Permanent Tsb Group Holdings Plc · EURONEXT:PTSB
Permanent Tsb — Irish Life & Permanent — Investor Presentation (November 2004)
33 slides from Permanent Tsb's investor presentation, November 2004
Slide 1: Analyst & Investor Briefing IFRS
Analyst & Investor Briefing IFRS Peter Fitzpatrick, Group Financial Director David McCarthy, Group CFO November 2004
Slide 2: Agenda
n Background n Overview of changes n Detailed Analysis n Summary of Implications 2
Slide 3: Background: EU IFRS requirement
n EU regulation requires all listed companies in the EU to prepare their consolidated financial statements from 1 January 2005 in conformity with IFRS n Endorsement of IAS39/IFRS4 by EU members has proved to be problematic n Regulation and Taxation issues on the drip n Statutory reporting for life a
Slide 4: Overview of changes: Group and Banking
1. Group n Presentation / Format n Treatment of goodwill & share options 2. Banking n Spreading of fees, charges, discounts n Less conservative bad debt provisioning n Hedge accounting - liquidity management 4
Slide 5: Overview of changes: Life Assurance and General Insurance
3. Life Assurance n Split of business between insurance & investment contracts n Investment contracts - significant changes in timing of profit recognition n Value of in-force (VIF) attributable to “investment” contracts removed from balance sheet n Reduction in reported profit and (non-distributabl
Slide 6: Other issues: cashflows, surpluses, dividend policy
n Cashflows n Life assurance surpluses n Dividend policy n Life regulatory capital n Accounting for “insurance” contracts 6
Slide 7: Group reporting and profit components
n No separation of life assurance and banking activities n Three components to profit: Ø Insurance Ø Investment & other Ø Banking n Segmental reporting will be the key tool for analysing income streams going forward n Embedded Value (EV) numbers reported by way of supplemental information 7
Slide 8: Goodwill and share based compensation
n Goodwill (IFRS 3) Ø No amortisation but annual impairment testing Ø Amortisation saving of €12m p.a. expected n Share based compensation (IFRS 2) Ø P&L charge for fair value of options at date of grant Ø Cost c.€4m per annum for next three years (max) 8
Slide 9: Banking: discounts, fees, provisioning, pensions, tax
(a) Discounts & Fees - recognised over the estimated life of the loan and taken against net interest income. Ø First year discounts Ø Intermediary commissions Ø MIG costs Ø Application fee income (b) Bad Debt Provisioning – use of discounted cash flow models to arrive at and support loan loss provis
Slide 10: Impact on 2003 Reserves
Impact on 2003 Reserves (a) Discounts & Fees (Effective Yield) €m permanent tsb First Year Discounts 46 Intermediary Commissions 23 MIG 15 Commission Income (4) 80 CHL Application Fees/Intermediary Commissions (12) 68 (b) Bad Debt Provisions permanent tsb 52 Balance carried forward 120 10
Slide 11: Impact on 2003 Reserves (IAS 19, deferred tax)
Impact on 2003 Reserves €m Balance brought forward 120 (c) IAS 19 Deficit (166) Total (46) Tax Effect 6 (d) Deferred Tax on Property Revaluation (8) Net Reduction in Reserves (48) 11
Slide 12: Impact on Profit before Tax 2003
Impact on Profit before Tax 2003 Increase/ Irish (Decrease) GAAP IFRS in PbT Discounts / Fees (Effective Yield) €m €m €m permanent tsb First Year Discount 33 23 10 Intermediary Commissions 20 14 6 MIG 10 3 7 CHL (6) 17 Bad Debt Provisions 13 8 5 IAS 19 Additional Charge (10) Total Uplift in Profit b
Slide 13: Hedge accounting under IAS 39
n IAS 39 heavily restricts use of hedge accounting n Major impact is that all derivatives need to be carried at fair value unless it can be proved that they are an effective hedge. This requires: Ø Formal documentation in place approved by auditors Ø Testing of effectiveness Ø If ineffective hedges
Slide 14: IFRS 4: insurance and investment contracts
n IFRS 4 issued on 31 March 2004 - Phase I n Business is split into “insurance” and “investment” contracts n Insurance contracts must have significant insurance risk n Investment contracts are accounted for under IAS 39 / IAS 18 (Accruals) n No change to the embedded value accounting for insurance c
Slide 15: Split of contracts by technical provisions
n Investment Contracts (75% technical provisions) Ø Investment Bonds Ø Property Bonds Ø Pensions /PRSAs Ø SSIAs Ø I.L.I.M. UL Funds n Insurance Contracts (15% technical provisions) Ø Protection/Risk Ø Annuities n Other Contracts (10% technical provisions) 15
Slide 16: Income and cost recognition under IAS 18
n Income recognised under IAS 18 Ø Annual management fee Ø Front end or initial fees amortised over life of contract n Costs Recognised Under IAS 18 Ø Maintenance Costs Ø Fixed Acquisition Costs Ø Variable Acquisition Costs amortised over life of contract 16
Slide 17: Value of in-force and deferred acquisition costs
n Shareholder value of in-force (VIF) on investment contracts can no longer be recognised in profit and loss and balance sheet n A liability for the deferral of front end fees must be recognised n An asset for deferred acquisition costs [DAC] on investment contracts will be permitted but is limited
Slide 18: Worked example: €10,000 investment for 3 years
Investment of €10,000 for 3 years Front Fee - 5% €500 Annual Management Fee - 2% €200 Fixed Acquisition Cost - 7% (€700) Variable Acquisition Cost - 3% (€300) Annual Maintenance Cost - (€20) 18
Slide 19: Cash Flows
Cash Flows In Out Net DCF Year € € € @ 6% 1 700 1,000 (300) (300) 2 200 20 180 170 3 200 20 180 160 Total 1,100 1,040 60 30 19
Slide 20: EV Accounting
EV Accounting VIF Cash P&L € € € Year 1 Value of New Business 30 30 Cashflow 300 (300) Balance 330 (300) 30 Year 2 VIF @ Discount Rate 20 20 Cashflow (180) 180 Balance 170 (120) 50 Year 3 VIF @ Discount Rate 10 10 Cashflow (180) 180 Balance - 60 60 20
Slide 21: IFRS Accounting
IFRS Accounting Year 1 Year 2 Year 3 Total € € € € Front End Fee 500 - - Deferred Front End Fee (332) 166 166 Management Fee 200 200 200 Fixed Acquisition Cost (700) - - Variable Acquisition Cost (300) - - Deferred Variable Costs 200 (100) (100) Maintenance Cost - (20) (20) IFRS Profit/(Loss) (432)
Slide 22: Annual Profit Profile
Annual Profit Profile 400 300 200 100 Profit IFRS Profits 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 EV Profits -100 -200 -300 -400 Year 22
Slide 23: Cumulative Profit Profile
Cumulative Profit Profile 1,200 1,000 Accumulated Profits 800 600 IFRS Profits 400 EV Profits 200 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 -200 -400 Year 23
Slide 24: Split of Investment / Insurance Contracts 2003
Split of Investment / Insurance Contracts 2003 Maximum Minimum Change Change % % Investment Contracts 85 75 Insurance Contracts 15 25 24
Slide 25: Shareholder Net Assets 2003
Shareholder Net Assets 2003* Net Worth VIF Total €m €m €m Reported 623 816 1,439 Restated under IFRS (75/25 split) 670 476 1,146 Minimum Change 47 (340) (293) Restated under IFRS (85/15 split) 665 405 1,070 Maximum Change 42 (411) (369) * Life Assurance Ireland 25
Slide 26: Change in Shareholder Net Assets 2003
Change in in Shareholder Net Assets 2003 Min Max €m €m Net Worth DAC 101 121 Deferred income (91) (119) Release of cash reserves 51 68 IAS19 pensions (19) (19) Other 5 (9) 47 42 Value of in-force (VIF) (340) (411) Total (293) (369) 26
Slide 27: IFRS - Life Assurance P&L
IFRS - Life Assurance P & L 2003 Profit after Tax* Net Worth VIF Total €m €m €m Reported 149 36 185 Restated under IFRS (75/25 split) 156 (12) 144 Minimum Change 7 (48) (41) Restated under IFRS (85/15 split) 141 (33) 108 Maximum Change (8) (69) (77) * Life Assurance Ireland 27
Slide 28: Balance Sheet and P&L Account 2003
Balance Sheet 2003 €m Reported net assets* 2,022 Bank (48) Life (293) - (369) Restated under IFRS 1,681 - 1,605 P & L Account 2003 €m Reported net profit 262 Group 8 Bank 11 Life (41 - 77) Restated under IFRS 240 - 204 28 * Excluding UK Life Assurance €82m
Slide 29: Summary of implications
n IFRS - reporting standard not management tool n Growing business - IFRS impact: Ø Increases banking profits Ø Reduces life assurance profits n Embedded Value Ø Most appropriate management metrics Ø Changes in methodology and disclosures n Economic fundamentals & outlook unchanged 29
Slide 30: Appendix: Life assurance analysis
n Analysis of 2003 PAT from Life Assurance [ROI] n EV v IFRS Comparison of 2003 PAT from Life Assurance [ROI] n Analysis of IFRS 2003 Investment Earnings [ROI] 30
Slide 31: Life assurance achieved profits by region
ROI UK/US Total Continuing Operations €m €m €m New business contribution 42 4 46 Contribution from existing business Unwind of discount rate 80 9 89 Experience variances 24 (6) 18 Development expenditure (11) - (11) Operating assumption changes 39 (2) 37 Expected investment returns 4 1 5 Other incom
Slide 32: Comparison of IFRS v. Reported Life PAT 2003
Comparison of IFRS v. Reported Life PAT 2003 Minimum Maximum EV IFRS EV IFRS €m €m €m €m Interest on VIF 27 32 VNB 13 17 Experience variances (1) 0 Expected income 1 1 Other income 6 6 46 56 Operating assumption variances 23 27 STIFS 16 24 Economic (2) (3) 83 20 104 9 Insurance 107 107 86 86 Earning
Slide 33: IFRS investment earnings: fees and expenses
Min Max €m €m Management fees 84 104 Non-deferrable acquisition expenses (17) (44) Renewal expenses (57) (62) 10 (2) Fees amortised 19 21 Variable acquisition cost amortised (16) (18) 13 1 Investment return 7 8 Profits from other businesses 9 9 29 18 Exceptional Costs (9) (9) Earnings before tax 20
Irish Life & Permanent — Investor Presentation (November 2004) on 6ix