By virtue of the authorization granted by the shareholders at the Extraordinary General Meeting of April 22, 2008, the Management Board increased the Company’s share capital through the issue of shares to Group employees under the SharePlan 2008 program. The shareholders waived their preferential subscription rights so that this offering could be made to employees.
New mutual funds (FCPE) with direct voting rights have been created since 2005 to allow beneficiaries, in most cases, to directly exercise their voting rights.
• The total amount invested was €460.3 million, as follows: – €29.3 million in the traditional plan, and – €431 million in the leveraged plan.
Pursuant to article 241-2 of the AMF General Regulations, this section constitutes the description of the Company’s share repurchase program that will be submitted to the Shareholders for approval at AXA’s General Meeting on April 30, 2009.
Treasury shares (held directly by the Company or owned by Company subsidiaries) as of January 31, 2009 The table below sets forth the number of AXA shares and the percentage of shares directly (treasury shares) or indirectly (shares held by the subsidiaries) held by the Company.
Number of shares % of share capital (a) Par value (in Euro)
(a) Percentage calculated on the basis of the number of company’s outstanding ordinary shares as of January 31, 2009 (source: Euronext Notice of January 29, 2009).
(b) Excluding the 6,899,477 shares which are the object of a futures contract expiring on April 20, 2009.
Analysis of treasury shares in terms of objectives as of January 31, 2009
Objectives of the Company’s share repurchase program Pursuant to the provisions of the European Commission Regulation n° 2273/2003 which came into force on December 22, 2003 and in accordance with market practices permitted by the AMF, the objectives of the Company’s share repurchase program that will be submitted to the Shareholders’ approval on April 30, 2009 are the following: a) optimizing the liquidity of AXA ordinary shares, notably to foster regular and liquid trading in the securities through a liquidity contract that complies with the Association Française des Marchés Financiers (AMAFI) Code of conduct approved by the Autorité des marchés financiers (AMF), and agreed to with an investment service provider, in compliance with market practice accepted by the AMF; b) (i) hedging stock options offered to some or all employees or eligible corporate officers of the Company and/or affiliated entities or economic interest groups as defined in Article L.225-180 of the French Commercial Code, (ii) granting free shares to some or all eligible corporate officers, employees, former employees and general insurance agents enrolled in a employer-sponsored company savings plan sponsored by the Company or the AXA Group, (iii) granting free shares to some or all employees or eligible corporate officers of the Company and/or its affiliated entities or economic interest groups notably in accordance with Article L.225-197-2 of the French Commercial Code, in connection with the provisions of Articles L.225-197-1 et seq. of the French Commercial Code, and (iv) assigning shares to some or all employees, former employees, eligible corporate officers and general insurance agents of the Company or the AXA Group in connection with the implementation of any employee savings plan in accordance with the applicable laws and regulations, notably the Articles L.3332-1 et seq. of the French Labor Code, or any other employee savings plans; c) holding shares for the purpose of subsequent payment or in exchange in respect of potential external growth acquisitions, in compliance with the market practice accepted by the AMF;
d) delivering shares upon exercise of rights attached to debt instruments giving a claim on the Company’s share capital by way of repayment, conversion, exchange, presentation of a warrant or in any other manner; e) canceling some or all of these shares, provided that the Management Board is duly authorized by the Shareholders, under an extraordinary resolution, to reduce the capital through the cancellation of the shares acquired pursuant to a share repurchase program; or f) in general, performing all operations admissible, or to be subsequently admitted, by the laws and regulations in force.
(a) This number corresponds to the theoretical maximum number of shares that may be purchased by the company, calculated on the basis of the company’s registered share capital as of December 31, 2008, i.e. €4,784,172,207.01 divided into 2,089,158,169 shares. Based on the number of treasury shares held directly by the company on that date, AXA may purchase up to 204,196,309 of its own securities.
Duration of the repurchase program 18 months, subject to the approval of the program by the ordinary Shareholders’ Meeting of April 30, 2009.
Table of transactions made during the current share repurchase program (until January 31, 2009)
All of the share repurchases in the above table were made for cash. The Company entered into a derivatives transaction on December 23, 2008 consisting of a futures contract with respect to 6,899,477 shares with an expiration date of April 20, 2009.
Transactions completed in 2008 by AXA in its own shares In connection with its share repurchase programs, which were approved respectively by AXA’s Shareholders at their Annual Meeting held on May 14, 2007 (13th resolution) and at their Annual Meeting held on April 22, 2008 (15th resolution), AXA, in accordance with the provisions of article L.225-209 of the French Commercial Code, has continued the liquidity contract dated May 16, 2005 that complies with the AMAFI Code of Conduct approved by AMF. This contract has an initial duration of one year, is automatically renewed unless terminated by one of the parties and appoints Crédit Agricole Cheuvreux to execute transactions pursuant to the terms of the contract.
Between January 1, 2008 and April 22, 2008, 10,285,769 shares were purchased under this liquidity contract for an average weighted gross unit price of €23.05 and 10,250,769 shares were sold for an average weighted gross unit price of €23.20. Related transaction fees incurred over the same period amounted to €134,000.
Between April 23, 2008 and December 31, 2008, 31,236,387 shares were purchased under this liquidity contract for an average weighted gross unit price of €18.44, and 28,821,387 shares were sold for an average weighted gross unit price of €18.81. Related transaction fees incurred over the same period amounted to €266,000.
As a result, on December 31, 2008 the number of treasury shares held under the liquidity contract was 4,700,000 and the number of treasury shares, allocated for hedging purposes, was 19,507, i.e. a total of 4,719,507 shares held directly by the Company, equal to 0.23% of AXA’s share capital at the year-end closing date, acquired for an aggregate purchase price of €64,430,658.86 (with a par value of €2.29 per share).
PART III – cORPORATE gOVERNANcE, EXEcUTiVE cOMPENsATiON, MAJOR sHAREHOLDERs AND RELATED MATTERs 3.4 MAJOR sHAREHOLDERs AND RELATED PARTy TRANsAcTiONs
CAPITAL OwNERSHIP As of December 31, 2008, AXA’s fully paid up issued and outstanding share capital totaled €4,784,172,207.01 divided into 2,089,158,169 shares, each with a par value of €2.29 and eligible for dividends as of January 1, 2008.
To the best of the Company’s knowledge, the table below summarizes the ownership of its issued outstanding ordinary shares and voting rights as of December 31, 2008: Number of shares Capital ownership Voting rights (a)
To the best of the Company’s knowledge, no shareholder held more than 5% of the Company’s outstanding ordinary shares or of the voting rights as of December 31, 2008 except as indicated in the table above.
(a) in this table voting rights’ percentages are calculated on the basis of all shares with voting rights attached, notwithstanding the fact that certain of these shares may be deprived of voting rights by law or otherwise (for example, treasury shares are deprived of voting rights under French law).
The following table indicates the Company’s fully diluted share capital, assuming that the maximum number of new shares is issued following the exercise of all outstanding stock options and warrants.
As of December 31, 2008 (a) As of December 31, 2007 (a) As of December 31, 2006 (a)
As of December 31, 2008, to the best of the Company’s knowledge based on the information available to it, (i) substantially all of the ADS were held by U.S. residents and (ii) approximately 19.55% of the Company’s total outstanding ordinary shares were held by U.S. residents (including the ordinary shares held through the ADR program).
conversion starting February 17, 2000: 4.15 (b) shares for 1 bond
Early redemption – The company may purchase the bonds on any stock Exchange or otherwise in accordance with applicable law, including by way of tender for purchase or exchange, – At the option of the issuer, in cash, from January 1, 2007 at a price with a gross 6% actuarial yield, if the company’s share average over 10 consecutive days is above 125% of the anticipated repayment price, – At any time, at the option of the issuer, at €269.16 if the number of bonds in circulation is below 10% of the number of bonds issued.
Number of bonds in circulation as of December 31, 2008 6,636,896
(a) AXA’s 2017 bonds can still be converted, but any dilutive impact created by the issuance of new shares resulting from the conversion of the bonds is neutralized by the automatic exercise of call options on the AXA shares which have been put in place since January, 2007.
RELATED PARTy TRANSACTIONS, EMPLOyEE SHAREHOLDERS AND CROSS-SHAREHOLDING AGREEMENTS Related party transactions For information concerning related party transactions, please see Part V “Consolidated Financial Statements” – Note 27 “Related Party Transactions” of this Annual Report.
Cross-Shareholding Agreements AXA has entered into cross-shareholding agreements with BNP Paribas and Schneider which are described hereafter.
Agreement with BNP Paribas On December 15, 2005, and after authorization by the AXA Supervisory Board on June 29, 2005, the AXA Group and the BNP Paribas Group entered into an agreement that replaces a prior agreement between them dated September 12, 2001.
The 2005 agreement maintains the provisions of the prior agreement concerning minimal and stable cross-shareholdings. Pursuant to the agreement, the AXA Group undertakes to hold at least 43,412,598 shares of BNP Paribas and the BNP Paribas Group undertakes to hold at least 61,587,465 shares of AXA. These amounts are subject to adjustment to reflect the impact of certain capital transactions, including, but not limited to: capital increases, free allotments of stock, stock splits or similar transactions. In addition, the agreement includes an option for each party to repurchase its shares in the event of a hostile change of control of the other party.
Agreement with Schneider On May 15, 2006, and after authorization by the AXA Supervisory Board on December 21, 2005, the AXA Group, the Mutuelles AXA and the Schneider Group entered into an agreement that provides for the maintenance of minimal cross-shareholdings. Under the terms of this agreement, the AXA Group undertakes to hold at least 2,583,300 shares of Schneider stock and the Schneider Group undertakes to hold at least 8,816,681 AXA ordinary shares. The number of shares held under this cross-shareholding agreement will be adjusted as needed to reflect the impact of certain capital transactions, including, but not limited to: capital increases, free allotments of stock, stock splits or similar transactions. In addition, the agreement includes an option for each party to repurchase its shares in the event of a hostile change of control of the other party.
Special report of the Statutory Auditors on regulated agreements and commitments (Article L.225-209 of the French Commercial Code)
It does not fall within the scope of our assignment to ascertain the potential existence of other agreements and commitments but rather, on the basis of the information that was supplied to us, to inform you, the shareholders, of the main features of those agreements of which we have been informed. It is not our responsibility to express an opinion on the utility or merits of such agreements. Pursuant to Article R.225-58 of the French Commercial Code, you are asked to form an opinion on the relevance of such agreements for the purpose of approving them.
No notice of Agreements and commitments: No regulated commitment or agreement falling within the scope of Articles L.225-86 and L.225-90-1 of the French Commercial Code was submitted to us.
Agreements and commitments approved in prior fiscal years that remained in force in 2008: In accordance with French Commercial Code, we have been informed that the following commitments and regulated agreements, approved in prior fiscal years, remained in force in 2008: • With the BNP Paribas Group On December 15, 2005 and after authorization by the AXA Supervisory Board on June 29, 2005, the AXA Group (AXA and its subsidiaries) and the BNP Paribas Group entered into an agreement that replaces the one in force since September 12, 2001. The new agreement contains provisions in terms of minimal and stable cross-shareholdings (the AXA Group undertakes initially to hold at least 43,412,598 shares of BNP Paribas stock; the BNP Paribas Group undertakes initially to hold at least 61,587,465 shares of AXA stock; these amounts will be adjusted thereafter in order to reflect the impact of capital transactions, including but not limited to free allotments of stock or share tenders involving the same company (stock splits or regrouping, etc.), and capital increases involving either BNP Paribas or AXA, and also provides for a reciprocal repurchase option in the event of a hostile takeover on either AXA or BNP Paribas. In force for a period of five years as from December 16, 2005, this agreement is renewable automatically for an initial period of two years and for successive periods of one year thereafter, unless one of the two parties decides to terminate beforehand, in which case it is required to give three months notice prior to the next renewal date. The agreement was made public by the AMF (Autorité des marchés financiers) on December 21, 2005.
• With Schneider On May 15, 2006, and after authorization by the AXA Supervisory Board on December 21, 2005, the AXA Group (the AXA Mutuelles, AXA and its subsidiaries) and the Schneider Group entered into an agreement that provides for the maintenance of minimal cross-shareholdings. Under the terms of this agreement, the AXA Group undertakes to hold at least 2,583,300 shares of Schneider stock and the Schneider Group undertakes to hold at least 8,816,681 shares of AXA stock. The number of shares held under this cross-shareholding agreement will be adjusted as needed in order to reflect the impact of capital transactions, including but not limited to free allotments of stock or share tenders involving the same company (stock splits or regrouping, etc.). In addition, the parties have consented to a reciprocal repurchase option in the event of a hostile takeover on either AXA or Schneider. In force for a period of one year as of the date of its signature, this agreement is renewable automatically for successive periods of one year thereafter, unless one of the parties decides to terminate beforehand, in which case it is required to give three months notice prior to the next renewal date.
Trading on Euronext Paris Official trading of listed securities on Euronext Paris, including the Company’s ordinary shares, is transacted through French stockbrokers (sociétés de bourse) and takes place continuously on each business day in Paris from 9:00 a.m. to 5:25 p.m. (Paris time), with a fixing of the closing price at 5:30 p.m.
The table below sets forth, for the periods indicated, the reported high and low prices (closing and intraday) in Euro for the Company’s ordinary shares on Euronext Paris: Calendar Period Closing High (€) (a) Closing Low (€) (a) Intraday High (€) Intraday Low (€)
4.1 RISK FACTORS Risks relating to the financial markets, our financial strength ratings and financial condition, the valuation of our assets and related matters 192
Risks related to ownership of AXA ADSs or ordinary shares 204 4.2 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK AND RISK FACTORS The Risk Management organization 206
These events and the continuing market upheavals, including extreme levels of volatility, have had and may continue to have an adverse effect on our revenues and results of operations in part because we have a large investment portfolio and are also dependent upon customer behavior and confidence. In 2008 our consolidated revenues declined from their 2007 levels and our net income fell significantly from 2007 levels due to a variety of factors including impairments and unfavorable changes in the values of our investment assets. A prolonged continuation of the adverse market and broader economic environment that we experienced at the end of 2008 and early 2009, may continue to adversely affect our business and future profitability, particularly our Life & Savings and Asset Management businesses. In our Life & Savings business, these conditions could affect the sales of our participating life insurance and pension products, mutual funds, asset management services and products with financial risk borne by the policyholders (unit-linked), including variable annuity products and variable life products. In particular, protracted or steep declines in the stock or bond markets typically reduce the popularity of unit-linked products. Also, the account value of these products will be affected by a downturn in financial markets and decreased account values will decrease the fees generated by these products. In our Asset Management business, these adverse market conditions may result in continued decreases in the value of the assets we manage and affect our ability to accumulate and retain those assets, since clients may choose to withdraw assets under management in these circumstances.
Adverse capital and credit market conditions may significantly affect our ability to meet liquidity needs, access to capital and cost of capital The capital and credit markets have been experiencing extreme volatility and disruption for more than eighteen months. In the second half of 2008, the volatility and disruption reached unprecedented levels and severely limited the availability of additional liquidity in the markets and credit capacity for most issuers including AXA.
The Company’s consolidated solvency margin declined significantly during 2008 and continued adverse capital market conditions may further negatively impact our consolidated solvency margin and the regulatory capital requirements of our insurance subsidiaries which could have a material adverse affect on our business, liquidity, credit ratings, results of operations and financial position The Company’s insurance subsidiaries are subject to the regulatory capital requirements in the jurisdictions where they do business, which are designed to monitor capital adequacy and to protect policyholders. While the specific regulatory capital requirements (including definition of admitted assets and methods of calculation) vary between jurisdictions, an insurer’s required capital can be impacted by a wide variety of factors including, but not limited to, business mix, product design, sales volume, invested assets, liabilities, reserves and movements in the capital markets, including interest rates and equity markets. Regulatory capital requirements may increase, possibly significantly, during periods of declining equity markets and/or lower interest rates such as those experienced during 2008.
(2) For this purpose, available capital represents (i) tangible net asset value, i.e. consolidated shareholders equity less intangible assets (including DAc), perpetual debt and certain other items, plus (ii) subordinated debt, unrealized capital gains, minority interests and certain other items.
that consolidated solvency calculation methodologies and calculations are not entirely uniform and comparable across markets and between companies, the Company’s consolidated solvency margin is lower than the consolidated solvency margin ratios published by certain of the Company’s principal competitors. The decline in the Company’s consolidated solvency margin ratio during 2008 was due to a number of factors including the significant drop in equity markets, valuation of fixed income securities and foreign exchange impacts as well as other factors. Continued adverse capital market conditions would further negatively impact the Company’s consolidated solvency margin.
Management monitors the Company’s consolidated solvency margin and the regulatory capital requirements of its insurance subsidiaries on an on-going basis both for regulatory compliance purposes and to ensure that the Company and its subsidiaries are appropriately positioned from a competitive point of view. Insurance regulators have broad discretion in interpreting, applying and enforcing their rules and regulations with respect to regulatory capital requirements and, during periods of extreme financial market turmoil of the type we have experienced over the past several months, regulators may become more conservative in the interpretation, application and enforcement of these rules which may involve them, for example, imposing increased reserving requirements for certain types of risks, greater liquidity requirements, higher discounts / “haircuts” on certain assets or asset classes, more conservative calculation methodologies or taking other similar measures which may significantly increase regulatory capital requirements. In the event of a failure by the Company and/or any of its insurance subsidiaries to meet minimum regulatory capital requirements, insurance regulators have broad authority to require or take various regulatory actions including limiting or prohibiting the issuance of new business, prohibiting payment of dividends, and/or, in extreme cases, putting a company into rehabilitation or insolvency proceedings. A failure of any of the Company’s insurance subsidiaries to meet their regulatory capital requirements and/or a reduction in the level of their regulatory capital that may negatively impact their competitive position may also result in the Company having to inject significant amounts of new capital into its insurance subsidiaries which could adversely affect the Company’s liquidity position, results of operations and financial position. In 2008, the Company provided significant amounts to its subsidiaries through loans, capital contributions or other mechanisms including approximately €2.44 billion loaned to its U.S. subsidiary AXA Financial that was used to enhance the capitalization of AXA Financial’s insurance subsidiaries. In the current financial market environment, management believes that its insurance subsidiaries may become increasingly dependent on the Company for capital resources and funding over the coming months.
Ratings agencies also take into account the Company’s consolidated solvency margin and the regulatory capital position of its insurance subsidiaries in assessing our financial strength and credit ratings. Ratings agencies may make changes to their internal models from time to time that may increase or decrease the amount of capital we must hold in order to maintain our current ratings. To the extent our regulatory capital levels are deemed insufficient to meet rating agency criteria, our financial strength and credit ratings may be downgraded.
A downgrade in our claims paying ability and credit strength ratings could adversely impact our business, results of operations and financial condition Claims paying and credit strength ratings have become increasingly important factors in establishing the competitive position of insurance companies. Rating agencies review their ratings and rating methodologies on a recurring basis and may change their ratings at any time. Consequently, our current ratings may not be maintained in the future. In the context of the current financial market crisis and the deterioration in the credit and equity markets over the past months, certain rating agencies have lowered their outlook on the life insurance sector to negative from stable and have downgraded a growing number of companies. In February 2009, (i) Standard & Poor’s affirmed its AA counterparty credit and financial strength ratings on AXA’s principal insurance subsidiaries and its A+ counterparty credit ratings on the Company, but revised its outlook on these ratings to negative from stable and indicated that they “believe that AXA’s fundamentals are sound and are highly likely to help the Group withstand market conditions and keep ratings in the ‘AA’ category in the medium term”; and (ii) Moodys’ Investors Services reaffirmed the Aa3 counterparty credit and financial strength ratings on AXA’s principal insurance subsidiaries and its A2 counterparty credit rating on the Company and maintained its stable outlook. In March 2009, Fitch Ratings downgraded the financial strength ratings of AXA’s principal insurance subsidiaries from AA to AA- (one notch) and also downgraded the Company’s senior debt from A+ to A- (two notches), subordinated debt from A to BBB+ (two notches) and short term debt from F1+ to F1 (one notch). Fitch Ratings also revised its outlook on these ratings to negative from stable. A downgrade or the potential for a downgrade of our ratings could have a variety of negative impacts on us including (i) damaging our competitive position, (ii) negatively impacting our ability to underwrite new insurance policies, (iii) increasing the levels of surrenders and termination rates of our in-force policies, (iv) increasing our cost of obtaining reinsurance, (v) negatively impacting our ability to obtain financing and/or increasing our cost of financing, (vi) triggering additional collateral requirements under certain agreements to which we are party, (vii) harming our relationships with creditors or trading counterparties and/or (viii) adversely affecting public confidence in us. Any of these developments could have a material adverse effect on our business, liquidity position, results of operations, revenues and financial condition.
Losses due to defaults by financial institution counterparties and other third parties, impairment of our investment assets and unrealized losses could all negatively affect the value of our investments and reduce our profitability Third parties that owe us money, securities or other assets may not perform under their obligations. These parties include issuers whose securities we hold in our investment portfolios (including mortgage-backed, asset-backed and other types of securities), borrowers under mortgages and other loans that we extend, reinsurers to which we have ceded insurance risks, customers, trading counterparties, counterparties under swap and other derivative contracts, other counterparties including brokers and dealers, commercial and investment banks, hedge funds, other investment funds, clearing agents, exchanges, clearing houses and other financial institutions. Many of our transactions with these third parties expose us to credit risk in the event of default of our counterparty. In addition, with respect to secured transactions, our credit risk may be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to cover the full amount of the loan, derivative or other secured obligation. Also, defaults by parties with which we have no direct contractual relation, such as a default by a credit insurer that has insured bonds, structured finance products or other securities we may hold in our investment portfolios, may adversely impact the value of those securities and potentially adversely affect the financial markets more generally. These parties may default on their obligations due to bankruptcy, lack of liquidity, downturns in the economy or real estate market, operational failure or other reasons. Negative trends and investment climates in our major markets, such as those experienced in the course of the last eighteen months, may result in an increase in investment impairments on our investment assets. There can be no assurance that any such losses or impairments to the carrying value of these assets would not materially and adversely affect our business and results of operations. For further risks relating to impairments taken on our investment assets, see “The determination of the amount of allowances and impairments taken on our investments requires use of significant management judgment in certain cases, particularly for debt instruments, and could materially impact our results of operations or financial position”. The default of a major market participant could disrupt the securities markets or clearance and settlement systems in our major markets, which could in turn cause market declines or volatility. A failure of a major market participant could also cause some clearance and settlement systems to assess members of that system or could lead to a chain of defaults that could adversely affect us. For risks relating to defaults by reinsurers and retrocessionaires to which we have transferred part of our risks, see “Reinsurance may not be adequate to protect us against losses and we may incur losses due to the inability of our reinsurers to meet their obligations”.
Reinsurance may not be adequate to protect us against losses and we may incur losses due to the inability of our reinsurers to meet their obligations In the normal course of business, AXA seeks to reduce losses that may arise from catastrophes or other events that cause unfavorable underwriting results through reinsurance. Under the reinsurance arrangements, other insurers assume a portion of the losses and related expenses; however, we remain liable as the direct insurer on all risks reinsured. Consequently, ceded reinsurance arrangements do not eliminate our obligation to pay claims and we are subject to our reinsurers’ credit risk with respect to our ability to recover amounts due from them. Although we evaluate periodically the financial condition of our reinsurers to minimize our exposure to significant losses from reinsurer insolvencies, our reinsurers may become financially unsound by the time their financial obligation becomes due. The reinsurance market has become increasingly concentrated following recent mergers and acquisitions, which have reduced the number of major reinsurance providers. The inability of any reinsurer to meet its financial obligations to us could negatively impact our results of operations. In addition, the availability, amount and cost of reinsurance depend on general market conditions and may fluctuate significantly. Reinsurance may not be available to us in the future at commercially reasonable rates and any decrease in the amount of our reinsurance will increase our risk of loss.
The determination of the amount of allowances and impairments taken on our investments requires use of significant management judgment in certain cases, particularly for debt instruments, and could materially impact our results of operations or financial position Our accounting principles and policy with respect to the determination of allowances and impairments on our investments is set forth in Note 1.7.2 “Financial Instruments” in the 2008 Consolidated Financial Statements included in this Annual Report. The determination of the amount of allowances and impairments vary by investment type and is based upon our periodic evaluation and assessment of known and inherent risks associated with the respective asset class. Such evaluations and assessments are revised as conditions change and new information becomes available. In considering impairments, management considers a wide range of factors including those described in Note 1.7.2 and uses its best judgment in evaluating the cause of the decline in the estimated fair value of the security and the prospects for near-term recovery. For certain asset classes, particularly debt instruments, management’s evaluation involves a variety of assumptions and estimates about the operations of the issuer and its future earnings potential. Management updates its evaluations regularly and reflects changes in allowances and impairments as such evaluations are revised. There can be no assurance, however, that management has accurately assessed the level of impairments taken and allowances reflected in our financial statements and additional impairments and/or allowances may have a material adverse effect on our consolidated results of operations and financial position.
Our mitigation efforts with respect to interest rate risk are primarily focused towards maintaining an investment portfolio with diversified maturities that has a weighted average duration that is approximately equal to the duration of our estimated liability cash flow profile. However, our estimate of the liability cash flow profile may be inaccurate and we may be forced to liquidate investments prior to maturity at a loss in order to cover the liability. Although we take measures to manage the economic risks of investing in a changing interest rate environment, we may not be able to mitigate the interest rate risk of our assets relative to our liabilities.
A sustained increase in the inflation rate in our principal markets would have multiple impacts on AXA and may negatively affect our business, solvency position and results of operations In certain of our principal markets, inflation, as measured by consumer price indices or other means, has increased, in some cases significantly, over recent periods. A sustained increase in the inflation rate in our principal markets would have multiple impacts on AXA and may negatively affect our business, solvency position and results of operations. For example, a sustained increase in the inflation rate may result in an increase in market interest rates which may (i) decrease the value of certain fixed income securities we hold in our investment portfolios resulting in reduced levels of unrealized capital gains available to us which could negatively impact our solvency margin position and net income, (ii) result in increased surrenders of certain Life & Savings products, particularly, those with fixed rates below market rates, and (iii) require us, as an issuer of securities, to pay higher interest rates on debt securities we issue in the financial markets from time to time to finance our operations which would increase our interest expenses and reduce our results of operations. A significant and sustained increase in inflation has historically also been associated with decreased prices for equity securities and sluggish performance of equity markets generally. A sustained decline in equity markets may (i) result in impairment charges to equity securities that we hold in our investment portfolios and reduced levels of unrealized capital gains available to us which would reduce our net income and negatively impact our solvency position, (ii) negatively impact performance, future sales and surrenders of our unit-linked products where underlying investments are often allocated to equity funds, and (iii) negatively impact the ability of our asset management subsidiaries to retain and attract assets under management, as well as the value of assets they do manage, which may negatively impact their results of operations. In addition, in the context of certain Property & Casualty risks underwritten by our insurance subsidiaries (particularly “long-tail” risks), a sustained increase in inflation with a resulting increase in market interest rates may result in (i) claims inflation (i.e. an increase in the amount ultimately paid to settle claims several years after the policy coverage period or event giving rise to the claim), coupled with (ii) an underestimation of corresponding claims reserves at the time of establishment due to a failure to fully anticipate increased inflation and its effect on the amounts ultimately payable to policyholders, and, consequently, (iii) actual claims payments significantly exceeding associated insurance reserves which would negatively impact our results of operations. In addition, a failure to accurately anticipate higher inflation and factor it into our product pricing assumptions may result in a systemic mis-pricing of our products resulting in underwriting losses which would negatively impact our results of operations. For additional information, please see Part IV, Section 4.2 “Quantitative and Qualitative Disclosures About Market Risk and Risk Factors” in this Annual Report.
RISKS RELATINg TO ThE STRUCTURE OF OUR gROUp, ThE SCOpE AND NATURE OF OUR BUSINESS, ThE ENVIRONMENT IN whICh wE OpERATE AND ThE pRODUCTS wE OFFER As a holding company, we are dependent on our subsidiaries to cover our operating expenses and dividend payments
We expect that dividends received from subsidiaries and other sources of funding available to us will continue to cover our operating expenses, including (i) interest payments on our outstanding financing arrangements and (ii) dividend payments with respect to our outstanding ordinary shares. We expect that future acquisitions and strategic investments will be funded from available
cash flow remaining after the payment of dividends and operating expenses (including interest expenses), cash on hand from previous securities offerings, proceeds of future offerings of securities, and proceeds from the sale of non-core assets. Certain of our significant subsidiaries, including AXA France Assurance, AXA Financial, AXA UK Holdings, AXA Japan, AXA Asia-Pacific Holdings, and AXA Germany, are also holding companies and are dependent on dividends from their respective subsidiaries for funds to meet their obligations. Our principal insurance subsidiaries are subject to restrictions on the amount of dividends and debt repayments that can be paid to us and our affiliates. In 2009, we currently expect to receive reduced or no dividends from certain of our principal subsidiaries and also expect that some of our subsidiaries will be dependent on the Company for capital resources and funding which may require us to provide significant amounts to our subsidiaries through loans, capital injections or other mechanisms. In addition, as noted above, currency hedges used by AXA to manage foreign exchange rate risk may significantly impact the statutory results (parent only) of the Company and the amounts available for distribution as dividends to its shareholders because unrealized exchange rate gains and losses under these derivatives are recognized in the Company’s income statement. These factors may adversely impact the Company’s liquidity position and capacity to pay dividends on its ordinary shares. For further details, see the “liquidity and capital resources” Section included in Part II and the Part V — Note 28.3 “Other items: Restrictions on Dividend Payments to Shareholders”, and of this Annual Report. See also “Risks relating to the financial markets, our financial strength ratings and financial condition, the valuation of our assets and related matters” – ”The Company’s consolidated solvency margin declined significantly during 2008 and continued adverse capital market conditions may further negatively impact our consolidated solvency margin and the regulatory capital requirements of our insurance subsidiaries which could have a material adverse affect on our business, liquidity, credit ratings, results of operations and financial position”.
PART IV – Risk FAcTORs, cERTAiN DiscLOsUREs ABOUT MARkET Risks AND RELATED MATTERs
The claims experience in our Life & Savings businesses could be inconsistent with the assumptions we use to price our products and establish our reserves and adversely affect our earnings In our Life & Savings businesses, our earnings depend significantly upon the extent to which our actual claims experience is consistent with the assumptions we use in setting the prices for our products and establishing the liabilities for obligations for technical provisions and claims. AXA uses both its own experience and industry data to develop estimates of future policy benefits, including information used in pricing the insurance products and establishing the related actuarial liabilities. However, there can be no assurance that actual experience will match these estimates. To the extent that our actual benefits paid to policyholders are less favorable than the underlying assumptions used in initially establishing the future policy benefit reserves, or events or trends cause us to change the underlying assumptions, we may be required to increase our liabilities, which may reduce our net income. For example, certain variable annuity products issued or reinsured by certain of our subsidiaries contain various types of minimum guaranteed benefits such as GMDB, GMIB and/or GMWB. The determination of GMDB, GMIB and GMWB liabilities is based on models that involve numerous estimates and management judgments, including those regarding expected market rates of return and volatility, GMIB election rates, contract surrender rates and mortality experience. Determination of liabilities for our other lines of Life & Savings business, such as our annuity business also involve numerous assumptions and subjective judgments as to mortality and morbidity experience, investment returns, expenses, policy surrender rates, policy lapse rates, and other matters. There can be no assurance that the actual experience on these products will not differ, upwards or downwards, from management’s estimates. In addition, certain acquisition costs related to the sale of new policies and the purchase of policies already in force have been recorded as assets on our balance sheet and are being amortized into income over time. If the assumptions relating to various factors, including the future profitability of these policies (such as future claims, investment income and expenses) and policy lapses and surrenders are not realized, the amortization of these costs could be accelerated
and may even require write-offs due to unrecoverability. These factors could have a material adverse effect on our business, results of operations and financial condition.
Our operating results may be materially adversely affected by the occurrence of natural or man-made disasters and pandemic diseases Unpredictable events, such as hurricanes, windstorms, hailstorms, earthquakes, fires, explosions and floods, as well as other natural or man-made disasters, including acts of terrorism, have the potential to adversely affect our operating results. Over the past several years, changing weather patterns and climatic conditions, such as global warming, have added to the unpredictability and frequency of natural disasters in certain parts of the world and created additional uncertainty as to future trends and exposures. We generally seek to reduce our exposure to these events through individual risk selection, monitoring risk accumulation and purchase of reinsurance. We have experienced in the past, and could experience in the future, material losses from such disasters and catastrophic events, which are inherently unpredictable and which could have a material adverse effect on our financial position and results of operations.
The property & Casualty insurance business is cyclical, which may impact our results The Property & Casualty insurance business is cyclical. Although no two cycles are the same, these cycles have typically lasted for periods ranging from two to six years. Periods of intense price competition due to excessive underwriting capacity, periods of shortages of underwriting capacity permitting more favorable rates, consequent fluctuations in underwriting results and the occurrence of other losses characterize the conditions in these cycles. Historically, Property & Casualty insurers have experienced significant fluctuations in operating results due to volatile and sometimes unpredictable developments, many of which are beyond the direct control of the insurer, including competition, frequency or severity of catastrophic events, levels of capacity, general economic conditions and other factors. This may cause a decline in revenues during certain cycles if we choose not to reduce our Property & Casualty product prices in order to maintain our market position and profitability. We may therefore experience the effects of such cyclicality, changes in customer expectations of appropriate premium levels, the frequency or severity of claims or other loss events, or other factors affecting the Property & Casualty insurance business, which could have an adverse effect on our results of operations and financial condition.
The financial markets crisis has given rise to numerous legislative and regulatory initiatives across various jurisdictions where the Group is conducting its business. These initiatives, which are generally designed to stabilize financial markets and financial institutions around the world, included substantial capital injections into a number of AXA’s direct competitors. Financial institutions, such as AXA, that have not received any form of government support or backing, find themselves increasingly competing directly against government supported or, in some cases, controlled financial institutions in many of their principal markets. In this environment, the Group is exposed to potential abusive or uncompetitive practices by its government supported or controlled competitors, for example, in attempting to use their government endorsement as a marketing advantage with consumers and/or taking advantage of government injected funds to aggressively acquire revenue and market share by underwriting risks on an unprofitable basis, in each case, to the detriment of pure private sector players such as AXA. This is an unprecedented situation that may negatively impact the competitive position of AXA in certain of its key markets and adversely affect its results of operations and financial condition.
Legislative and regulatory initiatives growing out of the financial crisis may adversely impact AXA’s business, results of operations and financial condition Most of the principal markets where the Group conducts its business have adopted or are currently considering major legislative and/or regulatory initiatives in response to the financial crisis. In particular, governmental and regulatory authorities in France, the United Kingdom, the United States and elsewhere are implementing measures to increase regulatory control in their respective financial markets and financial services sectors, including in the areas of prudential rules, capital requirements, executive compensation and financial reporting, among others. We cannot predict whether or when future legislative or regulatory actions may be taken, or what impact, if any, actions taken to date or in the future could have on our business, results of operations and financial condition. We believe, however, that many of the principal jurisdictions where we do business are likely to consider fundamental and wide-ranging legislative and/or regulatory reforms to address the perceived causes of the financial crisis. Management believes that these initiatives will likely revolve around common themes but may result in the enactment of a series of technically incoherent and potentially inconsistent measures across the various jurisdictions where the Group does business. For further information in this respect, see Item 2.2 in Part II of this Annual Report. While management believes many of these reforms may prove beneficial for the Group and the financial markets generally, at present, there is substantial uncertainty as to the nature and extent of these reforms and there can be no assurance that they will not adversely affect AXA’s business, competitive position, results of operations and financial condition.
Changes in tax laws and regulations, including elimination of tax benefits for our products, may adversely affect sales of our insurance and investment advisory products, and also impact our deferred tax assets Changes to tax laws may affect the attractiveness of certain of our products, which currently have favorable tax treatment. From time to time, governments in the jurisdictions in which we operate, have considered or implemented proposals for changes in tax law that could adversely affect our products. These proposals have included proposals to levy tax on the undistributed increase in value of life insurance policies or annuities or similar proposals that affect the tax-favored status of life insurance products and annuities in certain jurisdictions as well as other changes that could adversely affect the attractiveness of our products. For example, in the UK, recently adopted modifications to the capital gains tax regime are expected to reduce the attractiveness of certain products we sell including life insurance bonds and adversely impact sales of these products. In addition legislation enacted in the United States in the spring of 2001 increased the size of estates exempt from the federal estate tax. This legislation is phasing in reductions in the estate tax rate between 2002 and 2009 and will repeal the estate tax entirely in 2010. Under the legislation, however, the estate tax will be reinstated, without the increased exemption or reduced rate, in 2011 and will be in effect thereafter. This legislation, and possible future changes to it such as extending or making permanent its repeal or reform to reduce the impact of estate taxes, could have a negative impact on the sales of estate planning products by U.S. life insurance companies, including our U.S. subsidiaries. The enactment of these or other similar types of legislation in the various countries where we operate, including proposals in the U.S. to create or favor alternative tax-favored long-term savings vehicles, could result in a significant decrease in sales of our currently tax-favored products.
Finally, our results of operations and financial condition may be materially affected, from time to time, by the general economic conditions such as the levels of employment, consumer lending or inflation, in the countries in which we operate.
RISKS RELATED TO OwNERShIp OF AXA ADSs OR ORDINARy ShARES we may, in the future, offer rights, warrants or similar securities at prices below the then-current market price which may adversely affect the market price of our ordinary shares, and our ADSs, and dilute the positions of existing shareholders. Current difficult market conditions may require us to offer rights, warrants or similar securities at prices much below the then-current market price in order to help fund acquisitions and other expansion plans, as well as improvements to our existing infrastructure and other business activities. This may adversely affect the market price of our ordinary shares and our ADSs and have a dilutive effect on the ownership and voting percentages of existing shareholders.
The trading price of AXA ADSs and dividends paid on AXA ADSs may be materially adversely affected by fluctuations in the exchange rate for converting Euro into U.S. dollars Fluctuations in the exchange rate for converting Euro into U.S. dollars may affect the value of AXA ADSs. Specifically, as the relative value of the Euro against the U.S. dollar declines, each of the following values will also decline: • the U.S. dollar equivalent of the Euro trading price of AXA ordinary shares on Euronext Paris which may consequently cause the trading price of AXA ADSs in the United States to also decline; • the U.S. dollar equivalent of the proceeds that a holder of AXA ADSs would receive upon the sale in France of any AXA ordinary shares withdrawn from the depositary; and • the U.S. dollar equivalent of cash dividends paid in Euro on the AXA ordinary shares represented by the AXA ADSs.
The holders of AXA ADSs may not be able to exercise their voting rights due to delays in notification to and by the depositary The depositary for the AXA ADSs may not receive voting materials for AXA ordinary shares represented by AXA ADSs in time to ensure that holders of AXA ADSs can instruct the depositary to vote their shares. In addition, the depositary’s liability to holders of AXA ADSs for failing to carry out voting instructions or for the manner of carrying out voting instructions is limited by the Deposit Agreement governing the AXA ADR facility. As a result, holders of AXA ADSs may not be able to exercise their right to vote and have limited recourse against the depositary or AXA if their shares are not voted according to their request.
holders of AXA ADSs will have limited recourse if AXA or the depositary fails to meet its obligations under the Deposit Agreement and they wish to involve AXA or the depositary in a legal proceeding The Deposit Agreement expressly limits the obligations and liability of AXA and the depositary. Neither AXA nor the depositary will be liable if they: • are prevented from or delayed in performing any obligation by circumstances beyond their control; • exercise or fail to exercise discretion under the Deposit Agreement; or • take any action based upon the advice of, or information from, legal counsels, accountants, any person presenting ordinary shares for deposit, any holder or owner of an AXA ADR or any other person believed by AXA or the depositary in good faith to be competent to give such advice or information. In addition, the depositary and AXA have the obligation to participate in any action, suit or other proceeding with respect to the AXA ADSs which may involve them in expense or liability only if they are indemnified.
As an integrated part of all of our business processes, the aim of our Risk Management is twofold: • Ensure a consolidated view, at local and group levels, of financial, insurance and operational risks and to manage their impact on key financial indicators (earnings, value, capital, liquidity).
Within the AXA Group, Risk Management is coordinated by a central team, supported by local Risk Management teams within each operational entity.
RISK gOVERNANCE wIThIN AXA In order to manage efficiently our local and global risks, the decision process within our risk governance structure is divided into 4 levels: • The Management Board defines business objectives and capital allocation with respect to investment return and risk. It defines the Group appetite for risks in terms of impact on key financial indicators.
• Group Risk Committees integrate various existing committees (such as the Asset-Liability Management Supervisory Committee,
The risk governance structure is further enhanced by Group Audit, which performs, on a periodic basis, as part of its role, an assessment of Group’s risk and governance processes.
RISK MANAgEMENT MISSIONS AND STRUCTURE AT gROUp LEVEL The principal missions that fall under the responsibility of the Group Risk Management Department are described below: • Ensure consolidated view at Local and Group level of financial, insurance and operational risks, and control their impact on key financial indicators (earnings, value, capital, liquidity).
• Implement Economic Capital measures through quarterly assessment (per operating unit, at Group level, and per product)
• Define and coordinate a decentralized review of risk-adjusted pricing and profitability for new products prior to launch (the
Product Approval Process) in Life & Savings and Property & Casualty. For variable annuity products with guarantees, the review is centralized, and submitted to the Management Board.
• Develop and deploy models/metrics to measure risks and monitor the profitability of the business lines (please see the section “Insurance risk”).
• Steer the Risk Management family and develop a risk culture throughout the Group. • Represent the Group at the CRO Forum.
The Group’s risk management structure is also reinforced by AXA Cessions, which advises and supports local entities in their reinsurance strategy (Property & Casualty; Life & Savings), centralizes the Group’s purchasing of reinsurance. Please refer to the section “controlling exposure and insurance risk” for further details on our reinsurance strategy.
AXA is exposed to financial market risks through its core business of financial protection (i.e. insurance and asset management) and through the financing of its activities as part of its equity and debt management. These two distinct sets of risks can be summarized as follows: MARKET RISK AND ASSET-LIABILITy MANAgEMENT OF INSURANCE pORTFOLIOS Local entities have the primary responsibility for managing their financial risk (market risk, ALM, liquidity), with the obligation of respecting the risk framework defined at Group level in terms of limits/ thresholds and standards. This approach allows subsidiaries to react swiftly in an accurate and targeted manner to changes in financial markets and to the political and economic environments in which they operate.
A wide variety of risk management techniques are used to control and mitigate the market risks to which the AXA Group’s operational entities and the Group itself are exposed. These techniques include: • ALM through regular monitoring, and in particular the definition of optimal strategic asset allocations. Please refer to next paragraphs for further details on ALM. • Hedging of financial risks when they exceed the tolerance levels set by the Group. All products requiring hedging programs involving derivative instruments are designed with the assistance of the Group’s specialist asset management teams (AXA Investment Managers and AllianceBernstein).
• Exposure analyses are carried out to monitor certain identified risks.
AXA’s exposure to market risk is reduced by its broad range of operations and geographical positions, which provides good risk diversification and some natural hedging effects between different products and jurisdictions. Furthermore, a large portion of AXA’s Life & Savings operations involve unit-linked products, in which most of the core financial risk is borne directly by policyholders (the shareholder’s value is however still sensitive to financial market evolution and volatility).
Asset-liability and market risk involved in the business: general quantitative information There is a clear distinction of risks between Life & Savings and Property & Casualty.
• A rise in yields on fixed-income investments (coming from a rise in interest rates or in spreads) reduces the value of fixed-income portfolios and could have an adverse impact on the solvency margin and surrender levels on certain contracts, if competitive pressures lead to higher rates of policyholder profit participation on new contracts.
• A decline in equity, real estate prices and alternative investments may reduce the level of solvency margins, as well as available surpluses.
• Foreign-exchange risk is generally limited for the Group’s Life & Savings companies as foreign-currency commitments are matched to a large extent by assets in the same currencies.
• 7% at the end of 2008 (8% at the end of 2007 and 7% at the end of 2006) of the Group’s Life & Savings technical reserves cover separate-account products with related interest-rate or equity guarantees provided by the insurance company, called Variable Annuities with guaranteed benefits. Suitable risk management policies have been put in place with respect to these products: – Derivatives are used as part of the dynamic management of risks related to guaranteed benefits, in order to cover some market risks linked to guaranteed minimum death benefits, guaranteed minimum income benefits, guaranteed minimum accumulation benefit and guaranteed minimum withdrawal benefits. Derivatives are used to help reduce the economic impact of, among other things, unfavorable changes in GMDB, GMIB, GMAB and GMWB exposures due to movements in the equity, fixed income and foreign exchange markets. Two hedging platforms located in AXA Equitable for the US business and AXA Bank Europe for the European and Asian business manage the market risks on these products.
– Policyholder’s behaviors on these products, notably lapses, longevity/ mortality and election rates, are closely monitored and the risk of deviations of these items from our underlying assumptions is limited through updating the dynamic management programs that are in place.
• 18% at the end of 2008 (17% at the end of 2007 and 18% at the end of 2006) of the Group’s Life & Savings technical reserves cover products without guaranteed cash values upon surrender.
– In the UK, surrender options on fixed-rate annuities are monitored through specific analyses and partially covered by interestrate options.
Description of Property & Casualty and International Insurance reserves Property & Casualty and International Insurance technical reserves break down as follows: (in Euro million) Technical liabilities
Sub-total personal lines 24,060 24,182 23,656 commercial lines – Motor 2,885 2,698 2,679 commercial lines – Physical damage 3,012 3,075 2,748 commercial lines – Professional liability 6,717 6,950 7,244 commercial lines – Health 3,054 2,799 2,757 commercial lines – Other 6,896 6,494 6,254
• Lower yields on fixed-income investments increase the value of fixed maturity portfolios and, therefore, generally do not present a material risk, with the exception of certain contracts (disability income and workers’ compensation) that provide guaranteed rates. On the other hand, a prolonged period of low yields would have an impact on the pricing of these products.
• Foreign-exchange rate risk is relatively limited as commitments in foreign currencies are largely backed by assets in the same currencies.
• Inflation may increase the compensation payable to policyholders, with the effect that actual claims payments may exceed the reserves set aside. This risk can be significant for long-tail businesses but is adequately taken into consideration through regular pricing adjustments or specific protections against peaks in inflation.
• A decline in equity, real estate prices and alternative investments may reduce the level of solvency margins, as well as available surpluses
processes in place and related governance for Asset & Liability management AXA manages its risks relating to investments as part of disciplined investment and reporting processes and through an appropriate governance structure. As stated previously, insurance subsidiaries are responsible for monitoring risks through the use of liability structure analysis and asset-liability matching techniques. Based on detailed analyses, they define the strategic asset allocation policy, which is implemented by asset management companies appointed via investment management agreements. Insurance subsidiaries
SHORT-/MEDIUM-TERM OUTLOOK These analyses are designed to confirm AXA’s ability to satisfy capital adequacy requirements over the short and medium terms. These requirements are included as constraints in asset-liability analyses.
• ALM constraints are also taken into account when new products are being designed as part of the product approval process (see section “Insurance risk – Product approval”).
REPORTING: MONTHLY CONCENTRATION RISK REPORTING Operational entities produce an asset allocation statement every month, to ensure that strategic allocations are being implemented. This allows regular monitoring of certain key ALM indicators such as the duration and convexity of fixed income portfolios.
This work is carried out by local teams and then consolidated by Group Risk Management to give an overview for the whole Group and to allow any required action to be taken.
• Exchange-rate risk related to the operating activities of Group subsidiaries. • Risks relating to the management of holding companies’ foreign exchange exposure and debt. • Liquidity risk. Please read “Liquidity position and risk management framework” included in Part II – Section 2.4 - Liquidity and capital resources.
INTEREST RATES & EQUITy RISK RELATED TO ThE OpERATINg ACTIVITIES OF gROUp SUBSIDIARIES AXA performs sensitivity analyses to estimate Group exposure to movements in interest rates and equity markets. These analyses quantify the potential impact on the Group of positive and adverse changes in financial markets.
These analyses cover AXA SA, which carries most of the Group’s debt, along with the largest subsidiaries in France, the United States, the United Kingdom, Belgium, Switzerland, Germany, the Mediterranean and Latin American Region (Spain, Portugal, Italy, Mexico, Morocco, Turkey, the Gulf Region and Greece), Australia, Hong Kong and Japan. At December 31, 2008, these subsidiaries represented 98% of AXA’s consolidated invested assets within its insurance operations.
Savings Other businesses Total iFRs shareholders’ equity at December 31 33,513 3,927 37,440 33,488 12,153 45,642 33,488 12,153 45,642
Life & savings Adjusted Net asset value (ANAv) and Other Businesses iFRs shareholders’ equity 14,750 3,927 18,677 15,738 12,153 27,892 15,738 (3,650) 12,088
“Embedded Value” (EV) is a valuation methodology often used for long term insurance business. It attempts to measure the present value of cash available to shareholders now and in the future and accordingly is presented net of taxes and minority interests. “European Embedded Value” (EEV) is a refinement of this methodology based on Principles issued by the CFO Forum of European insurers, which AXA adopted during 2005. AXA publishes EEV only for its Life & Savings business.
The Group EV is not an estimate of AXA’s “fair value”, regardless of how one might define “fair value”. It does not include the value of business to be sold in the future, nor does it include any value for future profits from existing business of other-than-life businesses (Property & Casualty, International Insurance, Asset Management, Banking, and Holdings and other companies). However, the Life & Savings EEV is a key management metric measuring the risk-adjusted value of the business and tracking its evolution over time, and the Group EV provides a crucial link to processes that impact total Group value but can not be seen within the Life & Savings segment, such as hedging strategies executed at the Group level and also the impact of leverage on the Group.
• No productivity gains in the future are assumed, while a 2.0% average inflation rate was assumed in 2008 (2.2% in 2007). • Expenses are adjusted for non-recurring expenses and one-time strategic spending.
• Non-financial risks are provided for through the cost of holding capital consistent with the necessary amount to obtain a
10% lower value of equity markets at the start of the projection same as above but a decrease.
Upward parallel shift of 100bps in risk-free rates 1,293 4% (1,814) –6% (521) –2% 318 1% (1,576) –3% (1,258) –2%
(*) 2007 sensitivities are different than the ones disclosed last year for other businesses in order to reflect the change in methodology for the Group Ev.
2008 interest rate sensitivities (% of Group EV) for other-than-life businesses of –6% to upward 100bps and 6% to downward 100bps (2007: –3% and 3%) reflect mainly the net-of-tax impacts on fixed-income assets, offset somewhat by derivatives. The majority of other-than-life reserves are not sensitive to interest rate changes.
2008 equity market sensitivities (% of Group EV) for Life & Savings business of 3% to upward 10% or –3% to downward 10% (2007 3% and –3%) are more nearly symmetrical, with no complicating effects from changes of discount rates. The limited asymmetries reflect the impact of guarantees and profit-sharing rules, along with some hedging programs to limit potential losses. The impacts of equity market value changes can come through general account exposures or through changing asset balances impacting future fee revenue on separate account business.
2008 equity market sensitivities (% of Group EV) for other-than-life businesses of 1% to upward 10% or –1% to downward 10% (2007: 2% and –2%) reflect the net-of-tax impacts on equities including derivatives on equities.
• Life & Savings business: 77% of Group assets at the end of 2008 (79% at the end of both 2007 and 2006).
In the United Kingdom, the Life & Savings segment is exposed to exchange-rate risk in both non-profit and with-profits funds. The exposure in the non-profit funds arises through: i. foreign-currency investments in Group companies with a market value of €569 million (€868 million in 2007 and €889 million in 2006), of which €178 million of fixed maturity holding in AXA Belgium (€175 million in 2007 and €177 million in 2006) is hedged; ii. other foreign-currency investments with a market value of €443 million (€161 million in 2007 and €135 million in 2006), of which (a) €123 million are hedged through foreign exchange derivative instruments, and (b) €320 million represent strategic investments that are not hedged (notably €77 million in Banca MPS).
In Belgium, in the United States, and in the Mediterranean and Latin American Region, the Group’s Life & Savings companies do not have any significant exposure to exchange-rate risk.
• property & Casualty business: 10% of Group assets at the end of 2008 (9% at the end of both 2007 and 2006).
In the United Kingdom and Ireland, AXA is exposed to exchange-rate risk through its AXA Insurance subsidiary, which operates in pound sterling but has diversified its investment portfolio in line with its asset liability management objectives. At December 31, 2008, AXA Insurance managed around €203 million (€86 million in 2007 and €146 million in 2006) of directly owned foreign-currency investments and cash. The United Kingdom and Ireland P&C segment also has investments totaling €97 million (€184 million in 2007 and €113 million in 2006) of CDO equity funds and investment funds which predominately invest in foreign-currency investments, equal to around 2.3% (3.1% in 2007 and 1.7% in 2006) of its investment portfolio. The United Kingdom has Euro denominated Credit Default Swaps in place with a nominal value of €144 million (€285 million in 2007 and nil in 2006). In addition, AXA UK’s Irish subsidiary also operates in Northern Ireland, and so manages a portfolio of pound sterling policies in an amount of €122 million (€140 million in 2007 and €134 million in 2006), hedged with investments in the same currency of €131 million (€150 million in 2007 and €137 million in 2006).
In Switzerland, foreign exchange exposure amounted to €3.1 billion (circa 37% of assets) at the end of 2008, of which €3.0 billion were hedged with foreign exchange forwards.
• As regards holding companies (6% of Group assets at the end of 2008, 2007 and 2006), AXA SA has, since 2001, adopted a hedging policy on net investments denominated in foreign currencies, which aims at protecting the Group’s consolidated shareholders’ equity against currency fluctuations, using cross-currency swaps and foreign-currency debt.
At December 31, 2008, the main hedging positions were as follows: – US$13.2 billion or €9.5 billion (US$11.3 billion or €7.7 billion at the end of 2007, and US$11.1 billion or €8.4 billion at the end of 2006) in respect of the US activities, including US$9.6 billion or €6.9 billion (US$7.7 billion or €5.2 billion at the end of 2007, and US$7.0 billion or €5.3 billion at the end of 2006) via cross-currency swaps,
– JPY1,036 billion or €8.2 billion (JPY599 billion or €3.6 billion at the end of 2007, and JPY456 billion or €2.9 billion at the end of 2006) in respect of the activities in Japan, mainly in the form of cross-currency swaps,
– CHF8.3 billion or €5.6 billion (CHF5.0 billion or €3.0 billion at the end of 2007, none at the end of 2006 as the hedges were put in place on January 1, 2007 following the acquisition of Winterthur) in respect of the Switzerland business, in the form of cross-currency swaps.
AXA SA’s assets accounted for most of the assets of Group holding companies at the end of 2008.
The Group Central Finance Department produces monthly reporting data that consolidate interest rate, foreign exchange and liquidity exposures, as well as the interest expenses of AXA SA. This reporting also includes medium-term forecasts.
These reports, together with information about hedging strategies, are sent regularly to and reviewed by the Finance Committee of AXA’s Supervisory Board.
ASSESSMENT: • Variability analyses assess the change in interest expenses over the duration of the strategic plan resulting from a 1% rise in interest rates. • Interest-rate sensitivity analyses assess changes in the value of interest-rate positions by currency and by maturity following a 1% upward shift in the yield curve.
Exchange-rate risk DEFINITION: exchange-rate risk results from a mismatch between the currency of an asset (particularly net foreign currency investments in subsidiaries) and the currency in which it is financed.
Information in this section (except the Credit Derivatives pie chart) should be read in conjunction with Note 4 to the Consolidated Financial Statements included in Part V of this Annual Report which is covered by the Statutory Auditor’s Report on the Consolidated Financial Statements.
As regards debt securities’ issues, total issuer-specific exposure limits are set at Group level and at the level of each subsidiary. These limits depend on the issuer’s risk, assessed via its credit rating and type (corporate, government, state-owned companies and agencies). Note 9.4 of Part V – Consolidated financial statements sets out the debt securities portfolio by issuer type. These tools allow GRM to ensure compliance with limits defined by the Group, among which asset allocation, credit risk concentration or counterparty risk for derivatives. The ALM Supervisory Committee is regularly kept informed of the work performed. These tools also enable coordinated contingency measures to be taken for the most sensitive counterparties.
At December 31, 2008, the breakdown of the debt security portfolio (€305.5 billion, including €10.7 billion of debt securities held through with-profits funds) by credit rating category was as follows: A
At December 31, 2007, the breakdown of the debt security portfolio (€303.2 billion, including €15.5 billion held through with-profits funds) by rating was: 37% in AAA, 30% in AA, 19% in A, 9% in BBB, 1% in BB and lower, and 4% in other. At December 31, 2006, the breakdown of the debt security portfolio (€298.3 billion, including €17.9 billion held through with-profits funds) by rating was: 40% in AAA, 26% in AA, 22% in A, 9% in BBB, 1% in BB and lower, and 1% in other.
(a) Mainly consumer loan ABs (plus some leases and operating ABs assets).
At December 31, 2008, AXA’s invested assets included an exposure to US subprime residential and Alt-A mortgage loans of approximately €0.8 billion (68% equaling or above AA rating and 56% estimated policyholders’ participation).
At December 31, 2008, the analysis by rating of the ABS portfolio was as follows and showed that 69% were AAA & AA.
The negative gross fair value evolution of the ABS assets over the year 2008 was evaluated at €–3.5 billion, of which €–2.7 billion was recognized in the income statement and €–0.7 billion was recognized in shareholders’ equity (versus €–1.5 billion in 2007, of which €–0.7 billion in the income statement and €–0.8 billion in shareholders’ equity). Net of policyholders’ participation, tax and VBI/DAC reactivity, the negative fair value evolution of the ABS assets over the year 2008 was evaluated at €–1.3 billion, of which €–1.0 billion was recognized in the income statement and €–0.3 billion was recognized in shareholders’ equity (versus €–0.6 billion in 2007, of which €–0.3 billion in the income statement and €–0.3 billion in the shareholders’ equity).
At December 31, 2008, the nominal amount of positions taken through credit derivatives was €30.9 billion1 including €8.1 billion of CDSs (or €1.7 billion net) held through CDOs and €22.8 billion (or €19.1 billion net) of CDSs. For these €19.1 billion CDSs, the credit risk taken by the AXA Group through these instruments is included in analyses of debt security portfolios as described in the previous section “Invested assets”. Limits applied to issuers take into account these credit derivative positions.
The breakdown of these CDS’s underlying debt securities by rating (resulting from management information) is as follows: AA
Counterparty Risk arising from Over-The-Counter (OTC) Derivatives AXA actively manages counterparty risk generated by OTC derivatives through a specific Group-wide policy. This policy includes a limit framework and an exposure monitoring process. Limits are set specifically for each authorized counterparty, based on an internal scoring system. This policy also includes daily to weekly collateralization for the majority of the Group’s exposure.
MBIA reinsures 100% of all credit insurance risks (excluding cumulative losses between $0 and $13 million (ca 0.14%) and between $110 and $200 million (ca 1.19% and 2.16%) reinsured to other third party reinsurers on a diversified portfolio of wrapped US municipal bonds underwritten by AXA RE (prior to its run-off). The main characteristics of this portfolio are: • 5,000+ different issues (84% AAA, AA & A, all investment grade) with aggregate principal amount of approximately €7 billion, • Portfolio underwritten between 1998 and 2004, • Very few defaults encountered in 2008 and no impact expected for AXA.
The breakdown of all reserves ceded to reinsurers by reinsurer rating at December 31, 2008 (€11.7 billion) was as follows: AAA
Information in this section should be read in conjunction with Note 4 to the Consolidated Financial Statements included in Part V of this Annual Report which is covered by the Statutory Auditor’s Report on the Consolidated Financial Statements.
• Regular exposure analysis to ensure that the Group’s current exposure is within our risk appetite at Group level. • Optimization of reinsurance strategies to mitigate the risks in order to cap the Group’s peak exposures to protect our Solvency and reduce volatility of key financial indicators. • Reviews of technical reserves. • Emerging risks initiative to share expertise within the underwriting and risk communities.
pRODUCT AppROVAL In its Individual Life & Savings activities, the AXA Group has set up pre-launch product approval procedures in each subsidiary, to ensure that new risks underwritten by the Group undergo a rigorous approval process before the products are offered to customers. This harmonized approach also facilitates the sharing of product innovation within the Group. These procedures are defined and implemented locally, and are structured and harmonized using the minimum requirements defined by GRM. The main characteristics of these procedures are as follows: • Although the decision to launch a new product is taken locally, it must be the result of a documented approval process that complies with local governance practices and AXA Group standards. For variable annuity products with guarantees, this review is centralized, and submitted to the Management Board.
• All significant Individual Life & Savings products must go through this process. • Guarantees and options embedded in the product must be quantified using stochastic methods defined by GRM in order to ensure that they are correctly reflected in pricing. This work also gives a better understanding of any asset-liability mismatch risk and the actual economic capital requirement at the product design stage. Where significant financial risks exist, an ALM study must be performed to confirm the hedging strategy for the product.
• Stress tests are required on key assumptions to ensure that appropriate ‘what if’ scenarios are considered in the development process.
This profitability analysis framework is also used in Property & Casualty as a regular technical & risk audit with methods adapted to the underwriting of risks, while maintaining the principle of local decision-making based on a documented approval procedure. The aim is twofold: • For pre-launch business, to ensure that new risks underwritten by the Group have undergone a rigorous process before the products are offered to customers and show adequate profitability adjusted for the cost of capital.
A uniform Group-wide framework for quantifying all risks has been developed by GRM using stochastic modeling tools factoring in asset and insurance risks. This framework includes pricing control systems used by insurance operations as part of their product development process, such as those described in the previous section. This type of analysis quantifies and demonstrates the benefits of the diversification created by AXA’s wide range of businesses and regional operations.
In the Life & Savings business, the aforementioned tools allow mortality/longevity risks to be analyzed on a multi-country basis. The AXA Group regularly monitors its exposure to these risks (mortality, longevity, long-term care, etc.) and uses the results of this work to enhance the structure of its product ranges and its reinsurance coverage.
to optimize the quality and cost of reinsurance cover. These analyses are performed in collaboration with the technical and reinsurance departments of Group operational entities. They measure frequency risks as well as specific severity risks (natural catastrophes, storms, floods, earthquakes). They provide guidance for determining the most appropriate reinsurance cover (retention levels and scope of cover) for each portfolio and for each type of risk, in accordance with objectives and capital allocation constraints.
• Estimates of catastrophic risks are carried out on the basis of several pieces of modeling software available in the market. Although these software products are key to allow objective discussions with reinsurers, they are regularly assessed within GRM and adjusted to the specific features of AXA’s portfolio. Experience shows that these software products give imperfect estimates of real exposure, and can underestimate some important factors such as inflation following a major catastrophe or the effects of climate change. In addition, they do not factor in risks relating to legal developments requiring an insurer retrospectively to cover a risk that, it believed, was excluded from its policies.
The retention rate and coverage applied to these pools are designed to effectively protect the Group at low cost. Coverage is arranged through the reinsurance market or directly in the financial market through securitization (cat or mortality bonds). In 2008, five pools were managed by AXA Cessions: • Property (Catastrophe and per risk + Personal Accident), • General Liability, • Marine, • Engineering, • Life.
All local Group companies ceding reinsurance are collectively protected by this Group coverage. The net financial results of this Group protection are then retroceded to these entities.
TEChNICAL RESERVES In addition to controlling upstream risks through prior product approval and analyzing the reinsurance strategy, operational entities specifically monitor reserve risks, both in Life & Savings and Property & Casualty businesses. Reserves have to be booked for claims as they are incurred or reported. These reserves are measured individually for each file by the claims departments. Additional reserves for incurred but not reported (IBNR) claims, along with reserves for incurred but not enough reported (IBNER) claims are also booked. Various statistical and actuarial methods are used in these calculations. Calculations are initially carried out locally by the technical departments in charge, and are then reviewed for a second opinion by local risk management teams or external technical experts.
The Group’s methods for Property & Casualty reserves are based on applicable accounting and actuarial standards as well as internal and industry best practice. Actuaries in charge of assessing reserves for claims payable do not use a single method but a selection of approaches such as: • Methods based on the development of claims (paid or incurred) using triangulation methods (e.g. chain ladder and link ratio)
• Methods based on claims ratios (such as the ultimate claims ratio or the additional claims ratio). • Hybrid methods (such as Bornhuetter-Ferguson and Cape Cod). • Methods based on frequency and severity estimates.
The analysis is segmented differently depending on product type, geographical location, distribution channel, local regulation and other factors, in order to obtain a homogeneous claims base and ensure an appropriate analysis of reserves. Assumptions depend on available data relating to reported losses at the time of the estimates, as well as local regulations, claims management procedures, pricing, underwriting information and the type of activities and claims (coverage type, attritional or major claims, recent or old occurrence). They also depend on economic, social and environmental factors, as well as on the legislative and political context, which are important variables in terms of reserves. Assumptions are made following discussions with claims managers, pricing actuaries, underwriters and other specialized departments. These discussions lead to the definition of reasonable estimate ranges.
EMERgINg RISKS Through its Emerging Risks initiative, AXA has established processes to qualify and quantify emerging risks which could develop over-time and become significant. These processes are designed to ensure that the Group’s exposure is within its risk tolerance. This initiative also allows expertise to be shared within the underwriting and risk communities and adequate underwriting policies to be defined.
Natural risks: climate change The changing and growing risks caused by climate change and, more specifically, by global warming, represent a major challenge for all human activities and particularly insurance operations.
pandemic / extreme mortality risk In past years developments relating to bird flu attracted increasing attention across governments and industry to the risks associated with pandemics. While the level of public attention slowed in 2008, the risks continue to exist. Although assessing pandemic risks involves a significant amount of various assumptions, it requires the development and implementation of an appropriate risk management strategy.
AXA has defined a framework to identify and measure its operational risks that may arise from a failure in its organization, systems and resources or from external events. Ensuring an adequate mitigation of these risks across the Group is a key pillar of the risk management functions.
gENERAL pRINCIpLES Guided by the principles set forth by the Basel Committee on banking supervision, AXA defines operational risk as the risk of loss resulting from inadequate or failed processes, people or systems. This inadequacy or failure may come from internal or external causes. It includes legal risk and considers reputation risk as an impact, and excludes risk arising from strategic decisions.
AXA has developed a common operational risk typology listing around a hundred risks classified in the following seven risk categories: • Internal fraud.
• Business disruption and system failures. • Execution, products, delivery and process management.
• In addition, a loss data collection process has been initiated in most companies of the Group in order to track and mitigate appropriately actual operational losses. This process is also used as a valuable source of information to back-test the assumptions taken in local risk assessments.
• a continuous monitoring of our online reputation (web and media monitoring system). • an extensive communication of our CEO to the media in France and at international level.
MONEy LAUNDERINg AND TERRORIST FINANCINg RISK AXA is firmly committed to combating money laundering and terrorist financing. This commitment is enshrined in a specific AntiMoney Laundering charter established in 2002, which was approved by the Management and Supervisory Boards. In line with this charter, each AXA Group company is required to maintain procedures based on Group standards and principles, in addition to those required by applicable local regulations, and to appoint an anti-money laundering officer. The “know your customer” principle is crucial in this respect, and is fundamental to all transactions. The Group Charter is reviewed and adjusted on a regular basis by taking into account international legal and regulatory developments.
REgULATORy RISKS For the regulatory environment in which AXA operates including regulatory risks, please see “Additional factors which may affect AXA’s business” in Part II (Section 2.2) of this Annual Report.
LEgAL AND ARBITRATION pROCEEDINgS Please see Part V – Note 30 “Litigation” of this Annual Report.
SOCIAL AND ENVIRONMENTAL RISKS With respect to its employment practices, AXA’s key challenge is to retain employees and position itself as an employer that is able to attract top talent. Environmental risks are limited because AXA’s core business activities are generally non-polluting.
The insurers used by the Group are acknowledged international leaders and financially solid. For the policy year 2008-2009, the total cost for these Group-wide insurance programs was approximately €9.3 million, excluding taxes and commissions.
LEgAL pROCEEDINgS Please see Part V “Consolidated Financial Statements” – Note 30 “Litigation” of this Annual Report.
AXA determines its dividend policy on the basis of its adjusted earnings minus interest charges on perpetual debt, and, in each of the past several years, has paid aggregate dividends in a general range of 40% to 50% of this amount. While management currently intends to maintain this dividend policy over the long term, it has decided to propose to the Shareholders’ Meeting to be held on April 30, 2009 a dividend of €0.40 per share, which management believes strikes the correct balance between prudent capital management and the range of 40% to 50%, taking into account current financial market conditions and the general economic environment.
For further information on the dividends declared and paid in the most recent five years and on the Company’s dividend policy, see Part II “The AXA Group: Our global business operations, recent financial performance and financial condition”, Section 2.1 “Dividends” and Part VI “Certain additional information – Description of AXA’s Capital Stock”, Section “Dividends” of this Annual Report.
SIgNIFICANT ChANgES For a description of certain developments since the date of the annual financial statements included in this Annual Report, please see Part V “Consolidated Financial Statements” – Note 31 “Subsequent events” of this Annual Report.
ASSETS Notes December 31, 2008 (c) December 31, 2007 December 31, 2006 (in Euro million) Restated (d)
All invested assets are shown net of related derivative instruments impact. (a) Amounts gross of tax.
(b) Includes assets backing contracts where the financial risk is borne by policyholders with Guaranteed Minimum features. (c) AXA Japan’s balances were translated using December 31, 2008 exchange rates. (d) In accordance with IFRS 3, i.e. within 12 months following the acquisition date, the Group adjusted certain items impacting the allocation of Winterthur purchase price.
LIABILITIES Notes December 31, 2008 (d) December 31, 2007 December 31, 2006 (in Euro million) Restated (e)
Liabilities arising from insurance contracts where the financial risk is borne by policyholders (a) 85,916 113,654 108,984
Liabilities arising from investment contracts with no discretionary participating features and where the financial risk is borne by policyholders 38,680 59,173 56,665
14 Liabilities arising from insurance and investment contracts 517,504 556,892 560,602 15 Provisions for risks and charges 9,308 8,654 8,845
(d) AXA Japan’s balances were translated using December 31, 2008 exchange rates. (e) In accordance with IFRS 3, i.e. within 12 months following the acquisition date, the Group adjusted certain items impacting the allocation of Winterthur purchase price.
Liabilities arising from insurance contracts where the financial risk is borne by policyholders 85,916 113,654 108,984
(a) In accordance with IFRS 3, i.e. within 12 months following the acquisition date, the Group adjusted certain items impacting the allocation of Winterthur purchase price.
Fees and charges relating to investment contracts with no participating features 662 740 608
Revenues from insurance activities 85,324 86,857 71,907 Net revenues from banking activities 409 336 376
Change in fair value of other investments designated as at fair value through profit or loss (h) (51,994) 4,084 14,338
21 Net investment result excluding financing expenses (36,068) 25,891 32,555 Technical charges relating to insurance activities (e) (34,338) (89,592) (83,877)
Amortization of the value of purchased business in force (393) (357) (274)
Operating income before tax 406 7,695 7,626 18 Income tax (g) 830 (1,783) (1,991)
(d) Excludes impairment releases on investments sold. (e) Offset by a balancing entry in technical charges relating to insurance activities.
(f) Includes net balance of income and expenses related to derivatives on financing debt (however excludes change in fair value of these derivatives). (g) The Income tax line item as at December 31, 2008 includes an out-of-period adjustment related to the prior years’ double recognition of Deferred tax liabilities in relation with the changes in fair values of assets held by some consolidated investment funds (€188 million). The Group evaluated the impact for each individual year and in aggregate and concluded that they were immaterial to the financial statements for all years in which they were included. The prior years’ Income tax expense recognized since the transition to IFRS was overstated by €13 million as at December 31, 2004, €51 million as December 31, 2005, €36 million as at December 31, 2006, €88 million as at December 31, 2007.
(h) Includes €–106 million loss recognized against Other payables in the balance sheet. As a reminder, AXA Japan closes its books at the end of September. According to IFRS principles whereby the financial statements of the subsidiary shall be adjusted to reflect the effects of significant events that would have been recognized with a closing date aligned with the AXA Group, AXA Japan’s 2008 accounts were adjusted with the provisional loss from October to December 2008. This adjustment reflects mainly the further increase of the credit spreads during this period.
Reserves relating to changes in fair value through shareholders’ equity (5,173) (3,016) (291)
Total recognized income and expense for the period (SoRIE) (5,922) 2,433 4,758
Split between: (a) Includes €–106 million loss recognized against Other payables. As a reminder, AXA Japan closes its books at the end of September. According to IFRS principles whereby the financial statements of the subsidiary shall be adjusted to reflect the effects of significant events that would have been recognized with a closing date aligned with the AXA Group, AXA Japan’s 2008 accounts were adjusted with the provisional loss from October to December 2008. This adjustment reflects mainly the further increase of the credit spreads during this period.
December 31, 2008 December 31, 2007 December 31, 2006 (in Euro million) Restated (a)
Change in fair value of investments at fair value through profit or loss (k) 49,759 (4,547) (14,085)
Net change in liabilities arising from insurance and investment contracts (c) (d) (33,001) 22,940 28,567
Income arising from investments in associates – Equity method (21) (13) (34)
Dividends recorded in profit or loss during the period (2,048) (2,543) (2,014)
Interests paid (excluding interests on financing and perpetual debts) (1,903) (1,959) (1,160)
Net cash provided by other assets and liabilities (h) (1,043) 430 (551)
Other operating cash impact and non cash adjustment 2,032 1,401 1,294
Net cash related to changes in scope of consolidation (2,424) (540) (6,732)
Purchases of equity securities and non controlled investment funds (g) (h) (21,939) (33,114) (19,829)
Purchases of investment properties held directly or not (h) (1,575) (1,292) (1,575)
Net cash related to purchases and issuance of investments (g) (h) (i) (131,375) (168,108) (132,768)
Net cash related to sales and purchases of tangible and intangible assets (339) (312) (164)
Increase in collateral payable / Decrease in collateral receivable 3,287 5,766 9,714
Decrease in collateral payable / Increase in collateral receivable (4,994) (289) (3,355)
Net cash impact of assets lending / borrowing collateral receivables and payables (1,707) 5,477 6,359
Other investing cash impact and non cash adjustment 809 (15) (34)
Other financing cash impact and non cash adjustment 100 4 8
(e) Mainly includes change in provisions for risks & charges, for bad debts/doubtful receivables and change in impairment of assets held for sale. (f) Includes impact of asset lending / borrowing and equivalent relating to banking activities.
(g) Includes equity securities held directly or by controlled investment funds as well as non controlled investment funds. (h) Includes relating derivatives.
According to IFRS principles whereby the financial statements of the subsidiary shall be adjusted to reflect the effects of significant events that would have been recognized with a closing date aligned with the AXA Group, AXA Japan’s 2008 accounts were adjusted with the provisional loss from October to December 2008. This adjustment reflects mainly the further increase of the credit spreads during this period. It was assumed that most of this impact affects non cash items.
AXA operates in the following primary business segments: • Life & Savings, • Property & Casualty, • International Insurance, • Asset Management, • Banking.
These consolidated financial statements including all Notes were finalized by the Management Board on March 16, 2009.
The consolidated financial statements were prepared in compliance with IFRS standards and IFRIC interpretations that were definitive and effective as at December 31, 2008, as adopted by the European union before the balance sheet date. However, the Group does not use the “carve out” option to avoid applying all the hedge accounting principles required by IAS 39. As a consequence, the consolidated financial statements also comply with IFRS as issued by the International Accounting Standards Board (“IASB”).
Financial instruments: Disclosures), was published on October 13, 2008. The amendments permit an entity to reclassify certain non-derivative financial assets out of the fair value through profit or loss category and out of the available for sale category if specific circumstances are met.
Revised IAS 1 – Presentation of financial statements, published on September 6, 2007 and applicable from January 1, 2009, represents the first step in the IASB’s comprehensive project on reporting financial information. The new standard requires to present all non-owner changes in equity either in one statement of comprehensive income or in two statements, to present a statement of financial position (balance sheet) as at the beginning of the earliest comparative period in a complete set of financial statements when the entity applies an accounting policy retrospectively or makes a retrospective restatement. It also requires to disclose income tax relating to each component of other comprehensive income and reclassification adjustments relating to components of other comprehensive income. Finally, revised IAS 1 changes the titles of financial statements. The standard is expected to have a limited impact on the presentation of the Group’s financial statements.
The amendments to IAS 32 – Financial Instruments: Presentation and IAS 1 – Presentation of Financial Statements – Puttable Financial Instruments with Obligations Arising on Liquidation, published on February 14, 2008 and applicable from January 1, 2009 respectively require i) certain puttable financial instruments and obligations arising on liquidation to be classified as equity if certain criteria are met and ii) disclosure on these instruments. These amendments are not expected to have a significant impact on the Group’s consolidated financial statements.
changes with minimal effect on accounting. These amendments are not expected to have a significant impact on the Group’s consolidated financial statements.
Eligible Hedged Items (an amendment to IAS 39 Financial Instruments: Recognition and Measurement), published on July 31, 2008 and applicable for the Group from January 1, 2010, clarifies how the existing principles underlying hedge accounting should be applied. Additional guidance is given to illustrate how hedge accounting should be applied in (a) a one-sided risk in a hedge item, and (b) inflation in a financial hedged item. These amendments are not expected to have a significant impact on the Group’s consolidated financial statements.
IFRIC 15, Agreements for the Construction of Real Estate, published July 3, 2008 and applicable from January 1, 2009, applies to the accounting for revenue and associated expenses by entities that undertake the construction of real estate directly or through subcontractors. IFRIC 15 provides guidance on how to determine whether an agreement for the construction of real estate is within the scope of IAS 11, Construction Contracts or IAS18, Revenue, and when revenue from the construction should be recognized. This interpretation is not expected to have a significant impact on the Group’s consolidated financial statements
1.2.2. First time adoption of IFRS The AXA Group’s transition date is January 1, 2004. The Group prepared its opening IFRS balance sheet at that date. The Group’s IFRS adoption date is January 1, 2005.
The major options elected in accordance with IFRS 1 were the following: Purchase Accounting, goodwill and other intangibles related to past business combinations performed prior to January 1, 2004 AXA chose not to restate past business combinations based on the option available in IFRS 1. As a result, past business combinations prior to January 1, 2004 are accounted for on a previous GAAP basis in the IFRS financial statements, except: • goodwill has been denominated in the functional currency of the acquired entity under IFRS since January 1, 2004 (transition to IFRS), and • any item recognized under previous GAAP that did not qualify for recognition as an asset or liability under IFRS was reclassified into goodwill.
Pension accounting All cumulative past actuarial gains and losses on all employee benefit plans were recognized in retained earnings as of January 1, 2004.
Entities that are controlled in substance, even without any ownership interest, are also consolidated, as well as entities that are controlled in substance because of a specific statute or an agreement, even without any ownership interest. In particular this relates to special purpose entities, such as securitization vehicles.
Investment funds and real estate companies are either fully consolidated or proportionately consolidated or accounted for under the equity method, depending on which conditions of IAS 27 / SIC 12 listed above they satisfy. For fully consolidated investment funds, minority interests are recognized at fair value and shown as liabilities in the balance sheet if the companies’ instruments can be redeemed at any time by the holder at fair value. Investment funds accounted by equity method are shown under the balance sheet caption “Financial investments”.
1.3.2. Business combinations: purchase accounting and goodwill including minority interests buyout In accordance with the option made available by IFRS 1 – First-time adoption of IFRS, business combinations prior to 2004 were not restated with respect to French accounting principles in force at the time. The principles described below apply to the business combinations that occurred after January 1, 2004.
regarding claims, expenses and financial revenues, or they can be estimated on the basis of the new business value. In line with accounting practices in force before the adoption of IFRS, which may continue to be applied under IFRS 4, future premiums relating to acquired business may be recognized in the “Value of purchased business in force” item.
Goodwill The excess of the cost of acquisition over the net fair value of the assets, liabilities and contingent liabilities acquired represents goodwill. Goodwill arising from the acquisition of a foreign entity is recorded in the local currency of the acquired entity and is translated into Euro at the closing date.
Minority interests buyouts In the event of a minority interests buyout of a subsidiary, the new goodwill is recognized as the difference between the price paid for the additional shares and the shareholders’ equity acquired (including changes in fair value posted through equity).
When the contract involves an unconditional commitment exercisable by the option holder, it is recognized as a liability. Since the balancing entry to this liability is not specified by current IFRS, and since IFRIC’s Agenda Committee decided in 2006 not to take any position on the accounting treatment of these transactions, the Group’s method is (i) to reclassify minority interests from equity to liability, (ii) to re-measure this liability at the present value of the option price and (iii) to recognize the difference as an addition to goodwill. Similarly, subsequent changes in the liability will be recorded against goodwill.
Intra-group transactions Intra-group transactions, including internal dividends, payables/receivables and gains/losses on intra-group transactions are eliminated: • in full for controlled subsidiaries, and; • to the extent of AXA’s interest for entities consolidated by equity method or proportionate consolidation.
In the event of an internal sale of an asset that is not intended to be held on the long term by the Group, deferred tax is recognized as the current tax calculated on the realized gain or loss is eliminated. The income statement impact of the potential policyholders’ participation resulting from this transaction is also eliminated, and a deferred policyholders’ participation asset or liability is posted to the balance sheet.
1.4. FOREIGN CURRENCY TRANSLATION OF FINANCIAL STATEMENTS AND TRANSACTIONS The consolidated financial statements are presented in Euro million, the Euro being the Group’s presentational currency.
The results and financial position of all Group entities that have a functional currency (i.e. the currency of the primary economic environment in which the entity operates) different from the Group presentational currency are translated as follows: • assets and liabilities of entities in a functional currency different from Euro are translated at the closing rate; • revenues and expenses are translated at the average exchange rates over the period; • all resulting foreign exchange differences are recognized as a separate component of equity (translation differences).
At the local entity level, foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at closing rates of monetary assets and liabilities denominated in foreign currencies are recognized in the income statement, except where hedge accounting is applied as explained in section 1.9.
1.6. INTANGIBLE ASSETS 1.6.1. Goodwill and impairment of goodwill Goodwill is considered to have an indefinite useful life and is therefore not amortized. Impairment tests are performed at least annually. Impairment of goodwill is not reversible.
1.6.2. value of purchased life insurance business in force (vBI) The value of purchased insurance contracts and investment contracts with discretionary participating features recognized in a business combination (see section 1.3.2) is amortized as profits emerge over the life of the contracts’ portfolio. In conjunction with the liability adequacy test (see section 1.13.2), VBI is subject to annual recoverability testing based on actual experience and expected changes in the main assumptions.
They also include customer relationships intangibles as well as distribution agreements recognized as a result of business combinations, provided that their fair value can be measured reliably and it is probable that future economic benefits attributable to the assets will benefit to the Group. If these assets have a finite useful life, they are amortized over their estimated life. In all cases, they are subject to impairment tests, at each closing for assets with a finite useful life and at least annually for other assets. In the event of a significant decline in value, an impairment is booked corresponding to the difference between the value on the balance sheet and the higher of value in use and market value.
Investment properties that totally or partially back liabilities arising from: • contracts where the financial risk is borne by policyholders, • “With-Profit” contracts where dividends are based on real estate assets, are recognized at fair value with changes in fair value through profit or loss.
In practice, assets held through consolidated investment funds are classified: • either as assets of the “Core Investment Portfolios” which include assets backing liabilities arising from insurance and investment contracts, managed according to AXA’s ALM strategy; • or as assets of the “Satellite Investment Portfolios”, reflecting the strategic asset allocation based on a dynamic asset management aimed at maximizing returns.
Assets designated as available-for-sale, trading assets, investments designated as at fair value through P&L and all derivatives are measured at fair value, i.e. the amount for which an asset could be exchanged, between knowledgeable, willing parties in an arm’s length transaction. The Group applies the IAS 39 fair value hierarchy as detailed in Note 9.9.
1.8. ASSETS BACkING LIABILITIES ARISING FROM CONTRACTS WHERE THE FINANCIAL RISk IS BORNE BY POLICYHOLDERS Assets backing liabilities arising from insurance or investment contracts where the financial risk is borne by policyholders are presented in a separate aggregate of the balance sheet so that they are shown in a symmetrical manner to the corresponding liabilities. This presentation is considered more relevant for the users and consistent with the liquidity order recommended by IAS 1 for financial institutions, since the risks are borne by policyholders, whatever the type of assets backing liabilities (investment properties, debt securities or equity securities, etc). Details of these assets are provided in the notes.
Cash flow hedge The effective portion of changes in the fair value of derivatives designated and qualifying as cash flow hedge is recognized in shareholders’ equity. The gain or loss relating to any ineffective portion is recognized in the income statement. Cumulative gain or loss in shareholders’ equity is recycled in the income statement when the hedged underlying item impacts the profit or loss for the period (for example when the hedged future transaction is recognized). When a hedging instrument reaches its maturity date or is sold, or when a hedge no longer qualifies for hedge accounting, the cumulative gains or losses in shareholders’ equity are held until the initially hedged future transaction ultimately impacts the income statement.
The Group holds financial investments that include embedded derivatives. Such embedded derivatives are separately recorded and measured at fair value through profit or loss if the impact is deemed significant.
1.10. ASSETS / LIABILITIES HELD FOR SALE AND ASSETS / LIABILITIES INCLUDING DISCONTINUED OPERATIONS These comprise assets, particularly buildings or operations, intended to be sold or discontinued within twelve months. Subsidiaries held for sale remain within the scope of consolidation until the date on which the Group loses effective control. The assets and
The purpose and condition of the use of the derivatives within the Group are detailed in Note 19.
1.11. CASH AND CASH EQUIvALENTS Cash comprises cash on hand and demand deposits while cash equivalents are short-term, liquid investments that are readily convertible to cash and which are subject to low volatility.
1.12. SHARE CAPITAL AND SHAREHOLDERS’ EQUITY 1.12.1. Share capital Ordinary shares are classified in shareholders’ equity when there is no obligation to transfer cash or other assets to the holders.
1.12.3. Compound financial instruments Any financial instrument issued by the Group with an equity component (for example an option granted to convert the debt instrument into an equity instrument of the company) and a liability component (a contractual obligation to deliver cash) is classified separately on the liability side of the balance sheet with the equity component reported in Group shareholders’ equity (in the “other reserves” aggregate). Gains and losses relating to redemptions or refinancing of the equity component are recognized as changes to shareholders’ equity.
A number of insurance and investment contracts contain discretionary participating features. These features entitle the contract holder to receive additional benefits or bonuses on the top of these standard benefits: • they are likely to represent a significant portion of the overall contractual benefits; • their amount or timing is contractually at the discretion of the Group; and • they are contractually based on the performance of a group of contracts, the investment returns of a financial asset portfolio or the company profits, a fund or another entity that issues the contract.
The Group classifies its insurance and investment contracts into six categories: • liabilities arising from insurance contracts, • liabilities arising from insurance contracts where the financial risk is borne by policyholders, • liabilities arising from investment contracts with discretionary participating features, • liabilities arising from investment contracts with no discretionary participating features, • liabilities arising from investment contracts with discretionary participating features where the financial risk is borne by policyholders; these relate to unit-linked contracts or multi-funds contracts containing a non-unit-linked fund with discretionary participating features,
• liabilities arising from investment contracts with no discretionary participating features where the financial risk is borne by policyholders.
1.13.2. Insurance contracts and investment contracts with discretionary participating features According to IFRS 4, recognition and derecognition are based on the AXA accounting policies existing prior to IFRS and are described below, except for the elimination of equalization provisions and selective changes as permitted by IFRS 4 (see paragraph below on guaranteed benefits).
For traditional life insurance contracts (that is, contracts with significant mortality or morbidity risk), the future policy benefits reserves are calculated on a prospective basis according to each country regulation provided methods used are consistent with the Group’s policies and using assumptions on investment yields, morbidity/mortality and expenses.
Additional reserves are booked if there are any adverse impacts on reserves level caused by a change in mortality table.
Future policy benefits reserves relating to investment contracts with discretionary participation features (previously called “savings contracts” in AXA’s accounting principles) that carry low mortality and morbidity risk are calculated using a prospective approach based on discount rates set at inception (similar to the retrospective approach, i.e. “account balance” methodology).
The “Liabilities arising from policyholders participation” caption includes the entire “Fund for Future Appropriation” (FFA) relating to uK with-profit contracts, which principally covers future terminal bonuses according to the terms of these contracts. The combination of provisions on with-profit contracts and the FFA varies in line with the market value of the assets supporting the participating with-profit funds. Technical reserves are measured on a “realistic” basis in accordance with uK accounting standard FRS 27 and in line with the practice used by uK insurance companies with respect to these contracts.
Except when these guarantees are covered by a risk management program using derivative instruments (see next paragraph), guaranteed minimum benefits reserves relating to contracts where the financial risk is borne by policyholders (insurance contracts because they include such guarantees or investment contracts with discretionary participating features), are build over the life of the contract based on a prospective approach: the present value of future benefit obligations to be paid to policyholders in relation to these guarantees is estimated on the basis of reasonable scenarios. These scenarios are based on assumptions including investment returns, volatility, surrender and mortality rates. This present value of future benefit obligations is reserved as fees are collected over the life of the contracts.
Shadow accounting and Deferred policyholders Participation Asset (DPA) or Liability (DPL) In compliance with IFRS 4 option, shadow accounting is applied to insurance and investment contracts with discretionary participating features. Shadow accounting is applied to technical liabilities, acquisition costs and value of business in force to take into account unrealized gains or losses on insurance liabilities or assets in the same way as it is done for a realized gain or loss of invested assets. When unrealized gains or losses are recognized, a deferred participating liability (DPL) or asset (DPA) is recorded. The DPL or DPA corresponds to the discretionary participation available to the policyholders and is determined by applying an estimated participation rate to unrealized gains and losses.
Deferred policyholders participation is fully classified as liabilities (or assets). As a consequence, there is no component recognized as an equity component and AXA does not need to ensure the liability recognized for the whole contract is not less than the amount that would result from applying IAS 39 to the guaranteed element.
When a net unrealized loss is accounted, a deferred participating asset (DPA) should be recognized only to the extent that its recoverability toward future policyholders participation, by entity, is highly probable. That could be the case if the DPA can be offset against future participation either directly through deduction of the DPL from future capital gains or indirectly through deduction of future fees on premiums or margins.
Embedded derivatives in insurance and investment contracts with discretionary participating features Embedded derivatives that meet the definition of an insurance contract or correspond to options to surrender insurance contracts for a set amount (or based on a fixed amount and an interest rate) are not separately measured. All other embedded derivatives are bifurcated and booked at fair value when material if they are not considered as closely related to the host insurance contract and/or do not meet the definition of an insurance contract.
1.13.3. Investment contracts with no discretionary participating features In accordance with IAS 39, these contracts are accounted for using “deposit accounting”, which mainly results in not recognizing the cash flows corresponding to premiums, benefits and claims in the statement of income (see “Revenue recognition” section below). These cash flows shall rather be recognized as deposits and withdrawals.
This category includes mainly unit-linked contracts that do not meet the definition of insurance or investment contracts with discretionary participating features. For these unit-linked contracts, the liabilities recognized under existing accounting policies are valued based on the fair value of the financial investments backing those contracts at the balance sheet date.
Unearned fees reserves Fees received at inception of an investment contract with no discretionary participating features to cover future services are recognized as liabilities and accounted in the income statement based on the same amortization pattern as the one used for deferred origination costs (see section 1.6.4).
1.14. REINSURANCE: CEDED REINSURANCE Transactions relating to reinsurance assumed and ceded are accounted in the balance sheet and income statement in a similar way to direct business transactions provided that these contracts meet the insurance contracts classification requirements and in agreement with contractual clauses.
Deferred tax assets and liabilities emerge from temporary differences between the accounting and fiscal values of assets and liabilities, and when applicable from tax loss carryforwards. Deferred tax assets are recognized to the extent that it is probable that future taxable profit will be available to offset the temporary differences. Therefore, deferred tax assets that are not expected to be recovered are derecognized.
1.16.2. Pensions and other post-retirement benefits Pensions and other post-retirement benefits include the benefits payable to AXA Group employees after they retire (retirement compensation, additional pension benefit, health insurance). In order to meet those obligations, some regulatory framework have allowed or enforced the set up of dedicated funds (plan assets).
Defined benefit plans: an actuarial assessment of the commitments based on each plan’s internal rules is performed. The present value of the future benefits paid by the employer, known as the DBO (Defined Benefit Obligation), is calculated annually on the basis of long-term projections of rate of salary increase, inflation rate, mortality, staff turnover, pension indexation and remaining service lifetime. The amount recorded in the balance sheet for employee benefits is the difference between the Defined Benefit Obligation and the market value at the balance sheet date of the corresponding invested plan assets after adjustment at fair value. If the net result is negative, a provision is recorded in the balance sheet under the provision for risks and charges heading. If the net result is positive, a prepaid asset is recorded in the balance sheet. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are recognized in shareholders’ equity (in the Statement of Recognized Income and Expense – SoRIE) in full in the period in which they occur. Similarly, any adjustment arising from the asset ceiling is recognized in shareholders’ equity. Past service costs are recognized immediately in the income statement, unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, past service costs are amortized on a straight-line basis over the vesting period.
1.16.3. Share-based compensation plans Group’s share-based compensation plans are predominantly equity-settled plans.
All equity-settled share-based compensation plans granted after November 7, 2002 and not fully vested as at January 1, 2004 are accounted for at fair value at the date they were granted and the fair value is expensed over the vesting period.
1.17. PROvISIONS FOR RISkS, CHARGES AND CONTINGENT LIABILITIES 1.17.1. Restructuring costs Restructuring provisions other than those that may be recognized on the balance sheet of an acquired company on the acquisition date are recorded when the Group has a present obligation evidenced by a binding sale agreement or a detailed formal plan whose main features are announced to those affected or to their representatives.
Provisions are measured at management’s best estimate, at the balance sheet date, of the expenditure required to settle the obligation, discounted at the market risk-free rate of return for long term provisions.
1.18.2. Fees and revenues from investment contracts with no discretionary participating features Amounts collected as premiums from investment contracts with no discretionary participating features are reported as deposits net of any loadings and policy fees. Revenues from these contracts consist of loadings and policy fees relating to underwriting, investment management, administration and surrender of the contracts during the period. Front-end fees collected corresponding to fees for future services are recognized over the estimated life of the contract (see “unearned fees reserves” section 1.13.3).
1.18.3. Deposit accounting Investment contracts with no discretionary participating features fall within the scope of IAS 39. Deposit accounting applies to these contracts, which involves the following: • the Group directly recognizes the consideration received as a deposit financial liability rather than as revenues, • claims paid are recognized as withdrawals with no posting in the income statement apart from potential fees.
1.18.5. Change in unearned premiums reserves net of unearned revenues and fees Changes in unearned premiums reserves net of unearned revenues and fees include both the change in the unearned premium reserve reported as a liability (see “unearned premium reserves” in section 1.13.2) and the change in unearned revenues and fees. unearned revenues and fees correspond to upfront charges for future services recognized over the estimated life of insurance and investment contracts with discretionary participating features (see “unearned revenues reserves” in section 1.13.2) and investment contracts with no discretionary participating features (see section 1.13.3 “unearned fees reserves”).
1.18.7. Revenues from other activities Revenues from other activities mainly include: • insurance companies revenues from non insurance activities, notably commissions received on sales or distribution of financial products, • commissions received and fees for services relating to asset management activities, and • rental income received by real estate management companies.
(depreciation expense relating to owner occupied properties is included in the “administrative expenses” aggregate); this item includes interest received calculated using the effective interest method for debt instruments and dividends received on equity instruments,
In respect of banking activities, interest income and expenses are included in the “Net revenue from banking activities” item (see section 1.18.6).
1.19. SUBSEQUENT EvENTS Subsequent events relate to events that occur between the balance sheet date and the date when the financial statements are authorized for issue: • such events lead to an adjustment of the consolidated financial statements if they provide evidence of conditions that existed at the balance sheet date, • such events result in additional disclosures if indicative of conditions that arose after the balance sheet date, and if relevant and material.
Winterthur (UK) Holdings Ltd Merged with AXA UK Plc – – 100.00 99.99
AXA Wealth Management (HK) Limited Merged with (previously Winterthur Life (Hong Kong) Ltd.) AXA China Region Limited – – 100.00 53.86
DBV-Winterthur Krankenversicherung AG Merged with AXA Kranken Versicherung AG – – 100.00 96.69
Winterthur Europe Assurances – Vie Merged with AXA Belgium SA – – 100.00 100.00
Winterthur Europe Assurances – Non Vie Merged with AXA Belgium SA – – 100.00 100.00
AXA Aurora SA Vida de Seguros y Reaseguros Merged with Winterthur Vida y Pensiones – – 99.70 99.70
AXA Aurora SA Vida Merged with Winterthur Vida y Pensiones – – 99.96 99.67
AXA-MPS Vita 50,00 50.00 50,00 50.00 + 1 voting right + 1 voting right
AXA-MPS Danni 50,00 50.00 50,00 50.00 + 1 voting right + 1 voting right
AXA Oyak Hayat Sigorta AS Minority interest buyout 100.00 100.00 100.00 50.00
AXA Cooperative Insurance Company (Saudi Arabia) Newly consolidated 50.00 34.00 – –
Winterthur Swiss Insurance Company Holding Merged with AXA Insurance – – 100.00 100.00
(a) Wholly owned by AXA Asia Pacific Holdings Limited. (b) “MedLA” country is part of Mediterranean and Latin American Region.
International Insurance voting Ownership voting Ownership (entities having worldwide activities) Change in scope rights interest rights interest
voting Ownership voting Ownership Banking Change in scope rights interest rights interest
The main changes to the Group scope of consolidation in 2008 are: • the minority shareholders’ buyout of OYAk in Turkey, • the acquisition of Seguros ING in Mexico, • the acquisition of SBJ Group in the united Kingdom.
At December 31, 2008, the 38 consolidated real estate companies corresponded to total invested assets of €7,740 million (€7,643 million at the end of 2007 and €7,863 million at the end 2006), mainly in Germany and France.
Given the nature of the Group activities (no securitization of AXA’s own invested assets), the current market conditions did not lead to the consolidation of off balance sheet special purpose vehicles originated by the Group.
In most investment funds (particularly open-ended investment funds), minority interests do not meet the definition of shareholders’ equity. They are therefore presented as liabilities under “Minority interests of controlled investment funds and puttable instruments held by minority interest holders”. At December 31, 2008, minority interests in controlled investment funds amounted to €4,847 million (€7,116 million at December 31, 2007 and €6,099 million at the end 2006).
On June 17, 2008, AXA completed, through the acquisition of 39.34% of RGI Holdings B.V., the acquisition of 36.7% of the share capital of RESO GARANTIA, Russia’s 2nd largest P&C insurer for a total cash consideration of around €810 million. As part of the agreement, AXA will have the option to buy out the remaining stake through calls exercisable in 2010 and 2011. Also as part of the agreement, AXA granted a 6-year $1 billion credit facility to RESO’s main shareholder, fully secured by his shareholding in the company.
Investment funds and real estate entities consolidated by equity method At December 31, 2008, real estate companies consolidated by equity method represented total assets of €430 million (€338 million at the end of 2007 and €475 million at the end 2006) and investment funds consolidated by equity method represented total assets of €1,445 million (€1,234 million at the end of 2007 and €1,376 million at the end 2006), mainly in France, Germany and the united States.
2.2. CONSOLIDATED ENTITIES RELATING TO SPECIFIC OPERATIONS Acacia The Acacia SPV is consolidated within the operations of AXA France Vie. This structure was put in order to improve AXA France Vie assets/liabilities adequacy ratio by ceding receivables resulting from eligible insurance operations against cash. The main impact is a €250 million increase in the AXA Group’s other liabilities, and a parallel increase in receivables.
Through securitization, AXA transferred to the financial markets the potential deviation of the cost of claims on the securitized insurance portfolios above certain thresholds.
Arche Finance AXA France invested €1.2 billion in 2008 in Arche Finance, a new investment vehicle dedicated to credit investment, which entered the scope of consolidation in June 2008.
International Insurance: This segment’s operations include insurance products that specifically relate to AXA Corporate Solutions Assurance. These products provide coverage to large national and international corporations. The segment also includes assistance activities and the group’s run-off management activities, managed by AXA Liabilities Managers, including risks underwritten by AXA RE relating to 2005 and prior underwriting years. Years after 2005 are covered by a treaty ceding 100% of the reinsurance business to Paris Ré.
The Asset Management segment includes diversified asset management (including investment fund management) and related services, which are provided to a variety of institutional investors and individuals, including AXA’s insurance companies.
In this document, “Insurance” covers the three insurance segments: Life & Savings, Property & Casualty and International Insurance. The term “Financial Services” includes both the Asset Management segment and the Banking segment.
Reinsurer’s share in insurance and investment contracts liabilities 5,902 2,430 3,691 – – – (278) 11,745
Mediterranean and Latin American Region 34,336 13,098 – – – – – 47,433
Reinsurers’ share in insurance and investment contracts liabilities 5,055 2,269 4,985 – – – (272) 12,038
Assets held for sale including discontinued operations 235 3,098 – – – – – 3,333
Mediterranean and Latin America Region 14,067 10,458 – – – – – 24,525
Liabilities arising from policyholder’s participation 13,585 276 – – – – (1) 13,859
Derivatives relating to insurance and investment contracts (1,156) – (20) – – – – (1,176)
TOTAL LIABILITIES EXCLUDING CONSOLIDATED SHAREHOLDERS’ EQUITY 513,763 64,300 17,308 5,050 27,438 45,299 (40,140) 633,018
Liabilities arising from investment contracts (a) 111,161 – – – – – – 111,161
Unearned revenues and unearned fees reserves 2,232 – – – – – – 2,232
Provisions for risks and charges 4,988 2,376 277 207 168 638 – 8,654
Liabilities from held for sale including discontinued operations 61 9 – – – – – 70
(a) Also includes changes in liabilities arising from insurance contracts and investment contracts where the financial risk is borne by policyholders. (b) Includes SPEs and CDOs previously disclosed in the Other Financial Services segment which was renamed “Banking”.
Provisions for risks and charges 4,788 2,844 307 166 159 580 – 8,845
TOTAL LIABILITIES EXCLUDING CONSOLIDATED SHAREHOLDERS’ EQUITY 559,005 63,789 19,513 7,508 23,792 27,373 (23,536) 677,443
Net revenues from banking activities – – – – 388 9 13 409
Of which change in fair value of assets with financial risk borne by policyholders (43,687) – – – – – – (43,687)
Technical charges relating to insurance activities (15,213) (16,662) (2,691) – – – 227 (34,338)
Amortization of the value of purchased business in force (393) – – – – – – (393)
(a) Includes SPEs and CDOs previously in the Other Financial Services segment which was renamed “Banking”. (b) Includes €–106 million loss recognized against Other payables in the balance sheet. As a reminder, AXA Japan closes its books at the end of September.
Fees and charges relating to investment contracts with no participating features 740 – – – – – – 740
Change in fair value of other investments at fair value through profit or loss 4,691 (75) 38 (22) – (550) 3 4,084
Of which change in fair value of assets with financial risk borne by policyholders 7,468 – – – – – 8 7,476
Technical charges relating to insurance activities (70,595) (16,723) (2,527) – – – 254 (89,592)
Bank operating expenses – – – – (55) (2) – (57)
Change in tangible assets impairment – 3 – – – – – 2
Income from operating activities before tax 4,265 2,969 396 1,449 34 (377) (584) 8,152
Income arising from investments in associates – Equity method 6 5 1 – – 2 – 13
Result from discontinued operations net of tax – – – – – 480 – 480
Net consolidated income – Group share 2,899 2,218 243 588 6 (287) – 5,666
Net consolidated income – Minority interests 287 49 3 399 1 (14) – 725
(a) Includes SPEs and CDOs previously in the Other Financial Services segment which was renamed “Banking”.
Fees and charges relating to investment contracts with no participating features 608 – – – – – – 608
Change in fair value of other financial instruments designated as at fair value through profit or loss 14,687 50 35 47 – (482) – 14,338
Net investment result excluding financing expenses 30,122 2,159 465 182 – 55 (429) 32,555
Income arising from investments in associates – Equity method 12 22 – – – – – 34
(a) Includes SPEs and CDOs previously disclosed in the Other Financial Services segment which was renamed “Banking”. (b) As described in Note 1.10, the contribution of discontinued operations is stated on a separate line of the income statement.
All of the following paragraphs form an integral part of the Group financial statements. They appear in Section 4.2 “Quantitative and Qualitative Disclosures About Market Risk and Risk Factors” and Section 2.4 “Liquidity and capital resources” sections of this Annual Report: 4.1. RISk MANAGEMENT ORGANIZATION Please refer to pages 206 to 207 of the “Quantitative and Qualitative Disclosures About Market Risk and Risk Factors” section.
4.4. INSURANCE RISk Please refer to pages 222 to 225 of the “Quantitative and Qualitative Disclosures About Market Risk and Risk Factors” section.
4.5. LIQUIDITY AND CAPITAL RESOURCES Please refer to pages 111 to 116, “Liquidity and capital resources” section.
5.1. GOODWILL An analysis of goodwill is presented in the table below: Gross Gross Accumulated Gross Accumulated value Accumulated Net value value impairment Net value value impairment Net value December 31, impairment December 31, Transaction December 31, December 31, December 31, December 31, December 31, December 31, 2006 December 31, 2006 (in Euro million) year 2008 2008 2008 2007 2007 2007 Restated (a) 2006 Restated (a)
AXA-MPS Vita and Danni 2007 487 – 487 465 – 465 – – –
Bluefin Insurance Group Ltd (previously Venture Preference limited) (c) 2007 & 2008 241 – 241 246 – 246 – – –
(b) Includes the goodwill in connection with the put to re-purchase units of the former shareholders of Sanford C. Bernstein. (c) Includes the goodwill of SBJ group.
(d) Following a revaluation of deferred tax assets booked at the time of the Nippon Dantaï acquisition, goodwill was reduced by an equivalent amount
(€70 million in 2005, equivalent to €76 million at December 31, 2008 due to change in foreign exchange).
Goodwill presented in the table above also includes the balancing entry for the revaluation of minority interests relating to buyout commitments recognized as liabilities under the “Minorities of controlled investments funds and puttable instruments held by minority interest holders” caption: • The amount relating to the puts owned by minority shareholders in Sanford C. Bernstein and presented in the Sanford C.
• The amount relating to the puts owned by minority shareholders in former Winterthur subsidiaries in Central and Eastern Europe and presented in the Winterthur item of the above table totaled €81 million at December 31, 2008 (€81 million at December 31, 2007 and €71 million at December 31, 2006).
AXA MPS Vita and Danni 465 22 – – – – 487
Bluefin Insurance Group Ltd (previously Venture Preference limited) (b) 246 63 – 1 (68) – 241
Bluefin Advisory Services Limited (previously Thinc Group) (b) 58 94 – – (29) – 122
AXA Financial, Inc. (minority buyout) 2,571 – – (2) 143 – 2,712
SLPH (AXA UK Holdings) (minority buyout) 1,388 – – – (279) – 1,109
AXA Aurora (minority buyout) 120 – – – – – 120
Gross value Acquisitions Disposals Currency Gross value January 1, during during Goodwill translation Other December 31, (in Euro million) 2007 the period the period adjustments adjustment changes (a) 2007
Bluefin Advisory Services Limited (previously Thinc Group) – 62 – – (4) – 58
AXA Financial, Inc. (minority buyout) 2,885 – – (11) (303) – 2,571
SLPH (AXA UK Holdings) (minority buyout) 1,541 – – (33) (120) – 1,388
AXA China Region (minority buyout) 246 – – – (28) – 218
(a) Includes the impact of exercises and revaluations of minority interest buyout commitments. (b) The decrease in 2007 corresponds to the disposal of the Netherlands operations. (c) The increase is due to the minority buyout of AXA Konzern AG.
5.2.2. Goodwill – Change in impairment Accumulated Increase in impairment impairment losses relating to transferred out goodwill Write back of relating to Cumulative Increase in created on impairment goodwill Cumulative impairment impairment acquisitions of goodwill transferred in Currency impairment January 1, during during sold during the “held for translation Other December 31, (in Euro million) 2008 the period the period the period sale” category adjustment changes 2008
Royale Belge (a) 33 – – (33) – – – –
An impairment loss is recognized for a cash-generating unit if, and only if, the recoverable amount of the unit or group of units is less than the carrying amount of the unit or group of units. The recoverable amount of each cash generating unit or group of units is the higher of (i) the cash generating unit or group of units’ fair value less costs to sell and (ii) its value in use.
For Life & Savings businesses, such valuation techniques include discounted cash flows taking into account: • the current shareholders’ net asset value plus future profitability on business in force. Such techniques (embedded value types of methodologies) are industry specific valuation methods which are consistent with the principles of discounted earnings approaches as the value of business in force results from the projection of distributable earnings. The current shareholders’ net asset value is adjusted to take into account any difference between the basis of cash flows projections used in the value of business in force calculations and IFRS.
Key assumptions include expected growth, expenses, cost of capital, future investment margins, first assessed on a risk free basis (basic test) and then on the basis of illustrative investment assumptions suitable for a traditional embedded value approach if the previous recoverable value is lower than the carrying amount.
The results of these projections exceed the carried amount of each of the generating unit or group of units. However, given current market conditions, the amount of excess has decreased significantly, in particular in the uS Life & Savings and asset management markets, and in the uK Life & Savings market. To the extent that securities valuations remain depressed for prolonged periods of time and market conditions stagnate or worsen as a result of the global financial crisis, revenues, profitability, new business volumes, assets under management would likely be adversely affected. In addition, the future cash flow expectations and other assumptions underlying management’s current business plans could be negatively impacted by other risks to which the Group’s business is subject. As a result, subsequent impairment tests may be based upon different assumptions and future cash flow projections, which may result in an impairment of these assets in the foreseeable future.
5.3. OTHER INFORMATION RELATING TO GOODWILL Goodwill is mainly attributable to the following business combinations and entities: 5.3.1. Acquisitions during the period The main acquisitions of the year 2008 were the following: • On February 6, 2008, AXA announced it had reached an agreement to acquire OYAK’s 50% share in AXA OYAk Holding A.Ş. (“AXA OYAk”), a joint-venture company established by AXA and OYAK in 1999. under the terms of the agreement, AXA paid a purchase price of $525 million (approximately €354 million) in cash for OYAK’s 50% share in AXA OYAK (in addition, according to the same agreement, AXA OYAK Holding bought, for $15 million (approximately €9 million), the 1.5% interest that Mais Motors, an OYAK joint venture company, holds in AXA OYAK’s non-life subsidiary. The transaction closed on August 12, 2008.
At December 31, 2008, the goodwill had a net value of €247 million.
At December 31, 2008, the goodwill had a net value of €479 million.
Acquisition of ELLA Bank (2007) On July 27, 2007, AXA Holdings Belgium SA acquired 100% of the Hungarian retail bank ELLA and its affiliates for €123 million. At December 31, 2008, the goodwill had a net value of €59 million.
Acquisition of MPS Vita and MPS Danni (2007) On October 19, 2007, AXA, as part of a long-term agreement with BMPS in life and non-life bancassurance as well as in pension business in Italy, acquired 50% of MPS vita (Life & Savings) and MPS Danni (Property & Casualty), and 50% of BMPS open pension funds business. At December 31, 2008, the goodwill had a net value of €487 million.
Acquisition of MLC Hong Kong and Indonesia (2006) On May 8, 2006, AXA Asia Pacific Holdings (AXA APH) acquired MLC Hong kong and MLC Indonesia for €340 million. At December 31, 2008, the goodwill had a net value of €110 million.
Following registration of these squeeze-outs, further litigation with minority shareholders on valuation issues is expected in a compensation review procedure (Spruchverfahren) under German law.
The impact of acquisitions and disposals of subsidiaries and portfolios amounted to: • €103 million in 2008, driven by the acquisitions of Seguros ING (Mexico) (€56 million) and of the financial advisor Genesys
Netherlands operations (€–238 million). • €2,513 million in 2006 mainly driven by the acquisition of Winterthur (€2,307 million) and MLC Hong Kong (€248 million).
Net deferred acquisition costs relating to Life & Savings (a) 15,867 14,045 13,653
Deferred acquisition costs and equivalent relating to Life & Savings 17,026 14,990 14,199
Deferred acquisition costs and equivalent relating to Property & Casualty and International Insurance 1,739 1,767 1,697
7.2. ROLLFORWARD OF DEFERRED ACQUISITION COSTS AND EQUIvALENT – LIFE & SAvINGS
Life & Savings deferred acquisition costs and equivalent net carrying value as at January 1 13,754 1,236 13,047 1,152 12,360 960
DAC and similar costs capitalization for the period 2,667 250 3,104 362 2,501 265
Life & Savings deferred acquisition costs and equivalent net carrying value as at December 31 15,952 1,074 13,754 1,236 13,047 1,152
In 2008, the currency translation was impacted by the united States (€396 million) and Japan (€321 million), partly offset by the united Kingdom (€–478 million).
Bluefin Insurance Group Ltd (previously Venture Preference limited) 94 (21) – 72
Bluefin Advisory Services Limited (previously Thinc Group) 59 (13) – 47
Bluefin Insurance Group Ltd (previously Venture Preference limited) 88 (10) – 77
Accumulated (in Euro million) Gross value amortization Impairment Net value 8.3. CHANGE IN INTANGIBLE ASSETS RECOGNIZED IN BUSINESS COMBINATIONS
AXA-MPS Vita and Danni 785 – – – – – – – 785
In 2008, acquisition during the period was related to SBJ Group.
Bluefin Insurance Group Ltd (previously Venture Preference limited) – 94 – (11) – – – (5) 77
Investment in real estate properties designated as at fair value through profit or loss (b) 2,398 2,398 0.47% – – – 2,398 2,398 0.46%
Debt securities designated as at fair value through profit or loss (b) 44,199 44,199 8.60% 57 57 0.45% 44,256 44,256 8.40%
Debt securities held for trading 102 102 0.02% 875 875 6.94% 977 977 0.19%
Equity securities available for sale 15,468 15,468 3.01% 3,959 3,959 31.38% 19,427 19,427 3.69%
Equity securities designated as at fair value through profit or loss (b) 10,503 10,503 2.04% 259 259 2.05% 10,761 10,761 2.04%
Non controlled investment funds held for sale 5,336 5,336 1.04% 76 76 0.61% 5,412 5,412 1.03%
Non controlled investment funds designated as at fair value through profit or loss (b) 2,187 2,187 0.43% 63 63 0.50% 2,250 2,250 0.43%
Macro hedge and other derivatives – – – 8 8 0.06% 8 8 –
Investment in real estate properties at amortized cost 17,778 12,045 2.06% 1,867 1,776 12.96% 19,645 13,821 2.31%
Macro hedge and other derivatives – – – – – – – – –
Debt securities held to maturity – – – – – – – – –
Debt securities designated as at fair value through profit or loss (b) 55,152 55,152 9.44% 822 822 6.00% 55,974 55,974 9.36%
Debt securities (at cost) that are not quoted in an active market – – – – – – – – –
Equity securities available for sale 33,350 33,350 5.71% 2,546 2,546 18.58% 35,896 35,896 6.00%
Equity securities designated as at fair value through profit or loss (b) 19,322 19,322 3.31% 271 271 1.98% 19,593 19,593 3.28%
Non controlled investment funds held for sale 3,449 3,449 0.59% 142 142 1.03% 3,591 3,591 0.60%
Non controlled investment funds designated as at fair value through profit or loss (b) 2,298 2,298 0.39% 134 134 0.98% 2,433 2,433 0.41%
Macro hedge and other derivatives – – – 7 7 0.05% 7 7 –
Investment properties at amortized cost 18,235 13,260 2.28% 731 548 3.36% 18,966 13,808 2.30%
Investment properties designated as at fair value through profit or loss (b) 5,364 5,364 0.92% 608 608 3.73% 5,972 5,972 1.00%
Debt securities designated as at fair value through profit or loss (b) 49,591 49,591 8.51% 182 182 1.11% 49,772 49,772 8.31%
Debt securities held for trading 94 94 0.02% 1,203 1,203 7.38% 1,297 1,297 0.22%
Equity securities designated as at fair value through profit or loss (b) 22,050 22,050 3.78% 123 123 0.75% 22,173 22,173 3.70%
Macro hedge and other derivatives – – – 8 8 0.05% 8 8 –
Investments (excluding those backing contracts where the financial risk is borne by policyholders) 411,329 406,202 69.70%
(a) Mainly includes policy loans. (b) Use of fair value option. (c) In accordance with IFRS 3, i.e. within 12 months following the acquisition date, the Group adjusted certain items impacting the allocation of Winterthur purchase price.
Breakdown of the carrying value and fair value of investment properties at amortized cost, excluding the impact of all derivatives: Gross Amorti- Impair- Carrying Fair Gross Amorti- Impair- Carrying Fair Gross Amorti- Impair- Carrying Fair (in Euro million) value zation ment value value value zation ment value value value zation ment value value
Change in impairment and amortization of investment properties at amortized cost (all activities): Impairment – Investment properties Amortization – Investment properties
December 31, December 31, December 31, December 31, December 31, December 31, (in Euro million) 2008 2007 2006 2008 2007 2006
Excluding the effect of all derivatives, the unrealized capital gains and losses on financial investments when not already reflected in the income statement is allocated as follows: Amortized Carrying Unrealized Unrealized Amortized Carrying Unrealized Unrealized Amortized Carrying Unrealized Unrealized (in Euro million) cost (a) Fair value value (b) gains losses cost (a) Fair value value (b) gains losses cost (a) Fair value value (b) gains losses
Debt securities available for sale 254,174 254,720 254,720 10,405 9,858 242,608 241,220 241,220 4,762 6,150 234,964 241,652 241,652 8,158 1,470
Debt securities (at cost) that are not quoted in an active market 1,212 1,132 1,212 – 80 – – – – – 10 10 10 – –
Non controlled investment funds held for sale 5,230 5,413 5,413 346 163 3,251 3,588 3,588 369 33 4,414 4,819 4,819 429 24
See also table 9.8.1 Breakdown of financial assets subject to impairment.
Equity securities available for sale 12,509 14,768 14,768 1,753 478 24,320 33,249 33,249 9,413 484 25,354 35,761 35,761 10,551 144
OTHER ACTIvITIES December 31, 2008 December 31, 2007 December 31, 2006
(a) Net of impairment – including premiums/discounts and related accumulated amortization. (b) Net of impairment (details in Note 9.8).
Debt securities (at cost) that are not quoted in an active market, the effect of derivatives (detailed in section 19.3) and loans and debt securities backing contracts where the financial risk is borne by policyholders are excluded from the tables below. The effect of derivatives modifies in certain cases the profile of the assets below. Most of the debt securities and loans held by the Group are fixed-rate debt instruments (i.e. exposed to fair value interest rate risk).
Debt securities designated as at fair value through profit or loss (a) 5,490 3,940 3,933 13,364
TOTAL – Financial investments exposed to cash flow interest rate risk 6,920 7,137 13,932 27,989
Debt securities designated as at fair value through profit or loss (a) 17,739 8,883 22,698 49,320
Loans designated as at fair value through profit or loss (a) 5 39 (4) 40
TOTAL – Invested financial assets exposed to fair value interest rate risk 33,870 70,583 199,833 304,286
Debt securities designated as at fair value through profit or loss (a) 380 5,332 2,060 7,772
Loans designated as at fair value through profit or loss (a) – 17 59 77
(a) Corresponds to financial assets held for trading purposes and financial assets recognized designated as at fair value through profit or loss.
Loans designated as at fair value through profit or loss (a) 21 19 43 84
(a) Corresponds to financial assets held for trading purposes and financial assets recognized designated as at fair value through profit or loss. (b) In accordance with IFRS 3, i.e. within 12 months following the acquisition date, the Group adjusted certain items impacting the allocation of Winterthur purchase price.
December 31, 2008 Finance Services Energy Communications Industrial Consumer goods Raw material Technology Other TOTAL
Equity securities available for sale 5,435 1,342 2,091 1,116 2,108 1,273 712 1,067 1,082 16,226
Sub-total: Equity securities held directly 20,264 6,755 4,224 2,300 5,997 4,455 2,847 2,160 2,711 51,713
Equity securities designated as at fair value through profit or loss 1,253 1,458 642 36 403 299 308 599 174 5,171
Total Equity securities as at December 31, 2008 8,202 3,553 3,451 1,349 3,087 1,869 1,195 2,005 2,437 27,148
Equity securities designated as at fair value through profit or loss 2,739 2,243 388 730 1,503 1,314 1,074 324 636 10,952
Equity securities available for sale 16,040 4,020 3,942 1,447 4,355 2,911 1,971 1,860 1,960 38,505
Equity securities designated as at fair value through profit or loss 4,224 2,735 282 854 1,642 1,544 876 300 751 13,208
Equity securities held by controlled investment funds (a) 2,324 385 347 97 858 653 393 513 3,894 9,465
Non controlled investment funds available for sale mainly holding equity securities 3,171 3,016 – – 3,171 3,016 1,512 1,349 29 29 1,541 1,379 1,432 1,215 18 18 1,450 1,233
Non controlled investment funds mainly holding equity securities 3,990 – 5 – 3,996 – 2,307 – 145 – 2,451 – 2,140 – 205 – 2,345 –
Non controlled investment funds available for sale mainly holding debt securities 1,095 1,071 – – 1,095 1,071 931 856 – – 931 856 1,480 1,438 – – 1,480 1,438
Non controlled investment funds mainly designated as at fair value through profit or loss mainly holding debt securities 137 – – – 137 – 51 – – – 51 – 46 – – – 46 –
Other non controlled investment funds designated as at fair value through profit or loss 98 – – – 98 – 389 – 26 – 415 – 353 – – – 353 –
Other non controlled investment funds 1,169 – 76 – 1,246 – 1,392 – 139 – 1,531 – 2,033 – 208 – 2,241 –
Non controlled investment funds mainly holding debt securities 1,368 – – – 1,368 – 982 – – – 982 – 1,527 – – – 1,527 –
Debt securities (at cost) that are not quoted in an active market 1,212 – 1,212 – 1,212 – – – – – 11 – 11 – 11
Loans held to maturity – – – – – – – – – – – – – – –
(b) Asset value including impairment, discounts/premiums and accrued interests, but before revaluation to fair value of assets available for sale. (c) Including policy loans. (d) In accordance with IFRS 3, i.e. within 12 months following the acquisition date, the Group adjusted certain items impacting the allocation of Winterthur purchase price.
Impairment – non controlled investment funds 97 723 (61) – 75 834
Write back Write back January 1, Increase for following sale or following December 31, (in Euro million) 2007 the period reimbursement recovery in value Other (a) 2007
Impairment – non controlled investment funds 77 38 (24) – 7 97
Write back Write back January 1, Increase for following sale or following December 31, (in Euro million) 2006 the period (b) reimbursement (b) recovery in value Other (a) (b) 2006
(a) Changes in the scope of consolidation and impact of changes in exchange rates. (b) As described in Note 1.10, the contribution of discontinued operations is stated on a separate line of the income statement.
9.9. FINANCIAL ASSETS RECOGNIZED AT FAIR vALUE 9.9.1. Fair value measurement a) Active market: quoted price The Group applies the IAS 39 fair value hierarchy as described below for both assets measured at fair value (and assets at cost for which fair value is disclosed in the previous notes).
The amount of assets for which fair value is determined in whole directly by reference to an active market is disclosed in column (1) of the table shown below in section 9.9.2.
b) Active versus inactive markets Equity securities quoted on exchange traded developed markets and bonds actively traded on liquid markets for which prices are regularly provided by external pricing services that represent consensus with limited dispersion and for which quotes are readily available are generally considered as being quoted in an active market. Liquidity may be defined as the possibility to sell or dispose of the asset in the ordinary course of business within a certain limited time period at approximately the price at which the investment is valued. Liquidity for debt instruments is assessed using a multi criteria approach including the number of quotes available, the place of issuance and the evolution of the widening of bid ask spreads.
A financial instrument is regarded as not quoted in an active market if there is little observation of transaction prices as an inherent characteristic of the instrument, when there is a significant decline in the volume and level of trading activity, in case of significant illiquidity or if observable prices can not be considered as representing fair value because of dislocated market conditions. Characteristics of inactive markets can therefore be very different in nature, inherent to the instrument or be indicative of a change in the conditions prevailing in certain markets.
The amount of assets which are not traded in an active market is disclosed in column (2) of the table shown below in section 9.9.2.
Valuation techniques are subjective in nature and significant judgment is involved in establishing fair values for financial assets. They include recent arm’s length transactions between knowledgeable willing parties on similar assets if available and representative of fair value and involve various assumptions regarding the underlying price, yield curve, correlations, volatility, default rates and other factors. unlisted equity securities are based on cross checks using different methodologies such as discounted cash flows techniques, price earning ratios multiples, adjusted net asset values, taking into account recent transactions on instruments which are substantially the same if concluded at arm’s length between knowledgeable willing parties, if any. The use of valuation techniques and assumptions could produce different estimates of fair value. However, valuations are determined using generally accepted models (discounted cash flows, Black&Scholes models, etc.) based on quoted market prices for similar instruments or underlyings (index, credit spread, etc.) whenever such directly observable data are available and valuations are adjusted for liquidity and credit risk.
The dislocation of certain markets may be evidenced by various factors, such as very large widening of bid ask spreads which maybe helpful indicators in understanding whether market participants are willing to transact, wide dispersion in the prices of the small number of current transactions, varying prices over time or among market participants, inexistence of secondary markets, disappearance of primary markets, closing down of dedicated desks in financial institutions, distress and forced transactions motivated by strong needs of liquidity or other difficult financial conditions implying the necessity to dispose of assets immediately with insufficient time to market the assets to be sold, and large bulk sales to exit such markets at all costs that may involve side arrangements (such as sellers providing finance for a sale to a buyer). Transactions do not meet the definition of a forced or distress sale if the seller had a reasonable amount of time to market the assets or there were a number of parties competing to buy. However, in an inactive market, a transaction price for the same instrument might not represent fair value if the transaction involved a seller that needed to sell the assets and there was one or very few buyers.
9.9.2. Financial assets recognized at fair value excluding derivatives Amounts presented exclude the impact of all derivatives (set out in Notes 19.3 and 19.5) and investment funds accounted for using the equity method. Investment funds accounted for using the equity method represented assets of €1,192 million at December 31, 2008 (€1,160 million at December 31, 2007 and €1,294 million at December 31, 2006). The breakdown by valuation method of financial assets recognized at fair value is as follows: Fair value Fair value Fair value Fair value assets not Fair value assets not Fair value assets not determined quoted in determined quoted in determined quoted in directly by an active directly by an active directly by an active reference to market/No reference to market/No reference to market/No an active active an active active an active active (in Euro million) market (1) market (2) TOTAL market (1) market (2) TOTAL market (1) market (2) TOTAL
Financial investments and loans available for sale 166,491 114,574 281,065 241,292 45,215 286,508 248,053 43,413 291,467
Other assets held by controlled investment funds designated as at fair value through profit or loss 2,143 4,143 6,286 2,152 2,366 4,518 1,738 1,407 3,145
Financial investments and loans held for trading 944 559 1,502 1,369 467 1,836 1,392 666 2,057
N.B.: This table excludes assets backing contracts where the financial risk is borne by policyholders.
Methods applied to determine the fair value of held assets measured at fair value in the financial statements are described in section 9.9.1 above. The group applies the IAS39 fair value hierarchy.
Assets classification Fair values determined in whole directly by reference to an active market (column (1)) relate to prices which are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency and those prices represent actual and regularly occurring market transactions on an arm’s length basis, i.e. the market is still active.
Most of the equity securities traded on exchange markets, government bonds, government related bonds and corporate bonds were previously (years ending at December 31, 2006 and 2007 shown above) considered as quoted in an active market, with quotes or consensus prices readily available. Quotes provided by external pricing services are presented in column (1) if readily, regularly and publicly available and if related markets are considered as active. Brokers and vendors quotes are presented in column (2) if there is no active market due to the inherent characteristic of the instrument or if the market is no longer active. As at December 31, 2008, a significant portion of bonds (mainly corporate bonds), although still measured using the same valuation
sources (mainly quotes from external pricing providers) were no longer considered to be quoted in an active market and were therefore presented in column (2) because of the increasing illiquidity of such markets leading to markets which were no longer active. Liquidity for debt instruments is assessed using a multi criteria approach including the number of quotes available, the place of issuance of such instruments and the evolution of the widening of bid ask spreads.
Among amounts presented in column (2), fair values determined in whole or in part using a valuation technique based on assumptions that are not supported by a majority of prices from observable current market transactions in the same instrument or a majority of available observable market data represented as at December 31, 2008 less than 3.4% (2.2% 1 as at December 2007) of financial invested assets held by the Group excluding assets backing contracts where the financial risk is borne by policyholders (including an estimation of the extent to which external quotes on inactive markets are based on observable data).
Assets such as certain unquoted debt instruments, instruments issued on private markets such as private equity securities or private loans were always considered as not quoted in active markets as an inherent characteristic of these investments and were included in column (2) in all periods presented. Valuations are based either on external pricing providers or internal models using techniques commonly used by market participants. Valuation teams make the maximum use of current transaction prices if any and observable data but some of the underlying sectors to which the investment relate may be so particular that significant adjustments are performed or unobservable data are used. Private equity funds of funds are measured on the basis of the latest Net Asset Values of funds provided to the Group.
Such models incorporate factors that market participants would consider in setting a price and are consistent with accepted economic methodologies for pricing financial instruments. They were applied except when the uncertainty surrounding valuation was assessed as being too significant to exercise an adequate judgment in setting the appropriate risk margins (in which case assets remained measured on the basis of available quotes). For the purpose of the modeling, ABS and CDOs were ranked according to their underlying risks characteristics such as their underwriting and origination year for example to determine the appropriate set of assumptions to be used, giving consideration to market conditions in pricing these instruments. Cash flows were developed based on current observable inputs reflecting the credit metrics of each type of underlying assets: for example weighted average rating factors – WARF – provided by rating agencies, historical default rates or third parties credit defaults studies, with loss severity assumptions and recovery lag, adjusted with adequate risk margins to reflect the uncertainty related to these inputs and the historical dimension of some of these data. Risk adjusted discount rates have been based on interest rates and discount margins derived from observations of implied rates of return adjusted considering the current evolution of available quotes which reflect spreads widening due to increased liquidity risks. The objective of these models is to arrive at the price at which an orderly transaction would take place between market participants (a willing buyer and a willing seller) at the measurement date.
participation related adjustments, and the Statement of Recognized Income and Expenses (SoRIE) by €–13.8 million net of tax and policyholders’ participation related adjustments; • using alternative discount margins higher by 25% would impact net income by €–56.2 million, net of tax and policyholders’ participation related adjustments, and the Statement of Recognized Income and Expenses (SoRIE) by €–86.8 million, net of tax and policyholders’ participation related adjustments.
(1) Restated in 2008 in comparison with 2007 in order to take into account a change in the way the amount of such assets based on a limited number of observable data was estimated: at the end of 2008, the two proportions disclosed for 2008 and 2007 are based on an estimation of the weight of observable data used by external pricing services when setting their quotes, while such estimated look though exercize was not performed at the date of issuance of December 31, 2007 financial statements.
9.10. INvESTMENTS BACkING CONTRACTS WHERE THE FINANCIAL RISk IS BORNE BY POLICYHOLDERS
Kyobo AXA Investment Managers Company Limited – 24 1 (2) – 22
Neuflize Vie (previously NSM Vie) – – 4 – 89 93
Philippines AXA Life Insurance Corporation 14 – 4 (1) – 17
In 2008, “Acquisitions & disposals” notably included: • Reso Garantia, with a goodwill of €588 million at December 31, 2008 and a Property & Casualty renewals intangible of €20 million; • Kyobo AXA Investment Managers Company Limited, with a goodwill of €7 million at December 31, 2008.
AXA Affin General Insurance Berhad 29 – – – (29) –
Pt AXA Mandiri Financial Services 6 – 4 (1) (1) 8
Winterthur Life (Hong Kong) Ltd (b) 1 – – – – –
Krungthai AXA Life Insurance Company Ltd 13 – 3 1 – 18
Philippines AXA Life Insurance Corporation 11 – 5 (1) – 14
In 2007, “other changes” notably included: • The change in consolidation method of AXA Affin General Insurance Berhad. This company is now fully consolidated
(€–29 million). • The entry in the scope of consolidation of AXA Minmetals at December 31, 2007 (€16 million).
AXA Affin General Insurance Berhad – – 18 – 11 29
Pt AXA Mandiri Financial Services – – 2 – 3 6
Banque de Marchés et d’Arbitrage 11 – – – (4) 7
Krungthai AXA Life Insurance Company Ltd – – (4) 1 16 13
(a) Includes dividend distributions and changes in consolidation method. (b) Following its sale to AXA Asia Pacific Holdings, this entity is now fully consolidated.
In 2006, “other changes” notably included: • The merger of associate CFP-Crédit with fully consolidated CFP (€–34 million). • The sale of AXA RE (included in the Other items: €–2 million) and Parfimmo in Belgium (€–24 million). • The liquidation of AXA Insurance Investment Holding in Singapore (€–41 million). • The entries into the scope of consolidation of Krungthai AXA Life Insurance Company Ltd (€16 million), Philippines AXA Life
This excludes investment funds and real estate companies consolidated by equity method, which are presented under financial investments.
Current accounts receivable from other companies 1,111 (12) 1,099 1,099 996 (40) 956 956 839 840
Premiums earned but not written 1,601 – 1,601 1,601 1,812 – 1,812 1,812 1,895 1,895
Receivables arising from direct insurance and inward reinsurance operations 12,975 (346) 12,629 12,629 12,473 (333) 12,140 12,140 11,873 11,874
Receivables arising from banking activities (c) 19,007 (404) 18,604 19,120 17,651 (391) 17,260 17,176 14,063 14,026
This table excludes cash held by consolidated investment funds in the “Satellite Investment Portfolio”, as defined in section 1.7.2.
Cash and cash equivalents increased by €13,542 million compared to 2007 mainly due to: • The uS Life & Savings (€+5,724 million) mainly due to cash received on Variable Annuity guarantees (GMxB) derivatives
(€+401 million); • AXA MPS (€+690 million) due to the asset relocation between sale of government bonds (€+6,206 million) and purchase of corporate bonds (€–5,191 million).
Cash and cash equivalents as at December 31 32,227 18,684 21,169
Net cash and cash equivalents as at December 31 (b) 30,811 17,192 19,831
(a) Included in “Other debt instruments issued and bank overdrafts”. (b) The “Cash and cash equivalents” balances shown in the statement of consolidated cash flows do not include cash balances of consolidated investment funds from the Satellite Investment Portfolio (see Note 1.7.2). As described in Note 1.20, the “Cash and cash equivalents” item in the statement of consolidated cash flows excludes cash backing contracts where the financial risk is borne by policyholders (unit-linked contracts).
At December 31, 2008, total consolidated net cash and cash equivalents amounted to €30,811 million, net of €1,415 million bank overdrafts classified under “Other debt instrument issued and bank overdrafts” in the consolidated balance sheet (at the end of 2007: €17,192 million cash and cash equivalents, net of €1,493 million of bank overdrafts).
Net cash relating to financing activities totaled €–308 million in 2008 mainly due to: • dividends payments of €–2,887 million, partly offset by • €2,319 million of net cash related to Group financing, including €2.3 billion issue of commercial paper by the Company.
13.1. IMPACT OF TRANSACTIONS WITH SHAREHOLDERS 13.1.1. Change in shareholders’ equity Group share in 2008 a) Share capital and capital in excess of nominal value In 2008, the following transactions had an impact on AXA’s share capital and capital in excess of nominal value: • Employee share offering (November 2008) for €460 million (including €57 million in nominal share capital); • Exercise of stock options and share subscription rights for a total of €72 million (including €8 million in nominal share capital).
b) Treasury shares At December 31, 2008, the Company and its subsidiaries owned approximately 29 million AXA shares, a decrease of 1.6 million shares or €169 million compared to December 31, 2007.
At December 31, 2008, the carrying value of treasury shares and related derivatives was €451 million, representing 1.40% of the share capital. This figure included €2.1 million relating to AXA shares held by consolidated mutual funds (0.1 million shares) not used to back contracts where financial risk is borne by policyholders.
Equity component of convertible debt (2017) 95 95 95 95 203 203
During the year, AXA pursued its share purchase program to control dilution arising from share-based compensation and employee Shareplan program, and purchased 70.4 million shares for a total amount of €2,125 million (including “AXA Miles”). Of these €2,125 million, €1,899 million were cancelled by a decrease in share capital.
At December 31, 2007, 2.7 million treasury shares backing contracts where the financial risk is borne by policyholders held in controlled funds were not deducted from shareholders’ equity. Their total estimated historical cost was €74 million and their market value €75 million at the end of December 2007.
d) Dividends paid At the May 14, 2007 shareholders’ meeting, shareholders approved a dividend distribution of €2,218 million with respect to the 2006 financial year.
b) Treasury shares At December 31, 2006, the Company and its subsidiaries owned approximately 30 million AXA shares, a decrease of €137 million with respect to December 31, 2005. The decrease was mainly due to the exercise of AXA stock options by employees of AXA Financial, which led to the sale of 6 million treasury shares during the period.
d) Dividends paid The shareholders’ meeting of May 4, 2006, approved a dividend payout of €1,647 million in respect of financial year 2005.
13.2. RECOGNIZED INCOME AND EXPENSE FOR THE PERIOD The statement of recognized income and expense for the period (SoRIE), which is a part of the consolidated statement of shareholders’ equity, includes net income for the period, the reserve relating to the change in fair value of available for sale financial instruments, the translation reserve, and actuarial gains and losses on employee benefit obligations.
The reduction in gross unrealized gains and losses on assets available for sale totaled €–6,452 million, mainly due to equity securities (€–7,825 million) resulting from the accelerated market declines in January and September 2008, partly offset by a €+1,797 million increase from debt securities following the reduction of interest rates and despite corporate spread widening.
The following table shows reconciliation between gross unrealized gains and losses on available for sale financial assets and the corresponding reserve recognized in shareholders’ equity: (in Euro million) December 31, 2008 December 31, 2007 December 31, 2006
Unrealised gains and loss (net of tax) – Assets available for sale (441) 4,753 7,966
Unrealised gains and loss (net of tax) – Equity accounted companies (1) – –
Unrealized gains and losses (net of tax) – 100% – Total (443) 4,753 7,966
Minority interests’ share in unrealized gains and losses (d) 35 (48) (275)
At the end of 2008, most of the unrealized gains on assets available for sale are observed in the Life & Savings segment, leading to a significant shadow accounting on policyholders’ participation, while most of the unrealized losses are observed in other segments, mainly Holdings, leading to a total net unrealized loss position.
Unrealized gains and losses (net of tax) 100%, as at January 1 4,753 7,966 8,365
c) Employee benefits actuarial gains and losses The main contributors to the €695 million decrease in actuarial gains and losses on employee benefit obligations were the united States (€–489 million), the united Kingdom (€–122 million). Additional information on pension benefits is provided in Note 25.2.
b) Translation reserve The impact of foreign exchange rate movements (€–1,392 million) was mainly due to the united States (€–1,242 million, principally due to the difference between the 2006 and 2007 closing $/€ exchange rates: $1.32 for €1 at the end of 2006 compared to $1.47 for €1 at the end of 2007), the united Kingdom (€–470 million), and Japan (€–311 million), partially offset by the change in fair value of currency hedges set up by the Company to hedge net investments in foreign operations (€638 million).
b) Translation reserve The impact of exchange rate movements (€–764 million) was mainly attributable to the united States (€–1,218 million, principally due to the difference between the 2006 and 2005 closing $/€ exchange rates: $1.32 for €1 at the end of 2006 compared to $1.18 for €1 at the end of 2005), Japan (€–291 million) and Canada (€–81 million), partially offset by the change in fair value of currency hedges set up by the Company to hedge net investments in foreign operations (€841 million).
c) Employee benefits actuarial gains and losses The main contributors to the €252 million increase in actuarial gains and losses on employee benefit obligations were the united States (€146 million), Germany (€63 million) and the Netherlands (€16 million).
13.3. CHANGE IN MINORITY INTERESTS under IFRS, minority interests in most investment funds in which the Group invests consist of instruments that holders can redeem at will at fair value, and qualify as a liability rather than shareholders’ equity items. Please refer to Note 17 – Debt (other than financing debt). The same is true for puttable instruments held by minority interest holders.
AXA Konzern (Germany); • change in translation reserve (€–205 million); • net income for the period (€673 million); • other movements (€–394 million), mainly comprising dividends paid to minority interests (€–440 million).
Reserves relating to changes in fair value through shareholders’ equity – – – – – (5,199) 112 – – – – (5,087) (86)
Employee benefits actuarial gains and losses through OCI (b) – – – – – – – – – – (695) (695) (36)
Total recognized income and expense for the period (SoRIE) – – – – – (5,199) 112 – – (1,234) 227 (6,094) 172
NB: amounts are presented net of impacts of shadow accounting and of its effects on policyholders’ participation, deferred acquisition costs, and value of business in force. (a) Perpetual subordinated debts (TSS, TSDI) and equity components of compounded financial instruments (e.g convertible bonds) (see Note 13.1.1c). (b) Actuarial gains and losses accrued since opening January 1, 2008. (c) Includes €–106 million loss recognized against Other payables. As a reminder, AXA Japan closes its books at the end of September. According to IFRS
Shareholders’ equity as at January 1, 2008 2,060,753 2.29 4,719 17,363 (716) 4,846 (11) 4 7,219 (1,478) 13,697 45,642 3,272
Capital in excess of nominal value – – – 370 – – – – – – – 370 –
Equity – share based compensation – – – 107 – – – – – – – 107 –
Change in scope of consolidation – – – – – – – – – – – – (9)
Deeply subordinated debt – – – – – – – – (420) – – (420) –
Dividends paid – – – – – – – – – – (2,473) (2,473) –
Capital in excess of nominal value – – – (1,126) – – – – – – – (1,126) –
Equity – share based compensation – – – 92 – – – – – – – 92 –
Equity component of compound financial instruments – – – – – – – – (109) – – (109) –
Accrued interests – Deeply subordinated debt – – – – – – – – (290) – – (290) –
Net income of the period – – – – – – – – – – 5,666 5,666 725
Capital in excess of nominal value – – – 3,800 – – – – – – – 3,800 –
Equity component of compound financial instruments – – – – – – – – – – – – –
Deeply subordinated debt – – – – – – – – 3,699 – – 3,699 –
Impact of transactions with shareholders 221,283 2.29 507 3,906 137 7 – – 3,539 (2) (1,592) 6,502 (383)
Reserves relating Reserves relating to the change to the change in fair value of Number Nominal Capital in in fair value of hedge accounting Reserves relating Undistributed Shareholders’ of shares value Share excess of Treasury financial instruments derivatives to revaluation of Translation profits and Equity Group Minority (In Euro million, except for number of shares and nominal value) (in thousands) (euros) Capital nominal value shares available for sale (cash flow hedge) tangible assets Other (a) reserves other reserves share interests
Shareholders’ equity as at January 1, 2006 1,871,605 2.29 4,286 14,492 (658) 8,111 75 3 3,550 681 5,985 36,525 2,763
Equity – share based compensation – – – 106 – – – – – – – 106 –
NB: amounts are presented net of impacts of shadow accounting and of its effects on policyholders’ benefit, deferred acquisition costs, and value of business in force. (a) Perpetual subordinated debt (TSS, TSDI) and equity components of compounded financial instruments (e.g convertible bonds) (see Note 13.1.1c). (b) Actuarial gains and losses accrued since opening January 1, 2006.
Liabilities arising from insurance contracts, including those where the financial risk is borne by policyholders, were split by segment as follows: Property & International Property & International Property & International (in Euro million) Life & Savings Casualty Insurance Total Life & Savings Casualty Insurance Total Life & Savings Casualty Insurance Total
Liabilities arising from insurance contracts 272,215 47,356 10,985 330,555 252,691 47,072 10,946 310,709 265,391 46,210 11,760 323,361
Reinsurers’ share in liabilities arising from insurance contracts 5,710 2,381 3,586 11,677 4,613 2,298 4,340 11,250 4,818 2,206 4,913 11,937
Of which measured at current market assumptions (d) – – – – – – – – – – – –
Reinsurers’ share in claim reserves (b) – – – – – – – – 2 – – 2
TOTAL LIABILITIES ARISING FROM INSURANCE CONTRACTS, NET OF REINSURANCE CEDED 352,407 44,975 7,398 404,780 361,715 44,774 6,607 413,095 369,534 44,004 6,848 420,386
NB: Liabilities relating to unearned revenues and fees (see Note 7.3), to policyholders’ participation (see Note 14.8), and to derivative instruments (see Note 19.4) are excluded from the table above. Reinsurer’s share in insurance contracts liabilities relating to policyholders participation (€34 million in 2008, €62 million in 2007 and €58 million in 2006), as well as derivatives instruments (none in 2008, 2007 and 2006) are excluded from the table above. (a) In accordance with IFRS 3, i.e. within 12 months following the acquisition date, the Group adjusted certain items impacting the allocation of Winterthur purchase price.
Liability adequacy test reserves – – – – – – – – 17 – – 17
Of which measured at current market assumptions (d) 6,377 – 46 6,423 19 – 33 52 (263) – 57 (205)
Reinsurers’ share in future policy benefit reserves 4,941 – 5 4,946 3,994 – 6 4,000 4,217 – 11 4,228
Reinsurers’ share in future policy benefit reserves 13 – – 13 18 – – 18 20 – – 20
Reinsurers share in liabilities arising from insurance contracts where the financial risk is borne by policyholders 13 – – 13 18 – – 18 22 – – 22
At the end of 2008, insurance liabilities relating to uK with-profit insurance contracts excluding the FFA (Fund for Future Appropriation) were €12,122 million versus €17,761 million at the end of 2007, and €20,358 million at the end of 2006.
Reinsurers’ share in other reserves – – – – – – –
(in Euro million) Life & Savings Total investment contracts Life & Savings Total investment contracts Life & Savings International Insurance Total investment contracts
Liability adequacy test reserves – – – – – – –
Reinsurers share in liabilities arising from investment contracts with no discretionary participating features – – – – – – –
Reinsurers’ share in future policy benefit reserves 6 6 9 9 9 – 9
Reinsurers’ share in claim reserves (b) – – – – – – –
Reinsurers share in liabilities arising from investment contracts where the financial risk is borne by policyholders 6 6 9 9 9 – 9
NB: Liabilities relating to unearned revenues and fees (see Note 7.3), to policyholders’ bonuses (see Note 14.8), and to derivative instruments (see Note 19.4) are excluded from the table above. Reinsurance’s share in investments contracts liabilities relating to policyholders participation (none in 2008, 2007, and 2006), as well as derivatives instruments (none in 2008, 2007, and 2006) are excluded from the table above. (a) In accordance with IFRS 3, i.e. within 12 months following the acquisition date, the Group adjusted certain items impacting the allocation of Winterthur purchase price.
At the end of 2008, investment liabilities relating to uK with-profit investment contracts excluding the FFA (Fund for Future Appropriation) were €5,374 million versus €8,515 million at the end of 2007, and €10,323 million at the end of 2006.
Impact of foreign currency fluctuation (634) 97 (537) (432) (529) (961) (99) (530) (629)
Claim reserves as at December 31 33,296 9,365 42,661 33,426 9,598 43,024 33,625 10,275 43,899
Gross claim reserves as at December 31 (a) 34,691 9,614 44,305 34,813 9,860 44,673 34,931 10,534 45,465
Property International Property International Property International (in Euro million) & Casualty Insurance Total & Casualty Insurance Total & Casualty Insurance Total
Reinsurers’ share in claim payments (618) (1,245) (1,863) (576) (1,151) (1,727) (356) 1,014 657
14.4.1. Change in liabilities arising from insurance and investment contracts – gross of reinsurance The table below includes liabilities arising from insurance and investment contracts for the Life & Savings segment, whether or not the risk is borne by policyholders (i.e. including unit-linked business), except unearned revenue and unearned fees reserves, liabilities arising from policyholders’ participation and derivative instruments relating to insurance and investment contracts.
Insurance Investment Insurance Investment (in Euro million) contracts contracts Total contracts contracts Total
Collected premiums net of loadings on premiums (+) 46,880 13,027 59,907 49,145 13,927 63,073
Unit-Linked technical reserves value adjustment (+/–) (32,396) (9,943) (42,338) 5,473 3,953 9,426
Change in reserves relating to technical and actuarial items (+/–) (b) 11,393 (322) 11,071 6,533 (55) 6,477
Transfers following technical reserves / contract reclassification 3 (3) – 364 (364) –
Change in scope of consolidation, portfolio transfers and change in accounting principles (2,096) 1,767 (330) (8,734) 12,689 3,955
(b) Notably includes interests credited and policyholders’ participation credited to reserves, fees on account balance and investment management fees and change in reserves relating to other technical and actuarial items.
In 2008, changes in the scope of consolidation totaled €–330 million, mainly due to: • In France, €–3,297 million corresponding to the change in consolidation method of Neuflize Vie (previously NSM Vie) (equitymethod instead of proportionately consolidated). • In Germany, €–234 million corresponding to the continued reduction in AXA Germany’s co-insurance share of HÄK-BÄK
medical profession pools (€–208 million) and co-insurance share in business with press employees (€–25 million), partly offset by: • In Italy, the entry of Quadrifoglio and Open Pension Funds in the scope of consolidation (€2,237 million and €341 million, respectively).
• In Mexico, the entry of Seguros ING Life in the scope of consolidation (€653 million).
• The transfer of €–2,495 million towards pension liabilities in Switzerland. • In Germany, €–337 million corresponding to the continued reduction in AXA Germany’s co-insurance share of HÄK-BÄK
medical profession pools (€–305 million) and co-insurance share in business with press employees (€–29 million).
Reinsurers’ share in collected premiums net of loadings on premiums (+) 983 1 983 937 2 939
Reinsurers’ share in change in reserves relating to technical and actuarial items (+/–) (b) 938 (3) 936 (11) 1 (10)
Change in scope of consolidation and change in accounting principles (7) – (7) 45 – 45
Reinsurers’ share in closing technical reserves (a) 5,723 20 5,744 4,630 22 4,653
(a) Includes: future policy benefits reserves (including shadow accounting reserves), unearned premium reserves, unexpired risk reserves, claims reserves, claims expense reserves, other policy benefits reserves.
(Non Unit-Linked) – Liabilities arising from: Investment contracts with Discretionary Participation Features (DPF) measured according to existing accounting policies (a) (d) 38,081 40,121 32,606
Investment contract with no Discretionary Participation Features (DPF) measured at amortized cost 1,238 911 510
Features in investment contracts with Discretionary Participation Features (DPF) measured with current assumptions (b) – – –
Investment contract with no Discretionary Participation Features (DPF) measured at current unit value (d) 38,680 59,173 56,665
N.B.: This information is presented net of the impact of derivatives, which is described in Note 19.4.1. (a) In accordance with IFRS 4 standards which allow, under certain conditions, to continue to use a previous system of reference to liabilities arising from contracts with discretionary participating features.
(b) See Note 1.13.2. – Reserves measured according to IFRS 4.24 option which allows to evaluate certain portfolios with current assumptions. (c) & (d) As unit-linked contracts, they share the same reserves measurement determined on the basis of held assets units fair value (“current unit value”).
(e) In accordance with IFRS 3, i.e. within 12 months following the acquisition date, the Group adjusted certain items impacting the allocation of Winterthur purchase price.
However, these contracts must be treated in accordance with IFRS 7 with regards to the disclosures to be provided in the notes to the financial statements. IFRS 7 requires the reporting of fair value or value ranges for these contracts, unless the Group cannot reliably measure the participating features.
In Phase I, the IAS Board acknowledged the difficulties involved in the recognition and the measurement of discretionary participating features. In addition, the IAS Board has numerous projects underway that could influence the definition of fair value of discretionary participating features. Discussions on these issues are highly complex, and are not yet sufficiently advanced, particularly with regard to projects such as Fair Value measurement and Revenue. Phase II discussions concerning insurance and investment contracts with a discretionary participating features, even if re-activated at the IASB level soon after the issuance of IFRS 4, are still at an early stage. Even though the Phase II Discussion Paper was published in May 2007, there are too many remaining uncertainties and AXA cannot reliably disclose fair value or value ranges for investment contracts with a discretionary participating features.
With effect from the development of loss reserves at end of 2006, however, AXA uses the method which consists in completing each column of the table using the same scope as that used for “Gross reserves for unpaid claims and claim expenses developed initially at the booking date”. In practice, therefore, with effect from the 2006 column, the differences between the first and second lines are mainly due to exchange rate impacts and only marginally to changes in scope of consolidation.
The second part of the table entitled “Reserve re-estimated” shows, for a given column N, an estimate of the final cost of liabilities carried at December 31 of year N in respect of all years of occurrence prior to and including N, at each future period end. The final cost estimate varies year on year as information relating to losses still outstanding becomes more reliable.
Gross reserves for unpaid claims and claims expenses developed in 2008 adjusted for changes in exchange rates and scope of consolidation (c) 21,346 23,000 23,738 25,158 25,716 26,414 27,230 28,598 41,983 43,433 44,046
(b) AXA acquired GRE in May 1999. GRE’s operations have been integrated within AXA. At the time of acquisition, GRE’s gross reserves totaled €5.6 billion.
b) Loss reserves development table: AXA RE On December 21, 2006, the AXA Group finalized an agreement to sell the AXA RE reinsurance business to Paris Ré Holding. under the terms of the agreement, AXA retains exposure to any changes in the final cost of claims occurring before December 31, 2005. However, the proportional treaty set in place as part of the agreement between AXA RE and Paris Ré protects AXA entirely from any claims occurring after January 1, 2006. Consequently, the table below shows the development of loss reserves recognized in AXA RE’s balance sheet at each year-end until December 31, 2005. Reserves recognized after that, which correspond to exposure assumed fully by Paris Ré, have not been developed.
(In Euro million except percentages) 1998 1999 2000 2001 (c) 2002 2003 2004 (d) 2005
Gross reserves for unpaid claims and claims expenses developed in 2008 (d) 3,060 3,396 3,453 5,868 4,778 3,742 3,314 4,253
Cumulative redundancy (deficiency) from the initial gross claims reserves in excess of (less than) re-estimated gross claim reserves (399) (327) (442) 417 452 189 (350) 369
Initial net claims reserves in excess of (less than) re-estimated net claims reserves as at December 31, 2008
Percentages of original net reserve (a) 18.9% 26.3% 33.3% 36.0% 45.9% 31.4% 20.6% 34.9%
Total gross claim reserves and other reserves for Property & Casualty and International Insurance 48,477 48,754 49,035
14.7. ENvIRONMENTAL POLLUTION AND ASBESTOS AXA continues to receive claims from policies written in prior years asserting damages from asbestos-related and environmentalrelated exposures. These asbestos claims relate primarily to bodily injuries suffered by those who came in contact with asbestos, while environmental claims relate primarily to pollution related clean-up costs.
AXA’s exposure to asbestos and environmental (“A&E”) claims originates primarily from the following contracts: • Insurance or reinsurance of uS-originated risks: this exposure arises primarily from the reinsurance of uS cedants or from direct policies written in the London Market (excess of primary covers). The underlying exposure is made-up of both asbestos and pollution claims.
At year-end 2008, key data relating to A&E claims were as follows: Key reserves data for asbestos
Data in Euro million, unless otherwise stated Gross Net Gross Net
Claims reserves at beginning of year (a) 82 68 102 92
Cumulative Payments to date / Projected Ultimate Cost 65% 63% 61% 61%
In 2008, AXA incurred losses and loss expenses of €2 million net of reinsurance (respectively €–1 million in respect of asbestos and €3 million in respect of environmental pollution). This was the result of two effects offsetting each other: claims reserves for AXA’s asbestos-related exposures in the united Kingdom were increased due to a higher-than-anticipated claims average cost, whereas the united States asbestos-related claims developed favorably in 2008.
December 31, 2006 (in Euro million) December 31, 2008 December 31, 2007 Restated (a)
Fund for Future Appropriation (FFA) – UK with-profits contracts 1,335 3,629 4,668
The deferred policyholders’ participation liability and asset include the impact of shadow accounting (see definition in 1.13.2) mainly in relation to unrealized gains and losses on invested financial assets available for sale as described in 13.2.1.
14.9.1. Payment and surrender projections The table below shows the breakdown of projected payments and surrenders related to Life & Savings and Property & Casualty insurance and investment contracts excluding contracts where the financial risk is borne by policyholders. Actual maturities may differ significantly from the estimates set out below, mainly because some of the contracts contain a surrender option controlled by the policyholder that may reduce their duration.
More than 1 year (in Euro million) 12 months or less up to 5 years More than 5 years TOTAL
Liabilities arising from insurance and investment contracts 25,772 77,813 406,587 510,172
As shown in the table below, as at December 31, 2008: 90% of Life & Savings reserves (excluding unit-linked contracts) were discounted, of which 12% were subject to a revision of the discount rate and 77% retained the rate set at inception, subject to the liability adequacy test described in Note 1.
In the Property & Casualty business, most reserves (91% at December 31, 2008) are not discounted, with the exception of disability annuities and worker’s compensation liabilities that are deemed structured settlements and where the discount rate is revised regularly. Such reserves are not sensitive to interest rate risks in financial statements.
Life & Savings – unlocked discount rate (b) 37,968 3.34% 39,094 3.19% 43,438 3.31%
Amounts are presented excluding the impact of derivatives on insurance and investment contracts (presented in section 19.4) and excluding liabilities related to unearned revenues and fees, and to policyholders’ participations. Liabilities relating to contracts where the financial risk is borne by policyholders are also excluded. (a) Subject to liability adequacy tests. (b) In accordance with IFRS 3, i.e. within 12 months following the acquisition date, the Group adjusted certain items impacting the allocation of Winterthur purchase price.
In accordance with IFRS 7, the Group discloses, in Note 4 of its consolidated financial statements, quantitative sensitivities of the Group “Embedded Value” (as defined in the “market risks” section) to interest risk and equity price risk.
The impact of the unlocking of discount rates relating to Life & Savings unlocked discounted reserves was €123 million for 2008 (compared to €142 million for 2007 and €150 million for 2006) gross of policyholders’ participation and tax impacts and was included in the income statement of the period.
AXA sells insurance contracts that contain a variety of options and guarantees for contract-holders. These features are described in Note 4. They are not embedded derivatives which AXA reports separately at fair value because: • many of the features would be considered clearly and closely related to the host contract, and • many of the features themselves would qualify as insurance contracts under phase I.