Aguas Superficiales

2011 2010

€m €m

As at 1 January 1,681 1,858

Bank operating losses after tax and corporate costs (1,429) (325)

Dividends received 165 28

Capital injection / convertible bonds 2,634 -

Liability management programme (123) -

Core deposit intangible deduction (103) -

Other* (69) 120

As at 31 December 2,756 1,681

Life assurance and fund management operations

2011 2010

€m €m

Shareholders’ funds attributable to life and fund management business 1,148 1,289

Less: Shareholder value of in-force ("VIF") business

Gross (647) (699)

Related deferred tax 106 114

Shareholders’ funds excluding VIF 607 704

Adjustments to valuation of assets and liabilities to regulatory basis (35) (43)

Subordinated liabilities 201 201

VIF loan - 100

Other assets available to cover solvency margin 11 16

Regulatory capital 784 978

Held within the long-term business fund 447 491

Held outside the long-term business fund 337 487 784

978

As disclosed in Note 3, Segmental information, the life assurance and fund management operations constitute the discontinued operations of the group. 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 *Other movement of (€69m) in own funds in 2011 includes a deduction for securitisation exposures not included in risk-weighted assets of (€73m), the movement in the IRB provision excess of €39m and a (€35m) reduction in other additional own funds. The liability management programme ("LME") generated an increase in Tier 1 reserves of €1,000m but this was offset by a reduction in Tier 2 capital of €1,123m during the year. Resulting from the INBS deposit acquisition a core deposit intangible of €124m was created, the net book value of which (€103m) is disallowable when calculating regulatory capital.

35. Analysis of equity and capital (continued)

Shareholder capital is invested in cash, short-term debt securities and property.

2011 2010

€m €m

Effect on regulatory assets 10 44

Analysis of effect on regulatory assets:

New business strain 34 39

Expected return (51) (47)

Experience variance 27 52

10

44

The table below analyses the change in regulatory capital of the life and fund management operations (net of tax).

2011 2010

€m €m

Regulatory capital as at 1 January 978 685

Capital generated from existing business

- Expected return 158 155

- Experience variances 34 89

- Operating assumption changes 16 70

New business strain (59) (75)

Expected investment return 10 13

Short-term investment fluctuations

- Direct shareholder property short-term investment fluctuations (17) 1

- Property commitment cost - (13)

- Other short-term investment fluctuations (25) 33

Effect of economic assumption changes (28) (48)

VIF loan capital movements and costs (115) 100

Change in regulatory capital due to disposal of subsidiary undertaking 5 -

Transfer of regulatory capital out of life and fund management operations,

due to sale of subsidiary undertaking (25) -

Other (5) (4)

Change in inadmissible assets 8 (8)

Dividends paid (151) (13)

Change in subordinated liabilities - (7)

Regulatory capital as at 31 December 784 978

In 2010 Irish Life Assurance plc raised loan capital of €100m secured on the in-force book of business. The table below shows this addition to capital in 2010 and the early repayment of the loan, including interest and penalty charges, in 2011.

The accounting treatment in the financial statements of this stop-loss reinsurance treaty is not to show either the contingent asset or contingent liability on the statement of financial position as they offset each other but the reassurance fee of €3.9m (2010: €3.2m) for this treaty is accounted for in the income statement.

The group has provided for the cost of financial options and guarantees on a market-consistent basis, which is discussed further in Note 16, Shareholder value of in-force business. Capital is affected by a range of factors including interest rates, mortality and morbidity. The group’s capital management and risk management policies are discussed in Note 36, Financial risk management. The solvency cover for Irish Life Assurance plc, before accounting for any available dividends, is 1.9 times (2010: 2.4 times) the minimum requirement of €402m (2010: €401m). The directors consider this to be a conservative level of capital to manage the business having regard for the basis of calculating liabilities and the insurance and operational risks inherent in the underlying products. At 31 December 2011 each of the group’s life assurance and fund management entities had sufficient capital on a stand- alone basis and therefore no capital injections were expected to be needed in the future. Transfers of capital out of the life assurance and fund management companies are subject to the companies continuing to meet the regulatory capital requirements.

In November 2008 a stop-loss reinsurance treaty in relation to new business was signed with Swiss Re and the effect on regulatory assets is analysed below:

Notes to the Group Financial Statements

35. Analysis of equity and capital (continued)

Capital generated on existing business which has three components:

- Expected return: the capital which would arise if the existing business behaved in line with the EV assumptions;

- Experience variances: the capital arising because actual experience in the year differs from the EV assumptions on mortality, morbidity, persistency, expenses and non-linked matching; and

- Operating assumption changes: the effect on capital of changes to regulatory liability demographic and expense assumptions.

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.

Expected investment return: capital generated by the expected investment earnings on the net assets attributable to shareholders using the equity and property investment return EV assumptions applicable at the start of the financial year. The expected investment earnings allow for interest payable on subordinated debt and the fee payable in relation to the stop-loss reassurance treaty.

these costs are then recovered through future charges. This up-front payment gives rise to a reduction in capital. New business strain: when a life assurance contract is written, significant acquisition costs are normally incurred up-front,

These assumptions are reviewed regularly and are changed where appropriate in light of either current or expected experience. Best estimate assumptions are used to analyse the various components of the capital movements which are explained as follows: