The following document is a free translation of AXA’s French Document de Référence which was filed with the Commission des Opérations de Bourse (“COB”) on April 9, 2003. This translation is furnished for informational purposes only.
Stock markets no longer play their intended role of supplying the equity capital that supports long-term economic growth. After the enthusiasm ushered in by the new economy, we are seeing stocks - often those of businesses with excellent medium- and long-term prospects and a secure future – being massacred in the marketplace. And in the ensuing panic, those involved are behaving in more lemming-like fashion than usual.
The events of 2002 demonstrated the wisdom of our strategic decisions. First of all, the decision to focus on one core business – financial protection and wealth management – rather than being tempted to further diversify was a sound one.
These decision are beginning to pay dividends: • Revenue growth accelerated in property-casualty insurance and was highly satisfactory in life and savings.
H. de C.: I see AXA as a team that has finished the first half, and that is ready to win the match.
We have faith in our business and we are determined to show that, regardless of the environment, we can continue on the path toward operational excellence. This is the only road that will lead us to our goal of becoming the uncontested champion of financial protection and wealth management.
We will get there thanks to the hard work of our dedicated teams, at every level and in every company of the AXA Group.
For the first time, in addition to providing information on AXA’s financial performance in 2002, this activity report features a separate section on sustainable development. Why is that?
I think it is important to state what AXA and its people are doing to ensure that the Group’s development is durable while keeping the rights and needs of its stakeholders in sight at all times.
Our business: financial protection and wealth management It’s how we see financial protection and wealth management.
Our business – financial protection and wealth management – involves responding to the evolving needs of our clients – whether they are individuals, small or medium-sized businesses, or large corporations –
in the areas of insurance, personal protection, savings and estate planning.
Customers At AXA, we seek to build close and lasting relationships with our customers by offering expert advice and a full range of adapted solutions, and by adhering to the highest standard of professional ethics.
At AXA, we seek to maintain quality relationships with our suppliers and non-exclusive distributors by adhering to a clearly defined code of conduct, and by promoting ongoing dialogue.
Employees At AXA, we seek to contribute to the satisfaction and fulfillment of our employees by promoting respect and empowerment in the workplace, and by providing regular training and development opportunities.
AXA1 originated from several French regional mutual insurance companies, known collectively as “les Mutuelles Unies”: In 1982, les Mutuelles Unies took control of Groupe Drouot and following this transaction the new Group began operating under the name of AXA.
In 1986, AXA obtained control of Groupe Présence and, in 1988, transferred its insurance businesses to Compagnie du Midi and operated under the name of AXA Midi, which subsequently reverted back to the AXA name. Two years later, the French insurance operations were reorganized to operate by distribution channel.
In 1995, AXA obtained a majority ownership interest in National Mutual Holdings following its demutualization. National
In 1998, AXA purchased the minority interests of AXA Royale Belge and, in 1999, acquired Guardian Royal Exchange in Great Britain through its subsidiary Sun Life & Provincial Holdings (“SLPH”). The Guardian Royal Exchange acquisition allowed AXA to further establish its positions in both the United Kingdom and Germany.
In 2001 and 2002, AXA focused on improving its operational performance. AXA strengthened its core business positioning by acquiring two financial advisory networks in Australia, Sterling Grace and ipac Securities, and Banque
EXECUTIVE POWER SHARED BY THE MANAGEMENT BOARD AND THE SUPERVISORY BOARD
A Management Board and a Supervisory Board have governed AXA since 1997. This form of corporate governance, which separates the powers of management from those of supervision, is considered to offer the most balanced framework governing the exercise of power.
On the recommendation of the Selection Committee, the Supervisory Board of January 15, 2003 reappointed the following members of the Management Board to new three-year terms (their previous terms expired on January 19, 2003).
Each Management Board member is assigned responsibility for some specific aspect of Company management.
Gérard de La Martinière sits on the board of companies outside the Group: Schneider Electric and Crédit Lyonnais.
The Committee’s composition reflects the structure of the AXA Group. It includes members of the Management Board and the CEOs of the Group’s business units.
François Pierson Member of the Management Board, Chief Executive Officer of AXA France, Head of Large Risks,
Françoise Colloc’h Member of the Management Board in charge of Human Resources, Communications and Branding
Stanley Tulin Head of the Relations with the US analysts, investors and rating agencies, Vice Chairman and Chief Financial Officer of AXA Financial (United States)
Philippe Donnet Chief Executive Officer of AXA Japan (Japan) and Chairman of the Board of Directors of AXA RE
Gérard de La Martinière Member of the Management Board, Chief Financial Officer of AXA
Role and powers The Supervisory Board oversees the smooth functioning of the Company and reports to the shareholders. The
Board’s prior approval is required: – the issuance of securities with a direct or indirect claim on the equity capital of the Company,
– financing operations with a material impact on the financial structure of the Company,
Operating procedures The principles governing the operation, organization and remuneration of the Supervisory Board are specified in the internal regulations.
To ensure that their interests and those of the Company are aligned, members of the Supervisory Board are required to own shares in the Company, the value of which must be at least equal to the amount of directors’ fees they receive in the course of any given year.
Board, the quality of the decision-making process and the effectiveness of Supervisory Board and sub-committee meetings. It has also noted a few improvment measures which will be implemented in 2003.
Composition At the December 31, 2002 reporting date, the Supervisory Board counted 14 members, appointed by the shareholders assembled in an ordinary meeting. Currently, three members of the Supervisory Board are not French nationals. At their annual meeting on May 3, 2002, the shareholders appointed Edward Miller to the Supervisory Board to replace
Richard Jenrette for the remainder of the latter’s term of office.
At the annual general meeting on April 30, 2003, the shareholders will be asked to consider the reappointment of eight members of the Supervisory Board whose term of office expires: Messrs Jean-René Fourtou, Jacques Calvet,
– to recommend that the appointment of the following new member be put to a vote of the shareholders at the aforementioned meeting: Mr. Ezra Suleiman.
Pending shareholder approval of the foregoing, the Supervisory Board will have 13 members as of the close of the
Chairman and CEO of France Telecom; Chairman of the Board of Directors of Thomson SA and Orange; Member of the Board of Directors or Supervisory Board of Dexia, Schneider Electric and Thomson.
Chairman of the Supervisory Board of Bazar de l’Hôtel de Ville (BHV); Vice Chairman of the Supervisory Board of Galeries Lafayette; Member of the Board of Directors or Supervisory Board of Société Générale, Vivarte and Société Foncière Lyonnaise.
Chairman of the Supervisory Board of Banque Sal Oppenheim jr. & Cie KgaA (Germany); Chairman f the Board of Directors of Banque Sal Oppenheim jr & Cie AG (Switzerland), member of the Supervisory Board of AXA Konzern AG (Germany).
Chairman and CEO of BNP Paribas; Member of the Board of Directors or Supervisory Board of Saint Gobain, Total Fina Elf, Lafarge, Dresdner Bank AG Francfort (Germany) and BNP Paribas UK (UK).
Professor of Politics and Chair of the Committee for European Studies, Princeton University. Associate professor, Institut d’Etudes Politiques, Paris.
Office No. AXA Directors’ fees Name presently shares held earned in 2002 Present principal occupation Term
(and age) held at 12/31/02 * (in euros) or employment of office
Each Committee issues opinions, proposals and recommendations and is empowered to undertake or commission studies on subjects to be discussed by the Board, or invite outside participants to its meetings.
To reflect the proposed “independence” criteria under the Sarbanes-Oxley Act, the composition of the Audit Committee was reduced to three members, all of whom should be independent: Messrs Jacques Calvet (Chairman), David
– is consulted on the selection of the independent auditors of the Company. It also reviews audit programs, findings and recommendations, and any actions taken in light of these recommendations. The Management Board and the independent auditors of the AXA Group are entitled to refer matters to the Committee concerning any event that exposes the AXA Group to a significant risk,
– examines the programs and objectives of AXA’s Internal Audit Department as well as the reports issued by this division or by audit firms. It may request any internal or external audits it deems necessary and oversees followup on internal controls,
In addition to internal regulations of the Supervisory Board, the Audit Committee has adopted audit guidelines, which highlight certain of its duties. In particular, the Audit Committee: – works with the Management Board and Group Internal Audit to review the Internal Audit Guidelines and the audit department’s structure and operations,
The Committee met four times in 2002. The global attendance rate was 79%.
The Finance Committee: – examines and issues an opinion on plans to sell real-estate or equity interests whose appraised value exceeds the authorizations granted to the Management Board by the Supervisory Board,
– reviews the broad outlines governing AXA’s asset management policy and, more generally, all issues that pertain to AXA’s investment management policy.
The Selection Committee has four members, two of whom are independent: Messrs Jean-René Fourtou (Chairman),
The Committee held one meeting in 2002. The global attendance rate was 80%.
Board or the Management Board, their respective Chairmen and Vice-Chairman, as well as the members and Chairmen of the different Supervisory Board sub-committees; – is notified of the appointments of AXA’s principal executives and officers, in particular members of the Executive
The primary subjects considered by the Selection Committee in 2002 and early 2003 are indicated below: – the situation of Supervisory Board members,
– the re-appointment of incumbent members to the Management Board and the appointment of two new members,
– review of the succession plans for the CEOs of the Group’s principal subsidiaries.
AXA executives and proposed grants of stock options to AXA employees,
OPERATING UNITS AXA is divided into nine business units, whose CEOs report directly to the Management Board and its Chairman.
SUBSIDIARIES Implementing the principles of corporate governance is a priority at AXA. Consequently, all of its principal subsidiaries, whether publicly traded or not, are governed by a board whose membership includes independent or non-executive directors and have an audit committee, whose membership also comprises independent members.
The general principles of AXA’s executive compensation policy have been presented to the Compensation Committee of the Supervisory Board. This policy applies to all executive officers of the Company and is adapted to local regulations and practices under the supervision of the boards of directors and compensation committees of Group subsidiaries.
The table below provides the following information: – gross compensation paid in respect of 2002 (e), i.e. the fixed component paid 2002 (a), the variable component earned in 2002 and paid in 2003 (excluding expatriation allowances paid in 2003) (b), any directors’ fees paid in 2002 (c) and benefits in kind for the year 2002 (d); – gross compensation paid in 2002 (g), i.e. the fixed paid in 2002 (a), the variable component earned in 2001 and paid in 2002 (f) (including expatriation allowances paid in 2002), any directors’ fees paid in 2002 (c) and benefits in kind for the year 2002 (d); - and gross compensation paid in 2001, i.e. fixed compensation paid in 2001, the variable component earned in 2000 and paid in 2001 (including expatriation allowances paid in 2001), any directors’ fees paid in 2001 and benefits in kind for the year 2001.
This table also allows for comparisons between compensation earned in respect of 2002 with that paid in 2001 and 2002.
(2) C. Condron opted for the deferred payment of 25% of the fixed and variable components of his compensation. The amounts indicated reflect the full amount of this compensation. C. Condron joined the AXA Group on July 4, 2001. It also includes a 2,688,000 euro signing bonus.
(3) D. Duverne was appointed to the Management Board on February 26, 2003. (4) J.-R. Abat was appointed to the Executive Committee on February 26, 2003.
In 2002, the Company paid 660,000 euros gross (617,853.26 euros net) in directors’ fees to the 14 members of the
(1) Excluding the Church tax of 8-10%, depending on the state.
For many years, AXA has shared the rewards of its performance with directors, officers and employees of the Company in France and abroad by offering stock options. Stock option programs are designed to act as an incentive for longterm employment in the Company.
At the December 31, 2002 reporting date, options to purchase 43,789,361 AXA shares had been granted by the
Company, representing 2.5% of the share capital outstanding. At February 28, 2003, 650,000 Mofipar options were outstanding.
S. TULIN (United States) 131,304 1,780,755 (1) As part of AXA’s buyout of minority interests in AXA Financial, the outstanding options on AXA Financial common shares were converted into AXA American depository shares (ADR) on January 2, 2001. (2) An unlisted subsidiary of the AXA Group. (3) Also holds 7,562 shares of stock in AXA Investment Managers, an unlisted company.
AXA stock options AXA ADR Information/ Options Options Options Options granted exercised granted exercised Beneficiaries Number Exercise Price Number Price Number Exercice Price Number Price date (in euros) (in euros) date (USD)
(1) Also exercised 50,000 Mofipar options in 2002 at a price of €7.09. (2) Also exercised 10,000 Mofipar options in 2002 at a price of €7.09.
AXA adopted a Code of Professional Ethics in the early 1990s.
The members of the Supervisory Board must comply with a general obligation of confidentiality with respect to the information they receive in their governance capacity.
The Company may also ask each member of the Supervisory Board to furnish all information, particularly relative to transactions in shares of publicly traded Group companies, which it may require to comply with its stock market and insurance disclosure requirements in certain countries.
Group employees whose professional responsibilities are such that they may have access to information that could have an effect on the stock price are considered to be sensitive. As such, formal restrictions apply to their own trading in listed shares of stock.
Wherever it operates, AXA strives to comply with regulations and legislation designed to fight money laundering and corruption. The AXA Group has adopted a Charter on the fight against money laundering, and has also set up a framework for ensuring the overall consistency of local anti-laundering mechanisms: – A TRACFIN contact has been designated in each company to liaise with TRACFIN and comply with all disclosure requirements.
– To help fight against organized terrorist financing schemes, AXA reviews all lists provided by local authorities.
CUSTOMERS: AXA seeks to build close and lasting relationships with them by offering expert advice and a full range of adapted solutions, and by adhering to the highest standard of professional ethics.
SHAREHOLDERS: AXA seeks to satisfy them by achieving operating performance that ranks among the best in the industry, and by furnishing complete and accurate financial information.
ENVIRONMENT: AXA seeks to play an active role in protecting it by making available our environmental risk management capability, and by promoting environmentally sound practices in the workplace.
Sustainable development correspondents have been appointed in the Group’s principal companies. Their role is to define and implement detailed action plans aimed at improving company performance to better comply with local commitments. The Group has defined performance indicators to track performance improvement.
AXA has also set up an Intranet site to relay company information on these indicators.
AXA and AXA ADS Stocks transactions since 18 months (Paris and New York) PARISBOURSE NEW YORK STOCK EXCHANGE
Price per Ordinary Share Price per AXA ADS Calendar Volume High Low Calendar Volume High Low Period (in thousand) (in euros) (in euros) Period (in thousand) (in US$) (in US$)
– by issuer agreement, in cash, from January 1, 2005 at a price with a gross 4.45% actuarial yield, if the Company's share average over 10 consecutive days is above 125% of the anticipated repayment price,
– At any time, by issuer agreement, at 269.16 euros if the number of bonds in circulation is below 10% of the number of bonds issued.
The AXA Group offers its employees an opportunity to become shareholders through a special equity issue reserved for them. By virtue of the authorization granted by the shareholders at their meetings of May 9, 2001 and May 3, 2002, the Management Board increased share capital, as provided for by French Ordonance of October 21, 1986, in two offerings, through the issue of shares to employees of the Group under the Shareplan 2002 program. The shareholders were asked to waive their preferential subscription rights so that these options could be granted to employees.
In the countries that met the legal and tax requirements, two investment options were proposed in 2002: – the traditional plan, available in 27 countries,
– the leverage plan offered in 28 countries (34 in 2001).
The Shareplan 2002 program was carried out in two phases: – phase I (July 2002): employees in France were given the opportunity to invest their profit-sharing and bonuses,
More than 140 companies in 28 countries took part in Shareplan 2002, and participating employees invested a total of €255 million (down 21% compared with the €323 million invested in 2001) as follows: €41 million in the traditional plan (versus €70 million in 2001), €214 million in the investment leverage plan (versus €253 million in 2001).
AXA share price (in euros): 12/31/2001: 23,47 12/31/2002: 12,79 03/14/2003: 12,06
in 2002, its worst yearly performance since 1974. Weak economic growth, corporate scandals including fraud, bankruptcies, profit warnings, dividend cuts, market volatility, fears of deflation and the looming threat of conflict in
All industry sectors were adversely affected, with the food & beverages and the energy sectors the least affected
(– 51.2%). The Insurance Sector was particularly impacted by concerns surrounding the impact of falling equity markets on capital adequacy and reported earnings and by significant reserve strengthening exercises.
Traditionally, European insurers have invested approximately 15% - 30% of their assets in equities. The outperformance of equities versus other asset classes in the late 1990s resulted in an increase in the equity exposure of many companies, and consequently, the underperformance of equities over the last three years has had a direct impact on the capital of European insurers in terms of lower unrealised capital gains. In addition, several insurers have redeployed significant amounts of excess capital via acquisitions, or made significant use of debt to finance acquisitions, thereby increasing balance sheet leverage. Financial strength ratings of virtually all insurers were either downgraded or placed under review by rating agencies during the year. As equity markets tumbled, a number of insurers announced capital raising measures, raising a total of $7 billion additional shareholder funds.
As a result of their equity investments, historically, a high proportion of European insurers’ reported earnings were generated by the realisation of capital gains. Falling equity markets have eroded many of these gains, leaving several insurers with unrealised loss positions on equities. In addition, many insurers have had to increase valuation allowances to recognise a portion of the difference between the book value of their equity holdings and the actual market value further reducing reported earnings. Additional impacts of the falling equity markets include lower fee income on asset management and unit-linked business due to lower levels of assets under management and reserve additions to cover guaranteed benefits on US variable annuities and DAC recoverability.
In addition to the above concerns directly linked to equity markets, some insurers’ have also been impacted by concerns surrounding adequacy of reserves. Asbestos remains a concern as there has been a major acceleration in
US asbestos-related litigation and insurance claims incurred in the last 18 months. In addition to asbestos, claims costs, particularly legal costs and settlements have continued on an upward trend. In 2002, several European insurers with large US Property & Casualty exposure added significantly to their reserves.
(1) Based on the Dow Jones Stoxx 600 sector indices as of 12/31/02.
All these factors contributed to the 51% decline in the value of the insurance sector.
The AXA stock price declined by 45.5% in 2002, outperforming the insurance sector, as management actions and focus on operational efficiency enabled the Group to better cope with the difficult environment. AXA’s focus during 2002 has been on delivering significant cost savings of €966 million, on reducing the combined ratio from 114% in 2000 to 106.5% in 2002, and on de-leveraging the balance sheet from 63% at 12/31/2000 to 46% at 12/31/2002.
For the insurance sector, many of the concerns faced during 2002 persist. Balance sheets risks remain and sector performance will be closely tied to equity markets.
Prospects for non-life insurers look better. Significant price increases suggest that, for most commercial insurers and reinsurers, the 2003 underwriting year should be significantly more profitable that any in the past five years. In addition, the tightening of policy terms and conditions as well as widespread imposition of limits on liability and more specific risk definitions suggest that medium term profitability should be improved.
The management also set a new target combined ratio of 102% by 2005. The Life & Savings operations held up well despite the negative economic conditions with underlying earnings at the same level as in 2001. The Group’s financial structure demonstrated strong resilience, with an estimated consolidated solvency margin of 172% at 12/31/02, nevertheless, the decision to rebase the dividend to a sustainable level of adjusted earnings was viewed as a prudent measure.
On 17 March 2003, AXA’s share price rose by 4.7% to close at €12.63, having risen by 13.7% and 17.1% on the two previous trading sessions. Markets have risen sharply in recent days as war with Iraq appears imminent. AXA’s shares have continued to outperform the insurance sector during 2003, and year to date the AXA stock is down just 1.3% compared to the Stoxx Insurance sector which is down 17.6%, the Stoxx 50 index which is down 8.5% and the CAC 40 which is down 7.6%.
At the end of February 2003, of the 37 analysts following AXA, 23 rate AXA a buy, 12 are neutral and two have underperform recommendations.
Based in Paris and New York, the Group’s investor relations teams are in regular contact with the financial community: sell side analysts, buy-side analysts and fund managers, and rating agency analysts. They keep the market informed of events impacting the Group and its performance, respond their questions and promote the Group’s goal of satisfying investor needs for information and transparency. In response to the high volatility of the financial markets in 2002, the Group reduced the period of uncertainty ahead of earnings releases, by pre-announcing the Group results for the half-year 2002, and advancing the publication of its 2002 annual results by two weeks compared to 2001, situating it among the first European Insurance Groups to publish their results.
INDIVIDUAL INVESTORS Individual shareholders own approximately 7% percent of AXA’s total equity capital. AXA has an active shareholder information program and holds regular meetings for individual shareholders.
The highlight of the year for individual shareholders is the Annual General Meeting. Around 1,200 individual shareholders attended AXA’s annual shareholders’ meeting in May of 2002, and nearly 3,300 were represented by proxy.
Since 1997, AXA has offered registered shareholders and interested holders of shares in bearer form the opportunity to take part in the Cercle des Actionnaires AXA.
– Invitations to local presentations. In addition, regular meetings are held throughout the year in France, where most of AXA’s individual shareholders are domiciled,
– AXA also hosts an individual shareholders’ committee (Comité Consultatif d’Actionnaires Individuels), whose 15 members are selected from among the members of the Cercle des Actionnaires. The Committee meets twice a year with AXA
executives to discuss and make recommendations on AXA’s disclosure and communications policy with respect to individual shareholders.
( shareholders can send and monitor the status of trading orders, provided they have entered into a stock market services agreement and have opened a share account with a financial institution domiciled in France.
Key business and financial information concerning AXA is regularly made available to shareholders via: – Inserts and page spreads in financial and business publications announcing major events (earnings and annual meetings),
Individual shareholders may also contact the Shareholder Relations department at AXA: E-mail: actionnaires.web@axa.com
Total consolidated gross premiums and financial services revenues in 2002: €74.7 billion
50% Alliance capital 12% Separate account assets 51% Managed on behalf of third parties 36% AXA Investment
Total assets under management as at December 31, 2002: €742 billion
Donaldson, Lufkin & Jenrette (DLJ) – – – 10,686 – –
(b) Same as in footnote (a) above for 2001 and 2000. However, in 2001, the reporting year-end was changed to December 31 and, therefore, the average exchange rate corresponds to the period from October 1 to December 31 (15-month period) and the year-end exchange rate is at December 31, 2001.
(a) Proforma New French GAAP as if the new French Regulations, which became effective on January 1, 2001, had been in force since January 1, 2000.
(b) Adjusted earnings represents AXA's consolidated net income before goodwill amortization and exceptional operations. Adjusted earnings is a non-GAAP measure, which management believes provides a meaningful understanding of the results. It should be noted that “Adjusted earnings” as defined may not be comparable with similarly-titled measures reported by other companies as it is not defined under either French GAAP or U.S. GAAP.
Dividends (a) : – gross per share, including tax credit (in euros) 0.51 0.84 0.83
Dividend Pay-Out Ratio (b) 44% 81% 36% (a) 2002 dividends proposed for approval by AXA shareholders at the annual general meeting of shareholders held on April 30, 2003. (b) Net Dividend / Adjusted Earnings.
(a) The personnel at January 1, 2002 are included on a constant structural basis in relation to personnel at December 31, 2002: – De-consolidation of AXA Minmetals (China), – 2002 entities accounted by equity method (Turkey, Spain P&C [Direct acitivities], Singapore and Hong Kong P&C), – Disposal of Australian Health insurance activities, – Acquisition of Banque Directe, ipac Security Ltd and Sterling Grace, – Acquisition of Northern (Switzerland), – Transfers from UK Health to AXA Assistance, and from National Mutual Fund Management to l’Australia / New Zeland Life
& Savings. (b) A portion of the personnel of AXA’s French affiliates are included in GIEs. In addition, the personnel included in insurance and financial services activities in France are included in the “cadre de convention”. (c) In 2000 and 2001, Japan salaried employees included respectively 5,947 and 5,925 salaried sales force by mistake. (d) As at December 31, 2002, United States salaried employees were under estimated (115 p.) and The Netherlands salaried employees over estimated (667 p.) (in 2001, figures included salaried employees from a brokerage network). (e) Employees of AXA Belgium provide services in common for both the insurance activities and the bank activities. Consequently, split is not available.
On September 26, 2002, Fitch, an international rating agency, affirmed the financial strength ratings attributable to the major insurance entities of the AXA group as well as the ratings related to the debt issued by the Group.
Group capital adequacy remains very strong at a level significantly above Fitch minimum requirement.
growth, undermined by the continuing decline in equity markets. Group debt ratings were consequently lowered.
On March 19, 2003, Moody’s affirmed the Aa3 Insurance Financial Strength ratings on AXA’s main insurance subsidiaries with a stable outlook, reflecting those companies’ leading position in their respective market and good average regulatory solvency levels. These ratings also remain underpinned by strong management, superior diversification and distribution, focused strategy, and the prospects of a recovery of the earnings in the Property & Casualty business.
At the same time, Moody’s lowered the long term debt ratings of AXA (the Company) by one notch with a stable outlook, reflecting a revision of Moody’s notching practice for European insurance groups. This downgrade was primarily driven by Moody’s decision to increase to two notches, at least, the difference between the financial strength ratings on operating companies and holding senior debt rating.
The PVFP is calculated for Life & Savings business only. It is based on future regulatory earnings on current portfolio, not including any value of future sales. Investment returns include the unrealized capital gains and losses on assets backing policyholder liabilities, where appropriate for local regulation and management practice.
+ Net Unrealized Capital Gains (including Alliance Capital shares at market value) 2,204
Other ANAV 5,324 (a) “Other adjustments” are 1) Unrealized capital gains or losses which are included in the PVFP calculation, 2) Adjustments from GAAP to Statutory basis for businesses life , 3) Value embedded in undiscounted Property & Casualty and International liabilities, and 4) Adjustment of employee benefit accounts from GAAP to Statutory bases. In total, €2,029 million (pretax) of GAAP pension assets for Life and Property & Casualty business are eliminated while €1,743 million of pension liabilities are maintained in the ANAV.
The PVFP calculation of necessity involves many assumptions about the future. Our major assumptions include: – discount rate generally based on risk premium of 250 basis points (higher in Japan), with a weighted average of 7.2% resulting,
– no productivity gains in the future are assumed, while inflation averaging 2.4% is assumed,
The sensitivity of the PVFP and NBC to changes in major assumptions has been calculated as follows (measure in
(a) Life mortality improvements sensitivity based on US, France, Japan, and Belgium grossed up for the total Group.
Introduction The Company is the holding company for AXA, a worldwide leader in financial protection and wealth management.
Services. In addition, various holding companies within the AXA Group conduct certain non-operating activities The tables below summarize certain key financial data by segment for the periods and as at the dates indicated.
(c) Adjusted earnings represent net income before the impact of exceptional operations and amortization of goodwill. Adjusted earnings represent a non-GAAP measure, which management believes provide a meaningful understanding of the results. It should be noted that this information may not be comparable with similarly-titled measures reported by other companies as it is not defined under either French GAAP or U.S. GAAP.
(1) Source FFSA 2001, based on total revenues. (2) Source Citygroup: based on 2001 assets under management.
Segment Market Segment Market Segment Market contribution contribution contribution contribution contribution contribution (%) to total (%) to total (%) to total segment (%) segment (%) segment (%)
Total gross premiums and financial services revenues (in euro millions) 74,727 74,832 79,971 Life & Savings 65% 65% 58%
AXA Investment Managers 19% 13% 13% National Mutual Funds Management – 1% 1%
Other Financial Services 1% 2% 15% Donaldson, Lufkin & Jenrette (a) – – 91%
Life & Savings AXA’s Life & Savings segment offers a broad range of Life insurance products including retirement products as well as Health insurance products for both individuals and groups (that is corporate clients), with an emphasis on savingsrelated products including separate account (unit-linked) products. The Life & Savings segment accounted for €48.6 billion or 65% of AXA’s consolidated gross premiums and financial services revenues for the year ended
(a) Include revenues from other activities (commissions and related fees associated with the management of AXA’s general account assets and mutual funds sales).
– North America: United States: The Equitable Life Assurance Society “AXA Financial” and its insurance and distribution subsidiaries and affiliates.
– Asia / Pacific region: Japan: AXA Insurance Co. and AXA Group Life Insurance.
Information on market trends in countries where AXA operates are presented in the introduction of the Management
Based on worldwide gross Life insurance premiums in 2001 Country statistics (a) AXA (b)
(a) Source: Swiss Re Sigma report 6/2002 “World insurance in 2001”, measured in U.S. dollars. (b) In general, based on 2001 market data for each specific country or an estimate for 2002. (c) Relates to the variable annuity products. (d) Based on annualized new business premium equivalent (regular premium plus one-tenth of new business single premium) .
COMPETITION The nature and level of competition vary among the countries in which AXA operates. There is strong competition among companies for all the types of individual and group Life & Savings products sold by AXA. Many other insurance companies offer one or more products similar to those offered by AXA, in some cases using similar marketing techniques. In addition, AXA competes increasingly with banks, mutual funds, investment advisers and other financial institutions for sales of savings-related investment products and, to a lesser extent, Life insurance products.
The principal competitive factors affecting the Life & Savings segment’s business include: – price,
– ratings for an insurer’s financial strength and claims-paying ability (at March 31, 2003, main Life entities of AXA Group were rated AA by Fitch IBCA, AA– by Standard & Poor’s and Aa3 by Moody’s),
The table below presents consolidated gross written premiums (after intersegment elimination) and gross insurance liabilities by major product for the periods and as at the dates indicated for AXA’s Life & Savings segment: (in euro millions, except percentages)
Certain of AXA’s Life & Savings products provide features which enable the policyholders to participate in the excess assets over the liabilities (the surplus) of the life company issuing the contract through an interest or bonus crediting rate. AXA offers participating contracts in all of its principal Life & Savings operations. The policyholder may participate in the investment return and/or in part of the operating profits earned by the life insurance company. The nature and extent of participation by the policyholder vary from country to country. Therefore, such participations, including policyholder participations on UK “With-profit” business (explained below), are treated as dividends that may either increase the present value of future policy benefits or be paid in cash to the policyholder in the year the bonus is credited.
UK “WITH-PROFIT” BUSINESS Specific to the United Kingdom, the participating contract, also known as the “With-profit” contract, is offered by many life insurance companies in the United Kingdom, including AXA Sun Life. For “With-profit” contracts, policyholders’
premiums are paid into a life insurance company’s participating (“With-profit”) fund, which is part of a company’s longterm insurance business fund. In the participating (“With-profit”) fund, the premiums are invested in a range of assets, including fixed maturity and equity securities, real estate and loans. The participating (“With-profit”) policyholders are entitled to receive a share of the profits arising from these investments. The policyholders’ share of the profits, referred to as bonuses include both regular bonuses and terminal bonuses. These bonuses are either paid on or credited to
Following policyholder and court approvals, in 2001 AXA Equity & Law underwent a financial reorganization whereby the life insurance funds were transferred to AXA Sun Life and fundamentally restructured. A portion of the assets that accumulated over the years (which we refer to in this annual report as the “inherited estate”) were attributed to AXA
(b) Other networks including the Chamber of Commerce and Industry and corporate direct sales (to individuals).
For most life and retirement type products, costs in the first year are higher than costs in subsequent years due to first year commissions and the costs of underwriting and issuing a contract. Consequently, the rate of policies remaining in-force and not lapsing, also known as the “persistency rate”, plays an important role in profitability. The majority of individual retirement products and individual Life & Savings products issued by AXA may be surrendered for a cash surrender value. Most of the individual life and retirement products issued by AXA have front-end charges
(or subscription fees), which are assessed at the inception date of the contract and/or surrender charges (charges assessed in the case of early surrender). Both front-end charges and surrender charges are intended to offset a portion of the acquisition costs.
Total surrenders and lapses for 2002 and the ratio of surrenders and lapses to average gross insurance reserves for the periods indicated are presented below.
Property & Casualty Gross premiums and financial services revenues Gross insurance liabilities
The table below presents the Property & Casualty markets in which AXA operates ranked by worldwide gross premiums in 2001, along with AXA’s ranking (by market share).
In France, Germany and Belgium, markets are fragmented with hundreds of insurers competing for business. In the
United Kingdom, industry-wide consolidation across the sector has affected both major insurance companies and brokers, resulting in increased concentration among the top few players in recent years.
DISTRIBUTION AXA distributes its Property & Casualty insurance products through a number of channels that vary from country to country. In Europe, the same distribution channels are used by both AXA’s Life & Savings operations and Property &
Independent advisers and marketing corporate partnerships and brokers and bank networks
Insurance). With effect from November 15, 2002, the parent company and reinsurance company have changed their name back to “AXA RE” while its large risk insurance subsidiary retained its name. This change will be reflected in future publications.
– AXA Corporate Solutions Reinsurance focuses on its reinsurance business, principally property and catastrophe business as well as some other profitable niches. Such business is underwritten in Paris, the United Kingdom,
The table below summarizes AXA’s consolidated gross premiums and financial services revenues and gross insurance liabilities (gross of reinsurance) for the International Insurance segment, for the periods and at the dates indicated.
AXA CORPORATE SOLUTIONS REINSURANCE (AXA RE) These operations have a geographically diverse reinsurance portfolio, including the following classes of business: property damage (including catastrophe exposure), third-party liability, marine, financial risk and guarantee, and life and health insurance.
The reinsurance operations are oriented towards non-proportional and proportional reinsurance treaties and cover niche products (such as catastrophic risks), and new sophisticated products (such as weather derivatives) and hedging of yields guaranteed by Life companies to policyholders.
DISTRIBUTION AXA Corporate Solutions distributes its products principally through insurance and reinsurance brokers.
AXA Cessions on behalf of AXA’s insurance subsidiaries (2001: €480 million).
AXA to benefit in the future from the expected growth in savings-related products in the markets in which it operates.
AXA’s principal Asset Management companies are Alliance Capital Management (”Alliance Capital”) and AXA
The table below presents the total assets managed by AXA’s Asset Management segment, including those assets managed on behalf of third parties, and the related fees earned by AXA’s Asset Management segment on those assets as at the dates and for the periods indicated.
– management of mutual funds sponsored by Alliance Capital, its subsidiaries and affiliates for individual investors,
AXA INVESTMENT MANAGERS (“AXA IM”) AXA IM’s clients include both (i) institutional investors and (ii) individual investors. AXA IM provides diversified Asset
Management and related services globally to mutual funds managed by AXA IM, which are distributed through AXA’s distribution networks and external distributors, and AXA’s insurance subsidiaries in respect of their insurance-related invested assets and separate account (unit-linked) assets.
During 2002, AXA IM and AXA Rosenberg, a subsidiary of AXA IM specializing in the management of equities, merged their Asian offices. In addition, in 2001, AXA exercised its option to acquire an additional ownership interest in that company for approximately U.S.$30 million, increasing its equity interest from approximately 47% to approximately 75%. As part of this agreement, and due to AXA Rosenberg’s operating performance, during 2002, AXA made an additional payment of approximately U.S.$25 million. This transaction is also subject to an earn-out agreement whereby additional consideration may be paid up until the end of 2005 that is contingent upon the future operating performance of AXA Rosenberg.
AXA BANK BELGIUM AXA Bank Belgium is a subsidiary of AXA Belgium that offers a comprehensive range of financial services to individuals and small businesses. It has a network of independent bank agents that support the sale of products offered by AXA
AXA BANQUE ET AXA CREDIT Based in Paris, AXA Banque delivers banking services dedicated to AXA. Its main activities include cash and securities flows management and bank account services to high net worth individual policyholders and to general agents of
AXA France Assurance. In 2002, AXA purchased Banque Directe from BNP Paribas. Banque Directe is a provider of online banking services and will complement AXA’s existing financial offering in France. It will provide a wellestablished banking platform to AXA’s existing clients and distribution networks, as well as increasing AXA’s expertise in direct distribution. AXA Crédit provides short-term loans to customers of AXA’s French insurance operations.
Although all the general account assets of each insurer support all of that insurer’s liabilities, the insurers have developed asset-liability management techniques with separate investment objectives for specific classes of product liabilities. As part of this approach, insurers develop investment guidelines for each product line that form the basis for investment strategies to manage such product line’s investment return and liquidity requirements, consistent with management’s overall investment objectives for the insurance related investment assets. Investments frequently meet the investment objectives of more than one class of product liabilities whereby each class of business may be allocated on a pro rata basis across the investment portfolio.
Held to maturity and available for sale 111,066 118,525 14,028 14,988 5,204 5,454 130,298 138,967 63% 66%
At December 31, 2002 and based on net consolidated book value of fixed investment and equity securities excluding participating interests, AXA’s Life & Savings and Property & Casualty insurance operations held investments in a single issuer, Bayerische Hypo und Vereinsbank AG of €2.6 billion, principally in the German operations, representing more than 10% of AXA’s total shareholders’ equity. The investments consisted of equity securities, fixed maturity corporate bonds, mortgage “pfandbriefe” and public “pfandbriefe” of approximately €0.1 billion, €0.4 billion, €1.3 billion and €0.8 billion respectively. Mortgage “pfandbriefe” and public “pfandbrief” are secured by mortgages loans and lendings to the public sector, respectively. AXA believes that the real economic exposure to Bayerische Hypo und Vereinsbank is limited to the equity and unsecured fixed maturity corporate bond investments of approximately €0.1 billion and €0.4 billion, respectively.
More specifically, the insurance-related invested assets backing the insurance liabilities in these operations were predominantly holdings in domestic investments, or in the local currency of the liabilities. In 2002, insurance related invested assets included Government bonds (35% versus 32% in 2001), investments in financial services companies
(20% versus 24% in 2001) and in other companies (36% versus 37% in 2001), as well as mutual funds (9% versus
Fixed maturity investments: Related assets at year end 14,059 15,726 15,259
Equity investments (including trading accounts): Related assets at year end 11,358 11,636 11,409
Other assets, cash and cash equivalents: Related assets at year end 3,282 2,529 2,777
ESTABLISHMENT OF CLAIMS RESERVES AXA is required to establish reserves for outstanding claims (claims which have not yet been settled) and associated claims expenses that arise from its Property & Casualty and International Insurance operations. AXA establishes its gross insurance liabilities, that is, its claims reserves, by product, type of insurance coverage and year, and charges them to income as incurred.
As a result, actual losses may deviate from the original gross reserves established. Consequently, the reserve may be re-estimated on the base of information available at that time. Any adjustment resulting from change in claims reserves is recorded in the financial statements of the period.
The information within this section presents separately (i) AXA’s Property & Casualty insurance operations including the Property & Casualty segment operations and AXA Corporate Solutions Insurance within the International Insurance segment, and (ii) AXA Corporate Solutions Reinsurance business in the International Insurance segment.
The loss reserve development table presents the claims reserve development for calendar years 1992 through 2002, as determined in accordance with French GAAP. The top line entitled “gross reserves for unpaid claims and claims expenses” represents the original gross claims reserve liability reported at the balance sheet date for the year indicated.
(deficiency)” for each year represents the aggregate amount by which the original gross claims reserve liability as of that year-end has changed in subsequent periods.
In 2002, these has been ne significant change in reinsurance agreements.
Loss reserve development table: Property & Casualty including International Insurance operations (excluding AXA Corporate Solutions Reinsurance)
Cumulative redundancy (deficiency) from the initial gross reserves in excess of re-estimated gross reserves: (a) AXA acquired Compagnie UAP (“UAP”) in January 1997 and Guardian Royal Exchange in May 1999. The integration of Property & Casualty subsidiarie in AXA’s consolidation score impacted net reserves by €13.7 billion in 1997 and €5.6 million in 1999.
Loss reserve development table: AXA Corporate Solutions Reinsurance At December 31,
Initial gross reserves for claims expenses in Balance Sheet (a) 941 1,184 1,496 2,451 2,646 2,880 3,060 3,396 3,455 5,868 4,778
Total gross claims and other reserves excluding Life & Savings 38,175 39,899
Claims and other reserves for Life & Savings Segment 7,556 9,029
In 2002 and in 2001, AXA has undertaken no major acquisitions (i.e. over €0.2 billion)1.
On January 2, 2001, following the tender offer realized in December 2000 for the shares held by AXA Financial minority shareholders, AXA Merger Corp., a special purpose entity created for purposes of this transaction, was merged into
AXA Financial, Inc. Upon this merger the AXA Financial shares still held by the public have been cancelled and converted into a right to receive U.S.$35.75 cash and 0.295 of a “AXA American Depositary Share” (ADS), thus producing a €737 million increase in AXA shareholders’ equity. Following this operation, AXA now holds 100% of
(1) Please refer to “Year 2002 operating highlights” in the management report for a complete description of acquisitions and disposals.
In 1998, Royale Belge and ANHYP. AXA acquired the remaining 51% minority interests in Royale Belge
(subsequently renamed AXA Belgium) through a public exchange offer. In the same year, AXA Belgium acquired a
Belgian bank, ANYHP, through a public acquisition offer. In January 2000, ANYHP was merged with AXA’s existing
The Equitable Life Assurance Society of the United States (“Equitable Life”), in anticipation of Equitable’s Life demutualization. Following the demutualization of Equitable Life in 1992, AXA’s initial investment was converted into a controlling equity interests in The Equitable Holding Companies, Inc. (renamed AXA Financial, Inc.), the holding of Equitable Life.
Donaldson, Lufkin & Jenrette (“DLJ”) to Crédit Suisse Group for U.S.$7.3 billion (€8.4 billion at the date of the operation). The consideration included cash for U.S.$2.4 billion and 25.7 billion shares from the Crédit Suisse Group
Holdings and AXA UK Holdings are also holding companies and are dependent on dividends received from their own subsidiaries for funds to meet their obligations. In addition, certain of AXA’s principal subsidiaries are subject to restrictions on the amount of dividends and debt repayments that can be paid. Based on the information currently available, AXA
For further information on restrictions on the amount of dividends that can be paid please refer to Note 33 to the consolidated financial statements.
LIFE & SAVINGS The liquidity needs can also be affected by fluctuations in the level of surrenders, withdrawals and guarantees to policyholders in the form of minimum income benefits or death benefits specifically on variable annuity business (see
AXA regularly monitors the valuation and duration of its assets, the financial market performance especially in volatile market conditions, the market conditions that might affect the level of surrenders and withdrawals on its life insurance policies, and changes in projected immediate and long-term cash needs. AXA adjusts its investment portfolios to reflect such considerations.
SOURCES OF LIQUIDITY At December 31, 2002, AXA’s consolidated balance sheet included cash and cash equivalents of €18 billion, gross of bank overdrafts of €1.1 billion (2001: €18 billion and €1.6 billion, respectively). The Company had cash and cash equivalents in the amount of €195 million (2001: €43 million). The Company did not have any amounts outstanding on bank overdrafts at December 31, 2002.
For further information, refer to Notes 13 and 18 to the consolidated financial statements.
– In early 2002, the Company undertook a program of refinancing its existing short-term debt. As part of this program, the Company made private placements totaling approximately €500 million from its existing €3.0 billion Euro
Medium Term Note program (“EMTN”), primarily in euro and U.S. dollars as follows: ii(i) U.S.$100 million variable rate due 2004, i(ii) €200 million variable rate due 2004, and
– A general decrease in amounts outstanding on non-euro denominated debt (primarily U.S. dollars) in 2002 due to the significant strengthening of the euro against the U.S. dollar during the year.
Of AXA’s total issued debt obligations outstanding at December 31, 2002, the amount related to short term debt was €701 million, of which €13 million related to the Company (2001: €1,802 million and €826 million, respectively).
For further information see Note 21 to the consolidated financial statements.
As a result of this liquidity management, the amount outstanding at December 31, 2002 had decreased by approximately €579 million; – A reduction of approximately €550 million in bank overdrafts across the Group; and
– A reduction in the amount of operating debt held by entities in the Other Financial Services segment, in particular, the reduction in operating debt of AXA Banque by €350 million and Compagnie Financière de Paris Crédit (by nearly €330 million). These reductions in operating debt were offset by an increase in the operating debt of AXA Vorsorgebank in
Germany by nearly €210 million, which was used to refinance the growth of its loan book during 2002.
Of the total amounts owed to credit institutions on a consolidated basis, nearly all of the arrangements are payable on demand, except for those of the Company. The aggregate principal payments required to be made by the Company are €26 million in 2003, €228 million in 2004 and nil thereafter.
ISSUANCE OF ORDINARY SHARES On May 9, 2001, at AXA’s annual general meeting of shareholders, the shareholders approved a four-for-one split of
ADSs to AXA ordinary shares changed from one ADS representing one-half of an ordinary share to one ADS
The information provided below is given on a post 4-for-1 stock split basis.
December 20, 2002) resulting in the issuance of 27.2 million AXA ordinary shares. At December 31, 2002,
held approximately 30.5 million of its ordinary shares at a book value of €487 million, or 1.7% of the total outstanding ordinary shares (2001: 30.5 million, €489 million and 1.7%, respectively). These shares are allocated principally to the
AXA Financial stock-option program, where options have been granted to AXA Financial employees to acquire AXA ADSs.
SOLVENCY MARGINS AND RISK BASED CAPITAL Each insurance company within AXA is required by the regulations in the local jurisdictions to maintain capital adequacy and solvency margin requirements. The primary objective of the solvency margin requirements is to protect policyholders. AXA’s insurance subsidiaries are in compliance with the applicable solvency requirements.
On this basis and taking into account future profits as advised by the 2002.12 Directive dated from March 5, 2002, the adjusted solvency ratio is approximately 172% at December 31, 2002 compared to 193% at December 31, 2001.
SUBSEQUENT EVENTS AFTER DECEMBER 31, 2002 AFFECTING AXA’S LIQUIDITY AXA’s ordinary general meeting of shareholders was held on April 30, 2003. The shareholders approved the recommended cash dividend to be paid in 2003 in respect of the 2002 financial year of €0.34 per ordinary share or €599 million in the aggregate.
– An Investment Committee, made up of managers from the finance and operational sides of the insurance company
(and also, in certain cases, representatives of its board of directors), approves investment strategy and assesses the quality of the returns generated.
These investment processes are part of a larger strategy in place at Group level, which includes: – Defined standards for assessing asset liability matching risk and managing investments.
At the consolidated level, an ALM Steering Committee determines general asset liability management policy guidelines and evaluates the results, which are then submitted to the Management Board and to the Finance Committee of the
Risk assessment covers two areas: 1. Analysis of the insurer’s ability to meet long-term policyholder obligations arising from its insurance contracts.
In addition, AXA’s insurance operations worldwide are subject to local regulatory requirements in most jurisdictions in which AXA operates. These local regulations prescribe: – the type, quality and concentration (counterparty, geographic location and type) of investments, and
– the level of assets to be maintained in the local currency in order to cover insurance liabilities in that local currency.
MARKET RISKS Life and savings operations The market risks to which life and savings subsidiaries are exposed arise from a number of factors: – A decline in yields on fixed-income investments could reduce the investment margin if the return on new invested assets is not sufficient to cover contractual interest rates payable to life insurance policyholders.
– Exposure to the foreign exchange risk is very limited for life insurance companies.
2. 10% of AXA’s life insurance reserves cover separate account products that include guaranteed interest-crediting rates. These guarantees are monitored for risk and subject to a monthly reporting requirement. Suitable risk management policies have been put in place: – products that offer guaranteed benefits in the event of death are partially reinsured,
– the risk of policyholder transfers to products that offer guaranteed interest-crediting rates are managed under hedging programs that use derivatives (see paragraph 4 below).
3. 21% of AXA’s life insurance reserves cover products without guaranteed cash values upon surrender.
– The with-profit contracts sold in the United Kingdom and Australia are managed with a significant surplus of free assets, used to smooth performance over the duration of such contracts while at the same time reflecting financial market performance in payments to policyholders.
– Annuities in the payout phase are invested in fixed-income assets with maturities that match the underlying payout schedules, thereby avoiding reinvestment and liquidity risks.
– other products are managed with the surplus required to cover guarantees,
– hedging programs that make use of derivatives are put in place as needed.
– Higher yields decrease the value of bond portfolios. This poses no risk, unless an exceptional loss occurs, leading to a negative cash flow situation that requires the early liquidation of part of the portfolio.
– The foreign exchange rate risk is limited. Obligations stated in foreign currencies are backed by assets in the same currencies.
– Inflation is a risk, since it increases the value of claims paid to policyholders. Consequently, if inflation is not adequately taken into consideration, actual claims payments may be higher than related reserves.
– interest rate risk, resulting from differences between the interest rate structure of an asset and its financing in terms of: – type (fixed rate versus floating rate),
In the interest of optimizing financial management, these risks are managed independently.
AXA’s holding companies use monitoring methods based on a common and uniform set of indicators: – variability analysis, which measures the year-by-year change in interest expense following a 1% rise in short term interest rates,
– exchange rate sensitivity analysis, which measures the year-by-year change in interest expense due to 10%
The Finance Committee of the Supervisory Board receives regular written updates on aggregate holding company exposures to these risks. The Committee also validates the methods used to monitor market risks and any changes in risk management policy.
– a managed consolidated debt schedule, to avoid concentration of maturities,
– financing programs which, combined with AXA’s financial strength and ratings, offer broad access to financial markets.
United Kingdom, Belgium, Germany, Australia and Japan. At December 31, 2002, these subsidiaries accounted for more than 90% of AXA’s consolidated invested assets and net policyholder benefits and insurance claims reserves.
The purpose of such analyses is to measure the sensitivity of fair values. For invested assets, fair values were estimated in accordance with the valuation methods described in the notes to the consolidated financial statements. The fair values of liabilities were estimated as follows: For traditional insurance contracts, the portion of estimated fair value attributed to provisions is considered to be unaffected by changes in interest rates or equity prices.
The fair values for property and casualty and reinsurance contracts, as well as for non-participating life insurance contracts were estimated using a discounted cash flow approach. These fair values, which vary with changes in the estimated discount rate, were considered to be sensitive to interest rate changes but unaffected by equity price changes. For property and casualty and reinsurance contracts, no changes were made in the estimates of claims amounts and timing as a result of changes in interest rates or stock market prices for equity securities.
Sensitivity to interest rate risk The purpose of such analyses is to estimate changes in the fair values of assets and liabilities in the event of a 100 basis point increase or decrease in the yield curves prevailing in the country in which each subsidiary operates. The estimated potential exposure due to a 100 basis point increase in the December 31, 2002 yield curve would result in an estimated net fair value loss for all items within the scope of the analyses of approximately €0.4 billion (net of changes in liabilities), compared with €1.3 billion in 2001. The €0.9 billion difference is attributable to the following events: In 2002, AXA France reorganized its insurance operations, which resulted in an increase in the fair values of assets
The global impact of 100 basis point changes in interest rates was less pronounced than in 2001. If these assets had been included in the sensitivity analysis completed for the December 31, 2001 reporting date, the decline in fair values of assets (net of changes in liabilities) would have been €0.4 billion instead of €1.3 billion (the total for 2001).
GAAP earnings was a decline in all currencies relative to the euro.
The potential exposure to a 10% adverse fluctuation of foreign currency exchange rates (against the euro) would be an earnings loss of €48 million (compared with €11 million in 2001).
– and the lack of correlation of interest rates, equity prices and foreign currency exchange rates.
Taken together, these factors limit the ability of these analyses to accurately predict the impact of future market movements on fair values and future earnings.
COUNTERPARTY CREDIT RISK Counterparty credit risk is defined as the risk that the other party in a transaction will default on its commitment.
Whenever established counterparty limits are surpassed, the Credit Committee, which reports to the ALM Steering
– Receivables from reinsurers resulting from reinsurance ceded by AXA. An ad hoc committee was set up to manage this particular type of credit risk, charged with evaluating the quality of the reinsurers with which AXA does business according to objective criteria and determining admissible commitments. The committee is spearheaded by AXA
– Positions resulting from AXA’s use of derivatives, which are analyzed on a regular basis at the consolidated level.
Local monitoring: Monitoring their insurance risk is the primary responsibility of AXA’s insurance subsidiaries. This risk is primarily measured using a variety of actuarial tools and methods put in place by local insurance departments, which are also responsible for product design and profitability measurement over time.
The global insurance department also conducts an annual review of the actuarial practices of AXA insurance subsidiaries, using the results to draw up a scorecard. The scores obtained are used to define minimum requirements with which all subsidiaries are expected to comply by undertaking any remedial actions that may be necessary.
– Insurance risks are integrated and modeled in connection with work directed by the Economic Capital Steering
AXA has identified its operational risks as follows: – Business interruption due to an external (disaster, etc.) or internal event.
On the basis of the typology provided above, AXA subsidiaries perform annual operating risk audits to identify and evaluate the level of risk to which they are exposed. AXA’s Group Management Audit Department is responsible for centralizing key audit findings. Responsibility for managing these risks lies with each subsidiary.
Since it was initially created, this system has been reinforced by: – The adoption of a charter pertaining to the fight against money-laundering.
Code des assurances). Consequently, it is subject to supervision by the French Insurance Commission (the
AXA is listed on the Paris Bourse and, since August 1996, on the New York Stock Exchange (“NYSE”). Because AXA
Audit Committee by the Supervisory Board, all of whose members must be independent (non-executive), as the term is defined under the Act. AXA has always been attentive to corporate governance, and hence is compliant with the specific provisions of US law.
All claims relating to the German insurance market were settled under an inter-governmental agreement reached between Germany and the United States for a global sum of €281 million. Under the terms of this agreement, AXA’s
AXA is in the process of defining and preparing for the rollout of employment policies and best HR practices that, combined with those that already exist, will enable it to meet these key challenges. They are designed to make AXA
As of 2003, AXA’s global employee satisfaction survey, Scope, will be conducted annually. Previously, Scope was conducted every two years since it was initially launched in 1993.
Carnet Sanitaire (a health report card) used by AXA in France.
Today, failure to disclose information relative to social and environmental practices and challenges – in particular to specialized rating agencies – has itself become a risk factor. To counter this risk, AXA has sought environmental and social ratings and also inclusion in the major international ethical indices.
In the furtherance of this aim, AXA has implemented a social and environmental reporting system that operates via the corporate intranet. This tool is used to consolidate data that is relevant in light of AXA’s business activities and risk factors. Once such data has been consolidated, it will be made available to social and environmental rating agencies. Updated annually, this information will be used to provide additional guidance to AXA subsidiaries as they devise targeted action plans.
For example, facilities located in France carry extensive coverage, regardless of their actual use or ownership status.
For risks that concern all AXA subsidiaries, transversal programs have been set up to provide protection against high magnitude risks that are common to various operating units.
growth (2.4% in 2002 as against 0.3% in 2001), the major indices declined sharply in 2002, especially those tracking the euro zone. The CAC 40 in Paris was down 33.7% on the year and the Frankfurt DAX lost 44%. The London FTSE
(compared with 1.64% in December of 2000) to 0.90% at the end of 2002. Corporate bonds behaved in similar fashion, although relatively to government bonds the broadening of the yield spread offset lower yields.
Despite the changes in financial markets during the last three years, the long-term view is of increasing demand for insurance products. In Europe, the post-World War II “baby-boom” generation is creating an ageing population and, as a result, more countries are reducing the level of state funded welfare systems. This trend has led to an increase in retirement and other saving-oriented product advice and services in respect of financial, tax and estate planning.
Moreover, the continued uncertainty generated by stock markets volatility has reinforced the need for financial advice.
France. In 1999 and 2000, the French Life & Savings market had experienced a significant growth in gross premiums
(13% and 20%, respectively), mainly driven by the success of unit-linked savings products. In 2001, the market was adversely affected by unfavorable stock market conditions, leading to a 7% decrease in gross premiums, the 40%
decrease in gross premiums on unit-linked contracts being partly offset by an 18% increase in general account premiums. In 2002, as the financial markets remained adversely oriented, the same trends persisted with unit-linked premiums decreasing by 32%, offset by a +16% increase in general account premiums. As a result of these opposite trends, total gross premiums increased by +2% in 2002.
One survey reported that the number of investors reporting they need “very little advice” fell from 53% in 1999 to 32% in 2001. The educational savings market continues to grow as parents save for their children’s education and take advantage of the income tax benefits of these plans. Funding of “529” education plans has grown to approximately $8.5 billion of assets through 2001 up from $2.5 billion at year-end 2000.
Independent Financial Advisers continued to be the principal sales channel in 2002 accounting for around 70% of new business.
Kong equity market (Hang Seng Index) fell 18% between January and end of December.
Germany. In 2002, growth of the Life & Savings market re-accelerated and was again higher than 4%, after it had slowed down in the two previous years (2001: 1.9%). However, the impact of the German pension reform on this growth was lower than expected. The supervisory authority took much longer to certify corporate pension solutions.
Therefore, the consumers, following the advice of consumer associations, waited until late in the year when finally all types of offers were available from different providers. The ongoing need for individual financial protection will continue to have positive impact on the Life & Savings growth prospects. However, the downturn of the capital markets also severely affected the insurers that will force them either to reduce significantly promised policyholder returns for 2003 or – in extreme cases – even stop selling Life insurance with guaranteed returns. Health insurance showed highest growth rates with almost 6.0% (after 4.9% in 2001; 4.0% in 2000). The main reason was a strong increase of the number of individuals insured, who have left the state social security system. To stop this trend, the federal government has increased the threshold values of the minimum annual salary necessary for switching from a state to a private
Belgium. After a general boom in unit-linked savings related products between 1997 & 2000 (CAGR1: 119%), the trend changed in 2001 and, in 2002, led to an expected decrease of 40%. This shift away from unit-linked products is primarily due to the deterioration in stock market performance. As a result, consumers returned to savings related insurance products with guaranteed returns (+ 30% in 2002) and bank savings products.
Southern Europe. Spanish Life market2 increased by 15% driven by the legal requirement of group pension outsourcing, regulatory deadline being 2002 November 16th. In 2002, the Italian market witnessed high expansion rates: gross written premiums went up 18% vs. 12% in 2001. Traditional products with a guaranteed yield captured most of new business (+143% from last year, as at Sept. 30th) because of the poor performance of financial markets.
On the contrary, new business growth for unit-linked products was weak. Banks underwrote 67% of total new business, while the rapid growth of financial advisors allowed them to seize the same share as agents, at 13% of total. Portugal market grew by 1.6% as compared to the same period last year. This growth was mainly attributable to the exceptional increase of two bank-insurers (Santander and BPI) whereas traditional insurers registered a decrease of their gross written premiums. Excluding these two bank-insurers, market decreased by 8.9%.
– Two weather events – one in January and a second in October – impacting property classes.
(1) CAGR: Compounded Annual Growth Rate. (2) Estimation of AXA Seguros taking as data source the “Instituto de Actuarios Españoles” 2003, January 22.
The financial market conditions have resulted in particularly hard market conditions in property & liability lines.
Market should report an approximate growth of 7% in 2002 (against 4% in 2001) as a result of rates increases in motor (which represents 36% of total Property & Casualty), industrial risks & household. Some companies also pruned portfolio in order to restore technical profitability. Workers compensation market remained adversely affected by intense competition, with rates remaining almost stable during 2002. In motor insurance, regulation is moving towards the abolition of the merit-rating (bonus-malus) system.
Southern Europe. The Spanish market had outperformed past years volume achievement, continuing the trend that it has achieved up to June 2002, with 13% increase in written premiums1. However, motor business is beginning to show some weakness; car sales decreased compared to last year (–6.6%), while claims costs increased, especially the compulsory liability guarantee. As in 2001, companies operating in the Italian market have significantly increased motor premium rates (by over 10% in 2002) to improve technical profitability. The frequency of reported small motor claims has decreased as a result of particularly high tariff increases for clients with a high “malus”. Results of nonmotor branches were adversely influenced by the natural events of the second half-year, most notably the floods in
to €748 million (representing 20% of total Property & Casualty business).
(1) Estimation of AXA Seguros taking as data source the “Instituto de Actuarios Españoles” 2003, January 22. (2) Source Portuguese Insurance Association.
IMPACT OF DECLINE IN STOCK MARKETS Following the significant decline in stock markets, additional allowances for permanent impairment of equity securities were accounted for in 2002, for a total amount of €–912 million (€–614 million net Group share). This amount was added to the €995 million booked in 2001 (€–636 million net Group share).
Euronext Paris, will be acquired through a public offer (in cash and shares) to be launched by GECINA on SIMCO.
AXA ORDINARY SHARES HELD IN TREASURY As at December 31, 2002, AXA held approximately 30.5 million of its ordinary shares at book value of €487 million or 1.7% of the outstanding total ordinary shares, stable compared to 2001.
FINANCING OPERATIONS In January 2002, AXA entered into a 3-year bilateral credit facility for €100 million. In January and February 2002,
As of December 31, 2002, employee shareholders represent approximately 4% of the outstanding share capital of
Events subsequent to December 31, 2002 In Austria and in Hungary, AXA Konzern announced on December 18, 2002 the terms of its discussions with UNIQA
(a) Net of intercompany transactions. (b) Percentages are on constant methodology, constant exchange rates, constant structural basis (“constant scope”). (c) Including DLJ 9 months contribution in Other Financial Services activities
Consolidated gross revenues were €74,727 million, slightly down by –0.1% on a current basis, mainly due to negative impacts from: – A stronger euro, mainly against the yen and U.S.$ (on a constant exchange rate, consolidated gross revenues would have been €+2,136 million higher).
– Starting January 1, 2002, “de-consolidation” or change in consolidation method for small entities (for which premiums were not exceeding 0.15% of total consolidated revenues) under AXA Group (€–532 million mainly relating to Turkey
On a comparable basis, consolidated gross revenues increased by +4.6%: Life & Savings revenues (representing 65% of total consolidated revenues) were up by +5.5%, as a result of the very good performance of United States (+15.4%), pulled by strong sales on the new Variable Annuity product launched in April 2002 and to a strong first quarter sales of a new Fixed Annuity product (SPDA) launched in September 2001, and Japan (+28.8%), driven by the sharp increase in group pension premiums following acquisition of additional shares in several large contracts. This strong growth was partly offset by a lower performance from France (–5.4%) and the
Property & Casualty. Gross written premiums (representing 21% of total consolidated revenues), increased by +5.7%, with strong performance in the UK (+12.6%) and France (+6.3%), driven by strong rates increases, combined with limited effects of stricter underwriting.
Asset Management fees and other revenues (5% of total consolidated revenues) declined by –7.2%, mainly in Alliance
(a) Adjusted earnings represents AXA’s consolidated net income, before goodwill amortization and exceptional operations. Adjusted earnings is a non-GAAP measure, which management believes provides a meaningful understanding of the results. It should be noted that “Adjusted earnings” as defined may not be comparable with similarly-titled measures reported by other companies as it is not defined under either French GAAP or U.S. GAAP.
(c) Following the disposal of Donaldson, Lufkin & Jenrette (DLJ) in the second half of 2000, these items are significantly lower in 2001 and in 2002.
– an exceptional profit of €148 million in Alliance Capital, as a result of the partial release (€+277 million) of the provision set up in 2000 to offset the dilution gain when acquiring Sanford C. Bernstein, Inc. This release was due to the buy-back of 8.16 million private units in Alliance Capital to the former shareholders of Sanford Bernstein, after these shareholders exercised their liquidity put option; it generated an additional goodwill, which was entirely amortized over the year (€–129 million at average exchange rate).
Goodwill amortization Group share decreased by €37 million, mainly as a result of exchange rate impacts
(€–15 million), 2001 Banque Worms goodwill amortization (€19 million) not repeated in 2002 and exceptional amortization in 2001 relating to ex-GRE entities (€22 million), partly offset by goodwill amortization in 2002 of Banque Directe
Adjusted earnings increased by €+156 million to €1,357 million a +13% increase compared to 2001, thanks to the strong improvement of underlying earnings, the decrease in net capital gains being more than compensated by the lower cost resulting from September 11, 2001 events.
NET INCOME 949 520 3,444 (a) Adjusted earnings represents AXA’s consolidated net income, before goodwill amortization and exceptional operations. Adjusted earnings is a non-GAAP measure, which management believes provides a meaningful understanding of the results. It should be noted that "Adjusted earnings" as defined may not be comparable with similarly-titled measures reported by other companies as it is not defined under either French GAAP or U.S. GAAP.
Life & Savings. Adjusted earnings increased by €+142 million, mainly as a result of lower valuation allowances on equity securities.
Property & Casualty. Group combined ratio strongly improved by –6 points, to 106.5% from 112.5%, or –5.7 points on a comparable basis (excluding the UK Discontinued business now presented in the International Insurance segment), reflecting a strong technical improvement in all major entities, driven by the impacts of stricter underwriting measures and rates increases, and despite the impact of natural disasters in 2002. This favorable trend was however more than offset by a €–387 million decrease in net capital gains.
September 2001 cost and slightly higher net capital gains, earnings deteriorated by €–169 million, as a result of unfavorable prior year loss development and increased cost of covers.
Asset Management. Asset Management adjusted earnings decreased by €–88 million, mainly due to Alliance Capital, where fees, commissions and other revenues strongly decrease in the context of lower average asset under management, only partly offset by lower interest and administrative expenses.
Other Financial Services. The deterioration in adjusted earnings (€–11 million) is mainly due to AXA Bank Belgium
(€–40 million) following a 2001 release of provisions for corporate loans, partly offset by favorable run-off development in 2002 in other entities (€+26 million).
(€+153 million), primarily due to lower cost of debt (€+137 million), as a result of lower interest charge stemming from declining interest rates and the strengthening of the euro against mostly U.S. dollar, yen and sterling pound, partially offset by the amortization of redemption premiums on the convertible bonds issued by AXA SA, and (ii) the unfavorable impact of revised German tax rules regarding the use of tax credits (€–29 million).
EARNINGS PER SHARE (“EPS”) Based on adjusted earnings of €1,357 million in 2002, and a weighted fully diluted average number of outstanding shares of 1,739 million, fully diluted adjusted EPS amounted to €0.78, improving by +11.7% from 2001 (€0.70).
(€–57 million), Germany (€–22 million), the Netherlands (€–75 million), and Italy (€–34 million).
NET INCOME 1,063 922 1,802 (a) Pro forma New French GAAP according to the new French Regulations that became effective on January 1, 2001, as if New French GAAP had been in force since January 1, 2000.
– Investment & Savings: individual savings gross written premiums (59% of gross written premiums) were down by 12% as a consequence of the drop in unit-linked sales (–61%) partly offset by an increase in general account sales
(+33%). The sales forces succeeded in promoting general account products, which are perceived as less volatile by clients in the current financial market environment. General account premiums represented 79% of individual savings premiums, as compared to 52% in 2001.
– Life & Health premiums (34% of gross written premiums) grew by 5% as individual and group segments benefited from positive inflows and from a positive impact of group accident and health rates increases.
– A strong decrease in net investment gains (€–194 million to €89 million), mainly on equities (€–228 million to €14 million in 2002). The 2002 program of disposal of equities was reduced, as compared to the 2001 program, due to market conditions. The 2002 program included a €113 million gain on sale of shares in the French listed real estate company SIMCO. In 2002, gains on sale of equities were offset by impairment allowances amounting to €–24 million and by net losses realized on sale of equities as part of the reallocation of some portfolios: notably in the group retirement line of business, from direct holdings in equity lines to holdings in mutual funds presenting a more diversified risk profile. Net investment gains on real estate increased by €81 million to €109 million, benefiting from favorable conditions on the French real estate market.
– Partly offset by lower amounts credited to policyholders for €106 million. The average rate credited to individual policyholders slightly decreased from 4.82% in 2001 to 4.75% in 2002. Amounts credited to group retirement policyholders decreased by €90 million, mainly as the consequence of net realized losses on sale of equities.
Fees and revenues decreased by €–111 million in 2002 as compared to 2001.
The average unit-linked policyholders’ reserve drop in value remained largely inferior to the average decrease in
– Fees and revenues also decreased by €–18 million on group Life and Health products. This decrease is mainly due to product mix change, resulting from the fast development in 2002 of a new line of mortgage guarantee business featuring lower fees and revenues offset by a lower commission rate (€–63 million). The majority of existing mortgage guarantee contracts in force were converted into this new type of products at the end of 2001 and, mainly, starting
January 1st 2002. This change was offset by lower expenses and is therefore neutral on adjusted income (see expenses). This product mix impact was partly offset by increased volumes and increased fee rates on the nonmortgage guarantee group Life and Health line of business.
Net technical margin decreased by €–17 million to €104 million mainly due to: – The higher net technical margin on savings products (€+34 million to €16 million in 2002) as 2001 was negatively affected by a non-recurring increase in reserve for policyholders’ dividends (€–39 million).
– Partly offset by a lower net technical margin on group Life and Health products (€–63 million to €58 million in 2002).
The main factor for this decrease was the introduction of a new law, which reinforced the insurers’ obligations as regards death coverage in the cases where group policies are not renewed. A non recurring €–40 million charge was registered in 2002 in order to cover the expected ultimate economic cost of this new obligation.
Expenses net of DAC and VBI decreased by €123 million to €1,464 million. The decrease is attributable to: – Distribution expenses decreasing by €77 million. Distribution expenses were down by €–64 million on group Life
– Other management expenses decreasing by €37 million attributable to the AXA France cost cutting program primarily resulting in reduced IT, advertising and consulting expenses.
– VBI amortization lower by €11 million (to €26 million in 2002) as 2001 was negatively affected by a non-recurring amortization charge related to increased surrenders on an old portfolio of business.
Income tax expense was down by €85 million as the result of a more favorable mix of non taxable income, income taxed at a reduced rate (20%) and expenses deductible at full rate (35%).
The 26% increase in adjusted earnings (€432 million in 2002 as compared to €345 million in 2001) is mainly attributable to the decrease in expenses (€123 million) and in income tax (€85 million) partly offset by the decrease in fees and revenues (€–111 million).
of US Life & Savings gross revenues) grew by 18% in 2002 and 20% in the second half of 2002, compared to the same periods in 2001. This trend is mainly due to strong sales of the new Variable Annuity Accumulator Series product line launched on April 1, 2002, and to high first quarter sales of the fixed annuity product (SPDA) launched last September 2001. The other premiums slightly increased by 1.9%. Excluding institutional separate account premiums, gross revenues were up €1,072 million or +16% compared to full year 2001 on a constant exchange rate basis.
The decrease was mainly due to an increase in realized capital losses by €–133 million, as gains on sales of real estate (up €81 million) are more than offset by higher losses on telecommunications, airlines and energy sector bonds.
Fees & revenues decreased by €–125 million in 2002 as compared to 2001, or a decrease of €–74 million on a constant exchange rate basis, mainly due to lower fees earned on separate account business (€–89 million) and lower loadings on premiums and account balances (€–19 million) resulting from lower Life sales, partially offset by higher fees on third party brokerage insurance products (€+34 million) following higher sales. The decrease in fees earned on separate account business was attributable to the decline in separate account balances, due to the depreciation in the financial markets.
Minimum Income Benefits (“GMIB”) features of €159 million due to the decline in the financial markets in 2002, (ii)
The cost income ratio was 101% versus 91% in 2001 as the reduction in expenses was more than offset by the decline in margins primarily due to the increase of reserves for GMDB/GMIB risks. However, excluding these reserves, the 2002 ratio would decline to 93% reflecting the lower revenues substantially offset by the reduction in expenses.
Income tax expense decreased by €–253 million in 2002 as compared to 2001, or a decrease of €–255 million on a constant exchange rate basis. The decrease is due to a €161 million benefit resulting from the favorable treatment of certain tax matters related to separate account investment activity arising during the 1997-2001 tax years and a settlement with the IRS with respect to such tax matters for the 1992-1996 tax years as well as the impact of lower pre-tax income.
Excluding net capital gains and losses, net of DAC and tax and claims associated with the terrorist attacks in 2001, underlying earnings increased by €63 million compared to 2001, or €+101 million on a constant exchange rate basis.
of total UK Life & Savings revenues), revenues have reduced by 9% to €7,228 million or 8% on a constant exchange rate basis, with new business on an Annual Premium Equivalent (APE)1 basis down 6% on a constant exchange rate basis.
Group pensions business increased by 18%, benefiting from AXA’s strategy of focusing on key distributors in the intermediary market. This has offset a decline in sales of less profitable individual pensions from the exceptional level reached in 2001 when sales were driven by changes to tax legislation.
– Health revenues (14% of total UK Life & Savings revenues): Revenues increased by 1% with a 4% increase in individual premiums being partly offset by a 2% reduction in group premiums due to reduced volumes following strategic pricing increases.
(a) Pro forma New French GAAP as if New French GAAP had been in force since January 1, 2000. (b) Excluding Health business.
€–34 million decrease in loadings on premiums on Life and Investment & Savings products attributable to
€+15 million increase in fees generated by business transferred to the non-participating funds of AXA Sun
Net technical margin has increased by €+18 million in 2002 as compared to 2001 or €+19 million on a constant exchange rate basis. Following the completion of the “Pensions Mis-Selling” review, compensation payments to policyholders have been finalized with total payments less than estimates provided in prior years.
The cost income ratio improved 2 points from 74% in 2001 to 72% in 2002 as a result of expense savings offset by lower fees and revenues on unit-linked business. Excluding capital gains and losses, the underlying cost income ratio is stable at 72%.
Adjusted earnings increased by €+181 million in 2002 as compared to 2001, or €+186 million on a constant exchange rate basis. The finalization of the transfer of Inherited Estate assets and the income tax release mentioned above increased adjusted earnings by €+133 million. A further non-recurring impact of €+19 million increased the technical margin. Excluding these impacts, the growth in the Health Margin of €38 million before tax and a €+49 million expense reduction in the Life companies has more than offset the reduction in fees and revenues resulting from the poor stock market performance and reductions in “With-profit” bonus rates.
Excluding net capital gains and losses, net of DAC and tax, underlying earnings increased by €187 million compared to 2001, or €192 million on constant exchange rate.
– Investment & Savings: Premiums increased by 93%, due to strong growth in the group pension business (+153%)
– Life: Premiums were down by 3%, impacted by the decrease of Life unit-linked (€–58 million, or –50%) due to a shift in premium mode from single premium to regular premium product. Traditional Life products slightly increased
to €–71 million. The further fall of capital markets in 2002 led to an additional €–68 million valuation allowance on impaired equities (€–62 million on current exchange rate), to be compared to a €–478 million valuation allowance in 2001.
Excluding equity valuation allowances, the investment result reduced by €–120 million on a constant exchange rate basis as compared to prior year reflecting both the implementation of a hedging strategy designed to protect the equity portfolio against market deterioration (€–90 million cost) and the impact of the restructuring of investment portfolio made in 2001. Through that restructuring, AXA Japan realized capital gains in 2001 and increased its holding in low-risk bonds, which triggered a lower income over 2002. As a result, the yield on invested assets decreased from 3.0% in 2001 to 2.3% in 2002. Early 2003 (over the last quarter 2002), in order to protect the bond portfolio yield against a further decline of Japanese interest rates, and to boost its investment performance, AXA Japan increased the weight of foreign corporate bonds within its portfolio.
Fees and revenues increased by €+25 million on constant exchange rate (a decrease by €–65 million on current exchange rate) to €927 million. This increase primarily came from the sales of high profitable products, in particular in the Health business.
Net technical margin amounted to €–43 million, a decrease of €–195 million on constant exchange rate (€–191 million on current exchange rate). In 2001, the surrender margin benefited from profits arising from high surrenders of unprofitable investment contracts, following the bankruptcy of two Japanese Life insurance companies. In 2002,
Cost income ratio was 104%, a decrease of 12 points versus last year, due to the higher investment margin in 2002, partially compensated by the lower technical margin. Excluding net capital gains and losses, the underlying cost income ratio increased from 80% to 104% in 2002, as a result of the lower investment income and technical margin.
Gross written premiums rose by 5%, mainly due to Investment & Savings and Health.
– Investment & Savings (17% of total gross written premiums): Revenues increased by 9%, mainly driven by non unitlinked premiums up 8% (97% of total investment and savings premiums). This increase was supported by a strong growth in single premiums (+14%). German Pension Reform products only accounted for a small portion of the non unit-linked regular business. The supposed impact of “Pension Reform Business” lagged behind market-wide expectations. Portfolio in unit-linked continued to build up strongly, but still represents a small proportion of investment and savings premiums (3% versus 2% in the prior year).
– Other gross written premiums (7% of total gross written premiums – mainly consortium and medical councils business) grew by 7% mainly due to higher premiums in medical councils business.
Given the high legally regulated policyholder participation rates applied on all margins, the whole margin analysis is presented net of policyholder participation.
Despite reduced investment result, as a result of weak equity markets (leading to a shift from capital gains of €178 million in 2001 to capital losses of €–48 million in 2002), investment margin (€+29 million as compared to last year) was supported by a strong reduction in policyholder crediting rates (by 1.85 point to 4.70% for the major German
Fees and revenues decreased by €–3 million to €27 million mainly due to lower new business growth in unit-linked business in 2002.
Net technical margin increased by €+3 million to €10 million largely caused by an improved claims development in disability risk compared to the poor experience in 2001.
The decrease in expenses of €+4million was primarily due to lower non-commission expenses as a result of a successful realization of cost cutting measures in 2002.
The income tax expenses increased by €–62 million mainly due to (i) a €–20 million tax provision for potential tax claims from 2001 and (ii) a higher trade tax of €–27 million on dividends received from diversified participations following a new regulation introduced as of January 1, 2002. In addition, 2001 benefited from the release of deferred tax liabilities on equity securities as a result of the 2001 German tax reform (€–10 million).
Mainly driven by the high income tax expenses partly offset by a higher investment margin, adjusted earnings dropped by €21 million to zero in 2002. Underlying earnings also declined by €–14 million to €6 million.
The investment margin decreased by €–104 million to €61 million, partly due to valuation allowance recorded in respect of impairments on equity securities for €112 million as compared to €91 million in 2001. Excluding these allowances, the investment margin would decrease by €–83 million to €173 million driven by: – Lower net result on equity securities capital gains (€–26 million).
– Higher interests credited (€–53 million) due to higher reserves. However, the average policyholder crediting rate served in 2002 decreased by 10 basis points to 4.70%.
Expenses increased by €9 million, mainly driven by lower net DAC, and by a higher VBI amortization charge due to lower investment return expectations. Overhead costs and commissions decreased by €7 million. However, the cost income ratio increased by 26 points up to 84% mostly driven by lower net capital gains. Excluding capital gains and losses and allowance, the underlying cost income ratio increased from 67% in 2001 to 74% in 2002 mainly as a consequence of the decrease of the spread between investment income and interest credited.
Adjusted earnings decreased by €57 million to €8 million mainly as a result of lower capital gains and the lower tax charge.
(1) AXA Belgium is a composite Life and Property & Casualty company. Until 2001, the tax charge was allocated according to the adjusted earnings. As valuation allowances and capital gains on equity investments are tax free, it was decided in 2002 to allocate the tax charge according to the underlying earnings distribution.
LIFE & SAVINGS OPERATIONS - OTHER COUNTRIES The following tables present the operating results for the other Life & Savings operations of AXA, which includes
Australia / New Zealand, Hong Kong, The Netherlands, Italy, Spain as well as Portugal, Austria, Hungary, Singapore,
AUSTRALIA AND NEW ZEALAND The AXA Asia Pacific Holdings group (AXA APH) changed their financial reporting year-end from September 30, to December 31, during 2001. The following commentary analyses operational results for the 12 months ended
Total consolidated gross revenues for the Life & Savings and Health businesses were €2,018 million for the 12 months to December 2002. This reflects an increase of 2% on a comparable basis1. Despite the difficult investment environment throughout 2002, mutual fund sales, net of redemptions, of €478 million were 5% higher than 2001 following the acquisition of Sterling Grace and ipac.
December 2002 on a constant exchange rate basis, principally driven by improved claims experience for income protection business and reduced expenses following local management’s continuing transformation program.
– The investment margin decreased by €60 million to €21 million3 due to lower investment returns driven by the adverse investment climate this year and the inclusion in last year’s result of the €43 million profit from the sale of NMFM’s property management business.
– The technical margin increased by €102 million to a profit of €15 million. The prior year margin included the €72 million strengthening of income protection reserves following poor claims experience. The favorable underwriting result in 2002 reflects improved claims management procedures and changes to product design.
– Expenses (gross of DAC and VBI) decreased by €55 million to €369 million primarily due to reductions in administration expenses, from the outsourcing of selected service transactions, redesign of customer service processes to increase efficiencies and renegotiation of contracts with suppliers. Staff headcount (excluding
(1) On a comparable calandar basis (restarting 2001 to be on 12 months to December 2001) and including NMFM Asset Management activities. (2) The AXA Asia Pacific group is 51.66% owned by AXA. (3) Includes losses of equity-accounted entities €–13 million held by policyholder funds.
– Underlying earnings for the Life & Savings business are €54 million (Group share) compared to a loss of €22 million (Group share) last year reflecting the operational improvements mentioned above.
HONG KONG Total gross written premiums of €936 million were 10% lower than for the 12 months to December 2001, as prior year revenues included internal conversions from the pre-existing retirement product offering to the Mandatory
Provident Fund. Excluding these conversions, total gross written premiums were 1% lower than last year on a constant exchange rate basis. This trend reflected lower renewal premiums on a smaller inforce base following agent poaching in the Hong Kong market during 2001, partially offset by the growth in individual life sales following new product developments.
Underlying earnings increased by €24 million (on a constant exchange rate basis) to €95 million (Group share) for the 12 months to December 2002, reflecting mainly the operational improvements previously mentioned.
The cost income ratio remained stable at 87%; excluding net realized capital losses, the underlying cost income ratio improved 7 points to 52% driven by the above-mentioned favorable technical margin and expense experience.
In Life insurance, adjusted earnings were lower by €73 million presenting a loss of €–3 million. This was mainly driven by a €76 million lower investment margin, due to lower net investment income (€–8 million) and lower realized capital gains (€–48 million), as well as a €17 million valuation allowance for impairment on equity securities. Fees and revenues were lower by €13 million mainly due to a decrease of loadings on unit linked business. The net technical margin decreased by €–29 million primarily driven by non-recurring profits in 2001 (€31 million, including an exceptional release of reserves, following a full review of reserves). Expenses decreased by €1 million, mostly attributable to a lower value of business inforce amortization charge (€14 million positive impact), partly offset by a €9 million valuation allowance for doubtful receivables, pension expenses (€3 million) and increased IT expenses for new projects (€1 million). Income tax expense decreased by €46 million as a result of the lower operating result.
ITALY AXA posted a significant growth in revenues, with gross written premiums up by 54.1% from last year to €552 million due to sales of guaranteed index-linked products (55% of total premiums), reflecting the benefits of a bank-insurance agreement signed in 2001 and the growing success of the agent network.
Adjusted earnings amounted to €2 million, decreasing by €34 million from last year mainly as a result of (i) a reduction of the net technical margin (€–11 million) primarily related to the strengthening of insurance reserves on an oldgeneration guaranteed index-linked product, (ii) an increase in non-commission expenses (€–9 million) notably attributable to the set-up of provisions with the public reinsurance body CONSAP and other one-offs, and (iii) a €–9 million lower tax benefit from the legal restructuring of AXA subsidiaries in Italy (€11 million vs. €20 million in 2001).
Underlying earnings reached €11 million, down by €32 million from last year due to the deterioration of technical margin, non-recurring expenses and the decrease in tax gain mentioned above.
The cost income ratio increased by 68 points to 115% due to non-recurring expenses, lower technical margin, and valuation allowances on impaired equities and South-American bonds. Excluding realized capital gains and allowances, the underlying cost income ratio increased by 45 points to 85%.
The cost income ratio improved by 14 points to 61% driven by the higher realized capital gains. Excluding net capital gains, the underlying cost income ratio deteriorated by 2.8 points to 87% as compared to the same period last year due to the decrease in investment margin.
OTHER COUNTRIES The other countries’ adjusted earnings of €–14 million were mainly attributable to the following countries: (in euro millions)
NET INCOME (14) 14 25 (a) Pro forma New French GAAP, as if New French GAAP had been in force since January 1, 2000.
(€6 million post-tax). Despite cost cutting (€–1 million post-tax), underlying earnings reduced by €1 million to €9 million, driven by the decrease in technical margin, due to lower penalties on surrenders linked to a different mix of products.
Switzerland Gross revenues increased by +22.5% up to €81 million, mainly as a result of a better product positioning, of difficulties met by competitors and of a closer relation with the tied agents network.
Adjusted earnings decreased by €–22 million to €–21 million in 2002, mainly due to a higher allowance for equity impairment (€–16 million), lower capital gains (€–3 million) and lower DAC capitalization (€–8 million), despite an increase in net technical margin (€+6 million) mainly attributable to a better mortality and savings margin.
Underlying earnings decreased by €–3 million to €–2 million mainly due to lower DAC capitalization (€–8 million), partly offset by an increase in technical margin.
(1) AXA Life Singapore is part of the AXA Asia Pacific group and is 51.66% owned by AXA. All related figures are provided at Group share.
FY FY 2001 FY 2001 FY 2002 (Pro forma) (c) (Published) 2000 (b)
NET INCOME (19) 71 52 135 (a) Before intercompany transactions. (b) Pro forma New French GAAP, as if New French GAAP had been in force since January 1, 2000. (c) Discontinued business has been transfered to the International Insurance segment.
FY FY 2001 FY 2001 FY 2002 (Pro forma) (b) (Published) 2000 (b)
NET INCOME (19) 71 52 135 (a) Discontinued business has been transfered to the International Insurance segment. (b) Pro forma New French GAAP, as if New French GAAP had been in force since January 1, 2000.
As a consequence of successful rate increases, associated with a maintained strict underwriting policy, both in personal and commercial lines, gross written premiums were up by 6% on a comparable basis.
– Personal lines (54% of gross written premiums): premiums grew by 5% as a consequence of higher rates and sale of additional guarantees both in motor and non-motor.
The net technical result improved by €169 million or +23% of which €27 million is attributable to the increase in gross earned premiums, €103 million to the improvement in net current year loss ratio (including a €22 million improvement in claims handling expenses) and €39 million to a more favorable loss reserve development.
– Net current accident year loss ratio stabilized (–0.1%) for personal lines. Deteriorations occurred in the natural disasters branch, primarily due to September 2002 flooding in the South of France, and personal property branches, due to increased theft frequency. These adverse trends were largely offset by the improvement in ratio for the personal motor line, attributable to lower frequency of bodily injury claims.
ADJUSTED EARNINGS 237 266 222 (a) Pro forma New French GAAP, as if New French GAAP had been in force since January 1, 2000.
Property & Casualty segment experienced a €–45 million unfavorable loss reserve development in respect of certain contracts on liability business, which are now in runoff. In 2002, an adverse loss development in respect of personal property was partly offset by a favorable development in the personal motor line.
Other management expenses decreased by €26 million attributable to the AXA France cost cutting program primarily resulting in reduced IT, advertising and consulting expenses.
The expense ratio improved from 25.2% in 2001 to 24.1% in 2002 mainly as a consequence of the cost cutting program and of the increase in earned premiums.
Net investment result dropped by €–221 million mainly due to: – A sharp decrease of net investment gains by €–198 million from €268 million in 2001 to €70 million in 2002. Net investment gains on equities were down to €40 million in 2002, as compared to €263 million in 2001, and included valuation allowances for impairment for €–18 million. This decrease was partly offset by an increase in net investment gains on real estate to €20 million, as compared to €–4 million in 2001, attributable to the maintained favorable conditions on the French real estate markets.
Gross written premiums (before inter-company eliminations) amounted to €2,867 million. Net of inter-company eliminations, gross written premiums decreased by –9.2% to €2,854 million resulting mainly from the transfer of contracts with large industrial companies to AXA Corporate Solutions (€155 million) and the transfer of the former
Albingia French business to AXA SA (€88 million). Adjusted for these premium transfers, gross written premiums on a comparable basis decreased by –1.6%.
– Personal (61% of total gross written premiums): premiums decreased by –3.2% on a comparable basis due to lower written premiums in motor and liability, mainly as a result of re-underwriting measures, and increasing cancellations in property.
– Other (12% of total gross written premiums): premiums grew by 0.6% on a comparable basis due to a 23.6% growth in fine art insurance, which is partly offset by the decrease from the intensive re-underwriting measures at DARAG
– All accident year loss ratio improved by 10.8 points due to (i) the improvement of the current accident year loss ratio by 4.5 points and (ii) the favorable development of the run-off result in the direct business (impact of 5.7 points)
Expense ratio decreased by 0.2 point. Excluding (i) the posting of €41 million provision for early retirement in 2002 and (ii) the one-off release of restructuring provisions to an amount of €15 million in 2001, the non commission expenses decreased by €+117 million mainly as a result of the successful cost-cutting program. The cost-cutting program primarily included the reduction of personnel charges and IT costs as well as a strong decrease in professional services and marketing expenses.
Tax expenses increased by €–357 million. 2001 benefited from the following items: (i) use of a tax loss carry forward of €+64 million, (ii) release of deferred tax liabilities (impact of €+273 million in 2001), of which €211 million on equity securities due to tax exemption of capital gains as a result of the German tax reform. In 2002, local tax charges amounted to €60 million given a positive operating income and the high proportion of fiscally non-deductible items in the investment income.
Adjusted earnings decreased by €–112 million, mainly resulting from (i) the more favorable tax position in 2001 and
Gross revenues increased by €+281 million in 2002 or +13% on a comparable basis, following strong growth in the commercial account and the stabilization of the personal account.
– Personal lines (46.4% of gross revenues) slightly increased by +2% due to strong growth in creditor business partly offset by a decline in motor business as a result of improved risk selection and the effect of policy count reductions in 2001 following the high rate increases at the end of 2000.
The net technical result improved by €+43 million in 2002 as compared to 2001 or €+49 million on a comparable basis, reflecting AXA’s focus on profitability and the impact of the “First Choice” business transformation project launched in June 2002.
– A decrease in levies (1 point) as year 2001 included an industry levy to fund UK insurance company insolvencies.
(a) Discontinued business has been transfered to the International Insurance segment. (b) Pro forma New French GAAP, as if New French GAAP had been in force since January 1, 2000.
The expense ratio increased by 0.5 point to 36.5% with a substantial improvement in underlying management expenses being offset by the investment in the First Choice strategy, a reduction in deferred acquisition costs and an increase in commissions.
– Underlying management expenses decreased by €+105 million or €+102 million on a comparable basis, driven by tight expense control and a –14% reduction in headcount across the business resulting from the efficiency improvements introduced under the “First Choice” strategy.
Net investment result decreased by €–73 million, or €–72 million on a comparable basis, to €82 million in 2002.
growth despite rate increases (+5% on average). In household (+4%), rate increases offset decline in portfolio initiated during past years.
– Commercial lines (32% of total gross written premiums) were up by 3% due to strong growth in property (+26%), mainly due to new business and rate increases that offset a decrease in portfolio. Liability premiums increased by 16% driven by new business. Workers’ compensation premiums decreased by 4% as a result of portfolio pruning, which more than offset rate increase impacts.
– Health premiums (5% of the total gross written premiums) increased by 14%, due to the launch of a medical assistance service concept as well as an important co-insurance contract.
The net technical result increased by €70 million to €275 million as compared to December 2001.
– The current year loss ratio net of reinsurance improved by 5.9 points to 88.7%. The key factor of this evolution was a decrease in claim frequency for most lines, in particular motor and commercial workers’ compensation.
– The loss ratio for all accident years net of reinsurance improved by 4.4 points to 80.2%. The improvement in current year loss ratio was partially offset by a lower prior year’s reinsurance result due to a large reinsured claim in 2001.
Compared to December 2001, the expense ratio decreased by 2.3 points to 29.6% as a result of lower IT costs. The reengineering of the back office, that took place in prior years, also started generating savings in 2002.
Income tax expense increased by €43 million to €44 million, mainly due to (i) a decrease of recoverable deferred tax assets, in relation to a tax reform voted at the end of year 2002, (ii) a more important taxable income due to better technical results, and (iii) change in the tax allocation between Life and Property & Casualty segments.1
Adjusted earnings decreased by €24 million to a loss of €29 million, mainly due to lower capital gains and the higher tax charge, offsetting better technical results and lower expenses.
Underlying earnings reached €23 million, up by €33 million, from last year, driven by the 4-point combined ratio improvement and the tax gain mentioned above.
Adjusted earnings increased by €28 million compared to 2001 to €33 million. Direct Seguros reached breakeven for the first time with a €2 million profit against a €2 million loss in 2001. This good performance was attributable to improved frequency and lower claim costs. Excluding Direct Seguros, adjusted earnings increased by €25 million to €31 million reflecting a 6.7 points improvement of combined ratio to 99.9% driven by (i) a favorable technical trend and a reduction in claims handling costs (€–8 million post-tax), and (ii) a decrease in expenses reflecting the impact of cost cutting program. The improvement in operational performance was partly offset by a decrease in net realized capital gains (€0 million post-tax in 2002 versus €9 million in 2001) mainly due to higher valuation allowances on impaired equity securities in 2002. As a result of improved operational performance, excluding net capital gains and losses, underlying earnings increased by €38 million to €33 million.
CANADA Gross revenues increased by 12% to €744 million on a comparable basis. The growth was principally due to increases in premium rates in all lines of business following the hardening of the Canadian market, with the most important increases in Ontario’s motor business and in commercial lines.
(21% of gross written premiums). This trend was driven by both (i) rating action taken on all branches of business, including increases of 8-9% applied to the personal and commercial motor accounts and (ii) growing volumes on motor mainly due to new business inflow combined with a strong retention rate on existing portfolios.
Adjusted earnings increased by €29 million compared to 2001, mainly explained by an improved net technical result, due to a 7.1 points reduction in the loss ratio from 87.9% in 2001 to 80.8% in 2002. This favorable change is attributable to higher average earned premium in 2002, reflecting the rating actions taken during 2001, together with an improvement in motor claims frequency in 2002 and an absence of prior year reserve strengthening. The result on the household account, while somewhat improved on the previous year, continues to be unsatisfactory due to weather-related catastrophes and increased reinsurance costs. Significant rating actions have been taken to correct this account. The expense ratio improved by 0.2 point. As a result of these evolutions, the combined ratio improved by 7.3 points to 95.7% in 2002.
Adjusted earnings improved by €+28.5 million. The increase was mostly driven by the loss ratio improvement from 98% in 2001 to 82.3% as a consequence of measures taken to improve profitability (increases in premium rates, review of the business portfolio and pruning actions). The expense ratio (excluding brokers activity) decreased by
Adjusted earnings decreased by €17 million to €–4 million in 2002 as compared to 2001. The deterioration was mainly explained by (i) a €–9 million decrease in net investment result, of which a €–2 million valuation allowance was recorded on equities, and (ii) a €–5 million net Group share related to a provision posted on non recoverable deferred tax asset. The combined ratio increased by 7 points to 112% with a loss ratio net of reinsurance of 89% as compared to 81% in 2001 deteriorating mainly in workers’ compensation and liabilities businesses.
–2.4% decrease in motor business (55% of written premiums) reflecting the more stringent and segmented underwriting and the reduction in commercial discounts. Workers’ compensation (24% of written premiums) remained stable in a very competitive market.
on a comparable basis, which reflected (i) the return to a more normalized trend in claims with 2001 being adversely impacted by climatic conditions and (ii) improved expense ratio (–1.8 point to 28.4%) following the cost-cutting program.
on a comparable basis as a result of rate increases and despite portfolio pruning and stricter underwriting.
Net technical margin decreased by €–5 million, mainly attributable to current year claims charge. The current year loss ratio strongly deteriorated by 10.1 points to 78.5%, mainly attributable to motor and property (natural catastrophes, higher frequency, large claims and fronting).
Net investment result decreased by €–11 million, due to lower capital gains (€–4 million) and a higher allowance for equity impairment (€–7 million).
Japan Gross written premium increased by +19% on a constant exchange rate basis to €77 million, primarily as a result of the progression of the motor portfolio ( 43%, 75% of the total revenues).
Contribution to consolidated gross revenues 5,762 5,695 5,678 3,651 (a) Gross written premiums, plus fees, commissions and other revenues. (b) Discontinued business transferred from Property & Casualty segment.
Adjusted earnings & Net income FY FY 2001 FY 2001 FY
– Insurance (34% of gross revenues): Premiums and fees increased by 14% to €1,762 million due to (i) market rate increase after September 11 U.S. terrorist attacks in Property & Casualty lines, (ii) portfolio recovery not only resulting in revision of underwriting terms applied to business in force but also in cancellations in Property & Casualty and marine business and (iii) prior years adjustments coming from an in depth full year review of 2001 underwritten policies.
Net attritional margin on current accident year increased significantly by €209 million.
Attritional current year loss ratio (a) (b) 73.4% 76.6% 75.7% 80.4%
Attritional all accident year loss ratio (a) (b) 75.1% 77.4% 76.6% 85.5%
Operating income (including AXA Cessions) (179) (538) (a) Net of ceded reinsurance (cession and retrocession).
(b) Attritional data exclude (i) major losses in claims charge and (ii) covers’ cost in ceded premiums. (c) (Attritional claims charge and major losses cost on all accident years) divided by (net earned premiums). (d) Pro forma New French GAAP, as if New French GAAP had been in force since January 1, 2000. (e) FY 2002 and FY 2001 proforma are presented excluding AXA Cessions.
– The cost of cover programs increased by €64 million to €572 million, resulting from the hardening market conditions.
– Loss reserve adjustment on prior years were recorded in 2002 (€–416 million), i.e. €507 million worse than in 2001, mainly due to unfavorable development of claims such as September 11 events claim (€–143 million net of reinsurance and gross of tax) and to extensive reserving review performed in 2002.
Net investment result decreased by €97 million to €307 million in 2002 as compared to 2001, mainly explained by a €68 million decrease in investment income and a €26 million decrease in net capital gains corresponding to (i) a €57 million increase in exchange rate result due to the U.S. dollar decrease and (ii) a €85 million decrease in net capital gains, including an allowance for equity impairments of €115 million in 2002.
Income tax expense had a positive impact of €+44 million in 2002 though €154 million lower than in 2001.
Adjusted earnings increased by €220 million to €–138 million in 2002 as compared to 2001. The increase was mainly due to (i) a €496 million increase in the net technical margin partly offset by (ii) a €23 million increase in general expenses (iii) a €97 million decrease in the net investment result and (iv) a €154 million increase in income tax expense.
AXA Cessions adjusted earnings decreased by €–12 million due to the setting-up of a bad debt reserve.
ASSISTANCE Gross revenues increased by +11% on a comparable basis to €391 million, mainly attributable to the European area due to the strong increase of +19.5% in the UK National Healthcare Service business.
Asset Management The Asset Management segment includes third-party Asset Management and Asset Management on behalf of AXA
insurance companies. The tables below present the revenues and the net income for the Asset Management segment for the periods indicated: (in euro millions)
Contribution to consolidated gross revenues 3,411 3,730 2,984 (a) As a result of the joint-venture between AXA Asia Pacific Holdings and Alliance Capital, Asset Management operations previously run by National Mutual Funds Management are now run by Alliance Capital. Other previous activities of NMFM are now presented within AXA Life & Savings operations in Australia / New Zealand.
Fees, commissions and other revenues were down €443 million in 2002 as compared to 2001, or –8% on a constant exchange rate basis, due to lower distribution revenues and advisory fees, in line with lower average AUM, down 8%
Administrative expenses decreased by €234 million, or –4% on a constant exchange rate basis, driven by lower cash compensation and promotion expenses, partially offset by higher Bernstein acquisition related expenses (higher deferred compensation and rent), and legal costs.
Net of minority interests, adjusted earnings decreased by €78 million, or –25% on a constant exchange rate basis
As a result of the acquisition of 8.16 million private units, AXA Financial’s ownership interest in Alliance Capital increased by 3 points from approximately 53% at year-end 2001 to 56% at year-end 2002.2
(a) Pro forma New French GAAP, as if New French GAAP had been in force since January 1, 2000.
On November 8th 2002, the former shareholders of Sanford C. Bernstein, Inc. decided to exercise their right to sell 8.16 million private units in Alliance Capital to AXA Financial. This acquisition, at a price of $30.6 a unit, generated a goodwill of $122 million reflecting an increase of circa 3 points in AXA Financial’s ownership interest in Alliance Capital. Consequently, the provision was released in proportion to the initial dilution (i.e. 3 points vs. 10.5 points), or €277 million ($261.5 million), and the goodwill was entirely amortized in the period, or €129 million. The release of the provision net of goodwill amortization was reported in the “impact of exceptional operations”.
Other Financial Services The tables below present the revenues and the net income for the Other Financial Services segment for the periods indicated: M an ag em en t R
FRENCH BANKS Adjusted earnings and underlying earnings decreased by €–18 million to €–3 million in 2002 as compared to 2001.
GERMAN BANKS Adjusted earnings and underlying earnings increased by €3 million to €2 million in 2002 as compared to 2001. It was mainly attributable to an increased interest margin in AXA Bank and lower income taxes of the building society.
(29% of the “Other” revenues) decreased by –57% in 2002 to €15 million due to the decrease in investment income following the sale in June 2001 of an important mutual fund asset. Holding SOFFIM revenues (24% of the “Other”
AXA (THE PARENT COMPANY) 2002 adjusted earnings improved by €56 million, as a result of (i) lower cost of debt (€+137 million) due to lower interest charge, as a result of declining interest rates and the strengthening of the euro against mostly U.S. dollar, yen and sterling pound, partially offset by the amortization of redemption premiums on the convertible bonds issued by AXA SA (ii) lower management expenses (€22 million post-tax) mainly due to lower AXA trade mark expenses and a decrease of AXA’s ADR management cost, partly offset by (iii) a decrease in net capital gains by €–97 million compared to 2001.
AXA ASIA PACIFIC HOLDINGS Adjusted earnings (excluding one-off profit on sale of AXA Health, €87 million Group share) were a loss of €–19 million compared to €–40 million for the 15 months 2001, or €–31 million for the restated 12 months to
December 31, 2001. This improvement reflected the inclusion of a tax crystallization upon the liquidation of a subsidiary offset by slightly higher financing costs resulting from a higher debt base used to fund acquisitions and despite lower average interest rates.
NET INCOME (257) (318) 1,123 (a) Pro forma New French GAAP, as if New French GAAP had been in force since January 1, 2000.
In this context, AXA’s focus on financial protection and wealth management, its renewed emphasis on operational performance, its financial strength, should allow the Group to be among the leading actors of the market, with significant net new money levels in Life & Savings and Asset Management, and solid organic growth in Property &
As indicated in 2001, a combined ratio of 104% is expected in 2003; further efforts will be made to improve the combined ratio aiming at the 102% target for 2005. Additional expense savings are also planned through the combination of local initiatives and global programs at Group level.
(constant methodological basis), in one of the two periods being compared.
ADJUSTED EARNINGS Adjusted earnings represent the net income (Group share) before the impact of exceptional operations and amortization of goodwill.
Adjusted earnings per share (adjusted EPS) represents AXA’s consolidated net income before the impact of exceptional operations and amortization of goodwill, divided by the weighted average number of outstanding ordinary shares.
Adjusted earnings per share diluted (adjusted EPS diluted) represents AXA’s consolidated net income before the impact of exceptional operations and amortization of goodwill, divided by the weighted average number of outstanding ordinary shares, on a diluted basis (that is to say including the potential impact of all outstanding stock options, that are not anti-dilutive, being exercised and conversion of existing convertible debt into shares, assuming the impact is not anti-dilutive).
LIFE & SAVINGS MARGIN ANALYSIS Even though the presentation of margin analysis is not the same as the statement of income, it is based on the same
There are certain material differences between the detailed line-by-line presentation in the statements of income and the components of margin analysis as set out below.
(i) Gross premiums (net of deposits), fees and other revenues are allocated in the margin analysis based on the nature of the revenue between “Fees and revenues” and “Net technical margin”.
(ii) Policyholders’ interest in participating insurance contracts is reflected as a change in insurance benefits in the statements of income. In the margin analysis, it is allocated to the related margin, that is, primarily, the “Investment margin” and the “Net technical margin”.
(iii) Loading on (or contractual charges included in) premiums received on all non unit-linked product lines (Life,
– Operating margin is the sum of (i) Investment margin, (ii) Fees and revenues, and (iii) Net technical margin (items as defined above in the margin analysis above).
(iii) Underlying cost income ratio: expenses / “underlying” operating margin, where: – Expenses are total expenses, excluding expenses related to mutual fund business (mainly fees paid to the sales fore) net of participating benefits, gross of deferral and amortization of deferred acquisition costs (DAC) and gross of amortization of value of purchased Life business in-force (VBI),
(iii) Valuation allowances and release in respect of impaired invested assets.
AXA CORPORATE SOLUTIONS Covers are specific reinsurance treaties, bought to protect all or a portion of the company’s portfolio against major losses. If such losses do not occur over the insured period, a profit commission (or “no-claim bonus”) is paid to the ceding company. In general, the cost of a cover is accrued (or by extension “earned”) ratably over the treaty period.
Major losses are defined as any event whose net ultimate cost is greater than $50 million (approx. 3% of AXA
Corporate Solutions consolidated shareholders’ equity); the Net “ultimate” cost is the result of the claim cost (net of reinsurance) minus the reinstatement premiums (net of reinsurance).
ASSET MANAGEMENT Net new money: Inflows of client money less outflows of client money. Net new money measures the impact of sales efforts, product attractiveness (mainly dependent on performance and innovation), and the general market trend in investment allocation.
1. Year 2002 operating highlights 2. Events subsequent to December 31, 2002 3. Accounting policies and consolidation principles 4. Scope of consolidation 5. Total asset by segment 6. Goodwill 7. Value of purchase life business in force 8. Investments 9. Separate account (unit-linked) assets 10. Investments from the non-insurance activities 11. Investments in affiliated companies (equity method)
Assets At December 31, 7 Value of purchased life business inforce 3,224 3,739 3,724
Reinsurers’ share of separate accounts (unit-linked) liabilities 20 28 92 19 Reinsurers’ share of insurance liabilities 9,930 11,619 9,234 12 Receivables from insurance and reinsurance activities 14,003 15,571 13,817
Receivables from non-insurance activities 11,367 11,433 10,719 13 Cash and cash equivalents 17,592 17,646 28,728
Income before income tax expense 2,597 1,721 9,176 11 Equity in income from affiliated entities 23 17 (23)
NET INCOME GROUP SHARE 949 520 3,904 28 Net income per ordinary share (basic) (b) 0.55 0.30 2.57 28 Net income per ordinary share (diluted) (b) 0.55 0.32 2.44
Goodwill amortization (Group share) 643 681 279 28 Adjusted earnings per ordinary share (basic) (b) 0.78 0.70 1.67 28 Adjusted earnings per ordinary share (diluted) (b) 0.78 0.70 1.60 (a) The December 31, 2000 financial statement data, as reported, have been presented under a new basis of presentation following the implementation of new French Regulations effective January 1, 2001.
(b) 2000 per ordinary share data restated for the effect of the 4-for-1 stock split approved by the shareholders at the annual general meeting held on May 9, 2001.
In 2000: – the consolidated net realized gain on the sale of Donaldson, Lukfin & Jenrette (“DLJ”), which totaled €2,004 million net group share (€2,071 million net Group share and net of realized and unrealized losses on Credit Suisse group shares received in respect of that transaction of €67 million); – realized losses and valuation allowances of euro 236 million (net Group share) relating primarily to the Equitable Life high yield bond portfolio as a result of broad weaknesses in credit markets from a slowing economy during the third and fourth quarter of 2000, coupled with a review of investment strategy following AXA’s acquisition of the minority interests in AXA Financial; and
– provision of €125 million recorded during the period in connection with the sale of Banque Worms.
East, in Africa and in South America. In AXA’s annual report and financial statements, the segment analysis is based on five types of activities: “Life & Savings”, “Property & Casualty”, “International Insurance” (including reinsurance)
1.2.1. ACQUISITIONS On September 2, 2002, AXA and BNP Paribas announced that they had concluded an agreement for the acquisition by AXA of 100% of Banque Directe, a subsidiary of BNP Paribas group. The purchase price was €60 million, and the operation generated goodwill of €13 million, amortized within the year.
In Australia, AXA Asia Pacific Holdings Limited (AXA APH) announced on July 19th the acquisition of the Australian company ipac Securities Limited, for AU$205 million (€118 million using the average AU$/€ exchange rate for the period). The goodwill generated by this operation amounts to €101 million (using the closing AU$/€ exchange rate)
1.3.1. CAPITAL OPERATIONS The AXA Group has for several years offered its employees, in and outside France, the opportunity to purchased its shares issued by way of capital increase reserved for employees. In 2002, employees invested €255 million (respectively €13 million in July 2002 and €242 million in December 2002). The 2002 offerings led to the issuance of 27.2 million additional shares, bringing the total number of shares in issue to 1,762 million as at December 20, 2002. As of December 2002, employee shareholders represented approximately 4% of the outstanding share capital of AXA
1.3.2. FINANCING OPERATIONS In January 2002, AXA negotiated a 3-year bilateral credit facility for €100 million. In January and February 2002, AXA
2. Events subsequent to December 31, 2002 In Austria and in Hungary, AXA announced on December 18, 2002 the terms of its discussions with certain shareholders of UNIQA Versicherung AG, the first Life and fourth non-life insurer in Austria, for the sale of its business. This transaction has been signed by both parties in December 2002, but is still subject to the approval of local regulators. The estimated amount of the realized capital gain to be accounted for in 2003 is €45 million.
In Australia, on 29 November 2002, AXA Asia Pacific Holdings announced that it had signed a memorandum of understanding to sell its 50% stake in Members Equity Pty Ltd for €51 million. The transaction was finalized early in 2003, at which time the realized capital gain on sale, of €11 million net Group share will be booked in the Group consolidated accounts.
AXA’s 2001 consolidated financial statements included 15 months of operating results beginning October 1, 2000 for this group of companies.
including the new French Regulation No. 2000-05 that became effective on January 1, 2001 and introduced certain new accounting and disclosure principles for preparing and presenting the consolidated financial statements of an insurance company.
In 2001, there were changes in accounting principles due to (i) the implementation of the new French Regulations
3.4.1. BASIS OF CONSOLIDATION Companies in which AXA exercises controlling influence are fully consolidated. Controlling influence is presumed when AXA directly or indirectly holds at least 40% of the voting rights and no other shareholder directly or indirectly holds a percentage interest greater than that held by AXA.
Companies in which AXA directly or indirectly holds 20% or more of the voting rights and for which AXA and other shareholders have agreed to exercise joint controlling influence are proportionately consolidated.
Investments in mutual funds, investment and real estate companies principally held by AXA’s insurance entities are not consolidated but accounted for at cost, if the exclusion from consolidation does not impact the true and fair presentation of AXA’s consolidated financial condition or operating results.
Subsidiaries and investments in affiliates are accounted for at cost rather than being consolidated if the following conditions are met: – from the date of acquisition, the entity is held for sale,
– the subsidiary does not have a material impact on AXA’s consolidated financial position and consolidated operating results, or
The equity holdings of entities that are not consolidated, which are used to support separate account (unit-linked)
If goodwill is negative, the following adjustments are made: – acquisition of a company that was not previously consolidated: the estimated fair value determined for real estate is decreased to the extent necessary to eliminate such excess,
– acquisition of ownership interest of an existing consolidated company: the net book value of the assets are reviewed and decreased in value where appropriate, with the remaining negative goodwill offset against any pre-existing goodwill asset arising from previous partial acquisitions of the relevant company.
Goodwill recorded is allocated (i) to the companies or portfolios of business acquired in respect of importance in the market and their expected profitability, and (ii) to the segments and entities within the AXA Group that will benefit from the activities acquired.
For acquisitions undertaken prior to January 1, 2001, when new shares were issued by AXA (the Company) to partly finance an acquisition, a portion or all of the goodwill could be charged directly to retained earnings and reserves (in proportion to the value of shares issued by AXA to total purchase price). The value recorded in retained earnings and reserves would remain unchanged unless there was a dilution of ownership interest in the acquired company (see “Net
3.4.3. INTER-COMPANY TRANSACTIONS From January 1, 2001, the entire effect of inter-company transactions is eliminated upon consolidation unless there are durable losses, which are recorded immediately.
If parameters used to determine the initial amortization period (value of assets, future operating profits, market share)
do not change in the course of this period, the initial amortization pattern remains the sames. If there are significant adverse changes, an exceptional goodwill amortization charge is recorded (or a modification to the initial pattern).
Valuation allowances are determined according to a regulation issued by the French standard setter (l’Avis du Comité
Valuation allowances recorded for the impairment of equity securities may be reversed in subsequent periods.
“With-profit” funds; an adjustment in insurance liabilities is required if a change in fair value occurs,
– invested assets held by AXA’s banking subsidiaries for trading purposes, for which the change in fair value is recorded in the net investment result.
3.5.5. DEFERRED ACQUISITION COSTS (“DAC”) IN RESPECT OF LIFE INSURANCE OPERATIONS The costs of acquiring new and renewal business that vary with and are primarily related to the production of new business are specifically identified and deferred by establishing an asset. This asset is amortized based on the estimated gross profits emerging over the contract term. Estimates of gross profits are reviewed at the end of each accounting period and the amount not deemed recoverable from future estimated gross profits is recorded as a charge against income.
DAC is reported net of unearned revenue reserves, which are recorded in income over the contract term using the same amortization basis used for DAC.
Restructuring Costs In connection with a business combination, restructuring costs relating to employee termination benefits, the closing of office sites and image changes in respect of the acquired company are included in a restructuring provision recognized in the opening balance sheet of the acquired company. When a restructuring provision impacts the acquirer or its subsidiaries, a restructuring provision is recorded as a liability and included in the purchase price. In the event that the provision is not fully utilized, the release of the provision does not impact the post-acquisition operating results.
In other cases, restructuring provisions are recorded in the period a restructuring plan is approved with any release in provision recorded in the operating results.
Pensions and other post-retirement benefits Long-term liabilities of employee benefits are calculated according to the “preferred method” under French regulation. They include the benefits payable to AXA group employees when they retire (departure compensation, pension complement, medical cover, long-service benefits). In order to face those commitments, some regulators have allowed or imposed the set-up of dedicated funds. The funding and implementation methods are specific to each country and each fund.
– Defined contribution plans are characterized by the payment(s) to institutions, which makes the employer free of future commitments. Those institutions are responsible for paying the amounts due to the employees. Indeed, once the contributions are paid by the employer, there is neither commitment nor liability in the Group financial statements.
The cost of the contributions paid which is an expense in the Profit and Loss account.
The balance sheet information for employee benefits captures the difference between the Projected Benefit Obligation and the market value of the corresponding invested plan assets increased by the unrecognized loss or decreased by the unrecognized gains. When this difference is positive a contingency and loss reserve is booked within the balance sheet liability. When it is negative, an asset is recorded in the balance sheet.
Insurance claims and claims expenses The claims reserves are determined on a basis to cover the total cost of settling an insurance claim. With the exception of disability annuities, annuities for which the payments are fixed and determinable, the claims reserves are not discounted.
(“IBNR”) in the accounting period and costs associated with the claims settlement management. The claims reserve is based upon estimates of the expected losses and unexpired risks for all lines of business taking into consideration management’s judgement on the anticipated level of inflation, regulatory risks and the trends in cost and frequency of claims, actual against estimated claims experience, other known trends and development, and local regulatory requirements.
– Unexpired risk provisions are established for contracts for which the premiums are expected to be insufficient to cover expected future claims and claims expenses. The calculation of the provision includes estimated future losses, administration expenses and investment income.
Even though analyses performed did not demonstrate any liquidity risk, for French regulatory reasons, a provision was maintained in the consolidated accounts for approximately €72 million before tax, or €47 million net Group share.
3.6.4. SEPARATE ACCOUNT (UNIT-LINKED) CONTRACTS These contracts are linked to a specific pool of investment funds / assets and are written by AXA’s Life insurance companies. In respect of these contracts, the investment risks and rewards are principally transferred to the policyholders and the guarantees on the benefits are realized and supported by the investment funds. For these contracts the liability represents the fair value of the investment funds / assets linked to those contracts at the balance sheet date.
Réglementation Comptable) issued on December 12, 2002 for certain financial instruments (forwards) issued by insurance companies. This opinion is consistent with the principles already applied by AXA, with the exception of the recognition until 2001 of unrealized gains on derivatives instruments that are not in qualifying hedges.
For derivative instruments that qualify as hedges that AXA uses in asset-liability management or to cover certain designated assets or liabilities against the change in fair value or future anticipated cash flows, the total change in value is recorded in a similar manner as the underlying hedge item; related charges and revenues are recorded in the net investment result. Tests of effectiveness are performed on a routine basis. For foreign currency hedges in net investments in foreign operations, the unrealized and realized gains and losses are recorded in shareholders’ equity until the foreign subsidiary is sold, at which time the amount is included in income. In the case of a strategic investment / divestment, the results are deferred until the asset is acquired or sold.
Other derivative instruments are accounted for on the balance sheet at estimated fair value. The unrealized losses are included in the net investment result with a credit to other provisions for risks and charges. The estimated fair value is determined using market value, if available, otherwise determined using other valuation techniques such as option pricing models, or other internal estimates.
3.8.1. GROSS PREMIUMS AND FINANCIAL SERVICES REVENUES Gross premiums written correspond to the amount of premiums written on business incepted in the year for insurance and reinsurance companies, net of policy cancellations and gross of reinsurance ceded. In the reinsurance sector, the premiums are recorded on a basis as declared by the cedant and may include estimates of gross premiums written but not yet reported in the period, which are adjusted in future periods to reflect actual gross premiums written and ceded to the reinsurer.
Gross revenues in respect of banking and other activities are determined principally as follows: – commissions received upon the sale of financial products, including those revenues received by the insurance companies on such activities,
– commissions received and fees for services rendered in respect of asset management activities,
3.8.2. CHANGE IN UNEARNED PREMIUM RESERVES The unearned premium reserve is reported as a liability (see “Unearned Premium Reserve” above). Total revenues in the period include the change in unearned premium reserve, which represents the earned premium in the period, gross of reinsurance.
3.8.3. NET INVESTMENT RESULT The net investment result in respect of insurance activities includes: – investment income from the insurance-related invested assets, net of depreciation expense on real estate investments
(depreciation expense on real estate not held for investment is included in administrative expenses),
– unrealized investment gains and losses on invested assets in respect of separate account (unit-linked) assets, assets allocated to UK “With-profit” contracts and other invested assets whereby such assets are stated at market value
Company’s share price in the market, to be attributed to employees in connection with share purchase programs, or are treated as investments supporting separate account (unit linked) contracts.
For all share options granted by AXA (the Company) or any other AXA entity that provide a guarantee for liquidity, a liability (corresponding to the difference between the market value of the shares and the exercise price) is determined at measurement date, being the vesting or exercise date. Accordingly, an estimate of the compensation charge is determined at the end of each interim reporting period dependent on the market value of the underlying shares at such interim date.
In respect of acquisitions of minority interests, the share repurchase induces an increase in the Group’s interest. The cost of settling or exchanging outstanding employee share options of the target company is included in the purchase price, as the buyout includes the cost of acquiring the minority shareholders interests plus the potential shares to be issued by the target company in respect of the share options granted to its employees. The excess price should be split between a charge corresponding to the Group increase in interest to the level of the initial interest level and an additional goodwill up to the complementary interest acquired.
4.1.1. PRINCIPAL CHANGES IN CONSOLIDATION IN 2002 The main change in scope of consolidation in 2002 is linked to the sale of AXA Health Insurance Pty Ltd in Australia, concluded and taken into account as of August 31, 2002 (8 months of activity in 2002).
4.2.1. FULLY CONSOLIDATED COMPANIES Certain entities below represent the Parent Company of sub-groups that can hold an interest in entities in more than one country and, therefore, may be consolidated with an ownership interest less than that indicated for the Parent
AXA Courtage Iard Merger with AXA Assurances IARD – – 99.65 99.65
AXA Equity & Law Life Assurance Soc. Merger with AXA Sun Life – – 100.00 99.99
AXA Non Life Insurance Co Ltd (Japon) 100.00 100.00 100.00 100.00
Australian Casualty Liquidation / Merger Insurance Pty Ltd with National Mutual – – 100.00 51.00
Ayuda Legal SA de Seguros y Reaseguros 100.00 99.68 100.00 99.68
AXA Aurora SA Vida de Seguros y Reaseguros 99.68 99.68 99.68 99.68
AXA Portugal Companhia de Seguros de Vida SA 95.09 95.05 95.09 95.09
Fonds immobiliers Paris Office Funds Scope entry 50.00 49.89 – –
Change Voting Ownership Voting Ownership in scope rights interest rights interest
5. Total asset by segment An analysis of total assets by segment is given below: The 2002 and 2001 breakdown of total assets by activity remains comparable. The decrease in total assets is attributable to unfavorable financial market conditions.
6. Goodwill An analysis of goodwill by principal acquisition and segment is presented in the table below. The figures presented usually refer to several operational entities for which the goodwill amortization charge decreases the contribution to earnings.
AXA Colonia (acquisition of minority interests) 217 4 – (10) –
Royale Belge (acquisition of minority interests) 616 – – (22) –
AXA Financial, Inc. (acquisition of minority interests) 4,782 – – (191) 7
AXA Aurora (acquisition of minority interests) 104 – – (3) –
Total by segment: (a) The portion of goodwill attributed to the Asset Management activities is to be amortized over 20 years (18 years remaining). (b) In 2001, €47 million have been reclassified from “Acquisition” to “Other changes”.
At December 31, At December 31, 2001 Acquisition Currency Amorti- Other 2002 Years
Goodwill is attributable to following operations and entities: 6.1. AXA UK (2001) As a result of AXA Equity & Law’s financial reorganization, AXA acquired a portion of the surplus assets held in the participating (“With-profit”) fund and related future benefits based on the percentage of policyholders who elected in favor of the plan. This acquisition was effectuated by the payment of an incentive bonus of approximately £260 million plus £18 million of direct expenses associated with the transaction (or approximately €451 million in the aggregate using the average £/€ exchange rate for the period). This cost represents goodwill and will be amortized over 30 years. The annual goodwill amortization expense will be €15 million.
As a result, AXA increased its ownership interest in AXA Financial from 60% to 100%. For purposes of these consolidated financial statements, the date of acquisition was December 31, 2000 given that pursuant to the Merger
The remaining €4,782 million of the excess purchase price was recorded as a goodwill asset and represented an annual amortization charge of €191 million in 2002 of which 80% was attributed to the Life insurance operations
(being amortized over 30 years) and 20% was attributed to the Asset Management operations of Alliance Capital
6.3 SANFORD C. BERNSTEIN TRANSACTION (2000) The purchase price was US$3.5 billion (€4.0 billion) and consisted of cash in the amount of US$1.5 billion and 40.8 million newly issued private units in Alliance Capital. A portion of the cash was funded by AXA Financial through a financing agreement whereby in June 2000 AXA Financial purchased units of limited partnership interest of Alliance
Capital Management L.P. for an aggregate purchase price of US$1.6 billion and, as a result, recorded goodwill of €583 million. Added to the €3,689 million recorded at time of acquisition, the total goodwill linked to the acquisition of Sanford C. Bernstein amounted to €4,272 million amortised over 20 years. The excess purchase price paid by
Alliance Capital over the fair value of the net assets acquired in Sanford C. Bernstein, Inc. totaled US$3.5 billion (or €4.0 billion). The goodwill amortization in 2002 was €336 million at 100% (€187 million net Group share).
After the completion of this lockout period in October 2002, Sanford C. Bernstein’s former shareholders exercised their options and AXA Financial acquired 8.16 million of their units, thus generating a complementary goodwill of
6.4. SUN LIFE & PROVINCIAL HOLDINGS (SUBSEQUENTLY RENAMED AXA UK HOLDINGS) – BUY-OUT OF MINORITY INTERESTS (2000)
AXA acquired the 44% minority interests in Sun Life & Provincial Holdings (SLPH), which was subsequently renamed
AXA UK Holdings for a purchase price of £2.3 billion (approximately €3.7 billion). The excess purchase price over the carrying value of the portion of net assets acquired was €1,971 million. The entire excess purchase price was attributed to goodwill and is being amortized over 30 years. The goodwill amortization charge was €64 million in 2002.
Pacific Holdings (formerly National Mutual Holdings and the parent company of AXA China Region) in 1995. The goodwill amortization charge in 2002 was €16 million.
6.7. GUARDIAN ROYAL EXCHANGE (1999) The excess purchase price over the fair value of net assets acquired of €1,138 million was attributed to goodwill and is being amortized over 30 years.
A portion of the goodwill was attributable to a decrease in net assets of the acquired companies at date of acquisition, as there was a significant deficiency in insurance claims reserves recorded in the opening balance sheet by AXA.
had been revised and, therefore, goodwill had increased. At December 31, 2000, gross goodwill was €1,261 million, accumulated amortization was €505 million (of which €25 million represented an amortization charge in 2000) and, therefore, goodwill net of accumulated amortization totaled €770 million, after taking account of foreign currency fluctuations of €14 million. The goodwill amortization charge in 2002 was €27 million.
6.8. ROYALE BELGE (1998) At December 31, 1999, gross goodwill from this transaction was €1,007 million of which €337 million was paid in cash from the issuance of treasury shares and charged directly to retained earnings and reserves. The remaining balance at December 31, 2001, represented a goodwill asset of €670 million, with accumulated amortization totaled €77 million (of which €22 million represented an amortization charge in 2001) with a net carrying value of €593 million.
In 1997 AXA acquired Companie UAP (“UAP”) and €1,863 million represented the excess purchase price over the net identifiable assets acquired, of which €1,641 million of the excess purchase price was charged directly to retained earnings and reserves. As a result of purchase accounting adjustments made in 1998 and in 1999, the excess purchase price increased to €1,866 million at December 31, 1999, of which €1,584 million represented the amount charged directly to retained earnings and reserves.
An analysis of goodwill amortization (positive and negative) is presented below: At December 31, 2002, accumulated amortization on goodwill totaled €3,083 million (2001: €2.394 million).
6.10. GOODWILL CHARGED DIRECTLY TO RETAINED EARNINGS AND RESERVES At December 31, 2002, goodwill (net of notional amortization) recorded in retained earnings and reserves totaled €3,882 million, or a gross goodwill amount of €4,439 million (2001: €4,038 million net and 2000: €4,194 million net).
From January 1, 2001, goodwill can no longer be charged directly against shareholders’ equity, this explains the absence of variation between 2001 and 2002 (to the exception of notional amortization allowances).
In connection with the plan of financial reorganization of AXA Equity & Law (UK Life & Savings subsidiary) in 2001, the unit-linked business was transferred from a participating fund to a non-participating fund. As a result of this transfer,
The value of purchased Life business in force on a consolidated basis and by product type, including the changes thereto, are as follows: Amortization of the value of purchased Life business in force, net of accrued interest, expected to be recorded in each of the next five years is €272 million in 2003 and €252 million, €239 million, €230 million and €189 million thereafter. Such amounts are best estimates based on assumptions regarding anticipated future experience of the purchased business. Accordingly, such amounts are subject to adjustment each year to reflect actual experience.
– In other cases, the fair value is estimated based on financial and other information available in the market, including reference to quoted prices for similar securities, or estimated discounted cash flows, including an element of premium risk.
8.2. ANALYSIS OF FIXED MATURITY AND EQUITY SECURITY INVESTMENTS A. An analysis of investments is presented below: Fin an cia l S
– Equity holdings in fixed maturity-based mutual funds 11,839 12,049 81 82 11,920 12,131
B. At December 31, 2002, AXA ordinary shares held by AXA (the Company) or its subsidiaries (“treasury shares”) totaled 30.5 million (or a slight decrease of –0.2 million compared to December 31, 2001). At December 31, 2002, the carrying value of such shares was €487 million, representing 1.7% of outstanding ordinary shares stable compared to 2001.
In 2002, AXA sold 0.7 million shares held in treasury with no realization of capital gains as in 2001 (in 2000 €60 million, net Group share, were sold).
8.3 INVESTMENTS IN PARTICIPATING INTERESTS The following table sets forth an analysis of investments in entities in which a participating interest exists at December 31, 2002: (in euro millions)
Net Last fiscal year Fiscal Percentage carrying Fair Shareholder’s net income year of value value equity Amount end ownership
ta te m en ts 8.4 FIXED MATURITY AND EQUITY SECURITIES Securities (excluding assets in representation of unit-linked accounts) are detailed below. The amortized or historical cost represents the acquisition cost of the securities, net of discount or premium in respect of fixed maturity securities acquired.
At December 31, 2002 Amortized or Gross Gross Fair historical cost unrealized gains (1) unrealized gains (1) value
Fixed maturities: (a) Held to maturity and available for sale 138,265 9,595 (738) 146,546
(b) Allocated to UK “With-profit” business trading 15,362 (c) Other trading securities 2,065 Total fixed maturities 163,972 Total equity investments (including holdings in mutual funds) (a) Available for sale 48,332 1,561 (6,790) 41,024 (b) Allocated to UK “With-profit” business trading 10,342 (c) Other trading securities 1,130 Total equity investments (including holdings in mutual funds) 52,495 Investment in participating interests 5,029 TOTAL 221,497
At December 31, 2001 Amortized or Gross Gross Fair historical cost unrealized gains (1) (2) unrealized gains (1) (2) value
Other local governments and agencies 884 114 (4) 997 Government-controlled corporations 10,533 390 (52) 10,869 Non-government controlled corporations 52,537 1,650 (661) 52,997
Depreciation of real estate used for operating purposes 1,119 171 – (230) 1,060
Assets from the banking sector and other are presented in note 8 above.
Companies that were accounted for by using the equity method are presented in note 4, along with AXA’s ownership interest percentage. An analysis of net carrying value and contribution to net income is given below.
(a) Includes foreign currency fluctuations and net income for the period adjusted for dividends received. (b) Includes €60 million from hungarian and austrian entities in application of the Règlement 99-02 and €34 million from the
The 2002 changes in scope are mainly related to entities which were consolidated under the equity method for 2002
(and which were previously fully consolidated), since they no longer meet Group materiality requirements. The complete list of these entities is available in Note 4. The change in scope on AXA Asia Pacific Holdings subsidiaries (€247 million) is linked to increasing participations.
The receivables and payables from insurance and reinsurance activities are as follows: 13. Cash and cash equivalents Cash and cash equivalent are mainly liquid and short-term investments. The table below details those cash and cash equivalents by segment.
Cash and cash equivalents 17,592 17,646 From insurance activities 16,362 15,955 From banking activities 259 361 From other companies 971 1,330
14. Deferred acquisition costs (DAC) The table below presents the deferred acquisition costs (DAC) by Insurance segment: The movements of other deferred costs acquisitions of the Life & Savings segment are provided below : (in euro millions)
At December 31, 2002 At At Life & Property & International December December
Deferred acquisition costs on unearned premiums 25 1,003 380 1,408 1,305 1,206
Number Nominal of nominal brought the financial in millions value value forward year TOTAL
– Impact of New French GAAP restatements – – – (593) – (593) – Impact of change in methodology
(July and December 2001) 18.3 42 279 – – 321 – Exercise of share options 2.6 9 22 – – 31 – Cash dividend – – – (1,053) – (1,053) – Impact of foreign currency fluctuations – – – 300 – 300 – Other – – – (49) – (49)
(July and December 2002) 27.2 62 192 – – 254 – Exercice of share options 0.8 2 6 – – 8 – Cash dividends (b) – – – (1,117) – (1,117) – Impact of foreign currency fluctuations – – – (1,197) – (1,197)
16. Minority interests Changes in minority shareholder’s interests are summarized as follows: Changes in consolidation scope and impact of acquisitions: The decrease in minority interests in 2000 was primarily attributable to the buyout of minority interests in AXA Financial
(€3,457 million), AXA UK Holdings (€1,718 million), and, to a lesser extent, the buyout of minority interests in AXA
17. Mandatorily Convertible bonds and notes At December 31, 2000 other equity only included a convertible bond for €192 million (€320 million before intra-group elimination for the Company). At December 31, 2001, this loan was fully repaid. As a consequence, 28.7 million shares were created after the 4 for 1 stock split, of which 11.2 million are held by AXA’s subsidiaries. This operation led to a €320 million increase in AXA capital equity. The remaining balance is consequently nil at December 2002 and at
Gross insurance reserves: Total insurance liabilities, gross of reinsurance ceded 217,916 224,892 31,612 33,079 13,644 14,154 263,172 272,125
Separate account (unit-linked) liabilities, gross of reinsurance ceded 90,011 115,305 – – – – 90,011 115,305
(b) Which includes: – Policyholders’ participation (bonuses), excluding UK “With-profit” business 9,737 10,832
The movement in gross claims reserves for claims to be paid is presented below, in respect of the Property & Casualty segment and the International Insurance segment.
There are significant uncertainties that affect the insurance companies’ ability to estimate future losses for these types of claims and there are a number of issues now being litigated, which may ultimately determine whether and to what extent insurance coverage exists.
In France, the French Supreme Court (Cour de Cassation) has recently extended the notion of inexcusable offense to professional diseases. AXA companies concerned by this new case law have reviewed their portfolio so as to identify the contracts that may be concerned by this extended guarantee.
liabilities are estimated and evaluated regularly based on information received by management. AXA carefully monitors potential claims for which it has received notice.
Provision attributable to the current year 10,884 2,904 12,125 5,100 11,879 2,684 Increase (decrease) in provision attributable to prior years (118) 1,008 (262) 920 247 951 Total claims and claims expenses 10,766 3,912 11,863 6,020 12,127 3,635 Claims and claims expenses attributable to current year (4,279) (1,266) (4,882) (1,264) (4,992) (1,856) Claims and claims expenses attributable to prior years (5,820) (2,744) (6,080) (1,743) (6,845) (1,693)
(a) Changes in the scope of consolidation are mainly due to the transfer of the UK discontinued business from “Property & Casualty” to “International Insurance” for €1,142 million as at January 1, 2002, the disposal of Austria and Hungary (€–234 million) and the de-consolidations or new entities accounted by for the equity method : principally Hong Kong Property & Casualty (€–176 million), Direct Assurances (in Spain) (€–48 million), and Singapore Property & Casualty (€–60 million).
(b) “International Insurance” currency fluctuations in 2002 are mainly due to insurance reserves on WTC (accounted to in U.S. dollars).
– A write-off of the deferred tax asset previously recorded on mutual funds unrealized gains for the France Property
– A write-off of the deferred tax asset previously recorded on expenses associated with stock-options paid to AXA
– A strong decrease in the deferred tax net balance in the United States Life & Savings activity, due to lower deferred tax assets (€–105 million due to temporary differences on contribution to pension funds and €–20 million due to the repayment of a tax credit) and higher deferred tax liabilities (€+287 million due to differences between the accounting and tax base on the deferred acquisition costs amortization pattern).
– The accounting in the Company of a deferred tax asset related to unrealized foreign exchange gains on a debt hedging an intrument (€+170 million).
II Pension obligations and other similar liabilities (b) 3,396 3,416 2,953 2,865
Net Deferred Asset (liability) 171 – 743 – (a) Net of reserves.
II) EMPLOYEE BENEFITS Long-term liabilities of employee benefits are calculated according to the “preferred method” under French regulation.
Employee benefit liabilities are either in defined contribution plans and/or defined benefit plans.
A) Defined contribution plans are characterized by the payment(s) to institutions, which makes the employer free of future commitments. Those institutions are responsible for paying the amounts due to the employees. Indeed, once the contributions are paid by the employer, there is neither commitment nor liability in the Group financial statements.
The cost of the contributions paid which is an expense in the Profit & Loss account.
B) Defined benefit plans are characterized by an actuarial assessment of the commitments based on each plans’
internal rules. The present value of the future benefits paid by the employer, PBO (Projected Benefit Obligation), is calculated based on long-term projections (salary increase rate, inflation rate, mortality, turnover, pension indexation and remaining service lifetime). The assumptions for each plan are consistent with the economic features of the countries in which the liabilities lie. Average assumptions for various regions are as follows: Annual change in liabilities: A yearly evolution of the PBO (Projected Benefit Obligation -present value of future benefits-) is made based on the following items: – service cost (representing the increase in the projected benefit obligation attributable to one year of additional service),
Given the long-term trend of employee benefit liabilities, the changes due to financial market variations and other actuarial gains or losses are amortized1 over the liability duration (approx. 15 years). They are brought into the income statement as an expense from the following accounting year.
January 2001 expected rate of return on assets for 2001 7.0% 10.2% 3.5% 8.2%
January 2002 expected rate of return on assets for 2002 6.5% 9.0% 3.5% 8.2%
The analysis of annual expenses (Net periodic benefit cost) recorded in the income statement is the following: The balance sheet information for employee benefits captures the difference between the projected benefit obligation and the market value of the corresponding invested plan assets increased by the unrecognized loss1 or decreased by the unrecognized gains. When this difference is positive a contingency and loss reserve is booked within the balance sheet liability. When it is negative, an asset is recorded in the balance sheet.
Net Periodic Benefit Cost 201 111 43 41 (a) i.e. not yet recorded in financial statements.
Fair value of plan assets, beginning of year 6,876 7,503 7 9
Fair value of plan assets, end of year (B) 5,531 6,876 7 7
With a negative net position (Liability) 1,743 1,716 441 511 (a) This amount does not necessarily equal to the amount used in the PBO calculation because pension plans are not always covered
The balance sheet evolution for a defined benefit plan is function therefore of: – the cumulated cost recorded in the income statement,
The overall amount of liabilities recorded in the balance sheet for pension benefits and similar obligations is the following: III) PROVISIONS FOR RESTRUCTURING COSTS
Impact of New French GAAP restatements – – – 33 33
In 2002, provisions were utilized for restructuring costs in the United Kingdom (€6 million for the “Blue Print” project)
and in Belgium (€9 million). In addition to the provisions utilised by AXA Financial (restructuring costs of €28 million for the head office and €9 million for the sales force), €78 million were used in France for “end-of-career” measures and €12 million in Australia / New Zealand for restructuring costs.
In 2002, €137 million were released of which €50 million linked to provisions, no longer necessary, and €75 million utilized on provision recorded in 2001 for loans that were sold below their nominal value in 2002.
– A provision of €277 million associated with the cost of settling/exchanging outstanding share options of AXA
Financial in connection with the buyout of minority interests of AXA Financial in 2000. This provision decreased by €66 million in 2002 mainly due to these options expiring.
– Provisions for the deferred compensation plans of AXA Financial (€149 million) and Alliance Capital (€120 million).
At December 31, 2002, aggregate maturities of non-subordinated debt instruments issued by AXA and its subsidiaries based on required principal payments at maturity for 2003 and the following four years amounted to €0.7 million, €0.7 million, €0.4 million and €0.4 million, €0.2 million respectively with the balance due in 2008 and thereafter
In 2002, non-subordinated debt decreased due to the following elements: – favorable foreign exchange impact (€–528 million),
– the decrease in the operating debt (€–185 million) in particular at Alliance Capital (decrease in the commercial debt following issuance of senior notes in 2001) and at AXA Banque (decrease in financing needs).
Changes occurred in 2001 in non-subordinated debt Instruments are summarized as follows: – €1.0 billion issued by the Company in June 2001 under a €3.0 billion Euro Medium Term Note Program (“EMTN”).
– In August 2001, Alliance issued U.S.$ 400 million 5.625% notes due 2006 in a public offering that are redeemable at any time. The registration statement filed with the U.S. SEC allows for the issuance of up to U.S.$600 million in senior debt securities. The proceeds were used to reduce commercial paper and credit facility borrowings and for other general partnership purposes.
23. Segment information and technical results 23.1. GROSS WRITTEN PREMIUMS AND FINANCIAL REVENUES
23.2. SEGMENT INFORMATION The following tables set forth the analysis of technical result by insurance segment: (in euro millions)
23.3. CONSOLIDATED STATEMENTS OF INCOME BY ACTIVITY The tables below present AXA’s consolidated statements of income by activity: Fin an cia l S
Life & Property & International Asset Financial Holding segments Savings Casualty Insurance Management Services companies eliminations Total
Gross written premiums and financial services revenues 48,619 15,981 5,872 3,724 1,046 – (514) 74,727
Bank operating expenses – – – – (874) – 36 (838)
Savings Casualty Insurance Management Services companies eliminations Total Data before inter-segments eliminations
Gross written premiums and financial services revenues 45,998 15,605 3,696 3,352 11,799 2 (482) 79,971
Income after income tax expense 2,982 343 160 680 484 1,754 – 6,403
Equity in income from affiliated entities 41 1 0 (5) (60) – – (23)
Other revenues, net of benefits, claims and other deductions 313 219 189
Other revenues, net of benefits, claims and other deductions 9 2 –
24. Net investment result The sources of net investment result are summarized as follows: (in euro millions)
Change in fair-value of separate account (unit-linked) assets (net) (17,576) (11,613) (4,713) – – – – – – – – – (17,576) (11,613) (4,713)
Investment gains (losses), net of valuation allowances on: (4,105) (3,324) 2,694 (145) 373 768 54 60 258 (4,196) (2,891) 3,720
Change in fair-value of separate account (unit-linked) assets (net) (17,576) (11,613) (4,713) – – – – – – (17,576) (11,613) (4,713)
(accounted for at market value in the balance sheet, excluding the positive impact of investment revenues) for €–3.4 billion (€–3 billion in 2001); (ii) valuation allowances for impairment of equity securities of €912 million on a consolidated basis (€995 million in 2001) and (iii) valuation allowances of €341 million for the depreciation of the bond portfolio in the Life & Savings insurance company in the United States (2001: €312 million).
2000 had been impacted by the following events: – The realized gain on the sale of DLJ (before minority interests and tax and net of realized and unrealized losses on the shares of Credit Suisse Group received) amounted to €5.4 billion, or €2.0 billion (net Group share). The realized gain was allocated to the Life & Savings Segment (€2.5 billion before tax and minority interests, or € 936 million net Group share) and the Holding companies (€2.9 billion before tax and minority interests, or €1,068 million net Group share).
The strong degradation of the reinsurance ceded in 2002 is explained by the exceptional cost of the September 11th attacks, for which the gross charge in 2001 was partly reinsured.
TOTAL BEFORE INTER-SEGMENTS ELIMINATIONS (7,273) (5,429) (1,769) (14,471) (2,952) (335) (177) 411 (17,525)
Intersegment eliminations – – – – – – – – –
Including: (a) Represents total acquisition expenses as presented in the statements of income including amortization expense for value of purchased life business in-force (VBI) and the change in deferred acquisition costs (DAC), which is net of changes in unearned premium reserves.
(c) Such costs are included within “insurance benefits and claims” in the consolidated statements of income. (d) Such costs are included within “net investment result” in the consolidated statement of income.
TOTAL BEFORE INTER-SEGMENTS ELIMINATIONS (7,966) (5,701) (1,554) (15,221) (3,130) (315) (222) 457 (18,431)
Life & Property & national Total Mana- Financial Holding elimi- TOTAL Savings Casualty Insurance Insurance gement Services companies nations
EMPLOYEE DATA The following table presents employee data for AXA for the year ended December 31, 2002: On a comparable basis, the total number of employees his down 3,836 of which 3,459 were in insurance operations.
The main contributors to this staff reduction are the United Kingdom (–1,412), France (– 671 of which 376 retired),
27. Income taxes A summary of the income tax (expense) / benefit in the consolidated income statements is shown below: Number Salaries and benefits of employees (a) (in euro millions)
(1) The 2002 remuneration includes the 2001 variable remuneration paid in 2002.
In 2002, in the United States, a €152 million tax credit has been recorded following settlement with the IRS that led to a more favorable treatment of certain tax matters related to separate account investments.
At December 31, 2002, AXA’s consolidated deferred tax asset, net of valuation allowances, included tax benefits attributable to net operating loss carry forwards of €737 million (€618 million in 2001). The principal countries with net operating loss carry-forwards at December 31, 2002 included Japan (€327 million vs. €362 million in 2001), the
Permanent differences relating to: – Operating expenses and other (271) (379) (326)
Insurance policy acquisition costs, policy reserves and reinsurance (260) (376) (499)
28. Net income per ordinary share The Company computes a basic net income per ordinary share and a diluted net income per ordinary share: – The calculation of the basic net income per ordinary share assumes no dilution and is based on the weighted average number of ordinary shares outstanding for the period.
– From 2002, the calculation of diluted net income per ordinary share takes into account the dilutive shares issued within stock-option plans and convertible bonds. The effect of stock-option plans on the number of fully diluted shares is taken into account only if options are considered to be exercisable on the basis of the average price of
In 2002, due to a – 41% fall in AXA’s average stock price (€17.8 vs. €30.3 in 2001), 37 million shares from stockoption plans have not been integrated in the calculation of the weighted average number of shares on a fully diluted basis (14 million in 2001). Accounting for this element as well as for the anti-dilutive effect of convertible bonds plans, this number of shares amounted to 1,739 million.
Years ended December 31, 2002 2001 Pro forma (b) 2001 as published 2000 (a)
Dilutive securities issued by subsidiaries (b) – – – – – – – – – (5) (5)
(b) From 2002, the relutive effect of convertible bonds are not taken into account for the calculation of the net income per ordinary share. 2001 has been restated to be on a comparable basis.
The detailed calculation of net income per ordinary share (basic and diluted) is provided below:
While notional amount is the most commonly used measure of volume in the derivatives market, it is not used as a measure of risk because the notional amount greatly exceeds the possible credit and market loss that could arise from such transactions. AXA is exposed to the credit risk of the counterparty to the derivative instrument, however,
At December 31, 2002, the notional amount and net fair value of such derivative instruments was €23,938 million, €83 million respectively (2001: €1,762 million and €38 million respectively). The impact on net income was a charge of €208 million (net Group share) in 2002 (2001: a charge of €56 million). The principal AXA entities that use such instruments are (i) AXA Bank Belgium, which uses non-foreign exchange rated forward rate contracts, as well as interest rate and foreign currency swaps in order to generate short-term trading profits in the ordinary course of banking activities, and (ii) AXA Japan, which purchases and writes covered call options and swaptions on the market that are denominated in either local or foreign currency to manage the interest rate, foreign currency and equity price risk exposures associated with its investment and liability portfolios: these derivatives are used to hedge principally interest rate risk, but do not meet certain requirements for hedge accounting.
(iii) managing liquidity positions (including the ability to pay benefits and claims when due) in connection with assetliability management and local regulatory requirements for AXA’s insurance and banking operations.
the balance sheet may include a net receivable or net payable at period end for cash flow exchanges that have been accrued for but not yet settled as at period end. AXA uses primarily (i) interest rate swap contracts to manage cash flows on interest received on investments or interest payments on debt, and to a lesser extent (ii) currency swap contracts to manage foreign currency denominated cash flows or investments. On a consolidated basis, the notional amount and net fair value of such instruments as at December 31, 2002 was €78,195 million and €1,453 million (2001: €49,959 million and €121 million). The net impact on income for 2002 was a gain of €584 million net Group share (2001: a charge of €86 million). At December 31, 2002, interest rate swap contracts accounted for more than 80% of these instruments used by AXA, in particular (i) AXA (the Parent Company) to hedge its interest rate exposure on debt issued or amounts borrowed, and (ii) AXA Bank Belgium mainly to hedge interest rate exposures in connection with its ordinary course of business to achieve an appropriate interest rate spread between the interest earning assets and the interest bearing liabilities. Currency swaps constitute another part of AXA’s hedging strategies to manage foreign currency cash flow exposures, and are primarily used by AXA (the Parent
– Forward and future contracts are contracts that obligate settlement at a specified price at a specified future date and can be either exchange or non-exchange traded. On a consolidated basis the notional amount and net fair value of such instruments as at December 31, 2002 was €49,301 million and €–79 million (2001: €29,314 million and €106 million). The net impact on income for 2002 was a charge of €199 million net Group share (2001: a charge of €23 million). Non-foreign currency related forward and future contracts accounted for more than 85%
of these instruments and were predominantly used by AXA’s French insurance operations and AXA Bank Belgium mainly to hedge future operating margins.
On a comparable basis, commitments to finance received amounted to €7,120 million in 2001 versus €6,991 million in 2002. This €129 million decrease is mainly explained by the decrease in AXA Financial credit facilities and the end of refinancing agreements granted to the Compagnie Financière de Paris partly compensated by new lines of credit subscribed by the Company.
– Collaterized commitments: These commitments are mainly given by customers of AXA Bank Belgium and result from and mortgage certificates, increasing strongly in 2002.
– Other commitments received: These are mainly securities managed by AXA France Assurance on behalf of provident societies (€740 million).
Principal commitments given are detailed as follow: – Commitments to finance and guarantees: From time to time, AXA has provided certain commitments to finance and guarantees to affiliates, investors, banks and others. These commitments include additional capital contributions to be made in respect of real estate joint ventures and private equity funds.
Due after one Due in one year through Due after 2002 2001 year or less five years five years TOTAL TOTAL
In addition and in the normal course of its banking operations, conducted primarily through AXA Banque (France),
AXA Banque in respect of performance guarantees on mutual funds coming to an end and to a lower level of credit production in BIA, a banking subsidiary of AXA Bank Belgium. On the contrary, the increase in financing commitments (€+405 million) relates from (i) an increase in commitmens given by AXA Bank Belgium on real estate loans and (ii) an increase in Banque Directe’s clients overdrafts as well as confirmed credit lines.
– Other commitments given: AXA had subordinated convertible debt instruments of (i) €1,524 million 2.5% debt instrument issued in February 1999 and due in 2014, and (ii) €1,099 million 3.75% debt instrument issued in February 2000 and due in 2017. At maturity, if such debt instruments are not converted to ordinary shares of AXA, they will be redeemed by AXA at a price in excess of the original issue price per note. Based on the number of notes outstanding at December 31, 2002, the aggregate amount payable upon maturity could be approximately €1,215 billion in excess of the existing obligation reported in AXA’s consolidated balance sheet at such date, AXA having recorded a €79 million provision at December 31st 2002.
“With-profit” funds, under the stringent tests set out in the Scheme. If, in the opinion of the Appointed Actuary, all or part of the assets transferred are unlikely to be returned in the foreseeable future (taking into consideration the duration of the in force “With-profit” policies), then the relevant part of the transfer would be designated permanent. Only a permanent transfer to the “With-profit” funds would result in a charge against the profit and loss account. The maximum amount that could be transferred under the Scheme is capped at the surplus assets from time to time in the non profit funds, which had a market value of £1.2 billion (€1.8 billion) at December 31, 2002.
During the second half of 2002, the decrease of the financial markets triggered a transfer to the “With-profit” funds, with a value at 31 December 2002 of £451million (€693 million). The further decline in the financial markets during
January 2003 has led to an additional transfer of £114 million (€175 million) as at 31 January 2003. Current projections, consistent with management’s strategic plans, indicate that these cumulative transfers can reasonably be expected to be returned by the “With-profit” funds over time and not be designated permanent.
AXA Collectives has placed a part of its direct collective contingeny insurance receivables in a Special Purpose Vehicle.
31. Related party transactions From time to time AXA enters into agreements and transactions with its subsidiaries and affiliates for various business purposes including the furnishing of services and / or financing of operating activities. These agreements are formalized under French regulation as “Groupement d’Intérêt Economique” or Economic Interest Grouping (GIE). The expenses invoiced to entities through the GIE depend on the services provided by AXA, or the proportion of gross revenues and operating expenses of each entity if the earlier charges allocation is unavailable. Charges invoiced by the GIE to the Company, its subsidiaries and affiliates amounted to €626 million in 2002, €770 million in 2001 and €827 million in 2000. The GIE also assumes cash management for the Company, its subsidiaries and affiliates. At December 31, 2002 the cash managed by the GIE amounted to €6.8 billion, in increase of €1.1 billion.
Members of the GIE (related parties) are the Company, the entities controlled directly or indirectly and the three insurance “mutuelles”1 (AXA Conseil Vie Assurance Mutuelle is no longer in the consolidation scope of AXA in 2002).
In 2002, the three “mutuelles” mentioned above and several entities of the French insurance segment have signed agreements related to the management of the “mutuelles” portfolio. Previously, Property & Casualty technical results from the brokers network were allocated to AXA Courtage IARD SA and AXA Courtage Assurance Mutuelle through the EIG, in compliance with an existing co-insurance agreement.
Following the French activities restructuring effective from January 1, 2003, the GIE is to disappear, and a new coinsurance contract will be implemented in order to allocate this result proportionally to AXA Courtage IARD Mutuelle premiums written with the newly created legal entity “AXA France Dommages”.
(1) At December 31, 2002, the three AXA “mutuelles” (AXA Assurance IARD Mutuelle, AXA Assurance Vie Mutuelle et AXA Courtage Assurance Mutuelle) own 2.8% of the Company’s equity capital.
(2) At December 31, 2002, Finaxa is owned at 64% by the AXA “mutuelles” and directly holds 17% of AXA.
Cash flows from financing activities: Long term debt and borrowings (24) 1 432 193
Net cash (used in) provided by financing activities (2,126) (1,625) 11,710
Cash flows from other activities: Net impact of foreign exchange fluctuations (768) (514) 915
Change in cash due to change in scope of consolidation (157) 91 452
Cash and cash equivalents beginning of year (net) 16,018 26,065 14,130
(b) Includes the cost of acquisitions and proceeds from the sale of subsidiaries. (c) Includes net movements in separate account assets.
(d) Non-cash transactions in include: (i) conversion of convertible bonds into ordinary shares, (ii) the merger of existing wholly-owned subsidiaries with and into AXA (the Company), and (iii) ordinary shares exchanged in connection with AXA’s buyout of minority interests in AXA Financial.
(e) The December 31, 2000 financial data, as reported, have been presented under a new basis of presentation following the implementation of new french regulations effective January 1, 2001.
We have also examined the information relative to the Company as provided in the Management Board’s annual report on operations. We have no particular opinion to express concerning the its fairness and conformity with the financial statements.
1. Summary of material differences between French GAAP and U.S. GAAP
1. SUMMARY OF MATERIAL DIFFERENCES BETWEEN FRENCH GAAP AND U.S. GAAP
Certain significant differences between French GAAP and U.S. GAAP are new or modified in 2002 and 2001 following
arise during the interim period). Concurrent with the adoption of FAS 142, AXA ceased to amortize goodwill and the remaining negative goodwill at January 1, 2002 was immediately recorded in the income statement. AXA’s intangible assets have finite useful lives and continue to be amortized over their estimated useful lives.
“Accounting for derivative instruments and hedging activities” (“FAS 133”). FAS 133 established new accounting and disclosure requirements for all derivative instruments, including certain derivative instruments embedded in other contracts (referred to as “embedded derivatives”) and hedging activities. FAS 133 requires all derivatives to be recognized on the balance sheet and measured at fair value.
ACCOUNTING FOR EMBEDDED DERIVATIVES: AXA elected a January 1, 1999 transition date, thereby effectively “grandfathering” existing accounting for derivatives embedded in hybrid instruments acquired, issued or substantively modified on or before that date. As a consequence of this election, coupled with interpretative guidance issued by the Financial Accounting Standards Board (“FASB”)
ACCOUNTING FOR HEDGING ACTIVITIES: French GAAP permits hedge accounting in respect of a derivative that hedges (i) the net exposure to a pool of assets and liabilities, (ii) the net risk exposure relating to net interest spread on customer accounts in respect of banking activities or net policyholder crediting risk exposure on insurance contracts, and (iii) certain embedded features in existing contracts. Under U.S. GAAP, the FAS 133 basis for hedge accounting is more prescriptive specifically as it relates to the nature and extent of the type of risk exposure that can be hedged (in respect of documentation and accounting). The accounting for changes in the fair value of a derivative (that is, the gains and losses) is recorded in income, unless the derivative is used as a hedging instrument. If the derivative is used as a hedging instrument, the accounting for such changes in fair value depends on the hedging relationship as summarized below.
– Cash-flow hedges. The change in fair value of the derivative attributable to the effective portion of the hedge is recorded in “other comprehensive income” (a separate component of shareholders’ equity), which is subsequently reclassified into income in the same period in which the forecasted transaction affects income. The change in fair value of the derivative attributable to the ineffective portion of the hedge is recorded in income.
U.S. GAAP hedge accounting and consequently are referred to as “free standing derivatives” with the change in fair value recorded in income effective from January 1, 2001 for U.S. GAAP. However, certain existing hedge arrangements meet the criteria for measurement and recognition as fair value hedges under FAS 133. In accordance with the transition provision of FAS 133 to recognize the difference between the carrying values and fair values of the free standing derivative instruments at January 1, 2001, the after tax cumulative-effect-type credit to income was €18 million at January 1, 2001.
Reclassification of fixed maturity and equity investments Under the transition rules of FAS 133, AXA recorded the following reclassifications (i) £ 19,806 million (or approximately €31,492 million at transition date) of ”available-for-sale” securities as “trading” securities, resulting in an aftertax cumulative-effect-type adjustment of €2,698 million from other comprehensive income to the statement of income, representing the after-tax unrealized gain of the assets backing the UK “With-profit” business at January 1, 2001, and (ii) US$ 257 million (or approximately €273 million at transition date) of ”held-to-maturity” securities as “availablefor -sale” securities, resulting in an after-tax cumulative-effect-type adjustment of US$ 9 million in other comprehensive income (or approximately €10 million at transition date), representing the after-tax unrealized gain at January 1, 2001.
– Under U.S. GAAP, the equity method of accounting is used for investments in companies in which AXA’s ownership interest approximates 20% and is not greater than 50% including those companies proportionately consolidated under French GAAP.
1.3. BUSINESS COMBINATIONS - PURCHASE ACCOUNTING Business acquisitions are generally accounted for using the purchase method of accounting under both French GAAP
Under U.S. GAAP and in respect of all acquisitions including the buyout of minority interests, the portion of assets acquired and liabilities assumed are recorded at their estimated fair values at the date of acquisition.
Goodwill Under French GAAP and in respect of acquisitions completed prior to January 1, 2001, a portion of goodwill could have been charged directly to shareholders’ equity to the extent that ordinary shares were issued by the parent company in connection with the transaction, with the remaining amount recorded as a goodwill asset. For all acquisitions completed on or after January 1, 2001, the difference between the purchase price and the value of the portion of net assets acquired is recorded as a goodwill asset. However, the French GAAP basis may not generate a goodwill asset value that is equal to that determined under U.S. GAAP due to, and as previously discussed, (i) the accounting for net assets acquired in respect of a buyout of minority interests, (ii) the accounting for the value of shares exchanged, if applicable, (iii) the accounting for the settlement or exchange of outstanding employee share options of the acquired company, and (iv) the identification and valuation of identifiable intangible assets.
GAAP. Under U.S. GAAP, and effective from January 1, 2002, (i) the goodwill asset is no longer amortized but subject to annual impairment testing (or more frequently if a circumstances or events trigger a review), and (ii) negative goodwill is recorded in income immediately.
Revision to goodwill Under French GAAP, revisions can be made to the goodwill calculation up to the end of financial year following the acquisition. Under U.S. GAAP, revisions can be made to the goodwill calculation up to 12 months from the date of acquisition only with respect to outstanding known contingencies at date of acquisition.
Shares issued by a subsidiary (dilution gains) When a subsidiary of AXA issues shares, this decreases (dilutes) AXA’s ownership interest in that subsidiary and is treated as a partial disposal of the investment in that subsidiary.
(at the time shares were issued), this gain is recorded in income with a corresponding charge to establish a provision, on a pre-tax basis. There is no impact on AXA’s consolidated net income and shareholders’ equity under French
– securities classified as “trading’’ are reported at fair value with changes in unrealized gains and losses included in income, and
Under U.S. GAAP, such impairment is recorded as a realized loss against income and is not reversible in future periods.
Assets allocated to UK “With-profit” contracts The assets supporting the UK “With-profit” contracts consist primarily of fixed maturity and equity securities. The
UK “With-profit” contracts are participating contracts and distribution from the “With-profit” long term fund is based on legal restrictions whereby policyholders have a 90% right to all risks and rewards of the participating (“With-profit”)
Under French GAAP, assets supporting the UK participating (“With-profit”) fund are stated at market value with changes in market value included in income, as the unrealized investment gains and losses on these investments are included in the determination of the related insurance liability. These assets include fixed maturity and equity securities, real estate and loans.
Under U.S. GAAP, real estate assets and loans allocated to UK “With-profit” contracts are carried at historical cost less accumulated depreciation and amortized cost or unpaid principal balance, respectively. In addition and prior to
”With-profit” policyholder benefits was recorded against income in the same period. Accordingly, AXA believed that this exclusion under U.S. GAAP did not reflect fully the economic effect of the UK “With-profit” contracts. An increase in the estimated fair value of these assets resulted in an increase in the liability for policyholder benefits, and a reduction of AXA’s consolidated net income. A decrease in the estimated fair value of assets resulted in a decrease in the liability for policyholder benefits, and an increase in AXA’s consolidated net income.