– more than offset by the realized loss on the sale of Advest in US Holdings (€–71 million), and €–28 million settlement for Nationwide litigation in holding companies (UK, Belgium, France, AXA SA and Germany Life).
– Super subordinated debt and perpetual debt (including accrued interests) 3,539
2006 2005 2005 2004 2004 Var. 2006 Restated (a) Published Restated (a) Published versus 2005
(perpetual subordinated debts) into shareholders’ equity for all periods presented in the 2006 financial statements with impact on net income. ** on weighted number of shares: following the capital increase related to Winterthur acquisition, the weighted average number of shares has been restated (IAS 33 § 26) by using an adjustment factor of 1,019.
The following tables present the consolidated gross revenues, adjusted earnings and net income attributable to AXA’s Life & Savings segment for the periods indicated.
Technical charges relating to insurance activities (b) (69,052) (64,722) (64,721) (57,425) (57,426)
Amortization of value of purchased life business in force (241) (529) (529) (389) (389)
Minority interests in income or loss (193) (149) (149) (115) (115)
Net realized capital gains attributable to shareholders 597 464 432 297 344
Gross written premiums increased by €1,565 million to €14,802 million. Net of intercompany transactions, gross written premiums increased by €1,573 million to €14,797 million mainly due to investment & savings premiums which increased by €1,331 million (+12%) to €10,238 million. Individual unit-linked premiums were up €606 million (+28%) to €2,771 million following successful commercial campaigns. Group retirement increased by €598 million (+62%) to €1,562 million, mainly due to new business inflows, while individual non unit-linked investments and savings were up 2 % to €5,905 million.
Net technical margin increased by €18 million to €88 million driven by (i) Investments and Savings (€+12 million) benefiting from boni partly offset by additional annuity reserves strengthening in savings following change in regulatory mortality tables and (ii) Life up
€7 million mainly due to the non repeat of the 2005 negative impact of the decrease in Group annuity reserves discount rates.
VBI amortization increased by €19 million to €–68 million due to the full amortization of a segment of the UAP portfolio.
Income tax expenses decreased by €65 million to €–111 million (i) as some dividends on equities were taxed at a reduced rate while previously taxed at full rate following a portfolio reallocation and (ii) reflecting the 0.5 point decrease in French short term tax rate.
Underlying earnings improved by €76 million to €462 million reflecting a structural lower average tax rate on the investment margin, which significantly improved on a net of tax basis.
Net income increased by €146 million to €776 million mainly resulting from (i) the adjusted earnings growth (€+88 million), and (ii) the positive impact of foreign exchange on currency macro hedge on equity investments (€+53 million to €15 million).
Underlying operating earnings before tax 1,333 1,220 931 Income tax expenses / benefits (334) (354) (266)
Underlying earnings group share 1,000 866 664 Net capital gains attributable to shareholders net of income tax 30 5 49
Adjusted earnings group share 1,029 871 713 Profit or loss on financial assets (under FV option) & derivatives – 9 14
Investment margin increased by €50 million to €858 million, or by €58 million on a constant exchange rate basis. Investment income increased €50 million to €2,626 million, primarily due to higher yields on cash and short term investments, higher fixed maturity asset levels, improved real estate income and lower corporate interest expense, partially offset by lower fixed maturity yields. Interests and bonus credited decreased by €8 million to €1,769 million reflecting an increase in the reserve released on discontinued operations (windup annuities).
Fees & revenues increased by €229 million, or by €243 million on a constant exchange rate basis, to €1,632 million. This increase was mainly due to higher fees earned on separate account business (€219 million on a constant exchange rate basis), resulting from positive net cash flows and the impact of the market appreciation on separate account balances, and higher mutual fund fees.
(iv) a non recurring positive reinsurance settlement in 2005 (€–24 million), and (v) a nonrecurring MONY group pension reserve adjustment in 2005 (€–14 million).
Expenses (including commissions and DAC) increased by €153 million or €168 million on a constant exchange rate basis: – Expenses net of capitalization (including commissions and DAC capitalization) increased by €13 million, or by €22 million on a constant exchange rate basis principally due to an increase in commission expenses of €150 million, partially offset by higher DAC capitalization (€127 million) and a slight decrease in other expenses.
– DAC amortization increased by €140 million or €146 million on a constant exchange rate basis reflecting reactivity to higher margins in products which are DAC-reactive and lower favorable DAC unlocking for expected higher emerging margins on annuity and variable and interest sensitive life products.
Underlying cost income ratio improved to 71.5% versus 74.2% in 2005 notably reflecting the strong improvement in fees and revenues.
Adjusted earnings increased by €158 million on a current exchange basis, or €167 million on a constant exchange rate basis, to €1,029 million primarily due to higher underlying earnings, and higher capital gains net of DAC/VBI reactivity.
Net income increased by €147 million, or by €156 million on a constant exchange rate basis, to €1,020 million, primarily due to the increase in adjusted earnings, partially offset by a decrease in mark to market adjustments on investments on fair value option.
Investment margin increased by €17 million on a current exchange rate basis or €16 million on a constant exchange rate basis to €198 million, primarily due to shareholder participation in higher With Profit bonuses.
– Loadings on Account Balances decreased by €6 million. Management fees increased by €48 million resulting from the growth in the unit-linked inforce portfolio through positive net inflows and market appreciation and despite the change in revenue allocation methodology from fees to technical margin on unit linked investment products surrenders charges (€–32 million). This was more than offset by higher deferral of initial fees in respect of Offshore Bonds (€54 million).
Net technical margin increased by €65 million on current and constant exchange rate base to €160 million. Excluding the impact of the change in the allocation methodology with fees and revenues (€+32 million as mentioned above), the net technical margin increased by €34 million. This is due to higher mortality and morbidity profits and 2006 non recurring items (€88 million) which notably include (i) the reduction of possible endowment mis-selling provision and (ii) a favorable movement in unit linked reserves following the finalization of compensation amounts to policyholders, partly offset by €67 million of positive 2005 non recurring items.
VBI amortization decreased by €15 million on a current and constant exchange rate basis due to a change in amortization profiles taking into account increased future bonus rates.
Underlying earnings increased by €70 million on a current and constant exchange rate basis to €155 million largely due to higher fees & revenues and technical margin partly offset by higher tax expense.
Adjusted earnings increased by €73 million on a current exchange rate basis or €72 million on a constant exchange rate basis to €165 million, following improved underlying earnings and release of a provision for contingent payment in relation to the transfer of annuity business from With-Profit funds to Non-Profit funds.
Net income increased by €94 million on a current exchange rate basis or €93 million on a constant exchange rate basis to €138 million, due to the improvement in adjusted earnings combined with the reduction in undiscounted tax adjustment on unrealized gains attributable to policyholders in unit linked life funds2 from €–55 million in 2005 to €–30 million in 2006.
(1) Part of these expenses are located in the With-Profit funds and therefore are borne by policyholders. (2) Undiscounted deferred tax provided on unit linked assets while the unit liability reflects the expected timing of the payment of future tax therefore using a discounted basis.
Underlying operating earnings before tax 426 78 258 258 Income tax expenses / benefits (164) 195 (110) (110)
Underlying earnings group share 256 266 145 145 Net capital gains attributable to shareholders net of income tax 38 120 113 146
Adjusted earnings group share 293 385 258 292 Profit or loss on financial assets (under FV option) & derivatives (37 6 16 (18)
Gross Revenues increased by 6% or 11% on a constant exchange rate basis to €5,027 million. Excluding (i) group pension transfers (€314 million versus €22 million last year) and (ii) the conversion program started in January 2003 towards Life (€41 million versus €98 million last year) and Health (€73 million versus €165 million last year), premiums increased by 9% on a constant exchange rate basis driven by: – Investment & Savings (31% of gross revenues excluding group pension transfers): Revenues increased by 3%, or 8% on a constant exchange rate basis (€+109 million), to €1,435 million due mainly to €391 million higher sales of SPA (single premium US dollardenominated index-linked annuity product) and €83 million sales of the newly launched Accumulator product (single premium US dollar-denominated variable annuity product), partially offset by a reduction in Fixed Annuity contribution (€–352 million) as part of the planned transition towards variable type products.
APE increased by 11% or 16% on a constant exchange rate basis to €651 million.
Individual business grew by 13% or 18% on a constant exchange rate basis (€+101 million) to €626 million, notably: – Investments & Savings: APE increased by 20%
– Life: APE increased by 7% or 12% on a constant exchange rate basis (€+47 million) to €401 million coming mainly from strong sales of Increasing Term products as part of the strategy developed during the first semester of the year 2006 to counter an anticipated second semester 2006 sales decline of LTPA, partially offset by lower sales of LTTP and Variable Life (following the discontinuance of this product midway through 2005).
Investment margin, at €0 million, remained stable stemming from: – Higher investment income up €+110 million, or €+137 million on a constant exchange rate basis, to €553 million driven by higher return on the alternative portfolio due to the combined impact of strong performance in the second quarter of 2006 and higher volumes invested in these portfolios, and
– Higher interest credited by €110 million, or by €137 million on a constant exchange rate basis, to €553 million.
Mortality margin decreased by €–52 million to €92 million. Excluding the impact of the change in the allocation methodology with fees and revenues on health products (€–12 million as mentioned above), and of changes in assumptions (€–40 million) on the annuity portfolio, it would have been stable. The main changes in assumptions are related to (i) a change in proportion of policyholders assumed to elect Term Certain (rather than Lifetime) immediate annuities (€+43 million), and (ii) to a new regulatory post-annuitization mortality table (€–92 million).
Expenses decreased by €31 million or €2 million on a constant exchange rate basis to €–604 million, driven mainly by: – the combined result of a sales driven increase in DAC capitalization (€+19 million) and lower DAC amortization (€+30 million), mainly related to the impact (€+27 million) of the 2005 change in future investment assumptions; – €47 million higher other expenses driven by (i) higher commission payments due to higher sales (€+25 million), (ii) higher project spend (€+4 million), (iii) higher rental costs and disposal expenses as a result of the move to the new headquarters (€+7 million), and (iv) increased contribution to industry protection levy as a consequence of AXA’s increased market share (€+7 million).
Underlying cost income ratio increased from 69.5% to 70.7% as higher expenses and lower technical margin more than offset higher fees and revenues.
Underlying earnings decreased by €10 million, or increased by €3 million on a constant exchange rate basis, to €256 million. 2005 earnings included €67 million non recurring positive impacts.
– the non-recurring 2005 release of valuation allowance on tax loss carried forward (€–115 million) and,
Net income decreased by €135 million or by €123 million on a constant exchange rate basis to €256 million, driven by €77 million lower adjusted earnings coupled with: – a lower change in fair value of the alternative portfolio (€–112 million); – the foreign exchange impacts, net of related derivatives impacts (€–23 million); – the ineffectiveness in hedge relationship using derivatives and involving notably the bonds under fair value option (€+25 million); – the positive impact of freestanding derivatives, mainly Credit Default Swap (€+17 million); – the related tax effect, DAC and VBI reactivity (€+46 million).
Underlying operating earnings before tax 171 105 108 108 Income tax expenses / benefits (99) (72) (93) (93)
increased by 27% to €922 million, driven by unit-linked premiums, notably stemming from the new product “TwinStar” which experienced a promising launch especially in proprietary channels. The share of unit-linked premiums grew significantly to 41% (vs. 24% in 2005). Non-unit linked premiums decreased by 2% to €541 million.
– Life (44% of gross revenues) decreased by 5% to €1,623 million mainly caused by a shift from endowment business to investments and savings products and higher maturities on regular premiums compared to last year.
– Other (6% of gross revenues) decreased by 17% to €207 million due to further reduction of the share in medical council business at the beginning of the year and lower consortium business.
APE increased by 6% to €287 million. Restated from the backlog effect in the first quarter 2005 linked to a change in tax regulation, APE would have increased by 29%, mainly driven by Investment & Savings unit-linked (especially TwinStar €+36 million) and Health business (notably following the launch of a new Medical Cost Insurance product).
Investment margin increased by €30 million to €96 million mainly driven by higher income from fixed maturities as well as lower policyholder participation.
Fees & revenues were strongly up by €39 million to €127 million, mainly resulting from higher new business especially from unitlinked products.
Underlying earnings increased by €39 million to €69 million mainly driven by the improved investment margin and the increase of fees and revenues partly offset by higher expenses and taxes.
Adjusted earnings increased by €43 million to €75 million benefiting from the increase in underlying earnings.
Net income increased by €46 million to €81 million in line with adjusted earnings evolution.
Underlying operating earnings before tax 87 81 86 Income tax expenses / benefits (22) (25) (12)
Underlying earnings group share 65 56 74 Net capital gains attributable to shareholders net of income tax 255 85 99
of revenues) decreased by 10% to €2,122 million. The decrease was driven by the fall in both non unit-linked contracts (–8% to €1,567 million) and unit-linked contracts (–26% to €290 million), partly offset by the growth in Traditional life (+4% to €264 million). Excluding “La Poste”, Individual life and savings revenues decreased by 7%.
– Group Life and Savings revenues (16% of revenues) increased by 1% to €390 million. Regular premiums were stable at €343 million and single premiums grew by 5% to €47 million.
Expenses increased by €12 million to €–194 million mainly due to the rise in the commission expenses driven by commissions linked to account balances and the decrease of net movements in DAC/DOC. The overhead costs remained stable despite the regulatory salary indexation.
Adjusted earnings group share 57 54 48 Profit or loss on financial assets (under FV option) & derivatives – 3 2
• Unit-linked contracts (€26 million or 18% of total APE) decreased by 8% following strong bank-insurance activity in 2005.
– Life (11% of total APE, €15 million) decreased by 15% mainly as a result of the cancellation of the above-mentioned important bankinsurance agreement in May 2005.
Underlying investment margin rose by €13 million to €67 million, notably driven by higher investment income (€14 million to €334 million) as a result of increased average asset base, while policyholder bonus increased by €1 million mainly due to a change in product mix which resulted in a lower policyholder benefit rate (–1.8 point to 84%).
Net technical margin decreased by €10 million to €23 million, mainly driven by a lower surrender margin in line with market trend as
Income tax expenses decreased by €2 million to €18 million despite the better pre-tax result, mainly due to the positive impact of tax reforms in Spain and in Portugal resulting in a decrease in tax rate.
Net income decreased by €1 million to €57 million as the increase in adjusted earnings was more than offset by a lower fair value adjustment on derivatives instruments.
The following tables present the operating results for the other Life & Savings operations of AXA: (in Euro million)
(a) The disability portfolio which was previously reported under the Life segment is now reported under the Property & Casualty segment Since December 1st, 2004. The Health portfolio which was previously reported under the Life segment has been disposed of at December 1st, 2004.
(b) Change in consolidation method in Turkey (from equity method to full consolidation) as at January 1st, 2005. (c) Includes Indonesia: P.T. Kotak Biru Konsultama and P.T. Indonesia Emas Perkasa (Former MLC Indonesia) and P.T. AXA Life Indonesia.
APE of €420 million was stable as strong growth in the superannuation and investment fund inflows was offset to a large extent by a reduction in AllianceBernstein inflows compared to 2005 which included two large mandates. Excluding AllianceBernstein mandates, APE was up 13% to €256 million driven by higher inflows into mezzanine funds, as well as an increased in sales into Summit and Generations wrap platforms.
– the tax expense was up €34 million to €–9 million, reflecting growth in pre-tax earnings and the non-recurrence of some 2005 tax benefits including transitional tax relief which ended on July 1, 2005.
(1) All comparisons to prior year figures are on a constant exchange rate basis. (2) AXA interest in AXA Asia Pacific Group is 52.7% broken down into 51.6% direct interest holding and an additional 1.1% owned by the AAPH Executive plan trust. (3) Net mutual fund sales exclude the net inflows of AllianceBernstein JV, as they are included in AllianceBernstein inflows.
Gross revenues were up 25% to €1,041 million. On a comparable basis, gross revenues increased by 15%.
APE was up 32% to €100 million. On a comparable basis, new business APE was up 28% benefiting from the increase in Individual Life regular premiums, due to strong sales from agency brokers and AXA advisers, strong growth in single premium unit-linked products as well as from new unit trust products sold through bank distribution agreements.
As a consequence, the underlying cost income ratio decreased to 51.0% in 2006 from 52.5%. On a comparable basis, the underlying cost income ratio was 51.7% in 2006.
The Netherlands Gross revenues decreased by €4 million to €527 million. Higher single and regular premiums in Investments & Savings Unit-Linked (within mortgage and pension segments), were more than offset by lower Life Non Unit-Linked regular premiums (as traditional portfolio is in run-off).
Underlying earnings increased by €1 million to €3 million mainly due to higher fees & revenues as a result of new business in Investment & Savings regular premiums.
Adjusted earnings were up €3 million to €7 million mainly driven by higher capital gains on equity securities.
Gross revenues were down 11% on a constant exchange rate basis to €49 million mainly due to the termination of a bank insurance agreement.
Gross revenues were up 12% on a constant exchange rate basis to €70 million driven by the development of traditional life business.
Underlying earnings, adjusted earnings and net income were stable, on a constant exchange rate basis at €2 million. Net income was stable at €3 million.
(1) AXA Assurance Maroc is 51% owned by AXA. (2) AXA Oyak Hayat is 50% owned by AXA.
Change in unearned premium reserves net of unearned revenues and fees (142) (269) (269) (250) (250)
Net investment result excluding financing expenses 1,594 1,461 1,461 1,320 1,320 Technical charges relating to insurance activities (12,841) (12,347) (12,347) (11,959) (11,959)
Net income from investments in affiliates and associates 9 3 3 34 34
OPERATING INCOME GROSS OF TAX EXPENSE 2,214 1,882 1,882 1,577 1,577
The tables below present the gross premiums and net income attributable to AXA’s
(a) Gross written premiums including intercompany eliminations. (b) Change in consolidation method in Turkey, Hong Kong and Singapore (from equity method to full consolidation) as at January 1st, 2005.
Goodwill and other related intangibles impacts (2) (1) (1) (30) (30)
increased by 2% to €3,166 million, mainly reflecting (i) positive net inflows in Motor (+58,000 new contracts) sustained by advertising campaigns in a very competitive market, and (ii) positive net inflows in Household (+23,000 new contracts) with an ongoing price increase.
– The 6% strong increase in Commercial lines premiums (39% of gross written premiums) to €2,022 million was driven by overall positive inflows, rate increases, notably in Liability and in Construction (including positive prior year premium adjustments).
– The prior accident year net technical result improved by €38 million to €60 million, mainly fuelled by positive developments in Property, as in 2005, and in Motor (up €52 million to €16 million as 2005 was negatively impacted by a decrease in the annuity interest rate).
Expense ratio decreased by 0.3 point to 24.1% mainly driven by the improvement in the administrative expense ratio by 0.5 point to 8.9% following a non recurring charge related to agents benefits in 2005.
As a consequence, the combined ratio improved by 0.4 point to 97.5%.
Net investment result remained stable at €464 million as lower equity dividend income following internal restructuring of the holding scheme of some equity investments (sold to
Current accident year loss ratio (net) 74.6% 74.0% 74.0% 74.3% 74.3%
All accident year loss ratio (net) 73.5% 73.5% 73.5% 75.4% 75.4%
Underlying earnings increased by €20 million to €382 million reflecting the improved combined ratio.
Adjusted earnings increased by €4 million to €452 million as the underlying earnings increase (€+20 million) was offset by lower net capital gains (€–15 million to €70 million).
Gross Revenues increased by 7% to €4,742 million on current and constant exchange rate base, reflecting significant growth on Personal Motor, Health and both Personal and Commercial Property.
were up 10% on a constant exchange rate basis due to a strong performance in the Motor business resulting from updated pricing strategies and new business growth in the UK. Property growth of 15.7% on a constant exchange rate basis was mainly due to additional corporate partner deals incepted in 2005 and 2006 in the UK. The 7.0% growth in Health was driven by higher volumes in UK and International Individual business, together with higher average premiums.
Net Technical Result increased by €180 million on a current exchange rate basis (€+175 million on a constant exchange rate basis) to €1,790 million: – The current accident year loss ratio improved by 1.5 point to 63.6%, driven by favorable claims experience and benign weather in 2006, improved claims management and risk selection in Health, partially offset by higher claims frequency on the Ireland Motor account combined with a reduction in average earned premiums.
– The all accident year loss ratio improved by 1.3 point to 61.8%, broadly reflecting the favorable current accident year loss ratio.
Current accident year loss ratio (net) 63.6% 65.1% 65.1% 67.7% 67.7%
Net income from investment in affiliates and associates – – – – –
Net underlying investment result increased by €56 million on current exchange rate basis or €55 million on a constant exchange rate basis, as a result of a higher asset base and interest rates.
Underlying earnings decreased by €13 million to €386 million on a current exchange rate basis (€–14 million on a constant exchange rate basis), as the improvement in net technical result and favorable investment performance were more than offset by the increase in income tax expenses.
Adjusted earnings decreased by €–1 million on a current exchange rate basis and €–2 million on a constant exchange rate basis to €461 million as the decrease in underlying earnings was largely offset by €12 million higher net capital gains.
All accident year loss ratio (net) 67.8% 65.8% 65.8% 69.6% 69.6%
Goodwill and other related intangibles impacts – – – 5 5
– All accident year loss ratio increased by 2.0 points to 67.8% in line with the development of the current accident year loss ratio. The net technical result of previous years amounted to €177 million in 2006 (vs. €180 million in 2005) primarily driven by boni on personal motor and commercial liability.
to the non-recurrence of several 2005 one-off expenses. Acquisition expense ratio marginally deteriorated (+0.1 point), as the non-recurrence of the 2005 amortization of some capitalized acquisition costs was offset by higher marketing expenses.
As a result of the above, underlying earnings improved by €4 million to €181 million.
Underlying operating earnings before tax 245 183 215 Income tax expenses / benefits (98) (55) (56)
Gross written premiums increased by 4% to €1,520 million driven by growth in both personal and commercial lines.
– Personal Lines (61% of the total gross written premiums): premiums increased by 3% mainly driven by household up 10% to €254 million as a result of the new Natural Disaster guarantee effective March 2006, and by motor (56% of personal lines written premiums) up 1% to €527 million driven by positive net inflows.
Net technical result was up €73 million to €512 million as a result of: – The current year loss ratio improved by 3.3 points to 78.1% due to an improved claims pattern in all Personal Lines (except Personal Accidents), Property, Health and Marine.
As a result, the combined ratio improved by 3.3 points to 95.4%.
Underlying earnings increased by €19 million to €147 million as a result of the improvement in combined ratio and higher net investment result, partially offset by higher tax expenses.
(€+76 million) and real estate (due to non recurrence of a €13 million depreciation on one building in 2005).
Net income increased by €101 million to €283 million as a result of higher adjusted earnings and unfavorable change in fair value on corporate bond mutual funds under fair value option due to interest rate increases.
Underlying operating earnings before tax 238 194 168 Income tax expenses / benefits (90) (68) (53)
Underlying earnings group share 148 125 114 Net capital gains attributable to shareholders net of income tax 42 27 62
Adjusted earnings group share 190 152 177 Profit or loss on financial assets (under FV option) & derivatives (1) 1 8
Gross written premiums increased by 4% on a comparable basis to €3,160 million.
– Commercial lines (22% of business, €688 million) were down 3%. In motor (6% of business, €198 million) revenues were up 3%. Non-motor business (16% of business, €490 million) decreased by 5% mainly due to the non renewal of several corporate contracts.
Adjusted earnings were up €39 million to €190 million due to higher underlying earnings and higher capital gains on equity securities, thanks to good equity market conditions.
Net realized capital gains attributable to shareholders 35 28 26 15 16
(c) Restated means: transfer of the forex impact from adjusted earnings to net income. (d) Includes Malaysia (newly consolidated in 2006 in equity method), Hong Kong and Singapore.
Underlying earnings were up €33 million or €27 million on a constant exchange rate basis to €113 million mainly resulting from the acquisition of Citadel combined with the improvement of the net combined ratio from 91.8% (93.0% including Citadel) to 91.0% reflecting the excellent performance across the board.
Net income increased by €19 million on a constant exchange rate basis to €119 million, as a result of higher adjusted earnings partly offset by Citadel’s integration costs of €4 million as well as €2 million amortization charge of the intangible assets related to Citadel.
Adjusted earnings increased by €12 million to €37 million driven by underlying earnings and lower realized capital gains of €5 million, mainly due to the sale of real estate in 2005.
Adjusted earnings were up €2 million to €11 million. Net income was up €2 million to
Morocco Gross revenues were up 17% on a constant exchange rate basis to €164 million, driven by personal motor, workmen compensation and fire lines of business.
Underlying earnings were up €1 million to €14 million as the combined ratio improvement (–6.3 points to 94.3%) was partly offset by the decrease in investment income on equity securities (especially high in 2005).
Adjusted earnings and net income increased by €15 million to €29 million due to strong realization of capital gains on equities.
Central and Eastern Europe Poland The activity of the Avanssur platform in Poland was launched in September 2006.
Underlying earnings, adjusted earnings and net income amounted to €–6 million mainly due to administrative expenses.
(a) Gross written premiums including intercompany eliminations. (b) Including AXA RE (in 2006 only), AXA RE Life and AXA Liabilities Managers.
AND NET INCOME Restated (b) Published Restated (b) Published AXA RE – 11 11 96 96
Current accident year loss ratio (net) (a) 88.7% 88.9% 88.9% 88.6%
Net technical result 207 189 189 195 Expense ratio 12.8% 12.9% 12.9% 13.0%
(a) Current accident year claim charges (including claims handling expenses) / Current accident year earned revenues (excluding premium adjustments on previous years). (b) Restated means: transfer of the forex impact from adjusted earnings to net income.
– The prior accident year net technical result increased by €8 million to €30 million, resulting from positive reserve developments in Property, Marine and Aviation.
Adjusted earnings increased by €24 million to €116 million, reflecting a €12 million improvement in underlying earnings and €12 million higher net realized gains, mainly on equities.
Net income increased by €21 million to €117 million, reflecting €24 million higher adjusted earnings combined with a €10 million positive impact on change in fair value of assets under fair value option partly offset by a €–13 million foreign exchange negative impact.
Adjusted earnings and net income amounted respectively to €14 million and €13 million.
Underlying earnings were up €4 million to €21 million, reflecting mainly an increased activity (+11% on a comparable basis) combined with a better technical result and contained expenses.
Adjusted earnings increased by €4 million to €21 million in line with higher underlying earnings.
Other transnational activities On December 21, 2006 the AXA RE’s business was sold to Paris Re Holding Limited, with the risks and corresponding net income related to AXA RE’s 2006 claims experience assuming to Paris Re Holdings Limited. As a result, AXA RE’s contribution to AXA consolidated accounts corresponds mainly to the result of the run-off of the 2005 and prior years reserves of AXA RE. This contribution for Full Year 2006 is presented as part of the “Other Transnational Activities” segment.
Underlying earnings increased by €52 million to €11 million mainly due to (i) the contribution of AXA Re’s run-off portfolio (€22 million driven by favorable claims experience on 2005 and prior years), (ii) a €43 million higher result on the other non-Life run-off portfolios mainly due to the positive result generated by the commutation of some large portfolios, partly offset by (iii) a €–13 million lower result of the AXA RE US Life run-off portfolio fully explained by the cost of fully hedging the remaining exposure of this portfolio.
UNDERLYING EARNINGS 508 396 396 300 Net realized capital gains attributable to shareholders 1 6 5 2
General expenses increased by €352 million or up 20% on a constant exchange rate basis, mainly as a result of higher compensation expense (€+230 million) from increased earnings, increased occupancy from expansion of offices in New York and overseas (€+39 million).
Income tax expenses increased by €67 million to €260 million, or by €69 million on a constant exchange rate basis due to higher pre taxearnings.
As a consequence, underlying earnings increased by €62 million to €302 million, or by €64 million at constant exchange rate.
Underlying operating earnings before tax 921 707 589 Income tax expenses / benefits (260) (193) (124)
Underlying earnings group share 302 240 204 Net capital gains attributable to shareholders net of income tax 1 6 2
Underlying earnings group share 206 156 156 95 Net capital gains attributable to shareholders net of income tax – – (1) –
Adjusted earnings group share 206 156 156 95 Profit or loss on financial assets (under FV option) & derivatives 10 10 11 2
Assets Under Management (“AUM”) were €485 billion as at December 31, 2006 increasing by €53 billion compared to December 2005, driven by (i) €35 billion Net New Money inflow, mainly from third-party Institutional clients (€23 billion), and retail clients (€11 billion), (ii) €20 billion of favorable market impact, partly offset by (iii) €–4 billion unfavorable exchange rate.
General expenses increased by €374 million to €1,330 million. Excluding €+115 million commissions paid to third-party agents and €+88 million AXA Framlington impacts, expenses increased, at a lower pace than revenues, by 28% to €782 million, notably given the increase of staff to support the business development, important investments in projects and higher staff incentives.
The underlying cost income ratio improved by 1.6 point from 69.9% in 20051 to 68.3% in 2006 (2.1 points improvement on a comparable basis).
(1) The Cost Income Ratio was restated for the year 2005 in order to be based on underlying earnings.
The tables below present the revenues and the net income for the Other Financial Services segment for the periods indicated: (in Euro million)
Net income decreased by €38 million to €31 million driven by the decrease in adjusted earnings as well as unfavorable change in fair value on bonds under fair value option and derivatives.
Net banking revenues decreased by 10% on a comparable basis to €62 million. Excluding derivatives, banking revenues increased by 24% to €85 million due to higher interest revenues and higher commissions both reflecting a strong activity.
Underlying and adjusted earnings increased by €8 million to breakeven mainly reflecting higher underlying banking revenues.
Gross revenues decreased slightly by €1 million to €26 million as a consequence of a reduced interest margin.
Underlying earnings, adjusted earnings and net income remained stable at €3 million.
CFP Underlying earnings, adjusted earnings and net income increased by €17 million to €35 million mainly due to favorable developments on doubtful receivables.
The Holding companies consist of AXA’s non-operating companies, including mainly AXA parent company, AXA France Assurance, AXA Financial, AXA Asia Pacific Holdings, AXA UK Holdings, German, Belgium and Netherlands holdings.
Adjusted earnings decreased by €16 million to €–189 million mainly driven by underlying earnings evolution.
AND NET INCOME Restated (a) Published Restated (a) Published AXA (219) (203) (282) (170) (263)
Net realized capital gains attributable to shareholders 23 39 6 7 (1)
– a €–43 million corresponding to foreign exchange operations of which €–52 million related to TSDI foreign exchange hedges no more eligible to natural hedge accounting linked to the reclassification in shareholder’s equity of TSDI,
Adjusted earnings increased by €22 million to €–11 million due to higher underlying earnings and higher realized gains on equities.
Net income increased by €33 million to €–8 million mainly due to a tax gain on the 2005 settlement with Nationwide.
Other French Holdings Underlying earnings decreased by €5 million to €15 million mainly due to AXA Tech holding which benefited notably last year from higher dividends.
Adjusted earnings increased by €1 million to €14 million, as the absence of impairment in 2006 more than offset the decrease of underlying earnings.
AXA Financial, Inc. Underlying earnings decreased by €25 million on a current exchange rate basis, or by €27 million on a constant exchange rate basis, to €–135 million due to higher net interest expense principally related to short-term borrowings from AXA (€16 million) and higher share based compensation expenses (€11 million).
Adjusted earnings decreased by €27 million on a current exchange rate basis, or €28 million on a constant rate basis, to €–135 million.
Net income increased by €94 million on a current exchange rate basis, or by €93 million on a constant exchange rate basis, to €–76 million, reflecting a €43 million favorable income tax settlement in 2006 related to the gain on sale of DLJ in 2000 and the €–69 million non recurrence of the 2005 after-tax loss on the sale of Advest.
Net income decreased by €17 million to €–22 million largely reflecting lower underlying and adjusted earnings partly offset by positive foreign exchange impacts.
Adjusted earnings and net income increased by €20 million as the improvement of underlying earnings (€+48 million) was compensated by the non repeat of 2005 one-off gains related to the final settlement of Cologne Re JV sale (€18 million) and a €10 million impairment on a participation.
Belgium Holding companies Underlying earnings increased by €14 million to €–10 million mainly due to the non recurrence of the indemnity fee paid in 2005 following the early repayment of a loan to AXA Bank Belgium.
Net income increased by €24 million to €–9 million due to the increase in adjusted earnings and the non recurrence of the settlement of an indemnity to Nationwide (€+8 million).
2006 was another very strong year in terms of top-line performance and earnings growth, and AXA continued to be ahead of the expected Ambition 2012 pace.
Assuming the global economic environment remains favorable and barring any major catastrophic events or financial market incidents, we expect that: – our Life & Savings operations should continue to grow on the back of favorable long-term trends, and our distribution and offer innovation initiatives, including the promising roll-out of Accumulator-type products across the Group,
Adjusted earnings Adjusted earnings represent the net income (group share) before: (i) The impact of exceptional operations
Adjusted earnings per share (adjusted EPS) represent AXA’s consolidated adjusted earnings, divided by the weighted average number of outstanding ordinary shares.
Adjusted earnings per share diluted (adjusted EPS diluted) represent AXA’s consolidated adjusted earnings, 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 dilutive stock options being exercised performance shares, and conversion of existing convertible debt into shares provided that their impact is not antidilutive ).
Underlying earnings Underlying earnings correspond to adjusted earnings excluding net realized capital gains attributable to shareholders.
Life & Savings Margin Analysis Life & Savings margin analysis is presented on an underlying basis.
(ii) Policyholders’ interest in participating contracts is reflected as a change in insurance benefits in the Statement of Income. In the Margin Analysis, it is allocated to the related margin, that is, primarily, the “Investment Margin” and the “Net Technical Margin”.
(iv) Change in URR (Unearned Revenue Reserve – capitalization net of amortization) is presented in the line “Change in unearned premiums net of unearned revenues and fees” in the underlying Statement of Income, whereas it is located in the line “Fees & Revenues” in the Margin analysis.
Underlying Fees & Revenues include: (i) revenues derived from mutual fund sales
(v) other fee revenues, e.g., fees received on financial planning, sales of third party products.
Underlying Net Technical result includes the following components: (i) Mortality/morbidity margin: The amount charged to the policyholder in respect of mortality/morbidity for the related period less benefits and claims. It is equal to the difference between income for assuming risk and the actual cost of benefits, including changes in valuation assumptions and additional reserves for mortality risk. This margin does not include the claims handling costs and change in claims handling cost reserves.
Underlying Expenses are: (i) Acquisition expenses, including commissions and general expenses allocated to new business, related to insurance products as well as to other activities (e.g., mutual fund sales).
(vi) Policyholder bonuses if the policyholder participates in the expenses of the company.
Underlying VBI amortization includes VBI (Value of Purchased Life Business In-force) amortization related to underlying margins, as well as amortization of other intangibles related to the in-force business.
Life & Savings cost income Ratio (i) Underlying cost income ratio: Expenses as defined above / “underlying” operating margin, where: – Expenses are total expenses, excluding expenses related to mutual fund business net of Participating Benefits, excluding deferral and amortization of Deferred Acquisition Costs (DAC) and net rights to future management fees and excluding amortization of Value of purchased Life Business In-force (VBI).
Expense ratio is the ratio of: (i) expenses (excluding claims handling costs but including non recurring expenses), to (ii) earned revenues, gross of reinsurance.
Expenses include two components: expenses (including commissions) related to acquisition of contracts (with the related acquisition ratio) and all other expenses (with the related administrative expense ratio).
All accidents year loss ratio (Property & Casualty) net of reinsurance is the ratio of: (i) [all accident years claims charge gross of reinsurance + claims-handling costs + result of reinsurance ceded on all accident years excluding the recurring interest credited to the insurance annuity reserves] to,
AXA RE Covers are specific reinsurance treaties, bought to protect all or a portion of the company’s portfolio against major losses. If such losses do not occur over the insured period, a profit commission (or “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.
Net attritional margin on current accident year includes the following elements: (i) earned premiums, net of cession /
(ii) current year claims charge (excluding major losses), net of cession / retrocession,
Receivables arising from direct insurance and inward reinsurance operations 11,873 9,713 8,167
Assets held for sale and relating to discontinued operations (j) 3,337 102 62 12 Cash and cash equivalents 21,169 21,402 22,494
Includes fixed maturities, equities, controlled and non controlled investment funds. (d) Includes policy loans. (e) Includes assets backing contracts with Guaranteed Minimum features. (f) Also includes trading financial assets and accrued interests.
Restated Restated Share capital and capital in excess of nominal value 22,670 18,120 19,385
Total liabilities arising from insurance contracts (b) 432,216 340,605 303,030 Liabilities arising from investment contracts with discretionary participating features (h) 32,599 33,267 31,832
Total liabilities arising from investment contracts (b) 101,393 82,742 71,828 Unearned revenues and unearned fees reserves (h) 2,080 1,726 1,570
Other debt instruments issued and bank overdrafts (g) (i) 8,711 8,411 7,784
Payables arising from direct insurance and inward reinsurance operations 7,947 4,680 3,863
Liabilities held for sale or relating to discontinued operations (k) 1,812 – –
Total Liabilities arising from contracts with financial risk borne by the policyholders 176,657 141,437 112,705 Liabilities arising from insurance contracts 323,232 247,717 229,452
Total Liabilities arising from insurance and investment contracts 356,952 281,910 262,153
Change in fair value of financial instruments at fair value through profit and loss (j) 14,550 16,110 12,530
Amortization of the value of purchased business in force and of other intangible assets (282) (558) (468)
Net consolidated income 5,758 4,806 4,266 Split between: Net income Group share 5,085 4,318 3,793
(e) Includes changes in liabilities arising from insurance contracts and investment contracts (with or with no discretionary participating features) where the financial risk is borne by policyholders for an amount of €15,370 million as a balancing entry to the change in fair value of financial instruments at fair value through profit and loss (€13,978 million in 2005 and €10,543 million in 2004). (f) Includes acquisition costs and change in deferred acquisition costs relating to insurance contracts and investment contracts with discretionary participating features as well as change in net rights to future management fees relating to investment contracts with no discretionary participating features.
(g) Notably includes financial charges in relation to other debt instruments issued and bank overdrafts. (h) Includes net balance of income and expenses related to derivatives on financing debt (however excludes change in fair value of these derivatives). (i) Includes change in goodwill impairment as well as negative goodwill. (g) As described in note 1.11.2, perpetual subordinated notes have been reclassified under shareholders’ equity for all periods presented. Details are provided in note 13. (h) As described in note 1.12.2, the adoption of FRS 27 in the United Kingdom has led to adjustments on all periods presented. The effect of these adjustments is set out in note 14.
Net increase / (write back) in impairment on investments, tangible and other intangible assets 175 214 455
Net change in liabilities arising from insurance and investment contracts (e) 28,604 31,312 24,426
Adjustment of non cash balances included in the operating income before tax 13,633 14,883 11,625 Net realized investment gains and losses (4,778) (3,921) (3,668)
Net cash provided by other assets and liabilities (h) (1,718) (808) (2,285)
Other operating cash impact and non cash adjustment (b) 1,239 188 (191)
Purchase of subsidiaries and affiliated companies, net of cash acquired (5,718) (1,583) (3,938)
Net cash related to changes in scope of consolidation (5,600) (691) (2,801) Sales of fixed maturities (h) 67,720 70,722 84,965
Sales of equities and non controlled investment funds (h) (i) 20,110 19,604 22,072
Net cash related to sales and repayments of financial assets (h) (i) (j) 110,040 103,262 112,878 Purchases of fixed maturities (h) (84,728) (79,833) (82,677)
Purchases and/or issues of loans and other assets (h) (j) (27,786) (20,878) (8,284)
Other investing cash impact and non cash adjustment (34) (401) (413)
Net cash related to transactions with shareholders 5,971 (1,842) 1,706 Cash provided by financial debts issuance 1,406 301 366
Cash and cash equivalent as at January 1 20,640 21,830 18,858 Net cash provided by operating activities 18,938 16,453 13,351
Impact of change in scope on cash and cash equivalent (7) 138 117
(b) As described in note 1.11.2, perpetual subordinated notes have been transferred from the “subordinated debt” item to the “shareholders’ equity” item, and so are treated similarly to deeply subordinated notes. The effect on the cash flow statement of this reclassification is as follows: – a €58 million decrease in operating income before tax at December 31, 2004 and a €102 million increase at December 31, 2005; – a €426 million increase in “issuance of equity instruments” in 2004 and a €515 million increase in “Repayments of equity instruments” in 2005; – a €132 million decrease in interest paid on perpetual debts at December 31, 2004 and a €157 million decrease at December 31, 2005.
(d) Includes the capitalization of premiums/discounts and related amortization and amortization of investment and owner occupied properties (held directly). (e) Includes the impact of reinsurance. This item also includes the change in liabilities arising from contracts where the financial risk is borne by policyholders. (f) Mainly includes changes in provisions for risks and charges, provisions for bad debts/doubtful receivables and change in impairment of assets held for sale. (g) Also includes changes relating to repository transactions and equivalent for banking activities. (h) Includes corresponding derivatives. (i) Includes equities held directly or by consolidated and non controlled investment funds.
Cash backing contracts where the financial risk is borne by policyholders (b) 7,959 – –
(b) From December 31, 2006, the “Cash and cash equivalents” item in the statement of consolidated cash flows includes cash backing contracts where financial risk is borne by policyholders (unit-linked contracts), which was previously considered as a financial asset.
Number Nominal value Share Capital Treasury of shares (euros) Capital in excess shares
(b) The 2006 opening balance was adjusted by €2,679 million following a change in presentation of perpetual deeply subordinated notes, as described in note 1.11.2 (accounting principles) and explained in note 13.
NB: Amounts are presented net of impacts of shadow accounting and of its effects on policyholders’ benefit, deferred acquisition costs, and value of business in force. (a) Mainly equity components of compound financial instruments (e.g. convertible bonds). (b) Actuarial gains and losses accrued since opening January 1, 2005.
Impact of transactions with shareholders 130,341 2.29 298 1,392 124 Reserves relating to changes in fair value through shareholders’ equity
NB: The 2004 opening balance was adjusted by €2,706 million and the 2004 closing balance by €3,048 million following a change in presentation of perpetual deeply subordinated notes, as described in note 1.11.2 (accounting principles) and explained in note 13.
1.1. General information AXA SA, a French “Société Anonyme” (the “Company” and, together with its consolidated subsidiaries, “AXA” or the “Group”), is the holding (parent) company for an international financial services group focused on financial protection. AXA operates principally in Europe, North America and Asia-Pacific. The list of main entities included in the scope of the AXA’s consolidated financial statements is provided in Note 2 of the notes to the consolidated financial statements.
AXA operates in the following primary business segments: – Life & Savings, – Property & Casualty, – International Insurance and, – Asset Management and Other Financial
The consolidated financial statements are prepared in accordance with IFRSs and IFRIC interpretations1 that were definitive and effective at December 31, 2006, as adopted by the European Union before the balance sheet date. However, the Group does not use the “carve out” option not to apply all hedge accounting principles as defined by IAS 39.
(1) International Financial Reporting Interpretations Committee. (2) Not all of these standards have yet been adopted by the European Union.
and the amendment to IAS 19 – Employee benefits relating to actuarial gains and losses, group plans and disclosures. Early adoption was encouraged for these standards, which became effective for accounting periods starting on or after January 1, 2006. The impact on the Group’s consolidated financial statements is set out in sections 1.15.2 Pensions and other postretirement benefits and 1.7.2 Financial instruments.
However, the following standards, amendments and interpretations adopted by the Group at January 1, 2006 had no impact or no material impact on the consolidated financial statements: – Amendment to IAS 21 – Net Investment in a
Foreign Operations. – Amendment to IAS 39 – Cash flow hedge
Guarantee Contracts. – IFRIC 4 – Determining whether an arrangement contains a lease.
These two standards require additional disclosures in the notes to the consolidated financial statements relating to the Group’s financial instruments, insurance contracts and capital. They will have no impact on the Group’s results or financial position.
IFRS 8 – Operating segments, published in November 2006 and applicable from January 1, 2009, replaces IAS 14 – Segment reporting. The new standard requires operating segments used in the disclosures to be based on the segmentation used in the entity’s internal reporting, i.e. on the basis of which operational heads allocate capital and resources to the various segments and assess the segments’ performance. The standard requires the entity to explain the basis on which segments are determined, and provide a reconciliation between consolidated balance sheet and income statement amounts. The analysis of the potential impact on Group segment reporting is currently underway.
IFRIC 9 – Reassessment of Embedded Derivatives, published in March 2006 and applicable to accounting periods starting on or after June 1, 2006, states that the identification and measurement of an embedded derivative may only take place after the implementation of the contract provided if the contract undergoes an alteration that leads to material changes in the cash flows of the contract, the embedded derivative or the whole. Since this interpretation is in line with the Group’s existing accounting principles, it is unlikely to have any impact on its consolidated financial statements.
IFRIC 10 – Interim Financial Reporting and Impairment, published in July 2006 and applicable to accounting periods starting on or after November 1, 2006, states that impairment cannot be released when a company, in its interim financial statements, has recognized a loss of value on goodwill, an unlisted equity instrument or a financial asset accounted at cost. Since this interpretation is in line with the Group’s existing accounting principles, it is unlikely to have any impact on its consolidated financial statements.
The Group has not opted for early application of the following interpretations, whose impact on the consolidated financial statements is not expected to be material: – IFRIC 7 – Restatement under Hyperinflation
The principles set out below specify the measurement methods used for these items. These methods, along with key assumptions where required, are discussed in greater depth in the notes relating to the asset and liability items concerned where meaningful and useful.
1.3. Consolidation 1.3.1. Scope and basis of consolidation Companies in which AXA exercises control are known as subsidiaries. Subsidiaries are fully consolidated from the date on which control is transferred to AXA. Control is presumed to exist when AXA directly or indirectly holds more than 50% of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible have also been considered when assessing whether AXA controls another entity.
Investment contracts with no discretionary participating features do not benefit from this exemption permitted by IFRS 4 in phase I of the IASB’s insurance project, i.e. the fair value of acquired liabilities is booked through the recognition of an asset corresponding to the value of acquired business inforce. Liabilities relating to investment contracts with no discretionary participating features are measured directly at fair value. In accordance with IAS 39, the fair value of these contracts cannot be less than surrender value when they contain a demand feature.
Other intangible assets such as the value of customer relationships are recognized only if they can be measured reliably. The value of customer relationships intangible in this case represents the value of future cash flows expected from renewals and the cross-selling of new products to customers known and identified at the time of the acquisition. These
The cost of an acquisition is measured at the fair value of the assets acquired, equity instruments issued and liabilities incurred or assumed at completion date, plus external fees directly attributable to the acquisition.
Adjustments can be made to goodwill within twelve months of the acquisition date, if new information becomes available.
Minority interests Buyouts In the event of a minority interests buyout of a subsidiary, the new goodwill is recognized as the difference between the price paid for the additional shares and the shareholders’ equity acquired (including changes in fair value posted through equity).
Where the contract involves an unconditional commitment exercisable at anytime by the option holder, it is recognized as a liability. Since the balancing entry to this liability is not specified by current IFRSs, and since IFRIC’s Agenda Committee decided in 2006 not to take any position on the accounting treatment of these transactions, the Group’s method is (i) to reclassify minority interests from equity to liability, (ii) to re-measure this liability at the present value of the option
In the event of an internal sale of an asset that is not intended to be sold on the long term by the Group, deferred tax is recognized on the top of the current tax calculated on the realized gain or loss. The income statement impact of the potential policyholders’ participation resulting from this transaction is also eliminated, and a deferred policyholders’ participation asset or liability is posted to the balance sheet.
In addition, the transfer of consolidated shares, between two consolidated subsidiaries but held with different ownership percentages, should not impact the Group net income. The only exception would be any related tax and policyholders’ participation recorded in connection to the transaction, which are maintained in the consolidated financial statements since the related consolidated shares are held on a long-term basis. These transfers also have an impact on Group shareholders’ equity (with a balancing entry recorded in minority interests). This impact is identified in the “Internal restructuring” item of the consolidated statement of shareholders’ equity.
The results and financial position of all group entities that have a functional currency (i.e. the currency of the primary economic environment in which the entity operates) different from the Group presentation currency are translated as follows: (i) assets and liabilities of entities in a functional currency different from Euro are translated at closing rate; (ii) revenues and expenses are translated at the average exchange rates over the period; (iii) all resulting foreign exchange differences are recognized as a separate component of equity (translation differences).
such investment are recorded in shareholders’ equity under translation differences and are reclycled in the income statement as part of the realized gain or loss on disposal of the net investment.
1.6. Intangible assets 1.6.1. Goodwill and impairment of goodwill Goodwill is considered to have an indefinite useful life and is therefore not amortized. Impairment tests are performed at least annually. Impairment of goodwill is not reversible.
AXA performs an annual impairment test of goodwill based on cash generating units, using a multi-criterion analysis with parameters such as the value of assets, future operating profits and market share, in order to determine any significant adverse changes. The analysis assumes a long-term holding, and excludes parameters affected by short-term market volatility. It also considers the interdependence of transactions within sub-groups. Within each cash generating unit, a comparison is made between net book value and the recoverable value (equal to the higher of market value and value in use). Value in use consists of the net assets and expected future earnings from existing and new business, taking into account the cash generating units’ future cash flows. The value of future expected earnings is estimated on the basis of the insurance and investment contracts embedded value figures published by AXA or similar calculations for other activities. Market values are based on various valuation multiples.
value, an impairment is booked corresponding to the difference between the value on the balance sheet and the higher of value in use and market value.
These unearned revenues and fees reserves are separately recognized as liabilities and are amortized over the contract term using the same amortization approach used for DAC and DOC.
Any impairment is recorded as soon as a permanent unrealized loss is identified. When the estimated market value is 15% lower than the net carrying value, the present value of the asset’s future estimated cash flows is calculated. If the calculated amount is lower than the net carrying value, an impairment is recorded, corresponding to the difference between (a) the net bookvalue and (b) the higher of the estimated market value and the discounted cash flow value.
Investment properties that totally or partially back liabilities arising from: – contracts where the financial risk is borne by policyholders,
– “With-Profit” contracts where dividends are based on real estate assets, are recognized at fair value with changes in fair value taken to the statement of income.
1.7.2. Financial instruments Classification Depending on the intention and ability to hold the invested assets, financial instruments are classified in the following categories: – assets held to maturity, accounted for at amortized cost; – loans and receivables (including unquoted debt instruments) accounted for at amortized cost; – trading assets and assets designated at fair value with change in fair value recognized through income statement; – available-for-sale assets accounted for at fair value with changes in fair value recognized through shareholders’ equity.
In practice, assets held through investment funds are classified: – either as assets of the “Core Investment
Portfolios” which include assets backing liabilities arising from insurance and investment contracts, managed according to AXA’s ALM strategy; – or as assets of the “Satellite Investment Portfolios”, reflecting the strategic asset allocation based on a dynamic asset management aimed at maximizing returns.
Underlying financial instruments held in the “Core Investment Portfolios” are classified as available-for-sale unless involved in a qualifying hedge relationship or more broadly when electing the fair value option reduces accounting mismatch. The financial instruments held in the “Satellite Investment Portfolios” are accounted for at fair value with changes in fair value recognized through income statement.
For fixed maturities, an impairment is recorded through the income statement for a decline in value of a security if the amounts may not be fully recoverable due to a credit event relating to the fixed maturity issuer. If this credit risk is eliminated or improves, the impairment may be released. The amount of the reversal is also recognized in the income statement.
date), or unrealized losses in excess of 20% of the net carrying value at the closing date. If such evidence exists for available-for-sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment on that financial asset already booked in the income statement – is removed from shareholders’ equity and an impairment is recognized through the income statement. Equity securities impairment recognized in the income statement can not be reversed through the income statement until the asset is sold or derecognized.
Methods for calculating the net book value of assets sold (average cost, first-in first-out, etc.) depend on local ALM strategies as these strategies have been set up to take into account specific commitments to policyholders. These methods may differ provided that they are used consistently at each entity level.
The Group documents, at inception, the hedge relationship, as well as its risk management hedging objectives and strategy. The Group also documents the hedge effectiveness, both at inception and on an ongoing basis, indicating the actual or expected efficiency level of the derivatives used in hedging transactions in offsetting changes in the fair values or cash flows of hedged underlying items.
Cash flow hedge The effective portion of changes in the fair value of derivatives designated and qualifying as cash flow hedge is recognized in shareholders’ equity. The gain or loss relating to any ineffective portion is recognized in the income statement. Cumulative gain or loss in shareholders’ equity are recycled in the income statement when the hedged underlying item impacts the profit or loss for the period (for example when the hedged future transaction is actually accounted). When a hedging instrument reaches its maturity date or is sold, or when a hedge no longer qualifies for hedge accounting, the cumulative gains or losses in shareholders’ equity are held until the initially hedged future transaction ultimately impacts the income statement.
Net investment hedge The accounting of net investments in foreign operations hedge is similar to the accounting of cash flow hedge. Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognized in shareholders’ equity; the gain or loss relating to the ineffective portion is recognized in the income statement. Cumulative gains and losses in shareholders’ equity impact the income statement only on disposal of the foreign operations.
The Group holds financial assets that include embedded derivatives. Such embedded derivatives are separately recorded and measured at fair value through profit or loss if the impact is deemed significant.
1.10. Assets held for sale and assets relating to discontinued operations
1.11. Share capital and shareholders’ equity 1.11.1. Share capital Ordinary shares are classified in shareholders’ equity when there is no obligation to transfer cash or other assets to the holders.
1.12. Liabilities arising from insurance and investment contracts 1.12.1. Contracts classification The Group issues contracts that transfer an insurance risk or a financial risk or both.
– liabilities arising from investment contracts with discretionary participating features where the financial risk is borne by policyholders; these relate to unit-linked contracts or multi-funds contracts containing a non-unitlinked fund with discretionary participating features,
The “Liabilities arising from policyholders participation” aggregate includes whole of the “Fund for Future Appropriation” (FFA) relating to UK With-Profit contracts. It mainly represents future terminal bonuses according to the terms of these contracts: the With-Profit contracts reserves as well as the FFA vary in line with the market value of the backing assets. Following the adoption of UK Financial Reporting Standard FRS27, reserves relating to with-profit contracts and the FFA were subject to a change in accounting policies applied retrospectively to the periods ended December 31, 2004, 2005 and 2006 (but not to the 2004 opening balance sheet), consistently with what other UK insurance companies applied. Reserves have been adjusted on a “realistic” basis, and related deferred acquisition costs and unearned revenues reserves have been cancelled. These adjustments had no impact on net income or shareholders’ equity.
Except when these guarantees are covered by a risk management program using derivative instruments (see next paragraph), guaranteed benefits relating to contracts where the financial risk is borne by policyholders and classified as insurance contracts because they include such guarantees or classified as investment contracts with discretionary participating features, are booked gradually based on a prospective approach: the present value of future benefit obligations to be paid to policyholders in relation to these guarantees is estimated on the basis of reasonable scenarios. These scenarios are based on assumptions including investment returns and related volatility, surrender and mortality rates. This present value of future benefit obligations is reserved as fees emerge over the life of the contracts.
Some guaranteed benefits such as Guaranteed Minimum Death or Income Benefits (GMDB or GMIB), or certain guarantees on return proposed by reinsurance treaties, are covered by a risk management program using derivative instruments. In order to minimize the accounting mismatch between liabilities and hedging derivatives, AXA has chosen to use the option allowed under IFRS 4.24 to re-measure its provisions: this revaluation is carried out at each accounts closing based on guarantee level projections and takes into account interest rates and other market assumptions. The liabilities revaluation impact in the current period is recognized through income, symmetrically with the impact of the change in value of hedging derivatives. This change in accounting principles was adopted on the first time application of IFRS on January 1, 2004 for contracts portfolios covered by the risk management program at that date. Any additional contracts portfolios covered by the risk management program after this date are valued on the same terms as those that applied on the date the program was first applied.
Unearned revenues reserves Revenues received at contract inception to cover future services are deferred and recognized in the income statement using the same amortization pattern as the one used for deferred acquisition costs (see section 1.6.4).
Shadow accounting and Deferred policyholders Participation Asset (DPA) or Liability (DPL) In compliance with IFRS 4 option, shadow accounting is applied to insurance and investment contracts with discretionary participating features. Shadow accounting is applied to technical liabilities, acquisition costs and value of business inforce to take into account unrealized gains or losses on insurance liabilities or assets in the same way as it is done for a realized gain or loss. When unrealized gains or losses are recognized, a deferred participating liability (DPL) or asset (DPA) is recorded. The DPL or DPA corresponds to the discretionary participation available to the policyholders and is determined by applying an estimated participation rate to unrealized gains and losses.
Deferred policyholders participation is fully classified as liabilities or assets. As a consequence, AXA does not need to ensure the liability recognized for the whole contract is not less than the amount that would result from applying IAS 39 to the guaranteed element.
When a net unrealized losses is accounted, a deferred participating asset (DPA) should be recognized only to the extent that its recoverability toward future policyholders participation, by entity, is highly probable. That could be the case if the DPA can be offset against future participation either directly through deduction of the DPL from future capital gains or indirectly through deduction of future fees on premiums or margins.
Liability adequacy test (LAT) At each balance sheet date, liability adequacy tests are performed in each consolidated entity in order to ensure the adequacy of the contract liabilities net of related DAC and VBI assets. To perform these tests, entities group contracts together according to how they have been acquired, are serviced and have their profitability measured. Entities also use current best estimates of all future contractual cash flows as well as claims handling and administration expenses, and they take into account embedded options and guarantees and investment yields relating to assets backing these contracts. Contract specific risks (insurance risk, asset return risk, inflation risk, persistency, adverse selection etc.) directly related to the contracts that might make the net liabilities inadequate, are also considered.
1.12.3. Investment contracts with no discretionary participating features In accordance with IAS 39, these contracts are accounted for using “deposit accounting”, which mainly results in not recognizing the cash flows corresponding to premiums, benefits and claims in the statement of income (see “Revenue recognition” section below). These cash flows shall rather be recognized as deposits and withdrawals.
This category includes mainly unit-linked contracts that do not meet the definition of insurance or investment contracts with discretionary participating features. For unitlinked contracts, the liabilities recognized under existing accounting policies are valued according to the fair value of the financial assets backing those contracts at the balance sheet date.
as liabilities and accounted in the income statement based on the same amortization pattern as the one used for deferred origination costs (see section 1.6.4).
1.15.2. Pensions and other post-retirement benefits Pensions and other post-retirement benefits include the benefits payable to AXA Group employees after they retire (retirement compensation, additional pension benefit, health insurance). In order to meet those obligations, some regulatory framework have allowed or enforced the set up of dedicated funds (plan assets).
– Defined contribution plans: payments are made by the employer to a third party (e.g. pension trusts). These payments free the employer of any further commitment, and the obligation to pay acquired benefits to the employees is transferred. The contributions paid by the employer are recorded as an expense in the income statement and no liability needs to be recorded.
– Defined benefit plans: an actuarial assessment of the commitments based on each plan’s internal rules is performed. The present value of the future benefits paid by the employer, known as the PBO (Projected Benefit Obligation), is calculated annually on the basis of long-term projections of rate of salary increase, inflation rate, mortality, staff turnover, pension indexation and remaining service lifetime. The amount recorded in the balance sheet for employee benefits is the difference between the Projected Benefit Obligation and the market value at the balance sheet date of the corresponding invested plan assets after adjustment for any unrecognized losses or gains. If the net result is negative, a provision is recorded in the balance sheet under the provision for risks and charges heading. If the net result is positive, a prepaid asset is recorded in the balance sheet. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are recognized in shareholders’ equity in full in the period in which they occur. Similarly, any adjustment arising from the asset ceiling is recognized in shareholders’ equity. Past service costs are recognized immediately in the income statement, unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, past service costs are amortized on a straight-line basis over the vesting period.
All equity-settled stock-option plans granted after November 7, 2002 and not fully vested as at January 1, 2004 are accounted for at fair value at the date they were granted and the fair value is expensed over the vesting period.
Cash-settled stock option plans are recognized at fair value, which is remeasured at each balance sheet date with any change in fair value recognized in the statement of income.
The AXA Shareplan issued under specific French regulatory framework includes two options: traditional and leveraged option. The cost of the traditional option Shareplan is valued according to the specific guidance issued in France by the CNC (Conseil National de la Comptabilité). The cost of the leveraged option plan is valued by taking into account the five-year lock-up period for the employees (as in the traditional plan) but adding the opportunity cost implicitly borne by AXA by enabling its employees to benefit from an institutional derivatives-based pricing instead of a retail pricing.
Provisions are not recognized for future operating losses or future losses associated with the ongoing activities of the company.
1.17. Revenue recognition 1.17.1. Gross written premiums Gross written premiums correspond to the amount of premiums written by insurance and reinsurance companies on business incepted in the year with respect to both insurance contracts and investment contracts with discretionary participating features, net of cancellations and gross of reinsurance ceded. For reinsurance, premiums are recorded on the basis of declarations made by the ceding company, and may include estimates of gross written premiums.
1.17.3. Deposit accounting Investment contracts with no discretionary participating features fall within the scope of
1.17.6. Net revenues from banking activities Net revenues from banking activities include all revenues and expenses from banking operating activities, including interests and banking fees.
– commissions received and fees for services relating to asset management activities,
1.17.8. Net investment result excluding financing expenses The net investment result in respect of insurance activities includes: – investment income from investments from non banking activities, net of impairment expense on real estate investments (impairment expense relating to owner occupied properties is included in “administrative expenses” aggregate); this item includes interest received calculated using the effective interest method for debt instruments and dividends received on equity instruments,
– the change in unrealized gains and losses on invested assets measured at fair value through profit or loss,
In respect of banking activities, interest income and financial charges including interest expenses are included in the “Net revenue from banking activities” item (see section 1.17.6).
The Group no longer reports “Net income Group share” (obtained by deducting minority interests from “Consolidated net income”). Net income is now broken down into “Minority interests share in net consolidated result” and “Net income
Parent and Holding Companies Change in scope Voting Ownership Voting Ownership rights interest rights interest France
Asia/Pacific (excluding Japan) National Mutual International Pty Ltd 100.00 52.69 100.00 52.95
Canada AXA Canada Inc. (sub-group including Citadel) 100.00 100.00 100.00 100.00
AXA Leben Versicherung AG Minority interest buyout 100.00 96.52 100.00 92.19
Life & Savings and Property & Casualty Change in scope Voting Ownership Voting Ownership rights interest rights interest Spain
Portugal AXA Portugal Companhia de Seguros SA 99.61 99.37 99.70 99.51
Switzerland AXA Compagnie d’Assurances sur la Vie 100.00 100.00 100.00 100.00
Asset Management December 31, 2006 December 31, 2005 (entities having worldwide activities) Change in scope Voting Ownership Voting Ownership rights interest rights interest AXA Investment Managers (sub-group) (a) 94.82 94.58 95.11 94.58
Other Financial Services Change in scope Voting Ownership Voting Ownership rights interest rights interest France
On December 22, 2006, AXA completed its acquisition of Winterthur after receiving all regulatory authorizations.
United Kingdom Winterthur (UK) Holdings Ltd Acquisition 100.00 100.00 – –
Life & Savings and Property & Casualty Change in scope Voting Ownership Voting Ownership rights interest rights interest Eastern Europe
Winterthur Europe Assurances - Non Vie Acquisition 99.81 99.81 – –
Other Financial Services Change in scope Voting Ownership Voting Ownership rights interest rights interest The Netherlands
The main removals from the scope in 2006 arose from the sale of Parfimmo in Belgium and AXA RE’s activities to Paris Ré Holding on December 21, 2006. In 2005, Advest, a subsidiary of AXA Financial Group (US life business) left the scope.
Investment funds and other investments Funds and other investments consolidated by AXA are as follows: Consolidated mutual funds represented total investments of €84,899 million at end-2006
The 70 consolidated real estate companies represented total investments of €22,898 million at end-2005 (€18,795 million at December 31, 2005 and €6,110 million at December 31, 2004), mainly in France, the UK, Germany and Japan. The 8 consolidated CDOs represented total investments of €1,410 million at end-2005 (€1,806 million at December 31, 2005 and
In most investment funds (particularly openended mutual funds), minority interests do not meet the definition of shareholders’ equity. They
Compagnie Financière de Paris Crédit Merger with Compagnie Financière de Paris – – 100.00 100.00
PT AXA Mandiri Financial Services Scope entry 51.00 26.87 – –
2.2. Other comments on the scope of consolidation AXA’s consolidated financial statements are prepared at December 31 based on individual company financial statements at the same date, with the exception of companies in the Japanese life insurance business (AXA Japan excluding Winterthur Swiss Life Insurance), which have a September 30 financial year-end.
Due to AXA Japan’s continuing involvement in managing these buildings, the Group is considered to retain almost all of the risks and benefits relating to ownership of the transferred assets, and so the assets have been kept on the balance sheet. The assets relating to this transaction kept on the balance sheet at December 31, 2006 totaled JPY 12 billion (€80 million).
Note 3 : Segmental information (Balance sheet and Statement of income)
The Other Financial Services Segment’s products and services mainly include banking activities conducted primarily in France and Belgium and financial vehicles including certain Special-Purpose Entities (CDOs and mortgage securitization vehicles).
In this document, “Insurance” covers the three insurance segments: Life & Savings, Property & Casualty and International Insurance. The term “Financial Services” includes both the Asset Management segment and the Other Financial Services segment.
Life & Property & International Asset Other Holding Inter- TOTAL (b)
SEGMENTAL LIABILITIES December 31, 2006 EXCLUDING SHAREHOLDERS’ EQUITY Life & Property & International Asset Other Holding Inter- TOTAL
Unearned revenues and unearned fees reserves 2,080 – – – – – – 2,080
Provisions for risks and charges 4,929 2,843 307 165 261 478 – 8,984
Liabilities from held for sale or discontinued operations – 1,812 – – – – – 1,812
Unearned revenues and unearned fees reserves (c) 1,726 – – – – – – 1,726
Provisions for risks and charges 5,221 2,699 93 99 272 377 – 8,761
SEGMENTAL LIABILITIES December 31, 2004 EXCLUDING SHAREHOLDERS’ EQUITY Life & Property & International Asset Other Holding Inter- TOTAL (b)
Provisions for risks and charges 4,663 2,305 99 78 270 313 – 7,729
(a) Also includes changes in liabiities arising from insurance contracts and investment contracts where the financial risk is borne by policyholders. (b) As described in note 1.11.2, perpetual subordinated notes have been reclassified under shareholders’ equity for all periods presented. Details are provided in note 13. (c) As described in note 1.12.2, the adoption of FRS 27 in the UK has led to adjustments on all periods presented. The effect of these adjustments is set out in note 14.
Net revenues from banking activities – – – – 398 – (22) 376
Change in tangible assets impairment 7 11 – – – 1 – 18
Life & Property & International Asset Other Holding Inter- TOTAL Savings (a) Casualty Insurance Management financial companies (b) segment services eliminations
Fees and charges relating to investment contracts with no participating features 509 – – – – – – 509
Change in tangible assets impairment (4) (1) 3 – – – – (3)
Change in goodwill impairment (70) – – – – – – (70)
Other operating income and expenses (72,214) (18,259) (4,096) (2,825) (457) (479) 492 (97,839)
Life & Property & International Asset Other Holding Inter- TOTAL Savings Casualty Insurance Management financial companies (a) segment services eliminations
Net result from outward reinsurance 17 (663) (401) – – – (15) (1,063)
Change in tangible assets impairment (3) (7) – – – – – (10)
Other operating income and expenses (64,700) (17,461) (3,873) (2,618) (405) (284) 603 (88,739)
(a) As described in note 1.11.2, perpetual subordinated notes have been reclassified under shareholders’ equity for all periods presented. Details are provided in note 13.
Please refer to pages 137 to 142, “Liquidity and capital resources” section (except for the “Solvency Margin” paragraph on page 141).
Cumulative amortization booked under French GAAP at December 31, 2003 is deducted from the gross value. Goodwill presented in the tables above also includes the balancing entry for the revaluation of minority interests relating to buyout commitments recognized as liabilities under the “Minorities in controlled funds and other minority interests buy out commitments” caption. – The amounts relating to the puts owned by minority shareholders in Sanford C. Bernstein and presented in the Sanford C. Bernstein item of the table above totaled €785 million at December 31, 2006 (€559 million at December 31, 2005, €298 million at December 31, 2004 and €508 million at January 2004).
– Goodwill relating to puts owned by minority shareholders in former Winterthur subsidiaries in Central Europe and presented in the Winterthur item of the above table were recorded on the Group’s balance sheet at December 31, 2006 in an amount of €71 million following the Winterthur acquisition.
AXA Equity & Law 377 – – – 8 – 385
SLPH (AXA UK Holdings) 1,525 – – – 17 (1) 1,541
Nippon Dantaï (AXA Nichidan) 1,343 – – – (118) – 1,225
Of which: (a) Gross value of goodwill is presented net of accumulated amortization under French GAAP as of December 31, 2003. (b) Including the impact of exercises and revaluations of minority interests buyout commitments. (c) Including €82,8 million due to the acquisition of Tynan Mackenzie.
Gross value Acquisitions Disposals Goodwill Currency Other Gross value January 1, during during adjustments translation changes (b) December 31, 2005 (a) the period the period adjustment 2005 (a)
AXA Investment Managers (including AXA Rosenberg) 102 – – – 15 – 117
Of which: (a) Gross value of goodwill is presented net of accumulated amortization under French GAAP as of December 31, 2003. (b) Including the impact of exercises and revaluations of minority interests buyout commitments.
Nippon Dantaï (AXA Japan) 70 – – – – (6) – 64
Guardian Royal Exchange (excluding Albingia) – – – – – – – –
Of which: Life and Savings 70 – – – – (6) – 64
Property and Casualty 35 – – – – – – 35
Nippon Dantaï (AXA Japan) – – – – – – 70 70
Of which: – – – – – – – Life and Savings – – – – – – 70 70
The Winterthur acquisition led to the recognition of €2,691 million of goodwill, excluding the goodwill related to put options held by minority shareholders of Winterthur’s former subsidiaries in Central Europe (see note 5.1). The goodwill arising from the Winterthur acquisition breaks down as follows: Acquisition cost: (in Euro million)
Assets and liabilities on the acquisition date totaled: (in Euro million)
Acquired assets and liabilities were previously valued using US GAAP. They were adjusted to fair value in the opening balance sheet and integrated with the group’s financial statements at year-end based on the AXA IFRS accounting policies.
Intangible assets totaling €3,468 million gross (€2,462 million net) were identified. They include: – €2,327 million gross (€1,653 million net)
relationships intangible recognized in the opening balance sheet was €1,141 million gross (€809 million net). In the Property & Casualty business, these projections include assumptions regarding claims, expenses and financial revenues. For Life & Savings, it is estimated on the basis of the new business value when the portion relating to customers with inforce policies can be identified, measured and recognized separately.
The residual goodwill mainly represents expected synergies, especially cost cuttings and other customer-related items that could not be measured reliably or recognized separately.
Acquired assets and liabilities have been reclassified, not only so that they can be presented according to the Group’s IFRS principles, but also to take account of its intention to sell Winterthur’s Property & Casualty operations in the United States (see below).
– Estimated net income totals €530 million, including some non-recurring items (sale of the healthcare and Weaver portfolios, one-off increase in technical liabilities booked by Winterthur in 2006, one-off tax gains or losses etc.).
intention to carry out a strategic review of its entire interest in Winterthur’s US Property & Casualty subsidiary. A binding offer was signed on January 4, 2007 with Australian insurer QBE and the transaction is expected to close in the second quarter of 2007. Assets and liabilities related to this business were restated at fair value net of costs to sell and classified within items held for sale in the opening balance sheet.
Buyout of minorities – AXA Konzern AG (2006) On May 15, 2006, AXA announced a squeezeout operation concerning its German subsidiary AXA Konzern AG (“AXA Konzern”), enabling it to acquire the 3.2% of AXA Konzern shares it did not previously own for €134.54 per ordinary and preferred share.
The resolution relating to this squeeze-out was approved in AXA Konzern’s shareholders’ meeting of July 20, 2006. The registration of this transaction is subject to various procedures under German law, which were still ongoing at
Previously, and as announced on December 21, 2005, AXA had offered to buy out minorities in AXA Konzern between January 9 and February 27, 2006 at a price of €129.3 per ordinary and preferred share. At the end of the offer period, AXA owned 96.8% of AXA Konzern directly and indirectly, thereby exceeding the 95% threshold required to initiate a mandatory squeeze-out operation.
Shareholders who tendered their shares to the offer at €129.30 per share will receive the mandatory squeeze-out price of €134.54 per share.
At end-December, the group owned 96.84% of AXA Konzern, generating goodwill of €92 million (reported on the UAP line of the table on page 299).
At December 31, 2006, this goodwill had a net value of €87 million.
Acquisition of Seguro Directo (2005) On October 18, 2005, AXA acquired the insurance company Seguro Directo. The total transaction consideration was €42 million. This transaction gave rise to goodwill of €31 million.
At December 31, 2006, the net value of this goodwill was €31 million.
In 2005, AXA Financial sold its Advest Group Inc. subsidiary (part of the MONY group) for $400 million. This transaction reduced the MONY goodwill by $189 million (€152 million).
Financial reorganization of AXA Equity & Law – 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 (“WithProfit ”) fund and related future benefits based on the percentage of policyholders who elected in favor of the plan.
Minority interest buyout – AXA Financial (2000) The aggregate purchase consideration was €11,213 million and included the following items: – €3,868 million financed by a capital increase, representing the value of the 25.8 million ordinary shares issued by AXA at a price of €149.90 per share at December 22, 2000, the closing date of the initial offer period and before the 4-for-1 stock split,
Based on the carrying value as at December 31, 2000 of the net assets acquired (€3,913 million), the goodwill amounted to €7,301 million. In accordance with article D248-3 of the decree dated January 17, 1986 and with recommendations issued by the “Commission des Opérations de Bourse” (French stock market regulator) in its bulletin 210 of January 1988, the excess purchase price of €2,518 million was charged directly to consolidated retained earnings and reserves; i.e. the entire excess purchase price multiplied by the ratio of the aggregate purchase consideration financed by the capital increase. The remaining €4,782 million goodwill was recorded as an asset.
At December 31, 2006, this goodwill had a net value of €2,885 million.
The total purchase price was U.S.$3.5 billion (€4.0 billion) and consisted of U.S.$1.5 billion in cash and 40.8 million newly issued private units of Alliance Capital. The cash was funded by AXA Financial through a financing agreement whereby, in June 2000, AXA Financial purchased units in the limited partnership Alliance Capital Management L.P. for an aggregate purchase price of $1.6 billion. Following this acquisition, Alliance Capital was renamed AllianceBernstein.
At December 31, 2006, this goodwill had a net value of €3,237 million.
Buyout of minorities – Sun Life & Provincial Holdings (renamed AXA UK Holdings) The total cost of the acquisition of the 44% minority interests in Sun Life & Provincial Holdings (SLPH) amounted to £2.3 billion (approximately €3.7 billion). The goodwill recorded was €1,971 million.
At January 1, 2004, the net book value of this goodwill was €1,660 million under French GAAP. With the adoption of IFRS, the goodwill
was adjusted for unrealized foreign exchange gains and losses, since goodwill must be recorded in the local currency of the acquired entity. The new goodwill figure is made up of £959 million relating to UK entities, US$114 million relating to US entities and €31 million relating to French entities.
At December 31, 2006, this goodwill had a net value of €1,541 million.
At January 1, 2004, the net book value of this goodwill was €1,408 million under French GAAP. No adjustment was made relating to the adoption of IFRS. The net value of this goodwill in local currency terms is JPY 181,521 million.
At December 31, 2006, the net value of this goodwill was €1,161 million.
Buyout of minorities – AXA China region (2000) The total transaction (buyout of 26% minority interests) amounted to €519 million and resulted in a goodwill of €300 million.
At January 1, 2004, the net book value of this goodwill was €253 million under French GAAP. With the adoption of IFRS, the goodwill was adjusted for unrealized foreign exchange gains and losses, since goodwill must be recorded in the local currency of the acquired entity. The new goodwill figure became HKD 2,510 million.
Following a review of the risks insured and the resulting additional technical reserves booked in 2000, the opening shareholders’ equity of the British entities of the former GRE group was revised and, therefore, goodwill modified (at December 31, 2000, gross goodwill was €1,261 million and net goodwill €770 million).
At December 31, 2006, the net value of this goodwill was €695 million.
Royale Belge (1998) At December 31, 1999, gross goodwill from the buyout of the 51% minority interests of Royale Belge amounted to €1,007 million, of which €337 million was charged directly to retained earnings and reserves.
In 2004, goodwill was written down by €33 million in relation to the Netherlands P&C
business. Goodwill was reduced by a further €18 million following the disposal of Unirobe in early 2004.
At December 31, 2006, this goodwill had a net value of €514 million.
In 2003, following the release of a provision booked when the Group acquired German activities in 1997 and which took place after the Group sold its stake in Colonia Re JV to General Re, exceptional amortization of €57 million was recognized.
The change in Value of Business Inforce (“VBI”) in the Life & Savings segment was as follows: In 2006, the €2,575 million increase in VBI following new subsidiaries’ acquisitions consists of €2,327 million relating to Winterthur and €248 million relating to MLC Hong Kong. The €694 million increase in 2004 corresponded to the acquisition of MONY in the United States.
Net carrying value as at December 31 5,050 2,623 3,123 Gross carrying value as at December 31 8,130 5,760 5,474
Note 7: Deferred acquisition costs and similar costs 7.1. Breakdown of deferred acquisition costs (DAC) and similar
(b) Applicable to investment contracts with no discretionary participation features. (c) As described in note 1.12.2, the adoption of FRS 27 in the United Kingdom has led to adjustments on all periods presented. The effects of these adjustments is set out in note 14.
Deferred future Deferred future Deferred future Acquisition management Acquisition management Acquisition management
Life & Savings deferred acquisition costs and similar costs net carrying value
Decrease following Life portfolio disposals – – – – – –
DAC = Deferred Acquisition Costs. (a) Relating to contracts subject to IFRS 4, i.e. insurance contracts and investment contracts with discretionary participating features. (b) Applicable to investment contracts with no discretionary participation features. (c) Includes the amortization charge for the period, eventual loss of value and, exceptionally in 2004, capitalized interest relating to the USA and Japan. (d) As described in note 1.12.2, the adoption of FRS 27 in the United Kingdom has led to adjustments on all periods presented. The effects of these adjustments is set out in note 14.
Unearned revenue reserves (URR) (c) 1,741 339 1,532 194 1,476 93 of which shadow URR (291) – (431) – (298) –
Gross value Accumulated Impairment Net Value Net Value Net Value amortization December 31, December 31, December 31,
Net value Acquisition Purchase Amortization Disposal Purchase Amortization Currency Net value at January 1st, during increases and impairment during decreases and impairment impact at December 31, the period following allowance the period following write back adjustments adjustments following disposal
Fixed maturities held to maturity – – – – – – – – –
Fixed maturities at fair value through profit and loss (c) 49,591 49,591 8.51% 182 182 1.11% 49,772 49,772 8.31%
Equity securities held for trading 142 142 0.02% 332 332 2.04% 474 474 0.08%
Non controlled investment funds at fair value through profit and loss (c) 2,319 2,319 0.40% 155 155 0.95% 2,474 2,474 0.41%
Other assets held by controlled investment funds designated as at fair value through profit and loss 3,144 3,144 0.54% – – – 3,144 3,144 0.52%
Financial assets (excluding those backing contracts where the financial risk is borne by policyholders) 411,308 406,182 69.70% Life and Savings 348,961 344,364 59.09%
Investment properties at fair value through profit & loss (c) 4,979 4,979 1.08% – – – 4,979 4,979 1.06%
Investments in real estate property 16,235 12,810 2.79% 357 314 3.12% 16,592 13,124 2.80% Fixed maturities held to maturity – – – – – – – – –
Fixed maturities available for sale 189,451 189,451 41.26% 5,739 5,739 56.91% 195,190 195,190 41.59%
Equity securities available for sale 27,680 27,680 6.03% 571 571 5.67% 28,251 28,252 6.02%
Equity securities at fair value through profit and loss (c) 18,804 18,804 4.09% 48 48 0.48% 18,852 18,852 4.02%
Loans designated as at fair value through profit and loss (c) 125 125 0.03% – – – 125 125 0.03%
Financial assets (excluding those backing contracts where the financial risk is borne by policyholders) 321,609 317,790 69.21% Life and Savings 272,271 268,885 58.56%
Fair Net book % (val. Fair Net book % (val. Fair Net book % (val. value value Balance value value Balance value value Balance sheet) sheet) sheet) Investment properties at amortized cost 10,293 7,683 1.95% 82 61 0.54% 10,375 7,744 2%
Macro hedge and speculative derivatives – – – – – – – – –
Investments in real estate property 14,843 12,233 3.10% 82 61 0.54% 14,925 12,294 3.0% Fixed maturities held to maturity – – – – – – – – –
Fixed maturities available for sale 164,650 164,650 41.76% 6,577 6,577 58.02% 171,227 171,227 42.2%
Fixed maturities at fair value through profit and loss (c) 41,886 41,886 10.62% 1,197 1,197 10.56% 43,083 43,083 10.6%
Fixed maturities held for trading 4 4 – 1,620 1,620 14.29% 1,624 1,624 0.4%
Equity securities at fair value through profit and loss (c) 16,847 16,847 4.27% 39 39 0.34% 16,886 16,886 4.2%
Non controlled investment funds available for sale 2,920 2,920 0.74% 65 65 0.58% 2,985 2,985 0.7%
Non controlled investment funds held for trading 232 232 0.06% – – – 232 232 0.1%
Other assets held by controlled investment funds designated as at fair value through profit and loss 596 596 0.15% – – – 596 596 0.1%
Macro hedge and speculative derivatives (242) (242) – 536 536 4.73% 294 294 0.1%
Loans held to maturity 2 2 – – – – 2 2 –
Loans designated as at fair value through profit and loss (c) 377 377 0.10% – – – 377 377 0.1%
Macro hedge and speculative derivatives – – – 76 76 0.67% 76 76 0.0%
Financial assets (excluding those backing contracts where the financial risk is borne by policyholders) 284,992 281,863 71.49% Life and Savings 243,464 240,741 61.06%
(a) Mainly includes policy loans. (b) Excluding investments backing contracts where the financial risk is borne by policyholders. (c) Use of fair value option.
Investment properties include buildings owned directly and through consolidated real estate companies. Investment properties stated at fair value on the balance sheet mainly consist of assets backing with-profit contracts. They also include the unallocated portion of real estate companies, part of which is used to back unitlinked contracts in which the financial risk is borne by policyholders.
Gross value Impairment Accumulated Carrying Fair Gross value Impairment Accumulated Carrying Fair Gross value Impairment Accumulated Carrying Fair
(gross of impairment value value (gross of impairment value value (gross of impairment value value impairment impairment impairment and and and amortization) amortization) amortization)
The integration of Winterthur increased the amount of investment properties by €5,606 million, i.e. €5,580 million at amortized cost and €26 million at fair value. €5,489 million of this increase relates to the insurance business, while €116 million relates to other activities.
Change in impairment and amortization of investment properties at amortized cost (all activities): Impairment – Amortization – Investment properties Investment properties
Excluding the effect of all derivatives, unrealized capital gains and losses on financial investments not already reflected in income break down as follows: INSURANCE December 31, 2006 Amortized Fair value Net book Unrealized Unrealized cost (a) value (b) gains losses Fixed maturities available for sale 234,964 241,652 241,652 8,158 1,470
Non quoted fixed maturities (amortized cost) 10 10 10 – –
Amortized Fair value Net book Unrealized Unrealized Amortized Fair value Net book Unrealized Unrealized cost (a) value (b) gains losses cost (a) value (b) gains losses
The table below sets out the bond portfolio by issuer type, excluding macro hedging derivatives and other derivatives but including the effect of hedging derivatives (IAS 39) and economic hedging derivatives that do not form part of a hedge relationship under IAS 39. Details of the effect of derivatives are provided in section 19.3.
Fixed maturities of the public and semi-public sectors 45,637 36,830 29,347
Excluded are loans and bonds held to maturity, unlisted bonds, the effect of derivatives (detailed in section 19.3) and loans and bonds backing contracts in which financial risk is borne by policyholders.
Net carrying amount by maturity as at December 31, 2006 12 months More than 1 year More than Total net or less up to 5 years 5 years carrying value
Fixed maturities at fair value through profit and loss (a) – 1 1 1
Fixed maturities at fair value through profit and loss (a) – – 1 1
Sub-total fixed maturities – 2 8 11 Loans at amortized cost – – 2 3
Fixed maturities held by controlled investment funds (b) – 13 6 19
Sub-total fixed maturities 11 62 133 206 Loans at amortized cost 1 4 10 15
Sub-total fixed maturities – 3 7 10 Loans at amortized cost – – 1 2
Sub-total: Equities held directly 13,417 6,585 3,359 Equities held by controlled investment funds (a) 3,871 691 352
Sub-total: Equities held directly 10,983 5,919 2,350 Equities held by controlled investment funds (a) 2,631 709 271
NON CONTROLLED INVESTMENT FUNDS December 31, 2006 Insurance Other activities Total
Fair Amortized Fair Amortized Fair Amortized value (a) cost value (a) cost value (a) cost
Non controlled investment funds available for sale mainly holding equity securities 1,432 1,215 18 18 1,450 1,233
Non controlled investment funds trading mainly holding fixed maturities – – –
Other non controlled investment funds at fair value through profit and loss 353 – 353
Non controlled investment funds – Equity method 1,294 – 1,294 Derivatives (hedge accounting) and other derivatives 4 9 – – 4 9
Fair Amortized Fair Amortized Fair Amortized Fair Net book Fair Amortized Fair Amortized value (a) cost value (a) cost value (a) cost value (a) cost value (a) cost value (a) cost
9.8. Financial assets subject to impairment 9.8.1. Breakdown of financial assets subject to impairment (excluding investment properties)
Cost before Impairment Cost after Revaluation Net book value impairment impairment to fair value (Carrying value)
and revaluation but before to fair value (a) revaluation to fair value (b)
Non controlled investment funds available for sale 4,497 (77) 4,420 405 4,825 Loans held to maturity – – – – –
Cost before Impairment Cost after Revaluation Net book value Cost before Impairment Cost after Revaluation Net book value impairment impairment to fair value (Carrying value) impairment impairment to fair value (Carrying value)
(€1,081 million at December 31, 2005 and €1,437 million at December 31, 2004). The breakdown by valuation method of financial assets recognized at fair value is as follows: (in Euro million)
Other assets held by controlled investment funds designated as at fair value through
9.10. Investments backing contracts where the financial risk is borne by policyholders
The “Other investments” item includes: – €7,959 million of directly held cash and equivalents.
impact AXA Affin General Insurance Berhad – – 18 – 11 29
impact AXA Insurance Hong Kong 13 – – – (13) –
AXA General Insurance Hong Kong 55 – – – (55) –
In 2006, “other changes” notably included: – The merger of associate CFP-Crédit with fully consolidated CFP (€–34 million). – The sale of AXA RE (included in the Other items: €–2 million) and Parfimmo in Belgium (€–24 million).
– The merger of AXA Asia Pacific Holdings subsidiaries with Axa Bharti and AXA Affin.
impact AXA Insurance Hong Kong 14 – – – (1) 13
Banque de marchés et d’arbitrage 9 – – – – 9
AXA General Insurance Hong Kong 58 – 9 (5) (7) 55
Current accounts receivable from other companies 845 (6) 839 840 783 (23) 760 760 1,056 1,056
Receivables arising from banking activities 14,456 (393) 14,063 14,026 13,300 (482) 12,818 13,072 11,481 11,804
Assets sold under repurchase agreements 4,732 – 4,732 4,732 1,667 – 1,667 1,667 – –
Cash and cash equivalents break down as follows: At December 31, 2006, cash and cash equivalents excluding Winterthur’s contribution of €3,264 million totaled €17,905 million.
At December 31, 2006, 2005 and 2004, there was no significant restriction on the cash position, other than that described in section 28.3. (Restriction on dividends payments to shareholders).
Note 13: Shareholders’ equity, minority interests and other equity 13.1. Impact of transactions with shareholders 13.1.1. Change in shareholders’ equity group share in 2006 a) Share capital and capital in excess of nominal value In 2006, the following transactions had an impact on AXA’s share capital and capital in excess of nominal value: – A rights issue with preferential subscription rights made on July 11 to finance the acquisition of Winterthur for a total amount of €4,091 million (including €477 million in nominal share capital); – Employee share offering (November 2006) for €375 million (including €35 million in nominal share capital); – Capital reduction of €–305 million by cancelling shares acquired under the share buyback program (including €–26 million in nominal share capital); – Exercise of stock options for a total of €131 million (including €19 million in nominal share capital); – Conversion of share subscription rights for €8 million (including €1 million in nominal share capital); – Other transactions (mainly bond conversions and capital gains on treasury shares) for a total of €7 million.
b) Treasury shares At December 31, 2006, the Company and its subsidiaries owned approximately 30 million AXA shares, a decrease of 137 million with respect to December 31, 2005. The decrease was mainly due to the exercise of AXA stock options by employees of AXA Financial, which led to the sale of 6 million treasury shares during the period.
c) Perpetual debt and related interest As described in paragraph 1.11.2 on accounting principles, the subordinated perpetual notes issued by the group do not qualify as a liability under IFRS. The corresponding financing debts have been retrospectively restated as equity for all financial periods presented, in the sum of €2,679 million at December 31, 2005, €3,048 million at December 31, 2004, and €2,706 million at January 1, 2004. The fair value of subordinated debt has been reduced by €2,650 million at end 2005 and €3,002 million at end 2004. The restatement of subordinated perpetual debt had the following impact on the income statement: change in fair value of financial instruments at fair value through profit & loss (€102 million at end 2005 and €–58 million at December 31, 2004); financing debts expenses (€121 million at end 2005 and €144 million at end 2004; income tax (€78 million at end 2005 and €30 million at December end 2004).
At December 31, 2006, perpetual debt recognized in shareholders’ equity broke down as follows: Value of Value of the perpetual the perpetual debt in currency debt in Euro million of issuance October 29, 2004 – 375 M€ rate CMS 10 years – in euro 375 375
November 7, 2006 – 150 M$AUD rate 6.5% in AUD 150 89 750m $ (TSS) non call 12 years, in USD 750 567 750m $ (TSS) non call 30 years, in USD 750 567
Sub-total Perpetual Deeply Subordinated notes (“TSDI”) – 4,709 Perpetual notes – variable 3.55% to 5% in EUR 1,404 1,404
In addition to the nominal amounts shown above, the debt component of shareholders’ equity includes net accumulated interest of €–367 million at December 31, 2006, making a total of €7,090 million.
The nominal value of subordinated perpetual notes at December 31, 2006 was €2,544 million (versus €2,679 million at end 2005, €3,048 million at end 2004 and €2,706 million at January 1, 2004). The financial expense on these notes in 2006 was €121 million before tax (€121 million in 2005 and €144 million in 2004), and €80 million net of tax (€79 million in 2005 and €93 million in 2004).
Some of these instruments contained the following features: – early redemption clauses (calls) at the group’s option, giving AXA the ability to redeem the principal amount before maturity without penalty on certain dates; – interest rate step-up clauses with effect from a given date.
d) Dividends paid The shareholders’ meeting of May 4, 2006, approved a dividend payout of €1,647 million in respect of 2005.
– The December 2005 capital increase reserved for employees led to an increase of €303 million (including a €37 million increase in nominal share capital).
c) Perpetual debt and related interest The change in other reserves was mainly due to the following: – €250 million issue of deeply subordinated notes through the Euro Medium Term Notes (EMTN) program; – €515 million redemption of perpetual deeply subordinated notes; – €–112 million in interest expense on the perpetual deeply subordinated and subordinated notes; – €–146 million foreign exchange impact.
In addition to the nominal amounts shown above, the debt component of shareholders’ equity includes net accumulated interest of €–207 million at December 31, 2005, making a total of €3,551 million.
b) Treasury shares At December 31, 2004, the Company and its subsidiaries owned approximately 24.6 million AXA shares, down compared to the figure at January 1, 2004. This decrease contributed to a net €124 million increase in shareholders’ equity with respect to December 31, 2003.
At December 31, 2004, the carrying value of treasury shares was €386 million, representing 1.29% of the share capital. These shares were intended in particular to hedge purchase option plans for Axa Financial Inc. employees (options to buy AXA American Depositary Shares or ADSs).
In addition to the nominal amounts shown above, the debt component of shareholders’ equity included net accumulated interest of €–95 million at December 31, 2004, making a total of €3,782 million.
The statement of recognized income and expense for the period (SORIE), which is an part of the consolidated statement of shareholders’ equity, includes net income for the period, the reserve relating to the change in fair value of available for sale financial instruments, the translation reserve, and actuarial gains and losses on employee benefit obligations.
13.2.1. Recognized income and expense for 2006 a) Reserve related to changes in fair value of available for sale financial instruments included in shareholders’ equity The change in reserves for unrealized gains totalled €–349 million, mainly relating to the United Kingdom (€–164 million), the United States (€–137 million) and Japan (€–88 million). The reduction in gross unrealized gains of available for sale financial assets totalled €–4,675 million, mainly due to fixed maturities (€–7,029 million) following a rise in interest rates during the year, partially offset by an increase in the unrealized gains on equity securities (€2,393 million).
Sub-total Perpetual Deeply Subordinated notes (“TSDI”) 625 Perpetual notes – variable 3.55% to 5% in EUR 1,919 1,919
Perpetual notes – variable 3.55% to 5% in JPY 27,000 193
Less unrealized gains and losses attributable to: Shadow accounting on policyholders’ participation (a) (7,242) (10,342) (7,528)
Shadow accounting on Value of purchased Business in force (394) (694) (530)
Unrealized gains and losses (net of tax) – 100% 7,966 8,365 5,832
(a) Including shadow accounting impact on premium deficiency liabilities, after reevaluation of available for sale assets. (b) Net of Shadow accounting on unearned revenues and fees reserves. (c) Including currency impact attributable to minority interests. (d) Group share.
Other comprehensive income as at January 1st 8,365 5,832 4,398 Transfer in the net income for the period (a) (791) (399) (290)
(a) Transfer of result induced by disposal of financial assets, impairment write-back following reevaluation, or tranfer of expenses following impairment charge during the period, and fixed maturity securities discount premiums impacts.
b) Reserves related to the hedging of net investments in foreign operations and translation reserve The impact of exchange rate movements (€–764 million) was mainly attributable to the United States (€–1,218 million, principally due to the difference between the 2006 and 2005 closing $/€ exchange rates: $1.32 for €1 at end 2006 compared to $1.18 for €1 at end 2005), Japan (€–291 million) and Canada (€–81 million), partially offset by the change in fair value of currency hedges set up by the
13.2.2. Recognized income and expense for 2005 a) Reserve related to changes in fair value of available for sale financial instruments included in shareholders’ equity The impact of change in fair value of assets (€2,391 million) mainly related to France (€1,060 million), Belgium (€710 million) and Japan (€347 million), partially offset by an adverse impact in the United States (€–385 million).
b) Reserves related to the hedging of net investments in foreign operations and translation reserve The impact of exchange rate movements (€1,361 million) was mainly attributable to the United States (€1,671 million, principally due to the difference between the 2005 and 2004 closing $/€ exchange rates: $1.18 for €1 at end 2005 compared to $1.36 for €1 at end 2004), Australia (€99 million) and Canada (€97 million), partially offset by the change in fair value of currency hedges set up by the Company to hedge net investments in foreign operations (€–576 million).
c) Employee benefits actuarial gains and losses The main contributors to the €–415 million change in actuarial gains and losses on the employee benefit liabilities were the UK (€–131 million), Germany (€–128 million) and the United States (€–95 million).
13.2.3. Recognized income and expense for 2004 a) Reserve related to changes in fair value of available for sale financial instruments included in shareholders’ equity The main contributors to the €1,514 million increase in fair value changes recognized in shareholders’ equity in 2004 were France (€729 million), Belgium (€416 million) and Germany (€111 million).
b) Reserve related to the hedging of net investments in foreign operations and translation reserve Currency translation impacts were €–686 million, and mainly attributable to the United States (€–826 million, principally due to the difference between the 2004 and 2003 closing $/€ exchange rates: $1.36 for €1 at end 2004 compared to $1.26 for €1 at end 2003), and Japan (€–126 million), partially offset by the change in fair value of currency hedges set up by the Company to hedge net investments in foreign operations (€341 million).
c) Employee benefits actuarial gains and losses The main contributors to the €–319 million change in actuarial gains and losses on the pension benefit obligation were the UK (€–185 million) and the United States (€–83 million).
Under IFRS, minority interests in most investment funds in which the Group invests consist of instruments that holders can redeem at will at fair value, and qualify as a liability rather than shareholders’ equity items. Please refer to note 17 – Debt (other than financing debt). The same is true for puttable instruments held by minority interest holders.
– consolidation of Winterthur (€72 million), mainly in Germany (€58 million) and Switzerland (€12 million); – changes in the scope of consolidation in other group entities (€–60 million), mainly due to the buyout of minority interests in AXA Konzern (Germany); – other movements (€139 million), mainly comprising movements in fair value reserves.
(€23 million), notably from previously equity accounted Turkish entities; – other movements (€69 million), mainly including movements in reserves related to changes in fair value of available for sale assets.
The €–299 million decrease recorded in “other changes” in minority interests in 2004 mainly comprised dividends paid to minorities (€–265 million).
Liabilities arising from insurance contracts 265,369 46,102 11,760 323,232 Of which measured at current market assumptions (c) (263) – 57 (205) Future policy benefit reserves 108,891 – – 108,891
Claim reserves (a) 85 – – 85 of which IBNR 7 – – 7 Other reserves 8 – – 8
Reinsurers’ share in liabilities arising from insurance contracts 4,818 2,206 4,913 11,937 Of which measured at current market assumptions (c) – – – – Reinsurers’ share in future policy benefit reserves 20 – – 20
Insurance liabilities relating to with-profit insurance contracts excluding the FFA (Fund for Future Appropriation) amounted to €20,358 million at December 31, 2006.
Excluding the Winterthur’s contribution (€2,006 million), these liabilities totaled €18,352 million versus €18,169 million at end 2005 and €17,249 million at end 2004.
Reinsurers’ share in liabilities arising from investment contracts where the financial risk is borne by policyholders 9 – 9
Life & Savings Total investment Life & Savings Total investment contracts contracts
Excluding Winterthur’s contribution (€223 million), these liabilities totaled €10,100 million versus €10,363 million at end 2005 and €10,444 million at end 2004.
Gross claim reserves as of January 1 (a) 26,602 10,623 37,225 24,599 9,147 33,747 23,923 9,946 33,869
In Property & Casualty, changes in the scope of consolidation in 2006 amounted to €7,235 million, mainly due to: i. The entry of Winterthur companies in the scope of consolidation (€7,776 million).
iii. In Canada, the entry of Citadel in the scope of consolidation (€250 million).
Hong Kong (€116 million) and Singapore (€63 million); ii. The transfer of the disability business from the Life & Savings segment to the Property & Casualty segment in the Netherlands (€116 million).
Property & International Total Property & International Total Property & International Total Casualty Insurance Casualty Insurance Casualty Insurance
Reinsurers’ share in claim reserves as of January 1 1,791 2,692 4,483 1,628 2,051 3,680 2,180 2,362 4,542 Reinsurers’ share in total claim expenses 314 716 1,030 305 1,265 1,570 216 476 692
Impact of foreign currency fluctuation (18) (218) (236) 22 150 172 (28) (157) (185)
In International Insurance, changes in the scope of consolidation in 2006 amounted to €144 million, mainly due to: i. The entry of Winterthur companies in the scope of consolidation (€6 million).
ii. The transfer of the disability business from the Life & Savings segment to the Property & Casualty segment in the Netherlands (€60 million).
Change in future policy benefit reserves (a) (c) 17,611 2,438 20,049 12,642 5,790 18,431 12,177 2,250 14,427
In 2006, changes in the scope of consolidation totaled €79,700 million, mainly due to: 1) The entries in the scope of consolidation of: i. Winterthur: €79,190 million (including €64,543 million of future policy benefits reserves related to insurance contracts and €14,647 million related to investment contracts).
ii. Citadel in Canada (€56 million). iii. MLC in Hong Kong: €391 million (including €304 million related to insurance contracts and €87 million to investment contracts).
2) Continued reduction in AXA Germany’s coinsurance share of HÄK-BÄK medical profession pools (€–304 million).
3) In Southern Europe, reclassification of policyholder bonus reserves to the future policy benefit reserves: €269 million (including €225 million related to insurance contracts, and €44 million related to investment contracts).
(a) Interest credited, policyholder bonus, adjustments on contracts where the financial risk is borne by policyholders. (b) Internal AXA transfers.
Investment contract with no Discretionnary Participation Features (DPF) measured at fair value 611 707 730
(a) In accordance with IFRS 4 standards which allow, under certain conditions, to continue to use a previous system of reference to liabilities arising from contracts with discretionary participating features.
(“DOC”) – see section 1.2.5. N.B.: This information is presented net of the impact of derivatives, which is described in note 19.4.1.` (d) As described in note 1.12.2 on accounting principles, the adoption of FRS 27 in the United Kingdom led to restatements in all the periods presented (see note 14 for details).
In Phase I, the IAS Board acknowledged the difficulties involved in the recognition of discretionary participating features. Phase II discussions concerning insurance and investment contracts with a discretionary participating features were only re-activated at IAS Board level in December 2005 and have to date produced little guidance regarding the fair value measurement of these contracts. The Phase II Discussion Paper had not yet been published as at the date of publication of these notes. In addition, the IAS Board has numerous projects underway that could influence the definition of fair value of discretionary participating features. Discussions on these issues are highly complex, and are not yet sufficiently advanced, particularly the Discussion Paper setting out the possibility of adopting US standard FAS 157 “Fair Value Measurement” in IFRSs.
Due to the resulting uncertainty, AXA cannot reliably disclose fair value or value ranges for investment contracts with a discretionary participating features.
The first row entitled "Gross reserves for unpaid claims and claim expenses developed initially at the booking date" represents the loss reserves developed in the balance sheet on the reporting date for the year indicated in the column heading. For example, the sum of €31,168 million appearing in the first row of the table in the 2005 column represents all loss reserves developed in all years of occurrence prior to and including 2005, recognized on the company’s balance sheet at December 31, 2005.
Preparation of the last diagonal must take account of the fact that, following the merger of some newly-acquired portfolios with the AXA Group’s existing portfolios, it is not always technically possible to distinguish, within payments made in a given year in respect of prior occurrence years, between those relating to the historical portfolio and those relating to the recently-acquired portfolio. In these cases,
The surplus (shortfall) of the initial reserve with respect to the re-estimated gross final cost for each year represents, for a given year N, the difference between the amount shown on the second row (gross reserves for unpaid claims and claims expenses developed in 2006 adjusted for changes in exchange rates and scope of consolidation) and the amount shown in the final diagonal under “Reserve reestimated ”.
14.6.1. Loss reserves development table: Property & Casualty and International Insurance (excluding AXA RE)
Gross reserves for unpaid claim and claim expenses developed in 2006 adjusted for changes in exchange rates and scope
Cumulative redundancy (deficiency) from the initial gross reserves in excess of re-estimated gross reserves: (a) It is not appropriate to extrapolate future redundancies or future deficiences based on the loss reserve development presented in the table, as conditions and trends that have affected development of the liability in prior periods may not necessarily occur in the future periods.
(c) AXA acquired GRE in May 1999. GRE’s operations have been integrated within AXA. At the time of acquisition, GRE’s gross reserves totaled €5.6 billion. (d) In 2004, AXA Corporate Solution Assurance US, AXA RE P&C Insurance Company and AXA RE P&C Reinsurance were transferred from AXA RE to “other international activities”. The reserves of AXA Corporate
(e) In 2006, Winterthur’s operations have been integrated within AXA. Total loss reserves developed amounted to €41.2 billion including €8.6 billion in respect of Winterthur.
On December 21, 2006, the AXA Group finalized an agreement to sell the AXA RE reinsurance business to Paris Ré Holding. Under the terms of the agreement, AXA retains exposure to any changes in the final cost of claims occurring before December 31, 2005. However, the proportional treaty put in place as part of the agreement between AXA RE and Paris Ré protects AXA entirely from any claims occurring after January 1, 2006. Consequently, the table below shows the development of loss reserves recognized in AXA RE’s balance sheet at each year-end until December 31, 2005. Reserves recognized after that, which correspond to exposure assumed fully by Paris Ré, have not been developed.
Re-estimated net claim reserves 1,672 1,750 2,242 2,318 2,208 2,919 2,233 2,538 2,617 2,599
Solution Assurance US were presented on an occurring year basis and included in the Property & Casualty loss reserve development table. The reserves of AXA RE P&C Insurance Company and AXA RE Reinsurance Company were presented on an underwriting year basis and included in the AXA RE loss reserve development table.
Total gross claims and other reserves developed 43,685 35,421 32,442 Construction reserves (PSNEM) – 1,126 1,056
Future policy benefits annuity reserves – 1,528 1,212 of which AXA RE liabilities 3,038 – –
Total gross claims and other reserves excluding Life & Savings Segment 48,927 40,173 36,792
(a) Total gross claims and other reserves developed are presented on the basis of the loss reserve development table. The reserves of AXA Corporate Solution Insurance US were included in Property & Casualty and International Insurance loss reserves. The reserves of AXA RE P&C Insurance Company and AXA RE Reinsurance Company (€282 million in 2006 and €409 million in 2005) were included in AXA RE’s loss reserve development table.
AXA continues to receive claims from policies written in prior years asserting damages from asbestos-related and environmental-related exposures. These asbestos claims relate primarily to bodily injuries suffered by those who came in contact with asbestos, while environmental claims relate primarily to pollution related clean-up costs.
AXA’s exposure to asbestos and environmental (“A&E”) claims originates primarily from the following contracts: – Insurance or reinsurance of US-originated risks: this exposure arises primarily from the reinsurance of US cedants or from direct policies written in the London Market (excess of primary covers). The underlying exposure is made-up of both asbestos and pollution claims.
Asbestos-related claims typically have very long latency periods. For instance, mesothelioma can take in excess of 40 years to develop after inhalation of asbestos fibres. This latency period makes it difficult to estimate accurately the future number of asbestosrelated claims, the future potential liability associated with such claims and creates unusual sensitivity to future legal and economic developments.
The calculation of reserves for A&E risks raises specific difficulties as conventional reserving techniques cannot be used for evaluating IBNR. As a result, AXA evaluates the future cost of those claims using a range of specific methods based either on exposure analysis, frequency / cost projections or reserving benchmarks. A&E
reserves are reviewed on a yearly basis to ensure that they adequately reflect the latest claims experience, as well as legal and economic developments. Consistent with AXA’s reserving practices, and despite the particularly long-tail nature of those risks, reserves for A&E are undiscounted.
At year-end 2006, key data relating to A&E claims were as follows: (in Euro million)
Gross Net Gross Net of reinsurance of reinsurance of reinsurance of reinsurance EVOLUTION OF RESERVES – ASBESTOS Reserves for losses and loss expenses at beginning of year 1,046 966 875 793
Reserves for losses and loss expenses at end of year (new scope) 1,176 1,123 1,046 966 of which Reported losses (1) 268 227 352 288 of which IBNR losses (2) 908 896 694 678
RESERVES ADEQUACY RATIOS 3 – Year Survival ratio excluding commutations (a) 32 years 34 years 30 years 32 years
Cumulative Payments to date / Projected Ultimate Cost 35% 33% 33% 31%
(a) Average yearly payments over the last 3 years (excluding in respect of commutations) / Reserves at the end of the year.
Kingdom, as well as to the implementation of additional methods for estimating the future costs of such claims.
As a result of the integration of Winterthur, AXA also assumed additional reserves for A&E exposures. On a net of reinsurance basis, these reserves amount to €87 million, of which €77 million in respect of asbestos and €10 million in respect of pollution.
As a result of those various changes and after allowing for movements in exchange rates, AXA held total reserves for A&E (net of reinsurance) of €1,215 million at year-end 2006. As can be seen from the above chart, reserves adequacy ratios remained close to their 2005 levels, with the exception of the IBNR / Case reserve ratio which showed a significant increase due to the combined impact of commutations and increase in IBNR.
Reserves for losses and loss expenses at end of year (new scope) 102 92 152 134 of which Reported losses (1) 46 39 81 71 of which IBNR losses (2) 56 53 71 63
RESERVES ADEQUACY RATIOS 3 - Year Survival ratio excluding commutations (a) 16 years 22 years 10 years 13 years
14.9.1. Payment and surrender projections The table below shows the breakdown of projected payments and surrenders related to Life & Savings and Property & Casualty insurance and investment contracts excluding contracts where financial risk is borne by policyholders. Actual maturities may differ significantly from the estimates set out below, mainly because, as already mentioned, some of the contracts contain a surrender option controlled by the policyholder that may reduce their duration.
14.9.2. Components of insurance contract liabilities The table below and related comments exclude contracts where financial risk is borne by policyholders (unit-linked contracts).
As shown in the table below, 93% of Life & Savings reserves (excluding unit-linked contracts) are discounted. 14% are subject to a revision of the discount rate. 79% retain the rate set at subscription, subject to the liability adequacy test described in note 1.
Sub-total – Property & Casualty and International Insurance 57,863 47,868 43,881
(a) Subject to liability adequacy tests. Amounts are presented excluding the impact of derivatives on insurance and investment contracts (presented in section 19.4) and excluding liabilities related to unearned revenues and fees, and to policyholder bonuses. Liabilities relating to contracts where the financial risk is borne by policyholders are also excluded.
AXA sells insurance contracts that contain a variety of options and guarantees for contractholders. These features are described in Note 4. They are not embedded derivatives which AXA reports separately at fair value because: – many of the features would be considered clearly and closely related to the host contract, and
This note describes the features that are embedded derivatives and meet the definition of an insurance contract on a stand-alone basis. The primary features can be divided into two broad categories: guaranteed minimum death benefits (GMDBs) or guaranteed minimum income benefits (GMIBs) offered on unit-linked contracts and guaranteed annuity purchase rates.
The risk of GMDB and GMIB features to AXA is that protracted under-performance of the financial markets could result in benefits being higher than the accumulated policyholder account balances could support. Reserves are established for these features on the basis of actuarial assumptions related to projected benefits and related contract charges. The determination of estimated GMDB and GMIB liabilities is based on models which involve numerous estimates and subjective judgments, including those regarding expected market rates of return and volatility, contract surrender rates and GMIB election rates. There can be no assurance that ultimate experience will not differ from management’s estimates. In addition to providing for risk through establishing reserves, AXA also manages the risk through a combination of reinsurance programs and active financial risk management programs including investment in exchange-traded futures contracts and other instruments.
Comments on provisions relating to employee benefits can be found in Note 25 “Employees”.
Changes in provisions for risks and charges are set out below: (in Euro million)
provisions contingency warranty liabilities relating for risks and provisions provisions to business charges combinations Carrying value - January, 1 163 217 1 – 534 914 Financial cost related to dezactualisation (a) – – – – – –
All provisions related to the Winterthur group described in this note correspond to liabilities that existed before the acquisition and have not arisen as a result of the acquisition.
At December 31, 2006, restructuring provisions totaled €104 million (including €18 million for Winterthur group subsidiaries), mainly comprising €55 million in the United States following the Mony acquisition, €17 million in Germany (including €6 million for Winterthur), and €14 million in the United Kingdom (including €7 million for Winterthur UK).
Other provisions (excluding amounts related to Winterthur) include €101 million in France, €107 million in the United Kindom, €76 million in Australia and New Zealand, €76 million at Compagnie Financière de Paris, €78 million in asset management (including €33 million at AllianceBernstein in respect of Dynegy), €45 million in international insurance and €51 million in Japan.
Write back after final cost review (4) (9) (18) – (42) (73) (154)
Impact of foreign exchange fluctuations 20 – – – 19 39 (24)
U.S. registered redeemable subordinated debt, 8.60% 2030 (euro) 960 1,118 952
Other financing debts owed to credit institutions (under €100 million) 85 – – Derivatives on financing debt owed to credit institutions (a) – – –
Financing debt instruments issued at cost 3,894 3,962 3,025 3,091 3,168 3,290
Derivatives on financing debt instruments issued (a) (206) (206) (208) (208) (265) (265)
Financing debt owed to credit institutions 95 95 17 17 17 17
The fair value of financing debt at December 31, 2006, excluding accrued interest but not yet due, was €10,475 million, including related hedging derivative instruments.
The tables below set out the contractual maturities of financing debt (excluding the impact of derivatives). Effective maturities may differ from those presented, mainly because some instruments include clauses allowing early redemption, with or without penalty.
Carrying value by contractual maturity Total 12 months More than 1 year More than carrying or less up to 5 years 5 years value
Minority interests of controlled investment funds and other puttable instruments held by minority interests holders 7,224 5,115 3,717
Debts relating to investments under a lending agreement 24,098 14,771 7,047
Payables, excluding Winterthur’s contribution (€9,264 million), amounted to €80,714 million at
Movements in the “Minority interests in controlled investment funds and other puttable instruments held by minority interest holders” caption depend on: – Changes in minority interests in controlled funds and changes in their fair value. An identical change in invested assets held by these funds is also recorded.
Minority interests in funds under this caption, excluding Winterthur’s contribution (€191 million), totaled €5,909 million at December 31, 2006 (€4,326 million at December 31, 2005 and €3,223 million at
17.2. Non-subordinated debt instruments issued and bank overdrafts (other than financing debt)
Derivatives on other debt instruments issued (other than financing debt) – Alliance Capital – – –
CDO (Collateralized Debt Obligations) and Real Estate Vehicles 1,275 1,507 1,422 CDO ARIA2 tranche A-23E7 – 48 –
Derivatives on other debt instruments issued (other than financing debt) – CDO (Collateralized Debt Obligations) – – –
Australia / New Zealand 174 141 – Sterling Grace 174 141 –
DBV 2,796 – – HOHO 1: class A Senior Class A Mortgage-backed notes, maturity 2030, 3 months Euribor + 0.31%, Floating 190 – –
HOHO 2: class D Subordinated Class D Notes, maturity 2080, 3 months Euribor + 3.75%, Floating 4 – –
HOHO 3: class A Senior Class A Mortgage-backed notes, maturity 2083, 3 months Euribor + 0.13%, Floating 707 – –
HOHO 3: class D Subordinated Class D Notes, maturity 2083, 3 months Euribor + 1.40%, Floating 7 – –
HOHO 4: class B Subordinated Class B Floating rate notes, maturity 2083, 3 months Euribor + 0.35%, Floating 10 – –
Derivatives on other debt instruments issued (other than financing debt) – Other – – –
Derivatives on other issued debt (other than financing debt) – Other financial services in France – – –
Derivatives on other issued debt (other than financing debt) – Other financial services in Germany – – –
Derivatives on other issued debt (other than financing debt) – Other financial services in Belgium – – –
Derivatives on other issued debt (other than financing debt) – Other (3) – –
At December 31, 2006, other debt instruments issued (other than financing debt) and bank overdrafts, excluding Winterthur’s contribution (€3,058 million mainly relating to the integration of Holland Homes SPEs, which securitize mortgages in the Dutch DBV Life business) totaled €5,653 million, in decrease of €2,758 million. The decrease, which was €2,712 million at constant exchange rates, was mainly due to: – Reclassification of AXA Bank Belgium’s debts related to securities sold under repurchase agreement. As at January 1, 2006, these liabilities have been classified as payables arising from banking activities instead of other debt instruments issued (other than financing debt) and overdrafts, which led to a decrease of €3,242 million.
– A €238 million decrease of CDO’s other debts instruments issued (other than financing debt).
– A €90 million reduction in the operational debt of AXA Vorsorgebank following the transfer of the mortgage business to the insurance company (AXA Leben).
These movements were partly offset by: – A €332 million increase in bank overdrafts. – A €290 million increase in deposits under
Debt instruments issued designated as at fair value through profit & loss 4,129 1,508 1,600
Debt owed to credit institutions held as trading – – –
DEBT INSTRUMENTS ISSUED AND BANK OVERDRAFTS (OTHER THAN FINANCING DEBT) (a) 8,714 8,411 7,784 Including debt at fair value through profit & loss 4,255 1,637 1,600
Fair value Fair value Total Fair value Fair value Total Fair value Fair value Total determined estimated determined estimated determined estimated directly by using directly by using directly by using reference to valuation reference to valuation reference to valuation an active technique an active technique an active technique market market market
Debt instruments issued held as trading – – – – – – – – –
Debt instruments issued designated as at fair value through profit & loss 594 3,536 4,129 726 782 1,508 1,600 – 1,600
Debt owed to credit institutions held as trading – – – – – – – – –
Payables to policyholders, brokers and general agent 6,248 6,248 3,494 3,494 3,119 3,119
Current accounts payable to other companies 3,941 3,941 1,927 1,927 2,213 2,213
Payables arising from direct outward reinsurance operations 5,849 5,849 3,507 3,507 3,588 3,588
At December 31, 2006, payables arising from direct insurance and inward reinsurance operations, excluding Winterthur’s contribution (€3,451 million) totaled €4,496 million, a decrease of €184 million compared to
At December 31, 2006, payables arising from direct outward reinsurance operations, excluding Winterthur’s contribution (€372 million), totaled €5,477 million, an increase of €1,970 million compared to December 31, 2005, mainly due to the implementation of a proportional reinsurance treaty between AXA RE and Paris Ré (€2,159 million) as part of the Group’s sale of Axa RE’s business.
Other debt instruments issued, notes and bank overdrafts 6,158 168 2,085 8,411
Income tax relating to items reclassified in shareholders’ equity (b) 51 96 31
(a) As described in notes 1.12.2 and 1.11.2 on accounting principles, the adoption of FRS 27 in the United Kingdom and the reclassification of Perpetual Deelply Subordinated notes to shareholders’ equity led to restatements in all the periods presented (see notes 14 and 13 respectively for details).
The current tax amount due on foreign income amounted to €1,037 million (€1,101 million and €770 million respectively in 2005 and 2004), including €243 million policyholder tax (€163 million and €148 million respectively in 2005 and 2004). The deferred tax amount due on foreign income amounted to €831 million (€104 million and €436 million respectively in 2005 and 2004), including €169 million policyholder tax (€395 million and €–28 million respectively in 2005 and 2004).
Policyholder tax is a specific tax levied on the life business of UK insurance companies. The savings business is not subject to this tax. Policyholder tax is calculated on the basis of “income minus expenses”. It is charged to the policyholder by deduction from the unit value of unit-linked contracts or directly from the surplus available for distribution to policyholders in the case of with-profit contracts.
18.1.2. Tax proof The reconciliation between the theoretical tax charge (pre-tax profit multiplied by the applicable tax rate in France for the period concerned) and the effective tax charge was as follows: (in Euro million)
Impairment of DTA on tax losses of previous years (b) 19 (387) 75
Tax losses impact (95) (423) 75 Permanent difference on financial income and expenses (c) (385) (665) (288)
Impact of permanent differences (355) (622) (194) Correction of payable tax on the previous year (199) (180) (60)
Impact of correction, decrease in value and other elements (95) 168 (49)
– Deferred tax through reserves relating to the fair value adjustment
– Deferred tax through reserves relating to gains and losses on defined benefits pension plans 244 20 224 369 140
Net deferred tax excluding policyholders’ tax 7,921 10,357 (2,436) (2,547) (2,474) Policyholder tax – Net deferred tax (a) assets/ (liabilities) 245 1,514 (1,268) (1,033) (582)
In the table above, the net balances represent the difference between deferred tax assets and deferred tax liabilities carried on the Group’s consolidated balance sheet. However, the information provided on the sources of deferred tax assets and liabilities are shown before netting.
Policyholder tax – Deferred tax through profit & loss (1,026) (157) – (23) (61) (1,268)
Policyholder tax – Deferred tax through reserves relating to the fair value adjustment of CFH derivatives – – 2 – (2) –
Policyhoder tax – Net deferred tax assets/ (liabilities) (1,033) (157) 8 (24) (63) (1,268)
Forecast reversal schedule for recognized deferred tax assets and expiration date: (in Euro million)
Deferred tax through profit & loss (316) 198 – (75) (187) (380)
Deferred tax through reserves relating to the revaluation of tangible assets – – (1) – – (1)
Policyholder tax – Deferred tax through reserves relating to the fair value adjustment of AFS assets (5) – (2) – – (7)
Policyholder tax – Deferred tax through reserves relating to the fair value adjustment of CFH derivatives 2 – (2) 2 (3) –
DTA maturity DTA maturity DTA maturity date 1 year date 2 years date 3 years
TOTAL unrecognized DTA by expected date of DTA use 78 82 7 Corresponding carryforward losses 251 311 20
DTA maturity DTA maturity DTA maturity DTA maturity DTA maturity No maturity TOTAL date 4 years date 5 years date 6 years date between date > 11 years date 7 and 11 years
NB: This table includes all derivatives (assets and liabilities), i.e hedging, macrohedging and other, asset and liability positions. (a) By convention, notional amounts are displayed in absolute value, and exclude potential netting out.
The consolidation of Winterthur had the effect of increasing derivatives by a net liability of €66 million, for a notional amount of €32,087 million.
AXA uses derivative instruments mainly to manage its financial exposure to interest rate and exchange rate risks.
As at December 31, 2006, the notional amount of all derivative instruments, for trading and non-trading purposes, totaled €238 billion (€207 billion and €191 billion respectively in 2005 and 2004). Their net fair value as at December 31, 2006 totaled €933 million (€987 million and €2,299 million respectively in
As at December 31, 2006, the notional amount of hedging derivative instruments as defined by IAS 39 (fair value, cash flow and net investment hedges) by the entire AXA Group totaled €28,537 million including €8,805 million for Winterthur entities (€20,897 million in 2005 and €13,507 million in 2004). Their net fair value was €1,083 million including €90 million for Winterthur entities (€208 million in 2005 and €1,083 million in 2004).
AXA primarily uses (i) interest-rate swap contracts to manage cash flows arising from interest received or paid, and (ii) currency swap contracts to manage foreign-currency denominated cash flows or investments.
On a consolidated basis, the notional amount of such instruments as at December 31, 2006 was €111,837 million including €6,300 million for the Winterthur entities (€108,315 million in 2005 and €104,238 million in 2004). Their market value was €1,445 million including €–145 million for the Winterthur entities (€1,656 million in 2005 and €2,570 million in 2004).
Currency swaps constitute another part of AXA’s hedging strategies to manage foreign currency cash flow exposures, and are primarily used by AXA parent company (€20,542 million at end 2006 versus €17,156 million and €12,050 million respectively at end 2005 and 2004), and by AXA Japan mainly to limit the exposure of its Euro and US dollar bond portfolio (€3,071 million versus €5,057 million and €5,540 million respectively at end 2005 and 2004).
The notional amounts of swaps used in net foreign investment hedge relationships totaled €9,554 million (€9,724 million at end 2005), including €8,718 million of currency swaps used by the Company.
Caps and floors are used predominantly by US and French Life & Savings operations to hedge interest rates on contracts with guaranteed rates of return.
AXA Japan also uses forward foreign currency contracts (the notional amount designated as fair value hedges at December 31, 2006 was €200 million, of a total notional amount of €14,596 million) to hedge exchange-rate risk arising from its investments in US and European fixed-maturity bonds, mainly held in controlled funds. In accordance with IAS 21 and IAS 39, some or all of the translation difference relating to these bonds is recognized in profit & loss and offsets most of the change in market value of associated derivative instruments, which is also recognized in profit & loss. In substance, therefore, these contracts act as hedges without the need to use hedge accounting within the meaning of IAS 39.
Additionally, AXA’s US insurance operations use forwards and futures for the dynamic risks management program associated with the guaranteed minimum benefits on unit-linked retirement savings products.
d. Credit derivatives AXA mainly uses credit derivatives to manage the exposures of its assets and liabilities to interest-rate risks, but may also use them to enhance returns on invested assets.
At December 31, 2006, the notional amount of these derivatives was €9,854 million (€9,771 million and €2,393 million in 2005 and
e. Mortality derivatives On November 13, 2006, AXA announced a €1 billion shelf program to transfer mortality risk to the capital markets, of which approximately €345 million was invested in 2006. This risk transfer results in a derivative contract between AXA and a special purpose vehicle called Osiris Capital plc, indexed to the mortality levels observed in various countries in which AXA operates (France, Japan and the United States for the 2006 investment). It is shown under the line item “Other derivatives”.
Investment property at fair value through profit & loss 5,364 – – 5,364
Fixed maturities at fair value through profit & loss 49,520 – 71 49,591
Non controlled investment funds available for sale 4,593 6 – 4,599
Non controlled investment funds held for tradings 80 – – 80
Loans at fair value through profit and loss 378 – – 378
Investment property 12,810 – – 12,810 Fixed maturities held to maturity – – – –
Liabilites arising from investment contracts where the financial risk is borne by policyholders 67,673 – – 67,673
Other debt instruments issued, notes and bank overdrafts 8,714 (3) – 8,711
Value before Impact Impact Value including Value before Impact Impact Value including effect of of derivative of other effect of effect of of derivative of other effect of derivative instruments derivative derivatives derivative instruments derivative derivatives instruments subject to instruments instruments subject to instruments hedge accounting hedge accounting
Fair value Fair value determined directly estimated by reference to using valuation an active market technique Derivative instruments on financial assets subject to hedge accounting 67 (305)
Total – derivative instruments relating to financial assets 138 138 Derivatives (hedge accounting) – Reinsurance – –
Total – derivative instruments relating to insurance and investment contracts – – Derivatives on other receivables (hedge accounting) – (19)
Total derivative instruments relating to insurance and investment contracts (19) (143) Derivative instruments relating to financing debt and other financial liabilities subject to hedge accounting 2 (781)
Other derivative instruments relating to financing debt and other financial liabilities (b) 16 75
Macro hedge banking activities and other derivatives (including speculative derivatives) – 175
of which direct premiums 46,516 41,063 39,461 of which reinsurance assumed 2,270 2,433 1,642 of which fees and charges on investment contracts with no participation features 608 509 417 of which revenues from other activities 1,084 1,111 824 of which direct premiums 19,568 18,588 17,521 of which reinsurance assumed 173 244 288 of which revenues from other activities 52 43 42
United Kingdom and Ireland 4,721 4,393 4,469 of which direct premiums 1,792 1,711 920 of which reinsurance assumed 1,780 1,957 2,320 of which revenues from other activities 144 145 123
Gross Liabilities arising Liabilities arising Gross Liabilities arising Liabilities arising Gross Liabilities arising Liabilities arising written from insurance from investment written from insurance from investment written from insurance from investment premiums contracts (b) contracts (b) premiums contracts (b) contracts (b) premiums contracts (b) contracts (b)
Fees and charges relating to investment contracts with no particpating features (c) 608 – 57,243 509 – 39,762 417 – 31,560
Fees, commissions and other revenues 1,084 – – 1,111 – – 824 – –
(a) Relates to contracts where the financial risk is borne by policyholders. (b) Excludes liabilities relating to unearned revenues and fees, and policyholder bonuses, along with derivatives relating to insurance and investment contracts. (c) Relates to liabilities arising from investment contracts without discretionary participation and investment contracts without discretionary participation where the financial risk is borne by policyholders. (d) As described in note 1.12.2 on accounting principles, the adoption of FRS 27 in the United Kingdom led to restatements in all the periods presented (see note 14 for details).
Gross written premium Liabilities arising from insurance contracts December 31, 2006 December 31, 2005 December 31, 2004 December 31, 2006 December 31, 2005 December 31, 2004
Fees, commissions and other revenues 52 43 42 – – –
Fees, commissions and other revenues 144 145 123 – – –
Total – Property & Casualty 20.3. Net revenues from banking activities (in Euro million)
Change in fair value of financial instruments at fair value through profit & loss (31) 7 (17)
Non controlled investment funds available for sale 82 213 – (5) 291
(a) Including fixed income maturities held by consolidated investment funds, designated at fair value through profit & loss. (b) Including equity securities maturities held by consolidated investment funds, designated as at fair value through profit & loss.
Fixed maturities designated at fair value through profit & loss (a) 2,037 297 175 – 2,510
Equity securities designated at fair value through profit & loss (b) 690 1,120 1,320 – 3,130
(a) Including fixed income maturities held by consolidated investment funds, designated at fair value through profit & loss. (b) Including equity securities maturities held by consolidated investment funds, designated as at fair value through profit & loss. (c) As described in Note 1.11.2 on accounting principles, subordinated perpetual notes have been reclassified in shareholders’ equity in all the periods presented (see note 13 for details).
Fixed maturities designated at fair value through profit & loss (a) 2,152 27 524 – (6,546)
Equity securities designated at fair value through profit & loss (b) 502 962 223 – (4,080)
Non controlled investment funds held for trading – 3 2 – 5
Net investment revenues are presented net of depreciation charges on directly-owned investment properties, and net of amortization of bond premiums/discounts. All investment management fees are also included in the aggregate figure.
In 2006, the decrease in net result of reinsurance ceded was mainly attributable to the International Insurance operations, which fell by €1,210 million (€–893 million compared to €317 million in 2005). The decrease was mainly due to the following factors: – at AXA RE, a decrease of €938 million to €–491 million following the transfer to Paris Ré of the gross technical result for the year, compared with a positive result of €447 million in 2005 due to strong loss recovery on major claims during the year (particularly Hurricanes Katrina, Rita and Wilma); – at AXA Corporate Solutions, a decline of €209 million (from €–222 million to €–431 million) due to lower loss recovery following an improvement in claims gross of reinsurance.
In Property & Casualty operations, the decrease of €52 million in 2006 (from €–581 million to €–632 million) was mainly attributable to the United Kingdom (down from €–99 million to €–152 million) due to lower loss recovery following an improvement in claims gross of reinsurance.
Casualty Insurance eliminations Premiums ceded and reinsurer’s share in claims paid (929) (1,043) (1,965) 158 (3,779)
Casualty Insurance eliminations Premiums ceded and reinsurer’s share in claims paid (820) (998) (1,172) 209 (2,782)
As described in note 1.11.2 on accounting principles, subordinated perpetual notes and related interest have been reclassified in shareholders’ equity, which had the effect of decreasing financing debt expenses by €121 million and €144 million respectively at end 2005 and 2004.
Financing debt expenses (€474 million in 2006, €481 million in 2005 and €439 million in 2004) include incomes and expenses relating to hedging derivative instruments on financing debt, mainly for AXA SA (€142 million in 2006, €176 million in 2005 and €248 million in 2004).
Change in deferred acquisition costs and equivalents (b) 1,378 34 1 1,413
Increase / (write back) of provisions for risk and charges 34 (46) 31 18
25.2. Employee benefits 25.2.1. Defined contribution plans The cost of the contributions paid was recognized as an expense in the income statement, and amounted to €88 million for the year ended December 31, 2006 (€72 million in 2005).
25.2.2. Defined benefit plans The assumptions for each plan are consistent with the economic features of the countries in which the liabilities lie. The weighted-average assumptions used by AXA for pension plans in the principal regions in which AXA operates were as follows: DECEMBER 2006 ASSUMPTIONS Europe North America Japan Other Pension benefit obligation – assumptions at end 2006
The acquisition of Winterthur in 2006 had a significant impact on the assumptions used by introducing a significant Swiss weighting into the European economic mix.
– Benefits paid. – Actuarial gains and losses (change in longterm assumptions, change in staff, etc.) – Change in plans.
AXA Group has decided to use the SORIE option available under IAS 19. Under the SORIE option, actuarial gains and losses are recognized in full in the period in which they occurred, but outside of profit or loss, and are presented on a separate line of the Statement Of Recognized Income and Expense in
Benefit obligation at the end of the year (A) 14,734 11,421 9,573 604 716 581 Change in plan assets
Impact of foreign currency fluctuations (227) 274 (137) – – –
For pension plans where the fair value of plan assets exceeds the benefit obligation, the aggregate fair value of plan assets and aggregate benefit obligation were €122 million and €109 million, respectively, as at December 31, 2006. For pension plans where the benefit obligation exceeds the fair value of plan assets, the aggregate fair value of plan assets and aggregate benefit obligation were €8,094 million and €14,625 million, respectively, as at 25.2.5. Net periodic benefit cost The net periodic benefit cost, that is, the annual expense for employee pension and other benefits recorded in the income statement, for the year ended December 31, 2006 is presented below: (in Euro million)
Expected return on plan assets (314) (269) (363) (0) – –
Employer contributions and benefits paid directly 242 328 264 49 49 29
SORIE impact (including exchange rate impact) (b) 392 (667) (445) 24 (28) –
25.2.6. Net economic funding position The evolution in the net economic funding position from January 1, 2006 to December 31, 2006 captures both the change in the liability recorded in the Group’s balance sheet and the change in separate assets, as presented in the table below: During 2006, the change in the SORIE component of shareholders’ equity after deduction of deferred tax and policyholder benefits was €258 million (€–415 million in 2005 and €–319 million in 2004). As at December 31, 2006, the cumulative impact since first time application amounted to €–478 million (€–736 million at the end of 2005).
Acquisitions and disposals (including Winterthur acquisition) (548) – (322) (8) (23) –
Net economic funding position at the end of the year (3,950) (3,957) (3,401) (595) (703) (572)
Opening actuarial gains and losses recognized in shareholders’ equity (1,112) (445) – (28) – – Experience adjustments on plan liabilities 226 (1,053) (469) 28 (30) –
Experience adjustments on plan assets 141 426 85 (5) 3 –
Closing actuarial gains and losses recognized 25.2.8. Change in actuarial gains and losses recognized in the balance sheet in the SORIE component of shareholders’ equity The Statement Of Recognized Income and Expense (SORIE) is an integral part of the statement of changes in shareholders’ equity. It includes actuarial gains and losses as well as net income for the period (see Note 13).
Five years thereafter 3,900 225 b) Employer contributions The estimated amount of 2007 employer contributions for pension benefits was €280 million (€259 million estimated in 2005 for 2006). The estimated amount for other benefits was €24 million (€28 million estimated in 2005 for 2006). These amounts are subject to uncertainty as they will be driven by 2007 economics.
25.2.10. Asset mix at the end of 2006 The table below shows the plan asset mix at end 2006: Total Group Europe North America Other Plan asset mix
Saxon countries, where investment strategy is often determined by Plan trustees. This asset mix generates some degree of volatility in returns, but, over the long-term, is expected to
AXA performance unit plans 48.8 14.8 5.1 2006 equity grants 1.3 2006 cash grants 11.5
The total employee share-based compensation cost of €155.3 million shown above does not include the cost generated by the liquidity guarantee granted by AXA SA to old AXA IM stock option plans, which amounted to a nonrecurring cost of €30 million recorded in 2006. In accordance with IFRS 2, the cost shown above includes equity-settled share-based payment instruments for grants made after November 7, 2002 which had not yet vested at
the second, third and fourth anniversaries of the grant date (generally in March).
The number of outstanding options and the number of exercisable options as at
Information on options granted after November 7, 2002 is shown in the table below: POST NOVEMBER 7, 2002 AXA SA STOCK OPTION PLANS Options Weighted price (in million) (in Euro)
The number of outstanding options and the number of exercisable options at December 31, 2006 are shown below by maturity date for AXA SA plans granted after November 7, 2002 : in million
The fair value of AXA SA stock options is calculated using the Black&Scholes option pricing model. The effect of expected early exercise is taken into account through the use of an expected life assumption based on historical data. AXA SA share price volatility is estimated on the basis of implied volatility, which is checked against an analysis of historical volatility to ensure consistency. The expected AXA SA dividend yield is based on the market consensus. The risk-free interest rate is based on the Euro zone government bond benchmark curve for the appropriate term.
The option pricing assumptions and fair value for plans issued in 2006, 2005 and 2004 are as follows: Outstanding Exercisable Number Exercise price Number Exercise price
The total cost of the AXA SA plans is amortized over the vesting period and an estimated 5% pre-vesting forfeiture rate is applied. On that basis, the expense recognized in profit & loss for the year ended December 31, 2006 was €48.7 million (€3 million for the 2003 grants, €8.2 million for the 2004 grants, €15.2 million for the 2005 grants and €22.3 million for the 2006 grants). Among the 2005 and 2006 grants, the expense relating to AXA SA share options granted to AXA Financial employees was €15.5 million.
No AXA ADR options were granted in 2006. The 0.7 million options shown in the “granted” line in the table above corresponds to the adjustment made to offset the dilution due to the capital increase done to finance the acquisition of Winterthur.
The fair value of AXA ADR stock options is calculated using the Black&Scholes option pricing model. The effect of expected early exercise is taken into account through the use of an expected life assumption based on historical data. AXA ADR volatility is based on AXA SA ordinary shares volatility, adjusted for the US$/€ exchange rate volatility.
The expected dividend yield on AXA SA shares is based on the market consensus. The risk-free interest rate is based on the US Treasury bond curve for the appropriate maturity. The option pricing assumptions and fair value for plans issued in 2005 and 2004 are as follows: Assumptions Dividend yield 3.01% 3.10%
In the traditional plan, employees invest in AXA shares at a discount to the market price for unrestricted shares. In the leveraged plan, an independent bank supplements the employees’ investment so that the total investment is a multiple of the contribution made by the employees. This total sum is invested in AXA shares at a discount to market price for unrestricted shares. After a period of five years, employees receive a percentage of any gains made on the investment, with a guaranteed minimum equal to the amount of their initial investment.
The cost of this plan is valued taking into account the five-year lock-up period, as recommended by the CNC (Conseil National de la Comptabilité). The CNC approach values the restricted shares through a replication strategy whereby the employee would sell the restricted shares forward at the end of the lock-up period, borrow enough money to buy unrestricted shares immediately, and uses the proceeds of the forward sale together with dividends paid during the lock-up period to finance the loan. For the leveraged plan, the cost also includes the opportunity gain implicitly provided by AXA by enabling its employees to benefit from an institutional price for derivatives as opposed to a retail price.
In 2006, the cost of the lock-up period was measured at 13.41% for the traditional plan and 14.32% for the leveraged plan (different discounts). In addition to the lock-up cost, the opportunity gain offered to the employees under the leveraged plan was measured at 2.26%.
The table below shows the main features of the plan, the amounts subscribed, valuation assumptions, and the cost of the plan for 2006,
Retail / institutional volatility spread N/A 7.00% N/A 4.40% N/A 4.20%
[b] Cost of the lock-up for the employee 17.15% 16.07% > 17.50% 13.41% 14.32%
OTHER SHARE-BASED COMPENSATION To a lesser extent, AXA issued Performance Units in 2004, 2005 and 2006. During the vesting period, the Performance Units initially granted are subject to non-market performance criteria. The value of each Performance Unit is equal to the average AXA share price before the settlement (which is cash rather than equitysettled in most cases).
The total cost of the Performance Units recorded in earnings in 2006 was €48.8 million (€3.5 million for the equity-settled portion and €45.3 million for the cash-settled portion).
In France, most of the Performance Units granted to employees have been converted into Performance Shares. The total cost of Performance Shares was €13.6 million in 2006.
In 2006: – Short-term benefits: compensation paid to members of the Management Board in respect of 2006 totaled €14.9 million, including fixed salary, bonuses, directors’ fees and benefits in kind.
– Share-based compensation: the expense recognized in 2006 in respect of share-based compensation granted to Management Board members was €13 million.
– Long-term benefits: amounts provisioned or recognized by AXA SA and its subsidiaries for the payment of pensions or retirement benefits to its corporate officers (members of the Management Board, Chairman of the Supervisory Board and the employees’ representative on the Supervisory Board) totaled €29.4 million.
The Company calculates 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 during the period.
– The calculation of diluted net income per ordinary share takes into account shares that may be issued as a result of stock option plans and convertible bonds. The effect of stock option plans on the number of fully diluted shares is taken into account only if options are considered to be exercisable on the basis of the average stock price of AXA share over the period. The effect of convertible bonds (on the number of shares and on income) is integrated in the calculation if it actually generates a dilution of the net income per share.
The share capital increase with preferential subscription rights launched by AXA on
June 14, 2006 to finance part of the acquisition of Winterthur has resulted in the issue of 208,265,897 new shares at a price of €19.80 compared to a market price of €24.47. According to IAS 33, share issues carried out at a below-market price may give rise to an adjustment to the average number of shares during the period and in each period presented. As a consequence, the loss of value suffered by existing shares represents the value of the existing shareholders’ theoretical subscription right, and the issue can be regarded as a bonus issue in the amount of the total value of the subscription rights. An adjustment factor (1.019456) equal to the pretransaction share price divided by the theoretical post-transaction value of the shares is applied to the weighted average number of shares outstanding in each period.
NET INCOME PER ORDINARY SHARE C = A / B 2,61 2,25 2,06
FULLY DILUTED NET INCOME PER ORDINARY SHARES F = E / D 2,56 2,22 1,98
(a) Weighted average. (b) Taking into account the impact of potential dilutive instruments. (c) Except for number of shares (million of units) and earnings per share (euros). (d) Following any significant capital increase with a stock price lower than the market price, average number of shares and consequently earning per share over each period shall be restated to take into account this event.
Relationships with the Mutuelles AXA The Mutuelles AXA (AXA Assurances IARD Mutuelle and AXA Assurances Vie Mutuelle) are two mutual insurance companies engaged in the Property & Casualty insurance business and Life & Savings insurance business in France. The Mutuelles AXA have no shares outstanding and the business of each Mutuelle is supervised by a board of directors elected by delegates representing policyholders. The Company and the Mutuelles have in common certain members of management and certain members of the Company’s Supervisory Board and Management Board serve as directors or executive officers of the Mutuelles AXA.
Groupement d’intérêt économique (GIE) From time to time the Company enters into GIE’s with certain of its subsidiaries. GIEs are French intercompany partnerships, governed by French law, created to perform various common services for their members and to allocate associated costs and expenses among their members. The allocation of costs and expenses invoiced to GIE members may be based on various agreed criteria including particular cost drivers. In 2006, expenses invoiced by GIEs to the Company, its subsidiaries and affiliates amounted to approximately €151.1 million. These GIEs cover a variety of common services including services performed by the AXA Group’s central functions for the benefit of AXA Group companies (such as finance, accounting and reporting, tax, legal, marketing and brand, internal audit, human resources, procurement, information systems, risk management etc.), cash management services for the Company and certain of its subsidiaries and affiliates as well as other services.
The Company, from time to time, makes capital contributions and/or loans to its subsidiaries and affiliates to finance their business operations, acquisitions or for other business purposes. Loans bear interest at varying rates that generally reflect prevailing market rates at the respective dates such loans were originated.
At December 31, 2006, there were no other loans outstanding from the Company to any members of AXA’s Management Board or Supervisory Board.
Various executive officers and directors of the Company may from time to time purchase insurance, wealth management or other products or services offered by AXA in the ordinary course of its business. The terms and conditions of these transactions are substantially similar to the terms and conditions generally available to the public or to AXA employees generally.
Note 28: Contingents assets and liabilities and unrecognized contractual commitments 28.1. Breakdown of commitments received
– the American holding company’s share in a Group cash facility since July 9, 2004 (€380 million),
Excluding Winterthur’s contribution, guarantees increased slightly by €78 million in 2006, mainly due to an increase in guarantees received by AXA Bank Belgium (€+169 million), partially offset by a decrease of the Belgian Life & Savings entities ones (€–81 million).
AXA Bank Belgium for home loans and other business loans (€12,577 million).
– Pledged securities representing technical commitments made by reinsurers, mainly for French Life & Savings companies (€218 million) and AXA Corporate Solutions Assurance (€271 million).
The €4,490 million increase in 2006 resulted mainly from new guarantees received by the Japanese entities under reverse-repo transactions (€+3,181 million), and by AXA Bank Belgium (€+1,213 million) due to higher portfolio of home loans (€+1,027 million) and Money Market activity (€+86 million).
AXA France Vie including €953 million in respect of assets belonging to provident societies (third-party management).
– At AXA RE, guarantees relating to forward currency transactions (€684 million) and notional commitments received by AXA RE on derivatives hedging ABR products (€62 million). Commitments were also given in an equivalent amount in relation to these products.
– Commitments received by AXA Bank Belgium as part of its Money Market activity (€38 million).
Letters of credit amounted to €1,233 million at December 31, 2006, mainly relating to the life insurance and reinsurance business in the United States (€1,132 million, representing a decrease of €135 million or €268 million at constant exchange rates).
Due in Due after Due after Due after TOTAL TOTAL TOTAL
Commitments given by AXA totaled €32,446 million, an increase of €6,753 million compared to 2005.
– €268 million of construction commitments given by the Swiss entities as part of their real estate management business.
– €143 million of pledged securities including €82 million related to Dutch government bonds pledged to ABN Amro and €59 million of securities pledged by the Swiss entities to third parties.
– €135 million of guarantees given to customers by other international operations, including €75 million related to the sale of the Churchill Group in 2003 to the Royal Bank of Scotland, and €60 million covering letters of indemnity for two former directors of the Australian holding company.
– €29 million in letters of credit given by the Swiss entities.
(€2,013 million excluding Winterthur’s contribution), mainly comprising commitments related to home loans granted by AXA Bank Belgium (€1,057 million), and credit lines and overdraft authorizations granted by the French banks to their customers (€953 million). These commitments were almost stable compared to 2005.
– Guarantees commitments given to customers (€2,522 million excluding Winterthur’s contribution) mainly including (i) performance guarantees granted by the French banks to funds managed by AXA Investment Managers (€1,919 million), the fair value of this commitment being zero as at December 31, 2006, and (ii) a guarantee provided by AXA Australia as part of its mutual funds distribution business, guaranteeing that customers will recoup their initial investment in the funds (€508 million).
Guarantee commitments decreased by €988 million overall, mainly due to the decrease in performance guarantees given by the French banks (€–1,604 million) and the reclassification of AXA Equitable’s guarantees as financing commitments (€–530 million). This decrease was partially offset by an increase in guarantees given by AXA SA to financial institutions related to credit lines granted to the Group’s entities (€+1,153 million).
Pledged assets and real collateral given totaled €15,821 million as at December 31, 2006 (€15,678 million excluding Winterthur’s contribution), and mainly consisted of: – Securities pledged as part of derivatives transactions (€695 million), securities given as guarantees for cash deposits received in securities lending transactions (€8,097 million), securities given as guarantees for short-term securities borrowing by Japanese entities (€809 million) – commitments were also received on these products – and securities pledged in respect of the Japanese insurance guarantee fund (€40 million).
Letters of credit totaled €673 million as at December 31, 2006 (€642 million excluding Winterthur’s contribution), mainly related to the international insurance operations (€606 million). The decrease in letters of credit is mainly due to the fall in gross technical reserves in the international insurance segment and the non-recurrence of commitments related to Hurricanes Katrina, Wilma, Rita and Yvan in 2005.
– €142 million of commitments given by the French Life & Savings business relating to capital and loans.
– Commitments given by the German entities relating mainly to (i) future acquisitions by private equity funds (€744 million) and a multitranche loan (€600 million), and (ii) a commitment given to “Protektor”, the German insurance guarantee fund (€263 million) in the case of a bankruptcy of the insurance companies.
On January 11, 2007, the meetings of holders of AXA’s 2014 and 2017 convertible bonds were held to vote on an amendment of the final conversion dates of the bonds to January 26, 2007 in exchange for a cash payment in respect of the value of the conversion option. The meeting of holders of the 2014 convertible bonds approved the amendment. Consequently, holders who did not convert their bonds by January 26, 2007, received €16.23 per bond on January 31, 2007. The meeting of holders of the 2017 convertible bonds did not approve the amendment. Consequently, to fully neutralize the dilutive impact of the 2017 convertible bonds AXA has purchased from a banking counterparty, for a total cash amount equivalent to the payment proposed to bondholders, call options on the AXA share with an automatic exercise feature. This feature is such that one option is automatically exercised upon each conversion of a convertible bond. Consequently, each issuance of a new share resulting from the conversion of the bond will be offset by the delivery by the bank to AXA (and subsequent cancellation) of an AXA share ; The issuance of a share in respect of the conversion of the bond and the cancellation by AXA of the AXA share received will offset each other. As a result of this transaction, there will no longer be a change to the outstanding number of AXA shares created by the convertible bond conversion.
part of the assets transferred are unlikely to be returned in the foreseeable future (taking into consideration the duration of in-force “WithProfit ” 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 market value of surplus assets in the nonprofit funds, which was £1.3 billion (€1.9 billion) as at December 31, 2006, however, the actual transfer at this date was nil.
On May 15, 2006, and after authorization on December 21, 2005 by the AXA Supervisory Board, the AXA Group (the AXA Mutuelles, AXA and its subsidiaries) and the Schneider Group entered into an agreement that provides for the maintenance of minimal crossshareholdings. Under the terms of this agreement, the AXA Group undertakes to hold at least 2,583,300 shares of Schneider stock and the Schneider Group undertakes to hold at least 8,816,681 shares of AXA stock. The number of shares held under this crossshareholding agreement will be adjusted as needed to reflect the impact of capital transactions, including but not limited to free allotments of stock or share tenders involving the same company (stock splits, business recombinations, etc.). In addition, the parties have consented to a reciprocal repurchase option in the event of a hostile takeover attempt on either AXA or Schneider.
On January 4, 2007, AXA reached an agreement with QBE Insurance Group for the sale of Winterthur’s US operations for US$1,156 million (€920 million taking into account hedges put in place by AXA for this transaction at 1 Euro = 1.26 US$). In addition, Winterthur US will repay US$636 million of which US$79 million have been repaid in Q4 2006 (€506 million taking into account hedges put in place by AXA for this transaction at 1 Euro = 1.26 US$) of inter-company loans to Winterthur Group. This transaction follows AXA’s decision to put Winterthur US operations under strategic review, as initially announced on June 14, 2006. The transaction is subject to necessary regulatory approvals and is expected to close during the second quarter of 2007.
For AXA shareholders, these transactions resulted in the elimination of the potential dilutive impact of the 2014 and 2017 convertible bonds (i.e. a maximum of 65.8 million shares). The total cash consideration paid by AXA amounts to €245 million.
On January 12, 2007, AXA UK announced that it has reached agreement with insurance brokers Stuart Alexander and Layton Blackham to acquire both businesses. AXA UK will be acquiring both firms through its subsidiary Venture Preference Ltd which already owned 38.9% of Layton Blackham. The two companies are to be combined and will have considerable autonomy to develop the business and will maintain independent broking status. Quality accounts with current insurers will be maintained and grown. The total cash consideration paid for 61.1% of Layton Blackham and 100% of Stuart Alexander amounts to £58.5 million.
On March 16, 2007, AXA reached an agreement with Kyobo Life to acquire its 75% stake in Kyobo Auto which has a leading position in the South Korean direct motor insurance market with revenues of KRW 346 billion (€278 million)
To the Shareholders of AXA S.A. 25, avenue Matignon 75008 PARIS
In compliance with the assignment entrusted to us by the shareholders, we have audited the accompanying consolidated financial statements of AXA SA for the year ended
I. Opinion on the consolidated financial statements We conducted our audit in accordance with the professional standards applicable in France; those standards require that we plan and perform the audit to obtain reasonable assurance that the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the management as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.
– During the fiscal year just ended, your Company acquired Winterthur (note 5 of the notes) and initially allocated the related acquisition cost by applying the method described in IFRS 3 on business combinations (notes 1.3.2 and 5.3 of the notes to the consolidated financial statements). In connection with the Winterthur acquisition, we reviewed the methods used to identify and measure the value of assets, liabilities and contingent liabilities accounted for at the date of acquisition, as well as the method used to determine the amount of goodwill on this date.
– The carrying values of purchase goodwill are tested at each closing for recoverability using the methods described in note 1.6.1 to the consolidated financial statements. We have assessed whether the valuation approaches used rely on assumptions that are consistent with the forecasts that emerge from the strategic plans established by the AXA Group.
– Deferred tax assets and liabilities are recorded and measured using the methods described in note 1.15.1 of the notes to the consolidated financial statements.
– Financial assets are recognized and measured using the methods described in note 1.7.2 to the consolidated financial statements. We have assessed whether the measurement methods and classifications used are consistent with the principles adopted by the AXA Group.
– Derivatives and hedging activities are recognized in accordance with the methods and procedures described in note 1.9 to the consolidated financial statements. We have assessed whether the hedging activities recognized in this manner have been duly documented, and whether this documentation includes an explanation of the hedging relationship, its efficiency and the Group’s objective in terms of risk management and hedging strategy.
The assessments were made in the context of our audit of the consolidated financial statements, taken as a whole, and therefore contributed to the formation of our opinion expressed in the first part of this report.
PricewaterhouseCoopers Audit Mazars & Guérard Yves Nicolas – Eric Dupont Patrick de Cambourg – Jean-Claude Pauly
Net income Net income for the year ended December 31, 2006 was €1,433 million, compared with €1,137 million for the year ended December 31, 2005.
Dividends received from European companies stand to €1,280 million and represent an overall decrease of €24 million compared to 2005. Main contributors are AXA France Assurance for €674 million, AXA Holdings Belgium for €299 million, AXA UK for €114 million, and Southern European companies for €116 million.
Dividends from insurance companies outside Europe came to a total of €109 million, up €36 million, mainly due to a €13 million dividend paid by the Morroco subsidiary AXA-ONA, and a €10 million increase in the dividend paid by AXA Asia Pacific Holding.
The income received from financial subsidiaries rose by €149 million to €192 million, mainly due to €121 million from Compagnie Financière de Paris, since improved ratio of “Grands Risques”
• a non recurring income of €57 million received from the unwinding in 2005 of interest-rate swaps relating to €500 million of perpetual subordinated debt securities, following the Company’s decision to exercise its early redemption option,
Operating charges dropped by €7 million to €190 million owing primarily to the end of the amortization of deferred acquisition costs incurred in 2000 on the buyout of minorities in AXA Financial and AXA UK.
The net gain on capital operations came to €421 million, versus a net loss of €530 million in the previous year. This steep increase was mainly the result of: – Foreign-exchange gains of €242 million versus €33 million in 2005, following the renewal of net foreign-currency investment hedges, notably in US dollars, which matured during the year and in respect of which AXA SA benefited from a more favorable exchange rate,
– Out of €89 million impairment allowances, compared to €15 million in 2005, €74 million reflected impairment in the value of Compagnie Financière de Paris shares given the exceptional dividend paid out in 2006.
– Capital gains, net of provision release, amounted to €38 million, mainly due to the gain on the sale of Financière Miro securities (formerly held in Albingia’s portfolio) and capital gains on its own shares under the liquidity agreement.
– Finally, the 2005 financial statements reflected a €236 million loss linked to the cancellation of bonds exchangeable into AXA shares issued by Finaxa in 1998 and repurchased by the Company at the end of 2005.
The provision for income tax amounted to €46 million, compared with an income tax benefit of €623 million in 2005. In 2006, depreciation in the US dollar and the yen against the euro gave rise to a tax liability on unrealized gains on foreign currency debt amounting to €1,163 million compared with a tax deduction of €1,064 million in 2005, which was marked by depreciation in the euro.
In addition, a release of provisions covering the risk of tax repayments to subsidiaries belonging to the fiscal group was set aside in an amount of €110 million to reflect the effects of AXA RE’s disposal on its future taxable income.
Assets Intangible fixed assets totaled €322 million. This amount mainly included the AXA brand contributed by FINAXA as part of the merger in 2005. The brand is valued at €307 million based on brand royalties billed to Group subsidiaries and to the Mutuelles AXA.
Loans, totaled €510 million which represent the short term advance granted for €498 million to GIE AXA Trésorerie.
The tax receivables showed at end-2005 the surplus tax payments in view of the group’s tax loss position. At the end of 2006, AXA has a tax liability of €98 million.
Miscellaneous receivables totaled €333 million at December 31, 2006, mainly €136 million of financial receivables and €189 million relating to current tax accounts of companies belonging to tax consolidation group.
– the €516 million increase in shareholders’ equity, including €375 million through the issue of shares to employees of the Group (Shareplan), €131 million from the exercise of subscription options and €10 million from the exercise of warrants and conversion of bonds.
Other shareholders’ equity included deeply subordinated notes and amounted to €4,824 million to be compared to €892 million in 2005. The increase of €3,932 million reflected the perpetual deeply subordinated notes successively issued to finance the acquisition of Winterthur.
Provisions for contingent liabilities were €817 million. The amount consisted principally of provisions for the redemption of premiums on convertible bonds, €421 million, for exchangerate risks €82 million, and for the possible repayment of tax savings attributable to tax consolidation €266 million.
Subordinated debt amounted to €7,976 million, down €238 million from €8,214 million in 2005, as a result of exchange rate effects, mainly US dollar-related.
– €290 million in borrowings and financial debt due to payments made by financial institutions affiliated with the Company under collateral agreements. These margin calls are intended to mitigate the counterparty risk and represents the value of derivative instruments at the balance sheet date.
Other payables totaled €193 million and mainly included €113 million of accrued expenses, plus €54 million of remaining capital to be called up on AXA Italia SPA.
The Management Board proposes that this amount be appropriated as follows: – dividend €2,218,461,613 – allocation to the legal reserve €46,138,302 – allocation to retained earnings €698,603,157
In accordance with the foregoing, the Management Board recommends the payment of a dividend of €1.06 for each of the 2,092,888,314 ordinary shares with dividend rights at January 1, 2006, payable as of May 21, 2007.
In accordance with the law, there are no distributable income subject to the shareholders approval, other than the dividend mentioned above, eligible or not eligible with the allowance of 40% mentioned in the 2° of the 3 of article 158 of the Code général des impôts.
If, when the dividend is paid, the Company owns some of its own shares, the corresponding dividend will be allocated to retained earnings.
PROFIT ON ORDINARY ACTIVITIES BEFORE TAX (VI = III + IV + V) 1,057 1,043 628
II. RESULT ON CAPITAL OPERATIONS Proceeds from the sale of fixed assets 115 16 12,025
From 01/01/2006 From 01/01/2005 From 01/01/2004 to 12/31/2006 to 12/31/2005 to 12/31/2004
CASH INFLOWS Profit on ordinary activities before tax 1,057 1,043 627
Sale or decrease in fixed assets – – – – Tangible fixed assets 8 3 –
CASH OUTFLOWS Dividends paid out during the year 1,635 1,164 676
CIE FINANCIERE DE PARIS 9 37 100.00% 184 137, rue Victor Hugo - 92687 LEVALLOIS-PERRET
AXA EQUITY AND LAW PLC 2 1,551 99.96% 1,133 107 cheapside EC2V 6DU LONDON
AXA GENERAL INSURANCE HONG KONG 16 28 100.00% 65 30th F, Hong Kong Telecom Tower, Taikoo Place, 979 King’s Road QUARRY BAY - HONG KONG
Net Book Value Loans and cash Guarantees and Last closing Last closing Dividends Closing date and of securities advances given commitments revenues result received other observations held by the company given by available (a) available still outstanding the company
Share Other Percentage Gross Book capital shareholders’ of capital Value of securities equity held held 120, avenue Hassan II - CASABLANCA 21000
AXA ASIA PACIFIC HOLDING (b) 604 1,032 43.50% 541 447 Collins Street MELBOURNE Victoria 3000
a) French subsidiaries (total) 146 b) Foreign subsidiaries (total) 39 2) Participating interests not shown in section A
01/01/2002 01/01/2003 01/01/2004 01/01/2005 01/01/2006 12/31/2002 12/31/2003 12/31/2004 12/31/2005 12/31/2006 1 - CLOSING BALANCE SHEET SUMMARY
b) Ordinary shares (numbers in million) 1,762 1,778 1,908 1,872 2,093 c) Bonds mandatorily convertible into ordinary shares (numbers in million) 16 126 16 16 16 2 - INCOME STATEMENT SUMMARY a) Gross revenues before sales tax 1,980 1,474 1,349 1,788 1,882 b) Pre-tax income from continuing operations, before depreciation, amortization and changes in reserves 1,223 846 660 1,061 1,067 c) Total pre-tax income, including capital gains and losses before depreciation, amortization and changes in reserves 1,222 934 603 598 1,613 e) Net after-tax income after depreciation, amortization and 3 - PER SHARE DATA a) After tax income, before depreciation, amortization and b) After tax income, after depreciation, amortization and a) Number of employees – – – – –
c) Employer contribution to employee benefits and social charges – – – – –
LIFE AND SAVINGS EUROPEAN EMBEDDED VALUE PLUS OTHER BUSINESS TANGIBLE NET ASSET VALUE
which measures the current balance sheet wealth, 2) “Value of Inforce” (VIF) which measures the present value of future shareholder profits for business currently in the portfolio, adjusted for the cost of holding capital that can not be distributed while the business is in force.
“Life & Savings New Business Value” (NBV) measures the value of new business sold during the year. It includes the VIF on new business, and also the upfront costs associated with acquiring new business (often called “strain”). Therefore NBV combines elements which increase VIF balances from one year to the next and elements which reduce the ANAV from one year to the next. Life & Savings EEV does not include any value for future sales.
Life & Savings EEV of other acquired business 41 161 202
Euro million, except when otherwise noted Group share 2005 2006 2006 Change at Change at Change constant FX constant FX
Life & Savings EEV the Tangible Net Asset Value for other-than-life businesses.
The Group EV is not an estimate of AXA’s “fair value”, regardless of how one might define “fair value.” It does not include the value of business to be sold in the future, nor does it include any value for future profits from existing business for other-than-life businesses i.e. Property & Casualty, International Insurance, Asset Management and Other Financial Services.
Life & Savings IFRS Shareholders’ equity at December 31, 2006 35,497 11,729 47,226 Net URCG not included in Shareholders’ equity 576 1,359 1,935
Life & Savings Adjusted Net Asset Value (ANAV) and Other Business Tangible Net Asset Value (TNAV) 15,562 (2,138) 13,424
AXA Life & Savings EEV + Other business TNAV at December 31, 2006 38,390 (2,138) 36,252
– Elimination of the value of intangibles. – Subtraction of unrealized capital gains included in the projection of future cash-flows (VIF). – Adjustment for the differences between AXA’s consolidated accounting basis and local regulatory bases.
The Tangible Net Asset Value (“TNAV”) for otherthan -life business is reflecting the consolidated IFRS shareholders’ equity adjusted for the elimination of all intangible assets and all debt (TSS/TSDI) that are treated as equity in IFRS.
The Life & Savings ANAV can be further segmented into two pieces: 1) the Required Capital which represents an amount consistent with obtaining a AA rating at each operation, net of implicit items that can support capital requirements, and 2) the Free Surplus, which represents the excess of ANAV over the Required Capital.
– Expenses are adjusted for non-recurring expenses and one-time strategic spending.
– Some benefit from future mortality improvement on Life business is included, while annuity business does have an allowance for the costs of longevity increasing in all markets.
– A weighted average tax rate of 33.8% in 2005 and 33.4% in 2006.