Consolidated balance sheet 76 Consolidated profit and loss account 77 Consolidated statement of cash flows 78 Consolidated statement of changes in equity 79 Accounting principles for the consolidated balance sheet and profit and loss account 80 Accounting principles for the consolidated statement of cash flows 97 Notes to the consolidated balance sheet 98 Additional information to the consolidated balance sheet 124 Notes to the consolidated profit and loss account 135 Segment reporting 146 Notes to the consolidated statement of cash flows 150 Risk management 152 2.3 OTHER INFORMATION
Shareholders’ equity and net profit on the basis of US GAAP 176 Notes to the differences between IFRS and US GAAP 177 RAROC performance 181 Internal capital requirements 182 Embedded value 183 2.5 GENERAL INFORMATION
Dick Harryvan, Tom McInerney, Hans van der Noordaa and Jacques de Vaucleroy are nominated for appointment to the Executive Board as of
Piet Klaver is nominated for appointment to the Supervisory Board as of
Impairments/additions to the provision for loan losses (in EUR million) 119 475 497 1,288 2,099 907
(Operating) return on equity (ROE) 26.6 25.4 22.9 21.5 17.4 15.3
Banking operations * Comparable figures shown under 2004 are IFRS-based figures at 1 January 2005; figures were restated due to adjustments to the opening balance sheet under IFRS.
We strive to deliver our financial products and services in the way our customers expect: with exemplary service, maximum convenience and at competitive rates. This is reflected in our mission statement: to set the standard in helping our customers manage their financial future.
ING is a global financial services company with 150 years of experience, providing a wide array of insurance, banking and asset-management services in over 50 countries. Our 115,000 employees work daily to satisfy a broad customer base: individuals, families, small businesses, large corporations, institutions and governments. Based on market capitalisation, ING is one of the 15 largest financial institutions worldwide and in the top-10 in Europe.
Conducts insurance operations and asset-management activities in the Americas. It is well-established in the United States with retirement services, annuities, life insurance and asset management. We have a leading position in non-life insurance in Canada. Furthermore, we are active in Mexico, Chile, Peru and Brazil.
Operates the insurance activities in the Netherlands, Belgium, Spain, Greece and Central Europe. In these countries we offer life insurance with a particular focus on pensions. In the Netherlands and Belgium we also offer non-life insurance. Insurance Europe also includes our European asset-management operations.
Conducts all the global wholesale-banking operations. Wholesale Banking offers a full range of products to corporates and institutions in the home markets in the Benelux countries. Elsewhere, it follows a more selective and focused client and product approach.
ING DIRECT Operates direct retail-banking activities for individual clients in Australia, Canada, France, Germany, Austria, Italy, Spain, the United Kingdom and the United States. The main products offered are savings, mortgages and mutual funds. A separate activity is ING Card, which manages for ING the credit cards within the Benelux and Germany.
Rest of Europe 21% 90.3 North America 9% 40.5 Latin America 1% 2.8
Our goal is to deliver value to shareholders through a combination of growth and return that is higher than the average of our peers. To achieve that, we steer our business towards value creation and aim to keep improving the execution of our business fundamentals. We want to excel at what we do and focus on delivering outstanding service to our customers and on firmly managing costs, risks and reputation. All this is reflected in the theme of this year’s annual report: ‘Executing our strategy for profitable growth’. In August 2005, Standard & Poor’s endorsed our strategic direction by awarding ING with AA credit ratings. The upgrades underline the fact that ING is a solid company and we are pleased to have achieved these ratings.
At the heart of our strategy lies a thorough analysis of our position in the global financial environment. There are in my opinion three fundamental trends that are shaping this environment. The first is ageing populations – a phenomenon that is being observed everywhere in the world, whether in Europe, Asia or the Americas. As a consequence, an increasing number of people are looking for ways to secure their financial situation after retirement. The second trend is technological progress. Only a few years ago the internet was considered by many to be a hype, now it is big business, especially for financial services companies. People everywhere want to enjoy the practical benefits of modern technology. The third trend concerns the gradual shift in economic power from West to East (including Central Europe). In the coming decades China and India will be among the four largest economies in the world, together with the United States and Japan. The countries of Central Europe will benefit from their entry into the European Union.
At ING, we are seizing the opportunities these trends offer and we are using them to drive our three growth engines – retirement services, direct banking and life insurance in emerging markets. In 2005, our growth engines showed very encouraging results. We significantly increased our pension activities, both in the United States and in the growth markets of Central Europe, Asia and Latin America. The pre-tax profit from our retirement-services activities in the United States went up by 22%.
The success of ING Direct shows that technological progress helps to deliver excellent service to customers and to drive down costs. ING Direct’s profit rose 42% in a challenging interest-rate environment. Built from scratch in 1997, ING Direct has grown to become the world’s leading direct bank.
As for life insurance in emerging markets, ING is the leading foreign insurer in Central Europe and the second-largest in Asia. We have built on our early-entry advantage in important countries like China, India, Japan and South Korea in Asia and the Czech Republic, Hungary, Poland and Romania in Central Europe. In 2005, we continued to invest in high-growth markets. We acquired a stake in the Bank of Beijing, which gives us a platform for selling a range of insurance and investment products in China.
When executing our strategy, we have a set of values that guide us: the ING Business Principles. They embody the standards of behaviour we expect from our employees and the commitments we have towards our stakeholders. In addition, we want to contribute to addressing global issues. One of them is the lack of access to education for children in many developing countries. In 2005, together with UNICEF we successfully launched a new global community development programme: ING Chances for Children. At year-end, ING had raised enough money to send over 30,000 children to school.
It is with satisfaction that I look back on the past year. ING is successfully executing its strategy for profitable growth. In this report, you are being updated on the financial and strategic developments of ING Group and its business lines. The Executive Board would like to thank the ING staff for their contribution to our favourable achievements in 2005. The dedication and commitment of our staff is crucial to the company’s success.
Furthermore, I would like to stress the importance of the Supervisory Board, guiding the Executive Board in its daily management of the company. At the 2006 Shareholders’ Meeting we will say goodbye to two members: Aad Jacobs and Paul de Meester. Both of them were of great value during their eight years on the Supervisory Board, for which I am very grateful. At the same Shareholders’ Meeting Piet Klaver, a Dutchman, will be nominated for appointment.
I was also happy to work with my colleagues in a strong and united management team. In 2006, the composition of the Executive Board will change. Fred Hubbell, Alexander Rinnooy Kan and Hans Verkoren have decided to retire from the Executive Board. Each of them played an important role in the development of ING. I am very grateful for their strong commitment during their years at ING. I am fully confident that the new team, including the new to be appointed members Dick Harryvan, Tom McInerney, Hans van der Noordaa and Jacques de Vaucleroy, has the capacity and enthusiasm to lead ING to a successful future. This new team will pursue our strategic course with energy and consistency.
ING attaches the utmost importance to exemplary customer service. Especially in mature markets, we believe high customer satisfaction is the way to differentiate ourselves from our peers and to generate profitable top-line growth. Important improvements were made in this area by NationaleNederlanden, our Dutch insurance company, which virtually caught up to the industry average in customer satisfaction, continuing the trend of 2004. In our insurance business unit in the United States, we launched a broad initiative to improve processes to better meet customer needs. There was also a clear improvement in customer satisfaction in our retailbanking businesses in the Benelux. At ING Direct, customer satisfaction continued to be high in 2005, with almost 80% of customers saying they receive better service from ING Direct than from other financial institutions.
In the United States, we made substantial progress with the outsourcing of our technology infrastructure to IBM. In total, those measures are expected to lead to cost savings of approximately EUR 500 million by 2008.
In 2005, ING introduced ‘Integrated Centralised Capital Management’ in order to utilise our capital more efficiently. Major progress was achieved in the credit-risk area in both risk modelling and data quality, both of which are key elements of Basel II. We have also been able to leverage this experience to our banking operations, which has led to a better modelling of loan-loss provisions and an enhancement of our internal models for measuring risk. For insurance, we introduced new economic-capital models, based on the experiences of the banking operations, and converted these into a limit structure for Market Value-at-Risk.
Our ultimate goal of integrated risk management is to better align our risk taking to our risk appetite. This allows ING to make optimal use of its capital base, leading to a lower overall cost of capital.
Finally, ING Direct’s performance was outstanding. Our direct-banking business in mature markets delivered high growth and profit in a challenging yield-curve environment.
Executing our strategy successfully and accelerating profitable growth throughout the company requires that employees understand ING’s strategy and the goals of their business unit. Employees must know their role in achieving these goals and should receive regular feedback on their performance and be rewarded accordingly. This is how ING sees a performance culture. In 2005, steps were taken at all business levels to embed a performance culture still more firmly, ranging from management-change programmes and workshops to individual-talent and team-development initiatives.
Taxes and net profit The effective tax rate declined to 15.5% in 2005 from 22.1% in 2004 due to a lower statutory tax rate in the Netherlands, high tax-exempt gains on divestments, and EUR 583 million from the creation of tax assets and net releases from tax provisions compared with EUR 161 million in releases in 2004. The effective tax rate is expected to return to a normalised level of 20% to 25%.
Dividend At the annual General Meeting of Shareholders on 25 April 2006, ING will propose a total dividend for 2005 of EUR 1.18 per (depositary receipt for an) ordinary share, up 10.3% from EUR 1.07 per (depositary receipt for an) ordinary share in 2004. Taking into account the interim dividend of EUR 0.54 made payable in September 2005, the final dividend will amount to EUR 0.64 per (depositary receipt for an) ordinary share to be paid fully in cash. ING’s shares will be quoted ex-dividend as of 27 April 2006 and the dividend will be made payable on 4 May 2006.
ING’s insurance operations continued to benefit from strong growth in retirement services and life insurance in developing markets, higher investment results and a favourable claims environment for the non-life insurance businesses. Underlying profit before tax from insurance rose 11.5% to EUR 3,975 million. The non-life operations in the Netherlands, Belgium and Canada continued to benefit from a historically low claims ratio, which helped drive underlying profit before tax from non-life insurance up 21.3%. The life-insurance activities in the Netherlands, United States and Central Europe showed strong profit growth, supported by increased sales, improved returns, growth in assets under management, and investment gains. Underlying profit before tax from life insurance increased 7.4%, as growth was somewhat tempered by continued reserve strengthening in Taiwan and lower capital gains on equities. Strong sales and a focus on cost control led to an improvement in the efficiency ratios for life and investment products.
Operating expenses from the insurance operations increased 9.5% to EUR 5,195 million, due to costs to support the ongoing growth of the business, particularly in Asia, as well as the impact of a new collective labour agreement in the Netherlands, investments in IT infrastructure, and start-up costs for a new distribution channel in Canada. Recurring expenses increased 4.9% to EUR 4,831 million. The efficiency ratios for life-insurance and investment products improved as premium and asset growth outpaced the increase in expenses.
Total income from banking increased 9.2% to EUR 13,848 million, however on an underlying basis (excluding divestments and special items) banking income rose 11.4% to EUR 13,408 million, mainly due to strong growth in savings and mortgage lending as well as higher investment income. The interest result increased 5.3% to EUR 9,162 million. On an underlying basis, the interest result rose 9.0% to EUR 9,157 million, driven by strong growth in savings and mortgage lending at Retail Banking and ING Direct, as well as higher prepayment penalties as customers refinanced their mortgages to take advantage of low interest rates. This was partially offset by lower interest results in Wholesale Banking due to margin pressure and a decline in volumes as the business focused on cross-selling fee products and limiting growth in risk-weighted assets. Investment income increased sharply due to the inclusion of EUR 379 million in gains on divestments in 2005 and a loss of EUR 166 million from divestments in 2004. On an underlying basis, investment income increased 18.7% to EUR 558 million from EUR 470 million. Commission income declined 7.0% to EUR 2,401 million, fully caused by the impact of divestments. On an underlying basis, commission income rose 6.7% to EUR 2,348 million. Other income rose 30.2% to EUR 1,348 million, while on an underlying basis the increase was 39.8% (to EUR 1,345 million). This included a EUR 226 million positive
Additions to the provision for loan losses remained exceptionally low, supported by an improvement of the credit portfolio, the release of provisions previously taken, the absence of new large defaults and improvements in risk management. The total addition in 2005 amounted to EUR 88 million compared with EUR 465 million in 2004.
Taking risk is inherent for financial-services providers. As a consequence strong risk management is a must for sustainable value creation. For ING, 2005 was characterised by an enhanced group risk profile and the strengthening of risk-management capabilities. We witnessed a reinforcing of functional reporting lines across all risk functions (credit, market, insurance and operational risk), with clear accountability within the risk functions for risk capturing, risk measurement and risk assessment. Integrated risk management was introduced and became, together with improved risk modelling and measurement, key ingredients of our strategy.
Underlying profit before tax at Insurance Europe increased 25.4% to EUR 2,021 million in 2005. This increase was driven by life insurance in Central Europe and strong underwriting results at the non-life businesses in the Netherlands and Belgium. Underlying profit before tax from life insurance increased 22.2% to EUR 1,597 million, while underlying profit before tax from non-life insurance rose 39.0% to EUR
Insurance Europe consists of a mix of businesses in mature and developing markets. The largest operations are in the Netherlands (80% of profit) through the activities of Nationale-Nederlanden (NN), Postbank Insurance and RVS and in Belgium (8% of profit). ING is also active in Bulgaria, the Czech Republic, Greece, Hungary, Poland, Romania, Russia, the Slovak Republic and Spain (together 12% of profit).
Operating expenses rose 5.8% due to an increase in the Netherlands, mainly related to the new collective labour agreement, costs for streamlining the IT organisation, as well as severance and reorganisation costs. Operating expenses in Belgium and Central Europe declined as a result of cost-containment programmes.
In the rest of Europe underlying profit increased 44.1% to EUR 258 million, driven by strong increases in Poland, Hungary, Greece, Spain and Romania due to healthy growth in premium income and lower operating expenses.
As for the second part of the strategy – selling more profitable products – NN rationalised and optimised its product portfolio in 2005. The focus is on products that offer more attractive returns and growth opportunities, such as group life and mortgages. Products that were not adding enough value have been removed and new products have been developed, such as the Levensloop-product (a product aimed at saving for different kinds of leave, such as early retirement). In addition, a thorough risk analysis has been undertaken and prices were revised on some products to better reflect the risk profile for the company and the policyholder. This stricter pricing has yielded better returns, as witnessed by the improvement in IRRs and the value of new business.
Thirdly, NN continued to look for ways to reduce costs and improve efficiency to preserve its competitive position. In May 2005, it was announced that NN will reduce its annual cost base by EUR 235 million by the end of 2007 to bring efficiency in line with the industry benchmark. This will lead to a reduction of the workforce by 1,000 positions by the end of 2007 as well as a reduction in third-party staff as backlogs diminish. Efficiency will be increased through the Lean Method program, which improves reliability by reducing wastage in core processes.
In the course of the year, NN strengthened its control and management of compliance with laws, regulations and ethical standards, due in part to a number of compliancerelated incidents.
Strengthening distribution in Belgium ING Insurance Belgium further strengthened its bancassurance infrastructure in 2005, by increasing its new product offering, introducing innovations in the medical underwriting of life policies (70% automatic settlement in front-office) and implementing process improvements. This resulted amongst others in record sales of the Optima investment product through ING Bank of EUR 900 million. In addition, ING focused its distribution through independent brokers who have a strong position in the quickly growing pensions market for the self-employed and small and medium-sized enterprises. Driven by new pension legislation, ING was able to sign large contracts with sector organisations. Moreover, it ensured compliance with the new legislation.
The strong performance of ING’s insurance businesses in Central Europe can be attributed to the consistent execution of the two-pillar strategy of optimising the current business and developing efficiency projects. In Poland, ambitious performance-improvement programmes resulted in better business performance and structurally lower costs. The Polish pension fund was again the best performing in the market according to independent press and business reviews. Hungary strengthened its market leadership with the introduction of an innovative unit-linked product.
In Belgium, ING Insurance will continue to strengthen its distribution. From 2006, the Optima investment products will be sold through Record Bank. There will also be a focus on cost reduction and cross-selling.
Underlying profit before tax from Insurance Americas increased 23.6% to EUR 1,979 million in 2005. Profit growth was driven by a 27.4% increase in the United States, led by higher results from retirement services and annuities due to higher asset levels, improved investment performance and higher margins. The Canadian non-life insurance business posted a 35.8% increase in underlying profit before tax, driven by continued strong underwriting results and the acquisition of Allianz Canada.
Operating expenses increased 8.9% to EUR 2,397 million due to the acquistion of Allianz Canada and expenses in the United States related to strategic initiatives and higher incentive-related benefit costs.
The embedded value of the life-insurance business in the Americas increased 33.8% to EUR 10,858 million in 2005, primarily due to significant currency effects (EUR 1,298 million) related to strengthening of the United States dollar against the euro. The value of new life-insurance business rose 19.7% to EUR 207 million, driven by a combination of higher margins across all business lines and higher sales, primarily in retirement services. The internal rate of return (IRR) improved to 11.1% from 10.7% in 2004, due to continued pricing discipline and changes to the product mix, particularly in the United States.
Value of new life business (in EUR million) 207 173 Internal rate of return 11.1% 10.7% Embedded value of life business (in EUR million) 10,858 8,118 * Chile and Peru; not including ING’s joint venture in Brazil because it is a minority interest
• Results from Mexico impacted by active hurricane season in the second half of 2005
ING Investment Management delivered excellent results achieving exceptionally high total returns while maintaining relatively stable investment yields. These results were aided by exceptionally low credit losses and strong private-equity gains, as well as prepayment income on fixed-income investments. Investment income declined 2.6% to EUR 4,387 million, reflecting the EUR 249 million gain on the ING Canada initial public offering (IPO) in 2004 as well as EUR 157 million higher investment income from divested business in 2004. Excluding those items, investment income increased 7.3% driven by higher yields, prepayment penalty income on fixed-income investments, investment gains from sales of fixed-income securities, and higher private-equity gains.
Improving processes and outsourcing During 2005, ING launched a broad Six Sigma initiative in the United States to improve processes to better meet customer needs while reducing unit costs. The initiative began with a detailed, measurable understanding of critical customer requirements, and then focused on the processes that hindered meeting those requirements.
In the United States, ING also made substantial progress outsourcing its technology infrastructure to IBM, which started at the end of 2004. IBM now manages the day-today operations of the infrastructure. ING realised meaningful cost benefits and, at the completion of the migration, expects to have a more stable, secure and effective technology environment.
Public company On 15 December 2005, ING Canada completed its first full year as a public company. On December 20, the share price closed at CAD 52.30, which represented a 101% increase from the debut price. So the company’s stock price more than doubled in a year and three business days on the continued strong performance of the business. Allianz Canada, acquired in 2004, is now largely integrated into ING Canada, and the claims and cost ratios of the combined entity are strong. ING Canada remains the premier propertyand -casualty company in Canada. ING is the majority shareholder, with a 70% stake.
Transforming and restructuring In Mexico, ING is shifting from its reliance on the volatile large-customer commercial property-and-casualty line into a predominantly personal line and small and medium-sized enterprise operation. ING introduced a restructuring programme based on a new strategy, organisational structure and management team, with members recruited from within ING as well as from the local market. In addition, ING launched a new distribution strategy via tied agents based on ING’s global best practices in a market that is dominated by independent intermediaries.
In 2005, the pension funds business in Peru began experiencing fierce competition from the biggest financial conglomerate in the country. Integra, ING’s joint venture and Peru’s leading pension-fund provider, anticipated this development by restructuring the company and tripling its sales force. As a result, the company gained additional market share.
In Brazil, ING has been discussing a restructuring of the joint venture with its partner to improve profitability and maximise value for shareholders.
In March, ING raised EUR 1.8 billion of investor assets for the new ING Global Equity Dividend and Premium Opportunity Fund (IGD), making IGD then the eighth largest closed-end fund listed on the New York Stock Exchange.
ING Mexico aims to continue building a customer-centric organisation with top-performing sales forces, improved channel and client service and disciplined underwriting.
In Chile, the IT platform will be improved to standardise operations, lower costs, reduce operational risk and improve underwriting and pricing decisions. ING Peru is aggressively building distribution to increase market share.
INSURANCE ASIA/PACIFIC A solid growth engine with rising premiums and sales
Underlying profit before tax from Insurance Asia/Pacific declined 5.9% to EUR 447 million, as a result of the strengthening of reserves in Taiwan due to the continued low interest rates. Excluding Taiwan, underlying profit before tax rose 15.8% to EUR 447 million from EUR 386 million. Profit growth was driven by South Korea (+52.1%).
Operating expenses increased 19.3% to EUR 867 million, reflecting staff and salary increases to support the continuing growth of the businesses across the region.
The embedded value of the life business at Insurance Asia/Pacific declined to EUR 1,799 at the end of 2005 from EUR 2,076 million in 2004. This is the result of changes in economic assumptions, particularly in Taiwan, where interest-rate assumptions have been adjusted downwards.
South Korea 19% 2,278 Australia and New Zealand 1% 181 Rest of Asia* 6% 777 * India, China, Hong Kong, Thailand and Malaysia
• Asia/Pacific accounts for almost half of the Group’s total value of new business
Consistent strategy The insurance and asset-management sectors in Asia’s high-growth markets are expanding faster than in mature markets worldwide. ING enjoys an early-mover advantage and has defined life insurance in emerging markets as one of its growth engines. It has been able to seize the opportunities arising from demographic changes, deregulation and the increasing sophistication of the customer. ING is the second-largest foreign life-insurance company in Asia/Pacific in terms of annual premium income. Almost all business units have again increased their market share in 2005.
There are a number of general features that determine the overall performance. As strong organisational capabilities are required to build a successful franchise, the focus is on strengthening distribution, optimising the product portfolio, excellence in execution and active portfolio management.
In Japan, the increase in sales in 2005, particularly in singlepremium variable annuities (SPVA), can be attributed to the extensive and rapidly growing network of bank and securities-house distributors. The rise in the number of independent agents helped corporate-owned life-insurance (COLI) sales higher. ING’s market share in Japan went up to 3.2% from 2.3% in 2004. In Japan’s huge life-insurance market – the second largest in the world – overall market growth is flat, but foreign companies are gradually gaining market share from domestic players.
Optimising product portfolio ING focuses on optimising the product portfolio in order to capitalise on customer needs. ING Antai Taiwan broadened the product range, leading to a diversification of risks. The old block of policies has been managed pro-actively by means of a reduction of average guarantees through product design and by means of better asset and liability management. In Japan, the SPVA product features were enhanced to meet customer preferences. In India, ING Vysya Life expanded its product line to include unit-linked products which led to strong sales growth. In Malaysia, ING remains the leading provider in the employee-benefit market and is looking to further build its burgeoning mutual-funds business.
Excellence in execution As competition is fierce in Asia/Pacific, our business units in the region focus on efficiency. ING Life Korea serves as a good example. It is the leading foreign insurer in South Korea and continues to be a top performer in the market on persistency. ING’s growth strategy in South Korea is one of rapidly expanding its sales force whilst maintaining its foundation of high standards of quality. This strategy has paid off for ING Life Korea in 2005. The company has over 5,000 highly productive tied agents.
Active portfolio management ING continued to adjust its business portfolio in 2005. In Asia/Pacific a number of smaller non-core activities were sold and new businesses were acquired. In March, ING announced the acquisition of a 19.9% stake in the Bank of Beijing. ING’s insurance business utilises the Bank of Beijing’s branch network to offer insurance and investment products to new and existing customers of the bank.
Growth markets In 2005, ING continued to invest in growth opportunities in its greenfield operations in China, India and Thailand. The financial-services environment in these countries is particularly challenging, with the markets becoming increasingly competitive.
In China, ING extended its operations markedly. It acquired a stake in the Bank of Beijing, as mentioned above. ING Capital Life, one of ING’s two insurance joint ventures, set up branches in Beijing and Shenyang, which included the license to expand operations across Liaoning Province. It has also received approval to set up a branch in Shandong Province. Moreover, the Guangzhou license of Pacific-Antai Life Insurance was upgraded to a provincial license and the company was given permission to set up sub-branches in the cities of Dongguan, Nanhai and Shunde. Both joint ventures are now able to sell group-life and health-insurance policies.
Strong growth in assets under management Insurance Asia/Pacific witnessed strong growth in assets under management in 2005 to EUR 72 billion (from EUR 51 billion in 2004). This can be ascribed to increasing bank distribution, a move from traditional insurance products to investment-linked products and the relaxation of regulations. There have been important new fund launches in India, the Philippines, South Korea and Taiwan, which increased funds under management. As for fund performance, 77% of ING funds in Asia score above median over one year. ING Investment Management Asia/Pacific received high-profile fund-performance awards in both Australia and New Zealand.
Prospects in 2006 remain favourable for Insurance Asia/Pacific as ING is well-positioned to benefit from the region’s healthy economic outlook.
Going forward, ING aims to expand its activities in the countries where it currently operates. New investments will be geared towards the largest markets.
A major goal is to further strengthen partnerships with banks and securities houses. In China, for instance, ING will aim to expand activities based on strong distribution channels and local partnerships.
Lastly, ING will continue to build strong organisational capabilities. Crucial elements are an improvement in assets and liability management, product innovation and further improvements in efficiency.
ING’s Wholesale Banking business achieved satisfying results in difficult business conditions. 2005 was characterised by a highly competitive market with eroding credit margins and a challenging yield curve.
Total income increased 1.5% to EUR 5,957 million. Excluding divestments, underlying income rose 4.8% to EUR 5,579 million. Operating expenses declined 7.2% to EUR 3,466 million, due entirely to the divestments of the Asian cash equities business, CenE Bankiers, ING BHF-Bank and Baring Asset Management. Excluding divestments, underlying expenses rose by 12.1% to EUR 3,411 million, due in part to non-recurring items. This also explained the deterioration of the underlying cost/income ratio to 61.1% from 57.1%. Excluding all non-recurring items and adjusted for exchange-rate differences, recurring operating expenses of Wholesale Banking increased 6.3%.
The addition to the provision for loan losses declined from EUR 192 million in 2004 to a net release of EUR 108 million in 2005. The release was due to improvements in the credit environment and the limited inflow of large new problem loans. The net release equalled -7 basis points of average credit-risk-weighted assets compared with an addition of 12 basis points in 2004.
* These numbers include the result from ING Real Estate which financially reports to Wholesale Banking. ING Real Estate is discussed in detail in the chapter on Asset Management together with ING Investment Management.
We integrated the information on our mid-corporate clients into the Wholesale Banking centralised client-information system. This helped to create more opportunities to service corporate clients in our Benelux home market. In the important Financial Markets division – serving mainly institutional clients – further changes were made to the structure to ensure it too was truly client-focused. The sales function was more closely aligned with products delivery and client demand. The appointment of a Global Head of Sales was instrumental in this. Finally, we integrated our divisions Corporate Finance and Equity Markets more into our focused Benelux offering. Several notable transactions followed from this (see landmark deals on page 30).
Central to the enhanced client-focus is cross-selling and deep-selling. By anticipating clients’ needs we can identify and generate new business opportunities by providing standard ING products or creating customised solutions that offer clients real added value to their business.
In the Financial Markets division pivotal IT investments were made by providing a single database that runs across all regions and products. This can support client service at low costs. Also, the transformation of risk-data projects helped to reduce economic capital. Another step taken was the outsourcing of the Equities Clearing and Settlement department in the UK to Société Générale. The operations and technology services were better aligned with the Wholesale Banking business.
In support of the above-mentioned developments, ING took steps to improve execution. The approval process for financing corporate clients was speeded up by a new streamlined process, in which transparency and accountability of credit approval was increased. Furthermore, the ‘balanced scorecard’ was introduced within Wholesale Banking. This is a method of measuring and improving individual performance.
Outside the home markets there were successes in the emerging markets of Central and Eastern Europe. In Poland, ING helped finance the EUR 1 billion acquisition of a vodka producer (Polmos) by distributor CEDC. This was a great cross-sell success that involved three major transactions and several ING teams. In Hungary, Structured Finance advised on a motorway project connecting Budapest with the Serbian border. Further, a pan-European deal was made when ING was appointed as cash-management bank for the publisher Sanoma WSOY in the Benelux, the Czech Republic and Hungary.
Client Relationship Planning and Senior Banker coverage will be extended to more clients and further emphasis will be placed on our cross-sell strategy. The client action plans that were started in 2005 will be measured to further improve the quality of our service to clients and there will be new initiatives in cost discipline. Value Chain Management will be further implemented for other products. By making use of our sector-specific knowledge we will continue to improve the quality of our product offering. We shall increase investments in key product areas such as Financial Markets, Payments & Cash Management, Leasing and Structured Finance.
In 2005, ING Retail Banking continued on the course set out on in 2004 with a strategic focus on profitable and selective growth, improving cost efficiency and customer satisfaction. Income increased, RAROC continued at high levels and market shares grew. Results were further flattered by a benign risk environment and some non-recurring profits, making 2005 a very good year. Recurring costs remained under control and increased only slightly. Customersatisfaction ratings improved in all our main businesses. The strengthening of compliance and sales procedures are expected to lead to further improvement of customer satisfaction over time.
Underlying profit before tax from Retail Banking rose 55.4% to EUR 1,815 million, driven by strong growth in the Benelux as well as in emerging markets. Total profit before tax in 2005 rose 59.7% to EUR 1,877 million. All retail banking business units contributed to the result.
The addition to the provision for loan losses declined to EUR 90 million from EUR 184 million in 2004, mainly due to releases in Belgium and Poland. All regions reported lower risk costs, with the exception of the Netherlands, where provisions rose slightly in line with the growth of the business. The addition was equal to 11 basis points of average credit-risk-weighted assets compared with 25 basis points in 2004.
Additions to loan-loss provisions 90 184 -51.1% Total profit before tax 1,877 1,175 59.7% Underlying profit before tax* 1,815 1,168 55.4%
After-tax RAROC 36.0% 26.2% Economic capital (in EUR billion) 3.4 3.1
Netherlands 1,387 Belgium 337 Poland 41 Other countries* 50 Total 1,815 * Mainly ING Vysya Bank, Private Banking rest of the world, and the Kookmin Bank stake.
• Continued high returns and further volume growth in the Benelux
Country developments Underlying profit before tax from Retail Banking in the Netherlands rose 27.1% to EUR 1,387 million, driven by growth in mortgage lending and savings as well as higher income from prepayment penalties on mortgages. The residential mortgage portfolio in the Netherlands grew by EUR 10.8 billion, or 13.4%, to EUR 91.5 billion. Operating expenses increased 11.2% due to the consolidation of Postkantoren BV, EUR 33 million in restructuring costs related to Operations/IT streamlining and outsourcing and EUR 27 million in accelerated software depreciation. Risk costs declined from 21 basis points of average credit-riskweighted assets to 18 basis points.
In Belgium, underlying profit before tax increased sharply to EUR 337 million from EUR 55 million, driven by higher income due to strong growth of savings and current accounts and high sales of investment products, as well as lower expenses and releases from loan-loss provisions. Total income rose 11.9% while operating expenses declined 7.0% due to high non-recurring expenses in 2004, including provisions for litigation issues and impairments on real estate in 2004 under International Financial Reporting Standards.
The upward cost effect of the acquisition of Mercator Bank was largely offset by the sale of ING Securities Bank France and Banque Baring Brothers Suisse in 2005, which were reported under ING Belgium. Risk costs declined from 34 basis points of average credit-risk-weighted assets in 2004 to –8 basis points in 2005 due to a EUR 11 million net release. The purchase of Eural Bank from Dexia Bank was successfully completed in December 2005.
Selective growth in our home markets In the Netherlands, we continued to focus on customer satisfaction. Postbank was already the best among the big banks in customer satisfaction in 2004. In 2005, it further improved on this by delivering on targets, derived from customer-survey analyses, such as speed of money transfer. Postbank reported strong growth in mortgages and in internet banking, with more than two million clients online (www.mijnpostbank.nl). Postbank was awarded the Website of the Year 2005 Award by the Dutch public and was one of the most visited websites in the country. Customer-satisfaction ratings for ING Bank improved in 2005 due to strengthened complaint management. Cash services in small branches were reinstalled and new franchise branches were opened in response to customers’ wishes. ING Bank was awarded several awards, including ‘best business partner’ by Management Team magazine. ING Bank improved its cost/income ratio by focusing on cost control and by increasing market share in savings, mortgages and in the small and medium-sized enterprise (SME) segment. Postbank and ING Bank saw a combined net growth of mutual funds against the market trend. 2005 was a very good year due to exceptional income from mortgage prepayments and low risk costs.
Improving cost efficiency In the Benelux, ING is moving ahead with its programme to improve efficiency and operational excellence. The shared service centres further increased their productivity. In 2005, ING further aligned the front-office functions to improve cost efficiency, upgrade service levels and increase customer satisfaction. Overall costs in Operations/IT stayed flat in 2005 despite strong volume growth and price inflation.
To remain competitive in mature markets, ING started to investigate the possibilities to outsource certain Operations/IT activities that can be performed at lower cost by external parties. Approximately 2,200 full-time equivalents (FTEs) are expected to be transferred to suppliers. As IT is an important business enabler and crucial to the business of financial services, ING is continuously investing in upgrading its IT applications and infrastructure environment, as well as in improving its IT security to make it more robust. Initiatives to streamline the internal organisation and processes were started in 2005. Some of the expected 500 FTE redundancies within the Operations/IT banking division will decrease through natural attrition. These redundancies were on top of the 450 redundancies announced earlier in the year.
In 2006, the focus will remain unchanged. We aim for profitable and selective market growth in both mature and emerging markets. We want to continue to strengthen our compliance organisation and improve cost efficiency especially in branch banking and Operations/IT. The outsourcing process will be further implemented in 2006. By increasing compliance awareness among all staff on prudent sales practices and fair treatment of customers, we want to maintain and strengthen our lead in customer satisfaction.
Total income rose 24.0% in 2005 to EUR 2,119 million, mainly driven by a 21.1% increase in the interest result due to the continued strong growth in funds entrusted. The total interest margin in 2005 narrowed to 0.86% from 0.98% in 2004, mainly caused by a flattening of the yield curve and the strategic decision to maintain competitive client rates in favour of stimulating growth. However, the impact on profit was mitigated by a lower operational cost base. The interest margin improved slightly in the fourth quarter of 2005, despite an increase in client rates in the United States and Canada.
Total marketing expenses rose 12.5%, also due to an increased focus on mortgages in addition to savings. The addition to the provision for loan losses was EUR 106 million, which was 19.1% more than in 2004. The addition equalled 17 basis points of average credit-risk-weighted assets, down from 22 basis points in 2004.
The number of ING Direct customers grew substantially in 2005 by 3.2 million to a total of 14.7 million worldwide. ING Direct Spain welcomed its one millionth customer in April and ING Direct UK in November. ING DiBa (the ING Direct name in Germany and Austria) reached the milestone of five million customers.
In the United States, ING Direct increased its geographical presence by rolling out its marketing campaign in the Phoenix/Arizona region and added 1.1 million new customers, bringing its total to 3.4 million.
Subtotal ING Direct 633 441 43.5% ING Card -16 -6 * Including Austria
Clients Funds entrusted Mortgage portfolio Clients in thousands, funds entrusted and mortgage portfolio in EUR billion at year-end 2005 2004 2005 2004 2005 2004
ING Card is a separate unit which is financially consolidated with the ING Direct business line. Next to managing and growing the existing credit-card portfolios of Postbank and ING Bank in the Netherlands and Belgium, new revolving credit cards were successfully introduced and rolled out in both countries in 2005. The developments were in line with expectations. ING Card showed a loss of EUR 16 million compared with a loss of EUR 6 million in 2004, mainly due to higher risk costs to bring provisions fully into line with IFRS as well as higher marketing and IT expenses. Good use was made of the revolving credit facility.
Assets under management increased 23.5% to EUR 547.4 billion in 2005, excluding the impact of several divestments and restatements such as Baring Asset Management and ING BHF-Bank. Including divestments and restatements, total assets under management increased by 11.3%. The growth in assets was driven by a net inflow of EUR 33.8 billion, plus EUR 34.9 billion attributable to higher currencies and EUR 35.5 billion from higher stock markets. The net inflow of EUR 33.8 billion was mainly realised by Insurance Asia/Pacific, ING Real Estate and Retail Banking. Third-party assets under management increased 27.2%, reaching EUR 352.7 billion at the end of 2005. Proprietary assets increased 17.3% to EUR 194.7 billion. ING IM manages the majority of both third-party and proprietary assets of ING.
2005 was a good year for ING Real Estate. On the basis of the total business portfolio, ING Real Estate is the largest property company in the world. It increased its total business portfolio thanks to ongoing organic growth and landmark deals such as the acquisition of the Gables Residential Trust and the Abbey National portfolio. This last EUR 1.7 billion deal was the largest real-estate transaction to date in the United Kingdom. The portfolio was divided between various clients, and put into existing and newly established funds, while some properties were sold off. A considerable part was successfully floated on the stock exchange as the ING UK Real Estate Income Trust for EUR 700 million. Another landmark transaction was the EUR 1 billion bridge facility provided together with NIBC to a group of institutional investors for the acquisition of the VendexKBB portfolio of prime retail properties in the Netherlands. Furthermore, ING Real Estate continued its growth in Asia by launching the ING Korea Property Investments Company in 2005.
Communication also plays a key role in embedding the performance-culture mentality. Chairman Michel Tilmant continued his direct communication with employees, by giving employee presentations and by sending e-mails to all employees about ING’s results or specific issues. The leaders of the different business lines and staff departments are doing the same. The presentations inform employees and managers about what is expected from them and where we are going. They also provide a chance for people to discuss where we are going. This dialogue is backed up by ING Matters, a new monthly staff magazine for all 115,300 employees worldwide, and via dialogue sessions between ING’s identified talent and the Executive Board.
Part of ING’s new strategy is to effect a fundamental change in culture and create a performance culture. ING defines this as a culture in which everyone is focused on improving ING’s performance to contribute to the ultimate goal: to be a winning company that creates sustainable profitable growth. Within ING’s performance culture, people should have a shared direction, be focused on execution and be wellequipped to do their jobs. In other words, all employees should understand ING’s strategy and the goals of their business unit, know their role in achieving these goals, receive feedback on their performance and be rewarded fairly based on their performance. To this end, Human Resources (HR) developed a set of core principles relating to performance management and is working with the business lines to ensure that their reward plans really distinguish between high and low performers.
A performance culture was the central theme in all HR initiatives, projects and programmes in 2005. All business lines conducted a performance scan, and many are now addressing the issues raised in these scans via a variety of initiatives, which will continue in 2006.
Diversity ING has a large variety of customers. Because of this, we believe that the only way to genuinely understand their needs is to be similarly diverse. Diverse teams are better able to focus on and meet individual customer needs. Although we already recruit from a variety of backgrounds, we want to go further; by increasing internships among students from different backgrounds; by building external relationships and participating in networks that focus on people with different backgrounds; by recruiting more employees with academic qualifications outside the traditional fields; and by using job rotation to stimulate employees to broaden their horizons.
Compliance generates trust The financial sector has been confronted with many new laws and regulations in recent years, and compliance monitoring is more important than ever. In 2005, ING put greater emphasis on compliance with laws, regulations and ethical standards. Regulatory compliance is essential because ING’s long-term relationships with its clients depend on integrity and trust. In 2005, ING introduced a new compliance policy, which will be implemented throughout the company by the end of 2006. ING also strengthened its compliance organisation in the Netherlands.
In project finance, ING applies a social and environmental set of screens, called the Equator Principles. Although project finance is only a small part of ING’s overall credit portfolio, it plays an important role in emerging markets. The Equator Principles categorise projects according to whether they have high, medium or low environmental and social risk and come into play with project costs of at least EUR 50 million.
Responsible share ownership ING Group has EUR 547 billion in assets under management, of which EUR 195 billion are proprietary assets. The majority of the proprietary assets comes from the premium income generated by our insurance business. We have a duty to invest these assets in a responsible manner, from both a prudential and ethical standpoint. On the one hand, we want to ensure that we are able to meet our promises to policyholders in the future; on the other hand, we want to avoid investing proprietary assets in companies that engage in activities incompatible with our policy regarding the defence industry.
Environment ING Group adopted a new internal environmental policy in 2005 to govern its future environmental activities. The policy gives priority to three areas where the business units will focus on reducing consumption in the coming years: business travel, energy consumption and paper consumption.
Commitments in 2006 As part of ING’s effort to further enhance the awareness of social, ethical and environmental issues throughout the Group, ING will be putting more emphasis on a select number of corporate responsibility commitments in 2006. These include a more prominent focus on compliance and responsible sales practices, a more customer-centric approach, an attractive and stimulating workplace, community development and responsible procurement. We also want to involve our stakeholders more closely in policy development and our Corporate Responsibility reporting process. By consistently emphasising these topics, business units will be increasingly encouraged to take these issues into account when managing their day-to-day business.
The Corporate Responsibility Report 2005 is available from 11 April 2006 on www.ing.com. The report can also be ordered through the website.
• ING Chances for Children launched to increase children’s access to education in emerging markets
Other topics through the year were the overall risk profile of the group, the risk organisation, internal control, the business principles, leadership development, corporate governance and compliance. Regarding governance, the future of the ING Trust Office was discussed. A proposal was approved to make English the sole external reporting language as of 2006 for the financial press releases, while a similar proposal for the Annual Report will be tabled for the 2006 Shareholders’ Meeting. Furthermore, the future composition of the Executive Board and the Supervisory Board were discussed, as well as the remuneration of both boards.
During the annual internal meeting of the Supervisory Board – not attended by Executive Board members – the functioning of the Supervisory Board and the Executive Board and their individual members was discussed.
Discussions on the Supervisory Board focused on its profile and composition, its role in decision-making, its role as supervisor and advisor, the preparation of the meetings, the position of the committees and the extent to which the individual members could play their role as they wish to do. One of the conclusions was that there is a need for additional in-depth information, which will be filled in by the annual Knowledge Day. Regarding the composition of the Supervisory Board, it was confirmed that the upcoming vacancies will be used to further internationalise the board in line with the global activities of the Group. Regarding the Executive Board the discussions focused on future vacancies.
Audit Committee meetings The Audit Committee discussed in four meetings the annual and quarterly results and in two meetings the annual and semi-annual US GAAP results. An important subject in 2005 was the introduction of the International Financial Reporting Standards and the impact of these new accounting principles on the balance sheet and profit & loss account. Other topics were risk management, capital management and compliance on the basis of incidents reports. The independence and the quality of service of the external auditors were evaluated. The Audit Committee was informed of the key themes of Corporate Audit Services in 2005 and discussed its future role regarding financial audit in relation to the external auditors. Management letters on internal control were discussed. The Audit Committee was updated on the SOX-404 project, which is aimed on bringing ING’s internal controls and underlying documentation in line with the requirements of the American Sarbanes-Oxley Act as of year-end 2006. Tax issues got more attention, both general tax levels and specific topics during the year. Presentations were given by ING Investment Management Europe, the Corporate Tax Department and Corporate Market Risk Management.
The committee also discussed the annual report on leadership development, ensuring proper talent management and succession planning for key positions. It includes a talent review and a list of future Executive Board candidates. Candidates for new appointments to the Executive Board were discussed.
Short-term and long-term performance targets for the individual Executive Board members were evaluated, resulting in a proposal to the Supervisory Board regarding the 2004 remuneration for each Executive Board member.
pre-retirement arrangements for the Executive Board members were also discussed in order to align them with new Dutch legislation.
Regarding the remuneration of the Supervisory Board, a proposal to increase the compensation for the Audit Committee was prepared prior to an overall evaluation of the compensation of the Supervisory Board. Early 2006 a proposal was made to increase the Supervisory Board remuneration, which will be an agenda item at the 2006 Shareholders’ Meeting.
Corporate Governance Committee meetings The Corporate Governance Committee prepared the agenda for the Annual General Meeting of Shareholders as well as the chapter on corporate governance in the Annual Report. The future of the ING Trust Office was discussed, also responding to remarks in the 2005 Shareholders’ Meeting to reduce the influence of the Trust Office. Furthermore, several regulations were updated to bring them in line with new international legislation and regulations. In order to assess whether Supervisory Board members are independent as defined in the Tabaksblat Code, an Independence Statement, containing the Tabaksblat independence criteria, was formulated. The Independence Statement will be submitted to all Supervisory Board members for signature on an annual basis. The 2005 Independence Statement has been signed by all members of the Supervisory Board.
Fred Hubbell and Hans Verkoren elected to retire from ING, while Alexander Rinnooy Kan will leave ING to take up a new position as the chairman of the Social and Economic Council of the Netherlands. Dick Harryvan (1953, Dutch), Tom McInerney (1956, American), Hans van der Noordaa (1961, Dutch) and Jacques de Vaucleroy (1956, Belgian) are the new Executive Board members, to be appointed by the Shareholders’ Meeting on 25 April 2006.
Tom McInerney will take over Fred Hubbell’s responsibilities for Insurance Americas and ING Investment Management in the Americas. Mr. McInerney will combine his new role with his current position as Chief Executive Officer of ING US Financial Services.
Jacques de Vaucleroy will take over responsibility for Insurance Europe, including Alexander Rinnooy Kan’s responsibilities for ING’s insurance activities in Central Europe and Fred Hubbell’s responsibilities for the insurance activities in the Netherlands and ING Investment Management in Europe. Jacques is currently Group President ING Retail at ING US Financial Services.
Information on the members of the Executive Board and the nominated members is provided on pages 52-53.
Independence and composition of the Supervisory Board The Supervisory Board is of the opinion that it is in compliance with best-practice provision III.2.1 of the Dutch Corporate Governance Code and that there are no Supervisory Board members who qualify as ‘non-independent’ as defined in the above-mentioned best-practice provision. Luella Gross Goldberg and Godfried van der Lugt were reappointed as members of the Supervisory Board. For Luella Gross Goldberg it is her last term until the AGM 2007.
Jan Timmer retired from the Supervisory Board after the AGM on 26 April 2005, as reported in the 2004 Annual Report. Jan Hommen was appointed as a new member as of 1 June 2005. He is the former vice-chairman and CFO of the Board of Management of Royal Philips Electronics.
Mr. Bourdais de Charbonnière was appointed as vicechairman of the Supervisory Board following the Supervisory Board meeting of 16 February. After the retirement of Mr. Timmer in April 2005, Mr. Bourdais de Charbonnière was appointed to the Remuneration and Nomination Committee and the Corporate Governance Committee, while Mr. Hommen was appointed to the Audit Committee as of November 2005. Prior to his scheduled retirement in the 2006 Shareholders’ Meeting, Mr. De Meester volunteered to step down from the Audit Committee in October 2005 to ensure a smooth renewal of the Audit Committee following the retirement of several members in 2005 and 2006. Mr. Van der Lugt joined the Audit Committee as a new member in November 2005.
In the AGM of 25 April 2006, Messrs. Jacobs and De Meester will retire, while Messrs. Herkströter and Vuursteen are eligible for reappointment. At the same Shareholders’ Meeting Piet Klaver (1945, Dutch) will be nominated for appointment. Piet Klaver is chairman of the Executive Board of SHV Holdings, a Dutch-based international trading company. He will bring valuable expertise and international experience to ING’s Supervisory Board.
In line with the retirement rules, Mrs. Gross Goldberg and Messrs. Herkströter and Van der Heijden are scheduled to retire after the AGM of 24 April 2007.
Information on the members of the Supervisory Board and the nominated new member is provided on pages 55-57.
Annual accounts and dividend The Executive Board has prepared the annual accounts and discussed these with the Supervisory Board. The annual accounts will be submitted for adoption to the General Meeting of Shareholders as part of the Annual Report. The proposed dividend for 2005 is EUR 1.18 per (depositary receipt for an) ordinary share. Taking into account the interim dividend of EUR 0.54, the proposed final dividend amounts to EUR 0.64, payable in cash.
Thanks for another successful year The Supervisory Board would like to thank the Executive Board members for the very good performance in 2005. Our appreciation also goes out to the 115,000 employees worldwide for their individual contributions to another successful year, successful both in profit development and growth of the business in all regions and business lines.
In compliance with the Tabaksblat Code In its corporate-governance structure and its corporategovernance practices, ING Group uses the Tabaksblat Code as reference. In a separate document, entitled ‘The Dutch Corporate Governance Code – ING’s implementation of the Tabaksblat Code for good corporate governance’ (available on the website of ING Group www.ing.com) ING Group sets out whether and how it applied each of the best-practice provisions of the Tabaksblat Code. The ING Group corporategovernance structure as described in this document, including some deviations from the Tabaksblat Code described therein, 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 Code.
In 2005, ING Group applied the best-practice provisions of the Tabaksblat Code as described in the above-mentioned document, subject to the following qualifications: – With respect to best-practice provision II.1.4 of the
– Mr. J.H.M. Hommen, who was appointed in the 2005 General Meeting of Shareholders as a Supervisory Board member, has more than five positions as a supervisory board member with other Dutch-listed companies (which is not compliant with best-practice provision III.3.4). Mr. Hommen has informed us he will resolve this situation in due course.
Both qualifications were approved by the General Meeting of Shareholders of 26 April 2005.
Capital structure, shares The authorised capital of ING Group consists of ordinary shares, preference A shares, five series of preference B shares and cumulative preference shares. When we refer to shares herein, we mean both our ordinary shares and our preference shares, unless otherwise specified. 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 61). The purpose of the cumulative preference shares is to protect the independence, the continuity and the identity of the company against the acquisition of control by third parties, including hostile takeovers, while the ordinary shares and the preference shares are used solely for funding purposes. The shares, which are all registered shares, are not listed on a stock exchange.
Depositary receipts Over 99% of the issued ordinary and preference shares are held by the ING Trust Office or ‘Trust Office’. The Trust Office issues bearer depositary receipts in exchange for these shares. The depositary receipts are listed (see page 188 for an overview of the listings). The depositary receipts can be exchanged, without any restrictions, for the underlying shares. An administrative fee may be charged for this.
The depositary receipts and the Trust Office structure outlined above would prevent a small minority of shareholders, which coincidentally may form the majority in the meeting, from taking decisions purely to suit themselves in the absence of other parties at the General Meeting of Shareholders.
On the basis of the closing price of the shares on 31 December 2005, the ratio of market price to voting rights on depositary receipts for ordinary shares was EUR 29.30 : 1, while the ratio for depositary receipts for preference A shares was EUR 3.29 : 5. There is an element of disequilibrium in this respect. Forthcoming legislation will be necessary to link the voting rights for preference shares to the market value of the shares.
In addition to this, it should be noted that the vast majority of the depositary receipts for preference A shares were issued as stock dividend on ordinary shares. The vast majority of holders of ordinary shares and depositary receipts for ordinary shares have, therefore, had the opportunity to obtain depositary receipts for preference A shares. It should also be noted that the market price of the depositary receipts for preference A shares has been relatively flat because of the financial rights attached to them. The market price of the depositary receipts for ordinary shares, on the other hand, has risen substantially over the years. Indeed, the ordinary shares have been split on two occasions because of the level of the share price.
Proposals by shareholders/holders of depositary receipts In view of the size and market value of ING Group, proposals to put items on the Shareholders’ Meeting agenda can be made by shareholders and holders of depositary receipts representing a joint total of 1 per mille of the share capital or representing together, on the basis of the stock prices on the Euronext Amsterdam Stock Exchange, a share value of at least EUR 50 million. Given the period of notice required for proxy voting, proposals have to be submitted in writing at least 50 days before the date of the meeting. Properly submitted proposals will be included on the agenda for the General Meeting of Shareholders.
Shareholders’ structure Details of investors who have reported their interest in ING Group pursuant to the Disclosure of Major Holdings in Listed Companies Act 1996 (or the predecessor of this legislation) are shown on page 188. As at 31 December 2005, ING Group subsidiaries held an interest of 13.13% in ABN AMRO, mainly in preference shares. The interests in Aegon and Fortis were below 1%. These interests are held as investments. There are no shareholders’ or other agreements between ING Group and the above major shareholders on the exercising of voting rights.
ING Group is not aware of investors with an interest of 10% or more in ING Group.
Similarly, on the basis of indirect change of control statutes in the various jurisdictions where subsidiaries of ING Group are operating, permission from or notification to local regulatory authorities may be required for the acquisition of a substantial interest in ING Group.
Remuneration and share ownership Details of the remuneration of members of the Executive Board, including shares and/or or option rights granted to them, together with information on the policy behind such decisions, are provided, starting on page 67. Members of the Executive Board are permitted to hold shares and depositary receipts for shares in the company for long-term investment purposes. Transactions in these shares are subject to the ING regulations for insiders. These regulations are available on the ING Group website (www.ing.com).
Ancillary positions/Conflicting interests In order to avoid potential conflicts of interest, ING Group has a policy that members of its Executive Board do not accept corporate directorships with listed companies outside ING. The only exception is the membership of Fred Hubbell of the Board of Directors of The Macerich Company in the U.S., a real-estate company. He held this position already prior to his employment with ING.
Transactions involving actual or potential conflicts of interest Details of relationships that members of the Executive Board may have with ING Group subsidiaries as ordinary, private individuals are not reported, with the exception of information on any loans that may have been granted to them (see page 70). In all these cases, the company complies with the best-practice provisions of the Tabaksblat Code.
Cees Maas, vice-chairman and CFO (Born 1947, Dutch nationality) After completing his degree in engineering physics and economics at the Erasmus University of Rotterdam in 1976, Cees Maas joined the Ministry of Finance of the Netherlands. From 1986 to 1992 he was Treasurer-General. In July 1992, he joined ING Group and became a member of the Executive Board. In July 1996, Cees Maas was appointed Chief Financial Officer. He was appointed vice-chairman of the Executive Board in April 2004. The following departments report to Cees Maas: Corporate Control & Finance, Market Risk Management, Credit Risk Management, Capital Management, Corporate Insurance Risk Management, Corporate Tax and Corporate Legal, Compliance & Security.
Alexander H.G. Rinnooy Kan (Born 1949, Dutch nationality) Alexander Rinnooy Kan graduated with a doctorate degree in mathematics (cum laude) from the University of Leiden. He also holds a bachelor’s degree in econometrics (cum laude) and a PhD in mathematics from the University of Amsterdam. He was awarded a honorary degree in economics from the Free University of Brussels. Since 1977, he has held various positions with the Erasmus University of Rotterdam, of which he was appointed Rector Magnificus in 1986. In 1991, he became President of the Federation of Netherlands Industries and Employers (VNO). After the merger in 1995 with the Netherlands Christian Employers’ Federation (NCW) he became President of VNO-NCW. In September 1996, he became a member of the Executive Board of ING Group. He is responsible for all insurance activities in Asia/Pacific and Central Europe, as well as ING Investment Management in Asia/Pacific. In addition, he is responsible for ING Real Estate, Corporate IT, Corporate Procurement and ING Global Pensions.
Hans K. Verkoren (Born 1947, Dutch nationality) After positions with banks before completing his degree in economics, followed after his graduation with positions at the Ministry of Finance and the Municipality of Amsterdam, Hans Verkoren began his career with ING in 1978 at the Postal Giro and National Savings Bank, which were merged into Postbank N.V. in 1986. In 1987 he was appointed in the Board of Postbank and, after the merger with NMB Bank, in the Board of NMB Postbank Group. After the merger with Nationale-Nederlanden in 1991 he remained responsible for Postbank until 1995. In that year he became responsible for consumer banking international, notably the ING Direct line of business. He was appointed a member of the Executive Board in April 2004. He is responsible for ING Direct and ING Card.
Changes in the composition Fred Hubbell and Hans Verkoren have elected to retire from the Executive Board as of the annual General Meeting of Shareholders on 25 April 2006. At the same meeting, Alexander Rinnooy Kan will step down from the Executive Board following his appointment as chairman of the Social and Economic Council of the Netherlands (SER).
The Supervisory Board will propose appointing four new members to the Executive Board as of the annual General Meeting of Shareholders on 25 April 2006: Dick Harryvan (born 1953, Dutch nationality) who has been Chief Financial Officer, Chief Risk Officer and member of the Global Management Team of ING Direct since 2005.
Tom McInerney (born 1956, American nationality) who has been CEO of ING’s Insurance activities in the United States (US Financial Services) since 2002.
Hans van der Noordaa (born 1961, Dutch nationality) who has been CEO of the Retail Division of ING Netherlands since 2004, a position that made him responsible for Postbank, ING Bank and RVS.
Jacques de Vaucleroy (born 1961, Belgian nationality) who has been Group President ING Retail at US Financial Services since 2004.
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 stock-based compensation programmes for top senior management, including the Executive Board.
In view of their experience and the valuable contribution that former members of the Executive Board can make to the Supervisory Board, it has been decided, taking into account the size of the Board and ING’s wide range of activities, that such individuals may become member of the Supervisory Board of ING Group. There is, however, a restriction in that only one in every five members of the Supervisory Board may be a former member of the Executive Board. In addition, this member must wait at least one year after resigning from the Executive Board before becoming eligible for appointment to the Supervisory Board. Former members of the Executive Board are not eligible for appointment to the position of chairman of the Supervisory Board.
Details of transactions involving actual or potential conflicts of interest Details of any relationships that members of the Supervisory Board may have with ING Group subsidiaries as ordinary, private individuals are not reported, with the exception of any loans that may have been granted to them (see page 74).
Cor A.J. Herkströter, chairman (Born 1937, appointed in 1998, term expires in 2006, Dutch nationality) Chairman of the Remuneration & Nomination Committee and the Corporate Governance Committee. 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. Trustee of the International Accounting Standards Committee Foundation. Chairman of the Social Advisory Council, Tinbergen Institute. 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.
Eric Bourdais de Charbonnière, vice-chairman (Born 1939, appointed in 2004, term expires in 2008, French nationality) Member of the Remuneration & Nomination Committee and the Corporate Governance Committee. Former managing director of JP Morgan and Chief Financial Officer of Michelin. Other business activities: chairman of the Supervisory Board of Michelin and member of the Supervisory Board of Thomson (listed companies).
Claus Dieter Hoffmann (Born 1942, appointed in 2003, term expires in 2007, German nationality) Member of the Audit Committee. Former Chief Financial Officer of Robert Bosch GmbH. Other business activities: managing partner of H+H Senior Advisors, Stuttgart. Member of the Supervisory Board of each of EnBW AG (listed company), Bauerfeind AG and Jowat AG. Chairman of the Charlottenklinik Foundation (hospital). Chairman of the Board of Trustees (Vereinigung der Freunde) of Stuttgart University.
Jan H.M. Hommen (Born 1943, appointed in 2005, term expires in 2009, Dutch nationality) Member of the Audit Committee (from November 2005). Former vice-chairman and CFO of the Board of Management of Royal Philips Electronics. Other business activities: chairman of the Supervisory Board of each of Reed Elsevier and TNT N.V. (listed companies). Member of the Supervisory Board of Koninklijke Ahold N.V. (listed company). Chairman of the Supervisory Board of each of Academisch Ziekenhuis Maastricht (hospital) and Tias Business School. Chairman of the Board of Directors of Medquist Inc.
Aad G. Jacobs (Born 1936, appointed in 1998, last term expires in 2006, Dutch nationality) Chairman of the Audit Committee. Former chairman of the Executive Board of ING Group (retired in May 1998). Other business activities: chairman of the Supervisory Board of each of Royal Dutch Shell plc, Imtech N.V. and N.V. Verenigd Bezit VNU (listed companies). Vice-chairman of the Supervisory Board of each of SBM Offshore NV and Buhrmann N.V. (listed companies). Chairman of the Supervisory Board of Royal Johan Enschedé N.V.
Paul J.A. Baron de Meester (Born 1935, appointed in 1998, last term expires in 2006, Belgian nationality) Member of the Audit Committee (until November 2005). Former member of the Board of Directors of BBL. Former chairman of the Belgian construction company BesixBetonimmo. Other business activities: member of the Supervisory Board of each of Tessenderlo Chemie N.V. and ETEX N.V. Chairman of the International Chamber of Commerce Belgium. Chairman of the Supervisory Board of Regionaal Ziekenhuis H. Hart (hospital).
The Supervisory Board evaluates the performance of the external auditors on an annual basis, in particular their independence, based on the findings of the Executive Board and the Audit Committee. In addition to the annual evaluation, the Audit Committee and Supervisory Board will review the auditors’ performance in 2007, prior to a proposal to the General Meeting of Shareholders for the next auditor’s appointment. The proposal will include the main conclusions of the assessment of the functioning of the external auditor.
The external auditors, both Ernst & Young and KPMG, attend the meetings of the Audit Committee.
After a maximum period of 5 years of performing audit services to ING Groep N.V. or ING Verzekeringen N.V. or ING Bank N.V., the lead audit partners of the external audit firms and the audit partners responsible for reviewing the audits, have to be replaced by other partners of the respective external audit firms. The Audit Committee makes recommendations to the Supervisory Board regarding these replacements, among others, based on an annual evaluation of the provided services. In line with this agreement, the lead audit partner of KPMG has been succeeded in 2005. The lead audit partner of Ernst & Young will be succeeded after the year-end audit 2006. The rotation of other partners of Ernst & Young and KPMG involved with the audit of the financial statements of ING are subject to applicable independence legislation.
The external auditors may be questioned at the annual General Meeting of Shareholders in relation to their statements on the fairness of the annual accounts. The external auditors will therefore attend and be entitled to address this meeting.
Changes in the composition Aad Jacobs and Paul Baron de Meester will retire after the 2006 Shareholders’ Meeting, having reached the age of 70 and 71, respectively. Cor Herkströter and Karel Vuursteen will be nominated for reappointment to the Supervisory Board in the Shareholders’ Meeting on 25 April 2006. Mr. Herkströter will reach the age of 70 in 2007, while Mr. Vuursteen will be eligible for reappointment for the full four-year term.
Ernst & Young Accountants (Ernst & Young) and KPMG Accountants N.V. (KPMG) are the appointed auditors of ING Group. Ernst & Young is responsible for auditing the financial statements of ING Group and ING Verzekeringen N.V., while KPMG is responsible for the audit of the financial statements of ING Bank N.V.
Both Ernst & Young and KPMG may only provide permitted non-audit services to ING Group and its subsidiaries with permission of the Audit Committee. The Audit Committee separately pre-approves the type(s) of audit, audit-related and non-audit services to be provided by ING’s external audit firms on an annual basis. The Audit Committee also sets the maximum annual amount that may be spent for such preapproved services. Throughout the year the external audit firms and Corporate Audit Services monitor the amounts paid versus the pre-approved amounts. The external auditors provide the Audit Committee with a full overview of all services provided to ING, including related fees, supported by sufficiently detailed information. This overview is semiannually evaluated by the Audit Committee.
Pursuant to its Constitution, the object of the Stichting ING Aandelen (ING Trust Office) is: a. to foster the interests of the holders of depositary receipts for shares in the capital of ING Groep N.V., while having regard for the interests of (i) the company itself, (ii) the enterprises carried on by the company and companies associated with it in a group and (iii) all other stakeholders in the company, such that all those interests are balanced and safeguarded as effectively as possible; b. to acquire and administer registered ordinary and preference shares for which bearer depositary receipts have been issued; c. to foster the exchange of information between the company on the one hand and the depositary-receipt holders and shareholders in the company on the other; d. to promote and organise the solicitation of proxies of shareholders other than the Stichting itself and of specific proxies and/or voting instructions of depositaryreceipt holders.
During the 2005 reporting year the Board held three meetings. On 18 April 2005 the Board met to discuss the 2004 annual report and to prepare the Annual General Meeting of Shareholders on 26 April 2005. Prior to this Board meeting the Executive Board and Supervisory Board of ING Groep N.V discussed with the Trust Office the company’s activities and performance over 2004 on the basis of the press release of 17 February 2005 on the 2004 figures. On 26 April 2005 the Board convened before the Annual General Meeting to discuss the proxy voting results and to decide on the initial position of the Board vis-à-vis the items on the agenda. A third meeting was held on 5 December 2005.
In the meeting of 5 December 2005 attention was paid to the position of the Trust Office and the current state of affairs regarding proxy voting. Furthermore, the Board decided to change the articles of association of the Trust Office to comply with the Dutch Corporate Governance code, best-practice provision IV.2.3 stating that a person may be appointed to the management of the Trust Office for a maximum of three four-year terms.
Prior to its meeting on 5 December 2005 the Executive Board and Supervisory Board of ING discussed with the Trust Office the company’s activities and performance over the first nine months of 2005 as published on 10 November 2005.
The Trust Office organises the solicitation of proxies of shareholders other than the Trust Office itself and of specific proxies and/or voting instructions of depositaryreceipt holders. The Board encourages the greatest possible participation of depositary-receipt holders and shareholders. Holders of depositary receipts in the Netherlands, the United Kingdom and the United States are able to vote by proxy. For the 2005 Annual General Meeting the Trust Office received voting instructions for 631,842,774 depositary receipts, which account for more than 36% of the total number of votes outstanding. Present at the meeting was approximately 1% of the total number of votes outstanding, so more than 37% of the total issued capital attended or was represented in the annual General Meeting of Shareholders, while the Board of the Trust Office voted for the remaining depositary receipts. New legislation is announced that will reduce the multiple voting rights of the preference shares and bring the voting rights in line with the market value of the preference shares. If this legislation would already have been in place at this meeting, the percentage of the total issued capital represented would have been 26% instead of 37%. The Trust Office takes the position that abandoning depositary receipts will be considered when the turnout at the shareholders’ meeting reaches a level of at least 35% of the voting rights (excluding the multiple voting rights of preference shares) during three consecutive years.
The Trust Office has to vote in the interest of all depositaryreceipt holders, including the majority of depositary-receipt holders that has not given voting instructions, while taking into account the interests of ING and other stakeholders. By doing so the Trust Office 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 and answered various questions. The Trust Office voted in favour of all agenda items for the shares for which it had received no voting instructions. About 2% of the voting instructions instructed to vote against the agenda item on the maximum number of stock options and performance shares to be granted to the Executive Board. A similar percentage instructed to vote against the agenda item on the authorisation to issue ordinary shares with or without preferential rights.
On 31 December 2005, preference A shares representing a nominal amount of EUR 104,491,514.40 were entered into the administration, for which 87,076,262 depositary receipts with a nominal value of EUR 1.20 were issued. During the reporting year there have been no changes in the total number of outstanding depositary receipts of preference A shares.
Tom Regtuijt was reappointed as Board member from 1 May 2005. In accordance with the provisions of article 7, section 3.8 of the Constitution, the Trust Office disclosed the proposed reappointments by publication in NRC Handelsblad and the Officiële Prijscourant (AEX Official List) of 5 April 2005. In 2006 Huib Blaisse is due to retire by rotation. He is eligible for reappointment. The intention to reappoint him will be published in due course. The Board will also invite other candidates every time a vacancy arises.
In 2005 the Board of the Stichting met twice, namely on 18 April and 5 December. The composition of the Board is currently as follows: Ad Timmermans (chairman) and Allard Metzelaar, who were reappointed as of 12 May 2005, Bas Kortmann and Wim van Vonno.
Board of Stichting Continuïteit ING Executive Board of ING Groep N.V.
Compliance vision Amongst ING’s most important assets are the integrity of its organisation and the reputation for professional and ethical conduct that ING’s businesses enjoy around the world. ING is committed to the preservation of its integrity and reputation, and requires of all businesses: 1. Good understanding of, and strict compliance with, applicable laws, regulations and standards in each of the markets and jurisdictions in which ING operates; 2. The continued implementation of, and adherence to, ING’s compliance standards.
Important compliance risk areas are: a. Client-related integrity risk areas: e.g. money laundering, terrorist financing, customer due diligence; b. Personal conduct-related integrity risk areas: e.g. market abuse and personal insider trading, business principles and local codes of conduct, whistleblower complaints; c. Financial services conduct-related integrity risk areas: e.g. marketing and sales conduct, transparency of product offerings, customer interest and protection, complaint-handling processes, data protection/privacy; d. Organisational conduct-related integrity risk areas: e.g. conflicts of interest, anti-trust, new-product approval, sector/industry standards, oversight of intermediaries.
Plans for the future The main objective for 2006 is to implement the new ING Group Compliance Policy by the end of the year and to further strengthen the compliance organisation. The implementation of the compliance policy and compliance monitoring have been included as new performance targets for senior management in 2006.
In addition, new legislation will need to be implemented as well. For example, the Third Anti-Money Laundering Directive of the EU builds on existing EU legislation and incorporates recommendations of the Financial Action Task Force (FATF). The directive will result in a review of ING’s Financial Economic Crime Policy.
Internal controls over financial 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 longestablished Business Principles and a strong internal-control culture, which all staff must adhere to. In addition, ING established the SOX 404 Advisory Board and Steering Committee to oversee the implementation of SOX 404 policies. SOX 404 activities are organised along the lines of the governance structure, and involve the participation of senior management across ING Group, assisted by local project teams.
This chapter sets out the remuneration for the Executive Board and the Supervisory Board. The remuneration policy for the Executive Board was adopted by the Annual General Meeting of Shareholders (AGM) on 27 April 2004. In 2005 there are no changes to this policy and therefore, the approval of the AGM still applies for 2005. As set out on page 65, the Supervisory Board proposes to amend the remuneration policy with respect to the Executive Board pension scheme, which amendment will be submitted to the AGM on 25 April 2006, so that following adoption the remuneration policy thus amended, will apply for 2006 and subsequent years. The chapter starts with the general policy for senior-management remuneration, followed by the Executive Board compensation for 2005 and the compensation structure for 2006. In addition, information is included on Supervisory Board remuneration, on loans and advances to the Executive and Supervisory Board members as well as ING Group shares held by members of both boards.
ING’s remuneration policy is based on five key principles that apply across ING. These principles are: – Total compensation levels are benchmarked against relevant markets in which ING competes for talent. – ING aims for total compensation at the median level in the relevant market, allowing only for above-median compensation in the event of outstanding performance.
– Long-term incentives ensure a focus on longer-term strategic targets and create alignment of management with the interests of shareholders. A broad selection of ING’s senior managers participate in the plan to ensure a common focus on ING’s overall performance.
– Short-term incentive (STI) in cash, which compensates for past performance measured over one year; – Long-term incentive (LTI) in stock options and/or performance shares, compensates for performance measured over multiple years and is forward-looking.
Base salary The base salaries of the Executive Board should be sufficient to attract and retain high calibre management needed to achieve our business objectives. The Supervisory Board assesses the experience, background and responsibilities of the CEO and the members of the Executive Board when making decisions on base-salary levels.
To ensure that base-salary levels are in line with the relevant market for talent, the Supervisory Board reviews the basesalary levels of the Executive Board on an annual basis.
Short-term incentive plan The short-term incentive plan (STIP) is a key component of ING’s performance-driven culture. The short-term incentive is paid in cash. The ‘at target’ bonus opportunity is expressed as a percentage of base salary. The target levels are based on benchmarks reflecting external market competitiveness as well as internal objectives. Three financial parameters were used in the 2005 STIP for the members of the Executive Board and top senior management across the organisation (the top-200 executives) to measure performance at Group level.
In addition to the financial targets, part of the short-term incentive award is based on individual performance, assessed over predefined measurable targets set for each senior executive. These targets depend on the specific responsibilities of the individual Executive Board members and are determined and assessed by the Supervisory Board. The Executive Board sets the targets for top senior management. For this layer directly reporting to the Executive Board, the emphasis is on individual performance as the primary business-related responsibility.
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 adopted during the General Meeting of Shareholders on 27 April 2004.
On the basis of these criteria the performance peer group is composed as follows: – Citigroup, Credit Suisse, Fortis, Lloyds TSB
Services, Munich Re Prudential (insurance companies); – Amvescap PLC (asset manager).
In line with ING’s overall remuneration policy, the Supervisory Board has gradually converged the Executive Board salaries to the European/Dutch median benchmark over a period of four years, starting in 2003. This has been achieved by raising the target bonus levels of both the short-term and long-term incentives. This ensures that future payouts more directly reflect performance. As a result, the mix between base salary, short-term and longterm incentives has changed so that the total remuneration is divided equally between each component (i.e. 1/3rd base salary, 1/3rd short-term incentives, and 1/3rd long-term incentives) in case of at-target performance.
Proposed remuneration-policy change regarding Executive Board pension schemes Pensions form an important part of the Executive Board’s total remuneration package and therefore must meet the prime objective of the ING remuneration policy: to enable the company to recruit and to retain qualified and expert managers. Pension schemes must also observe the requirements set by the (ever-changing) laws and regulations in the various relevant jurisdictions and should reflect the social situation in the various Executive Board members’ home bases. In addition, pension-related issues are more complex as a result of the increasing international composition of the Executive Board. In order to meet the demands described above the Supervisory Board intends to review the Executive Board pension plan with the intention to move from a defined benefit scheme to a defined contribution scheme. As a result, it is proposed to the General Meeting of Shareholders to agree to amend the Executive Board remuneration policy with respect to pensions accordingly.
On the basis of the thus amended remuneration policy, the Supervisory Board will undertake a review of the Executive Board pension scheme, with the objective of maintaining a comparable level of benefits as under the current defined benefit scheme. This revised pension plan will apply to the Executive Board members who are appointed after 1 January 2006. Whether and to what extent this revised pension plan will apply to existing Executive Board members and/or non-Dutch members who have a pension plan related to their home base, will also be part of this review.
Prior to 2003, the EB members’ base salary had been effectively frozen since 1999. Michel Tilmant and Cees Maas received a standard promotional increase in their base salary as of 28 April 2004 as a result of their appointment as chairman and vice-chairman of the Executive Board, respectively.
Early in 2006, the Remuneration and Nomination Committee reviewed the actual results of ING against the 2005 targets. Over 2005, ING exceeded on average the three Group financial targets set, resulting in a score of 141% of target on this component. The individual performance of the Executive Board members was on average 175%. ING’s external auditor has reviewed to which extent the objectives, both the group and the individual, have been met.
The grant is subject to shareholder approval of the maximum number of stock options and performance shares to be granted to the Executive Board pursuant to the 2005 LTIP. The LTI grant table on page 69 shows the award amounts for each Executive Board member.
The table on page 69 gives the details of the long-term incentives of the individual members of the Executive Board. The fair market value of long-term incentives of former members of the Executive Board amounted to nil in 2004 and EUR 481,000 in 2003.
Short-term performance-related bonus 1,520 866 366 Total cash compensation 2,809 2,116 1,538
Base salary 850 574 Short-term performance-related bonus 945 445 Total cash compensation 1,795 1,019
(1) The increase in base salary for Michel Tilmant and Cees Maas reflects a 10% increase, effective April 2004, related to their promotion to chairman and vice-chairman respectively.
CEES MAAS Number of options 58,500 51,200 41,250 Number of shares 10,400 9,300 13,750 Fair market value of long-term incentive(2) 628 410 481
Number of options 53,200 32,400 Number of shares 9,500 5,900 Fair market value of long-term incentive(2) 571 259
(3) Eric Boyer de la Giroday, Eli Leenaars and Hans Verkoren were appointed to the Executive Board on 28 April 2004. The figures for these members reflect compensation earned in their capacity as Executive Board members.
(4) As a result of their resignation/retirement from the Executive Board in 2006, Fred Hubbell, Alexander Rinnooy Kan and Hans Verkoren will receive their 2005 longterm incentive award in the form of cash instead of options and shares.
Eli Leenaars(3) 255 102 Alexander Rinnooy Kan 483 346 327 Hans Verkoren(3) 306 109
(1) For reasons of comparison, the company pension expenses are recalculated under IAS 19 with general assumption setting for 2003 to 2005. (2) Restated figures for the year 2003.
(3) Eric Boyer de la Giroday, Eli Leenaars and Hans Verkoren were appointed to the Executive Board on 28 April 2004. The figures for these members reflect pension costs in their capacity as Executive Board members.
(4) Fred Hubbell’s pension costs have been translated from US dollars to euros at the average exchange rate for that year.
Loans and advances The table below presents the loans and advances provided to Executive Board members and outstanding on 31 December 2005, 2004 and 2003. These loans were concluded in the normal course of business and on terms applicable to company personnel as a whole and were approved by the Supervisory Board. In 2004, a loan has been granted to Fred Hubbell amounting to EUR 100,000 and was repaid before 31 December 2004. This loan bore an average interest rate of 4.7%. In line with ING’s expatriate policy, ING paid in 2005 an amount of EUR 18,465 in advance for Dutch taxes due by Eli Leenaars for US stock options that were granted in 2002 and vested in March 2005. This amount was repaid by him before 31 December 2005.
Amount Amount Amount outstanding Average outstanding Average outstanding Average 31 December interest rate Repayments 31 December interest rate Repayments 31 December interest rate Repayments amounts in thousands of euros 2005 2004 2003
ING GROUP (DEPOSITARY RECEIPTS FOR) SHARES HELD BY MEMBERS OF THE EXECUTIVE BOARD(1)
(1) ING Group (depositary receipts for) shares of direct family included.
INFORMATION ON THE OPTIONS OUTSTANDING AND THE MOVEMENTS DURING THE FINANCIAL YEAR OF OPTIONS HELD
Executive Board Pension Plan 2006 The Supervisory Board intends to review the Executive Board pension plan during 2006 with the intention to move from a defined benefit scheme to a defined contribution scheme, which will provide a targeted benefit similar to the current Executive Board defined benefit pension scheme.
Executive Board Short-term incentive plan 2006 Continuing with the intended focus on variable, performance-related remuneration, the Supervisory Board has decided to increase the short-term incentive at target to 100% of base salary. The actual payout may vary between 0% and 200% of the target level (e.g. between 0% and 200% of base salary).
The mix for the 2006 short-term incentive award will remain the same as in 2005: 70% will be determined by pre-defined ING Group financial performance measures and 30% will be based on individual performance objectives set for each Executive Board member and agreed by the Supervisory Board.
The Supervisory Board has concluded for 2006 that the Executive Board’s short-term incentive award for the Group performance should again be measured using the same three financial criteria as were used in 2005: net profit, total operating expenses and return on economic capital. The targets set are challenging. The business continues to progress with the implementation of economic profit/embedded value profit and it is expected that this measure will be included as a Group performance driver in 2007.
Remuneration The annual remuneration of the chairman and vicechairman of the Supervisory Board amounts to EUR 68,100, including EUR 6,810 expense allowances. Other members receive a remuneration of EUR 38,600, including EUR 2,270 expense allowances. In addition to this remuneration, membership of a Supervisory Board committee entitles to an additional remuneration and expense allowances, except for the chairman and vice-chairman. The table below shows the remuneration and expense allowances per Supervisory Board member for 2005 and previous years. Remuneration and expense allowances of former Supervisory Board members retired before 2005 was EUR 89,000 in 2003.
MEMBERS OF THE SUPERVISORY BOARD Cor Herkströter 68 68 68 Eric Bourdais de Charbonnière(1) 65 29 Luella Gross Goldberg 44 44 40 Paul van der Heijden 43 44 44 Claus Dieter Hoffmann 49 46 32 Jan Hommen(2) 24
(1) Member as of April 2004; vice-chairman as of February 2005. (2) Member as of June 2005.
(3) Including a compensation payment to match his former remuneration as a member of the BBL Supervisory Board. (4) Appointed in April 2005 and resigned in June 2005. (5) Retired in April 2005.
Proposal to increase Supervisory Board remuneration On the agenda of the 2006 General Meeting of Shareholders a proposal has been tabled to increase the annual remuneration of the Supervisory Board members given a) the further growth and internationalisation of ING Group since the last remuneration increase in 1998, b) the necessity to offer a competitive compensation to be able to attract and retain high-quality directors with relevant international expertise and experience, and c) the wider and more demanding range of tasks of the Supervisory Board and its committees, resulting from international developments in corporate governance and compliance.
The increase of the Supervisory Board remuneration would be as follow as of 1 July 2006: chairman EUR 75,000 (was EUR 61,260), vice-chairman EUR 65,000 (was EUR 61,260), other members EUR 45,000 (was EUR 36,300), chairman of the Audit Committee EUR 8,000 (was EUR 1,360), members of the Audit Committee EUR 6,000 (was EUR 1,360), chairman of other Supervisory Board committees EUR 7,500 (was EUR 1,360), members of other Supervisory Board committees EUR 5,000 (was EUR 1,360). In addition to the remuneration, Supervisory Board members are entitled to expense allowances, which are partly fixed and partly directly related to the costs incurred.
Loans and advances As at 31 December 2005, the amount of loans and advances outstanding to the Supervisory Board was EUR 1.6 million at an average rate of 4.7%. This amount concerns a loan to Aad Jacobs. No loans and advances were outstanding to other members of the Supervisory Board.
As at 31 December 2003, the amount of loans and advances outstanding to the Supervisory Board was EUR 1.8 million at an average rate of 4.7%. This amount concerned a loan to Aad Jacobs of EUR 1.6 million at an average rate of 4.7% and a loan to Paul Baron de Meester of EUR 0.2 million at an average rate of 4.8%. No loans and advances were outstanding to other members of the Supervisory Board.
ING Group (depositary receipts for) shares and options Supervisory Board members are permitted to hold ING (depositary receipts for) shares as a long-term investment. The table below shows the holdings by members of the Supervisory Board. Supervisory Board members did not hold ING options at year-end 2005.
MEMBERS OF THE SUPERVISORY BOARD Cor Herkströter 1,616 1,616 1,616 Luella Gross Goldberg 6,814 6,701 6,369 Paul van der Heijden 0 1,716 1,716 Paul Baron de Meester 5,550 5,550 5,276
Josine Sips, chairman Paul de Widt, secretary Wim Evers, deputy chairman Gerard Dekkers, deputy secretary Goof Bode, Hans de Boer, Hans van den Brink, Eric van den Broek, Petra Delhez, Wim Dijkhuizen, Jeffrey Dinsbach, Rob Eijt, Ger Heijboer, Jan Hertog, Bas Hofstee, Ben van Kessel, Jan Kuijper, René van der Linden, Remko Roos, Anja Rozendaal, André Schat, Bernard Wempe, Paul Zoet
Gerlach Cerfontaine, chairman, Chairman Executive Board Schiphol Group, the Netherlands Yuan Chen, President State Development Bank, China Hans Eggerstedt, former member Executive Board Unilever, the Netherlands Marc Eyskens, former Prime Minister of Belgium Frits Goldschmeding, former President Randstad Holding, the Netherlands Louise Gunning-Schepers, Chairman Executive Board AMC (Amsterdam Medical Center), the Netherlands Loek Hermans, Chairman MKB-Nederland (Netherlands Federation of Small and Medium-sized Enterprises) Jim Heskett, Professor Emeritus of Business Logistics, Harvard University, USA Rudy van der Meer, former member Executive Board AKZO Nobel, the Netherlands Paul Nouwen, former CEO ANWB (Royal Dutch Touring Club), the Netherlands Petra Roth, Mayor Frankfurt am Main, Germany George Verberg, former Chief Managing Director of Nederlandse Gasunie (Dutch natural Gas Union, the Netherlands Eckart Wintzen, Managing Director Ex’tent, the Netherlands
ASSETS Cash and balances with central banks 1 13,084 9,113 Amounts due from banks 2 47,466 45,084 Financial assets at fair value through profit or loss 3 – trading assets 149,187 79,649 – investments for risk of policyholders 100,961 77,662 – non-trading derivatives 7,766 – designated as at fair value through profit or loss 10,230 – other 3,334 Investments 4 – available-for-sale 305,707 276,331 – held-to-maturity 18,937 Loans and advances to customers 5 439,181 330,458
Debt securities in issue 15 81,262 79,012 Other borrowed funds 16 32,252 23,712 Insurance and investment contracts 17 263,487 216,851 Amounts due to banks 18 122,234 95,878 Customer deposits and other funds on deposit 19 465,712 349,241 Financial liabilities at fair value through profit or loss 20 – trading liabilities 92,058 53,841 – non-trading derivatives 6,248 – designated as at fair value through profit or loss 11,562
References relate to the notes starting on page 98 which form an integral part of the consolidated annual accounts.
Income from investments 24 9,915 9,730 Gains and losses from investments 25 930 649
Valuation results from non-trading derivatives 27 47 Net trading income 28 426 888
Other interest expenses 33 969 1,019 Other operating expenses 34 6,327 5,874 Total expenditure 62,247 60,419
References relate to the notes starting on page 135 which form an integral part of the consolidated annual accounts.
CONSOLIDATED STATEMENT OF CASH FLOWS OF ING GROUP FOR THE YEARS ENDED 31 DECEMBER
Profit before tax 8,894 7,740 Adjusted for – depreciation 1,278 563
Taxation paid -1,398 -1,163 Movements in – amounts due from banks, not available on demand -720 -1,206
Investment and advances – associates and group companies -1.109 -2,643 – available-for-sale investments -260,769 -262,293 – held-to-maturity investments -1,030 – investment property -1,156 -1,169 – property and equipment -540 -380 – assets subject to operating leases -991 -950 – investments for the risk of policyholders -41,781 -34,467 – other investments -164 -103
Cash and cash equivalents at beginning of year 11,588 7,715 Implementation IAS 32/39 692 Effect of exchange-rate changes on cash and cash equivalents 300 -43 Cash and cash equivalents at end of year 3,335 11,588
Cash and cash equivalents comprises the following items Treasury bills and other eligible bills 39 11,572 12,382 Amounts due from/to banks -21,321 -9,907 Cash and balances with central banks 13,084 9,113 Cash and cash equivalents at end of year 3,335 11,588
Currency Share Share Revaluation translation Other amounts in millions of euros Total capital premium reserve reserve reserves
(1) 2003 final dividend of EUR 0.49 per ordinary share and 2004 interim dividend of EUR 0.49 per ordinary share. (2) 2004 final dividend of EUR 0.58 per ordinary share and 2005 interim dividend of EUR 0.54 per ordinary share.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY OF ING GROUP FOR THE YEARS ENDED 31 DECEMBER
ACCOUNTING PRINCIPLES FOR THE CONSOLIDATED BALANCE SHEET AND PROFIT AND LOSS ACCOUNT OF ING GROUP
ING Group has implemented IFRS-EU retrospectively, using the following transitional provisions: – Goodwill is only capitalised on acquisitions after 1 January 2004. Accounting for acquisitions before that date has not been restated; goodwill on those acquisitions was charged directly to shareholders’ equity.
– Hedge accounting is applied to all hedge relationships that were accounted for as a hedge under ING GAAP and meet the IAS
39 criteria for hedge accounting as of 1 January 2005. – 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.
IMPACT OF CHANGES IN ACCOUNTING PRINCIPLES ON NET PROFIT AND EQUITY The impact of implementing IFRS-EU on equity and net profit is summarised as follows: IMPACT OF CHANGES IN ACCOUNTING PRINCIPLES
Net profit 1 January 31 December 32/39 and 1 January amounts in millions of euros 2004 2004(1) 2004 IFRS 4 2005(2)
Classification of equity instruments – third-party interest -1,442 -1,442 Third-party interests in equity -14 56 42 IFRS-EU impact on net profit and group equity -213 -1,991 -1,811 2,717 906
(1) IFRS as adopted by the EU, excluding IAS 32, IAS 39 and IFRS 4. (2) IFRS as adopted by the EU, including IAS 32, IAS 39 and IFRS 4.
Investment property Under IFRS-EU, investment property is reported at fair value, with changes in fair value reported in the profit and loss account. Under ING GAAP, investment property was reported at fair value, with changes in fair value reported in a revaluation reserve in equity; at disposal, the accumulated revaluation was recognised in the profit and loss account under ING GAAP.
Property in own use Both under IFRS-EU and ING GAAP, property in own use is reported at fair value, with changes in fair value reported in a revaluation reserve in equity. However, under IFRS-EU a depreciation charge is recognised in the profit and loss account. At disposal, the accumulated revaluation was recognised in the profit and loss account under ING GAAP. Under IFRS-EU, no result is recognised on disposal. Furthermore, under IFRS-EU individually negative revaluation reserves on a property-by-property basis are charged to the profit and loss account; under ING GAAP negative revaluation reserves were offset against positive revaluation reserves.
Employee benefits – share-based payments Under IFRS-EU, the fair value of shares and options granted to employees is recognised in the profit and loss account over the vesting period of the award. The majority of the share-based payments are equity-settled. Under ING GAAP the intrinsic value was recognised in the profit and loss account.
Insurance provisions Where deferred acquisition costs are amortised over the lives of policies in relation to the emergence of estimated gross profits, the amortisation is adjusted for the effect of the differences between ING GAAP and IFRS-EU.
Result on sale of consolidated subsidiaries The result on sale under IFRS-EU is different from ING GAAP as the book value at the time of disposal under IFRS-EU differs from ING GAAP. This specifically relates to a negative revaluation on property in own use that under IFRS-EU was charged to the profit and loss account in 2004, whereas it was included in the result on disposal under ING GAAP (also in 2004). The effect included in Result on sale of consolidated subsidiaries is offset by an opposite amount included in Property, the total effect on 2004 net profit is nil.
DIFFERENCES FROM IMPLEMENTING IAS 32/39 AND IFRS 4 AS OF 1 JANUARY 2005 Available-for-sale debt securities Under IFRS-EU, quoted debt securities (non-trading) other than those designated as being held-to-maturity are reported at fair value, with changes in fair value recognised in a revaluation reserve in equity; realised results are recognised directly in the profit and loss account. Under ING GAAP, debt securities were reported at amortised cost; realised results were deferred and amortised over the remaining term.
Insurance provisions Under IFRS-EU certain contracts that do not contain significant insurance risk are presented as investment contracts and measured either at amortised cost or at fair value.
For insurance contracts with discretionary participation features, a deferred profit sharing liability is recorded under IFRS-EU for the full amount of unrealised results on allocated investments. In addition, a deferred profit sharing liability is recorded for the policyholders’ share in other differences between ING 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 ING 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.
Fair value option As an alternative to hedge accounting under IFRS-EU, financial assets and liabilities may be designated at fair value through profit and loss, which implies that these are presented at fair value, with all changes in fair value recognised directly in the profit and loss account. Furthermore, the fair value option is applied to certain financial liabilities that are subject to marketmaking activities.
Loans and advances to customers Under both ING GAAP and IFRS-EU loans are measured at amortised cost. Under IFRS-EU, certain fees/costs are capitalised and amortised whilst under ING GAAP they were expensed immediately (e.g. mortgage broker fees). The amortisation of premiums, discounts and fees under IFRS-EU is based on effective yield whereas under ING GAAP these were amortised on a straight-line basis. Under IFRS-EU, realised results are reported in net income. Under ING GAAP these were amortised over the remaining term (e.g. certain prepayment penalties on mortgages).
Venture capital investments Under ING GAAP, venture capital investments were reported at the lower of cost or fair value. Under IFRS-EU, venture capital investments are reported at fair value.
Equity securities Under ING GAAP, negative revaluations on equity securities were only charged to the profit and loss account as impairment when triggered by the financial condition of the issuer. Under IFRS-EU, impairment is also triggered by a significant or prolonged decline of the market value below cost. This does not affect Group equity as at 1 January 2005.
Classification of equity instruments Under ING GAAP, preference shares and trust preferred securities were - in accordance with the legal form - classified as equity. Under IFRS-EU, the terms and conditions of ING Group’s preference shares and trust preferred securities require their classification as liabilities.
1 January 1 January amounts in millions of euros 2005 2004
Before After Before After acquisition/ acquisition/ Impact acquisition/ acquisition/ Impact amounts in millions of euros disposal disposal 2005 disposal disposal 2004
The impact of a change in the composition of the group is defined as the change in assets, liabilities, shareholders’ equity or net profit resulting from the acquisition or disposal of a group company, compared to the situation where no acquisition or disposal took place. The impact is included in the financial year in which the acquisition or disposal took place.
In August 2005, ING Group acquired a portfolio of properties located in the UK from Abbey National. The purchase price amounted to EUR 1.7 billion. The portfolio has been divided between various separate account clients.
In December 2005 ING Group sold Arenda Holding BV to ZBG, a Dutch private equity firm. Arenda is a provider of consumer finance products.
In 2004, ING Group sold most of the German banking units of ING BHF-Bank. The transaction includes ING BHF-Bank’s asset management, private banking, financial markets and core corporate banking business. The value of the transaction amounted to EUR 600 million.
In 2004, ING Group signed a co-insurance agreement with Scottish Re regarding its individual life reinsurance business in the United States. Under this agreement, all assets of the business have been transferred to Scottish Re while the liabilities related to the business have been reinsured through Scottish Re. Under the agreement ING Group paid a ceding commission amounting to EUR 450 million.
In 2004, ING Group acquired Mercator Bank, a Belgium medium-sized savings bank. The negative goodwill amounted to EUR 26 million and was recognised as income in the profit and loss account.
In addition, the adequacy of provision for life policies, net of DAC and VOBA, is evaluated regularly. The test involves comparing the established insurance provision with current best estimate assumptions about factors such as court decisions, changes in laws, social, economic and demographic trends, inflation, investment returns, policyholder behaviour and other factors, mortality and morbidity trends. The use of different assumptions in this test could lead to a different outcome.
Insurance provisions also include the impact of minimum guarantees which are contained within certain variable annuity products. This impact is dependant upon the difference between the potential minimum benefits payable and the total account balance, expected mortality and surrender rates. The determination of the potential minimum benefits payable also involves the use of assumptions about factors such as inflation, investment returns, policyholder behaviour, mortality and morbidity trends and other factors. The use of different assumptions about these factors could have a material effect on insurance provisions and underwriting expense.
Models are subjective in nature and significant judgement is involved in establishing fair values for financial assets and liabilities. Models involve various assumptions regarding the underlying price, yield curve, correlations and many other factors. The use of different valuation techniques and assumptions could produce materially different estimates of fair value.
Price testing is done to assess whether the process of valuation has led to an appropriate fair value of the position and to an appropriate reflection of these valuations in the profit and loss account. Price testing is performed to minimise the potential risks for economic losses due to materially incorrect or misused models, which applies to both exchange traded positions as well as OTC positions.
The determination of the defined benefit plan liability is based on internal and external actuarial models and calculations. The defined benefit obligation is calculated using the projected unit credit method. Inherent in these actuarial models are assumptions including discount rates, rate of increase in future salary and benefit 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 significantly 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 significant impact on the defined benefit plan liabilities and future pension costs. The effects of changes in actuarial assumptions and experience adjustments are not recognised in the profit and loss account unless the accumulated changes exceed 10% of the greater of the defined benefit obligation and the fair value of the plan assets and then the excess is amortised over the employees’ expected average remaining working lives.
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 financial statements of ING Group comprise all entities (including special purpose entities) where ING Group, and/or it subsidiaries, has, either directly or indirectly, the power to exercise control over the financial and operating policies. Control is presumed to exist when ING Group has, directly or indirectly through subsidiaries, more than one half of the voting power or otherwise exercises effective control.
All intercompany transactions, balances and unrealised surpluses and deficits on transactions between group companies have been eliminated. Where necessary, the accounting policies used by subsidiaries have been changed to ensure consistency with Group policies. In general, the reporting dates of subsidiaries are the same as the reporting date of ING Groep N.V. There are no material restrictions on subsidiaries to transfer funds to the parent company.
For interests in investment vehicles the existence of control is determined taking into account both ING’s financial interests for own risk and its role as investment manager.
SEGMENTAL REPORTING A business segment is a distinguishable component of the Group engaged in providing products or services that is subject to risks and returns that are different from those of other business segments. A geographical segment is engaged in providing products or services within a particular economic environment that are subject to risks and returns that are different from those of segments operating in other economic environments. The geographical analyses are based on the location of the office from which the transactions are originated. The business lines of the Group are the business segments and the primary segment reporting format, the geographical segments the secondary.
Translation differences on non-monetary items, measured at fair value through profit and loss are reported as part of the fair value gain or loss. Non-monetary items are retranslated at the date fair value is determined. Translation differences on nonmonetary items measured at fair value through the revaluation reserve are included in the revaluation reserve in equity.
Group companies The results and financial position of all the 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 profit 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
DERIVATIVES AND HEDGE ACCOUNTING Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured to their fair value. Fair values are obtained from quoted market prices in active markets, including recent market transactions, and valuation techniques, including discounted cash flow models and options pricing models, as appropriate. All derivatives are carried as assets when their fair value is positive and as liabilities when their fair value is negative.
Cash flow hedge The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognised in equity. The gain or loss relating to the ineffective portion is recognised immediately in the profit and loss account. Amounts accumulated in equity are recycled to the profit and loss account in the periods in which the hedged item will affect profit or loss. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in the profit and loss account. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the profit and loss account.
Net investment hedge Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges. Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognised in equity; the gain or loss relating to the ineffective portion is recognised immediately in the profit and loss account. Gains and losses accumulated in equity are included in the profit and loss account when the foreign operation is disposed of.
Derecognition of financial assets Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or where the Group has transferred substantially all risks and rewards of ownership. If the Group neither transfers nor retains substantially all the risks and rewards of ownership of a financial asset, it derecognises the financial asset if it has no longer control over the asset. In transfers where control over the asset is retained, the Group continues to recognise the asset to the extent of its continuing involvement. The extent of continuing involvement is determined by the extent to which the Group is exposed to changes in the value of the asset.
Loans and advances to customers Loans and advances to customers are initially recognised at fair value, net of transaction costs. Subsequently, they are carried at amortised cost using the effective interest rate method less any impairment losses.
Held-to-maturity investments Investments for which the Group has the positive intention and ability to hold to maturity and which are designated as held-tomaturity assets are subsequently carried at amortised cost using the effective yield method, less any provision for impairment.
Financial assets at fair value through profit and loss Financial assets at fair value through profit and loss comprise two sub-categories: financial assets held for trading and other financial assets designated at fair value through profit and loss by management, including investments for the risk of policyholders. A financial asset is classified as at fair value through profit and loss if acquired principally for the purpose of selling in the short term or if so designated 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. Investments for the risk of policyholders are investments against insurance liabilities for which all changes in fair value of invested assets are offset by similar changes in insurance liabilities.
OFFSETTING OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES Financial assets and financial liabilities are offset and the net amount reported in the balance sheet when the Group has a legally enforceable right to set off the recognised amounts and intends to either settle on a net basis or to realise the asset and settle the liability simultaneously.
Securities purchased under agreements to resell (‘reverse repos’) are recorded as Loans and advances to customers or Amounts due from banks, as appropriate. The difference between sale and repurchase price is treated as interest and accrued over the life of the agreement using the effective interest method.
PROVISIONS FOR LOAN LOSSES The Group assesses periodically and at each balance sheet date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.
– The borrower has evidenced significant financial difficulty, to the extent that it will have a negative impact on the future cash flows of the financial asset.
– The credit obligation has been restructured for non-commercial reasons. ING has granted concessions, for economic or legal reasons relating to the borrower’s financial difficulty, the effect of which is a reduction in the expected future cash flows of the financial asset.
For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics. Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors’ ability to pay all amounts due according to the contractual terms of the assets being evaluated.
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 allowance account. The amount of the reversal is recognised in the profit and loss account.
IMPAIRMENT OF OTHER FINANCIAL ASSETS The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity investments classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is considered in determining whether the assets are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss - measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit and loss - is removed from equity and recognised in the profit and loss account. Impairment losses recognised in the profit and loss account on equity instruments are not reversed through the profit and loss account. If, in a subsequent period, the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit and loss, the impairment loss is reversed through the profit and loss account.
For interests in investment vehicles the existence of significant influence is determined taking into account both ING’s financial interests for own risk and its role as investment manager.
INVESTMENT PROPERTY Investment property is stated at fair value as at the balance sheet date. Changes in the carrying amount resulting from revaluations are recorded in the profit and loss account. On disposal the difference between the sale proceeds and book value is recognised in the profit and loss account.
Fair value of investment property is based on regular appraisals by independent qualified valuers.
PROPERTY AND EQUIPMENT Property in own use Land and buildings held for own use are stated at fair value as at balance sheet date. Increases in the carrying amount arising on revaluation of land and buildings held for own use are credited to the revaluation reserves in shareholders’ equity. Decreases that offset previous increases of the same asset are charged against revaluation reserves directly in equity; all other decreases are charged to the profit and loss account. Increases that reverse a revaluation decrease on the same asset previously recognised in profit or loss are recognised in the profit and loss account. Depreciation is recognised based on the fair value and the estimated useful life (in general 20-50 years). Depreciation is calculated on a straight-line basis. On disposal the related revaluation reserve is transferred to retained earnings.
The fair values of land and buildings are based on regular appraisals by independent qualified valuers. Subsequent expenditure is included in the assets carrying amount when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably.
Property held for sale Property held for sale comprises properties obtained from foreclosures and property developed for sale for which there is no specifically negotiated contract. These properties are stated at the lower of cost and net realisable value. Cost includes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses. Where the net realisable value is lower than the carrying amount, the impairment is recorded in the profit and loss account.
Property under development for third parties Property under development for third parties is measured at direct construction cost incurred up to the balance sheet date, including borrowing costs incurred during construction and the Group’s own directly attributable development and supervision expenses less any required provision for impairment. Profit is recognised on completion date of the property (completed contract method).
Equipment Equipment is stated at cost less accumulated depreciation and any impairment losses. The cost of the assets is depreciated on a straight-line basis over their estimated useful lives, which are generally as follows: for data processing equipment 2 to 5 years and 4 to 10 years for fixtures and fittings. Expenditures for maintenance and repairs are charged to the profit and loss account as incurred. Expenditure incurred on major improvements is capitalised and depreciated.
Computer software Computer software that has been purchased or generated internally for internal use is stated at cost less amortisation and any impairment losses. Amortisation is calculated on a straight-line basis over its useful life. This period will generally not exceed three years. Amortisation is included in other expenses.
Value of business acquired (VOBA) VOBA is an asset that represents the present value of estimated net cash flows embedded in the insurance contracts of an acquired company, which existed at the time the company was acquired. VOBA is amortised similar to amortisation of deferred acquisition costs as described in the section Deferred acquisition costs.
For traditional life insurance contracts and certain types of flexible life insurance contracts, DAC is amortised over the premium payment period in proportion to the premium revenue recognition.
For other types of flexible life insurance contracts DAC is amortised over the lives of the policies in relation to the emergence of estimated gross profits. Amortisation is adjusted retrospectively when estimates of current or future gross profits to be realised from a group of products are revised. The estimates and the assumptions are reassessed at the end of each reporting period. For DAC on flexible insurance contracts the approach is that in determining the estimate of future gross profits ING assumes the short-term and long-term separate account growth rate assumption to be the same. Higher/lower expected profits - e.g. reflecting stock market performance or a changed level of assets under management - may cause a lower/higher amortisation of DAC due to the catch-up of amortisation in previous and future years. This process is known as DAC unlocking. The impact of the DAC unlocking is recorded in the profit and loss account of the period in which the unlocking occurs.
DAC is evaluated for recoverability at issue and subsequent to this is tested on a regular basis together with the provision for life insurance liabilities and VOBA. The test for recoverability is described in the section Insurance, Investment and Reinsurance Contracts.
TAXATION Income tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.
Deferred tax assets are recognised where it is probable that future taxable profit 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 when it is probable that future taxable profits will be available against which these losses can be utilised. Deferred tax related to fair value remeasurement of available-for-sale investments and cash flow hedges, which are charged or credited directly to equity, is also credited or charged directly to equity and is subsequently recognised in the profit and loss account together with the deferred gain or loss.
Borrowings are recognised initially at their issue proceeds (fair value of consideration received) net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between proceeds net of transaction costs and the redemption value is recognised in the profit and loss account over the period of the borrowings using the effective interest method.
The as yet unamortised interest-rate rebates on periodic and single premium contracts are deducted from the Provision for life policy liabilities. Interest-rate rebates granted during the year are capitalised and amortised in conformity with the anticipated recovery pattern and are recognised in the profit and loss account.
Claims provision The Claims provision is calculated either on a case-by-case basis or by approximation on the basis of experience. Provisions have also been made for claims incurred but not reported and for future claims handling expenses. The adequacy of the Claims provision is evaluated each year using standard actuarial techniques. In addition, so-called ‘IBNR’ reserves are set to recognise the estimated cost of losses that have occurred but which have not yet been notified.
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.
Investment contracts Insurance policies without discretionary participation features which do not bear significant insurance risk under the Group accounting policies are presented as Investment contracts. Provisions for liabilities under investment contracts are determined either at amortised cost, using the effective interest method (including certain initial acquisition expenses) or at fair value.
If it is determined using a best estimate (50%) confidence level that a shortfall exists, it is immediately recorded in the profit and loss account.
If the reserves are determined to be adequate at above the 90% confidence level, no reduction in the provision is recorded.
OTHER LIABILITIES Employee benefits - 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 defined benefit and defined contribution plans.
A defined benefit plan is a pension plan that defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation. The liability recognised in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets, together with adjustments for unrecognised actuarial gains or losses and unrecognised past service costs. The defined benefit obligation is calculated annually by internal and external actuaries using the projected unit credit method.
Other post-retirement obligations Some Group companies provide post-retirement healthcare and other benefits to their retirees. The entitlement to these benefits is usually conditional on the employee remaining in service up to retirement age and the completion of a minimum service period. The expected costs of these benefits are accrued over the period of employment using an accounting methodology similar to that for defined benefit pension plans.
Other provisions A provision involves a present obligation arising from past events, the settlement of which is expected to result in an outflow from the company of resources embodying economic benefits, whereas the timing or the amount is uncertain. Unless stated otherwise below, provisions are discounted using a pre-tax discount rate to reflect the time value of money. The determination of provisions is an inherently uncertain process involving estimates regarding amounts and timing of cash flows.
Reorganisation provisions include employee termination benefits when the Group is demonstrably committed to either terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal; or providing termination benefits as a result of an offer made to encourage voluntary redundancy.
Net interest income Interest income and expense are recognised in the profit and loss account using the effective interest method. The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Group estimates cash flows considering all contractual terms of the financial instrument (for example, prepayment options) but
does not consider future credit losses. The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. All interest income and expenses from trading positions and non-trading derivatives are classified as interest income and interest expenses in the profit and loss account. Movements in the ‘clean fair value’ are included in net trading income.
Fees and commissions Fees and commissions are generally recognised as the service has been 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 for 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 has been provided. Asset management fees related to investment funds and investment contract fees are recognised rateably over the period the service is provided. The same principle is applied for wealth management, financial planning and custody services that are continuously provided over an extended period of time.
EARNINGS PER ORDINARY SHARE Earnings per ordinary share is calculated on the basis of the weighted average number of ordinary shares outstanding. The following has been taken into consideration 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.
For the purposes of the cash flow 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 insignificant risk of changes in value.
The net cash flow shown in respect of Loans and advances to customers only relates to transactions involving actual payments or receipts. The Additions to the provision for loan losses which is deducted from the item Loans and advances to customers in the balance sheet has been adjusted accordingly for the profit before tax and is shown separately in the cash flow statement.
NOTES TO THE CONSOLIDATED BALANCE SHEET OF ING GROUP AMOUNTS IN MILLIONS OF EUROS, UNLESS STATED OTHERWISE
Amounts held at central banks 9,479 6,734 Cash and bank balances 3,498 2,231 Short term deposits insurance operations 107 148 2 AMOUNTS DUE FROM BANKS
As at 31 December 2005, the non-subordinated receivables amounted to EUR 47,406 million (2004: EUR 44,818 million) and the subordinated receivables amounted to EUR 60 million (2004: EUR 266 million).
The majority of financial assets designated as at fair value through profit or loss are equity and debt securities.
Equity securities 10,107 10,103 Debt securities 38,299 37,171 Derivatives 20,254 Loans and receivables 80,527 32,375
Trading derivatives as at 31 December 2004 are included in trading liabilities.
At 31 December 2005, the balance sheet value included debt securities which were lent or sold in repurchase transactions amounting to EUR 67 million (2004: nil) and EUR 1,653 million (2004: nil), respectively.
The cost of investments for risk of policyholders as at 31 December 2005 was EUR 88,748 million (2004: EUR 77,338 million).
Changes in the composition of the group -380 -280 -1,458 -1,369 -1,838 -1,649 Gains/(losses) from change in fair value 3,097 678 -630 -860 2,467 -182
As at 31 December 2005, the balance sheet value included shares which were lent or sold in repurchase transactions amounting to nil (2004: EUR 5 million) and EUR 3 million (2004: EUR 9 million), respectively. As at 31 December 2005, the balance sheet value included debt securities which were lent or sold in repurchase transactions amounting to EUR 708 million (2004: EUR 719 million) and EUR 37,181 million (2004: EUR 29,402 million), respectively.
Borrowed equity securities and convertible bonds are not recognised in the balance sheet and amounted to nil as at 31 December 2005 (2004: EUR 12 million).
Borrowed debt securities are not recognised in the balance sheet and amounted to EUR 3,295 million as at 31 December 2005 (2004: EUR 2,868 million).
Investments in connection with the insurance operations with a combined carrying value of EUR 3 million (2004: EUR 153 million) were non-income-producing for the year ended 31 December 2005.
Loans and advances to customers and Amounts due from banks include finance lease receivables, analysed as follows: FINANCE LEASE RECEIVABLES
Unearned future finance income on finance leases -2,022 -1,783 Net investment in finance leases 12,217 11,664
The allowance for uncollectible finance lease receivables included in the provision for loan losses amounted to EUR 45 million at 31 December 2005 (2004: EUR 116 million).
Opening balance 4,456 4,835 Implementation IAS 32/39 -592 Changes in the composition of the group -4 -38 Write-offs -842 -956
Increase/(decrease) in loan loss provision 88 465 Exchange differences 115 -29 Other movements 31 94 Closing balance 3,313 4,456
Balance Interest sheet Total Total Total Total 2005 held (%) value assets liabilities income expense
Gables RE Trust – Permanent/Bridge equity 18 131 2,539 1,750 190 51 ING Retail Property Fund Australia 30 122 724 312 50 22
Changes in the composition of the group -187 477 Transfer to and from other assets -2,432 233 Transfer to and from property in own use -2 -8 Fair value gains/(losses) 171 199
The total amount of rental income recognised in the profit and loss account for the years ended 31 December 2005 and 2004 was EUR 372 million and EUR 453 million respectively. The total amount of contingent rent recognised in the profit and loss account for the years ended 31 December 2005 and 2004 was EUR 6 million and EUR 27 million respectively.
The total amount of direct operating expenses (including repairs and maintenance) arising from investment property that generated rental income for the years ended 31 December 2005 and 2004 was EUR 105 million and EUR 206 million respectively. The total amount of direct operating expenses (including repairs and maintenance) arising from investment property that did not generate rental income for the years ended 31 December 2005 and 2004 was EUR 38 million and EUR 30 million respectively.
Revaluation surplus Opening balance 361 380 Changes in revaluation reserve for the year 251 -19 Closing balance 612 361
The cost or purchase price amounted to EUR 1,659 million (2004: EUR 2,070 million). Cost less accumulated depreciation would have been EUR 1,576 million (2004: EUR 1,943 million).
Gross carrying amount as at 31 December 1,198 1,025 2,523 2,241 3,721 3,266 Accumulated depreciation as at 31 December -884 -692 -1,521 -1,301 -2,405 -1,993
The Group leases assets to third parties under operating leases as lessor. The future minimum lease payments to be received under non-cancellable operating leases are as follows: FUTURE MINIMUM LEASE PAYMENTS BY MATURITY
Effect of unrealised revaluations in equity 157 157 Changes in the composition of the group 63 -60 68 -5 -250 45 -1 43 -183
Amortisation of software and other intangible assets is included in the profit and loss account in other operating expenses. Amortisation of VOBA is included in Underwriting expenditure.
Effect of unrealised revaluations in equity 239 239 Transfer to VOBA -119 -2,574 -2,693 Changes in the composition of the group -138 -2 37 -140 37
For flexible life insurance contracts the growth rate assumption used for calculating the amortisation of the deferred acquisition costs is currently 7.9% gross (6.9% net of investment management fees).
Deferred tax assets relating to – insurance provisions 160 83 – investments 490 – other provisions 397 172 – unused tax losses carried forward 793 459 – loans and advances to customers 236
DEFERRED TAX ASSETS IN CONNECTION WITH UNUSED TAX LOSSES CARRIED FORWARD
Total unused tax losses carried forward 3,651 3,470 Unused tax losses carried forward not recognised as a deferred tax asset 906 1,817 Unused tax losses carried forward recognised as a deferred tax asset 2,745 1,653
Deferred income tax assets are recognised for tax loss carry forwards and unused tax credits only to the extent that realisation of the related tax benefit is probable. The uncertainty of the recoverability of the tax losses and tax credits is taken into account in establishing the deferred tax assets. The following tax loss carry forwards and tax credits will expire as follows at 31 December: TOTAL UNUSED TAX LOSSES CARRIED FORWARD ANALYSED BY EXPIRY TERMS
No deferred Deferred No deferred Deferred tax asset tax asset tax asset tax asset recognised recognised recognised recognised
– up to five years 29 348 62 568 – five to ten years 384 6 326 – ten to twenty years 322 640 750 189
Property obtained from foreclosures 532 473 Property developed for sale 1,359 1,166
The revaluation reserve includes revaluations related to securities and property in own use and the reserve for cash flow hedging and hedges of net investments of foreign operations. The reserve for cash flow hedging amounts to EUR 2,046 million as at 31 December 2005.
Preference shares Ordinary shares (par value EUR 1.20) (par value EUR 0.24)
Issue of shares 214 Issued share capital as at 31 December 2005 87,080 104 2,204,934 530
As of 2005, the total amount of preference shares (EUR 104 million share capital and EUR 192 million share premium) is presented as liabilities. Reference is made to Note 13 Preference shares.
As at 31 December 2005, the capital and reserves of Stichting Regio Bank, included in Other reserves, amounted to EUR 583 million (2004: EUR 507 million) and cannot be freely distributed. The increase reflects the profit appropriation for the year.
The revaluation reserve, share of associates reserve and currency translation reserve cannot be freely distributed.
Ordinary shares All shares are in registered form. No share certificates will be issued. Shares may be transferred by means of a deed of transfer, subject to the approval of the Executive Board of ING Group. The par value of ordinary shares is currently EUR 0.24. The authorised ordinary share capital of ING Group consists of 3,000,000 shares, of which as at 31 December 2005 2,204,934 million have been issued and fully paid.
Depository receipts for ordinary shares and preference shares More than 99% of the ordinary shares and preference shares issued by ING Groep N.V. are held by the Stichting ING Aandelen (Trust Office ING Shares). In exchange for these shares, the Trust Office has issued depositary receipts in bearer form for ordinary shares and for preference shares, respectively. The depositary receipts are listed on various European stock exchanges. Depositary receipts can be exchanged for (non-listed) shares of the relevant category without any restriction.
A holder of depositary receipts who does not attend the General Meeting of Shareholders in person or by proxy is entitled to give a binding voting instruction to the Trust Office for a number of shares equal to the number of his depositary receipts of the relevant category.
Concentration of holders of depository receipts for shares As at 31 December 2005, ABN AMRO Holding, AEGON and Fortis each had an interest in depositary receipts (for ordinary shares and for preference shares) of ING Groep N.V. of between 5% and 10%.
Depositary receipts for ordinary shares held by ING Group As at 31 December 2005, 38.7 million of depository receipts for ordinary shares ING Groep N.V. with a par value of EUR 0.24 was held by ING Group or its subsidiaries. These were purchased 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 (i) the paid-up capital, and (ii) reserves required by law. Additionally, certain group companies are subject to restrictions on the amount of funds they may transfer in the form of cash dividends or otherwise to the parent company.
The current exercise price of B warrants is EUR 49.92 for 2 depository receipts. The exercise price of B warrants will be adjusted by ING Group if one or more of the following circumstances occur: 1. ING Groep N.V. issues ordinary shares with pre-emptive rights for existing holders thereof at a price lower than the average price over the 20 business days preceding the relevant announcement of the median price between the highest and lowest prices of the depository receipts of EUR 0.24 par value as stated in the Official Price List of Euronext Amsterdam N.V.; 2. ING Groep N.V. issues ordinary shares to existing holders thereof, such shares being paid from a reserve of the company at a price lower than the average price over the 20 business days preceding the relevant announcement of the median price between the highest and lowest prices of the depository receipts of EUR 0.24 par value as stated in the Official Price List of Euronext Amsterdam N.V.; 3. ING Groep N.V. issues ordinary shares to existing holders thereof by way of paying a dividend at a price lower than the average price over the 20 business days preceding the relevant announcement of the median price between the highest and lowest prices of the depository receipts of EUR 0.24 par value as stated in the Official Price List of Euronext Amsterdam N.V.; 4. ING Groep N.V. grants to existing holders of ordinary shares pre-emptive rights to obtain securities other than ordinary shares; 5. Any company grants to existing holders of ordinary shares of ING Groep N.V. a right of subscription for securities which may be converted into or exchanged for ordinary shares of ING Groep N.V., provided that the price for which such ordinary shares of ING Groep N.V. may (initially) be obtained is lower than the then applicable exercise price; 6. ING Groep N.V. makes a distribution in cash out of its share premium reserve(s) to holders of ordinary shares.
In case of a restructuring of the share capital of ING Groep N.V. or a merger of ING Group with any other company or a transfer of the assets of ING Group (or a substantial part thereof) to any other company, the exercise price of the B warrants will not be adjusted. In that event, a warrant holder will be entitled to obtain the securities of the kind and number a holder of ordinary shares would have been entitled to if the B warrants had been exchanged for ordinary shares immediately before that event.
Opening balance 3,481 3,513 Implementation IAS 32/39 and IFRS 4 -1,386 Unrealised revaluations after tax -32 29 Unrealised revaluations transferred to deferred profit sharing liabilities and DAC 17 Exchange differences 14 -103 Net profit for the period 305 275 Changes in the composition of the group -710 -233 Closing balance 1,689 3,481
13 PREFERENCE SHARES As a result of the implementation of IAS 32 in 2005 preference shares are presented as liabilities. In the 2004 comparatives, preference shares are included in equity.
Preference shares rank before ordinary shares in entitlement to dividends and distributions upon liquidation of ING Groep N.V., but are subordinated to cumulative preference shares. Holders of ‘A’ and ‘B’ preference shares rank pari passu among themselves. If the profit or amount available for distribution to the holders of preference shares is not sufficient to make such distribution in full, the holders will receive a distribution in proportion to the amount they would have received if the distribution could have been made in full. The ‘A’ preference shares and ‘B’ preference shares are not cumulative and their holders will not be compensated in subsequent years for a shortfall in a prior year.
This percentage is calculated by taking the arithmetic mean of the average effective yield on the five longest-dated Dutch government loans, as calculated by a Calculating Agent to be designated by the Executive Board for the last twenty stock exchange days preceding the day on which the first ‘A’ preference shares are issued, or, as the case may be, preceding the day on which the dividend percentage is adjusted. The percentage thus established may be increased or decreased by not more than a half percentage point, depending on the market conditions then prevailing, as the Executive Board may decide with the approval of the Supervisory Board.
The dividend on the ‘A’ preference shares is set at EUR 0.1582 per year until 1 January 2014 at which stage the dividend percentage will be readjusted (and thereafter every ten years) to the average effective yield at that time on the five longestdated Dutch government loans.
‘A’ preference shares may only be cancelled if a distribution of the amount (including share premium) for which the ‘A’ preference shares were originally issued reduced by the par value of the shares can be made on each ‘A’ preference share. Upon liquidation of ING Groep N.V., a distribution of the amount (including share premium) for which the ‘A’ preference shares were originally issued will, insofar as possible, be made on each ‘A preference share.
Cumulative preference shares The par value of the cumulative preference shares is EUR 1.20. None of these shares have been issued.
The dividend on the cumulative preference shares will be equal to a percentage, calculated on the amount compulsorily paid up or yet to be paid up. This percentage shall be equal to the average of the Euro OverNight Index Average (EONIA) as calculated by the European Central Bank. During the financial year for which the distribution is made, this percentage is weighted on the basis of the number of days for which it applies, increased by two and a half percentage points.
14 SUBORDINATED LOANS Subordinated loans consists of perpetual subordinated bonds issued by ING Groep N.V. These bonds have been issued to raise hybrid capital for ING Verzekeringen N.V. and Tier-1 capital for ING Bank N.V.
EUR 5,563 million (2004: EUR 3,743 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.
Floating rate debt securities – 1 year or less 5,074 11,689 – 2 years or less but over 1 year 872 2,427 – 3 years or less but over 2 years 144 1,348 – 4 years or less but over 3 years 494 2,317 – 5 years or less but over 4 years 1,064 1,807
As of December 31, 2005, ING Group had unused lines of credit available including the payment of commercial paper borrowings presented above as part of the debt securities in issue, totalling EUR 22,588 million (2004: EUR 15,904 million).
Subordinated loans of group companies 1,011 1,435 735 713 1,492 8,924 14,310 Preference shares of group companies 1,261 1,261
As at 31 December 2005 the provision for life policy liabilities includes EUR 51,866 million for participating life policy liabilities.
As at 31 December 2005 claims incurred but not reported (IBNR) included in the claims provisions amounted to EUR 1,831 million.
Prior year provisions: – benefit payments to policyholders -10,929 -431 -10,498
– valuation changes for risk of policyholders 5,074 5,074 – effect of changes in discount rate assumptions 2 2 – effect of changes in other assumptions 1,167 306 861
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. The life reinsurance market is highly concentrated and, therefore, diversification of exposure is inherently difficult. To minimise its exposure to significant losses from reinsurer insolvencies, the Group evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographical regions, activities or economic characteristics of the reinsurer.
Premiums earned during the year -6,769 -6,542 -636 -729 -6,133 -5,813
The release of the provision from prior years in 2005 and 2004 are a result of favourable underwriting results in several business units, in particular, the Netherlands business units benefited from a change in legal requirements for health and disability benefits and Canada experienced unexpectedly mild winters.
Where discounting is used in the calculation of the claims provisions, the rate is within the range of 3% to 4%.
Prior year provisions – payments to contract holders -7,051 – interest accrual 276 – valuation changes investments 1,060
Liability recognised to prior underwriting years 5,225 Total amount recognised in balance sheet 9,591 18 AMOUNTS DUE TO BANKS Amounts due to banks include non-subordinated debt due to banks, other than amounts in the form of debt securities. As at 31 December 2005, liabilities concerning securities sold in repurchase transactions amounted to EUR 23,857 million (2004: EUR 24,452 million).
No funds have been entrusted to the Group by customers on terms other than those prevailing in the normal course of business. As at 31 December 2005, Customer deposits and other funds on deposit included liabilities with regard to securities sold in repurchase transactions amounting to EUR 2,104 million (2004: EUR 4,908 million).
Trading liabilities 92,058 53,841 Non-trading derivatives 6,248 Designated as at fair value through profit or loss 11,562
Financial liabilities designated as at fair value through profit or loss relate to debt securities in issue, funds entrusted and structured products.
Equity securities 10,206 9,314 Debt securities 7,264 10,058 Funds on deposits 54,264 33,080
Derivatives used in cash flow hedges 753 Derivatives used in fair value hedges 1,336 Derivatives used in hedges of net investments in foreign operations 91 Other non-trading derivatives 4,068 21 OTHER LIABILITIES
The additions to provision for reorganisations and relocations in 2005 relate to the restructuring of the Operations & IT activities in the Benelux and reorganisations in the Dutch insurance operations. The provision at 31 December 2004 includes an amount of EUR 41 million for the restructuring of the international Wholesale Banking network.
The amounts included in other provisions are based on best estimates with regard to amounts and timing of cash flows required to settle the obligation. In general, the reorganisations and relocations provisions are of a short-term nature.
The Group provides other post-employment and post-retirement employee benefits to certain employees. These are primarily post-retirement healthcare benefits and post-employment defined benefit early-retirement plans provided to employees and former employees.
Certain group companies sponsor defined contribution pension plans. The assets of all ING Group’s defined contribution plans are held in independently administered funds. Contributions are generally determined as a percentage of pay. These plans do not give rise to balance sheet provisions, other than relating to short-term timing differences included in current liabilities. The amount incurred in 2005 was EUR 76 million (2004: EUR 109 million).
Fair value of plan assets 12,937 10,498 375 353 13,312 10,851
Opening balance 10,498 9,528 Expected return on plan assets 710 686 Employer’s contribution 1,002 688 Participant contributions 7 1 Benefits paid -416 -392 Actuarial gains and losses 873 185 Changes in the composition of the group 98 -134 Exchange differences 165 -64 Closing balance 12,937 10,498
Pension Investment Strategy The primary financial objective of the ING Employee Benefit Plan (the Plan) is to secure participant retirement benefits. As such, the key objective in the Plan’s financial management is to promote stability and, to the extent appropriate, growth in funded status (i.e. the ratio of market value of assets to liabilities).The investment strategy for the Plan’s portfolio of assets (the Fund) balances the requirement to generate returns with the need to control risk. The asset mix is recognised as the primary mechanism to influence the reward and risk structure of the Fund in an effort to accomplish the Plan’s funding objectives. Desirable target allocations amongst identified asset classes are set and within each asset class, careful consideration is given to balancing the portfolio among industry sectors, geographical areas, interest rate sensitivity, dependence on economic growth, currency and other factors affecting investment returns. The assets are managed by professional investment firms. They are bound by precise mandates and are measured against specific benchmarks. Among managers, consideration is given, among others, to balancing security concentration, investment style, and reliance on particular active investment strategies. ING will review its asset mix of the fund on a regular basis. Generally, ING will rebalance the fund’s asset mix to the target mix as individual portfolios approach their minimum or maximum levels.
Equity securities include ING Group ordinary shares of EUR 15 million ( 0.1% of total plan assets) at 31 December 2005 (2004: EUR 16 million, 0.1% of total plan assets).
Determination of Expected Return on Assets An important element for financial reporting is the assumption for return on assets (ROA). The ROA is updated at least annually, taking into consideration the Plan’s asset allocation, historical returns on the types of assets held in the Fund, and the current economic environment. Based on these factors, it is expected that the Fund’s assets will earn an average percentage per year over the long term. This estimation takes into account a reduction for administrative expenses and non-ING investment manager fees paid from the Fund. For estimation purposes, it is assumed the long term asset mix will be consistent with the current mix. Changes on the asset mix could impact the amount of recorded pension income or expense, the funded status of the Plan, and the need for future cash contributions.
Discount rates 4.25 4.75 Expected rates of salary increases (excluding promotion increases) 2.50 2.50 Medical cost trend rates 4.25 4.25 Consumer price inflation 1.75 2.00
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid: PENSION BENEFITS
Opening balance 726 635 Current service cost 42 31 Interest costs 40 35 Employer’s contribution 70 Participant contributions 6 Benefits paid -28 -20 Actuarial gains and losses 143 69 Changes in the composition of the group -1 Effect of curtailment or settlement -569 Exchange differences 12 -24 Closing balance 441 726
The defined benefit obligations of post-retirement benefits other than pensions are entirely unfunded.
Discount rates 4.25 4.75 Expected rates of salary increases (excluding promotional increase) 2.50 2.50 Medical cost trend rates 4.25 4.25 Consumer price inflation 1.75 2.00
An increase of 1% in the assumed medical cost trend rate for each future year would have resulted in an additional accumulated defined benefit obligation of EUR 84 million at 31 December 2005 (2004: EUR 146 million) and an increase in the charge for the year of EUR 7 million (2004: EUR 12 million). A decrease of 1% in the medical cost trend rate for each future year would have resulted in lower defined benefit obligation of EUR 66 million at 31 December 2005 (2004: EUR 108 million) and a decrease in the charge for the year of EUR 5 million (2004: EUR 9 million).
Less than 1-3 3-12 1-5 Over five Maturity not 2005 one month months months years years applicable Total
Financial assets at fair value through profit or loss – trading assets 149,187 149,187
Customer deposits and other funds on deposit 394,141 47,310 9,446 5,752 9,063 465,712 Financial liabilities at fair value through profit or loss – trading liabilities 92,058 92,058
– designated at fair value through profit or loss 112 510 1,538 5,072 4,330 11,562
Customer deposits and other funds on deposit 317,514 10,494 8,101 6,273 6,859 349,241 Financial liabilities at fair value through profit or loss – trading liabilities 53,841 53,841 – non-trading derivatives
DERIVATIVES AND HEDGE ACCOUNTING ING Group manages the various risks it is exposed to as described in the Risk Management section. In managing these risks ING Group uses economic hedges, i.e. positions with opposite risk profiles to reduce the total risk exposure. To qualify for hedge accounting under IFRS-EU strict criteria must be met. Certain hedges that are economically effective from a risk management perspective do not qualify for hedge accounting under IFRS-EU. Both at inception and during the hedge relationship it can be concluded that the hedge does not (longer) qualify for hedge accounting. As a result, the volatility from these hedges in the profit and loss account may be higher than would be expected from an economic point of view.
Foreign exchange risk The most significant foreign exchange risk relates to foreign currency exposures on foreign subsidiaries and Tier-1 capital denominated in US Dollars. ING reduces these exposures by entering into derivatives (including currency forwards and swaps) and non-derivative financial instruments such as funding denominated in foreign currencies. Hedge accounting is applied using net investment hedge accounting or fair value hedge accounting for those positions that meet the criteria under IFRS-EU.
Credit risk ING Group uses credit derivatives in managing its exposure to credit risk, including total return swaps and credit default swaps to sell or buy protection for credit risk. Generally, no hedge accounting is applicable for credit derivatives.
MAXIMUM CREDIT EXPOSURE Credit risk in the non-trading environment mainly relates to loans to customers, non-trading derivatives and investments. For loans to customers and non-trading derivatives the balance sheet value approximates the maximum credit exposure for these items. For the investments maximum credit exposure is best represented by the cost as disclosed in Note 4 Investments.
CONTINGENT LIABILITIES AND COMMITMENTS In the normal course of business the Group is a party to activities whose risks are not reflected in whole or part in the consolidated financial statements. In response to the needs of its customers, the Group offers financial products related to loans. These products include traditional off-balance sheet credit-related financial instruments.
Banking operations Contingent liabilities in respect of – discounted bills 5 4
Guarantees relate both to credit and non-credit substitute guarantees. Credit-substitute guarantees are guarantees given by ING Group in respect of credit granted to customers by a third party. Many of them are expected to expire without being drawn on and therefore do not necessarily represent future cash outflows. The guarantees are generally of a short-term nature. In addition to the items included in contingent liabilities, ING Group has issued guarantees as a participant in collective arrangements of national industry bodies and as participant in government required collective guarantee schemes which apply in different countries.
Other contingent liabilities mainly relate to acceptances of bills and are of a short-term nature.
The non-consolidated SPEs primarily relate to commercial paper programmes. In the normal course of business, ING Group structures financing transactions for its clients by assisting them in obtaining sources of liquidity by selling the clients’ receivables or other financial assets to an SPE. The SPE issues asset-backed commercial paper to the market to fund the purchases. ING Group, in its role as administrative agent, facilitates these transactions by providing structuring, accounting, funding and operations services. As ING Group has no ownership or controlling interest in the SPE nor does it service the transferred assets, the SPE is not included in the consolidated financial statements.
ING Group supports the commercial paper programs by providing the SPE with short-term stand by liquidity facilities. Primarily these liquidity facilities are meant to cover temporarily disruptions in the commercial paper market. Once drawn these facilities bear normal credit risk. A number of programs are supported by granting structured liquidity facilities to the SPE, in which ING Group - in addition to normal liquidity facilities – to a certain extent covers the credit risk incorporated in these programs itself, and as a consequence might suffer credit losses from it. Furthermore, under a Program Wide Credit Enhancement ING Group guarantees to a limited amount all remaining losses incorporated in the SPE to the commercial paper investors. All facilities, which vary in risk profile, are granted to the SPE subject to normal ING Group analysis procedures regarding credit risk and liquidity risk. The fees received for services provided and for facilities are charged on market conditions.
The normal non-structured stand by liquidity facilities and the structured facilities are reported under irrevocable facilities.
Other entities ING Group is also a party in other SPEs used in for instance structured finance and leasing transactions.
FUTURE RENTAL COMMITMENTS FOR OPERATING LEASE CONTRACTS AS AT 31 DECEMBER 2005 years after 2010 355
These legal proceedings include a dispute over certain hurricane damages claimed by a Mexican fertilizer producer Grupo Fertinal (‘Fertinal’) against ING Comercial América, a wholly owned subsidiary of ING Group. Fertinal claims EUR 254 million (USD 300 million) from ING Comercial América, the maximum coverage under the insurance policy of their mining operations. A judge in Mexico ruled in favor of Fertinal. This decision was appealed to a Mexican Court of Appeal, which reduced the judgment to EUR 80 million (USD 94 million), plus interest. This decision has been appealed. ING Comercial América continues to pursue this matter vigorously; however, at this time we cannot assess the final outcome. Fertinal has also made criminal complaints alleging fraud against certain ING Comercial América employees, but, currently, there are no criminal actions pending.
In the Netherlands ING Bank N.V., together with other major Dutch banks and the payment processor Interpay (in which ING Bank N.V. is a minority shareholder), were subject of an examination by the Dutch competition authority ‘Nederlandse Mededingings-autoriteit’ or NMa. In April 2004, the NMa has adopted a decision which indicated that ING Bank N.V. and other Dutch banks should have sold payment processing services on an individual basis and imposed a fine of EUR 3.9 million on ING Bank N.V. At the time of the decision, the banks had already decided that they would henceforth sell payment processing services individually. Furthermore, the NMa held that Interpay committed a separate infringement by charging prices for its services that were anti-competitive. Both Interpay and the Dutch banks (including ING Bank N.V.) have appealed the NMa decision. In December 2005, the NMa decided to reduce the fines imposed on the banks (for ING Bank N.V. to EUR 3.3 million) and to repeal the decision regarding Interpay. ING Bank N.V. has decided not to file an appeal against this decision.
Like many other companies in the mutual funds, suppliers of brokerage and investment products and insurance industries, several of our companies have received informal and formal requests for information from various governmental and selfregulatory agencies or have otherwise identified issues arising in connection with fund trading, compensation, conflicts of interest, anti-competitive practices, insurance risk transfer and sales practices. ING is responding to the requests and working to resolve issues with regulators. We believe that any issues that have been identified thus far do not represent a systemic problem in the ING businesses involved and in addition that the outcome of the investigations will not have a material effect on ING Group.
The management of ING Group does not believe that these limitations will affect the ability of ING Group to pay dividends to its shareholders in the future.
ING and ANZ, one of Australia’s major banks, formed a funds management and life insurance joint venture in Australia. The joint venture, ING Australia Ltd, is owned for 51% by ING and 49% by ANZ.
Income received from and expenses paid to joint ventures were EUR 25 million and EUR 71 million respectively (2004: EUR 5 million and EUR 150 million respectively) and income received from and expenses paid to associates were EUR 91 million and EUR 1 million respectively (2004: EUR 6 million and nil respectively).
Transactions with key management personnel (Executive Board and Supervisory Board) and post-employment benefit plans are transactions with related parties. These transactions are disclosed in more detail in the remuneration report in the annual report (page 64 up to and including page 74) and Note 21 Other liabilities.
Executive Board Supervisory Board Total amounts in thousands of euros 2005 2004 2005 2004 2005 2004
– non-trading derivatives 6,248 6,248 – designated as at fair value through profit or loss 11,562 11,562
Investments The fair values of equity securities are based on quoted market prices or, if unquoted, on estimated market values generally based on quoted prices for similar securities. Fair values for fixed-interest securities are based on quoted market prices, where available. For those securities not actively traded, fair values are estimated using values obtained from private pricing services or by discounting expected future cash flows using a current market rate applicable to the yield, credit quality and maturity of the investment.
Amounts due to banks The fair values of payables to banks are estimated based on discounting future cash flows using available market interest rates for payables to banks with similar characteristics.
Financial liabilities at fair value through profit or loss The fair values of securities in the trading portfolio and other liabilities at fair value through profit or loss are based on quoted market prices, where available. For those securities not actively traded, fair values are estimated based on internal discounted cash flow pricing models taking into account current cash flow assumptions and the counterparties’ credit standings.
Equity attributable to the equity holders of the Company 36,736 24,069 Excluding: Revaluation reserves(4) -6,304 Preference shares 296 Preference shares issued by group companies(5) 1,269 1,283
Subordinated loans ING Verzekeringen N.V. 2,229 2,526 -385 Equity components not included in Tier-1(3) -1,128
Capital base – ING Verzekeringen N.V. 22,541 17,710 – ING Bank N.V. (Tier-1 qualifying capital) 23,408 20,000
(1) includes EUR 1,792 million (2004: EUR 366 million) of subordinated loans to ING Insurance. (2) includes EUR 5,764 million (2004: EUR 5,026 million) of subordinated loans to ING Bank. (3) includes revaluation reserve and dividend declared but not paid yet. (4) includes revaluation of debt securities (offset by shadow accounting) and the impact of cashflow hedge accounting. (5) nominal amounts.
Supplementary capital – Tier-2 11,605 10,533 Available Tier-3 funds 363 357
(1) subordinated loans qualifying as Tier-1 capital have been placed by ING Groep N.V. with ING Bank N.V. (2) revaluation reserve is deducted as it is not part of Tier-1 capital (included in Tier-2) and includes the cumulative revaluations on investment property.
ING Insurance European Union directives require insurance companies established in member states of the European Union to maintain minimum capital positions. The capital position of ING Insurance has been measured on the basis of this EU requirement.
Total core debt Total core debt ING Verze- & other Insurance ING Verze- & other Insurance keringen N.V. eliminations companies keringen N.V. eliminations companies
Required capital banking operations 25,572 21,931 Required capital insurance operations 8,851 8,697 Surplus capital 18,075 11,506
Interest income on loans 18,912 15,846 Interest income on impaired loans -23 -84 Total interest income on loans 18,889 15,762
In 2005, the growth of the average total assets caused an increase of the interest margin amounting to EUR 1,214 million (2004: EUR 1,183 million). The decrease of the interest margin by 6 basis points caused a decrease of the interest result with EUR 345 million (in 2004 the decrease of the interest margin by 9 basis points caused a decrease of the interest result with EUR 453 million).
NOTES TO THE CONSOLIDATED PROFIT AND LOSS ACCOUNT OF ING GROUP AMOUNTS IN MILLIONS OF EUROS, UNLESS STATED OTHERWISE
Premium income from life insurance policies 39,145 36,975 Premium income from non-life insurance policies 6,613 6,642
Reinsurance assumed premiums written, gross 57 1,501 1,558 50 1,443 1,493
Policies for which the insurer bears the investment risk 19,894 808 19,086 19,119 783 18,336 Policies for which the policyholder bears the investment risk 17,750 59 17,691 16,413 53 16,360 136 ING Group Annual Report 2005
PREMIUMS WRITTEN FROM DIRECT LIFE BUSINESS Policies for Policies for which the insurer which the policyholder bears the investment risk bears the investment risk Reinsurers’ Own Reinsurers’ Own 2005 Gross share account Gross share account
PREMIUMS WRITTEN FROM DIRECT LIFE BUSINESS Policies for Policies for which the insurer which the policyholder bears the investment risk bears the investment risk
NOTES TO THE CONSOLIDATED PROFIT AND LOSS ACCOUNT OF ING GROUP (CONTINUED)
Gross Gross and other reinsurance premiums premiums Gross claims Operating underwriting income/ Operational 2005 written earned(2) expenses expenses expenditure(3) (expenses) result
Fire and other property losses 1,489 1,495 681 228 306 -135 156
Movement in fair value of investment property 143 137 59 62 202 199 Income from investments in equity securities 479 425 71 151 550 576 Income from investments in debt securities 5,757 5,302 5,757 5,302 Income from loans
Realised result on disposal of equity securities 511 604 171 682 604 Realised result on disposal of debt securities 245 60 305 Impairments of available-for-sale equity securities -46 -45 45 -91 45 Impairments of available-for-sale debt securities 34 34 26 COMMISSION INCOME
Change in fair value of derivatives – fair value hedges 87 -425 -338 Change in fair value of derivatives – cash-flow hedges (ineffective portion) -1 -1 Change in fair value of derivatives – hedges of net investment in foreign entities (ineffective portion) -16 -16 Change in fair value of other non-trading derivatives -152 296 144 Net result on non-trading derivatives -81 -130 -211
EXPENDITURE FROM LIFE UNDERWRITING Reinsurance and retrocession premiums 2,031 1,619 Gross benefits 22,129 25,774 Reinsurance recoveries -1,625 -929 Movements in other insurance provisions for own account 15,824 11,098 Costs of acquiring insurance business 1,060 1,324 Other underwriting expenditure 364 713 Profit sharing and rebates 2,214 684
EXPENDITURE FROM INVESTMENT CONTRACTS Costs of acquiring investment contracts 53 Profit sharing and rebates 17 Other movements in investment contract liabilities 94 140 ING Group Annual Report 2005
Distributions on account of interest or underwriting results 1,824 313 Bonuses added to policies 379 371 Deferred profit sharing expense 11
Underwriting expenditure includes an amount of EUR 3,956 million in 2005 (2004: EUR 4,258 million) in respect of commission paid and payable with regard to the insurance operations. Amortisation of deferred costs of acquiring new business amounted to EUR 1,475 million in 2005 (2004: EUR 2,031 million).
Impairments on Loans and advances to customers are presented under Additions to the provision for loan losses. Impairments on investments are presented under Gains and losses from investments.
The actual return on the plan assets amounted to EUR 1,583 million (2004: EUR 540 million).
Exposure arising out of the share plan is not hedged. The obligations with regard to these plans will be funded by issuing own shares.
The entitlement to the depositary receipts for ING shares is granted conditionally. If the participant remains in employment for an uninterrupted period of three years from the grant date, the entitlement becomes unconditional. In 2005 73,500 shares have been granted to the members of the Executive Board and 2,907,101 shares have been granted to senior management and other employees remaining in the service of ING Group.
As of 31 December 2005 there was EUR 50 million (2004: EUR 24 million) of total unrecognised compensation costs related to stock options. These costs are expected to be recognised over a weighted average period of 2 years (2004: 1.8 years).
Due to timing differences in granting option rights and buying shares to hedge them, results can occur if shares are purchased at a different price than the exercise price of the options. These results are recognised in Shareholders’ equity. However, ING Group does not intentionally create a position and occurring positions are closed as soon as possible. If option rights expire, the results on the (sale of) shares which were bought to hedge these option rights are either debited or credited to Shareholders’ equity.
The fair value of share awards granted is recorded as an expense under personnel expenses and is allocated over the vesting period of the share awards. The fair values of share awards have been determined by using a Monte Carlo Simulation based valuation model. The model takes into account the risk free interest rate and for performance shares the current stock prices, expected volatilities and current divided yields of the performance peer group used to determine ING’s Total Shareholder Return (TSR) ranking.
33 OTHER INTEREST EXPENSES Other interest expenses mainly consist of interest in connection with the insurance operations, including interest on the perpetual subordinated loans.
Other interest expenses includes EUR 14 million and EUR 111 million dividends paid on preference shares and trust preferred securities (2004: nil and EUR 136 million).
Depreciation of property and equipment 113 114 376 311 489 425
Addition/(releases) of provision for reorganisation and relocation 38 29 86 82 124 111
Netherlands International Total Netherlands International Total 144 ING Group Annual Report 2005
RECONCILIATION OF THE STATUTORY INCOME TAX RATE TO ING GROUP’S EFFECTIVE INCOME TAX RATE
Due to the absence of dilutive effects, the net profit equals the diluted profit.
The accounting principles of the business segments are the same as those described under Accounting principles for the consolidated balance sheet and profit and loss account. Transfer prices for inter-segment transactions are set at arm’s length. Corporate expenses are allocated to business lines based on time spent by head office personnel, the relative number of staff or on the basis of income and/or assets of the segment.
Share in profit or loss of associates 346 12 34 134 6 9 541 541
At 31 December 2005 the segment Insurance Asia Pacific had a net reserve inadequacy using a prudent (90%) confidence level, and, in line with Group Policy, is taking measures to improve adequacy in that region. This inadequacy was offset by reserve adequacies in other segments, such that at the Group level there is a net adequacy at the prudent (90%) confidence level.
Insurance Insurance Insurance Wholesale Retail Total 2004 Europe Americas Asia/Pacific Banking Banking ING Direct Other segments Eliminations Total Group
Rest of North Latin 2005 Netherlands Belgium Europe America America Asia Australia Other Total Group
GEOGRAPHICAL ANALYSIS OF CLAIMS, COST RATIO AND COMBINED RATIO FOR NON-LIFE INSURANCE POLICIES
Provision for life the policyholders bear Claims policy liabilities the investment risk provision Other Total
LIABILITIES Insurance and investment contracts -1.5 -1.5 Amounts due to banks -0.1 -0.1 Customer deposits and other funds on deposit 1.4 1.4 -2.5 -2.5
Allianz Total Total amounts in billions of euros Canada Other acquisitions BHF Other disposals
LIABILITIES Amounts due to banks -5.0 -0.3 -5.3 Customer deposits and other funds on deposit 3.8 3.8 -8.2 -2.7 -10.9
Acquisitions and disposals of group companies have been included in the cash flow from investing activities at cost or sales price, insofar as payment was made in cash. The cash in the company acquired/disposed has been eliminated from the cost or sales price.
Treasury bills and other eligible bills included in trading assets 8,878 8,730 Treasury bills and other eligible bills included in available-for-sale investments 2,694 3,652
GROUP RISK FUNCTION The Executive Board determines the risk appetite of ING Group, aiming for a balance between risk, return and capital and sets risk policy and limits. The Chief Financial Officer (CFO) bears primary overall responsibility for the Group Risk Function. ING has a Dual Signatory Approval structure whereby Executive Board members and the Corporate Risk Managers will take direct responsibility for specified matters (such as transactional approval) within the delegated authorities granted by the Executive Board.
The Group Risk Function is structured independently from the business lines and is organised through three departments: – Corporate Credit Risk Management (CCRM) is responsible for the credit risk management of ING Bank and ING Insurance; – Corporate Market Risk Management (CMRM) is responsible for the market risk management of ING Bank and also for the operational risk management of ING Bank and ING Insurance; – Corporate Insurance Risk Management (CIRM) is responsible for the insurance and market risk management of ING Insurance.
The heads of these departments (Corporate Risk Managers) report to the CFO and bear direct responsibility for risk (mitigating) decisions. The Corporate Risk Managers advise the CFO and are responsible for the harmonisation and standardisation of riskmanagement practises. They are also responsible for risk definitions, policies, procedures, models and methodologies, measurement, monitoring and consolidated reporting.
GROUP RISK COMMITTEES The risk committees described below act within the overall risk policy and delegated authorities granted by the Executive Board. The risk committees have an advisory role to the CFO and ensure a close link between the business lines and the Group risk management function through representation of the business heads and the Corporate Risk Managers on each committee.
ING Group Credit Committee – Policy (GCCP) GCCP advises on policies, methodologies and procedures related to credit, insurance, market and operational risks within ING Group. The GCCP meets on a monthly basis. This committee was created in 2005 as a result of the streamlining of risk management governance at a Group level.
ING Provisioning Committee (IPC) IPC advises on specific and collective loan loss provisions figures for ING. The IPC meets on a quarterly basis.
Asset & Liability Committee ING Bank (ALCO Bank) ALCO Bank advises on the overall risk profile of all ING Bank’s non-trading market risk that occurs in its Wholesale Banking, Retail Banking and ING Direct activities. ALCO Bank defines the policy regarding funding, liquidity, interest rate mismatch and solvency of ING Bank. ALCO Bank meets on a monthly basis.
Asset & Liability Committee ING Insurance (ALCO Insurance) ALCO Insurance advises on all risks for ING Insurance activities. This includes volatility (affecting earnings and value), exposure (required capital and market risk) and insurance risks. ALCO Insurance meets six times a year.
Measurement Credit risk Credit risk is the risk of loss from the default by debtors or counterparties. Credit risks arise in ING Bank’s lending, presettlement and investment activities, as well as in its trading activities. Credit risk management is supported by dedicated credit risk information systems and internal rating methodologies for debtors and counterparties.
Credit analysis is risk/reward-oriented whereby the level of credit analysis is a function of the risk amount, tenor, structure (e.g. covers received) of the facility, and the risks entered into. Continually more sophisticated RAROC-based tools are used internally to ensure a proper balance of risk and reward within the portfolio and concentration parameters. ING’s credit analysts make use of publicly available information in combination with in-house analysis based on information provided by the customer, peergroup comparisons, industry comparisons and other quantitative techniques.
Construction, infrastructure & Real estate 5.7% 4.3% Financial institutions 39.4% 39.6% Private individuals 28.1% 28.9% Public administration 9.2% 8.6%
The methodology for calculating risk capital is linked to the risk definitions with respect to determining where the country risk occurs. Emerging market countries with low and medium risk that have not defaulted require no mandatory provisions for transfer risk. Instead of provisions, additional capital is allocated to transactions that incur country risk, the amount of which is a function of the risk of the country as well as the risk of the transaction itself.
For those transactions where DVP settlement is not possible, ING establishes settlement limits through the credit approval process. Settlement risk is then monitored and managed through the credit risk management units. Risk is further mitigated by operational procedures requiring trade confirmations to counterparties with all transaction details, and entering into internationally accepted documentation, such as International Swaps and Derivatives Association (ISDA) Master Agreements for derivative transactions. Additionally, ING regularly participates in projects with other banks to improve and develop new clearing systems and clearing mechanisms to further reduce the level of settlement risk.