Glossary of terms

This is a methodology used to calculate embedded value. It was the standard methodology used in the UK and Ireland prior to the adoption of European embedded value (EEV) principles.
See embedded value

Annual premium equivalent has traditionally been the common industry sales measure in the UK and Ireland. APE for new business is calculated as the annual premium amount for regular premium contracts plus 10% of new single premiums. It gives a roughly comparable measure of weighted sales across companies to allow for differences in mix between regular and single premium business. In measuring the new business margin it has been used as the denominator in the calculation.

However the EEV methodology has redefined sales as the present value of new business premiums [PVNBP] to be used for the purposes of computing the new business margin.
See PVNBP

These are the investments matching unit-linked business, where policyholder benefits are expressed in units of an underlying investment vehicle. Investment risk is borne by the policyholder(s).

Bancassurance is the sale of life, pension and investment products through the branch network of a bank.

This represents the range of activities to which the EEV reporting methodology is applied in the group. It applies to all of the Irish Life & Permanent group's life assurance activities and its supporting investment management business. It does not include any part of the group's banking activities or the two subsidiaries - Cornmarket, the life brokerage business or Irish Progressive Services International (IPSI), the third party life administration business.

In response to the exceptional turbulence in the world financial markets, the Irish government announced on 30 September 2008 the CIFS Scheme designed to restore the stability of the financial system and to remedy a serious disturbance in the Irish economy. The aim of the CIFS Scheme is to guarantee, for a period not exceeding two years, all eligible deposits and certain other liabilities of seven systemically important Irish credit institutions, including Irish Life & Permanent.

The reduction to present value at a given date of a future cash transaction at an assumed date, using a discount factor reflecting the time value of money. The choice of a discount rate will usually greatly influence the value of insurance provisions, and may give indications on the prudence of provisioning methods.

When calculating the embedded value of the in-force life assurance business assumptions are made as regards interest rates, future expense inflation and other economic factors which in turn determine the risk discount rate and investment return assumptions used. The effect of changes in these assumptions - which are outside management control - is reported separately below the operating profit line.

The liabilities covered under the CIFS Scheme (see above) are all liabilities of the participating financial institutions which existed at any time between 30 September 2008 and 29 September 2010, falling into one of the following categories: (1) All retail and corporate deposits (to the extent not covered by existing deposit protection schemes in the State or any other jurisdiction); (2) Interbank deposits; (3) Senior unsecured debt; (4) Asset covered securities; (5) Dated subordinated debt (Lower Tier 2).

The embedded value of the life assurance business is the sum of the shareholder's net worth (SNW) in the life assurance company plus the discounted value of distributable profits expected to emerge on business already written - the value of the in-force business (VIF). It excludes any value that may be attributed to future new business. The SNW consists of the required capital to support the business together with any surplus assets ("free surplus"). The VIF is calculated on European Embedded Value (EEV) principles using a set of best estimate actuarial, economic and operational assumptions and is net of deductions for the cost of holding required capital and for the cost of financial options and guarantees.
See group embedded value; european embedded value

EEV is embedded value computed in accordance with the set of principles agreed in May 2004 by the CFOs of the major insurance companies in Europe, setting the new industry standard for embedded value reporting.

In computing the embedded value of the in-force book of life business it is necessary to make assumption as to operating items such as lapses or surrenders, expense levels, mortality experience, taxation etc. In any period the actual operating result for these items will differ from the assumed experience. The resultant positive or negative experience variance is reported in operating profit for the period.

Under European EV principles allowance must be made in the embedded value for the time value of financial options and guarantees where a financial option exists which is exercisable at the discretion of the policyholder. These impact the group's business are in relation to some investment and death guarantees. In calculating the time value of FOGs stochastic models are used calibrated on a market consistent basis and in doing so an average risk free rate of return on assets is assumed rather than allowing for market risk premia.

Free surplus is the market value of assets in the covered business less statutory liabilities less required capital. Effectively these are the free assets available having provided for policyholder liabilities and the required capital to support them.

The statutory reporting basis for the group is IFRS. However given the significance of life assurance activities to the group we also provide group results computed on an embedded value basis by way of supplementary financial information. The group EEV results include all life assurance activities on an EEV basis and banking and other activities on an IFRS basis.

Insurance on which the premiums are being paid or have been fully paid. In other words the portfolio of policies active at a given point in time. In life assurance, the "value of business in-force" (VIF) is the discounted value of the profits expected to accrue to shareholders on in-force business.

Insurance contracts are defined under IFRS 4 as those life assurance contracts which transfer significant insurance risk to the group. All other life contracts are classed as investment contracts under IFRS 4. Insurance contracts can continue to be accounted for in IFRS statutory accounts using embedded value methodology.

Investment contracts are distinguished from other "insurance" contracts under IFRS 4 and are to be accounted for as financial instruments under IAS 39. The accounting basis for investment contracts under IFRS is a form of accruals / matching accounting.

Lapse occurs when the policyholder discontinues the payment of premiums under a contract. The assumption as to the rate at which policies will lapse is important in computing embedded value. It determines how long policies are assumed to remain in-force (or persist) and therefore the duration of the flow of policy fees and charges to the shareholder.

Linked or unit-linked refers to a life assurance policy where benefits are expressed in a unit of account, usually an investment fund. Benefits are effectively "linked" to the value of the underlying units rather than fixed or guaranteed benefits set up at inception.

Actuarial tables displaying the frequency of death for an individual, by sex and generation. The use of mortality tables is often regulated and drives pricing and reserving in life insurance. Adjustments to life insurance provisions are sometimes made to take account of changes in life expectancy and the use of new mortality tables. The mortality rates used by the group for reserving purposes are disclosed in the annual report.

NAMA was set up by the Government to deal with the riskiest loan portfolios on the balance sheet of Irish banks. It is an asset management company that will acquire good and bad loans from participating institutions and manage these assets with the aim of achieving the best possible return for the taxpayer on the acquired loans and any underlying assets. Irish Life & Permanent has no business banking to speak of and did not engage in development finance and therefore, uniquely among Irish banks, is not a participant in NAMA.

The NTMA manages assets and liabilities on behalf of the Irish Government. It was established at the end of 1990 to borrow for the Exchequer and manage the National Debt. Since then, its remit has been expanded greatly and now includes the management of the National Pensions Reserve Fund, the National Development Finance Agency, the National Asset Management Agency and the State Claims Agency. Certain banking system functions of the Minister for Finance have also been delegated to the NTMA.

New business sales reflect premiums arising from the sale of new life assurance contracts in the reporting period and any increases to existing contracts not included at the outset of the contract. Under European embedded value these sales are expressed as the present value of new business premiums (PVNBP) and this figure is the denominator for the purpose of computing the new business margin. PVNBP replaces the traditional measure of life sales being annual premium equivalent or APE.

The profit from new business sales, computed on an embedded value basis, expressed as a percentage of the present value of new business premiums (PVNBP) for the period. In the Irish Life & Permanent group we separately report the life and the investment management new business margins. The life margin relates to new business generated by the Retail and Corporate divisions in Ireland and by Irish Life International. The investment margin under EEV relates to the inflows of institutional funds into ILIM, both on-balance sheet and segregated.

This is the contribution, computed on an embedded value basis, arising from new business sales in the period. It is calculated on the actuarial, economic and operational assumptions used in the embedded value at the start of the financial period.

The total embedded value profit for a period is broken into three components for reporting purposes - the operating profit, the impact of short-term investment fluctuations and the effect of changes in economic assumptions. The latter items are "below the line" as they are outside the control of management. The operating profit consists of the profits from new business written in the period and the return from the in-force book of business.

Traditionally this is the person, (or persons), whose risk of financial loss from an insured peril - loss of life, illness etc - is protected by a policy or contract of insurance. For investment and savings business, where the insurance component may be minimal and the life assurance contract merely a wrapper, the investor or owner of the contract is also referred to as a policyholder.

This is the measure of sales under the EEV methodology. It is based on the present value of premiums arising under the contract so the full value of single premiums are included and a discounted value is taken for recurring premium contracts. PVNBP is the denominator in the calculation of the new business margin.

The PCAR was introduced by the Financial Regulator in March 2010; it assesses the capital requirements for credit institutions in Ireland. It involves the Central Bank and Financial Regulator making an assessment of the recapitalisation requirements of the Irish credit institutions in order to satisfy both a base case and stressed target capital requirement.

A regular premium contract is a contract where the policyholder accepts to pay a premium at regular intervals over a number of years. Also known as recurring or annual premium contract.

This is the measure of sales under the EEV methodology. It is based on the present value of premiums arising under the contract so the full value of single premiums are included and a discounted value is taken for recurring premium contracts. PVNBP is the denominator in the calculation of the new business margin.

The minimum required capital for a life company to transact business is its regulatory EU solvency margin. In practice the local regulator may, and in Ireland does, require an amount greater than the minimum. In Ireland this requirement is set at 150% of the minimum and this has also been taken as the group's required capital for embedded value purposes. Locking-in capital to protect policyholders creates a cost which is reflected in a reduced embedded value and value of new business. The cost arises as the discount rate used to value business cash flows is higher than the assumed investment return on the assets backing the required capital.

The risk discount rate is the rate used in calculating the embedded value to obtain the present value of future cashflows accruing to the shareholder. It is made up of a combination of a base risk-free rate and a risk margin. The risk margin reflects the residual risks inherent in the business after taking into account the prudence of supervisory liabilities, the level of required capital and the allowance made for financial options and guarantees.

In computing the group's embedded value assumptions are made as to the expected rates of return on the different investments making up the policyholders' funds of the life business. The assumptions as to the future growth in the funds determine amongst other things the expected future management fee income arising. The actual investment return / fund growth in any year will be greater or lesser than assumed. The impact on the embedded value of achieving a greater or lesser return in any year is included as a STIF and is reported separately below the operating profit line.

A single premium contract involves the payment of one premium at inception with no obligation for the policyholder to make subsequent, additional payments. It compares with regular or recurring premium contracts, where the policyholder agrees at inception to make a regular payment.

The minimum level that a regulated insurance company needs to cover with solvency capital to operate under normal conditions. The regulator prescribes the definition: the required minimum solvency margin is effectively a weighted average of the technical provisions. In general the solvency margin required for unit-linked products is significantly lower than that required for traditional life (non-linked) business. In Ireland the regulator's expectation is that a life company's capital would in practice be at or above 150% of the minimum.

EU expression broadly equivalent to statutory insurance liabilities, i.e. the value set aside to cover expected obligations arising on a book of insurance policies.

Policyholder benefits under such a contract are expressed in units of an underlying investment vehicle, e.g. an investment fund. As a result, they fluctuate with the value of the units and investment risk is transferred to the policyholder. Solvency requirements under EU regulation are much lower than for non-linked insurance business. The insurer is compensated with explicit management charges. "Separate account" and "variable annuity" are broadly equivalent expressions used in the US.

The value of the in-force business (VIF) is the discounted value of distributable profits expected to emerge on business already written, i.e. from life assurance contracts still in force. VIF is calculated using a set of best estimate actuarial, economic and operational assumptions and is net of deductions for the cost of holding the required level of capital and for the cost of financial options and guarantees.