Capital Management. Peter Fitzpatrick, Finance Director David McCarthy, CFO. Presentation by. Capital Management

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1 Presentation by Peter Fitzpatrick, Finance Director David McCarthy, CFO 1

2 Agenda 1. Group overview 2. Life (Insurance & Investment) capital 3. Banking capital 4. Capital planning 5. Target returns on capital Note: all figures relate to December 2006 unless otherwise stated 2

3 Capital - Key Messages Group structure & business mix give rise to complexity Prudent capital management has created significant financial flexibility Both Basel 2 and Solvency 2 will be strongly positive given low risk nature of the business Transition period for Regulator and market will delay impact 3

4 Group Structure Quoted company + bank t/a permanent tsb Irish Life & Permanent plc Irish Life Ltd Irish Life Capital Home Loans Limited Principal life company with Retail & Corporate divisions Assurance plc Irish Life Investment Mgrs Limited Allianz - Irish Life plc 30% permanent tsb Finance Limited 4 General insurance Associate

5 Group Capital Regulatory Shareholder Equity** Minimum m Available m (EV Basis) m Banking 1,960 2,152 * 775 Life ,101 Associate Other Goodwill 207 * Includes 1,215m of subordinated debt Excludes 1,354m of value of in-force 3,293 ** Including minority interest before own share deduction 5

6 Regulatory Capital Limits Minimum Internal Banking 9.5% RAR 10% RAR Life 150% of minimum 165% of minimum EU solvency EU solvency requirement requirement 6

7 Life Capital 7

8 Life Capital - Solvency 1 Available Capital m Life shareholder equity 2,101 less: value of in-force business (1,354) Life Net Worth 747 Other assets available 40 less: inadmissible assets (97) 690 Required (Solvency) Capital* EU Min 150% Min m m Unit-linked Non-linked * 150% of minimum EU solvency margin Minimum requirement covered 1.8 times Policy to dividend any excess capital to bank 8

9 Life Capital - Sources of Finance Source m Tier 2 Debt 200 Raised Q Utilises full debt capacity Additional Options * New business funding 500 From banks / reinsurers In-force securitisation 800 Represents 60% of value of in-force * No usage until 2009 or beyond 9

10 Life Capital - Solvency 2 Move to risk based capital adequacy QIS exercises undertaken by Regulator Realistic reserving likely to generate very significant release of reserves Timing uncertain Current regulatory limits to remain for some time 10

11 Banking Capital 11

12 Banking Required Capital - Basel 1 Risk Weighted Assets % Residential Mortgages Commercial Mortgages Non-Mortgage loans Inter-bank Off Balance Sheet Minimum Capital Required RWAs RAR 20.6bn X 9.5% = 2bn 12

13 Banking Available Capital - Basel 1 bn Bank - share capital/premium retained earnings 0.6 Life Co, Associate & other retained earnings (post-acquisition) less Goodwill - Irish Life 1.3 (1.5) - TSB bank 0.2 Tier Tier 2 - sub debt other 0.2 Total capital 4.3 less Life Co, Associate & other [90%] (2.1) Starting point in regulatory calculation is the shareholder equity in the bank s entity accounts. This is then adjusted for the effect of the life company, Associate, and other subsidiaries Regulatory methodology results in the bank s available capital of 2.2bn being all Tier 1. The 2.2bn consists of: m Bank (consolidated) s holder equity 775 Life, Associate & other s holder equity [10%] 231 Subordinated debt (admissible) 1,215 Regulatory adjustments (69) 2,152 Available Capital (Tier 1)

14 Banking Capital - Sources of Finance Dec 06 bn Max bn Huge financial flexibility Without recourse to equity there is potentially additional: Upper Tier 1 Lower Tier 1 - Perpetuals / prefs bn regulatory Tier 1 capacity 4.3bn regulatory Tier 2 capacity -Hybrids Total Tier 1 Upper Tier 2 Lower Tier In practice rating agencies would however take more conservative approach and restrict this level of gearing Total Tier

15 Banking Capital - Depth of Market Irish Banks Public Capital Issues 2006 m 2005 m 2004 m Tier 1 Lower 3, ,400 Tier 2 Upper - 1,000 - Tier 2 Lower 600 2,604 2,110 3,850 4,544 3,510 Note: Excludes private issues. Of IL&P s 1.2bn of Tier 2 debt 0.5bn was privately placed. 15

16 Banking Required Capital - Basel 2 Determined by Internal Capital Adequacy Assessment Process (ICAAP) Capital required to cover the following risks 1. Credit 2. Market 3. Operational 4. Property (own) Required to stress test for severe recession 16

17 Banking Required Capital - Basel 2 Economic Capital Required by Bank Risk Credit Market Operational Property Required capital m ,000 Point in time estimates Credit risk requirement computed using UK downturn loss given default (LGD) data 17

18 Banking Required Capital - Stress Test Severe Recession Scenario * Economic growth 0% Increased credit losses House prices 30% Increased capital due to higher PDs & LGDs Unemployment 11% Estimated 430m of additional capital required over 2 years * ESRI Model 18

19 Banking Available Capital - Basel 2 bn Share capital & retained earnings 4.4 less 50% investment in Life Co & Associate (1.8) TSB goodwill (0.2) Tier Tier Total Capital 3.8 less 50% investment in Life Co & Associate (1.8) Other (0.1) Adjustment for Life Co, Associate & other - totalling 3.6bn - is made as follows: 50% from Tier 1 50% from total capital The 3.6bn deduction comprises: bn Shareholder equity of Life Co, Associate & other 2.3 Goodwill on acquisition The reduction in available capital of 0.3bn principally reflects the additional deduction of 10% of the shareholder equity attributable to the Life Co, Associate & other. Available Capital

20 Potential Release under Basel 2 bn Available capital 1.9 Economic capital (1.0) Excess Capital release 0.3 [10% of Basel 1 requirement] * 2009 release 0.3 [10% of Basel 1 requirement] * * Assumes 20% balance sheet growth p.a. 20

21 Regulatory Process for Basel 2 Capital Requirements Directive (CRD) reporting available from 1 January 2007 Application to Regulator (IFSRA) in June 2007 Regulator can take up to six months and has indicated will do so to decide 21

22 Basel 2 Transition Operation of floors to limit capital releases in 2008 and 2009 and give space to Regulator Challenges for Regulator - absence of loss given default data Overseas market participants with home regulation using regulatory arbitrage as competitive lever Competition may force more rapid move to Basel 2 regime 22

23 Capital Planning Scenario 2007 m 2008 m 2009 m Total m Capital generation Dividends Capital required ,650 (700) 950 (1,900) Funding Requirement 950 Sources: Surplus (Dec 06) Life sub-debt (Q1 07) Share options exercised Basel 2 release (balancing amount)

24 Group Return on Equity Blended return Life : ROEV Banking : ROE Numerator Post tax operating profit excluding return from Associate Denominator Opening shareholders equity attributable to the group s life, banking and other activities 24

25 Expected Return on Equity Expected Weighted % % Life Inforce 6.5 * New business X.75 = 9.7 Banking Best in class 23.0 X.25 = * Risk discount rate in

26 Target Return on Equity - LTIP Blended ROC % Earnings Growth % Base case Stretch

27 Significant financial flexibility Basel 2 and Solvency 2 strongly positive Confident of delivering target return on capital 27

IRISH LIFE ASSURANCE PLC

IRISH LIFE ASSURANCE PLC Step-up Perpetual Capital Notes Presentation to European Fixed Income Investors Peter Fitzpatrick, Group Finance Director David McCarthy, Group Chief Financial Officer David Gantly,