In certain of our principal markets, inflation, as measured by consumer price indices or other means, has increased, in some cases significantly, over recent periods. A sustained increase in the inflation rate in our principal markets would have multiple impacts on AXA and may negatively affect our business, solvency position and results of operations. For example, a sustained increase in the inflation rate may result in an increase in market interest rates which may (i) decrease the value of certain fixed income securities we hold in our investment portfolios resulting in reduced levels of unrealized capital gains available to us which could negatively impact our solvency margin position and net income, (ii) result in increased surrenders of certain Life & Savings products, particularly, those with fixed rates below market rates, and (iii) require us, as an issuer of securities, to pay higher interest rates on debt securities we issue in the financial markets from time to time to finance our operations which would increase our interest expenses and reduce our results of operations. A significant and sustained increase in inflation has historically also been associated with decreased prices for equity securities and sluggish performance of equity markets generally. A sustained decline in equity markets may (i) result in impairment charges to equity securities that we hold in our investment portfolios and reduced levels of unrealized capital gains available to us which would reduce our net income and negatively impact our solvency position, (ii) negatively impact performance, future sales and surrenders of our unit-linked products where underlying investments are often allocated to equity funds, and (iii) negatively impact the ability of our asset management subsidiaries to retain and attract assets under management, as well as the value of assets they do manage, which may negatively impact their results of operations. In addition, in the context of certain Property & Casualty risks underwritten by our insurance subsidiaries (particularly “long-tail” risks), a sustained increase in inflation with a resulting increase in market interest rates may result in (i) claims inflation (i.e. an increase the amount ultimately paid to settle claims several years after the policy coverage period or event giving rise to the claim), coupled with (ii) an underestimation of corresponding claims reserves at the time of establishment due to a failure to fully anticipate increased inflation and its effect on the amounts ultimately payable to policyholders, and, consequently, (iii) actual claims payments significantly exceeding associated insurance reserves which would negatively impact our results of operations. In addition, a failure to accurately anticipate higher inflation and factor it into our product pricing assumptions, may result in a systemic mis-pricing of our products resulting in underwriting losses which would negatively impact our results of operations. For additional information, please see Part IV, Section 4.2 “Quantitative and Qualitative Disclosures About Market Risk and Risk Factors” in this Annual Report.
RISKS RELATINg TO ThE NATURE OF OUR BUSINESS AND ThE ENvIRONMENT IN whICh wE OpERATE
we have announced a multi-year “Ambition 2012” program with aspirational earnings, revenue growth and other targets. Our ability to realize our Ambition 2012 objectives is subject to multiple risks and uncertainties and there is no guarantee that these objectives will be achieved
In 2004, management publicly disclosed its “Ambition 2012” program pursuant to which AXA announced its intention to become the “preferred company” for its customers, shareholders and employees by 2012. Performance indicators relating to this program include objectives such as doubling revenues and trebling earnings per share over the period 2004-2012. While AXA is actively pursuing its announced objectives and has implemented multiple initiatives designed to help achieve them, there can be no assurance that these goals will be reached. Failure to meet the targets set forth in its “Ambition 2012” program may have a significant impact on AXA’s stock price, its image, investors’ and employees’ confidence in AXA’s management as well as its results of operations and cash flows.
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 judgement 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 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 provisions and underwriting expenses. Changes in
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 reestimated 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.
Our operating results may be materially adversely affected by the occurrence of natural or man-made disasters and pandemic diseases
Other risks, such as an outbreak of a pandemic disease, such as the Avian Influenza A Virus (H5N1), could also adversely affect our business and operating results. While outbreaks of the Avian Flu have occurred among poultry or wild birds in a number of countries in Asia, parts of Europe, and in Africa, transmission to humans has been rare. If the virus mutates to a form that can be transmitted from human to human, it has the potential to spread rapidly worldwide and result in mortality and morbidity rates that far exceed the assumptions that we have used in pricing certain of our products. Both the contagion and mortality rates regarding any mutated H5N1 virus that can be transmitted from human to human are highly speculative at this point in time and we continue to monitor the developing facts. A significant global outbreak could have a material adverse effect on our life insurance business, operating results and liquidity due to increased mortality and morbidity rates.
we face increased competition in all of our business segments, including the global financial services industry, as a result of continuing consolidation
We face strong and increasing competition in all our business lines. Our competitors include mutual fund companies, asset management firms, private equity firms, hedge funds, commercial banks and other insurance companies, many of which are regulated differently than we are and offer alternative products or more competitive pricing than we do. The recent consolidation in the global financial services industry has also enhanced the competitive position of some of our competitors by broadening the range of their products and services, and increasing their distribution channels and their access to capital. In addition, development of alternative distribution channels for certain types of insurance and securities products, including through the internet, may result in increasing competition as well as pressure on margins for certain types of products. These competitive pressures could result in increased pricing pressures on a number of our products and services, particularly as competitors seek to win market share, and may harm our ability to maintain or increase our profitability.
Changes to tax laws may affect the attractiveness of certain of our products, which currently have favorable tax treatment. From time to time, governments in the jurisdictions in which we operate, have considered or implemented proposals for changes in tax law that could adversely affect our products. These proposals have included proposals to levy tax on the undistributed increase in value of life insurance policies or annuities or similar proposals that affect the tax-favored status of life insurance products and annuities in certain jurisdictions as well as other changes that could adversely affect the attractiveness of our products. For example, in the UK, recently adopted modifications to the capital gains tax regime are expected to reduce the attractiveness of certain products we sell including life insurance bonds and adversely impact sales of these products. In addition legislation enacted in the United States in the spring of 2001 increased the size of estates exempt from the federal estate tax. This legislation is phasing in reductions in the estate tax rate between 2002 and 2009 and will repeal the estate tax entirely in 2010. Under the legislation, however, the estate tax will be reinstated, without the increased exemption or reduced rate, in 2011 and will be in effect thereafter. This legislation, and possible future changes to it such as extending or making permanent its repeal or reform to reduce the impact of estate taxes, could have a negative impact on the sales of estate planning products by U.S. life insurance companies, including our U.S. subsidiaries. The enactment of these or other similar types of legislation in the various countries where we operate, including proposals in the U.S. to create or favor alternative tax-favored long-term savings vehicles, could result in a significant decrease in sales of our currently tax-favored products.
In addition, changes in tax laws or regulations or an operating performance below currently anticipated levels may lead to a significant impairment of deferred tax assets, in which case we could be obligated to write off certain tax assets. Tax assets may also need to be written down if certain assumptions of profitability prove to be incorrect, as losses incurred for longer than expected will make it more unlikely that we would be able to use our tax assets. Any such development may have a material adverse impact on our results of operations.
Our business is subject to extensive laws and regulation and to significant litigation risks in the various countries where we operate; changes in existing or new laws and government regulations in these countries and/or an adverse outcome in any significant pending or future litigation or regulatory investigation may have an adverse effect on our business, financial condition, results of operations, reputation or image in the marketplace
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.
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.
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.
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.
Our insurance and financial services operations are generally conducted through direct and indirect subsidiaries. As a holding company, our principal sources of funds are dividends from subsidiaries and funds that may be raised from time to time through the issuance of debt or equity securities or through bank or other borrowings.
We expect that dividends received from subsidiaries will continue to cover our operating expenses, including (i) interest payments on our outstanding financing arrangements and (ii) dividend payments with respect to our outstanding ordinary shares. We expect that future acquisitions and strategic investments will be funded from available cash flow remaining after the payment of dividends and operating expenses (including interest expenses), cash on hand from previous securities offerings, proceeds of future offerings of securities, and proceeds from the sale of non-core assets. Certain of our significant subsidiaries, including AXA France Assurance, AXA Financial, AXA UK Holdings, AXA Japan, AXA Asia-Pacific Holdings, and AXA Germany, are also holding companies and are dependent on dividends from their respective subsidiaries for funds to meet their obligations. In addition, certain of our principal insurance subsidiaries are subject to restrictions on the amount of dividends and debt repayments that can be paid to us and our affiliates. While we do not believe that these restrictions currently constitute a material limitation on our ability to meet our obligations or pay dividends on our shares, these restrictions may lead to a material limitation in the future. For further details, see the “liquidity and capital ressources” Section included in Part II and the Part V — Note 28.3 “Other items: Restrictions on Dividend Payments to Shareholders” of this Annual Report.
Compliance with the Sarbanes-Oxley Act entails significant expenditure and managerial attention, and non-compliance with the Sarbanes-Oxley Act may adversely affect us
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
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 Mutuelles AXA, two French mutual insurance companies, acting as a Group, owned at December 31, 2007, approximately 14.48% of the issued ordinary shares of AXA representing approximately 20.84% 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.
RISKS RELATED TO OwNERShIp OF AXA ADSs OR ORDINARy ShARES The trading price of AXA ADSs and dividends paid on AXA ADSs may be materially adversely affected by fluctuations in the exchange rate for converting Euro into U.S. dollars
Fluctuations in the exchange rate for converting Euro into U.S. dollars may affect the value of AXA ADSs. Specifically, as the relative value of the Euro against the U.S. dollar declines, each of the following values will also decline: — the U.S. dollar equivalent of the Euro trading price of AXA
— the U.S. dollar equivalent of cash dividends paid in Euro on the AXA ordinary shares represented by the AXA ADSs.
holders of AXA ADSs will have limited recourse if AXA or the depositary fails to meet its obligations under the Deposit Agreement and they wish to involve AXA or the depositary in a legal proceeding
The Deposit Agreement expressly limits the obligations and liability of AXA and the depositary. Neither AXA nor the depositary will be liable if they: — are prevented from or delayed in performing any obligation by circumstances beyond their control; — exercise or fail to exercise discretion under the Deposit
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
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.
The Risk Management organization > 4.2 qUANTITATIvE AND qUALITATIvE DISCLOSURES ABOUT MARKET RISK AND RISK FACTORS
Within the Finance Department, the aim of Risk Management is to identify, quantify and manage the main risks to which the Group is exposed. To achieve this, the Risk Management Department develops and uses various methods and tools to assess and monitor risk.
RISK MANAgEMENT pRINCIpLES AND pRIORITIES In order to make a tangible and measurable contribution to the Group’s activities, Risk Management has three key characteristics: — Pragmatic: focusing on clearly identified priorities. — Operational: working directly with the Group’s businesses.
— Decentralized: based on the subsidiarity principle, in line with the Group’s general organization.
Risk Management has five main priorities: — Co-ordinating and monitoring asset-liability management
— Approving new products prior to launch and promoting product innovation.
— Managing insurance exposures, in particular reviewing Property & Casualty reserves and optimizing reinsurance strategies.
ThE AXA gROUp’S RISK MANAgEMENT : AXA CESSIONS AND gROUp RISK MANAgEMENT The Group’s risk management structure is mainly based around the Group Risk Management (GRM) department and AXA Cessions.
GRM also coordinates risk detection and management at the Group level, and indirectly at the subsidiaries’ level. In particular, this includes all procedures for reporting risk and consolidating risk at Group level. GRM coordinates the local Risk Management teams of the Group’s various subsidiaries. In line with Group governance principles, this coordination focuses on minimum Group-wide requirements defined by GRM in terms of organization, resources and results.
Management department performs these tasks using a uniform set of techniques including stochastic models. These modelling techniques allow an assessment of AXA’s risk exposure based on the large number of scenarios examined in this type of approach. These tools complement more traditional deterministic forecasting tools, such as stress scenarios. Besides the specific conclusions for each product line and each unit, these analyses measure the level of assets with respect to the economic capital required to cover a level of assumed risks consistent with a AA credit rating.
— Reviewing local technical reserves and optimizing entities’ reinsurance strategy (see section “Implementation of the reinsurance strategy Role of AXA Cessions”).
Market Risk > 4.2 qUANTITATIvE AND qUALITATIvE DISCLOSURES ABOUT MARKET RISK AND RISK FACTORS
AXA is exposed to financial market risks through its financial protection business and through the financing of its activities as part of its equity and debt management. These two distinct sets of risks can be summarized as follows: ASSET-LIABILITy MANAgEMENT OF INSURANCE pORTFOLIOS One of the basic functions of the insurance business is to invest premiums received from customers with a view to settling any claims that might occur. The way these premiums are invested must take into account the way in which any claims will be settled. This is the role of asset-liability management. In an effort to protect and enhance shareholder value, AXA actively manages its exposure to market risks.
A wide variety of risk management techniques are used to control and mitigate the market risks to which the AXA Group’s operational entities and the Group itself are exposed. These techniques include: — ALM, and in particular the definition of optimal strategic asset allocations.
— The overall balance of the product range leads to some natural hedging effects between different products.
(the shareholder’s value is however still sensitive to financial market evolution).
There is a clear distinction between the issues involved in the Life & Savings and Property & Casualty businesses: Description of Life & Savings insurance reserves: Risk profiles
The market risks to which Life & Savings subsidiaries are exposed arise from a number of factors: — 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 invested assets is not sufficient to cover contractual interest rates payable to life insurance policyholders.
— A rise in yields on fixed-income investments reduces the value of fixed-income portfolios and could have an adverse impact on the solvency margin and surrender levels on certain contracts, if competitive pressures lead to higher rates of policyholder profit participation on new contracts.
at the end of 2005) 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 passed on to policyholders in full. In cases where these products include interest-rate guarantees, they are usually covered by a financial partner within the separate account. Overall, therefore, they present only a limited market risk for the Group through reduction of shareholders’ value.
— 17% at the end of 2007 (18% at the end of 2006 and 20% at the end of 2005) of the Group’s Life & Savings technical reserves cover products without guaranteed cash values upon surrender.
• The in-force “With-Profit” policies of AXA UK are managed with a significant surplus of free assets, used to adjust performance over the duration of such policies while at the same time reflecting financial market performance in policyholders’ revenues.
— 32% at the end of 2007 (33% at the end of 2006 and 35% at the end of 2005) of the Group’s Life & Savings technical reserves cover other products. These reserves cover both surrender guarantees and, in some cases, a guaranteed longterm rate. Related risks are managed in the following ways: • Products that are not surrender-sensitive are usually backed by fixed-income investments whose maturities and interest rates are generally sufficient to cover guaranteed benefits, so as to reduce the reinvestment risk as far as possible.
• 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.
The obligations of Property & Casualty insurance companies are much less dependent on asset values than those of Life & Savings companies. Consequently, market fluctuations are fully reflected in their net asset value and fully borne by the shareholders. However, long-tail activities are more sensitive to movements in financial markets. The principal market risks are as follows: — A rise in fixed maturity yields reduces the value of fixed maturity portfolios and may lead to a liquidity risk in these portfolios or a real loss of value if the rise in yields is related to a rise in inflation.
— Lower yields on fixed-income investments increase the value of fixed maturity portfolios, and therefore generally do not present a material risk, with the exception of certain contracts (disability and worker’s compensation income) that provide guaranteed rates. On the other hand, a prolonged period of low yields would have an impact on the pricing of these products.
— Inflation is a risk, since it increases the compensation payable to policyholders, with the effect that, if it is not adequately taken into consideration, actual claims payments may exceed the reserves set aside. This risk is particularly significant for long-tail businesses.
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.
The definition and co-ordination 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).
These detailed analyses are performed on the non unitlinked business of the insurance companies, the financial risk of the unit linked business being directly borne by the policyholder.
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. 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 (for example, in 99% of cases over 10 years).
— The present value of future margins generated by insurance portfolios.
— ALM constraints are also taken into account when new products are being designed as part of the product approval process (see section “Pre-launch product approval and exposure monitoring”).
AXA manages its financial market risk as part of disciplined and organized investment processes.
Risks relating to investments are controlled through an appropriate governance structure and through reliable reporting procedures.
An Investment Committee, made up of managers from the financial and operational sides of the insurance company and also, in certain cases, representatives of its board of directors, approves investment strategy and assesses the quality of the results obtained.
These investment processes are part of a broader Grouplevel framework, which includes: — defining standards for managing investments and assessing asset-liability mismatch risk (see section above), — consolidating market risks at Group level.
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 stipulated by their client insurance companies in investment management agreements. This organization makes the skills required in these activities available for the benefit of all Group insurance companies.
All products that involve hedging programs using derivative instruments are executed with the help of dedicated teams at 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.
DEFINITION: exchange-rate risk results from a mismatch between the currency of an asset (particularly net foreign currency investments in subsidiaries) and the currency in which it is financed.
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 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.
DEFINITION: liquidity risk results from a mismatch between the date on which an asset matures and the date on which a liability falls due.
MANAGEMENT: liquidity risk is managed carefully and conservatively by keeping a long maturity on financial resources (debts) — mostly subordinated — and by maintaining a large amount of confirmed credit facilities (around €6.2 billion undrawn at December 31, 2007 and around €6.0 billion undrawn at December 31, 2006).
— AXA remains constantly vigilant regarding contractual documentation clauses that may be binding on the Group. This helps AXA limit its exposure to default or early repayment clauses that may have a material adverse effect on its consolidated financial position.
— AXA maintains significant liquidity, amounting to €17.2 billion at December 31, 2007 (€19.8 billion at the end of 2006). More than half of this liquidity is managed within the AXA Trésorerie Europe economic interest grouping (GIE), which was specifically set up to centralize management of the liquidity held by units operating within the Euro zone. This GIE reflects the solid liquidity position of the Group, since it had an average cash balance of around €9.4 billion in 2007 (€13.4 billion in 2006), which was invested in a liquid portfolio with a very short maturity.
— In addition, to deal with any liquidity crises that may arise, the Group has, under its liquidity contingency plan, around €18 billion of assets eligible to European Central Bank tenders (of which €8 billion immediately available), creating a very large alternative source of refinancing.
— Life & Savings business (79% of Group assets both at the end of 2007 and 2006) : In France, AXA is exposed to exchange-rate risk through the units it owns in certain investment funds partly invested in foreign currencies (particularly US dollar: €1,645 million vs €1,607 million in 2006, pound sterling: €338 million vs €343million in 2006 and Japanese yen : €335 million vs €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 foreign exchange derivatives (forwards €2,915 million vs €2,698 million in 2006).
In the past, AXA Japan’s investment strategy led the company to invest outside the Japanese market in order to benefit from higher returns. As of the end of the year, the total assets denominated in foreign currencies (mainly US dollar) represented an amount of €6,083 million (€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. In 2007, AXA Japan continued to decrease its investment in foreign markets, mainly in Euro fixed maturities (€—3,408 million compared to last year to €1,535 million at the end of 2007).
Companies in the German Life & Savings segment hold some investments denominated in foreign currencies for €3,558 million (€3,577 million in 2006), both directly and indirectly through investment funds, with the aim of diversifying their investments and taking advantage of foreign markets’ performance. These investments are mainly in US dollars €2,629 million (€2,092 million in 2006), but also in pound sterling for €674 million (€1,018 million in 2006) and Japanese yen for €178 million (€151 million in 2006). Exchange-rate risk exposure is hedged using forwards (notional €2,542 million vs €2,241 million in 2006) and currency swap (notional €430 million vs €423 million in 2006).
Swiss entities are exposed to exchange rate risk through foreign-currency investments in Group companies (mainly in Japan and CEE) and other 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 hold foreign exchange exposure on shares as well as on fixed maturities denominated in currencies other than Swiss Francs. However foreign exchange exposure on fixed maturities is hedged back into Swiss Francs with mainly foreign exchange forwards and to a minor degree foreign exchange options.
Switzerland Life & Savings foreign exchange exposure amounted to €13,604 million (circa 47% of assets) at the end of 2007, of which €10,729 million were hedged with mainly foreign exchange forwards (€7,641 million) and call/put strategy (€2,396 million).
In Belgium and the US, the Group’s Life & Savings companies do not have any significant exposure to exchange-rate risk.
German P&C segment is exposed to US dollar exchangerate risk on certain investment funds for €829 million (€733 million in 2006). Remaining exchange-rate risk exposure, mainly concerning the pound sterling €211 million (€264 million in 2006) and the Japanese yen for €62 million (€63 million in 2006), is incurred for the purpose of diversifying investments. It controls and limits its exchange-rate risk by using forwards (notional €785 million vs €587 million in 2006) and currency swap (notional €124 million vs none in 2006).
At December 31, 2007, the main hedging positions were as follows: • USD11.3 billion or €7.7 billion (USD11.1 billion or €8.4 billion at the end of 2006) in respect of the US activities, including USD7.7 billion or €5.2 billion (USD7 billion or €5.3 billion at the end of 2006) via cross-currency swaps,
• JPY599 billion or €3.6 billion (JPY456 billion or €2.9 billion at the end of 2006) in respect of the activities in Japan, mainly in the form of cross-currency swaps,
• C$1.7 billion or €1.2 billion (C$1 billion or €0.7 billion at the end of 2006) in respect of the Canadian business in the form of cross-currency swaps,
INTEREST RATES & EqUITy RISK RELATED TO ThE OpERATINg ACTIvITIES OF gROUp SUBSIDIARIES AXA performs sensitivity analyses to estimate Group exposure to movements in interest rates and equity risk.
Mark to market of debt — (77) (77) — (616) (616)
Life & Savings Adjusted Net asset Value (ANAV) and Other Business Tangible Net Asset Value (TNAV) 15,738 (3,650) 12,088 15,562 (2,758) 12,803
In addition to Life & Savings EEV, AXA calculates a “Group EV” which adds to the Life & Savings EEV the Tangible Net Asset Value (TNAV) for other-than-life businesses.
The Group EV is not an estimate of AXA’s “fair value”, regardless of how one might define “fair value”. It does not include the value of business to be sold in the future, nor does it include any value for future profits from existing business for other-than-life businesses i.e. Property & Casualty, International Insurance, Asset Management and Banking. However, the Life & Savings EEV is a key management metric measuring the risk-adjusted value of the business and tracking its evolution over time, and the Group EV provides a crucial link to processes that impact total Group value but can not be seen within the life and savings segment, such as hedging strategies executed at the Group level and also the impact of leverage on the Group.
The Life & Savings VIF calculation by its 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 fixed maturity or of equity, projecting expected cash flows, and discounting, will simply give Euro 1 of value. Mechanically, this can be described as assuming that all assets will earn the risk-free rate defined by the current market in the future. 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. AXA’s 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.
As described above, the Life & Savings VIF valuation under AXA’s market-consistent framework does not depend on assumed future asset returns, but rather on the actual riskfree yield curves observable in the market on each valuation date (consistent with financial market practices for valuing assets, the swap curve is used as the basis for risk-free yields). The Life & Savings VIF valuation also depends on stochastic projections of multiple scenarios, rather than a single scenario.
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.
Life & Savings Other than Life & Savings group Life & Savings Other than Life &
Savings group € million % group Ev € million % group
Estimated upward parallel shift of 100 bp in reference interest rates 318 1% (1,280) —4% (962) —3% 156 — (1,116) —3% (961) —3%
Estimated downward parallel shift of 100 bp in reference interest rates (1,416) —4% 1,466 4% 50 — (1,434) —4% 1,284 4% (149) —
10% lower value of equity markets at start of projection (1,639) —5% (997) —3% (2,636) —8% (1,959) —5% (1,104) —3% (3,063) —9%
Interest rate sensitivities for Life & Savings business of 1% to upward 100bp and —4% to downward 100bp (2006: 0% and —4%) reflect a close duration match of assets and liabilities across most of the business. In most markets there is an asymmetry predominantly driven by guaranteed interest rates having higher value when rates decrease, while higher reinvestment rates would need to be shared with policyholders limiting shareholder gains in a higher rate environment. However this classical pattern is not followed in the UK, 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 positvely 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.
The Group’s insurance activities expose it to various risks with a wide range of time horizons. Natural risks arising from climate change, particularly global warming, are long-term risks to which AXA Group pays close attention. On a more short-term view, insurance risks are covered mainly through procedures governing pre-launch product approval, exposure analyses, the use of reinsurance and the financial markets (catastrophe bonds, mortality bonds) and reviews of technical reserves.
The latest publications by the IPCC (Intergovernmental Panel on Climate Change 4th assessment report 2007) point in the same direction. 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, reliefs etc.), some results are now available at a regional level and used in our catastrophe risk estimations. However, it is still very difficult to estimate the consequences of extreme events (heatwaves, droughts and floods, high winds and intense precipitation caused by cyclones), which are of particular concern to insurance companies; this has led the Group to launch the AXA Research Fund which will support academic research projects in 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.
AXA’s operational entities. These have a set of actuarial tools for this purpose, enabling them to price products and then monitor their profitability over time.
The principal Risk Management tools are as follows: — Pre-launch approval procedures for new products. — Exposure analyses. — Optimization of reinsurance strategies (see section
In its Individual Life & Savings activities, the AXA Group has set up pre-launch product approval procedures in each of its principal subsidiaries. These procedures are defined and implemented locally, and are structured and harmonized using the minimum requirements defined by GRM. The main characteristics of these procedures are as follows: — Although the decision to launch a new product is taken locally, it must be the result of a documented approval process that complies with local governance practices.
These procedures are intended to ensure that new risks underwritten by the Group have undergone a rigorous prior approval process before the products are offered to customers. This harmonized approach also facilitates the sharing of product innovation within the Group. Similar methods have been developed for the underwriting of specific Property & Casualty risks, while maintaining the principle of local decision-making based on a documented approval procedure. The profitability analysis framework has been adapted to the Property & Casualty business, and special efforts have been made to formalize the quantitative requirements.
This type of analysis quantifies and demonstrates the benefits of the diversification created by AXA’s wide range of businesses and regional operations.
Estimates of catastrophic risks are carried out on the basis of several pieces of modeling software available in the market. Although these softwares are vital to allow objective discussions with reinsurers, it is regularly assessed within GRM and adjusted to the specific features of AXA’s portfolio. Experience shows that these softwares give imperfect estimates of real exposure, and can underestimate some important factors such as inflation following a major catastrophe or the effects of climate change. In addition, it does not factor in risks relating to legal developments requiring an insurer retrospectively to cover a risk that it believed it had excluded from its policies.
Since 2006, this work has been extended to the Life & Savings business based on the same procedures as in the Property & Casualty business. Certain entities now arrange reinsurance partially through AXA Cessions, which has set up a retention pool protected by Group covers placed on the Reinsurance Market.
After analysis work, the Group’s various operating subsidiaries place their reinsurance requirements with AXA Cessions. However, only a small part of most treaties is placed directly in the reinsurance market. Most risk is combined at the AXA Cessions level to form internal Group reinsurance pools by line of business.
The retention rate and coverage applied to these pools are designed to protect the Group effectively at low cost. Coverage is arranged through the reinsurance market or directly in the financial market through securitization (cat bonds).
In 2007, four pools were managed by AXA Cessions : — Property (Catastrophe and per risk + Personal Accident). — General Liability. — Marine.
All local entities’ ceding reinsurance are collectively protected by this Group coverage. The net financial results of this Group protection are then retroceded to these entities.
pROpERTy & CASUALTy RESERvES In addition to controlling upstream risks through prior product approval and analyzing the reinsurance strategy, the Property & Casualty businesses specifically monitor reserve risks. Reserves have to be booked for claims as they are incurred or reported. These reserves are measured individually for each file by the claims departments.
Additional reserves for incurred but not reported (IBNR) claims, along with reserves not enough reserved (IBNER — incurred but not enough reported) are also booked. Various statistical and actuarial methods are used in these calculations. Calculations are initially carried out locally by the technical departments in charge, and are then reviewed by local risk management teams.
The Group’s methods are based on applicable accounting and actuarial standards as well as internal and industry best practice.
However, it must be kept in mind that estimates are based mainly on assumptions that may prove different from subsequent experience, particularly in the event of changes in the economic environment (e.g. a rise in inflation), in the legal environment (case law) and in the social environment (class action suits), and especially if they affect the Group’s main portfolios simultaneously.
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 fixed maturities 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 fixed maturity portfolios. This database allows AXA to monitor exposure to the default risk of a given issuer, particularly through holding its fixed maturities. It also allows the monitoring of equity exposure.
As regards fixed maturity issues, total issuer-specific exposure limits are set at Group level and at the level of each subsidiary. These limits depend on the issuer’s risk, assessed via its credit rating and type (corporate, government, stateowned companies and agencies).
Credit Risk > 4.2 qUANTITATIvE AND qUALITATIvE DISCLOSURES ABOUT MARKET RISK AND RISK FACTORS
At December 31, 2005, the breakdown of the fixed maturity portfolio (€241.0 billion) by rating was: 41% in AAA, 23% in AA, 22% in A, 10% in BBB, 1% in BB and lower, and 3% in other.
CREDIT DERIvATIvES The AXA Group, as part of its investment and credit risk management activities, may use strategies that involve credit derivatives (Credit Default Swaps or CDS), which are mainly used as an alternative to corporate bond portfolios when coupled with government bonds.
For these €13.7 billion CDSs, the credit risk taken by the AXA Group through these instruments is included in analyses of bond portfolios as described in the previous section. Limits applied to issuers take into account these credit derivative positions.
ASSET BACKED SECURITIES By UNDERLyINg TypE OF ASSET (excluding Collateralized Mortgage Obligations (CMOs)) At December 31 2007, the total amount of ABS (excluding CMOs) was €16.2 billion and the economic breakdown was as follows: CLO
The analysis by rating of the ABS portfolio was as follows and shows that 70% were AAA & AA.
Credit risk relating to CDOs is monitored separately, depending on the tranches held, and regardless of the type of collateral (bonds 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 As at December 31, 2007, the direct general account (excluding the UK With-Profits) exposure to Monolines was insignificant and the indirect general account (excluding the UK With-Profits) exposure (bonds enhanced by Monoline reinsurers) was €379 million (of which €128 million Ambac and €162 million MBIA).
RECEIvABLES FROM REINSURERS: RATINg pROCESSES AND FACTORS To manage the risk of reinsurer insolvency, a Security Committee is in charge of assessing reinsurer quality and acceptable commitments. The committee is under GRM’s authority and is run by AXA Cessions. This risk is monitored to avoid any excessive exposure to a 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.
The breakdown of all reserves ceded to reinsurers by reinsurer rating at December 31, 2007 (€11.3 billion) is as follows, taking into account only the ratings of these top 50 reinsurers: BBB
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 Ré (reserves ceded to Paris Ré as part of the AXA RE disposal, which were not split by ratings at the end of 2006), and 25% in other.
gENERAL pRINCIpLES Guided by the principles set forth by the Basel Committee on banking supervision, AXA defines operational risk as the risk of loss resulting from inadequate or failed processes, people or systems. This inadequacy or failure may come from internal or external causes.
— External fraud. — Employment practices & workplace safety. — Clients and business practices. — Damage to physical assets.
— Business disruption and system failures. — Execution, products, delivery and process management.
On this basis, AXA develops quantification 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.
pROFESSIONAL EThICS AXA adopted the AXA Group Compliance and Ethics Guide (“the Guide”) in February 2004. The Guide was updated in 2006. It defines rules for day-to-day professional conduct. The Guide 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, and data protection and storage.
SOCIAL AND ENvIRONMENTAL RISKS With respect to its employment practices, AXA’s key challenge is to retain employees and position itself as an employer that is able to attract top talent.
In general, AXA Group’s purchasing of insurance is decentralized as far as possible. However, internal Group solutions are used wherever practical. Subsidiaries are responsible for identifying risks and purchasing their own insurance, such as property damage and public liability insurance according to the local exposures and market conditions.
As part of the general governance priniciples, subsidiaries may arrange protection with external insurers or with an internal AXA Group insurer. AXA Cessions maintains an inventory of local insurance contracts.
Group-wide insurance programs cover all AXA Group entities with the exception of AXA Asia Pacific Holdings and AXA Financial and their subsidiaries, who traditionally arrange cover within their local market.
AXA Group insurance programs are designed to meet the specific requirements of a large financial institution in its main businesses of insurance, banking, assistance, investment, and asset management.
For the policy year 2007-2008, the total cost for Directors and Officers Liability, Professional Indemnity and Fraud Insurance equalled appoximately €9.2 million, excluding taxes and commissions.
LEgAL pROCEEDINgS Please see Part V — Note 30 “Litigation” 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.
AXA determines its dividend policy on the basis of its adjusted earnings minus interest charges on perpetual debt, and currently intends to distribute 40 to 50% of that sum on a recurrent basis.
— Note 13: Shareholders’ equity, minority interests and other equity 271
— Note 20: Revenues by segment and net revenues from banking activities 334
6 Value of purchased business in force (a) 4,373 5,030 2,623 7 Deferred acquisition costs and equivalent (b) (h) 16,757 15,896 14,767
Reinsurers’ share in insurance and investment contracts liabilities 11,315 12,038 9,087
Receivables arising from direct insurance and inward reinsurance operations 12,140 11,873 9,713
Share capital and capital in excess of nominal value 21,080 22,670 18,120
Liabilities arising from investment contracts with discretionary participating features (h) 40,121 32,606 33,267
Minority interests of controlled investment funds and puttable instruments held by minority interests holders (f) 7,751 7,224 5,115
Payables arising from direct insurance and inward reinsurance operations 7,033 7,947 4,680
Liabilities arising from investment contracts where the financial risk is borne by policyholders
CONSOLIDATED STATEMENT OF INCOME (In Euro million, except EPS in euros)
Fees and charges relating to investment contracts with no participating features
Change in fair value of financial instruments at fair value through profit and loss (j)
Technical charges relating to insurance activities (e) (k) (89,590) (83,877) (80,614)
Amortization of the value of purchased business in force (357) (274) (557)
Change in goodwill impairment and other intangible assets impairment (i) (148) (12) (70)
Income from operating activities before tax 8,152 8,066 6,623 10 Income arising from investments in associates — Equity method 13 34 20
(c) Includes impairment releases on invested assets sold. (d) Excludes impairment releases on invested assets sold.
(e) Includes changes in liabilities arising from insurance contracts and investment contracts (with or without participating features) where the financial risk is borne by policyholders for an amount of €7,476 million euro as a balancing entry to the change in fair value of financial instruments at fair value through profit and loss (€15,158 million in 2006 and €13,589 million in 2005).
Change in fair value of investments and financial instruments accounted for at fair value through profit and loss
Net change in liabilities arising from insurance and investment contracts (c) 22,940 28,567 30,892
Income arising from investments in associates — Equity method (13) (34) (20)
Interests paid & received recorded in profit and loss during the period (16,237) (13,210) (12,702)
Adjustment of transactions from accrued to cash basis (18,780) (15,224) (14,468)
Net cash provided by other assets and liabilities (f) (1,528) (1,711) (676)
Other operating cash impact and non cash adjustment (l) 1,401 1,294 165
Purchase of subsidiaries and affiliated companies, net of cash acquired (3,275) (6,850) (1,583)
Disposal of subsidiaries and affiliated companies, net of cash ceded (k) 2,735 117 930
Sales of investment properties held directly or not (f) 2,802 2,104 948
Sales and/or repayment of loans and other assets (f) (h) 35,262 19,500 11,838
Decrease in collateral payable / Increase in collateral receivable (289) (3,355) (1,666)
Cash and cash equivalents as at January 1 (a) 19,831 20,640 21,830
Impact of change in scope on cash and cash equivalent 43 (7) 138
(g) Includes non controlled investments funds and equities held directly or by consolidated funds. (h) Also includes purchases and sales of assets backing contracts where the financial risk is borne by policyholders.
(k) At December 31, 2007, this item includes the disposal of Winterthur’s US Property & Casualty subsidiary and the disposal of the Netherlands operations. (l) As described in note 1.11.2, perpetual subordinated notes have been transferred in 2006 from the “subordinated debt” item to the “shareholders’ equity” item of the balance sheet, and are treated similarly to deeply subordinated notes. The effect on the 2005 cash flow statement of this reclassification is as follows: — a €102 million increase in “Operating income before tax”; — a €515 million reclassification of repayments of perpetual subordinated notes from the “Cash used for financing debt repayments” item to “Repayments of equity instruments” items; — a €157 million reclassification of interests paid on perpetual subordinated notes and deeply subordinated notes from the “Interests on financing debt paid” item to “Interests on perpetual debt paid” item.
(m) As described in note 1.19, the statement of consolidated cash flows now starts from “Operating income before tax”, whereas it used to start from “income from operating activities, gross of tax expenses”.
(n) As described in note 1.10, the contribution of discontinued operations is stated on a separate line of the income statement.
Reserves relating to changes in fair value through shareholders’ equity (3,016) (291) 2,420
Employee benefits actuarial gains and losses through OCI 628 260 (418)
The presentational amendments of the consolidated statement of shareholders’ equity which is now replaced by the statement of recognized income and expense for the period are explained in note 1.19.
1.1. GENERAL INFORMATION AXA SA, a French “Société Anonyme” (the “Company” and, together with its consolidated subsidiaries, “AXA” or the “Group”), is the holding (parent) company for an international financial services group focused on financial protection. AXA operates principally in Europe, North America and Asia-Pacific. The list of the main entities included in the scope of the AXA’s consolidated financial statements is provided in Note 2 of the notes to the consolidated financial statements.
AXA has its primary listing on Euronext Paris and has been listed since June 25, 1996 on the New York Stock Exchange.
The application of the following interpretations, as of January 1, 2007, has no significant impact on the Group’s consolidated financial statements: IFRIC 7 — Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies.
FRIC 9 — Reassessment of Embedded Derivatives, clarifies whether a reassessment should be made regarding whether an embedded derivative needs to be separated from the host contract after the initial hybrid contract has been recognized. IFRIC 9 concludes that reassessment is prohibited unless there is a change in the terms of the contract that significantly modifies the cash flows that otherwise would be required under the contract, in which case reassessment is required.
IFRS 8 — Operating Segments, published in November 2006 and applicable from January 1, 2009, replaces IAS 14 — Segment Reporting. The new standard requires disclosed operating segments to be based on the segmentation used in the entity’s internal reporting, on the basis of which operational heads allocate capital and resources to the various segments and assess the segments’ performance.
The standard requires the entity to explain the basis on which segments are determined, and provide a reconciliation between consolidated balance sheet and income statement amounts. The standard is not expected to have a significant impact on the Group’s financial statements.
The Group has not elected for early adoption of IFRIC 11 — Group and Treasury Share Transactions, published on November 2, 2006 and applicable to full-year reporting periods starting on or after March 1, 2007. This IFRIC 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 share-based payment transactions. When a parent grants employees of a subsidiary 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, the subsidiary should record the transaction as a cash-settled share-based payment transaction. IFRIC 11 is effective for annual periods beginning on or after March 1, 2007. The impact of this interpretation on the consolidated financial statements is estimated to be immaterial.
The major options elected in accordance with IFRS 1 were the following: Purchase Accounting, goodwill and other intangibles related to past business combinations performed prior to January 1, 2004
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
Companies in which AXA exercises control are known as subsidiaries. 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 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 in which AXA exercises significant long-term influence are accounted under the equity method. Significant influence is presumed when AXA directly or indirectly holds 20% or more of the voting rights or, for example, when significant influence is exercised through an agreement with other shareholders. AXA’s share of equity associates’ post-acquisition profits or losses is recognized in the income statement, and its share of post-acquisition movements in reserves is stated under “Other reserves”.
In accordance with the option made available by IFRS 1 — First-time adoption of IFRS, business combinations prior to 2004 were not restated with respect to French accounting principles in force at the time. The principles described below apply to the business combinations that occurred after January 1, 2004.
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.
To the extent that these other intangible assets can be estimated separately and reliably, they can also be measured by looking at the purchased marketing resources that will allow to generate these future cash flows.
The cost of an acquisition is measured at the fair value of the assets transferred, equity instruments issued and liabilities incurred or assumed at completion date, plus external fees directly attributable to the acquisition.
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 adjustement of the valuation of aquired assets and liabilities.
Goodwill is allocated across business segments (Life & Savings, Property & Casualty, International Insurance, Asset Management and Banking) to cash generating units corresponding (i) to the companies acquired or portfolios of business acquired according to their expected profitability, and (ii) to the entities already within the AXA Group that will benefit from the synergies of the combination with the activities acquired. This allocation of goodwill is used both for segment reporting and for impairment testing.
Intra-group transactions, including internal dividends, payables/receivables and gains/losses on intra-group transactions are eliminated: — in full for controlled subsidiaries and; — to the extent of AXA’s interest for entities consolidated by equity method or proportionate consolidation.
As mentioned in section 1.3.2, goodwill arising on the acquisition of a foreign entity is recorded in the local currency of the acquired entity and is translated into Euro at the closing date.
The variable costs of writing insurance contracts and investment contracts with discretionary participating features, primarily related to the underwriting of new business, are deferred by recognizing an asset. This asset is amortized based on the estimated gross profits emerging over the life of the contracts. In conjunction to the liability adequacy test (see section 1.12.2) this asset is tested for recoverability: any amount above future estimated gross profits is not deemed recoverable and expensed.
1.7. INVESTMENTS FROM INSURANCE, BANkING AND OTHER ACTIVITIES Investments include investment in real estate properties and financial instruments including equities, fixed maturities and loans.
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; — trading assets and assets designated at fair value with change in fair value recognized through income statement; — available-for-sale assets accounted for at fair value with changes in fair value recognized through shareholders’ equity.
Assets designated as available-for-sale, trading assets, investements designated as at fair value through P&L and all derivatives are measured at fair value, i.e. the amount for which an asset could be exchanged, between knowledgeable, willing parties in an arm’s length transaction. The Group applies the IAS 39 fair value hierarchy as detailed in Note 9.
AXA assesses at each balance sheet date whether a financial asset or a group of financial assets at (amortized) cost or designated as “available for sale” is impaired. A financial asset or group of financial assets is impaired when there is objective evidence of impairment as a result of one or more events and this event has an impact on the estimated future cash flows of the asset(s) that can be reliably estimated.
For equities classified as available for sale, a significant or prolonged decline in the fair value below its carrying value is considered as indication for potential impairment, such as equities showing unrealized losses over a 6 months period or more (prior to the closing 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 can not be reversed through the income statement until the asset is sold or derecognized.
Loans impairments 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.
For financial assets accounted for at amortized cost, including loans and assets classified as “held to maturity”, the impairment test is first performed at the asset level. A more global test is then performed on groups of assets with similar risk profile.
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.
The effective portion of changes in the fair value of derivatives designated and qualifying as cash flow hedge is recognized in shareholders’ equity. The gain or loss relating to any ineffective portion is recognized in the income statement. Cumulative gain or loss in shareholders’ equity are recycled in the income statement when the hedged underlying item impacts the profit or loss for the period (for example when the hedged future transaction is recognized). When a hedging instrument reaches its maturity date or is sold, or when a hedge no longer qualifies for hedge accounting, the cumulative gains or losses in shareholders’ equity are held until the initially hedged future transaction ultimately impacts the income statement.
The accounting of net investments in foreign operations hedge is similar to the accounting of cash flow hedge. Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognized in shareholders’ equity; the gain or loss relating to the ineffective portion is recognized in the income statement. Cumulative gains and losses in shareholders’ equity impact the income statement only on disposal of the foreign operations.
Changes in the fair value of all other derivative instruments that do not qualify for hedge accounting are recognized in the income statement.
1.10. ASSETS / LIABILITIES HELD FOR SALE AND ASSETS / LIABILITIES INCLUDING DISCONTINUED OPERATIONS These comprise assets, particularly buildings or operations, intended to be sold or discontinued within twelve months. Subsidiaries held for sale remain within the scope of consolidation until the date on which the Group loses effective control. The assets and activities (assets and liabilities) concerned are measured at the lower of net carrying value and fair value net of selling costs. They are presented in separate asset and liability items on the balance sheet. The liabilities of subsidiaries (excluding shareholders’ equity) held for sale are entered separately on the liability side of the consolidated balance sheet, with no netting against assets.
Details on information presented in the balance sheet and income statement are provided in the notes to the consolidated financial statements.
Before December 31, 2006, the Group classified within shareholders’ equity only perpetual debts on which interest payments could be cancelled on the condition that no dividend is paid to shareholders nor any interest paid on other securities of the same type. Perpetual instruments on which interest payments could be deferred while remaining due (cumulative interests) were recognized as liabilities under financing debts. These consisted mainly of perpetual subordinated notes issued by the Group.
A number of insurance and investment contracts contain discretionary participating features. These features entitle the contract holder to receive additional benefits or bonuses on the top of these standard benefits : — they are likely to represent a significant portion of the overall contractual benefits; — their amount or timing is contractually at the discretion of the Group; and — they are contractually based on the performance of a group of contracts, the investment returns of a financial asset portfolio or the company profits, a fund or another entity that issues the contract.
The Group classifies its insurance and investment contracts into six categories: — liabilities arising from insurance contracts, — liabilities arising from insurance contracts where the financial risk is borne by policyholders, — liabilities arising from investment contracts with discretionary participating features,
— liabilities arising from investment contracts with no discretionary participating features where the financial risk is borne by policyholders.
According to IFRS 4, recognition and derecognition are based on the AXA accounting policies existing prior to IFRS and are described below, except for the elimination of equalization provisions and selective changes as permitted by IFRS 4 (see paragraph below on guaranteed benefits).
The “Liabilities arising from policyholders participation” caption includes the entire “Fund for Future Appropriation” (FFA) relating to UK with-profit contracts, which principally covers future terminal bonuses according to the terms of these contracts. The combination of provisions on with-profit contracts and the FFA varies in line with the market value of the assets supporting the participating with-profit funds. Following the adoption of UK Financial Reporting standard FRS27, reserves relating to with-profit contracts and the FFA were subject to a change in accounting policies in 2006, that was applied retrospectively, consistently with what other UK insurance companies applied. Reserves were adjusted on a “realistic” basis, and related deferred acquisition costs and unearned revenues reserves were cancelled. These adjustements had no impact on net income or shareholders’ equity. The presentational impact of applying this standard is detailed in note 14. This change in accounting principles only applied to the Group’s UK with-profit contracts.
Revenues received at contract inception to cover future services are deferred and recognized in the income statement using the same amortization pattern as the one used for deferred acquisition costs (see section 1.6.4).
In accordance with IAS 39, these contracts are accounted for using “deposit accounting”, which mainly results in not recognizing the cash flows corresponding to premiums, benefits and claims in the statement of income (see “Revenue recognition” section below). These cash flows shall rather be recognized as deposits and withdrawals.
This category includes mainly unit-linked contracts that do not meet the definition of insurance or investment contracts with discretionary participating features. For these unit-linked contracts, the liabilities recognized under existing accounting policies are valued based on the fair value of the financial assets backing those contracts at the balance sheet date.
Fees received at inception of an investment contract with no discretionary participating features to cover future services are recognized as liabilities and accounted in the income statement based on the same amortization pattern as the one used for deferred origination costs (see section 1.6.4).
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.
In particular, a deferred tax liability is recognized for any taxable temporary difference relating to the value of shares in a consolidated company held, unless the Group controls at what date the temporary difference will reverse and it is probable that the temporary difference will not reverse in the foreseeable future. If a group company decides to sell its stake in another consolidated entity, the difference between the carrying value and the tax value of these shares for the company that holds them leads to the recognition of a deferred tax (including as part of a business combination when the Group as the buyer intends to sell or carry out internal restructuring of the shares following the acquisition). The same approach applies to dividend payments that have been voted or deemed likely, to the extent that a tax on dividends will be due.
Deferred taxes for taxable temporary differences relating to tax deductible goodwill are recognized to the extent they do not arise from the initial recognition of goodwill. These deferred taxes are only released if the goodwill is impaired or if the corresponding consolidated shares are sold.
Pensions and other post-retirement benefits include the benefits payable to AXA Group employees after they retire (retirement compensation, additional pension benefit, health insurance). In order to meet those obligations, some regulatory framework have allowed or enforced the set up of dedicated funds (plan assets).
Obligation and the market value at the balance sheet date of the corresponding invested plan assets after adjustment at fair value. If the net result is negative, a provision is recorded in the balance sheet under the provision for risks and charges heading. If the net result is positive, a prepaid asset is recorded in the balance sheet. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are recognized in shareholders’ equity (in the Statement of Recognised Income and Expense — SORIE) in full in the period in which they occur. Similarly, any adjustment arising from the asset ceiling is recognized in shareholders’ equity. Past service costs are recognized immediately in the income statement, unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, past service costs are amortized on a straightline basis over the vesting period.
1.16. PROVISIONS FOR RISkS, CHARGES AND CONTINGENT LIABILITIES 1.16.1. Restructuring costs
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.
Provisions are not recognized for future operating losses. The same applies to contingent liabilities, except if identified at the time of a business combination (see section 1.3.2).
1.17.2. Fees and revenues from investment contracts with no discretionary participating features
(including any embedded surrender option, i.e. without taking into account the “insurance” component); — the Group accounting methods do not otherwise require to recognize all obligations and rights arising from the “deposit” component.
— commissions received and fees for services relating to asset management activities, and,
— the change in unrealized gains and losses on invested assets measured at fair value through profit or loss,
In respect of banking activities, interest income and expenses are included in the “Net revenue from banking activities” item (see section 1.17.6).
Any gain or loss arising from a decrease in AXA’s ownership interest in a consolidated entity is recorded in the net investment result, to the extent it does not result from an internal restructuring within the Group. The gain or loss corresponds to the change in AXA’s share of the subsidiary’s shareholders’ equity before and after the subsidiary equity transaction.
1.18. SUBSEQUENT EVENTS Subsequent events relate to events that occur between the balance sheet date and the date when the financial statements are authorized for issue : — Such events lead to an adjustment of the consolidated financial statements if they provide evidence of conditions that existed at the balance sheet date,
1.19. PRESENTATION OF THE FINANCIAL STATEMENTS Consolidated Statement of Recognized Income and Expense for the period
Following the change in the consolidated income statement format regarding the “Change in goodwill impairment” item, and in order to make the presentation more consistent with that adopted by its peers, the Group changed in 2006 the starting point of the consolidated statement of cash flows. The consolidated statement of cash flows now starts with “Net operating result before tax”, whereas it used to be with “Income from operating activities, gross of tax expenses”. As a result, the following income statement items are now included in the starting point of the consolidated statement of cash flows: “Change in goodwill impairment”, “Income arising from investments in associates — Equity method” and “Financing debt expenses”.
While cash and the 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, the Group has 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.
Parent and Holding Companies Change in scope December 31, 2007 December 31, 2006
AXA Aurora S.A. Merged with Hispanowin S.A. — — 100.00 100.00
Winterthur Life (Hong Kong) Ltd. (a) Decrease in ownership interest following sale to AXA Asia Pacific Holdings
AXA Compagnie d’Assurances sur la Vie Merged with Winterthur Life — — 100.00 100.00
AXA Compagnie d’Assurances Merged with Winterthur Swiss Insurance P&C — — 100.00 100.00
Main acquired entities in 2007 are : — Thinc Group (ex-Thinc Destini) in the United Kingdom, — Venture Preference Ltd (Smart and Cook, Stuart
In most investment funds (particularly open-ended investment funds), minority interests do not meet the definition of shareholders’ equity. They are therefore presented as liabilities under “Minority interests of controlled investment funds and puttable instruments held by minority interest holders”. At December 31, 2007, minority interests in controlled investment funds amounted to €7,116 million (€6,099 million at December 31, 2006 and €4,326 million at December 31, 2005).
Fonds Immobiliers Paris Office Funds 50.00 49.91 50.00 49.91 2.1.3. Investments in companies consolidated by equity method
AXA Affin General Insurance Berhard Fully consolidated — — 50.48 50.48
AXA announced on December 21, 2007 that the Group had reached an agreement with Reso Garantia’s (“RESO”) shareholders to acquire a 36.7% stake in the company for a total cash consideration of around €810 million. As part of this agreement, AXA will have the option to buy out the remaining stake through calls exercisable in 2010 and 2011. This transaction is expected to be completed during the first half of 2008 and therefore is not recognized in the financial statements as at December 31, 2007.
2.2. CONSOLIDATED ENTITIES RELATING TO SPECIFIC OPERATIONS Securitization of mortgage loans in the life portfolio of DBV in the Netherlands The Holland Homes mortgage securitization structures previously set up by Winterthur Group were consolidated within DBV’s operations in the Netherlands. Such structures were no longer recognized following the sale of AXA’s operations in the Netherlands.
Acacia The Acacia SPV is consolidated within the operations of AXA France Vie. This structure was put in place for 5 years in order to improve AXA France Vie assets/liabilities adequacy ratio by ceding receivables resulting from eligible insurance operations against cash. The main impact is a €250 million increase in the AXA Group’s other liabilities, and a parallel increase in receivables.
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 €82 million stake in the vehicle carrying the junior tranches.
AXA Japan In 2002, AXA Japan transferred 102 buildings with net book 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.
Due to AXA Japan’s continuing involvement in managing these buildings, the Group is considered to retain almost all of the risks and benefits relating to ownership of the transferred assets, and so the assets have been kept on the balance sheet. The remaining assets relating to this transaction kept on the balance sheet at the end of 2007 totaled JPY 7 billion (€44 million).
AXA has five operating business segments: Life & Savings, Property & Casualty, International Insurance, Asset Management and Banking. An additional “Holding companies” segment includes all non-operational activities. The financial information relating to AXA’s business segments and holding company activities is consistent with the presentation provided in the consolidated financial statements.
Life & Savings: AXA offers a broad range of Life & Savings products including individual and group savings retirement products, life and health products. They comprise traditional term and whole life insurance, immediate annuities and investment products (including endowments, savingsrelated products, such as variable life and variable annuity products).
Property & Casualty: This business segment includes a broad range of products including mainly motor, household, property and general liability insurance for both personal and commercial customers (commercial customers being mainly small to medium-sized companies). In some countries, this segment includes health products.
International Insurance: This segment’s operations include insurance products that specifically relate to AXA Corporate Solutions Assurance. These products provide coverage to large national and international corporations. The segment also includes assistance activities and the group’s runoff management activities, managed by AXA Liabilities Managers, including risks underwritten by AXA RE relating to 2005 and prior underwriting years. Years after 2005 are covered by a treaty ceding 100% of the reinsurance business to Paris Ré.
The Banking Segment includes banking activities conducted primarily in France and Belgium.
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, formerly disclosed as part of the segment “Other Financial Services” which has been renamed “Banking”. This change has been applied retrospectively to previous years presented.
Of which: United States 113,521 — — — — — — 113,521
Other countries and other transnational activities 55,714 15,328 18,351 8,180 23,168 57,866 (27,797) 150,811
(a) Including cash and cash equivalents, deposits and guarantees, various debtors and assets covering employee benefit liabilities. (b) Including SPEs and CDOs previously disclosed in the Other Financial services segment which has been renamed “Banking”.
Of which: Other countries and other transnational activities 49,415 14,224 19,737 9,967 23,838 54,083 (23,764) 147,500
(a) Including cash and cash equivalents, deposits and guarantees, various debtors and assets covering employee benefit liabilities. (b) Including SPEs and CDOs previously disclosed in the Other Finanacial Services segment which has been renamed “Banking”. (c) As described in note 1.12.2, the adoption in 2006 of FRS 27 in the UK led to adjustments to 2005. The effect of these adjustments is set out in note 14.
Liabilities arising from investment contracts (a) 111,161 — — — — — — 111,161
Provisions for risks and charges 4,988 2,376 277 207 168 638 — 8,654
Liabilities arising from insurance contracts (b) 374,506 46,275 11,888 — — — (323) 432,345
Liabilities arising from policyholder’s participation 24,764 184 — — — — (8) 24,940
(a) In accordance with IFRS 3, i.e. within 12 months following the acquisition date, the Group has adjusted certain items impacting the allocation of Winterthur purchase price. (b) Also includes changes in liabilities arising from insurance contracts and investment contracts where the financial risk is borne by policyholders. (c) Including SPEs and CDOs previously disclosed in the Other Financial Services segment which has been renamed “Banking”.
Liabilities arising from insurance contracts (a) (d) 292,796 36,151 12,014 — — — (355) 340,605
Liabilities arising from investment contracts (a) (d) 82,742 — — — — — — 82,742
Liabilities arising from policyholder’s participation (d) 23,278 19 — — — — (13) 23,284
Provisions for risks and charges 5,221 2,699 93 99 168 481 — 8,761
Liabilities from held for saleincluding discontinued operations — — — — — — — —
TOTAL LIABILITIES EXCLUDING CONSOLIDATED SHAREHOLDERS’ EQUITY 443,936 46,954 15,628 6,951 18,869 21,866 (17,517) 536,686
(a) Also includes changes in liabilities arising from insurance contracts and investment contracts where the financial risk is borne by policyholders. (b) Including SPEs and CDOs previously disclosed in the Other Financial Services segment which has been renamed “Banking”. (c) As described in note 1.11.2, perpetual subordinated notes have been reclassified under shareholders’ equity in 2006 with retrospective application to 2005. Details are provided in note 13.
Net revenues from banking activities — — — — 369 6 (39) 336
Net realized investment gains and losses 4,196 953 (0) 8 — 107 — 5,264
Technical charges relating to insurance activities (70,595) (16,723) (2,525) — — — 254 (89,590)
Bank operating expenses — — — — (55) (2) — (57)
Change in tangible assets impairment (0) 3 (0) (0) — — — 2
Split between : Minority interests share in net consolidated result 287 49 3 399 1 (14) — 725
Net investment result excluding financing expenses 30,122 2,159 465 182 — 55 (429) 32,555
Bank operating expenses — — — — (89) 11 — (78)
Change in tangible assets impairment 7 11 — — — 1 — 18
Change in goodwill impairment and other intangible assets impairment — — (12) — — — — (12)
Other operating income and expenses (75,375) (18,872) (3,819) (3,552) (378) (603) 594 (102,004)
Result from discontinued operations net of tax 77 45 — — — — — 123
(a) As described in note 1.10, the contribution of discontinued operations is stated on a separate line of the income statement. (b) Including SPEs and CDOs previously disclosed in the Other Financial Services segment which has been renamed “Banking”.
Net revenues from banking activities — — — — 437 4 (13) 428
Change in unearned premiums net of unearned revenues and fees (b) (165) (272) (33) — — — (3) (473)
Net realized investment gains and losses 2,847 490 133 33 — 2 — 3,506
Net result from outward reinsurance (6) (565) 317 — — — 130 (125)
Income from operating activities before tax 3,430 2,330 256 1,029 101 (161) (363) 6,623
Result from discontinued operations net of tax 72 25 — — — — — 97
Split between : Minority interests share in net consolidated result 169 58 2 317 1 (59) — 488
(a) As described in note 1.10, the contribution of discontinued operations is stated on a separate line of the income statement. (b) As described in note 1.12.2, the adoption in 2006 of FRS 27 in the UK led to adjustments to 2005. The effect of these adjustments is set out in note 14. (c) As described in note 1.11.2, perpetual subordinated notes have been reclassified under shareholders’ equity in 2006 with retrospective application to 2005. Details are provided in note 13.
All of the following paragraphs form an integral part of the Group financial statements. They appear in Section 4.2 “Quantitative and Qualitative Disclosures About Market Risk and Risk Factors” and Section 2.4 “Liquidity and capital resources” sections of this Annual Report: 4.1. RISk MANAGEMENT ORGANIZATION Please refer to pages 176 to 177 of the “Quantitative and Qualitative Disclosures About Market Risk and Risk Factors” section.
4.3. CONTROLLING EXPOSURE AND INSURANCE RISk Please refer to pages 187 to 189 of the “Quantitative and Qualitative Disclosures About Market Risk and Risk Factors” section.
4.4. CREDIT RISk Please refer to pages 190 to 192 of the “Quantitative and Qualitative Disclosures About Market Risk and Risk Factors” section, except for the breakdown of CDS by underlying bond rating on page 191.
4.5. LIQUIDITY AND CAPITAL RESOURCES Please refer to pages 110 to 113, “Liquidity and capital resources” section.
AXA-MPS Vita and Danni 2007 465 — 465 — — — — — —
5.2. CHANGE IN GOODWILL 5.2.1. Goodwill — Change in gross value
United Kingdom Non life brokers (c) — 264 — — (17) — 246
Nippon Dantaï (AXA Nichidan) 1,225 — — — (106) — 1,119
AXA Aurora (minority buyout) 120 — — — — — 120
Of which: International Insurance 12 — — — — — (12) —
Of which: Asset Management — — — — — — — —
At December 31, 2007, the goodwill had a net value of €123 million.
At December 31, 2007, the goodwill had a net value of €58 million.
— On March 17, 2007, AXA Holdings Belgium SA reached an agreement with ELLA Holdings S.A. and its main shareholder Royalton Capital Investors to acquire 100% of the Hungarian retail bank ELLA and its affiliates. Originally specialized in on-line banking and today the fastest growing bank in terms of volume and number of mortgage loans in Hungary, ELLA is the 6th largest supplier of mortgage loans in the country with total assets of €375 million at the end of 2006. The combination of AXA Hungary’s operations, the 5th largest company in the pensions market, with those of ELLA Bank is intended to emulate the successful business model of AXA in Belgium. The transaction was closed on July 27, 2007 and the purchase price amounted to €123 million.
— AXA and BMPS finalized a long-term agreement (announced in March 2007) in life and non-life bancassurance as well as in pension business in Italy on October 19, 2007 after having received all required regulatory approvals. As part of this agreement, AXA acquired 50% of MPS Vita (Life & Savings) and MPS Danni (Property & Casualty), 50% of BMPS open pension funds business and will manage the insurance companies’ assets (€13 billion as of year-end 2006) and open pension funds’ assets (€0.3 billion as of year-end 2006).
AXA has management control of the partnership, including the CEO appointment. AXA also holds the majority of voting rights (50% + 1 voting right) at the ordinary general meetings. There is equal representation of AXA and BMPS on the Board of the insurance companies, however AXA benefits from a casting vote except on certain matters for which BMPS holds veto rights given the use of its banking network for the distribution of the products. As a result, AXA fully consolidates the newly owned companies with the recognition of minority interests in the net income and shareholders’ equity amounting to 50% of consolidated amounts.
Winterthur’s U.S. Property & Casualty subsidiary, which was acquired at the end of 2006 with the intention to sell within the following 12 months, was consolidated at December 31, 2006 and classified under “Assets held for sale”. The sale closed on May 31, 2007 for €920 million. The transaction did not lead to the recognition of realized gains.
On July 25, 2007, AXA announced it had reached an agreement with China Life Insurance Co Ltd., a life insurance company incorporated in Taiwan, for the sale of Winterthur Life Taiwan Branch (WLTB). In 2006, WLTB had a 0.35% market share. The transaction was closed on October 31, 2007. As the purchase opening balance sheet of Winterthur was adjusted with the actual transaction price, the transaction did not lead to the recognition of realized gains.
A memorandum of understanding on the disposal of AXA Netherlands, Winterthur Netherlands and DBV Netherlands was signed during the first half of 2007. The assets and liabilities of these companies, which were still consolidated at June 30, 2007, were included under “Assets/liabilities held for sale and Assets/liabilities relating to discontinued operations”. The subsidiary Vinci BV was not part of this disposal agreement. AXA announced on September 5, 2007 that it had successfully completed the sale for a total cash consideration of €1,797 million, leading to a total amount of realized gain of €406 million included in the line “Result from discontinued operations net of tax” of group statement of net income, in addition to the contribution of Dutch operations until the sale.
Winterthur was acquired shortly before the 2006 financial year-end and additional information obtained since the time of the acquisition has led to a review of certain items affecting the allocation of the purchase price during the year 2007, i.e. within 12 months following the acquisition as specified by IFRS 3.
A provisional goodwill amounting to €2,762 million excluding the goodwill related to put options held by minority shareholders of Winterthur’s former subsidiaries in Central and Eastern Europe (see note 5.1) was recognised at the time of the initial allocation of the purchase price. Based on new information obtained during the year 2007, goodwill was increased by €32 million, to €2,793 million. This increase in goodwill was due to adjustments to the Swiss pension schemes, the sale of Winterthur Life Taiwan Branch to China Life Insurance Company, Ltd. (Taiwan) and adjustments in reserves mainly in Belgium and Germany. These adjustments and the sale of the former Winterthur’s subsidiaries in the Netherlands led to a geographical goodwill reallocation between the remaining held entities.
The residual goodwill mainly represented expected synergies, especially cost cuttings and other customer-related items that could not be measured reliably or recognized separately.
On May 8, 2006, AXA Asia Pacific Holdings (AXA APH) announced that it had completed the acquisition of MLC Hong kong and MLC Indonesia. The purchase price was €340 million. This led to the recognition of €116 million of goodwill and €194 million of intangible assets (Value of purchased Business In force), for a total of €309 million (net of tax).
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.
The additonal goodwill generated by these transactions amounted to €96 million in 2007.
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, generating initial goodwill of €14 million.
At December 31, 2007, goodwill on this entity totaled €12 million.
On October 31, 2005, AXA Investment Managers acquired the Framlington Group for £208 million (€303 million). This transaction led to the recognition of £91 million intangibles net of tax and gross of minority interest (€133 million) and goodwill of £97 million (€142 million).
At December 31, 2007, this goodwill had a net value of €87 million.
On October 18, 2005, AXA acquired the insurance company Seguro Directo. The total transaction consideration was €42 million. This transaction gave rise to goodwill of €31 million.
No entities are presented as held for sale activities at December 31, 2007. The related captions only include real estate properties held for sale. All entities previously shown on these line items were sold within 12 months.
(a) In accordance with IFRS 3, i.e. within 12 months following the acquisition date, the Group has adjusted certain items impacting the allocation of Winterthur purchase price. (b) As described in note 1.10, the contribution of discontinued operations is stated on a separate line of the income statement.
Net deferred acquisition costs relating to Life & Savings (a) (c) 14,045 13,653 13,249
Deferred acquisition costs and equivalent relating to Property & Casualty and International Insurance
In 2006, the increase in deferred acquisition costs and equivalent in the Property & Casualty and International Insurance businesses was mainly due to the Winterthur acquisition (€284 million).
Changes in amortization, capitalization and impairment 1,622 183 1,168 173 1,185 249
In 2007, the €—281 million in other changes was mainly due to the Netherlands disposal (€—279 million).
DAC net of unearned revenues and unearned fees reserves 11,931 827 11,306 813 10,828 766
Intangible assets recognized in business combinations 2,896 (143) (34) 2,718 1,817 599 8.2. BREAkDOWN OF INTANGIBLE ASSETS RECOGNIZED IN BUSINESS COMBINATIONS
United Kingdom Non life brokers — 94 — (11) — — — (5) 77
Certain real estate properties (see note 1), available-for-sale investments, trading assets, instruments designated as at fair value through P&L and all derivatives are measured at fair value in the financial statements. In addition, this note also discloses the fair value of real estate properties and financial assets held at cost.
The Group applies the IAS39 fair value hierarchy as described below. 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.
Valuation techniques are subjective in nature and significant judgement is involved in establishing fair values for financial assets. They involve various assumptions regarding the underlying price, yield curve, correlations, volatility, default rates and other factors. Unlisted equity securities are based on cross checks using different methodologies such as discounted cash flows techniques, price earning ratios multiples, adjusted net asset values, taking into account recent transactions on similar assets if any. The use of valuation techniques and assumptions could produce different estimates of fair value. However, valuations are determined using generally accepted models (discounted cash flows, Black & Scholes models…) based on quoted market prices for similar instruments or underlyings (index, credit spread…) whenever such directly observable data are available, and valuations are adjusted for liquidity and credit risk.
Investment properties at amortized cost 17,778 12,045 2.06% 1,867 1,776 12.96% 19,645 13,821 2.31%
Investment properties at fair value through profit & loss (c) 4,137 4,137 0.71% — — — 4,137 4,137 0.69%
Macro hedge and other derivatives — — — — — — — — —
Non controlled investment funds at fair value through profit & loss (c)
Loans designated at fair value through profit & loss (c) 39 39 0.01% 1 1 0.01% 40 40 0.01%
Financial assets (excluding those backing contracts where the financial risk is borne by policyholders) 406,979 401,410 68.71%
Non controlled investment funds available for sale 4,599 4,599 0.79% 226 226 1.39% 4,825 4,825 0.81%
Loans held to maturity — — — — — — — — —
(a) Mainly Includes policy loans. (b) Excluding investments backing contracts where the financial risk is borne by policyholders. (c) Use of fair value option. (d) 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.
Investment properties at amortized cost 11,256 7,832 1.71% 357 314 3.12% 11,613 8,146 1.74%
Fixed maturities held to maturity — — — — — — — — —
Non quoted fixed maturities (amortized cost) 20 20 0.00% 2 2 0.02% 22 22 —
Equities at fair value through profit & loss (c) 18,804 18,804 4.09% 48 48 0.48% 18,852 18,852 4.02%
Other assets held by controlled investment funds designated at fair value through profit & loss 1,912 1,912 0.42% — — — 1,912 1,912 0.41%
Macro hedge and speculative derivatives (209) (209) N/A 198 198 1.97% (11) (11) N/A
Loans designated at fair value through profit & loss (c) 125 125 0.03% — — — 125 125 0.03%
(a) Mainly Includes policy loans. (b) Excluding investments backing contracts where the financial risk is borne by policyholders. (c) Use of fair value option.
9.2. INVESTMENT PROPERTIES Investment properties include buildings owned directly and through consolidated real estate companies. Investment properties stated at fair value on the balance sheet mainly consist of assets backing UK with-profit contracts. They also include the unallocated portion of real estate companies, part of which is used to back unit-linked contracts in which the financial risk is borne by policyholders.
(a) Mainly includes change in scope of consolidation and the effect of changes in exchange rates.
9.3. UNREALIZED GAINS AND LOSSES ON FINANCIAL INVESTMENTS Excluding the effect of all derivatives, the unrealized capital gains and losses on financial investments when not already reflected in the income statement is allocated as follows: (in Euro million)
Amortized cost (a) Fair value Net book value (b) Unrealized gains Unrealized losses Amortized cost (a) Fair value Net book value (b)
Non consolidated investment funds available for sale 3,109 3,446 3,446 368 31 4,188 4,593 4,593 428 24 2,702 3,132 3,132 438 8
Non consolidated investment funds available for sale 142 142 142 1 1 225 226 226 1 — 199 201 201 2 —
(a) Net of impairment - including premiums/discounts and related accumulated amortization. (b) Net of impairment (details in note 9.8).
Fixed maturities available for sale 247,645 246,153 246,153 4,764 6,256 240,661 247,297 247,297 8,163 1,527 181,453 195,123 195,123 14,580 910
Non quoted fixed maturities (amortized cost) — — — — — 11 11 11 — — 22 22 22 — —
Fixed maturities available for sale 242,608 241,220 241,220 4,762 6,150 234,964 241,652 241,652 8,158 1,470 175,729 189,382 189,382 14,554 901
Non quoted fixed maturities (amortized cost) — — — — — 10 10 10 — — 20 20 20 — —
Fixed maturities available for sale 5,037 4,933 4,933 2 106 5,697 5,645 5,645 5 57 5,724 5,740 5,740 26 10
9.4. FIXED MATURITIES BY TYPE OF ISSUER and economic hedging derivatives that do not form part of a hedge relationship under IAS 39. Details of the effect of derivatives are provided in section 19.3.
The table below sets out the bond portfolio by issuer type, excluding macro hedging derivatives and other derivatives but including the effect of hedging derivatives (IAS 39)
Fixed maturities issued by government agencies and state-owned companies (b) 20,392 23,083 10,713
(a) Includes fixed maturity investment funds. (b) Means that the state has a blocking minority interest.
In 2006, the integration of Winterthur increased the total amount of fixed maturities on the balance sheet by €55,315 million. The increase related mostly to government fixed maturities (€12,594 million), fixed maturities of local authorities (€5,136 million), fixed maturities of government agencies and state-owned companies (€10,104 million), corporate fixed maturities (€22,673 million) and fixed maturities guaranted by a mortage (€4,130 million).
Additional information on the credit risk associated with fixed maturities is provided in Note 4 “Management of financial and insurance risks”.
9.5. CONTRACTUAL MATURITIES AND EXPOSURE TO INTEREST RATE RISk 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.
Non-quoted fixed maturities, the effect of derivatives (detailed in section 19.3) and loans and fixed maturities backing contracts where the financial risk is borne by policyholders are excluded from the table below. The effect of derivatives modifies in certain cases the profile of the assets below. Most of the fixed maturities and loans held by the group are fixed-rate debt instruments (i.e. exposed to fair value interest rate risk).
Fixed maturities at fair value through profit and loss (a) 17,739 8,883 22,698 49,320
TOTAL — Invested financial assets exposed to cash flow interest rate risk
Fixed maturities at fair value through profit and loss (a) 342 3,964 839 5,146
Loans designated at fair value through profit and loss (a) 296 24 3,017 3,337
Total invested financial assets exposed to interest rate risk 35,095 77,277 217,574 329,946
(a) Corresponds to financial assets held for trading purposes and financial assets recognized at fair value through profit and loss. (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.
Total invested financial assets exposed to interest rate risk 15,044 79,800 164,219 259,063
Sub-total : Equities held directly 20,264 6,755 4,224 2,300 5,997 4,455 2,847 2,160 2,711 51,713
December 31, 2005 Finance Services Energy Communications Industrial Consumer goods Raw material Technology Other TOTAL
Sub-total: Equities held directly 15,558 5,008 5,443 2,538 6,165 4,224 2,959 2,144 2,711 46,750
Total Equities as at December 31, 2007 21,077 5,440 5,662 2,677 6,561 4,275 3,127 2,226 4,797 55,843
Equities at fair value through profit and loss 4,224 2,735 282 854 1,642 1,544 876 300 751 13,208
Equities held by controlled investment funds (a) 2,324 385 347 97 858 653 393 513 3,894 9,465
Non controlled investment funds mainly as at fair value through profit and loss mainly holding fixed maturities 51 — — — 51 — 46 — — — 46 — 8 — — — 8 —
Non controlled investment funds trading mainly holding fixed maturities — — — — — — — — — — — — 195 — — — 195 —
9.7. NON-CONTROLLED INVESTMENT FUNDS Non-controlled investment funds break down as follows: (in Euro million)
Non controlled investment funds available for sale mainly holding equities 1,512 1,349 29 29 1,541 1,379 1,432 1,215 18 18 1,450 1,233 1,045 847 3 1 1,048 848
Non controlled investment funds trading mainly holding equities 135 — 8 — 143 — 80 — 33 — 113 — — — 22 — 22 —
Fixed maturities available for sale 248,507 (373) 248,133 (1,433) 246,701 240,998 (138) 240,860 6,043 246,903 181,085 (126) 180,959 14,231 195,190
Non controlled investment funds available for sale 3,352 (97) 3,254 337 3,591 4,497 (77) 4,420 405 4,825 3,017 (118) 2,899 522 3,422
Loans held to maturity — — — — — — — — — — 1 — 1 — 1
9.9. FINANCIAL ASSETS RECOGNIZED AT FAIR VALUE EXCLUDING DERIVATIVES Amounts presented exclude the impact of all derivatives (set out in notes 19.3 and 19.5) and investment funds consolidated by equity method. Investment funds consolidated by equity method represented assets of €1,160 million at December 31, 2007 (€1,294 million at December 31, 2006 and €1,081 million at December 31, 2005).
Fair value determined directly by reference to an active market (1)
Financial assets available for sale 241,292 45,215 286,508 248,053 43,413 291,467 200,709 26,198 226,907
Other assets held by controlled investment funds designated as at fair value through profit and loss 2,152 2,366 4,518 1,738 1,407 3,145 647 1,264 1,910
Financial assets at fair value through profit and loss 63,978 21,471 85,448 70,645 14,751 85,397 60,766 10,193 70,957
TOTAL FINANCIAL ASSETS ACCOUNTED FOR AT FAIR VALUE 306,639 67,153 373,792 320,090 58,830 378,920 263,075 37,354 300,427
Methods applied to determine the fair value of held assets measured at fair value in the financial statements are described in the introduction to Note 9. The group applies the IAS39 fair value hierarchy.
Fair values estimated using valuation techniques (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
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.
AXA Affin General Insurance Berhad 29 — — — (29) —
AXA Asia Pacific Holdings associates 14 2 9 — (5) 20
Winterthur Life (Hong Kong) Ltd. (b) 1 — — — — —
In 2007, “other changes” notably included : — The change in consolidation method of AXA Affin General
— The entry in the scope of consolidation of AXA Minmetals as at December 31, 2007 (€16 million).
AXA Affin General Insurance Berhad — — 18 — 11 29
Banque de marchés et d’arbitrage 11 — — — (4) 7
AXA Asia Pacific Holdings associates 26 (14) 8 — (6) 14
AXA Oyak (3 Turkish entities) 71 — — — (71) —
AXA Asia Pacific Holdings associates 20 1 8 — (2) 26
Current accounts receivable from other companies 996 (40) 956 956 845 (6) 839 840 760 760
Receivables arising from direct insurance and inward reinsurance operations 12,473 (333) 12,140 12,140 12,155 (282) 11,873 11,874 9,714 9,714
Receivables arising from outward reinsurance operations 991 (79) 913 913 902 (97) 805 805 888 888
Receivables relating to investments under lending agreements and equivalent 4,462 — 4,462 4,462 4,732 — 4,732 4,732 1,667 1,667
(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.
The Winterthur group’s receivables totaled €2,125 million at December 31, 2006.
Carrying value (a) Carrying value (a) (b) Carrying value (a) (b)
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
At December 31, 2007, the carrying value of treasury shares and related derivatives was €620 million, representing 1.49% of the share capital. This figure included €18 million relating to AXA shares held by consolidated mutual funds (0.9 million shares) not used to back contracts where the financial risk is borne by policyholders.
At December 31, 2007, 2.7 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 €74 million and their market value €75 million at the end of December 2007.
The perpetual deeply subordinated notes were issued to finance the repayment of maturing borrowings, and comprised the following: — a €750 milllion perpetual deeply subordinated note placed on October 5, 2007, and
(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.
At December 31, 2007, 2006 and 2005, perpetual debt recognized in shareholders’ equity broke down as follows: Value of the perpetual debt in currency of issuance (in million)
November 7, 2006 — 150 M$AUD rate 6.5% in AUD 150 89 150 89 — —
December 11, 2006, 750m $ (TSS) non call 30 years, in USD 750 507 750 567 — —
Sub-total Perpetual Deeply Subordinated notes (“TSS”) — 6,179 — 4,709 — 875
Perpetual notes — variable 3.55% to 5% in EUR 844 844 1,404 1,404 1,404 1,404
Perpetual notes — variable 3.55% to 5% in JPY 27,000 164 27,000 172 27,000 194
Sub-total Deeply Subordinated notes (“TSDI”) — 1,602 — 2,544 — 2,679
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 maturity without penalty on certain dates; – interest rate step-up clauses with effect from a given date.
At the May 14, 2007 shareholders’ meeting, shareholders approved a dividend distribution of €2,218 million with respect to the 2006 financial year.
13.1.2. 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
At December 31, 2006, the Company and its subsidiaries owned approximately 30 million AXA shares, a decrease of €137 million with respect to December 31, 2005. The decrease was mainly due to the exercise of AXA stock options by employees of AXA Financial, which led to the sale of 6 million treasury shares during the period. At December 31, 2006, the carrying value of treasury shares and related derivatives was €521 million, representing 1.41% of the share capital. This figure 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’
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), and iii) £350 million for the Sterling perpetual non call twenty years (issued at a spread of 175 basis points over Libor); — AXA also placed in October 2006 a triple tranche Australian perpetual deeply subordinated note issue for a total amount of AU$750 million (approximately €0.5 billion); — On December 11, 2006 AXA priced a two-tranche perpetual deeply subordinated note issue for a total amount of US$1.5 billion (approximately €1.1 billion): i) US$750 million for the US$ perpetual deeply subordinated non call twelve years tranche, and ii) US$750 million for the US$ perpetual deeply subordinated non call thirty years tranche.
– The buyback of AXA shares led to a net reduction of €—512 million (including a €—45 million reduction in nominal share capital).
At December 31, 2005, the Company and its subsidiaries owned approximately 36 million AXA shares, an increase of €272 million with respect to December 31, 2004. The increase was mainly due to the purchase of €307 million of
As described in paragraph 1.11.2 on accounting principles, the subordinated perpetual notes issued by the Group do not qualify as liabilities under IFRS. The corresponding financing debts were retrospectively restated as shareholders’ equity for a total of €2,679 million at December 31, 2005, and €3,048 million at December 31, 2004. The fair value of subordinated debt was reduced by €2,650 million at the end of 2005 and €3,002 million at the end of 2004. The restatement of subordinated perpetual debt had the following impact on the 2005 income statement: change in fair value of financial instruments at fair value through profit & loss (€102 million); financing debts expenses (€121 million); income tax (€78 million).
13.2. RECOGNIZED INCOME AND EXPENSE FOR THE PERIOD The statement of recognized income and expense for the period (SORIE), which is a part of the consolidated statement of shareholders’ equity, includes net income for the period, the reserve relating to the change in fair value of available for sale financial instruments, the translation reserve, and actuarial gains and losses on employee benefit obligations.
The change in reserves for unrealized gains totaled €—2,917 million, 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 fixed maturities (€—8,128 million) following a rise in interest rates during the year, and equity securities (€—1,798 million).
Less unrealized gains and losses attributable to: Shadow accounting on policyholders’ participation (b) (1,832) (7,242) (10,342)
Unrealized gains and losses (net of tax) — 100% — Total 4,753 7,966 8,365
Minority interests’ share in unrealized gains and losses (d) (48) (275) (220)
(a) Unrealized gains on total available for sale invested assets including loans, and including assets held by equity accounted companies. (b) Including shadow accounting impact on premium deficiency liabilities, after revaluation of available for sale securities. (c) Net of Shadow accounting on unearned revenues and fees reserves. (d) Including currency impact attributable to minority interests.
Unrealized gains and losses (net of tax) 100%, as at January 1 7,966 8,365 5,832
Transfer in the income statement on the period (a) (1,309) (791) (399)
Investments bought in the current accounting period and changes in value (1,659) 206 2,638
Unrealized gains and losses (net of tax) 100%, as at December 31 4,753 7,966 8,365
(a) Transfer induced by disposal of financial assets, impairment write-back following reevaluation, or tranfer of expenses following impairment charge during the period, and fixed maturities discount premium impacts.
13.2.2. 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, 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 fixed maturities (€—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).
The impact of exchange rate movements (€—764 million) was mainly attributable to the United States (€—1,218 million, principally due to the difference between the 2006 and 2005 closing $/€ exchange rates: $1.32 for €1 at the end of 2006 compared to $1.18 for €1 at the end of 2005), Japan (€—291 million) and Canada (€—81 million), partially offset by the change in fair value of currency hedges set up by the Company to hedge net investments in foreign operations (€841 million).
13.2.3. Recognized income and expense for 2005 a) Reserve related to changes in fair value of available for sale financial instruments included in shareholders’ equity
The impact of change in fair value of assets (€2,391 million) mainly related to France (€1,060 million), Belgium (€710 million) and Japan (€347 million), partially offset by an adverse impact in the United States (€—385 million).
The €—331 million decrease in minority interests to €3,272 million was mainly due to: — positive net income for the period (€+725 million); — changes in the scope of consolidation (€+449 million), mainly due to the acquisition of 50% of MPS Vita and Danni (€+700 million), partly offset by the buyout of minority interests in Morocco (€—256 million); — change in translation reserves (€—182 million); and — other movements (€—608 million), mainly including dividends paid to minority interests (€—544 million).
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 AXA Konzern (Germany); — change in translation reserves (€—205 million); — net income for the period (€673 million); — other movements (€394 million), mainly comprising dividends paid to minority interests (€—440 million).
The €452 million increase in minority interests to €2,763 million was mainly due to: — net income for the period (€488 million); — dividends paid to minority interests (€—359 million); — change in translation reserves (€—230 million); — changes in the scope of consolidation (€23 million), notably from previously equity accounted Turkish entities; — other movements (€69 million), mainly including movements in reserves related to changes in fair value of available for sale assets.
Capital in excess of nominal value — — — (1,126) — — — — — — — (1,126) —
Reserves relating to the change in fair value of hedge accounting derivatives (cash flow hedge)
Dividends paid — — — — — — — — — — (2,218) (2,218) —
Reserves relating to changes in fair value through shareholders’ equity — — — — — (2,880) (67) — — — — (2,947) (69)
Net income of the period — — — — — — — — — — 5,666 5,666 725
NB : amounts are presented net of impacts of shadow accounting and of its effects on policyholders’ benefit, deferred acquisition costs, and value of business in force. (a) Mainly perpetual subordinated debts (TSS, TSDI), and equity components of compounded financial instruments (e.g convertible bonds). (b) Actuarial gains and losses accrued since opening January 1, 2007.
Equity — share based compensation — — — 106 — — — — — — — 106
Change in scope of consolidation — — — — — 7 — — — — — 7 11
Accrued interests — Deeply subordinated debt — — — — — — — — (160) — — (160)
Dividends paid — — — — — — — — — — (1,647) (1,647) —
Impact of transactions with shareholders 221,283 2.29 507 3,906 137 7 — — 3,539 (2) (1,592) 6,502 (383)
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. The changes in minority interests over the period has been restated in accordance with the presentation principles described in note 1.18. (a) Mainly perpetual subordinated debt (TSS, TSDI), and equity components of compounded financial instruments (e.g convertible bonds). (b) Actuarial gains and losses accrued since opening January 1, 2006.
Change in scope of consolidation — — — — — (2) — — — — — (2) 23
Deeply subordinated debt — — — — — — — — (119) — — (119)
Shareholders’ equity as at January 1, 2005 1,908,444 2.29 4,370 15,401 (386) 5,720 53 — 3,782 (686) 3,316 31,571 2,311
Employee benefits actuarial gains and losses through OCI (b) — — — — — — — — — — (415) (415) (3)
Net income of the period — — — — — — — — — — 4,318 4,318 488
Shareholders’ equity as at December 31, 2005 1,871,605 2.29 4,286 14,492 (658) 8,111 75 3 3,550 681 5,985 36,525 2,763
Liabilities arising from insurance contracts 252,691 47,072 10,946 310,709 265,391 46,210 11,760 323,361 199,849 35,998 11,870 247,717
Of which measured at current market assumptions (c) 19 — 33 52 (263) — 57 (205) — — 163 163
Of which measured at current market assumptions (c) — — — — 189 — — 189 (141) — — (141)
Of which measured at current market assumptions (c) — — — — — — — — — — — —
Reinsurers’ share in other reserves — — — — — — — — — — — —
Reinsurers share in liabilities arising from insurance contracts where the financial risk is borne by policyholders 18 — — 18 22 — — 22 10 — — 10
savings contracts, €6 million in group savings contracts and €315 million in life contracts; — liabilities arising from investment contracts with discretionary participating features increased by €377 million, including €317 million in individual savings contracts and €60 million in group savings contracts; — liabilities arising from policyholders’ participation were reduced by €—2,382 million; — unearned revenues and unearned fee reserves were reduced by €—109 million; — deferred tax liabilities were reduced by €—111 million.
14.1. LIABILITIES ARISING FROM INSURANCE CONTRACTS (GROSS AND REINSURERS’ SHARE) Liabilities arising from insurance contracts, including those where the financial risk is borne by policyholders, were split by segment as follows: (in Euro million)
of which IBNR (e) — — — — — — — — — — — —
Of which measured at current market assumptions (c) 11 — — 11 10 — — 10 8 — — 8
TOTAL LIABILITIES ARISING FROM INSURANCE CONTRACTS, NET OF REINSURANCE CEDED 361,715 44,774 6,607 413,095 369,534 44,004 6,848 420,386 288,497 34,043 9,036 331,576
NB : Excludes derivatives related to insurance and investment contracts, which are detailed in section 19.4. Liabilities relating to unearned revenues and fees, and to policyholders participation (gross and reinsurers’ share), along with derivative instruments relating to insurance and investment contracts, are excluded from the table above. However, the provision for credit risk on reinsurers share in technical liabilities is included. (a) Includes reserves for claim handling costs. (b) Notably includes non-life annuities mathematical reserves.
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)
Liability adequacy test reserves — — — — — — —
Liabilities arising from investment contracts with discretionary participating features 40,121 — 40,121 32,606 32,606 33,267 33,267
Reinsurers’ share in liabilities arising from investment contracts with discretionary participating features 13 — 13 12 12 13 13
Total investment contracts Life & Savings Total investment contracts Life & Savings Total investment contracts
Liabilities arising from investment contracts with no discretionary participating features 1,452 — 1,452 1,121 1,121 926 926
Reinsurers’ share in unearned premium reserves — — — — — — —
Reinsurers’ share in claim reserves (a) — — — — — — —
Reinsurers’ share in other reserves — — — — — — —
At the end of 2007, investment liabilities relating to UK with-profit insurance contracts excluding the FFA (Fund for Future Appropriation) amounted to €8,515 million, versus €10,323 million at the end of 2006 (of which €223 million relating to Winterthur) and €10,363 million at the end of 2005.
Claim handling cost reserves as of January 1 1,306 259 1,566 988 257 1,245 891 257 1,148
Gross claim reserves as of December 31 (a) 34,813 9,860 44,673 34,931 10,534 45,465 26,602 10,623 37,225
(b) Excluding claim handling cost reserves. (c) In accordance with IFRS 3, i.e. within 12 months following the acquisition date, the Group has adjusted certain items impacting the allocation of Winterthur purchase price. (d) As described in note 1.10, the contribution of discontinued operations is stated on a separate line of the income statement.
in the scope of consolidation (€154 million). — In the Mediterranean Region, the entry of AXA-MPS
Danni and Alpha Insurance in the scope of consolidation (€65 million and €71million respectively).
— The change in consolidation method (full consolidation instead of equity-method) in Malaysia (€41 million).
For International Insurance, changes in the scope of consolidation in 2007 amounted to €—275 million mainly due to: — The disposal of AXA RE Asia Pacific (€—123 million). — The disposal of Compagnie Générale de Réassurance de
Monte Carlo (€—57 million). — The reclassification to the “Reinsurers share in insurance and investment contracts liabilities” aggregate of the balance sheet assets of a risk provision for credit risk on reinsurers’ balances (€—39 million) and change of consolidation scope (€—74 million) at AXA Cessions.
For International Insurance, changes in the scope of consolidation in 2006 amounted to €1,239 million, mainly due to: — The entry of Winterthur companies in the scope of consolidation (€612 million).
For Property & Casualty, changes in the scope of consolidation in 2005 amounted to €697 million, mainly due to: — The change in consolidation method (full consolidation method instead of equity-method) in Turkey (€82 million), Hong Kong (€116 million) and Singapore (€63 million); — The transfer of the disability business from the Life & Savings segment to the Property & Casualty segment in the Netherlands (€116 million).
Reinsurers’ share in total claim expenses 573 784 1,357 307 716 1,023 308 1,265 1,573
Reinsurers’ share in claim payments (576) (1,151) (1,727) (356) 1,014 657 (321) (832) (1,154)
For Property & Casualty, changes in the scope of consolidation in 2007 amounted to €22 million, mainly due to: — The disposal of the Netherlands operations (€—120 million). — In France, the entry of NSA (Nationale Suisse Assurances)
in the scope of consolidation (€30 million). — In the Mediterranean Region, the entry of AXA-MPS
— The change in consolidation method (full consolidation instead of equity-method) in Malaysia (€20 million).
For International Insurance, changes in the scope of consolidation in 2007 amounted to €—44 million, mainly due to: — The disposal of Compagnie Générale de Réassurance de
Monte Carlo (€—20 million). — The change of consolidation scope (€—24 million) at AXA
For Property & Casualty, changes in the scope of consolidation in 2006 amounted to €240 million, mainly due to: — The entry of Winterthur companies in the scope of consolidation (€424 million).
— €—169 million in Germany mainly due to transfer of the run-off portfolio to AXA Liabilities Managers, International Insurance segment (€—125 million) and the disposal of DARAG (€—43 million).
For International Insurance, changes in the scope of consolidation in 2006 amounted to €144 million, mainly due to: — The entry of Winterthur companies in the scope of consolidation (€6 million). — The transfer of the German run-off portfolio (€125 million).
Change in scope of consolidation and change in accounting method (c) (8,393) 12,173 3,780 64,944 14,785 79,729 (546) (97) (644)
Gross future policy benefit reserves as of December 31 (c) 353,208 110,728 463,936 361,590 100,503 462,093 284,403 82,342 366,745
— In Germany, €—337 million corresponding to the continued reduction in AXA Germany’s co-insurance share of HÄK-BÄK medical profession pools (€—305 million) and co-insurance share of press employees business (€—29 million).
Change in scope of consolidation and change in accounting method — — — 694 — 694 (57) — (57)
In 2006, changes in the scope of consolidation (€694 million) mainly comprised the integration of Winterthur (€687 million).
(Non Unit-Linked) – Liabilities arising from : Investment contracts with Discretionnary Participation Features (DPF) measured according to existing accounting policies (a) (d) (e) 40,121 32,606 33,267
Investment contract with no Discretionnary Participation Features (DPF) measured at amortized cost 911 510 219
(Unit-Linked) – Liabilities arising from contracts where financial risk is borne by policyholders : Investment contract with Discretionnary Participation Features (DPF) measured according to existing accounting policies (a) & (c) 10,414 11,007 9,712
Investment contract with no Discretionnary Participation Features (DPF) measured at current unit value (d) 59,173 56,665 38,836
(b) See note 1.12.2. — Reserves measured according to IFRS 4.24 option which allows to evaluate certain portfolios with current assumptions. (c) & (d) As unit-linked contracts, they share the same reserves measurement determined on the basis of held assets units fair value (“current unit value”). Only the valuation of related assets is different: — for unit-linked contracts with a discretionary participating feature (c), an asset representing the deferred acquisition costs is recognized in continuity with French GAAP; — for unit-linked contracts with no discretionary participating feature (d), an asset representing the rights to future management fees is recognized in accordance with IAS 18
(“DOC”) — see section 1.2.5. N.B. : This information is presented net of the impact of derivatives, which is described in note 19.4.1. (e) As described in note 1.12.2 on accounting principles, the adoption of FRS 27 in the United Kingdom led to restatements to 2005 (see the first paragraph of this note). (f) In accordance with IFRS 3, i.e. within 12 months following the acquisition date, the Group has adjusted certain items impacting the allocation of Winterthur purchase price.
The recognition of investment contracts with a discretionary participating features is subject to IFRS 4, which allows under certain conditions the continued use of principles applied before the adoption of IFRS.
However, these contracts must be treated in accordance with IAS 32 with regards to the disclosures to be provided in the notes to Financial Statements. IAS 32 requires the reporting of fair value or value ranges for these contracts, unless the Group cannot reliably measure the participating features.
In Phase I, the IAS Board acknowledged the difficulties involved in the recognition of discretionary participating features. In addition, the IAS Board has numerous projects underway that could influence the definition of fair value of discretionary participating features. Discussions on these issues are highly complex, and are not yet sufficiently advanced, particularly the Discussion Paper setting out the possibility of adopting US standard FAS 157 “Fair Value Measurement” in IFRSs. Phase II discussions concerning insurance and investment contracts with a discretionary participating features were only re-activated at IAS Board level in December 2005 and have to date produced little guidance regarding the fair value measurement of these contracts. Even though the Phase II Discussion Paper was published in May 2007, there are too many remaining uncertainties and AXA cannot reliably disclose fair value or value ranges for investment contracts with a discretionary participating features.
Gross reserves for unpaid claims and claims expenses developed initially at the booking date (d) 20,371 20,941 26,656 26,916 28,636 28,465 27,825 29,128 31,168 41,301 44,020
(a) It is not appropriate to extrapolate future redundancies or future deficiences based on the loss reserve development presented in the table, as conditions and trends that have affected development of the liability in prior periods may not necessarily occur in the future periods. Redundancies/deficiencies disclosed above include forex impact between this year and last year. This line also includes the impact of the unwind of discount rate on annuities (which are developed from 2006 on) for an amount of €100 million for 2006.
(c) AXA acquired GRE in May 1999. GRE’s operations have been integrated within AXA. At the time of acquisition, GRE’s gross reserves totaled €5.6 billion. (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 “other international activities”.
protects AXA entirely from any claims occurring after January 1, 2006. Consequently, the table below shows the development of loss reserves recognized in AXA RE’s balance sheet at each year-end until December 31, 2005. Reserves recognized after that date, which correspond to exposure assumed fully by Paris Ré, have not been developed.
Gross reserves for unpaid claims and claims expenses developed in 2007 (d) 2,880 3,060 3,396 3,453 5,868 4,778 3,742 3,314 4,253
(a) The loss reserve 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 reserve 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 occurring year basis and included in the Property & Casualty loss reserve development table. The reserves of AXA RE P&C Insurance Company and AXA RE Reinsurance Company were presented on an underwriting year basis and included in the AXA RE loss reserve development table.
— of which future policy benefits annuity reserves 3,321 — —
14.7. ENVIRONMENTAL POLLUTION AND ASBESTOS AXA continues to receive claims from policies written in prior years asserting damages from asbestos-related and environmental-related exposures. These asbestos claims relate primarily to bodily injuries suffered by those who came in contact with asbestos, while environmental claims relate primarily to pollution related clean-up costs.
AXA’s exposure to asbestos and environmental (“A&E”) claims originates primarily from the following contracts : — Insurance or reinsurance of US-originated risks: this exposure arises primarily from the reinsurance of US cedants or from direct policies written in the London Market (excess of primary covers). The underlying exposure is made-up of both asbestos and pollution claims.
Asbestos-related claims typically have very long latency periods. For instance, mesothelioma can take in excess of 40 years to develop after inhalation of asbestos fibres. This latency period makes it difficult to estimate accurately the future number of asbestos-related claims, the future potential liability associated with such claims and creates unusual sensitivity to future legal and economic developments.
AXA Liabilities Managers manages these risks in a proactive manner, with a view to reducing AXA’s exposure to the uncertainties in these claims. All A&E claims are thus managed by dedicated teams of experts who use a variety of claims-resolution techniques including settlements, policy buy-backs and, in certain cases, litigation. In addition, AXA Liabilities Managers focuses specifically on final resolutions of exposures, either through commutations or other solutions.
The calculation of reserves for A&E risks raises specific difficulties as conventional reserving techniques cannot be used for evaluating IBNR. As a result, AXA evaluates the future cost of those claims using a range of specific methods based either on exposure analysis, frequency / cost projections or reserving benchmarks. A&E reserves are reviewed on a yearly basis to ensure that they adequately reflect the latest claims experience, as well as legal and economic developments. Consistent with AXA’s reserving practices, and despite the particularly long-tail nature of those risks, reserves for A&E are undiscounted.
Due to the uncertainty surrounding A&E claims, it is not possible to determine their future cost with the same degree of certainty as for other types of claims. Although AXA considers its reserves for A&E claims to be adequate, it is possible that, under some adverse scenarios, they may turn out to be insufficient to cover future losses.
At year-end 2007, key data relating to A&E claims were as follows: kEY RESERVES DATA FOR ASBESTOS Data in Euro million, unless otherwise stated
Claims reserves at beginning of year (a) 1,176 1,123 1,046 966
Claims reserves at end of year (a) 1,172 1,124 1,176 1,123 of which reported claims 251 216 268 227 of which IBNR claims 921 908 908 896
kEY RESERVES DATA FOR ENVIRONMENTAL POLLUTION Data in Euro million, unless otherwise stated
Claims reserves at end of year (a) 82 68 102 92 of which reported claims 40 34 46 39 of which IBNR claims 42 34 56 53
3 — Year survival ratio excluding commutations (c) 20 years 21 years 16 years 22 years
As a result of the sale of the Netherlands operations and Compagnie Générale de Réassurance de Monte Carlo, AXA’s reserves for A&E claims decreased by €31 million on a net of reinsurance basis (of which €27 million in respect of environmental asbestos and €4 million in respect of pollution).
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 €1,192 million at year-end 2007. The main reserves adequacy ratios (especially those for asbestos claims) improved compared to their 2006 levels, due to the combined impact of low yearly payments and increase in IBNR.
(a) As described in note 1.12.2 on accounting principles, the adoption of FRS 27 in the United Kingdom led to restatements in 2005 (see the first paragraph of this note 14 for details).
14.9. PAYMENT AND SURRENDER PROJECTIONS AND COMPONENTS OF INSURANCE CONTRACT LIABILITIES
The projections shown below cannot be compared with the reserves carried on the balance sheet and are higher than the published balance sheet figures because they represent expected cash flows without any discounting element. They are also shown net of inflows of periodical premiums payable by policyholders.
The tables below show the breakdown of projected payments and surrenders related to Life & Savings and Property &
The figures shown in the first line 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.
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.
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.).
The rates presented in the table below are weighted average rates for all the portfolios under consideration. They should be analyzed with care. For contracts with guaranteed rates that are revised annually, rates are crystallized at the closing date. The risk factors associated with the contracts are set out in note 4.
Life & Savings — locked-in discount rate (a) 225,765 2.82% 235,220 3.00% 193,557 3.40%
Life & Savings — unlocked discount rate (b) 39,094 3.19% 43,438 3.31% 30,615 3.17%
Non Life — locked-in discount rate (a) 2,090 4.25% 2,172 4.16% 2,082 3.57%
Non Life — unlocked discount rate 1,490 2.64% 753 2.13% 844 2.17%
The impact of the unlocking of discount rates relating to Life & Savings unlocked discounted reserves was €142 million for 2007 (for 2006, €150 million) gross of policyholders participation and tax impacts and was included in the income statement of the period.
GMDB features provide a guaranteed death benefit which may be higher than the contract account balances of the unit-linked contract, depending on performance of the unitlinked assets. GMIB features provide a guaranteed lifetime annuity which may be elected by the contract-holder after a stipulated waiting period, and which may larger than what the contract account balance could purchase at then-current annuity purchase rates.
Provisions for risks and charges include the following items: (in Euro million)
Provisions for risks and charges carried by Winterthur subsidiaries amounted to €986 million at the end of 2006.
15.2. CHANGE IN PROVISIONS FOR RISkS AND CHARGES (EXCLUDING EMPLOYEE BENEFITS AND SHARE-BASED COMPENSATION)
Impact of change in scope of consolidation and changes in accounting method
Impact of foreign exchange fluctuations (7) (6) 1 — (43) (56)
Write back after final cost review (5) (16) — — (72) (93) (73)
Debt component of subordinated convertible notes due 2014 (euro) 1,714 1,660 1,608
U.S. registered redeemable subordinated debt, 8.60% 2030 (USD) 797 960 1,118
U.S. registered redeemable subordinated debt, 6.75% 2020 (euro) 1,062 1,062 1,062
Other financing debt instruments issued (less than €100 million) (25) (81) (2)
Derivatives relating to other debt instruments issued (a) (60) (92) (14)
Other financing debts owed to credit institutions (under €100 million) 51 85 —
Derivatives on financing debt instruments issued (a) (163) (163) (206) (206) (208) (208)
16.3. FAIR VALUE MEASUREMENT OF FINANCING DEBT Information on the fair value figures presented in this note is provided in addition to information on carrying values and should be used with caution. On the one hand, these estimates are based on snapshots taking into account closing dates of parameters such as interest rates and spreads, which in fact fluctuate over time, and resulting in instantaneous values, and on the other hand because there are many possible methods of making these estimates.
Data used when calculating the fair value of financing debt (financing debt instruments issued or financing debt owed to credit institutions) are period-end market data that reflect (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 issue contracts, such as issuer redemption options.
Carrying value of financing debt by contractual maturity as at December 31,
Total carrying value 12 months or less More than 1 year up to 5 years More than 5 years (a)
Excludes the impact of derivatives (detailed in section 19.4.). (b) As described in note 1.11.2, perpetual subordinated notes were reclassified under shareholders’ equity in 2006 with retrospective application to 2005. Details are provided in
— 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.
“Debts relating to investments under lending agreements and equivalent” totaled €29,068 million at December 31, 2007, an increase of €4,970 million (€5,825 million at constant exchange rates) mainly attributable to France (€3,205 million), Switzerland (€1,246 million), AXA China Region (€652 million) and Japan (€467 million).
CDO (Collateralized Debt Obligations) and Real Estate Vehicles 827 1,275 1,507
HOHO 1: class B Mezzanine Class B Subordinated Mortgage-backed notes, maturity 2030, 7%, Fixed rated — 13 —
HOHO 2: class B Mezzanine Class B Mortgage-backed notes, maturity 2080, 5.04%, Fixed rated — 18 —
HOHO 2: class D Subordinated Class D Notes, maturity 2080, 3 months Euribor + 3.75%, Floating — 4 —
HOHO 3: class A Senior Class A Mortgage-backed notes, maturity 2083, 3 months Euribor + 0.13%, Floating — 707 —
HOHO 3: class B Mezzanine Class B Subordinated Mortgage-backed notes, maturity 2083, 3 months Euribor + 0.19%, Floating — 19 —
HOHO 3: class C Junior Class C Subordinated Mortgage-backed notes, maturity 2083, 3 months Euribor + 0.29%, Floating — 9 —
HOHO 3: class D Subordinated Class D Notes, maturity 2083, 3 months Euribor + 1.40%, Floating — 7 —
OTHER DEBT INSTRUMENTS ISSUED (OTHER THAN FINANCING DEBT) 1,560 4,715 2,233
Vendome Commerce: AFET Amortizing mortgage loan based on EURIBOR 3 month + 1.45 point, maturity date: 2011 203 214 —
REOF2: HSHNordBank — Mortgage loan based on Euribor 3 month + 0.65, maturity date: 2012 124 — —
ERIV2: RBS_Mortgage loan based on Euribor + 0.85 point, maturity date: 2014 104 — —
OTHER DEBT (OTHER THAN FINANCING DEBT) — OWED TO CREDIT INSTITUTIONS 3,207 2,658 5,415
(a) Including European Office Income Venture debt which was presented in 2005 in caption “Other debt instruments issued (other than financing debt)” and totaling €177 million at end 2005.
At December 31, 2007, other debt instruments issued (other than financing debt) and bank overdrafts totaled €6,260 million, a decrease of €2,451 million compared to December 31, 2006, or €2,344 million at constant exchange rates mainly due to: — a €2,796 million decrease following the sale of the
— a €428 million decrease of CDO’s other debts instruments issued,
Retail Income Venture II (€104 million), Real Estate Opportunity Fund II (€124 million), European Logistics Income Venture (€90 million) and Alternative Property Income Venture (€55 million) and a €96 million increase in European Retail Income Venture’s debt,
17.3.1. Other debt instruments issued and bank overdrafts (other than financing debt) by accounting method
Debt instruments issued designated as at fair value through profit & loss
Debt owed to credit institutions held as trading — — —
DEBT INSTRUMENTS ISSUED AND BANk OVERDRAFTS (OTHER THAN FINANCING DEBT) (a)
Debt instruments issued designated as at fair value through profit & loss 202 693 895 594 3,536 4,129 726 782 1,508
Debt owed to credit institutions designated as at fair value through profit & loss — — — 126 — 126 129 — 129
The fair value option is used to measure debt other than financing debt designated at fair value through profit and loss included in the table above. The decrease in debt measured at fair value through profit and loss is mainly due to the sale of the Netherlands operations.
Payables to policyholders, brokers and general agent 4,116 4,116 6,248 6,248 3,494 3,494
Payables arising from direct insurance and inward reinsurance operations 7,033 7,033 7,947 7,947 4,680 4,680
Current account payable to other companies (a) 4,128 4,128 3,941 3,941 1,927 1,927
Payables arising from direct outward reinsurance operations 6,024 6,024 5,849 5,849 3,507 3,507
(a) Includes a quota share reinsurance treaty between AXA RE and Paris Ré (€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, 2007, payables arising from direct insurance and inward reinsurance operations totaled €7,033 million, a decrease of €914 million compared to December 31, 2006 (€7,947 million including Winterthur’s contribution of €3,451 million).
At December 31, 2007, payables arising from direct outward reinsurance operations totaled €6,024 million, an increase of €175 million compared to December 31, 2006 (€5,849 million including Winterthur’s contribution of €372 million).
(a) As described in notes 1.12.2 and 1.11.2 on accounting principles, in 2006, the adoption of FRS 27 in the United Kingdom and the reclassification of Perpetual Deeply Subordinated notes to shareholders’ equity led to adjustements to 2005 (see notes 13 and 14 respectively for details).
(b) As described in note 1.10, the contribution of discontinued operations is stated on a separate line of the income statement.
Impact of differences in tax rates and tax basis (188) (73) 178
Tax losses of prior years used in the current year without DTA recognized previously (45) (51) (32)
18.2. DEFERRED TAX Net deferred tax balances broke down as follows: (in Euro million)
— Deferred tax through reserves relating to the fair value adjustment of cash flow hedge derivatives 13 16 (3) (28) (65)
— Deferred tax through reserves relating to the revaluation of tangible assets — 1 (1) (1) (1)
Net deferred tax excluding policyholders’ tax 8,338 9,739 (1,401) (2,395) (2,547)
(a) As described in note 1.12.2 on accounting principles, in 2006, the adoption of FRS 27 in the United Kingdom led to adjustements to 2005 (see note 14 for details). (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.
Deferred tax through profit & loss (897) 363 — 53 (244) (725)
Deferred tax through reserves in relation to stock options 142 — 1 (13) (34) 97
Policyholder tax — Deferred tax through reserves relating to the fair value adjustment of available for sale assets — — 3 — — 2
Deferred tax through profit & loss (380) 194 — 56 (767) (897)
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 revaluation of tangible assets (1) — — (0) — (1)
Deferred tax through reserves relating to gains and losses on defined benefits pension plans 369 — (129) (5) (12) 224
Deferred tax through reserves in relation to stock options 87 — 67 (12) — 142
Policyholder tax — Net deferred tax assets / (liabilities) (1,033) (157) 8 (24) (63) (1,268)
Deferred tax through reserves relating to the fair value adjustment of avaliable for sale investments (2,243) — (296) (61) 42 (2,557)
Policyholder tax — Deferred tax through reserves relating to the fair value adjustment of cash flow hedge derivatives 2 — (2) 2 (3) —
Policyholder tax — Net deferred tax assets / (liabilities) (582) (396) (3) (18) (146) (1,033)
(a) As described in notes 1.12.2 and 1.11.2 on accounting principles, the adoption of FRS27 in the United Kingdom and the reclassification of Perpetual Deeply Subordinated notes to sheraholders’equity led to adjustements to 2005 (see notes 13 and 14 respectively for details).
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
TOTAL RECOGNIZED DTA BY EXPECTED DATE OF DTA POSSIBLE USE 1,921 539 345 374 470 144 656 3,888 — 8,338
TOTAL RECOGNIZED DTA BY LATEST DATE OF DTA POSSIBLE USE 402 94 79 108 158 24 223 1,028 6,223 8,338
TOTAL RECOGNIZED DTA BY EXPECTED DATE OF DTA POSSIBLE USE 1,963 436 394 391 604 174 1,791 2,238 — 7,991
TOTAL RECOGNIZED DTA BY LATEST DATE OF DTA POSSIBLE USE 356 57 103 112 170 21 248 995 5,933 7,995
DTA recognized on tax loss carryforward 175 171 19 21 24 18 32 10 — 469
DTA recognized on tax loss carryforward 261 57 48 25 30 16 11 10 — 457
DTA recognized on tax loss carryforward 5 2 46 32 19 7 9 10 327 457
TOTAL UNRECOGNIZED DTA BY EXPIRATION DATE OF DTA POSSIBLE USE 6 6 1 11 6 14 7 6 108 164
Unrecognized DTA on tax loss carryforward — 2 82 20 14 12 (14) — 114 229
Puts sold — — — — — — 137 — 137 —
Collars — — — — — — — — — —
Calls sold — — — — — — 11 — 11 —
Macro-hedges and other derivative instruments not qualifying under IAS 39 but generally used as economic hedges
Puts sold — — — — — — 143 — 143 —
NB: This table includes all derivatives (assets and liabilities), i.e. hedging, macrohedging and other, asset and liability positions.
The Risk Management and associated economic hedging strategies are defined and managed by AXA’s local operations in line with accounting regulations. Such economic hedging strategies include (i) managing interest-rate exposures on fixed maturity investments, long-term debt and guaranteed interest rates on insurance contracts, (ii) managing foreign-currency exposures on foreign-currency denominated investments and liabilities, and (iii) managing liquidity positions (including the ability to pay benefits and claims when due) in connection with asset-liability management and local regulatory requirements for insurance and banking operations.
As at December 31, 2007 and based on notional amounts, (i) 50% of the derivative instruments used consisted in swap contracts (47% and 52% respectively at the end of 2006 and 2005), (ii) 28% were option products (mainly caps, floors and collars) (29% and 33% respectively at the end of December 2006 and 2005), (iii) 17% were futures and forwards (mainly other than foreign currency products) versus 19% and 10% respectively at the end of 2006 and 2005, and (iv) 5% were credit derivatives, compared to 4% and 5% respectively at the end of 2006 and 2005. Credit derivatives are an alternative option to investing in fixed maturities issued by private sector companies.
As at December 31, 2007, the notional amount of hedging derivative instruments as defined by IAS 39 (fair value, cash flow and net investment hedges) of the AXA Group totaled €28,305 million (€28,537 million at the end of 2006 and €20,897 million at the end of 2005). Their net fair value was €1,596 million (€1,083 million at the end of 2006 and €208 million at the end of 2005).
Swap contracts are agreements between two parties to exchange one set of cash flows for another. Payments are made on the basis of the swap’s notional value. AXA primarily uses (i) interest-rate swap contracts to manage cash flows arising from interest received or paid, and (ii) currency swap contracts to manage foreign-currency denominated cash flows or investments.
Currency swaps constitute another part of AXA’s hedging strategies to manage foreign currency cash flow exposures, and are primarily used by AXA parent company (€28,698 million at end 2007 versus €21,968 million and €17,156 million respectively at the end of 2006 and 2005), and by AXA Japan mainly to hedge the foreign currency exposure related to internal debts and loans (€1,259 million versus €3,071 million and €5,057 million respectively at the end of 2006 and 2005).
the end of 2005) mainly composed of interest-rate swaps and total return swaps that generate short-term profits.
The notional amounts of swaps used in fair value hedge relationships totaled €6,002 million as at December 31, 2007 (€5,117 million at the end of 2006 and €9,327 million at the end of 2005), including €850 million for the Company to hedge a part of its financing debts, €1,632 million for AXA Japan (mainly including €927 million of interest rate swaps on proper euro bonds and €705 million of equity swaps), and €2,180 million for AXA Bank Belgium to hedge a portfolio interest risk.
The notional amounts of swaps used in net foreign investment hedge relationships totaled €14,163 million (€9,554 million at the end of 2006 and €9,724 million at the end of 2005), including €13,084 million of currency swaps used by the Company.
The option portfolio consists mainly of caps and floors. Interest rate caps and floors are option-like agreements where the seller agrees to pay the counterparty an amount equal to the difference, based on a notional amount, between the interest rate of the specified index and the interest rate cap or floor. These products are used to hedge against interest rate increases (caps) or decreases (floor). The notional amount of these instruments at December 31, 2007 was €42,481 million (€49,690 million and €62,952 million respectively at the end of 2006 and 2005), the decrease being mainly attributable to the United States and France, where some hedges matured at the end of 2007 and were not replaced immediately. They represented 66% of the total notional amount of all options (72% and 93% respectively at the end of 2006 and 2005). Their fair value was €11 million (€—184 million at the end of 2006 and €—226 million at the end of 2005).
Caps and floors are used predominantly by the United States and French Life & Savings operations to hedge interest rates on contracts with guaranteed rates of return.
Futures are contracts that obligate settlement at a specified price and on a specified future date and can be traded on the market. Forwards are over-the-counter contracts.
Currency futures and forward contracts accounted for 76% of these instruments (based on notional amounts at December 31, 2007), compared to 81% at the end of 2006 and 80% at the end of 2005. Swiss entities held futures and forwards for a total notional amount of €16,780 million (€19,642 million at the end of 2006), including €4,297 million (€3,653 million at the end of 2006) designated as fair value hedges and €12,483 million (€13,775 million at the end of 2006) that did not qualify for hedge accounting under IAS 39.
As a result, 89% of the notional value of futures and forwards at the end of 2007 were used in hedging relationships that do not qualify for hedge accounting under IAS 39 (86% and 96% respectively at the end of 2006 and 2005).
AXA mainly uses credit derivatives to manage the exposures of its assets and liabilities to interest-rate risks, but may also use them to enhance returns on invested assets.
At December 31, 2007, the notional amount of credit derivatives carried by the Group was €19,523 million, of which: — €8,254 million relating to exposures held within investment funds of the “satellite investment portfolio” (see Note 1.7.2.) not detailed in this note. Such credit default swaps were used mainly in France (€6,998 million) and Belgium (€895 million) as an alternative to corporate bond portfolios.
Such credit derivatives were mainly used in CDOs to build their collateral portfolio (for a total notional amount of
€4,003 million at the end of 2007 versus €4,272 million at the end of 2006 and €4,612 million at the end of 2005). AXA Japan invested also in credit default swaps (€4,253 million at the end of 2007 versus €4,676 million at the end of 2006 and €4,623 million at the end of 2005) and used them on highly rated bonds to enhance the returns on its portfolio, a simple alternative to investing directly in corporate bonds.
Investment property at amortized cost 12,025 — 20 12,045 1,776 — — 1,776 13,801 — 20 13,821
Financial investments backing contracts where financial risks is borne by policyholders 182,726 — 101 182,827 — — — — 182,726 — 101 182,827
Fixed maturities at fair value through profit & loss 55,095 — 58 55,152 832 — (11) 822 55,927 — 47 55,974
Macro hedge and speculative derivatives — — — — 7 — — 7 7 — — 7
(a) Net book value, i.e net of impairment, discount premiums and related amortization, including accrued interest, but excluding any impact of derivatives. (b) Excluding macro hedge and other derivatives.
(c) Macro hedge and other derivatives. (d) Net book value (see (a)), but including effect of hedging instruments (IAS 39), economic hedging instruments not acting as hedging under IAS 39, macrohedge and other derivatives. (e) Notably includes policy loans, lease receivables and other loans. (f) Other investments held through consolidated investment funds at fair value through profit and loss. (g) Derivatives instruments used in hedge of net investment in a foreign operation, and not attached to a debt on the face of the balance sheet.
Fixed maturities at fair value through profit & loss 49,520 — 71 49,591 186 — (4) 182 49,706 — 67 49,772
Non controlled investment funds at fair value through profit & loss 2,321 13 (15) 2,319 155 — — 155 2,476 13 (15) 2,474
Loans at fair value through profit & loss 378 — — 378 2,815 — (48) 2,768 3,194 — (47) 3,146
Financial investments backing contracts where financial risks is borne by policyholders 176,479 — 83 176,562 — — — — 176,479 — 83 176,562
(a) Net book value, i.e net of impairment, discount premiums and related amortization, including accrued interest, but excluding any impact of derivatives. (b) Excluding macro hedge and other derivatives, i.e. excluding economic hedges that do not qualify for hedge accounting under IAS 39, macro-hedging and other derivatives. (c) Macro hedge and other derivatives. (d) Net book value (see (a)), but including effect of hedging instruments (IAS 39), economic hedging instruments not acting as hedging under IAS 39, macrohedge and other derivatives. (e) Notably includes policy loans, lease receivables and other loans. (f) Other investments held through consolidated investment funds at fair value through profit and loss.
(g) Derivatives instruments used in hedge of net investment in a foreign operation, and not attached to a debt on the face of the balance sheet. (h) In accordance with IFRS 3, i.e. within 12 months following the acquisition date, the Group has adjusted certain items affecting the allocation of Winterthur purchase price.
Investment property at amortized cost 13,260 — — 13,260 548 — — 548 13,808 — — 13,808
Fixed maturities available for sale 241,652 (83) (311) 241,258 5,645 — — 5,645 247,297 (83) (311) 246,903
Fixed maturities held for trading 71 — 23 94 1,172 — 31 1,203 1,244 — 54 1,297
Non quoted fixed maturities (amortized cost) 10 — — 10 1 — — 1 11 — — 11
Non controlled investment funds available for sale 4,593 6 — 4,599 226 — — 226 4,819 6 (0) 4,825
Non controlled investment funds held for trading 80 — — 80 33 — — 33 113 — — 113
Macro hedge and speculative derivatives (175) — — (175) 875 — — 875 701 — — 701
Macro hedge and speculative derivatives — — — — 8 — — 8 8 — — 8
Investment property at fair value through profit & loss 4,979 — — 4,979 — — — — 4,979 — — 4,979
Non controlled investment funds available for sale 3,132 — 89 3,221 201 — — 201 3,333 — 89 3,422
Macro hedge and speculative derivatives — — — — 15 — — 15 15 — — 15
Investment property at amortized cost 7,832 — — 7,832 314 — — 314 8,146 — — 8,146
Fixed maturities available for sale 189,382 (166) 235 189,451 5,740 — (1) 5,739 195,123 (166) 234 195,190
Fixed maturities at fair value through profit & loss 43,403 — 10 43,413 779 — (42) 737 44,182 — (32) 44,150
Equities at fair value through profit & loss 18,804 — — 18,804 48 — — 48 18,852 — — 18,852
Non controlled investment funds held for trading 195 — — 195 22 — — 22 217 — — 217
Loans at fair value through profit & loss 125 — — 125 — — — — 125 — — 125
19.4. EFFECT OF HEDGING ON LIABILITIES The impact of derivative instruments is presented in the balance sheet within their related underlying financial liabilities (and assets, see section 19.3). The tables below set out the impact of derivative instruments on the related underlying liabilities.
Liabilities arising from investment contracts with discretionary participating features (a) 40,121 — (102) 40,019 32,606 — — 32,606 33,267 — — 33,267
Macro hedge derivative instruments on insurance and investment contracts (liabilities) — — 13 — — — (13) — — — 5 —
Other debt instruments issued, notes and bank overdrafts 6,258 2 — 6,260 8,714 (3) — 8,711 8,413 (3) — 8,411
Derivative instruments hedging net investment in a foreign operation (liabilities) (d) — — — — — — — — — — 267 —
Liabilities arising from investment contracts where the financial risk is borne by policyholders 69,587 — — 69,587 67,673 — — 67,673 48,549 — — 48,549
Minority interest of controlled investment funds and puttable instruments held by minority interests holders 7,751 — — 7,751 7,224 — — 7,224 5,115 18 — 5,133
Payables arising from outward reinsurance operations 6,024 — — 6,024 5,849 — — 5,849 3,507 — — 3,507
Derivatives relating to other financial liabilities 120 120 5 5 4 4
Macro hedge — Reinsurance — — — — — — — — —
Macro hedge derivatives on insurance and investment contracts — 13 13 — (13) (13) 5 — 5
Macro hedge banking activities and other derivatives (including speculative derivatives) — 271 271 — 175 175 — 113 113
Derivative instruments relating to financing debt, operating debt and other financial liabilities (116) 68 (48) 17 (707) (689) 7 (1,051) (1,044)
Total net value of derivative instruments — liabilities (2) 35 (677) (1,079)
(a) Other derivatives instruments that do not qualify for hedge accounting according to IAS 39. (b) Including speculative derivatives, if any, relating to financing debt and other financial liabilities.
of which direct premiums 55,330 45,998 40,539 of which reinsurance assumed 2,442 2,270 2,433 of which fees and charges on investment contracts with no participation features of which revenues from other activities 1,332 1,076 1,104
of which direct premiums 24,727 19,280 18,308 of which reinsurance assumed 210 179 248 of which revenues from other activities 79 52 43
(a) Net of intercompany elimination (b) Including SPEs and CDOs previously disclosed in the Other Financial services segment which has been renamed “Banking”. (c) As described in note 1.10, the contribution of discontinued operations is stated on a separate line of the income statement.
Retirement/annuity/investment contracts (individual) (d) 28,264 172,219 42,716 26,038 172,276 34,705 22,468 157,061 34,580
Life contracts (including endowment contracts) (d) 18,095 143,163 910 12,837 152,432 1,464 11,567 97,532 280
Asset backing contracts with financial risk borne by policyholders (unit-linked) (a) 21,529 113,654 69,587 18,512 108,984 67,129 12,947 92,888 48,549
(d) As described in note 1.12.2 on accounting principles, the adoption of FRS 27 in the United Kingdom led to adjustements to 2005 (see note 14 for details). (e) In accordance with IFRS 3, i.e. within 12 months following the acquisition date, the Group has adjusted certain items impacting the allocation of Winterthur purchase price. (f) As described in note 1.10, the contribution of discontinued operations is stated on a seperate line of the income statement.
(a) In accordance with IFRS 3, i.e. within 12 months following the acquisition date, the Group has adjusted certain items impacting the allocation of Winterthur purchase price. (b) As described in note 1.10, the contribution of discontinued operations is stated on a seperate line of the income statement
Total — Property & Casualty excluding International Insurance 26,920 6,813 1,306 35,039 11,171 46,210 35,998
Total — Property & Casualty including International Insurance 33,019 10,988 1,566 45,573 12,941 58,514 47,868
Net investment result (excluding financing expenses) from the financial assets of insurance companies and companies in other business segments (excluding revenues from the financial assets of banks included in net revenues from banking activities) was as follows: (in Euro million)
Investment properties at fair value through profit & loss 263 527 (541) — 250
Fixed maturities at fair value through profit & loss (a) 2,256 106 (1,481) — 881
Equities at fair value through profit & loss (b) 785 2,585 (1,632) — 1,738
Non controlled investment funds available for sale 89 157 — (38) 208
Other assets held by consolidated investment funds designated at fair value through profit & loss 206 20 66 292
Non controlled investment funds held for trading — 3 — — 3
Other assets held by consolidated investment funds designated at fair value through profit & loss 208 (7) 16 217
(a) Including fixed maturities held by consolidated investment funds, designated at fair value through profit & loss. (b) Including equity securities held by consolidated investment funds, designated at fair value through profit & loss. (c) As described in note 1.10, the contribution of discontinued operations is stated on a separate line of the income statement.
Investment properties at fair value through profit & loss 283 99 375 — 757
Fixed maturities at fair value through profit & loss (a) 2,037 297 175 — 2,510
Non quoted fixed maturities (amortized cost) — — — — —
Equities at fair value through profit & loss (b) 690 1,119 1,321 — 3,129
Non controlled investment funds available for sale 35 147 — (10) 173
Non controlled investment funds held for trading — 3 1 — 5
Other assets held by consolidated investment funds designated at fair value through profit & loss
Loans at fair value through profit & loss (3) — 75 — 72
Assets backing contracts where the financial risk is borne by policyholders
(a) Including fixed maturities held by consolidated investment funds, designated at fair value through profit & loss. (b) Including equity securities held by consolidated investment funds, designated at fair value through profit & loss. (c) As described in note 1.10, the contribution of discontinued operations is stated on a separate line of the income statement. (d) As described in note 1.11.2, perpetual subordinated notes were reclassified under shareholders’ equity in 2006 with retrospective application to 2005. Details are provided in note 13.
The change in fair value of investments at fair value through profit & loss consists mainly of adjustments relating to investments backing contracts where the financial risk is borne by policyholders.
Changes in the fair value of financial instruments designated at fair value through profit & loss, relating to available-forsale equities and fixed maturities, correspond to the change in fair value of underlying items in fair value hedges (as defined by IAS 39) notably in Japan.
Claims ceded (including change in claim reserves) 959 573 994 (209) 2,316
(a) As described in note 1.10, the contribution of discontinued operations is stated on a separate line of the income statement.
In 2007, the €+403 million improvement in the net result of reinsurance ceded compared to 2006 was mainly attributable to the International Insurance operations for which net result of reinsurance improved by €338 million due to : — AXA Liabilities Managers up €+153 million fuelled by (i) the transfer to Paris Ré of AXA RE’s gross technical result for the year together with (ii) an improved ceded result driven by lower premiums ceded in 2007.
— AXA Corporate Solutions Assurance (up €+170 million) due to higher loss recovery following higher occurrence of large claims gross of reinsurance in 2007.
As described in note 1.10, the contribution of discontinued operations is stated on a separate line of the income statement and as a consequence the financing debt expenses in 2006 and 2005 were restated and were respectively €473 million and €480 million. They included incomes and expenses relating to hedging derivatives instruments on financing debt, mainly for AXA SA (€142 million in 2006 and €176 million in 2005).
Write back of depreciation for tangible assets — (3) 0 (2) 0 — 0 — (2) (18) 3
Other staff costs and employees’ profit sharing (a) 508 332 329
— Actuarial gains and losses (change in long term assumptions, change in staff, etc.).
The sale of the Netherlands took place in 2007. The Netherlands is included in the 2005 and 2006 data but excluded from the 2007 data.
Benefit obligation at the beginning of the year 14,734 11,421 9,573 604 716 581
Impact of foreign currency fluctuations (737) (268) 513 (54) (66) 113
Fair value of plan assets at the beginning of the year 8,216 4,693 3,869 9 14 9
Actual return on plan assets 477 395 689 (3) (4) 3
Impact of foreign currency fluctuations (546) 28 135 — — —
Fair value of separate assets at the beginning of the year 2,480 2,697 2,265 — — —
Overfunded status (plan by plan) 200 12 1 — — —
Net economic funding position (including separate assets) (5,079) (3,950) (3,957) (501) (595) (703)
For pension plans where the fair value of plan assets exceeds the benefit obligation, the aggregate fair value of plan assets and aggregate benefit obligation were €2,364 million and €2,164 million, respectively, as at December 31, 2007. For pension plans where the benefit obligation exceeds the fair value of plan assets, the aggregate benefit obligation and fair value of plan assets were €10,791 million and €4,693 million, respectively, as at December 31, 2007.
Expected return on separate assets (33) (172) (189) — — —
The increase in expense from 2006 to 2007 is largely due to the inclusion of former Winterthur employees (their benefits are included in year end 2006 balances but appear in expenses for the first time in 2007).
The evolution in the net economic funding position from January 1, 2007 to December 31, 2007 captures both the change in the liability recorded in the Group’s balance sheet and the change in separate assets, as presented in the table below: (in Euro million)
Pension and other benefits expense (371) (225) (257) (40) (23) (66)
Employer contributions and benefits directly paid 378 242 328 45 49 49
Net transfer In (out) (including acquisitions and disposals) (a) (b) (2,280) (485) 121 (20) (8) (23)
Net transfer In (out) (including acquisitions and disposals) (a) (b) (2,253) (548) — (20) (8) (23)
Actuarial gains and losses recognized in the SORIE component 1,022 392 (667) 54 24 (28)
Balance sheet liability at the end of the year (5,818) (6,430) (6,654) (501) (595) (703)
Fair value of separate assets at the end of the year 739 2,480 2,697 — — —
Net economic funding position at the end of the year (5,079) (3,950) (3,957) (501) (595) (703)
(a) This amount includes the sale of the Netherlands. (b) This amount includes the effect of the elimination of the insurance contract in Switzerland. (c) This amount includes the effect of the requalification of assets in the United States as plan assets rather than separate assets.
equity. It includes actuarial gains and losses as well as net income for the period (see Note 13). The table shows the change in the SoRIE component between January 1, 2005 and December 31, 2007 due to adjustments arising on plan liabilities and adjustments arising on plan assets.
Five years thereafter 4,175 169 b) Employer contributions to plan and separate assets
The estimated amount of 2008 employer contributions for pension benefits is €184 million (€280 million estimated in 2006 for 2007). The estimated amount for other benefits is nil (€24 million estimated in 2006 for 2007). These amounts are subject to uncertainty as they will be driven by 2008 economics.
The elimination of the insurance contract in Switzerland and the requalification of assets in the United States as plan assets rather than separate assets have an impact on the evolution of asset mix between 2006 and 2007.
In the United States, AXA Financial provides certain medical and life insurance benefits (collectively, “postretirement benefits”) for qualifying employees, managers and agents retiring from AXA Financial based on years of service and age. The life insurance benefits are related to age and salary at retirement for certain grandfathered retirees, and a flat dollar amount for others. AXA Financial continues to fund the postretirement benefits costs for these plans on a payas -you-go basis. For 2007, postretirement benefits payments were made in the amounts of €37 million (€42 million in 2006 and €39 million in 2005).
(a) The net position corresponds to a liability of €6,954 million (as at December 31, 2007) included in the provision for risks and charges and an asset for €345 million (as at December 31, 2007) included in the balance sheet under the item “Other long term assets”.
25.3. SHARE-BASED COMPENSATION All figures 100%, gross of tax (in Euro million)
AXA stock options for AXA Financial 19.5 24.0 16.0 2006 AXA SA grants 3.4 11.2 —
In accordance with IFRS 2, the total employee share based compensation cost of €195.6 million shown above includes expenses from share-based compensation instruments for grants made after November 7, 2002 which had not yet vested at December 31, 2003.
For members of the Executive Committee (2006 Grants) and employees who are granted more than 5,000 options (2007 Grants), the first two installments vest unconditionally at the end of the vesting period. However, the final installment will only vest if AXA shares outperform the DowJones Europe Stoxx Insurance index sometime after 4 years and before the maturity of the options.
Information on options granted after November 7, 2002 is shown in the table below: POST NOVEMBER 7, 2002 AXA SA STOCk OPTION PLANS
The number of outstanding options and the number of exercisable options at December 31, 2007 are shown below by maturity date for AXA SA plans granted after November 7, 2002: EXERCISABLE UNTIL in million
The fair value of AXA SA stock options is calculated using the Black and Scholes option pricing model. The effect of expected early exercise is taken into account through the use of an expected life assumption based on historical data. AXA SA share price volatility is estimated on the basis of implied volatility, which is checked against an analysis of historical volatility to ensure consistency. The expected AXA SA dividend yield is based on the market consensus. The risk-free interest rate is based on the Euro Swap Rate curve for the appropriate term.
The option pricing assumptions and fair value for plans issued in 2007, 2006 and 2005 are as follows: Assumptions
(a) For employees who have been granted more than 5,000 options, the final instalment will only vest if AXA share price outperforms the Dow Jones Euro Stoxx Insurance Index. The options with performance criteria have been valued at e6.67 per option based on a Monte Carlo model. The options without performance criteria have been valued at e7.02 per option based an Black&Scholes model.
The 0.7 million options shown for 2006 in the “granted” line in the table above is largely the adjustment made to offset the dilution due to the capital increase done to finance the acquisition of Winterthur, as employees and associates now receive AXA SA shares rather than ADR options.
The expected dividend yield on AXA SA shares is based on the market consensus. The risk-free interest rate is based on the U.S. Treasury bond curve for the appropriate maturity.
From 2005 on, there are no more AXA ADR grants to employees, and only a limited number of AXA Equitable Life sales associates continue to receive AXA ADR grants.
AXA offers its employees the opportunity to become shareholders through special employee share offerings. In countries that meet the legal and fiscal requirements, two investments options are available: the traditional plan and the leveraged plan. In the traditional plan, employees invest in AXA shares at a discount to the market price for unrestricted shares. In the leveraged plan, an independent bank supplements the employees’ investment so that the total investment is a multiple of the contribution made by the employees. This total sum is invested in AXA shares at a discount to market price for unrestricted shares. After a period of five years, employees receive a percentage of any gains made on the investment, with a guaranteed minimum equal to the amount of their initial investment.
On September 24, 2007, the AXA Group made an employee share offering at €23.22 per share for the traditional plan (discount of 20% to the reference price of €29.03 representing the average over the twenty trading days preceding the date of announcement) and €24.89 per share
for the leveraged plan. Subscriptions amounted to 22.1 million shares, increasing the share capital by €552.3 million. This offering represented a total cost of €24.7 million taking into account the five-year lock-up period.
In 2007, the cost of the lock-up period was measured at 13.45% for the traditional plan and 13.15% for the leveraged plan (different discounts). In addition to the lock-up cost, the opportunity gain offered to the employees under the leveraged plan was measured at 2.24%.
The table below shows the main features of the plan, the amounts subscribed, valuation assumptions, and the cost of the plan for 2007, 2006 and 2005.
Amount subscribed by employee (in Euro million) 74.0 47.0 51.8 32.0 33.7 26.8
Total amount subscribed (in Euro million) 74.0 478.3 51.8 323.7 33.7 270.6
Interest rate on employee loan 7.54% 7.47% 7.01% 7.34% 7.16% 7.62%
Total cost for AXA = [a] — [b] + [c] (equivalent to a discount) 6.55% 3.35% 6.59% 3.15% 3.93% 2.68%
To a lesser extent, AXA issued Performance Units in 2004, 2005, 2006 and 2007. During the vesting period, the Performance Units initially granted are subject to non-market performance criteria. The value of each Performance Unit is equal to the average AXA share price before the settlement (which is cash rather than equity-settled in most cases). The total cost of the Performance Units recorded in earnings in 2007 was €40.1 million (€5.4 million for the equity-settled portion and €34.7 million for the cash-settled portion).
AXA APH grants stock options based on AXA APH shares, with both market and non-market performance conditions. These plans are valued according to the IFRS applicable in Australia. The total cost for this plan in 2007 was €7.8 million.
In 2007, AllianceBernstein granted to certain key employees the right to receive part of their deferred compensation in the form of options to acquire AllianceBernstein units. Because of this new plan, the total cost of share-based compensation plans granted by AllianceBernstein became material at Group level. The 2007 total cost (including old and new plans) amounted to €10.6 million.
Options to acquire AllianceBernstein Units were granted as follows: 3,708,939 options were granted during 2007; 9,712 were granted during 2006; and 17,604 options were granted during 2005.
25.4. COMPENSATION OF MANAGEMENT AND OFFICERS In 2007: — Short-term benefits: compensation paid to members of the Management Board in respect of 2007 totaled €14.1 million, including fixed salary, bonuses, directors’ fees and benefits in kind.
— Long-term benefits: amounts provisioned or recognized by AXA SA and its subsidiaries for the payment of pensions or retirement benefits to its corporate officers (members of the Management Board, Chairman of the Supervisory Board and the employees’ representative on the Supervisory Board) totaled €34.8 million.
— Share-based compensation: the expense recognized in 2007 in respect of share-based compensation granted to Management Board members was €16 million.
The increase in 2007 compared to 2006 was mainly due to: — in the United Kingdom: the acquisition of Thinc Group and
— The calculation of diluted net income per ordinary share takes into account shares that may be issued as a result of stock option plans. The effect of stock option plans on the number of fully diluted shares is taken into account only if options are considered to be exercisable on the basis of the average stock price of the AXA share over the period.
As a result, the fully diluted number of shares at December 31, 2007 was 2,061 million.
Weighted average number of ordinary shares (net of treasury shares) — opening 2,063 1,855 1,921
NET INCOME PER ORDINARY SHARE (e) C = A / B 2.77 2.61 2.25
Potentially dilutive instruments : — Subordinated convertible Notes — February 8, 2000 due 2017 — 28 27
— Subordinated convertible Notes — February 8, 1999 due 2014 — 38 37
FULLY DILUTED NET INCOME PER ORDINARY SHARE (e) F = E / D 2.75 2.56 2.22
The Company, from time to time, makes capital contributions loans, other extensions of credit, or otherwise provides liquidity to its subsidiaries and affiliates to finance their business operations (e.g. to facilitate acquisitions, integration of acquired businesses, internal restructurings, or similar transactions) or for other business purposes. These transactions may involve the Company acquiring different types of securities (e.g. ordinary shares, preferred shares, senior debt securities, subordinated debt securities, etc.) or assets from its subsidiaries and affiliates from time to time. Loans or other extensions of credit bear interest at varying rates that generally reflect prevailing market rates at the respective dates such loans were originated.
NOTE 28 > CONTINGENTS ASSETS AND LIABILITIES AND UNRECOGNIZED CONTRACTUAL COMMITMENTS
Off-balance sheet commitments received were up €1,774 million at the end of 2007, mainly due to pledged securities and collaterized commitments (€+2,339 million) and guarantee commitments received from customers (€+566 million), partly offset by a decrease in other commitments (€—1,367 million). These commitments broke down as follows: Financing commitments received totaled €8,156 million at the end of 2007 and mainly consisted of: — AXA SA credit lines (€6,268 million), — AllianceBernstein credit lines (€928 million) mainly comprising credit facilities (€475 million) and revolving credit facilities (€316 million) from various banks and other lenders,
— bank credit lines granted to AXA Life Japan as part of its Life & Savings operations (€330 million),
— The United States holding company’s share in a Group cash facility since July 9, 2004 (€340 million),
— €5,030 million in Japan, including securities received as guarantees for cash deposits given in security lending transactions (€4,413 million) and for short-term security borrowings (€617 million). Commitments were also given on these products.
The €2,339 million increase in pledged securities and collaterized commitments received in 2007 resulted mainly from new guarantees received by AXA Bank Belgium (€+2,510 million), mainly in mortgage commitments relating to residential contracts.
Letters of credit received amounted to €1,431 million at the end of 2007, mainly in the United States (€1,283 million), a €198 million increase compared to the end of 2006.
The €—1,367 million decrease in other commitments received mainly included (i) a €601 million decrease in commitments received by France Life & Savings, (ii) a €767 million decrease in International Insurance, and (iii) the termination of the commitments received last year from external shareholders of an AXA real estate entity (€—150 million).
Pledged securities and collaterized commitments 12,639 56 20 1,887 14,601 15,821 10,428
— Financing commitments to credit institutions (€934 million), including notably €676 million given by Switzerland Life & Savings to private equity funds (in line with 2006 commitment).
Guarantee commitments given totaled €5,353 million at the end of 2007, and consisted of: — Guarantee commitments given to credit institutions
Guarantee commitments given decreased by €325 million overall, mainly due to (i) the decrease in gap guarantees on structured products given by AXA Banque on 3 mutual funds which were terminated in 2007 (€—318 million), and (ii) the decrease of guarantee commitments given to customers by Australia Life & Savings (€—218 million), partly offset by (iii) an increase in guarantees given by AXA SA mainly related to credit lines granted to the Group’s entities (€+348 million).
— Securities pledged by AXA Bank Belgium to financial institutions in respect of security repurchase agreement (€4,104 million) and security interests given to the National Bank of Belgium for clearing-house activities (€1,273 million).
Overall, pledged assets and collaterized commitments given decreased by €1,219 million in 2007 mainly due to a decrease in securities pledged under Japanese stock lending transactions (€—1,238 million).
Letters of credit given totaled €576 million at the end of 2007, and were mainly related to the run-off activities of reinsurance operations.
Other commitments given totaled €10,056 million at the end of 2007 and consisted mainly of: — €2,193 million commitments given by the German entities relating mainly to (i) future acquisitions in private equity funds (€557 million) and a multi-tranche loan (€965 million), and (ii) a commitment given to “Protektor”, the German insurance guarantee fund (€449 million) in the case of a bankruptcy of the insurance companies.
— €587 million of commitments given by the United States mainly to Limited Partnerships, that were previously classified as financing commitments.
The scheme governing the financial reorganisation of AXA Sun Life in 2001 (the “Scheme”) details arrangements under which assets from the inherited estate, attributed to AXA through the reorganisation, may be transferred on a temporary, or permanent basis to the With Profits Funds as required to support the capital requirements of these funds, as determined under the scheme.