Due to the nature of certain of these lawsuits and investigations, we cannot estimate the potential losses or predict with any certainty the potential impact thereof on our business, brand, reputation, relations with regulators and/or results of operations.
Collection, transfer and protection of significant amounts of sensitive data are critical to the operation of our business. Regulations in this area are quickly evolving in the European Union, which could adversely aff ect our business if we fail to timely adapt our rules, internal controls and strategy to the emerging regulatory environment.
Any failure to comply with GDPR and other applicable data protection laws, and data theft , loss or misuse, aff ecting any Group entity or a third-party service provider, could result in significant regulatory sanctions, penalties, injunctions or other similar restrictions, damage to our reputation, need to compensate customers, customer litigation (including class actions and individual lawsuits), and consequently have a material adverse eff ect on our business, results of operations and prospects.
Regarding transfer of data to the United States, following invalidation in 2015 of the European Commission’s Safe Harbor Decision by the European Union Court of Justice (the “2015 ECJ Decision”), which allowed under certain conditions for the transfer of personal information from EU companies to US companies, transatlantic data flows between companies continued using other mechanisms, such as standard contractual clauses with US companies and binding corporate rules for transfers within a multinational corporate group. While a new safe harbor, referred to as the “EU-US Privacy Shield”, was adopted in July 2016, banks and (re)insurance companies are generally not currently eligible to register on the EU-US Privacy Shield list and the AXA Group has accordingly been relying on the above-mentioned mechanisms to transfer personal data from the Company or its EU-based aff iliates to its banking and (re)insurance aff iliates based in the United States. While we currently anticipate that we can continue using such mechanisms to transfer data into the United States, there is no guarantee that such mechanisms will not be subject to challenge or to stricter scrutiny by the competent authorities or that further changes in the regulation will not potentially increase our legal and compliance costs, or result in regulatory sanctions or damage to our brand or reputation.
In addition, Brexit could significantly impact transfers of data to or from the United Kingdom if no agreement is reached between the United Kingdom and the European Union, with its consequences being comparable to those of the 2015 ECJ Decision. EU-UK data flows between companies would continue, but rely on other mechanisms than before Brexit, such as standard contractual clauses with UK companies and binding corporate rules for transfers within a multinational corporate group. Although we currently anticipate that we can continue using such mechanisms to transfer data to or from the United Kingdom, there is no guarantee that such mechanisms will be fully implemented in time by all external providers, given the overall uncertainty surrounding a potential withdrawal agreement, contingency plans at EU and Member State levels and, more generally, the United Kingdom’s future relationship with the European Union. There can be no assurance that such mechanisms will not be challenged or impeded by competent authorities or as result of amendments to applicable regulations, or that Brexit and its related consequences will not increase our legal and compliance costs, result in regulatory sanctions or damage to our brand or reputation, or otherwise have an adverse eff ect on the Group’s business and financial condition.
Changes in tax laws or uncertainties in the interpretation of certain tax laws may result in adverse consequences to our business and our results of operations
As a global company operating in numerous jurisdictions, we are subject to various tax regimes and regulations. Changes in tax laws, including the US Foreign Account Tax Compliance Act (FATCA) withholding requirements and the introduction of the Common Reporting Standard across a multitude of jurisdictions in which the Group does business, could result in higher tax expenses and payments and are expected to result in higher compliance costs. In particular, while we continue to expect the Tax Cuts and Jobs Act of 2017 (the “US Tax Act”) to have an overall net positive economic impact on the Group, significant new regulations interpreting and implementing the US Tax Act have recently been proposed and are subject to change. We continue to evaluate these new regulations and assess the magnitude of the various impacts they may have.
Union and national governments intended to address concerns over perceived international tax avoidance techniques. We take tax positions that we believe are correct and reasonable in the course of our business. However, there is no guarantee that our tax positions will be upheld by the relevant tax authorities. Our business operations, results, financial position, liquidity, outlook or reputation could be materially aff ected if one or more of the aforementioned risks materialized.
The Mutuelles AXA, which comprise two French mutual insurance companies, together held 14.40% of the Company’s outstanding shares and 24.16% of its voting rights as of December 31, 2018. The Mutuelles AXA have stated their intention to collectively vote their shares in AXA and may have interests conflicting with other shareholders’ interests. For example, even though the Mutuelles AXA do not hold a majority of the total voting rights in AXA, eff orts by the Mutuelles AXA to decline or deter a future off er to acquire control of AXA, which other shareholders may find attractive, may prevent other shareholders from realizing a premium for their AXA ordinary shares. The Mutuelles AXA may decide to increase their ownership interest in AXA or to sell all or a portion of the ordinary shares they own at some future date.
The AXA Group is engaged in Insurance, Reinsurance, Asset Management and Banking business on a global scale. As such, it is exposed to a wide variety of risks, including market risks, credit risk, insurance risks, operational risk and other material risks, as further described in this Part 4 “Risk Factors and Risk Management” (1) and in Note 31 “Litigation” in Part 5 “Consolidated Financial Statements” of this Annual Report.
To manage these risks, the Group has put in place a comprehensive system of internal control and Risk Management designed to ensure that executives are informed of significant risks on a timely basis and can manage these risks, so that the Consolidated Financial Statements and other market disclosures are accurate.
In addition, the Solvency II regime requires the Group to have in place an eff ective system of governance which provides for sound and prudent Risk Management. This governance system must be based on a clear separation of responsibilities and must be proportionate to the nature, extent and complexity of the Group’s operations.
The three lines of defense are: Responsibilities Owners 1st line of defense responsible for day-to-day risk and control management and decision-making
Asset Management and banking activities as well as monitoring that compliance is eff ective. The compliance function holder at Group level is the Group Chief Compliance Off icer; ■ the internal audit function is responsible for performing an evaluation of the adequacy and eff ectiveness of the Group’s internal control system and other elements of the system of governance. The internal audit function must be objective and independent from the operational functions. The internal audit function holder at Group level is the Global Head of Internal Audit; and
■ the actuarial function is responsible for overseeing the calculation of Solvency II technical provisions (including ensuring the appropriateness of the methodologies and underlying models used as well as the assumptions made in the calculation of technical provisions), assessing the suff iciency and quality of the data used in this calculation
RISK FACTORS AND RISK MANAGEMENT 4 4.2 INTERNAL CONTROL AND RISK MANAGEMENT
and comparing best estimates against experience, expressing an opinion on the overall underwriting policy and on the adequacy of reinsurance arrangements. The actuarial function holder at Group level is the Group Actuarial Function Holder. For further information on the actuarial function, please refer to Section 4.6 “Insurance Risks” of this Annual Report (1).
regulation, both at appointment and on an ongoing basis. These requirements are: ■ appropriate competence and capability, taking into account professional qualifications, training, knowledge and relevant experience including understanding of regulatory requirements to enable sound and prudent management (fit); and
For more information about the Executive Management, please see Section 3.1 “Corporate governance structure” of this Annual Report (1 ).
The Audit Risk and Compliance Committee (“ARCC”) has been created in 2016 by the Chief Executive Off icer with the view to strengthen the overall Group’s Risk Management governance and is chaired by the Group General Counsel with the purpose of reviewing all material audit, risk and compliance issues faced by the Group.
(1) This information is not required under IFRS and as such is not part of the Consolidated Financial Statements. Therefore, it is not covered by the report of the Statutory Auditors on the Consolidated Financial Statements.
Reporting to the ARCC, the following Group Risk Committees cover the main risk categories: ■ for financial risks: the Group Financial Risk Committee is cochaired by the Group Chief Financial Off icer and the Group Chief Risk Off icer. This Committee determines the Group ALM policies and ensures that the Group exposures are within the Group risks limits; ■ for operational, other material risks (strategic, reputation, emerging) and internal control: the Operational Audit Risk & Compliance Committee is co-chaired by the Group Chief Risk Off icer and the Group Chief Operating Off icer.
Insurance risks are directly managed and monitored at the Group ARCC level.
The Solvency II Committee, co-chaired by the Group Chief Risk Off icer and the Group Chief Financial Off icer, is in charge of (i) steering the overall AXA Group Solvency II framework, (ii) implementing the governance and validation of the Internal Model, and (iii) reviewing Solvency II developments. The Solvency II Committee is also responsible to monitor current developments in systemic risk.
Management and staff have primar y responsibi l i ty for (i) establishing and maintaining an effective control environment, (ii) identifying and managing the risks inherent in the products, services and activities in their scope and (iii) designing, implementing, maintaining, monitoring, evaluating and reporting on the Group’s internal control system in accordance with the risk strategy and policies on internal control as approved by the Board of Directors.
Second line of defense: Group Risk Management function, including Group internal control function and Group compliance function
1. Risk Management independence and comprehensiveness: Chief Risk Off icers are independent from operations (first line of defense) and Internal Audit Department (third line of defense). The Risk Management Department, together with the Compliance and Internal Control constitute the second line of defense, whose objective is to develop, coordinate and monitor a consistent risk framework across the Group.
4. Extensive use of Internal Model based on a robust economic capital metric: the Internal Model is intended to offer a concrete and powerful tool to control and measure exposure to most risks, in line with the Solvency II framework. The Internal Model is designed as a consistent and comprehensive Risk Management tool, which also forms an important element in the capital management and planning process.
GRM oversees the operating entities’ adherence to the ERM, supported by the local Risk Management teams. It coordinates Risk Management for the Group, steers the local Risk Management Departments and strives to develop a risk culture throughout the Group.
The Risk Management function at Group level has been further reinforced since December 1, 2017 with the decision to create a Group Insurance Off ice (“GIO”) which reports to the Group Chief Risk Off icer and gathers Life & Savings, Health & Protection and Property & Casualty business experts in charge of promoting technical excellence and ensuring compliance with Group insurance guidelines and standards. In addition, the reinsurance structure in charge of Property & Casualty and Life & Savings, Health & Protection reinsurance (AXA Global Re) also reports to the Group Chief Risk Off icer. Its main mandate is to contribute to the protection of the Group through the centralization of the Group’s purchase of reinsurance. For additional information on the reinsurance strategy, please see Section 4.6 “Insurance Risks” of this Annual Report (1).
The Group Compliance function is responsible for advising Executive Management and the Board of Directors on applicable compliance laws, regulations and administrative provisions, and on the impact of major changes related to the regulatory evolution applicable to AXA Group’s operations. The Group Compliance function provides expertise, advice and support to the various entities of the Company to assess significant compliance matters, analyze the major compliance risks and contributes to designing solutions to mitigate the risks to which the Group is exposed. The Group Compliance function manages a wide range of compliance related matters including (i) financial crime matters (which include anti-corruption, anti-bribery, antimoney laundering programs as well as international sanctions/ embargo compliance), (ii) data privacy, (iii) compliance & ethics, (iv) the monitoring of other major compliance and regulatory risks, and (v) regular reporting of significant compliance and regulatory matters to Executive Management, the Board and regulators.
The compliance activities within the Group are set out in a number of standards and policies which set the minimum requirements expected to be covered by the entities and their compliance functions.
The Group Compliance function has implemented a number of monitoring processes. For example, the Compliance Support and Development Program (CSDP) which is an ongoing program of structured, on-site, Compliance reviews conducted by the Group Compliance Department to AXA Group Companies worldwide. The main purpose of these reviews is to measure adherence to the Group Standards and Policies, to define improvement action plans, to provide experienced advice and to rate the entity’s maturity level against other Group companies. This program was introduced in 2009 using a risk-based approach.
On a regular basis, the Group Compliance function reports to the Group Audit Risk & Compliance Committee, the Audit Committee, and to the Board of Directors (as required) on significant compliance matters. These include major regulatory changes that have compliance implications, results of the Compliance Risk Assessment, and any other significant issues that require escalation.
To further strengthen its control environment, the AXA Group established in 2017 a centralized Internal Control function within the second line of defense independent from business operations. Group Head of Internal Control is reporting to the Group Head of Operational Risk and Internal Control. Group Internal Control is responsible for the development of a standardized methodology and framework for internal control and for oversight of its implementation in the AXA Group’s subsidiaries. For more information on the internal control at local level, please refer to the paragraph “Risk Management and internal control at local level” below.
The Group’s Internal Audit function provides the Group Audit Committee and the Group’s Management Committee with independent and objective assurance on the eff ectiveness of the overall control environment across the Group.
All internal audit teams across the Group report to the Global Head of Internal Audit whilst also having a direct and unfettered reporting line to their local Audit Committee Chairman and an administrative reporting line within their local management structure.
Group Internal Audit sets an annual plan of work, based on an assessment of both the inherent risk and the adequacy of controls as well as consideration of the audit cycle. The plan is reviewed and its performance formally monitored by the Group Audit Committee.
Over the audit cycle, all applicable “Common Audit Universe” categories for each entity are expected to be audited. Any exceptions identified are notified to the Audit Committee for ratification.
In addition, the Group has established Standards that apply to AXA SA and entities (including Joint Ventures) where AXA has the majority of the voting rights, or has a minority interest but exercises control through other means such as management. They are mandatory for all Group entities within scope unless otherwise indicated. The Standards focus on critical requirements and form part of an overall Risk Management framework which allow the Group to have a clear understanding of risks, both locally and Group-wide.
Compliance: The local Compliance functions are expected to undertake an annual Compliance Risk Assessment to identify the major compliance risks to which the business is exposed. Based on the Compliance Risk Assessment, an Annual Compliance Plan must be developed at the end of each year for the following year. The local Compliance function must directly report on a regular basis to local senior management and the local Audit Committee (or equivalent body), on significant compliance matters, including key compliance risks, major regulatory changes that have compliance implications, the Annual Compliance Plan, outstanding Compliance Support and Development Program action points and any other significant issues that require escalation.
PBRC’s role encompasses the following principal activities: ■ development of both accounting and reporting standards; ■ managing process instructions with the subsidiaries for the various exercises; ■ managing the Group’s financial consolidation and reporting systems; ■ producing the Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS) and analyzing key performance indicators; ■ developing and using management control tools; ■ managing and consolidating the European Embedded Value and Eligible Own Funds processes, related actuarial indicators and the economic balance sheet; ■ coordinating the production of the Group’s Annual Reports filed with the AMF; ■ coordinating the production of reports filed with the ACPR related to Solvency II;
■ liaising with the Statutory Auditors and contributing to Audit Committee meetings as required; and
Group accounting standards, which are consistent with accounting and regulatory principles, are set forth in the “AXA Group Accounting Manual” and updated regularly by PBRC experts. These guidelines are submitted to AXA’s Statutory Auditors for review before being made available to AXA’s subsidiaries.
At PBRC level, accounting, financial and economic information reported by entities are analyzed by teams that liaise with subsidiaries on a full-time basis. In particular, these teams analyze the compliance with the AXA Group Accounting Manual and Group actuarial standards.
In that context, the Group has implemented a comprehensive program managed by Group Risk Management, entitled Internal Financial Control (“IFC”), to ensure that the Group Chief Executive Officer has a reasonable basis to conclude that AXA Group’s ICOFR is eff ective as of the end of each financial year.
At each year-end, the in-scope entities have to perform an evaluation of their ICOFR as part of an internal certification process, involving formal sign-off by process owners and with a formal management report from the entity’s Chief Financial Off icer and Chief Risk Off icer stating their conclusion as to the eff ectiveness of the entity’s ICOFR.
This process is based on the following four pillars: 1. Chief Financial Officer Signs-Off Certificates, which are required to be submitted by all local Chief Financial Off icers to PBRC, together with the required subsidiary financial reporting and consolidation information; 2. IFC Management reports are required to be submitted by the Chief Financial Off icer or another senior executive of every in-scope entity, as part of the IFC program dedicated to ICOFR; 3. Disclosure Controls & Procedures Certificates, which are required to be submitted by AXA’s Management Committee members, Chief Financial Off icers and certain other senior executives pursuant to which each of these executives is required to review the Group’s Registration Document and formally certify (i) the accuracy and completeness of the information in the Annual Report with respect to the companies under his/her responsibility, and (ii) the
The ORSA policy defines minimum standards for assessing and reporting own risks and solvency to be applied across the Group. Adherence to this policy is expected to be promoted and monitored by all entity heads of Risk Management Department (Chief Risk Off icers).
ORSA mainly encompasses Risk Management and financial activities, which are organized around the following processes: ■ Solvency Capital Requirement (“SCR”) & Eligible Own Funds (“EOF”) calculation; ■ liquidity risk reporting; ■ strategic planning and financial projections; ■ risk appetite process; ■ stress and scenario testing analysis and monitoring; and
The ORSA report provides an assessment on: ■ the overall solvency needs through the measurement of quantifiable risks considering risk mitigation actions implemented in current economic context and approved business strategy detailed in the 2018-2020 strategic plan and within approved risk appetite limits. Stress scenario analyses are performed to ensure adequacy of the economic capital assessed. This is supported by the ERM, including the identification, monitoring and management of nonquantifiable risks; ■ the compliance, on a continuous basis, with regulatory capital requirements, through the assessment of the ability to meet capital requirements using the approved Internal Model, in compliance with the Solvency II regulatory standard. Stress scenario analyses are performed to ensure adequacy of the economic capital assessed. Also, the extensive use of the Internal Model outputs for key decision making processes provides a feedback loop for improving the modelling according to the evolution of the risk profile; ■ the significance with which the risk profile of the AXA Group deviates from the assumptions underlying the SCR calculated with the Internal Model. Extensive validation tests are performed to assess the relevance of the Internal Model and the model error. Limitations of the Internal Model and evolution plan resulting from the validation activities are presented.
For more information on regulatory capital and solvency requirements applicable to the Group, including Solvency II, please refer to Section 6.3 “General Information – Regulation and Supervision” of this Annual Report.
The Group has developed a robust economic capital model since 2007. The internal model of the Group (the “Internal Model”) is used in its Risk Management systems and decision-making processes. The ACPR has approved the use by the Group of its Internal Model to calculate its SCR under Solvency II. The Internal Model encompasses the use of AXA Group’s economic capital model on all material entities, except AXA US entities which are considered in equivalence, and entities that were part of the XLGroup we acquired in 2018 (“XL Entities”). The solvency capital requirement in respect of the entities that were part of the XL Group (“XL entities”) as at December 31, 2018 was calculated in accordance with the equivalence regime, based on the Bermudian Standard Formula SCR, plus a 5% addon required by the Group’s lead supervisor (i.e. the ACPR), as a transitional measure. Furthermore, in compliance with the ACPR’s decision, XL entities will be fully consolidated for Solvency II purposes (as per the consolidation-based method set forth in the Solvency II Directive) and their contribution to the Group’s solvency capital requirement will be calculated using the Solvency II standard formula from March 31, 2019. Subject to the prior approval of the ACPR, the Group intends as soon as FY 2020 to extend its Internal Model to XL entities.
The Internal Model is based on a common definition of risks used consistently throughout the Group. It aims to ensure that the Company risk mapping is comprehensive and is followed in a consistent way across the Company and that eff icient procedures and reporting are in place so that roles and responsibilities are allocated to identify, measure, monitor, manage and report key risks.
The underlying methodologies and assumptions used in the economic capital model are regularly reviewed to ensure that they accurately reflect the AXA Group’s risk profile and new methods are developed and integrated regularly (in accordance with the Internal Model change policy).
In addition to the risks that impact the SCR through the Internal Model calculation, the Group also monitors its liquidity risk, reputation risk, strategic risk and regulatory risks as well as emerging threats.
At Group level, the governance bodies involved in the Internal Model governance are as follows: ■ the Board of Directors reviews the Internal Model, and authorizes the application to the ACPR for approval of major changes to the Internal Model; ■ the Audit, Risk and Compliance Committee; and
The Group has implemented and documented a validation process of its Internal Model to monitor its performance and continued adequacy. This process and associated governance are documented in the Group validation policy, endorsed by the ARCC.
In particular, Group Risk Management teams provide independent testing of the local model choices, local parameters, assumptions or calibration as well as local results.
These Committees are responsible for, inter alia, defining the entity’s Strategic Asset Allocation, approving and monitoring investments, meeting local compliance obligations and reviewing the participation in investment proposals syndicated by the Group, as well as local investment proposals.
ALM aims to match assets with the liabilities generated by the sale of insurance policies. The objective is to define the optimal asset allocation so that all liabilities can be met with the highest degree of confidence while maximizing the expected investment return.
Derivative strategies are reviewed by local Investment and ALM Committees. In addition, there is a segregation of duties between those responsible for making investment decisions, executing transactions, processing trades and instructing the custodian. This segregation of duties aims in particular at avoiding conflicts of interest.
Additionally, there is a centralized counterparty risk policy. GRM has established rules on authorized counterparties, minimum requirements regarding collateral and counterparty exposure limits.
Information in this section should be read in conjunction with the paragraph “Market - related risks” in Section 4.1 “Risk Factors” of this Annual Report.
■ reinsurance which also off ers solutions to mitigate certain financial risks.
For the purpose of optimizing the financial management and control of financial risks linked to AXA SA and its sub-holding companies, the Group Corporate Finance and Treasury Department has defined a methodology to monitor and assess financial risks.
Eligible Own Funds represent the amount of economic capital available to absorb losses under stress events. The EOF are the surplus of assets over liabilities derived from the Solvency II balance sheet.
AXA Group Risk Management is monitoring EOF sensitivities and the EOF are derived from IFRS equity. The following table presents the reconciliation between IFRS shareholders’ equity to Group EOF.
(1) Only information contained in Section 4.2 “Internal control and Risk Management” of this Annual Report and referred to in Note 4 “Financial and insurance risks management” in Part 5 “Consolidated Financial Statements” of this Annual Report is covered by the report of the Statutory Auditors on the Consolidated Financial Statements.
Reconciliation IFRS shareholders’ equity to Group EOF (in Euro billion) 2018
The main elements of the reconciliation from the €62.4 billion of IFRS shareholders’ equity to the €25.3 billion of IFRS TNAV are as follows: ■ addition of €5.1 billion of net unrealized gains and losses on assets not reflected in IFRS shareholders’ equity; ■ deduction of €6.8 billion of undated deeply subordinated notes (TSS) and of undated subordinated notes (TSDI) included in IFRS shareholders’ equity; and
■ elimination of €35.5 billion of intangible assets net of unearned revenues and fee reserves, taxes and policyholder bonuses.
IFRS TNAV d ecreased by €10.5 billion mainly due to the fact that it excludes additional intangibles linked to the acquisition of XL Group. This metric however reflects the IFRS accounting value of liabilities and not their economic value which is better reflected within Solvency II EOF.
The main elements of the reconciliation between the IFRS TNAV and the Group EOF unrestricted Tier 1 are as follows: ■ Deduction of €3.2 billion of foreseeable dividends to be paid to shareholders in 2019; ■ Addition of €12.0 billion reflecting the Solvency II technical provision adjustments corresponding to the adjustment from IFRS reserves to best estimate liabilities (€+21.4 billion) and the risk margin (€-9.3 billion); and
The sensitivities of the EOF to changes in major economic assumptions were calculated as follows for the 2018 values: ■ upward shift of 50 basis points in reference rates simulates a sudden shock to the initial conditions. This means changes to: 1) the current market values of fixed-interest assets, with related possible changes to projected capital gains/losses and/or fee revenues, 2) future reinvestment rates for all asset classes, and 3) discount rates. The change is applied to the reference interest rates, including the volatility adjuster where applied in the base case. Inflation rates, the volatility on interest rates and the Ultimate Forward Rates are not changed; ■ downward shift of 50 basis points in reference rates is the same as above but with a shift downward; ■ 25% higher value of equity markets simulates a shock to the initial conditions for equities only. Listed equities and private equity values including the impact of equity hedges are shocked. This means changes to current market values of all these equities excluding hedge funds, with related possible changes to projected capital gains/losses and/or fee revenues; ■ 25% lower value of equity markets: same methodology as mentioned above assuming a decrease.
2018 interest rate sensitivities for Property & Casualty business (% of P&C EOF) of 0% to upward 50 bps and 1% to downward 50 bps reflect mainly the impacts on fixed-income assets, off set by discount on liabilities.
2018 equity market sensitivities for Life & Savings business (% of L&S EOF) of 5% to 25% higher value and -6% to 25% lower value show asymmetries mainly driven by the impact of guarantees and profit-sharing rules, along with some hedging programs to limit potential losses. The impacts of equity market value changes can come from General Account exposures or from changing asset balances impacting future fee revenue on separate account business.
A 10% change in foreign exchange rate as at December 31, 2018 and December 31, 2017 between euro and main functional currencies of the Group (USD, JPY and CHF) would have had the following impacts on Shareholders’ equity Group share and underlying earnings Group share: (in % ) Shareholders’ equity Group s hare Underlying Earnings Group s hare 2017 (in % ) Shareholders’ equity Group s hare Underlying Earnings Group s hare
In the insurance companies, which accounted for 91% of Group assets at December 31, 2018 (90% in 2017), assets and liabilities with foreign currency exposure are generally naturally matched or hedged.
In Germany, AXA held €9,417 million investments denominated in foreign currencies at the end of 2018 (€9,582 million in 2017) both directly and indirectly through investment funds with the aim of diversifying its investments and taking advantage of foreign markets’ performance. These investments were mainly denominated in US Dollar (€7,363 million versus €7,641 million in 2017) including the US Short Duration High Yield Fund (€481 million versus €741 million in 2017) and in Pound Sterling (€1,232 million versus €1,200 million in 2017). AXA Germany controls and limits its exchange-rate risk by using foreign exchange forwards for a notional amount of €6,701 million (notional €7,148 million in 2017), currency swaps for a notional amount of €853 million (notional €687 million in 2017), foreign exchange collars for a notional amount of €1,194 million (notional €1,241 million in 2017) and congruent coverage (matching assets and liabilities denominated in the same currency) for €29 million (€34 million in 2017).
■ United States: 21% of Group assets at the end of 2018 (22% i n 2017): In United States, there is no significant exposure to exchangerate risk.
AXA Hong Kong holds investments denominated in foreign currencies €14,921 million (€13,465 million in 2017), both in directly and indirectly through investment funds.
■ International: 5% of Group assets at the end of 2018 (5% in 2017): International entities held investments denominated in foreign currencies for €3,384 million in 2018 (€3,003 million in 2017) both directly and indirectly through investment funds which are mainly denominated in US Dollar €2,071 million (€1,678 million in 2017). In particular, Mexico has its exchange-rate risk exposure mostly under congruent coverage, matching assets and liabilities denominated in the same currency. Besides, Singapore has its exchange-rate risk exposure hedged through forwards, cross currency swaps and forex options. The remaining part is due to investments in countries having their currency pegged to US Dollar.
For the majority of AXA XL’s business, assets and liabilities are denominated in US Dollar. For business written in currencies other than in US Dollar, the risk is managed primarily by matching assets and liabilities in each currency. Asset positions in certain currencies, in particular Canadian Dollar and Swiss Franc, are hedged back to US Dollars using foreign exchange forwards with a notional amount of €796 million at the end of 2018 .
Information in this section should be read in conjunction with the paragraph “Credit and liquidity-related risks” in the Section 4.1 “Risk factors” of this Annual Report.
Credit risk is defined as the risk that a third party in a transaction will default on its commitments. Given the nature of its core business activities, AXA Group monitors three major types of counterparties, using methods suitable to each type: ■ investment portfolios held by the Group’s insurance operations (excluding assets backing separate-account products where the financial risk is borne by policyholders) as well as by banks and holding companies; ■ receivables from reinsurers resulting from reinsurance ceded by the AXA Group; and
AXA Group’s exposure to credit risk is covered by AXA Group’s Solvency Capital Requirement metric, except for XL entities, as detailed in the paragraph “Internal Model” in the Section 4.2 “Internal control and Risk Management” of this Annual Report and is taken into account in AXA’s liquidity Risk Management framework (please refer to Section 4.5 “Liquidity risk” of this Annual Report).
A specific set of limits take into account all AXA Group exposures on a given ultimate shareholder through debt securities, cash, equity, derivatives, reinsurance receivables, insurance and reinsurance commitments. They aim at managing globally the default risk of a given counterparty.
On sovereign exposures, specific limits have also been defined on government bonds and government-guaranteed bonds.
At December 31, 2017, the breakdown of the debt security portfolio (€431 billion) by credit rating was: 20% in AAA, 29% in AA, 22% in A, 24% in BBB, 2% in BB and lower, and 3% in other.
At December 31, 2018, the breakdown of Government and Government related bonds fair values (€236 billion) by country was as follows: Spain
At December 31, 2018, the nominal amount of positions taken through credit derivatives was €16.2 billion (1) of CDS (cumulated notional amounts of €1.9 billion protections bought and of €14.3 billion protections sold), which can be broken down as follows: i. €1.7 billion of CDS protections bought to hedge credit risk with regard to certain investments, mostly in corporate bonds; ii. €0.1 billion of CDS protections bought used to lock the liquidity premium through purchasing bonds and CDS protection on the same name (negative basis trade strategy) mostly in corporate bonds mainly in Japan (€0.07 billion) and United Kingdom (€0.02 billion); iii. €14.3 billion of CDS protections sold as an alternative to the direct purchase of a corporate bond mainly by holding government bonds and at the same time selling protection on very good quality names. This type of ALM strategy is oft en implemented to compensate for the lack of depth or liquidity in some markets in order to take synthetic credit risk.
At December 31, 2018, the breakdown of these CDS’s underlying debt securities gross exposure by rating was as follows: BBB
AXA Group actively manages counterparty risk generated by OTC derivatives through a specific Group-wide policy. This policy includes: ■ rules on derivative contracts (ISDA, CSA); ■ mandatory collateralization; ■ a list of authorized counterparties; ■ a limit framework and an exposure monitoring process.
To manage the risk of reinsurers’ insolvency, a Security Committee is in charge of assessing reinsurers’ quality and acceptable commitments. The Committee is under joint authority of GRM and AXA Global Re. This risk is monitore d to oversee the credit reinsurance exposure of the Group and to avoid any excessive exposure to any specific reinsurer. The Group Security Committee meets monthly – and more frequently during renewal periods – and decides on any action to be taken with the aim of limiting AXA Group’s exposure to the risk of default by any of its reinsurers.
At December 31, 2017, the breakdown of reserves ceded to reinsurers (€15 .3 billion) by reinsurer rating was: 51% in AA, 13% in A, 15% in BB and lower, 1% in BBB and 20% in others.
The increase in reserves ceded to reinsurers is mainly driven by XL Group acquisition (€ 11.8 billion).
Information in this section should be read in conjunction with Section 2.4 “Liquidity and capital resources” of this Annual Report.
Life risks also include risks related to mortality, longevity, lapses, disability and pandemic events among others. The main risks to which the life business is exposed are longevity risk and lapse risk, which are both sensitive to changes in interest rates, and could be defined as follows: ■ longevity risk is the risk related to the overestimation of mortality rates for business contingent on longevity; ■ lapse risk is the risk of experiencing lapses lower (or higher) than expected on a permanent basis for businesses adversely sensitive to a decrease (or an increase) in lapses.
In addition, AXA Group’s investment strategy, which is mainly driven by Asset Liability Management, aims to meet the Group’s obligations and commitments to policyholders, and to protect the solvency of the Group and of its entities (please refer to paragraph “Governance of investment strategy and Asset & Liability Management (ALM)” in Section 4.2 “Internal control and Risk Management” of this Annual Report).
For Life & Savings, Health and Property & Casualty activities, GRM has developed and deployed common models and metrics to consistently measure risks throughout the Group (in particular via its economic capital framework as detailed in Section 4.2 of the Annual Report. This enables the Group to verify that its exposure complies with consolidated risk appetite limits along the dimensions of earnings, Eligible Own Funds (EOF), solvency and liquidity. These tools also contribute substantially to monitoring the major risks (claims frequency deviation, claims severity, reinsurance, pricing consistency, natural catastrophes, biometric and behavior risks deviations).
In the Life & Savings, Health businesses, these tools allow for mortality/longevity risks to be analyzed on a multi-country basis. The AXA Group regularly monitors its exposure to these risks (including mortality, longevity and morbidity) and uses the results of this work to optimize its product design and its reinsurance coverage. These exposure analyses are supported by expert risk models in Life & Savings.
In order to build adjusted and optimized protection, the Group’s operating entities are reinsured by AXA Global Re. AXA Global Re can place a variable part of the local treaties on the reinsurance market, for regulatory reason for example. A portion of the risk exposure is retained and mitigated within AXA Global Re through the internal Group covers (including pools) and the remaining part is ceded to external reinsurers.
The additional reserves’ calculations are initially carried out locally by a two-opinion process, one given by the Technical Department, the other one by local Risk Management.
The Group Actuarial Function Holder has been set with a specific role to monitor the tasks undertaken by the Group actuarial function stakeholders (notably GRM, PBRC) as well as the local actuarial functions established in insurance entities across the Group.
• derivatives may be used to hedge the risk of a fall (floor) or a rise (cap) in interest rates,
Both quantitative and qualitative requirements are defined: ■ across the Group, the most critical operational risks of each entity and a set stress scenarios are identified and assessed following a forward-looking and expert-opinion approach. These risk scenarios are then used to estimate the capital requirement needed to cover operational risks based on advanced models based on Solvency II principles. The operational Risk Management process is embedded into local governance through senior management validation to ensure that the risk assessment is adequate, appropriate and comprehensive but also to ensure that adequate corrective and pre-emptive actions are defined and implemented in respect of the main risks; ■ in addition, a loss data collection process is in place within most companies of the Group in order to track and appropriately mitigate actual operational risk losses. This process is also used as a valuable source of information to back-test the assumptions taken in risk assessments.
AXA Group’s exposure to operational risk is captured in the AXA Group’s Solvency Capital Requirement as detailed in the paragraph “Internal Model” in Section 4.2 “Internal control and Risk Management” of this Annual Report.
Emerging risks are risks which may develop or which already exist and are continuously evolving. Emerging risks are marked by a high degree of uncertainty, as some of them may never even emerge.
5.1 CONSOLIDATED STATEMENT OF FINANCIAL POSITION 216 5.2 CONSOLIDATED STATEMENT OF INCOME 218 5.3 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 219 5.4 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 220 5.5 CONSOLIDATED STATEMENT OF CASH FLOWS 224 5.6 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 226 NOTE 1 Accounting principles 226 NOTE 2 Scope of consolidation 247 NOTE 3 Consolidated statement of income by segment 253 NOTE 4 Financial and insurance Risk Management 258 NOTE 5 Goodwill 259 NOTE 6 Value of purchased business in-force 267 NOTE 7 Deferred acquisition costs and equivalent 268 NOTE 8 Other intangible assets 269 NOTE 9 Investments 272 NOTE 10 Investments accounted for using the equity method 292 NOTE 11 Receivables 297 NOTE 12 Cash and cash equivalents 298 NOTE 13 Shareholders’ equity and minority interests 299 NOTE 14 Liabilities arising from insurance and investment contracts 305 NOTE 15 Liabilities arising from banking activities 318 NOTE 16 Provisions for risks and charges 320 NOTE 17 Financing debt 321 NOTE 18 Payables 323 NOTE 19 Tax 326 NOTE 20 Derivative instruments 329 NOTE 21 Information by segment 338 NOTE 22 Net investment result excluding financing expenses 341 NOTE 23 Net result of reinsurance ceded 343 NOTE 24 Financing debt expenses 344 NOTE 25 Expenses by type 344 NOTE 26 Employees 345 NOTE 27 Net income per ordinary share 359 NOTE 28 Related-party transactions 360 NOTE 29 Contingent assets and liabilities and unrecognized contractual commitments 362 NOTE 30 Fees paid to Statutory Auditors 365 NOTE 31 Litigation 366 NOTE 32 Subsequent events 369 5.7 REPORT OF THE STATUTORY AUDITORS ON THE CONSOLIDATED FINANCIAL STATEMENTS 370
(in Euro million) Notes 6 Value of purchased business in force (a) 2,087 1,891 7 Deferred acquisition costs and equivalent 26,415 22,881 8 Other intangible assets 5,041 3,170
Assets backing contracts where the financial risk is borne by policyholders (b) 160,176 175,003 9 Investments from insurance activities 706,452 711,358 9 Investments from banking and other activities 41,809 37,335 10 Investments accounted for using the equity method 2,929 2,381 14 Reinsurers’ share in insurance and investment contracts liabilities 25,751 13,081
Tangible assets 1,599 1,380 14 Deferred policyholders’ participation assets 303 (0)
Receivables arising from direct insurance and inward reinsurance operations 25,259 16,360
Other receivables 14,745 12,868 5 Assets held for sale (c) 26,384 5,019 12 Cash and cash equivalents 31,329 23,898
Liabilities arising from investment contracts with discretionary participating features 34,225 33,199
Liabilities arising from investment contracts with no discretionary participating features 4,837 2,900
Liabilities arising from investment contracts with discretionary participating features and where the financial risk is borne by policyholders 2,785 3,637
Collateral debts relating to investments under lending agreements or equivalent 32,814 28,401
(a) Amounts are shown net of related derivative instruments impact. (b) Includes liabilities arising from contracts where the financial risk is borne by policyholders with Guaranteed Minimum features. (c) As of December 31, 2018, amounts included the liabilities relating to the Group Life portfolio in Switzerland, AXA Life Europe and AXA Wealth Management (HK) Limited, for which the disposals processes were not finalized at year-end. As of December 31, 2017, amounts included the liabilities of AXA Wealth Management (HK) Limited and Germany pension business ProbAV Pensionskasse AG for which the disposals processes were not finalized at year-end.
Net investment income (b) 16,579 12,668 Net realized gains and losses relating to investments at cost and at fair value through shareholders’ equity (c) 1,982 1,781 Net realized gains and losses and change in fair value of investments at fair value through profit and loss (d) (13,104) 20,299 of which change in fair value of assets with financial risk borne by policyholders (e) (10,706) 19,215 Change in investments impairments (f) (1,271) (300)
Amortization of the value of purchased business in force (470) (44)
Income from operating activities before tax 1,805 7,735 10 Income (net of impairment) from investment accounted for using the equity method 286 265 24 Financing debts expenses (g) (562) (315)
Net loss on held for sale Group Life portfolio in Switzerland (h) (428) Net consolidated income aft er tax (373) 6,603
(g) Includes net balance of income and expenses related to derivatives on financing debt (nonetheless excludes change in fair value of these derivatives). (h) Mainly related to VBI impairment associated to the Group Life portfolio in Switzerland classified as held for sale.
Reserves relating to changes in fair value of financial liabilities measured at fair value through profit and loss that are attributable to changes in own credit risk 31 (23)
Items that will not be reclassified subsequently to Profit or Loss 284 385
Amounts are presented net of tax, policyholders’ participation and other shadow accounting related movements. Tax, policyholder participation and related eff ects are further detailed in the Notes to the Consolidated F inancial S tatements.
Reserves relating to the change in fair value of hedge accounting derivatives (cash flow hedge) Other (a)
Note: A mounts are presented net of impacts of shadow accounting and its eff ects on policyholder participation, deferred acquisition costs, and value of business in force. (a) Mainly undated subordinated debts (TSS, TSDI), equity components of compounded financial instruments (e.g. convertible bonds) (see Note 13.1.2 ). (b ) Including changes in ownership interest in consolidated subsidiaries without losing control.
Net increase/(write back) in impairment on investments, tangible and other intangible assets 1,250 286
Net change in liabilities arising from insurance and investment contracts (c) (7,235 ) 26,571
Income (net of impairment) from investment accounted for using the equity method (286) (265)
Dividends recorded in profit or loss during the period (3,489) (3,200)
Investment income & expense recorded in profit or loss during the period (e) (13,951) (10,574)
Purchases of equity instruments and non consolidated investment funds (f) (g) (19,250) (38,732)
Purchases of investment properties held direct or not (f) (3,338) (4,230)
Net cash impact of assets lending/borrowing collateral receivables and payables 3,962 (256)
Impact of change in consolidation method and of reclassifications as held for sale (k) (4,024) (128)
Net impact of foreign exchange fluctuations and reclassification on cash and cash equivalents 1,955 (487)
(k) In 2018, amounts include the assets and liabilities of Group Life portfolio in Switzerland, AXA Life Europe and AXA Wealth Management (HK) Limited, for which the disposals processes were not finalized at year-end. In 2017, amounts include the assets and liabilities of AXA Wealth Management (HK) Limited and Germany pension business ProbAV Pensionskasse AG for which the disposal process was not finalized at year-end.
IFRS 4 - Insurance contracts September 12, 2016 IFRS 9 de ferral information on credit risk exposure.
IAS 40 - Investment Property December 8, 2016 Clarification on transfer to, or from, investment properties: the transfer to, or from, investment properties must result from a change in use of the asset.
December 8, 2016 Clarification on the exchange rate to be used for the accounting for transactions that include the receipt or payment of advance consideration in a foreign currency.
These consolidated financial statements including all Notes were set by the Board of Directors on March 8, 2019.
The application of the amendments below as of January 1, 2018 had no material impact on the Group’s consolidated financial statements.
STANDARDS AND AMENDMENTS PUBLISHED BUT NOT YET EFFECTIVE IFRS 17 – Insurance Contracts, published on May 18, 2017 establishes the principles for the recognition, measurement, presentation and disclosure of insurance contracts and supersedes IFRS 4 – Insurance contracts. The new standard applies to insurance contracts issued, to all reinsurance contracts and to investment contracts with discretionary participating features provided the entity also issues insurance contracts. It requires to separate the following components from insurance contracts: (i) embedded derivatives, if they meet certain specified criteria; (ii) distinct investment components; and (iii) distinct performance obligations to provide non-insurance goods and services. These components should be accounted for separately in accordance with the related standards.
IFRS 17 requires a current measurement model, where the general model is based on the following “building blocks”: (a) the fulfilment cash flows (FCF), which comprise: • probability-weighted estimates of future cash flows,
• an adjustment to reflect the time value of money (i.e. discounting) and the financial risks associated with those future cash flows,
• and a risk adjustment for non-financial risk; (b) the Contractual Service Margin (CSM).
At the end of each subsequent reporting period the carrying amount of a group of insurance contracts is remeasured to be the sum of: ■ the liability for remaining coverage, which comprises the FCF related to future services and the CSM of the group at that date; ■ and the liability for incurred claims, which is measured as the FCF related to past services allocated to the group at that date.
The CSM is adjusted subsequently for changes in cash flows related to future services but the CSM cannot be negative, so changes in future cash flows that are greater than the remaining CSM are recognized in profit or loss. Interest is also accreted on the CSM at rates locked in at initial recognition of a contract (i.e discount rate used at inception to determine the present value of the estimated cash flows). Moreover, the CSM will be released into profit or loss based on coverage units, reflecting the quantity of the benefits provided and the expected coverage duration of the remaining contracts in the group.
The Variable Fee Approach (VFA) is a mandatory model for measuring contracts with direct participation features (also referred to as ‘direct participating contracts’). A contract has a direct participation feature if it meets all three requirements below: ■ the contractual terms specify that the policyholder participates in a share of a clearly identified pool of underlying items; ■ the entity expects to pay to the policyholder an amount equal to a substantial share of the fair value returns on the underlying items; ■ the entity expects a substantial proportion of any change in the amounts to be paid to the policyholder to vary with the change in fair value of the underlying items.
This assessment of whether the contract meets these criteria is made at inception of the contract and not reassessed subsequently.
The Board also decided to propose an amendment to IFRS 4 to allow insurers qualifying for deferral of IFRS 9 (see below) one additional year of deferral, and thus, extending to 2022 the temporary exemption for insurers to apply IFRS 9. This would mean that qualifying insurers could apply both standards for the first time to reporting periods beginning on or aft er January 1, 2022.
Earlier application is permitted if both IFRS 15 – Revenue from Contracts with Customers and IFRS 9 – Financial Instruments have also been applied. The Standard has to be applied retrospectively unless impracticable, in which case two options are possible: ■ either the modified retrospective approach: based on reasonable and supportable information available without undue cost and effort to the entity, certain modifications are applied to the extent full retrospective application is not possible, but still with the objective to achieve the closest outcome to retrospective application possible; ■ or the fair value approach: the CSM is determined as the positive difference between the fair value determined in accordance with IFRS 13 and the fulfilment cash flows (any negative diff erence would be recognized in retained earnings at the transition date).
The standard has not yet been endorsed by the European Union. The implementation of IFRS 17 and its potential impact on the Group’s consolidated financial statements is in progress.
However, amendments to IFRS 4 – Insurance Contracts: Applying IFRS 9 – Financial Instruments with IFRS 4 – Insurance Contracts, published on September 12, 2016, changes the existing IFRS 4 to allow entities issuing insurance contracts within the scope of IFRS 4 to mitigate certain eff ects of applying IFRS 9 before the IASB’s new insurance contract standard (also referred to as IFRS 17 – Insurance Contracts) becomes effective. The amendments introduce two alternative options: (1) apply a temporary exemption from implementing IFRS 9 until the earlier of (i) the eff ective date of a new insurance contract standard; or (ii) annual reporting periods beginning on or aft er January 1, 2022 following the IASB’s proposal to
report the eff ective application date of IFRS 17/ IFRS 9 of one-year. Additional disclosures related to financial assets are required during the deferral period. This option is only available to entities whose activities are predominately connected with insurance and have not applied IFRS 9 previously; or
The Group has determined that it is eligible for the temporary exemption option (1). The eligibility conclusion is based on an analysis of the percentage of the total consolidated carrying amount of liabilities connected with insurance activities relative to the total consolidated carrying amount of all liabilities, which indicates AXA’s activities are predominately connected with insurance. Indeed, the amount of its insurance liabilities determined as of December 31, 2015 represent more than 90% of its total consolidated carrying amount of all liabilities. Consequently, the Group has decided to defer the implementation of IFRS 9 until the effective date of the new insurance contracts standard, as mentioned above with the IASB proposal. The amendments permitting the temporary exemption are eff ective for annual periods beginning on or aft er January 1, 2018. New disclosures related to financial assets required during the deferral period are included in the Group’s consolidated financial statements as of December 31, 2018 (please refer to the table above).
IFRS 16 – Leases, published on January 13, 2016 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract, i.e. the customer (“lessee”) and the supplier (“lessor”). Under the IFRS 16 model a lessee is required to recognize (i) assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value; and (ii) depreciation of lease assets separately from interest on lease liabilities in the income statement. Lessors will continue to classify and account for their leases as (i) operating leases with recognition of the underlying assets; or (ii) finance leases by derecognizing the underlying asset and recognition of a net investment, similar to the current IAS 17 requirements. IFRS 16 is effective for annual periods beginning on or aft er January 1, 2019. The cumulative eff ect of initially applying IFRS 16 will be recognized as an adjustment to the opening balance of retained earnings in 2019. Based on the analysis in progress within the Group the amounts of both debt and right-of-use to be recognized have been estimated to €2.5 billion. The impact on retained earnings as of January 1, 2019 is not expected to be material.
The following amendments and interpretation are not expected to have a material impact on the Group’s consolidated financial statements: Amendments and interpretations
January 1, 2019* Collection of amendments to IFRS in response to issues that are not part of a major project.
October 31, 2018 January 1, 2020* The amendments clarify the definition of “Material” and how it has to be applied by adding in the definition the clarifications that were included so far in other IFRS standards.
* With earlier application being permitted (subject to conditions in some cases) but no early adoption anticipated, except for IFRS 3 amendment related to definition of business.
PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in accordance with IFRS requires the use of estimates and assumptions. It requires a degree of judgment in the application of the Group accounting principles described below. The main balance sheet captions concerned are goodwill (in particular impairment tests described in paragraph 1.7.1), intangible assets acquired in a business combination, the value of acquired business in force, deferred acquisition costs and equivalent, certain assets accounted at fair value, deferred tax assets, liabilities relating to the insurance business, pension benefit obligations and balances related to share-based compensation. The principles set out below specify the measurement methods used for these items. These methods, along with key assumptions where required, are discussed in greater depth in the Notes relating to the asset and liability items concerned where meaningful and useful.
insurance companies, expenses are classified by destination in the income statement.
All amounts in the consolidated statement of financial position, consolidated statement of income, consolidated statement of comprehensive income, consolidated statement of cash flows, consolidated statement of changes in equity and in the Notes are expressed in Euro million.
Some companies in which AXA exercises control, a joint controlling influence or a significant influence are excluded from the scope of consolidation as they are not material with respect to the Group’s consolidated financial statements. These are mainly investment funds.
VALUATION OF ASSETS ACQUIRED AND LIABILITIES ASSUMED OF NEWLY ACQUIRED SUBSIDIARIES AND CONTINGENT LIABILITIES Upon first consolidation, all assets, liabilities and contingent liabilities (unless they are not present obligations) of the acquired company are estimated at their fair value. However, in compliance with an exemption permitted by IFRS 4, liabilities related to life insurance contracts or investment contracts with discretionary participating features are maintained at the carrying value prior to the acquisition date to the extent that this measurement basis is consistent with AXA’s accounting principles. The fair value of acquired business in force relating to life insurance contracts and investment contracts with discretionary participating features is recognized as an asset corresponding to the present value of estimated future profits emerging on acquired business in force at the date of acquisition (also referred to as value of acquired business in force or VBI and reflecting the diff erence between the fair value and the carrying value of the liabilities). The present value of future profits takes into consideration the cost of capital and is estimated using actuarial assumptions based on projections made at purchase date but also using a discount rate that includes a risk premium.
To the extent that these other intangible assets can be estimated separately, they can also be measured by looking at the purchased marketing resources that will allow them to generate these future cash flows. The nature of the intangible assets recognized is consistent with the valuation methods used when purchasing the acquired entity.
GOODWILL Goodwill is measured as the excess of (a) the aggregate of the consideration transferred, the amount of any minority interest in the acquiree and in a business combination achieved in stages, the acquisition-date fair value of the Group’s previously held equity interest in the acquiree over (b) the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed.
PURCHASE AND SALE OF MINORITY INTERESTS IN A CONTROLLED SUBSIDIARY Purchase and sale transactions of minority interests in a controlled subsidiary that do not change the conclusion of control are recorded through shareholders’ equity (including direct acquisition costs).
When the contract involves an unconditional commitment exercisable by the option holder, it is recognized as a liability. Since the balancing entry to this liability is not specified by current IFRS, the Group’s method is (i) to reclassify minority interests from equity to liability, (ii) to re-measure this liability
at the present value of the option price and (iii) to recognize the diff erence either as an increase in goodwill for puts existing before January 1, 2009 or as a decrease in equity (Group share) for a put granted aft er January 1, 2009, to the extent there is no immediate transfer of risks and rewards. Similarly, subsequent changes in the liability are recorded against goodwill for puts existing before January 1, 2009 and against equity (Group share) for puts granted aft er that date.
The eff ect on net income of transactions between consolidated entities is always eliminated. However, in case of a loss, an impairment test is performed, in order to assess whether an impairment has to be booked.
The results and financial position of all Group entities that have a functional currency (i.e. the currency of the primary economic environment in which the entity operates) diff erent from the Group presentational currency are translated as follows: ■ assets and liabilities of entities in a functional currency diff erent from Euro are translated at the closing exchange rate; ■ revenues and expenses are translated at the average exchange rates over the period; ■ all resulting foreign exchange diff erences are recognized as a separate component of equity (translation diff erences).
Foreign exchange diff erences arising from monetary financial investments available for sale are recognized as income or expense for the period in respect of the portion corresponding to amortized cost. The residual translation diff erences relating to fair value changes are recorded in shareholders’ equity, like for non-monetary items such as equity securities.
Fair values of assets and liabilities traded on active markets are determined using quoted market prices when available. An instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency and those prices represent actual and regularly occurring market transactions on an arm’s length basis between a willing seller and a willing buyer. For financial instruments traded in active markets, quotes received from external pricing services
Equity instruments quoted on exchange traded markets and bonds actively traded on liquid markets are generally considered as being quoted in an active market when: ■ quotes that represent consensus are regularly provided by external pricing services with limited dispersion; and
In such cases, the Group uses valuation techniques including observable data whenever possible and relevant, adjusted if needed to develop the best estimate of fair value, including adequate risk premiums or develops a valuation model based on unobservable data representing estimates of assumptions that willing market participants would use when prices are not current, relevant or available without undue costs and eff orts: in inactive markets, transactions may be inputs when measuring fair value, but would likely not be determinative and unobservable data may be more appropriate than observable inputs.
The segmental analysis provided in AXA’s Annual Report and Financial Statements reflects operating business segments. It is based on six geographies (France, Europe, Asia, AXA XL, the United States and International) and the seventh segment comprises tranversal entities as well as the Corporate Center and othe central holdings.
Following the completion of the acquisition of XL Group which took place on September 12, 2018, the financial reporting has been aligned and retroactively restated in this Annual report .
For investment contracts with no discretionary participating features, a similar asset is recognized, i.e. rights to future management fees, also known as Deferred Origination Costs (DOC) (see Note 7) but limited to incremental costs directly attributable to the provision of investment management services. This asset is amortized by taking into account projections of fees collected over the life of the contracts. The amortization of DOC is reviewed at each closing date to reflect changes in assumptions and experience. This asset is also tested for recoverability.
Investment in real estate properties (excluding investment in real estate properties totally or partially backing liabilities arising from contracts where the financial risk is borne by policyholders) is recognized at cost. The properties components are depreciated
over their estimated useful lives, also considering their residual value if it may be reliably estimated.
• assets included in hedging strategies set out by the Group for economical reasons but not eligible for hedge accounting as defined by IAS 39,
■ as assets of the “Satellite Investment Portfolios”, reflecting the strategic asset allocation based on a dynamic asset management aimed at maximizing returns.
For debt instruments classified as “held to maturity” or “available for sale”, an impairment based respectively on future cash flows discounted using the initial eff ective interest rate or on fair value is recorded through the income statement if future cash flows may not be fully recoverable due to a credit event relating to the instrument issuer. A downgrade of an entity’s credit rating is not, of itself, evidence of impairment. If the credit risk is eliminated or improves, the impairment may be released. The amount of the reversal is also recognized in the income statement.
Additionally, the Group is party to total return swaps under which financial assets are sold to a counterparty with a corresponding agreement. Cash flows equal to those of the underlying assets will be remitted to the Group in exchange for specified payments taking into account any increase or decline in the fair value of the assets. This results in substantially all of the risks and rewards of the financial assets remaining with the Group. As such, the Group does not derecognize the financial assets.
The Group is also party to reverse repurchase agreements under which financial assets are purchased from a counterparty, subject to a simultaneous agreement to return these financial assets at a certain later date, at an agreed price. If substantially all of the risks and rewards of the securities remain with the counterparty over the entire lifetime of the agreement of the transaction, the securities concerned are not recognized as financial assets of the Group. The amounts of cash disbursed are recorded under financial investments, except for transactions arising from banking activities, which are recorded as separate assets. Interest income on reverse repurchase agreements is accrued over the duration of the agreements.
reaches its maturity date or is sold, or when a hedge no longer qualifies for hedge accounting, the cumulative gains or losses in shareholders’ equity are held until the initially hedged future transaction ultimately impacts the income statement.
NET INVESTMENT HEDGE The accounting of net investments in foreign operations hedge is similar to the accounting of cash flow hedge. Any gain or loss on the hedging instrument relating to the eff ective portion of the hedge is recognized in shareholders’ equity; the gain or loss relating to the ineff ective portion is recognized in the income statement. Cumulative gains and losses in shareholders’ equity impact the income statement only on disposal of the foreign operations.
DERIVATIVES NOT QUALIFYING FOR HEDGE ACCOUNTING Changes in the fair value of all other derivative instruments that do not qualify for hedge accounting are recognized in the income statement. Given IAS 39 constraints, only a few hedges are eligible to hedge accounting provisions described above. However, most of the derivatives used by the Group are purchased with a view to hedge or for example to use such instruments as an alternative to gain exposure to certain asset classes through “synthetic positions”. See Note 20.
The Group holds financial investments that also include embedded derivatives. Such embedded derivatives are separately recorded and measured at fair value through profit or loss if the impact is deemed material.
Treasury shares and any directly related costs are recorded as a deduction to consolidated shareholders’ equity. Where treasury shares are subsequently sold or reissued, any consideration received is included in consolidated shareholders’ equity, net of any directly related costs and tax eff ects.
Preferred shares issued by the Group are recorded as equity when there is no contractual obligation to redeem and there is no contractual obligation to deliver cash or other financial asset.
A number of insurance and investment contracts contain discretionary participating features. These features entitle the contract holder to receive additional benefits or bonuses on top of these standard benefits: ■ they are likely to represent a significant portion of the overall contractual benefits; ■ their amount or timing is contractually at the discretion of the Group; and
PRE-CLAIMS RESERVES Unearned premiums reserves represent the prorata portion of written premiums that relates to unexpired risks at the closing date.
Future policy benefits reserves relating to investment contracts with discretionary participation features (previously called “savings contracts” in AXA’s accounting principles) that carry low mortality and morbidity risk are generally calculated using a prospective approach based on discount rates usually set at
inception with reserves similar to the retrospective approach, (i.e. “account balance” methodology).
Some guaranteed benefits such as Guaranteed Minimum Death or Income Benefits (GMDB or GMIB), or certain guarantees on return proposed by reinsurance treaties, are covered by a Risk Management program using derivative instruments. In order to minimize the accounting mismatch between liabilities and hedging derivatives, AXA has chosen to use the option allowed under IFRS 4.24 to re-measure its provisions: this revaluation is carried out at each accounts closing based on guarantee level projections and considers interest rates and other market assumptions. The liabilities revaluation impact in the current period is recognized through income, symmetrically with the impact of the change in value of hedging derivatives. This change in accounting principles was adopted on the first time application of IFRS on January 1, 2004 for contract portfolios covered by the Risk Management program at that date. Any additional contract portfolios covered by the Risk Management program aft er this date are valued on the same terms as those that applied on the date the program was first applied.
Unrealized gains and losses on assets classified as trading or designated at fair value through profit and loss, along with any other entry impacting the income statement and generating a timing difference, are accounted for through the income statement with a corresponding shadow entry adjustment also in the statement of income. The shadow accounting adjustments relating to unrealized gains and losses on assets available for sale (for which change in fair value is taken to shareholders’ equity) are booked through shareholders’ equity.
This category includes mainly Unit-Linked contracts that do not meet the definition of insurance or investment contracts with discretionary participating features. For these Unit-Linked contracts, the liabilities are valued at current unit value, i.e. on the basis of the fair value of the financial investments backing those contracts at the balance sheet date together with rights to future management fees, also known as Deferred Origination Costs (DOC, described in paragraph 1.7.3).
UNEARNED FEES RESERVES Fees received at inception of an investment contract with no discretionary participating features to cover future services are recognized as liabilities and accounted in the income statement based on the same amortization pattern as the one used for deferred origination costs.
If a reinsurance asset is impaired, the Group reduces the carrying amount accordingly and recognizes that impairment loss in the income statement. A reinsurance asset is impaired if there is objective evidence, as a result of an event that occurred aft er initial recognition of the reinsurance assets, that the Group may not receive all amounts due to it under the terms of the contract, and the event has a reliably measurable impact on the amounts that the Group will receive from the reinsurer.
Deferred tax assets and liabilities emerge from temporary diff erences between the accounting and fiscal values of assets and liabilities, and when applicable from tax loss carry forwards. Deferred tax assets are recognized to the extent that it is probable that future taxable profit will be available to off set the temporary diff erences taking into account the existence of tax groups and any legal or regulatory requirements on the limits (in terms of amounts or timing) relating to the carry forwards of unused tax credits. The recoverability of deferred tax assets recognized in previous periods is re-assessed at each closing.
In particular, a deferred tax liability is recognized for any taxable temporary diff erence relating to the value of shares in a consolidated company held, unless the Group controls at what date the temporary diff erence will reverse and it is probable that the temporary diff erence will not reverse in the foreseeable future. If a group company decides to sell its stake in another consolidated entity, the diff erence between the carrying value and the tax value of these shares for the Company that holds them leads to the recognition of deferred tax (including as part of a business combination when the Group as the buyer intends to sell or carry out internal restructuring of the shares following the acquisition). The same approach applies to dividend payments that have been voted or deemed likely, to the extent that a tax on dividends will be due.
The AXA Shareplan issued under a specific French regulatory framework includes a traditional and a leveraged formula (with an application subject to specific local regulations within the Group).
Provisions are recognized when the Group has a present obligation (legal or constructive) as a result of past events, when it is probable that an outflow of resources will be required to settle the obligation, and when the provision can be reliably estimated.
are reinstated under pre-defined contract terms and are fully earned when recognized.
The Group unbundles the deposit component of contracts when required by IFRS 4, i.e. when both the following conditions are met: ■ the Group can measure separately the “deposit” component (including any embedded surrender option, i.e. without taking into account the “insurance” component); ■ the Group accounting methods do not otherwise require the recognition of all obligations and rights arising from the “deposit” component.
1.19.5 Change in unearned premiums reserves net of unearned revenues and fees
Revenue is recognised when the Group satisfies a performance obligation by transferring a service to a customer. In particular, as asset management entities of the Group deliver investment management services to their clients, revenue for providing this service may theoretically occur over-time, with a time-based measure of progress, which is relevant as the service is provided continuously over the contract period. However, according to IFRS 15, revenue is recognised only to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur. As a result, as management fees and performance fees received by the Group are generally calculated based on a percentage of assets under management (AUM), they are considered as variable considerations, which are subject to market volatility and are recognised only when uncertainty is resolved.
The net investment result includes: ■ investment income from investments other than from banking activities, net of depreciation expense on real estate investments (depreciation expense relating to owner occupied properties is included in “administrative expenses”); this item includes interest received calculated using the eff ective interest method for debt instruments and dividends received on equity instruments; ■ investment management expenses (excludes financing debt expenses); ■ realized investment gains and losses net of releases of impairment following sales; ■ the change in unrealized gains and losses on invested assets measured at fair value through profit or loss; and
AXA France Participations New entity c reated to hold some former participations of AXA
United Kingdom & Ireland Guardian Royal Exchange Plc 100.00 99.98 100.00 99.98
South Korea Kyobo AXA General Insurance Co. Ltd. 99.71 99.71 99.71 99.71
(a) XL Group mainly operates in the United States, the United Kingdom, Bermuda, Switzerland, France, Ireland, Singapore, Germany, Australia and Canada.
Malaysia AXA Aff in General Insurance Berhad 50.00 50.00 50.00 50.00
CONSOLIDATED INVESTMENT FUNDS AND REAL ESTATE COMPANIES As of December 31, 2018, investment funds represented a total of €117,337 million invested assets (€123,468 million at the end of 2017), corresponding to 296 investment funds mainly in France, Japan, Germany, Switzerland and Belgium.
Liabilities arising from insurance & investment contracts 24,983 24,621 Other Liabilities 878 955 Total Liabilities (excluding shareholders’ equity) 25,861 25,577
Excluding minority interests related to consolidated investment funds and real estate companies that are classified in shareholders’ equity, these minority interests represent 1% of minority interests of the Group as of December 31, 2018 (76% as of December 31, 2017).
Asia Philippines AXA Life Insurance Corporation 45.00 45.00 45.00 45.00 Krungthai AXA Life Insurance Company Ltd. 50.00 50.00 50.00 50.00 ICBC-AXA Assurance Co. Ltd. 27.50 27.50 27.50 27.50 PT AXA Mandiri Financial Services 49.00 49.00 49.00 49.00
The Group does not hold significant interests in unconsolidated insurance/reinsurance structured entities.
AXA’s Chief Executive Officer (CEO), c hief o perating d ecision Maker, is a member of the Board of Directors. He is assisted by a Management Committee in the operational management of the Group and by a group of senior executives, the so-called Partners’ Group, in developing and implementing any strategic initiatives. The financial information related to AXA’s business segments and Holding companies reported to the Board of Directors twice a year is consistent with the presentation provided in the consolidated financial statements.
Europe: The Europe market consists of Life & Savings and Property & Casualty activities in Switzerland, Germany, Belgium, United Kingdom & Ireland, Spain and Italy. The German bank and the holding companies in these countries are also included in Europe. The direct and traditional entities are reported within their respective countries.
Asia: The Asian market consists of Life & Savings activities in Japan, Hong Kong and Asia High Potentials (Thailand, Indonesia, China and the Philippines) as well as Property & Casualty activities in Hong Kong and Asia High Potentials (Thailand and China). The Asia-Direct entities (Japan and South Korea) and the Asia/Pacific holding are also included.
United States: This segment includes Life & Savings activities in United States, as well as Asset Management services off ered by AB. US holdings are also included.
Transversal & Central Holdings: includes transversal entities namely AXA Investment Managers, AXA Assistance, AXA Liabilities Managers, AXA Global Re, AXA Life Europe, as well as AXA SA and other Central Holdings.
In this document, “Insurance” covers the three insurance activities: Life & Savings, Property & Casualty and Health.
Fees and charges relating to investment contracts with no participating features 1 130 36 - - 82 - - 249 249
of which change in fair value of assets with financial risk borne by policyholders (2,558) (1,168) (785) - (6,109) (29) (55) (2) (10,706) (10,706)
(a) Insurance covers the three insurance activities: Life & Savings, Property & Casualty and Health. (b) Includes gains/losses from derivatives hedging variable annuities within the Life & Savings activity. (c) Includes net realized and unrealized foreign exchange gains and losses relating to investments at cost and at fair value through shareholders’ equity. (d) Mainly related to the VBI impairment related to the Group Life portfolio in Switzerland classified as held for sale.
Other operating income and expenses (24,732) (38,643) (8,407) (6,699) (16,942) (6,651) (3,296) 766 (104,603) (95,766) Income from operating activities before tax 2,328 3,369 1,075 (300) (4,500) 372 (240) (299) 1,805 5,244 Income (net of impairment) from investment accounted for using the equity method 20 (6) 119 (3) - 137 20 - 286 274
Net consolidated income aft er tax 1,640 2,217 994 (447) (4,620) 402 (559) (0) (373) 4,145 Split between: Net consolidated income - Group share 1,635 2,141 987 (428) (1,986) 355 (564) (0) 2,140 4,549 Net consolidated income - Minority interests 5 75 7 (18) (2,634) 47 5 0 (2,513) (404)
Net realized gains and losses and change in fair value of other investments at fair value through profit or loss (d) 1,840 433 1,178 (46) 16,781 241 (127) (0) 20,299 20,420 of which change in fair value of assets with financial risk borne by policyholders 2,085 611 1,308 - 14,912 227 74 (1) 19,215 19,215
Net result from outward reinsurance (275) (300) (78) (300) 296 (149) 46 182 (578) (578)
Amortization of the value of purchased business in force - (25) (14) - (2) (3) - - (44) (44)
(a) Restated: as per the new governance. (b) Insurance covers the three insurance activities: Life & Savings, Property & Casualty and Health. (c) Includes gains/losses from derivatives hedging variable annuities within the Life & Savings activity. (d) Includes net realized and unrealized foreign exchange gains and losses relating to investments at cost and at fair value through shareholders’ equity. (e) Relates to the discontinued operations of AXA Life Europe in the UK and Ireland .
Other operating income and expenses (29,439) (39,888) (10,584) (2,601) (32,350) (7,409) (3,413) 826 (124,857) (120,468) Income from operating activities before tax 1,947 3,377 1,168 105 1,506 333 (332) (368) 7,735 6,949 Income (net of impairment) from investment accounted for using the equity method 22 7 128 - - 91 17 - 265 243
Net operating income 1,426 2,531 1,035 60 1,652 312 (414) - 6,603 6,538 Result from discontinued operations net of tax (e) - 0 - - - - - - 0 0
Net consolidated income aft er tax 1,426 2,531 1,035 60 1,652 312 (414) - 6,603 6,539 Split between: Net consolidated income - Group share 1,420 2,435 1,028 60 1,415 276 (425) - 6,209 6,394 Net consolidated income - Minority interests 6 97 7 0 237 36 11 - 394 145
All of the following paragraphs form an integral part of the Group financial statements. They appear in Section 4 “Risk Factors and Risk Management” and Section 2.4 “Liquidity and capital Resources” of this Annual Report: 4.1 RISK MANAGEMENT ORGANIZATION
Please refer to pages 184 to 189 of Section 4.2 “Internal control and Risk Management” subsections “Risk Management and Internal Control Organisation”, “Financial reporting, disclosure, controls and procedures” and “Conclusion”.
Please refer to pages 91 to 95 of Section 2.4 “Liquidity and capital resources” subsections “Liquidity, sources and needs for Group operating subsidiaries”, “Liquidity position”, “Uses of funds”, “Impact of regulatory requirements” and “Subsequent events aft er December 31, 2018 impacting AXA’s liquidity”.
Asia – Others and International . (c) Includes goodwill from AXA Corporate Solutions Assurance of €35 million.
(a) Restated: as per the new governance. (b) Mainly reallocation from former AXA Direct Cash Generating Units to Property & Casualty (P&C) business impacting the Cash Generating Units of France , Belgium , Italy ,
Spain , Asia – Others and International and reclassification of AXA Wealth Management (HK) Limited to assets held for sale.
METHODOLOGY BY UNIT For most Life & Savings businesses Cash Generating Units (“CGUs”) recoverability of goodwill is assessed using a fair value approach. The recoverability of AXA Belgium and AXA Equitable Holdings, Inc. (“AEH”, see Note 5.3.3 ), is assessed using the value in use approach. Both approaches are described in Note 1.
For the CGUs within the Property & Casualty business segment and for AXA Investment Managers (“AXA IM”), tested separately, recoverability of goodwill is also assessed using the value in use approach, as described in Note 1.
The applicable discount rates have been calculated using the Capital Asset Pricing Model (CAPM) which includes assumptions for risk-free interest rates, equity risk premiums, insurance activity beta and leverage ratio that are consistent with the view of AXA’s Management for the specific market(s) in which the CGU operates. For the main CGUs discount rates range from 5.6% to 8.4% in 2018, compared to a range of 5.4% to 8.2% in 2017, and growth rates, applied beyond the strategic plan horizon, where applicable, vary from 2.4% to 4.2%, compared to a range of 2.3% to 4.2% in 2017.
For Life & Savings CGUs, recoverable amounts are calculated using a risk neutral approach, relying on European Embedded Value (EEV) techniques, that are industry specific and widely used. The EEV represents the excess of the market value of assets over the market value of liabilities. The market value of the liabilities relies on the best estimate which is the probability weighted average of future cash flows adjusted to allow for the time value of money, using the relevant term structure of the risk-free interest rates, as well as for deviations related to nonfinancial risks.
Intangible assets totaling €2,878 million were identified at the date of the acquisition. They mainly included: ■ €1,083 million relating to the value of business acquired, reflecting the fair value of the contracts that have already been underwritten but that are not yet earned. This fair value takes into consideration the expected margins of these contracts calculated as the difference between unearned premium reserves and the sum of claims best estimate and risk margin corresponding to the cost of capital necessary to carry the portfolio. Deferred acquisition costs have been removed from the XL Group balance sheet, as premium reserves are already adjusted to fair value; ■ €1,144 million relating to the distribution network and €427 million attributable to Lloyd’s syndicate capacity intangibles, that were already recognized in XL Group accounts before the acquisition:
• the distribution network represents the future profitability of XL Group existing non-syndicate business, based on customer relationships at the acquisition date,
• the Lloyd’s syndicate capacity represents the value of the broker relationship and indefinite license that allows XL Group to transact business in the Lloyd’s market.
These figures are estimates based on US GAAP financial statements prepared by the previous owner. This information is not necessarily indicative of the results that could have been achieved within the AXA Group if the acquisition had actually taken place on January 1, 2018. In particular, the information does not factor in any synergy, nor does it provide an indication of future results.
The retrospective computation of XL Group net income considers: ■ adjustments relating to the amortization of purchase GAAP items and IFRS accounting diff erences, including in particular, the cancellation of almost all net gains and losses realized during the period and amortization of newly generated intangible assets; ■ the removal of the transaction costs spent before the acquisition.
Roland Rechtsschutz has been fully consolidated in AXA Germany since October 1, 2018. At the date of acquisition, acquired assets and liabilities were adjusted to fair value based on IFRS accounting policies for integration within the Group Consolidated Financial Statements. The badwill resulting from the diff erence between the consideration paid and the abovementioned assets and liabilities adjusted to fair value was fully off set by the revaluation of the stake already held prior to the completion of the transaction.
■ proceeds from the issuance by AXA of mandatory exchangeable bonds exchangeable into AEH shares (“Mandator y Exchangeable Bonds”) with a nominal value of USD 0.9 billion (€0.7 billion).
As AXA keeps control over AXA Equitable Holdings, Inc, this operation is a transaction between shareholders under IFRS 10 with no impact on the consolidated statement of income. As a result, the impact was recognized in consolidated shareholders’ equity for €-2.8 billion. Additionally, the IPO and the secondary off ering resulted in an increase in minority interest in shareholders’ equity of €6.5 billion. Following the IPO and the second off ering, AXA Group’s ownership in AEH was reduced to 59.25% as of November 20, 2018.
Consolidated book value divested excluding other comprehensive income and currency translation reserves (7,329) 7,329
Total Initial Public Off ering and secondary off ering impacts (2,817) 6,463
The Mandatory Exchangeable Bonds are a hybrid instrument with a debt component booked as financial debt corresponding to the present value of the coupons (€122 million – see Note 17.1) and an equity component booked in minority interests for the remaining part (€607 million – see Note 13.3.1).
The IPO of AEH that occurred in May 2018 has provided an external and observable value basis for minority interests in AEH. Furthermore, AXA Group has now changed the manner in which AB and AXA US are expected to be managed in the future aft er AXA Group’s announcement of its intention to fully exit its operations in the US. As a consequence, and in line with the change in legal structure and strategy, AXA Group now combines the AXA US and AB cash generating units in order to perform the recoverability test of the goodwill accounted for in AEH.
Based on these calculations including sensitivities to the above key assumptions, the goodwill of AEH was deemed recoverable as at June 30, 2018. However, given the current uncertainty and volatility surrounding the markets and the completion of the secondary off ering of AEH that took place in November, AXA Group updated its calculations, which resulted in a carrying value of circa €20 per share excluding currency translation adjustments, although several external analyses indicated a higher prospective evolution of the share price. As a result, the goodwill of AEH amounting to €6,329 million has been fully impaired as of December 31, 2018.
5.3.6 AXA to sell its Swiss Privilege franchise in Hong Kong (AXA Wealth Management (HK) Ltd.)
This transaction is in line with the Group’s portfolio simplification, and would allow AXA Hong Kong to focus on its core Life agency and broker channels, while simplifying its corporate structure. AXA remains committed to grow the Life, Health and Property & Casualty businesses in Hong Kong across all customer segments including high net-worth individuals. The price consideration is HKD 2,200 million (or €237 million (1)) to be fully paid at closing, representing an implied 1.4x EV multiple. The operations aff ected by this expected disposal were treated as held for sale in AXA’s consolidated financial statements as of December 31, 2018 and December 31, 2017.
I Note 6 Value of purchased business in-force 6.1 VALUE OF PURCHASED LIFE BUSINESS IN-FORCE
The change in Value of Life Business In-force (“VBI”) was as follows: (in Euro million) 2018 2017
(a) Related to the acquisition of XL Group (see Note 5.3.1).
I Note 7 Deferred acquisition costs and equivalent 7.1 BREAKDOWN OF DEFERRED ACQUISITION COSTS (DAC) AND EQUIVALENT
Deferred Acquisition Costs and equivalent relating to Life & Savings 23,934 20,863
Deferred Acquisition Costs and equivalent relating to Property & Casualty 2,481 2,018
(a) Applicable to Life & Savings insurance contracts and investment contracts with discretionary participation features according to IFRS 4. Amounts are net of accumulated amortization.
Capitalized interests for the period of Life DAC 916 26 910 29
DAC and similar costs capitalization for the period of Life DAC 2,130 26 2,193 35
In 2017, includes the reclassification of AXA Wealth Management (HK) Limited to assets held for sale and Germany pension business ProbAV Pensionskasse AG for which the disposal process was not finalized at year end.
7.3 DEFERRED ACQUISITION COSTS AND EQUIVALENT, NET OF AMORTIZATION, UNEARNED REVENUE RESERVES AND UNEARNED FEE RESERVES
DAC net of unearned revenues and unearned fees reserves 23,327 367 19,867 416
I Note 8 Other intangible assets 8.1 BREAKDOWN OF OTHER INTANGIBLE ASSETS
AXA MPS (Italy) Life & Savings 2007 & 2008 592 - - 592 592 - - 592
AXA MPS (Italy) Property & Casualty 2007 & 2008 347 - - 347 347 - - 347
(a) In 2018, mainly includes €1,656 million related to the acquisition of XL Group . In 2017, includes €29 million in Brazil due to Pernambucanas agreement and €14 million in Singapore Life from DBS bank agreement.
Each investment item is presented net of the eff ect of related hedging derivatives (IAS 39 qualifying hedges or economic hedges) except derivatives related to macro-hedges which are shown separately. Detailed eff ects of derivatives are also provided in Note 20.3.
Investment in real estate properties at amortized cost (a) 28,461 19,504 2.76% Investment in real estate properties designated as at fair value through profit or loss (b) 1,435 1,435 0.20% Macro-hedge and other derivatives - - Investment in real estate properties 29,896 20,939 2.96%
Non consolidated investment funds available for sale 7,425 7,425 1.05% Non consolidated investment funds designated as at fair value through profit or loss (b) 5,361 5,361 0.76% Non consolidated investment funds held for trading 250 250 0.04% Non consolidated investment funds 13,036 13,036 1.85%
Loans held to maturity - - Loans available for sale 0 0 0.00% Loans designated as at fair value through profit or loss (b) - - Loans held for trading - - Loans at cost (e) 34,087 33,592 4.76% Macro-hedge and other derivatives - - -
Investments (excluding those backing contracts where the financial risk is borne by policyholders) 555,881 546,276 77.33%
Investment in real estate properties designated as at fair value through profit or loss (b) 1,456 1,456 0.20%
Debt instruments (at cost) that are not quoted in an active market (d) 8,350 8,130 1.14%
Equity instruments designated as at fair value through profit or loss (b) 8,809 8,809 1.24%
Non consolidated investment funds designated as at fair value through profit or loss (b) 3,858 3,858 0.54%
Investments (excluding those backing contracts where the financial risk is borne by policyholders) 547,125 536,355 75.40%
Non consolidated investment funds available for sale 6,774 7,425 7,425 741 90 8,000 9,118 9,118 1,227 109
Debt instruments (at cost) that are not quoted in an active market 938 938 938 - 0 997 997 997 0 -
Equity instruments available for sale 1,030 1,466 1,466 451 15 844 1,073 1,073 257 28
(a) Net of impairment – including premiums/discounts and related accumulated amortization. (b) Net of impairment.
Government and government like debt instruments 231,059 231,176 Other debt instruments issued by government related 17,064 9,758 Corporate debt instruments (a) 199,752 190,193 Other debt instruments (b) 156 322 Hedging derivatives and other derivatives (2,272) (1,818) TOTAL DEBT INSTRUMENTS 445,759 429,632
The table below sets out the loans portfolio other than insurance activities, excluding macro-hedging derivatives but including the eff ect of related hedging derivatives (IAS 39 qualifying hedges or economic hedges).
Total Financial investments exposed to interest rate risk 35,083 125,552 349,067 509,702 (2,720) 506,982 32,692 120,744 336,249 489,684 (2,201) 487,484 o f which Financial investments exposed to fair value interest rate risk 32,586 112,885 327,949 473,420 29,770 108,272 315,432 453,473
Equity instruments as of December 31, 2018 8,978 6,637 741 1,290 2,550 932 1,453 2,490 25,072 (35) 25,036
The Group is part of repurchase agreements and securities lending transactions under which financial assets are sold to a counterparty, subject to a simultaneous agreement to repurchase these financial assets at a certain later date, at an agreed price. While substantially all of the risks and rewards of the financial assets remain with the Group over the entire lifetime of the transaction, the Group does not derecognize the financial assets. The proceeds of the sale are reported separately. Interest expense from repurchase and security lending transactions is accrued over the duration of the agreements.
Carrying value of associated liabilities (a) - 35,658 66 - 31,153 100
Non consolidated investment funds mainly holding equity securities 2,605 470 3,075 2,359 698 3,057
Non consolidated investment funds mainly holding debt instruments 3,897 41 3,939 3,622 0 3,622
The amortized cost of non consolidated investment funds available for sale was as below: ■ funds mainly holding equity securities: €1,566 million in 2018 compared to €1,103 million in 2017; ■ funds mainly holding debt instruments: €2,702 million in 2018 compared to €2,872 million in 2017; ■ other funds: €2,603 million in 2018 compared to €4,121 million in 2017 .
Debt instruments available for sale 364,973 (78) 364,895 33,938 398,833 342,096 (243) 341,853 43,074 384,927
Equity instruments available for sale 17,104 (2,733) 14,371 2,226 16,597 17,056 (2,280) 14,775 4,759 19,534
Impairment – Non consolidated investment funds 1,126 56 (34) - (64) 1,084
Financial investments and loans available for sale 328,779 91,518 4,992 425,290 422,954 301,740 109,437 4,524 415,701 413,689
Financial investments and loans held for trading 753 427 19 1,198 1,059 609 523 2 1,134 1,183
TOTAL FINANCIAL INVESTMENTS AND LOANS ACCOUNTED FOR AT FAIR VALUE 360,546 112,323 20,179 493,048 490,771 334,726 129,994 17,298 482,017 480,185
Methods applied to determine the fair value of investments measured at fair value in the consolidated F inancial S tatements are described in Note 1.5. The Group applies the IFRS 13 fair value hierarchy.
TRANSFER IN AND OUT OF THE LEVEL 3 CATEGORY AND OTHER MOVEMENTS From January 1, 2018 to December 31, 2018, the amount of level 3 assets increased to €20.1 billion, representing 4.1% of the total assets at fair value (3.6% in 2017 i.e. €17.3 billion).
Main movements related to level 3 assets to be noted were the following: ■ €+4.3 billion of new investments; ■ €+1.0 billion of change in unrealized gains and losses; ■ €+0.2 billion of net asset transfers in and out of level 3 and foreign exchange fluctuation impact; ■ €-2.6 billion of asset sales, redemptions and settlements mainly of debt instruments, equity securities and non-conso investment funds accounted as available for sale and of equity securities, non-conso investment funds, other assets held by controlled investment funds and debt instruments accounted as fair value through P&L.
Financial investments and loans held to maturity - - - - - - - - - -
Debt instruments at cost (loans & receivables) 221 7,340 2,722 10,283 10,284 299 6,062 3,013 9,375 9,347
Financial investments and loans at amortized cost 269 68,214 40,022 108,506 108,021 343 66,677 39,589 106,609 105,351
9.11 INVESTMENTS BACKING CONTRACTS WHERE THE FINANCIAL RISK IS BORNE BY POLICYHOLDERS
As mentioned in Section 1.2. “General accounting principles”, in the context of IFRS 9 implementation, the Group has determined that it is eligible for the temporary exemption option, introduced by the amendment to IFRS 4 – Insurance Contracts, until the earlier of annual reporting periods beginning on or after January 1, 2022. During this deferral period, additional disclosures related to SPPI criterion (Solely Payments of Principal and Interest) and to credit risk exposure are required.
To determine the appropriate classification of financial assets under IFRS 9, an entity would need to assess the contractual cash flows characteristics of any financial asset. Indeed, the contractual terms of the financial asset give rise, on specified dates, to cash flows that are solely payments of principal and interest on the principal amount outstanding (“SPPI”) i.e. cash flows that are consistent with a basic lending arrangement. In a basic lending arrangement, consideration for the time value of money and credit risk are typically the most significant elements of interest.
The tables below set out the result of the SPPI test for the assets not currently designated as at fair value with change in fair value through income statement, with a split between Insurance and Other activities.
Each investment item is presented gross of tax and excluding the eff ect of related hedging derivatives (IAS 39 qualifying hedges or economic hedges) and the potential impact resulting from the application of the future IFRS 17 standard on insurance contracts that will avoid accounting mismatches in particular for contracts eligible to the Variable Fee Approach measurement model.
Non consolidated investment funds available for sale 98 (13) - - 110 (1) - -
Non consolidated investment funds available for sale 7,517 (254) - - 9,226 206 - -
Debt i nstruments held to maturity 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Debt i nstruments available for sale 80,997 98,087 84,834 88,036 4,310 5,535 361,800 75,193 96,264 74,787 81,930 4,781 5,340 338,295
Debt instruments (at cost) not quoted in an active market 76 1,699 1,086 2,278 411 4,581 10,131 1,033 958 526 2,434 393 3,812 9,156
Total Gross Carrying amount of debt instruments that pass the SPPI test 81,073 99,786 85,921 90,313 4,721 10,117 371,931 76,226 97,223 75,312 84,364 5,174 9,152 347,450
Fair v alue of debt instruments that pass the SPPI test
Debt instruments (at cost) not quoted in an active market 68 1,734 1,101 2,316 414 4,651 10,283 1,056 1,028 545 2,486 397 3,863 9,375
For loans, the credit risk information is available through three categories: rating grades, range of probability of default (PD, scoring) which is issued by AXA banking entities and past due information.
Fair value of loans that pass the SPPI test Fair value of loans that pass the SPPI test
AXA SPDB Investments Managers Company Limited 32 - 15 (1) 75 122
AXA Mansard Insurance plc (P&C including Assur African Holding) 74 - 0 3 (0) 77
Krungthai AXA Life Insurance Company Ltd 176 - 59 (7) (48) 181
Bharti AXA General Insurance Company Limited 34 - (8) (2) 0 25
Kyobo AXA Investment Managers Company Limited 33 - 3 (0) (3) 33
AXA Mansard Insurance plc (P&C including Assur African Holding) 85 - 7 (21) 2 74
Total liabilities (including financing debts but excluding shareholders’ equity) 7,095 949 6,026 1,116
Change in unearned premiums net of unearned revenues and fees 1 89 (8) 21
Dividends received by AXA from the joint venture - - 48 -
Disclosures about the temporary exemption from IFRS 9 for ICBC-AXA Assurance Co. Ltd.
Debt i nstruments held to maturity 0 0 0 0 0 0 0 0
Debt i nstruments available for sale 0 0 2,047 213 0 0 2,464 (189)
Debt instruments (at cost) not quoted in an active market 888 0 1,992 0 798 0 2,241 0
This Note excludes investment funds and real estate companies accounted for using the equity method, which are presented as financial investments (Note 9).
Current accounts receivables from other Companies 1,928 (4) 1,923 1,923 1,104 (4) 1,100 1,100
Receivables from policyholders, brokers and general agents 14,941 (511) 14,431 14,431 8,393 (426) 7,967 7,967
Receivables arising from outward reinsurance operations 2,012 (68) 1,944 1,944 1,074 (61) 1,013 1,013
The table below reconciles assets and liabilities cash and cash equivalent balances with the statement of consolidated cash flows: (in Euro million) December 31, 2018 December 31, 2017
Cash and cash equivalents as of December 31 (b) 30,556 23,196
(a) Included in “Other debt instruments issued and bank overdraft s”. (b) The “Cash and cash equivalents” item excludes cash backing contracts where the financial risk is borne by policyholders (U nit-L inked contracts).
Regarding the consolidated statement of cash flows presented together with the primary financial statements, net cash provided by operating activities totaled €7,634 million in 2018, compared to €16,521 million in 2017.
Net cash used in investing activities was €-2,124 million in 2018, mainly reflecting: ■ €-9,247 million of net of cash acquired used in purchase of XL Group; ■ €+4,015 million of net cash used in purchases and sales of financial invested assets; ■ €+3,962 million of net cash impact of assets lending/borrowing collateral receivables and payables.
13.1.1 Change in S hareholders’ equity G roup share in 2018
SHARE CAPITAL AND CAPITAL IN EXCESS OF NOMINAL VALUE During 2018, the following transactions had an impact on AXA’s share capital and capital in excess of nominal value: ■ a capital increase of €1,016 million from the merger of AXA France Assurance took over by AXA SA; ■ a capital increase of €329 million from the employee share off ering of 15.4 million shares in December 2018; ■ a capital increase of €38 million due to the exercise of stock options; ■ share-based payments for €39 million; ■ a capital decrease of €429 million corresponding to 18.4 million shares in order to eliminate the dilutive eff ect of share-based compensation schemes (AXA SA’s stocks options, performance shares plans and share plan).
TREASURY SHARES As of December 31, 2018, the Company and its subsidiaries owned 41.6 million AXA shares, representing 1.7% of the share capital, a decrease of 0.2 million shares compared to December 31, 2017.
UNDATED SUBORDINATED DEBT AND RELATED FINANCIAL EXPENSES As described in the accounting principles, undated subordinated debt instruments issued by the Group do not qualify as liabilities under IFRS.
TREASURY SHARES As of December 31, 2017, the Company and its subsidiaries owned 41.8 million AXA shares, representing 1.7% of the share capital, an increase of 36 million shares compared to December 31, 2016.
As of December 31, 2017, the carrying value of treasury shares and related derivatives was €1,060 million. There was no AXA shares held by consolidated Mutual funds not backing contracts where financial risk borne by policyholders.
UNDATED SUBORDINATED DEBT AND RELATED FINANCIAL EXPENSES In 2017, the following transactions pertaining to undated subordinated debt had an impact on AXA’s other reserves: ■ €-331 million from repayment of undated subordinated debt; ■ €-385 million from foreign exchange rate fluctuations; ■ €-229 million from interest expenses related to the undated subordinated debt (net of tax).
The Statement of Comprehensive Income, presented as primary financial statements, includes net income for the period, the reserves relating to the change in fair value of available for sale financial instruments, the translation reserve, and actuarial gains and losses on employee benefit obligations.
Less unrealized gains and losses attributable to: Shadow accounting on policyholder participation and other obligations (22,154) (27,019)
UNREALIZED GAINS AND LOSSES (NET OF TAX) - 100% - TOTAL 11,831 16,194
In jurisdictions where participating business represents an important portion of contracts in force and where required minimum local policyholders’ share in the entities’ results (limited to investment result or not) are significant, the reconciliation between gross unrealized gains and losses on available for sale financial assets and the corresponding net reserve recognized in shareholders’ equity were as follows as of December 31, 2018: (in Euro million)
Less unrealized gains and losses attributable to: Shadow accounting on policyholders’ participation and other obligations (11,311) (5,563) (1,759) (1,851)
Shadow accounting on Value of purchased Business In force - - (93) (5)
Unallocated unrealized gains and losses before tax 3,442 981 851 2,799
Unrealized gains and losses (net of tax) - Assets available for sale 2,583 691 681 2,087
UNREALIZED GAINS AND LOSSES (NET OF TAX) - 100% - TOTAL 2,541 691 681 2,087
(a) Unrealized gains and losses on total available for sale invested assets including loans and assets held for sale. (b) Net of shadow accounting on unearned revenues and fees reserves. (c) Including foreign exchange impact attributable to minority interests. (d) Group share.
Unrealized gains and losses (net of tax) 100%, opening 16,19 4 15,376
Investments bought in the current accounting period and changes in fair value (3,715) 2,177
CURRENCY TRANSLATION RESERVE The total impact of foreign exchange rate movements was €+1,552 million (of which €+1,869 million from Group share and €-319 million from minority interests) as at December 31, 2018.
The change in Group share translation reserves (€-4,588 million) was mainly driven by the the United States (€-1,967 million), Switzerland (€-953 million), Asia (€-628 million), Japan (€- 571 million), AXA IM (€-227 million) and International (€- 198 million).
EMPLOYEE BENEFITS ACTUARIAL GAINS AND LOSSES The total impact of employee benefits actuarial gains and losses amounted to €+408 million (of which Group share was €+405 million and minority interests were €+3 million) as of December 31, 2017.
Total insurance and investment liabilities (D = A+B+C) 174,956 210,961 61,039 46,553 168,917 13,850 1,942 678,219
TOTAL INSURANCE AND INVESTMENT LIABILITIES NET OF REINSURER’S SHARE (F = D-E) 170,392 209,703 60,788 32,913 163,667 12,794 2,211 652,468
(a) Other liabilities was comprised of Unearned revenue and unearned fee reserves, liabilities arising from policyholders’ participation and other obligations, and derivatives instruments relating to insurance and investment contracts.
Total insurance and investment liabilities (D = A+B+C) 176,040 234,767 56,371 6,484 166,575 13,665 3,036 656,938
TOTAL INSURANCE AND INVESTMENT LIABILITIES NET OF REINSURER’S SHARE (F = D-E) 171,267 233,629 56,107 4,504 162,670 12,610 3,070 643,857
Liabilities arising from investment contracts where the financial risk is borne by policyholders 14,532 - 14,532 15,896 - 15,896
Unearned revenue and unearned fee reserves 2,711 10 2,722 2,586 12 2,598
Reinsurers’ share in insurance contract liabilities relating to policyholders’ participation 1 22 23 1 9 10
Reinsurers’ share in liabilities arising from investment contracts 91 - 91 69 - 69
Total reinsurers’ share in insurance and investment contracts liabilities (E) 12,371 13,380 25,751 8,342 4,739 13,081
TOTAL INSURANCE AND INVESTMENT LIABILITIES NET OF REINSURERS’ SHARE (F = D-E) 561,198 91,270 652,468 581,953 61,904 643,857
Liabilities arising from insurance contracts where the financial risk is borne by policyholders (B) 146,058 - 146,058 159,702 - 159,702
Sub-total Liabilities arising from insurance contract (C = A+B) 479,746 103,327 583,073 494,615 66,216 560,831
Reinsurers’ share in unearned premiums reserves 49 2,705 2,754 45 805 850
Reinsurers’ share in liabilities arising from insurance contracts where the financial risk is borne by policyholders (E) 0 - 0 0 - 0
TOTAL LIABILITIES ARISING FROM INSURANCE CONTRACTS, NET OF REINSURERS’ SHARE (G = C-F) 467,466 89,970 557,436 486,343 61,486 547,828
Sub-total liabilities arising from investment contract (D = A+B+C) 53,593 51,995
Reinsurers’ share in liabilities arising from investment contracts with discretionary participating features (E) 88 65
Reinsurers’ share in liabilities arising from investment contracts where the financial risk is borne by policyholders (G) 3 4
TOTAL LIABILITIES ARISING FROM INVESTMENT CONTRACTS – NET OF REINSURERS’ SHARE (I = D-H) 53,502 51,926
Note: Liabilities relating to unearned revenues and fees (see Note 7.3), to policyholders’ participation (see Note 14.9), and derivative instruments (see Note 20.4), are excluded from the table above. Reinsurance’s share in investments contracts liabilities relating to policyholders’ participation (none in 2018 and 2017), as well as derivatives instruments (none in 2018 and 2017) are excluded from the table above.
Change in scope of consolidation and change in accounting method 27,430 73
(a) Excluding “other policy benefits liabilities” (mainly mathematical annuity reserves), which totaled €5.3 billion in 2018 and €5.2 billion in 2017. (b) Excluding claims handling expense reserves.
Change in scope of consolidation, portfolio transfers, change in accounting principles and other changes 6,014 (151)
Surrenders, maturities and other claims and benefits paid net of charges and penalties (-) (52,390) (5,190) (57,581) (49,363) (5,322) (54,686)
Change in reserves relating to technical and actuarial items (+/-) (b) 6,130 880 7,011 4,816 2,467 7,283
Change in scope of consolidation, portfolio transfers and change in accounting principles (19,828) 111 (19,717) (2,710) (216) (2,926)
Impact of foreign currency fluctuation 13,121 321 13,442 (32,427) (830) (33,257)
Technical reserves as of December 31 (a) 479,746 52,729 532,475 494,615 51,995 546,610
(Non Unit-Linked) – Liabilities arising from: Investment contracts with Discretionary Participation Features (DPF) measured according to existing accounting policies (a) (d) 34,225 33,199 Investment contracts with Discretionary Participation Features (DPF) measured with current assumptions (b) - Investment contracts with no Discretionary Participation Features (DPF) measured according to existing accounting policies 4,837 2,900 (Unit-Linked) – Liabilities arising from contracts where financial risk is borne by policyholders: Investment contracts with Discretionary Participation Features (DPF) measured according to existing accounting policies (a) (c) 2,785 3,637 Investment contracts with no Discretionary Participation Features (DPF) measured at current unit value (d) 11,747 12,260 TOTAL LIABILITIES ARISING FROM INVESTMENT CONTRACTS 53,593 51,995
(b) See Note 1.14.2 – Reserves measured according to IFRS 4.24 option which allows to evaluate certain portfolios with current assumptions. (c) & (d) As unit-linked contracts reserves are measured on the basis of held asset units fair value (“current unit value”).
Only the valuation of related assets is diff erent: ■ for U nit-L inked contracts with a discretionary participating feature (c), an asset representing the deferred acquisition costs is recognized in continuity with previous accounting policies; ■ for U nit-L inked contracts with no discretionary participating feature (d), an asset representing the rights to future management fees is recognized in accordance with
In the context of the current IFRS 4, the IASB acknowledged the diff iculties involved in the recognition and the measurement of discretionary participating features included in insurance or investment contracts. The IASB issued guidance to measure fair value but with no principles addressing policyholder participation features. It would therefore be premature to interpret this definition before the implementation guidance of the future standard IFRS 17 (see Note 1.2) clarified it .
The first line labelled “Gross reserves for unpaid claims and claim expenses developed initially at the booking date” represents the loss reserves developed in the Group’s balance sheet on the reporting date for the year indicated in the column heading. For example, the amount of €44,046 million appearing in the first line of the table in the 2008 column represents all loss reserves developed in all years of occurrence prior to and including 2008, recognized on the Group’s balance sheet as of December 31, 2008.
The surplus (shortfall) of the initial reserve with respect to the re-estimated (gross) final cost for each year represents, for a given year N, the diff erence between the amount shown in the second line (gross reserves for unpaid claims and claims expenses developed in 2018 adjusted for changes in exchange rates and scope of consolidation) and the amount shown in the final diagonal under “Reserve re-estimated”.
Cumulative redundancy (deficiency) from the initial gross reserves in excess of re-estimated gross reserves (e): (a) In accordance with IFRS 3, i.e. within 12 months following the acquisition date, the Group adjusted certain items impacting the allocation of Seguros ING (Mexico) purchase price, resulting in a €33 million increase in the goodwill to €512 million. Most of this increase in goodwill was due to adjustments to provisions for liabilities and claims reserves.
(d) Amounts prior to 2015 contains the Life & Savings entities historically reported in the International Insurance segment. (e) It is not appropriate to extrapolate future redundancies or future deficiencies based on the loss reserves development presented in the table, as conditions and trends that have aff ected development of the liability in prior periods may not necessarily occur in the future periods. Redundancy or deficiency disclosed includes forex impact between one year and the next. This line also includes the impact of the unwind of discount rate on annuities for an amount of €119 million for 2013.
The gross developed reserves and total gross recognized claims reserves and the other reserves arising from insurance contracts for the segment AXA XL during 2018 amounts €34,527 million. The net developed reserves and total net recognized claims reserves and the other reserves arising from insurance contracts for the segment AXA XL during 2018 amounts €25 ,613 million.
Property & Casualty (a) 82,134 52,973 of which future policy benefit annuity reserves 4,830 4,815 of which construction reserves (PSNEM) 1,946 1,897
AXA continues to receive claims from policies written in prior years asserting damages from asbestos-related exposures.
The calculation of reserves for asbestos risks raises specific diff iculties as conventional reserving techniques cannot be used for evaluating IBNR. AXA evaluates the future cost of those claims using a range of specific methods based either on exposure analysis, frequency/cost projections or reserving benchmarks. Asbestos reserves are reviewed on a yearly basis to ensure that they adequately reflect the latest claims experience, as well as legal and economic developments. Consistent with AXA’s reserving practices, and despite the particularly long-tail nature of those risks, reserves for asbestos are undiscounted.
AXA held total reserves for asbestos exposure (net of reinsurance) of €432 million at year-end 2018. The reserve decrease by €400 million and is mainly driven by the sale of the UK asbestos portfolio to a third party company by €397 million partly off set by the XL Group acquisition that increased asbestos exposure by €128 million. On a comparable basis, restated from the sale of the UK asbestos portfolio, the 3-Year survival ratio excluding commutations in 2017 would have been 16 years (compared to 15 years in 2018), and the IBNR / case reserves ratio would have been 316% (compared to 2 42% in 2018) and cumulative Payments to date / Projected Ultimate Cost would have been 58% (compared to 71% in 2018).
The decrease of respectively the IBNR/Case Reserves and survival ratio comes from the shift of AXA asbestos exposure from the UK exposure to the US and Rest of the World exposures that usually have lower such ratios.
The following table shows liabilities and assets arising from policyholder participation and other obligations as of December 31, 2018: (in Euro million)
The projections shown below cannot be compared with the reserves carried on the balance sheet and are higher than the published balance sheet figures because they represent expected cash flows without the impact of discounting. They are also shown net of inflows of periodical premiums payable by policyholders.
As shown in the table below, as at December 31, 2018: 86 % of Life & Savings reserves (excluding unit-linked contracts) were discounted, of which 16% were subject to a revision of the discount rate and 70 % retained the rate set at inception, subject to the liability adequacy test described in Note 1.
By convention, contracts with zero guaranteed rates are deemed undiscounted, except for products off ering guaranteed rates updated annually and for one year: these contracts are presented in discounted reserves. Reserves for savings contracts with non-zero guaranteed rates are discounted at the technical restatements at closing mainly consist of reserves for guarantees (Guaranteed Minimum Death Benefits, etc.).
Life & Savings - unlocked discount rate 59,282 2.73% 54,964 2.62%
AXA sells insurance contracts that contain a variety of options and guarantees for contract-holders. These features are described in Note 4. They are not embedded derivatives which AXA reports separately at fair value because: ■ many of the features would be considered clearly and closely related to the host contract; and
GMDB features provide a guaranteed death benefit which may be higher than the contract account balances of the unit-linked contract, depending on performance of the Unit-Linked assets. GMIB features provide a guaranteed lifetime annuity which may be elected by the contract-holder after a stipulated waiting period, and which may be larger than what the contract account balance could purchase at then-current annuity purchase rates.
Liabilities arising from investment contracts with no discretionary participating features (as per Note 14.3) 4,837 2,900
Guaranteed annuity purchase rates provide contract-holders with a guarantee that at a future date the accumulated balance on their contract will be suff icient to purchase a lifetime annuity at currently defined rates. The risk to AXA in these features is either that longevity will improve significantly so that contract-holders electing to exercise this benefit will live longer than assumed in the guaranteed purchase rates, or that investment returns during the payout period will be lower than assumed in the guaranteed purchase rates. Reserves are established for these features on the basis of actuarial assumptions related to projected benefits and related contract charges. The determination of this estimated liability is based on models which involved numerous estimates and subjective judgments, including those regarding expected rates of return and volatility, policyholders’ behaviour assumptions, mortality, and benefit election rates. There can be no assurance that ultimate experience will not diff er from management’s estimates. In addition to providing for risk through establishing reserves, AXA also manages these risks through asset-liability management programs including derivatives to protect against a decline in interest rates.
Banking liabilities issued at fair value – Retail customers 129 1,004 991 2,125 53 1,114 1,543 2,710
Other liabilities arising from banking activities 554 2,378 1,504 4,436 42 2,127 1,000 3,169
I Note 16 Provisions for risks and charges 16.1 BREAKDOWN OF PROVISIONS FOR RISKS AND CHARGES
As of December 31, 2018, the “Other provisions for risks and charges” mainly included provisions for tax liability (€862 million)
principally in the United States (€524 million) and Germany (€162 million). Other provisions for risks and charges other than provisions for tax liability amounted to €1,080 million mainly in France (€254 million), Switzerland (€172 million), Germany (€147 million), AXA SA (€119 million) and Belgium (€100 million).
Derivatives relating to subordinated debts (a) (324) (655) Subordinated debt, 3.375%, due 2047 (in Euro) 1,500 1,500 Undated Subordinated Notes, US$850M, 4.5% 742 709 Subordinated Notes, 5.125%, due 2047 (in US$) 873 834 Subordinated Notes, 3.25%, due 2049 (in Euro) 2,000 AXA XL 1,385 Subordinated Notes, 4.45%, due March 2025 (in US$) 437 Subordinated Notes, 5.5%, due March 2045 (in US$) 448 Subordinated Notes, 3.25%, due March 2025 (in Euro) 501 AXA Bank Belgium 26 38 Subordinated debt maturity below 10 years fixed rate 11 22 Undated Subordinated debt fixed rate 16 17 AXA Italy 67 69 Subordinated Notes, EURIBOR 6 months +81bps 67 69 Other subordinated debt (under €100 million) 39 28 Subordinated debt 10,876 7,086
Debt component of bonds mandatorily exchangeable into shares of AXA Equitable Holdings, Inc 122 Euro Medium Term Note, due 2028 500 500 AXA XL 607 Senior Notes, 6.25%, due May 2027 (in US$) 322 Senior Notes, 5.25%, due December 2043 (in US$) 285 AXA Financial 3,594 291
AXA UK Holdings 168 170 GRE: Loan Notes, 6.625%, due 2023 168 170 Other financing debt instruments issued (under €100 million) 104 52 Other financing debt instruments issued (under €100 million) 104 94 Derivatives relating to other financing debt instruments issued (a) (1) (42) Financing debt instruments issued 5,096 1,013
(a) Debt from the acquisition of XL Group including €1,377 million subordinated debt, €1,576 million financing debt and €1,397 million preferred shares.
Inc. for €3,031 million and in AXA SA for €1,561 million and in the context of the acquisition of XL Group for €1,974 million.
Other debt instruments issued, notes and bank overdraft s 7,104 6,651
Collateral debts relating to investments under lending agreements and equivalent (b) 32,814 28,401
“Collateral debts relating to investments under lending agreements and equivalent” totaled €32,814 million as of December 31, 2018, an increase of €4,413 million compared to December 31, 2017, mainly due to activities in France and Belgium, partially off set by those in the United States.
18.2 OTHER DEBT INSTRUMENTS ISSUED, NOTES AND BANK OVERDRAFTS (OTHER THAN FINANCING DEBT) BY ISSUANCE
AXA Financial (Delayed draw term loan, 3 month LIBOR + 1.125%, due 2021 (in US$) 262 -
Collateralized debt – JPY Libor 3M + 4bps annual interest – maturity March 27, 2021 150 139
OTHER DEBT (OTHER THAN FINANCING DEBT) – OWED TO CREDIT INSTITUTIONS 1,460 734
OTHER DEBT INSTRUMENTS ISSUED, NOTES AND BANK OVERDRAFTS EXCLUDING TRS 2,739 3,043
Deferred tax assets recognized on tax losses of prior years (9) (30)
Deferred tax assets not recognized on tax losses of the year 79 31
Effective tax rate stood at 119% in 2018 versus 15% in 2017. The 104 points increase is mainly explained by exceptional €6,328 million impairment of the United States Goodwill and is detailed as follows (excluding this goodwill impairment, the eff ective tax rate would have stood at 22%): ■ impact of permanent differences (€+1,345 million) mainly represented the impact in some countries of non-taxable dividends and realized capital gains on equity instruments, partly compensated by non-deductible impairment on financial assets and realized capital losses on equity instruments. The change was mainly driven by the above mentioned goodwill impairment in the United States (impact of €1,100 million); ■ impact of rate differences on notional tax charges (€+731 million) corresponded to the diff erence between the expected tax calculated at each entity level with the applicable standard rate and the tax calculated using the 34.43% French tax rate applicable to the Company. This tax rate is composed of a basic tax rate (33.33%) and a social contribution (1.1%). The blended standard rate was 59% in 2018 and 29% in 2017. The increase was mainly driven by the above mentioned goodwill impairment in the United States. Excluding this impact, the blended rate would have been 27%; ■ adjustments of tax relating to prior years (€+337 million) were mainly driven by the non-repeat of 2017 favorable settlement related to past tax audit in the United States as well as the refund of the 3% dividend tax in France; ■ impact of the change in tax rate mainly corresponded to tax reforms in France, the United States and Belgium enacted in 2017. In 2018, it also included the cantonal tax reform in Switzerland.
DTL disclosed in these tables corresponds to the deferred tax before the netting that occurs for balance sheet presentation purposes as required by IAS 12. Net deferred tax balances are broken down as follows: (in Euro million)
As of December 31, 2018, the €15,932 million DTA were mainly related to entities located in France (€5,989 million), Germany
The €15,932 million DTA included €1,008 million of DTA on tax losses carried forward as of December 31, 2018, of which €509 million for the French Tax Group.
DTA recognized on tax losses carried forward 230 257 195 153 117 24 24 9 - 1,008
DTA recognized on tax losses carried forward 2 0 4 1 1 2 66 148 783 1,008
As of December 31, 2017 , the €4,947 million net DTL position included €16,814 million DTA of which €923 million DTA on tax losses carried forward of which €568 million for the French Tax Group.
DTA recognized on tax losses carried forward 288 225 222 68 61 13 16 29 - 923
The amount of the potential DTA which has not been recorded in the accounts at the end of the year as considered unrecoverable amounted to €764 million (€237 million in 2017) of which: ■ €556 million concerned unrecognized DTA on €2,771 million tax losses carried forward (€170 million DTA on €913 million tax losses carried forward in 2017). The major part of these losses occurred in countries where losses can be carried forward without time limit (€2,154 million in 2018 and €730 million in 2017); ■ €207 million related to other unrecognized deferred tax assets (€66 million in 2017).
The significant increase in unrecognized DTA was mainly driven by the XL Group acquisition with a total of €312 million non recognized DTA on tax losses carried forward and €199 million related to other unrecognized deferred tax assets.
Note: This table includes all derivatives (assets and liabilities) as described in Note 1.10, i.e. hedge, macro-hedge and other asset or liability positions. (a) By convention, notional amounts are displayed in absolute value, and exclude potential netting out.
As of December 31, 2018, the notional amount of all derivative instruments totaled €457.9 billion (€467.2 billion at the end of 2017). Their net fair value totaled €318 million as of December 31, 2018 (€2,515 million at the end of 2017), comprised of the fair value of derivatives on invested assets (€-1,800 million and €-1,354 million at the end of 2017 – see Note 20.3) and the fair value of derivatives on liabilities (€-2,285 million and €-3,869 million at the end of 2017 – see Note 20.4).
In 2018, the use of derivatives within the Group decreased overall by €9.2 billion in terms of notional amount for the main reasons listed below (see also details in Note 20.2.1.): ■ notional amount of interest rates derivatives decreased by €30.7 billion mainly due to (i) the reclassification of AXA Life Europe as held for sale, and (ii) the decrease of interest rate derivatives mainly in the Company driven by the unwind of the EUR Interest Rate Swaps tactical portfolio which aimed to benefit from a steepening of the EUR curve; ■ notional amount of credit derivatives decreased by €1.7 billion explained by the unwind of some n egative b asis t rade strategies; ■ notional amount of equity derivatives increased by €5.4 billion mainly in the Company through equity optional strategies implemented during 2018 to support Group solvency; ■ notional amount of currency derivatives increased by €19.0 billion compared to 2017 mainly explained by the increase in the Company to protect the value of AXA Equitable Holding, Inc. shares against foreign risk and the model transformation of the Swiss Group Life business.
As of December 31, 2018, the notional amount of interest rate derivative instruments totaled €200.3 billion (€231.1 billion at the end of 2017). Their net fair value as of December 31, 2018 totaled €1,007 million (€1,725 million at the end of 2017). AXA mainly uses (i) interest rate swaps (57% of total notional amount of interest rate derivative instruments), (ii) interest rate options (22%), and (iii) futures and forwards (18%).
These instruments are mainly used to: ■ hedge interest rate risk and interest volatility risk as part of the Asset Liability Management strategy associated with the guaranteed minimum benefits on Variable Annuity products, with notional amount of €25.4 billion at the end of 2018 (€53.3 billion at the end of 2017) mainly in the United States (notional amount of €20.8 billion at the end of 2018 versus €22.5 billion at the end of 2017, this strategy also includes €12.8 billion of interest Total Return Swaps classified as Other derivatives instruments at the the end of 2018 versus €12.6 billion at the end of 2017), and in Switzerland (notional amount of €2.1 billion at the end of 2018 versus €1.6 billion at the end of 2017); ■ manage duration gap and/or hedge convexity risk between assets and liabilities on the General Account as a part of Asset Liability Management strategies mainly in France for €61.5 billion (versus €60.7 billion at the end of 2017), Japan for €17.3 billion at the end of 2018 (versus €16.8 billion at the end of 2017) and in Switzerland for €5.4 billion at the end of 2018 (versus €3.5 billion at the end of 2017); ■ minimize the cost of Group debt and limit volatility of financial charges, mainly in the Company, with notional amount of €30.9 billion at the end of 2018 versus €40.5 billion at the end of 2017, mainly due to the management of its interest rate derivatives in a context of low but volatile interest rate environment; ■ hedge interest rate risk exposures arising in the context of its ordinary banking activities, mainly at AXA Bank Belgium, in order to manage an interest rate exposure between its interest-earning assets and interest-bearing liabilities mainly by interest rate swaps (notional value of €21.7 billion at the end of 2018 versus €18.6 billion at the end of 2017).
These instruments are mainly used to: ■ hedge the exposure to equity risk, mainly in the Company €4.6 billion in 2018 (nil in 2017) to support Group Solvency; ■ hedge equity risk as part of the Asset Liability Management strategy associated with the guaranteed minimum benefits on Variable Annuity products, which totaled €5.9 billion at the end of 2018 (7.7 billion at the end of 2017) mainly in the United States (notional amount of €5.8 billion in 2018 compared with €6.4 billion in 2017, this strategy also includes €6.5 billion of equity Total Return Swaps classified as Other derivatives instruments in 2018 and €6.3 billion in 2017); ■ hedge the exposure to equity risk within the General Account assets, protecting policyholders’ investments and their guaranteed liability over time, mainly in the United States (notional amount of €18.0 billion in 2018 compared with €17.1 billion in 2017).
As of December 31, 2018, the notional amount of currency derivative amounted to €166.9 billion versus €147.9 billion at the end of 2017. Their market value was €-2.295 million versus €-867 million at the end of 2017. AXA mainly uses (i) currency future and forward contracts (63% of total notional amount of currency derivative instruments), (ii) currency swaps (24%) and (iii) currency option contracts (13%).
Currency derivative instruments are also used to hedge foreign exchange mismatch between assets and liabilities in insurance subsidiaries of the Group. While most of the operating units’ commitments are matched by assets denominated in the same currency, some entities may invest in foreign currency denominated assets to diversify their investments. This is the case mainly in (i) Switzerland using such contracts to hedge exchange rate risk arising from their investments in equities and debt instruments denominated in non CHF currencies (mainly Euro and US Dollar) with a total notional amount of €48.0 billion at the end of 2018 versus €43.5 billion at the end of 2017, and (ii) Japan using future and forward foreign currency contracts to hedge exchange-rate risk arising from its investments in fixedmaturity debt instruments denominated in non JPY currencies with a total notional amount of €13.2 billion at the end of 2018 versus €12.0 billion at the end of 2017.
As of December 31, 2018, the notional amount of credit derivatives held by the Group was €16.2 billion compared to €17.9 billion at the end of 2017 (including the instruments held within investment funds of the “Satellite Investment Portfolio” (€0.5 billion); see Note 1.8.2).
Investment in real estate properties 20,977 (38) 20,939 1,495 - 1,495 22,472 (38) 22,434
(d) Other investments held through consolidated investment funds designated as at fair value through profit or loss.
(a) Carrying value, i.e. net of impairment, discount premiums and related amortization, including accrued interest, but excluding any impact of derivatives. (b) Including macro-hedge and other derivatives.
TOTAL LIABILITIES ARISING FROM INSURANCE CONTRACT 583,073 (812) 582,262 560,831 (1,109) 559,722
TOTAL LIABILITIES ARISING FROM INVESTMENT CONTRACTS 53,593 (73) 53,520 51,995 (79) 51,916
Macro-hedge and other derivative instruments on insurance and investment contracts (liabilities) - (910) (910) - (1,706) (1,706)
Financing debt owed to credit institutions - - - 0 - 0
As of December 31, 2018, derivatives related to banking liabilities shown in Note 15 are used to hedge interest rate risk exposures in the context of ordinary banking activities, in order to achieve an appropriate interest rate spread between its interest earning assets and interest bearing liabilities. Related hedged assets are disclosed in Note 9.4.2 and liabilities in Note 15.
Fair value mainly not based on observable market data Level 3)
Net value of derivative instruments – assets (A) (1,165) (802) - (1,966) (601) (753) (0) (1,354)
Derivative instruments relating to insurance and investment contracts 7 (1,802) - (1,795) 18 (2,912) - (2,895)
The Group mitigates counterparty credit risk of derivative instruments by contractually requiring collateral for the majority of derivative contracts. As of December 31, 2018, the adjustment to the fair value of derivatives for non-performance risk was not material.
Distribution of financial product Administration services Advisory Assistance Other Total of which recognized over time 3,309 291 389 13 0 254 64 4,321 of which recognized at a point in time 782 2 653 102 1 79 280 1,899 21.2 TOTAL ASSETS
Fees and charges relating to investment contracts with no participating features (a) 257 15,719 220 15,159 Fees, commissions and other revenues 1,472 1,445
(a) Relates to liabilities arising from investment contracts without discretionary participation features and investment contracts without discretionary participation features where the financial risk is borne by policyholders.
Net realized gains and losses relating to investments at cost and at fair value through shareholders ’equity
Net realized gains and losses and change in fair value of other investments at fair value through profit or loss
Non consolidated investment funds available for sale 324 144 27 (186) 310 Non consolidated investment funds designated as at fair value through profit or loss 288 - 2 - 290 Non consolidated investment funds held for trading 13 - (26) - (13)
Assets backing contracts where the financial risk is borne by policyholders - - (10,706) - (10,706)
(a) Includes gain/losses from derivatives hedging variable annuities. (b) Includes debt instruments held by consolidated investment funds, designated as at fair value through profit or loss. (c) Includes equity instruments held by consolidated investment funds, designated as at fair value through profit or loss.
Debt instruments designated as at fair value through profit or loss (b) 622 - 282 - 905
Equity instruments designated as at fair value through profit or loss (c) 503 - 480 - 983
Non consolidated investment funds available for sale 264 84 (0) (58) 289
Premiums ceded and unearned premiums ceded (1,324) (761) (473) (2,220) (1,046) (793) (144) 457 (6,303)
Claims ceded (including change in claims reserves) 957 327 384 2,021 1,046 443 245 (231) 5,191
NET RESULT OF REINSURANCE CEDED (275) (300) (78) (300) 296 (149) 46 182 (578)
As of December 31, 2018, financing debt expenses, which include income and expenses relating to hedging derivative instruments on financing debt, amounted to €562 million (€315 million as of December 31, 2017) mainly in the Company: €387 million (€206 million as of December 31, 2017).
Increase/(write back) of tangible assets amortization 0 - - 0 (5)
On a constant exchange rate basis, other activities expenses has increased by €241 million mainly from: ■ Transversal (€+164 million) notably in Other French Holdings from the non-repeat of the release of provisions for risks and charges in 2017.
In the United Kingdom, the United States and Germany, pensions in payment are generally updated in line with the retail price index or inflation, as opposed to other countries where pensions do not necessarily receive inflationary increases once in payment.
Most of the defined benefit pension plans are funded through long-term employee benefit funds or covered by insurance policies or Mutual funds. In Switzerland and Belgium, the main defined benefit plans are contributory pension plans whereas in the United States, France and Germany, the main plans are non-contributory defined benefit plans.
Salary increase for future years 2.5% 1.8% 0.0% 6.3% 1.7% 5.0%
(b) In 2018, this amount mainly included an annuity purchase for some group of retired participants in the United States. (c) In 2018, this amount comprised the additional liabilities and assets in connection with the XL acquisition and the consolidation of Roland Rechtsschutz. (d) In 2018, this amount included contributions to plan assets in Switzerland and the United Kingdom.
In 2017, this amount also included an one-off contribution in the United Kingdom.
Benefits classified in “Other benefits” include post-retirement benefits other than pensions, principally health care benefits for retirees, pre-retirement benefits and deferred cash awards.
The calculation of the periodic pension cost is based on a “spot rate approach” or “full yield approach” that involves the use of separate discount rates of the yield curve, to determine the related service cost, interest cost and interest income on assets associated to each discounted cash flow or segregated subsets of the plan’s obligation.
Consistently with IAS 19 requirements, the roll-forward of the statement of financial position liability from January 1, 2018 to December 31, 2018 shown below only captures the evolution of the liability recorded in the Group’s statement of financial position net of Plan Assets and does not include Separate Assets and Swiss assets included in the i nsurance General Account liabilities (which are presented in Note 26.2.8.). The table below shows the detailed roll-forward of the statement of financial position liability, with the Separate Assets added at each year end.
Statement of financial position liability at the beginning of the year (8,094) (9,713) (560) (639) (8,654) (10,352) Pension and other benefits expense (332) (339) (46) (21) (378) (359) Adjustment due to Separate Assets 14 (116) - - 14 (116)
Statement of financial position liability at the end of the year (7,633) (8,094) (617) (560) (8,250) (8,654)
26.2.7 Sensitivity analysis of the defined benefit obligation (DBO): gross of all assets
A description of the risk that pension schemes are exposed to is presented in Note 26.2.10. The sensitivity analysis for significant actuarial assumptions showing how the Defined Benefit Obligation (totaling €20,376 million as of December 31, 2018 and €21,062 million as of December 31, 2017) would have been aff ected by changes in the relevant actuarial assumption that is reasonably possible for year ended as of December 31, 2018, and 2017 is presented below: eff ect of 0.50% increase eff ect of 0.50% decrease eff ect of 0.50% increase eff ect of 0.50% decrease
One year increase in the life expectancy (derived from adjusted mortality rates) would result in an increase of 3.3% of the Defined Benefit Obligation.
FUNDING POLICY AND FUNDING ARRANGEMENTS THAT AFFECT FUTURE CONTRIBUTIONS In the United Kingdom, the Pensions Act 1995 legislation governs pension funds and the Pensions Act 2004 introduced regulations on the funding of defined benefit pension arrangements and several other measures. Central to the funding regime are the Statutory Funding Objective (SFO) which is a requirement that the Scheme has appropriate and adequate assets to meet its technical provisions and the Statement of Funding Principles (SFP) which is a document prepared by the Trustees setting out their policy to ensure that the SFO is met. As part of the actuarial valuation, the appropriate level of future contributions to be paid to the pension plan is determined and a schedule of contributions is prepared by the Trustees of the pension scheme following discussions with the entity. This includes a 10 year recovery plan to ensure that the SFO is met . The contributions for the recovery plan are based on the actuarial valuation performed every three years. However the schedule of contributions may change more frequently if significant events occur in the year.
In France, voluntary regular employer annual contributions are made to Separate Assets, with an objective of the coverage ratio remaining within a targeted range of the total defined benefit obligation after consideration of the yearly predetermined service cost.
(a) This amount represents the Defined Benefit Obligation less Plan Assets adjusted for any assets not recoverable. (b) This amount includes: Separate Assets or right to reimbursements and other assets managed within the Group but not taken into consideration in the pension disclosures as described in Note 26.2.6.
ESTIMATED EMPLOYER CONTRIBUTIONS TO THE PLAN FOR THE NEXT ANNUAL REPORTING PERIOD The estimated amount of 2019 employer contributions for pension benefits is €205 million (€280 million estimated in 2017 for 2018).
These estimated future contributions and benefits expected to be paid are subject to uncertainty as they will be notably driven by economics of future years.
The following tables disclose the fair values of Plan Assets and their level within the fair value hierarchy for the defined benefit plans of AXA Group as at December 31, 2018, and 2017, respectively (fair value hierarchy principles described in Note 1.5): Asset mix for plan assets
Local operating entities and trustees have the primary responsibility for managing the risks that plans are exposed to , in accordance with local legislation if any and the risk framework defined at local level.
AXA stock options for US holding company 0.3 0.7 ■ 2014 AXA SA grants 0.0 0.1 ■ 2015 AXA SA grants 0.1 0.1 ■ 2016 AXA SA grants 0.1 0.1 ■ 2017 AXA SA grants 0.1 0.5 ■ 2018 AXA SA grants - -
■ AXA Financial TSARs/SARs 0.1 - ■ AXA Financial Restricted Shares and PARS (0.2) 1.9
AXA Investment Managers Performance Shares 25.4 18.9 AB share-based compensation instruments 158.8 131.9 TOTAL EMPLOYEE SHARE-BASED COMPENSATION COST 309.7 302.1
All options granted to the members of the Management Board since 2009, Management Committee since 2011, and Executive Committee since 2014, have been subject to the fulfilment of this market-based performance condition.
The following table shows AXA SA stock options granted under all plans: Options (in million) Weighted exercise price (in Euro)
Weighted average fair value per option at grant date (in Euro) (b) (c) 1.21 1.81 1.80 1.42
At the end of the 5 year lock-up period, the employees can, depending on their residence country, do any one of the following: (1) receive the cash value of their investment; (2) receive the value of their investment in the form of AXA shares; or (3) transfer their assets invested in the leveraged plan into the traditional plan.
The cost of this plan is valued taking into account the 5 year lock-up period, as recommended by the ANC (Autorité des N ormes C omptables). The ANC approach values the restricted shares through a replication strategy whereby the employee would sell the restricted shares forward at the end of the lockup period, borrow enough money to buy unrestricted shares immediately, and uses the proceeds of the forward sale together with dividends paid during the lock-up period to finance the loan. For the leveraged plan, the cost also includes the opportunity gain implicitly provided by AXA by enabling its employees to benefit from an institutional price for derivatives as opposed to a retail price.
the date preceding the Chief Executive Off icer’s decision setting the definitive terms of the operation) and at a price of €21.83 per share for the leveraged plan (discount of 5.85% to the reference price). A total of 15.4 million new shares were issued, increasing the share capital by €330 million. This off ering represented a total cost of €3.0 million taking into account the 5 year lock-up period. In 2018, the cost of the lock-up period was measured at 19.40% for the traditional plan and 5.85% for the leveraged plan (due to diff erent discounts). In addition to the lock-up cost, the opportunity gain off ered to the employees under the leveraged plan was measured at 0.89%.
Total number of shares subscribed (in million shares) 2.1 13.3 1.9 17.7
Total cost for AXA GROUP = [A] – [B] + [C] (as a percentage of the reference price) 0.60% 0.89% 0.39% 1.95%
TOTAL COST FOR AXA GROUP (in Euro million) 0.30 2.73 0.18 8.71
Performance Shares are granted to executive off icers and other key employees mainly in France. These Performance Share plans are equity-settled award plans subjected to a non-market performance criteria and have a three years vesting period followed by a two-year post-vesting restriction to transfer period.
In 2018, the valuation was based on a market price of €21.03 per share at grant date and an estimate 5% pre-vesting lapse rate per year. The grant date average fair value of Performance Shares granted in 2018 was €14.06 (€15.91 for 2017 grants).
The total cost of Performance Shares recognized was €45.8 million as of December 31, 2018 (€36.2 million as of December 31, 2017).
The total cost of the International Performance Shares and Performance Units recorded as of December 31, 2018, was €59.2 million in earnings (€85.9 million as of December 31, 2017).
The total cost of the Retirement Performance Shares recorded as of December 31, 2018, was €14.0 million in earnings, gross of tax (€14.0 million as of December 31, 2017).
The total cost of Investment Managers Performance Shares recorded as of December 31, 2018, amounted to €25.4 million in earnings (€18.9 million as of December 31, 2017), gross of tax.
The 2018 total cost amounted to €158.8 million (€131.9 million in 2017), gross of tax.
Compensation costs/expenses: ■ short-term benefits: compensation paid to members of the Management Committee in 2018 amounted to €20.8 million (€13.9 million in 2017), including fixed salary, bonuses, directors’ fees, benefits in kind and other short-term benefits; ■ share-based compensation: the expense recognized in 2018 in respect of share-based compensation granted by AXA SA to Management Committee members was €7.4 million (€7.5 million in 2017); ■ post-retirement benefits: the estimated cost to the Group of providing defined benefit pensions and other post-retirement benefits to members of the Management Committee for the current year of service measured in accordance with IAS 19 amounted to €2.7 million in 2018 (€2.1 million in 2017).
At December 31, 2018, the Group employed 104,065 salaried people on a full-time equivalent basis (95,728 at the end of December 2017).
The increase of salaried employees by 8,338 in 2018 was mainly driven by: ■ AXA XL (+7,528) mainly due to the acquisition of XL Group; ■ Germany (+953) mainly driven by the full consolidation of Roland Rechtsschutz.
FULLY DILUTED NET INCOME PER ORDINARY SHARE E = A/D 0.79 2.49
(a) Except for number of shares (million of units) and earnings per share (Euro). (b) Weighted average. (c) Taking into account the impact of potentially dilutive instruments. (d) In 2018, it includes financial charges of €23 million related to Mandator y Exchangeable Bonds and €17 million related to preferred shares.
In 2018, the Company was party to the following transactions with related parties which may be deemed to have been material to AXA or the related party in question or unusual in their nature or conditions.
The Mutuelles AXA (AXA Assurances IARD Mutuelle and AXA Assurances Vie Mutuelle, hereaft er the “Mutuelles AXA”) are two mutual insurance companies engaged in the Property & Casualty insurance business and Life & Savings insurance business in France. On December 31, 2018, the Mutuelles AXA collectively owned 14.40% of the Company’s outstanding ordinary shares representing 24.16% of the voting rights.
The Mutuelles AXA and certain of the Company’s French insurance subsidiaries, AXA France IARD and AXA France Vie (the “Subsidiaries”), are parties to an agreement pursuant to which they provide a full range of management services to manage the insurance operations and portfolios of the Mutuelles AXA. The agreement includes provisions designed to ensure the legal independence and protection of the respective client portfolios of the Mutuelles AXA and these subsidiaries. Certain costs and charges (excluding commissions) are allocated between the subsidiaries and the Mutuelles AXA through an economic interest grouping (groupement d’intérêt économique) or “GIE”.
The Property & Casualty insurance business generated in France (Creditor excluded) by insurance brokers is mainly underwritten through a coinsurance arrangement between AXA Assurances IARD Mutuelle and AXA France IARD, a Property & Casualty insurance subsidiary of the Company. For coinsurance, AXA France IARD underwrites 89% of businesses and AXA Assurances IARD Mutuelle 11%. Aggregate written premiums recorded in this coinsurance agreement amounted to €1,664 million in 2018 (of which €1,483 million was attributed to AXA France IARD).
From time to time the Company enters into GIEs with certain of its subsidiaries. GIEs are intercompany partnerships, governed by French law, created to perform various common services for their members and to allocate associated costs and expenses among their members. The allocation of costs and expenses invoiced to GIE members may be based on various agreed criteria including particular activity drivers. The GIEs to which the Company was party during 2018 covered a variety of common services including services performed by the Group’s central functions (GIE AXA) for the benefit of AXA Group companies (e.g. finance, accounting and reporting, tax, legal, internal audit, human resources, procurement, information systems, r isk m anagement, cash management) as well as certain other services. Expenses invoiced by these GIEs to the Company and its subsidiaries are generally invoiced at cost and are included in the consolidated expenses reflected in the Company’s audited consolidated financial statements. Expenses invoiced by the GIE AXA to its members in 2018 and 2017 amounted to respectively €255 million and €242 million.
business purposes including to finance their business operations and/or to promote the development of their business (e.g. to facilitate acquisitions, integration of acquired businesses, distribution arrangements, internal restructurings, or similar transactions). These transactions may involve the Company entering into various types of transactions with its subsidiaries and aff iliates from time to time including loans or other types of credit arrangements, acquisitions or sales of assets, securities or other financial instruments and/or similar transactions. The Company may also from time to time borrow from its subsidiaries for various business purposes. These transactions are generally carried out on arms-length terms and conditions with loans and other extensions of credit bearing interest at varying rates that generally reflect prevailing market rates at the respective dates such loans were originated.
Investments in non-consolidated investment funds are limited to the shares in these funds which do not provide control. Any material arrangements between AXA and these funds are disclosed in this Note.
Commitments received by AXA totaled €81,631 million at the end of 2018, and decreased by €1,237 million compared to the end of 2017, mainly due to a decrease in pledged assets and collaterals (€4,567 million) and letters of credit (€1,120 million), partly offset by an increase in financing commitments (€2,499 million) and guarantee commitments (€1,944 million). These commitments can be broken down as follows: Financing commitments received totaled €16,311 million at the end of 2018, and mainly consisted of: ■ credit facilities received from banks for €12,608 million mainly by AXA SA (€12,337 million) and AB (€219 million); ■ commitment lines granted to AXA XL (€2,419 million), AB (€853 million) and Japan (€431 million) as part of their operations.
Guarantee commitments received totaled €25,936 million at the end of 2018, and mainly consisted of (i) guarantees from customers related to mortgage loans (€17,268 million) received mainly at Switzerland (€11,288 million), AXA Bank Belgium (€2,112 million), AXA Banque France (€3,157 million) and Belgium (€707 million), (ii) €4,131 million guarantees received from credit institutions mainly by AXA Banque France (€4,022 million) and Belgium (€109 million), and (iii) €4,335 million other guarantees received from customers, mainly at AXA Banque France (€4,320 million).
Letters of credit received totaled €2,762 million at the end of 2018 and were mainly from the United States (€2,425 million), AXA Global Re (€210 million) and Turkey (€97 million) due to letter of credits related to reinsurance transactions.
Other commitments received totaled €3,998 million at the end of 2018, and mainly consisted of: ■ €2,930 million mainly received by Germany (€802 million), France (€721 million), Japan (€606 million), Italy (€389 million) and Belgium (€370 million) related to mortgages as guarantees to debt instruments; ■ €638 million received by France relating to security lending; ■ €187 million received by AXA XL relating to security lending and monetary pledge in the context of reinsurance operations; ■ €94 million received by Switzerland mainly due to covered bonds collaterals relating to invested assets other than real estate and private equity funds.
Commitments given totaled €81,441 million at the end of 2018, increasing by €13,315 million compared to the end of 2017, mainly due to an increase of €9,211 million in pledged securities and collateralized commitments, €3,246 million in other commitments, and €735 million in financing commitments. These commitments can be broken down as follows: Financing commitments given totaled €3,530 million at the end of 2018, and mainly consisted of (i) financing commitments to customers (€3,508 million) notably comprising loan commitments granted at AXA Bank Belgium (€1,743 million), AXA Banque France (€1,271 million) and Germany (€479 million) provided to their customers, and (ii) financing commitments given to credit institutions at AB with commitment lines (€22 million).
Pledged securities and collateralized commitments given totaled €46,131 million at the end of 2018, and mainly consisted of: ■ security repurchase agreements and similar operations totaled €33,560 million mainly from France (€15,540 million), Japan (€8,129 million), Belgium (€4,797 million), Switzerland (€1,479 million), Hong Kong (€1,359 million), AXA XL (€641 million) and Spain (€383 million); ■ pledged assets and collaterals for reinsurance operations totaled €7,051 million mainly from AXA XL (€5,925 million) and France (€1,048 million); ■ pledged assets and collaterals for derivatives instruments totaled €3,773 million mainly in Japan (€1,073 million), AXA Bank Belgium (€929 million), France (€853 million), Germany (€389 million) and Belgium (€121 million);
■ other pledged assets/collaterals totaled €1,747 million mainly in AXA Banque France (€731 million), AXA Bank Belgium (€604 million) and Hong Kong (€372 million).
Other commitments given totaled €19,852 million at the end of 2018 and mainly consisted of: ■ €7,720 million commitment to private equity funds mainly from France (€2,668 million), Germany (€1,679 million), Switzerland (€1,276 million), Japan (€850 million), the United States (€808 million), Hong Kong (€269 million) and AXA XL(€ 99 million); ■ €4,076 million commitments to invested assets other than real estate funds or private equity funds mainly from Germany (€1,858 million), France (€1,454 million), the United Kingdom (€298 million), Japan (€220 million) and Belgium (€115 million); ■ €2,110 million as lease commitment given mainly by AB (€678 million), France (€413 million), United States (€367 million), Germany (€337 million), AXA Investment Managers (€242 million) and AXA Services (€122 million); ■ €1,238 million as commitments to Real Estate funds mainly from the United States (€543 million), Germany (€316 million), France (€226 million) and Hong Kong (€57 million); ■ €850 million as commitments for constructions, renovations and pre sale of real estate assets contracts notably given by Switzerland (€785 million); ■ €818 million as commitments to insurance protection funds and other regulatory requirements from AXA SA (€402 million), Germany (€352 million) and Turkey (€63 million).
Shareholders’ Meeting called to approve the financial statements for the fiscal year 2023 .
PricewaterhouseCoopers Audit is registered as an independent auditor with the Compagnie régionale des Commissaires aux
Statutory audit and certification of local and consolidated financial statements 5 38 43 76% 5 23 28 67%
AXA and certain of its subsidiaries are also involved in tax assessment negotiations and/or active litigation with tax authorities over contested assessments or other matters in a number of jurisdictions including in France. These actions or assessments arise in a variety of circumstances including matters in connection with M&A, restructuring or financing transactions as well as in the ordinary course of business.
Over the past several years a number of jurisdictions, including France and Belgium, have enacted legislation that permits corporate entities to be charged with criminal offences. The standard for attributing criminal conduct by corporate off icers and employees to corporate entities is not clearly defined in many of these jurisdictions and government prosecutors and judges have broad discretion in this area. In recent years, complaints against or indictments of corporate entities for alleged criminal off ences have become increasingly common and certain AXA Group companies have been the subject of penal complaints and/or indictments from time to time including in Belgium and France. While a criminal complaint against or indictment of a corporate entity may not pose material financial risk, it has broad potential implications for a regulated financial institution like AXA both from a reputation point of view and from a regulatory perspective because a criminal conviction can have potentially far reaching negative implications for AXA Group companies engaged in regulated businesses around the world (including for their ability to obtain or maintain licenses to engage in certain types of regulated business activities such as a sset m anagement, insurance and banking).
and certain of the claimants in these actions seek significant or unspecified amounts of damages, including punitive damages.
(1) AXA Insurance in Ukraine is a joint venture between AXA (50% shareholding) and Ukrsibbank.
CONSOLIDATED FINANCIAL STATEMENTS 5 5.7 REPORT OF THE STATUTORY AUDITORS ON THE CONSOLIDATED FINANCIAL STATEMENTS
In compliance with the engagement entrusted to us by your Shareholders’ Meeting, we have audited the accompanying consolidated financial statements of AXA SA for the year ended December 31, 2018.
We conducted our audit in accordance with professional standards applicable in France. We believe that the audit evidence we have obtained is suff icient and appropriate to provide a basis for our opinion.
Our responsibilities under those standards are described in the Statutory Auditors’ Responsibilities for the Audit of the Consolidated Financial Statements section of our report.
(See Notes 1.7.3, 1.14.2, 4.4 and 14 to the consolidated financial statements)
In the Life & Savings line of business, the Group sells contracts that may be combined with a long-term financial guarantee, the aim being to provide policyholders with a minimum return. In this case, the market volatility risk is borne by the Group and not the policyholder.
As stated in Note 4.4 to the consolidated financial statements, the breakdown of these contracts at December 31, 2018 was as follows: ■ 11% of the Life & Savings technical reserves of the Group, covering unit-linked products with related financial guarantees; ■ 35% of the Group’s Life & Savings technical reserves, covering other products such as Protection & Health with surrender guarantees and, in some cases, a guaranteed long-term rate.
The future policy benefit reserves relating to these contracts, including deferred acquisition costs, are measured on a prospective basis using economic, biometric and policyholder behavior assumptions, as described in Notes 1.14.2 and 14 to the consolidated financial statements. At each closing, the Company uses a Liability Adequacy Test to determine that the deferred acquisition costs are recoverable and that future policy benefit reserves are suff icient.
The sensitivity of these measurements increases with the term and complexity of the guarantees: even a slight variation in certain assumptions (chief among them future changes in medium/longterm interest rates and future returns generated by equity portfolios) could have a material impact on the level of provisioning, and therefore, their determination requires a higher degree of judgment from management.
Accordingly, we deemed the valuation of the future policy benefit reserves covering these contracts to be a key audit matter.
Finally, we assessed the adequacy of the disclosures in the financial statements.
At December 31, 2018, the Group had recorded claim reserves of €78, 703 million, as described in Note 14.1 to the consolidated financial statements.
These reserves correspond to the estimated ultimate cost of settling an insurance claim. They include claims incurred and reported, claims incurred but not reported (IBNR) as well as claims handling costs.
As stated in Note 1.14.2 to the consolidated financial statements, these reserves are calculated using deterministic statistical methods, on the basis of historical claim data, and using actuarial assumptions for which the judgment of an expert is required to estimate the ultimate cost. Changes in the inputs selected are liable to have a significant impact on the value of these reserves at the end of the reporting period, especially for long-tail insurance categories for which the inherent uncertainty and likelihood of forecasts not being achieved are generally higher.
Accordingly, due to these inherent uncertainties to calculate the estimates, we deemed the measurement of claim reserves in the Property & Casualty line to be a key audit matter.
The recoverable amount corresponds to the higher of fair value less costs to sell and value in use. Value in use calculations are based on assumptions including discount rates and financial assumptions such as growth rates to forecast future earnings and cash flows thus requiring significant judgment from management.
We performed sensitivity analysis around the key assumptions to ascertain that selected adverse changes to key assumptions would not cause the carrying amount of goodwill to exceed the recoverable amount. With respect to the Life & Savings and AB CGU in the United States, we assessed the various inputs, assumptions and methodologies with respect to the assessment performed by the Group to determine the recoverable amount of the CGU and the resulting full impairment of the goodwill. We assessed the adequacy of the disclosures in the financial statements.
During the year ended December 31, 2018, the Group acquired XL Group Ltd for €13 billion.
In this context, the Company proceeded at the first consolidation of this acquisition, and determined the fair value of identifiable net assets amounted to €5,7 billion, including identifiable intangible assets of €2,9 billion. A temporary goodwill of €7,4 billion was booked at 2018 year-end closing.
Our audit approach to the risk identified was as follows: We assessed and tested the internal controls over the acquisition and purchase price allocation.
VERIFICATION OF INFORMATION PERTAINING TO THE GROUP PRESENTED IN THE MANAGEMENT REPORT
As required Bylaw we have also verified in accordance with professional standards applicable in France the information pertaining to the Group in the management report of the Board of Directors.
We have no matters to report as to the fair presentation and the consistency with the consolidated financial statements, reminded that it is not our responsibility to conclude on the fair presentation and consistency with the financial statements of the solvency related information required by Article L.356-23 of the French Insurance Code (Code des assurances).
We were appointed as Statutory Auditors of AXA SA at the Shareholders’ Meetings held on February 28, 1989 (PricewaterhouseCoopers Audit) and on June 8, 1994 (Mazars). At December 31, 2018, PricewaterhouseCoopers Audit and Mazars were in the thirty and in the twenty-five-consecutive year of total uninterrupted engagement, respectively.
To the best of the Company’s knowledge, no shareholder held more than 5% of the Company’s share capital or voting rights on December 31, 2018 except as indicated in the table above.
Certain of the Company’s shares are entitled to double voting rights as described in Section 6.3 “General information – Voting rights” of this Annual Report. Of the Company’s 2,424,916,626 outstanding ordinary shares on December 31, 2018, 438,958,629 shares entitled their holders to double voting rights as of that date.
Significant changes in the Company’s share capital ownership between December 31, 2016 and December 31, 2018 are set forth in the table below: On December 31, 2018 (a) On December 31, 2017 (a) On December 31, 2016 (a)
Treasury shares held by Company subsidiaries (d) 368,439 0.02% [375,587] (c) [0.01%] (c) 413,421 0.02% [420,569] (c) [0.01%] (c) 450,272 0.02% [457,420] (c) [0.02%] (c)
(a) In this table, voting rights’ percentages are calculated on the basis that all outstanding ordinary shares are entitled to voting rights, notwithstanding the fact that certain of these shares may be deprived of voting rights b y law or otherwise (for example, treasury shares are deprived of voting rights under French law).
On December 31, 2018, to the best of the Company’s knowledge based on the information available to it, the Company had 11,090 total registered holders of its ordinary shares (i.e. shareholders holding in nominative form).
In connection with the share repurchase programs approved by AXA’s shareholders during their Shareholders’ Meetings held on April 26, 2017 (resolution 17) and April 25, 2018 (resolution 18) and pursuant to Article L.225-209 of the French Commercial Code (Code de commerce), (i) 22,906,117 AXA shares were repurchased (for the purposes of (a) hedging free grants of shares to employees of the Group, (b) delivering the shares upon exercise of the rights attached to securities corresponding to debt instruments or (c) cancelling them in order to neutralize the dilutive impact of shares issued in connection with equity compensation arrangements and employee share plan off erings) for an average weighted gross unit price per share of €23.11, and (ii) no AXA shares were sold between January 1 and December 31, 2018.
As a result, on December 31, 2018, the total number of AXA treasury shares, all allocated for hedging or cancellation purposes, was 41,245,315 (or 1.70% of AXA’s share capital at that date). The booking value of the 41,245,315 treasury shares on December 31, 2018 is €987,285,339.88. These shares were acquired for an aggregate purchase price of € 529,383,668.85 (with a par value of €2.29 per share).
Since 1993, the AXA Group has promoted employee shareholding by offering each year to its employees an opportunity to become shareholders through a share capital increase reserved exclusively to them (“Shareplan”).
The traditional plan allowed employees to subscribe through a personal investment to AXA shares (either through Mutual funds (FCPE) or through direct share ownership, depending on countries) with a 20% discount. The shares are held within the Group Company Savings Plans and are restricted from sale during a period of approximately 5 years (except specific early exit cases allowed by applicable law). Employees are subject to the share price evolution, up or down, as compared to the subscription price.
The leveraged plan in 2018 allowed employees to subscribe, on the basis of 10 times their personal investment, in AXA shares (either through Mutual funds (FCPE) or through direct share ownership, depending on their countries of residence) with a 5.85% discount. These shares are held within the Group Company Savings Plans and are restricted from sale during a period of approximately 5 years (except specific early exit cases allowed by applicable law). Employees’ personal investment is guaranteed by a bank, and employees also benefit from a portion of the share appreciation, calculated on the basis of the nondiscounted reference price.
• €290 million in the leveraged plan; ■ a total of over 15 million new shares were issued, each with a par value of €2.29. These shares began earning dividends on January 1, 2018.
On December 31, 2018, AXA’s share capital was comprised of 2,424,916,626 ordinary shares, each with a par value of €2.29. All these shares were fully paid up and non-assessable and began earning dividends on January 1, 2018.
The following table sets forth changes in the number of shares from January 1, 2016 to December 31, 2018: Date Transaction
Amount of share capital aft er the transaction (in Euro )
2016 New equity issue related to the 2012 AXA Miles Program (4 + 0 plan)
Share capital reduction by cancellation of shares (15,423,549) (323,167,103) 2,423,347,096 5,549,464,849 31/12/2018 Exercise of stock options 1,569,530 17,745,639 2,424,916,626 5,553,059,074
Ordinary shares and other securities giving a claim to ordinary shares of the Company through subscription, conversion, exchange, redemption, presentation of a warrant or otherwise (b) 6 billion (c) 2 billion (d) 26 months June 26, 2019
Ordinary shares and other securities giving a claim to ordinary shares of the Company through subscription, conversion, exchange, redemption, presentation of a warrant or otherwise (a) 6 billion (b) 550 million 26 months June 26, 2019
Ordinary shares or securities giving access to the capital, reserved for employees – 135 million (c) 18 months October 25, 2019
Performance shares (actions de performance) (d) – 1% (e) 38 months June 27, 2019
(c) Common and independent ceiling. (d) Existing shares and/or newly issued shares. (e) At the date on which performance shares are granted by the Board of Directors. (f) At the date on which stock options are granted by the Board of Directors. (g) Dedicated to retirement.
The following authorizations to issue shares or securities giving a claim to ordinary shares of the Company and will be submitted to the Shareholders’ Meeting on April 24, 2019: Issues with preferential subscription rights for shareholders
Ordinary shares and other securities giving a claim to ordinary shares of the Company through subscription, conversion, exchange, redemption, presentation of a warrant or otherwise (b) 6 billion (c) 2 billion (d) 26 months June 24, 2021
(a) Independent ceiling. (b) Including the issue of ordinary shares as result of securities issued by subsidiaries of AXA. (c) The aggregate nominal value of debt instruments associated with the issue of securities with or without preferential subscription rights may not exceed the global upper limit of €6 billion.
Ordinary shares reserved for a specific category of beneficiaries in connection with off erings for employees – 135 million (c) 18 months October 24, 2020
Performance shares (actions de performance) (d) (e) – 0.40% (f) 38 months June 24, 2022
The following documents may be consulted at the AXA Group Legal Department (21, avenue Matignon, 75008 Paris, France) until the filing of AXA’s next Registration Document with the AMF: (i) the Bylaws of the Company, (ii) the reports or other documents prepared by any expert at the Company’s request which are (in whole or in part) included or referred to in this Registration Document, and (iii) AXA SA’s financial statements and Consolidated Financial Statements for each of the two financial years preceding the publication of this Registration Document. These documents are also available on AXA’s website and, more specifically, at the following links for the Bylaws of the Company ( overview) and the documents referred to in (ii) and (iii) (https:// group.axa.com/en/investor/annual-and-interim-reports).
While the extent and nature of regulation varies from country to country, most jurisdictions in which AXA’s (re)insurance subsidiaries operate have laws and regulations governing distribution practices, standards of solvency, levels of capital and reserves, permitted types and concentrations of investments, and business conduct to be maintained by (re)insurance companies, as well as agent licensing, approval of policy forms and, for certain lines of insurance, approval or filing of rates. In certain jurisdictions, regulations limit sales commissions, fees and certain other marketing expenses that may be incurred by the insurer and impose product suitability and disclosure requirements. In general, (re)insurers are required to file detailed annual financial statements with their supervisory agencies in each of the jurisdictions in which they do business. Such agencies may conduct regular or unexpected examinations of the (re)insurers’ operations and accounts and request additional information from the (re)insurer. Certain jurisdictions also require registration and periodic reporting by holding companies that control a licensed (re)insurer. This holding company legislation typically requires periodic disclosure, reporting concerning the corporation that controls the licensed (re)insurer and other affiliated companies, including prior approval (or notice) of transactions between the (re)insurer and other aff iliates such as intra-group transfers of assets and payment of dividends by the controlled (re)insurer. In general, these regulatory schemes are designed to protect the interests of policyholders rather than shareholders. For additional information, see the paragraph “Our businesses are subject to extensive regulation and regulatory supervision in the various jurisdictions in which we operate” in Section 4.1 “Risk Factors” of this Annual Report.
requirements (including the definition of admitted assets and methods of calculation) vary between jurisdictions, an insurer’s required regulatory capital can be impacted by a wide variety of factors, including, but not limited to, business mix, product design, sales volume, invested assets, liabilities, reserves and movements in the capital markets, including interest rates and financial markets. Regulatory capital requirements may increase, possibly significantly, during periods of declining financial markets and/or lower interest rates.
In recent years, the European Union has implemented a regulatory regime for European insurers which became eff ective on January 1, 2016, following the adoption of Directive 2009/138/EC of November 25, 2009 on the taking-up and pursuit of the business of insurance and reinsurance, as amended (the “Solvency II Directive”) and the regulations promulgated thereunder (together with the Solvency II Directive, “Solvency II”). Solvency II was implemented into French law beginning in 2015. Solvency II is designed to implement solvency requirements that better reflect the risks that (re)insurance companies face and build a supervisory system that is consistent across all EU Member States. Solvency II is based on three pillars: (1) Pillar 1 consists of the quantitative requirements around own funds, valuation rules for assets and liabilities and solvency capital requirements; (2) Pillar 2 sets out qualitative requirements for the governance and r isk m anagement of insurers, as well as for the eff ective supervision of insurers, including the requirement for insurers to submit an Own Risk and Solvency Assessment (“ORSA”); and (3) Pillar 3 introduces an enhanced reporting and disclosure regime, pursuant to which subject insurance undertakings headquartered in the European Union are required to prepare the Regular Supervisory report (“RSR”), to be submitted by the undertaking to the competent national regulator on a regular basis as determined by the regulation, and the Solvency and Financial Condition report (“SFCR”), to be made publicly available on an annual basis. Solvency II covers, among other matters, valuation of assets and liabilities, the treatment of insurance groups, the definition of capital and the overall level of required capital. A key aspect of Solvency II is that assessment of the Group’s risks and capital requirements is aligned more closely with economic capital methodologies and allows the use of either a standard model or an insurer’s own internal economic capital model (to permit a better understanding of the actual risks and r isk m anagement of the insurer) to calculate the Solvency Capital Requirement (“SCR”), subject in the latter case to the approval of the insurer’s lead regulator.
(1) The Solvency II ratio is estimated based on the Internal Model calibrated based on adverse 1/200 year shock and assuming US equivalence; entities that were part of the XL Group we acquired in 2018 were subject to exceptional and transitional measures for the year ended December 31, 2018. For additional information, please refer to Section 4.2 “Internal control and Risk Management - Internal Model” of this Annual Report. The Solvency II ratio will be finalized prior to the publication of the AXA Group’s SFCR currently expected to be published on May 23, 2019.
AXA SA, and (re)insurance companies, including prohibiting payment of dividends, ordering portfolio transfers, establishing temporary bridge institutions and imposing a temporary stay on early termination rights. Under the French Resolution Framework, French major insurance groups, such as the AXA Group, are required to prepare and file with the ACPR a preventive recovery plan (plan préventif de rétablissement) by July 1, 2019, which should cover insurance holding companies, insurance and reinsurance subsidiaries thereof, and any other entity of such groups providing key services (services indispensables) thereto, and to ensure that such recovery plan remains up-todate thereaft er.
While EIOPA continues to issue regulations and guidelines under Solvency II, the European Commission and EIOPA are currently reviewing Solvency II, including regarding insurance group supervision and the consistency of European insurers’ internal models. Such review may lead to further regulatory changes to increase convergence and to strengthen oversight of cross-border groups, as well as changes to internal models and Solvency II capital requirements.
In addition, in connection with Solvency II, on September 22, 2017, the European Union and the United States signed the “Bilateral Agreement between the European Union and the United States of America on Prudential Measures Regarding Insurance and Reinsurance” (the “Covered Agreement”) which sets out principles governing the imposition of group capital and supervisory standards for insurance groups headquartered in an EU Member State or the United States with operations in both. Following approval by the European Parliament on March 1, 2018 and the European Council on March 20, 2018, the Covered Agreement entered into force on April 4, 2018 and will be fully implemented within five years from its signing date. Pursuant to the Covered Agreement, the AXA Group will remain subject to group supervisory and capital requirements, as currently provided under Solvency II, with AXA’s US insurance subsidiaries remaining subject to local requirements. The Covered Agreement also addresses various regulatory information-sharing and reporting matters, as well as EU/US reinsurance market issues.
For further information on the risks related to regulatory capital requirements, see the paragraph “The Group’s or its (re)insurance subsidiaries’ failure to meet their solvency and capital adequacy requirements could have a material adverse eff ect on our business, liquidity, ratings, results of operations and financial position” in Section 4.1 “Risk Factors” of this Annual Report.
The IAIS has developed three sets of supervisory requirements and actions applicable to the insurance industry: (i) insurance core principles (“ICPs”), which are intended to apply to the supervision of all insurers and insurance groups, regardless of size or importance; (ii) the Common Framework (“ComFrame”) , including the development of a comprehensive, group-wide, risk-based International Insurance capital standard (the “ICS”) for IAIGs; and (iii) policy measures for global systemically important insurers (“GSIIs”) and an assessment methodology for designating GSIIs. From 2013 to 2016, the FSB, in consultation with the IAIS and national authorities, annually published a list of GSIIs, which included AXA in each of such years.
The IAIS has indicated that the implementation of the Holistic Framework should remove the need for an annual identification of GSIIs by the FSB and national authorities. On November 14, 2018, the FSB expressed its support for the Holistic Framework and announced its decision not to engage in an identification of GSIIs in 2018. In addition, the FSB stated that it will assess the IAIS’s recommendation to suspend GSII identification from 2020 once the Holistic Framework is finalized in November 2019. In November 2022, the FSB will, based on the initial years of implementation of the Holistic Framework, review the need
to either discontinue or re-establish an annual identification of GSIIs in consultation with the IAIS and national authorities. In the meantime, the relevant group-wide supervisors have committed to continue applying existing enhanced supervisory policy measures related to liquidity management planning, supervisory colleges and crisis management groups and recovery planning, since these are proposed to be integrated in the ICPs and ComFrame.
AXA will continue to monitor the development of the Holistic Framework, ICPs and ComFrame and expects the regulatory landscape with respect to (re)insurance and financial markets to continue to evolve in 2019 and beyond with further legislative and regulatory initiatives.
AXA Investment Managers, AB and other AXA Asset Management entities are subject to extensive regulation in the various jurisdictions in which they operate. These include, in Europe, Directive 2011/61/EU of June 8, 2011 on Alternative Investment Fund Managers, and Directive 2009/65/EC of July 13, 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS), and their various implementing regulations and transposition measures. In addition, AB and AXA’s investment management operations in the United States are subject to extensive regulation by the SEC.
The European Union (Regulation (EU) No. 648/2012 of July 4, 2012, also referred to as the European Market Infrastructure Regulation – “EMIR”) and the US regulations (principally the Dodd-Frank Act), as amended from time to time, set several requirements and prescriptive guidelines for derivatives which impact operations, liquidity and credit r isk m anagement for derivatives. AXA’s asset managers and banks, which manage derivatives on behalf of various AXA Group aff iliates (including on behalf of AXA), are currently operating in conformity with these rules, in line with the Group’s financial risk framework. On May 4, 2017, the Commission proposed a regulation amending EMIR to address, in particular, compliance costs and transparency issues, and insuff icient access to clearing for certain derivative counterparties. Most recently on February 5, 2019, the EU Parliament and Council announced that they reached a political agreement on the draft regulation, wich is expected to be adopted in 2019.
In addition, certain AXA entities must comply with revised obligations on capital resources for banks and certain investment firms, including Directive 2013/36/EU of June 26, 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, as amended, and Regulation (EU) No. 575/2013 of June 26, 2013 on prudential requirements for credit institutions and investment firms, as amended, which set forth specific capital, governance and remuneration requirements.
For additional information, see the paragraph “Our businesses are subject to extensive regulation and regulatory supervision in the various jurisdictions in which we operate” in Section 4.1 “Risk Factors” of this Annual Report.
The main principles of the GDPR include (i) the strengthening of citizens’ fundamental rights, giving them more control over their personal data and making it easier for them to access it, (ii) an increased harmonization of the applicable law across the European Union and a “one-stop-shop” that will streamline cooperation between the data protection authorities on issues with implications for all the European Union, and (iii) a stronger enforcement regime, under which data protection authorities will be able to fine companies which do not comply with EU rules up to 4% of their global annual turnover. The GDPR applies to both EU and non-EU companies, if the latter are off ering goods and services or monitoring the behavior of individuals in the European Union. As (re)insurance companies need an EU license for providing insurance services in the European Union, the GDPR applies primarily, in the insurance and reinsurance sector, to companies operating in the European Union.
US Department of Commerce “Safe Harbor Privacy Principles,” transatlantic data flows between companies continued using other mechanisms, such as standard contractual clauses with US companies and binding corporate rules for transfers within a multinational corporate group. While a new safe harbor, referred to as the “EU-US Privacy Shield,” was adopted in July 2016, banks and insurance companies are generally not currently eligible to register on the EU-US Privacy Shield list, and the AXA Group has accordingly been relying on the above-mentioned mechanisms to transfer personal data from the Company or its EU-based affiliates to its banking and insurance affiliates based in the United States. For further information concerning transatlantic data transfers, please see the paragraph “The evolving and complex regulatory environment surrounding data protection and transfer in the European Union could increase our costs and adversely impact our business” in Section 4.1 “Risk Factors” of this Annual Report.
In 2009, the FSB published the “Principles for Sound Compensation Practices”, together with implementation standards. Among the matters covered in these standards and principles are a variety of mechanisms (including minimum recommended deferrals of cash bonuses, greater use of longterm equity grants rather than cash as a form of compensation, minimum vesting/deferral periods, and performance criteria for vesting of long-term awards) that are designed to ensure an appropriate alignment of interests between (i) Executive
These principles and standards are reflected in a variety of regulations and legislative initiatives that have been enacted over the past few years in various jurisdictions where the Group does business. While these restrictions are oft en aimed primarily at the banking sector and do not apply uniformly to the Group across the various jurisdictions where it does business, the Group has largely aligned its global executive compensation practices with these standards and principles, and conducts regular reviews of its compensation practices and policies in light of these standards as well as applicable legal and regulatory requirements. The application of these principles and standards may vary among the diff erent actors in the financial sector (such as banks, insurers, asset managers, private equity funds, hedge funds) and across the various jurisdictions where the Group does business, which may give rise to certain competitive issues for the Group, including by aff ecting the Group’s ability to attract and retain top-rate talents.
While the implementation of these standards within the Group is in progress, M anagement is currently assessing the impact of the adoption of these new standards, which may significantly aff ect the accounting treatment of policyholder liabilities and investments. For additional information, see the paragraph “Our businesses are subject to extensive regulation and regulatory supervision in the various jurisdictions in which we operate” in Section 4.1 “Risk Factors” of this Annual Report.
The Group’s (re)insurance, Asset Management and banking operations are subject to an increasing number of legislative and regulatory initiatives designed to increase consumer protection in the sector of financial services. In the European Union, initiatives related to the financial sector include in particular the IDD, MiFID II and the PRIIPs Regulation. Similar initiatives are under review (or in the course of implementation) in other jurisdictions where the Group operates and are likely to increase operational compliance costs to ensure point-of-sale compliance.
In light of this and other initiatives in respect of compliance requirements, M anagement believes that the complexity and
risks for international financial institutions like AXA in this area will likely continue to increase, and that compliance costs will also increase accordingly.