair value of financial instruments at fair value through profit & loss 14,687 50 35 47 — (482) — 14,338
Change in financial instruments impairment (134) (47) (2) — — (9) — (192)
Net result from outward reinsurance (27) (629) (893) — — — 99 (1,450)
Amortization of the value of purchased business in force (274) — — — — — — (274)
Income arising from investments in associates – Equity method 12 22 — — — — — 34
Split between: Minority interests share in net consolidated result 218 61 3 407 1 (17) — 673
Fees and charges relating to investment contracts with no participating features 509 — — — — — — 509
Change in fair value of financial instruments at fair value through profit & loss (c) 15,611 82 (6) 11 — 19 (3) 15,715
Change in financial instruments impairment (105) (84) (3) — — (16) — (208)
Net investment result excluding financing expenses 30,115 1,902 482 72 — 435 (314) 32,693
Technical charges relating to insurance activities (b) (64,668) (12,187) (3,796) — — — 36 (80,614)
Change in tangible assets impairment (4) (1) 3 — — — — (3)
4.2. MARkET RISkS (INCLUDING SENSITIVITY ANALYSES) Please refer to pages 178 to 186 of the “Quantitative and Qualitative Disclosures About Market Risk and Risk Factors” section.
5.1. GOODWILL An analysis of goodwill is presented in the table below: (in Euro million)
ELLA Bank (Hungary) 2007 53 — 53 — — — — — —
(a) In accordance with IFRS 3, i.e. within 12 months following the acquisition date, the Group has adjusted certain items impacting the allocation of Winterthur purchase price. (b) Following a revaluation of deferred tax assets booked at the time of the Nippon Dantaï acquisition, goodwill was reduced by an equivalent amount (€70 million in 2005). (c) Corresponding to Venture Preference Limited. (d) Including the goodwill in connection with the put to re-purchase units of the former shareholders of Sanford C. Bernstein.
Cumulative amortization booked under French GAAP at December 31, 2003 was deducted from the gross value. Goodwill presented in the table above also includes the balancing entry for the revaluation of minority interests relating to buyout commitments recognized as liabilities under the “Minorities of controlled investments funds and puttable instruments held by minority interest holders” caption. — The amounts relating to the puts owned by minority shareholders in Sanford C. Bernstein and presented in the Sanford C. Bernstein item of the table above totaled €328 million at December 31, 2007 (€785 million at December 31, 2006 and €559 million at December 31, 2005).
— Goodwill relating to puts owned by minority shareholders in former Winterthur subsidiaries in Central and Eastern Europe and disclosed in the Winterthur item of the above table was recorded on the Group’s balance sheet at December 31, 2007 for €81million (€71 million at December 31, 2006).
AXA MPS Vita and Danni — 465 — — — — 465
AXA Financial, Inc. (minority buyout) 2,885 — — (11) (303) — 2,571
AXA China Region (minority buyout) 246 — — — (28) — 218
Of which: (a) Including the impact of exercises and revaluations of minority interest buyout commitments. (b) The decrease in 2007 corresponds to the disposal of the Netherlands operations. (c) Corresponding to Venture Preference Limited. (d) The increase is due to the minority buyout of AXA Konzern AG.
AXA Financial, Inc. (minority buyout) 3,223 — — — (338) — 2,885
Nippon Dantaï (AXA Nichidan) 1,343 — — — (118) — 1,225
AXA China Region (minority buyout) 274 — — — (28) — 246
Of which : (a) In accordance with IFRS 3, i.e. within 12 months following the acquisition date, the Group has adjusted certain items impacting the allocation of Winterthur purchase price. (b) Including the impact of exercises and revaluations of minority interests buyout commitments. (c) Including €83 million due to the acquisition of Tynan Mackenzie in 2006.
Nippon Dantaï (AXA Nichidan) 64 — — — — (6) — 59
Royale Belge (a) 33 — — (33) — — — —
(a) The decrease in 2007 corresponds to the disposal of the Netherlands operations.
Increase in impairment relating to goodwill created on acquisitions during the period
Nippon Dantaï (AXA Nichidan) 70 — — — — (6) — 64
— AXA UK completed the acquisition of Thinc Group (formerly Thinc Destini), by increasing its stake in Thinc Destini to 100% for €51 million. This company’s main business is brokerage of Life & Savings products.
— AXA UK acquired a 95.4% interest in insurance brokers Stuart Alexander, Layton Blackham and Smart & Cook for €282 million. These three companies will operate under the same structure, Venture Preference Ltd, retaining their status as independent Property & Casualty insurance brokers.
At December 31, 2007, the goodwill had a net value of €246 million.
— On February 7, 2007, AXA U.K. announced that it was to acquire the U.K.’s only 100% online insurer, Swiftcover, jointly owned by international insurer Primary Group and Swiftcover’s management for €359 million. The transaction was closed on March 22, 2007. Swiftcover is a business targeting the U.K. Personal direct market, with net inflows of 120,000 policies in 2006. The upfront cash consideration for Swiftcover amounted to €112 million, with an additional potential earn-out of €244 million maximum over the next 4 years, based on policy volume and combined ratio level.
At December 31, 2007, the goodwill had a net value of €321 million.
— On May 22 , 2007, AXA acquired 75% of kyobo Auto for an amount of KRW 88 billion (€70 million). The company has a leading position in the South Korean direct Motor insurance market with annual revenues of KRW 476 billion (€374 million) in 2007 and a market share above 30%. As of the end of the year, the group’s ownership reached 90% following the buyback of minority interests.
At December 31, 2007, the goodwill had a net value of €53 million.
Total cash consideration paid by AXA in this transaction was €1,165 million.
The transaction gave rise to : • A value of the business in force (€71 million gross of minority interests and net of tax) to be amortized over the useful life of the underlying products.
• A value of the distribution agreement (€581 million gross of minority interests and net of tax) in relation with the future new business measured on the basis of the product mix previously underwritten (as the partnership would be exited at full appraisal value, and the value of the distribution agreement was clearly identified and will still be at exit date, it was measured separately and considered as having an indefinite useful life (not amortized and tested at least annually for impairment)).
• A goodwill amounting to €465 million. The closing date of the transaction was October 19, 2007 and the opening balance sheet was as of December 31, 2007. This option was taken in order to allow MPS Vita and Danni to comply with AXA’s reporting processes and deadlines which are shorter than the one’s MPS had in the past while the 2 months’ activity did no have any significant impact on the financial statements.
Assets and liabilities at the acquisition dates of Swiftcover, Thinc Destini, Alpha Insurance, ELLA bank, AXA-MPS Vita and AXA-MPS Danni, Stuart Alexander, Layton Blackham and Smart & Cook totaled: (in Euro million)
In accordance with IFRS 3, all assets, liabilities and contingent liabilities of Winterthur were provisionally estimated at fair value based on their position at December 31, 2006.
On December 22, 2006, AXA completed its acquisition of Winterthur after having received all regulatory authorizations
following the signature of an agreement on June 14, 2006 with the Credit Suisse Group whereby AXA would buy 100% of Winterthur for a CHF12.3 billion (€7.9 billion) consideration in cash. In addition, AXA refinanced CHF1.1 billion (€0.7 billion) of loans granted by the Credit Suisse Group to Winterthur.
The Group financed this transaction with a balanced mix of equity and debt. AXA raised €4.1 billion cash through a share capital increase in July 2006, and a further €3.8 billion through issues of deeply subordinated debts in July, October and December in Euro, Sterling, Australian and US dollars (see note 13).
Intangible assets totaling €3,449 million gross were identified. They included : — €2,307 million gross relating to the value of purchased business in-force, consisting of the present value of future profits on contracts already in-force at the acquisition date. The present value of future profits took into consideration the cost of capital and was estimated using actuarial assumptions based on projections made at purchase date but also using a discount rate that includes a risk premium,
— €1,141 million gross of Life & Savings and Property & Casualty customer relationships intangible. For both Life & Savings and Property & Casualty activities, it represents the value of future cash flows expected from renewals and the crossselling of new products to customers known and identified at the time of the acquisition. In the Property & Casualty business, these projections include assumptions regarding claims, expenses and financial revenues. For Life & Savings, it was estimated on the basis of the new business value when the portion relating to customers with inforce policies can be identified, measured and recognized separately.
These intangible assets are amortized over the residual life of the contracts.
At December 31, 2007, goodwill on this entity totaled €103 million.
On March 1, 2006, AXA Canada acquired Citadel for €221 million, generating initial goodwill of €99 million.
At December 31, 2007, goodwill on this entity totaled €98 million.
On July 5, 2007, AXA finalized definitive settlements with all claimants in litigations seeking nullity and avoidance
(Nichtigkeits- und Anfechtungsklagen) of the squeeze-out resolutions adopted by the general meetings of AXA konzern AG and Kölnische Verwaltungs-AG für Versicherungswerte AG on July 20 and July 21 2006, respectively. In parallel, AXA Konzern finalized in 2007 the squeeze-out of the minority shareholders of its life insurance companies AXA Lebensversicherung AG (0.86% of the share capital) and Deutsche Ärzteversicherung AG (2.13% of the share capital). These squeeze-out resolutions are now effective and AXA holds 100% of the shares of these four subsidiaries. Following registration of these squeeze-outs, further litigation with minority shareholders on valuation issues is expected in a compensation review procedure (Spruchverfahren) under German law.
5.3.5. Assets/ Liabilities held for sale and Assets/ Liabilities relating to discontinued operations
The change in Value of Business Inforce (“VBI”) in the Life & Savings segment was as follows: (in Euro million)
In 2007, the €105 million increase in VBI following new subsidiaries’ acquisitions related to AXA-MPS Vita and Danni, and the impact of other changes was due to the Netherlands operations disposal (€238 million).
In 2006, the €2,555 million increase in VBI following new subsidiaries’ acquisitions consisted of €2,307 million relating to Winterthur and €248 million relating to MLC Hong Kong.
Amortization and impairment for the period (c) (2,121) (180) (1,956) (92) (1,630) (60)
Capitalized interests for the period 639 — 623 — 588 —
DAC and similar costs capitalization for the period 3,104 362 2,501 265 2,225 309
Life & Savings deferred acquisition costs and equivalent net carrying value as at December 31 13,754 1,236 13,047 1,152 12,360 960
(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. (c) As described in note 1.12.2, in 2006 the adoption of FRS 27 in the United Kingdom has led to adjustments to 2005. The effects of these adjustments are set out in note 14. (d) As described in note 1.10, the contribution of discontinued operations is stated on a separate line of the income statement
7.3. DEFERRED ACQUISITION COSTS AND EQUIVALENT, NET OF AMORTIZATION, UNEARNED REVENUE RESERVES AND UNEARNED FEE RESERVES – LIFE & SAVINGS The value of Life & Savings deferred acquisition costs and equivalent, net of amortization, unearned revenue reserves and unearned fee reserves, was as follows: (in Euro million)
Unearned revenues and unearned fees reserves (c) 1,823 409 1,741 339 1,532 194 of which shadow unearned revenues reserves (138) — (291) — (431) —
8.1. BREAkDOWN OF OTHER INTANGIBLE ASSETS Other intangible assets represented €3,288 million net value at December 31, 2007 and mainly included: (in Euro million)
Gross value Accumulated amortization Impairment Net value 8.3. CHANGE IN INTANGIBLE ASSETS RECOGNIZED IN BUSINESS COMBINATIONS
AXA-MPS Vita and Danni — 785 — — — — — — 785
Fair value is usually based on valuations conducted by qualified property surveyors. They are based on a multicriteria approach and their frequency and terms are often based on local regulations.
The fair values of financial instruments that are not traded in an active market are estimated: — using external and independent pricing services such as brokers or arranging banks for example in the case of CDOs, or
Note 9.9 provides a detail of held assets measured at fair value valued by reference to an active market and those valued on the basis of valuation techniques.
9.1. BREAkDOWN OF INVESTMENTS Each investment item is presented net of the effect of hedging derivatives (IAS 39) and economic hedging derivatives that do not form part of a hedge relationship as defined by IAS 39 (excluding macro hedging derivatives and other derivatives).
Fixed maturities held to maturity — — — — — 0.00% — — 0.00%
Fixed maturities available for sale 241,766 241,766 41.38% 4,935 4,935 36.01% 246,701 246,701 41.26%
Fixed maturities at fair value through profit & loss (c) 55,152 55,152 9.44% 822 822 6.00% 55,974 55,974 9.36%
Non quoted fixed maturities (amortized cost) — — — — — — — — —
Equities at fair value through profit & loss (c) 19,322 19,322 3.31% 271 271 1.98% 19,593 19,593 3.28%
Non controlled investment funds available for sale 3,449 3,449 0.59% 142 142 1.03% 3,591 3,591 0.60%
Non controlled investment funds held for trading 135 135 0.02% 8 8 0.06% 143 143 0.02%
Other assets held by consolidated investment funds designated at fair value through profit & loss 4,358 4,358 0.75% 166 166 1.21% 4,524 4,524 0.76%
Macro hedge and other derivatives — — — 7 7 0.05% 7 7 —
Assets backing contracts where the financial risk is borne by policyholders 182,827 182,827 31.29% 182,827 182,827 30.58%
Fixed maturities at fair value through profit & loss (c) 49,591 49,591 8.51% 182 182 1.11% 49,772 49,772 8.31%
Equities at fair value through profit & loss (c) 22,050 22,050 3.78% 123 123 0.75% 22,173 22,173 3.70%
Non controlled investment funds at fair value through profit & loss (c) 2,319 2,319 0.40% 155 155 0.95% 2,474 2,474 0.41%
Non controlled investment funds held for trading 80 80 0.01% 33 33 0.20% 113 113 0.02%
Other assets held by controlled investment funds designated at fair value through profit & loss 3,144 3,144 0.54% — — — 3,144 3,144 0.52%
Macro hedge and speculative derivatives (175) (175) N/A 875 875 5.37% 701 701 0.12%
Loans designated at fair value through profit & loss (c) 378 378 0.06% 2,768 2,768 16.99% 3,146 3,146 0.53%
Macro hedge and speculative derivatives — — — 8 8 0.05% 8 8 —
Assets backing contracts where the financial risk is borne by policyholders 176,562 176,562 30.30% 176,562 176,562 29.47%
Financial assets (excluding those backing contrats where the financial risk is borne by policyholders) 411,329 406,202 69.70%
In 2006, the integration of Winterthur increased total investments by €101,342 million.
Investment properties at fair value through profit & loss (c) 4,979 4,979 1.08% — — — 4,979 4,979 1.06%
Fixed maturities at fair value through profit & loss (c) 43,413 43,413 9.45% 737 737 7.30% 44,150 44,150 9.41%
Non controlled investment funds available for sale 3,221 3,221 0.70% 201 201 1.99% 3,422 3,422 0.73%
Non controlled investment funds at fair value through profit & loss (c) 1,917 1,917 0.42% 73 73 0.73% 1,990 1,990 0.42%
Non controlled investment funds held for trading 195 195 0.04% 22 22 0.22% 217 217 0.05%
Macro hedge and speculative derivatives — — — 15 15 0.15% 15 15 —
Assets backing contracts where the financial risk is borne by policyholders 141,410 141,410 30.79% 141,410 141,410 30.13%
Financial assets (excluding those backing contrats where the financial risk is borne by policyholders)
Change in impairment and amortization of investment properties at amortized cost (all activities): (in Euro million)
Write back following sale or reimbursement (50) (83) (88) (208) (158) (91)
Amortized cost (a) Fair value Net book value (b) Unrealized gains Unrealized losses
Non consolidated investment funds available for sale 3,251 3,588 3,588 369 33 4,414 4,819 4,819 429 24 2,901 3,333 3,333 440 8
December 31, 2007 Net carrying amount by maturity 12 months or less
Loans at fair value through profit and loss (a) 5 39 (4) 40
TOTAL — Invested financial assets exposed to fair value interest rate risk 33,870 70,583 199,833 304,286
Fixed maturities at fair value through profit and loss (a) 380 5,332 2,060 7,772
Total invested financial assets exposed to interest rate risk 35,105 79,057 213,273 327,436
December 31,2006 Restated (b) Net carrying amount by maturity 12 months or less
Fixed maturities at fair value through profit and loss (a) 18,389 56,028 21,073 45,803
TOTAL — Invested financial assets exposed to fair value interest rate risk 33,480 71,741 204,224 309,445
TOTAL — Invested financial assets exposed to cash flow interest rate risk 1,614 5,536 13,350 20,501
December 31, 2005 Net carrying amount by maturity 12 months or less
Fixed maturities at fair value through profit and loss (a) 2,999 31,701 10,388 45,089
Loans at fair value through profit and loss (a) 17 33 76 125
TOTAL — Invested financial assets exposed to fair value interest rate risk 14,313 77,260 154,025 245,597
TOTAL — Invested financial assets exposed to cash flow interest rate risk 732 2,539 10,195 13,466
(a) Corresponds to financial assets held for trading purposes and financial assets recognized at fair value through profit and loss.
9.6. EXPOSURE TO PRICE RISk After excluding the effect of derivatives (detailed in section 19.3) and equities of real estate companies, the breakdown by industry of equities owned across the Group is as follows: (in Euro million)
Total Equities as at December 31, 2006 22,588 7,140 4,571 2,398 6,856 5,108 3,240 2,672 6,605 61,178
In 2006, the integration of Winterthur increased the total amount of equities by €7,801 million, including €5,813 million available for sale, €1,188 million at fair value through profit and loss and €800 million held by controlled investment funds.
Sub-total : Equities held directly 13,417 6,585 3,359 1,168 4,364 2,352 2,159 1,542 4,380 39,326
Equities held by controlled investment funds (a) 5,519 433 218 139 396 51 168 82 2,087 9,093
Equities at fair value through profit and loss 3,383 3,530 144 51 511 460 606 226 1,986 10,897
Equities held by controlled investment funds (a) 3,871 691 352 181 376 53 399 315 2,126 8,364
Total Equities as at December 31, 2005 17,288 7,276 3,710 1,349 4,740 2,405 2,559 1,857 6,506 47,690
Insurance Other activities Total Insurance Other activities Total Insurance Other activities Total
Non controlled investment funds at fair value through profit and loss mainly holding equities 660 — 108 — 768 — 628 — 155 — 782 — 699 — 73 — 772 —
Non controlled investment funds mainly holding equities 2,307 — 145 — 2,451 — 2,140 — 205 — 2,345 — 1,743 — 98 — 1,841 —
Non controlled investment funds available for sale mainly holding fixed maturities 931 856 — — 931 856 1,480 1,438 — — 1,480 1,438 859 818 — — 859 818
Non controlled investment funds — Equity method (b) 1,160 — — — 1,160 — 1,294 — — — 1,294 — 1,081 — — — 1,081 —
In 2006, Winterthur’s contribution to the increase in noncontrolled investment funds was €924 million for the ones valued at fair value through profit and loss and €859 million for the ones valued at amortized cost.
Non controlled investment funds mainly holding fixed maturities 982 — — — 982 — 1,527 — — — 1,527 — 1,062 — — — 1,063 —
Other non controlled investment funds available for sale 1,003 903 113 113 1,116 1,016 1,680 1,535 208 208 1,888 1,743 1,228 1,037 198 198 1,426 1,235
Other non controlled investment funds at fair value through profit and loss 389 — 26 — 415 — 353 — — — 353 — 129 — — — 129 —
Other non controlled investment funds held for trading — — — — — — — — — — — — — — — — — —
Other non controlled investment funds 1,392 — 139 — 1,531 — 2,033 — 208 — 2,241 — 1,357 — 198 — 1,555 —
Derivatives (hedge accounting) and other derivatives 42 40 — — 42 40 4 9 — — 4 9 89 (2) — — 89 (2)
9.8. FINANCIAL ASSETS SUBJECT TO IMPAIRMENT 9.8.1. Breakdown of financial assets subject to impairment (excluding investment properties)
Each investment item is presented net of the effect of hedging derivatives (IAS 39) and economic hedging derivatives that do not form part of a hedge relationship under IAS 39 (excluding macro hedging derivatives and other derivatives). Details of the effect of derivatives are provided in section 19.3.
Non quoted fixed maturities (amortized cost) — — — — — 11 — 11 — 11 23 — 22 — 22
Impairment — non controlled investment funds 77 38 (24) 7 97
Impairment — non controlled investment funds 118 5 (42) — (3) 77
(a) Changes in the scope of consolidation and impact of changes in exchange rates. (b) As described in note 1.10, the contribution of discontinued operations is stated on a separate line of the income statement.
Impairment — non controlled investment funds 166 10 (66) — 8 118
The breakdown by valuation method of financial assets recognized at fair value is as follows: (in Euro million)
NB: This tables excludes assests backing contracts where the financial risk is borne by policyholders.
Fair values determined directly by reference to an active market (1) relate to prices which are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency and those prices represent actual and regularly occurring market transactions on an arm’s length basis, i.e. the market is still active.
— assets measured on the basis of internal models including assumptions supported by observable data or mark to model valuations.
9.10. INVESTMENTS BACkING CONTRACTS WHERE THE FINANCIAL RISk IS BORNE BY POLICYHOLDERS
These investments (including investment properties) are measured at fair value through profit and loss. Financial assets included in these investments are stated at fair value through profit and loss under the fair value option.
At the end of 2006, investments backing contracts where the financial risk is borne by policyholders included €18,293 million attributable to Winterthur.
The amount of assets measured at fair value using in whole or in part a valuation technique based on assumptions that are not supported by prices from current market transactions and not based on available observable market data is less than 1.5% of financial invested assets held by the Group excluding assets backing contracts where the financial risk is borne by policyholders. When running this analysis, external valuations are considered as observable data determined by market participants.
Winterthur Life (Hong Kong) Ltd. — 1 — — — 1
In 2006, “other changes” notably included: — The merger of associate CFP-Crédit with fully consolidated
CFP (€—34 million). — The sale of AXA RE (included in the Other items: €—2 million)
and Parfimmo in Belgium (€—24 million). — The liquidation of AXA Insurance Investment Holding in
— The entries into the scope of consolidation of Krungthai AXA Life Insurance Company Ltd (€16 million), Philippines AXA Life Insurance Corporation (€10 million), AXA Mandiri Financial Services (€3 million) and AXA Affin General Insurance Berhad in Asia-Pacific (€11 million).
— The merger of AXA Asia Pacific Holdings subsidiaries with AXA Bharti and AXA Affin.
AXA General Insurance Hong Kong 55 — — — (55) —
In the years ended December 31, 2007, 2006 and 2005, AXA received cash dividends from equity-accounted companies respectively totaling €9 million, €4 million and €20 million.
Receivables from policyholders, brokers and general agents 3,607 (269) 3,338 3,338 3,586 (255) 3,331 3,330 2,903 2,903
Premiums earned but not written 1,812 — 1,812 1,812 1,895 — 1,895 1,895 1,883 1,883
Cash and cash equivalents break down as follows: (in Euro million)
As at December 31, 2006 the integration of Winterthur had an impact of €3,264 million on cash and cash equivalents.
13.1. IMPACT OF TRANSACTIONS WITH SHAREHOLDERS 13.1.1. Change in shareholders’ equity group share in 2007 a) Share capital and capital in excess of nominal value
— Exercise of stock options and share subscription rights for a total of €152 million (including €20 million in nominal share capital).
At December 31, 2007, the Company and its subsidiaries owned approximately 31 million AXA shares, an increase of 1 million shares or €99 million compared to December 31, 2006. This item also includes a €96 million premium paid in 2007 for call options on AXA shares.
During the year, AXA pursued its share purchase program to control dilution arising from share-based compensation and employee Shareplan program, and purchased 70.4 million shares for a total amount of €2,125 million (including “AXA Miles”). Of these €2,125 million, €1,899 million were cancelled by a decrease in share capital. In addition, AXA paid a €96 million premium for call options on AXA shares with an automatic exercise feature, to fully neutralize the dilutive impact of the 2017 convertible bonds.
In 2007, the change in other reserves was due to : (i) a €1,749 million issue of perpetual deeply subordinated note, a €—833 million repayment of deeply subordinated debt, €—289 million in interest expense, and €—388 million in exchange differences.
— a £700 million perpetual deeply subordinated note (approximately €1.0 billion) placed on October 16, 2007.
October 29, 2004 — 375 M€ rate CMS 10 years — in euro 375 375 375 375 375 375
December 22, 2004 — 250 M€ rate CMS 10 years — in euro 250 250 250 250 250 250
December 11, 2006, 750m $ (TSS) non call 12 years, in USD 750 507 750 567 — —
Perpetual notes — variable 3.55% to 5% in USD 875 594 1,275 968 1,275 1,081
Equity component of convertible debt 95 95 203 203 203 203
In addition to the nominal amounts shown above, the debt component of shareholders’ equity included related net financial expenses of : — €—657 million at December 31, 2007, making a total of €7,219 million, — €—367 million at December 31, 2006, making a total of €7,090 million, and — €—207 million at December 31, 2005, making a total of €3,550 million.
July 11, 2006 to finance the acquisition of Winterthur for a total amount of €4,091 million (including €477 million in nominal share capital); — Employee share offering (November 2006) for €375 million (including €35 million in nominal share capital); — Capital reduction of €—305 million by cancelling shares acquired under the share buyback program (including €—26 million in nominal share capital); — Exercise of stock options for a total of €131 million (including €19 million in nominal share capital); — Conversion of share subscription rights for €8 million (including €1 million in nominal share capital); — Other transactions (mainly bond conversions and capital gains on treasury shares) for a total of €7 million.
equity. Their total estimated historical cost was €121 million and their market value €127 million at the end of December 2006.
The shareholders’ meeting of May 4, 2006, approved a dividend payout of €1,647 million in respect of financial year 2005.
13.1.3. Change in shareholders’ equity group share in 2005 a) Share capital and capital in excess of nominal value
In 2005, the following transactions had an impact on AXA’s nominal share capital and capital in excess of nominal value: – AXA-Finaxa merger, led to a net reduction of €—940 million
– Exercise of stock options led to an increase of €53 million (including a €11 million increase in nominal share capital).
The change in other reserves was mainly due to the following: – €250 million issue of deeply subordinated notes through the Euro Medium Term Notes (EMTN) program; – €515 million redemption of perpetual deeply subordinated notes; – €—112 million in interest expense on the perpetual deeply subordinated and subordinated notes; – €—146 million foreign exchange impact.
Dividends paid by AXA totaled €1,164 million in 2005 in respect of the 2004 financial year, as approved by the shareholders meeting of April 20, 2005.
The following table shows a reconciliation between gross unrealized gains and losses on available for sale financial assets and the corresponding reserve recognized in shareholders’ equity: (in Euro million)
The change in reserves relating to changes in fair value of assets in 2007, 2006 and 2005 broke down as follows: (in Euro million)
The impact of foreign exchange rate movements (€—1,392 million) was mainly due to the United States (€—1,242 million, principally due to the difference between the 2006 and 2007 closing $/€ exchange rates: $1.32 for €1 at the end of 2006 compared to $1.47 for €1 at the end of 2007), the United Kingdom (€—470 million), and Japan (€—311 million), partially offset by the change in fair value of currency hedges set up by the Company to hedge net investments in foreign operations (€638 million).
The main contributors to the €612 million change in actuarial gains and losses on employee benefit obligations were the United Kingdom (€+299 million), Germany (€+137 million), the United States (€+53 million) and France (€51 million). Pension liabilities often have longer duration that the assets held. In the 2007 context of rising interest rates and stability of equity markets, pension liabilities declined more that the corresponding assets, leading to a positive impact on Group shareholders’ equity.
The impact of exchange rate movements (€1,361 million) was mainly attributable to the United States (€1,671 million, principally due to the difference between the 2005 and 2004 closing $/€ exchange rates: $1.18 for €1 at the end of 2005 compared to $1.36 for €1 at the end of 2004), Australia (€99 million) and Canada (€97 million), partially offset by the change in fair value of currency hedges set up by the Company to hedge net investments in foreign operations (€—576 million).
The main contributors to the €—415 million change in actuarial gains and losses on the employee benefit liabilities were the United Kingdom (€—131 million), Germany (€—128 million) and the United States (€—95 million).
13.3. CHANGE IN MINORITY INTERESTS Under IFRS, minority interests in most investment funds in which the Group invests consist of instruments that holders can redeem at will at fair value, and qualify as a liability rather than shareholders’ equity items. Please refer to note 17 — Debt (other than financing debt). The same is true for puttable instruments held by minority interest holders.
The €178 million increase in minority interests to €2,940 million was mainly due to: — consolidation of Winterthur (€70 million), mainly in
Deeply subordinated debt — — — — — — — — 528 — — 528 —
Employee benefits actuarial gains and losses through OCI (b) — — — — — — — — — — 612 612 16
Total recognized income and expense for the period (SORIE) — — — — — (2,880) (67) — — (1,388) 6,278 1,942 490
Change in scope of consolidation — — — — — (36) — — — (4) — (40) 449
Impact of transactions with shareholders (32,135) 2.29 (74) (1,035) (195) (36) — — 129 (4) (2,312) (3,526) (159)
Reserves relating to the change in fair value of hedge accounting derivatives
Employee benefits actuarial gains and losses through OCI (b) — — — — — — — — — — 252 252 8
Total recognized income and expense for the period (SORIE) — — — (355) (20) — — (764) 5,337 4,198 560
Equity component of compound financial instruments — — — — — — — — — — — —
Deeply subordinated debt — — — — — — — — 3,699 — — 3,699
Reserves relating to changes in fair value through shareholders’ equity — — — — — (355) (20) — — — — (375) 84
Accrued interests — Deeply subordinated debt — — — — — — — — (112) — — (112)
Dividends paid — — — — — — — — — — (1,164) (1,164) —
Impact of transactions with shareholders (36,839) 2.29 (84) (909) (272) (2) — — (232) 5 (1,234) (2,728) (265)
Reserves relating to changes in fair value through shareholders’ equity — — — — — 2,393 22 3 — — — 2,418 2
Equity — share based compensation — — — 57 — — — — — — — 57
NB : amounts are presented net of impacts of shadow accounting and of its effects on policyholders’ benefit, deferred aquisition costs, and value of business in force. (a) Mainly perpetual subordinated debts (TSS, TSDI), and equity components of compounded financial instruments (e.g convertible bonds). (b) Actuarial gains and losses accrued since opening January 1, 2005.
Following the adoption of the United Kingdom standard FRS 27, as described in note 1.12.2 “accounting principles”, the impacts on December 31, 2005 balance sheet and 2005 income statement were as follows: Impacts on December 31, 2005 balance sheet : — deferred acquisition costs were restated by €—708 million; — liabilities arising from insurance contracts were increased by €1,517 million, including €1,196 million in individual 14.1. LIABILITIES ARISING FROM INSURANCE CONTRACTS (GROSS AND REINSURERS’ SHARE) Liabilities arising from insurance contracts, including those where the financial risk is borne by policyholders, were split by segment as follows: (in Euro million)
Future policy benefit reserves Life & Savings (d) 239,649 — 228 239,877 252,682 — 285 252,967 191,579 — 373 191,952
Reinsurers’ share in unearned premium reserves 6 317 472 795 5 215 554 775 5 128 134 267
Reinsurers’ share in other reserves 158 16 — 174 154 27 — 181 140 37 — 177
Reinsurers’ share in future policy benefit reserves 18 — — 18 20 — — 20 10 — — 10
Reinsurers’ share in claim reserves (a) — — — — 2 — — 2 — — — —
Impacts on 2005 income statement : — the change in unearned premium reserves net of unearned revenues and fees was increased by €0.6 million; — technical charges relating to insurance activities were reduced by €0.4 million; — acquisition costs were restated by €0.8 million; — income tax was decreased by €1 million.
Liabilities arising from insurance contracts where the financial risk is borne by policyholders 113,654 — 113,654 108,984 — — 108,984 92,888 — — 92,888
(c) See note 1.12.2 — Reserves measured according to the option offered by IFRS 4.24 for selective re-measurement of reserves at current market assumptions. (d) As described in note 1.12.2, the adoption of FRS27 in the United Kingdom has led to adjustments to 2005 (see the first paragraph of this note). (e) For the detail of P&C and International Insurance IBNR, see note 20.2.4. (f) In accordance with IFRS 3, i.e. within 12 months following the acquisition date, the Group has adjusted certain items impacting the allocation of Winterthur purchase price.
At the end of 2006, total liabilities arising from insurance contracts included €78,569 million gross of reinsurance related to Winterthur. Net of reinsurance, the corresponding amount was €77,331 million.
At the end of 2007, insurance liabilities relating to UK withprofit insurance contracts excluding the FFA (Fund for Future Appropriation) were €17,761 million versus €20,358 million at the end of 2006 (of which €2,006 million relating to Winterthur) and €18,169 million at the end of 2005.
Liabilities arising from investment contracts where the financial risk is borne by policyholders 69,587 — 69,587 67,129 67,673 48,549 48,549
Reinsurers’ share in future policy benefit reserves 13 — 13 12 12 13 13
Reinsurers’ share in future policy benefit reserves 9 — 9 9 9 8 8
Liabilities relating to unearned revenues and fees, and to policyholder bonuses (gross and reinsurers’ share), along with derivative instruments relating to insurance and investment contracts, are excluded from the table above. (a) Includes reserves for claim handling costs.
Of which measured at current market assumptions (b) — — — — — — —
Reinsurers share in liabilities arising from investment contracts with no discretionary participating features — — — — — — —
TOTAL LIABILITIES ARISING FROM INVESTMENT CONTRACTS – NET OF REINSURANCE CEDED 111,138 — 111,138 100,836 101,379 82,720 82,720
Gross claim reserves as of January 1 (a) 35,039 10,534 45,573 26,602 10,623 37,225 24,599 9,147 33,747
Loss reserves development (prior years) (1,531) (157) (1,687) (827) (132) (959) (620) 199 (421)
Change in scope of consolidation and change in accounting method (919) (275) (1,195) 7,359 1,239 8,598 666 35 701
Impact of foreign currency fluctuation (432) (529) (961) (99) (530) (629) 324 622 946
Claim reserves as at December 31 33,426 9,598 43,024 33,625 10,275 43,899 25,614 10,366 35,980
Claim handling cost reserves as of December 31 1,387 262 1,649 1,306 259 1,566 988 257 1,245
(a) Excluding “other policy benefits liabilities” (mainly mathematical annuity reserves), which totaled €2.9 billion in 2005, €3.4 billion in 2006 including €0.5 billion for Winterthur and €3.3 billion in 2007 .
For Property & Casualty, changes in the scope of consolidation in 2007 amounted to €—919 million, mainly due to: — The disposal of the Netherlands operations (€—657 million). — In Switzerland, the transfer of annuities reserve from claims reserve to other policy benefits reserve (€—681 million). — In France, the entry of NSA (Nationale Suisse Assurances)
— In South Korea, the entry of Kyobo Auto in the scope of consolidation (€51 million).
For Property & Casualty, changes in the scope of consolidation in 2006 amounted to €7,359 million, mainly due to: — The entry of Winterthur companies in the scope of consolidation (€7,884 million). — In Germany, removals from scope of consolidation
(€—794 million), mainly due to transfer of the run-off portfolio to AXA Liabilities Managers, which belongs to the International Insurance segment (€—640 million), and the disposal of DARAG (€—127 million).
— The entry of Daev Sach (Germany) in the scope of consolidation (€57 million).
Change in scope of consolidation, portfolio transfers and change in accounting principles 22 (44) (22) 240 144 384 153 58 211
Impact of foreign currency fluctuation (19) (323) (341) (18) (218) (236) 22 150 172
Reinsurers’ share in claim reserves as of December 31 1,964 3,861 5,825 1,964 4,348 6,312 1,791 2,692 4,483
Danni and Alpha Insurance in the scope of consolidation (€6 million and €25 million respectively).
— In Canada, the entry of Citadel in the scope of consolidation (€24 million).
For Property & Casualty, changes in the scope of consolidation in 2005 amounted to €153 million, mainly due to: — The change in consolidation method in Turkey (€17 million),
Hong Kong (€42 million) and Singapore (€20 million). — The transfer of the disability business from the Life &
Savings segment to the Property & Casualty segment in the Netherlands (€60 million).
Gross future policy benefit reserves as of January 1 361,590 100,503 462,093 284,403 82,342 366,745 251,339 71,513 322,852
Change in future policy benefit reserves (a) (c) 12,147 2,944 15,091 17,611 2,438 20,049 12,642 5,790 18,431
Impact of foreign currency fluctuation (c) (18,195) (5,633) (23,828) (14,099) 624 (13,475) 15,293 1,868 17,162
(€3,661 million insurance liabilities and €12,548 million investment liabilities) and Alpha Insurance (€188 million).
In 2006, changes in the scope of consolidation totaled €79,729 million, mainly due to: — The entries in the scope of consolidation of: • Winterthur: €79,218 million (including €64,564 million related to insurance contracts and €14,654 million related to investment contracts).
• Citadel in Canada (€56 million). • MLC in Hong Kong: €391 million (including €304 million related to insurance contracts and €87 million to investment contracts).
• In Malaysia: €95 million (insurance contracts). — Continued reduction in AXA Germany’s co-insurance share of HÄK-BÄK medical profession pools (€—304 million).
— In the Mediterranean Region, reclassification of policyholder participation reserves to the future policy benefit reserves: €273 million (including €229 million related to insurance contracts, and €44 million related to investment contracts).
In 2005, changes in the scope of consolidation mainly included the reduction in AXA Germany’s co-insurance share of HÄK-BÄK medical profession pools (€—354 million), the sale of the Health business (€—142 million) and the transfer of the disability business from the Life & Savings segment to the Property & Casualty segment in the Netherlands (€—116 million).
Investment contracts Total Insurance contracts Investment contracts Total Insurance contracts Investment contracts Total
Reinsurers’ share in future policy benefit reserves as of January 1 4,237 20 4,258 3,720 21 3,741 3,391 — 3,391
Reinsurers’ share of change in future policy benefit reserves (a) 25 — 25 91 — 91 47 — 47
Impact of foreign currency fluctuation (308) — (308) (289) — (289) 356 — 356
Reinsurers’ share in future policy benefit reserves as of December 31 4,012 22 4,034 4,237 20 4,258 3,720 21 3,741
(a) Interests credited, policyholders bonus, adjustments on contracts where the financial risk is borne by policyholders. (b) Internal AXA transfers.
Investment contracts with Discretionnary Participation Features (DPF) measured with current assumptions (b) — — —
Investment contract with no Discretionnary Participation Features (DPF) measured at fair value 541 611 707
14.6. LOSS RESERVE DEVELOPMENT TABLE The loss reserve development table shows movements in loss reserves between 1997 and 2007, based on previously applied accounting standards, in accordance with IFRS 4. All contracts concerned are insurance contracts as defined by IFRS.
The second row entitled “Gross reserves for unpaid claims and claims expenses developed in 2007 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.
Preparation of the last diagonal reflects the fact that, following the merger of some newly-acquired portfolios with the AXA Group’s existing portfolios, it is not always technically possible to distinguish, within payments made in a given year in respect of prior occurrence years, between those relating to the historical portfolio and those relating to the recently-acquired portfolio. In these cases, the merged scope is used to prepare the last diagonal of the table, even in the columns corresponding to years before the one in which the most recent portfolio was acquired.
Also with effect from year-end 2006, IBNR reserves related to construction insurance in France (“PSNEM”) and the annuity reserves of the Property & Casualty segment have been included in the loss reserve development table for Property & Casualty and International Insurance (excluding AXA RE).
The second part of the table entitled “Reserves re-estimated” shows, for a given column N, an estimate of the final cost of liabilities carried at 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.
a) Loss reserve development table: Property & Casualty and International Insurance (excluding AXA RE)
Gross reserves for unpaid claims and claims expenses developed in 2007 adjusted for changes in exchange rates and scope of consolidation (d) 21,132 21,633 23,809 24,592 26,072 26,724 27,556 28,409 29,884 42,627 44,020
(b) AXA acquired Compagnie UAP (“UAP”) on January 1, 1997. The operations of AXA and UAP were integrated in 1998. At the date of acquisition, UAP had net reserves of €13.7 billion. The outstanding claims reserves and claims expenses of UAP’s Property & Casualty operations are included in the year end reserves as of December, 31, 1997 and after. Cumulative payments and reserve development for 1998 and after include the development of integrated Property & Casualty liabilities of AXA, including UAP, as loss development data specific to UAP are not available and there is no reasonable basis of allocating cumulative payments and reserves re-estimated between AXA and UAP post-acquisition.
The reserves of AXA Corporate Solutions Assurance US were presented on an occurring year basis and included in the Property & Casualty loss reserve development table. The reserves of AXA RE P&C Insurance Company and AXA RE Reinsurance Company were presented on an underwriting year basis and included in the AXA RE loss reserve development table.
On December 21, 2006, the AXA Group finalized an agreement to sell the AXA RE reinsurance business to Paris Ré Holding. Under the terms of the agreement, AXA retains exposure to any changes in the final cost of claims occurring before December 31, 2005. However, the proportional treaty set in place as part of the agreement between AXA RE and Paris Ré
Gross reserves for unpaid claims and claims expenses developed initially at the booking date (a) 2,880 3,060 3,396 3,455 5,868 4,778 4,200 3,314 4,523
Initial net claims reserves in excess of (less than) re-estimated net claims reserves as at December 31, 2007
Future policy benefits annuity reserves (separately developed in 2006) — 2,492 —
Total gross claims and other reserves excluding Life & Savings Segment 48,754 49,035 40,173
(a) Total gross claims and other reserves developed are presented on the basis of the loss reserve development table. The reserves of AXA Corporate Solutions Insurance US were included in Property & Casualty and International Insurance loss reserves. The reserves of AXA RE P&C Insurance Company and AXA RE Reinsurance Company (€203 million in 2007, €282 million in 2006 and €409 million in 2005) were included in AXA RE’s loss reserve development table.
(b) Including reserves on acceptations (€699 million in 2007, €771 million in 2006 and €938 million in 2005). (c) In accordance with IFRS 3, i.e. within 12 months following the acquisition date, the Group has adjusted certain items impacting the allocation of Winterthur purchase price.
— Employers Liability insurance in Europe: this created exposure to asbestos-related claims, in particular on the UK market.
3 — Year survival ratio excluding commutations (c) 36 years 38 years 32 years 34 years
Cumulative Payments to date / Projected Ultimate Cost 31% 29% 35% 33%
(a) includes claims expense reserves. (b) includes sale of the Netherlands operations in 2007 and integration of Winterthur in 2006. (c) Average yearly payments over the last 3 years (excluding in respect of commutations) / Reserves at year end.
Claims reserves at beginning of year (a) 102 92 151 134
In 2007, AXA paid claims and legal costs of €31 million (including €28 million in respect of asbestos and €3 million in respect of environmental pollution). This was significantly lower than last year (€126 million) as last year was impacted by an exceptionally high level of liabilities commuted.
In 2007, AXA incurred losses and loss expenses of €136 million net of reinsurance (respectively €146 million in respect of asbestos and €—10 million in respect of environmental pollution). This was primarily due to a higher-than-anticipated number of losses reported in respect of asbestos-related exposures in the United Kingdom.
Casualty insurance and investment contracts excluding contracts where the financial risk is borne by policyholders. Actual maturities may differ significantly from the estimates set out below, mainly because some of the contracts contain a surrender option controlled by the policyholder that may reduce their duration.
In the tables presented in section 14.9.1 and 14.9.2, liabilities arising from Life & Savings and Property & Casualty insurance and investment contracts exclude contracts where the financial risk is borne by policyholders. These liabilities are not exposed to interest-rate or duration risk, except unitlinked contracts with performance guarantees. Subsidiaries hold unit-linked assets backing the corresponding liabilities arising from these contracts. Occasional mismatches result solely from administrative timing differences in the processing of day-to-day operations.
Liabilities arising from insurance and investment contracts 23,461 70,482 308,239 402,182 of which Life and Savings liabilities relating to contracts including a surrender option with some surrender benefit before maturity 11,663 49,030 207,362 268,054
Liabilities arising from insurance and investment contracts 19,845 76,988 409,458 506,291 of which Life and Savings liabilities relating to contracts including a surrender option with some surrender benefit before maturity 5,061 42,870 220,690 268,621
The table hereafter and related comments exclude contracts where the financial risk is borne by policyholders (unit-linked contracts).
The general principles for establishing insurance liabilities are set out in note 1 of this report. Liabilities are based on estimates, and one of the key assumptions used in these estimates is the discount rate.
As shown in the table below, as at December 31, 2007: (i) 90% of Life & Savings reserves (excluding unit-linked contracts) are discounted, (ii) 13% are subject to a revision of the discount rate and (iii) 77% retain the rate set at subscription, subject to the liability adequacy test described in note 1.
In Property & Casualty business, most reserves (94%) are not discounted, except for disability contracts and annuity motor mathematical reserves, where the discount rate is revised regularly.
(a) Subject to liability adequacy tests. Amounts are presented excluding the impact of derivatives on insurance and investment contracts (presented in section 19.4) and excluding liabilities related to unearned revenues and fees, and to policyholders participations. Liabilities relating to contracts where the financial risk is borne by policyholders are also excluded.
The tables in note 20 set out the Group’s major insurance business areas, and reflect the Group’s high level of diversification.
14.10. EMBEDDED DERIVATIVES MEETING THE DEFINITION OF AN INSURANCE CONTRACT AXA sells insurance contracts that contain a variety of options and guarantees for contract-holders. These features are described in Note 4. They are not embedded derivatives which AXA reports separately at fair value because: — many of the features would be considered clearly and closely related to the host contract, and — many of the features themselves would qualify as insurance contracts under phase I.
This note describes the features that are embedded derivatives and meet the definition of an insurance contract on a stand-alone basis. The primary features can be divided into two main categories: guaranteed minimum death benefits (GMDBs) or guaranteed minimum income benefits (GMIBs) offered on unit-linked contracts and guaranteed annuity purchase rates.
The risk of GMDB and GMIB features to AXA is that protracted under-performance of the financial markets could result in benefits being higher than the accumulated policyholder account balances could support. 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, contract surrender rates and GMIB election rates. There can be no assurance that ultimate experience will not differ from management’s estimates. In addition to providing for risk through establishing reserves, AXA also manages the risk through a combination of reinsurance programs and active financial risk management programs including investment in exchangetraded futures contracts and other instruments.
Write back after final cost review (5) (23) — — (48) (76)
Impact of change in scope of consolidation and changes in accounting method 15 54 39 — 330 439 (131)
U.S. registered redeemable subordinated debt, 7.125% 2020 (GBP) 443 484 474
Euro Medium Term Notes, 6.0% due through 2013, and BMTN 955 971 1,041
Other financing debt instruments issued under €100 million 36 11 11
(a) Hedging instruments according to IAS 39 and economic hedge derivatives which are not acting as hedge under IAS 39. (b) As described in note 1.11.2, perpetual subordinated notes were reclassified under shareholders’ equity in 2006 with retrospective application to 2005. Details are provided in
Total financing debt increased by €1,509 million between December 31, 2006 and December 31, 2007, or by €1,822 million at constant exchange rates, to €10,856 million. Movements in exchange rates decreased financing debt by €313 million, mainly on AXA SA redeemable subordinated notes denominated in foreign currencies and AXA Financial senior bonds. The increase at constant exchange rates was mainly due to : i. a €739 million increase in subordinated debt (including derivative instruments) arising mainly from the decrease in market value of interest rate swaps following the rise in rates in the Euro zone (€578 million), the consolidation of AXA-MPS Vita and Danni (€134 million) and a new debt in AXA Bank Belgium (€50 million), partially offset by the repayment of €57 million debt by AXA RE Finance; ii. a €1,001 million increase in financing debt instruments issued arising mainly from AXA SA issues of commercial paper (€961 million); iii. a €82 million increase in financing debt owed to credit institutions mainly arising from a new debt in Morocco to finance the minority interests’ buyout of AXA ONA (€127 million) and the consolidation of AXA-MPS Vita and Danni (€50 million), partially offset by a €85 million decrease following the sale of the Netherlands and repayment of a €10 million debt in Switzerland.
Financing debt instruments issued at cost 4,698 4,722 3,894 3,962 3,025 3,091
Financing debts owed to credit institutions at cost 175 175 95 95 17 17
The Group does not hold any financing debt designated at fair value through profit & loss (fair value option or trading instruments).
The fair value of financing debt at December 31, 2007, excluding accrued interests, was €11,405 million, including related hedging derivative instruments.
16.4. EXPOSURE TO INTEREST-RATE RISk AND CONTRACTUAL MATURITIES The tables below set out the contractual maturities of financing debt (excluding the impact of derivatives). Effective maturities may differ from those presented, mainly because some instruments include clauses allowing early redemption, with or without penalty.
Minority interests of controlled investment funds and other puttable instruments held by minority interest holders 7,751 7,224 5,115
(a) Also includes speculative derivatives relating to other financial liabilities (b) In accordance with IFRS 3, i.e. within 12 months following the acquisition date, the Group has adjusted certain items impacting the allocation of Winterthur purchase price
Movements in the “Minority interests in controlled investment funds and other puttable instruments held by minority interest holders” caption depend on: — Changes in minority interests in controlled investment funds and changes in their fair value. An identical change in invested assets held by these funds is also recorded.
Minority interests in funds under this caption, totaled €7,192 million at December 31, 2007 (€6,100 million at December 31, 2006 and €4,326 million at December 31, 2005).
Other puttable instruments held by minority interest holders totaled €559 million at December 31, 2007 (€1,124 million at December 31, 2006 and €789 million December 31, 2005). They represented the put option granted to minority shareholders of Sanford C. Bernstein (€425 million) and put options held by the minority shareholders of former Winterthur subsidiaries in Central and Eastern Europe (€134 million).
17.2. OTHER DEBT INSTRUMENTS ISSUED, NOTES AND BANk OVERDRAFTS (OTHER THAN FINANCING DEBT) BY ISSUANCE (in Euro million)
AXA SA debts subscribed on behalf of French, English and German subsidiaries 86 150 186
Derivatives on other debt instruments issued (other than financing debt) — Other financial services — — —
HOHO 1: class A Senior Class A Mortgage-backed notes, maturity 2030, 3 months Euribor + 0.31%, Floating — 190 —
HOHO 1: class C Junior Class C Subordinated Mortgage-backed notes, maturity 2030, 8%, Fixed rated — 5 —
HOHO 2: class A1 Senior Class A1 Mortgage-backed notes, maturity 2080, 3 months Euribor + 0.26%, Floating — 263 —
HOHO 2: class A2 Senior Class A2 Mortgage-backed notes, maturity 2080, 4.73%, Fixed rated — 54 —
HOHO 2: class C Junior Class C Mortgage-backed notes, maturity 2080, 5.64%, Fixed rated — 7 —
HOHO 4: class A Senior Class A Mortgage-backed Floating rate notes, maturity 2083, 3 months Euribor + 0.03%, Floating — 1,492 —
ERIV: AFET Amortizing mortgage loan based on EURIBOR 3 month + 1.45 point, maturity date: 2011 203 214 —
ERIV: CORTEFIEL Mortgage loan based on Euribor 3 month + 0.85 point, maturity date: 2013 + 2x1 year 100 165 —
Derivatives on other issued debt (other than financing debt) — Other 2 (3) —
OTHER DEBT INSTRUMENTS ISSUED, NOTES (OTHER THAN FINANCING DEBT) AND BANk OVERDRAFTS 6,260 8,711 8,411
Netherlands (included Holland Homes SPEs, which securitized mortgages in the Dutch DBV Life business),
These movements were partly offset by: — a €193 million increase in bank overdrafts, — a €164 million increase in deposits under AXA SA’s collateral agreements, — first-time consolidation of real estate companies European
— a €529 million increase in Hungary due to the consolidation of ELLA Bank.
Debt owed to credit institutions held at cost 3,205 2,535 5,112
Debt owed to credit institutions designated as at fair value through profit & loss
Including debt at fair value through profit & loss 895 4,255 1,637
17.3.2. Other debt instruments issued, notes and bank overdrafts measured at fair value
Debt instruments issued held as trading — — — — — — — — —
Debt owed to credit institutions held as trading — — — — — — — — —
Debt owed to credit institutions (other than financing debt) (a) — — — 126 — 126 129 — 129
The current tax amount due on foreign income amounted to €1,732 million in 2007 (€991 million and €1,059 million respectively in 2006 and 2005), including €283 million policyholders tax (€243 million and €163 million respectively in 2006 and 2005). A deferred tax write back of €—344 million in 2007 (€825 million and €111 million respectively in 2006 and 2005) corresponding to tax due on foreign income is disclosed in the table above, including €—189 million policyholders tax (€169 million and €395 million respectively in 2006 and 2005).
The reconciliation between the theoretical tax charge (pretax profit multiplied by the applicable tax rate in France for the period concerned) and the effective tax charge was as follows: (in Euro million)
Income from operating activities, gross of tax expenses (excluding discontinued activities and result from investments consolidated using equity method) 7,681 7,593 6,142
Impact of rate differences on notional tax charge (118) (68) (117)
Impact of differences in tax rate and impact of taxes not linked to pre-tax income
Deferred tax assets recognized on tax losses of prior years (9) (82) (16)
Deferred tax assets not recognized on tax losses of the year 13 18 11
(a) Derecognition of DTA (Deferred Tax Assets) arising on tax losses is shown in “Tax losses impact”. (b) As described in note 1.10, the contribution of discontinued operations is stated on a separate line of the income statement.
(a) Excluding discontinued activities and contribution from equity-accounted companies. (b) In 2006 and 2005, before the integration of Winthertur, Switzerland was presented in “Other Countries”. (c) As described in note 1.10, the contribution of discontinued operations is stated on a separate line of the income statement.
Deferred tax Assets/ (Liabilities) concerning: — Deferred tax through profit & loss 7,517 8,242 (725) (897) (380)
— Deferred tax through reserves relating to gains and losses on defined benefits pension plans 32 99 (67) 224 369
— Deferred tax through reserves in relation to stock options 98 1 97 142 87
Policyholder tax — Net deferred tax assets / (liabilities) (a) 207 1,190 (982) (1,268) (1,033)
In the table above, the “net deferred tax position” column corresponds to the net between deferred tax assets and deferred tax liabilities carried on the Group’s consolidated balance sheet. However, the breakdown of DTA/DTL disclosed in the table corresponds to the deferred tax before any netting occurs for the balance sheet presentation purpose.
Deferred tax through reserves relating to the fair value adjustment of available for sale assets (1,833) — 1,048 31 53 (701)
Policyholder tax — Deferred tax through profit & loss (1,268) 183 — 94 7 (984)
Policyholder tax — Deferred tax through reserves relating to the fair value adjustment of cash flow hedge derivatives — — — — — —
Policyholder tax — Net deferred tax assets/ (liabilities) (1,268) 183 3 94 7 (982)
Total net deferred tax assets/ (liabilities) (3,663) 547 795 164 (226) (2,383)
Deferred tax through reserves relating to the fair value adjustment of cash flow hedge derivatives (65) — 16 — 21 (28)
Net deferred tax assets / (liabilities) excluding policyholder tax (2,547) 194 652 79 (772) (2,395)
Policyholder tax — Deferred tax through reserves relating to the fair value adjustment of available for sale investments (7) — 7 — — —
Policyholder tax — Deferred tax through reserves relating to the fair value adjustment of cash flow hedge derivatives — — 2 — (2) —
Deferred tax through profit & loss (316) 198 — (75) (187) (380)
Deferred tax through reserves relating to gains and losses on defined benefits pension plans 140 — 216 12 1 369
Deferred tax through reserves in relation to stock options — — 63 5 20 87
Policyholder tax — Deferred tax through profit & loss (a) (579) (396) — (19) (144) (1,026)
Total net deferred tax assets / liabilities (3,056) (198) (32) (136) (270) (3,580)
(DTA) accounted at the year end; (ii) in the second part, the “expiry date” of the Deferred Tax Assets (DTA), i.e. the latest date the Group can use them.
(a) In accordance with IFRS 3, i.e. within 12 months following the acquisition date, the Group has adjusted certain items impacting the allocation of Winterthur purchase price.
Unrecognized Deferred Tax Assets (DTA) by expiration date: The tables below break down the potential Deferred Tax Assets (DTA) which have not been recorded in the accounts at the year end as consider unrecoverable and the “expiry date”, i.e the latest date the Group could use them.
TOTAL UNRECOGNIZED DTA BY EXPIRATION DATE OF DTA POSSIBLE USE 4 2 82 20 14 12 (14) 1 419 539
This note includes all type of derivatives excluding derivative instruments that meet the definition of equity instruments (see Note 13 for details) or derivative instruments held by consolidated investment funds in the “satellite investment portfolio” (see Note 1.7.2.) which are recognized at fair value in accordance with IAS 39.
NB: This table includes all derivatives (assets and liabilities), i.e. hedge, macrohedge and other, asset and liability positions. (a) By convention, notional amounts are displayed in absolute value, and exclude potential netting out.
Basic swaps — — — — — — 220 — 220 —
Derivative instruments used in hedge of net investment in a foreign operation
As at December 31, 2007, the notional amount of all derivative instruments, for trading and non-trading purposes, totaled €233 billion (€238 billion and €207 billion respectively at the end of 2006 and 2005). Their net fair value as at December 31, 2007 totaled €2,107 million (€933 million and €987 million respectively at the end of 2006 and 2005).
While notional amount is the most commonly used measure of volume in the derivatives market, it is not used as a measure of risk because the notional amount greatly exceeds the possible credit and market loss that could arise from such transactions. The AXA 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. The notional amounts do not represent the amounts actually exchanged by the parties and thus are not a measure of the AXA Group’s exposure to derivative instruments. The AXA Group’s exposure is represented by the market value of a derivative contract at a given point in time.
On a consolidated basis, the notional amount of such instruments at December 31, 2007 was €116,307 million (€111,837 million at the end of 2006 and €108,315 million at the end of 2005). Their market value was €1,429 million (€1,445 million at the end of 2006 and €1,656 million at the end of 2005).
At December 31, 2007, interest-rate swaps accounted for 61% of all swaps used by AXA (versus 61% and 72% respectively at the end of 2006 and 2005). They are used mainly by (i) the Company to limit its interest-rate exposure on debt issued or amounts borrowed (notional value of €46,481 million compared to €39,602 million and €31,612 million respectively at the end of 2006 and 2005), (ii) AXA Bank Belgium to hedge interest-rate risk exposures arising in the context of its ordinary banking activities, in order to achieve an appropriate interest-rate spread between its interest-earning assets and interest-bearing liabilities (notional value of €10,799 million versus €11,864 million and €28,283 million respectively at the end of 2006 and 2005, the decrease being due to a diversification in asset allocation as part of an active treasury portfolio management policy) and (iii) AXA Japan (notional amount of €3,226 million versus €4,202 million and €7,402 million respectively at the end of 2006 and 2005) to limit its risk exposure to interest-rate on its invested assets (fixed maturities held directly and through consolidated mutual funds). The decrease in notional value in 2007 at AXA Japan was mainly due to the sale of bonds denominated in dollar within the consolidated mutual funds, the proceeds of which were reinvested in Japanese bonds.
At December 31, 2007, 81% of the total notional amount of swaps did not qualify for hedge accounting under IAS 39 (86% at the end of 2006 and 81% at the end of 2005), and included €61,291 million for the Company (€51,203 million at the end of 2006 and €38,566 million at the end of 2005) and €13,901 million for AXA Bank Belgium (versus €16,728 million at the end of 2006 and €27,826 million at
Swaptions represented 13% of the total notional amount of options as at December 31, 2007, mainly (i) in Switzerland for €2,767 million (€4,191 million at the end of 2006) including € 1,767 million (€2,089 million at the end of 2006) used to hedge the risk of reinvestment by the Swiss Individual Life & Savings business, (ii) in Belgium life for €2,366 million to hedge against a fall in rates in the traditional life fund and in a specific corporate life fund (€1,148 million and €627 million respectively) and against the risk of customer loss following an increase in rates in segregated funds (Crest for €591 million), and in Germany (€1,500 million).
On a consolidated basis, the notional amount of futures and forwards at December 31, 2007 was €39,649 million (€46,124 million at the end of 2006 and €21,211 million at the end of 2005). Their market value was €225 million (€—927 million at the end of 2006 and €—548 million at the end of 2005).
AXA Japan also uses futures and forward foreign currency contracts (for a total notional amount of €5,518 million) to hedge exchange-rate risk arising from its investments in US and European fixed-maturity bonds, mainly held in controlled funds. In accordance with IAS 21 and IAS 39, some or all of the translation difference relating to these bonds is recognized in profit & loss and offsets most of the change in market value of associated derivative instruments, which is also recognized in profit & loss. In substance, therefore, these contracts act as hedges without the need to use hedge accounting within the meaning of IAS 39.
Other futures were predominantly used by insurance operations to hedge future operating margins.
— €11,269 million held directly or within “core investment portfolio” or CDOs with a fair value of €15 million detailed in the present note.
On November 13, 2006, AXA announced a €1 billion pluriannual shelf program to transfer mortality risk to the capital markets, of which approximately €345 million (converted at the transaction date) was invested in 2006. This risk transfer resulted in a derivative contract between AXA and a special purpose vehicle called Osiris Capital plc, indexed to the mortality levels observed in various countries in which AXA operates (France, Japan, Australia and the United States for the 2006 investment). It is shown under the line item “Other derivatives”.
19.3. EFFECT OF HEDGING ON FINANCIAL INVESTMENTS The impact of derivative instruments is presented in the balance sheet within their related underlying financial assets (and liabilities, see section 19.4.). The table below sets out the impact of derivative instruments on the related underlying assets.
Non quoted fixed maturities (amortized cost) — — — — — — — — — — — —
Equities at fair value through profit & loss 19,322 — — 19,322 271 — — 271 19,593 — — 19,593
Non controlled investment funds available for sale 3,446 3 — 3,449 142 — — 142 3,588 3 — 3,591
Non controlled investment funds held for trading 135 — — 135 8 — — 8 143 — — 143
Loans at fair value through profit & loss 39 — — 39 1 — — 1 40 — — 40
Investment property at fair value through profit & loss 4,137 — — 4,137 — — — — 4,137 — — 4,137
Fixed maturities held for trading 123 — (3) 120 1,042 — (23) 1,019 1,165 — (26) 1,139
Non controlled investment funds at fair value through profit & loss 2,260 — 38 2,298 134 — — 134 2,394 — 38 2,433
Macro hedge and speculative derivatives (27) — — (27) 1,312 — — 1,312 1,285 — — 1,285
Derivative instruments hedging net investment in a foriegn operation (assets) (g) — — — — — — — — — — — —
Investment property at fair value through profit & loss 5,364 — — 5,364 608 — — 608 5,972 — — 5,972
Equities at fair value through profit & loss 22,076 (25) — 22,050 123 — — 123 22,198 (25) — 22,173
Loans held to maturity — — — — — — — — — — — —
Non quoted fixed maturities (amortized cost) 20 — — 20 2 — — 2 22 — — 22
Macro hedge and speculative derivatives (209) — — (209) 198 — — 198 (11) — — (11)
Financial investments backing contracts where financial risks is borne by policyholders 141,397 — 13 141,410 — — — — 141,397 — 13 141,410
Macro hedge and speculative derivatives — — — — — — — — — — — —
Fixed maturities held to maturity — — — — — — — — — — — —
Fixed maturities held for trading 142 — — 142 1,547 — — 1,547 1,689 — — 1,689
Non controlled investment funds at fair value through profit & loss 1,916 — — 1,917 73 — — 73 1,990 — — 1,990
(g) Derivatives instruments used in hedge of net investment in a foreign operation, and not attached to a debt on the face of the balance sheet.
Liabilities arising from insurance contracts where the financial risk is borne by policyholders 113,654 — — 113,654 108,984 — — 108,984 92,888 — — 92,888
Liabilities arising from investment contracts with no discretionary participating features 1,452 — — 1,452 1,121 — (62) 1,059 926 — (52) 873
Payables arising from banking activities (b) 18,443 — 271 18,713 16,817 — 175 16,992 11,970 — 113 12,083
(a) As described in note 1.11.2, perpetual subordinated notes were reclassified under shareholders’ equity in 2006 with retrospective application to 2005. Details are provided in Note 13.
(c) Other debts are presented excluding the effect of derivatives on the face of the balance sheet. (d) Derivative instruments used to hedge the net investment in a foreign operation, and not attached to a debt on the face of the balance sheet. (e) In accordance with IFRS 3, i.e. within 12 months following the acquisition date, the Group has adjusted certain items impacting the allocation of Winterthur purchase price.
Liabilities arising from insurance contracts (a) 310,709 — (98) 310,611 323,361 (21) (67) 323,274 247,717 (6) (94) 247,617
Total liabilities arising from insurance contracts 424,363 — (98) 424,265 432,345 (21) (67) 432,258 340,605 (6) (94) 340,505
Financing debt owed to credit institutions 175 — — 175 95 — — 95 17 — — 17
(b) Financing debt, other debt instruments issued, notes and bank overdrafts, and Payables arising from banking activities issued are disclosed in the balance sheet net of the impact of derivatives. As a result, the amount showing in the column “value including effect of derivatives” is their net book value.
Derivative instruments on financial assets subject to hedge accounting 54 (22) 33 67 (305) (238) (2) (326) (329)
Derivatives (hedge accounting) — Reinsurance — — — — — — — — —
Other derivatives — Reinsurance (a) — — — — — — — — —
Other derivatives on other receivables — 1 1 — — — — — —
Derivatives on insurance & investment contracts (hedge accounting) — — — (21) — (21) (6) — (6)
Other derivatives on insurance & investment contracts (a) (27) (174) (201) 1 (130) (129) — (147) (147)
Other derivative instruments on financial assets (a) 293 533 827 64 (258) (195) 19 214 233
Macro hedge and speculative derivatives on financial assets 956 335 1,292 7 701 708 11 (8) 3
Total — derivative instruments relating to financial assets 1,304 847 2,151 138 138 276 28 (120) (92)
Derivatives on other receivables (hedge accounting) — (9) (9) — (19) (19) — — —
Total derivative instruments relating to other receivables — (8) (8) — (19) (19) — — —
Total net value of derivative instruments — assets (1) 2,143 257 (92)
Total derivative instruments relating to insurance and investment contracts (27) (160) (187) (19) (143) (163) (1) (146) (148)
Other derivative instruments relating to financing debt and other financial liabilities (b) 510 83 593 16 75 90 7 (267) (260)
NOTE 20 > REVENUES BY SEGMENT AND NET REVENUES FROM BANKING ACTIVITIES
of which direct premiums 1,915 1,792 1,711 of which reinsurance assumed 1,492 1,780 1,957 of which revenues from other activities 161 144 145
Retirement/annuity/investment contracts (group) (d) 3,388 23,287 6,909 2,986 22,880 7,445 2,609 16,904 8,119
Fees and charges relating to investment contracts with no participating features (c) 740 — 60,625 608 — 57,243 509 — 39,762
Fees, commissions and other revenues 1,332 — — 1,076 — — 1,104 — —
(a) Relates to contracts where the financial risk is borne by policyholders. (b) Excludes liabilities relating to unearned revenues and fees, and policyholder bonuses, along with derivatives relating to insurance and investment contracts. (c) Relates to liabilities arising from investment contracts without discretionary participation features and investment contracts without discretionary participation features where the financial risk is borne by policyholders.
At December 31, 2006, Winterthur contributed €9,467 million to Property & Casualty liabilities arising from insurance contracts.
December 31, 2007 December 31, 2006 December 31, 2005 December 31, 2007 December 31, 2006 December 31, 2005
At December 31, 2006, Winterthur contributed €1,163 million to International Insurance liabilities arising from insurance contracts.
Total — Property & Casualty excluding International Insurance 26,931 6,495 1,209 34,813 12,259 47,072
(a) In accordance with IFRS 3, i.e. within 12 months following the acquisition date, the Group has adjusted certain items impacting the allocation of Winterthur.
Non controlled investment funds held for trading — 3 (1) — 2
Loans at fair value through profit & loss — — 51 — 51
Investment properties at fair value through profit & loss 278 336 384 — 998
Fixed maturities at fair value through profit & loss (a) 2,068 195 (1,322) — 941
Equities at fair value through profit & loss (b) 639 1,071 869 — 2,579
Non controlled investment funds available for sale 82 213 — (5) 291
Non controlled investment funds at fair value through profit & loss 192 42 (13) — 221
Loans at fair value through profit & loss — — (166) — (166)
Change in fair value of financial instruments at fair value through profit & loss
Non controlled investment funds at fair value through profit & loss
Claims ceded (including change in claim reserves) 859 308 777 (63) 1,882
(a) Includes all acquisition expenses relating to insurance and investment contracts before capitalization/amortization of deferred acquisition costs and equivalents. (b) Change (capitalization and amortization) in deferred acquisition costs relating to insurance and investment contracts with discretionary participation features and changes in net rights to future management fees relating to investment contracts with no discretionary participation features. (c) As described in note 1.10, the contribution of discontinued operations is stated on a separate line of the income statement.
Change in deferred acquisition costs and equivalents (b) (1,804) (109) 2 (1,911) — — — — (1,911) (1,371) (1,518)
Increase / (write back) of provisions for risk and charges 47 (58) 12 0 57 (9) (19) — 30 22 (196)
Charges relating to owner occupied properties 283 256 53 591 238 10 17 (2) 854 709 643
(a) Including redundancies and early retirement costs (triggering event = set up of the plan), and employees’ profit sharing in France. (b) As described in note 1.10, the contribution of discontinued operations is stated on a separate line of the income statement.
The cost of the contributions paid was recognized as an expense in the income statement, and amounted to €75 million for the year ended December 31, 2007 (€88 million in 2006 and €72 million in 2005).
The assumptions used for 2006 and 2005 were as follows: DECEMBER 2006 ASSUMPTIONS
Some plans do not have benefits linked to inflation or to salary increase.
The acquisition of Winterthur at the end of 2006 had a significant impact on the assumptions used by introducing a significant Swiss weighting into the European economic mix.
The annual change in the Defined Benefit Obligation (DBO) is calculated on the basis of: — Service cost for the period (representing the increase in the DBO attributable to one year of additional service). — Interest cost (cost of one year less discounting). — Benefits paid.
The balance sheet information for employee benefits captures the difference between the Defined Benefit Obligation (DBO), the fair value of the corresponding invested plan assets, and any unrecognized past service cost. When this difference is positive, a contingency and loss reserve is recognized in the balance sheet as a liability. When it is negative, a prepaid asset is recognized in the balance sheet. In addition, in accordance with IAS 19, a category of assets referred to as “separate assets” is also recorded in the balance sheet. As defined by IFRS, separate assets are assets that may not be used to offset the DBO. Separate assets are insurance contracts issued by AXA to back its defined benefit pension plans. The accounting consequence of these separate assets is a potential increase in the accrued liability or decrease in the prepaid asset. These assets are shown separately in the following table. These funds are dedicated to specific insurance contracts and are not available to general creditors, so their economic nature is no different from plan assets. However, as the separate account assets are available to the pension plan through an insurance contract, IFRS requires their categorization as separate assets despite their economic nature. During 2007, AXA reviewed the treatment of separate assets and insurance contracts backing the pension obligation in the United States and in Switzerland in light of prevailing practice that has developed in the industry. In the United States, the insurance contract was amended to add a transferability clause, and so its treatment is changing to being plan assets rather than separate assets as shown in prior years. In Switzerland, where the issue arose after the acquisition of Winterthur, AXA has amended its practice to eliminate the insurance contract rather than treat it as a plan asset as was originally presented. AXA Group has decided to use the Statement of Recognized Income and Expense (SoRIE) option available under IAS 19. Under the SoRIE option, actuarial gains and losses are recognized in full in the period in which they occurred, but outside of profit or loss, and are presented on a separate line of the SoRIE in shareholders’ equity (see Statement of consolidated shareholders’ equity). Actuarial gains and losses result from experience adjustments (the effects of differences between the previous actuarial assumptions and what has actually occurred) and changes in actuarial assumptions. They also include differences between the expected and actual returns on plan assets. Unrecognized past service cost represents non-vested benefits on the date of a change in the amount of benefits following an amendment to the plan. It is amortized on a straight-line basis over the average vesting period.
The table below presents the change in benefit obligation and the change in plan assets associated with pension plans and other benefit plans sponsored by AXA, together with an analysis of separate assets as of December 31, 2007.
Amendments (including acquisitions and disposals) (a) (261) 3,625 46 18 (7) 18
Benefits directly paid by the employer (227) (128) (115) (45) — —
Benefit obligation at the end of the year (A) 12,955 14,734 11,421 506 604 716
Net transfer In (out) (including acquisitions and disposals) (a) (b) (c) (811) 3,220 88 (3) — 1
Fair value of plan assets at the end of the year (B) 7,057 8,216 4,693 3 9 14
Actual return on separate assets 12 221 206 — — —
Net transfer In (out) (including acquisitions and disposals) (a) (b) (1,724) (85) (82) — — —
Underfunded status (plan by plan) (6,098) (6,530) (6,729) (502) (595) (703)
Plans with a positive net position (Asset) 199 11 1 — — —
Plans with a negative net position (Liability) (6,017) (6,440) (6,655) (501) (595) (703)
Net position (excluding separate assets) (5,818) (6,430) (6,654) (501) (595) (703)
(a) This amount includes the sale of the Netherlands in 2007 and the acquisition of Winterthur in 2006. (b) This amount includes the effect of the requalification of assets in the United States as plan assets rather than separate assets. (c) This amount includes the effect of the elimination of the insurance contract in Switzerland.
The annual expense for employee pension and other benefits recorded in the income statement, for the years ended December 31, 2007, 2006 and 2005 is presented below: (in Euro million)
Expected return on plan assets (489) (314) (269) — — —
Settlements, curtailments and employee contributions (60) (24) 4 — (20) 16
Pension and other benefits expense 371 225 257 40 23 66
(a) This amount includes the sale of the Netherlands. (b) This amount includes the effect of the elimination of the insurance contract in Switzerland.
The evolution during 2007 which appears to show a deterioration of the net economic funding position for pension benefits is due to the elimination of the Swiss insurance contract from plan assets; without this elimination the evolution would be positive which corresponds to the overall economic reality due primarily to the increase in discount rates.
25.2.7. Change in the liability recognized in the balance sheet (excluding separate assets)
The rollforward of the balance sheet liability from January 1, 2007 to December 31, 2007 captures only the evolution of the liability recorded in the Group’s balance sheet and not the separate assets. Therefore it is not a full economic picture. The table below shows the detailed rollforward of the balance sheet liability, with the separate assets added at each year end.
Balance sheet liability at the beginning of the year (6,430) (6,654) (5,666) (595) (703) (572)
Benefits directly paid by the employer 227 128 115 45 45 44
Benefits paid through separate assets 60 168 168 — — —
Net transfer of separate assets to plan assets (c) 1,695 155 82 — — —
25.2.8. Change in actuarial gains and losses recognized in the balance sheet in the SORIE component of shareholders’ equity
The Statement of Recognized Income and Expense (SORIE) is an integral part of the statement of changes in shareholders’
Adjustment due to the sale of the Netherlands (4) — — (1) — —
Closing actuarial gains and losses recognized in shareholders’ equity 308 (720) (1,112) 45 (4) (28)
During 2007, the change in the SORIE component of shareholders’ equity after deduction of deferred tax and policyholder benefits was €612 million (€252 million in 2006 and €—415 million in 2005). The main driver of the change is the increase in discount rates. As at December 31, 2007, the cumulative impact amounted to €101 million (€—478 million at the end of 2006).
As pension liabilities have a long-term nature, a mix of bond, equity, and real estate investments is used in the plan assets. The percentage of equities is higher in the Anglo-Saxon countries, where investment strategy is often determined by Plan trustees. This asset mix generates some degree of volatility in returns, but, over the long-term, is expected to provide a higher return than pure bond investments. Higher return is consistent with past experience, but may not be the case in the future.
The asset mix is maintained close to the target level, with minor fluctuations over time due to shifting fair values of assets.
Various methods are used to determine the expected longterm return on the Group’s asset depending on geographic area. Globally, it is based on historic returns adjusted for future expectations in each asset class. In addition, external consultants review or determine these assumptions to guarantee their appropriateness for each country.
Net position (excluding separate assets) (a): Employee benefit liabilities (6,319) (7,025) (7,357)
(a) The total 2007 cost of the AXA SA stock option plans shown above excludes the cost of the stock options granted to the employees of AXA Netherlands, which was sold in 2007. The expense corresponding to the amortization period before the transaction has been included in the results arising from discontinued operations. The remaining cost (including the cost triggered by accelerated vesting given to the employees) has been deducted from the capital gain of the transaction. 2006 and 2005 profit and loss have not been restated from the €0.2 million expense related to AXA SA stock options for AXA Netherlands.
(b) For 2006, the total cost of €155.3 million does not include the cost generated by the liquidity guarantee granted by AXA SA to old AXA IM stock option plans, which amounted to a non-recurring cost of €30 million in 2006.
Executive officers and other key employees may be granted options to purchase ordinary AXA shares under employee stock option plans. 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 installments of 33.33% per year on each of the second, third and fourth anniversaries of the grant date.
The number of outstanding options and the number of exercisable options as at December 31, 2007 are shown below by maturity date: EXERCISABLE UNTIL In million
Weighted average fair value per option at grant date in Euro 6.80 (a) 6.48 4.15
The total cost of the AXA SA plans is amortized over the vesting period and an estimated 5% pre-vesting lapse rate is applied. On that basis, the expense recognized in profit and loss for the year ended December 31, 2007 was €56.2 million (€2.1 million for the 2003 grants, €5.5 million for the 2004 grants, €11.0 million for the 2005 grants, €18.1 million for the 2006 grants, €19.5 million for the 2007 grants). Among the 2005, 2006 and 2007 grants, the expense relating to AXA SA share options granted to AXA Financial employees was €15.9 million.
AXA Financial may grant options to purchase AXA ADRs. These options are issued at the market value of AXA ADRs on the date of grant. Options granted prior to 2004 vest over a three-year period, with one third vesting on each anniversary date. However, starting in 2004, new grants generally vest over a four-year period with one third vesting on each of the second, third and fourth anniversary dates (generally in March). Options currently issued and outstanding have a 10-year contractual term from their date of grant.
The following tables show a summary of AXA Financial’s AXA ADR stock option plans: AXA ADR STOCk OPTION PLANS
The following table shows information for grants after November 7, 2002: POST NOVEMBER 7, 2002 AXA ADR STOCk OPTION PLANS
The fair value of AXA ADR stock options is calculated using the Black and Scholes option pricing model. The effect of expected early exercise is taken into account through the use of an expected life assumption based on historical data. AXA ADR volatility is based on AXA SA ordinary shares volatility, adjusted for the US$/€ exchange rate volatility.
The option pricing assumptions and fair value for plans issued in 2005 are as follows: Assumptions
Weighted average fair value per option at grant date in Euro 5.65
The cost of this plan is valued taking into account the fiveyear lock-up period, as recommended by the CNC (Conseil National de la Comptabilité). The CNC approach values the restricted shares through a replication strategy whereby the employee would sell the restricted shares forward at the end of the lock-up period, borrow enough money to buy unrestricted shares immediately, and uses the proceeds of the forward sale together with dividends paid during the lockup period to finance the loan. For the leveraged plan, the cost also includes the opportunity gain implicitly provided by AXA by enabling its employees to benefit from an institutional price for derivatives as opposed to a retail price.
Total number of shares subscribed (in million shares) 3.2 18.9 2.3 13.2 1.9 14.4
Retail / institutional volatility spread N/A 4.60% N/A 4.20% N/A 4.40%
Total cost for AXA (in Euro million) 6.0 18.7 4.3 12.0 1.7 8.8