2008 Preliminary Report

12 months to 31 December 2008

IRISH LIFE & PERMANENT PLC

Preliminary Announcement

Year ended 31 December 2008

CONTENTS

Page Presentation of information 1 Financial Highlights 2 Summary Overview 3 Group Performance Review 5 Divisional Performance Review 18 EU IFRS condensed Financial Statements Basis of preparation 27 Consolidated Income Statement 28 Consolidated Balance Sheet 29 Consolidated Statement of Recognised Income and Expense 30 Consolidated Cash Flow Statement 31 Notes to the statutory basis 32

Supplementary Embedded Value Basis Financial Statements

Basis of preparation 56 Consolidated Income Statement 60 Consolidated Balance Sheet 61

Consolidated Statement of Recognised Income and Expense 62 Consolidated Reconciliation of Shareholders’ Equity 62 Notes to the EV basis 63

PRESENTATION OF INFORMATION Statutory Basis (EU IFRS) EU law requires that the consolidated financial statements of the group be prepared in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the EU. The statutory basis applies IFRS to all operations including the application of IFRS 4 ‘Insurance Contracts’ to the group’s life assurance operations. IFRS 4 allows insurance contracts to continue to be accounted for under previous GAAP as adjusted for any changes which result in more relevant and reliable information. As a consequence of this the results for the group’s insurance contracts continue to be prepared under the embedded value methodology as described below. The statutory basis accounts are included on pages 27 to 54. Embedded Value Basis (EV) The EV basis shows the results of the group’s life assurance operations (including both insurance and investment contracts) prepared in accordance with the European Embedded Value (EEV) Principles issued in May 2004 with additional guidance on EEV disclosures issued in October 2005 by the European Chief Financial Officers’ Forum. The results of all other operations are prepared in accordance with IFRS. The group manages its life businesses on an EV basis, as it believes that EV is a more realistic measure of the performance of life businesses than the statutory IFRS basis. The EV basis is used throughout the group to assess performance, and it is also the measure used by life insurance companies generally and by the investment community to assess the performance of life businesses. The EV basis results employ the embedded value methodology for all of the group’s insurance and investment business. The statutory basis results use embedded value for insurance contracts only with investment contracts being accounted for under IFRS. Banking and other businesses are accounted for on the same basis in both statutory and EV results. The EV basis results are included on pages 56 to 75.

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FINANCIAL HIGHLIGHTS

Year ended 31 December 2008

2008 2007 Change Statutory Basis (EU IFRS) % Profit after tax (attributable to equityholders) €49m €449m (89) EPS on continuing activities 18 cent 168 cent (89) EV Basis (Loss) / Profit after tax (attributable to equityholders) (€433m) €404m (207) Total EPS (157 cent) 147 cent (207) Operating profit before impairment of goodwill & tax €341m €590m (42) Operating EPS before impairment of goodwill & tax 111 cent 195 cent (43) Bank Lending New loans issued €7.1bln €12.4bln (43) Lending book €40.1bln €39.1bln 2 Residential mortgage loan book (Ireland) €27.9bln €26.4bln 6 (including Springboard) Life & Investment New Business Life new business - APE €511m €673m (24) - PVNBP €3,152m €4,490m (30) Life and investment new business - APE €714m €1,014m (30) - PVNBP €5,180m €7,896m (34) Dividends Final Dividend per share Nil 52.5 cent Total Dividend per share 22.5 cent 75.0 cent Capital Ratios Total Tier 1 Capital Ratio Basel II 9.2% 8.7% (includes interim capital requirement of 23%) Life Solvency Cover (times) 1.6 1.6

.

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SUMMARY OVERVIEW Background The combination of major upheavals in credit markets, falling investment markets and a sharp weakening of the Irish economy in the second half of the year made 2008 a hugely challenging year for the group. Against that backdrop the group delivered a robust performance reflecting the diversity of its activities and in particular the low risk nature of its life business and of its bank loan book. However the unprecedented environment took its toll on earnings and on shareholder value in 2008. Transactions with Anglo Irish Bank Moreover the involvement of the group in making exceptional deposits to Anglo Irish Bank, over that company’s year end in September 2008, which resulted in the resignation of the group’s CEO, Finance Director and Group Treasurer in February 2009, impacted the group’s reputation and diverted attention and focus from the immediate business challenges. The Board of Irish Life & Permanent apologises unreservedly for what was done. It is taking a range of actions to ensure that these or similar events do not and can not happen again and has moved quickly to fill the vacated management positions. Group Profitability Statutory (IFRS) pre-tax operating profits, excluding share of associate, declined by 91% from €448m in 2007 to €41m in 2008. This decline principally reflects the impact of weak investment markets on the group’s life business both in terms of negative investment returns and weaker sales contribution as well as the increase in provisions for impairments in the banking business. Pre-tax operating profits for the year on an embedded value (EV) basis, before an impairment for goodwill, were €341m, down 42% on 2007. The principal contributors to the reduction in EV operating profit were a lower new business contribution and negative persistency experience in the life business and an increase in impairment provisions in the banking business. Total EV operating profits, including the goodwill write off of €170m, were €171m for the year. Total group earnings for 2008 fell sharply on both a statutory (IFRS) and an EV basis. Statutory profits after tax attributable to equityholders came to €49m (2007: €449m) while on an EV basis a loss after tax attributable to equityholders of €433m arose (2007: €404m profit). The EV results are after a write down of €640m before tax, reflecting investment losses and the impact of falling investment and asset values on the embedded value of the life business. Insurance and Investment Business Irish Life Assurance is the market leader in the life, pensions and investment market in Ireland and notwithstanding the difficult market conditions the business performed comparatively well and gained market share. Retail and Corporate life sales were down 24% compared to an estimated 29% fall in the overall life market and as a result market share increased to almost 32%. Reflecting their resilience, the Corporate Life division successfully grew its sales by 6% to €234m (APE basis) while the asset management division, ILIM, recorded strong inflows of over €2bn and grew its market share to 28.5%. The Retail Life division saw its sales fall by 40%, the biggest reduction being in lump sum investment products. Banking Business The principal challenge for the banking business through 2008 has been funding, in particular following the market disruption as a result of the collapse of Bear Sterns and Lehman Brothers. Notwithstanding the difficult markets the group successfully re-financed over €3bn of long-term debt over the mid-year. The swift action by the Irish Government, at the end of September when credit markets were gridlocked, to introduce a funding guarantee for Irish banks was a critical and positive intervention. Irish Life & Permanent is a participating covered institution under the government guarantee scheme which guarantees all deposits, senior debt, commercial paper and dated subordinated debt out to September 2010. Discussions are continuing between the industry and government on any further steps which might be taken in response to the expectation that funding conditions will continue to be difficult for an extended period. The rapid deterioration in the Irish economy in the second half of 2008 – in particular the sharp rise in unemployment and the continued reduction in property values – has translated into increased levels of arrears. Non-performing loans (loans over 90 days in arrears plus impaired loans) were €1,096m at the end of 2008 (2007: €441m) representing 2.8% of the loan book, up from 1.1% at the end of 2007. Impairments provisions totalling €82m were made in respect of loans and receivables in 2008, up from €28m in 2007, (which includes a €12m provision related to solicitor fraud). The group expects impairments to increase further through the cycle as economic conditions deteriorate and is satisfied that it is sufficiently strongly capitalised to absorb any losses arising.

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Capital The group is strongly capitalised and has considerable financial flexibility. The bank’s risk asset ratio on a Basel II basis was 9.2%, all core Tier 1 capital, at 31 December 2008 (2007: 8.7%). This compares to a minimum requirement of 8%. On a Basel I equivalent basis, the end 2008 capital ratio was 10.1% versus 10.4% reported for 2007. This compares with a corresponding regulatory minimum of 9%. The minimum statutory solvency capital requirement of Irish Life Assurance was covered 1.6 times at the year end. Corporate Activity On the 30 June 2008, the group consolidated its holding in Joint Mortgage Holdings No. 1 Limited (the parent of Springboard Mortgages Limited) by acquiring the other 50% holding. As at 31 December 2008 Springboard Mortgages is a wholly owned subsidiary of Irish Life & Permanent and is consolidated into the group financial statements. Outlook The business environment for 2009 will continue to be challenging with markets subject to a high degree of uncertainty and volatility and the economy slowing further. Guidance for 2009 must therefore be qualified given the sensitivity to assumptions used, which could result in actual outcomes differing materially from guidance. Our expectation for the life market is that sales volumes will decline again, broadly in line with the fall in 2008. However the defensive qualities of our Corporate life and investment management businesses should mitigate the impact of weaker retail sales. In our banking business we expect new lending demand to continue to fall and for the loan book to show a decline. We plan to grow our retail deposit base to improve the bank’s funding mix. Credit impairments in 2009 are expected to more than double from the 2008 level. The group will continue to be profitable in 2009.

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GROUP PERFORMANCE REVIEW The group’s 2008 results have been delivered against a background of exceptionally unfavourable global economic and financial conditions as well as a marked weakening in domestic demand as the Irish economy faces into a second consecutive year of contraction and adjustment. The falls in investment markets and the unprecedented level of deterioration in the Irish and global economies and the weakening in investor and consumer confidence has had a severe impact on the group’s 2008 earnings and profitability. However, despite this challenging backdrop, the group delivered pre-tax operating profits of €41m under IFRS and €171m under embedded value, representing a solid underlying performance in the group’s life and banking businesses.

Group Income Statement The group’s income statement is summarised below:

IFRS EV

12 months to

31 Dec 2008 12 months to 31 Dec 2007

12 months to 31 Dec 2008

12 months to 31 Dec 2007

€m €m €m €m Insurance and investment business

288 238 284 346

Banking 30 219 30 219 Other 5 (4) 5 (4) 323 453 319 561 Share of associate / joint venture 22 29 E 341 590 Impairment of goodwill (170) - (170) - 171 590 Short-term investment fluctuations (199) (4) (640) (114) Effect of economic assumption changes

89 1 105 (14)

Other non operational costs (3) - (3) Other IFRS consolidation adjustments

(2) - - -

Profit on sale of property - 1 - 1 Operating profit before tax on continuing operations

41 448

Share of associate / joint venture 22 29 Profit / (loss) before taxation 63 477 (364) 460 Taxation (10) (25) (65) (52) Profit / (loss) after tax 53 452 (429) 408 Minority interest (4) (3) (4) (4) Profit / (loss) after tax attributable to equityholders

49 449 (433) 404

EV operating profit before impairment of goodwill

EV operating profit

Total group statutory basis (IFRS) profits after tax attributable to equityholders for the period fell by 89% to €49m (2007: €449m). The decline in group profits principally reflects the impact of weak investment markets on the group’s life business both in terms of the investment return and weaker sales contribution and the increase in provisions for impairments in the banking business.

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Operating Profit on Continuing Operations At the operating level, IFRS pre-tax profits in the group’s core banking and life assurance business for 2008 were €41m, 91% below the 2007 outcome of €448m. Life Operating Profit Total IFRS life operating profits for 2008 fell by 24% to €178m (2007: €235m). This principally reflected the impact of negative investment returns arising from weak investment markets offset by better experience and assumption changes on insurance risk. Excluding short-term investment fluctuations (STIFs) and economic assumption changes, life business profits increased by 21% year on year to €288m in 2008 (2007: €238m). Life new business written (excluding investment sales for Irish Life Investment Managers), declined by 24% to €511m from €673m in 2007 on an APE basis. This was primarily due to the 40% reduction in Retail life sales. In the 2008 statutory profits new business contribution was nil, compared to a negative contribution of €2m in 2007. The existing book of life business saw a significant increase in surrenders and withdrawal in 2008 as investment markets continued to fall and economic conditions worsened. The adverse persistency resulted in a combined negative experience variance and assumption change totalling €60m in the 2008 embedded value earnings versus a positive of €6m in 2007. In 2008, STIFs were €199m negative compared to €4m negative in 2007. This result includes gains of €86m (2007: €73m) in respect of the movement in the year of the value of “own shares”. These are shares in the company held in policyholder funds entirely for the benefit of policyholders. Under IFRS the reduction in policyholder liabilities as a result of the fall in value of the shares is recognised as a gain but the corresponding fall in value of the asset is not included. Economic assumption changes were €89m positive in 2008 compared to €1m positive in 2007. Bank Operating Profit Banking operating profits for 2008, before the write-off of goodwill, at €30m, were 86% below the 2007 profit of €219m. Overall, the banking business reported an operating loss in 2008 of €140m compared to a profit of €219m in 2007. This loss was principally due to an increase in impairment provisions in 2008 to €374m from €28m in 2007. Revenues in the group’s banking business were in line with 2007 (before the cost of the government guarantee) with the reduction in net interest income offset by an exceptional gain of €29m realised on the sale of the bank’s gilt “held to maturity” portfolio in the first quarter of the year. The contribution to net interest income from the modest growth in the bank’s loan balances in the year - from €39.1bln in December 2007 to €40.1bln in December 2008 - was more than offset by the higher cost of funds due to the credit crisis. As a result of the higher funding costs the net interest margin declined to 105 basis points for 2008 from 117 basis points for the full year 2007. The cost of the government funding guarantee for the period from 30 September to end December 2008 was €8m. The goodwill impairment of €170m represents goodwill held on the balance sheet relating to the acquisition of TSB Bank in 2001. The group is required to assess goodwill on an annual basis. In the review for 2008 the divergence between the current market value of the banking business and the carrying book value of the TSB business warranted a full impairment against the remaining goodwill albeit that potential future profits may have indicated no impairment. Impairment provisions for the 2008 totalled €204m (2007: €28m) and this increased provisioning, coupled with the goodwill write off, accounted for almost all of the banking operating loss of €140m in 2008. Included in the provision were write downs totalling €122m in respect of holdings of Icelandic banks’ and Lehman Brothers’ debt securities, and an increase of €54m year on year on the provision for loans and receivables. The write down of €122m in debt securities comprised €92m in respect of the bank’s holdings of Icelandic bank debt plus a further €30m provision in respect of Lehman Brothers senior debt which the bank holds, albeit that the bank is overall a net debtor of Lehman Brothers. The balance of the impairment provisions of €82m (2007: €28m) are in respect of the bank’s lending activities and include collective / incurred but not reported provisions of €66m (2007: €11m). Excluding the exceptional goodwill and debt securities impairments, banking operating profits were down 31% year on year.

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Associate Operating Profit Post-tax profits achieved in Allianz, (a general insurance business in which the group has a 30% interest) in 2008, were €23m, compared to €31m in 2007. Better underwriting results for 2008 were offset by lower investment returns, reflecting the weakness in global equity markets. The 2007 profits also included a once-off profit from the sale of the business’ head office. Embedded Value The falls in investment markets and the continuing dislocation in credit markets significantly impacted the year end valuation of the group’s life and banking businesses resulting in the loss after tax, on an EV basis, of €433m (2007: €404m profit after tax) attributable to equityholders. At the operating level, the group’s core pre-tax profits, before the goodwill impairment of €170m, were €319m for 2008, 43% below the 2007 outcome of €561m. The operating profit including the associate and goodwill impairment was €171m for the year. Short-term Investment Fluctuations (STIFs) The continued impact of weak investment markets on the embedded value of the group’s life business has resulted in negative short-term investment fluctuations of €640m in 2008 compared to €114m negative fluctuations in 2007. The largest element of the charge, €383m, is attributable to the reduction in the present value of future unit-linked management fee income as a result of the fall in the value of funds under management. The write down in the value of company owned and occupied property accounted for a further €98m and the cost of financial options and guarantees came to €62m. Economic Assumptions The effect of revised embedded value economic assumptions as of 31 December 2008 was a positive of €105m (2007: €14m negative). This movement reflects the reduction of Irish medium term gilt yields over the year and a lower market risk margin which brings the embedded value in line with the outcome using market consistent assumptions. The market risk margin has fallen as a result of reduced market values, which reduces the proportion of value of in-force exposed to equity and property markets. Return on Capital Employed Total embedded value for the group for 2008, after capital movements, for 2008 fell 18% to €2.8bln (2007: €3.4bln). The adjusted operating return on capital employed on an EV basis for the group (excluding associate/joint venture and own share adjustment) was 9.5% at the end of 2008 compared to 15.6% achieved in 2007. Taxation The effective tax rate for 2008 has increased under both IFRS and embedded value reporting bases. The principal reasons being the non-deductibility for tax purposes of the goodwill impairment charge of €170m and, for EV reporting, the impact of the falls in unit-linked fund values on the ability to secure tax relief on expenses both current and future. At operating profit level (EV basis) the effective tax rate on combined insurance and banking profit in 2008 is 11% (2007: 10%).

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Group Balance Sheet Loan Portfolio and Credit Quality Loan Portfolio permanent tsb has consistently adopted a low risk approach to its lending activities. This is reflected in the exclusive focus on retail lending with 98% secured on underlying assets, 88% of which consist of residential mortgages. In particular, in the current economic downturn the bank has benefited from not being engaged in business, corporate or property development lending. As a result of the unprecedented liquidity conditions in the financial markets, coupled with the economic decline in the bank’s core markets, the bank adopted a cautious approach to balance sheet growth in 2008. It has focused on growing and developing the bank’s core customer lending franchises, residential mortgages for owner occupiers and consumer finance – car finance, terms lending, overdrafts and credit cards- in Ireland. Credit criteria across all loan portfolios were tightened from early 2008 and lending into non-core markets and products was suspended. Total loans and receivables to customers increased 2% to €40.1bln at 31 December 2008 from €39.1bln at 31 December 2007 while risk weighted assets declined by 4% year on year on a Basel II basis. Moderating loan book growth removes the strain on capital from the growth in risk weighted assets. In addition, since new loan assets have to meet tougher underwriting criteria, the overall risk weighting of the loan portfolio is expected to reduce over time. The growth in the balances over principal business lines was as follows: 31 Dec 2008 31 Dec 2007 Change Gross Lending €m €m % ROI residential lending 27,931 26,359 6 UK residential lending 7,171 8,259 (13) Consumer finance 2,381 2,272 5 Commercial lending*

1,978 1,862 6 Other 352 249 39,813 39,001 Provision for loan impairment (139) (75) 85 Deferred fees, discounts and fair value adjustments

401

194

Total lending 40,075 39,120 2 Risk Weighted Assets Basel II (Pillar 1)† 22,353 23,205 (4) Credit Quality The credit quality of the bank loan book is assessed by reference to the group’s rating system. The group uses the 24-point Basel II scale for the internal ratings approach (IRB) for credit risk. A summary of the credit quality of total loans and receivables to customers under this ratings system is outlined below. Loans classified as “past due but not impaired” and “impaired” doubled year on year while loans rated with an excellent risk profile increased by 9%. This reflects the marked decline in economic conditions, particularly in the second half of 2008. Further details are available in Note 24.

*Commercial lending excludes loans of €425m (2007: €439m) to the group’s life assurance operations including loans held for the benefit of unit-linked policyholders. † The risk weighted assets are after the application of the interim capital requirement of 23%

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31 Dec 2008 31 Dec 2007 Change Credit quality of loan balances neither past due nor impaired

€m €m %

Excellent risk profile 27,458 25,094 9 Satisfactory risk profile 7,567 9,275 (18) Fair risk profile 2,243 3,316 (32) 37,268 37,685 (1) Past due but not impaired 2,343 1,218 92 Impaired 202 98 106 Total loans and receivables to customers 39,813 39,001 As the decline in property prices in both Ireland (9.1% for 2008 per the permanent tsb / ESRI House Price Index) and the UK (16.2% year-on-year per Halifax) continued in 2008, the loan to values (LTVs) of the group’s lending portfolio, indexed against industry market values reported by the above mentioned house price indices, have risen accordingly resulting in an increase of cases in negative equity. The average indexed LTV of the Irish mortgage portfolio, for residential mortgages and residential investment property (RIP) loans, rose by five percentage points to 46% with cases over 100% LTV up five percentage points to 8%. The average indexed linked LTV of the UK mortgage portfolio rose by twelve percentage points to 79% with cases in negative equity representing 10% of the total portfolio at year end. Indexed LTVs (cases) 31 Dec 2008 31 Dec 2007 % % ROI Mortgage Portfolio average LTV 46 41 > 100% 8 3 > 90% ≤ 100% 5 5 > 80% ≤ 90% 7 5 < 80% 80 87 UK Mortgage Portfolio average LTV 79 67 > 100% 10 - > 90% ≤ 100% 26 6 > 80% ≤ 90% 24 21 < 80% 40 73 The marked deterioration in the Irish and UK economies and in particular, the acceleration of unemployment has begun to manifest itself in an increase in arrears across all of the bank’s loan portfolios, albeit from a low base. However, notwithstanding the significant increase in arrears levels, over 96% of loans are up to date. The key priority for the group in these changing economic conditions is to minimise the losses arising from credit impairments. Management recognises the credit challenges that the group is facing and the need to take appropriate and timely action on arrears and defaults. Resourcing has significantly increased in the credit and collections areas across all portfolios. Early arrears are being proactively managed, particularly those arising in the more exposed parts of the loan portfolio i.e. high LTV and negative equity loans. The bank is actively working with customers who find themselves in difficulty. A contingency plan has also been put in place to enable the bank to respond to the impact on the loan portfolio of large scale redundancies in the economy. Coupled with these actions, arrears management is also benefiting from the low interest rate environment both in Ireland and the UK, which results in improved affordability for the borrower. Impaired and Non-Performing Loans‡ Loans are treated as impaired as soon as there is objective evidence that an impairment loss has been incurred. Objective evidence includes known cash flow difficulties experienced by the borrower, overdue contractual payments of either principal or interest, or a breach of loan covenants or conditions.

‡ For the purposes of the 2008 accounts arrears data has been calculated on the basis of days overdue rather than instalments overdue, which brings the data into line with Basel II definitions. 2007 has been restated on a consistent basis.

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Impaired loans (ILs) at 31 December 2008 and 2007 are set out below:

31 Dec 2008 31 Dec 2007 Balances ILs / Total

Loans

Balances ILs / Total

Loans €m % €m % Residential Lending

ROI 51 0.2 21 0.1 UK 74 1.0 21 0.3

Consumer Finance 61 2.6 47 2.1 Commercial Lending 16 0.8 9 0.5 202 0.5 98 0.3 Non performing loans (NPLs) are defined as loan balances in excess of 90 days in arrears plus impaired loans. NPLs at 31 December 2008 and 2007 are set out below:

31 Dec 2008 31 Dec 2007 Balances NPLs /

Total Loans

Balances

NPLs / Total

Loans €m % €m % Residential Lending

ROI 605 2.2 239 0.9 UK 255 3.6 83 1.0

Consumer Finance 89 3.7 64 2.8 Commercial Lending 147 7.4 55 3.0 1,096 2.8 441 1.1 ROI Residential Lending As a result of the deterioration in economic conditions, arrears began to rise across the Irish (ROI) portfolio in 2008. Case numbers, over 30 days in arrears, increased by 37% to almost 6,200 cases in 2008 from 4,500 cases in 2007. The value of total arrears at 31 December 2008 as a percentage of the book was 0.16% compared to 0.11% at 31 December 2007, which was an historic low. This is reflected in the increase in NPL balances from €239m to €605m. There were 25 repossessions in 2008 compared with nine in 2007. UK Residential Lending Capital Home Loans (CHL) is the group’s UK centralised mortgage lender which is focused on the professional landlord residential investment property market or buy-to-let (BTL) as it is referred to in the UK. 93% of the portfolio is BTL. In line with the market generally in the UK, CHL has experienced a sharp upturn in the level of both arrears and impaired loans within its portfolio. BTL arrears as a percentage of the total loans outstanding increased to 2.15% from 0.4% at 31 December 2007. This compares with the UK Council of Mortgage Lenders industry average for three-month plus BTL arrears cases (including repossession) of 2.8% at end December 2008. NPLs increased to 3.6% in 2008 from 1.0% in 2007 while impaired loans increased by €53m year-on-year to €74m in 2008. Consumer Finance In the consumer finance portfolio, impaired loans as a percentage of the portfolio increased to 2.6% at year end 2008 from 2.1% at year end 2007. NPLs increased to 3.7% in 2008 from 2.8% in 2007. Car finance represents the majority of the consumer finance portfolio. In this portfolio, arrears cases over 30 days have increased by 40% year on year while car repossessions have doubled. Commercial Lending Commercial mortgage case numbers, over 30 days in arrears, increased by 50% to 359 cases at 31 December 2008 from 240 cases in 2007. The value of those arrears at end 2008 as a percentage of the commercial mortgage portfolio was 0.72% compared to 0.56% at end 2007. Impaired loans increased by 30 basis points from 0.5% in 2007 to 0.8% in 2008. NPLs increased to 7.4% in 2008 from 3.0% in 2007.

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Credit Impairment Provisions§ 2008 Profit & Loss Charge 31 Dec 2008 31 Dec 2007 €m €m Residential Lending

ROI 27 1 UK 15 4

Consumer Finance 31 11 Commercial Lending 9 - 82 16 Solicitor fraud - 12 82 28 Total Provisions 31 Dec 2008 31 Dec 2007 Specific Collective Specific Collective €m €m €m €m As of 1 January 26 49 11 46 Charge to P&L 16 66 17 11 Other** (5) (13) (2) (8) 37 102 26 49 Total impairment provisions increased 85% year on year to €139m for the end of 2008. This represents cover of 69% of impaired loans (Year end 2007: €75m with coverage of 77%). This is a comfortable level of provisioning with the majority of the portfolio being secured and 88% representing residential mortgage loans. Within the total provision of €139m, the collective / incurred but not reported (IBNR) provision has increased by €53m. The 2008 collective provision was €102m, compared to €49m in 2007, which was all allocated to the consumer finance portfolio. The total profit and loss charge for 2008 increased by €66m to €82m in 2008 from €16m in 2007. The 2007 comparator excludes provisions made for solicitor fraud of €12m. The high charge reflects the fact that collective / IBNR provisions have been provided across all portfolios, and not just the consumer finance portfolio as has been the case heretofore. The group has adopted this prudent and conservative approach to provisioning in order to reflect the impact of the deteriorating economic climate on the future credit quality of the lending portfolio, notwithstanding that the group’s roll rate models and actual experience to date do not support such a provision. The impairment charge for ROI residential mortgages for 2008 increased to €27m compared to €1m in 2007. This increase includes a collective provision of €21m. The impairment charge for CHL has been increased to €15m compared to €4m in 2007, €9m of which is a collective provision. Impairment provisions on the consumer finance portfolio are calculated on a collective rather than a specific basis and therefore represent an element of provisioning against expected losses within the portfolio that have not yet been reported. Falling values of second hand cars have resulted in higher losses on repossession and disposal and this, coupled with the 30% increase in the absolute levels of impaired loans, has resulted in a significant increase in the impairment charge on this portfolio to €31m in 2008 compared to €11m in 2007. Future Loan Impairments The group estimates future levels of loan impairments by modelling the bank’s loan book against a range of economic assumptions. Increased levels of unemployment, negative GDP growth and falling house prices are the key drivers of impairment and provisioning. Current estimates for the three years, 2009 –’11, indicate an aggregate impairment provision of circa 100 basis points on the group’s base assumptions, and circa 160 basis points on a stressed basis, the assumptions for which include unemployment rising to 14% and house prices falling by 40%, peak to trough. § In 2008 the group moved to a collective methodology to assess impairments on term and other unsecured lending books. 2007 has been restated on a consistent basis. ** Other provisions comprise amounts written off during the year and exchange movements.

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Asset Portfolios Movements in asset values, currencies and interest rates impact on the value of the group’s life business and the mark-to-market valuation of the bank’s liquidity / investment portfolios. Life Asset Portfolio The value of the group’s life operations is exposed to market movements in assets, currencies and interest rates. This is due to the fact that the non-linked insurance and investment liabilities and the shareholder value-of-in-force are calculated using assumptions regarding investment returns and interest rates. To the extent that actual returns and interest rates differ from the assumptions used, variances will arise, which may be positive or negative. The group’s life business is a relatively low risk operation. In its unit-linked portfolio of €21bln, which represents 92% (net of reinsurance) of the life company’s liabilities, the investment risk is primarily borne by the policyholders. In the non-linked insurance and investment portfolio, the group’s policy is to match liability flows with high quality assets, principally sovereign bonds. The average duration of the non-linked liabilities is 10.5 years while the average duration of the assets matching these liabilities is 10.7 years. The credit profile of the fixed-rate securities, held in the non-linked portfolio is as follows:

31 Dec 2008 31 Dec 2007 % % AAA 88 70 AA 9 23 A 3 7 100 100

Given the close duration match of assets and liabilities, any mark-to-market adjustments in the portfolio due to changes in yield curves are generally matched by equal and opposite movements in the value of the liabilities. At the year end, the life company had an investment of €34m in Sigma, a structured investment, which has been fully written down. The life company’s shareholder funds of €569m are principally invested in cash and owner occupied property. A full analysis of the life shareholder fund investments is set out in EV supplementary information Note 5. Bank Asset Portfolio The bank’s asset portfolio of €3.4bln is principally held in highly rated bank Fixed Rate Notes (FRN’s) (64%), prime (non-US) euro denominated Residential Mortgage Backed Securities (RMBS) (24%) and sovereign bonds (12%). There are no sub-prime assets held within the portfolio. The portfolio is rated 48% AAA, 9% AA, 33% A and 7% BAA. The remaining 3% is the net exposure on senior debt issued by three Icelandic banks and the investment in Lehman Brothers. The impairment of these debt securities has been provided for in full albeit that in the case of Lehman Brothers the group is, overall, a net debtor of Lehman Brothers and is asserting an economic right of set off against its bond exposure. The change in value of “available for sale” (AFS) financial assets at 31 December 2008 was €43m negative which, in accordance with the IAS39 accounting treatment applied to AFS assets, was taken into reserves. The group reclassified assets of €1,968m from AFS to loans and receivables as permitted under the reclassification of financial assets, amendments to IAS39 Financial Instruments. See Note 12 for further information. At 31 December 2007, the group held a €2.5bln debt securities portfolio designated as "Held to Maturity". This portfolio formed part of the group’s holdings with respect to liquidity management. At the year end the group had the ability and intention to hold the portfolio to maturity. However, in February 2008, increased market volatility presented the group with an opportunity to realise a gain of €29m on the sale of the portfolio. The group availed of this opportunity and disposed of the entire portfolio. The gain has been recognised in the 2008 results.

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Funding As a result of the continued dislocation of financial markets and in line with the international banking industry generally, the group’s access to wholesale funding has been reduced, durations shortened and credit spreads widened. This has impacted the profitability of the group’s banking operations and reduced its appetite for loan growth as these conditions persist. However, the low risk nature of permanent tsb’s loan book and the ability to collateralise these assets has provided and continues to provide flexibility in meeting the group’s funding requirements. At the 31 December 2008 the group was rated “A-” by Standard & Poor’s and “Aa3” by Moody’s Investor Service. On 17 February 2008 Moody’ downgraded the group to “A1”. At 31 December 2008, 62% of the bank’s total funding comprised customer accounts and long-term debt from 64% at the start of the year. Within this, customer accounts fell to 33%. This decrease reflects growth in retail deposits of €1bln in the second half of the year being offset by a weakness in corporate deposits on the back of lower ratings. The loan to deposit ratio at the end of 2008 was 274% compared to 266% at the end of 2007. The group is targeting a ratio of 200% by year end 2009 to be achieved by a combination of growth in customer deposits and natural balance sheet shrinkage. The group’s total funding is well diversified across markets as shown below:

31 Dec 2008 31 Dec 2007 % % Customer Accounts 33 34 Long-term Debt 29 30 Short-term Debt 38 36 100 100

Short-term Debt The group has a deep pool of collateralised assets, which are capable of being “repo-ed” as security with a wide range of counterparties including the European Central Bank (ECB) under the Eurosystem funding programme. During 2008 part of the group’s pool of collateralised assets was used as security for ECB drawings with an average level of drawings for the year of €7.9bln. The drawings at year-end 2008 were €11.8bln. These ECB drawings are included in the short-term debt portfolio. Customer Accounts and Deposits In 2008, the group started a process to strengthen its funding profile by reducing its dependency on short-term funding and growing its customer account balances in both the retail savings and corporate deposit markets. To drive retail deposit growth in Ireland, the group leveraged its distribution channels in both the bank and life businesses. A new range of competitively priced products have been launched into the market. New organisational structures have been put in place to support the initiative, including a deposit retention unit. As well as growing retail deposits in Ireland, the group’s Isle of Man subsidiary, Irish Permanent International, used its banking licence to grow overseas deposits. Throughout 2008, retail deposits proved to be a stable and resilient funding source, despite the intense competition in the marketplace. Retail customer account balances increased by 11% year-on-year from €7.6bln at end 2007 to €8.5bln at end 2008. Corporate deposit balances at end 2008 were down 11% at €6.1bln compared to €6.8bln in 2007 reflecting the sensitivity of this market to movements in the group’s credit ratings. However, new organisational structures have been set up to drive corporate deposit growth in the UK where a dedicated group of corporate account managers are now in place.

13

Term Funding Notwithstanding the group’s plans for deposit growth, the duration of the assets on the balance sheet is such that the appropriate management of duration risk requires that a significant portion of funding should be long-term. At present, given the continuing difficulties in the credit markets in terms of availability and cost of funding, it is envisaged that the portfolio of long-term funding will remain unchanged. However, when debt markets improve and longer term borrowing is more available it would be the group’s intention to seek to raise a higher level of debt from this market. The government funding guarantee scheme, introduced on 30 September 2008 for a two-year period, has been critical in providing access to funding for Irish banks. Discussions are taking place between the government and the industry on further collective steps, which might be taken to assist longer term funding. In the course of 2008, the group successfully secured term funding of €3.3bln to replace circa €3bln of maturing term debt. This was achieved using prime residential mortgage assets to support bilateral / collateralised facilities. The facilities were provided by a wide range of investors with maturities ranging from 18 months to a maximum of three years. This compares to the maturity profile of the maturing debt of 18 months to five years. In addition, during the first half of 2008 the group raised €100m of lower tier 2 debt capital to replace maturing debt capital. On 6 February 2009, as part of the strategy to refinance term debt of €1.5bln maturing in 2009, the group successfully raised €1bln through the issue of a 2-year benchmark bond under the government guarantee scheme maturing on 28 September 2010 priced at mid-swaps plus 175bps. Capital Management Irish Life & Permanent has a robust and flexible capital structure with the ability to improve and strengthen its capital base over the next few years. The group’s core capital objective is to meet or exceed all relevant regulatory capital requirements and to hold sufficient economic capital to withstand a worst case loss in economic value due to risks arising from business activities. The worst case loss is derived through statistical models influenced by the group’s target debt rating. Capital Resources The group’s capital resources, on an IFRS basis, at 31 December 2008 are as follows: Year ended 31

December 2008 €m

Year ended 31 December 2007

€m Shareholders’ equity 2,347 2,630 Minority interest - equity 1 13 Undated loan capital 588 455 Dated loan capital 1,111 1,144 Total capital resources 4,047 4,242 Capital resources fell by €195m during the year ended 31 December 2008. The decrease is as a result of the write off of goodwill, which as an intangible asset does not impact on regulatory capital or on the distributable reserves of the group, as it is a consolidation item. Regulatory Capital The group is regulated by the Financial Services Authority of Ireland (“Financial Regulator”) 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, the group’s holding company which is also the group’s banking operation (trading as permanent tsb), and Irish Life Assurance plc the group’s principal life assurance operation. Regulatory capital is the level below which the group’s capital must not fall. 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.

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The group manages its capital base through its Internal Capital Adequacy Assessment Process (ICAAP). The Irish Life & Permanent ICAAP is designed to allow capital requirements to be risk-weighted and to fully reflect the risk profile and appetite of the group. The ICAAP incorporates a detailed process to identify all material risks for the group and ascertain whether they are to be addressed through management or mitigation (or a combination of the two) and whether capital is required to be held against each risk. The regulatory capital requirements closely follow existing European capital requirement directives as established under EU legislation. Regulatory capital adequacy is established via comparison of risk-weighted assets and their associated minimum total capital requirements (currently established as 8% of risk-weighted assets), with the regulatory available capital resources of the group. Bank Capital 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 Adequacy Directive and the Financial Regulator. The following table sets out the regulatory capital position of Irish Life & Permanent on a Basel II basis at 31 December 2008. 31 Dec 2008 31 Dec 2007Available capital €m €m Tier 1 capital 4,174 4,617

Less: goodwill - (170) 4,174 4,447 Tier 2 capital

Subordinated liabilities 1,230 1,246 Other 81 177

1,311 1,423 Tier 1 + Tier 2 5,485 5,870 Life company and other deductions (3,426) (3,841)Total available capital (Tier 1) 2,059 2,029 Required capital €m €m Pillar 1 1,454 1,509 Interim capital requirement (ICR) at 23% 334 347 Total required capital 1,788 1,856 Excess own funds 271 173 Total risk-weighted assets before ICR 18,173 18,866 Total risk-weighted assets after ICR 22,353 23,205 Risk asset ratio (all Core Tier 1) Before the application of the ICR 11.3% 10.8% After the application of the ICR 9.2% 8.7% The group’s capital ratios remained strong at 31 December 2008 with a Tier 1 and total capital ratio of 9.2% compared to a regulatory minimum of 8%, including the interim capital requirement. The capital base is relatively under-geared with no Tier 1 hybrid capital in the structure and the Tier 2 capital being only 45% of that permitted under the regulations. Basel II The objective of Basel II is to align bank regulatory capital more closely with the economic capital required to support the risks being undertaken. The capital required to cover credit, operational and market risks are required to be explicitly measured under the Basel II methodology.

15

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 (PD) and the loss given default (LGD) 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 capital required to support market risk. Under Basel II, risk weighted assets reduced through 2008 from €18.9bln down to €18.2bln and available capital increased slightly to €2.1bln giving an end 2008 risk asset ratio of 11.3%, up from 10.8% in 2008. The 11.3% risk asset ratio compares with a Basel II regulatory minimum of 8%. The Pillar 2 capital requirement under Basel II has yet to determined. In the meantime an interim capital requirement (ICR) is applied equal to 23% of Pillar 1 RWAs. Adding this ICR reduces the risk asset ratio to 9.2% versus the regulatory minimum of 8%. The application of the ICR effectively prevents a release of capital. However, it is the group’s expectation that the Pillar 2 capital add-on will be less than the ICR and will give a risk asset ratio somewhere between the 11.3% and 9.2%. The result will probably be close to 10% versus the regulatory minimum of 8%. On a Basel I equivalent basis, the end 2008 capital ratio was 10.1% versus 10.4% reported for 2007. The reduction mainly reflected an increase in risk weighted assets (RWA) arising from loan book growth. This 10.1% risk asset ratio compares with a corresponding regulatory minimum of 9%. Life Capital Irish Life Assurance plc (ILA) operates to an internal target solvency cover of 1.6 times the minimum required. The group considers 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. Solvency I The solvency cover for ILA at 31 December 2008 is 1.6 (2007: 1.6) times the minimum requirement of €410m (2007: €386m). This is summarised below. 31 Dec 2008 31 Dec 2007 €m €m Minimum capital 410 386 Regulatory capital Net worth 540 559 Perpetual debt 205 193 Other assets available 24 41 769 793 Proposed dividend for Life operation - (65)Inadmissible assets (104) (106) 665 622 The table below sets out the movement in life capital in 2008. In 2008, the life’s back book of business generated strong cash flows of €377m compared with €297m in 2008. Capital required to support new business strain for 2008 was €88m (2007: €180m). Both the capital generated and the new business strain, were helped by the €125m new business strain reinsurance arrangement which was put in place at the back end of 2008. This arrangement added €66m to the in force and reduced the new business strain by €59m.

16

In previous years, the short-term investment variance was principally a future value effect, whether positive or negative. In 2008, €253m of the negative variance impacted the net worth. This was largely due to the tangible asset valuation reductions which the group suffered on property assets and debt securities. In line with the group’s capital management policy, whereby all surplus capital above targeted minimum levels is remitted to the group, the life businesses paid a dividend of €79m to the bank holding company. 31 Dec 2008 31 Dec 2007 €m €m Net worth at 1 January 587 747 Perpetual debt 193 - Capital generated 377 297 Debt capital issued - 200 1,157 1,244 New business strain (88) (180) STIFS†† and economic variance (228) (24) Bank dividend (79) (246) Other 12 (14) Closing capital December 2008 774 780 Net worth December 2008 569 587 Perpetual debt‡‡ 205 193 Solvency II The calculation of minimum regulatory capital for the life insurance business is currently based on the EU Solvency I directive. New requirements to be established under the proposed Solvency II directive are expected to significantly reduce the calculation of minimum regulatory capital. Solvency II will require the calculation of solvency and reserving requirements on a realistic market consistent basis. Given the low risk nature of its life business, on the introduction of Solvency II the group expects to achieve a significant reduction in the reserves required to support its insurance and investment contract liabilities (total December 2008: €23bln net of reinsurance). This would result in a significant increase in the statutory capital surplus, which would be available for distribution to the parent company. The final timeline for full implementation of Solvency II is uncertain. Recent implementation dates have been estimated at 2012 but it may be delayed beyond that. Reinsurance Treaty In November 2008, the group finalised the terms of a stop-loss reinsurance treaty in relation to new business with Swiss Re, which will reduce the new business strain in ILA over the next three years. As a result of this treaty ILA’s capital requirements for 2008 have reduced by €125m. It is estimated that there will be a further reduction of €100m in ILA’s capital requirements over the next three years. The exact quantum of the reduction is dependent on future life new business volumes and experience on the reinsured block. Dividend In the context of the extraordinary changes in financial markets in 2008 including the introduction of the Irish government guarantee scheme and the approach being adopted by financial institutions both in Ireland and internationally, the directors have declared that there will be no final dividend for 2008. This approach is consistent with the priority to conserve capital for the group in the current economic environment. The total dividend for the year is 22.5 cent, being the amount of the interim dividend paid in November 2008. This compares to a total dividend for 2007 of 75 cent.

†† Short-term Investment Fluctuations ‡‡ €200m net of mark-to-market adjustments

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DIVISIONAL PERFORMANCE REVIEW Banking Operating Review In 2008, the group’s banking business faced significant challenges. As a consequence of the uncertainty and dislocation in the global credit markets, the group decided to moderate the level of new lending in 2008 by concentrating on protecting its key Irish mortgage and consumer finance franchises. Reflecting this decision, together with the general slowdown in the Irish housing market, overall gross new lending in 2008 fell 43% to €7.1bln from €12.4bln in 2007. Total loans and receivables grew by 2% in 2008 to €40.1bln compared to €39.1bln at 31 December 2007. Notwithstanding the slowdown in the Irish economy, the bank’s customer acquisition strategy continues to be successful with over 53,000 new current account customers joining the bank in 2008 bringing to over 250,000 the number of new customers acquired since the campaign began in 2005. During the year, the bank built on the strength of its customer service ethos. 10,000 customers were surveyed in the second half of 2008 generating a customer satisfaction rating of 84.8%. The bank also was voted number one bank for customer service in Europe in the 2008 Finalta European Benchmarking Survey of over 40 European banks. This outcome reflects the group’s absolute commitment to, and its success in, putting the customer first. This is a core group strength and differentiator which will continue to be protected and developed. Lending Growth As a result of the unprecedented liquidity conditions in the financial markets, coupled with the economic decline in the bank’s core markets, the bank adopted a cautious approach to new lending and balance sheet growth in 2008 and focused on growing and developing the bank’s core customer lending franchises, residential mortgages for owner occupiers and consumer finance in Ireland. Credit criteria across all loan portfolios were tightened from early 2008 and lending into non-core markets and products was suspended. The bank’s pricing strategy was also adapted in response to margin erosion attributable to increased funding costs. Mortgage products were re-priced to reflect the higher cost of funding. Commissions payable to mortgage brokers were also reduced. The growth in the balances over principal business lines was as follows:

31 Dec 2008 31 Dec 2007 Growth Gross Lending €m €m % ROI residential lending *

27,931 26,359 6 UK residential lending £Stg 6.8bln (2007: £Stg6.1bln)

7,171 8,259 (13)

Consumer finance 2,381 2,272 5 Commercial lending§§ 2,403 2,301 4 39,886 39,191 2 Money market funds 352 159 Loans and receivables to joint ventures - 90 Deferred fees, discounts and fair value adjustments

401 194

40,639 39,634 Inter-group loans and receivables (425) (439) Impairment provisions (139) (75) 85 Total lending - €m 40,075 39,120 2

Irish residential mortgage balances outstanding increased 6% to €27.9bln compared to €26.4bln at year end 2007 (including Springboard). Despite the decline in new business volumes for the year, the overall portfolio grew due to the moderate new lending volumes and the lower levels of early redemption activity reflecting market conditions generally.

* Including securitised mortgages of €2.95bln §§ Commercial lending includes loans of €425m (2007: €439m) to the group’s life assurance operations for the benefit of unit-linked policyholders.

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The contraction of the Irish housing market, which commenced in 2007, accelerated in 2008. Demand for new residential mortgages reduced as consumer confidence fell as a result of a combination of economic uncertainty, house price falls (per the permanent tsb / ESRI House Price Index house prices fell on average 9.1% in 2008, having fallen by 7.3% in 2007), and less availability of credit. The economic factors were coupled with the bank’s objective of moderating loan growth with the withdrawal of 100% LTV mortgages. Irish residential investment property lending has also been severely curtailed. Reflecting both these internal and external factors total gross new Irish mortgages, including Springboard, issued by the group of €4.2bln in 2008 showed a reduction of 40% on the levels of €7.0bln issued in 2007. New consumer finance loans fell 13% to €1.1bln from €1.3bln in 2007 mainly reflecting reduced demand in the new car finance market. The portfolio grew 5% to €2.4bln (2007: €2.3bln). New commercial lending of €296m was down by 59% (2007: €726m). Reflecting the economic environment, this business has now been discontinued. The portfolio grew 4% in 2008 to €2.4bln (2007: €2.3bln). In the UK, Capital Home Loans Limited had a very strong pipeline of committed new business coming into 2008 that led to gross new lending of Stg£1.2bln in the year, compared to Stg£2.3bln in 2007. The portfolio grew by 13% from Stg£6.1bln in 2007 to Stg£6.8bln in 2008. In light of prevailing market conditions, CHL has been closed to new business since March 2008 with the focus shifted to collections and arrears management. Customer Acquisition Customer account balances at 31 December 2008 totalled €14.1bln, up 2% from €13.8bln at the end of 2007. Throughout 2008, the bank continued to maintain its focus on the acquisition of new current accounts and continued to be extremely successful with in excess of 53,000 new accounts opened during the year, following on from the 69,000 new accounts opened in the year ended 2007. Current account balances fell 14% to €2.2bln from €2.6bln in 2007. However the fall in current account balances was offset by the rise in deposit balances. As a result of a number of initiatives undertaken in 2008 through its network of branches and brokers and its Isle of Man subsidiary, deposit balances for the year were up 24% at €6.2bln against €5bln recorded in 2007. The bank has increased its focus on cross sales activity with the objective of increasing the current average product holding of two products per customer. During 2008, the bank continued to develop and launch innovative services to improve market penetration including the launch of text alerts and emergency cash. Whilst using new innovations to acquire new current accounts, the bank is also focused on retaining existing customers and has a customer retention unit in place for this purpose. Banking Financial Review The pre-tax results of the group’s banking business for the twelve months ended December 2008 are set out below:

12 months to 31 Dec 2008

12 months to 31 Dec 2007

€m €m Net interest income 473 500 Other non-interest income

Other income 42 43 Trading income 5 5

Government Guarantee (8) - Investment Return Held to Maturity portfolio disposal 29 1 541 549 Administrative expenses / Depreciation (307) (302) Impairment provisions (204) (28) 30 219 Impairment of goodwill (170) - Operating profit before tax (140) 219

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Against the background of a weak Irish housing market and continued global credit market turbulence and dislocation, the group’s banking business delivered pre-tax profits, before the impairment of goodwill, of €30m, down 86% from €219m in 2007. Overall, the banking business reported an operating loss in 2008 of €140m compared to a profit of €219m in 2007. This loss was principally due to an impairment of goodwill of €170m and an increase in impairment provisions in 2008 to €204m from €28m in 2007. The provisions include write downs totalling €122m in respect of holdings of Icelandic banks’ and Lehman Brothers’ debt securities, and an increase of the provision for loans and receivables by €54m year on year. A once-off gain of €29m achieved on the sale of the bank’s gilt “Held to Maturity” portfolio in the first quarter of the year was offset by €27m lower interest income and an €8m charge in 2008 for the Government guarantee. Excluding the exceptional impairments of the debt securities and goodwill, banking operating profits were down 31% year on year. Net Interest Income Net interest income in 2008, at €473m, was down 5% when compared to the 2007 outturn of €500m. This was due to the higher cost of funding in 2008 and the lower balances on high income generating current accounts. These were partially offset by a modest growth in mortgage and consumer finance volumes. Net interest margin (NIM) for the year declined to 105 basis points from 117 basis points for the full year 2007. This fall principally reflects the higher funding costs arising as a result of basis risk, which was caused by the extremely wide difference between EURIBOR and the official ECB interest rates that form the basis of mortgage pricing in Ireland. The higher EURIBOR spreads were compounded by a sharp widening in counterparty credit spreads through the year. As well as these factors, the fall in the NIM was also impacted by pressure on the liability margin that resulted from the increased costs of retail deposits and the lower return on current accounts. This pressure was partially offset by the higher asset margins on the Republic of Ireland mortgage business. A number of pricing initiatives were taken during the year to manage that differential including the suspension of tracker and standard variable rate mortgage products. Mortgage products were re-priced to reflect the higher cost of funding. LTV tracker products and the standard variable rate product were withdrawn. The number of LTV variable and fixed rate products was reduced. Commissions payable to mortgage brokers were also reduced. Other Income Other income of €42m compares to €43m achieved in 2007. This reflects higher resource fee income and VISA commission offset by a lower level of general insurance income together with lower bureau de change earnings due to the strengthening of the Euro exchange rate against the US Dollar and Sterling. Other income excludes the contribution from bancassurance sales generated through the bank which are reported in the pre-tax profit of the group’s life assurance activities. Sales of life and pension products through the bank were €55m compared to €105m in 2007 with the reduction reflecting a lower level of lump sum investment sales on foot of weaker investment markets generally. Trading income was a positive €5m in 2008 flat with the 2007 outturn. In both periods, the trading result was largely due to the group’s pre-hedging basis risk in its fixed rate mortgage portfolio. Under EU IFRS, the outcome of this pre-hedging is reflected in trading income rather than net interest income. Government Guarantee Charge The Government guarantee charge for 2008 was €8m which covered the period from 30 September 2008 to year end. This cost is calculated as a percentage of the liabilities which are covered by the scheme and is payable on a quarterly basis. The expected charge for the full year of 2009 will be in the region of €35m to €40m. Investment Return The “Held to Maturity” portfolio gain of €29m was achieved on the disposal of the bank’s “Held to Maturity” debt securities portfolio in the first quarter of 2008, which helped to mitigate the impact of higher funding costs arising from the global credit crunch. Costs Administrative expenses for 2008 were €307m a 2% increase on the 2007 outturn of €302m. In early 2008, the bank entered into a sale and lease back of its head office with the life company in order to improve overall capital efficiency within the group. Adjusting for the rent payable from this transaction in 2008, year-on-year costs in the bank are flat in absolute terms and down 6% in real terms. Cost management continues to receive significant management attention.

20

Impairment Provisions Impairment provisions for the year increased by €176m to €204m compared to €28m in 2007. These impairments comprise the €122m write-down of Icelandic and Lehman Brothers debt securities as well as a €66m increase in loan and receivable provisions to €82m in 2008. The 2008 provision compares to €16m in 2007, which excludes a €12m provision related to solicitor fraud. The year on year increase comprises primarily a higher collective / IBNR provision put in place due to the economic slowdown. Insurance and Investment Operating Review 2008 was a difficult year in the life market in Ireland with the impact of very weak global investment markets weighing heavily on investor sentiment and confidence and having a significant dampening effect on demand for lump sum investment products in particular. Against this backdrop, the group continued its focus on maintaining Irish Life’s leading market franchise and in particular, developing its two most resilient products – pensions and protection. The group’s life business performed comparatively well gaining market share in tough conditions. Life sales (on an APE basis), fell by 24% to €511m from €673m in 2007 (excluding ILIM) compared to an estimated 29% fall in the overall life market. Market share for Irish Life increased from 30.1% in 2007 to 31.9% in 2008. The pensions market remains a strategic priority for the group and whilst pension sales fell by 10% in 2008, pensions still accounted for 75% of total group life sales in Irish Life Assurance. The strong pensions business in both Retail and Corporate Business enabled the group to increase its pension’s market share to 33.5%. The sales in the group’s principal life business are summarised below:

APE*** Basis PVNBP††† Basis 31 Dec 31 Dec Change 31 Dec 31 Dec Change 2008 2007 2008 2007 €m €m % €m €m %

Retail Life 247 414 (40) 1,450 2,745 (47)Corporate Life 234 220 6 1,398 1,355 3 Irish Life International 30 39 (23) 304 390 (22)

511 673 (24) 3,152 4,490 (30)

Investment (ILIM) 203 341 (40) 2,028 3,406 (40)

714 1,014 (30) 5,180 7,896 (34)

Retail Life The market for investment products in 2008 was very weak reflecting the impact of weak global investment markets on investor confidence in equities and property. In the face of this reduced demand, retail life sales fell 40% to €247m (2007: €414m) on an APE basis. This reduction principally reflects a 71% decline in investment business and a 45% decline in savings business. On a PVNBP basis, sales declined 47% to €1.45bln (2007: €2.7bln). Reflecting reduced sales, the cost base was scaled back by 11% in 2008 through headcount and payroll reduction initiatives. Notwithstanding the decline in sales, Retail retained a 25% share of the market and 90,000 new customers were acquired in 2008. It also continued to develop excellence in customer service through its ‘Intouch’ customer satisfaction programme. In 2008, Retail life achieved a customer satisfaction index score of 80.1% compared to 80% in 2007.

*** APE sales are calculated as annual value of regular premiums plus 10% of the value of single premiums. ††† PVNBP sales are calculated as total single premiums plus the discounted value of regular premiums expected to be received over the term of the contracts.

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Corporate Life Notwithstanding the turbulence in the global investment markets, sales in the group’s Corporate Life business were ahead 6% to €234m (2007: €220m) on an APE basis. Incremental sales were up 14% on 2007. This reflects the resilience of this largely pensions based business. Sales of risk schemes were particularly strong in 2008. On a PVNBP, basis sales were ahead 3% to €1.4bln (2007: €1.36bln). Corporate Life’s share of the market for 2008 was 46%. Corporate Life continues to develop and adapt investment products to meet the needs of their customers. Investment Management Irish Life Investment Managers (ILIM) is committed to market leadership through recognising the needs of its clients and developing and providing the most appropriate investment solutions to meet those needs. ILIM delivered a resilient performance in 2008 on both the active and passive sides of the business despite the economic climate and continued to grow its client base. Market share was 28.5%, up 6% in the last five years. Gross new fund inflows were €2bln (2007: €3.4bln including €645m arising on the acquisition of the EBS Summit Funds). This included new sales of €1.3bln and contributions from existing clients of €0.7bln. The size of new client money was adversely affected by the market falls in 2008. Reflecting investment market conditions, total funds under management at 31 December 2008 were €27.3bln compared to €35.4bln at end 2007 representing a decline of 23% year on year. Insurance and Investment Financial Review - IFRS Basis The operating results of the group’s insurance and investment business under EU IFRS, for the 12 months ended 31 December 2008 are set out below.

12 months to 31 Dec 2008

12 months to 31 Dec 2007

€m €m Net interest receivable (51) (47) Net fees and commissions (137) (141) Premiums on insurance contracts net of reinsurance

441 407

Investment return (7,702) (1) Fees from investment contracts and fund management

250 262

Change in shareholder value of in-force business

70 54

Operating income (7,129) 534 Claims on insurance contracts net of reinsurance (314) (322) Change in insurance/investment contract liabilities

7,890 275

Administrative expenses / depreciation (219) (212) Investment expenses (50) (40) Operating expenses 7,307 (299) Operating profit before tax 178 235

The operating profit before tax for 2008 was €178m a 24% reduction on the 2007 outturn of €235m. Operating Income Operating income at €7,129m negative was significantly lower than 2007 (€534m positive) principally due to the large reduction in the investment return which was a negative €7,702m in 2008 compared to a negative €1m in 2007. This reduction principally reflects the impact of negative investment market returns on policyholder funds in 2008 compared to positive returns in 2007. Life new business written (excluding ILIM investment sales) on an APE basis declined by 24% to €511m from €673m in 2007. The new business contribution was nil in the reported 2008 statutory profits, compared to a negative contribution of €2m in 2007. Under EU IFRS, the fixed cost of acquiring investment contract new business is recognised in the year of acquisition whilst profit flows are recognised over the life of the contract.

22

The fees from investment contracts fell by 5% mainly due to a lower level of average investment fund balances in the twelve months to December 2008 compared to the twelve months to December 2007. The 2008 outcome also includes gains of €86m (2007: €73m) due to a reduction in policyholder liabilities. This reduction occurred because Irish Life & Permanent shares, held for the benefit of policyholders, fell in value. There was a corresponding fall in value of the asset represented by the shareholding but under EU IFRS, a fall in the value of own shares is not recognised in the income statement. Operating Expenses Operating expenses of €7,307m positive in 2008 compare to €299m negative in 2007 principally due to the change in insurance and investment contract liabilities. These were €7,890m positive in 2008 compared to €275m positive in 2007, again due to the negative investment return on policyholder funds in 2008. The change in insurance contract liabilities shows a net reduction in liabilities of €234m compared to a net reduction of €177m in 2007. This is mainly due to reductions in insurance linked liabilities arising from negative market returns in 2008 compared to positive markets returns in 2007. The change in investment contract liabilities has reduced from €98m positive in 2007 to €7,656m positive mainly due to the significant investment market falls in 2008. The change in these liabilities is reflected in the negative investment return of €7,702m included in operating income in 2008 compared to a negative return of €1m in 2007. Administrative expenses increased 3% to €219m in 2008 from €212m in 2007. Excluding the fluctuation in pension costs, overall costs were down 3% on 2007 reflecting tight cost management in a slower sales environment. Insurance and Investment Financial Review – Embedded Value Basis The operating results of the group’s insurance and investment business, presented on an EV basis, for the 12 months ended 31 December 2008 are set out below.

12 months to 31 Dec 2008

12 months to 31 Dec 2007

€m €m New business contribution 100 154 Contribution from in-force business Expected return In-force 133 118 Net worth 32 29 Experience variances - 10 Assumption changes 19 35 Operating profit before tax 284 346

Operating profit before tax for 2008 was down 18% to €284m on the 2007 outturn of €346m. The key drivers of this outturn were a lower level of new business contribution, which was down 35% to €100m (2007: €154m), and the decrease on experience variances, mainly reflecting the high negative persistency variances due to higher withdrawals across all Retail product lines. New Business Contribution & Margins New business contribution was €100m in 2008 compared to €154m in 2007. This 35% reduction was primarily driven by the 40% fall in Retail life sales and the lower Retail life sales margin due to the gearing of expenses.

23

On an APE basis, overall new business margins excluding ILIM were 15.1% compared to 19.2% reported for the full year 2007. Including ILIM new business, margins were 14.0% compared to 15.3% for the full year 2007 made up as follows: APE Basis PVNBP Basis 31 Dec 2008 31 Dec 2007 31 Dec 2008 31 Dec 2007 % % % % Life 15.1 19.2 2.4 2.9 Investment (ILIM) 11.4 7.4 1.1 0.7 14.0 15.3 1.9 2.0 The reduction in life new business margins principally reflects the operational gearing impact of a lower level of new business sales as unit fixed costs increased. The increase in margins in ILIM reflects a larger proportion of high ticket low margin sales within the mix in 2008. When calculated on the PVNBP basis, new business margins, including ILIM, were 1.9% compared to 2.0% in the full year 2007. The internal rate of return achieved on new business sales, excluding ILIM, was 12.1% which compares to 13.3% achieved in the full year 2007. The average undiscounted payback period‡‡‡ for 2008 across the group’s life product portfolio was seven years compared to six years for 2007. In-force Business Earnings on the in-force business held up well in 2008. Total in-force earnings for 2008 were €184m compared to €192m in 2007 demonstrating that the flow of profits and cash from the back book of business continued to be strong. Within this, the total expected return grew 12% to €165m, which principally reflects a larger book unwinding at a slightly higher risk discount rate than in 2007. The expected in-force return in 2008 represents the unwind of the risk discount rate. The 13% growth in these profits to €133m from €118m reflects principally the growth in the book in 2007. The expected return on the net worth relates to earnings on shareholder assets. It is calculated by reference to the assumed long-term rate of return on property and equities and the actual return on short-term cash. In 2008, the expected return was €32m compared to €29m in 2007. The total contribution of €19m from both experience variances and assumption changes are down from €45m in 2007. Risk – both mortality and morbidity – and expense outcomes continued to be strongly positive in 2008. However, the deterioration in persistency resulted in an overall negative impact of €60m compared with a positive effect of €6m in 2007. Experience variances are nil for 2008 compared with €10m in 2007. Positive risk and other variances experienced during the year were offset by a considerable negative persistency variance experienced in Retail Life reflecting the higher exit levels across all the major product lines, but particularly on unit linked investment products. This negative variance is due to factors arising from the economic environment as customers face into lower living standards due to falling incomes and unemployment as well as a move to cash products due to a fall in investor confidence. A dedicated retention team has been put in place to manage the business’s customer relationships. The contribution from assumption changes of €19m is 46% lower than that for 2007 at €35m. Favourable expense assumption changes arose from the impact of cost reduction programmes across the business. Improved risk assumptions were the outcome of an investigation into mortality assumptions for unit linked protection business completed in 2008. These positive assumption changes were offset by adverse persistency variances. Costs Costs

within the life company continue to be tightly managed. Overall costs were up 3% at €218m from the €212m outturn in 2007. When IAS 19 pension adjustments are excluded costs were down 3% year on year reflecting the impact of cost reduction programmes across the life business. Cost management remains a key focus for 2009.

‡‡‡ Payback period is calculated as the number of years it takes adding up the cash flows to break even.

24

For further information contact: Name Telephone No. Mobile No. Email address

Barry Walsh 353 1 7042678 087 681 8157 barry.walsh@irishlife.ie

David McCarthy 353 1 8563050 087 256 7292 david.mccarthy@irishlife.ie

Media: Ray Gordon 353 1 6788099 087 241 7373 ray@mkc.ie

25

EU IFRS Condensed Financial Statements

26

STATUTORY BASIS The information in this announcement (which is unaudited), which was approved by the Board of Directors on 3 March 2009, does not comprise statutory accounts for the years ended 31 December 2008 or 31 December 2007, within the meaning of the Companies Acts 1963 to 2006. Basis of preparation The 2008 statutory financial information on pages 27 to 54 has been prepared using the accounting policies adopted by the group in its last set of consolidated financial statements. These statutory results are prepared in accordance with International Financial Accounting Standards issued by the International Accounting Standards Board (IASB), as adopted by the EU which apply to accounting periods ended on or before 31 December 2008. The 2008 statutory financial information has been prepared on a consistent basis with the annual report and financial statements for 2007 with the exception of certain financial assets which were permitted, under the amendments to IAS 39 (Financial Instruments: Recognition and Measurement) and IFRS 7 (Financial Instrument: Disclosures), to be reclassified from available for sale to loans and receivables. Details of the reclassification are set out in note 12. IFRS 4 brings into force phase 1 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 financial information on pages 56 to 75 extends these principles to investment contracts written in the life assurance business. Estimates and assumptions In preparing the financial information, critical accounting estimates and judgements are made in applying the group’s accounting policies. There are assumptions built into the embedded value basis of accounting for insurance contracts. These include assumptions on mortality, morbidity and future investment returns and expenses. For investment contracts, the expected life of the products affects the recognition of costs and fees. The valuation of financial instruments for which there is an inactive market requires the use of valuation models using assumptions around interest rate yield curves and volatilities. In determining whether there are impairment losses on loan portfolios, management make judgements as to whether there is observable data indicating that there is a measurable decrease in the estimated future cash flow from a loan or a portfolio of loans. Estimates based on historical loss experience under similar market conditions are used to calculate loss provisions. The actuarial valuations used for the group’s defined benefit pension schemes are dependent on a series of assumptions including discount rates, expected return on assets, inflation and mortality rates (refer note 7). Where estimates are used, actual results may differ from the estimates made.

27

Consolidated Income Statement (Unaudited)year ended 31 December 2008

2008 2007 Notes €m €m

Interest receivable 2 2,176 2,336 Interest payable 2 (1,690) (1,856)

486 480 Fees and commission income 3 76 73 Fees and commission expenses 3 (130) (127) Trading income 5 5 Premiums on insurance contracts 669 718 Reinsurers' share of premiums on insurance contracts (228) (311) Investment return 4 (7,741) (25) Fees from investment contracts and fund management 272 284 Change in shareholder value of in-force business 15 70 54 Profit on the sale of property and equipment - 1 Total operating income (6,521) 1,152

Claims on insurance contracts (466) (453) Reinsurers' share of claims on insurance contracts 152 131 Change in insurance contract liabilities 3 63 Change in reinsurers' share of insurance contract liabilities 231 114 Change in investment contract liabilities 7,656 98 Administrative expenses 5 (540) (541) Depreciation and amortisation Property and equipment 5 (31) (28) Intangible assets 5 (19) (20) Investment expenses (50) (40)

6,936 (676) Impairment of goodwill 6 (170) - Total operating expenses 6,766 (676)

Operating profit before provisions 245 476

Provisions for impairmentLoans and receivables 8 (82) (28) Debt securities 8 (122) -

(204) (28)

Operating profit 41 448

Share of profits of associated undertaking / joint venture 22 29

Profit before taxation 63 477 Taxation (10) (25) Profit for the year 53 452

Attributable to: Equityholders 49 449 Minority interest 4 3

53 452

Earnings per share Cent Cent

Basic 9 18.3 167.9

Diluted 9 18.3 166.3

28

Consolidated Balance Sheet (Unaudited)as at 31 December 2008

2008 2007Notes €m €m

AssetsCash and balances with central banks 200 253 Items in course of collection 124 138 Debt securities 12 10,929 11,246 Equity shares and units in unit trusts 10,390 17,369 Derivative assets 1,162 1,223 Loans and receivables to customers 13 40,075 39,120 Loans and receivables to banks 14 4,775 2,528 Investment properties 2,280 3,561 Reinsurance assets 2,133 2,036 Prepayments and accrued income 364 414 Interest in associated undertaking / joint venture 139 147 Property and equipment 362 506 Shareholder value of in-force business 15 787 717 Goodwill and intangible assets 6 125 260 Deferred acquisition costs 256 248 Net post retirement benefit asset 7 89 86 Current tax assets 5 - Other assets 154 210 Total assets 74,349 80,062

LiabilitiesDeposits by banks 17 18,546 9,742 Customer accounts 14,118 13,845 Debt securities in issue 18 10,899 18,461 Derivative liabilities 550 788 Investment contract liabilities 21,118 27,574 Insurance contract liabilities 4,007 4,010 Outstanding insurance and investment claims 114 137 Accruals 224 452 Other liabilities 321 325 Current tax liabilities - 23 Deferred tax liabilities 130 167 Net post retirement benefit liability 7 158 162 Deferred front end fees 117 134 Subordinated liabilities 16 1,699 1,599 Total liabilities 72,001 77,419

EquityShare capital 19 89 88 Share premium 19 135 126 Retained earnings 19 1,999 2,149 Other reserves 19 124 267 Equity excluding minority interest 2,347 2,630 Minority interest 11 1 13 Total equity including minority interest 2,348 2,643

Total liabilities and equity 74,349 80,062

29

Consolidated Statement of Recognised Income and Expense (Unaudited)year ended 31 December 2008

2008 2007Notes €m €m

Revaluation of property (138) 17

Net investment in overseas subsidiaries (3) -

Change in value of available for sale financial assets (43) (19)

Amortisation of loans and receivables reserve to interest income 19 9 -

Deferred tax 36 1

Net amount recognised directly in equity (139) (1)

Profit for the year 53 452

Total recognised income and expense for the year (86) 451

Attributable to: Equityholders (89) 448 Minority interest 11 3 3

Total recognised income and expense for the year (86) 451

30

Consolidated Cash Flow Statement (Unaudited)year ended 31 December 2008

2008 2007€m €m

Cash flows from operating activities

Profit before taxation for the year 63 477

Adjusted for:Depreciation and amortisation 50 48 Impairment losses Loans and receivables 82 28 Debt securities 122 - Impairment of intangible assets 170 - Profits on disposal of property and equipment - (1) Profit on the sale of held to maturity portfolio (29) - Fair value losses on investment properties 1,430 62 Realised and unrealised losses on financial assets excluding trading assets 7,252 809 Interest on subordinated liabilities 79 80 Equity settled share-based payment expenses - 3 Share of results of associated undertaking / joint venture (22) (29) Net change in operating assets (3,463) (6,819) Net change in operating liabilities (4,044) 5,065 Net cashflows from operating activities before tax 1,690 (277) Tax paid (38) (48) Net cashflows from operating activities 1,652 (325)

Cashflows from investing activitiesPurchase of property and equipment (33) (38) Sale of property and equipment 6 7 Purchase of intangible assets (15) (14) Investment in joint venture - (2) Purchase of minority interest in subsidiary undertaking (52) (7) Dividends received from associated undertaking 30 58 Net cashflows from investing activities (64) 4

Cashflows from financing activitiesIssue of ordinary share capital 10 10 Purchase of treasury shares for long term incentive plan - (5) Issue of new subordinated liabilities 124 586 Redemption of subordinated liabilities (160) (344) Interest paid on subordinated liabilities (81) (82) Equity dividends paid (207) (194) Net cashflows from financing activities (314) (29)

Increase/(decrease) in cash and cash equivalents 1,274 (350)

Analysis of changes in cash and cash equivalentsCash and cash equivalents as at 1 January 1,006 1,356 Net cashflow before the effect of exchange translation adjustments 1,274 (350) Cash and cash equivalents as at 31 December 2,280 1,006

31

Notes to the Preliminary Announcementyear ended 31 December 2008

1. Segmental information

Eliminations1

2008 Insurance & General / Consolidation Banking investment insurance Other adjustments Total

€m €m €m €m €m €mNet interest receivable- external 512 (27) - 1 - 486 - inter segment (39) (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 29 (7,702) - - (68) (7,741) Fees from investment contracts and fund management - 250 - 22 - 272 Change in shareholder value of in-force business - 70 - - - 70 Total operating income 541 (7,129) - 73 (6) (6,521)

Claims on insurance contracts, net of reinsurance - (314) - - - (314) Change in insurance / investment contract liabilities - 7,890 - - - 7,890 Administrative expenses (285) (194) - (65) 4 (540) Depreciation and amortisation (22) (25) - (3) - (50) Investment expenses - (50) - - - (50) (307) 7,307 - (68) 4 6,936 Impairment of goodwill (170) - - - - (170) Total operating expenses (477) 7,307 - (68) 4 6,766

Operating profit before provisions 64 178 - 5 (2) 245

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

Operating profit (140) 178 - 5 (2) 41

Share of profits of associated undertaking / joint venture (1) - 23 - - 22 Taxation 4 (13) - (1) - (10) Profit for the year (137) 165 23 4 (2) 53

1 Eliminations / Consolidation adjustments relate to inter segmental interest receivable and payable on deposits and loans together with inter segmental commission payments and receipts. Its also includes elimination of intergroup rental expenses. In 2008 the negative €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 asset in the life company is carried at FVTPL.

Segmental information is presented in respect of the group’s business segments based on the group’s management reporting and internal structure. The group comprises 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, 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 corporate costs which are not attributable to any business unit.

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

32

Notes to the Preliminary Announcementyear ended 31 December 2008

1. Segmental information (continued)

2007 Insurance & General Banking Investment insurance Other Eliminations1 Total

€m €m €m €m €m €m

Net interest receivable - external 505 (26) - 2 (1) 480 - inter segment (5) (21) - - 26 - Other non-interest expenses - external 49 (119) - 21 - (49)- inter segment (1) (22) - 23 - - Premiums on insurance contracts, net of reinsurance - 407 - - - 407 Investment return 1 (1) - - (25) (25)Fees from investment contracts and fund management - 262 - 22 - 284 Change in shareholder value of in-force business - 54 - - - 54 Profit on the sale of property and equipment - - - 1 - 1 Total operating income 549 534 - 69 - 1,152

Claims on insurance contracts, net of reinsurance - (322) - - - (322)Change in insurance / investment contract liabilities - 275 - - - 275 Administrative expenses (280) (190) - (71) - (541)Depreciation and amortisation (22) (22) - (4) - (48)Investment expenses - (40) - - - (40)Total operating expenses (302) (299) - (75) - (676)

Operating profit before provisions 247 235 - (6) - 476

Loans and receivables (28) - - - - (28)Total provisions for impairment (28) - - - - (28)

- Operating profit 219 235 - (6) - 448

Share of profits of associated undertaking / joint venture (2) - 31 - - 29 Taxation (33) 8 - - - (25)Profit for the year 184 243 31 (6) - 452

1 Eliminations relate to inter segmental interest receivable and payable on deposits and loans together with inter segmental commission payments and receipts.

33

Notes to the Preliminary Announcementyear ended 31 December 2008

2. Net interest incomeRestated

2008 2007€m €m

Interest receivableLoans and receivables to customers 1,800 1,866 Loans and receivables to banks 120 219 Debt securities and other fixed income securities- Held to maturity 19 72 - Available for sale 77 68 - Loans and receivables 51 - Lease and instalment finance 125 104 Net gains/losses on hedge instruments (16) 7

2,176 2,336 Interest payableDeposits from banks 455 170 Due to customers 415 478 Interest on debt securities in issue 725 1,114 Interest on subordinated debt 79 80 Interest on other borrowed funds 16 14

1,690 1,856

Net interest income 486 480

The 2007 analysis of net interest income has been restated to separately identify net gains/losses on hedgeinstruments and to reflect the reclassification detailed in Note 18.

Interest income accrued on impaired loans was €40m (2007: €22m).

3. Net fees and commission expenses2008 2007

€m €mFees and commission incomeFees and commission earned on banking services 52 53 Commission earned on insurance and investment contracts 24 20

76 73

Fees and commission expensesFees and commission payable on banking services 9 9 Fees in respect of government guarantee scheme 8 - Commission payable on life and investment contracts 121 154 Deferral of acquisition costs on investment contracts (60) (99) Amortisation of deferred acquisition costs on investment contracts 52 63

130 127

Net fees and commission expenses (54) (54)

34

Notes to the Preliminary Announcementyear ended 31 December 2008

4. Investment return

The negative investment return of €7,741m (2007: negative €25m) mainly reflects the return on policyholderinvestments.

The market outcome in 2008 includes:2008

Region %Irish equities (65) European equities (42) Japanese equities (25) North American equities (34) Pacific equities (48) United Kingdom equities (46) Worldwide equities (38) Irish property (41)

5. Administrative and other expenses 2008 2007

€m €m

Administrative expenses 540 541 Depreciation 31 28 Amortisation of intangible assets 19 20

590 589

6. Impairment of goodwill

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

The group acquired additonal goodwill of €38m on the acquisition of 22.94% in Vestone Limited (parent of Cornmarket GroupFinancial Services Limited).

7. Retirement benefit obligations

Defined benefit schemesThe group operates six Irish defined benefit pension schemes and two small UK defined benefit schemes for employees. All of the definedbenefit schemes are funded by the payment of contributions into separately administered trust funds. The benefits paid from the definedbenefit 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 carriedout every three years by independent actuarial consultants. The actuarial reports are available for inspection by members of the schemeand are not available for public inspection. All of the group's defined benefit pension schemes have been revalued within the last threeyears with valuation dates ranging from 1 January 2006 to 30 June 2008. Actuarial gains and losses are accounted for under the corridorapproach.

The key financial assumptions used are:

2008 2007% %

Actuarial assumptions at the balance sheet dateDiscount rate 5.75 5.50 Expected rate of return on plan assets 6.75 6.50

Salary increases 1 3.50 4.00 Pension increases 2.00 2.50 Rate of price inflation 2.00 2.50

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 2008 and 31 December 2007 were 100% PA92 (c=2025) (less two years) for pensioners and 100% PA92 (c=2040) (less two years) for active/deferred members. On this basis the lifeexpectancy for a male pensioner aged 65 years at 31 December 2008 was 22.1 years (2007: 22.1 years) and for a femalepensioner aged 65 years was 25.0 years (2007: 25.0 years). Based on the assumed mortality improvements in 15 years time the life expectancy for a male pensioner then aged 65 will have increased to 23.1 years (2007: 23.1 years) and for a female pensioner then aged 65 will have increased to 26.0 years (2007: 26.0 years).

35

Notes to the Preliminary Announcementyear ended 31 December 2008

7. Retirement benefit obligations (continued)

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

2008 2007€m €m

Current service cost 45 50 Past service cost 1 2 Interest cost 73 58 Expected return on scheme assets (83) (82) Amortisation of corridor excess - (3)

36 25 This charge has been included in administrative expenses.

Unrecognised actuarial gains or losses which are outside the corridor under IAS 19 are amortised in the income statement over theestimated remaining service lives of the members which averaged 21 years in 2008 (2007: 26 years).

The actual return on scheme assets was negative €359m (2007: negative €34m).

The actual return is calculated as follows:

2008 2007€m €m

Expected return on plan assets 83 82 Actuarial loss on plan assets (442) (116)

(359) (34)

The expected return on assets is determined by calculating a total return estimate based on weighted average estimated returns for eachasset class. Asset class returns are estimated using current and projected economic and market factors such as inflation, credit spreadsand equity risk premiums.

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

2008 2007€m €m

Benefit obligation as at 1 January (1,293) (1,211) Current service cost (45) (50) Interest cost (73) (58) Past service cost (1) (2) Actuarial loss - experience adjustments (19) (48) Actuarial gain - assumption changes 230 60 Contributions by plan participants (7) (7) Benefits paid 24 23 Exchange and other adjustments 1 - Benefit obligation as at 31 December (1,183) (1,293)

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

2008 2007€m €m

Fair value of plan assets as at 1 January 1,262 1,277 Expected return on plan assets 83 82 Employer contribution 42 35 Contributions by plan participants 7 7 Actuarial loss (442) (116) Benefits paid (24) (23) Fair value of plan assets as at 31 December 928 1,262

36

Notes to the Preliminary Announcementyear ended 31 December 2008

7. Retirement benefit obligations (continued)

The pension assets and liabilities recognised on the balance sheet are as follows:

2008 2007 2006 2005 2004€m €m €m €m €m

Benefit obligation as at 31 December (1,183) (1,293) (1,211) (1,238) (1,041) Fair value of plan assets as at 31 December 928 1,262 1,277 1,108 884 Net (obligation)/asset (255) (31) 66 (130) (157) Unrecognised actuarial losses/(gains) 186 (45) (152) 43 51 Net recognised retirement benefit obligation (69) (76) (86) (87) (106)

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

2008 2007 2006 2005 2004Actuarial losses/(gains)- arising on benefit obligation (€m) 19 48 19 47 (7) - arising on benefit obligation (% plan liabilities) 2 4 2 4 (1)

Actuarial (losses)/gains- arising on plan assets (€m) (442) (116) 73 141 37 - arising on plan assets (% of plan assets) (48) (9) 6 13 4

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

2008 2007 €m €m

Net post retirement benefit obligations as at 1 January (76) (86) Expense recognised in income statement (36) (25) Contributions paid 42 35 Exchange and other adjustments 1 - Net post retirement benefit obligations as at 31 December (69) (76)

Net post retirement benefit assets 89 86 Net post retirement benefit liabilities (158) (162) Net post retirement benefit obligations (69) (76)

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

Long term Long termrate of return Plan rate of return Plan

expected Value assets expected Value assets

2008 2008 2008 2007 2007 2007% €m % % €m %

Equities 8.75 460 50 7.20 877 69 Bonds 4.00 352 38 4.50 237 19 Property 7.75 78 8 6.20 111 9 Other 6.38 38 4 4.50 37 3 Fair value of plan assets as at 31 December 6.75 928 100 6.50 1,262 100

to Irish Life & Permanent plc shares or properties occupied by ILP group. As at 31 December 2008, the group's pension scheme assetshad an indirect holding in Irish Life & Permanent plc shares of €2m (2007: €6m).

The group is expected to pay contributions of approximately €37m to the pension schemes in 2009.

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 2008.

If the mortality of pensioners was to improve by 10% over the current assumption then it is estimated that the present value of definedbenefit obligations would increase by approximately €41m, all of which would be included as unrecognised actuarial losses.

The fair value of plan assets includes investments in Irish Life Assurance unit-linked funds which on occasion include investments relating

If the discount rate was 0.5% lower than the assumption made at 31 December 2008 then the present value of defined benefit obligations(for the 5 main pension schemes in the group) would increase by approximately €140m, all of which would be included as unrecognised

37

Notes to the Preliminary Announcementyear ended 31 December 2008

8. Impairment provisions

a) Loans and receivables

Specific Collective Total Specific Collective Total€m €m €m €m €m €m

As at 1 January 26 49 75 11 46 57

Charge to profit or lossImpairment losses 16 67 83 18 17 35 Amounts recovered during the year - (1) (1) (1) (6) (7)

Amounts written off during the year (2) (12) (14) (1) (8) (9) Exchange movements (3) (1) (4) (1) - (1) As at 31 December 37 102 139 26 49 75

In 2008 the group moved to a collective methodology to assess impairments on term and other unsecured lending books. 2007 has been restated on a consistent basis.

Analysis of profit or loss charge

Specific Collective Total Specific Collective Total€m €m €m €m €m €m

ROI residential lending 6 21 27 1 - 1Commerical lending 4 5 9 - - - UK lending 6 9 15 4 - 4Consumer finance - 31 31 - 11 11Relating to rogue solicitors - - - 12 - 12

16 66 82 17 11 28

Analysis of provisions as at 31 December

Specific Collective Total Specific Collective Total€m €m €m €m €m €m

ROI residential lending 9 22 31 2 - 2Commerical lending 7 5 12 4 - 4UK lending 9 8 17 8 - 8Consumer finance - 67 67 - 49 49Relating to rogue solicitors 12 - 12 12 - 12

37 102 139 26 49 75

b) Debt securities

2008 2007€m €m

As at 1 January - - Charge to profit or loss

Impairment losses* 122 - As at 31 December 122 -

*relates to the impairment of Icelandic bank securites and Lehman Brothers securities.

2008 2007 Restated

Specific

2008

2008

2007 Restated

2007 Restated

38

Notes to the Preliminary Announcementyear ended 31 December 2008

9. Earnings per share

(a) Basic EPS 2008 2007

Weighted average ordinary shares in issue and ranking for dividend excluding own shares held for the benefit of life assurance policyholders and treasury shares 267,608,033 267,439,898

Profit for the year attributable to equityholders €49m €449mEPS (cent) 18.3 167.9

(b) Fully diluted EPS 2008 2007

Weighted average number of potential dilutive ordinary shares arising from the group's share option schemes - 2,609,073

Weighted average number of ordinary shares excluding own shares held for the benefit of policyholders used in the calculation of fully diluted EPS 267,608,033 270,048,971 Fully diluted EPS (cent) 18.3 166.3

At 31 December 2007 the calculation of the weighted average of potential dilutive ordinary shares includes all optionsoutstanding.

10. Dividends

Cent €m Cent €mDividends paid in the year

Final (relating to prior period) 52.5 145 47.9 132 Interim 22.5 62 22.5 62

75.0 207 70.4 194 Dividends proposed at 31 December - - 52.5 145

11. Minority interest 2008 2007

€m €mMinority interest in subsidiariesOpening balance 13 12 Total recognised income and expense 3 3 Acquisition of minority interest (see note 6) (15) (2) Closing balance 1 13

12. Debt securities2008 2007

€m €mHeld to maturity - 2,515 Available for sale 1,342 1,982 Loans and receivables 1,970 - Fair value through profit and loss (FVTPL) 7,739 6,749

11,051 11,246

Impairment provision (122) - 10,929 11,246

Debt securities exclude €144m (2007: €27m). These are held by Irish Life Assurance plc and have beeneliminated on consolidation.

In February 2008 the group disposed of its held to maturity portfolio, this gave rise to a realised gain of €29mwhich was recognised as part of investment return. The fair value of this portfolio at 31 December 2007 was €2,493m.

The group has availed of the amendment to IAS 39 and IFRS 7 issued in October 2008 which permits an entity under certain circumstances to reclassify these financial assets from available for sale (AFS) to loans and receivableThis has resulted in the group reclassifying €1,968m from AFS to loans and receivables. The fair value as at 31 December 2008 of the assets reclassified is €1,756m, the carrying value of the assets reclassified is €1,970m.

The group has not reclassified any debt securities measured at amortised cost rather than fair value during the year.

Debt securities with a carrying value of €1,306m have been pledged to third parties in sale and repurchase agreements.

The impairment provision is analysed in note 8.

2008 2007

39

Notes to the Preliminary Announcementyear ended 31 December 2008

13. Loans and receivables to customers

Loans and receivables by category are set out below:2008 2007

€m €mResidential mortgage loans

Held through special purpose vehicles 25,404 15,504 Held directly 10,104 19,313

35,508 34,817 Commercial mortgage loans* 1,978 1,862 Finance leases 1,734 1,666 Term loans/other 642 601 Money market funds 352 159 Loans and receivables to joint ventures - 90 Gross loans and receivables to customers 40,214 39,195 Less allowance for impairment (139) (75) Net loans and receivables to customers 40,075 39,120

Non-interest bearing loans are all loans to subsidiaries.

The group has established a number of special purpose vehicles which involve the selling of pools of residential mortgages to thespecial 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 orheld by the group and used as collateral for borrowings. The notes may be sold to investors or held by the group and used ascollateral for borrowings. As at 31 December 2008 €25.4bln (2007: €15.5bln) of the group’s residential mortgages were held withinthese special purpose vehicles which had issued notes of €24.9bln (2007: €14.1bln).

As at 31 December 2008 €2.95bln of the notes issued by these special purpose vehicles were sold to third parties and areincluded as other borrowed funds in the group balance sheet.€14.2bln are held by European Central Bank as collateral in respect of funds raised under the Eurosystem funding programme.€1.7bln are held by banks as part of collateralised lending or sale and repurchase agreements.€1.8bln are held by Irish Life Assurance plc as collateral for €1.1bln of government securities under a stock lending agreementwith the bank operations of the group with a further €0.7bln held as collateral against deposits placed by the life operationswith banking operations of the group. In accordance with accounting standards these transactions are eliminatedin the consolidated group accounts.€3.5bln of the notes are available to be sold or used as collateral as at 31 December 2008.

At 31 December 2007 the group had an available facility of €6.2bln under the mortgage backed promissory note programme with theCentral Bank and Financial Services Authority of Ireland (CBFSAI) which was secured by way of a first floating charge to the CBFSAI ofloans and receivables of €8.1bln.

*Commercial mortgage loans exclude loans of €425m (2007: €439m) to the group's life assurance operations including loansheld for the benefit of unit-linked policyholders.

Details of provisions for loan impairments are set out in note 8.

14. Loans and receivables to banks

Loans and receivables to banks includes €1.7bln in deposits placed by Irish Life Assurance plc with two banks covered bythe Irish Government guarantee scheme. These covered institutions in turn placed €1.1bln with Irish Life & Permanent plc onthe same terms and the €1.1bln is included in deposits by banks under note 17. Because no right of set-off existed betweenthese deposits by banks and the loans and receivables, they are recorded in loans and receivables in accordance withaccounting standards.

40

Notes to the Preliminary Announcementyear ended 31 December 2008

15. Shareholder value of in-force business

The shareholder value of in-force business for insurance contracts is computed using EEV principles issuedin May 2004 by the European Chief Financial Officers’ forum. Shareholder value of in-force businessrepresents the present value of future shareholder cash flows less a deduction for the cost of required capitaland 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 56 to 75.

A. Assumptions

Principal economic assumptionsThe assumed future pre-tax returns on fixed interest securities are set by reference to gross redemptionyields available in the market at the end of the reporting period. The risk free rate of return used for the riskdiscount 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 ofassuming future investment returns in excess of the base risk-free rate. The corresponding return on equitiesand property is equal to the risk free rate assumption plus the appropriate risk premium. An asset mix basedon the assets held at the valuation date within policyholder funds has been assumed within the projections.

31 December 31 December 31 December2008 2007 2006

Equity risk premium 3.0% 3.0% 3.0%Property risk premium 2.0% 2.0% 2.0%

Risk free rate 4.1% 4.4% 3.9%Non market risk margin 2.1% 2.1% 2.1%Market risk margin 0.8% 1.3% 1.4%Risk discount rate 7.0% 7.8% 7.4%

Investment return- Fixed interest 2.7% - 4.3% 3.9% - 4.7% 3.5% - 4.6%- Equities 7.1% 7.4% 6.9%- Property 6.1% 6.4% 5.9%

Expense inflation 3.0% 4.5% 4.1%

Other assumptionsThe assumed future mortality, morbidity and persistency assumptions are based on published tables of rates, adjusted by analyses of recent operating experience. Persistency assumptions are set by reference torecent operating experience.

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 beenmade 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 asset is analysed as follows:

2008 2007€m €m

As at 1 January 717 663Credit in income statement in the year 70 54As at 31 December 787 717

The credit to the income statement of €70m (2007: €54m) includes €17m (2007: €2m) in respect of operatingassumptions changes and €60m (2007: negative €6m) in respect of economic assumption changes.

41

Notes to the Preliminary Announcementyear ended 31 December 2008

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

C. Sensitivity calculationsA number of sensitivities have been produced on alternative assumption sets to reflect the sensitivity of theinsurance shareholder value of in-force asset to changes in key assumptions. The details of each sensitivityare set out below. All amounts are after allowing for the associated deferred tax effect:- 1% decrease in discount rate would increase equity by €66m.

- 1% decrease in discount rate would increase equity by €66m.

- 1% increase in discount rate would reduce equity by €58m.

- 10% decrease in maintenance expenses would increase equity by €22m.

- 5% decrease in both mortality and morbidity rates would increase equity by €20m.

- 5% decrease in both mortality and morbidity rates would increase equity by €20m.

16. Subordinated liabilities

In the twelve months to 31 December 2008 Irish Life & Permanent plc issued the followingsubordinated liabilities:

- €65m step-up callable notes due in 2018, callable after 5 years and quarterly on the coupon date thereafter. Interest rate is 3 month Euribor + 4.00% until June 2013 after which the interest rate becomes 3 month Euribor + 4.5%.

- €25m step-up callable notes due in 2018. The interest rate is fixed for the first 5 years at 8.25%, after which if not called the interest rate becomes 3 month Euribor + 4.25%.

- €10m constant maturity swap notes, repayable in 2018. The interest rate is referenced to 30 year Euro swap rates. - €25m zero-coupon note repayable in 2018. 8.76% on a zero coupon basis.

17. Deposits by banks2008 2007

€m €m

Deposits by banks 18,546 9,742 18,546 9,742

€269m of the 2007 deposits by banks balance has been reclassified to customer accounts to correctly reflect theunderlying nature of the deposits between customer accounts and deposits by banks. Prior to the reclassificationthe 2007 deposits by banks balance was €10,011m and the customer accounts balance was €13,576m.

Deposits by banks include €11.8bln placed by ECB and €1.25bln placed by banks which arecollateralised on notes issued by special purpose vehicles controlled by the group. The notes are securedby a first fixed charge over residential mortgages held by the special purpose vehicles, which form part ofthe group's consolidated financial information.

The maximum amount placed during the year by the ECB was €14.4bln (2007: €5.4bln). The averageamount placed during 2008 was €7.9bln (2007: €1.3bln).

Deposits by banks include €2.3bln of deposits held as a result of repurchase agreements (2007: €2.4bln).The balance also includes collateral held of €707m (2007: €nil) for investments for unit-linked funds (CPPI).

Included in deposits by banks is €1.1bln in interbank deposits from two banks covered under the Irish Governmentguarantee scheme on the same terms as deposits placed with these institutions by Irish Life Assurance plc. (seenote 14). Because no right of set-off existed between these deposits by banks and the loans and receivables, theyare recorded in deposits by banks in accordance with accounting standards.

18. Debt securities in issue

The 2007 balance of €18,461m includes a reclassification for non-recourse funding - securitised assets of €3,090m.

42

Notes to the Preliminary Announcementyear ended 31 December 2008

19. Reconciliation of movement in capital and reserves

2008

Share capital

Share premium

Revaluation reserve

Available for sale reserve Merger reserve

Other capital

reservesRetained earnings

Total excluding

minority interest

Minority interest

Total including minority interest

€m €m €m €m €m €m €m €m €m €m

As at 1 January 2008 88 126 263 (15) (21) 40 2,149 2,630 13 2,643 Issue of share capital 1 9 - - - - - 10 - 10 Profit for the year - - - - - - 49 49 4 53 Revaluation gains (net of tax) - - (105) - - - - (105) (1) (106)Change in value of available for sale financial assets (net of tax) - - - (38) - - - (38) - (38)Amortisation of loans and receivables** (net of tax) - - - 8 - - - 8 - 8 Transfer between reserves - - (1) - - (2) 3 - - - Release of share option reserve - - - - - (2) 2 - - - Change in own shares at cost* - - - - - - 3 3 - 3 Net investment in overseas subsidiaries - - - - - (3) - (3) - (3)Dividends - - - - - - (207) (207) - (207)Acquisition of minority interest - - - - - - - - (15) (15)As at 31 December 2008 89 135 157 (45) (21) 33 1,999 2,347 1 2,348

2007

Share capital

Share premium

Revaluationreserve

Available for sale reserve Merger reserve

Other capital

reservesRetainedearnings

Total excluding

minority interest

Minorityinterest

Total includingminority interest

€m €m €m €m €m €m €m €m €m €m

As at 1 January 2007 88 116 260 1 (21) 37 1,904 2,385 12 2,397Issue of share capital - 10 - - - - - 10 - 10 Profit for the year - - - - - - 449 449 3 452 Revaluation gains (net of tax) - - 15 - - - - 15 - 15 Change in value of available for sale financial assets - - - (16) - - (16) - (16)Transfer between reserves - - (12) - - - 12 - - - Change in own shares at cost* - - - - - - (17) (17) - (17)Purchase of treasury shares - - - - - - (5) (5) - (5)Equity settled transactions - - - - - 3 - 3 - 3 Dividends - - - - - - (194) (194) - (194)Acquisition of minority interest - - - - - - - - (2) (2)As at 31 December 2007 88 126 263 (15) (21) 40 2,149 2,630 13 2,643

*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 ofthese shares is deducted from distributable reserves €86m (2007: €73m). The liability to policyholder is based on the fair value of the shares and the change in liability due to the marked to market of theshares being charged to non-distributable reserves.

**This is the amortisation on the loans and receivables in the Available for Sale (AFS) reserve. From 1 July 2008, financial assets were reclassed to loans and receivables in the AFS reserve pursuant tothe amendments to IAS 39 Financial instruments: recognition and measurement and IFRS 7 Financial instrument: disclosures.

43

Notes to the Preliminary Announcementyear ended 31 December 2008

20. Authorised and issued share capital

Authorised share capital as at 31 December:2008 2007

Share Capital Share CapitalNumber 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 200,000,000 144 136 Stg£ preference shares 100,000,000 105 136

The company has only one class of issued shares and as at 31 December 2008, it had 276,782,351ordinary shares in issue in that class. Each ordinary share carries one vote except for shares held for thebenefit of life assurance policyholders, which pursuant to section 9(1) of the Insurance Act 1990, do nothave voting rights.

The number of ordinary 32 cent fully paid up shares is as follows:2008 2007

As at 1 January 276,017,990 275,168,707 Issued during the year 764,361 849,283 As at 31 December 276,782,351 276,017,990

Own shares held for the benefit of life assurance policyholders 8,870,331 8,743,343

Shares held under employee benefit trust 457,914 457,914

Shares issued during 2008 include 736,226 shares issued to the group profit sharing scheme. The balanceof 28,135 shares were issued as a result of the exercise of options under the group's share option schemes.All of the shares issued in 2007 were as a result of the exercise of options under the group's share optionschemes.

Own shares held for the benefit of life assurance policyholders are held by Irish Life Assurance plc andrepresent 3.2% (2007: 3.2%) of the issued share capital of the company.

No treasury shares were acquired in 2008. Treasury shares were acquired in July 2007 for €4.7m inanticipation of share awards that may vest under the long term incentive plan for senior management.

21. Contingent liabilities and commitments

(a) Capital commitments

In the normal course of its banking business the group have entered into commitments to lendmoney as follows:

2008 2007€m €m

Guarantees and irrevocable letters of credit 5 5

Commitments to extend credit- less than one year 433 536 - one year and over 229 150 Commitments to extend credit 662 686

44

Notes to the Preliminary Announcementyear ended 31 December 2008

21. Contingent liabilities and commitments (continued)

The group has entered into commitments to purchase investment properties totalling €244m (2007: €519m) andto purchase units in external property funds of €25m (2007: €50m) for the inclusion in unit-linked policyholder funds.

Commitments to extend credit do not expose the group or company to significant interest rate risk.

At 30 June 2008 the group acquired the remaining 50% of Joint Mortgage Holdings No. 1 Limited (parent ofSpringboard Mortgages Limited) and balances as at 31 December 2008 are included in the consolidated numbers.

As at 31 December 2007 the joint venture Joint Mortgage Holdings No. 1 Limited (parent of Springboard Mortgages Limited) had in the normal course of business, commitments of less than one year to extend credit of €51m.

(b) Contingencies

The group like all other banks and insurance companies is subject to litigation in the normal course of itsbusiness. The group does not believe that any such litigation will have a material effect on its profit or loss andfinancial condition.

As part of the agreement in 2001 to dispose of Interstate Life Assurance Company Limited, its wholly owned USsubsidiary, the group provided certain guarantees in regard to persistency experience on a block of business heldby Interstate. The maximum amount payable on foot of these guarantees is €8.4m (2007: €8.4m). The groupbelieve 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 includingthe Financial Regulator (Insurance Section) into deposits placed by Irish Life Assurance plc with Anglo Irish Bankplc (on 31 March 2008, 26 September 2008, 29 September 2008 and 30 September 2008) and into a repurchaseagreement between Irish Life & Permanent plc with Anglo Irish Bank plc that was in existence on 30 June 2008.

22. Related parties

A fully comprehensive list of related party transactions are not disclosed in this report. However, materialrelated party transactions which may have an effect on the financial results of the group are disclosed where relevant throughout this report. Loans to directors

Loans include mortgage loans to two directors of €258,584 (2007: €292,768) for the purchase of theirprincipal private residence. In addition, in 2007 Peter Fitzpatrick gave a personal guarantee on a loan of €400,000. Loans are analysed individually as follows:

2008 2007 2008 2007€'000 €'000 €'000 €'000

Denis Casey 228 254 254 279Peter Fitzpatrick 31 39 39 47

259 293 293 326

Balance End Maximum Balance

45

Notes to the Preliminary Announcementyear ended 31 December 2008

23. Analysis of equity and capital

A. Shareholders’ equity

The group's equity is analysed as follows:2008 2007

€m €mBanking

Net assets 865 1,043 Goodwill - 170

865 1,213

Insurance and investmentNet assets 1,223 1,297

Deduction in respect of liability relating to own shares held for the benefit of life assurance policyholders (14) (103)

1,209 1,194

Other operationsNet assets 70 48 Goodwill 66 28

136 76

Associated undertaking 139 147

IFRS consolidation adjustment (2) -

Equity excluding minority interest 2,347 2,630

Minority interest 1 13 Shareholders' equity including minority interest 2,348 2,643

46

Notes to the Preliminary Announcementyear ended 31 December 2008

23. Analysis of equity and capital (continued)

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 thereare a number of regulated entities within the group which have individual regulatory capital requirementsthe two principal regulated entities are Irish Life & Permanent plc (“IL&P”), the group’s holding companywhich 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 supportfuture growth in the business. In addition, the relationship between the level and composition of regulatorycapital and the shareholders’ return on capital is monitored to ensure that there is an appropriate balancebetween equity and debt capital within the overall regulatory capital held.

The management of capital within the group is monitored by the Group Assets and Liabilities Committee inaccordance with Board approved policy. In general, outside of IL&P, all regulated entities within the groupoperate to an internal target level of capital which provides a margin of comfort above the regulatoryminimum 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 will be calculated in accordance with the provisions of Basel II as implemented by the European Capital Adequacy 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 are 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 riskand was awarded IRB accreditation in late 2007. Under the IRB approach the bank uses internallygenerated risk models to compute the capital required to support credit risk by calculating the probability ofdefault and the loss given default in all of its various portfolio exposures. The models and calculations areconservatively 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 whichmight 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 capital required to support market risk.

47

Notes to the Preliminary Announcementyear ended 31 December 2008

23. Analysis of equity and capital (continued)

The following table summarises the composition of regulatory capital and the ratios of the group for the years ended 31 December 2008 and 2007. They are calculated in accordance with Basel II regulatory capital requirements. In the 2007 annual report and financial statements these tables were formulatedbased on the Basel I regulatory requirements.

2008 2007€m €m

Tier 1 capitalShare capital 2,922 2,912 Reserves 1,164 1,760 Prudential filters 88 (55) Less: goodwill - (170) Total qualifying Tier 1 capital 4,174 4,447

Tier 2 capitalSubordinated liabilities 1,230 1,246 Revaluation reserve 58 161 Other 23 16 Total qualifying Tier 2 capital 1,311 1,423

Total qualifying Tier 1 and Tier 2 capital 5,485 5,870

DeductionsInvestment in life operations (3,229) (3,623) Other (197) (218) Total regulatory capital (3,426) (3,841)

Total own funds 2,059 2,029

Total capital 1,454 1,509 Application of ICR (23%) 334 347 Total required capital 1,788 1,856

Excess own funds 271 173

Total risk-weighted assets before ICR 18,173 18,866 Total risk-weighted assets after ICR 22,353 23,205

Risk asset ratio (all Core Tier 1)Before the appliction of the ICR 11.3% 10.8%After the application of the ICR 9.2% 8.7% The percentage of capital is in excess of the regulatory minimum of 8% plus ICR.

The movement in the bank’s regulatory capital in 2008 is summarised below:

2008€m

As at 1 January 2008 2,029Bank earnings after tax and corporate costs 23Dividends received 109Interim dividends 2008 (62) Other (40) As at 31 December 2008 2,059

48

Notes to the Preliminary Announcementyear ended 31 December 2008

23. 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 thecalculation of the required solvency margin.

2008 2007€m €m

Total shareholders’ funds attributable to life business 1,209 1,194 Less: Shareholder value of in-force business

Gross (787) (717) Related deferred tax 99 93

Shareholders’ funds excluding VIF 521 570

Adjustments to valuation of assets and liabilities to regulatory basis (56) (88) Proposed dividend from life operations - (65) Subordinated liabilities 205 193 Other assets available to cover solvency margin 24 40 Regulatory capital on continuing activities 694 650

Held within the long term business fund 288 411 Held outside the long term business fund 406 239

694 650

The solvency cover for Irish Life Assurance plc, the group’s main life assurance operation, is 1.6 (2007:1.6) times the minimum requirement of €410m at 31 December 2008 (2007: €386m). The level of requiredcapital 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 ofthis the directors have set the level of required capital at 150% of the minimum requirement. The directorsconsider 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. Each ofthe group’s entities has sufficient capital on a stand alone basis and therefore no capital injections areexpected to be needed in the future. Transfers of capital out of the life companies are subject to companiescontinuing to meet the regulatory capital requirements.

Shareholder capital within the life business excluding the subordinated liability capital is mainly held within the long-term business fund and is invested in cash, short-term debt securities and property. The decrease in 2008 of the amount held in the long-term business fund is due to a large transfer from the fund in 2008 due to the stop loss reassurance treaty described below.

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 the group annualreport and financial statements.

Capital is affected by a range of factors including interest rates, mortality and morbidity. The group’s capitalmanagement and risk management policies are discussed in the group annual report and financialstatements for the year ended 31 December 2008.

49

Notes to the Preliminary Announcementyear ended 31 December 2008

23. Analysis of equity and capital (continued)

In February 2007, the group raised €200m of perpetual debt within its life operations which qualified asregulatory capital. The principal purpose of this transaction was to rebalance the use of debt capital between the group’s banking and life operations. In line with its policy on surplus capital during 2007 thelife operations distributed €230m of excess capital to IL&P.

In November 2008 a stop loss reinsurance treaty in relation to new business was signed with Swiss Re. This increased regulatory assets by €125m and is shown in the analysis below as a reduction in newbusiness strain of €59m and an experience variance of €66m.The accounting treatment in the IFRSaccounts of this stop loss reassurance treaty is not to show either the contingent asset or contingentliability on the balance sheet as they offset each other but the reassurance fee ( €0.2m) for this treaty isaccounted for in the IFRS income statement.

This table analyses the change in regulatory capital on continuing activities.

2008 2007€m €m

Regulatory capital as at 1 January 650 690 Capital generated from existing business- Expected return 242 233 - Experience variances 85 21 - Operating assumption changes 22 18 New business strain (88) (180) Expected investment return 28 25 Short term investment fluctuations (253) (17) Effect of economic assumption changes 25 (7) Other (16) (10) Change in inadmissible assets - (5) Dividends (15) (311) Subordinated liabilities 14 193 Regulatory capital as at 31 December 694 650

Best estimate assumptions are used to analyse the various components of the capital movements whichare 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;- 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 inlight of either current or expected experience.

New business strain: when a life assurance contract is written significant acquisition costs are normallyincurred up-front, these costs are then recovered through future charges. This up-front payment gives riseto 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 atthe start of the financial year. The expected investment earnings allows for interest payable on subordinateddebt and the fee payable in relation to the stop loss reassurance 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.

50

Notes to the Preliminary Announcementyear ended 31 December 2008

24. Financial risk management

Credit risk - Group

Maximum exposure to credit risk before collateral held or other credit enhancements:

TotalUnit-Linked

Funds*Group

Exposure€m €m €m

AssetsCash and balances with central banks 200 (24) 176 Items in course of collection 124 - 124 Debt securities 10,929 (5,809) 5,120 Derivative assets 1,162 (915) 247 Loans and receivables to customers 40,075 - 40,075 Loans and receivables to banks 4,775 (1,985) 2,790 Reinsurance assets 2,133 (144) 1,989

59,398 (8,877) 50,521 Contingent liabilities and commitments 667 - 667

60,065 (8,877) 51,188

TotalUnit-Linked

Funds*Group

Exposure€m €m €m

AssetsCash and balances with central banks 253 (17) 236 Items in course of collection 138 - 138 Debt securities 11,246 (4,744) 6,502 Derivative assets 1,223 (745) 478 Loans and receivables to customers 39,120 - 39,120 Loans and receivables to banks 2,528 (1,782) 746 Reinsurance assets 2,036 (280) 1,756

56,544 (7,568) 48,976 Contingent liabilities and commitments 691 - 691

57,235 (7,568) 49,667

* 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 IL&P group has set counterparty limits forall debts and loans on a group wide basis.The following table gives an indication of the level of creditworthiness of the group’s debt securities and is based on theratings prescribed by the rating agency Moody’s Investor Services Limited.

Debt securities2008 2007

€m €m Neither past due nor impaired

Aaa 2,558 3,740 Aa 690 2,031 A 1,567 731 Baa 305 -

Total 5,120 6,502

2008

2007

51

Notes to the Preliminary Announcementyear ended 31 December 2008

24. Financial risk management (continued)

Derivative assets 2008 2007 €m €mRatingAaa 4 27 Aa 22 261 A 40 23 Covered by netting agreements 181 167 Total 247 478

Loans and receivables to customers

Loans and receivables are summarised as follows:2008 2007

€m €m

ROI residential mortgages 27,931 26,359 UK residential mortgages 7,171 8,259 Commercial 1,978 1,862 Consumer Finance 2,381 2,272 Other 352 249

39,813 39,001 Provision for loan impairment (139) (75) Deferred fees, discounts and fair value adjustments 401 194

40,075 39,120

ROI UKResidental Residental Consumer

Total mortgages mortgages Commercial Finance Other€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

ROI UKResidental Residental Consumer

Total mortgages mortgages Commercial Finance Other€m €m €m €m €m €m

Neither past due nor impaired 37,685 25,499 8,104 1,730 2,103 249 Past due but not impaired 1,218 839 134 123 122 - Impaired 98 21 21 9 47 - Total 39,001 26,359 8,259 1,862 2,272 249

Collateral of €159m (2007: €84m) is held against loan and receivables classified as impaired. At 31 December 2008, thegroup had repossessed collateral of €43m on balances of €54m (2007: €12m collateral on balances of €11m).

2008

2007

52

Notes to the Preliminary Announcementyear ended 31 December 2008

24. Financial risk management (continued)

Loans and receivables to customers neither past due nor impaired - Group

ROI UKResidental Residental Consumer

Total mortgages mortgages Commercial Finance Other€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

ROI UKResidental Residental Consumer

Total mortgages mortgages Commercial Finance Other€m €m €m €m €m €m

Excellent risk profile 25,094 17,570 5,773 755 837 159 Satisfactory risk profile 9,275 5,422 2,080 704 979 90 Fair risk profile 3,316 2,507 251 271 287 - Total 37,685 25,499 8,104 1,730 2,103 249

Loans and receivables to customers past due but not impaired balances - Group

ROI UKResidental Residental Consumer

Total mortgages mortgages Commercial Finance Other€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 -

ROI UKResidental Residental Consumer

Total mortgages mortgages Commercial Finance Other€m €m €m €m €m €m

Past due up to 30 days 551 439 - 42 70 - Past due 30 - 60 days 206 133 26 19 28 - Past due 60 - 90 days 118 49 46 16 7 - Past due more than 90 days 343 218 62 46 17 - Total 1,218 839 134 123 122 -

These are loans and receivables where contractual interest or principal payments are past due but the group believes thatimpairment is not appropriate on the basis of the level of security / collateral available and / or the stage of collections ofamounts owed to the group.

2008

2007

2008

2007

53

Notes to the Preliminary Announcementyear ended 31 December 2008

24. Financial risk management (continued)

Loans and receivables to banks2008 2007

€m €mRating Aaa 180 33 Aa 2,088 597 A 263 116 Baa1 259 - Total 2,790 746

Reinsurance assetsThe 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:

2008 2007€m €m

Assets held in a charged account 1,277 1,133 Assets where credit risk is borne by the policyholder 144 280 Other assets where credit risk is borne by the shareholder 712 623

2,133 2,036

The assets held in a charged account are in respect of reinsurance treaties for annuity business, where all withdrawals fromthe charged account have to be authorised by Irish Life Assurance plc. Assets are managed in accordance with a mandatewhich matches the assets and liabilities.

Assets where credit risk is borne by the policyholders relate to unit-linked investment contracts where the policy documentsspecify that the return to the policyholder is based on the return from the reinsurance companies.

The group regularly reviews the financial security of its reinsurance companies. Where the reinsurance arrangementinvolves 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 thecounterparty as follows:

2008 2007

Rating €m €m

Aaa 9 8 Aa 440 525 A 263 90

712 623

54

Supplementary Embedded Value Basis Financial Statements

55

Basis of Preparation - EV basis financial information year ended 31 December 2008 Earnings generated by the group’s life assurance operations are prepared in accordance with the European Embedded Value (EEV) Principles issued in May 2004 (with additional guidance on EEV disclosures issued in October 2005) by the European Chief Financial Officers’ (CFO) Forum. For businesses other than life assurance the results have been prepared based on the recognition and measurement principles of IFRS issued by the International Accounting Standard Board (IASB) and adopted by the EU which were effective at 31 December 2008. IFRS 4 brings into force phase 1 of the 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 as a whole. 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 CFO Forum. The methodology produces an Embedded Value (EV) as a measure of the consolidated value of shareholders’ interests in the business covered by the EEV Principles. The EV basis financial information extends these principles to investment contracts written in the life assurance business. The statutory financial information treats tax deducted from policyholder funds as an income item while the EV basis financial information show these deductions as a tax item. The own share adjustment in EV basis partially reversed the mismatch which arises under IFRS statutory financial information where own shares held on behalf of policyholders are required to be marked-to-market in policyholder liabilities but the matching assets are not recorded as assets on the balance sheet. The EV basis restates the policyholder liability relating to own shares to the lower of market value or the book cost of the shares. In 2008, the EV basis has not reversed the mismatch as market value was lower than book cost. In the EV basis the marked-to-market movement on the liabilities is shown as a movement in shareholder equity, in IFRS this mismatch is included in the movement on the income statement. For all business other than “covered business”, the EV financial information incorporates the same values and earnings included in the statutory financial information, determined using the IFRS basis except that impairment of goodwill which is shown in the IFRS income statement under operating profit is shown in non operating profit in the EV basis. The statutory based financial information brings any change to the value of owner occupied property held in covered business through the Statement of Recognised Income and Expense (SORIE), and allows for a depreciation charge in the income statement. The EV financial information shows any change in the value of owner occupied property for covered business in the income statement. The EV financial information reclassifies and summarises the information included in the statutory financial information. The directors acknowledge their responsibility for the preparation of the supplementary EV basis information. The methodology applied to produce the EV basis for the year to 31 December 2008 is consistent with the methodology used to produce the EV information for the year ended 31 December 2007, other than as described in note 13 relating to the equity volatility rates used in the calculation of the costs of financial options and guarantees. Covered Business The EEV Principles are applied to value “covered business” as defined by the Principles. This includes individual and group life assurance and investment contracts, pensions and annuity business written in Irish Life Assurance plc and Irish Life International, and the investment management business written in Irish Life Investment Managers Limited. In the EV financial information, the same valuation approach is applied to both insurance and investment contracts within the covered business. All business other than the covered business is included in the EV Basis financial information on the same basis as that applied to the business in the statutory financial information.

56

Basis of Preparation - EV basis financial information year ended 31 December 2008 Embedded Value Embedded Value (EV) is the present value of shareholders’ interests in the earnings distributable from assets allocated to the covered business after sufficient allowance is made according to the EEV Principles for the aggregate risks in the covered business. The EV consists of the following components:

− free surplus allocated to the covered business

− required capital, less the cost of holding required capital

− present value of future shareholder cash flows from in-force covered business (PVIF), including an appropriate deduction for the time value of financial options and guarantees.

The value of future new business is excluded from the EV. The cost of holding required capital is defined as the difference between the amount of the required capital and the present value of future releases, allowing for future investment returns, of that capital. Free Surplus and Required Capital Free surplus is defined as the market value of assets in the covered business less supervisory liabilities less required capital. It is the market value of any capital and surplus allocated to, but not required to support, the in-force covered business at the valuation date. The free surplus is shown net of the accounting value of the subordinated debt. The free surplus also allows for the regulatory stop loss reinsurance treaty liability offset but a corresponding reduction equal to the regulatory stop loss reinsurance treaty liability offset is taken from the PVIF. The level of required capital reflects the amount of assets attributed to the covered business in excess of that required to back regulatory liabilities whose distribution to shareholders is restricted. The EEV Principles require this level to 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 to be 150% of the regulatory minimum solvency margin requirement at the valuation date, including the additional margin required under the Solvency 1 rules. The directors consider this to be a conservative level of capital to manage the covered business, allowing for the supervisory basis for calculating liabilities, the insurance and operational risks inherent in the underlying products and the methods used to value financial options and guarantees included in those products. New Business New business premiums reflect income arising from the sale of new contracts during the reporting year. Increases to premiums that are generated by policyholders at their discretion are included in new business as they occur. Increases to renewal premiums on group pension contracts are treated as new business premiums. The new business contribution is the present value of future shareholder cash flows arising from the new business premiums written in the year less a deduction if relevant for the time value of financial options and guarantees. The contribution makes full allowance for the associated amount of required capital and includes the value of expected renewals on new contracts. 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.

57

Basis of Preparation - EV basis financial information year ended 31 December 2008 Projection Assumptions Projections of future shareholder cash flows expected to emerge from covered business are determined using realistic assumptions for each component of cash flow and for each policy group. Future economic and investment return assumptions are based on year end conditions. The assumed discount and inflation rates are consistent with the investment return assumptions. The assumptions for demographic elements, including mortality, morbidity, persistency and expense experiences, reflect recent operating experiences and are reviewed annually. Allowance is made for future improvements in annuitant mortality based on experience and externally published data. Favourable changes in operating experience are not anticipated until the improvement in experience has been observed. All costs relating to the covered business are allocated to that business. The expense assumptions used for the projections therefore include the full cost of servicing the business. The costs include future depreciation charges in respect of certain property and equipment included in the free surplus. The PVIF makes no allowance for future planned development expenses where such expenses are expected to give rise to future improvements in efficiency. Certain group costs allocated to the life company are not included within the cash flow projections and are accounted for on an annual basis in the other group results. Risk Discount Rate The risk discount rate is a combination of a base risk-free rate and a risk margin, which reflects the residual risks inherent in the covered business, after taking account of prudential margins in the supervisory liabilities, the required capital and the specific allowance for financial options and guarantees. The group has adopted a bottom-up approach to the determination of the risk discount rate. Each element of risk is assessed in turn and a cost is reflected as an addition to the base risk-free discount rate. The risk discount rate derived in this way reflects the risk of volatility associated with the cash flows in the embedded value model. The key assumptions are set out in note 13. The market risk margin neutralises the effect of assuming future investment returns in excess of the base risk-free rate. The non-market risk margin is based on an estimate of the impact of each of the following risks - mismatch risk, credit risk, demographic risks including mortality, morbidity, persistency and expense risks, operational risk and liquidity risk. An allowance is made for the diversification effect in that each of the risks is not expected to occur simultaneously. Financial options and guarantees are explicitly valued using a stochastic model approach and no further risk allowance is included for these in the risk discount rate. The non-market risk margin was determined by the directors following a review of the estimates emerging from the above exercise. Financial Options and Guarantees Under the EEV Principles an allowance for the time value of financial options and guarantees (“FOG”) 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. The value of an option based on market conditions at the date of the valuation is referred to as the intrinsic value.

58

Basis of Preparation - EV basis financial information year ended 31 December 2008 The supervisory liabilities allow on a prudent basis for both the intrinsic and time value of FOGs and the PVIF allows for the run-off of these liabilities. An explicit deduction is made to the PVIF to allow for the impact of future variability of investment returns on the cost of FOGs (time value) and the current in the money cost of the FOG (intrinsic value). The cost of FOGs is calculated using stochastic models. The main financial options and guarantees and the assumptions used to value them are described in note 13. Service Companies All services relating to the covered business are charged on a cost recovery basis. Tax The projections include on a discounted basis all tax that is expected to be paid under covered business under current legislation, including tax that would arise if surplus assets within the covered business were eventually to be distributed. Analysis of Profit The profit from the covered business is analysed into three main components: • New business contribution

The contribution from new business written in the year is calculated as at the point of sale using assumptions applicable at the start of the year. This is then rolled forward to the end of the financial year using the risk discount rate applicable at the start of the reporting year.

• Profit from existing in-force business

The profit from existing business is calculated using opening assumptions and comprises:

− Interest at the risk discount rate on the value of in-force business allowing for the timing of cash flows (“expected return”);

− Experience variances: when calculating embedded values it is necessary to make assumptions regarding future experiences including persistency (how long policies will stay in force), risk (mortality and morbidity), future expenses and taxation. Actual experience may differ from these assumptions. The impact of the difference between actual and assumed experience for the year is reported as experience variances;

− Operating assumption changes: the assumptions on which embedded values are calculated are reviewed regularly. Where it is considered appropriate in the light of current or expected experience to change any assumptions regarding expected future experience, the impact on total value of in-force business of any such change is reported as an “operating assumption change”.

• Expected investment return

The expected investment earnings on the net assets attributable to shareholders are calculated using the future investment return assumed at the start of the year. The expected investment earnings allows for interest payable on subordinated debt and the fee payable in relation to the stop loss reassurance treaty.

Two further items make up the total profit arising from the covered business: • Short term investment fluctuations

This is the impact on the EV of differences between the actual investment return and the expected investment return assumptions assumed at the start of the year.

• Effect of economic assumption changes

This is the impact on the EV of changes in external economic conditions including the effect changes in interest rates have on risk discount rates and future investment return assumptions.

59

Consolidated Income Statement - Embedded Value Basis (Unaudited)year ended 31 December 2008

2008 2007Notes €m €m

Operating profitInsurance & investment business 284 346 Banking 30 219 Other 5 (4)

319 561 Share of associate / joint venture 22 29

Operating profit before impairment of goodwill and tax 1 341 590

Impairment of goodwill (170) - Operating profit before tax 171 590

Short-term investment fluctuations (640) (114) Effect of economic assumption changes 105 (14) Other non operational costs - (3) Profit on sale of property - 1

(Loss)/profit before tax (364) 460

Taxation 3 (65) (52)

(Loss)/profit for the year (429) 408

Attributable to:Equityholders (433) 404 Minority interest 4 4

(429) 408

Earnings per share including own shares held for the benefit oflife assurance policyholders (cent) 11 (156.8) 146.7

Operating earnings before impairment of goodwill per shareincluding own shares held for the benefit of life assurancepolicyholders (cent) 11 110.8 194.6

60

Consolidated Balance Sheet - Embedded Value Basis (Unaudited)as at 31 December 2008

2008 2007Notes €m €m

AssetsCash and other receivables 324 391 Investments 24,761 33,399 Loans and receivables to banks 4,775 2,528 Loans and receivables to customers 9 40,075 39,120 Interest in associated undertaking / joint venture 139 147 Reinsurance assets 2,258 2,036 Shareholder value of in-force business 1,080 1,460 Net post retirement benefit asset 89 86 Goodwill and intangible assets 120 255 Property and equipment 362 506 Deferred taxation 5 - Other debtors and prepayments 534 624 Total assets 74,522 80,552

LiabilitiesDeposits by banks 18,546 9,742 Customer accounts 14,118 13,845 Debt securities in issue 10,899 18,461 Derivative liabilities 550 788 Insurance contract liabilities 4,007 4,010 Investment contract liabilities 21,110 27,552 Outstanding insurance and investment claims 114 137 Net post retirement benefit liability 158 162 Deferred taxation - 58 Other liabilities and accruals 545 800 Subordinated liabilities 1,699 1,599 Total liabilities 71,746 77,154

EquityShare capital 89 88 Share premium 135 126 Retained earnings 2,427 3,002 Capital reserves 124 267 Own shares held for the benefit of life assurance policyholders - (98) Shareholders' equity 5 2,775 3,385 Minority interest 6 1 13

Total equity 2,776 3,398

Total liabilities and equity 74,522 80,552

61

Consolidated Statement of Recognised Income and Expense -Embedded Value Basis (Unaudited)year ended 31 December 2008

2008 2007€m €m

Revaluation of property (52) 5

Net investment in overseas subsidiaries (3) -

Change in value of available for sale financial assets (43) (19)

Amortisation of loans and receivables reserve to interest income 9 -

Deferred tax 24 2

Net amount recognised directly in equity (65) (12)

(Loss)/profit for the year (429) 408

Total recognised income and expense for the year (494) 396

Attributable to: Equityholders (497) 392 Minority interest in subsidiaries 3 4 Total recognised income and expense for the year (494) 396

Consolidated Reconciliation of Shareholders' Equity - Embedded Value Basis (Unaudited)year ended 31 December 2008

2008 2007€m €m

Shareholders' equity as at 1 January 3,385 3,199

Income and expenses attributable to equityholders (497) 392 Marked-to-market movement of policyholder liabilities in respect of own shares 86 (20) Adjustment to lower of cost/market value of own shares (5) - Change in own shares at cost 3 - Dividends paid (207) (194) Issue of share capital 10 10 Change in share based payment reserves - 3 Purchase of treasury shares for long term incentive plan - (5)

Shareholders' equity (excluding minority interest) as at 31 December 2,775 3,385

62

Notes to the EV Basis Financial Statementsyear ended 31 December 2008

1. Operating profit before tax2008 2007

€m €mInsurance and investment business

New business contribution 100 154 Profit from existing business - Expected return 133 118 - Experience variances - 10 - Operating assumption changes 19 35 Expected investment return 32 29 Operating profit before tax 284 346

BankingNet interest income 473 500 Non-interest income 42 43 Government guarantee (8) - Trading income 5 5

512 548 Administrative expenses including depreciation (307) (302) Impairment losses on loans and receivables and debt securities (204) (28)

1 218 Investment return 29 1 Operating profit before tax 30 219

Other activitiesNon-interest income 73 68 Administrative expenses including depreciation (68) (72) Operating profit/(loss) before tax 5 (4)

Share of associate / joint venture 22 29

Total operating profit before impairment of goodwill and tax 341 590

BankingImpairment of goodwill (170) -

Total operating profit before tax 171 590

63

Notes to the EV Basis Financial Statementsyear ended 31 December 2008

2. Life and investment new business

Life business2008 2007

€m €mPresent value of new business premiums (PVNBP)

Single premium 1,561 2,714

Regular premium 355 402

Regular premium capitalisation factor 4.5 4.4

PVNBP 3,152 4,490

Annual premium equivalent (APE) 511 673

New business contribution 77 129

New business margin PVNBP 2.4% 2.9%

APE 15.1% 19.2%

ILIM

Present value of new business premiums (PVNBP) 2,028 3,406

Annual premium equivalent (APE) 203 341

New business contribution 23 25

New business margin PVNBP 1.1% 0.7%

APE 11.4% 7.4%

Total new business

Present value of new business premiums (PVNBP) 5,180 7,896

Annual premium equivalent (APE) 714 1,014

New business contribution 100 154

New business margin PVNBP 1.9% 2.0%

APE 14.0% 15.3%

64

Notes to the EV Basis Financial Statementsyear ended 31 December 2008

3. Taxation2008 2007

€m €mLife operations *

Operating profit (24) (21) Short term investment fluctuations (20) 5 Effect of economic assumption changes (24) (3)

(68) (19) Banking Operations

Banking operating profit (10) (33) Release deferred tax 14 -

4 (33)

Other operations (1) - (65) (52)

* The 2008 EV life tax charge reflects a reduction in current and future tax appropriations from net lifeunit-linked policies as a result of the fall in investment markets in 2008. The movement in shortterm investment fluctuations of €640m negative attracted a tax charge of €20m as a consequence.

4. Analysis of (loss)/profit after tax

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)

Gross Tax Net€m €m €m

Operating profit Insurance and investment business 346 (21) 325 Banking 219 (33) 186 Other (4) - (4) Share of associate / joint venture 29 - 29

590 (54) 536 Short term investment fluctuations (114) 5 (109) Effect of economic assumption changes (14) (3) (17) Profit on sale of property 1 - 1 Other non operational costs (3) - (3)

460 (52) 408

2008

2007

65

Notes to the EV Basis Financial Statementsyear ended 31 December 2008

5. Shareholders' equity2008 2007

€m €m

Insurance and investment business 1,649 2,047 Banking 865 1,043 Other activities 71 61 Associate undertaking / joint venture 139 147 Goodwill 66 198

2,790 3,496

Minority interest (1) (13)

Deduction in respect of own shares held for the benefitof life assurance policyholders (14) (98) Shareholders' equity 2,775 3,385

Insurance and investment net assets are analysed as follows:

2008 2007€m €m

Property 159 152 Equities 14 59 Debt securities 78 44 Deposits 399 460 Other assets and liabilities 126 65 Subordinated debt (207) (193)

569 587 Shareholder value of in-force business 1,080 1,460

1,649 2,047

Analysis of movement in shareholders' equity attributable to insurance and investment business

Net Worth VIF Total€m €m €m

Shareholders' equity as at 1 January 2008 587 1,460 2,047 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 2008 569 1,080 1,649

Net Worth VIF Total€m €m €m

Shareholders' equity as at 1 January 2007 747 1,354 2,101 Operating profit after tax 117 208 325 Short term investment fluctuations (17) (92) (109) Effect of economic assumption changes (7) (10) (17) Capital movements (253) - (253) Shareholders' equity as at 31 December 2007 587 1,460 2,047

The required capital at 31 December 2008 is €626m (2007: €589m). €205m (2007: €193m) of the requiredcapital is covered by the subordinated debt and the remainder is covered by the net worth. The shareholdervalue of in-force is net of a deduction of €118m (2007: €118m) in respect of the cost of maintaining therequired capital and net of a deduction of €77m (2007: €46m) in respect of the time value of financial optionand guarantee costs.

2008

2007

66

Notes to the EV Basis Financial Statementsyear ended 31 December 2008

5. Shareholders' equity (continued)

Analysis of insurance and investment operating profit after tax

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

Net Worth VIF Total€m €m €m

New business contribution (180) 313 133 Profit from existing business

Expected return 233 (120) 113 Experience variances 21 - 21 Operating assumption changes 18 15 33 Expected investment return 25 - 25

Operating profit after tax 117 208 325

* New business contribution includes €59m net worth effect and negative €59m VIF effect due to stop lossreassurance treaty and experience variance includes €66m net worth effect and negative €66m VIF effect alsodue to same treaty.

6. Minority interest2008 2007

€m €mMinority interest in subsidiaryOpening balance as at 1 January 13 16 Total recognised income and expense 3 4 Acquisition of minority interest (15) (7) Closing balance as at 31 December 1 13

7. Management expenses2008 2007

€m €m

Administrative expenses 543 541 Depreciation 31 28 Amortisation of intangible assets 19 20

593 589

Analysed as follows:Banking operations Operational 307 302 Life and investment operations Administrative 218 212 Other operations (includes corporate costs) 68 72 Other non operational costs - 3

593 589

Administration expenses include €3m (2007: €nil) for rent paid by the bank to the life company in respect ofthe bank HQ. These expenses are eliminated on consolidation in the EU IFRS result.

2007

2008

67

Notes to the EV Basis Financial Statementsyear ended 31 December 2008

8. Impairment provisions

a) Loans and receivables

Specific Collective Total€m €m €m

As at 1 January 26 49 75

Charge to profit or lossImpairment 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

Specific Collective Total€m €m €m

As at 1 January 11 46 57

Charge to profit or lossImpairment losses 18 17 35 Amounts recovered during the year (1) (6) (7)

Amounts written off during the year (1) (8) (9) Exchange movements (1) - (1) As at 31 December 26 49 75

In 2008 the group moved to a collective methodology to assess impairments on term and other unsecured lending books. 2007 has been restated on a consistent basis.

Analysis of profit or loss charge

Specific Collective Total€m €m €m

ROI residential lending 6 21 27 Commerical lending 4 5 9 UK lending 6 9 15 Consumer finance - 31 31

16 66 82

Specific Collective Total€m €m €m

ROI residential lending 1 - 1 UK lending 4 - 4 Consumer finance - 11 11 Relating to rogue solicitors 12 - 12

17 11 28

2008

2007 Restated

2008

2007 Restated

68

Notes to the EV Basis Financial Statementsyear ended 31 December 2008

8. Impairment provisions (continued)

Analysis of provisions as at 31 December

Specific Collective Total€m €m €m

ROI residential lending 9 22 31 Commerical lending 7 5 12 UK lending 9 8 17 Consumer finance - 67 67 Relating to rogue solicitors 12 - 12

37 102 139

Specific Collective Total€m €m €m

ROI residential lending 2 - 2 Commerical lending 4 - 4 UK lending 8 - 8 Consumer finance - 49 49 Relating to rogue solicitors 12 - 12

26 49 75

b) Debt securities2008 2007

€m €m

As at 1 January - - Charge to profit or loss

Impairment losses* 122 - As at 31 December 122 -

*relates to the impairment of Icelandic bank securites and Lehman Brothers securities.

9. Loans and receivables to customers2008 2007

€m €m

Residential mortgage loans 35,102 34,618 Commercial mortgage loans 2,403 2,301 Finance lease, instalment finance and term loans 2,381 2,272

39,886 39,191 Loans and receivables to joint venture - 90 Money market funds / repurchase agreements 352 159 Deferred fees, discounts and fair value adjustments 401 194

40,639 39,634 Provision for impairment of loans and receivables (139) (75) Inter-group loans and receivables (425) (439)

40,075 39,120

2008

2007 Restated

69

Notes to the EV Basis Financial Statementsyear ended 31 December 2008

10. Funds under management2008 2007

€m €m

Funds managed on behalf of unit-linked policyholders 21,184 28,049 Funds managed on behalf of non-linked policyholders 2,288 2,450

23,472 30,499 Off-balance sheet funds 3,854 4,851

27,326 35,350

11. 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 now 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:

2008 2007

Weighted average ordinary shares in issue and ranking for dividend excluding treasury shares and own shares held for the benefit of life assurance policyholders 267,608,033 267,439,898

Weighted average ordinary shares held for the benefit of life assurance policyholders 8,510,390 7,966,600

276,118,423 275,406,498

(Loss)/profit for the period attributable to equityholders (€433m) €404m

(156.8 cent) 146.7 cent

Operating profit before impairment of goodwill (before minority interest) after tax for the year €306m €536m

110.8 cent 194.6 cent

Weighted average ordinary shares in issue and ranking for dividend including own shares held for the benefit of life assurance policyholders

Operating EPS including own shares held for the benefit of life assurance policyholders

EPS including own shares held for the benefit of life assurance policyholders

70

Notes to the EV Basis Financial Statementsyear ended 31 December 2008

12. Reconciliation of shareholders' equity on EU IFRS basis to EV basis

Net worth VIF Total €m €m €m

Statutory shareholders' equity excluding minority interest as at 31 December 2008 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 minority 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 minority interest as at 31 December 2008 1,695 1,080 2,775

Net worth VIF Total €m €m €m

Statutory shareholders' equity excluding minority interest as at 31 December 2007 1,913 717 2,630

Change insurance shareholder value of in-force to post tax basis 93 (93) - Shareholder value of in-force on investment contracts - 884 884 Changes in presentation of cost of FOGs 45 (45) - Deferred front end fees on investment contracts 134 - 134 Deferred acquisition costs on investment contracts (248) - (248) Restatement of investment liabilities to regulatory basis (29) - (29) Goodwill reclassification on acquisition of minority interest (5) 5 - Unwind own shares statutory adjustment 5 - 5 Change in the basis of deferred tax provisioning 17 (8) 9 EV basis shareholders' equity excluding minority interest as at 31 December 2007 1,925 1,460 3,385

All of the above adjustments relate to the application of IFRS 4 including the tax implications with theexception of the own share adjustment. The own share statutory adjustment reverses the mismatch whicharises under EU IFRS where own shares held on behalf of policyholders are required to bemarked-to-market in policyholder liabilities but the matching assets are not permitted to bemarked-to-market.

The stop loss reinsurance adjustment reflects that under EU IFRS no net worth offset is accounted forwhereas under EV a regulatory offset is accounted for and is reflected in EV net worth but acorresponding opposite adjustment is reflected in the EV VIF.

2007

2008

71

Notes to the EV Basis Financial Statementsyear ended 31 December 2008

13. EV Assumptions

The assumed future pre-tax returns on fixed interest securities are set by reference to gross redemption yieldsavailable in the market at the end of the reporting period. The risk free rate of return used for the risk discount rate isbased on the Irish Government yield available for the effective duration of the future cash-flows underlying thePVIF. The corresponding return on equities and property is equal to the risk free rate assumption plus theappropriate risk premium. An asset mix based on the assets held at the valuation date within policyholder fundshas been assumed within the projections.

31 Dec 31 Dec 31 Dec2008 2007 2006

Equity risk premium 3.0% 3.0% 3.0%Property risk premium 2.0% 2.0% 2.0%

Risk free rate 4.1% 4.4% 3.9%Non market risk margin 2.1% 2.1% 2.1%Market risk margin 0.8% 1.3% 1.4%Risk discount rate 7.0% 7.8% 7.4%

Investment return- Fixed interest 2.7% - 4.3% 3.9% - 4.7% 3.5% - 4.6%

- Equities 7.1% 7.4% 6.9%- Property 6.1% 6.4% 5.9%

Expense inflation 3.0% 4.5% 4.1%

Other assumptions

The assumed future mortality, morbidity and persistency assumptions are based on published tables of rates,adjusted by analyses of recent operating experience. Persistency assumptions are set by reference to recentoperating experience.

The management expenses attributable to life assurance business have been analysed between expensesrelating to the acquisition of new business and the maintenance of business in-force. No allowance has beenmade 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 theretained 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 subjectto 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 onpolicyholders 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.72

Notes to the EV Basis Financial Statementsyear ended 31 December 2008

13. 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 Irishgovernment yield curve and to other similarly rated euro denominated government bonds at durations where Irishgovernment bonds are not available. The equity volatility rate used in the model is calibrated to the average of thehistoric and the market implied equity volatility rates at 31 December 2008. The model used at 31 December 2007was calibrated to the market implied equity volatility rate at that time. Ten years of historical weekly data are used toderive the correlation between the returns of different asset classes.

The model uses the difference between two inverse Gaussian distributions to model the returns on each assetclass. This allows the model to produce fat-tailed distributions, and provides a good fit to historical asset returndistributions.

The statistics relating to the model used are set out in the following table:

As at 31 December 2008Mean1 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%

As at 31 December 2007Mean1 StDev2 Mean1 StDev2

European Assets (Euro)

Bonds 4.4% 1.9% 4.7% 4.1%Equities, Property 4.4% 26.3% 4.7% 26.4%

UK Assets (Sterling)

Bonds 4.6% 2.1% 4.5% 4.6%Equities 4.6% 24.5% 4.5% 24.9%

1. The risk neutral nature of the model means that all asset classes have the same expected return. No value isadded 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 thenatural logarithm of the result, calculating the variance of this statistic, dividing by n and taking the square root. Theresults are comparable to implied volatilities quoted in investment markets.

10-Year Return 20-Year Return

10-Year Return 20-Year Return

73

Notes to the EV Basis Financial Statementsyear ended 31 December 2008

14. Sensitivity calculations

A number of sensitivities have been produced on alternative assumption sets to reflect the sensitivity of the continuingoperations embedded value and the continuing operations new business contribution to changes in key assumptions.The details of each sensitivity are set out below:

- 1% variation in discount rate – a one percentage point increase/decrease in the risk margin has been assumed ineach case (meaning a 1% increase in the risk margin at end 2008 would result in a 3.9% risk margin and an 8.0%risk discount rate).

- 1% variation in interest rates – a one percentage point increase/decrease in interest rates including any relatedchanges to risk discount rates, valuation bases and non linked assets (meaning a 1% increase in interest rates atend 2008 would increase investment returns by 1% for each year in the future and increase the risk discount rateto 8.0%). 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 investmentreturns, excluding any related changes to risk discount rates or valuation bases, has been assumed (meaning a1% increase in equity returns would increase assumed total equity returns from 7.1% to 8.1%).

- 10% decrease in equity/property values - a ten percentage point decrease in the market value of equity/propertyassets, including any related changes to valuation reserves and life shareholder net assets. Therefore thissensitivity includes the effect on the life net worth.

- 10% decrease in maintenance expenses including any related changes to valuation expense bases andexcluding any potential change to reviewable policy fees (meaning a 10% reduction on a base assumption of €10per annum would result in a €9 per annum expense assumption).Therefore this sensitivity includes the effect on thelife net worth.

- 10% improvement in assumed persistency rates, incorporating a 10% reduction in lapse, surrender and premiumcessation assumptions (meaning a 10% reduction on a base assumption of 7% would result in a 6.3% lapseassumption).

- 5% decrease in both mortality and morbidity rates including any related changes to valuation bases and excludingany potential change to reviewable risk charging bases (meaning if base experienced mortality is 90% of astandard mortality table then for this sensitivity the assumption is set to 85.5% of the standard table).Therefore thissensitivity includes the effect on the life net worth.

The sensitivities allow for any material impact on the cost of financial options and guarantees caused by the changedassumption.

(a) Economic Assumptions

As issuedEV

Effect of 1% higher risk

discount rate

Effect of 1% lower risk

discount rate€m €m €m

Embedded value as at 31 December 2008 1,649 (111) 125 2008 new business contribution 100 (20) 23

74

Notes to the EV Basis Financial Statementsyear ended 31 December 2008

14. Sensitivity calculations (continued)

(b) Market sensitivities - equity/property and fixed interest yields

EV Fixed Int. yields

Fixed Int. yields

Equity/ property

yields€m €m €m €m

Embedded value as at 31 December 2008 1,649 (10) 14 39 2008 new business contribution 100 - (3) 8

(c) Market sensitivities - equity/property values

As issuedEV

Effect of 10% decrease in

equity/ property

values€m €m

Embedded value as at 31 December 2008 1,649 (86)

(d) Operational assumptions

As issuedEV

Effect of 10% decrease in

maintenance expenses

Effect of 10% improvement

in assumed persistency

rates

Effect of 5% decrease in mortality &

morbidity rates*

€m €m €m €m

Embedded value as at 31 December 2008 1,649 61 49 22 2008 new business contribution 100 10 15 3

*The sensitivity results above for a 5% decrease in mortality and morbidity rates includes an €11m reduction in theembedded value at 31 December 2008 and a €0m effect on the 2008 new business contribution from the effect ofa 5% reduction in the annuity mortality rate.

75