AXA’s interim consolidated financial statements are prepared as at June 30. However certain entities within AXA have a reporting half year end that does not coincide with June 30, in particular AXA Life Japan and its insurance subsidiaries, which have a March 31 financial half year end.
The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the AXA’s accounting policies set out below.
All amounts of the Balance Sheet, Income Statement and in the notes are shown in millions of euros, rounded to the nearest million, unless otherwise stated.
AXA’s consolidated financial statements were prepared in accordance with generally accepted accounting principles in France (referred to as “French GAAP”) until 31 December 2004. The comparative figures in respect of 2004 including IAS 32 IAS 39 and IFRS 4 impacts were restated to reflect these adjustments. First-time adoption of IFRS is described in Note 1 where are provided reconciliations and descriptions of the effect of the transition from French GAAP to IFRSs on the Group’s equity and its net income and cash flows.
4.3.2. Business combinations: purchase accounting and goodwill including acquisitions of minority interests
As described above and in note 1 on first time application of IFRS, the past business combinations have not been restated except for the goodwill related to entities in foreign currency. The principles described below apply to the operations business combinations occurring after 1 January 2004.
Valuation of assets acquired, liabilities assumed and contingent liabilities Upon the first consolidation, the identifiable assets, liabilities and contingent liabilities of the acquired company are recorded at their estimated fair value. However as permitted by IFRS 4, the liabilities related to the life insurance
contracts or investment contracts with discretionary participating features are maintained at the predecessor’s carrying value at the date of the acquisition if the measurement basis is consistent with AXA’s accounting principles. In conjunction with acquisition accounting relating to acquired life insurance operations or investment contracts with discretionary participating features portfolios, an asset is recorded corresponding to the present value of estimated future profits emerging on purchased business in-force at the date of acquisition (also referred to as value of purchased 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 anticipated experience. This experience is determined as of the purchase date using a discount rate that includes a risk premium. Other intangible assets such as trademarks or customer relationships are recognized if they can be valued reliably and it is probable that future economic benefits attributable to the assets will flow to the entity. In connection with a business combination, only restructuring costs that can be measured reliably and which correspond to an existing liability of the acquired company prior to the acquisition date are included in a restructuring provision recognized in the balance sheet of the acquired company as of the acquisition date.
Acquisitions of minority interests (without change in control): Acquisitions of minority interests are accounted for as equity transactions. The difference between the cost of acquisition and the corresponding interests acquired is directly recognized in equity. In certain transactions, when acquiring the control of an entity, a put option may be granted to the minority shareholders on the shares they keep. The recognition of this option as a liability however depends on clauses of the contract.
– The same applies to the potential policyholder benefit in respect of the eliminated gain or loss (a deferred policyholder benefit asset of liability is then posted to the balance sheet),
The results and financial position of all group entities that have a functional currency (i.e. the currency of the primary economic environment in which the entity operates) different from the presentation currency of the Group are translated into the presentation currency as follows: (i) assets and liabilities of subsidiaries denominated in non-euro currencies, being the functional currency of the local subsidiary, for each balance sheet presented, are translated into euro using spot foreign exchange rates at the date of that balance sheet; (ii) income and expenses for each income statement are translated at average exchange rates for each period presented , and
The VBI, in respect of acquired insurance companies, is determined on the basis of profits emerging over the contract period and is amortized over the life of the relevant contracts. In conjunction with the liability adequacy test (see part section 4-11-2) VBI is subject to annual recoverability testing based on actual experience and expected trends with respect to the principal assumptions.
4.6.4. Deferred acquisition costs (“DAC”) in respect of life insurance operations and investment contracts with discretionary participating features. Deferred origination costs (“DOC”) in respect of Investment contracts without discretionary participating features
The option for designation of financial assets and liabilities at fair value with change in fair value through profit or loss, as defined by the IAS 39 amendment “The Fair Value Option” issued June 16, 2005 by IASB, has been mainly used by the Group in the following cases: – financial assets for which electing fair value option is appropriate to reduce accounting mismatch, particularly in the following cases: o assets backing liabilities arising from contracts for which the financial risk is borne by the policyholders; o assets included in hedging strategies set out by the Group for economical reasons but not eligible to hedge accounting as defined by IAS 39; – groups of financial assets managed and their performance evaluated on a fair value basis: mainly, securities held by some mutual funds included in the scope of consolidation on the basis of Group risk management policy (“Satellite Investment Portfolio” see definition below)
– in addition, the debts held by consolidated CDOs have also been designated under this option, at fair value through profit or loss, electing this option being appropriate to reduce the accounting mismatch.
Impairment measurement of loans is based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, on the loan’s observable market price or the fair value of the collateral if the loan is collateral-dependent.
Due to numerous purchases and depending on the consolidated entities data systems, average cost or first-in firstout method (FIFO) or other method of assigning costs to investment at the time of sale are used on a permanent and consistent manner at the level of each entity.
Derivatives that do not qualify for hedge accounting Changes in the fair value of all other derivative instruments that do not qualify for hedge accounting are recognised immediately in the income statement.
Ordinary shares are classified as equity when there is no obligation to transfer cash or other assets. Incremental costs directly attributable to the issue of equity instruments are shown in equity as a deduction from the proceeds, net of tax.
Deeply subordinated debts are classified as equity (“other reserves”) since like for ordinary shares, they do not result in an obligation to transfer cash or other assets.
Any financial instrument issued by the Group with an equity component (e.g. option granted to convert the debt instrument into an equity instrument of the company) and a liability component (e.g. contractual obligation to deliver cash) are classified separately on the liability side of the balance sheet with the equity component reported in the shareholders’ equity (“other reserves”). Gains and losses associated with redemptions or refinancing of the equity component are recognised as changes in equity.
Treasury shares and any directly incremental costs are recorded as a reduction of consolidated shareholders’ equity. Where such shares are subsequently sold, or reissued, any consideration received is included in consolidated shareholders’ equity, net of any directly attributable incremental transaction costs and the related income tax effects.
A number of insurance and investment contracts contain a discretionary participating feature (DPF). This feature entitles the holder to receive, as a supplement to guaranteed benefits, additional benefits or bonuses: – that are likely to be a significant portion of the total contractual benefits; – whose amount or timing is contractually at the discretion of the Group; and – contractually based on performance of contracts, or return on assets, or profit or loss of the company, fund or other entity that issues the contract.
According to IFRS4, recognition and derecognition are based on the existing AXA accounting policies as follows except for the elimination of the equalization provisions and the selective changes as permitted by IFRS 4 (see below § on reserves for additional guarantees).
Liabilities For traditional life insurance contracts (that is, those contracts with significant mortality risk), the liability for future policy benefits is calculated in accordance with the applicable regulatory principles of each country on the basis of actuarial assumptions as to investment yields, mortality, morbidity and expenses, using a prospective approach. An additional provision is fully recorded in the event of an adverse impact on the benefits due to a change in mortality tables.
The future policy benefit on UK “With-Profit” contracts include 100% of the “Fund for Future Appropriation” (FFA), which principally covers the future terminal bonuses according to the terms of these contracts. The FFA and, therefore, the future policy benefits vary with the change in market value of the assets supporting the participating “With-Profit” funds.
Unearned revenues reserves Revenues and fees representing up-front charges for future services are recognised as a liability and amortised into income using the same assumptions to amortise deferred acquisition costs (DAC).
Shadow accounting and Deferred Participating Liability (DPL) or Deferred Participating Asset (DPA)
In compliance with the option offered by the IFRS 4, the shadow accounting is applied for insurance and investment contracts with a discretionary participating feature. This shadow accounting affects technical provisions, deferred acquisition costs and value of business in force to reflect the direct impacts of unrealized gains or losses on the measurement of these insurance liabilities or assets in the same way that a realized gain or loss does.
When unrealized capital gains of the assets are recognised, a deferred participating liability (DPL) is recorded. The DPL corresponds to the discretionary participating features available for the policyholders and is fully classified as liabilities arising from policyholders’ participation, with no allocation to any equity component. Consequently, AXA does not need to check that the liability recognised for the whole contract is not less than the amount that would result from applying IAS39 to the guaranteed element. The DPL is calculated by applying a participation rate to the unrealized gains or losses. The participation rate considered is the best estimate based on constructive obligations.
Embedded derivatives in insurance and investment contracts with DPF Embedded derivatives that meet the definition of an insurance contract or options to surrender insurance contracts for a fixed amount (or an amount based on a fixed amount and an interest rate) are not separately measured All other embedded derivatives are separated and carried at fair value if they are not closely related to the host insurance contract and meet the definition of an insurance contract.
In accordance with IAS 39, these contracts are accounted for using the “deposit accounting” method, which mainly results in not recognizing in our P&L the corresponding premiums and benefits and claims (see below Revenue recognition). This category includes mainly unit-linked contracts that don’t meet the definition of insurance or investment contract with discretionary participation feature. For unit-linked contracts, the liabilities recognised according to the existing accounting policies are valued in reference to the fair value of the investment funds / assets linked to those contracts at the balance sheet date.
The Group enters into contracts with reinsurers, under which the Group is compensated for losses on one or more contracts issued by the Group. These contracts that meet the classification requirements for insurance contracts are accounted for in a manner consistent with the accounting for the underlying direct insurance contract and takes into account contractual clauses.
The financing debts which relate to funds used to finance the solvency margin of an operational entity or to acquire the shares of an entity or a portfolio of contracts are presented on the balance sheet separately from the other debts, liabilities and payables.
Provisions are not recognised for future operating losses or associated with the on-going of activities of the company.
4.15.2. Fees and revenues from investment contracts with no participating feature
Amounts collected as premiums from investment contracts with no participating feature are reported as deposits net of any loadings and policy fees. Revenues from these contracts consist of loadings and policy fees for the cost of issuance, investment management, administration and surrender of the contract during the period. Front end fees collected corresponding to fees for future services, are recognized over the estimated life of the contract (see section 4-11-3 - Unearned fees reserves).
4.15.3. Change in unearned premiums reserves net of unearned revenues and fees
Change in unearned premiums reserves net of unearned revenues and fees include the change in the unearned premium reserve reported as a liability (see “Unearned Premium Reserve” above) along with the change in unearned revenues and fees. Unearned revenues and fees correspond to up front charges for future services recognized over the estimated life of insurance and investment contracts with discretionary participating feature (see Unearned revenues reserves in section 4-11-2) and investment contracts with no discretionary participating feature (see section 4-11-3 Unearned fees reserves).
Net revenues from banking activities include all revenues and expenses from banking activities, including interests and banking fees. They exclude bank operating expenses and change in provisions for bad debts, doubtful receivables or loans which are recorded in the item “Bank operating expenses”.
Revenues from other activities mainly include investment management fees recognized as earned as the service is provided. They mainly comprise: - Revenues from other activities of insurance companies, notably commissions received on sales or distribution of financial products, - Commissions received and fees for services rendered in respect of asset management activities, - Rental income received by real estate management companies, and - Sales proceeds received on buildings constructed or renovated and subsequently sold by real estate businesses.
These comprise assets held for sale and discontinued operations intended to be sold within twelve months. They are accounted for at the lower of carrying amount and fair value less selling costs to sell. They are presented separately on the face of balance sheet and in the Income Statement, net of tax for discontinued operations only.
(a) Equity-accounted companies as at december 31, 2004, fully consolidated from January 1, 2005
Change in unearned premiums net of unearned revenues and fees (196) (1 141) (406) - - - 21 (1 723)
Net realized investment gains and losses (3) 2 473 218 32 (1) 3 31 (0) 2 755 Change in fair value of financial instruments at fair value through profit and loss 1 927 3 4 3 10 (73) - 1 873
Amortization of the value of purchased business in force and other intan (238) - - - - - - (238)
Change in tangible assets impairment (5) (14) 0 - - - - (18)
Other operating income and expenses (29 338) (8 575) (1 904) (1 308) (226) (75) 329 (41 097) Net income from operating activities, gross of tax 1 593 1 029 249 362 18 (0) (122) 3 128 Income arising from investments associates - Equity method 16 19 1 - 5 (0) - 40
Minority interests share in net consolidated result 94 36 0 134 4 (25) - 243
Fees and charges relating to investment contracts with no participating f 237 - - - - - - 237
Amortization of the value of purchased business in force and other intan (364) - - - - - - (364)
The method for determining the fair value of investments stated at cost or amortized cost is described in note 1.2.6.
Fixed maturities held to maturity - - 0,00% - - 0,00% - - 0,00% Fixed maturities avilables for sale 182 891 182 891 42,19% 5 925 5 925 57,91% 188 816 188 816 42,55% Fixed maturities at fair value through profit and loss 42 623 42 623 9,83% 1 137 1 137 11,11% 43 760 43 760 9,86% Fixed maturities held for trading 4 4 0,00% 1 551 1 551 15,15% 1 555 1 555 0,35% Non quoted fixed maturities (amortized cost) 22 22 0,01% 2 2 0,02% 24 24 0,01%
Equity securities available for sale 24 644 24 644 5,69% 781 781 7,63% 25 425 25 425 5,73% Equity securities at fair value through Profit and Loss 18 238 18 238 4,21% 8 8 0,08% 18 246 18 246 4,11% Equity securities held for trading 226 226 0,05% 265 265 2,59% 491 491 0,11%
Other assets held by consolidated investment funds designated as at fair value through P&L 1 792 1 792 0,41% - - 0,00% 1 792 1 792 0,40%
Macro hedge and speculative derivatives 1 1 0,00% (79) (79) -0,77% (77) (77) -0,02%
Financial assets (excl. those backing contrats with financial risk borne by policyholders) 309 463 306 126 70,62%
Investment property at amortized cost 10 293 7 683 1,95% 82 61 0,54% 10 375 7 744 1,91% Investment property at fair value through Profit & Loss 4 550 4 550 1,15% - - 0,00% 4 550 4 550 1,12% Macro hedge and speculative derivatives - - 0,00% - - 0,00% - - 0,00%
Loans designated as at fair value through P&L 377 377 0,10% - - 0,00% 377 377 0,09%
Macro hedge and speculative derivatives - - 0,00% 76 76 0,67% 76 76 0,02%
7.2. Investment properties and roll-forward of impairment and amortization of investment properties
Investment property at amortized cost 9 275 (1 354) (397) 7 523 10 146 Investment property at fair value 4 827 4 827 Macro hedge and speculative derivatives - -
Impairment (1) Accumulated impairment (1) Carrying value (2) Fair value (2)
Investment property at amortized cost 78 0 (17) 61 82 Investment property at fair value - Macro hedge and speculative derivatives
Investment property at amortized cost 9 341 (1 358) (397) 7 586 10 230 Investment property at fair value 4 827 4 827 Macro hedge and speculative derivatives - -
Investment property at amortized cost 9 321 (1 324) (253) 7 744 10 375 Investment property at fair value 4 550 4 550 Macro hedge and speculative derivatives
(1) excludes potential effect of hedging derivatives, other derivatives, macrohedge and speculative (2) includes potential effect of hedging derivatives and other derivatives (excluding macrohedge and speculative).
(million euros) January 1st, 2005 Increase for the period Write back following sale or reimbursement
Write back following recovery in value Other (2) June 30 th, 2005
(million euros) January 1st, 2004 Increase for the period Write back following sale or reimbursement
(1) Including banking assets (2) incl. mainly change in scope of conso and change in exchange rate
Equity securities available for sale 19 037 24 644 24 644 5 671 136 615 781 781 167 0 19 652 25 425 25 425 5 908 136 Equitiy securities at fair value through P&L 18 238 18 238 8 8 - - 18 246 18 246 Equity securities held for trading 226 226 265 265 - - 491 491
Non consolidated investment funds available for sale 2 567 2 923 2 923 360 4 158 159 159 1 0 2 725 3 081 3 081 361 4 Non consolidated investment funds at fair value through P&L 2 186 2 186 27 27 2 213 2 213 Non consolidated investment funds held for trading 251 251 - - 251 251
Macro hedge and other derivatives 1 1 (79) (79) (77) (77) Total financial investments of insurance activities 275 800 275 800 9 778 9 778 285 577 285 577 (1) Gross of impairment - including amortization, premium and accumulated amortization (2) Net of impairment
Other assets held by consolidated investment funds designated as at fair value through P&L 596 596 - - 596 596
Impairement - non controlled investment funds 280 2 (33) - (4) 245
ROLL FORWARD OF IMPAIRMENT ON INVESTED ASSETS (EXCLUDING INVESTMENT PROPERTIES) (1)
Impairement - non controlled investment funds 166 2 (34) - (16) 119
The main changes in the first half of 2005 were as follows: - In their April 20, 2005 meeting, shareholders approved a dividend distribution of €1,164 million with respect to 2004. - Capital increases arising from exercises of stock options amounted to €4 million. - The change in other reserves is mainly due to a €250 million issue of deeply subordinated perpetual notes through the Euro Medium Term Notes (EMTN) program. - The impact of exchange rate movements mainly concerned the United States (€+1,293 million) and the UK
(€+156 million). However, it was partly offset by the change in value of currency hedges set up to hedge net foreign investments (€-519 million).
- Changes in the fair value of assets mainly related to France (€+509 million), Belgium (€+415 million), Japan (€+175 million) and Germany (€+146 million).
Unrealized gains and losses (net group share) 7 393 5 720 1 672
(1) including impact of shadow accounting on premium deficiency liabilities, after re-valuation of AFS securities (2) Net of shadow accounting on unearned revenues and fees reserves (3) including currency impact attributable to minority interests (4) group share
AXA Subordinated perpetual notes, variable (U.S. $ and euro) 2 239 2 120 Perpetual notes, 3.29% / variable (Yen) 201 193 Subordinated convertible notes, 2.5% due 2014 (euro) 1 583 1 558 Subordinated perpetual debt (euro) 219 234 Subordinated perpetual notes, 7.25% (euro) 500 Subordinated convertible notes, 3.75% due 2017 (euro) - debt component 1 108 1 089 Subordinated convertible notes, variable due 2020 (euro) 180 215
AXA UK Holdings GRE : Loan Notes, 6.625%, due 2023 229 219
Netherlands Holdings 17 17 Derivatives on financing debt owed to credit institutions - FINANCING DEBT OWNED TO CREDIT INSTITUTIONS 17 17
(1) Hedging instruments according to IAS 39 and economic hedge derivatives which are not acting as hedge under IAS 39.
Data used for calculating the fair value of financing debt (debt instruments or owed to credit institutions) are period-end market data that take into account (i) market interest rates by currency, (ii) AXA's average spread by maturity and currency, distinguishing subordinated and senior debt and (iii) options included in issuance contracts, such as issuer early redemption options. For subordinated convertible bonds, fair value is equal to the quoted price of these instruments at the end of the period.
Financing debt instruments issued at cost 3 111 3 158 3 168 3 290 Financing debt instruments issued held as trading - - - Financing debt instruments issued designated as at fair value through P&L - - - Derivatives on financing debt instruments issued (1) (154) (154) (265) (265)
Note 10 : Derivative instruments 10.1. Derivatives instruments: maturity, notional amounts, and fair value 10.2. Derivatives instruments subject to hedge accounting and other derivatives instruments
Hedging derivative instruments may be summarized as follows: NB : This table includes all derivatives (assets and liabilities), i.e hedge, macrohedge and other, inactive and passive position
Derivatives instruments used in macro hedging relationship on interest rate risk
Notional amount Fair valueNotional amount Fair value Notional amount Fair value
NB : This table includes all derivatives (assets and liabilities), i.e hedge, macrohedge and other, inactive and passive position
Positive fair value Negative fair value Net fair value Fair value changes
Maturity of notional amount as at June 30, 2005 (1) Notional amount
Fixed maturities held to maturity 0 0 0 0 0 0 0 0 0 0 0 0 Fixed maturities available for sale 164 184 (153) 619 164 650 6 577 0 0 6 577 170 761 (153) 619 171 227 Fixed maturities at fair value through profit and loss 41 907 0 (21) 41 886 1 324 0 (127) 1 197 43 231 0 (148) 43 083 Fixed maturities held for trading 4 0 0 4 1 571 0 49 1 620 1 575 0 49 1 624 Non quoted fixed maturities (amortized cost) 23 0 0 23 2 0 0 2 26 0 0 26
Macro hedge and speculative derivatives 0 0 (242) (242) 0 0 536 536 0 0 294 294
Investment property at amortized cost 7 523 0 0 7 523 62 0 0 62 7 586 0 0 7 586 Investment property at fair value through profit and loss 4 827 0 0 4 827 0 0 0 0 4 827 0 0 4 827 Macro hedge and speculative derivatives 0 0 0 0 0 0 0 0 0 0 0 0
Equity securities available for sale 24 424 (7) (76) 24 341 194 0 37 231 24 618 (7) (39) 24 572 Equity securities at fair value through profit and loss 18 237 0 0 18 238 8 0 0 8 18 246 0 0 18 246 Equity securities held for trading 226 0 0 226 265 0 0 265 491 0 0 491 Participating interests available for sale 301 0 1 302 551 0 0 551 852 0 1 853
Non controlled investment funds available for sale 2 862 0 60 2 923 159 0 0 159 3 021 0 60 3 081 Non controlled investment funds at fair value through profit and loss 2 159 0 26 2 186 27 0 0 27 2 187 0 26 2 213 Non controlled investment funds held for trading 251 0 0 251 0 0 0 0 251 0 0 251
Loans at fair value through profit and loss 143 0 5 148 0 0 0 0 143 0 5 148
Macro hedge and speculative derivatives 0 0 0 0 0 0 99 99 0 0 99 99
10.4. Value of financial liabilities, with effect of potential hedging 10.4.1. Liabilities arising from insurance and investment contracts 10.4.2. Other financial liabilities 10.5. Derivatives instruments not subject to hedge accounting
The notional amount of these instruments at June 30, 2005 was €11,915 million.
Financing debt owed to credit institutions 17 - - 17 17 - 4 22
Controlled investment funds minority interests liability 4 051 - - 4 051 3 223 - - 3 223 Other debt instruments issued, notes and bank overdrafts 8 215 (13) - 8 202 7 784 - 1 7 785 Payables arising from direct insurance and inward reinsurance operations 4 090 - - 4 090 3 863 - - 3 863 Payables arising from outward reinsurance operations 4 304 - - 4 304 3 588 - - 3 588 Payables arising from banking activities (1) 11 707 - 76 11 783 12 220 - 65 12 285
Liabilites arising from investment contracts where the financial risk is borne by policyholders 44 007 0 0 44 007 39 127 0 0 39 127
Derivatives instruments on financial assets subject to hedge accounting 63 32 (270) (178) (207) (146)
Other derivatives instruments on financial assets (1) 148 209 187 431 335 640 Macro hedge and speculative derivatives on financial assets (143) 481 165 (111) 22 370
Total - derivatives instruments relating to financial assets 68 722 83 142 151 864
Other derivatives instruments on insurance and investment contracts (1) (76) (47) 224 3 147 (44)
Macro hedge banking activities (liabilities) and other derivatives (including speculative derivatives) (1) (5) 77 70 76 65
United Kingdom (and Ireland since January 1st, 2004) 2 290 Belgium 775 Other countries 2 690 INTERNATIONAL INSURANCE 2 501 of which direct premiums 531 of which reinsurance assumed 1 893 of which revenues from other activities 77
(million euros) June 30, 2005 Interests received and equivalent 267 Interests paid and equivalent -176 Net interests and equivalent 91 Commissions received 20 Commissions paid -10 Net commissions 10 Investment income 92 Realized investment gains and losses 36 Change in fair value of financial instruments at fair value through P&L 17 Change in financial instruments impairment -1 Net investment results 146 Other bank operating income 9 Other bank operating expenses -29 Net other bank operating income -20
Fully diluted net income per ordinay shares F = E / D 1,19 0,94 (1) Weighted average (2) Fully diluted
The nature of related-party transactions in the first half of 2005 was similar to that of the 2004 transactions described in note 1.2.27.