Overview of Business Performance - Investis

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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
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Overview of Business Performance - Investis

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