Report of the Supervisory Board 58 Corporate governance 61 Report of ING Trust Offi ce 71 Report of ING Continuity Foundation 73 Section 404 Sarbanes-Oxley Act 74 Remuneration report 76 Works councils 87 2.1 Consolidated annual accounts
Parent company balance sheet 232 Parent company profi t and loss account 233 Parent company statement of changes in equity 234 Accounting policies for the parent company balance sheet and profi t and loss account 235 Notes to the parent company balance sheet 236 2.3 Other information
EXECUTIVE BOARD Michel J. Tilmant (55), chairman Eric F. Boyer de la Giroday (1) (55) Dick H. Harryvan (54) John C.R. Hele (49), CFO Eli P. Leenaars (1) (46) Tom J. McInerney (51) Hans van der Noordaa (46) Koos (J.V.) Timmermans (47), CRO Jacques M. de Vaucleroy (46) (1) Nominated for reappointment as of 22 April 2008
SUPERVISORY BOARD Cor A.J. Herkströter (1) (70), chairman (until 1 January 2008) Jan H.M. Hommen (64) (chairman as of 1 January 2008) Eric Bourdais de Charbonnière (2) (68), vice-chairman Henk W. Breukink (57) Peter A.F.W. Elverding (59) Luella Gross Goldberg (3) (70) Claus Dieter Hoffmann (65) Piet Hoogendoorn (62) Piet C. Klaver (62) Wim Kok (69) Godfried J.A. van der Lugt (67) Karel Vuursteen (66) (1) Retirement as of 1 January 2008 (2) Nominated for reappointment as of 22 April 2008 (3) Retirement as of 22 April 2008
Audit Committee* Jan H.M. Hommen, chairman (until 1 January 2008) Wim Kok (chairman as of 1 January 2008) Claus Dieter Hoffmann Godfried J.A. van der Lugt
Joan Spero, Harish Manwani, Aman Mehta and Jackson Tai are nominated for appointment to the Supervisory Board. The Shareholders’ meeting will decide on these nominations on 22 April 2008.
> Full year net profi t up 20.1% to EUR 9,241 million > Risk management and business profi le shield ING from direct impact of credit market turmoil > Robust commercial growth: insurance new business up 38% and continued growth in bank volumes > Strong capital position with effi cient capital allocation > Sharpened strategic focus on banking, investments, life insurance and retirement services
Insurance Value of new life business (in EUR million) 1,113 807 805 632 440 Internal rate of return (life) 14.3% 13.3% 13.2% 12.1% 10.9%
Assets under management (in EUR billion) 637 600 547 492 463
Our strategy Capitalising on changing customer preferences and building on our solid business capabilities, ING’s strategic focus is on banking, investments, life insurance and retirement services. We want to provide retail customers with the products they need during their lives to grow savings, manage investments and prepare for retirement with confi dence. We will build and invest more in bank distribution platforms. We will increasingly invest in high-growth markets. The successful execution of the strategy is underpinned by continued effi cient reallocation of capital through redeploying the capital we generate in mature markets to high-growth businesses, or returning it to our shareholders. With this strategy, ING remains focused on creating value for its shareholders and rewarding them with a better total return on investment than the average of our peers in the fi nancial sector over the longer term.
• 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.
It is clear that we can fulfi l our strategic initiatives only with a highly skilled and dedicated work force that is willing to go the extra mile for our clients. We put a lot of effort into attracting and retaining the best people and we are proud that we are recognised as a top-tier employer in an increasing number of countries.
Our role in society is very important to us and we continuously seek to meet the highest levels of sound business ethics. Corporate responsibility is embedded in the daily business activities of our employees. We made important progress in social and environmental areas. ING became ‘carbon neutral’ in 2007. And, I take great personal pride in the fact that ING and its employees helped raise funds for the education of around 125,000 children for one year; one child for every employee in the company.
As of 1 January 2008, Cor Herkströter retired as chairman of the Supervisory Board of ING Group. Jan Hommen has been appointed as his successor. On behalf of my Executive Board colleagues I wish to express my sincere gratitude and appreciation for the contribution Cor Herkströter made to ING Group for the past nine years. We truly value his contribution to the success of ING. I would also like to thank Luella Gross Goldberg, who will retire from the Supervisory Board at the Shareholders’ meeting in April, for her commitment and contribution to ING over the past years.
I am pleased to report that ING performed strongly in what has been a very diffi cult year for the fi nancial sector, with a weak dollar, a fl at yield curve and obviously the fi nancial market turbulence. We generated attractive profi ts for our shareholders, while our strong balance sheet, our large customer base and our solid risk management have helped to shield us from the direct impact of the market turmoil.
ING has systematically invested over the recent years to improve its risk management capabilities and has weathered the credit market turmoil with limited direct impact. This illustrates the importance of having solid risk management in times of stress.
We enjoyed strong performance on the commercial front. Our banking businesses continued to show solid volume growth and ING Direct passed the 20 million customer mark, a big achievement after only ten years of operation. And we achieved strong sales growth in our life insurance businesses in Central Europe, Asia and in the United States.
It is my fi rm belief that companies can only be successful if they put their customers fi rst and know exactly how to best serve them. Customers’ preferences are changing rapidly and are reshaping the fi nancial industry. As customers live longer, accumulate more wealth, and expect easy access to fi nancial products, we witness strong growth in client retail balances, particularly in developing markets. We also see a major shift in the distribution of fi nancial products where banks are increasingly taking the lead.
SHARE PRICE PERFORMANCE In 2007, ING’s share price decreased 20.4% to EUR 26.75 at year-end. Over the full year, ING underperformed the AEX by 23.8%-points. In the four-year period 2004 – 2007 ING’s share price rose 44.7%.
PROFIT RETENTION AND DISTRIBUTION POLICY ING Group’s profi t retention and distribution policy is determined by its internal fi nancing requirements and its growth opportunities on the one hand and the capital providers’ dividend expectations on the other. ING Group’s internal funding needs are determined partly by statutory solvency requirements and capital ratios, compliance with which is essential to its existence. No less important to ING Group are its credit ratings, which directly affect its fi nancing costs and hence its profi tability. For their part, the capital providers expect a dividend which refl ects ING Group’s fi nancial results and is relatively predictable.
FOUR-YEAR PRICE DEVELOPMENT ING DEPOSITARY RECEIPTS FOR SHARES index 1 January 2004 = 100
Annual General Meeting of Shareholders Tuesday, 22 April 2008, 10:30 a.m.
Payment date fi nal dividend 2007 Monday, 5 May 2008 (NYSE Euronext) Monday, 12 May 2008 (NYSE)
ING share quotation ex interim dividend 2008 Thursday, 14 August 2008 (NYSE Euronext and NYSE)
United Kingdom 25 United States and Canada 24 Netherlands 18 Belgium 11 Luxembourg 7 Switzerland 5 France 5 Other 5 Total 100
Against this backdrop, the life insurance sector is going through a paradigm shift from traditional to investment-linked products. And because of this shift, distribution is moving increasingly into the domain of banking. With the surge in technological developments, customers can access fi nancial services faster and in many different ways. Customers increasingly obtain easy, direct access to fi nancial products, and advice only when they want it. This has led to growth of direct distribution channels, as refl ected in the success of Postbank and ING Direct.
Another priority is to build and invest in bank distribution platforms. Banks fulfi l many customer needs, covering the full range of products from liquidity to lending and investing. Banking is structurally well-positioned as it offers opportunities for early customer acquisition and maintaining customer relationships. Moreover, it is a rapidly growing industry in developing markets, with Turkey as an important example. There is also a steady and fundamental shift taking place towards online banking – already one of our key differentiators which we will continue to build on.
In the context of our strategic focus we will signifi cantly invest in organic growth and add-on acquisitions. We will also accelerate our portfolio management, assessing our current business in line with the sharpened strategic focus.
We also sold several non-core businesses in 2007 including Regio Bank in the Netherlands. In Belgium, we divested our Broker and Employee Benefi ts insurance business as these businesses did not have critical mass, and we expect the bank distribution channel to become more dominant in the future with above industry average growth rates. ING will continue to sell its insurance products in Belgium through its own bank channels. Early 2008, we sold our non-core insurance business in Mexico in line with our strategy to focus our activities on banking, investments, life insurance and retirement services.
In 2007, as a result of disciplined capital management and solid profi tability of our businesses, we have been able to maintain a strong capital position. On balance, ING was able to widen its spare leverage by a third, further securing the capital base and providing maximum fi nancial fl exibility to pursue our renewed strategic objectives. A position that is even stronger under the new Basel II regime. ING employed its excess capital to fund acquisitions, pay dividends to shareholders and buy back shares. A EUR 5 billion buy-back programme was started in June 2007 and is expected to be completed by June 2008. By the end of 2007, 56% of the programme had been completed.
SOLID RISK MANAGEMENT FULLY INTEGRATED In recent years, ING has systematically invested to improve its risk management capabilities. We have built a strong risk management function and fully integrated risk management into the daily management of all business units and strategic planning, embedding a philosophy of sound risk management at ING. The turmoil in fi nancial markets over recent months illustrated the importance of having sound risk management in times of stress. ING has weathered this market turmoil with limited direct impact. Moreover, risk management also functions as an enabler, working with the businesses to identify and execute business opportunities, lower the cost of funding and support strategic decisions.
CONCLUSIONS AND AMBITIONS In 2007, ING performed strongly in a challenging environment refl ected in an excellent commercial development. Moreover, with risk management fully integrated at all levels, ING is well-insulated from the worst effects of the market turmoil.
Capitalising on changing customer preferences and building on our solid business capabilities, we have chosen to sharpen our strategic focus to banking, investments, life insurance and retirement services. We want to provide retail customers with the products they need during their lives to grow savings, manage investments and prepare for retirement with confi dence. We will build and invest more in bank distribution platforms. We will increasingly invest in high-growth markets. In 2007, we already stepped up the number of initiatives that support this strategy. In 2008, we will continue along this path.
ADDITIONAL INFORMATION In the Report of the Executive Board, information is included about strategy, fi nancial highlights, capital management, risk management, developments in ING’s six business lines, as well as about asset management, human resources, branding and corporate responsibility. For additional information, reference is made to the section on corporate governance (pages 61-70), which is deemed to be incorporated by reference here.
GROUP RESULTS Total net profi t rose by 20.1% to EUR 9,241 million. Underlying net profi t, which is defi ned as total net profi t excluding the impact of divestments and special items, rose by 19.4% to EUR 9,172 million, including the net gain on the sale of stakes in ABN AMRO and Numico of EUR 2,087 million. Earnings per share (EPS) rose to EUR 4.32 from EUR 3.57. Underlying profi t before tax rose by 12.4%. The high tax exempt gains on equity investments resulted in a reduction in the effective tax rate from 19.2% in 2006 to 13.9% in 2007.
Robust commercial growth Although the turmoil in credit markets in the second half of 2007 made the business environment even more challenging, the commercial growth remained robust, both in insurance as well as in banking. The life insurance business in developing markets showed strong sales, refl ected in a rise of 57.3% in the value of new business and of 23.1% in new sales (annual premium equivalent ‘APE’). ING Direct attracted almost 2.8 million new customers in 2007. Residential mortgages grew from EUR 69 billion, end of 2006, to EUR 97 billion, end of 2007. Total funds entrusted decreased EUR 4.4 billion due to a decrease in the UK of EUR 14 billion. At ING Direct UK measures are taken to reposition the business, among others targeting for less rate-sensitive clients. Growth in mature markets is shown in the Benelux, where loans and advances to customers increased by EUR 39 billion, of which EUR 12 billion came from the transfer of mortgages from Nationale-Nederlanden.
Improved returns ING focuses on balancing growth and returns to maximise value creation. Effi cient capital allocation and pricing discipline received continued attention. The underlying after-tax risk-adjusted return on capital (RAROC) of the Banking operations improved to 22.3% from 20.5%, refl ecting lower tax charges. The internal rate of return on new life insurance sales improved from 13.3% in 2006 to 14.3% in 2007.
Insurance Europe 19 Insurance Americas 22 Insurance Asia/Pacific 6 Wholesale Banking 25 Retail Banking 22 ING Direct 6 Total 100
Embedded value and value of new business The embedded value of ING’s life insurance businesses increased 17.1% before dividends and capital injections to EUR 32,460 million in 2007. After the dividend payment of EUR 5,468 million to ING Group, the year-end embedded value was EUR 26,993 million. Embedded value profi t, an important measure of value creation, increased 41.4% to EUR 2,802 million. The value of new business increased 37.9% to EUR 1,113 million in 2007, with the largest contributions coming from the developing markets in Asia/Pacifi c and Central and Rest of Europe. The largest increases were in Central and Rest of Europe, where the Romanian secondpillar pension fund added EUR 150 million, and in the Americas, mainly in the US and in Mexico’s pension business. New sales, measured in annual premium equivalent, rose 13.3% to EUR 7,320 million, while the internal rate of return improved to 14.3% from 13.3% in 2006.
BANKING OPERATIONS Despite the market and credit turmoil, the results at ING’s banking business continued to be resilient supported by commercial growth in all three business lines. Total profi t before tax from Banking operations decreased 9.9%. Underlying profi t before tax (excluding the impact of divestments and special items) decreased 1.7% to EUR 4,967 million as higher results at Retail Banking and the Corporate Line were offset by lower results at ING Direct and the Wholesale Banking product groups Financial Markets and Structured Finance. Income was up 3.5%, while operating expenses rose 6.1% primarily due to investments in growth. Risk costs remained low.
Share buy-back ING’s EUR 5.0 billion share buy-back is continuing on track and is expected to be completed by June 2008. At the end of December 2007, 55.9% of the buy-back had been completed. The shares that have been repurchased are held in treasury until shareholder approval is gained to cancel those shares.
ASSET MANAGEMENT Assets under management increased EUR 36.9 billion (6.1%) to EUR 636.9 billion in 2007. Growth was driven by a net infl ow of EUR 40.4 billion, where Insurance Asia/Pacifi c contributed EUR 14.2 billion, Retail Banking EUR 8.6 billion, Insurance Americas EUR 8.5 billion and ING Real Estate EUR 6.6 billion. Furthermore, changed asset prices of equity and fi xed income securities contributed EUR 16.2 billion and the positive impact of acquisitions and divestments amounted to EUR 12.7 billion. Growth was offset by the negative impact of exchange rates (mainly US dollar) of EUR 32.5 billion. Growth was achieved for the greater part in thirdparty assets, which increased by 13.8% to EUR 460.1 billion by year-end 2007. Proprietary assets decreased 9.6% to EUR 176.8 billion, where net infl ow and changed asset prices of equity and fi xed income securities were more that offset by the negative impact of currencies and divestments.
ING seeks to maintain a strong capital position and to allocate capital effi ciently. Together they help us to support growth, withstand fi nancial stress and ultimately help to deliver shareholder value. In 2007, we enhanced our strong capital position thanks to strong profi tability of the business and capital adequacy measures within capital management. ING employed excess capital to fund signifi cant organic growth, for acquisitions, to buy back shares and pay attractive dividends to shareholders. On balance, ING was able to widen its spare leverage by a third, further securing the capital base and providing maximum fi nancial fl exibility to pursue strategic objectives.
STRONG CAPITAL POSITION The capital position of ING Group remained robust during 2007, as adjusted equity increased from EUR 42.5 billion to EUR 44.9 billion. Shareholders’ equity decreased to EUR 37.2 billion from EUR 38.3 billion. Spare leverage, defi ned as the potential cash that can be raised at ING Group level if all capital ratios were on target, increased to EUR 4.8 billion from EUR 3.1 billion.
All major capital ratios were within their target by year-end 2007. ING sets the targets to be consistent with the AA rating target that exists for ING Group, ING Bank and ING Insurance. The core debt ratio limit (core debt is debt which is on-lent as equity to subsidiaries) for ING Group is derived from the estimated diversifi cation between ING Bank and ING Insurance.
Financings in the market throughout the year raised further senior debt and hybrid Tier-1 for ING Group, the latter on-lent on a mirrored basis to both ING Bank and ING Insurance. Also a successful lower Tier-2 transaction was concluded for ING Bank. ING Insurance did not issue senior unsecured debt in 2007.
Basel II applies to ING Bank N.V., ING Investment Management B.V. and their legal entities. The Tier-1 ratio under Basel II as of 1 January 2008 is approximately 9.9% and the total BIS ratio is 13.8%. These numbers, although indicative as ING Bank will only report formally under Basel II as of the fi rst quarter 2008, compare very favourably to the capital ratios under Basel I and are a refl ection of the moderate risk in the ING Bank balance sheet, mainly as a result of ING Bank’s large mortgage portfolio. It is the intention that over the coming years the capital ratios will be brought back down to their existing targets. The additional Tier-1 capital available under Basel II is approximately EUR 7 billion.
Shareholders’ equity (in parent) 37,208 38,266 + Group hybrid capital 8,620 7,606 + Group leverage (core debt) 4,728 4,210 Total capitalisation (Bank + Insurance) 50,556 50,082 –/– Revaluation reserves fi xed income and other 963 3,352 –/– Group leverage (core debt) (d) 4,728 4,210 Adjusted equity (e) 44,865 42,520 Debt/equity ratio (d/(d+e)) 9.53% 9.01% Economic Capital and Available Financial Resources EC ING Group 36,000 35,500 AFR ING Group 49,715 48,774 AFR/EC ratio 138% 137%
Adjusted equity (e) 27,036 29,123 Core debt (d) 4,267 4,802 Debt/equity ratio (d/(d+e)) 13.63% 14.15% Available regulatory capital (a) 22,965 25,505 E.U. required regulatory capital (b) 9,405 9,296 Capital coverage ratio (a/b) 244% 274% Buffer for equities and real estate (c) 6,428 7,101 Internal capital coverage ratio (a/b+c) 145% 156% Economic Capital and Available Financial Resources EC ING Insurance 23,199 22,410 AFR ING Insurance 22,710 27,200
The new Financial Supervision Law also defi nes the necessary supervision on fi nancial conglomerates. Here also ING Bank has worked with the regulator to make sure ING meets all regulations.
Measures to manage capital ING increasingly looks at available fi nancial resources and economic capital employed when managing capital. These concepts come from our internal risk management models. Economic capital (EC) is a measure for the totality of risks run in the company over a oneyear time horizon and with a AA confi dence interval of 99.95%. Available fi nancial resources (AFR) equal market value of assets minus market value of liabilities, excluding hybrids issued by ING Group which is counted as capital.
In the course of selling life insurance policies ING Insurance Netherlands also sells mortgages. At the beginning of 2007 approximately EUR 17 billion of mortgages had accumulated within ING Insurance Netherlands, mostly at a mortgage subsidiary. This entity was transferred to ING Bank, where the assets can be funded more cheaply and the systems are in place to actively manage the prepayment risk. This transfer reduced the operating leverage of ING Insurance signifi cantly. Subsequently, more mortgages were transferred directly from ING Insurance Netherlands to ING Bank, creating liquidity and thereby facilitating the implementation of the new asset allocation. In total EUR 12 billion of mortgages were transferred.
SHARE TRANSACTIONS It was foreseen that during 2007 signifi cant excess capital would continue to build without further intervention. Therefore it was decided to proceed with a EUR 5 billion share buy-back to be spread out over a full year from June 2007 onwards. By the end of 2007, 90.7 million shares had been repurchased for a total consideration of EUR 2.8 billion. The full impact of the share buy- back, once it has fully run its course, will be to improve EPS by approximately 7%.
Also, after the repurchase of ING preference shares from Aegon during 2006, the ING preference shares of both Fortis and ABN AMRO were repurchased during 2007. With these transactions, all three major holders have now sold their ING preference shares back to ING Group.
CAPITAL MANAGEMENT TRANSACTIONS IN 2007 In 2007, Capital Management has executed the following funding transactions: For ING Groep N.V.
For ING Bank N.V. USD 2,000 million Lower Tier-2, Institutional Eurodollar market, fl oating rate
Capital Management also routinely adjusted the delta hedge for employee options throughout the year. At the start of 2007 ING Group held 52.7 million shares as a hedge against employee options. At the end of 2007 this amount was 36.0 million. As a result of buy-backs, warrants and delta hedging transactions the number of shares outstanding in the market decreased by 52 million to 2,099 million.
At the end of 2006, 17.2 million warrants B were outstanding. These warrants entitle the holder to purchase two ordinary ING Group shares at a price of EUR 24.96 each. During 2007, 7.9 million of these warrants were exercised, leading to the issue of 15.8 million new shares. During the early days of January 2008 the last of the warrants were exercised, leading to further issuance of more than 18 million shares. No warrants were outstanding after 8 January 2008.
Already during the fi rst half of 2007 Capital Management had started to execute internal securitisations to enhance ING Bank’s already substantial liquidity buffer. The AAA rated senior positions of these securitisations can be used as collateral for liquidity. Thus EUR 29.3 billion of collateral was created during 2007.
Pre-tax P&L impact directly related to credit and liquidity crisis in EUR million 3Q 4Q 3Q+4Q
US subprime RMBS –17 –47 –64 Alt-A RMBS –0 –0 –0 CDOs/CLOs –15 –36 –51 Monolines –0 –66 –66 Investments in SIVs, ABCP –0 –45 –45 Leveraged Finance –29 –0 –29 Total –61 –194 –255
US subprime RMBS, Alt-A RMBS and CDO/CLO exposures and revaluations at year-end 2007
Credit risk (including Transfer risk) 7,503 7,557 Market risk 7,407 4,816 Non-fi nancial risk* 3,017 3,503 Total Banking operations 17,927 15,876 * Non-fi nancial risk includes operational risk as well as business risk.
Economic Capital break-down by risk category ING Insurance in EUR billions 2007 2006
Credit risk (including Transfer risk) 1,021 1,411 Market risk 15,258 14,555 Insurance risk 3,293 3,110 Non-fi nancial risk* 3,627 3,334 Total Insurance operations 23,199 22,410 * Non-fi nancial risk includes operational risk as well as business risk.
MANAGING THE MARKET TURMOIL ING has integrated risk management in ING’s daily business activities and strategic planning. ING has systematically invested in its risk management capabilities over recent years. ING’s risk approach is refl ected in the diversifi ed business mix and the composition of the balance sheet.
The total direct pre-tax negative impact on ING’s 2007 profi t and loss account was EUR 255 million (EUR 61 million in the third quarter and EUR 194 million in the fourth quarter). The direct impact is a result from exposures to these pressurised asset classes and leveraged fi nance in the third quarter, as well as monoline insurers, Structured Investments Vehicles (SIVs) and Asset-Backed Commercial Paper (ABCP) in the fourth quarter. Pre-tax revaluation for the pressurised asset classes (US subprime RMBS, Alt-A RMBS and CDOs/CLOs) at year-end 2007 was EUR –1,377 million. On an aftertax basis this runs through shareholders’ equity in the balance sheet.
ING has a high quality ABS portfolio The US subprime RMBS, US Alt-A RMBS, CDO and CLO portfolios are part of ING’s Asset Backed Security (ABS) portfolio, which is of high quality and well diversifi ed due to strict limits and investment policies defi ned in mandates for every portfolio. The investments ABS portfolio, almost entirely available for sale, was EUR 84 billion at year-end.
Limited exposure to US subprime mortgages The US subprime RMBS exposure is of relatively high quality. ING has a very limited exposure to US subprime RMBS and does not originate subprime mortgages. Investment decisions have been based on extensive internal research. Exposure to US subprime RMBS amounted to EUR 2.8 billion at 31 December, 2007, representing 0.2% of total assets and was fair valued at 90.1% of its cost. The negative pre-tax revaluation on US subprime RMBS at 31 December, 2007 was EUR 307 million. Net impairments and trading losses combined amounted to EUR 64 million (EUR 17 million in the third quarter and EUR 47 million in the fourth quarter). At year end, 96.0% of the portfolio was rated AA or higher, and in the fourth quarter only EUR 31 million was downgraded by ratings agencies.
On average, the ING Direct Alt-A RMBS portfolio is near prime and of high-quality with a loan-to-value ratio of 71%, an average FICO score of 723 and more than 99% of the portfolio is rated AAA. S&P’s estimates average AAA Alt-A RMBS credit enhancement at approximately 7.5%, whereas ING Direct’s Alt-A RMBS portfolio has a 12% average credit enhancement. ING Direct’s average credit enhancement can absorb eight times the current pipeline losses in the underlying Alt-A mortgages.
The portfolio had a negative pre-tax revaluation of EUR 936 million at 31 December 2007. The rating agencies downgraded EUR 10 million of ING’s Alt-A RMBS portfolio in the fourth quarter of 2007. There were no impairments or trading losses taken in respect of the Alt-A RMBS portfolio. ING continues to review its RMBS portfolio very closely, and performs structural monitoring activities at the level of the individual security.
Leveraged Finance ING’s leveraged fi nance pipeline is limited and transactions are in various stages of syndication and negotiation. At the end of the year ING had a leveraged fi nance pipeline of EUR 2.3 billion or 0.2% of total assets, over 13 deals. Existing underwriting standards, which were tightened from the fi rst quarter 2007 onwards, and leverage limits have resulted in negligible mezzanine and covenant-lite lending.
Negligible liquidity impact ING has a strong balance sheet and a sound capital position. ING enjoys a favourable funding base with customer deposits providing 61% of total funding. Retail (36%) and corporate (25%) deposits are relatively stable sources of funding. Our funding costs remain low. The fi xed income market recognises our sound balance sheet and favourable risk profi le.
In April 2007, ING made a strong commitment to risk management by appointing Koos Timmermans to the Executive Board as chief risk offi cer. It was decided to separate this function from the role of the chief fi nancial offi cer because of the increasing complexity and importance of both the risk and fi nance functions in ING. Having Risk Management separately represented in the Executive Board ensures that risk is a key component of management decisions.
The Risk Dashboard The Risk Dashboard, disclosed for the fi rst time in September 2007, is a tool that enables the Executive Board to identify risk concentrations and potential risk mitigating actions. This tool gives an overview of risks inherent in all the banking and insurance businesses and facilitates monitoring the adherence of risk-taking with respect to the Groups’ risk appetite. It thereby allows ING to take strategic decisions using comparable risk measures and to maximise effi cient capital allocation. The tool is unique to ING and will be reported annually. A full disclosure of the Risk Dashboard is included in the Risk section of the Annual Accounts.
Since the start of the market turmoil in August 2007, ING’s Liquidity Crisis Committee has met on a regular basis in line with ING’s liquidity policy. The Committee discusses ING’s liquidity and funding profi le and is chaired by the chief risk offi cer (CRO). Other members include the chief fi nancial offi cer (CFO), all the main treasurers of ING Group, the head of Market Risk Management and the head of Corporate Communications and Affairs. The liquidity strategy and market conditions are monitored on a daily basis. Large buffers of liquidity were retained throughout 2007, and as a result, contingency funding plans, in place at all levels, were not required to be executed as ING’s liquidity position remained sound during the year.
BUILDING A COMPETITIVE ADVANTAGE The purpose of ING Risk Management is to build a sustainable competitive advantage by fully integrating risk management in ING’s daily business activities and strategic planning. Assuring maintenance of solvency, credit ratings and liquidity implies that products and portfolios are structured, underwritten, priced, approved and managed appropriately and that internal and external rules and guidelines are complied with.
Fully integrating risk management in ING’s daily business activities and strategic planning is further achieved through a transparent disclosure of ING’s risks and a risk strategy that is consistent with the overall Group strategy and the risk appetite.
ING Group’s risk metrics cover the most important aspects in terms of different stress severities (non-extreme versus extreme situations) and performance measures where risk can materialise (value versus earnings). The Earnings at Risk and Capital at Risk metrics are important metrics from a shareholder point of view since they provide insight in the level of risk ING takes. From a debt-holder point of view Economic Capital is more important since it serves as the capital amount required to absorb losses in extreme circumstances.
RISK MANAGEMENT CREATES VALUE Risk Management benefi ts ING shareholders directly by providing more effi cient capitalisation, lower costs of risk and funding, and support for growth. Together this results in the ability to generate more economic profi t.
SOUND COMPLIANCE Financial institutions continue to experience close scrutiny by regulatory authorities, governmental bodies, shareholders, rating agencies, customers and others to ensure they comply with the relevant laws, regulations, standards and expectations. Bank and Insurance regulators and other supervisory authorities in Europe, the US and elsewhere continue to oversee the activities of fi nancial institutions to ensure that they operate with integrity and conduct business in an effi cient, orderly and transparent manner. ING seeks to meet the standards and expectations of regulatory authorities and other interested parties through a number of initiatives and activities, including scrutinising account holder information,
payment processing and other transactions to support compliance with regulations governing money-laundering, economic and trade sanctions, bribery and other corrupt practices. The failure or perceived failure by ING to meet applicable standards in these areas could result in, among other things, suspension or revocation of ING’s licenses, cease and desist orders, fi nes, civil or criminal penalties and other disciplinary action which could materially damage ING’s reputation and fi nancial condition. ING’s primary focus is to support these objectives as good business practice through Business Principles and group policies. ING Bank N.V. has been in discussions with its Dutch bank regulator De Nederlandsche Bank (DNB) related to transactions involving persons in countries subject to sanctions by the EU, the United States and other authorities. These discussions prompted ING Bank to engage in a review regarding transactions involving sanctioned parties. In connection with this review and related discussions ING Bank has undertaken to complete the global implementation of enhanced compliance and risk management procedures, and to monitor the implementation of such procedures on an ongoing basis, as instructed by DNB. ING Bank also remains in discussions with authorities in the US and in other jurisdictions concerning these matters, and it is not possible to predict at this time the outcome thereof.
In addition a dedicated Sanctions Desk was established within Corporate Compliance in 2007 to help the businesses cope with the increasing amount of regulation and sanctions, such as the EU, UN and US Regulations on money laundering and terrorist fi nancing and sanctions.
Underlying profi t before tax 1,840 2,249 –18.2% Total profi t before tax* 2,300 2,362 –2.6%
Value of new life business (EUR million) 400 219 Internal rate of return 15.8% 14.9% Embedded value of life business (EUR million) 14,156 16,103 Economic capital (EUR billion) 5.9 5.9
Underlying operating expenses increased by 1.4%. The slight decrease in the Netherlands of 1.6% was more than offset by an increase in Central & Rest of Europe of 15.9%, largely explained by higher start-up investments for the life insurance operation in Russia and the second-pillar pension fund in Romania. Expenses in the Netherlands were tempered by ongoing staff reductions and last year’s software impairments, as the release of employee benefi ts provisions in 2007 was matched by last year’s releases.
Despite EUR 23 million higher start-up investments in new businesses in Russia and Romania, Central & Rest of Europe’s underlying profi t before tax increased 17.7% to EUR 332 million. Profi t growth was driven by the life business and related asset management activities. The higher life result was mainly due to strong sales throughout the region propelled by the accelerated growth strategy.
HIGHLIGHTS ING Insurance Europe operates in the mature Benelux market and the emerging markets in Central and Eastern Europe with a strong focus on life insurance and retirement services. Across the region, a number of trends affecting the insurance industry are becoming increasingly visible. First of all, as in many other parts of the world, the European population is living longer than any generation before. Consequently, insurers will increasingly need to focus on insuring longevity risk, providing solutions to help customers create and manage the capital needed to fi nance a long retirement. Second, the distinction between commodity and advisory products is becoming more apparent, with bank and direct channel distribution growing at the expense of the intermediary channel in commodity products. Third, increased transparency requirements and heightened competition, with some competitors adopting aggressive pricing strategies to capture market share, are putting pressure on premium volumes and margins.
Optimising the Benelux insurance operations... In the Benelux region, ING is improving cost and capital effi ciency, actively managing its business portfolio, enhancing customer satisfaction and leveraging its solid distribution power across the various distribution channels. These are fundamental factors in sustaining the profi tability of the Benelux insurance operations.
…by actively managing the business portfolio… The business portfolio in the Benelux was actively managed in 2007 with the sale of the non-core broker and employee benefi ts business of ING Belgium to P&V Verzekeringen. ING will continue to sell life and non-life insurance products in Belgium exclusively through its proprietary retail bank channels (ING Bank and Record Bank). It is expected that this distribution channel will become more dominant in the future, and will experience above industry average growth rates. In the Netherlands, NN has decided to discontinue several industry pension fund contracts that have marginal returns, thereby freeing up economic capital and improving returns. At the same time, the add-on acquisition of AZL which was completed early 2007, strengthens ING’s position in the Netherlands as an integrated services provider for pension funds. An integrated service offering, including fi duciary asset management and excellent administration capabilities, is critical to obtain mandates from company pension funds which are increasingly outsourcing activities.
…by enhancing customer satisfaction… NN continues to make strong progress in improving customer satisfaction, as satisfaction levels increased in every segment in which NN operates, as measured by the annual Dutch Insurance Performance Survey.
…and starting new operations ING launched two greenfi elds in Central Europe in 2007: a life insurance company in Russia and a mandatory pension fund in Romania. The fi rst life insurance policy was sold in Russia in July. Whereas the Russian life insurance market offers substantial potential, it is still at an early stage of development and will require a long-term effort. The fi rst priority is to recruit and train a sales force of tied agents. In addition, ING is also looking for opportunities to conclude distribution agreements with banks. The Romanian government introduced mandatory private pension funds in September 2007. With the aim of capturing a large market share, ING Romania made a remarkable achievement by recruiting and training a large fl exible sales force, bringing the total to about 40,000 distributors. These efforts clearly paid off with more than one million new clients at the end of 2007, outperforming all competitors by a considerable margin and resulting in a market share of over 30%.
CONCLUSIONS AND AMBITIONS ING Insurance Europe continued its solid performance in 2007, both in terms of profi t and value creation. Looking ahead, the business will continue to respond to emerging trends in the insurance industry, in particular by addressing changing client needs, the move to a multi-distribution approach, more competition and the growing need for cost effi ciency. In the Benelux, ongoing volume and margin pressure will require a continued focus on cost reduction to retain attractive pricing as well as improved customer satisfaction. ING will increasingly shift the emphasis towards life insurance and pensions and will, within its multi-distribution approach, expand bank distribution.
GEOGRAPHICAL BREAKDOWN OF PREMIUM INCOME in percentages * Mexico, Chile and Peru; not including ING’s joint venture in Brazil because it is a minority interest.
Insurance Americas achieved growth in pre-tax profi t and value of new business in 2007 for the fi fth consecutive year, despite challenging market conditions. This strong performance was led by better results across all business lines in the US, and by very good results in Latin America life insurance. During the year, Insurance Americas continued to hone its strategy, focusing resources on higher-growth markets including those for investment products, life insurance and retirement services in the US and Latin America. Through the purchase of pension businesses in Latin America, ING has established a market-leading position to further expand its activities in the region.
FINANCIAL DEVELOPMENTS Underlying profi t before tax rose 3.4% to EUR 2,059 million during a period of diffi cult fi nancial market conditions in the US and an adverse currency trend. The result was also impacted by lower non-life profi ts in Canada and Mexico following lower underwriting results. Excluding currency effects, underlying profi t before tax rose 11% led by strong results in the US and Latin America.
Premium income at Insurance Americas fell 2.4% to EUR 23,537 million, although excluding currency effects, premium income grew 6.0% through higher life and non-life sales across all countries.
Premiums from life insurance increased 6.6%, whereas non-life premium income increased 3.0%, both excluding currency impacts. In the United States premiums grew by 6.7%, driven by higher variable annuity and retirement services sales, partially offset by lower premiums from fi xed annuities. Record variable annuity production in the United States was led by strong sales of LifePay Plus, a withdrawal benefi t rider introduced in August 2007. Life premiums in Latin America grew 3.8%, following higher group life business in Mexico as well as higher annuity sales in Chile, which more than offset lower sales in Mexico’s annuity business due to weaker market conditions. In Canada, non-life premiums advanced 2.7% on an increase in the number of insured risks, partially offset by lower average premium rates. Non-life premiums in Latin America grew 3.4% through higher health premiums in Chile and Mexico, offsetting lower sales in Mexico’s property and casualty business.
The embedded value of the life insurance business in the Americas increased 3.5% to EUR 10,633 million, due to strong sales and favourable operational variances, despite unfavourable currency movements and negative fi nancial variances refl ecting adverse equity market performance in the second half of 2007. The value of new business increased 61.7 % to EUR 270 million, due to positive developments in both the United States and Latin America. Last year’s value of new business was depressed by an increase in the discount rate, the impact of redundant reserves in the US individual life insurance business and assumption changes in Mexico. In the United States the value of new business increased 48.3 % to EUR 215 million, following product introductions and distribution initiatives related to the individual life and variable annuity segments as well as strong institutional sales in the second half of 2007. The value of new business in Latin America increased 154.5% to EUR 56 million, mainly due to higher volumes and returns in Mexico pensions, including EUR 10 million from acquired pension operations.
Non-life insurance Non-life underlying profi t before tax in the Americas fell 27.4% to EUR 487 million, or 24.5% excluding currency impacts in 2007, with lower results in both Canada and Latin America. While organic business growth in Canada remained solid during 2007, profi tability was down signifi cantly against 2006. Lower underwriting results, refl ecting the continuing softening of the underwriting cycle, and losses on investments contributed to the profi t decline. Underwriting results decreased in 2007 because of deterioration in the automobile insurance business and higher property insurance losses. While investment activities generated higher interest and dividend income, disappointing capital market conditions resulted in investment losses on debt securities. ING Canada continues to outperform the property/casualty industry on combined ratios, top-line growth and Return on Equity (ROE). The business is the country’s largest property/casualty insurer and has a strong reputation for effectively managing its business through the insurance cycle.
ING is a top player in retirement services, providing defi ned contribution pension plans to small and medium-sized corporations, educational institutions, hospitals, and governments. While all retirement services segments are important, ING specifi cally focuses on the markets with the best growth potential: the small and medium size corporate 401(k) market and the education market, specifi cally kindergarten to 12th grade (K-12) teachers and staff.
US variable annuity sales remain strong Variable annuity sales received a major boost, hitting record levels in the second half of 2007, following the launch of ING LifePay Plus in August. ING LifePay Plus – a minimum guaranteed withdrawal benefi t – has proven very popular among investors and fi nancial advisers. Variable annuities continued to be a major driver of sales and net fl ows for US Wealth Management in 2007.
Underlying profi t before tax in Latin America decreased 74.2% to EUR 17 million, due to lower underwriting results in Chile and Mexico. Mexico posted EUR 39 million in pre-tax losses, mainly caused by higher fi re- and weather-related claims and provision strengthening in automobile insurance. Unfavourable non-life results in Chile and Mexico were partly offset by strong results from the health business in Brazil.
Insurance Americas continued its sharp focus on top and bottomline growth by taking advantage of the product and distribution opportunities presented by the ageing of the US population and the increasing wealth in Latin America.
Companies such as ING which have leading positions in the retirement services and variable annuities markets and which provide a broad array of risk management guarantees have a signifi cant advantage. Increasingly, retirees and pre-retirees are looking for guarantees to protect their wealth.
The strength of the ING brand name in the US continued to be a strong selling point with both distributors and end-customers. Additional investments in the ING brand in the second half of 2007 supported the sales growth experienced across the US businesses.
ING Investment Management Americas ING IM Americas maintained strong asset management sales fi gures and launched new funds despite market challenges, particularly in the second half of the year. ING IM continued to increase its focus on improving portfolio performance in order to better serve both prospective and existing clients.
ING IM recorded strong investment performance from alternative investments, including private equities, limited partnerships and hedge funds, and its Institutional Markets division – renamed ING Financial Products in early 2008 – generated signifi cant new business.
On the retail side, ING IM America’s successful ‘Going Global’ campaign continued to attract signifi cant infl ows, with EUR 945 million in 2007. Several new funds expanded the international lineup including ING Asia Pacifi c Real Estate and ING European Real Estate, and two new closed-end funds, the ING Asia Pacifi c High Dividend Equity Income Fund and the ING International High Dividend Equity Income Fund. This brings total closed-end fund assets to EUR 3.3 billion. All new funds use ING’s varied investment capabilities and regional expertise to create customised global solutions for investors.
ING vaults into a leading position in Latin America Through the acquisition in Latin America, ING has picked up leading pension businesses in fi ve countries. In Mexico, it boosted ING to the number-3 position in the industry, and ING also became the number-3 player in Chile. In addition, ING acquired top-5 positions in Argentina, Colombia and Uruguay. ING was already the number-one pension provider in Peru with slightly more than 35% market share. Altogether, ING is now the second largest pension fund manager in Latin America – a strong position from which to continue building its businesses.
The acquisition gives ING a sustainable, scaled platform in the Latin American region where attractive macroeconomic and demographic trends are driving increasing demand for pension, life insurance and personal fi nancial products.
ING’s pension expertise in the region, combined with the solid local management from the acquired pension companies, will enable a smooth integration while maximising growth opportunities.
Key points > Asia/Pacifi c region continues to be a high-growth market > Present in the right markets to secure profi table long-term growth > Accounts for almost half of the Group’s total value of new business > Further strengthening of bank distribution
Value of new life business (EUR million) 442 421 Internal rate of return 16.8% 16.8% Embedded value of life business (EUR million) 2,204 1,343 Economic capital (EUR billion) 7.0 7.5
GEOGRAPHICAL BREAKDOWN OF PREMIUM INCOME in percentages * India, China, Hong Kong, Thailand and Malaysia.
South Korea 29% 3,607 Australia/New Zealand 2% 275 Rest of Asia* 8% 1,047
With economic growth and wealth creation in Asia continuing to outpace other regions, Insurance Asia/Pacifi c is wellpositioned to capitalise on opportunities for further growth. As a key value creator for ING, Insurance Asia/Pacifi c has a strong footprint in the region with a comprehensive product portfolio and multi-distribution capabilities.
FINANCIAL DEVELOPMENTS Underlying profi t before tax decreased by 7.2% to EUR 576 million in 2007 from EUR 621 million in 2006. Higher profi ts in South Korea and Australia were more than offset by a decrease in Japan. Excluding Japan, underlying profi t before tax increased by 18.7%. During the year, Insurance Asia/Pacifi c continued to invest in ongoing expansion of its businesses, especially in the high-growth markets of China, India and Thailand.
In Japan, underlying profi t before tax decreased by 84.6%, or EUR 132 million to EUR 24 million in 2007 from EUR 156 million in 2006 largely due to the impact of market volatility on its variable annuities business, and a EUR 24 million markdown in the assets backing the Corporate Owned Life Insurance (COLI) business related to a collaterized debt obligation (CDO). The total market for new Single Premium Variable Annuity (SPVA) business decreased due largely to the introduction of new regulatory requirements (Financial Instruments Exchange Law: FIEL) which increased compliance procedures for distributors of fi nancial products such as mutual funds and SPVAs. The market was also negatively impacted by weakened consumer confi dence due to ongoing market volatility. Despite these developments, sales of ING Life Japan’s Smart Design 1-2-3 introduced in the second half of 2007 were strong and ING maintained its top-3 market position. Although COLI tax product sales continue to be impacted by new tax deductibility guidelines, ING is well positioned for a shift to more protection driven COLI products in that market. However overall, premium income declined by 5.0%. Operating expenses increased by 6.6%, mainly due to higher promotional and branding activities.
In South Korea, underlying profi t before tax rose by 14.1%, or EUR 37 million, to EUR 300 million in 2007 from EUR 263 million in 2006, driven primarily by growth of investment-linked product sales and in-force premium, as well as a one-off recognition of EUR 10 million dividend on equity investment funds that were consolidated in the fourth quarter of the year. Premium income rose by 11.9%, or EUR 383 million to EUR 3,607 million in 2007 from EUR 3,224 in 2006, due mainly to sales of unit-linked products. Operating expenses rose by 29.1%, or EUR 57 million, to EUR 253 million in 2007 from EUR 196 million in 2006 as support for growing the business increased.
As in 2006, ING recorded zero profi t for Taiwan in 2007 due to strengthening of reserves in what continues to be a low interest rate environment. A total charge of EUR 110 million was taken in 2007 to strengthen reserves, compared with EUR 182 million in 2006. In Taiwan, ING’s strategic focus is to boost its sales and VNB by improving tied agency productivity and selling a higher proportion of the less capital intensive investment-linked products, supported by the higher margin accident and health riders. In line with this strategy, new sales increased by 56.8% to EUR 425 million from EUR 271 million in 2006. Value of new life business increased by 17.4% to EUR 182 million from EUR 155 million in 2006 with IRR at 20.0%.
In Rest of Asia, underlying profi t before tax from life insurance increased to EUR 34 million from EUR 33 million in 2006, partly driven by Malaysia’s new sales of its single premium investmentlinked product. Greenfi eld operations in China, India and Thailand recorded losses as ING continues to invest for future growth and profi tability in these markets. ING Vysya Life in India is continuing to increase its distribution reach including agency force and sales offi ces. ING’s life insurance joint-ventures in China obtained regulatory approval to open branch offi ces in the provinces of Anhui and Jiangsu, establishing a presence in two more regions (adding to its current operations in 10 provinces) with a combined population of more than 136 million.
Based on assets under management, ING is a top-3 regional investment manager with operations in 13 markets. Insurance Asia/Pacifi c will continue to invest in growth, either through bolt-on acquisitions or organically. In 2007, ING Investment Management Korea merged with the recently acquired Landmark Investment Management, to become South Korea’s 10th largest asset manager.
In Hong Kong, India, Malaysia, South Korea and Taiwan, ING has a strong tied agency force. ING Life Korea is the exemplary tied agency model in the region, with Taiwan catching up quickly. ING Life Korea’s success is based on selective recruiting, excellent training and support, and continual performance monitoring of its fi nancial advisers. In 2007, ING has further strengthened its tied agency force in Taiwan and India. In Taiwan, this has led to near record sales levels. In India an accelerated growth plan has led to a signifi cant increase of life insurance branches and agents, to more than 270 and 51,000 respectively by the end of the year (versus 90 branches and over 26,000 agents at year-end 2006). As a result, ING has been able to increase its market shares in highly competitive markets.
Bank distribution becoming a signifi cant channel While tied agency is currently ING’s strongest channel, we continue to develop third-party channels, in particular bank distribution. In Malaysia, ING recently signed an exclusive regional distribution agreement with Public Bank. Public Bank has an extensive distribution network of 241 branches across Malaysia and 15 commercial branches in Hong Kong. Sales through the Public Bank branches commenced in January 2008 with the launch of a threeyear investment linked plan that provides life insurance coverage and capital protection. In India, distribution via ING Vysya Bank has been stepped up, and in Thailand an exclusive bank distribution agreement is being signed with the fi fth largest bank, TMB, following ING’s announced acquisition of a 30% strategic shareholding in the bank. ING offers a total solution provider approach to its bank partners, including marketing and organisational support. One of our greatest strengths is our understanding of both the banking and insurance businesses, and how the two can augment each other.
Alongside bank distribution and tied agents, ING continues to explore innovative alternative channels. In South Korea, for example, selling insurance via Tesco’s hypermarkets has recently begun, and direct online sales of simple life insurance products such as OneCare express in Australia has also shown positive results. OneAnswer, ING’s investment platform offering retail investment services also continues to experience rapid growth.
Taiwan showed increased sales of investment-oriented products and annuities. In Taiwan, ING’s sales in investment-linked products in 2007 have increased because of a concerted effort to improve the productivity of our service. In New Zealand, the KiwiSaver pension product has been launched successfully and ING New Zealand has become the leading player in this segment with over 65,000 customers and 3,000 employers signing up for this voluntary retirement savings plan. In Australia, sales via ING Direct of ING Australia’s life insurance product linked to a mortgage commenced during the latter part of 2007 and the initial results are promising.
Expanding organisational capabilities Building and improving organisational capabilities, with particular focus on recruitment, management development and training, was an absolute priority in 2007. Along with the tremendous economic growth in Asia, the demand for talent is huge. Human resources remains a key priority, and ING is investing in improving and broadening long-term incentive programmes to attract and retain talent.
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 standardised processing 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. In Taiwan, for example, the focus on effi ciency has stimulated profi table new business growth. Implementing ING Group’s compliance policies also continues to be a high priority.
Enhancing brand awareness Efforts to enhance brand awareness have been initiated and implemented successfully. ING reached an audience of almost 500 million people in the region with sponsorship of the AFC (Asian Football Confederation) 2007 Asian Cup and Formula One races in Australia, China, Japan and Malaysia. Both platforms generated valuable business leads and increased brand awareness levels were registered, especially in Malaysia, South Korea and Thailand.
ING Investment Management in Asia/Pacifi c ING Investment Management (ING IM) is a leading asset manager in Asia/Pacifi c and manages both proprietary life portfolios as well as funds for third-party clients. In 2007, the focus has been on increasing scale. Recent acquisitions, such as Landmark Investment Management in South Korea, have helped create the right level of scale. The year also saw the opening of an offi ce in Dubai, the United Arab Emirates. ING IM’s initial focus will be on the six Gulf Co-operating Council countries of Saudi Arabia, United Arab Emirates, Kuwait, Oman, Qatar and Bahrain. Several new funds were successfully launched in multiple markets across the region during 2007. Fund performance was on track: over the one-year period to December 2007, 68% of ING funds outperformed their respective benchmarks on an asset-weighted basis. Investment management services in Asia/Pacifi c are discussed in more detail in the Asset Management chapter on page 50.
CONCLUSIONS AND AMBITIONS In 2007, Insurance Asia/Pacifi c delivered on its growth plans. Tied agents improved production, new signifi cant bank distribution deals were concluded and sales revitalised. This resulted in 18.7% growth in underlying profi t before tax excluding Japan where results were affected primarily by increased market volatility. Including Japan, underlying profi t before tax decreased by 7.2% to EUR 576 million. The overall internal rate of return remained highly attractive at 16.8% and both APE and VNB increased. These fi nancial accomplishments refl ect successful execution of our strategy in the region.
Key points > Resilient results in challenging business conditions > Generator of high-quality assets and important source of market and risk expertise > Landmark deals illustrate services and capabilities > Using capital effi ciently to stimulate growth
Additions to loan-loss provisions –115 –121 Underlying profi t before tax 2,399 2,525 –5.0% Total profi t before tax** 2,261 2,481 –8.9%
** Total profi t before tax is defi ned as profi t before tax including divestments and special items.
After-tax RAROC 20.3% 20.6% Economic capital (in EUR billion) 7.8 8.1
Wholesale Banking achieved resilient results in 2007 in what was a very challenging business environment and with fi nancial markets experiencing signifi cant turbulence. Profi table growth was achieved by concentrating on the needs of clients and on high value-added products, especially in the home markets. There was also a focus on reducing expenses, improving capital effi ciency and stimulating growth. Wholesale Banking’s position as a full-service Benelux bank, a specialist products provider and a growing force in emerging markets helped it perform well in unusually diffi cult business conditions.
Including the provisions booked as special items in 2007 and the impact of the divestment of Williams de Broë and Deutsche Hypothekenbank in 2006, total profi t before tax decreased 8.9% to EUR 2,261 million. Total underlying income rose 1.0% to EUR 5,860 million driven by ING Real Estate and Other Wholesale Products, while income from Financial Markets activities declined 11.2%. Underlying operating expenses remained under control, rising 5.2% to EUR 3,576 million. Fast growing ING Real Estate contributed 2.8%-point to this increase. The underlying cost/ income ratio increased to 61.0% from 58.6% in 2006.
ING Real Estate’s business portfolio increased by 18.2% to EUR 107.2 billion, driven by strong growth in the lending portfolio which increased 42.0% to EUR 32.1 billion. Underlying profi t before tax from ING Real Estate rose 5.2% to EUR 664 million. Profi t before tax of Investment Management increased 13.9% to EUR 156 million. The profi t of the Investment Portfolio rose 31.2% to EUR 261 million refl ecting higher realised gains and fair value changes on investments, while profi t at the Finance activities increased 16.9% to EUR 214 million. Profi t from Development declined to EUR 33 million from EUR 112 million in 2006 when profi ts included exceptionally high gains on the sale of completed projects. The after-tax RAROC of ING Real Estate decreased to 32.7% from 40.1% in 2006.
ING offers wholesale banking services to mid-corporates, corporates and fi nancial institutions in more than 40 countries. In the Netherlands and Belgium, ING is a full-service bank with a wide range of products, from cash management to corporate fi nance. ING also offers an extensive range of services in Poland and Romania and other Central and Eastern European markets. In other countries Wholesale Banking has a product and client range that is more selective. In all areas, ING is trying to boost growth by offering a range of leading banking services and products.
Wholesale Banking has six units: General Lending & Payments and Cash Management (PCM); Structured Finance; Leasing & Factoring; Financial Markets; Other Wholesale Products, and ING Real Estate, the world’s largest real estate investment manager. Structured Finance and Financial Markets are competitive internationally and are well-positioned for further growth. In Europe, ING is also a leader in PCM and Leasing.
Robust demand for Structured Finance Structured Finance generally had a good year due to robust demand and solid revenue growth in most product areas. The one exception was Leveraged Finance where the markets came largely to a halt in the second half due to concerns about credit quality in the global credit markets.
The recent disruption in the markets increased funding costs and decreased institutional demand. Over the longer term, the disruption is expected to increase loan pricing in a way that will benefi t structured fi nance. International trade and export fi nance volumes increased with our main multinational commodity clients. ING saw an especially strong performance across a number of other products, including asset-based fi nance, natural resources fi nance and telecommunications fi nance, which contributed signifi cant transaction fees.
Structured Finance has ambitious plans to strengthen its market position. Staff numbers were boosted in 2007 to support several large initiatives and will be increased further in 2008 to support more growth. The new jobs include a project advisory team in natural resources in London, an increase in headcount at the syndicated loan team in the Netherlands and Central and Eastern Europe, an expansion of the aviation team and staffi ng a start-up offi ce in Dubai.
Solid growth in Leasing & Factoring Leasing & Factoring saw a large increase in volumes and income due to solid growth in general leasing despite pressure on margins, as well as efforts to cross-sell services to corporate clients. ING Lease maintained its number fi ve position among European international leasing companies.
These losses were partially offset by a strong performance in the client-related businesses. ING offered hedging solutions to clients, due to interest rate and foreign exchange movements, and also booked strong results in developed markets in government bonds and in the treasury business. Financial Markets is also actively improving its mid-corporate coverage.
The emerging markets franchise is doing well, especially in money markets and foreign exchange. ING’s strong position in the sovereign debt market was underscored by its appointment as joint book runner on Greece’s benchmark 23-year infl ation-linked bond. Financial Markets also helped issue a USD bond for the Trade and Development Bank of Mongolia, the fi rst foreign currency issuance from that country.
During the fourth quarter, Financial Markets announced an ambitious three-year strategy to build on its successes in the clients and products function.
Fast-growing emerging markets are a key opportunity and we expect a large percentage of our top-line growth to be driven by expansion in these areas. Our aim is to be a top-5 player in our selected markets or products by taking advantage of our geographic footprint, strong brand recognition and commercial expertise and reputation.
With a diversifi ed business model, ING Real Estate weathered the turmoil in the fi nance and real estate markets well. ING Real Estate Investment Management broadened its product offer, providing investors with new investment strategies and funds, Real Estate Finance diversifi ed further internationally and Real Estate Development maintained its focus on Europe while growing its development pipeline. Turn to the Asset Management chapter, page 50, for further details.
Winning a number of landmark deals Wholesale Banking completed a number of important deals in 2007 that illustrate its array of services and capabilities. Corporate Finance advised the Van Gansewinkel Groep in an auction process in January resulting in the sale of the company to the private equity fi rms CVC and KKR. In April, ING landed a mandate to advise Akzo Nobel with its EUR 1.6 billion share buy-back.
ING advised KPN on its acquisition of Getronics in July. Corporate Finance successfully advised KPN on four public offers for the Dutch IT company to an enterprise value of EUR 1.2 billion. Two months later, ING was one of three banks providing KPN with a EUR 1.25 billion loan for standby and general corporate purposes. The long-standing relationship with KPN was again confi rmed when ING’s Debt Capital Markets was chosen to be a joint bookrunner for a EUR 1.25 billion fi ve-year bond.
In September, ING participated as one of four joint bookrunners in a EUR 2 billion deal for General Electric Capital Corp., the biggest euro-denominated transaction ever issued by GECC. ING also won several other large transactions, including a fi nancing for an Indonesian integrated energy provider and a Ukrainian real estate company. ING rounded off the year with an important advisory mandate in December when it advised Vedior on the intended public offer by Randstad. Corporate Finance acted as joint adviser to Vedior in this important EUR 3.5 billion transaction, which would create the second largest human resources services company in the world.
Containing operating expenses Wholesale Banking sought to contain expenses without impairing growth opportunities. Expenses rose in 2007 due to growth at ING Real Estate, higher compliance costs and investments in Structured Finance, Financial Markets, Leasing, as well as in PCM to prepare for SEPA. ING implemented a number of cost containment initiatives in 2007 to reduce operating expenses and to stimulate growth. Wholesale Banking has also been working on re-engineering the lending process, reducing the number of full-time equivalents and cutting support services.
In 2007, ING initiated GLOBE (Global Lending Operating and Business Environment), a major business transformation strategy aimed at improving business lending and streamlining the number of products offered to clients, reducing the cost of production and administration, enhancing control and compliance and improving the overall client experience.
Growth initiatives – especially in Structured Finance, Financial Markets and Real Estate – will focus on areas where ING can make the best returns. These initiatives are expected to accelerate earnings and revenue growth, reduce the cost-income ratio and increases the risk-adjusted return on capital.
CONCLUSIONS AND AMBITIONS Although 2007 produced challenging business conditions, Wholesale Banking remained resilient and delivered good results by focusing on high value-added products, especially in the home markets. This was accompanied by a focus on reducing expenses, improving capital effi ciency and actively stimulating growth. Wholesale Banking remains the largest contributor of profi t within the Group and has a clearly defi ned focus and ambition to be a full-service Benelux bank, specialist products provider and to have key franchises in the emerging markets. Wholesale Banking also offers key balance sheet management skills.
Netherlands 1,548 Belgium 341 Poland 110 Other* 63 Total 2,062 * Mainly the retail banking operations in Romania, Ukraine, India (ING Vysya Bank), Private Banking Asia and Americas, ING Card, ING Trust, the ING participations in Bank of Beijing, TMB and Kookmin Bank.
Total underlying operating expenses increased 4.3% to EUR 4,162 million driven by investments to grow the business in Poland, India, Romania and the Private Banking activities in Asia. The underlying cost/income ratio slightly improved to 65.1% from 65.6%. The addition to the provision for loan losses rose to EUR 172 million from EUR 161 million in 2006, due to higher risk costs in the Netherlands mainly related to a specifi c SME portfolio. The addition as a percentage of average credit-risk-weighted assets declined slightly to 16 basis points down from 17 basis points in 2006, due to strong business growth.
The underlying risk-adjusted return on capital (RAROC) after tax from Retail Banking improved to 39.5% from 32.0% in 2006. Higher risk-adjusted results combined with reduced economic capital led to this increase. The after-tax RAROC’s of all regions improved. Average economic capital declined 4.2% to EUR 3.9 billion. Methodology refi nements in line with Basel II compensated for strong business growth and the transfer of portfolios.
Country developments Underlying profi t before tax from Retail Banking in the Netherlands rose 9.8% to EUR 1,548 million driven by volume growth in almost all products. The residential mortgage portfolio in the Netherlands grew by 16.8% to EUR 116.1 billion, supported by the EUR 11.5 billion transfer of portfolios from ING Insurance, partly offset by the sale of RegioBank. Excluding these changes, underlying profi t before tax rose 8.1%, with income up 3.8%. Operating expenses declined 0.4% due to effi ciency improvements and lower compliance costs. Risk costs increased to 20 basis points of average credit-risk-weighted assets from 17 basis points in 2006.
In Belgium, underlying profi t before tax declined 28.7% to EUR 341 million due to 6.6% lower income and 3.4% higher expenses. The decline in income was next to a EUR 44 million capital gain on the sale of Banksys shares in 2006, mainly caused by margin pressure, as competition intensifi ed, while customers shifted from variable savings to lower margin term deposits. Average retail balances grew by 10%. Operating expenses increased 3.4% partly caused by the impact of allocation refi nements and some one-offs. Risk costs decreased from a net addition of eight basis points of average credit-risk-weighted assets in 2006 to a net addition of six basis points in 2007.
Underlying profi t before tax of ING Bank Slaski’s retail banking activities in Poland jumped 124.5% to EUR 110 million driven by strong volume growth and the shift of SME companies from Wholesale Banking to Retail Banking. Excluding this shift, profi t before tax rose 94.7%. The adjusted underlying income rose 31.0%, partly offset by 18.1% higher expenses due to strong business growth and investments in the franchise distribution network. Net releases from the loan loss provisions increased to EUR 12 million compared with a net release of EUR 5 million in 2006, refl ecting the signifi cant strengthening of credit risk management in Poland.
The other retail banking activities posted an underlying profi t before tax of EUR 63 million compared with a loss of EUR 2 million in 2006, mainly due to higher results in India and from the Private Banking activities in Asia as well as the high dividend received from Kookmin Bank. This was partly offset by higher investments in the greenfi eld franchises in Romania and Ukraine.
Major growth initiative in the Netherlands In May 2007, ING announced that Postbank and ING Bank will join forces to create a leading Dutch retail bank with more than 8 million retail and 600,000 business customers. By combining the activities of both banks, ING will improve services and maintain a strong focus on cost-effective execution. It will operate under the ING brand from 2009 and will be based on the successful direct banking model of Postbank with enhanced access to the professional advice capabilities of ING Bank.
It is expected that the integration will have a positive impact on earnings from 2009 onwards. The number of full-time employees (FTEs) will be reduced by 2,500 over a fi ve-year period. The intention is to help people from work to work as much as possible.
To strengthen its position in the mortgage market, Postbank launched mass media campaigns promoting ways for customers to reduce their monthly mortgage payments. The campaigns were successful and resulted in a substantial 16% increase in leads through Postbank’s direct channels. ING Bank started positioning campaigns to underline its advice capabilities.
Focus on fast-developing markets ING is well positioned in the key Central European markets of Romania and Poland and the important Asian markets of China and India. The strategy is to expand in Central and Eastern Europe and Asia and to enter selected high-growth countries by acquiring a partial or full stake in a bank or by starting up a greenfi eld. ING focuses on entering countries with a large population and strong GDP growth, like Turkey and Thailand, because these are the drivers for expansion of the fi nancial services market.
The intention over the next three years is to increase the contribution that high-growth markets make to total retail banking profi t. This will entail substantial investment. Initiatives are taken to prepare the business for the increasing demand for direct and simple products.
In Poland, ING Bank Slaski is developing a network of partner outlets to boost distribution. These outlets are based on ING’s Romanian Self’Bank model, a branch concept that focuses on internet banking and automated cash functions. At the end of 2007, ING Bank Slaski’s network consisted of just over 400 branches, including 75 franchise outlets, 29 of which were opened that year. ING Bank Slaski managed to strengthen its position in retail deposits, achieving a 9.4% market share by the end of the year. ING Bank Slaski is key distributor of ING investments funds in Poland. At the end of 2007, its market share of mutual funds was 5.8%. ING Bank Slaski also intends to increase its market share of local currency mortgages. It began piloting an online mortgage via brokers, Kredyt Hipoteczny Express, characterised by automated processes and fast decision-making.
In Romania, the concept of self-service banking has proved successful. The number of Self’Bank outlets now stands at 148 since the concept was launched in September 2004. 230,000 new customers were added in 2007, breaking the target of 500,000 total customers by the end of the year.
In India, ING has a 44% stake in ING Vysya Bank. The strategic focus in 2007 was to increase branch productivity and accelerate the acquisition of new customers by rolling out new branches and cash machines. The number of internet customers increased from 90,000 to 145,000. ING Vysya Bank obtained approval from the Reserve Bank of India to open 56 new branches and to install 100 off-site cash machines. The bank is growing faster than the retail banking market as a whole; for example, the overall deposits market grew by 12.8% while ING Vysya Bank’s deposits grew by 14.1%.
Ukraine is also an attractive country for retail banking. Its economy has been growing rapidly and a substantial increase in GDP per capita is expected. ING has started preparations to implement the Self’Bank concept copying the Romanian model. The aim is to have around 20 branches operational by mid-2008.
One of the big growth markets in Asia is Thailand. In December 2007, ING fi nalised the acquisition of a 30% stake in TMB for approximately EUR 460 million. This transaction enables ING to extend its footprint in the fast growing Asian market. TMB is one of the leading banks in Thailand with approximately EUR 14 billion in total assets, over 5 million customers and 472 branches. It offers a wide range of products and services with a large retail deposit base and a lending focus on the small-tomedium enterprise and corporate sectors.
PRIVATE BANKING ING Private Banking is well positioned to capitalise on the global growth in personal wealth. The mix between onshore private banking operations (Belgium and the Netherlands) and offshore (Switzerland and Asia) provides ING with a strong platform to benefi t from the worldwide potential. Onshore businesses are centred in the Benelux where ING is able to capitalise on both retail and wholesale distribution models. For the developing markets dedicated teams have been set up. ING Private Banking is growing rapidly, with all regions contributing to that growth.
ING decided to transfer mid-corporate clients in its home markets from Wholesale Banking to Retail Banking with effect from 1 January 2008. The transfer will allow ING’s domestic banking organisations in the Netherlands, Belgium, Poland and Romania to operate under a single management and a single brand.
The ambition is to increase the contribution of the growth markets to overall retail banking profi t in the next three years. ING will continue to screen opportunities for greenfi elds or acquisitions.
Underlying profi t before tax in EUR million 2007 2006 change
ING Direct continued to invest in building the business and expanding its product offering. The company faced a challenging year, given the interest rate environment, strong competition and required repositioning of ING Direct UK, all of which impacted profi t. Total client retail balances were up EUR 35 billion (excluding currency effects), bringing the total balance to EUR 310.1 billion, driven by a record ownoriginated mortgages production of EUR 29 billion.
Total underlying income declined in 2007 by 1.7% to EUR 2,196 million due to an 8.1% lower interest result. The interest margin narrowed to 0.75% from 0.89% in 2006 as a result of higher central bank rates in the euro, British pound and Australian currency zones and the intensifi ed competition for retail funds. The total client retail balances in 2007 grew EUR 28 billion (or EUR 35 billion excluding currency effects) to EUR 310.1 billion at year-end. This includes EUR 5.3 billion from add-on acquisitions in the fourth quarter. Commission income increased due to further growth in off-balance sheet funds. Investment and other income was up EUR 104 million, supported by higher gains on the sale of bonds and loans and increased net trading income. This was in part offset by an EUR 29 million impairment on asset-backed commercial paper in Canada in the fourth quarter of 2007.
Total operating expenses increased by 7.8% to EUR 1,598 million, refl ecting higher staff numbers to drive the growth in mortgages and payments accounts, preparations for the launch of ING Direct in Japan (EUR 22 million start-up costs), the consolidation of Sharebuilder in the US, as well as costs for repositioning the UK business. The underlying cost/income ratio increased to 72.8% in 2007 from 66.4% in 2006.
The operational cost to client retail balance ratio, which excludes marketing expenses, rose to 0.37% compared with 0.36% in 2006. The number of full-time staff increased to 8,883 from 7,565 a year earlier.
The underlying risk-adjusted return on capital (RAROC) after tax improved to 14.3% from 11.8% in 2006, due to lower tax charges supported by a tax asset in Germany. The pre-tax RAROC decreased to 17.7% from 19.4% primarily due to a lower riskadjusted profi t, outweighing the 14% decline in average economic capital to EUR 2.8 billion from EUR 3.2 billion in 2006 as a result of improvements in RAROC methodology.
In all of its activities, ING Direct focuses on making banking simple for customers by offering a range of straightforward and transparent banking products at low costs, combined with excellent service delivered through direct channels. The low-cost base is maintained by the use of standardised, state-of-the-art IT systems and the absence of a branch network.
The ING Direct brand has been fi rmly established in all nine countries and currently the aided brand awareness exceeds 80% at most of its operations. A recent survey showed that on average 91% of our customers are likely to recommend ING Direct to friends, relatives and colleagues.
Geographical expansion ING Direct USA extended its activities to new cities in 2007: Miami, Seattle and Houston. The company was already active in New York, Philadelphia, Boston, Los Angeles, San Francisco, Baltimore, Washington, Phoenix, Atlanta and Chicago. Further geographical expansion in the US is anticipated.
ING-DiBa Germany bought a EUR 3.9 billion mortgage portfolio and customer rights from Hypo Real Estate Bank AG. The Munichbased bank’s portfolio includes 39,000 private customers with an average outstanding amount of EUR 110,000 per customer.
Further develop four major product categories ING Direct accelerated its growth investments to a total of EUR 354 million to further support the growth of the business at the expense of short-term profi t. Investments in mortgages, now fi rmly embedded as our second core product after savings, will continue, as well as in payment accounts and investment products.
ING Direct is now the largest retail mortgage provider in Germany in terms of new business and has become a major provider in the US for the fi rst time. Throughout our business units, we have simplifi ed our procedures – aiming for high quality and fast service as these are big differentiators in a competitive environment. An example is the launch of an online tool – the ‘Unmortgage Application Tracker’ in Canada that allows mortgage prospects to track the exact status of their applications. Another example is Germany, where all paperwork for mortgages has been minimised as part of the ‘Simplify ING-DiBa programme’. This programme makes the application process simpler and in many cases we are able to reach a decision on mortgage applications in as little as three hours.
The new ‘Rata Costante’ – a mortgage refi nancing with fi xed instalments and a variable term offered by ING Direct Italy – invites customers to switch from their current mortgage provider to ING Direct. This product was introduced following a change in legislation by the Italian government and has positioned ING Direct as a mortgage expert.
People are key Banking is fi rst and foremost a people’s business and our employees are therefore key in executing our strategy. Signifi cant time and effort are put into maintaining the culture and the quality of our workforce, which increased from 7,565 FTEs at year-end 2006 to 8,883 FTEs at the end of 2007. One of the tools we use to maintain our strong company spirit is our Business Management Programme, which more than 600 managers have attended. The course provides a shared understanding of the key success factors, including the company’s culture and strategy, and builds crosscompany networks.
State-of-the-art IT systems Internet security is one of the most important issues for our customers, so we strive to minimise risks and use proven technology. We share best practices to optimise the development cycle. Strong IT is crucial for the business and ING Direct is always looking to achieve industry-leading reliability and provide fl awless service to end-users to remain competitive. In 2007, the business continued to invest in systems to ensure that they are highly secure, in addition to being fl exible and cost-effective.
** Market ranking in retail funds entrusted in local banking market at year-end. ** Ranking at end of November 2007. *** Ranking at end of September 2007.
ING Direct continued to invest in building the business and expanding its product offering and will continue to pursue its growth strategy in a challenging market environment by further building the business – in the US, for example, where we still see much potential – and by product line – savings, mortgages, payment accounts and investment products. In the product area we will concentrate most on expanding the mortgage business, payment accounts and investment products.
Insurance policy holders 19% 122.4 Institutional clients 24% 153.3 Retail clients 18% 116.4 Private banking clients 11% 68.0 Proprietary 28% 176.8
Successful execution of ING Group’s strategy requires a world class asset manager. Asset management is a core competency of ING which includes three key businesses: ING Investment Management (ING IM, our principal asset manager), ING Real Estate and ING Private Banking. ING IM gives ING a signifi cant global presence through its broad offerings of a diversifi ed mix of products with strong performance. In 2007, ING IM made a signifi cant contribution to ING Group’s overall results. ING Real Estate recorded another year of strong growth and ING Private Banking continues to attract new customers.
ING INVESTMENT MANAGEMENT ING IM’s goal is to become a top-10 global asset manager. The mission is already under way across all three regions – Europe, the Americas and Asia/Pacifi c – which are delivering a wide range of innovative investment solutions to ING’s vast network of internal and external clients. Our strategy focuses on distributing these successful investment strategies globally. This will be achieved by working closely across regions to leverage both scale and investment expertise, while bringing the best of our manufacturing expertise effi ciently to clients wherever in the world they are located. Additionally, where we see opportunities we develop alternative investments and structured solutions.
Sound investment performance In 2007, ING IM has delivered sound investment performance. On a three-year basis, 77% of mutual fund assets performed above their benchmark. Compared to peers, 60% of the funds ranked in the fi rst or second quartile as measured on a three-year basis.
Additionally, 14 funds received 5 stars and 53 funds received 4 stars from Morningstar ratings agency; the highest and second highest ratings a fund can receive. These 5- and 4-star rated fund assets represented EUR 21.4 billion or 35% of total ranked mutual fund assets. ING IM increased its third party assets by EUR 23.2 billion, bringing the total to EUR 232.2 billion.
The growth in alternative asset classes combined with the needs of ING IM’s clients has led to a continued focus in this area during the year. Pomona Capital, ING IM’s private equity fi rm, introduced its fi rst Fund of Funds in Asia/Pacifi c.
Europe ING IM Europe witnessed strong organic growth in its third party assets during the year helped by continued sales of solidly performing existing product, new product launches and the trend towards open-architecture. Our Central European operations continued to generate strong sales of EUR 1.25 billion driven by ING Bank Slaski in Poland. We entered a new market through ING Group’s acquisition of Oyak Bank in Turkey.
Taking advantage of growth in the post retirement market and investors need for income in retirement, the Multi-Asset Structured & Solutions Group added two more target date funds to a suite of ‘in-retirement’ solutions for plan participants. On the retail side, ING IM America’s successful ‘Going Global’ campaign continued to attract signifi cant infl ows, adding EUR 945 million. Several new funds expanded the international line-up including the ING Asia Pacifi c Real Estate and the ING European Real Estate funds, and two new closed-end funds, the ING Asia Pacifi c High Dividend Equity Income Fund and the ING International High Dividend Equity Income Fund. The launch of these two funds brings total assets in ING IM’s closed-end fund assets to over EUR 3.3 billion. All new funds use ING’s varied investment capabilities and regional expertise to create customised global solutions for investors.
Asia/Pacifi c ING IM Asia/Pacifi c saw continued strong organic growth in assets in every country in which it operates, driven by infl ows from institutional and retail clients and by market performance. ING IM maintained its position as a top-three investment manager in the region.
In China, assets under management for ING’s 33.3% equity in the China Merchant Fund Company rose to EUR 2 billion on strong infl ows. In India, assets under management increased to EUR 1.74 billion in 2007 from EUR 1.22 billion in 2006, a substantial increase of about 141%. In Taiwan, ING IM won several institutional onshore equity mandates worth EUR 257 million. In Australia, ING IM added EUR 203 million in enhanced cash management products through institutional investors. In Hong Kong, net infl ows totalled EUR 385 million in fi xed income, equity and real estate investment funds during the year.
The successful launch of Global Yield Maximiser, with assets under management of EUR 102 million at the end of 2007, refl ected close cooperation between ING IM Australia and ING Private Banking in Asia. The launch of the China Access Fund was also successful and raised EUR 80 million during the IPO. The joint venture with China Merchant Bank proved fruitful with a Core Value fund launch which raised EUR 1.55 billion. ING Funds Malaysia set another industry record when its ING Baraka Capital Protected Fund raised EUR 106.4 million, far surpassing its initial issue of EUR 42.4 million and thus making it the country’s largest closed-end capital protected fund.
ING REAL ESTATE ING Real Estate had another year of solid growth, with assets under management increasing by 10% over the year, despite the weaker dollar, its loan portfolio growing by 42% and a development portfolio growing by 17%. At the year-end ING Real Estate’s total business portfolio was EUR 107.2 billion up 18.2% on 2006 and profi t before tax increased by 5.2% to EUR 664 million.
After a sustained period of double-digit returns from real estate, 2007 marked a turning point in the market, with returns from core real estate reverting to more normal levels. The benefi ts of a well diversifi ed business became especially apparent in the second half of 2007, which saw lower, but still positive, growth from real estate investments and volatile stock markets starting to impact on listed real estate holdings. At the same time, ING Real Estate Finance took advantage of these changed market circumstances which resulted in strong profi t growth.
ING Real Estate Investment Management ING Real Estate Investment Management expanded its product range to incorporate value-added and opportunistic investment strategies as well as new funds such as the China Opportunity Fund and Iberian Value-Added Fund. It continued to be acquisitive. Among a number of notable transactions were the purchase of the Apple 2 hotel portfolio in the US and the acquisition of two
retail assets in Japan. In early 2008, a transaction had been concluded with ABP Pension Fund, in respect to the KFN offi ce portfolio, following which the KFN EUR 1.6 billion Dutch offi ce portfolio will be held by two ING Real Estate funds. Performance and customer service remained a central theme: 69% of funds outperformed their benchmarks on an asset-weighted basis. Eleven new funds were launched in 2007 in response to investors’ needs, and during the year 150 new investors and 23 new separate accounts were gained.
ING Real Estate Finance ING Real Estate Finance had a very strong year, growing its loan portfolio, increasing income, and continued very low risk costs. It achieved further international diversifi cation while remaining market leader in the Netherlands. Almost half its loan portfolio is now international, up from 35% last year. Market conditions in the latter part of the year were positive and ING Real Estate Finance took advantage of the dearth of lenders in the real estate markets to grow its portfolio. During the year it also embarked on a comprehensive change programme to ensure that it remains at the forefront of real estate lending.
Ambitions ING Real Estate anticipated that 2007 would be the last year of exceptional performance for real estate but demand from investors and borrowers remains robust and, while growth may moderate, with a diverse business model ING Real Estate believes it is wellplaced to weather the current turmoil in property markets.
ING Private Banking aims to grow rapidly its assets in the next fi ve years. The objective is to become one of the top-20 players globally by increasing brand awareness, improving customer loyalty and promoting new innovative investments platforms.
For more information on Private Banking see the Retail Banking chapter on page 40.
There is increasing evidence to prove the link between strong leadership, employee engagement and shareholder value. Corporations with staff-oriented managers and committed workers are the most successful, which is why ING places much importance on having a professional and business driven Human Resources function. In 2007, HR focused on further improving leadership capabilities and enhancing employee engagement.
EMPLOYEE ENGAGEMENT Leadership behaviour that drives employee engagement was the focal point of HR’s strategy in 2007. Consequently, the performance evaluation of ING’s top 200 managers now includes their leadership behaviour as well as the many other traditional performance measures, such as ability to meet business objectives. This provides a clear signal to everyone that ING takes people management seriously.
Measuring and improving performance ING continued to implement its Winning Performance Culture (WPC) across the organisation in its objective to support ING’s business targets. WPC was introduced in 2005 and is the standard ING has set for itself for the kind of company it wants to be. ING aims at a culture in which the company’s shared values, beliefs and practices create and sustain superior business performance. Also in 2005, a WPC scan was introduced. This is an online assessment that produces a snapshot-in-time of ING and the essential elements of ING’s performance culture. It is a survey to measure the gap between the Winning Performance Culture ING wants to instil and the actual state of the culture.
In 2007, the scope of the WPC scan was extended, resulting in the participation of over 37,000 employees. Overall, the WPC has increased the focus on employee engagement. The scan made it clear that ING’s employee engagement is higher than typically seen in global organisations. Particular strengths highlighted were employee/job fi t, belief in the future of the organisation, feeling valued and trust in senior leadership. However, areas for improvement included internal communications, recognising individual achievement and career advancement opportunities. The results were communicated across all businesses which led to training and change initiatives running in almost every business. Global HR and Group Internal Communications joined forces to translate the WPC framework into tangible behaviours that are being communicated with greater intensity. Examples include ‘Set challenging and connected goals’ (shared direction), ‘Take responsibility and make things happen’ (performance execution) and ‘Engage, challenge and develop our people in the right way’ (human capital).
HR is also boosting its readiness for more acquisitions and divestments to ensure it is involved and can add value at all stages. In addition, HR is getting more involved in compliance risk management.
Key points > Building one global ING brand > First-ever global advertising campaign to further build awareness > F1 marketing programmes unify ING businesses world-wide and generate signifi cant new business > Ongoing ambition to make it easier for our customers to manage their fi nances
ING wants to fi ll this void: in 2007 we began to refi ne and develop ‘easy to deal with’ as the key differentiating factor for ING. Already in the last decade we have made signifi cant progress in moving ING from being a ‘house of brands’ to a valuable global brand in fi nancial services. In 2007 we focused on activating our brand across the world with one consistent look and feel – one logo, one dominant corporate color (orange), and one global advertising campaign. We are becoming a differentiated, global ‘branded house’: one company, one brand. In line with this, in 2007 the important decision was taken to bring the Dutch retail banking businesses under the single ING brand starting next year.
Key points > ING becomes carbon neutral > Green electricity used in offi ces in US and the Netherlands > Successful ‘ING Plant a Tree’ campaign > Internal lending guidelines made public > Chances for Children programme exceeds expectations
ING Real Estate recognises the need to invest in construction projects that reduce the adverse effects of the built environment and is committed to a future where sustainability is second nature to every asset we develop, own and manage. The main drivers for sustainability are lower costs for energy, waste disposal and water consumption, and tenant and investor demand for more sustainable building solutions. Several of ING Real Estate’s business units are strongly committed to integrating sustainability into their business activities.
ING Group, its subsidiaries and business units and to every employee worldwide. Based on the ING Business Principles, a range of in-depth policies are put in place to guide our day-to-day activities. Examples are ING’s Human Rights Statement, Environmental Statement and the Whistleblower procedure for complaints and irregularities.
In our business lines, Environmental and Social Risk (ESR) policies are used to manage fi nancial and reputational risk and to help our clients be more socially and environmentally responsible. For this purpose, ING Investment Management has adopted the Global Voting Policy and the ING Defence Policy. It also offers its customers sustainable asset management services. For the same reasons, Wholesale Banking has adopted a wide range of policies guiding its client engagements.
How does ING invest customers’ money? Certain environmental, ethical and social principles are applied when ING invests money on behalf of its customers. A website was launched in 2007 which goes into more details on this. It was developed to explain ING’s point of view on ethical, environmental and social issues. The website intends to give an accessible and easy to understand overview of what ING stands for and how we invest our customers’ money. See www.ingandyourmoney.com.
Training staff Making responsible business decisions must be embedded in the behaviour of our employees. Corporate responsibility is therefore part of our general staff education programmes and our leadership development curriculum. For example, one day in the ‘ING International Graduate Programme’, a three-week learning event for recently hired graduates across all business lines, was dedicated to the topic of corporate responsibility. CR is also included in the introduction course for all new Wholesale Banking staff. Approximately 80% of teams involved in transactions and/or engagements that are subject to ING’s Environmental and Social Risk policies have participated in a special CR training programme. We also teach corporate responsibility as part of several programmes at the ING Business School. In 2008, ING aims to further develop its CR training programme and extend it to several business units worldwide.
Economic value generated (in EUR million) Total assets 1,312,510 1,226,307 Capital and reserves 37,208 38,266 Total income 76,587 73,621 Profi t before tax 11,043 9,940 Net profi t 9,241 7,692 Personnel expenses: salaries 5,696 5,492 Personnel expenses: other 2,565 2,426 Employee engagement index (3) 77% n/a*
Diversity % of women in the international management council 10.2% 7.3% ING Chances for Children Number of children provided with access to education 124,634 52,000 Green energy KWH (in thousands) of electricity purchased by ING that is derived from renewable resources 259,780 102,000 (1) The Audit Firm Ernst & Young has audited the 2007 KPIs and has reviewed the 2006 KPIs.
methodology, adapted for the fi nancial services market and based on a combination of questions related to overall satisfaction, customer delight and ideal provider. This score is not weighted by market.
(3) ING engagement index is the percentage of ING employees that have indicated that they are proud to work for ING. The research is done by Kenexa (April 2007).
GENERAL The Supervisory Board met nine times in 2007. Only four members were absent once during the year. The Audit Committee held six meetings, while the Remuneration and Nomination Committee met three times and the Corporate Governance Committee twice. No committee members were absent at those meetings.
The Supervisory Board Knowledge Day was held, which was a full day of presentations and discussions on several important subjects, including structured fi nance and variable annuities. In cooperation with the Dutch Authority Financial Markets (AFM) a workshop on compliance was organised for the Knowledge Day.
In February the 2006 annual fi gures were discussed, including the related reports from the external auditors. In this meeting the draft agenda of the annual General Meeting of Shareholders was also discussed and approved.
At the end of 2006 and in the fi rst months of 2007, a possible combination of ING’s businesses with those of ABN AMRO was discussed. Exploratory talks were held but did not lead to fruition.
The quarterly fi gures of 2007 were discussed in May, August and November respectively. The results in each quarter were good, despite the turmoil in fi nancial markets in the second half of the year. The results for the second, third and fourth quarter also included a large capital gain, mainly due to the sale of the ABN AMRO and Numico shares.
In January and May, ING’s Dutch retail banking approach was tabled for the Supervisory Board meeting. One integrated bank will combine the best of ING Bank and Postbank. The Supervisory Board extensively discussed the business case, the potential reduction of employees and the IT implications. The Supervisory Board approved the proposal. In May the share buy-back programme was also discussed and approved, and the annual General Meeting of Shareholders was evaluated.
In May and November the assessment of the Executive Board of the adequacy and effectiveness of the risk management and control systems of ING as well as the signifi cant changes thereto were discussed.
The management of Nationale-Nederlanden gave a presentation to the Supervisory Board in the August meeting about the development of Nationale-Nederlanden and the main challenges lying ahead. An updated ING Insider Regulation as well as the ING Regulation on Financial Instruments was also approved in this meeting. These regulations were updated due to changes in Dutch legislation.
The proposed change of the audit structure was discussed in the 2007 annual General Meeting of Shareholders. Accordingly, both Ernst & Young and KPMG were invited to tender for the fi nancial auditing of ING Groep N.V. and all of its subsidiaries. The external auditor selection was discussed in the Supervisory Board meeting of October, following preparatory meetings of the Audit Committee in August and September. Although both Ernst & Young and KPMG are fully qualifi ed fi rms to audit ING Groep N.V. and all of its subsidiaries, the Supervisory Board decided to nominate Ernst &Young as the sole external auditor from 2008, for appointment at the 2008 annual General Meeting of Shareholders.
Upon request of the Supervisory Board the restructuring of IT systems within ING in the Netherlands was discussed in the November meeting. The Supervisory Board discussed the IT plans also in the context of the integration of Postbank and ING Bank in the Netherlands. The updated charters of the Executive Board and Supervisory Board were also approved in this meeting.
During the regular internal meetings of the Supervisory Board, the auditor tender process was discussed as well as the succession of the chairman of the Supervisory Board. The peer group selection for assessing Executive Board remuneration and the remuneration proposals for the Executive Board were also reviewed.
The 2006 performance of 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 2006 was approved. The Executive Board compensation structure for 2007 was discussed as well as the adjustment of the compensation and performance peer group, following the takeover of ABN AMRO.
Composition of the Executive Board In April 2007, Cees Maas, vice-chairman and chief fi nancial offi cer, retired from the Executive Board. The annual General Meeting of Shareholders approved the appointment of John Hele and Koos Timmermans as chief fi nancial offi cer and chief risk offi cer respectively. The fi rst term of appointment for four years of Eric Boyer de la Giroday and Eli Leenaars will end after the 2008 annual General Meeting of Shareholders. They are nominated for reappointment for another four-year term. Information on the members of the Executive Board is provided on pages 65-66.
The Supervisory Board nominates four candidates for appointment: Joan Spero, Harish Manwani, Aman Mehta and Jackson Tai. More information can be found in the convocation for the 2008 annual General Meeting of Shareholders, available on the ING Group website (www.ing.com).
For the proposed appointments approval has been obtained from the Dutch Central Bank.
Information on the members of the Supervisory Board is provided on pages 67 – 69.
Appreciation for the Executive Board and ING employees The Supervisory Board would like to thank the Executive Board members for the strong performance in 2007. The Executive Board focused especially on the growth strategy of ING. The risk management policies of the Executive Board members have proved to be of great value in the challenging circumstances on the fi nancial markets in the second half of the year. The Supervisory Board would also like to express its appreciation to the 125,000 employees of ING who each serve the interests of customers, shareholders and other ING stakeholders.
Composition of the Supervisory Board Paul van der Heijden retired from the Supervisory Board after the annual General Meeting of Shareholders in April 2007. Cor Herkströter and Luella Gross Goldberg both agreed to stay on longer to allow for a more gradual succession, although both would have retired at reaching the age of 70 in 2007. Claus Dieter Hoffmann and Wim Kok were reappointed as members of the Supervisory Board. Henk Breukink, Peter Elverding, and Piet Hoogendoorn were appointed as new members. Karel Vuursteen succeeded Paul van der Heijden as a member of the Remuneration and Nomination Committee and Corporate Governance Committee in April 2007.
Cor Herkströter retired as member and chairman of the Supervisory Board on 1 January 2008. Jan Hommen succeeded Cor Herkströter as chairman of the Supervisory Board and Wim Kok succeeded Jan Hommen as chairman of the Audit Committee, both on 1 January 2008. For this reason Wim Kok will not retire in 2008, but in 2009. Luella Gross Goldberg will retire at the annual General Meeting of Shareholders in 2008 having stayed on one year longer.
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.
Executive Board members may obtain banking and insurance services from ING Group subsidiaries in the ordinary course of their business and on terms that apply to all employees. These may include services in which the granting of credit is of a subordinate nature, e.g. credit cards and overdrafts in current accounts (best-practice provisions II.2.8, II.3.2. and II.3.3). These exceptions are based on a lack of materiality; if a Supervisory Board member does not meet the independence criteria of the Code, the Supervisory Board may decide to still consider such member to be independent in order to take into account specifi c circumstances, such as family and employment relations (best-practice provision III.2.2), so as to allow for situations of non-independence that are not material; the legally required second candidate on a binding nomination for appointment to the Supervisory Board does not need to meet the independence criteria of the Tabaksblat Code nor the requirements of the Supervisory Board profi le (best-practice provisions III.2.2. and II.3.1), in view of the contemplated abolition of this legal requirement; Jan Hommen, who was appointed in the 2005 annual General Meeting of Shareholders as a Supervisory Board member, had more than fi ve positions as a supervisory board member with other Dutch-listed companies until May 2007 (best-practice provision III.3.4). He was appointed chairman of the Supervisory Board, effective 1 January 2008. As of this date, the number of his board memberships exceeds the number of fi ve. This was approved by the Supervisory Board in view of the fact that Jan Hommen is planning to give up his chairmanship of the Supervisory Board of TNT N.V. as soon as a suitable replacement in a position to take over has been found. In any case, Jan Hommen plans to resign from the supervisory board of TNT N.V. at its 2009 General Meeting of Shareholders. under special circumstances the Supervisory Board may deviate from the general rule that a member of the Supervisory Board may not be re-appointed for more than two subsequent fouryear terms (best-practice provision III.3.5); ING Group established a combined Remuneration and Nomination Committee instead of a separate remuneration committee and a nomination committee (best-practice provision III.5.1); the Remuneration and Nomination Committee is being chaired by the chairman of the Supervisory Board (best-practice provision III.5.11) so that he can be involved in this important subject directly and at an early stage; in the case of a transaction with a family member that entails a confl ict of interests according to the Code, the Supervisory Board may decide that no confl ict of interests exists if the relationship is based on a marriage that is now over, (bestpractice provision III.6.1) to allow for situations where the family relationship no longer exists; transactions with Supervisory Board members or persons holding at least 10% of the shares of ING Group in which there are signifi cant confl icting interests will be published in the annual report, unless (i) this confl icts with the law, (ii) the confi dential, share-price sensitive or competition-sensitive character of the transaction prevents this and/or (iii) the information is so competition-sensitive that the publication could damage the competitive position of ING Group (bestpractice provision III.6.3 and III.6.4); –
Elimination of preference A shares and preference B shares Following the repurchase of the depositary receipts of the preference A shares held by Aegon in 2006, the depositary receipts of the preference A shares held by Fortis and ABN AMRO were also repurchased in 2007. The preference A shares underlying the repurchased depository receipts were all cancelled by February 2008.
As ING Group sees no need to issue preference A shares or preference B shares in the near future, such shares will be eliminated from the Articles of Association and the conditions of administration. A proposal to amend the Articles of Association accordingly will be submitted at the 2008 annual General Meeting of Shareholders.
In compliance with the Dutch Corporate Governance Code In its corporate governance structure and practices, ING Group uses the Dutch Corporate Governance Code (Tabaksblat Code or the Code) as reference. The ING Group corporate governance structure described in the document ‘The Dutch Corporate Governance Code – ING’s implementation of the Tabaksblat Code for good corporate governance’ was approved by the General Meeting of Shareholders on 26 April 2005. As a result, ING Group is considered to be in full compliance with the Tabaksblat Code, although it does not apply all best-practice provisions of the Code in full. The document is available on the website of ING Group (www.ing.com) and has been expanded with an update of ING’s implementation of the Tabaksblat Code since 2005. The following deviations from the Tabaksblat Code are reported for 2007: Michel Tilmant, being appointed as an Executive Board member before 1 January 2004, remains appointed for an indefi nite period of time and retains his agreed exit arrangement, which exceeds one year’s salary (best-practice provisions II.1.1. and II.2.7), as existing contractual arrangements cannot be changed unilaterally; existing rights for severance payments with respect to Executive Board members who were already employed by ING prior to their appointment to the Executive Board, are taken into account. As a result thereof, their exit arrangement as Executive Board members may exceed the maximum mentioned in the Code (best-practice provision II.2.7); Executive Board members may sell shares awarded to them without fi nancial consideration within the fi ve-year retention period in order to cover the wage tax which is to be withheld over the vested award (best-practice provision II.2.3), so as to avoid the total wage tax being withheld in the month of vesting exceeding the gross salary payment of that month; performance criteria for variable remuneration are disclosed only to the extent that this information is not share price sensitive or competition-sensitive (best-practice provisions II.2.3, II.2.10 and II.2.11); –
There are no restrictions for the transfer of depositary receipts pursuant to the Articles of Association or the conditions of administration.
Supervisory Board members may obtain banking and insurance services from ING Group subsidiaries in the ordinary course of their business and on terms that are customary in the sector. These may include services in which the granting of credit is of a subordinate nature, e.g. credit cards and overdrafts in current accounts (best-practice provisions III.7.4). These exceptions are based on a lack of materiality; the voting rights of the Preference A shares are based on their nominal value (best-practice provision IV.1.2) as these voting rights cannot be changed unilaterally; if a notarial report is drawn up of the General Meeting of Shareholders, shareholders will not have the opportunity to react to the minutes of the meeting (best-practice provision IV.3.8), as this would be in confl ict with the laws applicable to such notarial report.
Deviations from the Tabaksblat Code by the Trust Offi ce are reported in the Trust Offi ce’s own report (see page 71).
Capital structure, shares The authorised capital of ING Group consists of ordinary shares, preference A shares, fi ve series of preference B shares and cumulative preference shares. When we refer to shares, we mean both our ordinary shares and our preference shares, unless otherwise specifi ed. Currently, only ordinary and preference A shares are issued, while a right to acquire cumulative preference shares has been granted to the ING Continuity Foundation (see page 73). Of the issued share capital 97% consists of ordinary shares and 3% of preference A shares. The purpose of the cumulative preference shares is to protect the independence, the continuity and the identity of ING Group against infl uences which are contrary to the interests of ING Group, its enterprise and the enterprises of its subsidiaries and all stakeholders (including hostile takeovers). 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.
Proposals by shareholders/holders of depositary receipts In view of the size and market value of ING Group, proposals to put items on the agenda for a General Meeting of Shareholders can be made by shareholders and holders of depositary receipts representing a joint total of 0.1% of the share capital or representing together, on the basis of the stock prices on the Euronext Amsterdam by NYSE Euronext, 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.
for the ordinary shares not lower than one eurocent and not higher than the highest stock price on the Euronext Amsterdam by NYSE Euronext 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% of the amount, including share premium, that is paid on such a share, or 130% of the highest stock price on the Euronext Amsterdam by NYSE Euronext either on the date on which an offer for the preference A shares is made or on the date of the purchase contract or the preceding day on which this stock market is open.
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 in May 2000. He was appointed chairman in April 2004. Five Group staff departments report directly to Michel Tilmant: Corporate Legal Department, Corporate Human Resources, Corporate Development, Corporate Communications & Affairs and Corporate Audit Services.
Eric F. Boyer de la Giroday (Born 1952, Belgian nationality, male; appointed in 2004, term expires in 2008) After completing his degree in commercial engineering at the Free University of Brussels and a master in Business Administration at the Wharton School, University of Pennsylvania, Eric Boyer started his career with Citibank in 1978. In 1984 he joined Bank Brussels Lambert, which was acquired by ING Group in 1998, where he held various management positions in the fi elds of capital markets, treasury and corporate and investment banking. He was appointed a member of the Executive Board of ING Group in April 2004. He is responsible for Wholesale Banking and ING Real Estate.
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 United States, 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.
John C.R. Hele, CFO (Born 1958, Canadian nationality, male; appointed in 2007, term expires in 2011) John Hele graduated from the University of Waterloo, Canada, in 1980 with a bachelor’s degree in Mathematics. He joined ING in 2003. Before he joined the Executive Board John Hele has been deputy chief fi nancial offi cer of ING Group since 2006. Prior to assuming this role, he was the general manager and chief insurance risk offi cer responsible for global insurance risk management and also functioned as the Group actuary.
Members of the Executive Board may be suspended or dismissed at any time by a majority resolution at the General Meeting of Shareholders. A resolution to suspend or dismiss members of the Executive Board that has not been introduced by the Supervisory Board needs the support of at least one-third of the issued capital.
Function of Executive Board The Executive Board is responsible for the management of the company, which includes being responsible for achieving the company’s aims and for the company’s results, as well as for determining the company’s strategy and policy. It also includes 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).
Jacques M. de Vaucleroy (Born 1961, Belgian nationality, male; appointed in 2006, term expires in 2010) Jacques de Vaucleroy graduated from Louvain University with a degree in Law. He also has a master’s degree in Business Law from the Free University of Brussels, Belgium. In 1986 he joined Bank Brussels Lambert, which was acquired by ING in 1998. Before his appointment to the Executive Board in 2006, he was Group president ING Retail at US Financial Services. Jacques de Vaucleroy is responsible for Insurance Europe and ING Investment Management Europe.
Function of the Supervisory Board and its committees The function of the Supervisory Board is to supervise the policy of the Executive Board and the general course of events in the company and its business, as well as to provide advice to the Executive Board. The Supervisory Board has three standing committees: the Audit Committee, the Remuneration and Nomination Committee and the Corporate Governance Committee. The organisation, powers and modus operandi of the Supervisory Board are detailed in the Supervisory Board Charter. Separate charters have been drawn up for the Audit Committee, the Remuneration and Nomination Committee and the Corporate Governance Committee. These charters are available on the ING Group website (www.ing.com). A short description of the duties for the three Committees follows below.
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. He has been CEO of ING’s insurance activities in the United States, 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.
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 on pages 85 – 86. Members of the Supervisory Board are permitted to hold shares and depositary receipts for shares in the company for long-term investment purposes. Details are given on page 86. Transactions by Supervisory Board members in ING Group shares and depositary receipts for shares are subject to the ING regulations for insiders. These regulations are available on the ING Group website (www.ing.com).
Cor A.J. Herkströter, chairman (until 1 January 2008) (Born 1937, Dutch nationality, male; appointed in 1998, retirement on 1 January 2008) Chairman of the Remuneration and Nomination Committee and the Corporate Governance Committee (until 1 January 2008). Former president of Royal Dutch Petroleum Company and chairman of the Committee of Managing Directors, Royal Dutch/ Shell Group. Other business activities: chairman of the Supervisory Board of Koninklijke DSM N.V. (listed company). Member of the Advisory Committee, Robert Bosch GmbH. Chairman of the Social Advisory Council, Tinbergen Institute. Emeritus Professor of International Management, University of Amsterdam. Chairman of the Advisory Committee Royal NIVRA (Netherlands Institute of Chartered Accountants). Member Committee Capital Market, Authority Financial Markets, Amsterdam.
The Remuneration and Nomination Committee advises the Supervisory Board amongst others on the composition of the Supervisory Board and Executive Board, on the compensation packages of the members of the Executive Board and on stockbased compensation programmes for top senior management, including the Executive Board.
Ancillary positions/Confl icting interests Members of the Supervisory Board are asked to provide details of any other directorships, paid positions and ancillary positions they may hold. Such positions are not permitted to confl ict with the interests of ING Group. It is the responsibility of the individual member of the Supervisory Board and the Supervisory Board’s Corporate Governance Committee to ensure that the directorship duties are performed properly and not affected by any other positions that the individual may hold outside the group.
Piet Hoogendoorn (Born 1945, Dutch nationality, male; appointed in 2007, term expires in 2011) Member of the Audit Committee (from 24 January 2008). Former chairman of the Board of Directors of Deloitte Touche Tohmatsu and CEO of Deloitte in the Netherlands. Former chairman of Royal NIVRA (Netherlands Institute of Chartered Accountants).
Wim Kok (Born 1938, Dutch nationality, male; appointed in 2003, term expires in 2010) Member of the Audit Committee; chairman of the Audit Committee from 1 January 2008. 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 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 Nationale Ballet, Amsterdam. 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.
Henk W. Breukink (Born 1950, Dutch nationality, male; appointed in 2007, term expires in 2011) Member of the Corporate Governance Committee (from 24 January 2008). Former managing director of F&C and country head for F&C Netherlands (asset management fi rm). Vice-chairman of VastNed Offi ces/Industrial (real estate fund) and non-executive director of F&C hedge funds, Ireland (listed companies). Other business activities: non-executive director of Heembouw Holding B.V. and B&S Vastgoed Nederland NV.
Peter A.F.W. Elverding (Born 1948, Dutch nationality, male; appointed in 2007, term expires in 2011) Member of the Audit Committee (from 24 January 2008). Former chairman of the Managing Board of Directors of Royal DSM N.V. and former vice-chairman of the Supervisory Board of De Nederlandsche Bank N.V. (Dutch Central Bank). Other business activities: chairman of the Supervisory Board of Océ N.V. (listed company). Member of the Supervisory Board of SHV Holdings N.V. Chairman of the Supervisory Board of Maastricht University and member of the Supervisory Board of the cross-border University of Limburg.
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 Group 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 Group (whether or not as the result of a public bid), such contracts may be amended or terminated, leading to, for example, 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.
Severance payments to Executive Board members The employment contracts with the members of the Executive Board provide for severance payments, which are to become due in case of termination of the contract in connection with a public bid defi ned in section 5:70 of the Dutch Financial Supervision Act. With respect to the amounts due, there is no difference as to whether termination of the contract would be in connection with a public bid or not.
AMENDMENT OF ARTICLES OF ASSOCIATION The Articles of Association of ING Group may be amended pursuant to a resolution of the General Meeting of Shareholders, adopted with a majority of two-thirds of the votes cast in a meeting in which two-thirds of the issued share capital is present or represented. The resolution of the General Meeting of Shareholders must be proposed by the Executive Board; the Executive Board proposal must be approved by the Supervisory Board.
At the annual 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 on the outcome of these audits to the Executive Board and the Supervisory Board and to provide an audit opinion on the fi nancial statements of ING Group. Furthermore, Ernst & Young also audited and reported on the effectiveness of internal control over fi nancial reporting as of 31 December 2007.
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 Group and its subsidiaries be assigned to one single audit fi rm, instead of being shared between two fi rms. Accordingly, both Ernst & Young and KPMG were invited to tender for the fi nancial audit of ING Group and all of its subsidiaries in 2007. This resulted in the nomination of Ernst & Young for appointment by the annual General Meeting of Shareholders in 2008 as sole external auditor as of 2008 onwards for ING Group and its subsidiaries. ING appreciates the excellent
After a maximum period of fi ve years of performing the fi nancial audit of ING Group or ING Verzekeringen N.V. or ING Bank N.V., the lead audit partners of the external audit fi rms and the audit partners responsible for reviewing the audits, have to be replaced by other partners of the respective external audit fi rms. The Audit Committee provides recommendations to the Supervisory Board regarding these replacements, among others, based on an annual evaluation of the provided services. In line with this requirement, the lead audit partner of Ernst & Young has been succeeded after the year-end audit 2006. The rotation of other partners involved with the audit of the fi nancial statements of ING, are subject to applicable independence legislation.
Both Ernst & Young and KPMG may only provide audit and nonaudit services to ING Group and its subsidiaries with the permission of the Audit Committee. The Audit Committee has generally preapproved certain types of audit, audit-related, tax and non-audit services to be provided by ING’s external audit fi rms on an annual basis. Services that have not been generally pre-approved by the Audit Committee should not be provided by the external auditor or should be specifi cally pre-approved by the Audit Committee after recommendation of local management.
In 2007 and 2006, the following amounts were paid to Ernst & Young and KPMG for audit services and non-audit services: Fees Ernst & Young and KPMG (1)
Audit fees 61 63 Audit-related fees 7 4 Tax fees 5 4 All other fees 2 3
On 24 April 2007 the Board convened before the annual General Meeting of Shareholders to discuss the proxy voting results and to decide on the initial position of the Board vis-à-vis the items on the agenda.
The last meeting was on 3 December 2007. In this meeting attention was paid again to the composition of the Board, a decision was taken to change the Trust Conditions and recent developments in the area of corporate governance were discussed. The amendments of the Trust Conditions were made in connection with the Act of 20 October 2006 to amend Book 2 of the Civil Code in order to promote the use of electronic means of communication in connection with decision-making in legal entities.
Prior to its meeting on 3 December 2007 the Executive Board and Supervisory Board of the company discussed with the Trust Offi ce the company’s activities and performance over the fi rst nine months of 2007 as published on 7 November 2007.
By doing so the Trust Offi ce promotes the execution of voting rights in a transparent way and prevents at the same time that a minority of shareholders could use a chance majority of votes to the disadvantage of those investors not present or not represented. The Board, as is customary, attended the annual General Meeting of Shareholders and answered various questions. The Trust Offi ce voted in favour of all agenda items for the shares for which it had received no voting instructions.
On 31 December 2007 the nominal value of administered ordinary shares amounted to EUR 534,183,417.12 for which 2,225,764,238 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 21,363,919.
The increase came about as follows: Add: from exercise of warrants 15,783,588 from conversion of shares into depositary receipts 5,585,939 Less: from conversion of depositary receipts into shares 5,608
On 31 December 2007, preference A shares representing a nominal amount of EUR 19,212,562.80 were entered into the administration, for which 16,010,469 depositary receipts with a nominal value of EUR 1.20 were issued. During the reporting year the preference A shares initially held by Fortis and ABN AMRO were bought and partially withdrawn. The remainder of the preference A shares currently held by the company will be withdrawn in 2008.
The Board of the Trust Offi ce currently consists of: Jan Veraart, former chairman of the Executive Board of HBG, several supervisory directorships and additional offi ces; Huib Blaisse lawyer and partner at Blaisse; Paul Frentrop, head Corporate Governance APG Vermogensbeheer; Carel van den Driest, former chairman Executive Board of Koninklijke Vopak N.V, several supervisory directorships and additional offi ces; Herman Hazewinkel, chairman of the Executive Board of Koninklijke Volker Wessels Stevin N.V. and several supervisory directorships and additional offi ces.
A call-option agreement concluded between the Stichting and ING Groep N.V. vests the Stichting with the right to acquire cumulative preference shares in the capital of ING Groep N.V. up to a maximum of 900 million cumulative preference shares. The purpose of the cumulative preference shares is to protect the independence, the continuity and the identity of the company against infl uences which are contrary to the interests of ING Group, its enterprise and the enterprises of its subsidiaries and all stakeholders (including hostile takeovers). The acquisition of cumulative preference shares by the Stichting is subject to the restriction that, immediately after the issue of cumulative preference shares, the total amount of cumulative preference shares may not exceed one third of the total issued share capital of ING Groep N.V. If new shares other than cumulative preference shares are subsequently issued, the Stichting may again exercise its right, subject to the provisions of the preceding sentence. On acquisition of cumulative preference shares, at least 25% of the nominal value must be paid.
In 2007 the Board of the Stichting met once, namely on 4 April. The December meeting was postponed until 28 January 2008.
The composition of the Board is currently as follows: Allard Metzelaar, Wim van Vonno and Sebastian Kortmann, who was reappointed as of 13 May 2007. Ad Timmermans retired on 1 January 2008 as chairman and member because he reached the statutory age limit. The Board will appoint his successor in due course.
Internal controls over fi nancial reporting already existed before the adoption of SOX 404. However, SOX 404 regulations require management to demonstrate the effectiveness of such controls. This implies a more formalised approach in executing our tasks. ING Group has long-established Business Principles and a strong internal-control culture, which all staff must adhere to. SOX 404 activities are organised along the lines of the governance structure, and involve the participation of senior management across ING. 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 2007. The SOX 404 statement by the Executive Board is included below, followed by the report of the external auditor.
Report of the Executive Board on Internal Control Over Financial Reporting The Executive Board is responsible for establishing and maintaining adequate internal control over fi nancial reporting. ING’s internal control over fi nancial reporting is a process designed under the supervision of our principal executive and principal fi nancial offi cers 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.
The Executive Board assessed the effectiveness of our internal control over fi nancial reporting as of 31 December 2007. In making this assessment, the Executive Board performed tests based on the criteria of the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework. Based on the Executive Board’s assessment and those criteria, the Executive Board concluded that the company’s internal control over fi nancial reporting is effective as of 31 December 2007.
Our independent registered public accounting fi rm has audited and issued their report on ING’s internal control over fi nancial reporting, which appears on the following page.
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, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of ING Groep N.V. as of 31 December 2007, the consolidated profi t and loss account, consolidated statement of cash fl ows and consolidated statement of changes in equity for the year then ended. Our report dated 17 March 2008 expressed an unqualifi ed opinion thereon.
Background The prime objective of the remuneration policy is to enable the company to recruit and retain qualifi ed and expert leaders. The remuneration package supports a performance-driven culture that aligns ING’s objectives with those of its stakeholders. ING rewards performance on the basis of previously determined, challenging, measurable and infl uenceable short-term and long-term targets.
We believe that by combining a profi t, a cost and a return parameter, the overall performance of ING is properly refl ected. Each element is weighted equally to determine the fi nal award. The three performance targets are set by the Supervisory Board at the beginning of the performance period. Under the short-term incentive plan, the actual payout in any year may vary between 0% and 200% of the target level.
In addition to the fi nancial targets, part of the short-term incentive award is based on individual performance, assessed over predefi ned measurable targets set for each senior executive. These targets depend on the specifi c responsibilities of the individual Executive Board members and are determined and assessed by the Supervisory Board. The Executive Board sets the targets for senior management. For this layer directly reporting to the Executive Board, the emphasis is on individual performance in their primary business-related responsibility.
Executive Board 70% of total bonus 30% of total bonus Top senior management in business 15% of total bonus 85% of total bonus Top senior management in Group staff 30% of total bonus 70% of total bonus
Long-term incentive plan The long-term incentive plan (LTIP) at ING includes both stock options and performance shares. LTIP awards are granted to ensure alignment of senior management with the interests of shareholders, and to retain top management over a longer period of time. The LTIP awards will be granted with a total ‘fair value’ split between stock options and performance shares. The LTI plan was tabled and approved during the General Meeting of Shareholders on 27 April 2004.
The ING stock options have a total term of ten years and a vesting period of three years after which they can be exercised for the remaining seven years. After three years, the options will vest only if the option holder is still employed by ING. The exercise price of the stock options is equal to the Euronext Amsterdam by NYSE Euronext market price of the ING depositary receipts on the grant date. For members of the Executive Board the grant date is a specifi c date during the fi rst ‘open period’ after the General Meeting of Shareholders.
Performance shares are conditionally granted. The number of ING depositary receipts that is ultimately granted at the end of a threeyear 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 with a substantial free fl oat.
The Supervisory Board has determined that in light of the disappearance of ABN AMRO from the peer group, it will be replaced by Unicredito Italiano. This replacement is based upon a thorough replacement process using the above objective criteria to determine the performance peer group.
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 short-term incentive plan 2007 The target STI payout over 2007 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 underlying net profi t, underlying operating expenses and economic profi t/embedded value profi t (excluding fi nancial variances), 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.
In line with ING’s overall remuneration policy, the Supervisory Board has focused on increasing variable (performance-driven) pay components which has resulted in a gradual convergence of the Executive Board total compensation to the median benchmark over a period of four years. This has been achieved by raising the target levels of both the short-term and long-term incentives. This ensures that future payouts more directly refl ect short-term and long-term performance. As a result, the mix of total target compensation (in case of at-target performance) is divided equally between each component (i.e. 1/3rd base salary, 1/3rd short-term incentives, and 1/3rd long-term incentives). This balance of variable remuneration provides the right amount of focus on both the short and long term.
(4) Cees Maas stepped down from his position in the Executive Board on 24 April 2007 and retired on 1 June 2007. The fi gures for this member refl ect compensation earned until the last day of employment. Thus, the fi gures for 2007 refl ect the partial year. In addition to his base salary, Cees Maas received a one-off retirement payment in 2007 of EUR 727 thousand.
Short-term performance-related bonus 1,319 1,477 945 Total cash compensation 2,169 2,327 1,795
Base salary 412 Short-term performance-related bonus 621 Total cash compensation 1,033
Short-term performance-related bonus 438 1,244 806 Total cash compensation 729 1,941 1,503
Compensation in cash of former members of the Executive Board who are not included in the above table amounted to nil in 2007, EUR 3,412 thousand in 2006 and EUR 5,068 thousand in 2005.
Executive Board long-term incentive plan 2007 Under the 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.
As the Group STIP performance outcome over 2007 was 136%, the resulting LTIP award is 118% of target. The number of options and performance shares is determined based on a reference price set at the end of 2007 (EUR 26.79) and a ‘fair value’ calculation of options and performance shares (based on a pricing model).
The grant to the Executive Board members is subject to shareholder approval of the maximum number of stock options, performance shares and conditional share awards pursuant to the 2007 LTIP. The LTIP grant table on page 81 shows the award amounts for each Executive Board member.
Tom McInerney will receive a conditional share award on the same grant date as the other long-term incentive awards. The conditional share award will be 100% vested four years after the grant date with 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 81 shows the number of the conditional shares.
fair market value at grant in thousands of euros 2007 2006 2005
Michel Tilmant (1) Long-term incentives are granted in the year following the reporting year. The long-term incentive plan provides for a combination of share 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 2007 resulted in a ratio of options to performance shares of 4.22 : 1 (2006: 4.78 : 1, 2005: 5.6 : 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 General Meeting of Shareholders.
(2) The fair market value of a long-term incentive award refl ects the estimated fair market value of the long-term incentive award based on a fair value calculation. The valuation is calculated on the last trading day of the year for grants made to the Executive Board members for performance over the specifi ed year and is not updated for current market values.
Number of options 132,054 132,163 108,200 Number of performance shares 31,293 27,650 19,300 Fair market value of long-term incentive (2) 1,521 1,734 1,160
Eric Boyer de la Giroday Number of options 87,066 87,138 71,400 Number of performance shares 20,632 18,230 12,800 Fair market value of long-term incentive (2) 1,003 1,143 765
Number of options 64,967 43,347 Number of performance shares 15,396 9,069 Fair market value of long-term incentive (2) 748 569
(2) Dick Harryvan, Tom McInerney, Hans van der Noordaa and Jacques de Vaucleroy were appointed to the Executive Board on 25 April 2006. The fi gures for these members refl ect pension costs in their capacity as Executive Board members.
(6) The early retirement pension benefi t is paid up until age 65 and during the early retirement benefi t period, the plan provides for additional pension rights earned towards the old-age pension plan, which begins at age 65. The pension cost shown is the additional IFRS impact and cost related to the funding of Cees Maas’ old-age pension rights earned during the early retirement pension period, which must be fully realised by the company in the same year he has retired.
Hans van der Noordaa (2) 267 170 Koos Timmermans (3) 166 Jacques de Vaucleroy (2) 267 170
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 2007, 2006 and 2005. These loans were concluded in the normal course of business and on terms generally applicable to Company personnel as a whole and were approved by the Supervisory Board.
ING depositary receipts for shares held by members of the Executive Board number of shares 2007 2006 2005
Michel Tilmant 24,764 7,764 7,764 (1) The shares held by Tom McInerney are American Depositary Receipts. He also holds 2,239 units in a Leveraged Stock Fund.
Eric Boyer de la Giroday 7,126 Dick Harryvan 2,000 John Hele 2,300 Eli Leenaars 5,628 Hans van der Noordaa 2,000 Koos Timmermans 2,000 Jacques de Vaucleroy 27,740
Policy for 2008 With regard to the remuneration policy for 2008, the Supervisory Board continues to build upon the remuneration policy initiated in 2003, which supports the performance-oriented culture. Over the past six years, the Executive Boards’ total remuneration package has gradually converged to the benchmark through increases in the short-term and long-term incentive target levels (as a percentage of base salary). The results of the market-competitive analysis indicate overall increases in the market that may put pressure on compensation levels.
Executive Board long-term incentive plan 2008 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 2008 longterm incentive award will remain the same as the 2004 structure (the total award value will be split between stock options and performance shares).
Remuneration The annual remuneration of the Supervisory Board members amounts to: chairman EUR 75,000, vice-chairman EUR 65,000, other members EUR 45,000. In addition to the remuneration each member receives an expense allowance. For the chairman and vice-chairman the annual amount is EUR 6,810. For the other members the amount is EUR 2,270.
(4) Jan Hommen is a member of the Supervisory Board as of June 2005. The compensation fi gure for 2005 refl ects the partial year as member of the Supervisory Board.
(6) Piet Klaver is a member of the Supervisory Board as of April 2006. The compensation fi gure for 2006 refl ects the partial year as member of the Supervisory Board.
Eric Bourdais de Charbonnière (1) 72 70 65 Henk Breukink (2) 35 Peter Elverding (3) 20 Luella Gross Goldberg 60 52 44 Claus Dieter Hoffmann 62 56 49
Consolidated balance sheet of ING Group as at 31 December amounts in millions of euros 2007 2006
EQUITY Shareholders’ equity (parent) 12 37,208 38,266 Minority interests 2,323 2,949 Total equity 39,531 41,215
References relate to the notes starting on page 110 which form an integral part of the consolidated annual accounts.
Net gains/losses on disposal of group companies 430 1 390 Gross commission income 7,693 6,867 5,845 Commission expense –2,866 –2,551 –2,098
Earnings per ordinary share attributable to shareholders of parent 47 4.32 3.57 3.32 Diluted earnings per ordinary share 47 4.28 3.53 3.32 Dividend per ordinary share 48 1.48 1.32 1.18
Consolidated profi t and loss account of ING Group for the years ended 31 December
Profi t before tax 11,043 9,940 8,894 Adjusted for – depreciation 1,382 1,298 1,278
– deferred acquisition costs and VOBA –1,338 –1,317 –1,141 – increase in provisions for insurance and investment contracts 26,494 17,689 21,250 – addition to loan loss provisions 125 103 88 – other –3,897 –4,778 –1,282
Taxation paid –1,347 –1,739 –1,398 Changes in – amounts due from banks, not available on demand –8,690 3,117 –720
– trading assets 2,997 –48,168 –29,925 – non-trading derivatives 261 –179 2,596 – other fi nancial assets at fair value through profi t and loss –4,878 3,930 –2,193 – loans and advances to customers –75,501 –59,800 –62,709 – other assets –6,534 1,218 –7,551 – amounts due to banks, not payable on demand 15,414 1,925 19,405 – customer deposits and other funds on deposit 28,640 47,521 62,089
Investments and advances – group companies –3,215 –2,358 –250 – associates –1,221 –449 –858 – available-for-sale investments –284,006 –295,086 –260,769 – held-to-maturity investments –1,030 – real estate investments –876 –1,588 –1,156 – property and equipment –575 –568 –540 – assets subject to operating leases –1,393 –1,164 –991 – investments for risk of policyholders –54,438 –44,116 –41,781 – other investments –316 –250 –164
Cash and cash equivalents at beginning of year –1,795 3,335 11,588 Implementation IAS 32/39 692 Effect of exchange rate changes on cash and cash equivalents 40 –385 300 Cash and cash equivalents at end of year 53 –16,811 –1,795 3,335
Changes in composition of the group –710 –710 Dividends (1) –2,461 –2,461 –2,461 Exercise of warrants and options 9 9 9
Unrealised revaluations after taxation –1,135 –1,135 –109 –1,244 Realised gains/losses transferred to profi t and loss –3,186 –3,186 –3,186 Changes in cash fl ow hedge reserve –925 –925 –925 Transfer to insurance liabilities/DAC 1,132 1,132 5 1,137 Employee stock option and share plans 104 104 104 Exchange rate differences –1,381 –1,381 23 –1,358 Other revaluations 31 31 Total amount recognised directly in equity –5,391 –5,391 –50 –5,441
Changes in composition of the group –745 –745 Dividends (3) –2,999 –2,999 –40 –3,039 Purchase/sale of treasury shares –2,304 –2,304 –2,304 Exercise of warrants and options 4 391 395 395 Change in minority interest shareholdings –58 –58
(1) 2004 fi nal dividend of EUR 0.58 per ordinary share and 2005 interim dividend of EUR 0.54 per ordinary share. (2) 2005 fi nal dividend of EUR 0.64 per ordinary share and 2006 interim dividend of EUR 0.59 per ordinary share. (3) 2006 fi nal dividend of EUR 0.73 per ordinary share and 2007 interim dividend of EUR 0.66 per ordinary share.
Reserves include Revaluation reserve of EUR 4,937 million (2006: EUR 9,453 million; 2005: EUR 11,206 million), Currency translation reserve of EUR –1,354 million (2006: EUR –473 million; 2005: EUR 668 million) and Other reserves of EUR 24,352 million (2006: EUR 20,408 million; 2005: EUR 15,989 million). Changes in individual components are presented in Note 12 ‘Shareholders’ equity (parent)’.
For details on Implementation IAS 32/39 and IFRS 4 refer to section ‘Implementation of IAS 32, IAS 39 and IFRS 4’ at the end of the Accounting policies section.
International Financial Reporting Standards as adopted by the EU provide several options in accounting policies. ING Group’s accounting policies under International Financial Reporting Standards as adopted by the EU and its decision on the options available are set out in the section ‘Principles of valuation and determination of results’ below.
CHANGES IN ACCOUNTING POLICIES AND PRESENTATION As of 1 January 2007, the level at which the adequacy test of the provision for insurance contracts is evaluated has been aligned to the business lines, which is the level at which performance is evaluated and segments are reported.
For certain fi nancial assets and liabilities no quoted market prices are available. For these fi nancial assets and liabilities, fair value is determined using valuation techniques. These valuation techniques range from discounting of cash fl ows to valuation models, where relevant pricing factors including the market price of underlying reference instruments, market parameters (volatilities, correlations, credit ratings) and customer behaviour are taken into account. All valuation techniques used are subject to internal review and approval. Most data used in these valuation techniques are validated on a daily basis.
The determination of the defi ned benefi t plan liability is based on internal and external actuarial models and calculations. The defi ned benefi t obligation is calculated using the projected unit credit method. Inherent in these actuarial models are assumptions including discount rates, rates of increase in future salary and benefi t levels, mortality rates, health care costs trend rates, consumer price index, and the expected return on plan assets. The assumptions are based on available market data and the historical performance of plan assets, and are updated annually.
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-employment benefi ts.
CONSOLIDATION ING Group (‘the Group’) comprises ING Groep N.V. (‘the Company’), ING Verzekeringen N.V., ING Bank N.V. and all other subsidiaries. The consolidated fi nancial statements of ING Group comprise the accounts of ING Groep N.V. and each of those entities in which it either owns, directly or indirectly, more than half of the voting power or over which it has control of their operating and fi nancial policies through situations including, but not limited to: Ability to appoint or remove the majority of the board of directors; Power to govern such policies under statute or agreement; and Power over more than half of the voting rights through an agreement with other investors.
The results of the operations and the net assets of subsidiaries are included in the profi t and loss account and the balance sheet from the date control is obtained until the date control is lost. On disposal, the difference between the sales price, net of directly attributable transaction costs, and the net assets is included in net profi t.
ING Group’s interests in jointly controlled entities are accounted for using proportionate consolidation. ING Group proportionately consolidates its share of the joint ventures’ individual income and expenses, assets and liabilities, and cash fl ows on a line-by-line basis with similar items in ING Group’s fi nancial statements. ING Group recognises the portion of gains or losses on the sale of assets to the joint venture that is attributable to the other venturers. ING Group does not recognise its share of profi ts or losses from the joint venture that result from the purchase of assets by ING Group from the joint venture until it resells the assets to an independent party. However, if a loss on the transaction provides evidence of a reduction in the net realisable value of current assets or an impairment loss, the loss is recognised immediately.
Group companies The results and fi nancial position of all group companies that have a functional currency different from the presentation currency are translated into the presentation currency as follows: Assets and liabilities included in each balance sheet are translated at the closing rate at the date of that balance sheet; Income and expenses included in each profi t and loss account are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and All resulting exchange rate differences are recognised in a separate component of equity.
On consolidation exchange rate differences arising from the translation of a monetary item that forms part of the net investment in a foreign operation, and of borrowings and other instruments designated as hedges of such investments, are taken to shareholders’ equity. When a foreign operation is sold such exchange rate differences are recognised in the profi t and loss account as part of the gain or loss on sale.
Goodwill and fair value adjustments arising on the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at the rate ruling at the balance sheet date.
The fair values of fi nancial instruments that are not traded in an active market are determined using valuation techniques. The Group uses a variety of methods and makes assumptions that are based on market conditions existing at each balance sheet date.
Non-trading derivatives that do not qualify for hedge accounting Derivative instruments that are used by the Group as part of its risk management strategies, but do not qualify for hedge accounting under the Group’s accounting policies, are presented as non-trading derivatives. Non-trading derivatives are measured at fair value with changes in the fair value taken to the profi t and loss account.
Loans and receivables Loans and receivables 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. Loans and receivables are included in the following balance sheet lines: Cash and balances
with central banks, Amounts due from banks, Loans and advances to customers, and Other assets. Interest income from loans and receivables is recognised in Interest income and Investment income in the profi t and loss account using the effective interest method.
Credit risk management classifi cation In relation to credit risk management disclosures provided in the Risk management section, classifi cation follows the credit risk management characteristics of the instrument. The relationship between risk classifi cations and the classifi cations above is explained below: Lending risk arises when ING grants a loan to a customer, or issues guarantees on behalf of a customer and mainly relates to the balance sheet classifi cation Loans and advances to customers and credit commitments in respect of off balance sheet items e.g. fi nancial guarantees. Investment risk comprises the credit default and migration risk that is associated with ING’s investment portfolio and mainly relates to the balance sheet classifi cation Investments (available-for-sale and held-to-maturity). Money market risk arises when ING places short term deposits with a counterparty in order to manage excess liquidity and mainly relates to the balance sheet classifi cation Amounts due from banks.
REPURCHASE TRANSACTIONS AND REVERSE REPURCHASE TRANSACTIONS Securities sold subject to repurchase agreements (‘repos’) are retained in the consolidated fi nancial statements. The counterparty liability is included in Amounts due to banks, Other borrowed funds or Customer deposits and other funds on deposit, as appropriate.
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor’s credit rating), the previously recognised impairment loss is reversed by adjusting the provision. The amount of the reversal is recognised in the profi t and loss account.
IMPAIRMENT OF OTHER FINANCIAL ASSETS The Group assesses at each balance sheet date whether there is objective evidence that a fi nancial asset or a group of fi nancial assets is impaired. In the specifi c case of equity investments classifi ed as available-for-sale, a signifi cant or prolonged decline in the fair value of the security below its cost is considered in determining whether the assets are impaired. If any objective evidence exists for available-forsale debt and equity investments, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that fi nancial asset previously recognised in net profi t – is removed from equity and recognised in the profi t and loss account. Impairment losses recognised on equity instruments can never be reversed. If, in a subsequent period, the fair value of a debt instrument classifi ed as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profi t and loss, the impairment loss is reversed through the profi t and loss account.
INVESTMENTS IN ASSOCIATES Associates are all entities over which the Group has signifi cant infl uence but not control. Signifi cant infl uence generally results from a shareholding of between 20% and 50% of the voting rights, but also is the ability to participate in the fi nancial and operating policies through situations including, but not limited to the following: Representation on the board of directors; Participation in the policy making process; and Interchange of managerial personnel.
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. The reporting dates of all material associates are consistent with the reporting date of the Group.
For interests in investment vehicles the existence of signifi cant infl uence is determined taking into account both the Group’s fi nancial interests for own risk and its role as investment manager.
REAL ESTATE INVESTMENTS Real estate investments are stated at fair value at the balance sheet date. Changes in the carrying amount resulting from revaluations are recorded in the profi t and loss account. On disposal the difference between the sale proceeds and book value is recognised in the profi t and loss account.
Property under development where there is a specifi cally negotiated contract is valued using the percentage of completion method (pro rata profi t recognition).
Disposals The difference between the proceeds on disposal and net book value is recognised in the profi t and loss account.
PURCHASE ACCOUNTING, GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill ING Group’s acquisitions are accounted for under the purchase method of accounting, whereby the cost of the acquisitions is allocated to the fair value of the assets, liabilities and contingent liabilities acquired. Goodwill, being the difference between the cost of the acquisition (including assumed debt) and the Group’s interest in the fair value of the acquired assets, liabilities and contingent liabilities as at the date of acquisition, is capitalised as an intangible asset. The results of the operations of the acquired companies are included in the profi t and loss account from the date control is obtained.
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’.
Other intangible assets Other intangible assets are capitalised and amortised over their expected economic life, which is generally between three and ten years. Intangible assets with an indefi nite life are not amortised.
For traditional life insurance contracts, certain types of fl exible life insurance contracts, and non-life contracts, DAC is amortised over the premium payment period in proportion to the premium revenue recognised.
TAXATION Income tax on the net profi t for the year comprises current and deferred tax. Income tax is recognised in the profi t and loss account but it is charged or credited directly to equity if the tax relates to items that are credited or charged directly to equity.
Deferred tax assets are recognised where it is probable that future taxable profi t will be available against which the temporary differences can be utilised. Deferred income tax is provided on temporary differences arising from investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the difference will not reverse in the foreseeable future. The tax effects of income tax losses available for carry forward are recognised as an asset where it is probable that future taxable profi ts will be available against which these losses can be utilised. Deferred tax related to fair value remeasurement of available-for-sale investments and cash fl ow hedges, which are charged or credited directly to equity, is also credited or charged directly to equity and is subsequently recognised in the profi t and loss account together with the deferred gain or loss.
Financial liabilities at fair value through profi t and loss comprise two sub-categories: fi nancial liabilities held for trading, and other fi nancial liabilities designated at fair value through profi t and loss by management. Designation by management will only take place if this eliminates a measurement inconsistency or if the related assets and liabilities are managed on a fair value basis. All other fi nancial liabilities are measured at amortised cost.
Provision for unearned premiums and unexpired insurance risks The provision is calculated in proportion to the unexpired periods of risk. For insurance policies covering a risk increasing during the term of the policy at premium rates independent of age, this risk is taken into account in determining the provision. Further provisions are made to cover claims under unexpired insurance contracts, which may exceed the unearned premiums and the premiums due in respect of these contracts.
Reinsurance contracts Reinsurance premiums, commissions and claim settlements, as well as the reinsurance element of technical provisions are accounted for in the same way as the original contracts for which the reinsurance was concluded. To the extent that the assuming reinsurers are unable
to meet their obligations, the Group remains liable to its policyholders for the portion reinsured. Consequently, provisions are made for receivables on reinsurance contracts which are deemed uncollectible.
If, for any business unit, it is determined using a best estimate (50%) confi dence level that a shortfall exists, and there are no offsetting amounts within other business units in the Business Line, then the shortfall is immediately recorded in the profi t and loss account.
If the net insurance liabilities are determined to be adequate at above the 90% confi dence level, no reduction in the net insurance liabilities is recorded.
OTHER LIABILITIES Employee benefi ts – pension obligations Group companies operate various pension schemes. The schemes are generally funded through payments to insurance companies or trustee-administered funds, determined by periodic actuarial calculations. The Group has both defi ned benefi t and defi ned contribution plans.
INCOME RECOGNITION Gross premium income Premiums from life insurance policies are recognised as revenue when due from the policyholder. For non-life insurance policies, gross premium income is recognised on a pro-rata basis over the term of the related policy coverage. Receipts under investment contracts are not recognised as gross premium income.
Fees and commissions Fees and commissions are generally recognised as the service is provided. Loan commitment fees for loans that are likely to be drawn down are deferred (together with related direct costs) and recognised as an adjustment to the effective interest rate on the loan. Loan syndication fees are recognised as revenue when the syndication has been completed and the Group retained no part of the loan package for itself or retained a part at the same effective interest rate as the other participants. Commission and fees arising from negotiating, or participating in the negotiation of, a transaction for a third party – such as the arrangement of the acquisition of shares or other securities or the purchase or sale of businesses – are recognised on completion of the underlying transaction. Portfolio and other management advisory and service fees are recognised based on the applicable service contracts as the service is provided. Asset management fees related to investment funds and investment contract fees are recognised on a pro-rata basis over the period the service is provided. The same principle is applied for wealth management, fi nancial planning and custody services that are continuously provided over an extended period of time. Fees received and paid between banks for payment services are classifi ed as commission income and expenses.
Lease income The proceeds from leasing out assets under operating leases are recognised on a straight-line basis over the life of the lease agreement. Lease payments received in respect of fi nance leases when ING is the lessor are divided into an interest component (recognised as interest income) and a repayment component.
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.
FIDUCIARY ACTIVITIES The Group commonly acts as trustee and in other fi duciary capacities that result in the holding or placing of assets on behalf of individuals, trusts, retirement benefi t plans and other institutions. These assets and income arising thereon are excluded from these fi nancial statements, as they are not assets of the Group.
IMPLEMENTATION OF IAS 32, IAS 39 AND IFRS 4 ING Group applies IFRS-EU since 2004. However, as permitted by IFRS 1, ING Group implemented IAS 32, IAS 39 and IFRS 4 as of 1 January 2005.
For insurance contracts with discretionary participation features, a deferred profi t sharing liability is recorded under IFRS-EU for the full amount of unrealised results on allocated investments. In addition, a deferred profi t sharing liability is recorded for the policyholders’ share in other differences between Dutch GAAP and IFRS-EU as at 1 January 2005.
Derivatives Under IFRS-EU, all derivatives (including embedded derivatives that are not closely related to the host contract) are reported at fair value. Under Dutch GAAP, non-trading derivatives were valued similarly to the item being hedged (mainly at cost); realised results were deferred and amortised over the remaining term.
Hedge accounting Under IFRS-EU, for derivatives qualifying as cash fl ow hedges and net investment hedges, the fair value movements are initially deferred in equity and subsequently released to the profi t and loss account in the same period in which the hedged item affects profi t and loss. For fair value hedges, the valuation of the hedged item is adjusted to refl ect the hedged risk; this fair value adjustment on the hedged item is reported in the profi t and loss account and (partly) offsets the fair value impact of the derivative that is also reported in the profi t and loss account. Under Dutch GAAP, non-trading derivatives used for risk management purposes were valued similarly to the item being hedged (mainly at cost).
Classifi cation of equity instruments Under Dutch GAAP, preference shares and trust preferred securities were classifi ed as equity in accordance with their legal form. Under IFRS-EU, the terms and conditions of ING Group’s preference shares and trust preferred securities require them to be classifi ed as liabilities.
The cash fl ow statement has been drawn up in accordance with the indirect method, classifying cash fl ows as cash fl ows from operating, investing and fi nancing activities. In the net cash fl ow from operating activities, the profi t before tax is adjusted for those items in the profi t and loss account, and changes in balance sheet items, which do not result in actual cash fl ows during the year.
For the purposes of the cash fl ow statement, Cash and cash equivalents comprise balances with less than three months’ maturity from the date of acquisition, including cash and non-restricted balances with central banks, treasury bills and other eligible bills, amounts due from other banks and amounts due to banks. Investments qualify as a cash equivalent if they are readily convertible to a known amount of cash and are subject to an insignifi cant risk of changes in value.
Cash fl ows arising from foreign currency transactions are translated into the functional currency using the exchange rates at the date of the cash fl ows.
The difference between the net cash fl ow in accordance with the cash fl ow statement and the change in Cash and cash equivalents in the balance sheet is due to exchange rate differences and is separately accounted for as part of the reconciliation of the net cash fl ow and the balance sheet change in Cash and cash equivalents.
Amounts held at central banks 8,376 10,511 Cash and bank balances 3,664 3,563 Short term deposits insurance operations 366 252 2 AMOUNTS DUE FROM BANKS
Loans and advances to banks 14,451 4,660 31,339 31,751 45,790 36,411 Cash advances, overdrafts and other balances 1,065 285 2,033 3,176 3,098 3,461
As at 31 December 2007, the non-subordinated receivables amounted to EUR 48,705 million (2006: EUR 39,774 million), and the subordinated receivables amounted to EUR 170 million (2006: EUR 94 million).
No individual amount due from banks has terms and conditions that materially affect the amount, timing or certainty of consolidated cash fl ows of the Group. For details on signifi cant concentrations see ‘Risk management’ section.
Equity securities 106,061 102,775 Debt securities 7,398 7,100 Loans and receivables 122 59
The cost of investments for risk of policyholders as at 31 December 2007 was EUR 105,625 million (2006: EUR 98,863 million).
In 2007 none of the changes in the fair value of the loans and receivables designated as at fair value through profi t and loss are attributable to changes in the credit risk of the fi nancial assets (2006: nil), or cumulatively (2006: nil).
Changes in the composition of the group –536 –26 –2,903 –9,653 –3,439 –9,679 Changes in unrealised revaluations 3,379 1,956 –6,284 –5,177 –2,905 –3,221 Impairments and reversals –53 –42 –133 36 –186 –6 Disposals and redemptions –9,093 –5,782 –272,106 –266,200 –822 –1,342 –282,021 –273,324 Exchange rate differences –275 –448 –12,219 –13,445 –26 –45 –12,520 –13,938
The reclassifi cation from Available-for-sale debt securities to Financial assets designated as at fair value through profi t and loss relates to debt securities backing insurance contracts where current market assumptions were implemented in the measurement of the insurance contracts.
As at 31 December 2007, the balance sheet value included equity securities which were lent or sold in repurchase transactions amounting to EUR 13 million (2006: EUR 20 million) and nil (2006: nil), respectively, and debt securities which were lent or sold in repurchase transactions amounting to EUR 4,114 million (2006: EUR 2,119 million) and EUR 38,214 million (2006: EUR 37,804 million), respectively.
– more than 1 year but less than 5 years 8,448 8,061 – more than 5 years 3,753 3,346
Unearned future fi nance income on fi nance leases –3,109 –2,684 Net investment in fi nance leases 15,565 13,364
– more than 1 year but less than 5 years 7,060 6,813 – more than 5 years 3,168 2,608
– loans and advances to customers 654 733 1,334 1,905 1,988 2,638
ING Dutch Offi ce Master Fund C.V. 24 348 1,718 257 202 24
ING Real Estate Asia Retail Fund 46 189 791 399 29 2
Other investments in associates represents a large number of associates with a balance sheet value of less than EUR 50 million.
Retail Property Fund France Belgium (RPFFB) 15 63 1,096 678 142 60
Changes in the composition of the group 934 152 Transfers to and from Investments –438 197 Revaluations –155 41 Share of results 765 638 Dividends received –224 –174 Disposals –1,296 –511 Impairments –25 –3 Exchange rate differences –112 –68 Closing balance 5,014 4,343
Changes in the composition of the group –2,919 1,497 Transfers to and from Property in own use –60 44 Transfers to and from Other assets 13 Fair value gains/(losses) 168 175 Disposals –309 –1,293 Exchange rate differences 84 –68 Closing balance 4,829 6,974
In 2007 Changes in composition of the group relates mainly to the deconsolidation of Real estate funds as a result of the reduction of ING’s shareholding in these funds.
The total amount of direct operating expenses (including repairs and maintenance) arising from Real estate investments that generated rental income for the year ended 31 December 2007 was EUR 64 million (2006: EUR 168 million). The total amount of direct operating expenses (including repairs and maintenance) arising from Real estate investments that did not generate rental income for the year ended 31 December 2007 was EUR 20 million (2006: EUR 32 million).
Gross carrying amount as at 31 December 2,943 2,883 Accumulated depreciation as at 31 December –708 –669 Accumulated impairments as at 31 December –166 –180 Net book value 2,069 2,034
Gross carrying amount as at 31 December 2,946 3,057 2,245 305 1,379 1,049 766 224 7,336 4,635 Accumulated amortisation as at 31 December –645 –416 –878 –657 –43 –25 –1,566 –1,098 Accumulated impairments as at 31 December –29 –15 –1 –30 –15
Amortisation of software and other intangible assets is included in the profi t and loss account in Other operating expenses. Amortisation of VOBA is included in Underwriting expenditure.
Additions to goodwill in 2007 include mainly EUR 1,818 million related to the acquisition of Landmark, Latin American Pension business of Santander, Oyak Bank and Sharebuilder Corporation. The increase in Other intangibles in 2007 includes mainly EUR 390 million related to the acquisition of Latin American Pension business of Santander and Oyak Bank. Reference is made to Note 29 ‘Companies acquired and companies disposed’.
For fl exible life insurance contracts the growth rate assumption used for calculating the amortisation of the deferred acquisition costs for 2007 is 6.6% gross and 5.6% net of investment management fees (2006: 7.6% gross and 6.1% net of investment management fees).
Reinsurance and insurance receivables 3,664 4,105 Deferred tax assets 2,723 1,872 Property held for sale 2,993 2,243 Property under development for third parties 96 Income tax receivable 974 1,222 Accrued interest and rents 17,818 14,535 Other accrued assets 1,099 1,167 Pension assets 439 251 Other receivables 10,389 5,572
Included in the above are assets measured at amortised cost under the IAS 39 classifi cation Loans and receivables. These amount to EUR 8,844 million and are included in Accrued interest and rents.
Receivables on account of direct insurance from: Reinsurance receivables 1,170 1,476
Property held for sale 530 367 Other: – property obtained from foreclosures 48 58 – property developed for sale 2,415 1,818
The Revaluation reserve, Share of associates reserve (included in Other reserves) and Currency translation reserve cannot be freely distributed.
In May 2007, ING announced a plan to adopt a buy-back programme under which it plans to purchase (depository receipts for) ordinary shares with a total value of EUR 5 billion over a period of 12 months, beginning in June 2007. During 2007 the total number of (depository receipts for) ordinary shares repurchased under this programme is 90.7 million at an average price of EUR 30.49, and a total consideration of EUR 2.8 billion. This represents completion of approximately 56% of the repurchase programme. Shares bought back are included in the table ‘Changes in treasury shares’ on page 126.
Depository receipts for ordinary shares held by ING Group As at 31 December 2007, 126.8 million (2006: 53.8 million; 2005: 38.7 million) of depository receipts for ordinary shares of ING Groep N.V. with a par value of EUR 0.24 was held by ING Group or its subsidiaries. These were purchased as part of the buy-back plan announced in 2007 and to hedge option rights granted to the Executive Board members and other employees.
Dividend restrictions ING Groep N.V. and its Dutch group companies are subject to legal restrictions regarding the amount of dividends they can pay to their shareholders. The Dutch Civil Code contains the restriction that dividends can only be paid up to an amount equal to the excess of the company’s own funds over the sum of the paid-up capital, and reserves required by law. Additionally, certain group companies are subject to restrictions on the amount of funds they may transfer in the form of dividends or otherwise to the parent company.
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 2007, 9,266,097 B warrants were outstanding (2006: 17,157,891; 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 2007, 601,356 B warrants (2006: nil; 2005: nil) were held by group companies of ING Group.
The closing date for exercising warrants B was 5 January 2008. The exercise price of warrants B was EUR 49.92 for 2 depository receipts.
Unrealised revaluations after taxation –29 –1,508 –1,537 Realised gains/losses transferred to profi t and loss –3,186 –3,186 Changes in cash fl ow hedge reserve –925 –925 Transfer to insurance liabilities/DAC 1,132 1,132
Property revaluation reserve Available-forsale reserve Cash fl ow hedge reserve Total
Profi t for the year 6,972 720 7,692 Unrealised revaluations after taxation –124 –124 Changes in treasury shares –520 –520 Dividend –2,534 –147 –2,681
Implementation IAS 32/39 and IFRS 4 –2,584 –2,584 Profi t for the year 7,210 7,210 Changes in treasury shares –305 –305 Dividend –2,461 –2,461
Share based payments –201 –462 –76 –6,751,515 –15,722,126 –3,203,303 Other –873,957
13 PREFERENCE SHARES ING Group preference shares Preference shares are divided into 2 categories: ‘A’ preference shares and ‘B’ preference shares. The authorised preference share capital of ING Groep N.V. consists of 100 million ‘A’ preference shares with a par value of EUR 1.20, of which as at 31 December 2007 16,012,839 have been issued and 1,000 million ‘B’ preference shares with a par value of EUR 0.24, of which none have been issued. The only movement in preference shares outstanding is explained under Buy-back of preference shares.
In July 2007, ING announced that agreement had been reached with Fortis Insurance Netherlands to buy-back 28,172,583 ‘A’ preference shares of ING at a price of EUR 3.618175 per share or EUR 101,933,336 in total. Following the repurchase the preference shares were cancelled.
In October 2007, ING announced that agreement had been reached with ABN AMRO Holding to buy-back 28,843,989 ‘A’ preference shares of ING Group. The transaction was completed in two tranches. On 15 October 2007, 18,843,989 ‘A’ preference shares, were repurchased at a price of EUR 3.65 per share, or EUR 68,780,560 in total. Following the repurchase these preference share were cancelled. On 24 December, an additional 10,000,000 ‘A’ preference shares were repurchased at a price of EUR 3.68 per share, or EUR 36,800,000. None of the 10 million preference shares had been cancelled at 31 December 2007, and are therefore included in the number of ‘A’ preference share in issue at 31 December 2007. However, all of these shares were cancelled in February 2008.
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, of which none have been issued.
The number of debentures held by group companies as at 31 December 2007 was 3,504 with a balance sheet value of nil (2006: nil with a balance sheet value of nil).
15 DEBT SECURITIES IN ISSUE Debt securities in issue relate to debentures and other issued debt securities with either fi xed interest rates or interest rates based on interest rate levels, such as certifi cates of deposit and accepted bills issued by ING Group, except for subordinated items. Debt securities in issue do not include debt securities presented as Financial liabilities at fair value through profi t and loss. ING Group does not have debt securities that are issued on terms other than those available in the normal course of business. The maturities of the debt securities are as follows: Notes to the consolidated balance sheet of ING Group (continued)
More than 1 year but less than 2 years 4,156 1,475 More than 2 years but less than 3 years 1,738 2,914 More than 3 years but less than 4 years 2,057 1,824 More than 4 years but less than 5 years 2,374 3,140 More than 5 years 5,870 5,155 Total fi xed rate debt securities 51,377 64,200
More than 1 year but less than 2 years 487 238 More than 2 years but less than 3 years 989 413 More than 3 years but less than 4 years 1,847 1,086 More than 4 years but less than 5 years 1,140 2,611 More than 5 years 3,951 4,948 Total fl oating rate debt securities 15,618 13,933
As of 31 December 2007, ING Group had unused lines of credit available including the payment of commercial paper borrowings relating to debt securities in issue, totalling EUR 6,974 million (2006: EUR 29,335 million).
Subordinated loans of group companies 34 200 366 1,227 2,276 9,488 13,591 Preference shares of group companies 1,132 1,132
Provision for non-participating life policy liabilities 70,149 78,772 4,481 4,930 74,630 83,702 Provision for participating life policy liabilities 54,645 52,914 175 187 54,820 53,101 Provision for (deferred) profi t sharing and rebates 1,601 2,956 5 5 1,606 2,961 Provision for life insurance for risk of policyholders 100,753 97,304 639 651 101,392 97,955
Provision for unearned premiums and unexpired risks 2,564 2,631 99 156 2,663 2,787
Investment contracts for risk of company 9,520 7,505 9,520 7,505 Investment contracts for risk of policyholders 14,132 13,245 14,132 13,245 Total provisions for investment contracts 23,652 20,750 23,652 20,750
Changes in the composition of the group –3,475 83 2 23 –3,473 106
– valuation changes for risk of policyholders 5,612 2,702 5,612 2,702 – effect of changes in other assumptions 2 –21 2 –21
ING transferred part of their life insurance business to Scottish Re in 2004 by means of a co-insurance contract. This business continues to be included in Life insurance provisions. The related asset from the co-insurance contract is recognised under Reinsurance contracts.
Changes in the composition of the group –194 –9 3 –191 –9
Premiums earned during the year –5,701 –5,929 –326 –377 –6,027 –6,306 Exchange rate differences 15 –245 –10 –22 5 –267 Other changes 33 –15 –30 –42 3 –57
– for prior years –282 –525 14 –18 –268 –543 – interest accrual of provision 32 54 32 54
ING Group had an outstanding balance of EUR 66 million at 31 December 2007 (2006: EUR 66 million) relating to environmental and asbestos claims of the insurance operations. In establishing the liability for unpaid claims and claims adjustment expenses related to asbestos related illness and toxic waste clean up, the management of ING Group considers facts currently known and the current state of the law and coverage litigation. Liabilities are recognised for IBNR claims and for known claims (including the costs of related litigation) when suffi cient information has been developed to indicate the involvement of a specifi c insurance policy, and management can reasonably estimate its liability. In addition, liabilities are reviewed and updated regularly.
The release of the provision from prior years in 2006 is as a result of favourable underwriting results in several business units, in particular, the Netherlands business units benefi ted from changes in legal requirements for disability benefi ts, favourable results and reserving methodology changes 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 3.8% to 4.3% (2006: 3.0% to 4.0%).
Estimate of cumulative claims: At the end of underwriting year 2,773 3,010 2,678 3,007 3 years later 2,169
Liability relating to prior underwriting years 2,688 Total amount recognised in the balance sheet 6,647
Savings accounts 275,127 283,147 Credit balances on customer accounts 161,204 147,695 Corporate time deposits 86,151 62,628
In 2007, changes in the fair value of fi nancial liabilities designated as at fair value through profi t and loss is attributable to changes in the credit risk of that liability is approximately EUR 20 million.
The amount that ING Group is contractually required to pay at maturity to the holders of fi nancial liabilities designated as at fair value through profi t and loss is EUR 13,845 million.