Collateral policies As with all financial institutions, ING is in the business of taking credit risks. As such, we continually evaluate the creditworthiness of our customers, trading partners and investments for their ability to meet their financial obligations to ING. During the assessment process of creating new loans, acquiring securities, as well as reviewing existing loans and securities positions, ING determines the amount and type of collateral, if any, that a customer may be required to pledge to ING.
Generally, the lower the perceived creditworthiness of a borrower or financial counterparty, the more collateral the customer or counterparty will have to provide. Within counterparty trading activities, ING actively enters into various legal arrangements whereby counterparties (or ING) may have to post collateral to one another to cover market fluctuations of their relative positions. Laws in various jurisdictions also affect the type and amount of collateral that ING can receive or pledge. Additionally, ING will sometimes enter into credit default swaps, and other similar instruments, in order to reduce the perceived credit risk on a given borrower or portfolio.
Past-due obligations ING continually measures its portfolio in terms of payment arrears. Particularly the retail portfolios (such as residential mortgages, consumer loans and policy loans) are closely monitored on a monthly basis to determine if there are any significant changes in the level of arrears. Generally, an obligation is considered ‘past-due’ if a payment of interest or principal is more than one day late. In practice, the first 5-7 days are considered to be operational risk. After this period, letters will be sent to the obligor reminding it of its (past due) payment obligations. If payment has not been made after 90 days, the obligation is generally considered impaired and transferred to one of the ‘problem loan’ units. In order to reduce the number of arrears, most ING units encourages obligors to set up automatic debits from their accounts to ensure timely payments.
Repossession policy It is ING’s general policy not to take repossession of assets of defaulted debtors. Rather, ING attempts to sell the assets from within the legal entity that has pledged these assets to ING, in accordance with the respective collateral or pledge agreements signed with the obligors. In those cases where ING does take possession of the collateral, ING generally attempts to sell the asset as quickly as possible to prospective buyers. Based on internal assessments to determine the highest and quickest return for ING, the sale of repossessed assets could be the sale of the company as a whole (or at least all of its assets), or the assets could be sold over time.
Market risk for the fixed income and equity markets is split into two components: general market risk and specific market risk. The general market risk component estimates the VaR resulting from general market-value movements (e.g. euribor movements). The specific market risk component estimates the VaR resulting from market-value movements that relate to the underlying issuer of securities in the portfolios.
The average exposure over 2005 was higher than 2004 (average VaR 2005: EUR 28 million and average VaR 2004: EUR 25 million). The VaR remained well within the ING Wholesale Banking trading limit. The interest rate markets provided the largest contribution to the trading VaR.
More details on the VaR of the ING Wholesale Banking trading portfolio for 2005 and 2004 are provided in the table below.
Note: the above captions are consistent with those used for internal risk management purposes and do not relate to financial statement captions.
CONSOLIDATED TRADING VaR ING WHOLESALE BANKING 2004-2005 in millions of euros
Non-trading risk-interest rate risk The non-trading books primarily consist of banking (commercial) books and ALM books. Within ING Bank the commercial business units are not allowed to run structural mismatch positions in their banking books. As a result of this policy all structural interest-rate risks are replicated to the ALM books of the designated Treasury departments within ING Wholesale Banking. The management of structural interest-rate mismatch positions is performed within the Treasury function. The commercial business units bear responsibility for the remaining interest-rate risks that result from banking products of which future cash flows depend on client behaviour, like saving accounts and mortgages. Within ING Direct the interest rate risks from the ALM books and the commercial banking books are measured and managed on an integrated level.
Within ING several methods are in place to model the interest-rate risk characteristics of demand deposits, saving accounts and mortgages. This is done via replicating portfolio models whereby the interest rate character is modelled taking into account the contractual and behavioural characteristics of these products. All models and assumptions are back-tested regularly and presented to the designated Asset & Liability Committee for approval. Historical simulation is used to determine the duration and the investment rules for saving accounts and demand deposits, taking into account historical client rates, outstanding volumes and market rates. The investment rules are tested on their suitability through volatility/correlation analysis and updated regularly. To estimate future prepayment rates of mortgages, a model is applied based on historical observed prepayments.
ING Bank uses several measures to control interest-rate risk. The most important ones are Value-at-Risk (VaR) and Earnings-atRisk (EaR). EaR measures the pre-tax loss of net accrual interest income resulting from changes of market interest rates over a time period of one year. The EaR calculations differ per book. For the ALM books it measures the potential loss of net accrual interest due to the structural mismatch in interest rate positions. In these calculations it is assumed that all gaps are to be reinvested or refunded at the changed market rates. The calculations capture the earnings risk in the current ALM book and do not consider the impact of new business. For the commercial banking books the EaR captures the basis risk between market interest rates and the client rates of saving accounts and demand deposits. For these books the impact of new business is included in the EaR calculations.
In the table on the next page both the EaR figures and the VaR figures for the large banking books (representing approximately 95% of the banking book) are presented as result of a parallel instantaneous shock to the market rates of 2%. The VaR figures are therefore calculated under a different scenario than the traditional VaR figures for the trading books.
ING Wholesale Banking -158 ING Retail Banking -95 ING Direct -513 ING Bank Corporate Line 33 ING Bank Total -733
The ING Bank EaR is mainly caused by the EaR contributions of EUR (EUR -250 million), USD (EUR -297 million) and GBP (EUR -188 million) interest rate exposure. The main contributing portfolios of the EaR are the savings and demand deposits portfolios (short-term earnings will be affected) and the ALM books.
The most material foreign exchange risk in the non-trading books relates to translation risk due to foreign investments and USD-denominated Tier-1 capital. The translation risk is managed by Capital Management on behalf of ALCO Bank. For ING’s main foreign currencies, US dollar, Pound sterling and Polish zloty, the translation risk is managed taking into account the effect of translation results on the Tier-1 ratio. For all other currencies the translation risk is managed within a VaR limit.
The amount of USD and Korean won capital invested in foreign investments has increased significantly during 2005. For USD the main reasons were higher retained earnings and the impact of the introduction of IFRS-EU accounting rules (ie revaluation reserves relating to fixed income securities). The increase in Korean won capital was caused by a higher valuation of Kookmin Bank equity stake.
The chart graph below provides an overview of the development of the FX VaR during 2004 and 2005.
The second component is to maintain an adequate mix of funding sources. ING Bank aims for a well-diversified funding mix in terms of instrument types, fund providers, geographic markets and currencies. Sources of liquidity are widely distributed over the entire ING Bank. ING has a broad base of core retail funding, which mainly consists of current accounts, savings and retail deposits. Although these accounts can be withdrawn immediately or at short notice, the accounts are considered to form a stable resource of funding because of the broad customer base. The retail funding is, from a geographical point of view, widely spread, with most of the funding located in the euro zone.
The third component of ING’s liquidity strategy is to maintain a broad portfolio of highly marketable assets that can be easily used to bear disruptions in the cash-flow profile. ING has relatively large portfolios of unencumbered marketable assets. These marketable assets can provide liquidity through repurchase agreements or through sale. The majority of ING’s marketable assets are located in the euro zone.
MEASUREMENT ING has defined operational risk as the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events. ING distinguishes the following event types (based on the Basel Committee level 1 and 2 event types): – processing failure – control failure – unauthorised activities – internal crime/fraud – external crime/fraud – information security failure – employment practices & workplace safety – clients, products and business malpractice – system failure – business disruption
To assess, monitor and manage operational risk, ING has developed a sophisticated framework of activities which includes: – risk awareness programmes and risk & control self assessments – audit finding action tracking and incident reporting and analysis – key-risk indicators reporting and local operational risk committees – new-product reviews
In order to protect ING against financial consequences of uncertain operational events ING has acquired insurance policies issued by third-party insurers, with world-wide cover for (Computer) Crime, Professional Liability, Directors & Officers Liability, Employment Practices Liability and Fiduciary Liability. ING retains a portion of these risks that matches industry practice.
Risks from these products arise with respect to the adequacy of insurance premium rate levels and provisions for insurance liabilities and capital position as well as uncertainty of the future returns on investments of the insurance premiums. Risks are classified as actuarial and underwriting, market risk, credit risk and operational risk. ING considers that the principal components of insurance risk are actuarial and underwriting risk.
The outcome of the reserve adequacy test for Taiwan is inherently uncertain given the use of various assumptions and the long term nature of the liability. The outcome can only be reliably estimated within broad ranges which are bound to vary significantly from period to period. The outcome of the test for Taiwan is especially sensitive to (changes in) interest rate assumptions. The reserve adequacy test at 31 December 2005 is based on the current 10-year swap rate in Taiwan at 31 December 2005 of 2.35%, with the assumption that, in the long term, this swap rate will move to 5.75%.
Management’s best estimate, based on a 50% confidence interval, is that Taiwan has a marginal adequacy of EUR 165 million (which represents a 53% confidence interval) as at 31 December 2005. Under the Group’s accounting policy, any inadequacy below the 50% interval would be charged to the profit and loss account immediately.
ACTUARIAL AND UNDERWRITING RISK General Actuarial and underwriting risks are the risks resulting from the pricing and acceptance of insurance contracts. These risks are managed through product design requirements, risk limitations, and management of concentrations. Actuarial risks are managed through pricing procedures and included in the overall adequacy of provisions for insurance contract and investment contract liabilities. Underwriting risks are managed in the process whereby applications submitted for insurance coverage are reviewed. The maximum underwriting exposure is limited through exclusions, cover limits, and reinsurance.
For the main non-life units (in The Netherlands, Belgium, Canada, Mexico) the risk tolerance is generally set at 2.5% of the Group’s after-tax earnings. For 2005, this translated into a (pre-tax) risk tolerance level of EUR 170 million. The risk tolerance refers to the maximum allowable loss for catastrophe events. The assessment of potential losses in this business is done on the basis of 1 in 250 events. With respect to the Fire line of business this assessment is based on risk assessment models that are widely accepted in the industry. For the smaller non-life units, the (pre-tax) risk tolerance level for 2005 was set at EUR 5.0 million per event per business unit.
With respect to life business ING Group’s (pre-tax) risk tolerance level is set at EUR 22 million per insured life. While life insurance risks are considered to be naturally diversifiable by virtue of each life being a separate risk, group contracts may result in significant exposures. For life insurance contracts involving multiple lives ING made its own assessment and believes that the potential loss from a significant mortality event occurring in the normal course of business will not exceed an amount higher than approximately 12% of the Groups after-tax earnings. For 2005, this translated into a (pre-tax) risk-tolerance level of EUR 750 million. Such an amount could result from a pandemic as observed during the Spanish Flue pandemic in 1918, without taking into account medical improvements since that time. ING continues to model the possible impact of pandemics based on studies published by internationally credible organisations.
Regarding catastrophic losses arising from events such as terrorism, ING believes that it is not possible to develop a business model that takes into account the possibility of very high losses resulting from these events. For the non-life business, losses that result from these events are generally not covered unless required by law. In various countries industry pools have been established to mitigate the terrorism risk to which the individual insurers are nevertheless still exposed. ING participates in such pools.
Through scenario analyses, ING Insurance measured the potential changes in the realised after-tax earnings of the insurance operations from an increase/decrease of the insurance risk factors over the year 2005. These changes to income can relate to realised claims or any other net-income item that would be affected by the change of these factors. In addition, ING has estimated the impact to the 31 December 2005 shareholders equity of ING Insurance from the same change in insurance risk factors. The differentiation of sensitivities before and after risk mitigation typically refers to mitigation of the risks by re-insurance.
The sensitivities represent a one-time increase/decrease of the realised claims of P&C and morbidity and an increase/decrease of the mortality rates over 2005. Due to the standard definition of the shocks the mortality risk partly hedges the longevity risk globally, but mortality risk may not offset longevity risk in particular region. In this case the total risk increases after including the existing reinsurance contracts.
MARKET RISK General Market risks arise when the market value of assets and liabilities do not move consistently as financial markets change. Changes in interest rates, equity prices, foreign exchange rates and real estate prices can impact present and future earnings of the insurance operations as well as the shareholders equity.
In 2005, ING implemented Market Value at Risk (MVaR) limits to manage the market and credit risks resulting from the Insurance operations world-wide. ALCO Insurance has set a MVaR limit for ING Group Insurance and each of the business lines that relates to the economic capital of ING Group Insurance. The MVaR is based on a 99.95% confidence interval over a oneyear horizon.
ALM risk – interest rate risk ING’s insurance operations are exposed to changes in interest rates with respect to guaranteed interest rates on the insurance and investment contract liabilities when interest rates fall. The current product portfolio also includes products where interest rate risks are entirely or partially passed on to the policyholder, thereby reducing ING’s exposure to interest rate movements.
Through scenario analyses, ING Insurance measured the potential changes in earnings of the insurance operations from an instantaneous increase/decrease in interest rates of 100 basis points. These changes to income can relate to investment income, interest paid to policyholders, adequacy of provision for liabilities, market-value adjustments, amortisation of Deferred Acquisition Costs (DAC) or any other net-income item that would be affected by interest rate changes. The effect of interest rate changes is different by business line and by product. In addition, ING has estimated the impact to the 31 December 2005 shareholders equity of ING Insurance from such an instantaneous change in interest rates.
The sensitivities represent an instantaneous increase/decrease of interest rates as of 31 December 2005. The net profit sensitivity reflects the related immediate effect on net income after-tax for the year 2005. Sensitivity disclosures include the effect of non-bifurcated embedded derivatives contained in insurance contracts.
The net profit impact related to a 1% change in current interest rates is asymmetric due to the need to increase reserves for ING’s business in Taiwan if interest rates were 1% lower, including a 1% shift of the long term interest rate assumption from 5.75% to 4.75%. The IFRS-EU profit impact on Taiwan of 1% lower interest rates at 31 December 2005 is EUR 1.7 billion. This is the amount necessary to bring reserves to a best estimate (50%) level in this sensitivity. There is not a corresponding benefit for rising interest rates in 2005 since the additional profit from a rising interest scenario is not recognised in profit through unlocking of reserves.
Shareholders equity impacts also relate directly to use of market values for available for sale securities offset by shadow accounting of reserves and DAC where possible.
Through scenario analyses ING Insurance measured the potential changes in earnings of the insurance operations resulting from an instantaneous increase/decrease in equity markets of 10%. These changes to income can relate to fee income, unrealised or realised gains and losses, amortisation of DAC or any other net-income item that would be affected by a substantial change to equity markets. The effect of equity market changes is different by business line and by product. In addition, ING has estimated the impact to the 31 December 2005 shareholders equity of ING Insurance from such a change in equity markets.
Increase of equity by 10% 59 1,072 Decrease of equity by 10% -80 -1,094
The sensitivities represent an instantaneous increase/decrease in equity markets as of 31 December 2005. The net profit sensitivity reflects the related immediate effect on net income after-tax for the year 2005. Sensitivity disclosures include the effect of non-bifurcated embedded derivatives contained in insurance contracts.
ALM risk – foreign exchange risk Foreign-exchange risk in the investments backing ING’s insurance and investment contract liabilities is dealt with in the investment-management processes in each business unit. An immaterial portion of the investment portfolio backing insurance liabilities is invested in assets of a different currency than the liabilities.
Another type of foreign exchange risk exists as translation risk. Locally required capital levels are invested in local currencies in order to satisfy regulatory requirements and to support local insurance business regardless of currency movements. These capital levels may affect the consolidated balance sheet when translated to Euros. Depending on hedging costs and the capital exposure, ING may hedge the capital over locally required margins.
2005 net profit equity 10% Increase of Euro versus all other currencies -81 -950 10% Decrease of Euro versus all other currencies 87 1,041
The sensitivities represent an instantaneous increase/decrease in the Euro on 31 December 2005. The net profit sensitivity reflects the related effect on net income after tax for the year 2005. Sensitivity disclosures include the effect of non-bifurcated embedded derivatives contained in insurance contracts.
The main real estate risk of ING Insurance exists within ING Real Estate investment portfolio in The Netherlands.
Measurement For the investment portfolios backing the insurance liabilities, ING’s policy is to maintain a well diversified investment portfolio.
The credit exposure of ING Insurance is mainly related to investments in debt securities, private placements and traditional lending to private individuals. Loans to private individuals are mainly mortgage loans secured by residential property. Credit exposure also arises from derivatives, repurchase and reverse-repurchase transactions, securities lending/borrowing and reinsurance contracts used to hedge the portfolio.
In the table below a summary is shown of the outstandings in the general account fixed-income portfolios per industry sector.
ING Insurance has begun calculating economic capital for operational risk on a quarterly basis beginning 2005. Although not required for regulatory purposes ING has decided internally that ING Insurance will also adhere to the new Basel II regulations with respect to operational risk management.
PARENT COMPANY BALANCE SHEET OF ING GROUP AS AT 31 DECEMBER
EQUITY 3 Share capital 530 634 Share premium 8,343 8,525 Revaluation reserve 13,535 2,611 Reserve for associates 608 613 Exchange differences reserve -692 -690 Other reserves 7,202 6,621 Net profit for the period 7,210 5,755
References relate to the notes starting on page 170 which form an integral part of the parent company annual accounts.
Exchange Share Share Revaluation differences Other amounts in millions of euros Total capital premium reserve reserve reserves(1)
(1) Other reserves includes the reserves for associates, other reserves and net profit for the period.
PARENT COMPANY STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER
The parent company accounts of ING Group are prepared in accordance with the financial reporting requirements included in Part 9 of Book 2, of the Netherlands Civil Code. The accounting policies with regard to presentation and disclosures are in accordance with the financial reporting requirements included in Part 9 of Book 2, of the Netherlands Civil Code.The principles of valuation and determination of results stated in connection with the consolidated balance sheet and profit and loss account are also applicable to the parent company balance sheet and profit and loss account. Investments in group companies and investments in associates are initially recognised at cost and subsequently accounted for by the equity method of accounting.
A statutory reserve is carried at an amount equal to the share in the results of associates since their first inclusion at net asset value less the amount of profit distributions to which rights have accrued in the interim. Profit distributions which can be repatriated to the Netherlands without restriction are likewise deducted from the Reserve for associates, which forms part of Shareholders’ equity.
– Unrecognised actuarial results on employee benefit plans were recognised directly in equity at 1 January 2004. – The cumulative translation differences reserve in equity was reset to nil at 1 January 2004. – IFRS 2 (share-based payments) is applied for awards issued after 7 November 2002, that have not vested by 1 January 2005.
Net Equity Equity Impact IAS Equity profit 1 January 31 December 32/39 and 1 January amounts in millions of euros 2004 2004(1) 2004 IFRS 4 2005(2)
For an explanation of the individual items reference is made to the section Changes in accounting principles in the Consolidated annual accounts.
ACCOUNTING POLICIES FOR THE PARENT COMPANY BALANCE SHEET AND PROFIT AND LOSS ACCOUNT OF ING GROUP
Changes in ING Groep N.V. shares held by group companies -187 -88 Closing balance 41,488 28,062 2 OTHER ASSETS
Receivables from group companies 8,094 7,202 Other receivables, prepayments and accruals 37 138 3 EQUITY The capital and reserves of Stichting Regio Bank, the revaluation reserve, share of associates reserve and currency translation reserve cannot be freely distributed. The reserve for cash flow hedging included in the revaluation reserve is included on a net basis.
See Note 12 to the consolidated annual accounts for additional information.
4 PREFERENCE SHARES See Note 13 to the consolidated financial statements.
5 SUBORDINATED LOANS See Note 14 to the consolidated financial statements.
EUR 5,563 million (2004: EUR 5,026 million) of these loans has been subsequently provided as subordinated loans by ING Groep N.V. to ING Bank N.V. under the same conditions as the original bonds.
EUR 1,792 million (2004: EUR 366 million) has been subsequently provided as subordinated loan by ING Groep N.V. to ING Verzekeringen N.V. under the same conditions as the original bonds.
The number of debentures held by group companies as at 31 December 2005 was nil with a balance sheet value of nil (2004: 7,800 with a balance sheet value of EUR 1 million).
Unsecured subordinated loans from group companies to ING Groep N.V., which may be renewable at their due dates at the then prevailing market rates, are included in subordinated loans.
Debenture loans 3,740 5,178 Amounts owed to group companies 991 606 Other amounts owed and accrued liabilities 409 157
– up to one year 956 600 – one year to five years 35 – over five years 6
REMUNERATION OF SENIOR MANAGEMENT, EXECUTIVE BOARD AND SUPERVISORY BOARD The information on share based payment plans and remuneration of the members of the Executive Board and the Supervisory Board is included in the remuneration paragraph in the annual report (page 64 up to and including page 74). This information is considered to be an integral part of the audited annual accounts.
SCOPE We conducted our audit in accordance with auditing standards generally accepted in the Netherlands. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the annual accounts are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the annual accounts. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the annual accounts. We believe that our audit provides a reasonable basis for our opinion.
OPINION WITH RESPECT TO THE CONSOLIDATED ANNUAL ACCOUNTS In our opinion, the consolidated annual accounts give a true and fair view of the financial position of the company as at 31 December 2005 and of the result and the cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the EU and comply with the financial reporting requirements included in Part 9 of Book 2 of the Netherlands Civil Code as far as applicable.
Furthermore we have established to the extent of our competence that the report of the executive board is consistent with the consolidated annual accounts.
OPINION WITH RESPECT TO THE PARENT COMPANY ANNUAL ACCOUNTS In our opinion, the parent company annual accounts give a true and fair view of the financial position of the company as at 31 December 2005 and of the result for the year then ended in accordance with the accounting principles generally accepted in the Netherlands and comply with the financial reporting requirements included in Part 9 of Book 2 of the Netherlands Civil Code.
PROPOSED PROFIT APPROPRIATION The profit is appropriated pursuant to Article 38 of the Articles of Association of ING Groep N.V., the relevant stipulations of which state that the part of the profit remaining after the Executive Board, with the approval of the Supervisory Board, has determined the appropriation to reserves, shall be at the disposal of the General Meeting of Shareholders.
It is proposed to declare a dividend of EUR 1.18 per ordinary share of EUR 0.24.
On 18 August 2005, an interim dividend of EUR 0.54 per ordinary share of EUR 0.24 was made payable. This interim dividend was paid in cash. Therefore, a final dividend remains of EUR 0.64. The final dividend will be paid entirely in cash and will be made payable on 4 May 2006.
Net profit 7,210 To reserves pursuant to Article 38 (5) of the Articles of Association 4,593 Non-distributable profit of Stichting Regio Bank 29 At the disposal of the General Meeting of Shareholders pursuant to Article 38 (6) of the Articles of Association 2,588
RECONCILIATION OF THE SHAREHOLDERS’ EQUITY AND NET PROFIT ON THE BASIS OF IFRS-EU TO US GAAP
Valuation of equity securities 148 Derivatives and hedge accounting 590 -101 794 425 Fair value option 155 29
Provision for life insurance liabilities 277 -431 151 282 Deferred profit sharing 2,691 11
Associates and other equity instruments -1,115 -138 -424 5 Loan loss provisioning 623
GOODWILL (2005 AND 2004) Under IFRS-EU, goodwill is capitalised on acquisitions after 1 January 2004; goodwill on acquisitions prior to 1 January 2004 was charged directly to equity. Under US GAAP, goodwill is recognised on all acquisitions. When a reporting unit or a business is to be disposed of, goodwill associated with that reporting unit or business is included in the carrying amount of the reporting unit or business in determining the gain or loss on disposal. The difference as at 1 January 2004 may therefore result in differences in results on disposal. In addition, the transition difference may result in differences in impairments in future years. The amount of transition difference changes due to foreign currency translation effect.
REAL ESTATE (2005 AND 2004) Investment property Under IFRS-EU, investment property is measured at fair value, with changes in fair value recognised in the profit and loss account. No depreciation is recorded. Under US GAAP, investment property is measured at cost less depreciation and impairment. Depreciation is charged to the profit and loss account. Realised results on disposal are reported in the profit and loss account.
Sale and leaseback Under IFRS-EU the gains and losses arising from a sale and operating leaseback transaction are recognised immediately, provided the transaction has been concluded at fair value. Under US GAAP, gains on a sale and operating leaseback transaction are generally amortised over the future period of the lease.
DEBT SECURITIES (2005) Held to maturity investments Under IFRS-EU, assets designated as held-to-maturity at the date of implementing IFRS-EU (1 January 2005) were recorded at the amortised cost value as at that date. Under US GAAP, these assets were transferred to held-to-maturity from available-forsale at the 1 January 2005 fair value. The difference between fair value and amortised cost at 1 January 2005 is amortised over the remaining life. For assets designated as held-to-maturity after 1 January 2005 there is no difference between IFRS-EU and US GAAP.
DERIVATIVES AND HEDGE ACCOUNTING (2004) Under IFRS-EU excluding IAS 39 (2004), derivative financial instruments, primarily interest rate swap contracts, used to manage interest rate risk are accounted for as off-balance sheet transactions. The related interest income and expense is accounted for on a basis in conformity with the hedged position, primarily on an accrual basis. Transactions qualify as hedges if these transactions are identified as such and there is a negative correlation between the hedging results and the results of the position being hedged. Under US GAAP, derivatives are carried at fair value with changes in fair value recorded in income unless specified criteria are met to obtain hedge accounting treatment. Under US GAAP, the Group has opted to not applying hedge accounting subject to items specifically designated as a hedge under US GAAP (including certain hedges of net investments in foreign operations). Accordingly, under US GAAP all derivatives other than those designated as hedges are marked-to-market through the income statement and no adjustments to hedged items are recognised.
FAIR VALUE OPTION (2005) Under IFRS-EU, certain financial instruments are designated as “at fair value through profit and loss”. For US GAAP, these financial instruments are reported as either available-for-sale instruments with movements in fair value recognised in equity attributable to equity holders of the company or as loans and receivables which are carried at amortised cost.
PROVISION FOR INSURANCE LIABILITIES (2005 AND 2004) Provision for life policyholders Both under IFRS-EU and US GAAP, the provision for life policy liabilities is calculated on the basis of a prudent prospective actuarial method, having regard to the conditions of current insurance contracts. The difference between IFRS-EU and US GAAP primarily concerns the treatment of initial expenses and the assumptions which are made in calculating the provisions with regard to the yield on the investments. Adequacy testing of the provisions for life policy liabilities, net of unamortised policy acquisition costs and value of business acquired, is performed similarly under both IFRS-EU and US GAAP. A reserve inadequacy (under US GAAP: a “premium deficiency”) exists if the life policy liabilities plus the present value of expected future gross premiums are insufficient to provide for expected future policy benefits and expenses and to recover any unamortised policy acquisition costs and value of business acquired. Reserve strengthening is recognised as an additional provision for insurance liabilities under IFRS-EU. Premium deficiencies are recognised under US GAAP as an adjustment to the current year’s value of business acquired, or if the deficiency is greater than the value of business acquired, it is recognised as a decrease in deferred acquisition costs and then as an increase in the provision for life policy liabilities. Based on the differences in the life policy liabilities under IFRS-EU and US GAAP and the different confidence levels used in reserve adequacy testing, a premium deficiency may be recognised differently under US GAAP.
DEFERRED PROFIT SHARING (2005) Under IFRS-EU, a deferred policyholder profit sharing liability is established for the realised and unrealised investment results allocated to insurance contracts with discretionary participation or with a legal/constructive obligation to share investment results with policyholders. Under US GAAP, such deferred liability is only recognised for legal obligations.
EMPLOYEE BENEFITS (2005 AND 2004) Unrecognised actuarial gains and losses Under IFRS-EU, all previously unrecognised actuarial gains and losses were charged to equity at 1 January 2004. Under US GAAP, no reset of actuarial gains and losses was applied at 1 January 2004.
ASSOCIATES AND OTHER EQUITY INVESTMENTS (2004) Differences arise between US GAAP and IFRS-EU for associates for which equity accounting is applied due to underlying differences between IFRS-EU and US GAAP in the associates’ equity and profit and loss. These mainly relate to underlying differences in the accounting treatment for real estate.
RAROC is calculated as the risk-adjusted return divided by economic capital. The risk-adjusted return is based on similar valuation principles as applied in the financial accounts, with two important exceptions. The actual credit-risk provisioning is replaced by expected losses reflecting statistically calculated average credit losses over the entire economic cycle. In addition the profit and loss account is adjusted for effects that relate to replacing actual book capital by economic capital.
Note: In 2004 retail RAROC figures have been restated for changes in market risk methodology.
The after-tax RAROC of ING’s Total banking operations improved to 22.6% from 14.7% in 2004. Excluding the impact of divestments the after-tax RAROC increases to 18.8% compared to 16.4% last year. The overall RAROC target that has been set by the Executive Board is 12% after-tax. The RAROC performance of Wholesale Banking excluding the impact of divestments markedly improves from 14.9% in 2004 to 16.7%. RAROC Retail Banking improves its performance in all regions resulting in an after-tax RAROC – excluding divestments – of 34.1% (2004: 26.1%). ING Direct, with an after-tax RAROC of 14.9% compared to 11.3% last year, reaches the RAROC target for the first time.
Economic capital is calculated for credit, transfer, market, operational and business risk. Business risk is used to cover unexpected losses that may arise as a result of changes in volumes, margins and costs.
Economic capital has been calculated for ING Bank Total banking operations. The figures shown by risk category reflect all diversification effects, including risk reduction between the risk categories. The diversification effects that arise as a result of combining bank and insurance activities are not taken into account.
All risks, except for business risk, are subject to an independent control process with a functional reporting line to the Corporate Risk Managers. Although business risk is factored into the planning and budgeting process, business risk is not subject to an independent control process, but is the responsibility of the relevant business units.
Each Corporate Risk Management Department is responsible for the consistency and correctness of the respective methodology, including the calculation of economic capital (and expected loss) and the diversification within the risk type.
Embedded Value is an indicator of the economic value creation as a consequence of selling and managing long-term contracts such as life insurance, annuities and pensions. Embedded value is defined as the capital invested in our insurance operations, adjusted net worth or total regulatory surplus, and the value of the in-force covered business. Adjusted net worth equals the free surplus and the required capital. The value of in-force covered business is defined as the present value of future after-tax statutory book profits expected to arise from the in-force business, including new business written in the reporting period, less the cost of capital. The value of new business is the embedded value added with sales during the year, and therefore provides insight into the expected profitability related to 2005 sales. Underlying assumptions (expenses, interest rates, mortality, lapse, etc.) reflect best estimates of future expected experience. Future earnings are discounted at a rate representing the cost of capital.
The value of new business written during 2005 was EUR 805 million, compared to the 2004 level of EUR 632 million. This 27.4% increase is primarily due to higher sales and improved pricing margins. During 2005 ING invested EUR 1,770 million to write new life insurance business. The overall rate of return expected on this investment is 13.2%. This compares to an overall return of 12.1% in 2004. The expected internal rate of return in developing markets is 17.4%.
The value of new business fully reflects acquisition expense overruns, which represent the excess of the costs of acquiring new business over the expense allowances provided in product pricing. Such overruns may exist while new operations are achieving scale, while several businesses are integrating into one, or during a year when sales are lower than anticipated. During 2005, after-tax acquisition expense and commission overruns were EUR 103 million, compared to EUR 73 million in 2004.
Addition of business/(divested business) 196 Currency effects 1,575 Model changes 338 Revised starting embedded value 24,560
Implied market forward rates (31 Oct 2005) 51 18 -1,540 -1,471 Lower short-term rates with 10bp 14 27 -26 15 1% lower equity and real estate returns (1) -576 -179 -150 -905 10% downward shift in market values of equity and real estate investments -877 -378 -202 -1,456 Local regulatory minimum capital requirement 12 125 2,261 2,398
We make the following observations to above results: – The negative impact to Embedded Value from using implied market forward rates (net of corresponding discount rate adjustments) is EUR 1,471 million, almost entirely due to impact from Taiwan (EUR 1,499 million negative). Insurance Europe and Insurance Americas actually benefit from using implied market forward curves as new money assumptions (net of adjustment to discount rates) reflecting alignment of new money assumptions used with observable market rates at 31 October 2005; – The impact of using local regulatory capital instead of ING capital model is positive EUR 2,398 million and primarily due to Taiwan for which ING allocates capital at a significantly higher level than local regulatory level; – The net impact of 1% decrease in new money rate (1% downward parallel shift) and discount rates is EUR 734 million negative, down from 2004 (EUR 937 million negative).
(1) Countries classified as developing markets are: – Central Europe: Bulgaria, Czech Republic, Hungary, Poland, Romania, Slovakia, Russia (note Russia was added for both 2004 and 2005); – Americas: Chile, Mexico, Peru; – Asia/Pacific: China, Hong Kong, India, Korea, Malaysia, Taiwan, Thailand.
The primary focus of the review was the methodology and assumptions used. Watson Wyatt was also requested to perform a limited high level review of the results of the calculations but was not asked to perform any detailed checks on the models and processes used.
ING BANK – short term A1+ P-1 – long term AA Aa2 – financial strength B+
In February 2005, ING defined its dividend policy: ING intends to pay dividends in relation to the longer term underlying development of cash earnings following the introduction of International Financial Reporting Standards (IFRS), which is expected to increase volatility in net profit. Furthermore it was decided to reduce the dilution of earnings per share even further and therefore ING decided in the beginning of 2005 to change its dividend policy to a full cash dividend starting with the 2004 final dividend (paid in May 2005). This change was very much welcomed by investors and analysts.
Ratings Standard & Poor’s upgraded its ratings of ING Groep N.V., ING Bank N.V. and ING Verzekeringen N.V. in August 2005. Moody’s confirmed its ratings in May 2005. ING Groep N.V. and ING Verzekeringen N.V. now have an AA- rating from Standard & Poor’s and an Aa3 rating from Moody’s. ING Bank N.V. now has an AA rating from Standard & Poor’s and an Aa2 rating from Moody’s.
Listing The (depositary receipts for) ordinary shares ING Group are listed on the exchanges of Amsterdam, Brussels, Frankfurt, Paris, New York (NYSE) and the Swiss exchanges. The (depositary receipts for) preference shares and warrants B are listed on the Euronext Amsterdam Stock Market. Warrants B are also listed on the exchange of Brussels. Options on (depositary receipts for) ordinary shares ING Group are traded at the Euronext Amsterdam Derivative Markets and the Chicago Board Options Exchange.
United Kingdom 28% United States & Canada 21% Netherlands 17% Belgium 11% Luxembourg 8% France 6% Switzerland 5% Germany 2%
ING share quotation ex final dividend 2005 Thursday, 27 April 2006
ING share quotation ex interim dividend 2006 Friday, 11 August 2006
ING share quotation ex final dividend 2006 Thursday, 26 April 2007 * All dates shown are provisional.
Investor relations In addition to financial press releases, ING also publishes ShareholdersNews and ShareholdersBulletin. You can subscribe to both publications through the ING website, www.ing.com. To be kept informed of press releases and other ING news, you can subscribe to the email service on www.ing.com.
AVAILABLE-FOR-SALE FINANCIAL ASSETS Those non-derivative financial assets that are designated as available for sale or are not classified as (a) loans and receivables, (b) held-to-maturity investments, or (c) financial assets at fair value through profit and loss.
CONTINGENT LIABILITIES Contingent liabilities are commitments or risks, for which it is more likely than not that no outflow from ING Group of resources embodying economic benefits will occur. The underlying value of these liabilities is not recorded as liabilities in the balance sheet. For these products, the underlying value represents the maximum potential credit risk to which ING Group is exposed, i.e. assuming that all counterparties failed completely to perform in accordance with the terms of the contracts and that any existing collateral or security proves to be of no value.
COUNTRY RISK The risk that a foreign government will not fulfil its obligations or obstructs the remittance of funds by debtors, either for financial reasons (transfer risk) or for other reasons (political risk).
DEFERRED TAX LIABILITIES The amounts of income tax payable in future periods in respect of temporary valuation differences between carrying amounts of assets or liabilities in the balance sheet and tax base, based on tax rates that are expected to apply in the period when the assets are realised or the liabilities are settled.
DEFINED BENEFIT PLAN Defined benefit plans are post-employment benefit plans other than defined contribution plans.
DEPOSITARY RECEIPT Depositary receipt for ordinary and preference shares, issued by the Trust, in exchange for ordinary and preference shares issued by ING Group.
ELIMINATION Elimination is a process by which intercompany transactions are matched with each other and deducted, so that the assets, liabilities, income and expenses are not inflated.
FAIR VALUE The amount at which an asset or a liability could be traded on a fair basis at the balance sheet date, between knowledgeable, willing parties in arm’s-length transactions.
FINANCIAL ASSET Any asset that is: – a contractual right to receive cash or another financial asset from another company; – a contractual right to exchange financial instruments with another company under conditions that are potentially favourable; or – an equity instrument of another company.
FORWARD CONTRACTS Forward contracts are commitments to exchange currencies or to buy or sell other financial instruments at specified future dates.
MONETARY ASSETS AND LIABILITIES Monetary assets and liabilities are assets and liabilities whose amounts are fixed in terms of units of currency by contract or otherwise. Examples are cash, short or long-term accounts, notes receivable in cash and notes payable in cash.
NOTIONAL AMOUNTS Notional amounts represent units of account which, in respect of derivatives, reflect the relationship with the underlying assets. They do not reflect, however, the credit risks assumed by entering into derivative transactions.
– are available to be used only to pay or fund employee benefits, are not available to the reporting enterprise’s own creditors (even in bankruptcy), and cannot be returned to the reporting enterprise, unless either the remaining assets of the fund are sufficient to meet all the related employee benefit obligations of the plan or the reporting enterprise or the assets are returned to the reporting enterprise to reimburse it for employee benefits already paid. A qualifying insurance policy is an insurance policy issued by an insurer that is not a related party of the reporting enterprise, if the proceeds of the policy: – can be used only to pay or fund employee benefits under a defined benefit plan; and
– are not available to the reporting enterprise’s own creditors (even in bankruptcy) and cannot be paid to the reporting enterprise, unless either the proceeds represent surplus assets that are not needed for the policy to meet all the related employee benefit obligations or the proceeds are returned to the reporting enterprise to reimburse it for employee benefits already paid.
POST-EMPLOYMENT BENEFIT PLANS Formal or informal arrangements under which a company provides post-employment benefits for one or more employees. Post-employment benefits are employee benefits other than termination benefits and equity compensation benefits, which are payable after the completion of employment.
PRIVATE LOAN Private loans are loans to governments, other public bodies, public utilities, corporations, other institutions or individuals with a loan agreement as the only instrument of title.
entitlement and measures each unit separately to build up the final obligation.
QUALIFYING ASSET (WITHIN THE MEANING OF BORROWING COSTS) A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale.
RECOGNITION The process of incorporating in the balance sheet or profit and loss account an item that meets the definition of an element and satisfies the following criteria for recognition: – it is probable that any future economic benefit associated with the item will flow to or from the enterprise; and – the item has a cost or value that can be measured reliably.
TIER-1 RATIO The tier-1 ratio is reflecting the tier-1 capital of ING Bank as a percentage of its total risk weighted assets. The minimum set by the Dutch central bank is 4%.
ING Publications – Annual Review, in Dutch and English; – Annual Report, in Dutch and English; – Corporate Responsibility Report, in Dutch and English; – Annual Report on Form 20-F, in English
DISCLAIMER Certain of the statements contained in this Annual Report are statements of future expectations and other forward-looking statements. These expectations are based on management’s current views and assumptions and involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those in such statements due to, among other things, (i) general economic conditions, in particular economic conditions in ING’s core markets, (ii) performance of financial markets, including emerging markets, (iii) the frequency and severity of insured loss events, (iv) mortality and morbidity levels and trends, (v) persistency levels,(vi) interest-rate levels, (vii) currency exchange rates, (viii) general competitive factors, (ix) changes in laws and regulations, and (x) changes in the policies of governments and/or regulatory authorities. ING assumes no obligation to update any forwardlooking information contained in this document.