Irish Life profits dwarfed by potential bank losses
THE top brass at Irish Life & Permanent's life insurance arm could be forgiven for developing a bit of a complex.
Yesterday, the country's largest life insurer delivered a 57pc rise in full-year operating profits, a stellar result even for non-recessionary times.
And no-one gave a damn.
Because no matter how great the Irish Life results look, the gains there are tiny in comparison to the potential losses on the banking arm.
Permanent TSB booked impairments of about €420m last year on its €38bn loan book, dwarfing the €160m in operating profits notched up by Irish Life.
The level of future losses on the banking portfolio, which includes €27bn of Irish mortgages, is the great and terrifying unknown.
If the Central Bank pencils in a harder landing for mortgages in the next stress tests, then Permanent TSB's capital target could go up again.
The nightmare case scenario is that the new target is too high for IL&P to fund, or that Permanent TSB is forced into a capital-destructive fire sale of its non-core assets.
Either way the result is the same -- IL&P would finally have to join every other indigenous bank and go cap in hand to the taxpayer.
A profitable life insurance company isn't much use to investors if the investors don't own it any more -- a reality reflected in IL&P's dismal share price (which values the massive bancassurer at just €240m).
The group's chiefs argue that the prospect of State ownership or any State investment is remote, but then turkeys rarely vote for Christmas.
The best way to avoid accepting state cash is to make sure the life insurance business is profitable enough to plug any future holes in the bank.
Yesterday's results make it clear that Irish Life is profitable, but the sustainability of those profits is open to debate.
The profit surge reported was largely owing an improvement in "persistency", or the number of people surrendering their policies.
In layman's terms, when the recession hit, Irish Life was expecting a lot of people to let their life insurance policies lapse and stop paying into their pensions.
The actual out-turn was better than the anticipated hit, so they booked a nice whack of profits -- whether the same feat can be accomplished next year remains to be seen.
On the plus side, Irish Life's 2010 earnings are a low point in the recessionary cycle, and an improvement in Ireland's fortunes would see the insurer make profits from more sustainable sources.
IL&P also seems willing to take the necessary steps to make sure the life insurance captain doesn't go down with the bank's potentially sinking ship.
Yesterday, the group's boss Kevin Murphy said he was "very open" to various solutions to resolve Permanent TSB's future, including selling or merging the bank.
If they can pull off that feat by this time next year, and if they can return to the market with another 57pc increase in life-operating profits, then people will definitely care.