II- UPDATE RELATED TO THE ADOPTION OF EUROPEAN COMMISSION REGULATION N° 809/2004 OF APRIL 29, 2004 107 2.1.1. Composition of the Supervisory Board on September 30, 2005 107 2.1.2. Expertise and experience of the management bodies’ members 109 2.1.3. Positions held by members of the Supervisory Board over the last 5 years 114 2.1.4. Conflicts of interests 117 2.1.5. Total amounts set aside or accrued to provide pension, retirement or similar benefits 117 2.1.6. Service Contracts between the AXA Group and members of management bodies
I- UPDATE RELATED TO EVENTS SUBSEQUENT TO MARCH 31, 2005 (DATE ON WHICH THE DOCUMENT DE RÉFÉRENCE WAS FILED)
The shareholders ratified all of the resolutions submitted to their approval, including the following: Approval of the parent company and consolidated financial statements for the fiscal year ended December 31, 2004; Appropriation of earnings and determination of a dividend of Euro 0.61 per share, payable as of April 28, 2005; All resolutions related to financial authorizations and changes to the bylaws; Reappointment of some members of the Supervisory Board, and appointment of new members to replace Thierry Breton, Jacques Calvet and Bruno Roger: Reappointed: Anthony Hamilton, Henri Lachmann and Michel Pébereau; Appointed: Ms. Dominique Reiniche, Mr. Léo Apotheker and Mr. Jacques de Chateauvieux.
1.2. Half-year financial disclosures 1.2.1. Operating highlights through June 30, 2005
- Asset management net inflows of Euro 16 billion4 contributing to underlying earnings growth of 30%5
• Tight management and increased earnings resulting in a stronger Balance Sheet - Gearing at a historically low level of 38% vs. 42% at year end 2004 - P&C reserve ratios continued to improve - Shareholders’ equity up 15% to Euro 32.7 billion - Unrealized gains attributable to shareholders6 standing at Euro 10.1 billion, up 28%
Profit or loss on financial assets under Fair Value option and derivatives
In the US, the positive impact of the integration of MONY more than offset lower yields and prepayments on fixed maturities as well as lower partnership distributions from a very strong level in 2004.
Globally, total gross margin (sum of the above margins) was Euro 4,067 million, up 13% with MONY representing 7 points of this growth.
Expenses, tax and minority interests were Euro -3,095 million up 11% with MONY representing 7 points of this growth. H1 2005 was impacted by higher DAC amortization especially in the US and by higher expenses in the UK related to sales and customer services strategic initiatives. Japan was positively impacted by the non-recurring profit mentioned above.
Overall current year loss ratio benefited from: - the favorable evolution of bodily injury claims frequency on the personal motor portfolio in France and Southern Europe; - lower severity of bodily injury claims and a favorable product mix in the UK.
OTHER FINANCIAL SERVICES & HOLDINGS. Other Financial Services & Holdings underlying earnings improved by Euro 91 million to Euro -163 million, mainly due to a tax benefit at AXA SA (Euro 47 million) and to higher AXA Bank Belgium earnings.
12 Excluding impact of the sale of AC Cash Management Services 13 Idem 14 Revenues, excluding management and front-end fees collected on behalf of external distributors
Adjusted Earnings 1H’05 adjusted earnings, the basis for our dividend policy, were up 28% (or +31% at constant exchange rates) to Euro 2,132 million, driven by the solid underlying earnings performance as well as a Euro 107 million increase in net capital gains attributable to shareholders to Euro 370 million.
1H’05 net capital gains attributable to shareholders benefited from (i) Euro 114 million release of valuation allowance on tax losses carried forward in Japan, (ii) capital gains on the restructuring of the AXA Japan investment portfolio (Euro 200 million) offset by related impacts of changes in future investment assumptions, (iii) strong equity markets, especially in Europe.
Despite the recent weather related events in the US and barring any new major catastrophic events, Management believes that the Group is well on track to deliver strong double digit earnings growth for the full year 2005.
Stock markets Performance in the equity markets was mixed over the period: although the global progression was 3.52%, the US markets were down (-4.7% for the Dow Jones, -1.7% for the S&P 500 and -5.5% for the NASDAQ). Japanese Nikkei was nearly flat (+0.8%). In Europe, the CAC 40 was up +10.7%, the STOXX 50 +7.8%, and the FTSE +6.2%.
Bond markets All of the world’s bond markets turned in a positive performance. Globally, 10-year government maturities are up +4.61%, with both Bund (+6.76%) and Gilt (+5.79%) yields standing out. As for spread bonds, performance has also been positive across the board: emerging markets (+5.11%), investment grade corporate bonds (+3.43%), High Yield debt (+1.31%) and BBB-rated corporate debt (+1.22%). For two-year government bonds, the rise was less spectacular (+0.97%) due to expectations of key rate increases by the Federal Reserve. The Federal Reserve Board raised its intervention rate to 3.25%, a 100bp hike since the beginning of this year. Elsewhere - in the eurozone, the United Kingdom and Japan - the status quo has ruled so far this year.
CAPITAL OPERATIONS: On June 29, 2005, the Management Board of AXA (following a meeting of the Supervisory Board) and the Board of Directors of FINAXA approved the terms and conditions of the merger of FINAXA into AXA. For AXA and its shareholders, this merger simplifies the shareholder structure, improves the standing of the stock and increases the proportion of publicly traded shares. In addition, AXA will obtain ownership of the “AXA” brand which is currently the property of FINAXA. For FINAXA shareholders, this transaction improves the liquidity of their securities and eliminates the discount which affects the value of their securities. Following the studies conducted by the committees of independent directors appointed within the Supervisory Board of AXA and the Board of Directors of FINAXA, the Management Board of AXA and the Board of Directors of FINAXA have set an exchange ratio of 3.75 AXA shares for one FINAXA share, corresponding to 15 AXA shares for 4 FINAXA shares. Independent banks respectively appointed by the Supervisory Board of AXA and the Board of Directors of FINAXA have each given a fairness opinion confirming that the exchange ratio is fair to the shareholders of each company. AXA will undertake a capital increase of a minimum of 288 million shares. This number could go up to 299 million shares depending on the proportion of FINAXA's dividend paid in newly issued FINAXA shares. This number could also be adjusted for FINAXA stock options and convertible bonds exercised up to the suspension date of these operations.
Other In order to further protect the Group balance sheet exposure to the USD, an additional $1.950 billion economic hedges have been implemented in the first half-year 2005, through Cross Currency Swaps.
15 AXA Assurances IARD Mutuelle, AXA Assurances Vie Mutuelle and AXA Courtage Assurance Mutuelle
On August 29, 2005, Hurricane Katrina made landfall on the U.S. Gulf Coast causing severe damages and floods. AXA has exposures to this event mainly through its reinsurance activities in AXA RE, and marginally through its large risks (AXA Corporate Solutions Assurance) and Art (AXA Art) businesses. As at the date of publication of this Management Report, AXA RE only received limited information from its cedants in relation with this event. The corresponding cost to AXA, of which a significant part will be reinsured or retroceded outside of the AXA Group, will be included in the Full Year 2005 financial statements. Based on our current knowledge, including an insurance market loss in the range of $40 billion to $60 billion, the costs related to Hurricane Katrina are estimated to be approximately $200 million before tax and net of retrocession in AXA RE.
Excluding the unfavorable impact of the appreciation of the euro against other currencies (1.5 point, mainly from the US Dollar), and additional revenues stemming from (i) MONY integration (€867 million or 2.5 points) and (ii) the change in consolidation method of Turkey, Hong-Kong and Singapore P&C operations (€287 million, or 0.8 point)16, gross consolidated revenues were up 3.3% on a comparable basis.
Life & Savings revenues growth was +2.4% to €21,907 million, mainly driven by good performances in France (+10.7% to 6,583 million) primarily due to a surge in Unit-Linked premiums and price increases in Health, Belgium (+27.1% to 1,353 million) driven by Individual Investment non UnitLinked products (Crest) and individual investment structured Unit-Linked product (Millesimo), and Southern Europe (+25.2% to €717 million), mainly due to large corporate Investment & savings contracts in Italy. This trend was partly offset by lower revenues in the United States (-2.5% to €6,623 million), the UK (-2.1% to €1,130 million) and Japan (-16.5% to €2,322 million). The US revenues were down -2.5%, or +2.0% excluding Real Estate Institutional Separate Account premiums. This growth was mainly attributable to an increase in First Year Life premiums (+15%) and Variable Annuity premiums (+5%), as well as increases in asset management fees (other revenues), partially offset by a decline in Life renewal premiums (-4%) and Fixed Annuity premiums (-46%). In the UK, the decline (-2.1%) mainly stemmed from Investment & Savings, as the market is shifting away from Old World products towards Self Invested Personal Pensions and Stakeholder products in advance for Pensions Simplifications in 2006. Investment & Savings margins increased 16 Fully consolidated starting January 1, 2005 (previously accounted for under the equity method)
HY HY (in euro million) 2005 2004 of which Gross written premiums 21 127 20 570 of which Fees and revenues from investment contracts with no participating feature 237 216
Property & Casualty 10 314 9 794 International Insurance 2 501 2 284 Asset Management 1 550 1 518 Other Financial services (Net banking revenues) (b) 225 198 Holding companies activities 0 0
Group New Business APE17 reached €2,515 million, up +10.8% compared to Half-Year 2004. On a pro-forma basis18, Group New Business APE increased by +6.5%, stemming from all significant countries except Germany. Germany APE decline (-19%) was primarily due to a new business surge at the end of 2004 in anticipation of a change in the tax regulation (non UL products), and to a decrease in Health due to a weak market environment.
Property & Casualty gross written premiums were up 2.9% to €10,314 million, mainly driven by France (+3.8% to 2,770 million), Southern Europe (+5.5% to €1,551 million), while Germany, Belgium and the UK showed lower performance. Personal lines were up nearly 4%, stemming from both Motor (France +3% and Southern Europe +5%), benefiting from positive net inflows of 35,300 and 91,300 respectively) and Non Motor (mainly in Household in the UK +11%, Southern Europe +9%, France +2% and Belgium +3%). Commercial lines (+1.5%) benefited from Non Motor lines (+2%) primarily in France and Southern Europe (+7% for both), mainly as a result of tariff increases in most business lines, while maintaining a strict underwriting policy. Motor lines declined (-1%) mainly in Ireland, due to falling average premiums reflecting the competitive market. Other lines increased by 2% driven by UK health (+8%).
Net banking revenues in Other Financial Services were up +15.9% to €225 million, mainly attributable to AXA Bank Belgium (+20.6% to €161 million), as a result of higher revenues on mortgage loans and lower interest paid for certificates of deposits, partly offset by lower income from inter-bank operations.
(in euro million) 2005 2004 Gross written premiums 33 844 32 571 Fees and revenues from investment contracts with no participating feature 237 216 Revenues from insurance activities 34 082 32 786 Net revenues from banking activities 200 207 Revenues from other activities 2 192 1 900 TOTAL REVENUES 36 473 34 893 Change in unearned premium reserves net of unearned revenues and fees -1 943 -1 723 Net investment result excluding financing expenses (a) 12 308 10 118 Technical charges relating to insurance activities (a) -36 313 -33 347 Net result of reinsurance ceded -302 -585 Bank operating expenses -26 -58 Acquisition costs -3 142 -2 740 Amortization of value of purchased life business in force and other intangible asset -370 -167 Administrative expenses -3 932 -3 627 Valuation allowances on tangibles assets 25 -18 Other -56 -130 Other operating income and expenses -44 116 -40 672 INCOME FROM OPERATING ACTIVITIES, GROSS OF TAX 2 723 2 617 Income arising from investment in associates - Equity method 9 40 Financing debts expenses -305 -291 OPERATING INCOME GROSS OF TAX 2 427 2 366 Income tax -439 -742 Minority interests share in income -226 -227 UNDERLYING EARNINGS 1 761 1 398 Net realized capital gains attributable to shareholders 370 263 ADJUSTED EARNINGS 2 132 1 661 Profit or loss (excluding change) on financial assets (under fair value option) & derivatives 119 -16
Exceptional operations (including discontinued operations) 27 126 Goodwill and other related intangible impacts -4 -38 NET INCOME 2 274 1 733
Property & Casualty underlying earnings improved by €+118 million to €695 million. This improvement was attributable to all countries (mainly France €+31 million, Germany €+38 million, UK €+16 million, Canada €+20 million) except Belgium, and derived from: (i) A higher net technical result (€+271 million to €2,734 million), with an accounting loss ratio improving by 1.5 point to 70.2% (ii) Higher expenses (€-170 million to €-2,508 million), the expense ratio slightly deteriorating by 0.5 point to 27.3%, but only due to higher acquisition ratio in France and in the UK. As a consequence, Group combined ratio improved by 1.0 point to 97.5%.
(in euro million) Life & Savings 972 815 Property & Casualty 695 577 International Insurance 103 138 Asset Management 154 123 Other Financial Services 42 8 Holding companies -205 -265
ADJUSTED EARNINGS 2 132 1 661 Profit or loss (excluding change) on financial assets (under fair value option) & derivatives 119 -16
Exceptional operations (including discontinued operations) 27 126 Goodwill and other related intangible impacts -4 -38
(iii) Higher investment income overall (€+105 million to €819 million) mainly as a result of higher technical reserves and stable investment yield.
(v) Income/Loss arising from investment in affiliates and associates-equity method decreased by €-17 million as a result of the change in consolidation method for Asian P&C entities and Turkey.
International Insurance underlying earnings reached €103 million, down €-35 million. This was mainly attributable to AXA RE (€-33 million or €-20 million on a comparable basis19), as a result of lower technical result (as two major losses - Erwin storm and Suncor Energy fire - occurred at the beginning of 2005 for €73 million as well as negative development on 2004 hurricanes for €39 million mitigated by other boni). The combined ratio increased by 2.6% to 97% as a consequence of the deterioration of the loss ratio (up 5.1 points to 82%) and despite the improvement of the expense ratio by 2.6 points to 15% (decrease in general expenses)
Holdings underlying earnings were up €+57 million to €-205 million. This improvement was mainly attributable to (i) AXA SA (€+67 million to €-86 million), mainly due to a €47 million non recurring 19 Transfers of US AXA RE Life and non life activity to other Transnational activities
The Half-Year 2005 Net Income reached €2,274 million, up €+541 million or +31% compared to half-Year 2004. At constant exchange rates, the growth amounted to +33%.
This growth was the result of: (i) Higher adjusted earnings (+28% or €+471 million to €2,132 million)
Property & Casualty operations (€+35 million to €47 million) encountered higher profit and loss on change in fair value of consolidated Mutual funds (€+42 million), of which €+28 million in France, €9 million in Germany, and €5 million in Belgium.
Half-Year 2004 exceptional operations (€126 million) related to: - The realized capital gains on the disposal of Unirobe in The Netherlands Holding (€+104 million), - The realized capital loss on the disposal of AXA Bausparkasse in Germany (€-22 million, net group share, of which €-8 million in the Life company)
- An exceptional profit in the AXA Financial holding (pre-tax gain on disposal of the discontinued Investment Banking and Brokerage segment of €66.7 million, or €43.4 million net of Federal income taxes). The gain resulted from the reduction of state tax liabilities related to the 2000 sale of DLJ.
Consolidated Shareholders’ Equity As of June 30, 2005, consolidated shareholders’ equity totaled €32.7 billion. The movement in shareholders’ equity since December 31, 2004 is presented in the table below: Shareholders' Equity (in euro million)
At December 31, 2004 28 523 - Share capital 4 - Capital in excess of nominal value 25 - Equity-share based compensation -5 - Treasury shares -12 - Change in equity component of compound financial instruments 0 - Super subordinated debt (including accrued interests) 236 - Fair value recorded in shareholders' equity 1 695 - Impact of currency fluctuations 1 127 - Cash dividend -1 164 - Actuarial gains and losses on pension benefits -15 - Other -8 At June 30, 2005 (before net income of the period) 30 406
Average Shareholder's equity 29 464 23 505 Average Shareholder's equity (a) 22 854 18 511 Net income 2 274 3 738 ROE 15,4% 15,9% -0,5 pts Adjusted Earnings 2 132 3 344 Adjusted ROE 18,7% 18,1% 0,6 pts Underlying ROE 15,4% 14,3% 1,2 pts
(a) excluding change in fair value on invested assets and derivatives (recorded through SHE)
Var. HY 2005 / FY 2004 20 ROE on Net Income are calculated on total average shareholder’s equity, whereas adjusted and underlying ROE are calculated with
Shareholder’s equity excluding change in Fair Value on invested assets and derivatives (included in consolidated shareholder’s equity)
(in euro million except ordinary shares in millions) Basic Fully diluted
Net income 2 274 2 328 1 733 1 812 Net income Per Ordinary Share 1,21 1,19 0,99 0,94 21,8% 26,7% Adjusted Earnings 2 132 2 186 1 661 1 741 Adjusted Earnings Per Ordinary Share 1,13 1,12 0,95 0,90 19,1% 23,8% Underlying Earnings Per Ordinary Share 0,93 0,93 0,80 0,77 16,9% 21,2%
Life & Savings Segment The following tables present the consolidated gross revenues, adjusted earnings and net income attributable to AXA’ s Life & Savings segment for the periods indicated
(b) For the periods ended June 30, 2005 and June 30, 2004, the change in fair value of assets backing contracts with financial risk borne by policyholders had impacted the net investment result for respectively €+3,807 million and €+3,483 million and benefits and claims by the offsetting amounts respectively.
(in euro million) France 249 218 United states 388 317 United Kingdom 43 38 Japan 118 80 Germany 15 1 Belgium 42 41 Southern Europe 25 23 Other countries 92 97
UNDERLYING EARNINGS 972 815 Net realized capital gains attributable to shareholders 213 168
Underlying investment margin decreased by €4 million or -1% to €515 million, as higher investment income by €157 million to €1,958 million mainly benefiting from higher dividend yields on the European equity markets was offset by higher amounts credited to policyholders (€-161 million to €1,444 million).
Fees & revenues were up €46 million or +9% to €564 million mainly resulting from strong growth of fees on unit linked products (€+17 million to €170 million), and on non unit linked business (€+29 million to €394 million, mainly group life business), both due to new inflows and higher account balances.
Net technical margin improved by €17 million to €65 million, as half year 2004 was negatively affected by adverse claims experience in Group disability.
Expenses increased by €29 million to €745 million mainly due to €35 million higher commissions, in line with increased volume, partly offset by lower administrative expenses.
Underlying investment margin 515 519 Underlying fees & revenues 564 518 Underlying technical margin 65 48 Underlying expenses -745 -716 Underlying amortization of VBI -28 -27 Underlying operating earnings before tax 371 342 Underlying income tax expenses / benefits -120 -116 Minority interests -2 -8 Underlying earnings group share 249 218 Net capital gains attributable to shareholders net of income tax 35 47 Adjusted earnings group share 284 265 Profit or loss (excluding change) on financial assets (under FV option) & derivatives 44 -11
Net income was up €74 million to €328 million resulting from increased adjusted earnings and from positive change in fair value of derivatives (€+21 million) and assets designated at fair value through profit & loss (€+33 million net) including consolidated mutual funds, in line with positive performance of equities and fixed interest securities markets during the first half year 2005.
Underlying investment margin 374 363 Underlying fees & revenues 648 454 Underlying technical margin 275 185 Underlying expenses -728 -553 Underlying amortization of VBI -24 0 Underlying operating earnings before tax 545 449 Underlying income tax expenses / benefits -158 -132 Minority interests 0 0 Underlying earnings group share 388 317 Net capital gains attributable to shareholders net of income tax 16 27 Adjusted earnings group share 404 344 Profit or loss (excluding change) on financial assets (under FV option) & derivatives 2 8
Exceptional operations (including discontinued operations) 0 0 Goodwill and other related intangibles impacts -4 0 Net income group share 402 352
Net technical margin increased by €90 million to €275 million, or by €103 million on a constant exchange rate basis. Excluding the contribution of MONY in 2005, the net technical margin increased by €6 million, or by €15 million on a constant exchange rate basis. This increase was notably attributable to a €26 million better life mortality experience. “GMDB/GMIB" margins decreased slightly (€-9 million) primarily due to the impact of poor market performance in first half year 2005 on the unhedged portfolio.
Expenses increased by €175 million to €728 million and by €209 million on a constant exchange rate basis. Excluding the contribution of MONY in 2005, expenses increased €55 million, or €84 million on a constant exchange rate basis, principally due to (i) greater commission expenses (€-34 million), (ii) an increase in other miscellaneous expenses primarily within variable expenses and growth initiatives partly offset by lower amortization of IT expenses net of capitalization (net impact of €-41 million), (iii) higher DAC amortization (€-63 million) reflecting reactivity to higher margins in products which are DAC reactive and lower favorable DAC unlocking in the first half of 2005 for expected higher emerging margins on variable life and annuity products, partly offset by (iv) higher DAC capitalization (€+54 million).
VBI amortization was €24 million in 2005 reflecting the consolidation of MONY.
Adjusted earnings were €404 million, up €60 million or a €79 million on a constant exchange rate basis. MONY contributed €65 million in 2005. Excluding the contribution of MONY in 2005, adjusted earnings increased by €11 million on a constant exchange rate basis. This increase was driven by the higher underlying earnings partially offset by €14 million lower net capital gains to €12 million (gross realized gains amounted to €36 million in half year 2005 or €28 million excluding Mony).
Net income increased by €50 million to €402 million, or €69 million on a constant exchange rate basis. MONY contributed €59 million in 2005. Excluding the contribution of MONY in 2005, net income increased by €7 million on a constant exchange rate basis, in line with adjusted earnings.
APE was up 14% on a constant exchange rate basis to €381 million reflecting increases in unit linked Pension and Bond sales. Total unit linked bond APE were €141 million, up 32%, benefiting from a 13% Onshore Bond growth and an 85% Offshore Bond growth. Group pensions were up 25% due to an increased number of large schemes in the first half of 2005. The unit linked share of total APE increased by 5 points to 87% reflecting a significant increase in unit linked bond sales
Underlying investment margin 97 106 Underlying fees & revenues 212 167 Underlying technical margin 18 3 Underlying expenses -288 -219 Underlying amortization of VBI -12 -23 Underlying operating earnings before tax 28 34 Underlying income tax expenses / benefits 15 4 Minority interests 0 0 Underlying earnings group share 43 38 Net capital gains attributable to shareholders net of income tax 8 -65 Adjusted earnings group share 51 -27 Profit or loss (excluding change) on financial assets (under FV option) & derivatives -11 -1
Net technical margin increased by €16 million on a current and constant exchange rate basis to €18 million mainly due to the non recurrence of a €8 million 2004 reserves strengthening on possible misselling obligations, while 2005 benefited from a €7 million reserves release.
Underlying earnings increased by €5 million or €6 million on a constant exchange rate basis to €43 million.
Net income included the undiscounted tax adjustment on unrealized gains attributable to policyholders in Unit Linked Life22, for €11 million in 2005. As a result, net income increased by €67 million or €68 million on a constant exchange rate basis to €40 million.
21 Part of these expenses are located in the With-Profit funds and therefore are borne by policyholders.
22 Mismatch where undiscounted deferred tax is provided on unit linked assets but the unit liability reflects the expected timing of the payment of future tax."
APE increased by 7%, with individual business APE up 4%, driven by Term Life products and riders (following the launch of new products in October 2004 and March 2005), and Group Life APE up 164%, thanks to the New Mutual Aid product. After a slow start in 1Q05 Japan APE grew strongly during the second quarter with new business APE increasing by 10% as a result of new product launch and improved productivity in the AXA Advisors channel.
Half-year 2005 net income included the following two significant items: Adjusted net realized capital gains net of valuation allowance reached €322 million, mainly following a change in asset allocation from US Bonds to Japanese government bonds. AXA Japan actively manages its investments considering both income and realized capital gains/losses to optimize continuously the investment yield in the context of low interest rates and significant traditional insurance in-force. Therefore, investment income and realized gains are taken into account together to fund investment items such as guaranteed credited interest and bonuses as well as reserves impacts due to change in future investment assumptions in 2005. In this context, AXA Japan recorded a strengthening of insurance reserves (€352 million pre-tax), mainly resulting from a change in future investment assumptions, which impacted the investment margin (€329 million pre-tax). In addition, this new set of assumptions led to record higher VBI and DAC amortization (respectively €197 million and €22 million). Secondly, following an improved outlook on recovery of the tax losses carried forward, a €309 million release of valuation allowance on deferred tax assets was recorded. The overall combined impact of these two significant items was €+47 million underlying earnings and €-39 million on adjusted earnings and net income.
Fees & revenues decreased by €9 million at current exchange rate, or increased by €9 million at constant exchange rate, to €428 million reflecting the contribution from new business resulting from the launch of new Term products and sales of high margin health products, along with continuing efforts to retain profitable policies. This increase was partly offset by a small decline in group medical fees and revenues, which was limited by the implementation of a retention program on Medical Term customers in a competitive environment.
Expenses increased by €24 million, or by €36 million at constant exchange rate, to €310 million following (i) higher DAC amortization (€34 million) resulting from higher in-force and a change in future investment assumptions, (ii) increased operating expenses (€6 million) due to increased spending on projects focused on product development and distribution partially offset by (iii) lower commissions net of capitalization (€4 million) driven by a decline in commission rate.
Income tax expense reduced significantly compared to last year by €300 million, or €310 million at constant exchange rate to a tax benefit of €240 million. A €193 million release of valuation allowance was recorded in 2005 reflecting the improvement in recoverability of tax losses carried forward.
Adjusted earnings increased by €34 million, or €43 million at constant exchange rate, to €232 million in line with the €+43 million improvement of underlying earnings due to: - Higher pre-tax realized capital gains net of valuation allowances (€+74 million to €314 million)
- Investment & Savings (22% of gross revenues) increased by 17% to €371 million, mainly driven by regular unit-linked premiums as a result of high new business in the previous years. The share of unit-linked premiums grew significantly to 22% (14% for the same period in 2004). Non-unit linked premiums increased by 5% to €288 million mainly driven by annuity business.
- Health (26% of gross revenues) slightly increased by 1% to €448 million due to the last step of legal premium adjustment, which was partly offset by higher cancellations at the end of 2004.
- Other (5% of gross revenues) amounted to €97 million (-10%) due to the decrease in Medical Council business and lower consortium business.
APE decreased by -19% to €132 million, due to lower activity level in the first half of 2005 (mainly in non unit linked products: -30%) as a result of a change in tax regulation at year end 2004, partly offset by increase in unit linked (+11%).
Fees & revenues amounted to €45 million, up €8 million, mainly due to increased unit linked business.
Exceptional operations (including discontinued operations) 0 -7 Goodwill and other related intangibles impacts 0 0 Net income group share 17 -32
Net technical margin increased by €3 million to €19 million mainly driven by higher profit from lapses in health and lower policyholder ratio applied to technical items in Life.
Underlying earnings increased by €15 million to €15 million mainly due to the increase of fees & revenues and to lower tax expenses.
Adjusted earnings increased by €41 million to €17 million benefiting from increased underlying earnings and higher net capital gains (€+27 million to €2 million) due to the fact that capital losses accounted for in the first half of 2004 were attributable for a significant part to the shareholders.
Net income increased by €50 million to €17 million, benefiting from increased adjusted earnings and the non recurrence of the loss on the sale of Bausparkasse in 2004 (€8 million).
APE increased by 26% on a comparable basis, to €115 million. Single premiums APE increased by 32% to 98 million due to Crest 30 and structured unit-linked products. New business for regular premiums went up by 1.6% to €17 million mainly due the group life product “Optiplan Groupe”.
Underlying investment margin decreased by €2 million to €61 million due to the decrease of the rate of return (-20 bps on an annual basis) while average credited rate was stable. As a consequence of the high production in products with lower guaranteed rates (Crest 30), the average guaranteed rate decreased by 34 bp on an annual basis.
Fees & revenues at €68 million went up by €6 million (+10%) mainly due to higher sales.
The underlying cost income ratio decreased from 66.6% to 65.7% as a consequence of higher revenues and lower expenses.
Income tax expense increased by €11 million to €21 million, mainly due to higher underlying before tax and the non recurrence of an exceptional refund in 2004.
Underlying earnings increased by €2 million to €42 million, driven by increasing margins partly offset by the increasing income tax expense.
Net income decreased by €24 million to €64 million as the decrease of €32 million of adjusted earnings was partly offset by profit on mutual funds under fair value option.
Gross revenues were €717 million up 25.2% driven by savings products (86% of the business) up 28.8% as well as a sustained growth in traditional life premiums (+7.1%). - Investment unit-linked premiums (13% of gross revenues) increased by 16.7% to €91 million benefiting from new bank distribution agreement signed early 2005 in Spain. - Investment & savings non-unit linked premiums (73% of gross revenues) were up 31.1% to €523 million as a result of a sustained market growth in Italy and Portugal, and several non-recurring large contracts in Italy.
- Life premiums (14% of gross revenues) increased by 7% to €103 million benefiting from distribution agreements with banks in Spain. This evolution is expected to slow down over the second half-year following the termination of the Hispamer agreement.
Expenses increased by €5 million to €59 million mainly as a result of higher commissions in line with volume growth.
As a result, the underlying cost income ratio increased by 0.6 point to 68.0%.
Income tax expenses decreased by €3 million to €8 million mainly as a result of lower pre-tax underlying earnings.
Adjusted earnings remained stable at €29 million. Net capital gains amounted to €4 million. Gross realized gains amounted to €16 million.
The following tables present the operating results for the other Life & Savings operations of AXA, which include Australia/New Zealand, Hong Kong, The Netherlands, Singapore, Switzerland, Canada, Morocco, Luxembourg and Turkey, for the years indicated.
TOTAL 1 461 1 584 Intercompany transactions 0 -2 Contribution to consolidated gross revenues 1 461 1 582
(a) Change in consolidation method in Turkey (from equity method to full consolidation) as at January 1st, 2005.
(in euro million) Australia / New Zealand 29 29 Hong Kong 36 39 The Netherlands 19 23 Other countries 7 7
Exceptional operations (including discontinued operations) 0 0 Goodwill and other related intangible impacts 0 0
Total gross revenues of €566 million were 5% lower than last year on a constant exchange rate basis. - Gross written premiums decreased by 9% to €460 million on a constant exchange rate basis. This reflects the ongoing planned reduction in retirement income business following continued tactical pricing increases and legislative changes in late 2004. The decision to channel individual pension business into Generations, a simplified administration platform for mutual fund portfolios, has also contributed to the reduction in premiums (see Net mutual retail fund sales below).
- Revenues from mutual fund and advice businesses, which remains the key growth area for the Australian market, increased 18% from last year to €88 million as a result of improved sales of the global equity growth and value funds, the successful launch of the Generations platform and funds growth from improved market conditions.
- Net mutual retail fund sales of €468 million are 14% lower than last year. Whilst the launch of the Generations product range has been successful, the 2005 result includes a higher level of retail unit trust outflows A local bank was utilizing an AXA solution until the development of their own product, which has now occurred.
APE of €95 million group share (€183 million on a 100% ownership basis) increased by 2% on a constant exchange rate basis. The decrease in traditional products, due to the planned reduction in retirement income was more than offset by an increase in mutual funds sales driven by global equity growth and value funds and the successful launch of the Generations administration platform.
Gross revenues of €357 million were 3% higher than last year on a constant exchange rate basis reflecting continued improvement in persistency and higher sales in the unit linked life and investment products, partly offset by decreases in non-unit linked financial protection sales.
APE was up 13% on a constant exchange rate basis to €62 million group share due to Dimensions, a unit linked product launched in late 2004 and higher sales of “Mandatory Provident Fund”, a pension product.
Gross revenues were flat at €291 million on a comparable basis 24.
APE decreased by €3 million (-11%), mainly due to lower mortgages and group pensions.
Underlying earnings decreased by €3 million, or increased by €5 million on a comparable basis to €19 million driven by increased fees & revenues and a higher investment margin partly offset by higher commissions expenses.
24 The Life segment now excludes the health and disability portfolios. Health portfolio has been disposed of at December 1st 2004, and disability portfolio is now reported under Property & Casualty segment.
Exceptional operations (including discontinued operations) 0 0 Goodwill and other related intangible impacts 0 -32
Net technical result improved by €76 million to €628 million reflecting both the volume effect and the improvement of the all accident year loss ratio by 1.9 point to 74.5%: - The current net technical result increased by €40 million to €628 million resulting from increased activity and the improvement of the current accident year loss ratio by 0.3 point to 74.5%, as better frequency in personal motor offset the continued increase of claims average cost.
As a result, the combined ratio improved by 1.0 point to 98.5%.
As a consequence, underlying earnings increased by €31 million to €195 million.
Adjusted earnings grew by €29 million to €208 million resulting from increased underlying earnings and higher realized gains mainly on equities (€+26 million to €38 million) offset by unrealized losses on foreign currency macro hedge (€-29 million to €25 million). In half year 2005, gross realized gains amounted to €53 million of which €49 million on equity.
Net income increased by €57 million to €237 million mainly due to the increase of adjusted earnings and favorable change in fair value of consolidated mutual funds.
- Health business (27% of gross revenues) was up 7% at €624 million. This was mainly due to a transfer of a major portfolio in November 2004 in Personal medical insurance.
Net technical result increased by €47 million to €746 million, or by €61 million on a constant exchange rate basis. - The current accident year loss ratio improved by 2.2 points to 66.7% mainly due to favorable claims experience in the UK, in particular the absence of exceptional large injury loss claims on Personal Motor, and a favorable product mix.
- The all accident year loss ratio improved by 2.9 point to 65.5% as a result of better current accident year loss ratio and positive prior year reserves development.
Current accident year loss ratio (net) 66,7% 68,9% All accident year loss ratio (net) 65,5% 68,4% Net technical result 746 699 Expense ratio 31,8% 29,1%
Net underlying investment result increased by €20 million to €148 million, or €23 million on a constant exchange rate basis. The key drivers were higher reserves and higher cash interest rates.
Adjusted earnings and net income increased by €7 million in 2005, or €9 million on a constant exchange rate basis to €189 million as the increase in underlying earnings was partly offset by a €10 million reduction in realized gains to €28 million. In half year 2005, realized gains gross of tax amounted to €37 million.
- Commercial lines (33% of total gross revenues) decreased by 0.4% due to the reduction in Aviation line, which was partly offset by tariff increases and new business in Industrial Liability and Engineering.
Expense ratio decreased by 1.9 point to 27.3% explained both by a €15 million non recurring cost in 2004 and slightly lower administrative expenses.
25 Including Daëv Sach in 2004 (€9 million gross revenues) which is a newly consolidated entity in 2005.
Current accident year loss ratio (net) 77,0% 77,2% All accident year loss ratio (net) 69,4% 70,0% Net technical result 430 428 Expense ratio 27,3% 29,2%
Underlying operating earnings before tax 177 118 Underlying income tax expenses / benefits -64 -46 Net income from investment in affiliates and associates 1 2 Minority interests -9 -6 Underlying earnings group share 105 68 Net capital gains attributable to shareholders net of income tax 38 -18 Adjusted earnings group share 143 50 Profit or loss (excluding change) on financial assets (under FV option) & derivatives 13 12
Exceptional operations (including discontinued operations) 0 0 Goodwill and other related intangibles impacts 0 1 Net income group share 157 62
Current accident year loss ratio (net) 80,6% 80,9% All accident year loss ratio (net) 75,1% 75,2% Net technical result 356 334 Expense ratio 24,0% 23,8%
Adjusted earnings and net income were down respectively by €23 million and €24 million to €86 million due to the €26 million net capital gains decrease to €16 million resulting from significant capital gains on real estate realized in 2004 (€2 million compared to €24 million in 2004). Gross realized gains amounted to €23 million in half year 2005.
Gross written premiums increased by 0.2% to €781 million driven by growth in both personal and commercial lines. - Personal lines (62% of the total gross revenues) increased by 1.2% at €482 million. Motor (57%
- Commercial lines (38% of the total gross revenues) increased by 0.8% at €299 million, driven by Workers’ Compensation (+5.6% mainly due to an increase in average premium) and Motor (+1.9% following portfolio increases), partly offset by a decrease in Corporate Accident (-6.0%).
The net technical result was down by €13 million to €229 million: - The current year loss ratio deteriorated by 1.7 point to 81.6% mainly due to a deteriorated claims pattern in Personal and Collective Accidents, Personal Liability, Health and Workers' Compensation on Small Businesses.
- The all accident year loss ratio deteriorated by 1.9 point to 68.0% due to the deterioration in current year loss ratio.
As a result, the combined ratio deteriorated by 1.6 points to 96.5%.
Exceptional operations (including discontinued operations) 0 0 Goodwill and other related intangibles impacts 0 0 Net income group share 125 112
Underlying earnings decreased by €8 million to €84 million as a result of deterioration in combined ratio and lower net investment income partially offset by lower tax expenses.
Adjusted earnings increased by €8 million to €120 million as increased capital gains more than offset lower underlying earnings.
HY HY (in euro million) 2005 2004 Canada 413 371 The Netherlands 189 128 Other countries 540 231
(a) Change in consolidation method in Turkey, Hong-Kong and Singapore (from equity method to full consolidation) as at January 1st, 2005.
HY HY (in euro million) 2005 2004 Canada 45 25 The Netherlands 9 0 Other countries 27 17
ADJUSTED EARNINGS 88 65 Profit or loss (excluding change) on financial assets (under fair value option) & derivatives 0 0
Net technical result increased by €27 million to €154 million. - The current accident year loss ratio decreased by 0.4 point to 67.7% due to lower reinsurance cost partly offset by a larger number of large claims mainly in Personal auto and in Commercial Property.
- The prior year technical result improved by €19 million to €+31 million due to boni resulting from favorable developments and better weather conditions in December 2004 than expected in the early close-off. Consequently, the all accident year loss ratio improved by 5.2 points to 59.6%.
Net underlying investment result improved by €2 million to €22 million reflecting higher income on bonds and on Treasury.
Income tax expenses increased by €5 million to €22 million due to higher taxable income.
Underlying earnings increased by €20 million or €19 million on a constant exchange rate to €45 million, due to the strong improvement of the combined ratio.
Adjusted earnings and net income increased by €20 million or €18 million on a constant exchange rate basis to €50 million in line with the increase of underlying earnings.
NETHERLANDS The disability portfolio which was previously reported under the Life segment is now reported under the Property & Casualty segment. The Health portfolio which was previously reported under the Life segment has been disposed of at December 1st 2004.
Gross revenues increased by 48% or by 1% on a comparable basis to €189 million. This increase was mainly explained by the disability portfolio, which was up €6 million as a result of higher insured sums (change in regulations).
MAROCCO26 Gross revenues increased by 5.2% on a constant exchange rate basis to €73 million.
Adjusted earnings and net income decreased by €16 million to €8 million mainly attributable to a high level of realized gains on equity securities in 2004.
Adjusted earnings and net income were €-8 million, following the booking of €1 million losses on sales of fixed maturities in June.
TURKEY27 On a comparable basis, gross revenues increased by 16.8% to €217 million mainly driven by motor growth which benefited from a positive net inflow.
Underlying earnings increased by €1 million to €5 million reflecting business volume growth and the deterioration of expense ratio. The combined ratio reached 98.2%.
26 AXA Assurance Maroc is 51% owned by AXA. 27 AXA Oyak is 35% owned by AXA. Turkish operations, which were previously accounted under the equity method, were consolidated from January 2005.
The following tables present the gross premiums and net income for the International Insurance Segment for the periods indicated: HY HY (in euro million) 2005 2004 AXA RE 1 065 1 005 AXA Corporate Solutions Assurance 1 068 990 AXA Cessions 29 71 AXA Assistance 304 264 Other 86 23 TOTAL 2 552 2 353 Intercompany transactions -51 -69 Contribution to consolidated gross revenues 2 501 2 284
Net technical result decreased by €23 million to €100 million, mainly explained by the following: Non Life net technical result decreased by €42 million to €73 million: - The net attritional margin on current accident year increased by €12 million up to €243 million driven by a 1.8 point lower net attritional current year loss ratio at 59.0%. - The cost of cover programs decreased by €22 million to €-73 million. - The technical result on prior years decreased by €4 million to €-24 million. 2005 notably experienced €-39 million mali (net of reinsurance) on 2004 US hurricanes, partly offset by various boni on other underwriting years.
Income tax expense amounted to €-28 million in 2005, or a €17 million increase, mainly due to the increase of AXA RE Paris gross tax result and to an unfavorable mix of taxable and non taxable results in 2005.
Compared to the change in adjusted earnings, net income decreased only by €19 million to €66 million due to the non recurrence of a €5 million impairment of the goodwill generated by the buyout of AXA RE Finance minority interests in 2004.
Net technical result improved by €4 million to €104 million mainly due to: - Decreased current net technical result by €10 million to €89 million. This is the result of an increased net current accident year loss ratio by 1.9 point to 88.6% mainly due to higher impact of large claims.
Net underlying investment result improved by €28 million to €79 million mainly due to higher fixed income revenues resulting from significant investments in bonds since half year 2004 on the back of improved cash flows.
Income tax expense increased by €6 million to €-24 million due to an increased taxable income.
(a) Current accident year claim charges (including claims handling expenses) / Current accident year earned revenues (excluding premium adjustments on previous years).
Adjusted earnings increased by €37 million to €58 million and net income increased by €33 million to €54 million in line with (i) the increase of the underlying earnings, (ii) foreign exchange gains (increase of €9 million to €4 million) and (iii) net realized capital gains mainly on equities (net increase of €12 million to €14 million).
AXA Assistance Gross revenues increased by €40 million or +15% on a comparable basis to €304 million reflecting increased business with car manufacturers, new partnerships regarding home services providing, positive new inflow on travel activity in France and Germany and increased legal protection agreements in Italy.
Underlying earnings increased by 10% to €10 million due to higher revenues offset by increased expenses mainly commissions.
Adjusted earnings increased by €2 million or +24% to €12 million in line with underlying earnings and realized foreign exchange gains.
Net income increased by €25 million to €34 million due to the sale of CAS, a UK based software company.
HY HY (in euro million) 2005 2004 Alliance Capital 1 173 1 208 AXA Investment Managers 537 452 TOTAL 1 709 1 660 Intercompany transactions -159 -142 Contribution to consolidated gross revenues 1 550 1 518
(in euro million) Alliance Capital 98 86 AXA Investment Managers 57 38
Exceptional operations (including discontinued operations) 3 0 Goodwill and other related intangible impacts 0 0
General expenses decreased by €-42 million or remained flat at constant exchange rate.
Income tax expenses increased by €9 million to €74 million, or up €12 million at constant exchange rate due to higher pre tax-earnings.
Underlying earnings increased by €12 million to €98 million, or up €17 million at constant exchange rate due to higher earnings and higher ownership interest in Alliance Capital.
Total revenues 1 162 1 197 General expenses -878 -920 Underlying operating earnings before tax 285 277 Underlying income tax expenses / benefits -74 -66 Net income from investment in affiliates and associates 0 0 Minority interests -113 -126 Underlying earnings group share 98 86 Net capital gains attributable to shareholders net of income tax 4 2 Adjusted earnings group share 102 87
Net income increased by €18 million to €105 million, up €23 million at constant exchange rate due to increased adjusted earnings and net capital gains largely from the sale of Alliance cash management business (€3 million). As a result of the acquisition of 8.16 million private units in the second half of 2004, AXA Financial’s ownership interest in Alliance Capital increased 2.8 points from approximately 58% at June 2004 to 61% at June 2005.
Fees, commissions and other revenues, including those earned from AXA insurance companies eliminated in consolidation, increased by €85 million from 1H2004 to €537 million (or +20%). Excluding fees retroceded to distributors, net revenues grew by 25.3%, or 21.4% on a comparable basis (including carried interest), which is mainly driven by higher average AUM (+19% on a comparable basis), and higher performance fees.
Total revenues 545 457 General expenses -444 -388 Underlying operating earnings before tax 102 69 Underlying income tax expenses / benefits -30 -23
Minority interests -14 -8 Underlying earnings group share 57 38 Net capital gains attributable to shareholders net of income tax 0 0 Adjusted earnings group share 57 38
Profit or loss (excluding change) on financial assets (under FV option) & derivatives -2 1
ADJUSTED EARNINGS 47 8 Profit or loss (excluding change) on financial assets (under fair value option) & derivatives 10 -7
Exceptional operations (including discontinued operations) 2 0 Goodwill and other related intangible impacts 0 0
AXA Banque (France) Underlying earnings and adjusted earnings increased by €3 million to €-2 million resulting from stable underlying banking revenues while expenses were down following the non recurrence of the 2004 media campaign.
AXA Bank (Germany) Gross revenues decreased slightly by €1 million to €12 million mainly due to reduced commission income. Underlying and adjusted earnings decreased both by €1 million to €1 million.
First half 2005 experienced a moderately higher financial charge mainly due to the increase of the percentage of fixed rate debt; this increase in fixed rate debt to the detriment of variable debt was the consequence of our current funding policy which, in the context of declining long term rates, aims at protecting future financial charges, whilst locking-in attractive medium term fixed rates.
As a result, net income increased by €103 million to €-102 million.
(in euro million) AXA the company -86 -153 Other French holdings companies -11 -13 Foreign holdings companies -109 -99
ADJUSTED EARNINGS -230 -314 Profit or loss (excluding change) on financial assets (under fair value option) & derivatives 26 -22
Exceptional operations (including discontinued operations) 0 134 Goodwill and other related intangible impacts 0 0
Net capital gains increased by €11 million on a constant exchange rate basis to €8 million due to a loss on currency hedging instruments in 2004. This has not recurred in 2005 due to a restructure of the instruments.
German Holding companies. Underlying earnings and adjusted earnings decreased by €6 million to €-28 million mainly due to higher interest expenses as well as higher tax expenses. Net Income increased by €7 million to €-28 million as the decrease in adjusted earnings was more than offset by the non recurrence of the €-13 million impact of the sale of Bausparkasse in 2004.
In Property & Casualty, management expects a continuation of the positive trends witnessed in the first half of the year, despite some pricing pressure, due to continued moderate claims frequencies.
The Statement of Income referred here-after and presented page 8 of the current document is based on an underlying basis.
o For insurance contracts and investment contracts with DPF: (i) Gross premiums (net of deposits), fees and other revenues are allocated in the Margin
(iii) The “Investment margin” represents the net investment result in the Statement of Income and is adjusted to take into account the related policyholders’ participation (see above) as well as changes in specific reserves linked to invested assets returns and to exclude the fees on (or contractual charges included in) contracts with a financial risk borne by policyholders, which are included in “Fees and Revenues”.
o For investment contracts without DPF: (i) Deposit accounting is applied. As a consequence, fees and charges related to these contracts are presented in the underlying Statement of Income within Gross consolidated revenues on a separate line, and in Margin analysis in the lines “Fees & Revenues” and “Net Technical margin”.
Underlying Net Technical result includes the following components: (i) Mortality/morbidity margin: The amount charged to the policyholder in respect of mortality/morbidity for the related period less benefit and claims. It is equal to the difference between income for assuming risk and the actual cost of benefits, including changes in valuation assumptions and additional reserves for mortality risk. This margin does not include the claims handling costs and change in claims handling cost reserves,
(iii) Policyholder bonuses if the policyholder participates in the risk margin, (iv) Other changes in insurance reserves and economic hedging strategies impacts related to insurance contracts valuated according to the "selective unlocking" accounting policy. (v) Ceded reinsurance result.
(iv) Administrative expenses (v) Claims handling costs (vi) Policyholder bonuses if the policyholder participates in the expenses of the company.
Underlying VBI amortization includes VBI (Value of Purchased Life Business In-force) amortization related to underlying margins, as well as amortization of other intangibles related to the in-force business
Underlying net technical result is the sum of the following components: (i) Earned premiums, gross of reinsurance, (ii) Claims charges, gross of reinsurance, (iii) Change in claims reserves, including claims handling costs reserves, gross of reinsurance, less the recurring interest credited to insurance annuity reserves, (iv) Claims handling costs, (v) Net result of ceded reinsurance.
AXA RE Covers are specific reinsurance treaties, bought to protect all or a portion of the company’s portfolio against major losses. If such losses do not occur over the insured period, a profit commission (or “noclaim bonus”) is paid to the ceding company. In general, the cost of a cover is accrued (or by extension “earned”) ratably over the treaty period.
Major losses are defined as any event whose ultimate cost, gross of reinsurance and reinstatement premiums, is greater than $30 million.
(a) paid to the ceding companies and (b) received from the reinsurance companies, (iv) Claims handling costs.
Net attritional margin on current accident year includes the following elements: (i) Earned premiums, net of cession / retrocession (reinsurance ceded excluding covers), (ii) Current year claims charge (excluding major losses), net of cession / retrocession, (iii) Commissions (fixed commissions, sliding scale commissions and profit commissions), (a)
Asset Management Net New Money: Inflows of client money less outflows of client money. Net New Money measures the impact of sales efforts, product attractiveness (mainly dependent on performance and innovation), and the general market trend in investment allocation. Operating Cost Income Ratio: operating expenses over net revenues (including performance fees).
Mazars & Guérard Le Vinci – 4 allée de l’Arche 92 075 Paris La Défense
Report of Independent Auditors on the limited review of interim financial statements
To the shareholders of Société AXA SA 25 avenue Matignon 75008 Paris
This is a free translation into English of the report of independent auditors on the limited review of interim financial statements issued in the French language and is provided solely for the convenience of English speaking readers. This report should be read in conjunction with, and construed in accordance with French law and professional standards applicable in France.
These interim financial statements have been prepared under the responsibility of the Management Board. Based on our limited review, our role is to report on the conclusions we have reached on that review.
In connection with IFRS standards adopted for use in the European Union for the preparation of the consolidated financial statements for the year ended December 31, 2005, the interim financial statements have been drawn up for the first time in compliance with IFRS. These standards should be applicable within the European Union and used by the Company to prepare its consolidated financial statements for the year ended December 31, 2005, as described in Notes 1 and 4 to the financial statements. For the purpose of comparison, they include information related to the year ended December 31, 2004 and the 6 months ended June 30, 2004, restated to reflect the impact of IFRS.
Without qualifying the conclusion expressed hereinabove, we would like to draw your attention to Note 1.1.1 appended hereto, which describes IASB standards, which have not yet been adopted within the European Union and which are being applied early by the Company for the 2005 interim financial statements in order to be consistent with the accounting standards on which the annual consolidated financial statements for the year ended December 31, 2005 will be based; explains the reasons for which the comparative information that will be included in the fullyear consolidated financial statements for the year ended December 31, 2005 and in the interim financial statements for the six months ended June 30, 2006 may differ from the financial statements appended to this report.
In accordance with the professional standards applicable in France, we have also reviewed the information provided in the half-year report that accompanies and comments on the half-year consolidated financial statements that were the subject of our limited review.
We have no observation to make with respect to their fairness and concordance with the half-year consolidated financial statements.
On April 19, 2005, AXA announced the creation of a new regional organization with the AXA “Northern Europe” region, aimed at duplicating the proven success of similar organizations in SouthEast Asia and Southern Europe.
The objective is to accelerate organic growth and improve the efficiency of the operations in the region. The creation of regional platforms to carry out their activities across markets relatively comparable enables the AXA Group to accelerate its organic growth through sharing best practice and the development of operational excellence.
Such regional platforms already exist within the AXA Group, such as the Mediterranean Region, under the responsibility of Jean-Raymond Abat, which brings together AXA’s operations in Italy, Spain, Portugal, Morocco, Turkey and the Middle East, and the Asia Pacific region, under the responsibility of Les Owen, which brings together AXA's life & savings and P&C activities in the South East Asia, in Australia and New Zealand.
Alfred Bouckaert has confirmed the CEOs of AXA entities for the Netherlands, Luxemburg, Switzerland and AXA Art in their current position and proposed Eugène Teysen as new chairman of the management board (Vorstand) of AXA Konzern in Germany. AXA Konzern supervisory board (Aufsichtsrat), chaired by Claas Kleyboldt, has appointed Eugène Teysen on Monday August 15, 2005, to the position of chairman of the management board of AXA Konzern.
28 This region does not include the « transversal » activities of the AXA group such as International Insurance, reinsurance and asset management.
Norbert Rohrig, currently member of the AXA Konzern management board in charge of information systems, will coordinate back office and IT synergies among AXA units in the region.
Launch of synergy groups In order to swiftly extract the benefits of the newly created region, Alfred Bouckaert has asked the AXA Northern Europe executives to head four synergy groups for corporate lines, retail P&C lines, retail life lines and banking activities.
Following the studies conducted by the committees of independent directors appointed within the Supervisory Board of AXA and the Board of Directors of FINAXA, the Management Board of AXA and the Board of Directors of FINAXA have set an exchange ratio of 3.75 AXA shares for one FINAXA share, corresponding to 15 AXA shares for 4 FINAXA shares.
Independent banks respectively appointed by the Supervisory Board of AXA and the Board of Directors of FINAXA have each given a fairness opinion confirming that the exchange ratio is fair to the shareholders of each company.
The following transactions will also be presented for approval to FINAXA shareholders : the merger of CFGA, FDR Participations, Oudinot Finance and Colisée Vendôme into their holding company, FINAXA30.
October 1, 2005 Suspension of subscription, conversion and exchange rights relating to FINAXA’s convertible bonds, exchangeable bonds and stock options ; October 17 (and 18), 2005 Meeting of the Management Board of AXA (and Board of Directors of FINAXA) to propose the draft merger-related resolutions, reports and prospectus (Document E) to the Extraordinary General Assemblies ; November 16, 2005 (at the latest)
Potential impacts of the merger AXA should undertake a capital increase of 299,012,355 shares, to be alloted to FINAXA shareholders as follows: 15 AXA shares for 4 FINAXA shares, on the day the merger is completed, i.e. on December 16, 2005. As a result, AXA’s capital stock would be raised from €4,375,603,269.94 to €5,060,341,562.89.
Following this capital increase, all AXA shares tendered by FINAXA and its subsidiaries in connection with the merger, as well as 1,152,720 AXA shares resulting from FINAXA shares ceded by AXA Participations 2 to AXA (a total of 337,490,816 AXA shares), will be cancelled via a capital reduction.
Mutuelles AXA33 and FINAXA currently own, directly and indirectly, a total of 20.35% of AXA outstanding shares and 32.20% of AXA voting rights. Following the merger, and on the basis of September 30, 2005 data, the Mutuelles AXA which currently own 2.72% of AXA outstanding shares representing 4.38% of AXA voting rights and 71.69% of FINAXA outstanding shares representing 80.53% of FINAXA voting rights, would become the principle AXA shareholder, holding 14.30% of AXA shares representing 22.67% of voting rights.
31 Including the cancellation of Euro 205 million dividend paid by AXA to Finaxa and its subsidiaries in 2005. 32 Before impact of (i) the November 3, 2005 acquisition of a block of bonds redeemable into AXA shares and (ii) the market’s abandonment of the claim subsequent to this transaction 33 AXA Assurances IARD Mutuelle, AXA Assurance Vie Mutuelle et AXA Courtage Assurance Mutuelle
On September 14, 2005, AXA Financial, Inc., a Delaware corporation, and Merrill Lynch, Pierce, Fenner & Smith Incorporated, a Delaware corporation too, entered into a definitive stock purchase agreement, dated as of September 14, 2005. Pursuant to the stock purchase agreement, Merrill Lynch will purchase from AXA Financial all of the issued and outstanding shares of capital stock of The Advest Group, Inc., a Delaware corporation and a wholly owned subsidiary of AXA Financial, for $400 million in cash, subject to adjustments in certain circumstances. AXA Financial’s estimated posttax proceeds from the sale will be approximately $297 million. AXA Financial preliminarily estimates that the purchase price will result in a pre-tax gain of approximately $6 million and a post-tax loss of approximately $96 million. This transaction reduces AXA Financial’s goodwill by approximately $190 million. The sale of Advest is expected to close in the fourth quarter of 2005 and is subject to certain regulatory approvals.
On October 27, 2005, AXA hosted a presentation on the theme of “the Benefits of Being Global” which covered recent achievements in building a solid and efficient platform and detailed some of the levers available to enhance the Group’s future growth.
In addition, AXA discussed the internal company-wide project called “Ambition 2012”, which is aiming at mobilizing all employees on organic growth and on the objective of becoming the preferred company in the Industry. As a result AXA has set aspirational 2012 targets to double revenues and triple underlying earnings compared to 2004. Plans will be progressively developed to substantiate these targets.
In the course of the presentation, AXA’s senior management highlighted topics which will support the growth strategy.: Combined ratio: new target set at 96%-101% Taking into account levers available to improve claims management and notably a work in progress on claims leakage reduction, fraud detection and prevention as well as insurance procurement, AXA has rebased its combined ratio target to a new range of 96% to 101% throughout the cycle versus 98%-102% previously announced.
Economic Capital and diversification benefit AXA believes it is one of the most diversified Financial Protection Groups: in terms of geography, business lines, risks, activities and distribution networks34.
Other topics discussed in the course of the presentation To support its ambition and help AXA achieve its aspirational targets, AXA’s management highlighted other key achievements and opportunities in various areas of the organization. Most notably: technology improvements and rationalization, reinsurance optimization, risk management practices dissemination, operational efficiency enhancement, business process outsourcing (AXA Business Services), Brand and Human Resources management and objectives.
With this transaction, AXA creates a flexible structure enabling it to transfer P&C insurance companies’ liability risk while offering investors the possibility to invest in a new class of assets.
Purchase of a block of bonds exchangeable into AXA shares and offers of the same price to other holders of exchangeable bonds for a 7 trading day period
On November 3, 2005, after the closing of the Euronext Paris market, and through a block trade, AXA has acquired 5,268,465 bonds exchangeable into AXA shares with a maturity date as of January 1st, 2007, issued by FINAXA on June 10th, 1998. (referred to as « OE »), for an aggregate nominal amount of Euro 441,760,790.25. Through this transaction, AXA has acquired 42.19% of the OE initially 37 Under the existing program and on the Eurolist market of Euronext Paris SA
issued or 42.33% of the currently outstanding OE, for a total consideration of Euro 622,205,716.50, i.e. Euro 118.10 per OE (including accrued interest).
On November 8, 2005 AXA published its performance indicators39 for the first 9 months of 2005.
Life & Savings new business (APE40) increased by 8% to Euro 3,770 million driven by most of our major operations. New business growth accelerated in the third quarter of 2005 (approximately +10%), notably in Japan, the United Kingdom, Belgium, Hong-Kong, the United States and Australia. Unit-linked new business increased by 17%.
Life & Savings New Business Value (NBV)41 was up 18% to Euro 652 million, driven by most of our major operations, notably France, the US, Belgium, Southern Europe, Australia and Japan. As a result, NBV margin42 increased to 17.3% (or 17.9% on a comparable basis) from 16.3% in the first nine months of 2004.
Asset Management revenues increased by 10% to Euro 2,404 million driven by higher average
Assets Under Management (AUM) (+16% compared to 9M04). Both AXA IM and Alliance Capital contributed to very strong net inflows of Euro 42 billion, excluding the impact of the 38 As set out in the offering circular relating to the OE which received the visa of the COB on June 16, 1998 – visa n°98-505 39 Source: AXA. This financial data is not extracted from the issuer’s audited financial statements. Numbers herein have not been adjusted for scope and currency changes. Growth rates are on a comparable basis and, accordingly, have been adjusted for changes in scope, accounting methods and currency. APE, NBC and NBV are non-GAAP measures. Management uses these measures as key indicators of performance in assessing AXA’s Life & Savings business. 40 Annual Premium Equivalent (APE) represents 100% of new business regular premiums +10% of new business single premiums. APE is group share. 41 The New Business Value (NBV) is defined as the New Business Contribution (NBC) after the cost of capital. NBV is expressed as group share. 42 After cost of capital.
Nine months ended (Euro million,except when otherwise noted) September 30 2004 Change Change on a comparable basis Life & Savings, group share
43 Alliance Capital’ cash management services have been sold to Federated Investors.
The United States new business increased by 4% primarily driven by Life APE (up 11%) and Variable Annuity APE (up 8% compared to +5% in 1H05), partly offset by a 60% decline in Fixed Annuity APE, as, in the current interest rate environment, this product does not correspond to Group profitability targets. Excluding fixed annuities, new business was up 8% with a strong acceleration in the third quarter (+11%).
Benelux new business growth accelerated to +23% driven by Belgium up 30%, mainly due to the continuing strong growth momentum of structured unit-linked products, such as the open-architecture product Millesimo, and Crest 30 and 40 (non unit-linked products with no guaranteed rate).
Hong-Kong new business increased by 15% reflecting further improvements in productivity in both agency and adviser channels and significant increase in single premiums driven by strong inflows into investment and retirement products, in particular in the new multi-manager investment platform, as well as higher sales of “Mandatory Provident Fund”, a pension product, through broker and direct channels.
Life & Savings New Business Value (NBV) was up 18% to Euro 652 million due to increased volume and favorable shift in product mix. As a result, NBV margin increased to 17.3% (or 17.9% on a comparable basis) compared do 16.3% in the first nine months of 2004.
Property & Casualty revenues increased by 3% to Euro 14,677 million, as Personal lines were up 3%, benefiting from a resilient pricing environment and moderate portfolio growth, and Commercial lines were up 1%.
Motor revenues grew 3%, mainly driven by Southern Europe and France, up 5% and 2%, respectively, benefiting from positive net inflows of +119,400 and +40,000 policies, respectively.
Motor revenues were flat, mainly as positive evolution in France (+4%), Belgium (+3%) and Southern Europe (+3%) was offset by the decrease of UK & Ireland revenues (-7%), in a context of intense competition in Ireland.
International Insurance revenues increased by 10% to Euro 3,183 million. The 13% increase at AXA RE was due to the non-recurrence of some 2004 negative premium adjustments, increased reinstatement premiums linked to 2005 major events and selected development in lines with favorable pricing conditions. AXA Corporate Solutions Assurance up 5%, driven by Marine and Aviation.
(a) Following the full consolidation of Turkey, Hong-Kong and Singapore, AXA Cessions revenues derived from business with these entities are now eliminated as inter-company transaction. In the first nine months of 2004, this represented Euro 37 million of AXA Cessions revenues.
Reinsurance: Revenues increased by 13%, due to the non-recurrence of some 2004 negative premium adjustments, the increase in reinstatement premiums linked to major events in 2005 and higher premiums in selected non proportional General Liability business, taking advantage of favorable pricing conditions, as well as in Credit business.
(a) Excluding management and front-end fees collected by AXA Investment Managers on behalf of external distributors, gross revenues increased 24% on a comparable basis.
In the discrete third quarter, all channels experienced positive net inflows: Institutional (+Euro 6 billion), Private Clients (+Euro 2 billion) and Retail (+Euro 2 billion).
AUM increased by Euro 67 billion from year-end 2004 to Euro 412 billion at the end of September 2005 primarily driven by (i) Euro 29 billion of net inflows mainly from institutional and retail third party clients (Euro +22 billion) especially on AXA Rosenberg's products as well as real estate, fixed income and structured finance products, (ii) a Euro 30 billion favorable market impact, and (iii) a Euro 6 billion positive foreign exchange rate impact.
TOTAL APE (9 main countries/regions) 3 770 3 411 + 11% + 8%
France 161 649 20% 16% + 32% United States 660 277 308 70% 73% + 9% United Kingdom 516 83 86% 82% + 25% Japan 12 420 3% 2% + 37% Germany 55 125 31% 27% - 13% Benelux 56 144 28% 23% + 52% Southern Europe 16 82 1 16% 23% - 14% Australia/New-Zealand 17 21 116 44% 43% - 11% Hong-Kong 20 30 40% 28% + 60%
International Insurance 2 938 - 8 2 930 3 183 8.6% 9.6% AXA RE 1 087 1 087 1 314 20.9% 13.1% AXA Corporate Solutions Assurance 1 245 1 245 1 310 5.2% 5.4% Others 606 - 8 598 559 -6.6% +12.1%
(1) In the Netherlands, following the sale of the Health portfolio as of December 1, 2004 (IFRS revenues of Euro 164 million in 9M04), the disability activity was transferred from Life & Savings to Property & Casualty (IFRS revenues of Euro 70 million in 9M04).
(3) The right to renew our UK Personal Direct business was sold to RAC in October 2004. In the first nine months of 2004, revenues from this activity amounted to Euro 95 million.
II- UPDATE RELATED TO THE ADOPTION OF EUROPEAN COMMISSION REGULATION N° 809/2004 OF APRIL 29, 2004 2.1. Management bodies 2.1.1. Composition of the Supervisory Board on September 30, 2005
Chairman and CEO of Vivendi Universal ; Chairman of the Supervisory Board of Groupe Canal+ Director of Sanofi-Aventis and Cap Gemini.
Chairman, Global Field Operations of SAP AG ; Member of the Executive Board of SAP AG ; Director of SAP America, Inc. (US); SAP Global Marketing Inc. (US) ; SAP Asia Pte. Ltd.(Singapor) ; SAP JAPAN Co., Ltd.(Japan) ;SAP FRANCE S.A. ; S.A.P. ITALIA Sistemi, applicazioni, prodotti in data processing s.p.a., (Italy) ;SAP Hellas Systems Application and Data Processing S.A. (Greece) ; SAP (Beijing) Software System Co., Ltd., (China) ;Enigma Inc. (US)
Chairman of AXA UK Plc (United Kingdom) and AXA Equity and Law (United Kingdom) ; Director or member of the Supervisory Board of AXA Financial (US) ; Pinault-Printemps-Redoute, Swiss Re Capital Markets Limited (United Kingdom), Binley Limited (United Kingdom) and Tawa UK Limited (United Kingdom)
Chairman and CEO of Suez ; Chairman of Suez Environnement, Suez-Tractebel (Belgium) and Electrabel (Belgium) ; Vice-Chairman of Sociedad General de Aguas de Barcelona (Spain) and Hisusa (Spain) ; Director or member of the Supervisory Board of Crédit Agricole S.A., Compagnie de Saint-Gobain, Taittinger and Pargesa Holding S.A (Switzerland)
Chairman of the Board of Directors of BNP Paribas ; Director or member of the Supervisory Board of Saint Gobain, Total, Lafarge, BNP Paribas UK (United Kingdom) and Banque Marocaine pour le Commerce et l'Industrie (BMCI) ; Non-voting member of the Board of Galeries Lafayette
(1) Independent (2) Reappointed by the shareholders on April 20, 2005 (3) Co-opted by the AXA Supervisory Board on February 23, 2005 ; ratified by the shareholders on April 20, 2005 (4) Appointed by the shareholders on April 20, 2005
RE 1982 Chairman of Mutuelles Unies and Chairman of Groupe Drouot 1988 Was appointed director, then Vice-Chairman and Chairman (in 1989) of
Jean-René Fourtou 1963 Management Consultant of Organization Bossard & Michel 1972 Chief Executive Officer of Bossard Consultants 1977 Chairman and Chief Executive Officer of Groupe Bossard 1986 – 1999 Chairman and Chief Executive Officer of Rhône-Poulenc Group which became
Léo Apotheker 1978 – 1980 Senior Controller, Finance Department – Hebrew University 1980 – 1981 Operations Director – Altex GmbH 1981 – 1984 Finance Manager – S.W..F.T. s.c. 1984 – 1987 European Operations Director – Mc Cormack & Dodge 1988 – 1991 Chairman and Chief Executive Officer of SAP France & Belgium 1991 – 1995 Co-Founder President & CEO de ECSoft BV Since 1995 SAP AG
Since July 2002 Member of the Executive Committee of SAP AG Chairman, Global Field Operations of SAP AG
Jacques de Chateauvieux 1975 – 1977 Management auditor – Union des Transports Aériens 1977 – 1979 Consultant – Boston Consulting Group Since 1979 Chairman and Chief Executive Officer of Groupe Bourbon
Anthony Hamilton 1968 to 1978 Worked in London and New York for the investment bankers Schroders,
Morgan Grenfell, and Wainright. 1978 Joined Fox-Pitt, Kelton – CEO 1994 – 2003. 1993 Non-executive Director of AXA Equity and Law, (Chairman, 1995) 1997 Non-executive Director of AXA UK 1999 - 2003 Product Unit Head of Swiss Re End of 2004 Resignation as a Director of Fox-Pitt, Kelton Group Ltd (UK) and of Fox-
Henri Hottinguer 1962 Joined the Banque Hottinguer 1965 Was appointed Associé-Gérant of the bank then was appointed
Henri Lachmann 1963 Began his carreer with the international consulting firm Arthur Andersen 1970 Joined the Compagnie Industrielle et Financière de Pompey a 1976 Chief Executive Officer of the Compagnie Industrielle et Financière of Pompey 1981 – 1998 Chairman and Chief Executive Officer of Financière Strafor, which later became Strafor Facom Since 1996 Director of Schneider Electric SA Since February 1999 Chairman and Chief Executive Officer of Schneider Electric SA
Gérard Mestrallet 1984 Joined Compagnie de Suez as Vice-President, Special Projects 1986 Executive Vice-President Industry February 1991 Executive Director and Chairman of the Management Committee of Société
Générale de Belgique 1995 Chairman and Chief Executive Officer of Compagnie de Suez June 1997 Chairman of the Management Board of Suez Lyonnaise des Eaux Since May 4, 2001 Chairman and Chief Executive Officer of Suez
(Valéry Giscard d'Estaing) 1971 – 1982 Project leader, and then, sub-Manager, Assistant Manager and Head of the public revenue Department of the Finance Ministry 1978 – 1981 Head of the Finance Minister's Cabinet (René Monory) 1982 – 1987 Chief Executive Officer of Crédit Commercial de France 1987 – 1993 Chairman and Chief Executive Officer of Crédit Commercial de France 1993 – 2000 Chairman and Chief Executive Officer of Banque National de Paris 2000 - 2003 Chairman and Chief Executive Officer of BNP Paribas Since 2004 Chairman of the Board of Directors of de BNP Paribas
Department of AXA Group Since April 1er, 2003 Cadre de réserve of AXA Since 1990 Lecturer for masters in banking and finance at Université Panthéon-Assas
Paris II Since April 2004 Member of the AXA Supervisory Board, representing the employeeshareholders
Henri de Castries 1980 – 1984 French Finance Ministry Inspection Office where he audited government agencies from 1980 to 1984 1984 - 1989 French Treasury Department where he played an active role in several privatizations 1989 Joined AXA's corporate finance division 1991 AXA's Corporate Secretary, responsible for dealing with the legal aspects of the reorganization and merger of Compagnie du Midi with and into the AXA Group 1993 - 1997 Senior Executive Vice President for the Group's asset management, financial and real-estate businesses. In 1994, he assumed the additional role of overseeing North American and UK operations. In 1996, he played an active role in preparing for the UAP Merger. In 1997, he was appointed Chairman of the Equitable Companies (wich later became AXA Financial).
Denis Duverne 1984 – 1986 Commercial counselor for the French Embassy in New-York 1986 – 1988 Director fo the Corporate Taxes Department for the French Ministry of
Finance 1988 – 1991 Deputy Assistant Secretary for Tax Policy for the French Ministry of Finance 1991 – 1992 Secretary General of Compagnie Financière IBI 1992 – 1995 Member of the Executive Committee of Banque Colbert, in charge of operations 1995 Joined the AXA Group. Took part in the supervision of AXA's companies in the US and the UK. Has been closely involved in the reorganization process of AXA Companies in Belgium and the United Kingdom
François Pierson 1974 Joined AGP and become Sales Director 1990 General Manager of the South-East Region of AXA Assurances and
Director of Distribution in that company 1995 Deputy Chief Executive of AXA Assurances 1997 Chief Executive Officer of UAP Vie and of Alpha Assurances 1998 Chief Executive Officer of AXA Conseil 1999 Chief Executive Officer of AXA Assurances Since November 2001 Member of the AXA Management Board Chief Executive Officer of AXA France, responsible of the large risks activities, of the Assistance and of AXA Canada
2.1.3. Positions held by members of the Supervisory Board aver the last 5 years
June 1988 2008 AGM Chairman of the Supervisory Board of AXA Chairman and CEO of FINAXA Director of AXA Assurances IARD Mutuelle, AXA Assurances Vie Mutuelle, AXA Courtage Assurance Mutuelle, BNP Paribas and Vivendi Universal Non-voting member of the Board of Schneider Electric
Chairman of the Supervisory Board of AXA Chairman and CEO of FINAXA Director of AXA Conseil Vie Assurance Mutuelle, AXA Assurances IARD Mutuelle, AXA Assurances Vie Mutuelle, AXA Courtage Assurance Mutuelle, BNP Paribas, and Schneider Electric
Chairman of the Supervisory Board of AXA Chairman of FINAXA, AXA Conseil Vie Assurance Mutuelle, AXA Assurances IARD Mutuelle, AXA Assurances Vie Mutuelle, AXA Courtage Assurance Mutuelle, Director of BNP Paribas, Schneider Electric
Jean-René Fourtou Vice-Chairman of the Supervisory Board of AXA Chairman of the Supervisory Board of Vivendi Universal
Vice-Chairman of the Supervisory Board of AXA Chairman and CEO of Vivendi Universal Chairman of the Supervisory Board of Groupe Canal+ Director of Aventis and Cap Gemini
Vice-Chairman of the Supervisory Board of AXA Chairman and CEO of Vivendi Universal Chairman of the Supervisory Board of Vivendi Environnement, Groupe Canal+ Vice-Chairman of the Management Board of AXA Assurances IARD Mutuelle, AXA Assurances Vie Mutuelle, AXA Courtage Assurance Mutuelle CEO of USI Entertainment Inc. (USA) Director of Aventis, Cap Gemini, EADS (The Netherlands), USA Interactive (USA)
Vice-Chairman of the Management Board of AXA Assurances Conseil Vie Mutuelle, AXA Assurances IARD Mutuelle, AXA Assurances Vie Mutuelle, AXA Courtage Assurance Mutuelle Director of Rhône-Poulenc Pharma, Rhône-Poulenc AGCO Ltd, Schneider Electric, Pernod-Ricard, La Poste, Rhodia, EADS (The Netherlands) Permanent representative of AXA Assurances IARD Mutuelle on the FINAXA Board of Directors
Vice-Chairman of the Supervisory Board of AXA Vice-Chairman and CEO of Aventis Director of AXA Assurances Conseil Vie Mutuelle, AXA Assurances IARD Mutuelle, AXA Assurances Vie Mutuelle, AXA Courtage Assurance Mutuelle, Schneider Electric, Pernod-Ricard, La Poste, EADS Permanent representative of AXA Assurances IARD Mutuelle on the FINAXA Board of Directors
Senior Advisor Lazard Frères Managing partner of DD Finance Chairman of Montech Expansion (US) Director of Club Méditerranée, Casino, Rue Impériale, Fimalac Non-voting member of the Board of Groupe Go Sport, Lazard Frère Banque
Senior Advisor Lazard Frères Chairman of Parande Développement (Groupe Euris) Director of Lazard Frères Banque, Club Méditerrannée, Casino, Rue Impériale Non-voting member of the Board of Groupe Go Sport
Senior Advisor Lazard Frères Chairman of Parande Développement (Groupe Euris) Director of Société Immobilière Marseillaise, Lazard Frères Banque, Club Méditerrannée, Casino
April 2005 2009 AGM Chairman and CEO of Groupe BOURBON Chairman of Sapmer, S.A., JACCAR, SAS, Vindemia SAS Director of Happy World Foods, Ltd
Chairman and CEO of Groupe BOURBON Chairman of Vindemia SAS, Antenne Réunion Télévision Director of Sapmer, Happy World Foods, Ltd
Chairman of AXA UK Plc (United Kingdom) Chairman of Fox-Pitt, Kelton Group Limited (United Kingdom), Fox-Pitt, Kelton Nominees Limited (United Kingdom) Director or member of the Supervisory Board, Pinault-Printemps-Redoute, FoxPitt, Kelton Limited (UK) Swiss Re Capital Markets Limited (United Kingdom), Binley Limited (United Kingdom)
June 1988 April 2007 Chairman and CEO of Sofibus Senior Chief Officer and Director of Financière Hottinguer, Intercom, Profinor Chairman of the Supervisory Board of Emba N V (The Netherlands) Vice-Chairman of Gaspee (Switzerland) Chief Officer of the Board of directors of Hottinger Finanz & Treuhand (Switzerland) Director or member of the Supervisory Board, FINAXA, Hottinguer International Fund (Luxembourg), Hottinguer International Asset Management (Luxembourg) Non-voting member of the Board of Didot Bottin
Chairman and CEO of Sofibus Chairman of the Supervisory Board of Crédit Suisse Hottinguer, Emba N V (The Netherlands) Chairman of Hottinguer Capital Corp. (US) Vice-Chairman of Gaspee (Switzerland) Managing Partner of Hottinguer & Cie (Zurich) Senior Chief Officer and director of Financière Hottinguer, Intercom, Director or member of the Supervisory Board, FINAXA, Hottinguer International Fund (Luxembourg), Hottinguer International Asset Management (Luxembourg), Swiss Helvetia Fund Inc., Hottinguer US, Inc. Non-voting member of the Board of Didot Bottin
Chairman and CEO of Sofibus Chairman of the Supervisory Board of Crédit Suisse Hottinguer, Emba N V (The Netherlands) Chairman of Hottinguer Capital Corp. (US) Vice-Chairman and director of Financière Hottinguer Vice-Chairman of Gaspee (Switzerland) Managing Partner of Hottinguer & Cie (Zurich) Senior Chief Officer and director of Intercom, Director or member of the Supervisory Board, FINAXA, Investissement Provence SA, Hottinguer International Fund (Luxembourg), Hottinguer International Asset Management (Luxembourg), Swiss Helvetia Fund Inc., Hottinguer US, Inc. Non-voting member of the Board of Didot Bottin
Chairman and CEO of Sofibus Chairman of the Supervisory Board of Crédit Suisse Hottinguer, Emba N V (The Netherlands) Chairman of Hottinguer Capital Corp. (US) Vice-Chairman and director of Financière Hottinguer Vice-Chairman of Gaspee (Switzerland) Managing Partner of Hottinguer & Cie (Zurich) Director or member of the Supervisory Board, FINAXA, Intercom, Investissement Provence SA, Hottinguer International Fund (Luxembourg), Hottinguer International Asset Management (Luxembourg), Swiss Helvetia Fund Inc., Hottinguer US, Inc. CEO of Sofides Non-voting member of the Board of Didot Bottin
May 1996 April 2009 Chairman and CEO of Schneider Electric Director or member of the Supervisory Board, AXA Assurances Vie Mutuelle, AXA Assurances IARD Mutuelle, AXA Courtage Assurance Mutuelle, FINAXA, Vivendi Universal, Groupe Norbert Dentressangle Non-voting member of the Board of Fimalac
Chairman and CEO of Schneider Electric Vice-Chairman of AXA Assurances Vie Mutuelle, AXA Assurances IARD Mutuelle, AXA Courtage Assurance Mutuelle Director or member of the Supervisory Board, FINAXA, Vivendi Universal, Groupe Norbert Dentressangle Non-voting member of the Board of Fimalac
Chairman and CEO of Schneider Electric Director or member of the Supervisory Board, AXA Assurances Vie Mutuelle, AXA Assurances IARD Mutuelle, AXA Courtage Assurance Mutuelle, AXA Conseil Vie Assurance Mutuelle, FINAXA, Vivendi Universal, Groupe Norbert Dentressangle, ANSA, CNRS
Chairman and CEO of Suez Chairman of Suez-Tractebel (Belgium), Hisua (Spain) Vice-Chairman of Sociedad General de Aguas de Barcelona (Spain) Director or member of the Supervisory Board, Crédit Agricole S.A., Compagnie de Saint-Gobain, Taittinger Pargesa Holding S.A. (Switzerland), Electrabel (Belgium)
Chairman of the board of BNP Paribas Director or member of the Supervisory Board, Saint Gobain, Total, Lafarge, Dresdner Bank AG Francfort (Germany), BNP Paribas UK Non-voting member of the Board of Galeries Lafayettes
Chairman and CEO of BNP Paribas Director or member of the Supervisory Board, Galeries Lafayettes, Compagnie Saint Gobain, Total Fina Elf, Lafarge, Dresdner Bank AG Francfort Permanent representative of BNP Paribas at Renault and Dresdner Bank AG’s boards (Germany)
Chairman and CEO of Coca-Cola Entreprise Vice-Chairman of Coca-Cola Enterprises-Groupe Europe
Jacques Tabourot Member of the Supervisory Board of AXA, representing the employeeshareholders
AXA’s management organs are the Supervisory and Management Boards. The members of the Management Board do not currently hold any mandates outside the AXA group. Certain members of the Supervisory Board, however, are executive officers and/or directors of companies that may have dealings from time to time with the AXA group which dealings may include extensions of credit, purchases of securities (for their own account or for third parties), underwriting of securities and/or furnishing of other types of services or goods. These dealings are generally fully negotiated and effected on arm-length terms and conditions, and consequently AXA does not believe they give rise to any potential conflicts of interests between the duties to AXA of the Supervisory and Management Boards’ members and their private interests and/or other duties.
47 Source: AXA. This financial data is not extracted from the issuer’s audited financial statements.
2.1.6. Service Contracts between the AXA Group and members of management bodies
The French members of the AXA Management Board (Henri de Castries, Claude Brunet, Denis Duverne, François Pierson), corporate officers, are employed by AXA under contract.
Christopher Condron, also a member of the Management Board, corporate officer, is employed by Equitable in the United States under contract.
2.2. Capital ownership 2.2.1. Major shareholders as of September 30, 2005
Self holding shares 2.3.4. Fully diluted capital as of September 30, 2005
Ordinary shares issued as of September 30, 2005 1,910,743,786 1,910,743,786 Subordinated convertible bonds 1999-2014 9,199,353 37,349,373 Subordinated convertible bonds 2000-2017 6,639,463 26,956,220 Stock options 69,098,575 Freely allotted shares 1,110,532 Maximum total number of shares 2,045,258,486
2.4. General information 2.4.1. Anticipated sources of funds needed to finance the principal investments in progress or future
Mr. Henri de Castries, Chairman of the Management Board of AXA SA
We have requested and obtained from the statutory auditors of the Company a letter attesting to the completion of their assignment, in which they mention their report on the limited review of half-year consolidated financial statements as of June 30, 2005, as well as their reports on the annual consolidated financial statements for the years ended December 31, 2004, December 31, 2003 and December 31, 2002. In this same letter, the statutory auditors indicate that they have performed their limited review in accordance with the professional standards applicable in France and that they have verified the information pertaining to the Company’s financial situation and the financial statements contained in this update as well as having read substantially all of this update.
Chairman of the Management Board Henri de Castries 3.1.3. Person responsible for investor information
Patrick Frotiée : 63, rue de Villiers – 92208 Neuilly-sur-Seine, first appointed on May 17, 1995. The current appointment is for a period of 6 years, until the annual general meeting of the shareholders called to approve the financial statements for the fiscal year 2005.
Update filed with the AMF on November 14, 5. Information about the issuer 5.1. History and development of the issuer p. 314 ; p. 10 p. 88-91 p.254 7. Organizational structure 7.1. Brief description of the Group p. 82-83 7.2. List of significant subsidiaries p. 50-51 ; p. 306-309, p.211-216 8. Property, plants and equipment N/A N/A
10.5. Anticipated sources of funds needed p. 121 11. R&D, patents and licenses N/A N/A
12. Trend information 12.1. Most significant trends since the end of the last financial year p. 5-11 12.2. Known trends for the current financial year p. 189 p. 12 13. Profits forecasts or estimates N/A N/A
6. Interim and other financial information p. 86-87 ; Appendix p. 1-132 20.8. Legal and arbitration proceedings p. 133-134 p. 121 20.9. Significant change in the issuer’s financial or trading position p. 201 p. 121, Appendix p. 99 21.2. Memorandum and Articles of association p. 11-25 ; p. 314 ; p. 315 ; p. 320
NOTE 2 : OPERATING HIGHLIGHTS OF THE PERIOD........................................................................................................... 3 NOTE 3 : EVENTS SUBSEQUENT TO JUNE 30, 2005 ............................................................................................................. 3 NOTE 4 : ACCOUNTING POLICIES AND CONSOLIDATION METHOD .................................................................................... 3 4.1. General information ...............................................................................................................................................3 4.2. General accounting principles ...............................................................................................................................3 4.2.1. Basis for preparation ............................................................................................................................................................3 4.2.2. First-time adoption of IFRS .................................................................................................................................................3 4.3. Consolidation...........................................................................................................................................................3 4.3.1. Basis of consolidation ..........................................................................................................................................................3 4.3.2. Business combinations: purchase accounting and goodwill including acquisitions of minority interests ............................3 4.4. Foreign currency translation and transactions ....................................................................................................3 4.5. Segment reporting...................................................................................................................................................3 4.6. Intangible assets ......................................................................................................................................................3 4.6.1. Goodwill and impairment of goodwill .................................................................................................................................3 4.6.2. Value of purchased life insurance business in force (“VBI”)...............................................................................................3 4.6.3. Other intangible assets .........................................................................................................................................................3 4.6.4. Deferred acquisition costs (“DAC”) in respect of life insurance operations and investment contracts with discretionary participating features. Deferred origination costs (“DOC”) in respect of Investment contracts without discretionary participating features 3 4.7. Investments from insurance, banking, and other activities.................................................................................3 4.7.1. Investment properties ...........................................................................................................................................................3 4.7.2. Financial instruments ...........................................................................................................................................................3 4.8. Assets backing contracts liabilities for which the financial risk is borne by the policyholders........................3 4.9. Derivatives financial instruments ..........................................................................................................................3 4.10. Share capital and reserves ...................................................................................................................................3 4.10.1. Share capital....................................................................................................................................................................3 4.10.2. Deeply subordinated debts..............................................................................................................................................3
NOTE 8 : SHAREHOLDERS’ EQUITY AND MINORITY INTERESTS......................................................................................... 3 8.1. Change in shareholders’ equity (group share) .....................................................................................................3 8.2. Minority interests....................................................................................................................................................3 8.3. Change in net unrealized gains and losses included in shareholders' equity.....................................................3
NOTE 9 : FINANCING DEBTS 3 9.1. Financing debt by issuance ....................................................................................................................................3 9.2. Financing debt by accounting method ..................................................................................................................3 9.3. Fair value measurement methodology ..................................................................................................................3
NOTE 10 : DERIVATIVE INSTRUMENTS ................................................................................................................................. 3 10.1. Derivatives instruments: maturity, notional amounts, and fair value .............................................................3 10.2. Derivatives instruments subject to hedge accounting and other derivatives instruments .............................3 10.3. Value of financial investments, with effect of potential hedging ......................................................................3 10.4. Value of financial liabilities, with effect of potential hedging ...........................................................................3 10.4.1. Liabilities arising from insurance and investment contracts ...........................................................................................3 10.4.2. Other financial liabilities.................................................................................................................................................3 10.5. Derivatives instruments not subject to hedge accounting .................................................................................3 10.6. Derivatives instruments measured at fair value ................................................................................................3
NOTE 12 : NET INCOME PER ORDINARY SHARE.................................................................................................................... 3 NOTE 13 : RELATED-PARTY TRANSACTIONS ........................................................................................................................ 3 NOTE 14 : CONTINGENT ASSETS AND LIABILITIES AND UNRECOGNIZED CONTRACTUAL COMMITMENTS......................... 3
Assets backing contracts where the fiinancial risk is borne by policyholders (5) 127 355 112 387 113 786 101 002 1.2.6 & 7 Investments from banking and other activities (6) 10 233 11 336 8 962 8 100 1.2.7 Investments in associates - Equity method 175 330 871 1 254 1.2.11 Reinsurer's share in insurance and investment contracts liabilities 8 716 7 898 7 897 8 489
(*) French GAAP information is presented under the IFRS presentation format (1) Balance shown gross of tax (2) Balance gross of unearned revenue reserve and unearned fee reserve (3) Financial assets excluding loans and assets backing contracts where the financial risk is borne by policyholders
All financial assets balances are shown net of derivatives impact (please refer to notes 1.2.16 and 10) (7) Includes long term assets, i.e. when maturity is above 1 year (8) Includes short term assets, i.e. when maturity is below 1 year
2.11 LIABILITIES ARISING FROM INSURANCE AND INVESTMENT CONTRACTS 429 413 394 520 386 158 360 600 1.2.12 Provisions for risks and charges 7 911 7 729 4 392 4 964
(*) French GAAP information is presented under the IFRS presentation format (1) Also includes liabilities arising from contracts with Guaranteed Minimum features (2) Balances shown gross of reinsurer's share in liabilities arising from contracts
Liabilities arising from insurance contracts with financial risk borne by the policyholders 83 632 73 578 113 929 101 004 Liabilities arising from investment contracts with financial risk borne by the policyholders 44 007 39 127 0 0 Total Liabilities arising from contracts with financial risk borne by the plicyholders 127 639 112 705 113 929 101 004 Liabilities arising from insurance contracts 241 730 227 843 257 358 246 560 Liabilities arising from investment contracts with discretionary participating feature 32 431 31 662 0 0 Liabilities arising from investment contracts with no discretionary participating feature 968 869 0 0 Total Liabilities arising from insurance and investment contracts 275 129 260 374 257 358 246 560
Liabilities arising from investment contracts with discretionary participating feature and investment contracts with no discretionary participating feature with financial risk is borne by the policyholder
(*) More details on the IFRS first time application impacts are available in note 1 (1) Excludes insurance and banking activities (2) Net of investment management costs (3) Includes impairment write back on invested assets after sale (4) Excludes impairment write back on invested assets after sale
Underlying earnings correspond to adjusted earnings excluding net realized capital gains attributable to shareholders. Net realized gains or losses attributable to shareholders include : - i) realized gains and losses (on assets not designated under fair value option or trading assets) ii)change in impairment valuation allowance, iii) foreign exchange rates impacts (including derivatives and except the ones mentioned above) net of tax, - related impact on policyholder participation net of tax, (life business) - DAC and VBI amortization or other reactivity to those elements if any. (life business)
Fees and charges relating to investment contracts with no participating feature 237 216 - -
Change in unearned premiums net of unearned revenues and fees (1 943) (1 723) (1 608) (1 559)
Net realized investment gains and losses (3) 2 091 2 755 1 462 1 244 Change in fair value of financial instrument at fair value through P&L 4 354 1 873 2 743 6 637 Change in financial instruments impairment (4) (104) (168) (218) (2 217)
1.2.19 Net investment result excluding financing expenses 13 600 11 065 10 518 11 794 Technical charges relating to insurance activities (5) (36 951) (33 683) (35 595) (39 387)
Amortization of the value of purchased business in force and of other intangible assets (364) (238) (137) (112)
(*) French Gaap information is presented under the IFRS presentation format
Underlying earnings per share 0,93 0,80 0,81 0,62 Fully diluted underlying earnings per share 0,93 0,77 0,77 0,61
CONSOLIDATED STATEMENT OF INCOME Disclosure reference (million euros, except EPS which is in euros)
Income from operating activities, gross of tax expenses 3 402 3 128 (+/-) Net capital gains / (losses) from investing activities (2 046) (2 346) (+) Net amortization expense 380 182 (+) Net change in valuation allowances 83 186 (+) Change in deferred acquisition costs (636) (755) (+) Change in insurance liabilities and financial liabilities related to investment contracts 13 906 10 336 (+) Net allowance to other provisions (112) (141) (-) Dividends recorded in P&L during the period (1 028) (956) (-) Interests recorded in P&L during the period (5 732) (5 116)
(+) Change in fair value of financial instruments as at fair fair value trough P&L (excluding cash and cash equivalent) (4 354) (1 851)
(+) Deposit accounting (Net cash) 719 464 (+) Dividends and interim dividends collected 1 067 1 084
(+/-) Change in operating receivables and payables (1 147) (581) (+/-) Change in valuation of instruments given or received as guarantees 0 0 (+) Net cash provided by other assets and liabilities 466 1 229 (-) Tax expenses paid (301) (100)
(-) Purchases and/or issues of loans and other assets (including those allocated to unit-linked contracts) (8 348) (4 182)
Net cash related to purchases and issuance of financial assets (62 464) (63 208) (+) Sales of tangible and intangible assets 89 97 (-) Purchases of tangible and intangible assets (166) (137)
(+) Issuance of equity instruments 312 31 (-) Repayments of equity instruments - -
Net cash related to transactions with shareholders (976) (778) (+) Cash provided by financial debts issuance 35 413 (-) Cash used for financial debts repayments (1 064) (496) (-) Interest on financing debt paid in year (excluding accrued interest) (396) (362)
Net interest margin of hedging derivatives on financing debt - Net cash related to Group financing (1 425) (445) Net cash provided by financing activities (2 401) (1 223) Cash and cash equivalent as of 1st January 21 830 18 858 Net cash provided by operating activities 10 090 9 905 Net cash provided by investing activities (7 974) (7 211) Net cash provided by financing activities (2 401) (1 223) Net impact of foreign exchange fluctuations on cash and cash equivalents 243 312 Impact of changes in scope on cash and cash equivalents 194 176 Impact of reclassification on cash and cash equivalents (16) (14) Net cash provided by assets and liabilities held for sale discontinued operations - Cash and cash equivalent at 30 June 21 965 20 803
Reserves relating to the change in FV of financial instruments available for sale
Capital in excess of nominal value 5 5 Including Proceeds from shares issued - Equity - share based compensation 19 19 Change in scope of consolidation (3) - - (0) - (3) (125) Treasury shares 24 24 Equity component of compound financial instruments - Super subordinated debt - Accrued interests - Super subordinated debt - Dividends paid AXA (676) (676) Impact of transactions with shareholders' 636 2,29 1 24 24 (3) - - (0) - (676) (628) (125) Reserves relating to changes in fair value through shareholders' equity (286) (4) - - (290)
Net income of the period 1 733 1 733 243 Total recognised income and expense for the period (SORIE) - - - - - - - - - - 1 733 1 733 247
Employee benefits actuarial gains and losses trough OCI (2) (15) (15)
First-time adoption at January 1, 2004 - In accordance with the rules governing the first-time adoption of standards, as set out by IFRS 1, the AXA Group is adopting IFRS as if they had always existed, except in cases where prospective adoption is authorized. AXA has selected the following options regarding its first-time adoption of applicable IFRS standards at January 1, 2004: - Adoption of IFRS 4, IAS 32, IAS 39 and IFRS 2 as of 2004 (see below for the adoption of the fair value option)
- Recognition in opening shareholders’ equity of past actuarial losses on benefit plans granted to employees - No restatement of business combinations prior to January 1, 2004 - Cumulative translation reserve reset to zero - Recognition at fair value at January 1, 2004 of investment properties carried at cost and whose fair value at
1.1.2. First Time application impacts at January 1st 2004 a) Assets
Receivables arising from direct insurance and inward reinsurance operations 11 372 (1 771) 9 601 Receivables arising from outward reinsurance operations - 2 049 2 049 Receivables arising from banking activities 10 956 46 11 002 Receivables - current tax position 255 17 272
Share capital and capital in excess of nominal value 18 056 (486) 17 570
Liabilities held for sale or relating to discontinued operations - - -
(4) Also includes liabilities arising from deferred policyholder's participation (5) Financing debts balances are shown net of effect of derivatives instruments (please refer to notes 1.2.16 and 10) (6) Includes effect of derivatives instruments (please refer to notes 1.2.16 and 10)
Under IFRS, goodwill resulting from the acquisition of a foreign entity is recorded in the currency of the acquired entity and translated into euros at the end of the accounting period. Under French GAAP, goodwill was translated into the acquirer’s currency. As a result, a retroactive adjustment was recorded under IFRS to recognize goodwill in the currency of the acquired entity. This restatement reduced goodwill by €1,284 million in the opening balance sheet, and is the main adjustment contributing to the goodwill and Purchase Accounting sub-total adjustment. The total net impact on opening shareholders’ equity is €-1,260 million.
Goodwill recognized at the date of business combinations prior to 2004 is no longer amortized but subjected to impairment tests. The impact of this change in accounting principles on 2004 figures is presented in section 1.1.3. There is no difference between French GAAP and IFRS as regards the conclusions of impairment tests.
According to IAS 39, the intention to hold the investment is more important than the nature of investment. Applying the principle, invested assets excluding derivative instruments are classified in the following categories: - held to maturity financial assets, accounted for at amortized cost; - loans & receivables, accounted for at amortized cost; - trading assets and assets under fair value option, accounted for at fair value with change in fair value in
Under IFRS, interest accrued but not yet due are incorporated to invested assets value. As a result, revalued financial assets are presented at fair value including accrued interest. Interest accrued but not yet due were previously presented under other debtors-creditors under French GAAP. The reclassification (with no net impact) increased the value of invested assets in the opening balance sheet by €2,969 million.
(million euros) Net impact from reevaluation at fair value of available for sale assets (with change in fair value in shareholders' equity) 4 091 Net impact of impairment of available for sale assets (with change in fair value in shareholders' equity) (1 445) Other impacts (mainly impact of reevaluation of financial assets with change in fair value through P&L (1)) 24
While there is no difference between impairment rules for debt securities under French GAAP and IFRS principles differ regarding equity securities, under IFRS, AXA considers that equity securities showing unrealized losses for a continuous period of 6 months or more prior to the closing date or equal to more than 20% of the carrying value at the closing date should be impaired.
The impairment is calculated in reference to the market value at the closing date rather than to a recoverable value. Under IFRS, any impairment of equity securities is irreversible. The amount of additional impairment recorded in the opening balance sheet is €2,269 million including consolidated funds and €2,251 million gross excluding consolidated funds, i.e. a net impact on shareholders' equity of €-1,445 million excluding consolidated funds.
The Group applies as much as possible the hedge accounting rules. When it is not possible, the derivatives are accounted for at fair value with change in fair value in P&L. The impact on revenues is limited when hedged items are recognized at fair value with change in fair value through profit and loss.
The net impact on opening shareholders' equity is €192 million. This includes the revaluation of underlying items when appropriate in cases of hedge accounting in the meaning of IAS 39 or in cases of "natural hedge" (use of the fair value option to value the underlying item, or selective use of current interest rates for insurance contracts - IFRS 4.24). This residual net impact relates mainly to derivative instruments held by the AXA SA holding company, which hedging effects cannot be reflected adequately due to the constraints imposed by IAS 39.
The Group continues to apply existing accounting principles for insurance contracts and investment contracts with discretionary participation during Phase I. Consistently with the accounting standards previously used by the Group, an adequacy test is performed to ensure that the existing provisions are sufficient to cover future flows including settlement costs, embedded options and guarantees. The only exception to the previous accounting principles relates to equalization provisions, which are eliminated under IFRS. This adjustment increased opening shareholders' equity by €260 million (net), and reduced gross non-life provisions by €397 million (gross).
A small number of the contracts are classified as investment contracts without discretionary participation and are accounted for differently under IFRS. In accordance with IAS 39, these contracts are accounted for using the "deposit accounting" method (see comments in point 1.1.3 about reconciliations between 2004 French GAAP and IFRS statements of income). For the Group, this category includes mainly unit-linked contracts for which liabilities already represented the fair value of the investment funds / assets linked to those contracts at the balance sheet date under existing accounting standards.
In addition, VBI relating to acquired life insurance companies is presented gross of tax. This increased VBI on the asset side of the balance sheet by € 857 million, with deferred tax liabilities as counterpart.
Overall, the impact of adjustments to existing deferred acquisition costs (DAC) and life value of business in force (VBI) on shareholders' equity was €-127 million.
Acquisition costs relating to investment contracts without discretionary participation were recognized under French GAAP, but can no longer be recognized as assets under IFRS. Only costs directly attributable to the acquisition of a financial management service contract may be recognized as an asset (deferred origination costs) to the extent that the company will receive payments covering these costs over the life of the contract. The scope of these deferrable costs is lower under IFRS than under French GAAP. There are also amortization differences, mainly arising from differing ways of valuing profits emerging from the business concerned. €641 million of gross DACs relating to investment contracts without discretionary participation have been reversed out of opening shareholders' equity, while €499 million of deferred origination costs (DOCs) have been included in the opening balance sheet.
Impact of shadow accounting on deferred acquisition costs and value of business in force
On the balance sheet, amortization of Deferred acquisition costs and equivalent and Value of purchased business in force is also affected by IFRS restatements (“reactivity” impacts). The recognition of available-for-sale assets at fair value through shareholders' equity, for example, caused accelerated amortization of these two captions through shareholders' equity, with a reduction in corresponding assets (DACs and VBI) and a reduction in the revaluation reserve for available-for-sale securities ("shadow DACs" and "shadow VBI") totalling €634 million for DACs and €380 million for VBI. In addition, DACs and VBI reactivity impacts were also recorded in relation to P&L adjustments (retained earnings in opening balance sheet) : € 38 million for DACs and € 297 million on VBI.
Guaranteed minimum income benefits (GMIBs) offered by certain direct insurance contracts and performance guarantees offered by some reinsurance contracts are covered by a risk management programme. To reduce the asymmetry between the valuation of liabilities and the valuation of the related derivatives, the Group adjusted liabilities to better reflect current interest rates on these contracts, using the “selective unlocking” option under section 24 of IFRS 4, so as to reflect changes in assumptions of the market (interest rate,….).
Similarly to embedded derivatives in the financial assets (according to IAS 39), embedded derivatives in insurance and investment contracts should be separated and accounted for at fair value with change in fair value in P&L (according to IFRS 4) if they don’t meet the following criteria of exclusion: - if they are clearly and closely related to the host contracts; - if they are explicitly excluded by IFRS 4 in Phase I (e.g. surrender option for a fixed amount in a insurance contracts);
This adjustment affected both employee benefit liabilities accounted for under Provisions for risks and charges and Other long-term operating assets for plans that had an net asset position. Assets representing pensions commitments but that did not meet the definition under IAS 19 have also been transferred to these asset and liability captions. Such assets are to be decompensated. This presentation adjustment did not affect opening shareholders' equity, but increased total assets and liabilities.
Actuarial gains and losses arising from differences with respect to estimates and from changes in assumptions subsequent to the opening balance sheet are fully recorded shareholders' equity during the period in which they arise (through the "statement of income and expenses recognized during the period"). The impact of this change in accounting principle on 2004 is discussed in section 1.1.3.
Favourable conditions granted as part of share plans with capital increases reserved to employees are also recognized in accordance with IFRS 2, and with the application document published by the CNC (Conseil National de la Comptabilité, French accounting standard-setter) relating to French share plans. The resulting impact is recognized in the statement of income for the period: see section 1.1.3. First time application impacts at June 30 and December 31, 2004.
Financial debts intended to finance the solvency margin of an operating entity or to acquire a portfolio of insurance contracts are presented on the face of the balance sheet separately from other debts. Within operating debts, the main changes are the recognition as liabilities of minority interests in most investment funds (see scope of consolidation above) and the recognition of newly-consolidated CDO tranches, which increase the volume of liabilities on the face of the balance sheet.
1.1.3. First-time application impacts at June 30, 2004 and December 31, 2004 a) Reconciliations between statements of income at June 30 and December 31, 2004
The column showing the impact of transition to IFRS also contains reclassifications due to changes in presentation between French GAAP and IFRS. For example: • The notion of net banking revenues is used under IFRS, whereas figures were presented gross under French GAAP.
• Depreciation of VBI resulting from acquisitions is now isolated in a specific caption under IFRS.
Investment contracts without discretionary participation meet the definition of financial instruments under IAS 39. These contracts are recognized according to the deposit accounting principle, which means that flows of premiums, benefits and changes in technical reserves on the related contracts are not recorded the statement of income. This adjustment reduced the apparent business volumes of life insurance companies. However, its net impact on earnings is nil. The resulting reduction in premium income was €2,449 million in the first half of 2004 and €5,139 million for full-year 2004 (main adjustment to premium income.) Loadings perceived on these contracts are recognized under "Revenues from investment contracts without discretionary participation", which totalled €216 million in the first half of 2004 and €417 million in full-year 2004. The other main statement of income caption to be impacted is "Technical charges relating to insurance activities", which fell by €-2,268 million in the first half of 2004 and by €-4,793 million in full-year 2004.
Amortization of the value of purchased business in force and of other intangible assets (137) (101) (238)
Change in goodwill impairment (9) (526) 488 (37) Result from discontinued operations net of tax - - -
The reconciliation between earnings reported under French GAAP in the twelve months to December 31, 2004 and the earnings for the same period under IFRS is as follows: (million euros) French GAAP (*) IFRS FTA impacts IFRS
Net realized investment gains and losses (3) 1 978 1 304 3 282 Change in fair value of financial instrument at fair value through P&L 11 449 1 139 12 588 Change in financial instruments impairment (4) (71) (373) (444) Net investment result excluding financing expenses 26 356 2 010 28 367 Technical charges relating to insurance activities (5) (77 148) 4 189 (72 959) Net result from outward reinsurance (1 064) 1 (1 063) Bank operating expenses (122) 21 (101)
Change in tangible assets impairment (11) 1 (10) Other income and expenses (7) (195) (45) (239) Other operating income and expenses (92 405) 3 702 (88 703) Income from operating activities before tax 5 742 847 6 589 Income arising from investments in associates - Equity method 76 (21) 55
(7) Notably includes financial charges in relation to other debt instruments issued and bank overdrafts
b) Reconciliation of shareholders' equity at June 30 and December 31, 2004
Translation reserve and undistributed profits 3 920 (5 115) (1 195) Net income for the period 2 519 1 219 3 738 Translation reserves, undistributed profits, and net income of the period 6 439 (3 896) 2 543
Main impacts on net income (group share) at June 30, 2004 and December 31, 2004
• No exceptional income from the release of reserves relating to the exercise of their puts by the former shareholders of Sanford C. Bernstein (Alliance Capital). This income is cancelled under IFRS (see Goodwill below), resulting in impacts of €-65 million in the first half of 2004 and €-112 million in full-year 2004.
At June 30, 2004 On Change in financial instrument impairment 213 -213 0 On Change in goodwill impairment -148 148 0
At December 31, 2004 On Change in financial instrument impairment 420 -420 0 On Change in goodwill impairment -308 308 0
Net impact on shareholder's equity of adjustments on financial assets, excluding consolidated funds 2 581 4 456 2 670 (the impact of this adjustment is included in the subtotal "Difference in scope of consolidation")
Net impact in shareholder's equity from derivatives and hedging activities 156 463 (3) 192
IFRS transition adjustments reflect the differing movements in equity, fixed-income and foreign-exchange markets between the 2004 opening of the period, June 30, 2004 and December 31, 2004.
Net investment result now includes: • The effects of revaluing derivative instruments, with the exception of derivatives used as cash flow hedges or to hedge net foreign investments
• The change in fair value of non-derivative trading assets or assets recorded using the fair value option Part of these change in value reduce the impact of derivative instruments,
• The recognition under IFRS of the appreciation in value during the period of derivative instruments at AXA SA that are not used for hedging purposes in the meaning of IAS 39 (€-6 million in the first half of 2004 and +€307 million in full-year 2004, gross of tax effects). These derivative instruments were not revalued under French GAAP.
• The increased impact during the period of revaluing assets recognised at fair value through profit and loss. • The net impact of "natural hedging" on Japanese bonds against currency risk was not significant for both 2004 periods. However, not only did variations reversed during the period, but they affected both Net realized investments gains and loss (arising from rollover of derivative instruments) and Change in fair value of financial instruments recognized at fair value through profit and loss (due to the revaluation of derivatives not yet exercised and especially the change in fair value of bonds hedged for currency risk).
At June 30, 2004 On Net realized investment gains and losses 1 605 33 638 On Change in fair value of financial instrument at fair value through P&L 1 -193 -418 -611 Net 27 At December 31, 2004 On net realized investment gains and losses 1 -357 112 -245 On Change in fair value of financial instrument at fair value trough P&L 1 -264 497 233 Net -12 1 including derivative instruments
Acquisition costs relating to investment contracts without discretionary participation are partly replaced by “rights to future management fees”. This reduction is offset by lower DAC and VBI amortization charge following the write off in the opening balance sheet of balances related to investment contracts without discretionary participation. As a result, the cumulative impact is shareholder’s equity of adjustments on DAC and VBI was €- 249 million at December 31, 2004 (€-236 million at June 30, 2004).
Changes in unrealized capital gains and losses in 2004 on available-for-sale securities are presented net of policyholder bonuses in the previous section. This principle also concerns temporary differences generated by differences between French GAAP and IFRS. The corresponding additional policyholder bonus charge was €447 million at June 30, 2004 and €779 million at December 31, 2004. These adjustments appear on the Technical charges relating to insurance activities caption in the statement of income.
2The reduction in impairment reserves recorded during the period under IFRS does not appear separately under the Change in financial instruments impairment caption, which includes the cancellation of the reserve release arising from the exercise of put options from the former Sanford C. Bernstein (Alliance Capital) shareholders, explained in Goodwill section above
Deeply subordinated notes are classified under shareholders' equity ("other reserves") when, like ordinary shares, they do not involve the contractual obligation to deliver cash or another financial asset. This difference with respect to French GAAP amounted to €625 million at December 31, 2004, following an issue of such bonds in the second half of 2004. The related interest expense is no longer recorded through the statement of income but through shareholders' equity.
United States AXA Financial, Inc. 100,00 100,00 AXA America Holding Inc. Scope entry 100,00 100,00
United kingdom Guardian Royal Exchange Plc 100,00 99,99 AXA UK Holdings Limited 100,00 100,00 AXA UK Plc 100,00 99,99 AXA Equity & Law Plc 99,96 99,96
Germany GRE Continental Europe Holding Gmbh Merger with AXA Konzern AG - Kölnische Verwaltungs A.G für Versicherungswerte 99,56 97,74 AXA Konzern AG 92,67 92,09
The Netherlands AXA Verzekeringen 100,00 99,92 AXA Nederland BV 100,00 99,92 Vinci BV 100,00 100,00
United kingdom AXA Insurance Plc 100,00 99,99 AXA Sun Life Plc 100,00 99,99 GREA Insurance 100,00 99,99 PPP Group Plc 100,00 99,99 PPP Healthcare Ltd 100,00 99,99
Asia/Pacific (excluding Japan) AXA Life Insurance Singapore 100,00 51,59 AXA Australia New Zealand 100,00 51,59 AXA China Region Limited 100,00 51,59
Germany AXA Versicherung AG 100,00 92,09 AXA Art 100,00 92,09 AXA Leben Versicherung AG 100,00 92,09 Pro Bav Pensionskasse 100,00 92,09 Deutsche Aerzteversicherung 97,87 90,14 AXA Kranken Versicherung AG 99,69 91,81
*: changes reported are by comparison with the IFRS scope of consolidation at January 1, 2004.
Luxembourg AXA Assurances Luxembourg 100,00 99,92 AXA Assurances Vie Luxembourg 100,00 99,92
The Netherlands AXA Leven N.V. 100,00 99,92 AXA Schade N.V. 100,00 99,92 AXA Zorg N.V. 100,00 99,92 Unirobe Groep B.V. Sold - -
Switzerland AXA Compagnie d'Assurances sur la Vie 100,00 100,00 AXA Compagnie d'Assurances 100,00 100,00
AXA RE (sub-group) 100,00 100,00 AXA Corporate Solutions Assurances (sub-group) 98,75 98,75 AXA Cessions 100,00 100,00 AXA Assistance SA (sub-group) 100,00 100,00 English & Scottish 100,00 100,00 Créalux Sold - Futur Ré Deconsolidation - Saint -Georges Ré 100,00 100,00
AXA Investment Managers (sub-group) 95,44 94,90 Alliance Capital (sub-group) 61,33 61,33 National Mutual Funds Management (sub-group) 100,00 51,59
Germany AXA Vorsorgebank 100,00 92,09 AXA Bausparkasse AG Sold - -
Belgium AXA Bank Belgium 100,00 99,92 IPPA Vastgoed Sold - -
In Belgium UAB’s activities were merged with AXA Belgium SA. Following the buy-out of minority interests in Servis (formely Assurance de la Poste), in Assurance de la Poste Vie and in Hilo Direct SA de Seguros y Reaseguros in Spain, these entities are now fully consolidated.
Funds and other investments consolidated by AXA are as follows: Consolidated mutual funds represent total investments of €55,434 million. Of these, 99% are accounted for by 215 funds, mainly in France, the UK, Belgium, Australia and New Zealand. The number of consolidated funds in these four countries is 178.
43 real estate consolidated companies represent total investments of €6,110 million at December 31, 2004, mainly in France, the UK and Germany.
Minority interests in most investment funds do not meet the definition of shareholders' equity (particularly in the case of open-ended mutual funds), and are therefore reported as debt on the balance sheet for an amount of €3,223 million at December 31, 2004.
France Natio Assurances 50,00 49,96 NSM Vie 39,98 39,98 Fonds Immobiliers Paris Office Funds 50,00 49,91
(a) Equity-accounted companies excluding mutual funds and real estate entities *: changes reported are by comparison with the IFRS scope of consolidation at January 1, 2004.
Asia/Pacific AXA General Insurance Hong Kong Ltd 100,00 100,00 AXA Insurance Investment Holding 100,00 100,00 AXA Insurance Hong Kong Ltd 100,00 100,00 AXA Insurance Singapore 100,00 100,00 National Mutual Home Loans Origination Fund No. 1 100,00 51,59
Turkey AXA Oyak Holding AS 50,00 50,00 AXA Oyak Hayat Sigorta AS 100,00 50,00 AXA Oyak Sigorta AS 70,91 35,45
AXA has five operating business segments: Life & Savings, Property & Casualty, International Insurance, Asset Management and Other Financial Services. In addition, non-operating activities are conducted by the holding companies. The financial information for AXA’s business segments, and the holding company activities, is presented on a French GAAP basis and is consistent with the presentation provided in the consolidated financial statements presented herein.
Property & Casualty Segment products and services. Includes a broad range of products including principally automobile and household property and general liability insurance for both personal and commercial customers (the latter to using mainly on small to medium sized companies) and permanent health insurance.
Asset Management Segment products and services. Includes diversified asset management (including mutual funds management) and related services to a variety of institutional clients and individuals, including AXA’s insurance companies.
Other Financial Services Segment products and services. This segment includes principally other financial services, such as banking activities conducted primarily in France and Belgium.
Other countries and other transnational activities 33 393 8 053 14 038 6 397 21 601 36 406 (15 013) 104 877
Net revenues from banking activities - - - - 404 (1) (17) 386
Change in unearned premiums net of unearned revenues and fees (131) (250) 318 - - - (41) (104)
Net realized investment gains and losses 2 492 487 175 4 6 119 (0) 3 282 Change in fair value of financial instruments at fair value through profit and loss 12 080 113 2 3 44 346 - 12 588 Change in financial instruments impairment (264) (124) (22) (0) (10) (23) - (444) Net investment result excluding financing expenses 25 494 1 795 500 22 138 779 (361) 28 367 Technical charges relating to insurance activities (58 376) (11 959) (2 832) - - - 208 (72 959) Net result from outward reinsurance 17 (663) (401) - - - (15) (1 063)
Change in tangible assets impairment (3) (7) 0 (0) - (0) - (10)
The main goodwill are as follows: (1): cumulative amortization booked under French GAAP at December 31, 2003 is deducted from the gross value.
AXA Investment Managers (including AXA Rosenberg) 106 102 - 102 Guardian Royal Exchange (except Albingia) 339 338 - 338 Guardian Royal Exchange (Albingia) 346 346 - 346
BUY-OUT OF MINORITY INTERESTS - AXA FINANCIAL (2000) The aggregate purchase consideration was €11,213 million and included the following items: − €3,868 million financed by capital increase, representing the value of the 25.8 million ordinary shares issued by
− €7,316 million in cash relating to the cost of settling or exchanging outstanding employee share options of AXA Financial, fees, and direct transaction costs.
Based on the carrying value of the net assets acquired of €3,913 million, the goodwill amounted to €7,301 million. In accordance with article D248-3 of the decree dated January 17, 1986 and with recommendations issued by the "Commission des Opérations de Bourse" (French stockmarket regulator) in its bulletin 210 of January 1998, the excess purchase price was charged directly to consolidated retained earnings and reserves in an amount of €2,518 million; i.e. the entire excess purchase price in proportion to the ratio of the value of ordinary shares issued by AXA to total purchase price. The remaining €4,782 million goodwill was recorded as an asset.
BUY-OUT OF MINORITY INTERESTS - SUN LIFE & PROVINCIAL HOLDINGS (SUBSEQUENTLY RENAMED AXA UK HOLDINGS) (2000) Total cost of the acquisition cost of 44% minority interests in Sun Life & Provincial Holdings (SLPH) amounted to £2.3 billion (approximately €3.7 billion). The goodwill recorded was €1,971 million . At December 31, 2004, this goodwill had a net book value of €1,474 million.
AXA NICHIDAN (NOW KNOWN AS AXA LIFE JAPAN) (2000) The valuation of the assets transferred by AXA and the shareholders of Nippon Dantai to the new joint entity, AXA Nichidan Holding, together with the two cash contributions made by AXA to increase AXA Nichidan’s capital generated a goodwill of €1,856 million. Following the 2001 revaluation of an intangible asset that decreased the opening shareholders' equity by €130 million (group share), goodwill was subsequently increased. At December 31, 2004, this goodwill had a net book value of €1,323 million.
BUY-OUT OF MINORITY INTERESTS - AXA CHINA REGION (2000) The total of the transaction cost amounted to €519 million and resulted in a goodwill of €300 million. At December 31, 2004, this goodwill had a net book value of €236 million.
GUARDIAN ROYAL EXCHANGE (1999) The acquisition of GRE (Guardian Royale Exchange), in 1999, resulted in a goodwill of €1.138 million. The goodwill relating to the English, Irish and Portuguese Property & Casualty subsidiaries was mainly due to a significant deficiency in insurance claims reserves, and had been impaired in 1999 for €446 million (€259 million net group share), representing the deficiency observed in the opening reserves. Following a review of the risks insured and the resulting additional technical reserves booked in 2000, the opening shareholders' equity of british entities of the former GRE group was revised and, therefore, goodwill modified (at December 31, 2000, gross goodwill was €1,261 million and net goodwill €770 million). At December 31, 2004, this goodwill had a net book value of €684 million.
ROYALE BELGE (1998) At December 31, 1999, gross goodwill from the buy-out of the minority interests of Royale Belge amounted to €1,007 million, of which €337 million was charged directly to retained earnings and reserves. At December 31, 2004, this goodwill had a net book value of €514 million.
AXA Investment Managers (including AXA Rosenberg) 106 3 - - (8) - 102 Guardian Royal Exchange (except Albingia) 339 - - - (0) - 338
Of which : (1) Gross value of goodwill is presented net of accumulated amortization under French GAAP as at December 31, 2003.
(2) Goodwill adjustments in relation to : - Value adjustment of assets and liabilities acquired - Recognition of a deferred tax asset after combination date - Adjustment of the acquisition price - Correction of errors
AXA Investment Managers (including AXA Rosenberg) - - - - - - Guardian Royal Exchange (except Albingia) - - - - - - -
The change in value of life Value of Business in force was as follows: The €694 million increase in value in 2004 corresponded to the acquisition of MONY in the United States.
Gross carrying value as at 1st january 5 005 Accumulated amortization and impairment (1 414) Shadow accounting on VBI (380) Net carrying value as at 1st january 3 210 Increase following Life portfolio acquisitions Decrease following Life portfolio disposals Increase following new subsidiaries acquisitions 694 Decrease following subsidiaries disposals Decrease following the transfer of portfolios as " held for sale " Impact on VBI of changes in scope and portfolios transfers 694 Changes in amortization and capitalized interests (469) Increase in impairment for the period 1 Write-back in impairment for the period following a disposal or a transfer Changes in VBI amortization, capitalization and impairment (468) Change in shadow accounting on VBI (163) Currency translation (149) Other changes (0)
Net carrying value as at 31 december 3 123 Gross carrying value as at 31 december 5 474 Accumulated amortization and impairment (1 821) Shadow accounting on VBI (530)
1.2.5. Deferred acquisition costs and equivalent a) Breakdown of deferred acquisition costs b) Life Roll forward of deferred acquisition costs
Net deferred acquisition costs relating to Life and Savings (1) 11 729 Net rights to future managements fees (2) 692 Shadow accounting on DAC (767) Deferred acquisition costs and equivalent relating to Life and Savings 11 654 Deferred acquisition costs and equivalent relating to Property and Casualty and International Insurance 1 354
Net deferred acquisition costs and equivalent 13 008 DAC = Deferred Acquisition Costs (1) Applicable to Life & Savings insurance contracts and investment contracts with Discretionnary participation feature according to IFRS 4 (2) Applicable to investment contracts with no Discretionnary participation feature
(1) Applicable to Life & Savings insurance contracts and investment contracts with Discretionnary participation feature according to IFRS 4
(1) Applicable to Life & Savings insurance contracts and investment contracts with Discretionnary participation feature according to IFRS
Macro hedge and speculative derivatives 0 0 0,00% 0 0 0,00% 0 0 0,0%
Fixed maturities available for sale 164 650 164 650 41,76% 6 577 6 577 58,02% 171 227 171 227 42,2%
Non quoted fixed maturities (amortized cost) 26 23 0,01% 2 2 0,02% 29 26 0,0%
Equity securities at fair value through profit and loss 16 847 16 847 4,27% 39 39 0,34% 16 886 16 886 4,2%
Non controlled investment funds available for sale 2 920 2 920 0,74% 65 65 0,58% 2 985 2 985 0,7%
Other assets held by consolidated investment funds designated as at fair value through P&L 596 596 0,15% 0 0 0,00% 596 596 0,1%
Macro hedge and other derivatives (242) (242) -0,06% 536 536 4,73% 294 294 0,1%
Financial assets (excl. those backing contracts with financial risk borne by policyholders) 284 992 281 863 71,49%
(1) Mainly includes Policy loans T.12.A (2) Excluding investments backing contracts where the financial risk is borned by policyholders. NB: Each investment caption is presented net of hedge derivatives (IAS 39) and economic hedge derivatives which are recognize as hedge in the meaning of IAS 39 (excluding macro hedge derivatives and other derivatives). Detail effect derivatives is presented in the note 23 "Derivative instruments"
Investment property at amortized cost 9 243 (1 325) (236) 7 683 10 293 Investment property at fair value 4 550 4 550 Macro hedge and speculative derivatives 0 0
Investment property at amortized cost 78 0 (17) 61 82 Investment property at fair value 0 0 Macro hedge and speculative derivatives 0 0
(1) excludes potential effect of hedging derivatives, other derivatives, macro hedge and speculative (2) includes potential effect of hedging derivatives and other derivatives (excluding macro hedge and speculatives)
Equity securities available for sale 17 913 22 249 22 249 4 583 247 Equity securities at fair value through profit and loss 16 847 16 847 Equity securities held for trading 258 258
Non consolidated investment funds available for sale 2 640 2 920 2 920 288 8 Non consolidated investment funds at fair value through profit and loss 2 093 2 093 Non consolidated investment funds held for trading 232 232 Non consolidated investment funds 5 245 5 245
Other assets held by consolidated investment funds designated as at fair value through Profit & Loss - 596 596
Macro hedge and other derivatives - (242) (242) Total financial investments of insurance activities 251 519 251 516 (1) Gross of impairment - including amortization, premium and accumulated amortization (2) Net of impairment
Non consolidated investment funds available for sale 62 65 65 3 0 Non consolidated investment funds at fair value through profit and loss 45 45 Non consolidated investment funds held for trading - Non consolidated investment funds 110 110
Other assets held by consolidated investment funds designated as at fair value through Profit & Loss - -
Macro hedge and other derivatives 536 536 Total financial investments of insurance activities 10 820 10 820 (1) Gross of impairment - including amortization, premium and accumulated amortization (2) Net of impairment
Equity securities available for sale 18 466 22 891 22 891 4 673 248 Equity securities at fair value through profit and loss 16 886 16 886 Equity securities held for trading 354 354
Other assets held by consolidated investment funds designated as at fair value through Profit & Loss 596 596 - Macro hedge and other derivatives 294 294 - -
d) Fixed maturities by type of issuer e) Non controlled investments funds
Fair value Amortized cost Fair value Amortized cost Fair value Amortized cost
Non controlled investment funds available for sale mainly holding equity securities 780 704 4 3 784 707 Non controlled investment funds at fair value throught P&L mainly holding equity securities 539 - 539 Non controlled investment funds trading mainly holding equity securities - - Non controlled investment funds mainly holding Equity securities 1 319 4 1 323 Non controlled investment funds available for sale mainly holding Fixed Maturities 1 442 1 351 39 38 1 481 1 389 Non controlled investment funds mainly as at fair value through P&L mainly holding Fixed Maturiti 90 - 90 Non controlled investment funds trading mainly holding Fixed Maturities 199 - 199 Non controlled investment funds mainly holding Fixed Maturities 1 731 39 1 770 Other non controlled investment funds available for sale 699 586 22 21 721 607 Other non controlled investment funds at fair value through profit and loss 27 45 72 Other non controlled investment funds held for trading - - Other non controlled investment funds 726 67 793 Derivatives (hedge accounting) and other derivatives 32 - - - 32 -
Fixed maturities of the French State 31 897 31 897 Fixed maturities of Foreign States 60 857 60 857 Fixed maturities of French or Foreign local administration 7 337 7 337 Fixed maturities of the public and semi-public sectors 9 743 9 743 Fixed maturities of the private sector 68 101 68 098 Fixed maturities guaranteed by a mortgage 10 805 10 805 Fixed maturities from other issuers (1) 26 854 26 854 Hedging derivatives and other derivatives 367 367
(1) This caption includes non quoted fixed maturities and fixed maturities held through consolidated investments funds
(b) Roll forward of impairment on invested assets (excluding investment property)
Impairment - fixed maturities 531 46 (203) (14) 3 363 Impairment - equity securities 5 493 286 (1 878) 0 37 3 939 Impairement - non controlled investment funds 280 13 (122) 0 (4) 166
(a) Breakdown of financial assets recognized at fair value by calculation methodology.
Excluding the impact of derivative instruments and excluding equity-accounted mutual funds (which represent assets of €1,437 million), the presentation of financial assets stated at fair value was as follows: (b) Investments in participating interests
"Strategic" participating interests are included on the asset side of the Balance sheet under available-for-sale equities. At December 31, 2004, AXA's participating interests notably included BNP Paribas. The fair value of BNP Paribas shares held by AXA was €2,344 million, equal to their carrying value. Investments in other companies in this category had a value of less than €70 million each.
Assets backing contracts where the financial risk is borne by policyholders 111 452 928 112 380
Financial assets at fair value through Profit & Loss 171 609 7 081 178 690
Total financial assets accounted for as at fair value 345 316 32 393 377 709
“Other changes” notably include the sale of two Australian entities, Krungthai and Global Equity Trust for €26 million.
Dividends received by AXA from equity-accounted companies totalled €27 million in 2004. This excludes equity-accounted investment funds and real estate companies, which are presented under financial investments.
At December 31, 2004, there was no significant restriction on the cash position, other than that described in section 1.2.27 c) “Restriction on dividends payment to shareholders”.
Gross value Impairment Carrying value Fair value Receivables arising from banking activities 11 786 (305) 11 481 11 804
1.2.10. Shareholders’ equity, minority interests and other equity a) Change in shareholders’ equity (group share)
Changes in shareholder’s equity for the period 1st jan – 31st dec 2004 were as follows: In 2004, three types of capital increase were carried out: - Capital increases reserved to employees (€3.8 million in July 2004 and €39.4 million in December 2004), totalling €43.1 million.
- Other capital increases arising from exercises of stock options, totalling €3 million.
The main contributors to the change in actuarial gains and losses on pension liabilities were the UK (€-185 million) and the USA (€-83 million).
Net income of the period 3 738 3 738 473 Total recognised income and expense for the period (SORIE) - - - - - - - 3 419 3 419 466
The €-203 million change in minority interests was mainly due to: - the buyout of minority interest in AXA Re Finance from BNP Paribas (€-43 million) - €-168 million attributable to the 5.8-point increase in the Group’s ownership interest in Alliance Capital (from 55.5% to 61.3%) following the exercise of options to buy 16.32 million units from former Sanford Bernstein shareholders.
The €-309 million "other changes" in minority interests mainly included €265 million of dividends paid to minority interest.
CHANGE IN NET UNREALIZED GAINS AND LOSSES INCLUDED IN SHAREHOLDERS' EQUITY
(1) including impact of shadow accounting on premium deficiency liabilities, after reevaluation of AFS Securities (2) Net of Shadow accounting on unearned revenues and fees reserves (3) including currency impact attributable to minority interests (4) Group share
Future policy benefits reserve 176 234 419 176 653 Unearned premium reserve 65 5 924 745 6 735 Claims reserve (a) (1) 5 344 24 599 9 147 39 090 Liability adequacy test reserve 0 0 0 0 Other reserves (2) 2 320 3 001 44 5 365 Liabilities arising from insurance contracts 183 962 33 525 10 356 227 843 Of which measured at current market assumptions (3) 0 0 237 237 Future policy benefits reserve 73 496 73 496 Claims reserve (1) 65 65 Other reserves 17 17
Of which measured at current market assumptions (98) (98) Reinsurers' share in future policy benefits reserve 3 377 6 3 383 Reinsurers' share in unearned premium reserve 1 111 120 233 Reinsurers' share in claims reserve (b) (1) 412 1 628 2 051 4 092 Reinsurers' share in other reserves 93 20 0 113 Reinsurers' share in liabilities arising from insurance contracts 3 882 1 760 2 178 7 820 Of which measured at current market assumptions (3) 0 0 0 0 Reinsurers' share in future policy benefits reserve 12 12 Reinsurers' share in unearned premium reserve (1) 2 2 Reinsurers' share in other reserves 0 0 Reinsurers share in liabilities arising from insurance contracts where the financial risk is borne by the policyholders 14 14
Liabilities relating to investment contracts, including those in which the financial risk is borne by the policyholder, were as follows: Note: Insurance and financial liabilities relating to with-profit insurance contracts amounted to €12,722 million at December 31, 2004.
Liabilities arising from investment contracts where the financial risk is borne by the policyholders 39 127 0 0 39 127
Reinsurers' share in future policy benefits reserve 0 0 0 0 Reinsurers' share in unearned premium reserve 0 0 0 0 Reinsurers' share in claims reserve (b) (1) 0 0 0 0 Reinsurers' share in other reserves 0 0 0 0 Reinsurers' share in liabilities arising from investment contracts with discretionary participating feature 0 0 0 0
(2) see note 4-11-2 - option opened by IFRS 4.24 for selective re-measurement of reserves at current market assumptions
Reinsurers' share in claims reserve as at January 1st 2004 2 180 2 362 4 542
Reinsurers' share in total claims expense 216 476 692 Reinsurers' share in claims payments (667) (595) (1 262) Change in scope of consolidation, portfolio transfers and change in accounting principles (72) (35) (107) Impact of foreign currency fluctuation (28) (157) (185)
Claims reserve as at January 1st 23 082 9 719 32 801 Claims handling cost reserve as at January 1st 841 227 1 068
Gross claims reserve as at January 1st 2004 23 923 9 946 33 869 Current year change 11 541 2 259 13 801 Loss reserve development (prior years) (562) (101) (663) Total claims expense (1) 10 979 2 159 13 138 Claims payment (current year) (4 749) (1 278) (6 027)
Reinsurers' share in future policy benefits reserve as at December 31st 3 389 0 3 389
(1) Interests credited, policyholders' bonus, adjustements on contracts where the financial risk is borne by the policyholders.
e) Liabilities arising from investment contracts by accounting method f) Policyholder bonuses g) Environmental pollution, and asbestos
Under insurance and reinsurance contracts related to environmental pollution and asbestos, AXA paid claims and legal costs of €51 million related to environmental pollution in 2004 of which €35 million related to asbestos and €16 million related to environmental pollution (2003: €53 million and 2002: €45 million). At December 31, 2004, AXA had made cumulative payments relating to such contracts of €571 million of which €422 million related to asbestos and €149 million related to environmental pollution (2003: €536 million).
(1) In use before IFRS standards implementation : in accordance with IFRS4 standards which allow, under certain conditions, to continue to use previous system of reference to liabilities arising from contracts with discretionary participating feature. (2) : Cf. section 4.11.2 - Reserves mesured according to IFRS 4.24 option which allows to evaluate portfolios with current assumptions.
The loss reserve development table presents the claims reserve development for calendar years 1994 through 2004. The top line entitled “gross reserves for unpaid claims and claims expenses” represents the original gross claims reserve liability reported at the balance sheet date for the year indicated. The upper portion of the table entitled “paid (cumulative)” represents the cumulative amount paid as of the end of each succeeding year with respect to the original gross claims reserve liability reported. The lower portion of the table entitled “Reserve re-estimated” represents the previously recorded liability as adjusted (that is, re-estimated) based on claims experience as of the end of each succeeding year. The estimate is increased or decreased, as more information becomes known in future periods relating to unsettled claims. For example, the gross claims reserve as at December 31, 1996 was originally €5,847 million and increased by €12,943 million in 1997 to €18,790 million primarily due to the UAP acquisition in 1997. By the end of 2004, cumulative amounts paid were €12,143 million and the original gross claims reserve had been re-estimated to be €16,272 million at December 31, 2004. The “cumulative redundancy (deficiency)” for each year represents the aggregate amount by which the original gross claims reserve liability as of that year-end has changed in subsequent periods.
The majority of the business of the Property & Casualty insurance operations is short tail and, therefore, losses develop and are paid relatively quickly. In 2004, approximately 40% of the claims charges were paid in the year that the claim event occurred (2003: 39%).
In respect of the direct insurance business in 2004, there were no reportable changes in the claims payment patterns. In addition, (i) there have been no significant changes in assumptions during the current year, and (ii), in 2004, the company AXA Corporate Solution Insurance US was transferred from the reinsurance business to other Transnational Activities.
Gross reserves for unpaid claims and claims expenses developed initailly at the booking date (d) 5 595 5 712 5 847 20 371 20 941 26 656 26 916 28 636 28 465 27 825 29 128
Gross reserves for unpaid claims and claims expenses developed in 2004 (d) 14 995 14 682 18 790 21 769 22 481 24 892 25 765 27 225 27 872 28 237 29 128
Paid (cumulative) at One year later 1 419 1 305 1 388 4 737 4 745 7 727 6 807 6 715 6 371 6 075 Two years later 2 044 1 684 5 759 6 632 6 818 11 184 10 302 9 900 9 554 Three years later 2 368 6 898 7 327 8 087 9 361 13 474 12 378 12 440
Cumulative redundancy (deficiency) from the initial gross reserves: (c) AXA acquired GRE in May 1999. The operations of GRE have been integrated within AXA. At time of acquisition the gross reserves totalled €5.6 billion.)
(d) In 2004, the companies AXA Corporate Solution Insurance US, AXA RE P&C Insurance company and AXA RE P&C Reinsurance company were transferred from AXA RE to the Other transnational activities. The reserves of AXA Corporate Solution Insurance US were presented on an occuring year basis and included in Property & Casualty loss reserve developement 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 AXA RE loss reserve development table.
Loss reserve development table: Property & Casualty including international insurance operations (excluding AXA RE)
(a) I 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 the future periods.
The reconciliation with the breakdown of insurance liabilities by segment set out in note a) was as follows: Gross reserves for unpaid claims and claims expenses developed initailly at the booking date (d) 1 496 2 451 2 646 2 880 3 060 3 396 3 455 5 868 4 778 4 200 3 314
Gross reserves for unpaid claims and claims expenses developed in 2004 (d) 1 496 2 451 2 646 2 880 3 060 3 396 3 453 5 868 4 778 3 742 3 314
Cumulative redundancy (deficiency) from the initial gross claims reserves in excess of (less than) re-estimated gross claims reserves (7) (1) 178 156 (384) (359) (364) 554 615 304
(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 in excess of the original 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 the future periods.
(b) Represents premium earned subsequent to the accounting year end and premium reinstatements / experience-rated premiums received and accrued from the ceding insurers as assumed losses were incurred.
Gross claims and other reserves developed Property & Casualty and International Insurance (excluding AXA RE) (a) 29.128 AXA RE (a) 3.314 Total gross claims and other reserves developed 32.442 Other reserves (b) 4.350 Total gross claims and other reserves excluding Life & Savings Segment 36.792
(a) Total gross claims and other reserves developed are presented on the loss reserve development basis: The reserves of AXA Corporate Solution Insurance US were included in Property & Casualty and International Insurance loss reserve. The reserves of AXA RE P&C Insurance company and AXA RE Reinsurance company (€460 million) were included in AXA RE loss reserve development table.
(b) Of which Future policy benefits or annuity claims (€1,950 million), construction reserves (€1,056 million) and reserves on acceptations (€975 million).
1.2.12. Provisions for risks and charges a) Breakdown of the provisions for risks and charges b) Roll forward of provisions for risks and charges (excluding employee benefits and share-based compensation)
Changes in provisions for risks and charges were as follows: (million euros) Restructuring provisions
Write back after final cost review (4) (5) - - (145) Impact of foreign exchance fluctuations (14) (0) (0) - (11)
(1) If provisions are discounted (2) Relates to existing and new provisions
Employee Benefits 6 621 Share-based compensation 59 Restructuring provisions 231 Litigation 155 Liability warranty provisions 18 Contingent liabilities relating to business combinations Other provisions for risks and charges 644 TOTAL PROVISIONS FOR RISKS AND CHARGES 7 728
Litigation provisions mainly included €59 million in France, €18 million in the UK and €15 million in Belgium banks.
AXA Subordinated perpetual notes, variable (U.S. $ and euro) 2 120 Perpetual notes, 3.29% / variable (Yen) 193 Subordinated convertible notes, 2.5% due 2014 (euro) 1 558 Subordinated perpetual debt (euro) 234 Subordinated perpetual notes, 7.25% (euro) 500 Subordinated convertible notes, 3.75% due 2017 (euro) - debt component 1 089 Subordinated convertible notes, variable due 2020 (euro) 215 U.S. registered subordinated debt, 8.60% 2030 (euro) 952 U.S. registered subordinated debt, 7.125% 2020 (euro) 461 U.S. registered subordinated debt, 6.75% 2020 (euro) 1 070 Others 50 Derivatives on subordinated debt (1) (1 205)
AXA Financial Surplus Notes, 6.95 %, due 2005 294 Surplus Notes, 7.70 %, due 2015 147 MONY Life 11.25% Surplus Notes 1
SUBORDINATED DEBT 8 089 AXA Euro Medium Term Notes, 6.0% due through 2013, and BMTN 1 183 Other 5 Derivatives on financing debt instruments issued (289)
Netherlands Holdings 17 Derivatives on financing debt owed to credit institutions 0
TOTAL FINANCING DEBT 11 009 (1) Hedging instruments according to IAS 39 and economic hedge derivatives which are not acting as hedge under IAS 39.
The fair value of financing debt at December 31, 2004, excluding interest accrued but not yet due, was €12,177 million, including related derivatives hedging instruments.
b) Financing debt by accounting method c) Fair value measurement methodology – financing debt
Controlled investment funds minority interests liability 3 223 3 223 Other debt instrument issued and bank overdrafts 7 784 7 792 Payables arising from direct insurance and inward reinsurance operations 3 863 3 863 Payables arising from outward reinsurance operations 3 588 3 588 Payables arising from banking activities 12 285 12 285 Payables - current tax position 954 955 Derivatives relating to other financial liabilities (1) 1 1
Financial services operating debt included in financing non-subordinated debt instruments or amounts owed to credit institutions mainly consists of repo transactions or short-term interbank debt contracted by the Group's banks. The fair value of this debt is then very close to par value.
Other financial services in Belgium AXA Bank Belgium 4 128 other 1
(b) Other debt instruments issued, notes and bank overdrafts, by accounting method d) Payables arising from direct insurance, inward reinsurance operations and direct outward reinsurance operations
Current account payable to othe companies 2 213 2 213 Other payables - Payables arising from direct outward reinsurance operations 3 588 3 588
Income tax on discontinued activities - Current 0 Income tax on discontinued activities - Deferred 0
The tax rates broken down by country could be detailed as follows: (million euros) December 31, 2004
Net income, gross of tax expense and before equity in income from affiliated companies 5 971
Net income, gross of tax expense and before equity in income from affiliated companies
Hedging derivatives instruments can be summarised as follows: Notional amount Fair value Notional amount Fair value Notional amount Fair value Notional amount Fair value Notional amount Fair value
Investment property at amortized cost 7 683 - - 7 683 61 - - 61 7 744 - - 7 744 Investment property at fair value through profit and loss 4 550 - - 4 550 - - - - 4 550 - - 4 550 Macro hedge and speculative derivatives - - - - - - - - - - - -
Equity securities available for sale 22 221 7 21 22 249 642 - - 642 22 863 7 21 22 891 Equity securities at fair value through profit and loss 16 847 - (1) 16 847 10 - 29 39 16 857 - 28 16 886 Equity securities held for trading 258 - - 258 96 - - 96 354 - - 354
Macro hedge and speculative derivatives - - - - - - 76 76 - - 76 76
Controlled investment funds minority interests liability 3 223 - - 3 223 Other debt instruments issued, notes and bank overdrafts 7 784 - 1 7 785 Payables arising from direct insurance and inward reinsurance operations 3 863 - - 3 863 Payables arising from outward reinsurance operations 3 588 - - 3 588 Payables arising from banking activities (1) 12 220 - 65 12 285
(1) Financing debt and Payables arising from banking activities issued are disclosed in the balance sheet net of the impact of derivatives. As a result, the amount showin in the column "value including effect of derivatives" is their net book value.
Liabilities arising from insurance contracts 227 843 22 (40) 227 825 Liabilities arising from insurance contracts where the financial risk is borne by policyholders 73 578 - - 73 578
Total liabilites arising from investment contracts 71 659 (10) (4) 71 644 Macro hedge derivatives instruments on insurance and investment contracts (liabilities) -
Derivatives instruments on financial assets subject to hedge accounting 32 (178) (146)
Macro hedge and speculative derivatives on financial assets 481 (111) 370
Macro hedge derivatives on insurance and investment contracts - - -
Total - derivatives instruments relating to financing debt, operating debt and other financial liabilities (1 488) 20 (1 469)
Macro hedge banking activities (liabilities) and other derivatives (including speculative derivatives) (5) 70 65
(1) Hedge accounting not acting as hedge in the meaning of IAS 39 (2) Notably includes speculative derivative instruments on financing debt and other financial liabilities
1.2.17. Revenues by segment and net revenues from banking activities a) Total revenues
LIFE & SAVINGS 42 344 of which direct premiums 39 461 of which reinsurance assumed 1 642 of which fees and charges on investment contracts with no participation feature 417 of which revenues from other activities 824
Other countries 4 262 INTERNATIONAL INSURANCE 3 363 of which direct premiums 920 of which reinsurance assumed 2 320 of which revenues from other activities 123
Change in unearned premiums net of unearned revenues and fees (250) (6) (256)
Fees and charges relating to investment contracts with no participating feature 417 - 417
Change in unearned premiums net of unearned revenues and fees 23 (0) 23
Net investment result excluding financing expenses and investment result included in technical result 14 951
Other revenues, net of benefits, claims and other deductions 658 INCOME FROM OPERATING ACTIVITIES GROSS OF TAX 3 016
Net investment result excluding financing expenses and investment result included in technical result 500
Change in fair value of financial instruments at fair value through P&L
Fixed maturities held to maturity 1 - - - 1 Fixed maturities available for sale 8 289 8 726 207 (32) 17 190 Fixed maturities designated as at fair value through P&L (1) 1 138 (8 208) 524 - (6 546)
Equity securities available for sale 989 6 782 63 (285) 7 550 Equity securities designated as at fair value through P&L (2) 152 (4 455) 223 - (4 080)
Non controlled investment funds available for sale 63 189 - (13) 239 Non controlled investment funds designated as at fair value through P&L 164 (12) (15) - 137 Non controlled investment funds trading - 3 2 - 5
Reinsurers' share in liabilities arising from insurance and investment contracts - January, 1 3 690 2 366 2 992 (560) 8 489
Changes in scope of consolidation, portfolios transfers and changes in accounting methods 379 12 181 203 775
Reinsurers' share in liabilities arising from insurance and investment contracts - December, 31 4 025 1 835 2 474 (436) 7 898
Change in reinsurers' share in liabilities arising from insurance and investment contracts 87 (493) (213) 21 (598)
Net result of reinsurance ceded 17 (663) (401) (15) (1 063)
Expenses related to the financing of changes in the Group's scope of consolidation were as follows: 1.2.22. Expenses by type a) Acquisition costs b) Expenses by type
Breakdown of expenses by type : 8 158 5 906 898 14 961 2 626 299 286 (500) 17 673
(1) Includes all acquisition expenses relating to insurance and investment contracts before capitalization/amortization of deferred acquisition costs and equivalents. (2) Change (capitalization and amortization) in deferred acquisition costs relating to insurance and investment contracts with discretionnary participation feature and changes in net rights to future management fees relating to investment contracts with no discretionnary participation feature.
A yearly evolution of the PBO (Projected Benefit Obligation) is made based on the following items: - service cost (representing the increase in the PBO attributable to one year of additional service), - interest cost (cost of one year less discount), - benefits paid, - actuarial gain or losses (change in long term assumptions, change in staff, ...), - change in plans.
(in euro millions) 2004 2004 Change in benefit obligation: Benefit obligation, beginning of year 8 602 508 Service cost 180 5 Interest cost 461 30 Amendments (including acquisitions) 385 83 Actuarial (gains) and losses 612 23 Benefits paid -362 -4 Benefits directly paid by the employer -104 -26 Effect of foreign currency fluctuation -199 -39 Benefit obligation, end of year (A) 9 573 581 Change in plan assets: Fair value of plan assets, beginning of year 3 619 8 Actual return on plan assets 346 0 Employer contributions 115 3 Employee contributions 10 2 Net transfer (including acquisitions) 0 0 Benefits paid -207 -4 Effect of foreign currency fluctuation -14 0 Fair value of plan assets, end of year (B) 3 869 9 Change in separate assets: Fair value of separate assets, beginning of year 2 195 0 Actual return on separate assets 208 0 Employer contributions 147 0 Employee contributions 4 0 Net transfer (including acquisitions) 3 0 Benefits paid -155 0 Effect of foreign currency fluctuation -137 0 Fair value of separate assets, end of year 2 573 0
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 €28 million and €26 million respectively as at December 31, 2004. For pension plans where benefit obligation is in excess of the fair value of the plan assets, the aggregate fair value of plan assets and aggregate benefit obligation were € 3 841 million and € 9 548 million respectively as at December 31, 2004.
For MONY employee benefit plans, the fair value at acquisition date became new cost basis for post-acquisition accounting. This was accomplished by revaluation of the liabilities using the AXA US operation current assumptions as of the acquisition date, including recognition of any previously deferred actuarial gains and losses. Any prepaid pension asset was eliminated in connection with these revaluations.
The estimated amount of 2005 employer contributions for pension benefits and other benefits is respectively € 283 million and € 32 million. These amounts also include benefits directly paid by the employer. These amounts are subject to uncertainty as they will be driven by 2005 economics.
(in euro millions) Net position (excluding separate assets) Employee benefit liabilities -6 238 Other liabilities -383 b) Share-based compensation
The total employee share-based compensation cost recorded in earnings for the year ended December 31, 2004 is € 86.6 million. In accordance with IFRS 2, the cost above includes equity-settled share-based payment instruments for their portion that were granted after November 7, 2002 and had not yet vested at 31/12/2003. This total employee share-based compensation cost includes the expenses from share-based compensation instrument issued by the Group as well as the expenses from share-based compensation instrument issued by AXA local operations.
The information related to options granted after November 7, 2002 is as follows: Shares (in millions) Price (in euro) (a)
Outstanding January 1, 2004 10,7 10,96 Granted 10,3 17,68 Subscribed (0,0) 10,96 Expired (0,4) 13,91
A summary of the activity in the option shares of the Holding Company's option plans follows, including information about options outstanding and exercisable at December 31, 2004.
In respect of share option plans issued by the US Holding Company for AXA ADR shares, the number of share options outstanding and the number of share options exercisable at December 31, 2004 are set out below.
The 2 templates below include all the generations of stocks and not only the post-November 7, 2002 grants.
For option granted after 7 November 2002, figures are as follows: AXA ADR's Options Number Weighted Average 2004 Outstanding Exercise Price (in millions) (in U.S. Dollars)
Weighted average fair value per 4,44 3,04 option at grant date (in US dollars)
Amortizing this equity-settled plan expense against the vesting period and applying a 5% pre-vesting yearly estimation of forfeiture rate, the total cost for the AXA ADR Share Options recorded in earnings for the year ended December 31, 2004 is € 11,5 million (€ 6,3 million for the 2003 grant and € 5,2 million for the 2004 grant).
the employee. This total sum invests in AXA shares at a discount to market price. After a period of 5 years, the employee will get a percentage of any gains on the total investment, with a floor of the initial investment.
Most of the 2004 subscriptions for the AXA Group Shareplan occur in December. Total subscriptions amount to € 257 million for the year 2004.
The cost of this a plan is valued by taking into account the restriction over 5 years for the employee using the CNC recommendations (Conseil National de la Comptabilité). The CNC approach values the restricted share through a replication strategy where the employee would sell forward the restricted share at a five year term, borrow enough money to buy an unrestricted share, and use the eventual proceeds from the forward sale, and the accumulated dividends received during the period of restriction, to pay off the loan. In the case of the leverage plan, the opportunity gain implicitly provided by AXA by enabling its employees to benefit from an insitutional derivatives' pricing versus a retail pricing in the leverage plan, is added to this cost.
The total employee share-based compensation cost recorded in earnings for the year ended December 31, 2004 includes U.S.$16.2 million in connection with the AXA Financial Stock Appreciation Rights liability, as they are subject to variable accounting based on the change in market value of AXA ADRs and U.S.$ 13.0 million in connection with the AXA ADR Restricted Shares and Performance Accelerated Restricted Shares granted to senior executives and non-employee directors.
The global overview of plans and their cost is as follows: Plan (millions of euros) AXA Share Options 19.3
AXA Group Share Options plan 6.9 AXA 2004 Performance Units plan 5.1 AXA APH Share Options Plans 1,1 AXA Financial Share-Based Compensation Instruments 23.5*
AXA Financial Stock Appreciation Rights (SAR) 13.0* AXA Financial Restricted Shares and Performance Accelerated RS (PARS)
Deposit accounting (Net cash) 924 Dividends and interim dividends collected 1 386 Interests collected 10 697 Change in operating receivables and payables 1 326 Change in valuation of instruments given or received as guarantees 0 Net cash provided by other assets and liabilities 4 820 Tax expenses paid (882) Net cash provided by operating activities 20 884 Purchase of subsidiaries and affiliated companies, net of cash acquired (4 788) Disposal of subsidiaries and affiliated companies, net of cash ceded 856 Purchase of shares of affiliated companies (72) Disposal of shares of affiliated companies 352 Net cash related to changes in scope of consolidation (3 651) Sales of fixed maturities 84 965 Sales of equity securities 22 072 Sales of investment property 1 620 Sales and/or repayment of loans and other assets 4 222 Net cash related to sales and repayments of financial assets 112 878 Purchases of fixed maturities (82 678) Purchases of equity securities (34 416) Purchases of investment property (1 043)
In 2004, taking into account AXA's average stock price, 44 million shares relating to stock options were not included in the calculation of the weighted average number of shares on a fully diluted basis. This difference is mainly due to a new stock option plan (March 2004, relating to 10 million shares).
In addition, to finance the MONY acquisition, ORAN bonds were redeemed on July 22, 2004 through the issuance of one new ordinary AXA share (at a price of €12.75 versus the market price of €17.08) for each ORAN, i.e. a total issuance of 110,245,309 new AXA shares.
As a result of these factors, along with the anti-dilutive effect of convertible bond plans, the fully diluted number of shares is 1,935 million at December 31, 2004.
The detailed calculation of net income per ordinary share (basic and diluted) is provided below: NET INCOME A 3738
Weighted average number of ordinary shares (net of treasury shares) - opening 1748
Increase in capital (excluding stock option exercised) (1) 52 Stock option exercised (1) 1 Treasury shares (1) 4 Cancellations (1) Weighted average number of ordinary shares B 1805 Net income per ordinary share C = A / B 2,07 Potentially dilutive instruments - Stock options 6
In 2004, the Company or one of its subsidiaries has been party to the following transactions with related parties, which may be deemed to have been either material to AXA or the related party in question or unusual in their nature or conditions.
A GIE also assumes cash management for the Company, its subsidiaries and affiliates. At December 31, 2004 the cash managed by the GIEs amounted to €11.5 billion. Members of the GIE (related parties) are the Company and affiliated entities.
In addition to the foregoing transactions to which the Company is party, there are various on-going business relationships and transactions between various subsidiaries of the Company which include the following: Investment Management. The AXA Group has two principal asset management subsidiaries, Alliance Capital Management and AXA Investment Managers (the "Asset Managers"). In addition to managing assets for unaffiliated third parties, the Asset Managers manage the "general account" investment assets of AXA's various insurance subsidiaries. At December 31, 2004, the general account assets managed on behalf of the Company's insurance subsidiaries by the Asset Managers totalled approximately €229 billion and generated approximately €277 million in fees for year ended December 31, 2004. In addition, the Asset Managers manage most of the assets backing contracts with financial risk borne by policyholders (unit-linked) of the Company's insurance subsidiaries, which totalled approximately €66 billion at December 31, 2004.
1.2.27. Contingent assets and liabilities and unrecognized contractual commitments a) Breakdown of commitments b) Comments
Off-balance sheet commitments received by AXA totalled €24,377 million at December 31, 2004, an increase of €3,274 million compared to 2003. This increase was mainly due to pledged assets and collateralized commitments (up €926 million), other commitments received (up €1,408 million) and commitments to finance (up €697 million), broken down as follows: Financing commitments received totalled €7,821 million at December 31, 2004, and consisted mainly of: - AXA SA credit lines (€6,058 million), - commitments relating to the €312 million of commercial paper issued by Alliance Capital in 1998, with an extension of €73 million in 1999 and a cash facility of around €422 million, - bank credit facilities granted to AXA Life Japan as part of its Life & Savings operations (€430 million), - the US holding company's share in a Group cash facility since July 9, 2004 (€367 million), - credit facilities received by AXA RE from cedants as part of its reinsurance operations (€95 million). The €701 million increase in commitments to finance compared to 2003 was mainly due to the €638 million increase in AXA SA credit facilities.
Pledged assets and collaterized commitments totalled €10,191 million at December 31, 2004. Pledged assets represent technical commitments made by reinsurers, mainly to French Life & Savings companies (€259 million) and AXA Corporate Solutions Assurance (€217 million). The €826 million fall in these commitments reflected the reclassification of commitments consisting of life insurance contracts used to back loans granted by French banks into the "other commitments received" category. Collaterized commitments totalled €9,585 million at December 31, 2004 and were mainly mortgage collateral given by customers of AXA Bank Belgium on home loans and other professional loans (€9,576 million). They increased by €1,752 million mainly due to higher production of home loans.
- Commitments received by AXA RE mainly: €146 million of guarantees relating to forward currency transactions, €54 million transfer commitment on a real estate fund managed by AXA Reim, FDV Venture, and €298 million of notional commitments received on ABR products. For these products, commitments were also given for an equivalent amount.
Letters of credit totalled €627 million at December 31, 2004, mainly consisting of €477 million of new letters of credit relating to the US reinsurance business.
Guarantee commitments totalled €6,199 million at December 31, 2004: - Guarantee commitments given to financial institutions amounted to €1,730 million at December 31, 2004 and are mainly consisted of €914 million of collateral and pledges given by AXA SA to credit institutions, €307 million of capital financing commitments given by AXA Financial to Limited Partnership, €250 million of investment guarantees given by the German holding company as part of the marketing of its real estate funds and €92 million of collateral given by Alliance Capital to a commercial bank in 2002 to guarantee some of Sanford Bernstein's commitments. At December 31, 2003, these commitments totalled €1,991 million, or a €247 million decrease mainly due to the reduction in guarantee commitments given by AXA Germany concerning the WTC claim (down €103 million).
- Guarantee commitments given to customers totalled €4,468 million at December 31, 2004 and mainly consisted of (i) €3,618 million of mutual fund performance guarantees provided by AXA Banque to funds managed by AXA IM, the fair value of this commitment being nil at December 31, 2004 and (ii) guarantees given by AXA Australia as part of its marketing of mutual funds, guaranteeing that customers will recoup their initial investment. These guarantee commitments were stable compared to December 31, 2003 (€4,489 million).
Pledged assets and collaterized commitments totalled €5,056 million at December 31, 2004. Pledged assets consisted mainly of €296 million of collateral on derivatives given as part of the Japanese life insurance operations, €126 million of assets ankpledged by AXA Germany to WestLB to hedge a dollar-
denominated reinsurance liability and €142 million of pledges given to cedants as part of AXA Re's reinsurance operations. Collaterized commitments totalled €4,389 million at December 31, 2004 and mainly consisted of €3,382 million of securities pledged by AXA Bank Belgium to financial institutions in respect of repo operations (cash management), along with €689 million of collaterized commitements given to the National Bank of Belgium as security for clearing-house activities. They also included €318 million relating to a transfer by AXA Financial of a real estate asset as collateral for a short-term debt. Overall, pledged assets and collaterized commitments given increased by €1,387 million due to the €1,332 million increase in securities pledged by AXA Bank Belgium, and the €115 million increase in pledged assets relating to Japanese entities' derivative transactions, in line with increasing derivative volumes.
- €366 million of commitments on forward financial instruments in the French life insurance business - €72 million of compensation commitments granted by AXA France Assurances to a real estate promoter in the event of non motivated refusal to confirm the completion of work of a real estate operation.
- Commitments given by AXA France Vie to the Acacia special-purpose vehicle (€230 million in 2003) are now recognized through the consolidation of this vehicle in the 2004 consolidated financial statements.
- €107 million of commitments given by AXA Bank Belgium as part of its Money Market activity; the fall in these commitments reflecting the fall in cash management activity.
Some AXA subsidiaries, principally insurance companies, are subject to restrictions on the amount of funds they may transfer in the form of cash dividends or otherwise to their shareholders.
AXA will undertake a capital increase of a minimum of 288 million shares. This number could go up to 299 million shares depending on the proportion of Finaxa's dividend paid in newly issued FINAXA shares. This number could also be adjusted for Finaxa stock-options and convertible bonds exercised up to the suspension date of these operations.
Under IFRS principles, this merger would be +1.2% accretive to AXA non-diluted EPS as soon as 2005 and -0.7% dilutive to fully diluted EPS.
Mutuelles AXA and FINAXA currently own 20.35% of AXA outstanding shares and 32.20% of AXA voting rights. Following the merger, the Mutuelles AXA, which currently own 2.72% of AXA outstanding shares representing 4.38% of AXA voting rights and 71.69% of FINAXA outstanding shares representing 80.53% of FINAXA voting rights, would become the principal AXA shareholder, holding approximately 14% of AXA shares representing 23% of voting rights.
On January 25, 2005, AXA issued, under its €5 billion Euro Medium Term Notes program, €250 million of undated deeply subordinated notes (“Titres Super Subordonnés”), allowing the Group to improve debt quality and to strengthen hybrid capital, whilst anticipating the refinancing of debts maturing in 2005 and after.
On July 28, 2005, AXA Investment Managers (AXA IM) and Framlington Group Limited announced that AXA IM entered into an agreement to buy Framlington Group Limited from HSBC Holdings plc and Comerica Incorporated. Completion of the transaction is subject to certain conditions, including FSA approval. Framlington is an investment management boutique with an emphasis on specialist, high-performance and high-value-added equity investments, and has a significant market position within the UK retail market segment, capturing 10.7% of overall UK retail net sales during 2004. Assets under management, as at the end of June 2005, were £4.5 billion. Under this agreement, AXA IM will buy 100% of Framlington Group Limited shares for a total consideration of £174 million over consolidated Net Asset Value at completion. This acquisition will be financed internally within the AXA Group.
On July 29, 2005, AXA announced its intention to acquire from the group Caixa Geral de Depósitos the insurance company “Seguro Directo Gere – Companhia de Seguros, S.A.”. Usually known as Seguro Directo, the company operates in the direct insurance market in Portugal (by telephone and Internet), where it has a market share of almost 50% and gross revenues of approximately Euro 23 million. This acquisition is consistent with the growth strategy of AXA Portugal and will allow the company to diversify its distribution channels and further improve the service to its 700.000 clients. AXA has the objective of growing the direct distribution channel and re-establishing the leadership position Seguro Directo once held in Portugal. The transaction is subject to regulatory approvals, including the Portuguese Insurance Institute and Antitrust Authority.
On September 14, 2005, AXA Financial, Inc., and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Delaware corporations, entered into a definitive Stock Purchase Agreement, dated as of September 14, 2005. Pursuant to the Stock Purchase Agreement, Merrill Lynch will purchase from the Company all of the issued and outstanding shares of capital stock of The Advest Group, Inc. ("Advest"), a Delaware corporation and a wholly owned subsidiary of AXA Financial, for $400 million in cash, subject to adjustments in certain circumstances. AXA Financial's estimated post-tax proceeds from the sale will be approximately $297 million. AXA Financial also preliminarily estimates that the purchase price will result in a pre-tax gain of approximately $6 million and a post-tax loss of approximately $96 million. This transaction reduces the Company's goodwill by approximately $190 million. The sale of Advest is expected to close in the fourth quarter of 2005 and is subject to certain regulatory approvals.
Note 4 : Accounting policies and consolidation method 4.1. General information
AXA, 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, insurance and asset management. AXA operates principally in Western Europe, North America and Asia-Pacific. The list of entities included in the scope of the AXA’s consolidated financial statements is provided in the note 1.2.1 of the notes to consolidated financial statements.
AXA has its primary listing on the Eurolist Paris stock exchange and is also listed since August 1996 on the New York Stock Exchange (“NYSE”).
The interim consolidated financial statements have been prepared in accordance with International Financial Reporting Standards endorsed by the European Commission. AXA has anticipated the amendment to IAS 39 regarding the Fair value option issued by the IASB in June 2005 and expected to be formally endorsed by the European Commission in the second half-year 2005. AXA has also applied the amendment to IAS 19 adopted by IASB in December 2004, and to be endorsed in the second half-year 2005 by the European Commission following the approval by ARC (Accounting Regulation Committee or Comité de réglementation comptable) in May 2005.
AXA Group transition date is 1 January 2004. The Group prepared its opening IFRS balance sheet at that date (the reporting date of these interim consolidated financial statements is 30 June 2005). The Group’s IFRS adoption date is 1 January 2005.
The AXA’s accounting policies have been consistently applied to all the periods presented including those relating to the classification and measurement of insurance contracts, investment contracts and other financial assets and liabilities including derivatives.
Companies in which AXA exercises control are known as subsidiaries. Subsidiaries are fully consolidated from the date on which control is transferred to AXA. Control is presumed to exist when AXA directly or indirectly (including related parties) holds at least 50% of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible have also been considered when assessing whether AXA controls another entity. Entities that are controlled in substance even without any ownership interest are also consolidated. In particular that relates to special purpose entities including securitization vehicles and other entities, resulting from sales of receivables and with the purpose of issuing securities whose redemption is backed by acquired receivables proceeds - known as Collateralized Debt Obligations or CDOs.
Companies in which AXA directly or indirectly holds 20% or more of the voting rights and for which AXA and other shareholders have contractually agreed to exercise joint controlling influence are known as joint ventures. Joint ventures are proportionately consolidated. Companies, in which AXA exercises significant long-term influence, that is, associated companies, are accounted for as an investment using the equity method of accounting. Significant influence is presumed when AXA directly or indirectly holds 20% or more of the voting rights or when significant influence is exercised through an agreement with other shareholders. The AXA's share of the associates’ post-acquisition profits or losses is recognised in the income statement, and its share of post-acquisition movements in reserves is recognised in reserves through Other Comprehensive Income (OCI).
Investments funds and real estate companies are either fully or proportionately consolidated, or accounted for using equity method if they meet the above criteria. Minority interests in the fully consolidated mutual funds are accounted for at fair value and recorded as debts. Investment funds accounted for using equity method are included in the balance sheet caption “Financial assets ”.
The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus external fees directly attributable to the acquisition.
External fees related to the business combination include the costs of settling or exchanging the target company’s outstanding employee share options (applicable to all acquisitions including acquisitions of minority interests). If the transaction is based in a foreign currency, the impact of the foreign currency is included in the purchase price at the date of the transaction or the initial date of the transaction (if it occurs over a period of time).
Goodwill The excess of the cost of acquisition over the net fair value of the assets, liabilities and contingent liabilities acquired represents goodwill and is recorded as an asset. Goodwill arising on the acquisition of a foreign entity is recorded in local currency of the acquired entity and translated into euros at the closing date. If the cost of acquisition is less than the net fair value of the assets, liabilities and contingent liabilities acquired, the difference is recognised directly in the income statement. Revisions can be made to goodwill within the twelve months of the acquisition date, if new information becomes available. Goodwill is allocated across segments (“Life & Savings”, “Property & Casualty”, “International Insurance” including reinsurance and “Other Financial Services”) to cash generating units corresponding (i) to the companies or portfolios of business acquired in respect of their market image and share and their expected profitability, and (ii) to the entities 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 purposes.
Step by step acquisitions (with change in control): When an acquisition is achieved in stages (successive acquisitions), each significant transaction is treated separately for purpose of determining the cost of acquisition, the fair values of the identifiable assets acquired and liabilities assumed, and the goodwill. Any adjustment to the fair values previously recognized is a revaluation and is accounted for as such through equity (other comprehensive income).
The effect on intercompany transactions on net income is always eliminated upon consolidation, unless there are other than temporary losses, which are usually recorded immediately.
When an asset is disposed of internally and not intended for long term holding within AXA’s asset portfolios: – The tax corresponding to the eliminated capital gain or loss is eliminated upon consolidation through a deferred tax adjustment recorded in the balance sheet
In addition, the total or partial transfer of securities in a company included in the scope of consolidation, between two subsidiaries that are fully consolidated but held with different ownership percentages, will not affect the consolidated operating results (with the exception of any related tax and allocation to policyholders’ participating benefits recorded as consequence of the transaction, which are maintained in consolidated accounts as the related securities are held for long-term holding). These transfers also have an impact on the Group shareholders’ equity (its counterpart being recorded in minority interests) which is identified in the "Internal restructuring" line of the shareholder's equity reconciliation.
(iii) all resulting exchange differences are recognised as a separate component of equity (cumulative translation adjustment).
Goodwill arising on the acquisition of a foreign entity is recorded in local currency of the acquired entity and is translated into euros at the reporting date.
Exchange differences arising from the translation of the net investment in foreign entities, and of borrowings and other currency instruments designated as hedges of such investments, are recorded in shareholders’ equity and are recognised in the income statement as part of the gain or loss on disposal of the net investment. Exchange differences arising from monetary financial assets classified as available for sale and corresponding to the amortized cost are recognized as income or expense for the period; the remaining changes relating to fair value changes are recorded in equity.
The segmental analysis provided in AXA’s annual report and financial statements reflects both lines of business (primary segment) and geography; it is based on five types of activities: “Life & Savings”, “Property & Casualty”, “International Insurance” (including reinsurance) and “Other Financial Services”(including Asset Management). An additional “Holdings” segment includes all non-operational activities.
Goodwill is considered to have indefinite useful life and is therefore not amortized. It is subject to impairment test which should be performed at least annually. Impairment of goodwill is not reversible. AXA performs an annual one-step impairment test of goodwill based on the cash generating units (see above part 3) using a multi-criterion analysis (parameters include value of assets, future operating profits, market share) in order to determine if there are significant adverse changes. That analysis includes the long-term nature of the holding, and excludes factors affected by short-term market volatility. The analysis also considers the interdependence of transactions within sub-groups. Within each cash generating unit, a comparison is made between net book value and the recoverable value, which is equal to the highest of the market value and value in use. The value in use is the net assets and expected earnings from existing and new business, taking into account the cash generating unit’s future prospects. The value of future expected earnings is estimated on the basis of life insurance and savings embedded value figures published by AXA or similar calculations for other activities. Market value is based, for example, on various valuation multiples.