Net underlying investment result was up by €47 million to €218 million due to €29 million higher fixed income revenues (increase of investment in corporate bonds and higher durations) and €20 million lower charge on financial interests credited on the UBR products (specific German Protection Products sold by the Property and Casualty Company).
Net income improved by €132 million to €295 million, in line with the increase of adjusted earnings. The 2005 net income benefited from the positive impact of derivatives (futures), whereas 2004 was impacted by a non recurring positive change in fair value on some equity funds which were converted into fixed income funds in 2005.
– Personal Lines (62% of the total gross written premiums ): premiums increased by 1.2%. Motor (57% of personal lines written premiums) remained stable (+0.1%) at €521 million as the portfolio decrease was offset by an average premium increase. Household increased by 2.7% to €232 million as a result of rate increases.
Corporate Liability. As a result, the current net technical result improved by € 21 million to € 272 million.
– The all accident year loss ratio deteriorated by +0.6 point to 70.0% as the improvement in current year loss ratio was offset by lower positive reserve developments. Prior year technical result deteriorated by € 24 million to € 167 million.
The expense ratio increased by +0.7 point to 28.7% mainly as a result of higher commissions.
As a result, the combined ratio deteriorated (+1.4 point) to 98.7%.
Net underlying investment result decreased by €–12 million to € 167 million mainly due to a decrease in real estate income linked with a decrease in occupancy rates due to refurbishment work in 2005.
Income tax expense decreased by €+1 million due to lower pre tax earnings partly offset by the non recurrence of a tax recovery in 2004.
Profit or loss (excluding change) on financial assets (under FV option) & derivatives 1 14
Contribution to consolidated gross revenues 2,163 1,361 (a) Change in consolidation method in Turkey, Hong-Kong and Singapore (from equity method to full consolidation) as at January 1st, 2005.
Underlying earnings reached €80 million, up €+13 million (on a constant exchange rate basis) due to the –2.4 points improvement in the net combined ratio to 91.8%, reflecting mainly higher boni in personal motor (€+21 million) and commercial liability (mali in 2004 versus boni in 2005).
The Netherlands The disability portfolio which was previously reported under the Life segment is now reported under the Property & Casualty segment. The Health portfolio which was previously reported under the Life segment has been disposed of at December 1st
NET INCOME 179 83 (a) Change in consolidation method in Turkey, Hong-Kong and Singapore (from equity method to full consolidation) as at January 1st, 2005.
Gross revenues increased by 30% or decreased by 5% on a comparable basis to €275 million. The decrease was mainly driven by ongoing selection of authorized agents and reduction in group disability following change in legislation, partly offset by an increase of higher insured sums and new business in Individual Disability.
Underlying earnings increased by €24 million or by €6 million on a comparable basis to €19 million, driven by a 2 points improvement in combined ratio to 99.5%.
On a comparable basis, gross revenues increased by +17% to €453 million mainly driven by motor portfolio growth.
Morocco Gross revenues were up by 2% on a constant exchange rates basis to €140 million, driven by personal motor, workmen compensation and health lines of business.
Underlying earnings were stable at €13 million driven by (i) a higher dividend income and (ii) a combined ratio improvement by 1 point to 100.6%, offset by higher tax expenses.
Adjusted earnings and net income decreased by €2 million to €14 million due to lower net capital gains.
Japan Gross written premiums increased by 24% on a constant exchange rate basis to €140 million, mainly driven by motor business growth (+28%, 92% of revenues). Total motor portfolio (350,000 contracts) continued to show a sharp increase (+82,000 contracts compared to December 2004) thanks to competitive rates, as well as the launch of a new product, a risk-segmented direct insurance for Motorcycles.
Adjusted earnings as well as the Net income were slightly lower, at €4 million (improvement over last year by €1 million), as some capital losses on fixed maturities were recorded in 2005.
Underlying earnings reached €8 million with a combined ratio of 94.3%. Last year the entity was consolidated using the equity method therefore 2004 underlying earnings are not fully comparable to 2005 underlying earnings.
Contribution to consolidated gross revenues 3,813 3,363 (a) Gross written premiums including intercompany eliminations.
Revenues increased by 17% on a comparable basis up to €1,460 million mainly due to the non-recurrence of some 2004 negative premium adjustments and the increase in reinstatement premiums linked to major events in 2005. Excluding these two effects, revenues increased by 6% mainly driven by higher premiums in selected non proportional General Liability business, taking advantage of favourable pricing conditions, as well as in Credit business, Marine Offshore and Non-Cat Property.
Net capital gains attributable to shareholders net of income tax 53 16
Net income group share 67 126 (a) Net of ceded reinsurance (cession and retrocession). (b) Attritional data exclude (i) major losses in claims charge and (ii) covers cost in ceded premiums. (c) (Attritional claim charge and major loss cost on all accident years) divided by (net earned premiums, net of all reinsurance costs including covers).
Life net technical result increased by €63 million to €61 million due to the good performance of stock markets in 2005 on the run off of the ABR portfolio.
Expense ratio improved by 4.7 points to 13.3% as a result of a decrease in general expenses by €28 million to €–154 million, due to lower employment costs.
Net underlying investment result increased by €9 million to €129 million, mainly driven by higher revenues on fixed income assets and equities.
Income tax expense amounted to €25 million (tax profit), or a €+41 million variation in line with a lower pre tax result.
Underlying earnings decreased by €85 million to €11 million mainly as a result of lower technical result (as seven major losses occurred in 2005) partly offset by the decrease in general expenses, the increase in investment result and the income tax profit in 2005.
Net income decreased by €59 million to €67 million driven by the decrease in adjusted earnings. The €12 million additional deterioration over adjusted earnings is mainly explained by the non recurrence of some 2004 elements (a €+22 million gain on consolidated mutual funds which was partly offset by a €–7 million goodwill impairment following the buyback of minority interests of AXA RE Finance).
The net technical result decreased by €6 million or –3% to €189 million: – The current accident year net technical result decreased by €1 million to €166 million as the positive volume effect was more than offset by a slight increase of the current accident year net loss ratio by 0.3 point to 88.9%, notably reflecting increased case by case claims in Motor in France and in the UK as well as a more competitive price environment in Aviation and Liability.
The combined ratio reached 100.9%, up 0.7 point, driven by a +0.8 point increase in the all accident years net loss ratio (to 87.9%).
Net investment result improved by €+26 million to €123 million mainly driven by higher income (€+10 million) reflecting mainly a higher asset base due to positive technical cash flows mainly invested in fixed maturities and €+16 million lower financing charges due to the subordinated debts restructuring implemented at the end of 2004.
Income tax expense increased by €7 million to €–37 million, reflecting mainly increasing taxable result.
As a consequence, underlying earnings increased by €+22 million to €72 million.
Net capital gains attributable to shareholders net of income tax 30 46
Profit or loss (excluding change) on financial assets (under FV option) & derivatives (5) 1
Net income group share 97 97 (a) Current accident year claim charges (including claims handling expenses) / Current accident year earned revenues (excluding premium adjustments on previous years).
Adjusted earnings increased by €+5 million to €102 million, driven by the increase in the underlying earnings partly offset by decreased net capital gains. The €16 million decrease in net capital gains (to €30 million) resulted from €17 million higher net foreign exchange gains (€+10 million vs. a €–7 million loss, mainly on the dollar vs. € parity) and lower realized gains (€–34 million to €20 million).
Underlying earnings decreased by €8 million to €9 million, mainly due to (i) a €12 million decrease in the net technical margin (notably lower boni) together with (ii) a €1 million increase in general expenses and (iii) a €3 million positive tax impact due to a lower operating result.
Underlying earnings remained stable at €17 million mainly due to (i) a surging activity, offset by (ii) the sale of CAS, a UK based software company (contributing for €3 million in 2004 net of tax) and (iii) higher advertising costs in 2005.
Net income increased by €24 million to €43 million mainly reflecting the €+2 million increased adjusted earnings and the sale of CAS (net impact of €+23 million).
Other transnational activities underlying earnings remained stable at €–41 million primarily attributable to: – a €+27 million increase in US non life entities to €–41 million; 2005 was impacted by a €–12 million valuation allowance on a deferred tax asset versus €–31 million in 2004. In addition, the net technical result improved by €14 million, mainly explained by the 2004 charge linked to US hurricanes,
Adjusted and net income both decreased by €15 million to €–31 million explained by a €15 million lower gains realisation mainly as 2004 was impacted by a restructuring of the asset portfolio which induced some significant gains on equities and bonds.
Profit or loss (excluding change) on financial assets (under fair value option) & derivatives 11 2
The underlying cost income ratio improved by 2.9 points from 71.6% in 2004 to 68.7% in 2005.
Adjusted earnings increased by €39 million to €246 million both on constant and current exchange rate basis driven by higher underlying earnings and higher net capital gains (€+3 million)
Assets Under Management (“AUM”) were €432 billion as of December 31, 2005, increasing by €87 billion compared to December 2004 (+25% on a comparable basis) mainly driven by positive net new money (€+34 billion), mainly from third-party institutional and retail clients, market improvement (€+38 bill ion), acquisition of AXA Framlington (€7 bil l ion), and foreign exchange variance (€+6 billion).
Underlying and adjusted earnings, increased by €61 and €60 million to €156 million as a result of a business growth and an improvement in cost income ratio.
On October 31st, 2005 AXA IM SA purchased Framlington. The impact on 2005 underlying earnings was €4 million.
Profit or loss (excluding change) on financial assets (under FV option) & derivatives 11 2
Contribution to consolidated gross revenues 428 387 (a) Includes CFP, CDO’s and Real Estate entities.
Profit or loss (excluding change) on financial assets (under fair value option) & derivatives 8 (11)
NET INCOME 82 13 (a) Includes CFP, CDO’s and Real Estate entities.
Gross revenues remained stable at €28 million. Underlying and adjusted earnings both increased by €1 million to €3 million mainly explained by reduced expenses.
CFP. Underlying earnings increased by €18 million to €18 million due to the positive impact of the run-off development in 2005.
Underlying earnings decreased by €19 million to €–282 million. Excluding €70 million of non recurring tax benefit in 2005 versus €65 million of non recurring tax benefit in 2004, underlying earning decreased by €24 million mainly driven by (i) a higher financial charge by €6 million, (ii) an increase in general expenses by €36 million due to initiatives for developing business and increasing costs in connection with the preparation of the Sarbanes-Oxley 404 attestation of effectiveness of internal controls, due for year-end 2006 and (iii) a tax saving of €19 million on dividends received.
Adjusted earnings decreased by €43 million to €–286 million mainly driven by the decrease of (i) the underlying earnings and (ii) the mark to market related mainly to foreign currency swaps not qualified at net investment hedge by €20 million to €7 million.
Profit or loss (excluding change) on financial assets (under fair value option) & derivatives (4) 251
The Holding company activities consist of AXA’s nonoperating companies, including mainly AXA parent company, AXA France Assurance, AXA Financial, AXA Asia Pacific Holdings and AXA UK Holdings.
– the mark-to-market on interest rate swaps declines by €157 million mainly resulting from a lower decrease of Euro interest rates in 2005 than in 2004. Furthermore, additional hedge accounting qualifications, allowing to lower volatility of the mark-to-market, reduced the amount recorded through net income.
AXA France Assurance. Underlying and adjusted earnings decreased by €15 million to €–32 million, reflecting mainly the €14 million settlement with Armenian policyholders. Net income decreased by €22 million to €–40 million, due to the settlement of an indemnity to Nationwide in 2005 for €8 million.
Other French holdings. Underlying and adjusted earnings slightly increased by €5 million to respectively €20 million and €13 million. Due to favourable change in fair value of derivatives (€+29 million), net income was up €33 million to €41 million.
AXA Financial Inc. Underlying earnings decreased by €32 million on both current and constant exchange rate basis, to €–110 million due to higher net interest expense principally related to the MONY acquisition and higher stock based compensation expense. Adjusted earnings decreased by €29 million to €–108 mil l ion on both current and constant exchange rate basis. Net income decreased by €126 million in 2005, or by €127 million on a constant exchange rate basis, to €–170 million reflecting the after-tax loss on the sale of Advest in 2005 of €–69 million and the impact of a €43 million state tax release in 2004 related to the sale of DLJ in 2000.
Underlying Earnings of €–3 million decreased by €3 million due to additional costs associated with the expansion strategy in the Asian region.
Adjusted Earnings of €–2 million decreased by €14 million, largely due to the recognition of gains in 2004 on deemed ineffective swaps.
Net income included €–8 million (net of tax) indemnity to Nationwide and was down €–33 million or €–34 million to €–105 million.
Adjusted earnings increased by €68 million to €–1 million mainly driven by the improvement of underlying earnings (€+30 million) and to a €+36 million impact linked to the final settlement in 2005 of the sale of Cologne Re JV announced in 2003.
Net income improved by €82 million to €–1 million due to better adjusted earnings and the non recurrence of a €14 million capital loss on Bausparkasse sale in 2004.
Net income decreased by €31 million to €–33 million as a result of lower underlying earnings, the non recurrence of the capital gains recognized on the disposal of Crealux, treated as an exceptional operation in 2004 and the settlement of an indemnity to Nationwide in 2005 for €8 million.
– In Property and Casualty – barring any major catastrophes – AXA’s geographic diversification and price discipline lead management to believe in a stabilization of loss ratios, despite a slightly less favorable underwriting environment; – In International Insurance, a return to a more normalized claims environment would contribute to improved earnings.
Barring a significant downturn in the equity markets, net capital gains should contribute €600 to €800 million to adjusted earnings in 2006.
The solid revenue growth and very strong earnings growth of 2005 mark the first milestones on AXA’s path towards reaching its Ambition 2012 objective of becoming the preferred company in the industry.
Underlying earnings Underlying earnings correspond to adjusted earnings excluding net real ized capital gains attributable to shareholders.
Net realized gains or losses attributable to shareholders include: – i) realized gains and losses (on assets not designated under fair value option or trading assets) ii)change in impairment valuation allowance, iii) foreign exchange rates impacts (including derivatives and except the ones mentioned above) net of tax,
– DAC and VBI amortization or other reactivity to those elements if any (Life business).
The Statement of Income referred here-after and presented page 171 of the current document is based on an underlying basis.
There are certain material differences between the detailed line-by-line presentation in the Statement of Income and the components of Margin Analysis as set out below.
Adjusted earnings Adjusted earnings represent the net income (group share) before: (i) The impact of exceptional operations (primarily change in scope, including restructuring costs related to a newly acquired company during the considered accounting period).
Adjusted earnings per share (adjusted EPS) represents the AXA’s consol idated adjusted earnings, divided by the weighted average number of outstanding ordinary shares.
based on the nature of the revenue between “Fees and Revenues” and “Net Technical Margin”.
(iii) The “Investment margin” represents the net investment result in the Statement of Income and is adjusted to take into account the related policyholders ’ participation (see above) as well as changes in specific reserves linked to invested assets returns and to exclude the fees on (or contractual charges included in) contracts with a financial risk borne by policyholders, which are included in “Fees and Revenues”.
(ii) Change in UFR (Unearned Fees Reserve – capitalization net of amortization) is presented in the line “Change in unearned premiums net of unearned revenues & fees” in the underlying Statement of Income, whereas it is located in the line “Fees & Revenues” in the Margin analysis.
Underlying Fees & Revenues include: (i) Revenues derived from mutual fund sales (which are part of consolidated revenues). (ii) Loading charged to policyholders on premiums /
(iv) Other changes in insurance reserves and economic hedging strategies impacts related to insurance contracts valuated according to the “selective unlocking” accounting policy allowing liabilities adjustment so as to better reflect the current interest rates for these contracts.
and net rights to future management fees only for investment contracts without DPF.
Life & Savings cost income Ratio Underlying cost income ratio: Expenses as defined above/“underlying” operating margin, where: – Expenses are total expenses, excluding expenses related to mutual fund business net of Participating Benefits, excluding deferral and amortization of Deferred Acquisition Costs (DAC) and net rights to future management fees and excluding amortization of Value of purchased Life Business In-force (VBI),
Property & Casualty (including AXA Corporate Solutions Assurance) Underlying net investment result includes the net investment income less the recurring interest credited to insurance annuity reserves.
Underlying net technical result is the sum of the following components: (i) Earned premiums, gross of reinsurance. (ii) Claims charges, gross of reinsurance. (iii) Change in claims reserves, including claims handling costs reserves, gross of reinsurance, less the recurring interest credited to insurance annuity reserves.
general, the cost of a cover is accrued (or by extension “earned”) ratably over the treaty period. Major losses are defined as any event whose ultimate cost, gross of reinsurance and reinstatement premiums, is greater than $30 million.
Net technical margin includes: (i) Earned premiums, net of reinsurance (cession /
Net attritional margin on current accident year includes the following elements: (i) Earned premiums, net of cession/retrocession (reinsurance ceded excluding covers),
(iii) Commissions (fixed commissions, sliding scale commissions and profit commissions), (a) paid to the ceding companies and (b) received from the reinsurance companies, excluding commissions related to covers,
Consolidated Statement of Shareholders’ Equity / p. 238 Notes to the Consolidated Financial Statements / p. 242
Assets held for sale and relating to discontinued operations 102 62 – –
(*) French GAAP information is disclosed under the IFRS presentation format. (a) Amounts shown gross of tax. (b) Amounts gross of unearned revenue reserve and unearned fee reserve (c) Financial assets excluding loans and assets backing contracts where the financial risk is borne by policyholders.
Includes fixed maturities, equities, controlled and non controlled investment funds. (d) Includes policy loans. (e) Includes assets backing contracts with Guaranteed Minimum features. (f) Also includes trading financial assets and accrued interest.
Shareholders’ equity – Group share 33,847 28,523 26,157 23,401 14 Total minority interests and shareholders’ equity 36,609 30,834 28,363 25,870
Liabilities arising from insurance contracts where the financial risk is borne
Liabilities arising from investment contracts with discretionary participating features 32,890 31,662 – –
Liabilities arising from investment contracts with no discretionary participating features 926 869 – –
15 Liabilities arising from insurance and investment contracts 448,805 394,520 386,158 360,600 16 Provisions for risks and charges 8,761 7,729 4,392 4,964
Minority interests of controlled investment funds and puttable instruments held by minority interests holders (f) 5,115 3,717 – –
Other debt instruments issued and bank overdrafts (g) 8,411 7,784 5,830 4,518
(b) Amounts shown gross of reinsurer’s share in liabilities arising from contracts. (c) Liabilities arising from investment contracts with discretionary participating feature and investment contracts with no discretionary participating feature where the financial risk is borne by policyholders. (d) Also includes liabilities arising from deferred policyholder’s participation. (e) Financing debt amounts are shown net of effect of derivative instruments (please refer to Note 20). (f) Mainly comprises minority interests of controlled mutual funds puttable at fair value – also includes put options granted to minority shareholders. (g) Includes effect of derivative instruments (please refer to Note 20).
(h) Under French GAAP, liabilities arising from contacts with financial risk borne by the policyholders are shown within insurance contracts.
Liabilities arising from investment contracts with financial risk borne by the policyholders 48,549 39,127
Liabilities arising from investment contracts with discretionary participating feature 32,890 31,662
Fees and charges relating to investment contracts with no participating feature 509 417 –
Amortization of the value of purchased business in force and of other intangible assets (558) (468) (283)
Income from operating activities before tax 6,724 6,589 5,742 11 Income arising from investments in associates – Equity method 21 55 76
(d) Excludes impairment write back on sold invested assets. (e) Includes changes in liabiities arising from insurance contracts and investment contracts (with or with no participating feature) where the financial risk is borne by policyholders for 13,978 million euros as a counterpart of change in fair value of financial instrument at fair value through profit & loss (10,543 million euros in 2004). (f) Includes acquisition costs and change in deferred acquisition costs relating to insurance contracts and investment contracts with discretionary participating feature as well as change in rights to future management fees relating to investment contracts with no discretionary participating feature. (g) Notably includes financial charges in relation to other debt instruments issued and bank overdraft. (h) Net balance of income and expenses related to derivatives on financing debt (however excludes change in fair value of these derivatives). (i) Includes change in impairment and amortization of intangible assets as well as negative goodwill.
Fully diluted adjusted earnings per share 2.16 1.78 1.52 (*) French Gaap information is disclosed under the IFRS presentation format. (j) Underlying earnings correspond to adjusted earnings excluding net realized capital gains attributable to shareholders.
For more information, a reconcilation from adjusted earnings to net income is provided in the Management Discussion and analysis.
(k) Adjusted earnings represent the net income (group share) before: (i) The impact of exceptional operations (primarily change in scope, including restructuring costs related to a newly acquired company during the considered accounting period). (ii) Goodwill and other related intangible impacts, and (iii) Profit and loss on financial assets accounted for under the fair value option (excluding assets backing contract where the financial risk is borne by the policyholder) and derivatives related to invested assets (excluding (i) all impacts of foreign exchange except the ones related to currency options in earnings hedging strategies and (ii) those related to insurance contracts valued according to the “selective unlocking” accounting policy).
For more information, a reconciliation adjusted earnings to net income is provided in the Management Discussion and analysis.
(excluding cash and cash equivalent) (15,962) (12,301) (+) Other non-cash items included in income from operating activities 66 (757)
(–) Purchase of subsidiaries and affiliated companies, net of cash acquired (b) (1,583) (3,938) (+) Disposal of subsidiaries and affiliated companies, net of cash ceded (b) 891 856 (–) Purchase of shares of affiliated companies – (72) (+) Disposal of shares of affiliated companies – 352
Net cash related to changes in scope of consolidation (691) (2,801) (+) Sales of fixed maturities 70,722 84,965 (+) Sales of equity securities 19,604 22,072 (+) Sales of investment property 962 1,620 (+) Sales and/or repayment of loans and other assets 11,974 4,222
Net cash related to sales and repayments of financial assets 103,262 112,878 (–) Purchases of fixed maturities (79,833) (82,677) (–) Purchases of equity securities (19,685) (34,416) (–) Purchases of investment property (991) (1,043) (–) Purchases and/or issues of loans and other assets (c) (20,878) (8,284)
Net cash related to purchases and issuance of financial assets (121,387) (126,421) (+) Sales of tangible and intangible assets 225 33 (–) Purchases of tangible and intangible assets (214) (221)
(+/–) Transactions on treasury shares (512) – (–) Dividends payout (1,308) (924)
Net interest margin of hedging derivatives on financing debt – – Net cash related to Group financing (3,497) (2,032) Net cash provided by financing activities (4,667) (620) Cash and cash equivalent as of 1st January 21,830 18,858 Net cash provided by operating activities 22,073 20,170 Net cash provided by investing activities (18,805) (16,531) Net cash provided by financing activities (4,667) (620) Net impact of foreign exchange fluctuations on cash and cash equivalent 71 (166) Impact of changes in scope on cash and cash equivalent 138 117 Net cash provided by assets and liabilities held for sale discontinued operations – – Cash and cash equivalent at 31 December 20,640 21,830
(b) These items include the impact of purshases and sales of units in a consolidated mutual funds. (c) ) Including investments backing contracts where the financial risk is borne by the policyholder.
Total recognised income and expense for the period (SORIE) – – –
NB : amounts are presented net of impacts of shadow accounting and of its effects on policyholder’s benefit, deferred acquisition costs, and value of business in force. (a) Mainly equity components of compounded financial instruments (i.e. for example convertible bonds). (b) Actuarial gains and losses accrued since January 1, 2005.
Number Nominal value Share Capital Capital in excess Treasury shares of shares (euros) of nominal
Reserves Reserves Reserves Others (a) Translation Undistributed share interests relating to relating to relating to reserve profits and the change in the change in revaluation of other reserves FV of financial FV of hedge tangible assets instruments accounting available derivatives for sale (cash flow hedge)
Consolidated financial statements have been approved by the Management Board on February 20, 2006.
The restated 2005 financial statements were prepared in accordance with IFRS standards and with IFRIC interpretations that had been adopted by the European Union as of December 31, 2005. However, the Group does not use the “carve out” option not to apply all hedge accounting principles as defined by IAS 39.
However, the Group has elected for early adoption in both 2004 and 2005 of the amendment to IAS 39 (Financial instruments: recognition and measurement) relating to the fair value option, and the amendment to IAS 19 (Employee benefits) relating to actuarial gains and losses, group plans and disclosures. Early adoption was encouraged for these standards, which are effective for accounting periods starting on or after
1.3. Consolidation 1.3.1. Basis of consolidation Companies in which AXA exercises control are known as subsidiaries. Subsidiaries are fully consolidated from the date on which control is transferred to AXA. Control is presumed to exist when AXA directly or indirectly (including related parties) holds at least 50% of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible have also been considered when assessing whether AXA controls another entity. Entities that are controlled in substance even without any ownership interest are also consolidated. In particular this relates to special purpose entities including securitization vehicles and other entities, resulting from sales of receivables and with the purpose of issuing securities whose redemption is
Investment and real estate companies are either fully consolidated or proportionately consolidated or accounted for under the equity method, depending on which conditions listed above they satisfy. For fully consolidated investment companies, minority interests are accounted for at fair value and shown as debt in the balance sheet if these investment companies can be redeemed at any time by the holder at fair value. Investment companies accounted for under the equity method are shown under the balance sheet caption “Investments”.
1.3.2. Business combinations: purchase accounting and goodwill including buyout of minority interests As described above and in note 2 on first time application of IFRS, business combinations that occurred prior to 2004 have not been restated except for the goodwill related to entities in foreign currency. The principles described below apply to the business combinations that occurred after January 1, 2004.
Valuation of assets acquired, liabilities assumed and contingent liabilities Upon the first consolidation, the identifiable assets, liabilities and contingent liabilities of the acquired company are recorded at their estimated fair value. However as permitted by IFRS 4, liabilities related to life insurance contracts or investment contracts with discretionary participating features are maintained at the carrying value prior to the date of the acquisition if the measurement basis is consistent with AXA’s accounting principles. In conjunction with acquisition accounting relating to acquired life insurance operations or investment contracts with discretionary participating features portfolios, an asset is recorded corresponding to the present value of estimated future profits emerging on purchased business in-force at the date of acquisition (also referred to as value of purchased business in-force or VBI). The present value of future profits takes into consideration the cost of capital and is estimated using actuarial assumptions based on anticipated experience. This experience is determined as of the purchase date using a discount rate that includes a risk premium. Other intangible assets such as trademarks or customer relationships are recognized if they can be valued reliably and if it is probable that future economic benefits attributable to the assets will flow to the entity.
If the cost of acquisition is less than the net fair value of the assets, liabilities and contingent liabilities acquired, the difference is recognized directly in the income statement.
Commitment towards minority shareholders When control over an entity is acquired, a put option may be granted to minority shareholders. However, the recognition of the option as a liability depends on the precise terms of the contract.
Where the contract involves an unconditional commitment exercisable at the option holder’s wish, the option is recognized as a liability. However, current accounting standards make no statement regarding the balancing entry for this liability. While waiting for an interpretation or an amendment to accounting standards on this point, the Group, having reclassified minority interests as liabilities, recognizes the difference between these liabilities, measured as the discounted value of the option price, and the minority interests, measured as their share of shareholders’ equity, as goodwill. Similarly, subsequent variations in the value of this liability will be recorded with a balancing entry in goodwill.
Intra group transactions Intra group transactions, including internal dividends, balances and gains or losses on intra group transactions are eliminated: – in full for wholly owned subsidiaries and – to the extent of AXA’s interest for associates and joint ventures proportionally consolidated.
The effect of inter-company transactions on net income is always eliminated upon consolidation, unless there are other than temporary losses, which are usually recorded immediately.
When an asset, not intended for long term holding within AXA’s asset portfolios, is disposed of internally: – The tax corresponding to the eliminated capital gain or loss is eliminated upon consolidation through a deferred tax adjustment recorded in the balance sheet.
– The same applies to the potential policyholder benefit in respect of the eliminated gain or loss (a deferred policyholder benefit asset or liability is then posted to the balance sheet).
In addition, the total or partial transfer of securities in a company included in the scope of consolidation, between two subsidiaries that are fully consolidated but held with different ownership percentages, will not affect the consolidated operating results (with the exception of any related tax and allocation to policyholders’ participating benefits recorded as a consequence of the transaction, which are maintained in the consolidated accounts as the related securities are held for long-term holding).
These transfers also have an impact on the Group shareholders’ equity (its counterpart being recorded in minority interests) which is identified in the “Internal restructuring” line of the shareholder’s equity.
The consolidated financial statements are presented in millions of euros, euro being the Company’s functional and presentation 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
Exchange rate differences arising from the translation of a net investment in foreign entities, borrowings and other currency instruments designated as hedges of such investments are recorded in shareholders’ equity and are recognized in the income statement as part of the gain or loss on disposal of the net investment. Exchange rate differences arising from monetary financial assets classified as available for sale and corresponding to the amortized cost are recognized as income or expense for the period; the remaining differences relating to fair value changes are recorded in shareholders’ equity.
The segmental analysis provided in AXA’s annual report and financial statements reflects both lines of business (primary segment) and geography; it is based on five types of activities: “Life & Savings”, “Property & Casualty”, “International Insurance” (including reinsurance) and “Other Financial Services” (including Asset Management). An additional “Holdings” segment includes all non-operational activities.
1.6. Intangible assets 1.6.1. Goodwill and Impairment of goodwill Goodwill is considered to have indefinite useful life and is therefore not amortized. It is subject to impairment tests which should be performed at least annually. Impairment of goodwill is not reversible. AXA performs an annual impairment test of goodwill based on the cash generating units (see above part 1.3) using a multi-criterion analysis (parameters include value of assets, future operating profits, market share) in order to determine if there are significant adverse changes. That analysis includes the long-term nature of the holding, and excludes factors affected by short-term market volatility. The analysis also considers the interdependence of transactions within sub-groups. Within each cash generating unit, a comparison is made between net book value and the recoverable value, which is equal to the highest of the market value and value in use. The value in use is the net assets and expected earnings from existing and new business, taking into account the cash generating unit’s future prospects. The value of future expected earnings is estimated on the basis of life and savings embedded value figures published by AXA or similar calculations for other activities. Market value is based on various valuation multiples.
1.6.2. Value of purchased life insurance business in force (“VBI”) The VBI, in respect of acquired insurance companies, is determined on the basis of profits emerging over the contract period and is amortized over the life of the relevant contracts. In conjunction with the liability adequacy test (see section 1.11.2), VBI is subject to annual recoverability testing based on actual experience and expected trends with respect to the main assumptions.
1.6.3. Other intangible assets Other intangible assets include software developed for internal use. The associated direct costs are capitalized and amortized on a straight-line basis over their estimated useful life.
Other intangible assets also include trademarks or customer relationships recognized as a result of business combinations, subject to the fact that their fair value can be measured reliably and it is probable that future economic benefits attributable to the assets will flow to the Company. They are carried at cost. If these assets have a finite useful life, they are amortized over their estimated life using the straightl ine method. In al l cases, they undergo an impairment test at each period end. In the event of a significant decline in value, a valuation allowance is booked for the difference between the value on the balance sheet and the higher of value in use and market value.
1.6.4. Deferred acquisition costs (“DAC”) in respect of insurance contracts and investment contracts with discretionary participating features Deferred Origination Costs (“DOC”) in respect of investment contracts without discretionary participating features.
contracts where the financial risk is borne by policyholders and from With-Profit contracts) are accounted for at depreciated cost, the components of the properties being depreciated over their estimated useful life, taking into consideration their residual value at the end of the useful life if the residual value may be reliably estimated.
The option for designation of financial assets and liabilities at fair value with change in fair value through profit or loss has been mainly used by the Group in the following cases: – financial assets for which electing fair value option is appropriate to reduce accounting mismatch, particularly in the following cases: • assets backing liabilities arising from contracts for which the financial risk is borne by the policyholders; • assets included in hedging strategies set out by the Group for economical reasons but not eligible to hedge accounting as defined by IAS 39; – groups of managed financial assets with their performance evaluated on a fair value basis: mainly, securities held by some mutual funds included in the scope of consolidation on the basis of Group risk management policy (“Satellite Investment Portfolio”, see definition below); in addition, debts held by structured fixed income funds mainly holding CDOs have also been designated under this option, at fair value through profit or loss, as electing this option is appropriate to reduce the accounting mismatch.
In practice, assets held through mutual funds are classified either: – as assets of the “Core Investment Portfolios” which include assets held for backing insurance and investment contracts liabilities, based on AXA asset allocation which is driven by its ALM strategy; or
For equity securities classified as available for sale, a significant or prolonged decline in the fair value of the security below its cost is considered in determining whether the securities are impaired. That is the case for equity securities with unrealized losses for a continuous period of 6 months or more prior to the closing date or higher than 20% of the carrying value at the closing date. If any such evidence exists for available-for-sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in the income statement – is removed from shareholders’ equity and recognized in the income statement. Impairment losses recognized in the income statement on equity instruments are not reversed through the income statement until the asset is sold or derecognized.
For assets accounted for at amortized cost, including loans and assets classified as “held to maturity”, impairment test is first performed at the individual level. If there is no evidence of impairment at this level, then a collective assessment is made for groups of assets with similar risks.
Based on local entities’ ALM strategies, average cost or first-in first-out method (FIFO) or other method of assigning costs to investment at the time of sale are used on a permanent and consistent manner at the level of each entity.
Liabilities arising from insurance or investment contracts where the financial risk is borne by policyholders are presented in a separate caption of the balance sheet. The assets backing those liabilities are symmetrically presented in a specific caption on the asset side of the balance sheet. This presentation is relevant for the users and consistent with the order of liquidity recommended by IAS 1 for financial institutions since the risks are borne by policyholders, whatever the nature of assets backing the liabilities, be they properties, fixed maturity securities or equity securities. A breakdown by nature of assets is disclosed in the notes to the financial statements.
highly probable expected future transactions (cash flow hedges); or (iii) hedges of net investments in foreign operations.
The Group documents, at inception, the hedge relationship, as well as its risk management objective and strategy for undertaking various hedge transactions. The Group also documents its assessment of hedge effectiveness, both at hedge inception and on an ongoing basis, indicating whether the derivatives that are used in hedging transactions are expected to be or have been highly effective in offsetting changes in fair values or cash flows of hedged items.
Fair value hedge Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk.
Cash flow hedge The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in shareholders’ equity. The gain or loss relating to any ineffective portion is recognized immediately in the income statement. Amounts accumulated in shareholders’ equity are recycled into the income statement in the periods in which the hedged item affects profit or loss (for instance when the hedged expected future transact ion takes place).When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in shareholders’ equity at that time remains there until the expected future transaction ultimately affects the income statement.
Derivatives that do not qualify for hedge accounting Changes in the fair value of all other derivative instruments that do not qualify for hedge accounting are recognized immediately in the income statement.
The Group enters into financial asset contracts that include embedded derivatives. Such embedded derivatives are separately recorded and valued at fair value through profit or loss when appropriate and significant.
For balance sheet presentation, derivatives are netted against the assets or liabilities for which they are used, regardless of those derivatives meeting the criteria for hedge accounting. Detailed amounts are disclosed in the notes to financial statements.
1.10.3. Compound financial instruments Any financial instrument issued by the Group with an equity component (e.g. option granted to convert the debt instrument into an equity instrument of the company) and a liability component (e.g. contractual obligation to deliver cash) are classified separately on the liability side of the balance sheet with the equity component reported in shareholders’ equity (“other reserves”). Gains and losses associated with redemptions or refinancing of the equity component are recognized as changes to the shareholders’ equity.
1.10.4. Treasury shares Treasury shares and any directly incremental costs are recorded as a reduction to the consolidated shareholders’ equity. Where such shares are subsequently sold, or reissued, any consideration received is included in consolidated shareholders’ equity, net of any directly attributable incremental transaction costs and the related income tax effects.
Exceptionally, the portion of own shares held by controlled funds that back policies where the financial risk is borne by the policyholder is not deducted. All risks and income resulting from holding these shares are attributable to the funds that hold them.
1.11. Liabilities arising from insurance and investment contracts 1.11.1. Contract classification The Group issues contracts that transfer insurance risk or financial risk or both.
The Group classifies its insurance and investments contracts into six categories: – liabilities arising from insurance contracts, – liabilities arising form 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 where the financial risk is borne by policyholders and with discretionary participating features, these relate to unit linked contracts or multi funds contracts containing a non unit linked fund with a discretionary participating features,
– liabilities arising from investment contracts where the financial risk is borne by policyholders and without discretionary participating features.
1.11.2. Insurance contracts and Investment contracts with discretionary participating features (DPF) According to IFRS 4, recognition and derecognition rules are based on the existing AXA accounting policies as follows except for the elimination of the equalization provisions and the selective changes as permitted by IFRS 4 (see paragraph below on guaranteed benefits).
Unearned premium reserves Unearned premium reserves represent the portion of premiums received on in force contracts that relates to unexpired risks at the balance sheet date.
For traditional life insurance contracts (that is, those contracts with significant mortality risk), the liability for future policy benefits is calculated in accordance with the applicable regulatory principles of each country on the basis of actuarial assumptions as to investment yields, mortality, morbidity and expenses, using a prospective approach.
Mathematical provisions relating to investment contracts with discretionary participation (previously termed “savings contracts” in AXA’s accounting principles) that carry low mortality and morbidity risk are calculated using a forward-looking approach based on discount rates set at the outset. The results of this approach are similar to those obtained using a retrospective approach (earned savings valuation or “account balance”). The discount rates used by AXA are at most equal to the expected future investment yields based on prudent estimates.
The “Liabilities relating to policyholder bonuses” caption includes the entire “Fund for Future Appropriation” (FFA) relating to UK with-profit contracts, which principally covers the future terminal bonuses according to the terms of these contracts. The combination of provisions on withprofit contracts and the FFA varies in line with the market value of the assets support ing the participating “With-Profit” funds.
For insurance and investment contracts with discretionary participation, if the contracts include a minimum guaranteed rate of return, the insurance liability will also include a reserve necessary to cover the guarantee in the event that the future returns are insufficient.
Provisions for unearned revenues Revenues received at the start of a contract to cover future services are deferred and recognized in income using the same amortization pattern as the one used for deferred acquisition costs (see 1.6.4).
In case of unrealized losses, a deferred participating asset (DPA) should be recognized only to the extent that its recoverability is highly probable. That could be the case if the DPA can be offset against future participation either directly through deduction of the DPA from future capital gains or indirectly through deduction of future loads on premiums or margins.
Unrealized gains & losses on assets: – classified as trading or fair value through profit or loss are accounted for in Income Statement with shadow accounting adjustment through income statement, and
– classified as available for sale accounted for at fair value with change in fair value in shareholders’ equity are booked through shareholders’ equity with shadow accounting adjustment through shareholders’ equity.
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 separated and carried at fair value if they are not
1.11.3. Investment contracts without discretionary participating features (DPF) In accordance with IAS 39, these contracts are accounted for using the “deposit accounting” method, which mainly results in not recognizing in the income statement the corresponding premiums and benefits and claims (see below Revenue recognition). This category includes mainly unit-linked contracts that do not meet the definition of insurance or investment contract with discretionary participation features. For unit-linked contracts, the liabilities recognized according to the existing accounting policies are valued in reference to the fair value of the investment funds / assets linked to those contracts at the balance sheet date.
Financing debts used to finance the solvency margin of an operational entity or to acquire the shares of an entity or a portfolio of contracts are presented on the balance sheet separately from other debts, liabilities and payables.
Deferred income tax assets and liabilities emerge from temporary differences between accounting and fiscal values of assets and liabilities, and from net operating losses carry forwards, if any. Deferred tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the temporary differences can be used. Therefore, valuation allowances are recorded for deferred tax assets that are not expected to be recovered.
1.14.2. Pensions and other post-retirement benefits Pensions and other post-retirement benefits include the benefits payable to AXA Group employees when they retire (departure compensation, additional pension, medical cover). In order to meet pension liabilities, some regulations have allowed or imposed the establishment of dedicated funds (plan assets): – Defined contribution plans are characterized by payments made by the employer to institutions (e.g. pension trusts). These payments free the employer of any further commitment; the institutions are responsible for paying acquired benefits to the employees. The contributions paid by the employer are recorded as an expense in the income statement and no liability needs to be recorded.
– Defined benefit plans are characterized by an actuarial assessment of the commitments based on each plan’s internal rules. The present value of the future benefits paid by the employer, known as the PBO (Projected Benefit Obl igation), is
calculated annually using the projected unit credit method. It is valued on the basis of long-term projections (salary increase rate, inflation rate, mortal i ty, turnover, pension indexation and remaining service lifetime). The amount recorded in the balance sheet for employee benefits is the difference between the Projected Benefit Obligation and the market value at balance sheet date of the corresponding invested plan assets after adjustment for any unrecognized losses or gains and past service costs. If the net result is negative, a provision is recorded in the balance sheet under the provision for risks and charges. 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 full in the period in which they occurred. Similarly, any adjustment arising from the asset ceil ing is recognized in shareholders’ equity. Past-service costs are recognized immediately in income, 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, the past-service costs are amortized on a straight-line basis over the vesting period.
All equity-settled stock-option plans granted after November 7, 2002 and not fully vested as of January 1, 2004 are accounted for at fair value at the grant date and the fair value is accrued over the vesting period.
The AXA Shareplan issued under specific French compensation scheme includes two options: a classic option and a leverage plan. The cost of the classic plan is valued according to the specific guidance issued by the CNC (“Conseil National de la Comptabilité”). The cost of the leverage plan is valued by taking into account the restriction over five years for the employee, as in the classic plan, but adding to this cost the opportunity gain implicitly provided by AXA by enabling its employees to benefit from an institutional derivatives’ pricing instead of a retail pricing.
1.15. Other provisions and liabilities 1.15.1. Restructuring costs Restructuring provisions not related to a business combination 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.
Provisions are not recognized for future operating losses or associated with the on-going activities of the company.
1.16. Revenue recognition 1.16.1. Gross written premiums Gross written premiums correspond to the amount of premiums written on business incepted in the year with respect to both insurance contracts and investment contracts with discretionary participating features by insurance and reinsurance companies, net of policy cancellations and gross of reinsurance ceded. In the
reinsurance sector, the premiums are recorded on the basis of declarations made by the ceding company, and may include estimates of gross premiums written.
1.16.2. 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 for the cost of issuance, investment management, administration and surrender of the contract during the period. Front-end fees collected corresponding to fees for future services, are recognized over the estimated life of the contract (see “Unearned fees reserves” section 1.11.3).
1.16.4. Net revenues from banking activities Net revenues from banking activities include all revenues and expenses from banking activities, including interests and banking fees. They exclude bank operating expenses and change in provisions for bad debts, doubtful receivables or loans which are recorded in the item “Bank operating expenses”.
From time to time, subsidiaries that are not wholly owned by AXA may issue additional capital. As a result, AXA’s ownership interest in that subsidiary decreases and a dilution gain or loss arises. This gain or loss is recorded in the net investment result. This gain or loss corresponds to the variation of the shareholders ’ equity portion of the subsidiary before and after the operation.
1.17. Discontinuing operations/ assets held for sale These comprise assets held for sale and discontinued operations intended to be sold within twelve months. They are accounted for at the lower of carrying amount and fair value net of selling costs. They are presented separately on the face of balance sheet. Discontinued operations’ contribution to earnings, net of tax, is presented separately in the Income Statement.
In its 2004 annual report, the Group stated that it would present consolidated financial statements in accordance with IFRS standards as of the 2005 accounting exercise. The conversion project involved the Management Board approving and the Audit Committee reviewing the accounting options and application principles adopted for the opening balance sheet and comparative figures for 2004 (first-half and full-year periods). The Audit Committee carried out its final review of these accounting options and principles in June 2005.
IFRS: (*) French GAAP information is disclosed under the IFRS presentation format. (a) Amounts shown gross of tax. (b) Amounts gross of unearned revenue reserve and unearned fee reserve. (c) Financial assets excluding loans and assets backing contracts where the financial risk is borne by policyholders.
Includes fixed maturities, equities, controlled and non controlled investment funds (d) Includes policy loans. (e) Also includes assets backing contracts with Guaranteed Minimum features (f) Also includes trading financial assets; includes accured interest.
All financial assets amounts are shown net of derivatives impact. (g) Includes long term assets, i.e. when maturity is above 1 year. (h) Includes short term assets, i.e. when maturity is below 1 year.
Share capital and capital in excess of nominal value 18,056 (486) 17,570 Reserves and translation reserve 5,345 (446) 4,899
Liabilities arising from investment contracts with discretionary participating features – 31,401 31,401 Liabilities arising from investment contracts with no discretionary participating features – 936 936 Liabilities arising from investment contracts where the financial risk is borne by policyholders (c) – 34,458 34,458 Total liabilities arising from investment contracts (b) – 66,795 66,795
Unearned revenues and unearned fees reserves – 1,646 1,646 Liabilities arising from policyholder’s participation (d) 13,037 2,051 15,087 Derivatives relating to insurance and investment contracts – (28) (28) LIABILITIES ARISING FROM INSURANCE AND INVESTMENT CONTRACTS 360,600 4,756 365,357
Financing debt instruments issued 4,459 (873) 3,585 Financing debt owed to credit institutions 29 – 29
Liabilities held for sale or relating to discontinued operations – – –
(a) Also includes liabilities arising from contracts with Guaranteed Minimum features. (b) Amounts shown gross of reinsurer’s share in liabilities arising from contracts. (c) Liabilities arising from investment contracts with discretionary participating features and investment contracts with no discretionary participating features where the financial risk is borne by the policyholder.
(f) Mainly comprises minority interests of controlled mutual funds puttable at fair value. (g) Includes effect of derivative instruments. (h) Under French GAAP, liabilities arising from contracts with financial risk borne by the policyholders are shown within insurance contacts.
to opening shareholders’ equity at January 1, 2004 under IFRS is as follows: (1) Adjustments net of tax and policyholder’s participation impacts, when applicable.
The detailed reconciliation by type of adjustment1 of the opening shareholders’ equity from French GAAP to IFRS as of January 1, 2004, is as follows: (in euro millions)
In addition to these gross up effects, the expansion of the scope of consolidation led to an increase in opening asset and liability balances.
According to IFRS, all entities in which AXA has a significant influence should be consolidated with: – the full consolidation method if AXA exercises an exclusive control; – the proportionate method if AXA exercises a joint control; – the equity method if AXA exercises a significant long-term influence; The IFRS scope of consolidation is presented in Note 3. The impact on the Group’s opening shareholders’ equity of the increase in the number of consolidated companies was €–217 million.
For consolidated investment companies, minority interests are recognized at fair value and recorded as a liability under Controlled Investment Funds minority interest liabilities. The recognition of these minority interests induced an increase in invested assets and liabilities in the opening balance sheet by
(b) Goodwill As mentioned in section 1.2.1 above, the Group opted not to restate past business combinations, in accordance with the exemption offered by IFRS 1. As a result, adjustments to opening goodwill are limited to the translation adjustments described below and restatements of any assets and liabilities recognized at the date of acquisitions which do not meet IFRS recognition criteria (see VBI relating to investment contracts without discretionary participation features).
Under IFRS, goodwill resulting from the acquisition of a foreign entity is recorded in the currency of the acquired entity and translated into euros at the end of the accounting period. Under French GAAP, goodwill was translated into the acquirer’s currency. As a result, a retroactive adjustment was recorded under IFRS to recognize goodwill in the currency of the acquired entity. This restatement reduced goodwill by €1,284 million in the opening balance sheet, and is the main adjustment contributing to the goodwill and Purchase Accounting sub-total adjustment. The total net impact on opening shareholders’ equity was €–1,260 million. Goodwill recognized at the date of business combinations prior to 2004 is no longer amortized but subjected to impairment tests. The impact of this change in accounting principles on 2004 figures is presented in section 2.3.3. There is no difference between French GAAP and IFRS as regards the conclusions of impairment tests.
Net impact from reevaluation at fair value of available for sale assets (with change of fair value in shareholders’ equity) 4,091
CLASSIFICATION According to IAS 39, the intention to hold an investment is more important than the nature of the investment. Applying this principle, invested assets, excluding derivative instruments, are classified in the following categories: – held to maturity financial assets, accounted for at amortized cost; – loans & receivables, accounted for at amortized cost; – trading assets and assets under fair value option, accounted for at fair value with change in fair value recorded in the income statement; – available for sale assets accounted for at fair value with change in fair value recorded in shareholders’ equity.
Pursuant to the IAS 39 amendment published by the IASB on June 16, 2005, companies have the option, at first recognition of financial assets and liabilities, to recognize them at fair value with change in fair value recorded in the income statement (recognize them at “fair value through profit & loss”). The Group has used this option mainly in the following cases: – assets backing liabilities resulting from contracts where the financial risk is borne by policyholders; – securities held by consolidated investment entities under a Group risk management policy; – certain assets covered by hedging strategies implemented by the Group and for which hedge accounting in the meaning of IAS 39 is not used; – Debt held by newly-consolidated Collateralized Debt Obligations (CDOs) are also stated at fair value with change in fair value recorded in profit & loss. This has a limited impact, since the corresponding assets are also recognized at fair value through profit & loss. This debt appears under Other debt instruments issued and bank overdrafts.
The adoption of these principles results in most invested assets being recognized at fair value. No investment has been classified in the held-to-maturity securities category, and only loans are recognized at amortized cost. The increase in invested assets resulting from the reevaluation of available-for-sale assets amounted to €11,880 million at January 1, 2004. The impact on reserves relating to the change in fair value of available-for-sale financial assets, net of tax, policyholder bonuses where applicable, and additional depreciation of VBI and DACs, is €4,213 million including the impact on consolidated funds and €4,091 million excluding the impact on these funds.
Identification and valuation of embedded derivatives According to IFRS, embedded derivatives in financial assets should be separated and accounted for at fair value with change in fair value in profit & loss if the host contract is not accounted for with the same method and derivatives are not clearly and closely related to the host contract. So far, total embedded derivatives in invested assets which are not accounted for at fair value through profit & loss in accordance with this method are not material at the Group level.
Impairment rules While there is no difference between impairment rules for debt securities under French GAAP and IFRS, principles differ regarding equity securities. Under IFRS, AXA considers that equity securities showing unrealized losses for a continuous period of 6 months or more prior to the closing date or equal to more than 20% of the carrying value at the closing date should be impaired.
Accounting rules for derivatives and hedging The Group applies as much as possible the hedge accounting rules. When it is not possible, the derivatives are accounted for at fair value with change in fair value through profit & loss. The impact on revenues is limited when hedged items are recognized at fair value with change in fair value through profit & loss.
(i) CLASSIFICATION AND ACCOUNTING RULES OF THE CONTRACTS According to IFRS 4 (“Phase I”) and IAS 39, contracts should be classified in 2 categories: insurance contracts or investment contracts.
The Group continues to apply existing accounting principles for insurance contracts and investment contracts with discretionary participating features during Phase I. Consistently with the accounting standards previously used by the Group, an adequacy test is performed to ensure that the existing provisions are sufficient to cover future flows including settlement costs, embedded options and guarantees. The only exception to the previous accounting principles relates to equalization provisions, which are eliminated under IFRS. This adjustment increased opening shareholders’ equity by €260 million (net), and reduced gross non-life provisions by €397 million.
A small number of the contracts are classified as investment contracts without discretionary participating features and are accounted for differently under IFRS. In accordance with IAS 39, these contracts are accounted for using the “deposit accounting” method (see comments in point 2.3.1. about reconciliations between 2004 French GAAP and IFRS income statements). For the Group, this category includes mainly unit-linked contracts for which liabilities already represented the fair
value of the investment funds / assets linked to those contracts at the balance sheet date under pre-existing accounting standards.
Presentation impact On the face of the balance sheet, information about deferred acquisition costs and deferred origination costs is presented gross of unearned revenues and unearned fees reserves. This led to a €1,646 million increase in deferred acquisition costs and equivalent, with unearned revenues and unearned fees reserves as counterpart.
In addition, VBI relating to acquired life insurance companies is presented gross of tax. This increased VBI on the asset side of the balance sheet by €857 million, with deferred tax liabilities as counterpart.
Investment contracts without discretionary participating features Acquisition costs relating to investment contracts without discretionary participating features were recognized under French GAAP, but can no longer be recognized as assets under IFRS. Only costs directly attributable to the acquisition of a financial management service contract may be recognized as an asset (deferred origination costs) to the extent that the company will receive payments covering these costs over the life of the contract. The scope of these deferrable costs is smaller under IFRS than under French GAAP. There are also amortization differences, mainly arising from differing ways of valuing profits emerging from the business concerned. €641 million of gross DAC relating to investment contracts without discretionary participating features have been reversed out of opening shareholders’ equity, while €499 million of deferred origination costs (DOCs) have been included in the opening balance sheet.
At the same time, VBI relating to investment contracts without discretionary participating features was reduced by €378 million in the opening balance sheet.
Guaranteed minimum income benefits (GMIB) offered by certain direct insurance contracts and performance guarantees offered by some reinsurance contracts are covered by a risk management program. To reduce the asymmetry between the valuation of liabilities and the valuation of the related derivatives, the Group adjusted liabilities to better reflect current interest rates on these contracts, using the “selective unlocking” option under section 24 of IFRS 4, so as to reflect changes in market assumptions such as interest rate.
(options to surrender insurance contracts and investment contracts with discretionary participating features for a set amount); – they are an insurance contract.
Actuarial gains and losses arising from differences with respect to estimates and from changes in assumptions subsequent to the opening balance sheet are fully recorded through shareholders’ equity during the period in which they arise (through the “statement of income and expenses recognized during the period”). The impact of this change in accounting principle on 2004 is discussed in section 2.3.
Favorable conditions granted as part of share plans with capital increases reserved to employees are also recognized in accordance with IFRS 2, and with the application document published by the CNC (Conseil National de la Comptabilité, French accounting standard-setter) relating to French share plans. The resulting impact is recognized in the statement of income for the period: see section 2.3.
(h) Compounded financial instruments Under IFRS, any compounded financial instruments issued by the Group comprising both an equity component (i.e. an option allowing a debt instrument to be converted into an equity instrument of the company) and a debt instrument (comprising a contractual obligation to deliver cash) are classified separately on the liability side of the balance sheet, and the equity component is presented under shareholders’ equity. This resulted in a €120 million net increase in opening shareholders’ equity.
(i) Other debts Financing debts intended to finance the solvency margin of an operating entity or to acquire a portfolio of insurance contracts are presented on the face of the balance sheet separately from other debts. Within operating debts, the main changes are the recognition as liabilities of minority interests in most investment funds (see scope of consolidation in section 3.1), the recognition under the same caption of the commitment to buy out minority interests held by former shareholders of Sanford C. Bernstein, revalued at each closing with a balancing entry to goodwill, and the recognition of newly consolidated CDO tranches, which increase the amount of liabilities on the balance sheet.
Deposit accounting Investment contracts without discretionary participating features meet the definition of financial instruments under IAS 39. These contracts are recognized according to the deposit accounting principle, which means that flows of premiums, benefits and changes in technical reserves on the related contracts are not recorded in the income statement. This adjustment reduced the apparent business volumes of life insurance companies. However, its net impact on earnings is nil. The resulting reduction in premium income was €5,139 million for full-year 2004 (main adjustment to premium income.) Loadings received on these contracts are recognized under “Revenues from investment contracts with no discretionary participating features”, which totaled €417 million for full-year 2004. The other main income statement caption to be impacted is “Technical charges relating to insurance activities”, which decreased by €–4,793 million for fullyear 2004.
Gross written premiums 67,407 (5,255) 62,152 Fees and charges relating to investment contracts with no participating features – 417 417 Revenues from insurance activities 67,407 (4,838) 62,570
Net revenues from banking activities 370 16 386 Revenues from other activities (a) 3,966 108 4,074
Net investment income (b) 13,000 (59) 12,941 Net realized investment gains and losses (c) 1,978 1,304 3,282 Change in fair value of financial instruments at fair value through profit & loss 11,449 1,139 12,588 Change in financial instruments impairment (d) (71) (373) (444) Net investment result excluding financing expenses 26,356 2,010 28,367
Technical charges relating to insurance activities (e) (77,148) 4,189 (72,959) Net result from outward reinsurance (1,064) 1 (1,063) Bank operating expenses (122) 21 (101)
Change in tangible assets impairment (11) 1 (10) Other income and expenses (g) (195) (45) (239) Other operating income and expenses (92,405) 3,702 (88,703)
2.3.2. Reconciliation of shareholders’ equity at December 31, 2004 The reconciliation between the shareholders’ equity reported at December 31, 2004 under French GAAP
and the shareholders’ equity at the same date under IFRS is as follows: (in euro millions)
Share capital and capital in excess of nominal value 19,719 (333) 19,385
Reserves relating to the change in FV of financial instruments available for sale – 5,720 5,720 Reserves relating to the change in FV of hedge accounting derivatives (cash flow hedge) – 53 53 Reserves relating to revaluation of tangible assets – – –
Translation reserve and undistributed profits 3,920 (5,115) (1,195) Net income for the period 2,519 1,219 3,738 Translation reserves, undistributed profits, and net income of the period 6,439 (3,896) 2,543
SHAREHOLDERS’ EQUITY – GROUP SHARE 26,157 2,366 28,523 2.3.3. Reconciliation of shareholders’ equity by component
MAIN IMPACTS ON NET INCOME (GROUP SHARE) AT DECEMBER 31, 2004 The main changes to earnings for the period are as follows: – No goodwill amortization (positive impact of €607 million in full-year 2004).
– Incomplete recognition of derivative hedging effects under IFRS (a net positive impact of €254 million in full-year 2004).
GOODWILL The absence of goodwill amortization under IFRS significantly increased earnings in full-year 2004 (€+607 million). However, goodwill remains lower under IFRS than under French GAAP since the impact of currency increased in 2004 under IFRS (counterpart in accumulated translation adjustments).
At December 31, 2004 French Impact of transition IFRS GAAP to IFRS
Net impact from reevaluation at fair value of available for sale assets (with change of fair value in shareholders’ equity) (a) 5,513 4,091
Other impacts (mainly impact of reevaluation of financial assets with change in fair value through profit & loss) (b) 48 24
Net impact on shareholders’ equity from derivatives and hedge accounting (c) 463 192 (a) Net of the impacts of tax, bonus policyholders and amortization of DACs and VBI on revaluation reserves. (b) Net of the impacts of tax, bonus policyholders and amortization of DACs and VBI on the income statement. (c) Net of the impacts of tax, bonus policyholders and amortization of DACs and VBI on the income statement or on shareholders’ equity (cash flow hedges). (d) The impact of this adjustment is included in the subtotal “Difference in scope of consolidation”.
The revaluation reserve for available-for-sale securities increased by €1,422 million excluding consolidated funds at December 31, 2004.
Net investment result now includes: – The effects of revaluing derivative instruments, with the exception of derivatives used as cash flow hedges or to hedge net foreign investments.
– Translation impact on monetary items of the balance sheet. Fixed-income instruments are monetary assets and changes in their amortized cost due to exchange rates are recorded in the income statement. Equities are non-monetary assets, and changes in fair value of available-for-sale equity
(1) The reduction in impairment reserves recorded during the period under IFRS does not appear separately under the Change in financial instruments impairment caption, as this caption also includes the cancellation of the reserve release arising from the exercise of put options from the former Sanford C. Bernstein (AllianceCapital) shareholders, explained in Goodwill section above.
DETAIL OF ADJUSTMENT TO IFRS AS AT DECEMBER 31, 2004 Derivatives Underlying Total
On the line “Realized gains and losses on invested assets” (a) (357) 112 (245)
SHADOW ACCOUNTING AND DEFERRED POLICYHOLDER PARTICIPATION Changes in unrealized capital gains and losses in 2004 on available-for-sale securities are presented net of policyholder bonuses in the previous section. This principle also concerns temporary differences generated by differences between French GAAP and IFRS. The corresponding additional policyholder bonus charge was €779 million at December 31, 2004. These adjustments appear on the Technical charges relating to insurance activities caption in the income statement.
EMPLOYEE BENEFITS Actuarial gains and losses recorded against opening shareholders’ equity are no longer amortized through the income statement (Administrative expenses). New actuarial gains and losses generated since January 1, 2004 are recognized in a specific component of shareholders’ equity. This new reserve totaled €–301 million net at the end of 2004.
DEEPLY SUBORDINATED NOTES Deeply subordinated notes are classified under shareholders’ equity (“other reserves”) when, like ordinary shares, they do not involve the contractual obligation to deliver cash or another financial asset. This difference with respect to French GAAP amounted to €625 million at December 31, 2004. The related interest expense is no longer recorded through the income statement but through shareholders’ equity.
Parent and Holding Companies Change in scope December 31, 2005 December 31, 2004 Voting Ownership Voting Ownership rights interest rights interest
AXA UK Holdings Limited Merger with AXA Global Risk UK (included in AXA Corporate Solutions Assurance sub-group) – – 100.00 100.00
(a) The interest in AXA Asia Pacific Group is 52.95%, with a direct stake of 51.6% and 1.35% owned by AXA APH Executive Plan (newly consolidated under IFRS).
AXA Oyak Holding AS Fully consolidated since January 1, 2005 (formerly equity-accounted) 50.00 50.00 50.00 50.00
AXA Zorg N.V. Merger with AXA Schade N.V. – – 100.00 99.92
Asset Management Change in scope December 31, 2005 December 31, 2004 (Entities having Worldwide Activities) Voting Ownership Voting Ownership rights interest rights interest
The 46 consolidated real estate companies represented total investments of €18,795 million at end 2005 (€6,110 million at December 31, 2004), mainly in France, the United Kingdom, Germany and Japan.
Fonds Immobiliers Paris Office Funds 50.00 49.91 50.00 49.91 3.1.3. Investments in equity-accounted companies a) Equity-accounted companies excluding mutual funds and real estate entities
3.2. Other comments on the scope of consolidation AXA’s consolidated financial statements are prepared as at December 31. Certain entities within AXA have a reporting year-end that does not coincide with December 31, in particular AXA Life Japan and its subsidiaries, which have a September 30 financial year-end.
AXA Japan In 2002, AXA Japan sold 102 buildings with net book value of JPY 40 billion to a fund owned by a third party and AXA Japan for JPY 43 billion, with a view to selling the buildings to other parties. Due to AXA Japan’s continuing involvement in managing these buildings, the Group is considered to retain almost all of the risks and benefits relating to ownership of the transferred assets, and so the assets have been kept on the balance sheet. The assets relating to this transaction kept on the balance sheet at December 31, 2005 totaled JPY 15 billion (€110 million).
Matignon Finances AXA has set up an intra-group financing and cash management company. This company entered the scope of consolidation in 2005.
Information described as “Insurance” below includes the three insurance segments: Life & Savings, Property & Casualty and International Insurance. Information described below as “Financial Services” includes both the Asset Management Segment and the Other Financial Services segment.
Of which: United States 123,290 – – – – – – 123,290
Of which: United States 100,793 – – – – – – 100,793
SEGMENTAL LIABILITIES EXCLUDING December 31, 2005 SHAREHOLDERS’ EQUITY Life & Property & International Asset Other financial Holding Inter-segment TOTAL
Unearned revenues and unearned fees reserves 1,835 – – – – – – 1,835
(a) Includes changes in liabiities arising from insurance contracts and investment contracts where the financial risk is borne by policyholders.
Life & Property & International Asset Other financial Holding Inter-segment TOTAL Savings Casualty Insurance Management services companies eliminations
Net realized investment gains and losses 2,492 487 175 4 6 119 (0) 3,282 Change in fair value of financial instruments at fair value through profit & loss 12,080 113 2 3 44 346 – 12,588 Change in financial instruments impairment (264) (124) (22) (0) (10) (23) – (444) Net investment result excluding
Change in tangible assets impairment (3) (7) 0 (0) – (0) – (10)
Change in goodwill impairment (0) (29) (7) – – – – (36) Result from discontinued operations net of tax – – – – – – – –
Please refer to pages 136 to 143, section “Risk factors”. Excludes Analysis of sensitivity to interest rates, equity prices and Exchange rates.
An analysis of goodwill is presented in the table below: N.B.: Gross value of goodwill is presented net of accumulated amortization under French GAAP as of
Cumulative amortization booked under French GAAP at December 31, 2003 is deducted from the gross value.
Gross value Acquisitions Disposals Goodwill Currency Other Gross value January 1, during during adjustments translation change (b) December 31, 2005 (a) the period the period adjustment 2005 (a)
SLPH (AXA UK Holdings) 1,474 – – – 51 – 1,525
Nippon Dantaï (AXA Nichidan) 1,334 – – – 9 – 1,343
Of wich: (a) Gross value of goodwill is presented net of accumulated amortization under French GAAP as of December 31, 2003. (b) Including the impact of exercises and revaluations of minority interests buyout commitments.
Gross value Acquisitions Disposals Goodwill Currency Other Gross value January 1, during during adjustments translation change (b) December 31, 2004 (a) the period the period adjustment 2004 (a)
Nippon Dantaï (AXA Japan) (a) – – – – – – 70 70
AXA China Region – – – – – – – –
Property & Casualty 35 – – – – – – 35
Others – – – – – – – – (a) Following a revaluation of the deferred tax assets booked at the time of the Nippon Dantaï acquisition, goodwill was reduced by an equivalent amount (€70 million).
SLPH (AXA UK Holdings) – – – – – – – –
Nippon Dantaï (AXA Japan) – – – – – – – –
AXA Investment Managers (including AXA Rosenberg) – – – – – – – –
Acquisition of Seguro Directo (2005) On October 18, 2005, AXA acquired the insurance company Seguro Directo. The total transaction consideration was €42 million. This transaction gave rise to a goodwill of €31 million.
At December 31, 2005, the net value of this goodwill was €31 million.
Acquisition of MONY (2004) On July 8, 2004, AXA Financial acquired MONY for US$1.48 billion (€1.3 billion). The total cost of the transaction was US$1.63 billion, including: – US$1.55 billion of cash payments for MONY
As regards the adoption of IFRS, since the transaction took place after January 1, 2004, certain restructuring costs relating to MONY were deducted from this goodwill figure. The net goodwill figure therefore became $478 million.
This transaction reduced the MONY goodwill by $189 million (€152 million).
As a result, at December 31, 2005, the MONY goodwill had a net book value of €246 million.
At January 1, 2004, the net book value of this goodwill was €361 million under French GAAP. With the adoption of IFRS, the goodwill was adjusted for unrealized foreign exchange gains and losses, since goodwill must be recorded in the local currency of the acquired entity. The new goodwill figure became £255 million.
Minority interests’ buyout – AXA Financial (2000) The aggregate purchase consideration was €11,213 million and included the following items: – €3,868 million financed by a capital increase, representing the value of the 25.8 million ordinary shares issued by AXA at a price of €149.90 per share based on the quotation on December 22, 2000, closing date of the initial offer period and before the 4-for-1 stock split,
– €7,316 million in cash relating to the cost of settling or exchanging outstanding employee share options of AXA Financial, as well as fees and direct transaction costs.
Based on the carrying value as of December 31, 2000 of the net assets acquired of €3,913 million, the goodwill amounted to €7,301 million. In accordance with article D248-3 of the decree dated January 17, 1986 and with recommendations issued by the “Commission des Opérations de Bourse” (French stock market regulator) in its bulletin 210 of January 1988, the excess purchase price of €2,518 million was charged directly to consolidated retained earnings and reserves; i.e. the entire excess purchase price multiplied by the ratio of the aggregate purchase consideration financed by the capital increase. The remaining €4,782 million goodwill was recorded as an asset.
At December 31, 2005, this goodwill had a net value of €3,223 million.
At January 1, 2004, the net book value of this goodwill was €2,256 million under French GAAP. With the adoption of IFRS, this figure became U.S.$3,490 million due to the adjustment of the exercised puts (see below).
In connection with this acquisition, AXA Financial agreed, in 2000, to provide liquidity to the former shareholders of Sanford C. Bernstein over an eightyear period following a two-year lockout period. No more than 20% of the original units issued to former Sanford C. Bernstein shareholders may be put to AXA Financial in any one annual period.
The estimated exercise value of these commitments to minority interests is recognized on the balance sheet under “Minorities in controlled funds and other commitments to buy out minority interests”. This value is revalued every year depending on exercised puts and the change in the value of residual commitments, with a balancing entry to goodwill. The value of the liability on the balance sheet was €895 million at January 1, 2004, €494 million at December 31, 2004 after the exercise of two puts and €789 million at December 31, 2005. The goodwill recorded as a balancing entry for the revaluation of the liability was €508 million at after the exercise of two puts and €559 million at
The valuation of the assets transferred by AXA and the shareholders of Nippon Dantaï to the new joint entity, AXA Nichidan Holding, together with the two cash contributions made by AXA to increase AXA Nichidan’s capital generated a goodwill of €1,856 million. Following the 2001 revaluation of an intangible asset that decreased the opening shareholders’ equity by €130 million (group share), goodwill was increased.
At December 31, 2005, this goodwill had a net value of €274 million.
Guardian Royal Exchange (1999) The acquisition of GRE (Guardian Royal Exchange) in 1999 resulted in a goodwill of €1,138 million. The goodwill relating to the English, Irish and Portuguese Property & Casualty subsidiaries was mainly due to a significant deficiency in insurance claims reserves, and was impaired in 1999 for €446 million (€259 million net group share), representing the deficiency observed in the opening reserves. Following a review of the risks insured and the resulting additional technical reserves booked in 2000, the opening shareholders’ equity of the British entities of the former GRE group was revised and, therefore, goodwill modified (at December 31, 2000, gross goodwill was €1,261 million and net goodwill
At January 1, 2004, the net book value of this goodwill was €547 million under French GAAP. With the adoption of IFRS, this goodwill became €565 million.
At December 31, 2005, this goodwill had a net value of €514 million.
UAP (1997) In 1997, AXA acquired UAP, resulting in a goodwill of €1,863 million being booked, of which €1,641 million was charged directly to retained earnings and reserves. As a result of purchase accounting adjustments made in 1998 and in 1999, the total goodwill increased to €1,866 million at December 31, 1999, of which €1,584 million represented the amount charged directly to retained earnings and reserves.
At December 31, 2005, the net book value of the goodwill was €534 million.
The change in Value of Business in force in Life & Savings segment was as follows: The €694 million increase in value in 2004 corresponded to the acquisition of MONY in the United States.
Shadow accounting on VBI (694) (530) (a) Includes the amortization charge for the period, eventual loss of value and, exceptionally in 2004 capitalized interests relating to the United States and Japan.
Note 8: Deferred acquisition costs and similar costs 8.1. Breakdown of deferred acquisition costs
Deferred acquisition costs and similar costs relating to Life & Savings 14,028 11,654
Deferred acquisition costs and equivalent relating to Property & Casualty and International Insurance 1,447 1,354
Changes in deferred acquisition costs and similar costs were as follows: (in euro millions)
Impact of changes in scope and portfolios transfers – – – –
(b) Applicable to investment contracts with no Discretionary participation features. (c) Includes the amortization charge for the period, eventual loss of value and, exceptionally in 2004, capitalized interest relating to the USA and Japan.
8.3. Deferred acquisition costs and similar costs, net of amortization, unearned revenue reserve and unearned fee reserves – Life & Savings
The method for determining the fair value of investments stated at cost or amortized cost is as follows: – For real estate investments, fair value determination is usually based on studies conducted by qualified external appraisers. They are based on a multicriteria approach, the frequency and terms of which are based on local requirements.
– Fair values of mortgages, policy loans and other loans are estimated by discounting future contractual cash-flows using interest rates at which loans with similar characteristics and credit quality would be originated. Fair values of doubtful loans are limited to the estimated fair value of the underlying collateral, if lower than the estimated discounted cash-flows.
Estimated fair values do not take into account supplemental charges or reductions due to selling costs that may be incurred, nor the tax impact of realizing unrealized capital gains and losses.
Other intangible assets (€1,074 million at December 31, 2005) mainly include: – the AXA brand brought by FINAXA as part of the merger in 2005, valued at €307 million on the basis of brand royalties invoiced to Group subsidiaries and to the Mutuelles AXA; – the value of asset management contracts at Framlington (acquired by AXA IM in 2005), for an amount of €182 million; – €106 million relating to MONY, including an amortizable amount of €48 million relating to client relationships and €51 million relating to asset management contracts; – an amortizable amount of €393 million relating to software.
value value Balance value value Balance value value Balance sheet) sheet) sheet)
Fixed maturities held to maturity – – – – – – – – – Fixed maturities availables for sale 189,451 189,451 41.26% 5,739 5,739 56.91% 195,190 195,190 41.59% Fixed maturities at fair value through profit & loss (c) 43,413 43,413 9.45% 737 737 7.30% 44,150 44,150 9.41% Fixed maturities held for trading 142 142 0.03% 1,547 1,547 15.34% 1,689 1,689 0.36% Non quoted fixed maturities (amortized cost) 20 20 0.00% 2 2 0.02% 22 22 0.00%
Other assets held by consolidated investment funds designated as at fair value through profit & loss 1,912 1,912 0.42% – – – 1,912 1,912 0.41% Macro hedge and speculative derivatives (209) (209) (0.05%) 198 198 1.97% (11) (11) 0.00%
Loans designated as at fair value through profit & loss (c) 125 125 0.03% – – – 125 125 0.03%
Macro hedge and speculative derivatives – – – 15 15 0.15% 15 15 0.00%
Financial assets (excl. those backing contrats where financial risk borne by policyholders) 321,609 317,790 69.21%
(a) Mainly Includes Policy loans. (b) Excluding investments backing contracts where the financial risk is borne by policyholders. (c) Use of Fair value option. NB: Each investment caption is presented net of hedge derivatives (IAS 39) and economic hedge derivatives which are recognized as hedge in the meaning of IAS 39 (excluding macro hedge derivatives and other derivatives).
Insurance Other activities Total Fair Net book % (val. Fair Net book % (val. Fair Net book % (val.
Investment properties at amortized cost 10,293 7,683 1.95% 82 61 0.54% 10,375 7,744 2% Investment properties at fair value through profit & loss (c) 4,550 4,550 1.15% – – – 4,550 4,550 1.1% Macro hedge and speculative derivatives – – – – – – – – –
Macro hedge and speculative derivatives – – – 76 76 0.67% 76 76 0.00%
Financial assets (excl. those backing contrats where financial risk borne by policyholders) 284,992 281,863 71.49%
Investment property at amortized cost 9,650 (1,474) (345) 7,832 11,256 9,243 (1,325) (236) 7,683 10,293
Fixed maturities held to maturity – – – – – – – – – –
Fixed maturities available for sale 175,360 189,451 189,451 15,309 1,092 152,552 164,650 164,650 13,025 928
Non quoted fixed maturities (amortized cost) 20 20 20 – – 23 26 23 3 –
Equity securities available for sale 22,691 27,679 27,680 8,190 252 17,913 22,249 22,249 4,583 247
Other assets held by consolidated investment funds designated as at fair value
Unrealized capital gains and losses on financial investments, including the value of corresponding derivative instruments, are broken down as follows:
Fixed maturities available for sale 5,725 5,739 5,739 26 12 6,525 6,577 6,577 52 1
Equity securities available for sale 666 571 571 167 – 553 642 642 90 1
Non consolidated investment funds at fair value through profit & loss 73 73 45 45
Non consolidated investment funds held for trading 22 22 – –
(a) Excludes impairment but includes premium/discount and relating amortization. (b) Net of impairment which are detailed in section 10.8.
Non quoted fixed maturities (amortized cost) 23 22 22 – – 26 29 26 3 –
See also table 10.8.1. (Breakdown of balance sheet value of financial assets subject to impairment).
Additional information on credit risk relating to bonds can be found in Note 5 (Management of financial and insurance risks).
The tables below set out the contractual maturities of fixed-income assets held by the Group. Effective maturities may differ from those presented, mainly because some assets include clauses allowing early redemption, with or without penalty.
Fixed maturities at fair value through profit & loss (a) 3 15 8 26
Fixed maturities held by consolidated investment funds (b) – – – –
Excludes loans and bonds held until maturity, unlisted bonds, the impact of derivatives (detailed in section 20.3) and loans and bonds representing contracts where the financial risk is borne by the policyholder. (a) Corresponds to financial assets held for trading purposes and financial assets recognized at fair value trough profit & loss. (b) Recognized at fair value through profit & loss.
TOTAL – Invested financial assets exposed to fair value interest rate risk 13 65 143 221
Fixed maturities at fair value through profit & loss (a) – – 1 1
Excludes loans and bonds held until maturity, unlisted bonds, the impact of derivatives (detailed in section 20.3.) and loans and bonds representing contracts where the financial risk is borne by the policyholder. (a) Corresponds to financial assets held for trading purposes and financial assets recognized at fair value through profit & loss. (b) Recognized at fair value through profit & loss.
Finance Consumer Energy Communications Industrial Utilities Basic Technology Other TOTAL Materials
Non controlled investment funds at fair value through profit & loss mainly holding equity securities 699 – 73 –
Non controlled investment funds available for sale mainly holding fixed maturities 859 818 – –
Non controlled investment funds mainly as at fair value through profit & loss mainly holding fixed maturities 8 – – –
Non controlled investment funds trading mainly holding fixed maturities 195 – – –
(a) Excludes potential effect of hedging derivatives, other derivatives, macro hedge and speculative (section 20.3.).
NB: Each investment caption is presented net of hedge derivatives (IAS 39) and economic hedge derivatives which are recognized as hedge in the meaning of IAS 39 (excluding macro hedge derivatives and other derivatives). Detail effect of derivatives is presented in the Note 23 “Derivative instruments”. (a) Asset value including amortization/premium and accrued interests, but before impairment and revaluation to fair value of assets available for sale. (b) Asset value including Impairment, amortization/premium, accrued interests, but before revaluation to fair value of assets available for sale. (c) Including policy loans.
(a) Change in scope of consolidation and variation of exchange rate.
Amounts presented do not include the impact of derivatives (set out in Note 20.3.) or equity-accounted mutual funds. Equity-accounted mutual funds represented assets of €1,081 million at December 31, 2005 (€1,437 million at December 31, 2004). The breakdown by valuation method of financial assets recognized at fair value is as follows: (in euro millions)
Fair value Fair value TOTAL Fair value Fair value TOTAL determined estimated using determined estimated using directly by valuation directly by valuation reference to an technique reference to an technique active market active market
Total financial assets accounted for as at fair value 402,533 37,381 439,914 345,316 32,393 377,709 10.9. Financial assets accounted for at fair value
These non-cash investments (including investment properties) are measured at fair value through profit & loss. Financial assets included in these investments are stated at fair value through profit & loss under the fair value option.
As described in Note 5 (Management of financial and insurance risks), the financial risk associated with these contracts is borne by the policyholder, except in certain contracts that offer income guarantees.
(a) Fair value equals net carrying value. (b) Including derivative instruments related to investments backing contracts where the financial risk is borne by the policyholders (including derivatives included in consolidated investment funds), as well as cash and cash equivalents backing these contracts.
10.10. Investments backing contracts where the financial risk is borne by policyholders
AXA Asia Pacific Holdings associates 20 1 8 – (2) 26
In 2005, “Other changes” related mainly to change in consolidation method. The following companies are now fully consolidated: – Turkish Life & Savings, Non life and holding companies
Dividends received by the AXA Group from equityaccounted companies totaled €20 million in 2005 and €27 million in 2004.
The information displayed above excludes equityaccounted investment funds and real estate companies, which are presented under financial investments.
AXA Asia Pacific Holdings associates 52 – 3 2 (37) 20
Given the Group’s scale and diversity, none of its clients account for more than 10% of its business.
Gross value Impairment Carrying Fair value Gross value Impairment Carrying Fair value value value
Current accounts receivable from other companies 783 (23) 760 760 1,134 (77) 1,056 1,056
Receivable from policyholders, brokers and general agents 3,123 (220) 2,903 2,903 3,860 (193) 3,667 3,716
Premiums earned but not written 1,883 – 1,883 1,883 1,526 – 1,526 1,526
Receivables arising from outward reinsurance operations 967 (78) 888 888 2,208 (75) 2,134 2,137
(a) Notably includes the reinvestment of assets sold under repurchase agreements (up €+1,666 million in Japan).
– Exercises of stock options led to an increase of €53 million, including a €11 million increase in the nominal share capital.
This figure includes €37 million relating to AXA shares held by consolidated mutual funds (2.2 million shares) not used to back contracts where financial risk is borne by policyholders.
4,540,278 treasury shares backing contracts where financial risk is borne by policyholders were not deducted from shareholder’s equity (as held in controlled funds). Their total estimated historical value was €80 million and their market value (net group share) was €124 million at the end of December 2005.
c) Super subordinated debt The change in other reserves was mainly due to a €250 million issue of deeply-subordinated perpetual notes through the Euro Medium Term Notes (EMTN) program.
– capital increases arising from the conversion of ORAN bonds (bonds redeemable in cash or shares) totaling €1,396 million, including a €252 million increase in the nominal share capital,
b) Treasury shares At December 31, 2004, the Company and its subsidiaries owned around 24.6 million AXA shares, down compared to the figure at January 1, 2004. This decrease contributed to a net €124 million increase in shareholders’ equity with respect to
d) Dividends paid Dividends paid by AXA totaled €676 million in 2004 with respect to the 2003 financial year.
The Statement of Recognized Income and Expense for the period (SORIE), which is part of the consolidated statement of shareholder’s equity, includes the net income for the period, the reserve relating to the change in fair value of available for sale financial instruments, the translation reserve, and employee benefits actuarial gains and losses.
14.2.1. Recognized income and expense for the 2005 period a) Reserve related to changes in fair value of available for sale financial instruments included in shareholders’ equity The impact of change in fair value of assets (€+2,391 million) mainly related to France (€+1,060 million), Belgium (€+710 million) and Japan (€+347 million), partly offset by an adverse impact in the United States (€–385 million).
The reconciliation between unrealized gains and losses on available for sale financial assets and the related reserve included in shareholder’s equity was as follows: (in euro millions)
Less unrealized gains and losses attributable to: Shadow accounting on policyholder’s participation (a) (10,342) (7,528)
Shadow accounting on Value of purchased Business In force (694) (530)
(a) Including shadow accounting impact on premium deficiency liabilities, after revaluation of available for sale securities. (b) Net of Shadow accounting on unearned revenues and fees reserves. (c) Including currency impact attributable to minority interests. (d) Group share.
The change in reserves relating to change in fair value of assets in 2004 and 2005 was split as follows: 14.2.2. Recognized income and expense for the 2004 period a) Reserve related to changes in fair value of available for sale financial instruments included in shareholders’ equity The main contributors to the €1,514 million increase in fair value changes included in shareholders equity in 2004 were France (€729 million), Belgium (€416 million) and Germany (€111 million).
Transfert in the net income for the period (a) (399) (290)
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 liabilities instead of shareholders’ equity items. Please refer to Note 18 – Debt (other than financing debt). The same is true for puttable instruments held by minority interest holders.
14.3.1. Change in minority interests for 2005 The €+452 million change in minority interests to €2,763 million was mainly due to: – Net income for the period (€+488 million).
– Other movements (€+69 million) including movements in reserves related to changes in fair value of assets.
The €–299 million of “other changes” in minority interests in 2004 mainly related to €265 million of dividends paid to minorities.
Life & Property & International Total Life & Property & International Total
Liabilities arising from insurance contracts where the financial risk is borne by policyholders 92,888 – – 92,888 73,578 – – 73,578 Of which measured at current market assumptions (c) (141) – – (141) (98) – – (98)
Of which measured at current market assumptions (c) 8 – – 8 – – – – TOTAL LIABILITIES ARISING FROM INSURANCE CONTRACTS, NET OF REINSURANCE CEDED 286,980 34,043 9,036 330,059 253,644 31,765 8,178 293,587
(b) Notably includes non Life annuities mathematical reserves. (c) See note 1.11.2. – Reserves mesured according to the option offered by IFRS 4.24 for selective re-measurement of reserves at current market assumptions. Liabilities relating to unearned revenues and fees, and to policyholder bonuses (gross and reinsurers’ share), along with derivative instruments relating to insurance and investment contracts, are excluded from the table above.
Insurance liabilities relating to with-profit insurance contracts, excluding the FFA (Fund for Future Appropriation), amounted to €16,652 million at December 31, 2005, compared to €15,641 million at December 31, 2004.
Life & Savings Total investment Life & Savings Total investment contracts contracts Future policy benefits reserve 32,742 32,742 31,548 31,548 Unearned premium reserve – – – –
Liabilities arising from investment contracts where the financial risk is borne
Reinsurers’ share in future policy benefits reserve 13 13 – – Reinsurers’ share in unearned premium reserve – – – – Reinsurers’ share in claims reserve (a) – – – – Reinsurers’ share in other reserves – – – – Reinsurers’ share in liabilities arising from investment contracts with discretionary participating feature 13 13 – – Of which measured at current market assumptions (b) – – – – Reinsurers’ share in future policy benefits reserve – – – – Reinsurers’ share in claims reserve (a) – – – – Reinsurers’ share in other reserves – – – – Reinsurers share in liabilities arising from investment contracts with no discretionary participating feature – – – – Reinsurers’ share in future policy benefits reserve 8 8 – – Reinsurers’ share in claims reserve (a) – – – – Reinsurers’ share in other reserves – – – – Reinsurers share in liabilities arising from investment contracts where the financial risk is borne by policyholders 8 8 – – TOTAL LIABILITIES ARISING FROM INVESTMENT CONTRACTS – NET OF REINSURANCE CEDED 82,344 82,344 71,659 71,659
(a) Includes reserve for claim handling costs. (b) See note 1.11.2. – Reserves mesured according to the option opened by IFRS 4.24 for selective re-measurement of reserves at current market assumptions. Liabilities relating to unearned revenues and fees, and to policyholder bonuses (gross and reinsurers’ share), along with derivative instruments relating to insurance and investment contracts, are excluded from the table above.
15.3. Change in claims reserve in Property & Casualty and International Insurance (insurance contracts)
Change in scope of consolidation and change in accounting method 697 35 732 (38) 2 (36)
Gross claims reserve as of December 31 (a) 26,602 10,623 37,225 24,599 9,147 33,747
– The transfer of the disability business from the Life & Savings segment to the Property & Casualty segment in the Netherlands (€116 million),
Reinsurers’ share in claims reserve as of January 1 1,628 2,051 3,680 2,180 2,362 4,542
Impact of foreign currency fluctuation 22 150 172 (28) (157) (185)
Reinsurers’ share in claims reserve as of December 31 1,791 2,692 4,483 1,628 2,051 3,680
In Property & Casualty activities, changes in the scope of consolidation amounted to €172 million, mainly due to: – The change in consolidation method in Turkey
(€17 million), Hong Kong (€42 million) and Singapore (€20 million), 15.4. Change in future policy benefits reserve (Life & Savings)
Gross future policy benefits reserve as of January 1 249,730 71,343 321,073 230,502 66,528 297,030
Change in future policy benefits reserve (a) 12,780 5,587 18,367 12,177 2,250 14,427
Impact of foreign currency fluctuation 15,247 1,863 17,110 (9,155) (513) (9,668)
Gross future policy benefits reserve as of December 31 282,886 81,965 364,851 249,730 71,343 321,073
NB: This table summarizes future policy benefit reserves arising from insurance and investment contracts for the Life & Savings segment, whether or not the risk is borne by policyholders.
(€13,300 million) and (ii) in 2005 to the reduction in AXA Germany’s co-insurance share of HÄK-BÄK medical profession pools (€354 million), and to the sale of the Health business (€142 million) and the transfer of the disability business from the Life & Savings segment to the Property & Casualty segment in the Netherlands (€116 million).
15.4.2. Change in reinsurers’ share 15.5. Liabilities arising from investment contracts by accounting method
Reinsurers’ share in future policy benefits reserve as of January 1 3,391 – 3,391 3,097 – 3,097
Change in scope of consolidation and change in accounting method (57) – (57) 393 – 393
(a) In accordance with IFRS4 standards which allow, under certain conditions, to continue to use previous system of reference to liabilities arising from contracts with discretionary participating feature.
The recognition of investment contracts with discretionary bonuses is subject to IFRS 4, which allows under certain conditions the continued use of principles applied before the adoption of IFRS.
However, these contracts must be treated in accordance with IAS 32 with regards to the disclosures to be provided in the notes to Financial Statements. IAS 32 requires the reporting of fair value or value ranges for these contracts, unless the Company cannot reliably measure the policyholder bonus clause.
Due to the resulting uncertainty, AXA cannot reliably report fair value or value ranges for investment contracts with discretionary policyholder bonuses.
15.6.1. Loss reserve development table Property & Casualty and International Insurance operations (excluding AXA RE)
Gross reserves for unpaid claims and claims expenses developed initially at the
Cumulative redundancy (deficiency) from the initial gross reserves in excess of re-estimated gross reserves: (a) It is not appropriate to extrapolate future redundancies or future deficiencies based on the loss reserve development presented in the table as conditions and trends that have affected the development of the liability in prior periods may not necessarily occur in the future periods.
(c) AXA acquired GRE in May 1999. The operations of GRE have been integrated within AXA. At time of acquisition the gross reserves totalled €5.6 billion). (d) In 2004, the companies AXA Corporate Solution Insurance US, AXA RE P&C Insurance company and AXA RE P&C Reinsurance company were transferred from AXA RE to the Other transnational activities.
The reserves of AXA Corporate Solution Insurance US were presented on an occuring year basis and included in Property & Casualty loss reserve developement table. The reserves of AXA RE P&C Insurance company and AXA RE Reinsurance company were presented on an underwriting year basis and included in AXA RE loss reserve development table.
Most Property & Casualty insurance losses are short-tail (i.e. involve short payment times). During 2005, around 43% of losses were settled during the year (2004: 41%). In direct insurance, there was no major change in the loss settlement schedule in 2005, and there was no significant change in forecasts during the year. In 2005, insurance reserves included the transfer of the disability business from the Life & Savings to the Property & Casualty segment in the Netherlands, and the change in consolidation method (full consolidation instead of equity-method) for businesses in Turkey, Hong Kong and Singapore.
Gross reserves for unpaid claims and claims expenses developed initailly at the booking date (a) 2,451 2,646 2,880 3,060 3,396 3,455 5,868 4,778 4,200 3,314 4,253 Gross reserves for unpaid claims and claims expenses developed
Initial net claims reserves in excess of (less than) re-estimated net claims reserves 2,189 2,450 2,595 2,644 2,966 3,060 4,216 3,758 3,281 2,812 3,205 Cumulative payments at: Eight years later 2,000 1,813 2,060 Nine years later 1,856 1,881 Ten years later 1 918
Cumulative redundancy (deficiency) from the initial gross claims reserves in excess of (less than) re-estimated gross claims reserves (39) 133 106 (461) (449) (491) 332 404 100 (483)
Initial net claims reserves in excess of (less than) re-estimated net claims reserves: (a) The loss reserve development table is presented on an underwriting year basis for AXA RE business. Accordingly reserves re-estimated and the excess of re-estimated reserves in excess of the original reserves include reserves for losses occurring up to twelve months subsequent to the original year-end. It is not appropriate to extrapolate future redundancies or future deficiencies based on the loss reserve development presented in the table as conditions and trends that have affected the development of the liability in prior periods may not necessarily occur in the future periods.
(b) Represents premium earned subsequent to the accounting year end and premium reinstatements / experience-rated premiums received and accrued from the ceding insurers as assumed losses were incurred. (c) Includes the claims reserves of Abeille Re acquired in 1995.
Financial informations 15.6.3. Reconciliation between developed and total accounted insurance reserves €58 million relating to asbestos and €10 million relating to pollution), compared to €51 million and 2004 and €53 million in 2003. At December 31, 2005, AXA had made cumulative payments relating to prior years of €682 million (including €508 million relating to asbestos and €174 million relating to pollution), compared to €571 million at December 31, 2004.
At the end of 2005, gross claims reserves (including reinsurances’ share) totaled €1,197 million (including €1,046 million relating to asbestos and €151 million relating to pollution), or €1,099 million net of reinsurance (including €966 million relating to asbestos and €134 million relating to pollution), as opposed to €1,021 million and €914 million net of reinsurance at the end of 2004. Reported loss reserves totaled €433 million (including €352 million relating to asbestos and €81 million relating to pollution) compared to €380 million at the end of 2004, and IBNR (incurred but not reported) losses totaled €764 million (including €693 million relating to asbestos and €71 million relating to pollution), compared to €641 million at the end of 2004. The IBNR liabilities are estimated and evaluated regularly based on information received by management.
(b) Notably future policy benefits annuity claims (€1,528 million compared to €1,212 million in 2004), construction reserves (€1,126 million compared to €1,056 million in 2004) and reserves on acceptations (€938 million compared to €975 million in 2004).
Policyholders’ participation reserve 7,478 6,717 Fund for Future Appropriation (FFA) – UK with profits contracts 6,911 5,015 Policyholders’ deferred participation liabilities 11,276 8,066
15.9.1. Contractual maturities The table below shows the breakdown by contractual maturity of liabilities arising from Life & Savings insurance contracts excluding contracts where financial risk is borne by policyholders. The effective maturities may differ significantly from the contractual maturities set out below, notably because, as stated, part of the contracts contain a surrender option that may reduce their duration.
Amounts are presented excluding the impact of derivatives on insurance and investment contracts and excluding liabilities related to unearned revenues and fees, and to policyholder bonuses. Liabilities relating to contracts where the financial risk is borne by policyholders are also excluded.
15.9.2. Components of insurance contracts liabilities The table above and related comments exclude contracts where financial risk is borne by policyholders (unit-linked contracts).
The general principles for establishing insurance liabilities are set out in note 1 of this document. Liabilities are based on estimates, and one of the assumptions used in these estimates is the discount rate.
13% are subject to a revision of the discount rate. 83% retain the rate set at subscription, subject to the liability adequacy test discussed in note 1.
Contracts whose assumptions are revised in the financial statements at each closing mainly consist of certain UK with-profits contracts and reserves for guarantees (Guaranteed Minimum Death Benefits etc.).
In Property & Casualty business, most reserves (94%) are not discounted, except for incapacity and disability contracts and annuity motor mathematical reserves, which also undergo regular revision of the discount rate.
(a) Subject to liability adequacy tests. Amounts are presented excluding the impact of derivatives on insurance and investment contracts (presented in section 20.4.) and excluding liabilities related to unearned revenues and fees, and to policyholder bonuses. Liabilities relating to contracts where the financial risk is borne by policyholders are also excluded.
AXA sells insurance contracts that contain a variety of options and guarantees for contractholders. These features are described in Financial and Insurance Risk Manangement section. These features are not embedded derivatives which AXA reports 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.
This section describes the contract features which are embedded derivatives, but which would qualify as insurance contracts on a standalone basis. The primary features can be summarized in two categories: enhanced guaranteed death or lifetime annuity benefits offered on unit-linked contracts, and guaranteed annuity income purchase rates offered on deferred annuity contracts.
The risk of GMDB and GMIB features to AXA is that protracted under-performance of the financial markets could result in benefits being higher than what accumulated contract-holder account balances could support. Reserves are established for these features on the basis of actuarial assumptions related to projected benefits and related contract charges. The determination
Note 16: Provisions for risks and charges 16.1. Breakdown of provisions for risks and charges
TOTAL PROVISIONS FOR RISKS AND CHARGES 8,760 7,728 of this estimated liability is based on models which involve numerous estimates and subjective judgments, including those regarding expected rates of return and volatility, contact surrender rates, mortality experience, and for GMIB the election rates. There can be no assurance that ultimate experience will not differ from management’s estimates. The different impairment methodologies are described in the Note 1.11.2. In addition to providing for risk through establishing reserves, AXA also manages the risk through a combination of reinsurance programs and active financial management programs including investment in exchange-traded futures contracts and other instruments.
16.2. Change in provisions for risks and charges (excluding employee benefits and share-based compensation)
Financial cost related to desactualisation (a) – – – – –
Impact of change in scope of consolidation and changes in accounting method (10) – – – (46)
Write back after final cost review (4) (9) (18) – (42)
At December 31, 2005, restructuring provisions totaled €163 million, including €99 million in the United States following the MONY acquisition, €24 million in Germany relating to AXA Versicherung and €12 million in the books of the UK and Ireland.
Lawsuit contingency provisions totaled €217 million, including €93 million in France, €48 million in AXA Bank Belgium and €25 million in Compagnie Financière de Paris.
AXA 7,111 7,187 Subordinated perpetual notes, variable (US dollar and euro) 1,841 1,753 Subordinated perpetual notes 7.1% (US dollar) 424 367 Perpetual notes 3.29% / variable (Yen) 194 193 Subordinated perpetual notes (Euro) 219 234 Debt component of subordinated convertible notes due 2014 (euro) 1,608 1,558 Subordinated perpetual notes 7.25% (US dollar) – 500 Debt component of subordinated convertible notes 3.75% due 2017 (euro) 1 127 1,089 Subordinated convertible notes due 2020 (euro) 180 215 U.S registered redeemable subordinated debt, 8.60%, 2030 (euro) 1,118 952 U.S registered redeemable subordinated debt ,7.125%, 2020 (GBP) 474 461 U.S registered redeemable subordinated debt, 6.75%, 2020 (euro) 1,062 1,070 Derivatives on debts instruments issued (a) (1,137) (1,205) AXA Financial 171 442 Surplus Notes, 6.95%, due 2005 – 294
Closed-Block Mony, 6.44%, due 2017 254 220 Derivatives on financing debt instruments issued (a) 15 21 Other financial debt instrument issued (less than euro 100 million) (2) 30 Other financial debt instrument issued (less than euro 100 million) 11 32 Derivatives on financing debt instruments issued (a) (14) (1) FINANCING DEBT INSTRUMENTS ISSUED 2,817 2,903 Netherlands Holdings 17 17 AXA Investment Managers – – Other subordinated debt (under euro 100 million each) – – Derivatives on financing debt owed to credit institutions (a) – – FINANCING DEBT OWNED TO CREDIT INSTITUTIONS 17 17 TOTAL FINANCING DEBT 10,585 11,009
The nominal value of subordinated perpetual debt securities at December 31, 2005 was €2,679 million (versus €3,047 million at December 31, 2004 and €2,706 million at January 1, 2004). The financial expense on these subordinated perpetual debt securities in 2005 was €121 million before tax (2004: €144 million), and €79 million after tax (2004: €93 million). These debt securities are perpetual debt. The Group has the option of deferring coupon payments on these securities under certain conditions. However, coupons must be paid when these conditions cease to apply or when the instrument is redeemed. Even if they are deferred for a long period, coupons remain legally due. Even if a decision is taken in a shareholders’ meeting to stop paying a dividend and if the Group decides to stop paying coupons, unpaid coupons that have accrued over the years will form part of the debts to be repaid in the event of court-ordered liquidation. These instruments are classified as financial debts due to the contractual obligation to pay coupons thus defined. It should be noted that the classification of perpetual borrowings as equity or debt is currently being studied by IFRIC. A definitive interpretation may alter the way in which subordinated perpetual debt securities are presented.
Non-subordinated financing debt instruments decreased by €86 million in 2005, or by €327 million at constant exchange rates, reflecting the maturing of €210 million of MONY Group Inc bonds and AXA SA’s redemption of €332 million of EMTNs and BMTNs. This reduction was partially offset by the €55 million change in fair value of hedging derivative instruments. AXA SA also issued €150 million of commercial paper on behalf of its French, UK and German subsidiaries, which is recorded under other debts (debt other than financing debt).
17.2. Fair value measurement methodology – financing debt (in euro millions)
Derivatives on financing debt instruments issued (a) (208) (208) (265) (265)
The Group does not hold any financing debt recognized at fair value through profit & loss (fair value option or trading instruments).
Carrying value by contractual maturity TOTAL Carrying 12 months More than 1 year More than 5 years value as at or less up to 5 years December 31, 2004
The fair value of other debts is very close to book value.
Operating debt in financial services activities included in debt securities or in debts owed to credit institutions consists mainly of repo transactions or short-term interbank debt contracted by the Group’s banks. The fair value of this debt is disclosed as additionnal information on carrying values and is very close to per value.
Minority interests of controlled investment funds and other puttable instruments held by minority interests holders 5,115 3,717
Payables arising from direct insurance and inward reinsurance operations 4,680 3,863
18.3.1. Other debt instruments issued, notes and bank overdrafts - by issuance
Ecureuil – 95 European Office Income Venture 177 – Australia New Zealand 141 – Sterling Grace 141 – Other financial services in France 35 257 Fonds Immobilier Paris Office Funds (FIPOF) – 60 Rheinhyp Rheinische Hypotheken Bank, Aktiengesellschaft (London Branch) – 131
OTHER DEBT (OTHER THAN FINANCING DEBT) – owed to credit institutions 5,238 4,923 Bank overdrafts 762 664 OTHER DEBT INSTRUMENTS ISSUED, NOTES (OTHER THAN FINANCING DEBT) AND BANK OVERDRAFTS 8,411 7,783
– the exit from the scope of consolidation of CDO Ecureuil (€95 million),
– an €86 million reduction in the operational debt of AXA Vorsorgebank following the transfer of the mortgage business to the insurance company (AXA Leben).
18.3.2. Other debt instruments issued, notes and bank overdrafts – by accounting method
Debt instruments issued designated as at fair value through profit & loss 1,508 1,600
Debt owed to credit institutions designated as at fair value through profit & loss 127 –
Fair value Fair value Total Fair value Fair value Total determined estimated determined estimated directly by using directly by using reference to an valuation reference to an valuation active market technique active market technique
Debt instruments issued held as trading – – – – – –
Debt instruments issued (other than financing debt) 726 782 1,508 1,600 – 1,600
Debt owed to credit institutions designated as at fair value through profit & loss 129 – 129 – – –
Debt owed to credit institutions (other than financing debt) (a) 129 – 129 – – –
Carrying value by contractual maturity Total carrying 12 months or less More than 1 year More than 5 years value at up to 5 years December 31, 2005
Other debt instruments issued, notes and bank overdrafts 6,158 168 2,085 8,411 Excludes the impact of derivatives (detailed in note 20.4.).
Carrying value by contractual maturity Total carrying 12 months or less More than 1 year More than 5 years value at up to 5 years December 31, 2004
Note 19: Tax 19.1. Tax expense 19.1.1. Breakdown of tax expense between current and deferred tax
The current tax amount due on foreign income for €1,101 million (2004: €761 million) includes €163 million of policyholder tax (2004: €148 million).
Net income, gross Notional tax rate Net income, gross Notional tax rate of tax expense of tax expense and before equity and before equity in income from in income from affiliated companies affiliated companies
The reconciliation between the notional tax charge (pretax profit multiplied by the applicable tax rate in France for the period concerned) and the effective tax charge was as follows: (in euro millions)
Permanent difference on financial income and expenses (665) (288) Permanent difference on other income and expenses 44 94 Impact of permanent differences (622) (194)
Correction of payable tax on the previous year (180) (60) Reestimation of deferred tax assets (a) (421) 52
Impact of correction, decrease in value and other elements (225) 26
(a) Including €409 million from the reestimation of the deferred tax asset in AXA Life Japan.
Net deferred tax balances was split as follows: (in euro millions)
Deferred tax Assets/Liabilities concerning : – Deferred tax through profit & loss (380) (316)
– Deferred tax through reserves relating to the Fair Value adjustment of Cash Flow Hedge derivatives (65) (55)
Note 20: Derivative instruments 20.1. Derivative instruments : maturities, notional values and fair values
< 1 year 1 to 2 years 2 to 3 years 3 to 4 years 4 to 5 years > 5 years
Calls sold – – – – – – 108 – 108 –
Puts sold – – – – – – 143 – 143 –
At December 31, 2005, the total notional amount of derivative instruments held by the AXA Group amounted to €207,2 billion (2004: €190,8 billion). The net fair value of these derivative instruments at December 31, 2005 was €986,7 million (2004: While notional amount is the most commonly used measure of volume in the derivatives market, it is not used as a measure of risk as the notional amount largely exceeds the potential profit or market loss that could arise from such transactions. The AXA Group is exposed to the default credit risk of its counterparts, however with no exposure to notional principal amounts: the notional amounts do not represent the amounts actually exchanged by the parties and thus are not a measure of the AXA Group’s risks exposure to the derivative instruments. The AXA Group’s exposure is represented by the market value of the derivative contract at a given point in time.
At December 31, 2005, the notional amount of hedging derivative instruments as defined by IAS 39
(fair value, cash flow and net investment hedges) by the whole AXA Group totaled €20,897 million (2004: €13,507 million), and their net fair value was €208 million (2004: €1,083 million).
At December 31, 2005, 81% of the total notional amount of swaps were not used in a qualifying hedge relationship, and included €38,566 million of swaps at the Company and €27,826 million at AXA Bank Belgium which, as part of its business, uses mainly euro-denominated forward rate agreements and interest-rate swaps that generate short-term profits.
The notional amounts of swaps used in net foreign investment hedge relationships totaled €9,724 million, including €8,282 million of currency swaps used by the Company.
amount equal to the differential, based on a notional amount, between the interest rate of the specified index and the interest-rate cap or floor. These instruments are used to hedge against interest-rate increases (caps) or decreases (floors).
The notional amount of such instruments at December 31, 2005 was €62,952 million (2004: €52,538 million), the increase being mainly attributable to the United States. They represented 93% of the total notional amount of options (2004: 92%). Their fair value was €–226.2 million (2004: €–232 million).
On a consolidated basis, the notional amount of such instruments at December 31, 2005 was €21,211 million (2004: €27,113 million), while their market value was €–548 million (2004: €–256 million).
d. Credit derivatives AXA uses derivative instruments to manage the exposures of its assets and liabilities to interest-rate, foreign-currency and equity price risks. These instruments may also be used to enhance the returns of invested assets.
instruments increased mainly (i) at AXA Japan (€4,623 million versus €757 million at the end of 2004). In particular, AXA Japan uses credit default swaps (CDSs) on highly-rated bonds in order to improve the returns on its portfolio, and (ii) in CDOs (€4,612 million at the end of 2005 compared to €1,568 million at the end of 2004) also use credit derivatives to build their portfolio of collateral.
The impact of derivative instruments is presented within their related underlying financial assets and liabilities (see section 20.4.) on the face of the balance sheet. The table below details the impact of derivative instruments and related underlying assets.
Investment property at fair value through profit & loss 4,979 – – 4,979
Non controlled investment funds at fair value through profit & loss 1,916 – – 1,917
Non controlled investment funds held for trading 195 – – 195
(c) Macrohedge and other derivatives. (d) Net book value (see (a)), but including effect of hedging instruments (IAS 39), economic hedging instruments not acting as hedging under IAS 39, macrohedge and other derivatives. (e) Notably includes policy loans, lease receivables and other loans. (f) Other investments held through consolidated investment funds at fair value through profit & loss. (g) Derivative instruments used in hedge of net investment in a foreign operation, and not attached to a debt on the face of the balance sheet.
Derivative instruments hedging net investment in a foreign operation (assets) (g) – – – –
(a) Net book value, i.e. net of impairment, discount premiums and related amortization, including interest accrued but not yet due, but excluding any derivatives impact. (b) Excluding macrohedge and other derivatives.
Liabilities arising from insurance contracts 246,201 (6) (94) 246,100 227,843 22 (40) 227,825
Liabilities arising from investment contracts with no discretionary participating features 926 – (52) 873 869 – – 869
Total liabilities arising from investment contracts 82,365 – (52) 82,312 71,659 (10) (4) 71,644
Macro hedge derivative instruments on insurance and investment contracts (liabilities) 5
The impact of derivative instruments is presented within their related underlying financial liabilities and assets (see section 20.3.) on the face of the balance sheet. The table below details the impact of derivative instruments and related underlying liabilities.
Payables arising from direct insurance and inward reinsurance operations 4,680 – – 4,680 3,863 – – 3,863
Payables arising from outward reinsurance operations 3,507 – – 3,507 3,588 – – 3,588
Payables arising from banking activities (a) 11,970 – 113 12,083 12,220 – 65 12,285
Payables – current tax position 1,382 – – 1,382 954 – – 954
(a) Financing debt and Payables arising from banking activities issued are disclosed in the balance sheet net of the impact of derivatives. As a result, the amount shown in the column “value including effect of derivatives” is their net book value.
LIFE & SAVINGS 45,116 42,344 of which direct premiums 41,063 39,461 of which reinsurance assumed 2,433 1,642 of which fees and charges on investment contracts with no participation features 509 417 of which revenues from other activities 1,111 824
Alliance Capital 2,472 2,325 AXA Investment Managers 968 759 OTHER FINANCIAL SERVICES 428 387
French banks 64 101 German banks 24 24 AXA Bank Belgium 336 258
Gross written Liabilities arising Liabilities arising Gross written Liabilities arising Liabilities arising premiums from insurance from investment premiums from insurance from investment contracts (b) contracts (b) contracts (b) contracts (b)
Gross written premiums Liabilities arising from insurance contracts December 31, 2005 December 31, 2004 December 31, 2005 December 31, 2004
Net investment result (excluding financing expenses) from the financial assets of insurance companies and companies in other business sectors (excluding revenues from the financial assets of banks included in net revenues from banking activities) was as follows: Note 22: Net investment result excluding financing expenses
Fixed maturities held to maturity – – – – – Fixed maturities available for sale 8,133 443 – (23) 8,553 Fixed maturities designated as at fair value through profit & loss (a) 2,037 297 175 – 2,510 Fixed maturities held for trading 90 120 27 – 236 Fixed maturities at amortized cost 3 – – – 3
Equity securities available for sale 753 1,485 – (136) 2,102 Equity securities designated as at fair value through profit & loss (b) 690 1,120 1,320 – 3,130 Equity securities held for trading (7) 15 172 – 180
Other assets held by consolidated investment funds designated as at fair value through profit & loss 141 (1) 93 – 234 Loans held to maturity – – – – – Loans available for sale 1 – – – 1 Loans designated as at fair value through profit & loss (3) – 75 – 72 Loans held for trading – (122) (12) – (134)
(a) Including fixed maturities held by consolidated investment funds, designated as at fair value through profit & loss. (b) Including equity securities maturities held by consolidated investment funds, designated as at fair value through profit & loss.
Net investment revenues are presented net of depreciation charges on directly-owned investment properties, and net of amortization of bond premiums /discounts. All investment management fees are also included in the aggregate figure.
Realized investment gains and losses include post-disposal releases of valuation allowances for impairment.
The change in fair value of investments at fair value through profit & loss consists mainly of adjustments
Fixed maturities held to maturity 1 – – – 1 Fixed maturities available for sale 7,275 491 207 (32) 17,190 Fixed maturities designated as at fair value through profit & loss (a) 2,152 27 524 – (6,546) Fixed maturities held for trading 86 (1) 17 – 102 Fixed maturities at amortized cost 4 – – – 4
Non controlled investment funds available for sale 63 189 – (13) 239 Non controlled investment funds designated as at fair value through profit & loss 164 (12) (15) – 137 Non controlled investment funds held for trading – 3 2 – 5
Other assets held by consolidated investment funds designated as at fair value through profit & loss – – 1 – 1 Loans held to maturity – – – – – Loans available for sale 1 – – – 1 Loans designated as at fair value through profit & loss – – (49) – (49) Loans held for trading – – 2 – 2
relating to investments backing contracts where the financial risk is borne by policyholders. The change in financial instruments impairment includes all additional impairment reserves on investments, and releases of impairment reserves only following revaluation. Releases of impairment reserves following disposals are included in net realized capital gains or losses on investments.
Premiums ceded and reinsurer’s share in claims paid (944) (986) (1,122) 146 (2,907)
Premiums ceded and reinsurer’s share in claims paid (820) (998) (1,172) 209 (2,782)
Claims ceded (included change in claims reserves) 746 203 667 (212) 1,405
– In Property & Casualty operations, the €82 million increase in the result of reinsurance ceded occurred mainly in France (up €+72 million) due to efforts to optimize the reinsurance program and improved results from reinsurance ceded in previous years.
Breakdown of expenses by type 7,938 6,258 1,049 15,245 2,805 341 356 (342) 18,405 17,673
(a) Includes all acquisition expenses relating to insurance and investment contracts before capitalization/amortization of deferred acquisition costs and equivalents. (b) Claims handling expenses are included in the “Technical charges relating to insurance activities” profit & loss caption. (c) Investment management expenses are included in the “Net investment income” profit & loss caption. (d) Amount detailed in Note 26.
Defined benefit plans The assumptions for each plan are consistent with the economic features of the countries in which the liabilities lie. The weighted-average assumptions used by AXA for pension plans in the principal regions in which AXA operates were as follows: DECEMBER 2005 CALCULATION ASSUMPTIONS Europe North America Japan Other
AXA Group has decided to use the SORIE option that is available in IAS19. Under the SORIE option, actuarial gains and losses are recognized in full in the period in which they occurred outside profit or loss and are presented on a separate line of the Statement Of Recognized Income and Expense in equity (see Statement of consolidated shareholder’s equity). Actuarial gains and losses are defined as experience adjustments (the effects of differences
attributable to one year of additional service). – Interest cost (cost of one year less discount). – Benefits paid. – Actuarial gains and losses (change in long term assumptions, change in staff...). – Change in plans.
between the previous actuarial assumptions and what has actually occurred) and the effects of changes in actuarial assumptions. They include differences between the expected and actual return on plan assets.
Change in benefit obligation Benefit obligation, beginning of year 9,573 8,602 581 508
Change in plan assets Fair value of plan assets, beginning of year 3,869 3,619 9 8 Actual return on plan assets 689 346 3 –
(a) The SORIE impact consists in the actuarial gains and losses recorded net of Policyholder Benefit and net of tax.
The estimated amount of 2006 employer contributions for pension benefits and other benefits were respectively €259 million and €28 million. These amounts are subject to uncertainty as they will be driven by 2006 economics.
Below is disclosed the total asset mix, including separate assets: 26.2.8. Balance sheet reconciliation
AXA SA Share Options for agents (2004) – 6.9 AXA Group Share Plan (2005) 10.5 19.0
In accordance with IFRS 2, the cost above includes equity-settled share-based payment instruments for their portion that were granted after November 7, 2002 and had not yet vested at 31/12/2003. This total employee share-based compensation cost includes the expenses from share-based compensation instruments issued by the Group as well as the expenses from share-based compensation instruments issued by AXA local operations.
(the Company) pursuant to stock option plans maintained by the Company. While the precise terms and conditions of each option grant may vary, current options are currently (1) granted at a price not less than the average closing price of the ordinary share on the Paris Stock Exchange during the 20 trading days preceding the date of grant (2) valid for a maximum term of ten years, and (3) become exercisable in installments of 33.33% per year on each of the second, third and fourth anniversaries of the grant date which is generally end of March.
The following table presents the headcount of all exercisable share options, including all the generations of stocks and not only the post-November 7, 2002 grants.
The global overview of plans and their cost was as follows:
All AXA SA stock option plans Options Weighted price (in millions) (in euros)
The information related to options granted after November 7, 2002 is as follows: In respect of share option plans issued by AXA for AXA ordinary shares, and granted after 7 November 2002, the number of share options outstanding and the
Post November 7, 2002 AXA SA stock option plans Options Weighted price (in millions) (in euros)
Weighted average fair value per option at grant date in EUR 4.15 3.96
In respect of share option plans issued by the US Holding Company for AXA ADR shares, the number of share options outstanding and the number of share options exercisable at December 31, 2005 are set out below.
The Black-Scholes option pricing model was used in determining the fair values of the AXA ADR Share Options. The effect of expected early exercise is taken into account through the use of an expected life assumption based on historic data. The AXA ADR volatility assumption is the AXA SA ordinary share volatility assumption adjusted with the exchange rate US$/€ volatility and correlation to ensure that consistency is maintained between the volatility assumptions for the share prices denominated in the two different currencies. The AXA ADR expected dividend yield is similar to the AXA SA expected dividend yield. Risk-free interest rate is based on the US Treasury bonds of an appropriate term. The option pricing assumptions and fair values for 2005 and 2004 were as follows: Assumptions
Most of the 2005 subscriptions for the AXA Group Shareplan occured in December. Total subscriptions amounted to €304 million for year 2005 (€34 millions for the classic plan and €270 millions on the leverage plan). As a reminder, subscriptions were €257 million for the year 2004.
The cost of this a plan is valued by taking into account the restriction over 5 years for the employee using the CNC recommendation (Conseil National de la Comptabilité). The CNC approach values the restricted share through a replication strategy where the employee would sell forward the restricted share at a five year term, borrow enough money to buy an unrestricted share, and use the eventual proceeds from the forward sale, and the accumulated dividends received during the period of restriction, to pay off the loan. In the case of the leverage plan, the opportunity gain implicitly provided by AXA by enabling its employees to benefit from an institutional derivatives’ pricing versus a retail pricing in the leverage plan, is added to this cost.
It has to be mentioned that the option recommended by CNC is currently being reviewed by IFRIC. The final interpretation could lead the Group to modify its approach to the Shareplan valuation.
Other share-based compensation To a less significant extent, AXA issued in 2004 and 2005 a Performance Units plan. During the vesting period the performance units initially granted are subject to non-market performance criteria. The value of each performance unit corresponds to an average price of the AXA share before the settlement which is cash-settled in most cases.
The total cost for performance units plans recorded in earnings for the year ended December 31, 2005 was €14.8 million (5.7 for cash performance units granted in 2004, 7.3 for cash performance units granted in 2005, 0.7 for equity performance units granted in 2004 and 1.1 for those granted in 2005).
In 2005, and only in France, Performance Shares have been issued, for which the total cost was €5.9 million.
26.3.2. Share-based Compensation instruments issued by local operations Only significant plan at Group level are listed below.
AXA FINANCIAL Share-based compensation instruments The total employee share-based compensation cost recorded in earnings for the year ended December 31, 2005 included €29 million in connection with the AXA Financial Stock Appreciation Rights liability, as they are subject to variable accounting based on the change in market value of AXA ADRs and €10.4 million in connection with the AXA ADR Restricted Shares and Performance Accelerated Restricted Shares granted to senior executives and non-employee directors.
– Equity compensation benefits: the expense booked in 2005 relating to share-based remuneration granted to Management Board members was €11.1 million.
– The calculation of diluted net income per ordinary share takes into account shares that may be issued as a result of stock option plans and convertible bonds. The effect of stock option plans on the number of fully diluted shares is taken into account only if options are considered to be exercisable on the basis of the average stock price of AXA share over the period. The effect of convertible bonds (number of shares and income) is integrated in the calculation if it actually generates a dilution of the net income per share.
Earnings per share calculation was as follows: (in euro millions) (c)
FULLY DILUTED NET INCOME PER ORDINAY SHARES F = E / D 2.19 1.99
(a) Weighted average. (b) Taking into account the impact of potential dilutive instruments. (c) Except for number of shares (million of units) and earnings per share (euros).
A GIE also assumes cash management for the Company, its subsidiaries and affiliates. At December 31, 2005 the cash managed by the GIEs amounted to €12 billion. Members of the GIE (related parties) are the Company and affiliated entities.
Relationships with the Mutuelles AXA The Mutuelles AXA are three mutual insurance companies engaged in the Life & Savings insurance business and Property & Casualty insurance business in France: AXA Assurances IARD Mutuelle, AXA Assurances Vie Mutuelle and AXA Courtage Assurance Mutuelle. These insurance businesses, generated gross premiums of €1,494 million in 2005 (€1,578 million in 2004). The insurance businesses of the Mutuelles AXA and the insurance businesses of the Company’s French insurance subsidiaries use similar distribution channels and are managed as a single business, subject to legal and management arrangements established to maintain the legal distinctions between their respective businesses.
The Mutuelles AXA do not have shares outstanding and the business of each Mutuelle AXA is supervised by a board of directors elected by delegates representing policyholders. At February 28, 2006, the Mutuelles AXA owned a direct and indirect interest of 14.3% in AXA’s capital and 23.29% of voting rights in the Company’s shareholders’ meetings.
While the Company and each of the Mutuelles AXA has its own board of directors (or similar corporate governance structure), they have in common certain members of management and certain members of the Company’s Management Board. Members of the Company’s Supervisory Board can also hold directorships and/or management positions in the Mutuelles AXA. The Mutuelles AXA, which have no employees, also use employees of the Company’s French insurance subsidiaries pursuant to management agreements between the Mutuelles AXA and those subsidiaries. There are no agreements between the Mutuelles AXA and the Company’s insurance subsidiaries that restrict in any way their ability to compete with one another.
Technical results are shared between entities in proportion with their written premiums. Aggregate written premiums (AXA Courtage Assurance Mutuelle and AXA France IARD) recorded in the agreement amounted to €1,457 million in 2005 (of which €1,297 million attributed to AXA France IARD).
In addition to the foregoing transactions to which the Company is party, there are various on-going business relationships and transactions between various subsidiaries of the Company which include the following: Investment Management. The AXA Group has two principal asset management subsidiaries, AllianceBernstein and AXA Investment Managers (the “Asset Managers”). In addition to managing assets for unaffiliated third parties, the Asset Managers manage the “general account” investment assets of AXA’s various insurance subsidiaries. At December 31, 2005, the general account assets managed on behalf of the Company’s insurance subsidiaries by the Asset Managers totaled approximately €278 billion and generated approximately €413 million in fees for the year ended December 31, 2005. In addition, the Asset Managers manage most of the assets backing contracts with financial risk borne by policyholders (unit-linked) of the Company’s insurance subsidiaries, which totaled approximately €77 billion at December 31, 2005.
AXA Technology Services. As one of the many initiatives designed to maximize the economies of scale of the AXA Group has established a technology services company, AXA Technology Services (“AXA Tech”), which provides technology services to various AXA Group companies. AXA Tech also negotiates and administers relationships with various IT providers on a Group-wide basis. Services provided by AXA Tech to Group companies are generally provided pursuant to contracts with fully negotiated terms and conditions (including service level standards and fees) which are based on market standards and conditions. Total fees paid by AXA Group companies to AXA Tech in 2005 were approximately €660 million. AXA also, from time to time, provides guarantees to AXA Tech in order to facilitate certain contractual arrangements that AXA Tech has entered into with various third party service providers for technology and/or telecommunications equipment and/or services, including a guaranty provided by AXA SA in connection with an agreement between AXA Tech and France Telecom, dated December 15, 2003, pursuant to which AXA SA provided a performance guaranty to France Telecom on behalf of AXA Tech which is capped at €50 million during the term of the agreement.
Reinsurance. In order to achieve optimal pricing in the market and cost efficiencies at the Group level, various insurance subsidiaries of the Company cede reinsurance through AXA Cessions. AXA Cessions acts on behalf of the ceding AXA insurers to arrange reinsurance cover with suitable third-party reinsurers. Total premiums ceded by AXA Group insurers through AXA Cessions were approximately €717 million for the year ended December 31, 2005 and total claims reserves with respect to this ceded reinsurance were approximately €1,724 million at
Note 29: Contingents assets and liabilities and unrecognized contractual commitments 29.1. Breakdown of commitments received (in euro millions)
– the US holding company’s share in a Group cash facility since July 9, 2004 (€424 million),
– credit facilities received by AXA RE from ceding companies as part of its reinsurance operations (€255 million).
The €459 million increase in financial commitments relative to 2004 is mainly due to the increase in credit facilities at AXA SA (€160 million) and AXA RE (€160 million), as well as to exchange rate differences at AllianceBernstein (€126 million).
The €1,157 million increase in guarantee commitments is mainly due to the reclassification of other commitments as guarantee commitments relating to French banking customers.
Pledged assets and collateralized commitments totaled €14,241 million at December 31, 2005.
They consisted mainly of: – securities received representing technical commitments made by reinsurers, mainly for French Life & Savings companies (€263 million) and AXA Corporate Solutions Assurance (€266 million),
– securities received to secure loans (€1,665 million) and short-term securities borrowings (€535 million) by Japanese entities. Commitments were also given on these products,
The €4,050 million increase resulted from new guarantees received by the Japanese entities (€2,201 million) along with increased home loan production at AXA Bank Belgium (€1,788 million).
Other commitments totaled €2,539 million at December 31, 2005. This amount breaks down as follows: – €880 million of commitments received by AXA
France Vie in respect of assets belonging to provident societies (third-party management), a rise of €17 million.
– At AXA RE, guarantees relating to forward currency transactions (€623 million) and notional commitments received by AXA RE on derivatives hedging ABR products (€245 million). Commitments were also given in an equivalent amount in relation to these products.
Letters of credit totaled €1,075 million at December 31, 2005, mainly relating to the life insurance and reinsurance business in the United States (€997 million). This figure represents an increase of €475 million, of which €81 million was due to currency effects.
Due in Due after Due after Due after TOTAL TOTAL 1 year 1 year through 3 years through 5 years or less 3 years 5 years
Pledged assets and Collaterized commitments 8,550 401 6 1,471 10,428 5,440
Financing commitments given totaled €2,077 million at December 31, 2005, consisting mainly of: – €1,991 million of commitments to customers, made up of €1,138 million of commitments related to home loans at AXA Bank Belgium (down €37 million due to lower home loan production) and €851 million of credit facilities and overdraft authorizations granted by French banks to their clients (up €259 million due to strong growth in this business). These changes were offset by a €711 million reduction concerning the commitment relating to MONY subsidiary Advest (sold in late 2005). This commitment concerned transactions executed with or on behalf of institutional clients.
– Commitments to credit institutions (€85 million at December 31, 2005), made up mainly of the guarantee relating to loans granted to French general agents (€65 million). These guarantees were almost stable with respect to 2004.
– €109 million of securities pledged by AXA Germany to West LB to hedge a dollar-denominated reinsurance liability.
– €123 million of pledges to ceding companies relating to AXA RE's reinsurance business.
– €383 million relating to a transfer by AXA Financial of a real estate asset as collateral for a short-term debt.
Letters of credit given totaled €926 million at December 31, 2005. They related mainly to international insurance operations, particularly those of AXA RE Paris (€788 million) and AXA RE Finance (€38 million). The increase in letters of credit is related to the increase in AXA RE's gross technical reserves, due in particular to US hurricanes in 2005.
Other commitments given totaled €5,399 million at December 31, 2005, and consisted mainly of: – €863 million of commitments given at AXA RE, consisting of €620 million relating to forward foreignexchange transactions and €243 million covering ABR contracts. Commitments were received on these products in equivalent amounts.
– €238 million of commitments given by the French Life & Savings business, including €85 million of commitments relating to the custody of Mercialys’ securities and €62 million of commitments relating to capital and loans.
At December 31, 2005, this transfer amounted to £539 million (€786 million), corresponding to the total amount transferred as of January 1, 2005 plus the corresponding financial revenues. According to the rules of the plan, an annual test must be carried out at least once every 12 months, possibly resulting in an additional transfer. The test carried out at January 1, 2006 led to the conclusion that no additional transfer was necessary. Current projections, consistent with management’s strategic plans, indicate that these cumulative transfers can reasonably be expected to be returned by the “WithProfits ” funds over time and are therefore not permanent.
In most cases, the amounts available for dividends from AXA’s insurance subsidiaries are limited to the accumulated earnings calculated using the subsidiaries’ historical statutory basis of accounting. These amounts can be further limited based on the discretion of the insurance regulators in each country in which AXA operates. In some cases, amounts available for dividends are also subject to regulatory capital adequacy tests or the approval of an independent actuary or subject to individual terms contained in company by-laws.
In accordance with European Union directives, insurance companies organized in European Union member countries are required to maintain minimum solvency margins which must be supported by capital, retained earnings and reserves and, in France or in certain other countries (as approved by local regulators), unrealized capital gains on marketable securities and real estate as reported in regulatory filings. AXA’s insurance operations in countries outside of the European Union are also subject to capital adequacy and solvency margin regulations. At December 31, 2005, management believes AXA’s subsidiaries are in compliance with all applicable solvency and capital adequacy margin requirements.
AXA Canada announced on November 29, 2005 that it had entered into an agreement to buy Winterthur Canada Financial Corporation, whose main asset is The Citadel General Assurance Company (“Citadel”). The acquisition is financed internally by the AXA Group. The transaction was closed in March 2006.
Reaching the threshold of more than 95% in AXA Konzern AG will allow AXA to launch a squeeze-out on AXA Konzern AG. Following completion of the offer, AXA’s current intention is to launch a squeeze-out on the remaining minority shareholders in AXA Konzern AG, assuming that all conditions to achieving such a squeeze-out have been fulfilled.
In 2006, in order to further protect the group net asset denominated in US dollars, AXA implemented a US dollars 1.5 billion foreign exchange hedge.
In our opinion, the consolidated financial statements for fiscal year 2005 give a true and fair view of the assets, liabilities, financial position and results of the consolidated group of persons and entities in accordance with the IFRSs adopted by the European Union and applicable to its member states.
PricewaterhouseCoopers Audit Mazars & Guérard 63, rue de Villiers Le Vinci – 4, allée de l’Arche 92208 Neuilly-sur-Seine Cedex 92075 Paris-La Défense Cedex
Report of Independent Auditors on the consolidated financial statements (for the year ended December 31, 2005)
We have assessed whether the measurement methods and classifications used are consistent with the principles adopted by the AXA Group.
– Derivatives and hedging activities are recognized in accordance with the methods and procedures described in note 1.9 to the financial statements. We have assessed whether the hedging activities recognized in this manner have been duly documented, and whether this documentation includes an explanation of the hedging relationship, its efficiency and the Group’s objective in terms of risk management and hedging strategy.
Dividends received from European companies rose by €592 million to €1,309 million, including €901 million from AXA France Assurance, €146 million from Belgium and €142 million from Southern European companies. This increase reflects these subsidiaries’ greater payout capacity resulting from improved earnings and local solvency. The main increase was from AXA France Assurance, which raised dividends by €321 million, including an interim dividend of €236 million. Belgium increased dividends by €118 million, Southern Europe by €80 million and AXA RE by €53 million.
Net financial expenses, including interest expense net of income from loans and investments, totaled €182 million, up from €179 million in 2004.
•This reduction was partly offset by a €31 million increase in non-recurring income from swaps. This figure was due principally to the unwinding of interest-rate swaps relating to €500 million of perpetual subordinated debt securities following the Company’s decision to exercise its early redemption option in 2005.
Management Board’s Report on the Parent Company Financial Statements for the year ended December 31, 2005
– The €30 million decline in interest expenses arising from repayments of debts in 2005, including €20 million in relation with the €500 million of perpetual subordinated debt securities that were redeemed in 2005.
Therefore unrealized foreign exchange losses on debts and currency swaps must be provisioned in full.
– AXA bought 12,399,075 bonds exchangeable into AXA shares issued by FINAXA in 1998. The aim of this offer was to neutralize potential dilution arising from AXA’s issue of new bonds convertible into AXA shares in substitution for the aforementioned bonds received by AXA, at the time of the merger with FINAXA. The cancellation of the bonds generated a €236 million capital loss, which is accounted for under exceptional items.
At December 31, 2005, total assets were €41,521 million compared to €42,304 million at December 31, 2004.
Investments in subsidiaries net of valuation allowances, totaled €37,428 million compared to €37,475 million at end-2004, a decline of €47 million, mainly attributable to: – The cancellation of shares in Société de Gestion
Civile Immobilière (SGCI) €87 million, following the total transfer of property from SGCI to the Company,
Tax receivables amount of €274 million represents corporate income tax payments on account made in 2005.
Miscellaneous receivables totaled €427 million at December 31, 2005. They consisted mainly of €180 million of financial receivables and €224 million relating to current tax accounts of companies belonging to AXA’s tax consolidation group.
Cash and cash equivalents fell by €685 million to €320 million. Most of the decline arose from AXA’s November 2005 purchase of FINAXA bonds exchangeable into AXA shares, along with the share purchase program to control dilution arising from share-based compensations and employees Shareplan program.
• the cancellation of the €205 million dividend paid by AXA to FINAXA,
– the cancellation of €512 million of AXA shares acquired as part of the share purchase program to control dilution resulting from share-based compensations and employees Shareplan program.
– These reductions were partly offset by €362 million of additions to shareholders’ equity, including €303 million from new equity issues reserved for the Shareplan program, €53 million from the exercise of subscription options and €6 million from the conversion of bonds.
Provisions for contingent liabilities were €1,139 million. The amount consisted principally of provisions for the redemption of premiums on convertible bonds, €332 million, for exchange-rate risks €368 million, and for the possible repayment of tax savings in connection with tax consolidation €394 million.
Financial debt rose by €366 million to €2,468 million. Mainly, this resulted from the Company’s increased borrowing from Group entities, €600 million, as part of efforts to optimize the financial position, along with a €150 million issue of commercial paper at the end of the year. Offsetting this, €332 million of EMTNs (Euro-Medium Term Notes) and other BMTNs (“Bons à Moyen Terme négociables”) were redeemed.
The Management Board proposes that this amount be appropriated as follows: – dividend €1,647,012,404 – allocation to retained earnings €1,518,630,844
This dividend will give rise as of January 1, 2006 to a 40% tax credit for individuals whose fiscal residence is in France equal to €0.35 per share.
Equity Interest In 2005, there was no significant change in the Company’s main equity interests in subsidiaries that has not been disclosed above in the comments on the financial statements.
Events subsequent to December 31, 2005 In January 2006, AXA pursued its share purchase program to control dilution arising from 2005 sharebased compensations and employees Shareplan program and purchased 9,4 million of shares for a total amount of €0,25 billion.
On February, 13th 2006, AXA informed the Management Board of AXA Konzern AG that AXA reached directly and indirectly, more than 95% ownership of the shares (owned and tendered) in AXA Konzern AG. Reaching the threshold of more than 95% in AXA Konzern AG will allow AXA to launch a squeeze-out on AXA Konzern AG. Following completion of the offer, AXA’s current intention is to launch a squeeze-out on the remaining minority shareholders in AXA Konzern AG, assuming that all conditions to achieving such a squeeze-out have been fulfilled.
As at december 31, As at december 31, As at december 31, 2005 2004 2003
RESERVES: Specific reserves for long term capital gains 2,016 2,216 2,185
PROFIT ON ORDINARY ACTIVITIES BEFORE TAX (VI = III + IV + V) 1,043 628 820
III. NET INCOME FOR THE FINANCIAL YEAR VI + VII + VIII 1,137 519 863
From 01/01/2005 From 01/01/2004 From 01/01/2003 to 12/31/2005 to 12/31/2004 to 12/31/2003
Purchase of fixed assets – Tangible fixed assets 3 – –
A. Detailed information concerning subsidiaries and investments accounting for in excess of 1% of AXA’s shareholders’ equity 1) Subsidiaries (at least 50%-owned)
CIE FINANCIERE DE PARIS 9 278 100.00% 184 137, rue Victor Hugo - 92687 LEVALLOIS-PERRET
AXA UK Limited holdings 107 (77) 100.00% 109 140, Frenchurch Street EC3M 6BL LONDON
2020 rue University - MONTREAL - QUEBEC H 3A 2A5 109, rue La Boétie - 75008 PARIS
AXA OYAK HOLDING AS 106 2 50.00% 61 Meclisi Mebusan caddasi n 81 Oyak hann - Salipazari 23, avenue Matignon - 75008 PARIS
AXA GENERAL INSURANCE HONG KONG 18 29 100.00% 65 30th F, Hong Kong Telecom Tower, Taikoo Place, 979 King’s Road QUARRY BAY - HONG KONG
AXA INSURANCE INVESTMENT HOLDING 47 (12) 100.00% 78 77, Robinson road - # 11 - 00 SIA Building - 068896 SINGAPORE
AXA LIFE HONG KONG 7 1 100.00% 90 151 Gloucester Road - Wan Chai - HONG KONG
AXA ASIA PACIFIC HOLDING LIMITED (b) 624 874 42.59% 541 447 Collins Street MELBOURNE Victoria 3000
a) After tax income, before depreciation, amortization b) After tax income, after depreciation, amortization and a) Number of employees – – – – –
EEV 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, and it includes only Life & Savings activity.
“New Business Value” (NBV) measures the value of new business sold during the year. It includes the VIF on new business, and also the upfront costs associated with acquiring new business (often called “strain”). Therefore NBV combines elements which increase
Present Value of Expected Premiums (PVEP) 40,124 42,228 47,973 14% 14% 11%
NBV/PVEP Margin 1.9% 2.1% 2.4% + 0.2 pt + 0.3 pt + 0.3 pt
VIF balances from one year to the next and elements which reduce the ANAV from one year to the next. "Annualized Premium Equivalent" (APE) is a measure of new business volume which includes sales of regular recurring premium business at 100% but sales of single premium business at only 10%. The “APE Margin” is the ratio of NBV to APE.
“Present Value of Expected Premium” (PVEP) is a measure of new business volume which includes the present value of the future premiums expected to be received over time for business sold in the current year. The “PVEP Margin” is the ratio of NBV to PVEP.
The Life & Savings ANAV can be reconciled to Life & Savings IFRS Shareholder’s equity as follows (in euro million): (in euro million)
The Life & Savings ANAV is calculated from the free surplus available on a local regulatory (statutory) basis, adjusted for any unrealized capital gains or losses not included in the calculation of VIF. Starting from the consolidated accounts, an adjustment is needed for the differences between AXA’s consolidated accounting basis and local regulatory bases, including elimination of intangible assets such as Deferred Acquisition Costs, Value of Business Inforce, and Goodwill.
The VIF calculation by its nature involves many assumptions about the future. For EEV, AXA has adopted a “market-consistent” approach to setting asset return assumptions. Each cash flow is discounted at an appropriate discount factor, so that starting with Euro 1 of bond or of equity, projecting expected cash flows, and discounting, will simply give you Euro 1 of value. Mechanically, this can be described in a short-cut as assuming that all assets will earn the risk-free rate defined by the current market in the future. However, cash flows are projected not only in a single scenario, but rather a stochastic set of scenarios is created, with the set maintaining the market-consistent condition that Euro 1 of any asset projected into the future gives a present value of 1. Future earnings available to shareholders are assessed across this range of stochastic scenarios, with the present value being the VIF. Our major assumptions include: – Actuarial assumptions reflect best estimates based on recent experience.
Opening Life & Savings EEV – 12/31/04 25,829 2005 New Business Value 1,138
2005 New Business Value reflects the strain (first year loss) and VIF impacts described above.
– Operational experience and assumption changes of €–33 million is the impact of actual versus expected experience and changes in future assumptions for items like mortality, expenses, lapse rates, etc.
Change in investment assumptions is zero. This line would reflect changes to investment assumptions such as volatilities and correlations between asset classes, which are not directly driven by investment market data observed at yearend. For 2005 no such changes were made.
Total Return on Life & Savings EEV before currency effects and capital flows of €3,500 million combines the Underlying Return with the Investment impacts. It represents 14% of the Opening Life & Savings EEV.
Capital flows of €–1,291 million reflect net transfers out of the Life segment in 2005.
Life & Savings EEV of acquired business is zero because there were no acquisitions within the Life & Savings segment during 2005.
The sensitivity of the Life & Savings EEV and NBV to changes in major assumptions has been calculated as follows for the 2005 values (measured in euro million, group share): (euro million, Group share)
LIFE & SAVINGS EEV SENSITIVITIES Life & Savings EEV Life &Savings NBV Impact Impact
Estimated upward parallel shift of 50 bp in risk-free rates 588 55
(b) A portion of the personnel of AXA’s French affiliates are included in GIEs. In addition, the personnel included in insurance and financial services activities in France are included in the “cadre de convention” of 4 not consolidated “mutuelles”.
(c) Employees of AXA Belgium provide services in common for both the insurance activities and the bank activities. Consequently, split is not available. (d) Including Ireland since January 1, 2004 and AXA Business Services in India. The increase between 2004 and 2005 related principally to AXA Business Services.
Under the terms of the offer, and would AXA accept it, the business of AXA RE would be ceded in 2007 to Paris Re Holdings, with the risks attached to the 2006 claims experience of ceded business also accruing to Paris Re Holdings. Underwriting and claims for 2006 and prior years would continue to be managed by AXA. AXA would guarantee the reserves pertaining to losses incurred on or before December 31, 2005. The acceptance of this offer has no impact on the Group Financial statements as at December 31, 2005.
Person responsible for the Annual Report / p. 422 Correspondence table / p. 425
I have obtained from the statutory auditors of the Company a letter attesting to the completion of their assignment, stating that they have verified the information pertaining to the financial condition and financial statements provided in the registration document (with the exception of information pertaining to European Embedded Value (EEV) which they have not reviewed but which they have checked for consistency with thre work performed by the independent actuary Tillinghast and dated February 27, 2006), and have carried out the overall reading of this document.
PRICEWATERHOUSECOOPERS AUDIT: 63, rue de Villiers – 92208 Neuilly-sur-Seine, represented by Yves Nicolas and Eric Dupont, first appointed on February 28, 1989. The current appointment is for a term of 6 years, until the annual general meeting of the shareholders called to approve the financial statements for the fiscal year 2005. The re-election of PricewaterhouseCoopers Audit as Statutory Auditor, for a six-year term, is proposed to the General Meeting of shareholders on May, 4th 2006.
Jean-Louis Simon: 39, rue de Wattignies – 75012 Paris, first appointed on April 21, 2004. The current appointment is for a period of 6 years, until the annual general meeting of the shareholders called to approve the financial statements for the fiscal year 2009.
13. Profits forecasts or estimates........................................................................................................................................................................................................ n/a 14. Administrative, Management, and Supervisory bodies and senior management 14.1. Information on members of the administrative, management or supervisory bodies ................................................................................................................................................................ 22 to 31 and 35 to 37 14.2. Administrative, Management and Supervisory bodies’ conflicts of interests............................................................. 37 15. Remuneration and benefits 15.1. Amount of remuneration paid......................................................................................................................................................................... 55 to 59 15.2. Amounts set aside or accrued to provide pension, retirement or similar benefits............................................... 60 16. Board practices 16.1. Date of expiration of the current term of office .................................................................................................... 22 to 23 and 34 16.2. Information about members of the management bodies’ service contracts with the issuer or any of its subsidiaries ........................................................................................................................................ 32 and 37 16.3. Information on the audit committee and the remuneration committee........................................................... 32 to 34 16.4. Statement of compliance with the country of incorporation’s corporate governance regime...................................................................................................................................................................................................................... 20 17. Employees 17.1. Number of employees.......................................................................................................................................................................................................... 418 17.2. Shareholdings and stock options........................................................................................................................................ 68 to 69 and 74 17.3. Arrangements for involving the employees in the capital of the issuer............................................................................. 75 18. Major shareholders..................................................................................................................................................................................................................... 83 to 85 19. Related party transactions.......................................................................................................................................................................................... 388 to 390 20. Financial information concerning the issuer’s assets and liabilities, financial position and profits and losses 20.1. Historical financial information * .................................................................................................................................. 232 to 392 and 426 20.2. Pro forma financial information .................................................................................................................................................................................... n/a 20.3. Financial statements ...................................................................................................................................................................................................................... – 20.4. Auditing of historical annual financial information ............................................................................................................. 397 to 398 20.5. Age of latest financial information ................................................................................................................................................................................... – 20.6. Interim and other financial information ................................................................................................................................................................ n/a 20.8. Legal and arbitration proceedings ..................................................................................................................................................... 153 to 154 20.9. Significant change in the issuer’s financial or trading position...................................................................... 132 and 167 * Pursuant to Article 28 of Commission Regulation (EC) n° 809/2004 of April 29, 2004, the following items are incorporated by reference: –AXA’s consolidated financial statements for the year ended December 31, 2004 and the independent auditors’ report on them, respectively presented on pages 196-275 and on pages 276-277 of the Annual Report (Document de Référence) n° D05-0313 filed with the AMF (Autorité des Marchés Financiers) on March 31, 2005; – AXA’s consolidated financial statements for the year ended December 31, 2003 and the independent auditors’ report on them, respectively presented on pages 220-299 and on pages 300-301 of the Annual Report (Document de Référence) n° D04-0433 filed with the AMF (Autorité des Marchés Financiers) on April 7, 2004.
Annual Information Document (art. 221-1-1)........................................................................................................................................................... 88 to 92 Compensation paid to independent auditors in 2005 and 2004 (art. 221-1-2) ............................................................................ 424 Description of the Company’s own shares buyback program (art. 241-2)............................................................................ 81 to 82
Report on the conditions of preparation and organization of the Board’s work.............................................................. 20 to 33 Report on internal control procedures ............................................................................................................................................................................ 40 to 52 Report of the independent auditors on the Supervisory Board Chairman’s report............................................................ 53 to 54
Full disclosure on executive and employees compensation and share in capital 55
Parent Company 400 Embedded value 413 Salaried employees 418 Significant event known sebsenquently at the year end closing 419