RNS Number:8175O
Irish Life & Permanent PLC
27 February 2008
Irish Life & Permanent plc
2007 Preliminary Report
12 months to 31 December 2007
Contents
Page
Presentation of information 1
Financial Highlights 2
Chief Executive's Review 3
Financial Performance Review 6
Divisional Performance Review 12
Commentary on Statutory Results 19
Embedded Value basis
Basis of preparation 22
Consolidated Income Statement 26
Consolidated Balance Sheet 27
Consolidated Statement of Recognised Income and Expense 28
Consolidated Reconciliation of Shareholders' Equity 28
Notes to the EV basis 29
Statutory basis
Basis of preparation 43
Consolidated Income Statement 44
Consolidated Balance Sheet 45
Consolidated Statement of Recognised Income and Expense 46
Consolidated Cashflow Statement 47
Notes to the Statutory basis 48
IRISH LIFE & PERMANENT PLC
Preliminary Announcement
Year ended 31 December 2007
PRESENTATION OF INFORMATION
Statutory Basis (EU IFRS)
EU law requires that the consolidated financial statements of the group be
prepared in accordance with International Financial Reporting Standards ("IFRS")
as adopted by 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. IFRS 4
allows insurance contracts to continue to be accounted for under previous GAAP
as adjusted for any changes which result in more relevant and reliable
information. As a consequence of this the results for the group's insurance
contracts continue to be prepared under the embedded value methodology as
described below.
The statutory basis accounts are included on pages 42 to 53.
Embedded Value basis (EV)
The EV basis shows the results of the group's life assurance operations
(including both insurance and investment contracts) prepared in accordance with
the European Embedded Value (EEV) Principles issued in May 2004 with additional
guidance on EEV disclosures issued in October 2005 by the European Chief
Financial Officers' Forum.
The results of all other operations are prepared in accordance with IFRS.
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 life insurance companies generally and by the
investment community to assess the performance of life businesses.
The EV basis results are included on pages 21 to 41.
FINANCIAL HIGHLIGHTS
Year ended 31 December 2007
2007 2006 Growth
Statutory Basis (EU IFRS) %
Profit after tax (attributable to equity Euro449m Euro358m 25
holders)
EPS on continuing activities 168 cent 135 cent 25
EV Basis
Profit after tax (attributable to equity Euro404m Euro561m (28)
holders)
Total EPS 147 cent 205 cent (28)
Operating profit before tax Euro590m Euro529m 12
Operating EPS 195 cent 178 cent 9
Bank Lending
New loans issued Euro12.4bln Euro12.9bln (3)
Lending book Euro39.2bln Euro33.8bln 16
Mortgage loan book (Ireland) Euro26.4bln Euro23.1bln 14
Life & Investment New Business
Life new business
- APE Euro673m Euro516m 30
- PVNBP Euro4,490m Euro3,482m 29
Life and investment new business
- APE Euro1,014m Euro706m 44
- PVNBP Euro7,896m Euro5,383m 47
Dividends
Final Dividend per share 52.5 cent 47.9 cent 10
Total Dividend per share 75.0 cent 68.0 cent 10
CHIEF EXECUTIVE'S REVIEW
The Group 2007 results, with operating profits (embedded value basis) ahead 12%
at Euro590m, represent an outstanding outcome in what were, particularly in the
second half of the year, very challenging times. On the statutory basis
(European Union IFRS) operating profits were ahead 16% to Euro448m (2006: Euro386m)
and profit after tax before minority ahead 25% to Euro452m (2006: Euro361m). The
turbulence experienced in the global credit and equity markets sparked by the US
sub-prime crisis and the impact which that has had on the world financial
landscape is unparalleled in recent memory. In Ireland, the overall economy
continued to perform strongly throughout 2007 with GDP growth estimated at 5%.
All of our businesses benefited from this, recording strong product growth with
the exception of Irish residential mortgages where the Irish housing sector,
after a decade of unprecedented growth, witnessed a correction which saw house
prices decline by an average 7%.
Against this backdrop the group's clear strategic focus on retail financial
services in Ireland, its low risk business model and the strength of its
franchises and brands has served it well.
Overall group pre-tax operating profits were ahead 12% to Euro590m from Euro529m in
2006 while the core life and banking profits increased 18% to Euro561m from Euro474m.
The Board has approved a final dividend of 52.5 cent per share which will lead
to a total dividend of 75 cent for 2007. This represents a 10.3% increase over
the total dividend paid in respect of 2006 (68.0 cent).
Life Business
The group's life and pensions operations experienced strong demand across all
business lines and channels with life sales in Ireland (excluding investment
sales in Irish Life Investment Managers) ahead 30% for the full year to Euro673m
(2006: Euro516m) driven particularly by very strong growth in pensions which group
wide were ahead 39% accounting for 59% of total group life sales in Irish Life
Assurance.
Within the retail life division sales grew 31% to Euro414m (2006: Euro317m) with
strong sales of pensions (up 46%) and investment products (up 23%) being the key
drivers. Overall the retail life division increased its market share to in
excess of 25% maintaining its number one position.
In the group's corporate life division sales were ahead 33% to Euro220m (2006:
Euro165m) with strong growth in new defined contribution schemes and defined
benefit liability annuity buy-outs. Corporate Business continues to be the
dominant player in the group risk and pensions marketplace.
Our asset management business, Irish Life Investment Managers ("ILIM"), enjoyed
record inflows of new business which were up 79% to Euro3.4bln (2006: Euro1.9bln) on
the foot of exceptional fund management performance, and product development and
innovation in both its passive and active businesses. As a result of these
record inflows group funds under management increased 11% to Euro35.4bln (2006:
Euro31.8bln).
The strong sales performance in the life business combined with a strong growth
in the in-force book led to operating profit growth in the life business of 26%
to Euro346m from Euro274m in 2006.
Banking Business
The group's banking business performed well in 2007 notwithstanding the turmoil
in credit markets and the slowdown in the Irish housing market. The bank's loan
portfolios grew 16% for the year to Euro39.2bln (2006: Euro33.8bln) on foot of gross
new lending of Euro12.4bln. While gross new lending was down 3% on the exceptional
levels achieved in 2006 (Euro12.9bln) this decrease reflected the general slowing
of the Irish housing market. Gross new residential mortgage lending in Ireland
contracted by 19% to Euro7.0bln, (2006: Euro8.7bln) in line with the market generally.
The slowdown in Irish residential mortgage new lending was partially offset by
growth in Capital Home Loans Ltd, the group's UK mortgage provider, where new
issues were ahead 51% to Stg�2.2bln. In addition consumer finance new lending
grew strongly, up 15% to Euro1.3bln reflecting growth in market share on foot of
increased distribution reach in the new car finance market. In addition to its
lending activities the bank continued to attract large numbers of new customers
through its current account offering with 69,000 new current accounts being
opened during the year.
The strong growth in the bank's credit portfolios combined with a net interest
margin of 117bps (compared to 119bps in 2006) resulted in 17% growth in net
interest income to Euro500m (2006: Euro429m). This was an excellent performance given
the difficult conditions which pertained in the global credit markets in the
second half of the year.
Notwithstanding successive increases in Euro interest rates and the slowdown in
the Irish housing market credit quality across all of the bank's loan portfolios
continues to be excellent with arrears on all credit lines being at record low
levels. Within the core Irish residential mortgage portfolio arrears as a
percentage of the total portfolio were 0.11% at the year end 2007 compared to
0.12% at the year end 2006 with the number of arrears decreasing by 6% over the
course of the year notwithstanding the growth in the portfolio.
While credit quality is at an all time high, in the last quarter of the year, in
common with many other banks, permanent tsb was impacted by the fraudulent
actions of a rogue solicitor resulting in a specific charge of Euro11.7m being made
in respect of loans connected with this fraud. Although the bank is vigorously
pursuing recovery of the debts, a full write down of all amounts due has been
taken in 2007. Excluding this exceptional provision the increase in the
impairment charge of 14% is in line with the underlying growth in the loan book.
Total pre-tax profits in the bank grew 8% to Euro219m (2006: Euro202m). However
excluding the Euro11.7m once off provision in respect of the solicitor case
underlying pre-tax profits grew 14%, a very satisfactory outcome.
Associated Business
The group has a 30% interest in Allianz (Ireland) Limited, a general insurance
provider which operates exclusively in Ireland. The majority shareholder in the
operation is Allianz. For the year ended 2007 the group's share of the post tax
earnings of this operation was Euro31m compared to Euro56m in 2006. The 2006 outcome
was positively impacted by the release of prior year claims reserves while the
2007 underwriting profits reduced as a consequence of lower net written premiums
reflecting softer premium rates due to competition in the market.
Capital
In late 2007 the group achieved the internal ratings based approach (IRB)
accreditation under Basel 2. This was a significant achievement representing the
culmination of a substantial investment in the groups' risk management systems
and will pave the way for significant reductions in required capital in the bank
over time.
The group's capital position remained strong at 31 December 2007 with the bank
Tier 1 ratios at 10.4% and the solvency margin in Irish Life Assurance plc, the
group's principal life business, covered 1.6 times by available assets. In
addition the group's capital structure remains relatively under-geared with no
hybrid Tier 1 equity in issue and Euro1.2bln of Tier 2. This relatively low level
of gearing, and the capital capacity and flexibility which it provides, combined
with the free cash generation of the life company and the bank and the capital
releases anticipated under Basel 2 leaves the group well positioned from a
capital perspective going forward.
Outlook
While the medium term outlook for the group's core banking and life businesses
continues to be very favourable, driven by the supportive underlying
demographics in Ireland and the strong fundamentals of the Irish economy, 2008
will present some significant challenges.
In the life business the downturn in markets experienced in the last quarter of
2007 has dampened investor appetite for equity and property based products.
However we expect a reduction in demand on this product line to be more than
offset by growth in other product areas, particularly pensions, and overall our
expectations are for mid single digit percent sales growth in the life company
in 2008.
The slowdown in Irish residential mortgage lending witnessed in 2007 is expected
to carry over into 2008. However, we do see prices stabilizing in the short
term as supply contracts and demand improves in response to reduced prices.
Taken together with tighter credit conditions the pace of loan growth in the
bank is expected to moderate to mid to high single digit percent in 2008.
In our pre-close period trading statement in December we guided that the outcome
for group earnings in 2008 could be in the range of flat or slightly ahead on
the 2007 result to high single digit negative depending on which of the
alternative credit market scenarios prevailed in 2008.
Revisiting that guidance two months on and taking into account the current
market conditions, where the cost of short term money has eased since year end,
and also the actions which we have already taken, we are now guiding an improved
outcome with group operating profit for 2008 expected at the upper end of that
range and marginally ahead of 2007. This guidance reflects our current best
estimate of the trends in volume growth and margins for 2008.
FINANCIAL PERFORMANCE REVIEW
Consolidated Income Statement - EV Basis
For the year ended 31 December 2007
2007 2006
Eurom Eurom
Operating profit on continuing operations
Insurance and investment business 346 274
Banking 219 202
Other (4) (2)
561 474
Share of associate / joint venture 29 55
Operating profit before tax on continuing operations 590 529
Short-term investment fluctuations (114) 101
Effect of economic assumption changes (14) (38)
Other non operational costs (3) -
Profit on sale of property 1 -
Profit before tax 460 592
Taxation (52) (28)
Profit after tax 408 564
Minority interest (4) (3)
Profit after tax attributable to equity holders 404 561
Group Income Statement
Total profit after tax attributable to equity holders was Euro404m compared to
Euro561m in 2006. This outcome reflects strong growth in pre-tax operating profit
- which was ahead 12% to Euro590m (2006: Euro529m) - but which was offset by the
impact of weaker investment markets and rising interest rates on the embedded
value of the group's life business which resulted in negative short term
investment fluctuations of Euro114m, compared to a positive Euro101m in 2006, and
economic assumption changes which were a negative Euro14m (2006: negative Euro38m).
At the operating level pre-tax profits of the group's core banking and life
assurance business grew 18% to Euro561m from Euro474m in 2006. This principally
reflects growth of 26% in the life business embedded value profits to Euro346m
(2006: Euro274m) - driven by strong growth in the new business contribution and the
expected return on the existing business - and 8% growth in the banking business
to Euro219m (2006: Euro202m). The outturn in the banking business was depressed by a
once off charge of Euro11.7m in respect of exposures created by the fraudulent
activities of a rogue solicitor. Excluding this once-off specific provision the
underlying level of growth in the bank was 14% reflecting good growth in net
interest income driven by balance sheet growth.
The post tax return from the group's interest in Allianz (Ireland) Limited was
Euro31m compared to Euro56m in 2006. This reduction in profits principally reflects a
lower underwriting result due to further softening of premium rates in the
market in 2007 combined with the fact that the 2006 outcome benefited from
significant prior year claims reserve releases.
Short term investment fluctuations reflect the impact of actual against assumed
investment returns on the embedded value of the group's life operations. The
outcome was a negative Euro114m in 2007 compared to a positive Euro101m in 2006 and
reflects the significant down turn in investment markets in the second half of
2007.
In 2007 changes in the economic assumptions used to calculate the life assurance
embedded value resulted in a negative Euro14m outcome (2006: negative Euro38m). This
principally relates to the impact of an increase in the risk discount rate used
to compute the embedded value from 7.4% to 7.8% reflecting increases in medium
term euro bond rates. In 2006 changes in the risk discount rate from 6.5% to
7.4% had a Euro38m negative impact on the embedded value.
The taxation charge of Euro52m is comprised of two elements, a Euro54m (2006: Euro42m)
charge on insurance and banking operating profits and a credit of Euro2m (2006:
Euro14m) attributable to investment fluctuations and economic assumption changes in
the life embedded value. The effective tax rate of 10% on (combined insurance
and banking) operating profit is lower than expected benefiting from the release
of some Euro10m of life tax reserves.
Asset Portfolios
Movements in asset values, currencies and interest rates impact the embedded
value of the group's life business and the mark to market valuation of the
bank's liquidity / investment portfolios.
Life Asset Portfolio
The embedded value of the group's life operations is exposed to market movements
in assets currencies and interest rates due to the fact that the embedded value
is calculated using assumptions regarding future investment returns and interest
rates. To the extent that actual returns and interest rates differ from the
assumptions used variances will arise which may be positive or negative.
As a result of the sharp fall in investment markets in the second half of 2007
the actual returns on investment markets fell significantly short of the
embedded value assumptions resulting in a negative investment variance on short
term investment fluctuations of Euro114m in 2007 compared to a positive Euro101m
experienced in 2006. The bulk of this variance represents the present value of
the reduction of future fund management fee income from unit linked funds as a
consequence of the fall in unit prices.
In addition the increase in medium term euro interest rates has led to an
increase in the risk discount rate used to compute the embedded value from 7.4%
to 7.8%. This is the principal reason behind the negative economic variance of
Euro14m recorded in 2007 which compares to a negative Euro38m in 2006 when the risk
discount rate increased to 7.4% from 6.5% as a consequence of rising medium term
euro bond rates.
The sensitivity of the embedded value to changes in markets is set out in detail
in note 14. In summary a 1% increase in interest rates reduces the embedded
value by Euro28m (1.4%) of the total embedded value, while a 1% decrease in rates
increases the embedded value by Euro32m (1.6%). A 10% reduction in equity and
property values would reduce the embedded value by Euro103m (5%).
The group's life business is a relatively low risk operation. With regard to the
unit linked portfolio of Euro27.6bln, which represents 94% (net of reinsurance) of
the life company liabilities, the investment risk in this portfolio is primarily
borne by the policyholders.
In the non-linked or traditional insurance portfolio the group's policy is to
match liability flows with high quality assets, principally sovereign bonds. The
average duration of the non-linked liabilities is 8.6 years while the average
duration of the assets matching these liabilities is 8.5 years.
The assets held in the fund total Euro1.7bln and the credit profile of the
portfolio is as follows:-
%
AAA 70
AA 23
A 7
100
Given the close duration match, any mark to market adjustments in the portfolio
due to changes in yield curves are generally matched by equal and opposite
movements in the value of the liabilities. In the year ended 2007 one asset held
in the portfolio valued at Euro38m was subject to an impairment write-down of Euro8m.
Excluding this item there were no other impairment write-downs in the portfolio.
The life company's shareholder funds are principally invested in cash and owner
occupied property. A full analysis of the life shareholder fund investments is
set out in Note 5.
Bank Asset Portfolio
The bank's liquidity portfolio of Euro4.2bln is principally held in sovereign bonds
(59%) highly rated bank FRN's (28%) and prime (non-US) euro denominated RMBS
(13%). There are no sub-prime assets held within the portfolio. The portfolio
is rated 73% AAA, 20% AA and 7% A. The mark to market adjustment to this
portfolio at year end was Euro19m gross which, in accordance with the IAS39
accounting treatment applied to "available for sale" assets, was taken to
reserves.
At 31 December 2007, the group held a Euro2.5bln debt securities portfolio
designated as being "Held to Maturity". This portfolio formed part of the
group's holdings with respect to liquidity management. At the year end the
group had the ability and intention to hold the portfolio to maturity. However,
in February 2008, increased market volatility presented the group with an
opportunity to realise a gain of Euro29m on the sale of the portfolio. The group
availed of this opportunity and disposed of the entire portfolio. The gain will
be recognised in the 2008 results.
Funding
The regulatory regime under which the bank operates requires it to have
sufficient liquidity available to cover 100% of outflows over the next eight
days and 90% of outflows over the next 30 days. Throughout the year the group
operated comfortably within these limits.
The diversification and duration profile of the group's funding sources leave it
in a strong position in the current credit environment. At the year end 64% of
the bank's funding base comprised customer accounts and long-term debt. In
addition the high quality and low risk nature of the group's lending activities
- overwhelmingly prime residential mortgages - provide a pool of assets against
which funding can be drawn through the ECB repo facility. At 31 December 2007
available ECB facilities totalled Euro17.2bln, (Euro20bln nominal collateralised asset
pool), against which drawings of Euro5.3bln had been made. The balance of Euro11.9bln,
which is available together with the other eligible assets which have not yet
been collateralised, provide a secure underpinning of the groups' funding
requirements for 2008.
In the latter part of 2007 in response to the increased cost of wholesale
funding, the group increased mortgage and other credit interest rates on
selected products in order to protect margins against increased wholesale
funding rates. This re-pricing included a 9bps increase in the bank's Standard
Variable Rate.
Capital & Dividend
The group's policy is to manage the capital base of all regulated entities
within the group to an internal target level of capital which provides a margin
of comfort above the regulatory minimum with any excess capital above this
target level being remitted to IL&P.
Life Capital
Other than IL&P the principal regulated entity within the group is Irish Life
Assurance Limited ("ILA") which operates to an internal target solvency cover of
1.6 times the minimum required.
The capital position of ILA at 31 December 2007 is summarised below.
2007 2006
Eurom Eurom
Minimum capital 386 372
Regulatory capital
Net worth 559 724
Perpetual debt 193 -
Other assets available 41 44
793 768
Proposed dividend for Life operation (65) -
Inadmissible assets (106) (99)
622 669
Solvency cover (times) 1.6 1.8
In the first half of 2007 the group raised Euro200m of Tier 2 debt in the life
company, the proceeds of which were used to fund a Euro246m dividend from the life
entities to the bank. This served to rebalance the group's debt capital between
the life entities and the bank. The 2007 capital flows within the life entities
are set out below:
2007
Eurom
Net worth Dec 2006 747
Capital generated 297
Debt capital issued 200
1244
New business strain (180)
STIFS & economic variance (24)
Other (14)
Bank dividend (246)
Closing capital Dec 2007 780
Net worth Dec 2007 587
Perpetual debt(1) 193
Closing capital Dec 2007 780
It is expected that Euro65m of surplus capital available in Irish Life Assurance at
31 December 2007 will be distributed to the bank in the first half of 2008.
Bank Capital
The following table sets out the regulatory capital position of IL&P, the parent
company of the group, which is a regulated bank, at year end 2007.
2007 2006
Eurom Eurom
Tier 1 capital 4,636 4,449
Tier 1 deductions (2) (1,560) (1,563)
3,076 2,886
Tier 2 capital
Subordinated liabilities 1,247 1,215
Other 182 179
1,429 1,394
Tier 1 + Tier 2 4,505 4,280
Life company and other deductions (2,072) (2,128)
Total regulatory capital 2,433 2,152
Total risk-weighted assets 23,494 20,636
Risk asset ratio 10.4% 10.4%
It can be seen from the above that the group's capital ratios remained strong at
31 December 2007 with the Tier 1 and total capital ratio of 10.4% compared to a
regulatory minimum of 9.5%. The capital structure is relatively under-geared
with no Tier 1 hybrid capital in the structure and the Tier 2 capital being only
45% of that permitted under the regulations.
The movement in the bank's regulatory capital in 2007 is summarised below:
2007
Eurom
Opening capital Dec 2006 2,152
Net earnings (3) 171
Dividends received 297
Shareholder dividend (194)
Other 7
Closing Dec 2007 2,433
Basel 2
From 1 January 2008 the minimum regulatory capital requirement of the group's
banking operations will be calculated in accordance with the provisions of Basel
2 as implemented by the European Capital Adequacy Directive and the Irish
Financial Regulator. The objective of Basel 2 is to more closely align bank
regulatory capital with the economic capital required to support the risks being
undertaken. The capital required to cover credit, operational and market risks
are required to be explicitly measured under the Basel 2 methodology.
In implementing Basel 2 the group has adopted the Internal Ratings Based ("IRB")
approach to credit risk and was awarded IRB accreditation in late 2007. Under
the IRB approach the bank uses internally generated risk models to compute the
capital required to support credit risk by calculating the probability of
default and the loss given default in all of its various portfolio exposures.
The models and calculations are conservatively based.
With regard to operational risk the group has adopted the standardised approach
under which all operational risks are methodically identified together with the
probability and magnitude of any loss which might arise from such risks taking
into account any mitigating factors and controls. Value at risk, an industry
wide standard, is the methodology which the group has adopted in regard to the
measurement of capital required to support market risk.
Given the nature of the group's banking business, which is retail focused and
where the risk assets are predominately residential mortgages, it is expected
that the level of capital required under Basel 2 will ultimately be
significantly less than that required under Basel 1. However the exact quantum
of the release of capital which might be expected is difficult to determine at
this point in time and will be driven, in particular, in the short term by the
interpretation and manner in which the Irish Financial Regulator will seek to
implement the new Accord.
What is clear however is that the timing of the expected releases of capital
under Basel 2 has been delayed with the Irish Financial Regulator limiting
releases of capital under Basel 2 in 2008 to 5% compared to 10% allowed for in
the Accord. Accordingly the group expects the implementation of Basel 2 to
result in a reduction in the required level of capital within its banking
business by Euro130m in 2008. We expect the quantum and timing of further releases
to be clarified during 2008.
Dividend
The directors have declared a final dividend of 52.5 cent per share. Subject to
shareholder approval the dividend will be paid on 28 May 2008 to shareholders on
the register as at 25 April 2008. The ex-dividend date is 23 April 2008. The
final dividend will bring the total dividend for the year to 75.0 cent, an
increase of 10.3% on the 2006 total dividend of 68.0 cent. The dividend is
covered 2.0 times by total profit (2.6 times at the operating level) and
represents an approximate yield of 7.2% on the basis of the share price at the
end of February 2008.
DIVISIONAL PERFORMANCE REVIEW
Insurance and Investment Operating Review
2007 was an extremely buoyant year for life and investment business in Ireland,
and all of the group's divisions - Retail, Corporate Business and ILIM -
performed extremely well.
In the Retail Life division sales growth of 31% to Euro414m (2006: Euro317m) led to an
increase in market share to in excess of 25% with all distribution channels and
product lines performing well. In the Corporate Business division sales
increased 33% and this division continues to be the dominant force in the
corporate life and pensions arena. Driven by excellent fund management
performance in both their passive and active funds ILIM had a record sales year
with gross investment inflows of Euro3.4bln a 79% increase on the funds inflow of
Euro1.9bln in 2006.
APE(4) sales in the group's principal life businesses are summarised below:
2007 2006
Eurom Eurom %
Retail Life 414 317 31
Corporate Life 220 165 33
Irish Life International 39 34 15
673 516 30
Investment (ILIM) 341 190 79
1,014 706 44
Retail Life
The retail life assurance market was extremely buoyant in 2007 and sales in the
Retail Life division increased 31% to Euro414m (2006: Euro317m). On a PVNBP basis
sales were ahead 28% to Euro2.7bln (2006: Euro2.1bln). The principal drivers of the
sales performance were pensions (up 46%) and investments (up 23%). Both lines of
business benefited from the group's excellent investment performance and track
record, with pensions also benefiting from the introduction of a new self
administered pension product and lump sum investments benefiting from maturing
SSIA accounts in the first half of the year. Growth in protection sales were
more subdued (up 2%) reflecting the slowdown in the residential mortgage market
during the year.
Corporate Life
2007 saw continued strong growth in the Irish economy with increasing employment
and continued good growth in salaries and wages. This provided an excellent
economic backdrop for the group's Corporate Life business with sales growing 33%
to Euro220m (2006: Euro165m). On a PVNBP basis sales were ahead 36% to Euro1.4bln (2006:
Euro1.0bln). The sales performance was particularly driven by a high level of new
defined contribution schemes (up 30%) and annuity sales (up 65%) which benefited
from a large number of annuity purchases to buy out defined benefit pension
scheme liabilities.
Investment Management
The group's investment management performance continued to be excellent in 2007
on both the active and passive side of the business. This led to record levels
of fund inflows with gross new inflows of Euro3.4bln (including Euro645m arising from
the acquisition of the EBS Summit Funds) compared to Euro1.9bln in 2006. Reflecting
the strong levels of gross new inflows group funds under management increased
11% to Euro35.4bln (2006: Euro31.8bln) notwithstanding the falls in global equity
markets in the second half of the year.
Insurance and Investment Financial Review
The operating results of the group's insurance and investment business,
presented on an EV basis, for the year ended 31 December 2007 are set out below.
2007 2006
Eurom Eurom
New business contribution 154 128
Contribution from in-force business
Expected return
In-force 118 89
Net worth 29 26
Experience variances 10 14
Assumption changes 35 17
192 146
Operating profit before tax 346 274
The operating profit before tax for the year ended 2007 was Euro346m, a 26% uplift
on 2006 (Euro274m). The key drivers of this performance were strong growth in the
new business contribution, which was ahead 20% to Euro154m (2006: Euro128m), and good
growth in the expected in-force return which grew 33% to Euro118m from Euro89m in 2006
reflecting growth in the book.
New Business Contribution & Margins
The new business contribution increased 20% to Euro154m from Euro128m in 2006. This
outcome was driven by a 30% increase in life new business sales (excluding ILIM)
to Euro673m on an APE basis (compared to Euro516m in 2006) combined with a strong new
business margin performance. On a PVNBP basis sales, excluding ILIM, were ahead
29% to Euro4.5bln (2006: Euro3.5bln).
Overall new business margins, excluding ILIM were 19.2%, compared to 20.6%
reported in 2006. Including ILIM, new business margins were 15.3% compared to
18.1% in 2006 made up as follows:
2007 2006
% %
Life 19.2 20.6
Investment (ILIM) 7.4 11.4
15.3 18.1
The continued strength in life margins (19.2%) in 2007 reflects the high volume
of new business sales. The reduction in margins from the exceptional levels
achieved in 2006 (20.6%) reflects a change in the product mix with a higher
proportion of single premium investment sales being achieved in 2007 and a
relatively lower proportion of higher margin protection business, combined with
the impact of the increase in the opening risk discount rate from 6.5% to 7.4%
which had a negative impact on 2007 impacted margins. The reduction in margins
in ILIM reflect a larger proportion of high ticket low margin sales within the
mix in 2007.
When calculated on the basis of present value of new business premiums ("PVNBP")
new business margins, including ILIM, were 2.0% in 2007 (2006: 2.4%).
The internal rate of return achieved on new business sales, excluding ILIM, was
13.3% which compares to 12.1% achieved in 2006. The average payback period(5)
across the group's life product set was 6 years.
In-force Business
The expected in-force return represents the unwind of the risk discount rate and
the growth in these profits reflect very strong underlying growth in the
portfolio.
The expected return on the net worth, which relates to earnings on shareholder
assets calculated by reference to the assumed long term rate of return on
property and equities and the actual return on short term cash, increased to
Euro29m from Euro26m mainly due to a higher yield achieved on cash assets as euro
rates increased.
Experience variances continue to be positive at Euro10m compared to Euro14m in 2006
with particularly strong risk experience achieved in both mortality and
morbidity. Assumption changes, largely reflecting continued unit cost
productivity gains and good risk experience, were a positive Euro35m compared to
Euro17m in 2006. Overall the assumptions underlying the embedded value continue to
be prudent.
Costs
Costs within the life company continue to be tightly managed. Overall costs grew
7% to Euro225m in 2007 from Euro210m with the principal driver of this growth being
underlying salary inflation.
Banking Operating Review
Notwithstanding the slow down in the Irish housing market in 2007 and the impact
of credit market turbulence the group's banking business performed extremely
well with underlying pre-tax profits growing 14% before the exceptional
provision of Euro11.7m in respect of solicitor cases previously noted.
Although gross new lending declined by 3% to Euro12.4bln from the Euro12.9bln achieved
in 2006, principally due to a reduction of 19% in new Irish residential
mortgages, total asset balances grew 16% to Euro39.2bln (2006: Euro33.8bln).
The slowdown in Irish residential mortgage demand was broadly in line with the
overall market. A key feature of the bank's performance in 2007 was the
continued success of its customer acquisition strategy with the acquisition of
69,000 new current account holders during the year following on from the 68,000
new current account holders acquired in 2006.
Lending Growth
Total loans and advances to customers increased 16% to Euro39.2bln (2006: Euro33.8bln)
which represents a very strong performance given the economic backdrop.
The growth in the balances over principal business lines was as follows:
31 Dec 31 Dec Growth
2007 2006
Eurobln Eurobln %
Mortgage lending ROI * 26.3 23.1 14
Consumer finance 2.3 2.0 15
Commercial lending 2.3 1.9 24
30.9 27.0 15
Mortgage lending - UK (�Stg) * 6.1 4.6 31
Total lending - Eurom 39.2 33.8 16
After ten years of spectacular growth the Irish housing market slowed in 2007.
Overall a total of over 78,000 new units were completed in 2007, a 16.5%
reduction on the record levels achieved in 2006, while average house prices came
back some 6% - 7% in the calendar year. Reflecting this softening in the
market, gross new Irish mortgages issued by the group at Euro7.0bln showed a
reduction of 19% on the record levels of Euro8.7bln issued in 2006.
Against this backdrop Irish residential mortgages outstanding increased 14% to
Euro26.3bln compared to Euro23.1bln at year end 2006 with part of the increase in the
portfolio being due to a reduction in the level of early redemption activity
(notwithstanding some extremely aggressive switcher offerings from competitors),
reflecting management actions in this area.
In the UK the buy to let sector, in which the group's centralised mortgage
lender Capital Home Loans principally operates, was extremely buoyant with new
mortgages issued growing 51% to Stg�2.2bln from Stg�1.5bln in 2006. Reflecting
the strong growth in new issues the UK mortgage portfolio increased 31% to
Stg�6.1bln from Stg�4.6bln in 2006.
New consumer finance loans issued increased 15% to Euro1.3bln from Euro1.2bln in 2006
as a result of market share gains on the back of increased distribution reach in
the new car finance arena. The portfolio grew 15% to Euro2.3bln (2006: Euro2.0bln).
New commercial lending of Euro726m was in line with 2006 of Euro753m and reflects a
slowdown in opportunities in this sector in the latter part of 2007 particularly
in relation to geared property investment transactions. The portfolio grew 24%
in 2007 to Euro2.3bln (2006: Euro1.9bln).
Customer Acquisition
Customer account balances at 31 December 2007 totalled Euro13.6bln (2006:
Euro13.6bln). Throughout 2007 the bank continued to maintain its focus on the
acquisition of new current accounts and the strategy in this area continued to
be extremely successful with 69,000 new accounts opened during the year,
following on from the 68,000 new accounts opened in the year ended 2006.
Banking Financial Review
The pre-tax results of the group's banking business for the year ended 31
December 2007 are set out below:
2007 2006
Eurom Eurom
Net interest income 500 429
Other income 44 48
Trading income 5 12
549 489
Administrative expenses (302) (273)
Impairment provisions (28) (14)
Operating profit before tax 219 202
Overall pre-tax profits in the group's banking business increased 8% to Euro219m
(2006: Euro202m). As noted previously the 2007 outcome includes a specific
provision of Euro11.7m in respect of the fraudulent activities of a rogue solicitor
and, excluding this once off item, underlying banking profits were ahead 14%.
Net Interest Income
Net interest income increased 17% to Euro500m from Euro429m due to strong underlying
growth in loans and advances to customers which were ahead 16% to Euro39.2bln
(2006: Euro33.8bln). This balance sheet growth helped offset the impact of a
reduction in the net interest margin to 1.17% from 1.19% in 2006. The key
movements in the net interest margin in 2007 are set out below:
BPS
Margin 2006 119
Funding Mix & Basis Risk (5)
Asset Re-pricing (6)
Liquidity 4
Liability Margins 4
Treasury 1
Margin 2007 117
In addition to the ongoing impact of increasing wholesale funding levels in the
balance sheet, which has been a feature of the business over the past number of
years, the margin was negatively impacted by basis risk in the Irish mortgage
portfolio as interest rates increased during the year. This basis risk impact
was magnified in the second half of the year due to the increased cost of
wholesale funding as a result of the credit market crisis. The margin was
further dampened by the decision in late 2006 to reduce the back book margins in
certain products in response to competitor actions. These negative margin
impacts were partially offset by the reduction of the quantum of liquid assets
which the bank is required to hold to meet regulatory requirements in the first
half of 2007 following the introduction of a new cash flow based liquidity
protocol and, by improved liability spreads as euro interest rates increased.
Other Income
Other income of Euro44m compares to Euro48m earned in 2006. The reduction of Euro4m
principally reflects growth in fees and commissions payable due to the costs of
internal securitisation transactions designed to generate eligible collateral
for the ECB repo facility. Given the nature of these transactions it was decided
to write these costs off as incurred rather than amortising them over the life
of transactions as permitted under the accounting standards.
Other income excludes the contribution from Bancassurance sales generated
through the bank which are included in the pre-tax profit reported in the
group's life assurance activities. Sales of life and pensions products through
the bank in 2007 were Euro105m, up from Euro88m in 2006, a 19% increase. The pre-tax
profit achieved on the Bancassurance book of life business was Euro64m in 2007 a
16% on the 2006 outturn of Euro56m.
Trading income in 2006 was a positive Euro5m compared to Euro12m which arose in 2006.
The trading result in both years principally arose due to the group pre-hedging
against basis risk in its fixed note mortgage portfolio. Under IFRS, the outcome
of this pre-funding is reflected in trading income rather than net interest
income.
Costs
Administrative costs increased 11% in 2007 to Euro302m (2006: Euro273m). This includes
short term increases in the staffing levels designed to maximise the SSIA
maturity opportunity which presented itself in the first half of 2007 and the
costs associated with increased distribution within Capital Home Loans.
Excluding these once off costs the underlying level of cost growth was in the
order of 7% reflecting salary inflation. Cost containment continues to be a
significant priority of the bank.
Credit Quality & Provisions
The charge in respect of impairment provisions of Euro28m includes a specific
provision of Euro11.7m against exposures created by the fraudulent actions of a
rogue solicitor. Outside of this charge the 14% growth in impairment provisions
is in line with the underlying growth in the loan portfolios.
Credit quality across all portfolios remains excellent particularly in the Irish
residential mortgage portfolio where, despite the slowdown in the Irish housing
market in 2007 and successive increases in Euro interest rates in 2006 and 2007,
arrears levels at 31 December 2007 were at an historic low. Within the Irish
residential mortgage book total arrears as a percentage of the portfolio were
11bps, compared to 12bps at the year end 2006 and the total number of arrears,
notwithstanding the underlying growth in the portfolio, decreased by 6%. In CHL
arrears also continued to be low with arrears as a percentage of the portfolio
at 4bps (2006: 4bps).
Funding and Liquidity
During the first half of 2007 the Irish Financial Regulator changed the
regulations concerning the liquidity requirements of the Irish banking system.
Previously Irish banks were required to meet a minimum 25% liquidity ratio.
Under the new protocol required liquidity holdings are based upon various cash
flow stress tests. The key limits applied are that an institution must have
sufficient available liquidity to cover 100% of outflows over the next 8 days
and 90% of outflows over the next month.
The introduction of this new protocol was very opportune given the liquidity and
credit crisis which developed in the second half of 2007. The group has operated
within the permitted limits.
The group's funding position is supported by its credit ratings. The group is
rated "A+" by Standard & Poors. In May 2007 Moodys Investor Service improved the
group's credit rating from A to AA.
The group has always followed a policy of diversification of its funding sources
and this diversification and the duration profile of the funding leave the group
in a strong position in the current credit environment. At 31 December 2007 64%
of the bank's total funding comprised customer accounts and term debt.
The group's total funding, is well diversified across markets as shown below
%
Customer Accounts 34
Long-term Debt 23
Securitisation 7
64
ECB Repo 12
US Commercial Paper 7
Deposits by Banks - Secured 6
Euro Commercial Paper 5
US X Notes 3
Deposits by Banks - Unsecured 3
100
In addition the group can utilise its mortgage assets to provide collateral
against which funding can be drawn through to ECB Repo facility. This is a
facility which is made available by the ECB to all European Banks on a tender
basis. At 31 December 2007 the group had committed ECB facilities available to
it of Euro17.2bln, (Euro20bln nominal collateralised asset pool), against which it had
drawn Euro5.3bln.
The undrawn balance of Euro11.9bln, which is available together with other eligible
assets which are available but have not yet been collateralised, provide a
secure underpinning of the group's funding requirements for 2008.
In the latter part of 2007 in order to protect margins against the increased
cost of wholesale funding the group increased mortgage and other credit interest
rates on new business by 9 -25bps on selected products. This re-pricing included
a 9bps increase in the Standard Variable Rate attributable to the back book of
mortgages.
COMMENTARY ON STATUTORY RESULTS
The statutory results for the year ended 31 December 2007 (presented under
International Financial Accounting Standards) are set out in detail on pages 42
to 53 and summarised below.
2007 2006
Eurom Eurom
Net interest income 480 409
Other non interest income (49) (7)
Premiums on insurance contracts 718 584
Reinsurance share of premiums on insurance contracts (311) (204)
Fees from investment contracts 284 247
Change in value of in-force 54 117
Investment return (25) 2,813
Profit on sale of property & equipment 1 -
Operating income 1,152 3,959
Claims on insurance contracts - net of reinsurance (322) (293)
Change in insurance contract liabilities - net of reinsurance 177 (26)
Change to investment contract liabilities 98 (2,672)
Administration expenses (541) (497)
Provision for impairment losses and receivables (28) (14)
Other (88) (71)
Operating expenses (704) (3,573)
Operating profit 448 386
Share of associated profits / joint venture 29 55
Profit before tax 477 441
Taxation (25) (80)
452 361
The EV basis results employ the embedded value methodology for all of the
group's insurance and investment business. The statutory results use embedded
value for insurance contracts only with investment contracts being accounted
under IFRS. Banking and other businesses are accounted for on the same basis in
both statutory and EV results.
Total statutory basis profits after tax increased 25% to Euro452m (2006: Euro361m).
The profit before tax at Euro477m was 8% ahead of 2006 (Euro441m).
Operating income at Euro1,152m was significantly lower than 2006 (Euro3,959m)
principally due to a reduction in the investment return which was a negative
Euro25m in 2007 compared to a positive Euro2,813m in 2006. This reduction principally
reflects the impact of lower investment market returns on policyholder funds.
Operating expenses of Euro704m were also significantly lower than 2006 (Euro3,573)
principally due to a reduction in the change in insurance and investment
liabilities again due to the reduction in investment return on policyholder
funds.
The 2007 outcome also includes gains of Euro73m in respect of the fall in the value
of Irish Life & Permanent shares held for the benefit of policyholders which
reduced policyholder liabilities but under IFRS the corresponding fall in the
value of the assets is not recognised. In 2006 this item resulted in a charge of
Euro28m as there was an increase in the value of the shares in the year.
Net interest income increased 17% principally reflecting growth of 16% to
Euro39.2bln (2006: Euro33.8bln) in the bank's loan balances outstanding.
The group enjoyed significant growth in new business on both insurance and
investment contracts which is reflected in the 23% growth in premiums on
insurance contract from Euro584m in 2006 to Euro718m in 2007 and 15% growth in fees
from investment contracts to Euro284m (2006: Euro247m). Reflecting the strong growth
in new business the net new business contribution was a negative Euro1m in the
reported 2007 statutory profits, compared to a negative contribution of Euro8m in
2006, as under IFRS the fixed cost of acquiring investment contract new business
is recognised in the year of acquisition whilst profit flows are recognised over
the life of the contract.
The change in insurance contract liabilities shows a net reduction in
liabilities of Euro177m compared to an increase of Euro26m in 2006. This is mainly due
to reductions in insurance linked liabilities arising from negative market moves
in 2007 compared to positive moves in 2006. The change in investment contract
liabilities has decreased from Euro2,672m negative in 2006 to Euro98m positive mainly
due to investment market falls in 2007. The change in these liabilities are
reflected in the negative investment return of Euro25m included in operating income
in 2007 compared to a positive return of Euro2,813m in 2006.
Administrative expenses increased 9% to Euro541m in 2007 from Euro497m in 2006. This
principally reflects the increase in costs associated with the buoyant new
business issued.
The post-tax profits achieved in Allianz, (a general insurance business in which
the group has a 30% interest) in 2007, were Euro31m, compared to Euro56m in 2006 where
lower underwriting profits were offset by the profit from the sale of the
business's head office and higher investment returns.
Under IFRS the effective tax rate is distorted by the inclusion of additional
tax paid by policyholders. The tax charge in 2007 was Euro25m compared to Euro80m in
2006 largely reflecting the investment returns achieved by policyholders in both
years.
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 6788099 087 241 7373 ray@mrpakinman.ie
Embedded Value Basis
Basis of Preparation - EV Basis financial information
Earnings generated by the group's life assurance operations are prepared in
accordance with the European Embedded Value (EEV) Principles issued in May 2004
(with additional guidance on EEV disclosures issued in October 2005) by the
European Chief Financial Officers' Forum. For businesses other than life
assurance the results have been prepared based on the recognition and
measurement principles of IFRS issued by the IASB and adopted by the EU which
were effective at 31 December 2007.
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 as a whole. 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 statutory financial information treats tax deducted from
policyholder funds as an income item while the EV basis financial information
show these deductions as a tax item. The own share adjustment in EV basis
partially reverses the mis-match which arises under the IFRS statutory financial
information where own shares held on behalf of policyholders are required to be
marked-to-market in policyholder liabilities but the matching assets are not
permitted to be marked-to-market. The EV basis restates the policyholder
liability relating to own shares to the book cost of those shares.
For all business other than "covered business", the EV financial information
incorporates the same values and earnings included in the statutory financial
information, determined using the IFRS bases. The statutory financial
information brings any change to the value of owner occupied property held in
covered business through the SORIE, and allows for a depreciation charge in the
income statement. The EV financial information shows any change in the value of
owner occupied property for covered business in the income statement. The EV
financial information reclassifies and summarises the information included in
the statutory financial information.
The Directors acknowledge their responsibility for the preparation of the
supplementary EV basis information.
The methodology applied to produce the EV basis for the year to 31 December 2007
is consistent with the methodology used to produce the EV information for the
year ended 31 December 2006.
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 and
Irish Life International, and the investment management business written in
Irish Life Investment Managers Limited. In the EV financial information, the
same valuation approach is applied to both insurance and investment contracts
within the covered business.
All business other than the covered business is included in the EV Basis
financial information on the same basis as that applied to the business in the
statutory financial information.
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 free surplus is shown net of the
accounting value of the subordinated debt raised in the life assurance business
during 2007.
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 year. 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 year 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 year 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 13.
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.
The supervisory liabilities allow on a prudent basis for both the intrinsic and
time value of FOGs and the PVIF allows for the run-off of these liabilities. 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) and the
current in the money cost of the FOG (Intrinsic value). The cost 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 13.
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 covered business 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 year is calculated as at the
point of sale using assumptions applicable at the start of the year. This is
then rolled forward to the end of the financial year using the risk discount
rate applicable at the start of the reporting year.
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 year
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
year. The expected investment earnings allows for interest payable on
subordinated debt.
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 year.
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.
Consolidated Income Statement - Embedded Value Basis
Year ended 31 December 2007
Notes 2007 2006
Eurom Eurom
Operating profit
Insurance & investment business 346 274
Banking 219 202
Other (4) (2)
561 474
Share of associate / joint venture 29 55
Operating profit before tax 1 590 529
Short-term investment fluctuations (114) 101
Effect of economic assumption changes (14) (38)
Other non operational costs (3) -
Profit on sale of property 1
Profit before tax 460 592
Taxation 3 (52) (28)
Profit for the year 408 564
Attributable to
Equityholders 404 561
Minority interests in subsidiaries 4 3
408 564
Earnings per share including own shares held for the 11 146.7 204.9
benefit of life assurance policyholders (cent)
Operating earnings per share including own shares held 11 194.6 177.9
for the benefit of life assurance policyholders (cent)
Consolidated Balance Sheet - Embedded Value Basis
As at 31 December 2007
Notes 2007 2006
Eurom Eurom
Assets
Cash and other receivables 391 380
Investments 33,428 29,192
Loans and receivables to banks 2,528 8,429
Loans and receivables to customers 9 39,120 33,732
Interest in associated undertaking / joint venture 147 174
Reinsurance assets 2,036 1,991
Shareholder value of in-force business 1,460 1,354
Net post retirement benefit asset 86 73
Goodwill and intangible assets 255 261
Property and equipment 506 486
Other debtors and prepayments 624 543
Total assets 80,581 76,615
Liabilities
Customer accounts 13,576 13,643
Deposits by banks 10,011 5,526
Debt securities in issue 15,371 18,432
Non-recourse funding 3,090 3,813
Derivative liabilities 817 610
Insurance contract liabilities 4,010 4,073
Investment contract liabilities 27,552 24,728
Outstanding insurance and investment claims 137 124
Net post retirement benefit liability 162 159
Deferred taxation 58 77
Other liabilities and accruals 800 824
Subordinated liabilities 1,599 1,391
Total liabilities 77,183 73,400
Equity
Share capital 88 88
Share premium 126 116
Retained earnings 3,002 2,796
Capital reserves 267 277
Own shares held for the benefit of life assurance (98) (78)
policyholders
Shareholders' equity 5 3,385 3,199
Minority interests 6 13 16
Total equity 3,398 3,215
Total liabilities and equity 80,581 76,615
Consolidated Statement of Recognised Income and Expense
Embedded Value Basis
Year ended 31 December 2007
2007 2006
Eurom Eurom
Revaluation of property and equipment 5 44
Share of associate revaluation reserve - 7
Change in value of available for sale financial assets (19) 2
Deferred tax 2 (8)
Net amount recognised directly in equity (12) 45
Profit for the year 408 564
Total recognised income and expense for the year 396 609
Attributable to
Equityholders 392 605
Minority interests in subsidiaries 4 4
Total recognised income and expense for the year 396 609
Consolidated Reconciliation of Shareholders Equity - Embedded Value Basis
Year ended 31 December 2007
12 months 12 months
to 31 Dec to 31 Dec
2007 2006
Eurom Eurom
Shareholders' equity at 1 January 3,199 2,728
Income and expenses attributable to equityholders 392 605
Movement in cost of own shares held for the benefit of
life assurance policyholders (20) (2)
Dividends paid (194) (173)
Issue of share capital 10 43
Change in share based payment reserves 3 2
Purchase of treasury shares for long term incentive plan (5) (4)
Shareholders' equity at 31 December 3,385 3,199
Notes to the EV basis financial information
Year ended 31 December 2007
1. Operating Profit before tax
2007 2006
Eurom Eurom
Insurance & investment business
New business contribution 154 128
Profit from existing business
- Expected return 118 89
- Experience variances 10 14
- Operating assumption changes 35 17
Expected investment return 29 26
Operating profit before tax 346 274
Banking
Net interest income 500 429
Non-interest income 43 45
Trading income 5 12
548 486
Administrative expenses including depreciation (302) (273)
Impairment losses on loans and receivables (28) (14)
218 199
Investment return 1 3
Operating profit before tax 219 202
Other activities
Non-interest income 68 56
Administrative expenses including depreciation (72) (58)
Operating loss before tax (4) (2)
Share of associate / joint venture 29 55
Total operating profit before tax 590 529
Notes to the EV basis financial information
Year ended 31 December 2007
2. Life and investment new business
Life business
2007 2006
Eurom Eurom
Present value of new business premiums (PVNBP)
Single premium 2,714 2,034
Regular premium 402 312
Regular premium capitalisation factor 4.4 4.6
PVNBP 4,490 3,482
Annual Premium Equivalent (APE) 673 516
New business contribution 129 106
New business margin
PVNBP 2.9% 3.1%
APE 19.2% 20.6%
ILIM
Present value of new business premiums (PVNBP) 3,406 1,901
Annual Premium Equivalent (APE) 341 190
New business contribution 25 22
New business margin
PVNBP 0.7% 1.1%
APE 7.4% 11.4%
Total new business
Present value of new business premiums (PVNBP) 7,896 5,383
Annual Premium Equivalent (APE) 1,014 706
New business contribution 154 128
New business margin
PVNBP 2.0% 2.4%
APE 15.3% 18.1%
Notes to the EV basis financial information
Year ended 31 December 2007
3. Taxation
2007 2006
Eurom Eurom
Life operations
Operating profit (21) (13)
Short term investment fluctuations 5 15
Effect of economic assumption changes (3) (1)
(19) 1
Banking operating profit (33) (30)
Other operations - 1
(52) (28)
4. Analysis of profit after tax
Year to 31 December 2007
Gross Tax Net
Eurom Eurom Eurom
Operating profit
Insurance and investment business 346 (21) 325
Banking 219 (33) 186
Other (4) - (4)
Share of associate / joint venture 29 - 29
590 (54) 536
Short term investment fluctuations (114) 5 (109)
Effect of economic assumption changes (14) (3) (17)
Profit on sale of property 1 - 1
Other non operational costs (3) - (3)
460 (52) 408
Year to 31 December 2006
Gross Tax Net
Eurom Eurom Eurom
Operating profit
Insurance and investment business 274 (13) 261
Banking 202 (30) 172
Other (2) 1 (1)
Share of associate / joint venture 55 - 55
529 (42) 487
Short term investment fluctuations 101 15 116
Effect of economic assumption changes (38) (1) (39)
592 (28) 564
Notes to the EV basis financial information
Year ended 31 December 2007
5. Shareholders' Equity
2007 2006
Eurom Eurom
Insurance and investment business 2,047 2,101
Banking 1,043 775
Other activities 61 36
Associate undertaking / joint venture 147 174
Goodwill 198 207
3,496 3,293
Minority interest (13) (16)
Deduction in respect of own shares held for the (98) (78)
benefit of life assurance policyholders
Shareholders' equity 3,385 3,199
Insurance and investment assets are analysed as follows
2007 2006
Eurom Eurom
Property 152 163
Equities 59 13
Debt securities 44 29
Deposits 460 566
Other assets and liabilities 65 (24)
Subordinated debt (193) -
587 747
Shareholders' value of in-force business 1,460 1,354
2,047 2,101
Notes to the EV basis financial information
Year ended 31 December 2007
5. Shareholders' Equity (continued)
Analysis of movement in shareholders' equity attributable to insurance and investment
business
Year to 31 December 2007
Net Worth VIF Total
Eurom Eurom Eurom
Shareholders' equity as at 1 January 2007 747 1,354 2,101
Operating profit after tax 117 208 325
Short term investment fluctuations (17) (92) (109)
Effect of economic assumption changes (7) (10) (17)
Capital movements (253) - (253)
Shareholders' equity as at 31 December 2007 587 1,460 2,047
Year to 31 December 2006
Net Worth VIF Total
Eurom Eurom Eurom
Shareholders' equity as at 1 January 2006 750 1,103 1,853
Operating profit after tax 40 221 261
Short term investment fluctuations 53 63 116
Effect of economic assumption changes (6) (33) (39)
Capital movements (90) - (90)
Shareholders' equity as at 31 December 2006 747 1,354 2,101
The shareholders' equity as at 31 December 2007 includes required capital of Euro589m (2006:
Euro560m) within the net worth. The shareholders' value of in-force is net of a deduction of
Euro118m (2006: Euro120m) in respect of the cost of maintaining the required capital and net of
a deduction of Euro46m (2006: Euro28m) in respect of the time value of financial option and
guarantee costs.
Notes to the EV basis financial information
Year ended 31 December 2007
5. Shareholders' Equity (continued)
Analysis of insurance and investment operating profit after tax
Year ended 31 December 2007
Net Worth VIF Total
Eurom Eurom Eurom
New business contribution (180) 313 133
Profit from existing business
- Expected return 233 (120) 113
- Experience variances 21 0 21
- Operating assumption changes 18 15 33
- Expected investment return 25 25
-
Operating profit after tax 117 208 325
Year ended 31 December 2006
Net Worth VIF Total
Eurom Eurom Eurom
New business contribution (164) 271 107
Profit from existing business
- Expected return 185 (98) 87
- Experience variances (3) 18 15
- Operating assumption changes (1) 30 29
- Expected investment return 23 - 23
Operating profit after tax 40 221 261
6. Minority Interests 2007 2006
Eurom Eurom
Minority interests in subsidiaries
Opening Balance 16 12
Total recognised income and expense 4 4
Acquisition of minority interest (7)
Closing Balance 13 16
Notes to the EV basis financial information
Year ended 31 December 2007
7. Management expenses
2007 2006
Eurom Eurom
Administrative expenses 541 497
Depreciation 28 28
Software amortisation 20 15
589 540
Analysed as follows:
Banking operations
Operational 302 273
Life and investment operations
Administrative 212 209
Other operations (includes corporate costs) 72 58
Other non operational costs 3 -
589 540
8. Provision for impairment of loans and receivables
2007 2006
Eurom Eurom
At 1 January 57 52
Charged against income statement 28 14
Amounts written off (11) (10)
Reinstatement of amounts previously written off 1 1
At 31 December 75 57
At end of period
Specific 53 36
Collective 22 21
75 57
9. Loans and receivables to customers
2007 2006
Eurom Eurom
Residential mortgage loans 34,618 29,986
Commercial mortgage loans 2,301 1,862
Finance lease, instalment finance and term loans 2,272 1,977
39,191 33,825
Loans & Receivables to Joint Venture 90
Money market funds / repurchase agreements 159 161
Deferred fees, discounts and fair value adjustments 194 171
39,634 34,157
Provision for impairment of loans and receivables (75) (57)
Inter-group loans and receivables (439) (368)
39,120 33,732
Deposits under agreement to repurchase of Euro4m are included above (2006: Nil)
Notes to the EV basis financial information
Year ended 31 December 2007
10. Funds Under Management
2007 2006
Eurom Eurom
Funds managed on behalf of unit-linked policyholders 28,049 25,272
Funds managed on behalf of non-linked policyholders 2,450 2,384
30,499 27,656
Off-balance sheet funds 4,851 4,182
35,350 31,838
11. 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:
2007 2006
Weighted average ordinary shares in issue and ranking
for dividend excluding treasury shares and own shares
held for the benefit of life assurance policyholders 267,439,898 266,144,143
Weighted average ordinary shares held for the benefit
of life assurance policyholders 7,966,600 7,677,528
Weighted average ordinary shares in issue and ranking
for dividend including own shares held for the
benefit of life assurance policyholders 275,406,498 273,821,671
Profit for the year attributable to equityholders Euro404m Euro561m
EPS including own shares held for the benefit of life
assurance policyholders 146.7 cent 204.9 cent
Operating profit (before minority interest) after tax
for the year Euro536m Euro487m
Operating EPS including own shares held for the
benefit of life assurance policyholders 194.6 cent 177.9 cent
Notes to the EV basis financial information
Year ended 31 December 2007
12 Reconciliation of shareholders' equity on Statutory basis to EV basis
2007
Net worth VIF Total
Eurom Eurom Eurom
Statutory shareholders' equity excluding minority interest 1,913 717 2,630
as at 31 December 2007
Change insurance shareholder value of in-force to post tax 93 (93) -
basis
Shareholder value of in-force on investment contracts - 884 884
Changes in presentation of cost of FOGs 45 (45) -
Deferred front end fees on investment contracts 134 - 134
Deferred acquisition costs on investment contracts (248) - (248)
Restatement of investment liabilities to regulatory basis (29) - (29)
Goodwill reclassification on acquisition of minority (5) 5 -
interest
Unwind own shares statutory adjustment 5 - 5
Change in the basis of deferred tax provisioning 17 (8) 9
EV basis shareholders' equity excluding minority interest 1,925 1,460 3,385
as at 31 December 2007
2006
Net worth VIF Total
Eurom Eurom Eurom
Statutory shareholders' equity excluding minority interest 1,722 663 2,385
as at 31 December 2006
Change insurance shareholder value of in-force to post tax 118 (118) -
basis
Shareholder value of in-force on investment contracts - 808 808
Changes in presentation of cost of FOGs 20 (20) -
Deferred front end fees on investment contracts 142 - 142
Deferred acquisition costs on investment contracts (203) - (203)
Restatement of investment liabilities to regulatory basis (39) - (39)
Unwind own shares statutory adjustment 81 - 81
Change in the basis of deferred tax provisioning 5 18 23
Deferred tax on above adjustments 2 - 2
EV basis shareholders' equity excluding minority interest 1,848 1,351 3,199
as at 31 December 2006
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 statutory adjustment partially reverses the mis-match
which arises under IFRS where own shares held on behalf of policyholders are required to be marked-to-market in
policyholder liabilities but the matching assets are not permitted to be marked-to-market.
Notes to the 2007 EV basis financial information
Year ended 31 December 2007
13. 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
2007 2006 2005
Equity risk premium 3.0% 3.0% 3.0%
Property risk premium 2.0% 2.0% 2.0%
Risk free rate 4.4% 3.9% 3.2%
Investment return
- Fixed interest 3.9% - 4.7% 3.5% - 4.6% 2.5% - 3.6%
- Equities 7.4% 6.9% 6.2%
- Property 6.4% 5.9% 5.2%
Risk margin 3.4% 3.5% 3.3%
Risk discount rate 7.8% 7.4% 6.5%
Expense inflation 4.5% 4.1% 3.6%
Other assumptions
The assumed future mortality, morbidity and persistency 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.
EEV 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 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.
The statistics relating to the model used are set out in the following table:
As at 31 December 2007 10-Year Return 20-Year Return
Mean1 StDev2 Mean StDev
European Assets (euro)
Bonds 4.4% 1.9% 4.7% 4.1%
Equities, Property 4.4% 26.3% 4.7% 26.4%
UK Assets (Sterling)
Bonds 4.6% 2.1% 4.5% 4.6%
Equities 4.6% 24.5% 4.5% 24.9%
As at 31 December 2006 10-Year Return 20-Year Return
Mean1 StDev2 Mean StDev
European Assets (euro)
Bonds 4.0% 1.8% 4.1% 4.0%
Equities, Property 4.0% 18.7% 4.1% 19.1%
UK Assets (Sterling)
Bonds 4.8% 2.2% 4.4% 4.7%
Equities 4.8% 17.5% 4.4% 18.7%
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.
14. 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 2007 would result in a 4.4% risk margin and an
8.8% risk discount rate).
- 1% variation in interest rates - a one percentage point increase/decrease
in interest rates including any related changes to risk discount rates,
valuation bases and non linked assets (meaning a 1% increase in interest
rates at end 2007 would increase investment returns by 1% for each year
in the future and increase the risk discount rate to 8.8%). Therefore this
sensitivity includes the effect on the life net worth.
- 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 7.4% to 8.4%).
- 10% decrease in equity/property values - a ten percentage point 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
Effect of Effect of
As issued 1% higher risk 1% lower risk
EV discount rate discount rate
Eurom Eurom Eurom
Embedded value at 31 December 2007 2,047 (121) 138
2007 new business contribution 154 (27) 31
(b) Market Sensitivities - equity/property and fixed
interest yields
Effect of Effect of Effect of
As issued 1% higher 1% Lower 1% higher
EV Fixed Int. Fixed Int. Equity/property
yields yields yields
Eurom Eurom Eurom Eurom
Embedded value at 31 December 2007 2,047 (28) 32 58
2007 new business contribution 154 2 (5) 12
(c) Market Sensitivities - equity/property values
Effect of
10% decrease
As issued in equity/property
EV values
Eurom Eurom
Embedded value at 31 December 2007 2,047 (103)
(d) Operational Assumptions
Effect of Effect of Effect of
10% 10% improvement 5% decrease
decrease in in assumed in mortality
As issued maintenance persistency & morbidity
EV expenses rates Rates*
Eurom Eurom Eurom Eurom
Embedded value at 31 December 2007 2,047 65 23
57
2007 new business contribution 154 11 19 3
*The sensitivity results above for a 5% decrease in mortality and morbidity
rates includes a Euro7m reduction in the embedded value at 31 December 2007 and a
Euro0m effect on the 2007 new business contribution from the effect of a 5%
reduction in the annuity mortality rate.
Statutory Basis
STATUTORY BASIS
Basis of Preparation
The 2007 statutory results financial information on pages 42 to 53 has been
prepared using the accounting policies adopted by the group in its last set of
consolidated financial statements. These statutory results are prepared in
accordance with International Financial Accounting Standards issued by the
International Accounting Standards Board (IASB) as adopted by the EU which apply
at 31 December 2007.
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 21 to 41
extends these principles to investment contracts written in the life assurance
business.
The 2007 statutory results financial information has been prepared on a
consistent basis with 31 December 2006 financial statements.
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.
Consolidated Income Statement - Statutory Basis
Year ended 31 December 2007
Notes 2007 2006
Eurom Eurom
Interest receivable 2 2,336 1,602
Interest payable 2 (1,856) (1,193)
480 409
Fees and commission income 3 73 78
Fees and commission expenses 3 (127) (97)
Trading income 5 12
Premiums on insurance contracts 718 584
Reinsurers' share of premiums on insurance contracts (311) (204)
Investment return (25) 2,813
Fees from investment contracts and fund management 284 247
Change in shareholders' value of in-force business 54 117
Profit on the sale of property and equipment 1
Operating income 1,152 3,959
Claims on insurance contracts (453) (410)
Reinsurers' share of claims on insurance contracts 131 117
Change in insurance contract liabilities 63 9
Change in reinsurers' share of insurance contracts 114 (35)
liabilities
Change in investment contract liabilities 98 (2,672)
Administrative expenses (541) (497)
Depreciation and amortisation
Property and equipment (28) (28)
Intangible assets - software (20) (15)
Investment expenses (40) (28)
Provision for impairment losses on loans and receivables (28) (14)
Operating expenses (704) (3,573)
Operating profit 448 386
Share of profits of associated undertaking / joint venture 29 55
Profit before taxation 477 441
Taxation (25) (80)
Profit for the year 452 361
Attributable to
Equityholders 449 358
Minority interests 7 3 3
452 361
Earnings per share Cent Cent
Basic 5 167.9 134.5
Diluted 5 166.3 132.9
Consolidated Balance Sheet - Statutory Basis
As at 31 December 2007
2007 2006
Notes Eurom Eurom
Assets
Cash and balances with central banks 253 228
Items in course of collection 138 152
Financial assets
- Debt securities 11,246 9,051
- Equity shares and units in unit trusts 17,369 15,985
- Derivative assets 1,252 816
- Loans and receivables to customers 4 39,120 33,732
- Loans and receivables to banks 2,528 8,429
Investment properties 3,561 3,340
Reinsurance assets 2,036 1,991
Prepayments and accrued income 414 358
Interest in associated undertaking / joint venture 147 174
Property and equipment 506 486
Shareholder value of in-force business 717 663
Goodwill and intangible assets 260 261
Deferred acquisition costs 248 212
Net post retirement benefit asset 86 73
Other assets 210 185
Total assets 80,091 76,136
Liabilities
Financial liabilities
- Deposits by banks 10,011 5,526
- Customer accounts 13,576 13,643
- Debt securities in issue 15,371 18,432
- Non-recourse funding - securitised assets 3,090 3,813
- Derivative liabilities 817 610
- Investment contract liabilities 27,574 24,797
Insurance contract liabilities 4,010 4,073
Outstanding insurance and investment claims 137 124
Accruals and deferred income 452 379
Other liabilities 325 435
Current tax liabilities 23 10
Deferred tax liabilities 167 199
Net post retirement benefit liability 162 159
Deferred front end fees 134 148
Subordinated liabilities 1,599 1,391
Total liabilities 77,448 73,739
Equity
Share capital 8 88 88
Share premium 8 126 116
Retained earnings 8 2,149 1,904
Other reserves 8 267 277
Equity excluding minority interest 2,630 2,385
Minority interests 7 13 12
Total equity including minority interest 2,643 2,397
Total liabilities and equity 80,091 76,136
Consolidated Statement of Recognised Income and Expense - Statutory Basis
Year ended 31 December 2007
2007 2006
Notes Eurom Eurom
Revaluation of property & equipment 17 82
Share of associate revaluation reserve - 7
Change in value of available for sale financial assets (19) 2
Deferred tax 1 (12)
Net amount recognised directly in equity (1 ) 79
Profit for the year 452 361
Total recognised income and expense for the year 451 440
Attributable to :
Equityholders 448 436
Minority interest 7 3 4
Total recognised income and expense for the year 451 440
Consolidated Condensed Statutory Cashflow Statement
Year ended 31 December 2007
2007 2006
Eurom Eurom
Net cashflows from operating activities (325) 938
Investing activities
Purchase of property and equipment (38) (34)
Sale of property and equipment 7 6
Purchase of intangible assets (14) (9)
Purchase of subsidiary undertaking - (3)
Investment in joint venture (2) (1)
Purchase of minority interest in subsidary undertaking
(7) -
Dividends received from associated undertaking 58 56
Net cashflows from investing activities 4 15
Financing activities
Issue of ordinary share capital 10 43
Purchase of treasury shares for long term incentive plan (5) (4)
Issue of new subordinated liabilities 320 51
Redemption of subordinated liabilities (78) -
Interest paid on subordinated liabilities (82) (70)
Equity dividends paid (194) (173)
Net cashflows from financing activities (29) (153)
(Decrease) / increase in cash and cash equivalents (350) 800
Analysis of changes in cash and cash equivalents
Cash and cash equivalents at 1 January 1,356 556
Net cashflow before effect of exchange translation adjustments (350) 800
Cash and cash equivalents at end of year 1,006 1,356
Notes to the Preliminary Announcement - Statutory basis
Year ended 31 December 2007
1. Segmental Information
Segmental information is presented in respect of the group's business segments based on the group's management
reporting and internal structure. The group comprises the following main business segments:
Banking Retail banking services including current accounts, residential
mortgages and other loans.
Insurance and investment Includes individual and group life assurance and investment contracts,
pensions and annuity business written in Irish Life Assurance plc and
Irish Life International, and the investment management business written
in Irish Life Investment Managers Limited.
General insurance Property and casualty insurance carried out through the group's
associate company Allianz-Irish Life Holdings Plc.
Other This includes a number of small business units including third party
life assurance administration, insurance brokerage and corporate costs
which are not attributable to any business unit.
The segmental results are as follows
2007
Banking Insurance & General Other Eliminations Total
investment insurance 1
Net interest receivable - external 526 (47) - 2 (1) 480
- inter segmental (26) - - - 26 -
Other non-interest income - external 49 (119) - 21 - (49)
- inter segmental (1) (22) - 23 - -
Premiums on insurance contracts, net of
reinsurance - 407 - - - 407
Investment return 1 (1) - - (25) (25)
Fees from investment contracts and fund
management - 262 - 22 - 284
Change in shareholders' value of in-force
business - 54 - - - 54
Profit on the sale of property and equipment - - - 1 - 1
Operating income 549 534 - 69 - 1,152
Claims on insurance contracts, net of
reinsurance - (322) - - - (322)
Change in insurance / investment contract
liabilities - 275 - - - 275
Administrative expenses (280) (190) - (71) - (541)
Depreciation and amortisation (22) (22) - (4) - (48)
Investment expenses
- (40) - - - (40)
Provision for impairment losses on loans and
receivables (28) - - - - (28)
Operating expenses (330) (299) - (75) - (704)
Operating profit 219 235 - (6) - 448
Share of profits of associated undertaking /
joint venture (2) - 31 - - 29
Taxation (33) 8 - - - (25)
Profit for the year 184 243 31 (6) - 452
Notes to the Preliminary Announcement - Statutory basis
Year ended 31 December 2007
1. Segmental information (continued)
2006
Banking Insurance & General Other Eliminations Total
investment insurance 1
Net interest receivable - external 435 (26) - - 409
- inter segmental (6) - - - 6 -
Other non-interest income - external 57 (91) - 27 - (7)
- inter segmental - (10) - 10 - -
Premiums on insurance contracts, net of
reinsurance - 380 - - - 380
Investment return 3 2,816 - - (6) 2,813
Fees from investment contracts and fund
management - 228 - 19 - 247
Change in shareholders' value of in-force
business - 117 - - - 117
Operating income 489 3,414 - 56 - 3,959
Claims on insurance contracts, net of
reinsurance - (293) - - - (293)
Change in insurance / investment contract
liabilities - (2,698) - - - (2,698)
Administrative expenses (253) (187) - (57) - (497)
Depreciation and amortisation (20) (22) - (1) - (43)
Investment expenses - (28) - - - (28)
Provision for impairment losses on loans and
receivables (14) - - - - (14)
Operating expenses (287) (3,228) - (58) - (3,573)
Operating profit 202 186 - (2) - 386
Share of profits of associated undertaking /
joint venture (1) - 56 - - 55
Taxation (29) (51) - - - (80)
Profit for the year 172 135 56 (2) - 361
1 Eliminations relate to inter segmental interest receivable and payable on deposits and loans together with
inter segmental commission payments and receipts.
Notes to the Preliminary Announcement - Statutory basis
Year ended 31 December 2007
2. Net Interest Income
Interest receivable
2007 2006
Eurom Eurom
Loans and receivables to customers 1,463 858
Loans and receivables to banks 629 482
Debt securities and other fixed income securities 140 184
Lease and instalment finance 104 78
2,336 1,602
Interest payable
2007 2006
Eurom Eurom
Interest on deposits by other banks 73 68
Interest on customer accounts 653 276
Interest on debt securities in issue 1,050 779
Interest on subordinated debt 80 70
1,856 1,193
3. Net Fees and commission income
Fees and commission income
2007 2006
Eurom Eurom
Fees and commission earned on banking services 53 51
Commission earned on insurance and investment contracts 20 27
73 78
Fees and commission expenses
2007 2006
Eurom Eurom
Fees and commission payable on banking services 9 6
Commission payable on life and investment contracts 154 121
Deferral of acquisition costs on investment contracts (99) (69)
Amortisation of deferred acquisition costs on investment contracts 63 39
127 97
Notes to the Preliminary Announcement - Statutory basis
Year ended 31 December 2007
4. Loans and receivables to customers
2007 2006
Eurom Eurom
Residential mortgage loans 34,817 30,162
Commercial mortgage loans * 1,862 1,494
Finance leases 1,666 1,409
Term loans 601 563
Money market funds / repurchase agreements ** 159 161
Loans & Receivables to Joint Venture 90 -
39,195 33,789
Gross loans and receivables 39,195 33,789
Less: allowance for impairment (75) (57)
Net loans & receivables 39,120 33,732
*Commercial mortgage loans exclude loans of Euro439m (December 2006:Euro368m) to the group's life
assurance operations for the benefit of unit-linked policyholders.
There is no particular concentration of risk within these categories.
**Deposits under agreement to repurchase of Euro4m are included above (2006: Nil)
Loans & receivables include Euro3,039m (2006:Euro3,743m) of assets which have been securitised
but not derecognised
Notes to the Preliminary Announcement - Statutory basis
Year ended 31 December 2007
5. Earnings per share
2007 2006
(a) Basic EPS
Weighted average ordinary shares in issue and ranking for 267,439,898 266,144,143
dividend excluding own shares held for the benefit of life
assurance policyholders and treasury shares
Profit for the year attributable to equityholders Euro449m Euro358m
EPS (cent) 167.9 134.5
b) Fully diluted EPS
Weighted average of potential dilutive ordinary shares 2,609,073 3,175,396
arising from the group's share option schemes
Weighted average number of ordinary shares excluding own shares 270,048,971 269,319,539
held for the benefit of policyholders used in the calculation of
fully diluted EPS
Fully diluted EPS (cent) 166.3 132.9
6. Dividends
2007 2006
Eurom Eurom
Dividends paid in the year
Final (relating to prior year) 132 117
Interim 62 56
Total 194 173
Cent Cent
Dividends per share in the year
Final (relating to prior year) 47.9 42.8
Interim 22.5 20.1
Total 70.4 62.9
7. Minority Interests 2007 2006
Eurom Eurom
Minority interests in subsidiaries
Opening Balance 12 8
Total recognised income and expense 3 4
Acquisition of minority interest (2) -
Closing Balance 13 12
Notes to the Preliminary Announcement - Statutory basis
Year ended 31 December 2007
8. Reconciliation of movement in capital and reserves
2007
Share Share Revaluation Available Other Retained Total Minority Total
capital premium reserve for sale capital earnings excluding interest including
reserve reserves minority minority
interest interest
As at start of year 88 116 260 1 16 1,904 2,385 12 2,397
Issue of share capital - 10 - - - - 10 - 10
Profit for the year - - - - - 449 449 3 452
Revaluation gains (net
of tax) - - 11 - - 4 15 - 15
Release of associate's
revaluation gains - - (8) - - 8 - - -
Change in value of
available for sale - (16) (16) (16)
financial assets - - - - -
Change in own shares at
cost - - - - - (17) (17) - (17)
Purchase of treasury
shares - - - - - (5) (5) - (5)
Equity settled
transactions - - - - 3 - 3 - 3
Dividends - - - - - (194) (194) - (194)
Acquisition of minority
interest - - - - - - - (2) (2)
As at end of year 88 126 263 (15) 19 2,149 2,630 13 2,643
2006
Share Share Revaluation Available Other Retained Total Minority Total
capital premium reserve for sale capital earnings excluding interest including
reserve reserves minority minority
interest interest
As at start of year
87 74 189 (1) 15 1,711 2,075 8 2,083
Issue of share capital - - - -
1 42 - 43 43
Profit for the period - - - - -
358 358 3 361
Revaluation gains (net - - - -
of tax) 76 76 1 77
Change in value of - - - - - -
available for sale 2 2 2
financial assets
Transfer between - - - -
reserves (5) (1) 6 - -
Change in own shares at - - - - - -
cost 6 6 6
Purchase of treasury - - - - - -
shares (4) (4) (4)
Equity settled - - - - - -
transactions 2 2 2
Dividends - - - - - -
(173) (173) (173)
As at end of year
88 116 260 1 16 1,904 2,385 12 2,397
9. Post balance sheet event
At 31 December 2007, the group held a Euro2.5bn debt securities portfolio designated as being "Held to
maturity". This portfolio formed part of the group's holdings with respect to liquidity management. At the
year end the group had the ability and intention to hold the portfolio to maturity. However, in February
2008 increased market volatility presented the group with an opportunity to realise a gain of Euro29m on the
sale of the portfolio. The group availed of this opportunity and disposed of the entire portfolio. The gain
will be recognised in the 2008 results.
10. The financial information contained within the preliminary announcement does not constitute the group's
statutory accounts for the year ended 31 December 2007. The statutory accounts for 2007 will be finalised
on the basis of the financial information preliminary announcement and together with the auditor's report
thereon will be delivered to the Register of Companies following the company's annual general meeting.
--------------------------
(1) Euro200m net of mark-to-market adjustments
(2) Principally Goodwill
(3) Includes banking after tax profit of Euro184m and other earnings charged to the
bank of (Euro13m)
(4) APE sales are calculated as annual value of regular premiums plus 10% of the
value of single premiums
(5) Payback period is calculated as the number of years it takes adding up the
cash flows to break even.
* including securitised mortgages
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR EANAKADFPEFE
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