Contents Pages

Irish Life & Permanent plc Annual Report and Financial Statements 2009 1-232

Irish Life & Permanent Group Holdings plc Annual Report and Financial Statements 2009 233-256

Irish Life & Permanent plc Annual Report and Financial Statements 2009 Contents

Overview Financial Performance Highlights 2 The Group at a Glance 3 Chairman’s Statement 4 Group Chief Executive’s Review 6

Business Review Group Performance Review 8 Divisional Performance Review 20 Risk Management 30 Corporate Responsibility 40

Corporate Governance Board of Directors 42 Directors’ Report 44 Corporate Governance 50 Directors’ Report on Remuneration 56

Financial Statements Statement of Directors’ Responsibilities 64 Independent Auditor’s Report 66 Group Financial Statements 68 Notes to the Group Financial Statements 81 Embedded Value Basis Supplementary Information 211 Financial Performance Highlights year ended 31 December 2009

2009 2008 Statutory Basis (EU IFRS) (Loss) / Profit after tax (attributable to equityholders) (€313m) €49m

EPS (Earnings per share) on continuing activities (117 cent) 18 cent

Embedded Value (“EV”) Basis Loss after tax (attributable to equityholders) (€279m) (€433m)

Total EPS1 (101 cent) (157 cent)

Operating profit before impairment of goodwill and tax (€196m) €341m

Operating EPS before impairment of goodwill and tax 1 (66 cent) 111 cent

Banking Business New loans issued €1.2bln €7.1bln

Lending book €38.6bln €40.1bln

Residential mortgage loan book (Ireland) €27.3bln €27.9bln

Customer accounts €14.6bln €14.1bln

Life and Investment New Business Life new business - APE (Annual premium equivalent) €348m €511m - PVNBP (Present value of future new business premiums) €2,398m €3,152m

Life and investment new business - APE €539m €714m - PVNBP €4,306m €5,180m

Dividends Final dividend per share Nil Nil

Total dividend per share Nil 22.5 cent

Capital Ratios Total Tier 1 Capital Ratio Basel II (includes interim capital requirement of 23%) 9.2% 9.2%

Life Solvency Cover (times) 1.6 1.6

1Including own shares held for the benefit of life assurance policyholders. 2 Overview Business Review Corporate Governance Financial Statements 3 network and network permanent tsb , the group’s banking division, provides division, provides banking , the group’s Fund Management (“ILIM”) is the fund Managers Investment Irish Life ILIM manages division of the group. management of institutional and on behalf of a wide range money occupational defined benefit and defined retail, multinational corporations, contribution pensions, large charities and domestic companies and is the of Irish pension assets. ILIM has seen manager largest in funds under management significant growth and product market its recognised since 1992 reflecting leadership position. Banking Business Banking permanent tsb and services banking products of retail a full range as as well of branches network its nationwide through the phone over intermediaries and directly through of residential provider and internet. It is a leading to current car finance in addition mortgages and new the deposit facilities. Strategically account and retail banking business is to service the residential of its focus mortgage occupier and consumer finance credit owner of deposit and life a wide range and to offer markets and services into its customer base products assurance its customer acquisition strategy. through Life Assurance and is the leader in the life Assurance Irish Life a business operates The in Ireland. pensions market and its products for multi-channel distribution strategy and Life main divisions, Retail its two services through Life. Corporate Of particular importance has been the development which it successfully operation of its bancassurance in the developed subsequently extended to a number of other credit of other credit to a number subsequently extended thereby in Ireland networks institutions with branch its customer base. expanding brand, life assurance and pensions assurance life brand, Group Strategy Group businesses have assurance Both the banking and life of the group significantly since the creation developed on the Irish the singular focus in 1999 reflecting on and the focus offerings product strong market, positions market strong customer satisfaction. The diversified with broadly distribution strength reflect businesses giving distribution in both banking and life The access to all segments of the market. the group ensuring place developments market reviews group trends, to meet evolving it is positioned positively and opportunities.challenges and the banking activities of the group’s focus retail The and pensions of its life nature unit-linked predominantly 99% of of the group. the risk profile business reduces of which 89% consists is secured, lending the bank’s business is mortgages. 92% of the life of residential the risk is borne by the market where unit-linked policyholder / investor. Irish Life & Permanent plc (“ILP” or “the group”) is a (“ILP” or “the group”) plc & Permanent Irish Life in the financial services of personal leading provider and positions in life market with strong Irish market banking. The and retail pensions, fund management banking under the activities comprise retail group’s permanent tsb The Group at a Glance Group The Irish Life under the (including bancassurance) under the Irish fund management brand, Assurance Insurance and General brand Managers Investment Life Allianz. its associate company, through of the merger in 1999 from created was group The in Ireland assurer life largest the Assurance, Irish Life mortgage leading residential the and Irish Permanent, TSB Bank and acquired In 2001, the group lender. its business with Irish Permanent. merged programme restructuring 2010, a corporate In January Group & Permanent Irish Life completed whereby was holding Holdings plc (“ILPGH”) became the new ILP de-listed and ILPGH became the ILP. for company stock on both the Irish and London listed company new transferred ILP were in All shareholdings exchanges. to an equal of a scheme of arrangement way by in ILPGH. shareholding Chairman’s Statement

2009 was an exceptionally difficult year for the difficulty to reach realistic, workable solutions Irish economy and for our customers whose to any problems those customers had; financial positions are so entwined with that − to position the group strongly from a economy. As a result it was a difficult, challenging strategic perspective in anticipation of likely year for each of our core businesses and for the consolidation in the financial services industry group as a whole. Regretfully that meant another in Ireland over the coming months; and tough year for our shareholders, customers and − to implement the findings of the Oliver staff. Wyman report on corporate governance which was undertaken in light of the The financial performance of the group was controversy of February 2009. dominated by the impact of substantial impairment charges in the bank and the impact of In respect of each of these priorities, important the weaker economy on the life company which progress was made. meant reduced profits in that division. In total the group reported a loss on both an IFRS and Advancing Strategic Agenda Embedded Value (“EV”) basis of €313 million and €279 million respectively. The strategic agenda is particularly important for the future of the group. However, throughout the year important progress was made on adapting the group’s key businesses It is clear that we are at a critical juncture for to the new economic circumstances. permanent the financial services industry in Ireland. Over tsb performed extremely well in the critical the course of the coming months we expect retail deposits market and secured an extra very significant decisions to be taken about the €1.8 billion in deposits during the year. Irish Life future shape of the industry here. As the largest made progress in tackling what was an emerging player in the life and pensions business, the problem with persistency (a measure of policy fund management business and the residential retention) and ILIM continued to dominate the mortgage business, we are determined to play fund management business. All the businesses an important role in shaping the solutions which made progress in reducing their cost bases emerge. and “resizing” for a smaller market. That gives us considerable confidence that the financial With that in mind, the group undertook a strategic performance of the group will be stronger in 2010 restructuring during 2009 which was completed than in 2009. in early 2010. This means that the group has increased flexibility to participate in corporate In the context of the extraordinary challenges transactions in the Irish market where we in financial markets, the introduction of the believe they would be in the best interests of our Government Guarantee Scheme and the shareholders and other stakeholders. approach being adopted by financial institutions both in Ireland and internationally, the board has Improving Corporate Governance proposed that no dividend will be paid for 2009. While this is regrettable, it is consistent with the At last year’s AGM I spoke at some length of the priority to conserve capital in the group in the controversy which emerged at the start of 2009 current economic environment. surrounding transactions between Irish Life & Permanent plc and Anglo Irish Bank in 2008. Board Priorities in a Challenging Market As we stated clearly at that time, the transactions which took place were wrong and should not have The board’s priorities throughout the year were: taken place. The board was not advised of the − to set out clear directions for each of the key transactions as it should have been and it would businesses to ensure that they performed not have given permission for them to take place if as strongly as possible in the difficult it had been so advised. environment which pertained and that they pursued change programmes to ensure that Those events led to the swift resignations of three they can perform better in these conditions; senior executives from the group which was a − to ensure that each of the businesses worked critical first step in responding to this crisis. sympathetically with customers in financial 4 Overview Business Review Corporate Governance Financial Statements 5 Outlook restructuring corporate the completion of our Following placed to is strategically 2010, the group in January in the participate developments efficiently with any during the course of the Irish financial services market the await developments corporate on any Progress year. the and process transfer commencement of the NAMA participating of the banks. recapitalisation and of challenge that 2010 will be a year I believe which the in the Irish financial services market change additional participate will actively in to secure group On the business all our stakeholders. for value that priorities will be to ensure one of our key front, dealt with all our customers facing difficulties are and workable and that realistic sympathetically in the investment I believe solutions will be found. pursued in 2009 leave which we programmes change us better placed to compete in this challenging market. further progress to make in the coming year hope We the and laying our financial strength on rebuilding success. future for foundation to acknowledge I want on behalf of the board Finally, management the group’s the contribution made by with staff together working team and that of our hard in these difficult times. the supportof our shareholders Gillian Bowler Chairman 2010 23 March National Developments National Scheme which was Guarantee Government The 2009 has been instrumental in in December extended and corporate the confidence of both retail retaining security of their deposits the customers regarding participating institutions. This financial with the seven funding programme the group’s scheme has facilitated this for appreciation my and I wish again to express support. continued Government by institutions covered Uniquely amongst the is the group Scheme, Guarantee the Government assets to the National Asset any not transferring this is believe We (“NAMA”). Agency Management also We the group. for an important differentiator the from that once the assets begin transferring believe liquidity will participatingfive institutions to NAMA, effect a positive which will have in the market increase on our group. The board also moved quickly to commission quickly to commission moved also board The experts Oliver risk and compliance international to group at the governance corporate to review Wyman further needed to identify what action was strengthen in this area. and procedures our processes fully implemented the proposals has now board The included the appointment actions made, the key and Compliance, the Head of Risk Group of a new committees and reporting of board restructuring of risk and control lines along with the strengthening the group. throughout processes Chief Executive appointed as Group was Murphy Kevin and executive experienced is a very in June 2009. Kevin assurance life the group’s Life, with Irish has worked of appointed to the board business, since 1972. He was in 1999 and since 2005 has been responsible the group and pensions life of the group’s the operation for of the group’s as Chief Executive businesses. He served 1993 and 2005. business between fund management the Government, closely with the is working Kevin to alike other stakeholders and all the Regulator in the business and the wider the challenges manage economy. appointed to the was Ryan 2009 Pat In December of risk experience has considerable Pat board. in financial services combined with management means he actuarial qualifications. This professional insight into the can bring an unusually relevant assurance which span the life of the group operations Collins 2010 Bernard and banking businesses. In March has extensive Bernard appointed to the board. was and and overseas both in Ireland business experience our board. will further strengthen indicated have and Liam O’Reilly Eamonn Heffernan for forward will not be putting themselves that they at the board from and thus will retire re-appointment Both Eamonn and Liam the conclusion of the AGM. made important colleagues and have been valued have to I want during their tenure. contributions to the board their work to both of them for appreciation my express on the board. Chairman’s Statement Chairman’s Group Chief Executive’s Review

Background Progress in 2009

2009 was a very difficult year for our customers The overriding focus of the group in 2009 was to and our businesses. The defining development drive the changes necessary in the core businesses during the year was a steep and quick economic to allow them compete in this new environment. correction with GDP falling by close to 8% and We made progress in reducing costs in the key unemployment increasing to 12.5% and while businesses and we will continue to drive this the pace of the decline slowed noticeably during agenda in 2010. the year, it still had a profound effect on our key businesses. In that context, our priority during the In the life company we took action to address year was to support our key businesses as they a growing persistency issue in the Retail Life adapted to this new environment and to drive division. This had first emerged as the broader the changes necessary to allow the group recover economy weakened in late 2008 and continued in the months and years ahead. In this regard, I through the first half of 2009. As a result of our believe we have been successful. actions we saw the persistency experience improve in the latter half of the year. Group Profitability - IFRS Basis In the bank, we redirected the sales focus to The financial performance of the group is the retail deposit market which resulted in retail dominated by the cost of provisions made for deposit balances growing by 23% on 2008. We impaired loans in the lending book of permanent also moved decisively to increase interest rates on tsb. The group made an operating profit of €68m our standard variable rate residential mortgages before provisions for impairment (2008: €245m and some other products in light of the continuing profit). After provisions for impairment, the group high cost of funds. recorded an operating loss of €308m in 2009 (2008: €41m profit). While provisions dominate For 2010, I am looking forward to a significant this result, other factors include lower net interest improvement in the profitability of the life income due to higher funding costs, lower business but I expect 2010 to be another difficult investment contract fee income due to market year for the bank. The strategies commenced and movements and negative shareholder property completed in 2009 position the group positively to returns. take advantage of the opportunities resulting from the more positive economic outlook for 2010. Total group earnings for 2009 fell sharply on a statutory (IFRS) basis with a statutory loss after Banking Businesses tax attributable to equityholders of €313m (2008: €49m profit). At the end of the year shareholder The principal challenges for the banking business funds were €2.0bln (2008: €2.3bln). in 2009 were funding, credit quality, cost management and margins. Group Profitability – Embedded Value Basis In 2009 the bank successfully re-focused its sales efforts to growing the retail deposit book. We The pre-tax operating loss for the year on an regard this book, coupled with long-term debt, Embedded Value (“EV”) basis was €196m (2008: as a stable source of funding for the group. These €341m profit before the impairment of goodwill). funds accounted for 48% of the total funding The principal factors in the reduction in EV mix in 2009 and are expected to increase to 60% operating profit were the lower new business in 2010. The increase will be supported by the contribution and the negative persistency significant momentum achieved in retail deposit experience in the life business along with the growth in 2009, US $1.75bln long-term debt issued increase in impairment provisions in the banking in January 2010 and €2bln long-term debt issued business and the reduction in net interest income. in March 2010. The extension of the Government Guarantee Scheme in December 2009 was On an EV basis the loss after tax attributable to welcomed by the group and will facilitate the equityholders of €279m improved significantly bank’s long-term debt agenda over the coming on the 2008 loss of €433m principally resulting months. from negative short-term investment fluctuations, which, albeit negative, were significantly better We have clearly stated our intention to address than those experienced in 2008. our high loan-to-deposit ratio and have made progress on this during the year. At year end that ratio stood at 246% (2008: 271%). Our target for 2010 is to reduce it further to 230% through a combination of deposit book growth and reduced loan balances resulting from the expected lower level of new business volumes in 2010. 6 Overview Business Review Corporate Governance Financial Statements 7 23m gain in risk 23m gain in € 1.9bln in 2009 and increased its market share to share its market 1.9bln in 2009 and increased The life businesses had positive mortality and morbidity businesses had positive life The in a in 2009 resulting experience our EV earnings. in variances experience Investment business, Irish Life Our fund management of with inflows year strong had a very Managers, € the dominant fund management now are 31.2%. We in Ireland. company 2009 agenda, a significant cost reduction Following on year 10% underlying costs fall by assurance life saw in headcount. This includes a 7% reduction This year. the business flows for been right-sized business has now in 2010. expected Corporate Activity completed a major 2010, the group On 18 January & Permanent Irish Life whereby restructuring corporate holding became the new Holdings plc (“ILPGH”) Group plc (“ILP”). ILP & Permanent Irish Life for company listed company de-listed and ILPGH became the new on this stock exchanges on both the Irish and London way by transferred in ILP were date. All shareholdings to an equal shareholding of a scheme of arrangement in ILPGH. the group in preparing an important was exercise This of the to participate consolidation in the expected on which we in Ireland, financial services marketplace this year. to see progress likely are Outlook we However, a difficult year. 2009 was In summary, challenges key in addressing made important progress in improvement with an expected and together better are we economic conditions in Ireland, broader the 2009. In 2010, I expect 2010 than for positioned for to 2009 similar to be broadly banking businesses’ results in the life but I anticipate a significant improvement built in 2009 foundations The businesses’ profitability. ahead to face the challenges the group should allow with confidence. Murphy Kevin Chief Executive Group 2010 23 March Capital 9.2% at on a Basel II basis was capital ratio bank’s The to a compares 2009 (2008: 9.2%). This 31 December minimum statutory of 8%. The minimum requirement was Assurance of Irish Life capital requirement solvency end (2008: 1.6 times). year 1.6 times at the covered re-priced the Irish residential the Irish residential re-priced 348m. Retail Life sales performed sales performed Life 348m. Retail € permanent tsb Life Assurance and Fund Management Life Assurance and Fund Management Businesses leader continues to be the market Assurance Irish Life in Ireland. market pensions and investment in the life, line with the in sales declined here Nevertheless, economy. and in light of the weaker market broader 32% down sales were as a whole, APE the year Over at on year year strongly in the second half of 2009 with the strongly channel being the most Independent Financial Adviser impacted by sales were Life while Corporate resilient, and salary reductions. rising unemployment Sales activity in 2010 will be supported the by the more to reflect range of our product repositioning Life, of our customers. In Corporate needs risk averse for strategy investment lifestyle the launch of a new the defined contribution pension schemes will allow moves participate as the market to actively group defined benefit to defined contribution pension from schemes. on year to be flat year expected are 2010 sales volumes sales being Life in Retail the recovery from resulting sales Life the continuing decline in Corporate offset by continues. salary growth and low as unemployment successfully in 2009 progressed agenda retention The in rates in our retention improvement with a marked particularly Life. in Retail the second half of the year, and in the economy redundancies from Resulting in-force Life’s in Corporate the growth scheme closures, not are Life As policies in Corporate book has slowed. on our earnings being encashed, the persistency effect Life. than in Retail Life is less in Corporate Credit quality and impairments are critical issues for critical issues for and impairments are quality Credit in accelerated in Ireland Arrears the bank businesses. with the significant increase of the year the first half moderated of increase but the rate in unemployment, in line with unemployment in the second half of 2009 in provisions in impairment increase large The levels. in our Irish arrears expect We those trends. 2009 reflects In our UK business, arrears loan book to peak in 2010. fallen since peaking in March. have costs in the bank which continue to tightly control We underlying costs The than the peak. 13% lower now are with headcount on year 10% year down in 2009 were initiated a number of already have We 8%. down on this which will see further progress measures and a branches of eleven including the closure agenda one numbers by of staff weeks in the coming reduction and forty full time equivalents. hundred falling in 2009 to 0.83% (2008: margins net interest With 1.05%) mortgages in September 2009 and again rate variable in which increased spreads, in February 2010. Deposit expected are pressures, market 2009 due to competitive in 2010. generally in the market gradually to reduce Group Chief Executive’s Review Executive’s Chief Group Group Performance Review

The environment in which the group operates to compete successfully. Several initiatives were remained challenging in 2009 for our customers and commenced and completed during 2009 which leaves our business, with continuing low levels of economic the group in a better position heading into 2010. activity and weak consumer confidence. While the worldwide economic upheaval and associated financial The group initiated a cost restructuring programme crises continued into 2009, the latter half of 2009 that aligns staffing levels in the life assurance company saw some signs of improvement both nationally and to current activity projections and the Irish banking internationally. Unemployment growth and asset value business has initiated plans to deliver on the same deflation have impacted the Irish economy significantly agenda in 2010. The group made progress in addressing and weakened purchasing power along with investor the life assurance persistency variance seen in the and consumer confidence. These factors lowered new Retail Life portfolio in the first half of the year. A funding business volumes and margins across all our businesses strategy which focuses on maximising stable sources and resulted in higher impairment provisions on the of funding (retail deposits and long-term funding) group’s loan portfolios. continues to be pursued in the bank. In response to the increase in the cost of funds, the group increased the The group’s priority for 2009 was to support the cost of variable rate mortgages in September 2009 and businesses in responding to the changed environment again in February 2010 to address the falling net interest and driving the change needed to allow them margin.

Summarised Group Income Statement

The group’s income statement on an IFRS basis for the years ended 31 December 2009 and 2008 is summarised on a segmental level below:

2009 2008 €m €m Operating (loss) / profit before impairment provisions - Banking Ireland 77 37 - Banking UK 29 27 - Life assurance (15) 170 - Fund management 13 17 - Brokerage and third party administration 4 21 - Other1 (40) (27) Operating profit before impairment provisions 68 245 Impairment provisions: - Banking Ireland (343) (189) - Banking UK (33) (15) Operating (loss) / profit (308) 41 Share of associate - General Insurance (2) 23 Share of joint venture - Banking Ireland - (1) Taxation (3) (10) (Loss) / profit for the year (313) 53

Group Key Performance Indicators 2009 2008 Total tier 1 capital ratio on Basel II basis (%) 9.2 9.2 Life solvency cover (times) 1.6 1.6 Operating profit before impairment provisions on an IFRS basis (€m) 68 245 Operating (loss) / profit on continuing operations on an IFRS basis (€m) (308) 41 Adjusted operating return on capital employed on an EV basis (%)2 (7.1) 9.5 Operating (loss) / profit on an EV basis before impairment of goodwill and tax (€m) (196) 341 Shareholder funds per share EV basis (€) 9.0 10.0

1‘Other’ includes reconciliations, eliminations and consolidation adjustments as detailed in Note 3 to the Financial Statements. 2The adjusted operating return on capital employed on an EV basis is calculated by dividing the operating profit after tax, excluding share of associate / joint venture (see Note 4 to the EV basis financial statements) by the average shareholder equity for 2008 and 2009 before non-controlling interest and own share adjustment, excluding associate / joint venture and consolidation adjustment (Note 5 to the EV basis financial statements). 8 Overview Business Review Corporate Governance Financial Statements 9 m 86m 341 € €

45m. 12m) in € € EV 18m (2008: (429) (433) (364) (364) - 105 (640) 171 319 22 (429) 5 30 € 2008 (65) 4 (170) 284 - - m (2) 40 (17) (38) (68) (26) 102 € (279) (279) (319) (319) (196) (194) (196) (279) (270) 2009 568m. 7m (2008: € € m €

49 53 63 41 22 (10) (11) 89 (190) 53 323 30 5 respect of the fall in value of owner occupied buildings of owner of the fall in value respect movements benefit of policyholders. These the held for but under IFRS the impact policyholder liabilities recognised in the asset is not movement corresponding in the income statement. Following various restructuring programmes in the programmes restructuring various Following 10% excluding by on year year costs fell group, costs of / non-operational restructuring costs in 2009, / non-operational Including restructuring to on year year 4% costs fell of charge includes a 2009 result The & of Irish Life of the uplift in the value gain) in respect of policyholders the benefit held for shares Permanent of and also includes a gain 2008 4 (170) 288 - - m (2) (3) 93 (10) (22) (73) (26) € (313) (313) (310) (308) (313) (203) (270) 245m). The 245m). The € 68m before 68m before €

308m in 2009 (2008: 308m in 2009 €

41m profit) after the provisions for impairment. for after the provisions 41m profit)

Attributable to: - Owners of the parent of associate / joint venture Share Taxation tax before (Loss) / profit tax before Operating (loss) / profit after tax (Loss) / profit Other IFRS consolidation adjustments Effect of economic assumption changes of economic assumption changes Effect Short-term investment fluctuations fluctuations Short-term investment - Non-controlling interest interest - Non-controlling 2009 venture of associate / joint Share Impairment of goodwill IFRS business and investment Insurance EV operating (loss) / profit Banking Other* *Other includes unallocated corporate costs and the income from brokerage and third party subsidiaries. administration and third brokerage costs and the income from *Other includes unallocated corporate The following table restates the group’s IFRS income statement in a format that is comparable to the embedded that is comparable IFRS income statement in a format the group’s table restates following The 2009 and 2008: ended 31 December the years for in the Supplementary Information shown income statement value Group Performance Review Performance Group The group made an operating profit of profit made an operating group The impairment in 2009 (2008: for provisions group made an operating loss of loss made an operating group losses in both the by is driven year the for result The businesses’ banking businesses. The banking and life and charge a higher impairment provision loss reflects higher from income arising principally net interest lower results businesses’ loss life group’s funding costs. The fund lower returns, property shareholder negative from income and fee contract and investment management business insurance of in-force of the value the reduction in the risk discount the change principally arising from rate. € Group Performance Review

Operating Results on Continuing restructuring / non-operational costs, the cost base fell Operations 10% year on year. The bank has announced a further Banking Businesses’ Operating Results efficiency programme to be concluded in 2010 with The banking operating loss for 2009 of €270m, the amalgamation of eleven branches and further compared to a profit of €30m (before impairment of reductions in staffing levels. These actions will lead to goodwill) in 2008, was principally due to an increase further cost reductions in 2010. in impairment provisions reflecting the deteriorating macroeconomic conditions in Ireland and to lower Life Assurance and Fund Management Operating net interest income due to higher funding costs. The Profit Republic of Ireland business accounted for €266m of The group’s life assurance and fund management this loss with the UK banking business accounting for divisions made an operating profit (before short- €4m of the loss. term investment fluctuations (“STIFs”) and economic assumption changes) of €93m for 2009 (2008: €288m). The net interest margin3 fell to 83 basis points (“bps”) This fall in profits reflects investment contracts and fund (2008: 105bps) as a result of the higher funding costs management fees falling by €45m year on year due in both the wholesale and retail markets. This resulted to lower fund balances in 2009 resulting from a fall in in net interest income falling from €473m in 2008 to markets in 2008. The change in shareholder value of €375m in 2009. An asset re-pricing strategy has seen in-force (net of short-term investment fluctuations and a 50bps increase applied to Irish standard variable rate economic variances) fell by €101m year on year mainly mortgages in September 2009 and a further 50bps due to lower insurance sales and poor persistency. increase was applied in February 2010. Also included in the operating profit was the fall in the shareholder expected return of €18m and the increase Net interest income includes a credit of €7m in relation of €18m in exceptional expenses principally due to the to deferred acquisition costs; this incorporates a life restructuring costs. credit arising from the reassessment of expected cash flows from mortgages due to the lower redemption Resulting from the economic downturn, 2009 saw an rate experienced in the portfolio in 2009. This helped increase in surrenders and withdrawals as investment offset the negative impact of mismatches which arose markets continued to fall and economic conditions between the fees charged on fixed rate mortgage worsened. The adverse persistency resulted in switches and the cost of closing fixed rate positions in a combined negative experience variance and the early part of 2009 (impact on net interest income assumption changes of €26m in the 2009 IFRS earnings was circa €30m). A provision was made during 2009 in (2008: €7m positive). With the assistance of a new relation to outstanding settlements on certain closed persistency infrastructure, the Retail Life business has derivative contracts (impact on net interest income was seen persistency improve in the latter half of 2009 while €15m). it is expected that Corporate Life will see persistency experience moderate in 2010. The cost of the Government guarantee for the four months ending December 2008 was €8m and this A restructuring programme in the life assurance and increased to €29m for the twelve months ending fund management businesses has been successfully December 2009. completed resulting in a 10% fall in operational costs excluding restructuring / non-operational costs. The provision for impairment on loans and receivables was €376m (2008: €82m). This charge consists of Life assurance new business written (excluding a specific provision charge of €213m (2008: €16m) investment sales for Irish Life Investment Managers, and a collective / incurred but not reported provision “ILIM”), was €348m (2008: €511m) on an APE basis. (“IBNR”) charge of €163m (2008: €66m). This brings The decrease was due to the 36% and 30% reduction in the provision coverage4, net of write-offs, to 1.2% at the Retail Life and Corporate Life sales respectively. In the end of 2009 (2008: 0.3%). 2008 included a provision for 2009 statutory profits, new business contribution was impairment on debt securities of €122m. €2m negative, compared to a nil contribution in 2008. ILIM full year sales of €191m (2008: €203m) were 6% During 2009, resulting from the continued focus on behind the same period last year. cost management; the aggregate banking businesses were successful in reducing their costs by 7%. Excluding

3Net interest margin is the ratio of net interest income and the average interest earning assets for the year. 4Provision coverage is the ratio of the year end loans and receivables to customers balance (before impairment provision and deferred fees, discounts and fair value adjustments) and the impairment provision balance. 10 Overview Business Review Corporate Governance Financial Statements 11 50m 97m € € 15m (2008: € 105m positive). This This 105m positive). € 2.8bln). The adjusted operating adjusted operating 2.8bln). The € 38m in 2009 (2008: € 128m negative) and negative movement in the in movement and negative 128m negative) 383m negative). € € 2.5bln (2008: 68m in 2009. Albeit a negative variance, there was a was there variance, 68m in 2009. Albeit a negative the fall from principally resulted charge 640m. The € € € 62m negative) being offset partially by the positive being offset partially the positive by 62m negative) (2008: of and guarantees cost of financial options € of fees management on unit-linked effect market (2008: on capital employed Return 10% 2009 fell for the group for value embedded Total to the group on an EV basis for on capital employed return non-controlling / joint venture, associate (excluding negative 7.1% adjustment) was share and own interest (2008: 9.5% positive). Short-term Investment Fluctuations Short-term Investment on markets property impact of weak continued The business has life of the group’s value the embedded fluctuations short-term in negative investment resulted of fluctuation negative on 2008’s significant improvement of holdings of property of shareholder in the value Economic Assumptions a economic assumptions was of revised effect The negative in the of the increase includes the effect movement of the a result as to 7.5% 7.0% from risk discount rate gilt in Irish medium-term yields. increase 190m € 18m € 15m in 2009 € 4m (2008: nil) 22m negative 22m negative € € 23m profit). A negative A negative 23m profit). € 89m positive in 2008 principally in 2008 principally 89m positive 73m negative compared to compared 73m negative € € 429m loss after tax) attributable to 86m) in respect of the movement in of the movement 86m) in respect € 21m) was impacted by the impairment impacted by 21m) was € 55m). 2m (2008: € € € 196m for 2009, compared to a profit in 2008 to a profit 2009, compared 196m for € 30m). € 279m (2008: 4m (2008: 170m). 341m (before the impairment of goodwill 341m (before € € € € 64m (2008: The falls in property markets, increase in increase markets, falls in property The in credit and the continuing dislocation unemployment end valuation significantly impacted the year markets in businesses resulting banking and life of the group’s (“EV”) basis, the loss after tax, on an Embedded Value of charge on property and intangibles of on property charge from sales resulting assurance of life level and the lower cuts in the public service. pay on an Embedded Value Operating Results Basis pre-tax the group’s level, equityholders. At operating loss was Brokerage and Third Party Administration and Third Brokerage Operating Profit on this business segment profit In 2009, the operating of The group’s share of the loss in Allianz, (a general of the loss in Allianz, (a general share group’s The has a 30% business in which the group insurance was interest) General Insurance Operating (Loss) / Profit General Insurance Operating (Loss) negative in 2008. This result includes a loss of result 2008. This in negative (2008: a gain of shares are These shares”. of “own the value on the year for held in policyholder funds entirely in the company in Under IFRS, the increase the benefit of policyholders. of in value of the rise as a result policyholder liabilities loss but the corresponding as a is recognised the shares STIFs of the asset is not included. The rise in value the from impact resulting also include the negative investment property to exposure shareholders’ direct of properties) occupied owner losses on (excluding € were Economic assumption changes claims 2009 includes negative in underwriting result adverse from in the last quarterexperience resulting 2009 The conditions at the end of the year. weather costs. Allianz also includes restructuring performance of to the group made a dividend payment Life Assurance and Fund Management STIFs and STIFs and and Fund Management Life Assurance Assumption Changes Economic were In 2009, STIFs to in 2009 compared (2008: Group Performance Review Performance Group 7.0% from the risk discount rate in due to the increase in Irish medium-term increase of the as a result to 7.5% gilt yields. of of Group Performance Review Summarised Group Statement of Financial Position

The group’s consolidated statement of financial position for the years ended 31 December 2009 and 2008 are summarised below:

IFRS Basis EV Basis 2009 2008 2009 2008 €m €m €m €m Assets Financial assets 32,228 24,761 32,228 24,761 Loans and receivables to customers 38,592 40,075 38,592 40,075 Loans and receivables to banks 4,925 4,775 4,925 4,775 Shareholder value of in-force business 730 787 1,076 1,080 Other assets 3,546 3,951 3,476 3,831 Total assets 80,021 74,349 80,297 74,522

Liabilities and equity Deposits by banks 18,713 18,546 18,713 18,546 Customer accounts 14,562 14,118 14,562 14,118 Debt securities in issue 13,262 10,899 13,262 10,899 Investment contract liabilities 24,032 21,118 24,060 21,110 Insurance contract liabilities 4,034 4,007 4,034 4,007 Other liabilities 3,412 3,313 3,181 3,066 Equity including non-controlling interest 2,006 2,348 2,485 2,776 Total liabilities and equity 80,021 74,349 80,297 74,522

Loans and Receivables to Customers permanent tsb is focused predominantly on retail The loans and receivables to customers balance lending with 99% of its loan portfolio secured on assets, over principal business lines for the years ended 31 89% of which consists of residential mortgages. As a December 2009 and 2008 are summarised as follows: result of adopting a low risk approach to its lending activities, the group is not engaged in business, Gross Lending 2009 2008 corporate or property development lending and as a €m €m consequence the group is not transferring any loans to ROI residential lending 27,256 27,931 the National Asset Management Agency (“NAMA”). UK residential lending 7,484 7,171 Consumer finance 1,749 2,381 The bank continued to focus during 2009 on its core Commercial lending5 1,939 1,978 customer lending franchises – residential mortgages Other 211 352 for owner occupiers and consumer finance – in Ireland. 38,639 39,813 Due to the uncertainty with regard to residential property prices, the associated lower transaction Provision for loan impairment (477) (139) volumes and the tightening of credit criteria across all Deferred fees, discounts and fair loan products, total loans and receivables to customers value adjustments 430 401 of €40.1bln at the end of 2008 fell during the year by Total lending 38,592 40,075 4% to €38.6bln.

5Commercial lending excludes loans of €447m (2008: €425m) to the group’s life assurance operations including loans held for the benefit of unit- linked policyholders. 12 Overview Business Review Corporate Governance Financial Statements 13 m € 338m € m m % € € applied by the applied by 6 2,545 39,813 59 (3) 27,458 7,567 (13) 2,243 37,268 4 28 2,343 (7) 202 37 310 2008 Change m m € 828 € 2009 4,036 7,885 2,877 3,208 38,639 23,841 34,603 (5) (13) (18) 37 102 139 26 16 49 66 75 82 Specific Collective Total 204m of this increase. These provisions provisions These 204m of this increase. m € € 376m was charged in 2009. charged 376m was

€ 2008 m € 2009 134m. The higher charge reflects the fact that collective / IBNR the fact that collective reflects higher charge 134m. The

€ m (9) (29) (38) 37 102 139 900m of which 241 236 477 213 163 376 €

Specific Collective Total 800m to €

477m, with specific provision increases accounting for accounting for increases 477m, with specific provision €

7 Satisfactory risk profile Satisfactory risk profile risk profile Fair Excellent risk profile risk profile Excellent

As of 1 January As of 1 January to Income Statement Charge Other Total loans and receivables to customers and receivables loans Total € but not impaired due Past Impaired due nor impaired Neither past

Other movements comprise amounts written off during the year together with exchange movements. with exchange together comprise amounts written off during the year Other movements The group uses the 25-point Basel II scale for the internal ratings approach (“IRB”) for credit risk. credit (“IRB”) for approach the internal ratings uses the 25-point Basel II scale for group The Future Loan Impairments Loan Future of against a range loan book modelling the bank’s of loan impairments by levels estimates future group The the and falling house prices are GDP growth negative of unemployment, levels economic assumptions. Increased ending 2011 indicate an aggregate years the three estimates for Current of impairment and provisioning. drivers key in the range impairment provision Credit Quality Credit system the rating to customers under total loans and receivables quality of of the credit A summary Group Performance Review Performance Group provisions have been provided across all portfolios in acknowledgement of the deterioration of the economy. of the deterioration all portfolios in acknowledgement across been provided have provisions year on year to on year year as is regarded of provisioning level 69%). This loan balances at the end of 2009 (2008: 58% of the impaired represent on assets. with the majority of the portfolio being secured appropriate by has increased / IBNR provision collective The Following an increase in arrears numbers and falling property values, impairment provisions increased by by increased impairment provisions values, numbers and falling property in arrears an increase Following Loans classified as “past due but not impaired” and “impaired” increased by 59% year on year while loans rated while loans rated on year 59% year by increased and “impaired” as “past due but not impaired” classified Loans in economic activity and employment. trends the deteriorating reflects 13%. This by fell profile risk with an excellent Management. Financial Risk in Note 34 – available Further details are outlined below: 2009 and 2008 are balances for impairment provision A summary of the loans and receivables group is outlined in the following table: is outlined in the following group 7 6 Group Performance Review

Loans and Receivables to Banks rates. This is due to the fact that the non-linked Loans and receivables to banks year on year remained insurance and investment liabilities and the shareholder stable at €4.9bln (2008: €4.8bln). At the end of 2009 value of in-force are calculated using assumptions the balance included €2.5bln (2008: €2.0bln) repayable regarding investment returns and interest rates. To the on demand. extent that actual returns and interest rates differ from the assumptions used, variances will arise, which may Financial Assets be positive or negative. The following table provides further analysis on financial assets, on an IFRS basis, for the years ending 31 The group’s life business is a relatively low risk December 2009 and 2008: operation. Its unit-linked portfolio of €24bln represents 92% (net of reinsurance) of the life assurance and 2009 2008 fund management businesses’ contract liabilities. Financial Assets €m €m The unit-linked investment risk is primarily borne by policyholders. Debt securities 15,780 10,929 Equity shares in units and unit trusts 13,510 10,390 In the non-linked insurance and investment portfolio, Derivative assets 1,169 1,162 the group’s policy is to match liability flows with high Investment properties 1,769 2,280 quality assets, principally sovereign bonds. The average Total 32,228 24,761 duration of the non-linked liabilities is 9.9 years while the average duration of the assets matching these Debt Securities liabilities is 9.8 years. The growth in debt securities of 44% to €15.8bln at the end of 2009 includes the €4.5bln increase in securities The credit profile of the fixed-rate securities held in the classified as available for sale. Government bonds non-linked portfolio is as follows: account for 66% of the 2009 balance (2008: 59%). Credit Profile 2009 2008 The change in value of “available for sale” (“AFS”) % % financial assets at 31 December 2009 was €42m AAA 77 88 positive (2008: €43m negative) which, in accordance AA 22 9 with the IAS 39 accounting treatment applied to AFS A 1 3 assets, was taken into other comprehensive income. 100 100

Included in debt securities is the bank’s asset portfolio The increase in AA rated securities reflects the impact of €7.4bln. This is principally held in sovereign bonds of the downgrading of sovereign bonds held in the (48%), highly rated bank Floating Rate Notes (44%) portfolio year on year. and prime (non-US) euro denominated Residential Mortgage Backed Securities (“RMBS”) (8%). There Given the close duration match of assets and liabilities, are no sub-prime assets held within the portfolio. The any mark to market adjustments in the portfolio due to portfolio is rated 33% AAA, 54% AA, 10% A and 3% changes in yield curves are generally matched by equal BAA/BA/B. and opposite movements in the value of the liabilities.

The balance of debt securities, €8.4bln, is held at fair The life company’s shareholder funds of €566m are value through the profit or loss in the life assurance principally invested in cash and owner occupied and fund management businesses. Unit-linked funds property. An analysis of the life shareholder fund account for €6.6bln of this balance while €1.8bln is investments as at 31 December 2009 is set out in EV held in non-linked funds at the end of 2009. supplementary information Note 5.

Equity Shares and Units in Unit Trusts Investment and Insurance Contract Liabilities Shares and units in unit trusts are held in listed and The increase in investment contract liabilities during unlisted entities and are all designated as fair value the year includes premium receipts of €3.4bln (2008: through profit or loss. 99% of these balances are held in €4.3bln) and market movements of €2.5bln (2008: unit-linked funds on behalf of policyholders. €7.7bln negative) being offset partially by €2.9bln (2008: €2.8bln) in claims. Insurance contract liabilities, Life Asset Portfolio which are 73% non-linked (net of reinsurance), The value of the group’s life operations is exposed to remained constant year on year at €4bln (€2.2bln net market movements in assets, currencies and interest of reinsurance). 14 Overview Business Review Corporate Governance Financial Statements 15 5.8bln, € 13.5bln 9.9bln at € 14.6bln in € 7.9bln). The The 7.9bln). € € 10.9bln (2008: € 11.8bln). ECB drawings, reported reported 11.8bln). ECB drawings, € 1.8bln) year on year to on year 1.8bln) year € 14.1bln in 2008. € 14.4bln) while drawings at 31 December 2009 at 31 December 14.4bln) while drawings 9.8bln (2008: € € success in growing the retail deposit base resulted in deposit base resulted the retail success in growing highly the a higher competitive given cost of funding during the year. deposit market of the nature 70% of funding having towards bank is working The deposits and long-term funding retail through sourced in the medium term. 246%, at the end of 2009 was loan-to-deposit ratio The group of 271%. The on the 2008 ratio an improvement this ratio. to reduce continues to work maximum level of drawings during 2009 was during 2009 was of drawings maximum level (2008: were by in the statement of financial position as ‘deposits included in the short-term debt portfolio. are banks’, reflecting the outflow of overseas deposits in the of overseas the outflow reflecting in Irish deposits growth early part 2009 and strong of thereafter. 2009 from 2009 from and resilient to be a stable deposits proved Retail the intense competition in despite funding source, customer account balances Retail the marketplace. 23% ( by increased end 2009. deposit balances at end 2009, including Corporate the benefit of unit-linked deposits held for at on year 12% year down policyholders, were on deposit growth, focus Notwithstanding the group’s of the assets on the balance sheet is such the duration risk of duration management that the appropriate funding that a significant portion of the group’s requires should be long term. Customer Accounts and Deposits Customer Accounts the group’s of leveraging a process In 2009 through company distribution channels in both the bank and life priced of competitively as launching a range as well to increased customer accounts products, Funding Term Short-term Debt that assets has a pool of collateralised group The of as security with a range capable of being used are Bank Central counterparties including the European used (“ECB”). During 2009, an element of assets was of level with an average ECB drawings as security for of the year for drawings 2008 % 33 29 38 100 33 27 40 2009

600,000. The matter is now closed. matter is now 600,000. The % Customer accounts Long-term debt Long-term Short-term debt 100 Funding Profile At 31 December 2009, 60% of the bank’s funding 2009, 60% of the bank’s At 31 December comprised customer accounts and long-term debt, At 33%, 62% at the start of the year. slightly from down increase on year a year customer accounts reflected in of 12% deposits and a decrease of 23% in retail of an outflow latter reflected deposits. The corporate replaced deposits in early 2009 which were overseas funds. The domestically sourced by extent to a large Funding and Liquidity Funding to continued system and financial global economy The and uncertainty turbulence during 2009. experience the course of over funding conditions improved While the terms on which such year, the second half of the and expensive onerous remained secured funding was historically. with the terms available when compared banking of the group’s impacted the profitability This operations. under which the group protocol, regulatory The based on various of liquidity levels requires operates, that limits applied are key tests. The stress cash flow liquidity sufficient available an institution must have eight days the next over 100% of outflows to cover As a the coming 9 – 30 days. over and 90% of outflows funding consequence of the industry-wide wholesale first half of 2009, the during the difficulties experienced easing of the to a temporary agreed Financial Regulator easing applied This noted above. liquidity requirements liquidity standard 2009. The April to September from applied again since September 2009 and requirements comfortably limits. within these operated the group it had inadvertently discovered In early 2009, the group and requirement reporting a regulatory breached with the Financial co-operated notified and promptly the investigated Financial Regulator The Regulator. with settlement agreement a matter and entered the that agreement, On reaching the company. & Irish Life that acknowledged Financial Regulator fully and had been open had co-operated Permanent that the and the process throughout and transparent and complete remedial prompt had taken company was company The breaches. the action to fully rectify the incident and paid a penalty of for reprimanded € across diversified total funding is well bank’s The below: as shown markets Group Performance Review Performance Group Group Performance Review

Funding and Liquidity (continued) Regulatory Capital The Credit Institutions (Financial Support) Scheme 2008 The group is regulated by the Irish Financial Services (the “Scheme”) and the Credit Institutions (Eligible Regulatory Authority (“Financial Regulator”) which sets Liabilities Guarantee) Scheme (the “ELG Scheme”) and monitors regulatory capital requirements in respect have been critical in providing Irish financial institutions of the group’s operations. with access to funding. During the course of 2009, the group successfully secured term funding of €3bln While there are a number of regulated entities within from international investors under the Scheme which the group which have individual regulatory capital expires on 29 September 2010. The ELG scheme, which requirements, the two principal regulated entities Irish Life and Permanent plc and its subsidiary Irish are Irish Life & Permanent plc, the group’s banking Permanent (IOM) Limited joined on 4 January 2010, operation (trading as permanent tsb), and Irish Life facilitates debt issuance for terms up to five years. Assurance plc, the group’s principal life assurance These schemes, coupled with improving investor operation. sentiment towards Ireland, enables the group to secure longer term funding, as evidenced by the issuance Regulatory capital is the level below which the group’s under the ELG Scheme of a 3-year US $1.75bln bond capital must not fall. The group’s policy is to manage the in January 2010, and a 5-year €2bln in March 2010. capital base so as to meet all regulatory requirements Further issuance under the ELG Scheme will take while maintaining investor, creditor and market place over the course of 2010, which will increase the confidence and ensuring that there is adequate capital proportion of long-term funding. to support future growth in the business. In addition, the relationship between the level and composition The group will also continue to explore alternative of regulatory capital and the shareholders’ return term funding opportunities in the senior unsecured and on capital is monitored to ensure that there is an securitisation markets which would contribute to the appropriate balance between equity and debt capital management of duration risk. within the overall regulatory capital held.

Credit Ratings The group manages its capital base through its Internal At 31 December 2009 the group was rated ‘BBB+’ by Capital Adequacy Assessment Process (“ICAAP”). Standard & Poor’s and ‘A2’ by Moody’s Investor Service. The Irish Life & Permanent ICAAP is designed to allow capital requirements to be risk-weighted and to fully Capital Management reflect the risk profile and appetite of the group. The ICAAP incorporates a detailed process to identify all The group has a flexible capital structure with the ability material risks for the group and ascertain whether they to improve and strengthen its capital base over the next are to be addressed through management or mitigation few years. The group’s core capital objective is to meet (or a combination of the two) and whether capital is or exceed all relevant regulatory capital requirements required to be held against each risk. and to hold sufficient economic capital to withstand a worst case loss in economic value due to risks arising The regulatory capital requirement follows existing from business activities. The worst case loss is derived European capital requirement directives as established through statistical models influenced by the group’s under EU legislation. Regulatory capital adequacy is target debt rating. established via comparison of risk-weighted assets and Capital Resources their associated minimum total capital requirements (currently established as 8% of risk-weighted assets), The group’s capital resources, on an IFRS basis, as at 31 with the regulatory available capital resources of the December 2009 and 2008 are as follows: group.

2009 2008 Bank Capital €m €m From 1 January 2008, the minimum regulatory capital Shareholders’ equity 2,006 2,347 requirement of the group’s banking operations has been Non-controlling interest - 1 calculated in accordance with the provisions of Basel II Undated loan capital 527 588 as implemented by the European Capital Requirements Dated loan capital 1,117 1,111 Directive and the Financial Regulator. Total capital resources 3,650 4,047

Resulting principally from the 2009 loss after tax of €313m, total capital resources fell by €397m during the year ended 31 December 2009. 16 Overview Business Review Corporate Governance Financial Statements 17 m m € € 1,788 271 18,173 22,353 11.3% 9.2% 4,174 2,059 1,230 81 1,311 5,485 (3,426) 1,454 334 2008 m m 33 243 302 € € 2009 9.2% 1,615 3,938 1,858 1,167 1,200 5,138 1,313 11.3% 16,411 20,185 1.9bln giving an end 2009 (3,280) € 16.4bln in 2009. The group’s group’s 16.4bln in 2009. The € 18.2bln in 2008 to capital ratio of 11.3% (2008: 11.3%). The 11.3% capital of 11.3% (2008: 11.3%). The capital ratio minimum of with a Basel II regulatory compares ratio 8%. available capital reduced to capital reduced available The capital requirement for operational risk is calculated operational for capital requirement The in which approach, to the standardised according divided into eight activities are all of the institution’s finance, trading business lines: corporate standardised payment banking, banking, commercial and sales, retail asset management services, and settlement, agency risk with individual operational brokerage; and retail risk, an industry- at applicable to each. Value weightings is the methodology which the group wide practice, of capital to the measurement has adopted in regard risk. to support market required table, risk- Under Basel II, as outlined in the above 10% from by reduced assets (“RWA”) weighted €

Subordinated liabilities liabilities Subordinated Other Excess own funds own Excess ICR assets before risk-weighted Total assets after ICR risk-weighted Total Tier 1) asset ratio (all Core Risk the application of the ICR Before After the application of the ICR Tier 1 capital Tier 2 capital Tier 2 1 + Tier Tier and other deductions company Life capital (Tier 1) available Total Pillar 1 (“ICR”) at 23% Interim capital requirement capital required Total Required Capital Required Capital Available Basel II of Basel II is to align bank regulatory objective The closely with the economic capital required capital more capital to support The risks being undertaken. the risks and market operational credit, to cover required under the Basel II measured to be explicitly is required methodology. has adopted the In implementing Basel II, the group risk to credit Internal Ratings Based (“IRB”) approach Under in late 2007. IRB accreditation awarded and was the bank uses internally generated the IRB approach, to support risk models to compute the capital required of default calculating the probability risk by credit in all of its default (“LGD”) (“PD”) and the loss given portfolio exposures. various The group’s capital ratios, after applying the interim capital requirement, remained strong at 31 December 2009 with 2009 with at 31 December strong remained requirement, the interim capital after applying capital ratios, group’s The base has capital minimum of 8%. The to a regulatory compared of 9.2% (2008: 9.2%) capital ratio 1 and total a Tier the regulations. of that permitted under 2 capital is only 30% Tier and the the structure capital in 1 hybrid no Tier Basel II basis at 31 on a & Permanent of Irish Life capital position the regulatory table sets out following The 2009 and 2008: December Group Performance Review Performance Group Group Performance Review

Bank Capital (continued) The table below sets out the movement in life The Pillar 2 capital requirement under Basel II has yet regulatory capital in 2009 and 2008: to be determined. In the meantime an interim capital requirement (“ICR”) is applied equal to 23% of Pillar 1 2009 2008 RWAs. Adding this ICR reduces the capital ratio to 9.2%, €m €m versus the regulatory minimum of 8%. As at 1 January 694 650 Capital generated from existing business 194 377 The application of the ICR effectively prevents a release New business strain (74) (88) of capital. However, it is the group’s expectation that the STIFs and economic variances (106) (228) Pillar 2 capital add-on will be less than the ICR and will Bank dividend (13) (15) give a capital ratio somewhere between the 11.3% and Other (10) (2) 9.2%, versus the regulatory minimum of 8%. As at 31 December 685 694

The group continues to review developments and In 2009, the existing book of life assurance business € € proposals issued by the Basel Committee on Banking generated cash flows of 194m compared with 377m Supervision in order to ensure that it remains in 2008. Both the new business strain and the net € appropriately capitalised and prepared for any capital generated were helped by the 22m (2008: € additional requirements adopted by the EU. 125m) new business strain reinsurance arrangement which was put in place at the end of 2008. This Life Capital arrangement reduced the new business strain by €44m € Irish Life Assurance plc (“ILA”) operates to an internal (2008: 59m) and impacted by capital generated from € € target solvency cover of 1.6 times the minimum required existing business 22m negative (2008: 66m positive). (2008: 1.6 times). The group considers this to be an appropriate level of capital to manage the business In 2009, the negative STIFs and economic variances of € € having regard for the basis of calculating liabilities and 106m (2008: 228m) were largely due to the tangible the insurance and operational risks inherent in the asset valuation reductions which the group suffered on underlying products. property assets and debt securities.

The solvency cover for Irish Life Assurance plc, the In line with the group’s capital management policy, group’s main life assurance operation, at 31 December whereby all surplus capital above targeted minimum 2009 is 1.6 times (2008: 1.6 times) the minimum levels is remitted to the group, ILA paid a dividend of € € requirement of €416m (2008: €410m). This is 13m (2008: 15m) to the bank holding company. summarised below: Solvency II Solvency Cover 2009 2008 The calculation of minimum regulatory capital for €m €m the life assurance business is currently based on the EU Solvency I Directive. New requirements will be Minimum capital 416 410 established under the Solvency II Directive which was formally adopted in 2009 and is expected to be Regulatory capital implemented in 2013. Solvency II will require the Net worth 536 540 calculation of solvency and reserving requirements Perpetual debt 208 205 on a realistic market consistent basis. Given the low Other assets available 20 24 risk nature of its life business, on the introduction of 764 769 Solvency II the group expects to achieve a significant Inadmissible assets (108) (104) reduction in the reserves required to support its 656 665 insurance and investment contract liabilities (December 2009: €26bln net of reinsurance) which would result in an increase in the statutory capital surplus.

In light of the expected increase in available capital resources, the group believes it is reasonable to seek to access a limited part of this capital increase at this stage. The group is in discussion with the Financial Regulator and an international bank with a view to securing a value of in-force facility of €200m.

18 Overview Business Review Corporate Governance Financial Statements 19 125m). € 22m (2008: In the context of the extraordinary challenges in challenges of the extraordinary In the context of the Government the introduction financial markets, being adopted by Scheme and the approach Guarantee and internationally, financial institutions both in Ireland will be no dividend that there proposed have the board is consistent with the priority to approach 2009. This for economic in the current capital in the group conserve to a total dividend per compares This environment. in 2008 of 22.5 cent. share Dividend Reinsurance Treaty Reinsurance terms of a finalised the 2008, the group In November business to new in relation treaty stop-loss reinsurance business strain the new will reduce which Re, with Swiss treaty of this As a result years. three the next in ILA over by reduced 2009 were for capital requirements ILA’s € Group Performance Review Performance Group Divisional Performance Review

Banking Operating Review Net interest income includes a credit of €7m in relation to deferred acquisition costs; this incorporates a credit arising from the reassessment of expected cash flows Banking Key Performance Indicators 2009 2008 from mortgages due to the lower redemption rate experienced in the portfolio in 2009. This helped Operating (loss) / profit before offset the negative impact of mismatches which arose impairment of goodwill and tax (€m) (270) 30 between the fees charged on fixed-rate mortgage Banking margin (bps) 83 105 switches and the cost of closing fixed-rate positions in Impairment provision balance (€m) 477 139 the early part of 2009 (impact on net interest income Lending book (€bln) 38.6 40.1 was circa €30m). Total Tier 1 ratio after ICR (%) 9.2 9.2 Retail deposits balance (€m) 9,889 8,047 The fall in the net interest margin to 83bps is detailed in Customer satisfaction index (%) 82.5 82.7 the following table:

In 2009 the group’s banking businesses faced bps significant challenges and, for the Irish business in 2008 105 particular, continued to be adversely affected by the Funding costs (18) deterioration in the Irish economy, lower consumer Liability margins (17) confidence, transaction volumes and falling property Asset margins 21 prices. Resulting from the decision to concentrate on Other (8) protecting the group’s key Irish mortgage and consumer 2009 83 franchises together with the general slowdown in the Irish housing market, overall gross new lending in Portfolio Growth 2009 fell 84% to €1.2bln from €7.1bln in 2008. Total As a result of the unprecedented liquidity conditions loans and receivables fell by 4% in 2009 to €38.6bln in the financial markets, coupled with the economic compared to €40.1bln at 31 December 2008. decline in the bank’s core markets, the bank continued to adopt a cautious approach to new lending and Notwithstanding the deterioration in the Irish economy, balance sheet growth in 2009 and focused on the bank’s the bank’s customer acquisition strategy continued core customer lending franchises - residential mortgages to be successful in 2009 with the bank using its sales for owner occupiers and consumer finance - in Ireland. strengths to re-focus its efforts in growing retail deposits. All other lending was suspended. Retail deposit balances increased 23% on 2008 to €9.9bln at the end of 2009. The change in the balances over principal business lines was as follows: During the year, the bank continued to focus on its customer service ethos through its Customer Central Gross Lending 2009 2008 programme. In 2009, permanent tsb’s customer €m €m satisfaction index score reduced slightly from 82.7% to ROI residential lending9 27,256 27,931 82.5% UK residential lending £6.6bln (2008: £6.8bln)9 7,484 7,171 Net interest margin8 (“NIM”) for the year declined Consumer finance 1,749 2,381 to 83 basis points (bps) from 105bps for the full year Commercial lending10 2,386 2,403 2008. This resulted in net interest income falling 21% 38,875 39,886 to €375m for 2009 from €473m for 2008. This fall Money market funds 211 352 principally reflects the higher funding costs associated Deferred fees, discounts and with the sharp rise in the marginal cost of attracting fair value adjustments 430 401 retail and corporate deposits as well as the cost of 39,516 40,639 refinancing maturing wholesale debt. This pressure Inter-group loans and receivables (447) (425) was partially offset by the higher asset margins on the Impairment provisions (477) (139) Irish mortgage business facilitated by the re-pricing of Total lending 38,592 40,075 standard variable rate mortgage products during the year.

8Net interest margin is the ratio of net interest income and the average interest earning assets for the year. 9Including securitised mortgages. 20 10Commercial lending includes loans of €447m (2008: €425m) to the group’s life assurance operations including loans held for the benefit of unit- linked policyholders. Overview Business Review Corporate Governance Financial Statements 21 m € 428m. € 0.3bln from 0.3bln from € - (189) 18 (152) (8) (289) 5 207 (170) 29 496 42 428 2008 - 8 m (2) (4) 44 2.4bln. (29) 355 336 € 336m was down down 336m was (343) (266) (276) € 2009 € 7.5bln at the end of 2009. at the 7.5bln € 2.4bln) reflecting the short term nature the short term nature 2.4bln) reflecting € 1.1bln in 2008 mainly reflecting reduced demand in reduced reflecting 1.1bln in 2008 mainly 1.7bln (2008: As a result of exchange rate movements, this book in movements, rate of exchange As a result to increased terms, euro 72% to consumer finance loans fell New € 27% to portfolio fell The car finance market. the new € of this portfolio. discontinued in lending being commercial new With 1% to by 2008, the portfolio fell Net interest income Net interest income in 2009 at Net interest to the 2008 outturn of 21% when compared due to the higher funding costs associated was This with both deposits and wholesale funding in 2009. In to the higher costs, the pricing of the funding response increased was mortgage product variable-rate standard 50bps and a furtherin September 2009 by 50bps in February 2010. Regulatory Capital Regulatory ICR) (after the capital ratio 1 regulatory total Tier The remains ratio 9.2% (2008: 9.2%). The 2009 was for of 8%. minimum higher than the regulatory 0.8bln 4.2bln € € 27.3bln compared compared 27.3bln € 189m in 2008 and lower net 189m in 2008 and lower 266m, down from a profit of a profit from 266m, down € € / ESRI House Price Index house prices / ESRI House Price Index 343m up from 343m up from € Trading income Trading Other income 27.9bln at year-end 2008. A lower level of early level 2008. A lower at year-end 27.9bln € 18m before impairment of goodwill in 2008. The 2009 The in 2008. impairment of goodwill 18m before Operating profit before impairment provisions provisions impairment before Operating profit Impairment provisions Impairment of goodwill tax Operating loss before 77 (266) Investment return return Investment / amortisation depreciation / expenses Administrative equipment and intangible assets Impairment of property, Government guarantee charge charge guarantee Government Net interest income Net interest income Other non-interest

Banking Operating Review - Ireland Banking Operating Review 2009 and ended 31 December the years Irish banking business for of the group’s performance operating pre-tax The set out below: 2008 are The contraction of the Irish housing market, which housing market, of the Irish contraction The 2009. in accelerate continued to in 2007, commenced as mortgages reduced residential new for Demand of a combination as a result fell consumer confidence (per the house price falls of economic uncertainty, permanent tsb Divisional Performance Review Performance Divisional 9.1% in fallen by having 18.5% in 2009, on average fell credit. of 2008), and less availability of the group Irish mortgages issued by New in 2009 showed a reduction of 81% on the a reduction in 2009 showed mortgage Irish residential issued in 2008. As a result, 2% to by fell balances outstanding to conditions market activity reflecting redemption in 2009. experienced also was generally closed to mortgage book, which was UK residential The to £6.6bln. on year 3% year by business in 2008, fell new Against the background of a sharp contraction in sharp contraction of a Against the background higher funding costs and a weak economic activity, Irish banking business the group’s Irish housing market, loss of a pre-tax delivered € principally due to the impairment provision loss was of charge interest income. interest Divisional Performance Review

Banking Operating Review - Ireland by the end of 2010 the bank plans to reduce its branch (continued) network by 11 branches and reduce headcount by a Net interest income accruing from the mortgage further 140 full time equivalents. book includes a credit of €7m in relation to deferred acquisition costs; this incorporates a credit arising Portfolio analysis from the reassessment of expected cash flows The continued deterioration in the general economic from mortgages due to the lower redemption rate environment and the low levels of activity in the experienced in the portfolio in 2009. This helped offset residential property market has impacted credit quality. the negative impact (circa €30m) of mismatches which As the decline in property prices in Ireland (18.5% arose between the fees charged on fixed charged on for 2009 per the permanent tsb / ESRI House Price fixed rate mortgage switches and the case of closing Index) continued in 2009, the loan to values (“LTVs”) of fixed rate positions in the early part of 2009. the group’s lending portfolio, indexed against industry market values reported by the above mentioned house Other Income price index, have risen accordingly resulting in an Other income of €44m is up 5% compared to €42m increase in the number of cases in negative equity. The achieved in 2008. This reflects higher resource fee average indexed LTV of the Irish mortgage portfolio, income and general insurance commission offset by for residential mortgages and residential investment lower bureau de change. property (“RIP”) loans now stands at 63% with cases over 100% representing 22% of the portfolio. Other income excludes the contribution from bancassurance sales generated through the bank, which The deterioration in the Irish economy and in particular, are reported in the pre-tax profit of the group’s life the acceleration of unemployment has resulted in the assurance business. Sales of life and pension products number of Irish residential mortgage accounts in arrears through the bank were €29m in 2009 compared to increasing by 79% year on year to 6.1% of the portfolio. €55m in 2008 with the reduction reflecting a lower level The number of residential mortgage accounts in arrears of lump sum investment and protection sales on foot of greater than 90 days has increased from 3,711 in 2008 to weaker investment markets generally and the reduced 7,228 in 2009, 3.9% of the residential mortgage portfolio. level of mortgage lending. Notwithstanding the level of arrears, 93% of all loan Government Guarantee Charge accounts are up to date at the end of 2009 (95% at The Government guarantee charge for 2009 was €29m the end of 2008). Arrears management and customer compared to €8m in 2008 which covered the period affordability continues to benefit from the historically from 30 September 2008 to year-end. This cost is low interest rate environment. calculated as a percentage of the liabilities which are covered by the scheme and is payable on a quarterly The key priority for the group in these challenging basis. economic conditions is to minimise the losses arising from credit impairments. Resourcing has significantly Investment return increased in the credit and collections areas across The 2009 investment return of €8m resulted from the all portfolios with particular focus being placed on purchase of Auburn and Fastnet securities (securities those arrears arising in more exposed parts of the issued by the group) in the market. In 2008, a gain of loan portfolio. There were 7,835 residential mortgage €29m was achieved on the disposal of the bank’s “Held accounts on a moratorium at the end of 2009 to Maturity” debt securities portfolio in the first quarter representing 4.3% of this portfolio. of 2008. During 2009, permanent tsb welcomed the Costs introduction, on a statutory basis by the Financial Administrative expenses including depreciation and Regulator, of a code of conduct for mortgage arrears. amortisation for 2009 were €276m, a 4% fall on the This code ensures that both borrowers and lenders 2008 outturn of €289m. Excluding 2009 restructuring engage with each other pro-actively to address any / non-operational costs of €13m, costs in 2009 fell mortgage repayment difficulties. by 9% year on year. Cost management continues to receive significant management attention in 2010 and 22 Overview Business Review Corporate Governance Financial Statements 23 m € 343m € 2008 27 31 9 67 30m on the m 90 99 € 154 343 € 2009 276m to € 47m and € 343m. € 186m and collective / IBNR 186m and collective

€ 157m. This reflects the decision to make the decision to make reflects 157m. This € 67m). The 2009 charge is split between is split between 2009 charge 67m). The € Impairment Charge Impairment Residential lending Residential Consumer finance lending Commercial Impairment provisions loans and the arrears on impaired movement The in the impairment resulted outlined above performance and receivables Irish loans for charge provision to on year year increasing 2009 and 2008 for A summary of the impairment charge is as follows: Consumer Finance Consumer loans as a impaired finance portfolio, In the consumer to 9.5% at year- of the portfolio increased percentage to NPLs increased 2008. 2.6% at year-end end 2009 from represents 3.7% in 2008. Car finance 11.8% in 2009 from In this finance portfolio. the majority of the consumer increased cases have arrears on year year portfolio, in the portfolio has seen a moderation 41%. The by in the latter half of 30 days cases over in arrears growth on this provisions impairment for charge The the year. in 2009. peaked to have portfolio is expected Lending Commercial in 30 days mortgage case numbers, over Commercial at 31 December 61% to 554 cases by increased arrears, at of those arrears value 2009 (2008: 345 cases). The of the commercial the end of 2009 as a percentage to 0.6% at the 0.9% compared mortgage portfolio was 0.7% in 2008 from loans increased end of 2008. Impaired to 12.9% in 2009 from in 2009. NPLs increased to 7.2% exposures prime commercial 6.1% in 2008. In general cases do default but where continued to perform have in the short to medium term to cure difficult are they repayment tenants with good the need to acquire given capacity. Irish residential mortgage and commercial mortgage mortgage and commercial Irish residential of the in acknowledgement portfolios respectively in 2009. of the Irish economy deterioration Irish loans and for charge impairment provision The by increased the year for receivables (2008: of specific provisions of provisions of / IBNR provisions collective 605m € 425m). € m % m % € € Balances NPLs/Total Balances

Loans Loans 147 6.1 16 0.7 605 2.2 51 0.2 Balances ILs/Total 841 2.6 128 0.4 89 3.7 61 2.6 447m (2008: € % % Loans Loans 2008 2008 NPLs/Total

28 22% m m 2009 2009 307 12.9 171 7.2 415 1.5 753 2.4 206 11.8 167 9.5 213 28% 1,342 4.9 1,855 5.9 Balances Balances ILs/Total 11 11 1,342m. € Calculation includes intra-group loans of Calculation includes intra-group Residential Residential Lending Residential lending Residential

Consumer finance Consumer finance Coverage Coverage Specific Provision Specific Provision Commercial Commercial Lending Commercial Commercial Lending € € 11 to ROI Residential Lending Residential ROI in economic conditions, of the deterioration As a result the residential across continued to increase arrears in arrears, 30 days portfolio in 2009. Case numbers, over 79% to almost 11,400 cases in 2009 from by increased at 31 of total arrears value 6,350 cases in 2008. The 0.28% of the book was 2009 as a percentage December is 2008. This to 0.16% at 31 December compared in NPL balances from in the increase reflected

Portfolio quality is there as soon as as impaired treated are Loans an impairment loss has been that evidence objective not includes, but is evidence Objective incurred. by difficulties experienced cash flow known limited to, of either payments contractual overdue the borrower, or of loan covenants or a breach principal or interest, conditions. 2009 and 2008 loans (“ILs”) at 31 December Impaired set out below: are Divisional Performance Review Performance Divisional Non-performing loans (“NPLs”) are defined as loan loans (“NPLs”) are Non-performing plus impaired in arrears 90 days of balances in excess set out 2009 and 2008 are loans. NPLs at 31 December below: Divisional Performance Review

Banking Operating Review - Ireland The operating loss for 2009 of €4m is impacted by (continued) an impairment provision charge of €33m which was up from €15m in 2008. The 2009 impairment charge Impairment provisions on the consumer finance of €33m includes a specific charge of €27m and a portfolio are calculated on a collective and a specific collective / IBNR of €6m. basis. Falling values of second hand cars, albeit they The higher funding costs experienced by the group in have shown signs of stabilising in the latter half of the general with have resulted in net interest income falling year, have resulted in higher losses on repossession year on year by 13% to €39m. and disposal and this, coupled with the 174% increase in the absolute levels of impaired loans, has resulted With new lending suspended in Capital Home Loans in a significant increase in the impairment charge on since 2008, administrative expenses in the UK fell 39% this portfolio to €90m in 2009 (2008: €31m). The 2009 to €11m facilitated by a fall in average staff numbers charge includes a €10m specific provision. from 197 in 2008 to 124 in 2009.

Customer Acquisition Portfolio Quality Customer account balances for the Irish banking With house prices in the UK increasing year on year by business at 31 December 2009 totalled €14.6bln, up 1.1% (per the Halifax House Price Index), the average 3% from €14.1bln at the end of 2008. Excluding current index linked LTV of the UK mortgage portfolio is 83% accounts, Irish retail deposit balances, principally with cases in negative equity representing 24% of the demand and term deposits, increased by 34% from total portfolio at year end. €5.7bln in 2008 to €7.7bln in 2009. This increase more than offset the 4% fall in current account balances to Impaired loans (“ILs”) and non performing loans12 at 31 €2.2bln in 2009. New customer service initiatives and December 2009 and 2008 are set out below: competitive pricing were launched to attract and retain new deposit balances. In total retail deposits increased 2009 2008 23% to €9.9bln at the end of 2009. Balances % of Total Balances % of Total Loans Loans Banking Operating Review - UK €m % €m % Impaired loans 75 1.0 74 1.0 The group’s principal business in the UK, Capital Home Non-performing Loans Limited (“CHL”) is a centralised mortgage lender loans 258 3.4 255 3.6 which is focused on the professional landlord residential investment property market or buy-to-let (“BTL”) as CHL’s three month arrears peaked at over 1,600 cases it is referred to in the UK. 94% of the portfolio is BTL in March 2009 and have declined steadily since to 1,162 (93% in 2008). Capital Home Loans Limited was closed cases at year end, a 28% reduction. This downward to new business in March 2008, which resulted in the trend has continued into 2010 in line with that reported UK lending portfolio falling by 3% to £6.6bln. The by other buy-to-let lenders in the UK although CHL’s focus in CHL is now on customer service and arrears experience has been consistently better than the management. industry overall. CHL’s three month buy-to-let arrears cases at the end of December 2009 was 2.55% of its The pre-tax results of the group’s UK banking business loan book compared to the industry average of 3.37% as for years ended December 2009 and 2008 are set out reported by the UK Council of Mortgage Lenders. below:

2009 2008 €m €m Net interest income 39 45 Other non-interest income Other income 1 - 40 45 Administrative expenses / depreciation / amortisation (11) (18) Operating profit before impairments 29 27 Impairment provisions (33) (15) Operating (loss) / profit before tax (4) 12

24 12Non-performing loans are defined as loan balances in excess of 90 days in arrears plus impaired loans. Overview Business Review Corporate Governance Financial Statements 25 1.1bln 348m from 348m from Basis € € m % 14 the term of the € 3,152 (24) 304 (17) 1,450 1,398 (24) (25) 2008 Change 2008 15.1 511 32 m 30 252 348 € 11.4 2009 2009 2,398 1,096 1,050 191m, while down 6% year on year, on year, 6% year 191m, while down € 247m) on an APE basis. This reduction reduction basis. This 247m) on an APE € 1.5bln). Reflecting reduced sales activity, the the sales activity, reduced 1.5bln). Reflecting € 159m (2008: 511m in 2008 compared to an estimated 28% fall in to an estimated compared 511m in 2008 Basis PVNBP m % 13 principally reflects a 29% decline in investment business a 29% decline in investment principally reflects business. On a PVNBP and a 69% decline in savings sales declined 24% to Life basis, total Retail (2008: a further scaled back by 12% (excluding cost base was costs) in 2009 through / non operational restructuring initiatives. reduction headcount and payroll The market for retail investment products in 2009 products investment retail for market The global the impact of weak reflecting weak very was confidence in equities on investor markets investment deposit for preference and an investor and property In the face rates. interest attractive offering products 36% to sales fell Life demand, Retail of this reduced € Life sales (on an APE basis), fell by 32% to by fell basis), sales (on an APE Life € sales (on Fund management market. life the overall basis) of an APE Irish Life company, facilitated the fund management to share its market to increase Managers, Investment 31.2% (2008: 29.8%). priority for a strategic remains market pensions The 32% in 2009, by and whilst pension sales fell the group sales life total group 76% of for pensions still accounted business pensions strong The Assurance. in Irish Life enabled the group Life Corporate and in both Retail position in the share to maintain its dominant market of 30%. share with an estimated market pensions market €

511 (32) 30 (17) 247 234 (36) (30) 2008 Change m 25 348 159 164 € 2009 187 284 2008 714 5,180 14.0 (2) 9.4 102 539 2009 4,306 m € m m) € € m m € € ), direct sales, franchises, institutional sales, franchises, ), direct PVNBP sales are calculated as total single premiums plus the discounted value of regular premiums expected to be received over over to be received expected premiums of regular plus the discounted value as total single calculated premiums PVNBP sales are APE sales are calculated as annual value of regular premiums plus 10% of the value of single premiums. plus 10% of the value premiums of regular as annual value calculated sales are APE IFRS operating (loss) / profit (loss) / profit IFRS operating business (PVNBP) New % (APE) business margin New profit EV operating New business (APE) business (APE) New Corporate Life Life Corporate International Limited Irish Life Retail Life Life Retail Life margin (%) margin Life ( business APE new Life Life market share (%) (%) share market Life 14 13 (other bank branches) and telephone / internet (other bank branches) the business with unrivalled channels providing and customer access points. This distribution reach is not overly that Retail ensures distribution reach one channel. dependent on any 2009 was a difficult year in the life market in Ireland in Ireland market in the life a difficult year 2009 was and deteriorating markets global investment with weak a significant dampening domestic conditions having in products sum investment lump on demand for effect its retained the group Against this backdrop, particular. franchise leading market on maintaining Irish Life’s focus most resilient its two developing and in particular, protection. – pensions and products Life Retail on sales of life business concentrates Retail group’s The It in Ireland. market to the retail and pensions products range product leader with a comprehensive is a market and regular investment spanning pensions, protection, savings. a multi-channel distribution strategy follows Life Retail (via bancassurance with independent brokers, permanent tsb Life Assurance Key Performance Indicators Performance Life Assurance Key APE Life Assurance Operating Review

Life Assurance and Fund Management Management and Fund Life Assurance Review Operating Divisional Performance Review Review Performance Divisional contracts.

The sales in the group’s principal life assurance businesses are summarised below: businesses are assurance principal life sales in the group’s The Divisional Performance Review

Retail Life (continued) Customer service levels are a key differentiator of Notwithstanding the decline in sales, Retail has an providers in the market and the Corporate Life division estimated 30% share of the market. It also continued has achieved competitive advantage through continued to develop excellence in customer service through its and sustained investment in both staff and technology ‘Intouch’ customer satisfaction programme. In 2009 it in order to achieve significant improvement in service launched a broker satisfaction survey which resulted levels and customer satisfaction. In 2009, Corporate in an index score of 76%. In 2009, Irish Life Retail was Life achieved a customer service index score of 92.6%, awarded the “Best in the World at Plain English” award up from 89.1% in 2008. This focus on service level beating over 12,000 organisations in over 80 countries. improvements and customer satisfaction will continue to be a feature of the division’s agenda into the future. Corporate Life The Corporate Life division sells pension and risk Corporate Life persistency experience has schemes to employers and affinity groups in Ireland deteriorated during 2009 due principally to increasing distributed principally through pension consultants unemployment, company closures and lower salary and brokers (including Cornmarket, a specialist affinity levels. Despite this experience, generally policies are broker and a wholly owned subsidiary of the group). not being encashed and, as a result, the persistency The key drivers of sales growth are employment and effect on Corporate Life’s earnings is less than on the salary growth in the Irish economy. The decline in Retail Life side. Corporate Life sales in 2009 resulted principally from increasing unemployment, salary freezes and the public sector pension levy. APE sales fell 30% to €164m in 2009. On a PVNBP basis sales fell 25% to €1,050m from €1,398m in 2008. Corporate Life has a leading position in this market with an estimated market share in excess of 40%. Life Assurance Financial Review - IFRS Basis

The operating results of the group’s life assurance business under IFRS, for the 12 months ended 31 December 2009 and 2008 are set out below:

2009 2008 €m €m Net interest payable (36) (51) Net fees and commissions (136) (137) Premiums on insurance contracts net of reinsurance 593 441 Investment return 2,616 (7,693) Fees from investment contracts and fund management 203 240 Change in shareholder value of in-force business (57) 70 Operating income 3,183 (7,130) Claims on insurance contracts net of reinsurance (329) (314) Change in insurance / investment contract liabilities (2,614) 7,890 Administrative expenses / depreciation / amortisation (183) (190) Impairment (5) - Investment expenses (67) (86) Operating expenses (3,198) 7,300

Operating (loss) / profit before tax (15) 170

The operating loss before tax for 2009 was €15m compared to the operating profit in 2008 of €170m.

Operating income This increase principally reflects the impact of positive Operating income at €3,183m was significantly higher investment market returns on policyholder funds in than 2008 (€7,130m negative) principally due to the 2009 compared to negative returns in 2008. large increase in the investment return, which was a negative €7,693m in 2008 compared to a positive of €2,616m in 2009. 26 Overview Business Review Corporate Governance Financial Statements 27 2.0 1.1 29.8 26.7 203 11.4 2008 183m in € 1.9 0.6 5.9 191 31.2 29.8 2bln). This 2bln). This 2009 € bln) 26.6bln) representing an 26.6bln) representing € € 2.2bln were 65% higher than 2.2bln were 1.9bln (2008: € 0.4bln and contributions from 0.4bln and contributions from € € 1.5bln. The quantum of new client quantum of new 1.5bln. The € 190m). Excluding restructuring / restructuring 190m). Excluding 29.8bln (2008: € bln) € € m) € Margin (PVNBP) % (PVNBP) % Margin (%) share Market Fund Management new business new Fund Management ( APE % (APE) Margin business new Fund Management PVNBP ( Funds under Management ( Funds under Management Fund Management Key Key Fund Management Indicators Performance Administrative expenses decreased 4% to 4% decreased expenses Administrative 2009 (2008: 10% down costs were costs, overall non-operational and the tight cost management on 2008 reflecting slower necessary due to the successful restructuring sales environment. increase of 12% year on year. of 12% year increase included new sales of included new clients of existing economic the general by affected adversely was money activity in the market. of the year for Outflows state clients. Despite the loss of 2 large 2008 reflecting for conditions, total funds under management market ILIM were ILIM is committed to market leadership through leadership through ILIM is committed to market and clients and developing the needs of its recognising solutions to investment the most appropriate providing performance a strong meet those needs. ILIM delivered sides of the and passive in 2009 on both the active business despite the economic climate and continued its client base. to grow under management of domestic funds share Its market Gross 29.8% in 2008 to 31.2% in 2009. from increased were fund inflows new

Fund Management Operating Review Fund Management (ILIM) provides Managers Investment Irish Life life the group’s services for management investment in addition to managingand pensions business large of active, a wide range funds. ILIM offers segregated of focus funds with a key consensus and multi-manager business The innovation. the business being on product and in the past number of years strongly has grown as in Ireland fund manager as the largest ranks now domestic funds under management. by measured 2,614m € 348m € 7,656m positive positive 7,656m € 130m compared to a net 130m compared € 3,198m in 2009 compare to 3,198m in 2009 compare € 2,616m included in operating 2,616m included in operating € 86m gain) due to an increase in 86m gain) due to an increase € 234m in 2008. This is mainly due to 234m in 2008. This € 2,484m negative in 2009 mainly due to the 2,484m negative € 511m). The new business contribution was was business contribution new 511m). The 7,890m positive in 2008 compared to in 2008 compared positive 7,890m € € 18m (2008: € 7,693m in 2008. 7,693m 7,300m positive in 2008 principally due to the change due to the change in 2008 principally positive 7,300m 2m negative in the reported 2009 statutory profits, 2009 statutory profits, in the reported 2m negative negative in 2009, again due to the positive investment investment positive in 2009, again due to the negative funds in 2009 and negative on policyholder return in 2008. returns also includes losses expenses 2009 operating The of because occurred increase policyholder liabilities. This the benefit of held for shares, & Permanent Irish Life a corresponding was There value. in policyholders, rose the by represented of the asset rise in value of own but under IFRS, a rise in the value shareholding in the income statement. is not recognised shares a liabilities shows contract in insurance change The in liabilities of net increase reduction of reduction from liabilities arising linked in insurance an increase to negative in 2009 compared returns market positive in investment change in 2008. The returns market from liabilities has decreased contract in 2008 to in 2009. gains experienced market investment in the positive in these liabilities is reflected change The of return investment income in 2009 compared to a negative return of return to a negative income in 2009 compared € Operating expenses of expenses Operating € These liabilities. contract and investment in insurance were Life new business written (excluding ILIM investment ILIM investment written (excluding business new Life 32% to basis declined by APE sales) on an (2008: € IFRS, to a contribution of nil in 2008. Under compared new contract of acquiring investment cost the fixed whilst of acquisition in the year business is recognised of the contract. the life over recognised are flows profit 15% mainly by fell contracts investment from fees The in 2009 and experience due to the poor persistency investment of average level lower 2008 coupled with the 2009 months to December fund balances in the twelve 2008. The months to December to the twelve compared business insurance of in-force of the value reduction in the risk discount the change principally arises from rate. Divisional Performance Review Performance Divisional Divisional Performance Review

Fund Management Financial Review - the negative experience variances, mainly reflecting IFRS Basis negative persistency variances due to higher product withdrawals in Retail Life. The operating results of the group’s fund management business under IFRS, for years ended 31 December 2009 New business contribution and margins and 2008 are set out below: The decrease in new business contribution is explained by a 25% fall in life and investment sales and the fall in new business margin. 2009 2008 €m €m Life Margins APE Basis PVNBP Basis Fees from investment contracts 2009 2008 2009 2008 and fund management 38 46 % % % % Operating income 38 46 Life 11.4 15.1 1.6 2.4 Fund Management (ILIM) 5.9 11.4 0.6 1.1 Administrative expenses / 9.4 14.0 1.2 1.9 depreciation / amortisation (25) (29) Operating expenses (25) (29) The reduction in Life new business margins principally reflects the operational gearing impact of a lower level Operating profit before tax 13 17 of new business sales as unit fixed costs increased. To enhance margins in the future, a level of restructuring Operating profit before tax of €13m is 24% behind 2008 was completed in the second half of 2009. due to a drop in fee income of €8m year on year due to a fall in markets in 2009 being offset somewhat by a When calculated on the PVNBP basis, new business €4m reduction in administration expenses. margins, including ILIM, were 1.2% compared to 1.9% in Life Assurance and Fund Management the full year 2008. Financial Review - Embedded Value Basis The internal rate of return for 2009 was 9.3% (2008: 12.1%). The average undiscounted payback period15 for 2009 across the group’s life product portfolio, excluding The operating results of the group’s life assurance and ILIM, was 8.3 years (2008: 7 years). fund management businesses, presented on an EV basis, for the years ended 31 December 2009 and 2008 In-force Business are set out below: Total in-force earnings for 2009 were €51m compared to €184m in 2008. This 72% decline in earnings 2009 2008 principally reflects the impact of negative persistency €m €m variances. Within this, the total expected return fell by New business contribution 51 100 19% to €108m, which principally reflects a smaller book unwinding at a lower risk discount rate than in 2008. Contribution from in-force business The expected in-force return represents the unwind of Expected return the risk discount rate on the opening shareholder value In-force 108 133 of in-force. Net worth 14 32 Experience variances (70) - The expected return on the net worth relates to Assumption changes (1) 19 earnings on shareholder assets. It is calculated by 51 184 reference to the assumed long-term rate of return on Operating profit before tax 102 284 property and equities and the actual return on short- term cash. In 2009, the expected return was €14m Operating profit before tax for 2009 was down 64% to compared to €32m in 2008. The principal reason for €102m (2008: €284m). The key drivers of this outturn this fall was due to the fall in deposit rates. were a lower level of new business contribution, which was down 49% to €51m (2008: €100m), and

15Payback period is calculated as the number of years it takes adding up the cash flows to break even. 28 Overview Business Review Corporate Governance Financial Statements 29 m € m € 218m). When 218m). When € m € 208m (2008: 32m positive reflects the reflects 32m positive € € - 19 19 (29) (31) (60) 4 28 32 25 22 47

Experience Assumption Total Assumption Experience m € changes 27m reflects the impact in 2009 of the restructuring the impact in 2009 of the restructuring 27m reflects 2008 The negative expense / other experience variance of variance other experience / expense negative The € expense business. The assurance the life costs across of assumption changes the by achieved capitalisation of the cost saving gains in 2009. and productivity restructuring Costs and fund management assurance Costs within the life Overall divisions continue to be tightly managed. 5% at down costs were costs excluded are costs / non-operational restructuring the successful reflects 10%. This by fell on year year of level the lower given of the businesses restructuring years. to previous relative sales activity forecast

m € 2009 changes 42m € 69m

€ m 23 9 32 (27) 32 5 (70) (1) (71) (66) (42) (108) € Experience Assumption Total 108m includes € 28m negative variance for the first six months the first six months for variance 28m negative €

14m negative variance for the second six for variance 14m negative € 38m in Corporate Life. This negative variance was was variance negative This Life. 38m in Corporate Total Expenses / Other Risk Risk Persistency Persistency

negative include a provision for the adverse persistency the adverse for include a provision negative 2010 but at a lower in 2009 continuing in experience level. principally results variance risk experience positive The mortality and permanent health insurance positive from and Corporate Life in Retail termination experiences respectively. Life The aggregate negative persistency experience variance variance persistency experience negative aggregate The of and assumption changes months. The persistency assumption changes of persistency assumption changes months. The Experience variances and assumption changes are analysed as follows: are changes and assumption variances Experience persistency has been negative where Life in Retail lines and all the main product across experienced € the economic environment due to factors arising from due to falling living standards as customers faced lower to cash as a move as well incomes and unemployment Retail confidence. The investor due to a fall in products second in the did improve persistency experience Life with the to the first half of the year half of 2009 relative improving variance persistency experience negative a from to a Divisional Performance Review Performance Divisional Risk Management

Risk Factors Market conditions may restrict or limit the availability of funding or liquidity to The group is subject to risk factors that could have the group a material adverse effect on the business, financial The Group’s banking business condition, results of operations and prospects or its As a result of the continued dislocation of financial ability to continue as a going concern. In addition to the markets and in line with the international banking matters set out under the Forward-Looking Statements industry generally, the group has seen the availability on the inside cover, the principal factors that may affect of funding in certain wholesale markets which it the group are described below: has traditionally accessed been severely disrupted with, in certain markets, no funding being available The group’s results may be adversely for periods of time. Since the latter half of 2007, the affected by general economic conditions global economy and the global financial system have and other business conditions been experiencing an ongoing period of significant The group’s results are affected by general economic turbulence and uncertainty. Credit markets worldwide and other business conditions in Ireland, where the have experienced a severe reduction in the level of majority of the group’s earnings are generated, as liquidity and quantum of term-funding available in well as by conditions in the UK where its subsidiary the wholesale markets. While recently there has been Capital Home Loans operates. These conditions include easing in the availability of funding, the terms on which changing economic cycles that affect demand for life such funding is available remain more onerous and assurance and banking products and as a result, the expensive than the terms available historically. As a group’s profitability. Such cycles are influenced by global result of these events the group has focused on its core political events as well as by market specific events, customer lending franchises in Ireland. In the event of such as shifts in consumer confidence and consumer severe curtailment of credit markets, the group could be spending, the rate of unemployment, industrial output placed in a position where it has to significantly curtail and political uncertainty. The global financial system growth in the balance sheet with a consequent negative has experienced difficulties since 2007 resulting in very impact on profitability. However, the low risk nature significant deterioration in financial markets. Banks of the group’s loan book and the ability to collateralise and other lenders have suffered significant losses these assets has provided some flexibility in meeting due to the increased risk of default and the impact of the group’s funding requirements. The Government declining asset values on the value of collateral while Guarantee Scheme and the Eligible Liabilities insurance companies have seen significant falls in sales Guarantee Scheme are of significant importance to and asset values. In that same period, the group has the group’s banking business in supporting availability experienced reductions in business activity, increased of funding. Eurosystem funding, and in particular funding costs and funding pressures, decreased asset funding from the ECB, is an important lower cost values, decreased sales, additional write-downs and / source of funding which the group can access. The or impairment charges with consequent adverse effects group’s ability to maintain material levels of funding on its results of operations and financial condition. Since under the Eurosystem is dependent on the continued the end of the first quarter of 2009 there have been eligibility of its collateral. Accordingly, any impact on some signs of stabilisation in financial markets with the group’s eligible collateral could restrict the group’s reduced volatility versus the peak, modestly improving ability to continue to access Eurosystem funding. This asset prices in general, although Irish house prices would further limit its access to funding and liquidity have continued to fall, and modestly tightening credit and could further materially affect the group’s results, spreads. However, conditions remain unpredictable. financial conditions and prospects. The precise nature of all the risks and uncertainties the group faces as a result of the current global financial The Group’s life assurance business crisis and global economic outlook cannot be predicted For certain property linked funds of the group’s life and many of these risks are outside the group’s control. assurance business there is the ability for the group to defer encashments for up to six months to allow it time to sell relevant properties. However, if any such properties cannot be sold within this time period the group may have to provide liquidity for these funds which could adversely affect the group’s results, 30 financial condition and prospects. Overview Business Review Corporate Governance Financial Statements 31 amounts of cash flows (premiums and benefits) due (premiums amounts of cash flows of death. to the incidence or non-incidence policy among trends expectancy life to increasing in payout holders and pensioners, resulting originally higher that the group than those ratios accounted for. (such as claims) due to and amount of cash flows and the incidence or non-incidence of disability sickness. Life assurance risk and other inherent inherent risk and other Life assurance business its life assurance risks affecting and market including persistency the group’s impact may performance risks results in the amount and volatility risk is the assurance Life in any changes unexpected by timing of claims caused or morbidity risks: longevity of mortality, • Mortality in timing and risk is the risk of deviations • due risk is the risk of such deviations Longevity • in timing is the risk of deviations Morbidity risk is a major participant and in the Irish life group The to changes and as such is exposed pensions market and morbidity longevity in policyholder mortality, or morbidity longevity in mortality, Changes experience. significantly of policyholders could, therefore, rates In its pricing and reserving results. the group’s affect of rates assumes that current policies, the group over mortality annuitants continuously improve for time. the from risk is the risk resulting Persistency assurance or lapse of life surrender redemption, a has experienced policies. Since 2008, the group to in persistency as customers move deterioration of additional cash in their policies or to stop payment confidence in investor due to the fall generally premium in personal net cash flows. and the reduction actuarial the group’s from A material variation or persistency assurance to life assumptions in relation the Group’s affect risks could materially and adversely financial condition and prospects. assurance life In addition, within the group’s used to calculate the business, the risk discount rate of the business, which is the principal embedded value of in respect the group used by measure performance with activities, will fluctuate in line assurance its life a material and this can have rates interest market of this business which in results impact on the reported financial results, the group’s affect adversely turn may condition and prospects. The performance of the investment markets (equities, markets of the investment performance The impact on the group’s and gilts) has a direct property equity to direct is exposed group The financial results. assurance life holdings within the group’s / property impact of the indirect assets and from shareholder held in of equities / properties in the value changes assurance life which the group’s policyholder funds from In addition, fees. management derive operations and investment values of equity and property volatility confidence, which investor can affect performance Since in turn can impact both sales and retention. in a deterioration has experienced 2008, the group due to cash products persistency as customers moved the group confidence. Whilst to the fall in investor diversification seeks to mitigate this risk through which will products offering of the portfolio and by turbulent market meet customer needs in these more impacting are conditions market conditions, current on customers’ risk appetite particularly equity and for products. property Investment market returns and changes in and changes returns market Investment the impact may values equity / property results group’s The level of credit risk faced by the group the group risk faced by of credit The level environment the economic by is impacted in economic conditions will continue Deterioration way by the group faced by risks the credit to increase The impairment losses on bank lending. of increased UK economies has in the Irish and slowdown current in both the Irish and UK in a contraction resulted In addition, higher unemployment housing markets. borrowers’ reduce costs of funding may and increased other economic and loans. These ability to repay or other assets to cause prices of property factors may on of collateral the value reducing thereby fall further, write-downs loans and increasing group’s of the many impairments expects group and impairment losses. The the cycle. further through to increase and investment life the group’s to Specifically relating into so that likely is entered business reinsurance within risk claims are statistical fluctuations in insurance perspective. a capital and profit from acceptable levels loss if a reinsurer a credit incur would group The is claims. Collateral unable to meet contractual was to limit this risk. A order in some cases in employed in such an be engaged would reinsurer replacement event. Risk Management Risk Risk Management

Downgrades in the group’s credit ratings the business, the principal performance measure used could significantly impact its competitive by the group in respect of its life assurance activities will position and affect its relationships with fluctuate in line with market interest rates and this can creditors or trading counterparties have a material impact on the reported results of this The group’s credit ratings are an important factor in business. Excluding this, there is no significant exposure its continuing financial performance. In particular, the to interest rates within the group’s life operations due to interest rates the group pays on its borrowings and its the asset / liability matching strategies which it follows. ability to secure funding are affected by its debt credit ratings, which are in place to measure the group’s ability The group conducts its businesses subject to pay its contractual obligations. The group’s long-term to regulation and associated regulatory senior debt is rated A2 (negative outlook) by Moody’s risks, including the effects of changes and BBB+ (stable outlook) by Standard & Poor’s. The in the laws, regulations, policies and group’s short-term debt is rated P-1 by Moody’s and A-2 interpretations in the markets in which it by Standard & Poor’s. Long-term and short-term debt operates issued by the group and covered by the Government Changes in government policy, legislation or regulatory Guarantee Scheme or by the Eligible Liabilities interpretation applying to the financial services industry Guarantee Scheme carries the sovereign rating and is in the markets in which the group operates may rated Aa1/P-1 by Moody’s and AA/A-1 by Standard & adversely affect the group’s product range, distribution Poor’s. channels, capital requirements and, consequently, reported results and financing requirements. These Changes in interest rates may impact the changes include possible changes in statutory pension group’s results arrangements and policies, the regulation of selling Fluctuations in interest rates can also influence practices and solvency requirements. the group’s banking and insurance and investment performance. The group may be exposed to potential regulatory action arising from certain transactions between the The results of the group’s banking operations are group and Anglo Irish Bank which were made public in affected by the management of interest rate sensitivity. February 2009. Interest rate sensitivity refers to the relationship between changes in market interest rates and changes Adverse experience in the operational in net interest income. The composition of the group’s risks inherent in the group’s business assets and liabilities, and any gap position resulting could have a negative impact on the from this composition can cause the reported banking results of its operations income to vary with changes in interest rates. A Operational risks are present in all of the group’s mismatch of interest-earning assets and interest-bearing businesses, including the risk of direct or indirect liabilities in any given period may, in the event of loss resulting from inadequate or failed internal and changes in interest rates, have an effect on results from external processes, systems and human error or from the group’s banking business. external events. The group’s business is dependent on processing a large number of complex transactions The group’s ability to vary the interest rates on customer across numerous and diverse products and is subject borrowings to reflect the increased cost of funding to a number of different legal and regulatory regimes. may be somewhat restricted particularly where its In addition, the group manages a small number of customers have tracker mortgages. By their nature, outsourced operations which include certain UK these mortgages do not allow the group the flexibility processing and IT functions. In turn, the group is reliant to vary the rate where it would otherwise be desirable upon the operational processing performance of its or appropriate for the group to do so. Accordingly, outsourcing partners. restrictions on the group’s ability to vary rates, and increased funding costs, may adversely affect the The group’s system of internal control is designed to group’s results. provide reasonable, but not absolute, assurance against the risk of material errors, fraud or losses occurring. It is Within the group’s life assurance business the risk possible that internal controls can be circumvented or discount rate used to calculate the embedded value of overridden. 32 Overview Business Review Corporate Governance Financial Statements 33 was specifically pointed out that if the combination of out that if the combination specifically pointed was not sufficient are returns and investment contributions then either more the specified benefits, for to provide of increased way be added, by need to would money either or both pension scheme contributions from or else the benefits promised members and the group, to be reduced. will have Litigation and regulatory investigations investigations Litigation and regulatory a material financial impact not have may but could result damage in reputational all other banks and insurance like group, The course companies, is subject to litigation in the normal that to believe has no reason group of its business. The on its profit a material effect such litigation will have any or loss and financial condition. Damage to the group’s public reputation reputation public group’s to the Damage the affect adversely or brands may and with new relationship group’s existing customers and capital from risk is the risk to earnings Reputation This or brands. public reputation to the group’s damage with new relationships the group’s affect negatively may considers reputation group customers. The and existing captured risk to be a consequence of risk events the Thus, the group. across within other risk categories the risk is facilitated through of reputation management other risk put in place for structures risk management above. and explained categories The impact of pension fund risk The impact fund risk is the risk associated with the Pension contributions to required uncertainty surrounding defined benefit pension schemes. The the group’s of the asset portfolios risk arises because the value or be less than expected them may from and returns or other financial rates in interest because changes in the estimated rise to increases give may parameters increases Furthermore of the schemes’ liabilities. value of the schemes the value increase may in longevity regularly consulting actuaries are liabilities. Professional the pension fund trustees to assess and appointed by the funding status and the underlying risk profile review of results schemes. The pension of each of the group decision making strategic to drive used are such reviews by testing is performed risk. In addition, stress to reduce pension actuaries to assess the Asset / Liability scenarios stress impact of various Mismatch (“ALM”) and macroeconomic market including adverse asset mix within each scheme is conditions. The basis to on an annual closely and rebalanced monitored is strategy investment that the scheme’s ensure to. adhered of each pension scheme in a full review Following 2006 and wide consultation with staff and pension defined benefit pension fund members, the group’s members and the asset closed to new schemes were ALM to reduce in order altered mix of the funds was communicated to existing it was risk. Furthermore, It not guaranteed. members that pension benefits were Systemic risk could adversely affect the adversely Systemic risk could business group’s has been adversely environment the credit Recently and default. significant instances of fraud by affected one institution could by, Concerns about, or a default losses or defaults lead to significant liquidity problems, soundness because the commercial other institutions by as be closely related institutions may financial of many clearing or other relationships trading, of credit, a result risk is sometimes referred institutions. This between financial affect adversely and may risk’’ to as ‘‘systemic clearing intermediaries, such as clearing agencies, with houses, banks, securities firms and exchanges on a daily basis and therefore interacts which the group the group. affect could adversely Any weakness in the systems could have a negative a negative could have in the systems weakness Any because of Further, of the group. results impact on the an internal of the effectiveness in conditions, changes time. over vary may system control Risk Management Risk Risk Management

Group Risk Management Framework Under relevant headings, the recommendations from Oliver Wyman are as follows: In the context of group risk management, risk is defined as unexpected future events leading to variability in • Ensure the board’s visibility of risk and control performance and damage to earnings capacity, capital issues, at all times: positioning, business reputation or cash flows; or any unexpected future event damaging the group’s ability - Improve management communication and to achieve its strategic, financial, or overall business reporting to the board; objectives. - Enhance board oversight of risk and control Risk taking is fundamental to a financial institution’s issues; business profile and hence prudent risk management, limitation and mitigation forms an integral part • Reorganise executive level management: of the group’s governance structure. The group operates a proactive Enterprise Risk Management - Increase the influence of senior risk and (“ERM”) approach in the identification, assessment control staff; and management of risk. This framework underpins profitable and prudent risk taking throughout the group. • Strengthen the risk and controls culture at all levels of the organisation; The group ERM is designed to ensure that all material risks are identified and managed and that business • Upgrade the Risk Management function strategy across the group is implemented in full recognition of these risks. - Extend and clarify the function’s responsibilities; Certain transactions between the group and Anglo Irish Bank were made public in February 2009, and - Redesign the organisational structure and following this the board commissioned international reporting lines, increasing the function’s risk management and strategy consultants Oliver influence within the organisation and ensuring Wyman to review the group’s Corporate Governance independence from the business; framework and to advise on any changes necessary to ensure the group was operating in line with emerging - Invest in human capital and infrastructure; international best practice. The board accepted the recommendations made by Oliver Wyman in this • Integrate risk and control considerations firmly into regard, and the following measures were taken in line key business processes with that report: - Such as strategy setting, planning and • The group separated the reporting lines of Internal budgeting, performance management and Audit and Risk Management from Finance. compensation setting.

• The group upgraded the risk management function In addition, the board established a new board of the group and appointed a new Group Head of committee, the Board Risk and Compliance Committee, Risk and Compliance, who sits on the executive to provide oversight and advice to the board on risk management team to input a risk perspective into governance, and to support the board in carrying out all key decisions by the group. its responsibilities for ensuring that risks are properly identified, reported, assessed and controlled, and that • The group reviewed and strengthened the risk and the group’s strategy is consistent with the group’s risk control throughout the organisation. appetite.

• The group has taken steps to improve management communication and reporting to the board and improve board oversight of risk and control issues.

34 Overview Business Review Corporate Governance Financial Statements 35 selecting the methodology and reporting structures structures selecting the methodology and reporting and monitor these capture best placed to identify, risks. committee mandates and terms of reference, composition. risk governance. industry guidelines for Risk Governance Risk the governance for is ultimately responsible board The and establishing the group of risk throughout risk. and manage to control mechanisms and structures policy in relation overall approves In addition, the board is permitted risk that the group of to the types and level and of strategic to assume in the implementation business plans. established was framework governance risk group’s The by: − and applicable to the group the risks Reviewing − risk policies with appropriate relevant Developing − against structures Benchmarking the group’s Risk Appetite and Strategy Appetite Risk to the type and policy in relation sets overall board The To is permitted to assume. of risk that the group level risk has established a formal this, the board achieve identified risk parameters appetite statement. The practice applied in are in the risk appetite statement are risk parameters the business. These throughout and business strategic closely aligned with the group’s objectives. established in the risk appetite parameters Risk such as values group core statement address prudent liquidity earnings stability, stability, solvency and risk management prudent credit management, have parameters Risk risk management. operational internal and been established based on relevant data. external risk appetite statement has been group The all involving process an iterative through developed holds the board The functions of the group. the key of the risk appetite approval for final responsibility statement. Risk Management Risk Risk Management

The risk governance structure, which is subject to ongoing review and amendment by the Board of Directors, is set out below:

Board of Directors

Group Board Board Risk and Internal Audit Compliance Audit Committee Committee

Group Life Banking Group Group Group Credit Assurance Assets and Operational Counterparty Compliance Committee Assets and Risk Credit and Committee Liabilities Liabilities Committee Market Risk Committee Committee Committee

The risk governance structure facilitates reporting The Board Risk and Compliance Committee, in and escalation of risk issues from the bottom up, and turn, delegates responsibility for the monitoring communication and guidance of group risk policy and and management of specific risks to committees risk decisions from the top down. accountable to it. These committees are the Group Credit Committee, the Banking Assets and Liabilities Board Risk and Compliance Committee Committee, the Life Assurance Assets and Liabilities The Board Risk and Compliance Committee has Committee, the Group Operational Risk Committee, the responsibility for oversight and advice to the board Group Counterparty Credit and Market Risk Committee on risk governance, the current risk exposures of and the Group Compliance Committee. The terms of the group and future risk strategy, including strategy reference for each committee, whose members include for capital and liquidity management, the setting members of group senior management, are reviewed of compliance policies and principles and the regularly by the Board Risk and Compliance Committee. embedding and maintenance throughout the group of a supportive culture in relation to the management of Group Internal Audit risk and compliance. The Board Risk and Compliance Reporting to the Audit Committee, Group Internal Committee supports the board in carrying out its Audit independently monitors compliance with the responsibilities for ensuring that risks are properly group’s policies and procedures as well as evaluating the identified, reported, assessed and controlled, and that effectiveness of internal control structures across the the group’s strategy is consistent with the group’s risk group. appetite. The objectives of Group Internal Audit are: The Board Risk and Compliance Committee is − To provide increased business control assurance by responsible for monitoring adherence to the group reviewing the full spectrum of business risks; risk appetite statement. Where exposures exceed − To deliver timely and graded audit reports levels established in the appetite statement, the Board to business management, which assist in the Risk and Compliance Committee is responsible for management and monitoring of risk; developing appropriate responses. This is facilitated − To assist in developing improved business operating by the periodic review of a key risk indicators report processes; calibrated to the risk appetite statement. − To disseminate best practice in relation to operational efficiency and effectiveness throughout the group; 36 Overview Business Review Corporate Governance Financial Statements 37

Group Compliance Committee Compliance Group the by Compliance Committee is chaired Group The and Compliance and includes Head of Risk Group The the group. across business unit heads from core and oversight Compliance Committee provides Group including the group, of compliance within management to be setting out the compliance and ethical standards The Group Operational Risk Committee is chaired by by Committee is chaired Risk Operational Group The and includes and Compliance Head of Risk the Group The the group. across from business unit heads core oversight Committee provides Risk Operational Group risk within the group. of operational and management impacting events includes reputation oversight This top committee identifies the group’s and risks. The actions are appropriate risks and ensures operational these the business to mitigate and manage by taken risks. and Market Counterparty Credit Group Committee Risk Risk and Market Counterparty Credit Group The and of Risk Head the Group by Committee is chaired representatives Compliance and includes management Managers. Investment and Irish Life of Treasury Risk and Market Counterparty Credit Group The cascading risk appetite for Committee is responsible limits for setting exposure limits to business unit level, financial counterparties, and monitoring aggregated The against limits. risk exposures counterparty credit Committee Risk and Market Counterparty Credit Group guidelines risk limits, policy, to credit changes proposes and Compliance Risk and methodology to the Board strategies. appropriate Committee and recommends Assets and Liabilities CommitteesAssets and (“ALCOs”) its banking and for ALCOs has separate group The is Banking ALCO The businesses. and assurance life and includes Finance Director the Group by chaired Banking The senior management. members of group all activities relating for and is responsible reviews ALCO funding exposures, counterparty credit to Treasury and structural and strategy and liquidity management is Banking ALCO The asset and liability management. risk. of market the management for also responsible the Group by is chaired ALCO Assurance Life The senior includes members of group and Chief Executive is responsible ALCO Assurance Life The management. the life risks arising from of the management for business assets and liabilities. assurance Committee Operational Risk Group management delivering an audit plan that aligns an audit delivering management of corporate itself with the achievement and any internal policies and directives regulation, the group. adopted by codes of practice Group Credit Committee Credit Group the Group by is chaired Committee Credit Group The members of group and includes Finance Director developing for It is responsible senior management. policy within the group. and implementing credit all material aspects of credit policy addresses The risk assessment including credit risk management, and the risk requirements collateral processes, risk credit The exposures. credit of individual grading of a hierarchy through operate systems management to internal loan related lending authorities which are of to the probability in turn linked which are ratings, subject to a are approvals default. All credit credit a certain individual authorities. Above of tiered system Credit sign the Group off by require approvals level Committee also monitors Credit Group Committee. The and its evolution risk exposure and credit credit the oversees the board, against the risk appetite set by of implementation and performance development, committee oversees tools. The risk measurement credit the application of the Internal Rating Based (“IRB”) the portfolios, reviews across capital regime regulatory testing, and monitors and stress of forecasting results consumption against and economic capital regulatory limits set within the risk appetite framework. The work of Internal Audit follows a risk based approach a risk based approach Internal Audit follows of work The in an annual audit plan. This which is documented Audit Committee. The the by each year is approved on an operational Head of Internal Audit reports Group access to has direct Chief Executive, to the Group level to the Audit regularly the Audit Committee and reports Audit Committee monitors and reviews Committee. The on Internal Audit activities of Group the effectiveness basis. an ongoing files, access to all records, Internal Audit has Group as required documents and personnel within the group, to carry out its assignments. − with business adopt a partnership approach To and objectives; − compliance with laws; the group’s monitor To Risk Management Risk Risk Management

Group Compliance Committee Risk Identification and Assessment (continued) observed by staff across the group in relation to legal, The risk identification and assessment process is regulatory and market conduct responsibilities. The overseen by the Group Head of Risk and Compliance, emphasis is on conducting business following a best and supported by the Group Risk department. practice approach and with a strong customer focus. Significant input is also provided by relevant senior management and the specific risk committees. Group Actuarial Function Led by the group’s Chief Actuary, this function is The risk identification and assessment process operates responsible for monitoring and regulating the capital within a clearly defined structure following four and solvency of the life assurance companies and distinct steps. reports to the boards of life assurance companies, Life Assurance ALCO and the Board Risk and Compliance 1. Risk investigation – Through a consultative Committee on a regular basis. Summary risk reports are process involving relevant members of group senior prepared for the consideration of the Life Assurance management and business unit leaders, risks facing the ALCO on a regular basis. Reports, which include asset group are monitored on an ongoing basis and formally / liability matching reports, are prepared covering reviewed on an annual basis. The risk identification shareholder exposure to market risk. Reports are also process utilises a top down approach to identifying prepared reviewing credit risk in relation to significant significant risks for the group supported by a bottom up reinsurance counterparties. risk identification exercise carried out at business unit level. Group Head of Risk and Compliance In 2009, the group appointed a Group Head of Risk 2. Determination of materiality – The group has a and Compliance to provide independent oversight clearly defined definition of materiality in relation to of the group’s risk governance and risk management risk assessment. This definition, which is approved by processes. The Group Head of Risk and Compliance the board, is applied to all identified risks to determine reports on an operational level to the Group Chief which risks are material for the group. The materiality Executive (in 2008 the Chief Risk Officer reported to the assessment is ratified with group senior management Group Finance Director), has direct access to the Risk and relevant business leaders. and Compliance Committee and reports regularly to Risk and Compliance Committee. The Group Head of The determination of a risk’s materiality follows an Risk and Compliance is tasked with: iterative approach as represented in the chart below.

• Developing and maintaining the group’s ERM structure; 1 Is the risk (likely to be) Yes • Developing and maintaining the group’s ICAAP; significantly capital consuming? Risk material • Providing independent risk advice to senior management throughout the group; No, or difficult to quantify • Identifying material risks for the group and 2 In a worst case scenario, developing appropriate responses to such risks; and Yes is the risk reputation hitting, Risk material liquidity pressing or damaging Iteration • Policing group-wide adherence to risk policies and to regulatory compliance? the group’s risk appetite statement. No

The Group Head of Risk and Compliance is a member 3 Considering other relevant information (e.g. peer Yes of the executive management team and of all risk benchmarks), do you consider Risk material committees within the group and directly manages a this risk material?

team of risk professionals at group level. No

Risk immaterial

38 Overview Business Review Corporate Governance Financial Statements 39 Economic Capital Economic Capital as its has elected to use Economic group The economic capital Internal unit of risk currency. core capital by to allocate economic the group models allow business activity. its economic capital will continue to develop group The and risk- methodologies to support risk measurement of the business at all levels based decision making Return Adjusted calculated off Risk rates hurdle through on Capital (“RAROC”). – The risk assessment – The – For each identified risk the group’s identified risk the group’s – For each Risk treatment Documentation and recording Stress Testing and Scenario Analysis Testing Stress testing for stress carries out scenario and group The and both the banking business and the insurance as at a combined group as well business investment combinations various tests consider Stress level. stress different reflecting of economic parameters capital adequacy is group’s this, the scenarios. From to the group’s linked determined at a confidence level time horizon. a three-year over rating credit desired of credit in the context testing is also performed Stress shocks to help inform losses, funding issues and market business policy. but based on extreme, scenarios are Stress associated economic The events. plausible, negative to each scenario is established relevant environment senior group involving process though a consultative of experts. Determination and external management each scenario allows for drivers certain macroeconomic asset returns models to determine expected the group’s the given group of the the risk profile and forecast environment. stressed each under capital adequacy projections Stressed with information senior management scenario provide planning process. in the strategic incorporated 3. Risk of the risk is established. management to approach limited not include (but are techniques management mitigation and capitalisation. to) limitation, monitoring, 4. in of all material risks is documented and treatment risk the relevant by is ratified full. Documentation committees. Risk Management Risk Corporate Responsibility

Corporate Responsibility Agenda Employees

Corporate Responsibility (“CR”) refers to how the Summary Workforce Data group views its obligations to each of its stakeholders: Average Total number Training and customers, employees, shareholders and the wider annual of employees development community in which the group operates, together with Year turnover at year end days how it lives up to these obligations in practice. 2009 7.8% 5,024 14,700 Customers 2008 14.0% 5,490 17,000 2007 14.5% 5,607 16,600 Customer Satisfaction Results 2009 2008 2007 Irish Life Retail 78.4% 80.1% 80.0% In common with all businesses in Ireland, the group Irish Life Corporate 92.6% 89.1% 87.6% is dealing with the consequences of the economic permanent tsb 82.5% 82.7% 84.2% recession and a reduction in business activity. This has resulted in reduced demand for products and services Irish Life & Permanent (“IL&P”) engages with its and a need to reduce costs and cut job numbers. Group customers through customer satisfaction programmes- policy is to manage this as far as possible through career Intouch (Irish Life Retail), BORU (Irish Life Corporate) breaks and reduced working time under the group’s and Customer Central (permanent tsb). Customer flexible working policy. However, it has also been satisfaction is measured using indices based on the necessary to implement limited voluntary severance results of customer surveys. and voluntary early retirement schemes in a number of businesses. In Irish Life Retail, customer satisfaction is measured monthly using a sample of customers who have Total group employee numbers have fallen from a peak experienced one of five key interactions with the of 5,607 at the end of 2007 to 5,024 at the end of 2009. company – New Business, Financial Review, Customer Reductions have taken place across all businesses. Service Centre, Withdrawal, or a Complaint. The This includes 225 employees who are on career customer satisfaction index is calculated using a mix of break at the end of 2009 and 57 who have availed of customers’ experience in core criteria such as the value voluntary severance and voluntary early retirement for money of their product or how Irish Life treats them schemes during the year. There was a sharp reduction as a person, and also then using criteria related to the in employee turnover in 2009 to 7.8% - approximately specific interaction or transaction that they had with the half the level of the previous two years. Data on the company. composition of the workforce is published each year in the group CR Report including gender, age profile and The Irish Life Corporate Business (“ILCB”) customer length of service. service index measures actual performance against target service levels across twelve key administrative The reduced level of training days in 2009 is partly due services carried out for clients. ILCB also commissions to a significant change in the way training is delivered. an independent yearly survey of brokers and An increasing proportion of employee training now consultants to assess their levels of satisfaction with takes place through a variety of techniques including: insurance companies operating in the group business • coaching / mentoring area. This survey is carried out by Millward Brown IMS. • self directed study • Point of Sale observation and support In permanent tsb, there are three methods of assessing • elearning. performance on customer service: • An annual customer satisfaction index (“CSI”) The group runs Health & Well-being programmes where 2,500 customers are asked their views on each year in Irish Life and permanent tsb. Activities service across 28 measures of performance; and topics covered in 2009 included physical fitness, • Nightly Moments of Truth surveys where customers childcare solutions and healthy eating. are asked to comment on their branch experiences within 24 hours of attending the branch (10,000 Community Activities customers surveyed in 2009); and • Participation in a pan European retail banking The group’s main community programmes to date service quality study involving over 40 other banks are built on a partnership approach to community in 17 countries. involvement. In 2006, three partners were selected with the necessary scale and expertise to work with IL&P 40 to develop the group’s main community programmes. Overview Business Review Corporate Governance Financial Statements 41 2008 2007 11,695 11,471 1,636 1,520 75 71 28.0 27.2 24 25 79 30 26.8 1,258 10,306 . emissions for the 2009 CR emissions for 2 position in the Sunday Times Times position in the Sunday th emissions (tonnes)* 2 Anniversary Award. In the UK, Capital Homeloans Award. Anniversary th Total waste (tonnes) waste Total (%) recycled Waste Total energy consumption (GWh) consumption (GWh) energy Total (%) energy Green CO At the end of 2008, the group set a target to apply for to apply for set a target At the end of 2008, the group IS393 and Standards to the International accreditation was 2009. Significant progress year-end IS14001 by of review but an independent made on this objective required. indicated that furtherthe system actions were been now have Most of the additional requirements in completed and it is planned to submit the application quarter 2, 2010. conversion gas has adopted greenhouse group *The in the UK in April the Carbon Trust factors published by calculating CO 2008 for Foróige review the support material for the programme the support the programme material for review Foróige the process how to explain hold workshops regularly, to all results on clear feedback very and give works participants. Environment 2009 Limited. achieved 19 Limited. achieved “Top 100 Best Small Companies to Work for” survey. for” 100 Best Small Companies to Work “Top in can be found in this area work of IL&P’s A full review Report. This Responsibility its sixth annual Corporate website on the group is available report www.irishlifepermanent.ie Report and prior year numbers have been restated. numbers have Report and prior year showed in 2009 at 26.8 GWh consumption energy Total mainly due to was This of 4% in 2009. a reduction use in a group energy and reduced premises vacating Investment Irish Life head office building occupied by used came from In 2009, 30% of total energy Managers. sources. renewable has recycling the group management, waste As regards facilities in place in almost all of its offices and recycles During 2009, an produced. almost 80% of all waste tested was machine (eCorect) recycling waste organic head office. This in the group in the staff restaurant up to 90% and by waste organic machine reduces it to multi-purpose biomass particles. The converts successful and, subject to cost, one of these test was machines will be installed in 2010. 12,000 organisations selected from was In 2009, Irish Life winner of the Plain English in 80 countries as the overall 30 2m in Foróige Foróige ’s € 750,000 to the € permanent tsb permanent tsb 1.3m compared with 1.3m compared € charities selected by them are matched by IL&P; matched by them are charities selected by and organisations; 29m funded by the Irish Government, The Atlantic The the Irish Government, 29m funded by Awards Citizenship Youth Age Action Ireland Ireland Action Age Services for & Repair Care Foundation Trinity study long-term Trinity Foróige older people in Ireland The in Ireland on ageing Community PartnerCommunity Programme IL&P’s commitment to the Trinity long-term ageing long-term ageing commitment to the Trinity IL&P’s other two the and, for ten years study runs for three for commitment was the initial programmes, in both cases the partnerships have However, years. to the a further years for two been extended now account for main programmes end of 2011. The The community budgets. 75% of total approximately of other activities: balance is used to fund a range for employees by Staff charities: all funds raised • community Small donations to charities and • school students. for Mentoring programme • and in community programmes investment Total was activities last year 2008. This reflects reduced funding for all programmes all programmes funding for reduced reflects 2008. This business environment difficult in line with the more In addition, expenditure. and cutbacks in discretionary made a loan contribution of the group Social Finance Foundation to support community-based Ireland. around projects services have & Repair Care Ireland Action Age The and 18 of of franchises the creation through developed the country at the end of in place around these were 2009. Mary McAleese formally 2009, President In May (TILDA) launched the Irish long-term study on ageing the also marked Dublin. This College, at Trinity beginning of the public phase of the study that involves two 8,000 to 10,000 older people every interviewing on all aspects to collect detailed information years including health, economic and social of their lives total cost of the study is estimated at dimensions. The € and Irish Life. Philanthropies of year the third 2009 marked Citizenship Youth sponsorship of the Foróige has a very programme The and Awards. Programme with a people involved the young for clear structure – Evaluation. – Action of Awareness process three-stage These were: These Corporate Responsibility Corporate Board of Directors

Gillian Bowler (57) Kevin Murphy (58) Breffni Byrne (64) Chairman Group Chief Executive Non-Executive A member of the board of Irish Life Group Chief Executive appointed in June Appointed to the board in July 2004. since July 1998. A non-executive 2009. An actuary and an employee of He is Chairman of NCB stockbrokers director of Grafton Group plc and Irish Life since 1972, he was appointed a and a non-executive director of Coillte of the Voluntary Health Insurance main board director following the merger Teoranta, Tedcastle Holdings Limited, Board and former Chairman of Fáilte of Irish Life and Irish Permanent in 1999. Hikma plc, Cpl Resources plc and a Ireland. She is a past President of the He is a director of a number of companies number of other companies. A chartered Institute of Directors and a director of within the group including the associated accountant, he was formerly a Senior a number of other companies. company Allianz-Irish Life Holdings plc. Partner of Arthur Andersen in Ireland He is President of the Society of Actuaries and Director of Risk Management for in Ireland and is a member of the board of Andersen’s audit practice in Scandinavia, the Irish Stock Exchange. the Middle East and Africa.

Eamonn Heffernan (65) Roy Keenan (62) David McCarthy (49) Non-Executive Non-Executive Executive Appointed to the board in March 2003. Appointed to the board in October Group Finance Director. Appointed An actuary, he was formerly a Partner 2006. He is a former Chief Executive to the board in March 2009. He is a of Mercer Human Resource Consulting. of Bank of Ireland UK and former chartered accountant who formerly He is a past President of the Society Managing Director of Bank of Ireland worked with Coopers & Lybrand (now of Actuaries in Ireland and is a former Life and Bank of Ireland Mortgages. PriceWaterhouseCoopers) and was Chairman of the Pensions Board and of He is a non-executive director of the Group Financial Controller in Irish the Irish Association of Pension Funds. Met Life Europe and a number other Permanent plc. He is a director of a companies. He is a former council number of companies within the group member of the British Bankers including the associated company Association, the Council of Mortgage Allianz-Irish Life Holdings plc. Lenders and a former President of the Irish Insurance Federation.

Board Committees

Audit Remuneration and Nomination Risk and Compliance Breffni Byrne (Chairman) Compensation Gillian Bowler (Chairman) Pat Ryan (Chairman) Margaret Hayes Danuta Gray (Chairman) Breffni Byrne Breffni Byrne Roy Keenan Gillian Bowler Danuta Gray Bernard Collins Pat Ryan Eamonn Heffernan Roy Keenan Eamonn Heffernan Ray MacSharry Ray MacSharry Roy Keenan Pat Ryan Liam O’Reilly 42 Overview Business Review Corporate Governance Financial Statements 43 (55)

(63)

(57)

Non-Executive Margaret Hayes Margaret in December Appointed to the board Irish 2008. She is a member of the General Secretary bar and a former and of the Departments Tourism of and of Sportand Recreation Trade, and Gaeltacht Rural Community, as retired Affairs. She recently chairman of the Health and Social Council and is the Professionals Care of the National chairman outgoing the for Group Verification Performance She is also a member Health Sector. the Public for the panel of interviewers Appointments Commission. Non-Executive Pat Ryan Pat in December Appointed to the board Treasurer Group formerly 2009, he was Officer of Allied Irish and Chief Risk the AIB from Bank plc. He retired a in 2002 and is currently Group Limited Europe of AXA Life director He holds an M.Sc in and J&E Davy. College University Economics from of the Institute Dublin, and is a fellow of the Society He is a fellow of Bankers. and the Institute Ireland in of Actuaries of Actuaries. Company Secretary Company Ciarán Long since 1969. He is an actuary of Irish Life An employee has been spent and most of his time with Irish Life appointed a company He is in the pensions area. trustee in each of the staff pension schemes. Ciarán is Planning Council of the Retirement Director a former He Board. member of the Pensions and is a former 2004. in May Secretary appointed Company was (62) (51)

Liam O’Reilly in September Appointed to the board Chief formerly 2008. He was of the Irish Financial Executive He is Authority. Services Regulatory Chairman of the Chartered former and a Board Regulatory Accountants International of Merrill Lynch Director on the Bank Limited. He served Ireland on Auditing in Group Review a member of the formally and he was Foundation. UK Accounting Danuta Gray in August 2004. Appointed to the board of O2 Officer She is Chief Executive a position she has held since Ireland, to Ireland, 2001. Prior to her move for she held the position of Director and previous in Germany Europe BT at BT Manager General to that was Mobile in the UK. She is chairperson and is a non-executive of Barretstown Lingus of Aer plc. director Non-Executive Non-Executive (61) (71)

Non-Executive Non-Executive Ray MacSharry Ray in Appointed to the board EU 2008. He is a former December Finance, Minister for Commissioner, and Governor Agriculture Minister for Bank. He Investment of the European director as a non-executive has served Jefferson Group, of Bank of Ireland plc plc and Ryanair Smurfit Group Chairman of London and is former plc and Property City Airport, Green plc. eircom Appointed to the board in March in March Appointed to the board vice president formerly 2010 he was and of international operations of of the international board director He is Boston Scientific Corporation. of director a non-executive currently and a number of other Ireland IDA companies in the medical device/life science sectors. He is also currently chairman of the VHI. Bernard Collins Bernard Board of Directors of Board Directors’ Report

The directors present their annual report and audited Directors consolidated and company financial statements to the shareholders for the year ended 31 December 2009. The names of the directors, together with a short biographical note on each, appear on pages 42 and Results 43. David McCarthy was co-opted to the board in March 2009 as an executive director. Pat Ryan was The group loss after tax and non-controlling interests co-opted to the board in December 2009 as a non- for the year was €313m (2008: €49m profit) and executive director. Bernard Collins was co-opted to was arrived at as shown in the consolidated income the board in March 2010 as a non-executive director. statement on page 69. No dividends (2008: €207m) Denis Casey and Peter Fitzpatrick resigned from the were paid during the year. €107m has been transferred board in February 2009. Finbar Sheehan retired from from distributable to non-distributable reserves (2008: the board in May 2009. Eamonn Heffernan and Liam €8m transferred from distributable to non-distributable O’Reilly will retire from the board at the 2010 AGM and reserves) and distributable reserves have been will not offer themselves for re-appointment. All other increased by €9m in respect of the sale of own shares directors will retire at the 2010 AGM and, being eligible, acquired for the benefit of policyholders (2008: €3m). will offer themselves for re-appointment. Details of the directors’ and secretary’s interest in the share capital Dividends of the company and of transactions involving directors are set out in Note 54 Related parties to the financial No dividends were paid or proposed for 2009 (2008: statements. None of the directors’ service contracts €62m). have notice periods exceeding twelve months.

Review of the Business and Likely Share Capital and Shareholders Future Developments Authorised Share Capital A detailed review of the group’s performance during the (a) The authorised share capital of the company year and an indication of likely future developments are is €428,000,000 divided into 400,000,000 set out in the Chairman’s Statement on pages 4 and 5, Ordinary Shares of €0.32 each and 300,000,000 Group Chief Executive’s review on pages 6 and 7 and Non-Cumulative Preference Shares of €1 each the Business Review on pages 8 to 41. Information on (“Euro Preference Shares”), STG£100,000,000 the key performance indicators and principle risks and divided into 100,000,000 Non-Cumulative uncertainties in the business as required by European Preference Shares of STG£1 each (“Sterling Accounts Modernisation Directive (2003/51/EEC) are Preference Shares”) and US$200,000,000 included in the Business Review on pages 8, 20, 25, 27 divided into 200,000,000 Non-Cumulative and 30 to 33. Preference Shares of US$1 each (“Dollar Preference Shares”). Accounting Policies The company has only one class of issued As required by European Union (“EU”) law from 1 shares and as at 31 December 2009, it had January 2005, the consolidated financial statements 276,782,351 Ordinary Shares in issue in that have been prepared in accordance with International class. During 2009, no shares were issued Financial Reporting Standards (“IFRSs”) and adopted by under the group’s share option and profit the EU as set out in group accounting policies in Note 1 share schemes. At 31 December 2009 Irish Life to the financial statements. Assurance plc, a subsidiary of the group, held 7.1m (2008: 8.9m) shares representing 2.6% Corporate Governance (2008: 3.2%) of the issued share capital of the company. These shares are held on behalf of The report on Corporate Governance is set out on policyholders and in accordance with Section pages 50 to 55 and forms part of the directors’ report. 9(1) of the Insurance Act, 1990, carry no voting rights. In addition, at 31 December 2009 Irish Life & Permanent plc holds, through an employee benefit trust, 457,914 shares (2008: 44 Overview Business Review Corporate Governance Financial Statements 45 if it would not breach or cause a breach cause a breach or not breach if it would capital Bank of Ireland’s of the Central time to time from adequacy requirements applicable to the company; and right to participate in the profits other than of the company reserves Dividend and if on any the Preference of the Preference occasion an instalment the cash for Dividend is not paid in (b) or described in sub-paragraph reasons the preference (c) above, sub-paragraph respect no claim in shall have shareholders of such instalment; and of Preference payment on the date for Dividend instalment, if such instalment had not been paid in cash, be allotted such additional nominal amount of of the class in question, Shares Preference as is equal to an as fully paid, credited been paid to have amount which would instalment the holder had such relevant been paid in cash plus an amount equal to which the to the associated tax credit been entitled had the have holder would been paid in cash. instalment relevant c. be paid only Dividend may a Preference d. shall carry no further Shares Preference e. shall, Shares each holder of Preference Capital of capital return or other On a winding-up of, of of shares (other than on a redemption by class in the capital of the company) any shareholders the preference the company, held Shares of the Preference shall in respect out of the them be entitled to receive, by to the distribution for surplus assets available members, an amount equal to the company’s as paid up on the amount paid up or credited paid premium (including any Shares Preference thereof) in respect together to the company Dividend which is due for Preference with any after the date of commencement of payment of capital but the winding-up or other return of a period ending in respect which is payable Preference such date and any on or before of Dividend accrued prior to the date of return capital.

the right to receive dividends in priority to the right to receive in the capital of the Shares Ordinary any company; and distributable distributable profits from of the company; reserves b. b. only be paid Dividend may a Preference Provisions applying to Preference Shares applying to Preference Provisions shall apply in provisions following The Shares particular to any Preference relation prior to the the directors if so determined by allotment thereof: a. as regards shall rank Shares the Preference The general rights attaching to Sterling general The Shares Preference Euro Shares, Preference (“Preference Shares Preference and Dollar the pari-passu as regards shall rank Shares”) dividends and the rights on a right to receive the of capital by, or other return winding-up of, company. may Shares Notwithstanding, such Preference and be issued with such rights and privileges, and limitations, subject to such restrictions in the shall determine as the directors the issue of Preference approving resolution power have the directors Whenever Shares. of the rights, privileges, to determine any of attached to any limitations or restrictions the rights, privileges, Shares, the Preference so determined limitations or restrictions need not be the same as those attached then which have Shares to the Preference Shares been allotted or issued. Preference then been allotted or issued which have class of shares. shall constitute a separate shall entitle the holders Shares Preference a Non-Cumulative to receive thereof Dividend”) Dividend (“Preference Preferential which shall be calculated at such annual and shall be or variable) (whether fixed rate on such dates and on such other payable be determined by terms and conditions as may prior to allotment thereof. the directors 457,914) in anticipation of share awards that awards of share in anticipation 457,914) plan incentive under the long-term vest may Share Each Ordinary senior management. for and the number of voting carries one vote 269,674,169 2009 was rights as at 31 December (2008: 267,912,020). Preference Shares Preference Directors’ Report Directors’ Directors’ Report

Preference Shares (continued) At a separate General Meeting of any class The amounts payable or repayable in the event of preference shareholders, on a show of of a winding-up of, or other return of capital hands each preference shareholder present in (other than on a redemption of shares of any person shall have one vote and on a poll each class in the capital of the company) by, the preference shareholder present in person or company, shall be so paid pari-passu with any by proxy shall have one vote in respect of each amounts payable or repayable in that event Preference Share held by him and whenever upon or in respect of any further Preference preference shareholders are entitled to vote at Shares of the company ranking pari-passu with a General Meeting of the company then, on a the Preference Shares as regards repayment show of hands, each preference shareholder of capital, and shall be so paid in priority to present in person shall have one vote and on any repayment of capital on any other class a poll each preference shareholder present in of shares of the company. The preference person or by proxy shall have such number of shareholders shall not be entitled in respect votes in respect of each Preference Share held of the Preference Shares held by them to any by him as the directors may determine prior to further or other right of participation in the the allotment of such shares. assets of the company. If the most recent instalment of the Preference Redemption Dividend has not been paid a majority of Unless otherwise determined by the directors any class of Preference Shares in issue may either generally or in relation to any particular requisition, and the directors shall procure, Preference Shares prior to allotment thereof, the that an Extraordinary General Meeting of the Preference Shares shall, subject to the provisions company shall be convened forthwith. of the Acts, be redeemable at the option of the company where the company shall give Restriction on Capitalisation to the holders of the Preference Shares to be Save with the written consent of the holders redeemed not less than 30 days and not more of not less than 662/3% in nominal value of than 60 days notice in writing of the date on each class of Preference Shares, or with the which such redemption is to be effected. sanction of a resolution passed at a separate General Meeting of the holders of each class Voting of Preference Shares where the holders of The preference shareholders shall be entitled not less than 662/3% in nominal value of the to receive notice of any General Meeting of the relevant class of Preference Shares have voted company and a copy of every circular or other in favour of such resolution, the directors shall like document sent out by the company to the not capitalise any part of the amounts available holders of Ordinary Shares and to attend any for distribution if, after such capitalisation the General Meeting of the company but shall not, aggregate of such amounts would be less than in respect of the Preference Shares, be entitled a multiple, determined by the directors prior to speak or vote upon any resolution other to the allotment of each class of Preference than a resolution for winding-up the company Shares, of the aggregate amount of the annual or a resolution varying, altering or abrogating dividends (exclusive of any associated tax any of the rights, privileges, limitations or credit) payable on Preference Shares then in restrictions attached to the relevant Preference issue ranking as regards the right to receive Shares unless at the date of such meeting dividends or the rights on winding-up of, or the most recent instalment of the Preference other return of capital by the company, pari- Dividend due to be paid prior to such meeting passu with or in priority to the Preference shall not have been paid in cash in which event Shares, or authorise or create, or increase the preference shareholders shall be entitled the amount of, any shares of any class or any to speak and vote on all resolutions proposed security convertible into the shares of any at such meeting. class ranking as regards the right to receive dividends or the rights on winding up of, or other return of capital by the company, in 46 priority to the Preference Shares. Overview Business Review Corporate Governance Financial Statements 47 special resolution passed at a separate General General passed at a separate special resolution of the the holders of the shares Meeting of either or abrogated so varied be class, and may concern or is a going whilst the company of a winding-up. during or in contemplation The board may at its discretion give notice to give at its discretion may board The a calling for in the USA certain holders resident one days within twenty disposal of their shares considers period as the board or such longer the period extend may board The reasonable. to required such notice is within which any such any withdraw be complied with and may sees fit. the board circumstances notice in any that a disposal has is not satisfied If the board one of the twenty the expiry been made by no transfer be extended), period (as may day to which the notice relates of the shares of any other than a be made or registered may disposal made pursuant to a procured transfer or unless such the board, by of the said shares notice is withdrawn. Subject to the provisions of the Articles of Subject to the provisions the shares shares, to new Association relating and of the directors shall be at the disposal of the Articles and (subject to the provisions or options over allot, grant may they the Acts) to such persons on otherwise dispose of them such terms and conditions and at such times consider to be in the best interests may as they but so and its shareholders, of the company issued at a discount and shall be that no share to the offered so that, in the case of shares subscription, the amount payable public for shall not be less on application on each share than one-quarter of the nominal amount of the thereon. premium any and the whole of share Holders Resident in the USA in the Holders Resident Allotment of Shares Allotment Whenever the share capital is divided into capital is divided into the share Whenever the rights attached classes of shares, different or abrogated be varied class may to any with the consent in writing of the holders of of the issued in nominal value three-quarters of that class or with the sanction of a shares Further Preference Shares Further Preference time create time to from may company The as ranking Shares and issue further Preference and assets participation in the profits regards pari-passu with the Preference of the company such further and so that any Preference Shares currency be denominated in any may Shares participation in carry as regards and may rights and assets of the company the profits to those attaching identical in all respects or rights differing Shares to the Preference therefrom. or the variation, or issue of, creation The to the of or addition or abrogation alteration limitations or restrictions rights, privileges, of the company shares any attaching to, as regards Shares after the Preference ranking of the and assets participation in the profits that, on the date and, provided company the most recent or issue, of such creation instalment of the dividend due to be paid in the Share on each class of Preference such date prior to capital of the company or been paid in cash, the creation shall have ranking Shares issue of further Preference as Shares pari-passu with the Preference shall be deemed not to above, for provided of the or abrogation alteration be a variation, limitations or restrictions rights, privileges, If any Shares. attached to the Preference of the company Shares further Preference subsequent been issued, then any shall have of or or abrogation alteration variation, limitations addition to the rights, privileges, of such further attaching to any or restrictions shall be deemed not to be a Shares Preference of the rights, or abrogation alteration variation, attaching limitations or restrictions privileges, that the provided Shares, to the Preference rights attaching to such further Preference shall be such that the thereafter Shares of further the company and issue by creation carrying those rights would Shares Preference been permitted. have Variation of Rights Variation Directors’ Report Directors’ Directors’ Report

Refusal to Transfer with a rights issue to deal with legal The directors in their absolute discretion and or practical problems that may arise without assigning any reason therefore may in respect of shareholders resident in decline to register: certain territories and / or to deal with any fractional entitlements or any other I. any transfer of a share which is not fully issue of equity securities for cash up to paid save however, that in the case of such an aggregate nominal amount of 5% a share which is admitted to listing on the of the nominal value of the company’s Stock Exchange, such restriction shall not issued share capital. This authority was operate so as to prevent dealings in such last granted by shareholders at the share of the company from taking place on Company’s AGM on 15 May 2009 and an open and proper basis; will expire on the earlier of the date of the next AGM or 15 August 2010. II. any transfer to or by a minor or person of unsound mind; or Change of Control of the Company (c) If any person or company obtains control The directors may decline to recognise any of the company, the company’s share instrument of transfer unless: option schemes contain provisions for the exercise of share options, provided these III. the instrument of transfer is accompanied have not lapsed, even if the performance by the certificate of the shares to which conditions have not been satisfied or, with it relates and such other evidence as the the agreement of an acquiring company, directors may reasonably require to show exchange the subsisting options for new the right of the transferor to make the options in the acquiring company. Following transfer (save where the transferor is a Stock the acquisition of the Irish Life & Permanent Exchange Nominee); plc by Irish Life & Permanent Group Holdings plc in January 2010, the subsisting IV. the instrument of transfer is in respect of options were exchanged for new options in one class of share only; Irish Life & Permanent Group Holdings plc.

V. the instrument of transfer is in favour of not The company’s Long-term Incentive Plan more than four transferees; and contains similar provisions where awards may vest immediately to the extent VI. it is lodged at the office or at such other determined by the directors or, with the place as the directors may appoint. agreement of an acquiring company, exchange the subsisting awards for new Annual General Meetings awards in the acquiring company. Following (b) At its annual general meetings, the the acquisition of the Irish Life & Permanent members normally authorise the company: plc by Irish Life & Permanent Group • To allot relevant securities within Holdings plc in January 2010, the subsisting the meaning of section 20 of the awards were exchanged for new awards in Companies (Amendment) Act, 1983 Irish Life & Permanent Group Holdings plc. up to a maximum amount equal to the aggregate of the authorised but as (d) In the event of a change of control of the yet un-issued Ordinary Share capital company, there are no agreements (other of the company. This authority was than under normal employment contracts) last granted by shareholders at the between the company, its directors or company’s Annual General Meeting employees providing for compensation for (“AGM”) held on 20 May 2005 for a loss of office that might occur. period of five years. • To disapply the strict statutory pre-emption provisions in connection 48 Overview Business Review Corporate Governance Financial Statements 49 In accordance with Section 160 (2) of the Companies with Section In accordance Accountants Chartered KPMG, 1963 the Auditor, Act, will continue in office. Auditor, and Registered Subsidiaries and Associated and Associated Subsidiaries Companies principal subsidiaries and associated undertakings The in Note 53 shown are therein interests and the group’s associated undertakingsPrincipal subsidiary and of the financial statements. group the State Branches outside plc has established branches, Permanent & Irish Life European 25 of the Regulation within the meaning of 1993 (which Regulations, Communities (Accounts) 89/666/EEC), in the to EU Council Directive effect gave United Kingdom. Independent Auditor On behalf of the Board Gillian Bowler Chairman McCarthy David Finance Director Group Murphy Kevin 2010 23 March Secretary Company Ciarán Long Chief Executive Group Political Donations Political were that there satisfied themselves have directors The which require no political contributions during the year, 1997. Act, under the Electoral disclosure As detailed in Note 56 of the financial statements, on 15 As detailed in Note 56 of the financial statements, acquired plc was & Permanent 2010, Irish Life January Holdings plc and on Group & Permanent Irish Life by and Irish the London delisted from 2010 was 18 January stock exchanges. Event after the Reporting Period after the Reporting Event Accounting Records Accounting complied with have they that believe directors The 1990 with regard Act, Section 202 of the Companies financial personnel employing to books of account by adequate providing expertise and by with appropriate books of function. The to the financial resources at the maintained are account of the company Lower Centre, office, Irish Life registered company’s principal offices of the Dublin 1 and the Street, Abbey the inside back on and its subsidiaries, as shown group of this report. cover Directors’ Report Directors’ Corporate Governance

Combined Code on Corporate membership, appointment and removal of the Group Governance Chief Executive and the Company Secretary, executive remuneration, trading and capital budgets and risk The directors endorse the Combined Code on management policies. All strategic decisions are referred Corporate Governance (“the Code”) issued by the to the Board. Documented rules on management Financial Reporting Council which sets out Principles authority levels and on matters to be notified to the of Good Governance and a Code of Best Practice. board are in place, supported by an organisational The Listing Rules of the Irish and London Stock structure with clearly defined authority levels and Exchanges require a statement to be made in relation to reporting responsibilities. compliance with the Code. The directors have reviewed the group’s corporate governance arrangements in The board currently comprises ten non-executive and light of the Code and believe that they are fully in two executive directors. Biographies of each of the compliance. directors are set out on pages 42 and 43. The roles of the Chairman and the Group Chief Executive are The directors have developed a code of practice which separated and are clearly defined, set out in writing and deals with, among other matters, issues of corporate agreed by the board. The board considers all the governance. This code of practice is designed to ensure non-executive directors to be independent of that the main principles and the supporting principles management and free of any business or other of good governance set out in Section 1 of the Code are relationship which would interfere with the exercise applied within the group. of their independent judgement. The Chairman, on appointment, met the independence criteria set up in Certain transactions between the group and Anglo the Code. The board has nominated Roy Keenan as the Irish Bank Corporation Limited were made public senior independent non-executive director. in February 2009 and following this the board commissioned international risk management and The board had nine scheduled board meetings during strategy consultants Oliver Wyman to review the group’s 2009 and also met on other occasions as considered Corporate Governance framework and to advise on any necessary. Full board papers are sent to each director changes necessary to ensure the group was operating in sufficient time before board meetings and any in line with emerging international best practice. The further papers or information are readily available to board accepted the recommendations made by Oliver all directors on request. The board papers include Wyman in this regard, and the following measures were the minutes of all committee meetings which have taken in line with that report: been held since the previous board meeting and the chairman of each committee is available to report • The group separated the reporting lines of Internal on the committee’s proceedings at board meetings Audit and Risk Management from Finance; if appropriate. Attendance at scheduled board and committee meetings is outlined on page 55. The board • The group upgraded the risk management function receives formal reports on group compliance matters at of the group and appointed a new Group Head of each of its meetings. Risk and Compliance, who sits on the executive management team to input a risk perspective into The board has a formal performance review process all key decisions by the group; to assess how the board and its committees are performing. This process, facilitated every three years • The group reviewed and strengthened the risk and by external consultants, comprises a detailed and control processes throughout the organisation; and rigorous examination by directors of all aspects of board and committee performance. A report produced • The group has taken steps to improve management by the consultants identifies any measures which can communication and reporting to the Board and enhance this performance and these are considered improve board oversight of risk and control issues. by the full board. The performance of each individual non-executive director is assessed on an annual basis Role of the Board by the Chairman and is discussed with the director concerned. The non-executive directors, led by the There is an effective board to lead and control the senior independent director, evaluate the performance group. The board has reserved to itself for decision a of the Chairman, taking into account the views of formal schedule of matters pertaining to the group executive directors. and its future direction such as the group’s commercial strategy, major acquisitions and disposals, board 50 Overview Business Review Corporate Governance Financial Statements 51 The Audit Committee provides a link between the a link between provides Audit Committee The of the auditors, is independent external and the board making for and is responsible management group’s of the appointment of in respect recommendations the the scope of reviewing and for auditors external reviewing for It also has responsibility audit. external and financial statements, annual report the group’s interim reports, announcement, half-yearly preliminary of the statements and the effectiveness management and risk management systems internal control group’s process. internal audit, committee monitors the group’s The and procedures compliance and risk management made and recommendations considers issues raised the internal audit, auditors and by the external by functions of the compliance and risk management committee meets at least annually with The group. sessions without auditors in confidential the external committee reviews The being present. management in may, which staff of the group by the arrangements concerns about possible improprieties confidence, raise other matters. or in matters of financial reporting the non-audit services Audit Committee reviews The auditors based on the policy the external by provided to the provision in relation the board by approved of audit, audit of such services. Fees paid in respect outlined in Note services are and non-audit related to the Group and other expenses 46 Administration services services are Financial Statements. Audit related as virtue the auditors by role carried out by of their regulatory work, related auditors and include assurance non-audit services advice. The and accounting returns to tax advice. In line with principally relate provided services such the auditors do not provide best practice, design and valuation system as financial information to be inconsistent with which could be considered work the audit role. Risk and Compliance CommitteeRisk and Compliance Committee comprises Risk The Collins Bernard Byrne, (Chairman), Breffni Ryan Pat and Liam O’Reilly. Keenan Roy Eamonn Heffernan, that the chairman of the committee ensures board The and / or compliance risk management has relevant experience. and Compliance Committee has responsibility Risk The on risk and advice to the board oversight for of the group risk exposures the current governance, capital for including strategy risk strategy, and future of compliance the setting and liquidity management, policies and principles and the embedding and of a supportive group the maintenance throughout of risk and to the management in relation culture www. . In accordance with the terms of . In accordance Audit CommitteeAudit Byrne Audit Committee comprises Breffni The Ryan. and Pat Keenan Roy Hayes, (Chairman), Margaret that the chairman of the committee ensures board The financial experience. and relevant has recent Board Committees Board has established a number of committees board The within defined terms of reference. which operate the Audit Committee, the committees are These and Compliance Committee, the Remuneration Risk and Compensation Committee and the Nomination committees of the board. Committee, all of which are composed of non-executive All of these committees are to be the board by considered all of whom are directors independent. Membership and chairmanship of each Detailed years. two at least every committee is reviewed each of the committees are for terms of reference website and on the group’s on request available irishlifepermanent.ie the Code, the Chairman of the group is not a member the Code, the Chairman of the group the establishment of the Audit Committee. Following Holdings plc, terms Group & Permanent of Irish Life committee will be identical of each board of reference & plc and Irish Life & Permanent each of Irish Life for Holdings plc. Group Permanent The Chairman meets at least once a year with the non- with the year meets at least once a Chairman The present. without the executives directors executive in furtherance of directors, in place for are Procedures advice professional independent their duties, to take The expense. at the group’s if necessary, and training, and officers’ liability directors’ has arranged group of legal action against its in respect cover insurance directors for is arranged training Appropriate directors. the Chairman also ensures on first appointment and continually update their skills that the directors seminars and appropriate through and knowledge is responsible Secretary Company The presentations. the Chairman on all through the board advising for matters. governance access to the Company direct have All directors Secretary. concerns which cannot be have directors Where or a the running of the company about resolved that their concerns will ensure action, they proposed non- minutes. On resignation, in the board recorded are a written statement to will provide directors executive have if they to the board, circulation the Chairman, for such concerns. Corporate Governance Corporate Corporate Governance

Risk and Compliance Committee Nomination Committee (continued) This committee comprises Gillian Bowler (Chairman), compliance. The Risk and Compliance Committee Breffni Byrne, Danuta Gray, Roy Keenan and supports the board in carrying out its responsibilities Ray MacSharry. The committee is charged with for ensuring that risks are properly identified, reported, responsibility for bringing recommendations to the assessed and controlled, and that the group’s strategy is board regarding the appointment of new directors and consistent with the group’s risk appetite. of a new Chairman. The Chairman will not chair the committee when it is dealing with the appointment The Risk and Compliance Committee is responsible of a successor to the Chairman. Decisions on board for monitoring adherence to the group risk appetite appointments are taken by the full board. The statement. Where exposures exceed levels established committee uses external consultants to assist in in the appetite statement, the Risk and Compliance identifying and considering candidates from a wide Committee is responsible for developing appropriate range of backgrounds in the context of a description responses. This is facilitated by the periodic review of a of the role and capabilities required for a particular key risk indicators report calibrated to the risk appetite appointment. All directors are subject to election by statement. the shareholders at the first opportunity after their appointment. The Risk and Compliance Committee, in turn, delegates responsibility for the monitoring and management of The committee keeps under review the leadership specific risks to committees accountable to it. These needs of the group, both executive and non-executive, committees are the Group Credit Committee, the with a view to ensuring the continued ability of the Banking Assets and Liabilities Committee, the Life group to compete effectively in the marketplace. Assurance Assets and Liabilities Committee, the Group This committee is also responsible for reviewing the Operational Risk Committee, the Group Counterparty effectiveness of the board’s operations, including the Credit and Market Risk Committee and the Group chairmanship and composition of board committees. Compliance Committee. The terms of reference for each committee, whose members include members of Subject to satisfactory performance, non-executive group senior management, are reviewed regularly by directors are typically expected to serve two three- the Risk and Compliance Committee. year terms, although the board may extend an invitation to serve a further three-year term. The form The Remuneration and Compensation of appointment letter for non-executive directors Committee is available for inspection and is also included on The Remuneration and Compensation Committee the group’s website (www.irishlifepermanent.ie). comprises Danuta Gray (Chairman), Gillian Bowler, The remuneration of the non-executive directors Eamonn Heffernan, Ray MacSharry and Pat Ryan. This is determined by the board within the parameters committee considers all aspects of the performance decided by the shareholders and on the advice of the and remuneration of executive directors and senior Chairman and the Group Chief Executive. The term executives and, having consulted with the Chairman of office of the Chairman is six years regardless of any and Group Chief Executive, sets the remuneration of previous term as a director. The board has adopted a these executives, under advice to other non-executive practice of all directors submitting themselves for re- directors. The committee also has responsibility for election at each Annual General Meeting. Under the setting the remuneration of the Chairman (without Articles of Association, directors are required to submit the Chairman being present) and the Group Chief themselves to shareholders for re-election to the board Executive. Senior management succession issues are every three years. also addressed by this committee. During 2009 the committee used the Executive Communication with Shareholders Compensation Practice of Watson Wyatt for advice on executive director and senior management The group has an ongoing programme of meetings remuneration. Services provided to the group by other between its senior executives, institutional Watson Wyatt practices include the valuation of the shareholders, analysts and brokers. These meetings, Irish Progressive Staff Pension Scheme and tsb Staff which are governed by procedures designed to ensure Pension Scheme. that price sensitive information is not divulged, are wide ranging and are designed to facilitate a two-way dialogue based upon the mutual understanding of objectives.

52 Overview Business Review Corporate Governance Financial Statements 53 The Code on Corporate Governance has a requirement has a requirement Governance Code on Corporate The annually the effectiveness to review the directors for requires This of internal controls. system of the group’s all to cover of internal controls of the system a review including: controls − Financial − Operational − Compliance − Management. Risk of on the implementation directors Formal guidance for Guidance “Internal Control: entitled the requirements published in was on the Combined Code”, Directors for board guidance”). The 1999 (“the Turnbull September, necessary to implement has established the procedures with fully compliant guidance and was the Turnbull of the it during 2009 and up to the date of approval financial statements. of the effectiveness Audit Committee has reviewed The to thereon and reported of internal controls this system the board. the management has delegated to executive board The of internal planning and implementation of the system which applies framework within an established controls the group. throughout maintaining a for responsibility have directors The reasonable which provides of internal controls system internal and efficient operations, of effective assurance and with laws and compliance financial control regulations. Risk Management Risk for process has established an ongoing board The and managing the significant identifying, evaluating process risk management This the group. risks faced by with in accordance the board by reviewed is regularly confirms board The Turnbull. by the guidance provided identified were weaknesses that no significant control to risk approach group’s The process. in the review is further 30 to 39. management detailed on pages the internal audit, Audit Committee reviews The The programmes. compliance and risk management to the regularly Head of Internal Audit reports Group Audit Committee also Audit Committee. The and annual financial statements the half-year reviews audit. There of the external and extent and the nature auditors the external in place for procedures formal are to the Audit findings and recommendations to report significant identified risks findings or Committee. Any action can be taken. so that appropriate examined are ) www.irishlifepermanent.ie Internal Control the group’s for responsibility has overall board The its reviewing and for of internal controls system is designed to manage Such a system effectiveness. to achieve than eliminate the risk of failure rather only reasonable and can provide business objectives, against material and not absolute assurance misstatement or loss. to provide information and access to investors. The The and access to investors. information to provide is updated section of the website relations investor and formal releases stock exchange with the company’s are as they and investors to analysts presentations made. to the comply with the Code as it relates directors The of resolutions the separation votes, of proxy disclosure at the and the attendance of Committee Chairmen Meeting. Annual General In addition, the Chairman attends the announcement the Chairman attends In addition, to final results, preliminary and of both half-yearly they and where invited, are shareholders which major issue the opportunity to question and discuss any have pertaining of these occasions to the business. Outside or the can meet with the Chairman major shareholders In addition, on request. Senior Independent Director appointed to meet newly invited are major shareholders directors. non-executive of shareholders of the views appraised is kept board The from the feedback through in general and the market presentations. and results the meetings’ programme to also circulated are on the company Analysts’ reports the group basis. Finally, a regular members on the board surveys periodically commissions independent sample analysts to ascertain and stockbroker of shareholders issues arising. and any of the group perceptions market to the board. provided are of these surveys results The the Chairman’s is designed, through annual report The in addition to the Statement and the Business Review, contained in the report, detailed financial information and understandable assessment a balanced to present uses group The position and prospects. of the group’s ( its internet website Corporate Governance Corporate Corporate Governance

Risk Management (continued) the Group Operational Risk Committee, the Group The Risk and Compliance Committee monitors total Counterparty Credit and Market Risk Committee risk levels across the group, in line with the overall and the Group Compliance Committee. Their policy approved by the Board of Directors. The Risk and activities are described in the Business Review on Compliance Committee supports the board in carrying pages 36 to 38. The terms of reference of these out its responsibilities for ensuring that risks are properly committees, whose members include executive identified, reported, assessed and controlled, and that directors and senior management, are reviewed the group’s strategy is consistent with the group’s risk regularly by the board. appetite. The Group Head of Risk and Compliance − Comprehensive budgeting systems are in place with reports regularly to the Risk and Compliance annual financial budgets prepared and approved by Committee. the board. Actual results are monitored and there is regular consideration by the board of progress The group has in place a Speaking Up (or “whistle- compared with budgets and forecasts. blowing”) Policy, which allows all staff and other people − There are clearly defined capital investment control who work with or for the group, to raise any concerns guidelines and procedures set by the board. they may have about suspected wrongdoing within the − Responsibilities for the management of credit, group, and ensures that anyone raising a concern in investment and treasury activities are delegated good faith can feel safe and confident that the group will within limits to line management. In addition, treat the concern seriously, provide adequate protection management has been given responsibility to set and ensure fair treatment for the person raising the operational procedures and standards in the areas concern. In addition, the group has in place a Code of of finance, tax legal and regulatory compliance, Ethics, which lays down the standards of responsibility internal audit, human resources and information and ethical behaviour to be observed by all employees technology systems and operations. of the group. − The internal audit function, which is centrally controlled (and staffed centrally), monitors The group’s business involves the acceptance and compliance with the group’s policies and standards management of a range of risks. The group’s system and the effectiveness of internal control structures of internal controls is designed to provide reasonable, across the group. The work of internal audit follows but not absolute, assurance against the risk of material a risk based approach. The Group Head of Internal errors, fraud or losses occurring. It is possible that Audit reports to the Group Chief Executive and internal controls can be circumvented or overridden. the Audit Committee and has direct access to the Further, because of changes of changes in conditions, Audit Committee. The Audit Committee monitors the effectiveness of an internal control system may and reviews the effectiveness of the internal audit vary over time. There was one material operational activities on an ongoing basis. event in the early part of 2009, when mismatches arose − Compliance in the group is controlled centrally between the fees charged on fixed rate mortgage under the Group Head of Risk and Compliance. switches and the cost of closing fixed rate positions. The Divisional compliance officers are in place in all of annualised impact of this event on net interest margin the group’s operating divisions. The Group Head was approximately €30m. Corrective action has been of Risk and Compliance reports to the Group Chief taken to address the issue that arose and to generally Executive and the Risk and Compliance Committee strengthen applicable controls. and has direct access to the Risk and Compliance Committee. Internal Control Procedures − There is a risk management framework in place The group’s key internal control procedures include the in each business throughout the group whereby following: executive management reviews and monitors, on an ongoing basis, the controls in place, both − An organisational structure with formally defined financial and non-financial, to manage the risks lines of responsibility and delegation of authority. facing that business. − Established systems and procedures to identify, control and report on key risks. Exposure to these risks will be monitored mainly by the Risk and Compliance Committee through the operations of the committees accountable to it. These committees include the Group Credit Committee, the Banking Assets and Liabilities Committee, the Life Assurance Assets and Liabilities Committee, 54 Overview Business Review Corporate Governance Financial Statements 55 Board Board and Audit Remuneration Nomination Non-executive Directors Non-executive Gillian Bowler Byrne Breffni Danuta Gray Hayes Margaret Eamonn Heffernan Keenan Roy Ryan MacSharry Ray 9 Sheehan Liam O’Reilly 9 Pat 9 9 9 9 3 1 Finbar 4 4 - 1 4 - 1 9 - - Directors Executive - - 1 - - 9 Murphy Kevin 7 9 - 9 9 McCarthy David 8 Casey Denis 9 7 8 Fitzpatrick Peter - 9 - 9 8 9 7 8 3 - - 9 8 8 - 8 - 3 1 9 2 1 3 8 8 - - 8 - 1 3 3 1 - 3 3 - 2 3 3 - - - - 2 - 3 2 - - 3 2 - - - 2 - 2 - - - - 2 2 ------a member of the was Column A indicates the number of scheduled meetings held during the period the director and / or Committee. Board a member of was director Column B indicates the number of scheduled meetings attended during the period the and / or Committee. the Board meetings held during the year. and committee additional unscheduled board also twelve were There Risk and Compensation and Risk Committee Meetings during the and Board Attendance at Scheduled Board 2009 ended 31 December year A B A B A B A B Compliance with the Combined Code on Corporate Governance Compliance with the Combined 1 to Section listed companies to disclose, in relation and the UK Listing Authority require Irish Stock Exchange The throughout complied with its provisions have its principles and whether they applied have they of the Code, how the accounting year. in set down period with the provisions accounting the most recent has complied fully throughout company The within report auditor’s The of its principles as set out in this report. Section 1 of the Code including the application of the Code specified provisions compliance with the nine of the company’s their review the Annual Report covers Stock Exchange. of the Irish the Listing Rules by their review for Going Concern to 33), 30 on pages Review (as discussed in the Business the risk factors, has reviewed of Directors Board The activities and all group’s risks which impact on the and operational insurance liquidity, market, including: credit, the impact included review concern. This ability to continue as a going the group’s to assess information relevant the capital position of the and the industry, the group affecting economic and political factors of the current directors the banking entities. The liquidity position and the access to funds for the entities in the group, regulated including the liquidity, improve to the Irish Government by introduced into account the measures also taken have Eligible Institutions Liabilities Guarantee the Credit in September 2008 and introduced Guarantee, Government concern 2009. In concluding on the going in December the Government by Scheme”) introduced Scheme (the “ELG ability to use assets Scheme, the the ELG Guarantee, into account the Government taken have basis the directors as importance to the economy of the group’s acknowledgement funds and the Government’s to raise as collateral the in business for to continue has adequate resources consider that the group the directors a whole. As a result the financial concern basis in preparing continues to adopt the going the board For this reason future. foreseeable statements. Corporate Governance Corporate Directors’ Report on Remuneration

This report sets out the remuneration policy for the Non-Executive Directors group’s senior executives, including executive directors. Non-executive directors are remunerated solely by way Remuneration and Compensation of fees in respect of their board membership, full Committee details of which are set out on page 62.

The members and role of the Remuneration and Executive Directors Compensation Committee are outlined on page 52 of the report on Corporate Governance. The remuneration of the executive directors comprises a basic salary, certain benefits, an annual performance Remuneration Policy bonus and pension entitlements. In addition, executive directors participate in the group’s employee profit In framing the group’s remuneration policy the board sharing scheme, long-term share incentive awards confirms that it has complied with the Combined Code and share option schemes. Each of these elements is on Corporate Governance. The group’s policy on senior discussed below and details of the total remuneration executive remuneration (including executive directors) are set out on pages 59 to 62. is to reward executives competitively in order to ensure that the group continues to attract and retain high Basic Salary calibre executives and that they are properly motivated The basic salary is reviewed annually having regard to perform in the best interests of the shareholders. to competitive market practice and Government The policy is also designed to ensure that there are guidelines. adequate succession plans in place. Benefits The Remuneration and Compensation Committee Executive directors are entitled to a company car or makes recommendations to the board on the group’s a car allowance. The group also pays private health executive remuneration policy taking into account a insurance on behalf of the directors and their families. number of factors, including the comparative market In addition, executive directors may avail of subsidised places in which the group operates and performance house purchase loans. Loans to executive directors are relative to these market places. The need to ensure on the same terms and conditions as loans to other that there is a strong alignment of interest between eligible Irish Life & Permanent management. executives and shareholders is addressed through a combination of rewards which includes annual bonus, Bonus share option and long-term incentive schemes. In all Bonus awards in any year are determined by the cases, rewards are subject to stringent performance Remuneration and Compensation Committee by criteria which include appropriately balanced reward reference to the overall profit performance of the structures. The Committee seeks external advice on group and to performance criteria which are set by these matters. the Committee. Bonus awards are geared towards attracting and retaining staff together with aligning The Committee has reviewed remuneration policy in their performance with business strategies and plans. the wake of the various external reports on improving The awards extend to 100% of basic salary related to the governance and management of reward, particularly the achievement of stretching performance targets. No the 2009 EU CEBS Remuneration report which the bonus payments were made in respect of 2009 to senior Financial Regulator has recommended be followed. executives including executive directors. This has resulted in a range of changes in remuneration policy aimed at ensuring remuneration based risks are cogently managed together with the introduction of new oversight of all reward structures and changes. Revised Terms of Reference for the Remuneration and Compensation Committee including improvements to its own operating practice have been approved by the board and are now in place.

56 Overview Business Review Corporate Governance Financial Statements 57 the board decided in 2007 to offer executive directors directors executive in 2007 to offer decided the board pension option of limiting their the and management cap with a taxable, of the pension accrual to the level being paid in lieu of the non-pensionable allowance to the group. pension accrual with a similar cost excess chose this option during 2008. of the executives Two 30 June from with effect withdrawn option was This 2009. Directors’ Fees from another Company Fees from Directors’ is of the group director an executive Where of director service as a non-executive for remunerated the remuneration, such and retains another company is disclosed. amount of this remuneration 5m or the €

Fitzpatrick and David McCarthy are members of McCarthy are Fitzpatrick and David this defined benefit scheme. members of this are Murphy and Kevin Casey defined benefit scheme. return on capital (“ROC”) over the performance the performance over on capital (“ROC”) return period of 48%; 12.5% on a linear scale between will vest awards 48% and 60%; between ROC and 50% for at least the group (“TSR”) for Return Shareholder TSR of the FTS average matches the weighted indices; and Insurance 300 Banking and Eurofirst TSR of the average the weighted exceeds group indices and Insurance 300 Banking FTS Eurofirst on a linear scale will vest Awards plus 8% p.a. the two TSR between 12.5% and 50% for between specified. levels The group contributes to these pension schemes. group The to determined solely in relation benefits are Pension basic salary. on a tax charge 2006 introduced Finance Act The of the higher of pension assets in excess Pensions in defined benefit pension arrangements two are There directors: executive place for − Scheme - Peter Pension Executive Irish Permanent − Scheme - Denis plc Pension Assurance Irish Life of the individual accrued pension entitlements value to as referred is generally 2005. This as at 7 December changes of these legislative As a result the pension cap. In any financial year the value of an award (based on of an award the value financial year In any multiplied by is made the award price at the date share shall allocated under the award) the number of shares No awards salary. a participant’s 100% of not exceed made in 2009. were Long-term Incentive Plan Incentive Long-term was management senior plan for incentive A long-term directors, in 2006. Executive shareholders by approved selected by senior executives in common with other may and Compensation Committee, the Remuneration under the plan, of shares certainbe granted awards participants for on the attainment of certainwhich vest in 2007 and 2008 granted criteria. Awards performance and the criteria period performance year a three have are: − cumulative for vest awards of the share 12.5% − of 60% and ROC for vest awards 50% of the share − if the Total vest awards 12.5% of the share − the if the TSR for will vest awards 50% of the share Directors’ Report Remuneration on Directors’ Directors’ Report on Remuneration (Audited)

The following sections are audited and CPI plus 10% p.a. compounded and EPS growth form part of the financial statements. being in the top 25% of a peer group of financial service companies. Following the introduction Share Option Schemes of IFRS and as permitted under the scheme the The group has three share option schemes in place directors have amended the calculation basis for which conform to the guidelines of the Irish Association EPS to reflect the EV earnings basis which the of Investment Managers and were approved by the directors believe is a more realistic measure of the shareholders in 1994, 2000 and 2001. The option performance of a life business and is the measure schemes are designed to encourage staff and in used by the investment community to assess the particular senior executives to identify with shareholder performance of life businesses. There is no change interests. It is current policy to phase the grant of to the EPS growth criteria. The requirement that options. EPS growth be in the top 25% of a peer group of financial services companies has, as permitted Executive directors, in common with other senior under the scheme, been deleted since it is executives, hold options under the 1994 scheme. This not possible to obtain comparable EPS growth scheme is now closed and no further options can be information, following the introduction of IFRS for allocated under it. all quoted companies in Europe in 2005. − Options under the 2001 scheme are exercisable Executive directors and other senior executives may where EPS growth in any three year period after participate in the allocation of options under the 2000 the granting of the options exceeds the increase in scheme. Executives are selected to participate in this CPI plus 5% p.a. compounded. scheme based on performance criteria set by the Remuneration and Compensation Committee. Options under all of the above schemes are issued at the market price on the day preceding the date of the The 2001 scheme is a Revenue-approved share option grant. Options are granted at no consideration. The scheme in which all employees including executive aggregate exercise price of options granted under the directors of the company and certain subsidiaries may share options schemes may not exceed eight times an participate. Under this scheme 30% of the options may executive’s emoluments. In total, not more than 15% be granted to key employees with the remaining 70% of the issued share capital of the group can be put granted on similar terms to the remaining eligible staff. under option in any ten-year period. In addition, over The Remuneration and Compensation Committee any three-year period the number of shares which selects key employees which may include executive may be placed under option may not exceed 4.5% of directors based on performance criteria. Key employees the group’s issued share capital. Options lapse if not have specialist skills, qualifications and relevant exercised within ten years of grant. No share options experience which are considered vital to the future were granted in 2009. success of the group. Profit-sharing Schemes Options are exercisable under the following The group operates Revenue-approved employee circumstances: profit-sharing schemes on terms approved by the shareholders. All employees, including executive − 1994 scheme options are exercisable if the growth directors of the company, and certain subsidiaries in the group’s Earnings per share (“EPS”) exceeds who meet the criteria laid down in the schemes, may the growth in the CPI over any three years participate in these schemes. There were no payouts following the grant of the options. under the profit-sharing schemes in 2009. − Under the 2000 scheme, 50% of the options are exercisable only if growth in the group’s EPS in Directors’ Service Contracts the three-year period after grant exceeds growth in CPI plus 5% p.a. compounded over the period. In accordance with the recommendation of the The balance of the options are exercisable in equal Combined Code on Corporate Governance there are instalments after the fourth and fifth anniversary no directors’ service contracts with notice periods of the date of grant subject to growth in EPS in the exceeding twelve months or with provisions for pre- three-year period after grant exceeding growth in determined compensation on termination which exceeds one year’s salary and benefits. 58 Overview Business Review Corporate Governance Financial Statements 59 000 2008 € 0.2m 2,889 942 - 988 959 € 514 719 744 000 € 6,551 4,574 2009 99,000 paid 000 € 2008 € 820 20 - 400 400 500,000 with effect from from 500,000 with effect 4 € 52 196 000 2009 0.1m negative (2008: 0.1m negative € 3,182 2,930 € 540,000 in accordance with his with his 540,000 in accordance €

3.1m). This figure includes a share includes a share figure 3.1m). This 000 € 2008 € 114 32 - 48 34 26 27 64 33 150 000 € 2009 11.1m (2008: € 000 0.3m) and additional pension contributions amounting 2008 € March 2009. The remuneration disclosed is for the full is for disclosed remuneration 2009. The March €

52,000 in respect of Peter Fitzpatrick which represent in each Fitzpatrick which represent of Peter 52,000 in respect ------February 2009 and ceased employment from the same date. the same date. from February 2009 and ceased employment - - €

540 000 € 1,789 1,249 2009

0.2m (2008: 192,000 paid to Kevin Murphy up to June 2009 and Murphy 192,000 paid to Kevin € € 000 2008 € 0.1m), a long-term incentive plan expense of plan expense 0.1m), a long-term incentive € 1,955 890 - 540 540 525 63 369 483 515 000 1,430 nil (2008: € 1,249,000 in accordance with his contractual entitlements. with his contractual 1,249,000 in accordance €

2 4

3

1 7.3m. At the request of the trustees, these additional pension contributions were made to the relevant made to the relevant of the trustees, these additional pension contributions were At the request 7.3m. 1. terminated on 14 May employment Casey’s on 28 February 2009. Denis the board from retired Casey Denis in a payment received Casey included up to this date. In addition to salary Denis are 2009; salary payments lieu of notice 2. on 13 board the from retired Fitzpatrick Peter contractual entitlement. contractual 3. to reduced guidelines was annual salary in line with Government Murphy’s Kevin Chief Executive. 1 August of Group 2009 on his appointment to the position 4. on 3 appointed to the board McCarthy was David in lieu of notice a payment Fitzpatrick received In addition to salary Peter year 2009. year € 2,928,000 in respect of Denis Casey and a negative and a negative Casey of Denis 2,928,000 in respect Peter Fitzpatrick Peter

Kevin Murphy Murphy Kevin David McCarthy David 2009 Salary lieu of notice in Payment Kind in Benefit remuneration* Total Other € Casey Denis Executive Directors’ Remuneration and Pension Benefits Pension and Remuneration Directors’ Executive for who held office directors to executive the group) by pension contributions (excluding payable remuneration The part is as follows: year any of the financial Directors’ Report on Remuneration (Audited) Report Remuneration on Directors’ option grant expense of expense option grant to These lifetime. their remaining individuals over pension schemes to enable the pensions to be paid to the retiring brought but were directors executive of the relevant service lives the future been due over have contributions would of their early retirement. as a result practice, in line with standard forward, and its principal subsidiaries based on duties the company is allocated between directors cost of executive The those companies. carried out for case the transfer value of the increase in accrued pension during the year including an allowance for the impact of for including an allowance in accrued pension during the year increase of the value case the transfer based on past normal custom and practice. early payment, amounted to directors executive for remuneration Aggregate to Peter Fitzpatrick, each of whom opted for a taxable allowance in compensation for loss of pension. This loss of pension. This for in compensation a taxable allowance Fitzpatrick, each of whom opted for to Peter on determined and was 2006 in the Finance Act of the pensions “cap” the introduction compensation arises from their long service and the pension benefits being forfeited. the basis of independent actuarial advice, reflecting an amount of 30 June 2009. Also included is from discontinued with effect of the compensation was payment The € normal pension contributions of negative), *Other remuneration includes amounts of includes amounts *Other remuneration Directors’ Report on Remuneration (Audited)

Executive Directors’ Remuneration and Pension Benefits (continued)

The directors’ pension benefits under the various defined benefit pension schemes in which they are members are as follows:

Transfer value of the Increase in accrued pension increase in accrued Total accrued during the year 1 pension 2 pension 3 2009 2008 2009 2008 2009 2008 €000 €000 €000 €000 €000 €000 Denis Casey 8 48 2,928 668 438 430 Peter Fitzpatrick 4 (7) - (52) 24* 277 284** Kevin Murphy 4 12 (26)*** 211 (382)* 291 279** David McCarthy 5 58 2 762 22 214 156 71 24 3,849 332 1,220 1,149

1. Increases are after adjustment for inflation and reflect additional pensionable service and earnings. 2. The transfer value of the increase in accrued benefits represents the amounts that the pension scheme would transfer to another pension scheme, in relation to the benefits accrued during the year in the event of the member leaving service. *Spouses benefits are based on the non-capped pension. The transfer value of the increase includes the sum of (a) the effect of the change of the capped pension for the member, (b) the effect of the change of the spouses’ uncapped benefit and (c) the impact of early payment based on past normal custom and practice. 3. Total accumulated amounts of accrued benefits payable at normal retirement ages. **The accrued pension represents the capped pension with CPI increase. ***The level of cap selected was lower than the pension already accrued resulting in a negative increase during 2008 and thus a negative transfer value. 4. The accrued pensions for Peter Fitzpatrick and Kevin Murphy reflect the removal of the cap on pension accrual with an appropriate adjustment following the discontinuance of the compensation payments. 5. The increase in accrued pension and the associated increase in transfer value reflects adjustments to David McCarthy’s salary on his appointment as Group Finance Director in February 2009.

60 Overview Business Review Corporate Governance Financial Statements 61 21/06/2002 20/06/2009 28/03/2003 27/03/2010 1.57) and the price range 1.57) and the price range € 04/03/2011 03/03/2018 04/03/2011 08/10/2007 07/10/2014 08/04/2006 07/04/2013 08/04/2006 18/04/2005 17/04/2012 04/03/2011 03/03/2018 04/03/2011 27/06/2004 26/06/2011 08/10/2007 07/10/2014 08/10/2007 28/03/2003 27/03/2010 08/04/2006 07/04/2013 04/03/2011 03/03/2018 18/04/2005 17/04/2012 08/10/2007 07/10/2014 27/06/2004 26/06/2011 08/04/2006 07/04/2013 04/03/2011 03/03/2018 18/04/2005 17/04/2012 08/10/2007 07/10/2014 27/06/2004 26/06/2011 08/04/2006 07/04/2013 28/03/2003 27/03/2010 18/04/2005 17/04/2012 21/06/2002 20/06/2009 date date 27/06/2004 26/06/2011 exercise exercise 28/03/2003 27/03/2010 Earliest Latest 21/06/2002 20/06/2009 ------30,644 36,336 45,884 25,656 18,564 31,746 48,182 22,620 28,864 17,930 17,418 22,912 188,830 157,926 As at 31 December 2009 Price 3.30 (31 December 2008: 3.30 (31 December

€ year 13.31). Executive directors’ and non-executive directors’ directors’ and non-executive directors’ 13.31). Executive €

1.10 to € Lapsed Forfeited

- - 10.38 - - 13.21 - - 9.68

- - 14.85 - 49,628 10.38 - - 13.85 - 31,590 13.21 12,821 - - 10.90 - 9.20 - 40,310 9.68 - - 10.38 - 22,114 14.85 - - 13.21 - 21,544 13.85 - 28,571 9.20 - - 9.68 - 77,092 10.38 - - 14.85 - 23,370 13.21 - - 13.85 - 30,104 9.68 - - 9.20 - 37,206 14.85 18,648 - 10.90 year - 17,418 13.85 during the during the Exercise - 21,256 9.20 9.20 21,256 - - 16,317 10.90 5.90 (2008: € 30,644 36,336 45,884 25,656 49,628 18,564 31,590 12,821 31,746 40,310 48,182 22,114 22,620 21,544 28,571 28,864 77,092 17,930 23,370 17,418 30,104 22,912 37,206 18,648 17,418 21,256 16,317 As at 1 201,651 193,757 176,574 222,763 2009 0.63 to € Scheme Denis Casey Denis David McCarthy David Peter Fitzpatrick Peter Kevin Murphy Kevin 1994 2000 2000 during 2009 was during 2009 was shareholdings in the company are detailed in Note 54 Related parties. detailed in Note 54 Related are in the company shareholdings The market price of the shares at 31 December 2009 was 2009 was at 31 December price of the shares market The 2000

2000 2000 2001 2000 1994 1994 2000 2000 2000 2000 2001 1994 2000 2000 2000 2000 2001 2000 1994 2000 1994

2001 January 1994 Executive Directors’ Share Options Share Directors’ Executive Directors’ Report on Remuneration (Audited) Report Remuneration on Directors’ Directors’ Report on Remuneration (Audited)

Long-term Incentive Plan

Conditional shares awarded under the long-term incentive plan are as follows:

Total as at 31 Granted in Granted in Granted in Lapsed in Forfeited in December 2006 2007 2008 2009 2009 2009

Kevin Murphy 18,662 26,595 48,182 18,662 - 74,777 David McCarthy 15,398 16,914 30,644 15,398 - 47,558 Denis Casey 19,395 42,553 77,092 - 139,040 - Peter Fitzpatrick 26,066 27,393 49,628 - 103,087 -

The fair value of conditional shares at the grant date in 2007 was €11.50 and at 31 December 2009 was €2.12. The fair value of conditional shares at the grant date in 2008 was €6.12 and at 31 December 2009 was €2.18.

Non-Executive Directors’ Remuneration

Fees paid to non-executive directors are reviewed annually. The level of basic fees for non-executive directors was reduced by 25% to €56,250 with effect from 1 September 2009. Non-executive directors who perform additional services outside the normal duties of a director may receive additional fees. In particular Roy Keenan received additional fees as Senior Independent Director and as a member of the Audit and Risk Committee and Breffni Byrne received an additional fee as Chairman of the Audit and Risk Committee.

The remuneration payable in respect of each non-executive director is as follows:

2009 2008 €000 €000

Gillian Bowler1 200 288 Breffni Byrne 103 113 David Byrne2 - 75 Danuta Gray 69 78 Margaret Hayes3 77 2 Eamonn Heffernan 78 85 Roy Keenan 95 85 Ray MacSharry3 69 2 Kieran McGowan4 - 77 Liam O’Reilly5 78 27 Pat Ryan6 5 - Finbar Sheehan7 38 102 812 934

1. The Chairman’s (Gillian Bowler) fee was reduced to €200,000 p.a. with effect from 1 January 2009.

2. David Byrne retired from the board in May 2008.

3. Ray MacSharry and Margaret Hayes joined the board in December 2008.

4. Kieran McGowan retired from the board in October 2008.

5. Liam O’Reilly joined the board in September 2008.

6. Pat Ryan joined the board in December 2009. In addition to board fees, in 2009 prior to his appointment as a director, Pat Ryan was paid €121,000 (inclusive of VAT) in respect of consultancy services to the bank’s treasury operation from April to September 2009.

7. Finbar Sheehan retired from the board in May 2009. 62 Financial Statements

Statement of Directors' Responsibilities 64

Independent Auditors' Report 66 Overview

Consolidated Statement of Financial Position 68

Consolidated Income Statement 69

Consolidated Statement of Comprehensive Income 70

Consolidated Statement of Changes in Equity 71 uiesRve CroaeGvrac Financial Statements Corporate Governance Business Review

Consolidated Statement of Cash Flows 73

Company Statement of Financial Position 75

Company Statement of Comprehensive Income 76

Company Statement of Changes in Equity 77

Company Statement of Cash Flows 79

Notes to the Group Financial Statements 81

Additional Information 209

Embedded Value Basis Supplementary Information 211 Statement of Directors’ Responsibilities in respect of the Annual Report and the Financial Statements

The directors are responsible for preparing the Annual Report and the consolidated and company financial statements, in accordance with applicable law and regulations.

Company law requires the directors to prepare consolidated and company financial statements for each financial year. Under company law the directors are required to prepare the consolidated financial statements in accordance with IFRSs, as adopted by the European Union (“EU”), and have elected to prepare the company financial statements in accordance with IFRSs as adopted by the EU and as applied in accordance with the provisions of the Companies Acts, 1963 to 2009. In preparing the consolidated and company financial statements, the directors have also elected to comply with IFRSs issued by the International Accounting Standards Board (“IASB”).

The consolidated and company financial statements are required by law and IFRSs as adopted by the EU to present fairly the financial position and performance of the group and company. The Companies Acts, 1963 to 2009 provide in relation to such financial statements, that references in the relevant part of these Acts to financial statements giving a true and fair view are references to their achieving a fair presentation.

In preparing each of the consolidated and company financial statements, the directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and estimates that are reasonable and prudent; • state that the financial statements comply with IFRSs as adopted by the EU as applied in accordance with the Companies Act, 1963 to 2009 and IFRSs issued by the IASB; and • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the group and the company will continue in business.

Under applicable law and the requirements of the Listing Rules issued by the Irish Stock Exchange regulations, the directors are also responsible for preparing a Directors’ Report and reports relating to directors’ remuneration and corporate governance which comply with that law and those Rules. In particular, in accordance with the Transparency (Directive 2004/109/EC) Regulations 2007 (the “Transparency Regulations”), the directors are required to include in their report a fair review of the business and a description of the principal risks and uncertainties facing the group and the company and a responsibility statement relating to these and other matters, included below.

The directors are responsible for keeping proper books of account that disclose with reasonable accuracy at any time the financial position of the company and enable them to ensure that its financial statements comply with the Companies Acts, 1963 to 2009 and, as regards the consolidated financial statements, Article 4 of the IAS Regulation.

The directors are also responsible for taking such steps as are reasonably open to them to safeguard the assets of the group and to prevent and detect fraud and other irregularities.

The directors are responsible for the maintenance and integrity of the corporate and financial information included on the company’s website www.irishlifepermanent.ie. Legislation in the Republic of Ireland governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

64 Statement of Directors’ Responsibilities in respect of the Annual Report and the Financial Statements

Responsibility Statement, in accordance with the Transparency Regulations

Each of the directors, whose names and functions are listed on pages 42 to 43, confirm that, to the best of each person’s knowledge and belief: Overview • the consolidated financial statements, prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities and financial position of the group at 31 December 2009 and its (loss) for the year then ended; • the company financial statements, prepared in accordance with IFRSs as adopted by the EU and as applied in accordance with the Companies Acts 1963 to 2009, give a true and fair view of the assets, liabilities and financial position of the company at 31 December 2009; and • the directors’ report contained in the Annual Report includes a fair review of the development and performance of the business and the position of the group and company, together with a description of the principal risks and uncertainties that they face.

On behalf of the Board

Gillian Bowler Kevin Murphy Financial Statements Corporate Governance Business Review Chairman Group Chief Executive

David McCarthy Ciarán Long Group Finance Director Company Secretary

23 March 2010

65 Independent Auditor’s Report to the Members of Irish Life & Permanent plc

We have audited the consolidated and company financial statements (the ‘‘financial statements’’) of Irish Life & Permanent plc for the year ended 31 December 2009 which comprise the Consolidated and Company Statement of Financial Position, the Consolidated Income Statement, the Consolidated and Company Statement of Comprehensive Income, the Consolidated and Company Statement of Changes in Equity, the Consolidated and Company Statement of Cash Flows and the related notes. These financial statements have been prepared under the accounting policies set out therein.

This report is made solely for the company’s members, as a body, in accordance with section 193 of the Companies Act 1990. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

Respective Responsibilities of Directors and Independent Auditor

The directors’ responsibilities for preparing the Annual Report and the financial statements in accordance with applicable law and International Financial Reporting Standards (“IFRSs”) as adopted by the European Union are set out in the Statement of Directors’ Responsibilities.

Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland).

We report to you our opinion as to whether the financial statements give a true and fair view in accordance with IFRSs as adopted by the European Union and have been properly prepared in accordance with the Companies Acts 1963 to 2009 and, in the case of the consolidated financial statements, Article 4 of the IAS Regulation. We also report to you whether, in our opinion:

• proper books of account have been kept by the company; • at the financial position date, there exists a financial situation requiring the convening of an extraordinary general meeting of the company; and • the information given in the Directors’ Report is consistent with the financial statements.

In addition, we state whether we have obtained all the information and explanations necessary for the purposes of our audit, and whether the Company Statement of Financial Position is in agreement with the books of account.

We also report to you if, in our opinion, any information specified by law or the Listing Rules of the Irish Stock Exchange regarding directors’ remuneration and directors’ transactions is not disclosed and, where practicable, include such information in our report.

We review whether the Corporate Governance Statement reflects the group’s compliance with the nine provisions of the 2008 FRC Combined Code specified for our review by the Listing Rules of the Irish Stock Exchange, and we report if it does not. We are not required to consider whether the board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the group’s corporate governance procedures or its risk and control procedures.

We read the other information contained in the Annual Report and consider whether it is consistent with the audited financial statements. The other information comprises only; the Directors’ Report, the Overview, including the Chairman’s Statement and the Business Review. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information.

66 Independent Auditor’s Report to the Members of Irish Life & Permanent plc

Basis of Audit Opinion

We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and

disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements Overview made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the group’s and company’s circumstances, consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements.

Opinion

In our opinion: the consolidated financial statements give a true and fair view, in accordance with IFRSs as adopted by the • Financial Statements Corporate Governance Business Review European Union, of the state of the group’s affairs as at 31 December 2009 and of its (loss) for the year then ended; • the company financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Acts 1963 to 2009, of the state of the company’s affairs as at 31 December 2009; • the consolidated financial statements have been properly prepared in accordance with the Companies Acts 1963 to 2009 and Article 4 of the IAS Regulation; and • the company financial statements have been properly prepared in accordance with the Companies Acts 1963 to 2009.

We have obtained all the information and explanations which we consider necessary for the purposes of our audit. In our opinion proper books of account have been kept by the company. The Company Statement of Financial Position is in agreement with the books of account.

In our opinion the information given in the Directors’ Report is consistent with the financial statements.

The net assets of the company, as stated in the company statement of financial position are more than half of the amount of its called up share capital and, in our opinion, on that basis there did not exist at 31 December 2009 a financial situation which under Section 40 (1) of the Companies (Amendment) Act, 1983 would require the convening of an extraordinary general meeting of the company.

Chartered Accountants Registered Auditor 1 Harbourmaster Place IFSC Dublin 1

23 March 2010

67 Consolidated Statement of Financial Position

as at 31 December 2009

Notes 2009 2008 €m €m

Assets Cash and balances with central banks 4 218 200 Items in course of collection 4 108 124 Debt securities 5, 9 15,780 10,929 Equity shares and units in unit trusts 6 13,510 10,390 Derivative assets 7 1,169 1,162 Loans and receivables to customers 8, 9 38,592 40,075 Loans and receivables to banks 10 4,925 4,775 Investment properties 11 1,769 2,280 Reinsurance assets 34 1,979 2,133 Prepayments and accrued income 294 364 Interest in associated undertaking 12 122 139 Property and equipment 13 238 362 Shareholder value of in-force business 14 730 787 Intangible assets 15 42 54 Goodwill 16 75 71 Current tax assets - 5 Other assets 17 129 154 Deferred acquisition costs 18 245 256 Retirement benefit asset 19 96 89 Total assets 80,021 74,349

Liabilities Deposits by banks 20 18,713 18,546 Customer accounts 21 14,562 14,118 Debt securities in issue 22 13,262 10,899 Derivative liabilities 7 665 550 Investment contract liabilities 23 24,032 21,118 Insurance contract liabilities 24 4,034 4,007 Outstanding insurance and investment claims 115 114 Accruals 220 224 Other liabilities 26(a) 306 268 Provisions 26(b) 63 53 Current tax liabilities 9 - Deferred front end fees 27 102 117 Deferred tax liabilities 28 129 130 Retirement benefit liability 19 159 158 Subordinated liabilities 29 1,644 1,699 Total liabilities 78,015 72,001

Equity Share capital 30, 32 89 89 Share premium 30 135 135 Other reserves 30 87 124 Retained earnings 30 1,695 1,999 Equity excluding non-controlling interest 2,006 2,347 Non-controlling interest 31 - 1 Total equity including non-controlling interest 2,006 2,348

Total liabilities and equity 80,021 74,349

On behalf of the Board

Gillian Bowler Kevin Murphy Chairman Group Chief Executive

David McCarthy Ciarán Long Group Finance Director Company Secretary 68 Consolidated Income Statement year ended 31 December 2009

2009 2008 Notes €m €m

Interest receivable 39 1,281 2,180 Interest payable 39 (918) (1,694) 363 486 Overview Fees and commission income 40 77 76 Fees and commission expenses 40 (157) (130) Trading income 41 (4) 5 Premiums on insurance contracts 42 709 669 Reinsurers’ share of premiums on insurance contracts (116) (228) Investment return 43 2,585 (7,741) Fees from investment contracts and fund management 225 272 Change in shareholder value of in-force business 14 (57) 70 Total operating income / (expense) 3,625 (6,521)

Claims on insurance contracts 44 (489) (466) Reinsurers’ share of claims on insurance contracts 160 152 Change in insurance contract liabilities 24 (27) 3 Change in reinsurers’ share of insurance contract liabilities 24 (103) 231

Change in investment contract liabilities 23 (2,484) Financial Statements 7,656 Corporate Governance Business Review Investment expenses 45 (35) (50) Administrative expenses 46 (518) (540) Depreciation and amortisation Property and equipment 13, 46 (30) (31) Intangible assets 15, 46 (20) (19) Impairment Property and equipment 13 (9) - Intangible assets 15 (2) - (3,557) 6,936 Impairment of goodwill 16 - (170) Total operating (expenses) / income (3,557) 6,766

Operating profit before provisions 68 245

Provisions for impairment Loans and receivables 9 (376) (82) Debt securities 9 - (122) (376) (204)

Operating (loss) / profit (308) 41

Share of (losses) / profits of associated undertaking / joint venture 12 (2) 22

(Loss) / profit before taxation (310) 63 Taxation 49 (3) (10) (Loss) / profit for the year (313) 53

Attributable to Owners of the parent (313) 49 Non-controlling interest - 4 (313) 53

Earnings per share Cent Cent

Basic 50 (116.8) 18.3

Diluted 50 (116.8) 18.3

On behalf of the Board

Gillian Bowler Kevin Murphy Chairman Group Chief Executive

David McCarthy Ciarán Long Group Finance Director Company Secretary 69 Consolidated Statement of Comprehensive Income

year ended 31 December 2009

2009 2008 Notes €m €m

(Loss) / profit for the year (313) 53

Other comprehensive income

Revaluation of owner occupied property 30, 49 (97) (138)

Currency translation adjustment reserve Gains / (losses) on hedged investment in foreign operations 7 2 (12) Gains / (losses) on unhedged investment in foreign operations 7 1 (3)

(Losses) / gains on hedging of investment in foreign operations 7 (2) 12 30, 49 1 (3) Change in value of available-for-sale financial assets Change in fair value of AFS financial assets 42 4 Change in fair value of AFS financial assets prior to date of reclassification as loans and receivables 5 - (47) 5, 30, 49 42 (43)

Amortisation of AFS securities reclassified to loans and receivables 5, 30, 49 15 9 Other comprehensive income (39) (175)

Deferred tax on other comprehensive income 28, 49 1 36 Other comprehensive income, net of tax (38) (139)

Total comprehensive income for the year (351) (86)

Attributable to Owners of the parent (351) (89) Non-controlling interest 31 - 3 Total comprehensive income for the year (351) (86)

On behalf of the Board

Gillian Bowler Kevin Murphy Chairman Group Chief Executive

David McCarthy Ciarán Long Group Finance Director Company Secretary

70 m € trolling m € m € Overview m € m € m € uiesRve CroaeGvrac Financial Statements Corporate Governance Business Review m € m € m € Attributable to owners of the parent Attributable to owners m € m € m € ------1 ------9 11 - - - 96 - (107) - - - 1 - 9 - - - - - 1 (1) 9 (1) ------(89) ------37 - 1 13 ------(313) ------(313) - - - - - (89) - - (313) - - 1 - 37 (89) - 13 - 1 37 - 13 m € Equity-settled transactions Equity-settled transactions at cost shares in own Change reserves between Transfer of non-controlling Acquisition (note 31) interest Balance as at 31 December 89 135 68 5 (2) 9 7 (66) 703 1,058 2,006 - 2,006 As at 1 January the year for Loss income Other comprehensive (net of tax) losses (net of tax) Revaluation translation in currency Change (net of tax) adjustment reserve of available-for- in value Change sale financial assets (net of tax) securities Amortisation of AFS 89 to loans and reclassified (net of tax) receivables 135 other comprehensive Total income income for comprehensive Total 157 the year with owners, Transactions (45) in equity directly recorded (3) 8 - 7 - (86) - - 920 (89) (89) 1,165 50 50 2,347 1 1 1 2,348 ------(313) - - (351) (38) - - (351) (38) Share Share Revaluation for-sale adjustment payments capital Own share Distributable distributable controlling controlling con controlling non- controlling Non- interest distributable non- interest interest Distributable Non- reserve share reserve Own reserve Other capital reserves based payments reserve translation adjustment reserve Available- for-sale reserve Revaluation reserve Share premium in Equity Consolidated Statement of Changes 2009 ended 31 December year 2009 including Total Share capital excluding Total Share- Currency and Contributions by distributions to owners 71 m € trolling m € m € m € m € m € m € m € m € Attributable to owners of the parent Attributable to owners m € m € m € m € Share Share Revaluation for-sale adjustment payments capital Own share Distributable distributable controlling controlling con controlling non- controlling Non- distributable non- Distributable Non- share Own Other capital based payments translation adjustment Available- for-sale Revaluation Share in Equity Consolidated Statement of Changes 2009 ended 31 December year 2008 Share including Total excluding Total interest Share- interest interest reserve reserve reserves reserve Currency reserve reserve reserve reserve premium capital 72 As at 1 January the year for Profit income Other comprehensive (net of tax) losses (net of tax) Revaluation translation in currency Change (net of tax) adjustment reserve of available-for- in value Change sale financial assets (net of tax) securities Amortisation of AFS to loans and reclassified 88 (net of tax) receivables - - - income other comprehensive Total 126 income for comprehensive Total - - - the year - 263 recorded with owners, Transactions in equity directly (105) - - and distributions Contributions by - (15) to owners - capital Issue of share - - option reserve of share Release - - at cost shares in own Change - reserves between - Transfer - Dividends - (105) of non-controlling Acquisition (38) - (note 31) interest 11 Balance as at 31 December - - - (30) (3) - On behalf of the Board - - - Gillian Bowler 8 1 Chairman - - - 8 (3) - - - - (98) - 9 - 89 - - - - (105) - 1,077 - - Murphy Kevin 135 - - - - - (30) (1) - - Chief Executive Group - 1,170 - - - 157 - - - 2,630 - - 49 (3) - - (45) - - - - 13 - - - - - McCarthy David Finance Director - Group - (3) (2) - 2,643 - - - (105) - - - - - (1) - 8 49 - (3) (1) - (1) (38) - - - 7 - - Secretary Company - (106) 4 - (138) 9 3 Ciarán Long - (86) - - - - 53 49 2 (3) (1) (38) - 920 8 - (1) - (139) - - 1,165 - - - - (5) - 2,347 (89) - - 8 (207) - - 3 1 10 3 - 2,348 - - (86) - - - - (207) - 3 10 - - (15) (207) (15) Consolidated Statement of Cash Flows year ended 31 December 2009

2009 2008 Notes €m €m Cash flows from operating activities

(Loss) / profit before taxation for the year (310) 63 Overview

Adjusted for Depreciation and amortisation 46 50 50 Impairment losses Loans and receivables 9 376 82 Debt securities 9 - 122 Impairment of property and equipment and intangible assets 13, 15 11 - Impairment of goodwill 16 - 170 Amortisation of subordinated debt 8 - Profit on the sale of held-to-maturity portfolio 43 - (29) Fair value losses on investment properties 43 517 1,430 Realised and unrealised (profits) / losses on financial assets excluding trading assets (2,345) 7,252

Profit on buy back of debt securities in issue 43 (8) Financial Statements - Corporate Governance Business Review Interest on subordinated liabilities 39 57 79 Equity-settled share-based payment expenses 47 1 - Share of results of associated undertaking / joint venture 12 2 (22) Proceeds on the disposal of held-to-maturity portfolio - 2,543 Change in investment contract liabilities due to unrealised movements (154) (27)

(Increase) / decrease in operating assets Loans and receivables to banks 1,224 (2,380) Loans and receivables to customers 1,165 (1,044) Other financial assets (5,370) (2,155) Investment properties (6) (148) Reinsurance assets 154 (96) Shareholder value of in-force business 57 (70) Other assets (122) 44 Deferred acquisition costs 11 (8) Retirement benefit assets (7) (3)

Increase / (decrease) in operating liabilities Deposits by banks (104) 9,190 Customer accounts (148) 1,488 Debt securities in issue 2,364 (7,821) Insurance contract liabilities 27 (3) Investment contract liabilities 3,068 (6,429) Payables related to direct insurance contracts 1 (23) Deferred front-end fees (15) (17) Derivative liabilities 120 (313) Other liabilities and accruals 50 (231) Retirement benefit liability 1 (4) Net cash flows from operating activities before tax 675 1,690 Tax refunded / (paid) 9 (38) Net cash flows from operating activities 684 1,652

73 Consolidated Statement of Cash Flows

year ended 31 December 2009

2009 2008 Notes €m €m Cash flows from investing activities Purchase of property and equipment 13 (14) (33) Sale of property and equipment 13 2 6 Purchase of intangible assets 15 (9) (15) Purchase of non-controlling interest in subsidiary undertaking (5) (52) Dividends received from associated undertaking 15 30 Net cash flows from investing activities (11) (64)

Cash flows from financing activities Issue of ordinary share capital - 10 Issue of new subordinated liabilities - 124 Redemption of subordinated liabilities - (160) Interest paid on subordinated liabilities (60) (81) Cash from redemption of debt securities in issue (57) - Equity dividends paid 51 - (207) Net cash flows from financing activities (117) (314)

Increase in cash and cash equivalents 556 1,274

Analysis of changes in cash and cash equivalents Cash and cash equivalents as at 1 January 2,280 1,006 Net cash flow 556 1,274 Cash and cash equivalents as at 31 December 2009 4 2,836 2,280

74 Company Statement of Financial Position as at 31 December 2009

2009 2008 Notes €m €m Assets Cash and balances with central banks 4 100 122 Items in course of collection 4 108 124 Debt securities 5, 9 12,438 9,359 Overview Derivative assets 7 327 253 Loans and receivables to customers 8, 9 38,165 39,545 Loans and receivables to banks 10 2,600 1,988 Interest in subsidiary undertakings 12 2,855 2,855 Prepayments and accrued income 91 118 Property and equipment 13 103 163 Intangible assets 15 11 16 Current tax assets - 8 Deferred tax asset 28 31 15 Other assets 17 34 19 Retirement benefit assets 19 11 5 Total assets 56,874 54,590 uiesRve CroaeGvrac Financial Statements Corporate Governance Business Review Liabilities Deposits by banks 20 17,842 17,581 Customer accounts 21 20,830 19,552 Debt securities in issue 22 12,558 10,176 Derivative liabilities 7 411 1,793 Accruals 171 147 Other liabilities 26(a) 75 78 Provisions 26(b) 23 45 Current tax liabilities 1 - Retirement benefit liabilities 19 143 142 Subordinated liabilities 29 1,432 1,492 Total liabilities 53,486 51,006

Equity Share capital 30, 32 89 89 Share premium 30 2,833 2,833 Other reserves 30 30 28 Retained earnings 30 436 634 Total equity 3,388 3,584

Total liabilities and equity 56,874 54,590

On behalf of the Board

Gillian Bowler Kevin Murphy Chairman Group Chief Executive

David McCarthy Ciarán Long Group Finance Director Company Secretary

75 Company Statement of Comprehensive Income

year ended 31 December 2009

2009 2008 Notes €m €m

Loss for the year (198) (39)

Other comprehensive income

Revaluation of owner occupied property 30, 49 (51) (47)

Change in value of available-for-sale financial assets Change in fair value of AFS financial assets 42 4 Change in fair value of AFS financial assets prior to date of reclassification as loans and receivables 5 - (47) 5, 30, 49 42 (43) Amortisation of AFS securities reclassified to loans and receivables 5, 30, 49 15 9 Other comprehensive income 6 (81)

Deferred tax on other comprehensive income 28, 49 (5) 22 Other comprehensive income, net of tax 1 (59)

Total comprehensive income for the year (197) (98)

On behalf of the Board

Gillian Bowler Kevin Murphy Chairman Group Chief Executive

David McCarthy Ciarán Long Group Finance Director Company Secretary

76

m € m € m € Overview m € m € m € uiesRve CroaeGvrac Financial Statements Corporate Governance Business Review m € - - - - 1 - - 1 ------(49) - - - - 37 - 13 - - - - - (198) - (198) - - - (49) - 37 13 m € Share Share Revaluation for-sale payments capital Retained Retained capital payments for-sale Revaluation Other Share- based Share Available- Share Total earnings premium reserves capital reserve reserve reserve

Company Statement of Changes in Equity Statement of Changes Company 2009 ended 31 December year 2009 Equity-settled transactions Balance as at 31 December 89 2,833 8 5 9 8 436 3,388 As at 1 January the year for Loss income (net of tax) Other comprehensive losses (net of tax) Revaluation financial assets (net of tax) of available-for-sale in value Change (net of tax) to loans and receivables securities reclassified Amortisation of AFS income other comprehensive Total income for the year comprehensive Total in equity directly recorded with owners, Transactions and distributions to owners Contributions by 89 77 - 2,833 - - - 57 (45) (49) (49) 50 8 50 8 - - 634 - 3,584 - (198) - (197) 1 m € m € m € m € m € m € m € m € Share Share Revaluation for-sale payments capital Retained capital payments Other based for-sale Revaluation Share Share Available- Share- Total earnings premium reserves capital reserve reserve reserve Company Statement of Changes in Equity Statement of Changes Company 2009 ended 31 December year 2008 On behalf of the Board Gillian Bowler Chairman Murphy Kevin Chief Executive Group McCarthy David Finance Director Group Secretary Company Ciarán Long 78 As at 1 January the year for Loss income (net of tax) Other comprehensive losses (net of tax) Revaluation financial assets (net of tax) of available-for-sale in value Change (net of tax) to loans and receivables securities reclassified Amortisation of AFS income other comprehensive Total the year income for comprehensive Total transactions in equity directly recorded with owners, Transactions and distributions to owners Contributions by capital Issue of share Equity-settled option reserve of share Release Dividends - (2) Balance as at 31 December - - (2) ------88 - - - 8 - 2,824 - (38) - - - - 161 - - (104) - - (15) (104) (104) - - 1 - - 11 (30) 89 - (30) - - 8 9 - 2,833 8 (38) - - - - - 804 - - 57 3,881 - - - - 75 - (45) - (39) 36 (29) 75 (39) - (98) (1) 8 (59) - - - 8 - 634 1 - 3,584 - - 10 - (207) (207) Company Statement of Cash Flows year ended 31 December 2009

2009 2008 Notes €m €m

Cash flows from operating activities

Loss before taxation for the year (220) (50) Overview

Adjusted for Depreciation and amortisation 13, 15 19 22 Impairment losses Loans and receivables 9 276 46 Debt securities 9 - 122 Impairment of property and equipment 13 3 - Impairment of goodwill 16 - 170 Amortisation of subordinated debt 8 - Profit on the sale of held-to-maturity portfolio 5 - (29) Fair value losses on investment properties 11 - 1 Dealing profits (10) (5)

Interest on subordinated liabilities 52 Financial Statements 68 Corporate Governance Business Review Dividends from subsidiaries (42) (121) Proceeds on the disposal of held-to-maturity portfolio - 2,543

(Increase) / decrease in operating assets Loans and receivables to banks 767 (1,463) Loans and receivables to customers 1,115 (1,492) Other financial assets (2,908) (3,288) Other assets (1,617) 309 Retirement benefit assets (5) -

Increase / (decrease) in operating liabilities Deposits by banks (10) 8,728 Customer accounts 687 3,291 Debt securities in issue 2,400 (7,231) Other liabilities 16 (154) Retirement benefit liabilities - (5) Net cash flows from operating activities before tax 531 1,462 Tax refunded / (paid) 9 (16) Net cash flows from operating activities 540 1,446

79 Company Statement of Cash Flows

year ended 31 December 2009

2009 2008 Notes €m €m

Cash flows from investing activities Purchase of property and equipment 13 (7) (14) Sale of property and equipment 13 - 91 Purchase of intangible assets 15 (1) (5) Dividends received from subsidiaries 42 121 Net cash flows from investing activities 34 193

Cash flows from financing activities Issue of ordinary share capital - 10 Issue of new subordinated liabilities - 124 Redemption of subordinated liabilities - (160) Interest paid on subordinated liabilities (53) (69) Equity dividends paid 51 - (207) Net cash flows from financing activities (53) (302)

Increase in cash and cash equivalents 521 1,337

Analysis of changes in cash and cash equivalents Cash and cash equivalents as at 1 January 2,197 860 Net cash flow 521 1,337 Cash and cash equivalents as at 31 December 2009 4 2,718 2,197

80 Notes to the Group Financial Statements year ended 31 December 2009

1 Basis of preparation and significant accounting policies 82 2 Critical accounting judgements and estimates 95 3 Segmental information 97 4 Cash and cash equivalents 102 5 Debt securities 102 6 Equity shares and units in unit trusts 105 Overview 7 Derivative instruments 105 8 Loans and receivables to customers 109 9 Provision for impairment 111 10 Loans and receivables to banks 115 11 Investment properties 116 12 Interest in subsidiaries and associated undertakings 117 13 Property and equipment 119 14 Shareholder value of in-force business 121 15 Intangible assets 123 16 Goodwill 124 17 Other assets 125 18 Deferred acquisition costs 125

19 Retirement benefit obligations Financial Statements 126 Corporate Governance Business Review 20 Deposits by banks 130 21 Customer accounts 131 22 Debt securities in issue 131 23 Investment contract liabilities 133 24 Life insurance contracts 134 25 Financial options and guarantees 136 26 Other liabilities and provisions 137 27 Deferred front-end fees 138 28 Deferred taxation 139 29 Subordinated liabilities 140 30 Shareholders' equity 143 31 Non-controlling interest 144 32 Authorised and issued share capital 144 33 Analysis of equity and capital 145 34 Financial risk management 150 35 Fair value of financial instruments 177 36 Measurement basis of financial assets and liabilities 184 37 Current / non-current assets and liabilities 188 38 Assets held in unit-linked funds 189 39 Net interest income 189 40 Net fees and commission expenses 190 41 Trading income 190 42 Premiums on insurance contracts 190 43 Investment return 191 44 Claims on insurance contracts 192 45 Investment expenses 192 46 Administrative and other expenses 192 47 Employment costs 193 48 Share-based payments 194 49 Taxation 197 50 Earnings per share 199 51 Dividends 200 52 Commitments and contingencies 200 53 Principal subsidiary and associated undertakings 202 54 Related parties 203 55 Reporting currency and exchange rates 208 56 Events after reporting period 208

81 Notes to the Group Financial Statements

year ended 31 December 2009

1. Basis of preparation and significant accounting policies

Introduction

Irish Life & Permanent plc is a parent company domiciled in Ireland. The consolidated financial statements for the year ended 31 December 2009 consolidate the individual financial statements ("the financial statements") of the company and its subsidiaries (together referred to as “the group”) and show the group’s interest in associates using the equity method of accounting.

There has been no change arising from the reorganisation of the group structure. This structure is set out Note 56 Events after reporting period.

The individual and consolidated financial statements of the company were authorised for issue by the directors on 23 March 2010.

The accounting policies applied in the preparation of the financial statements for the year ended 31 December 2009 are set out below.

Basis of preparation As required by European Union (EU) law from 1 January 2005, the consolidated financial statements have been prepared in accordance with International Financial Accounting Standards (“IFRSs”) as adopted by the EU. The individual financial statements of the company (“company financial statements”) have been prepared in accordance with IFRSs as adopted by the EU and as applied in accordance with the Companies Acts 1963 to 2009 which permits a company, that publishes its company and consolidated financial statements together, to take advantage of the exemption in Section 148(8) of the Companies Act 1963 from presenting to its members its company income statement and related notes.

The 2009 statutory financial information has been prepared on a consistent basis with the annual report and financial statements for 2008 with the exception of the following items: - The presentation of segmental analysis has been amended to incorporate the requirements of "IFRS 8: Operating Segments", effective from 1 January 2009; - The presentation of the primary financial statements has been updated to reflect the requirements of "IAS 1: Presentation of Financial Statements (Amendment)", effective from 1 January 2009; and - The financial statements include enhanced disclosures as required by "IFRS 7: Financial Instruments: Disclosures (Amendment) - Improving disclosures about Financial Instruments with respect to fair value measurements and liquidity risk".

IFRS 4 brings into force phase one 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 Chief Financial Officers' (CFO) Forum. The EV basis supplementary information on pages 216 to 218 extends these principles to investment contracts written in the life assurance business.

The financial information has been prepared on the going concern basis. Risk factors including credit, market, liquidity, insurance and operational risk impact on the group’s activities. The current continued global financial crisis and the significantly deteriorated economic environment in which we operate places further pressure on the group as these risk factors are managed. The Board of Directors has reviewed these risk factors and all relevant information to assess the group’s ability to continue as a going concern. This review included consideration of the impact of the current economic and political factors affecting the group and the industry, the capital position of the regulated entities in the group, the liquidity position and the access to funds for the banking entities (including the ability to use assets as collateral to raise funds).

The directors have reviewed the group’s business plan for 2010 to 2012 which incorporates its funding and capital plan and considered the critical assumptions underpinning this plan and tested them under stressed scenarios. The directors have also taken into account measures introduced by the Irish Government to improve liquidity, including the Government Guarantee, introduced by the Irish Government in September 2008, and the Credit Institutions Eligible Liabilities Guarantee Scheme (the "ELG Scheme") introduced by the Government in December 2009. In concluding on the going concern basis the directors took into account the Government Guarantee, the ELG scheme the ability to use assets as collateral to raise funds and the Government’s acknowledgment of the group’s importance to the economy as a whole. As a result the directors are satisfied that the group’s financial information continues to be prepared on a going concern basis as it will have access to sufficient funding and resources to continue in business for the foreseeable future.

The IFRSs adopted by the EU applied by the company and group in the preparation of these financial statements are those that were effective for accounting periods ending on or before 31 December 2009. 82 Notes to the Group Financial Statements year ended 31 December 2009

1. Basis of preparation and significant accounting policies (continued)

Standards and interpretations which are effective from 1 January 2009 and have been adopted for the first time in the current reporting period are detailed below: Overview Title Impact on company and consolidated financial statements

IAS 1: Presentation of The group has elected to present two performance statements (an income statement and a Financial Statements statement of comprehensive income) in compliance with the revised standard. Changes to (Amendment) terminology and increased disclosure requirements have also been reflected in the consolidated financial statements of the group.

IFRS 8: Operating This standard requires that the identification of reportable segments be determined by reference Segments to the internal reporting structure of the company. Consequently, two new reporting segments have been identified and included in the consolidated financial statements. Prior period comparatives have been restated to reflect this revised presentation.

IAS 32: Financial This amendment allows puttable financial instruments and obligations which arise on liquidation Instruments: Presentation to be classified as equity only if they meet specific criteria detailed in the standard. This (Amendment) amendment did not have a material impact on the consolidated financial statements of the group. uiesRve CroaeGvrac Financial Statements Corporate Governance Business Review

IAS 23: Borrowings Costs This amendment requires that borrowing costs related to assets that take a substantial period of (Amendment) time to get ready for use or resale should be capitalised as part of the cost of the assets. This amendment did not have a material impact on the consolidated financial statements of the group.

IFRS 2: Share-Based This amendment provides clarification on the accounting treatment of cancellations and vesting Payment: Vesting conditions. This amendment did not have a material impact on the consolidated financial Conditions and statements of the group. Cancellations (Amendment)

IFRIC 16: Hedges of Net IFRIC 16 addresses the application of hedge accounting to foreign exchange differences between Investment in a Foreign the functional currency of a foreign operation and the functional currency of its parent. This IFRIC Operation did not have a material impact on the consolidated financial statements of the group.

IFRS 7: Financial This amendment to IFRS 7 requires enhanced disclosures with respect to fair value Instruments : Disclosures measurements and liquidity risk. The group has elected to avail of the transitional relief offered in (Amendment) - the amendments thereby deciding not to provide comparative information in the current year. Improving Disclosures about Financial Instruments

IAS 40: Investment IAS 40: Investment property has been amended to include investment property in the course of Property (Amendment) construction within its scope. It requires that if the company adopts the fair value model, investment property under construction should be measured at fair value with changes in fair value recognised in the income statement. This amendment did not have a material impact on the consolidated financial statements of the group.

IAS 38: Intangible Assets IAS 38: Intangible Assets has been amended to state that an entity may recognise a prepayment (Amendment) asset for advertising or promotional expenditure up to the point at which the entity has the right to access the goods purchased or up to the point of receipt of services. This amendment did not have a material impact on the consolidated financial statements of the group.

IFRIC 18: Transfers of This interpretation advises on the appropriate accounting treatment for transfers of property, Assets from Customers plant and equipment received from 'customers' and concludes that when an item of property, plant and equipment transferred meets the definition of an asset from the perspective of the recipient, the recipient should recognise the asset at its fair value on the date of transfer with the credit recognised as revenue in accordance with IAS 18: Revenue. This IFRIC did not have a material impact on the consolidated financial statements of the group.

IFRIC 9: Reassessment of This amendment includes guidance on whether an embedded derivative should be separated Embedded Derivatives from a host contract when a hybrid financial asset has been reclassed out of the 'fair value and IAS 39: Financial through profit or loss' category as permitted by the amendments to IAS 39: Financial Instruments: Instruments: Recognition Recognition and Measurement effected in October 2008. This amendment is not expected to and Measurement have a material impact on the consolidated financial statements of the group. (Amendment) 83 Notes to the Group Financial Statements

year ended 31 December 2009

1. Basis of preparation and significant accounting policies (continued)

The following table provides a brief outline of the likely impact on future financial statements of relevant IFRSs which are issued by the IASB and endorsed by the EU but are not yet effective and have not been early adopted in these financial statements.

Standards and interpretations effective for annual periods beginning on or after 1 July 2009 Title Impact on company and consolidated financial statements

IFRS 3: Business The revisions to this standard addresses partial and step-up acquisitions costs associated with Combinations (Revised) acquisitions, contingent consideration (measurement and recognition) and transactions with non-controlling interests. These amendments are not expected to have a material impact on the consolidated financial statements of the group.

IAS 27: Consolidated and The amendments to this standard arise as a consequence of the revisions introduced in IFRS 3: Separate Financial Business Combinations (Revised). These amendments are not expected to have a material impact Statements (Amendment) on the consolidated financial statements of the group.

IAS 28: Investments in The amendments to this standard arise as a consequence of the revisions introduced in IFRS 3: Associates (Amendment) Business Combinations (Revised). These amendments are not expected to have a material impact on the consolidated financial statements of the group.

IAS 31: Interests in Joint The amendments to this standard arise as a consequence of the revisions introduced in IFRS 3: Ventures (Amendment) Business Combinations (Revised). These amendments are not expected to have a material impact on the consolidated financial statements of the group.

IAS 38: Intangible Assets The amendments to this standard arise as a consequence of the revisions introduced in IFRS 3: (Amendment) Business Combinations (Revised). These amendments are not expected to have a material impact on the consolidated financial statements of the group.

IAS 39: Financial This amendment includes guidance on how existing principles on hedge accounting should be Instruments: Recognition applied. This amendment will not have a material impact on the consolidated financial and Measurement statements of the group. (Amendment)

IFRIC 17: Distributions of This interpretation advises on the appropriate accounting treatment to be applied when an entity non-cash Assets to distributes assets other than cash dividends to its shareholders. This IFRIC is not currently Owners expected to have a material impact on the consolidated financial statements of the group.

84 Notes to the Group Financial Statements year ended 31 December 2009

1. Basis of preparation and significant accounting policies (continued)

Standards and interpretations effective for annual periods beginning on or after 1 January 2010

IFRS 2: Share-based The amendments incorporate 'IFRIC 8: Scope of IFRS 2' and 'IFRIC 11: IFRS-Group and treasury

Payment (Amendment) share transactions' and expand on the guidance included in IFRIC 11 to address the classification Overview of group arrangements which were not previously covered by that interpretation. These amendments are not expected to have a material impact on the consolidated financial statements of the group.

IFRS 5: Non-Current This amendment clarifies that IFRS 5 specifies the disclosure requirements in respect of Assets Held for Sale and non-current assets classified as held for sale and discontinued operations. This amendment is not Discontinued Operations expected to have a material impact on the financial statements of the group. (Amendment)

IAS 1: Presentation of This revision clarifies that the potential settlement of a liability by the issue of equity will not Financial Statements affect its classification as current or non-current. This allows a liability to be classified as (Revised) non-current (provided the entity has an unconditional right to defer settlement by transfer of cash or other assets for at least 12 months following the accounting period). This amendment will not

have a material impact on the consolidated financial statements of the group. Financial Statements Corporate Governance Business Review

IAS 7: Statement of Cash The amendments specify that only expenditures that result in a recognised asset in the statement Flows (Amendment) of financial position can be classified as investing activities in the statement of cash flows. This amendment will not have a material impact on the consolidated financial statements of the group.

IAS 17: Leases This amendment provides specific guidance on the classification of leases of land to make it (Amendment) consistent with general guidance on leases. In accordance with the general principles of IAS 17, leases should be classified as operating or finance leases. This amendment will not have a material impact on the consolidated financial statements of the group.

IAS 36: Impairment of This amendment clarifies that the largest cash generating unit (or group of units) to which Assets (Amendment) goodwill should be allocated for impairment testing purposes is an operating segment as defined by IFRS 8: Operating segments (paragraph 5) before the aggregation of operating segments with similar economic characteristics allowed by paragraph 12 of IFRS 8. This amendment will not have a material impact on the consolidated financial statements of the group.

Comparative amounts The comparative IFRS financial information for 2008 has been prepared on a consistent basis.

Basis of measurement The consolidated and company financial statements are presented in millions of euro. They have been prepared on the historical cost basis except that the following assets and liabilities are stated at their fair values: derivative financial instruments; trading financial instruments and other financial instruments designated at fair value through profit or loss, certain risks in hedged financial instruments, financial assets classified as available for sale, investment properties and share-based payments on initial recognition. In addition, earnings of the life assurance in-force business are included on an embedded value (“EV”) basis.

(i) Estimates and assumptions The preparation of financial statements in conformity with IFRSs as adopted by the EU, requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances and are reflected in the judgements made about the carrying amounts of assets and liabilities that are not objectively verifiable.

Actual results may differ from the estimates made. The estimates and assumptions are reviewed on an ongoing basis and where necessary are revised to reflect current conditions. The principal estimates and assumptions made by management relate to insurance liabilities, investment valuations and investment contract liabilities, impairment of loans, interest rates, demographic and other factors. Judgements made by management that have a significant effect on the financial statements and estimates with a significant risk of material adjustment in the next year are discussed in Note 2 Critical accounting judgements and estimates. 85 Notes to the Group Financial Statements

year ended 31 December 2009

1. Basis of preparation and significant accounting policies (continued)

(ii) Accounting for subsidiaries Consolidated financial statements Subsidiaries are those entities (including special purpose entities and unit trusts) controlled by the group. Control exists when the group has the power, directly or indirectly, to govern the operating and financial policies of an entity in order to gain economic benefits. In assessing control, potential voting rights that are currently exercisable or convertible are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Financial statements of subsidiaries are prepared up to the statement of financial position date.

The result of subsidiaries acquired, other than the combination of Irish Permanent plc and Irish Life plc, are included in the consolidated income statement from the date of acquisition. Profits or losses of subsidiary undertakings sold or acquired during the period are included in the consolidated results up to the date of disposal or from the date of gaining control.

The combination of the businesses of Irish Life plc and Irish Permanent plc, which occurred in 1999, has been included in the consolidated financial statements using merger accounting rules whereby the assets and liabilities of the acquired entity were included at their previous carrying amounts as if the businesses had always been combined. The merger adjustment, which is the difference between the fair value of the shares issued to effect the merger and the nominal value of the shares acquired, is dealt with on consolidation through reserves. In accordance with S149 (5) of the Companies Act 1963, pre-acquisition profits of Irish Life plc are presented in accordance with merger accounting rules in retained earnings.

All significant inter-company transactions and balances are eliminated on consolidation.

The group has a controlling interest in an investment unit trust that is consolidated into the consolidated financial statements. The non-controlling interest liability is included in investment contract liabilities.

Company financial statements Investments in subsidiaries are shown at cost less pre-acquisition dividends received prior to 1 January 2009 in the company financial statements unless they are impaired, in which case they are recorded at their recoverable amount.

Investments in subsidiaries are assessed for impairment when dividends are received from the subsidiary in excess of the underlying subsidiary profit for that year.

(iii) Interest in associates Associates are entities over which the group has significant influence but which it does not control. Consistent with IAS 28: “Investment in Associates”, it is presumed that the group has significant influence where it has between 20% and 50% of the voting rights in the entity.

Interests in associates are accounted for on consolidation under the equity method. The investment in the associate is initially recorded at cost and increased or decreased each year by the group’s share of the post acquisition profit or loss of the associate and other movements recognised directly in the equity of the associated undertaking. Goodwill arising on the acquisition of an associate is included in the carrying amount of the investment (net of any accumulated impairments).

(iv) Interest in joint ventures A joint venture is an entity in which the group has joint control. Interests in joint ventures are accounted for on consolidation under the equity method. The investment in the joint venture is initially recorded at cost and increased or decreased each year by the group’s share of the post acquisition profit or loss of the joint venture and other movements recognised directly in the equity of the joint venture. Goodwill arising on the acquisition of a joint venture is included in the carrying amount of the investment (net of any accumulated impairments).

86 Notes to the Group Financial Statements year ended 31 December 2009

1. Basis of preparation and significant accounting policies (continued)

(v) Foreign currencies Foreign currency transactions are translated into the functional currency of the entity at the exchange rate prevailing at the date of the transaction. Monetary and non-monetary assets and liabilities denominated in foreign currency are translated at the exchange rates prevailing at the balance sheet date. Exchange movements on these are Overview recognised in the income statement. The results and financial position of group entities which have a functional currency different from euro are translated into euro as follows: - assets and liabilities, including goodwill and fair value adjustments, are translated at the rates of exchange ruling at the date of the statement of financial position; - income and expenses are translated at the average exchange rates for the period; and - all resulting exchange differences are recognised as a separate component of reserves called the currency translation adjustment reserve.

On consolidation exchange differences arising from the translation of borrowings and currency instruments designated as hedges of the net investment in overseas subsidiaries are also taken to a separate component of other comprehensive income to the extent to which the hedge is deemed to be effective. The ineffective portion of any net investment hedge is recognised in the income statement immediately. On disposal or partial Financial Statements disposal of an Corporate Governance Business Review overseas subsidiary, the appropriate portion of the separate component of other comprehensive income is included in the gain or loss on disposal.

(vi) Investment properties Investment properties consist of land and buildings which are held for long-term rental yields and capital growth. Investment properties are carried at fair value with changes in fair value included in the income statement within the net investment return. Valuations are undertaken at least annually by external chartered surveyors at open market value in accordance with IAS 40: Investment Property and with guidance set down by their relevant professional bodies.

(vii) Financial assets The group classifies its financial assets on initial recognition as held for trading (“HFT”), designated at fair value through profit and loss (“FVTPL”), available for sale (“AFS”), held to maturity (“HTM”) or loans and receivables. All derivatives are classified as HFT unless they have been designated as hedges. Purchases and sales of financial assets are recognised on the trade date, being the date on which the group commits to purchase or sell the asset. Financial assets are initially recorded at fair value. However, with the exception of assets classified as HFT or FVTPL, the initial fair value includes direct and incremental transaction costs. The fair value of assets traded on an active market is based on current bid prices. In the absence of current bid prices, the group establishes a fair value using various valuation techniques. These include recent transactions in similar items, discounted cash flow projections, option pricing models and other valuation techniques used by market participants.

Financial assets are derecognised when the right to receive cash flows from the financial assets has expired or the group has transferred substantially all the risks and rewards of ownership.

All assets attributable to life operations are carried at FVTPL to eliminate an inconsistency that would otherwise arise between the valuation of assets and liabilities.

Debt securities Debt securities may be classified as HFT, FVTPL, AFS, or loans and receivables. In 2008, the group disposed of its HTM portfolio. The consequence of this disposal is that the HTM portfolio is tainted for a two-year period.

Debt securities classified as HFT or FVTPL are measured at fair value and transaction costs are taken directly to the income statement.

All debt securities held as part of the group’s life assurance operations are classified as FVTPL. Realised and unrealised gains together with income earned on these assets are shown as investment return in the income statement.

87 Notes to the Group Financial Statements

year ended 31 December 2009

1. Basis of preparation and significant accounting policies (continued)

Where the group’s banking operations holds debt securities as HFT, realised and unrealised gains together with interest are shown as trading income in the income statement.

Debt securities classified as HTM, subsequent to initial recognition, are measured at amortised cost less any allowance for impairment. Income on these investments is recorded on an effective interest basis as interest receivable in the income statement. Impairment losses, where they arise and foreign exchange movements are reflected in the income statement.

Debt securities classified as AFS, subsequent to initial recognition, are measured at fair value with unrealised gains and losses, other than currency translation differences, recognised in a separate reserve within other comprehensive income. Realised gains and losses, impairment losses and foreign exchange movements are reflected in the income statement. Income on debt securities classified as AFS is recognised on an effective interest basis and included as interest receivable in the income statement.

In 2008, in compliance with the amendments to IAS 39 Financial Statements: Recognition and Measurement and IFRS 7 Financial Instruments: Disclosures (October 2008) the group reclassified debt securities from the available for sale category to a loans and receivables category. The securities reclassified meet the qualifying criteria per the amendment to the standard and the group has the intention and the ability to hold these financial assets for the foreseeable future or until maturity. The impact of which is detailed in Note 5 Debt securities.

Debt securities classified as loans and receivables, are measured at amortised cost, based on an effective interest rate which was determined at the date of reclassification.

Equities and units in unit trusts Equities are classified as HFT or FVTPL. Realised and unrealised gains together with dividend income on equities are reported as net investment return in the income statement. Dividends are recognised in the income statement when the group’s right to receive payment is established.

Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted on an active market and that the group has no intention of trading. Loans and receivables, subsequent to initial recognition, are held at amortised cost less allowance for incurred impairment losses unless they are part of a fair value hedge relationship. Income is recognised on an effective interest basis as interest receivable in the income statement.

Where loans and receivables are part of a fair value hedging relationship the accumulated change in the fair value resulting from the hedged risk is recognised together with the movements in the fair value of the related hedging instrument in the income statement.

Cash and cash equivalents Cash and cash equivalents include liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value.

(viii) Impairment provisions The group assesses impairment of financial assets at each balance sheet date on a case by case basis for assets that are individually significant and collectively for assets that are not individually significant.

Assets are impaired only if there is objective evidence that the result of one or more events that have occurred after the initial recognition of the asset have had an impact on the estimated future cash flows of the asset. For individual assets this includes changes in the payment status of the counterparty. Collective assessment groups together assets that share similar risk characteristics and applies a collective methodology based on existing risk conditions or events which have a strong correlation with a tendency to default. Potential impairment is calculated by comparing the present value of the estimated future cash flows (after taking account of the security held) discounted at the effective interest rate applicable to the asset with the carrying value in the statement of financial position.

88 Notes to the Group Financial Statements year ended 31 December 2009

1. Basis of preparation and significant accounting policies (continued)

Where loans are impaired, the written down value of the impaired loan is compounded back to the net realisable balance over time using the original effective interest rate. This is reported through interest receivable within the income statement and represents the unwinding of the discount. A write-off is made when all or part of a loan is deemed uncollectible or forgiven. Write-offs are charged against previously established provisions for impairment or Overview directly to the income statement.

(ix) Derivative instruments Derivative instruments are used in both the group’s banking and life assurance operations and primarily comprise currency forward rate contracts, currency and interest rate swaps, futures contracts, forward rate agreements and options. All derivatives are classified as HFT unless they have been designated as hedges.

All derivatives are held on the statement of financial position at fair value. Fair values are obtained from quoted prices prevailing in active markets, where available. Otherwise, valuation techniques including discounted cash flow analysis and option pricing models are used to value the instruments.

Gains and losses arising on derivatives held by life operations, which are measured at fair value, are recognised in investment return. Financial Statements Corporate Governance Business Review

Gains and losses arising from derivatives held for trading are recognised in trading income.

Derivatives are used to hedge the group’s banking operations. Where derivatives are used as hedges, formal documentation is drawn up at inception of the hedge specifying the hedging strategy, the component transactions and the methodology that will be used to measure effectiveness. Monitoring of hedge effectiveness is carried out on an on-going basis.

All existing hedge relationships are fair value hedges. Movements in the fair value of derivative hedge positions together with the fair value movement in the hedged risk of the underlying financial instrument are reflected in the income statement.

(x) Leases Lessee Rentals payable under operating leases are charged to the income statement on a straight-line basis over the lease period.

Assets held as finance leases are capitalised and included in property and equipment at fair value.

Lessor Assets leased to customers that transfer substantially all the risks and rewards incidental to ownership to the customer are classified as finance leases. They are recorded at an amount equal to the net investment in the lease, less any provisions for impaired rentals, within loans and receivables to customers. Leasing income is credited to interest income on an actuarial before-tax net investment basis to give a constant periodic rate of return.

Assets leased to customers are classified as operating leases if the lease agreements do not transfer substantially all the risks and rewards of ownership. The leased assets are included as investment properties. Lease income is recognised on a straight-line basis over the term of the lease.

(xi) Securitised assets The group has entered into funding arrangements to finance specific loans and receivables to customers. All such financial assets are held on the group statement of financial position and a liability recognised for the proceeds of the funding transactions.

(xii) Financial liabilities Financial liabilities include deposits, debt securities issued, customer accounts and subordinated debt issued.

Financial liabilities are carried at amortised cost calculated on an effective interest basis.

89 Notes to the Group Financial Statements

year ended 31 December 2009

1. Basis of preparation and significant accounting policies (continued)

Financial liabilities that are part of a hedging relationship are carried at amortised cost adjusted for changes in the fair value of the hedged risk. The change in the fair value of the hedged risk is recognised together with the movement in the fair value of the derivative positions hedging the liability in the income statement. Interest expense on an effective interest basis is recorded in the income statement as interest payable.

(xiii) Product classifications In accordance with IFRS 4, the group’s life assurance products are classified for accounting purposes as either insurance contracts or investment contracts at inception of the contract. Insurance contracts are contracts which transfer significant insurance risk. Contracts which do not transfer significant insurance risk are investment contracts. The group has a small closed book of insurance contracts which have a discretionary participating feature, all of these contracts also have significant insurance risk and are therefore classified as insurance contracts.

(xiv) Insurance contract liabilities Insurance contract liabilities are determined by the appointed actuaries. The liabilities include statutory surpluses which have not been allocated to policyholders as well as an assessment of the cost of any future options and guarantees contained within the insurance contracts measured on a market consistent basis. Changes in the liabilities are included in the income statement.

Statutory surpluses are determined by the appointed actuary following the annual investigations. The Board of Directors, acting upon the advice of the appointed actuaries, allocate a proportion of the statutory surplus to policyholders through an appropriation of declared bonuses.

(xv) Liability adequacy tests The group performs liability adequacy tests on its insurance contract liabilities to ensure that the carrying amount of the liabilities is sufficient to cover estimated future cash flows. When performing the liability adequacy tests the group discounts all contractual cash flows and compares this amount to the carrying value of the liability. Any deficiency is immediately charged to the income statement.

(xvi) Investment contract liabilities Investment contracts are measured at FVTPL to eliminate an inconsistency that would otherwise arise between the valuation of assets and liabilities. Unit-linked liabilities are valued with reference to the value of the underlying net asset value of the group’s unitised investment funds at the balance sheet date. Non-linked investment contracts are measured based on the value of the liability to the policyholder at the balance sheet date.

Deposits and withdrawals are accounted for directly in the statement of financial position as movements in the investment contract liabilities.

(xvii) Reinsurance The group cedes insurance premiums and risk in the normal course of business in order to limit the potential for loss. Outward reinsurance premiums are accounted for in the same period as related premiums for the business being reinsured. Reinsurance assets include amounts due from reinsurance companies in respect of paid and unpaid losses and ceded future life and investment policy benefits. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. Reinsurance is recorded gross in the consolidated statement of financial position.

(xviii) Property and equipment Leasehold premises with initial lease terms of less than fifty years and all other equipment are stated at cost less accumulated depreciation and impairment losses. Depreciation is calculated to write off the costs of such assets to their residual value over their estimated useful lives, which are assessed annually by the directors.

Freehold premises and leasehold premises with initial lease terms in excess of fifty years are revalued annually by the directors and at least every five years by external valuers. The resulting increase in value is transferred to a revaluation reserve. The revalued premises, excluding the land element, are depreciated to their residual values over their estimated useful lives, which are assessed annually by the directors.

90 Notes to the Group Financial Statements year ended 31 December 2009

1. Basis of preparation and significant accounting policies (continued)

Subsequent costs are included in the asset’s carrying amount, only when it is probable that increased future economic benefits associated with the item will flow to the group and the cost of the item can be measured reliably.

Property and equipment is assessed for impairment where there is an indication of impairment. Where impairment Overview exists, the carrying amount of the asset is reduced to its recoverable amount and the impairment loss recognised in the income statement. The depreciation charge for the asset is then adjusted to reflect the asset’s revised carrying amount.

The estimated useful lives are as follows:

Freehold buildings 50 years Leasehold buildings 50 years or term of lease if less than 50 years Office equipment 5 - 15 years Computer hardware 3 - 10 years Motor vehicles 5 years

(xix) Goodwill Financial Statements Corporate Governance Business Review The excess of the cost of a business combination over the interest in the net fair value of the identifiable assets, liabilities and contingent liabilities at the date of acquisition, of subsidiary undertakings, associated undertakings and other businesses, arising is capitalised as goodwill.

Goodwill arising on the acquisition of shares in subsidiary and associated undertakings prior to 31 December 1996 was written off against reserves in the year of acquisition.

Goodwill arising on acquisitions between 31 December 1996 and 1 January 2004 was recognised on the statement of financial position and amortised on a straight-line basis over its estimated useful life. The group has availed of the transitional arrangements under IFRS 1 and accordingly the unamortised goodwill at 1 January 2004 is recognised on the statement of financial position at deemed cost, and accumulated amortisation on goodwill arising before 1 January 2004 has not been reversed.

From 1 January 2004 and arising subsequently, goodwill is carried on the statement of financial position at cost less any accumulated impairment losses. Goodwill is subject to an impairment review at least annually and if events or changes in circumstances indicate that the carrying amount may not be recoverable it is written down through the income statement by the amount of any impairment loss identified in the year.

Goodwill arising on associates or joint ventures is shown as part of the investment in the associate or joint venture.

(xx) Intangible assets Software Computer software is stated at cost, less amortisation and provision for impairment, if any. The external costs and identifiable internal costs of acquiring and developing software are capitalised where it is probable that future economic benefits that exceed its cost will flow from its use over more than one year.

Capitalised computer software is amortised over three to seven years.

Software is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An asset's carrying value is written down immediately to its recoverable amount if the asset's carrying amount is greater than its estimated recoverable amount. The estimated recoverable amount is the higher of the asset's fair value less costs to sell or value in use.

Other intangible assets Other intangible assets relate to the client portfolio acquired on the acquisition of a brokerage company.

Other intangible assets are amortised over twenty years. They are subject to an impairment review at least annually and if events or changes in circumstances indicate that the carrying amount may not be recoverable it is written down through the income statement by the amount of any impairment loss identified in the year. 91 Notes to the Group Financial Statements

year ended 31 December 2009

1. Basis of preparation and significant accounting policies (continued)

(xxi) Assets and liabilities classified as held for sale An asset or a disposal group is classified as held for sale if the following criteria are met: - its carrying value will be recovered principally through sale rather than continuing use; - it is available for immediate sale; and - the sale is highly probable within the next twelve months.

When an asset (or disposal group) is initially classified as held for sale, it is measured at the lower of its carrying amount or fair value less costs to sell at the date of reclassification. Prior period amounts are not reclassified.

Impairment losses subsequent to the classification of assets as held for sale are recognised in the income statement. Increases in the fair value less the costs to sale of assets classified as held for sale are recognised in the income statement to the extent that the increase is not in excess of any cumulative impairment loss previously recognised in respect of the asset.

Where the above conditions cease to be met, the assets (or disposal group) are reclassified out of held for sale and included under the appropriate statement of financial positions classifications.

(xxii) Shareholder value of in-force business As permitted under IFRS 4, insurance contracts are accounted for in accordance with embedded value methods, applying EEV principles and reflecting the provisions of FRS 27. The shareholder value of in-force business is the present value of future statutory surpluses attributable to shareholders expected to arise from the contracts which have been classified as insurance contracts. The shareholders’ interest in the value of the in-force business is included as an asset on the statement of financial position and the movement in this asset is reflected in the income statement.

The value of in-force business calculated in accordance with EEV principles is determined by the group in consultation with independent actuaries.

Assumptions regarding future rates of mortality, morbidity, persistency, taxation, investment returns and expense levels are based on the recent experience of the business, taking account of current economic conditions.

The risk discount rate used to calculate the shareholder value of in-force business is a combination of a discount rate to reflect the time value of money and a risk margin to make prudent allowance for the risk that experience in future years may differ from the assumptions.

(xxiii) Retirement benefit obligations The group has both defined benefit and defined contribution schemes.

The group’s net obligation in respect of the defined benefit schemes is calculated separately for each scheme. The net obligation represents the present value of the obligation to employees in respect of service in the current or prior period less the fair value of the plan assets. The present value of the obligation is calculated annually by external actuaries using the projected unit method. The present value of the obligation is determined by discounting the estimated future cash flows. This discount rate is based on the market yield of high quality corporate bonds that have maturity dates approximating to the terms of the pension liability.

Actuarial gains and losses up to 1 January 2004 have been taken directly to reserves. As permitted under IAS 19, the corridor approach has been adopted for actuarial gains and losses arising since that date. Under the corridor approach actuarial gains and losses are recognised only where the cumulative unrecognised actuarial gains or losses at the end of the previous reporting period exceed the greater of:

- 10% of the present value of the defined benefit obligations at that opening statement of financial position date; or

- 10% of the fair value of the scheme assets at that opening statement of financial position date.

92 Notes to the Group Financial Statements year ended 31 December 2009

1. Basis of preparation and significant accounting policies (continued)

The limits are applied separately to each scheme, with any resulting excess actuarial gains or losses recognised in the income statement over the expected remaining service lives of the active members of each scheme.

The current and past service cost, the interest cost of the scheme liabilities and the expected return on scheme Overview assets are recognised in the income statement in the period in which they are incurred.

The group pays contractual contributions in respect of defined contribution plans. These contributions are recognised as employee expenses when the related employee service is received.

(xxiv) Share-based payments The group operates a number of equity-settled share option schemes based on non-market vesting criteria. The group has availed of the transitional arrangements under IFRS 1 and no charge is included for share options granted before 7 November 2002 which had not vested by 1 January 2005. For all other options, the fair value of the options is determined at the date of grant and expensed in the income statement over the period during which the employees become unconditionally entitled to the options. The expense is credited to a separate equity reserve on the statement of financial position. At each period end the group revises its estimate of the number of shares that it expects to vest and any adjustment relating to current and past vesting periods is charged to the income Financial Statements statement. Corporate Governance Business Review

The group operates an equity-settled long-term incentive plan. The plan has grants under both market and non- market vesting criteria. The fair value of conditional shares granted is determined at the date of grant, the value determined with reference to market vesting criteria is expensed in the income statement over the period from the date of grant to vesting date, the value determined with reference to non-market vesting criteria is expensed in the income statement over the period during which the employees become unconditionally entitled to the shares. The expense is credited to a separate reserve in the statement of financial position. For the grant under non-market vesting criteria, at each period end the group revises its estimate of the number of options that it expects to vest and any adjustment relating to current and past vesting periods is charged to the income statement.

(xxv) Termination payments Termination payments are recognised as an expense when the group is demonstrably committed to a formal plan to terminate employment before the normal retirement date. Termination payments for voluntary redundancies are recognised where an offer has been made by the group, it is probable that the offer will be accepted and the number of acceptances can be reliably estimated.

(xxvi) Taxation Taxation comprises both current and deferred tax. Taxation is recognised in the income statement except where it relates to an item which is recognised directly in equity.

Corporation tax payable is provided on taxable profits at current tax rates.

Deferred tax is provided using the liability method on all temporary differences except those arising on goodwill not deductible for tax purposes, or where the temporary difference arose on the initial recognition of an asset or liability in a transaction which was not a business combination and which at the time of the transaction affects neither accounting profit nor taxable profit. Deferred tax assets are recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised.

Deferred tax liabilities and assets are offset only where there is both the legal right and the intention to settle on a net basis or to realise the asset and settle the liability simultaneously.

(xxvii) Premium income and claims recognition on insurance contracts Premiums earned in respect of insurance contracts are accounted for in the same period in which the liabilities arising from those premiums are established.

Claims are accounted for when paid or payable, or if earlier, on the date when the policy ceases to be included within the calculation of insurance contract liabilities.

93 Notes to the Group Financial Statements

year ended 31 December 2009

1. Basis of preparation and significant accounting policies (continued)

(xxviii) Revenue from investment contracts Fees charged in respect of investment contracts are recognised when the service is provided. Initial fees, which exceed the level of recurring fees are deferred and amortised over the anticipated period in which services will be provided. Fees charged for investment management services for institutional fund management are also recognised over the period of the service.

Premiums and claims in respect of investment contracts are not included in the income statement but are reported as deposits to and withdrawals from investment contract liabilities in the statement of financial position.

(xxix) Interest receivable and payable Revenue on assets classified as HTM and AFS as well as loans and deposits is recognised on an effective interest basis. This calculation takes into account interest received or paid, directly attributable fees and commissions and incremental transaction costs. The effective interest rate is the rate that discounts the expected future cash flows over the expected life of the instrument to the net carrying amount of the financial asset or liability at initial recognition.

(xxx) Acquisition costs The costs directly associated with the acquisition of new investment management service contracts are deferred to the extent that they are expected to be recoverable out of future revenues to which they relate.

Such costs are amortised through the income statement over the period in which the revenues on the related contracts are expected to be earned, at a rate commensurate with those revenues.

Deferred acquisition costs are reviewed by category of business at the end of each financial year. Should the circumstances which justified the deferral of costs no longer apply, costs to the extent that they are believed to be irrecoverable are written off.

For insurance contracts, acquisition costs to the extent that they are deferred are reflected within the shareholder value of in-force business.

(xxxi) Other income and expense recognition Unless included in the effective interest calculation, fees and commissions receivable and payable are recognised on an accruals basis. Expenses are recognised on an accruals basis.

(xxxii) Sales and repurchase agreements (including stock borrowing and lending) Financial assets may be lent for a fee or sold subject to a commitment to repurchase them. Such assets are retained on the statement of financial position when substantially all the risks and rewards of ownership remain with the group. The liability to the counterparty is included separately on the statement of financial position as appropriate.

Similarly, where financial assets are purchased with a commitment to resell, or where the group borrows financial assets but does not acquire the risks and rewards of ownership, the transactions are treated as collateralised loans, and the financial assets are not included in the statement of financial position.

The difference between the sale and repurchase price is recognised in the income statement over the life of the agreements using the effective interest rate. Fees earned on stock lending are recognised in the income statement over the term of the lending agreement. Securities lent to counterparties are also retained in the financial statements.

(xxxiii) Dividends Final dividends on ordinary shares are recognised in equity in the period in which they are approved by the company’s shareholders. Interim dividends are recognised in equity in the period in which they are paid.

(xxxiv) Purchases and sales of own shares As permitted under Irish legislation, a subsidiary of the group holds Irish Life & Permanent plc shares on behalf of life assurance policyholders. These shares are required to be treated as though they were purchased by the company for its own benefit and treated as treasury shares and therefore treated as a deduction in arriving at shareholders’ equity rather than as an asset. 94 Notes to the Group Financial Statements year ended 31 December 2009

1. Basis of preparation and significant accounting policies (continued)

Under IFRS, the cost of the shares is required to be deducted from shareholders’ equity. However, as the shares are held on behalf of policyholders, the liability to the policyholder is carried at fair value. As a result shareholders’ equity is also reduced by the unrealised gain or loss on the shares reflected in the measurement of the liability, with changes in the unrealised gain and loss during the year resulting in a gain or loss in the income statement. Shares Overview purchased and held by the employee benefit trust in anticipation of share awards that may vest under the long-term incentive plan are treated as treasury shares and therefore treated as a deduction in arriving at shareholders’ equity rather than an asset.

(xxxv) Netting Assets, liabilities, income and expenses are shown net where there is a legal right to offset and there is an intention and an ability to settle on a net basis.

2. Critical accounting judgements and estimates

Management discussed with the Audit Committee the development, selection and disclosure of the group’s critical accounting policies and estimates and the application of these policies and estimates. uiesRve CroaeGvrac Financial Statements Corporate Governance Business Review Critical accounting judgements made by management in applying the group’s accounting policies are set out below.

Insurance and investment contracts Under IFRS, the group accounts for its insurance contracts using the embedded values, calculated based on the European Embedded Value Principles, and investment contracts are accounted for under IAS 39 and IAS 18. Insurance contracts are defined as those contracts which transfer significant insurance risk. Insurance risk is defined as the possibility of having to pay benefits on the occurrence of an insured event which are significantly more than the benefits payable if the insured event were not to occur. Investment contracts are those contracts which carry no significant insurance risk.

Insurance contracts The group accounts for its insurance contracts using the embedded value basis of accounting which recognises the present value of in-force business (shareholder value of in-force business) as an asset.

Policyholder liabilities for non-linked insurance contracts are estimated by management. This requires management to estimate future policyholder cash flows and to make assumptions regarding the probability and the timing of the occurrence of the insured event, future investment returns and future expenses. The liability will therefore vary with movements in interest rates and with changes in the actual cost of life assurance and annuity benefits where future mortality experience is uncertain. Management follows industry guidelines in setting assumptions, using standard insurance risk tables amended to reflect the group’s own experience and, where appropriate, makes allowance for expected insurance risk improvements or disimprovements. Assumptions and sensitivities are set out in Note 24 Insurance contract liabilities.

Reinsurance assets for non-linked insurance contracts require the group to estimate future cash flows from reinsurance contracts. The cash flows make assumptions regarding the probability and the timing of the occurrence of the reinsured event, future investment returns and future expenses. The asset will therefore vary with movements in interest rates and with future changes in actual experience. Management follows industry guidelines in setting assumptions using standard insurance risk tables amended to reflect the group’s own experience and, where appropriate, makes allowance for expected insurance risk improvements or disimprovements.

The shareholder value of in-force business is calculated by projecting future surpluses attributable to shareholders and discounting them to the balance sheet date. Future surpluses depend inter alia on insurance risk, lapse rates, future investment returns, expenses, reinsurance charges, product charges and taxation. Management estimates the future surpluses using industry standard methodologies having regard to both actual experience and current economic conditions. Surpluses are discounted at a risk,adjusted discount rate which is estimated by management based on current interest rates and an estimated risk margin. There is an acceptable range into which these assumptions can validly fall, and the use of different assumptions may cause the shareholder

95 Notes to the Group Financial Statements

year ended 31 December 2009

2. Critical accounting judgements and estimates (continued)

value of in-force business to differ from that assumed at the balance sheet date. This could significantly affect the income recognised and the value attributed to the in-force business in the financial statements.

Assumptions and sensitivities are set out in Note 14 Shareholder value of in-force business.

Investment contracts Investment contracts are accounted for as financial instruments under IAS 39 and IAS 18. These are primarily unit-linked contracts whose value is contractually linked to the fair value of the financial assets within the group’s unitised investment funds. Initial fees earned and incremental costs (mainly commission) paid on sale of an investment contract are deferred and recognised over the expected life of the contract. The expected life of the contracts is estimated based on current experience and the term of the contracts and is reviewed at least annually. Changes to the expected life could affect the income and cost recognised and the value of the asset and liability in the accounts. However, given that any changes to expected life will affect both costs and fees, the net impact is unlikely to be significant.

Impairment losses Management reviews the group’s loan portfolios to assess impairment at least quarterly. Impairment loss calculations involve the estimation of future cash flows of loans and advances based on observable data at the statement of financial position date and historical loss experience for assets with similar credit risk characteristics. These calculations are undertaken on either a portfolio basis or separately for individually significant exposures. In applying the portfolio basis the group makes use of various modelling techniques which are specific to different portfolio types. Significant judgement is applied in use of various modelling techniques which are specific to different portfolio types. Significant judgement is applied in selecting and updating these models.

In calculating individual impairment provisions the group takes account of a number of relevant considerations including historical experience, future prospects of the customer and value of collateral held. Significant judgement is applied in estimating the impact of these considerations on the expected future cash flows which relies heavily on the individual case circumstances and available information, including the date of the most recent professional valuation, the value of similar property recently sold, geographically adjacent property disposals, similar case experience and expert judgement. Where there has been a passage of time since a valuation has been obtained either an up to date valuation is obtained or an appropriate discount is applied.

Financial instruments The group carries certain financial assets and liabilities at fair value, including all derivatives as well as assets and liabilities of the life assurance operations. Assets and liabilities are priced using a quoted market price where there is an active market for the instrument or by using a valuation model. Valuation models use data such as interest rate yield curves, equity prices, option volatilities and currency rates. Most of these parameters are directly observable from the market. Changes in the fair value of financial assets of the life assurance operations will largely be offset by corresponding changes in the fair value of liabilities and therefore the net impact on equity is unlikely to be significant.

Interest receivable and payable Revenue on assets classified as HTM, AFS or FVTPL as well as on loans and deposits is recognised on an effective interest basis. This calculation takes into account interest received or paid, fees and commissions attributable to the asset or liability and incremental transaction costs. The effective interest rate is the rate that discounts the expected future cash flows over the expected life of the instrument to the net carrying amount of the financial asset or liability at initial recognition. The expected life is calculated based on current experience. Changes to the expected life could affect the income recognised and the value of the asset in the financial statements.

Retirement benefit obligations The group operates a number of defined benefit and defined contribution pension schemes. For defined contribution schemes, the pension cost recognised in the income statement represents the contributions payable to the scheme. For defined benefit schemes, actuarial valuation of each of the scheme’s obligations using the projected

96 Notes to the Group Financial Statements year ended 31 December 2009

2. Critical accounting judgements and estimates (continued) unit method and the fair valuation of each of the scheme’s assets are performed annually in accordance with the requirements of IAS 19. The actuarial valuation is dependent upon a series of assumptions, the key ones being discount rates, expected rate of return on plan assets, salary increases, pension increases, rate of price inflation and mortality rates. The discount rate used to calculate the defined benefit scheme liabilities is based on the market Overview yield at the Statement of Financial Position date of high-quality bonds with a similar duration to that of the schemes’ liabilities.

The returns on Irish and overseas equities are set relative to fixed-interest returns by considering the long-term expected equity risk premium. The price inflation assumption reflects long-term expectations of both earnings and retail price inflation. Mortality estimates are based on standard industry and national mortality tables, adjusted where appropriate to reflect the group’s own experience. The impact on the consolidated income statement and the consolidated statement of financial position could be materially different if a different set of assumptions were used.

The difference between the fair value of the plan assets and the present value of the defined benefit obligation at the statement of financial position date, adjusted for any historic unrecognised actuarial gains or losses, is recognised as a liability in the statement of financial position. An asset arising, for example, as a result Financial Statements of past Corporate Governance Business Review overfunding or the performance of the plan investments, is recognised to the extent that it does not exceed the present value of future contribution holidays or refunds of contributions. To the extent that any unrecognised gains or losses at the start of the measurement year in relation to any individual defined benefit scheme exceed 10% of the greater of the fair value of the scheme assets and the defined benefit obligation for that scheme, a proportion of the excess is recognised in the income statement. Further information on retirement benefit obligations, including assumptions, is set out in Note 19 Retirement benefit obligations.

3. Segmental information

Segmental information is presented in respect of the group’s business segments.

The presentation of segmental information has been revised in line with the update to IFRS 8 "Operating Segments" which is applicable for periods beginning on or after 1 January 2009. The December 2008 segmental information has been reclassified accordingly to incorporate the new segments identified under the new requirements of the standard.

Historically, segmental information was presented in respect of 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 Limited 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 unallocated corporate costs.

97 Notes to the Group Financial Statements

year ended 31 December 2009

3. Segmental information (continued)

The revised segmental information is determined based on internal reporting provided to the Strategy Group, the chief operating decision maker ("CODM") of the group. All the members of the Strategy Group are members of key management personnel as described in Note 54 Related parties. The members include the Group Chief Executive of Irish Life & Permanent plc, the Group Finance Director, the Chief Executive of permanent tsb, the Chief Executive of Irish Life Investment Managers, the Chief Executive of Irish Life Retail, the Chief Executive of Irish Life Corporate Business, the Group Head of Risk and Compliance and the Group Head of Human Resources and Organisation Development. The Strategy Group is responsible for implementing the strategic management of the group as guided by the board. The Strategy Group reviews key performance indicators and internal management reports on a monthly and on a quarterly basis.

The accounting policies of the segments are the same as for the group as a whole. Transactions between the reportable segments are on normal commercial terms and conditions. Revenue from external parties is measured in a manner consistent with that in the income statement. The primary performance measure utilised by the Strategy Group for the Banking Ireland and UK reportable segments is net interest receivable.

The group is not reliant on revenue from transactions with a single external customer in the current or prior year reporting period.

The group is organised into six reportable segments. Management identifies its reportable operating segments by service line, consistent with the reports used by the Strategy Group. The reporting segments represent the revenues generated from the group's products and services. The group's products and services have been aligned with the relevant reporting segments.

These segments and their respective operations are as follows:

Banking - Ireland Retail banking services including current accounts, residential mortgages and other loans to the Irish market.

Banking - UK Retail banking services including residential mortgages and lending services to the UK market.

Life assurance Includes individual and group life assurance and investment contracts, pensions and annuity business written in Irish Life Assurance plc and Irish Life International Limited.

Fund management Investment management services business provided to corporate, pension and charity clients and internally to Irish Life Assurance plc 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.

Brokerage and third-party This includes a number of small business units including third-party life assurance administration administration and insurance brokerage.

98 Notes to the Group Financial Statements year ended 31 December 2009

3. Segmental information (continued)

The segmental results which relate to continuing activities are as follows:

2009 Reconciliations / Overview Brokerage eliminations / Banking Banking Life Fund General and third-party consolidation Ireland UK assurance management insurance administration1 adjustments2 Total €m €m €m €m €m €m €m €m Net interest receivable - external 132 249 (18) - - - - 363 - inter-segment 204 (210) (18) - - - 24 - Other non-interest expenses - external 11 1 (119) - - 23 - (84) - inter-segment - - (17) - - 17 - - Premiums on insurance contracts, net of reinsurance - - 593 - - - - 593

Investment return Financial Statements Corporate Governance Business Review - external 8 - 2,585 - - - - 2,593 - inter-segment - - 31 - - - (39) (8) Fees from investment contracts and fund management - external - - 203 6 - 16 - 225 - inter-segment - - - 32 - - (32) - Change in shareholder value of in-force business - - (57) - - - - (57) Total operating income / (expense) 355 40 3,183 38 - 56 (47) 3,625

Claims on insurance contracts, net of reinsurance - - (329) - - - - (329) Change in insurance / investment contract liabilities - - (2,614) - - - - (2,614) Investment expenses - - (67) - - - 32 (35) Administrative expenses (255) (10) (160) (24) - (44) (25) (518) Depreciation and amortisation (21) (1) (23) (1) - (4) - (50) Impairment (2) - (5) - - (4) - (11) Total operating (expenses) / income (278) (11) (3,198) (25) - (52) 7 (3,557) Operating profit / (loss) before provisions 77 29 (15) 13 - 4 (40) 68

Loans and receivables (343) (33) - - - - - (376) Total provisions for impairment (343) (33) - - - - - (376)

Operating (loss) / profit (266) (4) (15) 13 - 4 (40) (308)

Share of losses of associated undertaking - - - - (2) - - (2) Taxation 23 1 (27) (2) - (1) 3 (3) (Loss) / profit for the year (243) (3) (42) 11 (2) 3 (37) (313)

99 Notes to the Group Financial Statements

year ended 31 December 2009

3. Segmental information (continued)

2008 Reconciliations / Brokerage eliminations / Banking Banking Life Fund General and third-party consolidation Ireland UK assurance management insurance administration1 adjustments2 Total €m €m €m €m €m €m €m €m Net interest receivable - external 55 457 (27) - - 1 - 486 - inter-segment 373 (412) (24) - - 1 62 - Other non-interest expenses - external 40 - (113) - - 24 - (49) - inter-segment (1) - (24) - - 25 - - Premiums on insurance contracts, net of reinsurance - - 441 - - - - 441 Investment return - external 29 - (7,761) - - - - (7,732) - inter-segment - - 68 - - - (77) (9) Fees from investment contracts and fund management - external - - 240 10 - 22 - 272 - inter-segment - - - 36 - - (36) - Change in shareholder value of in-force business - - 70 - - - - 70 Total operating income / (expense) 496 45 (7,130) 46 - 73 (51) (6,521)

Claims on insurance contracts, net of reinsurance - - (314) - - - - (314) Change in insurance / investment contract liabilities - - 7,890 - - - - 7,890 Investment expenses - - (86) - - - 36 (50) Administrative expenses (268) (17) (166) (28) - (49) (12) (540) Depreciation and amortisation (21) (1) (24) (1) - (3) - (50) (289) (18) 7,300 (29) - (52) 24 6,936 Impairment of goodwill (170) ------(170) Total operating (expenses) / income (459) (18) 7,300 (29) - (52) 24 6,766

Operating profit / (loss) before provisions 37 27 170 17 - 21 (27) 245

Loans and receivables (67) (15) - - - - - (82) Debt securities (122) ------(122) Total provisions for impairment (189) (15) - - - - - (204)

Operating (loss) / profit (152) 12 170 17 - 21 (27) 41

Share of (losses) / profits of associated undertaking / joint venture (1) - - - 23 - - 22 Taxation 7 (3) (10) (3) - (3) 2 (10) (Loss) / profit for the year (146) 9 160 14 23 18 (25) 53

100 Notes to the Group Financial Statements year ended 31 December 2009

3. Segmental information (continued)

2009

Reconciliations / Brokerage eliminations / Overview Banking Banking Life Fund General and third-party consolidation Ireland UK assurance management insurance administration1 adjustments2 Total €m €m €m €m €m €m €m €m Assets Interest in associate - - - - 122 - - 122 Other assets 48,522 13,035 31,564 17 - 174 (13,413) 79,899 Total assets 48,522 13,035 31,564 17 122 174 (13,413) 80,021

Liabilities 47,927 12,987 30,428 9 - 56 (13,392) 78,015

Equity attributable to owners 595 48 1,136 8 122 118 (21) 2,006 uiesRve CroaeGvrac Financial Statements Corporate Governance Business Review Capital expenditure 9 - 10 - - 4 - 23

2008

Reconciliations / Brokerage eliminations / Banking Banking Life Fund General and third-party consolidation Ireland UK assurance management insurance administration1 adjustments2 Total €m €m €m €m €m €m €m €m Assets Interest in associate - - - - 139 - - 139 Other assets 45,136 13,863 28,638 16 - 185 (13,628) 74,210 Total assets 45,136 13,863 28,638 16 139 185 (13,628) 74,349

Liabilities 44,316 13,818 27,430 6 - 48 (13,617) 72,001

Total equity 820 45 1,208 10 139 137 (11) 2,348

Equity attributable to non-controlling interest - - - - - (1) - (1)

Equity attributable to owners 820 45 1,208 10 139 136 (11) 2,347

Capital expenditure 20 - 23 2 - 3 - 48

Brokerage and third-party administration1 - Brokerage and third party administration services include €8m (2008: €14m) profit in respect of the insurance brokerage company and €5m loss (2008: €4m profit) in respect of the third party administration company. In 2009, the profit of the insurance brokerage company exceeded 10% of the cumulative profits earned by the group reporting segments. This company has not exceeded any of the other criteria specified in the segmental accounting standard and this experience is not expected to be repeated in subsequent reporting periods.

101 Notes to the Group Financial Statements

year ended 31 December 2009

3. Segmental information (continued)

Reconciliations / eliminations / consolidation adjustments2 - In 2009, the negative return of €37m (2008: negative €25m) includes the following: (a) €8m negative investment return (2008: negative €9m) arising on the consolidation of the movement in the value of properties financed by non recourse inter-group loans. This brings the balance per the statement of financial position to €17m (2008: €9m). (b) €2m (2008: negative €2m) arises due to the different accounting treatment between the bank and the life company. The bank carried the liabilities at amortised cost; however, the corresponding assets in the life company are carried at FVTPL. This brings the balance per the statement of financial position to €4m (2008: €2m). (c) Corporate costs of €27m (2008: €14m), net of tax accounts for the remainder. These costs relate to group functions and are included here as they are not directly attributable to any business unit and hence are unallocated amounts.

- Included in reconciliations / eliminations /consolidation adjustments are eliminations of €12bln (2008: €13bln) in respect of the statement of financial position. These adjustments relate to the elimination of floating-rate notes issued by special purpose vehicles between the Banking Ireland and Banking UK reporting segments but held within the group. The remainder of €2bln (2008: €1bln) relates to the elimination of inter-group balances between the bank and other group entities.

- Reconciliations / eliminations / consolidation adjustments include inter-segmental interest receivable and payable on deposits and together with inter-segmental commission payments and receipts.

- Elimination of inter-group rental expenses are also included.

4. Cash and cash equivalents

Group Company 2009 2008 2009 2008 €m €m €m €m

Cash and balances at central banks 218 200 100 122 Items in the course of collection 108 124 108 124 Loans and receivables to banks (note 10) 2,510 1,956 2,510 1,951 2,836 2,280 2,718 2,197

5. Debt securities

Group Company 2009 2008 2009 2008 €m €m €m €m

Available for sale 5,856 1,342 5,856 1,313 Loans and receivables 1,570 1,970 6,601 8,168 Designated at FVTPL 8,373 7,739 - - Gross debt securities 15,799 11,051 12,457 9,481

Less provision (19) (122) (19) (122) Net debt securities 15,780 10,929 12,438 9,359

Debt securities exclude €90m (2008: €144m) issued by Irish Life & Permanent plc and held by Irish Life Assurance plc which have been eliminated on consolidation.

102 Notes to the Group Financial Statements year ended 31 December 2009

5. Debt securities (continued)

Debt securities, representing a mix of government gilts and high-rated corporate bonds, with a carrying value of €6.1bln (2008: €2.3bln) have been pledged to third parties in sale and repurchase agreements (Note 20 Deposits by banks). Overview In February 2008, the group disposed of its held-to-maturity portfolio ("HTM"). This gave rise to a realised gain of €29m which was recognised as part of investment return. The fair value of this portfolio at 31 December 2007 was €2,493m. Cash flows arising from this disposal in 2008 were included within operating activities on the cash flow statement reflecting that the held-to-maturity portfolio formed part of the group’s banking operations assets portfolio and the proceeds were reinvested in debt securities classified above as either "Available for sale" or "Loans and receivables" which also form part of the banking operations asset portfolio.

The consequence of this disposal is that the HTM portfolio is tainted for a two-year period.

During the year ended 31 December 2008 the group availed of the amendment to IAS 39 and IFRS 7 issued in October 2008, effective 1 July 2008, which permitted financial assets classified as available for sale ("AFS") that would have met the definition of loans and receivables, had they not been designated as available for sale, to be reclassified out of the available for sale category to the loans and receivables category as the group has the intention and ability to hold the financial assets for the foreseeable future or until maturity. No items were reclassified Financial Statements during Corporate Governance Business Review the current accounting period.

The table below sets out the financial assets reclassified and their carrying and fair values:

Carrying value Fair value 2009 2008 2009 2008 €m €m €m €m Available for sale debt securities reclassified to loans and receivables 1,570 1,970 1,542 1,756

The movement in the carrying value of debt securities classified as loans and receivables is included in subsequent tables within this note for both the current and prior year reporting periods.

The table below sets out the amounts actually recognised in the income statement and other comprehensive income in respect of assets reclassified out of available for sale debt securities into loans and receivables:

Income statement Other comprehensive income 2009 2008 2009 2008 €m €m €m €m Period before reclassification Interest income - 44 - - Net change in fair value - - - (47)

Period after reclassification Interest income 40 51 - - Amortisation (15) (9) 15 9 Total for period after reclassification 25 42 15 9

The table below sets out the amounts that would have been recognised in the year following reclassification if the reclassification had not been made:

Income statement Other comprehensive income 2009 2008 2009 2008 €m €m €m €m

Interest income 40 51 - - Fair value movement - - 186 (214)

At the date of reclassification, the effective interest rates on reclassified available-for-sale investment securities ranged from 1.5% to 5% with expected recoverable cash flows of €2,098m. 103 Notes to the Group Financial Statements

year ended 31 December 2009

5. Debt securities (continued)

The group has not reclassified any debt securities from available for sale to loans and receivables during the current year.

The impairment provision is analysed in Note 9 Provision for impairment.

The carrying value of debt securities is analysed as follows:

Group Company 2009 2008 2009 2008 €m €m €m €m

Government bonds 10,337 6,406 3,585 431 Bonds issued by public boards 101 107 - - Bonds issued by credit institutions 4,336 4,147 3,143 2,730 Bonds issued by subsidiary companies - - 5,041 6,198 Other bonds 1,006 269 669 - 15,780 10,929 12,438 9,359

Listed 15,342 10,222 12,438 9,359 Unlisted 438 707 - - 15,780 10,929 12,438 9,359

The movement in held-to-maturity, available-for-sale and loans and receivables securities may be classified as follows:

Group 2009 Available for Loans and sale receivables €m €m

As at 1 January 1,342 1,970 Exchange differences on monetary assets (2) (5) Revaluation 42 - Additions 4,797 - Maturities / disposals (329) (416) Effective interest 6 6 Amortisation to statement of comprehensive income - 15 As at 31 December 5,856 1,570

Group 2008 Held to Available for Loans and maturity sale receivables €m €m €m

As at 1 January 2,515 1,982 - Exchange differences on monetary assets - (7) (10) Revaluation - (43) - Additions - 2,203 - Maturities / disposals (2,514) (849) (2) Effective interest (1) 24 5 Amortisation to statement of comprehensive income - - 9 Reclassification - (1,968) 1,968 As at 31 December - 1,342 1,970

104 Notes to the Group Financial Statements year ended 31 December 2009

5. Debt securities (continued)

Company 2009 Available for Loans and sale receivables €m €m Overview

As at 1 January 1,313 8,168 Exchange differences on monetary assets (2) (5) Revaluation 42 - Additions 4,797 - Maturities / disposals (300) (1,583) Effective interest 6 6 Amortisation to statement of comprehensive income - 15 As at 31 December 5,856 6,601

Company 2008 Held to Available for Loans and

maturity sale Financial Statements receivables Corporate Governance Business Review €m €m €m

As at 1 January 2,515 1,982 4,173 Exchange differences on monetary assets - (7) (10) Revaluation - (43) - Additions - 2,174 2,360 Maturities / disposals (2,514) (849) (337) Effective interest (1) 24 5 Amortisation to statement of comprehensive income - - 9 Reclassification - (1,968) 1,968 As at 31 December - 1,313 8,168

6. Equity shares and units in unit trusts

Group 2009 2008 €m €m Designated as FVTPL - Listed 13,381 10,262 - Unlisted 129 128 13,510 10,390

7. Derivative instruments

The group uses derivatives in both its banking and insurance businesses. Within the banking operations, derivatives are used to reduce interest and foreign currency exchange rate exposures (fair value hedges) and to generate incremental income for the group (trading). In the insurance business derivatives are used to match fixed-rate or tracker bond liabilities arising on insurance or investment contracts and within the unitised investment funds which match unit-linked policyholder liabilities as part of the efficient portfolio management of these funds.

Derivatives have also been purchased for Constant Proportion Portfolio Insurance (CPPI) unitised investment funds. In turn, the CPPI counterparty has purchased a zero-strike option from the insurance company. In the case of derivatives entered into for the benefit of unit-linked policyholders, all of the risks are borne by the policyholder. The insurance business also has a fair value hedge to reduce interest rate exposure on a subordinated debt issue. All derivatives are carried at fair value. Derivatives not qualifying as fair value hedges are classified as trading in the note below. The movement in the valuation of life derivatives is included in investment return.

105 Notes to the Group Financial Statements

year ended 31 December 2009

7. Derivative instruments (continued)

The derivatives used include: - Currency forward rate contracts which are commitments to purchase and sell currencies, including undelivered spot transactions; - Currency and interest rate swaps which are commitments to exchange one set of cash flows for another, for example, fixed interest rates for floating interest rates; - Futures contracts which may be for currency, interest rates or equity indices and are contractual obligations to pay or receive an amount based on changes in exchange rates, interest rates or equity indices; - Forward rate agreements which are contracts that give rise to a cash settlement at a future date for the difference between a contracted rate of interest and the interest rate at the date of settlement based on a notional principal amount; and - Options which are contractual agreements under which the seller grants the purchaser the right but not the obligation to buy (a call option) or to sell (a put option) at a set date or during a set period a specific amount of a currency or a financial instrument at a specified price. Options may be traded on an exchange or negotiated between two parties.

Further details on the group’s risk management policies are set out in Note 34 Financial risk management.

The fair value of derivative instruments is set out below:

2009 2008 Fair value Fair value Fair value Fair value asset liability asset liability €m €m €m €m Derivatives held by banking operations - designated as fair value hedges 234 376 162 364 - held for trading 36 35 56 51 270 411 218 415 Derivatives held by life operations - designated as fair value hedges 13 - 9 - - held for trading 886 254 935 135 899 254 944 135 Total derivative instruments 1,169 665 1,162 550

Fair value hedges The losses recognised in income on the hedging instruments designated as fair value hedges and the gains on the hedged items recognised in income attributable to the hedged risk are analysed below:

2009 2008 €m €m Losses on hedging instruments (123) (264) Gains on hedged items attributable to hedged risk 111 248 Net losses (12) (16)

These gains and losses are recognised in Note 39 Net interest income.

106 Notes to the Group Financial Statements year ended 31 December 2009

7. Derivative instruments (continued)

Net investment in foreign operations The following gains / (losses) have been recorded in other comprehensive income in respect of hedging instruments held to manage the group's net investment in foreign operations in addition to the gains / (losses) on the net investment: Overview

2009 2008 €m €m Net (losses) / gains in respect of hedging instruments held for net investment in foreign operations (2) 12

Gains / (losses) in respect of hedged net investment in foreign operations 2 (12) Gains / (losses) in respect of unhedged net investment in foreign operations 1 (3) Total gains / (losses) in respect of net investment 3 (15)

Banking operations Financial Statements Corporate Governance Business Review Fair value hedges by the banking operations are analysed as follows:

2009 2008 Contract / Contract / notional Fair value Fair value notional Fair value Fair value amount asset liability amount asset liability €m €m €m €m €m €m

Currency swaps 8,599 52 1 6,994 107 45 Interest rate swaps 14,506 182 375 16,606 55 319 23,105 234 376 23,600 162 364

Trading derivatives are analysed below. Generally derivative assets are matched by derivative liabilities and reflect the closing of trading positions by instruments of equal duration.

2009 2008 Contract / Contract / notional Fair value Fair value notional Fair value Fair value amount asset liability amount asset liability €m €m €m €m €m €m

Currency swaps 211 - - 212 5 5 Interest rate swaps 4,033 36 35 6,582 51 46 4,244 36 35 6,794 56 51

Interest rate swap liabilities include €0.5m (2008: €0.5m) embedded derivatives linked to subordinated debt issued as disclosed in Note 29 Subordinated liabilities.

107 Notes to the Group Financial Statements

year ended 31 December 2009

7. Derivative instruments (continued)

Life operations

Life operations derivatives are analysed as follows:

2009 2008 Contract / Contract / notional Fair value Fair value notional Fair value Fair value amount asset liability amount asset liability €m €m €m €m €m €m Designated as fair value hedges - Interest rate swap 200 13 - 200 9 - 200 13 - 200 9 - Held for trading - held in unitised / closed funds for the benefit of policyholders 5,309 848 30 3,255 914 26 - zero-strike option to return growth in unitised fund to CPPI counterparty 224 - 224 108 - 108 - held to match fixed-rate and tracker bond liabilities 305 38 - 361 21 1 5,838 886 254 3,724 935 135 Total life operations 6,038 899 254 3,924 944 135

Derivatives held in unitised / closed funds for the benefit of unit linked policyholders are as follows:

2009 2008 Contract / Contract / notional Fair value Fair value notional Fair value Fair value amount asset liability amount asset liability €m €m €m €m €m €m

CPPI 818 822 - 865 825 - Interest rate swaps 68 - 6 - - - Currency swaps 3,237 17 16 2,108 39 17 Equity futures 1,186 9 8 282 50 9 5,309 848 30 3,255 914 26

Derivatives held to match fixed rate and tracker bond liabilities within insurance operations are analysed as follows:

2009 2008 Contract / Contract / notional Fair value Fair value notional Fair value Fair value amount asset liability amount asset liability €m €m €m €m €m €m

Interest rate swaps 28 - - 29 - 1 OTC options 277 38 - 332 21 - 305 38 - 361 21 1

108 Notes to the Group Financial Statements year ended 31 December 2009

7. Derivative instruments (continued)

All of the group's banking operations derivative exposures are held by the parent company. The parent company may also enter into derivative transactions with subsidiaries. The fair value of the parent company derivative instruments is as follows: Overview

2009 2008 Contract / Contract / notional Fair value Fair value notional Fair value Fair value amount asset liability amount asset liability €m €m €m €m €m €m

- designated as fair value hedges 23,105 234 376 23,600 162 364 - held for trading 4,244 36 35 6,794 56 51 - held with subsidiaries 1,618 57 - - 35 1,378 28,967 327 411 30,394 253 1,793

8. Loans and receivables to customers uiesRve CroaeGvrac Financial Statements Corporate Governance Business Review Loans and receivables by category are set out below:

Group Company 2009 2008 2009 2008 €m €m €m €m Residential mortgage loans Held through special purpose vehicles 25,983 25,404 19,441 19,164 Held directly 9,189 10,104 7,778 8,754 35,172 35,508 27,219 27,918 Commercial mortgage loans* 1,939 1,978 1,939 1,978 Consumer finance Finance leases 1,211 1,734 - - Term loans / other 536 642 536 642 Money market funds 211 352 211 352 Loans to subsidiaries - - 8,618 8,744 Gross loans and receivables to customers 39,069 40,214 38,523 39,634

Less allowance for impairment (477) (139) (358) (89) Net loans and receivables to customers 38,592 40,075 38,165 39,545

*Commercial mortgage loans exclude loans of €447m (2008: €425m) to the group's life assurance operations including loans held for the benefit of unit linked policyholders.

There is no particular concentration of risk within these categories.

Loans and receivables can be analysed into fixed and variable-rate loans as follows:

Group Company 2009 2008 2009 2008 €m €m €m €m

Variable rate 32,676 28,815 26,221 23,988 Fixed rate 5,916 11,260 3,326 6,813 38,592 40,075 29,547 30,801 Loans to subsidiaries Interest bearing - - 8,268 8,410 Non interest bearing - - 350 334 - - 8,618 8,744 38,592 40,075 38,165 39,545 109 Notes to the Group Financial Statements

year ended 31 December 2009

8. Loans and receivables to customers (continued)

The group has established a number of special purpose vehicles which involve the selling of pools of residential mortgages to the special purpose vehicles which issue mortgage backed floating rate notes (“notes”) to fund the purchase of these mortgage pools. The notes are secured by a first fixed charge over the residential mortgages in each pool. The notes may be sold to investors or held by the group and used as collateral for borrowings.

Details of the residential mortgage pools sold to special purpose vehicles and the notes issued by the special purpose vehicles are included below:

2009 2008 €bln €bln Residential mortgages held through special purpose vehicles 26.0 25.4

Notes issued by special purpose vehicles - rated 23.8 24.9 - unrated 2.3 1.9

The notes issued by these special purpose vehicles comprise of the following:

2009 2008 €bln €bln - Sold to third parties and included within debt securities in issue (non-recourse) on the statement of financial position 2.8 3.0 - Held by the European Central Bank ("ECB") as collateral in respect of funds raised under the Eurosystem funding programme (note 20)1 13.7 14.2 - Held by other banks as part of collateralised lending or sale and repurchase agreements 1.3 1.7 - Held by Irish Life Assurance plc as collateral for government securities under a stock lending agreement with the bank operations of the group2 0.2 1.8 - Held as collateral against deposits placed by the life operations with the banking operations of the group3 - 0.7 - Other Available collateral 5.8 3.5 Unrated notes 2.3 1.9 26.1 26.8

1 See Note 20 Deposits by banks for amounts placed by the ECB with Irish Life & Permanent plc.

2 Government securities held by the bank under a stock-lending agreement with Irish Life Assurance plc amount to €0.1bln at 31 December 2009 (2008: €1.1bln). The stock-lending agreement provides for a minimum collateral value of 150% of Aaa-rated bonds to be maintained in respect of the government securities borrowed.

3 The collateral agreement for the deposits provides for a minimum collateral value of 130% Aaa-rated bonds to be maintained in respect of the deposits in 2008. In accordance with accounting standards these transactions were eliminated in the consolidated financial statements. This arrangement is no longer in place.

Details of provisions for loan impairments are set out in Note 9 Provision for impairment.

At 31 December 2008, the group had drawn down €nil against an available facility of €163m under the mortgage-backed promissory note programme with the Central Bank and Financial Services Authority of Ireland (CBFSAI) which was secured by way of a first floating charge to the CBFSAI of loans and receivables of €209m. This facility was not available in December 2009.

110 Notes to the Group Financial Statements year ended 31 December 2009

8. Loans and receivables to customers (continued)

Finance leases net of provision include the following:

2009 2008 €m €m Overview Finance leases receivables gross of future income No later than 1 year 664 875 Later than 1 year and no later than 5 years 554 949 Later than 5 years 11 20 1,229 1,844 Unearned future finance income on finance leases No later than 1 year (35) (52) Later than 1 year and no later than 5 years (44) (88) Later than 5 years (1) (2) (80) (142)

Total 1,149 1,702 uiesRve CroaeGvrac Financial Statements Corporate Governance Business Review Present value of minimum lease payments analysed by residual maturity No later than 1 year 629 823 Later than 1 year and no later than 5 years 510 861 Later than 5 years 10 18 1,149 1,702

Provision for uncollectable minimum payments receivable* 62 32 Unguaranteed residual values accruing to the benefit of the group n/a n/a

*This provision is disclosed in Note 9 Provision for impairment within the "consumer finance" category.

Finance leases normally have a term of five years or less.

9. Provision for impairment

Group provision for impairment a) Loans and receivables

2009 Specific Collective Total €m €m €m

As at 1 January 37 102 139 Charge to income statement Impairment losses 213 163 376 Amounts written off during the year (10) (30) (40) Exchange movements 1 1 2 As at 31 December 241 236 477

111 Notes to the Group Financial Statements

year ended 31 December 2009

9. Provision for impairment (continued)

Group provision for impairment (continued)

a) Loans and receivables (continued) 2008 Specific Collective Total €m €m €m

As at 1 January 26 49 75 Charge to income statement Impairment losses 16 67 83 Amounts recovered during the year - (1) (1) Amounts written off during the year (2) (12) (14) Exchange movements (3) (1) (4) As at 31 December 37 102 139

Analysis of income statement charge

2009 Specific Collective Total €m €m €m

ROI residential lending 107 47 154 ROI commercial lending 69 30 99 UK lending 27 6 33 Consumer finance 10 80 90 213 163 376

2008 Specific Collective Total €m €m €m

ROI residential lending 6 21 27 ROI commercial lending 4 5 9 UK lending 6 9 15 Consumer finance - 31 31 16 66 82

Analysis of amounts written off during the year

2009 Specific Collective Total €m €m €m

ROI residential lending (1) - (1) UK lending (9) - (9) Consumer finance - (30) (30) As at 31 December (10) (30) (40)

2008 Specific Collective Total €m €m €m

UK lending (2) - (2) Consumer finance - (12) (12) As at 31 December (2) (12) (14)

112 Notes to the Group Financial Statements year ended 31 December 2009

9. Provision for impairment (continued)

Group provision for impairment (continued) a) Loans and receivables (continued) Overview Analysis of provisions 2009 Specific Collective Total €m €m €m

ROI residential lending 125 69 194 ROI commercial lending 78 35 113 UK lending 28 14 42 Consumer finance 10 118 128 As at 31 December 241 236 477

2008

Specific Collective Financial Statements Total Corporate Governance Business Review €m €m €m

ROI residential lending 19 22 41 ROI commercial lending 9 5 14 UK lending 9 8 17 Consumer finance - 67 67 As at 31 December 37 102 139 b) Debt securities

2009 2008 €m €m

As at 1 January 122 - Charge to income statement Impairment losses* - 122 Amounts written off during the year (103) - As at 31 December 19 122

*Impairment losses relate to the impairment of Icelandic bank securities and Lehman Brothers securities.

The provisions in relation to rogue solicitors disclosed at 31 December 2008 have been incorporated into the above provisions.

Company provision for impairment a) Loans and receivables 2009 Specific Collective Total €m €m €m

As at 1 January 28 61 89 Charge to income statement Impairment losses 164 112 276 Amounts written off during the year (1) (6) (7) As at 31 December 191 167 358

113 Notes to the Group Financial Statements

year ended 31 December 2009

9. Provision for impairment (continued)

Company provision for impairment (continued)

a) Loans and receivables (continued) 2008 Specific Collective Total €m €m €m

As at 1 January 19 31 50 Charge to income statement Impairment losses 9 37 46 Amounts written off during the year - (7) (7) As at 31 December 28 61 89

Analysis of income statement charge 2009 Specific Collective Total €m €m €m

ROI residential lending 95 46 141 ROI commercial lending 69 30 99 Consumer finance - 36 36 164 112 276

2008 Specific Collective Total €m €m €m

ROI residential lending 5 20 25 ROI commercial lending 4 5 9 Consumer finance - 12 12 9 37 46

Analysis of amounts written off during the year 2009 Specific Collective Total €m €m €m

ROI residential lending (1) - (1) Consumer finance - (6) (6) (1) (6) (7)

2008 Specific Collective Total €m €m €m

Consumer finance - (7) (7) - (7) (7)

Analysis of provisions

2009 Specific Collective Total €m €m €m

ROI residential lending 113 66 179 ROI commercial lending 78 35 113 Consumer finance - 66 66 As at 31 December 191 167 358 114 Notes to the Group Financial Statements year ended 31 December 2009

9. Provision for impairment (continued)

Company provision for impairment (continued) a) Loans and receivables (continued) 2008 Overview Specific Collective Total €m €m €m

ROI residential lending 18 19 37 ROI commercial lending 10 4 14 Consumer finance - 38 38 As at 31 December 28 61 89 b) Debt securities

2009 2008 €m €m uiesRve CroaeGvrac Financial Statements Corporate Governance Business Review As at 1 January 122 - Charge to income statement Impairment losses* - 122 Amounts written off during the year (103) - As at 31 December 19 122

*Impairment losses relate to the impairment of Icelandic bank securities and Lehman Brothers securities.

The provisions in relation to rogue solicitors disclosed at 31 December 2008 have been incorporated into the above provisions.

10. Loans and receivables to banks

Group Company 2009 2008 2009 2008 €m €m €m €m Held at amortised cost Repayable on demand (note 4) 2,510 1,956 2,510 1,951 Other loans and receivables to banks 94 38 90 37 2,604 1,994 2,600 1,988 Designated as FVTPL Life operations deposits with banks 2,321 2,781 - - 4,925 4,775 2,600 1,988

At 31 December 2009, loans and receivables to banks include €0.65bln deposits placed with one financial institution (2008: €1.7bln with two financial institutions) covered by the Irish Government guarantee scheme. This covered institution placed €0.65bln (2008: €1.1bln) with Irish Life & Permanent plc on the same terms and the €0.65bln (2008: €1.1bln) is included in Note 20 Deposits by banks. No right of set-off exists between these deposits by banks and the loans and receivables to banks. They are recorded in loans and receivables to banks in accordance with accounting standards.

115 Notes to the Group Financial Statements

year ended 31 December 2009

11. Investment properties

Group Company 2009 2008 2009 2008 €m €m €m €m

As at 1 January 2,280 3,561 - 1 Additions from acquisitions 25 457 - - Additions from subsequent expenditure 14 - - - Transfer from property and equipment (note 13) - 5 - - Disposals (33) (310) - - Fair value adjustments (note 43) (517) (1,433) - (1) As at 31 December 1,769 2,280 - -

Investment property is held for capital appreciation and income and is let on a commercial basis to third parties.

Investment property is carried at fair value as determined by an independent valuer having an appropriate recognised professional qualification and recent experience in the location and category of the property being valued. Fair values take into account recent occupancy and rental levels and are based on yields which are applied to arrive at the property valuation.

There are low levels of liquidity in the Irish investment property market and transaction levels are significantly reduced resulting in a lack of clarity as to pricing and market drivers. In the Irish market this has resulted in significant falls in the market value during the year. The UK market has seen an improvement in transaction levels which has resulted in an improved visibility on pricing in that market.

In Ireland, investment properties currently on the market typically involve vendors who are compelled to sell or purchasers who will only buy at discounted prices. In this environment, prices and values are experiencing a period of heightened volatility while the market absorbs these various issues and reaches its conclusion.

At 31 December 2009 €1,751m (2008: €2,253m) of investment properties are held by unit-linked funds.

The yield spreads used in the independent valuations were as follows:

2009 2008 Sector ROI UK ROI UK

Office Prime 6.80%-9.96% 5.00%-8.00% 5.10%-6.50% 5.18%-7.33% Suburban 6.91%-12.01% 6.76%-8.92% 6.25%-8.50% 6.52%-9.45% Provincial 7.57%-12.51% 5.35%-10.00% 6.10%-9.00% 6.86%-10.27%

Industrial Prime 7.80%-11.34% 7.64%-9.26% 7.00%-8.00% 6.77%-11.42% Secondary 8.1%-11.78% 11.25% 8.00%-8.80% 6.39%-9.24% Provincial 13.30% - 10.10% -

Retail Prime high street 6.00%-8.76% 4.74%-7.39% 4.50%-5.50% 4.86%-7.30% Secondary 6.65%-8.54% - 5.50%-7.50% - Shopping centre 7.72%-10.08% 9.39% 6.55%-7.15% 7.25% Retail warehousing 7.57%-8.81% 7.04%-8.18% 6.00%-6.80% 5.52%-9.20% Provincial 7.04%-9.38% 6.26%-9.82% 5.50%-7.00% 6.95%

Residential Residential properties are valued on a capital value per square foot rather than on basis of investment yield. Residential properties represent 0.5% of total investment property.

116 Notes to the Group Financial Statements year ended 31 December 2009

11. Investment properties (continued)

Investment properties as at 31 December 2009 are analysed as follows:

ROI UK Other Total €m €m €m €m Overview

Residential 29 - - 29 Office 531 356 142 1,029 Industrial 138 12 - 150 Retail 410 151 - 561 1,108 519 142 1,769

Investment properties as at 31 December 2008 are analysed as follows:

ROI UK Other Total €m €m €m €m uiesRve CroaeGvrac Financial Statements Corporate Governance Business Review Residential 37 - - 37 Office 795 315 - 1,110 Industrial 195 12 152 359 Retail 618 156 - 774 1,645 483 152 2,280

The acquisition of certain investment properties on behalf of unit-linked policyholders is funded by borrowing. These borrowings, which have recourse only to the specific property which they were used to acquire, amounted to €610m at 31 December 2009 (2008: €591m). At 31 December 2009 €370m (2008: €354m) borrowings were issued by Irish Life & Permanent plc and were eliminated on consolidation. The remaining balance of borrowings is contained within Note 20 Deposits by banks.

As a result of the decrease in the values of investment properties, there were some breaches of loan-to-value terms attached to certain borrowings, otherwise, facilities are in order. The group is engaged in negotiations with the relevant lenders. To date there has been no amendments to the group's obligations attached to these borrowings. The group continues to fulfil all its repayment obligations for such borrowings.

Property held under long leasehold interest at 31 December 2009 was €48m (2008: €64m). There are no future payments under these leases. There are no contingent rents on these properties.

12. Interest in subsidiary and associated undertaking

(a) Group's interest in associated undertaking

The group owns 30.43% (2008: 30.43%) of Allianz-Irish Life Holdings plc, an unlisted general insurance company operating in Ireland.

The group's share of Allianz-Irish Life Holding plc net assets are as follows: 2009 2008 €m €m

As at 1 January 139 147 Share of results before tax (2) 27 Share of tax - (4) Share of capital reserve - (1) Dividends paid (15) (30) As at 31 December 122 139

117 Notes to the Group Financial Statements

year ended 31 December 2009

12. Interest in subsidiary and associated undertakings (continued)

Summary financial information on Allianz-Irish Life Holdings plc (100%) is as follows:

2009 2008 €m €m

Assets 1,677 1,732 Liabilities 1,277 1,276 Equity 400 456 Gross premium written 445 503 (Loss) / profit after tax (5) 76

The group's share of losses of Allianz-Irish Life Holdings plc for the year ended 31 December 2009 was €2m (2008: profit €23m).

(b) Company's interest in subsidiary undertakings

2009 2008 €m €m

As at 1 January 2,855 2,855 Additions - - As at 31 December 2,855 2,855

(c) Acquisition of Merrill Lynch interest in Joint Mortgage Holdings No.1 Limited (parent of Springboard Mortgages Limited)

At 31 December 2007, the group owned 50% of Joint Mortgage Holdings No.1 Limited (parent of Springboard Mortgages Limited), a specialist mortgage lender, established as a joint venture with Merrill Lynch. On 30 June 2008, IL&P acquired the remaining 50% of Joint Mortgage Holdings No.1 Limited from Merrill Lynch. The assets and liabilities were acquired at fair value for €nil consideration and no goodwill arose on acquisition.

As at 31 December 2008, the balances of Joint Mortgage Holdings No.1 Limited were included in the consolidated numbers as detailed below:

Group 2008 €m

As at 1 January - Additions 1 Share of results (1) As at 31 December -

Company 2008 €m

As at 1 January - Additions 1 Writedown of investment (1) As at 31 December -

Details of the group's principal subsidiary and associated undertaking are set out in Note 53 Principal subsidiary and associated undertaking.

118 Notes to the Group Financial Statements year ended 31 December 2009

13. Property and equipment

Group 2009 Office and Land and computer Motor Overview buildings equipment vehicles Total €m €m €m €m Cost or valuation As at 1 January 318 250 23 591 Additions 4 8 2 14 Valuation (113) - - (113) Disposals - (4) (3) (7) Impairment (9) - - (9) Reclassification (5) 6 (1) - As at 31 December 195 260 21 476

Depreciation

As at 1 January 23 195 Financial Statements 11 229 Corporate Governance Business Review Provided in the year (note 46) 10 16 4 30 Disposals - (3) (2) (5) Valuation (16) - - (16) Reclassification (5) 6 (1) - As at 31 December 12 214 12 238

Net book value as at 31 December 183 46 9 238

2008 Office and Land and computer Motor buildings equipment vehicles Total €m €m €m €m Cost or valuation As at 1 January 469 233 23 725 Additions 6 21 6 33 Valuation (150) - - (150) Disposals (2) (2) (6) (10) Reclassification to investment property (note 11) (5) - - (5) Reclassification to software (note 15) - (1) - (1) Currency exchange - (1) - (1) As at 31 December 318 250 23 591

Depreciation As at 1 January 28 181 10 219 Provided in the year (note 46) 11 16 4 31 Disposals - (1) (3) (4) Valuation (16) - - (16) Currency exchange - (1) - (1) As at 31 December 23 195 11 229

Net book value as at 31 December 295 55 12 362

119 Notes to the Group Financial Statements

year ended 31 December 2009

13. Property and equipment (continued)

Company 2009 Office and Land and computer Motor buildings equipment vehicles Total €m €m €m €m Cost or valuation As at 1 January 166 78 6 250 Additions 5 1 1 7 Valuation (67) - - (67) Disposals - - (1) (1) Reclassification (5) 7 - 2 Impairment (3) - - (3) As at 31 December 96 86 6 188

Depreciation As at 1 January 24 60 3 87 Provided in the year 7 5 1 13 Valuation (16) - - (16) Disposal - - (1) (1) Reclassification (5) 7 - 2 As at 31 December 10 72 3 85

Net book value as at 31 December 86 14 3 103

2008 Office and Land and computer Motor buildings equipment vehicles Total €m €m €m €m Cost or valuation As at 1 January 301 72 6 379 Additions 6 6 2 14 Valuation (49) - - (49) Disposals (92) - (2) (94) As at 31 December 166 78 6 250

Depreciation As at 1 January 20 55 2 77 Provided in the year 8 5 2 15 Valuation (2) - - (2) Disposals (2) - (1) (3) As at 31 December 24 60 3 87

Net book value as at 31 December 142 18 3 163

Land and buildings were revalued at 31 December 2009. Valuations were carried out by registered, independent appraisers having an appropriate recognised professional qualification and recent experience in the location and category of the property being valued. Values take into account recent market transactions for similar properties. Valuations have used yields ranging from 6.86% to 8.2%, depending on the property size and location. In relation to the larger head office buildings, vacant periods of 2 to 3 years have been applied.

120 Notes to the Group Financial Statements year ended 31 December 2009

13. Property and equipment (continued)

The net book value of land and buildings include the following:

Group Company 2009 2008 2009 2008 Overview €m €m €m €m

Buildings - freehold 121 200 42 80 Buildings - leasehold 17 16 16 14 Land 45 79 28 48 183 295 86 142

The historic cost of land and buildings in the group is €169m (2008: €170m).

14. Shareholder value of in-force business

The shareholder value of in-force business for insurance contracts is computed using EEV principles issued in May

2004 by the European Chief Financial Officers’ forum. Shareholder value of in-force business represents Financial Statements the present Corporate Governance Business Review value of future shareholder cash flows less a deduction for the cost of required capital and before allowing for tax and includes a deduction for the time value of financial options and guarantees. Further details of the EV principles are set out in the supplementary EV basis on pages 216 to 218.

A. Assumptions

The principal assumptions are set out below:

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 Irish Government yield available for the effective duration of the future cash flows underlying the shareholder value of in-force business. The market risk margin neutralises the effect of assuming future investment returns in excess of the base risk-free rate. 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 2009 2008 2007 Equity risk premium 3.0% 3.0% 3.0% Property risk premium 2.0% 2.0% 2.0%

Risk-free rate 4.6% 4.1% 4.4% Non market risk margin 2.1% 2.1% 2.1% Market risk margin 0.8% 0.8% 1.3% Risk discount rate 7.5% 7.0% 7.8%

Investment return - Fixed interest 1.1% - 4.2% 2.7% - 4.3% 3.9% - 4.7% - Equities 7.6% 7.1% 7.4% - Property 6.6% 6.1% 6.4%

Expense inflation 3.0% 3.0% 4.5%

121 Notes to the Group Financial Statements

year ended 31 December 2009

14. Shareholder value of in-force business (continued)

Other assumptions

The assumed future mortality and morbidity 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.

Further details of assumptions are included in Note 24 Life insurance contracts including insurance contracts with discretionary participation features (DPF).

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.

B. Analysis of the movement in the year

The change in the shareholder value of in-force assets is analysed as follows:

2009 2008 €m €m

As at 1 January 787 717 (Debit) / credit in income statement in the year (57) 70 As at 31 December 730 787

The debit to the income statement of €57m negative (2008: credit of €70m positive) includes €99m positive (2008: €121m positive) in respect of new business; €88m negative (2008: €86m negative) expected return on existing business; €33m negative (2008: €20m positive) in respect of experience variances; €7m negative (2008: €17m positive) in respect of operating assumptions changes; €8m positive (2008: €62m negative) in respect of short-term investment fluctuations and €36m negative (2008: €60m positive) in respect of economic assumption changes.

C. Sensitivity calculations

A number of sensitivities have been produced on alternative assumption sets to reflect the sensitivity of the insurance shareholder value of in-force asset to changes in key assumptions. The details of each sensitivity are set out below. All amounts are after allowing for the associated deferred tax effect:

- 1% decrease in discount rate would increase equity by €64m; - 1% increase in discount rate would reduce equity by €56m; - 10% decrease in maintenance expenses would increase equity by €19m; - 10% improvement in assumed persistency rates would increase equity by €12m; and - 5% decrease in both mortality and morbidity rates would increase equity by €21m.

122 Notes to the Group Financial Statements year ended 31 December 2009

15. Intangible assets

Group 2009 Software Other Total €m €m €m Cost Overview As at 1 January 160 9 169 Additions 9 - 9 Write-off (1) - (1) Reclassification 2 1 3 Impairment (4) - (4) As at 31 December 166 10 176

Amortisation As at 1 January 114 1 115 Amortisation for the year (note 46) 20 - 20 Impairment (2) - (2) Write-off (1) - (1)

Reclassification 1 1 Financial Statements 2 Corporate Governance Business Review As at 31 December 132 2 134

Net book value as at 31 December 34 8 42

2008 Software Other Total €m €m €m Cost As at 1 January 147 9 156 Additions 15 - 15 Disposals (3) - (3) Reclassification from property and equipment (note 13) 1 - 1 As at 31 December 160 9 169

Amortisation As at 1 January 98 1 99 Amortisation for the year (note 46) 19 - 19 Disposals (3) - (3) As at 31 December 114 1 115

Net book value as at 31 December 46 8 54

123 Notes to the Group Financial Statements

year ended 31 December 2009

15. Intangible assets (continued)

Company 2009 2008 Software Software €m €m Cost As at 1 January 66 61 Additions 1 5 Reclassification (2) - As at 31 December 65 66

Amortisation As at 1 January 50 43 Amortisation for the year 6 7 Reclassification (2) - As at 31 December 54 50

Net book value as at 31 December 11 16

16. Goodwill

Group 2009 2008 €m €m

As at 1 January 71 203 Additions 4 38 Impairment - (170) As at 31 December 75 71

Company 2009 2008 €m €m

As at 1 January - 170 Additions - - Impairment - (170) As at 31 December - -

Goodwill is attributable to two business units as set out below: Goodwill is allocated to the group's operating divisions which represent the lowest level within the group at which goodwill is monitored for internal management purposes and is not higher than the group's operating segments as reported in Note 3 Segmental information.

Group 2009 2008 €m €m Life assurance 5 5 Brokerage and third party administration 70 66 75 71

The goodwill acquired during the year ended 31 December 2009 of €4m arose on the acquisition of the remaining 2% non-controlling interest in Cornmarket Group Financial Services Limited.

124 Notes to the Group Financial Statements year ended 31 December 2009

16. Goodwill (continued)

The goodwill acquired during 2008 of €38m arose on the acquisition of 22.94% of the non-controlling interest in Cornmarket Group Financial Services Limited.

No impairment losses on goodwill were recognised during 2009. Overview

The impairment of goodwill during 2008 of €170m relates to an unamortised balance arising from the acquisition of TSB Bank in 2001. This balance has been written off given the divergence between the market value of banking operations in current market conditions and the carrying value.

The carrying goodwill value is tested for impairment by calculating the recoverable amount. The recoverable amount is based on value in-use calculations of cash-generating units using cash flow projections based on actual operating results and future business plans, discounted at an appropriate rate. Where appropriate the embedded value has been used as a conservative proxy for discounted cash projections. The determination of cash flows and discount rates require the exercise of judgement.

The calculation of the value in-use was based on the following key assumptions:

Cash flows were projected based on past experience, actual operating results and future business plans and uiesRve CroaeGvrac Financial Statements Corporate Governance Business Review assume no future growth (2008: 0%). Cash flows for a period of seven years (2008: five years) based on 2009 actuals and 2010 business plans were used. The forecast period is based on the group's long-term perspective with respect to the operation of these cash-generating units.

A pre-tax discount rate of 12.5% (2008: 12%) was applied in determining the recoverable amounts for the cash generating units. The discount rate is based on the rate used in calculating the future cash flows for shareholder value of in-force business with an additional risk premium of 5% (2008: 5%).

The key assumptions described above may change as economic and market conditions change. The group estimates that reasonably possible changes in these assumptions are not expected to cause the recoverable amount of either cash-generating unit to decline below the carrying amount.

17. Other assets

Group 2009 2008 €m €m Amounts falling due within one year Amount due from policyholders 55 61 Amount due from intermediaries 2 1 Investment trading balances 1 12 Other debtors 71 80 129 154

Company 2009 2008 €m €m Amounts falling due within one year Amount due from subsidiary undertakings 12 19 Other debtors 22 - 34 19

18. Deferred acquisition costs

2009 2008 €m €m

As at 1 January 256 248 Arising in the year (note 40) 45 60 Charge to income arising in the year (note 40) (56) (52) As at 31 December 245 256

125 Notes to the Group Financial Statements

year ended 31 December 2009

19. Retirement benefit obligations

Defined benefit schemes The group operates six Irish defined benefit pension schemes and two small UK defined benefit schemes for employees. All of the defined benefit schemes are funded by the payment of contributions into separately administered trust funds. The benefits paid from the defined benefit scheme are based on percentages of the employees' final pensionable pay for each year of credited service.

The pension costs and provisions are assessed in accordance with the advice of independent qualified actuaries. Valuations are carried out every three years by independent actuarial consultants. The actuarial reports are available for inspection by members of the scheme and are not available for public inspection. All of the group's defined benefit pension schemes have been revalued within the last three years with valuation dates ranging from 1 March 2007 to 30 September 2009. Actuarial gains and losses are accounted for under the corridor approach as set out in Note 1 Basis of preparation and significant accounting policies.

The key financial assumptions used are:

Group Company 2009 2008 2009 2008 % % % % Actuarial assumptions at the statement of financial position date Discount rate 5.50 5.75 5.50 5.75 Expected rate of return on plan assets 6.60 6.75 6.60 6.75 Salary increases1 3.50 3.50 3.50 3.50 Pension increases 2.00 2.00 2.00 2.00 Rate of price inflation 2.00 2.00 2.00 2.00

1 In addition to the salary inflation assumption above an assumed salary scale is also allowed for.

The main post-retirement mortality assumptions used at 31 December 2009 were 95% PA92 (c=2025) less two years (2008: 100% PA92 (c=2025) less two years) for pensioners and 95% PA92 (c=2040) less two years (2008: 100% PA92 (c=2040 less two years) for active / deferred members. On this basis the life expectancies underlying the value of the schemes liabilities at 31 December 2009 and 31 December 2008 were the following:

2009 2008 Years Years Retiring today age 65 Males 22.4 22.1 Females 25.4 25.0

Retiring in 15 years time aged 65 Males 23.3 23.1 Females 26.3 26.0

Amounts recognised in the income statement in respect of these defined benefit schemes are:

Group Company 2009 2008 2009 2008 €m €m €m €m

Current service cost 34 45 16 21 Past service cost 8 1 2 1 Interest cost 70 73 30 32 Expected return on scheme assets (63) (83) (23) (28) Amortisation of corridor excess 4 - 1 - 53 36 26 26

This charge has been included in administrative expenses.

126 Notes to the Group Financial Statements year ended 31 December 2009

19. Retirement benefit obligations (continued)

Unrecognised actuarial gains or losses which are outside the corridor under IAS 19 are amortised in the income statement over the estimated remaining service lives of the members which averaged seventeen years in 2009 (2008: twenty one years). Overview

The actual return on scheme assets was €131m (2008: negative €359m) in the group and €47m in the company (2008: negative €117m).

The actual return is calculated as follows:

Group Company 2009 2008 2009 2008 €m €m €m €m

Expected return on plan assets 63 83 23 28 Actuarial gain / (loss) on plan assets 68 (442) 24 (145) 131 (359) 47 (117) uiesRve CroaeGvrac Financial Statements Corporate Governance Business Review The expected return on assets is determined by calculating a total return estimate based on weighted average estimated returns for each asset class. Asset class returns are estimated using current and projected economic and market factors such as inflation, credit spreads and equity risk premiums.

The expected rates of return for equities and property were calculated by allowing for a risk premium over prevailing long-dated bond yields. The equity rate allows for a yield on 30-year Eurozone Government bonds of 4.30% (2008: 3.80%) together with an equity risk premium of 3.60% (2008: 4.95%), giving a total of 7.90% (2008: 8.75%). For property, a risk premium 1% lower than for equities was adopted for the years ended 31 December 2009 and 31 December 2008. The expected rate of return on bonds reflected the prevailing yield on the specific portfolio of nominal and inflation-linked long-dated bonds for the years ended 31 December 2009 and 31 December 2008. The effect of the major categories of plan assets on the overall expected rate of return on assets is set out in the table on the long-term rate of return expected for each class of asset on page 129.

The movements in the present value of defined benefit obligations in the year are:

Group Company 2009 2008 2009 2008 €m €m €m €m

Benefit obligation as at 1 January (1,183) (1,293) (519) (568) Current service cost (34) (45) (16) (21) Interest cost (70) (73) (30) (32) Past service cost (8) (1) (2) (1) Actuarial gain / (loss) - experience adjustments 97 (19) 8 - - assumption changes (52) 230 (39) 95 Contributions by plan participants (7) (7) (3) (3) Benefits paid 32 24 12 10 Exchange and other adjustments - 1 - 1 Benefit obligation as at 31 December (1,225) (1,183) (589) (519)

127 Notes to the Group Financial Statements

year ended 31 December 2009

19. Retirement benefit obligations (continued)

The movement in the fair value of defined benefit assets in the year are:

Group Company 2009 2008 2009 2008 €m €m €m €m

Fair value of plan assets as at 1 January 928 1,262 333 427 Expected return on plan assets 63 83 23 28 Employer contribution 59 42 31 30 Contributions by plan participants 7 7 3 3 Actuarial gain / (loss) 68 (442) 24 (145) Benefits paid (32) (24) (12) (10) Fair value of plan assets as at 31 December 1,093 928 402 333

The pension assets and liabilities recognised on the statement of financial position are as follows:

Group Company 2009 2008 2007 2006 2005 2009 2008 2007 2006 2005 €m €m €m €m €m €m €m €m €m €m

Benefit obligation as at 31 December (1,225) (1,183) (1,293) (1,211) (1,238) (589) (519) (568) (556) (563) Fair value of plan assets as at 31 December 1,093 928 1,262 1,277 1,108 402 333 427 425 357 Net (obligation) / asset (132) (255) (31) 66 (130) (187) (186) (141) (131) (206) Unrecognised actuarial losses / (gains) 69 186 (45) (152) 43 55 49 (1) (9) 65 Net recognised retirement benefit obligation (63) (69) (76) (86) (87) (132) (137) (142) (140) (141)

The experience adjustments arising on plan liabilities and plan assets are as follows:

Group Company 2009 2008 2007 2006 2005 2009 2008 2007 2006 2005 Actuarial (gains) / losses - arising on benefit obligation (€m) (97) 19 48 19 47 (8) - 15 12 30 - arising on benefit obligation (% of plan liabilities) (8) 2 4 2 4 (1) - 3 2 5

Actuarial gains / (losses) - arising on plan assets (€m) 68 (442) (116) 73 141 24 (145) (40) 21 44 - arising on plan assets (% of plan assets) 6 (48) (9) 6 13 6 (44) (9) 5 12

128 Notes to the Group Financial Statements year ended 31 December 2009

19. Retirement benefit obligations (continued)

The movement in the present value of defined benefit obligations in the year are:

Group Company 2009 2008 2009 2008 Overview €m €m €m €m

Net post-retirement benefit obligations as at 1 January (69) (76) (137) (142) Expense recognised in income statement (53) (36) (26) (26) Contributions paid 59 42 31 30 Exchange and other adjustments - 1 - 1 Net post-retirement benefit obligations as at 31 December (63) (69) (132) (137)

Net post-retirement benefit assets 96 89 11 5 Net post-retirement benefit liabilities (159) (158) (143) (142)

Net post-retirement benefit obligations (63) (69) (132) Financial Statements (137) Corporate Governance Business Review

The following tables set out, on a combined basis for all schemes, the fair value of the assets held by the schemes together with the long-term rate of return expected for each class of asset for the group and the company.

Group Long term Long term rate of return Fair Plan rate of return Fair Plan expected value assets expected value assets

2009 2009 2009 2008 2008 2008 % €m % % €m %

Equities 7.90 637 58 8.75 460 50 Bonds 4.40 377 35 4.00 352 38 Property 6.90 53 5 7.75 78 8 Other 5.90 26 2 6.38 38 4 Fair value of plan assets as at 31 December 6.60 1,093 100 6.75 928 100

Company Long term Long term rate of return Fair Plan rate of return Fair Plan expected value assets expected value assets

2009 2009 2009 2008 2008 2008 % €m % % €m %

Equities 7.90 232 58 8.75 160 48 Bonds 4.40 138 34 4.00 133 40 Property 6.90 22 5 7.75 25 8 Other 6.00 10 3 8.75 15 4 Fair value of plan assets as at 31 December 6.60 402 100 6.75 333 100

The fair value of plan assets includes investments in Irish Life Assurance unit-linked funds which on occasion include investments relating to Irish Life & Permanent plc shares or properties occupied by Irish Life & Permanent group. As at 31 December 2009, the group's pension scheme assets had an indirect holding in Irish Life & Permanent plc shares of €2m (company: €0.7m) (2008: €2m (company: €1m)) and an indirect holding of properties occupied by the Irish Life & Permanent group of €0.2m (company: €0.1m) (2008: €0.2m (company: €0.1m)).

129 Notes to the Group Financial Statements

year ended 31 December 2009

19. Retirement benefit obligations (continued)

The group is expected to pay contributions of approximately €35m to the pension schemes in 2010.

If the discount rate was 0.5% lower than the assumption made at 31 December 2009 then the present value of defined benefit obligations (for the five main pension schemes in the group) would increase by approximately €128m (group) and €62m (company), all of which would be included as unrecognised actuarial losses. A similar effect would arise if the rate of increase in salaries and pensions was to rise by 0.5% over the assumptions used at 31 December 2009.

If the expectation of life post-retirement increased by one year, then the present value of defined benefit obligations (for the five main pension schemes in the group) would increase by approximately €24m (group) and €11m (company), all of which would be included as unrecognised actuarial losses.

20. Deposits by banks

Group Company 2009 2008 2009 2008 €m €m €m €m

Deposits by banks 18,713 18,546 17,842 17,581 18,713 18,546 17,842 17,581

Deposits by banks include the following: Group 2009 2008 €bln €bln

Placed by the European Central Bank ("ECB")1 9.8 11.8 Placed by other banks2 1.0 1.3 Held as a result of repurchase agreements 6.1 2.3 Collateral held for investments for unit-linked funds (CPPI) 0.6 0.7 Interbank deposits3 0.7 1.1 Other 0.5 1.3 18.7 18.5

Balances placed by the European Central Bank ("ECB")

Maximum 13.5 14.4 Average 10.9 7.9

1 The deposits made by the ECB are secured on €13.7bln notes issued by special purpose vehicles controlled by the group. The notes are secured by a first fixed charge over residential mortgages held by the special purpose vehicles which are included in Note 8 Loans and receivables to customers.

2 These deposits are collateralised on €1.3bln of notes issued by special purpose vehicles controlled by the group. The notes are secured by a first fixed charge over residential mortgages held by the special purpose vehicles, which form part of the group's consolidated financial statements.

3 These deposits were placed by a bank covered under the Irish Government guarantee scheme (2008: two banks) on the same terms as deposits placed with this institution by Irish Life Assurance plc (Note 10 Loans and receivables to banks). Because no right of set-off existed between these deposits by banks and the loans and receivables to banks, they are recorded in deposits by banks in accordance with accounting standards.

130 Notes to the Group Financial Statements year ended 31 December 2009

21. Customer accounts

Group Company 2009 2008 2009 2008 €m €m €m €m Overview

Repayable on demand 3,503 3,866 3,410 3,866 Other 11,059 10,252 10,693 9,784 Due to subsidiary undertakings - - 6,727 5,902 14,562 14,118 20,830 19,552

Customer accounts exclude deposits of €1,251m (2008: €613m) from the group's non-banking operations including deposits held for the benefit of unit-linked policyholders.

22. Debt securities in issue

Group Company 2009 2008 2009 2008 €m €m €m Financial Statements €m Corporate Governance Business Review

At amortised cost Bonds and medium-term notes 7,855 5,928 7,855 6,028 Other debt securities in issue 3,043 2,446 2,618 2,021 Non-recourse funding 2,364 2,525 - - Debt securities in issue to subsidiaries - - 2,085 2,127 13,262 10,899 12,558 10,176

2009 2008 2009 2008 €m €m €m €m

Repayable in not more than 1 year 8,132 3,210 8,209 3,329 Repayable in more than 1 year but not more than 2 years 1,395 2,484 1,395 2,488 Repayable in more than 2 years but not more than 5 years 452 1,620 452 1,626 Repayable in more than 5 years 3,283 3,585 2,502 2,733 13,262 10,899 12,558 10,176

Bonds and medium-term notes exclude €77m (2008: €129m) of debt securities issued by the group held in the group's life assurance operations which have been eliminated on consolidation.

Other debt securities in issue

Other debt securities in issue at 31 December 2009 included €425m (2008: €425m) advances secured on notes issued by special purpose vehicles which are secured on residential property. These loans which have not been derecognised, are shown within loans and receivables to customers and the funding is shown as a separate liability.

Non-recourse funding

At 31 December 2009, the group had advances secured on residential property subject to non-recourse funding. These loans, which have not been derecognised, are shown within loans and receivables to customers and the non-recourse funding is shown as a separate liability.

The securitisations involve the selling of pools of mortgages to special purpose entities which issue mortgage backed floating notes ("notes") to fund the purchase of these mortgage pools.

131 Notes to the Group Financial Statements

year ended 31 December 2009

22. Debt securities in issue (continued)

Under the terms of these securitisations, the rights of the providers of the related funds are limited to the mortgage loans in the securitised portfolios and any related income generated by the portfolios, without recourse to Irish Life & Permanent plc. Irish Life & Permanent plc is not obliged to support any losses in respect of the mortgages subject to the non-recourse funding and does not intend to do so. During the term of the transactions, any amounts realised from the portfolios in excess of that due to the providers of the funding, less any related administrative costs, will be paid to Irish Life & Permanent plc. The providers of this funding have agreed in writing (subject to the customary warranties and covenants) that they will seek repayment of the finance, as to both principal and interest, only to the extent that sufficient funds are generated by the mortgages and related security, and that they will not seek recourse in any other form.

Debt securities in issue to subsidiaries

At 31 December 2009, the group had €77m of securities issued to Irish Life Assurance plc and the company held €2,008m of non-recourse funding from its subsidiaries.

Profit on repurchase of debt securities in issue

During the year ended 31 December 2009, the group repurchased €53m and £10m of medium term non-recourse notes in issue at discounts of 7% to 34% for the securities outlined below. This repurchase of debt is accounted for under IAS 39 and met the requirements to be treated as an extinguishment of the original instruments. It resulted in a total profit of €8m (€7m after taxation) being recognised in the investment return as detailed in Note 43 Investment return.

The carrying value of each instrument repurchased and the consideration given including costs to arrive at the profit are set out below:

Instrument exchange Percentage Nominal Carrying repurchased value value % €m €m EMTN Tranche Auburn 5 A2 4.53 12 12 Fastnet 2 A2 3.33 53 53 Total 65 65

Repurchase consideration given including costs €m Consideration 57 Costs - Total repurchase consideration including costs 57

Profit 8

132 Notes to the Group Financial Statements year ended 31 December 2009

23. Investment contract liabilities

31 December 2009 31 December 2008 Gross Reinsurance Net Gross Reinsurance Net €m €m €m €m €m €m Overview

Unit-linked liabilities 23,434 (91) 23,343 20,311 (144) 20,167 Non-linked and guaranteed tracker liabilities 381 - 381 469 - 469 Investment financial options and guarantees 43 - 43 82 - 82 Non-controlling share of unit trust 174 - 174 256 - 256 24,032 (91) 23,941 21,118 (144) 20,974

The non-controlling share of unit trust refers to the portion of unit trusts consolidated in the financial statements which are not attributable to Irish Life Assurance policyholders. The trusts are consolidated as Irish Life Assurance is deemed by its percentage holdings to have a controlling interest.

The change in liabilities during 2009 is analysed as follows: 2009 Financial Statements Corporate Governance Business Review Gross Reinsurance Net €m €m €m

As at 1 January 21,118 (144) 20,974 Premiums 3,358 (1) 3,357 Claims (2,869) 88 (2,781) Fees deducted (174) - (174) Exchange movements 15 - 15 Change in investment contract liabilities 2,666 (34) 2,632 Non-controlling interest - Change in investment contract liabilities (148) - (148) - Investment by non-controlling interest in unit trust 66 - 66 As at 31 December 24,032 (91) 23,941

The change in liabilities during 2008 is analysed as follows: 2008 Gross Reinsurance Net €m €m €m

As at 1 January 27,574 (280) 27,294 Premiums 4,313 (1) 4,312 Claims (2,813) 71 (2,742) Fees deducted (206) - (206) Exchange movements (63) - (63) Change in investment contract liabilities (7,695) 66 (7,629) Non-controlling interest - Change in investment contract liabilities (27) - (27) - Investment by non-controlling interest in unit trust 35 - 35 As at 31 December 21,118 (144) 20,974

133 Notes to the Group Financial Statements

year ended 31 December 2009

24. Life insurance contracts including life insurance contracts with discretionary participation features (DPF)

(a) Analysis of insurance contract liabilities

31 December 2009 31 December 2008 Gross Reinsurance Net Gross Reinsurance Net €m €m €m €m €m €m

Unit-linked liabilities 591 - 591 562 (1) 561 Non-linked liabilities - without discretionary participation features 3,391 (1,829) 1,562 3,370 (1,931) 1,439 - with discretionary participation features 52 - 52 75 - 75 4,034 (1,829) 2,205 4,007 (1,932) 2,075

The change in liabilities during 2009 is analysed as follows: 2009 Gross Reinsurance Net €m €m €m

As at 1 January 4,007 (1,932) 2,075 Premiums 709 (116) 593 Claims (489) 160 (329) Expected return on insurance contract liabilities 100 (59) 41 Return debited to policyholders 96 - 96 Fees deducted (317) 67 (250) Change in economic assumptions (33) 15 (18) Change in operating assumptions (35) 36 1 Exchange differences 6 - 6 Other (10) - (10) As at 31 December 4,034 (1,829) 2,205

The change in liabilities during 2008 is analysed as follows: 2008 Gross Reinsurance Net €m €m €m

As at 1 January 4,010 (1,701) 2,309 Premiums 669 (228) 441 Claims (466) 152 (314) Expected return on insurance contract liabilities 127 (73) 54 Return credited to policyholders (243) - (243) Fees deducted (230) (7) (237) Change in economic assumptions 392 (289) 103 Change in operating assumptions (224) 214 (10) Exchange differences (30) - (30) Other 2 - 2 As at 31 December 4,007 (1,932) 2,075

(b) Assumptions

The liabilities for insurance contracts are calculated in accordance with insurance regulations in force in Ireland.

Liabilities for unit-linked insurance contracts include amounts reflecting the value of the underlying funds in which the policy is invested.

134 Notes to the Group Financial Statements year ended 31 December 2009

24. Life insurance contracts including life insurance contracts with discretionary participation features (DPF) (continued)

Liabilities are calculated using either the net or the gross premium method. In calculating the appropriate liability for non-linked insurance liabilities including the closed book of business with discretionary participation features, it is necessary to make assumptions on a range of items. The assumptions which have the most significant impact on the Overview measurement of liabilities are: - Interest rates - Mortality and morbidity - Expenses.

The interest rates gross of tax used are as follows:

2009 2008 Regular premium business - No DPF 2.70% to 3.98% 3.56% to 3.98% - With DPF 2.11% to 2.53% 2.33% to 2.79%

Single premium business 1.12% to 5.47% 2.70% Financial Statements to 3.66% Corporate Governance Business Review

Mortality and morbidity assumptions are based on the standard industry published tables amended where appropriate to reflect the group’s current experience and to allow for expected improvements or disimprovements in mortality. The tables used for 2009 and 2008 are as follows:

2009 2008 Lives assured - Non-linked 55%-90% AM / AF00 select 70%-75% AM / AF92 ultimate - Linked 100% AM / AF00 ultimate 90% AM / AF92 ultimate

Annuities - Males 104% PNMA00 100% PMA 92 (c=2003) - Females 104% PNFA00 100% PFA 92 (c=2003)

- Future mortality rates to improve on medium cohorts basis with minimum improvement of 1.50% p.a. 1.50% p.a.

Disability rates - Inception: Males 105%-320% CMIR (12) 105%-320% CMIR (12) - Inception: Females 210%-640% CMIR (12) 210%-640% CMIR (12) - Termination 25%-160% CIDA rates 25%-160% CIDA rates

Serious illness rates - Smokers 163% of IC94 with 3% p.a. 163% of IC94 with 3% p.a. future deterioration future deterioration - Non-smokers 100% of IC94 with 3% p.a. 100% of IC94 with 3% p.a. future deterioration future deterioration

Expense assumptions are based on the current year expenses and size of book. Expense inflation assumption is 3.0% (2008: 3.0%).

(c) Changes in assumptions

The principal changes in assumptions since 31 December 2008 were:

- Interest rates used were changed to reflect the actual market interest rates at 31 December 2009. This reduced liabilities by €24m after allowing for reinsurance, however, this is largely offset by movement in matching assets reflecting the group’s policy of matching assets and liabilities where possible.

135 Notes to the Group Financial Statements

year ended 31 December 2009

24. Life insurance contracts including life insurance contracts with discretionary participation features (DPF) (continued)

- The benefit inflation assumption was increased to reflect a rise in inflation which increased liabilities by €6m after allowing for reinsurance.

- Morbidity rates were changed to reflect the latest experience which increased liabilities by €9m after allowing for reinsurance.

- Annuitant mortality rates were changed which increased liabilities by €1m after allowing for reinsurance. Life assurance mortality rates were changed which reduced liabilities by €4m after allowing for reinsurance.

- Expense assumptions were changed to reflect current unit costs which reduced liabilities by €5m after allowing for reinsurance.

(d) Sensitivities

The following indicates the sensitivities of insurance liabilities to changes in the assumptions:

- 1% decrease in interest rates would increase liabilities by €178m after allowing for reinsurance;

- 1% increase in interest rates would decrease liabilities by €142m after allowing for reinsurance;

- 10% decrease in maintenance expenses would decrease liabilities by €12m after allowing for reinsurance; and

- 5% decrease in both mortality and morbidity rates would decrease liabilities by €16m after allowing for reinsurance.

The above are based on a change in one assumption while holding all other assumptions constant. In practice this is unlikely to occur and changes in assumptions may be correlated while the effect of changes in interest rates would be linked to equivalent changes in the value of corresponding assets.

25. Financial options and guarantees

The main options and guarantees for which financial options and guarantees (“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 cost of these FOGs are calculated using stochastic models. There are two elements to the cost:

- The time value, which 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; and

- The intrinsic value, which is the value based on market conditions at the date of the valuation.

136 Notes to the Group Financial Statements year ended 31 December 2009

25. Financial options and guarantees (continued)

Where a FOG relates to a contract classed as an investment contract, the investment contract liability includes both the time value and the intrinsic value.

In accordance with EEV principles where FOGs are part of an insurance contract, allowance is made for the Overview intrinsic value of FOGs in the insurance contract liabilities and an explicit deduction is made to the shareholder value of in-force asset for the time value. The time value of FOGs is calculated using stochastic models.

The supplementary EV information in Note 12 EV assumptions sets out the detailed assumptions used to calculate the cost.

26. Other liabilities and provisions

(a) Other liabilities

Group 2009 2008 €m €m uiesRve CroaeGvrac Financial Statements Corporate Governance Business Review Amounts falling due within one year PAYE and social insurance 18 7 Other taxation 4 8 Investment trading balances 4 4 Other payables 227 221 Premiums on deposit 46 12 Bank overdraft 7 13 306 265

Amounts falling due after one year Other payables* - 3 306 268

*Other payables falling due after one year include the outstanding consideration due on the purchase of a brokerage subsidiary.

Company 2009 2008 €m €m

Amounts falling due within one year PAYE and social insurance 7 4 Other payables 20 23 Amounts due to subsidiary undertaking 48 51 75 78

(b) Provisions

Group 2009 Staff restructuring Onerous cost contracts Other Total €m €m €m €m

As at 1 January* 10 - 43 53 Provisions made during the year 22 33 15 70 Provisions used during the year (25) - (35) (60) As at 31 December 7 33 23 63

137 Notes to the Group Financial Statements

year ended 31 December 2009

26. Other liabilities and provisions (continued)

Company 2009 Staff restructuring Onerous cost contracts Other Total €m €m €m €m

As at 1 January* 2 - 43 45 Provisions made during the year 4 - 15 19 Provisions used during the year (6) - (35) (41) As at 31 December - - 23 23

*Provisions were previously included with other liabilities in the statement of financial position. Other liabilities for 2008 have been reclassified to show provisions separately.

Staff restructuring costs Staff restructuring costs include provisions for employees on career breaks, voluntary severance schemes and voluntary early retirement.

Onerous contracts Irish Life Assurance plc has an onerous contract in respect of an investment property where the market value has reduced.

Subsequently, a provision has been recognised resulting in a negative investment return of €33m (Note 43 Investment return).

Other The other provision is in relation to outstanding settlements on certain closed derivative contracts.

27. Deferred front end fees

2009 2008 €m €m

As at 1 January 117 134 Arising in the year 17 19 Credit to income arising in the year (32) (36) As at 31 December 102 117

138 Notes to the Group Financial Statements year ended 31 December 2009

28. Deferred taxation

Group Deferred tax assets and liabilities are attributable to the following:

2009 Overview As at Recognised Recognised As at 1 Jan in income in equity Acquired 31 Dec €m €m €m €m €m

Property and equipment 12 8 (8) - 12 Deferred acquisition costs (10) - - - (10) Deferred front end fees (1) - - - (1) Shareholder value of in-force business 99 21 - - 120 Investment contract liabilities 1 (3) - - (2) Undistributed life business surpluses 43 5 - - 48 Unrealised gains on assets (3) (1) 7 - 3 Retirement benefits (9) - - - (9)

IFRS / FRS transition spreading - (1) - Financial Statements - (1) Corporate Governance Business Review Losses carried forward - (38) - - (38) Other temporary differences (2) 9 - - 7 130 - (1) - 129

2008 As at Recognised Recognised As at 1 Jan in income in equity Acquired 31 Dec €m €m €m €m €m

Property and equipment 48 (4) (32) - 12 Deferred acquisition costs (8) (2) - - (10) Deferred front end fees (1) - - - (1) Shareholder value of in-force business 93 6 - - 99 Investment contract liabilities 1 - - - 1 Undistributed life business surpluses 46 (3) - - 43 Unrealised gains on assets (1) 2 (4) - (3) Retirement benefits (10) 1 - - (9) IFRS / FRS transition spreading 1 (1) - - - Losses carried forward (3) 4 - (1) - Other temporary differences 1 (3) - - (2) 167 - (36) (1) 130

Company Deferred tax assets and liabilities are attributable to the following:

2009 As at Recognised Recognised As at 1 Jan in income in equity 31 Dec €m €m €m €m

Property and equipment 8 2 (2) 8 Unrealised gains on assets (6) - 7 1 Retirement benefits (17) 1 - (16) IFRS / FRS transition spreading 2 (3) - (1) Other temporary differences (2) 7 - 5 Losses carried forward - (28) - (28) (15) (21) 5 (31)

139 Notes to the Group Financial Statements

year ended 31 December 2009

28. Deferred taxation (continued)

2008 As at Recognised Recognised As at 1 Jan in income in equity 31 Dec €m €m €m €m

Property and equipment 41 (15) (18) 8 Unrealised gains on assets (6) 4 (4) (6) Retirement benefits (18) 1 - (17) IFRS / FRS transition spreading 5 (3) - 2 Other temporary differences (1) (1) - (2) 21 (14) (22) (15)

29. Subordinated liabilities

Group Company 2009 2008 2009 2008 €m €m €m €m

Dated Issued by Irish Life & Permanent plc

€18m floating-rate notes 2011* 18 18 18 18 €250m 6.25% fixed rate notes 2011 258 254 258 254 €10m floating-rate step-up callable notes 2015 10 10 10 10 €50m floating-rate step-up callable notes 2015 50 50 50 50 €200m floating-rate step-up callable notes 2015 200 200 200 200 €50m floating-rate step-up callable notes 2016 50 50 50 50 €75m floating-rate step-up callable notes 2017 75 76 75 76 €300m 4.625% fixed step-up callable notes 2017 308 308 308 308 €45m floating-rate step-up callable notes 2018 45 45 45 45 €25m step-up callable notes 2018 25 25 25 25 €20m floating-rate step-up callable notes 2018 20 20 20 20 €5m constant maturity swap notes 2018* 5 5 5 5 €5m constant maturity swap notes 2018* 5 5 5 5 €55m 8.76% non-callable lower tier 2 capital notes due 2018 28 25 28 25 €10m floating-rate notes 2023* 10 10 10 10 €10m 4.31% fixed-rate callable notes 2035 10 10 10 10 1,117 1 ,111 1,117 1,111

Undated Issued by Irish Life & Permanent plc

JPY 7bln 3.98% undated step-up notes 56 69 56 69 JPY 10bln 3.75% undated step-up notes 82 99 82 99 JPY 20bln 4.655% undated step-up notes 177 213 177 213

Issued by Irish Life Assurance plc

€200m 5.25% step-up perpetual capital notes 212 207 - - 527 588 315 381

1,644 1,699 1,432 1,492

* These loans contain embedded derivatives which have been separated out and disclosed in Note 7 Derivative instruments as they are not closely related to the host debt instrument. The 10yr notes are linked to 30yr swap rates.

Of the above total for subordinated liabilities, €1,167m (2008: €1,230m) is classified as Tier 2 capital. 140 Notes to the Group Financial Statements year ended 31 December 2009

29. Subordinated liabilities (continued)

The consent of the Financial Regulator is required before: - any repayment, for whatever reason, of a dated subordinated liability prior to its stated maturity; and - any exercise of any redemption option in any undated liability. Overview

In the event of the winding up of the entity which issued the subordinated liability the claims of the holders of the subordinated liabilities shall be subordinated to the claims of depositors, policyholders and creditors of the relevant entity other than creditors whose claims are expressed to rank pari passu with, or junior, to the claims of the holders of the subordinated liabilities.

Dates above for callable notes represent the final maturity dates, notes are callable by Irish Life & Permanent plc at dates prior to final maturity.

The terms and conditions of the subordinated liabilities are detailed below:

Irish Life & Permanent plc - €18m notes repayable on 30 August 2011. Coupon payments are calculated by reference to 20 year forward fixed swap rates versus 6-month Euribor rates, reset every six months on the coupon payment dates, and paid uiesRve CroaeGvrac Financial Statements Corporate Governance Business Review bi-annually in February and August of each year.

- €250m notes repayable on 15 February 2011. The coupon interest rate is fixed at 6.25% and is payable annually in arrears in February.

- €10m step-up callable notes due on 10 August 2015 and callable after 5 years on 10 August 2010, and quarterly on the coupon date thereafter. The coupon interest rate is 3-month Euribor + 0.28% until August 2010 after which the interest rate becomes 3-month Euribor + 0.78% until maturity in August 2015. The notes are redeemable at the option of the issuer subject to the prior consent of the Financial Regulator.

- €50m step-up callable notes due on 10 August 2015 and callable after 5 years on 10 August 2010, and quarterly on the coupon date thereafter. The coupon interest rate is 3-month Euribor + 0.30% until August 2010 after which the interest rate becomes 3-month Euribor + 0.80% until maturity in August 2015 and payable quarterly in arrears. The notes are redeemable at the option of the issuer subject to the prior consent of the Financial Regulator.

- €200m step-up callable notes due on 7 December 2015 and callable after 5 years on 7 December 2010, and quarterly on the coupon date thereafter. The coupon interest rate is 3-month Euribor + 0.25% until December 2010 after which the interest rate becomes 3-month Euribor + 0.75% until maturity in December 2015 and payable quarterly in arrears. The notes are redeemable at the option of the issuer subject to the prior consent of the Financial Regulator.

- €50m step-up callable notes repayable on 7 November 2016 and callable after 5 years on 7 November 2011, and quarterly on the coupon date thereafter. The coupon interest rate is 3-month Euribor + 0.30% until November 2011 after which the interest rate becomes 3-month Euribor + 0.80% until maturity in November 2016 and payable quarterly in arrears. The notes are redeemable at the option of the issuer subject to the prior consent of the Financial Regulator.

- €75m step-up callable notes repayable on 24 April 2017 and callable after 5 years on 24 April 2012, and quarterly on the coupon date thereafter. The coupon interest rate is 3-month Euribor + 0.275% until April 2012 after which the interest rate becomes 3-month Euribor + 0.775% until maturity in April 2017, and payable quarterly in arrears. The notes are redeemable at the option of the issuer subject to the prior consent of the Financial Regulator.

- €300m step-up callable notes repayable on 9 May 2017 and callable after 5 years on 9 May 2012, and annually on the coupon date thereafter. The coupon interest rate is 4.625% paid annually until May 2012 after which the coupon interest rate steps up by 0.50% and is re-set to a floating rate set at 3-month Euribor + 0.80% and payable annually in arrears. The notes are redeemable at the option of the issuer subject to the prior consent of the Financial Regulator.

- €45m step-up callable notes repayable on 25 June 2018 and callable after 5 years on 25 June 2013, and quarterly on the coupon date thereafter. The coupon interest rate is 3-month Euribor + 4.00% paid quarterly until June 2013 after which the interest rate becomes 3-month Euribor + 4.50%, and payable quarterly in arrears. The notes are redeemable at the option of the issuer subject to the prior consent of the Financial Regulator. 141 Notes to the Group Financial Statements

year ended 31 December 2009

29. Subordinated liabilities (continued)

- €25m step-up callable notes repayable on 18 June 2018 and callable after 5 years on 18 June 2013, and on the coupon date thereafter. The coupon interest rate is fixed for the first 5 years at 8.25%, payable semi-annually up until June 2013. From then on, if not called, the coupon interest rate switches to a floating rate based on 3 month Euribor + 4.25%, payable quarterly in arrears. The notes are redeemable at the option of the issuer subject to the prior consent of the Financial Regulator.

- €20m step-up callable notes repayable on 25 June 2018 and callable after 5 years on 25 June 2013, and quarterly on the coupon date thereafter. The coupon interest rate is 3-month Euribor + 4.00% until June 2013 after which the interest rate becomes 3-month Euribor + 4.50%, payable quarterly in arrears. The notes are redeemable at the option of the issuer subject to the prior consent of the Financial Regulator.

- €5m constant maturity swap notes repayable on 20 June 2018. The coupon interest rate is 9.75% to June 2011 and thereafter is referenced to 30 year Euro swap rates, subject to a maximum rate of 8%, all payable annually.

- €5m constant maturity swap notes repayable on 25 June 2018. The coupon interest rate is referenced to 30 year Euro swap rates, subject to a minimum rate of 6.55% payable annually.

- €55m non-callable lower tier 2 capital notes repayable on 15 September 2018, issued at 43.1825% of aggregate nominal amount of €54.56m. The notes carry a rate of return of 8.76% on a zero coupon basis.

- €10m constant maturity swap notes repayable on 21 March 2023. The coupon interest rate is referenced to 20 year Euro swap rates, subject to a maximum rate of 6.50% payable annually in arrears.

- €10m notes repayable on 28 November 2035 and callable by the issuer in whole after 5 years on 28 November 2010 and every five years thereafter. The coupon interest rate is fixed at 4.31% payable annually. The notes are redeemable at the option of the issuer subject to the prior consent of the Financial Regulator.

- JPY 7bln undated step-up subordinated loans. The coupon interest rate is fixed at USD 3.98% until 18 October 2035 payable annually, thereafter the interest rate becomes 12 month JPY Libor + 1.45%, also payable annually. The issuer retains the option to redeem the loan at the step-up date in October 2035 and at every interest payment date thereafter. The notes are redeemable at the option of the issuer subject to the prior consent of the Financial Regulator.

- JPY 10bln undated step-up subordinated loans. The coupon interest rate is fixed at USD 3.75% until 25 February 2035 payable annually in arrears, thereafter the interest rate becomes 12 month JPY Libor + 1.37%, also payable annually in arrears. The issuer retains the option to redeem the loan at the step-up date in October 2035 and at every interest payment date thereafter. The notes are redeemable at the option of the issuer subject to the prior consent of the Financial Regulator.

- JPY 20bln undated step-up loans. The coupon interest rate is fixed at USD 4.655% until 23 August 2034, payable annually in arrears, thereafter the interest rate becomes 12 month JPY Libor + 1.44%, also payable annually in arrears. The issuer retains the option to redeem the loan at the step-up date in August 2034 and at every interest payment date thereafter. The notes are redeemable at the option of the issuer subject to the prior consent of the Financial Regulator.

Irish Life Assurance plc

- €200m step-up perpetual capital notes. The interest rate is fixed at 5.25% for 10 years until 8 February 2017 ("the first reset date"). On the first reset date the interest rate becomes Euribor + 2.03%. The note is callable in whole at the first reset date and each coupon payment thereafter. The notes may also be redeemed if they no longer qualify as eligible regulatory capital.

142 Notes to the Group Financial Statements year ended 31 December 2009

30. Shareholders' equity

Share capital Share capital is the funds raised as a result of a share issue and comprises the ordinary shares of the company.

Share premium Overview The share premium reserve represents the excess of amounts received for share issues over the par value of those shares for the group and the company.

Revaluation reserve The revaluation reserve comprises the unrealised gain or loss, net of tax, on the revaluation of owner occupied properties. This is a non-distributable reserve.

Available-for-sale reserve The available for sale reserve comprises unrealised gains or losses, net of tax on available-for-sale financial assets which have been recognised at fair value on the statement of financial position.

Currency translation adjustment reserve

The currency translation adjustment reserve represents the cumulative gains and losses, net of hedging Financial Statements on the Corporate Governance Business Review retranslation of the group's net investment in foreign operations, at the rate of exchange at the statement of financial position date.

Share-based payments reserve This reserve comprises the cost of share options and the long-term incentive plan, which have been charged to the income statement over the vesting period of the options.

Other capital reserves Other capital reserves include the share premium €21m of Irish Life plc at the date of the merger and the €7m capital redemption reserve arising from the repurchase and cancellation of shares. It also includes the merger reserve which is the difference between the shares issued by Irish Permanent plc and the nominal value of the issued share capital of Irish Life plc on the merger of the companies and amounts to a deficit of €2,719m. The share premium arising on the shares (€2,698m) issued in connection with the merger has been classified with the merger reserve rather than with the other share premium in existence in the company.

Own share reserve Own shares held (excluding shares held for the long-term incentive plan) are held within the group's life operations for the benefit of life assurance policyholders. In accordance with IFRS the cost of these shares, €66m (2008: €86m), is deducted from distributable reserves. The liability to policyholder is based on the fair value of the shares and the change in liability due to the mark to market of the shares is transferred from retained earnings to non-distributable reserves.

Retained earnings The group retained earnings include distributable and non-distributable earnings. These reserves represent the retained earnings of the company, subsidiaries and associate after consolidation adjustments.

In respect of the company statement of financial position, retained earnings represent the cumulative revenue reserves of that company.

143 Notes to the Group Financial Statements

year ended 31 December 2009

31. Non-controlling interest

2009 2008 €m €m Non-controlling interest in subsidiary Opening balance 1 13 Total comprehensive income - 3 Acquisition of non-controlling interest (1) (15) Closing balance - 1

32. Authorised and issued share capital

Authorised share capital as at 31 December: 2009 2008 Share Capital Share Capital Number of Shares €m €m

Ordinary Shares of 32-cent each 400,000,000 128 128 € Preference Shares 300,000,000 300 300 US$ Preference Shares 200,000,000 139 144 Stg£ Preference Shares 100,000,000 113 105

The company has only one class of issued shares and as at 31 December 2009, it had 276,782,351 (2008: 276,782,351) ordinary shares in issue in that class. Each ordinary share carries one vote except for shares held for the benefit of life assurance policyholders, which pursuant to section 9(1) of the Insurance Act 1990, do not have voting rights.

The number of ordinary 32 cent fully paid up shares is as follows:

2009 2008

As at 1 January 276,782,351 276,017,990 Issued during the year - 764,361 As at 31 December 276,782,351 276,782,351

Own shares held for the benefit of life assurance policyholders 7,108,182 8,870,331

Shares held under employee benefit trust 457,914 457,914

No shares were issued in 2009 as a result of the exercise of options under the group's share option schemes. There were no shares issued to the group profit-sharing scheme in 2009.

Shares issued during 2008 included 736,226 shares issued to the group profit sharing scheme and 28,135 shares issued as a result of the exercise of options under the group's share option schemes.

Own shares held for the benefit of life assurance policyholders are held by Irish Life Assurance plc and represent 2.6% (2008: 3.2%) of the issued share capital of the company.

There were no acquisitions of treasury shares during the period (2008: nil) in anticipation of share awards that may vest under the long-term incentive plan for senior management.

144 Notes to the Group Financial Statements year ended 31 December 2009

33. Analysis of equity and capital

A. Shareholders’ equity

The group's equity is analysed as follows: Overview

2009 2008 €m €m Banking - Ireland Net assets 595 820 595 820

Banking - UK Net assets 48 45 48 45

Life assurance Net assets 1,154 1,217

Goodwill 5 Financial Statements 5 Corporate Governance Business Review Deduction in respect of liability relating to own shares held for the benefit of life assurance policyholders (23) (14) 1,136 1,208

Fund Management Net assets 8 10 8 10

Brokerage and third party administration Net assets 48 70 Goodwill 70 66 118 136

Associated undertaking 122 139

Consolidation adjustment (note 3) (21) (11)

Equity excluding non-controlling interest 2,006 2,347

Non-controlling interest - 1 Shareholders' equity including non-controlling interest 2,006 2,348

B. Capital management

The group is regulated by the Irish Financial Services Regulatory Authority (“Financial Regulator” or “FR”) which sets and monitors regulatory capital requirements in respect of the group’s operations. While there are a number of regulated entities within the group which have individual regulatory capital requirements the two principal regulated entities are Irish Life & Permanent plc (“IL&P”), the group’s holding company at 31 December 2009 which is also the group’s banking operation (trading as permanent tsb), and Irish Life Assurance plc (“ILA”) the group’s principal life assurance operation.

The group’s policy is to manage the capital base so as to meet all regulatory requirements while maintaining investor, creditor and market confidence and ensuring that there is adequate capital to support future growth in the business. In addition, the relationship between the level and composition of regulatory capital and the shareholders’ return on capital is monitored to ensure that there is an appropriate balance between equity and debt capital within the overall regulatory capital held.

145 Notes to the Group Financial Statements

year ended 31 December 2009

33. Analysis of equity and capital (continued)

The management of capital within the group is monitored by the Board Risk and Compliance Committee, the Banking Assets and Liabilities Committee and the Life Assurance Assets and Liabilities Committee in accordance with board approved policy. In general, outside of IL&P, all regulated entities within the group operate 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.

Banking operations

From 1 January 2008 the minimum regulatory capital requirement of the group’s banking operations has been calculated in accordance with the provisions of Basel II as implemented by the European Capital Requirements Directive and the Irish Financial Regulator. The objective of Basel II 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 is required to be explicitly measured under the Basel II methodology.

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. 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 market risk. For regulatory capital purposes in respect of market risk the group utilises the standardised approach. The value at risk methodology is discussed in further detail in Note 34 Financial risk management.

The following table summarises the composition of regulatory capital and the ratios of the group for the years ended 31 December 2009 and 2008. They are calculated in accordance with Basel II regulatory capital requirements.

146 Notes to the Group Financial Statements year ended 31 December 2009

33. Analysis of equity and capital (continued)

2009 2008 €m €m Tier 1 capital Share capital and share premium 2,922 2,922 Overview Reserves 951 1,164 Prudential filters 65 88 Total qualifying Tier 1 capital 3,938 4,174

Tier 2 capital Subordinated liabilities 1,167 1,230 Revaluation reserve 8 58 Other 25 23 Total qualifying Tier 2 capital 1,200 1,311

Total qualifying Tier 1 and Tier 2 capital 5,138 5,485

Deductions Financial Statements Corporate Governance Business Review Investment in life operations (3,187) (3,229) Other (93) (197) Total deductions (3,280) (3,426)

Total own funds 1,858 2,059

Required capital 1,313 1,454 Application of ICR (23%) 302 334 Total required capital 1,615 1,788

Excess of total own funds over total required capital 243 271

Non-audited information Total risk-weighted assets before ICR* 16,411 18,173 Total risk-weighted assets after ICR 20,185 22,353

Risk asset ratio (all Core Tier 1) Before the application of the ICR 11.3% 11.3% After the application of the ICR 9.2% 9.2% * Interim capital requirement ("ICR"): The Pillar II capital requirement under Basel II has yet to be determined. In the meantime an interim capital requirement is applied equal to 23% of Pillar I risk-weighted assets.

The above ratio is calculated and reported to the Financial Regulator on a quarterly basis.

The percentage of capital is in excess of the regulatory minimum of 8% plus ICR.

The movement in the bank’s regulatory capital is summarised below:

2009 2008 €m €m

As at 1 January 2,059 2,029 Bank earnings after tax and corporate costs (262) 23 Dividends received 42 109 Interim dividends - (62) Other 19 (40) As at 31 December 1,858 2,059

147 Notes to the Group Financial Statements

year ended 31 December 2009

33. Analysis of equity and capital (continued)

Life operations

The regulatory capital requirements of the life assurance business are determined according to the European Communities (Life Assurance) Framework Regulations 1994 modified by the EU directive 2002/83/EC. The regulations set down the approach to be used to value the assets and liabilities and the calculation of the required solvency margin.

2009 2008 €m €m

Total shareholders’ funds attributable to life business 1,144 1,218 Less: Shareholder value of in-force business - Gross (730) (787) Related deferred tax 121 99 Shareholders’ funds excluding VIF 535 530

Adjustments to valuation of assets and liabilities to regulatory basis (78) (65) Subordinated liabilities 208 205 Other assets available to cover solvency margin 20 24 Regulatory capital on continuing activities 685 694

Held within the long-term business fund 248 288 Held outside the long-term business fund 437 406 685 694

The solvency cover for Irish Life Assurance plc, the group’s main life assurance operation, is 1.6 (2008: 1.6) times the minimum requirement of €416m at 31 December 2009 (2008: €410m). The level of required capital should 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 at 150% of the minimum requirement. The directors consider this to be a conservative level of capital to manage the business having regard for the basis of calculating liabilities and the insurance and operational risks inherent in the underlying products. At 31 December each of the group’s entities has sufficient capital on a stand-alone basis and therefore no capital injections were expected to be needed in the future. Transfers of capital out of the life companies are subject to the companies continuing to meet the regulatory capital requirements.

Shareholder capital is invested in cash, short-term debt securities and property.

The group has provided for the cost of financial options and guarantees on a market-consistent basis, details of which, together with the process of setting other assumptions, are included in Note 25 Financial options and guarantees.

Capital is affected by a range of factors including interest rates, mortality and morbidity. The group’s capital management and risk management policies are discussed in Note 34 Financial risk management.

In November 2008 a stop loss reinsurance treaty in relation to new business was signed with Swiss Re. The effect on regulatory assets for 12 months to December 2009 was €22m (December 2008: €125m) and is shown in the analysis below as a reduction in new business strain of €44m (December 2008: €59m), expected return of negative €34m (December 2008: €nil) and an experience variance of €12m (December 2008: €66m). The accounting treatment in the IFRS accounts of this stop loss reinsurance treaty is not to show either the contingent asset or contingent liability on the statement of financial position as they offset each other but the reassurance fee of €2.6m (December 2008: €0.2m) for this treaty is accounted for in the IFRS consolidated income statement.

148 Notes to the Group Financial Statements year ended 31 December 2009

33. Analysis of equity and capital (continued)

This table analyses the change in regulatory capital of the life operations on continuing activities (net of tax):

2009 2008 €m €m Overview

Regulatory capital as at 1 January 694 650 Capital generated from existing business - Expected return 161 242 - Experience variances 12 85 - Operating assumption changes 9 22 New business strain (74) (88) Expected investment return 12 28 Short-term investment fluctuations - Direct shareholder property short-term investment fluctuations (56) (112) - Property commitment cost (29) - - Other short-term investment fluctuations (24) (141)

Effect of economic assumption changes 3 Financial Statements 25 Corporate Governance Business Review Other (9) (16) Change in inadmissible assets (4) 2 Dividends (13) (15) Subordinated liabilities 3 12 Regulatory capital as at 31 December 685 694

Best estimate assumptions are used to analyse the various components of the capital movements which are explained as follows:

Capital generated on existing business which has three components:

- Expected return: the capital which would arise if the existing business behaved in line with the EV assumptions;

- Experience variances: the capital arising because actual experience in the year differs from the EV assumptions on mortality, morbidity, persistency, expenses and non-linked matching; and

- Operating assumption changes: the effect on capital of changes to regulatory liability demographic and expense assumptions. These assumptions are reviewed regularly and are changed where appropriate in light of either current or expected experience.

New business strain: when a life assurance contract is written significant acquisition costs are normally incurred up-front, these costs are then recovered through future charges. This up-front payment gives rise to a reduction in capital.

Expected investment return: capital generated by the expected investment earnings on the net assets attributable to shareholders using the equity and property investment return EV assumptions applicable at the start of the financial year. The expected investment earnings allows for interest payable on subordinated debt and the fee payable in relation to the stop loss reinsurance treaty.

Short-term investment fluctuations: this is the effect on capital of the difference between the actual investment return achieved and the long-term investment return assumed for both policyholder and shareholder assets.

Effect of economic assumption changes: this is the impact on capital of changes in economic assumptions excluding changes in non-linked regulatory liability interest assumptions.

149 Notes to the Group Financial Statements

year ended 31 December 2009

34. Financial risk management

The group risk identification and assessment process identifies the following risks as being material to the operations of Irish Life & Permanent plc.

Credit Risk Liquidity Risk Market Risk Insurance Risk Operational Risk.

The group’s approach to management of these risks is set out in the following pages.

Risk management framework

The Board of Directors approves overall policy in relation to the types and levels of risk that the group is permitted to assume in the implementation of its strategic and business plans.

The Board Risk and Compliance Committee has responsibility for oversight and advice to the board on risk governance, the current risk exposures of the group and future risk strategy, including strategy for capital and liquidity management, and the embedding and maintenance throughout the group of a supportive culture in relation to the management of risk. The Board Risk and Compliance Committee supports the board in carrying out its responsibilities for ensuring that risks are properly identified, reported, assessed and controlled, and that the group's strategy is consistent with the group's risk appetite.

The Board Risk and Compliance Committee is responsible for monitoring adherence to the group risk appetite statement. Where exposures exceed levels established in the appetite statement, the Board Risk and Compliance Committee is responsible for developing appropriate responses. This is facilitated by the periodic review of a key risk indicators report calibrated to the risk appetite statement.

The Board Risk and Compliance Committee, in turn, delegates responsibility for the monitoring and management of specific risks to committees accountable to it. These committees are the Group Credit Committee, the Banking Assets and Liabilities Committee, the Life Assurance Assets and Liabilities Committee, the Group Operational Risk Committee, the Group Counterparty Credit and Market Risk Committee and the Group Compliance Committee. The terms of reference for each committee, whose members include members of group senior management, are reviewed regularly by the Board Risk and Compliance Committee.

Credit risk

Credit risk is defined as the current or prospective risk to earnings and capital arising from an obligor’s failure to meet the terms of any contract with the group or its failure to perform as agreed.

The group maintains detailed credit policies for each business unit which outlines relevant conditions under which a loan can be made. Credit policies establish coherent limit systems for credit risk. The various limit structures in place create a credit risk ‘ceiling’. Limit structures are in place to manage credit default risk, concentration risk, settlement risk and counterparty risk, as described below.

For Irish Life & Permanent plc this risk can be further sub-categorised into:

Credit Default Risk Concentration Risk Securitisation Risk Settlement Risk Reinsurance Counterparty Risk.

150 Notes to the Group Financial Statements year ended 31 December 2009

34. Financial risk management (continued)

Credit Default Risk - The potential for loss occasioned by the counterparty’s insolvency or lack of willingness to pay.

A robust management process is in place to ensure that credit risk taken on is in line with group risk appetite and Overview that effective credit risk measurement takes place across the group. A core part of the tools used in the management of credit risk is the calculation of obligor level probability of default (“PD”) and portfolio level loss given default (“LGD”) under the Basel II Internal Ratings Based (“IRB”) approach. The PD is a measure of the likelihood of a specific obligor defaulting within the next twelve months. Where an obligor is: a) More than 90 days in arrears; and / or b) Expected to default on obligations due to known financial difficulties or other rationale, the allocated PD for the obligor is 1, indicating a 100% probability of default.

Both PD and LGD are calculated using internally developed models and give a statistical view of the risk profile of the lending portfolios and individual accounts. The Group Credit Committee reviews the lending portfolio statistical profiles on a regular basis. Financial Statements Corporate Governance Business Review

Calculation tools generate the measures of credit risk through statistically based scoring mechanisms. Scorecard systems at account application and at subsequent points in the life of the account (using a combination of application and behavioural scorecards) are used to assess the risk inherent in new credit applications and for existing customers. The statistical scorecards differ across lending portfolio classification and product type. Scorecards incorporate expert lender judgement where relevant. Individual accounts and applications are allocated a credit risk score from a graded scale, which distributes the loans according to their propensity to default. Underwriting authorities in place cascade down from the Credit Committee to individual business units and credit officers.

For wholesale credit applications (and ongoing assessment), the PD for a counterparty is determined using the group’s IRB model. As a basis for the IRB credit rating for counterparty, the group uses the lowest credit rating for the counterparty from three separate rating agencies. This credit rating is mapped to a statistical PD before the application of the group’s “notching” process. The “notching” process increases the counterparty IRB credit rating (and hence PD) according to pre-defined “notching” parameters. “Notching” parameters revise the IRB credit rating for a counterparty upwards dependent on factors such as geographical location, presence of the counterparty on rating agency “watchlists” and economic market stability, amongst others.

Credit default risk also arises on non-traded / over-the-counter derivative exposures since the group is exposed to the risk of the counterparty defaulting prior to the maturity of “in-the-money” products, thereby necessitating replacement of the contract at applicable market rates. To manage this risk, counterparty limits are maintained in the group’s investment accounting system, and specialist Risk Management and Compliance teams undertake regular independent monitoring of counterparty exposure against limits. All breaches of counterparty limits are notified to the Banking Assets and Liabilities Committee (Banking ALCO).

In the case of some counterparties, to avoid a build-up of exposure on derivatives, the group uses a credit support annex ("CSA"), which is an addendum to the bi-lateral ISDA Agreement with a counterparty, and which requires daily settlement of mark to market values of outstanding derivative deals.

Credit default risk represents the most significant element of credit risk for the group. Irish Life & Permanent plc capitalise for credit default risk using the key risk parameters of probability of default (“PD”), loss given default (“LGD”) and exposure at default (“EAD”). These parameters are utilised to calculate expected loss (“EL”) and a standalone unexpected loss figure at a credit risk sub-portfolio level. The stand-alone unexpected loss can then be converted to a sub-portfolio unexpected loss contribution which generates required economic capital. Expected losses should be covered by the normal business operating margins but unexpected losses are by definition rare and of significant impact, necessitating the setting aside of a capital cushion.

Concentration Risk - The risk that any single (direct and / or indirect) exposure or group of exposures has the potential to produce losses large enough to threaten the institution’s health or its ability to maintain its core business. 151 Notes to the Group Financial Statements

year ended 31 December 2009

34. Financial risk management (continued)

The group risk appetite statement explicitly outlines limits for lending and non-lending concentration that will be tolerated by the group. The group position against these limits is monitored on a regular basis by the Group Credit Committee, the Board Risk and Compliance Committee and the Board of Directors.

The Bank’s lending strategy in Ireland is not targeted at any particular geographic locations and should, in the ordinary course, be spread throughout the country proportionately to local economic activity.

Securitisation Risk - The risk of loss associated with buying or selling asset-backed securities.

Securitisation risk occurs when issuing mortgage-backed securities as a risk transfer or funding device. Securitisation risk is minimised through the use of “standard” (as opposed to exotic) securitisation structures, the use of only high quality counterparties to perform the structuring, oversight and governance provided by appropriately qualified and experienced external and internal parties.

Monitoring of securitisation risk within the group principally occurs through three processes:

1. A review of the mortgage pool to be used in the securitisation including checking the pool is appropriately homogeneous by reference to time in arrears and loan-to-value ("LTV”) amongst other parameters. 2. A review of the internal securitisation process following the execution of a transaction allowing the process to be improved in terms of efficiency and risk reduction. 3. Monthly monitoring of the underlying mortgage pool performance following the transaction.

High quality counterparties to securitisation structuring are chosen from a panel of suitable counterparties after consideration of selection parameters such as:

– Recent securitisation activity and performance; – Presence of an ongoing successful relationship with Irish Life & Permanent plc; and – Position in relevant industry league tables.

Settlement Risk - The risk that the group delivers a sold asset or cash to a counterparty and then does not receive the purchased asset or cash as expected.

The group is involved in a limited volume of derivatives contracts trading, and thus this risk is limited in the group context. Robust management controls including established counterparty limits, and a restriction in trading to counterparties with an A+ credit rating or higher from Standard & Poor’s, also limit the potential risk.

Credit Risk Mitigation

The credit policy includes guidelines on the acceptability of specific classes of collateral or risk mitigation. The principal collateral types for loans and receivables are mortgages over residential properties, charges over business assets and guarantees. Estimates of the fair value of collateral are assessed at the time of borrowing and are generally not updated except when a loan is individually assessed as impaired.

The group has a concentration of credit risk in retail mortgages which reflects the group’s strategic decision to focus on this market.

The group makes use of collateral agreements to mitigate exposures to wholesale credit risk. Collateral is obtained on credit risk exposures in line with the group’s lending policies and procedures (and the reinsurance strategy in the case of reinsurance counterparty risk). The accepted collateral is also governed by the group’s lending policies.

Impairment Provisions

For individually assessed accounts, loans are treated as impaired as soon as there is objective evidence that an impairment loss has been incurred. The criteria used by the group to determine whether there is such objective evidence includes, but is not limited to:

152 Notes to the Group Financial Statements year ended 31 December 2009

34. Financial risk management (continued)

– Known cash flow difficulties experienced by the borrower; – Overdue contractual payments of either principal or interest; and – Breach of loan covenants or conditions. Overview Account-specific impairment provisions are established by evaluating the total exposure to loss on a case-by-case basis for all individually significant accounts and any other accounts that do not qualify for the collective assessment approach outlined below. To determine the appropriate account-specific impairment provision for all individually significant non-residential mortgages, a discounted cash flow approach using a number of factors is adopted. The factors considered include:

– The group’s aggregate exposure to the customer; – The viability of the customer’s business model in generating sufficient cash flow to service its debt obligations; – The ranking of the group’s claim in relation to the customer’s other obligations; – The realisable value of any security (or other credit risk mitigant) and the likelihood for a successful repossession; – The expected distribution available on any liquidation or bankruptcy; and – The estimated time to realise the security / collateral.

In respect of residential mortgage exposures, the account-specific impairment provision is determined Financial Statements for all Corporate Governance Business Review accounts greater than six months in arrears using a discounted cash flow approach taking account of a number of factors:

– The loan exposure; – The recent repayment history; – The estimated value of the collateral; – The cost of realising the collateral; and – The estimated time to realise the security / collateral.

Accounts over six months in arrears which do not attract a specific provision are included in the collective provisioning approach.

Impairment provisions are also established on a collective basis to cover losses which have been incurred but not yet identified on loans subject to individual assessment. These provisions also include impairment provisions calculated for large numbers of loans managed on a portfolio basis (for example, credit cards or motor vehicle financing). Whilst no account-specific indicators of impairment loss have been identified and attributed to specific customers, experience and other observable data indicate that such impairment losses are present in the portfolio as at the date of assessment.

The collective impairment provision factors into calculations the historical loss experience in portfolios of similar credit risk characteristics, current economic conditions and account behavioural trends.

Credit quality

The credit risk ratings employed by the group are designed to highlight exposures requiring management attention. The credit quality of loans is assessed by reference to the group’s rating system. The group uses the Basel II 25-point scale for the internal ratings approach (“IRB”) for credit risk. The scale ranges from 1 to 25 where 1 represents the best risk grade or lowest Probability of Default (PD) and 25 represents the defaulted exposures or PD = 100% for credit risk. The internal rating scale or masterscale is not a rating tool but is based on probability of default and is used to aggregate borrowers for comparison and reporting purposes after their rating by the underlying rating tool(s) (models). The internal gradings below incorporate the IRB rating:

– investment grade (IRB ratings 1 to 7) – includes loans and receivables to banks; – excellent risk profile (IRB ratings 8 to 16) – includes exposures whose general profiles are considered to be of a very low risk nature; – satisfactory risk profile (IRB ratings 17 to 21) – includes exposures whose general profiles are considered to be of a low to moderate risk nature; – fair risk profile (IRB ratings 22 to 24) – includes exposures whose general profiles are considered to require some additional monitoring; and – defaulted (IRB rating 25) – includes exposures that are impaired and unimpaired greater than 90 days past due.

153 Notes to the Group Financial Statements

year ended 31 December 2009

34. Financial risk management (continued)

Credit risk - Group

Maximum exposure to credit risk before collateral held or other credit enhancements:

2009 Total Unit-linked funds* Group exposure €m €m €m Assets Cash and balances with central banks (note 4) 218 (15) 203 Items in course of collection (note 4) 108 - 108 Debt securities (note 5) 15,780 (6,329) 9,451 Derivative assets (note 7) 1,169 (858) 311 Loans and receivables to customers (note 8) 38,592 - 38,592 Loans and receivables to banks (note 10) 4,925 (1,577) 3,348 Reinsurance assets 1,979 (91) 1,888 62,771 (8,870) 53,901 Contingent liabilities and commitments (note 52) 565 - 565 63,336 (8,870) 54,466

2008 Total Unit-Linked Funds* Group Exposure €m €m €m Assets Cash and balances with central banks (note 4) 200 (24) 176 Items in course of collection (note 4) 124 - 124 Debt securities (note 5) 10,929 (5,809) 5,120 Derivative assets (note 7) 1,162 (915) 247 Loans and receivables to customers (note 8) 40,075 - 40,075 Loans and receivables to banks (note 10) 4,775 (1,985) 2,790 Reinsurance assets 2,133 (144) 1,989 59,398 (8,877) 50,521 Contingent liabilities and commitments (note 52) 678 - 678 60,076 (8,877) 51,199 * excludes unit-linked tracker funds where an investment guarantee is given by the shareholder.

Debt securities

The group is exposed to credit risk on third parties where the company holds debt securities (including sovereign debt). Sovereign debt is restricted to countries with a Moody’s rating of A- or higher. The group has set counterparty limits for all debts and loans on a group-wide basis.

154 Notes to the Group Financial Statements year ended 31 December 2009

34. Financial risk management (continued)

The following table gives an indication of the level of creditworthiness of the group’s debt securities and is based on the ratings prescribed by the rating agency Moody’s Investor Services Limited.

Debt securities Overview

2009 2008 €m €m Neither past due nor impaired Aaa 3,719 2,558 Aa 4,628 690 A 881 1,567 Baa 178 305 Below Ba 45 - Total 9,451 5,120

Derivative assets uiesRve CroaeGvrac Financial Statements Corporate Governance Business Review 2009 2008 €m €m Rating Aaa - 4 Aa 43 22 A 112 40 Baa 1 - Covered by netting agreements 155 181 Total 311 247

Loans and receivables to customers

Loans and receivables are summarised as follows:

Group 2009 2008 €m €m

ROI residential mortgages 27,256 27,931 UK residential mortgages 7,484 7,171 Commercial 1,939 1,978 Consumer finance Finance leases 1,213 1,739 Term loans / other 536 642 Money market funds 211 352 38,639 39,813 Provision for loan impairment (477) (139) Deferred fees, discounts and fair value adjustments 430 401 38,592 40,075

155 Notes to the Group Financial Statements

year ended 31 December 2009

34. Financial risk management (continued)

2009 ROI UK Money Residential Residential Consumer market Total mortgages mortgages Commercial finance funds €m €m €m €m €m €m

Neither past due nor impaired 34,603 24,306 7,158 1,495 1,433 211 Past due but not impaired 3,208 2,535 251 273 149 - Impaired 828 415 75 171 167 - Total 38,639 27,256 7,484 1,939 1,749 211

2008 ROI UK Money Residential Residential Consumer market Total mortgages mortgages Commercial finance funds €m €m €m €m €m €m

Neither past due nor impaired 37,268 26,269 6,786 1,682 2,179 352 Past due but not impaired 2,343 1,611 311 280 141 - Impaired 202 51 74 16 61 - Total 39,813 27,931 7,171 1,978 2,381 352

Collateral of €739m (2008: €159m) is held against loans and receivables classified as impaired. At 31 December 2009, the group had repossessed collateral of €46m on balances of €57m (2008: €43m collateral on balances of €54m). Repossessed assets are sold as soon as practicable, with proceeds offset against any outstanding indebtednesses. At 31 December 2009, repossessed assets are included within other assets in the statement of financial position.

The carrying amount of loans and receivables that would otherwise have been past due or impaired whose terms have been renegotiated is €1,701m (2008: €596m).

Loans and receivables to customers neither past due nor impaired balance - Group

2009 ROI UK Money Residential Residential Consumer market Total mortgages mortgages Commercial finance funds €m €m €m €m €m €m

Excellent risk profile 23,841 18,874 3,788 229 739 211 Satisfactory risk profile 7,885 3,652 2,617 1,072 544 - Fair risk profile 2,877 1,780 753 194 150 - Total 34,603 24,306 7,158 1,495 1,433 211

2008 ROI UK Money Residential Residential Consumer market Total mortgages mortgages Commercial finance funds €m €m €m €m €m €m

Excellent risk profile 27,458 20,856 4,514 635 1,101 352 Satisfactory risk profile 7,567 3,885 2,013 814 855 - Fair risk profile 2,243 1,528 259 233 223 - Total 37,268 26,269 6,786 1,682 2,179 352

156 Notes to the Group Financial Statements year ended 31 December 2009

34. Financial risk management (continued)

Loans and receivables to customers past due but not impaired balances - Group

2009 ROI UK Money Overview Residential Residential Consumer market Total mortgages mortgages Commercial finance funds €m €m €m €m €m €m

Past due up to 30 days 1,082 935 1 80 66 - Past due 30 - 60 days 483 402 25 30 26 - Past due 60 - 90 days 358 271 42 27 18 - Past due more than 90 days 1,285 927 183 136 39 - Total 3,208 2,535 251 273 149 -

2008 ROI UK Money

Residential Residential Consumer Financial Statements market Corporate Governance Business Review Total mortgages mortgages Commercial finance funds €m €m €m €m €m €m

Past due up to 30 days 771 618 6 71 76 - Past due 30 - 60 days 415 286 57 50 22 - Past due 60 - 90 days 263 153 67 28 15 - Past due more than 90 days 894 554 181 131 28 - Total 2,343 1,611 311 280 141 -

These are loans and receivables where contractual interest or principal payments are past due but the group believes that impairment is not appropriate on the basis of the level of security / collateral available and / or the stage of collections of amounts owed to the group.

Loans and receivables to banks

Loans and receivables to banks are with investment-grade counterparties. The following table gives an indication of the level of creditworthiness of the group’s loans and receivables to banks and is based on the ratings prescribed by the rating agency Moody’s Investor Services Limited.

2009 2008 €m €m

Rating Aaa 107 180 Aa 1,921 2,088 A 1,301 263 Baa 19 259 Total 3,348 2,790

157 Notes to the Group Financial Statements

year ended 31 December 2009

34. Financial risk management (continued)

Reinsurance assets

The group’s life operations cede insurance and investment risk to a number of reinsurance companies. There are three main categories of reinsurance assets as set out below:

2009 2008 €m €m

Assets held in a charged account 1,342 1,277 Assets where credit risk is borne by the policyholder 91 144 Other assets where credit risk is borne by the shareholder 546 712 Total 1,979 2,133

The assets held in a charged account are in respect of reinsurance treaties for annuity business, where all withdrawals from the charged account have to be authorised by Irish Life Assurance plc. Assets are managed in accordance with a mandate which matches the assets and liabilities.

Assets where credit risk is borne by the policyholders relate to unit-linked investment contracts where the policy documents specify that the return to the policyholder is based on the return from the reinsurance companies.

Reinsurance counterparty risk is managed through the group's reinsurance strategy. The reinsurance strategy is established by the Life Assurance Assets and Liabilities Committee and approved by the Irish Life Assurance plc board.

The group regularly reviews the financial security of its reinsurance companies. Where the reinsurance arrangement involves asset accumulation on the part of the reinsurance company, these companies have a Moody’s rating of at least A. Other limits are set with reference to premium income, assets and shareholder capital of the reinsurance company.

The reinsurance assets where the credit risk is borne by the shareholder are broken down by credit rating of the counterparty as follows:

2009 2008 €m €m Rating Aaa - 9 Aa 153 440 A 393 263 Total 546 712

Credit risk - Company

Maximum exposure to credit risk before collateral held or other credit enhancements:

2009 Company Exposure €m Assets Cash and balances with central banks (note 4) 100 Items in course of collection (note 4) 108 Debt securities (note 5) 12,438 Derivative assets (note 7) 327 Loans and receivables to customers (note 8) 38,165 Loans and receivables to banks (note 10) 2,600 53,738 Contingent liabilities and commitments (note 52) 598 54,336

158 Notes to the Group Financial Statements year ended 31 December 2009

34. Financial risk management (continued)

Maximum exposure to credit risk before collateral held or other credit enhancements:

2008

Company Exposure Overview €m Assets Cash and balances with central banks (note 4) 122 Items in course of collection (note 4) 124 Debt securities (note 5) 9,359 Derivative assets (note 7) 253 Loans and receivables to customers (note 8) 39,545 Loans and receivables to banks (note 10) 1,988 51,391 Contingent liabilities and commitments (note 52) 682 52,073

Debt securities Financial Statements Corporate Governance Business Review

The company is exposed to credit risk on third parties where the company holds debt securities (including sovereign debt). Sovereign debt is restricted to countries with a Moody’s rating of A- or higher. The group has set counterparty limits for all debts and loans on a group-wide basis.

The following table gives an indication of the level of creditworthiness of the company’s debt securities and is based on the ratings prescribed by the rating agency Moody’s Investor Services Limited.

Debt securities Company 2009 2008 €m €m Neither past due nor impaired Aaa 2,395 1,225 Aa 4,073 238 A 722 1,393 Baa 172 305 Below Ba 45 - Issued by subsidiaries 5,031 6,198 Total 12,438 9,359

Derivative assets Company 2009 2008 €m €m Rating Aaa 58 - Aa 4 1 A 109 71 Baa 1 - Covered by netting agreements 155 181 Total 327 253

159 Notes to the Group Financial Statements

year ended 31 December 2009

34. Financial risk management (continued)

Loans and receivables to customers

Loans and receivables are summarised as follows: Company 2009 2008 €m €m

ROI residential mortgages 26,788 27,518 Commercial 1,939 1,977 Consumer finance Term loans / other 537 642 Subsidiaries 8,618 8,744 Money market funds 211 352 38,093 39,233 Provision for loan impairment (358) (89) Deferred fees and commission 430 401 38,165 39,545

2009 ROI Money Residential Consumer market Total mortgages Commercial finance Subsidiaries funds €m €m €m €m €m €m

Neither past due nor impaired 34,690 23,946 1,495 420 8,618 211 Past due but not impaired 2,789 2,458 273 58 - - Impaired 614 384 171 59 - - Total 38,093 26,788 1,939 537 8,618 211

2008 ROI Money Residential Consumer market Total mortgages Commercial finance Subsidiaries funds €m €m €m €m €m €m

Neither past due nor impaired 37,214 25,897 1,681 540 8,744 352 Past due but not impaired 1,928 1,580 280 68 - - Impaired 91 41 16 34 - - Total 39,233 27,518 1,977 642 8,744 352

Collateral of €591m (2008: €43m) is held against loans and receivables classified as impaired. At 31 December 2009 the group had repossessed collateral of €22m on balances of €30m (2008: €19m collateral on balances of €19m). Repossessed assets are sold as soon as practicable, with proceeds offset against any outstanding indebtednesses. At 31 December 2009, repossessed assets are included within other assets in the statement of financial position.

The carrying amount of loans and receivables that would otherwise have been past due or impaired whose terms have been renegotiated is €1,365m (2008: €435m).

160 Notes to the Group Financial Statements year ended 31 December 2009

34. Financial risk management (continued)

Loans and receivables to customers neither past due nor impaired balances - Company

2009

ROI Money Overview Residential Consumer market Total mortgages Commercial finance Subsidiaries funds €m €m €m €m €m €m

Excellent risk profile 27,723 18,880 229 232 8,171 211 Satisfactory risk profile 4,931 3,286 1,072 126 447 - Fair risk profile 2,036 1,780 194 62 - - Total 34,690 23,946 1,495 420 8,618 211

2008 ROI Money

Residential Consumer Financial Statements market Corporate Governance Business Review Total mortgages Commercial finance Subsidiaries funds €m €m €m €m €m €m

Excellent risk profile 30,391 20,869 634 217 8,319 352 Satisfactory risk profile 5,002 3,500 814 263 425 - Fair risk profile 1,821 1,528 233 60 - - Total 37,214 25,897 1,681 540 8,744 352

Loans and receivables to customers past due but not impaired balances - Company

2009 ROI Money Residential Consumer market Total mortgages Commercial finance funds €m €m €m €m €m

Past due up to 30 days 1,044 934 80 30 - Past due 30 - 60 days 438 401 30 7 - Past due 60 - 90 days 285 252 27 6 - Past due more than 90 days 1,022 871 136 15 - Total 2,789 2,458 273 58 -

2008 ROI Money Residential Consumer market Total mortgages Commercial finance funds €m €m €m €m €m

Past due up to 30 days 729 619 71 39 - Past due 30 - 60 days 335 277 50 8 - Past due 60 - 90 days 184 149 28 7 - Past due more than 90 days 680 535 131 14 - Total 1,928 1,580 280 68 -

These are loans and receivables where contractual interest or principal payments are past due but the group believes that impairment is not appropriate on the basis of the level of security / collateral available and / or the stage of collections of amounts owed to the group.

161 Notes to the Group Financial Statements

year ended 31 December 2009

34. Financial risk management (continued)

Loans and receivables to banks

Loans and receivables to banks are with investment-grade counterparties. The following table gives an indication of the level of creditworthiness of the company's loans and receivables to banks and is based on the ratings prescribed by the rating agency Moody’s Investor Services Limited:

Company 2009 2008 €m €m

Rating Aaa 107 180 Aa 1,916 1,440 A 558 109 Baa 19 259 Total 2,600 1,988

Liquidity risk

Liquidity risk is the risk that the group may be unable to meet payment of obligations in a timely manner at a reasonable cost or the risk of unexpected increases in the cost of funding the portfolio at appropriate maturities or rates.

The Credit Institutions (Financial Support) Scheme 2008 (the “Scheme”) and the Credit Institutions (Eligible Liabilities Guarantee) Scheme (the “ELG Scheme”) have been critical in providing Irish financial institutions to access funding. During the course of 2009, the group successfully secured term funding of €3bln from international investors under the Scheme for differing durations which expires on 29 September 2010. The ELG Scheme, which Irish Life & Permanent plc ("the company") and its subsidiary Irish Permanent (IOM) Limited joined on 4 January 2010, facilitates debt issuance for terms up to five years. These schemes, coupled with improving investor sentiment towards Ireland, enable the group to secure longer term funding, as evidenced by the issuance under the ELG Scheme of a 3-year US $1.75bln bond in January 2010 and a 5-year €2bln bond in March 2010. Further issuance under the ELG Scheme will take place over the course of 2010, which will increase the proportion of long- term funding.

Without the government guarantee, the cost and availability of funding is influenced by the credit rating allocated to the group by industry rating agencies. A downgrade of the group’s credit rating may increase financing costs and restrict market access whilst an upgrade may achieve the reverse. The senior debt credit ratings of Irish Life & Permanent plc at 31 December 2009 were: Moody's Investor Services Limited A2, Standard and Poor's BBB+.

Liquidity management for banking operations within the group is carried out by the group’s treasury function. In carrying out this responsibility, treasury’s principal objective is to ensure that the banking operations have sufficient funding available, at an optimal cost, to meet the operational needs of the bank and to adhere to regulatory and prudential requirements. The liquidity management process includes:

- Day-to-day funding, managed by monitoring future cash flows to ensure that requirements can be met. This includes replacing funds that mature or are borrowed by customers; - Balance sheet funding, managed by monitoring the funding profile against established target funding levels, with monitoring performed by the Banking Assets and Liabilities Committee; - Maintaining a portfolio of marketable assets that can be easily liquidated as protection against any unforeseen interruption to cash flow; - Monitoring statement of financial position liquidity ratios against internal and regulatory requirements; and - Managing the concentration and profile of debt securities in issue.

Irish Life & Permanent plc liquidity policies and protocols establish quantitative rules and targets in relation to measurement and monitoring of liquidity risk. The Banking Assets and Liabilities Committee plays a fundamental role in the monitoring of liquidity risk measures through the monthly review of liquidity reports. 162 Notes to the Group Financial Statements year ended 31 December 2009

34. Financial risk management (continued)

The Banking Assets and Liabilities Committee monitors sources of funding and reviews short-term and long-term borrowings and their respective maturity profiles.

The groups funding profile at year end was: Overview

2009 2008 % %

Customer accounts 33 33 Long-term debt 27 29 Short-term debt 40 38 100 100

An analysis of the maturity profile of debt securities in issue is given in Note 22 Debt securities in issue. ECB drawings as detailed in Note 20 Deposits by banks, are included in short-term debt.

As a result of the dislocation of financial markets, the group's access to wholesale funding has been Financial Statements reduced, Corporate Governance Business Review durations shortened and credit spreads widened. However, the group has the ability to use the loan book as collateral for borrowings as detailed in Note 8 Loans and receivables to customers.

The Banking Assets and Liabilities Committee also monitors the dependencies inherent in the funding by reviewing the group’s usage of lines of credit with financial institutions.

Liquidity reports to the Banking Assets and Liabilities Committee each month include the loan-to-deposits ratio. The loan-to-deposit ratio at the end of 2009 was 246% compared to 271% at the end of 2008. The group is working to reduce this ratio in 2010 by an increased focus on retail deposits and by non-replacement of maturing loans.

The regulatory protocol, under which the group operates, requires levels of liquidity based on 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 eight days and 90% of outflows over the coming 9 - 30 days. The group monitors the liquidity ratio daily and reports weekly to the Financial Regulator. As a consequence of the industry-wide wholesale funding difficulties experienced during the first half of 2009, the Financial Regulator agreed to a temporary easing of the liquidity requirements noted above. This easing applied from April to September 2009. The standard liquidity requirements applied again since September 2009 and the group operated comfortably within these limits.

In 2009, the group discovered that it had inadvertently breached a regulatory reporting requirement, and promptly notified and co-operated with the Financial Regulator. The Financial Regulator investigated the matter and entered into a settlement agreement with the company. On reaching that agreement, the Financial Regulator acknowledged that Irish Life & Permanent had co-operated fully and had been open and transparent throughout the process and that the company had taken prompt and complete remedial action to fully rectify the breaches. The company was reprimanded for the incident and paid a penalty in the sum €600,000. The matter is now closed.

The table below presents the cash flows payable by the group by remaining contractual maturities at the statement of financial position date for non-derivative assets and liabilities. The amounts disclosed in the table are the contractual undiscounted cash flows. The group manages the inherent liquidity risk based on expected cash inflows and cash outflows accordingly the expected gap excluding derivatives is also presented below. This maturity mismatch approach takes into account the inherent stability of particular funding sources. The focus on an ongoing basis is to ensure that the bank can meet all its obligations as they fall due while continuing to provide for all other funding requirements of the bank. Regulatory limits based on this approach are imposed and except as described above, are adhered to.

The bank's forward looking approach to liquidity management also incorporates running stressed scenarios for the purposes of contingency funding.

The inclusion of information on non-derivative financial assets is necessary in order to understand the group's liquidity risk management as the liquidity is managed on a net asset and liability basis. 163 Notes to the Group Financial Statements

year ended 31 December 2009

34. Financial risk management (continued)

2009 Group banking operations Up to 1-3 3-6 6-12 1-2 Over 2 1 month months months months years years Total €m €m €m €m €m €m €m Assets Debt securities 5,886 13 21 51 99 4,577 10,647 Loans and receivables to banks 2,134 - - 8 - - 2,142 Loans and receivables to customers 2,188 6,544 1,989 8,494 1,379 17,324 37,918 Total assets 10,208 6,557 2,010 8,553 1,478 21,901 50,707

Liabilities Deposits by banks 2,878 6,587 1,888 8,658 40 1,482 21,533 Customer accounts 6,406 4,566 1,327 2,019 296 454 15,068 Debt securities in issue and subordinated liabilities 1,793 2,017 1,082 4,227 1,717 2,390 13,226 Total liabilities 11,077 13,170 4,297 14,904 2,053 4,326 49,827

Gap (869) (6,613) (2,287) (6,351) (575) 17,575 880

Expected gap (excluding derivatives) 3,623 (2,969) (1,296) (5,060) (381) 5,345 (738)

2008 Group banking operations Up to 1-3 3-6 6-12 1-2 Over 2 1 month months months months years years Total €m €m €m €m €m €m €m Assets Cash and balances with central banks 151 - - - - - 151 Debt securities 5,519 23 56 60 152 4,613 10,423 Loans and receivables to banks 1,914 1 - 21 8 64 2,008 Loans and receivables to customers 11,935 3,113 1,441 3,229 2,425 21,527 43,670 Total assets 19,519 3,137 1,497 3,310 2,585 26,204 56,252

Liabilities Deposits by banks 11,317 2,091 37 1,061 444 913 15,863 Customer accounts 10,644 2,286 597 918 589 21 15,055 Debt securities in issue and subordinated liabilities 1,604 1,242 697 345 2,333 3,624 9,845 Total liabilities 23,565 5,619 1,331 2,324 3,366 4,558 40,763

Gap (4,046) (2,482) 166 986 (781) 21,646 15,489

164 Notes to the Group Financial Statements year ended 31 December 2009

34. Financial risk management (continued)

The following table details the group's liquidity analysis for derivative instruments. The table has been drawn up based on the undiscounted contractual net cash inflows and outflows on derivative instruments that settle on a net basis, and the undiscounted gross inflows and outflows on those derivatives that require gross settlement. When the amount payable or receivable is not fixed, the amount disclosed has been determined by reference to the projected Overview interest rates by the yield curves at the end of the reporting period.

2009 Group banking operations Up to 1-3 3-6 6-12 1-2 Over 2 1 month months months months years years Total €m €m €m €m €m €m €m Net settled Interest rate swaps (20) (58) (75) (24) (96) (261) (534) Gross settled Currency swaps (19) (21) 1 (10) 6 141 98 (39) (79) (74) (34) (90) (120) (436) uiesRve CroaeGvrac Financial Statements Corporate Governance Business Review 2008 Group banking operations Up to 1-3 3-6 6-12 1-2 Over 2 1 month months months months years years Total €m €m €m €m €m €m €m Net settled: Interest rate swaps (10) (50) (74) (127) (179) (258) (698) Gross settled: Currency swaps 148 (56) (3) (38) (54) 21 18 138 (106) (77) (165) (233) (237) (680)

Interest rate risk is managed principally through monitoring interest rate gaps. Repricing Gap is a duration-based interest rate gap analysis which displays the bank's positions in quarterly buckets, highlighting possible interest rate exposures on the statement of financial position. The gap is produced and quantified by Treasury Risk Management and reported to senior management daily.

The gap analysis reflects the estimated discounted cash flows on a mix of interest bearing assets and liabilities and assumptions on the expected repricing dates.

On a daily basis management are provided with the following analysis:

- deals are grouped into assets and liabilities in each currency; - deals are grouped in quarterly 'buckets' according to their duration; - weighted average rates for the various 'buckets' of assets and liabilities are calculated and displayed; - a break-even rate is calculated and displayed; and - five Year Equivalent Risk Figure is calculated and displayed.

165 Notes to the Group Financial Statements

year ended 31 December 2009

34. Financial risk management (continued)

Interest Rate Repricing - Euro 2009 Over three Over six Over one months but months year Not more not more but not but not Over than three than six more than more than five months months one year five years years Total €m €m €m €m €m €m Group banking operations

Assets Euro 31,198 890 3,160 3,286 1,253 39,787 Sterling 6,592 199 1,034 253 52 8,130 US dollar 601 - - 14 69 684 Total assets (A) 38,391 1,089 4,194 3,553 1,374 48,601

Liabilities Euro (22,924) (3,098) (13,107) (959) (1,269) (41,357) Sterling (2,340) (126) (103) (49) - (2,618) US dollar (2,642) (347) (228) (19) (7) (3,243) Total liabilities (B) (27,906) (3,571) (13,438) (1,027) (1,276) (47,218)

Derivatives Euro 1,245 116 2,699 (979) 4 3,085 Sterling (4,665) (105) (931) (193) (41) (5,935) US dollar 2,005 252 227 15 (62) 2,437 Derivatives affecting interest rate sensitivities (C) (1,415) 263 1,995 (1,157) (99) (413)

Interest rate repricing gap Euro 9,519 (2,092) (7,248) 1,348 (12) 1,515 Sterling (413) (32) - 11 11 (423) US dollar (36) (95) (1) 10 - (122) Interest rate repricing gap 9,070 (2,219) (7,249) 1,369 (1) 970 (A) + (B) + (C)

Cumulative interest rate repricing gap 9,070 6,851 (398) 971 970

166 Notes to the Group Financial Statements year ended 31 December 2009

34. Financial risk management (continued)

Interest Rate Repricing - Euro 2008 Over three Over six Over one months but months year Overview Not more not more but not but not Over than three than six more than more than five months months one year five years years Total €m €m €m €m €m €m Group banking operations

Assets Euro 28,126 1,043 1,633 4,962 451 36,215 Sterling 4,920 811 579 2,212 65 8,587 US dollar 621 - - 14 73 708 Total assets (A) 33,667 1,854 2,212 7,188 589 45,510

Liabilities Financial Statements Corporate Governance Business Review Euro (30,772) (754) (1,211) (2,510) (1,282) (36,529) Sterling (4,782) (244) (229) (53) - (5,308) US dollar (2,467) (92) (30) (65) (7) (2,661) Total liabilities (B) (38,021) (1,090) (1,470) (2,628) (1,289) (44,498)

Derivatives Euro 5,312 (581) (1,354) (2,846) 561 1,092 Sterling (559) (413) (195) (1,846) (59) (3,072) US dollar 1,751 58 29 277 (136) 1,979 Derivatives affecting interest rate sensitivities (C) 6,504 (936) (1,520) (4,415) 366 (1)

Interest rate repricing gap Euro 2,666 (292) (932) (394) (270) 778 Sterling (421) 154 155 313 6 207 US dollar (95) (34) (1) 226 (70) 26 Interest rate repricing gap 2,150 (172) (778) 145 (334) 1,011 (A) + (B) + (C)

Cumulative interest rate repricing gap 2,150 1,978 1,200 1,345 1,011

167 Notes to the Group Financial Statements

year ended 31 December 2009

34. Financial risk management (continued)

Liquidity risk - Life operations

Liquidity risk for life operations' unit-linked funds is managed by Irish Life Investment Managers, by means of the asset selection process. For certain property-linked funds there is the ability to defer encashments for six months to allow time to sell properties. If properties cannot be sold within this period then the shareholder may have to provide liquidity for these funds. Currently a six month deferral period is applied to most property linked funds. The liquidity position of the property-linked funds is monitored on a regular basis by the Life Assurance Assets and Liabilities Committee. The liquidity risk for non-linked funds is managed through the matching of asset and liability cash flows as shown in the liquidity risk table for life operations.

The following tables set out the expected cash flows for the assets and liabilities relating to insurance contract liabilities including discretionary participating contracts where the shareholder is exposed to a financial risk.

2009 Over 5 Over 1 years Over 10 No more year but but less years but than 1 less than than 10 less than Over 20 No fixed year 5 years years 20 years years term Total €m €m €m €m €m €m €m Assets Debt securities 246 448 497 540 1,180 - 2,911 Equities - - - - - 10 10 Investment properties - - - - - 1 1 Reinsurance assets 88 330 426 859 1,407 - 3,110 Total assets 334 778 923 1,399 2,587 11 6,032

Liabilities Insurance contracts 258 687 856 1,743 2,294 - 5,838

Gap 76 91 67 (344) 293 11 194

2008 Over 5 Over 1 years Over 10 No more year but but less years but than 1 less than than 10 less than Over 20 No fixed year 5 years years 20 years years term Total €m €m €m €m €m €m €m Assets Debt securities 212 394 517 420 1,103 - 2,646 Equities - - - - - 14 14 Investment properties - - - - - 1 1 Reinsurance assets 82 315 399 801 1,598 - 3,195 Total assets 294 709 916 1,221 2,701 15 5,856

Liabilities Insurance contracts 261 629 754 1,582 2,386 - 5,612

Gap 33 80 162 (361) 315 15 244

The group is also exposed to financial risk on certain investment contracts, principally tracker products where the shareholder has given the guarantee and other fixed interest return single premium bonds. Both assets and liabilities are held at fair value in the statement of financial position. It is group policy to purchase assets to match liabilities. The fair value of assets and liabilities by maturity date was disclosed in the Annual Report and Financial Statements 2008. This table has been updated in the current reporting period to reflect the undiscounted cash flows for the assets and liabilities by maturity date as set out below:

168 Notes to the Group Financial Statements year ended 31 December 2009

34. Financial risk management (continued)

2009 Over 1 Not more year but

than less than No fixed Overview 1 year 5 years term Total €m €m €m €m Assets Debt securities 131 266 - 397 Derivatives 3 22 - 25 Total assets 134 288 - 422

Liabilities Investment contracts 119 268 - 387

Gap 15 20 - 35

Financial options and guarantees* - - Financial Statements 43 43 Corporate Governance Business Review

*The calculation of financial options and guarantees is derived using stochastic modelling.

2008 Over 1 Not more year but than less than No fixed 1 year 5 years term Total €m €m €m €m Assets Debt securities 281 180 - 461 Derivatives 15 4 - 19 Total assets 296 184 - 480

Liabilities Investment contracts 283 181 - 464

Gap 13 3 - 16

Shareholders’ assets of the life operations including those assets required to match solvency capital are predominantly invested in cash and properties occupied by the group. An analysis of the shareholders’ assets is set out in Note 5 Shareholders equity of the EV basis supplementary information.

Currency exposure

The group’s life assurance liabilities are primarily denominated in euro and it is group policy to match the currency exposure of the liabilities and the underlying assets.

Market risk – Banking operations

Market risk is the risk of change in fair value of a financial instrument due to changes in equity prices, property prices, interest rates or foreign currency exchange rates. All market risks within the group are subject to strict internal controls and reporting procedures and are monitored by the Group's Assets and Liabilities Committee. All market risks are subject to limits on the magnitude and nature of exposures which may be undertaken. These limits are outlined in policy documents which are regularly reviewed by the board.

Market risk in the group’s banking operations arises from open positions in interest rate or currency products. The market risk exposure is managed by Group Treasury. Group Treasury use a number of tools to identify market risk; including Value at Risk, Interest Rate Gap, stress testing, mark to market / stop loss reports. Market risk is reported on an overall basis and is also separated into trading and non-trading portfolios. 169 Notes to the Group Financial Statements

year ended 31 December 2009

34. Financial risk management (continued)

In managing market exposures, the group uses a Value at Risk (VaR) model. VaR is a statistically based estimate of potential loss on a portfolio from adverse market movements, which summarises the predicted maximum loss over a target time horizon and a given confidence level. Group Treasury adopts JP Morgan’s Risk Metrics methodology which is a variance co-variance approach. The VaR model assumes a holding period of ten days, and a 99% confidence level is applied. Volatilities and correlations are exponentially weighted (the most recent event carries a greater weighting), and are calculated based on price movements over the past one hundred and fifty days. The volatilities and correlations are imported daily from Risk Metrics.

VaR limits are approved by the board and are established for the overall banking book and trading portfolio. Individual trader VaR limits are established internally within Group Treasury. VaR reports are produced and quantified by Treasury Risk Management and reported to senior management daily and to the Banking Assets and Liabilities Committee on a monthly basis.

The prices of similar financial instruments do not move in exact step with each other and, as a result, the total risk contained in a portfolio of different financial instruments cannot be calculated by taking the sum total of the individual risks. The VaR methodology employed by the group calculates the risk in each instrument held in the portfolio and measures the impact of diversification of the risk of the portfolio using an industry standard methodology called the variance co-variance approach.

As with any market risk measurement system, the VaR methodology utilised by the group has recognised limitations. VaR does not measure “event” (e.g. crash) risk or incorporate assumptions about the range of likely changes in future market conditions, including behavioural assumptions about the various types of assets and liabilities (particularly those arising from retail transactions). Accordingly, the group supplements its VaR methodology with other risk measurement techniques including interest rate gap, stress testing and mark to market / stop loss reports.

Stress testing techniques are also used as a means to assess potential exposure to predefined moves in individual risk factors. Stress tests (1 basis point move in interest rates) are applied to the Trading, Available-for-sale and Held -to-maturity portfolios and the results are reported to the Banking Assets and Liabilities Committee on a monthly basis. A projected income sensitivity analysis is also performed on the statement of financial position through the assets liabilities model.

Group Treasury applies parallel basis point shocks to the individual yield curves of 50, 100, 200 and 300bps. The model incorporates projected new business growth, using current rates to produce its base case scenario.

The impact on net interest income of a 100 basis point straight-line increase or decrease in Euro, Sterling and US Dollar interest rates, applied to positions at 31 December 2009 is shown in the table below:

2009 2008

Euro €m €m 1% increase 74.3 56.2 1% decrease (0.3) (70.2)

Sterling £m £m 1% increase (0.2) (2.6) 1% decrease 2.8 2.6

US Dollar $m $m 1% increase 1.5 0.7 1% decrease (0.3) (1.4)

Mark to market / Stop Loss limits are applied to the trading portfolio and to individual traders. Treasury Risk management reports stop losses to senior management on a daily basis.

170 Notes to the Group Financial Statements year ended 31 December 2009

34. Financial risk management (continued)

Value at risk - Total 2009 2008 €m €m At 31 December 4.6 4.6 Overview Average 5.4 6.2 Minimum 3.4 2.5 Maximum 7.3 10.6

The non-trading book comprise the bank’s retail and corporate deposit books and its loan book combined with the inter-bank book, wholesale funding instruments and the liquid asset investment portfolio, which is managed by Treasury.

Value at risk – non-trading

2009 2008 €m €m

At 31 December 4.2 Financial Statements 4.7 Corporate Governance Business Review Average 5.0 6.0 Minimum 3.4 2.9 Maximum 7.5 10.6

In addition to the responsibility for managing the liquidity and interest rate exposures arising in the banking operations, Treasury trades in liquid interest rate and foreign currency exchange rate instruments, and derivatives thereof, in order to profit from short-term changes in market values. Trading book exposures are subject to strict limits which have been approved by the board. Interest rate exposures within the trading book are measured using VaR.

The methodology employed is the same as that utilised in respect of the non-trading book set out above. Foreign currency exposures are measured by reference to open positions (the sum of all long and short positions). All financial instruments held for trading purposes are clearly designated and are held separately from other holdings and all trading positions are mark to market.

Value at risk – trading

2009 2008 €m €m

At 31 December 0.2 0.2 Average 0.4 0.5 Minimum 0.1 - Maximum 2.2 2.2

171 Notes to the Group Financial Statements

year ended 31 December 2009

34. Financial risk management (continued)

Market risk - Life operations

The life operations' investment policies set out the principles in respect of the management of market risk. They are determined by the Irish Life Assurance plc board and are designed to ensure that investment activity is carried out in a prudent and controlled manner. They are subject to annual review by the Irish Life Assurance plc board. The policies take into account the different requirements and risk profiles of different classes of policyholder funds, whether the investments are in respect of guaranteed or non-guaranteed business and the solvency and financial strength requirements of the life companies. Adherence to the policy is monitored by the Life Assurance Assets and Liabilities Committee.

Liability as at 31 December 2009* €m

Unit-linked funds where the financial risks are primarily borne by the policyholders 24,025 Other policyholder liabilities 3,396 Unit-linked tracker bonds** and non-linked fixed-interest return single premium bonds 376 Discretionary participation insurance contracts 52 Investment financial options and guarantees 43 Non-controlling share of unit trust 174 28,066

Liability as at 31 December 2008* €m

Unit-linked funds where the financial risks are primarily borne by the policyholders 20,873 Other policyholder liabilities 3,375 Unit-linked tracker bonds** and non-linked fixed-interest return single premium bonds 464 Discretionary participation insurance contracts 75 Investment financial options and guarantees 82 Non-controlling share of unit trust 256 25,125

*Liabilities before reinsurance **Only includes unit-linked tracker bonds where the investment guarantee is given by the shareholder (it is group policy to purchase assets to match these liabilities). Tracker bonds where the investment guarantee is given by a third party and the shareholder is not at risk are included in unit-linked funds liabilities.

The group holds assets at fair value to back the liabilities set out above together with the assets relating to the life operations solvency capital and free shareholder funds.

Details of the financial options and guarantees are set out in Note 25 Financial options and guarantees.

Unit-linked funds

For unit-linked funds, which comprise 94% (2008: 93%) of the group’s long-term insurance and investment contracts net of reinsurance liabilities, policyholders primarily bear the investment risk, with changes in the underlying investments being matched by changes in the underlying contract liabilities. On a day-to-day basis, cash outflows which are necessitated by policyholders withdrawing their funds are generally met by cash inflows from new investors. In circumstances where funds are contracting, or to meet unusually high levels of withdrawals, the group sells assets in the fund in order to meet the cash demands with any dealing costs charged to the underlying unit-linked fund and consequently the policyholders.

The underlying assets in the unit-linked funds are subject to credit and market risks in the form of interest rate, equity prices, foreign exchange and other market risks depending on the fund, including movement in property values. These changes are matched by changes in the unit-linked liabilities. Accordingly, the group is not directly exposed to significant liquidity, credit or market risks, although the policyholders' benefits will vary as a consequence. As the group is not exposed to any significant financial risk on assets or liabilities held within unit-linked funds, these are excluded from the risk analysis. 172 Notes to the Group Financial Statements year ended 31 December 2009

34. Financial risk management (continued)

Decreases in the capital value of unit-linked funds (as a result of falls in market values of equities, property or fixed interest assets) will however reduce the future annual investment management charges that will be earned from unit-linked business. An additional risk the group faces in respect of unit-linked business is the risk that increases to surrender rates for both insurance and investment contracts reduces the value of future investment management Overview charges. Actions to control and monitor this risk include charges applicable on some products where the investor surrenders early, regular experience monitoring, consideration of the sensitivity of product profitability to levels of lapse rates at the product development stage and initiatives within the relevant businesses to encourage customer retention.

Equity / property price risk

Equity / property price risk is defined as the risk of a potential loss in market values due to an adverse change in prices including changes in the value of investment properties. Investment in equities and property is generally limited to investments to match commitments to policyholders or to match a portion of the liabilities under discretionary participation contracts. The group's shareholders are exposed to direct equity / property holdings in its shareholder assets, including assets acquired through providing liquidity support to certain property-linked funds, and from the indirect impact of changes in the value of equities and properties held in policyholder funds from uiesRve CroaeGvrac Financial Statements Corporate Governance Business Review which management charges are taken. The group manages the life operations measuring earnings in accordance with the European Embedded Value (EEV) principles issued in May 2004 by the European Chief Financial Officer’s Forum. The Embedded Value Supplemental Information included from page 216 includes a measurement of the sensitivity of the continuing operations to changes in equity / property values.

Derivative risk

Derivatives are permitted to be held only as part of efficient portfolio management. All investments made are within the parameters set down by senior management as well as by statutory requirements. There is regular reporting of asset and liability mismatches to investment committees within business units and to the Life Assurance Assets and Liabilities Committee. Derivative transactions are fully covered by either cash or corresponding assets and liabilities.

Interest rate risk

Life operations of the group carry interest rate risk exposures on its debt securities and its loans to banks portfolio and on its fixed-rate insurance and investment liabilities. It is the group’s policy where possible to match its asset and liability profile and this is monitored on a regular basis by the investment committees within each business unit and by the Life Assurance Assets and Liabilities Committee. The Embedded Value Supplemental Information included from page 216 includes a measurement of the sensitivity of the continuing operations to changes in interest rates.

Insurance risk

Insurance risk is the risk associated with the variability in liability cash flows caused by fluctuations in policyholder claims under insured events. The theory of probability is applied to the pricing and provisioning for a portfolio of insurance contracts. The principal risks are that the frequency of claims or the severity of claims is greater than expected. Insurance events are random by their nature and the actual number and size of events during any one year may vary from those estimated using established statistical techniques.

The group manages its insurance risk through underwriting limits, approval procedures for new products and reinsurance where appropriate.

Reinsurance is managed in accordance with approved policy and is regularly reviewed by the Life Assurance Assets and Liabilities Committee.

173 Notes to the Group Financial Statements

year ended 31 December 2009

34. Financial risk management (continued)

The assumptions used to place a value on the liabilities of insurance contracts and the sensitivity of these assumptions to a range of factors is set out in Note 24 Life insurance contracts.

Insurance risk falls into three main categories:

- Life assurance contracts - Annuity contracts - Insurance contracts with a discretionary participation feature.

Life assurance contracts

These are contracts where the benefit is payable on death or serious illness. The benefit may be a lump sum or in the case of serious illness an annual income stream which may be fixed or escalate at a fixed rate or in line with a relevant index.

Insurance risks associated with life insurance contracts include the risk of epidemics, accidents and changes in lifestyle such as smoking habits and stress-related diseases.

Life assurance contracts may be unit-linked or non linked. For unit-linked contracts the group charges for the insured risk on a monthly basis and has the right to alter these charges based on its risk experience. In this way the group can limit its exposure. Non-linked business may be group business or individual contracts. Group business is normally written for a maximum of a three year term and the insurance risk may be repriced at the end of each term. For individual business written for a fixed term there are no mitigating terms and conditions which reduce the insurance risk.

Individual business risk is managed through the inclusion of medical selection in the underwriting criteria and through reinsurance of the risk.

The sum-at-risk amounts net of reinsurance are as follows:

2009 2008 €m €m

Unit-linked contracts 12,311 11,415 Non-linked contracts - Individual 17,808 17,916 - Group 52,318 51,859

The calculation of the insurance contract liabilities allows for the discounted expected cost of the sum-at-risk amounts shown above using mortality and morbidity assumptions and interest rate assumptions as shown in Note 24(b) Life insurance contracts.

Annuity contracts

These are contracts where the policyholder in return for a single premium paid at the start of the contract purchases an annual income stream for the remainder of his or her life. Annuities may be level, escalate at a fixed rate or in line with a relevant index.

Payments are often guaranteed for a minimum term regardless of survival. Annuities may also continue after death in full or in part to a surviving partner.

The main insurance risk associated with this product is longevity risk and in particular that improvements in medical science and social conditions would increase longevity. In recognition of this risk, in 2002 the group decided to reinsure 57% of the in force portfolio of annuity contracts. All new annuity business written since 2002 has also been 100% reinsured.

174 Notes to the Group Financial Statements year ended 31 December 2009

34. Financial risk management (continued)

Under the reinsurance, treaty longevity risk is borne by the reinsurance company. Assets are held by the reinsurance company in a charged account, all withdrawals from which have to be authorised by Irish Life. Assets are managed in accordance with a mandate which matches the asset and liabilities. Overview

The reserves held for annuity contracts are as follows:

2009 2008 €m €m

Gross 2,059 1,950 Reinsurer’s share (1,353) (1,376) 706 574

Insurance contracts with a discretionary participation feature

The group has a closed book of with profit business where the policyholder benefits from a discretionary annual bonus and a discretionary final bonus. There has been no new business written since it was set up as Financial Statements a closed fund Corporate Governance Business Review in 1990. The shareholder does not participate in the with profit fund.

The assets of the fund are invested in a fund which invests in a mixture of equities and fixed-interest securities.

The group has discretion on the level of bonuses declared.

The total guaranteed sums assured in the future and bonuses payable on death as at 31 December 2009 are €62m (2008: €96m). Reserves as at 31 December 2009 are €52m (2008: €75m) which on a discounted cash flow basis are sufficient to meet fund liabilities.

Operational risk

Operational risk at Irish Life & Permanent plc is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.

Operational risk management within the group also addresses regulatory risk which is defined as the risk of uncertainty in profits due to unforeseen changes in regulation. Regulatory risk is not the failure to meet regulations (that is compliance risk), rather it is the risk that the group is not sufficiently aware of the changing regulatory environment, increasing the cost of compliance and reducing the effectiveness of risk management processes.

The group operates an industry best practice operational risk framework which includes the measurement and monitoring of both operational and regulatory risk. The aim of this framework is to help focus management attention on the subset of operational risks which are material at each level of the organisation (either in terms of financial impact, or more broadly because of reputational or regulatory impacts).

Central group management, and each of the business units within the group, identify the material operational risks to which they are exposed. The identification process is based on a detailed review of business activities, supplemented by reference to external industry information. Each business unit has a designated operational risk manager who is responsible for coordinating operational risk management within that business unit. The local management team of each business unit is responsible for reviewing and authorising the register of main operational risks for each business unit on an annual basis.

The group operational risk framework utilises the business unit operational risk registers to identify the group’s material operational risks. Materiality is determined by a quantitative and qualitative assessment of each risk by reference to its likelihood of incidence and potential impact. These material operational risks are regularly reported to the Group Operational Risk Committee and the Board Risk and Compliance Committee. The Group Operational Risk Committee is responsible for steering progress on the measurement and mitigation of these risks. Key risk indicators are used to carry out this monitoring process.

175 Notes to the Group Financial Statements

year ended 31 December 2009

34. Financial risk management (continued)

Each of the operational risks considered material for the group is the subject of a documented, in depth analysis of the cause and impact of the risk. An appropriate control environment is established to protect against the risk.

A sub-register of significant operational risks at business unit level is also maintained by the group. Each of the business units (or group function as appropriate) manages and monitors these operational risks to group requirements.

Irish Life & Permanent plc has a formal, documented Operational Risk Policy which has been approved by the board.

Operational risk recording

The group operates an industry best practice risk and event recording database. The database is managed by the Group Operational Risk function and records all operational risk (including regulatory risk and reputational risk) events and near misses across the group. Risk events and their associated impact are analysed in accordance with the group’s operational risk categories which also comply with Basel II requirements. All loss events are recorded in the register.

The operational risk database generates risk reports for review at the Operational Risk Committee meetings. Each report details the number of operational risk loss events and near misses by business unit for the period.

Operational risk economic capital

Irish Life & Permanent plc employs the Basel II standardised approach as the basis for calculating economic capital for operational risk in the banking business. This approach utilises an established multiplier ("beta" factor) against a three-year average “risk-weighted relevant indicator” measure of net income to derive a capital requirement. The beta multipliers are drawn from Basel II benchmark values and are differentiated by business line.

Operational risk mitigation

Operational risk cannot be entirely eliminated from an entity’s business operations without the cessation of business. Acknowledging this fact, the group has implemented risk mitigation techniques (such as business continuity planning for example) to reduce the level of this risk where possible.

The group maintains a comprehensive suite of insurance cover in order to mitigate against operational risk to the extent possible. Aligned closely to the operational risk event types established by Basel II, insurance cover includes:

- Theft and fraud (internal and external) - Civil liability - Employer’s liability - Business interruption - Directors and officers' liability - Natural catastrophe cover (Business Continuity Planning).

176 Notes to the Group Financial Statements year ended 31 December 2009

35. Fair value of financial instruments

The fair value of financial instruments held by the group is set out below:

Group 2009 2008 Overview Carrying Carrying amount Fair value amount Fair value €m €m €m €m Financial assets Cash and balances with central banks (note 4) 218 218 200 200 Items in course of collection (note 4) 108 108 124 124 Debt securities (note 5) 15,780 15,752 10,929 10,715 Equity shares and units in unit trusts (note 6) 13,510 13,510 10,390 10,390 Derivative assets (note 7) 1,169 1,169 1,162 1,162 Loans and receivables to customers (note 8) 38,592 33,200 40,075 34,912 Loans and receivables to banks (note 10) 4,925 4,925 4,775 4,775

Financial liabilities Financial Statements Corporate Governance Business Review Deposits by banks (note 20) 18,713 17,930 18,546 18,562 Customer accounts (note 21) 14,562 14,562 14,118 14,191 Debt securities in issue (note 22) 13,262 13,209 10,899 11,084 Derivative liabilities (note 7) 665 665 550 550 Investment contract liabilities (note 23) 24,032 24,032 21,118 21,118 Subordinated liabilities (note 29) 1,644 1,805 1,699 1,773

Company 2009 2008 Carrying Carrying amount Fair value amount Fair value €m €m €m €m Financial assets Cash and balances with central banks (note 4) 100 100 122 122 Items in course of collection (note 4) 108 108 124 124 Debt securities (note 5) 12,438 12,409 9,359 9,145 Derivative assets (note 7) 327 327 253 253 Loans and receivables to customers (note 8) 38,165 33,485 39,545 35,580 Loans and receivables to banks (note 10) 2,600 2,600 1,988 1,988

Financial liabilities Deposits by banks (note 20) 17,842 17,909 17,581 17,597 Customer accounts (note 21) 20,830 20,830 19,552 19,624 Debt securities in issue (note 22) 12,558 12,505 10,176 10,360 Derivative liabilities (note 7) 411 411 1,793 1,793 Subordinated liabilities (note 29) 1,432 1,593 1,492 1,566

177 Notes to the Group Financial Statements

year ended 31 December 2009

35. Fair value of financial instruments (continued)

The volatility in financial markets and the illiquidity that is evident in these markets has reduced the demand for many of these instruments and this creates a difficulty in estimating the fair value of certain financial instruments.

The valuation methodologies for calculating the fair value of financial instruments are set out below.

Deposits by banks / customer accounts The estimated fair value of current accounts and deposits with no stated maturity, which includes non-interest bearing deposits, is the amount repayable on demand. The estimated fair value of fixed-interest bearing deposits and other borrowings not quoted in an active market is based on discounted cash flows using interest rates for new debts with similar remaining maturities.

Cash and balances with central bank / items in course of collection The fair value of these financial instruments is equal to their carrying value due to these instruments being repayable on demand and short-term in nature.

Loans and receivables The group’s valuation methodology for loans and receivables uses a discounted cash flow methodology that takes into account original underwriting criteria, borrower attributes (such as age and credit scores), loan to value ratios and expected losses on the portfolios. These features are used to estimate expected cash flows which are then discounted at a risk-adjusted rate. Model inputs are calibrated against historical data and published forecasts and, where possible, against current or recent observed transactions in mortgage-backed securities originated by the Banking group. This calibration process is inherently subjective as different input sources may imply different levels of expected losses and discount rates; also, adjustments are required for the differing features of different securities.

Debt securities - available for sale (AFS) As at 31 December 2009, these debt securities have been classified as level 1 (€5,576m) and level 2 (€261m) in the fair value hierarchy below. The fair value of such instruments are based on an external asset pricing tool from a recognised market source. This tool incorporates both market observable and unobservable data. Significant inputs include current and historical market prices of these instruments, the current and historical prices of similar instruments and price estimates from indirect pricing models. Debt securities of €261m are classified as level 2 in the fair value hierarchy below due to less liquidity in the market for these instruments and a greater reliance on inputs derived from indirect market observable data.

Debt securities at fair value through profit or loss (FVTPL) The fair values of debt securities in an active market are based on quoted market prices. Debt securities in inactive markets are determined using broker valuations and / or valuation techniques such as discounted cash flow models which are subject to internal management review. Such models incorporate inputs such as current interest rate, for credit spreads and forward foreign exchange rates.

The bulk of debt securities are sourced from quoted market prices. Management review the source of the market prices, the liquidity of the security, the credit risk and recent market history to assess the reasonableness of the valuations.

The significant categories of debt securities where fair value valuations are not obtained using quoted market prices are as follows:

(i) Zero coupon bonds amounted to €361m (2008: €587m). As at 31 December 2009, such bonds are classified as level 2 in the fair value hierarchy below. Valuations are determined by a discounted cash flow model produced by a third-party system. Model inputs include bond cash flows, interest rates and term to maturity, all of which are market observable data.

(ii) French government strip bonds amounted to €638m (2008: €312m). As at 31 December 2009, such bonds are classified as level 2 in the fair value hierarchy below. Valuations are obtained from a third-party broker who extracts the valuation from their proprietary model. Model inputs include bond cash flow, interest rates and credit spreads which are market observable data.

178 Notes to the Group Financial Statements year ended 31 December 2009

35. Fair value of financial instruments (continued)

(iii) Housing finance agency inflation-linked bond amounted to €84m (2008: €40m). As at 31 December 2009, such bonds are classified as level 2 in the fair value hierarchy below. Valuations are obtained from a third-party broker market maker. The broker considers interest rates, credit spreads and

inflatory expectations in arriving at their quote. Overview

(iv) European investment bank inflation-linked notes amounted to €528m (2008: €508m). As at 31 December 2009, these notes are classified as level 3 in the fair value hierarchy below. Valuation are obtained from an external broker using a valuation technique incorporating significant inputs, some of which are market unobservable data. Such inputs include a discount to reflect the lack of liquidity in the market for these instruments.

During the year ended 31 December 2008 the group availed of the amendment to IAS 39 and IFRS 7 which permitted financial assets classified as available for sale (“AFS”) to be reclassified out of the AFS category to the loans and receivables category. Such securities are carried at amortised cost in accordance with loans and receivables accounting policy. The fair value of such securities are determined by using valuation models incorporating a mix of broker quotes for securities with similar terms and features and unobservable data. uiesRve CroaeGvrac Financial Statements Corporate Governance Business Review Equity shares and units in unit trusts The fair value of quoted equities are based on quoted market price sourced from external pricing services where securities are traded on a recognised exchange. Equity investments valued using quoted market prices totalled €13,139m (2008: €9,285m) as at 31 December 2009.

The net asset value (“NAV”) based on the underlying fair value of the investments of the unit trusts and funds, as reported by the investment managers has been used as the basis for determining the fair value of the group’s interest in unit trusts and funds.

Therefore units in unlisted unit trusts and unlisted investment funds are valued using the latest price or valuation issued by unit trust and fund managers. Each unit trust price is reviewed by management to assess the reasonableness of the price. Management considers the illiquidity and pricing basis of any underlying assets, any restrictions on redemptions put in place by the unit trust and fund managers and evidence of trading taking place at the issued price. If appropriate the latest price or valuation issued by the unit trust and fund managers is adjusted to reflect the illiquidity or latest valuations of underlying assets.

The significant categories of equity shares and units in unit trusts where fair value valuations are not obtained using quoted market prices are as follows:

(i) Units in unit trusts that are not priced or traded on a daily basis amounted to €100m. As at 31 December 2009, these units are classified as level 2 in the fair value hierarchy below due to a lack of liquidity in the market.

(ii) Units held in a property unit trust amounted to €195m. As at 31 December 2009, these units are classified as level 3 in the fair value hierarchy below. These units are valued by an independent external property valuer. These valuations are reliant on expert judgement by the valuer and consequently are not verifiable to observable market data.

(iii) Unlisted shares held in private companies amounted to €36m. As at 31 December 2009, these shares are classified as level 3 in the fair value hierarchy below. These valuations are prepared internally using the most recent financial statements of the companies, which are market unobservable data.

Derivative assets and liabilities The fair values for derivatives traded in active markets are obtained from prevailing quoted prices. Active markets would include all exchange traded equity, currency and commodity futures, quoted on recognised futures and derivative exchanges.

179 Notes to the Group Financial Statements

year ended 31 December 2009

35. Fair value of financial instruments (continued)

Derivatives in inactive markets are determined using broker valuations and / or valuation techniques such as discounted cash flow models which are subject to internal management review. Such models incorporate inputs such as current interest rate, time to maturity and forward foreign-exchange rates. Observable prices model inputs are usually available in the market for exchange traded derivatives (primarily options) and simple over the counter derivatives such as interest rate swaps.

The significant categories of derivatives where fair value valuations are not obtained using quoted market prices are as follows:

(i) Derivative instruments relating to CPPI products (as described in Note 7 Derivative Instruments) amounted to €822m (2008: €825m). As at 31 December 2009, these instruments are classified as level 2 in the fair value hierarchy below. Valuations are obtained from a third-party broker who extracts the valuation from their proprietary model. This uses a standard option pricing model comprising Monte Carlo simulation and discounted cash flows. Significant inputs include volatility of returns, risk-free discount rate and expected returns.

(ii) Options used in tracker products amounted to €38m. As at 31 December 2009, these options are classified as level 3 in the fair value hierarchy below. These options are valued by a third-party broker based on a valuation model incorporating proprietary inputs, some of which are market unobservable data.

(iii) Derivative assets of €270m and derivative liabilities of €411m related to fair value hedges in respect of the bank operations. As at 31 December 2009, these derivative instruments have been classified as level 2 in the fair value hierarchy below. Valuations are obtained from third-party brokers who extract valuation from a mix of discount cash flow models and pricing models. Model inputs include yield curve and volatility measurements which are market observable data.

Debt securities in issue / subordinated liabilities The fair values for debt securities issued are based on quoted market prices where available. Where quoted prices are not available valuations are based on a third-party system which uses observable data, with the balance valued by management using discounted cash flow models using interest rate yield curves and observable data.

Fair value measurements recognised in the statement of financial position Pursuant to the recent amendments to IFRS 7 Financial Instruments: Disclosures, the group has adopted the fair value hierarchy classification of financial instruments. This requires the group to classify its financial instruments held at fair value according to a hierarchy based on the significance of the inputs used to arrive at the overall fair value of these instruments. The three levels of the fair value hierarchy as defined by the accounting standard are outlined below:

Level 1: fair value measurements derived from quoted market prices (unadjusted) in active markets for identical assets or liabilities.

Level 2: fair value measurements derived from inputs other than quoted prices included within level 1 that are observable for the asset or liability either directly (i.e. as prices) or indirectly (i.e. derived from prices).

Level 3: fair value measurements derived from valuation techniques that include inputs for the asset and liability that are based on unobservable market data.

This fair value hierarchy has been applied to all of the financial instruments that are measured at fair value in the statement of financial position. Categorisation of these financial instruments according to the fair value hierarchy is included below for both group and company as at 31 December 2009:

180 Notes to the Group Financial Statements year ended 31 December 2009

35. Fair value of financial instruments (continued)

Group Valuation Valuation techniques techniques Quoted using using Overview market observable unobservable prices market data market data Level 1 Level 2 Level 3 Total Financial instruments measured at fair value €m €m €m €m

Financial assets Debt securities Available for sale (note 5) 5,576 261 - 5,837 At fair value through profit and loss (FVTPL) (note 5) 6,745 1,100 528 8,373 Equity shares and units in unit trusts (note 6) 13,140 100 270 13,510 Derivative assets (note 7) 39 1,092 38 1,169

Financial liabilities Financial Statements Corporate Governance Business Review Derivative liabilities (note 7) 25 640 - 665 Investment contract liabilities* (note 23) - 24,032 - 24,032

*Investment contract liabilities are backed by assets attributable to the life operations including assets which are carried at FVTPL which are measured at quoted market prices and valuation techniques using observable market data as described above.

Reconciliation of level 3 fair value measurements of financial assets Group 2009 Equity Debt shares and securities units in Derivative at FVTPL unit trusts assets Total €m €m €m €m

Opening balance - - - - Total gains or losses - in profit or loss - Investment return 20 (350) 7 (323) Transfers into level 3 508 607 24 1,139 Sales - (1) (17) (18) Purchases - 14 24 38 528 270 38 836

Total gains or losses for the year included in profit or loss for assets held at the end of the reporting year. - Investment return 21 (340) 9 (310)

Following a review and in-depth analysis of valuation techniques adopted by the group as at 31 December 2009, certain instruments have been transferred into level 3 per the fair value hierarchy classification. Transfers into level 3 occurred for these instruments due to inputs of the underlying valuation techniques becoming unobservable. The majority of such instruments classified as level 3 have been outlined in detail above.

181 Notes to the Group Financial Statements

year ended 31 December 2009

35. Fair value of financial instruments (continued)

Company

Derivative assets and liabilities Interest rate swaps amounted to €57m in relation to Fastnet 2 Limited. As at 31 December 2009, these swaps have been classified as level 3 in the company's fair value hierarchy below. These swaps are valued from a third- party broker based on a valuation model / technique incorporating inputs which are market unobservable data. Such inputs include assumptions on factors such as amortisation rates, forward ECB rates and repayment uncertainties.

Company Valuation Valuation techniques techniques Quoted using using market observable unobservable prices market data market data Level 1 Level 2 Level 3 Total Financial instruments measured at fair value €m €m €m €m

Financial assets

Debt securities - Available for sale (note 5) 5,576 261 - 5,837 Derivative assets (note 7) - 270 57 327

Financial liabilities Derivative liabilities (note 7) - 411 - 411

Reconciliation of level 3 fair value measurements of financial assets:

Company 2009 Derivative assets Total €m €m

Opening balance - - Total gains or losses - in profit or loss - net interest income 23 23 Transfers into level 3 34 34 57 57

Total gains or losses for the year included in profit or loss for assets held at the end of the reporting year. - Net interest income 23 23

Following a review and an in depth analysis of valuation techniques adopted by the company as at 31 December 2009, certain derivative assets have been transferred into level 3 per the fair value hierarchy classification. Transfers into level 3 occurred for these derivative assets due to inputs of the underlying valuation technique becoming unobservable. The derivative assets classified as level 3 are outlined in detail above.

182 Notes to the Group Financial Statements year ended 31 December 2009

35. Fair value of financial instruments (continued)

Sensitivity analysis of level 3 fair value measurements

Group Financial instruments classified as level 3 amounting to €809m, debt securities, equity shares and units in unit Overview trusts, derivative assets, are held within unit-linked funds in respect of the group’s life operations. For unit-linked funds, any fair value changes in unit-linked assets are matched by changes in unit-linked liabilities. As a result, sensitivity analysis has not been undertaken for level 3 financial instruments held within unit-linked funds.

The balance of €27m of European investment bank inflation-linked notes classified as level 3 are not held within unit-linked funds, hence the fair value of such notes are sensitive to changes in the underlying assumptions (inflation expectations, nominal yields and credit spreads). The following table shows the sensitivity of the fair value of these notes to a +1% /-1% movement in the assumptions respectively as at 31 December 2009:

2009 Reflected in income statement Favourable Unfavourable

change Financial Statements change Corporate Governance Business Review €m €m

Debt securities at FVTPL - Inflation expectations 7 (5) - Nominal yields 6 (5) - Credit spreads 6 (5)

183 m € m € m € m € of financial position classification. m € At fair value At m € m € m € - - - - 218 - - 218 - - 13,510 - - - - 13,510 - - - - 38,389 203 - 38,592 ------24,032 24,032 - - 2,321 - 2,604 - - 4,925 - - - - 108 - - 108 - - - - 13,172 90 - 13,262 - - - - 1,598 46 - 1,644 - - - - 14,562 - - 14,562 376 289 - - - - - 665 - - - - 18,713 - - 18,713 247 922 - - - - - 1,169 - - 8,373 5,837 1,542 28 - 15,780 Notes to the Group Financial Statements Notes to the Group 2009 ended 31 December year of financial instruments basis 36. Measurement statement and by accounting treatment analyses the carrying amounts of financial assets and liabilities by table below The Group 2009 equity or loss through profit through fair value At Derivatives designated as fair value Held hedges for Designated trading upon initial recognition Available- for-sale amortised / receivables assets hedged adjustment on cost contract Investment and liabilities** and Loans liabilities*** Total Fair value Total financial liabilities Total 376 289 - - 48,045 136 24,032 72,878 Financial assets: banks (note 4) Cash and balances with central Items in course of collection (note 4) securities (note 5) Debt and units in unit trusts (note 6) Equity shares assets* (note 7) Derivative to customers (note 8) and receivables Loans to banks (note 10) and receivables Loans financial assets Total Financial liabilities: banks (note 20) by Deposits Customer accounts (note 21) securities in issue (note 22) Debt liabilities (note 29) Subordinated 247 922 24,204 5,837 42,861 231 - 74,302 184 liabilities (note 7) Derivative liabilities*** (note 23) contract Investment m € m € Overview m € m € uiesRve CroaeGvrac Financial Statements Corporate Governance Business Review m € at FVTPL. n the fair value of the hedged risk. of the hedged n the fair value At fair value m € m € 935m) held for the benefit of policyholders and to match tracker bond liabilities. the benefit of policyholders and to match tracker 935m) held for € m € 886m (2008: € 991m) is € 922m (2008: € Notes to the Group Financial Statements Notes to the Group 2009 ended 31 December year of financial assets and liabilities (continued) basis 36. Measurement Group 2008 Derivatives equity or loss through profit through At fair value designated as fair value Held hedges for Designated trading upon initial recognition Available- for-sale amortised / receivables assets hedged adjustment on cost and liabilities** contract Investment and Loans liabilities*** Total value Fair **Financial assets and liabilities that are part of a hedging relationship are carried at amortised cost adjusted for changes i carried at amortised changes cost adjusted for are part of a hedging relationship **Financial assets and liabilities that are carried including assets which are operations assets attributable to the life by backed liabilities are contract ***Investment held-to-maturity securities. does not hold any the sale of held-to-maturity portfolio in February 2008, the group Following Financial assets: banks (note 4) Cash and balances with central Items in course of collection (note 4) securities (note 5) Debt and units in unit trusts (note 6) Equity shares assets* (note 7) Derivative to customers (note 8) and receivables Loans to banks (note 10) and receivables Loans financial assets Total Financial liabilities: banks (note 20) by Deposits - Customer accounts (note 21) securities in issue (note 22) Debt liabilities (note 7) Derivative - liabilities*** (note 23) contract Investment - - liabilities (note 29) Subordinated financial liabilities - Total of - category *Included in held-for-trading - - - 171 - - 10,390 - 991 - 185 - 171 - - - 2,781 - - - - 991 364 7,739 - - - - 200 - - - - - 186 1,220 20,910 - 364 - - 124 39,884 - 1,220 1,994 186 1,945 - - - - - 44,147 - - - - 191 ------25 - - - 18,546 10,884 14,118 216 - 200 - - - - 10,390 - - 40,075 1,607 - - 124 10,929 45,155 4,775 - 15 - - - - 67,655 1,162 - 92 107 21,118 - - 21,118 - 10,899 18,546 14,118 21,118 - - 66,930 1,699 550 m € m € m € m € At fair value At m € m € ------5,837 ------6,573 - 100 - 108 - 37,962 - 2,600 - 28 - - - - 17,842 203 20,830 12,468 - 12,438 1,399 100 - 38,165 108 - 90 2,600 33 17,842 20,830 12,558 1,432 m € 234 234 36 36 57 376 57 376 35 - 35 5,837 - 47,343 - - - 231 - - 52,539 - 53,738 327 123 - 53,073 411

Notes to the Group Financial Statements Notes to the Group 2009 ended 31 December year of financial assets and liabilities (continued) basis 36. Measurement Company 2009 equity or loss through Derivatives profit through fair value At designated as fair value Held hedges for Designated trading upon initial recognition Available- for-sale amortised receivables/ assets hedged adjustment on cost and liabilities* and Loans Fair value Total 186 Financial assets: banks (note 4) Cash and balances with central Items in course of collection (note 4) securities (note 5) Debt assets (note 7) Derivative to customers (note 8) and receivables Loans to banks (note 10) and receivables Loans financial assets Total Financial liabilities: banks (note 20) by Deposits Customer accounts (note 21) securities in issue (note 22) Debt liabilities (note 7) Derivative liabilities (note 29) Subordinated financial liabilities Total m € m Overview € m € uiesRve CroaeGvrac Financial Statements Corporate Governance Business Review m € n the fair value of the hedged risk. of the hedged n the fair value At fair value m € m € At fair value through profit or loss through equity or loss through profit through At fair value m € Notes to the Group Financial Statements Notes to the Group 2009 ended 31 December year of financial assets and liabilities (continued) basis 36. Measurement Company 2008 Derivatives designated as fair value Held hedges for Designated trading upon initial recognition Available- for-sale amortised / receivables assets hedged adjustment on cost and liabilities* and Loans value Fair Total Financial assets: banks (note 4) Cash and balances with central Items in course of collection (note 4) securities (note 5) Debt assets (note 7) Derivative to customers (note 8) and receivables Loans to banks (note 10) and receivables Loans financial assets Total Financial liabilities: banks (note 20) by Deposits - Customer accounts (note 21) securities in issue (note 22) Debt liabilities (note 7) Derivative liabilities (note 29) Subordinated - - - financial liabilities Total - i carried at amortised charges cost adjusted for are part of a hedging relationship * Financial assets and liabilities that are - - 162 - - - 187 56 - 162 ------56 35 364 ------51 122 364 35 - - - 1,191 51 1,378 39,354 - 124 - - 1,191 1,988 - - 8,143 1,378 - - 49,731 191 ------25 17,581 122 10,161 19,552 - 216 - 39,545 48,703 1,409 124 1,988 9,359 15 - - 51,391 - 253 98 83 10,176 17,581 19,552 1,793 50,594 1,492 Notes to the Group Financial Statements

year ended 31 December 2009

37. Current / non-current assets and liabilities

The following tables provide an analysis of certain asset and liability line items that include amounts expected to be recovered or settled no more than twelve months after the balance sheet date (current) and more than twelve months after the financial position date (non-current).

Group Current Non-current Total Current Non-current Total 2009 2009 2009 2008 2008 2008 €m €m €m €m €m €m

Assets Cash and balances at central banks (note 4) 218 - 218 200 - 200 Items in the course of collection (note 4) 108 - 108 124 - 124 Debt securities (note 5) 3,281 12,499 15,780 918 10,011 10,929 Equity shares and units in unit trusts (note 6) 13,510 - 13,510 10,284 106 10,390 Derivative assets (note 7) 68 1,101 1,169 151 1,011 1,162 Loans and receivables to customers (note 8) 6,967 31,625 38,592 7,373 32,702 40,075 Loans and receivables to banks (note 10) 4,925 - 4,925 4,775 - 4,775

Liabilities Deposits by banks (note 20) 18,302 411 18,713 17,386 1,160 18,546 Customer accounts (note 21) 14,290 272 14,562 13,354 764 14,118 Debt securities in issue (note 22) 8,204 5,058 13,262 3,206 7,693 10,899 Derivative liabilities (note 7) 308 357 665 209 341 550 Subordinated liabilities (note 29) - 1,644 1,644 - 1,699 1,699

Company Current Non-current Total Current Non-current Total 2009 2009 2009 2008 2008 2008 €m €m €m €m €m €m

Assets Cash and balances at central banks (note 4) 100 - 100 122 - 122 Items in the course of collection (note 4) 108 - 108 124 - 124 Debt securities (note 5) 3,291 9,147 12,438 1,939 7,420 9,359 Derivative assets (note 7) 33 294 327 93 160 253 Loans and receivables to customers (note 8) 6,429 31,736 38,165 6,746 32,799 39,545 Loans and receivables to banks (note 10) 2,600 - 2,600 1,988 - 1,988

Liabilities Deposits by banks (note 20) 17,842 - 17,842 16,679 902 17,581 Customer accounts (note 21) 20,521 309 20,830 13,960 5,592 19,552 Debt securities in issue (note 22) 8,209 4,349 12,558 3,340 6,836 10,176 Derivative liabilities (note 7) 67 344 411 82 1,711 1,793 Subordinated liabilities (note 29) - 1,432 1,432 - 1,492 1,492

188 Notes to the Group Financial Statements year ended 31 December 2009

38. Assets held in unit-linked funds

2009 2008 €m €m Designated as FVTPL - Debt securities 6,728 6,290 Overview - Equities and units in unit trusts 13,442 10,070 - Loans and receivables to and from banks 1,923 1,664 - Derivative assets and liabilities 862 909 - Cash / other assets / other liabilities 116 32 Total designated at FVTPL 23,071 18,965

- Investment properties 1,751 2,253 As at 31 December 24,822 21,218

The balances are the total assets held in unit-linked policyholder funds and include tracker products and funds managed by external fund managers. The balances are gross of consolidation adjustments which eliminate inter group balances and holdings of Irish Life & Permanent plc shares. uiesRve CroaeGvrac Financial Statements Corporate Governance Business Review 39. Net interest income

2009 2008 €m €m Interest receivable Loans and receivables to customers 1,051 1,809 Loans and receivables to banks 59 120 Debt securities and other fixed-income securities - Held to maturity - 19 - Available for sale 67 77 - Loans and receivables 40 51 - Amortisation of AFS securities reclassified to loans and receivables (note 5) (15) (9) Lease and instalment finance 94 125 Net losses on interest rate hedges (15) (12) 1,281 2,180

Interest payable Deposits from banks (313) (455) Due to customers (335) (415) Interest on debt securities in issue (205) (725) Interest on subordinated debt (57) (79) Interest on other borrowed funds (11) (16) Net gains / (losses) on interest rate hedges 3 (4) (918) (1,694)

Net interest income 363 486

Interest income accrued on impaired loans was €56m (2008: €40m).

In 2009, the group has classified net gains / losses on hedge instruments to interest receivable and interest payable as appropriate. 2008 has been reclassified on a consistent basis. In 2008 the net position of €16m negative was shown under interest receivable.

Net interest income includes the movement in deferred acquisition costs of €7m credit due to the lower redemption rate on the mortgage portfolio (2008: €32m). The 2009 net interest income includes circa €30m negative impact of mismatches which arose between the fees charged on fixed rate mortgage switches and the cost €30m of closing fixed rate positions.

189 Notes to the Group Financial Statements

year ended 31 December 2009

40. Net fees and commission expenses

2009 2008 €m €m

Fees and commission income Fees and commission earned on banking services 55 52 Commission earned on insurance and investment contracts 22 24 77 76

Fees and commission expenses Fees and commission payable on banking services (10) (9) Fees in respect of Government Guarantee scheme (29) (8) Commission payable on life and investment contracts (107) (121) Deferral of acquisition costs on investment contracts (note 18) 45 60 Amortisation of deferred acquisition costs on investment contracts (note 18) (56) (52) (157) (130)

Net fees and commission expenses (80) (54)

41. Trading income

2009 2008 €m €m

Designated held for trading Interest rate instruments (4) 6 Foreign exchange instruments - (1) (4) 5

42. Premiums on insurance contracts

2009 2008 €m €m

Individual premiums Recurring 329 329 Single 115 100 444 429 Premiums under group contracts Recurring 179 194 Single 86 46 265 240 709 669

190 Notes to the Group Financial Statements year ended 31 December 2009

43. Investment return

2009 2008 Financial assets designated at FVTPL €m €m

Equity shares Overview Dividends 275 408 Fair value gains / (losses) 2,553 (7,652) 2,828 (7,244) Debt securities Interest 236 232 Profit on buy back of debt securities in issue 8 - Fair value (losses) / gains (18) 479 226 711

Realised exchange losses on debt securities / equity shares (115) (130) Total investment return on financial assets designated at FVTPL 2,939 (6,663)

Profit on the sale of held-to-maturity portfolio - Financial Statements 29 Corporate Governance Business Review

Derivatives designated as held-for trading ('HFT') Income - 11 Exchange gains - 73 Fair value losses (3) (75) (3) 9

Property market / Money market Income from investment properties 160 163 Interest 78 109 Exchange (losses) / gains (29) 53 Fair value losses on investment property (517) (1,430) Provision on onerous contract (33) - (341) (1,105)

Consolidation adjustments (note 3)* (10) (11) Total investment return 2,585 (7,741)

Total investment return Income from investment properties 160 163 Dividends 275 408 Interest 314 341 Income from derivatives - 11 Profit on the sale of held-to-maturity portfolio - 29 Profit on buy back of debt securities in issue 8 - Exchange losses (144) (4) Unrealised gains / (losses) 2,015 (8,678) Provision on onerous contract (33) - Consolidation adjustments (note 3)* (10) (11) Total investment return 2,585 (7,741)

*€2m (2008: €2m) arises due to different accounting treatment between the bank and the life company. The bank carries the liabilities at amortised cost; however, the corresponding assets in the life company are carried at FVTPL. €8m (2008: €9m) arises on the consolidation of the movement in the value of properties financed by non-recourse inter group loans.

191 Notes to the Group Financial Statements

year ended 31 December 2009

44. Claims on insurance contracts

2009 2008 €m €m

Death and disability benefit 225 205 Maturities and encashments 117 127 Annuities 147 134 489 466

45. Investment expenses

2009 2008 €m €m

Expenses relating to investment properties 14 10 Other investment expenses 21 40 35 50

Investment property expenses include €1m (2008: €1m) in respect of vacant properties.

46. Administrative and other expenses

2009 2008 €m €m

Administrative expenses 518 540 Depreciation 30 31 Amortisation of intangible assets 20 19 568 590

Expenses are after charging the following: 2009 2008 €m €m Auditor's remuneration (including VAT) - Audit services 1.7 1.7 - Audit-related services 1.3 0.5 - Non-audit services* 0.4 1.1 Operating lease rentals - land and buildings 11.4 11.0

*Non-audit services principally comprise taxation and transaction due diligence services.

192 Notes to the Group Financial Statements year ended 31 December 2009

47. Employment costs

Group

Staff costs (including executive directors) for the year were: 2009 2008 Overview €m €m

Wages and salaries* 243 278 Social insurance 25 30 Pension costs - Payments to defined contribution pension schemes 3 3 - Charge in respect of defined benefit pension schemes (note 19) 53 36 Equity-settled transactions 1 - Charged to income statement 325 347

Unrecognised actuarial (gains) / losses on defined benefit pension schemes arising in the year (117) 231

208 Financial Statements 578 Corporate Governance Business Review

* Including commission paid to sales staff

Average number of staff (including executive directors) employed during the year:

2009 2008

Ireland 4,527 4,856 UK 167 197 4,694 5,053

Life assurance 1,868 1,978 Banking 2,354 2,573 Investment management 141 149 Other 331 353 4,694 5,053

Information concerning individual directors' emoluments is given on pages 56 to 62 of the Annual Report.

Company

Staff costs (including executive directors) for the year were: 2009 2008 €m €m

Wages and salaries* 116 123 Social insurance 12 13 Pension costs - Payments to defined contribution pension schemes 1 1 - Charge in respect of defined benefit pension schemes (note 19) 26 26 Equity-settled transactions - - Charged to income statement 155 163 Unrecognised actuarial losses on defined benefit pension schemes arising in the year 6 50 161 213

* Including commission paid to sales staff

193 Notes to the Group Financial Statements

year ended 31 December 2009

47. Employment costs (continued)

Average number of staff (including executive directors) employed during the year:

2009 2008

Ireland 2,324 2,504 2,324 2,504

Life assurance 268 323 Banking 2,056 2,181 2,324 2,504

48. Share based payments

Share option schemes

The group has three share option schemes in which management and staff of the group participate. Full details of the share option schemes are set out in the directors' report on remuneration on page 58. It has been audited and forms part of the financial statements.

In accordance with the IFRS transitional arrangements included in IFRS 1 and IFRS 2, IFRS 2 measurement requirements have not been applied to options granted before 7 November 2002.

The total number of options outstanding as at 31 December 2009 is as follows: 2009 Number of Options Other Key Grant Date Exercise Price Employees Management Total Pre-2000 €10.90 - - - 2000 €9.20 192,079 132,498 324,577 2001 €13.85 967,600 98,823 1,066,423 2002 €11.99 and €14.85 1,366,562 96,128 1,462,690 2003 €9.68 1,587,299 170,594 1,757,893 2004 €13.21 1,630,168 113,584 1,743,752 2008 €10.38 325,030 252,640 577,670 6,068,738 864,267 6,933,005

2008 Number of Options Other Key Grant Date Exercise Price Employees Management Total Pre-2000 €10.90 200,363 78,568 278,931 2000 €9.20 277,701 120,509 398,210 2001 €13.85 1,128,989 112,943 1,241,932 2002 €11.99 and €14.85 1,483,146 167,840 1,650,986 2003 €9.68 1,775,278 239,250 2,014,528 2004 €13.21 1,830,740 172,434 2,003,174 2008 €10.38 396,612 386,732 783,344 7,092,829 1,278,276 8,371,105

194 Notes to the Group Financial Statements year ended 31 December 2009

48. Share-based payments (continued)

Options are normally exercisable between three and ten years from grant and expire ten years after the date of grant. Total number of options outstanding as at 31 December 2009 is equivalent to 2.5% of the issued share capital (2008: 3.0%). Should the outstanding options be exercised as at 31 December, the total amount receivable on those options would be €78m (2008: €86m). Overview

All options granted prior to 2008 have met their vesting conditions and are available to be exercised.

Number of options Weighted average exercise price 2009 2008 2009 2008

Outstanding as at 1 January 8,371,105 8 ,009,162 12.08 12.25 Granted during the year - 789,858 - 10.38 Exercised during the year - (28,135) - 9.68 Lapsed during the year (278,931) - 10.90 - Forfeited during the year (1,159,169) (399,780) 12.03 12.30 Outstanding as at 31 December 6,933,005 8,371,105 12.13 12.08 uiesRve CroaeGvrac Financial Statements Corporate Governance Business Review Exercisable as at 31 December 6,355,335 7,083,403

The 1994 scheme is closed and no further options can be issued under it.

The average share price during the year was €3.14 (2008: €7.34). The share price during the year ranged from €0.63 to €5.90 (2008: €1.10 to €13.31).

The weighted average contractual life of options outstanding as at 31 December 2009 is 3.5 years (2008: 4.4 years).

The range of exercise prices for outstanding options as at 31 December 2009 is €9.20 to €14.85 (2008: €9.20 to €14.85).

The intrinsic value of options exercisable as at 31 December 2009 is nil (2008: nil) where the intrinsic value is the difference between actual share price as at 31 December 2009 €3.30 (2008: €1.57) and the option price.

The charge in the income statement in respect of equity-settled transactions is set out in Note 47 Employment costs.

The fair value of service received for share options granted is measured by reference to the fair value of share options granted. The value is estimated based on the Black-Scholes model adjusted for dividends.

There were no options issued in 2009. 2008 Fair value at grant date €1m

Share price at date of grant €10.31 Exercise price €10.38 Expected volatility 27.70% Option life 5.4 years Expected dividend yield (at grant date) 6.80% Risk-free interest rate 3.82%

In calculating the number of options which are expected to vest, the group takes into account the service condition attaching to the options. Share options are granted under a non-market performance condition which is not taken into account in calculating the fair value at date of grant.

As a result of the corporate restructure to create Irish Life & Permanent Group Holdings plc, there was no subsequent impact on the number of options outstanding or on the terms and conditions of these options.

195 Notes to the Group Financial Statements

year ended 31 December 2009

48. Share based payments (continued)

Long-Term Incentive Plan

The group has a Long-Term Incentive Plan ("the plan") which provides for the delivery of conditional fully paid ordinary shares in Irish Life & Permanent plc ("the company") to selected senior executives of the company or its subsidiaries at no cost. The plan was approved by shareholders at the AGM held in May 2006.

Under the plan shares granted in 2006 vest for participants on the attainment of the following performance criteria:

- Cumulative growth in earnings per share ("EPS") on an embedded value basis over the three years from grant must exceed the increase in the consumer price index (CPI) over the same period plus 5% p.a. before any shares can vest.

- 25% of the share awards vest if the total shareholder return ("TSR") for the group at least matches the weighted average TSR of the FTS Eurofirst 300 Banking and Insurance indices.

- 100% of the share awards will vest if the TSR for the group exceeds the weighted average TSR of the FTS Eurofirst 300 Banking and Insurance indices plus 8% p.a.. Awards will vest on a linear scale between 25% and 100% for TSR between the two levels specified.

Conditional shares granted in 2006 lapsed in 2009.

Following a review of remuneration policy, the performance conditions for plan awards granted from 2007 onwards were amended, the revised performance conditions were approved by the shareholders at the AGM held in May 2007.

Under the plan, shares granted after 2007 vest for participant on the attainment of the following performance criteria:

- 50% of the award vests if and only if the Return on Capital (“ROC”) target set by the Remuneration and Compensation Committee of the Board ("the Committee") at the date of grant is met (the “ROC 50%”).

- For awards granted in 2007, all of the ROC 50% (50% of an award) vests for cumulative ROC over the performance period of 60%. One quarter of the ROC 50% (or 12.5% of an award) vests for cumulative ROC over the performance period of 48%. For ROC performance between 48% and 60% the awards vest on a linear scale.

- The Return on Capital is measured on an EEV ("European Embedded Value") basis taking the post-tax EV operating profits of the group (excluding Allianz) and dividing by the opening shareholders equity attributable to the group’s insurance, banking and other activities.

- 50% of an award vests if and only if the TSR already abbreviated on page for the group at least matches the weighted average TSR of the FTS Eurofirst 300 Banking and Insurance indices (the TSR 50%).

- All of the TSR 50% (or 50% of an award) vests if the TSR for the group exceeds the weighted average TSR of the FTS Eurofirst 300 Banking and Insurance indices plus 8% p.a.. One quarter of the TSR 50% (or 12.5% of an award) vests for TSR performance equal to average TSR of the FTS Eurofirst 300 Banking and Insurance indices. Awards vest on a linear scale between 12.5% of an award and 50% of an award for TSR exceeding the average up to 8% p.a..

196 Notes to the Group Financial Statements year ended 31 December 2009

48. Share-based payments (continued)

Long-Term Incentive Plan

2009 Number of Conditional Shares Overview

Key Other Total Management Employees Outstanding as at 1 January 736,866 752,469 1,489,335 Lapsed during the year - (517,368) (517,368) Balance as at 31 December 736,866 235,101 971,967

2008 Number of Conditional Shares

Key Other Total Management Employees

Outstanding as at 1 January 350,134 381,478 Financial Statements 731,612 Corporate Governance Business Review Granted during the year 386,732 403,126 789,858 Forfeited during the year - (32,135) (32,135) Balance as at 31 December 736,866 752,469 1,489,335

The fair value of service received for share grants is measured by reference to the fair value of conditional shares granted. The value is estimated using a standard Monte Carlo approach, a Cox-Ingersoll-Ross model to calculate stochastic behaviour and log normal distributions for volatility.

There were no conditional shares granted in 2009.

The fair value of conditional shares granted in 2008 was €6.12 per share.

Share price at date of grant €10.31 Expected volatility 29.60% Share grant life 3 years Expected dividend growth 10% Risk-free discount rate 3.71%

Expected volatility was determined based on three-year historic volatility.

As a result of the corporate restructure to create Irish Life & Permanent Group Holdings plc, there was no subsequent impact on the number of the plan shares outstanding or on the terms and conditions of these plan shares.

49. Taxation

(a) Analysis of taxation charge

Taxation charged to income statement

2009 2008 €m €m

Current taxation Charge for current year 4 11 Adjustments for prior years (1) (1) Taxation charged to income statement 3 10

197 Notes to the Group Financial Statements

year ended 31 December 2009

49. Taxation (continued)

(b) Reconciliation of standard to effective tax rate 2009 2008 €m €m

Operating (loss) / profit (310) 63 Less share of profits of associate undertaking / joint venture 2 (22) Profit on continuing activities before tax (308) 41

Tax calculated at standard ROI corporation tax rate of 12.5% (2008: 12.5%) (39) 5

Different basis of tax for ROI life assurance 25 2 Non-taxable own share adjustment 2 (11) Local basis of taxation on overseas profits (1) 1 Non-deductible expenses 2 21 Other 14 (8) 3 10

(c) Tax effects of each component of other comprehensive income

Group 2009 Gross Tax Net €m €m €m

Revaluation of property (97) 8 (89) Change in currency translation adjustment reserve 1 - 1 Change in available-for-sale financial assets 42 (5) 37 Amortisation of AFS securities reclassified to loans and receivables 15 (2) 13 (39) 1 (38)

2008 Gross Tax Net €m €m €m

Revaluation of property (138) 32 (106) Change in currency translation adjustment reserve (3) - (3) Change in available-for-sale financial assets (43) 5 (38) Amortisation of AFS securities reclassified to loans and receivables 9 (1) 8 (175) 36 (139)

Company 2009 Gross Tax Net €m €m €m

Revaluation of property (51) 2 (49) Change in available-for-sale financial assets 42 (5) 37 Amortisation of AFS securities reclassified to loans and receivables 15 (2) 13 6 (5) 1

198 Notes to the Group Financial Statements year ended 31 December 2009

49. Taxation (continued)

2008 Gross Tax Net €m €m €m Overview

Revaluation of property (47) 18 (29) Change in available for sale financial assets (43) 5 (38) Amortisation of AFS securities reclassified to loans and receivables 9 (1) 8 (81) 22 (59)

50. Earnings per share

(a) Basic EPS 2009 2008

Weighted average number of ordinary shares in issue and ranking for dividend excluding own shares held for the benefit of life assurance policyholders and treasury shares* 267,990,308 Financial Statements 267,608,033 Corporate Governance Business Review

(Loss) / profit for the year attributable to equityholders (€313m) €49m EPS (cent) (116.8) 18.3

(b) Fully diluted EPS 2009 2008

Weighted average number of potential dilutive ordinary shares arising from the group's share option schemes - -

Weighted average number of ordinary shares excluding own shares and treasury shares held for the benefit of policyholders used in the calculation of fully diluted EPS 267,990,308 267,608,033 Fully diluted EPS (cent) (116.8) 18.3

Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. The group's share options are the only category of dilutive potential ordinary shares.

As at 31 December 2009 and 2008 the adjustment calculation to the weighted average for the effects of dilutive potential ordinary shares was nil as the share option exercise prices were all lower than the average share price for the year.

*Weighted average number of shares 2009 2008

As at 1 January Number of shares in issue 276,782,351 276,017,990

Own shares held for the benefit of life assurance policyholders (8,933,798) (8,743,343) Treasury shares held (457,914) (457,914)

During the year Weighted average shares issued - 558,347 Weighted average shares sold 1,929,182 1,506,245 Weighted average shares purchased (1,329,513) (1,273,292) Weighted average number of shares 267,990,308 267,608,033

199 Notes to the Group Financial Statements

year ended 31 December 2009

51. Dividends

2009 2008 Cent per €m Cent per €m share share

Dividends paid in the year Final (relating to prior period) - - 52.5 145 Interim - - 22.5 62 Total Dividends paid in the year - - 75.0 207

Dividends proposed as at 31 December - - - -

52. Commitments and contingencies

(a) Capital commitments

In the normal course of its banking business the group has entered into commitments to lend money as follows:

Group Company 2009 2008 2009 2008 €m €m €m €m

Guarantees and irrevocable letters of credit 6 16 41 51

Commitments to extend credit - less than one year 402 433 402 433 - one year and over 157 229 155 198 Total commitments to extend credit 559 662 557 631

The group has entered into commitments to purchase investment properties totalling €224m (2008: €244m). As a result of a reduction in the market value of investment properties included in the capital commitments, an onerous contract has been recognised per Note 26(b) Provisions, which resulted in a negative investment return of €33m as included in Note 43 Investment return. The group has also entered into commitments to purchase units in external property funds of €21m (2008: €25m) for the inclusion in unit-linked policyholder funds.

Commitments to extend credit do not expose the group or company to significant interest rate risk.

As at 30 June 2008 the group acquired the remaining 50% of Joint Mortgage Holdings No. 1 Limited (parent of Springboard Mortgages Limited) and balances as at 31 December 2008 are included in the consolidated numbers.

(b) Contingencies

The group like all other banks and insurance companies is subject to litigation in the normal course of its business. Based on legal advice, the group does not believe that any such litigation will have a material effect on its profit or loss and financial position.

As part of the agreement in 2001 to dispose of Interstate Life Assurance Company Limited, its wholly owned US subsidiary, the group provided certain guarantees in regard to persistency experience on a block of business held by Interstate. The maximum amount payable on foot of these guarantees is €7.8m (2008: €8.4m). The group believes that the crystallisation of this amount is unlikely.

Since 31 December 2008, the group has been subject to investigations by a number of statutory bodies including the Financial Regulator (Insurance Section) into deposits placed by Irish Life Assurance plc with Anglo Irish Bank (on 31 March 2008, 26 September 2008, 29 September 2008 and 30 September 2008). As at 31 December 2009, these investigations are ongoing.

200 Notes to the Group Financial Statements year ended 31 December 2009

52. Commitments and contingencies (continued)

The company has given a commitment to Fastnet 4 Limited, Fastnet 5 Limited, Fastnet 6 Limited and Fastnet 7 Limited which are special purpose subsidiaries of the group, that in the event that a rating event occurs the company would provide additional reserves to each of the special purpose subsidiaries. The bonds issued by these special purpose subsidiaries are principally held by the company. A rating event is defined as the long-term, Overview unsecured, unsubordinated and unguaranteed debt obligations of Irish Life & Permanent plc are rated below A3 by Moody’s or the short-term, unsecured, unsubordinated and unguaranteed debt obligations of Irish Life & Permanent plc are rated below P-1 by Moody’s or A-1 by S&P (unless the rating agencies confirm that the rating of the special purpose subsidiaries will not be adversely affected as a consequence of such rating of Irish Life & Permanent plc). As at 31 December 2009 this commitment amounted to €853m (2008: €707m).

(c) Operating lease commitments

The group leases various offices under non-cancellable operating leases. The future aggregate minimum lease payments under these leases are as follows:

Group Company

2009 2008 2009 Financial Statements 2008 Corporate Governance Business Review €m €m €m €m

Less than 1 year 11 10 12 11 Greater than 1 year and less than 5 years 40 36 40 39 Greater than 5 years 81 73 68 58 132 119 120 108

These leases typically run for a period of twenty five years, with an option to renew the lease after that date. Lease payments may be increased every five years to reflect market rentals. None of these leases include contingent rentals.

201 Notes to the Group Financial Statements

year ended 31 December 2009

53. Principal subsidiary and associated undertakings

(a) Principal subsidiary undertakings

Incorporated % of ordinary Name and Registered Office in shares held

Banking: permanent tsb Finance Limited* Ireland 100 56-59 St. Stephens Green, Dublin 2

Capital Home Loans Limited* UK 100 Admiral House, Harlington Way, Fleet, Hampshire, GU13 8YA

Irish Permanent Holdings (IOM) Limited* IOM 100 12/14 Ridgeway Street, Douglas, Isle of Man

Joint Mortgage Holdings No. 1 Limited Ireland 100 100 Lower Mount St., Dublin 2 (parent of Springboard Mortgages Limited)

Life Assurance: Irish Life Assurance plc Ireland 100 Irish Life Centre, Lower Abbey Street, Dublin 1

Irish Life International Limited Ireland 100 Irish Life Centre, Lower Abbey Street, Dublin 1

Other: Irish Progressive Services International Limited* Ireland 100 100 Lower Mount St., Dublin 2

Cornmarket Group Financial Services Limited Ireland 100 Liberties House, Christchurch Square, Dublin 8

Investment management: Irish Life Investment Managers Limited Ireland 100 Beresford Court, Beresford Place, Dublin 1

*held directly through Irish Life & Permanent plc.

The principal country of operation of each company is the country in which it is incorporated with the exception of Irish Life International Limited which operates internationally.

The registered office of Irish Life & Permanent plc is: Irish Life Centre, Lower Abbey Street, Dublin 1.

(b) Principal associated undertaking

Total issued equity / debt capital % holding Allianz - Irish Life Holdings plc Incorporated, registered and operating as a general 23,053,408 ordinary €1.25 shares 30.4 insurance company in Ireland (Held by a subsidiary undertaking)

202 Notes to the Group Financial Statements year ended 31 December 2009

54. Related parties

The group has a related party relationship with its directors and senior management, its associate (Note 12 Interest in associated undertaking) and the group’s pension schemes. As a result of the group's participation in Government guarantee schemes as described below, the group also has a related party relationship with the Government. The company also has related party relationships with its subsidiaries. Overview

(a) Directors shareholdings

The interests of the directors and the company secretary, including interests of their spouses and minor children, in the share capital of Irish Life & Permanent plc are as follows:

Number of beneficial ordinary shares held As at 31 December 2009 As at 31 December 2008 Ordinary Share Ordinary Share Shares Options Awards Shares Options Awards

Gillian Bowler 30,259 - - 30,259 - - Kevin Murphy 137,966 157,926 74,777 137,966 176,574 93,439 Breffni Byrne 10,000 - - 10,000 Financial Statements - - Corporate Governance Business Review Danuta Gray 4,600 - - 4,600 - - Margaret Hayes ------Eamonn Heffernan 7,500 - - 7,500 - - Roy Keenan 5,000 - - 5,000 - - Ray MacSharry ------David McCarthy 39,479 188,830 47,558 39,749 201,651 62,956 Liam O'Reilly ------Pat Ryan ------Ciarán Long (Company Secretary) 16,629 65,925 17,967 16,629 75,440 22,382

As at 31 December 2008, Ciarán Long, as alternative director of the TSB ESOP Trustees Limited, had a non-beneficial interest in 2,016,072 shares, these shares were transferred to an approved profit scheme reducing his non-beneficial interest to zero.

David McCarthy, Kevin Murphy and Ciarán Long as trustees of the employee benefit trust set up under the terms of the long-term incentive plan have a non-beneficial interest in 457,914 shares held in the plan (2008: 457,914).

(b) Transactions with key management personnel

Key management personnel include non-executive directors, executive directors and group senior management. Group senior management and executive directors as at 31 December 2009 includes:

Kevin Murphy Group Chief Executive David McCarthy Group Finance Director David Guinane Chief Executive – permanent tsb Bill Hannan Group Head of Risk and Compliance David Harney Chief Executive – Corporate Business Gerry Hassett Chief Executive – Irish Life Retail Tony Hession Group Head of Human Resources and Organisational Development Gerry Keenan Group Chief Executive – Irish Life Investment Managers Brendan Healy Group Chief Information Officer Bruce Maxwell Chief Actuary

The group's senior management as at 31 December 2008 are listed in the Annual Report and Financial Statements 2008 on page 142 and were the members of the Group Executive Team which was in place at the time.

Non-executive directors are compensated by way of fees only. The compensation of executive directors and other group senior management comprises salary and other benefits together with pension benefits. In addition they participate in the group's profit sharing, share option schemes and long-term incentive schemes. Full details of individual directors’ compensation are set out in the Directors Report on Remuneration on pages 58 to 62 which has been audited and forms part of the financial statements. Details of the share options are set out in Note 48 Share based payments. 203 Notes to the Group Financial Statements

year ended 31 December 2009

54. Related parties (continued)

Total compensation to key management personnel is as follows: 2009 2008 €’000 €’000

Fees 812 934 Salary and other benefits 4,107 4,921 Costs associated with departing executives - payment in lieu of notice 1,789 - - pension* 2,876 - Pension benefits - defined benefit 1,432 1,427 - defined contributions 30 44 Equity settled benefits 83 (339) 11,129 6,987 *Actuarial value of the pension arising as the result of early resignation (based on past normal custom and practice) for departing executives.

Number of key management personnel as at 31 December is as follows: 2009 2008 Non-executive directors 9 9 Executive directors and senior management 10 12 19 21

For key management who are members of a defined benefit scheme, the pension benefit included above is the increase in transfer value during the year. For defined contribution schemes it is the contributions made by the group to the scheme.

In the normal course of its business the group had balances and transactions with key management personnel as follows:

2009 2008 €’000 €’000 As at 31 December Loans* 612 1,023 Unsecured credit card balances and overdrafts 3 20 Deposits 3,564 3,479 Life assurance 6,797 5,902 Pension policies 4,594 6,271

2009 2008 €’000 €’000 Transactions during the year Loan advances - 626 Loan repayments* 270 175 Interest on loans 24 41 Interest on deposits (51) (69) Life assurance and pension premiums 1,441 1,217 Life assurance claims 1,267 537

*Loan balances as at 31 December 2008 include €342,180 in respect of employees who are no longer part of key management as at 31 December 2009.

The loans are granted on normal commercial terms and conditions with the exception of certain house loans where executive directors and senior management may avail of subsidised loans on the same terms as other eligible management of the group. All of the loans are secured. All interest and principal due at the statement financial position date on loans has been repaid on schedule and no provision for loan impairment is required. Life policies represent values for investment contracts (including pension policies) and sum assured for protection products. In addition some policies carry serious illness insurance cover. As at 31 December 2009 total secured illness cover amounted to €4,412,352 (2008: €3,197,280). 204 Notes to the Group Financial Statements year ended 31 December 2009

54. Related parties (continued)

Loans to directors

Loans are analysed individually as follows: Overview

2009 Balance 1 Principal Balance Interest Maximum Jan Repaid 31 Dec Paid Balance €’000 €’000 €’000 €’000 €’000

Denis Casey 1 228 (228) - (5) 228 Peter Fitzpatrick 1 31 (8) 23 (1) 31 David McCarthy 2 155 (9) 146 (3) 155 414 (245) 169 (9) 414

2008 Balance 1 Principal Balance Interest Maximum

Jan Repaid 31 Dec Paid Financial Statements Balance Corporate Governance Business Review €’000 €’000 €’000 €’000 €’000

Denis Casey 1 254 (26) 228 (9) 254 Peter Fitzpatrick 1 39 (8) 31 (1) 39 David McCarthy 2 163 (8) 155 (8) 163 456 (42) 414 (18) 456

1 Loans to Denis Casey and Peter Fitzpatrick were secured on their principal private residence. Both of these directors resigned in 2009. 2 The loan to David McCarthy is secured on a residential investment property.

As at 31 December 2009, the total interest outstanding and the total provisions on loans by the directors / former directors was €nil (2008: €nil).

Associate

Irish Life & Permanent plc has a commission agreement with its associated company, Allianz – Irish Life Holdings Limited (“Allianz”). Under this agreement, Irish Life & Permanent plc is paid commission for general insurance business written with Allianz through Irish Life & Permanent plc. Commission earned in 2009 was €8m (2008: €10m). In addition, a subsidiary of the group, Irish Life Investment Managers Limited has an investment agreement with Allianz. Fees earned under this agreement were €0.5m in 2009 (2008: €0.5m). Included within the group accounts is a net balance due to Allianz of €1.2m (2008: €2m). All transactions with Allianz are priced on an arms- length basis.

Other

In the normal course of business the group provides investment management to the group’s pension schemes. Fees earned under these agreements were €2.6m (2008: €3m).

Government

Irish Life & Permanent plc (“the company”) and its subsidiary Irish Permanent (IOM) Limited are participating covered institutions under the Government’s Credit Institutions (Financial Support) Scheme 2008 (the “scheme”) which guarantees covered liabilities raised by covered institutions up to September 2010. Covered liabilities are those liabilities in respect of retail and corporate deposits (to the extent not covered by existing deposit protection scheme in Ireland or any other jurisdiction), interbank deposits, senior unsecured debt, covered bonds and dated subordinated debt (Lower Tier 2) excluding any intra-group borrowing and any debt due to the European Central Bank arising from Eurosystem monetary operations. Under the terms of the scheme the Financial Regulator in consultation with the Minister may regulate the commercial conduct of covered institutions strictly in order to achieve the objectives of this scheme. 205 Notes to the Group Financial Statements

year ended 31 December 2009

54. Related parties (continued)

The total amount of guaranteed deposits, senior unsecured debt, covered bonds and dated subordinated debt raised by Irish Life & Permanent plc (“the company”) and Irish Permanent (IOM) Limited as covered institutions of the scheme as at 31 December 2009 amounted to €21,274m (2008: €19,641m). The charge to the income statement in respect of the Government guarantee for the year ended 31 December 2009 was €29m (3-month period ended 31 December 2008: €8m).

The other institutions covered by the scheme are:

1. Allied Irish Banks plc and its subsidiaries AIB Mortgage Bank, AIB Bank (CI) Limited, AIB Group (UK) plc and Allied Irish Banks North America Inc;

2. Anglo Irish Bank Corporation Limited and its subsidiary Anglo Irish Bank Corporation (International) Limited;

3. The Governor and Company of the Bank of Ireland and its subsidiaries Bank of Ireland Mortgage Bank, ICS Building Society and Bank of Ireland (IOM) Limited;

4. EBS Building Society and its subsidiary EBS Mortgage Finance;

5. Irish Nationwide Building Society and its subsidiary Irish Nationwide (IOM) Limited; and

6. Postbank Ireland Limited.

Irish Life & Permanent plc (“the company”) and its subsidiary Irish Permanent (IOM) Limited are also a participating covered institution under the Government’s Credit Institutions (Eligible Liabilities Guarantee) Scheme 2009 (the “ELG scheme”) which guarantees certain eligible liabilities (including deposits) of up to five years in maturity. Subsequent to the year end, the group issued $1.75billion worth of bonds which are guaranteed by the ELG scheme.

As a result of the group’s participation in the schemes described above, the Government is recognised as a related party as defined by the accounting standards. Transactions that the group has entered into with the Government include deposits, senior debt, commercial paper and dated subordinated debt.

In the normal course of business the group has various transactions with the Government, state departments and semi-state bodies including the holding of securities issued by the Government and semi-state bodies of €2,586m (2008: €379m).

Deposits by banks include deposits of €450m (2008: €450m) placed by the National Treasury Management Agency (NTMA). These deposits are collateralised on notes issued by special purpose vehicles controlled by the group. The notes are secured by a first fixed charge over residential mortgages held by the special purpose vehicles, which form part of the group’s consolidated financial statements.

In addition to the above financial instrument transactions with the Government, the group during the normal course of business has engaged with the Government in other transactions. Included in the investment property portfolio are eleven properties for which the Office of Public Works (OPW) on behalf of Government departments is a tenant. These property investments are held in unit-linked funds, the total annual unit-linked rental income earned from these leases is €11.3m out of a total annual rental income of €150m. Some other investment properties may include tenants who are agencies financed by the Government.

During 2009 the Government held a 100% shareholding in Anglo Irish Bank Corporation Limited (“Anglo Irish Bank”). Due to the group’s participation in the Government’s scheme outlined above, balances between Anglo Irish Bank and the group are considered related party transactions in accordance with the accounting standards. Balances as at 31 December 2008 are included for comparative purposes.

As at 31 December 2009, deposits with Anglo Irish Bank amounted to €2m (2008: €79m). As at 31 December 2009, debt securities includes €701m (2008: €330m) of securities issued by Anglo Irish Bank and loans and receivables to bank includes loans amounting to €375m (2008: €262m) issued to Anglo Irish Bank.

206 Notes to the Group Financial Statements year ended 31 December 2009

54. Related parties (continued)

As at 31 December 2009, deposits by banks include deposits of €1,901m (2008: €905m) from Anglo Irish Bank, including deposits in respect of a repurchase agreement with Anglo Irish Bank. As at 31 December 2009, derivative assets includes €2m (2008: €4m) being the fair value of derivative instruments where the counterparty is Anglo Irish Bank. Overview

Company

In addition to the above relationships with Allianz and key management personnel, the company in the normal course of its banking business enters into transactions with the life assurance and other banking subsidiaries of the group including special purpose vehicles established in respect of securitised assets. These transactions which may be collateralised are eliminated in the consolidated group financial statements and are all priced on an arms length basis. The following amounts were included in the company statement of financial position in respect of transactions with related parties:

2009 2008 €m €m

Assets Financial Statements Corporate Governance Business Review Loans and receivables to customers Interest bearing 8,268 8,410 Non-interest bearing 350 334 Debt securities 5,041 6,198 Derivatives 57 35 Other assets 12 19

Liabilities Customer accounts * 6,727 5,902 Debt securities in issue 2,085 2,127 Derivatives - 1,378 Other liabilities 48 44

The group’s Isle of Man operations have advanced loans of €36m (2008: €46m) which in the event of the counterparty defaulting, the company has committed to reimburse the Isle of Man subsidiary for any losses incurred.

As at 31 December 2009, the parent company held pools of mortgages amounting to €19,441m (2008: €19,164m) with special purpose subsidiaries of the group. These special purpose vehicles issued mortgage-backed floating-rate notes to fund the purchase of these mortgage pools. As at 31 December 2009 the parent company holds €18,279m of these notes (2008: €17,679m) to use as collateral against borrowings. Details of this collateral is included in Note 8 Loans and receivables to customers.

The parent company's statement of financial position (in accordance with IAS 32) continues to show the loans and receivables that were transferred to the special purpose vehicles and which form the security for the notes issued do not qualify for derecognition. Consequently the company continues to show the loans and receivables and not the notes issued by the special purpose vehicles. The parent company's statement of financial position is shown net of the debt securities purchased from the special purpose vehicles, the related derivative contracts, customer account balances, and the funds to the special purpose vehicles which were used to acquire the mortgage pools.

* Customer accounts include deposits of €1,251m (2008: €611m) to the group's life assurance operations (including deposits held for the benefit of unit linked policyholders). As at 31 December 2009 the company gave collateral €nil (2008: €0.7bln) against these deposits. The collateral was in the form of the notes purchased from the special purpose vehicles as described above.

207 Notes to the Group Financial Statements

year ended 31 December 2009

54. Related parties (continued)

Capital Home Loans Limited (a UK subsidiary of the group) has sold pools of mortgages amounting to £5,784m (2008: £5,943m) to special purpose subsidiaries of the group. These special purpose vehicles issued sterling and euro mortgage-backed floating-rate notes to fund the purchase of these mortgage pools. In January 2009 the euro mortgage-backed floating-rate notes were redenominated into sterling. As at 31 December 2009 the parent company holds notes of £4,427m (2008: €6,155m) to use as collateral against borrowings.

The company has entered into a stock-lending agreement with Irish Life Assurance plc to borrow government securities (from non-policyholder funds). In return the company places collateral in the form of mortgage-backed floating-rate notes ("notes") issued by special purpose vehicles of the group with Irish Life Assurance plc. As at 31 December 2009, the company had borrowed €0.13bln (2008: €1.1bln) of government securities against collateral of €0.2bln (2008: €1.8bln) of notes. The stock-lending agreement provides for a minimum collateral value of 150% of Aaa-rated bonds to be maintained in respect of the government securities borrowed. The stock-lending agreement ceased in January 2010.

The company has given a commitment to Fastnet 4 Limited, Fastnet 5 Limited, Fastnet 6 Limited and Fastnet 7 Limited which are special purpose subsidiaries of the group, that in the event that a rating event occurs the company would provide additional reserves to each of the special purpose subsidiaries. The bonds issued by these special purpose subsidiaries are principally held by the company. A rating event is defined as the long-term, unsecured, unsubordinated and unguaranteed debt obligations of Irish Life & Permanent plc are rated below A3 by Moody’s or the short-term, unsecured, unsubordinated and unguaranteed debt obligations of Irish Life & Permanent plc are rated below P-1 by Moody’s or A-1 by S&P (unless the rating agencies confirm that the rating of the special purpose subsidiaries will not be adversely affected as a consequence of such rating of Irish Life & Permanent plc). As at 31 December 2009 this commitment amounted to €853m (2008: €707m).

55. Reporting currency and exchange rates

The consolidated financial statements are presented in millions of euro.

The following table shows, for the periods and dates indicated, the average and closing rates used by the group:

2009 2008

Closing exchange rate € / Stg£ 0.8881 0.9525 Average exchange rate € / Stg£ 0.8899 0.8028

Closing exchange rate € / US$ 1.4406 1.3917 Average exchange rate € / US$ 1.3971 1.4725

56. Events after reporting period

On 15 January 2010 Irish Life & Permanent plc was acquired by Irish Life & Permanent Group Holdings plc. On this date under a scheme of arrangement sanctioned by the High Court. 276,782,344* Irish Life & Permanent plc ordinary shares were cancelled and Irish Life & Permanent Group Holdings plc subsequently issued the 276,782,344 ordinary shares to the shareholders of Irish Life & Permanent plc on a one-for-one basis. On the same day, Irish Life & Permanent plc issued 276,782,344 ordinary shares to Irish Life & Permanent Group Holdings plc. Irish Life & Permanent plc is now a 100% subsidiary of Irish Life & Permanent Group Holdings plc.

On 18 January 2010 Irish Life & Permanent plc was delisted from the London and Irish stock exchanges. Subsequently, Irish Life & Permanent Group Holdings plc was listed on those stock exchanges.

*To meet statutory requirements, seven shares were left in issue following this cancellation. These shares are now held directly by or in trust for Irish Life & Permanent Group Holdings plc.

208 Additional Information year ended 31 December 2009

Funds Under Management

2009 2008 €m €m

Funds managed on behalf of unit-linked policyholders 24,536 21,184 Overview Funds managed on behalf of non-linked policyholders 2,296 2,288 26,832 23,472 Segregated funds 3,945 3,854 30,777 27,326 uiesRve CroaeGvrac Financial Statements Corporate Governance Business Review

209 210 Embedded Value Basis Supplementary Information

Statement of Directors' Responsibilities 212

Consolidated Statement of Financial Position 213 Overview

Consolidated Income Statement 214

Consolidated Statement Of Comprehensive Income and Expense 215

Consolidated Reconciliation of Shareholders' Equity - Embedded Value Basis 215

Notes to EV Basis Supplementary Information 216 uiesRve CroaeGvrac Financial Statements Corporate Governance Business Review

Independent Auditor's Report 231 Statement of Directors’ Responsibilities in relation to Embedded Value Basis – Supplementary Information

The directors of Irish Life & Permanent plc have chosen to prepare supplementary information in accordance with the European Embedded Value ("EEV") Principles issued in May 2004 by the European Chief Financial Officers’ Forum. When compliance with the EEV principles is stated, those principles require the directors to prepare supplementary information in accordance with the embedded value methodology contained in the EEV principles and to disclose and explain any non-compliance with the EEV guidance included in the EEV principles.

In preparing the embedded value (“EV”) basis information the directors have:

• Prepared the EV information in accordance with the EEV principles;

• Identified and described the business covered by embedded value methodology;

• Applied the embedded value methodology consistently to the covered business;

• Determined assumptions on a realistic basis, having regard to past, current and expected future experience and to any relevant external data, and then applied them consistently and made estimates that are reasonable and consistent; and

• For businesses other than those to which the embedded value methodology has been applied the results have been prepared based on the requirements of the IFRS issued by the IASB and adopted by the EU as set out in the group’s accounting policies.

212 Irish Life & Permanent plc Annual Report and Financial Statements 2009 Consolidated Statement of Financial Position - Embedded Value Basis

As at 31 December 2009 2009 2008 Notes €m €m

Assets Cash and other receivables 326 324 Investments 32,228 24,761 Overview Loans and receivables to customers 8 38,592 40,075 Loans and receivables to banks 4,925 4,775 Reinsurance assets 2,126 2,258 Interest in associated undertaking / joint venture 122 139 Property and equipment 238 362 Shareholder value of in-force business 1,076 1,080 Intangible assets 42 54 Goodwill 70 66 Deferred tax assets 29 5 Other debtors and prepayments 427 534 Retirement benefit asset 96 89 Total assets 80,297 74,522 uiesRve CroaeGvrac Financial Statements Corporate Governance Business Review Liabilities Deposits by banks 18,713 18,546 Customer accounts 14,562 14,118 Debt securities in issue 13,262 10,899 Derivative liabilities 665 550 Investment contract liabilities 24,060 21,110 Insurance contract liabilities 4,034 4,007 Outstanding insurance and investment claims 115 114 Other liabilities and accruals 598 545 Retirement benefit liability 159 158 Subordinated liabilities 1,644 1,699 Total liabilities 77,812 71,746

Equity Share capital 89 89 Share premium 135 135 Other reserves 87 124 Retained earnings 2,174 2,427 Equity excluding non-controlling interest 5,11 2,485 2,775 Non-controlling interest 6 - 1 Total equity including non-controlling interest 2,485 2,776

Total liabilities and equity 80,297 74,522

213 Irish Life & Permanent plc Annual Report and Financial Statements 2009 Consolidated Income Statement - Embedded Value Basis

year ended 31 December 2009 2009 2008 Notes €m €m

Operating profit Insurance and investment business 102 284 Banking (270) 30 Other (26) 5 (194) 319

Share of associate / joint venture (2) 22

Operating (loss) / profit before impairment of goodwill and tax (196) 341

Impairment of goodwill - (170) Operating (loss) / profit before tax 1 (196) 171

Short-term investment fluctuations 4 (68) (640) Effect of economic assumption changes 4 (38) 105 Adjustment on inter-operating segments 4 (17) - Loss before tax (319) (364)

Taxation 3 40 (65)

Loss for the year (279) (429)

Attributable to: Owners of the parent (279) (433) Non-controlling interest - 4 (279) (429)

Earnings per share including own shares held for the benefit of life assurance policyholders (cent) 10 (101.0) (156.8)

Operating earnings before impairment of goodwill per share including own shares held for the benefit of life assurance policyholders (cent) 10 (65.9) 110.8

214 Irish Life & Permanent plc Annual Report and Financial Statements 2009 Consolidated Statement of Comprehensive Income - Embedded Value Basis year ended 31 December 2009 2009 2008 Notes €m €m

Loss for the year 4 (279) (429)

Other comprehensive income Overview

Revaluation of owner occupied property (57) (52)

Currency translation adjustment reserve Gains / (losses) on hedged investment in foreign operations 2 (12) Gains / (losses) on unhedged investment in foreign operations 1 (3) (Losses) / gains on hedging of investment in foreign operations (2) 12 1 (3) Change in value of available for sale financial assets Change in fair value of AFS financial assets 42 4 Change in fair value of AFS financial assets prior to date of reclassification as loans and receivables - (47)

42 Financial Statements (43) Corporate Governance Business Review Amortisation of AFS securities to loans and receivables 15 9 Other comprehensive income 1 (89)

Deferred tax on other comprehensive income (4) 24 Other comprehensive income, net of tax (3) (65)

Total comprehensive income for the year (282) (494)

Attributable to: Owners of the parent (282) (497) Non-controlling interest 6 - 3 Total comprehensive income for the year (282) (494)

Consolidated Reconciliation of Shareholders' Equity - Embedded Value Basis year ended 31 December 2009 2009 2008 €m €m

Shareholders' equity (excluding non-controlling interest) as at 1 January 2,775 3,385

Income and expenses attributable to owners of the parent (282) (497) Mark to market movement of policyholder liabilities in respect of own shares (18) 86 Adjustment to lower of cost / market value of own shares - (5) Change in own shares at cost 9 3 Dividends paid - (207) Issue of share capital - 10 Change in share-based payment reserves 1 - Shareholders' equity (excluding non-controlling interest) as at the end of the year 2,485 2,775

215 Irish Life & Permanent plc Annual Report and Financial Statements 2009 Notes to the EV Basis Supplementary Information

year ended 31 December 2009

Basis of Preparation income statement. The EV financial information shows Earnings generated by the group’s life assurance any change in the value of owner occupied property for operations are prepared in accordance with the covered business in the income statement. The EV European Embedded Value ("EEV") Principles issued in financial information reclassifies and summarises the May 2004 (with additional guidance on EEV disclosures information included in the statutory financial issued in October 2005) by the European Chief Financial information. The directors acknowledge their Officers’ ("CFO") Forum. For businesses other than life responsibility for the preparation of the supplementary assurance the results have been prepared based on the EV basis information. recognition and measurement principles of IFRS issued by the International Accounting Standards Board The methodology applied to produce the EV ("IASB") and adopted by the EU which were effective as information for the year ended 31 December 2009 is at 31 December 2009. consistent with the methodology used to produce the EV information for the year ended 31 December 2008, IFRS 4 brings into force phase 1 of the IASB insurance other than as described in Note 12 EV assumptions accounting project. In view of the phased relating to the equity volatility rates used in the implementation of IFRS for insurance business, the calculation of the costs of financial options and group believes that shareholders will continue to place guarantees. considerable reliance on embedded value information relating to the life assurance business as a whole. The Covered Business statutory financial information includes insurance The EEV Principles are applied to value “covered contracts written in the life assurance business based business” as defined by the Principles. This includes on embedded value earnings calculated using the EEV individual and group life assurance and investment principles developed by the European CFO Forum. The contracts, pensions and annuity business written in Irish methodology produces an Embedded Value ("EV") as a Life Assurance plc and Irish Life International, and the measure of the consolidated value of shareholders’ investment management business written in Irish Life interests in the business covered by the EEV Principles. Investment Managers Limited. In the EV financial The EV basis financial information extends these information, the same valuation approach is applied to principles to investment contracts written in the life both insurance and investment contracts within the assurance business. The statutory financial information covered business. treats tax deducted from policyholder funds as an income item while the EV basis financial information Embedded Value show these deductions as a tax item. Embedded Value ("EV") is the present value of shareholders’ interests in the earnings distributable The own share adjustment in EV basis partially reversed from assets allocated to the covered business after the mismatch which arises under IFRS statutory sufficient allowance is made according to the EEV financial information where own shares held on behalf Principles for the aggregate risks in the covered of policyholders are required to be mark to market in business. The EV consists of the following components: policyholder liabilities but the matching assets are not recorded as assets on the statement of financial - free surplus allocated to the covered business; position. The EV basis restates the policyholder liability - required capital, less the cost of holding required relating to own shares to the lower of market value or capital; and the book cost of the shares. In the year to - present value of future shareholder cash flows from December 2009, the EV basis has not reversed the in-force covered business ("PVIF"), including an mismatch as market value was lower than book cost. In appropriate deduction for the time value of financial the EV basis the mark to market movement on the options and guarantees. liabilities is shown as a movement in shareholder equity, in IFRS this mismatch is included in the movement on The value of future new business is excluded from the the income statement. EV.

For all business other than “covered business”, the EV The cost of holding required capital is defined as the financial information incorporates the same values and difference between the amount of the required capital earnings included in the statutory financial information, and the present value of future releases, allowing for determined using the IFRS basis except that impairment future investment returns, of that capital. of goodwill which is shown in the IFRS income statement under operating profit is shown in Free Surplus and Required Capital non-operating profit in the EV basis. The statutory Free surplus is defined as the market value of assets in based financial information brings any change to the the covered business less supervisory liabilities less value of owner occupied property held in covered required capital. It is the market value of any capital and business through the Statement of Comprehensive surplus allocated to, but not required to support, the Income, and allows for a depreciation charge in the in-force covered business at the valuation date. The free 216 Irish Life & Permanent plc Annual Report and Financial Statements 2009 Notes to the EV Basis Supplementary Information year ended 31 December 2009 surplus is shown net of the accounting value of the emerge from covered business are determined using subordinated debt. The free surplus also allows for the realistic assumptions for each component of cash flow regulatory stop loss reinsurance treaty liability offset but and for each policy group. Future economic and a corresponding reduction equal to the regulatory stop investment return assumptions are based on conditions loss reinsurance treaty liability offset is taken from the as at 31 December 2009. The assumed discount and

PVIF. inflation rates are consistent with the investment return Overview assumptions. The level of required capital reflects the amount of assets attributed to the covered business in excess of The assumptions for demographic elements, including that required to back regulatory liabilities whose mortality, morbidity, persistency and expense distribution to shareholders is restricted. The EEV experiences, reflect recent operating experiences and Principles require this level to be at least the level of are reviewed annually. Allowance is made for future solvency capital at which the local supervisory authority improvements in annuitant mortality based on is empowered to take action and any further amount experience and externally published data. Favourable that may be encumbered by local supervisory changes in operating experience are not anticipated restrictions. until the improvement in experience has been observed. Further comments on the assumptions are In light of this the directors have set the level of given in Note 12 EV assumptions, below. required capital to be 150% of the regulatory minimum uiesRve CroaeGvrac Financial Statements Corporate Governance Business Review solvency margin requirement at the valuation date, All costs relating to the covered business are allocated including the additional margin required under the to that business. The expense assumptions used for the Solvency 1 rules. The directors consider this to be a projections therefore include the full cost of servicing conservative level of capital to manage the covered the business. The costs include future depreciation business, allowing for the supervisory basis for charges in respect of certain property and equipment calculating liabilities, the insurance and operational risks included in the free surplus. The PVIF makes no inherent in the underlying products and the methods allowance for future planned development expenses used to value financial options and guarantees included where such expenses are expected to give rise to future in those products. improvements in efficiency. Certain group costs allocated to the life company are not included within New Business the cash flow projections and are accounted for on an New business premiums reflect income arising from the annual basis in the other group results. sale of new contracts during the reporting period. Increases to premiums that are generated by Risk Discount Rate policyholders at their discretion are included in new The risk discount rate is a combination of a base business as they occur. Increases to renewal premiums risk-free rate and a risk margin, which reflects the on group pension contracts are treated as new business residual risks inherent in the covered business, after premiums. taking account of prudential margins in the supervisory liabilities, the required capital and the specific The new business contribution is the present value of allowance for financial options and guarantees. future shareholder cash flows arising from the new business premiums written in the period less a The group has adopted a bottom-up approach to the deduction if relevant for the time value of financial determination of the risk discount rate. Each element of options and guarantees. The contribution makes full risk is assessed in turn and a cost is reflected as an allowance for the associated amount of required capital addition to the base risk-free discount rate. The risk and includes the value of expected renewals on new discount rate derived in this way reflects the risk of contracts. volatility associated with the cash flows in the embedded value model. 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 217 Irish Life & Permanent plc Annual Report and Financial Statements 2009 Notes to the EV Basis Supplementary Information

year ended 31 December 2009

The key assumptions are set out in Note 12 EV three main components: assumptions. - New business contribution The contribution from new business written during The market risk margin neutralises the effect of the reporting period is calculated as at the point of assuming future investment returns in excess of the sale using assumptions applicable at the start of the base risk-free rate. year. This is then rolled forward to the end of the financial period using the risk discount rate applicable The non-market risk margin is based on an estimate of at the start of the reporting year. the impact of each of the following risks - mismatch risk, credit risk, demographic risks including mortality, - Profit from existing in-force business morbidity, persistency and expense risks, operational The profit from existing business is calculated using risk and liquidity risk. opening assumptions and comprises:

An allowance is made for the diversification effect in - Interest at the risk discount rate on the value of that each of the risks are not expected to occur in force business allowing for the timing of cash simultaneously. Financial options and guarantees are flows (“expected return”). explicitly valued using a stochastic model approach and no further risk allowance is included for these in the risk - Experience variances: when calculating embedded discount rate. The non-market risk margin was values it is necessary to make assumptions determined by the directors following a review of the regarding future experiences including persistency estimates emerging from the above exercise. (how long policies will stay in force), risk (mortality and morbidity), future expenses and taxation. Financial Options and Guarantees Actual experience may differ from these Under the EEV Principles an allowance for the time assumptions. The impact of the difference between value of financial options and guarantees (“FOG”) is actual and assumed experience for the reporting required where a financial option exists which is period is reported as experience variances. exercisable at the discretion of the policyholder. The time value of an option reflects the additional value - Operating assumption changes: the assumptions inherent in the option due to the potential for the on which embedded values are calculated are option to increase in value prior to its expiry date, reviewed regularly. Where it is considered usually due to movements in the market value of assets. appropriate in the light of current or expected The value of an option based on market conditions at experience to change any assumptions regarding the date of the valuation is referred to as the intrinsic expected future experience, the impact on total value. value of in-force business of any such change is reported as an “operating assumption change”. The supervisory liabilities allow on a prudent basis for both the intrinsic and time value of FOGs and the PVIF - Expected investment return allows for the run-off of these liabilities. An explicit The expected investment earnings on the net assets deduction is made to the PVIF to allow for the impact of attributable to shareholders are calculated using the future variability of investment returns on the cost of future investment return assumed at the start of the FOGs (time value) and the current in the money cost of year. The expected investment earnings allows for the FOG (intrinsic value). The cost of FOGs is calculated interest payable on subordinated debt and the fee using stochastic models. The main financial options and payable in relation to the stop loss reassurance treaty. guarantees and the assumptions used to value them are described in Note 13 Sensitivity analysis. Two further items make up the total profit arising from the covered business: Service Companies All services relating to the covered business are charged - Short-term investment fluctuations on a cost recovery basis. This is the impact on the EV of differences between the actual investment return and the expected Tax investment return assumptions assumed at the The projections include on a discounted basis all tax start of the year. that is expected to be paid under covered business under current legislation, including tax that would arise - Effect of economic assumption changes if surplus assets within the covered business were This is the impact on the EV of changes in external eventually to be distributed. economic conditions including the effect changes in interest rates have on risk discount rates and Analysis of Profit future investment return assumptions. The profit from the covered business is analysed into 218 Irish Life & Permanent plc Annual Report and Financial Statements 2009 Notes to the EV Basis Supplementary Information year ended 31 December 2009

1. Operating (loss) / profit before tax

2009 2008 €m €m

Insurance and investment business Overview New business contribution 51 100 Profit from existing business - Expected return 108 133 - Experience variances (70) - - Operating assumption changes (1) 19 Expected investment return 14 32 Operating profit before tax 102 284

Banking Net interest income 375 473 Non-interest income 44 42 Government guarantee (29) (8)

Trading income (3) Financial Statements 5 Corporate Governance Business Review 387 512 Administrative expenses including depreciation (287) (307) Impairment losses on loans and receivables and debt securities (376) (204) Impairment of other assets (2) - (278) 1 Investment return 8 29 Operating (loss) / profit before tax (270) 30

Other activities Non-interest income 55 73 Administrative expenses including depreciation (77) (68) Impairment of other assets (4) - Operating (loss) / profit before tax (26) 5

Share of associate / joint venture (2) 22

Total operating (loss) /profit before impairment of goodwill and tax (196) 341

Banking Impairment of goodwill - (170)

Total operating (loss) / profit before tax (196) 171

219 Irish Life & Permanent plc Annual Report and Financial Statements 2009 Notes to the EV Basis Supplementary Information

year ended 31 December 2009

2. Life and investment new business

2009 2008 €m €m Life business

Present value of new business premiums (PVNBP) Single premium 1,459 1,561 Regular premium 202 355 Regular premium capitalisation factor 4.6 4.5 PVNBP 2,398 3,152 Annual premium equivalent (APE) 348 511

New business contribution 40 77

New business margin PVNBP 1.6% 2.4%

APE 11.4% 15.1%

ILIM

Present value of new business premiums (PVNBP) 1,908 2,028 Annual premium equivalent (APE) 191 203 New business contribution 11 23 New business margin PVNBP 0.6% 1.1% APE 5.9% 11.4%

Total new business

Present value of new business premiums (PVNBP) 4,306 5,180 Annual premium equivalent (APE) 539 714 New business contribution 51 100 New business margin PVNBP 1.2% 1.9% APE 9.4% 14.0%

220 Irish Life & Permanent plc Annual Report and Financial Statements 2009 Notes to the EV Basis Supplementary Information year ended 31 December 2009

3. Taxation

2009 2008 €m €m

Life operations* Overview Operating profit (12) (24) Short-term investment fluctuations 15 (20) Effect of economic assumption changes 11 (24) 14 (68) Banking operations Banking operating profit 24 (10) Release deferred tax - 14 24 4

Other operations 2 (1) 40 (65)

* The 2009 EV life tax charge due to the increase in investment markets reflects a small reversal of the reduction

in 2008 of the tax appropriation from net life unit linked policies. The 2008 EV life tax charge reflects Financial Statements a reduction Corporate Governance Business Review in current and future tax policies as a result of the fall in investment markets in 2008. The movement in short- term investment fluctuations of €640m negative attracted a tax charge of €20m as a consequence.

4. Analysis of (loss) / profit after tax

2009 Gross Tax Net €m €m €m

Operating loss Insurance and investment business 102 (12) 90 Banking (270) 24 (246) Other (26) 2 (24) Share of associate (2) - (2) Operating loss (196) 14 (182)

Impairment of goodwill - - - Operating (loss) / profit (196) 14 (182)

Short-term investment fluctuations (68) 15 (53) Effect of economic assumption changes (38) 11 (27) Adjustment on inter-operating segments (17) - (17) (319) 40 (279)

2008 Gross Tax Net €m €m €m

Operating profit Insurance and investment business 284 (24) 260 Banking 30 (10) 20 Other 5 (1) 4 Share of associate / joint venture 22 - 22 Operating profit before impairment of goodwill 341 (35) 306

Impairment of goodwill (170) - (170) Operating profit 171 (35) 136

Short term investment fluctuations (640) (20) (660) Effect of economic assumption changes 105 (24) 81 Release of deferred tax - 14 14 (364) (65) (429) 221 Irish Life & Permanent plc Annual Report and Financial Statements 2009 Notes to the EV Basis Supplementary Information

year ended 31 December 2009

5. Shareholders' equity 2009 2008 €m €m

Insurance and investment business 1,642 1,649 Banking 643 865 Other activities 48 71 Associate undertaking / joint venture 122 139 Goodwill 70 66 2,525 2,790

Non-controlling interest - (1) Adjustment on inter-operating segments (17) -

Deduction in respect of own shares held for the benefit of life assurance policyholders (23) (14) Shareholders' equity 2,485 2,775

Insurance and investment net assets are analysed as follows: 2009 2008 €m €m

Property 163 159 Equities 13 14 Debt securities 69 78 Deposits 449 399 Other assets and liabilities 84 126 Subordinated debt (212) (207) 566 569 Shareholder value of in-force business 1,076 1,080 1,642 1,649

In addition to the property exposure detailed above, the group has entered into commitments to purchase investment properties totalling €224m (2008: €244m). As a result of a reduction in the market value of investment properties included in the capital commitments, an onerous contract has been recognised in other liabilities, which resulted in a negative investment return of €33m. This negative investment return is included in short-term investment fluctuations.

222 Irish Life & Permanent plc Annual Report and Financial Statements 2009 Notes to the EV Basis Supplementary Information year ended 31 December 2009

5. Shareholders' equity (continued)

Analysis of movement in shareholders' equity attributable to insurance and investment business

2009

Net Worth VIF Total Overview €m €m €m

Shareholders' equity as at 1 January 569 1,080 1,649 Operating profit after tax 120 (30) 90 Short term investment fluctuations (109) 56 (53) Effect of economic assumption changes 3 (30) (27) Capital movements (17) - (17) Shareholders' equity as at 31 December 566 1,076 1,642

2008 Net Worth VIF Total €m €m €m

Shareholders' equity as at 1 January 587 1,460 Financial Statements 2,047 Corporate Governance Business Review Operating profit after tax 289 (29) 260 Short term investment fluctuations (253) (407) (660) Effect of economic assumption changes 25 56 81 Capital movements (79) - (79) Shareholders' equity as at 31 December 569 1,080 1,649

The required capital at 2009 is €634m (2008: €626m). €208m (2008: €205m) of the required capital is covered by the subordinated debt and the remainder is covered by the net worth. The shareholder value of in-force is net of a deduction of €140m (2008: €118m) in respect of the cost of maintaining the required capital and net of a deduction of €46m (2008: €77m) in respect of the time value of financial option and guarantee costs.

Analysis of insurance and investment operating profit after tax

2009 Net Worth VIF Total €m €m €m

New business contribution* (74) 112 38 Profit from existing business Expected return* 161 (63) 98 Experience variances* 12 (70) (58) Operating assumption changes 9 (9) - Expected investment return 12 - 12 Operating profit after tax 120 (30) 90

Analysis of insurance and investment operating profit after tax 2008 Net Worth VIF Total €m €m €m

New business contribution* (88) 174 86 Profit from existing business Expected return* 242 (116) 126 Experience variances* 85 (87) (2) Operating assumption changes 22 - 22 Expected investment return 28 - 28 Operating profit after tax 289 (29) 260

* New business contribution includes €44m (2008: €59m) net worth effect and negative €44m (2008: negative €59m) VIF effect due to stop loss reinsurance treaty. Expected return includes negative €34m (2008: €nil) net worth effect and positive €34m (2008: €nil) VIF effect due to treaty. Experience variance includes positive €12m (2008: positive €66m) net worth effect due to treaty and negative €12m (2008: negative €66m) VIF effect due to treaty. 223 Irish Life & Permanent plc Annual Report and Financial Statements 2009 Notes to the EV Basis Supplementary Information

year ended 31 December 2009

6. Non-controlling interest

2009 2008 €m €m

Non-controlling interest in subsidiary Opening balance as at 1 January 1 13 Total comprehensive income - 3 Acquisition of non-controlling interest (1) (15) Closing balance as at 31 December - 1

7. Management expenses

2009 2008 €m €m

Administrative expenses 522 543 Depreciation 30 31 Amortisation of intangible assets 20 19 572 593

Analysed as follows: Banking operations Operational 274 304 Restructuring / non-operational costs 13 3 Life and investment operations Operational 191 211 Restructuring / non-operational costs 17 7 Other operations (includes corporate costs) Operational 62 68 Restructuring / non-operational costs 15 - 572 593

Administration expenses include €4m (2008: €3m) for rent paid by the bank to the life company in respect of the bank headquarters. These expenses are eliminated on consolidation in the EU IFRS result.

8. Loans and receivables to customers

2009 2008 €m €m

Residential mortgage loans 34,740 35,102 Commercial mortgage loans 2,386 2,403 Finance lease, instalment finance and term loans 1,749 2,381 38,875 39,886 Money market funds / repurchase agreements 211 352 Deferred fees, discounts and fair value adjustments 430 401 39,516 40,639 Provision for impairment of loans and receivables (477) (139) Inter-group loans and receivables (447) (425) 38,592 40,075

224 Irish Life & Permanent plc Annual Report and Financial Statements 2009 Notes to the EV Basis Supplementary Information year ended 31 December 2009

9. Funds under management

2009 2008 €m €m

Funds managed on behalf of unit-linked policyholders 24,536 21,184 Overview Funds managed on behalf of non-linked policyholders 2,296 2,288 26,832 23,472 Segregated funds 3,945 3,854 30,777 27,326

10. 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 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: uiesRve CroaeGvrac Financial Statements Corporate Governance Business Review 2009 2008

Weighted average ordinary shares in issue and ranking for dividend excluding treasury shares and own shares held for the benefit of life assurance policyholders 267,990,308 267,608,033

Weighted average ordinary shares held for the benefit of life assurance policyholders 8,334,129 8,510,390

Weighted average ordinary shares in issue and ranking for dividend including own shares held for the benefit of life assurance policyholders 276,324,437 276,118,423

(Loss) for the year attributable to equityholders (€279m) (€433m)

EPS including own shares held for the benefit of life assurance policyholders (101 cent) (156.8 cent)

Operating (loss) / profit before impairment of goodwill (before minority interest) after tax for the year (€182m) €306m

Operating EPS including own shares held for the benefit of life assurance policyholders (65.9 cent) 110.8 cent

225 Irish Life & Permanent plc Annual Report and Financial Statements 2009 Notes to the EV Basis Supplementary Information

year ended 31 December 2009

11. Reconciliation of shareholders' equity on EU IFRS basis to EV basis

2009 Net Worth VIF Total €m €m €m

Statutory shareholders' equity excluding non-controlling interest as at 31 December 1,276 730 2,006 Change insurance shareholder value of in-force to post-tax basis 121 (121) - Shareholder value of in-force on investment contracts - 663 663 Changes in presentation of cost of FOGs 44 (44) - Deferred front end fees on investment contracts 102 - 102 Deferred acquisition costs on investment contracts (245) - (245) Restatement of investment liabilities to regulatory basis (72) - (72) Goodwill reclassification on acquisition of non-controlling interest (5) 5 - Change in the basis of deferred tax provisioning 37 (10) 27 Impact of stop loss reinsurance treaty 147 (147) - Other 4 - 4 EV basis shareholders' equity excluding non-controlling interest as at 31 December 1,409 1,076 2,485

2008 Net Worth VIF Total €m €m €m

Statutory shareholders' equity excluding non-controlling interest as at 31 December 1,560 787 2,347 Change insurance shareholder value of in-force to post-tax basis 99 (99) - Shareholder value of in-force on investment contracts - 600 600 Changes in presentation of cost of FOGs 82 (82) - Deferred front end fees on investment contracts 117 - 117 Deferred acquisition costs on investment contracts (256) - (256) Restatement of investment liabilities to regulatory basis (74) - (74) Goodwill reclassification on acquisition of non-controlling interest (5) 5 - Change in the basis of deferred tax provisioning 36 (6) 30 Impact of stop loss reinsurance treaty 125 (125) - Other 11 - 11 EV basis shareholders' equity excluding non-controlling interest as at 31 December 1,695 1,080 2,775

All of the above adjustments relate to the application of IFRS 4 including the tax implications.

The stop loss reinsurance adjustment reflects that under EU IFRS no net worth offset is accounted for whereas under EV a regulatory offset is accounted for and is reflected in EV net worth but a corresponding opposite adjustment is reflected in EV VIF.

226 Irish Life & Permanent plc Annual Report and Financial Statements 2009 Notes to the EV Basis Supplementary Information year ended 31 December 2009

12. EV 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 Irish Government 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 Overview appropriate risk premium. An asset mix based on the assets held at the valuation date within policyholder funds has been assumed within the projections.

2009 2008 2007

Equity risk premium 3.0% 3.0% 3.0% Property risk premium 2.0% 2.0% 2.0%

Risk free rate 4.6% 4.1% 4.4% Non market risk margin 2.1% 2.1% 2.1% Market risk margin 0.8% 0.8% 1.3% Risk discount rate 7.5% 7.0% 7.8% uiesRve CroaeGvrac Financial Statements Corporate Governance Business Review Investment return - Fixed interest 1.1% - 4.2% 2.7% - 4.3% 3.9% - 4.7% - Equities 7.6% 7.1% 7.4% - Property 6.6% 6.1% 6.4%

Expense inflation 3.0% 3.0% 4.5%

Other assumptions

The assumed future mortality and morbidity 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. However, there was a deterioration in persistency experience in 2009. The deterioration is believed to be a temporary phenomenon which will improve gradually through 2010. It has therefore been disregarded in setting the long-term persistency assumption but a provision for additional adverse persistency experience in 2010 has been held. Persistency experience will continue to be monitored closely.

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.

227 Irish Life & Permanent plc Annual Report and Financial Statements 2009 Notes to the EV Basis Supplementary Information

year ended 31 December 2009

12. EV assumptions (continued)

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 model is used to derive the cost of FOGs. The model is calibrated to the Irish government yield curve and extrapolated at longer durations where no Irish government bonds exist. The equity volatility rate used in the model is calibrated to the market implied equity volatility rate at 31 December 2009. The model used as at 31 December 2008 was calibrated to the average of the historic and the market implied equity volatility rates at that time. Ten years of historical weekly data are used to derive the correlation between the returns on 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 2009 10-Year Return 20-Year Return Mean1 StDev2 Mean1 StDev2

European Assets (Euro)

Bonds 4.7% 3.3% 5.6% 7.3% Equities, Property 4.7% 25.7% 5.6% 28.4%

UK Assets (Sterling)

Bonds 4.3% 2.8% 4.8% 6.1% Equities 4.3% 23.9% 4.8% 25.9%

As at 31 December 2008 10-Year Return 20-Year Return Mean1 StDev2 Mean1 StDev2

European Assets (Euro)

Bonds 4.4% 3.9% 5.4% 8.7% Equities, Property 4.4% 26.8% 5.4% 30.3%

UK Assets (Sterling)

Bonds 3.6% 2.8% 4.2% 6.1% Equities 3.6% 23.8% 4.2% 25.9%

1. The risk-neutral nature of the model means that all asset classes have the same expected return. 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.

228 Irish Life & Permanent plc Annual Report and Financial Statements 2009 Notes to the EV Basis Supplementary Information year ended 31 December 2009

13. 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: Overview

- 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 2009 would result in a 3.9% risk margin and an 8.5% 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 2009 would increase investment returns by 1% for each year in the future and increase the risk discount rate to 8.5%). 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 Financial Statements from 7.6% to Corporate Governance Business Review 8.6%).

- 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 including any related changes to valuation expense bases and excluding any potential change to reviewable policy fees (meaning a 10% reduction on a base assumption of €10 per annum would result in a €9 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 including any related changes to valuation bases and excluding any potential change to 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

As issued Effect of 1% Effect of 1% EV higher risk lower risk discount rate discount rate €m €m €m

Embedded value as at 31 December 2009 1,642 (113) 128 2009 new business contribution 51 (15) 18

229 Irish Life & Permanent plc Annual Report and Financial Statements 2009 Notes to the EV Basis Supplementary Information

year ended 31 December 2009

13. Sensitivity calculations (continued)

(b) Market sensitivities - equity / property and fixed interest yields

As issued Effect of 1% Effect of 1% Effect of 1% EV higher lower higher fixed fixed equity / interest interest property yields yields yields €m €m €m €m

Embedded value as at 31 December 2009 1,642 (9) 12 44 2009 new business contribution 51 2 (3) 5

(c) Market sensitivities - equity / property values

Effect of 10% decrease in equity / As issued property EV values €m €m

Embedded value as at 31 December 2009 1,642 (100)

(d) Operational assumptions

As issued Effect of 10% Effect of 10% Effect of 5% EV decrease in improvement decrease in maintenance in assumed mortality and expenses persistency morbidity rates rates* €m €m €m €m

Embedded value as at 31 December 2009 1,642 52 52 23 2009 new business contribution 51 7 10 2

*The sensitivity results above for a 5% decrease in mortality and morbidity rates includes a €8m reduction in the embedded value as at 31 December 2009 and a €nil effect on the 2009 new business contribution from the effect of a 5% reduction in the annuity mortality rate.

230 Irish Life & Permanent plc Annual Report and Financial Statements 2009 Independent Auditor’s Report to Directors of Irish Life & Permanent plc on the Embedded Value Basis – Supplementary Information

We have audited the EV basis supplementary information (“the supplementary information”) of Irish Life & Permanent plc for the year ended 31 December 2009 which comprise Consolidated Income Statement, Consolidated Statement of Financial Position, Consolidated Statement of Comprehensive Income, Consolidated Overview Reconciliation of Shareholders’ Equity and the related notes. The supplementary information has been prepared in accordance with the European Embedded Value Principles issued in May 2004 by the CFO Forum (“the EEV Principles”) using the methodology and assumptions set out therein. The supplementary information should be read in conjunction with the group financial statements.

This report, including the opinion, has been prepared solely for the company in accordance with the terms of our engagement. Our audit work has been undertaken so that we might state to the company those matters we have been engaged to state in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of directors and independent auditor As described in the statement of directors’ responsibilities, the directors’ responsibilities include preparing the uiesRve CroaeGvrac Financial Statements Corporate Governance Business Review supplementary information on the EEV basis in accordance with the EEV Principles. Our responsibility is to audit the supplementary information in accordance with International Standards on Auditing (UK and Ireland) and the terms of our engagement.

Under the terms of our engagement, we report to the company our opinion as to whether the supplementary information has been properly prepared in accordance with the EEV Principles using the methodology and assumptions set out therein. In addition, we state whether we have obtained all the information and explanations necessary for the purposes of our audit.

Basis of audit opinion We conducted our audit having regard to International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the supplementary information. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the supplementary information, and of whether the accounting policies applied in the preparation of the supplementary information are appropriate to the group’s circumstances, consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the supplementary information is free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion, we also evaluated the overall adequacy of the presentation of the supplementary information.

Opinion In our opinion, the EV basis supplementary information for the year ended 31 December 2009 has been properly prepared in accordance with the EEV Principles using the methodology and assumptions set out therein.

Chartered Accountants Registered Auditor 1 Harbourmaster Place IFSC Dublin 1

23 March 2010 231 Irish Life & Permanent plc Annual Report and Financial Statements 2009 232 Irish Life & Permanent plc Annual Report and Financial Statements 2009 Irish Life & Permanent Group Holdings plc

Contents

Company Information 234

Directors' Report 235

Statement of Directors' Responsibilities 241

Independent Auditor's Report 242

EU IFRS Financial Statements

Statement of Financial Position 244

Income Statement 245

Statement of Comprehensive Income 246

Statement of Changes in Equity 247

Statement of Cash Flows 248

Notes to the Financial Statements 249

Shareholder Information 255 Company Information

Directors: Gillian Bowler (appointed 12 October 2009) Breffni Byrne (appointed 12 October 2009) Danuta Gray (appointed 12 October 2009) Margaret Hayes (appointed 12 October 2009) Eamonn Heffernan (appointed 12 October 2009) Roy Keenan (appointed 12 October 2009) Ray MacSharry (appointed 12 October 2009) David McCarthy (appointed 30 September 2009) Kevin Murphy (appointed 30 September 2009) Liam O'Reilly (appointed 12 October 2009) Pat Ryan (appointed 15 December 2009) Bernard Collins (appointed 02 March 2010)

Secretary: Ciarán Long (appointed 29 September 2009)

Registered Office: Irish Life Centre, Lower Abbey Street, Dublin 1.

Independent Auditor: KPMG, Chartered Accountants, 1 Harbourmaster Place, IFSC, Dublin 1.

Company Registration Number: 474438

234 Irish Life & Permanent Group Holdings plc Annual Report and Financial Statements 2009 Directors' Report

The directors present their annual report and audited financial statements to the shareholders of Irish Life & Permanent Group Holdings plc ("the company") from the date of incorporation, 24 August 2009 to 31 December 2009.

Principal activities / Review of the business and future developments The company was incorporated on 24 August 2009 as Aquilani plc. The company changed its name to Irish Life & Permanent Group Holdings plc on 9 October 2009. The company was established to become a group holding company. At 31 December 2009, the company had no subsidiaries. On 15 January 2010 the company acquired Irish Life & Permanent plc with Irish Life & Permanent plc becoming a 100% subsidiary of the company. This event which occurred after the reporting period is detailed in Note 8 Events after the reporting period to the financial statements. The company was listed on the Irish and London stock exchanges on 18 January 2010.

Results and dividends The profit for the period amounts to €38,090 after taxation and was arrived at as shown in the income statement. The directors did not authorise any dividends payment for the period ended 31 December 2009.

Risk management At 31 December 2009, the company had no holdings in subsidiaries. On 15 January 2010, the company acquired Irish Life & Permanent plc and consequently inherited the risks of Irish Life & Permanent plc. These risks are detailed in the risk management report of Irish Life & Permanent plc 2009 annual report and financial statements. The following is a summary of these risks: • Irish Life & Permanent Group Holdings plc's results may be adversely affected by general economic conditions and other business conditions. • Market conditions may restrict or limit the availability of funding or liquidity to subsidiaries of Irish Life & Permanent Group Holdings plc. • The level of credit risk faced by Irish Life & Permanent Group Holdings plc is impacted by the economic environment. • Investment market returns and changes in equity / property values may impact Irish Life & Permanent Group Holdings plc's results. • Life assurance risk and other inherent risks affecting its life assurance business including persistency and market performance risks may impact Irish life & Permanent Group Holdings plc's results. • Downgrades in Irish Life & Permanent Group Holdings plc's credit ratings could significantly impact its competitive position and affect its relationships with creditors or trading counterparties. • Changes in interest rates may impact Irish Life & Permanent Group Holdings plc's results. • Irish Life & Permanent Group Holdings plc subsidiaries conduct businesses subject to regulation and associated regulatory risks, including the effects of changes in the laws, regulations policies and interpretations in the market in which it operates. • Adverse experience in the operational risks inherent in Irish Life & Permanent Group Holdings plc's business could have a negative impact on the results of its operations. • Systematic risks could adversely affect Irish Life & Permanent Group Holdings plc's business. • The impact of pension fund risk. • Damage to Irish Life & Permanent Group Holdings plc's public reputation or brands may adversely affect Irish Life & Permanent Group Holdings plc's relationship with new and existing customers. • Litigation and regulatory investigations may not have a material financial impact but could result in reputational damage.

Directors and secretary and their interests The interest of directors and secretary are set out in Note 7 Related parties to the financial statements.

Directors The first directors of the company, Paul White and Cian McCourt were appointed on 24 August 2009, and were replaced by Kevin Murphy and David McCarthy on 30 September 2009. On 12 October 2009, Gillian Bowler, Breffni Byrne, Danuta Gray, Margaret Hayes, Eamonn Heffernan, Roy Keenan, Ray MacSharry and Liam O’Reilly were appointed to the board. On 15 December 2009 Pat Ryan joined the board. On 2 March 2010 Bernard Collins was appointed to the board. Each of the directors will retire from the board at the company’s AGM on 14 May 2010 and with the exception of Eamonn Heffernan and Liam O'Reilly, will offer themselves for reappointment.

235 Irish Life & Permanent Group Holdings plc Annual Report and Financial Statements 2009 Directors' Report

Share capital and shareholders

Authorised share capital The authorised share capital of the company at incorporation was €128,000,000 divided into 400,000,000 ordinary shares of €0.32 each. On 29 September the shareholders approved an increase in the authorised share capital to €428,000,000 divided into 400,000,000 Ordinary Shares of €0.32 each and 300,000,000 Non-Cumulative Preference Shares of €1 each (“Euro Preference Shares”), STG£100,000,000 divided into 100,000,000 Non-Cumulative Preference Shares of STG£1 each (“Sterling Preference Shares”) and US$200,000,000 divided into 200,000,000 Non-Cumulative Preference Shares of US$1 each (“Dollar Preference Shares”). Following this approval the authorised share capital of the company was the same as that of Irish Life & Permanent plc.

The company has only one class of issued shares and as at 31 December 2009, it had 119,038 ordinary shares in issue in that class. Each ordinary share carries one vote.

Preference shares The general rights attaching to Sterling Preference Shares, Euro Preference Shares and Dollar Preference Shares (“Preference Shares”) shall rank pari-passu as regards the right to receive dividends and the rights on a winding up of, or other return of capital by, the company. (This is consistent with the rights which apply to the equivalent share class in Irish Life & Permanent plc.)

Notwithstanding, such Preference Shares may be issued with such rights and privileges, and subject to such restrictions and limitations, as the directors shall determine in the resolution approving the issue of Preference Shares. Whenever the directors have power to determine any of the rights, privileges, limitations or restrictions attached to any of the Preference Shares, the rights, privileges, limitations or restrictions so determined need not be the same as those attached to the Preference Shares which have then been allotted or issued. Preference Shares which have then been allotted or issued shall constitute a separate class of shares. Preference Shares shall entitle the holders thereof to receive a non-cumulative preferential dividend (“Preference Dividend”) which shall be calculated at such annual rate (whether fixed or variable) and shall be payable on such dates and on such other terms and conditions as may be determined by the directors prior to allotment thereof.

Provisions applying to Preference Shares The following provisions shall apply in relation to any particular Preference Shares if so determined by the directors prior to the allotment thereof:

i. the Preference Shares shall rank as regards the right to receive dividends in priority to any ordinary shares in the capital of the company;

ii. a Preference Dividend may only be paid from distributable profits and distributable reserves of the company;

iii. a Preference Dividend may only be paid if it would not breach or cause a breach of the Central Bank of Ireland’s capital adequacy requirements from time to time applicable to the company;

iv. Preference Shares shall carry no further right to participate in the profits and reserves of the company other than the Preference Dividend and if on any occasion an instalment of the Preference Dividend is not paid in cash for the reasons described in sub-paragraph (b) or sub-paragraph (c) above, the preference shareholders shall have no claim in respect of such instalment; and

v. each holder of Preference Shares shall, on the date for payment of Preference Dividend instalment, if such instalment had not been paid in cash, be allotted such additional nominal amount of Preference Shares of the class in question, credited as fully paid, as is equal to an amount which would have been paid to the holder had such relevant instalment been paid in cash plus an amount equal to the associated tax credit to which the holder would have been entitled had the relevant instalment been paid in cash.

236 Irish Life & Permanent Group Holdings plc Annual Report and Financial Statements 2009 Directors' Report

Capital On a winding up of, or other return of capital (other than on a redemption of shares of any class in the capital of the company) by the company, the preference shareholders shall in respect of the Preference Shares held by them be entitled to receive, out of the surplus assets available for distribution to the company’s members, an amount equal to the amount paid up or credited as paid up on the Preference Shares (including any premium paid to the company in respect thereof) together with any Preference Dividend which is due for payment after the date of commencement of the winding up or other return of capital but which is payable in respect of a period ending on or before such date and any Preference Dividend accrued prior to the date of return of capital.

The amounts payable or repayable in the event of a winding up of, or other return of capital (other than on a redemption of shares of any class in the capital of the company) by the company, shall be so paid pari-passu with any amounts payable or repayable in that event upon or in respect of any further Preference Shares of the company ranking pari-passu with the Preference Shares as regards repayment of capital, and shall be so paid in priority to any repayment of capital on any other class of shares of the company. The preference shareholders shall not be entitled in respect of the Preference Shares held by them to any further or other right of participation in the assets of the company.

Redemption Unless otherwise determined by the directors either generally or in relation to any particular Preference Shares prior to allotment thereof, the Preference Shares shall, subject to the provisions of the Acts, be redeemable at the option of the company where the company shall give to the holders of the Preference Shares to be redeemed not less than thirty days’ and not more than sixty days’ notice in writing of the date on which such redemption is to be effected.

Voting The preference shareholders shall be entitled to receive notice of any General Meeting of the company and a copy of every circular or other like document sent out by the company to the holders of ordinary shares and to attend any General Meeting of the company but shall not, in respect of the Preference Shares, be entitled to speak or vote upon any resolution other than a resolution for winding up the company or a resolution varying, altering or abrogating any of the rights, privileges, limitations or restrictions attached to the relevant Preference Shares unless at the date of such meeting the most recent instalment of the Preference Dividend due to be paid prior to such meeting shall not have been paid in cash in which event the preference shareholders shall be entitled to speak and vote on all resolutions proposed at such meeting.

At a separate General Meeting of any class of preference shareholders, on a show of hands each preference shareholder present in person shall have one vote and on a poll each preference shareholder present in person or by proxy shall have one vote in respect of each Preference Share held by him and whenever preference shareholders are entitled to vote at a General Meeting of the company then, on a show of hands, each preference shareholder present in person shall have one vote and on a poll each preference shareholder present in person or by proxy shall have such number of votes in respect of each Preference Share held by him as the directors may determine prior to the allotment of such shares.

If the most recent instalment of the Preference Dividend has not been paid a majority of any class of Preference Shares in issue may requisition, and the directors shall procure, that an Extraordinary General Meeting of the company shall be convened forthwith.

237 Irish Life & Permanent Group Holdings plc Annual Report and Financial Statements 2009 Directors' Report

Restriction on capitalisation

Save with the written consent of the holders of not less than 662/3% in nominal value of each class of Preference Shares, or with the sanction of a resolution passed at a separate General Meeting of the holders

of each class of Preference Shares where the holders of not less than 662/3% in nominal value of the relevant class of Preference Shares have voted in favour of such resolution, the directors shall not capitalise any part of the amounts available for distribution if, after such capitalisation the aggregate of such amounts would be less than a multiple, determined by the directors prior to the allotment of each class of Preference Shares, of the aggregate amount of the annual dividends (exclusive of any associated tax credit) payable on Preference Shares then in issue ranking as regards the right to receive dividends or the rights on winding up of, or other return of capital by the company, pari-passu with or in priority to the Preference Shares, or authorise or create, or increase the amount of, any shares of any class or any security convertible into the shares of any class ranking as regards the right to receive dividends or the rights on winding up of, or other return of capital by the company, in priority to the Preference Shares.

Further Preference Shares The company may from time to time create and issue further Preference Shares ranking as regards participation in the profits and assets of the company pari-passu with the Preference Shares and so that any such further Preference Shares may be denominated in any currency and may carry as regards participation in the profits and assets of the company rights identical in all respects to those attaching to the Preference Shares or rights differing therefrom.

The creation or issue of, or the variation, alteration or abrogation of or addition to the rights, privileges, limitations or restrictions attaching to, any shares of the company ranking after the Preference Shares as regards participation in the profits and assets of the company and, provided that, on the date of such creation or issue, the most recent instalment of the dividend due to be paid on each class of Preference Share in the capital of the company prior to such date shall have been paid in cash, the creation or issue of further Preference Shares ranking pari-passu with the Preference Shares as provided for above, shall be deemed not to be a variation, alteration or abrogation of the rights, privileges, limitations or restrictions attached to the Preference Shares. If any further Preference Shares of the company shall have been issued, then any subsequent variation, alteration or abrogation of or addition to the rights, privileges, limitations or restrictions attaching to any of such further Preference Shares shall be deemed not to be a variation, alteration or abrogation of the rights, privileges, limitations or restrictions attaching to the Preference Shares, provided that the rights attaching to such further Preference Shares thereafter shall be such that the creation and issue by the company of further Preference Shares carrying those rights would have been permitted.

Variation of rights Whenever the share capital is divided into different classes of shares, the rights attached to any class may be varied or abrogated with the consent in writing of the holders of three-quarters in nominal value of the issued shares of that class or with the sanction of a special resolution passed at a separate general meeting of the holders of the shares of the class, and may be so varied or abrogated either whilst the company is a going concern or during or in contemplation of a winding-up.

Allotment of shares Subject to the provisions of the Articles of Association relating to new shares, the shares shall be at the disposal of the directors and (subject to the provisions of the Articles and the Acts) they may allot, grant options over or otherwise dispose of them to such persons on such terms and conditions and at such times as they may consider to be in the best interests of the company and its shareholders, but so that no share shall be issued at a discount and so that, in the case of shares offered to the public for subscription, the amount payable on application on each share shall not be less than one-quarter of the nominal amount of the share and the whole of any premium thereon.

238 Irish Life & Permanent Group Holdings plc Annual Report and Financial Statements 2009 Directors' Report

Holders resident in the USA The board may at its discretion give notice to certain holders resident in the USA calling for a disposal of their shares within twenty one days or such longer period as the board considers reasonable. The board may extend the period within which any such notice is required to be complied with and may withdraw any such notice in any circumstances the board sees fit. If the board is not satisfied that a disposal has been made by the expiry of the twenty one day period (as may be extended), no transfer of any of the shares to which the notice relates may be made or registered other than a transfer made pursuant to a procured disposal of the said shares by the board, or unless such notice is withdrawn.

Refusal to transfer The directors in their absolute discretion and without assigning any reason therefore may decline to register:

i. any transfer of a share which is not fully paid save however, that in the case of such a share which is admitted to listing on the Stock Exchange, such restriction shall not operate so as to prevent dealings in such share of the company from taking place on an open and proper basis;

ii. any transfer to or by a minor or person of unsound mind; or

The directors may decline to recognise any instrument of transfer unless:

iii. the instrument of transfer is accompanied by the certificate of the shares to which it relates and such other evidence as the directors may reasonably require to show the right of the transferor to make the transfer (save where the transferor is a Stock Exchange Nominee);

iv. the instrument of transfer is in respect of one class of share only;

v. the instrument of transfer is in favour of not more than four transferees; and

vi. it is lodged at the office or at such other place as the directors may appoint.

Voting rights i. Details of substantial holders of Voting Rights:

The Directors have been notified as at 23 March 2010 of the following substantial interests in voting rights held:

− Allianz Global Investors 3.05% (8,221,480 shares)

− Capital Research and Management Company 3.13% (8,435,059 shares);

ii. No person holds securities carrying special rights;

iii. The company has an employee share scheme that holds 1.25% (3,373,666 shares) of the total voting rights and voting rights are exercised by employee participants in proportion to their share holding within the scheme;

iv. There are no particular restrictions on voting rights, except that shares held by Irish Life Assurance pursuant to section 9(1) of the Insurance Act 1990 carry no voting rights; and

v. The company is not aware of any agreements between shareholders that may result in restrictions on the transfer of its shares or on voting rights.

239 Irish Life & Permanent Group Holdings plc Annual Report and Financial Statements 2009 Directors' Report

Annual General Meetings At its 2010 Annual General Meeting, the members will be asked to authorise the company: • To allot relevant securities within the meaning of section 20 of the Companies (Amendment) Act, 1983 up to a maximum amount equal to one third of the total amount of the Company's issued ordinary share capital as at 23 March 2010. This authority was last granted by shareholders on the 29 September 2009 for an amount equal to the aggregate of the authorised but as yet un-issued Ordinary Share capital of the company and will expire on earlier of the date of the Company's next AGM or 29 December 2010.

• To disapply the strict statutory pre-emption provisions in connection with a right to deal with legal or practical problems that may arise in respect of shareholders resident in certain territories and / or to deal with any fractional entitlements or any other issue of equity securities for cash up to an aggregate amount of 5% of the nominal value of the company’s issued share capital. This authority will expire on the earlier of the date of the 2011 Annual General Meeting or 14 August 2011. This authority was last granted by shareholders on 29 September 2009 and will expire on the 14 May 2010.

These authorities are consistent with the authorities normally granted to the directors of Irish Life & Permanent plc.

Change of control of the company If any person or company obtains control of the company, the company’s share option schemes contain provisions for the exercise of share options, provided these have not lapsed, even if the performance conditions have not been satisfied or, with the agreement of an acquiring company, exchange the subsisting options for new options in the acquiring company.

The company’s Long-term Incentive Plan contains similar provisions where awards may vest immediately to the extent determined by the directors or, with the agreement of an acquiring company, exchange the subsisting awards for new awards in the acquiring company.

In the event of a change of control of the company there are no agreements (other than under normal employment contracts) between the company, its directors or employees providing for compensation for loss of office that might occur.

Accounting records The directors believe that they have complied with section 202 of the Companies Act, 1990 with regard to books of account by employing financial personnel with appropriate expertise and by providing adequate resources to the financial function. The books of account of the company are maintained at the registered office of the company.

Political donations There were no political donations, which require disclosure under the Electoral Act 1997.

Independent auditor On 29 September 2009, KPMG, Chartered Accountants and Registered Auditor, were appointed as independent auditor to the company. In accordance with Section 160(2) of the Companies Act, 1963 the Auditor, KPMG, Chartered Accountants and Registered Auditor, will continue in office.

On behalf of the board

Gillian Bowler Kevin Murphy Chairman Group Chief Executive

David McCarthy Ciarán Long Group Finance Director Company Secretary

23 March 2010

240 Irish Life & Permanent Group Holdings plc Annual Report and Financial Statements 2009 Statement of Directors’ Responsibilities in respect of the Annual Report and the Financial Statements

The directors are responsible for preparing the Annual Report and the financial statements, in accordance with applicable law and regulations.

Company law requires the directors to prepare financial statements for each financial period. Under company law the directors have elected to prepare the financial statements in accordance with IFRSs, as adopted by the European Union (“EU”) and as applied in accordance with the provisions of the Companies Acts, 1963 to 2009. In preparing the financial statements, the directors have also elected to comply with IFRSs issued by the International Accounting Standards Board (“IASB”).

The financial statements are required by law and IFRSs as adopted by the EU to present fairly the financial position and performance of the company. The Companies Acts, 1963 to 2009 provide in relation to such financial statements, that references in the relevant part of these Acts to financial statements giving a true and fair view are references to their achieving a fair presentation.

In preparing the financial statements, the directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and estimates that are reasonable and prudent; • state that the financial statements comply with IFRSs as adopted by the EU as applied in accordance with the Companies Act 1963 to 2009 and IFRSs issued by the IASB; and • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business.

Under applicable law the directors are also responsible for preparing a Directors’ Report.

The directors are responsible for keeping proper books of account that disclose with reasonable accuracy at any time the financial position of the company and enable them to ensure that its financial statements comply with the Companies Acts, 1963 to 2009.

The directors are also responsible for taking such steps as are reasonably open to them to safeguard the assets of the company and to prevent and detect fraud and other irregularities. The directors are responsible for the maintenance and integrity of the corporate and financial information included on the company’s website www.irishlifepermanent.ie. Legislation in the Republic of Ireland governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

On behalf of the board

Gillian Bowler Kevin Murphy Chairman Group Chief Executive

David McCarthy Ciarán Long Group Finance Director Company Secretary

23 March 2010

241 Irish Life & Permanent Group Holdings plc Annual Report and Financial Statements 2009 Independent Auditor’s Report to the Members of Irish Life & Permanent Group Holdings plc

We have audited the financial statements (the ‘‘financial statements’’) of Irish Life & Permanent Group Holdings plc for the period ended 31 December 2009 which comprise the Statement of Financial Position, the Income Statement, the Statement of Comprehensive Income, the Statement of Changes in Equity, the Statement of Cash Flows and the related notes. These financial statements have been prepared under the accounting policies set out therein.

This report is made solely for the company’s members, as a body, in accordance with section 193 of the Companies Act 1990. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

Respective Responsibilities of Directors and Independent Auditor The directors’ responsibilities for preparing the Annual Report and the financial statements in accordance with applicable law and International Financial Reporting Standards (“IFRSs”) as adopted by the European Union are set out in the Statement of Directors’ Responsibilities.

Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland).

We report to you our opinion as to whether the financial statements give a true and fair view in accordance with IFRSs as adopted by the European Union and have been properly prepared in accordance with the Companies Acts 1963 to 2009. We also report to you whether, in our opinion:

• proper books of account have been kept by the company; • at the reporting date, there exists a financial situation requiring the convening of an extraordinary general meeting of the company; and • the information given in the Directors’ Report is consistent with the financial statements.

In addition, we state whether we have obtained all the information and explanations necessary for the purposes of our audit, and whether the financial statements are in agreement with the books of account.

We also report to you if, in our opinion, any information specified by law regarding directors’ remuneration and directors’ transactions is not disclosed and, where practicable, include such information in our report.

We read the other information contained in the Annual Report and consider whether it is consistent with the audited financial statements. The other information comprises only the Directors’ Report. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information.

242 Irish Life & Permanent Group Holdings plc Annual Report and Financial Statements 2009 Independent Auditor’s Report to the Members of Irish Life & Permanent Group Holdings plc

Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the company’s circumstances, consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements.

Opinion In our opinion: • the financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of the company’s affairs as at 31 December 2009 and of its profit for the period then ended; and • the financial statements have been properly prepared in accordance with the Companies Acts 1963 to 2009.

We have obtained all the information and explanations which we consider necessary for the purposes of our audit. In our opinion proper books of account have been kept by the company. The financial statements are in agreement with the books of account.

In our opinion the information given in the Directors’ Report is consistent with the financial statements.

The net assets of the company, as stated in the company Statement of Financial Position are more than half of the amount of its called up share capital and, in our opinion, on that basis there did not exist at 31 December 2009 a financial situation which under Section 40 (1) of the Companies (Amendment) Act, 1983 would require the convening of an extraordinary general meeting of the company.

Chartered Accountants Registered Auditor 1 Harbourmaster Place IFSC Dublin 1

23 March 2010

243 Irish Life & Permanent Group Holdings plc Annual Report and Financial Statements 2009 Statement of Financial Position

as at 31 December 2009

2009 Notes €'000 Assets Cash and cash equivalents 2 38 Other assets 3 51 Total assets 89

Liabilities Current tax 13 Total liabilities 13

Equity Share capital 4 38 Share premium - Retained earnings 38 Total equity 76

Total liabilities and equity 89

On behalf of the board

Gillian Bowler Kevin Murphy Chairman Group Chief Executive

David McCarthy Ciarán Long Group Finance Director Company Secretary

244 Irish Life & Permanent Group Holdings plc Annual Report and Financial Statements 2009 Income Statement from date of incorporation 24 August 2009 to 31 December 2009

From 24 Aug 2009 to 31 Dec 2009 Notes €'000

Other income 5 51 Total operating income 51

Operating profit 51

Profit before taxation 51

Taxation 6 (13) Profit for the period 38

On behalf of the board

Gillian Bowler Kevin Murphy Chairman Group Chief Executive

David McCarthy Ciarán Long Group Finance Director Company Secretary

245 Irish Life & Permanent Group Holdings plc Annual Report and Financial Statements 2009 Statement of Comprehensive Income

from date of incorporation 24 August 2009 to 31 December 2009

From 24 Aug 2009 to 31 Dec 2009 Notes €'000

Profit for the period 38

Other comprehensive income -

Deferred tax on other comprehensive income - Other comprehensive income, net of tax -

Total comprehensive income for the period 38

On behalf of the board

Gillian Bowler Kevin Murphy Chairman Group Chief Executive

David McCarthy Ciarán Long Group Finance Director Company Secretary

246 Irish Life & Permanent Group Holdings plc Annual Report and Financial Statements 2009 Statement of Changes in Equity from date of incorporation 24 August 2009 to 31 December 2009

Attributable to owners of the parent Share capital Retained earnings Total* €'000 €'000 €'000

As at 24 August 2009 - - - Profit for the period - 38 38

Other comprehensive income (net of tax) - - - Total other comprehensive income - - - Total comprehensive income for the period - 38 38

Transactions with owners, recorded directly in equity Contributions by and distributions to owners Ordinary shares issued 38 - 38 As at 31 December 2009 38 38 76

*Total equity including controlling and non-controlling interests.

On behalf of the board

Gillian Bowler Kevin Murphy Chairman Group Chief Executive

David McCarthy Ciarán Long Group Finance Director Company Secretary

247 Irish Life & Permanent Group Holdings plc Annual Report and Financial Statements 2009 Statement of Cash Flows

from date of incorporation 24 August 2009 to 31 December 2009

From 24 Aug 2009 to 31 Dec 2009 Notes €'000

Profit before taxation for the period 51

Increase in operating assets Other assets (51) Net cash flows from operating activities before tax -

Tax paid - Net cash flows from operating activities -

Cash flows from investing activities - Net cash flows from investing activities -

Cash flows from financing activities Issue of ordinary share capital 4 38 Net cash flows from financing activities 38

Increase in cash and cash equivalents 38

Analysis of changes in cash and cash equivalents Cash and cash equivalents as at 24 August 2009 - Net cash flow 38 Cash and cash equivalents as at 31 December 2009 2 38

248 Irish Life & Permanent Group Holdings plc Annual Report and Financial Statements 2009 Notes to the Financial Statements period ended 31 December 2009

1. Basis of preparation and significant accounting policies

Introduction Irish Life & Permanent Group Holdings plc ("the company") is a company domiciled in Ireland. The company’s registered office address is Irish Life Centre, Lower Abbey Street, Dublin 1, Ireland. The company was established to become a group holding company.

The company was incorporated as Aquilani plc on 24 August 2009. On 9 October 2009, the company changed its name to Irish Life & Permanent Group Holdings plc. The company did not trade during the period from incorporation to 13 November 2009.

The financial statements of the company were authorised for issue by the directors on 23 March 2010.

As at 31 December 2009, the company had not been involved in any significant transactions hence no detailed accounting policies were applicable to the company at that date. The accounting policies applied in the preparation of the financial statements for the period ended 31 December 2009 are set out below.

Basis of preparation The financial statements have been prepared in accordance with International Financial Accounting Standards (“IFRSs”) as issued by the International Accounting Standards Board ("IASB") as adopted by the EU and in accordance with the provisions of the Companies Acts 1963 to 2009.

The financial information has been prepared on a going concern basis. After making appropriate enquiries, the directors consider that the company has adequate resources to continue in operation for the foreseeable future. For this reason they adopt the going concern basis in preparing the financial statements.

The IFRSs adopted by the EU applied by the company in the preparation of these financial statements are those that were effective for accounting periods ending on or before 31 December 2009. The following standards and interpretations to existing standards have been published by the IASB and to the extent indicated have been adopted by the EU and will be mandatory for future accounting periods. The company has not early adopted these standards or interpretations.

249 Irish Life & Permanent Group Holdings plc Annual Report and Financial Statements 2009 Notes to the Financial Statements

period ended 31 December 2009

1. Basis of preparation and significant accounting policies (continued)

Standards and interpretations effective for annual periods beginning on or after 1 January 2010 Title Impact on company financial statements

IFRS 2: Share-Based The amendments incorporate 'IFRIC 8: Scope of IFRS 2' and 'IFRIC 11: IFRS-Group and treasury Payment (Amendment) share transactions' and expand on the guidance included in IFRIC 11 to address the classification of group arrangements which were not previously covered by that interpretation. This amendment is not expected to have a material impact on the financial statements of the company.

IFRS 5: Non-Current This amendment clarifies that IFRS 5 specifies the disclosure requirements in respect of Assets Held for Sale and non-current assets classified as held for sale and discontinued operations. This amendment is not Discontinued Operations expected to have a material impact on the financial statements of the company. (Amendment)

IAS 1: Presentation of This amendment clarifies that the potential settlement of a liability by the issue of equity will not Financial Statements affect its classification as current or non-current. This allows a liability to be classified as (Revised) non-current (provided the entity has an unconditional right to defer settlement by transfer of cash or other assets for at least 12 months following the accounting period). This amendment is not expected to have a material impact on the financial statements of the company.

IAS 7: Statement of Cash The amendments to IAS 7 specify that only expenditures that result in a recognised asset in the Flows (Amendment) statement of financial position can be classified as investing activities in the statement of cash flows. This amendment is not expected to have a material impact on the financial statements of the company.

IAS 17: Leases This amendment deletes specific guidance on the classification of leases of land to make it (Amendment) consistent with general guidance on leases. In accordance with the general principles of IAS 17, leases should be classified as operating or finance leases. This amendment is not expected to have a material impact on the financial statements of the company.

IAS 36: Impairment of This amendment clarifies that the largest cash-generating unit (or group of units) to which Assets (Amendment) goodwill should be allocated for impairment testing purposes is an operating segment as defined by IFRS 8: Operating segments (paragraph 5) before the aggregation of operating segments with similar economic characteristics allowed by paragraph 12 of IFRS 8. This amendment is not expected to have a material impact on the financial statements of the company.

250 Irish Life & Permanent Group Holdings plc Annual Report and Financial Statements 2009 Notes to the Financial Statements period ended 31 December 2009

1. Basis of preparation and significant accounting policies (continued)

Basis of measurement The company financial statements are presented in thousands of euro. They have been prepared on the historical cost basis.

Estimates and assumptions The preparation of financial information in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on management’s best judgement as to what is reasonable under the circumstances, the results of which form the basis of making the judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

Cash and cash equivalents Cash and cash equivalents include cash and highly liquid financial assets with initial maturities of three months or less, which are subject to insignificant risk of changes in their fair value, and are used by the company in the management of their short-term commitments. Cash and cash equivalents are carried at amortised cost in the statement of financial position.

Taxation Taxation comprises both current and deferred tax. Taxation is recognised in the income statement except where it relates to an item which is recognised directly in equity.

Corporation tax payable is provided on taxable profits at current tax rates.

Deferred tax is provided using the liability method on all temporary differences except those arising on goodwill not deductible for tax purposes, or where the temporary difference that arose on the initial recognition of an asset or liability in a transaction that affects neither accounting profit nor taxable profit. Deferred tax assets are recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised.

Deferred tax liabilities and assets are offset only where there is both the legal right and the intention to settle on a net basis or to realise the asset and settle the liability simultaneously.

Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of taxation from the proceeds.

2. Cash and cash equivalents

2009 €'000

Cash and cash equivalents 38

During the period, the company received cash to the value of €38,092 in respect of ordinary shares issued.

3. Other assets

2009 €'000

Amounts due from other companies 51

As at 31 December 2009, the company recognised this contribution as a creditor balance with Irish Life Limited.

251 Irish Life & Permanent Group Holdings plc Annual Report and Financial Statements 2009 Notes to the Financial Statements

period ended 31 December 2009

4. Authorised and issued share capital

Authorised share capital as at 31 December 2009 Share Capital Number of Shares €'000

Ordinary shares of 32 cent each 400,000,000 128,000 € non-cumulative preference shares 300,000,000 300,000 US$ non-cumulative preference shares 200,000,000 138,832 Stg£ non-cumulative preference shares 100,000,000 112,600

The company has only one class of issued shares and as at 31 December 2009, it had 119,038 ordinary shares in issue in that class. Each ordinary share carries one vote.

The number of ordinary 32 cent fully paid up shares is as follows: 2009 As at 24 August - Issued during the period 119,038 As at 31 December 119,038

On the date of incorporation 24 August 2009, the authorised share capital of the company was 400,000,000 ordinary shares of €0.32 each. On this date the issued share capital of the company was seven fully paid up ordinary shares at €0.32 each, total amount of €2.

On 9 October 2009, 119,031 ordinary shares of €0.32 each were issued at par for total cash proceeds of €38,090 to facilitate commencement of trading.

5. Other income 2009 €'000

Other Income 51

On 9 October 2009, Irish Life Limited, a subsidiary of Irish Life & Permanent plc, made an unconditional contribution to the company of €50,787. Neither Irish Life Limited nor any other subsidiaries of Irish Life & Permanent plc have the right to seek repayment in any circumstances and the contribution is not made in return for any rights such as voting rights, any share of the profits or any share of the surplus assets of the company on liquidation.

252 Irish Life & Permanent Group Holdings plc Annual Report and Financial Statements 2009 Notes to the Financial Statements period ended 31 December 2009

6. Taxation

(a) Analysis of taxation charge

Taxation charged to income statement 2009 €'000

Current taxation Charge for current period (13) Taxation charged to income statement (13)

(b) Reconciliation of standard to effective tax rate 2009 €'000

Operating profit 51 Profit on continuing activities before tax 51

Tax calculated at standard ROI corporation tax rate of 25% (13)

7. Related parties

The company has a related party relationship with its directors.

Directors' shareholdings

At 31 December 2009, none of the directors nor their spouses and minor children held any interest in the share capital of Irish Life & Permanent Group Holdings plc.

At 31 December 2009, the company secretary, Ciarán Long, held one ordinary share in the share capital of Irish Life & Permanent Group Holdings plc.

For the period ended 31 December 2009, no compensation / fees was remitted to directors in respect of their duties regarding the company.

In the normal course of its business the company had no transactions or outstanding balances as at 31 December 2009 with any of its directors.

253 Irish Life & Permanent Group Holdings plc Annual Report and Financial Statements 2009 Notes to the Financial Statements

period ended 31 December 2009

8. Events after the reporting period

On 15 January 2010 Irish Life & Permanent Group Holdings plc ("the company") acquired Irish Life & Permanent plc. On this date 276,782,344* Irish Life & Permanent plc ordinary shares were cancelled and the company subsequently issued the 276,782,344 ordinary shares at the nominal value of €0.32 to the shareholders of Irish Life & Permanent plc on a one-for-one basis. On the same day, Irish Life & Permanent plc issued 276,782,344 ordinary shares to the company. Irish Life & Permanent plc is now a 100% subsidiary of the company.

On 18 January 2010 Irish Life & Permanent plc was delisted from the Irish and London stock exchanges. Subsequently, Irish Life & Permanent Group Holdings plc was listed on these stock exchanges.

*To meet statutory requirements, seven shares were left in issue following this cancellation. These shares are now held directly by or in trust for Irish Life & Permanent Group Holdings plc.

The following table outlines the impact of the above events on the equity of the company:

Share Capital premium Other Distributable redemption Share capital account reserves earnings reserve Total €'000 €'000 €'000 €'000 €'000 €'000

Balance as at 31 December 2009 38 - - 38 - 76 Cancellation of shares1 (38) - - (38) 38 (38) Investment in IL&P plc2 88,570 998,631 2,497,165 - - 3,584,366 Recognition of distributable reserves3 - (634,102) - 634,102 - - Impairment of investment in IL&P plc4 - - (2,497,165) - - (2,497,165) Balance as at 15 January 2010 88,570 364,529 - 634,102 38 1,087,239

1 This is in respect of the purchase and subsequent cancellation of 119,031 ordinary shares. 2 The recognition of the issue of shares in return for the investment in Irish Life & Permanent plc on 15 January 2010. The investment of €3,584,366,000 represents the book value of Irish Life & Permanent plc reserves as at 31 December 2008. 3 For the company to have the ability to make distributions to the company's new shareholders who were previously shareholders of Irish Life & Permanent plc, the high court approved an application to create a distributable reserve (SPA reduction reserve) through a reduction in the share premium account. 4 Following the initial recognition of the company's investment in Irish Life & Permanent plc, an impairment will occur to recognise the investment at its recoverable amount, the market value for Irish Life & Permanent plc on 15 January 2010.

254 Irish Life & Permanent Group Holdings plc Annual Report and Financial Statements 2009 Shareholder Information

Annual reports for Irish Life & Permanent plc and Irish Life & Permanent Group Holdings plc are available to view online at www.irishlifepermanent.ie. This website also provides further information to shareholders including contact details and links to our other group websites.

Analysis of holdings of ordinary shares at 23 March 2010

Shareholders Shares Number Percent Number Percent Size of shareholding 1-1,000 125,766 92.79% 41,397,178 14.96% 1,001-5,000 8,154 6.02% 16,744,903 6.05% 5,001-10,000 927 0.68% 6,467,517 2.34% 10,001-50,000 451 0.33% 9,647,606 3.49% 50,001-100,000 71 0.05% 5,075,095 1.83% 100,001-1,000,000 138 0.10% 47,976,334 17.33% Over 1,000,000 34 0.03% 149,473,718 54.00% 135,541 100.00% 276,782,351 100.00%

Shareholder Enquiries A full range of online services is available to the shareholders of Irish Life & Permanent Group Holdings plc. These services are provided by Capita Registrars who administer the company’s share register. To use these, services please log onto our group website www.irishlifepermanent.ie and click on Shareholder Services / My Shareholding.

Shareholder Helpline If you have any difficulty accessing your shareholding online, or have any queries regarding your shareholding in general, you should contact the Capita Helpline at:

Telephone: +353 (0) 1 810 2400 Fax: +353 (0) 1 810 2422 Email: [email protected]

Registered Office Irish Life & Permanent Group Holdings plc, Irish Life Centre, Lower Abbey Street, Dublin 1.

255 Irish Life & Permanent Group Holdings plc Annual Report and Financial Statements 2009 Notes

256 Irish Life & Permanent Group Holdings plc Annual Report and Financial Statements 2009