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Risk & Capital Management
Denis DuverneCFO, member of the Management Board
Autumn Investor Seminar
November 24, 2009
2 – Autumn Investor Seminar – November 24, 2009 – Risk & Capital management
Certain comments contained herein are forward-looking statements including, but not limited to, statements that are predictions of or indicate future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties. Please refer to AXA's Annual Report on Form 20-F and AXA’s Document de Référence for the year ended December 31, 2008, for a description of certain important factors, risks and uncertainties that may affect AXA’s business.
In particular, please refer to the section "Special Note Regarding Forward-Looking Statements" in AXA's Annual Report on Form 20-F. AXA undertakes no obligation to publicly update or revise any of these forward-looking statements, whether to reflect new information, future events or circumstances or otherwise.
This document does not constitute an offer to sell or a solicitation of an offer to purchase or subscribe securities issued by AXA in any jurisdiction, including the United States.
Cautionary note
3 – Autumn Investor Seminar – November 24, 2009 – Risk & Capital management
The calm after the storm?
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Itraxx Europe Main EUR ML Single A (asset sw ap) EUR ML Double A (asset sw ap)
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Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09
EUR - 10y USD - 10y
Equity volatility stabilizingStock markets have partially recovered
Low interest rates levelsSpreads stabilizing above historical average
Daily volatility over 20 days on the S&P 500
In bps In %
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EuroStoxx 50
4 – Autumn Investor Seminar – November 24, 2009 – Risk & Capital management
What went well? Page 5Diversification benefits were real Page 5Risk management actions worked Page 7
Lessons from the crisis Page 9
Keeping market risk under control Page 12
New key performance indicators Page 20
Table of content
5 – Autumn Investor Seminar – November 24, 2009 – Risk & Capital management
We experienced diversification benefits
Business
2008 Revenues Mix
P&C32%
L&S64%
Asset management5%
Financial crisis
Property &Casualty
Life & Savings AssetManagement
+31%
-43%
+6%
FY08 Underlying earnings growth
2008 Revenues Mix
Geography
Financial crisis
Mediterranean & LA region
* Excluding International Insurance, Asset Management, Banking & Holdings
18%
10%
13%
24%
10%
26%
NORCEE UK &Ireland
NorthAmerica
France
Asia-Pacific (incl. Japan)
+54%+35%
+6%
FY08 Underlying earnings growth
-5% -9%
N/A
6 – Autumn Investor Seminar – November 24, 2009 – Risk & Capital management
We experienced diversification benefits
Clients
57%
36%
7%
2008 Revenues
88%
12%
2008 APE
Life & Savings Property & Casualty
+1million clients
Net inflows
€ +7billion
39% 49%
61% 51%
2008 APE 2008 Revenues
Mix
Non proprietary
Proprietary
Life & Savings Property & Casualty
Partnerships & JV
Exclusive agents
Distribution
Financial crisis
Life & Savings Property & Casualty
Mix Financial crisis
L&S -13%P&C -1%
L&S -2%P&C +1%
Individual/ personal
Group/ commercial
7 – Autumn Investor Seminar – November 24, 2009 – Risk & Capital management
Risk management actions were effective
Assets
• Efficient equity hedge: €1.6 billion gain
• No credit default above €300 million
• Systematic collateralization of derivatives
Liabilities
• No liquidity issues
• No credit enhancement activity
Asset Liability Management (ALM)
• Limited duration gap: less than 1 year• Gain versus 2 years gap:
• 14 pts in Solvency II
• 10 pts in Rating Agency models
Solvency & ratings
• Rating remained in AA range • Average rating of the sector down 1 notch
• Solvency II ratio (QIS4) > 155%
• Solvency I ratio > 140%
8 – Autumn Investor Seminar – November 24, 2009 – Risk & Capital management
Table of contents
What went well? Page 5
Lessons from the crisis Page 9The unthinkable can happen Page 9Higher proportion of market risk Page 10
Keeping market risk under control Page 12
New key performance indicators Page 20
9 – Autumn Investor Seminar – November 24, 2009 – Risk & Capital management
• Equities -25%• Interest rates -100bps/+100bps• Credit spreads (corp) +75bps• Credit defaults (corp) 1%• Other: ABS, real estate, private equity, hedge funds, volatility…
The unthinkable can happen: more weight on stress test scenarios
VALUE CAPITAL
EARNINGS LIQUIDITY
Our internal framework based on stochastic calculations was in place and embedded in business decision…
Adverse events (1/20 years)
• Equities -40%• Interest rates -150bps/+250bps• Credit spreads (corp) +150bps• Credit defaults (corp) 2%• Other: ABS, real estate, private equity, hedge funds, volatility…
Extreme events (1/200 years)
Combined scenarios
…still, we have changed calculation frequency (quarterly basis) &
tail risk scenarios on corporate spreads and correlations
10 – Autumn Investor Seminar – November 24, 2009 – Risk & Capital management
Extreme financial scenarios in light of the crisis
Before diversification
Diversification
STEC
Market risk: 61% Life: 21% P&C: 24%
Counterparty9%
Operational 13%
100%
-29%
Market risk represents 61% of total Internal STEC before diversification: how to maintain it at a reasonable level?
Breakdown of STEC by risk categories
How does this measure of Internal STEC impact our key performance indicators?
A high proportion of financial risk
11 – Autumn Investor Seminar – November 24, 2009 – Risk & Capital management
Table of contents
What went well? Page 5
Lessons from the crisis Page 9
Keeping market risk under control Page 12
Refining our asset allocation Page 12Evolution of Variable Annuities Page 16
New key performance indicators Page 20
12 – Autumn Investor Seminar – November 24, 2009 – Risk & Capital management
Orange ZoneGo/no go?
Green ZoneComfort zone
Red ZoneSystematic de-risking
LimitAlert level
Invested assets (100%)In Euro billion %
Fixed income 79%o/w Govies 37%
o/w Corporate bonds 36%
o/w Asset backed securities 3%
o/w Mortgage loans & other 4%
Cash 7%
Listed equities 4%
Real Estate 5%
Alternative Investments 2%
Policy loans 2%
Total G/A and Bank Assets 100%
Our asset allocation is in line with our risk limits guidance with some potential for further optimization …
We have target limits to monitor our asset allocation
13 – Autumn Investor Seminar – November 24, 2009 – Risk & Capital management
0%
2%
4%
6%
8%
10%
Corporate BondsIG
Corporate BondsBIG
Equity Property Hedge Funds Private Equity
Expected return by asset class
Internal STEC requirements*
0%
25%
50%
75%
100%
Corporate BondsIG
Corporate BondsBIG
Equity Property Hedge Funds Private Equity
* STEC calibration is more conservative than QIS4 but less conservative than QIS5 (third consultation paper)
Risk free rate
Illustrative expected return by asset class & internal STEC requirements
14 – Autumn Investor Seminar – November 24, 2009 – Risk & Capital management
Under Solvency II, corporate bonds have a better risk / returntrade off than all other asset classes.
Expected risk premium on required Internal STEC capital*
* Shareholders’ share net of cost of capital and diversification benefits
0%
20%
40%
Corporate BondsIG
Corporate BondsBIG
Equity Property Hedge Funds Private Equity
Corporate bonds: relatively attractive assets
15 – Autumn Investor Seminar – November 24, 2009 – Risk & Capital management
Underwriting:
• Selection process based on a dual credit analysis (Asset Management analyst + Insurance company analyst)
• Second opinion from risk management
• Group Chief Investment Officer review/approval
Risk management:
• Diversification at Group level (country, issuer, sector…)
• Corporate bonds portfolio duration limited to 4/5 years
Managing corporate bond risk
16 – Autumn Investor Seminar – November 24, 2009 – Risk & Capital management
Allocation funds & guided architecture
Japan developments
Evolution of Variable Annuities
US developments
Very limited involvement in the under priced Variable Annuities market expansion until 2008
First mover in 2009 to reduce commissions and reprice GMIB products
Market share gains since 2009 with a double digit NBV margin
Reduced rollup rate (6.5% to 6%)Eliminated GWBL
Increased pricing
November 2008
Lowered annuitization rate
Reduced rollup rate (5%)Limit fund lineup
February 2009
New Accumulator 9.0February 2009
Retirement CornerstoneNovember 2009
Improved hedging efficiency across the board
Basis risk action planVolatility action plan
Germany developments
Stopped parts of “TwinstarInvest” new business
Optimized swaption strategy on Inforce books to reduce exposure to long term interest rates convexity
Early 2009
Redesigning “TwinstarInvest” with a launch expected early 2010
Going forward
17 – Autumn Investor Seminar – November 24, 2009 – Risk & Capital management
Allocation funds
New business systematically invested in:• Allocation funds• Guided architecture
Customer benefits• Simple for investors to adopt a strategy that matches their risk-tolerance profile and their
investment time horizon
• Capacity to invest in a thoughtfully constructed, professionally allocated portfolio of investment funds diversified across domestic and international as well as equity and fixed income asset classes
AXA’s benefits• Diversification of assets, and limits on equity allocation• Capacity to apply ATM process to mitigate equity volatility • Permanent flexibility on selection of asset managers
18 – Autumn Investor Seminar – November 24, 2009 – Risk & Capital management
Action plan on equity volatility
-38%
6%
-40%
5%
-30%
8%
-34%
5%
Total2008 2009YTD
+6%
2007
+2%
+0%
+8%
S&P 500 Index
Hypothetical ATM 500 Portfolio
Introducing AXA Tactical Manager (“ATM”) strategy…
Tactically Managed Portion of an ATM Portfolio
Low HighVolatility
100% Equity Exposure Exposure
0% Equity
Implementation of a new tactical strategy designed to reduce equity weightings during periods of high volatility (above ca. 30%) for all funds under guided allocation
…should allow to improve funds performance
Back testing
19 – Autumn Investor Seminar – November 24, 2009 – Risk & Capital management
Table of contents
What went well? Page 5
Lessons from the crisis Page 9
Keeping market risk under control Page 12
New key performance indicators Page 20New KPIs using Internal Short Term Economic Capital (STEC)Developments on the P&C front: New Combined Ratio & key findings
20 – Autumn Investor Seminar – November 24, 2009 – Risk & Capital management
Systematic measure of return on risk adjusted capital
• Definition:
• Granularity:
- Protection, investment & savings, mixed
- Individual, Group
- Motor, property, liability, health
- Personal, Commercial
Systematic measure of Value creation
• Definition:
New KPIs using Internal Short Term Economic Capital (STEC)
Net IncomeSTEC
Life & Savings
Property & Casualty
∆ AFR* STEC
* Available Financial Resources
21 – Autumn Investor Seminar – November 24, 2009 – Risk & Capital management
Economic Combined Ratio (ECR) has become one of our KPI’s, reflecting:
• Current year experience• Cost of risk• Business duration• Normalized Natural Catastrophe costs
Developments on the P&C frontA new Combined Ratio
Making Combined Ratios comparable across the various business lines and across the years
Calculation
AccountingCR
EconomicCR
Prior years reserve dev.
One-off expenses
Cat Nat events
Reserves discount
Cost of risk Tax
Objective: ECR ≤ 100%
• ECR = 100% return/STEC = 10% (RFR + Equity risk premium)• ECR < 100% return/STEC > 10%
22 – Autumn Investor Seminar – November 24, 2009 – Risk & Capital management
Impact on 2009/2010 action plan
• Repricing actions on Inforce business, taking into account price elasticity and market cycle• Moderating new business activity in soft countries
Most business lines are profitable but necessity to decrease ECR in some cases
Developments on the P&C frontKey findings 2008
PropertyMotor Liability Health
Group average ECR = 101.5%
Per Business Line
UK Germany Belgium
France Switzerland Med Region
Per Country
Group average ECR = 101.5%
< 101.5%
< 101.5%
> 101.5%
> 101.5%
23 – AXA Investor day – November 24, 2009 – Risk & Capital management
Conclusion
Life & Savings business has gone in 2008 through a crisis comparable to P&C in 2000/2002.
Risk management allowed us, as in 2000/2002, to navigate well through the storm.
The combination of:• normalized Solvency II rules across the sector, • upgraded risk management in Life & Savings, • key performance indicators to measure economic return of all business lines,
should lead to lower equity risk premium for the insurance sector and for AXA.