Parent company balance sheet 167 Parent company profit and loss account 168 Accounting policies for the parent company balance sheet and profit and loss account 169 Notes to the parent company balance sheet 170 2.4 ADDITIONAL FINANCIAL INFORMATION
It serves 15 million customers in North America, Europe and Australia and manages close to EUR 200 billion in funds entrusted.
In 2005, ING’s underlying profit before tax increased by 19.4% to EUR 8,506 million. In our banking activities, aftertax risk-adjusted return on capital (RAROC) rose from 14.5% to 22.6%. In our insurance activities, the internal rate of return (IRR) improved from 12.1% to 13.2%.
In order to further improve customer satisfaction, ING aligned its brand positioning with the new mission statement introduced in 2004, which is: ‘To set the standard in helping our customers manage their financial future’. At ING, we want to excel in three aspects of client service: ‘being easy to deal with’, ‘treating customers fairly’ and ‘delivering on promises’. This is how we want to position our brand. In 2005, a strategy was devised to promote and implement this brand positioning worldwide. Throughout the organisation, business units are developing and implementing action plans to make sure they move towards ING’s customercentric positioning.
Total profit before tax 2,031 1,623 25.1% Underlying profit before tax* 2,021 1,612 25.4%
• Further strengthening of position in Central Europe as leading foreign life insurer and pension provider
In South America, underlying profit before tax declined 34.9% to EUR 54 million due to lower earnings in Chile, including the impact of lower investment income due to low interest rates and reserve strengthening in the health business. Premium income increased 9.3% to EUR 597 million, mainly due to higher life sales in Chile. Operating expenses increased 25.0% due to higher staffing and office expenses in Chile as a result of IT improvements and customer-service enhancements. A loss in Brazil after reserve strengthening in the life and auto lines was not reflected in results, consistent with equity accounting for ING’s 49%stake in SulAmérica.
In Japan, underlying profit before tax increased 4.2% to EUR 74 million. Profits from the single-premium variableannuity and mutual-fund business increased due to strong growth in premiums resulting in higher fee income. Profits from the corporate-owned life-insurance business decreased mainly due to lower investment yields and higher levels of early surrenders.
Strengthening distribution As ING does not have its own banking subsidiaries throughout the region except in China and India, distribution is through tied agents and partnerships with banks to improve the effectiveness of each sales channel. ING has developed several joint ventures and focused on strengthening partnerships with local banks and securities houses, such as the deepening of the partnership with ANZ Group to form ING New Zealand.
After-tax RAROC 22.3% 12.2% Economic capital (in EUR billion) 8.5 9.6
The after-tax risk-adjusted return on capital (RAROC) from Wholesale Banking improved from 12.2% in 2004 to 22.3% in 2005, lifted in part by the impact of divestments. Underlying RAROC after-tax improved from 14.9% to 16.7%. The pre-tax RAROC of the Wholesale Banking activities in the Netherlands remained strong, while Belgium showed a slight decrease. The pre-tax RAROC in the rest of the world, excluding divestments, improved to 16.4% from 11.8%. Total economic capital decreased to EUR 8.5 billion from EUR 9.6 billion in 2004, mainly due to the divestments of ING BHF-Bank, the Asian cash equities business, CenE Bankiers and Baring Asset Management.
In Romania, an innovative retail-banking branch network was started up in July 2004. By December 2005, 77 outlets serving more than 150,000 retail customers had been opened in Romania’s main cities. Savings are growing rapidly.
High level of customer satisfaction On average, 78% of customers said they received better service from ING Direct than from other financial institutions. ING Direct believes in knowledgeable, accurate, quick and customer-friendly service. Transactions such as deposits and withdrawals are dealt with largely over the internet or by the voice-response system. The high level of customer satisfaction is also acknowledged by external parties as shown by the many awards ING Direct won in 2005.
ING Real Estate’s total portfolio, including the finance activities, increased 39.5% to EUR 69.9 billion, driven mainly by the investment-management activities. ING Real Estate’s investment-management portfolio grew by 52% to EUR 47.1 billion. The record growth was driven by the acquisitions of the portfolios of Gables Residential Trust in the United States and Abbey National in the United Kingdom, along with a strong inflow into 13 new funds that were created in 2005. Pre-tax profit of ING Real Estate decreased from EUR 365 million to EUR 349 million. ING Real Estate’s Finance and Investment Management divisions delivered a very strong performance, but the profit of the Development division was affected by an accounting change leading to the later recognition of sales results and by an impairment on a project in Poland.
Other key aspects in the success of ING IM in 2005 were cost reductions. This was the result of scale advantages as discussed above, but also of strong cost control in absolute terms. The development of better back-office systems and the limited outsourcing of some non-core back-office activities contributed to cost reductions. Other developments in this respect were the restructuring and partial outsourcing of IT operations of ING IM Europe and the integration in Asia of several services into a central regional office in Hong Kong.
Responsible lending and investment Financial-services providers are increasingly being held accountable for the actions of their corporate clients. ING’s wholesale banking operations use policies called the Corporate Social Responsibility Statements to make sure companies that request financing are not involved in areas that are incompatible with ING’s environmental, social or ethical values.
REPORT OF THE SUPERVISORY BOARD With corporate governance and compliance high on the agenda, the Supervisory Board discussed a wide array of subjects in 2005, most importantly the quarterly results and strategic issues.
Retirement of Aad Jacobs and Paul de Meester Aad Jacobs was eight years on the Supervisory Board following his retirement as chairman of the Executive Board in 1998. Also as a member of the Supervisory Board he was very dedicated and committed to the interests of ING. His broad and in-depth knowledge and experience helped us in further developing ING. Aad Jacobs was member of the Audit Committee since 2000 and chairman as of 2003, leading that committee into an era of much more responsibilities. He very much contributed to the development of the Audit Committee.
We would like to thank both Mr. Jacobs and Mr. De Meester for their contributions to ING’s development during their eight years on the Supervisory Board. Both were outspoken personalities, who also contributed to the team spirit.
The board of the Trust Office reports on its activities through an annual report, which has been included on pages 59-60 of this annual report.
Under the terms of the Dutch Act on the Supervision of the Credit System 1992 and the Insurance Industry (Supervision) Act 1993, declarations of no objection from the Dutch Minister of Finance are to be obtained by anyone wishing to obtain or hold a participating interest of at least 10% respectively in ING Group or to exercise control to this extent via a participating interest in ING Group.
Eli P. Leenaars (Born 1961, Dutch nationality) Eli Leenaars studied civil law at the Catholic University of Nijmegen and received an LLM from the European University Institute in Florence, Italy and attended the Harvard Graduate School of Business in Boston. After a traineeship at ABN AMRO Bank, he joined ING in 1991, where he held various management positions, including chairman of ING Poland and of ING Latin America. He was appointed a member of the Executive Board of ING Group in April 2004. He is responsible for Retail Banking (Netherlands, Belgium, South-West Europe, Poland and India). He is also in charge of Operations/IT and private banking.
Wim Kok (Born 1938, appointed in 2003, term expires in 2007, Dutch nationality) Former Minister of Finance and Prime Minister of the Netherlands. Other business activities: member of the Supervisory Board of each of Royal Dutch Shell plc and TNT N.V. (listed companies). Member of the Supervisory Board of KLM Royal Dutch Airlines. Chairman of the Supervisory Board of the Anne Frank Foundation. Member of the Supervisory Board of each of the Rijksmuseum, the National Ballet and the Music Theatre, Amsterdam, AGO Foundation and the Netherlands Cancer Institute, Antoni van Leeuwenhoek Hospital. Member of the Board of Start Foundation.
The activities involved in the administration of shares are performed by the Algemeen Administratie- en Trustkantoor BV, Amsterdam.
A policy on outside positions of Management Council members was implemented in 2005 to avoid potential conflicts of interest. The policy governs outside positions held by ING’s senior management. Managers need the consent of the Executive Board to hold positions with potential conflicts of interest. These positions are administered at Corporate Compliance. Management Council members have to sign off annually on the outside positions reported.
The Executive Board members are not allowed to sell shares obtained either through the stock-option or the performance-shares plan within a period of five years from the grant date. They are only allowed to sell part of their performance shares at the date of vesting to pay tax over the vested award. Shares obtained from exercised stock options may only be sold within a period of five years from the grant date of the options to pay tax over the vested award.
In 2003, the compensation benchmark report identified a significant compensation gap at total direct compensation levels between ING’s Executive Board and its peer group counterparts. Key recommendations from the report included that in order to close the gap, in particular the variable (performance-driven) pay component should be increased.
Pensions Executive Board members The pensions of the Dutch members of the Executive Board are based on defined-benefit plans, which are insured through a contract with Nationale-Nederlanden Levensverzekering Maatschappij N.V. The Employment Contract will terminate by operation of law in case of retirement (‘Standard Retirement’), which will take place on June 1 of the year that the individual has reached or will reach the age of 65. The retirement age has been changed from previous years (age 60) to 65 as a result of the change in the Dutch tax reform; Executive Board members that are age 55 or older as of 1 January 2005, maintain the standard retirement age of 60. The Executive Board prospective pensions amount to a maximum of 60% of their base salaries. Starting in 2006, members of the Executive Board will be required to pay a portion of the pension premium. This change aligns with those outlined and agreed to in the Collective Labour Agreement. The non-Dutch members of the Executive Board have a pension plan linked to their home base.
Eric Boyer de la Giroday 31 4.3% 3 34 4.3% 3
MEMBERS OF THE EXECUTIVE BOARD Michel Tilmant 7,764 Cees Maas 7,764
ING GROUP (DEPOSITARY RECEIPTS FOR) SHARES HELD BY MEMBERS OF THE SUPERVISORY BOARD(1)
Mathieu Blondeel, chairman, Belgium Mirjam Busse, secretary, the Netherlands Adriana Dumitrescu, deputy chairman, Romania Marcel Koopman, deputy secretary, the Netherlands Jean-Claude Van Den Abeele, Freddy Dekerf, Olivier Vandueren, Dirk Verstrepen, Belgium Evetta Mircheva, Bulgaria Marie Martinkova, Czech Republic Hervé Laurent, Sebastien Barthe, France Thomas Meder, Klaus Eichwald, Germany Maria Tapini Orianou, Greece Laszlo Szabo, Hungary Alan Maher, Ireland Arsène Kihm, Denis Richard, Luxembourg Bob Bohlander, Eric van den Broek, Wim Evers, Bas Hofstee, Gerlinde Korterink, Maarten Kramer, Paul Zoet, the Netherlands Mieczyslaw Bielawski, Mariusz Cieslik, Jaroslaw Szczesny, Poland José Sanz Gomez, Gregorio Tejedor Mingo, Spain Thomas Wipf, Switzerland Mike Sharman, Sati Khaira, United Kingdom
Employee benefits Accounting for pension liabilities under ING GAAP was similar to IFRS-EU; however, at transition to IFRS all unrecognised actuarial gains and losses were charged to shareholders’ equity. Under IFRS additional provisions for certain employee benefits are required.
Taxation Deferred taxation was adjusted for the (deferred) tax effect of the above differences between ING GAAP and IFRS-EU.
In March 2005, ING Group finalised the sale of Barings Asset Management to MassMutual Financial Group and Northern Trust Corp. The sale resulted in a net gain of EUR 254 million.
For certain financial assets and liabilities, including OTC derivative instruments, no quoted market prices are available. For these financial assets and liabilities fair value is determined using valuation techniques. These valuation techniques consider, among other factors, contractual and market prices, correlations, time value of money, credit, yield curve volatility factors and/or prepayment rates of the underlying positions. All valuation techniques used are approved by the applicable internal authorities. In addition, market data used in these valuation techniques are validated on a daily basis.
ANALYSIS OF INSURANCE BUSINESS Where amounts in respect of insurance business are analysed into ‘life’ and ‘non-life’, health and disability insurance business is included in ‘non-life’.
FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES The fair values of financial instruments traded in active markets (such as publicly traded derivatives and trading and available-forsale securities) are based on quoted market prices at the balance sheet date. The quoted market price used for financial assets held by the Group is the current bid price; the quoted market price used for financial liabilities is the current ask price.
The Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment.
If the Group purchases its own debt, it is removed from the balance sheet, and the difference between the carrying amount of the liability and the consideration paid is included in net income.
Expense recognition Expenses are recognised in the profit and loss account when a decrease in future economic benefits related to a decrease in an asset or an increase in a liability has arisen that can be measured reliably.
Equity securities 79,290 74,015 Debt securities 7,140 2,673 Other investments 14,531 974
APPRAISAL OF INVESTMENT PROPERTY DURING THE LAST FIVE YEARS BY PROFESSIONALLY QUALIFIED VALUERS
Gross carrying amount as at 31 December 2,362 2,446 Accumulated depreciation as at 31 December -83 -15 Accumulated impairments as at 31 December -8 -22 Net book value 2,271 2,409
B warrants In 1998, ING Groep N.V. authorised the issue of a maximum of 17,317,132 B warrants, of which 17,220,200 have been issued. As at 31 December 2005, 17,189,554 B warrants were outstanding (2004: 17,190,610). B warrant holders are entitled to obtain from ING Groep N.V., for a fixed price, depository receipts for ordinary shares in the proportion of 1 B warrant to 2 depository receipts. B warrant holders may exercise their rights at their own discretion but no later than 5 January 2008. As at 31 December 2005, no B warrants (2004: nil) were held by group companies of ING Group.
Total unused tax losses carried forward 1,689 1,047 Unused tax losses carried forward not recognised as a deferred tax asset 398 64 Unused tax losses carried forward recognised as a deferred tax asset 1,291 983
Loans and advances to customers 89,539 9,906 17,918 52,669 144,880 15,546 330,458
– investments for risk of policyholders 100,961 100,961 77,662 77,662 – non-trading derivatives 7,766 7,766 – designated as at fair value through profit or loss 10,230 10,230
The estimated fair values correspond with the amounts at which the financial instruments could have been traded on a fair basis at the balance sheet date between knowledgeable, willing parties in arm’s-length transactions. The fair value of financial assets and liabilities is based on quoted market prices, where available. Because substantial trading markets do not exist for all of these financial instruments various techniques have been developed to estimate their approximate fair values. These techniques are subjective in nature and involve various assumptions about the discount rate and the estimates of the amount and timing of the anticipated future cash flows. Changes in these assumptions could significantly affect the estimated fair values. Consequently, the fair values presented may not be indicative of the net realisable value. In addition, the calculation of the estimated fair value is based on market conditions at a specific point in time and may not be indicative of future fair values.
Expenditure from Life underwriting includes an amount of EUR 220 million in 2005 (EUR 100 million in 2004) in relation to reserve strengthening for Insurance Asia Pacific as further described under Segment Reporting.
SECONDARY REPORTING FORMAT – GEOGRAPHIC SEGMENTS ING Group’s six business lines operate in seven main geographical areas: Netherlands, Belgium, Rest of Europe, North America, Latin America, Asia and Australia. Geographical distribution of income is based on the origin of revenue.
Cash in company acquired / disposed 0.1 0.1 Cash outflow / inflow on acquisition / disposal -0.1 -0.1 -0.2 0.7 0.3 1.0
Loans and advances to customers 0.8 0.8 -2.2 -2.2 Amounts due from banks 0.3 0.3 -1.4 -1.4
The regional and local risk managers in the business lines have a functional reporting line to the Corporate Risk Managers; they ensure day-to-day risk analysis, proper measurement and controls, registration of risks and policy development within the overall risk governance framework.
In the sections below, the risk categories are sub-divided by types of risk and for each type of risk the applicable risk measurement method that ING practices is described, including a quantification of the risks.
(1) Diversification cannot be calculated for the columns Low and High since the observations for both the individual markets as well as total VaR may come from different dates.
The sensitivity to interest rates changes is explained below under ING Insurance – Interest rate sensitivity.
Before risk After risk Before risk After risk mitigation mitigation mitigation mitigation
Through scenario analysis ING Insurance measured the potential changes in the reported earnings of the insurance operations resulting from an instantaneous increase/decrease on 31 December 2005 in foreign exchange markets of 10%. In addition, ING has estimated the impact to the 31 December 2005 shareholders equity of ING Insurance from such a change in foreign exchange markets.
The tables below are based on EUR 172 billion of general account fixed income assets on 31 December 2005 and exclude equities and real estate but include preferred shares.
Sovereigns 24.0% Financials 20.5% Mortgages/retail 18.8% Securitisations 15.8% General industries 4.8% Food, beverages and personal care 1.7% Chemicals 1.5% Automotive 1.1% Media 1.0% Other 10.8%
GEOGRAPHICAL SPREAD: ING INSURANCE PORTFOLIO, BY REGION AS % OF TOTAL OUTSTANDINGS
NOTES TO THE PARENT COMPANY BALANCE SHEET OF ING GROUP (CONTINUED)
Property in own use Under IFRS-EU, property in own use is measured at fair value with changes in fair value recognised in equity. Negative revaluation reserves on a property-by-property basis are charged to the profit and loss account. Subsequent recoveries are recognised as income up to the original cost. Depreciation over the fair value is charged to the profit and loss account. On disposal any revaluation reserve remains in equity and any difference between the carrying amount of the property and the sales price is reported in the profit and loss account. Under US GAAP, property in own use is measured at cost less depreciation and impairment. Depreciation over the cost basis is charged to the profit and loss account. Realised results on disposal are reported in the profit and loss account. Impairments are an adjustment to the cost basis and are not reversed on subsequent recovery.
– 10bp lower short term rates for the period 2006-2015: assumes a parallel shift of the yield curve for this period. The discount rate is adjusted accordingly. – One percentage point decrease in assumed investment returns for equity and real estate investments; – Ten percent fall in market value of equity and real estate investments; and – Local regulatory minimum capital requirement.
All these ratings, from both Standard & Poor’s and Moody’s, have a stable outlook. An overview of the ratings is given on page 187.
BIS The Bank for International Settlements (BIS) is an international organisation which fosters international monetary and financial co-operation and serves as a bank for central banks. BIS has set a minimum for the solvency ratio reflecting the relationship between capital and risk weighted assets. The ratio should at least be 8%.
FUTURE CONTRACTS Future contracts are commitments to exchange currencies or to buy or sell other financial instruments at specified future dates. Exchanges act as intermediaries and require daily cash settlement and collateral deposits.
INTEREST BEARING INSTRUMENT An interest bearing instrument is a financial asset or a liability for which a time-proportionate compensation is paid or received, in relation to a notional amount.
NET ASSET VALUE The net asset value is used in the equity method of accounting. The initial net asset value of the investment is determined by the fair value of the assets and liabilities of the investee. After the initial valuation of assets and liabilities of the investee at fair value, the assets and liabilities of the investee are valued in accordance with the accounting principles of the investor. The profit and loss account reflects the investor’s share in the results of operations of the investee.