Number of shares cancelled since the beginning of the program –
In addition, and in connection with the two share repurchase programs mentioned above (liquidity contracts being excluded), AXA repurchased 247,202 of its own shares (exercises of call options and settlements of futures contracts) between January 1, 2008 and April 22, 2008 for an average weighted gross unit price of €23.11, and between April 23, 2008 and December 31, 2008 AXA sold, off-exchange, 6,899,477 of its own shares for a unit price of €15.09.
(b) AXA Assurances iARD Mutuelle and AXA Assurances Vie Mutuelle. (c) These shares will be entitled to vote when they cease to be treasury shares (e.g. upon their sale or other transfer to an unaffiliated third party). (d) Treasury shares as indicated in Note 13 to “consolidated Financial statements” included in Part V of this Annual Report. (e) source: Euronext Notice of December 29, 2008. (f) Excluding the 6,899,477 shares which are the object of a futures contract expiring on April 20, 2009.
Significant changes in capital ownership Significant changes in ownership of the Company’s share capital between December 31, 2006 and December 31, 2008 are set forth in the table below.
As of December 31, 2008, to the best of the Company’s knowledge based on the information available to it, the Company had approximately: • 10,463 total registered holders of its ordinary shares (i.e. shareholders holding in nominative form); and • 90,498,617 ADSs outstanding, representing approximately 4.3% of the Company’s total outstanding ordinary shares.
Ordinary shares issued on December 31, 2008 (a) 2,089,158,169 stock options 80,226,817 stock subscription warrants related to the sharePlan operation in germany 5,480,275
(b) AXA Assurances iARD Mutuelle and AXA Assurances Vie Mutuelle. (c) These share will be entitled to vote when they cease to be treasury shares (e.g. upon their sale or other transfer to an unaffiliated third party). (d) Treasury shares as indicated in Note 13 to “consolidated Financial statements” included in Part V of this Annual Report. (e) including BNP Paribas sA. (f) source: Euronext Notice of December 29, 2008.
(b) Following the capital increase with preferential subscription rights made by AXA in June 2006 in order to finance part of the Winterthur acquisition, the conditions of conversion of AXA 2017 convertible bond were adjusted. The conversion ratio was increased from 4.06 to 4.15 AXA shares with a par value of €2.29 for one convertible bond (see Euronext notice n° 2006-2063 published on July 18, 2006).
Employee shareholders SharePlan Since 1993, the AXA Group has promoted employee shareholding by offering each year to its employees an opportunity to become shareholders through a special equity issue reserved exclusively for them (“SharePlan”).
On the closing of the 2008 SharePlan offering in November 2008, AXA issued a total of 24.7 million new ordinary shares each with a par value of €2.29, all of which were entitled to dividends for 2008. Most Group employees participating in SharePlan are entitled to directly exercise their voting rights at AXA’s Shareholders’ Meetings.
AXA Miles In order to reward its employees for the results obtained in 2005 and 2006 and to foster their engagement to the success of its “Ambition 2012” project, AXA has implemented a worldwide program of granting free shares to all its employees, called “AXA Miles”.
This broad-based grant to all employees having at least 3 months of service as of July 1, 2007, regardless of their position or compensation level, was designed to underline the important role that all Group employees have in helping the Group to attain its Ambition 2012 objectives.
The AXA Miles program resulted in a grant of 5,586,900 AXA shares to 111,738 employees in 54 countries. While the vesting conditions and holding periods applicable to these shares vary depending on local regulations, these shares generally are not fully vested and available to employees before the fourth anniversary of the grant date.
In force for a period of one year from the date of signature, this agreement is renewable automatically for successive periods of one year thereafter, unless one of the parties decides to terminate beforehand, in which case the terminating party is required to give three months notice prior to the next renewal date.
PricewaterhouseCoopers Audit Mazars 62, rue de Villiers 61, rue Henri Régnault 92208 Neuilly-sur-Seine Cedex 92400 Courbevoie
In our capacity as Statutory Auditors of your Company, we hereby submit our report on regulated agreements and commitments.
We performed our work in accordance with the standards of our profession applicable in France. These standards consisted in the verification of the consistency between the information we received and the original documentation in which these information were contained.
MARKETS The principal trading market for the Company’s ordinary shares is the Compartment A of Euronext Paris. The AXA ADSs, each representing one AXA ordinary share, are listed on the New York Stock Exchange.
In France, the Company’s ordinary shares are included in the principal index published by Euronext Paris (the “CAC 40 Index”). The Company’s ordinary shares are also included in Euronext 100, the index representing Euronext’s blue chip companies based on market capitalization. The Company’s ordinary shares are also included in the Dow Jones STOXX 50 and Dow Jones Euro STOXX 50, blue chip indices comprised of the 50 most highly capitalized and most actively traded equities throughout Europe and within the Eurozone, respectively. In addition, the Company’s ordinary shares are also included in the Dow Jones Euro Stoxx Insurance, the insurance related index for companies within the Eurozone.
(a) Following the issue of new shares with preferential subscription rights made by AXA in June 2006 (see Euronext notice n° 2006-1670 published on June 14, 2006), historical share prices were adjusted on the basis of the theoretical value of the right (see Euronext notice n° 2006-1719 published on June 16, 2006).
Trading on the New york Stock Exchange The Bank of New York Mellon serves as depositary with respect to the Company’s ADSs traded on the NYSE. Each ADS represents the right to receive one ordinary share. The table below sets forth, for the periods indicated, the reported high and low prices (closing and intraday) in U.S. dollars for the Company’s ADSs on the NYSE: Calendar Period Closing High ($) Closing Low ($) Intraday High ($) Intraday Low ($)
Calendar Period Closing High ($) Closing Low ($) Intraday High ($) Intraday Low ($)
PART IV RISK FACTORS, CERTAIN DISCLOSURES ABOUT MARKET RISKS AND RELATED MATTERS
Risks relating to the structure of our Group, the scope and nature of our business, the environment in which we operate and the products we offer 197
RISKS RELATINg TO ThE FINANCIAL MARKETS, OUR FINANCIAL STRENgTh RATINgS AND FINANCIAL CONDITION, ThE VALUATION OF OUR ASSETS AND RELATED MATTERS Current difficult conditions in the global financial markets and the economy may materially adversely affect our business and profitability, and these conditions may continue Our results of operations are materially affected by conditions in the global financial markets and the economy generally. The stress experienced in the global financial markets that started in the second half of 2007 continued and substantially increased throughout 2008 and continues in 2009. A wide variety of factors including concerns over the availability and cost of credit, the stability and solvency of financial institutions and other companies, future inflation, energy costs, and geopolitical issues have contributed to increased volatility and diminished expectations for the economy in general and the markets going forward. These factors, combined with volatile oil prices, depressed real estate markets, falling equity market values, declining business and consumer confidence and the risks of increased future inflation and unemployment, have precipitated a significant economic slowdown and fears of a potential global recession.
Our ability to make a profit on insurance products and investment products, including fixed and guaranteed products, depends in part on the returns on investments supporting our obligations under these products, and the value of specific investments may fluctuate substantially depending on the foregoing conditions. Certain types of insurance and investment products that we offer expose us to risks associated with fluctuations in financial markets, including certain types of interest sensitive or variable products such as guaranteed annuities or variable annuities, which have crediting or other guaranteed rates or guaranteed minimum benefits not necessarily related to prevailing market interest rates or investment returns on underlying assets. Although we use hedging techniques to manage our exposure under certain of these guarantees, increased volatility in the financial markets, combined with unanticipated policyholder behavior, may increase the cost of these hedges and/or negatively affect our ability to hedge certain of these risks, which may adversely affect our profitability. For further risks related to our hedging techniques, see “Risks relating to the nature of our business and the environment in which we operate – Our hedging programs may be inadequate to protect us against the full extent of the exposure or losses we seek to mitigate which may negatively impact our business, results of operations and financial condition.”
Factors such as consumer spending, business investment, government spending, the volatility and strength of the capital markets, and inflation all affect the business and economic environment and, ultimately, the amount and profitability of our business. In an economic downturn characterized by higher unemployment, lower family income, lower corporate earnings, lower business investment and lower consumer spending, the demand for our financial and insurance products could be adversely affected. In addition, we may experience an elevated incidence of lapses or surrenders of policies, and our policyholders may choose to defer paying insurance premiums or stop paying insurance premiums altogether. These developments could have a material adverse effect on our business, results of operations and financial condition.
We need liquidity to pay our operating expenses (including claims and surrenders), interest on our debt, dividends on our capital stock and to refinance certain maturing debt and other liabilities. In addition, we need liquidity in connection with certain derivatives transactions to which we are party which require us to post cash collateral and/or subject us to margin calls in certain circumstances. A lack of sufficient liquidity and/or access to financing over a prolonged period may have a material adverse effect on our business, results of operations and consolidated financial position. The principal sources of our liquidity are insurance premiums, annuity considerations, deposit funds, asset management fees, cash flows from our investment assets and cash/cashequivalents on our balance sheet. Sources of liquidity in normal markets also include a variety of short-and long-term instruments, including repurchase agreements, commercial paper, medium-and long-term debt, junior subordinated debt securities, capital securities and stockholders’ equity.
In the event our current resources do not satisfy our needs, we may have to seek additional financing. The availability of additional financing will depend on a variety of factors such as market conditions, the general availability of credit, the volume of trading activities, the overall availability of credit to the financial services industry, our credit ratings and credit capacity, as well as the possibility that customers or lenders could develop a negative perception of our long-or short-term financial prospects if we incur large investment losses or if the level of our business activity decreased due to a market downturn. Similarly, our access to funds may be impaired if regulatory authorities or rating agencies take negative actions against us. While management has in place a liquidity risk management framework that includes active monitoring of the Group’s liquidity position and contingency plans for accessing liquidity, if our internal sources of liquidity prove to be insufficient or if our liquidity requirements change so as to require additional funding, we may not be able to successfully obtain additional financing on favorable terms, or at all.
Continued disruptions, uncertainty and volatility in the capital and credit markets of the type experienced over the past months may also limit our access to the financing required to operate our business, most significantly our insurance operations, refinance, in a timely manner, our maturing debt or other liabilities, satisfy statutory capital requirements of our insurance subsidiaries and access the financing necessary to grow our business organically and/or through acquisitions. In this context, we may be forced to delay raising capital or to accept onerous financing which could decrease our profitability and significantly reduce our financial flexibility.
At the consolidated Group level, the Company is required to calculate, in accordance with applicable French “Solvency I” regulations, a consolidated solvency margin ratio which represents the Company’s total available capital as compared to its required regulatory capital. Under applicable French regulations, 100% is the minimum required consolidated solvency margin for the Company. At December 31, 2008 the Company’s consolidated solvency margin was 131% (or 127% taking into account the proposed 2008 dividend payment of €0.40 per share) which represented a €6 billion capital surplus at that date: (i) €22.1 billion of required capital1, versus (ii) €28.1 billion of available capital2. The Company’s year-end 2008 solvency margin is lower than its consolidated solvency margin at December 31, 2007 (154%) and December 31, 2006 (186%). While management believes
(1) For this purpose, required capital is calculated based on formulas that take into account a variety of factors including (i) for life & savings business: specified percentages of mathematical reserves (4% of mathematical reserves for business where investment risk is borne by the insurer and 1% of mathematical reserves for business where investment risk is borne by policyholders) adjusted by an entity specific retention rate plus an amount of capital at risk; and (ii) for property & casualty business, the highest amount of the following two results: 23% of the average cost of claims or 16% of the gross premiums written or earned, in each case, subject to various adjustments.
In the context of the continuing financial market crisis, management has developed various contingency plans designed to ensure that the Company’s consolidated solvency margin and the regulatory capital levels of its insurance subsidiaries remain well in excess of regulatory minimum requirements and at levels that leave the Company and its subsidiaries well positioned from a competitive point of view. These plans may involve use of reinsurance, sales of investment portfolio and/or other assets, measures to reduce capital strain of new business, issuance of preference shares or other measures. There can be no assurance, however, that these plans will be effective to achieve their objectives and any failure by the Company and/or its insurance subsidiaries to meet minimum regulatory capital requirements and to maintain regulatory capital at competitive levels could have a material adverse affect on our business, liquidity, credit ratings, results of operations and financial position.
Market conditions and other factors could adversely affect the carrying value of our goodwill, cause us to accelerate amortization of our DAC and VBI and/or to derecognize deferred tax assets which could have a material adverse effect on our consolidated results of operations and financial position. Business and market conditions may impact the amount of goodwill we carry in our consolidated balance sheet as well as our pattern of DAC and VBI amortization and the value of our deferred tax assets. The value of certain of our businesses including, in particular,
Our valuation of certain investments may include methodologies, estimations and assumptions which are subject to differing interpretations and could result in changes to investment valuations that may materially adversely affect our results of operations and financial condition Our accounting principles and policy with respect to valuation of our investments is set forth in Note 9.9 “Financial Assets Recognized at Fair Value” in the 2008 Consolidated Financial Statements included in this Annual Report. The determination of fair values in the absence of quoted market prices is based on a variety of factors including those described in Note 9.9. Certain of our investment assets, for which there is no active trading market or other observable market data, are valued using models and methodologies that involve estimates, assumptions and significant management judgment. During periods of market disruption of the type we have experienced over the past several months, an increasing portion of our investment assets may be valued using these models and methodologies as a result of less frequent trading or less observable market data with respect to certain asset classes that were previously actively traded in liquid markets. There can be no assurance that our valuations on the basis of these models and methodologies represent the price for which a security may ultimately be sold or for which it could be sold at any specific point in time. Use of different models, methodologies and/or assumptions may have a material impact on the estimated fair value amounts and could have a material adverse effect on our results of operations and financial condition. In addition, rapidly changing and unprecedented credit and equity market conditions could materially impact the valuation of securities as reported in our consolidated financial statements and the period-to-period changes in value could vary significantly. Decreases in value may have a material adverse effect on our results of operations and financial condition.
Interest rate and credit spread volatility may adversely affect our profitability Our exposure to interest rate risk relates primarily to the market price and cash flow variability associated with changes in interest rates.
During periods of declining interest rates, life insurance and annuity products may be relatively more attractive to consumers, resulting in increased premium payments on products with flexible premium features, and a higher percentage of insurance policies remaining in force from year-to-year, creating asset liability duration mismatches. During a low interest rate period, our investment earnings may be lower because the interest earnings on our fixed income investments will likely have declined in parallel with market interest rates which would also cause unrealized losses on our assets recorded at fair value under IFRS. In addition, mortgages and fixed maturity securities in our investment portfolios will be more likely to be prepaid or redeemed as borrowers seek to borrow at lower interest rates. Consequently, we may be required to reinvest the proceeds in securities bearing lower interest rates. Accordingly, during periods of declining interest rates, our profitability may suffer as the result of a decrease in the spread between interest rates charged to policyholders and returns on our investment portfolios.
Euro, could have a material adverse effect on our consolidated results of operations, financial condition or cash flows through realized losses, impairments, and changes in unrealized loss positions.
Fluctuations in currency exchange rates may affect our reported earnings AXA publishes its consolidated financial statements in Euro. For the year ended December 31, 2008, a significant portion of AXA’s insurance gross premiums and financial services revenues, as well as AXA’s benefits, claims and other deductions were denominated in currencies other than the Euro, primarily U.S. dollars, pounds sterling, Japanese yen, Swiss francs and Australian dollars. AXA’s obligations are denominated either in Euro or other currencies, the value of which is subject to foreign currency exchange rate fluctuations.
While AXA seeks to manage its exposure to foreign currency fluctuations through hedging, fluctuations in the exchange rates may have a significant impact on AXA’s results of operations and cash flows. For example, continued strength of the Euro against the US dollar and other major currencies in 2009 and future periods may adversely affect AXA’s results of operations and the price of its securities. In addition, the currency hedges used by AXA to manage foreign exchange rate risk may significantly impact the statutory results (parent only) of the Company and the amounts available for distribution as dividends to its shareholders because unrealized exchange rate gains and losses under these derivatives are recognized in the Company’s income statement (unlike in the Group’s consolidated accounts where hedge accounting is applied to net investments in subsidiaries such that these exchange rate movements have no income statement impact at the consolidated Group level).
Our hedging programs may be inadequate to protect us against the full extent of the exposure or losses we seek to mitigate which may negatively impact our business, results of operations and financial condition We use derivatives, including exchange traded equity futures contracts, treasury futures contracts, interest rate swaps and floor contracts, to hedge certain risks under guarantees provided to our clients, including guaranteed minimum death benefits (“GMDB”), guaranteed minimum income benefits (“GMIB”) and/or Withdrawal for Life benefits (“GMWB”), available under our Accumulator series of variable annuity products (the “accumulator guarantees”). These hedging techniques are designed to reduce the economic impact of unfavorable changes to our exposures under the accumulator guarantees due to movements in the equity and fixed income markets and other factors. In certain cases, however, we may not be able to apply these techniques to effectively hedge our risks because the derivative market(s) in question may not be of sufficient size or liquidity. The operation of our hedging program is based on models involving numerous estimates and management judgments, including among others, mortality, lapse rates, election rates, volatility and interest rates. There can be no assurance that ultimate actual experience will not differ materially from our assumptions, which could adversely impact results of operations and financial condition. In 2008, for example, we incurred substantial losses under the accumulator guarantees principally because (i) the assumptions underlying our hedging models did not adequately anticipate the extreme levels of market volatility and the sustained low level of interest rates experienced in 2008; and (ii) indices used in our hedging program did not adequately reflect the underlying separate account investment options available under these annuity contracts (basis risk).
The profitability of AXA’s flagship Accumulator series of variable annuity products depends, among other factors, on AXA’s ability to effectively hedge the accumulator guarantees. Management is in the process of pursuing a number of initiatives, including re-design and re-pricing of certain product features, which are designed to improve the profitability of these products and avoid future hedging losses on the accumulator guarantees of the type experienced in 2008. There can be no assurance, however, that these initiatives will succeed in meeting their objective or that the re-designed and re-priced products will continue to be attractive to their target markets which, in either case, could have an adverse impact on AXA’s business, competitive position, results of operations and financial condition.
we use numerous assumptions to determine the appropriate level of insurance reserves and deferred acquisition costs (DAC) and to calculate certain widely used industry measures of value such as Life & Savings New Business Value (NBV) and European Embedded Value (EEV), which involve a significant degree of management judgment and predictions about the future that are inherently uncertain; if these assumptions are not correct, it may have adverse impact on our results of operations and/or performance indicators, such as NBV, that may adversely affect the price of our securities The establishment of insurance reserves, including the impact of minimum guarantees which are contained within certain of our variable annuity products, the adequacy test performed on the reserves for life policies (which encompasses the recoverability of DAC, Value of Business Inforce and deferred participations assets) and the establishment of DAC, NBV and EEV are inherently uncertain processes involving assumptions about factors such as policyholder behavior (e.g. lapses, persistency, etc.), court decisions, changes in laws and regulations, social, economic and demographic trends, inflation, investment returns and other factors, and, in the life insurance business, assumptions concerning mortality and morbidity trends. The use of different assumptions about these factors could have a material effect on insurance reserves and underwriting expenses as well as on our DAC, NBV and EEV. In addition, insurance reserves for minimum guarantees contained within certain of our variable annuity products, DAC balances, EEV and NBV may be significantly impacted by the state of the financial markets and significant declines could have a material adverse effect on our consolidated results of operations and financial position. Furthermore, certain of these assumptions can be volatile. While AXA’s NBV and EEV calculations are done on a market consistent basis which is more conservative in many respects than traditional NBV and EEV calculations, changes in assumptions used in calculating these measures may have a material adverse effect on the level of our NBV and/or EEV. For example, our NBV is sensitive to interest rate movements and, consequently, incorrect assumptions about future interest rates may have a significant impact on our NBV and a corresponding impact on the trading price of our securities.
If our established loss reserves for our property & Casualty and International Insurance businesses are insufficient, our earnings will be adversely affected In accordance with industry practices and accounting and regulatory requirements, we establish reserves for claims and claims expenses related to our Property & Casualty and International Insurance businesses. With the exception of disability annuities and workers compensation liabilities that are deemed structured settlements, the claims reserves are not discounted. Reserves do not represent an exact calculation of liability, but instead represent estimates, generally using actuarial projection techniques at a given accounting date. These reserve estimates are expectations of what the ultimate settlement and administration of claims will cost based on our assessment of facts and circumstances then known, review of historical settlement patterns, estimates of trends in claims severity, frequency, legal theories of liability and other factors. The process of estimating the insurance claims reserves is based on the most current information available at the time the reserves are originally established. However, claims reserves are subject to change due to the number of variables which affect the ultimate cost of claims, such as: • development in claims (frequency, severity and pattern of claims) between the amount estimated and actual experience; • changes arising due to the time lag between the occurrence of the insured event, notification of the claim (from the insured party, a third party or a ceding company) and the final settlement (payment) of the claim, primarily attributable to long tail casualty claims that may take several years to settle due to the size and nature of the claim, and the occurrence of large natural catastrophes late in the financial year for which limited information may be available at year-end; • judicial trends; • expenses incurred in resolving claims; • regulatory and legislative changes; • changes in economic conditions, including inflation and foreign currency fluctuations; and • changes in costs of repairs and medical costs.
Many of these items are not directly quantifiable, particularly on a prospective basis. As a result, actual losses may significantly differ from the original gross reserves established. Consequently, the reserves may need to be re-estimated reflecting those changes resulting in loss reserve redundancies (in cases where the original gross claims reserve was overstated) or deficiencies (in cases where the original gross claims reserve was understated). Adjustments to reserves are reflected in current results of operations.
We continually review the adequacy of the established claims reserves, including emerging claims development, and actual claims compared to the original assumptions used to estimate gross claims reserves. Based on current information available, we believe that our claims reserves are sufficient; however, because the establishment of claims reserves is an inherently uncertain process involving numerous estimates, there can be no assurance that ultimate losses will not materially exceed our claims reserves and have a material adverse effect on our results of operations. For example, there is a high degree of uncertainty with respect to future exposure from asbestos claims because of significant issues surrounding the liabilities of insurers, diverging legal interpretations and judgments in different jurisdictions and aggressive asbestos related litigation, particularly in the U.S. and increasingly in the UK and other European countries. These uncertainties include the extent of coverage under insurance policies, whether or not particular claims are subject to an aggregate limit, the number of occurrences involved in particular claims and new theories of insured and insurer liability. We have established reserves for insurance and reinsurance contracts related to environmental pollution and asbestos at December 31, 2008, which represent our best estimate of ultimate claims exposure at December 31, 2008 based on our current knowledge of facts and law. However, given uncertainties surrounding the related claims, there can be no assurance that ultimate losses will not materially exceed our claims reserves and have a material adverse effect on our earnings. For additional information, see “Environmental Pollution and Asbestos” in Note 14 to AXA’s consolidated financial statements included in the Part V of this Annual Report.
PART IV – Risk FAcTORs, cERTAiN DiscLOsUREs ABOUT MARkET Risks AND RELATED MATTERs we may not be able to sustain the growth of our insurance and asset management businesses The strong growth of our insurance and asset management businesses in recent years, both organically and through acquisitions, may not be sustainable in future years. Unprecedented volatility in the financial markets and reduced availability of credit since mid-2007 coupled with recession and increasingly negative consumer sentiment in many of our major markets pose significant risks to our ability to achieve continued growth at rates consistent with the recent past and our ability to continue growing through acquisitions. In addition, our ability to sustain growth consistent with rates we have achieved in the recent past may be adversely affected by regulatory changes, including changes in the tax laws applicable to our Life & Savings products and operations. The Group has implemented global product “reuse” and distribution initiatives designed to drive product innovation and reuse of successful products, such as our “Accumulator” line of variable annuity products, across major markets where we operate around the world. Our Life & Savings products, including our Accumulator line of annuities, often involve complex features and guarantees that are not easily translated and transposed into the legal, regulatory and tax regimes across multiple jurisdictions. Our inability to successfully execute these product reuse initiatives and/or to develop new distribution channels and partnerships for these products in a timely manner could adversely affect the growth of our Life & Savings business. See also “Risks relating to the financial markets – Current difficult conditions in the global financial markets and the economy generally may materially adversely affect our business and profitability, and we currently do not expect these conditions to improve in the near future.”
We are faced with significant compliance challenges due to the fact that our regulatory environment is evolving rapidly and supervisory authorities around the world are assuming an increasingly active and aggressive role in interpreting and enforcing regulations in the jurisdictions where we do business. We have been and may become in the future subject to regulatory investigations which, together with the civil actions often following these investigations, may affect our image, brand, relations with regulators and/or results of operations. For a discussion of regulations which affect our business, please see the “Additional Factors which may affect AXA’s Business” Section included in the Part II “The AXA Group: Our global business operations, recent financial performance and financial condition” of this Annual Report. We cannot predict with any certainty the potential effects that any change in applicable laws or regulations, their interpretation or enforcement, or that any enactment of new regulation or legislation in the future may have on the business, financial condition or results of operations of our various businesses. See also “Risks relating to the financial markets – Legislative and regulatory initiatives growing out of the financial crisis may adversely impact AXA’s business, results of operations and financial condition.”
Certain of these lawsuits and investigations seek significant or unspecified amounts of damages, including punitive damages, and certain of the regulatory authorities involved in these proceedings have substantial powers over the conduct and operations of our business. Due to the nature of certain of these lawsuits and investigations, we cannot make an estimate of loss or predict with any certainty the potential impact of these suits or investigations on our business, financial condition or results of operations. Please see Part V – Note 30 “Litigation” and the “Additional Factors which may affect AXA’s Business” included in the Part II, Section 2.2 of this Annual Report for additional information on these matters.
Increased geopolitical risks and any future terrorist attacks may have a continuing negative impact on certain of our businesses We cannot assess with any degree of certainty the future effects on our businesses of terrorist attacks that have occurred and may occur in the future throughout the world, and other responsive actions, including war.
PART IV – Risk FAcTORs, cERTAiN DiscLOsUREs ABOUT MARkET Risks AND RELATED MATTERs required levels of capital and surplus, and the credit quality of local counterparties. These risks include, for example, political, social or economic instability in countries in which we operate, fluctuations in foreign currency exchange rates, credit risks of our local borrowers and counterparties, lack of local business experience in certain markets, risks associated with exposure to insurance industry insolvencies through policyholder guarantee funds or similar mechanisms set up in foreign markets and, in certain cases, risks associated with the potential incompatibility with foreign partners, especially in countries in which we are conducting business through entities we do not control. Our expansion in emerging markets requires us to respond to rapid changes in market conditions in these countries. Our overall success as a global business depends, in part, upon our ability to succeed in different economic, social and political conditions. We may not continue to succeed in developing and implementing policies and strategies that are effective in certain locations where we do business.
we increasingly operate in markets with less developed judiciary and dispute resolution systems; in the event of disputes in these markets, the quality and the effectiveness of such systems could have an adverse effect on our operations and results of operations In the less developed markets in which we operate, judiciary and dispute resolution systems may be less developed. As a result in case of a breach of contract, regulatory enforcement action or other dispute we may have difficulties in making and enforcing claims against contractual counterparties and, if claims are made against us, we might encounter difficulties in defending such claims. If we become party to legal or regulatory proceedings in a market with an insufficiently developed judiciary system, it could have an adverse effect on our operations and results of operations.
Inadequate or failed processes or systems, human factors or external events may adversely affect our profitability, reputation or operational effectiveness Operational risk is inherent in our business and can manifest itself in various ways, including business interruption, poor vendor performance, information systems malfunctions or failures, regulatory breaches, human errors, employee misconduct, and external fraud. These events can potentially result in financial loss, harm to our reputation and/or hinder our operational effectiveness. Management attempts to control these risks and keep operational risk at low levels by maintaining a sound and well controlled environment in light of the characteristics of our business, markets and regulatory environment in which we operate. Notwithstanding these measures, operational risk is part of the business environment in which we operate and we may incur losses from time to time due to these types or risks.
we may have contingent liabilities from discontinued, divested and run-off businesses and may incur other off-balance sheet liabilities that may result in charges to the income statement We may, from time to time, retain insurance or reinsurance obligations and other contingent liabilities in connection with our divestiture, liquidation or run-off of various businesses. For example, on December 21, 2006, we completed the disposition of AXA RE’s business, our reinsurance subsidiary, but retained the risk related to adverse deviation of claims reserves for all accident years prior to January 1, 2006.
Our reserves for these types of obligations and liabilities may be inadequate which could cause us to take additional charges that could be material to our results of operations. We may also, from time to time and in the course of our business provide guarantees and enter into derivative and other types of off-balance sheet transactions that could result in income statement charges. For additional information, see Part V – Note 28 “Contingent assets and liabilities and unrecognized contractual commitments” and also Part V – Note 19 “Derivative Instruments” of this Annual Report.
The failure to maintain and modernize our information systems could adversely affect our business Our business depends significantly on effective information systems, and we have many different information systems for our various businesses. We must commit significant resources to maintain and enhance our existing information systems, and develop new ones in order to keep pace with the evolving information technology, industry and regulatory standards and customer preferences. If we do not maintain adequate information systems, we may not be able to gather and rely on adequate information to base our pricing, underwriting and reserving decisions. We may also have difficulties in attracting new customers and preserving our existing customer base. In addition, underperforming information systems could cause us to become subject to a higher number of customer, provider and agent disputes, may increase our litigation and regulatory exposure and make us incur higher administrative expenses, including remediation costs.
Significant shareholders of AXA may have interests conflicting with your interests The Mutuelles AXA, two French mutual insurance companies, acting as a Group, owned at December 31, 2008, approximately 14.29% of the issued ordinary shares of AXA representing approximately 23.29% of the voting power of AXA’s shares. Many of the shares owned by the Mutuelles AXA have double voting rights pursuant to the provisions of AXA’s articles of association, see the “Additional information” Section included in the Part VI of this Annual Report. The Mutuelles AXA have stated their intention to collectively vote their shares in AXA. We cannot assure you that the interests of the Mutuelles AXA will not, from time to time, conflict with your interests as a shareholder. For example, even though the Mutuelles AXA do not hold a majority of the total voting power in AXA, efforts by the Mutuelles AXA to decline or deter a future offer to acquire control of AXA, which other shareholders may find attractive, may prevent other shareholders from realizing a premium for their AXA ordinary shares or ADRs. The Mutuelles AXA may decide to increase their interest in AXA or to sell all or a portion of the ordinary shares they own at some future date.
PART IV – Risk FAcTORs, cERTAiN DiscLOsUREs ABOUT MARkET Risks AND RELATED MATTERs of such rights or other securities and distributing the net proceeds in U.S. dollars to ADR holders. Given the significant number of AXA ADR holders in the U.S., AXA generally would be required to register with the SEC any public offering of rights, warrants or other securities made to its ADR holders unless an exemption from the registration requirements of the U.S. securities laws is available. Registering such an offering with the SEC can be a lengthy process which may be inconsistent with the timetable for a global capital raising operation. Consequently, we have in the past elected and may in the future elect not to make such an offer in the U.S., including to our ADR holders in the U.S. and rather only conduct such an offering in an “offshore” transaction in accordance with “Regulation S” under the U.S. Securities Act of 1933, as amended. Therefore, there can be no assurance that our ADR holders will be able to participate in such an offering in the same manner as our ordinary shareholders.
Our ADSs and ordinary share price could be volatile and could drop unexpectedly and you may not be able to sell your ADRs or ordinary shares at or above the price you paid The price at which our ADSs and ordinary shares will trade may be affected by a large number of factors, some of which will be specific to us and our operations and some of which will be related to the insurance industry and equity markets generally. As a result of these factors, you may not be able to resell your ADSs or ordinary shares at or above the price which you paid for them. In particular, the following factors, in addition to other risk factors described in this Section, may have a significant impact on the market price of our ADSs or ordinary shares: • investor perception of our Company, including actual or anticipated variations in our revenues, earnings or other operating results; • announcement of intended acquisitions, disposals or financings or speculations of such acquisitions, disposals or financings; • changes in our dividend policy, which could result from changes in our cash flow and capital position; • sales of blocks of our shares by significant shareholders; • hedging activities on our shares; • a downgrade of our credit or financial strength ratings, including placement on credit watch, or rumors of such downgrades; • actual or potential litigation involving us or the insurance or asset management industries generally; • changes in financial estimates and recommendations by securities research analysts; • fluctuations in foreign exchange rates and interest rates; • the performance of other companies in the financial services’ sector; • regulatory developments in the principal markets in which we operate; • international or local political, economic and market conditions; and • unforeseen events such as natural disasters or terrorist attacks and other developments stemming from such events and the uncertainty related to these developments.
As a “foreign private issuer” in the United States, AXA is exempt from certain rules under the U.S. securities laws and is permitted to file less information with the SEC than U.S. companies As a “foreign private issuer,” AXA is exempt from certain rules under the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”), that impose certain disclosure obligations and procedural requirements for proxy solicitations under Section 14 of the Exchange Act. In addition, AXA’s officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and the rules under the Exchange Act with respect to their purchases and sales of AXA ordinary shares and ADRs. Moreover, AXA is not required to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act, and for years ended December 31, 2007 and thereafter, AXA will no longer be required to reconcile its IFRS financial statements to US GAAP provided that AXA continues to publish its primary IFRS financial statements in accordance with IFRS as published by the IASB. In addition, AXA is not required to comply with Regulation FD, which restricts the selective disclosure of material information. Accordingly, there may be less publicly available information concerning AXA than there is for U.S. public companies.
Judgments of United States courts may not be enforceable against us Judgments of United States courts, including those predicated on the civil liability provisions of the Federal securities laws of the United States, may not be enforceable in French courts. As a result, our shareholders who obtain a judgment against us in the United States may not be able to require us to pay the amount of the judgment.
• Build a favorable environment for operational entities to take risks within a Risk Appetite framework defined and monitored by the Group (as both a business enabler and a risk controller)
Risk & Compliance Committee, Risk Insurance Supervisory Committee), co-chaired by the Group Chief Financial Officer together with other members of the Management Board or CEOs of local entities. Based on risk reports presented by the Group Risk Management together with other central teams, including AXA Cessions for insurance risks, they monitor the Risk Profile of the Group (Asset Allocation, Insurance policy, Accumulation) and recommend actions to mitigate risks.
• Group Risk Management (GRM), which reports to the Chief Financial Officer, develops the risk framework in terms of limits/ thresholds (financial, insurance and operational risks), standards, minimum requirements or processes, and oversees the operating entities’ adherence to the framework, supported by the local risk management teams.
• Local Risk Management teams within each operational entity report also to local CFOs. These teams are responsible for controlling and managing their risks proactively within Group policies and limits, validating investment or underwriting decisions through local risk committees in place, and reporting risk exposures to Group Risk Management. This approach allows subsidiaries to react swiftly in an accurate and targeted manner to changes in financial markets, insurance cycles and to the political and economic environment in which they operate.
and lead the validation of the Group’s internal model for Solvency II. • Participate in the optimization of Group asset allocation: (i) monitor risk concentration in assets, (ii) perform regular studies and reporting on exposure and performance, and (iii) define standards in terms of Asset-Liability management (see section Market Risks).
• Carry out, at local level, regular reviews of the technical reserves established by the operating units and perform, at Group level, regular reviews of models implemented throughout the Group in order to ensure the consistency between actuarial and financial standards.
• Define and propose to the Management Board, with the support of AXA Cessions, the main features of the reinsurance coverage program of the Group.
LOCAL RISK MANAgEMENT TEAMS Local Risk Management teams are, in particular, in charge of applying AXA risk management standards and implementing the minimum requirements set by GRM.
• Controlling the implementation of ALM policies, and in particular monitoring the strategic asset allocation of local entities. • Implementing pre-launch product approval procedures, and in particular reviewing risk-adjusted profitability analyses. • Reviewing local technical reserves and optimizing entities’ reinsurance strategy. • Identifying, quantifying and monitoring the main operational risks.
Information in this section should be read in conjunction with Note 4 to the consolidated financial statements included in Part V of this Annual Report which is covered by the Statutory Auditor’s Report on the Consolidated Financial Statements.
Description of Life & Savings insurance reserves The market risks to which Life & Savings subsidiaries are exposed arise from a number of factors, among which: • A decline in returns on assets (due in particular to a sustained fall in yields on fixed income investments or in equity markets)
could reduce the investment margin if the return on new and existing invested assets is not sufficient to cover contractual interest rates payable to life insurance policyholders.
• A rise in realized volatility may increase the cost of hedging the guarantees associated with some variable annuity products sold to policyholders.
The breakdown of life insurance reserves by product type and thus by AXA’s obligations to its policyholders, is as follows: • 23% at the end of 2008 (30% at the end of 2007 and 30% at the end of 2006) of the Group’s Life & Savings technical reserves cover separate-account (unit-linked) products that do not materially affect AXA’s risk exposure. This category includes products that provide a guarantee on invested capital in the event of death. On these products, the underlying financial market performance is mostly passed on to the policyholders. Overall, therefore, they present only a limited market risk for the Group through reduction of shareholders’ value.
• 16% at the end of 2008 (14% at the end of 2007 and 12% at the end of 2006) of the Group’s Life & Savings technical reserves are related to products offering one-year guaranteed rates that are updated every year. The risks arising from a sustained fall in interest rates in the financial markets are limited for these types of products, as most concern policies in France and group policies in Japan. Hedging programs have been implemented to cover long-term fixed maturities from the risk of an increase in interest rates.
• 36% at the end of 2008 (32% at the end of 2007 and 33% at the end of 2006) of the Group’s Life & Savings technical reserves cover other products. These reserves cover surrender guarantees and, in some cases, a guaranteed long-term rate. Related risks are managed in the following ways: – Products that are not surrender-sensitive are usually backed by fixed-income investments with maturities and interest rates generally sufficient to cover guaranteed benefits, so as to reduce as much as possible the reinvestment risk.
– Other products are managed with the surplus required to cover guarantees. – Hedging programs that make use of derivatives may be set up to hedge the risk of a fall (floor) or a rise (cap) in interest rates.
TOTAL – pROpERTy & CASUALTy INSURANCE EXCLUDINg INTERNATIONAL INSURANCE 47,356 47,072 46,210 international insurance – Physical damage 1,604 1,943 2,288 international insurance – Motor, Marine, Aviation 2,980 3,144 3,294 international insurance – Professional liability 3,649 3,846 3,935 international insurance – Other 2,751 2,013 2,786
TOTAL – pROpERTy & CASUALTy INSURANCE INCLUDINg INTERNATIONAL INSURANCE 58,340 58,018 58,514
(a) in accordance with iFRs 3, i.e. within 12 months following the acquisition date, the Group adjusted certain items impacting the allocation of Winterthur purchase price.
For Property & Casualty insurance business, the financial risk is borne directly by the shareholders. Long-tail activities, such as certain Third Party Liability lines, are sensitive to movements in financial markets. The principal market risks are: • A rise in yields on fixed-income investments (coming from a rise in interest rates or in spreads) reduces the value of fixed-income portfolios and could have an adverse impact on the solvency margin.
The investments of Property & Casualty insurance companies are therefore managed so as to optimize the return on assets while bearing in mind both the aforementioned risks and the requirements in terms of regulatory solvency and covering commitments. A large portion of investments is made in liquid fixed maturities, to ensure the payment of exceptional benefits and claims that may arise. Once these factors have been taken into consideration, there is some capacity to make diversified investments (real estate or equity securities) that offer a natural hedge against inflation and optimize yields while minimizing volatility risk.
PART IV – Risk FAcTORs, cERTAiN DiscLOsUREs ABOUT MARkET Risks AND RELATED MATTERs are responsible for monitoring and controlling the investment policy carried out on their behalf by these asset management companies.
At Group level, an ALM Co-ordination Committee, supervised by the Group Chief Financial Officer, determines general assetliability management policy guidelines, ensure that our current exposure is within the Group risks limits and evaluates the results, which are then submitted to the Management Board and to the Finance Committee of AXA’s Supervisory Board.
ALM coordination The definition and coordination of ALM involves six major stages: • Detailed analysis of the liability structure by insurance companies. • Definition and proposal of a strategic asset allocation that factors in the long-term outlook as well as short-term constraints
(see below). • Validation of these strategic allocations by the entity’s risk management unit and investment committee. • Local implementation of these strategic allocations through the definition of management contracts with asset management companies.
• Tactical allocation and stock selection by asset management companies as part of management contracts. • Performance and reporting analysis.
This work is carried out by Risk Management departments (local and central teams) and takes the form of detailed annual analyses that use consistent methods based on deterministic and stochastic scenarios. The aim of these analyses is to maximize the increase in economic value while complying with risk constraints and cost of capital. They are carried out by all significant Group entities, and provide the following information for the main product lines: • The amount of assets needed to meet commitments in a specific proportion of cases depending on risk tolerance. • The present value of future margins generated by insurance portfolios.
In addition, AXA’s insurance operations are subject to local regulatory requirements in all jurisdictions in which AXA operates. These local regulations prescribe: • The category, nature and diversification (by issuer, geographical zone and type) of investments.
• The minimum proportion of assets invested in the local currency, taking into account technical commitments denominated in this currency (congruence rule).
• As part of an ongoing capital allocation process, subsidiaries perform at least twice-yearly simulations on the various regulatory constraints applicable to them using extreme scenarios for assets (in terms of both the market value of equity securities and interest rate trends). The Group Central Finance Department consolidates these models, enabling it to assess the extent of each subsidiary’s financial flexibility. The results are presented to the Finance Committee of AXA’s Supervisory Board on a regular basis.
Tactical allocation duties of Group asset management companies (AXA Investment Managers and AllianceBernstein) Asset management specialists, primarily AXA subsidiaries (AXA Investment Managers (AXA IM) and AllianceBernstein), are responsible for the day-to-day management of investments. Processes have been put in place in these companies to manage investments without exceeding agreed risk tolerance thresholds imposed by their client insurance companies in the investment management agreements. This organization makes the skills required in these activities available for the benefit of all Group insurance companies.
Products that involve hedging programs using derivative instruments are designed with the help of dedicated teams at AXA Bank Europe, AXA IM and AllianceBernstein. This organization means that all entities benefit from the best possible expertise and a high level of legal and operational security in these transactions, which are sometimes complex.
The AXA Group analyzes sensitivity to movements in interest rates and equity markets in two main ways: • sensitivities of European Embedded Value (EEV) for the Life & Savings business, as described below; • sensitivities of IFRS shareholder’s equity for other-than-life businesses.
Excluded Tss/TsDi – – – – – – – (7,781) (7,781)
Mark to Market debt – – – – – – – (77) (77)
Life & savings value of inforce (viF) 12,459 – 12,459 22,752 – 22,752 22,752 – 22,752 group EV = AXA Life & Savings EEV + Other Businesses IFRS ShE at December 31 27,209 3,927 31,136 38,490 12,153 50,643 38,490 (3,650) 34,840
In addition to Life & Savings EEV, AXA calculates a “Group EV” which adds to the Life & Savings EEV the IFRS shareholders’ equity of the other-than-life businesses. It is noteworthy that for other-than-life businesses, the presentation is designed to align with the Group EV standard proposed by the Market Consistent Embedded Value (MCEV) Principles©, issued by the CFO Forum in June 2008. In prior years, AXA had published a Group EV using a different definition regarding the contribution of other-than-life businesses (differences arising mainly from the treatment of perpetual subordinated debts and other-than-life intangible assets). A comparison between both methodologies for 2007 figures is provided above.
The table above shows the reconciliation of IFRS shareholders’ equity to the Group EV. The Life & Savings “Adjusted Net Asset Value” (ANAV) is derived by aggregating the local regulatory (statutory) balance sheets and reconciling with the Life & Savings IFRS shareholders’ equity, with the following main adjustments: • addition of unrealized capital gains/losses not included in shareholders’ equity, • elimination of the value of intangibles, • elimination of unrealized capital gains/losses included in the projection of future cash-flows (VIF), • adjustment for the differences between AXA’s consolidated accounting basis and local regulatory bases. Adding the Life & Savings VIF to the Life & Savings ANAV completes the Life & Savings EEV.
The Group EV equals the Life & Savings EEV plus the other businesses IFRS shareholders equity.
The Life & Savings VIF calculation, by nature, involves many assumptions about the future. For Life & Savings EEV, AXA has adopted a “market-consistent” approach to setting asset return assumptions. Each cash flow is discounted at an appropriate discount factor, so that starting with Euro 1 of bond or of equity, projecting expected cash flows and discounting, will simply give Euro 1 of value. Mechanically, this can be described in a shortcut as assuming that, in the future, all assets will earn the riskfree rate (referred to as the “reference rate” in the Embedded Value methodology) defined by the current market. However, cash flows are projected not only in a single scenario, but rather a stochastic set of scenarios is created, with the set maintaining the market-consistent condition that Euro 1 of any asset projected into the future gives a present value of Euro 1. Future earnings available to shareholders are assessed across this range of stochastic scenarios, with the present value being the Life & Savings VIF. Our major assumptions include: • Actuarial assumptions reflect best estimates based on recent experience.
• Some benefit from future mortality improvement on Life business is included, while annuity business does have an allowance for the costs of longevity increasing in all markets.
AA rating at each entity level • A weighted average tax rate of 31.7% was assumed in 2008 (32.4% in 2007). • In 2008, a premium over the swap rate (100 bps in the US and 50 bps in other countries except Japan) is included in the reference rate, reflecting the ability, in current market, for insurers with long term liabilities to earn risk-free returns in excess of swaps as a result of their investment in corporate bonds and the potential to purchase credit default swaps. In prior years, any such premium had been immaterial.
The sensitivities of the Group EV to changes in major economic assumptions were calculated as follows for the 2007 and 2008 values: Upward parallel shift of 100 basis points (bps) in reference interest rates simulates a sudden shock to the initial conditions. This means changes to: 1) the current market values of fixed-interest assets, with related possible changes to projected capital gains/losses and/or fee revenues, 2) future reinvestment rates for all asset classes, and 3) risk-discount rates. Inflation rates are not changed. Policyholder and management behaviors are adjusted following normal behavioral modeling. As noted in the definitions, these calculations reflect discount rate changes in Life & Savings and for other-than-life discounted reserves, as well as changes to the value of fixed-income assets, but no changes in value for asset classes such as equities or real estate are
assumed to accompany the reference interest rate movements (although for Life & Savings future returns are impacted as these equal the risk-free rate on average across scenarios in the market consistent valuation). In reality, changes in value of other asset classes would probably lead to different results than shown here. It is also possible that a gradual movement in interest rates would produce different results than a sudden shock.
Downward parallel shift of 100 basis points in reference interest rates is the same as above but with a shift downward. Where the shift of 100 basis points would drop rates below 0%, they are floored at zero.
10% higher value of equity markets at the start of the projection simulates a shock to the initial conditions just for equities. This means changes to current market values of equities, with related possible changes to projected capital gains/losses and/or fee revenues. Policyholder and management behaviors are adjusted to be consistent with these conditions. As noted in the definitions, these calculations reflect a shock to the initial conditions for equities, but no changes in value for asset classes such as fixed maturities or real estate are assumed to accompany the equity change. In reality, changes in value of other asset classes would probably lead to different results than shown here. It is also possible that a gradual movement in equity would produce different results than a sudden shock.
Downward parallel shift of 100bps in risk-free rates (2,639) –8% 1,948 6% (692) –2% (1,416) –3% 1,762 3% 346 1%
10% higher value of equity markets at start of projection 1,085 3% 264 1% 1,348 4% 1,594 3% 997 2% 2,591 5%
10% lower value of equity markets at start of projection (1,047) –3% (317) –1% (1,364) –4% (1,639) –3% (997) –2% (2,636) –5%
2008 interest rate sensitivities (% of Group EV) for Life & Savings business of 4% to upward 100bps and –8% to downward 100bps (2007: 1% and –3%) start from a significant lower financial market level than in 2007. As a result direct comparisons between 2007 and 2008 sensitivities have little meaning. In most markets, there is an asymmetry predominantly driven by guaranteed interest rates having higher value when interest rates decrease, while higher reinvestment rates would need to be shared with policyholders limiting shareholders’ gains in a higher rate environment. However this classical pattern is not followed in some entities (e.g., the UK and the Mediterranean and Latin American Region), where the business has significantly less interest rate guarantees and the EEV behaves more like a portfolio of fixed-income assets. In addition, higher interest rates affect the value both positively through higher investment rate and negatively through lower starting value of fixed income assets and higher discount rates for future profits. For different product types these interactions produce different results.
EXChANgE RATE RISK RELATED TO ThE OpERATINg ACTIVITIES OF gROUp SUBSIDIARIES In the insurance companies, which accounted for 89% of Group assets at December 31, 2008 (90% at the end of both 2007 and 2006), assets and liabilities with foreign currency exposure were generally matched or hedged.
In France, AXA is exposed to exchange-rate risk through the units it owns in certain investment funds partly invested in foreign currencies (particularly US dollar: €483 million vs. €1,645 million in 2007 and €1,607 million in 2006, pound sterling: €72 million vs. €338 million in 2007 and €343 million in 2006, and Japanese yen: €136 million vs. €335 million in 2007 and €349 million in 2006). AXA France owns these units in order to diversify its investments and enable policyholders to benefit from the performance of international financial markets. AXA France controls and limits its exposure to exchange-rate risk by using forwards (notional of €1,046 million vs. €2,915 million in 2007 and €2,698 million in 2006).
In addition, the UK non-profit funds have Euro denominated Credit Default Swaps in place with a nominal value of €76 million (€199 million in 2007 and nil in 2006). The exposure in with-profits funds arises on assets with a market value of €1,232 million (€2,770 million in 2007 and €2,996 million in 2006), while foreign currency liabilities in the fund amount to €86 million (€136 million in 2007 and €188 million in 2006). The UK With-Profits funds hold some foreign exchange derivative instruments (including swaptions held in connection with Guaranteed Annuity Options).
AXA Japan’s investment strategy is to invest when relevant outside the Japanese market in order to benefit from higher returns. At the end of 2008, the total assets denominated in foreign currencies (mainly US dollar) represented an amount of €5,725 million (€6,083 million at the end of 2007 and €10,025 million at the end of 2006). Excluding assets backing unit-linked contracts, the corresponding exchange rate risk was fully hedged through the use of derivatives.
Swiss entities are exposed to exchange rate risk through their investments in foreign currencies (mainly Euro and US Dollar) due to limited investment possibilities and traditional low interest rate environment in Switzerland. As a result, they have foreign exchange exposure on equity securities as well as on fixed maturities denominated in currencies other than Swiss Francs. However, the main part of the exposure is hedged back into Swiss Francs with foreign exchange forwards. Switzerland Life & Savings foreign exchange exposure amounted to €15 billion (circa 36% of assets) at the end of 2008, of which €12 billion were hedged.
These countries accounted for 96% at the end of 2008 (96% at the end of both 2007 and 2006) of the Group’s Life & Savings companies’ assets.
In France, AXA is exposed to exchange-rate risk through the units it owns in certain investment funds partly invested in foreign currencies mainly US dollar (€151 million vs. €492 million in 2007 and €649 million in 2006) and to a much lesser extent pound sterling and japanese yen in order to diversify its investments. France controls and limits its exposure to exchange-rate risk by using forwards in all these currencies (notional of €301 million vs. €867 million in 2007 and €1,021 million in 2006).
In Belgium, AXA manages a US dollar run-off portfolio, which is fully hedged with investments in the same currency amounting to around €29 million (€110 million at the end of 2007 and €130 million at the end of 2006).
Germany is exposed to US dollar exchange-rate risk on certain investment funds for €808 million (€829 million in 2007 and €733 million in 2006). Remaining exchange-rate risk exposure, mainly concerning the pound sterling for €57 million (€211 million in 2007 and €264 million in 2006) and the Japanese yen for €22 million (€62 million in 2007 and €63 million in 2006), is incurred for the purpose of diversifying investments. Germany controls and limits its exchange-rate risk by using forwards (notional €836 million vs. €785 million in 2007 and €587 million in 2006) and currency swaps (notional of €194 million vs. €124 million in 2007 and none in 2006).
In the Mediterranean and Latin American Region, the Group’s property & Casualty companies do not have any significant exposure to exchange-rate risk.
These countries accounted for 99% at the end of 2008 (95% at the end of 2007 and 94% at the end of 2006) of the Group’s Property & Casualty companies’ assets.
• International Insurance business (3% of Group assets at the end of 2008 vs. 2% at the end of 2007 and 3% at the end of 2006): In the course of its business, AXA Corporate Solutions Assurance carries some insurance liabilities, denominated in foreign currencies, particularly in US dollar (€1,319 million at the end of 2008 vs. €984 million at the end of 2007 and €1,118 million at the end of 2006) and, to a lesser extent, pound sterling (€474 million at the end of 2008 vs. €590 million at the end of 2007 and €607 million at the end of 2006). The company carries assets denominated in foreign currencies to ensure the balance sheet congruence. The congruence between the company’s foreign-currency assets and liabilities is regularly adjusted, but is subject to unpredictable loss occurrence and the corresponding movements in reserves.
– C$1.7 billion or €1.0 billion (C$1.7 billion or €1.2 billion at the end of 2007, and C$1.0 billion or €0.7 billion at the end of 2006) in respect of the Canadian business in the form of cross-currency swaps,
Interest-rate risk DEFINITION: interest-rate risk may result from: • a mismatch between types of interest rates (fixed versus floating), • a mismatch between floating rate benchmarks, • a mismatch between floating rate renewal dates.
POLICY: the objective is to limit variations in net foreign currency-denominated assets resulting from movements in exchange rates. The purpose of the policy is therefore to protect the value of AXA’s net foreign-currency investments in its subsidiaries and thus protect Group consolidated shareholders’ equity against currency fluctuations. It is also designed to protect other key indicators such as adjusted net asset value, European embedded value and solvency ratios against such fluctuations.
ASSESSMENT: exchange rate sensitivity analyses measure the annual change in interest expenses resulting from a 10% appreciation in the Euro against all other currencies together with the impact on shareholders’ equity, gearing ratio and European solvency margin.
Counterparty credit risk is defined as the risk that a third party in a transaction will default on its commitments. Given the nature of its core business activities, AXA monitors two major types of counterparties, using methods suitable to each type: • Investment portfolios held by the Group’s insurance operations (excluding assets backing separate-account products where the financial risk is borne by policyholders) as well as by banks and holding companies. These portfolios give rise to counterparty risk through the debt securities and derivative products held within them.
INVESTED ASSETS AXA has a database consolidating the Group’s listed assets and analyzing them by issuer, credit rating, sector and geographic region, in order to assess the risk of concentration in its equity and debt security portfolios. This database allows AXA to monitor, on a monthly basis, exposure to the default risk of a given issuer, particularly through holding of its debt securities. It also allows the monitoring of equity exposure.
At December 31, 2007, the economic breakdown of the total value of ABS (€16.2 billion excluding CMOs and ABS held through with-profits funds) was: 18% in CLO, 15% in Consumer ABS, 11% in CDO, 18% in Commercial MBS, 23% in Prime Residential, 10% in US Subprime & Alt-A, and 5% in Non conforming RMBS. At December 31, 2007, AXA’s invested assets included an exposure to US subprime residential and Alt-A mortgage loans of approximately €1.6 billion (84% equaling or above AA rating and 54% estimated policyholders’ participation).
At December 31, 2007, the breakdown of the ABS portfolio by rating was: 63% in AAA, 6% in AA, 14% in A, 10% in BBB, 1% in high yield, and 6% in NR/equity.
Credit risk relating to CDOs is monitored separately, depending on the tranches held, and regardless of the type of collateral (debt securities or credit derivatives). Note that the CDOs are consolidated in AXA‘s balance sheet, in line with IFRS rules, even though AXA’s investments in these CDO’s assets are limited.
Monolines At December 31, 2008, the direct general account exposure (excluding the UK with-profits) to monoline credit insurers (“Monolines”) was insignificant and the indirect exposure (debt securities enhanced by Monoline reinsurers) in the general account (excluding the UK with-profits) was €306 million, of which €113 million to Ambac and €135 million to MBIA (versus €379 million indirect exposure at the end of 2007, of which €128 million to Ambac and €162 million to MBIA).
(1) This figure represents an economic view i.e. 100% of assets held in consolidated “core block” and “satellite” funds and assets held by non consolidated funds.
RECEIVABLES FROM REINSURERS: RATINg pROCESSES AND FACTORS To manage the risk of reinsurers’ insolvency, a Security Committee is in charge of assessing reinsurers’ quality and acceptable commitments. The committee is under co-joined authority of GRM and AXA Cessions. This risk is monitored to avoid any excessive exposure to any specific reinsurer. The security committee meets monthly – and more frequently during renewal periods — and decides on any action to be taken with the aim of limiting AXA’s exposure to the risk of default by any of its reinsurers.
In addition, AXA summarizes and analyzes its exposure to all reinsurers by factoring in all positions with reinsurers (claims, premiums, reserves, deposits, pledges and security deposits). The Group’s top 50 reinsurers accounted for 80% of reinsurers’ share of insurance and investment contract liabilities in 2008 (versus 78% in 2007 and 75% in 2006).
At December 31, 2006, the breakdown of reserves ceded to reinsurers (€12.0 billion) by reinsurer rating was: 11% in AAA, 30% in AA, 15% in A, 2% in BBB/BB/B, 17% in Paris RE (reserves ceded to PARIS RE as part of AXA RE disposal, which were not split by ratings at the end of 2006) and 25% in other.
Insurance risks for both Life & Savings and Property & Casualty businesses are covered through 5 major processes, defined at Group level but performed jointly by central and local teams: • Profitability analysis mainly through procedures governing pre-launch product approval (New product risk control) that complement strong and basic underwriting rules.
EXpOSURE ANALySIS In order to ensure a consolidated view of insurance risks, GRM has developed and deployed common models/ metrics to measure risks homogeneously throughout the Group. This is designed to check that the Group’s current exposure is within the Group’s consolidated risk appetite limits.
Since 2006, this work has been extended to the Life & Savings business based on the same procedures as in the Property & Casualty business. Certain Group companies now arrange reinsurance through AXA Cessions, which has set up a retention pool protected by Group covers placed on the Reinsurance Market.
Implementation of the reinsurance strategy: role of AXA cessions In order to build adjusted and optimized protection, the Group’s various operating entities place 100% of their reinsurance treaties with AXA Cessions. Only a small part of most treaties is placed directly in the reinsurance market through AXA Cessions, as most of the risk is combined at AXA Cessions level to form internal Group reinsurance pools by line of business.
Finally, in addition to the analyses described above, AXA regularly monitors its exposure to its main reinsurers, to ensure that consolidated limits remain within Group risk tolerance (please see the section “Credit Risk – Receivables from reinsurers”)
for which past experience is applied to each loss occurrence or underwriting year, in order to make reserves projections until their estimated final development.
Global warming is now proven beyond doubt, although experts may disagree on its magnitude and projection. Even if it remains very difficult to estimate the local effect of climate change due to the large number of local geographical factors to be taken into account (sea currents, topography, etc.), some results are now available at regional level and used in our catastrophe risk estimations. However, it is still very difficult to estimate the consequences of extreme events (heat waves, droughts and floods, high winds and intense precipitation caused by cyclones), which are of particular concern to insurance companies. This led the Group to launch in 2007 the AXA Research Fund, which supports academic research projects on Climate.
Aside from the immediate destruction caused mainly by flooding, and to a lesser extent by drought, climate change will have major implications for most human activities, particularly agriculture, timber production, healthcare and water activities, and therefore for the insurance used to protect them (property, agricultural, business interruption, civil liability, marine and aviation, life, health, etc.). The insurance sector thus faces major challenges in the coming years in the form of potential increases in property and
PART IV – Risk FAcTORs, cERTAiN DiscLOsUREs ABOUT MARkET Risks AND RELATED MATTERs casualty claims, the emergence of new liability claims and growing uncertainties about the size of maximum possible losses, which have become harder to assess and to predict on the basis of past events. Furthermore, certain key economic sectors, which work together with the insurance sector, are set to undergo radical changes, due in particular to greenhouse gas emission constraints laid down in the Kyoto protocol, which was enacted on February 16, 2005.
As part of its mortality risk management, AXA issued in 2006 a “mortality” bond which provides the Group with some protection against mortality shocks. The redemption amount of this bond depends on general mortality thresholds. This instrument was transformed, where needed, by AXA Cessions into reinsurance capacity for AXA Group subsidiaries.
4.2 QUANTiTATivE AND QUALiTATivE DiscLOsUREs ABOUT MARkET Risk AND Risk FAcTORs
Responsibility for managing day-to-day operational risks lies mainly within operating subsidiaries, which are best positioned to take the appropriate measures to mitigate the risks faced by their organizations. However, AXA has defined a single Group framework for identifying, quantifying and monitoring the main operational risks, involving the deployment of a common system, and dedicated operational risk teams are in place in all the major entities of the Group.
At Group level, both quantitative and qualitative requirements have been defined. • Across the Group, the most critical operational risks of each entity are identified and assessed following a forward-looking and expert opinion approach. These risks are then aggregated using actuarial methods to estimate the capital allocation needed to cover operational risks based on models inspired by those proposed by the Basel Committee for banking supervision. Moreover, Operational Risk profile is embedded into local governance through senior management validation to ensure adequate corrective and pre-emptive action of the main risks.
MANAgINg pOTENTIAL RISK ON REpUTATION In the light of the global financial crisis triggered in 2008, AXA reinforced measures in place to protect its reputation, and communicated to shareholders, customers, staff, and more broadly the financial community, on its strength and financial soundness through: • a tailored and daily basis communication at both internal and external levels (AXA’s intranet and specific hotline to answer questions of staff, letters sent to customers and articles posted on AXA’s Web site).
PART IV – Risk FAcTORs, cERTAiN DiscLOsUREs ABOUT MARkET Risks AND RELATED MATTERs pROFESSIONAL EThICS AXA adopted the AXA Group Compliance and Ethics Guide (“the Guide”) in February 2004. The Guide, which was updated in 2006, covers all of the Group’s worldwide employees. It defines rules for day-to-day professional conduct and covers a variety of matters including specific rules concerning conflicts of interest, transactions involving AXA securities and those of its listed subsidiaries, anti-money laundering, confidentiality and control of sensitive information.
AXA Cessions, however, is mandated to buy certain types of Group-wide insurance programs for risks shared by all AXA Group companies. These policies cover directors and officers’ liability, professional liability and fraud and are: • Group-wide insurance programs covering all AXA Group entities with the exception of AXA Asia Pacific Holdings and
Please see Part V “Consolidated Financial Statements” of this Annual Report.
DIVIDEND pOLICy The Company has paid dividends on its ordinary shares in each of the past five years. The Company pays dividends in Euro. Future dividends will depend on AXA’s earnings, financial condition and other factors. Proposals for dividend payments are made at the discretion of the Management Board, subject to prior approval by the Supervisory Board, and are submitted for final approval to AXA’s shareholders at their Annual General Meeting.
CONSOLIDATED STATEMENT OF RECOGNIZED INCOME AND EXPENSE FOR THE PERIOD 234
Note 20: Revenues by segment and net revenues from banking activities 370
Note 28: Contingent assets and liabilities and unrecognized contractual commitments 404
6 Value of purchased business in force (a) 4,410 4,373 5,030 7 Deferred acquisition costs and equivalent 18,765 16,757 15,896
Reinsurers’ share in insurance and investment contracts liabilities 11,745 11,315 12,038
Receivables arising from direct insurance and inward reinsurance operations 12,629 12,140 11,873
Share capital and capital in excess of nominal value 22,077 21,366 22,670
Net consolidated income for the period – Group share (c) 923 5,666 5,085
Liabilities arising from investment contracts with no discretionary participating features 1,295 1,452 1,121
Minority interests of controlled investment funds and puttable instruments held by minority interest holders 5,108 7,751 7,224
Other debts instruments issued, notes and bank overdrafts (b) 6,676 6,260 8,711
(a) Also includes liabilities arising from contracts where the financial risk is borne by policyholders with Guaranteed Minimum features. (b) Amounts are shown net of related derivative instruments impact (Note 19). (c) Includes €–106 million loss recognized against Other payables. As a reminder, AXA Japan closes its books at the end of September. According to IFRS
principles whereby the financial statements of the subsidiary shall be adjusted to reflect the effects of significant events that would have been recognized with a closing date aligned with the AXA Group, AXA Japan’s 2008 accounts were adjusted with the provisional loss from October to December 2008. This adjustment reflects mainly the further increase of the credit spreads during this period.
LIABILITIES December 31, 2008 December 31, 2007 December 31, 2006 (in Euro million) Restated (a)
Liabilities arising from investment contracts with discretionary participating features and where the financial risk is borne by policyholders 7,840 10,414 11,007
Total Liabilities arising from contracts where the financial risk is borne by policyholders 132,436 183,241 176,657
Total Liabilities arising from other insurance and investment contracts 369,931 352,283 357,088
Revenues from other activities 5,488 6,441 5,684 20 Revenues (a) 91,221 93,633 77,966 Change in unearned premiums net of unearned revenues and fees (321) (612) (452)
Of which change in fair value of assets with financial risk borne
Change in goodwill impairment and other intangible assets impairment (126) (148) (12)
Net consolidated income 1,236 6,391 5,758 Split between: Net consolidated income – Group share 923 5,666 5,085
Net consolidated income – Minority interests 313 725 673 26 Earnings per share (j) 0.44 2.76 2.54 Fully diluted earnings per share (j) 0.44 2.73 2.49 (a) Gross of reinsurance.
(i) As described in Note 1.10, the contribution of discontinued operations is stated on a separate line of the income statement. (j) Revised net income EPS taking into account interest payments related to perpetual debts classified in equity, including foreign exchange impacts. Previously disclosed EPS excluded such adjustments. Basic net income EPS amounted to€2.77 and fully diluted net income EPS to €2.75 as at December 31, 2007 and €2.61 and €2.56 respectively as at December 31, 2006.
Employee benefits actuarial gains and losses through OCI (731) 628 260
The consolidated statement of shareholders’ equity is presented in Note 13.
Change in goodwill impairment and other intangible assets impairment (d) 126 4 12
Net change in deferred acquisition costs and equivalent (1,474) (1,911) (1,371)
Net increase / (write back) in impairment on investments, tangible and other intangible assets 5,732 963 174
Net increase / (write back) in other provisions (e) (45) 26 59
Adjustment of non cash balances included in the operating income before tax 21,615 18,317 13,829
Adjustment for reclassification to investing or financing activities 624 (5,786) (4,260)
Interests paid & received recorded in profit or loss during the period (20,790) (16,237) (13,210)
Adjustment of transactions from accrued to cash basis (22,838) (18,780) (15,224)
Purchase of subsidiaries and affiliated companies, net of cash acquired (2,273) (3,275) (6,850)
Disposal of subsidiaries and affiliated companies, net of cash ceded (150) 2,735 117
Sales of equity securities and non controlled investment funds (g) (h) 26,251 34,258 18,890
Sales of investment properties held directly or not (h) 1,794 2,802 2,104
Sales and/or repayment of loans and other assets (h) (i) 44,507 35,262 19,500
Net cash related to sales and repayments of investments (g) (h) (i) 127,616 144,955 107,292
Purchases and/or issues of loans and other assets (h) (i) (48,155) (44,917) (27,574)
Cash and cash equivalent as at January 1 (l) 17,192 19,831 20,640
Net impact of foreign exchange fluctuations and reclassification on cash and cash equivalents (161) (494) (649)
Cash and cash equivalent as at December 31 (l) 30,811 17,192 19,831
(a) As described in Note 1.10, the contribution of discontinued operations is stated on a separate line of the income statement. (b) Includes premium/discount capitalization and relating amortization, amortization of investment and owner occupied properties (held directly). (c) Includes impact of reinsurance and change in liabilities arising from contracts where the financial risk is borne by policyholders. (d) Includes impairment and amortization of intangible assets booked during business combinations.
(i) Includes sales/purchases of assets backing insurance & investment contracts where the financial risk is borne by policyholders. (j) Includes net cash impact of interest margin relating to hedging derivatives on financing debt.
(k) Includes €–106 million loss recognized against Other payables in the balance sheet. As a reminder, AXA Japan closes its books at the end of September.
AXA has its primary listing on the Paris stock exchange’s Euronext market and has been listed since June 25, 1996 on the New York Stock Exchange.
1.2. GENERAL ACCOUNTING PRINCIPLES 1.2.1. Basis for preparation AXA’s consolidated financial statements are prepared as at December 31. However, certain entities within AXA have a different reporting year end, in particular AXA Life Japan, which has a September 30 financial year end.
– Debt instruments may be reclassified to the loans and receivables category, if they meet the definition of loans and receivables at the reclassification date and the entity has the ability and intention to hold the assets for the foreseeable future or until maturity.
– Other certain non-derivative financial assets classified as at fair value through profit or loss category (other than assets designated by option at inception as measured at fair value through profit or loss) may be reclassified to the held to maturity category or to the available for-sale category in rare circumstances and where the entity no longer has the intention to sell the assets in the short term.
– At the reclassification date the financial assets are reclassified at their fair value, which becomes the new cost or amortised cost of the financial asset. Previously recognized gains and losses cannot be reversed.
A further amendment was published on November 27, 2008 to clarify the effective date and transition requirements. The amendments to IAS 39 and IFRS 7 are effective July 1, 2008 and are to be accounted for on a prospective basis from the date of reclassification. For reclassifications made before November 1, 2008, the amendment permits an entity to use fair values as of July 1, 2008. Any reclassification on or after November 1, 2008 shall take effect only from the date when the reclassification is made. No reclassification of financial assets, such as allowed by the amendments to IAS 39, was made by the Group in 2008.
• IFRIC 14 – IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction, published on July 4, 2007; • IFRIC 11 – Group and Treasury Share Transactions, published on November 2, 2006, that addresses the application of IFRS 2 to share-based payment arrangements in three cases. When an entity chooses or is required to buy its own equity instruments to settle the share-based payment obligation, the arrangement should be accounted for as equity-settled sharebased payment transactions. When a parent company grants employees of a subsidiary’s rights to its equity instruments, assuming the transaction is recorded as an equity-settled transaction in the consolidated financial statements, the subsidiary would also record the transaction as an equity-settled transaction in its financial statements. When a subsidiary grants its employees rights to equity instruments of its parent company, the subsidiary should record the transaction as a cash-settled share-based payment transaction.
The amendment to IAS 23 – Borrowing Costs, published on March 29, 2007 and applicable from January 1, 2009, makes it compulsory to capitalise borrowing costs and removes the option to expense these costs. The amendment excludes eligible assets measured at fair value from the revised standard’s scope of application. This amendment is not expected to have a significant impact on the Group’s consolidated financial statements.
Revised IFRS 3 – Business Combinations and amendments to IAS 27 – Consolidated and Separate Financial Statements, published on January 10, 2008 and effective for financial years beginning on or after July 1, 2009 with earlier adoption permitted, represent the second phase of the IASB business combination project. Revised IFRS 3 introduces a number of changes in the accounting of business combinations that could impact the amount of goodwill to be recognized, the net income of the period of the acquisition and future results. The amendments to IAS 27 require that a change in the ownership interest of a subsidiary be accounted for as an equity transaction, with no impact on goodwill or net income. In addition, they introduce changes in the accounting for losses incurred by subsidiaries and the loss of control of an entity. The changes will be applied prospectively to new acquisitions and transactions with minority interests after the adoption date.
The amendment of IFRS 2 – Share based payments, published on January 17, 2008 and applicable from January 1, 2009, clarifies that vesting conditions are service conditions and performance conditions only. Other features of a share-based payment are not vesting conditions. It also specifies that all cancellations, whether by the entity or by other parties, should receive the same accounting treatment. This amendment is not expected to have a significant impact on the Group’s consolidated financial statements.
The Improvements to IFRSs, published on May 22, 2008 and applicable from January 1, 2009 unless otherwise specified, include amendments that are not part of a major project. They are presented in a single document rather than as a series of piecemeal changes. They involve accounting changes for presentation, recognition or measurement purposes and terminology or editorial
IFRIC 16, Hedges of a Net Investment in a Foreign Operation, published July 3, 2008 and applicable to the Group from January 1, 2009, provides guidance to an entity that hedges the foreign currency risk arising from its net investments in foreign operations and wishes to qualify for hedge accounting in accordance with IAS 39. IFRIC 16 does not apply to other types of hedge accounting. The interpretation provides guidance on identifying the foreign currency risks that qualify for hedge accounting and where within a group, the hedging instrument can be held. The guidance is to be applied prospectively to transactions and hedging arrangements after the adoption date.
IFRIC 17. Distribution of Non-cash Assets to Owners, published November 27, 2008 and applicable to the Group from January 1, 2010, provides guidance on how an entity should measure distribution of assets other than cash when it pays dividends to its owners. The interpretation also requires an entity to provide additional disclosures if the net assets being held for distribution to owners meet the definition of a discontinued operation. The guidance is to be applied prospectively to distributions after the adoption date.
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), intangible assets acquired in a business combination, the value of acquired business in force, deferred acquisition costs and equivalent, certain assets accounted at fair value, liabilities relating to the insurance business, pension benefit obligations and balances related to share-based compensation. The principles set out below specify the measurement methods used for these items. These methods, along with key assumptions where required, are discussed in greater depth in the notes relating to the asset and liability items concerned where meaningful and useful.
As the result, the goodwill gross value disclosed in Note 5 represents the gross value of these goodwills net of cumulated amortization recognised in French GAAP as at December 31, 2003.
Currency Translation Differences AXA elected the option to reset to zero all past cumulative currency translation differences for all foreign operations as of January 1, 2004.
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 investments and liabilities including derivatives.
1.3. CONSOLIDATION 1.3.1. Scope and basis of consolidation Companies in which AXA exercises control are known as subsidiaries. under the current definition of IAS 27, control is the power to govern the financial and operating policies of a company so as to obtain benefits from its activities. Subsidiaries are fully consolidated from the date on which control according to the IAS 27 / SIC 12 current model is transferred to AXA. Control is presumed to exist when AXA directly or indirectly holds more than 50% of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are also considered when assessing whether AXA controls another entity.
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 for 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”.
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.
Other intangible assets such as the value of customer relationships are recognized only if they can be measured reliably. The value of customer relationships intangible in this case represents the value of future cash flows expected from renewals and the crossselling of new products to customers known and identified at the time of the acquisition. These projections include assumptions
The nature of the intangible assets recognized is consistent with the valuation methods used when purchasing the acquired entity. In the context of a business combination, only restructuring costs that can be measured reliably and which correspond to an existing liability of the acquired company prior to the acquisition date are included in restructuring provisions recognized in the acquired company’s balance sheet at acquisition date.
The adjustment to the cost of a business combination contingent on future events is included in the cost of the combination if the adjustment is probable and can be measured reliably. In the estimate of the contingent consideration, attention is paid to use assumptions that are consistent with the assumptions used for the valuation of intangible assets such as VBI. If the future events do not occur or the estimate needs to be revised, the cost of the business combination is adjusted accordingly, taking account of the impact in terms of additional goodwill and/or adjustments of the valuation of acquired assets and liabilities.
If the cost of acquisition is less than the net fair value of the assets, liabilities and contingent liabilities acquired, the difference is directly recorded in the consolidated statement of income.
Foreign exchange differences arising from monetary financial investments available for sale are recognized as income or expense for the period in respect of the portion corresponding to amortized cost. The residual translation differences relating to fair value changes are recorded in shareholders’ equity.
AXA performs an impairment test of goodwill at least annually based on cash generating units, using a multi-criterion analysis with parameters such as the value of assets, future operating profits and market share, in order to determine any significant adverse changes. It also considers the interdependence of transactions within sub-groups. Within each cash generating unit, a comparison is made between net book value and the recoverable value (equal to the higher of market value and value in use). Value in use consists of the net assets and expected future earnings from existing and new business, taking into account the cash generating units’ future cash flows. The value of future expected earnings is estimated on the basis of the life insurance and investment contracts embedded value figures published by AXA or similar calculations for other activities. Market values are based on various valuation multiples.
1.6.3. Other intangible assets Other intangible assets include softwares developed for internal use for which direct costs are capitalized and amortized on a straight-line basis over the assets’ estimated useful lives.
1.6.4. Deferred acquisition costs (DAC) relating to insurance contracts and investment contracts with discretionary participating features – Deferred origination costs (DOC) relating to investment contracts with no discretionary participating features 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 1.13.2) this asset is tested for recoverability: any amount above future estimated gross profits is not deemed recoverable and expensed.
For investment contracts with no discretionary participating features, a similar asset is recognized (DOC) but limited to costs directly attributable to the provision of investment management services. This asset is amortized by taking into account projections of fees collected over the life of the contracts. The amortization of DOC is reviewed at each closing date to reflect changes in assumptions and experience. This asset is also tested for recoverability.
1.7. INvESTMENTS FROM INSURANCE, BANkING AND OTHER ACTIvITIES Investments include investment in real estate properties and financial instruments including equities, debt securities and loans.
1.7.1. Investment properties Investment properties (excluding investment properties totally or partially backing liabilities arising from contracts where the financial risk is borne by policyholders and from “With-Profit” contracts) are recognized at cost. The properties components are depreciated over their estimated useful lives, also considering their residual value if it may be reliably estimated.
1.7.2. Financial instruments Classification Depending on the intention and ability to hold the invested assets, financial instruments are classified in the following categories: • assets held to maturity, accounted for at amortized cost; • loans and receivables (including unquoted debt instruments) accounted for at amortized cost; • assets held for trading and assets designated as at fair value with change in fair value through profit or loss; • available-for-sale assets accounted for at fair value with changes in fair value recognized through shareholders’ equity.
At inception, the option to designate financial investments and liabilities at fair value with change in fair value recognized through income statement is mainly used by the Group in the following circumstances: • financial investments when electing the fair value option allows the Group to solve accounting mismatch, and in particular: – assets backing liabilities arising from contracts where the financial risk is borne by policyholders; – assets included in hedging strategies set out by the Group for economical reasons but not eligible for hedge accounting as defined by IAS 39; – debts held by structured bond funds controlled and consolidated by the Group and made up of CDOs (Collateralized Debt
Obligations); • portfolios of managed financial investments 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).
underlying financial instruments held in the “Core Investment Portfolios” are classified as available-for-sale unless involved in a qualifying hedge relationship or more broadly when electing the fair value option reduces accounting mismatch. As specified above, the financial instruments held in the “Satellite Investment Portfolios” are accounted for at fair value with changes in fair value recognized through income statement.
Loans which are not designated under the fair value option are accounted at amortized cost, net of amortized premiums and discounts and impairment.
For debt instruments classified as “held to maturity” or “available for sale”, an impairment based respectively on future cash flows discounted using the initial effective interest rate or on fair value is recorded through the income statement if future cash flows may not be fully recoverable due to a credit event relating to the instrument issuer. A downgrade of an entity’s credit rating is not, of itself, evidence of impairment. If the credit risk is eliminated or improves, the impairment may be released. The amount of the reversal is also recognized in the income statement.
For equity securities classified as available for sale, a significant or prolonged decline in the fair value below its carrying value is considered as indication for potential impairment, such as equity securities showing unrealized losses over a 6 months period or more (prior to the closing date), or unrealized losses in excess of 20% of the net carrying value at the closing date. If such evidence exists for an available for sale financial asset, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment on that financial asset already booked in the income statement – is removed from shareholders’ equity and an impairment is recognized through the income statement. Equity securities impairment recognized in the income statement cannot be reversed through the income statement until the asset is sold or derecognized.
Impairments of loans available for sale are based on the present value of expected future cash flows, discounted at the loan’s effective interest rate (down to the loan’s observable market price), or on the fair value of the collateral.
1.9. DERIvATIvE INSTRUMENTS Derivatives are initially recognized at fair value at purchase date and are subsequently re-measured at their fair value. unrealized gains and losses are recognized in the statement of income unless they relate to a qualifying hedge relationship as described below. The Group designates certain derivatives as either: (i) hedging of the fair value of recognized assets or liabilities or of a firm commitment (fair value hedge); or (ii) hedging of highly probable expected future transactions (cash flow hedge); or (iii) hedging of net investments in foreign operations.
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.
Derivatives not qualifying for hedge accounting Changes in the fair value of all other derivative instruments that do not qualify for hedge accounting are recognized in the income statement.
activities (assets and liabilities) concerned are measured at the lower of net carrying value and fair value net of selling costs. They are presented in separate asset and liability items on the balance sheet. The liabilities of subsidiaries (excluding shareholders’ equity) held for sale are entered separately on the liability side of the consolidated balance sheet, with no netting against assets.
In the event of a discontinuation of operations representing either a business line, a main and distinct geographical region or a subsidiary acquired solely with a view to reselling, their after-tax contribution is stated on a separate line of the income statement. For comparison purposes, the same applies to the presentation of income statements relating to previous periods that are included in the financial statements. This separate line also includes the post-tax gain / loss recognized on the disposal of the discontinued operation at the date of loss of control.
1.12.2. 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 without taking into consideration the prospect of redemption under economic constraints (e.g. step up clauses or pressure from shareholders to pay a dividend).
1.12.4. 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.
1.13. LIABILITIES ARISING FROM INSURANCE AND INvESTMENT CONTRACTS 1.13.1. Contracts classification The Group issues contracts that transfer an insurance risk or a financial risk or both.
In some insurance or investment contracts, the financial risk is borne by policyholders. Such contracts are usually unit-linked contracts.
Claims reserves (non-life insurance) The purpose of claims reserves is to cover the ultimate cost of settling an insurance claim. Claims reserves are not discounted, except when relating to disability annuities.
unrealized gains and losses on assets classified as trading or designated at fair value through profit or loss, along with any other entry impacting the income statement and generating a timing difference, are accounted in the statement of income with a corresponding shadow entry adjustment in the statement of income. The shadow accounting adjustments relating to unrealized gains and losses on assets available-for-sale (for which change in fair value is taken to shareholders’ equity) are also booked through shareholders’ equity.
Liability adequacy test (LAT) At each balance sheet date, liability adequacy tests are performed in each consolidated entity in order to ensure the adequacy of the contract liabilities net of related DAC and VBI assets and deferred policyholders’ participation liability or asset. To perform these tests, entities group contracts together according to how they have been acquired, are serviced and have their profitability measured. Entities also use current best estimates of all future contractual cash flows as well as claims handling and administration expenses, and they take into account embedded options and guarantees and investment yields relating to assets backing these contracts. Contract specific risks (insurance risk, asset return risk, inflation risk, persistency, adverse selection, etc.) directly related to the contracts that might make the net liabilities inadequate, are also considered.
1.16. OTHER LIABILITIES 1.16.1. Income taxes The current income tax expense (benefit) is recorded in the income statement on the basis of net amounts estimated to be payable (or recoverable) in relation to taxable operations recorded during the year and based on the local tax regulation.
The AXA Shareplan issued under specific French regulatory framework includes two options: traditional and leveraged option. The cost of the traditional option Shareplan is valued according to the specific guidance issued in France by the CNC (Conseil National de la Comptabilité). The cost of the leveraged option plan is valued by taking into account the five-year lock-up period for the employees (as in the traditional plan) but adding the value of the advantage granted to the employees by enabling them to benefit from an institutional derivatives-based pricing instead of a retail pricing.
1.17.2. 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.
The same applies to contingent liabilities, except if identified at the time of a business combination (see section 1.3.2).
1.18. REvENUE RECOGNITION 1.18.1. Gross written premiums Gross written premiums correspond to the amount of premiums written by insurance and reinsurance companies on business incepted in the year with respect to both insurance contracts and investment contracts with discretionary participating features, net of cancellations and gross of reinsurance ceded. For reinsurance, premiums are recorded on the basis of declarations made by the ceding company, and may include estimates of gross written premiums.
1.18.4. 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”
1.18.6. Net revenues from banking activities Net revenues from banking activities include all revenues and expenses from banking operating activities, including interests and banking fees.
1.18.8. Net investment result excluding financing expenses The net investment result includes: • investment income from investments from non banking activities, net of depreciation expense on real estate investments
• investment management expenses (excludes financing debt expenses), • realized investment gains and losses net of releases of impairment following sales, • the change in unrealized gains and losses on invested assets measured at fair value through profit or loss, • the change in impairment of investments (excluding releases of impairment following sales).
1.20. PRESENTATION OF THE FINANCIAL STATEMENTS Consolidated statement of cash flows While cash and cash equivalent balances backing contracts where the financial risk is borne by policyholders are not held within legally segregated “separate accounts”, the use of these cash balances is nevertheless subject to significant restrictions and these funds are not considered readily available for use by the Group. Accordingly, in 2007, the Group reconsidered the presentation of these amounts and decided to discontinue the presentation of cash backing unit-linked contracts in its consolidated statement of cash flows, for all periods presented.
Segment reporting From 2007 on, the “Holding companies” segment (that includes all non-operational activities), also includes some financial vehicles including certain Special Purpose Entities such as consolidated CDOs, formely disclosed as part of the segment “Others Financial Services” which was renamed “Banking”. This change was applied retrospectively to all periods presented.
2.1. CONSOLIDATED COMPANIES 2.1.1. Main fully consolidated companies December 31, 2008 December 31, 2007 voting Ownership voting Ownership Parent and Holding Companies Change in scope rights interest rights interest
voting Ownership voting Ownership Parent and Holding Companies Change in scope rights interest rights interest
(a) Wholly owned by AXA Asia Pacific Holdings Limited. (b) “MedLA” country is part of Mediterranean and Latin American Region. (c) AXA interest in AXA Asia Pacific Group is 53.42% broken down into 53.15% direct interest holding and an additional 0.27% owned by the
Bluefin Insurance Group Ltd (previously Venture Preference limited) 97.84 97.83 95.40 95.40
Hilo Direct SA de Seguros y Reaseguros 100.00 100.00 100.00 100.00
AXA Aurora SA Iberica de Seguros y Reaseguros Merged with Winterthur Seguros Generales, S.A. de Seguros y Reaseguros – – 99.70 99.70
voting Ownership voting Ownership Life & Savings and Property & Casualty Change in scope rights interest rights interest
AXA Oyak Sigorta AS Minority interest buyout 72.55 72.55 70.96 35.48
Asset Management voting Ownership voting Ownership (entities having worldwide activities) Change in scope rights interest rights interest
Hungary voting Ownership voting Ownership Other Change in scope rights interest rights interest
The cumulative opening balance sheet for the main entities acquired over the period is shown in Note 5.
Consolidated investments and investment funds At December 31, 2008, consolidated investment funds represented total invested assets of €89,139 million (€110,162 million at the end of 2007 and €98,124 million at the end 2006), corresponding to 332 investment funds mainly in France, the united Kingdom, Germany, Australia, Japan and Mediterranean and Latin American Region and in majority relating to the Life & Savings segment.
At December 31, 2008, the 6 consolidated CDOs represented total investments of €417 million (€1,024 million at the end of 2007 and €1,410 million at the end 2006). These CDO’s are consolidated in AXA’s balance sheet in line with IFRS rules even though AXA’s investments in these CDO’s assets represented only approximately €114 million out of the €417 million.
2.1.2. Proportionately consolidated companies December 31, 2008 December 31, 2007 voting Ownership voting Ownership Life & Savings and Property & Casualty Change in scope rights interest rights interest
Neuflize Vie (previously NSM Vie) Consolidated by equity method – – 39.98 39.98
Neuflize Vie (previously NSM Vie) Previously consolidated by proportional method 39.98 39.98 – –
AXA IM Asia Holding Private Ltd Newly consolidated 50.00 47.53 – –
Kyobo AXA Investment Managers Company Limited Acquired 50.00 47.53 – –
2.1.4. Post balance sheet closing In connection with AllianceBernstein’s acquisition of the business of Sanford C. Bernstein Inc. in 2000, AXA Financial Inc. entered into a purchase agreement under which certain former shareholders of Sanford C. Bernstein have the right to sell (“Put”) to AXA Financial, subject to certain restrictions set forth in the agreement, limited partnership interests in AllianceBernstein L.P. (“AllianceBernstein units”) issued at the time of the acquisition. As of the end of 2008, AXA Financial, either directly or indirectly through wholly owned subsidiaries, had acquired a total of 32.7 million AllianceBernstein units for an aggregate market price of $1,631 million through several purchases made pursuant to the Put. At December 31, 2008, AXA’s ownership in AllianceBernstein L.P. was approximately 62.4%. On January 6, 2009, the purchase of the last tranche of 8.16 million AllianceBernstein units was completed for a total price of approximately $150 million pursuant to the final installment of the Put, increasing the ownership of AXA in AllianceBernstein L.P. by approximately 3% to 65.4%.
On July 6, 2007, AXA announced the closing of the €450 million securitization of its pan-European motor insurance portfolio (diversified portfolio spread across 4 countries: Belgium, Germany, Italy and Spain). AXA consolidated its €96 million stake in the vehicle carrying the junior tranches.
AXA Japan In 2002, AXA Japan transferred 102 buildings with a carrying value of JPY 40 billion to a fund owned by a third party and AXA Japan for JPY 43 billion, with a view to sell the buildings to other parties. The remaining assets in the December 31, 2007 balance sheet relating to this transaction totaled JPY 7 billion (€44 million). During the first half of 2008, all assets were sold for a total amount of JPY 9.6 billion (€60 million).
Matignon Finances AXA set up an intra-group financing and cash management company, which entered the scope of consolidation in 2005.
The Banking segment includes banking activities conducted primarily in France and Belgium.
Assets held for sale including discontinued operations 394 1 – – – 19 – 415
Reinsurer’s share in insurance and investment contracts liabilities 4,846 2,349 4,380 – – – (261) 11,315
Assets held for sale including discontinued operations 680 – – – – – – 680
Mediterranean and Latin American Region 31,595 11,794 – – – – – 43,389
(a) Includes cash and cash equivalents, deposits and guarantees, various debtors and assets covering employee benefit liabilities. (b) Includes SPEs and CDOs previously disclosed in the Other Financial services segment which was renamed “Banking”. (c) In accordance with IFRS 3, i.e. within 12 months following the acquisition date, the Group adjusted certain items impacting the allocation of Winterthur purchase price.
Liabilities arising from insurance contracts (a) 358,285 47,434 11,072 – – – (319) 416,471
Liabilities arising from investment contracts (a) 85,896 – – – – – – 85,896
Provisions for risks and charges 4,185 4,154 87 266 177 439 – 9,308
Liabilities from held for sale including discontinued operations – – – – – – – –
(a) Also includes changes in liabilities arising from insurance contracts and investment contracts where the financial risk is borne by policyholders. (b) Includes SPEs and CDOs previously disclosed in the Other Financial Services segment which was renamed “Banking”. (c) Includes €–106 million loss recognized against Other payables. As a reminder, AXA Japan closes its books at the end of September. According to IFRS
Liabilities arising from insurance contracts (a) 366,487 47,138 11,058 – – – (320) 424,363
Derivatives relating to insurance and investment contracts (196) – 9 – – – – (187)
TOTAL LIABILITIES EXCLUDING CONSOLIDATED SHAREHOLDERS’ EQUITY 559,125 62,687 18,216 6,046 23,144 32,593 (27,797) 674,014
Inter- Life & Property & International Asset Holdings segment (In Euro million) Savings Casualty Insurance Management Banking companies (b) eliminations TOTAL
Liabilities arising from insurance contracts (a) 374,506 46,275 11,888 – – – (323) 432,345
Liabilities arising from investment contracts (a) 100,856 – 543 – – – – 101,399
Liabilities arising from policyholder’s participation 24,764 184 – – – – (8) 24,940
Derivatives relating to insurance and investment contracts (130) – (33) – – – – (163)
Liabilities from held for sale including discontinued operations – 1,812 – – – – – 1,812
OF WHICH WINTERTHUR TOTAL LIABILITIES EXCLUDING SHAREHOLDERS’ EQUITY 93,669 14,787 1,612 4 2,885 2,018 (3,763) 111,212
(a) Also includes changes in liabilities arising from insurance contracts and investment contracts where the financial risk is borne by policyholders. (b) Includes SPEs and CDOs previously disclosed in the Other Financial Services segment which was renamed ”Banking”. (c) In accordance with IFRS 3, i.e. within 12 months following the acquisition date, the Group adjusted certain items impacting the allocation of Winterthur purchase price.
Fees and charges relating to investment contracts with no participating features 662 – – – – – – 662
Change in unearned premiums net of unearned revenues and fees (348) (244) 272 – – – (1) (321)
Net realized investment gains and losses (558) 472 31 (13) – (104) – (173)
Net investment result excluding financing expenses (37,528) 414 483 (272) (1) 1,578 (743) (36,068)
Net result from outward reinsurance 913 (780) (362) – – – 132 (97)
Change in tangible assets impairment (3) (1) – – – – – (5)
Income from operating activities before tax (1,863) 1,358 87 943 (13) 1,349 (791) 1,070
Income arising from investments in associates – Equity method 18 5 – (2) – – – 21
Result from discontinued operations net of tax – – – – – – – –
Net consolidated income – Group share (446) 926 103 396 (38) (19) – 923
Net consolidated income – Minority interests 26 54 2 259 1 (29) – 313
According to IFRS principles whereby the financial statements of the subsidiary shall be adjusted to reflect the effects of significant events that would have been recognized with a closing date aligned with the AXA Group, AXA Japan’s 2008 accounts were adjusted with the provisional loss from October to December 2008. This adjustment reflects mainly the further increase of the credit spreads during this period.
Net revenues from banking activities – – – – 369 6 (39) 336
Change in unearned premiums net of unearned revenues and fees (278) (362) 28 – – – – (612)
Net realized investment gains and losses 4,196 953 – 8 – 107 – 5,264
Net investment result excluding financing expenses 23,129 2,687 385 64 4 217 (595) 25,891
Net result from outward reinsurance 32 (599) (553) – – – 74 (1,046)
Amortization of the value of purchased business in force (357) – – – – – – (357)
Change in goodwill impairment and other intangible assets impairment (58) (89) – – (1) – – (148)
Net revenues from banking activities – – – – 394 4 (22) 376
Change in unearned premiums net of unearned revenues and fees (229) (139) (84) – – – – (452)
Of which change in fair value of assets with financial risk borne by policyholders 15,158 – – – – – – 15,158
Change in financial instruments impairment (134) (47) (2) – – (9) – (192)
Technical charges relating to insurance activities (68,999) (12,697) (2,272) – – – (90) (83,877)
Net result from outward reinsurance (27) (629) (893) – – – 99 (1,450)
Bank operating expenses – – – – (89) 11 – (78)
Amortization of the value of purchased business in force (274) – – – – – – (274)
Change in goodwill impairment and other intangible assets impairment – – (12) – – – – (12)
Income from operating activities before tax 4,477 2,748 374 1,412 22 (544) (423) 8,066
Result from discontinued operations net of tax 77 45 – – – – – 123
Net consolidated income – Group share 2,957 1,977 244 610 10 (712) – 5,085
Net consolidated income – Minority interests 218 61 3 407 1 (17) – 673
Oyak (minority buyout) 2008 247 – 247 – – – – – –
Bluefin Advisory Services Limited (previously Thinc Group) (c) 2006 & 2008 122 – 122 58 – 58 – – –
AXA Financial, Inc. (minority buyout) 2000 2,712 – 2,712 2,571 – 2,571 2,885 – 2,885
SLPH (AXA UK Holdings) (minority buyout) 2000 1,109 – 1,109 1,388 – 1,388 1,541 – 1,541
AXA China Region (minority buyout) 2000 234 – 234 218 – 218 246 – 246
In this table, goodwills exclude goodwills related to entities accounted for the equity method (in 2008, Reso Garantia and Kyobo AXA Investment Managers Limited. See Note 10). (a) In accordance with IFRS 3, i.e. within 12 months following the acquisition date, the Group adjusted certain items impacting the allocation of Winterthur purchase price.
At December 31, 2008, the main contributors in terms of cash generating units to the: • Life & Savings net goodwill of €8,142 million were the united States (€2,513 million), Japan (€1,807 million), the united Kingdom
(€1,330 million) and the Mediterranean and Latin American Region (€756 million). • Property & Casualty net goodwill (€4,635 million) were the Mediterranean and Latin American Region (€1,456 million), the united Kingdom (€1,251 million), Germany (€902 million) and Belgium (€563 million). • Asset Management net goodwill (€4,047 million) was AllianceBernstein (€3,712 million).
5.2. CHANGE IN GOODWILL 5.2.1. Goodwill – Change in gross value Gross value Acquisitions Disposals Currency Gross value January 1, during during Goodwill translation Other December 31, (in Euro million) 2008 the period the period adjustments adjustment changes (a) 2008
AXA China Region (minority buyout) 218 – – – 16 – 234
(a) Includes the impact of exercises and revaluations of minority interest buyout commitments. (b) Includes the goodwill of SBJ group.
AXA MPS Vita and Danni – 465 – – – – 465
Nippon Dantaï (AXA Nichidan) 1,225 – – – (106) – 1,119
Nippon Dantaï (AXA Nichidan) 59 – – – – 17 – 76
Accumulated Increase in impairment impairment losses relating to transferred out goodwill Write back of relating to Cumulative Increase in created on impairment goodwill Cumulative impairment impairment acquisitions of goodwill transferred in Currency impairment January 1, during during sold during the “held for translation Other December 31, (in Euro million) 2007 the period the period the period sale” category adjustment changes 2007
Nippon Dantaï (AXA Nichidan) 64 – – – – (6) – 59
• and profitability on future new business. The value of new business is computed either on the basis of multiples of a standardized year of new business contribution
(present value of projected future distributable profits generated from business written in a year) or on a projection of each of the expected annual future earnings when multiples are not appropriate because of future growth specific patterns.
For each group of units of the Property & Casualty and Asset Management businesses, the calculation uses cash flow projections based on business plans approved by management covering a three to five year period and a risk adjusted discount rate. Cash flows beyond that period have been extrapolated using a steady growth rate and terminal value.
• On March 19, 2008, AXA uK completed the purchase of 100% of the share capital of SBJ Group. The acquisition of SBJ will complement and enhance AXA’s uK advisory and broking capability, bringing a number of strengths to the Group, including increased scale, a wider national presence and access to new market areas.
• On June 30, 2008 the agreement on the sale by Banca MPS to AXA MPS Assicurazioni Vita, of 100% of Quadrifoglio vita’s shares, was concluded (purchase price of €142 million). The closing of the transaction occurred on December 12, 2008. The purchase accounting was completed with an opening balance sheet as of December 31, 2008 and gave rise to a goodwill of €68 million. No other material intangibles were recognized.
At December 31, 2008, the goodwill had a net value of €68 million.
Assets and liabilities at the acquisition dates of Seguros ING, Quadrifoglio and SBJ totaled: (in Euro million)
Note that all amounts in the above table are converted at acquisition dates’ foreign exchange rates.
Acquisition of Thinc Group (renamed Bluefin Advisory Services Limited from December 31, 2008) (2007) On November 10, 2006, AXA uK completed the acquisition of Thinc Group, by increasing its stake to 100% for €51 million. This company’s main business is brokerage of Life & Savings products. At December 31, 2008, the goodwill had a net value of €44 million.
Acquisition of Venture Preference limited (renamed Bluefin Insurance Group Ltd from December 31, 2008) (2007) In 2007, AXA uK acquired a 95.4% interest in insurance brokers Stuart Alexander, Layton Blackham and Smart & Cook for €282 million. These three companies operate under the same structure, Venture Preference Limited, retaining their status as independent Property & Casualty insurance brokers. In 2008, AXA uK completed the acquisition by increasing its stake to 97.8%. At December 31, 2008, the goodwill had a net value of €178 million.
Acquisition of Swiftcover (2007) On March 22, 2007, AXA uK acquired the uK’s only 100% online insurer, Swiftcover, jointly owned by international insurer Primary Group and Swiftcover’s management for €359 million. At December 31, 2008, the goodwill had a net value of €218 million.
Acquisition of Kyobo Auto (2007) On May 22, 2007, AXA acquired 75% of Kyobo Auto for an amount of KRW 88 billion (€70 million). At the end of 2007, the Group’s ownership had reached 90% following the buyback of minority interests. At December 31, 2008, the goodwill had a net value of €43 million.
Buyout of minorities – AXA Konzern AG (2007 and 2006) On July 5, 2007, AXA finalized definitive settlements with all claimants in litigations seeking nullity and avoidance (Nichtigkeits- und Anfechtungsklagen) of the squeeze-out resolutions adopted by the general meetings of AXA konzern AG and Kölnische Verwaltungs-AG für Versicherungswerte AG on July 20 and July 21, 2006, respectively. In parallel, AXA Konzern finalized in 2007 the squeeze-out of the minority shareholders of its life insurance companies AXA Lebensversicherung AG (0.86% of the share capital) and Deutsche Ärzteversicherung AG (2.13% of the share capital). These squeeze-out resolutions are now effective and AXA holds 100% of the shares of these four subsidiaries.
The total investment to reach a 100% ownership in AXA Konzern, KVAG, AXA Lebensversicherung and Deutsche Ärzteversicherung starting from the situation as at January 1, 2006 amounted to €367 million. At December 31, 2008, the additonal goodwill generated by these transactions had a net value of €188 million.
Buyout of minorities – Tynan Mackenzie (2006) On September 27, 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. At December 31, 2008, the goodwill had a net value of €82 million.
Changes in deferred acquisition costs and equivalent for Life & Savings were as follows: Life & Savings Rights Life & Savings Rights Life & Savings Rights Deferred to future Deferred to future Deferred to future Acquisition management Acquisition management Acquisition management (in Euro million) Costs (a) fees (b) Costs (a) fees (b) Costs (a) fees (b)
Amortization and impairment for the period (2,000) (125) (2,121) (180) (1,956) (92)
Capitalized interests for the period 650 – 639 – 623 –
Changes in amortization, capitalization and impairment 1,317 126 1,622 183 1,168 173
Acquisitions and disposals of subsidiaries and portfolios (7) 3 (281) – 89 –
(a) Relating to contracts subject to IFRS 4, i.e. insurance contracts and investment contracts with discretionary participating features. (b) Applicable to investment contracts with no discretionary participation features. (c) As described in Note 1.10, the contribution of discontinued operations is stated on a separate line of the income statement.
7.3. DEFERRED ACQUISITION COSTS AND EQUIvALENT, NET OF AMORTIZATION, UNEARNED REvENUE RESERvES AND UNEARNED FEE RESERvES – LIFE & SAvINGS
The value of Life & Savings deferred acquisition costs and equivalent, net of amortization, unearned revenue reserves and unearned fee reserves, was as follows: Life & Savings Rights Life & Savings Rights Life & Savings Rights Deferred to future Deferred to future Deferred to future Acquisition management Acquisition management Acquisition management (in Euro million) Costs (a) fees (b) Costs (a) fees (b) Costs (a) fees (b)
DAC net of unearned revenues and unearned fees reserves 13,880 692 11,931 827 11,306 813
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).
Other intangible assets represented €3,156 million net value at December 31, 2008 and mainly included: Net value Net value Net value Accumulated December 31, December 31, December 31, (in Euro million) Gross value amortization Impairment 2008 2007 2006
Intangible assets recognized in business combinations 2,820 246 2 2,572 2,718 1,817 8.2. BREAkDOWN OF INTANGIBLE ASSETS RECOGNIZED IN BUSINESS COMBINATIONS
Bluefin Advisory Services Limited (previously Thinc Group) 42 (6) – 36
Amortization and Purchase Amortization Purchase impairment Net value at Acquisition increases and Disposal decreases write back Net value at January 1, during following impairment during following following Currency December 31, (in Euro million) 2008 the period adjustments allowance the period adjustments disposal impact 2008
Bluefin Insurance Group Ltd (previously Venture Preference limited) 77 32 – (16) – – – (21) 72
Amortization and Purchase Amortization Purchase impairment Net value at Acquisition increases and Disposal decreases write back Net value at January 1, during following impairment during following following Currency December 31, (in Euro million) 2007 the period adjustments allowance the period adjustments disposal impact 2007
AXA-MPS Vita and Danni – 785 – – – – – – 785
Bluefin Advisory Services Limited (previously Thinc Group) – 45 – (7) – – – (3) 36
Certain investment properties (see Note 1), available-for-sale investments, trading assets, instruments designated as at fair value through profit or loss and all derivatives are measured at fair value in the financial statements. In addition, this note also discloses the fair value of investment properties and financial assets held at cost. Principles applied in measuring fair value generally described in Note 1 are further detailed in Note 9.2 (investment properties) and 9.9 (financial assets recognized at fair value).
Each investment item is presented net of the effect of related hedging derivatives (IAS 39 qualifying hedges or economic hedges) except derivatives related to macro hedges shown separately.
Details of the effect of derivatives are provided in section 19.3.
% (value % (value % (value Fair Carrying balance Fair Carrying balance Fair Carrying balance (in Euro million) value value sheet) value value sheet) value value sheet)
Investment in real estate properties at amortized cost 18,165 12,859 2.50% 2,332 2,306 18.28% 20,497 15,165 2.88%
Debt securities available for sale 255,465 255,465 49.69% 3,894 3,894 30.87% 259,359 259,359 49.24%
Debt securities (at cost) that are not quoted in an active market 1,132 1,212 0.24% – – – 1,132 1,212 0.23%
Equity securities held for trading 89 89 0.02% 179 179 1.42% 268 268 0.05%
Non controlled investment funds held for trading 147 147 0.03% – – – 147 147 0.03%
Assets backing contracts where the financial risk is borne by policyholders 131,990 131,990 25.67% 131,990 131,990 25.06%
Investments (excluding those backing contracts where the financial risk is borne by policyholders) 387,685 382,133 74.33%
(a) Mainly includes policy loans. (b) Use of fair value option.
Investment in real estate properties designated as at fair value through profit or loss (b) 4,137 4,137 0.71% – – – 4,137 4,137 0.69%
Debt securities available for sale 241,766 241,766 41.38% 4,935 4,935 36.01% 246,701 246,701 41.26%
Debt securities held for trading 120 120 0.02% 1,019 1,019 7.44% 1,139 1,139 0.19%
Equity securities held for trading 127 127 0.02% 325 325 2.37% 452 452 0.08%
Macro hedge and other derivatives (27) (27) N/A 1,312 1,312 9.58% 1,285 1,285 0.21%
Loans designated as at fair value through profit or loss (b) 39 39 0.01% 1 1 0.01% 40 40 0.01%
Investments (excluding those backing contracts where the financial risk is borne by policyholders) 406,979 401,410 68.71%
Debt securities available for sale 241,258 241,258 41.40% 5,645 5,645 34.64% 246,903 246,903 41.22%
Debt securities (at cost) that are not quoted in an active market 10 10 – 1 1 0.01% 11 11 –
Non controlled investment funds designated as at fair value through profit or loss (b) 2,319 2,319 0.40% 155 155 0.95% 2,474 2,474 0.41%
Macro hedge and other derivatives (175) (175) N/A 875 875 5.37% 701 701 0.12%
Loans designated as at fair value through profit or loss (b) 378 378 0.06% 2,768 2,768 16.99% 3,146 3,146 0.53%
Investment properties include buildings owned directly and through real estate subsidiaries. Investment properties stated at fair value on the balance sheet mainly consist of assets backing uK with-profit contracts.
Fair value is generally based on valuations performed by qualified property surveyors. They are based on a multi-criteria approach and their frequency and terms are often based on local regulations.
Debt securities (at cost) that are not quoted in an active market – – – – – – – – – – 1 1 1 – –
Non controlled investment funds held for sale 77 76 76 – – 142 142 142 1 1 225 226 226 1 –
Equity securities available for sale 15,147 16,226 16,226 1,871 792 26,896 35,799 35,799 9,545 642 27,804 38,505 38,505 10,846 144
Debt securities available for sale 4,155 3,913 3,913 43 285 5,037 4,933 4,933 2 106 5,697 5,645 5,645 5 57
Amortized Carrying Unrealized Unrealized Amortized Carrying Unrealized Unrealized Amortized Carrying Unrealized Unrealized (in Euro million) cost (a) Fair value value (b) gains losses cost (a) Fair value value (b) gains losses cost (a) Fair value value (b) gains losses
The table below sets out the debt securities portfolio by issuer type, excluding macro hedging derivatives and other derivatives but including the effect of related hedging derivatives (IAS 39 qualifying hedges or economic hedges). Details of the effect of derivatives are provided in section 19.3.
Debt securities issued by government agencies and state-owned companies (b) 18,570 20,392 23,083
(a) Includes debt security investment funds. (b) Means that the state has a blocking minority interest. (c) Includes debt securities issued by companies in which a State now holds interests following the 2008 financial crisis.
The tables below set out the contractual maturities of debt instruments held by the Group. Effective maturities may differ from those presented, mainly because some assets include clauses allowing early redemption, with or without penalty.
Loans designated as at fair value through profit or loss (a) 2 1 42 45
TOTAL – Financial investments exposed to fair value interest rate risk 21,780 81,172 199,504 302,456
Loans designated as at fair value through profit or loss (a) – 7 – 7
More than 1 year Total net (in Euro million) 12 months or less up to 5 years More than 5 years carrying value
TOTAL – Financial investments exposed to cash flow interest rate risk 1,235 8,475 13,440 23,150
Total Financial investments exposed to interest rate risk 35,105 79,057 213,273 327,436
Debt securities designated as at fair value through profit or loss (a) 18,389 6,341 21,073 45,803
TOTAL – Financial investments exposed to fair value interest rate risk 33,480 71,741 204,224 309,445
Debt securities designated as at fair value through profit or loss (a) 342 3,964 839 5,146
Loans designated as at fair value through profit or loss (a) 296 24 3,017 3,337
Total Financial investments exposed to interest rate risk 35,095 77,277 217,574 329,946
Sub-total: Equity securities held directly 6,687 2,800 2,733 1,153 2,511 1,573 1,020 1,666 1,256 21,397
December 31, 2007 Finance Services Energy Communications Industrial Consumer goods Raw material Technology Other TOTAL
December 31, 2006 Finance Services Energy Communications Industrial Consumer goods Raw material Technology Other TOTAL
Equity securities held by controlled investment funds (a) 1,514 753 718 197 576 297 175 339 1,181 5,750
Non controlled investment funds designated as at fair value through profit or loss mainly holding equity securities 808 – 5 – 813 – 660 – 108 – 768 – 628 – 155 – 782 –
Non controlled investment funds trading mainly holding equity securities 11 – – – 11 – 135 – 8 – 143 – 80 – 33 – 113 –
Non controlled investment funds trading mainly holding debt securities 136 – – – 136 – – – – – – – – – – – – –
Other non controlled investment funds available for sale 1,071 1,066 76 77 1,147 1,143 1,003 903 113 113 1,116 1,016 1,680 1,535 208 208 1,888 1,743
Other non controlled investment funds held for trading – – – – – – – – – – – – – – – – – –
Non controlled investment funds – Equity method (b) 1,134 – 58 – 1,192 – 1,160 – – – 1,160 – 1,294 – – – 1,294 –
(a) Amounts are presented excluding macro hedging and other derivatives but including the effect of related hedging derivatives (IAS 39 qualifying hedges or economic hedges).
Fair Amortized Fair Amortized Fair Amortized Fair Amortized Fair Amortized Fair Amortized Fair Amortized Fair Amortized Fair Amortized (in Euro million) value (a) Cost value (a) Cost value (a) Cost value (a) Cost value (a) Cost value (a) Cost value (a) Cost value (a) Cost value (a) Cost
Derivatives (hedge accounting) and other derivatives 9 (3) – – 9 (3) 42 40 – – 42 40 4 9 – – 4 9
(b) The carrying value of non controlled investment funds – Equity method is disclosed in the fair value column.
9.8. FINANCIAL ASSETS SUBJECT TO IMPAIRMENT 9.8.1. Breakdown of financial assets subject to impairment (excluding investment properties) Each investment item is presented net of the effect of related hedging derivatives (IAS 39 qualifying hedges or economic hedges) except derivatives related to macro hedges shown separately. Details of the effect of derivatives are provided in section 19.3.
Debt securities available for sale 260,469 (1,389) 259,080 279 259,359 248,507 (373) 248,133 (1,433) 246,701 240,998 (138) 240,860 6,043 246,903
Equity securities available for sale 20,287 (5,019) 15,268 4,159 19,427 29,287 (2,307) 26,980 8,916 35,896 30,393 (2,504) 27,890 10,447 38,337
Non controlled investment funds available for sale 6,060 (834) 5,226 186 5,412 3,352 (97) 3,254 337 3,591 4,497 (77) 4,420 405 4,825
Cost before Cost after Cost before Cost after Cost before Cost after impairment impairment impairment impairment impairment impairment and but before and but before and but before revaluation revaluation Revaluation Carrying revaluation revaluation Revaluation Carrying revaluation revaluation Revaluation Carrying (in Euro million) to fair value (a) Impairment to fair value (b) to fair value value to fair value (a) Impairment to fair value (b) to fair value value to fair value (a) Impairment to fair value (b) to fair value value
(a) Asset value including impact of discounts/premiums and accrued interests, but before impairment and revaluation to fair value of assets available for sale.
Write back Write back January 1, Increase for following sale or following December 31, (in Euro million) 2008 the period reimbursement recovery in value Other (a) 2008
Impairment – non controlled investment funds 118 5 (42) – (3) 77
Fair values of financial assets traded on active markets are determined using quoted market prices when available. A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency and those prices represent actual and regularly occurring market transactions on an arm’s length basis between a willing seller and a willing buyer. For assets traded in active markets, quotes received from external pricing services represent consensus prices.
External pricing services may be fund asset managers in the case of non consolidated investments in funds or brokers. To the extent possible, the Group collects quotes from external pricing providers as inputs to measure the fair value of assets held. Prices received may form tight clusters or dispersed quotes which may then lead to the use of valuation techniques. The dispersion of quotes received may be an indication of the large range of assumptions used by external pricing providers given the limited number of transactions to be observed or reflect the existence of distress transactions. In addition, given current market conditions and the complete inactivity of some markets, many financial institutions closed their desks dedicated to structured assets deals and are no longer in a position of delivering meaningful quotes.
In such cases, the Group uses valuation techniques including observable data whenever possible and relevant, adjusted if needed to develop the best estimate of fair value, including adequate risk premium or develops a valuation model based on unobservable data representing estimates of assumptions that willing market participants would use when prices are not current, relevant or available without undue costs and efforts: in inactive markets, transactions may be inputs when measuring fair value, but would likely not be determinative and unobservable data may be more appropriate than observable inputs. The objective of these models is to arrive at the price at which an orderly transaction would take place between market participants (a willing buyer and a willing seller) at the measurement date. For those assets for which the Group used mark to model valuations because of dislocated market conditions, sensitivities are disclosed in section 9.9.2 below, even when such techniques are based on a majority of observable inputs.
Investments in real estate properties 193 2,204 2,398 2,667 1,469 4,137 4,800 1,172 5,972
Financial investments and loans designated as at fair value through profit or loss 26,213 38,798 65,011 63,978 21,471 85,448 70,645 14,751 85,397
TOTAL FINANCIAL INvESTMENTS AND LOANS ACCOUNTED FOR AT FAIR vALUE 193,648 153,930 347,578 306,639 67,153 373,792 320,090 58,830 378,920
Fair values for assets not quoted in an active market/No active market (column (2)) include: • values provided at the request of the Group by pricing services and which are not readily publicly available or values provided by external parties which are readily available but relate to assets for which the market is not always active, and • assets measured on the basis of valuation techniques including a varying degree of assumptions supported by market transactions and observable data.
Amounts presented in column (2) represent a variety of circumstances. A financial instrument is regarded as not quoted in an active market if there is little observation of transaction prices as an inherent characteristic of the instrument, when there is a significant decline in the volume and level of trading activity, in case of significant illiquidity or if observable prices can not be considered as representing fair value because of dislocated market conditions. Characteristics of inactive markets can therefore be very different in nature, inherent to the instrument or be indicative of a change in the conditions prevailing in certain markets.
As mentioned in 9.9.2.(a), many corporate bonds held by the Group were presented in column (2) as at December 31, 2008 as opposed to December 31, 2007 and 2006 because of the significant illiquidity of such markets at the end of the period. Valuation sources were however unchanged, even if market participants recognize that available quotes include more than expected credit defaults and an adequate associated risk premium, i.e. such prices/spreads reflect liquidity premiums in excess of credit risks and funding costs associated with the inherent characteristics of the instruments.
A significant portion of ABS (Asset Backed Securities) and CDOs (Collaterized Debt Obligations) held by the Group were transferred to column (2) as at December 2007 when markets became no longer active while still measured using the same valuation approaches (mainly external valuations and indices). As at December 31, 2008, the turmoil reached a further point of dislocation. Many financial institutions closed their desks dedicated to structured assets deals and were no longer in a position of delivering meaningful quotes with the appropriate knowledge and dedication at the end of year 2008. The lack of activity with very few prices representing arm’s length transactions between willing market participants restricted the possibility and the relevance to refer to the very limited number of observed deals. As a result, more valuation techniques were introduced at year end based on a maximum use of observable inputs whenever possible.
These investments (including investment properties) are measured at fair value through profit or loss. Financial assets included in these investments are stated at fair value through profit or loss under the fair value option.
As described in Note 4 (Management of financial and insurance risks), the financial risk associated with these contracts is borne by policyholders, except for contracts that offer some investment-related guarantees.
Banque de Marchés et d’Arbitrage 7 – 2 – (7) 1
AXA Asia Pacific Holdings associates 20 1 6 (3) (7) 17
Krungthai AXA Life Insurance Company Ltd 18 – 6 2 (4) 22
In 2008, “other changes” notably included: • The capital increase (€23 million) and the change in consolidation method (€66 million) of Neuflize Vie (previously NSM Vie).
This company was proportionately consolidated and is now consolidated by equity method; • The capital increase of AXA Minmetals (€11 million), included in the line “Other”; • The capital reduction of Banque de Marchés et d’Arbitrage (€–6 million).
Banque de Marchés et d’Arbitrage 7 – – – – 7
AXA Asia Pacific Holdings associates 14 2 9 – (5) 20
Currency Acquisitions & Contribution translation Other (in Euro million) January 1 disposals to net income impact changes (a) December 31
Winterthur Life (Hong Kong) Ltd. (b) – 1 – – – 1
Philippines AXA Life Insurance Corporation – – 3 (2) 10 11
Insurance Corporation (€10 million), AXA Mandiri Financial Services (€3 million) and AXA Affin General Insurance Berhad in Asia-Pacific (€11 million).
• The merger of AXA Asia Pacific Holdings subsidiaries with AXA Bharti and AXA Affin.
Carrying Carrying Carrying (in Euro million) Gross value Impairment value Fair value Gross value Impairment value Fair value value Fair value
Receivables from policyholders, brokers and general agents 3,762 (307) 3,455 3,455 3,607 (269) 3,338 3,338 3,331 3,330
Receivables arising from outward reinsurance operations 1,242 (95) 1,148 1,148 991 (79) 913 913 805 805
Receivables relating to investments under lending agreements and equivalent 2,160 – 2,160 2,160 4,462 – 4,462 4,462 4,732 4,732
(a) Includes separate assets related to employee benefits (see Note 25.2). (b) In accordance with IFRS 3, i.e. within 12 months following the acquisition date, the Group has adjusted certain items impacting the allocation of Winterthur purchase price.
(in Euro million) Carrying value (a) Carrying value (a) Carrying value (a) (b)
(€+4,140 million); • France Life & Savings (€+1,934 million) due to matured fixed maturities whose cash was not reinvested to maintain a high level of cash; • AXA SA (€+1,590 million) as a result of a liquidity risk management adapted to prevailing market conditions and due to margin calls from banks relating to collateral agreements; • AXA Japan (€+1,104 million) mainly due to the operating activity (€+843 million) and the foreign currency impact
Net cash used in investing activities was €7,421 million in 2008 and mainly consisted of: • net cash used in the purchase and sale of financial invested assets amounted to €3,760 million; • cash used in the purchase of subsidiaries and affiliated companies (net of cash acquired) amounted to €2,273 million and principally consisted of the acquisitions of Seguros ING, SBJ Group and RESO Garantia, and of the minority shareholders’ buyout of AXA OYAK.
Net cash used in investing activities was €18,543 million in 2007 and mainly consisted of: • net cash used in the purchase and sale of financial invested assets amounted to €23,153 million; • cash used in the purchase of subsidiaries and affiliated companies (net of cash acquired) amounted to €3,275 million principally consisted of the acquisitions of MPS Vita and Danni, Alpha insurance, Thinc Group (renamed Bluefin Advisory Services Limited from December 31, 2008), Venture Preference limited (renamed Bluefin Insurance Group Ltd from December 31, 2008), Kyobo Auto and ELLA bank; • cash received from the disposal of subsidiaries and affiliated companies amounted to €2,735 million and principally consisted of the sale of the Netherlands’ operations and Winterthur’s uS Property & Casualty subsidiary.
Net cash relating to financing activities totaled €–3,164 million in 2007 mainly due to: • dividends payments of €–2,714 million, • a capital reduction of €–1,913 million due to the cancellation of shares acquired under the share buyback program, and • €–1,046 million equity instruments repayment (including €–833 million repayment of deeply subordinated debt), partly offset by • €+2,547 million equity instruments issued (including €+1,749 million issue of perpetual deeply subordinated notes and an employee share offering for €+552 million).
At December 31, 2008, 2.6 million 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 €53 million and their market value €41 million at the end of December 2008.
In 2008, the change in other reserves was due to €–299 million in interest expense on the deeply subordinated debt, and €–420 million in exchange rate differences.
At December 31, 2008, 2007 and 2006, perpetual debt recognized in shareholders’ equity broke down as follows: value of the value of the value of the perpetual debt perpetual debt perpetual debt in currency value of the in currency value of the in currency value of the of issuance perpetual debt of issuance perpetual debt of issuance perpetual debt (in Euro million) (in million) in Euro million (in million) in Euro million (in million) in Euro million
Perpetual notes – variables rates in € 844 844 844 844 1,404 1,404
Perpetual notes – (of which 500 M US$ at 7.1%) in US$ 875 629 875 594 1,275 968
Some of these instruments contained the following features: • Early redemption clauses (calls) at the Group’s option, giving AXA the ability to redeem the principal amount before settlement without penalty on certain dates; • Interest rate step-up clauses with effect from a given date.
d) Dividends paid At the April 22, 2008 shareholders’ meeting, shareholders approved a dividend distribution of €2,473 million with respect to the 2007 financial year.
13.1.2. Change in shareholders’ equity Group share in 2007 a) Share capital and capital in excess of nominal value In 2007, the following transactions had an impact on AXA’s share capital and capital in excess of nominal value: • Capital reduction of €–1,899 million by cancelling shares acquired under the share buyback program (including €–145 million in nominal share capital); • Employee share offering (November 2007) for €552 million (including €51 million in nominal share capital); and • Exercise of stock options and share subscription rights for a total of €152 million (including €20 million in nominal share capital).
c) Perpetual debt and related financial expenses In 2007, the change in other reserves was due to: (i) a €1,749 million issue of perpetual deeply subordinated note, a €–833 million repayment of deeply subordinated debt, €–289 million in interest expense, and €–388 million in exchange differences. The perpetual deeply subordinated notes were issued to finance the repayment of maturing borrowings, and comprised the following: • a €750 million perpetual deeply subordinated note placed on October 5, 2007, and • a £700 million perpetual deeply subordinated note (approximately €1.0 billion) placed on October 16, 2007. (ii) a €109 million decrease in equity component of financial instruments issued: following the decision taken during the meeting of holders of the 2014 AXA convertible bonds to have a final conversion date of the bonds on January 26, 2007 in exchange for a cash payment in respect of the value of the conversion option, the equity component of the bond (i.e. the conversion option), representing an amount of €109 million, has been cancelled as a counterpart to the payment.
13.1.3. Change in shareholders’ equity Group share in 2006 a) Share capital and capital in excess of nominal value In 2006, the following transactions had an impact on AXA’s share capital and capital in excess of nominal value: • A rights issue with preferential subscription rights made on July 11, 2006 to finance the acquisition of Winterthur for a total amount of €4,091 million (including €477 million in nominal share capital); • Employee share offering (November 2006) for €375 million (including €35 million in nominal share capital); • Capital reduction of €–305 million by cancelling shares acquired under the share buyback program (including €–26 million in nominal share capital); • Exercise of stock options for a total of €131 million (including €19 million in nominal share capital); • Conversion of share subscription rights for €8 million (including €1 million in nominal share capital); • Other transactions (mainly bond conversions and capital gains on treasury shares) for a total of €7 million.
The carrying value of treasury shares and related derivatives was €521 million, representing 1.41% of the share capital. This figure included €43 million relating to AXA shares held by consolidated mutual funds (2.1 million shares) not used to back contracts where the financial risk is borne by policyholders.
At December 31, 2006, 4.1 million treasury shares backing contracts where the 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 the end of December 2006.
c) Perpetual debt and related financial expenses In 2006, the change in other reserves was due to a €3,794 million issue of perpetual deeply subordinated notes, €–160 million in interest expense, and €–95 million in foreign exchange differences. The perpetual deeply subordinated notes were issued to finance the acquisition of Winterthur, and comprised 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
• 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.
13.2.1. Recognized income and expense for 2008 a) Reserve related to changes in fair value of available for sale financial instruments included in shareholders’ equity The change in reserves for unrealized gains and losses on assets available for sale totaled €–5,200 million (net Group share), mainly attributable to the united States (€–1,120 million), Belgium (€–1,064 million), France (€–605 million), the Mediterranean & Latin American region (€–417 million) and the Company (€–1,099 million).
Less unrealized gains and losses attributable to: Shadow accounting on policyholders’ participation (b) (1,894) (1,832) (7,242)
Shadow accounting on Value of purchased Business In force (146) (266) (394)
(a) Unrealized gains on total available for sale invested assets including loans. (b) Including shadow accounting impact on premium deficiency liabilities, after revaluation of available for sale investments. (c) Net of shadow accounting on unearned revenues and fees reserves. (d) Including foreign exchange impact attributable to minority interests. (e) Group share.
The change in reserves relating to changes in fair value of assets in 2008, 2007, and 2006 broke down as follows: (in Euro million) December 31, 2008 December 31, 2007 December 31, 2006
Transfer in the income statement on the period (a) 1,665 (1,309) (791)
Investments bought in the current accounting period and changes in value (7,026) (1,659) 206
b) Translation reserve The impact of foreign exchange rate movements (€–1,234 million) was mainly due to the united Kingdom (€–1,206 million) and the Company (€–1,213 million driven by change in fair value of currency hedges set up to hedge net investments in foreign operations), partially offset by Japan (€+890 million), Switzerland (€+537 million) and the united States (€+468 million).
13.2.2. Recognized income and expense for 2007 a) Reserve related to changes in fair value of available for sale financial instruments included in shareholders’ equity The change in reserves for unrealized gains totaled €–2,917 million (net Group share), mainly relating to France (€–750 million), Belgium (€–674 million), Germany (€–375 million), the united Kingdom (€–182 million), the united States (€–174 million) and the Company (€–240 million). The reduction in gross unrealized gains of available for sale financial assets totaled €–10,048 million, mainly due to debt securities (€–8,128 million) following a rise in interest rates during the year, and equity securities (€–1,798 million).
13.2.3. Recognized income and expense for 2006 a) Reserve related to changes in fair value of available for sale financial instruments included in shareholders’ equity The change in reserves for unrealized gains totaled €–349 million (net Group share), mainly relating to the united Kingdom (€–164 million), the united States (€–137 million) and Japan (€–88 million). The reduction in gross unrealized gains of available for sale financial assets totaled €–4,675 million, and was mainly due to debt securities (€–7,029 million) following a rise in interest rates during the year, partially offset by an increase in unrealized gains on equity securities (€2,393 million).
13.3.1. Change in minority interests in 2008 The €–213 million decrease in minority interests to €+3,058 million was mainly due to: • dividends paid to minority interests holders for €–427 million; • change in the scope of consolidation mainly buy out of minority interests in Turkey (€–82 million) and in Germany (€–30 million), partly offset by the consolidation of AXA Gulf (€+42 million); • net income attributable to minority interests for €+313 million.
13.3.3. Change in minority interests in 2006 The €178 million increase in minority interests to €2,940 million was mainly due to: • consolidation of Winterthur (€70 million), mainly in Germany (€56 million) and Switzerland (€12 million); • changes in the scope of consolidation in other group entities (€–60 million), mainly due to the buyout of minority interests in
Accrued interests – Deeply subordinated debt – – – – – – – – (299) – – (299) –
Net income of the period (c) – – – – – – – – – – 923 923 313
Shareholders’ equity as at December 31, 2008 2,089,157 2.29 4,784 17,840 (547) (353) 100 4 6,500 (2,712) 11,824 37,440 3,058
principles whereby the financial statements of the subsidiary shall be adjusted to reflect the effects of significant events that would have been recognized with a closing date aligned on the AXA Group, AXA Japan’s 2008 accounts were adjusted with the provisional loss from October to December 2008. This adjustment reflects mainly the further increase of the credit spreads during this period.
Shareholders’ equity as at January 1, 2007 2,092,888 2.29 4,793 18,398 (521) 7,763 55 4 7,090 (86) 9,730 47,226 2,940
Treasury shares – – – – (195) – – – – – – (195) –
Dividends paid – – – – – – – – – – (2,218) (2,218) –
Reserves relating to changes in fair value through shareholders’ equity – – – – – (2,880) (67) – – – (2,947) (69)
Employee benefits actuarial gains and losses through OCI (b) – – – – – – – – – – 612 612 16
Shareholders’ equity as at December 31, 2007 2,060,753 2.29 4,719 17,363 (716) 4,846 (11) 4 7,219 (1,478) 13,697 45,642 3,272
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) Perpetual subordinated debts (TSS, TSDI) and equity components of compounded financial instruments (e.g convertible bonds) (see Note 13.1.1c). (b) Actuarial gains and losses accrued since opening January 1, 2007.
Change in scope of consolidation – – – – – (36) – – – (4) – (40) 449
Deeply subordinated debt – – – – – – – – 528 – – 528 –
Impact of transactions with shareholders (32,135) 2.29 (74) (1,035) (195) (36) – – 129 (4) (2,312) (3,526) (159)
Treasury shares – – – – 137 – – – – – – 137 –
Accrued interests – Deeply subordinated debt – – – – – – – – (160) – – (160) –
Dividends paid – – – – – – – – – – (1,647) (1,647) –
Total recognized income and expense for the period (SoRIE) – – – – – (355) (20) – – (764) 5,337 4,198 560
Shareholders’ equity as at December 31, 2006 2,092,888 2.29 4,793 18,398 (521) 7,763 55 4 7,090 (86) 9,730 47,226 2,940
Change in scope of consolidation – – – – – 7 – – – – – 7 11
Reserves relating to changes in fair value through shareholders’ equity – – – – – (355) (20) – – – – (375) 84
Liabilities arising from insurance contracts where the financial risk is borne by policyholders 85,916 – – 85,916 113,654 – – 113,654 108,984 – – 108,984
Reinsurers’ share in unearned premium reserves 3 400 164 567 6 317 472 795 5 215 554 775
Reinsurers’ share in claim reserves (b) 529 1,988 3,418 5,935 455 1,964 3,861 6,280 442 1,964 4,348 6,754
Reinsurers’ share in other reserves 236 (7) – 229 158 16 – 174 154 27 – 181
Reinsurers’ share in other reserves – – – – – – – – – – – –
Of which measured at current market assumptions (d) 11 – – 11 11 – – 11 10 – – 10
(e) For the detail of P&C and International Insurance IBNR, see Note 20.2.4.
Property & International Property & International Property & International (in Euro million) Life & Savings Casualty Insurance Total Life & Savings Casualty Insurance Total Life & Savings Casualty Insurance Total
Of which measured at current market assumptions (d) 1 – – 1 – – – – 189 – – 189
14.2. LIABILITIES ARISING FROM INvESTMENT CONTRACTS (GROSS AND REINSURERS’ SHARE) The following table shows a segmental breakdown of liabilities arising from investment contracts, including those where the financial risk is borne by policyholders: (in Euro million) Life & Savings Total investment contracts Life & Savings Total investment contracts Life & Savings International Insurance Total investment contracts
Liabilities arising from investment contracts with discretionary participating features 38,081 38,081 40,121 40,121 32,606 – 32,606
Liabilities arising from investment contracts with no discretionary participating features 1,295 1,295 1,452 1,452 1,121 – 1,121
Reinsurers’ share in unearned premium reserves – – – – – – –
Of which measured at current market assumptions (c) – – – – – – –
Reinsurers’ share in future policy benefit reserves – – – – – – –
TOTAL LIABILITIES ARISING FROM INvESTMENT CONTRACTS – NET OF REINSURANCE CEDED 85,876 85,876 111,138 111,138 100,836 543 101,379
(b) Includes reserves for claim handling costs. (c) See Note 1.13.2. – Reserves measured according to the option opened by IFRS 4.24 for selective re-measurement of reserves at current market assumptions.
14.3. CHANGE IN CLAIM RESERvES FOR PROPERTY & CASUALTY AND INTERNATIONAL INSURANCE (INSURANCE CONTRACTS)
Claim reserves as at January 1 33,426 9,598 43,024 33,733 10,275 44,007 25,614 10,366 35,980
Claim handling cost reserves as at January 1 1,387 262 1,649 1,306 259 1,566 988 257 1,245
Gross claim reserves as at January 1 (a) 34,813 9,860 44,673 35,039 10,534 45,573 26,602 10,623 37,225
Change in scope of consolidation and change in accounting method 574 226 801 (919) (275) (1,195) 7,359 1,239 8,598
Claim handling cost reserves as at December 31 1,395 249 1,644 1,387 262 1,649 1,306 259 1,566
(a) Excluding “other policy benefits liabilities” (mainly mathematical annuity reserves), which totaled €3.4 billion in 2006 including €0.5 billion for Winterthur, €3.3 billion in 2007 and €4.1 billion in 2008.
Reinsurers’ share in claim reserves as at January 1 1,964 3,861 5,825 1,964 4,348 6,312 1,791 2,692 4,483
Reinsurers’ share in total claim expenses 510 488 998 573 784 1,357 307 716 1,023
Change in scope of consolidation, portfolio transfers and change in accounting principles 199 57 256 22 (44) (22) 240 144 384
Reinsurers’ share in claim reserves as at December 31 1,988 3,436 5,424 1,964 3,861 5,825 1,964 4,348 6,312
Surrenders, maturities and other claims and benefits paid net of charges and penalties (–) (40,910) (15,740) (56,650) (42,418) (14,200) (56,618)
(a) Includes: future policy benefits reserves (including shadow accounting reserves), unearned premium reserves, unexpired risk reserves, claims reserves, claims expense reserves, other policy benefits reserves. Excludes: unearned revenues and unearned fees reserves, liabilities from policyholders’ participation.
In 2007, changes in the scope of consolidation totaled €3,955 million, mainly due to: • The entries in the scope of consolidation of AXA-MPS Vita (€3,664 million insurance liabilities and €12,696 million investment liabilities) and Alpha Insurance (€188 million), partly offset by: • The disposal of the Netherlands (€–9,890 million).
Opening reinsurers’ share in technical reserves (a) 4,630 22 4,653 4,840 20 4,861
Reinsurers’ share in surrenders, maturities and other claims and benefits paid net of charges and penalties (–) (885) – (885) (863) (1) (864)
Excludes: unearned revenues and unearned fees reserves, liabilities from policyholders’ participation. (b) Notably includes interests credited and policyholders’ participation credited to reserves, fees on account balance and investment management fees and change in reserves relating to other technical and actuarial items.
Investment contracts with Discretionary Participation Features (DPF) measured with current assumptions (b) – – –
(Unit-Linked) – Liabilities arising from contracts where financial risk is borne by policyholders: Investment contract with Discretionary Participation Features (DPF) measured according to existing accounting policies (a) (c) 7,840 10,414 11,007
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 (“DOC”) – see section 1.2.5.
The recognition of investment contracts with discretionary participating features is subject to IFRS 4, which allows, under certain conditions, the use of accounting principles applied prior to the adoption of IFRS.
14.6. LOSS RESERvES DEvELOPMENT TABLE The loss reserves development table shows movements in loss reserves between 1998 and 2008, based on previously applied accounting standards, in accordance with IFRS 4. All contracts concerned are insurance contracts as defined by IFRS.
The second line entitled “Gross reserves for unpaid claims and claim expenses developed in 2008 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.
a) Loss reserves development table: Property & Casualty and International Insurance (excluding AXA RE)
(In Euro million except percentages) 1998 1999 (b) 2000 2001 2002 2003 2004 (c) 2005 2006 (d) 2007 2008
Gross reserves for unpaid claims and claims expenses developed initially at the booking date (c) 20,941 26,656 26,916 28,636 28,465 27,825 29,128 31,168 41,301 44,020 44,046
(d) In 2006, Winterthur’s operations were integrated within AXA. Total loss reserves developed amounted to €41.3 billion including €8.7 billion in respect of Winterthur (final figure after PGAAP re-opening).
Gross reserves for unpaid claims and claims expenses developed initially at the booking date (a) 3,060 3,396 3,455 5,868 4,778 4,200 3,314 4,523
(a) The loss reserves development table is presented on an underwriting year basis for AXA RE business. Accordingly reserves re-estimated and the excess of re-estimated reserves of the initial reserves include reserves for losses occurring up to twelve months subsequent to the original year-end. It is not appropriate to extrapolate future redundancies or future deficiencies based on the loss reserves development presented in the table, as conditions and trends that have affected the development of the liability in prior periods may not necessarily occur in future periods.
(c) In 2001, AXA RE’s claims reserves were adversely affected by the September 11 attacks. (d) In 2004, AXA Corporate Solutions 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 Solutions Assurance US were presented on an occurrence year basis and included in the Property & Casualty loss reserves development table. The reserves of AXA RE P&C Insurance Company and AXA RE Reinsurance Company were presented on an underwriting year basis and included in the AXA RE loss reserves development table.
• of which future policy benefits annuity reserves 3,530 3,321 –
(a) Total gross claims and other reserves developed are presented on the basis of the loss reserves development table. The reserves of AXA Corporate Solutions Insurance US were included in Property & Casualty and International Insurance loss reserves. The reserves of AXA RE P&C Insurance Company and AXA RE Reinsurance Company (€165 million in 2008, €203 million in 2007 and €282 million in 2006) were included in AXA RE’s loss reserves development table.
(b) Includes reserves on acceptations (€798 million in 2008, €699 million in 2007 and €771 million in 2006). (c) In accordance with IFRS 3, i.e. within 12 months following the acquisition date, the Group adjusted certain items impacting the allocation of Winterthur purchase price.
• Employers Liability insurance in Europe: this created exposure to asbestos-related claims, in particular on the uK market.
AXA actively manages its exposure to A&E claims. Most of the Group’s A&E claims are managed by AXA Liabilities Managers, a specialized unit in charge of managing the Group’s non-life run-offs.
Claims reserves at beginning of year (a) 1,172 1,124 1,176 1,123
Claims reserves at end of year (a) 1,005 961 1,172 1,124
Cumulative Payments to date / Projected Ultimate Cost 36% 33% 31% 29%
3 – Year survival ratio excluding commutations (c) 14 years 16 years 20 years 21 years
(a) Includes claims expense reserves. (b) Includes sale of the Netherlands operations in 2007. (c) Reserves at the end of the year / Average yearly payments over the last 3 years (excluding in respect of commutations).
In 2008, AXA paid claims and legal costs of €56 million net of reinsurance (including €50 million in respect of asbestos and €6 million in respect of environmental pollution). This was significantly higher than last year (€31 million) as 2008 was impacted by large settlements in both asbestos and environmental liabilities.
As a result of those various changes and after allowing for movements in exchange rates, AXA held total reserves for A&E (net of reinsurance) of €1,030 million at year-end 2008. The main reserves adequacy ratios remained quite stable compared to their 2007 levels, with the exception of the 3-year survival ratio which was impacted by the decrease in reserves due to claims payments, while ultimate estimates for both A&E exposures remained overall stable over 2008.
14.9. PAYMENT AND SURRENDER PROJECTIONS AND INSURANCE AND INvESTMENT CONTRACT LIABILITIES DISCOUNT RATES In the tables presented in section 14.9.1 and 14.9.2, liabilities arising from Life & Savings and Property & Casualty insurance and investment contracts exclude contracts where the financial risk is borne by policyholders. These liabilities are not exposed to interest-rate or duration risk, except unit-linked contracts with performance guarantees. Subsidiaries hold unit-linked assets backing the corresponding liabilities arising from these contracts. Occasional mismatches result mainly from administrative timing differences in the processing of day-to-day operations.
The figures shown in the first line of the table below represent estimated cash outflows in connection to 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.
Of which Life & Savings liabilities relating to contracts including a surrender option with some surrender benefit before maturity 13,032 56,341 310,085 379,458
14.9.2. Insurance and investment contract liabilities – discount rates The table hereafter and related comments exclude contracts where the financial risk is borne by policyholders (unit-linked contracts).
By convention, contracts with zero guaranteed rates are deemed not-discounted, except for products offering guaranteed rates updated annually and for one year: these contracts are presented in discounted reserves. Reserves for savings contracts with non-zero guaranteed rates are discounted at the technical interest rate. Contracts for which the assumptions are revised in the financial statements at closing mainly consist of certain uK With-Profit contracts and reserves for guarantees (Guaranteed Minimum Death Benefits, etc.).
Average Average Average Carrying discount Carrying discount Carrying discount (in Euro million) value rate % value rate % value rate %
Life & Savings – locked-in discount rate (a) 241,022 2.76% 225,765 2.82% 235,220 3.00%
Non Life – locked-in discount rate (a) 4,396 4.18% 2,385 4.25% 2,426 4.16%
Non Life – unlocked discount rate 822 2.05% 1,490 2.64% 753 2.13%
14.9.3. Major business areas The tables in Note 20 set out the Group’s major insurance business areas, and reflect the Group’s high level of diversification.
States as the timing and amount related to these liabilities are uncertain. • Other Provisions for risks and charges for €610 million, including a multitude of different amounts, in particular run offs management reserves, reinsurance agreements, or past ceded activities.
Impact of change in scope of consolidation and changes in accounting method 13 (6) 1 – 402 409
Write back after final cost review (19) (41) (1) – (91) (151)
Contingent liabilities Other Lawsuits Liability relating provisions Restructuring contingency warranty to business for risks (in Euro million) provisions provisions provisions combinations and charges TOTAL TOTAL
Impact of change in scope of consolidation and changes in accounting method (4) 120 – – 227 342 439
Write back after final cost review (5) (23) – – (48) (76) (93)
Euro Medium Term Notes, 6.0% due through 2013, and BMTN 912 955 971
Other financing debt instruments issued (less than €100 million) 91 (25) (81)
Other financing debts owed to credit institutions (under €100 million) 103 51 85
Total financing debt increased by €3,658 million between December 31, 2007 and December 31, 2008, or by €3,674 million at constant exchange rates, to €14,514 million. The increase at constant exchange rates was mainly due to: i. a €582 million increase in subordinated debt (including derivative instruments) arising mainly from the decrease in market value of currency swaps and interest rate swaps at AXA SA (€554 million), and the new subordinated perpetual notes of €423 million from AXA Bank Europe, partly offset by the repayment of €466 million notes by AXA Bank Europe; ii. a €2,050 million increase in financing debt instruments issued arising mainly from AXA SA issues of new commercial paper (€2.3 billion), partly offset by repayment of €238 million mortgage notes by AXA Equitable and maturity of €170 million senior notes of AXA Financial; iii. a €1,042 million increase in financing debt owed to credit institutions mainly arising from AXA SA new credit line of €1,000 million for 5 years (“club deal” banking pool) in order to finance AXA development including the acquisition of RESO GARANTIA.
Financing debts owed to credit institutions at cost 1,216 1,227 175 175 95 95
The fair value of financing debt at December 31, 2008, excluding accrued interests, was €14,135 million, including related hedging derivative instruments. The fair value was €379 million lower than the carrying value mainly due to the increase of credit spreads.
16.3. EXPOSURE TO INTEREST-RATE RISk AND CONTRACTUAL MATURITIES The table below sets out the contractual maturities of financing debt (excluding the impact of derivatives). Effective maturities may differ from those presented, mainly because some instruments include clauses allowing early redemption, with or without penalty.
Payables arising from direct insurance and inward reinsurance operations 7,167 7,033 7,947
Debts relating to investments under lending agreements and equivalent 25,522 29,068 24,098
Movements in the “Minority interests in controlled investment funds and other puttable instruments held by minority interest holders” caption depend on: • Changes in minority interests in controlled investment funds and changes in their fair value. An identical change in invested assets held by these funds is also recorded. • 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 in goodwill.
Other puttable instruments held by minority interest holders totaled €261 million at December 31, 2008 (€559 million at December 31, 2007 and €1,124 million at December 31, 2006). They represented the put option granted to minority shareholders of Sanford C. Bernstein (€107 million) and put options held by the minority shareholders of former Winterthur subsidiaries in Central and Eastern Europe (€154 million).
AXA SA debts subscribed on behalf of French, English and German subsidiaries 42 86 150
CRL deposits held by Sterling Grace NZ on behalf of clients 137 184 174
HOHO 2: class A2 Senior Class A2 Mortgage-backed notes, maturity 2080, 4.73%, Fixed rated – – 54
HOHO 2: class C Junior Class C Mortgage-backed notes, maturity 2080, 5.64%, Fixed rated – – 7
HOHO 2: class D Subordinated Class D Notes, maturity 2080, 3 month Euribor + 3.75%, Floating – – 4
HOHO 3: class C Junior Class C Subordinated Mortgage-backed notes, maturity 2083, 3 month Euribor + 0.29%, Floating – – 9
HOHO 3: class D Subordinated Class D Notes, maturity 2083, 3 month Euribor + 1.40%, Floating – – 7
HOHO 4: class A Senior Class A Mortgage-backed Floating rate notes, maturity 2083, 3 month Euribor + 0.03%, Floating – – 1,492
ERIV: AFET Amortizing mortgage loan based on Euribor 3 month + 1.45 point, maturity date: 2011 200 203 214
Vendome Commerce: AFET Amortizing mortgage loan based on Euribor 3 month + 1.45 point, maturity date: 2011 200 203 214
ERIV2: RBS_Mortgage loan based on Euribor + 0.85 point, maturity date: 2014 104 104 –
APIV+EHV: CALYON_Mortgage loan based on Euribor 3 month + 1.20 point, maturity date: 2015 44 – –
Derivatives on other issued debt (other than financing debt) – Other – 2 (3)
17.3. FAIR vALUE MEASUREMENT OF OTHER DEBT INSTRUMENTS ISSUED AND BANk OvERDRAFTS (OTHER THAN FINANCING DEBT)
Other debt instruments issued designated as at fair value through profit or loss 403 895 4,129
Other debt owed to credit institutions held at cost 4,268 3,205 2,535
Other debt owed to credit institutions held as trading – – –
Other debt owed to credit institutions designated as at fair value through profit or loss – – 126
OTHER DEBT INSTRUMENTS ISSUED AND BANk OvERDRAFTS (OTHER THAN FINANCING DEBT) (a) 6,644 6,258 8,714
Other debt instruments issued held as trading – – – – – – – – –
Other debt instruments issued designated as at fair value through profit or loss – 403 403 202 693 895 594 3,536 4,129
Other debt instruments issued (other than financing debt) (a) – 403 403 202 693 895 594 3,536 4,129
Other debt owed to credit institutions held as trading – – – – – – – – –
The fair value option is used to measure debt other than financing debt designated as at fair value through profit or loss included in the table above. The decrease in debt measured at fair value through profit or loss is mainly due to the CDO’s market value decline.
17.4. PAYABLES ARISING FROM DIRECT INSURANCE, INWARD REINSURANCE OPERATIONS AND DIRECT OUTWARD REINSURANCE OPERATIONS
Current accounts payable to other companies 2,156 2,156 1,842 1,842 1,223 1,223
Payables arising from direct insurance and inward reinsurance operations 7,167 7,167 7,033 7,033 7,947 7,947
(a) Includes a quota share reinsurance treaty between AXA RE and Paris Ré (€2,518 million in 2008, €2,431 million in 2007 and €2,214 million in 2006) as part of the Group’s sale of AXA RE’s business in 2006.
At December 31, 2008, payables arising from direct insurance and inward reinsurance operations totaled €7,167 million, an increase of €134 million compared to December 31, 2007.
At December 31, 2008, payables arising from direct outward reinsurance operations totaled €6,211 million, an increase of €187 million compared to December 31, 2007.
17.5. EXPOSURE TO INTEREST-RATE RISk AND CONTRACTUAL MATURITIES The table below sets out the contractual maturities of other debt instruments issued, notes and bank overdrafts (excluding the impact of derivatives). Effective maturities may differ from those presented, mainly because some instruments include clauses allowing early redemption, with or without penalty.
(a) As described in Note 1.10, the contribution of discontinued operations is stated on a separate line of the income statement.
The current tax amount due on foreign income amounted to €1,208 million in 2008 (versus €1,732 million in 2007 and €991 million in 2006), including €69 million related to policyholders’ tax (versus €283 million in 2007 and €243 million in 2006).
18.1.2. Tax proof The reconciliation between the theoretical tax charge (pre-tax profit multiplied by the applicable tax rate in France for the period concerned) and the effective tax charge was as follows: (in Euro million) December 31, 2008 December 31, 2007 December 31, 2006 (c)
Impact of differences in tax rates and tax basis (941) (188) (73)
Deferred tax assets recognized on tax losses of prior years (95) (9) (82)
Deferred tax assets not recognized on tax losses of the year 74 13 18
Derecognition of deferred tax assets on tax losses of prior years (a) 1 1 19
Corrections and adjustments of tax relating to prior years (393) (170) (204)
Impact of adjustments, decrease in value and other items (254) (215) (100)
(a) Derecognition of DTA (Deferred Tax Assets) arising on tax losses is shown in “Tax losses impact”. (b) Including the effect of policyholders’ tax. (c) As described in Note 1.10, the contribution of discontinued operations is stated on a separate line of the income statement.
The applicable tax rate broke down as follows: Income from Income from Income from operating operating operating activities, activities, activities, gross of tax Notional gross of tax Notional gross of tax Notional (in Euro million) expenses (a) tax rate expenses (a) tax rate expenses (a) tax rate
(a) Excluding discontinued activities and contribution from equity-accounted companies. (b) In 2006, before the integration of Winterthur, Switzerland was presented in “Other Countries”. (c) As described in Note 1.10, the contribution of discontinued operations is stated on a separate line of the income statement. (d) Income including Ireland. Notional tax rate applicable for the UK only.
18.2. DEFERRED TAX Net deferred tax balances broke down as follows: Deferred tax Deferred tax Net deferred Net deferred Net deferred (in Euro million) assets liabilities tax position tax position tax position
• Deferred tax through reserves relating to the fair value adjustment of available for sale investments 1,623 1,524 99 (701) (1,833)
• Deferred tax through reserves relating to the revaluation of tangible assets – 1 (1) (1) (1)
The change from a net liability position in 2007 to a net asset position in 2008 was mainly due to the significant decrease of the market value of investments.
Deferred tax through profit or loss (725) 1,950 – (51) 177 1,352
Deferred tax through reserves relating to the revaluation of tangible assets (1) – – – – (1)
Deferred tax through reserves relating to gains and losses on defined benefits pension plans (67) – 361 8 (4) 298
Deferred tax through reserves in relation to stock options 97 – (70) 1 (12) 16
Policyholder tax – Deferred tax through profit or loss (984) 962 – 69 – 47
Total net deferred tax assets/ (liabilities) (2,383) 2,912 1,092 (15) 165 1,770
Deferred tax through reserves relating to the fair value adjustment of available for sale assets (1,833) – 1,048 31 53 (701)
Deferred tax through reserves relating to the fair value adjustment of cash flow hedge derivatives (28) – 26 – (1) (3)
Policyholder tax – Deferred tax through profit or loss (1,268) 183 – 94 7 (984)
Policyholder tax – Deferred tax through reserves relating to the fair value adjustment of available for sale assets – – 3 – – 2
Policyholder tax – Deferred tax through reserves relating to the fair value adjustment of cash flow hedge derivatives – – – – – –
Deferred tax through reserves relating to the fair value adjustment of available for sale investments (2,557) – 697 41 (14) (1,833)
Deferred tax through reserves relating to the fair value adjustment of cash flow hedge derivatives (65) – 16 – 21 (28)
Policyholder tax – Deferred tax through reserves relating to the fair value adjustment of cash flow hedge derivatives – – 2 – (2) –
Recognized Deferred Tax Assets (DTA) by maturity and expiration date: The tables below break down: (i) in the first part the maturity by which the Group expects to use the Deferred Tax Assets (DTA) accounted at year end; (ii) in the second part, the “expiration date” of the DTA, i.e. the latest date at which the Group could use them.
DTA maturity DTA maturity DTA maturity DTA maturity DTA maturity DTA maturity DTA maturity date between DTA maturity No maturity (in Euro million) date 1 year date 2 years date 3 years date 4 years date 5 years date 6 years 7 and 11 years date > 11 years date TOTAL
DTA recognized on tax loss carryforward 175 171 19 21 24 18 32 10 – 469
TOTAL recognized DTA by latest date of possible use 402 94 79 108 158 24 223 1,028 6,223 8,338 2006 Restated (a)
TOTAL recognized DTA by expected date of use 1,921 539 345 374 470 144 656 3,888 – 8,338
Other unrecognized deferred tax – – – – – – 5 – – 5 2006 Restated (a)
Change in December 31, December 31, December 31, December 31, December 31, December 31, December 31, December 31, December 31, December 31, December 31, December 31, fair value (in Euro million) < 1 year 1 to 2 years 2 to 3 years 3 to 4 years 4 to 5 years > 5 years 2008 2007 2006 2008 2007 2006 2008 2007 2006 2008 2007 2006 2008/2007
NB: This table includes all derivatives (assets and liabilities), i.e. hedge, macrohedge and other, in an asset or liability position. (a) By convention, notional amounts are displayed in absolute value, and exclude potential netting out.
Hedging derivative instruments broke down as follows: Macro-hedges and other derivative Derivative instruments instruments not Derivative instruments Derivative instruments used in hedge of qualifying under IAS 39 used in fair value used in a cash flow net investment in but generally used hedging relationship hedging relationship a foreign operation as economic hedges Total
NB: This table includes all derivatives (assets and liabilities), i.e. hedging, macrohedging and other, in an asset or liability position.
Macro-hedges and other derivative Derivative instruments instruments not Derivative instruments Derivative instruments used in hedge of qualifying under IAS 39 used in fair value used in a cash flow net investment in but generally used hedging relationship hedging relationship a foreign operation as economic hedges Total
AXA uses derivative instruments to hedge some equity and real estate exposures and to manage various types of risks, including interest rate risk, exchange rate risk and credit risk. Details of the impact of derivative instruments on financial investments and liabilities are provided in section 19.3 and 19.4.