Analyst & Investor Briefing

IFRS

Peter Fitzpatrick, Group Financial DirectorDavid McCarthy, Group CFO

November 2004

� Background

� Overview of changes

� Detailed Analysis

� Summary of Implications

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� EU regulation requires all listed companies in the EUto prepare their consolidated financial statementsfrom 1 January 2005 in conformity with IFRS

� Endorsement of IAS39/IFRS4 by EU members hasproved to be problematic

� Regulation and Taxation issues on the drip

� Statutory reporting for life assurance subsidiaries willremain unchanged

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1. Group

� Presentation / Format� Treatment of goodwill & share options

2. Banking

� Spreading of fees, charges, discounts� Less conservative bad debt provisioning� Hedge accounting - liquidity management

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3. Life Assurance� Split of business between insurance & investment

contracts� Investment contracts - significant changes in timing of

profit recognition� Value of in-force (VIF) attributable to “investment”

contracts removed from balance sheet� Reduction in reported profit and (non-distributable)

reserves

4. General Insurance [Associate]� General reserves / provisions

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� Cashflows

� Life assurance surpluses

� Dividend policy

� Life regulatory capital

� Accounting for “insurance” contracts

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� No separation of life assurance and banking activities

� Three components to profit:

� Insurance

� Investment & other

� Banking

� Segmental reporting will be the key tool for analysingincome streams going forward

� Embedded Value (EV) numbers reported by way ofsupplemental information

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� Goodwill (IFRS 3)� No amortisation but annual impairment testing� Amortisation saving of €12m p.a. expected

� Share based compensation (IFRS 2)� P&L charge for fair value of options at date of grant� Cost c.€4m per annum for next three years (max)

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(a) Discounts & Fees - recognised over the estimated life ofthe loan and taken against net interest income.

� First year discounts� Intermediary commissions� MIG costs� Application fee income

(b) Bad Debt Provisioning – use of discounted cash flow models to arrive at and support loan loss provisions

� Only permitted on an incurred basis� General provisions outlawed

(c) IAS 19 - Pensions� Effectively FRS 17 Approach

(d) IAS 12 - Taxation� Deferred Tax on property revaluation surplus

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(a) Discounts & Fees (Effective Yield)€m

permanent tsb First Year Discounts 46 Intermediary Commissions 23

MIG 15Commission Income (4)

80

CHLApplication Fees/Intermediary Commissions (12) 68

(b) Bad Debt Provisions permanent tsb 52

Balance carried forward 120

Impact on 2003 Reserves

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€mBalance brought forward 120

(c) IAS 19 Deficit (166) Total (46)

Tax Effect 6

(d) Deferred Tax on Property Revaluation (8)

Net Reduction in Reserves (48)

Impact on 2003 Reserves

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Increase/ Irish (Decrease)GAAP IFRS in PbT

€m €m €m Discounts / Fees (Effective Yield) permanent tsb First Year Discount 33 23 10 Intermediary Commissions 20 14 6 MIG 10 3 7 CHL (6)

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Bad Debt Provisions 13 8 5

IAS 19 Additional Charge (10)Total Uplift in Profit before Tax 12

Total Reported Profit before Tax 129

Impact on Profit before Tax 2003

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� IAS 39 heavily restricts use of hedge accounting

� Major impact is that all derivatives need to be carriedat fair value unless it can be proved that they are aneffective hedge. This requires:� Formal documentation in place approved by auditors� Testing of effectiveness� If ineffective hedges must be marked to market

� More stringent classifications for debt securities whichonly permit the early disposal of held to maturity debtsecurities in exceptional circumstances

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� IFRS 4 issued on 31 March 2004 - Phase I

� Business is split into “insurance” and “investment”contracts

� Insurance contracts must have significant insurancerisk

� Investment contracts are accounted for under IAS 39 /IAS 18 (Accruals)

� No change to the embedded value accounting forinsurance contracts under Phase 1(although subjectto FRED 34 proposed changes)

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� Investment Contracts (75% technical provisions)� Investment Bonds� Property Bonds� Pensions /PRSAs� SSIAs� I.L.I.M. UL Funds

� Insurance Contracts (15% technical provisions)� Protection/Risk� Annuities

� Other Contracts (10% technical provisions)

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� Income recognised under IAS 18� Annual management fee� Front end or initial fees amortised over life of contract

� Costs Recognised Under IAS 18� Maintenance Costs� Fixed Acquisition Costs� Variable Acquisition Costs amortised over life of

contract

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� Shareholder value of in-force (VIF) on investmentcontracts can no longer be recognised in profit andloss and balance sheet

� A liability for the deferral of front end fees must berecognised

� An asset for deferred acquisition costs [DAC] oninvestment contracts will be permitted but is limited tofully variable costs

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Investment of €10,000 for 3 years

Front Fee - 5% €500Annual Management Fee - 2% €200Fixed Acquisition Cost - 7% (€700)Variable Acquisition Cost - 3% (€300)Annual Maintenance Cost - (€20)

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In Out Net DCFYear € € € @ 6%

1 700 1,000 (300) (300)

2 200 20 180 170

3 200 20 180 160

Total 1,100 1,040 60 30

Cash Flows

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VIF Cash P&L€ € €

Year 1 Value of New Business 30 30 Cashflow 300 (300)

Balance 330 (300) 30Year 2 VIF @ Discount Rate 20 20 Cashflow (180) 180

Balance 170 (120) 50Year 3 VIF @ Discount Rate 10 10

Cashflow (180) 180

Balance - 60 60

EV Accounting

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Front End Fee 500 - -

Deferred Front End Fee (332) 166 166

Management Fee 200 200 200

Fixed Acquisition Cost (700) - -

Variable Acquisition Cost (300) - -

Deferred Variable Costs 200 (100) (100)

Maintenance Cost - (20) (20)

IFRS Profit/(Loss) (432) 246 246 60

EV Profit / (Loss) 30 20 10 60

Year 1 Year 2 Year 3 Total

€ € € €

IFRS Accounting

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-400

-300

-200

-100

0

100

200

300

400

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Year

Prof

it IFRS ProfitsEV Profits

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Annual Profit Profile

-400

-200

0

200

400

600

800

1,000

1,200

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Year

Acc

umul

ated

Pro

fits

IFRS ProfitsEV Profits

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Cumulative Profit Profile

Maximum Minimum Change Change

% %Investment Contracts 85 75

Insurance Contracts 15 25

Split of Investment / Insurance Contracts 2003

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Net Worth VIF Total €m €m €m

Reported 623 816 1,439

Restated under IFRS (75/25 split) 670 476 1,146

Minimum Change 47 (340) (293)

Restated under IFRS (85/15 split) 665 405 1,070

Maximum Change 42 (411) (369)

Shareholder Net Assets 2003*

* Life Assurance Ireland 25

Change in in Shareholder Net Assets 2003

Min Max€m €m

Net WorthDAC 101 121Deferred income (91) (119)Release of cash reserves 51 68IAS19 pensions (19) (19)Other 5 (9)

47 42

Value of in-force (VIF) (340) (411)

Total (293) (369)26

IFRS - Life Assurance P & L

Net Worth VIF Total €m €m €m

Reported 149 36 185

Restated under IFRS (75/25 split) 156 (12) 144

Minimum Change 7 (48) (41)

Restated under IFRS (85/15 split) 141 (33) 108

Maximum Change (8) (69) (77)

2003 Profit after Tax*

* Life Assurance Ireland 27

Balance Sheet 2003 €mReported net assets* 2,022

Bank (48)Life (293) - (369)

Restated under IFRS 1,681 - 1,605

P & L Account 2003 €mReported net profit 262

Group 8Bank 11Life (41 - 77)

Restated under IFRS 240 - 204

* Excluding UK Life Assurance €82m 28

� IFRS - reporting standard not management tool

� Growing business - IFRS impact:� Increases banking profits

� Reduces life assurance profits

� Embedded Value� Most appropriate management metrics

� Changes in methodology and disclosures

� Economic fundamentals & outlook unchanged

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� Analysis of 2003 PAT from Life Assurance [ROI]

� EV v IFRS Comparison of 2003 PAT from LifeAssurance [ROI]

� Analysis of IFRS 2003 Investment Earnings [ROI]

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Continuing Operations €m €m €mNew business contribution 42 4 46Contribution from existing business Unwind of discount rate 80 9 89 Experience variances 24 (6) 18 Development expenditure (11) - (11)Operating assumption changes 39 (2) 37Expected investment returns 4 1 5Other income 6 - 6Contribution from life assurance activities 184 6 190

Discontinued US life assurance activities - 1 1Short term fluctuations in investment returns 24 4 28Effect of economic assumption changes (18) (2) (20)Life assurance achieved profits 190 9 199Taxation (5) (4) (9)Life assurance achieved profits after tax 185 5 190

ROI UK/US Total

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Comparison of IFRS v. Reported Life PAT 2003

Interest on VIF 27 32 VNB 13 17 Experience variances (1) 0Expected income 1 1 Other income 6 6

46 56

Operating assumption variances 23 27STIFS 16 24Economic (2) (3)

83 20 104 9

Insurance 107 107 86 86Earnings before tax 190 127 190 95Taxation (5) 17 (5) 13Profit after taxation 185 144 185 108

Minimum Maximum EV IFRS EV IFRS €m €m €m €m

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Management fees 84 104 Non-deferrable acquisition expenses (17) (44)Renewal expenses (57) (62)

10 (2)Fees amortised 19 21Variable acquisition cost amortised (16) (18)

13 1Investment return 7 8Profits from other businesses 9 9

29 18Exceptional Costs (9) (9)Earnings before tax 20 9 Taxation 4 14 Profit after taxation 24 23

Min Max €m €m

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