Parent company balance sheet 237 Parent company profit and loss account 238 Parent company statement of changes in equity 239 Accounting policies for the parent company balance sheet and profit and loss account 240 Notes to the parent company balance sheet 241 2.3 Other information
Auditor’s report 245 Proposed appropriation of result and Subsequent events 246 2.4 Additional information
Composition of the Boards 2 Key figures 3 ING at a glance 4 Letter to stakeholders 6 Information for shareholders 7 1.2 Report of the Executive Board
Strategy 10 Financial highlights 13 Capital management 16 Risk management 20 Insurance Europe 25 Insurance Americas 28 Insurance Asia/Pacific 31 Wholesale Banking 34 Retail Banking 37 ING Direct 40 Asset management 43 Human resources 47 Corporate responsibility 49 1.3 Our governance
SUPERVISORY BOARD Jan H.M. Hommen (1) (65), chairman Eric Bourdais de Charbonnière (2) (69), vice-chairman Henk W. Breukink (58) Peter A.F.W. Elverding (3) (60) Claus Dieter Hoffmann (66) Piet Hoogendoorn (63) Piet C. Klaver (63) Wim Kok (2) (70) Godfried J.A. van der Lugt (68) Harish Manwani (55) Aman Mehta (62) Joan E. Spero (64) Jackson P. Tai (58) Karel Vuursteen (67) (1) Nominated chairman of the Executive Board as of 27 April 2009. (2) Retirement as of 27 April 2009. (3) Designated chairman of the Supervisory Board as of 27 April 2009.
Audit Committee Wim Kok, chairman Peter A.F.W. Elverding Piet Hoogendoorn Godfried J.A. van der Lugt Jackson P. Tai
Remuneration and Nomination Committee Jan H.M. Hommen, chairman Eric Bourdais de Charbonnière Piet C. Klaver Joan E. Spero Karel Vuursteen
On page 63 you can find the current composition of the Supervisory Board Committees.
Addition to loan loss provision Banking operations (in EUR million) 1,280 125 103 88 465
Figures per ordinary share (in EUR) Basic earnings –0.36 4.32 3.57 3.32 2.71 Earnings – after attribution to non-voting equity securities (2) –0.56 4.32 3.57 3.32 2.71
Capital ratios ING Group debt/equity ratio 13.5% 9.5% 9.0% 9.4% 10.2%
OUR PROfile ING is a global financial institution of Dutch origin offering banking, investments, life insurance and retirement services. We serve more than 85 million private, corporate and institutional customers in Europe, North and Latin America, Asia and Australia. We draw on our experience and expertise, our commitment to excellent service and our global scale to meet the needs of a broad customer base, comprising individuals, families, small businesses, large corporations, institutions and governments.
OUR CORPORate ReSPOnSibility ING wants to pursue profit on the basis of sound business ethics and respect for its stakeholders. Corporate responsibility is therefore a fundamental part of ING’s strategy: ethical, social and environmental factors play an integral role in our business decisions.
Conducts life insurance and asset/wealth management activities in the region. ING is the region’s second-largest international life insurer in nine countries. ING has strong positions in Australia, New Zealand, Japan, Hong Kong, Malaysia and South Korea, and has a growing presence in the high-growth markets of China, India and Thailand.
For ING, the immediate consequence was a need to increase our capital position and ratios. International market expectations of capital levels had changed practically overnight, also against the backdrop of capital injections into financial institutions by the US and UK governments. The Dutch government responded to the market turmoil by establishing a facility for healthy financial institutions that needed extra capital. Given the exceptional circumstances, and our desire to find a quick, sizeable and proactive solution, we decided to use this facility for a EUR 10 billion capital strengthening agreement. We are grateful that the Dutch government appreciates the importance of a strong financial sector, and the role of ING in it, and has taken measures to boost the confidence in the sector and the stability of the financial system. The government’s involvement brings with it an increased need for ING to be responsive to the interests of Dutch society.
We are fortunate and thankful for the continued loyalty of our customers, but the crisis has understandably damaged trust in our industry. For the entire sector, including ING, our clients’ confidence is our licence to operate. Our customers entrust us with their deposits and savings, expecting ING to carefully manage their money and invest it in a sensible way. Our business principles, the backbone of our approach to corporate responsibility, give us guidance on our responsibilities towards our customers as well as on such matters as the environment and human rights. These principles are the basis upon which customer confidence, and consequently, investor confidence in ING is built.
In January 2009, Michel Tilmant stepped down from his position as CEO of ING. We want to use this opportunity to thank Michel for his hard work over the last five years. Michel has given a lot to ING as CEO, transforming ING into a more focused organisation.
Jan Hommen will succeed Michel Tilmant as chairman of the Executive Board upon approval of his appointment to the Executive Board by the annual General Meeting on 27 April 2009. Peter Elverding has been appointed as Jan Hommen’s successor as chairman of the Supervisory Board. Wim Kok and Eric Bourdais de Charbonnière will retire from the Supervisory Board on that same day. Patrick Flynn will be nominated for appointment to the Executive Board to succeed John Hele as CFO. John Hele will leave the company on 31 March 2009. On behalf of our colleagues in the Executive Board and Supervisory Board we wish to express our gratitude and appreciation for the contribution Wim Kok, Eric Bourdais de Charbonnière and John Hele have made to ING.
2009 has started off as a challenging year, with the global economy in recession and a further deterioration of financial markets. In January, we announced an Illiquid Assets Back-up Facility by the Dutch State, which strongly reduces the risks in our portfolio. Furthermore, we are confronting the crisis head-on by preserving our capital base, reducing risk and bringing costs in line with the operating environment. In concurrence with the Illiquid Assets Back-up Facility, we announced measures to reduce costs including a 6% reduction of our workforce.
SHARE PRICE PERFORMANCE In 2008, ING’s share price decreased 72.6% to EUR 7.33 at year-end. Over the full year, ING underperformed the Amsterdam Exchange Index (AEX) by 20.3%-points.
DIVIDEND As previously announced in October 2008, ING Group will not pay a final dividend in May 2009 over the year 2008. ING Group already paid an interim dividend of EUR 0.74 per ordinary share (or depositary receipt therefor) in August 2008.
TOTAL SHAREHOLDER RETURN ING’s Total Shareholder Return amounted to –49% over the four-year period 2005–2008.
RATINGS Credit ratings are indicators for the likelihood of timely and complete repayment of interest and instalments of fixed-income securities as assigned by rating agencies. For an overview of the main credit ratings of ING, please see page 9.
PROFIT RETENTION AND DISTRIBUTION POLICY ING Group’s profit retention and distribution policy is determined by its internal financing requirements and its growth opportunities on the one hand and the capital providers’ dividend expectations on the other. ING Group’s internal funding needs are determined partly by statutory solvency requirements and capital ratios, compliance with which is essential to its existence. Credit ratings are just as important to ING Group, because they directly affect the company’s financing costs and hence profitability. For their part, the capital providers expect a dividend which reflects ING Group’s financial results and is relatively predictable. Following the capital injection from the Dutch State, ING maintains full discretion to determine its dividend on ordinary shares.
ING Group has announced that it will not pay a final dividend in May 2009 over the year 2008. Given the intensity of the crisis, it is difficult to foresee whether ING Group will be in a position to pay a dividend in 2009. The interim dividend for 2009 will not automatically be half of the total dividend of 2008.
Core Tier-1 securities In October 2008, ING Group took advantage of previously announced capital support facilities by the Dutch Government by issuing EUR 10 billion of core Tier-1 (‘Securities’) to the Dutch State with a coupon of 8.5%. This capital injection significantly enhanced the capital position of ING Group. The Securities are pari passu with common equity (there is no claim, even in liquidation). When a dividend is paid, however small, the coupon on the Securities is also payable, albeit only with the permission of DNB (the Dutch central bank). More information on the Securities and the relation between dividend on common shares and the coupon on the Securities is available in the Capital management section, starting on page 16.
Share buy-back programme On 16 May 2007, ING announced a share buy-back programme to purchase ordinary shares (or depositary receipts for such shares), with a total value of EUR 5 billion over a period of 12 months, beginning in June 2007. On 23 May 2008, ING Group announced that it had completed the share buy-back programme. Under the programme, ING has repurchased 183,158,017 ordinary shares (or the depositary receipts therefor) in the market for a total consideration of EUR 4,903,355,838.50, bringing the average purchase price for the total programme to EUR 26.77. The repurchased shares were cancelled in accordance with approval obtained at the 2008 annual General Meeting.
Preference A shares On 5 March 2008, ING announced the tender offer for the 6,012,839 issued and outstanding preference A shares (or the depositary receipts therefor) of ING Groep N.V., with a nominal value of EUR 1.20 each. The purchase price for each share offered in accordance with the Tender Offer was EUR 3.60, or EUR 21.6 million in total. The purpose of the buy-back of the preference A shares was to simplify the corporate ownership and capital structure of ING on a one-share-one-vote basis and to optimise its capital structure. The tender period ended on 26 June 2008 and all preference A shares (or the depositary receipts therefor) were cancelled in accordance with the resolution of ING’s General Meeting held on 22 April 2008.
(Depositary receipts for) ordinary shares of EUR 0.24 nominal value 2,063.1 2,226.4
(Depositary receipts for) own ordinary shares held by ING Group and its subsidiaries 36.5 126.8
ING GROUP** AA– A1 A+ ING INSURANCE – short term A-1+ P-1 – long term AA- A2 A+ ING BANK – short term A-1+ P-1 F1+ – long term AA Aa3 AA– – financial strength C+ * Still valid on 16 March 2009, the date of this Annual Report. ** The Standard & Poor’s and Fitch ratings on ING Group have a negative outlook, while Moody’s outlook is stable.
IMPORTANT DATES IN 2009 AND 2010* Annual General Meeting Monday, 27 April 2009, 11:00 a.m.
Annual General Meeting Tuesday, 27 April 2010 * All dates shown are provisional. ** See dividend policy on page 8.
SHAREHOLDERS WITH STAKES OF 5% OR MORE As at 31 December 2008, no holder of ordinary shares (or the depositary receipts therefor) with an interest or potential interest as mentioned in the Dutch Financial Supervision Act was known.
Investors and financial analysts may contact: ING Group Investor Relations (IH 07.430) P.O. Box 810 1000 AV Amsterdam The Netherlands
Four-year price development ING depositary receipts for shares in percentages United Kingdom 26
United States and Canada 25 Netherlands 20 Luxembourg 10 Belgium 7 Switzerland 6 Other 6 Total 100
The global financial crisis has strongly impacted the financial services sector. ING has not been immune and has seen a corresponding deterioration in earnings. As maintaining the confidence of our stakeholders is essential to remain successful, we are confronting the crisis head-on by putting customers first, preserving our capital base, further mitigating risks and lowering costs. We will continue to align our long-term business strategy around a universal customer ideal: saving and investing for the future should be easier. This is even more valid going forward, as the crisis proves that financial institutions need to reduce the complexity of their product and services offering and go back to the basics of finance.
WEATHERING THE CRISIS In the course of 2008 the financial crisis intensified significantly. It has become evident that the long-lasting period of low interest rates and ample liquidity has triggered the emergence of incongruities in the financial sector. A combination of factors has severely undermined the proper functioning of the financial system: the mispricing of risk and excessive leverage by a number of financial institutions, the rapid emergence of toxic assets, the industry’s over-reliance on mathematical modelling; as well as the detrimental effects of certain incentive structures and the procyclical working of accounting rules. As a result of the crisis, customer confidence in the sector has decreased significantly.
At Wholesale Banking, we reviewed and even selectively decreased our client coverage model in non-core markets. We reduced and exited certain volatile products and activities, especially in equities markets and within Financial Markets Strategic Trading. We will increasingly focus our full-service wholesale banking activities on
Our efforts will be focused on disciplined execution of these plans in 2009, specifically by: putting customers first;• preserving a strong capital position, including divestments that • free up capital; further mitigating risks; and • bringing our costs in line with the operating environment.•
Putting customers first The credit crisis has had a clear impact on customer needs, both in terms of product offering, as well as servicing models. These turbulent times prove once more that delivering an easier customer experience and going back to basics should be an essential part of our strategy. Hence, we will continue along the path chosen in 2007, when we launched our Easier programme, which emphasises the attributes that build customer trust and competitive advantage over the long term: customers expect us to be available when they need us, to provide them with a clear overview of their financial situation, to respond to their queries in a fast and efficient manner, to be open and transparent about our products and services and to provide them with objective and professional advice. Apart from the need to reinforce our efforts to deliver an easier customer experience, the crisis has created a shift in customer demand towards products that offer wealth-protection and risk reduction. Therefore, we will reposition our product portfolio to accommodate changing customer needs.
Preserving a strong capital position The economic environment has not only put pressure on the profitability of our business, but has also led to an internationally recognised belief that going forward, capital requirements for financial institutions should be higher. Although our capital position was above or in line with previously targeted levels and regulatory requirements, in October we decided to further strengthen our capital base in the form of the issuance of EUR 10 billion of core Tier-1 securities to the Dutch State. As a consequence, the ING Bank Tier-1 ratio rose to 9.32% as of 31 December 2008.
In the Americas, we are focused on the long-term growth opportunities presented by the ageing of the US population and the increasing wealth in Latin America. The acquisition of CitiStreet, one of the major retirement plan service and administration organisations in the US defined contribution market, provides us with an expanded geographic footprint and broader service offerings to customers. In Peru, we increased our stake in AFP Integra to 80%, the number one pension fund company by market share.
In Asia/Pacific, bank distribution was further reinforced through an exclusive agreement with the Royal Bank of Scotland in Hong Kong, and by sales expansion through TMB Bank from the Bangkok region to the entire branch network in Thailand. Furthermore, ING became one of the multi-region preferred strategic partners of HSBC Insurance.
ING has a clear eye for what lies at the heart of our business: collecting customer balances and redeploying these in the economy, by means of a self-originated loan book consisting of mortgages and corporate, private and other types of loans. We are well aware of our responsibilities and will continue to do our utmost to maintain the confidence of all our stakeholders and to contribute to a proper functioning of markets. We will align our long-term business strategy around a universal customer ideal: saving and investing for the future should be easier.
Going forward we will take steps to strengthen our financial position and adjust to the reality of the global recession while keeping focus on our long-term priorities. In the short to medium term, we will step up efforts to steer the business through these turbulent times, to stabilise our company and reinforce our credibility.
Bringing costs in line with the operating environment With pressure on margins and investment returns, it is vital to contain costs. In 2009 we announced to cut operating expenses by EUR 1 billion in 2009. The structural expense reduction is expected to lead to annual savings of approximately EUR 1.1 billion from 2010 onwards. Of the cutback, 35% will come from a reduction of the workforce by approximately 7,000 full-time positions in 2009. The remainder of the expense reduction comes from decreasing costs for our head office, marketing, the Formula 1 programme, consultancy, third-party staff and the renegotiating of certain contracts with IT-vendors.
We will continue to invest in our bank distribution platforms. We are able to serve our 85 million customers through different distribution channels – our direct banking channels and branches and also through tied agents, and via distribution agreements with other parties. Banks can fill many customer needs across a wide range of products from liquidity to lending and investing. Banking is also structurally well-positioned with many chances for customer interaction and long customer retention.
High-growth markets continue to play an important role for ING. Yet, given the new economic and regulatory realities and the necessity to preserve ING’s capital position, new investments will be tempered.
While drawing lessons from the crisis and the debate on the function of financial institutions in society, we will review the portfolio of the company in terms of markets, distribution models as well as product offering, in order to ensure our long-term competitiveness. We will focus on fewer, coherent and strong businesses. Also, we will simplify the organisation, improve the fundamentals of our business and invest in improving commercial processes.
Moreover, further strengthening of our brand around a universal ideal of delivering an easier customer experience remains a main objective, as awareness and appreciation of the ING brand is essential in building trust, a key driver for long-term business growth.
Last, but certainly not least, continued investment in our people is essential. ING is proud to have highly skilled and motivated staff. Hence, we will continue to promote people-oriented leadership, and to drive for excellence.
While the global economy will be confronted with a recession in 2009, our first priority is to improve the financial fundamentals of the company, without losing perspective on the long term. We will assess our strategic focus and review our portfolio in the best interests of our customers, the markets we want to be in, our distribution models and our product offering. ING will pursue a universal customer ideal: saving and investing for the future should be easier.
In 2008, ING’s results were adversely impacted by the global financial crisis. The sharp market deterioration led to significant impairments and negative revaluations across almost all asset classes. Several steps were taken to strengthen ING Group’s capital position, including a capital support facility of EUR 10 billion by the Dutch State. ING also actively reduced risk exposures. The turmoil in financial markets caused a sharp decline in results for ING’s insurance operations. At the same time, the banking business reported positive net results despite the challenging circumstances.
GROUP RESULTS Total net result decreased from EUR 9,241 million in 2007 to EUR -729 million. Underlying net result, which is defined as total net result excluding the impact of divestments and special items, decreased from EUR 9,172 million to EUR -171 million. Underlying result before tax decreased from EUR 11,080 million to EUR -786 million. Extreme market volatility and sharp declines in asset prices triggered impairments and fair value changes of EUR 5,081 million, of which EUR 2,599 million related to pressurised assets and EUR 1,707 million to equity securities. The remainder was attributable to impairments on other debt securities, including financial institutions’ debt.
Globally, real estate prices fell noticeably in 2008, leading to negative revaluations on real estate and impairments on development projects of EUR 1,184 million. Negative revaluations on private equity were EUR 399 million. Other impacts stemming from the weak financial landscape were EUR -162 million, including deferred acquisition cost unlocking and hedge losses, partly compensated by capital gains on equity securities. The weakening of most currencies against the euro during 2008 had a negative impact of EUR 163 million on net underlying result. Earnings per share decreased to EUR -0.36 from EUR 4.32.
Contribution business lines to underlying result, excluding market volatility and risk costs in percentages Insurance Europe 15
Insurance Americas 17 Insurance Asia/Pacific 6 Wholesale Banking 26 Retail Banking 24 ING Direct 12 Total 100
Revaluations on real estate/ impairments on development projects –732 –452 –1,184 Revaluations on private equity –399 –399 Revaluations –732 –851 –1,583 Equity capital gains/equity hedge 30 1,181 1,211 Equity related DAC unlocking –567 –567 FX hedge/Other –206 –600 –806 Other market impacts –176 14 –162 Risk costs Bank –1,280 –1,280 Underlying result before tax 449 –1,235 –786 Tax and third-party interests 273 343 615 Underlying net result 722 –893 –171 Divestments and special items –267 –291 –558 Total net result 454 –1,183 –729 * Numbers may not add up due to rounding.
Across the organisation, cost-cutting initiatives have been implemented to adapt to the negative economic climate, amounting to a targeted overall cost reduction of EUR 1 billion in 2009.
Divestments and special items Divestments resulted in a gain after tax of EUR 7 million in 2008 compared with a gain of EUR 407 million in 2007. The impact from operations of divested units on total net result was EUR -50 million, versus EUR -4 million a year earlier. Special items in 2008 of EUR -515 million after tax were related to integration costs (mainly CitiStreet), the loss for the nationalisation of the pension business and provisioning for annuities in Argentina, the combination of ING Bank and Postbank in the Netherlands, the costs for the cancelled launch of ING Direct Japan, and the provisioning for the unwinding of the joint venture with Postkantoren BV in the Netherlands. The impact from divestments and special items is excluded in the underlying result.
In addition to the capital support facility provided by the Dutch State in 2008, ING received an Illiquid Assets Back-up Facility for 80% of our portfolio of Alt-A residential mortgage-backed securities (RMBS) in early 2009. This transaction will result in the reversal of 80% of the negative revaluation reserve held against the shareholders’ equity in relation to the Alt-A RMBS portfolio. As a result, ING Group’s shareholders’ equity will increase by EUR 4.6 billion. In addition, risk-weighted assets will decline by approximately EUR 13 billion, subject to discussions with regulators, increasing ING Bank’s Tier-1 ratio by 37 basis points to 9.7%, on a pro-forma basis. ING aims to close this transaction in the first quarter of 2009, but is dependent on the approval of various regulators.
The sale of the Taiwan life business substantially reduced our economic capital requirements, releasing EUR 5.7 billion in economic capital. The sale of the Canadian property and casualty business will further reduce leverage in the insurance business, and resulted in gross proceeds of CAD 2.2 billion (EUR 1.35 billion).
One of ING’s top priorities is to further reduce asset exposures and rationalise the cost base. We aim to shrink the balance sheet of ING Bank by 10% compared with the end of September 2008, while continuing to lend to key customers in our home markets. Also, we are reallocating investments towards less risky assets.
Dividend ING Group has announced that it will not pay a final dividend in May 2009, leaving the total dividend over the year 2008 at EUR 0.74 per share, which was paid as an interim dividend in August 2008. The first short coupon on the core Tier-1 securities will be paid to the Dutch State in May 2009, pending approval from DNB (the Dutch central bank). Given the intensity of the crisis, it is difficult to foresee whether ING Group will be in a position to pay a dividend in 2009. The payment of dividends is in relation to underlying cash earnings. In case a dividend is paid, the coupon on the Securities is also payable, subject to approval of DNB (the Dutch Central Bank).
INSURANCE OPERATIONS Total result before tax from Insurance operations fell by EUR 8,168 million to a loss of EUR 1,635 million in 2008 from a profit of EUR 6,533 million in 2007. The underlying result before tax (excluding the impact of divestments and special items) decreased to a loss of EUR 1,235 million in 2008 from a profit of EUR 6,113 million in 2007. The sharp decline in results was mainly due to the deterioration of the financial markets in the second half of 2008, as well as EUR 2,087 million of gains on the sale of ING’s stakes in ABN AMRO and Numico in 2007.
Underlying result from life insurance fell to a loss of EUR 1,744 million from a profit of EUR 4,831 million last year. Investment income was negatively impacted by capital losses and impairments on equity and debt securities, as well as negative fair value changes on real estate and private equity investments. Furthermore, the result was negatively impacted by DAC unlocking in the US as well as losses on the SPVA business in Japan due to hedge losses.
Underlying operating expenses from the Insurance operations decreased 0.6%, but were up 0.7% excluding ING Life Taiwan to EUR 5,188 million as cost containment helped to offset most of the investments to support growth of the business in Asia/Pacific and Central Europe. Furthermore, the 2007 operating expenses contained a EUR 89 million one-off net release of employee benefits provisions in the Netherlands.
MARKET CONDITIONS Market conditions deteriorated dramatically during 2008, especially in the second half of the year. Credit spreads widened to unprecedented levels, raising the internal rate of return on many assets, but government interest rates and swap rates declined. Central banks cut short-term interest rates in the second half of the year. Equity markets fell throughout. The US dollar weakened during the first half of the year, but regained strength in the second half. The euro yield curve remained inverse for most of the year, but towards the end finally steepened somewhat thanks to ECB rate cuts. Equity, fixed income and real estate impairments negated underlying profitability. These market conditions significantly impacted Shareholders’ equity. ING Group took advantage of previously announced capital support facilities by issuing EUR 10 billion of core Tier-1 securities to the Dutch State in October. This capital injection significantly enhanced the capital position of ING Group.
The repurchase of the Securities is flexible. ING Group may repurchase all or part of the Securities when in the opinion of the DNB it can afford it. ING Group could use retained earnings for the repurchase of the Securities in the future. Alternatively, once the share price recovers to above EUR 15 per share, a rights issue can be considered to fund the repurchase.
As described above, the Securities are pari passu with common equity and have been structured to mirror common shares. As there are 1 billion Securities outstanding and just over 2 billion common shares, in liquidation the Securities and common shares share for one-third and two-thirds respectively in the value of the Group after all claims are paid. In a going concern situation the Securities have a claim on after-tax earnings of EUR 850 million per annum as long as dividends are paid and do not exceed EUR 0.68 per share.
DIVIDEND POLICY ING Group has announced that it will not pay a final dividend on common equity in May 2009 over the year 2008. However, an interim dividend was paid in August 2008 and therefore the first short coupon on the Securities will be paid in May 2009 if DNB approves. Given the intensity of the crisis at the moment, it is difficult to foresee whether ING Group will be in a position to pay a dividend in 2009. The interim dividend for 2009 will not automatically be half of the total dividend of 2008. If ING Group resumes payment of dividends, it will continue to do so in relation to underlying cash earnings. Therefore ING will take a balanced approach to dividends in a careful and conservative manner in the next few years. In case a dividend is paid, the coupon on the Securities is also payable, subject to approval by DNB.
SUBSEQUENT EVENTS The intensity of the crisis in the fourth quarter resulted in significant losses among the global financial institutions. In order to mitigate the impact of these results ING Group negotiated an Illiquid Assets Back-up Facility with the Dutch State in January 2009. Through this facility ING Group transfers 80% of its Alt-A mortgage assets in ING Direct US and ING Insurance US at a price of 90% of par in return for a government note. The up-front impact of this transaction was more or less neutral for the profit and loss account in 1Q, but reduced Risk Weighted Assets (RWAs) by approximately EUR 13 billion equivalent, subject to discussions with regulators. Also, approximately EUR 4.6 billion of negative revaluation reserves will be reversed in Shareholders’ equity.
D iv id en d an d sh ar e bu yba
’ e qu ity en d of p er io d
Shareholders’ equity declined due to unrealised losses on available for sale fixed income and equity assets that are booked against equity, dividends paid to shareholders and the remainder of the buy-back. In adjusted equity the revaluation reserve fixed income is added back, given the asymmetry of the accounting for assets and liabilities.
Available for sale assets are marked to market through Shareholders’ equity whilst liabilities are booked on an amortised cost basis. If ING Group were to mark its financial liabilities (senior term debt, dated subordinated debt and hybrids) to market, approximately EUR 12 billion would be added to Shareholders’ equity at the end of 2008. Adjusted equity improved by EUR 1 billion in spite of the decline in Shareholders’ equity because of an increase in hybrid Tier-1 capital, the capital injection from the Dutch State and the adding back of the revaluation reserve.
KEY CAPITAL AND LEVERAGE RATIOS Group leverage, defined as equity investments into Bank and Insurance from Group minus adjusted Group equity, increased from EUR 5 billion to EUR 7 billion or, in other words, from 9.5% to 13.5%. Group paid out EUR 3 billion in dividends to shareholders and EUR 2 billion on the remainder of the share buy-back. Group injected EUR 2.95 billion into Bank and EUR 2.65 billion into Insurance during the year. As indicated, Group also received a capital injection from the Dutch State of EUR 10 billion.
Tier-1 capital at Bank increased from EUR 30 billion to EUR 32 billion, although the definition of Tier-1 capital changed, moving from Basel I to Basel II. Basel II Tier-1 capital is approximately EUR 1 billion less than Basel I Tier-1 due to different deduction rules. Net profit in Bank was approximately EUR 0.5 billion. RWAs grew by 17% from EUR 293 billion at the start of the year to EUR 343 billion at the end of the year. Basel I RWAs grew by 18% from EUR 403 billion to EUR 477 billion at the end of the year. The nominal balance sheet of Bank increased from EUR 994 billion to EUR 1,030 billion, only 4%. The difference between nominal balance sheet growth and the growth of RWAs can be explained by the relative reduction of money market activities. Nominal lending by Bank grew from EUR 526 billion to EUR 598 billion, an increase of 14%.
AFR Bank increased from EUR 32 billion to EUR 35 billion during the year. The capital injections from Group to Bank more than compensated the loss for the year. EC Bank increased from EUR 18 billion to EUR 22 billion, given the increase in RWAs and also a methodology change. Interest rate risk resulting from the investment of capital is now included in the calculation. The free surplus at Bank declined from EUR 14 billion to EUR 13 billion.
ACQUISITIONS AND DIVESTMENTS In 2008, the acquisitions and divestments of ING Group balanced in terms of transaction value. Total divestments in the amount of EUR 1.5 billion comprised mainly of the sale of the Mexican non-core insurance business to AXA and the sale of our Taiwanese life insurance business to Fubon Financial Holding (closed on 11 February 2009). Furthermore, we closed the sale of NRG to a subsidiary of Berkshire Hathaway in June 2008 which was announced in December 2007. In South Korea we sold our 20% stake in the asset management joint-venture KBAM to KB Financial Group while we acquired the remaining 14.9% in ING Life Korea from Kookmin Bank. ING and KB Financial Group remain committed to their strategic partnership in Korea via the 49% stake in KB Life Insurance while ING increased its stake in KB Financial Group to 5.05%. Add-on acquisitions amounted to a value of about EUR 1.3 billion in 2008 and include the acquisition of CitiStreet in the US, Interhyp in Germany and Oyak Emiklilik in Turkey.
Risk mitigating actions Although some limits had been set at more stringent levels since early 2007, anticipating a downturn in the market, ING has taken additional actions over time to reduce risk across major asset classes.
De-leveraging ING is working to reduce the bank balance sheet by 10% by decreasing the non-lending part by 25%. The available for sale portfolio will be reduced over time as proceeds from maturing securities will be used to fund ING-originated loans. Reducing trading activities, deposits at other banks and reverse-repos will make up most of the remaining reduction. At the same time, lending activities will be maintained with focus on the corporate and retail business.
US subprime RMBS –120 –64 Alt-A RMBS –2,064 0 CDOs/CLOs –394 –51 Monolines –9 –66 Investments in SIVs, ABCP –11 –45 Leveraged Finance 0 –29 Total –2,598 –255
liquidity dried up, which had an impact on ING’s results and equity far in excess of estimated credit losses. Under the terms of the facility, ING will transfer 80% of each security in the Alt-A RMBS portfolios to the Dutch State. The Dutch State will absorb 80% of the risks and returns on the Alt-A RMBS portfolios. ING will remain exposed to 20% of the result of the Alt-A RMBS portfolios and will remain the legal owner of 100% of the securities. As such the transaction will significantly reduce the uncertainty regarding the impact on ING of any future losses in the portfolio. In addition, as a result of the facility, 80% of the Alt-A RMBS portfolios will be derecognised from ING’s balance sheet under IFRS. Therefore, 80% of the negative revaluation reserve on the securities will be reversed, resulting in an increase of EUR 4.6 billion in Shareholders’ equity. Another benefit of the facility is that it will reduce the amount of ING’s risk weighted assets approximately EUR 13 billion, subject to discussions withe regulators.
As condition to the Facility ING committed to support the growth of the Dutch lending business for an amount of EUR 25 billion at market-conform conditions.
Reduction of interest rate risk ING sold ING Life Taiwan which resulted in a reduction of its interest rate risk exposure. This divestment was in line with the strategy to allocate capital to those businesses that generate the highest return. In addition, ING lengthened its asset duration in order to hedge the impact of declining interest rates, herewith further reducing its interest rate risk exposure.
The core loan book ING’s core loan book consists mainly of corporate loans and mortgages. The core loan book continues to perform well despite a continuous increase in risk cost over the year. Total net additions to loan loss provisions were EUR 1,280 million. This translates to
Financial assets at fair value As a result of the ongoing and unprecedented volatility in global financial markets, ING incurred negative revaluations and writedowns on its investment portfolio. The table on the first page of this section shows the negative revaluations and losses taken on the pressurised asset classes during 2008. Unrealised gains(/losses) relate to the available for sale (fixed income) securities and are taken into account in the revaluation reserve in Shareholders’ equity. Impairments, fair value changes and trading losses are directly charged to the profit and loss account.
US subprime mortgages ING has a very limited exposure to US subprime RMBS and does not originate subprime mortgages. Exposure to US subprime RMBS was EUR 1.8 billion at 31 December 2008, representing 0.1% of total assets and was valued at 58% of its cost. The exposure is of relatively high quality; at year-end 77% of the portfolio was rated AA or higher. The negative pre-tax revaluation on US subprime RMBS at 31 December 2008 was EUR 1,146 million. Net impairments and trading losses combined amounted to EUR 120 million.
At year-end, ING’s exposure under the broad definition was EUR 18.8 billion representing 1.4% of total assets. About 65% of the portfolio is rated AAA. ING Direct has the largest part of the Alt-A RMBS exposure, which was EUR 16.3 billion at year-end.
Under the ‘narrow’ definition a security qualifies as Alt-A RMBS if it meets all three criteria simultaneously (i.e. change ‘or’ to ‘and’). Under the narrow definition ING Direct’s exposure amounted to EUR 6.2 billion at 31 December 2008.
ING’s Alt-A RMBS portfolio continues to benefit from the high level of ‘attachment points’ (the point at which credit losses are incurred), which provide structural protection equal to the overcollateralisation plus the subordinated tranches in the RMBS. Losses from underlying mortgage pools are first absorbed by the overcollateralisation and the subordinated RMBS tranches. A credit loss occurs when the underlying losses breach, or are expected to breach, the lower threshold. An estimated credit loss triggers an impairment of the specific RMBS tranche. IFRS requires that the impairment reflects a full write-down to market value. As the current Alt-A RMBS prices are hampered by illiquid markets, an impairment is significantly higher than the expected credit loss of the RMBS tranche.
CDOs and CLOs ING uses a conservative definition for CDOs/CLOs. ING includes derivatives on corporate indices and credits as synthetic CDOs in its CDO/CLO exposure. The vast majority of the CDOs/CLOs have investment grade corporate credit as underlying assets, only EUR 1 million has US subprime mortgages as underlying assets.
Since the start of the credit crisis ING’s Liquidity Crisis Committee, chaired by the chief risk officer, has met regularly to discuss ING’s liquidity and funding profile. The liquidity position and market conditions were monitored daily. Large buffers of liquidity were retained throughout 2008, and as a result, contingency funding plans, in place at all levels, were not required to be executed as ING’s liquidity position remained sound.
ING’s risk governance framework ensures that the risk appetite is communicated and enforced throughout the Group. The framework contains three lines of defence: the business lines themselves, which have the primary responsibility for day-to-day management; Risk Management and Finance, which provide high-level policies, limits and risk oversight, as well as day-to-day transaction approval; and Corporate Audit Services, the internal audit department within ING Group, which provides an independent assessment of the design and effectiveness of internal controls over the risks to ING’s business performance.
Non-Financial Risk Dashboard In 2008, Risk Management introduced a Non-Financial Risk Dashboard for all business units providing integrated information on compliance, operational, information and security risk. Especially in these times of turmoil it is particularly pressing to ensure business continues as normal and is able to react quickly to potential risk breaches that could have a negative impact.
RISK MANAGEMENT SUPPORTS THE BUSINESS Risk Management benefits ING and its shareholders directly by providing more efficient capitalisation and lower costs of risk and funding.
The cost of capital is reduced by working closely with rating agencies and regulators to align capital requirements to risks. Funding costs are kept low and risk costs are mitigated by minimising potential losses.
Risk measurement allows ING to identify portfolios generating economic value. Risk management can help identify the most economically promising areas as well those businesses that are underperforming and in some cases need to be sold.
SOUND COMPLIANCE ING believes that our compliance practices are in the best interest of its customers, shareholders and staff, and is important for the way ING does business. Complying with relevant laws, regulations and ethical/internal standards, in both letter and spirit, is essential for maintaining a good reputation. It also leads to lower operational risk costs and more stable business processes.
Low interest rates: • Over the course of 2008 interest rates declined in both the US and the Eurozone putting pressure on Insurance earnings. It is part of ING’s risk reduction programme to mitigate the impact of declining interest rates.
The market turmoil has demonstrated the importance of having a robust risk management organisation in place. Although ING’s risk management organisation and favourable liquidity profile have helped to limit the impact and manage the company throughout the turmoil, ING will continue to further strengthen its risk management organisation. The lessons learned in this crisis will contribute to this continuous process. Redefining risk appetite, de-leveraging and de-risking will remain key tasks. A more detailed disclosure of outstanding risk factors facing ING and the financial industry turn to the Risk factors section in the Additional Information part of the Annual Report.
In recent years, ING has systematically improved its risk management capabilities with investments in people, governance, processes, measurement tools and systems. This has become necessary as investor demands have increased, regulation has become more sophisticated and as secondary markets have continued to decline. In 2008, ING invested in a number of areas including the further development of the risk trainee programme and liquidity risk management (with a further centralisation of treasury activities). Compliance was further embedded within ING Bank and ING Insurance.
The Executive Board and Senior Management share a clear vision of reputation management that goes well beyond the compliance and operational risk functions. They expect the highest levels of personal conduct and integrity from all employees and managers to safeguard the Group’s reputation. In 2008, Compliance Risk Management helped develop and roll out the Non-Financial Risk Dashboard, which gives management an overview of all key risks in their jurisdiction.
ING’s Financial Economic Crime Policy (FEC Policy) was enhanced in 2008 to provide a clearer statement on combating criminal activity and on ING’s participation in international efforts to counter money laundering and the funding of terrorist and criminal activities.
Financial institutions continue to experience close scrutiny by regulatory authorities, governmental bodies, shareholders, rating agencies, customers and others to ensure they comply with the relevant laws, regulations, standards and expectations. Bank and insurance regulators and other supervisory authorities in Europe, the US and elsewhere continue to oversee the activities of financial institutions to ensure that they operate with integrity and conduct business in an efficient, orderly and transparent manner. ING seeks to meet the standards and expectations of regulatory authorities and other interested parties through a number of initiatives and activities, including scrutinizing account holder information, payment processing and other transactions to support compliance with regulations governing money-laundering, economic and trade sanctions, bribery and other corrupt practices. The failure or perceived failure by ING to meet applicable standards in these areas could result in, among other things, suspension or revocation of ING’s licences, cease and desist orders, fines, civil or criminal penalties and other disciplinary action which could materially damage ING’s reputation and financial condition, and accordingly ING’s primary focus is to support good business practice through its Business Principles and group policies. ING Bank N.V. has continued discussions with its Dutch bank regulator De Nederlandsche Bank (DNB) related to transactions involving persons in countries subject to sanctions by the EU, the US and other authorities and its earlier review of transactions involving sanctioned parties. In connection with that review and related discussions ING Bank has undertaken to complete the global implementation of enhanced compliance and risk management procedures, and to monitor the implementation of such procedures on an ongoing basis, as instructed by DNB. ING Bank also remains in discussions with authorities in the US and in other jurisdictions concerning these matters, including with respect to ongoing information requests, and it is not possible to predict at this time the outcome thereof.
As a result of our frequent evaluation of all businesses from economic, strategic and risk perspectives ING continues to believe that for business reasons doing business involving certain specified countries should be discontinued, which includes that ING has a policy not to enter into new relationships with clients from these countries and processes remain in place to discontinue existing relationships involving these countries. At present these countries include Myanmar, North Korea, Sudan, Syria, Iran and Cuba. ING Bank N.V. is now in the final stages of liquidating the Netherlands Caribbean Bank, which is since 2007 a 100% owned subsidiary.
Training and education ING started several global training programmes in 2008, including a global compliance training programme for 11,000 managers around the world. A training course was launched for Money Laundering Reporting Officers that aims to support the implementation of the updated FEC Policy. ING also started a course for all 750 compliance officers worldwide to increase personal effectiveness. Finally, a new e-learning course has been developed for all employees in the Netherlands updating them on financial laws and regulations, based on a course created in 2006.
Key points > Investment losses across asset classes negatively impacted results > Strong performance Central Europe > Major drive for cost containment and capital efficiency in the Benelux > Favourable long-term prospects, despite market turmoil
Insurance Europe delivered a resilient performance in 2008, especially in Central Europe. However, like others in the life insurance industry, Insurance Europe was affected by the global financial turmoil. The lower net result was mainly due to negative revaluations of real estate and private equity investments. The business responded to the difficult financial and economic climate by focusing on efficiency and de-risking its balance sheet. With a range of products designed to meet the needs of customers throughout their lives, Insurance Europe continues to be well positioned to take advantage of long-term trends.
FINANCIAL DEVELOPMENTS Insurance Europe’s underlying result before tax fell 64.6% to EUR 651 million in 2008, as most European investment portfolios were negatively impacted by the financial market turmoil that intensified in the second half of the year. The EUR 1,189 million decline in underlying result before tax was primarily caused by lower income from real estate of EUR -278 million from EUR 371 million in 2007 and private equity income of EUR -296 million down EUR 456 million from 2007, due to impairments and revaluations. The lower investment income particularly affected the life insurance results, which declined EUR 1,066 million from EUR 1,412 million to EUR 346 million in 2008. The decline was concentrated in the Benelux, as the life result in Central and Rest of Europe was flat with ongoing growth in the first half of the year being offset by higher expenses. Underlying profit before tax from non-life insurance declined 28.7% to EUR 305 million, primarily due to a decline of EUR 120 million in investment income to EUR 193 million. Despite the sharply lower result before tax, corporate income tax fell only 36.9% to EUR 159 million as the fall in result mainly involved tax-exempt investment income.
Underlying premium income decreased by 0.6% to EUR 10,194 million, as both life and non-life premiums fell marginally in the deteriorating economic environment. Life premiums in the Netherlands were flat at EUR 5.0 billion notwithstanding unfavourable market conditions, as single premium immediate annuities were re-priced more frequently to reflect the current interest rate conditions. In Belgium, life premiums declined 8.3% to EUR 1,064 million as the outlook for single premium products with profit participation worsened and bank deposits offered increasingly attractive rates. Premium growth in Central and Rest of Europe clearly slowed down in the course of the year, as the effects of the credit crisis were increasingly felt in the emerging economies in the region. The successful introduction of a single premium investment product in Poland, which generated EUR 542 million in sales, is not reflected in gross premiums because of the IFRS accounting of deposits on investment contracts. Pension inflows in Central Europe, which continued their steady growth, totalled EUR 2.0 billion in 2008, up 29.1% from 2007.
Underlying operating expenses of Insurance Europe increased by 2.2% in 2008. In the Netherlands, underlying operating expenses decreased by 6% excluding the one-off release of employee benefits provision of EUR 89 million in the fourth quarter of 2007. Expenses in Central and Rest of Europe increased 9.1%, reflecting business growth and a EUR 16 million investment in a multi-year operational efficiency programme that started in 2008. This programme aims to integrate a substantial number of the insurance units’ back-offices in the region.
Value of new life business (EUR million) 397 400 Internal rate of return 17.1% 15.8% New sales (EUR million) 1,010 969 Economic Capital (EUR billion) 3.0 5.9
Underlying profit before tax in Belgium and Luxembourg increased by 23.1% to EUR 80 million. Both the life and non-life results were higher in 2008 due to one-off claims provision releases and the transfer of equity losses and impairments to the Corporate Line Insurance, whereas the profit sharing for policyholders was lower to reflect the negative return on equity investments. This was partly offset by higher expenses, due to business growth and organisational changes.
Benelux insurance operations Within the Benelux, ING maintains its focus on the pension and life insurance business while continuing to enhance cost and capital efficiency.
Efforts have been made to reduce the capital needs of the business by reducing the risk in the investment portfolio, including net sales of EUR 3 billion of public equity and a European equity hedging programme of EUR 2.8 billion, substantially reducing the impact of market volatility on the financial results.
In the non-life sector, the innovative car insurance product distributed through the proprietary bank channel (via the internet, phone and bank branches) in Belgium continued its strong performance with over 50,000 policies sold in 2008. In the Netherlands, non-life maintained its market share in the property & casualty as well as the disability & accident insurance business in a competitive market.
Overall, the number of customers increased from 7 million to 8.6 million, especially through the success of the Romanian second pillar pension fund. In Poland, where about half the region’s profit was recorded, premium income rose by 85% after the successful introduction of a single premium investment product (‘Optima’) sold through the bank channel. In Poland and in the Czech Republic APE increased by 42% and 24% respectively. Furthermore, an integrated transformation programme was launched in the region to leverage size into economies of scale by creating one operating model for all businesses, to reduce costs and increase synergies.
The strong performance of the two Romanian ING pension funds continued in 2008 with ING’s market-leading position supplemented by the final governmental ‘lottery’, through which a further 300,000 customers were allotted to ING’s pension fund. ING is Romania’s number one pension fund provider with a market share of almost 40% with 1.4 million customers. Furthermore, ING secured the pension contract for 35,000 employees at Romania Post.
ING Bulgaria won group pension deals with some well-known companies in the country, for instance with the national TV station. ING Pension Insurance Company will also provide a comprehensive voluntary pension contribution scheme to the main telecommunication operator, BTC. The contract covers approximately 5,000 employees and has the potential to extend to the entire staff of more than 9,000. It is one of the largest pension plans of its type in Bulgaria.
Enhancing the multi-channel distribution network ING is implementing a multi-channel distribution approach, with a blend of channels such as tied agents, bancassurance and brokers. Direct channels are mainly used to generate leads. An example of this approach is a pilot with ING Direct in Spain.
Insurance Europe has the long-term ambition to grow sales through bancassurance in Central and Rest of Europe. ING has a solid retail banking presence in the large markets of Poland, Romania and Turkey. In addition, Insurance Europe has developed distribution agreements with third-party banks in other countries. In Greece it has a bancassurance joint-venture with Piraeus Bank. For the longer term, ING will focus on growth in pension and life insurance client balances driven by economic growth and growth in retirement services.
Several initiatives have been taken to enhance tied agent effectiveness in Central and Rest of Europe, such as the roll-out of a region-wide programme to increase value of new business by strict activity management, standardised monitoring, intensive coaching and joint field work.
CONCLUSIONS AND AMBITIONS The fundamentals of ING Insurance Europe’s well-diversified portfolio are solid. Commercial performance is resilient, expenses are under control and ING is well positioned to take advantage of major trends in areas where it is present.
Latin America* 2% 480 * Excludes ING’s joint venture in Brazil because it is a minority interest.
Key points > United States results significantly affected by unprecedented downturn in markets > CitiStreet acquisition boosts
Insurance Americas results were significantly affected by the global financial turmoil, which resulted in substantial credit and investment-related losses together with lower sales of equity-linked products. The CitiStreet acquisition has given Retirement Services in the US a robust platform for further growth. Sales in Latin America remained constant, while returns were lower and Canada produced firm results given the challenging market circumstances.
BUSINESS DEVELOPMENTS In 2008, Insurance Americas continued its focus on the long-term growth opportunities presented by the ageing of the US population and increasing wealth in Latin America despite the challenging markets. During 2008, Insurance Americas maintained or improved its market position in retirement services and individual life insurance through innovative product development and distribution expansion.
Insurance Americas’ focus on faster-growing markets in the US and Latin America continued to be rewarded in the first half as sales, returns and the value of new business increased across the region. In the second half of the year, the deepening financial crisis resulted in substantial credit and investment-related losses, and dampened sales of equity-linked products including investments, variable universal life and variable annuities.
The acquisition of CitiStreet for EUR 570 million boosted ING’s leading position in retirement services in the US, making ING the third-largest defined contribution business in the US based on assets under management and administration, and the secondlargest based on number of plan participants.
Retirement Services boosted by CitiStreet ING is a major player in retirement services, providing defined contribution plans to small and medium-sized corporations, educational institutions, hospitals and governments. ING is ranked number one in sales of retirement services for kindergarten through to 12th grade education markets and number two in small corporate plan sales.
The integration of the CitiStreet business into Retirement Services has proceeded according to plan, and key business and operational policies and strategies are being pursued which leverage the strengths and talents of both organisations.
ING plans to fully leverage CitiStreet’s scalable technology platform to allow easier business expansion and more technological innovation. Emphasis is now on strict execution of integration initiatives to become more efficient and effective. Significant cost savings, primarily in IT expenditure, are expected.
The addition of CitiStreet, one of the premier retirement plan service and administration organisations in the US defined contribution marketplace, provides ING with an expanded geographic footprint, further entry into specific market segments including the large corporate market, and broader service offerings to customers.
Retirement Services produced solid commercial results in 2008. For example, the State of Iowa selected ING as its 403 (b) plan administrator and one of its plan providers for education employees. The 403 (b) plan is a retirement savings plan offered by non-profit organisations such as educational institutions that come with several advantages such as tax concessions on contributions and earnings. ING is already one of the State’s four 457 (also a particular type of retirement savings plan) government pension plan providers for state and county employees. From 360 school districts in Iowa, more than 300 have already signed up to the Iowa state plan. This high enrolment rate could be repeated in other states which have yet to offer state-wide 403 (b) plans for school districts. Under recent changes to 403 (b) regulations, individual school districts in Iowa now have the option of arranging their own plans or joining the state plan. Only a few states have taken advantage of the changes in the legislation, but many more could follow, opening up opportunities for ING in the important education pension plan market.
Annuities hold ground in market turbulence Variable annuity sales were well supported by ING LifePay Plus, a withdrawal benefit, which was launched in August 2007. An enhanced version of the product was introduced in April 2008. ING continued to target pre- and post-retirees in sales strategies as part of the easier brand campaign. Sales began to slow in the third quarter as equity markets became more volatile and dipped further in the fourth quarter. In 2008, as part of Insurance Americas’ de-risking initiatives, several product changes were made which lowered overall business risk. In January 2009, more de-risking product changes were instituted which included further restricting client exposure to equity funds, reducing benefit entitlements and repricing.
ING continued to expand its distribution capacity, particularly in variable annuities, seeking out partnerships with major distributors. As part of the easier campaign, ING launched a major campaign to help simplify retirement planning. The ‘Your Number’ campaign was aimed at encouraging Americans to think about and calculate the savings they would require to retire comfortably. Print, web and TV ads directed people to www.INGyournumber. com where they could calculate their ‘number’ via an interactive, user-friendly tool.
CONCLUSIONS AND AMBITIONS Insurance Americas achieved reasonable growth in sales and value of new business in 2008 given the market circumstances. ING will focus on aggressive capital management and de-risking in 2009 to ensure the company is well-positioned for the rebound in markets. Over the longer term, Insurance Americas will balance profit, growth, value creation and capital management with a continued focus on retirement services, life insurance and investments in the Americas. Insurance Americas remains committed to building and strengthening customer and distributor relationships, and making it easier for people to do business with ING. Accordingly, the company intends to continue to improve its technology to make it easier to serve customers, and to improve overall efficiency and effectiveness.
US Insurance benefits from diversified business model Over the past three years, the US Individual Life business has diversified its product offering to include a variety of term insurance products as well as universal and variable life insurance. During 2008, customers turned away from products with an equity market component, and instead bought term insurance which provides a death benefit but no investment return. It is this diversified model and Individual Life’s continued focus on effective distribution, efficient operations and competitive manufacturing that allowed the business to generate an 11% increase in sales in 2008.
During 2008, ING conducted a major campaign to increase sales in multicultural markets in the US, specifically the Latino and Asian American communities. ING trained and equipped its existing distribution channels with sales and marketing materials tailored to the language and culture of the target group. By 2010, ING expects US insurance multicultural sales to more than double to USD 48 million.
The sale of the Mexican non-life insurance business, completed in July 2008, allowed ING in Mexico to concentrate on its growing Afore pension, annuities and investment management businesses.
In November, the Argentine government nationalised the country’s private pension system, which included ING’s pension fund business.
Key points > Despite lower sales, Insurance Asia/Pacific maintained or improved market positions across the region > Declining equity markets and weak economic conditions eroded demand for investment linked products > Bank distribution reach extended: number of tied agents reached 100,000 > Brand awareness rose through the global and regional advertising campaigns
Growth in the Asia/Pacific region was adversely affected by global economic developments in 2008. However, as one of the leading international insurance and asset management companies in the region with a strong and diversified distribution network, ING remains well-positioned to maintain its franchise. Based on annual premium equivalent, ING maintained or improved its market positions across the region in 2008, a sign of its sound product portfolio and distribution capabilities. Active repositioning of its product portfolio was at the core of ING’s response to changing customer needs due to the economic downturn.
FINANCIAL DEVELOPMENTS Underlying result before tax decreased by 79.9% to EUR 116 million in 2008 from EUR 576 million in 2007. Japan recorded a loss of EUR 167 million in 2008 compared to a profit of EUR 24 million in 2007, driven by losses on the variable annuity business, mainly due to extreme market volatility in October. Turmoil in the global financial markets led to negative revaluations on credit- and equity-linked securities and impairments on fixed income investments, which further contributed to the decrease in the underlying result. Excluding Japan and currency effects, underlying result before tax declined 15.5%.
South Korea 30% 3,291 Australia/New Zealand 2% 292 Rest of Asia* 12% 1,275 * India, China, Hong Kong, Thailand and Malaysia.
expenses for the greenfield business units in China, India and Thailand from their VNB.
BUSINESS DEVELOPMENTS Challenging markets affected investment-linked sales, while increased customer demand for more traditional protection products emerged in the fourth quarter. ING helped customers protect their wealth and reduce risk across their portfolio through protection-type and capital-guaranteed products. Although Asia is being affected by negative developments in the global economy, long-term economic growth trends remain favourable.
ING is the region’s second-largest international life insurer, based on annual premium equivalent (APE), with 11 operations in 9 countries. APE is the sum of regular annual premiums from new business plus 10% of single premiums on new business written during the year. ING has strong positions in Australia, New Zealand, Japan, Hong Kong, Malaysia and South Korea, and has a growing presence in the high-growth markets of China, India and Thailand. ING is also the third-largest regional asset manager, based on assets under management, operating in 12 markets.
Organisational and operational efficiency Insurance Asia/Pacific’s regional structure was strengthened and simplified by the establishment of a new regional governance structure. ING continues to focus on talent management, managing the inflow of new talent as well as local leadership development. Across business units, ING aims to reap the benefits of scale through greater standardisation in key processes and IT systems. In line with Group risk and cost management, Insurance Asia/Pacific is continuing to improve operational risk management and cost management in the region. The pursuit of operational efficiencies is facilitated through the implementation of several programmes to streamline operations (often using the Lean Six Sigma approach).
CONCLUSIONS AND AMBITIONS Faced with the challenging economic climate, Insurance Asia/ Pacific’s performance was negatively impacted. Despite these difficulties ING maintained or improved market positions across the region supported by its strong product portfolio and by expanding its distribution network.
The product portfolio is shifting to accommodate changing customer needs for more protection and capital guaranteed type offerings. ING’s multi-distribution approach allows for diversification and flexibility to respond quickly to these changing needs. We will continue to strengthen the bancassurance model. These key priorities will position us well to capture the growth opportunities that Asia/Pacific offers.
Bank distribution was further reinforced through an exclusive agreement with the Royal Bank of Scotland in Hong Kong, and by sales expansion to TMB Bank’s entire branch network in Thailand. As a result of these and other bank agreements, ING products and services are marketed through over 200 different banks in the region, with a total branch network of more than 16,000 branches.
Australia and New Zealand fund outflows ING further strengthened its life risk and bancassurance businesses in Australia and New Zealand, maintaining sales and improving market share. Life risk and bancassurance now represent the majority of the profits of ING’s business in these two countries. However, ING is also active in the wealth management business which is more reliant on financial market conditions. In 2008, the performance of ING’s wealth management businesses in Australia and New Zealand was impacted by the market downturn, as well as the Australian government guarantee on bank deposits which led to significant outflows in favour of bank deposits. These developments led to the suspension of certain ING managed funds which were impacted most substantially. This was an industry-wide issue, affecting not just ING, but other companies as well.
** Total result before tax is defined as underlying result before tax including divestments and special items.
Wholesale Banking achieved a solid commercial performance in what was an extremely challenging year for the industry. Income remained fairly resilient, with good income growth in many businesses. However, overall results were negatively affected by the global financial crisis, especially in the second half of 2008 due to the unprecedented market turmoil. Wholesale Banking therefore increased its focus on reducing expenses, improving capital efficiency and controlling risk. ING’s commitment to being a full-service bank supported its market penetration, lead bank standing, and landmark deal participation in its home markets.
Total underlying income fell 14.5% to EUR 4,107 million driven by ING Real Estate and Other Wholesale Products, while income from General Lending & PCM and Structured Finance increased by 24.5% and 30.2% respectively. Underlying operating expenses remained under control, rising 0.6% to EUR 2,902 million. The underlying cost/income ratio increased to 70.7% from 60.1% in 2007.
The underlying risk-adjusted return on capital (RAROC) after tax declined to 4.9% from 19.8% in 2007. Average Economic Capital increased 34.1% to EUR 9.3 billion mainly because of the implementation of Basel II and increased market volatility.
compared with a profit of EUR 261 million in 2007. The after-tax RAROC of ING Real Estate declined to -13.3% from 32.7% in 2007.
BUSINESS DEVELOPMENTS Wholesale Banking plays a fundamentally important role within ING Group. The essence of the Group’s business is to collect customer deposits and redeploy these funds as investments. Wholesale Banking complements the Group’s business model in three ways: as a contributor of capital, as an important generator of assets, and as a source of skills and expertise. The business line generates capital that can be redeployed efficiently to high-growth businesses. It also generates high-quality assets into which ING can invest retail deposits, and provides the Group with many relevant skills in financial markets, risk and specialist finance, as well as access to the financial markets.
Focused strategy After years of improved capital efficiency, solid profit growth and expense reduction, Wholesale Banking in 2008 launched a ‘Fitter, Focused, Further’ strategy for 2008-2010, with the aim of becoming a leader in several key markets and products.
Operating expenses under control ING continues to be vigilant about costs without impairing growth opportunities. Expenses rose slightly in 2008 despite lower compliance costs and favourable currency effects. The market turmoil also resulted in additional risk costs. Wholesale Banking’s cost/income ratio excluding impairments improved significantly, putting it in line with the industry average.
The organisation has several cost containment initiatives in place to reduce operating expenses and to stimulate growth. It has also been working on re-engineering the lending process, reducing the number of full-time equivalents and streamlining support services. In 2008, Wholesale Banking reviewed and in some cases selectively decreased its client coverage model in non-core markets. ING reduced and exited certain volatile products and activities, especially in equity markets and within Financial Markets Strategic Trading. Core products have been prioritised and optimised. Financial Markets has been re-evaluating its priorities. In Operations & IT Banking (OIB), steps have been taken to contain costs and a programme has been launched to reduce further baseline costs.
Strong demand for Structured Finance Structured Finance helps companies finance large capital projects and transfer risk through various products. Key segments of expertise are Natural Resources, Telecommunications, Media, Finance and Utilities. In 2008, Structured Finance held up well due to strong demand from customers in a market where credit was reduced significantly. Both margins and the relative market position of Structured Finance continued to improve. ING continued to support clients’ funding needs during 2008. The scarcity of available financing further increased margins, especially benefiting Structured Finance in the US, but also in Western Europe and Asia. Deal flow was particularly robust in Natural Resources, where ING extended its capabilities by adding advisory teams in London and Singapore. International Trade & Export Finance again posted strong results, particularly in the commodity finance area.
In Leveraged Finance, ING led a number of European transactions, which were successfully syndicated. The number of transactions was relatively low in 2008 compared to prior years. ING was concerned about the overexpansion of the market and started to decrease its exposure from the beginning of 2007, well ahead of the summer 2007 turmoil. 2008 was much more moderate. A bigger tendency emerged towards club deals that spread the risk, and the income, over a larger group of partners. There was also downward pressure on underwriting fees.
Strong Financial Markets operational performance Financial Markets had an exceptionally strong first half and continued to show robust operational performance during the rest of 2008. Nevertheless, credit-related markdowns and impairments in the second half negatively impacted 2008’s overall performance. The client and product businesses held up well, in line with the aim to diversify away from proprietary risk businesses, including proprietary trading. Financial Markets continues to seek crossselling opportunities across product areas and client groups, including a new strategy to target emerging markets, home markets, strategic clients and global clients. ING aims to be a top-5 player in selected markets or products by taking advantage of our geographic footprint, strong brand recognition and commercial expertise and reputation. In developed markets, particularly in home markets where ING remains uniquely positioned, ING will continue to provide core products and explore selective growth initiatives.
The retail banking market became increasingly challenging in 2008. Against this backdrop, Retail Banking remained a steady performer with a high return on capital. Further progress was made in improving the customer experience and efficiency, reducing costs in the Benelux and preparing new service models. In Central Europe and Asia, ING continued to grow its activities.
The addition to the loan loss provisions doubled versus 2007 levels to EUR 401 million, mainly because of higher risk costs in the mid-corporate segment and Private Banking (as underlying collateral for loans decreased significantly), and from the inclusion of ING Bank Turkey.
ING Bank Turkey reported a loss before tax of EUR 17 million, after internal capital charges. However, its result before tax before internal capital charges was EUR 121 million. In Asia, result before tax declined 53.3% as a result of higher risk costs at Private Banking while income declined 3.2% due to lower equity markets. Profit from Private Banking operations, which is included in the respective Retail Banking regions, decreased 57.8% to EUR 111 million.
BuSINESS DEVELOPMENTS Retail Banking operates in the Benelux and in the fast-developing countries of Central Europe and Asia. Over the last year, the retail banking environment has changed dramatically, with the fight for savings intensifying and the economic slowdown becoming more visible worldwide. The successive waves of the banking crisis have led to less confidence in banks and the desire for safety as the main driver in choosing a financial institution. The winning retail banks will first of all be safe but also low cost, with simple straight forward products and transparent pricing.
In this increasingly competitive environment, ING will continue or even accelerate investments in its domestic markets by consolidating branch networks in the Benelux and moving them towards the ‘internet-first’ model with its focus on low-cost, easy transactions and strong branding. ING remains committed to growth in emerging markets but will temporise investments. In all markets ING will put more emphasis on cost reduction and de-risking in the present environment.
Competition in the Dutch savings market remained fierce and resulted in a shift from variable to relatively low-margin fixed products. ING responded by offering competitive fixed and variable savings products for both retail and business banking customers. ING managed to increase savings and deposits in 2008 by EUR 1.1 billion, or 2%.
In Belgium, ING attracted substantial inflows and new clients by introducing a range of online savings products for different target groups. The launch of the ING Lion Deposit, an online savings account, resulted in 103,000 account openings. ING also introduced the ING Long Term Account, a savings certificate with maturities varying from one to ten years. The ING Lion Fidelity account, introduced in 2007, attracted EUR 3.6 billion by the end of 2008.
Mortgage production in the Netherlands fell significantly, as demand for mortgage financing dropped sharply. ING’s focus is to keep volumes and market share stable without sacrificing margins.
ING started retail banking operations in Ukraine in 2008, based on the Romanian concept and had 20 branches by the end of 2008.
appointed and several senior ING managers were assigned to further develop risk management and improve profitability.
PrIVATE BANKING ING Private Banking suffered from the ongoing market turmoil. Assets under management remained stable during the first nine months but due to market events assets under management decreased by 9% by year-end. The crisis motivated many investors to move their assets into more conservative products, like deposits and savings. Provisioning in Asia was quite high given the exceptional market circumstances in 2008.
ING sold its Curaçao Private Banking Business in 2008, in line with its strategy to concentrate on Europe and Asia.
The focus for 2009 is on further asset gathering, concentrating on Europe and Asia and offering more competitive products, while keeping a close eye on margins and expenses.
Given the current market upheaval, our priorities are more than ever to be customer-oriented and to exceed customer expectations. Next to that, maintaining liquidity, increasing margins, controlling costs and managing risk are key. Across all regions, steps have been taken to respond to the challenging conditions while remaining open to new opportunities.
Total underlying income declined by 60% in 2008 to EUR 878 million as a result of EUR 1,891 million of impairments, primarily on the Alt-A RMBS portfolio in the US. In 2007, impairments were limited to EUR 29 million on asset-backed commercial paper in Canada. Excluding impairments, underlying income increased 24.4% to EUR 2,769 million driven by higher interest results, especially in the US. The total interest margin widened to 0.94% in 2008 from 0.75% in 2007 following rate reductions by central banks across the globe.
Underlying operating expenses increased 7.6% to EUR 1,719 million due to higher expenses related in part to customer retention and win-back campaigns, as well as the inclusion of Interhyp from August 2008. The number of full-time staff rose from 8,883 in 2007 to 9,980, of whom 479 came from Interhyp. Excluding impairments, the underlying cost/income ratio improved to 62.1% from 71.8% in 2007.
Additions to loan loss provisions 283 68 316.2 Underlying result before tax –1,125 530 –312.3% Total result before tax* –1,155 530 –317.9%
* Launch year in brackets ** Early 2009, it was decided not to launch operations in Japan.
Another source of growth is via an expansion of the product range. ING Direct aims to address the five major consumer needs: savings, mortgages, payment accounts, investment products and consumer lending. These products will only be introduced in a country if it is economically viable. Expanding the multi-product range will result in more diversified profit and also supports client retention and cross-selling opportunities.
Savings – strong competition in 2008 The savings market has become increasingly competitive, with strong competition for retail deposits in all ING Direct countries, especially as banks worldwide seek to lock in liquidity. In light of this development, one of ING Direct’s key focus points is to increase the repricing speed of assets in order to be able to track central bank rates more closely.
As the financial crisis deepened during late September/early October, consumers worldwide actively re-allocated their account balances among multiple financial institutions to maximise protection from government guarantees. This led to outflows, but also to an inflow of new customers coming over from other banks. Active rebalancing slowed after governments increased guarantee limits. From the end of October, customer behaviour returned to normal and ING Direct returned to growth.
Overall, production of funds entrusted was EUR 6.7 billion, mainly driven by strong growth in the United States. Including the impact of negative currency effects, total funds entrusted balances declined by EUR 0.5 billion to EUR 191.0 billion at year-end.
Mortgages – portfolio growth under strict criteria The own-originated mortgages portfolio grew by EUR 17.2 billion (up 18.6% from 2007), bringing the total residential mortgages portfolio to EUR 113.7 billion at year-end. ING Direct’s ownoriginated residential mortgages reached 57% of funds entrusted.
The deterioration in the US housing market led to an increase in the provision for loan losses, reflecting a higher rate of delinquencies in the mortgage market and lower recovery. Within the US mortgage portfolio, the non-performing loans (90+ Days Past Due) rose to 2.7% at the end of December. However, the mortgage portfolio continues to perform better than the US industry average for prime adjustable-rate mortgages (ARMs), which showed a rate of non-performing loans of 8.3% as at the end of November 2008.
State-of-the-art IT systems Excellent direct banking facilities require advanced IT support. ING Direct has highly integrated, 24/7 online and synchronised distribution channels. We are always looking to achieve industryleading reliability and provide flawless service to end-users and customers in order to remain competitive. In 2008, the business continued to invest in systems to ensure that they are highly secure, in addition to being flexible and cost-effective.
CONCLUSIONS AND AMBITIONS In 2008, ING Direct continued to put the customer first, and will continue to do so. Despite the market turmoil, ING Direct produced positive commercial results. It is strictly monitoring expenses, risk and capital. Given the current priorities of preserving ING’s capital position and the worsening economy, ING Direct will reduce expenses by about EUR 150 million in 2009, through lower operating and marketing expenses, and a headcount reduction of around 600 FTEs. ING Direct will continue to gradually expand the product range.
The performance of payment accounts was encouraging in 2008: 431,000 new accounts were opened in Spain, the United States Germany and Italy, bringing the total to 1.3 million accounts over 2008. Payment accounts were launched in Italy in October and 8,000 accounts had been opened by year-end. Launches are being prepared in France and Australia in 2009.
Investment products – good results at ShareBuilder Despite the ongoing financial crisis, ING Direct reported substantial net inflows of customers and funds in investment products, primarily in the US and Germany. Total balances of off-balance funds, however, declined by EUR 3.6 billion to EUR 15.1 billion as a result of lower asset prices.
ING Direct recognises the future potential of investment products and has launched initiatives in Canada and Italy.
Number of clients, total funds entrusted, residential mortgage portfolio, off-balance sheet funds
Key points > Total assets under management, which include ING Investment Management, ING Real Estate and ING Private Banking decreased by 14% to EUR 551.3 billion > Investor confidence hit hard by the global financial crisis resulting in sharply lower net inflows > ING Real Estate total business portfolio marginally lower > ING Private Banking recorded net inflows 2008 proved to be a very challenging year for the asset management industry. Sharp falls in asset values and lower net inflows had a major impact on industry profitability. Client appetite for risk almost disappeared with alternative investments such as hedge funds and private equity hit hard, and with retail clients in particular seeking sanctuary in low-risk funds or those with guarantees. ING’s investment management business was to a certain extent insulated from the global financial turmoil because of relatively stable inflows from ING’s insurance, investment and pension businesses. ING Real Estate’s total business portfolio was EUR 106 billion, marginally lower than 2007. Despite the market turmoil, ING Private Banking achieved net inflows.
FINANCIAL DEVELOPMENTS Assets under management fell by EUR 91.4 billion, or 14.2%, to EUR 551.3 billion in 2008, as a result of the sharp deterioration in financial markets. Lower asset prices for equity and fixed-income securities had an adverse impact of EUR 99.1 billion. Despite the depressed financial markets, ING recorded a net inflow of EUR 17.4 billion in 2008. All lines of business contributed to this net inflow with the exception of Insurance Europe which reported a net outflow of EUR 2.2 billion. Acquisitions and divestments had a net negative impact of EUR 6.2 billion and exchange rate movements reduced assets under management by EUR 3.6 billion.
ING INVESTMENT MANAGEMENT ING Investment Management (ING IM) is the principal asset manager of ING Group with EUR 332.5 billion in assets under management at the end of 2008 compared to EUR 390.2 billion at the end of 2007. ING’s investment management business continued to pursue its goal of strengthening its position in global asset management. Growth was constrained by the financial turmoil and the dampening impact it had on investor enthusiasm. Despite this, ING IM’s global distribution reach and strong emerging markets presence, together with its scale in fixed income, strong brand recognition and access to a global network of ING channels and flows held the company in a relatively solid position in challenging market circumstances.
The company fared relatively better in the institutional segment where it managed to maintain and in some regions attract net inflows. Retail flows were adversely affected by investors moving to lower-risk products or those with a capital guarantee.
At the end of the year, the investment management business delivered investment performance with 46% of mutual fund assets outperforming their peer median and 61% of mutual funds outperforming their benchmark on a three-year basis. Morningstar awarded 76% of ING’s ranked mutual funds with 3 stars or higher.
All three regions – Europe, Americas and Asia/Pacific continued to focus on the core strategy of delivering a wide range of innovative investment strategies to ING’s global network of businesses and third-party clients.
Insurance policy holders 19% 103.0 Institutional clients 25% 140.5 Retail clients 17% 91.6 Private banking clients 11% 62.0
This was achieved by all three working closely to leverage scale, investment expertise and best practices, in order to maximise cross-selling opportunities. An example of this was the successful distribution of ING’s European investment management Global Currency strategy in Japan in close cooperation with the investment management business in the Asia/Pacific. The fund successfully attracted EUR 1.3 billion of inflow.
In the second half of the year, as the financial crisis worsened, the investment management businesses in Europe, the Americas and Asia/Pacific focused very much on client communication, advice and client retention. There was very close cooperation among all three regions to assess market, credit and operational risk exposures as well as thorough discussions about risk mitigation scenarios.
ING IM benefited from the growth of ING’s insurance and pension businesses in Central Europe. Operations in six Central European countries serve an increasing broad spectrum of clients.
The retail side of the investment management business realigned its sales force to focus on improved client segmentation and increased traction with broker dealer investment platforms and with ING’s Retirement Services Group. Despite challenging market conditions there were several positive developments during the quarter. Separately Managed Accounts sales increased by 13% during the year from EUR 414 million to EUR 466 million, assets were added to the VP Growth and Income Fund through a merger, and the ING Global Target Payment Fund, one of the first openend managed payout funds, was launched in September.
Pomona Capital, part of the Alternative Assets Group, saw strong ongoing fundraising of EUR 860 million in the Private Equity Fund of Funds. Performance in ING’s Fund of Hedge Funds was relatively solid despite difficult market conditions and there are good prospects for the marketability of this fund. In spite of the challenging market conditions, investment management in Latin America continued to deliver strong relative investment performance across the region supporting growth in ING’s mandatory pension and annuities businesses. In its third-party business, assets under management in institutional private pension plans continued to grow offsetting weakness in retail mutual funds. In January 2009, ING launched its Chilean mutual fund company.
ING REAL ESTATE 2008 was a difficult year for ING Real Estate as the financial crisis continued to impact negatively on real estate markets around the globe. As a result, some of world’s most established real estate markets saw substantial falls in value as the readily available capital which had fuelled the strong valuation growth of previous years, dried up. Canada, Australia and the United Kingdom in particular saw substantial yield shift and valuation declines with Asia and Europe also being affected negatively during the year. In the second half of the year the prospect of recession in many major economies proved a further blow to the markets.
As the real estate markets went into reversal, ING Real Estate put in place a cost containment programme, beginning at the end of the first quarter of 2008. This resulted in full-year costs excluding impairments being only marginally (less than 1%) higher than 2007.
ING Real Estate Development At Real Estate Development it became apparent that to withstand the deteriorating markets it would need to continue to review its business and refocus its activities on major retail and regeneration projects. As a result the business withdrew from a number of projects while also deferring several projects that were in the pipeline. It continued to progress major regeneration and inner city projects across Europe, projects which were already under way and which had already passed the stringent risk criteria in place for development activities.
Asia/Pacific Assets under management fell 25% to EUR 63.6 billion. Thirdparty AuM fell by 19% to EUR 48.4 billion and proprietary business AuM declined by 39% to EUR 15.2 billion. Equity funds in the region experienced outflows, but bond funds received net inflows. Despite the uncertain economic climate, ING was successful in booking significant new and prestigious mandates with the Monetary Authority of Singapore (EUR 183 million), the Bank of Thailand (EUR 143 million), Bank Negara in Malaysia (EUR 129 million) and GSIS in the Philippines (EUR 215 million).
Goals and ambitions ING Investment Management gives ING a significant global presence through its broad offerings of a diversified mix of products with solid performance.
Both the retail and institutional sides of the businesses will continue to focus on close customer contact and are committed to working with clients to manage their investments through turbulent times.
ING IM will focus further on strengthening the organisation to capitalise fully on the recovery after the crisis. This includes enhancing operations, investment platforms and distribution capacity.
Private Banking aims to grow its assets under management by focusing on gathering assets and building a strong foundation for future revenues when the market recovers, while keeping a close eye on margins and expenses. The uncertain economic situation has stimulated many investors to move their assets into more conservative products. ING benefited from its conservative profile and from being the third largest savings bank in the world.
In the Netherlands, capitalising on the integration of Postbank and ING Bank, Personal Banking was introduced. This is a new service for clients with investments of between EUR 75,000 and EUR 500,000. The service combines the investment advice strengths of both banks and gives clients access to investment specialists. ING sold its Curaçao Private Banking Business in 2008 in line with its strategy to concentrate its activities on Europe and Asia. The focus for 2009 is on this region and offering more competitive products.
Human resources Focus on leadership and engagement in times of change
Each manager has received the WPC Survey results for their own business unit and HR is helping them interpret the results, understand the core issues and develop an action plan.
In 2008, diversity was comprehensively integrated in the WPC survey for the first time to measure employee perceptions around diversity and comparisons of engagement among diverse segments to the overall employee base.
External benchmarking of our industry peers in the last quarter of 2008 indicated that high-performing companies continued their focus on people development during times of crisis, of which diversity was an integral part. Meeting our workforce diversity objectives remained a priority in 2008. The Global Diversity Council was re-established, containing several senior executives. Diversity business plans are being introduced in several business lines and coordinated on a global level.
In 2008, ING was successful in attracting a considerable number of young talented graduates. In the Netherlands, ING was named as ‘favourite employer in the financial services industry’ by students. The financial crisis, however, will impact the recruitment process as we are bringing expenses in line with revenue expectations. This will lead to lower inflows of graduates. In addition to this, the image of the financial industry has been harmed. Hence, it will be more challenging to attract talents. At the same time the war for talent continues, making recruitment of talent even more critical.
A talent review was conducted in 2008 by each business line, covering all senior positions and talents. ING’s long-term success will depend heavily on having key talents in the right critical positions. The international mobility of staff is a necessity for a global company. A need for leaders with regional and international responsibilities and experience will remain. Retaining and motivating our key people is now more important than ever.
Investment (PRI) > Financial education initiatives around the world > Thousands of children in school via the ING
CLEAR STRATEGY Our corporate responsibility strategy is an integral part of our business and is built on our Business Principles. These principles give us guidance on matters such as the environment and human rights, as well as our responsibilities towards our stakeholders. We consider them to be the fundaments for confidence of customers, employees, investors and business partners in ING.
ING aims at taking part in society in a positive and responsible way. We have our own vision on ethical social and environmental topics, which is translated into clear policies. These apply all over the world and to all market circumstances. We continuously keep track of how stakeholders perceive ING, which issues are important to them and what we can do to meet their expectations. An open shareholder dialogue helps us to understand issues and concerns and to adapt our policies, where necessary.
Our corporate responsibility strategy is based on main focus areas which are formulated in six key pillars. This helps us to continue to focus on achieving our objectives, to measure our performance and to meet our commitment of continuous improvement. We believe that the integration of sustainability issues into our strategy is essential for our licence to operate. It contributes to our success by earning and maintaining trust, enabling us to recruit and retain talented employees, continuing strong stakeholder relationships, taking advantage of new business opportunities and managing risk.
Responsible lending and investing Performance is not only about demanding targets. Sometimes it also means refraining from a certain business activity or transaction in order to live up to our standards. We avoid business dealings that are not in line with our vision on sustainability. When making ethical choices, we take into consideration the expectation that our customers, employees, shareholders and society have of us. This has led to policies with regard to not financing cluster bombs or landmines, nor financing projects in countries such as Burma and Sudan.
In 2008, we actively sought the views of various stakeholders, not only to hold up the mirror to our own business practices, but also to exchange ideas and knowledge. Key issues that were discussed include climate change, controversial weapons and human rights.
We believe that providing additional information to educate people on financial products is a key element in empowering customers with the confidence and capacity to take more appropriate financial decisions. In our view, financial education should be complementary to adequate consumer protection and to the responsibility of treating our customers fairly. Moreover, education can only be effective if it is relevant to people’s needs. Therefore, our initiatives are developed to link in with the different phases of our customers’ lives, from buying a house to managing a pension.
We place an emphasis on investing in financial education for youth, as we believe it is important that good financial habits are developed early in life. In recent years, we have started several financial education initiatives around the world. ING Vysya Bank in India launched the portal www.kidzzbank.com to help children understand the concept of money and savings in a fun way. In Peru, ING has partnered with the Aflatoun organisation and the Peruvian Ministry of Education to advance the financial education of Peruvian children. The ING Foundation in the US has joined with charity Girls Inc. to create a pioneering initiative for high school girls. The programme aims at teaching girls how to invest. ING has also developed educational tools for its (potential) clients.
An example is the L-earn online education package from ING Australia. L-earn covers key investment topics and is relevant to people regardless of age, risk tolerance, existing wealth or current level of investment and knowledge.
Art, culture and sports Also in the fields of art, culture and sports, ING feels committed to contributing to society. Our cultural sponsorships focus on music, fine arts and design. In the Netherlands, for example, ING is the main sponsor of the Royal Concertgebouw Orchestra, the Rijksmuseum and the Zuiderzeemuseum. In 2008, an innovative approach was taken to establishing a think tank for various business problems. This group consists of young talented designers who, in cooperation with ING employees, came up with innovative, creative and useful solutions. In the field of sports, ING sponsors soccer and the ING Renault F1 Team. It has also been the title sponsor of the ING New York City marathon for several years. Business units throughout the company support various initiatives in their own communities, such as the Society for the Preservation of Nature, sponsored by ING in the Netherlands.
In 2005, ING issued a global internal environmental statement, which outlines three areas in which ING believes its direct impact on the environment is most significant and which can be controlled effectively: energy consumption, business travel and paper consumption. These three areas cause about 99% of our direct environmental footprint. Furthermore, ING was one of the first major Dutch financial institutions to be 100% carbon neutral. This was achieved in 2007. By lowering our energy consumption, using green energy and investing in renewable energy projects, we have reduced our net CO2 emission to zero.
ING has drawn up sector-specific policies to prevent or limit our indirect impact on the environment. Our financing activities, for example, may involve us indirectly in operations which can be harmful to the environment. This mainly applies to financing of the oil, gas, mining, forestry, paper and agricultural sectors.
MEASURING PERFORMANCE ING has identified ten KPIs for its CR reporting. These KPIs relate directly to the ING CR Strategy and are used by ING to measure CR performance within ING.
Diversity Percentage of women in the international management council 11.8% 10.2%
ING Chances for Children Number of children provided with access to education 111,409 124,634
General The Supervisory Board met thirteen times in 2008 of which six meetings were scheduled. Most of the ad-hoc meetings focused on the development of the financial markets crisis and the implications for ING. The unique unprecedented market circumstances required intensive interaction between the Supervisory Board and the Executive Board to support the necessary actions initiated by management to weather the crisis. Attendance in the scheduled meetings was high: only three Supervisory Board members were absent once. Due to the fact that the ad hoc meetings were called at very short notice, attendance in these meetings was somewhat lower: on average, about 75% of the Supervisory Board members were present. The Audit Committee had six meetings, while the Remuneration and Nomination Committee met five times and the Corporate Governance Committee met twice. One Audit Committee member was absent once at the Audit Committee meetings. Three members were absent once at the Remuneration and Nomination as well as at the Corporate Governance Committee meetings.
In January 2008, the Supervisory Board also held its annual full-day meeting on ING’s strategy and medium-term plan, including the related risks. The medium-term plan addresses the plans and the financial targets for each of the business lines, and for the Group as a whole. The Supervisory Board discussed and approved the medium-term plan and ING’s strategic direction. In this meeting the feedback of investors on ING over the year 2007 was also discussed.
The quarterly figures of the first three quarters 2008 were discussed in May, August and November respectively. The results of the first two quarters declined compared to the same period in 2007, but the direct impact from the financial markets crisis on ING was still limited. At the end of the third quarter, after the collapse of Lehman Brothers, financial market circumstances deteriorated sharply. Several financial institutions became distressed, one of which was Fortis. After careful consideration with the Supervisory 1.3 Our Governance
Board, ING decided not to make an offer to acquire ABN AMRO Netherlands from Fortis.
In the fourth quarter, the earnings became more and more affected through impairments on pressurised asset classes, negative revaluations and write-offs. This resulted in a first-time negative net result for the fourth quarter of 2008. The Supervisory Board met in a number of additional meetings to discuss various measures to mitigate the effects of the financial crisis on the results of ING. It was decided to take measures aimed at reducing the risks and expenses of ING, and to increase the capital position and ratios as international market expectations of capital levels had changed dramatically.
At the end of January 2009, the Supervisory Board extensively discussed and finally approved an agreement between ING and the Dutch government on an Illiquid Assets Back-up Facility covering 80% of ING’s Alt-A residential mortgage-backed securities. This transaction significantly reduced the uncertainty regarding the impact on ING of any future losses in the portfolio. In connection with this agreement, the government-recommended members of the ING Supervisory Board will have approval rights regarding the CEO appointment. Furthermore several other measures to reduce risk and costs were approved by the Supervisory Board. ING aims to close this transaction in the first quarter of 2009, but is dependent on the approval of various regulators.
The progress of the integration of ING Bank in the Netherlands and Postbank was discussed by the Supervisory Board in February, May and November 2008. The Supervisory Board extensively discussed the timelines, the dismantling of Postkantoren BV, the integration of the IT systems, the migration of customers to the new bank and possible implications of the financial crisis for the project. In February 2008, the management of Wholesale Banking gave a presentation on structured finance products and in May the annual General Meeting was evaluated.
During the regular internal meetings of the Supervisory Board, potential Supervisory Board candidates and the membership of the various Supervisory Board committees was discussed in light of the appointment of Mr. Hommen as the chairman of the Supervisory Board as of 1 January 2008. The peer group selection for assessing Executive Board remuneration and the remuneration proposals for the Executive Board were also reviewed. At the internal meeting of the Supervisory Board in November, the functioning of the Supervisory Board, its committees and its individual members and the conclusions to be drawn there from were discussed. This was done in the light of the Supervisory Board Profile and the composition of the Supervisory Board. Furthermore, the functioning of the Executive Board and the performance of the individual Executive Board members were discussed.
remuneration and nomination Committee meetings In January 2008, four Supervisory candidates were nominated for appointment by the 2008 annual General Meeting. The Remuneration and Nomination Committee also discussed the future composition of the Supervisory Board and its committees.
CompoSition of the SuperviSory Board Cor Herkströter retired as member and chairman of the Supervisory Board per 1 January 2008. Jan Hommen succeeded Cor Herkströter as chairman of the Supervisory Board and Wim Kok succeeded Jan Hommen as chairman of the Audit Committee, both as of 1 January 2008. For this reason Wim Kok did not retire in 2008. Luella Gross Goldberg retired after the 2008 annual General Meeting having stayed on one year longer.
Harish Manwani, Aman Mehta, Joan Spero and Jackson Tai were appointed as new members of the Supervisory Board at the 2008 annual General Meeting. Jan Hommen succeeded Cor Herkströter as chairman of the Remuneration and Nomination Committee and the Corporate Governance Committee. Harish Manwani and Aman Mehta each became a member of the Corporate Governance Committee. Joan Spero became a member of the Remuneration and Nomination Committee. Jackson Tai became a member of the Audit Committee, together with Piet Hoogendoorn. Claus Hoffmann stepped down from the Audit Committee and joined the Corporate Governance Committee. Lodewijk de Waal participated in the Remuneration and Nomination Committee and the Corporate Governance Committee as an observer as of November 2008 onwards.
With his background, Wim Kok had good insights into Dutch politics, and was also of great value for discussions about financial issues both nationally and internationally. The members of the Supervisory Board and the Executive Board valued his opinion in the decision-making process and would like to thank him for his strong personal contribution.
The Supervisory Board has nominated three candidates for appointment: Tineke Bahlmann, Jeroen van der Veer and Lodewijk de Waal. For the proposed appointments approval has been obtained from DNB (the Dutch central bank).
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 2009 General Meeting as part of the Annual Report. The interim dividend for 2008 was EUR 0.74 per (depositary receipt for an) ordinary share which was paid in August 2008. ING has announced that it will not pay a final dividend in May 2009 over the year 2008.
additional information For additional information, reference is made to the section on corporate governance (pages 55-66) and the Remuneration Report (pages 73-82), which are deemed to be incorporated by reference here.
This section discusses the application by ING Groep N.V. (‘ING Group’) of the Dutch Corporate Governance Code and provides information on capital and control, the Executive Board, the Supervisory Board and the external auditors. This section also serves as the ‘corporate governance statement’ referred to in article 46a of Directive 78/660/EEC.
RECENT DEVELOPMENTS Legislative and regulatory developments In December 2008, the Monitoring Committee of the Dutch Corporate Governance Code (the ‘Frijns Committee’) published an updated version of the Dutch Corporate Governance Code (‘Tabaksblat Code’ or ‘Code’), the draft of which was distributed for consultation in June 2008. The revised Code became effective on 1 January 2009.
Finally, as a result of a change in Dutch law, the term ‘general meeting of shareholders’ in the Dutch Civil Code was changed to ‘general meeting’. For the time being ING Group is not planning to change its Articles of Association to incorporate the new term, though the term is used in this Annual Report.
1.3 Our Governance rights in the General Meeting. The financial entitlements of the Securities are described in the Annual Accounts on page 122.
On 26 January 2009, ING Group reached an agreement with the Dutch State regarding an Illiquid Assets Back-up Facility covering 80% of ING’s Alt-A residential mortgage-backed securities (‘Back-up Facility’) and on 30 January 2009, its subsidiary ING Bank N.V. announced that it had issued under the Credit Guarantee Scheme of the Dutch government USD 6 billion three-year government guaranteed senior unsecured bonds (‘Bonds’).
In 2006, the percentage of votes thus cast amounted to 28% of total votes, which increased to 37.6% in 2007 and to well over 38% in 2008. Assuming that the 35% threshold will be exceeded again in the 2009 annual General Meeting, the Executive Board and the Supervisory Board will discuss the position of the Trust Ofiice at that General Meeting. The Executive Board is committed to encouraging depositary-receipt holders, particularly institutional investors, to participate in voting at the General Meeting.
Elimination of preference A shares and preference B shares In 2008 all remaining preference A shares were eliminated. Such shares were cancelled either following the repurchase of the depositary receipts of the A shares, or through redemption. Subsequently, the preference A shares and the preference B shares were removed from ING Group’s Articles of Association. As a result, all outstanding ING Group shares have voting rights proportional to their economic value as recommended under section IV.1.2 of the Dutch Corporate Governance Code.
Separate Remuneration Committee and Nomination Committee On 1 January 2009, the Remuneration and Nomination Committee of the Supervisory Board was split into a separate Remuneration Committee and a separate Nomination Committee. As recommended under section III.5.11 of the Tabaksblat Code, the Remuneration Committee will not be chaired by the chairman of the Supervisory Board.
CORPORATE GOVERNANCE CODES In compliance with the Dutch Corporate Governance Code In its corporate governance structure and practices, ING Group uses the Tabaksblat Code of 2003 as reference. The Code can be downloaded on the website of the Frijns Committee (1). The ING Group corporate governance structure described in the document ‘The Dutch Corporate Governance Code – ING’s implementation of the Tabaksblat Code for good corporate governance’ was approved by the General Meeting on 26 April 2005. As a result, ING Group is considered to be in full compliance with the Tabaksblat Code, although it does not apply all bestpractice provisions of the Code in full. The document is available on the website of ING Group (www.ing.com).
Differences between Dutch and US corporate governance practices In conformity with recent regulation from the US Securities and Exchange Commission, ING Group as a foreign private issuer, whose securities are listed on the New York Stock Exchange (‘NYSE’) must disclose in its Annual Report on Form 20-F any significant ways in which its corporate governance practices differ from those applicable to US domestic companies under the NYSE listing standards.
CAPITAL AND SHARES Capital structure, shares The authorised capital of ING Group consists of ordinary shares and cumulative preference shares. Currently, only ordinary shares are issued, while a right to acquire cumulative preference shares has been granted to the ING Continuity Foundation (Stichting Continuïteit ING). The acquisition of cumulative preference shares pursuant to the call option is subject to the restriction that, immediately after the issue of cumulative preference shares, the total amount of cumulative preference shares outstanding may not exceed one-third of the total issued share capital of ING Group (see page 69). The purpose of the cumulative preference shares is to protect the independence, the continuity and the identity of ING Group against influences which are contrary to the interests of ING Group, its enterprise and the enterprises of its subsidiaries and all stakeholders (including hostile takeovers). The ordinary shares 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 shares are held by the Trust Office. The Trust Office issues bearer depositary receipts in exchange for these shares. The depositary receipts are listed on certain stock exchanges (see page 8 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 board of the Trust Office reports on its activities through an Annual Report, which has been included on pages 67-68.
The powers delegated to the Executive Board are limited: in time: powers are delegated for a period of 18 months;• by number: ordinary shares may be issued up to a maximum • of 10% of the issued capital, or 20% in the event of a merger or takeover; and in terms of control: resolutions by the Executive Board to issue • shares require the approval of the Supervisory Board.
There are no restrictions for the transfer of depositary receipts pursuant to the Articles of Association or the conditions of administration. ING Group is not aware of the existence of any agreement under which transfer of ordinary shares or depositary receipts is restricted.
Special rights of control No special rights of control referred to in Article 10 of the EU Directive on takeover bids are attached to any share.
GENERAL MEETING Frequency, notice and agenda of General Meetings General Meetings are normally held each year in April or May, to discuss the course of business in the preceding financial year on the basis of the reports prepared by the Executive Board and the Supervisory Board, and to decide on the distribution of dividends or other distributions, the appointment and/or reappointment of members of the Executive Board and Supervisory Board (if any), other items requiring shareholder approval under Dutch law, and any other matters proposed by the Supervisory Board, the Executive Board or shareholders or holders of depositary receipts in accordance with ING Group’s Articles of Association.
This information includes the notice to the General Meeting, the agenda, the verbatim text of the proposals with an explanation and instructions on how to participate in the meeting (either in person or by proxy vote), as well as the reports of the Executive Board and the Supervisory Board. More complex proposals such as amendments to ING Group’s Articles of Association normally are not included in the notice but are made available separately on ING Group’s website and at ING Group’s head office.
Dialogue with shareholders In 2008, investors were allowed to ask questions about items on the agenda for the annual General Meeting, and they will be allowed to do so in 2009. Shareholders and holders of depositary receipts can visit the website of ING Group (www.ing.com) to submit their questions and they will be answered on the same website.
Attending General Meetings For logistical reasons, attendance at a General Meeting by shareholders and depositary receipt holders, either in person or by proxy, is subject to the requirement that ING Group be notified in advance. Instructions to that effect are included in the notice to the General Meeting.
Voting rights on shares Each share entitles the holder to cast one vote at the General Meeting. Articles of Association do not restrict the voting rights on any class of shares of ING Group. ING Group is not aware of any contract under which voting rights on any class of its shares are restricted.
Voting on depositary receipts Although the depositary receipts do not formally have any voting rights, holders of depositary receipts, in practice, rank equally with shareholders with regard to voting. The Trust Office will, subject to certain restrictions, grant a proxy to a holder of depositary receipts for ordinary shares to the effect that such holder may, in the name of the Trust Office, exercise the voting rights attached to the number of its shares that corresponds to the number of depositary receipts held by such holder of depositary receipts.
The Trust Office has discretion to vote in respect of shares for which it has not issued proxy votes to holders of depositary receipts and has not received any voting instructions. Under its conditions of Administration, the Trust Office is required to promote the interests of all holders of depositary receipts, irrespective of whether they attend the General Meeting, also taking into account the interests of ING Group, the businesses of ING Group and its group companies and all other ING Group stakeholders in voting such shares, to ensure that all these interests are given as much consideration and protection as possible.
Proxy voting facilities ING Group is a member of the Stichting Communicatiekanaal Aandeelhouders, through which participating depositary receipt holders can give voting instructions to the Trust Office. ING Group provides a similar proxy voting facility to international institutional investors. In addition, ING Group solicits proxies from its American Depositary Receipt (‘ADR’) holders in line with common practice in the United States.
Voting proxy forms for shareholders and voting instruction forms for depositary receipt holders who do not participate in the Stichting Communicatiekanaal Aandeelhouders are made available on ING Group’s website. The submission of these forms is subject to additional conditions which are specified in the forms themselves.
Main powers of the General Meeting The main powers of the General Meeting are to decide on: the appointment, suspension and dismissal of members of the • Executive Board and of the Supervisory Board, subject to a binding nomination or a proposal of the Supervisory Board; the adoption of the annual accounts;• the declaration of dividends, subject to the power of the • Executive Board to make – with approval of the Supervisory Board – reservations, and the declaration of other distributions, subject to a proposal by the Executive Board which was approved by the Supervisory Board; the appointment of the external auditor;• an amendment of the Articles of Association, a legal merger • or division of ING Group, and to dissolve or liquidate ING Group, all subject to a proposal by the Executive Board which was approved by the Supervisory Board; the issue of shares or rights to shares, the restriction or exclusion • of pre-emptive rights of shareholders, and to delegate these powers to the Executive Board, subject to a proposal by the Executive Board which was approved by the Supervisory Board, and to authorise the repurchase of outstanding shares and to • cancel shares.
EXECUTIVE BOARD Appointment and dismissal Members of the Executive Board are appointed by the General Meeting from a binding list to be drawn up by the Supervisory Board. This list shall mention at least two candidates for each vacancy and if not, the list will be non-binding. The General Meeting may declare the list non-binding by a majority resolution supported by at least one-third of the issued share capital.
Candidates for appointment to the Executive Board must comply with the expertise and reliability requirements set out in the Wet financieel toezicht (Dutch Financial Supervision Act). Members of the Executive Board may be suspended or dismissed at any time by a majority resolution at the General Meeting. A resolution to suspend or dismiss members of the Executive Board that has not been introduced by the Supervisory Board needs the support of at least one-third of the issued capital.
Function of the Executive Board The Executive Board is responsible for the management of the company, which includes the responsibility for achieving the company’s aims and for the company’s results, as well as for determining the company’s strategy and policy. It also includes the day-to-day management of the company and its business lines (Insurance Europe, Insurance Americas, Insurance Asia/Pacific, Wholesale Banking, Retail Banking and ING Direct). The organisation, powers and modus operandi of the Executive Board are detailed in the Executive Board Charter, which was approved by the Supervisory Board. The Executive Board Charter is available on the ING Group website (www.ing.com).
Profile of members of the Executive Board The Supervisory Board has drawn up a profile to be used as a basis for selecting members of the Executive Board. This Executive Board profile was submitted for discussion to the annual General Meeting in 2005. It is available at the ING Group head office and on the ING Group website (www.ing.com).
Remuneration and share ownership Details of the remuneration of members of the Executive Board, including shares and/or option rights granted to them, together with information pertaining to such decisions, are provided in the Remuneration Report, starting on page 73. 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).
reported, with the exception of information on any loans that may have been granted to them (see page 80). In all these cases, the company complies with the best-practice provisions of the Tabaksblat Code.
Eli P. Leenaars (Born 1961, Dutch nationality, male; appointed in 2004, term expires in 2012) Eli Leenaars studied Civil Law at the Catholic University of Nijmegen and received an LLM from the European University Institute in Florence, Italy and attended the Harvard Graduate School of Business in Boston. After a traineeship at ABN AMRO, he joined ING in 1991, where he held various management positions, including chairman of ING Poland and of ING Latin America. He was appointed a member of the Executive Board of ING Group in April 2004. He is responsible for Retail Banking and Private Banking. He is also in charge of Operations/IT.
Koos (J.)V. Timmermans, CRO (Born 1960, Dutch nationality, male; appointed in 2007, term expires in 2011) Koos Timmermans graduated from Erasmus University in Rotterdam with a master’s degree in economics. Until 1991 he worked at ABN AMRO in the field of derivatives. For IBM’s European treasury he was stationed in Ireland. Koos Timmermans joined ING in 1996. He performed various roles: head of Treasury ING Insurance, head of Corporate Market Risk Management and from 2006-2007 he was deputy CRO of ING Group, until his appointment to the Executive Board. Koos Timmermans is responsible for ING’s risk departments including compliance.
Changes in the composition Michel Tilmant stepped down from the Executive Board on 26 January 2009. He will be succeeded as chairman of the Executive Board by Jan Hommen (born 1943, Dutch nationality, male) upon his appointment to the Executive Board. Jan Hommen will be nominated for appointment to the Executive Board at the 2009 annual General Meeting. In the intervening months, Eric Boyer will be acting chairman of the Executive Board.
John Hele will leave ING on 31 March 2009. At the 2009 General Meeting, Patrick Flynn (born 1960, Irish nationality, male) will be nominated for appointment to the Executive Board. More information can be found in the convocation for the 2009 General Meeting, available on the ING Group website (www.ing.com).
SUPERVISORY BOARD Appointment and dismissal Members of the Supervisory Board are appointed by the General Meeting from a binding list to be drawn up by the Supervisory Board. This list shall mention at least two candidates for each vacancy, failing which the list will be non-binding. The list will also be non-binding pursuant to a resolution to that effect of the General Meeting adopted by an absolute majority of the votes cast which majority represents more than one-third of the issued share capital. Candidates for appointment to the Supervisory Board must comply with the reliability requirements set out in the Wet financieel toezicht (Dutch Financial Supervision Act).
Candidates thus recommended by the Dutch State will be nominated, by way of a binding nomination, for appointment at the next annual General Meeting, unless one or more specified situations would occur. These include that: the candidate is not fit and proper to discharge his duties as a • Supervisory Board member; upon appointment the composition of the Supervisory Board • would not be appropriate and/or not be in accordance with the Supervisory Board profile; appointment would be incompatible with any provision of the • ING Group’s Articles of Association, its Supervisory Board Charter, any principle or best-practice provision of the Dutch
Corporate Governance Code as applied by ING Group and/or any other generally accepted corporate governance practice or requirement which is applicable to ING Group as an internationally listed company the relevant candidate has a structural conflict of interest with • ING Group; and the Dutch central bank refuses to issue a statement of “no • objection” against the appointment of the relevant candidate.
The Audit Committee assists the Supervisory Board in monitoring the integrity of the financial statements of ING Group, ING Verzekeringen N.V. and ING Bank N.V., in monitoring the compliance with legal and regulatory requirements, and in monitoring the independence and performance of ING’s internal and external auditors. On 31 December 2008, the members of the Audit Committee were: Wim Kok (chairman), Peter Elverding, Piet Hoogendoorn, Godfried van der Lugt and Jackson Tai.
The (new) Remuneration Committee advises the Supervisory Board, among other things, 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. As of 1 January 2009, the members of the Remuneration Committee were: Eric Bourdais de Charbonnière (chairman), Piet Klaver, Joan Spero and Karel Vuursteen.
The (new) Nomination Committee advises the Supervisory Board, among other things, on the composition of the Supervisory Board and Executive Board. As of 1 January 2009, members of the Nomination Committee were: Jan Hommen (chairman), Eric Bourdais de Charbonnière, Peter Elverding, Piet Klaver, Joan Spero and Karel Vuursteen.
1.3 Our Governance reappointed for two four-year terms, based on a proposal from the Supervisory Board to the General Meeting.
INFORMATION ON MEMBERS OF THE SUPERVISORY BOARD Jan H.M. Hommen, chairman (until 27 April 2009) (Born 1943, Dutch nationality, male; appointed in 2005, term expires in 2009) Former vice-chairman and CFO of the Board of Management of Royal Philips Electronics.
Peter A.F.W. Elverding (chairman from 27 April 2009) (Born 1948, Dutch nationality, male; appointed in 2007, term expires in 2011) Former chairman of the Managing Board of Directors of Royal DSM N.V. and former vice-chairman of the Supervisory Board of De Nederlandsche Bank N.V. (Dutch Central Bank). Other business activities: chairman of the Supervisory Board of Océ N.V. (listed company). Member of the Supervisory Board of SHV Holdings N.V. Vice-chairman of the Supervisory Board of Q-Park N.V. Member of the Supervisory Board of Koninklijke FrieslandCampina N.V. Chairman of the Supervisory Board of Maastricht University and member of the Supervisory Board of the cross-border University of Limburg.
Henk W. Breukink (Born 1950, Dutch nationality, male; appointed in 2007, term expires in 2011) Former managing director of F&C and country head for F&C Netherlands (asset management firm). Other business activities: non-executive/vice-chairman of VastNed Offices/Industrial (real estate fund) and non-executive director of F&C hedge funds, Ireland (listed companies). Non-executive director of Heembouw Holding B.V. and chairman of the Supervisory Board of Modulus VastGoed Ontwikkelingen. Member of the Supervisory Board of Omring (health care institution) and HaagWonen (housing corporation). Also associated as coach with TEC (Top Executive Coaching).
Claus Dieter Hoffmann (Born 1942, German nationality, male; appointed in 2003, term expires in 2011) Former chief financial officer of Robert Bosch GmbH. Managing partner of H+H Senior Advisors, Stuttgart. Other business activities: chairman of the Supervisory Board of EnBW AG (listed company). Member of the Supervisory Board of de Boer Structures Holding B.V. Chairman of the Charlottenklinik Foundation (hospital). Chairman of the Board of Trustees (Vereinigung der Freunde) of Stuttgart University.
Piet C. Klaver (Born 1945, Dutch nationality, male; appointed in 2006, term expires in 2010) Former chairman of the Executive Board of SHV Holdings N.V. Other business activities: chairman of the Supervisory Board of TNT N.V. (listed company). Chairman of the Supervisory Board of each of Dekker Hout Groep B.V., Credit Yard Group BV and Jaarbeurs Holding B.V. Member of the Supervisory Board of SHV Holdings N.V. and Dura Vermeer Groep N.V. Member of the African Parks Foundation. Chairman of the Supervisory Board of Utrecht School of the Arts.
Wim Kok (until 27 April 2009) (Born 1938, Dutch nationality, male; appointed in 2003, retirement in 2009) Former Minister of Finance and Prime Minister of the Netherlands. Other business activities: non-executive member of the Board of Directors of Royal Dutch Shell plc and member of the Supervisory Board of TNT N.V. (listed companies). Member of the Supervisory Board of KLM Royal Dutch Airlines. Chairman of the Supervisory Board of the Anne Frank Foundation, Amsterdam and of Het Nationale Ballet, Amsterdam. Member of the Supervisory Board of Het Muziektheater, Amsterdam and of the Rijksmuseum, Amsterdam. Chairman of the Supervisory Board of the Netherlands Cancer Institute – Antoni van Leeuwenhoek Hospital. Member of the Board of Start Foundation.
Godfried J.A. van der Lugt (Born 1940, Dutch nationality, male; appointed in 2001, term expires in 2009) Former chairman of the Executive Board of ING Group (retired in May 2000). Other business activities: chairman of the Supervisory Board of Stadsherstel Amsterdam NV. Chairman of the Advisory Board of Kasteel De Haar and of R.C. Oude Armenkantoor. Member of the Investment Advisory Committee of Stichting Instituut GAK.
Harish Manwani (Born 1953, Indian nationality, male; appointed in 2008, term expires in 2012) President Unilever Asia, Africa, Central & Eastern Europe. Other business activities: non-executive chairman of Hindustan Unilever Ltd. Member of the Executive Board of Indian School of Business.
Joan E. Spero (Born 1944, American nationality, female; appointed in 2008, term expires in 2012) Former Executive Vice-President Corporate Affairs and Communications of American Express Company. Former Under Secretary Economic Business & Agricultural Affairs, US State Department. Other business activities: non-executive director of IBM Corporation. President of Doris Duke Charitable Foundation. Member of the International Advisory Board of Toyota Motor Corporation. Trustee of Columbia University, Council on Foreign Relations and Trustee of Wisconsin Alumni Research Foundation.
Karel Vuursteen (Born 1941, Dutch nationality, male; appointed in 2002, term expires in 2010) Former chairman of the Executive Board of Heineken N.V. Other business activities: vice-chairman of the Supervisory Board of Akzo Nobel N.V., chairman of the Supervisory Board of TomTom N.V. and member of the Supervisory Board of Henkel KGaA (listed companies). Member of the Board of Directors of Heineken Holding N.V. Member of the Advisory Board of CVC Capital Partners. Chairman of World Wild Life Fund Netherlands and of the Concertgebouw Fund Foundation. Member of the Supervisory Board of Nyenrode Foundation.
FINANCIAL REPORTING A description of the main features of ING Group’s internal control and risk management systems in relation to the financial reporting process is included in the statement with respect to Section 404 Sarbanes-Oxley Act on page 71, which is deemed to be included by reference here.
CHANGE OF CONTROL PROVISIONS Legal provisions Under the terms of the Dutch Act on Financial Supervision a declaration of no objection from the Dutch Minister of Finance must be obtained by anyone wishing to obtain or hold a participating interest of at least 10% respectively in ING Group or to exercise control to this extent via a participating interest in ING Group. 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.
Change of control clauses in important contracts ING Group is not a party to any material agreement, which becomes effective, or is being amended or terminated subject to the condition of a change of control of ING Group following a public bid defined in section 5:70 of the Financial Supervision Act. ING Group subsidiaries have customary change of control arrangements in contracts related to various business activities, such contracts including joint venture agreements, letters of credit and other credit facilities, reinsurance contracts and futures and option trading contracts. Following a change of control of ING Group (whether or not as the result of a public bid), such contracts may be amended or terminated, leading to, for example, an obligatory transfer of the interest in the joint venture, early repayment of amounts due, loss of credit facilities or reinsurance cover and liquidation of outstanding futures and option trading positions.
Severance payments to Executive Board members The employment contracts with the members of the Executive Board provide for severance payments, which are to become due in case of termination of the contract in connection with a public bid defined in section 5:70 of the Dutch Financial Supervision Act. With respect to the amounts due, there is no difference as to whether termination of the contract would be in connection with a public bid or not.
AMENDMENT OF THE ARTICLES OF ASSOCIATION The Articles of Association of ING Group may be amended in accordance with a resolution of the General Meeting, adopted with a majority of two-thirds of the votes cast in a meeting in which two-thirds of the issued share capital is present or represented. The resolution of the General Meeting must be proposed by the Executive Board; the Executive Board proposal must be approved by the Supervisory Board.
During the 2008 reporting year the Board of ING Trust Office (the ‘Board’) held five meetings.
On 4 March 2008 the Board met to discuss among others corporate governance developments, the composition of the Board, the independence of ING Trust Office and its position in general. During this meeting the Board also prepared for the annual General Meeting of ING Group of 22 April 2008.
On 2 April 2008 the Board held a meeting to discuss among others the 2007 balance sheet and statement of income and expenditure of ING Trust Office, the power of attorney to the secretary of ING Trust Office, the amendment of the Articles of Association of ING Trust Office and the amendment of the Trust Conditions. During this meeting the Board also prepared for the annual General Meeting of ING Group of 22 April 2008. Prior to this meeting the Executive Board and Supervisory Board of ING Groep discussed with the Board the activities and performance of ING Group over 2007 on the basis of the press release of 20 February 2008 on the 2007 figures.
The last meeting was held on 3 December 2008. In this meeting the Board discussed among others the amendment of the Articles of Association of ING Trust Office, the composition of the Board, the statements regarding independence of the members of the Board, the agreement regarding reimbursement of costs between ING Trust Office and ING Group and corporate governance developments. During this meeting the Board also looked back at the annual General Meeting of ING Group of 22 April 2008 and looked forward to the annual General Meeting of ING Group of 27 April 2009. Prior to this meeting the Executive Board and Supervisory Board of ING Group discussed with the Board the activities and performance of ING Group over the first nine months of 2008 as published on 12 November 2008.
ING Trust Office, represented by the Board, attended the 2008 annual General Meeting of ING Group and answered various questions. ING Trust Office voted in favour of all agenda items for the shares for which it had received no voting instructions.
During the reporting year 2008 all issued preference A shares in the share capital of ING Group were cancelled. Given said cancellation and the fact that there were no preference B shares in the share capital of ING Group outstanding and there will be no need to issue preference B shares in the future, the Articles of Association of ING Trust Office and the Trust Conditions were amended, as a result of which all provisions with respect to the preference A shares and preference B shares were deleted.
The Board currently consists of: Jan Veraart, chairman, former chairman of the Executive Board of Hollandsche Beton Groep N.V.; Huib Blaisse, lawyer and partner at Blaisse Advocaten; Paul Frentrop, Head Corporate Governance APG Groep N.V.; Carel van den Driest, former chairman of the Executive Board of Koninklijke Vopak N.V.; Herman Hazewinkel, former chairman of the Executive Board of Koninklijke Volker Wessels Stevin N.V.
A call-option agreement concluded between ING Continuity Foundation and ING Groep N.V. (‘ING Group’) vests ING Continuity Foundation with the right to acquire cumulative preference shares in the share capital of ING Group up to a maximum of 4.5 billion cumulative preference shares. The acquisition of cumulative preference shares by ING Continuity Foundation is subject to the restriction that, immediately after the issue of cumulative preference shares, the total amount of cumulative preference shares may not exceed one third of the total issued share capital of ING Group. If new shares other than cumulative preference shares are subsequently issued, ING Continuity Foundation may again exercise its right, subject to the provisions of the preceding sentence. On acquisition of cumulative preference shares, at least 25% of the nominal value must be paid up on said shares.
As required by section 5:25c paragraph 2(c) of the Dutch Financial Supervision Act, each of the signatories hereby confirms that to the best of his or her knowledge: the ING Groep N.V. 2008 Annual Accounts give a true and fair • view of the assets, liabilities, financial position and profit or loss of ING Groep N.V. and the enterprises included in the consolidation taken as a whole; the ING Groep N.V. 2008 Annual Report gives a true and fair • view of the position at the balance sheet date, the development and performance of the business during the financial year 2008 of ING Groep N.V. and the enterprises included in the consolidation taken as a whole, together with a description of the principal risks ING Groep N.V. is being confronted with.
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 long-established Business Principles and a strong internal-control culture, which all staff must adhere to. SOX 404 activities are organised along the lines of the governance structure, and involve the participation of senior management across ING. Following the SOX 404 process, ING is in the position to publish an unqualified statement which denotes that the company’s internal control over financial reporting is effective as of 31 December 2008. The SOX 404 statement by the Executive Board is included below, followed by the report of the external auditor.
Our internal control over financial reporting includes those policies and procedures that: pertain to the maintenance of records that, in reasonable detail, • accurately and fairly reflect the transactions and dispositions of the assets of ING; provide reasonable assurance that transactions are recorded • as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorisations of our management and directors; and provide reasonable assurance regarding prevention or timely • detection of unauthorised acquisition, use or disposition of our assets that could have a material effect on our financial statements.
The Executive Board assessed the effectiveness of our internal control over financial reporting as of 31 December 2008. In making this assessment, the Executive Board performed tests based on the criteria of the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework. Based on the Executive Board’s assessment and those criteria, the Executive Board concluded that the company’s internal control over financial reporting is effective as of 31 December 2008.
We have audited ING Groep N.V.’s internal control over financial reporting as of 31 December 2008, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). ING Groep N.V.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of the Executive Board on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
In our opinion, ING Groep N.V. maintained, in all material respects, effective internal control over financial reporting as of 31 December 2008, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of ING Groep N.V. as of 31 December 2008, the consolidated profit and loss account, consolidated statement of cash flows and consolidated statement of changes in equity for the year then ended. Our report dated 16 March 2009 expressed an unqualified opinion thereon.
GENERAL POLICY SENIOR MANAGEMENT REMUNERATION Background The prime objective of the remuneration policy is to enable the company to recruit and retain qualified and expert leaders. The remuneration package supports a performance-driven culture that aligns ING’s objectives with those of its stakeholders. ING rewards performance on the basis of previously determined, challenging, measurable and influenceable short-term and long-term targets.
ING’s remuneration policy is based on five key principles that apply throughout 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. The remuneration package includes variable-pay components • (short-term and long-term incentives) to ensure that executive remuneration is linked to ING’s short-term and long-term business performance. To enhance the effectiveness of the short-term incentive plan, • clear, measurable and challenging targets are set at the beginning of each year. Long-term incentives ensure a focus on longer-term strategic • targets and create alignment of management with the interests of shareholders. A broad selection of ING’s senior leaders participates in the plan to ensure a common focus on ING’s overall performance.
1.3 Our Governance 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 2008 STIP for the members of the Executive Board and top senior management across the organisation (the top 200 executives) to measure performance at Group level. These financial parameters are: underlying net profit per share, underlying operating expenses and economic profit/embedded value profit (excluding financial variances). The quantitative elements of the targets are considered stock price sensitive and competition sensitive; accordingly these are not disclosed.
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 senior management. For this layer, directly reporting to the Executive Board, the emphasis is on individual performance in their 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 approved during the General Meeting on 27 April 2004.
The Supervisory Board reviews the peer group before each new three-year performance period. The Supervisory Board has determined that for the 2009-2011 performance period Fortis and AIG will be replaced by KBC N.V. and Manulife Financial Corporation respectively. Considering the market turmoil, the Supervisory Board will also continue to monitor the composition of the peer group for existing performance cycles. Any replacement of a company in the peer group will be based upon a thorough replacement process using the above objective criteria to determine the performance peer group.
The Executive Board members are not allowed to sell depositary receipts obtained either through the stock-option or the performance shares plan within a period of five years from the grant date. They are only allowed to sell part of their depositary receipts at the date of vesting to pay tax over the vested performance share award. Depositary receipts obtained from exercised stock options may only be sold within a period of five years from the grant date of the options to pay tax over the exercised award.
Remuneration levels Every year a compensation benchmark analysis is performed based upon a peer group of companies. This peer group, established in 2008, is a group of European financial services companies. The peer group reflects ING’s business structure and environment. ING competes with these companies for executive talent. The following companies are part of this compensation peer group: Aegon, Allianz, AXA, Banco Santander, Barclays, BNP Paribas, Credit Suisse, Deutsche Bank, Fortis, HSBC, Royal Bank of Scotland, Société Générale, Unicredito Italiano, and Zurich Financial Services.
Executive Board short-term incentive plan 2008 The target STI payout over 2008 was set at 100% of the individual Executive Board member’s base salary. The final award is based on the achievement of a set of common Group financial targets and specific individual qualitative and quantitative objectives for each Executive Board member. Specifically, 70% of the total award is based on the Group’s underlying net profit per share, underlying operating expenses and economic profit/embedded value profit (excluding financial variances), while the remaining 30% is based on individual objectives set at the beginning of the year by the chairman of the Executive Board and approved by the Remuneration and Nomination Committee of the Supervisory Board.
Under the terms of the agreement reached with the Dutch State to strengthen ING’s capital position, the individual Executive Board members will not receive their 2008 LTI grant.
Tom McInerney is entitled to receive a conditional share award on the same grant date as the other long-term incentive awards. The conditional share award would be 100% vested four years after the grant date with the condition being an active employment contract at the date of vesting. This award is part of Tom McInerney’s employment contract to align his total remuneration with the market practice of senior executives in the United States. Tom McInerney will not receive his conditional share award to be awarded in 2009 for the 2008 performance year.
The performance shares granted in 2006 had a three-year performance period of 2006–2008 and will vest in 2009. The actual results of 43% are based upon ING’s TSR ranking of 15 within the designated peer group. The results were determined by an independent third party. ING’s external auditor has reviewed the calculations performed. For members of the Executive Board who received an award as an Executive Board member in 2006, such award will vest in the final number of performance shares in May 2009. For the other senior leaders who participated in the 2006–2008 performance share award, such award vested in March 2009.
Short-term performance-related bonus 0 2,001 2,299 Total cash compensation 1,353 3,290 3,588
Base salary 603 412 Short-term performance-related bonus 0 621 Total cash compensation 603 1,033
Short-term performance-related bonus 0 1,425 1,157 Total cash compensation 879 2,371 1,847
fair market value at grant in thousands of euros 2008 2007 2006
(3) Dick Harryvan, Tom McInerney, Hans van der Noordaa and Jacques de Vaucleroy were appointed to the Executive Board on 25 April 2006. The figures for these members reflect compensation earned in their capacity as Executive Board members.
(5) Tom McInerney is entitled to receive conditional shares on the same grant date as the other long-term incentive awards. The conditional shares will be 100% vested four years after the grant date with the condition being an active employment contract. The conditional shares are provided to align Tom McInerney’s total remuneration with US market practice. Tom McInerney will not receive his conditional share award for the 2008 performance year.
Number of options 0 42,228 Number of performance shares 0 10,007 Fair market value of long-term incentive (2) 0 486
Number of options 0 96,875 70,695 Number of performance shares 0 22,957 14,790 Number of conditional shares 0 54,312 37,633 Fair market value of long-term incentive (2) 0 2,571 2,201
The fair market value of long-term incentive awards of former members of the Executive Board who are not included in the above table amounted to nil in 2008 and 2007, and to EUR 938 thousand in 2006.
Information on the options outstanding and the movements during the financial year of options held by the members of the Executive Board as at 31 December 2008 (continued)
Pension costs of the individual members of the Executive Board (1)
Michel Tilmant 971 874 689 (1) For reasons of comparison, the company pension expenses are recalculated under IAS 19 with general assumption setting for 2006 to 2008.
(2) Dick Harryvan, Tom McInerney, Hans van der Noordaa and Jacques de Vaucleroy were appointed to the Executive Board on 25 April 2006. The figures for these members reflect pension costs in their capacity as Executive Board members.
(3) John Hele and Koos Timmermans were appointed to the Executive Board on 24 April 2007. The figures for these members reflect pension costs in their capacity as Executive Board members.
Pension costs of former members of the Executive Board who are not included in the above table amounted to nil in 2008, to EUR 1,386 thousand in 2007, and to EUR 4,954 thousand in 2006.
Loans and advances to the individual members of the Executive Board
Average interest rate Repayments amounts in thousands of euros 2008 2007 2006
(1) John Hele’s loans and advances have been translated from US dollars to euros.
ING DEPOSITARY RECEIPTS fOR SHARES HELD BY EXECUTIVE BOARD MEMBERS Executive Board members are permitted to hold ING depositary receipts for shares as a long-term investment. The table below shows the holdings by members of the Executive Board.
ING depositary receipts for shares held by members of the Executive Board number of shares 2008 2007 2006
Hans van der Noordaa 2,930 2,000 Koos Timmermans 2,546 2,000 Jacques de Vaucleroy 37,326 27,740
In December 2008, the Monitoring Committee Dutch Corporate Governance Code (the ‘Frijns Committee’) published an updated and revised version of the Tabaksblat Code in its definitive form; a proposal thereto was disclosed for consultation purposes in June 2008. The revised Tabaksblat Code became effective as of 1 January 2009. ING Group is now considering the implications of the revised Tabaksblat Code on the remuneration policy and to what extent these can be implemented. As recommended by the Frijns Committee, the implementation of the revised Tabaksblat Code will be discussed in the 2010 General Meeting as a separate agenda item.
Executive Board base salary 2009 For 2009 base salary levels will be frozen.
Executive Board long-term incentive plan 2009 Under the terms of the Illiquid Assets Back-up Facility agreed with the Dutch State in January 2009, the individual Executive Board members will not receive a 2009 long-term incentive award.
REMUNERATION SUPERVISORY BOARD Remuneration The annual remuneration of the Supervisory Board members amounts to: chairman EUR 75,000, vice-chairman EUR 65,000, other members EUR 45,000. In addition to the remuneration each member receives an expense allowance. For the chairman and vicechairman the annual amount is EUR 6,810. For the other members the amount is EUR 2,270.
(5) Piet Hoogendoorn is a member of the Supervisory Board as of June 2007. The compensation figure for 2007 reflects the partial year as member of the Supervisory Board.
(6) Piet Klaver is a member of the Supervisory Board as of April 2006. The compensation figure for 2006 reflects the partial year as member of the Supervisory Board.
Lodewijk de Waal is nominated for appointment as a member of the Supervisory Board at the General Meeting in 2009. Under the terms of the agreement reached with the Dutch State in October 2008 to strengthen ING’s capital position, and anticipating his appointment in 2009, he has been acting as an observer in the Supervisory Board as from November 2008. Lodewijk de Waal has received remuneration, expense allowances and attendance fees in line with the Remuneration policy of the Supervisory Board.
Loans and advances to Supervisory Board members As at 31 December 2008, 2007 and 2006, there were no loans and advances outstanding to members of the Supervisory Board.
ING depositary receipts for shares and options held by Supervisory Board members 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 2008.
Investments in associates 6 4,355 5,014 Real estate investments 7 4,300 4,829 Property and equipment 8 6,396 6,237
Investment result for risk of policyholders 32,408 –1,079 –2,702 Reinsurance recoveries –1,754 –1,906 –2,175
Result before tax –1,487 11,043 9,940 Adjusted for – depreciation 1,492 1,382 1,298 – deferred acquisition costs and value of business acquired –444 –1,338 –1,317 – increase in provisions for insurance and investment contracts 16,363 26,494 17,689 – addition to loan loss provisions 1,280 125 103 – other 6,955 –3,897 –4,778 Taxation paid –49 –1,347 –1,739 Changes in – amounts due from banks, not available on demand 7,162 –8,690 3,117 – trading assets 32,386 2,997 –48,168 – non-trading derivatives –2,020 261 –179 – other financial assets at fair value through profit and loss 3,174 –4,878 3,930 – loans and advances to customers –76,215 –75,501 –59,800 – other assets –11,847 –6,534 1,218 – amounts due to banks, not payable on demand 13,210 15,414 1,925 – customer deposits and other funds on deposit 6,831 28,640 47,521
– other financial liabilities at fair value through profit and loss 13,016 44 2,405 – other liabilities –485 6,577 –2,416 Net cash flow from operating activities 12,823 11,708 9,570
Investments and advances – group companies –1,725 –3,215 –2,358 – associates –1,034 –1,221 –449 – available-for-sale investments –228,291 –284,006 –295,086 – held-to-maturity investments –314 – real estate investments –905 –876 –1,588 – property and equipment –708 –575 –568 – assets subject to operating leases –1,401 –1,393 –1,164 – investments for risk of policyholders –64,735 –54,438 –44,116 – other investments –881 –316 –250 Disposals and redemptions – group companies 1,590 1,012 490
– available-for-sale investments 225,539 281,198 271,983 – held-to-maturity investments 1,640 822 1,343 – real estate investments 415 309 1,294 – property and equipment 137 151 292 – assets subject to operating leases 428 417 402 – investments for risk of policyholders 59,251 47,136 37,945
Unrealised revaluations after taxation –18,437 –18,437 –48 –18,485 Realised gains/losses transferred to profit and loss 2,476 2,476 2,476 Changes in cash flow hedge reserve 746 746 746 Transfer to insurance liabilities/DAC 2,193 2,193 2,193 Employee stock option and share plans 31 31 31 Issuance costs incurred –20 –20 –20 Exchange rate differences (3) –952 –952 –134 –1,086 Other revaluations –23 –23 Total amount recognised directly in equity –13,963 –13,963 –205 –14,168
Issue of non-voting equity securities 10,000 10,000 Changes in the composition of the group –455 –455 Dividends (4) –3,600 –3,600 –32 –3,632 Purchase/sale of treasury shares –44 –1,986 –2,030 –2,030 Exercise of warrants and options 5 443 448 448
The following standards and interpretations became effective in 2008: International Financial Reporting Interpretation Committee (IFRIC) 12 ‘Service Concession Arrangements’, IFRIC 14 ‘IAS 19 – The Limit of a Defined Benefit Asset, Minimum Funding Requirements and their Interaction’ and ‘Reclassification of Financial Assets: Amendments to IAS 39 Financial Instruments: Recognition and Measurement and IFRS 7 Financial Instruments: Disclosures’. None of these recently issued standards and interpretations has had a material effect on equity or result for the year.
As explained in the section ‘Principles of valuation and determination of results’ and in Note 23 ‘Derivatives and hedge accounting’ ING Group applies fair value hedge accounting to portfolio hedges of interest rate risk (macro hedging) under the EU ‘carve out’ of IFRS-EU.
In addition, the adequacy of insurance provisions, 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, and mortality and morbidity trends. The use of different assumptions in this test could lead to a different outcome.
See the ‘Risk management’ section for a sensitivity analysis of net result and shareholders’ equity to insurance, interest rate, equity, foreign currency and real estate risks. These sensitivities are based on changes in assumptions that management considers reasonably likely at the balance sheet date.
The identification of impairment and the determination of the recoverable amount are an inherently uncertain process involving various assumptions and factors including the financial condition of the counterparty, expected future cash flows, observable market prices and expected net selling prices.
Future cash flows in a portfolio of financial assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the assets in the portfolio and historical loss experience for assets with credit risk characteristics similar to those in the portfolio. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. Current observable data may include changes in unemployment rates, property prices and commodity prices. The methodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience.
FAIR VALUES OF REAL ESTATE Real estate investments are reported at fair value; all changes in fair value are recognised directly in the profit and loss account. The fair value of real estate investments is based on regular appraisals by independent qualified valuers. The fair values represent the estimated amount for which the property could be exchanged on the date of valuation between a willing buyer and willing seller in an at-arm’slength transaction after proper marketing wherein the parties each acted knowledgeably, prudently and without compulsion. The valuations are based on the assumption that the properties are let and sold to third parties based on the actual letting status. The valuations are based on discounted cash flow analysis of each property. The discounted cash flow analyses are based on calculations of the future rental income in accordance with the terms in existing leases and estimations of the rental values when leases expire.
The valuation of real estate involves various assumptions and techniques. The use of different assumptions and techniques could produce significantly different revaluations.
In certain markets that have become significantly less liquid or illiquid, the range of prices for the same security from different price sources can be significant. Selecting the most appropriate price within this range requires judgement. The choice of different prices could produce materially different estimates of fair value.
Valuation techniques are subjective in nature and significant judgement is involved in establishing fair values for certain financial assets and liabilities. Valuation techniques involve various assumptions regarding pricing factors. The use of different valuation techniques and assumptions could produce materially different estimates of fair value.
IMPAIRMENTS Impairment evaluation is a complex process that inherently involves significant judgements and uncertainties that may have a material impact on the ING Group’s consolidated financial statements. Impairments are especially relevant in two areas: Available-for-sale debt and equity securities and Goodwill/Intangible assets.
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.
SEGMENTAL REPORTING A business segment is a distinguishable component of the Group engaged in providing products or services that is subject to risks and returns that are different from those of other business segments. A geographical segment is a distinguishable component of the Group engaged in providing products or services within a particular economic environment that is subject to risks and returns that are different from those of segments operating in other economic environments. The geographical analyses are based on the location of the 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 are considered the secondary.
FOREIGN CURRENCY TRANSLATION Functional and presentation currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The consolidated financial statements are presented in euros, which is the Company’s functional and presentation currency.
Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Exchange rate differences resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the profit and loss account, except when deferred in equity as part of qualifying cash flow hedges or qualifying net investment hedges.
Group companies The results and financial position of all group companies that have a functional currency different from the presentation currency are translated into the presentation currency as follows: Assets and liabilities included in each balance sheet are translated at the closing rate at the date of that balance sheet;• Income and expenses included in each 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 All resulting exchange rate differences are recognised in a separate component of equity.•
On consolidation, exchange rate differences arising from the translation of a monetary item that forms part of the net investment in a foreign operation, and of borrowings and other instruments designated as hedges of such investments, are taken to shareholders’ equity. When a foreign operation is sold, these exchange rate differences are recognised in the profit and loss account as part of the gain or loss on sale.
The fair values of financial instruments that are not traded in an active market are determined using valuation techniques. The Group uses a variety of methods and makes assumptions that are based on market conditions existing at each balance sheet date.
See Note 33 ‘Fair value of financial assets and liabilities’ for the basis of the determination of the fair value of financial instruments.
Held-to-maturity investments Non-derivative financial assets with fixed or determinable payments and fixed maturity for which the Group has the positive intent and ability to hold to maturity and which are designated as held-to-maturity assets are initially recognised at fair value plus transaction costs. Subsequently, they are carried at amortised cost using the effective interest method less any impairment losses. Interest income from debt securities classified as held-to-maturity is recognised in Interest income in the profit and loss account using the effective interest method. Held-to-maturity investments include only debt securities.
Credit risk management classification Credit risk management disclosures are provided in the section ‘Risk management’. The relationship between credit risk classifications in that section and the consolidated balance sheet classifications above is explained below: Lending risk arises when ING grants a loan to a customer, or issues guarantees on behalf of a customer and mainly relates to the • balance sheet classification Loans and advances to customers and credit commitments in respect of off balance sheet items e.g. financial guarantees; Investment risk comprises the credit default and migration risk that is associated with ING’s investment portfolio and mainly relates • to the balance sheet classification Investments (available-for-sale and held-to-maturity); Money market risk arises when ING places short term deposits with a counterparty in order to manage excess liquidity and mainly • relates to the balance sheet classification Amounts due from banks; Pre-settlement risk arises when a counterparty defaults on a transaction before settlement and ING has to replace the contract by a • trade with another counterparty at the then prevailing (possibly unfavourable) market price. The pre-settlement risk classification mainly relates to the balance sheet classification Financial assets at fair value through profit and loss (trading assets and non-trading derivatives); Settlement risk arises when there is an exchange of value (funds, instruments or commodities) for the same or different value dates and • receipt is not verified or expected until ING has paid or delivered its side of the trade. Settlement risk mainly relates to the balance sheet classification Financial assets at fair value through profit and loss (trading assets and non-trading derivatives) and Investments (availablefor -sale and held-to-maturity).
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 at fair value. Fair values are obtained from quoted market prices in active markets, including recent market transactions, and valuation techniques (such as discounted cash flow models and option pricing models), as appropriate. All derivatives are carried as assets when their fair value is positive and as liabilities when their fair values are negative.
Net investment hedges Hedges of net investments in foreign operations are accounted for in a similar way to cash flow hedges. Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognised in equity and 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.
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.
REAL ESTATE INVESTMENTS Real estate investments are stated at fair value at the balance sheet date. Changes in the carrying amount resulting from revaluations are recognised 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.
PROPERTY AND EQUIPMENT Property in own use Land and buildings held for own use are stated at fair value at the balance sheet date. Increases in the carrying amount arising on revaluation of land and buildings held for own use are credited to the revaluation reserve in shareholders’ equity. Decreases that offset previous increases of the same asset are charged against the revaluation reserve 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 net result 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.
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 recognised in the profit and loss account.
Assets under operating leases Assets leased out under operating leases in which ING is the lessor are stated at cost less accumulated depreciation and any impairment losses. The cost of the assets is depreciated on a straight-line basis over the lease term. Reference is made to the section ‘Leases’.
Disposals The difference between the proceeds on disposal and net book value is recognised in the profit and loss account.
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.
INSURANCE, INVESTMENT AND REINSURANCE CONTRACTS Insurance contracts Insurance policies which bear significant insurance risk are presented as insurance contracts. Provisions for liabilities under insurance contracts represent estimates of future payouts that will be required for life and non-life insurance claims, including expenses relating to such claims. For some insurance contracts the measurement reflects current market assumptions.
Adequacy test The adequacy of the Provision for life insurance, net of unamortised interest rate rebates, DAC and VOBA (the net insurance liabilities), is evaluated regularly by each business unit. The test considers current estimates of all contractual and related cash flows, and future developments. It includes investment income on the same basis as it is included in the profit and loss account.
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 and losses, and unrecognised past service costs. The defined benefit obligation is calculated annually by internal and external actuaries using the projected unit credit method.
For defined contribution plans, the Group pays contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis. The Group has no further payment obligations once the contributions have been paid. The contributions are recognised as staff expenses when they are due. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in the future payments is available.
The statement of cash flows has been drawn up in accordance with the indirect method, classifying cash flows as cash flows from operating, investing and financing activities. In the net cash flow from operating activities, the result before tax is adjusted for those items in the profit and loss account, and changes in balance sheet items, which do not result in actual cash flows during the year.
Trading assets 160,378 193,213 Investments for risk of policyholders 95,366 114,827 Non-trading derivatives 16,484 7,637 Designated as at fair value through profit and loss 8,277 11,453
As at 31 December 2008, the balance sheet value included equity securities which were lent or sold in repurchase transactions amounting to EUR 1 million (2007: EUR 4 million) and nil (2007: nil), respectively. As at 31 December 2008, the balance sheet value included debt securities which were lent or sold in repurchase transactions amounting to EUR 28 million (2007: EUR 386 million) and EUR 1,904 million (2007: EUR 629 million), respectively.
The fair value of credit derivatives included in trading assets and held to mitigate exposure to credit risk was nil (2007: nil), and the change in their fair value in the period was nil (2007: nil).
Equity securities 83,208 106,061 Debt securities 7,729 7,398 Loans and receivables 4,429 1,368
The cost of investments for risk of policyholders as at 31 December 2008 was EUR 115,929 million (2007: EUR 105,625 million).
The fair value of credit derivatives included in non-trading derivatives and held to mitigate exposure to credit risk was EUR –17 million (2007: EUR –10 million), and the change in their fair value in the period was EUR –7 million (2007: nil).
Other non-trading derivatives include mainly interest rate swaps for which no hedge accounting is applied. The increase is mainly due to changes in fair value resulting from changes in market interest rates.
Equity securities 313 306 Debt securities 5,445 8,774 Loans and receivables 637 428
The change in the fair value of the loans and receivables designated as at fair value through profit and loss attributable to changes in the credit risk of the financial assets during 2008 was nil (2007: nil),and nil (2007: nil) on a cumulative basis.
Amortisation –48 –181 –33 –59 –81 –240 Transfers and reclassifications 154 512 –1,594 –1,417 –1,440 –905 Changes in the composition of the group and other –748 –536 –11,670 –2,903 –12,418 –3,439 Changes in unrealised revaluations –4,621 3,379 –14,877 –6,284 –19,498 –2,905 Impairments and reversals –1,916 –53 –2,904 –133 –4,820 –186 Disposals and redemptions –8,320 –9,093 –217,239 –272,106 –1,640 –822 –227,199 –282,021 Exchange rate differences –177 –275 709 –12,219 45 –26 577 –12,520
To/from available- for-sale 21 –21 To/from loans and advances –1 –1,594 –6 –1,594 –7 To/from fair value through profit and loss 52 –1,386 –1,334 To/from Investment in associates 154 438 154 438
In the year ended 31 December 2007, no impairment on reclassified financial assets available for sale was recognised. Unrealised fair value losses of EUR 20 million were recognised directly in shareholders’ equity.
Borrowed debt securities are not recognised in the balance sheet and amounted to EUR 166 million as at 31 December 2008 (2007: EUR 170 million).
– more than 1 year but less than 5 years 9,766 8,448 – more than 5 years 4,836 3,753
Unearned future finance income on finance leases –3,614 –3,109 Net investment in finance leases 17,351 15,565
– more than 1 year but less than 5 years 7,955 7,060 – more than 5 years 4,239 3,168
Included in Amounts due from banks 100 232 Included in Loans and advances to customers 17,251 15,333
The allowance for uncollectible finance lease receivables included in the loan loss provisions amounted to EUR 88 million as at 31 December 2008 (2007: EUR 33 million).
– Loans and advances to customers 761 654 1,765 1,334 2,526 1,988
Changes in the composition of the group –4 –3 2 98 –2 95 Write-offs –6 –11 –728 –952 –734 –963
ING Retail Property Fund Australia 29 109 790 412 13 7
The values presented in the table above could differ from the values presented in the individual annual accounts of the associates, due to the fact that the individual values have been brought in line with ING’s accounting principles.
In general, the reporting dates of all material associates are consistent with the reporting date of the Group. However, for practical reasons, the reporting dates of certain associates differ slightly from with the reporting date of the Group, but, in any case, the difference between the reporting date of the associates and that of the Group is no more than three months.
ING Retail Property Fund Australia 29 150 958 399 179 100
ING Re Nordic Property Fund 22 104 1,089 623 70 47
Changes in the composition of the group 46 934 Transfers to and from Investments –154 –438 Revaluations 217 –155 Share of results –375 765 Dividends received –212 –224 Disposals –972 –1,296 Impairments –29 –25 Exchange rate differences –214 –112 Closing balance 4,355 5,014
In 2008, share of results of EUR –375 million (2007: EUR 765 million) and impairments of EUR –29 million (2007: EUR –25 million) are presented in the profit and loss account in Share of profit from associates for EUR –404 million (2007: EUR 740 million).
Changes in the composition of the group –296 –2,919 Transfers to and from Property in own use –38 –60 Transfers to and from Other assets 117 13 Fair value gains/(losses) –400 168 Disposals –415 –309 Exchange rate differences –402 84 Closing balance 4,300 4,829
Real estate investments 4,300 Investments in associates 3,200 Other assets – property held for sale 3,143 Property and equipment – property in own use 1,841 Investments – available-for-sale 663
Furthermore, the exposure is impacted by third party interests, leverage in funds and off-balance commitments, resulting in an overall exposure of EUR 15.5 billion. Reference is made to the section ‘Risk management’.
The total amount of rental income recognised in the profit and loss account for the year ended 31 December 2008 was EUR 361 million (2007: EUR 402 million). The total amount of contingent rent recognised in the profit and loss account for the year ended 31 December 2008 was EUR 17 million (2007: EUR 14 million).
Real estate investments by year of most recent appraisal by independently qualified valuers (in percentages)
Changes in the composition of the group –150 29 Transfers to and from Real estate investments 38 60 Transfers to and from Other assets 5 59 Depreciation –39 –39 Revaluations –5 –60 Impairments –1 Reversal of impairments 14 Disposals –114 –84 Exchange rate differences –47 –29 Closing balance 1,841 2,069
Revaluation surplus Opening balance 633 693 Revaluation in year –48 19 Released in year 30 –79 Closing balance 615 633
The cost or the purchase price amounted to EUR 2,087 million (2007: EUR 2,310 million). Cost less accumulated depreciation and impairments would have been EUR 1,226 million (2007: EUR 1,436 million).
Most recent appraisal in 2008 59 Most recent appraisal in 2007 18 Most recent appraisal in 2006 8 Most recent appraisal in 2005 8 Most recent appraisal in 2004 7
Changes in the composition of the group –4 10 10 16 6 26 Disposals –2 –24 –20 –44 –22 –68 Depreciation –146 –164 –263 –216 –409 –380 Impairments –9 –1 –9 –1 –18 –2 Exchange rate differences –13 –3 –28 –17 –41 –20 Other changes –14 3 12 –87 –2 –84
Gross carrying amount as at 31 December 1,562 1,763 2,935 2,950 4,497 4,713 Accumulated depreciation as at 31 December –1,231 –1,481 –1,840 –1,959 –3,071 –3,440 Accumulated impairments as at 31 December –11 –1 –8 –2 –19 –3
Changes in the composition of the group 172 –2 170 Disposals –428 –417 –428 –417 Depreciation –764 –720 –2 –4 –766 –724 Impairments –3 –3 Exchange rate differences –124 –44 –124 –44
Gross carrying amount as at 31 December 2,980 2,946 3,225 2,245 1,988 1,379 1,125 766 9,318 7,336 Accumulated amortisation as at 31 December –896 –645 –1,051 –878 –200 –43 –2,147 –1,566 Accumulated impairments as at 31 December –155 –56 –29 –45 –1 –256 –30
Additions to goodwill in 2008 include mainly EUR 371 million related to the acquisition of Interhyp AG, EUR 462 million related to the acquisition of CitiStreet, EUR 285 million related to the acquisition of the pension business of Santander Chile, EUR 69 million related to the acquisition of Oyak Emeklilik and EUR 9 million related to the acquisition of Universal Lease Iberia. The additions to Other intangibles in 2008 includes EUR 31 million related to the acquisition of the pension business of Santander Chile and EUR 73 million related to the acquisition of CitiStreet. Reference is made to Note 29 ‘Companies acquired and companies disposed’. The additions to Other intangibles also include EUR 50 million related to Interhyp AG.
Goodwill is tested for impairment at the lowest level at which it is monitored for internal management purposes (so called ‘reporting units’). Goodwill is allocated to reporting units as follows: Goodwill allocation to reporting units
Management believes that it may be reasonably possible that if ongoing market volatility adversely impacts the performance of the reporting units Retail Banking – Central Europe and Insurance Americas – United States, compared with what was assumed in the year-end 2008 goodwill impairment test, the book value (including goodwill) of these reporting units may exceed the fair values resulting in impairments.
Amortisation and unlocking –12 –12 –1,884 –1,294 –130 –274 –2,026 –1,580 Effect of unrealised revaluations in equity 1,523 43 1,523 43
The total amount of borrowing costs relating to Property under development for third parties, capitalised in 2008 is nil (2007: nil).
Gross carrying amount as at 31 December 3,276 3,104 Accumulated impairments as at 31 December –133 –111 Net book value 3,143 2,993
As at 31 December 2008, Other reserves included an amount of EUR 566 million (2007: EUR 566 million; 2006: EUR 566 million) related to Regio Bank N.V. (formerly Stichting Regio Bank) that cannot be freely distributed.
In May 2007, ING announced a plan to adopt a buy-back programme under which it plans to purchase (depositary receipts for) ordinary shares with a total value of EUR 5 billion over a period of 12 months, beginning in June 2007. On 23 May 2008 this programme was terminated as ING had almost reached the legal limit then in force for the acquisition of its own shares (10% of the issued share capital). In total, 183.2 million (depositary receipts for) ordinary shares were repurchased under this programme at an average price of EUR 26.77 and a total consideration of EUR 4.9 billion (98% of the total amount of the share buy back programme as announced). Repurchased ordinary shares and depositary receipts are included in the table ‘Changes in treasury shares’.
Depositary receipts for ordinary shares More than 99% of the ordinary shares issued by ING Groep N.V. are held by Stichting ING Aandelen (ING Trust Office). In exchange for these shares, the Trust Office has issued depositary receipts in bearer form for ordinary shares. The depositary receipts are listed on various stock exchanges. Depositary receipts can be exchanged for (non-listed) ordinary shares without any restriction.
In addition, the holder of a depositary receipt is entitled to attend and to speak at the General Meeting of Shareholders of ING Groep N.V. either in person or by proxy. A holder of a depositary receipt, who thus attends the General Meeting of Shareholders, is entitled to vote as a proxy of the Trust Office but entirely at his own discretion for a number of shares equal to the number of his depositary receipts.
Depositary receipts for ordinary shares held by ING Group (Treasury shares) As at 31 December 2008, 36.5 million (2007: 126.8 million; 2006: 53.8 million) depositary receipts for ordinary shares ING Groep N.V. with a par value of EUR 0.24 were held by ING Groep N.V. or its subsidiaries. These depositary receipts for ordinary shares were purchased to hedge option rights granted to the Executive Board members and other employees.
Restrictions with respect to dividend and repayment of capital ING Groep N.V. is subject to legal restrictions regarding the amount of dividends it can pay to the holders of its ordinary shares. Pursuant to the Dutch Civil Code, dividends can only be paid up to an amount equal to the excess of the company’s own funds over the sum of the paid-up capital and reserves required by law.
Moreover, ING Groep N.V.’s ability to pay dividends is dependent on the dividend payment ability of its subsidiaries. ING Groep N.V. is legally required to create a non-distributable reserve insofar profits of its subsidiaries are subject to dividend payment restrictions which apply to those subsidiaries themselves. Such restrictions may among others be of a similar nature as the restrictions which apply to ING Groep N.V. Furthermore there can be restrictions as a result of minimum capital requirements that are imposed by industry regulators in the countries in which the subsidiaries operate, or other limitations which may exist in certain countries.
B warrants In 1998, ING Groep N.V. authorised the issue of a maximum of 17,317,132 B warrants, of which 17,220,200 were issued. On 5 January 2008 of the remaining 9,266,097 warrants, 259,484 warrants expired and 9,006,613 were exercised. Accordingly no B warrants were outstanding anymore as at 31 December 2008 (2007: 9,266,097; 2006: 17,157,891). B warrant holders were entitled to obtain from ING Groep N.V., for a fixed price, depositary receipts for ordinary shares in the proportion of one B warrant to two depositary receipts. B warrant holders could exercise their rights at their own discretion but no later than 5 January 2008.
Non-voting equity securities On 12 November 2008, ING Groep N.V. issued EUR 10 billion non-voting equity securities to the Dutch government. This was effected by issuing one billion securities with an issue price of EUR 10 each. The nominal value of each security is EUR 0.24.
These securities do not have voting rights. However as a holder of the non-voting equity securities, the Dutch government has the right to, subject to applicable law and to corporate governance practices, generally accepted under applicable stock listing regimes, recommend two candidates for appointment to the Supervisory Board. Certain Supervisory Board approval items require approval by these nominees. Until their formal appointment, the nominees will function as observers. As at 31 December 2008, the General Meeting of Shareholders had not yet adopted any resolution to implement the State recommendation.
On these non-voting equity securities a coupon is payable of the higher of: EUR 0.85 per security, payable annually in arrears, with a first coupon of EUR 0.425 per security payable on 12 May 2009; and• 110% of the dividend paid on each ordinary share over 2009 (payable in 2010)• 120% of the dividend paid on each ordinary share over 2010 (payable in 2011)• 125% of the dividend paid on each ordinary share over 2011 onwards (payable in 2012 onwards).•
This coupon is to be paid on 12 May of each year (the coupon date) in cash if the dividend on ordinary shares is paid in cash or to be paid in scrip securities in the event of a scrip dividend on ordinary shares. Coupons are only due and payable, on a non-cumulative basis and if a dividend is paid on ordinary shares over the financial year preceding the coupon date, either on an interim or a final dividend basis, provided that ING Group’s capital adequacy position is and remains satisfactory both before and after payment in the opinion of the Dutch central bank.
ING Group has the right to repurchase all or some of the non-voting equity securities at EUR 15 per security at any time, together with the pro-rate coupon, if due, accrued to such date. It also has the right to convert all or some of the non-voting equity securities into ordinary shares on a one-for-one basis from three years after the issue date onwards. The Dutch government in that case has the right to demand a redemption payment of EUR 10 per non-voting equity security, together with the pro-rata coupon, if due, accrued to such date. Both repurchase and conversion of the securities must be approved by the Dutch central bank.
Opening balance –1,354 –473 668 Unrealised revaluations after taxation 388 500 194 Realised gains/losses transferred to profit and loss –228 Exchange rate differences –952 –1,153 –1,335 Closing balance –1,918 –1,354 –473
Result for the year –360 –369 –729 Unrealised revaluations after taxation –77 106 29 Changes in treasury shares –2,030 –2,030 Dividend –3,387 –213 –3,600 Employee stock options and share plans 31 31 Issuance costs incurred –20 –20 Cancellation of shares 4,904 –4,860 44 Closing balance 23,232 726 –866 –5,015 18,077
Result for the year 6,972 720 7,692 Unrealised revaluations after taxation –124 –124 Changes in treasury shares –520 –520 Dividend –2,534 –147 –2,681
LIABILITIES 13 PREFERENCE SHARES Preference shares The authorised preference share capital of ING Groep N.V. was divided into two categories preference A shares and preference B shares. The share capital consisted of 100 million preference A shares with a par value of EUR 1.20 of which as at 31 December 2007 16,012,839 were issued and 1,000 million preference B shares with a par value of EUR 0.24 of which none were issued as at 31 December 2007. As at 31 December 2008 no preference A shares or preference B shares were in issue. The movement in outstanding preference shares is explained under Cancellation of preference shares.
The dividend on the preference A shares was equal to a percentage of the amount (including share premium) for which the preference A shares were originally issued. This percentage was calculated by taking the arithmetic mean of the average effective yield on the five longest-dated Dutch government loans, as determined by a Calculating Agent to be designated by the Executive Board for the last 20 stock exchange days preceding the day on which the first preference A shares are issued, or, as the case may be, preceding the day on which the dividend percentage is adjusted. The percentage thus established could be increased or decreased by not more than 0.5 percentage points, depending on the market conditions then prevailing, as the Executive Board could decide with the approval of the Supervisory Board. The dividend on the preference A shares for the financial years 2004-2013 was set at EUR 0.1582 per share per year.
Restrictions with respect to dividend and repayment of capital ING Groep N.V. is subject to legal restrictions regarding the amount of dividends it can pay to the holders of its cumulative preference shares, when issued. Pursuant to the Dutch Civil Code, dividends can only be paid up to an amount equal to the excess of the company’s own funds over the sum of the paid-up capital, and reserves required by law.
Subordinated loans consist 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. Under IFRS-EU these bonds are classified as liabilities. They are considered capital for regulatory purposes.
The number of subordinated loans held by group companies as at 31 December 2008 was 32,759 with a balance sheet value of EUR 1 million (2007: 35,040 with a balance sheet value of nil).
More than 1 year but less than 2 years 5,325 487 More than 2 years but less than 3 years 5,189 989 More than 3 years but less than 4 years 1,423 1,847 More than 4 years but less than 5 years 28 1,140 More than 5 years 3,762 3,951 Total floating rate debt securities 27,585 15,618
Subordinated loans of group companies relate to capital debentures and private loans which are subordinated to all current and future liabilities of ING Bank N.V. or Postbank N.V. Preference shares of group companies comprise non-cumulative guaranteed Trust Preference Securities which are issued by wholly owned subsidiaries of ING Groep N.V. These securities have a liquidation preference of a certain amount plus any accrued interest and unpaid dividend. Dividends with regard to these preference securities are presented as an interest expense in the profit and loss account. These trust preference securities have no voting rights.