Parent company balance sheet 210 Parent company profi t and loss account 211 Parent company statement of changes in equity 212 Accounting policies for the parent company balance sheet and profi t and loss account 213 Notes to the parent company balance sheet 214 2.3 Other information
Shareholders’ equity and net profi t on the basis of US GAAP 221 Notes to the differences between IFRS/-EU and US GAAP 222 RAROC performance 227 Embedded value 228 Credit ratings 232 Capital base 233 Financial glossary 234
SUPERVISORY BOARD Cor A.J. Herkströter (69), chairman Eric Bourdais de Charbonnière (67), vice-chairman Luella Gross Goldberg (69) Paul F. van der Heijden(1) (57) Claus Dieter Hoffmann(2) (64) Jan H.M. Hommen (63) Piet C. Klaver (61) Wim Kok(2) (68) Godfried J.A. van der Lugt (66) Karel Vuursteen (65) (1) Retirement as of 24 April 2007 (2) Nominated for reappointment as of 24 April 2007
Audit Committee Jan H.M. Hommen, chairman Claus Dieter Hoffmann Wim Kok (as of May 2006) Godfried J.A. van der Lugt
Corporate Governance Committee Cor A.J. Herkströter, chairman Eric Bourdais de Charbonnière Luella Gross Goldberg Paul F. van der Heijden
John Hele and Koos Timmermans are nominated for appointment to the Executive Board as of 24 April 2007. Henk Breukink, Peter Elverding and Piet Hoogendoorn are nominated for appointment to the Supervisory Board. The Shareholders’ Meeting will decide on these nominations on 24 April 2007.
• ING’s record profi t demonstrates its solid and diversifi ed earnings capacity from high- quality franchises
• ING manages capital actively to redeploy in many growth opportunities across the Group
Impairments/additions to the provision for loan losses (in EUR million) 114 99 487 1,288 2,099
Figures per ordinary share (in EUR) Net profi t 3.57 3.32 2.71 2.00 2.32
Capital ratios ING Group debt/equity ratio 9.0% 9.4% 10.2% 14.4% 19.9%
Net profi t growth 7% 25% n.a. –10% –2% Insurance Value of new life business (in EUR million) 807 805 632 440 519 Internal rate of return (life) 13.3% 13.2% 12.1% 10.9% 11.5%
Assets under management (in EUR billion) 600 547 492 463 449
(1) Figures according to Dutch GAAP. (2) Including inter-company eliminations. (3) Including other impairments.
ING has six business lines. A clear client focus and strong business logic are the key elements in this structure.
Insurance Europe Operates the insurance and asset management activities in Europe. Main insurance activities are in the Netherlands, Belgium, Spain, Greece and Central Europe. Here we offer life insurance with a particular focus on pensions. In the Netherlands and Belgium we also offer non-life insurance.
Insurance Americas Provides insurance, investment, retirement and asset management products and services in the region. In the United States, ING is a top-10 provider of retirement services, based on sales. In Canada, we are the leading property and casualty insurer, based on gross premiums. We are also active in Mexico, Chile, Peru and Brazil.
Insurance Asia/Pacifi c Conducts life insurance and asset/wealth management activities in the region. We are well-established in Australia, Hong Kong, Japan, Malaysia, New Zealand, South Korea and Taiwan. Our activities in China, India and Thailand are key future growth engines.
Retail Banking Offers retail banking services in the mature markets of the Netherlands and Belgium, and in the developing markets of Poland, Romania, India and China. Private banking is offered in the Netherlands, Belgium, Luxembourg, Switzerland and various countries in Asia, Latin America and Central and Eastern Europe.
ING Direct Operates direct retail banking activities for customers in Australia, Canada, France, Germany and Austria, Italy, Spain, the United Kingdom and the United States. The main products offered are savings accounts and mortgages.
term growth potential. Retirement services, ING Direct, and our life insurance activities in developing markets are all good examples of this. In many cases we are also able to outgrow the competition in mature markets by focusing on selective product and client segments.
Improving our execution of the business fundamentals is another cornerstone of our strategy. In 2006, we further improved the effi ciency of our operations. Customers are the central driving force of our operations, and all ING businesses now measure customer satisfaction and develop concrete action plans to improve their customer focus. These efforts are already paying off. We have been able to increase our customer base, and expand our product offering. We are also expanding our distribution capacity, making optimal use of direct channels and the bancassurance possibilities that ING offers.
We are faced with a growing emphasis on compliance, additional regulation and increased complexity in accounting and reporting. Our commitment to fully comply with all rules and regulations in the jurisdictions in which we operate stands fi rm. Complying with regulations is our licence to operate. It is a responsibility that all our employees share, regardless of their position within the company. Knowing, understanding and operating by the rules is a natural part of every employee’s mindset, and we continuously strive to improve compliance awareness within the organisation.
ING performed very well in 2006. I am particularly pleased that we have been able to further enlarge our business franchise. We attracted more and increasingly satisfi ed clients, launched new products and expanded our distribution capacity.
In 2006, our underlying business performance remained strong, helping us sustain our growth momentum. We managed to raise net profi t by 6.7% to EUR 7,692 million and realised a good return on capital. Our underlying net profi t – total net profi t without the impact of divestments and special items – increased by 24.3%. This was accomplished in an increasingly challenging environment, with growing competition and, in the second half of the year, a decline in long-term interest rates and a substantial fl attening of yield curves. At the same time, our businesses have also benefi ted in the current market environment, for instance from rallying equity and real estate markets.
The results in 2006 clearly illustrate that our people are very committed and motivated to make our strategy a success. Talent management and developing our future leaders are crucial for the future of our company. That is why we launched our fi rst International Graduate Programme, a talent development programme for recently hired graduates with leadership potential.
Three-year price development ING depositary receipts for shares 04/06 07/06 10/06 01/0701/04
SHARE PRICE PERFORMANCE In 2006, ING’s share price increased 14.6% to EUR 33.59 at year-end. Over the full year, ING outperformed the AEX by 1.2%-points. In the 3-year period 2004 – 2006 ING’s share price rose 79.1% and outperformed the AEX by 34.6%-points.
The (depositary receipts for) ordinary shares ING Group are listed on the exchanges of Amsterdam, Brussels, Frankfurt, Paris, New York (NYSE) and the Swiss exchanges. The (depositary receipts for) preference shares and warrants B are listed on the Euronext Amsterdam Stock Market. Warrants B are also listed on the exchange of Brussels. Options on (depositary receipts for) ordinary shares ING Group are traded at the Euronext Amsterdam Derivative Markets and the Chicago Board Options Exchange.
On 24 April 2007 the Annual General Meeting of Shareholders will take place in Amsterdam, in the Factory Theatre, located in the Czaar Peterstraat 213. The meeting will be webcast. The meeting documents will be available on the ING Group internet site www.ing.com as of 20 March 2007. Printed versions of the meeting documents can be obtained free of charge at ING Group N.V., Amstelveenseweg 500, 1081 KL Amsterdam as of 28 March 2007.
Price – year-end 33.59 29.30 22.26 Price/earnings ratio* 9.4 8.8 8.8 * Based on the share price at year-end and underlying net profi t per ordinary share for the fi nancial year.
Cumulative preference shares – authorised 1,080 1,080 – issued – –
United Kingdom 33 Netherlands 18 Belgium 13 United States and Canada 12 Luxembourg 8 Switzerland 5 Germany 1 Other 10 Total 100
ING share quotation ex fi nal dividend 2006 Thursday, 26 April 2007 (Euronext)
Payment date interim dividend 2007 Thursday, 16 August 2007 (Euronext) Thursday, 23 August 2007 (NYSE)
ING share quotation ex fi nal dividend 2007 Monday, 28 April 2008 (Euronext and NYSE)
Payment date fi nal dividend 2007 Monday, 5 May 2008 (Euronext) Monday, 12 May 2008 (NYSE)
GEOGRAPHICAL DISTRIBUTION OF ING SHARES* In percentages * 2006 fi gures, based on information provided by several large custodians.
Investors and fi nancial analysts may contact: ING Group, Investor Relations (IH 07.430) P.O. Box 810, 1000 AV Amsterdam The Netherlands
In 2006, ING created value by focusing on profi table growth and excellence in execution, which are the cornerstones of our strategy. The consistent implementation of our strategy has led to good fi nancial results and a substantially higher Total Shareholder Return than the average of that of our peers over the past three years.
Our strong and diversifi ed earnings capacity and returns at satisfying level in all business lines show that the consistent implementation of our strategy is paying off. ING continues to offer a solid increase in Total Shareholder Return (TSR). Amongst the peer group of 20 global fi nancial organisations, ING ranks second with a TSR of 109% over a three-year period since 2004. This exceeds our fi nancial objective to offer our shareholders a higher total return than the average of that of our peers over the longer term.
We believe that ING is well positioned in the fi nancial sector with banking, insurance and asset management activities. All these activities are strong and successful in their own right. In addition, we leverage value from the combination of these activities in two ways. First, there is an increasing convergence between the banking, insurance and asset management industries in terms of saving and pension products. ING capitalises on this convergence through product development and diverse sales expertise, thereby focusing on customer needs and offering them the products they need to manage their fi nancial futures.
• Solid increase in Total Shareholder Return • Diversifi cation enables active capital allocation across businesses to generate high growth and return • Profi table growth across businesses • Improving execution of business fundamentals
Growth can be achieved in any market as long as we put our customers fi rst, know exactly what their preferences are and how we can best serve them. What differentiates companies is their ability to do their basic business with excellence. Satisfi ed customers provide a good platform to further expand product offerings and attract new customers. Over the past two years, ING has launched a number of initiatives, especially in its mature markets, to improve customer centricity. To check our progress, we continually monitor customer satisfaction.
Important progress has been made in 2006 in improving risk modelling and measurement techniques. At Group level, we are developing risk metrics that capture bank and insurance risk into a single view. We signifi cantly improved the quantifi cation and our understanding of the credit risk in our banking book in line with Basel II, and on the insurance side, we have introduced a market consistent framework which enables more accurate pricing of complex products.
We believe that ING is well positioned to capitalise on three fundamental trends that are globally reshaping fi nancial services and the competition to be leaders in our industry, namely ageing, technological development and a shift of economic power from West to East. We are using these trends to drive our three growth engines: retirement services, ING Direct and our life insurance operations in developing markets.
The 2006 results show that our growth engines continued to be on solid footing. Our retirement services business in the US had a good year which is also refl ected in our market rankings. US Retirement Services maintained its number one position in the K-12 market as measured by sales and participants. It also maintained its number two position in the small corporate market.
ING Direct was able to increase profi ts in a very challenging interest rate environment. Our residential mortgage portfolio reached EUR 69 billion, and in terms of profi t, mortgage business approached break-even in 2006. Although, there is increased competition in some markets, ING Direct continues to attract many new customers. ING Direct now accounts for 7% of ING’s total underlying profi t, compared with 3% in 2003. Our life insurance business in Asia/Pacifi c posted a 13.2% rise in the value of new business. For some years now, this business line contributes around 50% of ING Group’s total value of new business – a clear refl ection of how economic growth is shifting from West to East. In Central Europe, VNB was up 13.8%.
For long-term growth, we do not only expand existing businesses, we also invest in future organic growth opportunities, such as life insurance activities in Bulgaria and Russia in 2006.
We will continue with our strategic course in 2007. Our fi rst priority is to build on the momentum of profi table growth. We will continue to analyse where we are creating value and where we need to deploy resources for improved growth and return. In those businesses where returns have stabilised at satisfying levels, we want to put more emphasis on growing our activities. On top of that, we will continue to invest in promising new business opportunities, thus planting the seeds for future growth.
Growth can be achieved in any market as long as we succeed in further enhancing the execution of our business fundamentals. We want to do so by improving customer satisfaction, including tightening up compliance at all levels. We will keep tight control over costs, and ensure risks are properly measured, managed and priced. Execution is an ongoing process. By improving every day, we want to drive our performance to the next level.
As such, ING keeps focusing on creating value for its shareholders in order to be able to reward them with a better total return on investment than the average of that of our peers in the fi nancial sector over the longer term.
Reputation and integrity are two important assets for fi nancial services providers. Over the past few years, the amount of regulation has increased and enforcement has become more vigorous. More generally, the cost of being in the fi nancial services industry continues to grow. At ING we have strengthened our compliance organisation accordingly. A Group-wide compliancy policy has been adopted that allows us to approach compliance in a uniform and consistent way throughout ING. Regulatory compliance is essential for us, not just from a regulator’s point of view, but also because ING’s relationships with its clients depend on integrity and fairness. Compliance is more than just adhering to a set of rules. It also refl ects the way we want to treat our clients and our shareholders – fairly and with excellent performance.
However great a strategy may be, it cannot be implemented without the right attitude and the right people at the company. At ING, investing in people to develop a high performance workforce with a common vision is very important. In 2006, we continued to put a lot of effort into embedding a performance culture at all business levels. We have rolled out a number of global projects to actively engage people to drive operational excellence from the top down as well as from the work fl oor up.
ING is satisfi ed with the progress made with the strategic direction we embarked on in 2004. By keeping a constant and persistent course, we have created value for our shareholders. We have seen good steps forward on all fronts in 2006. We have been able to achieve further profi table growth in our existing businesses, to continue to invest in new growth opportunities and to further improve the execution of our business fundamentals. One of ING’s distinguishing features is our ability to reallocate the capital that we generate in our mature businesses to the most value-adding areas within the company, including our growth engines.
In 2006, ING again posted a solid increase in profi t. Total net profi t rose by 6.7% to EUR 7,692 million. Underlying net profi t, which is defi ned as total net profi t excluding the impact of divestments and special items, rose by 24.3% to EUR 7,750 million. This is the third consecutive year with a growth in underlying net profi t of more than 20%. Earnings per share rose to EUR 3.57 from EUR 3.32.
ING again posted strong results in 2006, driven by solid top-line growth, improved returns, sustained business momentum at our growth engines and good performance in the mature markets in which we operate. Costs remained under control while we invested in new growth opportunities. ING proposes to increase total dividend by 12% to EUR 1.32 per share, to be paid fully in cash.
ING Group Annual Report 2006 13 1.2 Our performance Report of the Executive Board
Insurance Europe 23 Insurance Americas 20 Insurance Asia/Pacific 6 Wholesale Banking 25 Retail Banking 19 ING Direct 7 Total 100
Execution Improving the execution of the business fundamentals is a priority for ING. Operating expenses remained under control, despite continued investments in new growth initiatives. Recurring expenses for the Group were up 2.4% in 2006, excluding one-off items, currency effects and expenses at the growth businesses of ING Direct, ING Real Estate and Insurance Asia/Pacifi c. The underlying cost/income ratio within the bank improved to 63.6% from 65.1% in 2005, showing the strong cost containment. On the insurance side, expenses to life premiums improved slightly to 13.26% from 13.28% in 2005, while expenses to assets under management improved to 0.75% from 0.82%.
Taxes and net profi t The effective tax rate increased to 19.2% from 15.5% in 2005, when total profi t included large tax-exempt gains on divestments of Group companies. The effective tax rate on underlying profi t decreased to 18.8% from 23.4%.
Underlying profi t before tax from life insurance increased by 23.0%. The life-insurance activities in the Netherlands, Latin America and Asia showed strong profi t growth, supported by increased sales, growth in assets under management and investment gains. The underlying profi t before tax from non-life insurance went up 22.7%, driven by higher results in the Netherlands and benefi ting from a favourable underwriting cycle. Canada showed lower but still good results, due to less favourable developments in prior-year reserves and lower investment related gains.
Underlying premium income increased 2.5% to EUR 46,834 million. Life premiums of total insurance increased 2.3%, or 3.3% excluding currency effects, mainly driven by strong growth of life premiums in Central and Rest of Europe, the US, Latin America and Australia. In the Netherlands and Belgium life premiums declined, while in Asia, growth in life premiums in all countries, especially Korea and Taiwan, was more than offset by Japan, which showed a signifi cant drop in premiums. Non-life premiums increased 3.8%, or 1.1% excluding currency effects, as lower premiums in the Netherlands were more than offset by higher premiums in all other regions, especially in Canada and Latin America.
Assets under management increased 9.6% to EUR 600 billion in 2006. Compared with 2005, growth was mainly offset by the negative impact of exchange rates of EUR 31.8 billion, while developments on stock markets contributed EUR 33.7 billion to growth. The net infl ow of EUR 43.8 billion was mainly realised by Insurance Asia/Pacifi c (EUR 11.2 billion), ING Real Estate (EUR 13.5 billion) and Insurance Americas (EUR 6.8 billion). Growth was achieved for the greater part in third-party assets, which increased by 14.7% to EUR 404.5 billion by year-end 2006. Proprietary assets increased 0.4% to EUR 195.5 billion.
Risk-weighted assets grew moderately within the Bank from EUR 320 billion to EUR 338 billion (5.7%). This modest growth was made possible through the execution of an ambitious securitisation plan that released a further EUR 8.1 billion of risk-weighted assets from the balance sheet during the year. The underlying growth of assets produced by the business was therefore much higher.
Much attention was paid during 2006 to the implementation of Basel II (the Revised International Capital Framework). The Basel II framework has three pillars. Pillar 1 calculates the minimum capital requirement. Pillar 2 is an overall review by the regulator of capital adequacy. Pillar 3 concerns the external reporting. Capital Management at ING is responsible for Pillar 2.
The centre piece of ING’s capital adequacy assessment process, the second pillar of Basel II, is the so called Capital Letter, which was fi rst produced in June 2006. It contains an analysis of the capital positions of ING Group, ING Bank and ING Insurance from multiple viewpoints: the regulatory viewpoint, the rating agencies’ perspectives and the internal economic capital methodology. It analyses whether solvency targets need to be adjusted due to/in light of economic circumstances, changes in requirements from
Capital management Contributing to effi cient allocation and distribution of capital
Shareholders’ equity (in parent) 38,266 36,736 + Group hybrid capital 7,606 7,883 + Group leverage (core debt) 4,210 3,969 Total capitalisation (Bank + Insurance) 50,082 48,588 –/– Revaluation reserves fi xed income and other 3,352 6,477 –/– Group leverage (core debt) (d) 4,210 3,969 Adjusted equity (e) 42,520 38,142 Debt/equity ratio (d/(d+e)) 9.01% 9.43%
Going forward the Capital Letter will be produced every year in June with an update in December to enhance the medium-term planning process. This document is not public information, but it is shared with regulators as part of the review of ING’s internal capital adequacy assessment process.
Capital management is to a large extent good housekeeping with the establishment of policies, procedures and routines. At the beginning of each year, a Funding Plan and Securitisation Plan are prepared describing all funding transactions. In 2006, the Delta Hedge Policy for employee options was renewed to take into account the changing regulatory and tax landscape. Not only to comply with regulations but also to make internal processes more transparent and effi cient for business units, procedures were written for capital contributions into the business and also for pension funds. The target maturity profi le and interest rate profi le of the core debt, both for ING Group and ING Insurance, are being written into policy.
Another aspect of capital management and good housekeeping is the continuous streamlining of the organisation, by tidying up the corporate structure and through divestments and acquisitions. 2006 was again a very active year with many divestments (some of which will be formally fi nalised in 2007): Piraeus, Williams de Broë, Deutsche Hypothekenbank, Nationale Borg, Degussa Bank and ING Trust. On the other hand, ING bought a mutual fund manager in Taiwan and the pension administrator AZL in the Netherlands.
Core Tier-1 20,058 17,643 Hybrid Tier-1 5,726 5,764 Total Tier-1 capital 25,784 23,407 Other capital 11,445 11,318 BIS capital 37,229 34,725 Risk-weighted assets 337,926 319,653 Tier-1 ratio 7.63% 7.32% BIS ratio 11.02% 10.86%
We made a signifi cant move forward with the integrated risk management approach in 2006, which was marked by a reorganisation of the Group Risk Function. A deputy Chief Risk Offi cer (CRO) was appointed, who is responsible for risk management and control on a consolidated level. The deputy CRO reports to the Chief Financial Offi cer (CFO) who continues to bear primary responsibility in the Executive Board for the Group Risk Function. It is the intention that the CRO function will be a full Executive Board function in 2007. The Operational, Information and Security risk functions have been merged into one function, the head of which reports directly to the deputy CRO. The Compliance function has been transferred fr om the Legal department to the Group Risk Function to further improve the visibility and effectiveness of Compliance. Other risk functions that report to the deputy CRO are Corporate Credit Risk Management (CCRM), Corporate Market Risk Management (CMRM) and Corporate Insurance Risk Management (CIRM). In 2006 the Model Validation Unit has been established. This unit validates risk models and reports to the deputy CRO.
Financial institutions in general are coming under closer scrutiny by society to ensure they comply with laws, regulations, standards and expectations. Bank regulators and other supervisory authorities in the EU, the US and elsewhere continue to scrutinise payment processing and other transactions under regulations governing such matters as money-laundering, prohibited transactions with countries subject to sanctions, and bribery or other anti-corruption measures. Regulators and other authorities have the power to bring administrative or judicial proceedings against ING, which could result, amongst other things, in suspension or revocation of ING’s licenses, cease and desist orders, fi nes, civil penalties, criminal penalties or other disciplinary action which could materially harm ING’s results of operations and fi nancial condition.
In 2006, ING strengthened risk management across all risk functions. The Executive Board decided to appoint a deputy Chief Risk Offi cer and, as a consequence, to reorganise the Group Risk Function. The change emphasises our commitment to risk management and our drive towards a more effi cient risk management process.
Credit risk (including Transfer risk) 7.6 7.0 Market risk 4.8 3.9 Operational risk 1.7 1.7 Business Risk 1.8 2.3 Total banking operations* 15.9 14.9 * Economic capital excludes divestments and special items.
Note: Figures based on 2006 economic capital models; enhancement programme expected to be implemented in 2007. Preliminary calculations show that this could increase economic capital up to 10%. All risks are subject to an independent control process; presented economic capital numbers are non-audited.
Shareholders’ Shareholders’ Interest rate sensitivity Net profi t equity Net Profi t equity
A priority during 2006 has been to increase compliance awareness Group-wide and to implement the ING Group Compliance Policy. The implementation of the ING Group Compliance Policy has been a key performance target for all senior managers. Further embedding in procedures and processes Group-wide has high priority to be completed in 2007.
In 2006, in the context of changing legislation, regulation and regulatory scrutiny ING revised, amongst other policies, its Financial Economic Crime Policy to comply with the third EU Anti-Money Laundering directive. As a result of the revision of the Financial Economic Crime Policy, a review of all customer fi les, to assist ING to prevent its businesses and systems from being used to launder money or fi nance terrorist activities, is in progress. An additional benefi t of reviewing customer fi les is that increased knowledge of its customers enables ING to provide services that are better tailored to customer needs.
Expenses in the Wholesale Banking segment were adversely impacted in 2006 by compliance-related costs of EUR 79 million.
One of the key risk metrics across the organisation is ‘economic capital’, which assesses our internal capital requirements. It describes the minimum level of capital that is required to absorb unexpected losses in times of severe stress given our AA target rating. Economic capital is also used for calculating our Risk Adjusted Return on Capital (RAROC) and economic profi t to assess business performance for bank operations.
Currently, we only disclose economic capital for ING Bank. For ING Insurance we internally implemented economic capital to cover all risks including insurance risk in 2005. Simultaneously Market Value-at-Risk limits were introduced to manage market and credit risks for the insurance activities globally. In addition we introduced market consistent pricing.
Figures shown by risk category in the fi rst table on page 18 refl ect all diversifi cation effects, including risk reduction between the risk categories. Diversifi cation effects that arise as a result of combining bank and insurance activities are not taken into account. Business risk is included to cover unexpected losses that may arise as a result of changes in volumes, margins and costs.
In 2006 Corporate Credit Risk Management introduced a signatory system for credit approvals in Wholesale Banking, which replaced the credit committees, with the exception of the highest Group Credit Committee. The latter part of 2006 saw a signifi cant roll-out of, and communication effort on the Basel II implementation
programme and Credit Risk economic capital inclusive of pricing tools. As a result of the work on Basel II and a revised method for calculating Credit Risk economic capital, ING made signifi cant progress in 2006 in quantifying credit risk in the Bank and is now planning to perform a similar exercise with respect to the investment portfolio of ING’s insurance operations.
Our aim is to maintain an internationally diversifi ed loan, bond and investment portfolio and to avoid large credit risk concentrations. This is supported by a system of risk limits which corresponds with the risk appetite of the Executive Board. Limits are set for countries, individual borrowers, issuers, counterparties, borrower groups and reinsurers which cascade down to all levels of the organisation. The breakdown of our portfolio in terms of credit risk ratings, expressed in S&P rating equivalents is given in the second table on page 18. Due to the different nature of the insurance and banking business the credit quality of the insurance portfolio is generally higher than that of the Bank.
Market risk arises from our trading and non-trading activities. Our aim is to measure, control and manage our exposure to market risk in line with the Executive Board’s risk appetite.
In addition to VaR, ING performs stress testing to monitor market risk under extreme market movements. This risk is measured weekly for the ING Wholesale Banking trading activity whereby exposures are shown per risk activity and per risk category and is restricted to a limit that is set by ING’s management.
EaR measures the loss of earnings over a period of one year resulting from amongst others an instantaneous increase of 1% in market interest rates. For 2006 the EaR measure was EUR –364 million. As compared to the EaR calculations presented in the 2005 Annual Report, the size of the applied shock to the interest rates has been reduced from to 2% to 1%. This has been done as the 1% scenario is more likely to occur in the current low interest rate environment than the 2% scenario. Applying the 2% instantaneous upward parallel shock to the year-end 2006 fi gures results in an EaR fi gure of EUR –640 million (2005: EUR –733 million). The reduction of the EaR fi gure in 2006 is mainly due to the fact that the EaR calculations have been changed this year in order to better align with the profi t & loss recognition under IFRS. The 2006 fi gures furthermore capture the convexity resulting from the embedded prepayment and offered rate options of the large Dutch mortgage portfolios.
NPV-at-Risk measures the full value impact to the banking books resulting from changing interest rates. For 2006 NPV-at-Risk was EUR –1,888 million. In line with the EaR calculations the interest rate scenario was also changed for the NPV-at-Risk calculations to a 1% move. Applying a 2% instantaneous upward shock to interest rates resulted in a NPV-at-Risk of EUR –4,261 million (2005: EUR –3,203 million). The considerable increase is mainly caused by ING Direct USA, which has an increasingly convex interest rate risk position. In addition, diversifi cation effects between ING Direct Canada and other portfolios decreased, further increasing ING Direct’s NPV-atRisk. In practice, the portfolio will be rebalanced in case of an upward interest rate move, signifi cantly mitigating NPV losses.
Liquidity risk The Corporate Market Risk Management function also monitors and manages the bank’s liquidity position, ensuring that ING can meet its payment obligations when they come due. The main objective of ING’s liquidity strategy is to maintain suffi cient liquidity in order to ensure safe and sound operations. This is achieved by spreading the day-to-day funding requirements (in tenor, currency and region), maintaining an adequate mix of funding sources and by holding a broad portfolio of highly marketable assets that can be easily used to bear disruptions. Another important component in ING’s liquidity strategy is to have adequate and up-to-date contingency funding plans in place throughout the organisation.
Market risk insurance ING Insurance is exposed to the risk that changes in interest rates, equity prices, foreign exchange rates and real estate prices affect its present and future earnings as well as shareholders’ equity. The most signifi cant risks are interest rate risk and equity risk. The impact on earnings is measured by an Earnings-at-Risk (EaR) measure. The impact on shareholders’ equity is measured under a scenario in which an instantaneous increase/decrease in equity markets and interest rates occurs (see the third table on page 18). These risks are managed through asset-and-liability management policies and procedures with a committee structure established at both business line and business unit levels.
The most signifi cant interest rate risk within ING’s insurance businesses exists in Taiwan where ING has material exposure to a sustained low interest rate environment in combination with long- term interest rate guarantees of 6-8% embedded in the life and health contracts sold by the business until 2001. The largest exposures to equity movements are in the ING business units in the Netherlands, United States, Canada and Belgium.
The risk framework was improved by better coverage of the risk assessments in the business units. In 2006 the operational risk management framework was extended to cover all ING entities. In addition, operational risk management systems for action tracking, incident management and scorecard evidencing were extended to all business units. The Audit Committee has been actively involved in the assessment of the risk reporting and receives regular updates on the company’s risk exposures, including Incident reporting.
For further information, please see the Risk Management section within the Annual Accounts on pages 185 to 208.
Premium income 10,552 10,702 –1.4% Operating expenses 1,805 1,869 –3.4% Underlying profi t before tax 2,328 2,021 15.2% Total profi t before tax* 2,362 2,031 16.3% * Total profi t before tax is defi ned as profi t before tax including divestments and special items.
Value of new life business (EUR million) 219 226 Internal rate of return 14.9% 14.6% Embedded value of life business (EUR million) 16,103 14,929
Underlying premium income decreased slightly by 1.4% to EUR 10,552 million. Higher life premiums in Central and Rest of Europe were offset by lower life premiums in Belgium, due to lower sales of single-premium investment products through the bank channel, and lower premiums in the Netherlands. The latter was caused by lower group life premiums and non-life premiums after legislative changes in income & accident insurance.
In Belgium, underlying profi t before tax fell by 21% to EUR 137 million, as higher non-life results were more than offset by a decline in life results mainly caused by the change in the commission structure in Belgium.
Central and Rest of Europe’s underlying profi t before tax increased 9% to EUR 280 million, mainly due to higher assets under management in the Polish pension fund, and strong sales in Hungary, Greece and Spain. This was partly offset by higher expenses for greenfi eld operations in Bulgaria and Russia.
ING Insurance Europe employs some 15,000 people in mature and developing markets throughout the region in life and non-life insurance and pension provision. Strong market positions have been attained. In the Netherlands, ING is the leading life insurer and third-largest non-life insurer; and in Belgium it is the sixth and ninth-largest, respectively (all fi gures based on gross-premium income). In Central Europe, ING is the market leader for pensions and life insurance combined, based on gross-premium income and pension infl ows.
Insurance Europe has three key priorities. First, continued profi table growth and effi cient allocation of capital across business units in the region. Second, to concentrate on wealth management and retirement services to meet the needs of an increasingly ageing population. Third, to continue improving effi ciency and risk management.
The Netherlands: advancing the business In 2006, Nationale-Nederlanden (NN) concentrated on increasing customer satisfaction, reducing costs, selling more profi table products, and improving compliance and risk management.
The independent annual Dutch Insurance Performance Survey showed improvements in customer satisfaction in 2006 in every segment in which NN operates. After two years of signifi cant increases, the growth rate in 2006 was less pronounced, which can be attributed to the continuous need to renew NN’s operational systems to prepare for future growth. One important reason for the improvement was the removal of administrative backlogs (except for pensions, where regulatory changes require policy adaptations). New functionalities and products were also added to NN’s broker extranet, contributing to a doubling of the number of online transactions compared with 2005.
As for cost reductions, actions to reduce the headcount at NN by 1,000 by year-end 2007 were ahead of plan, with a reduction of 900 at year-end 2006 compared with year-end 2004. Cost savings from that programme are progressing. However, additional investments are being made, due in part to new regulations which came into effect in 2007. The rationale behind these effi ciency programmes is not just to reduce costs, but to improve the quality of customer service, by creating faster and more automated administrative processes.
An essential element is the concept of Straight Through Processing (STP), under which a policy request by an intermediary is processed automatically and immediately, without human interference. STP was introduced for NN’s new car insurance in 2005 and in July 2006 extended to the Private Insurance Package covering personal, property and casualty insurance. At the end of 2006, 82% of all policy requests within the Package were processed automatically. The remaining 18% were still dealt with by employees, but even here, time-savings due to STP were huge.
NN continued to focus on product profi tability in 2006. While NN maintained pricing discipline and further rationalised its product range, increased competition in certain product segments put pressure on margins. NN also makes increasing use of bancassurance distribution to enhance new sales, and in 2006 intensifi ed sales of insurance products through ING Bank. Finally, NN further improved its compliance organisation in 2006, increasing the number of compliance offi cers and raising compliance awareness throughout the organisation.
Ongoing growth initiatives in Central Europe In Central Europe, ING made considerable progress in 2006 by implementing its strategy of growing its existing business while developing new initiatives. The result was visible in a sharp increase in VNB as well as double-digit growth in both life premium income and pension fund infl ows. Across the region, there is a shift in the insurance markets from regular to single-premium products, and ING captured its share of this growth in single-premium business.
ING reinforced its position as the leading pension provider in the region. In particular, the Polish pension fund – a consistent high achiever in terms of investment performance – enhanced its client base signifi cantly. The add-on pension fund acquisitions in the Slovak Republic in 2005 were successfully integrated in the ING organisation in 2006. Pensions are an important growth area as the countries of Central Europe are reforming their pension systems. The growth is especially manifest in the market for mandatory pension funds. With its good track record in investment management, ING is well-placed in this market.
The insurance businesses in Central and Rest of Europe devoted signifi cant efforts to broadening product ranges and distribution capacity. The number of new product launches more than tripled from 8 in 2005 to 30 in 2006. In the Czech Republic, cooperation with independent brokers led to a large increase in production. Spain has developed a franchise concept to attract and retain the best tied agents that will be used by other businesses in the region. In Greece, ING strengthened its bancassurance partnership with Piraeus Bank.
ING Investment Management Europe ING Investment Management Europe (ING IM) showed solid developments, especially due to the performance of its specialty products. At the end of 2006, 61% of the ranked assets at ING IM had a top-half ranking in peer group performance comparisons by Standard and Poor’s. Of ING IM’s total ranked assets, 35% had a Standard and Poor’s four or fi ve-Star ranking. ING IM is discussed in more detail in the Asset management chapter on page 46.
In 2006, ING Insurance Europe continued its solid performance in terms of both profi t and value creation. In the Netherlands, NN aims to confi rm its position as number one fi nancial services provider for the intermediary by focusing in particular on enhancing customer satisfaction and realising net growth. Further efforts will be made to enhance sales through ING’s banking channels. The process of increasing effi ciency through expense reduction and streamlining the organisation through renewed systems and rationalised product offerings will continue. Ongoing regulatory changes in the life insurance and pension markets will require additional investments and a continued focus on compliance, but will also create opportunities for NN, as these regulations make individuals more aware of their fi nancial situation after retirement.
Insurance Americas’ profi t before tax rose slightly, assisted by a 6.4% increase in total underlying income. Higher interest rates dampened overall profi t. US Retirement Services and Annuities continued to make a major contribution to the result. Latin America recorded a solid increase in profi t on the back of a strong increase in life premiums.
Underlying profi t before tax of Insurance Americas increased 0.7% to EUR 1,992 million in a rising interest rate environment, which resulted in investment-related losses on fi xed-income investments as bonds were traded to reposition the portfolio. Insurance Americas posted record underlying profi t in each of the past four years. Excluding investment-related losses, 2006 underlying profi t before tax of Insurance Americas increased 7.8%, led by strong results in the United States, Mexico and South America. Underlying profi t before tax in Canada declined 10.0%. Premium income grew 6.3%, to EUR 24,118 million, with higher life and non-life premiums across all countries. Operating expenses increased 4.6% to EUR 2,490 million, primarily due to normal business growth and increased sales agents in the competitive pension market in Mexico. Excluding currency impacts, premium income grew 6.0% and operating expenses rose 3.6%.
• Record profi t in the Americas for the fourth consecutive year
GEOGRAPHICAL BREAKDOWN OF PREMIUM INCOME in EUR million * Chile and Peru; not including ING’s joint venture in Brazil because it is a minority interest.
The internal rate of return (IRR) was impacted by the United States individual life business and decreased to 10.3% for both the Americas and the United States. Excluding the results of the individual life business, the IRR for the US businesses was 12.0%, or 12.8% in US dollars.
Growth in the US and Canada The United States businesses, which accounted for 61% of Insurance Americas underlying profi t before tax, recorded a higher result as strong sales of retirement services accumulation products and annuities were aided by good equity markets which together drove an increase in assets under management. US Wealth Management is one of the top-10 providers of retirement services and annuity products in the United States with strong top-10 positions in variable and fi xed annuities and a top-5 rank in retirement services sales. Retirement Services focuses on three growth markets: small/medium corporate plans, education plans, particularly those for kindergarten-through-twelfth-grade teachers and staff, and the rollover market which is becoming increasingly important as ageing baby boomers begin to shift from a savings focus to an emphasis on retirement income generation and protection. Retirement Services is also a leader in higher education, healthcare, and government retirement plan segments, and has a well regarded and very experienced management team. As such, the business has a strong competitive advantage. Retirement Services was one of the businesses in the United States that drove growth and value creation in 2006. The business recorded strong sales growth, aided by several large plans that were won during the year, such as the State of Missouri, Houston’s Methodist Hospital, and the City of San Jose in California. These sales translated into solid growth in assets under management – a key driver of income. Similarly, the Annuity business posted good sales growth from new products, strong equity markets and consumers’ growing preference for products that provide equity market upside along with downside protection.
Customer centricity ING’s mission is setting the standard in helping our customers manage their fi nancial future. In early 2006, the United States business unveiled its new brand message – ‘Your future. Made easier.’– in response to extensive consumer research, which showed Americans wanted the process of managing their money to be made easier. This customer centric focus was refl ected in several major initiatives undertaken during the year. For example, US Retirement Services nearly doubled the number of transition counsellors to help retirees and younger people who leave their jobs. Transition counselling is a service provided to employers who select ING as their retirement services provider. The job of the counsellors is to help answer questions and provide guidance in retirement savings.
The fi rst of the United States baby boomer generation – the 77 million Americans born between 1946 and 1964 – turned 60 in 2006, setting in motion more than USD 1 trillion of assets annually from maturing retirement plans. By 2020, about half of the baby boomers will have transitioned into retirement and will control two-thirds of all investable assets in the year. This will provide an unprecedented opportunity for companies like ING that have the products, services and expertise to grow retirement assets and to provide guaranteed lifetime incomes. This market has enormous potential, but it is also fi ercely competitive.
To remain a top-tier player in this market, ING is committed to allocating resources to areas that provide the best return. We are further investing in distribution in Wealth Management businesses by hiring additional wholesalers in Annuities and Retirement Services to help boost value producing sales. We are investing in operations and IT to improve capabilities, effi ciency and customer service. The US individual life business will continue its successful re-entry into the term life business – a product that meets a market need and provides a solid source of growth.
South Korea 27% 3,224 Australia/New Zealand 2% 230 Rest of Asia* 6% 872
Underlying profi t before tax from Insurance Asia/Pacifi c increased 38.9% to EUR 621 million, driven by South Korea (+44.5%) and Japan (+110.8%). Total profi t before tax increased 33% to EUR 636 million. During the year, Insurance Asia/Pacifi c continued to invest in the new and high-growth markets of China, India and Thailand.
The value of new business (VNB) written by Insurance Asia/Pacifi c was EUR 421 million, up 13.2% compared with 2005, driven by higher-margin sales. Taiwan, South Korea, Japan and Australia were the largest contributors to VNB. The internal rate of return increased to 16.8% from 15.0% last year, despite more competition.
Real economic growth in Asia continues to outpace the other regions, with increasing amounts of wealth being created. Growth in life insurance in Asia is similarly expected to outperform the rest of the world over the next 10 years. At the same time, almost all the Asian and Pacifi c markets are facing the challenge of ensuring a secure fi nancial future for their ageing populations. National regulators have introduced or are introducing regulation to deal with this challenge. These developments are driving rapid growth in retirement savings and diversifi cation from traditional bank deposits. As ING already enjoys leading positions in the current big markets and is well-placed in the future big markets, it is wellpositioned to secure long-term growth in the region.
Insurance Asia/Pacifi c is focused on growing and leveraging its core in order to accelerate growth. The shift in the market from guaranteed (fi xed-income) products to investment-linked (unitlinked ) products and the signifi cant increase in distribution via banks present various opportunities for ING. In line with these developments, ING’s strategic priorities are geared towards strengthening multiple distribution channels, introducing more profi table new product offerings, expanding organisational capabilities, increasing operational effi ciency, enhancing brand awareness and achieving scale in the asset management operations.
In Japan, underlying profi t before tax increased 110.8% to EUR 156 million largely due to hedging gains. SPVA sales momentum was dampened after an exceptional 2005 as the SPVA market slowed down and domestic competition increased. Meanwhile assets under management continued strong growth with a 12% increase in 2006. Growth in the corporate-owned life insurance (COLI) market also slowed down. However, sales were up in the more protection driven COLI products.
In the rest of Asia, underlying profi t before tax increased to EUR 41 million from EUR 20 million in 2005, driven by Malaysia and Hong Kong. The greenfi elds in China, India and Thailand recorded losses as ING continues to invest for future growth and profi tability. Nonetheless, sales in Thailand outperformed in a fl at market. In China, ING’s joint venture ING Capital Life Insurance Company set up branch operations in Shandong Province and opened up sales and marketing offi ces in both Liaoning and Shandong Provinces. The company also received approval from Chinese regulators to begin the set-up of branch operations in Henan Province. In India, 13 new branch offi ces were set up in 2006, taking the total number of branches to 90.
In Hong Kong, Korea, Malaysia and Taiwan, ING sells mainly through tied agents. ING Life Korea is the leading tied agency model in the region, where its success is based on selective recruiting, excellent training and support, and continuous performance monitoring. The South Korean model is now being used in other markets with the aim of achieving higher agent productivity, higher agent retention and better policy persistency. In China, for example, ING Capital Life has started several pilots based on the successful ING Life Korea agency model. In India, the tied-agent channel is gaining ground, the number of tied agents increased by more than 40% to over 26,000 in 2006.
In recent years, distribution via banks has grown rapidly compared with other channels. In a number of markets where banks are ING’s key distribution partners, VNB shows strong growth. ING offers a total solution approach to its bank partners, including marketing and organisational support. One of our greatest strengths is our good understanding of both the banking and insurance businesses, and how the two can augment each other.
Introducing more profi table new product offerings Most markets are showing a shift to investment-linked life insurance products. In Japan, the SPVA market had grown over the past years but has also become more competitive. Meanwhile South Korea and Taiwan, for example, showed increased sales of investment-linked products.
Increasing operational effi ciency On an operational level, ING aims to reap the benefi ts of scale through greater standardisation in key processes and systems. Regional roll-outs of straight-through processes have started, along with a large number of effi ciency projects. In line with Group risk and cost management, Insurance Asia/Pacifi c continues to improve operational risk management and cost management in the region. Implementing compliance policies also continues to be a high priority.
Achieving scale in asset management operations ING has a strong franchise for asset management in the region and is not just a manager of proprietary life portfolios. Over the past two years, it has increased market share in asset management services markedly, achieving faster growth over a wider geographical footprint than its major rivals. Growth was accelerated in 2006 by the acquisition of ABN AMRO’s local asset management business in Taiwan. Fund performance was also ontrack: over a one-year period to December 2006, 56% of ING’s mutual funds outperformed their respective benchmarks on an asset weighted basis. Asset management services in Asia/Pacifi c are discussed in more detail in the Asset management chapter on page 46.
Insurance Asia/Pacifi c once again delivered strong results in 2006, with 38.9% growth in underlying profi t before tax, driven by positive performance in Japan and South Korea. While competition in the region is increasing, ING is prepared to take the business of Insurance Asia/Pacifi c to the next level by growing and leveraging its existing core and by accelerating its priorities. These include further strengthening of multiple distribution channels, introducing more profi table new product offerings, expanding organisational capabilities, increasing operational effi ciency, enhancing brand awareness and achieving scale in the asset management operations. Continued emphasis will be placed on instilling a performance culture among employees to enhance operational effi ciency and optimise risk management.
The focus has been on delivering growth in Financial Markets, Structured Finance, Payments and Cash Management, and Leasing and Factoring. Financial Markets showed a decline in profi t that was to a large extent caused by fl at yield curves, low absolute levels of interest rates, market volatility at historic lows, a diffi cult market environment, particularly in the emerging markets component, as well as a lower revaluation of derivatives for which hedge accounting is not applied. General Lending continues to face pressure on credit margins due to generally excessive liquidity. ING Real Estate has continued to capitalise on strong investor demand for property funds and saw a strong improvement in its development business.
• Focus on clients’ interests, cross-selling and managing for greater value
• Rapid expansion of ING Real Estate • Selective investments in growth opportunities • Landmark deals refl ect geographic reach
Breakdown of underlying profi t before tax in EUR million 2006
The net release for the provision for loan losses was somewhat lower on EUR 121 million from a net release of EUR 127 million in 2005. The quality of the credit portfolio remains strong, although the fourth quarter of 2006 resulted in a net addition of EUR 20 million after seven quarters of net releases, as releases from old provisions diminish. The net release in 2006 equalled seven basis points of average credit-risk-weighted assets, unchanged compared to the net release in 2005.
Client coverage was further improved and simplifi ed after a number of top corporate clients were identifi ed as priority clients and then allocated additional resources, including a streamlined team of highly experienced bankers. A global event fi nance team was also established to advise clients on and coordinate transformational transactions. Mid-sized companies also remain very important to us and we continue to maintain strong relationships with them through the networks ING has built up across the Netherlands and Belgium, as well as in Romania and Poland. In Romania, for example, where we were the fi rst foreign bank to open a full-service branch, we now service three-fourths of the multinationals operating there.
To help build and sustain our business, Wholesale Banking continued to make strides towards looking and acting as a single brand differentiated by its core brand attributes of leading with knowledge, acting as a trusted adviser and fl awless execution. The rolling-out of a single ING brand globally is another important means by which to build and maintain strong client relationships.
ING also launched a secondary loan trading activity that focuses on trading and making markets in transactions that ING helped bring to the market, either through the syndications market or joined in another senior capacity. We continued to be a leading player in leveraged fi nance, whereby companies take on additional debt, with a focus on originate to distribute and maintaining quality risk monitoring.
Investments in payments and cash management have continued ahead of the January 1, 2008 launch of the Single Euro Payments Area, which will create one standard across Europe and offers a new market opportunity. ING has been making crucial investments to standardise its payment structure, training employees and actively informing clients ahead of the launch. We want to remain a major player in the European funds market.
ING Lease has boosted its European presence this year by acquiring Appleyard Vehicle Contracts in the UK and Autoplan in France. As a result the car lease business ranks among the top fi ve of manufacturer-independent vehicle leasing companies in Europe. ING has begun providing factoring solutions in Poland and Romania as part of its Central Europe growth strategy.
We have increased our investments in compliance to ensure we remain competitive and demonstrate to our clients that we have the highest possible compliance standards. We have focused on preparation for Basel II (the Revised International Capital Framework) and MiFID (the Markets in Financial Instruments Directive) and completed the customer due diligence programme, to help ensure that we apply the highest standards across all of our businesses and that we maintain an excellent reputation.
Landmark deals ING completed a number of top deals in 2006 that underscore our wide array of banking products and geographical reach. Wholesale Banking helped provide a consortium of private equity investors with fi nancial advisory services and the fi nancing of their offer for all outstanding shares of VNU, a global information and media company. ING and other fi nancial institutions together facilitated a EUR 4.1 billion term loan, a EUR 540 million revolving credit facility and EUR 1.3 billion worth of bonds that were oversubscribed during the syndication process. The total value of the transaction, amounting to approximately EUR 9 billion, makes this the largest public to private offer in the Netherlands.
ING also advised InBev SA, the world’s largest producer of beer by volume, on its 100% acquisition of Fujian Sedrin Brewery Company, one of China’s most profi table brewers. The Leuven, Belgium-based brewer chose ING as its sole fi nancial adviser for its offer of RMB 5,886 million (EUR 614 million). The transaction reaffi rms ING’s M&A advisory capabilities and cements the strong relationship with InBev, marking InBev’s fi fth deal in China in three years, all of which were advised and bridge-fi nanced by ING.
ING also advised private equity fi rms Cinven and Warburg Pincus when they set out to create the largest cable operator in the Netherlands. This included not only arranging for EUR 4.35 billion in fi nancing but also helping the consortium acquire Casema and Essent Kabelcom in almost simultaneous competitive auctions. Separately, ING advised a consortium led by Telegraaf Media Groep NV on its EUR 190 million acquisition of Sky Radio Ltd., a broadcaster with stations in the Netherlands and Germany, from News Corporation. ING also provided equity funding and acted as the sole underwriter. These transactions underscore the success of our cross-selling strategy.
Another priority has been to integrate fi nance and risk data. Through the combined efforts of risk management, fi nance and information technology we have been able to free up signifi cant economic capital. We also sought to drive down costs by creating effi ciencies in operations and information technologies, including the successful outsourcing of the UK equity clearing and settlement business. These initiatives reduce both development and maintenance costs.
Maximising value creation ING is committed to creating value for its shareholders by focusing on execution and through profi table growth. The Managing-forValue (MfV) initiative aims to create and measure value across all business lines. Within Wholesale Banking, the Target Operating Model (TOM) was launched in 2004 as one of our key tools to achieve value as it combines hitting targets with future growth, while optimising capital and improving effi ciency. This has resulted in a turnaround in the performance of our international network of activities and a refocusing of many business units in the pursuit of more profi table growth.
Although business conditions remain challenging, Wholesale Banking has had another profi table year, in large part due to putting the focus squarely on clients. We will continue developing a truly relationship-driven business, identifying and executing cross-selling opportunities and remaining vigilant in keeping costs under control. This strategy has moved the focus of the business onto new, more profi table priorities and has succeeded in generating good fi nancial results. ING Real Estate also continues to benefi t from rapid expansion.
In 2006, ING’s retail business performed well, despite fl attening yield curves and lower interest rates, thanks to initiatives in product development, direct distribution, cost control and process improvement. ING Retail Banking has a leading position in the attractive wealth accumulation market of the Benelux and is well positioned in the key developing markets of Central Europe and Asia, where it is using its skills and talent to support investments in growth. The focus areas are simplicity, customer satisfaction and cost leadership, because these are crucial for sustainable profi table growth.
Underlying income was 4.7% higher due to strong growth in almost all products, higher asset management fees and a capital gain on the sale of the stake in Banksys in Belgium. This was partially offset by the impact of fl attening yield curves, the continued low interest environment putting pressure on investment returns and a reclassifi cation of payment expenses from operating expenses to funds transfer commissions paid.
The addition to the provision for loan losses rose from EUR 90 million in 2005 to EUR 140 million in 2006, due to lower releases outside the Netherlands and a revision of parameters for provisions on non-performing loans. The addition rose to 15 basis points of average credit-risk-weighted assets from 11 basis points in 2005.
The underlying after-tax Risk-Adjusted Return On Capital (RAROC) from Retail Banking decreased slightly from 34.1% in 2005 to 32.5% in 2006 mainly due to model refi nements. The underlying pre-tax RAROCs of the Netherlands and Belgium continued to be strong on 65.9% and 60.5% respectively, while Poland jumped to 22.5% from 6.7% as economic returns increased. The pre-tax RAROC of the other countries declined to –2.3% from 3.0% due to a litigation provision and investments to support expansion at ING Vysya Bank, combined with an increase in economic capital.
Country developments Underlying profi t before tax from Retail Banking in the Netherlands rose 1.7% to EUR 1,410 million as volume growth in almost all products was largely offset by the impact of a fl attening of the yield curve and high compliance related costs in 2006. The residential mortgage portfolio in the Netherlands grew by 8.5% to EUR 99.3 billion. Operating expenses increased 1.3% as EUR 85 million in compliance costs and the effect of releases from employee benefi t provisions in both years was largely offset by lower pension costs and the reclassifi cation of payment expenses to commissions paid. Risk costs declined slightly from 18 basis points of average credit-risk-weighted assets to 17 basis points.
The other retail banking activities posted an underlying loss before tax of EUR 5 million compared with a profi t of EUR 50 million in 2005, due to the creation of a litigation provision in 2006, higher start-up losses in Romania and lower results in India, partly offset by higher results from ING Private Banking in Asia.
The Benelux is ING’s attractive wealth accumulation home market. Here we focus on selective growth while maintaining high returns and containing costs. Our leading position in the region’s retail fi nancial services market – with a 20% market share in savings, mutual funds and mortgages combined – has been attained by a combination of simplicity in products and processes, customer satisfaction and cost leadership.
The introduction of various innovative products has further enhanced customer service. One of these is ‘Voordeelhypotheek’: a simplifi ed mortgage at very competitive rates, largely responsible for Postbank maintaining return requirements and attracting new customers in the highly competitive mortgage market.
Postbank has further improved customer service with the start of the Postbank Shop formula. The fi rst shop opened in November 2006. Here customers can get personal support and advice or do their banking online. Over the coming years, there are plans for more Postbank Shops in major cities with long opening hours.
In 2006, ING started a review of the strategic positioning of ING’s retail banking business in the Netherlands. This is expected to be completed in the course of 2007.
The efforts in the fi eld of simplifi cation of products, processes and sales paid off leading to further control of costs. Other cost control initiatives are the further roll-out of small fl exible offi ces and reducing the number of branches with a cash desk. As in the Netherlands, improving customer satisfaction is one of the priorities. Customer satisfaction is pro-actively measured and followed-up by telephone interviews with our customers regarding their experience with the quality and service we provide to them.
The outsourcing agreements are part of ING’s Operations and IT effi ciency programme as announced in November 2005. Besides improving cost effi ciency, ING also outsources activities if other companies can do the job at a qualitatively higher standard. The effi ciency programme is expected to produce annual savings of about EUR 230 million, mainly related to Retail Banking, as of 2008.
Compliance Before the end of 2006 ING had to identify and register 80% of its private customers of ING Bank and Postbank in order to comply with the DNB (Dutch central bank) agreement regarding the WID law (Wet Identifi catie Dienstverlening: Law concerning Identifi cation in Services). This compliance project involves about 7.8 million individual customers of ING Bank and Postbank. As a special service for its elderly and disabled customers, ING had 25 mobile teams to visit customers at home.
Well positioned in developing markets With our presence in the key Central European markets of Romania and Poland, and the key Asian markets of China and India, ING is well positioned to capture growth. We focus on these markets since these are the largest in the respective regions.
In India, our 44% stake in ING Vysya Bank is a good starting position in a market with enormous growth potential. The ING Vysya Bank branch network expanded in 2006 with fi ve new branches and the upgrading of 16 extension counters to full branch status. Retail customers reached 1.5 million. ING Vysya Bank pioneered self-service banking in India, opening 11 Self’Banks in 2006 as part of a new network of 28 offsite ATMs.
ING has a 19.9% stake in the Bank of Beijing (BoB), China’s second-largest city commercial bank. As part of this strategic alliance, ING is committed to supporting the developments of BoB’s corporate governance, risk management and retail business. The partnership is strongly developing. ING has two seats on the executive board of BoB and in December 2006, a BoB delegation, led by its chairman, visited ING in Amsterdam to share our banking business practices.
Europe remains ING’s largest private banking market with assets concentrated in the Netherlands, Belgium, Luxembourg and Switzerland. In both the Netherlands and Belgium, ING Private Banking has further capitalised on ING’s retail and wholesale distribution channels to enhance cross-selling capabilities and achieve relatively strong growth in otherwise mature markets.
ING Private Banking is the second-biggest private bank in Belgium. Belgium successfully captured market share from competitors during the Belgian tax amnesty. ING’s Swiss operations showed strong resilience and continued to expand into Russia, Central and Eastern Europe, the Middle East, and in Latin America, where the private bank is focusing on Mexico and Brazil. Return on assets in Luxembourg continued to improve, as did profi tability.
Important trends in the fi eld of retail banking are simplicity, transparency and value for money. In 2006, ING Retail Banking addressed these trends very well and succeeded in simplifying products, services and channels and in containing costs. Retail Banking has a very strong position in the Netherlands and a good position in Belgium. In Eastern Europe, Retail Banking operates in Poland and Romania, and in Asia, Retail Banking is rapidly growing its franchise thanks to ING’s stake in ING Vysya Bank (India) and our stake in the Bank of Beijing (China).
In 2006, ING Direct achieved continued growth in residential mortgage lending, number of customers, funds entrusted and profi t. It maintained high levels of customer satisfaction and achieved a further increase in brand awareness – two key value drivers. These results were reached in a challenging environment, with rising short-term interest rates, a fl attening yield curve in each of the currency zones in which ING Direct operates, and increased competition. ING Direct continued to create value for customers by offering a focused range of simple and transparent banking products, alongside excellent service delivered through direct channels.
ING Direct showed a strong growth in underlying profi t before tax in 2006 of 16.2% to EUR 717 million, compared with EUR 617 million in 2005. Despite the challenge of interest rate increases in all countries and a fl attening yield curve, ING Direct managed to maintain a satisfactory interest margin and preserve solid commercial growth. Including the EUR 23 million accounting loss on the sale of Degussa Bank at year-end 2006, total profi t before tax in 2006 rose 12.5% to EUR 694 million.
Total underlying income rose 13.1% in 2006, to EUR 2,396 million, mainly driven by a 12.5% increase in interest results, due to continued strong growth in client funds entrusted and mortgage portfolios. The total interest margin in 2006 narrowed to 0.89% from 0.93%, mainly due to a fl attening of the yield curve and the strategic decision to maintain competitive rates offered to clients across all markets.
Total operating expenses increased by 14.5% to EUR 1,598 million, refl ecting investments to support long-term value creation of the business. The underlying cost/income ratio increased from 65.9% in 2005 to 66.7% in 2006, mainly as a result of a relatively lower income margin and additional staff being hired to keep pace with commercial growth, particularly in mortgages. The operational cost base (excluding marketing expenses) was 0.41% of total assets, compared with 0.40% in 2005, mainly due to investments in mortgages. The number of full-time staff increased to 7,638 from 6,964 a year earlier, to keep pace with strong commercial growth.
Marketing expenditure remained strong, with an increase of 16% to support the strong growth in both savings and mortgages.
• Almost three million new customers, totalling 17.5 million worldwide • Record own originated mortgage production of EUR 20 billion • Further increase in brand awareness and customer satisfaction
United Kingdom (2003) 19 –34 Subtotal ING Direct 723 633 14.2% ING Card –6 –16 Total 717 617 16.2% * Including Austria
The underlying after-tax Risk-Adjusted Return On Capital (RAROC) declined to 11.6%, from 14.9% in 2005, partly due to higher effective tax rate charges. Total economic capital increased to EUR 3.4 billion, from EUR 3.1 billion in 2005, refl ecting the continued strong growth of the business. With the exception of ING Direct UK, ING Direct US and ING Card, all ING Direct units are performing above ING’s hurdle for RAROC.
In 2006, ING Card developed in line with expectations. The business unit has been transferred as from 1 January 2007 to the ING Retail Banking business line to better align its activities with its customers.
Strong commercial performance ING Direct is the world’s leading direct bank and the leading direct bank in all nine countries in which it operates. In eight of those countries, except for the US, it is also a top-10 bank overall, measured by retail funds entrusted, demonstrating how direct banking is a mass market business gaining substantial scale.
Growth based on four principles A major factor contributing to its strong commercial performance is the four principles that differentiate ING Direct from other banks: the customer experience, the simplicity and transparency offered to customers, the low-cost operating model, and the ‘fl eet of companies’ concept.
The customer experience ING Direct aims to provide excellent customer service and satisfaction and research shows that, on average, 94% of customers would recommend ING Direct to others. These results are underpinned by the many awards ING Direct won in 2006 for excellent customer service. Because excellent customer satisfaction is a prerequisite of future growth and value creation, each business unit is in complete control of the customer experience. The customer channels are at the heart of ING Direct’s business. Customers get quick feedback from highly committed staff, who are at the centre of ING Direct’s success. Employee satisfaction is considered key to customer satisfaction.
Low-cost operating model This is ING Direct’s single most important sustainable competitive advantage, achieved mainly by focusing on a limited, simple product range, standardised state-of-the art IT systems and the absence of a branch network. With a growing number of consumers relying on technology such as internet and automatic voice-response systems to conduct banking transactions, ING Direct is well positioned to benefi t from a trend to the increasing use of cost-effi cient direct channels. 2006 witnessed a further increase of the use of automated channels by customers in all countries. Over 80% of customer transactions are through automated channels.
Clients in thousands, funds entrusted in EUR billion, residential mortgage portfolio in EUR billion and market rankings at year-end* Residential Funds mortgage Market Clients entrusted portfolio rankings * The sale of Degussa Bank had a negative impact of EUR 2.0 billion in funds entrusted, EUR 2.2 billion on mortgages and 141,000 on the number of clients, which are refl ected in the year-end fi gures of Germany and Austria.
** Including Austria. *** Market ranking in retail funds entrusted in local banking market.
Despite a challenging year, ING Direct produced strong results in 2006, fuelled by the acquisition of three million new customers and growth in both client funds entrusted and mortgages. ING Direct’s ambition going forward is to continue leading the transformation of direct banking.
ING Direct will continue to create value for its customers by ensuring simplicity in all its products, processes, services and systems. In so doing, it is well positioned to capture further growth in the direct banking sector. Future growth will come from three sources: fi rst, from increased savings growth in countries where the business is already active; second, from geographic expansion; and third, by serving a broader range of customer needs. ING Direct’s four principles will continue to be applied, so that at maturity the business will have a narrow range of simple products within each product category, with substantial scale, effi ciency and profi tability.
Insurance Europe 26% 157.9 Insurance Americas 34% 202.5 Insurance Asia/Pacific 14% 84.2 Wholesale Banking 10% 60.8 Retail Banking 15% 87.5 ING Direct 1% 7.1
ING IM’s global strategy is to leverage its strong global investment capabilities into regional opportunities to provide customer-centric solutions. ING IM Europe’s strong sales of EUR 1.1 billion of the US senior bank loan capability in 2006 demonstrates the success of this strategy. ING IM’s regional organisation, designed to ensure a closer relationship with local customers, has resulted in a good product offering that better serves customers’ needs. At the same time, ING IM has benefi ted from closer cooperation between the three regions – Americas, Europe and Asia/Pacifi c – especially in product development and investment performance. Each region is a centre of investment expertise that seeks to leverage its capabilities across ING’s global distribution.
Americas ING IM America’s strategy is to leverage our capabilities in traditional products with increased focus on client centric Structures and Solutions. These products involve multiple investment strategies and are distributed through multiple channels to meet client needs and deliver investment, client and business performance. The priorities are delivering strong sustainable investment performance, expanding investment management and retail funds distribution capabilities and on a global scale leveraging ING’s worldwide client access.
In the US, the fi xed income strategies performed well, resulting in the sale of EUR 8.8 billion in 2006 through both institutional and retail channels. The US institutional sales force has been rebuilt with an emphasis on derivatives or capital markets expertise to enable ING to compete in the increasingly complex pensions market.
Asia/Pacifi c In Asia, the focus is on increasing ING’s presence in existing markets, which include the fast growing markets of China and India. ING IM aims to achieve growth through product expansion, including alternative assets and similar high margin products; and by deepening distribution relationships and developing alternative channels.
Major wins were recorded in the institutional markets of Japan, Taiwan, South Korea, Thailand, the Philippines and Singapore. ING IM established a 100%-owned investment-management business in South Korea, in addition to ING’s 20%-holding in KB Asset Management. In Taiwan, ING acquired the local mutual fund operations of ABN AMRO (EUR 2.4 billion assets under management), putting ING IM at the top of the Taiwanese assetmanagement industry, in terms of total assets under management and mutual fund asset size. In Australia, while ING Australia (the retail joint venture between ING and ANZ Banking Group) remains at the core of its distribution strategy, ING IM has gained the legal and regulatory status to develop independently and launch mutual funds through other intermediaries in Australia.
ING IM received several awards and prizes. The Euro High Dividend fund was awarded “Best Fund over Five Years 2006 – Equity Eurozone” by rating agency Lipper. In the Netherlands, ING IM became “Best provider of investments funds year 2006” by S&P/Cash Readers.
ING Real Estate saw another year of strong growth. The total portfolio, including the fi nance portfolio, increased 29.8% to EUR 90.7 billion, driven mainly by infl ows of third-party money. Profi t before tax rose by 80.8% to EUR 631 million. For the third consecutive year, ING Real Estate topped the global ranking of real estate investment managers. It opened new offi ces in Stockholm, Tokyo and Los Angeles which will help to grow the business further and strengthen the company’s unique global platform.
The Investment Management division benefi ted from the unremitting appetite for property funds among investors. Thanks to its global platform, it is able to harness the growing demand for cross-border products.
With merger and acquisition activities in real estate rapidly increasing, ING Real Estate played a prominent role when it put in a bid to take over Summit Real Estate Investment Trust, Canada’s largest listed owner of industrial assets. The acquisition added EUR 2.3 billion to assets under management. Several new funds for the institutional market were launched in Europe, targeting a total investment volume of EUR 4.3 billion. The launch of the ING Real Estate China Opportunity Fund attracted both institutional investors as well as high net worth individuals from the US, Europe and Asia. In the US, a hotel investment team was established in response to improving fundamentals in the hotel industry. The new team took over the management of a EUR 1.4 billion portfolio in December.
ING Private Banking is currently a top-40 player in terms of assets under management. The company’s ambition is to become a top-20 private bank measured by assets under management, with growth expected to come from investment in new regions, and by launching innovative products, and the training, development, and recruitment of talented bankers and support staff.
For more information on Private Banking see the Retail Banking chapter on page 38.
In order to maintain our position in increasingly competitive local and global markets, we continued to focus on effi ciency and service. Specifi c effi ciency programmes resulted in a workforce reduction due to the streamlining of activities (960 FTEs since
• Chairman meets employees around the world • ING Global Employer Brand rolled out • First ING International Graduate Programme • Enhanced international mobility
Growth and value creation are key elements of ING’s strategy. IBS continued the Managing for Value workshop, which will remain part of the curriculum in 2007. The goal of maximising long-term value and growth rather than short-term profi t has been embedded as a target for senior management in ING’s business lines. Customer centricity, one of our key objectives, is addressed by the Lean/Six Sigma workshop, which provides management with tools for increasing quality and service. Following a pilot in the fi rst half of 2006, it is now a fi xed curriculum component. In order to meet the learning needs of high-value specialists at the various business units, IBS has developed a custom-built programme underlining the importance we give to them in executing our value creation strategy. Seven programmes were run and this initiative will be continued in 2007.
All staff in the Netherlands completed a mandatory e-learning compliance course, a formula now being adopted in Poland, Russia and India.
Insurance Europe 15,126 13% Insurance Americas 28,778 24% Insurance Asia/Pacifi c 10,487 9% Wholesale Banking 20,605 17% Retail Banking 37,113 31% ING Direct 7,638 6% Other 54
Brand awareness and the understanding of ING’s brand values continue to rise. ING is now a truly global brand as measured by Interbrand global 100, which ranks ING 85th among the top 100 worldwide brands. Nevertheless, we aim to bring brand awareness in line with ING’s business profi le as the world’s 13th largest company (Fortune 500, 2006) with a client base of 60 million people in over 50 countries. This is one of the reasons why ING decided to make a major investment in the ING brand with the three year sponsorship of the Renault Formula One (F1) team.
As ING brand awareness rises, so too does the brand expectations of customers and other stakeholders. It is therefore crucial that alongside increasing brand awareness, performance of the businesses against ING’s core brand attributes also continues to improve. It is very important that any gap which exists between brand promises and the customer’s actual experience is minimised.
To this end, in 2006 branding was built into ING’s formal planning cycle. The Executive Board and each of the business lines fi rst reviews its performance over the previous year against the brand attributes and then develops its own ‘customer-centric’ action plan, designed to adapt business processes and practices to further improve performance in the upcoming year. To monitor progress, central tracking of the performance of each business line against core brand attributes has been introduced, using independent market research.
With the F1 campaign, ING is taking the next step in developing its global brand. The global F1 campaign is intended to be a key element both in the process of bringing ING increasingly under a single brand and in the on-going effort to increase brand awareness and understanding.
• ING Human Rights Statement • Launch of revised Equator Principles • ING to become climate neutral • ING Chances for Children raises targets
ING wants to pursue profi t on the basis of sound business ethics and respect for its stakeholders. Corporate responsibility (CR) is therefore a fundamental part of ING’s strategy: ethical, social and environmental factors play an integral role in our business decisions. Our stakeholders, including employees, expect ING to act ethically. To this end, ING continued its dialogue with stakeholders – including non-governmental organisations (NGOs) and CR experts – with the aim of further embedding CR principles in ING’s business.
In December 2006, ING committed itself to the ten principles of the UN Global Compact – an initiative that brings companies together with UN agencies, labour and civil society to support universal environmental and social principles.
ING wishes to build long-term customer relationships. Long-term fi nancial commitments require us to provide customers with thorough information about fi nancial choices in insurance, banking and asset management. Our business lines are increasingly taking responsibility for further embedding corporate responsibility practices in their daily activities, as illustrated below.
Customers’ trust is important to ING’s legitimacy. Many of our fi nancial products and services, such as mortgages and life insurance, cover a long period of time. To earn that trust, our information needs to be thorough, accurate and easy to understand.
We aim to provide our customers with correct information, and we take responsibility when we make mistakes. The Dutch life-insurance sector is faced with complaints of policy holders concerning the cost and transparency of unit-linked life-insurance products. Further details are included in the annual accounts on page 154.
Our banking operations are strongly committed to enhancing fi nancial literacy. In the US, ING Direct launched its Planet Orange web site, helping children, parents and teachers explore basic fi nancial topics like earning and saving.
ING offers investors Sustainable Equity Investment products in several countries and provides investors with tailor-made information on the social, ethical and environmental performance of companies. It also allows clients to exclude activities and behaviour that do nog meet predefi ned sustainable criteria, such as tobacco industry, child-labour.
Wholesale Banking stimulates environmentally friendly projects. ING closed a contract to fi nance the construction and operation of a carbon emissions distribution network from a Dutch refi nery to Dutch greenhouses, requiring a total investment of EUR 70 million. Greenhouses need carbon dioxide to stimulate the growth of the crops and the refi nery could thus realise a substantial reduction in carbon emissions of 170,000 tonnes.
ING’s Green Finance department fi nanced a solar power project in Mali that provides 40,000 people with electricity and a project in the Dominican Republic that ensures the sustainable replacement of buses. Green Finance arranges around EUR 100 million worth of business loans per year for Postbank Green, a Postbank subsidiary that focuses on environmentally friendly savings and investments.
ING takes customer information protection seriously and we continue to strengthen security measures in all of our activities. At our US operations, for example, extremely sophisticated security encryption has been installed on all portable devices, and our direct banking operation, ING Direct, has continuous security upgrades of technical systems to meet customer needs, as customers rely increasingly on technology to conduct their banking affairs.
ING decided to raise the target to 115,000 children at 2007 year-end and is encouraging each employee to sponsor one child fi nancially.
ING believes that engaging employees in community development improves our corporate culture and performance. Several business units have set up foundations for employee engagement in community development. In the centre of Manila (the Philippines), ING Wholesale Banking Staff helped to build the ING Village. ING staff privately fi nanced the 140 houses for 700 people and personally built them in co-operation with Habitat for Humanity.
In Chile, ING staff launched the Support for the Community project, which provides fi nancial assistance for children from lowincome families and support for a home for mentally handicapped orphan girls.
The arts enrich society. It connects people and refl ects the values and aspiration of communities. ING supports the arts through sponsoring and partnerships.
ING focuses on the three areas – energy, paper and business travel – that have the greatest impact on the environment. Business units are encouraged to take responsibility at the local level. For example, from 2007, ING Netherlands will purchase 100% green electricity.
In 2007, ING plans to go ‘carbon neutral’ – meaning that ING will bring its net carbon emissions to zero at the end of each year – by purchasing green energy and extending our current offset programme. This programme supports the planting and rehabilitation of 300 hectares of degraded tropical rainforest in Malaysia. In 2006, ING met its target to reduce carbon emission levels by 30% compared with 2005 levels.
In the Dutch business units, new company cars must meet the category A, B, or C energy restrictions. ING Car Lease offers customers a similar three-step energy label plan for company car fl eets.
ING encourages its business units to purchase paper that is not bleached and comes from renewable sources. Some business units already have their own programmes in place. Others, like ING Malaysia, for example, will work to reduce its paper usage by 20% through a green ING campaign in 2007.
ING was again listed a ‘best in class’ company in the Carbon Disclosure Project’s Climate Leadership Index (for more, see www. cdproject.net). ING remains a member of the Global Round Table on Climate Change.
Supervisory Board meetings The Supervisory Board started the year with its annual full-day meeting in January on ING’s strategy and medium-term plan. This meeting included feedback on the way investors and analysts look at ING. The medium-term plan was discussed in detail and approved by the Supervisory Board. It addresses the plans of the business lines and the fi nancial targets for each of them and for the Group as a whole. The Supervisory Board discussed ING’s ambition to be a strong global fi nancial institution and how this position can be retained in an always changing environment. The discussion focused on the importance of autonomous growth, but also on the need to be alert on developments in the fi nancial services industry that could have an impact on ING’s global position.
In 2006, there was again intensive contact between the Supervisory Board and the Executive Board through regular meetings. In the Supervisory Board meetings all important issues were discussed during the year. Committees of the Supervisory Board discussed a range of subjects on which to advise the full Supervisory Board, the main ones being the quarterly results, human resources and governance.
The 2005 performance regarding the short-term and long-term incentives of the Executive Board members was discussed on the basis of the group performance criteria and the individual targets. The proposal to the full Supervisory Board regarding the variable remuneration for 2005 was approved. The Executive Board compensation structure for 2006 was discussed. According to the intended gradual move to market competitive levels, the variable components at target increased from 75% to 100% of base salary. The new retirement policy for the Executive Board members was discussed in the light of new legislation. The proposal to change from a defi ned-benefi t system to a defi ned-contribution scheme was supported and decided upon by the full Supervisory Board within the framework approved by the AGM.
During the annual internal meeting of the Supervisory Board the functioning of the Supervisory Board, its committees and its individual members were discussed. This was done in the light of the Supervisory Board profi le. Furthermore, the functioning of the Executive Board and the performance of the individual Executive Board members were discussed.
Audit Committee meetings The Audit Committee discussed the annual and quarterly results in four meetings and the annual and semi-annual US GAAP results in two meetings. An important subject in 2006 was the implementation of ING’s internal controls and underlying documentation in line with the requirements of the US SarbanesOxley Act by year-end 2006. Other topics were risk governance, capital management and compliance. Management letters of the internal and external auditors on internal control were discussed. The redesign of Corporate Audit Services and the restructuring of some of the risk management departments were also discussed. Presentations were given by Corporate Audit Services on the new working methodologies and the adjusted structure, by NationaleNederlanden on the accounting processes, and by Corporate Operational and Information Services on IT risk governance.
Information on the members of the Supervisory Board and the nominated members is provided on page 66–67.
Retirement of Paul van der Heijden Paul van der Heijden was appointed in 1995 following the nomination by the Dutch Central Works Council. As a professor in labour law, he added specifi c know-how to the Supervisory Board. He was an important liaison with the Central Works Council. He had a critical but balanced attitude in the Remuneration and Nomination Committee, having a good feel for comments in the Dutch market about the remuneration levels of the Executive Board members. He was very helpful in the discussions with the Central Works Council about the Executive Board remuneration. Both the Supervisory Board and the Executive Board would like to thank Mr. Van der Heijden for his commitment to ING during the past 12 years and the way he performed his role on the Supervisory Board.
Annual Accounts and dividend The Executive Board has prepared the annual accounts and discussed these with the Supervisory Board. The annual accounts will be submitted for adoption to the General Meeting of Shareholders as part of the Annual Report. The proposed dividend for 2006 is EUR 1.32 per (depositary receipt for an) ordinary share. Taking into account the interim dividend of EUR 0.59, the proposed fi nal dividend amounts to EUR 0.73, payable in cash.
Appreciation for the Executive Board and the ING employees Finally, the Supervisory Board would like to thank the Executive Board for the way it led the company in another year of good results, in an even more challenging economic environment in the second half of the year. With four new members out of eight, the Executive Board showed its ongoing strong focus on growth and return, cost effi ciency and portfolio management. The Supervisory Board would also like to thank the 120,000 employees of ING for their daily commitment to ING, ultimately always in the interests of the customers, shareholders and other stakeholders.
Paul van der Heijden will retire after the Shareholders Meeting on 24 April 2007, having reached the maximum period of three terms of four years. Cor Herkströter and Luella Gross Goldberg would retire from the Supervisory Board reaching the age of 70 in 2007. Both agreed to stay one more year to ensure a balanced composition of the Board. Claus Dieter Hoffmann and Wim Kok will be nominated for reappointment.
In addition, new legislation will enable shareholders to participate in meetings via videoconferencing. Under the new legislation shareholders’ meetings will become more accessible, particularly for institutional investors abroad, who can access videoconferencing facilities. Companies will also be able to notify shareholders of meetings via their website or by e-mail instead of by newspaper advertisements. Both of these changes are subject to amendment of the articles of association. Such an amendment of the articles of association is being proposed to the 2007 General Meeting of Shareholders.
Dialogue with shareholders And fi nally, ING Group will create the opportunity for investors to ask questions on matters on the agenda for the 2007 General Meeting of Shareholders. Shareholders and holders of depositary receipts can visit the website of ING Group (www.ing.com) to submit their questions. Questions pertaining to the Shareholders’ meeting will be answered on that same website.
The following deviations from the Tabaksblat Code are to be reported for 2006: – not in the 2005 annual report, but for the fi rst time in the 2006 annual report, ING will report in accordance to SOX 404 for the internal risk management and control systems related to fi nancial reporting; for other risks a description will be made of the risk management and control systems and any material shortcomings that were discovered, including the improvements made or scheduled to be made (best-practice provision II.1.4); This chapter discusses the application by ING Groep N.V. (‘ING Group’) of the Dutch Corporate Governance Code (the ‘Tabaksblat Code’) and provides information on capital and control, the Executive Board, the Supervisory Board and the external auditors.
Transfer of shares and depositary receipts and transfer restrictions Shares are transferred by means of a deed of transfer between the transferor and the transferee. In order to become effective, ING Group has to acknowledge the transfer, unless ING Group itself is a party to the transfer. Pursuant to the articles of association, there are no restrictions for the transfer of ordinary shares, preference A shares and preference B shares, whereas transfer of cumulative preference shares is subject to prior approval of the Executive Board.
Repurchase of shares The company may repurchase shares outstanding and depositary receipts for such shares. Although the power to repurchase shares and depositary receipts is vested in the Executive Board subject to Supervisory Board approval, prior authorisation from the General Meeting of Shareholders is required for these repurchases. By Dutch law, this authorisation lapses after eighteen months. Each year, the General Meeting of Shareholders is asked to approve the Executive Board’s authority to repurchase shares. When repurchasing shares the Executive Board is to observe the price ranges prescribed in the authorisation: – for the ordinary shares not lower than one eurocent and not higher than the highest stock price on the Euronext Amsterdam Stock Market on the date of the repurchase contract or the preceding day on which this stock market is open; – for the preference A shares not less than one eurocent and not higher than 130 percent of the amount, including share premium, that is paid on such a share, or 130 percent of the highest stock price on the Euronext Amsterdam Stock Market on the date of the purchase contract or the preceding day on which this stock market is open.
against the acquisition of control by third parties, including hostile takeovers, while the ordinary shares and the preference shares are used solely for funding purposes. The shares, which are all registered shares, are not listed on a stock exchange.
The board of the Trust Offi ce comprises fi ve members who are independent of ING Group. No ING Group employees or Supervisory Board members are on the board of the Trust Offi ce. The board of the Trust Offi ce appoints its own members, without any requirement for approval by ING Group.
Issue of shares The company’s authorised capital is the maximum amount of capital allowed to be issued under the terms of its Articles of Association. New shares in excess of this amount can only be issued after amendment of the Articles of Association. For reasons of fl exibility (an amendment to the Articles of Association has to be passed by notarial deed if it is to become effective, and this in turn requires a declaration of no objection to be issued by the Minister of Justice), the authorised capital in the Articles of Association of ING Group has been set at the highest level permitted by law.
Share issues have to be approved by the General Meeting of Shareholders, which may also delegate its authority. Each year, the General Meeting is asked to delegate authority to the Executive Board to issue new shares or to grant rights to take up new shares, both with and without a right of fi rst refusal for existing shareholders. The powers thus delegated to the Executive Board are limited: – in time: powers are delegated for a period of 18 months; – to specifi c types of shares: only ordinary shares and preference B
ING Group is not in a position to reduce the voting rights on the preference A shares unilaterally and awaits forthcoming legislation.
The Trust Offi ce has discretion to vote in respect of shares for which it has not issued proxy votes to holders of depositary receipts and has not received any voting instructions. Under the Conditions of Trust the Trust Offi ce is required to promote the interests of all holders of depositary receipts, irrespective of whether they attend the General Meetings of Shareholders, also taking into account the interests of ING Group, the businesses of ING Group and its group companies and all other ING Group stakeholders in voting such shares, so as to ensure that all these interests are given as much consideration and protection as possible.
Proposals by shareholders/holders of depositary receipts In view of the size and market value of ING Group, proposals to put items on the Shareholders’ Meeting agenda can be made by shareholders and holders of depositary receipts representing a joint total of 0.1 percent of the share capital or representing together, on the basis of the stock prices on the Euronext Amsterdam Stock Exchange, a share value of at least EUR 50 million. Given the period of notice required for proxy voting, proposals have to be submitted in writing at least 50 days before the date of the meeting. Properly submitted proposals will be included on the agenda for the General Meeting of Shareholders.
Function of Executive Board The Executive Board is responsible for the day-to-day management of the company and its business lines (Insurance Europe, Insurance Americas, Insurance Asia/Pacifi c, Wholesale Banking, Retail Banking and ING Direct). The organisation, powers and modus operandi of the Executive Board are detailed in the Executive Board Charter, which was approved by the Supervisory Board. The Executive Board Charter is available on the ING Group website (www.ing.com).
Remuneration and share ownership Details of the remuneration of members of the Executive Board, including shares and/or option rights granted to them, together with information behind such decisions, are provided in the Remuneration Report, starting on page 74. Members of the Executive Board are permitted to hold shares and depositary receipts for shares in the company for long-term investment purposes. Transactions in these shares are subject to the ING regulations for insiders. These regulations are available on the ING Group website (www.ing.com).
Ancillary positions/Confl icting interests To avoid potential confl icts of interest, ING Group has a policy that members of its Executive Board do not accept corporate directorships with listed companies outside ING. The only exception is currently Jacques de Vaucleroy, who is on the Board of Directors of Delhaize Brothers & Co in Belgium. Mr. De Vaucleroy held this position prior to his appointment to the Executive Board of ING Group.
Michel J. Tilmant, chairman (Born 1952, Belgian nationality, male; appointed in 1998, contractual retirement date 2012) Michel Tilmant graduated from Louvain University with a Licence in Business Administration. He is also a graduate of Louvain School for European Affairs. He started his career with Morgan Guaranty Trust Company in New York. In 1992 he joined Bank Brussels Lambert, where he was appointed chairman of the Executive Board in 1997. After the acquisition of BBL by ING in 1998, Michel Tilmant was appointed vice-chairman as of May 2000. He was appointed chairman in April 2004. Four Group staff departments report directly to Michel Tilmant: Corporate Human Resources, Corporate Development, Corporate Communications & Affairs and Corporate Audit Services.
Dick H. Harryvan (Born 1953, Dutch nationality, male; appointed in 2006, term expires in 2010) Dick Harryvan graduated from the Erasmus University Rotterdam with a master’s degree in Business Economics, majoring in fi nance. He joined ING as a management trainee at Nationale-Nederlanden in 1979. Before his appointment to the Executive Board in 2006, he held various management positions in the USA, Canada and the Netherlands, where he was lastly chief fi nancial offi cer/chief risk offi cer and member of the Global Management Team of ING Direct. Dick Harryvan is responsible for ING Direct.
Eli P. Leenaars (Born 1961, Dutch nationality, male; appointed in 2004, term expires in 2008) 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, 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 and Private Banking. He is also in charge of Operations/IT and Corporate Operations and Information Services.
Tom J. McInerney (Born 1956, American nationality, male; appointed in 2006, term expires in 2010) Tom McInerney has a bachelor’s degree from Colgate University (Hamilton, New York) and an MBA from the Tuck School of Business, Dartmouth College (Hanover, New Hampshire). He started his career in 1978 with Aetna Financial Services, which was acquired by ING in 2000. Before his appointment to the Executive Board in 2006, he has been CEO of ING’s insurance activities in the US, which position included the responsibility for ING Mexico. Tom McInerney is now responsible for Insurance Americas, ING Investment Management Americas and the global coordination of ING Investment Management.
Hans van der Noordaa (Born 1961, Dutch nationality, male; appointed in 2006, term expires in 2010) Hans van der Noordaa graduated in Public Administration at the University of Twente, the Netherlands. After a career in retail banking at ABN AMRO, he joined ING in 1991, where he held various management positions. He was CEO of the Retail Division of ING Netherlands, responsible for Postbank, ING Bank and RVS, before his appointment to the Executive Board in 2006. Hans van der Noordaa is responsible for Insurance Asia/Pacifi c and ING Investment Management Asia/Pacifi c.
Changes in the Executive Board composition Cees Maas will retire from the Executive Board as of the Annual General Meeting of Shareholders on 24 April 2007.
Appointment and dismissal Members of the Supervisory Board are appointed by the General Meeting of Shareholders from a binding list to be drawn up by the Supervisory Board. This list shall mention at least two candidates for each vacancy, failing which the list will be non-binding. The list will also be non-binding pursuant to a resolution to that effect of the General Meeting of Shareholders adopted by an absolute majority of the votes cast which together represent more than one-third of the issued capital.
(www.ing.com). A short description of the duties for the three Committees follows below.
In view of their experience and the valuable contribution that former members of the Executive Board can make to the Supervisory Board, it has been decided, taking into account the size of the Supervisory Board and ING’s wide range of activities, that such individuals may become member of the Supervisory Board of ING Group. There is, however, a restriction in that only one in every fi ve other members of the Supervisory Board may be a former member of the Executive Board. In addition, this member must wait at least one year after resigning from the Executive Board before becoming eligible for appointment to the Supervisory Board. Former members of the Executive Board are not eligible for appointment to the position of chairman of the Supervisory Board.
Reappointment of Supervisory Board members Members of the Supervisory Board will resign from the Supervisory Board at the Annual General Meeting of Shareholders held in the calendar year in which they will complete the fourth year after their most recent reappointment. As a general rule, they shall also resign at the Annual General Meeting of Shareholders in the year in which they attain the age of seventy and shall not be reappointed. The schedule for resignation by rotation is available on the ING Group website (www.ing.com). Members of the Supervisory Board may as a general rule be reappointed for two periods of four years, based on a proposal from the Supervisory Board to the Shareholders’ Meeting.
Remuneration and share ownership The remuneration of the members of the Supervisory Board is set by the General Meeting of Shareholders and is not dependent on the results of the company. Details of the remuneration are provided in the Remuneration Report as of page 85.
Eric Bourdais de Charbonnière, vice-chairman (Born 1939, French nationality, male; appointed in 2004, term expires in 2008) Member of the Remuneration and Nomination Committee and the Corporate Governance Committee. Former managing director of JP Morgan and Chief Financial Offi cer of Michelin. Other business activities: chairman of the Supervisory Board of Michelin and member of the Supervisory Board of Thomson (listed companies).
Luella Gross Goldberg (Born 1937, American nationality, female; appointed in 2001, last term expires in 2009) Member of the Remuneration and Nomination Committee and the Corporate Governance Committee. Former member of the Board of Directors of ReliaStar Financial Corp. Other business activities: member of the Supervisory Board of each of TCF Financial Corporation, Hormel Foods Corporation and Communications Systems Inc. (listed companies). Member of the Advisory Board of Carlson School of Management, University of Minnesota. Member of the Supervisory Board of the Minnesota Orchestra. Member (emerita) of the Board of Trustees, Wellesley College. Member of the Board of Trustees, University of Minnesota Foundation.
Jan H.M. Hommen (Born 1943, Dutch nationality, male; appointed in 2005, term expires in 2009) Chairman of the Audit Committee. Former vice-chairman and CFO of the Board of Management of Royal Philips Electronics. Other business activities: chairman of the Supervisory Board of each of Reed Elsevier and TNT N.V., member of the Supervisory Board of Royal Ahold N.V. (until May 2007) (listed companies). Chairman of the Supervisory Board of each of Academisch Ziekenhuis Maastricht (hospital) and TiasNimbas Business School. Member of the Supervisory Board of Campina BV.
Wim Kok (Born 1938, Dutch nationality, male; appointed in 2003, term expires in 2007) Member of the Audit Committee. Former Minister of Finance and Prime Minister of the Netherlands. Other business activities: non-executive member of the Board of Directors of Royal Dutch Shell plc, member of the Supervisory Board of Stork N.V. 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, Amsterdam. Chairman of the Supervisory Board of the Dutch National Ballet. Member of the Supervisory Board of Het Muziektheater, Amsterdam. Member of the Supervisory Board of the Rijksmuseum, Amsterdam. Chairman of the Supervisory Board of the Netherlands Cancer Institute - Antoni van Leeuwenhoek Hospital. Member of the Board of Start Foundation.
The proposed appointment of Peter Elverding per 1 August 2007 is based on his broad experience as chairman of an international, listed company and his extensive knowledge of human resources.
Change of control clauses in important contracts ING Group is not a party to any material agreement, which becomes effective, or is being amended or terminated subject to the condition of a change of control of ING Group following a public bid defi ned in section 5:70 of the Financial Supervision Act.
ING Groep N.V. subsidiaries have customary change of control arrangements in contracts related to various business activities, such contracts including joint-venture agreements, letters of credit and other credit facilities, reinsurance contracts and futures and option trading contracts. Following a change of control of ING Groep N.V. (whether or not as result of a public bid), such contracts may be amended or terminated, leading to e.g. an obligatory transfer of the interest in the joint-venture, early repayment of amounts due, loss of credit facilities or reinsurance cover and liquidation of outstanding futures and option trading positions.
At the General Meeting of Shareholders on 27 April 2004, Ernst & Young was appointed to audit the fi nancial statements of ING Group for the fi nancial years 2004 to 2007 inclusive, to report about the outcome of these audits to the Executive Board and the Supervisory Board and to give a statement about the truth and fairness of the fi nancial statements of ING Group. Furthermore, Ernst & Young has also to audit and report on management’s assessment of the effectiveness of internal control over fi nancial reporting as of 31 December 2006.
In 2006, the Supervisory Board, at the suggestion of the Audit Committee, and the Executive Board concluded that it is more effi cient that the fi nancial audit of ING Groep N.V. and its subsidiaries is being assigned to one single audit fi rm, instead of being shared between two fi rms. Accordingly, both Ernst & Young and KPMG will be invited to tender for the fi nancial auditing of ING Groep N.V. and all of its subsidiaries in 2007. It is the intention to shift to one external auditor as of 2008, this auditor to be appointed by the Annual General Meeting of Shareholders in 2008.
In 2006 and 2005, the following amounts were paid to Ernst & Young and KPMG for audit services and non-audit services: Fees Ernst & Young and KPMG
On 3 April 2006 the Board met to discuss the 2005 annual report and to prepare the Annual General Meeting of Shareholders on 25 April 2006. Prior to this Board meeting the Executive Board and Supervisory Board of ING Groep N.V discussed with the Trust Offi ce the company’s activities and performance over 2005 on the basis of the press release of 16 February 2006 on the 2005 fi gures.
On 25 April 2006 the Board convened before the Annual General Meeting to discuss the proxy voting results and to decide on the initial position of the Board vis-à-vis the items on the agenda.
A third meeting was held on 26 October 2006. Important agenda items were the composition of the Board, the proposal to review the Board’s remuneration and the periodic review of the profi le of board members.
The Trust Offi ce organises the solicitation of proxies of shareholders other than the Trust Offi ce itself and of specifi c proxies and/or voting instructions of depositary receipt holders. The Board encourages the greatest possible participation of depositary receipt holders and shareholders. Holders of depositary receipts in the Netherlands, the United Kingdom and the United States are able to vote by proxy. For the 2006 Annual General Meeting votes were cast for 39% of the total number of outstanding ordinary and preference shares and depositary receipts (28% excluding preference shares). The Board of the Trust Offi ce voted for the remaining depositary receipts.
The Trust Offi ce takes the position that abandoning depositary receipts will be considered when the turnout at the shareholders’ meeting reaches a level of at least 35% of the votes that can be cast on ordinary shares (excluding the multiple voting rights of preference shares) during three consecutive years.
On 31 December 2006 the nominal value of administered ordinary shares amounted to EUR 529,056,076.56 for which 2.204.400.319 depositary receipts of EUR 0.24 each were issued. During the reporting year, the net number of depositary receipts issued for ordinary shares ran to 312.293.
The increase came about as follows: Add: from exercise of warrants 63,326 from conversion of shares into depositary receipts 289,667 Less: from conversion of depositary receipts into shares 40,700
On 10 April 2006 the articles of association of the Trust Offi ce were amended so board members will be appointed for a term of four years. They will be eligible for immediate reappointment, but no member may be reappointed more than twice.
Huib Blaisse was reappointed as Board member from 1 September 2006. In accordance with the provisions of article 7, section 3.8 of the Constitution, the Trust Offi ce disclosed the proposed reappointments by publication in NRC Handelsblad and the Offi ciële Prijscourant (AEX Offi cial List). In 2007 Jan Veraart and Paul Frentrop are due to retire by rotation. They are both eligible for reappointment. The intention to reappoint them will be published in due course. In December 2006 Ton Risseeuw resigned as Chairman and board member because he reached the statutory age limit. Jan Veraart succeeded him as Chairman. The Board has consisted of four members since Mr Risseeuw’s resignation. We propose to appoint Mr. C.J. van den Driest to the Board. Mr. Van den Driest is a member of several supervisory boards and former chairman of the Executive Board of Koninklijke Vopak N.V. He will bring valuable expertise to ING’s Trust Offi ce.
The Board of the Trust Offi ce currently consists of: Jan Veraart (former chairman of the Executive Board of HBG (Dutch Construction Company), several supervisory directorships and additional offi ces). Huib Blaisse (lawyer and partner at Blaisse, several other advisory offi ces); Paul Frentrop (Director Deminor Nederland B.V., in that capacity advisor of Dutch and foreign institutional investors with regard to corporate governance issues); Tom Regtuijt (former Executive Board Member of Nederlandse Spoorwegen (Netherlands Railways), several supervisory and advice offi ces); An overview of additional relevant offi ces held by Board members can be found on the website of the Trust Offi ce: www.ingtrustoffi ce.com.
The annual remuneration for all Board members is EUR 7,800. With effect from 1 January 2007 the annual remuneration is set at EUR 25.000 for the Chairman and EUR 20.000 for other members.
Underlying this decision are two main considerations: (i) the more demanding tasks of the board members as a consequence of the developments in corporate governance and (ii) the necessity to offer a competitive remuneration to be able to attract board members with the relevant experience.
Stichting Continuïteit ING, established in Amsterdam, was founded on 22 January 1991. By amendment of the Articles of Association on 23 June 2003, the former name ‘Stichting Cumulatief Preferente Aandelen ING Groep’ was changed to Stichting Continuïteit ING (‘ING Continuity Foundation’).
– provide reasonable assurance regarding prevention or timely detection of unauthorised acquisition, use or disposition of our assets that could have a material effect on our fi nancial statements.
Michel Tilmant, Cees Maas, Chairman Executive Board Chief Financial Offi cer
Due to the listing of ING shares on the New York Stock Exchange, ING Group is required to comply with the SEC regulations adopted pursuant to Section 404 of the Sarbanes-Oxley Act, or SOX 404. These regulations require that the CEO (the chairman of the Executive Board) and the CFO of ING Group report and certify on an annual basis, starting over 2006, on the effectiveness of ING Group’s internal controls over fi nancial reporting, and that the external auditors provide an attestation report on the management’s assessment.
Following the SOX 404 process, ING is in the position to publish an unqualifi ed statement which denotes that the company’s internal control over fi nancial reporting is effective as of 31 December 2006. The SOX 404 statement by the Executive Board is included below, followed by the report of the external auditor.
We have audited management’s assessment, included in the accompanying Report of the Executive Board on Internal Control Over Financial Reporting, that ING Groep N.V. maintained effective internal control over fi nancial reporting as of 31 December 2006, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). ING Groep N.V.’s management is responsible for maintaining effective internal control over fi nancial reporting and for its assessment of the effectiveness of internal control over fi nancial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over fi nancial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over fi nancial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over fi nancial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over fi nancial reporting is a process designed to provide reasonable assurance regarding the reliability of fi nancial reporting and the preparation of fi nancial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over fi nancial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly refl ect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of fi nancial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorisations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the fi nancial statements.
– To enhance the effectiveness of the short-term incentive plan, clear, measurable and challenging targets are set at the beginning of each year.
– Long-term incentives ensure a focus on longer-term strategic targets and create alignment of management with the interests of shareholders. A broad selection of ING’s senior leaders participate in the plan to ensure a common focus on ING’s overall performance.
Remuneration structure Total compensation throughout ING consists of three basic components: – Fixed or base salary, which represents the total guaranteed annual income.
Base salary The base salaries of the Executive Board should be suffi cient to attract and retain high-calibre management needed to achieve our business objectives. The Supervisory Board assesses the experience, background, responsibilities, performance and leadership competencies of the CEO, CFO and the other members of the Executive Board when making decisions on base-salary levels.
Short-term incentive plan The short-term incentive plan (STIP) is a key component of ING’s performance-driven culture. The short-term incentive is paid in cash. The ‘at target’ bonus opportunity is expressed as a percentage of base salary. The target levels are based on benchmarks refl ecting external market competitiveness as well as internal objectives. Three fi nancial parameters were used in the 2006 STIP for the members of the Executive Board and top senior management across the organisation (the top-200 executives) to measure performance at Group level. These fi nancial parameters are: operating net profi t, total operating expenses and return on economic capital. The quantitative elements of the targets are considered stock-price sensitive and competition-sensitive; accordingly these are not disclosed.
Executive Board 70% of total bonus 30% of total bonus Top senior management 15% of total bonus 85% of total bonus
Performance shares are conditionally granted. The number of ING depositary receipts that is ultimately granted at the end of a 3-year performance period depends on ING’s Total Shareholder Return (TSR) performance over three years (return in the form of capital gains and reinvested dividends that shareholders receive in that period) relative to the TSR performance of a pre-defi ned peer group. The criteria used to determine the performance peer group are: a) considered comparable and relevant by the Supervisory Board, b) representing ING’s current portfolio of businesses (e.g. banking, insurance and asset management) and ING’s geographical spread, c) global players, d) listed and a substantial free fl oat.
Deutsche Bank, HSBC (banks); – Aegon, AIG, Allianz, Aviva, AXA, Prudential UK, Hartford
Financial Services, Munich Re (insurance companies); – Amvescap PLC (asset manager).
ING’s TSR ranking within this group of companies determines the fi nal number of performance shares that vest at the end of the three-year performance period. The initial number of performance shares granted is based on a mid-position ranking of ING. This initial grant will increase or decrease (on a linear basis) on the basis of ING’s TSR position after the three-year performance period as specifi ed in the table below.
Number of shares awarded after each three-year performance period related to peer group
The Executive Board members are not allowed to sell depositary receipts obtained either through the stock-option or the performance-shares plan within a period of fi ve years from the grant date. They are only allowed to sell part of their depositary receipts at the date of vesting to pay tax over the vested award. Depositary receipts obtained from exercised stock options may only be sold within a period of fi ve years from the grant date of the options to pay tax over the vested award.
Employment contract for newly appointed Board members The contract of employment for Executive Board members appointed after 1 January 2004 provides for an appointment for a period of four years (the appointment period) and allows for re-appointment by the General Meeting of Shareholders.
As existing contracts cannot be adapted unilaterally, Executive Board members appointed before 2004 remain appointed for an indefi nite period of time and, in case of an involuntary exit, remain entitled to an exit payment of three years base salary.
Executive Board Base salary 2006 The base salary of the Executive Board members has been frozen for 2006, as was the case in 2004 and 2005. The Executive Board received a 7.5% increase in their base salary in 2003. Prior to 2003, the EB members’ base salary had been effectively frozen since 1999. Michel Tilmant and Cees Maas received a standard promotional increase in their base salary as of 28 April 2004 as a result of their appointment as chairman and vice-chairman of the Executive Board, respectively.
Executive Board Short-term incentive plan 2006 The target STI payout over 2006 was set at 100% of the individual Executive Board member’s base salary. The fi nal award is based on the achievement of a set of common Group fi nancial targets and specifi c individual qualitative and quantitative objectives for each Executive Board member. Specifi cally, 70% of the total award is based on the Group’s operating net profi t, total operating expenses and return on economic capital, while the remaining 30% is based on individual objectives set at the beginning of the year by the chairman of the Executive Board and approved by the Remuneration and Nomination Committee of the Supervisory Board.
Executive Board Long-term incentive plan 2006 Under the long-term incentive plan (LTIP) for the Executive Board, two instruments are used: stock options and performance shares. As mentioned earlier, an identical plan has been adopted by the Executive Board for the top senior managers across ING. As a result, approximately 7,000 senior leaders participate in a similar plan.
The target level for the 2006 LTIP was set at 100% of base salary for each EB member. The fi nal grant level depends on the Group STIP performance and will vary between 50% of the target level (if Group STI would be 0%) and 150% (if Group STI would be 200%).
Tom McInerney will receive a conditional share award on the same grant date as the other long-term incentive awards. The conditional shares will be 100% vested four years after the grant date and the condition being an active employment contract at the date of vesting. This award is part of Tom McInerney’s employment contract to align his total remuneration with the market practice of senior executives in the United States. The LTIP grant table on page 80/81 shows the number of the conditional share awards.
The performance shares granted in 2004 had a three-year performance period of 2004 – 2006 and will vest in 2007. The actual results of 200% are based upon ING’s TSR ranking of 2 within the designated peer group. The results were determined by an independent third party. ING’s external auditor has reviewed the calculations performed. For members of the Executive Board who received an award as an Executive Board member in 2004, such award will vest in the fi nal number of performance shares in May 2007. For the other senior leaders who participated in the 2004 – 2007 performance share award, such award vested in March 2007.
Pension costs The fi rst table on page 82 shows the pension costs of the individual members of the Executive Board.
Compensation in cash of the individual members of the Executive Board
Short-term performance-related bonus 2,299 1,520 866 Total cash compensation 3,588 2,809 2,116
Short-term performance-related bonus 1,244 806 530 Total cash compensation 1,941 1,503 1,207
Base salary 423 Short-term performance-related bonus 710 Total cash compensation 1,133
Base salary 690 Short-term performance-related bonus 1,157 Total cash compensation 1,847
Short-term performance-related bonus 604 705 335 Total cash compensation 974 1,339 763
(2) Eric Boyer de la Giroday, Eli Leenaars and Hans Verkoren were appointed to the Executive Board on 28 April 2004. The fi gures for these members refl ect compensation earned in their capacity as Executive Board members. Thus, the fi gures for 2004 refl ect the partial year as Executive Board members.
(5) Fred Hubbell and Hans Verkoren retired and Alexander Rinnooy Kan resigned from the Executive Board on 25 April 2006. The fi gures for these members refl ect compensation earned in their capacity as Executive Board members. Thus, the fi gures for 2006 refl ect the partial year as Executive Board members.
Compensation in cash of former members of the Executive Board amounted to nil in 2006 and 2005 and EUR 681 thousand in 2004.
Number of options 0 58,600 51,200 Number of performance shares 0 10,500 9,300 Fair market value of long-term incentive (2) 938 628 410
Number of options 65,021 53,200 32,400 Number of shares 13,603 9,500 5,900 Fair market value of long-term incentive (2) 853 571 259
Number of options 70,695 Number of performance shares 14,790 Number of conditional shares 37,633 Fair market value of long-term incentive (2) 2,201
Number of options 43,347 Number of performance shares 9,069 Fair market value of long-term incentive (2) 569
Number of options 0 48,000 Number of performance shares 0 8,700 Fair market value of long-term incentive (2) 571 384
Number of options 0 32,400 Number of performance shares 0 5,900 Fair market value of long-term incentive (2) 571 259
(1) Long-term incentives are granted in the year following the reporting year. The long-term incentive plan provides for a combination of stock options and provisional performance shares based on a 50/50 split in value. The ratio of options to performance shares varies each year as a result of the fair value calculation and the 50/50 split in value. The fair value calculation for the performance year 2006 resulted in a ratio of options to performance shares of 4.78 : 1 (2005: 5.6 : 1, 2004: 5.5 : 1). The maximum number of stock options and performance shares to be granted to the Executive Board members will be tabled for approval at the annual General Meeting of Shareholders. The vesting period for the performance shares is 3 years. The costs of the performance shares are expensed pro-rata over the 3-year period.
(2) Fair market value of long-term Incentive refl ects the estimated fair market value of the long-term incentive award on the date of grant based on a fair value calculation. The valuation is calculated annually for grants made to the Executive Board members for performance over the year specifi ed.
(6) Tom McInerney will receive conditional shares on the same grant date as the other long-term incentive awards. The conditional shares will be 100% vested four years after the grant date and the condition being an active employment contract. The conditional shares are provided to align Tom McInerney’s total remuneration with the US market practice.
(7) As a result of their resignation/retirement from the Executive Board in 2006, Fred Hubbell, Alexander Rinnooy Kan and Hans Verkoren received the fair market value of their 2005 long-term incentive award in cash instead of options and performance shares.
The fair market value of long-term incentives of former members of the Executive Board amounted to nil in 2006, 2005 and 2004.
(4) Fred Hubbell and Hans Verkoren retired and Alexander Rinnooy Kan resigned from the Executive Board on 25 April 2006. The fi gures for these members refl ect pension costs for the partial year as Executive Board members.
Loans and advances to Executive Board members The table below presents the loans and advances provided to Executive Board members and outstanding on 31 December 2006, 2005 and 2004. These loans were concluded in the normal course of business and on terms applicable to Company personnel as a whole and were approved by the Supervisory Board.
ING depositary receipts for shares held by Executive Board members Executive Board members are permitted to hold ING depositary receipts for shares as a long-term investment. The table below shows the holdings by members of the Executive Board
Michel Tilmant 7,764 7,764 Cees Maas 7,764 7,764 Tom McInerney (1) 64,527 1) Tom McInerney also holds 940 units in a Leveraged Stock Fund
Information on the options outstanding and the movements during the fi nancial year of options held by the members of the Executive Board as at 31 December 2006 (continued)
Executive Board Short-term incentive plan 2007 The 2007 short-term incentive target at 100% of base salary will remain the same as 2006. The actual payout may vary between 0% and 200% of the target level (e.g. between 0% and 200% of base salary).
The mix for the 2007 short-term incentive award will remain the same as in 2006: 70% will be determined by pre-defi ned ING Group fi nancial performance measures and 30% will be based on individual performance objectives set for each Executive Board member and agreed by the Supervisory Board.
The Supervisory Board has concluded for 2007 that the Executive Board’s short-term incentive award for the Group performance will be changed slightly to replace the return on economic capital measure with economic profi t/embedded value profi t. The three fi nancial criteria that will be used for 2007 will be: operating net profi t, total operating expenses and economic profi t/embedded value profi t*. This slight adaptation to shift from return on economic capital to economic profi t/embedded value profi t is in line with the publication of the economic profi t and embedded value profi t as of 2007.
(*) The embedded value profi t target is less fi nancial variances
Executive Board Long-term incentive plan 2007 The Supervisory Board will keep the LTI target value at 100% of base salary (same target percentage as the STI). The range may vary between 50% and 150% of the target level (e.g. between 50% and 150% of base salary). The structure for the 2007 long-term incentive award will remain the same as the 2003 structure (the total nominal value at grant will be split between stock options and performance shares).
Remuneration As of July 2006 the remuneration of the Supervisory Board members was increased as follows: chairman EUR 75,000 (was EUR 61,260), vice-chairman EUR 65,000 (was EUR 61,260), other members EUR 45,000 (was EUR 36,300). In addition to the remuneration each member receives an expense allowance. For the chairman and vice-chairman the annual amount is EUR 6,800. For the other members the amount is EUR 2,270.
The table below shows the remuneration, expense allowances and attendance fees per Supervisory Board member for 2006 and previous years. The compensation of former Supervisory Board members who resigned before 2006 amounted to EUR 29,000 in 2005 and EUR 54,000 in 2004.
ING depositary receipts for shares held by members of the Supervisory Board(1)
Josine Sips, chairman Paul de Widt, secretary Wim Evers, deputy chairman Gerard Dekkers, deputy secretary Goof Bode, Hans de Boer, Hans van den Brink, Hans de Bruin, Petra Delhez, Wim Dijkhuizen, Jeffrey Dinsbach, Rob Eijt, Bas Hofstee, Alex Hoogendoorn, Aad Kant, Ben van Kessel, Jan Kuijper, René van der Linden, Ans Nijman, Anja Rozendaal, André Schat, Frans Veld, Bernard Wempe, Paul Zoet
ASSETS Cash and balances with central banks 1 14,326 13,084 Amounts due from banks 2 39,868 47,466 Financial assets at fair value through profit and loss 3 – trading assets 193,977 149,187 – investments for risk of policyholders 110,547 100,961 – non-trading derivatives 6,521 7,766 – designated as at fair value through profit and loss 6,425 10,230 Investments 4 – available-for-sale 293,921 305,707 – held-to-maturity 17,660 18,937 Loans and advances to customers 5 474,437 439,181
Debt securities in issue 15 78,133 81,262 Other borrowed funds 16 29,639 32,252 Insurance and investment contracts 17 268,683 263,487 Amounts due to banks 18 120,839 122,234 Customer deposits and other funds on deposit 19 496,680 465,712 Financial liabilities at fair value through profit and loss 20 – trading liabilities 127,975 92,058 – non-trading derivatives 4,934 6,248 – designated as at fair value through profit and loss 13,702 11,562
amounts in millions of euros 2006 2006 2005 2005 2004 2004
Net gains/losses on disposals of group companies 1 390 337 Gross commission income 6,867 5,845 5,659 Commission expense –2,551 –2,098 –1,880 Commission income 38 4,316 3,747 3,779 Valuation results on non-trading derivatives 39 89 47 Net trading income 40 1,172 426 888 Share of profit from associates 6 638 541 229
Earnings per ordinary share attributable to shareholders of parent 48 3.57 3.32 2.71 Diluted earnings per ordinary share 48 3.53 3.32 2.71 Dividend per ordinary share 49 1.32 1.18 1.07
Profit before tax 9,940 8,894 7,740 Adjusted for – depreciation 1,298 1,278 563 – deferred acquisition costs and VOBA –1,317 –1,141 –858 – increase in provisions for insurance and investment contracts 17,689 21,250 13,244 – addition to loan loss provision 103 88 465 – other –4,778 –1,282 4,467 Taxation paid –1,739 –1,398 –1,163 Changes in – amounts due from banks, not available on demand 3,117 –720 –1,206 – trading assets –48,168 –29,925 –4,417 – non-trading derivatives –179 2,596 – other financial assets at fair value through profit and loss 3,930 –2,193 –14 – loans and advances to customers –59,800 –62,709 –34,737 – other assets 1,218 –7,551 336 – amounts due to banks, not payable on demand 1,925 19,405 21,986 – customer deposits and other funds on deposit 47,521 62,089 64,555 – trading liabilities 38,821 13,442 – other financial liabilities at fair value through profit and loss 2,405 8,398 – other liabilities –2,236 3,475 4,141 Net cash flow from operating activities 9,750 33,996 75,102
References relate to the notes starting on page 184 which form an integral part of the consolidated annual accounts.
Unrealised revaluations after taxation 2,514 2,514 –32 2,482 Realised gains/losses transferred to profit and loss –663 –663 –663 Changes in cash flow hedge reserve 764 764 764 Transfer to insurance liabilities/DAC –89 –89 17 –72 Employee stock option and share plans 63 63 63
Changes in composition of the group –710 –710 Dividends (2) –2,461 –2,461 –2,461 Exercise of warrants and options 9 9 9
Unrealised revaluations after taxation –1,096 –1,096 –8 –1,104 Realised gains/losses transferred to profit and loss –759 –759 –1 –760 Changes in cash flow hedge reserve –696 –696 –696 Transfer to insurance liabilities/DAC 820 820 –3 817 Employee stock option and share plans 100 100 2 102 Exchange rate differences –1,335 –1,335 –70 –1,405 Total amount recognised directly in equity –2,966 –2,966 –80 –3,046
Changes in composition of the group 1,034 1,034 Dividends (3) –2,681 –2,681 –35 –2,716 Purchase/sale of treasury shares –520 –520 –520 Exercise of warrants and options 5 5 5
Certain amendments to IAS 19 Employee benefi ts became effective as of 1 January 2006. Also during the year several IFRIC interpretations became effective: IFRIC 4 Determining whether an arrangement contains a lease, IFRIC 8 Scope of IFRS 2 and IFRIC 9 Reassessment of embedded derivatives. None of these recent amendments and interpretations have had a material effect on equity or net profi t. Recently issued standards that became effective after 1 January 2007 are not expected to have a material effect on equity or net profi t. ING Group has not early adopted any new International Financial Reporting Standard.
Until 2005, health and disability insurance business was included in ‘non-life’, in line with regulatory defi nitions in the Netherlands. In line with international practice, as of 2006, health and disability insurance business that is similar in nature to life insurance business is presented under ‘life’. The impact of this change is disclosed in Note 17 Insurance, Reinsurance and Investment contracts.
In addition, the adequacy of provision for life policies, net of DAC and VOBA, is evaluated regularly. The test involves comparing the established insurance provision with current best estimate assumptions about factors such as court decisions, changes in laws, social, economic and demographic trends, infl ation, investment returns, policyholder behaviour and other factors, and mortality and morbidity trends. The use of different assumptions in this test could lead to a different outcome.
The identifi cation of impairment and the determination of the recoverable amount are an inherently uncertain process involving various assumptions and factors including the fi nancial condition of the counterparty, expected future cash fl ows, observable market prices and expected net selling prices.
Future cash fl ows in a portfolio of fi nancial assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash fl ows of the assets in the portfolio and historical loss experience for assets with credit risk characteristics similar to those in the portfolio. Historical loss experience is adjusted on the basis of current observable data to refl ect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. Current observable data may include changes in unemployment rates, property prices and commodity prices. The methodology and assumptions used for estimating future cash fl ows are reviewed regularly to reduce any differences between loss estimates and actual loss experience.
For certain fi nancial assets and liabilities, including Over-The-Counter (OTC) derivative instruments, no quoted market prices are available. For these fi nancial 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 management. In addition, data used in these valuation techniques are validated on a daily basis.
Valuation techniques are subjective in nature and signifi cant judgement is involved in establishing fair values for fi nancial assets and liabilities. Valuation techniques involve various assumptions regarding the underlying price, yield curve, correlations and many other factors. The use of different valuation techniques and assumptions could produce materially different estimates of fair value.
Price testing is done to assess whether the process of valuation has led to an appropriate fair value of the position and to an appropriate refl ection of these valuations in the profi t and loss account. Price testing is performed to minimise the potential risks for economic losses due to materially incorrect or misused models, which applies to both exchange traded positions as well as OTC positions.
The actuarial assumptions may differ signifi cantly from the actual results due to changes in market conditions, economic and mortality trends, and other assumptions. Any changes in these assumptions could have a signifi cant impact on the defi ned benefi t plan liabilities and future pension costs. The effects of changes in actuarial assumptions and experience adjustments are not recognised in the profi t and loss account unless the accumulated changes exceed 10% of the greater of the defi ned benefi t obligation and the fair value of the plan assets and the excess is then amortised over the employees’ expected average remaining working lives. See Note 21 Other liabilities for the weighted averages of basic actuarial assumptions in connection with pension and other post-retirement benefi ts.
USE OF ESTIMATES AND ASSUMPTIONS The preparation of the consolidated fi nancial statements necessitates the use of estimates and assumptions. These estimates and assumptions affect the reported amounts of the assets and liabilities and the amounts of the contingent liabilities at the balance sheet date, as well as reported income and expenses for the year. The actual outcome may differ from these estimates.
SEGMENTAL REPORTING A business segment is a distinguishable component of the Group engaged in providing products or services that is subject to risks and returns that are different from those of other business segments. A geographical segment is a distinguishable component of the Group engaged in providing products or services within a particular economic environment that is subject to risks and returns that are different from those of segments operating in other economic environments. The geographical analyses are based on the location of the offi ce from which the transactions are originated. The business lines of the Group are the business segments and the primary segment reporting format. The geographical segments are considered the secondary.
Translation differences on non-monetary items, measured at fair value through profi t and loss, are reported as part of the fair value gain or loss. Non-monetary items are retranslated at the date fair value is determined. Translation differences on non-monetary items measured at fair value through the revaluation reserve are included in the revaluation reserve in equity.
– All resulting exchange rate differences are recognised in a separate component of equity.
DERIVATIVES AND HEDGE ACCOUNTING Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured to their fair value. Fair values are obtained from quoted market prices in active markets, including recent market transactions, and valuation techniques (such as discounted cash fl ow models and option pricing models), as appropriate. All derivatives are carried as assets when their fair value is positive and as liabilities when their fair value is negative.
The Group documents at the inception of the transaction the relationship between hedging instruments and hedged items as well as its risk management objective and strategy for undertaking various hedge transactions together with the methods selected to assess hedge effectiveness. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash fl ows of the hedged items.
Certain derivatives embedded in other contracts are measured as separate derivatives when their economic characteristics and risks are not closely related to those of the host contract, the host contract is not carried at fair value through profi t and loss, and if a separate instrument with the same terms as the embedded derivative would meet the defi nition of a derivative. These embedded derivatives are measured at fair value with changes in fair value recognised in the profi t and loss account.
Available-for-sale fi nancial assets Available-for-sale fi nancial assets are initially recognised at fair value plus transaction costs. For available-for-sale debt securities, the difference between cost and redemption value is amortised. Interest income is recognised using the effective interest method. Availablefor -sale fi nancial assets are measured at fair value. Unrealised gains and losses arising from changes in the fair value are recognised in equity. When the securities are disposed of, the related accumulated fair value adjustments are included in the profi t and loss account as investment income. For impairments of available-for-sale fi nancial assets reference is made to the section ‘Impairments of other fi nancial assets’. Investments in prepayment sensitive securities such as Interest-Only and Principal-Only strips are generally classifi ed as available-for-sale.
Held-to-maturity investments Non-derivative fi nancial assets with fi xed or determinable payments and fi xed maturity for which the Group has the positive intent and ability to hold to maturity and which are designated as held-to-maturity assets are initially recognised at fair value plus transaction costs. Subsequently they are carried at amortised cost using the effective interest method less any impairment losses.
Loans and advances to customers Loans and advances to customers are non-derivative fi nancial assets with fi xed or determinable payments that are not quoted in an active market. They are initially recognised at fair value plus transaction costs. Subsequently, they are carried at amortised cost using the effective interest method less any impairment losses.
OFFSETTING OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES Financial assets and fi nancial liabilities are offset, and the net amount reported, in the balance sheet when the Group has a legally enforceable right to set off the recognised amounts and intends to either settle on a net basis or to realise the asset and settle the liability simultaneously.
Securities purchased under agreements to resell (‘reverse repos’) are recorded as Loans and advances to customers or Amounts due from banks, as appropriate. The difference between sale and repurchase price is treated as interest and amortised over the life of the agreement using the effective interest method.
LOAN LOSS PROVISION The Group assesses periodically and at each balance sheet date whether there is objective evidence that a fi nancial asset or group of fi nancial assets is impaired. A fi nancial asset or a group of fi nancial assets is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset, but before the balance sheet date, (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash fl ows of the fi nancial asset or group of fi nancial assets that can be reliably estimated. The following circumstances, among others, are considered objective evidence that a fi nancial asset or group of assets is impaired: – The borrower has sought or has been placed in bankruptcy or similar protection and this leads to the avoidance or delays repayment of the fi nancial asset; – The borrower has failed in the repayment of principal, interest or fees and the payment failure has remained unsolved for a certain period; – The borrower has demonstrated signifi cant fi nancial diffi culty, to the extent that it will have a negative impact on the expected future cash fl ows of the fi nancial asset; – The credit obligation has been restructured for non-commercial reasons. ING has granted concessions, for economic or legal reasons relating to the borrower’s fi nancial diffi culty, the effect of which is a reduction in the expected future cash fl ows of the fi nancial asset; – Historical experience, updated for current events where necessary, provides evidence that a proportion of a group of assets is impaired although the related events that represent impairment triggers are not yet captured by the Group’s credit risk systems.
Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Group.
LEASES The Group as the lessee The leases entered into by ING are primarily operating leases. The total payments made under operating leases are charged to the profi t and loss account on a straight-line basis over the period of the lease.
Adjustments to the fair value as of the date of acquisition of acquired assets and liabilities that are identifi ed within one year after acquisition are recorded as an adjustment to goodwill; any subsequent adjustment is recognised as income or expense. However, recognition of deferred tax assets after the acquisition date is recorded as an adjustment to goodwill even after the fi rst year. On disposal of group companies, the difference between the sale proceeds and book value (including goodwill) and the amount included in the currency translation reserve in equity is included in the profi t and loss account.
Value of business acquired (VOBA) VOBA is an asset that refl ects the present value of estimated net cash fl ows embedded in the insurance contracts of an acquired company, which existed at the time the company was acquired. It represents the difference between the fair value of insurance liabilities and their book value. VOBA is amortised in a similar manner to amortisation of deferred acquisition costs as described in the section ‘Deferred acquisition costs’.
INSURANCE, INVESTMENT AND REINSURANCE CONTRACTS Insurance contracts Insurance policies which bear signifi cant insurance risk are presented as insurance contracts. Provisions for liabilities under insurance contracts represent estimates of future payouts that will be required in respect of life and non-life insurance claims, including expenses relating to such claims.
Insurance provisions for universal life, variable life and annuity contracts, unit-linked contracts, etc. are generally set equal to the balance that accrues to the benefi t of the policyholders. Certain variable annuity products contain minimum guarantees on the amounts payable upon death and/or maturity. The insurance provisions include the impact of these minimum guarantees, taking into account the difference between the potential minimum benefi t payable and the total account balance, expected mortality and surrender rates.
If, for any business unit, it is determined using a best estimate (50%) confi dence level that a shortfall exists, it is immediately recorded in the profi t and loss account.
The expected value of the assets is calculated using the expected rate of return on plan assets. Differences between the expected return and the actual return on these plan assets and actuarial changes in the deferred benefi t obligation are not recognised in the profi t and loss account, unless the accumulated differences and changes exceed 10% of the greater of the defi ned benefi t obligation and the fair value of the plan assets. The excess is charged or credited to the profi t and loss account over employees’ remaining working lives. The corridor was reset to nil at the date of transition to IFRS-EU.
EARNINGS PER ORDINARY SHARE Earnings per ordinary share is calculated on the basis of the weighted average number of ordinary shares outstanding. In calculating the weighted average number of ordinary shares outstanding: – Own shares held by group companies are deducted from the total number of ordinary shares in issue; – The computation is based on daily averages; – In case of exercised warrants, the day of exercise is taken into consideration.
Diluted earnings per share data are computed as if the stock options and warrants outstanding at year-end were exercised at the beginning of the period. It is also assumed that ING Group uses the assumed proceeds thus received for stock options and warrants exercised to buy its own shares against the average market price in the fi nancial year. The net increase in the number of shares resulting from the exercise of warrants and stock options is added to the average number of shares used for the calculation of diluted earnings per share.
Available-for-sale debt securities 9,922 Insurance provisions –3,126 Derivatives/hedge accounting/fair value option –977 Loans and advances to customers 465 Loan loss provisions 623 Venture capital investments 90 Other –35 Taxation –2,460 Classification of equity instruments – shareholders’ equity –399 IFRS-EU impact on net profit and shareholders’ equity 4,103
Classification of equity instruments – minority interests –1,442 Minority interests in equity 56 Total impact 2,717
Insurance provisions Under IFRS-EU contracts that do not contain signifi cant insurance risk are presented as investment contracts and measured either at amortised cost or at fair value.
Accounting policies for the consolidated balance sheet and profi t and loss account of ING Group continued
Loans and advances to banks 4,660 2,805 31,751 24,072 36,411 26,877 Cash advances, overdrafts and other balances 285 2,174 3,176 18,422 3,461 20,596
As at 31 December 2006, the non-subordinated receivables amounted to EUR 39,774 million (2005: EUR 47,406 million), the subordinated receivables amounted to EUR 94 million (2005: EUR 60 million), and assets held under fi nance lease contracts amounted to EUR 277 million (2005: EUR 225 million).
Trading assets 193,977 149,187 Investments for risk of policyholders 110,547 100,961 Non-trading derivatives 6,521 7,766 Designated as at fair value through profit and loss 6,425 10,230
The majority of fi nancial assets included in Designated as at fair value through profi t and loss above are debt securities. For the fi nancial year 2006, the changes in fair value of loans designated as at fair value through profi t and loss attributable to changes in credit risk of the borrower were insignifi cant.
As at 31 December 2006, the balance sheet value included equity securities which were lent or sold in repurchase transactions amounting to EUR 13 million (2005: nil) and nil (2005: nil), respectively. As at 31 December 2006, the balance sheet value included debt securities which were lent or sold in repurchase transactions amounting to EUR 42 million (2005: EUR 67 million) and EUR 4,303 million (2005: EUR 1,653 million), respectively.
Equity securities 87,213 79,290 Debt securities 7,241 7,140 Other investments 16,093 14,531
Derivatives used in: – cash flow hedges 3,617 3,729 – fair value hedges 1,080 1,178 – hedges of net investments in foreign operations 3 32 Other non-trading derivatives 1,821 2,827 4 INVESTMENTS
Changes in the composition of the group –26 –380 –9,653 –1,458 –9,679 –1,838 Change in unrealised revaluations 1,956 3,097 –5,486 –630 –3,530 2,467 Impairments and reversals –42 –91 36 34 –6 –57 Disposals and redemptions –5,782 –8,390 –266,200 –210,629 –1,342 –245 –273,324 –219,264
Revaluation – gross unrealised gains 6,257 5,134 – gross unrealised losses 99 90
Revaluation – gross unrealised gains 5,361 10,401 – gross unrealised losses 2,364 1,809
As at 31 December 2006, the balance sheet value included equity securities which were lent or sold in repurchase transactions amounting to EUR 20 million (2005: nil) and nil (2005: EUR 3 million), respectively, and debt securities which were lent or sold in repurchase transactions amounting to EUR 2,119 million (2005: EUR 708 million) and EUR 37,804 million (2005: EUR 37,181 million), respectively.
Borrowed debt securities are not recognised in the balance sheet and amounted to EUR 460 million as at 31 December 2006 (2005: EUR 3,295 million).
Unearned future finance income on finance leases –2,684 –2,022 Net investment in finance leases 13,364 12,217
Opening balance 3,313 4,456 Implementation IAS 32/39 –592 Changes in the composition of the group –101 –4 Write-offs –691 –842
Fair value Balance Interest of listed sheet Total Total Total Total 2006 held (%) investment value assets liabilities income expenses
Accumulated impairments have been recognised of EUR 4 million (2005: EUR 4 million).
Changes in the composition of the group 108 –452 Transfers to and from Investments 241 964
Share of results 638 541 Dividends received –174 –170 Disposals –511 –923 Impairments –3 Exchange rate differences –68 98 Closing balance 4,343 3,622
Appraisal of real estate investments during the last fi ve years by professionally qualifi ed valuers (in percentages)
Changes to the composition of the group 417 3 –46 22 371 25 Disposals –400 –392 –2 –402 –392 Depreciation –617 –549 –10 –9 –627 –558
Gross carrying amount as at 31 December 3,938 3,070 39 98 3,977 3,168 Accumulated depreciation as at 31 December –1,267 –954 –25 –44 –1,292 –998
No individual operating lease has terms and conditions that materially affect the amount, timing or certainty of the consolidated cash fl ows of the Group.
Amortisation –175 –241 –200 –215 –8 –5 –383 –461 Impairments –10 –20 –1 –10 –21 Effect of unrealised revaluations in equity 18 157 18 157 Changes in the composition of the group –5 63 –21 –60 –6 –5 61 45 29 43
Disposal of portfolios –6 –6 Closing balance 2,641 2,986 305 173 377 408 199 94 3,522 3,661
Gross carrying amount as at 31 December 3,057 3,227 305 173 1,049 871 224 111 4,635 4,382 Accumulated amortisation as at 31 December –416 –241 –657 –457 –25 –17 –1,098 –715 Accumulated impairments as at 31 December –15 –6 –15 –6
Amortisation of software and other intangible assets is included in the profi t and loss account in Operating expenses. Amortisation of VOBA is included in Underwriting expenditure.
The total amount of borrowing costs relating to Property under development for third parties, capitalised in 2006 is EUR 2 million (2005: nil).
As at 31 December 2006 Other reserves included an amount of EUR 566 million (2005: EUR 583 million) related to the former Stichting Regio Bank that cannot be freely distributed. The decrease refl ects the loss for the year.
Concentration of holders of depository receipts for shares As at 31 December 2006, ABN AMRO Holding and Fortis each had an interest in depository receipts (for ordinary shares and for preference shares) of ING Groep N.V. of between 5% and 10%.
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 2006, 17,157,891 B warrants were outstanding (2005: 17,189,554). B warrant holders are entitled to obtain from ING Groep N.V., for a fi xed 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 2006, no B warrants (2005: nil) were held by group companies of ING Group.
Property Available Cash flow revaluation for sale hedge reserve reserve reserve Total 2006
Opening balance 460 8,700 2,046 11,206 Unrealised revaluations 8 –267 –696 –955 Realised gains/losses transferred to profit and loss –804 6 –798
Share of Retained associates Treasury Other earnings reserve shares reserves Total Total
Preference shares are presented in the balance sheet under liabilities. See Note 13 Preference shares.
The dividend on the ‘A’ preference shares is set at EUR 0.1582 per year until 1 January 2014 at which stage the dividend percentage will be readjusted (and thereafter every 10 years) to the average effective yield at that time on the 5 longest-dated Dutch government loans.
Cumulative preference shares The par value of the cumulative preference shares is EUR 1.20. The authorised cumulative preference share capital consists of 900 million cumulative preference shares, none of which have been issued.
Fixed rate debt securities Within 1 year 49,692 39,978 More than 1 year but less than 2 years 1,475 3,816 More than 2 years but less than 3 years 2,914 1,741 More than 3 years but less than 4 years 1,824 3,863 More than 4 years but less than 5 years 3,140 10,350 More than 5 years 5,155 9,718 Total fixed rate debt securities 64,200 69,466
Provision for non-participating life policy liabilities 78,772 79,759 4,930 5,241 83,702 85,000 Provision for participating life policy liabilities 52,914 51,866 187 200 53,101 52,066 Provision for (deferred) profit sharing and rebates 2,956 4,195 5 2,961 4,195 Provision for life insurance for risk of policyholders 97,304 89,531 651 1,197 97,955 90,728
– valuation changes for risk of policyholders 2,702 5,074 2,702 5,074 – effect of changes in discount rate assumptions 2 2 – effect of changes in other assumptions –21 861 306 –21 1,167 –5,694 –472 –348 –157 –6,042 –629
Where discounting is used in the calculation of life insurance provisions the rate is, based on weighted averages, within the range of 2.9% to 6.8% (2005: 3.0% to 6.0%).
Premiums earned during the year –5,929 –6,133 –377 –636 –6,306 –6,769 Exchange rate differences –245 380 –22 44 –267 424 Other changes –15 7 –42 –4 –57 3
The release of the provision from prior years in 2006 and 2005 are a result of favourable underwriting results in several business units, in particular, the Netherlands business units benefi ted from a changes in legal requirements for disability benefi ts and Canada benefi ted from favourable experience mostly from automobile pool.
Where discounting is used in the calculation of the claims provisions the rate is, based on weighted averages, within the range of 3.0% to 4.0% (2005: 3.0% to 4.0%).
Opening balance 18,633 Implementation IFRS 4 16,860 Changes in the composition of the group –42 18,591 16,860
Prior year provisions – payments to contract holders –6,667 –7,051 – interest accrual 344 276 – valuation changes investments 948 1,060 –5,375 –5,715
Exchange rate differences –1,021 1,659 Other changes 123 276 Closing balance 20,750 18,633
Estimate of cumulative claims: At the end of underwriting year 2,988 3,265 3,110 1 year later 2,619 3,109 2 years later 2,417 Estimate of cumulative claims 2,417 3,109 3,110 8,636
Trading liabilities 127,975 92,058 Non-trading derivatives 4,934 6,248 Designated as at fair value through profit and loss 13,702 11,562
Financial liabilities designated as at fair value through profi t and loss relate to debt securities in issue, funds entrusted and structured products.
Financial assets and liabilities at fair value through profit and loss 119 37 Deferred acquisition costs and VOBA 3,201 4,075 Fiscal equalisation reserve 3 –6
Loans and advances to customers 102 –105 Unused tax losses carried forward –909 –1,243
The deferred tax changes through equity includes a deferred tax charge of EUR –1,583 million relating to unrealised valuations, EUR –242 million relating to changes in the cash fl ow hedge reserve, EUR 486 million relating to transfers to insurance liabilities and DAC, and nil relating to stock options and share plans. These items are presented in the Deferred tax by origin table in investments and insurance provisions respectively. Other changes in deferred tax are included in the profi t and loss.
Included in Other in 2005 is EUR 2,460 million relating to the introduction of IAS 32/39 and IFRS 4.
No deferred tax Deferred tax tax asset recognised tax asset recognised
More than 1 year but less than 5 years 156 74 424 372 More than 5 years but less than 10 years 47 347 480 More than 10 years but less than 20 years 247 585 1,045 1,366
Annual contributions are paid to the funds at a rate necessary to adequately fi nance the accrued liabilities of the plans calculated in accordance with local legal requirements. Plans in all countries comply with applicable local regulations concerning investments and funding levels.
The Group provides other post-employment and post-retirement employee benefi ts to certain employees and former employees. These are primarily post-retirement healthcare benefi ts and discounts on ING products provided to employees and former employees.
Actuarial gains and losses for pension liabilities for the year ended 31 December 2006 includes EUR –180 million (2005: EUR 873 million) experience gain adjustments for assets and EUR –163 million (2005: EUR 116 million) experience gain adjustments for liabilities.
During 2006 certain plans were reclassifi ed from Other to Pension benefi ts. This reclassifi cation did not have an effect on total pension liabilities and other staff related liabilities. This reclassifi cation is included in the line other changes in the tables below.
The estimated unrecognised past services cost and unrecognised actuarial gains and losses for the defi ned benefi t plans that will be amortised into pension and other staff related liability costs during 2007 are nil and nil, respectively.
The actual return on the plan assets amounted to EUR 613 million (2005: EUR 1,583 million; 2004: EUR 871 million).
It is not expected that any plan assets are returned to ING Group during 2007.
Equity securities include ING Group ordinary shares of EUR 14 million (0.1% of total plan assets) at 31 December 2006 (2005: EUR 15 million, 0.1% of total plan assets). Real estate includes nil (0.0% of total plan assets) at 31 December 2006 which was occupied by the Group.
The assumptions above are weighted by defi ned benefi t obligations. The rates used for salary developments, interest discount factors and other adjustments refl ect specifi c country conditions.
An increase of 1% in the assumed medical cost trend rate for each future year would have resulted in an additional accumulated defi ned benefi t obligation of EUR 2 million at 31 December 2006 (2005: EUR 84 million) and no increase in the charge for the year (2005: EUR 7 million). A decrease of 1% in the medical cost trend rate for each future year would have resulted in lower defi ned benefi t obligation of EUR 2 million at 31 December 2006 (2005: EUR 66 million) and no decrease in the charge for the year (2005: EUR 5 million).
2.1 Consolidated annual accounts 22 ASSETS AND LIABILITIES BY CONTRACTUAL MATURITY
Maturity Less than 1–3 3–12 1–5 Over not 2006 1 month months months years 5 years applicable Total
Financial assets at fair value through profit and loss – trading assets (2) 193,977 193,977
– designated as at fair value through profit and loss 187 420 1,435 874 3,509 6,425
Customer deposits and other funds on deposit 447,824 15,374 16,690 12,197 4,595 496,680 Financial liabilities at fair value through profit and loss – trading liabilities (2) 127,975 127,975
– designated as at fair value through profit and loss 617 581 2,081 6,285 4,138 13,702
(1) Included in remaining assets where maturities are not applicable are: – property and equipment – real estate investments – investments for risk of policyholders – investments in associates.
(2) Trading assets and trading liabilities have been presented in the above table as maturity not applicable, because they are held for short term profi t taking. The majority of items are debt instruments and equity instruments, where the contractual maturity is generally more than 5 years.
Disclosures about the Group’s exposure to interest rate risk are presented in the ‘Risk management’ section. Those sensitivity disclosures are included instead of disclosures on repricing dates and effective interest rates, as those sensitivity disclosures better refl ect the Group’s exposure to interest rate risk in line with the Group’s risk management procedures.
Additional information to the consolidated balance sheet of ING Group amounts in millions of euros, unless stated otherwise
Maturity Less than 1–3 3–12 1–5 Over not 2005 1 month months months years 5 years applicable Total
Loans and advances to customers 89,382 14,276 29,258 81,778 224,221 266 439,181
– designated as at fair value through profit and loss 112 510 1,538 5,072 4,330 11,562
2.1 Consolidated annual accounts 23 DERIVATIVES AND HEDGE ACCOUNTING Use of derivatives and hedge accounting As described in the section ‘Risk management’, ING Group uses derivatives (principally interest rate swaps and cross currency interest rate swaps) for economic hedging purposes in the management of its asset and liability portfolios and structural positions. The objective of economic hedging is to enter into positions with an opposite risk profi le to an identifi ed exposure to reduce that exposure. The impact of ING Group’s hedging activities is to optimise the overall cost to the Group of accessing debt capital markets and to mitigate the market risk which would otherwise arise from structural imbalances in the duration and other profi les of its assets and liabilities. In addition, hedging activities are undertaken to hedge against the interest rate risk in the mortgage offer period in relation to retail mortgages and to lock-in the interest margin in relation to interest bearing assets and the related funding.
With respect to exchange rate and interest rate derivative contracts, the notional or contractual amounts of these instruments is indicative of the nominal value of transactions outstanding at the balance sheet date; they do however not represent amounts at risk.
Fair value hedge accounting ING Group’s fair value hedges principally consist of interest rate swaps and cross-currency interest rate swaps that are used to protect against changes in the fair value of fi xed-rate instruments due to movements in market interest rates.
For the year ended 31 December 2006, ING Group recognised in the profi t and loss account EUR 41 million of fair value changes on derivatives designated under fair value hedge accounting. This amount was partly offset by EUR 8 million fair value changes recognised on hedged items. This resulted in EUR 49 million net accounting ineffectiveness recognised in the profi t and loss account. At 31 December 2006, the fair values of outstanding derivatives designated under fair value hedge accounting was EUR 474 million (2005: EUR –158 million), presented in the balance sheet as EUR 1,080 million (2005: EUR 1,178 million) positive fair values under assets and EUR 606 million (2005: EUR 1,336 million) negative fair values under liabilities.
For the year ended 31 December 2006, ING Group recognised EUR –690 million after tax in equity as effective fair value changes on derivatives under cash fl ow hedge accounting. As a consequence, the balance of the cash fl ow hedge reserve in equity at 31 December 2006 was EUR 1,819 million (2005: EUR 2,974 million) gross and EUR 1,356 million (2005: EUR 2,046 million) after deferred tax. This cash fl ow hedge reserve will fl uctuate with the fair value changes on the underlying derivatives and will be refl ected in the profi t and loss account under Interest income/expense over the remaining term of the underlying hedged items. The cash fl ow hedge reserve relates to a large number of derivatives and hedged items with varying maturities, up to 40 years for insurance operations and 21 years for banking operations, with the largest concentration in the range of 20 to 25 years for insurance operations and 5 to 10 years for banking operations. Accounting ineffectiveness on derivatives designated under cash fl ow hedge accounting of EUR –7 million (2005: EUR –1 million) was recognised in the profi t and loss account.
2.1 Consolidated annual accounts 24 MAXIMUM CREDIT EXPOSURE ING’s maximum credit exposure as at 31 December 2006 and 2005 is represented as follows: Maximum credit exposure
Cash and balances with central banks 14,326 13,084 Amounts due from banks – loans and advances to banks 36,411 26,877 – cash advances, overdrafts and other balances 3,461 20,596 Trading assets – debt securities 38,287 38,299 – loans and receivables 118,459 80,527
Reinsurance contracts 6,529 8,285 Reinsurance and insurance receivables 4,105 3,144 Other receivables 5,572 7,468 Maximum credit exposure on balance sheet 1,033,943 991,039
The assets not freely disposable and the items for which they are held are as follows: Assets not freely disposable
ING Bank N.V. has an obligation to maintain a reserve with an average monthly balance with De Nederlandsche Bank (the Dutch Central Bank). In December 2006 the required monthly average was EUR 5,295 million (2005: EUR 3,747 million). On 31 December 2006 the balance on this reserve was EUR 4,076 million (2005: EUR 4,054 million).
After securitisation of these assets ING Group continues to recognise these assets on its balance sheet under Loans and advances to customers.
ING Group supports the commercial paper programs by providing the SPE with short-term standby liquidity facilities. Primarily these liquidity facilities are meant to cover temporarily disruptions in the commercial paper market. Once drawn these facilities bear normal credit risk. A number of programs are supported by granting structured liquidity facilities to the SPE, in which ING Group covers at least some of the credit risk incorporated in these programs itself (in addition to normal liquidity facilities), and as a consequence might suffer credit losses from it. Furthermore, under a Program Wide Credit Enhancement ING Group guarantees to a limited amount all remaining losses incorporated in the SPE to the commercial paper investors. All facilities, which vary in risk profi le, are granted to the SPE subject to normal ING Group analysis procedures regarding credit risk and liquidity risk. The fees received for services provided and for facilities are charged on market conditions.
Investment funds ING as fund manager and investor ING Group sets up investment funds for which it acts as a fund manager and sole investor at the inception of the fund. Subsequently, ING will seek third-party investors to invest in the fund, thereby reducing the interest of ING Group. In general, ING Group will maintain a small percentage of interest in these funds.
2.1 Consolidated annual accounts 28 PRINCIPAL SUBSIDIARIES AND COMPANIES ACQUIRED/DISPOSED The principal subsidiaries of ING Groep N.V. are as follows: Companies treated as part of the insurance operations ING Verzekeringen N.V. The Netherlands ING Verzekeringen Nederland N.V. The Netherlands ING Vastgoed Belegging B.V. The Netherlands Nationale-Nederlanden Levensverzekering Maatschappij N.V. The Netherlands Nationale-Nederlanden Schadeverzekering Maatschappij N.V. The Netherlands Parcom Ventures B.V. The Netherlands Postbank Levensverzekering N.V. The Netherlands Postbank Schadeverzekering N.V. The Netherlands RVS Levensverzekering N.V. The Netherlands RVS Schadeverzekering N.V. The Netherlands Movir N.V. The Netherlands ING Insurance N.V. Belgium ING Zivotna Poistovna a.s. Slovakia ING Nationale-Nederlanden Polska S.A. Poland ING Nationale-Nederlanden Polska Powszechne Towarzystwo Emerytaine S.A. Poland ING Asigurari de Viata S.A. Romania ING Greek Life Insurance Company S.A. Greece ING Greek General Insurance Company S.A. Greece ING Nationale-Nederlanden Magyarorszagi Biztosito Rt. Hungary Nationale Nederlanden Vida, Compañia de Seguros y Reaseguros S.A. Spain Nationale Nederlanden Generales, Compañia de Seguros y Reaseguros S.A. Spain ING Canada Inc. Canada Belair Insurance Company Inc. Canada ING Insurance Company of Canada Canada ING Novex Insurance Company of Canada Canada ING America Insurance Holdings, Inc. U.S.A. ING International Insurance Holdings, Inc. U.S.A. ING Life Insurance and Annuity Company U.S.A. ING North America Insurance Corporation U.S.A. Lion Connecticut Holdings Inc. U.S.A.
Cash in company acquired 19 19 Cash outflow / inflow on acquisition 46 110 2,132 2,288
Amounts due from banks 1 1 Financial assets at fair value through profit and loss 2 793 795 Miscellaneous other assets 332 34 366
(1) Goodwill recognised in 2006 on immaterial acquisitions and real estate portfolios was EUR 74 million, resulting in total Goodwill recognised in 2006 of EUR 169 million as disclosed in Note 9 Intangible assets.
Loans and advances to customers 228 16,884 2,334 19,446 Amounts due from banks 14 5,928 187 6,129 Financial assets at fair value through profit and loss 5 3,280 162 3,447
In June 2006 ING sold its U.K. brokerage unit Williams de Broë Plc for EUR 22 million. The sale is part of ING Group’s strategy to focus on core businesses. The result on the sale is subject to closing adjustments.
In September 2006 ING sold its 87.5% stake in Deutsche Hypothekenbank AG, a publicly listed mortgage bank in Germany, as part of ING’s strategy to focus on its core business. The sale resulted in a loss of EUR 83 million.
Disposal Disposal Acquisition Acquisition of Total of Baring Asset of Life of Total of Eural New Zealand acquisitions Management Georgia disposals
Minority interest Net assets acquired 83 151 234 863 306 1,169
In February 2005, ING sold internet service provider Freeler to KPN. The sale resulted in a net gain of EUR 10 million.
In March 2005, ING Group fi nalised 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.
In May 2005, ING Group sold Life Insurance Company of Georgia to Prudential PLC’s subsidiary, Jackson National Life Insurance Company. The loss from this transaction amounts to EUR 32 million after tax.
In June 2005, ING Group formed a private equity joint venture to purchase Gables Residential Trust, a U.S.-based real estate investment trust. Gables Residential Trust is a developer, builder, owner and manager of higher-end multifamily properties. ING will provide USD 400 million in equity to fi nance the transaction. The venture is managed by ING Clarion, a wholly-owned subsidiary of ING Group.
Acquisition of Allianz Other Total Disposal Other Total Canada acquisitions acquisitions of BHF disposals disposals
General Non-life Bank/ Primary line of business Insurance Bank Bank Insurance
In 2004, ING Group sold most of the German banking units of ING BHF-Bank. The transaction includes ING BHF-Bank’s asset management, private banking, fi nancial markets and core corporate banking business. The value of the transaction amounted to EUR 600 million.
In 2004, ING Group sold its non-life insurance business in Australia to QBE Insurance Group. The value of the transaction amounted to EUR 431 million.
29 LEGAL PROCEEDINGS ING Group companies are involved in litigation and arbitration proceedings in the Netherlands and in a number of foreign jurisdictions, including the United States, involving claims by and against them which arise in the ordinary course of their businesses, including in connection with their activities as insurers, lenders, employers, investors and taxpayers. In certain of such proceedings, very large or indeterminate amounts are sought, including punitive and other damages. While it is not feasible to predict or determine the ultimate outcome of all pending or threatened legal and regulatory proceedings, management does not believe that their outcome will have a material adverse effect on the Group’s fi nancial position or results of operations.
30 DIVIDEND RESTRICTIONS In addition to the restrictions in respect of minimum capital and solvency requirements that are imposed by industry regulators in the countries in which subsidiaries operate, other limitations exist in certain countries. The most signifi cant restrictions for ING Group relate to the insurance operations located in the United States, which are subject to limitations on the payment of dividends to the parent company imposed by the Insurance Commissioner of the state of domicile. For life, accident and health subsidiaries, dividends are generally limited to the greater of 10% of statutory surplus or the statutory net gain from operations. For the property and casualty subsidiaries, dividends are limited to a specifi ed percentage of the previous year’s shareholders’ equity or previous year’s net investment gains, which varies by state. Dividends paid in excess of these limitations require prior approval of the Insurance Commissioner of the state of domicile.
ING Australia Ltd 51 7,932 7,527 357 257 Postkantoren B.V. 50 169 132 241 238 KB Life 49 160 148 97 96 JV New Zealand Business 51 151 48 10 6 Pacific-Aetna Life Insurance/Shanghai Branch 50 114 96 38 39
32 RELATED PARTIES In the normal course of business, the Group enters into various transactions with related companies. Parties are considered to be related if one party has the ability to control or exercise signifi cant infl uence over the other party in making fi nancial or operating decisions. Transactions have taken place on an arm’s length basis.
Income received from and expenses paid to joint ventures were EUR 14 million and EUR 64 million respectively (2005: EUR 25 million and EUR 71 million respectively) and income received from and expenses paid to associates were EUR 154 million and EUR 1 million respectively (2005: EUR 91 million and EUR 1 million respectively).
Transactions with key management personnel (Executive Board and Supervisory Board) and post-employment benefi t plans are transactions with related parties. These transactions are disclosed in more detail in the remuneration report in the annual report. For the post-employment benefi t plans see Note 21 Other liabilities.
Base salary and short-term bonus 18,250 12,514 578 549 18,828 13,063
Financial assets Cash and balances with central banks 14,326 13,084 14,326 13,084
(1) Amounts due from banks and Loans and advances to customers do not include fi nance lease receivables. (2) Other assets do not include (deferred) tax assets. (3) Other liabilities do not include (deferred) tax liabilities, pension liabilities, insurance provisions and other provisions.
Cash and balances with central banks The carrying amount of cash approximates its fair value.
Amounts due from banks The fair values of receivables from banks are estimated based on discounting future cash fl ows using available market interest rates offered for receivables with similar characteristics.
Financial assets at fair value through profi t and loss The fair values of securities in the trading portfolio and other assets at fair value through profi t and loss are based on quoted market prices, where available. For those securities not actively traded, fair values are estimated based on internal discounted cash fl ow pricing models taking into account current cash fl ow assumptions and the counterparties’ credit standings.
Investments The fair values of equity securities are based on quoted market prices or, if unquoted, on estimated market values generally based on quoted prices for similar securities. Fair values for fi xed interest securities are based on quoted market prices, where available. For those securities not actively traded, fair values are estimated using values obtained from private pricing services or by discounting expected future cash fl ows using a current market rate applicable to the yield, credit quality and maturity of the investment.
Other assets The carrying amount of other assets is not materially different to their fair value.
Amounts due to banks The fair values of payables to banks are estimated based on discounting future cash fl ows using available market interest rates for payables to banks with similar characteristics.
Financial liabilities at fair value through profi t and loss The fair values of securities in the trading portfolio and other liabilities at fair value through profi t and loss are based on quoted market prices, where available. For those securities not actively traded, fair values are estimated based on internal discounted cash fl ow pricing models taking into account current cash fl ow assumptions and the counterparties’ credit standings.
Debt securities in issue and other borrowed funds The fair value of debt securities in issue and other borrowed funds is estimated using discounted cash fl ows based on current market interest rates for these instruments.
The fair values of the fi nancial instruments carried at fair value were determined as follows: Methods applied in determining fair values of fi nancial assets and liabilities
Financial assets designated at fair value through profit and loss 4,343 1,036 1,046 6,425 Available-for-sale investments 219,967 73,230 724 293,921
Sensitivities of fair values Reasonably likely changes in the assumptions used in the valuation techniques not supported by recent market transactions would not have a signifi cant impact on net profi t.
Supplementary capital – Tier-2 12,367 11,605 Available Tier-3 funds 329 363 Deductions –1,251 –650
(1) Subordinated loans qualifying as Tier-1 capital have been placed by ING Groep N.V. with ING Bank N.V. (2) Revaluation reserve is deducted as it is not part of Tier-1 capital (included in Tier-2) and includes the cumulative revaluations on real estate investments.
ING Insurance European Union directives require insurance companies established in member states of the European Union to maintain minimum capital positions. The capital position of ING Insurance has been measured on the basis of this European Union requirement.
Non-Insurance Total companies, core debt ING Verzekeringen N.V. & other eliminations Insurance companies
In line with the fi nal reporting to the supervisor, the 2005 split between Insurance companies and Non-Insurance companies, core debt and other eliminations has been adjusted. There is no impact on Total ING Verzekeringen N.V.
ING Group According to an agreement (‘Protocol’) between the Dutch Central Bank and the former Pension & Insurance Board regarding the supervision of fi nancial conglomerates, ING Group is required to have an amount of capital, reserves and subordinated loans which are at least equal to the sum of: – the required capital for the banking activities; and – the required capital for the insurance activities.
Required capital banking operations 27,034 25,572 Required capital insurance operations 9,296 8,851 Surplus capital 19,550 18,075
Interest income on loans 21,970 18,912 15,846 Interest income on impaired loans 13 –23 –84 Total interest income on loans 21,983 18,889 15,762
Interest expense on deposits by banks 3,559 2,371 1,351 Interest expense on customer deposits and other funds on deposit 15,107 11,960 9,440 Interest expense on debt securities 3,173 2,911 2,688 Interest expense on subordinated loans 1,132 1,126 892 Interest on trading liabilities 18,821 13,369 Interest on non-trading derivatives 5,159 5,821 Other interest expense 3,027 1,551 2,336 Interest expense banking operations 49,978 39,109 16,707
The presentation of interest income and interest expense changed in 2005 due to the implementation of IAS 32 and 39. For certain trading derivatives interest income and expense were included in Net trading income in 2004. As of 2005 these are presented as interest income and interest expense as included in Interest result banking operations. This reclassifi cation results in an increase in 2005 in interest income and interest expense of approximately EUR 12 billion. In addition, interest income and expense related to certain non-trading derivatives that were presented net during 2004, are presented gross as of 2005. As a result of this presentation difference, interest income and interest expense in 2005 is approximately EUR 5 billion higher than in 2004.
In 2006, the growth of the average total assets caused an increase of the interest margin amounting to EUR 1,040 million (2005: EUR 1,214 million; 2004: EUR 1,183 million). The decrease of the interest margin by 10 basis points caused a decrease of the interest result with EUR 867 million (in 2005 the decrease of the interest margin by 6 basis points caused a decrease of the interest result with EUR 345 million; in 2004 the decrease of the interest margin by 9 basis points caused a decrease of the interest result with EUR 453 million).
Gross premium income from life insurance policies 40,502 39,145 36,975 Gross premium income from non-life insurance policies 6,333 6,613 6,642
Insurance contracts Insurance contracts for risk of company for risk of policyholders Own Reinsurers’ Own Reinsurers’ 2006 account share Gross account share Gross
Acquisition Gross costs Net pre- Gross Gross and other reinsurance miums premiums claims Operating underwriting income/ Operational 2006 written earned (2) expenses expenses expenditure (3) (expenses) result
(1) Including disability insurance products. (2) Excluding reinsurance. (3) Including other underwriting income.
Acquisition costs Net Gross Gross Gross and other reinsurance premiums premiums claims Operating underwriting income/ Operational 2004 written earned (2) expenses expenses expenditure (3) (expenses) result
Income from investments in debt securities 6,359 5,757 5,302 6,359 5,757 5,302 Income from loans
Realised gains/losses on disposal of debt securities –56 245 93 60 37 305 Impairments of available-for-sale debt securities 36 34 36 34 Realised gains/losses and impairments of debt securities –20 279 93 60 73 339
Insurance operations Banking operations Total 39 VALUATION RESULTS ON NON-TRADING DERIVATIVES
Results from foreign exchange transactions 120 –87 –72 282 378 566 402 291 494
The portion of trading gains and losses for the year ended 31 December 2006 that related to trading securities still held at 31 December, amounts to EUR –121 million (2005: EUR 7 million; 2004: EUR 154 million).
The investment income and valuation results regarding investments for risk of policyholders of EUR 2,702 million (2005: EUR 5,074 million; 2004: EUR 2,309 million) has not been recognised in Investment income and valuation results on assets and liabilities designated at fair value through profi t and loss but is recognised in Underwriting expenditure together with the equal amount of change in insurance provisions for risk of policyholders.
Stock option and share plans ING Group has granted option rights on ING Group shares and conditional rights on depository receipts (share awards) for ING shares to a number of senior executives (members of the Executive Board, general managers and other offi cers nominated by the Executive Board), to all ING Group staff in the Netherlands and to a considerable number of employees outside the Netherlands. The purpose of the option and share schemes, apart from promoting a lasting growth of ING Group, is to attract, retain and motivate senior executives and staff.
The entitlement to the share awards is granted conditionally. If the participant remains in employment for an uninterrupted period of three years from the grant date, the entitlement becomes unconditional. In 2006 52,100 shares (2005: 73,500) have been granted to the members of the Executive Board and 2,432,686 shares (2005: 2,907,101) have been granted to senior management and other employees remaining in the service of ING Group.