RNS Number:4440Z
Irish Life & Permanent PLC
08 March 2006
IRISH LIFE & PERMANENT PLC
Preliminary Announcement
Year ended 31 December 2005
PRESENTATION OF INFORMATION
Statutory Basis (IFRS)
EU law requires that the consolidated financial statements of the group be
prepared in accordance with International Financial Accounting Standards
("IFRS") as adopted for use within the EU.
The statutory basis applies IFRS to all operations including the application of
IFRS 4 'Insurance Contracts' to the group's life assurance operations. The group
has availed of the deferred transitional date in respect of IAS 39 'Financial
Instruments: Recognition and Measurement', IAS 32 'Financial Instruments:
Disclosure and Presentation' and IFRS 4 'Insurance Contracts' and therefore has
not restated 2004 statutory comparatives for the impact of these IFRSs. IFRS 4
allows insurance contracts to continue to be accounted for under previous GAAP
as adjusted for any changes which results in more relevant and reliable
information. As a consequence of this the results for the group's insurance
contracts continue to be prepared under embedded value methodologies as
described below.
The pro-forma comparatives for 2004 have been prepared to show what the impact
of these IFRSs would have been had they been applied in 2004.
The statutory basis accounts are included on pages 28 to 35.
Embedded Value basis (EV)
The EV basis shows the results of the group's life assurance operations (both
insurance and investment contracts) prepared in accordance with the European
Embedded Value (EEV) Principles issued in May 2004 by the European Chief
Financial Officers' Forum. Life assurance operations were previously presented
in accordance with the Association of British Insurers' paper of December 2001
'Supplementary Reporting for Long Term Insurance Business (The Achieved Profits
Method)'. 2004 results have been restated to reflect the change in basis of
calculation to EEV.
The results of all other operations are prepared in accordance with IFRSs. 2004
results have been restated to reflect this. In order to provide more meaningful
comparison, this restatement also includes the main impacts of IAS 39 and IAS
32. The IASB has given a deferred transition date for these IFRSs under which
2004 results can continue to be reported on an ROI GAAP basis.
The group has focused on the EV basis, as it believes that EV is a more
realistic measure of the performance of life businesses than the statutory IFRS
basis. The EV basis is used throughout the group to assess performance, and it
is also the measure used by the investment community to assess the performance
of life businesses.
The EV basis results are included on pages 3 to 27.
Financial Highlights
Year ended 31 December 2005
2005 2004 Growth
EV Basis %
Profit after tax Euro475m Euro427m 11
Total EPS 176 cent 158 cent 11
Operating profit before tax Euro420m Euro387m 9
Operating EPS 135 cent 124cent 9
Statutory Basis 1
Profit after tax Euro353m Euro353m -
EPS on continuing activities 134 cent 132 cent 2
New loans issued Euro9.8bln Euro8.0bln 22
Lending book Euro26.2bln Euro21.1bln 24
Mortgage loan book (Ireland) Euro17.8bln Euro14.5bln 22
Life new business
- APE Euro388m Euro310m 25
- PVNBP Euro2,571m Euro2,091m 23
Life and investment new business
- APE Euro520m Euro470m 11
- PVNBP Euro3,890m Euro3,692m 5
Final Dividend per share 42.8 cent 38.5 cent 11
Total Dividend 60.5 cent 55.0 cent 10
1 The statutory comparative information is the pro-forma statutory information,
which together with the statutory comparatives is disclosed on page 30.
Commenting on the results David Went, Group Chief Executive said:
"We're reporting another year of strong out-performance in our businesses for
2005. Each of our key business units performed strongly. The life business is
now leading the market in terms of distribution reach, efficiency and
innovation. The banking business posted a very strong lending figure for the
year while also successfully establishing itself as the destination of choice
for switching current account customers. The broader economy continues to
provide a perfect environment for our businesses and we're confident of posting
another successful performance in the current year."
EV Basis
Commentary on Results EV basis
Consolidated Income Statement - EV Basis
For the year ended 31 December 2005
2005 2004
Eurom Eurom
Operating profit on continuing operations
Insurance and investment business 222 192
Banking 148 139
Other (4) -
366 331
Share of associate 54 56
Operating profit before tax on continuing operations 420 387
Short-term investment fluctuations 94 26
Effect of economic assumption changes 13 30
Other credits 4 21
Profit before tax 531 464
Taxation (16) (33)
Government levy (12) (12)
Profit after tax before discontinued operations 503 419
(Loss)/profit after tax on discontinued operations (26) 10
477 429
Minority interest (2) (2)
Total profit after tax 475 427
Overview
The profit after tax before discontinued operations increased 20% to Euro503m from
Euro419m in 2004 principally reflecting strong life embedded value earnings and a
reduced life tax charge in the year.
At operating profit level earnings increased by 9% to Euro420m from Euro387m in 2004.
This growth principally reflects the increase of 16% in the contribution from
the group's life assurance activities driven by strong growth in new business
profits which were ahead 62% to Euro94m. Banking profits which were ahead 6% to
Euro148m from Euro139m in 2004 were negatively impacted by Euro7m in trading losses in
the first half of the year which arose on positions which, under IFRS, fall to
be mark to market. Excluding this item underlying pre-tax profits in the bank
were ahead 10%.
The post tax contribution from the group's holding in Allianz (Ireland), a
general insurance business, was Euro54m compared to Euro56m reported in 2004. This
reflects a strong underwriting result, which includes prior year reserve
releases, in continuing favourable market conditions and the impact of the good
investment markets which prevailed throughout the year.
The growth in investment markets in 2005 resulted in positive short term
investment fluctuations of Euro94m (2004: Euro26m). This principally reflects the
boost to unit-linked management fees as a result in the growth in policyholder
funds which have benefited from the strong investment markets in 2005.
The 2005 outcome also includes a positive impact of Euro13m arising from changes to
the economic assumptions used to calculate the life assurance embedded value
(2004: Euro30m). This principally reflects the impact of a reduction in the risk
discount rate used to compute the embedded value from 6.7% to 6.5% and which
reflected a reduction in euro gilt rates.
The taxation charge of Euro16m is made up of a Euro42m charge on life and banking
operating profits - giving an effective tax rate of 11% - offset by a deferred
tax credit of Euro26m principally related to the short term investment fluctuations
of Euro94m. This offset reflects the reinstatement of certain tax credits which
were not previously regarded as recoverable within the EV assumptions.
The bank levy charge of Euro12m which has been a feature of the group's tax charge
for the past three years will not recur going forward.
The 2005 outcome includes a loss after tax of Euro26m which was incurred on the
disposal of City of Westminster Assurance, the group's closed life assurance
business in the UK, which is reported below the line as a loss after tax on
discontinued operations. The sale of this company occurred on 2 June 2005 for a
consideration, after transaction costs, of Euro63m. The loss arising on the
disposal of Euro26m includes a profit of Euro2m arising in the period up to the date
of disposal.
The total profit after tax for the year ended 31 December 2005 was Euro475m, an 11%
increase on the 2004 outcome of Euro427m.
Banking Business
The results of the group's banking business for the year ended 31 December 2005
are set out below:
2005 2004
Eurom Eurom
Net interest income 377 349
Other income 40 39
Trading income (4) 6
413 394
Administrative expenses (255) (245)
Impairment provisions (12) (10)
Operating profit before tax and exceptional items 146 139
Investment gains 13 -
Exceptional costs (11) -
148 139
The operating profit before tax and exceptional items generated by the group's
banking business increased 5% to Euro146m from Euro139m in 2004. The 2005 outcome was
negatively impacted by trading losses of Euro7m which arose on positions marked to
market under IFRS. These positions were closed out in the first half of the
year. These losses could not be offset by Euro12m of gains which arose on the
closing out of interest rate positions on transition to IAS39 and which are
required to be amortised over three years. Excluding this negative item, the
underlying pre-tax operating profit in the bank was ahead 10%.
Net interest income rose 8% to Euro377m from Euro349m in 2004 driven by continued
strong growth in new lending and current account balances which offset the
impact of increased levels of wholesale funding on the net interest margin.
The net interest margin in 2005 was 1.29% which compares with a margin of 1.40%
in 2004. The principal reason for the reduction in margin was, as expected, the
requirement to fund the growth in new lending and associated 25% liquidity
requirement largely in the wholesale money markets.
Total loans and advances to customers at 31 December 2005 were Euro26.2bln, 24%
ahead of the outstanding balances of Euro21.1bln at 31 December 2004. Total gross
new lending at Euro9.8bln was 22% ahead of 2004 (Euro8.0bln) with the growth in
balances over the principal business lines as follows:
2005 2004 Growth
Eurom Eurom %
Mortgage lending Ireland* 17,774 14,551 22
Consumer finance 1,617 1,381 17
Commercial lending 1,415 1,249 13
20,806 17,181 21
Mortgage lending - UK (#Stg)* 3,710 2,756 35
Total lending (Eurom) 26,220 21,090 24
* Including securitised mortgages
The Irish mortgage market continued to be extremely buoyant in 2005. Total gross
new mortgages issued were Euro6.3bln, a 28% increase on the Euro5.0bln issued in 2004.
Irish residential mortgage balances outstanding increased by 22% to Euro17.8bln
compared to Euro14.6bln in 2004.
In the UK mortgage demand was also robust with Capital Home Loans, the group's
centralised mortgage lender, issuing Stg#1.4bln in gross new mortgages in 2005
which was 6% ahead of the Euro1.3bln issued in 2004. Mortgage balances outstanding
in the UK rose 35% to Stg#3.7bln from Stg#2.8bln at 31 December 2004.
New consumer finance loans, which largely relate to new car finance issued
through permanent tsb finance, were Euro959m, up 28% from Euro748m in 2004. The
consumer finance loan book increased 17% to Euro1.6bln from Euro1.4bln at 31 December
2004. New commercial loans issued were ahead 8% to Euro383m compared to Euro353m in
2004 and the commercial finance portfolio at 31 December 2005 was Euro1.4bln, up
13% compared to 2004 (Euro1.2bln).
Customer account balances increased 10% to Euro12.8bln from Euro11.6bln in 2004.
Other income at Euro40m compares to Euro39m in 2004 and reflects a modest level of
growth in current account and related fee income following on from the very
successful fee-free current account marketing strategy in which the bank engaged
in 2005. A total of 67,000 new current accounts were opened in the bank in 2005
leading to a 27% increase in current account balances which grew to Euro2.2bln.
Other income reported in the bank includes no contribution from bancassurance
sales, the earnings from which are included in the pre-tax profit reported in
the group's life assurance activities. Sales of life and pensions products in
2005 were Euro65m on an APE basis, an increase of 20% on 2004. Pre-tax operating
profits achieved on the bancassurance book of life business in 2005 were Euro46m,
up 26% on the 2004 level of Euro37m.
Trading income for 2005 was a negative Euro4m compared to a positive Euro6m achieved
in 2004. The 2005 outcome arose due to certain positions taken in financial
instruments which fall to be accounted on a mark to market basis under IFRS.
These positions were closed out in the first half of the year and generated
trading losses of Euro7m. These losses could not be offset by gains of Euro12m which
also arose in the first half of the year, and which reflected the closing of
certain interest rate positions as part of the transition of the balance sheet
to meet the hedging requirements of IAS39. Instead these gains fall to be
amortised to net interest income over three years. Accordingly the losses in the
first half can be regarded as non-recurring and were reduced by Euro3m of trading
profits in the second half of the year.
Administrative expenses increased 4% to Euro255m from Euro245m in 2004. Included in
the 2005 outcome is a charge of Euro3m in respect of the cost of employee share
options under IFRS2. Excluding this item cost growth of 3% compares favourably
with the level of underlying salary inflation within the Irish economy. Cost
management continues to be a key focus within the bank in 2006.
Impairment provisions against loans in 2005 were Euro12m compared to Euro10m in 2004
and reflect the very good credit quality which prevails within all of the
group's loan portfolios, where realised bad debt losses are insignificant.
Provisions held against the portfolios continue to be conservative,
notwithstanding the write back of general provisions necessitated by IAS39, with
reserves of Euro52m compared to an arrears of Euro38m at 31 December 2005.
Exceptional costs of Euro11m reflect the costs of a restructuring plan which is
presently underway in the bank. The objective of the plan is to improve the cost
efficiency and sales capability of the organisation. It is anticipated that the
restructuring plan will be completed in 2006 and that it will have a significant
positive impact on costs and revenues going forward.
Investment gains of Euro13m represent an uplift in the value of investment
properties which are held by the bank.
Insurance and Investment Business
The results of the group's insurance and investment business presented on an EV
basis for the year ended 31 December 2005 are set out below:
2005 2004
Eurom Eurom
New business contribution 94 58
Contribution from in-force business
Expected return
In-force 74 69
Net worth 20 19
Experience variances 15 11
Assumption changes (net of development expenditure) 19 35
128 134
Operating profit before tax 222 192
The operating profit before tax on the group's life business was Euro222m in the
year ended 31 December 2005, a 16% increase on 2004. This reflects a 62%
increase in the new business contribution which improved to Euro94m from Euro58m in
2004 and which more than offset a 4% reduction in the contribution from the
in-force business which was principally due to a Euro16m reduction in the level of
assumption changes falling from Euro35m in 2004 to Euro19m in 2005.
The expected return on the in-force book increased 7% from Euro69m to Euro74m as the
growth in the book offset the reduction in the risk discount rate. The expected
return on net worth relates to earnings on shareholder assets including solvency
capital and is calculated by reference to the assumed long term returns on
equities and property combined with the actual earnings on short-term cash. The
return of Euro20m in 2005 is in line with 2004.
Experience variances were positive at Euro15m compared to Euro11m in 2004 with strong
risk experience achieved during the year on both mortality and morbidity.
The retail business successfully completed the Horizon project during 2005. The
core objective of this project was a fundamental redesign of the business
process to achieve operational efficiencies and leveraged use of this newer
technology. In the year ended 2005 development expenditure of Euro8m (2004: Euro4m) on
the project was written off against assumption changes as additional synergy
gains arising from the deployment of the technology and the migration of
policies from older systems were realised during the year. The capitalised
impact of these synergy gains, a positive Euro8m in 2005 (2004: Euro4m), has been
recognised as a positive change in operating assumptions.
The other operating assumption changes (excluding Horizon impacts) of Euro19m in
2005 principally relate to continued sustained improvements in morbidity
experience and improved cost efficiencies within the business. These
improvements have been capitalised within the embedded value. The operating
assumption changes in 2004 of Euro35m principally related to the capitalisation of
improved mortality experience.
The assumptions underlying the embedded value continue to be prudent.
New Business
The new business contribution for the year ended 31 December 2005 increased 62%
to Euro94m from Euro58m in 2004. The principal reason for this significant uplift in
new business contribution was a 25% increase in life new business sales
(excluding ILIM) to Euro388m on an APE basis in 2005 combined with improved new
business margins and a favourable product mix.
Overall new business margins, excluding ILIM, were 20.4% compared to 14.9% in
2004. Including ILIM new business margins were 18.1% (2004: 12.4%) made up as
follows:
2005 2004
% %
Life 20.4 14.9
Investment (ILIM) 11.4 7.6
18.1 12.4
A number of factors including a favourable product mix, improved pricing on
protection products and lower unit selling costs all combined to drive life
margins in excess of 20% compared to the group's target of 17%. The increase in
investment margins is largely due to the mix of business as 2004 sales included
a number of very large low margin mandates.
APE sales in the group's principal life businesses are summarised below:
2005 2004 Growth
Eurom Eurom %
Retail Life 238 178 34
Corporate Life 130 111 17
Irish Life International 20 21 (5)
388 310 25
Investment (ILIM) 132 160 (18)
520 470 11
APE sales are calculated as annual value of regular premiums plus 10% of the
value of single premiums
When calculated on the basis of present value of new business premiums ("PVNBP")
margins improved from 1.6% in 2004 to 2.4% in 2005 which is broadly the same
order as the improvement under the APE basis.
The PVNBP margin is as follows:
2005 2004
% %
Life 3.1 2.2
Investment (ILIM) 1.1 0.8
2.4 1.6
PVNBP sales in each of the group's principal life businesses are set out below:
2005 2004 Growth
Eurom Eurom %
Retail Life 1,602 1,207 33
Corporate Life 772 678 14
Irish Life International 197 206 (4)
2,571 2,091 23
Investment (ILIM) 1,319 1,601 (18)
3,890 3,692 5
PVNBP sales are calculated as total single premiums plus the discounted value of
regular premiums expected to be received over the term of the contracts
Retail Life
In a very favourable environment, retail sales increased 34% on an APE basis
(33% on the PVPBP basis) to Euro238m from Euro178m in 2004.
Sales were strongly ahead across all product lines and distribution channels
with growth in investment (up 29%) pensions (up 36%) and protection products (up
26%) being particularly strong. The group believes that this strong sales
performance has improved its overall market share position in 2005.
A notable milestone in the retail business in 2005 was the completion of the
Horizon project. This project, which commenced in 2002, was an unqualified
success and has led to significant efficiency improvements across the whole of
the retail business.
Corporate Life
Market conditions continued to be very favourable for the group's corporate life
business in 2005 with continued strong growth in employment and salaries in the
Irish economy. New business sales on an APE basis were ahead 17% to Euro130m from
Euro111m in 2004 (PVNBP growth was 14%). The business achieved particularly good
growth in risk products together with strong growth in defined contribution
increments and additional voluntary contributions.
Investment Management
In 2005 ILIM were confirmed as the top performing pension fund manager in
Ireland over the previous three years. On foot of this investment performance
ILIM generated inflows of Euro1.3bln in 2005. This compares to gross inflows of
Euro1.6bln in 2004 which included a number of very large mandates. As a result of
the strong new business inflows and good investment performance funds under
management grew 24% to Euro26.4bln from Euro21.3bln at 31 December 2004.
Capital and Liquidity
The group's capital and liquidity position continued to be strong. The Tier 1
total capital ratio at 31 December 2005 was 12.6% (31 December 2004: 11.2%)
while the liquidity ratio within the group's banking business was 26% (31
December 2004: 25%). The solvency margin in Irish Life Assurance plc, the
group's principal life business was covered 1.7 times by available assets (31
December 2004: 1.7 times).
Dividend
The directors have proposed a final dividend of 42.8 cent per share. Subject to
shareholder approval the dividend will be paid on 31 May 2006 to shareholders on
the register as at 28 April 2006. The ex-dividend date is 26 April 2006. The
final dividend will bring the total dividend for the year to 60.5 cent, an
increase of 10% on the 2004 total dividend of 55.0 cent per share. The dividend
is covered 2.9 times by total profit (2.2 times at the operating profit level)
and represents an approximate yield of 3.2% on the basis of the share price at
the beginning of March 2005.
For further information contact:
Name Telephone No. Mobile No. Email address
Barry Walsh 353 1 7042678 087 681 8157 barry.walsh@irishlife.ie
David McCarthy 353 1 8563050 087 256 7292 david.mccarthy@irishlife.ie
Media:
Ray Gordon 353 1 6788330 087 241 7373 ray@mrpakinman.ie
Consolidated Income Statement - EV basis
Year ended 31 December 2005
Notes 2005 2004
Eurom Eurom
Operating profit on continuing operations
Insurance & investment business 222 192
Banking 148 139
Other (4) -
366 331
Share of associate 54 56
Operating profit before tax on continuing operations 1 420 387
Short-term investment fluctuations 94 26
Effect of economic assumption changes 13 30
Other credits 2 4 21
Profit before tax 531 464
Taxation 5 (28) (45)
Profit for the year on continuing operations 503 419
(Loss)/profit after tax on discontinued operations 3 (26) 10
(Loss)/profit for the year 477 429
Attributable to
Equityholders 475 427
Minority interest 2 2
477 429
Earnings per share including own shares held for the benefit of
life assurance policyholders (cent) 13 175.7 158.4
Operating earnings per share including own shares held for the
benefit of life assurance policyholders (cent) 13 135.4 124.2
Consolidated Balance Sheet - EV basis
As at 31 December 2005
2005 2004
Notes Eurom Eurom
Assets
Cash and other receivables 299 243
Investments 23,966 20,436
Loans and receivables to banks 6,421 4,508
Loans and receivables to customers 11 26,340 21,133
Interest in associated undertaking 167 136
Reinsurance assets 2,023 1,738
Shareholder value of in-force business 1,103 940
Net post retirement benefit asset 71 66
Goodwill and other intangible assets 258 251
Property and equipment 404 318
Other debtors 426 353
Total assets 61,478 50,122
Liabilities
Customer accounts 12,808 11,597
Deposits by bank 2,281 1,249
Debt securities in issue 15,226 10,879
Non-recourse funding 2,232 2,193
Derivative liabilities 221 131
Insurance contract liabilities 4,082 4,148
Investment contract liabilities 19,806 15,895
Outstanding insurance and investment claims 110 115
Net post retirement benefit liability 158 172
Deferred Taxation 25 -
Other liabilities 404 453
Subordinated liabilities 1,385 951
Total liabilities 58,738 47,783
Equity
Share capital 87 86
Share premium 74 52
Profit and loss account 749 536
Non-distributable reserves 1,691 1,594
Capital reserves 203 125
Own shares held for the benefit of life assurance policyholders (76) (64)
Shareholders' equity 7 2,728 2,329
Minority interest 12 10
Total equity 2,740 2,339
Total liabilities and equity 61,478 50,122
Consolidated Statement of Recognised Income and Expense - EV Basis
Year ended 31 December 2005
2005 2004
Eurom Eurom
Revaluation of property & equipment 71 -
Deferred tax (12 ) -
Net amount recognised directly in equity 59 -
Profit for the year 477 429
Total recognised income and expense for the year 536 429
Attributable to
Equityholders 534 427
Minority interest 2 2
536 429
Consolidated Reconciliation of Shareholders Equity - EV Basis
Year ended 31 December 2005
2005 2004
Eurom Eurom
Shareholders' equity at 1 January (restated) 2,329 2,053
Income and expenses attributable to equityholders 534 427
Movement in cost of own shares held for the benefit of (12) (10)
life assurance policyholders
Dividends paid (152) (142)
Issue of share capital 23 1
Change in share based payment reserves 6 -
Shareholders' equity at 31 December 2,728 2,329
Basis of Preparation
Earnings generated by the group's life assurance operations are prepared in
accordance with the European Embedded Value (EEV) Principles issued in May 2004
by the European Chief Financial Officers' Forum. For businesses other than life
assurance the results have been prepared based on the requirements of the IFRS
issued by the IASB and adopted by the EU.
IFRS 4 brings into force phase 1 of the International Accounting Standard
Board's ("IASB") insurance accounting project. In view of the phased
implementation of IFRS for insurance business, the group believes that
shareholders will continue to place considerable reliance on embedded value
information relating to the life assurance business. The statutory financial
information includes insurance contracts written in the life assurance business
based on embedded value earnings calculated using the EEV principles developed
by the European CFO forum. The methodology produces an Embedded Value (EV) as a
measure of the consolidated value of shareholders' interests in the business
covered by the EEV Principles. The EV basis financial information extends these
principles to investment contracts written in the life assurance business.
The group's results were previously prepared on an ROI GAAP basis under which
life assurance operations were presented in accordance with the Association of
British Insurers' paper of December 2001 'Supplementary Reporting for Long Term
Insurance Business (The Achieved Profits Method)'.
The results for 2004 were restated in July 2005 to reflect the new reporting
basis, copies of these restatements are available from the group's website (
www.irishlifepermanent.ie). These restatements do not constitute the company's
statutory accounts for the year ended 31 December 2004 which were prepared under
ROI GAAP.
For all business other than that specifically referred to below, the statements
incorporate the same values and earnings included in the primary financial
statements, determined using the IFRS bases. The statements also reclassify and
summarise the information included in the primary financial statements and
restate policyholders' liabilities in respect of own shares consistent with the
recognition of the asset.
This section sets out the methodology used to produce the EV basis information.
The Directors acknowledge their responsibility for the preparation of the
supplementary information.
In accordance with IFRS 1, First Time Adoption of International Financial
Reporting Standards, in arriving at the underlying preliminary IFRS information
that forms the starting point for the supplementary information, no adjustments
have been made for any changes in estimates made at the time of approval of the
ROI GAAP statutory financial statements on which the IFRS financial information
is based.
The life assurance results have been prepared in conjunction with the Group's
consulting actuaries - Watson Wyatt Limited.
Covered Business
The EEV Principles are applied to value "covered business" as defined by the
Principles. This includes individual and group life assurance and investment
contracts, pensions and annuity business written in Irish Life Assurance plc,
Irish Life International Limited and City of Westminster Assurance Company
Limited up to the date of its disposal, and the investment management business
written in Irish Life Investment Managers.
All business other than the covered business is included in the supplementary
information on the same basis as that applied to the business in the primary
financial statements.
Under EV, the same valuation approach is applied to both insurance and
investment contracts within the covered business.
Embedded Value
Embedded Value (EV) is the present value of shareholders' interests in the
earnings distributable from assets allocated to the covered business after
sufficient allowance is made according to the EEV Principles for the aggregate
risks in the covered business. The EV consists of the following components:
*free surplus allocated to the covered business
*required capital, less the cost of holding required capital
*present value of future shareholder cash flows from in-force covered
business (PVIF), including an appropriate deduction for the time value of
financial options and guarantees.
The value of future new business is excluded from the EV.
The cost of holding required capital is defined as the difference between the
amount of the required capital and the present value of future releases,
allowing for future investment returns, of that capital.
Free Surplus and Required Capital
Free surplus is defined as the market value of assets in the covered business
less supervisory liabilities less required capital. It is the market value of
any capital and surplus allocated to, but not required to support, the in-force
covered business at the valuation date.
The level of required capital reflects the amount of assets attributed to the
covered business in excess of that required to back regulatory liabilities whose
distribution to shareholders is restricted. The EEV Principles require this
level to be at least the level of solvency capital at which the local
supervisory authority is empowered to take action and any further amount that
may be encumbered by local supervisory restrictions. In light of this the
Directors have set the level of required capital to be 150% of the regulatory
minimum solvency margin requirement at the valuation date, including the
additional margin required under the Solvency 1 rules. The Directors consider
this to be a conservative level of capital to manage the covered business,
allowing for the supervisory basis for calculating liabilities, the insurance
and operational risks inherent in the underlying products and the methods used
to value financial options and guarantees included in those products.
New Business
New business premiums reflect income arising from the sale of new contracts
during the reporting period. Increases to premiums that are generated by
policyholders at their discretion are included in new business as they occur.
Increases to renewal premiums on group pension contracts are treated as new
business premiums.
The new business contribution is the present value of future shareholder
cashflows arising from the new business premiums written in the period less a
deduction if relevant for the time value of financial options and guarantees.
The contribution makes full allowance for the associated amount of required
capital and includes the value of expected renewals on new contracts.
The EEV Principles require a measure of the present value of future new business
premiums (PVNBP) to be calculated and expressed at the point of sale. The PVNBP
is equivalent to the total single premiums plus the discounted value of regular
premiums expected to be received over the term of the contracts using the same
economic and operating assumptions used for calculating the new business
contribution. The new business margin reported under EEV is defined as the ratio
of the new business contribution to PVNBP.
Projection Assumptions
Projections of future shareholder cash flows expected to emerge from covered
business are determined using realistic assumptions for each component of cash
flow and for each policy group. Future economic and investment return
assumptions are based on period end conditions. The assumed discount and
inflation rates are consistent with the investment return assumptions.
The assumptions for demographic elements, including mortality, morbidity,
persistency and expense experiences, reflect recent operating experiences and
are reviewed annually. Allowance is made for future improvements in annuitant
mortality based on experience and externally published data. Favourable changes
in operating experience are not anticipated until the improvement in experience
has been observed.
All costs relating to the covered business are allocated to that business. The
expense assumptions used for the projections therefore include the full cost of
servicing the business. The costs include future depreciation charges in respect
of certain property and equipment included in the free surplus. Certain group
costs allocated to the life company are not included within the cash flow
projections and are accounted for on an annual basis in the other group results.
Risk Discount Rate
The risk discount rate is a combination of a base risk-free rate and a risk
margin, which reflects the residual risks inherent in the covered business,
after taking account of prudential margins in the supervisory liabilities, the
required capital and the specific allowance for financial options and
guarantees.
The Group has adopted a bottom-up approach to the determination of the risk
discount rate. Each element of risk is assessed in turn and a cost is reflected
as an addition to the base risk-free discount rate. The risk discount rate
derived in this way reflects the risk of volatility associated with the cash
flows in the embedded value model.
The key assumptions are set out in note 15.
The market risk margin neutralises the effect of assuming future investment
returns in excess of the base risk-free rate.
The non-market risk margin is based on an estimate of the impact of each of the
following risks - mismatch risk, credit risk, demographic risks including
mortality, morbidity, persistency and expense risks, operational risk and
liquidity risk.
An allowance is made for the diversification effect in that each of the risks is
not expected to occur simultaneously. Financial options and guarantees are
explicitly valued using a market-consistent approach and no further risk
allowance is included for these in the risk discount rate. The non-market risk
margin was determined by the Directors following a review of the estimates
emerging from the above exercise.
Financial Options and Guarantees
Under the EEV Principles an allowance for the time value of financial options
and guarantees ("FOG") is required where a financial option exists which is
exercisable at the discretion of the policyholder. The time value of an option
reflects the additional value inherent in the option due to the potential for
the option to increase in value prior to its expiry date, usually due to
movements in the market value of assets. The value of an option based on market
conditions at the date of the valuation is referred to as the intrinsic value.
Allowance is made for the intrinsic value of FOGs in the supervisory liabilities
and the cost is reflected in the PVIF. An explicit deduction is made to the PVIF
to allow for the impact of future variability of investment returns on the cost
of FOGs (time value). The time value of FOGs is calculated using stochastic
models calibrated on a market consistent basis.
The main financial options and guarantees and the assumptions used to value them
are described in note 15.
Service Companies
All services relating to the covered business are charged on a cost recovery
basis.
Tax
The projections include on a discounted basis all tax that is expected to be
paid under current legislation, including tax that would arise if surplus assets
within the covered business were eventually to be distributed.
Analysis of Profit
The profit from the covered business is analysed into three main components:
* New business contribution
The contribution from new business written in the period is calculated as at the
point of sale using assumptions applicable at the start of the period. This is
then rolled forward to the end of the financial period using the risk discount
rate applicable at the start of the reporting period.
* Profit from existing in-force business
The profit from existing business is calculated using opening assumptions and
comprises:
Interest at the risk discount rate on the value of in-force business allowing
for the timing of cash-flows ("expected return");
Experience variances: when calculating embedded values it is necessary to make
assumptions regarding future experiences including persistency (how long
policies will stay in force), risk (mortality and morbidity), future expenses
and taxation. Actual experience may differ from these assumptions. The impact of
the difference between actual and assumed experience for the period is reported
as experience variances;
Operating assumption changes: the assumptions on which embedded values are
calculated are reviewed regularly. Where it is considered appropriate in the
light of current or expected experience to change any assumptions regarding
expected future experience, the impact on total value of in-force business of
any such change is reported as an "operating assumption change".
* Expected investment return
The expected investment earnings on the net assets attributable to shareholders
are calculated using the future investment return assumed at the start of the
period with the exception of cash returns which is based on the actual return
achieved.
Two further items make up the total profit arising from the covered business:
* Short term investment fluctuations
This is the impact on the EV of differences between the actual investment return
and the expected investment return assumptions assumed at the start of the
period.
* Effect of economic assumption changes
This is the impact on the EV of changes in external economic conditions
including the effect changes in interest rates have on risk discount rates and
future investment return assumptions.
Notes to the 2005 EV basis financial information
Year ended 31 December 2005
1. Operating Profit before tax
2005 2004
Eurom Eurom
Insurance & investment business
New business contribution 94 58
Profit from existing business
- Expected return 74 69
- Experience variances 15 11
- Operating assumption changes 27 39
Development expenditure (8) (4)
Expected investment return 20 19
Operating profit before tax 222 192
Banking
Net interest income 377 349
Non-interest income 40 39
Trading Income (4) 6
413 394
Administrative expenses including depreciation (255) (245)
Impairment losses on loans and receivables (12) (10)
146 139
Investment return 13 -
Restructuring costs (11) -
Operating profit before tax 148 139
Other activities
Non-interest income 46 48
Administrative expenses including depreciation (50) (48)
Operating loss before tax (4) -
Share of associate 54 56
Total operating profit 420 387
2. Other Charges/Credits
(a) Disposal of property and equipment
In 2005 the group disposed of a number of properties occupied by the group and
realised a profit before tax of Euro4m (2004: Euro2m).
(b) Sale of Irish Estates Management
In December 2004 the group disposed of its property management subsidiary Irish
Estates Management Limited, the results for 2004 include Euro19m profit arising on
this disposal.
3. Discontinued Operations
On 2 June 2005 the group disposed of its UK life assurance subsidiary City of
Westminster Assurance Company Limited. The net proceeds were Euro63m, this compares
to a carrying value at date of disposal of Euro91m. The results for the period to
disposal (a profit of Euro2m) together with the loss on disposal are shown in the
income statement as discontinued operations. 2004 results have also been
reclassified to discontinued operations.
4. Life and investment new business
Life business (continuing operations)
2005 2004
Eurom Eurom
Present value of new business premiums (PVNBP)
Single premium 1,313 1,029
Regular premium 255 207
Regular premium capitalisation factor 4.9 5.1
PVNBP 2,571 2,091
Annual Premium Equivalent (APE) 388 310
New business contribution 79 46
New business margin
PVNBP 3.1% 2.2%
APE 20.4% 14.9%
ILIM
Present value of new business premiums (PVNBP) 1,319 1,601
Annual Premium Equivalent (APE) 132 160
New business contribution 15 12
New business margin
PVNBP 1.1% 0.8%
APE 11.4% 7.6%
Total new business
Present value of new business premiums (PVNBP) 3,890 3,692
Annual Premium Equivalent (APE) 520 470
New business contribution 94 58
New business margin
PVNBP 2.4% 1.6%
APE 18.1% 12.4%
5. Taxation
2005 2004
Eurom Eurom
Life operations
Operating profit (16) (15)
Short term investment fluctuations 31 18
Economic assumptions (5) (10)
10 (7)
Banking
Operating profit (26) (25)
Other operations - -
Taxation on the disposal of property and equipment - (1)
(16) (33)
Government levy on financial institutions (12) (12)
(28) (45)
6. Analysis of profit after tax on continuing activities
Year to 31 December 2005
Gross Tax Net
Eurom Eurom Eurom
Operating profit
Insurance and investment business 222 (16) 206
Banking 148 (26) 122
Other (4) - (4)
Share of associate 54 - 54
420 (42) 378
Short term investment fluctuations 94 31 125
Effect of economic assumption changes 13 (5) 8
Other credits/charges 4 0 4
Government levy on financial institutions - (12) (12)
531 (28) 503
7. Shareholders' Equity
2005 2004
Eurom Eurom
Insurance and investment business 1,853 1,689
Banking 561 350
Other activities 37 30
Associate Undertakings 167 136
Goodwill 198 198
2,816 2,403
Minority interest (12) (10)
Deduction in respect of own shares held for the benefit (76) (64)
of life assurance policyholders
Shareholders' equity 2,728 2,329
7. Shareholders' Equity continued
Investment and insurance assets are analysed as follows
2005 2004
Eurom Eurom
Property 80 93
Equities 10 11
Debt securities 4 20
Deposits 613 528
Other assets and liabilities 43 97
750 749
Shareholders' value of in-force business 1,103 940
1,853 1,689
Analysis of movement in shareholders equity attributable to investment and
insurance business
Year ended 31 December 2005
Net Worth VIF Total
Eurom Eurom Eurom
Shareholders' equity as at 1 January 2005 749 940 1,689
Operating profit after tax on continuing operations 84 122 206
Short term investment fluctuations 30 95 125
Effect of economic assumption changes (3) 11 8
Other credits 3 3
Profit after tax on discontinued operations 41 (67) (26)
Exchange rate movements (2) 2 -
Capital movements (152) - (152)
Shareholders' equity as at 31 December 2005 750 1,103 1,853
The shareholders' equity as at 31 December 2005 (2004) includes required capital
of Euro535m (Euro488m) within the net worth. The shareholders' value of in-force is
net of a deduction of Euro123m (Euro112m) in respect of the cost of maintaining the
required capital and net of a deduction of Euro35m(Euro30m) in respect of time value
of financial option and guarantee costs.
Analysis of insurance and investment operating profit after tax
Year ended 31 December 2005
Net Worth VIF Total
Eurom Eurom Eurom
New business contribution (118) 196 78
Profit from existing business
- Expected return 148 (77) 71
- Experience variances 24 (8) 16
- Operating assumption changes 21 9 30
- Development expenditure (7) (7)
- Expected investment return 16 2 18
Operating profit after tax 84 122 206
8. Interest receivable and similar income
2005 2004
Eurom Eurom
Loans and receivables to customers 771 629
Loans and receivables to banks 113 103
Debt securities and other fixed income securities 89 54
Lease and instalment finance 67 62
1,040 848
Inter-group charges eliminated on consolidation (8) (5)
1,032 843
9. Management expenses
2005 2004
Eurom Eurom
Administrative expenses 470 428
Depreciation 25 30
Software amortisation 15 10
510 468
Analysed as follows
Banking operations
Operational 255 245
Restructuring costs 11 -
Life and investment operations
Administrative 186 171
Development expenditure 8 4
Other operations (includes corporate costs) 50 48
510 468
10. Provision for impairment of loans and receivables
2005 2004
Eurom Eurom
At 1 January 46 43
Charged against income statement 12 10
Amounts written off (6) (7)
At 31 December 52 46
At 31 December
Specific 32 29
Collective 20 17
52 46
11. Loans and receivables
2005 2004
Eurom Eurom
Residential mortgage loans 23,188 18,460
Commercial mortgage loans 1,415 1,249
Finance lease, instalment finance and term loans 1,617 1,381
26,220 21,090
Money market funds 150 8
Deferred fees, discounts and fair value adjustments 155 164
26,525 21,262
Inter-group loans and receivables (185) (129)
26,340 21,133
12. Funds Under Management
2005 2004
Eurom Eurom
Funds managed on behalf of unit-linked policyholders 20,264 16,383
Funds managed on behalf of non-linked policyholders 2,379 2,587
22,643 18,970
Off-balance sheet funds 3,791 2,370
26,434 21,340
13. Earnings per share
As permitted under Irish Legislation the group's life assurance subsidiary
holds shares in Irish Life & Permanent plc for the benefit of policyholders.
Under accounting standards these are now required to be deducted from the
total number of shares in issue when calculating EPS. In view of the fact
that Irish Life & Permanent plc does not hold the shares for its own benefit,
EPS based on a weighted average number of shares in issue is disclosed. The
calculation is set out below:
2005 2004
Weighted average ordinary shares in issue and ranking
for dividend excluding own shares held for the benefit of 262,813,871 262,998,704
life assurance policyholders
Weighted average ordinary shares held for the benefit of 7,524,588 6,614,727
life assurance policyholders
Weighted average ordinary shares in issue and ranking
for dividend including own shares held for the benefit of 270,338,459 269,613,431
life assurance policyholders
Profit for the year Euro475m Euro427m
EPS including own shares held for the benefit of 175.7 cent 158.4 cent
life assurance policyholders
Operating profit after tax for the year Euro366m Euro335m
Operating EPS including own shares held for the benefit of 135.4 cent 124.2 cent
life assurance policyholders
14 Reconciliation of Shareholders equity on Statutory basis to EV basis
(a) As at 31 December 2005
Net worth VIF Total
Eurom Eurom Eurom
Statutory shareholders' equity excluding minority interest as at 1,529 546 2,075
31 December 2005
Change insurance shareholder value of in-force to post tax 89 (89) -
Shareholder value of in-force on investment contracts - 681 681
Changes in presentation of cost of FOGs 24 (24) -
Deferred front end fees on investment contracts 153 - 153
Deferred acquisition costs on investment contracts (176) - (176)
Restatement of investment liabilities to regulatory basis (72) - (72)
Unwind own shares statutory adjustment 62 - 62
Change in the basis of deferred tax provisioning 7 (14) (7)
Deferred tax on above adjustments 12 - 12
EV basis shareholders' equity excluding minority interest as at 31 1,628 1,100 2,728
December 2005
(b) As at 1 January 2005
Net worth VIF Total
Eurom Eurom Eurom
Statutory shareholders' equity excluding minority interest as at 1 1,258 525 1,783
January 2005
Change insurance shareholder value of in-force to post tax 96 (96) -
Shareholder value of in-force on investment contracts - 544 544
Changes in presentation of cost of FOGs 19 (19) -
Deferred front end fees on investment contracts 196 - 196
Deferred acquisition costs on investment contracts (176) - (176)
Restatement of investment liabilities to regulatory basis (88) - (88)
Unwind own shares statutory adjustment 34 - 34
Change in the basis of deferred tax provisioning 44 (16) 28
Deferred tax on above adjustments 8 - 8
EV basis shareholders' equity excluding minority interest as at 1 1,391 938 2,329
January 2005
All of the above adjustments relate to the application of IFRS 4 including the
tax implications with the exception of the own share adjustment. The own share
adjustment reverses the mis-match which arises under IFRS where own shares held
on behalf of policyholders are marked to market in policyholder liabilities but
it is not permitted to mark to market the matching asset.
15. EV Assumptions
Principal economic assumptions
The assumed future pre-tax returns on fixed interest securities are set by reference to gross
redemption yields available in the market at the end of the reporting period. The risk free rate
of return used for the risk discount rate is based on the yield available for the effective
duration of the future cash-flows underlying the PVIF. The corresponding return on equities and
property is equal to the risk free rate assumption plus the appropriate risk premium. An asset
mix based on the assets held at the valuation date within policyholder funds has been assumed
within the projections.
31 December 31 December 31 December
2005 2004 2003
Equity risk premium 3.0% 3.0% 3.0%
Property risk premium 2.0% 2.0% 2.0%
Risk free rate 3.2% 3.5% 4.2%
Non market risk margin 2.1% 2.1% 2.1%
Market risk margin 1.2% 1.1% 1.0%
Risk discount rate 6.5% 6.7% 7.3%
Investment return
- Fixed interest 2.5% - 3.6% 2.5% - 4.2% 3.0% - 4.9%
- Equities 6.2% 6.5% 7.2%
- Property 5.2% 5.5% 6.2%
Expense inflation 3.6% 3.6% 4.0%
Other assumptions
The assumed future mortality and morbidity assumptions are based on published tables of rates,
adjusted by analyses of recent operating experience. Persistency assumptions are set by
reference to recent operating experience.
The management expenses attributable to life assurance business have been analysed between
expenses relating to the acquisition of new business and the maintenance of business in-force.
No allowance has been made for future productivity improvements in the expense assumptions.
Projected tax has been determined assuming current tax legislation and rates. Deferred tax on
the release of the retained surplus in the Life Business is allowed for in the PVIF
calculations.
EV results are computed on a before and after tax basis.
Treatment of financial options and guarantees (FOGs)
The main options and guarantees for which FOG costs have been determined are
(a) Investment guarantees on certain unit-linked funds, where the unit returns to policyholders
are smoothed subject to a minimum guaranteed return (in the majority of cases the minimum
guaranteed change in unit price is 0%, usually representing a minimum return of the
original premium). An additional management charge is levied on policyholders investing in
these funds, compared to similar unit-linked funds without this investment guarantee. This
extra charge is allowed for in calculating the time value of FOG cost;
(b) Guaranteed Annuity Rates on a small number of products;
(c) Return of Premium death guarantees on certain unit-linked single premium products;
(d) Guaranteed benefits for policies in the closed with-profit fund.
The main asset classes relating to products with options and guarantees are European and
International equities, Property, and government bonds of various durations.
The Deloitte's TSM Streamline Market Consistent model is used to derive the cost of FOGs. The
model is calibrated to the yield curve and to the market prices of equity options. Ten years of
historical weekly data are used to derive the correlation between the returns of different asset
classes.
The model uses the difference between two inverse Gaussian distributions to model the returns on
each asset class. This allows the model to produce fat-tailed distributions, and provides a good
fit to historical asset return distributions.
Statistics relating to the model used as at 31 December 2005 are set out in the following table:
10-Year Return 20-Year Return
Mean 1 StDev 2 Mean StDev
European Assets (euro)
Bonds 3.4% 2.1% 3.7% 3.3%
Equities, Property 3.4% 21.7% 3.7% 22.8%
UK Assets (Sterling)
Bonds 4.1% 2.6% 4.1% 5.8%
Equities 4.1% 19.8% 4.1% 22.2%
1. The Market Consistent nature of the model means that that all asset classes earn the
risk free rate. No value is added by investing in riskier assets with a higher expected
rate of return. The Means quoted above reflect this.
2. Standard Deviations are calculated by accumulating a unit investment for n years in each
simulation, taking the natural logarithm of the result, calculating the variance of this
statistic, dividing by n and taking the square root. The results are comparable to
implied volatilities quoted in investment markets.
16. Sensitivity calculations
A number of sensitivities have been produced on alternative assumption sets
to reflect the sensitivity of the continuing operations embedded value and
the continuing operations new business contribution to changes in key
assumptions. The details of each sensitivity are set out below:
- 1% variation in discount rate - a one percentage point
increase/decrease in the risk margin has been assumed in each case
(meaning a 1% increase in the risk margin at end 2005 would result
in a 4.3% risk margin and a 7.5% risk discount rate).
- 1% increase in equity/property yields - a one percentage point
increase in the equity/property assumed investment returns,
excluding any related changes to risk discount rates or valuation
bases, has been assumed (meaning a 1% increase in equity returns
would increase assumed total equity returns from 6.2% to 7.2%).
- 10% variation in equity/property values - a ten percentage
point increase/decrease in the market value of equity/property
assets, including any related changes to valuation reserves and life
shareholder net assets. Therefore this sensitivity includes the
effect on the life net worth.
* 10% decrease in maintenance expenses, excluding any related changes
to valuation expense bases and to potentially reviewable policy fees
(meaning a 10% reduction on a base assumption of Euro10 per annum would result
in a Euro9 per annum expense assumption).
- 10% improvement in assumed persistency rates, incorporating a
10% reduction in lapse, surrender and premium cessation assumptions
(meaning a 10% reduction on a base assumption of 7% would result in
a 6.3% lapse assumption).
* 5% decrease in both mortality and morbidity rates, excluding any
related changes to valuation bases or potentially reviewable risk charging
bases (meaning if base experienced mortality is 90% of a standard mortality
table then for this sensitivity the assumption is set to 85.5% of the
standard table).
The sensitivities allow for any material impact on the cost of financial
options and guarantees caused by the changed assumption.
(a) Economic Assumptions
As issued 1% higher risk 1% lower risk
EV discount rate discount rate
Eurom Eurom Eurom
Effect on embedded value at 31 December 2005 1,853 (98) 111
Effect on 2005 new business contribution 94 (17) 19
(b) Market Sensitivities - equity/property yields
As issued 1% higher equity/
EV property yields
Eurom Eurom
Effect on embedded value at 31 December 2005 1,853 48
Effect on 2005 new business contribution 94 6
(c) Market Sensitivities - equity/property values
10% increase 10% increase
As issued in equity/property in equity/property
EV values values
Eurom Eurom Eurom
Effect on embedded value at 31 December 2005 1,853 81 (84)
(d) Operational Assumptions
10% 10% improvement 5% decrease
decrease in in assumed in mortality
As issued maintenance persistency & morbidity
EV expenses rates rates
Eurom Eurom Eurom Eurom
Effect on embedded value at 31 December 2005 1,853 40 57 14
Effect on 2005 new business contribution 94 6 11 2
Statutory Basis
Commentary on Statutory Results
As outlined in the basis of preparation note on page 29, the group has availed
of the exemption granted by the IASB not to restate 2004 comparatives for IAS32,
IAS39 and IFRS4. The statutory results for the year to 31 December 2004 do not
therefore reflect the impact of applying these IFRS. These IFRS which cover
insurance business and loans and advances have a fundamental impact on the
results of the group as a result of which the 2004 statutory results are not
directly comparable with 2005.
Statutory profits after tax on continuing activities for the year to 31 December
2005 are Euro352m, a reduction of 14% on the 2004 level of Euro413m.
The group has previously published pro-forma results which restated 2004 results
assuming that IAS39 and IFRS4 had been implemented in 2004. These restatements
are available on the group's website. To enable a more meaningful comparison
between the 2005 to 2004 results, the pro-forma income statement has also been
included in the 2005 accounts.
The EV information set out on pages 3 to 27 employs embedded value methodology
for all of the group's insurance and investment business. The statutory results
include embedded value for insurance contracts only. Banking and other
businesses are accounted for under the same basis in both statutory and EV
results.
On a pro-forma basis the statutory profit (after tax) on continuing activities
for the year ended 2005 was Euro352m, a Euro4m uplift on the 2004 outcome of Euro348m.
The 2005 outcome includes a charge of Euro28m in respect of the uplift in the value
of shares held for the benefit of policyholders reflecting the increase in value
of Irish Life & Permanent shares during 2005 which increases policyholder
liabilities but under IFRS the corresponding increase in the asset cannot be
recognised. The corresponding charge in 2004 was Euro6m. In addition the 2005
outcome includes a charge of Euro13m in respect of properties held within the life
assurance fund to reflect increases in the value of properties occupied by the
shareholder. Under IFRS the corresponding increase in the value of the assets is
taken directly to reserves. Adjusting for these two items the underlying
statutory profit (after tax on continuing operations) on a pro-forma basis
increased by 11%.
The underlying growth in the statutory after tax profit on continuing operations
reflects strong new business growth in both the banking and life businesses,
combined with good growth in investment markets and tight cost control. In the
bank total loan balances outstanding increased 24% to Euro26.2bln (2004: Euro21.1bln)
with total new loans issued of Euro9.8bln (2004: Euro8.0bln). The principal driver of
this growth was a 22% increase in residential mortgages outstanding in Ireland
which grew to Euro17.8bln from Euro14.6bln in 2004. This growth in assets combined
with growth of 27% in current account balances outstanding which increased to
Euro2.2bln from Euro1.7bln was the principal reason for the 7% increase in net
interest income which grew to Euro366m from Euro341m in 2004.
In the life business new business issued (including fund flows into ILIM) on an
APE basis increased by 25% to Euro388m (2004: Euro310m). Gross inflows into ILIM were
Euro1.3bln compared to Euro1.6bln in 2004. The strong growth in insurance new business
is reflected in the 10% growth in premiums on insurance contracts which
increased to Euro484m from Euro442m in 2004 and a change in shareholders' value of
in-force business of Euro76m which was significantly ahead of 2004 (Euro28m). The
growth experienced on the life business investment contracts served to depress
the reported growth in statutory basis pro-forma profits due to the manner in
which revenues and sales costs are treated under IFRS.
Administrative expenses increased 10% to Euro470m from Euro428m in 2004. The 2005
costs included Euro11m in restructuring changes in the bank, Euro8m development costs
in the life business (2004: Euro4m) and the cost of employee share options of Euro6m
(2004: Euro1m). Adjusting for these items the underlying level of cost growth was
5%.
Lastly the post-tax profits achieved in Allianz, a general insurance business in
which the group has a 30% interest, were Euro54m, slightly down on the 2004 level
of Euro56m.
STATUTORY BASIS
Basis of Preparation
EU law requires that the consolidated financial statements of the group, for the
year ended 31 December 2005, be prepared in accordance with International
Financial Accounting Standards ("IFRS") as adopted by the EU.
IFRS 4 brings into force phase 1 of the International Accounting Standard
Board's ("IASB") insurance accounting project. In view of the phased
implementation of IFRS for insurance business, the group believes that
shareholders will continue to place considerable reliance on embedded value
information relating to the life assurance business. The statutory financial
information includes insurance contracts written in the life assurance business
based on embedded value earnings calculated using the EEV principles developed
by the European CFO forum. The EV basis financial information on pages 3 to 27
extends these principles to investment contracts written in the life assurance
business.
2004 comparative basis
The 2004 comparative financial information on pages 30 to 35 is prepared under
the reporting basis for statutory comparatives under IFRS for the 2004 financial
year. This basis reflects all standards with the exception of IAS 32, IAS 39 and
IFRS 4 where transitional concessions have been permitted by the IASB. These
concessions allow the group to continue to report comparatives for areas covered
by these standards on a ROI GAAP basis for 2004 only including the reporting of
life assurance operations in accordance with the EEV Principles issued in May
2004 by the European Chief Financial Officers' Forum. Life assurance operations
were previously presented in accordance with the Association of British
Insurers' paper of December 2001 'Supplementary Reporting for Long Term
Insurance Business (The Achieved Profits Method). These transitional concessions
include the accounting policies for loans and advances, debt securities,
derivatives and life insurance.
In addition the comparative income statement and balance sheet figures have also
been shown on a pro-forma basis to provide more meaningful comparative
information by showing 2004 financial information including the impact on the
financial information of the recognition and measurement principles of IAS 32,
IAS 39 and IFRS 4, with the exception of the income statement impact of
derivative hedge accounting where the necessary documentation was not in place
prior to the standard being agreed in late 2004.
In preparing the 2004 comparative information the group has adjusted amounts
previously reported in financial statements under ROI GAAP. The impact of the
transition from ROI GAAP to IFRS at 31 December 2004 is set out and explained in
the "Transition to IFRS - Restatement of 2004 Financial Information" document
published on 21 July 2005. This document also sets out and explains the impact
of the adoption of IAS 32, IAS 39 and IFRS 4 on shareholders equity at 1 January
2005.
Estimates and assumptions
Certain amounts recorded include estimates and assumptions made by management
about insurance liability reserves, investment valuations, interest rates,
demographic and other factors. Actual results may differ from the estimates
made. Where estimates had been made under ROI GAAP, consistent estimates (after
adjustments to reflect any difference in accounting policies) have been made on
transition to IFRS. Judgements affecting the group's balance sheet have not been
revisited with the benefit of hindsight.
Consolidated Income Statement - Statutory Basis
Year ended 31 December 2005
2005 2004
Statutory Pro-forma
Eurom Eurom Eurom
Interest receivable 1,032 843 843
Interest payable (666) (502) (502)
366 341 341
Fees and commission income 63 60 60
Fees and commission expenses (73) (114) (67)
Net trading income (4) 6 6
Premiums on insurance contracts 484 3,557 442
Reinsurers share of premiums on insurance contracts (159) - (138)
Investment return 3,527 1,701 1,694
Fees from investment contracts and fund management 218 15 167
Change in shareholders' value of in-force business 76 154 28
Profit on the sale of property and equipment 4 2 2
Other income - 10 7
Operating income 4,502 5,732 2,542
Claims on insurance contracts (383) (1,234) (375)
Reinsurers share of claims on insurance contracts 108 - 91
Change in insurance contract liabilities (419) (3,582) (155)
Change in reinsurer's share of insurance contracts liabilities 231 - 122
Change in investment contract liabilities (3,134) - (1,387)
Administrative expenses (470) (408) (428)
Depreciation and amortisation
Property and equipment (25) (30) (30)
Intangible assets - software (15) (10) (10)
Investment expenses (16) (10) (10)
Impairment losses on loans and advances (12) (9) (10)
Operating expenses (4,135) (5,283) (2,192)
Operating profit 367 449 350
Share of operating profits of associated undertakings 54 56 56
Profit on the disposal of Irish Estates Management Limited - 19 19
Profit before taxation on continuing activities 421 524 425
Taxation (69) (111) (77)
Profit for the year on continuing activities 352 413 348
Profit from discontinued activities 1 8 7
Profit for the year 353 421 355
Attributable to
Equityholders 353 419 353
Minority interest - 2 2
353 421 355
Earnings per share (basic) Cent Cent Cent
Continuing activities 133.9 156.3 131.6
Discontinued activities 0.4 3.0 2.7
134.3 159.3 134.3
Earnings per share (diluted)
Continuing activities 132.9 155.3 130.8
Discontinued activities 0.4 3.0 2.6
133.3 158.3 133.4
Consolidated Balance Sheet - Statutory Basis
As at 31 December 2005
2005 2004
Statutory Pro-forma
Eurom Eurom Eurom
Assets
Cash and balances with central banks 162 176 176
Items in course of collection 137 67 67
Financial Assets
- Debt securities 8,530 8,371 8,388
- Equity shares 12,782 10,134 10,123
- Derivative assets 355 117 189
- Loans and receivables to customers 26,340 20,911 21,133
- Loans and receivables to banks 6,421 4,508 4,508
Investment properties 2,300 1,736 1,736
Reinsurance assets 2,023 1,444 1,738
Prepayments and accrued income 341 325 256
Interest in associated undertakings 167 136 136
Property and equipment 404 318 318
Shareholder value of -inforce business 546 1,144 525
Goodwill and other intangible assets 258 251 251
Deferred acquisition costs 182 - 182
Net post retirement benefit asset 71 66 66
Other assets 85 91 97
Total assets 61,104 49,795 49,889
Liabilities
Financial liabilities
- Deposits by banks 2,281 1,250 1,249
- Customer accounts 12,808 11,587 11,597
- Debt securities in issue 15,226 10,928 10,879
- Non-recourse funding 2,232 2,193 2,193
- Derivative liabilities 221 2 131
- Investment contract liabilities 19,798 - 15,860
Insurance contract liabilities 4,082 19,803 4,148
Outstanding insurance and investment claims 110 115 115
Accruals and deferred income 167 240 240
Other liabilities 203 168 169
Current tax liabilities 34 44 44
Deferred tax liabilities 157 212 147
Net post retirement benefit liability 158 172 172
Deferred front end fees 159 - 203
Subordinated liabilities 1,385 934 951
59,021 47,648 48,098
Equity
Share capital 87 86 86
Share premium 74 52 52
Profit and loss account 673 344 472
Non-distributable reserves 1,038 1,529 1,048
Other reserves 203 125 125
Equity excluding minority interest 2,075 2,136 1,783
Minority interest 8 11 8
Total equity including minority interest 2,083 2,147 1,791
Total liabilities and equity 61,104 49,795 49,889
Consolidated Statement of Recognised Income and Expense - Statutory Basis
Year ended 31 December 2005
Notes 2005 2004
Eurom Eurom
Revaluation of property & equipment 86 4
Deferred Tax (12) -
Net amount recognised directly in equity 74 4
Profit for the year 353 421
Total recognised income and expense for the year 427 425
Transition adjustment at 1 January 2005 arising from 2 (356) -
IAS 32, IAS 39 and IFRS 4
Total recognised income and expense for the period 71 425
including transition adjustment
Attributable to :
Equityholders 74 423
Minority interest (3) 2
Total recognised income and expense for the period 71 425
including transition adjustment
Consolidated Condensed Statutory Cashflow Statement
Year ended 31 December 2005
2005 2004
Eurom Eurom
Net cashflow (outflow) / inflow from operating activities (323) 345
Investing activities
Purchase of property and equipment (35) (27)
Sale of property and equipment 15 11
Purchase of intangible assets (24) (38)
Sale of Irish Estates Management Limited - 21
Sale of City of Westminster Assurance Company Limited 63 -
Dividends received from associated undertaking 23 16
42 (17)
Financing activities
Issue of ordinary share capital 23 1
Issue of new subordinated liabilities 392 144
Interest paid on subordinated liabilities (48) (41)
Equity dividends paid (152) (142)
215 (38)
Tax paid (74) (88)
(Decrease) / increase in cash (140) 202
Analysis of changes in cash and cash equivalents
Cash and cash equivalents at 1 January 694 492
Net cashflow before the effect of exchange translation adjustments (140) 202
Effect of exchange translation adjustments 1 -
Cash and cash equivalents at 31 December 556 694
Notes to the Preliminary Announcement - Statutory Basis
Year ended 31 December 2005
1. Amendments to previously published 2004 restatements
The group published preliminary 2004 IFRS restatements in July 2005. These
restatements were subject to change because of the possibility of subsequent
revision or changes to the standards or the guidance on their application. In
particular the calculation and presentation of taxation for life assurance
business remained under discussion by the industry. These discussions have given
rise to a different interpretation creating a change in the 2004 restatements,
the net impact of the change is as follows:
Statutory Pro-forma
As previously Revised As previously Revised
Published published
Eurom Eurom Eurom Eurom
Profit for the year 395 421 355 355
Equity at end of year 2,179 2,147 1,837 1,791
2. Reconciliation of Opening Shareholders Equity
As outlined in the basis of preparation note the group adopted IAS 32, IAS 39
and IFRS 4 with effect from 1 January 2005. The impact of opening
shareholders equity of these changes is as follows
Eurom
Shareholders' equity at 31 December 2004 2,136
IAS 39
Impairment provisions 50
Effective yield 77
Fair value adjustments 3
IFRS 4
Deferred acquisition costs 182
Deferred front end fees (203)
Shareholders' value of in-force business (619)
Other reserve changes 67
Deferred Tax 87
Minority share of IFRS adjustments 3
Shareholders' equity at 1 January 2005 1,783
3. Discontinued Activities
On 2 June 2005 the group disposed of its UK life assurance subsidiary City of
Westminster Assurance Company Limited. The proceeds net of costs were Euro63m, the
profit after tax for the period up to the date of disposal was Euro3m, the loss on
disposal was Euro2m.
4. Earnings per share
2005 2004
Statutory Pro-forma
(a) Basic EPS
Weighted average ordinary shares in issue 262,813,871 262,998,704 262,998,704
and ranking for dividend
Profit for the year attributable to equityholders
Continuing operations Euro352m Euro411m Euro346m
Discontinued operations Euro1m Euro8m Euro7m
Total Euro353m Euro419m Euro353m
EPS (Cent)
Continuing operations 133.9 156.3 131.6
Discontinued operations 0.4 3.0 2.7
Total 134.3 159.3 134.3
(b) Fully diluted EPS
Weighted average of potential dilutive ordinary shares
arising from the group's share option schemes 2,071,187 1,597,711 1,597,711
Weighted average number of ordinary shares 264,885,058 264,596,415 264,596,415
used in the calculation of fully diluted EPS
Fully diluted EPS (Cent)
Continuing operations 132.9 155.3 130.8
Discontinued operations 0.4 3.0 2.6
Total 133.3 158.3 133.4
5. The financial information contained within the preliminary announcement does
not constitute the group's statutory accounts for the year ended 31 December
2005. The statutory accounts for 2005 will be finalised on the basis of the
financial information presented by the directors in the preliminary
announcement and together with the auditors' report thereon will be delivered to
the Register of Companies following the company's annual general meeting
8 March, 2006
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR SSFFMWSMSEDD
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