Montepaschi Life (Ireland) Limited

Transcription

1 Directors report and financial statements Year ended 31 December 2006 Registered number:

2 Directors report and financial statements Contents Page Directors and other information 2-3 Directors' report 4-6 Statement of directors responsibilities 7 Reporting Actuary Report 8 Independent auditors' report 9-10 Statement of accounting policies Profit and Loss Technical Account Life Assurance Business 19 Profit and Loss Non -Technical Account 20 Balance sheet assets 21 Balance sheet liabilities 22 Notes to the financial statements

3 Directors and other information Directors A. Bates M. Ceccobelli (Italian) F. MacHugh E. Marsiglia (Italian) D. Rouse (British) G. Santucci (Italian) Registered office 33 Sir John Rogerson s Quay Dublin 2 Ireland (previously, Grand Canal House 1 Upper Grand Canal Street Dublin 4.) Secretary Tudor Trust Limited 33 Sir John Rogerson s Quay Dublin 2 Ireland Appointed Actuary Neil Guinan Montepaschi Life (Ireland) Limited Auditor KPMG 1 Harbourmaster Place IFSC Dublin 1 Ireland Bankers Allied Irish Banks plc 7/12 Dame Street Dublin 2 Ireland Banca Monte dei Paschi di Siena Member of MPS Banking Group Siena Italy 2

4 Directors and other information (continued) Solicitors Dillon Eustace 33 Sir John Rogerson s Quay Dublin 2 Ireland Service Provider Irish Progressive Services International Limited Beresford Court Beresford Place Dublin 1 Ireland Investment Managers JP Morgan Fleming Asset Management (Europe) S.a.r.l. Monte Paschi Asset Management SGR MPS Asset Management Ireland Limited Merrill Lynch Investment Managers Luxembourg S.A. Morgan Stanley Dean Witter Investment Management Limited Goldman Sachs International Limited Janus International Limited Deutsche Bank (London) Limited Fidelity Investments Luxembourg S.A. Fidelity Investments Ireland HSBC Asset Management (Europe) S.A. Mellon Global Investments Limited ING (L) Fund Shareholder Services Société Générale Asset Management Julius Baer Investment Funds Dexia Asset Management DWS Investments S.A. Aberdeen Fund Management Ireland Ltd. Aberdeen Fund Management Luxembourg S.A. ABN AMRO Investment Funds S.A. AXA Rosenberg JP Morgan Asset Management Europe Sarl Nordea Bank S.A. BNP Paribas Security Services European Fund Administration (EFA) Belgrave Capital Management Ltd. WestLB Asset Management Vontobel Asset Management Paravest UBAM Schroder Asset Management Pictet Funds Invesco Asset Managers Vitrivius Asset Management 3

5 Directors report The directors present their annual report and the audited financial statements for the year ended 31 December Principal activities, business review, annual risks and uncertainties The principal activity of the company is, as authorised by the Financial Regulator, to transact cross-border life assurance business in the European Union under the Third Life Directive as introduced into domestic Irish legislation by the European Communities (Life Assurance) Framework Regulations, The company s business to date has mainly been the sale of single premium investment products in Italy through a broker, Willis Italia. During 2006, investment and insurance product sales amounted to 1,220 million, an increase of 1.3% over Most of this production, ( 976 million) was in respect of our index linked product line which has proved to be very popular as it gives policyholders access to investments that literally 'track' the performance of an Index/basket of assets. The tracker bonds are structured to return the original investment back at the end of the term with a potential increased return based on the performance of the Index/basket of assets to which it is linked. Total insurance claims and investment redemptions for the period amounted to 698 million for the year 2006, an increase of 40% over that in 2005, reflecting the growth in the book of business. Overall investment surrender rates increased on index linked products by 75% and on unit linked products by 47% compared to For the year 2006 the investment markets performed well despite an adverse period in late Q2 when global markets posted a negative return. Overall the combination of sales and capital appreciation helped our funds under management for policyholders to grow to over 5,503 million at end 2006, an increase of 12% over those at the end of The directors are satisfied with the company s performance during the year and consider that it is well placed to continue its development in the future. In 2007 the MPL product strategy focuses on broadening and strengthening our existing product range. In particular, for index linked products we plan to develop products more which are more innovative in terms of financial structure of underlying assets and with enhanced operation management aiming to improve the overall profitability. For unit linked products we will focus during the first half of 2007 on existing products through improvement on service and commercial information provided and for the second half of 2007 we plan a strategic revision of the product range. We aim to improve efficiency in all areas of our operation through cost reduction, motivating and retaining talented people who are committed to the goals of the company and by continuing to working closely with our business partners. In 2006 the company s ultimate parent, Banca Monte dei Paschi di Siena (BMPS), signalled its intent to reduce its shareholding in its life assurance division. In Dec 2006, BMPS restructured the life assurance group to facilitate entering into a joint venture with a suitable partner. This resulted in a commercial transfer of its 40% shareholding in the issued share capital of Montepaschi Life (Ireland) Limited. This was sold to the company s immediate parent, Montepaschi Vita S.p.A who now own 100% of the issued share capital of Montepaschi Life (Ireland) Limited. The main risks and uncertainties that the business faces are in relation to new business volumes. These are influenced by the general investment markets and the impact that this has on the confidence of investors. This is constantly monitored by the company. The director s wish to thank all of those who contributed to the successful year of the company the management and staff of the company, our Service Provider, our broker Willis Italia and all our advisors, and in particular the branch networks of Banca Monte dei Paschi di Siena S.pA, Banca Toscana, 4

6 Directors report (continued) Banca Monte Parma S.p.A., Banca Popolare di Spoleto S.p.A and MPS Banca Personale who, by introducing our products to their customers, contributed so much to the great results recorded here. Financial risk management objectives and policies of the Company Ultimate responsibility for the company s internal controls, including risk management, rests with the company s Board of Directors. Management have day-to-day responsibility for monitoring, measuring, controlling and reporting the risks connected with the company s activities. As the company has developed, the directors have been improving our corporate governance processes, to take account of best practice, increasing regulatory requirements and the requirements of our parent group. The directors are aware of the critical need for effective corporate governance, risk management and internal controls to guide the company s business practices and activities, thereby promoting compliance with all laws and regulations and safeguarding the company s reputation. The risk management activity of the company is oriented towards measuring and controlling risk in order to substantially reduce any risk that could affect the net worth of the company and the assets under management. The main risks monitored are market risk, interest rate risk, currency risk, liquidity risk and credit risk. For all policyholder funds, the main investment risks (i.e. market risk, interest rate risk, currency risk, liquidity risk and credit risk) are borne by the policyholders and for shareholders funds the main investment risks are borne by the company. The company s strategic investment activities are approved and managed in accordance with a set of clearly defined policy statements which have been approved by the Board. An Investment Committee was established in 2003, whose role includes the review of the on-going asset allocation process for policyholder funds and the review of the asset allocation limits for shareholder funds. Investment of shareholders funds is governed mainly by solvency and liquidity considerations and the need to comply with the regulations and guidelines specified by the regulator. Currency risk, liquidity risk and credit risk are maintained at a very low level and do not represent a material risk to the company. The company tracks on a monthly basis certain key performance indicators. These include operating expenses and profit before tax. These are shown below in 000s Staff Costs 981 (2005: 1,113) Profit before tax 32,014 (2005: 31,614) Results for the year and state of affairs at 31 December 2006 The results for the year are set out on pages 19 and 20. The company s balance sheet is set out on pages 21 and 22. Dividends The Directors propose a dividend of 17 million in respect of the year ended 31 December 2006 (2005: 22.5 million). In accordance with FRS 21, this dividend is not recognised as a liability at the balance sheet date as it was declared after the balance sheet date. 5

7 Directors report (continued) Directors The directors are not required to retire by rotation. Accounting records The directors believe that they have complied with the requirements of Section 202 of the Companies Act, 1990 with regard to books of account by employing a service provider and personnel with appropriate expertise and by providing adequate resources to the financial function. The books of account of the company are maintained at the premises of its service provider, Irish Progressive Services International Limited, Beresford Court, Beresford Place, Dublin 1. Directors and secretary and their interests The directors and secretary who held office at 31 December 2006 had no interests in the shares in, or debentures or loan stock of, the company or group companies. Political Donations The company made no political donations during the year (2005: Nil) Post balance sheet events There have been no significant events affecting the company since the year end which requires amendment to the financial statements. Audit Information The Directors who held office at the date of the approval of this Directors report confirm that, so far as they are aware, there is no relevant audit information of which the company s auditor is unaware; and each director has taken all steps that he ought to have taken as a director to make himself aware of any relevant audit information and to establish that the company s auditor is aware of that information. Auditors In accordance with Section 160, (2) of the Companies Act 1963 the auditors, KPMG, Chartered Accountants, have indicated their willingness to continue in office. On behalf of the board Director Director 26 March 2007 E. Marsiglia D. Rouse 6

8 Statement of directors' responsibilities in respect of the directors report and financial statements The directors are responsible for preparing the Directors Report and financial statements, in accordance with applicable law and regulations. Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have elected to prepare the financial statements in accordance with Generally Accepted Accounting Practice in Ireland, comprising applicable law and the accounting standards issued by the Accounting Standards Board and promulgated by the Institute of Chartered Accountants in Ireland. The company s financial statements are required by law to give a true and fair view of the state of affairs of the company and of the profit or loss of the company for that period. In preparing the financial statements, the directors are required to: select suitable accounting policies and then apply them consistently; make judgements and estimates that are reasonable and prudent; and prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business. The directors are responsible for keeping proper books of account that disclose with reasonable accuracy at any time the financial position of the company and enable them to ensure that its financial statements comply with the Companies Acts 1963 to They are also responsible for taking such steps as are reasonably open to them to safeguard the assets of the company and to prevent and detect fraud and other irregularities. The directors are also responsible for preparing a Directors Report that complies with the requirements of the Companies Acts 1963 to On behalf of the board Director Director 26 March 2007 E. Marsiglia D. Rouse 7

9 Report of the reporting actuary to the directors I certify that at 31 December 2006: (i) (ii) (iii) in my opinion, proper records have been kept by Montepaschi Life (Ireland) Limited, adequate for the purposes of the valuation of the liabilities of its life assurance business; the computation of the Long Term Business Provision has been made on the basis of recognised actuarial methods and with due regard to the actuarial principles laid down in Council Directive 92/96/EEC; and the Long Term Business Provision is sufficient to enable the company to meet any liabilities arising out of insurance contracts as far as can reasonably be foreseen. Neil Guinan 26 March 2007 Fellow Member of the Society of Actuaries in Ireland Reporting Actuary of Montepaschi Life (Ireland) Limited 8

10 Independent auditor s report to the members of Montepaschi Life (Ireland) Limited We have audited the financial statements of Montepaschi Life (Ireland) Limited for the year ended 31 December 2006 which comprise the Profit and Loss Account, Balance Sheet and related notes. These financial statements have been prepared under the accounting policies set out therein. This report is made solely to the company s members, as a body, in accordance with section 193 of the Companies Act Our audit work has been undertaken so that we might state to the company s members those matters we are required to state to them in an auditor s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditors The directors responsibilities for preparing the Directors Report and the financial statements in accordance with applicable law and the accounting standards issued by the Accounting Standards Board and promulgated by the Institute of Chartered Accountants in Ireland (Generally Accepted Accounting Practice in Ireland), are set out in the Statement of Directors Responsibilities on page 7. Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). We report to you our opinion as to whether the financial statements give a true and fair view and have been properly prepared in accordance with the Companies Acts 1963 to We also report to you whether, in our opinion: proper books of account have been kept by the company; whether at the balance sheet date, there exists a financial situation requiring the convening of an extraordinary general meeting of the company; and whether the information given in the Directors Report is consistent with the financial statements. In addition, we state whether we have obtained all the information and explanations necessary for the purposes of our audit, and whether the financial statements are in agreement with the books of account. We also report to you if, in our opinion, any information specified by law regarding directors remuneration and directors transactions is not disclosed and, where practicable, include such information in our report. We read the Directors Report and consider implications for our report if we become aware of any apparent misstatements within it. 9

11 Independent auditor s report to the members of Montepaschi Life (Ireland) Limited (continued) Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the company s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. Opinion In our opinion: the financial statements give a true and fair view, in accordance with Generally Accepted Accounting Practice in Ireland, of the state of the company s affairs as at 31 December 2006 and of its profit for the year then ended; the financial statements have been properly prepared in accordance with the Companies Acts 1963 to We have obtained all the information and explanations which we consider necessary for the purposes of our audit. In our opinion proper books of account have been kept by the company. The company balance sheet is in agreement with the books of account. In our opinion the information given in the directors report is consistent with the financial statements. The net assets of the company, as stated in the company balance sheet are more than half of the amount of its called-up share capital and, in our opinion, on that basis there did not exist at 31 December 2006, a financial situation which under Section 40 (1) of the Companies (Amendment) Act, 1983 would require the convening of an extraordinary general meeting of the company. KPMG Chartered Accountants 26 March 2007 Registered Auditors Dublin 10

12 Statement of accounting policies for the year ended 31 December 2006 Significant accounting policies The following accounting policies have been applied consistently in dealing with items which are considered material in relation to the company s financial statements. These policies apply to both 2005 and 2006, except those asterisked, which relate to 2006 only, as the 2005 accounts have not been restated for FRS 25 Financial Instruments Disclosure and Presentation and for FRS 26 Financial Instruments: Recognition and Measurement. Basis of preparation The financial statements have been prepared in accordance with the Companies Act, 1963 to 2006 and the European Communities (Insurance undertakings: Accounts) Regulations, 1996 (the Regulations ) which cover the format and content of insurance company accounts, and applicable accounting standards. The financial statements are prepared in accordance with Generally Accepted Accounting Practice in Ireland comprising applicable law and the accounting standards issued by the Accounting Standards Board and promulgated by the Institute of Chartered Accountants in Ireland. The preparation of financial statements requires management on an on-going basis to make certain judgements, estimates and assumptions that affect the application of policies and the reported amount of assets, liabilities, income and expenses. Actual results may differ from these estimates. Judgements made by management that have a significant effect on the financial statements and estimates with a significant risk of material adjustment in the next year are discussed in Note 28. Currency The financial statements are prepared in Euro ( ) which is the company s functional currency. Foreign currency transactions Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to euros at the foreign exchange rate ruling at that date. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated to euros at foreign exchange rates ruling at the dates the fair value was determined. * Insurance and investment contracts - classification Classification of contracts Contracts under which the company accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder or other beneficiary if a specified uncertain future event (the insured event) adversely affects the policyholder or other beneficiary, are classified as insurance contracts. Insurance risk is risk other than financial risk. Financial risk is the risk of a possible future change in one or more of a specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, a credit rating or credit index or other variable, provided in the case of a non-financial variable that the variable is not specific to a party or contract. 11

13 Statement of accounting policies for the year ended 31 December 2006 Contracts under which the transfer of insurance risk to the company from the policyholder is not significant are classified as investment contracts. Where a direct contract contains both an investment element and an insurance element (rider benefit) the Company unbundles this contract into its constituent parts of insurance and investment. The insurance element of the contract is accounted for as an insurance contract and the investment element of the contract is accounted for as an investment contract. In the case of contracts where the rider benefit is not explicit, a prudent present value estimate is made of the death benefit costs and the contract is unbundled accordingly. A contract that qualifies as insurance remains an insurance contract until all rights and obligations are extinguished or expire. However, an investment contract classified as such on inception, could subsequently be reclassified as an insurance contract if it meets the insurance definition as described above. *Insurance contracts recognition and measurement a) Premiums Premiums earned in respect of insurance contracts are accounted for in the profit and loss account in the same period in which the liabilities arising from these premiums are established. b) Claims Claims incurred comprise claims paid in the year and changes in provisions for outstanding claims, together with any other adjustments to claims from previous years. Reinsurance recoveries are accounted for in the same period as the related claim. c) Long term business provision The long-term business provision is calculated on an annual basis with regard to the principles laid down in the EU Third Life directive (92/96EEC). It comprises provision for future mortality. Although the Directors consider that the gross long term business and the related reinsurance recovery is fairly stated in line with the information currently available the eventual liability may vary as a result of subsequent information and events. The provision, estimation technique, and assumptions are periodically reviewed with any changes in estimates reflected in the long-term business technical account as they occur, via the Income Statement. d) Reinsurance Only contracts that give rise to a significant cession of insurance risk from the Company are accounted for as insurance. Amounts recoverable under such contracts are recognised in the same period as the related claim and premiums are accounted for. 12

14 Statement of accounting policies for the year ended 31 December 2006 *Insurance contracts recognition and measurement (continued) d) Reinsurance (continued) A transfer of insurance risk is only considered to have occurred if there is a reasonable possibility both of a significant range of outcomes and of the reinsurer realising a significant loss. No transfer is considered to have occurred if under all reasonable scenarios the reinsurer will effectively receive no more than a lender s rate of return. In assessing whether a significant transfer has occurred consideration is given to the commercial substance of the contract, the range of outcomes that may reasonably be expected to occur under the contract and the timing of the cash flows anticipated under the contract. Accounts recoverable under reassurance contracts are assessed for impairment at each balance sheet date. Such assets are deemed impaired if there is objective evidence, as a result of an event that occurred after its initial recognition, that the company may not be able to recover all amounts due and that event has a reliably measurable impact on the amounts that the company will receive from the reinsured. *Investment contracts recognition and measurement Linked investment contracts have been classified as financial liabilities at fair value through the profit and loss account to eliminate an inconsistency that would otherwise arise between the valuation of assets and liabilities. Unit linked liabilities are valued with reference to the value of the underlying investment fund at the balance sheet date. Non unit linked investment contracts are measured based on the value of the liability to the policyholder at the balance sheet date. The revenue arising from these contracts (front end fees, surrender penalties and annual management charges) is recognised over the life of the contract and is recorded in the fees and commission income lines. These are deducted from the policyholders balance. Benefits charged to expenses include benefit claims incurred during the period in excess of policyholders balance and interest credited for policyholders balance. a) Premiums Amounts received from and paid to holders of investment contracts are accounted for as deposits received (or repaid) and are not included in premiums and claims in the profit and loss account. b) Liability measurement Liabilities in relation to linked contracts are held at fair value through the profit and loss account. The fair value of a financial instrument is the fund value of the contract, without any reduction. A financial liability is derecognised when and only when the liability is extinguished, that is, when the obligation specified in the contract is discharged, cancelled or has expired. The difference between the carrying amount of a financial liability extinguished or transferred to another party and consideration paid, including any non-cash assets transferred or liabilities assumed, is recognised in the profit and loss account. Gains and losses arising from changes in the fair value of financial liabilities designated at fair value through the profit and loss account are included in profit and loss in the period in which they arise. 13

15 Statement of accounting policies for the year ended 31 December 2006 *Investment contracts recognition and measurement (continued) c) Acquisition Costs The costs directly associated with the acquisition of new investment contracts are deferred to the extent that they are expected to be recoverable out of any future revenues to which they relate. Such costs are amortised through the profit and loss account over the period in which the revenues on the related contracts are expected to be earned, at a rate commensurate with those revenues. *Investments and investment return Montepaschi Life (Ireland) Limited has designated all linked products and their associated investment contract and insurance contract liabilities at fair value through the profit and loss account. a) Interest income Interest income is recognised in the income statement as it accrues, using the effective interest rate method. b) Dividend income Dividend income is recognised in the income statement on the date the entity s right to receive payments is established. *Financial assets The company classifies its financial assets as designated at fair value through the profit and loss account on initial recognition. The basis of this designation is that the financial assets and liabilities are managed and evaluated together on a fair value basis. The designation eliminates or significantly reduces a measurement inconsistency that would otherwise arise if these financial liabilities were not measured at fair value since the assets held to back the investment contract liabilities are also measured at fair value. The fair value of the company s unit linked investment contract liabilities is based on the fair value of the financial assets held within the appropriate unit-linked funds. Financial assets at fair value through the profit and loss account are financial assets which on initial recognition are designated by the company as being at fair value through the profit and loss account. Loans and receivables are non derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than those that the company intends to sell in the near term which the company upon initial recognition designates as fair value through the profit or loss, available for sale or where the company may not recover substantially all of its initial investment. Purchases of financial assets are recognised on the trade date, which is when the company commits to purchase the assets. Financial assets are derecognised when contractual rights to receive cash flows from 14

16 Statement of accounting policies for the year ended 31 December 2006 *Financial assets (continued) the investments expire, or where the investments, together with substantially all the risks and rewards of ownership have been transferred. Financial assets are initially measured at fair value plus in the case of assets not designated at fair value through the profit and loss account, transaction costs that are directly attributable to their acquisition. Transaction costs in relation to financial assets designated at fair value through profit and loss account are expensed immediately. After initial recognition, the company measures financial assets at fair value through the profit and loss account and available for sale financial assets at fair value without any deduction for transaction costs it may incur on disposal. The fair values of investments are based on quoted bid prices where available or amounts derived from cash flow models. Fair values for unlisted equity securities are estimated using applicable price/earnings or price/cash flow ratios refined to reflect the specific circumstances of the issuer. Loans and receivables are measured at amortised cost. Gains and losses arising from changes in the fair value of financial assets at fair value through the profit and loss account, are included in the profit or loss in the period in which they arise. Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously. Derivative financial instruments The company does not use hedge accounting. The only derivatives held where the risk is retained by the company are options held for short periods of time as a result of policyholder surrenders of structured assets. The company does not hold these for speculative purposes and sells the assets back to the issuing company at the next available opportunity. Other derivatives are included in assets held on behalf of policyholders where all gains and losses on these derivatives are exactly matched by changes in the related liabilities to policyholders. Derivative financial instruments are recognised initially at cost. Subsequent to initial recognition, derivative financial instruments are stated at fair value. The gain or loss on remeasurement to fair value is recognised immediately in profit or loss. Employee benefits (a) (b) Defined contribution plans The pension entitlements of employees are secured by contributions from the company to a separately administered defined contribution pension fund. Contributions to the fund are charged to the profit and loss account in the same period as the salaries to which they apply. The company makes a payment equal to between 5 and 10% of the gross income for each employee s pension fund. Life assurance The company makes a payment towards life assurance and permanent health insurance for senior management. Contributions towards these plans are recognised as an expense in the profit and loss account as incurred. 15

17 Statement of accounting policies for the year ended 31 December 2006 Italian tax provision Contributions to the Italian Revenue, as a result of the company becoming a withholding agent, are recognised as a deferred asset in the Balance Sheet of the company. All Italian capital gains tax due on policies maturing after the final payment of the Italian tax liability will be written off against this asset. The recoverable amount of this asset is reviewed at each year end by the Board of Directors. Impairment The carrying amount of the Company s assets are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the carrying value is reduced to the estimated recoverable amount by means of a charge to the profit and loss account. The amount of the cumulative loss that is recognised in profit or loss is the difference between the carrying value and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss. (i) Calculation of recoverable amount The recoverable amount of receivables carried at amortised cost is calculated as the present value of estimated future cash flows, discounted at the original effective interest rate. Receivables with a short term duration are not discounted. The recoverable amount of other assets is the greater of their net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash generating unit to which the asset belongs. The Italian tax asset is held at face value and the recoverability thereof is reviewed at each year end. (ii) Reversals of Impairment In respect of other assets, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that an asset s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. 16

18 Statement of accounting policies for the year ended 31 December 2006 Cash and cash equivalents Cash and cash equivalents comprise cash balances, call deposits and one month deposits. Bank overdrafts that are repayable on demand and which form an integral part of the company s cash management are included as a component of cash and cash equivalents. Management expenses Management expenses and administration costs are charged to the profit and loss account on an accruals basis. Technical provisions The technical provisions relate to linked contracts. The liability for these contracts is determined as the value of the units deemed allocated at the valuation date and other technical provisions that have been established for additional risk benefits and costs. The life assurance provisions were calculated by a Fellow Member of the Society of Actuaries in Ireland, Mr. Neil Guinan FSAI FIA. The computation was made on the basis of recognised actuarial methods, with due regard to the actuarial principles laid down in the Council Directive 92/96/EEC. The life assurance provision was computed separately for each life assurance contract using modern tables of mortality and expense assumptions which reflect the company s expected experience. Taxation Corporation tax payable is provided on taxable profits at the current rate. In accordance with Financial Reporting Standards No. 19 Deferred Tax, except where otherwise required by accounting standards, full provisioning without discounting is made for all timing differences which have arisen but not reversed at the balance sheet date. Deferred tax balances are provided for the average tax rates that are expected to apply in the periods in which the timing differences are expected to reverse based on tax rates and laws that have been enacted or substantively enacted by the balance sheet date. A deferred tax asset is regarded as recoverable and therefore recognised only when on the basis of all available evidence it can be recognised as more likely than not that there will be suitable taxable profits from which the future reversal of the underlying timing differences can be deducted. Trade and other receivables Trade and other receivables are initially booked at fair value and are stated at amortised cost less provision for impairment. The average payment period of debtors is less than three months. The carrying amount of trade and other receivables are reviewed at each balance sheet date to determine whether there is any indication of impairment. 17

19 Statement of accounting policies for the year ended 31 December 2006 Tangible fixed assets The charge for depreciation is calculated to write down the cost or current value of tangible fixed assets to their estimated residual values by equal annual installments over their expected useful lives as follows: Fixtures and Fittings, other equipment 20% Computer equipment and software 20% Dividend Distributions Dividends are recognised in the financial statements when they have been approved by the shareholders and are no longer at the discretion of the company. Interim dividends declared by the directors are recognised when paid. Cashflow statement The company has availed of the exemption in Financial Reporting Standard No 1 (Revised), which permits qualifying subsidiaries of a group which itself publishes financial statements, not to produce a cashflow statement. Accounting policies 2005 comparative figures The following accounting policies relate solely to the comparative figures of Premiums Premiums are recognised when they fall due, in accordance with the terms and conditions of policies issued by the Company. Reinsurance premiums are accounted for when the related premium income is received. Claims Claims incurred comprise claims and related expenses paid in the year and changes in provisions for outstanding claims, together with any other adjustments to claims from previous years. Investments Investments are included in the balance sheet at market value. Market value is determined by reference to bid market quotations in the case of listed investments and by reference to the directors estimate of market value in the case of unlisted investments. 18

20 Profit and loss account for the year ended 31 December 2006 Technical account life assurance business: Notes Earned premium net of reinsurance Gross premiums written 1 3,663 1,204,118 Outward reinsurance premiums 1 (10) 25 3,653 1,204,143 Investment income 2 199, ,912 Unrealised gains on investments 2 35, ,122 Fee and commission income 3 102,328 - Other technical income, net of reinsurance - 12,965 _ Total income 341,488 1,532,142 Claims incurred 4 (1,242) (497,518) Investment contract benefits 23 (119,485) - Change in technical provisions Technical provision for linked liabilities 5 - (920,121) Other technical provisions 5 (2,396) (4,576) (2,396) (924,697) Investment expenses and charges 2 (20,627) (9,447) Unrealised losses on investments 2 (107,358) (16,722) Operating expenses 6 (59,012) (56,044) Balance on the technical account life assurance business 31,368 27,714 19

21 Profit and loss account for the year ended 31 December 2006 Notes Balance on the technical account life assurance business 31,368 27,714 Investment income ,708 Investment expenses and charges 2 (180) (808) Profit on ordinary activities before taxation 32,014 31,614 Tax on profit on ordinary activities 10 (4,002) (3,952) Profit for the financial year 27 28,012 27,662 The company had no recognised gains or losses in the financial year or in the preceding financial year other than the profit on ordinary activities as shown above. All profits were generated by continuing activities. The accompanying notes form an integral part of the profit and loss account. On behalf of the board Director Director 26 March 2007 E. Marsiglia D. Rouse 20

22 Balance sheet As at 31 December 2006 Assets: Investments Notes Financial assets held for trading , ,915 Financial assets held for fair value 12 5,298,548 - Loans and receivable ,304 - Investments for the benefit of life assurance 19-4,934,312 policyholders who bear the investment risk 5,660,830 5,082,227 Other assets Tangible fixed assets Deferred acquisition cost 15 18, Debtors arising out of direct insurance operations - 50 Other debtors 16 42,252 32,720 Cash and cash equivalents 17 7,413 5,092 Total assets 5,729,515 5,121,134 21

23 Balance sheet As at 31 December 2006 Liabilities: Notes Capital and reserve Called up share capital Capital contribution 27 54,444 54,444 Profit and loss account 27 24,951 56,660 Shareholders funds equity interests 27 80, ,739 Technical provisions Technical provisions for linked liabilities 21-4,934,312 Other technical provisions 22 8,107 24,051 Financial liabilities investment contracts 23 5,502,922-5,511,029 4,958,363 Provisions for other risks and charges - 13 Creditors Creditors arising out of direct insurance operations ,811 Other creditors including tax and social welfare 25 59,188 16,208 Deferred income liability 26 79, ,456 51,019 Total liabilities 5,729,515 5,121,134 The accompanying notes form an integral part of this balance sheet. On behalf of the board Director Director 26 March 2007 E. Marsiglia D. Rouse 22

24 Balance sheet As at 31 December

25 Notes 1 Gross premiums written The Company operated in one main business segment during the year, writing life assurance business in the European Union. All premiums relates to individual premium business where the policyholder bears the investment risk Total gross premiums written 3,663 1,204,118 Outward reinsurance premiums (10) 25 3,653 1,204,143 From 1 January 2006 following the adaptation of FRS 26, premiums on investment contracts are no longer accounted for as premiums and are instead shown as movements in investment contract liabilities in the balance sheet. For the year ended 31 December 2006 premium income of 1,216,298,163 (note 23) relates to investment contracts and is not included in total premiums written above for Investment gains, losses, expenses and charges Technical account Investment income Gains on the realisation of investments 195,123 95,462 Income from other investments 4,471 51, , ,912 Unrealised gains on investments 35, ,122 Investment expenses and charges Investment expenses (12,722) (9,302) Losses on the realisation of investments (7,905) (145) Total investment expenses and charges (20,627) (9,447) Unrealised losses on investments (107,358) (16,722) 24

26 Notes (continued) 2 Investment gains, losses, expenses and charges (continued) Non technical account Investment income Unrealised gains 826 3,254 Other income - 1, ,708 Investment expenses and charges Unrealised losses on investments (180) (808) Total investment expenses and charges (180) (808) Realised and unrealised gains and losses include gains and losses on assets held in unit linked funds which are designated at fair value through profit and loss as well as gains and losses on investments held for the benefit of life assurance policyholders who bear the investment risk. 3 Fee and commission income Initial commission and fund fees 104,095 - Change in deferred revenue (Note 26) (1,767) - 102,328-4 Claims incurred Claims paid gross amount (1,242) (497,518) (1,242) (497,518) From 1 January 2006, following the adaptation of FRS 26, claims incurred on investment contracts are no longer accounted for as claims and are instead shown as movements in investment contract liabilities in the balance sheet. Claims incurred during 2006 of 697,230,168 relate to investment contracts and are therefore not included in claims above. Refer to Note

27 Notes (continued) 5 Movement in insurance contract liabilities provisions Insurance liabilities - (920,121) Change in other technical provisions (2,396) (4,576) 6 Operating expenses Technical account life assurance Acquisition costs 35,827 34,550 Administrative expenses 18,859 20,481 Change in deferred acquisition costs 4,326 1,013 59,012 56,044 Operating expenses include: Policyholder administration 9,581 8,760 Commission 38,157 38,756 General administration and office expenses 6,561 6,661 Professional fees Change in deferred acquisition costs (Note 15) 4,326 1,012 59,012 56,044 7 Auditors' remuneration The remuneration and expenses of the auditors for the audit of the statutory financial statements amounted to 87,725 (2005: 73,000). 8 Staff costs Wages and salaries Social security costs Pension costs ,113 26

28 Notes (continued) 8 Staff costs (continued) Average number of employees during the period Administration 8 8 Finance 2 2 Actuarial Directors' emoluments The aggregate emoluments of the directors including pension scheme contributions are included in staff costs and were as follows: For services as directors Taxation Corporation tax 4,002 3,952 Income tax reconciliation Profit before income taxes 32,014 31,614 Current tax at 12.5% (2005: 12.5%) 4,002 3,952 Effects of: Items not deductible for tax purposes 4 12 Capital allowances for period in excess of depreciation (4) (12) Current tax charge 4,002 3,952 27

29 Notes (continued) 11 Financial Assets held for trading Cost 250,066 - Fair Value 252,978 - Analysed as follows Investments in index linked bonds 6,518 - Investments in unit trusts 8,804 - Investments in Government securities 64,622 - Investments in index linked options 173, ,978 - Movement in financial assets held for trading At beginning of year (see note 19) 81,985 - Additions and disposals 32,936 - Fair value gains and losses 2,726 - Reclassification of index linked options 135,331 - Balance at year end 252, Financial Assets held for fair value Cost 4,993,800 - Fair Value 5,298,548 - Analysed as follows Investments in Index linked bonds 3,275,218 - Investments in Unit trusts 2,023,330-5,298,548-28

30 Notes (continued) 12 Financial Assets held for fair value (continued) Movement in financial assets held for fair value At beginning of year (see note 19) 4,885,800 - Additions and disposals 463,540 - Fair Value gains and losses 84,539 - Reclassification of index linked options (135,331) - 5,298, Loans and receivables Fixed deposit accounts 74,551 - Policyholder cash held to cover investment trading 34, Tangible fixed assets Cost 109,304 - Computer equipment and Other software equipment Total 000 Balance at 1 January , ,383 Additions Balance at 31 December , ,110 Accumulated depreciation Balance at 1 January , ,208 Charge for year Balance at 31 December , ,448 Net book value At 31 December At 31 December

31 Notes (continued) 14 Tangible fixed assets (continued) Computer equipment and Other software equipment Total 000 Cost At 31 December , ,340 Additions At 31 December , ,384 Accumulated depreciation At 31 December ,090 Charge for year At 31 December , ,208 Net book value At 31 December At 31 December

32 Notes (continued) 15 Deferred acquisition costs Balance at 1 January (see note 19) 22,684 - Release of prior year provision (5,309) - Increase in provision for current year Charge to the current year P&L (Note 6) (4,326) - Balance at 31 December 18, Other Debtors Deferred Tax 9,888 - Italian Substitute Tax 25,539 20,572 Sundry debtors 3,225 8,557 Accrued interest and rent Fund rebates receivable 2,795 3,069 42,252 32,720 On 1 February 2004 the company opted into the new Italian tax regime. Under the tax codes (L art. 41-bis del Decreto legge 30 settembre 2003, n. 269,convertito dalla legge n. 326 dello stresso anno) and (Decreto-legge 12 luglio 2004, n. 168,convertito dalla legge 30 luglio 2004, n.191 Disposizioni fiscali urgenti-modifiche alla disciplina fiscale delle reserve matematiche.) the company is required to make an advance payment of policyholder taxes to the Italian Revenue Authorities. The tax asset is recoverable against taxes withheld on policyholder gains and through a group recovery mechanism i.e. offsetable against other taxes payable. In the opinion of the directors, the realisable value of the Italian tax asset is not less than its book value. Included in the above is 25.5 million (2005: 20.5m) which is recoverable after more than 1 year. 17 Cash at bank and in hand Bank balances 7,413 5,092 31

33 Notes (continued) 18 Share capital ,000 Authorised: 5,078,953 Ordinary shares of 1 each 5,079 5,079 Allotted, called up and fully paid: 634,870 Ordinary shares of 1 each Explanation of transition re FRS 25 & 26 During 2006, the company adopted Financial Reporting Standard ( FRS ) 25, Financial Instruments: Disclosure and Presentation & FRS 26, Financial Instruments: Measurement. This has resulted in the company reclassifying contributions received for unit and index linked business from insurance to investment business for contracts which no longer qualify for accounting purposes as insurance contracts as they are deemed not to contain significant insurance risk or for portions of contracts in other cases where individual contracts are unbundled into separate insurance and investment components. As a result certain contributions from policyholders are accounted for as deposits in the balance sheet with earned fees being shown in the profit and loss account, rather than the previous treatment of recording contributions in and redemptions out as premiums and claims, respectively. In addition certain of the company s upfront fees and incremental acquisition costs on unit linked business are now deferred and amortised over the expected lives of the contracts. Previously these would have been recorded in the profit and loss account immediately. The following note explains the reconciliation from the Balance Sheet as at 31 December 2005 under Irish GAAP excluding FRS 25 and FRS 26, to the balance sheet of the Company as at the starting date of the FRS 25 & 26 reporting period. FRS adj. FRS 31/12/2005 1/1/2006 1/1/2006 Assets 000 Property, plant and equipment Deferred acquisition cost a ,815 22,684 - Financial assets held for trading b 147,915 (65,930) 81,985 - Investments for the benefit of life assurance policyholders who bear the investment risk b 4,934,312 (48,512) 4,885,800 Debtors arising out of direct insurance operations 11,626-11,626 Other debtor 21,144-21,144 Prepayments and accrued income h - 5,337 5,337 Cash and cash equivalents b 5, , ,534 Total assets 5,121,134 18,152 5,139,286 32

34 Notes (continued) 19 Explanation of transition FRS 25 & 26 (continued) FRS adj. FRS 31/12/2005 1/1/2006 1/1/ Liabilities Insurance contract provisions c 4,934,312 (4,934,312) - Financial liabilities - investment contracts d - 4,939,687 4,939,687 Other technical provisions e 24,051 (18,340) 5,711 Deferred income liability f - 77,338 77,338 Creditors arising from direct insurance operations b 34,811 (9,000) 25,811 Other creditors 16,221-16,221 Total liabilities 5,009,395 55,373 5,064,768 Net asset 111,739 (37,221) 74,518 Shareholders' equity Share capital Capital contribution 54,444-54,444 Retained earnings at 31/12/ restated g 56,660 (37,221) 19,439 Shareholders' funds - equity interests 111,739 (37,221) 74,518 a b c This is the Deferred Acquisition Cost for contracts classed as investment contracts. All incremental costs directly attributed to securing an investment management contract are recognised as an asset, deferred and released over the life of the contracts. This asset represents the deferred value of initial costs at the balance sheet date. See note (f). This represents the value of investments for policyholders who bear the investment risk, for contracts which were reclassified from insurance contracts to investment contracts and valued at "fair value". Shareholder investments where the risk of the investment is borne by the company are represented by financial assets held for trading and cash and cash equivalents. The linked liability for contracts classed as investment contracts is no longer included in the technical provisions. They are separately identified as investment contract liabilities. See note (d). 33

35 Notes (continued) d e f g h This represents the linked liability for contracts classed as investment contracts. The change to the technical provisions is the removal of cash reserves on contracts classed as investment contracts. Because of the deferral of initial margins and future annual management charges there is no longer a necessity for cash reserves on these contracts. This is the Deferred Income Liability for contracts classed as investment contracts. All front end fee income on these contracts is deferred and released over the life of the contracts. This liability represents the deferred value of initial margins at the balance sheet date. See note (a). The change to the retained profit and loss is the accumulation of the restatement of previous year's profit and loss accounts. It is negative because the deferred income liability is greater than the deferred acquisition cost and release of other technical provisions Represents the net tax asset created due to upfront fees upon which tax was paid, being deferred over the life of the investment contract. 20 Capital position statement Total shareholder funds 80, ,739 Adjustment to regulatory bases: Adjustment to asset values (6,357) (4,967) Adjustment to reserves values (38,865) (32,005) Adjustment to retained profit FRS 26 38,911 - Deferred acquisition cost (279) (870) (6,590) (37,842) Total available capital resources 73,440 73,897 Minimum solvency level required by Financial Regulator 33,175 25, Technical provisions for linked liabilities Balance at beginning of year (see note 19) - 4,010,768 Movement from technical account - 920,121 Other - 3,423-4,934,312 34

36 Notes (continued) 22 Other technical provisions Life assurance provision Gross amount Balance at beginning of year (Note 19) 5,711 19,475 Movement from the technical account (note 5) 2,396 4,576 Balance at end of year 8,107 24, Financial investment liability Balance at beginning of year (see note 19) 4,939,687 - Movement (see below) 563,235 - Unit reserve at 31 December 5,502,922 - Investment liability at 1 January (Note 19) 4,939,687 - Contributions received from policyholders (Note 1) 1,216,298 - Fee income (83,530) - Claims (Note 4) (697,230) - Investment return 119,485 - Bond options 8,212 - Unit reserve at 31 December 5,502,922 Unit reserves as above are matched by the following financial assets where the investment risk is borne by the policyholder: Financial assets held for trading 169,621 - Financial assets held at fair value 5,298,548 - Policyholder cash held to cover investment trading 34,753-5,502,922 - As investment contracts are predominately whole of life and can be surrendered immediately on demand, it is not possible to detail expected settlement dates of the contracts. The amount that the company would be contractually required to pay upon surrender would be based upon the fair value of the fund assets at that time. There is no difference between the carrying amount and the surrender amount. None of the amount of the change in investment contract liabilities during the year is attributable to changes in the credit risk of the liabilities. 35

37 Notes (continued) 24 Creditors arising out of direct insurance operations Amounts owed to credit institutions - 9,000 Amounts due to group companies Amounts due in respect of reinsurance outwards Other insurance creditors - 25, , Other creditors including tax and social welfare Amounts falling due within one year: Employment costs Corporation tax Italian tax payable 16,484 14,817 Other creditors incl commission payable and accruals 19, Investment redemptions payable 18,773 - Deferred Tax 4,310-59,188 16, Deferred income liability Deferred income liability at 1 January (Note 19) 77,338 - Release of prior year provision (19,589) - Increase in provision for current year 21,356 - Charge to the current year P&L (Note 3) 1,767 - Deferred income liability at 31 December 79,105-36

38 Notes (continued) 27 Statement of movement on shareholders funds Share Capital Profit capital contribution and loss Total Balance at 1 January ,444 56, ,739 Transitional adjustment (FRS25 & 26) (Note 19) - - (37,221) (37,221) Balance at 1 January 2006 restated ,444 19,439 74,518 Recognised income and expense for the year ,012 28,012 Dividend paid - (22,500) (22,500) Balance at 31 December ,444 24,951 80,030 Share Capital Profit capital contribution and loss Total Balance at 1 January ,444 22,998 84,077 Prior period adjustment 22,500 22,500 Balance at 1 January 2005 restated ,444 51, ,577 Profit for the financial year ,662 27,662 Dividend paid - - (22,500) (22,500) Dividend proposed - - (22,500) (22,500) Effect of prior period adjustment ,500 22,500 Balance at 31 December ,444 56, ,739 In 1999, the shareholders, Montepaschi Vita S.p.A. and Banca Monte dei Paschi di Siena S.p.A., companies incorporated in Italy, made an irrevocable contribution of 4,444,083 to the capital of the company. This contribution is distributable, after all accumulated losses have been taken into account. On 30 December 2004 the company received additional capital contributions from its parent and its ultimate parent of 30,000,000 and 20,000,000 respectively. The capital contributions are non-refundable and non interest bearing. Dividends paid in 2006 amount to per share (2005: 35.44) 37

39 Notes (continued) 28 Risk management policies Credit risk Credit risk is the risk that a counterparty will be unable to pay amounts in full when due. Key areas where the company may be exposed are: Amounts due from policyholders Amounts due from corporate bond holders Amounts due from reinsurers in respect of insurance claims paid The company reduces the risk of policyholder payment defaults by selling its products through the ultimate parent company banking network. All policyholder premium is debited directly from the bank account at the inception of the policy. Reinsurance is used to manage insurance risk. If a reinsurer fails to pay a claim the company is liable for payment to the policyholder. The creditworthiness of reinsurers is considered on an annual basis by reviewing their financial strength and their reputation in the market place prior to any contract being signed. Management has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis. Corporate bond holder risk is reduced by investing in bonds that have a rating of A+ or above at the date of purchase. Transactions involving derivative financial instruments are with counterparties with high credit ratings. Given their high credit ratings, management does not expect any counterparty to fail to meet its obligations. At the balance sheet date there were no significant concentrations of credit risk. For unit linked contracts the company matches all the liabilities with assets in the portfolio on which the unit prices are based. There is therefore no credit risk for the company on these contracts. Exposure to market risk Market risk can be described as the risk of change in fair value of a financial instrument due to changes in interest rates, equity prices, creditworthiness, foreign exchange rates or other factors. We seek to mitigate that risk by a number of factors as described below. Our policies to address these risks were unchanged from the previous year. There were no significant changes to the company s market risk from last year. The Company s exposure to changes in interest rates is limited to changes in the value of the shareholder s investments. Any changes to the company s assets or liabilities are offset by a corresponding change in the value of the company s liabilities or assets. Interest rate hedging Interest rate risk can be described as the risk that a security's value will change due to a change in interest rates. The Company does not have any liabilities that expose it to interest rate risk. The Company does hold assets which are exposed to interest rate movements. See exposure to market risk. Foreign currency risk Foreign currency risk can be described as the risk that the company may be affected due to an adverse movement in foreign exchange rates. The Company does not have any exposure to currency movements as all of its non unit-linked assets are 100% invested in euro and its non unitlinked liabilities are also 100% denominated in euro. For unit linked contracts the company matches all the liabilities with assets in the portfolio on which the unit prices are based. There is therefore no foreign currency risk for the company on these contracts. 38

40 Notes (continued) 28 Risk management policies (continued) Liquidity risk Liquidity risk is the risk that the company will encounter difficulties in obtaining funds to meet its commitments including commitments associated with financial instruments. In managing the company s assets and liabilities, the company seeks to ensure that cash is at all times available to settle liabilities as they fall due. The company s treasury position is reviewed on a daily basis and cash balances maintained to meet due liabilities. For investment contract redemptions, cash paid out is funded by the redemption of the linked assets supporting the contract liability. The company may be exposed to certain transactions affecting certain unit linked transactions such as unit private switching and purchase of index linked investment bonds. The unit private switching involves the selling and buying of assets on the same day. If a mismatch occurs the company may be liable to fund the purchase of the new assets while waiting for the sell transaction to complete. This risk is considered to be minimal and is monitored by management. Index linked products are subject to a minimum buy amount with the issuer. If sales do not match the minimum sell quantity the company is required to take a shareholding in the offering. The risk is minimised by entering into a sell back contract at the original price. As the company has no borrowings, the company is not exposed to any significant liquidity risk on the liability side. Price risk The prices of the index linked assets sold back to the issuing companies are negotiable and can result in price risk. These are the only assets with exposure to price risk. The prices of other assets held by the company are subject to interest rate movements and equity market movements. Analysis of counterparty risk on assets and exposures MPS Structured Products 13,796 15,292 Italian Government bond 64,622 64,688 Unit Trusts 4,963 4,324 Other 147, ,518 Other assets where counterparty risk is assumed by the policyholder 230, ,822 Investments in unit trusts 2,103,471 2,171,314 Investments in Index linked bonds 3,395,586 2,762,998 Total assets 5,729,515 5,121,134 Insurance risk Insurance risk refers to fluctuation in the timing frequency and severity of insured events relative to the expectations of the company at the time of underwriting. Insurance risk can also refer to fluctuations in the timing and amount of claim settlements. 39

41 Notes (continued) 28 Risk management policies (continued) Given the limited nature of the insurance risk, underwriting is limited to seeking declarations of good health. This declaration is not sought for some policies with minimal insurance risk. Any insurance risk is reinsured with one of the panel of reinsurers listed in the Company s reinsurance strategy. Exposure to interest rate risk The following table provides principal cash flow estimates by year for holdings of interest sensitive investment assets. At 31 December months 6-12 months 1-5 years over 5 years Total or less Government bonds , ,622 Unit Trusts 4, ,963 Deposits with credit institutions 74, ,551 MPS structured products 13, ,795 Cash and cash equivalents 7, , ,722-64, ,344 The effective interest rates at the balance sheet dates were as follows: Government bonds - - 4% 6% Unit trusts 0% Deposits with credit institutions 4% MPS structured products 0% Cash and cash equivalents 0% At 31 December months 6-12 months 1-5 years over 5 years Total or less Government bonds , ,688 Unit Trusts 4, ,324 Deposits with credit institutions 59, ,088 MPS structured products 15, ,292 Cash and cash equivalents 5, ,095 83,799-64, ,487 40

42 Notes (continued) 28 Risk management policies (continued) Exposure to interest rate risk (continued) The effective interest rates at the balance sheet dates were as follows: 6 months 6-12 months 1-5 years over 5 years or less Government bonds - - 2% 6% Unit Trusts 0% Deposits with credit institutions 2% Capitalia structured products 0% Cash and cash equivalents 0% Derivatives The Company does not use hedge accounting. The only derivatives held where the risk is retained by the Company are options held for short periods of time as a result of policyholder surrenders of structured assets. The Company does not hold these for speculative purposes and sells the assets back to the issuing company within a short period of time. Other derivatives are included in assets held on behalf of policyholders where all gains and losses on these derivatives are exactly matched by changes in the related liabilities to policyholders. Exposure to equity market movements: Any movement in the company s assets due to equity market movements is exactly offset by a corresponding movement in liabilities. The company s exposure to market movements is limited to the investment of shareholder assets in equities. 29 Accounting estimates and judgements The company s critical accounting policies and estimates and the application of these policies and estimates are considered by management for each reporting period. Insurance The company makes estimates of the expected number of deaths for each of the years that it is exposed to risk. These estimates are based on standard industry and national mortality tables, adjusted to reflect the company s own experience. Appropriate allowance is made for expected improvements in mortality, due to improvements in medical care and social conditions. However, there is considerable uncertainty regarding the impact of epidemics and changes in lifestyle such as smoking, eating and exercise habits, which could result in a deterioration in mortality. For contracts without fixed terms, the company has assumed that it will be able to increase premiums in future years in line with emerging mortality experience. 41

43 Notes (continued) 29 Accounting estimates and judgements (continued) Investment contracts Investment contracts are accounted for as financial instruments under FRS 25 and FRS 26. These are primarily unit linked contracts whose value is contractually linked to the fair value of the financial assets held by the company. Initial fees earned and incremental costs (mainly commission) paid on sale of an investment contract are deferred and recognised over the expected life of the contract. The expected life of the contract is estimated based on current experience and the term of the contracts and is reviewed at least annually. Changes to the expected life could affect the income and cost recognised and the value of the asset and liability in the accounts. However, given that any changes to the expected life will affect both costs and fees, the net impact is unlikely to be significant. Financial instruments The company carries certain financial assets and liabilities at fair value, including derivatives as well as assets and liabilities of the life assurance operations. Asset and liabilities are priced using a quoted market price where available or by using a valuation model. Valuation models use data such as interest rate yield curves, equity prices, options volatilities and currency rates. Most of these parameters are directly observable from the market. Changes in fair value of financial assets will largely be offset by corresponding changes in the fair value of liabilities and therefore the net impact on equity is unlikely to be significant. Other technical provisions In the calculation of other technical provisions it has been necessary to make certain assumptions regarding future experience. The main assumptions relate to expense levels and sales assumptions. Sales and expense assumptions are based on the companies Strategic Plan approved by the board of directors in Ultimate parent undertaking The company is ultimately a 100% subsidiary of Banca Monte dei Paschi di Siena S.p.A.. The parent undertaking of the smallest group of undertakings for which group financial statements are drawn up, and in which the company s financial statements are included, is Monte Paschi Vita S.p.A., a company incorporated in Italy. The parent undertaking of the largest group of undertakings for which group financial statements are drawn up is Banca Monte dei Paschi di Siena S.p.A.which is incorporated in Italy and this company is considered by the directors to be the ultimate parent undertaking. The consolidated financial statements of Banca Monte dei Paschi di Siena S.p.A. are available from the Company Secretary, Banca Monte dei Paschi di Siena S.p.A., Piazza Salimbeni 3, Siena, Italy. The financial statements of Montepaschi Life (Ireland) Limited are available from the Company Secretary at 33 Sir John Rogersons Quay, Dublin 2. 42

44 Notes (continued) 31 Related party transactions The company is availing of the exemption under Financial Reporting Standards No. 8 Related Party Disclosures not to disclose details of transactions with group companies as the company is ultimately a wholly owned subsidiary of Banca Monte dei Paschi di Siena S.p.A. Mr. A. Bates is a partner in Dillon Eustace. Dillon Eustace received professional fees of 63,225 (2005: 47,383) in relation to services provided to the company during the year. The balance owing to Dillon Eustace at 31 December 2006 was 15,500 (2005: 39,231). 32 Subsequent events Subsequent to the year end a dividend of 17m (2005: 22.5m) was declared. This equates to per share (2005: 35.44). In February 2007, the MPS group chose AXA as its preferred joint venture partner for the life assurance business. There have been no other significant events affecting the company since the year end which require amendment to or disclosure in these financial statements. 33 Approval of financial statements The directors approved the financial statements on 26 March