Overview of Business Performance - Investis

12
Overview of Business Performance
Business Review
This business review has been prepared in accordance
with the recommendations of the European Union
(EU) Modernisation Directive and is in line with
current best practice. It is addressed to, and written
for, the members of Irish Life & Permanent plc with
the objective of providing a fair review of the group’s
business development, performance and position. This
review aims to present a balanced and comprehensive
overview of the business that is consistent with the
size and complexity of the group. The review is written
in the context of the risks and uncertainties facing the
business.
Key Performance Indicators
The EU Modernisation Directive requires that business
reviews contain fi nancial, and where applicable, nonfi
nancial key performance indicators. We consider that
our key fi nancial performance indicators (KPIs) are
those that communicate the fi nancial performance and
strength of the group as a whole to the members. These
KPIs comprise:
• Adjusted Operating Return on Capital Employed
(European Embedded Value (“EV”)
basis)
• Operating Profi t on an EV basis
• Proposed Ordinary Dividend
• Risk Asset Ratio of the Bank
• Solvency cover within the group’s life assurance
business
• Life and banking margins
• Life internal rate of return (“IRR”)
• Sales growth:
- Life and Investment sales
- Loan book growth
- New current account customers
Each of those KPIs is addressed in the body of this
review.
The group also uses a variety of KPIs in both running
and assessing the performance of individual business
units, rather than the group as a whole. KPIs include
measures such as present value of new business
premiums, new business margins, net interest margins,
cost/income ratios and customer satisfaction ratings.
Forward-looking Statements
This business review contains “forward-looking
statements” with respect to certain of the group’s plans
and its current goals and expectations relating to its
future fi nancial condition, performance and results. By
their nature, all forward-looking statements involve risk
and uncertainty because they relate to future events
that are often beyond the group’s control. For example,
certain insurance risk disclosures are dependent on
choices about assumptions and models, and by their
nature are best estimates. However, actual future gains
and losses could differ materially from those that have
been estimated. Other factors that could cause actual
results to differ materially from those estimated by the
forward-looking statements include, but are not limited
to:
• Irish domestic and global economic business
conditions
• Interest rates
• Equity and property prices
• The impact of competition, infl ation and defl ation
• Changes to customers’ saving, spending and
borrowing habits
• The group’s success in managing the above factors
As a result the actual future fi nancial condition and
performance of the group may differ from the targets
and goals set out in the forward-looking statements. The
group has no obligation to update any forward-looking
statements contained in this review.
Accounting Basis of Preparation
The group has prepared its fi nancial statements set
out on pages 42 to 136 under International Financial
Reporting Standards (IFRS) as adopted by the EU. In
addition, on pages 137 to 155, the group has presented,
as supplementary information, its results under
European Embedded Value basis of accounting.
Group Overview IFRS Results
The group’s statutory consolidated income statement
under IFRS is summarised below:
2007 2006
bm am
Net interest income 480 409
Other non interest income (49) (7)
Premiums on insurance contracts
Reinsurance share of premiums on
718 584
insurance contracts (311) (204)
Fees from investment contracts 284 247
Change in value of in-force 54 117
Investment return (25) 2,813
Profi t on sale of property and equipment 1 –
Operating income 1,152 3,959

Overview of Business Performance
2007 2006
bm am
Claims on insurance contracts -
net of reinsurance
Change in insurance contract
(322) (293)
liabilities - net of reinsurance 177 (26)
Change to investment contract liabilities 98 (2,672)
Administration expenses
Impairment losses on
(541) (497)
loans and receivables (28) (14)
Other (88) (71)
Operating expenses (704) (3,573)
Operating profi t
Share of profi ts of associated
448 386
undertakings / joint venture 29 55
Profi t before tax 477 441
Taxation (25) (80)
Profi t for the year 452 361
The EV basis results which are presented as
supplementary information 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 for under IAS 39.
Banking and other businesses are accounted for on the
same basis in both statutory and EV results.
Total statutory basis profi ts after tax increased 25% to
a452m (2006: a361m). The profi t before tax at a477m
was 8% ahead of 2006 (a441m).
Operating income at a1,152m was signifi cantly lower
than 2006 (a3,959m) principally due to a reduction
in the investment return which was a negative a25m
in 2007 compared to a positive a2,813m in 2006. This
reduction principally refl ects the impact of lower
investment market returns on policyholder funds.
Operating expenses of a704m were also signifi cantly
lower than 2006 (a3,573m) 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 a73m in
respect of the fall in the value of Irish Life & Permanent
shares held for the benefi t 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
a28m as there was an increase in the value of the shares
in the year.
Net interest income increased 17% principally refl ecting
growth of 16% to a39.2bln (2006: a33.8bln) in the
bank’s loan balances outstanding.
The group enjoyed signifi cant growth in new business
on both insurance and investment contracts which is
refl ected in the 23% growth in premiums on insurance
contract from a584m in 2006 to a718m in 2007 and
15% growth in fees from investment contracts to
a284m (2006: a247m). Refl ecting the strong growth in
new business the net new business contribution was
a negative a1m in the reported 2007 statutory profi ts,
compared to a negative contribution of a8m in 2006,
as under IFRS the fi xed cost of acquiring investment
contract new business is recognised in the year of
acquisition whilst profi t fl ows are recognised over the
life of the contract.
The change in insurance contract liabilities shows
a net reduction in liabilities of a177m compared to
an increase of a26m 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 a2,672m negative in 2006
to a98m positive mainly due to investment market falls
in 2007. The change in these liabilities are refl ected in
the negative investment return of a25m included in
operating income in 2007 compared to a positive return
of a2,813m in 2006.
Administrative expenses increased 9% to a541m in
2007 from a497m in 2006. This principally refl ects the
increase in costs associated with the buoyant new
business issued.
The post-tax profi ts achieved in Allianz, (a general
insurance business in which the group has a 30%
interest) in 2007, were a31m, compared to a56m in
2006 where lower underwriting profi ts were offset by
the profi t from the sale of the business’s head offi ce 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 a25m compared to a80m in
2006 largely refl ecting the investment returns achieved
by policyholders in both years.
Corporate Responsibility
The group has a strong commitment to corporate
responsibility (“CR”). The board has responsibility
for setting overall policy and objectives for CR and
receives regular updates on the groups CR activities
and plans. The group has a CR manager in place who
is responsible for the day to day management of the
CR programme. The programme is overseen in the fi rst
instance by the Group CR Committee which is chaired
by a senior executive and comprises representatives
from across the group. This committee meets quarterly
to review progress in implementing the CR programme
and deciding a future direction. All staff are involved in
implementing CR throughout the organisation.
13

14
Overview of Business Performance
The CR programme addresses such issues as our values
as a company and how we apply them including, our
standards of customer care, our involvement with
local communities and reducing our impact on the
environment. Details of our CR initiatives and activities
in 2007 and our plans for 2008 are set out in full detail
in our Corporate Responsibility Report 2007 which is
available on our website at www.irishlifepermanent.ie.
Risk Governance Structure
The board of directors approves overall policy in relation
to the types and level of risk that the group is permitted
to assume in the implementation of its strategic and
business plans.
The Group Risk Committee, which was established
during 2007, is chaired by the Group Chief Executive
and comprises members of senior management. It is
the executive committee with overall responsibility
for risk management across the group. The Group Risk
Committee exercises authority delegated by the Board
of Directors to set policies in relation to specifi c risk
categories and to monitor total risk levels across the
group, in line with the overall policy approved by the
Board of Directors.
The Group Risk Committee, in turn, delegates
responsibility for the monitoring and management of
specifi c risks to committees accountable to it.
The committees reporting into the Group Risk
Committee include the Group Assets and Liabilities
Committee, the Group Credit Committee, the Group
Operational Risk Committee and the Bank Basel
Review Group. These committees monitor and manage
credit, liquidity, market, insurance and operational risk,
ensuring that the group’s objectives and risk policies
are adhered to. (Refer to note 51 for more detailed
information.)
Corporate Activity
In November 2007, the group consolidated its holding
in Irish Life International by buying out the minority
25% shareholding for a7m.
Basel II (Revised Capital Framework)
Implementation
During the year the group continued with its
preparations for the implementation of the new
regulatory requirements of Basel II as interpreted in
the EU through the Capital Requirements Directive
(“CRD”). In implementing Basel II, the group has
adopted the Internal Ratings Based (“IRB”) approach
to credit risk and was awarded IRB accreditation in
late 2007. In addition, the group submitted its Internal
Capital Adequacy Assessment Process (“ICAAP”),
which is a process for assessing its overall capital
adequacy in relation to its risk profi le and a strategy
for maintaining its capital levels, to the Financial
Regulator in June 2007. Implementation of CRD
required signifi cant changes to the group’s existing
risk management structures and processes in addition
to changes in the way in which the group’s required
level of regulatory capital is computed. The group is
confi dent that the signifi cant investment involved in
Basel II implementation will materially enhance the
sound risk management framework already in place
within the group and will drive signifi cant advantages in
terms of risk management and capital effi ciency for the
group.
Further details are set out in note 46 to the accounts.
Capital and Liquidity
The group’s capital ratios remained strong at 31
December 2007. In the bank, the Tier 1 and total
capital ratios were 10.4% (31 December 2006: 10.4%)
compared to a required ratio of 9.5%. The solvency
margin in Irish Life Assurance plc, the group’s principal
life assurance business, was covered 1.6 times by
available assets (31 December 2006: 1.8 times).
During the fi rst 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 (IL&P’s liquidity ratio at 31 December
2006 was 26%). Under the new protocol required
liquidity holdings are based upon various cash fl ow
stress tests. The key limits applied are that an institution
must have suffi cient available liquidity to cover 100% of
outfl ows over the next eight days and 90% of outfl ows
over the next month. Throughout the year the group
operated comfortably within these limits.
Details of the group’s capital management are set out in
Note 46 to the accounts.
Dividend
The directors have declared a fi nal 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 fi nal 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. On an IFRS
basis, the dividend is covered 2.2 times by total profi t.
On the supplementary embedded value basis, the
dividend is covered 2.0 times by total profi t (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.
Supplementary Group Reporting - European
Embedded Value
Irish Life has, since its fl otation in 1991, adopted
embedded value accounting as its primary reporting
basis for its life assurance activities. Despite the
transition to IFRS, the group has continued to provide
supplementary information on this basis, covering both
investment and insurance contracts linked into Life
Business. While supporting the stated objectives of IFRS

Overview of Business Performance
the group, and the life industry in general, is of the view
that the new IFRS basis is less satisfactory in terms of
the measurement and reporting of the profi tability and
the value added from writing long-term life assurance
business, specifi cally what is now categorised as
“investment” business. Accordingly, the group continues
to manage all of its life assurance business on the basis
of embedded value metrics and to provide embedded
value results to shareholders and the market by way of
supplementary fi nancial reporting.
Embedded value seeks to measure the value of the
shareholders’ interest in a life assurance business. This
consists of the shareholders’ equity - represented by
net assets - plus the present value (i.e. a discounted
cash fl ow) of future profi ts to be earned from the
existing book of in-force business less the cost of
required capital. Future profi ts are estimated using
actuarial methods and best estimate assumptions
regarding future expenses, lapses, mortality, interest
rates etc. Embedded value does not include any value
attributable to future new business.
The embedded value methodology adopted is in
accordance with the European embedded value
principles introduced by the CFO forum in May 2004,
and updated in October 2005.
The IL&P group has adopted the EV framework for the
fi nancial reporting of its group results. In the group EV
basis results, life assurance activities - covering both
insurance and investment contracts - are accounted for
on an embedded value basis and banking and other
activities are accounted for on an IFRS basis.
Supplementary Group Reporting - European
Embedded Value Basis (“EV”)
2007 2006
bm
Operating profi t on continuing operations
am
Insurance and investment business 346 274
Banking 219 202
Other (4) (2)
561 474
Share of associate / joint venture
Operating profi t before tax on
29 55
continuing operations 590 529
Short-term investment fl uctuations (114) 101
Effect of economic assumption changes (14) (38)
Other non operational costs (3) –
Profi t on sale of property 1 –
Profi t before tax 460 592
Taxation (52) (28)
Profi t after tax 408 564
Minority interest
Profi t after tax attributable to
(4) (3)
equityholders 404 561
Group Income Statement
Total profi t after tax attributable to equityholders was
a404m compared to a561m in 2006. This outcome
refl ects strong growth in pre-tax operating profi t - which
was ahead 12% to a590m (2006: a529m) - 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 fl uctuations of a114m, compared to
a positive a101m in 2006, and economic assumption
changes which were a negative a14m (2006: negative
a38m).
At the operating level pre-tax profi ts of the group’s core
banking and life assurance business grew 18% to a561m
from a474m in 2006. This principally refl ects growth
of 26% in the life business embedded value profi ts to
a346m (2006: a274m) - 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 a219m (2006: a202m). The outturn in
the banking business was depressed by a once off
charge of a11.7m in respect of exposures created by
the fraudulent activities of a rogue solicitor. Excluding
this once-off specifi c provision the underlying level of
growth in the bank was 14% refl ecting 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 a31m compared to a56m in 2006.
This reduction in profi ts principally refl ects a lower
underwriting result due to further softening of premium
rates in the market in 2007 combined with the fact that
the 2006 outcome benefi ted from signifi cant prior year
claims reserve releases.
Short-term investment fl uctuations refl ect the impact
of actual against assumed investment returns on the
embedded value of the group’s life operations. The
outcome was a negative a114m in 2007 compared to a
positive a101m in 2006 and refl ects the signifi cant 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 a14m outcome (2006: negative a38m). 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%, refl ecting increases in medium term
euro bond rates. In 2006, changes in the risk discount
rate from 6.5% to 7.4% had a a38m negative impact on
the embedded value.
The taxation charge of a52m is comprised of two
elements, a a54m (2006: a42m) charge on insurance
and banking operating profi ts and a credit of a2m (2006:
a14m) attributable to investment fl uctuations and
economic assumption changes in the life embedded
value. The effective tax rate of 10% on operating
profi t (combined insurance and banking) is lower than
expected, benefi ting from the release of some a10m of
15

16
Overview of Business Performance
life tax reserves.
The adjusted operating return on capital employed
(excluding associate/joint venture and own share
adjustment) was 15.7% at the end of 2007 compared to
15.0% achieved in 2006.
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 Assurance Asset Portfolio
The embedded value of the group’s life operations
is exposed to market movements in asset 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 signifi cantly short of the embedded value
assumptions, resulting in a negative variance on
short-term investment fl uctuations of a114m in 2007
compared to a positive a101m 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 a14m recorded in 2007, which
compares to a negative a38m 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 a28m (1.4%) of the total embedded value, while a
1% decrease in rates increases the embedded value by
a32m (1.6%). A 10% reduction in equity and property
values would reduce the embedded value by a103m
(5%).
The group’s life business is a relatively low risk
operation. With regard to the unit-linked portfolio of
a27.9bln, 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 fl ows 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 a1.7bln and the credit
profi le 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 a38m, was subject to an impairment writedown
of a8m. 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 a4.2bln 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 a negative a19m 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 a2.5bln 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 a29m 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 suffi cient liquidity available to cover
100% of outfl ows over the next eight days and 90% of
outfl ows over the next 30 days. Throughout the year the
group operated comfortably within these limits.
The diversifi cation and duration profi le of the group’s
funding sources leave it in a strong position in the
current credit environment. At the year end 64% of the

Overview of Business Performance
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
repurchase facility. At 31 December 2007 available
ECB facilities totalled a17.2bln, (a20bln nominal
collateralised asset pool), against which drawings of
a5.3bln had been made. The balance of a11.9bln,
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.
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.
The life and investment business had two major points
of focus during 2007- positioning Irish Life as the
dominant pension solutions provider in Ireland and
developing our life business to enable it capture the
wealth management opportunity in Ireland, which
has arisen through the growth in mass affl uence. In
2007 pensions sales were ahead 39% year-on-year and
accounted for 59% of total group life sales in Irish Life
Assurance. Progress has also been made on our wealth
management objective. We have started to build the
competencies and know how in our existing distribution
channels to enable us to access a bigger share of this
rapidly growing market, as well as establishing some
new structures in the group, focused exclusively on
the high net worth and mass affl uent sector, which will
be responsible for developing new products and new
distribution to fully exploit this opportunity.
In the Retail Life division sales growth of 31% to a414m
(2006: a317m) 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 infl ows of
a3.4bln, a 79% increase on the funds infl ow of a1.9bln
in 2006.
APE 1 sales in the group’s principal life businesses are
summarised below:
2007 2006
bm am %
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
PVNBP 2 sales in the group’s principal life businesses are
summarised below:
2007 2006
bm am %
Retail Life 2,745 2,145 28
Corporate Life 1,355 998 36
Irish Life International 390 339 15
4,490 3,482 29
Investment (ILIM) 3,406 1,901 79
7,896 5,383 47
1
APE sales are calculated as annual value of regular premiums plus 10%
of the value of single premiums
2
PVNBP sales are calculated as total single premiums plus the
discounted value of regular premiums expected to be received over the
term of the contracts
Retail Life
The group’s retail business concentrates on sales of life
and pensions products to the retail market in Ireland. It
is a market leader with a comprehensive product range
spanning pensions, protection, investment and regular
savings with a market share in excess of 25%.
The Retail Life business follows a multi-channel
distribution strategy with independent brokers,
bancassurance (via permanent tsb), direct sales,
franchises, institutional (other bank branches) and
telephone / internet channels providing the business
with unrivalled distribution reach and customer access
points. This distribution reach ensures that the business
is not overly dependant on one channel.
The retail life assurance market was extremely buoyant
in 2007 and sales in the Retail Life division increased
31% to a414m (2006: a317m). On a PVNBP basis,
sales were ahead 28% to a2.7bln (2006: a2.1bln).
The principal drivers of the sales performance were
pensions (up 46%) and investments (up 23%). Both
lines of business benefi ted from the group’s excellent
investment performance and track record, with
pensions also benefi ting from the introduction of a
new self administered pension product and lump sum
investments benefi ting from maturing SSIA accounts in
17

18
Overview of Business Performance
the fi rst half of the year. Growth in protection sales were
more subdued (up 2%) refl ecting the slowdown in the
residential mortgage market during the year.
Corporate Life
The Corporate Life division is engaged in the sale of
pension and risk schemes to employers and affi nity
groups in Ireland. It has a leading position in this market
with an estimated market share of 45%. Distribution
is principally through pension consultants and brokers
(including Cornmarket, a specialist affi nity broker in
which the group has a 75% interest).
Customer service levels are a key differentiator of
providers in the market and the Corporate Life division
has achieved competitive advantage through continued
and sustained investment in both staff and technology
in order to achieve signifi cant improvement in service
levels and customer satisfaction. This focus on service
level improvements will continue to be a feature of the
division’s agenda into the future.
The key driver of new business sales in Corporate
Life is employment and salary growth in the Irish
economy. 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 a220m (2006:
a165m). On a PVNBP basis, sales were ahead 36%
to a1.4bln (2006: a1.0bln). The sales performance
was particularly driven by a high level of new defi ned
contribution schemes (up 30%) and annuity sales (up
65%) which benefi ted from a large number of annuity
purchases to buy out defi ned benefi t pension scheme
liabilities.
Investment Management
Irish Life Investment Managers (ILIM) provides
investment management services for the group’s life
and pensions business in addition to managing large
segregated funds. ILIM offers a wide range of active,
consensus and multi manager funds with a key focus of
the business being on product innovation. The business
has grown rapidly in the past number of years and now
ranks as the second largest fund manager in Ireland as
measured by funds under 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 infl ows with gross new infl ows of a3.4bln
(including a645m arising from the acquisition of the EBS
Summit Funds) compared to a1.9bln in 2006. Refl ecting
the strong levels of gross new infl ows, total funds
under management increased 11% to a35.4bln (2006:
a31.8bln) 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
bm am
New business contribution
Contribution from in-force business
Expected return
154 128
In-force 118 89
Net worth 29 26
Experience variances 10 14
Assumption changes 35 17
192 146
Operating profi t before tax 346 274
The operating profi t before tax for the year ended 2007
was a346m, a 26% uplift on 2006 (a274m). The key
drivers of this performance were strong growth in the
new business contribution, which was ahead 20% to
a154m (2006: a128m), and good growth in the expected
in-force return which grew 33% to a118m from a89m in
2006 refl ecting growth in the book.
New Business Contribution & Margins
The new business contribution increased 20% to
a154m from a128m in 2006. This outcome was driven
by a 30% increase in life new business sales (excluding
ILIM) to a673m on an APE basis (compared to a516m
in 2006) combined with a strong new business margin
performance. On a PVNBP basis sales, excluding ILIM,
were ahead 29% to a4.5bln (2006: a3.5bln).
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 refl ects the high volume of new business sales.
The reduction in margins from the exceptional levels
achieved in 2006 (20.6%) refl ects 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 margins. The reduction in
margins in ILIM refl ect 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,

Overview of Business Performance
including ILIM, were 2.0% in 2007 (2006: 2.4%).
The PVNBP margin is calculated as follows:
2007 2006
% %
Life 2.9 3.1
Investment (ILIM) 0.7 1.1
2.0 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 3
across the group’s life product set was 6 years. The
consolidated internal rate of return achieved on
new business sales, including ILIM, was 14.3% which
compares to 13.2% achieved in 2006.
In-force Business
The expected in-force return represents the unwind of
the risk discount rate and the growth in these profi ts
refl ect 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 a29m from a26m mainly due to a higher
yield achieved on cash assets as euro rates increased.
Experience variances continue to be positive at a10m
compared to a14m in 2006 with particularly strong risk
experience achieved in both mortality and morbidity.
Assumption changes, largely refl ecting continued unit
cost productivity gains and good risk experience, were
a positive a35m compared to a17m 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 a225m in 2007 from
a210m with the principal driver of this growth being
underlying salary infl ation.
Banking Operating Review
permanent tsb, the group’s banking division has a
strategic objective of becoming the leading provider
of personal banking services in Ireland. The bank
continues to follow a multichannel distribution strategy
incorporating a broadly based branch and agency
network, a direct sales force and extensive broker
support supplemented by telephone and internet
banking facilities.
A major focus for the bank in 2007 was the continued
implementation of its ambition to make permanent
tsb the largest retail bank in Ireland through
aggressively targeting the current account market as
part of its customer acquisition strategy. In 2007, the
3
Payback period is calculated as the number of years it takes to recover
initial outlay.
bank continued to increase the total customer base
notwithstanding vigorous competition from other banks
promoting similiar product offerings. 2007 also saw
the bank defend its market share in the Irish mortgage
market, protecting substantially all of the market
share gains it won in 2006 notwithstanding the fi ercely
competitive mortgage market place throughout 2007.
Notwithstanding the slowdown 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 profi ts growing
14% before the exceptional provision of a11.7m in
respect of solicitor fraud case previously noted.
Although gross new lending declined by 3% to a12.4bln
from the a12.9bln achieved in 2006 principally due to
a reduction of 19% in new Irish residential mortgages,
total asset balances grew 16% to a39.2bln (2006:
a33.8bln).
Lending Growth
Total loans and receivables to customers increased 16%
to a39.2bln (2006: a33.8bln) which represents a very
strong performance given the economic backdrop.
The growth in the balances over principal business lines
was as follows:
2007 2006 Growth
bbln abln %
Mortgage lending ROI * 26.3 23.1 14
Consumer fi nance 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 - am 39.2 33.8 16
* including securitised mortgages
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. Refl ecting this softening in the market, gross new
Irish mortgages issued by the group at a7.0bln showed a
reduction of 19% on the record levels of a8.7bln issued
in 2006.
Against this backdrop Irish residential mortgages
outstanding increased 14% to a26.3bln compared to
a23.1bln 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), refl ecting management actions in this
area.
19

20
Overview of Business Performance
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. Refl ecting the strong growth in new
issues the UK mortgage portfolio increased 31% to
Stg£6.1bln from Stg£4.6bln in 2006.
New consumer fi nance loans issued increased 15% to
a1.3bln from a1.2bln in 2006 as a result of market share
gains on the back of increased distribution reach in
the new car fi nance arena. The portfolio grew 15% to
a2.3bln (2006: a2.0bln).
New commercial lending of a726m was in line with
2006 (a753m) and refl ects 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 a2.3bln (2006: a1.9bln).
Customer Acquisition
Customer account balances at 31 December 2007
totalled a13.6bln (2006: a13.6bln).
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 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
bm am
Net interest income 500 429
Other income 44 48
Trading income 5 12
549 489
Administrative expenses (302) (273)
Impairment provisions (28) (14)
Operating profi t before tax 219 202
Overall pre-tax profi ts in the group’s banking business
increased 8% to a219m (2006: a202m). As noted
previously the 2007 outcome includes a specifi c
provision of a11.7m in respect of the fraudulent
activities of a rogue solicitor and, excluding this once off
item, underlying banking profi ts were ahead 14%.
Net Interest Income & Margins
Net interest income increased 17% to a500m from
a429m due to strong underlying growth in loans and
receivables to customers which were ahead 16% to
a39.2bln (2006: a33.8bln). This balance sheet growth
helped offset the impact of a reduction in the net
interest margin to 117bps from 119bps in 2006. The key
movements in the net interest margin in 2007 are set
out below:
Margin 2006
2007
BPS
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
magnifi ed 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 fi rst half of 2007 following the
introduction of a new cash fl ow based liquidity protocol
and, by improved liability spreads as euro interest rates
increased.
Other Income
Other income of a44m compares to a48m earned in
2006. The reduction of a4m principally refl ects 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 profi t reported in the group’s
life assurance activities. Sales of life and pensions
products through the bank in 2007 were a105m, up
from a88m in 2006, a 19% increase. The pre-tax profi t
achieved on the Bancassurance book of life business
was a64m in 2007 a 16% increase on the 2006 outturn
of a56m.
Trading income in 2007 was a positive a5m compared
to a12m which arose in 2006. The trading result in both
years principally arose due to the group pre-hedging

Overview of Business Performance
against basis risk in its fi xed rate mortgage portfolio.
Under IFRS, the outcome of this pre-funding is refl ected
in trading income rather than net interest income.
Costs
Administrative costs increased 11% in 2007 to a302m
(2006: a273m). This includes short-term increases
in the staffi ng levels designed to maximise the SSIA
maturity opportunity which presented itself in the fi rst
half of 2007, the costs arising from the implementation
of Basel II 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% refl ecting salary infl ation. Cost
containment continues to be a signifi cant priority of the
bank.
Credit Quality & Provisions
The charge in respect of impairment provisions of
a28m includes a specifi c provision of a11.7m 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. Provisions held continued
to be adequate with reserves of a75m (2006: a57m)
compared to arrears of a50.7m (2006: a43.9m).
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 fi rst 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 fl ow
stress tests. The key limits applied are that an institution
must have suffi cient available liquidity to cover 100% of
outfl ows over the next 8 days and 90% of outfl ows 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’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 diversifi cation
of its funding sources and this diversifi cation and the
duration profi le 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 diversifi ed across
markets, as shown below:
Customer Accounts
2007
%
34
Long-term Debt 23
Securitisation 7
ECB repurchase agreements
64
12
US$ Commercial Paper 7
Deposits by Banks - Secured 6
Euro Commercial Paper 5
US$ Extendible 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 a17.2bln,
(a20bln nominal collateralised asset pool), against
which it had drawn a5.3bln.
The undrawn balance of a11.9bln, 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.
21