Basic Fully Basic Fully Basic Fully Basic Fully Basic Fully Basic Fully diluted diluted diluted diluted diluted diluted
Change in unearned premium reserves net of unearned revenues and fees (271) (197) (197) (124) (131)
Net income from investments in affiliates and associates 12 10 10 10 10
OPERATING INCOME GROSS OF TAX EXPENSE 3,445 2,504 2,504 2,295 2,295
(a) Before intercompany transactions. (b) For the periods ended December 31, 2006, December 31, 2005, and December, 2004, the change in fair value of assets backing contracts with financial risk borne by policyholders impacted the net investment result for respectively €15,370 million, €13,978 million and €10,543 million, and benefits and claims by the offsetting amounts respectively.
(c) Restated means: (i) transfer of the forex impact from adjusted earnings to net income, and (ii) in line with new accounting FRS27, the reclassification in the United Kingdom of some With-Profit technical reserves to allow for all future terminal bonuses payable to With-Profit policyholders within the allocated policyholder reserves, previously held in the unallocated policyholder bonus reserve, without any impact on earnings.
AND NET INCOME Restated (a) Published Restated (a) Published France 462 387 387 350 350
Goodwill and other related intangibles impacts (10) (8) (8) (5) (5)
APE increased by €156 million (+14.5%) to €1,231 million, stemming mainly from strong growth of Investment & Savings APE up €114 million to €862 million driven by (i) a €62 million increase in individual unit-linked premiums to €738 million mainly in proprietary channels and (ii) a €52 million strong increase in Group retirement APE to €126 million resulting from some large non unit-linked single premiums. Life and Health APE increased by €42 million to €369 million notably driven by last year product launches in individual lines.
Investment margin decreased by €48 million to €890 million under the combined effect of lower investment income (€–71 million to €3,304 million) mainly due to lower real estate income, and lower policyholder participation (€+23 million to €–2,415 million) as a consequence of decreased investment income and a slight decrease in main flagship products distribution rate.
Fees & revenues were up €149 million to €1,345 million mainly resulting from higher sales on group life products (€+40 million) and higher revenues on unit-linked products (€+80 million), following both higher sales and increased asset base.
Adjusted earnings were up €88 million to €666 million resulting from higher underlying earnings (€+76 million) and increased net capital gains (€+12 million to €204 million) mainly on equities.
Gross revenues increased by 10% to €15,390 million on a current exchange rate basis, or 13% on a comparable basis (excluding Advest revenues) primarily driven by increases in First Year Variable Annuity premiums (up 24%) and First Year life premiums (up 13%) partially offset by a planned 68% decrease in Fixed Annuities. Other revenues were up 20% on a comparable basis due primarily to higher asset management fees.
APE increased by 13% to €1,922 million on a current exchange rate basis or 14% on a constant exchange rate basis, with strong growth in Variable Annuities and Life products. Excluding Fixed Annuities, COLI1 business and mutual funds, APE was up 17% driven by the continued expansion of AXA Equitable’s wholesale distribution networks, where Variable Annuity and Individual Life New business increased by 29% and 34%, respectively.
Amortization of VBI increased by €15 million on both current and constant exchange rate base.
Income tax expense decreased by €21 million, or by €18 million on a constant exchange rate basis. This decrease is principally due to the impact of a €92 million favorable tax settlement in 2006, partially offset by higher taxes on higher pre-tax earnings.
Underlying earnings increased by €134 million, or by €143 million on a constant exchange rate basis, to €1,000 million. This increase primarily reflected higher fees and revenues and higher investment margin and a favorable income tax settlement in 2006 (€92 million), partially offset by higher net commissions and higher DAC and VBI amortization.
Gross revenues increased by €1,896 million on a current exchange rate basis or €1,882 million on a constant exchange rate basis to €4,292 million. – Investment & Savings (84% of gross revenues)
increased by 117% to €3,626 million as: • Insurance Premium (71% of gross revenues)
increased by 152% to €3,081 million due to the beneficial impact of the reclassification of a bond product from an investment to an insurance contract following the launch of a new insurance feature, and growth in single premium pensions business following simplification of pensions legislation.
• Margins on investment products (13% of gross revenues) increased by 21% to €545 million reflecting higher management fees following net new money growth and investment growth.
– Life Insurance Premium (16% of gross revenues) decreased by 9% to €666 million primarily due to lower volumes of creditor insurance single premium business.
Fees & Revenues increased by €134 million on a current exchange rate basis or €132 million on a constant exchange rate basis to €591 million. – Loadings on Life and Pensions business premiums increased by €138 million primarily due to a change to an Onshore Bond Product
to incorporate insurance features. In addition, 2006 benefited from significant growth in Offshore Bonds and increased Pension single premiums as policyholders switched to simplified products.
Expenses net of policyholder allocation1 decreased by €12 million on a current exchange rate basis or €14 million on a constant exchange rate basis to €–645 million, as lower commissions on Creditor Insurance business more than offset volume related expense increases from other products. Expense savings from ongoing cost reduction activities of €29 million have offset €16 million additional non-recurring project costs in 2006.
As a result of the above, the underlying cost income ratio improved from 109.1% to 91.4%.
Income tax expenses increased by €173 million on a current exchange rate basis or €172 million on a constant exchange rate basis to €–142 million, due to increasing pre-tax earnings and non-recurring increases in deferred tax provisions of €102 million, primarily as result of a reassessment of the likelihood of a future distribution from the attributed Inherited Estate.
– Life (46% of gross revenues excluding conversions): Revenues increased by 6% or 11% on a constant exchange rate basis (€+222 million) to €2,144 million driven by (i) strong sales of Increasing Term products (€+163 million), (ii) the LTPA (Long-Term Personal Accident) regular premium product (€+73 million) which benefited from a favorable sales environment up until April 2006, and (iii) stronger Term Rider revenue (€+81 million) coming predominantly from sales of the regular premium Term Rider 98 product. This was partially offset by lower Endowment, Whole Life and Variable Life regular premiums (€–81 million) and lower Group Life revenue (€–15 million) as a result of lower in force (these products are not actively promoted for new business).
or 26% on a constant exchange rate basis (€+14 million) to €64 million driven by SPA sales (€+39 million) launched in November 2004 for Bancassurance and in October 2005 for the other distribution channels combined with sales of the Accumulator product (€+8 million), partially offset by lower Fixed Annuity sales (€–34 million).
– Health: APE grew by 26% or 32% on a constant exchange rate basis (€+41 million) to €160 million. Following flat sales in the first three quarters (influenced by the significant focus put on Increasing Term to compensate for the anticipated decline in LTPA), Medical products rebounded in the last quarter driven by a return of focus on this market leading to an improvement of the product mix.
Group APE decreased by 30%, or 26% on a constant exchange rate basis (€–9 million), to €24 million driven by lower New Mutual Aid sales following a strong experience in 2005.
Fees & Revenues increased by €42 million, or €88 million on a constant exchange rate basis, to €931 million consistent with company growth including higher sales of Increasing Term, Term and high margin health products, the contribution from LTPA and a change in revenue allocation methodology from technical margin to fees on health products (€+12 million). This was partially offset by the continuing decline of Endowment and Fixed Annuity in-force.
Net technical margin decreased by €45 million, or €39 million on a constant exchange rate basis, to €130 million.
Surrender Margin increased by €13 million to €37 million due mainly to higher Safety Plus surrenders, higher Whole Life & Term Rider surrender margin and improved retention on Medical Term, partially offset by lower B-policy conversions.
Income tax expense increased by €359 million, or €367 million on a constant exchange rate basis, to €164 million due to: – Higher income tax of €141 million in line with higher 2006 operational income; – The non recurrence of the €225 million release of valuation allowance on tax losses carried forward net of goodwill reduction in 2005.
Adjusted earnings decreased by €92 million, or €77 million on a constant exchange rate basis, to €293 million. Excluding the underlying earnings improvement of €3 million, the main impacts are: – lower net capital gains (€–354 million to €112 million) as a consequence of the significant 2005 net capital gains (notably driven by the sale of headquarter and the shift from US/Euro bonds to JGB),
Underlying earnings group share 69 30 13 13 Net capital gains attributable to shareholders net of income tax 6 2 (11) (10)
Adjusted earnings group share 75 32 3 3 Profit or loss on financial assets (under FV option) & derivatives 6 4 4 4
Gross revenues increased by 3% to €3,681 million mainly due to higher Investment & Savings unit-linked and Health premiums: – Investment & Savings (25% of gross revenues)
– Health (25% of gross revenues) increased by 3% to €929 million driven by the strong new business at the beginning of 2006 and improved lapse rates.
Net technical margin increased by €5 million to €50 million mainly due to the improvement of surrender margin in Life & Savings combined with lower policyholder participation in Life, offset by a lower technical margin in Health.
Expenses increased by €10 million to €–92 million, primarily explained by the set-up
expenses for the new product “Twinstar” and higher commissions in line with strong new business in Health.
As a result of the above, underlying cost income ratio improved by 1.5 point to 54.2%.
Income tax expenses increased by €27 million to €–99 million in line with higher pre-tax earnings.
Gross Revenues decreased by €222 million to €2,512 million due to the exceptionally high production level of December 2005 induced by the introduction of a new tax on premium in 2006 and by the end of the distribution agreement with “La Poste” in Q1’05.
APE decreased by 11% to €300 million, mainly driven by non unit-linked contracts as a result of the very high production in Crest in December 2005.
Investment margin was up €12 million to €86 million. The average underlying investment margin increased by 1bp to 0.55% as the average investment return decreased by 12bps while the average credited rate fell by 13bps. As a consequence of the increased share of lower guaranteed rate products (Crest 30 and Crest 40), the average guaranteed rate decreased by 36bps.
The net technical margin rose by €7 million to €56 million mainly due to a €5 million non recurring release of reserves on disability business and to a strong increase of the mortality margin (€4 million) driven by an exceptionally low level of paid claims partly offset by the non repeat of the recovery in 2005 on undue annuity paid to the social security body (€–3 million).
The underlying cost income ratio decreased from 77.0% to 73.8% as a consequence of higher underlying investment and technical margin.
As a result of the above, underlying earnings increased by €9 million to €65 million.
Adjusted earnings increased significantly by €179 million to €320 million driven by higher gross realized capital gains (€+217 million to €360 million) mainly in equity investments partly offset by higher policyholder bonus on segregated funds (€–59 million to €–139 million).
Net income increased by €180 million to €310 million in line with higher adjusted earnings.
Underlying earnings group share 50 44 41 Net capital gains attributable to shareholders net of income tax 7 10 7
Thanks to new products launched and a better mix of regular premiums, new business APE increased by 2% to €143 million despite the lower revenues. The evolution by distribution channel is contrasted: Proprietary channels showed a 20% growth, whereas non-proprietary channels showed a 28% decrease, mainly due to the termination of the above mentioned agreement in traditional life line of business. – Investments & Savings (€128 million or 89% of total APE) increased by 5%: • Non-unit-linked contracts (€102 million or 71% of total APE) increased by 9%, driven by a strong level of new business in the retail segment and the improvement of regular / single premium mix backed by the launch of new products during the second half of the year, partially offset by the lower institutional activity issued in Italy in 2006 (–51% or €–8 million of APE).
Fees & revenues were almost stable (€–1 million to €88 million). The reduction of fees linked to the termination of a distribution agreement on traditional life products was offset by the new business in investments and savings.
well as the non recurring release of a technical policyholder bonus reserve in 2005 (€–3 million) following the termination of a distribution agreement.
Expenses (including VBI amortization) decreased by €2 million to €108 million as a result of the switch of new business towards products with lower commissions (€7 million), partly offset by higher DAC amortization. Noncommissions expenses (including VBI amortization) remained stable at €57 million.
As a result of improved investment margin and lower expenses, the underlying cost income ratio improved by 3.3 points to 62.4%.
As a result, underlying earnings were up €6 million to €50 million.
Adjusted earnings increased by €3 million to €57 million due to the increase in underlying earnings partly offset by lower capital gains on fixed maturities.
CONSOLIDATED GROSS REVENUES 2006 2005 2004 Australia / New Zealand 1,254 1,225 1,156
AND NET INCOME Restated (c) Published Restated (c) Published Australia / New Zealand 83 64 64 50 50
Net realized capital gains attributable to shareholders 47 42 42 37 36
(b) Change in consolidation method in Turkey (from equity method to full consolidation) as at January 1st, 2005. (c) Restated means: transfer of the forex impact from adjusted earnings to net income. (d) Includes Indonesia, Thailand and Philippines businesses.
– Gross written premiums including fees from investment contracts without discretionary participating features were down 3% to €981 million. Group superannuation premiums decreased as there has been a continued trend away from traditional investment and savings products towards mutual funds business. This was partially offset by higher individual life sales.
– Revenues from mutual fund and advice businesses increased by 28% to €273 million on a comparable basis reflecting the growth in funds under management particularly in mezzanine funds, and improved investment market conditions.
Mutual funds retail net flows3 were up +68% on a comparable basis to €1,859 million. Continuing strong inflows into the mezzanine global equity value fund and growth in Ipac, with a fund transfer of €132 million in June 2006 from one of Ipac’s equity partners contributed to this performance. In addition, the Summit and Generations wrap platforms contributed to the increase.
Underlying earnings were up €21 million to €83 million. On a 100% ownership basis, the evolution was as follows: – the investment margin was up €19 million to €23 million, largely due to lower interest expense on inter-company loans and debts and strong investment market performance,
– fees and revenues were up €82 million to €621 million, reflecting strong inflows and higher funds under management and administration following strong market performance,
– the net technical margin was up €26 million to €23 million, due to more favorable claims termination experience in the health business and strong claims experience in group life,
Overall, the underlying cost income ratio improved from 82.0% to 73.1%.
Adjusted earnings were up €31 million to €96 million, reflecting the increase in underlying earnings as well as higher net capital gains on equities (up €10 million to €13 million).
Net income was up €33 million to €100 million, reflecting the increase in adjusted earnings and a foreign exchange gain.
On May 8, 2006, AXA APH completed its acquisition of MLC Hong Kong. In the following commentaries, “on a comparable basis” means excluding the contribution from MLC Hong Kong in the second half of 2006. (Underlying earnings €6 million and Adjusted earnings €4 million Group share.)
Underlying earnings were up €28 million to €111 million. On a comparable basis, the underlying earnings were up €21 million mainly due to an increase in (i) fees and revenues (€11 million) reflecting increased sales and growing inforce portfolio, (ii) technical margin (€11 million) reflecting better claims experience together with successful National Life switching campaigns leading to an increase in the surrender margin and (iii) investment margin (€5 million) on a higher inforce portfolio partly offset by higher expenses (€–8 million) as a result of higher investments in strategic initiatives to support growth in Hong Kong.
Adjusted earnings increased by €26 million to €119 million. On a comparable basis, adjusted earnings were up €22 million driven by higher underlying earnings.
Net income of €115 million was €23 million higher than last year. On a comparable basis, net income was up €18 million.
APE increased by €3 million to €48 million, mainly due to higher new business within the mortgage and pension segments.
Underlying earnings improved by €11 million to €55 million, mainly attributable to improved investment result, mainly driven by (i) higher dividends received, and (ii) the release of an interest expense provision regarding tax review on prior liabilities due to finalizing several fiscal years; but also as a result of a better mortality experience.
Adjusted earnings improved by €5 million to €76 million, as the improved underlying earnings result was partly compensated by lower net realized capital gains (€–6 million).
Net income improved by €5 million to €77 million in line with adjusted earnings.
Switzerland Gross revenues were up 24% on a constant exchange rate basis to €141 million mainly due to Investment & Savings (+24%) as a result of new products and marketing initiatives.
(1) All comparisons to prior year figures are on a constant exchange rate basis. (2) AXA interest in AXA Asia Pacific Group is 52.7% broken down into 51.6% direct interest holding and an additional 1.1% owned by the AAPH Executive plan trust.
Canada Gross revenues amounted to €115 million. On a constant exchange rate basis, revenues increased by €37 million mainly as a result of the acquisition of Citadel (€+30 million) and higher fees from mutual fund sales (€+2 million).
Underlying earnings, adjusted earnings and net income increased by €7 million to €4 million due to the acquisition of Citadel and the reduction of the deferred income tax rate.
Underlying earnings, adjusted earnings and net income rose by €1 million to €4 million.
Fees and revenues from investment contracts with no participating feature – – – – –
Amortization of value of purchased life business in force – – – – –
Minority interests in income or loss (42) (44) (44) (32) (32)
Net realized capital gains attributable to shareholders 441 341 307 288 272
(a) Before intercompany transactions. (b) Change in consolidation method in Turkey, Hong Kong and Singapore (from equity method to full consolidation) as at January 1st, 2005. (c) Restated means: transfer of the forex impact from adjusted earnings to net income.
AND NET INCOME Restated (b) Published Restated (b) Published France 382 363 363 304 304
(a) Change in consolidation method in Turkey, Hong Kong and Singapore (from equity method to full consolidation) as at January 1st, 2005. (b) Restated means: transfer of the forex impact from adjusted earnings to net income.
Gross revenues increased by 2% to €5,219 million or by 4%, net of intercompany transactions and on a comparable basis: – Personal lines (61% of gross written premiums)
Net technical result improved by €45 million or 3% to €1,390 million: – The 0.7 point current accident year net loss ratio deterioration to 74.6%, was mainly driven by Property due to both large claims and a higher cost of reinsurance.
Net capital gains attributable to shareholders net of income tax 70 85 57 70 77
Income tax expense increased by €4 million to €–210 million in line with increased taxable income partially compensated by the 0.5 point decrease of the short term rate.
Net income increased by €51 million to €515 million reflecting (i) the stability of adjusted earnings (€+4 million), (ii) a positive impact of foreign exchange on a currency macro hedge (€+56 million to €28 million), partly offset by (iii) less favorable change of fair value on assets under fair value option (€–9 million to €36 million).
Expense ratio deteriorated by 1.5 point to 34.7% largely as a result of the increase of the commission ratio by 1.6 point as a result of a
All accident year loss ratio (net) 61.8% 63.1% 63.1% 66.4% 66.4%
change in business mix, higher profit commission and increased volumes on higher commission rated delegated authority business in the UK. The acquisition cost ratio excluding commissions increased by 0.3 point mainly due to Distribution and Customers Operations with increased activity arising from new Corporate Partners. This was slightly offset by 0.4 point improvement in administrative expense ratio primarily as a result of expenses incurred in prior year on the closure of a business transformation project for Health.
Net Income decreased by €13 million on a current exchange rate basis (€–14 million on a constant exchange rate basis) to €451 million due to the adverse foreign exchange movements.
Current accident year loss ratio (net) 74.2% 72.2% 72.2% 75.6% 75.6%
(a) Restated means: transfer of the forex impact from adjusted earnings to net income.
increased by 2% mainly driven by Motor lines up +4% due to strong positive net inflows (+157,000 contracts). Property and Liability both increased by 1% following the launch of new products for SMEs (e.g. Profischutz).
– Commercial lines (32% of total gross revenues) decreased by 1% mainly due to Property (–2%), driven by a decrease in average premium, and Accident (–3%), following a decline in net production, partly offset by motor (+1%) following the launch of a new motor fleet product.
– Other lines (7% of total gross revenues) increased by 7% mainly due to AXA Art.
Net technical result decreased by €70 million to €889 million, as: – Current accident year loss ratio deteriorated by 2.0 points to 74.2% driven by higher large claims charge than the exceptionally benign 2005 experience, and the increase of claims handling costs provision to reflect higher unit costs.
Expense ratio improved by 2.3 points to 30.3% mainly driven by a lower administrative expense ratio (–2.4 points), mainly due to the release of some VAT provisions coupled with a VAT refund following the creation of a VAT group, as well as
Overall, the net combined ratio improved by 0.2 point to 98.1%.
Net underlying investment result increased by €21 million to €239 million mainly driven by higher dividends from equities.
Income tax expense increased by €32 million to €–108 million due to higher taxable income coupled with a less favorable mix of taxable and non taxable elements.
Adjusted earnings decreased by €6 million to €259 million as the improvement in underlying earnings was more than offset by lower capital gains mainly on equities.
Underlying earnings group share 147 128 159 Net capital gains attributable to shareholders net of income tax 142 53 56
Adjusted earnings group share 290 181 215 Profit or loss on financial assets (under FV option) & derivatives (6) 1 14
– Commercial Lines (38% of the total gross written premiums): premiums grew by 6% driven by increases in most lines as a result of portfolio and tariff increases.
Expense ratio increased by 0.7 point to 29.3% driven by the increase in administrative expense ratio by 0,5 point to 8.7% mainly due to an IT project related to product offering segmentation (€4 million), and staff costs (regulatory salary indexation).
Net underlying investment result increased by €11 million to €178 million, mainly driven by higher income on fixed maturities and equity investments.
Income tax expense increased by €43 million to €98 million, as a result of higher pre-tax underlying earnings.
Adjusted earnings increased by €109 million to €290 million as a result of higher underlying earnings and higher realized gains on equities
– Personal lines (78% of gross written premiums, €2,468 million) grew by 6%. In motor (€1,814 million or 58% of gross written premiums), the 6% increase was driven by positive net inflows (+293,700 policies) coming both from direct and traditional networks, following the launch of new tariffs and products in the three countries. Motor average premium was flat as compared to 2005 in a very competitive market, thanks to the increasing weight of comprehensive cover policies in the portfolio. Non-motor lines (€649 million or 21% of gross written premiums) were up 7%, driven by growth in all lines.
Most of the growth was concentrated on proprietary distribution networks (72% of business, +6%) whereas non-proprietary networks were down 2%.
Net technical result increased by €76 million to €789 million as the loss ratio improved by 0.9 point to 74.7% mainly driven by strong monitoring of personal motor portfolio: – The current net technical result increased by €86 million to €718 million resulting from the improvement of the current accident year loss ratio by 1.3 point to 77.0% mainly located in personal motor line of business, thanks to the favorable evolution of claims frequency and the continuous efforts to contain the average claims cost.
Acquisition expense ratio excluding commissions ratio increased by 0.5 point to 5.0% primarily due to higher marketing costs (+0.4 point), aiming in particular to further develop direct distribution sales. Commission ratio decreased by 0.2 point to 13.6% partly driven by lower commission rate on the motor product launched in 2006.
As a result, the combined ratio improved by 0.8 point to 98.3%.
Net underlying investment result increased by €17 million to €184 million mainly driven by a larger average asset base combined with an improved return on the fixed maturity portfolio.
Income tax expense increased by €21 million to €90 million due to higher pre-tax earnings (€16 million impact), and a negative impact due to the evolution of tax regulations (€5 million), main impact in Italy.
Net income increased by €36 million to €189 million reflecting the positive adjusted earnings evolution partly offset by the lower fair value adjustment on consolidated mutual funds under fair value option.
(b) Includes Hong Kong and Singapore. (c) Change in consolidation method in Turkey, Hong Kong and Singapore (from equity method to full consolidation) as at January 1st, 2005. Hong Kong and Singapore businesses are now reported in Asia (Excluding Japan).
AND NET INCOME Restated (c) Published Restated (c) Published Canada 113 80 80 61 61
Goodwill and other related intangibles impacts (2) (1) (1) (34) (34)
(a) The disability portfolio which was previously reported under the Life segment is now reported under the Property & Casualty segment since December 1st, 2004. The Health portfolio which was previously reported under the Life segment has been disposed of at December 1st, 2004.
(b) Change in consolidation method in Turkey, Hong Kong and Singapore (from equity method to full consolidation) as at January 1st, 2005. Hong Kong and Singapore businesses are now reported in Asia (Excluding Japan).
Canada Gross revenues were up €200 million to €1,059 million, or up €140 million on a constant exchange rate basis. Excluding Citadel contribution of €145 million in 2006, gross revenues slightly decreased by €5 million as the result of a sustained level of new business (growth of 3%) combined with the impact related to the successful launch of the 18/24 month policies in 2005 leading to no renewal of these policies in 2006.
The Netherlands Gross revenues increased by 3% to €282 million mainly driven by new business in Authorized agents and Individual Disability, partly offset by the effects of the exit of Group Disability business as a consequence of legal changes in the Netherlands.
Underlying earnings increased by €17 million to €36 million, driven by a 7.8 point improvement in combined ratio to 91.8% following positive experience in Fire lines, combined with positive prior year developments, partly offset by higher profitsharing commissions.
Net income increased by €20 million to €45 million benefiting from €7 million additional contractual realized profit, related to the sale of the health portfolio to Achmea in 2004.
Gross revenues increased by 21% on a constant exchange rate basis to €508 million driven by average motor premium increase and positive evolution of fire business.
Underlying earnings were up €3 million to €11 million, thanks to (i) the combined ratio improvement (–2.7 points to 98.4%) and (ii) investment income growth on fixed maturities.
Japan Gross written premiums increased by 20% on a constant exchange rate basis to €158 million, mainly driven by motor business growth. Total
motor portfolio (455,000 contracts) continued to show a sharp increase (+104,000 contracts compared to December 2005) thanks to competitive rates, as well as the contribution from the new Motorcycle product.
Underlying earnings decreased by €4 million to €1 million as the slight improvement in the combined ratio (from 102.4% to 101.9%), following the decrease in the expense ratio (38.5% vs. 42.4% in 2005), despite the nonrecurrence of boni recorded in 2005 was more than offset by a lower contribution from the release of the valuation allowance on deferred tax assets than last year.
Net income decreased by €5 million to €–1 million reflecting some unrealized losses on fixed maturity mutual funds under fair value option.
Underlying earnings, adjusted earnings and net income were slightly below prior year at around €10 million with a combined ratio of 90.9% (vs. 88.0% in 2005) which has been impacted notably by an increase of claims incurred in the commercial property and casualty businesses.
Hong Kong Gross written premium (excl ACS business) remained stable at €64 million, compared to 2005 on a constant exchange rate basis. Excluding premium adjustments in workers compensation products (ECI construction), revenues increased by 1.6%.
Underlying earnings were stable at €8 million on a constant exchange rate basis, with a slight increase in the combined ratio from 94.3% to 95.2%.
Adjusted earnings decreased by €1 million to €10 million on a constant exchange rate basis mainly attributable to a reduction of realized capital gains by €1 million.
Net income increased by €1 million to €10 million on a constant exchange rate basis, mainly attributable to a reduction of exchange losses by €2 million.
The following tables present the gross premiums and net income for the International Insurance Segment for the periods indicated: (in Euro million)
CONSOLIDATED GROSS REVENUES (a) 2006 2005 2004 AXA RE – 1,460 1,069
Net realized capital gains attributable to shareholders 60 88 94 85 87
Goodwill and other related intangibles impacts (12) – – (7) (7)
(a) Including AXA RE (in 2006 only), AXA RE Life and AXA Liabilities Managers. (b) Restated means: transfer of the forex impact from adjusted earnings to net income
Underlying operating earnings before tax 144 110 110 81 Income tax expenses / benefits (59) (37) (37) (30)
Gross revenues amounted to €1,697 million, up €83 million (+5%) driven by (i) a strong portfolio development in Property (€84 million) due to reinsurance program restructuring providing additional underwriting capacities, (ii) an increase in liability (€26 million) and in construction (€19 million), partly offset by (iii) a decline in Marine and Motor, as some risks were not renewed in a context of softening market (€–45 million).
Net investment result increased by €21 million to €144 million driven by higher fixed maturity revenues notably reflecting a higher asset base.
Income tax expenses increased by €22 million to €–59 million, mainly as a result of higher taxable income.
As a result, underlying earnings increased by €12 million to €84 million.
Net income decreased by €21 million to €22 million as the increase in adjusted earnings was more than offset by the non recurrence of the €23 million net impact of the sale of CAS in 2005.
Adjusted earnings increased by €72 million to €39 million reflecting the €52 million improvement of underlying earnings and €20 million higher realized gains due to AXA RE (€34 million) partly offset by €–13 million on the other portfolios.
Net income increased by €123 million to €92 million, reflecting improvement in adjusted earnings combined with a €66 million gain after tax on the sale of AXA RE’s business, partly offset a €12 million charge related to the impairment of the goodwill formerly allocated to the reinsurance business.
UNDERLYING, ADJUSTED EARNINGS AND NET INCOME 2006 2005 2005 2004 Restated (a) Published Published
Assets under Management (“AUM”) increased by €54 billion to €544 billion, driven by strong market appreciation (€72 billion) and strong net inflows across all client categories (€38 billion, of which €22 billion from institutional clients, €10 billion from retail and €7 billion from private clients) partly offset by unfavorable exchange rate impact (€–57 billion).
Fees, commissions and other revenues increased by 25% on a comparable basis, due to higher investment advisory fees driven by 18% higher average AUM as a result of net new business inflows, market performance and higher performance fees.
Net income increased by €139 million to €394 million or by €143 million on a constant exchange rate basis mainly due to higher adjusted earnings and dilution gains from the issuance of AllianceBernstein units (€36 million), reversal of deferred taxes liability from prior period (€50 million) and €4 million related to the sale of Alliance Cash Management business, compared to a gain on the sale of Alliance Cash management business (€5 million) and India and South Africa joint ventures (€3 million) in 2005.
Net income from investment in affiliates and associates – – –
Adjusted earnings group share 303 246 207 Profit or loss on financial assets (under FV option) & derivatives – – –
Underlying operating earnings before tax 379 267 267 163 Income tax expenses / benefits (132) (78) (78) (51)
Net income from investment in affiliates and associates – – – –
Fees, commissions and other revenues including those earned from AXA insurance companies eliminated in consolidation, increased by €484 million, or +40% to €1,679 million. Excluding fees retroceded to distributors, AXA Framlington impact (€13 million in 2005 and €126 million in 2006), and exchange rate variation (€2 million), net revenues grew by 30% on a comparable basis, driven by higher average AUM (+16% on a comparable basis), a positive client and product mix evolution, and higher performance fees.
Underlying and adjusted earnings both increased by €50 million to €206 million as a result of a business growth and an improvement in underlying cost income ratio. AXA Framlington (purchased on October 31, 2005) contribution to 2006 and 2005 underlying and adjusted earnings was respectively €15 million and €4 million.
Net income increased by €60 million to €216 million, driven by adjusted earnings growth and fair value increase in real estate fund.
CONSOLIDATED GROSS REVENUES 2006 2005 2004 AXA Bank (Belgium) 306 339 268
UNDERLYING, ADJUSTED EARNINGS AND NET INCOME 2006 2005 2004 AXA Bank (Belgium) 21 50 26
Profit or loss on financial assets (under FV option) & derivatives (15) 8 (11)
Net banking revenues were down 10% to €306 million, as a result of the decrease of (i) realized capital gains (€–19 million) driven by investment portfolio, (ii) mark to market (€–12 million) mainly due to derivatives (natural hedge on investment portfolio and the credit spread portfolio) partly offset by an increase in loans (€+11 million), and the money market (€–10 million) and (iii) net interest and fee income remained stable.
Underlying earnings decreased by €29 million to €21 million mainly due to lower fixed income capital gains (€–6 million), a lower interest margin (€–9 million), and the non recurrence of the reversal in 2005 of a provision for risks related to loan activities in France following a favorable court decision (€16 million).
Adjusted earnings decreased by €26 million to €29 million notably driven by the decrease in underlying earnings (€–29 million) partly offset by an increase in capital gains on equities.
Net income decreased by €6 million to €–17 million, negatively impacted by the change in fair value of derivatives (a €17 million loss versus a €3 million loss in 2005) as a consequence of the rise in interest rates on the portfolio of interest rate swaps used to hedge the overall balance sheet exposure.
Underlying earnings decreased by €16 million to €–219 million. Excluding a non recurring tax benefit of €39 million in 2006 compared to €70 million in 2005, and €69 million financial income in 2006 on proceeds from Winterthur financing (rights and TSS issues), underlying earnings decreased by €54 million mainly due to (i) a €20 million higher financial charge mostly related to the financing of the Finaxa exchangeable bond buy-back and the dilution control program partly offset by positive volume effects due to increasing cash flows received from entities and (ii) €30 million some non recurring costs related to share based compensation plans.
(iii) €–133 million related to a lower increase of U.S Dollar interest rates linked to currency swaps in 2006 compared to 2005,
Goodwill and other related intangibles impacts – – – – –
– partly offset by a €+85 million due to the change in the mark-to-market of foreign currency options hedging AXA Group underlying earnings denominated in foreign currencies.
AXA France Assurance Underlying earnings increased by €19 million to €–13 million mainly due to the non recurrence of a €14 million settlement with Armenian policyholders in 2005.
Net income decreased by €12 million mainly due to the change in fair value of derivatives (a €15 million profit versus a €28 million profit in December 2005).
Underlying earnings decreased by €22 million to €–24 million largely due to the non-recurrence of positive income received in 2005 on cross currency interest rate swaps, following the restructuring of the forward rate hedging in July 2005. Lower interest revenue on intercompany finance arrangements and additional costs associated with the expansion strategy in Asian region also impacted the results.
Adjusted earnings decreased by €23 million to €–25 million largely due to the reduction in Underlying earnings.
(1) All comparisons to prior year figures are on a constant exchange rate basis. (2) AXA interest in AXA Asia Pacific Group is 52.7% broken down into 51.6% direct interest holding and an additional 1.1% owned by AAPH Executive plan trust.
AXA UK Holdings Underlying earnings increased by €7 million, both on current and constant exchange rate base to €–89 million resulting from lower financing costs and the reversal of a deferred tax asset valuation allowance. Adjusted earnings increased in line with underlying earnings evolution.
Net income increased by €18 million on a current exchange rate basis (€+19 million on a constant exchange rate basis) to €–86 million driven by adjusted earnings growth, foreign exchange gains and the non recurrence of the indemnity costs paid to Nationwide in 2005.
German Holding companies Underlying earnings improved by €48 million to €29 million mainly due to a €31 million tax refund following an industry wide change in tax legislation in 2006, a €9 million higher impact of the use of prior year loss carry-forward to €20 million, as well as higher investment result (€+4 million) and lower interests expenses (€+4 million).
Netherlands Holding companies Underlying earnings, adjusted earnings and net income decreased by €4 million to €–6 million mainly driven by the €2 million payment of loan interest to AXA SA.
In 2007, AXA’s key operational challenge will be to successfully manage the integration of Winterthur while keeping the growth momentum. Management has increased the target synergies (pre-tax annual cost savings) from this integration by 25% to €350 million, to be fully phased by 2010.
– despite increasing competitive pressure in some European markets, our Property & Casualty operations should benefit from the strength of marketing and distribution, claims management initiatives and increasing diversification into higher growth markets,
– our Asset Management businesses should continue to perform well, primarily driven by very strong net inflows in 2006 and current favorable financial market conditions,
– our net capital gains target range is increased from €600/800 million to €800/1,000 million from 2007 onwards.
(iii) Profit and loss on financial assets accounted for under fair value option (excluding assets backing contract liabilities for which the financial risk is borne by the policyholder) and derivatives related to invested assets (including all impacts of foreign exchange in particular the ones related to currency options in earnings hedging strategies, but excluding derivatives related to insurance contracts evaluated according to the “selective unlocking” accounting policy).
Net realized gains or losses attributable to shareholders include: – i) realized gains and losses (on assets not designated under fair value option or trading assets) ii) change in impairment valuation allowance, net of tax,
Preliminary note: Foreign exchange rate impacts are closer in nature to Profit and loss on financial assets accounted for under fair value option (excluding assets backing contract liabilities for which the financial risk is borne by the policyholder) and derivatives related to invested assets than to Net realized gains or losses attributable to shareholders. As a consequence, foreign exchange rates impacts have been reallocated from adjusted earnings to net income starting 2006 with retroactive restatement.
(ii) Change in UFR (Unearned Fees Reserve capitalization net of amortization) is presented in the line “Change in unearned premiums net of unearned revenues & fees” in the underlying Statement of Income, whereas it is located in the line “Fees & Revenues” in the Margin analysis.
(which are part of consolidated revenues), (ii) loading charged to policyholders on premiums / deposits and fees on funds under management for separate accounts (unit-linked) business,
(iii) loading on (or contractual charges included in) premiums / deposits received on all non unit-linked product lines,
(iv) deferral income such as capitalization net of amortization of URR (Unearned Revenue Reserve) and UFR (Unearned Fees Reserve),
(iv) Other changes in insurance reserves and economic hedging strategy impacts related to insurance contracts valuated according to the “selective unlocking” accounting policy allowing liability adjustment so as to better reflect the current interest rates for these contracts.
Underlying Operating earnings before tax correspond to the income derived from operations, before tax, minority interest, and goodwill and other related intangible impact.
– “Underlying” operating margin is the sum of (i) Underlying Investment margin; (ii) Underlying Fees and revenues excluding the change in deferral income, and (iii) Underlying Net technical Margin (all items defined above).
Underlying net technical result is the sum of the following components: (i) earned premiums, gross of reinsurance, (ii) claims charges, gross of reinsurance, (iii) change in claims reserves, including claims handling costs reserves, gross of reinsurance, less the recurring interest credited to insurance annuity reserves,
Current accident year loss ratio (Property & Casualty) net of reinsurance is the ratio of: (i) [current year claims charge gross of reinsurance + claims-handling costs + result of reinsurance ceded on current accident year excluding the recurring interest credited to the insurance annuity reserves], to
(cession / retrocession and covers), (ii) claims charge all accident years, net of reinsurance, including major losses, (iii) commissions (fixed commissions, sliding scale commissions as well as profit commissions), (a) paid to the ceding companies and (b) received from the reinsurance companies,
(iii) commissions (fixed commissions, sliding scale commissions and profit commissions), (a) paid to the ceding companies and (b) received from the reinsurance companies, excluding commissions related to covers,
Underlying Cost Income Ratio: general expenses excluding distribution fees / total revenues excluding distribution fees.
Restated Restated 6 Value of purchased business in force (a) 5,050 2,623 3,123 7 Deferred acquisition costs and equivalent (b) (i) 15,896 14,767 12,319
Assets backing contracts where the financial risk is borne by policyholders (e) 176,562 141,410 112,387 9 Investments from insurance activities (f) 582,744 459,200 394,250 9 Investments from banking and other activities (f) 16,295 10,084 11,336 10 Investments in associates – Equity method 144 208 330 14 Reinsurer’s share in insurance and investment contracts liabilities 12,038 9,087 7,898
(a) Amounts shown 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.
(h) Includes short term assets, i.e. when maturity is below 1 year. (i) As described in note 1.12.2, the adoption of FRS 27 in the United Kingdom has led to adjustments on all periods presented. The effect of these adjustments is set out in note 14. (j) Including Winterthur, please refer to note 5.
Shareholders’ equity - Group share 47,226 36,525 31,571 13 Total minority interests and shareholders’ equity 50,168 39,288 33,882 Liabilities arising from insurance contracts (h) 323,232 247,717 229,452
Liabilities arising from investment contracts with no discretionary participating features 1,121 926 869
14 Liabilities arising from insurance and investment contracts 560,443 448,208 393,940 15 Provisions for risks and charges 8,984 8,761 7,729
Deferred tax liability (h) 6,823 7,338 6,786 Minority interests of controlled investment funds and puttable instruments held by minority interests holders (f) 7,224 5,115 3,717
(a) Also includes liabilities arising from contracts with Guaranteed Minimum features. (b) Amounts shown gross of reinsurer’s share in liabilities arising from contracts.
(d) Also includes liabilities arising from deferred policyholder’s participation. (e) Financing debt amounts are shown net of effect of derivative instruments (please refer to note 19).
(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).
Liabilities arising from investment contracts with financial risk borne by the policyholders 67,673 48,549 39,127
Liabilities arising from investment contracts with discretionary participating features 32,599 33,267 31,832
Fees and charges relating to investment contracts with no participating features 608 509 417
Revenues from insurance activities 72,707 66,504 62,570 Net revenues from banking activities 376 428 386
Change in unearned premiums net of unearned revenues and fees (k) (476) (483) (104) Net investment income (b) 14,461 13,951 12,941
21 Net investment result excluding financing expenses 33,077 33,408 28,309 Technical charges relating to insurance activities (e) (k) (84,836) (81,791) (72,959)
(c) Includes impairment releases on sold invested assets. (d) Excludes impairment releases on sold invested assets.
Restated Restated Operating income before tax (b) (c) 7,801 6,296 6,111 Net amortization expense (d) 527 831 649
Net change in deferred acquisition costs and equivalent (1,413) (1,538) (1,548)
Net increase / (write back) in other provisions (f) 60 (23) (37)
Income arising from investments in associates – Equity method (34) (21) (55)
Adjustment of balances included in operating income before tax for reclassification to investing or financing activities (4,304) (3,440) (3,229) Dividends recorded in profit & loss during the period (2,030) (1,781) (1,344)
Interests paid & received recorded in profit & loss during the period (13,481) (12,975) (10,786)
Adjustment of transactions from accrued to cash basis (15,512) (14,755) (12,131) Net cash impact of deposit accounting 199 1 201 924
Net cash impact of transactions with cash impact not included in the operating income
Sales of investment properties held directly or not (h) 2,104 962 1,620
Sales and/or repayment of loans and other assets (h) (j) 20,106 11,974 4,222
Purchases of equity securities and non controlled investment funds (h) (i) (20,978) (19,685) (34,416)
Purchases of investment properties held directly or not (h) (1,575) (991) (1,043)
Net cash related to purchases and issuance of financial assets (h) (i) (j) (135,067) (121,387) (126,421) Sales of tangible and intangible assets 140 225 33
Restated Restated Net cash related to sales and purchases of tangible and intangible assets (155) 11 (187) Increase in collateral payable / Decrease in collateral receivable 9,714 7,720 7,051
Decrease in collateral payable / Increase in collateral receivable (3,355) (1,666) –
Net cash impact of assets lending / borrowing collateral receivables and payables 6,359 6,054 7,051
Other financing cash impact and non cash adjustment 8 (32) 182
Net impact of foreign exchange fluctuations and reclassification on cash and cash equivalents 6,190 71 (166)
(c) As described in note 1.18, the statement of consolidated cash flows now starts from “Operating income before tax”, whereas it used to start from “Income from operating activities, gross of tax expenses”.
(j) Also includes purchases and sales of assets backing contracts where financial risk is borne by policyholders. (k) Also includes issues and repayments of perpetual debts.
(l) Includes the net cash impact of interest margins relating to hedging derivatives on financing debts.
Impact of transactions with shareholders 221,283 2.29 507 3,906 137 Reserves relating to changes in fair value through shareholders’ equity
NB: amounts are presented net of impacts of shadow accounting and of its effects on policyholders’ benefit, deferred acquisition costs, and value of business in force. (a) Mainly equity components of compound financial instruments (e.g. convertible bonds).
(c) Actuarial gains and losses accrued since opening January 1, 2006.
NB: The 2005 opening balance was adjusted by €3,048 million and the 2005 closing balance by €2,679 million following a change in presentation of perpetual deeply subordinated notes, as described in note 1.11.2 (accounting principles) and explained in note 13.
NB: Amounts are presented net of impacts of shadow accounting and of its effects on policyholders’ benefit, deferred acquisition costs, and value of business in force. (a) Mainly equity components of compound financial instruments (e.g. convertible bonds). (b) Actuarial gains and losses accrued since opening January 1, 2004.
Reserves Reserves Reserves Others (a) Translation Undistributed Equity Group relating to relating to relating to reserve profits and share the change in the change in revaluation other reserves FV of financial FV of hedge of tangible instruments accounting assets available derivatives (cash for sale flow hedge)
AXA has its primary listing on the Paris stock exchange’s Eurolist market and has been listed since June 25, 1996 on the New York Stock Exchange.
The consolidated financial statements were finalized by the Management Board on April 2, 2007 and examined by the Supervisory Board on April 4, 2007.
1.2. General accounting principles 1.2.1. Basis for preparation AXA’s consolidated financial statements are prepared at December 31. 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 yearend.
Accounting of Intercompany Transactions. – Amendment to IAS 39 and IFRS 4 – Financial
Changes in accounting policies that did not result from the application of new standards published and effective in the period are set out in the notes relating to the topics concerned
Standards published but not yet effective IFRS 7 – Financial instruments: Disclosures, published in August 2005 and applicable from January 1, 2007 requires information on the following subjects to be disclosed in the notes: – the importance of financial instruments with respect to the entity’s financial position and performance; this includes a number of requirements previously contained in IAS 32; – qualitative and quantitative information on exposure to Market risks, including specified minimum disclosures on credit risk, liquidity risk and market risk. Qualitative information shall describe management objectives, policies and procedures in managing these risks. Quantitative information relates to the extent of the entity’s exposure to risk, based on information reported internally to the entity’s key managers. These notes provide an overview of the entity’s use of financial instruments and insurance contracts and the resulting risk exposures.
Amendment to IAS 1 – Capital disclosures, also published in August 2005 and applicable from January 1, 2007, requires disclosure of the entity’s objectives, procedures and processes for managing capital and complying with external regulatory constraints.
IAS 29. – IFRIC 8 – Scope of IFRS 2. – IFRIC 11 – IFRS 2: Group and Treasury Share
Preparation of financial statements The preparation of financial statements in accordance with IFRS requires the use of estimates and assumptions. It requires a degree of judgment in the application of Group accounting principles described below. The main balance sheet captions concerned are goodwill (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.
All amounts on the consolidated balance sheet, consolidated statement of income, statement of consolidated cash flows, consolidated statement of shareholders’ equity and in the notes are expressed in million of Euros, and rounded up to the nearest whole unit, unless otherwise stated.
1.2.2. First-time adoption of IFRS 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
The AXA’s accounting policies have been consistently applied to all the periods presented in its financial statements, including policies relating to the classification and measurement of insurance contracts, investment contracts and other financial assets and liabilities including derivatives.
Entities that are controlled in substance even without any ownership interest are also consolidated. In particular this relates to special
Companies over which AXA exercises a joint controlling influence alongside one or more third parties are consolidated proportionately. Companies in which AXA exercises significant long-term influence are accounted under the equity method. Significant influence is presumed when AXA directly or indirectly holds 20% or more of the voting rights or, for example, when significant influence is exercised through an agreement with other shareholders. AXA’s share of equity associates’ post-acquisition profits or losses is recognized in the income statement, and its share of post-acquisition movements in reserves is stated under “Other reserves”.
Investment 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 companies, 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 companies accounted for under the 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 In accordance with the option made available by IFRS 1 – First-time adoption of IFRS, business combinations prior to 2004 have not been restated with respect to French accounting principles in force at the time. The principles described below apply to the business combinations that occurred after
Valuation of assets acquired and liabilities assumed of newly acquired subsidiaries and contingent liabilities Upon first consolidation, all assets, liabilities and contingent liabilities of the acquired company are estimated at their fair value. However as permitted by IFRS 4, liabilities related to life insurance contracts or investment contracts with discretionary participating features are maintained at the carrying value prior to the acquisition date to the extent that this measurement basis is consistent with AXA’s accounting principles. The fair value of acquired business in force relating to insurance contracts and investment contracts with discretionary participating features is recognized as an asset corresponding to the present value of estimated future profits emerging on acquired business in force at the date of acquisition (also referred to as value of acquired business in force or VBI). The present value of future profits takes into consideration the cost of capital and is estimated using actuarial assumptions based on projections made at purchase date but also using a discount rate that includes a risk premium.
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, flexible premiums relating to acquired business are recognized in the “Value of purchased life business in force” item.
The value of expected future cash flows that can be measured separately and reliably can also be estimated by looking at the purchased marketing resources that will secure these flows.
The nature of the intangible assets recognized is consistent with the valuation methods used when purchasing the acquired entity.
Goodwill Of 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 Euros at the closing date.
If the cost of acquisition is less than the net fair value of the assets, liabilities and contingent liabilities acquired, the difference is directly booked in the consolidated statement of income.
Goodwill is allocated across business segments (Life & Savings, Property & Casualty, International Insurance, Asset Management and Other Financial Services) to cash generating units corresponding (i) to the companies acquired or portfolios of business acquired according to their expected profitability, and (ii) to the entities already within the AXA Group that will benefit from the synergies of the combination with the activities acquired. This allocation of goodwill is used both for segment reporting and for impairment testing.
Put over minority interests When control over a subsidiary is acquired, a put option may be granted to minority shareholders. However, the recognition of the puttable instruments as a liability depends on the contractual obligations.
Intra-group transactions Intra-group transactions, including internal dividends, payables/receivables and gains/losses on intra-group transactions are eliminated: – in full for wholly owned subsidiaries and; – to the extent of AXA’s interest for entities consolidated by equity method or proportionate consolidation.
The effect on net income of transactions between consolidated entities is always eliminated, except for permanent losses, which are maintained.
The consolidated financial statements are presented in million of Euros, the Euro being the Group’s functional and presentation currency.
Foreign currency transactions are translated into Euro using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at closing 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.
As mentioned in section 1.3.2, goodwill arising on the acquisition of a foreign entity is recorded in the local currency of the acquired entity and is translated into Euro at closing date.
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 four business lines: Life & Savings, Property & Casualty, International Insurance and Financial Services (including Asset Management). An additional “Holdings” segment includes all non-operational activities.
They also include customer relationships intangibles recognized as a result of business combinations, provided that their fair value can be measured reliably and it is probable that future economic benefits attributable to the assets will benefit to the Group. If these assets have a finite useful life, they are amortized over their estimated life. In all cases, they are subject to impairment tests, at each closing for assets with a finite useful life and annually for other assets. In the event of a significant decline in
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 The variable costs of writing insurance contracts and investment contracts with discretionary participating features, primarily related to the underwriting of new business, are deferred by recognizing an asset. This asset is amortized based on the estimated gross profits emerging over the life of the contracts. In conjunction to the liability adequacy test (see section 1.12.2) this asset is tested for recoverability: any amount above future estimated gross profits is not deemed recoverable and expensed.
Investments include investment in real estate properties and financial instruments including equities, fixed maturities and loans.
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 made up of CDOs (Collateralized Debt Obligations) and controlled by the Group; – 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).
Loans are accounted at amortized cost, net of amortized premiums and discounts and impairment.
Impairment of financial assets AXA assesses at each balance sheet date whether a financial asset or a group of financial assets is permanently impaired.
For equities classified as available-for-sale, a significant or prolonged decline in the fair value below its carrying value is considered as indication for potential impairment, such as equities showing unrealized losses over a 6 months period or more (prior to the closing
Loans impairments are based on the present value of expected future cash flows, discounted at the loan’s effective interest rate (on the loan’s observable market price), or on the fair value of the collateral.
1.8. Assets backing liabilities arising from contracts where the financial risk is borne by policyholders
Liabilities arising from insurance or investment contracts where the financial risk is borne by policyholders are presented in a separate aggregate of the balance sheet so that they are shown in a symmetrical manner to the corresponding liabilities. This presentation is considered more relevant for the users and consistent with the liquidity order recommended by IAS 1 for financial institutions, since the risks are borne by policyholders, whatever the type of assets backing liabilities (investment properties, fixed maturities or equities, etc). Details of these assets are provided in the notes.
Fair value hedge Changes in the fair value of derivatives designated and qualifying as fair value hedge are recorded in the income statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk.
These comprise assets, in particular real estate properties or operations intended to be sold or discontinued within the next twelve months. They are recognized at the lower of their net carrying value and their fair value net of costs to sell. They are disclosed in a dedicated aggregate of the balance sheet. Result from discontinued operations net of tax is presented in a separate aggregate of the income statement whether these discontinued operations correspond to a business segment, a main and separate geographical area, or a subsidiary acquired solely with a view to resell.
1.11.2. Perpetual debts 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.
The Group previously only classified in shareholders’ equity perpetual debts on which interest payments could be cancelled if no dividend is paid to shareholders nor any interest
paid on similar debts. Perpetual debts on which interest payments could be deferred while remaining payable (cumulative interests) were recognized as liabilities under financing debts. These mainly consisted of perpetual subordinated notes issued by the Group.
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 maturity, 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 recent clarification, the Group has reclassified these instruments, 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. Impacts are detailed in Notes 13 and 23.
1.11.3. Compound financial instruments 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) are classified separately on the liability side of the balance sheet with the equity component reported in 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.
1.11.4. Treasury shares Treasury shares and any directly related costs are recorded as a deduction to consolidated shareholders’ equity. Where treasury shares are subsequently sold or reissued, any consideration received is included in consolidated shareholders’ equity, net of any directly related costs and tax effects.
A number of insurance and investment contracts contain discretionary participating features. These features entitle the contract holder to receive additional benefits or bonuses on the top of these standard benefits : – they are likely to represent a significant portion of the overall contractual benefits; – their amount or timing is contractually at the discretion of the Group; and – they are contractually based on the performance of a group of contracts, the investment returns of a financial asset portfolio or the company profits, a fund or another entity that issues the contract.
For some insurance or investment contracts, the financial risk is borne by policyholders. Such contracts are usually unit-linked contracts.
The two last categories are presented on a single line item in the balance sheet: “Liabilities arising from investment contracts where the financial risk is borne by policyholders”.
1.12.2. Insurance contracts and investment contracts with discretionary participating features According to IFRS 4, recognition and derecognition are based on the AXA accounting policies existing prior to IFRS and are described below, except for the elimination of equalization provisions and selective changes as permitted by IFRS 4 (see paragraph below on guaranteed benefits).
Unearned premium reserves represent the prorated portion of written premiums that relates to unexpired risks at the balance sheet date.
Additional reserves are booked if there are any adverse impact on reserves level caused by a change in mortality table.
Future policy benefits reserves relating to investment contracts with discretionary participation features (previously called “savings contracts” in AXA’s accounting principles) that carry low mortality and morbidity risk are calculated using a prospective approach based on discount rates set at inception giving similar results to those obtained using a retrospective approach (earned savings valuation or “account balance”).
The discount rates used by AXA are less or equal to the expected future investment yields (assessed on prudent basis).
The presentational impact of applying this standard is detailed in Note 14. This change in accounting principles only applies to the Group’s UK With-Profit contracts.
Unrealized gains and losses on assets classified as trading or designated as 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-for-sale (for which change in fair value is taken to shareholders’ equity) are also booked through shareholders’ equity.
Embedded derivatives in insurance and investment contracts with discretionary participating features 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 or do not meet the definition of an insurance contract.
Unearned fees reserve Fees received at inception of an investment contract with no discretionary participating features to cover future services are recognized
1.13. Reinsurance: Ceded reinsurance Transactions relating to reinsurance assumed and ceded are accounted in the balance sheet and income statement in a similar way to direct business transactions provided that these contracts meet the insurance contracts classification requirements and in agreement with contractual clauses.
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 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 written off.
Following a business combination, a deferred tax liability or asset is also recognized on changes in the timing difference between the tax value and carrying value of a tax-deductible item of goodwill. This deferred tax is only released if the goodwill is impaired or if the corresponding consolidated shares are sold.
1.15.3. Share-based compensation plans Group’s share-based compensation plans are predominantly equity-settled plans.
1.16. Provisions for risks, charges and contingent liabilities 1.16.1. Restructuring costs Restructuring provisions other than those related to a business combination are recorded when the Group has a present obligation evidenced by a binding sale agreement or a formal detailed restructuration plan whose main features have been announced to those impacted.
1.16.2. Other provisions and contingencies Provisions are recognized when the Group has a present obligation (legal or implicit) as a result of past events, when it is more likely than not that an outflow of resources will be required to settle the obligation, and when the provision can be reliably estimated.
1.17.2. Fees and revenues from investment contracts with no discretionary participating features 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 contract during the period. Front-end 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).
IAS 39. Deposit accounting applies to these contracts, which involves the following: – the Group recognizes the consideration received as a deposit financial liability rather than as revenues,
1.17.4. Unbundling 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 (including any embedded surrender option, i.e. without taking into account the “insurance” component); – the Group accounting methods do not otherwise require to recognize all obligations and rights arising from the “deposit” component.
1.17.5. Change in unearned premiums reserves net of unearned revenues and fees Changes in unearned premiums reserves net of unearned revenues and fees include the change in the unearned premium reserve reported as a liability (see “Unearned premium 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
1.17.7. Revenues from other activities Revenues from other activities mainly include: – insurance companies revenues from non insurance activities, notably commissions received on sales or distribution of financial products,
– sales proceeds received on buildings constructed or renovated and subsequently sold by real estate businesses.
– realized investment gains and losses net of releases of impairment following sales,
Any gain or loss arising from a change in AXA’s ownership interest in a subsidiary not wholly owned, following an issuance or redemption of equity instruments, is recorded in the net investment result. The gain or loss would correspond to the change in AXA’s share of the subsidiary’s shareholders’ equity before and after the operation.
As part of its continuing review aimed at improving the presentation of its financial statements and to ensure that its accounting principles are consistent with those applied by its peers, the Group has amended some presentational aspects of its financial statements.
Consolidated income statement The “Change in goodwill impairment” aggregate is now presented under the “Other operating income and expenses” aggregate and is therefore included in “Income from operating activities before tax”. It was previously presented after “Operating income before tax”.
Group share”. These two items are presented at the bottom of the income statement as an allocation of net income.
Note 2: Scope of consolidation 2.1. Consolidated Companies 2.1.1. Main fully consolidated companies
International Insurance December 31, 2006 December 31, 2005 (entities having worldwide activities) Change in scope Voting Ownership Voting Ownership rights interest rights interest AXA RE (sub-group) Sale of AXA RE business – – 100.00 100.00
Winterthur Seguros Generales. S.A. de Seguros y Reaseguros Acquisition 100.00 100.00 – –
Asia/Pacific (excluding Japan) Winterthur Life (Hong Kong) Ltd Acquisition 100.00 100.00 – –
Life & Savings and Property & Casualty Change in scope Voting Ownership Voting Ownership rights interest rights interest United Kingdom
Japan Winterthur Swiss Life Insurance Co. Ltd Acquisition 100.00 100.00 – –
International Insurance December 31, 2006 December 31, 2005 (entities having worldwide activities) Change in scope Voting Ownership Voting Ownership rights interest rights interest Switzerland
Asset Management December 31, 2006 December 31, 2005 (entities having worldwide activities) Change in scope Voting Ownership Voting Ownership rights interest rights interest Switzerland
Aside from Winterthur, the main entries into the scope of consolidation in 2006 were Citadel (Canada), MLC Hong-Kong and MLC Indonesia. In 2005, the UK’s Framlington Group Limited was acquired by AXA Investment Managers and Seguro Directo was acquired in Portugal.
(€67,549 million at December 31, 2005 and €55,434 million at December 31, 2004). This amount relates to 279 funds, mainly in France, the UK, Germany, Australia and Japan. The funds are mainly in the Life & Savings business segment.
are therefore presented as liabilities under “Minorities in controlled funds and other commitments to buy out minority interests”. At December 31, 2006, minorities in controlled funds amounted to €6,099 million (€4,326 million at December 31, 2005 and 2.1.2. Proportionately consolidated companies
Life & Savings and Property & Casualty Change in scope Voting Ownership Voting Ownership rights interest rights interest France
AXA Affin General Insurance Berhad Scope entry 50.48 50.48 – –
Philippine AXA Life Insurance Corporation Scope entry 44.98 23.70 – –
Krungthai AXA Life Insurance Company Ltd Scope entry 50.00 26.34 – –
Belgium Parfimmo Liquidation – – 33.33 33.31 2.1.3. Investments in equity-accounted companies Equity-accounted companies excluding mutual funds and real estate entities
Equity-accounted mutual funds and real estate entities At December 31, 2006, equity-accounted real estate companies represented total assets of €693 million (€234 million at end-2005), including €298 million relating to real estate companies arising from the Winterthur acquisition. Equity-accounted mutual funds represented total assets of €1,376 million, mainly in France, the United States and Switzerland (€1,346 million at end-2005).
2.3. Consolidated entities relating to specific operations Securitisation of mortgages loans in the life portfolio of DBV in the Netherlands The Holland Homes mortgage securitization structures previously set up by Winterthur Group are consolidated within DBV’s operations in the Netherlands. Mortgage loans are issued to sell life insurance products. Surplus loans issued are securitized through special purpose entities.
Securitization of the French motor insurance portfolio On December 9, 2005, AXA announced the closing of the €200 million securitization of its French motor insurance portfolio. This operation, launched on November 3, 2005, was the first ever securitization of a low claim severity, high claim frequency insurance portfolio. Through securitization, AXA has transferred to the financial markets the deviation of the cost of claims on the securitized insurance portfolio above a certain threshold for four consecutive and independent annual periods. The transaction was oversubscribed and had an average margin per tranche of 28bp over Euribor 3 month rates, in line with similarly rated synthetic bank securitizations. Since the threshold for transferring risk to the financial markets was not reached, the recognition of this operation in AXA’s consolidated financial statements mainly involves the consolidation of the vehicle carrying the portion subscribed by AXA, and the recognition on the balance sheet under other liabilities of a €200 million deposit received from reinsurers.
AXA has five operating business segments: Life & Savings, Property & Casualty, International Insurance, Asset Management and Other Financial Services. An additional “Holding companies” segment includes all nonoperational activities. The financial information relating to AXA’s business segments and holding company activities is consistent with the presentation provided in the consolidated financial statements.
International Insurance: This segment’s operations include insurance products that specifically relate to AXA Corporate Solutions Assurance. These products provide coverage to large national and international corporations mainly relating to property damage, third party liability, marine, aviation and transport, construction, financial risk, and directors and officers liability. The segment also includes assistance activities and the group’s run-off management activities, managed by AXA LM, including risks underwritten by AXA RE relating to the 2005 underwriting year and before. Reinsurance operations (AXA RE) principally focus on: property damage, marine and aviation property, and third party liability. Years prior to 2005 are covered by a treaty ceding 100% of reinsurance to Paris Ré.
The Asset Management Segment’s products and services include diversified asset management (including mutual fund management) and related services, which are provided to a variety of institutional clients and individuals, including AXA’s insurance companies.
Of which: United States 120,215 – – – – – – 120,215
Other intangible assets 2,645 1,152 – – – – – 3,796
(a) Including cash and cash equivalents, deposits and guarantees, various debtors and assets covering employee benefit liabilities. (b) As described in note 1.12.2, the adoption of FRS 27 in the UK has led to adjustments on all periods presented. The effect of these adjustments is set out in note 14.
SEGMENTAL LIABILITIES December 31, 2005 EXCLUDING SHAREHOLDERS’ EQUITY Life & Property & International Asset Other Holding Inter- TOTAL (b)
Liabilities from held for sale or discontinued operations – – – – – – – –
Life & Property & International Asset Other Holding Inter- TOTAL Savings Casualty Insurance Management financial companies segment services eliminations
Net realized investment gains and losses 3,475 596 132 50 (17) 23 – 4,260
Net result from outward reinsurance (28) (632) (893) – – – 99 (1,455)
Bank operating expenses – – – – (78) – – (78)
Amortization of the value of purchased business in force and of other intangible
Change in goodwill impairment – – (12) – – – – (12)
Net revenues from banking activities – – – – 441 – (13) 428
Change in unearned premiums net of unearned revenues and fees (a) (178) (269) (33) – – – (3) (484)
Change in fair value of financial instruments at fair value through
Net result from outward reinsurance (7) (581) 317 – – – 130 (141)
Bank operating expenses – – – – (61) – – (61)
(a) As described in note 1.12.2, the adoption of FRS 27 in the UK has led to adjustments on all periods presented. The effect of these adjustments is set out in note 14. (b) As described in note 1.11.2, perpetual subordinated notes have been reclassified under shareholders’ equity for all periods presented. Details are provided in note 13.
Net revenues from banking activities – – – – 404 (1) (17) 386
Net realized investment gains and losses 2,492 487 175 4 6 119 – 3,282
Bank operating expenses – – – – (104) – 2 (101)
All of the following sections form an integral part of the Group financial statements. They appear in the “Risk Factors” and “Investment Strategy and capital resources” sections of this document as follows: 4.1. Risk Management organization
An analysis of goodwill is presented in the table below: (in Euro million)
Gross Accumulated Net value Gross value Accumulated Net value Gross value Accumulated Net value value impairment December 31, December 31, impairment December 31, December 31, impairment December 31,
Of which: (a) Following a revaluation of deferred tax assets booked at the time of the Nippon Dantail acquisition, goodwill was reduced by an equivalent amount (€70 million).
5.2. Change in goodwill 5.2.1. Goodwill – Change in gross value
Gross value Acquisitions Disposals Goodwill Currency Other Gross value January 1, during during adjustments translation changes (b) December 31, 2006 (a) the period the period adjustment 2006 (a)
Gross value Increase in Increase in Write back of Accumulated Currency Other Gross value January 1, impairment impairment impairment impairment translation changes December 31, 2006 during relating to GW of GW sold losses adjustment 2006 the period created on during transferred acquisitions the period out relating during to goodwill the period transferred in the “held for sale” category Winterthur – – – – – – – –
Gross value Increase in Increase in Write back of Accumulated Currency Other Gross value January 1, impairment impairment impairment impairment translation changes December 31, 2005 during relating to GW of GW sold losses adjustment 2005 the period created on during transferred acquisitions the period out relating during to goodwill the period transferred in the “held for sale” category Framlington – – – – – – – –
Goodwill is mainly attributable to the following business combinations and entities: Acquisition of Winterthur (2006) On 14 June 2006, AXA announced the signature of an agreement with the Credit Suisse Group for AXA to buy 100% of Winterthur for a CHF12.3 billion (€7.9 billion) consideration in cash.
Income from Winterthur’s activities between was regarded as immaterial with respect to the AXA group’s consolidated income. The acquisition balance sheet was prepared on the basis of December 31, 2006 figures.
The Group financed this transaction with a balanced mix of equity and debt. It raised €4.1 billion cash through a share capital increase in early 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).
TOTAL ASSETS (excluding goodwill) 116,389 Liabilities arising from insurance and investment contracts 98,017
relating to the value of purchased business inforce, consisting of the present value of future profits on contracts already inforce at the acquisition date. The present value of future profits takes into consideration the cost of capital and is estimated using actuarial assumptions based on projections made at purchase date but also using a discount rate that includes a risk premium,
– a customer relationships intangible, only recognized if it can be measured reliably. For both life and non-life activities, this value 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. The total life and non-life value of this customer
All of these future cash flows have been measured without distinguishing the marketing resources (distribution channels, brand etc.) through which they are expected to be secured, in order to ensure consistency with insurance industry practices, particularly as regards VBI, and also to avoid the recognition of redundant intangible assets. This method of measuring intangible assets is consistent with the method used when assessing the appraisal value.
In line with accounting practices in force before the adoption of IFRS, which may continue to be applied under IFRS 4, expected flexible premiums relating to purchased business in force are recognized in the “Value of purchased life business inforce” item.
The opening balance sheet no longer contains deferred acquisition costs relating to the Life & Savings business, since their fair value was nil at acquisition date. In accordance with practices used in past acquisitions, and based on previously used accounting methods that are still permitted under IFRS for insurance contracts, deferred acquisition costs relating to Property & Casualty have been maintained on the balance sheet. The value of unearned premiums net of these costs represents an estimate of the fair value of these liabilities.
Winterthur group’s estimated IFRS revenues from insurance operations and consolidated net income for 2006 Estimates of 2006 revenues and consolidated net income for the acquired Winterthur group assume the acquisition took place at January 1, 2006: – Estimated revenues total €14,477 million
These figures are estimates based on US GAAP financial statements prepared by the previous owner. This information is not necessarily indicative of the results that could have been achieved within the AXA group if the acquisition had actually taken place on January 1, 2006. In particular, the information does not factor in any synergies, nor does it provide an indication of future results.
Property & Casualty business that is held for sale (see below) and
– entries relating to the amortization of purchase GAAP items, including in particular the cancellation of almost all net gains and losses realized during the period and amortization of newly generated intangible assets.
Before eliminating the Swiss holding company’s loan to this subsidiary (€430 million), the net assets of this business held for sale were €860 million. All figures are based on the exchange rate at December 31, 2006.
The total net amount of assets held for sale is €49 million, excluding Winterthur’s US Property & Casualty subsidiary.
Acquisition of MLC Hong Kong and Indonesia (2006) On May 8, 2006, AXA Asia Pacific Holdings (AXA APH) announced that it had completed the acquisition of MLC Hong Kong and MLC Indonesia. Once the required regulatory authorizations had been obtained, these two acquisitions were completed within the timeframe mentioned when AXA APH announced its acquisition plan on February 21, 2006. The purchase price was €340 million. This led to the recognition of €116 million of goodwill and €194 million of intangible assets (Value of purchased Business
Acquisition of Citadelle (2006) On November 29, 2005, AXA Canada announced that it had reached an agreement with Winterthur Canada Financial Corporation to acquire its main asset, i.e. La Citadelle Compagnie d’assurances générales (“Citadelle”). The acquisition was financed through the AXA Group’s internal resources and was completed in March 2006. The purchase price was €221 million, including goodwill of €99 million.
Buyout of minorities – Tynan Mackenzie (2006) On 27 September 2006, AXA Asia Pacific Holdings (AXA APH) acquired 66.7% of Tynan Mackenzie for €99 million.
AXA APH had acquired a 33.3% stake in Tynan Mackenzie in January 2002 for €16 million, generating initial goodwill of €14 million.
At December 31, 2006, goodwill on this entity totaled €82.8 million.
Acquisition of Framlington (2005) On October 31, 2005, AXA Investment Managers (AXA IM) acquired the Framlington Group for £207.8 million (€303 million). This transaction led to the recognition of £130 million of intangible assets (€189 million before amortization) and goodwill of £97.2 million (€142 million).
Acquisition of MONY (2004) On July 8, 2004, AXA Financial acquired MONY for U.S.$1.48 billion (€1.3 billion). The total cost of the transaction was U.S.$1.63 billion, including: – U.S.$1.55 billion of cash payments for MONY
This transaction gave rise to goodwill of U.S.$672 million (€541 million) under French GAAP.
As a result, at December 31, 2006, the MONY goodwill had a net book value of €220 million.
At December 31, 2006, this goodwill had a net value of €385 million.
Goodwill totaled €583 million relating to the capital increase plus €3,689 million with respect to the acquisition of Sanford C. Bernstein operations, making a total of €4,272 million.
At January 1, 2004, the net book value of this goodwill was €2,256 million under French GAAP. With the adoption of IFRS, this figure became $3,490 million due to the adjustment of the exercised puts (see below).
In connection with this acquisition, AXA Financial agreed in 2000 to ensure the liquidity of new AllianceBernstein units distributed to the former shareholders of Sanford C. Bernstein over an eight-year period following a two-year lock-out period. Not more than 20% of the original units issued to former Sanford Bernstein shareholders may be put to AXA Financial in any one annual period.
The estimated exercise value of these commitments to minority interests is recognized on the balance sheet under “Minorities in controlled funds and other commitments to buy out minority interests”. This value is revised every year depending on exercised puts and the change in the value of residual commitments, with a balancing entry to goodwill. The value of the liability on the balance sheet was €895 million at January 1, 2004, €494 million at December 31, 2004 after the exercise of two puts, €789 million at December 31, 2005 and €1,003 million at December 31, 2006. The goodwill recorded as a balancing entry for the revaluation of the liability was €508 million at January 1, 2004, €298 million at December 31, 2004 after the exercise of two puts and €559 million at December 31, 2005 and €785 million at December 31, 2006.
AXA Nichidan (renamed AXA Life Japan) (2000) The valuation of the assets transferred by AXA and the shareholders of Nippon Dantaï to the new joint entity, AXA Nichidan Holding, together with the two cash contributions made by AXA to increase AXA Nichidan’s capital generated a goodwill of €1,856 million. Following the 2001 revaluation of an intangible asset that decreased the opening shareholders’ equity by €130 million (group share), goodwill was increased.
In 2005, following a new estimate of the deferred tax assets recorded at the time of the Nippon Dantaï acquisition, an equivalent amount (€70 million) was deducted from goodwill.
At December 31, 2006, this goodwill had a net value of €246 million.
Guardian Royal Exchange (1999) The acquisition of GRE (Guardian Royal Exchange) in 1999 resulted in a goodwill of €1,138 million.
The goodwill relating to the English, Irish and Portuguese Property & Casualty subsidiaries was mainly due to a significant deficiency in insurance claims reserves, and was impaired in 1999 for €446 million (€259 million net group share), representing the deficiency observed in the opening reserves.
At January 1, 2004, the net book value of this goodwill was €293 million under French GAAP, including net goodwill relating to AXA Colonia. With the adoption of IFRS, additional goodwill of £178 million was booked following the write-off of portfolio value on investment contracts without discretionary participating features by the UK Life & Savings subsidiary. The new goodwill figure is made up of €265 million relating to French, German and Belgian entities and £183 million relating to UK entities.
At December 31, 2006, the net book value of the goodwill was €631 million.
In 2005, amortization included an exceptional charge of €219 million in Japan, reflecting a change in future financial assumptions.
Net carrying value as at January 1 2,623 3,123 3,210 Increase following Life portfolio acquisitions – – –
Decrease following the transfer of portfolios to the “held for sale” category – – –
(a) Includes the amortization charge for the period, any losses of value and, exceptionally in 2004, capitalized interests relating to the United States and Japan.
Net deferred acquisition costs relating to Life & Savings (a) (c) 13,653 13,249 11,040
Deferred acquisition costs and similar costs relating to Life & Savings 14,199 13,320 10,965
Deferred acquisition costs and equivalent relating to Property & Casualty and International Insurance 1,697 1,447 1,354
In accordance with practices used in past acquisitions, and based on previous accounting methods that are still authorized under IFRS for insurance contracts, deferred acquisition costs in the Winterthur’s Property & Casualty business have been maintained on the balance sheet. The value of unearned premiums net of these costs represents an estimate of the fair value of these Property & Casualty liabilities.
7.2. Rollforward of deferred acquisition costs and similar – Life & Savings
Changes in deferred acquisition costs and similar costs for Life & Savings were as follows: (in Euro million)
Life & Savings Rights to Life & Savings Rights to Life & Savings Rights to
Costs (a) fees (b) Costs (a) (d) fees (b) Costs (a) (d) fees (b)
Increase following new subsidiaries acquisitions – – – – – –
Decrease following the transfer of portfolios to the “held for sale” category – – – – – –
7.3. Deferred acquisition costs and similar costs, net of amortization, unearned revenue reserves and unearned fee reserves – Life & Savings
The value of Life & Savings deferred acquisition costs and similar costs, net of amortization, unearned revenue reserves and unearned fee reserves, was as follows: (in Euro million)
DAC net of amortization (c) 13,047 1,152 12,360 960 10,273 692 of which shadow DAC (606) – (889) – (767) –
DAC net of amortization and URR 11,306 813 10,828 766 8,796 599
DAC = Deferred Acquisition Costs. (a) Relating to contracts subject to IFRS 4, i.e. insurance contracts and investment contracts with discretionary participating features. (b) Applicable to investment contracts with no discretionary participation features (IAS 39). (c) As described in note 1.12.2, the adoption of FRS 27 in the United Kingdom has led to adjustments on all periods presented. The effects of these adjustments is set out in note 14.
Intangible assets recognized 8.2. Breakdown of intangible assets recognized in business combinations
The method for determining the fair value of investments stated at cost or amortized cost is as follows: – For real estate investments, fair value is usually based on studies conducted by qualified external appraisers. They are based on a multi-criteria approach, and their frequency and terms are based on local regulations.
(excluding macro hedging derivatives and other derivatives). Details of the effect of derivatives are provided in section 19.3.
Fair Net book % (val. Fair Net book % (val. Fair Net book % (val. value value Balance value value Balance value value Balance sheet) sheet) sheet) Investment properties at amortized cost 18,218 13,243 2.27% 731 548 3.36% 18,949 13,791 2.30%
Investment properties at fair value through profit & loss (c) 5,364 5,364 0.92% 608 608 3.73% 5,972 5,972 1.00%
Fixed maturities held for trading 94 94 0.02% 1,203 1,203 7.38% 1,297 1,297 0.22%
Macro hedge and speculative derivatives (175) (175) – 875 875 5.37% 701 701 0.12%
Loans held to maturity – – – – – – – – –
Macro hedge and speculative derivatives – – – 8 8 0.05% 8 8 –
The integration of Winterthur increased total investments by €101,321 million, including: – €5,606 million of investment properties, – €55,315 million of fixed maturities, – €7,784 million of equities, – €924 million of non-controlled investment funds,
– €42 million of other investments held via controlled investment funds,
Fair Net book % (val. Fair Net book % (val. Fair Net book % (val. value value Balance value value Balance value value Balance sheet) sheet) sheet) Investment properties at amortized cost 11,256 7,832 1.71% 357 314 3.12% 11,613 8,146 1.74%
Fixed maturities at fair value through profit and loss (c) 43,413 43,413 9.45% 737 737 7.30% 44,150 44,150 9.41%
Fixed maturities held for trading 142 142 0.03% 1,547 1,547 15.34% 1,689 1,689 0.36%
Non quoted fixed maturities (amortized cost) 20 20 – 2 2 0.02% 22 22 –
Equity securities held for trading 101 101 0.02% 308 308 3.06% 409 409 0.09%
Other assets held by controlled investment funds designated as at fair value through profit and loss 1,912 1,912 0.42% – – – 1,912 1,912 0.41%
Macro hedge and speculative derivatives – – – 15 15 0.15% 15 15 –
Investment properties at fair value through profit & loss (c) 4,550 4,550 1.15% – – – 4,550 4,550 1.1%
Non quoted fixed maturities (amortized cost) 26 23 0.01% 2 2 0.02% 29 26 –
Equity securities available for sale 22,249 22,249 5.64% 642 642 5.66% 22,891 22,891 5.6%
Equity securities held for trading 258 258 0.07% 96 96 0.85% 354 354 0.1%
Non controlled investment funds at fair value through profit and loss (c) 2,093 2,093 0.53% 45 45 0.40% 2,138 2,138 0.5%
Write back following sale or reimbursement (83) (88) (54) (158) (91) (78)
(a) Mainly includes changes in scope of consolidation and the effect of changes in exchange rates. (*) Of which €100 million relating to investment properties at amortized cost presented net of impairment in 2004.
Non controlled investment funds available for sale 4,188 4,593 4,593 428 24
(a) Net of impairment – including premiums/discounts and cumulative amortization. (b) Net of impairment (details in note 9.8).
Non quoted fixed maturities (amortized cost) 1 1 1 – –
Non controlled investment funds available for sale 225 226 226 1 –
Non quoted fixed maturities (amortized cost) 11 11 11 – –
Non controlled investment funds available for sale 4,414 4,819 4,819 429 24
Fixed maturities of French or Foreign local administration 7,422 2,237 7,504
Fixed maturities at fair value through profit and loss (a) 2 6 16 24
Fixed maturities held by controlled investment funds (b) 16 1 5 22
Sub-total fixed maturities 30 65 190 285 Loans at amortized cost 3 7 14 24
Fixed maturities held by controlled investment funds (b) – 3 – 4
Loans designated at fair value through profit and loss (a) – – 3 3
Total invested financial assets exposed to interest rate risk 35 77 218 330
Net carrying amount by maturity as at December 31, 2005 12 months More than 1 year More than Total net or less up to 5 years 5 years carrying value
Fixed maturities at fair value through profit and loss (a) 3 15 8 26
Fixed maturities held by controlled investment funds (b) – 16 3 19
Total invested financial assets exposed to interest rate risk 15 80 164 259
Fixed maturities at fair value through profit and loss (a) 2 7 15 25
Loans at fair value through profit and loss (a) – – – –
Total invested financial assets exposed to interest rate risk 13 69 151 233
(a) Corresponds to financial assets held for trading purposes and financial assets recognized at fair value through profit and loss. (b) Recognized at fair value through profit and loss.
Equity securities at fair value through profit and loss 4,224 2,735 282
After excluding the effect of derivatives (detailed in section 19.3) and securities in real estate companies, the breakdown by industry sector of equities owned across the whole Group is as follows: Finance Consumer Energy
Equity securities at fair value through profit and loss 3,383 3,530 144
Equity securities at fair value through profit and loss 2,892 3,544 139
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 and €800 million held by controlled investment funds.
Non controlled investment funds trading mainly holding equity securities 80 33 113
Non controlled investment funds mainly holding equity securities 2,140 205 2,345 Non controlled investment funds available for sale mainly holding fixed maturities 1,480 1,438 – – 1,480 1,438
Non controlled investment funds mainly as at fair value through profit and loss mainly holding fixed maturities 46 – 46
Non controlled investment funds mainly holding fixed maturities 1,527 – 1,527 Other non controlled investment funds available for sale 1,680 1,535 208 208 1,888 1,743
Other non controlled investment funds held for trading – – –
Non-controlled investment funds broke down as follows: Winterthur’s contribution to the increase in non-controlled investment funds was €924 million at fair value and €859 million at amortized cost.
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
Non quoted fixed maturities (amortized cost) 11 – 11 – 11
(a) Asset value including impact of discounts/premiums and interest accrued but not yet due, but before impairment and revaluation to fair value of assets available for sale. (b) Asset value including impairment, discounts/premiums, interest accrued but not yet due, but before revaluation to fair value of assets available for sale. (c) Including policy loans.
January 1, 2006 Increase for Write back Write back Other (a) December 31, the period following sale or following recovery 2006 reimbursement in value
January 1, 2005 Increase for Write back Write back Other (a) December 31, the period following sale or following recovery 2005 reimbursement in value
January 1, 2004 Increase for Write back Write back Other (a) December 31, the period following sale or following recovery 2004 reimbursement in value
Amounts presented exclude the impact of all derivatives (set out in note 19.3) and equityaccounted investment funds. Equity-accounted investment funds represented assets of €1,294 million at December 31, 2006
Fair value Fair value TOTAL Fair value Fair value TOTAL Fair value Fair value TOTAL
determined estimated determined estimated determined estimated directly by using directly by using directly by using reference to an technical reference to an technical reference to an technical active market valuation active market valuation active market valuation
– €1,416 million of cash and equivalents held by controlled investment funds in the “Satellite Investment Portfolio” (defined in section 1.7.2 of note 1).
€18,293 million of the increase in investments was attributable to Winterthur, including €78 million with respect to investment properties, €1,971 with respect to bonds, €15,187 million with respect to equities and non controlled investment funds and €1,056 million with respect to other investments.
As described in note 4 (Management of financial and insurance risks), the financial risk associated with these contracts is borne by policyholders, except in certain contracts that offer income guarantees.
January 1st, Acquisitions & Contribution Currency Other December 31, disposals to net income translation changes (a)
Banque de marchés et d’arbitrage 11 – – – (4) 7
Winterthur Life (Hong Kong) Ltd – 1 – – – 1
Banque de marchés et d’arbitrage 9 – 2 – – 11
Hilo Direct SA de Seguros y Reaseguros – – – – – –
– The liquidation of AXA Insurance Investment Holding in Hong Kong (€–41 million).
In 2004, “Other changes” included: – The exit of two Australian entities
(€–26 million). – A change in consolidation method (following a buyout of minorities) for Direct Seguros, which is now fully consolidated (€–21 million).
In the years ended December 31, 2006, 2005 and 2004, AXA received cash dividends from equity-accounted companies totaling €4.4 million, €20 million and €27 million respectively.
This excludes equity-accounted investment funds and real estate companies, which are presented under financial investments.
Credit risk exposure, mainly relating to receivables from reinsurers, is covered in Note 4 (Management of financial and insurance risks).
Gross Impairment Carrying Fair Gross Impairment Carrying Fair Carrying Fair value value value value value value value value
This table excludes cash held by consolidated investment funds in the “Satellite Investment Portfolio”, as defined in section 1.7.2., and cash backing contracts where the financial risk is borne by policyholders (unit-linked contracts) detailed in note 9.10.
At December 31, 2006, the carrying value of treasury shares and related derivatives was €521 million, representing 1.41% of the share capital. This figure includes €43 million relating to AXA shares held by consolidated mutual funds (2.1 million shares) not used to back contracts where financial risk is borne by policyholders.
4,141,042 shares treasury shares backing contracts where financial risk is borne by policyholders held in controlled funds were not deducted from shareholders’ equity. Their total estimated historical cost was €121 million and their market value €127 million at end December 2006.
Subordinated perpetual debt is classified in shareholders’ equity at its historical value as regards interest rates and its closing value as regards exchange rates. The corresponding exchange differences are cancelled out through the translation reserve. The change in other reserves was due to a €3,794 million issue of deeply subordinated perpetual notes, €–160 million in interest expense on the deeply subordinated perpetual notes and the subordinated perpetual notes, and €–95 million in exchange differences. The deeply subordinated perpetual notes were issued to finance the acquisition of Winterthur, and comprise the following: – a triple tranche perpetual deeply subordinated notes placed on July 6, 2006 for a total amount of approximately €2.2 billion: i) €1 billion for the Euro perpetual non call ten years tranche (issued at a spread of 150 basis points over Euribor); ii) £500 million for the Sterling perpetual non call ten years tranche (issued at a spread of 150 basis points over Libor); iii) £350 million for the Sterling perpetual non call twenty years (issued at a spread of 175 basis points over Libor); – AXA also placed in October 2006 a triple tranche Australian perpetual deeply subordinated note issue for a total amount of AU$750 million (approximately €0.5 billion); – On December 11, 2006 AXA priced a two-tranche perpetual deeply subordinated note issue for a total amount of US$1.5 billion (approximately €1.1 billion): i) US$750 million for the US$ perpetual deeply subordinated non call twelve years tranche; ii) US$750 million for the US$ perpetual deeply subordinated non call thirty years tranche.
December 22, 2004 - 250 M€ rate CMS 10 years – in euro 250 250
Perpetual notes – variable 3.55% to 5% in JPY 27,000 172
Perpetual notes – variable 3.55% to 5% in USD 1,275 968
Sub-total Deeply Subordinated notes (“TSS”) – 2,544 Equity component of convertible debt 203 203
13.1.2. 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 (including an €–88 million reduction in nominal share capital).
– The buyback of AXA shares led to a net reduction of €–512 million (including a €–45 million reduction in nominal share capital).
– Other transactions (mainly bond conversions and capital gains on AXA shares) led to an increase of €46 million.
b) Treasury shares At December 31, 2005, the Company and its subsidiaries owned approximately 36 million AXA shares, an increase of €272 million with respect to December 31, 2004. The increase was mainly due to the purchase of €307 million AXA shares by AXA Financial following the exercise of call options contracted during 2004 to cover Axa Financial’s employee stock option plans.
At December 31, 2005, the carrying value of treasury shares and related derivatives was €658 million, representing 1.92% of outstanding ordinary shares. This figure included €37 million relating to AXA shares held by consolidated mutual funds (2.2 million shares) not used to back contracts where financial risk is borne by policyholders.
At December 31, 2005, perpetual debt recognized in shareholders’ equity broke down as follows: Value of Value of the perpetual the perpetual debt in currency debt in Euro million of issuance October 29, 2004 – 375 M€ rate CMS 10 years – in euro 375 375
December 22, 2004 – 250 M€ rate CMS 10 years – in euro 250 250
Sub-total Perpetual Deeply Subordinated notes (“TSDI”) 875 Perpetual notes – variable 3.55% to 5% in EUR 1,404 1,404
Perpetual notes – variable 3.55% to 5% in JPY 27,000 194
Perpetual notes – variable 3.55% to 5% in USD 1,275 1,081
d) Dividends paid Dividends paid by AXA totalled €1,164 million in 2005 in respect of the 2004 financial year, as approved by the shareholders meeting of 13.1.3. Change in shareholders’ equity group share in 2004 a) Share capital and capital in excess of nominal value In 2004, three types of capital increase were carried out: – Capital increases reserved for employees (July and December 2004) totalling €254 million (including a €43.1 million increase in nominal share capital); – Capital increases arising from the conversion of ORAN bonds (bonds redeemable in cash or shares) totalling €1,396 million (including a €252 million increase in nominal share capital); – Other capital increases arising from exercise of stock options totalling €11 million (including a €3 million increase in nominal share capital).
In 2004, AXA Financial bought purchase options on approximately 26 million AXA ADSs to improve the hedging of AXA Financial employees’ stock option plans. The option premium of €42 million (Euro value at December 31, 2004 of the premium paid and deducted from shareholders’ equity) was included in the value of treasury shares at the end of the period.
d) Dividends paid Dividends paid by AXA in 2004 with respect to the 2003 financial year totalled €676 million.
Value of Value of the perpetual the perpetual debt in currency debt in Euro million of issuance October 29, 2004 – 375 M€ rate CMS 10 years – in euro 375 375
Perpetual notes – variable 3.55% to 5% in USD 1,275 936
TOTAL – 3,876 c) Perpetual debt and related interest The change in other reserves was mainly due to a €625 million issue of deeply subordinated perpetual notes through the Euro Medium Term Notes (EMTN) program, and foreign exchange differences for the year of €–84 million.
The change in reserves relating to changes in fair value of assets in 2006, 2005 and 2004 broke down as follows: (in Euro million)
Minority interests share in unrealized gains and losses (c) (273) (220) (205)
Investments bought in the current accounting period and changes in value 206 2,638 1,735
13.3.1. Change in minority interests in 2006 The €180 million increase in minority interests to €2,943 million was mainly due to: – net income for the period (€673 million); – dividends paid to minority interests
13.3.2. Change in minority interests in 2005 The €452 million increase in minority interests to €2,763 million was mainly due to: – net income for the period (€488 million); – dividends paid to minority interests
(€–359 million); – change in translation reserves (€–230 million); – changes in the scope of consolidation
13.3.3. Change in minority interests in 2004 The €35 million decrease in minority interests in 2004 was mainly due to the buyout of minorities in AXA Re Finance from BNP Paribas (€–43 million).
Following the adoption of United Kingdom standard FRS 27, as described in note 1.12.2 “accounting principles”, at December 31, 2005, the impacts on the balance sheet and income statement were as follows: Balance sheet impacts: – deferred acquisition costs have been restated by €–708 million at December 31, 2005 and €–689 million at December 31, 2004; – liabilities arising from insurance contracts have been increased by: • €1,517 million in 2005, including €1,196 million in individual savings contracts, €6 million in group savings contracts and €315 million in life contracts; • €1,609 million in 2004, including €1,275 million in individual savings contracts, €4 million in group savings contracts and €329 million in life contracts; – liabilities arising from investment contracts with discretionary participating features were restated by: • €377 million in 2005, including €317 million in individual savings contracts and €60 million in group savings contracts; • €170 million in 2004, including €142 million in individual savings contracts and €28 million in group savings contracts; – liabilities arising from policyholder’s participation have been reduced by €–2,382 million in 2005 and €–2,253 million in 2004; – unearned revenues and unearned fee reserves have been reduced by €–109 million in 2005 and €–105 million in 2004; – deferred tax liabilities have been reduced by €–111 million in 2005 and €–109 million in 2004.
Impacts on the 2005 income statement (FRS 27 was applied as at December 31, 2004 and therefore had no impact on the 2004 income statement): – the change in unearned premium reserves net of unearned revenues and fees has been increased by €0.6 million; – technical charges relating to insurance activities have been reduced by €0.4 million; – acquisition costs have been restated by €0.8 million; – income tax has been decreased by €1 million. The overall impact on 2005 net income was therefore nil.
Liabilities arising from insurance contracts where the financial risk is borne by policyholders 108,984 – – 108,984 Of which measured at current market assumptions (c) 189 – – 189
Reinsurers’ share in future policy benefit reserves 4,217 – 11 4,228
Reinsurers’ share in claim reserves (a) 2 – – 2 of which IBNR – – – – Reinsurers’ share in other reserves – – – –
Reinsurers’ share in liabilities arising from insurance contracts where the financial risk is borne by policyholders 22 – – 22 Of which measured at current market assumptions (c) 10 – – 10
TOTAL LIABILITIES ARISING FROM INSURANCE CONTRACTS, NET OF REINSURANCE CEDED 369,513 43,896 6,848 420,257
NB: Excludes derivatives related to insurance and investment contracts, which are detailed in section 19.4. 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. (b) Notably includes non Life annuities mathematical reserves.
(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 in all periods presented. The effect of these adjustments is set out in note 14. (e) For the detail of P&C and international insurance IBNR, see note 20.2.4.
Liabilities arising from insurance contracts, including those where the financial risk is borne by policyholders, were split by segment as follows: Total liabilities arising from insurance contracts amounted to €432,216 million gross of reinsurance, including €78,440 million related to the acquisition of Winterthur. Net of reinsurance, the corresponding amounts were €420,257 million in total and €77,202 million for Winterthur.
– – – – – – – – – – – – – – –
The following table shows a segmental breakdown of liabilities arising from investment contracts, including those where the financial risk is borne by policyholders: Life & Savings International Total investment
Liabilities arising from investment contracts where the financial risk is borne by policyholders 67,129 543 67,673
Reinsurers’ share in liabilities arising from investment contracts with discretionary participating features 12 – 12 Of which measured at current market assumptions (b) – – – Reinsurers’ share in future policy benefit reserves – – –
Reinsurers’ share in liabilities arising from investment contracts with no discretionary participating features – – – Reinsurers’ share in future policy benefit reserves 9 – 9
TOTAL LIABILITIES ARISING FROM INVESTMENT CONTRACTS – NET OF REINSURANCE CEDED 100,829 543 101,372
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. (b) See note 1.11.2 - Reserves measured according to the option offered by IFRS 4.24 for selective re-measurement of reserves at current market assumptions. (c) As described in note 1.12.2, the adoption of FRS27 in the United Kingdom has led to adjustments in all periods presented. The effect of these adjustments is set out in note 14.
In Life & Savings, total liabilities arising from investment contracts amounted to €100,829 million net of reinsurance at December 31, 2006, including €14,669 million related to the acquisition of Winterthur.
For total insurance activities, these amounts were €101,372 million in total and €15,212 million for Winterthur after taking account of €543 million recognized by Winplan, a life insurance company in run-off which forms part of the international insurance segment.
Insurance liabilities relating to With-Profit insurance contracts excluding the FFA (Fund for Future Appropriation) amounted to €10,323 million at December 31, 2006.
14.3. Change in claim reserves for Property & Casualty and International Insurance (insurance contracts)
Claim reserves measured at current value as of January 1 – – – – – – – – –
Impact of foreign currency fluctuation (99) (530) (629) 324 622 946 (169) (415) (584) Claim reserves as at December 31 33,625 10,275 43,899 25,614 10,366 35,980 23,708 8,890 32,599
Claim reserves measured at current value as of December 31 – – – – – – – – –
(a) Excluding “other insurance liabilities” (mainly mathematical annuity reserves), which totaled €3 billion in 2004, €2.9 billion in 2005 and €3.4 billion in 2006 including 0.5 billion for Winterthur. (b) Excluding claim handling cost reserves.
In International Insurance, changes in the scope of consolidation in 2006 amounted to €1,239 million, mainly due to: i. The entry of Winterthur companies in the scope of consolidation (€612 million).
In Property & Casualty, changes in the scope of consolidation in 2005 amounted to €697 million, mainly due to: i. The change in consolidation method
iii. The entry of Daev Sach (Germany) in the scope of consolidation (€57 million).
Reinsurers’ share in claim payments (372) 1,014 642 (337) (832) (1,169) (667) (595) (1,262)
In Property & Casualty, changes in the scope of consolidation in 2006 amounted to €248 million, mainly due to: i. The entry of Winterthur companies in the scope of consolidation (€424 million). ii. €–169 million in Germany mainly due to transfer of the run-off portfolio to AXA Liabilities Managers (€–125 million) and the disposal of DARAG (€–43 million).
iii. In Canada, the entry of Citadel in the scope of consolidation (€24 million).
In Property & Casualty, changes in the scope of consolidation in 2005 amounted to €172 million, mainly due to: i. The change in consolidation method in
Turkey (€17 million), Hong Kong (€42 million) and Singapore (€20 million).
Impact of foreign currency fluctuation (c) (14,099) 624 (13,475) 15,293 1,868 17,162 (9,155) (513) (9,668)
(a) Interest credited, policyholder bonus, adjustments on contracts where the financial risk is borne by policyholders. (b) Internal AXA transfers. (c) As described in note 1.12.2 on accounting principles, the adoption of FRS 27 in the United Kingdom led to restatements in all the periods presented (see note 14 for details).
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).
In 2004, changes in the scope of consolidation mainly concerned the entry of MONY (United States) in the scope of consolidation (€13,300 million).
Insurance Investment Total Insurance Investment Total Insurance Investment Total contracts contracts contracts contracts contracts contracts
Reinsurers’ share in future policy benefit reserves as of January 1 3,720 21 3,741 3,391 – 3,391 3,097 – 3,097
Ceded technical income and other 69 1 70 91 1 92 49 – 49
Impact of foreign currency fluctuation (289) – (289) 356 – 356 (198) – (198)
Reinsurers’ share in future policy benefit reserves as of December 31 4,237 20 4,258 3,720 21 3,741 3,391 – 3,391
In 2006, changes in the scope of consolidation (€694 million) mainly comprised the entry of Winterthur (€687 million).
(Non Unit-Linked) – Liabilities arising from: Investment contracts with Discretionnary Participation Features (DPF) measured according to existing accounting
Investment contracts with Discretionnary Participation Features (DPF) – measured with current assumptions (b) – – –
Investment contract with no Discretionnary Participation Features (DPF) measured at amortized cost 510 219 140
Features in investment contracts with Discretionnary Participation Features (DPF) measured with current assumptions (b) – – –
Investment contract with no Discretionnary Participation Features (DPF) measured at current unit value (d) 56,665 38,836 30,691
(b) See note 1.12.2. – Reserves measured according to IFRS 4.24 option which allows to evaluate certain portfolios with current assumptions. (c) & (d) As unit-linked contracts, they share the same reserves measurement determined on the basis of held assets units fair value (“current unit value”). Only the valuation of related assets is different: – for unit-linked contracts with a discretionary participating feature (c), an asset representing the deferred acquisition costs is recognized in continuity with French GAAP; – for unit linked contracts with no discretionary participating feature (d), an asset representing the rights to future management fees is recognized in accordance with IAS 18
At December 31, 2006, financial liabilities arising from investment contracts including reinsurance for all insurance activities amounted to €101,393 million, including €15,212 million related to the acquisition of Winterthur.
The loss reserve development table shows movements in loss reserves between 1996 and 2006, 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 claim expenses developed in 2006 adjusted for changes in exchange rates and scope of consolidation” indicates the amount that would have been developed initially at the booking date had the exchange rates for the current year been used (for reserves recognized by AXA Group entities that do not use the Euro as their functional currency) and assuming an identical scope of consolidation to that used for the last diagonal of the table.
the 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.
However, with effect from the development of loss reserves at end 2006, the company uses the method which consists in completing each column of the table using the same scope as that used for "Gross reserves for unpaid claims and claim expenses developed initially at the booking date". In practice, therefore, with effect from the 2006 column, the differences between the first and second rows are mainly due to exchange rate impacts and only marginally to changes in scope of consolidation.
Also with effect from end 2006, IBNR reserves related to construction insurance in France have been included in the loss reserve development for the first time, and the development of all annuity reserves for the Property & Casualty segment are presented separately.
Gross reserves for unpaid claims and claim expenses developed initially at
Reserve re-estimated at: One year later 5,537 19,425 19,040 23,041 27,069 27,425 26,856 27,527 29,179 29,878
(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 claim reserves and claim 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.
Gross reserves for unpaid claims and claim expenses developed initially at the booking date (a) 2,646 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 claim reserves 2,450 2,595 2,644 2,966 3,060 4,216 3,758 3,281 2,812 3,205
Cumulative redundancy (deficiency) from the initial gross claim reserves in excess of (less than) re-estimated
(b) Represents premium earned subsequent to the accounting year end and premium reinstatements / experience-rated premiums received and accrued from the ceding insurers as assumed losses were incurred. (c) In 2001, AXA RE’s claim reserves were adversely affected by the September 11 attacks. (d) In 2004, AXA Corporate Solution Assurance US, AXA RE P&C Insurance Company and AXA RE P&C Reinsurance were transferred from AXA RE to the “other international activities”. The reserves of AXA Corporate
TOTAL GROSS CLAIM RESERVES 2006 2005 2004 Gross claims and other reserves developed Property & Casualty and International Insurance (excluding AXA RE) (a) 41,193 31,168 29,128
Future policy benefits annuity reserves (separately developed from 2006) 2,492 – –
(b) Mainly reserves on acceptations (€771 million in 2006, €938 million in 2005 and €975 million in 2004).
– Employers Liability insurance in Europe: this created exposure to asbestos-related claims, in particular on the UK market.
There is considerable uncertainty as to the future cost of A&E claims. The ultimate cost of claims is very much dependent on legal factors that are difficult to predict with any certainty. There have been in the past, and continue to be, frequent occurrences of inconsistent court decisions and judicial interpretations regarding the extent of liability and the level of damages awarded.
Reserves for losses and loss expenses at end of year (at constant scope) 1,091 1,046 1,046 966 Change in scope (Integration of Winterthur) 85 77
At constant scope and on a net of reinsurance basis, AXA paid claims and legal costs of €126 million in 2006 (including €98 million in respect of asbestos and €28 million in respect of environmental pollution). This is significantly higher than in prior years because several large commutations were made during the year, in line with AXA’s strategy to reduce the volatility associated with this type of exposure. Those commutations also explain the material decrease in the amount of reported losses.
During the year, and on a constant scope basis, AXA incurred losses and loss expenses of €211 million net of reinsurance (respectively €224 million in respect of asbestos and €–13 million in respect of environmental pollution). This is primarily due to a higher-thananticipated number of losses reported in respect of asbestos-related exposures in the United
Gross Net Gross Net of reinsurance of reinsurance of reinsurance of reinsurance EVOLUTION OF RESERVES – POLLUTION Reserves for losses and loss expenses at beginning of year 152 134 146 121
Reserves for losses and loss expenses at end of year (at constant scope) 93 83 152 134 Change in scope (Integration of Winterthur) 9 9
Cumulative Payments to date / Projected Ultimate Cost 66% 61% 53% 47%
(a) Average yearly payments over the last 3 years (excluding commutations) / Reserves at the end of the year.
Fund for Future Appropriation (FFA) – UK With Profits contracts (a) 4,668 4,529 2,761
Liabilities arising from policyholders’ participation for all insurance activities amounted to €24,918 million including €4,365 million related to the acquisition of Winterthur.
14.9. Payment and surrender projections and components of insurance contract liabilities
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 financial risk is borne by policyholders. These liabilities are not exposed to interest-rate or duration risk, except unit-linked 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.
EXPECTED PAYMENTS BY PERIODS 2006 12 months More than 1 year More than TOTAL
or less up to 5 years 5 years Liabilities arising from insurance and invesment contracts 19,845 76,988 409,458 506,291 of which Life & Savings liabilities relating to contracts including a surrender option with some surrender benefit
The figures shown in the first row represent estimated cash flows for death, incapacity and disability claims, surrenders, annuities, minimum guaranteed benefits for unit-linked contracts, Property & Casualty and Health claims, net of premiums due from policyholders under contracts in-force. These cash flows are based on assumptions regarding mortality, incapacity and disability, surrender and settlement frequency for Property & Casualty, which are consistent with past experience in the Group’s business. They are gross of reinsurance. Given the strong use of estimates, it is likely that actual payments will differ.
In Property & Casualty business, most reserves (95%) are not discounted, except for incapacity and disability contracts and annuity motor mathematical reserves, where the discount rate is revised regularly.
Carrying Average Carrying Average Carrying Average value discount value discount value discount rate % rate % rate %
Life & Savings – locked-in discount rate (a) 235,220 3.00% 193,557 3.40% 179,722 3.52%
Life & Savings – unlocked discount rate 43,410 3.31% 30,615 3.17% 29,119 3.33%
Sub-total Life & Savings 299,089 232,148 216,494 Discounted reserves – locked-in discount rate (a) 2,172 4.16% 2,082 3.57% 1,468 4.50%
Discounted reserves – unlocked discount rate 753 2.13% 844 2.17% 845 2.31%
– many of the features themselves would qualify as insurance contracts under phase I.
Guaranteed annuity purchase rates provide contract-holders with a guarantee that at a future date the accumulated balance on their contract will be sufficient to purchase a lifetime annuity at currently defined rates. The risk to AXA in these features is either that longevity will improve significantly so that contract-holders electing to exercise this benefit will live longer than assumed in the guaranteed purchase rates, or that investment returns during the payout period will be lower than assumed in the guaranteed purchase rates. Reserves are established for these features on the basis of actuarial assumptions related to projected benefits and related contract charges. The determination of this estimated liability is based on models which involved numerous estimates and subjective judgments, including those regarding expected rates of return and volatility, contract surrender rate, mortality, and benefit election rates. There can be no assurance that ultimate experience will not differ from management’s estimates. In addition to providing for risk through establishing reserves, AXA also manages these risks through assetliability management programs including interest rate floors to protect against a decline in interest rates.
Note 15: Provisions for risks and charges 15.1. Breakdown of provisions for risks and charges
Provisions for risks and charges carried by Winterthur subsidiaries amounted to €1,125 million at end December 2006.
15.2. Change in provisions for risks and charges (excluding employee benefits and share-based compensation)
Write back after final cost review (5) (16) – – (72) (93)
Impact of foreign exchance fluctuations (9) – – – (5) (14)
Litigation provisions totaled €217 million (including €57 million for Winterthur group subsidiaries and notably €34 million in Belgium), mainly comprising €50 million in France, €47 million at AXA Bank Belgium and €25 million at Compagnie Financière de Paris.
Liability warranty provisions totaled €39 million and mainly relate to Winterthur and disposals made by the Group in the past few years (€32 million carried by AXA LM Switzerland).
provisions contingency warranty liabilities relating for risks and provisions provisions to business charges combinations
Debt component of subordinated convertible notes due 2014 (euro) 1,660 1,608 1,558
Debt component of subordinated convertible notes, 3.75% due 2017 (euro) 1,168 1,127 1,089
U.S. registered redeemable subordinated debt, 7.125% 2020 (GBP) 484 474 461
U.S. registered redeemable subordinated debt, 6.75% 2020 (euro) 1,062 1,062 1,070
Euro Medium Term Notes, 6.0% due through 2013, and BMTN 971 1,041 1,183
Other financing debt instruments issued (less than €100 million) (81) (2) 30 Other financing debts instruments issued under €100 million 11 11 32
Derivatives relating to other debts instruments issued (a) (92) (14) (1)
Following publication of the IFRIC update by the IFRIC Agenda Committee in November 2006 based on the IASB’s comments, subordinated perpetual notes and related interest have been reclassified as shareholders’ equity and are therefore treated in the same way as the deeply subordinated notes. These notes issued by the Group are described in detail in Note 13.
Financing debt excluding perpetual debt classified as shareholders’ equity increased by €1,441 million, or by 1,711 million at constant exchange rates. Movements in exchange rates therefore had a positive impact of €270 million, mainly on AXA SA redeemable subordinated notes denominated in foreign currency and AXA Financial senior bonds. The overall increase was mainly due to: i. a €609 million increase in subordinated debt
(including derivative instruments) at constant exchange rates arising mainly from the decrease in market value of interest rate swaps following the rise in variable rates in the Euro zone; ii. a €1,023 million increase in financing debt securities at constant exchange rates arising mainly from AXA SA purchase of commercial paper (€1,350 million), partially offset by AXA Equitable early redemption of all its Closed-Block Mony debt and related derivatives (€254 million and €15 million respectively); iii. a €79 million increase in financing debt owed to credit institutions at constant exchange rates mainly arising from the consolidation of Winterthur (€85 million including €75 million for Winterthur Leven NV in the Netherlands and €10 million for Winterthur Life in Switzerland).
Financing debts owed to credit institutions at cost 95 95 17 17 17 17
(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, subordinated perpetual notes have been reclassified in equity for all periods presented. See Note 13 for further details.
The Group does not hold any financing debt designated as at fair value through profit & loss (fair value option or trading instruments).
The fair value of subordinated convertible bonds is equal to the quoted price for these instruments at the end of the period. Therefore, reported fair value includes the value of the conversion option, which is included as a component of equity.
Excludes the impact of derivatives (detailed in section 19.4). (a) As described in note 1.11.2, subordinated perpetual notes have been reclassified in equity for all periods presented. See Note 13 for further details.
Carrying value by contractual maturity Total 12 months More than 1 year More than carrying or less up to 5 years 5 years (a) value
– Buyouts of minority interests for which the Group holds an unconditional commitment and changes in value of related puttable instruments. Entries balancing these movements are recorded under goodwill.
Other payables, excluding Winterthur’s contribution (€1,575 million), totaled €15,399 million at December 31, 2006.
17.2.1. Other debt instruments issued, notes and bank overdrafts (other than financing debt) by issuance
AXA SA debts subscribed on behalf of French, English and German subsidiaries 150 186 215
Other financial services in France – 35 257 Fonds Immobilier Paris Office Funds (FIPOF) – – 60
Derivatives on other debt instruments issued (other than financing debt) – Other financial services – – –
HOHO 1: class B Mezzanine Class B Subordinated mortgage-backed notes, maturity 2030, 7%, Fixed rated 13 – –
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 B Mezzanine Class B Mortgage-backed notes, maturity 2080, 5,04%, Fixed rated 18 – –
HOHO 2: class C Junior Class C Mortgage-backed notes, maturity 2080, 5.64%, Fixed rated 7 – –
HOHO 3: class B Mezzanine Class B Subordinated mortgage-backed notes, maturity 2083, 3 months Euribor + 0.19%, Floating 19 – –
HOHO 3: class C Junior Class C Subordinated Mortgage-backed notes, maturity 2083, 3 months Euribor + 0.29%, Floating 9 – –
HOHO 4: class A Senior Class A Mortgage-backed Floating rate notes, maturity 2083, 3 months Euribor + 0.03%, Floating 1,492 – –
OTHER DEBT INSTRUMENTS ISSUED (OTHER THAN FINANCING DEBT) 4,715 2,233 2,196
Other financial services in Belgium 1,026 4,563 4,128 AXA Bank Belgium 1,026 4,563 4,128
ERIV: CORTEFIEL Mortgage loan based on Euribor 3 month + 0.85 point, maturity date: 2013 + 2x1 year 165 – –
OTHER DEBT (OTHER THAN FINANCING DEBT) – OWED TO CREDIT INSTITUTIONS 2,658 5,415 4,924
OTHER DEBT INSTRUMENTS ISSUED, NOTES (OTHER THAN FINANCING DEBT) AND BANK OVERDRAFTS 8,711 8,411 7,784
AXA SA’s collateral agreements. – First-time consolidation of real estate company European Retail Income Venture (€380 million), a €59 million increase in European Office Income Venture’s debt and a €214 million increase in Vendome Commerce’s debt.
– AllianceBernstein’s purchase of commercial paper (€284 million at constant exchange rates and €254 million at closing rates).
The fair value of other debt instruments issued and bank overdrafts (other than financing debt), excluding Winterthur’s contribution (€3,058 million) was €5,654 million at December 31, 2006. Including Winterthur, the fair value was therefore €8,712 million, which is very close to the carrying value. Among the issues included in the table above, fair value is only calculated for other debt instruments issued. Other items mainly comprise repo agreements or short-term interbank liabilities carried by group banks. By nature, their fair value is very similar to their nominal value.
Debt instruments issued 4,715 2,410 2,196 Debt owed to credit institutions held at cost 2,535 5,112 4,924
Debt owed to credit institutions designated as at fair value through profit & loss 126 127 –
Debt owed to credit institutions (other than financing debt) (a) 126 – 126 129 – 129 – – –
17.4. Payables arising from direct insurance, inward reinsurance operations and direct outward reinsurance operations
Carrying Fair Carrying Fair Carrying Fair value value value value value value
Current accounts payable to other companies 1,223 1,223 771 771 564 564
Premiums to be transferred – reinsurance pools (16) (16) – – – –
Other debt instruments issued, notes and bank overdrafts 3,526 795 4,394 8,714
Other debt instruments issued, notes and bank overdrafts 4,932 965 1,886 7,783
Note 18: Tax 18.1. Tax expense 18.1.1. Breakdown of tax expense between current and deferred tax The income tax charge was split as follows: (in Euro million)
TOTAL INCOME TAX FROM CONTINUED OPERATIONS 2,043 1,490 1,844 Income tax from discontinued operations (current) – – –
(b) This line shows the tax effect of reclassifying in equity items such as interest expense on perpetual deeply subordinated notes and any unrealized foreign exchange differences on perpetual debt.
Net income, gross of tax expense and before equity in income from affiliated companies (a) 7,767 6,275 6,056
Notional tax charge 2,674 2,192 2,146 Impact of rate differences on notional tax charge (77) (117) (149)
Impact of change in tax rates (87) 175 (132) Impact of tax losses used but not recorded in the previous year (51) (32) (12)
Tax losses generated in the year but not recognized 18 11 35
From 2006: (a) Income before tax expense and equity in income from affiliated companies is shown before the contribution from equity-accounted companies. (b) Impairment of DTA arising on tax losses is shown in “Tax losses impact”. The 2005 and 2004 figures are presented in a similar way for comparability. (c) In 2006, the elimination of non-taxable dividends from consolidated companies is shown in “Permanent differences on financial income and expenses”.
The applicable tax rate broke down as follows: (in Euro million)
Net income, Notional tax Net income, Notional tax Net income, Notional tax gross of tax rate gross of tax rate gross of tax rate expense and expense and expense and before equity before equity before equity in income in income in income from affiliated from affiliated from affiliated companies (b) companies (b) companies (b)
From 2006: (a) Tax on holding companies based in France is presented under France. (b) Income before tax expense and equity in income from affiliated companies is shown before the contribution from equity-accounted companies. The 2005 and 2004 figures are presented in a similar way for comparability.
Net deferred tax balances broke down as follows: (in Euro million)
Deferred tax Deferred tax Net deferred Net deferred Net deferred assets liaiblities tax position tax position tax position Deferred tax Assets/(Liabilities) concerning: – Deferred tax through profit & loss 7,320 8,258 (939) (380) (316)
– Deferred tax through reserves relating to the revaluation of tangible assets – 1 (1) (1) –
– Deferred tax through reserves in relation to stock options 143 1 142 87 –
Opening Movements Movements Forex impact Change Closing through through OCI in scope and profit & loss other variations
Deferred tax through profit & loss (380) 194 – 56 (808) (939)
Deferred tax through reserves relating to the fair value adjustment of CFH derivatives (65) – 16 – 21 (28)
Deferred tax through reserves relating to gains and losses on defined benefits pension plans 369 – (129) (5) (12) 224
TOTAL recognized DTA by expected date of DTA use 1,933 436 395 Corresponding carryforward losses 876 188 171
Deferred tax through reserves relating to the fair value adjustment of CFH derivatives (55) (1) (10) – – (65)
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)
Policyhoder tax – Net deferred tax assets/ (liabilities) (582) (396) (3) (18) (146) (1,033)
Total net deferred tax assets / (liabilities) (3,056) (198) (32) (136) (270) (3,580)
TOTAL unrecognized DTA by latest date of DTA use 4 2 82 Corresponding carryforward losses – 7 363
Forecast reversal schedule for unrecognized deferred tax assets and expiration date:
This note does not include 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. However, it includes all other types of derivative instrument.
Maturity of notional amount as at December 31, 2006 (a) Notional amount < 1 year 1 to 2 years 2 to 3 years 3 to 4 years 4 to 5 years > 5 years December 31, December 31, December 31,
N.B.: €4,272 million of notional value on credit derivatives correspond to consolidated CDOs.
Positive fair value Negative fair value Net fair value Change in December 31, December 31, December 31, December 31, December 31, December 31, December 31, December 31, December 31, fair value
used in fair value used in a cash flow used in hedge other derivative instruments hedging relationship hedging relationship of net investment in not qualifying under IAS 39 a foreign operation but generally used as economic hedges
Calls sold – – – – – – 11 – 11 –
NB: This table includes all derivatives (assets and liabilities), i.e hedging, macrohedging and other, asset and liability positions.
Notional Fair value Notional Fair value Notional Fair value Notional Fair value Notional Fair value amount amount amount amount amount
NB : This table includes all derivatives (assets and liabilities), i.e hedging, macrohedging and other, asset and liability positions.
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 the derivative instruments. The AXA Group’s exposure is represented by the market value of the derivative contract at a given point in time.
The risk management and associated economic hedging strategies are defined and managed by AXA’s local operations in line with accounting regulations. Such economic hedging strategies include (i) managing interest-rate exposures on fixed maturity investments, long-term debt and guaranteed interest rates on insurance contracts, (ii) managing foreign-currency exposures on foreign-currency denominated investments and liabilities, and (iii) managing liquidity positions (including the ability to pay benefits and claims when due) in connection with asset-liability management and local regulatory requirements for insurance and banking operations.
As at December 31, 2006 and based on notional amounts, (i) 47% of the derivative instruments used consisted in swap contracts (52% and 55% respectively in 2005 and 2004), (ii) 29% were option products (mainly caps, floors and collars) (33% and 30% respectively at end December 2005 and 2004), (iii) 19% were futures and forwards (mainly other than foreign currency products) versus 10% and 14% respectively at end 2005 and 2004, and (iv) 4% were credit derivatives, compared to 5% and 1% respectively at end 2005 and 2004. Credit derivatives are an alternative option to investing in fixed maturities issued by private sector companies.
a. Swaps Swap contracts are agreements between two parties to exchange one set of cash flows for another. Payments are made on the basis of the swap’s notional value.
At December 31, 2006, interest-rate swaps accounted for 61% of all swaps used by AXA (versus 72% and 74% respectively at end 2005 and 2004). They are used mainly by (i) the Company to limit its interest-rate exposure on debt issued or amounts borrowed (notional value of €39,602 million compared to €31,612 million and €24,210 million respectively at end 2005 and 2004), (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 €11,864 million versus €28,283 and €40,330 million respectively at end 2005 and 2004, 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 €4,202 million versus €7,402 million and €577 million respectively at end 2005 and 2004) 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 at AXA Japan was mainly due to the sale of directly held Euro-zone bonds, the proceeds of which were reinvested in Japanese bonds.
As at December 31, 2006, 86% of the total notional amount of swaps did not qualify for hedge accounting under IAS 39 (81% at end 2005), and included €49,776 million for the Company (€38,566 million at end 2005) and €16,728 million for AXA Bank Belgium (versus €27,826 million at end 2005) which, as part of its business, uses mainly Euro-denominated forward rate agreements and interest-rate swaps that generate short-term profits.
The notional amounts of swaps used in cash flow hedge relationships totaled €1,230 million (€1,050 million at end 2005), including €521 million of interest-rate swaps in Belgium (Life & Savings business), €351 million in Germany (Life & Savings business) mainly in CDO investments, and €266 million of interestrate swaps at the Australian holding company.
b. Options The options portfolio consists mainly of caps and floors. Interest rate caps and floors are option-like agreements where the seller agrees to pay the counterparty an amount equal to the difference, based on a notional amount, between the interest rate of the specified index and the interest rate cap or floor. These products are used to hedge against interest rate increases (caps) or decreases (floor).
The notional amount of these instruments as at December 31, 2006 was €49,690 million (€62,952 million and €52,538 million respectively in 2005 and 2004), the decrease being mainly attributable to France, where some hedges matured at end 2006 and were not replaced immediately. They represented 72% of the total notional amount of all options (93% and 92% respectively at end 2005 and 2004). Their fair value was €–184 million (€–226 million in 2005 and €–232 million in 2004).
On a consolidated basis, the notional amount of futures and forwards as at December 31, 2006 was €46,124 million (€21,211 million in 2005 and €27,113 million in 2004) including €20,205 million for the Winterthur entities. Their market value was €–927 million (€–548 million in 2005 and €–256 million in 2004) including €–63 million for the Winterthur entities.
Currency futures and forward contracts accounted for 81% of these instruments (based on notional amounts at December 31, 2006), compared to 80% at end 2005 and 53% at end 2004.
Winterthur’s Swiss entities held futures for a total notional amount of €19,642 million, including €3,653 million designated as fair value hedges under IAS 39 to hedge equity securities in currencies other than the Swiss franc, €2,214 million designated as hedges of a net investment in foreign operations, and €13,775 million that do not qualify for hedge accounting under IAS 39.
As a result, 86% of the notional value of futures and forwards at end 2006 were used in hedging relationships that do not qualify for hedge accounting under IAS 39 (96% and 92% respectively at end 2005 and 2004).
2004 respectively) and their fair value was €45 million (€–12 million and €37 million respectively in 2005 and 2004). Credit derivatives are mainly used in CDOs (€4,272 million at end 2006 versus €4,612 million at end 2005 and €1,568 million at end 2004) to build their collateral portfolio, and by AXA Japan (€4,676 million at end 2006 versus €4,623 million at end 2005 and €757 million at end 2004). AXA Japan mainly uses credit default swaps (CDSs) on highly rated bonds to enhance the returns on its portfolio, a simple alternative to investing directly in corporate bonds.
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 controlled investment funds at fair value through profit & loss 2,321 13 (15) 2,319
Insurance Net value Impact of Impact of Net value excluding derivative other derivative including effect of instruments instruments (c) effect of hedging subject to hedge derivatives (d)
Non controlled investment funds held for tradings 195 – – 195
Loans at fair value through profit and loss 125 – – 125
(a) Net book value, i.e net of impairment, discount premiums and related amortization, including interest accrued but not yet due, but excluding any impact of derivatives. (b) Excluding macrohedge and other derivatives, i.e. excluding economic hedges that do not qualify for hedge accounting under IAS 39, macro-hedging and other derivatives. (c) Macrohedge and other derivatives. (d) Net book value (see (a)), but including effect of hedging instruments (IAS 39), economic hedging instruments not acting as hedging under IAS 39, macrohedge and other derivatives. (e) Notably includes policy loans, lease receivables and other loans. (f) Other investments held through consolidated investment funds at fair value through profit and loss.
Net value Impact of Impact of Net value Net value Impact of Impact of Net value excluding derivative other derivative including excluding derivative other derivative including effect of instruments instruments (c) effect of effect of instruments instruments (c) effect of hedging subject to hedge derivatives (d) hedging subject to hedge derivatives (d)
The impact of derivative instruments is presented in the balance sheet within their related underlying financial liabilities (and assets, see section 19.3.). The tables below set out the impact of derivative instruments on the related underlying liabilities.
Net carrying Impact Impact Value including value excluding of derivative of other effect of effect of instruments derivative derivatives hedging value subject to instruments hedge accounting
Liabilities arising from insurance contracts where the financial risk is borne by policyholders 108,984 – – 108,984
Total liabilities arising from insurance contracts 432,216 (21) (67) 432,128 Liabilities arising from investment contracts with discretionary participating
Value before Impact Impact Value including effect of of derivative of other effect of derivative instruments derivative derivatives instruments subject to instruments hedge accounting
Minority interest of controlled investment funds and puttable instruments held by minority interests holders 7,224 – – 7,224
Payables arising from direct insurance and inward reinsurance operations 7,947 – – 7,947
Derivative instruments hedging net investment in a foreign operation (liabilities) (d) – – – –
(a) As described in note 1.11.2 on accounting principles, reclassification of deeply perpetual subordinated notes to shareholders’ equity led to restatements in all the periods presented (see note 13 for details). (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 showin in the column “value including effect of derivatives” is their net book value.
Net carrying Impact Impact Value including Net carrying Impact Impact Value including value excluding of derivative of other effect of value excluding of derivative of other effect of effect of instruments derivative derivatives effect of instruments derivative derivatives hedging value subject to instruments hedging value subject to instruments hedge accounting hedge accounting 5 –
Total net value of derivative instruments – assets (1) Derivatives on insurance & investment contracts (hedge accounting) (21) –
Derivative instruments relating to financing debt, operating debt and other financial liabilities 17 (707)
(a) Other derivatives instruments that do not qualify for hedge accounting according to IAS39. (b) Including speculative derivatives, if any, relating to financing debt and other financial liabilities.
determined directly estimated by reference to using valuation an active market technique
Note 20 : Revenues by segment and net revenues from banking activities 20.1. Total Revenues (in Euro million)
Asset backing contracts with financial risk borne by policyholders (unit-linked) (a) 18,793 108,984 67,129 13,216 92,888 48,549 7,696 73,578 39,127
At December 31, 2006, liabilities arising from insurance and investment contracts amounted to €374,353 million and €100,849 million respectively.
Excluding Winterthur’s contribution (€68,462 million and €14,669 million respectively), these liabilities totaled €305,892 million and €86,181 million respectively versus €292,737 million and €82,742 million at end 2005.
At December 31, 2006, liabilities arising from property & casualty insurance contracts amounted to €46,102 million.
Excluding Winterthur’s contribution (€9,359 million), these liabilities totaled €36,744 million versus €35,998 million at end 2005 and €33,525 million at end 2004.
At December 31, 2006, liabilities arising from international insurance contracts amounted to
Excluding Winterthur’s contribution (€1,163 million), these liabilities totaled €11,141 million versus €11,870 million at end 2005 and €10.356 million at end 2004.
reserves expense Claim reserves premium Technical reserves including IBNR reserves & Liabilities and expenses others Personal lines
Claims IBNR Claim TOTAL Unearned TOTAL TOTAL reserves expense Claim reserves premium Technical Technical reserves including IBNR reserves & Liabilities Liabilities and expenses others
Investment property at fair value through profit & loss 278 336 384 – 998
Fixed maturities designated at fair value through profit & loss (a) 2,077 195 (1,319) – 952
Equity securities designated at fair value through profit & loss (b) 639 1,072 869 – 2,580
Other assets held by consolidated investment funds designated at fair value through profit & loss 208 (7) 16 – 217 Loans held to maturity – – – – –
Loans designated at fair value through profit & loss – – (166) – (166)
Investment property at fair value through profit & loss 283 99 375 – 757
Other assets held by consolidated investment funds designated at fair value through profit & loss 141 (1) 93 – 234 Loans held to maturity – – – – –
Loans designated at fair value through profit & loss (3) – 75 – 72
Net investment Net realized Change in fair value Change in Net investment income investment gains of financial financial result and losses instruments at instruments fair value through impairment profit & loss
Investment property at fair value through profit & loss 255 106 403 – 764
Non controlled investment funds available for sale 63 189 – (13) 239
Other assets held by consolidated investment funds designated at fair value through profit & loss – – 1 – 1 Loans held to maturity – – – – –
Loans designated at fair value through profit & loss – – (49) – (49)
The change in financial instruments impairment includes all additional impairment reserves on investments, and releases of impairment reserves only following revaluation. Releases of impairment reserves following disposals are included in net realized capital gains or losses on investments.
Casualty Insurance eliminations Premiums ceded and reinsurer’s share in claims paid (944) (986) (1,122) 146 (2,907)
Claims ceded (included change in claim reserves) 864 312 1,273 (13) 2,436
Claims ceded (included change in claim reserves) 746 203 667 (212) 1,405
Write back of depreciation for tangible assets (7) (11) – (17)
(a) Including redundancies and early retirement costs (triggering event = set up of the plan), and employees’ profit sharing in France.
The assumptions used for 2005 and 2004 were as follows: DECEMBER 2005 ASSUMPTIONS Europe North America Japan Other Pension benefit obligation – assumptions at end 2005
25.2.4. Balance sheet information The balance sheet information for employee benefits captures the difference between the projected benefit obligation (PBO), the market value of the corresponding invested plan assets, and any unrecognized prior 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 PBO. 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. The most significant part of the separate assets relates to the United States pension plans, whose funds are largely invested in separate account (unit-linked) insurance contracts written by AXA Equitable. 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.
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 prior service cost represents nonvested 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 at December 31, 2006. The acquisition of Winterthur took place at 2006 year-end and, accordingly, only had an impact on data relating to acquisitions and on end-of-year balances.
Fair value of plan assets, beginning of the year 4,693 3,869 3,619 14 9 8 Actual return on plan assets 395 689 346 (4) 3 –
Fair value of plan assets at the end of the year (B) 8,216 4,693 3,869 9 14 9 Change in separate assets
Fair value of plan assets, beginning of the year 2,697 2,265 2,195 – – – Actual return on plan assets 221 206 208 – – –
Net transfer In (out) (including acquisitions) (85) (82) 3 – – –
Fair value of separate assets at the end of the year 2,480 2,697 2,265 – – – Funded status
Underfunded status (plan by plan) (6,530) (6,729) (5,707) (595) (703) (572) Overfunded status (plan by plan) 12 1 3 – – –
Plans with a positive net position (Asset) 11 1 3 – – – Plans with a negative net position (Liability) (6,440) (6,655) (5,669) (595) (703) (572)
Net position (excluding separate assets) (6,430) (6,654) (5,666) (595) (703) (572) Net economic funding position (including separate assets)
Net economic funding position (including separate assets) (3,950) (3,957) (3,401) (595) (703) (572)
Expected return on separate assets (172) (189) (18) (0) – –
(a) This amount includes the acquisition of Winterthur. (b) The SORIE impact consists in the actuarial gains and losses recorded gross of policyholder benefit and gross of deferred tax. It represents the actuarial gains or losses recorded as a provision with a corresponding amount recognized in shareholders’ equity.
25.2.7. Change in the liability recognized in the balance sheet (excluding separate assets) The change in the balance sheet liability from January 1, 2006 to December 31, 2006 captures only the evolution of the liability recorded in the Group’s balance sheet. It does not take into account separate assets. The change excluding separate assets is presented in the table below: (in Euro million)
Change in the liability recognized in the balance sheet Balance sheet liability, beginning of the year (6,654) (5,666) (4,953) (703) (572) (609)
Adjustment due to separate assets (232) (210) (212) – – –
The table below shows the total asset mix i.e., for plan assets and separate assets: Total Group Europe North America Other Total asset mix
As pension liabilities are of a long-term nature, a mixture of bond, equity, and real estate investments is used in the plan assets. The percentage of equities is higher in the Anglo-
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 market values of assets. The acquisition of Winterthur in 2006 had an impact on the evolution of the asset mix between 2005 and 2006.
Various methods are used to determine the expected long-term return on the Group’s assets 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.
25.2.11. Other employee benefits AXA provides certain medical and life insurance benefits (“post-retirement benefits”) to employees, managers and agents who retire after having met certain age and service requirements. The life insurance benefits are related to age and salary at retirement. The expected costs of providing post-retirement benefits are accrued over this vesting period. AXA paid €40 million in post-retirement benefits for the year ended December 31, 2006 (€39 million in 2005 and €30 million in 2004).
Balance sheet reconciliation Net position (excluding separate assets): Employee benefit liabilities (7,025) (7,357) (6,238)
AXA stock options for US holding company 24.0 16.0 11.5 2005 AXA SA grants 4.3 3.3 2006 AXA SA grants 11.2 AXA ADR grants 8.5 12.7 11.5
AXA Financial SAR 8.3 29.0 13.0 AXA Financial restricted shares and PARS 4.7 10.4 10.4
The total share-based compensation cost also includes transaction costs directly related to the issuance of share-based compensation instruments by the Group and by AXA subsidiaries.
Following the acquisition of Winterthur, and to avoid the dilution of stock options, performance units and performance shares, the number of outstanding stock options, performance units and performance shares was adjusted to maintain (not increase) the value of these instruments to employees.
25.3.1. Share-based compensation instruments issued by the Group AXA SA STOCK OPTIONS 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
For members of the executive committee, the first two installments vest unconditionally at the end of the vesting period. However, the final installment will only vest if AXA shares outperform the DowJones Europe Stoxx Insurance index after a period of four years.
AXA SA STOCK OPTION PLANS Options Weighted price (in million) (in Euro)
December 31, 2006 are shown below by maturity date: in million
Weighted average fair value per option at grant date in Euro 6.48 4.15 3.96
The following tables show a summary of the US holding company’s AXA ADR stock option plans: AXA ADR STOCK OPTION PLANS Options Weighted price (in million) (in US $)
The following table shows information for grants after November 7, 2002: POST NOVEMBER 7, 2002 AXA ADR STOCK OPTION PLANS Options Weighted price (in million) (in US $)
(in million) (in US $) (in million) (in US $) Price range
Weighted average fair value per option at grant date (in US $) 5.65 4.44
From 2005 on, there are no more AXA ADR grants. US employees now receive AXA SA stock options.
AXA GROUP SHAREPLAN AXA offers its employees the opportunity to become shareholders through special employee share offerings. In countries that meet the legal and fiscal requirements, two investments options are available: the traditional plan and the leveraged plan.
On September 18, 2006, the AXA Group made an employee share offering at €22.88 per share for the traditional plan (discount of 20% to the reference price of €28.60 representing the average over the twenty trading days preceding the date of announcement) and €24.25 per share for the leveraged plan. Subscriptions amounted to 15.5 million shares, increasing the share capital by €375.5 million. This offering represented a total cost of €16.3 million taking into account the five-year lock-up period.
PLAN MAIN FEATURES 2004 2005 2006 Traditional Leveraged Traditional Leveraged Traditional Leveraged
Performance Shares are similar to Performance Units, but the payment is equity-settled rather than cash-settled.
AXA ASIA PACIFIC HOLDING STOCK OPTION PLAN To a lesser extent, AXA APH grants stock options based on APH shares, with both market and non-market performance conditions.
These plans are valued according to the IFRS applicable in Australia. The total cost for this plan in 2006 was €5.5 million.
AXA FINANCIAL SHARE-BASED COMPENSATION PLANS The total cost of AXA Financial’s share-based compensation plans in 2006 included €8.3 million in respect of AXA Financial Stock Appreciation Rights (as they are subject to variations in the basis of recognition due to changes in the market value of AXA ADRs) and €4.7 million in respect of AXA ADR Restricted Shares and Performance Accelerated Restricted Shares granted to senior executives and nonemployee directors.
– Long-term benefits: amounts provisioned or recognized by AXA SA and its subsidiaries for the payment of pensions or retirement benefits to its corporate officers (members of the Management Board, Chairman of the Supervisory Board and the employees’ representative on the Supervisory Board) totaled €33.8 million.
In 2005: – Short-term benefits: compensation paid to members of the Management Board in respect of 2005 totaled €12.4 million, including fixed salary, bonuses, directors’ fees and benefits in kind.
At December 31, 2006, the Group, excluding Winterthur, employed 81,025 salaried people on a full-time equivalent basis (78,800 in 2005 and 76,339 in 2004). The total number of full time equivalent employees at December 31, 2006 including Winterthur was 96,009.
The increase, excluding Winterthur, was mainly due to: – the acquisition of MLC Indonesia and
MLC Hong Kong (444 employees) and the launch of the Avanssur platform in Poland in
As a result of these factors, along with the dilutive effect of convertible bond plans, the fully diluted number of shares at December 31, 2006 was 2,032 million.
Increase in capital (excluding stock option exercised) (a) 97 – 53
The insurance businesses of the Mutuelles AXA and the insurance businesses of the Company’s French insurance subsidiaries use similar distribution channels and are managed as a single business, subject to legal and management arrangements established to maintain the legal distinctions between their respective businesses. Certain of the costs and expenses of operating these businesses (other than commissions) are shared by these subsidiaries and the Mutuelles AXA and allocated among them through a Groupement d’Intérêt Economique or “GIE” which is a type of French inter-company partnership more fully described below. There are no agreements between the Mutuelles AXA and the Company’s insurance subsidiaries that restrict in any way their ability to compete with one another.
The Property & Casualty insurance business generated in France by insurance brokers is underwritten through a coinsurance arrangement between AXA France IARD, a Property & Casualty insurance subsidiary of the Company, and AXA Assurances IARD Mutuelle. Technical results are shared between entities in proportion with their written premiums. Aggregate written premiums recorded in the agreement amounted to €1,522 million in 2006 (of which €1,354 million was attributed to AXA France IARD).
Loans/Guarantees/Capital Contributions AXA has given numerous commitments and guarantees, including financing commitments, guarantees given to financial institutional institutions and customers, pledged assets, collateralized commitments and letters of credit. For a detailed description of these commitments and guarantees, see note 28 “Contingent assets
and liabilities and unrecognized contractual commitments”. Certain of these guarantees are given by the Company for the benefit of its subsidiaries and affiliates for various business purposes including to promote development of their business, support their credit ratings, and promote efficient use of the Group’s capital resources. In this context, the Company may guaranty repayment of loans extended from one of its subsidiaries to another and/or guarantees other obligations of its subsidiaries to third parties. The beneficiaries of these guarantees are generally required to compensate the Company at a negotiated rate based on prevailing market rates and conditions for guarantees of a similar nature. In addition, from time to time, the Company may provide comfort or similar letters to rating agencies and/or regulators for the benefit of its subsidiaries and affiliates for various business purposes, including facilitating specific transactions, achieving target ratings levels and, more generally, helping develop the business of these subsidiaries.
Key Management and Directors At December 31, 2006, there was one loan outstanding from a banking subsidiary of the Company to a member of AXA’s Management Board. The loan was for an amount of €200,000, bearing interest at a rate of 4.58% annually and had a 10-year term. The loan was made in the ordinary course of business of the Company’s banking subsidiary at prevailing market terms and conditions.
Off-balance sheet commitments received by AXA totaled €37,700 million, an increase of €7,260 million compared to 2005.
Off-balance sheet commitments received by Winterthur totaled €2,959 million, mainly corresponding to (i) €2,934 million of collateral for mortgage loans and (ii) €25 million of guarantees received from banks for tax disagreement with the Spanish government.
Excluding Winterthur’s contribution, off-balance sheet commitments received by AXA were up €4,302 million, mainly due to pledged securities and real collateral (€+4,490 million) and letters of credit (€+157 million), partially offset by other commitments (€–392 million).
These commitments break down as follows: Financing commitments received totaled €8,308 million at December 31, 2006 and consisted of : – AXA SA credit lines (€6,315 million), – AllianceBernstein credit lines (€884 million)
mainly comprising credit facilities (€304 million) and revolving credit facilities (€353 million) from various banks and other lenders,
– bank credit lines granted to AXA Life Japan as part of its Life & Savings operations (€362 million),
– credit facilities received by AXA RE from ceding companies as part of its reinsurance operations (€367 million).
Financing commitments were almost stable at December 31, 2006 compared to 2005.
Pledged assets and real collateral totaled €21,665 million at December 31, 2006 (€18,731 million excluding Winterthur’s contribution), mainly consisted of: – Mortgage security interests taken by
– Securities pledged to secure loans (€4,715 million) and short-term securities borrowings (€667 million) received by Japanese entities. Commitments were also given on these products.
Other commitments totaled €2,147 million at December 31, 2006, broken down as follows: – €1,117 million of commitments received by
– Commitments received from shareholders of an AXA real estate company, covering the investment period (€150 million).
The €392 million decrease was mainly due to a decrease in commitments received by AXA France Vie on stock lending activities (€–160 million) and by AXA Bank Belgium on its Money Market activity (€–188 million).
one year one year three years five years or less through through three years five years
Commitments given by Winterthur totaled €2,217 million, mainly consisted of: – €709 million of financing commitments to credit institutions including €664 million given by the Swiss entities for future investment by private equity funds.
– €322 million of other commitments given, mainly including (i) €25 million in credit lines granted by the German holding company to Commerzbank, and (ii) commitments given by the German entities to two real estate funds (€120 million) and to the German insurance guarantee fund “Protektor” that takes over insurance policies if insurance companies fail (€162 million).
Excluding Winterthur’s contribution, commitments given by AXA rose by €4,536 million. The increase was mainly due to pledged securities and real collateral (€+5.251 million) and financing commitments (€+603 million), partially offset by a decrease in guarantees (€–988 million).
Guarantee commitments totaled €5,677 million (€5,518 million excluding Winterthur’s contribution) as at December 31, 2006, and consisted of: – Guarantees commitments given to credit institutions (€2,995 million excluding Winterthur’s contribution) mainly including collateral and pledges given by AXA SA to credit institutions (€2,705 million), a financial guarantee given by the German holding companies to a real-estate company (€115 million) and guarantees given by AllianceBernstein to a commercial bank in 2002 to guarantee some of Sanford C. Bernstein’s commitments (€95 million).
– Securities pledged by Axa Bank Belgium to financial institutions in respect of repo operations (€3,692 million) and security interests given to the National Bank of Belgium as collateral for clearing-house activities (€1,661 million).
– A contribution of AXA Equitable of a real estate asset as collateral for a short-term debt (€349 million).
– Securities pledged by AXA Germany to West LBank to hedge a dollar-denominated reinsurance liability (€69 million).
Overall, pledged assets and real collateral given increased by €5,251 million excluding Winterthur’s contribution due to an increase in securities pledged under Japanese stock lending transactions (€+4,566 million), and an increase in commitments given by AXA Bank Belgium in respect of repo transactions (€+699 million).
Other commitments given totaled €5,668 million as at December 31, 2006 (€5,347 million excluding Winterthur’s contribution) and consisted mainly of: – €580 million mainly in commitments due to the Parallel Ventures (€124 million) and AXA Private Equity funds (€393 million) in the UK. These funds are vehicles (partnerships and similar vehicles) that allow exposure to private equity investments in UK, US and European markets.
– €794 million in commitments given by AXA RE mainly relating to forward foreign-exchange transactions (€684 million) and derivative products hedging ABR contracts (€62 million). Commitments were received on these products in equivalent amounts.
– €234 million of commitments given by the French Property & Casualty business, including €215 million of pledges.
Axa has issued the following subordinated convertible debt instruments (i) €1,524 million 2.5% issued in February 1999 and due in 2014, and (ii) €1,099 million 3.75% issued in February 2000 and due in 2017. The difference between the issue price and the redemption price (or in the event of non-conversion for the debt maturing in 2017) is amortized over the life of the instrument at the effective interest rate for each issue. The unamortized balance at December 31, 2006 was €1,083 million.
The scheme governing the financial reorganization of AXA Sun Life in 2001 (the “Scheme”) details arrangements under which assets from the inherited estate, attributed to AXA through the reorganization, may be transferred on a temporary or permanent basis to the “With-Profit” funds as required to support the capital requirements of these funds, as determined under the Scheme. In the case of a temporary transfer, assets and related investment income remain attributable to AXA since they will be returned when they are no longer required to support the capital requirements of the “With-Profit” funds, under the stringent tests set out in the Scheme. If all or
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 maintains the existing 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, business re-combinations, 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 attempt on either AXA or BNP Paribas.
The agreement was made public by the AMF (Autorité des Marchés Financiers) on December 21, 2005.
Some AXA subsidiaries, principally insurance companies, are subject to restrictions on the amount of funds they may transfer in the form of cash dividends or otherwise. In most cases, the amounts available for distribution from AXA’s insurance subsidiaries are limited to net income for the year and retained earnings calculated in accordance with the accounting policies used by the subsidiaries to prepare their financial statements. Further restrictions may be imposed by the local insurance regulators in countries where AXA operates. In some cases, amounts available for distribution are also subject to regulatory capital adequacy tests or the approval of an independent actuary, or subject to individual provisions contained in a company’s by-laws. In accordance with European Union directives, insurance companies with their registered office in a European Union member country are required to maintain minimum solvency ratios which must be supported by capital, retained earnings and reserves and unrealized capital gains on marketable securities and real estate as reported in regulatory filings in France or subject to approval by local regulators in some countries. AXA’s insurance operations in countries outside the European Union are also subject to local capital adequacy and solvency margin regulations. As at December 31, 2006, AXA’s subsidiaries complied with the applicable solvency and capital adequacy requirements.
On January 11, 2007, the meetings of holders of AXA’s 2014 and 2017 convertible bonds were held to vote on an amendment of the final conversion dates of the bonds to January 26, 2007 in exchange for a cash payment in respect of the value of the conversion option.
The meeting of holders of the 2014 convertible bonds approved the amendment. Consequently, holders who did not convert their bonds by January 26, 2007, received €16.23 per bond on January 31, 2007. The meeting of holders of the 2017 convertible bonds did not approve the amendment. Consequently, to fully neutralize the dilutive impact of the 2017 convertible bonds AXA has purchased from a banking counterparty, for a total cash amount equivalent to the payment proposed to bondholders, call options on the AXA share with an automatic exercise feature. This feature is such that one option is automatically exercised upon each conversion of a convertible bond. Consequently, each issuance of a new share resulting from the conversion of the bond will be offset by the delivery by the bank to AXA (and subsequent cancellation) of an AXA share ; The issuance of a share in respect of the conversion of the bond and the cancellation by AXA of the AXA share received will offset each other. As a result of this transaction, there will no longer be a change to the outstanding number of AXA shares created by the convertible bond conversion.
On February 7, 2007, AXA UK announced that it is to acquire the UK’s only 100% online insurer, Swiftcover, jointly owned by international insurer Primary Group and Swiftcover’s management. The transaction is subject to the satisfaction or waiver of certain conditions including regulatory approval. Swiftcover is a business on the UK personal direct market, with net inflows of 120,000 policies in 2006. The upfront cash consideration for Swiftcover amounts to £75 million, with an additional potential earn out of £195 million maximum over the next 4 years, based on policy volume and combined ratio level.
As of the end of 2006, AXA Financial, either directly or indirectly through wholly owned subsidiaries, had acquired a total of 24.5 million AllianceBernstein Units for an aggregate price of approximately $885.4 million through several purchases made pursuant to the Put. AXA Financial completed the purchase of another tranche of 8.16 million AllianceBernstein Units pursuant to the Put on February 23, 2007 for a total price of approximately $746 million. This purchase increased the consolidated economic interest of AXA Financial, Inc. and its subsidiaries in AllianceBernstein L.P. by approximately 3% from 60.3% to 63.3%.
and a market share above 30%. Following this acquisition, the AXA Group will serve over 2 million clients through its direct distribution P&C operations worldwide. Completion of this transaction was subject to local regulatory approvals.
Management of insurance companies assets (€13 billion as of year-end 2006) and open pension funds assets (€0.3 billion as of year-end 2006).
The partnership will be the sole platform for developing AXA’s and BMPS’s operations in the Italian bancassurance and pensions market including any new distribution channel. The objective of the transaction is to further strengthen and consolidate the competitive position of the joint operations in life and non-life bancassurance and increase their profitability by: i) leveraging AXA specific know-how to capture fully the growth potential and develop a leading position in the Italian pensions market and ii) fully exploiting the
potential of BMPS’s franchise, improving the product and service offer, and achieving higher efficiency and commercial effectiveness.
Total cash consideration to be paid by AXA in this transaction is €1,150 million and will be financed with internal resources.
PricewaterhouseCoopers Audit Mazars & Guérard 63, rue de Villiers Exaltis - 61, rue Henri Régnault 92208 Neuilly-sur-Seine Cedex 92075 Paris-La Défense Cedex
Report of Satutory Auditors on the consolidated financial statements (for the year ended December 31, 2006)
This is a free translation into English of the statutory auditors’ report issued in the French language and is provided solely for the convenience of English-speaking readers. The statutory auditors’ report includes information specifically required by French law in all audit reports, whether qualified or not, which is presented below in the opinion on the consolidated financial statements. This information includes an explanatory paragraph discussing the auditors’ assessments of certain significant accounting and auditing matters. These assessments were considered for the purpose of issuing an audit opinion on the consolidated financial statements taken as a whole, and not to provide separate assurance on individual account captions or information taken outside of the consolidated financial statements.
This report, together with the statutory auditors’ report addressing financial and accounting information in the President’s report on internal control, should be read in conjunction with, and construed in accordance with, French law and professional auditing standards applicable in France.
In our opinion, the consolidated financial statements for fiscal year 2006 give a true and fair view of the assets, liabilities, financial position and results of the consolidated group of persons and entities in accordance with the IFRSs adopted by the European Union and applicable to its member states.
II. Justification of our assessments In accordance with the requirements of Article L.823-9 of the French Commercial Code relating to the justification of our assessments, we would like to bring the following matters to your attention: – Perpetual notes are now accounted for in accordance with the methods described in note 1.11.2 of the notes to the consolidated financial statements. Pursuant to IAS 8, comparative information relative to fiscal years 2004 and 2005, presented in the consolidated financial statements, has been restated to
We have examined the rationale behind the classification used, as well as the restatements applied to the consolidated financial statements for fiscal years 2004 and 2005, as well as the information provided on this subject in note 16 of the notes to the consolidated financial statements.
– Certain consolidated balance sheet items that are specific to insurance and reinsurance business are estimated on the basis of statistical and actuarial data, such as actuarial reserves, deferred acquisition costs and their amortization, and the value of business in force. The methods and assumptions used to calculate the carrying values of these items are described in notes 1.6.2, 1.6.4 et 1.12 of the notes to the consolidated financial statements.
III. Specific verification We have also verified, in accordance with professional standards applicable in France, the information given in the Management Board’s annual report on Group operations. We have no matter to report with regard to its fair presentation and conformity with the consolidated financial statements.
Dividends received from subsidiaries amounted to €1,581 million, an increase of €161 million from the previous year.
In December 2005, AXA France Assurance paid an exceptional interim dividend of €236 million. This negative change is offset by dividends from Belgium which increased by €153 million and those from AXA UK by €106 million, reflecting the growth in their statutory net income.
Financial income fell by €67 million to €301 million: – Income from swaps dropped by €121 million on the back of the following factors: • €30 million due to additional expenses related to the implementation during 2006 of additional hedges of net foreign-currency investments, notably in dollars,
• €31 million premiums paid during 2006 due to the restructuring of interest-rate swaps,
– Income from receivables declined by €28 million following repayment of loans, particularly those granted to AXA Financial.
– Conversely, other interests income rose by €82 million mainly due to €106 million financial income on proceeds from Winterthur financing between the date of issuance (rights issue and TSS), and the closing date of
Financial charges increased by €83 million to €634 million, including €77 million related to the perpetual deeply subordinated notes issued in 2006 in connection with the financing of the Winterthur acquisition.
Indeed, in the Group’s consolidated financial statements, hedge accounting is applied to net investments in subsidiaries, such that exchange rate movements have no impact on Group results. On the other hand, at parent company level, investments in subsidiaries are booked at historical cost in euros. Therefore unrealized foreign exchange losses on debts and currency swaps must be provisioned in full.
Balance sheet At December 31, 2006, total assets were €51,707 million, versus €41,521 million at
– AXA finalized the acquisition of Winterthur shares for €7,870 million or CHF12.3 billion on
– the shareholding in Vinci raised by €967 million following two capital increases, enabling the Group to develop Matignon Finance, an intragroup financing and treasury company,
– following the buyout offer for minority interests in its German subsidiary AXA Konzern launched on January 9, AXA SA acquired 1,273,841 shares for €171 million,