The total amount of rental income recognised in the profi t and loss account for the year ended 31 December 2007 was EUR 402 million (2006: EUR 434 million). The total amount of contingent rent recognised in the profi t and loss account for the year ended 31 December 2007 was EUR 14 million (2006: EUR 14 million).
Appraisal of real estate investments during the last fi ve years by independently qualifi ed valuers (in percentages)
Changes in the composition of the group 29 –14 Transfers to and from Real estate investments 60 –44 Transfers to and from Other assets 59 –4 Depreciation –39 –64 Revaluations –60 76 Reversal of impairments 14 4 Disposals –84 –221 Exchange rate differences –29 –38 Closing balance 2,069 2,034
Revaluation surplus Opening balance 693 612 Revaluation in year 19 82 Released in year –79 –1 Closing balance 633 693
The cost or purchase price amounted to EUR 2,310 million (2006: EUR 2,190 million). Cost less accumulated depreciation would have been EUR 1,602 million (2006: EUR 1,521 million).
Appraisal of property in own use during the last fi ve years by independently qualifi ed valuers (in percentages)
Gross carrying amount as at 31 December 1,763 1,499 2,950 2,729 4,713 4,228 Accumulated depreciation as at 31 December –1,481 –1,216 –1,959 –1,699 –3,440 –2,915 Accumulated impairments as at 31 December –1 –2 –1 –3 –1
Gross carrying amount as at 31 December 5,177 3,938 70 39 5,247 3,977 Accumulated depreciation as at 31 December –2,291 –1,267 –58 –25 –2,349 –1,292
The Group leases assets to third parties under operating leases as lessor. The future minimum lease payments to be received under non– cancellable operating leases are as follows: Future minimum lease payments by maturity
Capitalised expenses 124 124 Amortisation –229 –175 –221 –200 –18 –8 –468 –383 Impairments –14 –10 –1 –15 –10 Effect of unrealised revaluations in equity 32 18 32 18 Changes in the composition of the group 25 –5 –28 –21 9 –6 390 61 396 29 Exchange rate differences –261 –290 –71 –10 –5 –9 –18 –7 –355 –316 Disposals –1 –6 –13 –14 –6
Amortisation –12 –11 –1,266 –1,178 –274 –255 –1,552 –1,444 Unlocking –28 –11 –28 –11 Effect of unrealised revaluations in equity 43 43 43 43 Changes in the composition of the group –5 –5 Exchange rate differences –1 –2 –938 –812 10 –43 –929 –857 Disposal of portfolios –39 16 –15 –16 –54
Gross carrying amount as at 31 December 3,104 2,328 Accumulated impairments as at 31 December –111 –85 Net book value 2,993 2,243
As at 31 December 2007 Other reserves included an amount of EUR 566 million (2006: EUR 566 million; 2005: EUR 583 million) related to Regio Bank NV (formerly Stichting Regio Bank) that cannot be freely distributed.
Issue of shares 214 Issued share capital as at 31 December 2005 2,204,934 530
Issue of shares 96 Exercise of B warrants and options 63 Issued share capital as at 31 December 2006 2,205,093 530
Issue of shares 5,569 1 Exercise of B warrants and options 15,783 3 Issued share capital as at 31 December 2007 2,226,445 534
Ordinary shares All shares are in registered form. No share certifi cates have been issued. Shares may be transferred by means of a deed of transfer, subject to the approval of the Executive Board of ING Group. The par value of ordinary shares is EUR 0.24. The authorised ordinary share capital of ING Group consists of 3,000 million shares, of which as at 31 December 2007 2,226 million have been issued and fully paid.
Depository receipts for ordinary shares and preference shares More than 99% of the ordinary shares and preference shares issued by ING Groep N.V. are held by the Stichting ING Aandelen (Trust Offi ce ING Shares). In exchange for these shares, the Trust Offi ce has issued depository receipts in bearer form for ordinary shares and for preference shares, respectively. The depository receipts are listed on various stock exchanges. Depository receipts can be exchanged for (non-listed) shares of the relevant category without any restriction.
Unrealised revaluations after taxation 8 –1,087 –1,079 Realised gains/losses transferred to profi t and loss –804 –804 Changes in cash fl ow hedge reserve –690 –690 Transfer to insurance liabilities/DAC 820 820
Implementation IAS 32/39 and IFRS 4 6,256 1,282 7,538 Unrealised revaluations after taxation 53 2,095 2,148 Realised gains/losses transferred to profi t and loss –663 –663 Changes in cash fl ow hedge reserve 764 764 Transfer to insurance liabilities/DAC –89 –89
Opening balance –473 668 –184 Implementation IAS 32/39 and IFRS 4 –556 Unrealised revaluations after taxation 500 194 489 Realised gains/losses transferred to profi t and loss –228 Exchange rate differences –1,153 –1,335 919 Closing balance –1,354 –473 668
Preference shares are presented in the balance sheet under liabilities. See Note 13 ‘Preference shares’.
Preference shares may only be issued if at least the nominal value is paid up.
The ING Groep N.V.’s Articles of Association make provision for cancellation of preference shares.
‘A’ preference shares may only be cancelled if a distribution of the amount (including share premium) for which the ‘A’ preference shares were originally issued reduced by the par value of the shares can be made on each ‘A’ preference share. Upon liquidation of ING Groep N.V., a distribution of the amount (including share premium) for which the ‘A’ preference shares were originally issued will, insofar as possible, be made on each ‘A’ preference share.
Buy-back of preference shares During 2007, ING Group bought back 57,016,572 (depository receipts for) ‘A’ preference shares (2006: 24,051,039) at an average price of EUR 3.64 per share or EUR 207.5 million in total (2006: EUR 3.72 per share or EUR 89.5 million). The ‘A’ preference shares were bought back from ABN AMRO Holding and Fortis as described below.
The dividend on the cumulative preference shares will be equal to a percentage, calculated on the amount compulsorily paid up or yet to be paid up. This percentage shall be equal to the average of the Euro OverNight Index Average (EONIA) as calculated by the European Central Bank. During the fi nancial year for which the distribution is made, this percentage is weighted on the basis of the number of days for which it applies, increased by 2.5 percentage points.
ING Groep N.V.’s Articles of Association make provision for the cancellation of cumulative preference shares. Upon cancellation of cumulative preference shares and upon liquidation of ING Groep N.V., the amount paid up on the cumulative preference shares will be repaid together with the dividend shortfall in preceding years, insofar as this shortfall has not yet been made up.
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 classifi ed as liabilities. They are considered capital for regulatory purposes.
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 profi t and loss account. These trust preference securities have no voting rights.
17 INSURANCE AND INVESTMENT CONTRACTS, REINSURANCE CONTRACTS The provisions for insurance and investment contracts, net of reinsurance (i.e. the provision for the company’s own account) is presented in the balance sheet gross under ‘Insurance and investment contracts’ and ‘Reinsurance contracts’.
Total provisions for insurance contracts 236,186 241,404 5,874 6,529 242,060 247,933
Change in deferred profi t sharing liability –1,546 –1,241 –1,546 –1,241
Prior year provisions: – benefi t payments to policyholders –21,933 –13,166 –82 –366 –22,015 –13,532
Exchange rate differences –15,583 –15,874 –501 –535 –16,084 –16,409 Other changes –1,893 458 9 –1,530 –1,884 –1,072
Included in Changes in the composition of the group is EUR 4,017 million relating to the disposal of portfolios in connection with the sale of Belgian Broker and Employee Benefi t insurance business as disclosed in Note 29 ‘Companies acquired and companies disposed’.
Where discounting is used in the calculation of life insurance provisions the rate is within the range 2.9% to 6.0% (2006: 2.9% to 6.8%) based on weighted averages.
To the extent that the assuming reinsurers are unable to meet their obligations, the Group remains liable to its policyholders for the portion reinsured. Consequently, provisions are made for receivables on reinsurance contracts which are deemed uncollectible. The life reinsurance market is highly concentrated and, therefore, diversifi cation of exposure is inherently diffi cult. To minimise its exposure to signifi cant losses from reinsurer insolvencies, the Group evaluates the fi nancial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographical regions, activities or economic characteristics of the reinsurer.
As at 31 December 2007, the total Reinsurance exposure, including Reinsurance contracts and Receivables from reinsurers (presented in Other assets) amounted to EUR 7,044 million (2006: EUR 8,005 million) after the provision for uncollectible reinsurance of EUR 5 million (2006: EUR 6 million).
Changes in the composition of the group –667 –4 –18 –685 –4
Opening balance 20,750 18,633 Changes in the composition of the group –277 –42
Prior year provisions – payments to contract holders –9,697 –6,667 – interest accrual 408 344 – valuation changes investments 576 948
18 AMOUNTS DUE TO BANKS Amounts due to banks include non-subordinated debt due to banks, other than amounts in the form of debt securities. As at 31 December 2007, liabilities concerning securities sold in repurchase transactions amounted to EUR 29,604 million (2006: EUR 23,627 million).
No funds have been entrusted to the Group by customers on terms other than those prevailing in the normal course of business. As at 31 December 2007, Customer deposits and other funds on deposit included liabilities with regard to securities sold in repurchase transactions amounting to EUR 3,725 million (2006: EUR 870 million).
Trading liabilities 148,988 127,975 Non-trading derivatives 6,951 4,934 Designated as at fair value through profi t and loss 13,882 13,702
Derivatives used in: – fair value hedges 958 606 – cash fl ow hedges 3,188 1,696 – hedges of net investments in foreign operations 352 7 Other non-trading derivatives 2,453 2,625
Financial assets and liabilities at fair value through profi t and loss 119 –40 82 –11 –2 8 156 Deferred acquisition costs and VOBA 3,201 3 151 –312 4 3,047
Total unused tax losses carried forward 3,814 3,977 Unused tax losses carried forward not recognised as a deferred tax asset –688 –953 Unused tax losses carried forward recognised as a deferred tax asset 3,126 3,024
More than 1 year but less than 5 years 176 156 249 424 More than 5 years but less than 10 years 230 47 610 347 More than 10 years but less than 20 years 71 247 1,010 1,045
Releases –62 –49 –149 –36 –211 –85 Charges –175 –174 –219 –238 –394 –412 Exchange rate differences –3 –1 –7 –15 –10 –16
Included in Other provisions is a provision for a loss of EUR 129 million relating to the agreed disposal of NRG as disclosed in Note 29 ‘Companies acquired and companies disposed’.
Pension and post-employment liabilities The Group maintains defi ned benefi t retirement plans in the major countries in which it operates. These plans generally cover all employees and provide benefi ts that are related to the remuneration and service of employees upon retirement. The benefi ts in some of these plans are subject to various forms of indexation. The indexation is, in some cases, at the discretion of management; in other cases it is dependent upon the suffi ciency of plan assets.
Employer’s contribution 1 Participants contributions 2 –22 5 Benefi ts paid –556 –493 –13 –44 Actuarial gains and losses –1,727 –1,199 –8 –25 Past service cost –83 18 –5 Changes in the composition of the group and other changes 207 727 –11 4 Effect of curtailment or settlement –32 –6 –147 Exchange rate differences –217 –169 –11 –15
The estimated unrecognised past services cost and unrecognised actuarial gains and losses for the defi ned benefi t plans that will be amortised into pension and other staff related liability costs during 2008 are nil and nil, respectively.
It is not expected that any plan assets are returned to ING Group during 2008.
Equity securities include ING Group ordinary shares of EUR 5 million (0.1% of total plan assets) at 31 December 2007 (2006: EUR 14 million, 0.1% of total plan assets). Real estate, which is included in Other, includes nil (0.0% of total plan assets) at 31 December 2007 which was occupied by the Group (2006: nil, 0.0% of total plan assets).
Expected rates of salary increases (excluding promotion increases) 2.80 2.75 3.20 3.50 Medical cost trend rates 7.00 6.10 Consumer price infl ation 2.10 2.00 2.30 2.25
An increase of 1% in the assumed medical cost trend rate for each future year would have resulted in an additional accumulated defi ned benefi t obligation of EUR 4 million at 31 December 2007 (2006: EUR 2 million) and nil increase in the charge for the year (2006: nil). A decrease of 1% in the medical cost trend rate for each future year would have resulted in lower defi ned benefi t obligation of EUR 4 million at 31 December 2007 (2006: EUR 2 million) and nil decrease in the charge for the year (2006: nil).
Expected Cash Flows During 2008 the expected contributions to pension plans are EUR 633 million (2007: EUR 904 million).
The following benefi t payments, which refl ect expected future service as appropriate, are expected to be paid by the plan: Benefi t payments
– designated as at fair value through profi t and loss 1,504 610 1,894 1,999 5,043 403 11,453 Investments
Loans and advances to customers 131,610 17,234 26,654 93,545 280,738 3,183 552,964
The majority of items are debt instruments and equity instruments, where the contractual maturity is generally more than 5 years. (2) Investments for risk of policyholders are managed on behalf of policyholders on a fair value basis. Although individual instruments may (or may not) have a maturity depending on their nature, this does not impact the liquidity position of ING. (3) Included in remaining assets where maturities are not applicable are: – property and equipment – real estate investments – investments in associates.
Additional information to the consolidated balance sheet of ING Group, amounts in millions of euros, unless stated otherwise
Loans and advances to customers 107,295 13,919 23,795 84,601 241,539 3,288 474,437
Customer deposits and other funds on deposit 447,824 15,374 16,690 12,197 4,595 496,680 Financial liabilities at fair value through profi t and loss
(1) Trading assets and trading liabilities have been presented in the above table as maturity not applicable, because they are held for short term profi t taking. The majority of items are debt instruments and equity instruments, where the contractual maturity is generally more than 5 years. (2) Investments for risk of policyholders are managed on behalf of policyholders on a fair value basis. Although individual instruments may (or may not) have a maturity depending on their nature, this does not impact the liquidity position of ING. (3) Included in remaining assets where maturities are not applicable are: – property and equipment – real estate investments – investments in associates.
Note: Due to their nature remaining assets consists mainly of assets expected to be recovered after more than 12 months.
With respect to exchange rate and interest rate derivative contracts, the notional or contractual amounts of these instruments is indicative of the nominal value of transactions outstanding at the balance sheet date; they do however not represent amounts at risk. ING Group uses credit derivatives in managing its exposure to credit risk, including total return swaps and credit default swaps, to sell or buy protection for credit risk exposures in the loan, investment and trading portfolios. Hedge accounting is not applied in relation to credit derivatives.
For the year ended 31 December 2007, ING Group recognised EUR –925 million (2006: EUR –690 million) after tax in equity as effective fair value changes on derivatives under cash fl ow hedge accounting. As a consequence, the balance of the cash fl ow hedge reserve in equity at 31 December 2007 was EUR 463 million (2006: EUR 1,819 million) gross and EUR 431 million (2006: EUR 1,356 million) after deferred tax. This cash fl ow hedge reserve will fl uctuate with the fair value changes on the underlying derivatives and will be refl ected in the profi t and loss account under Interest income/expense over the remaining term of the underlying hedged items. The cash fl ow hedge reserve relates to a large number of derivatives and hedged items with varying maturities, up to 40 years for insurance operations and 21 years for banking operations, with the largest concentration in the range of 20 to 25 years for insurance operations and 5 to 10 years for banking operations. Accounting ineffectiveness on derivatives designated under cash fl ow hedge accounting of EUR –9 million (2006: EUR –7 million) was recognised in the profi t and loss account.
Included in Interest income and interest expense on non-trading derivatives is EUR 2,317 million (2006: EUR 3,440 million) and EUR 2,042 million (2006: EUR 3,097 million) respectively relating to derivatives used in cash fl ow hedges.
At 31 December 2007, the fair values of outstanding non-derivatives designated under net investment hedge accounting was EUR –1,318 million (2006: EUR –1,520 million), presented in the balance sheet as negative fair values under liabilities. Non-derivatives designated as hedging instruments consist mainly of loan agreements.
Accounting ineffectiveness recognised in the profi t and loss account for the year ended 31 December 2007 on derivatives and nonderivatives designated under net investment hedge accounting was EUR –14 million (2006: EUR –12 million).
2.1 Consolidated annual accounts 24 MAXIMUM CREDIT EXPOSURE ING’s maximum credit exposure as at 31 December 2007 and 2006 is represented as follows: Maximum credit exposure
Non-trading derivatives 7,637 6,521 Designated as at fair value through profi t and loss 11,453 6,425 Available-for-sale debt securities 255,950 275,696 Held-to-maturity debt securities 16,753 17,660 Loans and advances to customers – policy loans 3,468 3,566 – public authorities 23,638 25,951 – secured by mortgages 290,933 235,812 – guaranteed by credit institutions 2,528 2,402 – personal loans 5,453 4,649 – other personal lending 24,204 22,141 – other corporate lending 204,528 181,939
Off-balance sheet credit commitments – commitments – Insurance 4,477 4,636 – guarantees – Insurance 173 319 – discounted bills – Bank 1 3 – guarantees – Bank 19,018 17,297 – irrevocable letters of credit – Bank 11,551 8,456 – other – Bank 350 623 – irrevocable facilities 100,707 90,384 Maximum credit exposure off balance sheet 136,277 121,718
The maximum credit exposure for relevant items on the balance sheet is the balance sheet carrying value for the relevant fi nancial assets. For the off-balance sheet items the maximum credit exposure is the maximum amount that could be required to be paid. Collateral received is not taken into account.
25 ASSETS NOT FREELY DISPOSABLE The assets not freely disposable primarily consist of interest bearing securities pledged to secure deposits from De Nederlandsche Bank (the Dutch Central Bank) and other banks, serve to secure margin accounts or are used for other purposes required by law. The assets not freely disposable and the items for which they are held are as follows: Assets not freely disposable
Loans and advances to customers 130 548 781 2 96 911 646
There are no material terms and conditions relating to the collateral represented in the above table which are individually signifi cant.
Irrevocable letters of credit mainly secure payments to third parties for a customer’s foreign and domestic trade transactions in order to fi nance a shipment of goods. ING Group’s credit risk in these transactions is limited since these transactions are collateralised by the commodity shipped and are of a short duration.
Other contingent liabilities include acceptances of bills and are of a short-term nature. Also included in Other contingent liabilities are contingent liabilities resulting from the normal operations of the Real Estate business including obligations under development and construction contracts. None of the items included in Other contingent liabilities are individually signifi cant.
Irrevocable facilities mainly constitute unused portions of irrevocable credit facilities granted to corporate clients. Many of these facilities are for a fi xed duration and bear interest at a fl oating rate. ING Group’s credit risk and interest rate risk in these transactions is limited. Most of the unused portion of irrevocable credit facilities is secured by customers’ assets or counter-guarantees by the central governments and exempted bodies under the regulatory requirements. Irrevocable facilities also include commitments made to purchase securities to be issued by governments and private issuers.
ING as sponsor of multi-seller conduit In the normal course of business, ING Group structures fi nancing transactions for its clients by assisting them in obtaining sources of liquidity by selling the clients’ receivables or other fi nancial assets to an SPE. The SPE issues asset-backed commercial paper to the market to fund the purchases. ING Group, in its role as administrative agent, facilitates these transactions by providing structuring, accounting, funding and operations services.
ING Group supports the commercial paper programmes by providing the SPE with short-term standby liquidity facilities. Primarily these liquidity facilities are meant to cover temporarily disruptions in the commercial paper market. Once drawn these facilities bear normal credit risk. A number of programs are supported by granting structured liquidity facilities to the SPE, in which ING Group covers at least some of the credit risk incorporated in these programs itself (in addition to normal liquidity facilities), and as a consequence might suffer credit losses from it. Furthermore, under a Program Wide Credit Enhancement ING Group guarantees to a limited amount all remaining losses incorporated in the SPE to the commercial paper investors. All facilities, which vary in risk profi le, are granted to the SPE subject to normal ING Group analysis procedures regarding credit risk and liquidity risk. The fees received for services provided and for facilities are charged on market conditions.
Collateralised debt obligations (CDO)-transactions Within ING Group, SPEs are used for CDO transactions. In a typical CDO transaction an SPE is used to issue structured, rated securities which are backed (or collateralised) by a pool of transferable debt securities. Besides investing in CDOs ING often has different roles in these transactions: the arranger of the transaction; ING structures the SPE, acquires the assets for the SPE and sells the CDOs to investors; collateral manager of the assets in the SPE; ING manages the assets based on strict conditions of the SPEs charter.
Non-cash investments are made by ING by selling credit protection in the market using credit default swaps.
Other entities ING Group is also a party in other SPEs used, for example, in structured fi nance and leasing transactions.
2.1 Consolidated annual accounts 28 PRINCIPAL SUBSIDIARIES The principal subsidiaries of ING Groep N.V. are as follows: Companies treated as part of the insurance operations ING Verzekeringen N.V. The Netherlands ING Verzekeringen Nederland N.V. The Netherlands ING Vastgoed Belegging B.V. The Netherlands Nationale-Nederlanden Levensverzekering Maatschappij N.V. The Netherlands Nationale-Nederlanden Schadeverzekering Maatschappij N.V. The Netherlands Parcom Ventures B.V. The Netherlands Postbank Levensverzekering N.V. The Netherlands Postbank Schadeverzekering N.V. The Netherlands RVS Levensverzekering N.V. The Netherlands RVS Schadeverzekering N.V. The Netherlands Movir N.V. The Netherlands ING Zivotna Poistovna a.s. Slovakia ING Nationale-Nederlanden Polska S.A. Poland ING Nationale-Nederlanden Polska Powszechne Towarzystwo Emerytaine S.A. Poland ING Asigurari de Viata S.A. Romania ING Greek Life Insurance Company S.A. Greece ING Greek General Insurance Company S.A. Greece ING Nationale-Nederlanden Magyarorszagi Biztosito Rt. Hungary Nationale Nederlanden Vida, Compañia de Seguros y Reaseguros S.A. Spain Nationale Nederlanden Generales, Compañia de Seguros y Reaseguros S.A. Spain ING Canada Inc. Canada Belair Insurance Company Inc. Canada ING Insurance Company of Canada Canada ING Novex Insurance Company of Canada Canada ING America Insurance Holdings, Inc. U.S.A. ING International Insurance Holdings, Inc. U.S.A. ING Life Insurance and Annuity Company U.S.A. ING North America Insurance Corporation U.S.A. Lion Connecticut Holdings Inc. U.S.A.
Companies treated as part of the banking operations ING Bank N.V. The Netherlands ING Bank Nederland N.V. The Netherlands Bank Mendes Gans N.V. The Netherlands ING Lease Holding B.V. The Netherlands ING Corporate Investments B.V. The Netherlands ING Vastgoed Management Holding B.V. The Netherlands InterAdvies N.V. The Netherlands Nationale-Nederlanden Financiële Diensten B.V. The Netherlands ING Commercial Finance B.V. The Netherlands Postbank N.V. The Netherlands Postbank Groen N.V. The Netherlands Westland Utrecht Hypotheekbank N.V. The Netherlands ING België N.V. Belgium ING Bank Slaski S.A. Poland ING Bank Deutschland A.G. Germany ING Financial Holdings Corporation U.S.A. ING Middenbank Curaçao N.V. Netherlands Antilles ING Vysya Bank Ltd. India ING Direct N.V. Canada, Germany, Spain, Australia, France, U.S.A., Italy, U.K. Oyak Bank A.S. Turkey
Loans and advances to customers 4,824 15 4,839 Amounts due from banks 508 508 Financial assets at fair value through profi t and loss 520 41 2 563
(3) Estimate of full year profi t of acquired company based on local accounting principles.
In April 2007 ING acquired 100% of AZL, an independent Dutch provider of pension fund management services, for EUR 65 million.
Loans and advances to customers 301 4 1,156 1,461 Financial assets at fair value through profi t and loss 350 350
Disposals announced and expected to occur in 2008 In December 2007 ING announced that agreement had been reached to sell NRG, a reinsurance unit, to Berkshire Hathaway. The sale for approximately EUR 300 million will result in a loss of approximately EUR 129 million. A provision has been recognised for this loss in Other liabilities. The net assets of NRG at 31 December 2007 amounted to EUR 397 million. Individually signifi cant assets and liabilities consisted of Investments of EUR 578 million and Technical provisions of EUR 194 million, respectively.
In February 2008, ING Group announced that it has reached an agreement with AXA to sell part of its Mexican business, Seguros ING SA de CV and subsidiaries, for a price of approximately EUR 1.0 billion. Under the terms of the agreement, ING will divest companies that comprise its non-life businesses of P&C and Auto, plus its Health and Life insurance lines, its Health Maintenance Organization (ISES) and its Bonding Business. This sale, which is subject to regulatory approval and is expected during the course of 2008, will allow ING to focus on growing its existing Mexican pension (Afore) and Annuities businesses. Seguros ING SA de CV and subsidiaries are presented within the Insurance Americas segment in Note 49 ‘Primary reporting format – Business segments’.
Cash in company acquired 19 19 Cash outfl ow on acquisition (2) 46 110 2,132 2,288
Cash in company disposed 11 27 38 Cash infl ow on disposal (1) 19 264 168 451
Liabilities Amounts due to banks 64 2,439 198 2,701 Customer deposits and other funds on deposit 8,984 2,184 11,168
General Primary line of business Bank Life Insurance Bank Life Insurance
Cash in company acquired / disposed 118 118 Cash outfl ow / infl ow on acquisition / disposal 83 98 181 663 353 1,016
In March 2005, ING Group reduced its stake in ING Bank Slaski from 87.77% to 75% by selling shares on the market. By reducing the stake in ING Bank Slaski, ING Group complied with requirements set by the Polish regulator in 2001. ING Group has no intention to further reduce its stake of 75% in ING Bank Slaski.
In November 2005, ING Group sold its stake in Austbrokers Holdings in an initial public offering. Austbrokers is one of the leading insurance brokers in Australia. The decision to sell the business follows ING’s sale of its 50% stake in general insurer QBE Mercantile Mutual to QBE in 2004.
Loans and advances to key management personnel amounts in thousands of euros Amount outstanding 31 December Average Interest Rate Repayments
33 FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES The following table presents the estimated fair values of ING Group’s fi nancial assets and liabilities. Certain balance sheet items are not included in the table, as they do not meet the defi nition of a fi nancial asset or liability. The aggregation of the fair values presented below does not represent, and should not be construed as representing, the underlying value of ING Group.
Financial assets Cash and balances with central banks 12,406 14,326 12,406 14,326 Amounts due from banks 48,461 39,861 48,875 39,868 Financial assets at fair value through profi t and loss
– designated as at fair value through profi t and loss 11,453 6,425 11,453 6,425 Investments
Investment contracts for risk of company 9,520 7,505 9,520 7,505 Investment contracts for risk of policyholders 14,132 13,245 14,132 13,245 Amounts due to banks 167,365 121,680 166,972 120,839 Customer deposits and other funds on deposit 522,859 496,077 525,216 496,680 Financial liabilities at fair value through profi t and loss
(1) Other assets do not include (deferred) tax assets, property held for sale, property under development for third parties and pension assets. (2) Other liabilities do not include (deferred) tax liabilities, pension liabilities, insurance provisions, property under development for third parties, share-based payment plans, other provisions and other taxation and social security contributions.
Loans and advances to customers For loans and advances that are repriced frequently and have had no signifi cant changes in credit risk, carrying amounts represent a reasonable estimate of fair values. The fair values of other loans are estimated by discounting expected future cash fl ows using interest rates offered for similar loans to borrowers with similar credit ratings.
The fair values of mortgage loans are estimated by taking into account prepayment behaviour and discounting future cash fl ows using interest rates currently being offered for similar loans to borrowers with similar credit ratings. The fair values of fi xed-rate policy loans are estimated by discounting cash fl ows at the interest rates charged on policy loans of similar policies currently being issued. Loans with similar characteristics are aggregated for purposes of the calculations. The carrying values of variable rate policy loans approximate their fair value.
Amounts due to banks The fair values of payables to banks are generally based on quoted market prices or, if unquoted, on estimates based on discounting future cash fl ows using available market interest rates for payables to banks with similar characteristics.
Customer deposits and other funds on deposit The carrying values of customer deposits and other funds on deposit with no stated maturity approximate their fair values. The fair values of deposits with stated maturities have been estimated based on discounting future cash fl ows using the interest rates currently applicable to deposits of similar maturities.
Financial liabilities at fair value through profi t and loss The fair values of securities in the trading portfolio and other liabilities at fair value through profi t and loss are based on quoted market prices, where available. For those securities not actively traded, fair values are estimated based on internal valuation techniques.
Other liabilities The fair value of debt securities in issue and other borrowed funds is generally based on quoted market prices or, if unquoted, on estimated by discounting expected future cash fl ows using a current market rate applicable to the yield, credit quality and maturity.
Financial assets designated at fair value through profi t and loss 5,012 4,608 1,833 11,453 Available-for-sale investments 204,838 69,306 1,753 275,897
Financial assets designated at fair value through profi t and loss 4,343 1,036 1,046 6,425 Available-for-sale investments 219,967 73,230 724 293,921
Financial liabilities designated at fair value through profi t and loss 10,914 2,788 13,702 Investment contracts (for contracts carried at fair value) 13,235 10 13,245
The total amount of changes in fair value estimated using a valuation technique not supported by market inputs recognised in net profi t in 2007 was EUR 74 million (2006: EUR 19 million).
Notes to the consolidated profi t and loss account of ING Group amounts in millions of euros, unless stated otherwise 34 INTEREST RESULT BANKING OPERATIONS
Interest income on available-for-sale securities 7,397 6,989 5,989 Interest income on held-to-maturity securities 736 755 639 Interest income on trading portfolio 32,443 21,414 15,237 Interest income on non-trading derivatives 6,190 5,231 5,658 Other interest income 3,619 2,798 1,764 Interest income banking operations 76,749 59,170 48,176
Interest expense on deposits by banks 5,131 3,559 2,371 Interest expense on customer deposits and other funds on deposit 18,563 15,107 11,960 Interest expense on debt securities 3,648 3,173 2,911 Interest expense on subordinated loans 1,167 1,132 1,126 Interest on trading liabilities 29,383 18,821 13,369 Interest on non-trading derivatives 6,115 5,159 5,821 Other interest expense 3,766 3,027 1,551 Interest expense banking operations 67,773 49,978 39,109
Reinsurance ceded –306 –339 –526 –1,968 –2,004 –2,031 –2,274 –2,343 –2,557
Direct premiums earned, gross 6,003 6,248 6,712 Reinsurance assumed premiums earned, gross 24 58 57 Total gross premiums earned 6,027 6,306 6,769
Income from investments in debt securities 6,857 6,359 5,757 6,857 6,359 5,757 Income from loans
Income from investments in debt securities and loans 8,784 8,756 8,340 18 12 8,784 8,774 8,352
Realised gains/losses on disposal of equity securities 2,975 772 511 330 149 171 3,305 921 682 Impairments of available-for-sale equity securities –36 –25 –46 –17 –17 –45 –53 –42 –91 Realised gains/losses and impairments of equity securities 2,939 747 465 313 132 126 3,252 879 591
Notes to the consolidated profi t and loss account of ING Group (continued)
Insurance operations Banking operations Total 38 VALUATION RESULTS ON NON-TRADING DERIVATIVES
Change in fair value of assets and liabilities (hedged items) 223 211 –98 –886 –203 467 –663 8 369 Valuation results on assets and liabilities designated as at fair value through profi t and loss (excluding trading) 89 56 –247 –111 145 –247 –111 39 NET TRADING INCOME
Results from foreign exchange transactions 174 120 –87 401 282 378 575 402 291
Expenditure from life underwriting Reinsurance and retrocession premiums 1,968 2,004 2,031 Gross benefi ts 28,877 26,234 22,129 Reinsurance recoveries –1,749 –1,705 –1,625 Change in life insurance provisions for risk of company 11,979 13,420 14,650 Costs of acquiring insurance business 1,098 1,083 1,060 Other underwriting expenditure 457 439 364 Profi t sharing and rebates 424 801 2,214
Expenditure from non-life underwriting Reinsurance and retrocession premiums 306 339 526
Underwriting expenditure includes an amount of EUR 4,275 million in 2007 (2006: EUR 4,141 million; 2005: EUR 3,956 million) in respect of commission paid and payable with regard to the insurance operations. Amortisation of deferred acquisition costs amounted to EUR 1,552 million in 2007 (2006: EUR 1,444 million; 2005: EUR 1,475 million).
Expenditure from Life underwriting includes an amount of EUR 110 million in 2007 (2006: EUR 181 million; 2005: EUR 220 million) in relation to reserve strengthening for Insurance Asia/Pacifi c as further described under Segment reporting.
Remuneration of Senior Management, Executive Board and Supervisory Board The information on share based payment plans and remuneration of the members of the Executive Board and the Supervisory Board is included in the remuneration report in the annual report. This information is considered to be an integral part of the audited annual accounts.
Exposure arising out of the share plan is not hedged. The obligations with regard to these plans will be funded by issuing own shares. On 15 March 2007 5.2 million own shares were issued in relation to the vesting of share plans.
The option rights are valid for a period of 5 or 10 years. Option rights that are not exercised within this period lapse. Option rights granted will remain valid until expiry date, even if the option scheme is discontinued. The option rights are subject to certain conditions, including a certain continuous period of service. The exercise prices of the options are the same as the quoted prices of ING Group shares at the date on which the options are granted.
The entitlement to the share awards is granted conditionally. If the participant remains in employment for an uninterrupted period of three years from the grant date, the entitlement becomes unconditional. In 2007 139,113 shares (2006: 52,100; 2005: 73,500) have been granted to the members of the Executive Board and 2,415,649 shares (2006: 2,432,686; 2005: 2,907,101) have been granted to senior management and other employees remaining in the service of ING Group.
The weighted average share price at the date of exercise for options exercised during 2007 is EUR 32.48.
The fair value of options granted is recorded as an expense under staff expenses and is allocated over the vesting period of the options. The fair values of the option awards have been determined by using a Monte Carlo simulation. This model takes the risk free interest rate into account (4.04% to 4.51%), as well as the expected life of the options granted (1 year to 7 years), the exercise price, the current share price (EUR 30.02 – EUR 33.10), the expected volatility of the certifi cates of ING Group shares (25% – 27%) and the expected dividends yield (3.98% to 4.63%).
Due to timing differences in granting option rights and buying shares to hedge them, an equity difference can occur if shares are purchased at a different price than the exercise price of the options. However, ING Group does not intentionally create a position and occurring positions are closed as soon as possible. If option rights expire, the results on the (sale of) shares which were bought to hedge these option rights are recorded in Shareholders’ equity.
The fair value of share awards granted is recorded as an expense under staff expenses and is allocated over the vesting period of the share awards. The fair values of share awards have been determined by using a Monte Carlo Simulation based valuation model. The model takes into account the risk free interest rate, the current stock prices, expected volatilities and current divided yields of the performance peer group used to determine ING’s Total Shareholder Return (TSR) ranking.
Other interest expenses includes EUR 7 million and EUR 92 million dividends paid on preference shares and trust preferred securities (2006: EUR 10 million and EUR 101 million; 2005: EUR 14 million and EUR 111 million).
Depreciation of property and equipment 98 102 113 321 361 376 419 463 489
Addition/(releases) of provision for reorganisations and relocations 11 –16 38 434 63 86 445 47 124
Associates exemption –814 –255 –386 Other income not subject to tax –577 –336 –222 Expenses not deductible for tax purposes 93 121 37 Impact on deferred tax from change in tax rates –9 –170 –2 Deferred tax benefi t from previously unrecognised amounts –64 –30 –413 Current tax benefi t from previously unrecognised amounts –222 –447 –391 Write down/reversal of deferred tax assets 8 –6 2 Adjustment to prior periods –49 –41 –77 Effective tax amount 1,535 1,907 1,379
The effect of the change in tax rates in 2006 is mainly attributable to a reduction in the tax rate in the Netherlands from 29.6% to 25.5%.
Tax benefi ts from previously unrecognised amounts includes releases of tax provisions resulting from settlements with tax authorities. Signifi cant amounts included relate to closing of tax audits in the main tax jurisdictions of the Group.
Effect of dilutive securities: Stock option and share plans 12.3 14.4
ING applies a system of capital charging that makes the results of the banking business units globally comparable, irrespective of the book equity they have and the currency they operate in. ING has the policy that, for the banking business units, equity locally needs to be invested at the local risk free rate. Banking business units are charged by the Corporate Line for the income that they make on the book equity invested and, are given a benefi t based on the risk free Euro rate on the economic capital they employ. Consequently, the results of the businesses as disclosed are the local results after Group overhead charges while the investment returns on equity are based on the risk free Euro rate on economic capital.
Share in profi t or loss of associates 316 191 212 26 –5 740 740
– Increase in provisions for Insurance and investment contracts 4,339 12,036 10,060 59 26,494 26,494
The segment Insurance Asia/Pacifi c has a net reserve inadequacy using a prudent (90%) confi dence level, and, in line with Group Policy, is taking measures to improve adequacy in that region. This inadequacy was offset by reserve adequacies in other segments, such that at the Group level there is a net adequacy at the prudent (90%) confi dence level.
Share in profi t or loss of associates 447 8 176 11 –4 638 638
Share in profi t or loss of associates 346 12 34 134 6 9 541 541
Cost incurred in 2007 to acquire property, equipment, and intangibles 1,081 142 46 214 236 103 8 1,830 1,830
As at 31 December 2007 ING’s well collateralised Alt-A RMBS portfolio was approximately 2% of total assets. Approximately 86% related to ING Direct; the average loan to value ratio is approximately 71% and more than 99% of the portfolio is AAA rated. ING’s available for sale Alt-A investments are measured at fair value in the balance sheet. Net investments in CDOs/CLOs at 31 December 2007 were 0.1% of total assets and are measured at fair value in the balance sheet. An analysis of the method applied in determining the fair values of fi nancial assets and liabilities is provided in Note 33 ‘Fair value of Financial Assets and Liabilities’.
ING has a limited exposure to monoline insurers. ING’s direct exposure to monoline insurers is negligible. However, ING has some indirect exposure to monoline insurers as it has insured 0.3% of total assets, either through embedded fi nancial guarantees (‘wrapped bonds’) or through credit derivatives. Changes in the monoline insurer’s rating (and as a result the asset’s fair value) impact the profi t and loss account for fi nancial assets at fair value through profi t and loss. Underlying wrapped bonds in the available for sale securities portfolio are monitored through the regular credit review process and were not impaired as of 31 December 2007.
ING Group’s credit risk management is described below for both ING Bank and ING Insurance. ING’s exposure to credit risk and the resulting credit risk losses in 2007 have been mitigated by maintaining a well diversifi ed portfolio.
ING Group’s capital management is described in the Capital Management section below. Throughout the market turmoil experienced during 2007, capital levels of ING Group, ING Bank and ING Insurance exceeded those required by regulators.
ING GROUP To ensure measured risk taking throughout the organisation, ING Group operates through a comprehensive risk management framework. This ensures the proper identifi cation, measurement and control of risks at all levels of the organisation so that ING Group’s fi nancial strength is safeguarded.
RISK GOVERNANCE ING’s risk management framework is based on the ‘three lines of defence’ concept which ensures that risk is managed in line with the risk appetite as defi ned by the Executive Board and is cascaded throughout the Group. This concept provides a clear allocation of responsibilities for the ownership and management of risk, to avoid overlaps and/or gaps in risk governance. Business line management
Chief Risk Offi cer The Chief Risk Offi cer (CRO), who is a member of the Executive Board, bears primary overall responsibility for the Group risk management function. The CRO is responsible for the management and control of risk on a consolidated level to ensure that the ING Group’s risk profi le is consistent with its fi nancial resources and the risk tolerance defi ned by the Executive Board. The CRO is also responsible for establishing a robust organisational basis for the management of risk throughout the ING organisation.
ING Group Credit Committee – Policy (GCCP): Discusses and approves policies, methodologies and procedures related to credit, country and reputation risks within ING Group. The GCCP meets on a monthly basis; ING Group Credit Committee – Transaction Approval (GCCTA): Discusses and approves transactions which entail taking credit risk
ING Group has over the past several year increased its use of risk assessment and risk measurement to guide decision making. As a result, the quality of risk models becomes increasingly important. To meet sophisticated business and regulatory requirements ING revised its governance process for approval of risk models, methods and parameter setting in 2007. The governance process ensures a clear assignment of responsibility and accountability.
Board level risk oversight At the highest level of the ING organisation, there are board committees which oversee risk taking, and have ultimate approval authority. ING Group has a two-tier board structure consisting of the Executive Board and the Supervisory Board; both bodies play a crucial role in managing and monitoring the risk management framework.
The Executive Board is responsible for managing risks associated with the activities of ING Group. Its responsibilities include ensuring that internal risk management and control systems are effective and that ING Group complies with relevant legislation and regulations. On a regular basis, the Executive Board reports on these issues and discusses the internal risk management and control systems with the Supervisory Board. On a quarterly basis, the Executive Board reports on the Group’s risk profi le versus its risk appetite to the Audit Committee, explaining changes in the risk profi le. The Audit Committee is a sub-committee of the Supervisory Board. It assists the Supervisory Board in reviewing and assessing ING Group’s major risk exposures and the operation of internal risk management and control systems. Audit Committee membership is such that specifi c business know-how and expertise relating to the activities of ING is available. The CRO attends the Audit Committee meetings.
The CRO makes sure that the board committees are well informed and understand ING Group’s risk position at all times. Every quarter the CRO reports to the board committees on ING’s risk appetite levels and on ING Group’s risk profi le. In addition the CRO briefs the board committees on developments in internal and external risk related issues and makes sure the board committees understand specifi c risk concepts.
ING has fully integrated risk management into the annual strategic planning process. This process aligns strategic goals, business strategies and resources throughout ING Group. The process is such that the Executive Board issues a Planning Letter which provides the organisation with the corporate strategic direction, and addresses key risk issues. Based on this Planning Letter, the business lines and business units develop their business plans which align with the Group’s strategic direction. The process includes a qualitative and quantitative assessment of the risks involved with the plans. It is part of the process to explicitly discuss strategic limits and group risk appetite levels. At each level, strategies and metrics are identifi ed to measure success in achieving objectives and to assure adherence to the strategic plan. Based on the business unit and line of business plans, the Executive Board formulates the Group Strategic Plan which is submitted to the Supervisory Board for approval.
ING GROUP RISK PROFILE In 2007, ING Group made a signifi cant step forward with its integrated risk management approach. At the Investor Day on 20 September 2007, the CRO presented for the fi rst time the ING Group risk dashboard. This risk dashboard captures the risks in all Banking and Insurance business lines in terms of Earnings at Risk and Capital at Risk, and shows the impact of diversifi cation across the Group. The
ING Group’s risk appetite is defi ned by the Executive Board as part of the strategic planning process. Strict boundaries are established with regard to acceptable risk types and levels. ING’s ‘three lines of defence’ governance framework ensures that the risk appetite is cascaded through the Group, thereby safeguarding proper and controlled risk taking. The role of the business lines is to maximise the value within established risk boundaries. Each quarter, the Executive Board monitors that the fi nancial and non fi nancial risks are within the boundaries of the risk appetite as set in the strategic planning process.
Confi dence interval 90% 90% 99.95% (based on AA target rating) Stressed metric Accounting earnings Value Value
Potential accounting earnings reduction against expectation during a ‘moderate’ stress scenario (i.e. 1 in 10)
The ING Group EaR over the actual (pre-tax) earnings decreased from 32% in 2006 to 31% in 2007. This is primarily due to the earnings increasing stronger than EaR. ING Bank’s EaR dominates the overall ING Group EaR mainly due to credit and transfer risk. Furthermore, real estate risk combined for ING Bank and ING Insurance has a signifi cant impact on EaR, especially when e.g. compared to interest rate risk. This is caused by the fact that, contrary to the accounting treatment of interest rate risk, most value changes in real estate assets directly impact earnings. The increase over 2007 in real estate risk for ING Bank was mainly due to a combination of an exposure increase in line with higher market values in 2007 (mainly in The Netherlands), and the introduction of improved risk modelling of business behaviour. The increase in equity risk for ING Bank was mainly caused by the inclusion of strategic equity interests, while the increase in ING Insurance is due to an increased earnings risk from potential equity impairments at year end 2007 and modelling refi nements in Japan and US insurance entities.
(1) Total ING Group is comprised of ING Bank and ING Insurance, excluding core debt of EUR 4,728 million within ING Group.
(1) Total ING Group is comprised of ING Bank and ING Insurance, excluding core debt of EUR 4,210 million within ING Group.
During 2007 Group CaR increased more than Group EaR mainly due to the fact that CaR tends to grow faster than EaR under accounting rules e.g. the earnings impact for interest rates and equity price changes are normally lower than their economic impact.
Economic Capital ING Group Since 1999 ING Bank has been disclosing Economic Capital information externally, whereas ING Insurance disclosed Economic Capital information for the fi rst time in 2007. Although the fundamental principles are the same, ING Bank and ING Insurance Economic Capital information is currently calculated based on (partly) separately developed models (see Model Disclosure section below) that may differ in the calculation and aggregation approach due to different market practices and standards used in the banking and insurance industries.
Credit risk limits for bank and insurance business; Market Value at Risk limits for the insurance business; ALM/Value at Risk limits for bank operations.
The following risk disclosures provide more insight into how the risk measures used by the risk organisation are linked to the Group risk dashboard and Economic Capital.
ING BANK ING Bank is engaged in selling a broad range of products. The fi nancial risks that arise from selling these products are managed by the Corporate Credit and Market Risk departments. Operational risks are managed by the Corporate Operational, Information and Security Risk department.
Wholesale Banking 8,646 8,136 Retail Banking 5,360 4,050 ING Direct 2,831 3,430 Corporate Line Bank* 1,090 260 Total banking operations 17,927 15,876 * Corporate Line includes funding activities at ING Bank level, internal transactions between business units and the Corporate Line, and is managed by Capital Management.
Credit analysis is risk/reward-oriented in that the level of credit analysis is a function of the risk amount, tenor, structure (e.g. covers received) of the facility, and the risks entered into. For credit risk management purposes, fi nancial obligations are classifi ed into lending, (pre)-settlement, money market and investments as well in trading activities. ING Bank applies a Risk Adjusted Return on Capital framework (RAROC) which consistently measures the performance of different activities and links to shareholder value creation. The use of RAROC increases focus on risks versus rewards in the decision making process, and consequently stimulates the use of scarce capital in the most effi cient way. More sophisticated RAROC-based tools are used internally to ensure a proper balance of risk and reward within the portfolio and concentration parameters. ING’s credit analysts make use of publicly available information in combination with in-house analysis based on information provided by the customer, peer group comparisons, industry comparisons and other quantitative techniques.
Pre-settlement risk 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 (potential or expected risk) is the cost of ING replacing a trade in the market. This credit risk category is associated with dealing room products such as options, swaps, and securities fi nancing transactions. Where there is a mutual exchange of value, the amount of outstanding is generally based on the replacement value (mark-to-market) plus potential future volatility concept, using an historical 7 year time horizon and a 99% confi dence level.
Country risk Country risk is the risk specifi cally attributable to events in a specifi c country (or group of countries). It can occur within each of the fi ve above described risk categories. All transactions and trading positions generated by ING include country risk which is further divided into economic and transfer risk. Economic risk is the concentration risk relating to any event in the risk country which may affect transactions and other exposure in that country, regardless of the currency. Transfer risk is the risk incurred through the inability of ING or its counterparties to meet their respective foreign currency obligations due to a specifi c country event.
In countries where ING is active, the relevant country’s risk profi le is regularly evaluated, resulting in a country rating. Country limits are based on this rating and ING’s risk appetite. Exposures derived from lending, investment pre-settlement and money market activities are then measured and reported against these country limits on a daily basis. Country risk limits are assigned for transfer risk mainly for emerging markets.
Collateral policies As with all fi nancial institutions and banks in particular, ING is in the business of taking credit risks in an informed and measured fashion. As such, the creditworthiness of our customers, trading partners and investments is continually evaluated for their ability to meet their fi nancial obligations to ING. During the assessment process of creating new loans, trading limits, or investments, as well as reviewing existing loans trading positions and investments, ING determines the amount and type of collateral, if any, that a customer may be required to pledge to ING. Generally, the lower the perceived creditworthiness of a borrower or fi nancial counterparty, the more collateral the customer or counterparty will have to provide. Within counterparty trading activities, ING actively enters into various legal arrangements whereby ING and/or counterparties may have to post collateral to one another to cover market fl uctuations of their relative positions. Laws in various jurisdictions also affect the type and amount of collateral that ING can receive or pledge. Additionally, ING will
sometimes enter into credit default swaps, and other similar instruments, in order to reduce the perceived credit risk on a given borrower or portfolio. The type of collateral which is held as security is determined by the structure of the loan or position. Consequently, since ING’s portfolio is diversifi ed, the profi le of collateral it receives is also diversifi ed in nature and does not refl ect any particular collateral type more than others.
ING BANK CREDIT RISK PROFILE ING Bank’s credit exposure is mainly related to traditional lending to individuals and businesses followed by investments in bonds and other securitised assets. Loans to individuals are mainly mortgage loans secured by residential property. Loans (including guarantees issued) to businesses are often collateralised, but can be unsecured based on internal analysis of the borrowers’ creditworthiness. Bonds in the investment portfolio are generally unsecured. Securitised assets such as Mortgage Backed Securities (MBS) and Asset Backed Securities (ABS) are secured by the pro rata portion of the underlying diversifi ed pool of assets (commercial or residential mortgages, car loans and other assets) held by the issuer of the security. The last major area of credit risk involves pre-settlement credit exposures which arise from trading activities, including derivatives, repurchase transactions and securities lending/borrowing and foreign exchange transactions.
For Business clients, ING has taken a proactive approach to restructuring loans that may have otherwise experienced fi nancial diffi culties, which has led to an increase in the level of restructuring loans returning to a regular status. The decrease in the level of problem loans returning to performing (regular) status is related to the overall decrease in problem loans as whole.
Renegotiated consumer and mortgage loans that would otherwise be past due or impaired
From restructuring (18-19) to regular (1-17) status From recovery (20-22) to regular or restructuring status (1-19) 2,945 2,008 Total of renegotiated consumer and mortgages loans (‘Consumer’) 2,945 2,008
The table above represents the breakdown of impaired loans by major industry sector across all of ING’s banking operations. Against this portfolio, ING holds specifi c and collective provisions of EUR 711 million and EUR 680 million, respectively (2006 EUR 1,391 million and EUR 718 million respectively), representing the difference between the amortised cost of the portfolio and the estimated recoverable amount discounted at the effective rate of interest.
Provisions The credit portfolio is under constant review. A formal analysis takes place quarterly to determine the provisions for possible bad debts, using a bottom-up approach. Conclusions are discussed by the IPC, which advises the Executive Board on specifi c provisioning levels. ING Bank identifi es as impaired loans those loans for which it is probable, based on current information and events that the principal and interest amounts contractually due will not be collected in accordance with the contractual terms of the loan agreements.
Changes in the composition of the Group 2 –78 95 1 –23 98 –101 Write-offs –593 –404 –302 –236 –57 –51 –952 –691
(1) During 2007, ING Cards was moved from ING Direct to Retail Banking. In order to provide comparative fi gures, EUR 21 million of ‘Increase/(decrease) in loan loss provision’
in 2006 has been reclassifi ed from ING Direct to Retail banking.
ING Bank’s risk costs continued to be low in 2007, as a result of the low infl ow of new problem loans and continued improvement of the average risk profi le of our credit portfolio refl ecting both the strength of the economy in our core markets in Wholesale Banking and the low risk growth strategy in Retail Banking and ING Direct. The total balance of Wholesale Banking provisions in 2007, like in 2006 experienced a material decrease as a result of signifi cant write offs, while there was little or no compensating effect from provisions on new problem loans. The 2007 Wholesale Banking risk costs were also low due to a release of EUR 115 million from one single debtor.
Risk classes ING Bank portfolio by business line, as % of total outstandings (1)
(1) Based on credit risk measurement contained in lending, pre-settlement, money market and investment activities. The table refl ects probabilities of default and does not take collateral into consideration.
Lending Investment Money Market Pre-settlement Total ING Bank 17-22 (CCC & Problem
(1) Based on credit risk measurement contained in lending, (pre)-settlement, money market and investment activities. The table refl ects probabilities of default and does not take collateral into consideration.
Construction, infrastructure and Real Estate 13.3% 12.3% 2.4% 2.0% 0.8% 0.8% 6.5% 5.8%
ING Direct showed a shift towards private individuals refl ecting the emphasis on building the ING Direct residential mortgage business. The other banking units showed no signifi cant shift in the economic sector concentrations. All other industries not shown in the table above have less than 2.0% concentrations.
Wholesale Banking Retail Banking ING Direct Total ING Bank amounts in billions of euros 2007 2006 2007 2006 2007 2006 2007 2006
(1) Only covers total exposures in excess of EUR 10 billion, including intercompany exposure with ING Insurance.
The growth in most countries presented above followed the growth pattern of the portfolio as a whole. The growth at ING Direct in Germany is driven by own originated mortgages as well as the acquisition of a residential mortgage portfolio, which closed in late 2007. This was offset by the sale of the former BHF problem loan portfolio within Wholesale Banking. Retail Banking in The Netherlands grew through organic growth as well as the purchase of Nationale Nederlanden Hypotheek Bedrijf (NNHB residential mortgages) from Nationale Nederlanden.
ING BANK – MARKET RISKS Market risk is the risk that movements in market variables, such as interest rates, equity prices, foreign exchange rates, negatively impact the bank’s earnings or market value. Market risk either arises through positions in trading books or through the banking book positions. The trading positions are held for the purpose of benefi ting from short-term price movements, while the banking book positions are intended to be held in the long-term (or until maturity) or for the purpose of hedging other banking book positions.
Market Risk in Trading Portfolios Organisation Within the trading portfolios, positions are maintained in the professional fi nancial markets for the purpose of benefi ting from short term price movements. Market risk arises in the trading portfolios through the exposure to various market risk factors, including interest rates, equity prices and foreign exchange rates.
CMRM Trading focuses on the management of market risks in the trading portfolios of Wholesale Banking (mainly Financial Markets) as this is the only business line where signifi cant trading activities take place. Trading activities include facilitation of client business, market making and proprietary position taking in cash and derivatives markets. CMRM Trading is responsible for the development and implementation of trading risk policies and risk measurement methodologies, reporting and monitoring of risk exposures against approved trading limits and validation of pricing and risk models. CMRM also reviews trading mandates and limits, and performs the gatekeeper role in the product review process. Management of trading market risk is performed at various organisational levels, from CMRM Trading overall down to specifi c business areas and trading offi ces.
In general, the trading VaR showed larger movements in 2007 resulting in broader ranges for the equity and interest rate VaR. Due to a counterparty downgrade in December, in particular the interest rate VaR (including credit spread exposures) has risen substantially.
Most important foreign exchange, interest rate and credit spread positions (year end 2007)
Interest Rate (Bpv (1)) Eurozone –1.2 United States –0.8 Mexico –0.4 South Korea –0.1 United Kingdom –0.1
Organisation Within ING Bank, positions are either labelled as trading or non-trading (banking book) positions. The most important aspect in segregating the banking from the trading books is the intent of the positions held in these books. The banking book positions are intended to be held for the long-term (or until maturity) or for the purpose of hedging other banking book positions.
ING Bank’s capital management positions, i.e. the own funds (core capital) and the investments of these own funds, are isolated in the ING Bank corporate line. ALCO Bank determines the target maturity profi le over which ING Bank’s own funds must be invested. This maturity profi le refl ects the long term nature of the rate of return required by its investors and aims for both earnings maximisation and stabilisation. ALCO Bank considers a well balanced portfolio of long-dated fi xed income investments as the risk neutral position.
For the determination of the interest rate sensitivity of savings accounts and current accounts, several methods have been developed, e.g. historical simulation, Earnings at Risk analysis and valuation models. Pricing strategies, outstanding volumes and the level and shape of the yield curve are taken into account in these models. Based on these analyses, investment rules are determined for the various portfolios.
The hedging of the embedded prepayment options within mortgage portfolios is based on prepayment prediction models. These models include the incentive for clients to prepay. The parameters of these models are based on historical data and are regularly updated. The interest sensitivity of the embedded offered rate options is determined as well for the mortgage portfolio and a hedging process is in place to minimise the resulting interest rate risk.
After transferring the outright interest rate risk position to the ALM books, the residual interest rate risk that remains in the commercial banking books is caused by basis risk and optionality. The commercial business units bear responsibility for these residual interest rate risks that result from banking products of which future cash fl ows depend on client behaviour (e.g. optionality in mortgages) and from banking products of which the client rate earned and paid imperfectly correlate with the changing market rates (basis risk). Examples of products in which these risks are inherent are demand deposits, saving accounts and mortgages.
In the following sections, the risk fi gures for interest rate risk in the banking books are presented. ING Bank uses several measures to manage interest rate risk both from an earnings and a value perspective. Earnings-at-Risk is used to provide the earnings perspective and the Net Present Value (NPV)-at-Risk and Basis Point Value (BPV) fi gures provide the value perspective.
Net Present Value-at-Risk The Net Present Value (NPV)-at-Risk fi gures represent the full value impact (i.e. including convexity) to the banking books resulting from changing interest rates. This full value impact cannot be linked directly to the balance sheet or profi t and loss account as the value mutations in the banking books only for a small part are fed directly through the profi t and loss account or through equity. The largest part, namely the value mutations of the amortised cost balances, is neither recognised in the balance sheet nor directly in the profi t and loss account. The NPV-at-Risk fi gures in the table below are determined on the basis of an instantaneous upward 1% parallel shock of market rates in line with the EaR calculations. For the ALM books the NPV-at-Risk fi gures again capture the potential change of value due to the structural mismatch in interest rate positions. For the commercial banking books the NPV-at-Risk calculations capture the convexity resulting from the optionality in the main mortgage portfolios. In these calculations it is assumed that savings and other demand deposits of Retail and Wholesale Banking are perfectly represented via the replicating methods and therefore fully hedged. The NPV-at-Risk of the Corporate Line again only refl ects the interest risk profi le of the investments of the bank’s own funds.
By Currency Euro –1,498 –1,465 US dollar –439 –402 Pound sterling 74 –58
Basis Point Values The Basis Point Value (BPV) fi gures below represent the value impact to the banking books resulting from a change in interest rates of 1 basis point. The BPV fi gures represent the directional position under a small shift in interest rates and do not capture the convexity resulting from the optionality in mortgages under larger interest rate movements.
FX Translation result ING’s strategy is to protect its Tier 1 ratio against unfavourable currency fl uctuations. The protection is largely achieved by the issuance of USD and GBP denominated capital, and furthermore by taking structural foreign currency positions. In general, open positions are deliberately taken in order to achieve protection of the Tier 1 ratio by aligning non-EUR denominated capital with risk weighted assets in these currencies. The US dollar, Pound sterling, Polish zloty, Australian dollar and Canadian dollar are the main currencies in this respect. With the acquisition of the Turkish Oyak Bank, the Turkish lira has been added to the list of main currencies. For other currencies the objective is to substantially mitigate the translation risk.
US dollar 2,644 –3,630 –986 –483 –1,469 Pound sterling –848 –817 –1,665 1,635 –30
Overnight exposure ING Bank, for primary non-trading currencies 2006 Foreign investments Tier-1 Gross exposure Hedges Net position
The acquisition of the Turkish Oyak Bank was concluded in December 2007. As a result, the number of risk-weighted assets denominated in Turkish lira increased substantially. The net position is maintained to safeguard the Tier 1 ratio against currency fl uctuations of the Turkish lira.
The FX risk in the non-trading books is measured by using the Value-at-Risk methodology as explained in the trading risk section. The VaR for FX quantifi es with a one-sided confi dence interval of 99%, the maximum overnight loss in 99% of the cases that could occur due to changes in foreign exchange rates.
Equity Price Risk in Banking Books Equity price risk arises from the possibility that equity security prices will fl uctuate, affecting the value of equity securities and other instruments of which the price reacts similarly to a particular security, a defi ned basket of securities, or a securities index. ING Bank maintains a rather stable portfolio with substantial equity exposure in its banking books. This equity exposure mainly consists of the investments in associates of EUR 2,010 million (2006: EUR 1,223 million) and equity securities held in the Available-for-Sale portfolio of EUR 3,627 million (2006: EUR 1,898 million). The value of equity securities held in the Available-for-Sale portfolio is directly linked to equity security prices with increases/decreases being recognised (except in the case of impairment) in the revaluation reserve. During the year ended 31 December 2007 the revaluation reserve relating to equity securities held in the Available-for-Sale portfolio fl uctuated between a month-end low amount of EUR 518 million (2006: EUR 463 million) and a high amount of EUR 2,580 million (2006: EUR 641 million). Investments in associates are measured in accordance with the equity method of accounting and the balance sheet value is therefore not directly linked to equity security prices.
Only for this last category, Real Estate price shocks will have a direct impact on reported net profi t.
Delegated Responsible: Working group consisting of Corporate Market Risk Management, Capital Management and Financial Markets
The liquidity risk management function is delegated to CMRM, which bears the responsibility for liquidity risk stress testing and for the identifi cation, measurement and monitoring of the liquidity risk position. For the measurement and monitoring of the actual liquidity position the focus is on the daily cash and collateral position. For stress testing purposes the liquidity risk positions are calculated in line with the regulatory reporting requirements for liquidity risk of the Dutch Central Bank. For this purpose ING Bank’s weekly and monthly liquidity positions are stress tested under a scenario that is a mix between a market event and an ING specifi c event. The resulting liquidity positions are corrected for liquidity surpluses in inconvertible currencies and in locations with restrictions on capital transfer.
Contingency liquidity risk Contingency liquidity risk relates to the organisation and planning for liquidity management in times of stress. Within ING a specifi c crisis team is responsible for the liquidity management in times of crisis. This crisis team consists of the CRO the CFO, the Directors of CMRM and Capital Management and all the main treasurers of both ING Bank and ING Insurance. Within ING it is policy to have adequate and up-to-date contingency funding plans in place throughout the organisation. The main objective of ING’s contingency funding plans is to enable senior management to act effectively and effi ciently at times of crisis. The contingency funding plans are established for addressing temporary and long-term liquidity disruptions caused by a general event in the market or an ING specifi c event. These plans ensure that all roles and responsibilities are clearly defi ned and all necessary management information is in place. The contingency funding plans are regularly tested both on consolidated and local level in order to be best prepared for potential liquidity risk issues.
The objective of the insurance risk management function is to provide the business a sustainable competitive advantage by fully integrating risk management into the tactical daily business activities as well as ING’s broader business strategy. Insurance Risk Management accomplishes this through four core activities. First, the IRM function ensures that products and portfolios are structured, underwritten, priced, approved and managed appropriately in compliance with internal and external rules and guidelines. Second, IRM ensures that the ING Insurance risk profi le is transparent and well understood by management and that it stays within delegated authorities, with a ‘no surprises’ approach to reporting and monitoring risks. Third, IRM ensures that both risk and reward are adequately considered in the development of business strategy, for example by supporting the planning and allocation of Economic Capital and limits during the strategic planning process. Finally, IRM ensures that these steps are understood by ING’s stakeholders, including shareholders, rating agencies, regulators and policy holders.
Risk management policies and tools To ensure appropriate risk management, CIRM in close co-operation with the business line CIRO’s, has developed Standards of Practice providing guidelines and tools to manage risks. While these standards are principle based, they include mandatory requirements to which the business unit CIRO must comply.
Other standards prescribe quarterly insurance risk reporting, ALM procedures and reporting, actuarial and economic assumption setting, reserve adequacy testing and embedded value measurement and reporting, amongst others.
To further manage risk, ING Insurance has implemented several limit structures. Examples include but are not limited to the following: Market Value at Risk (MVaR) limits provide the fundamental framework to manage the market and credit risks resulting from the Insurance operations’ asset / liability mismatch; Credit risk concentration limits; Mortality concentration limits; Catastrophe and mortality exposure retention limits for its insurance risk; and Investment and derivative guidelines.
Taiwan As of 31 December 2007, the inadequacy for Taiwan is EUR 1.5 billion (2006: EUR 2.4 billion) based on a 90% confi dence level, on a Taiwan reserve level (net of DAC and VOBA) of EUR 11.1 billion. The inadequacy results from a material exposure to a sustained low interest rate environment in Taiwan. This is due to long term interest rate guarantees of 6–8% embedded in the life and health contracts sold by the business until 2001. These long term interest rate guarantees together with the future anticipated premiums on these contracts (which have a present value of approximately EUR 15 billion) create a liability for the portfolio with an effective duration of approximately 32, compared to an asset duration of approximately 11. ING stopped selling these high guarantees in its Taiwan life insurance products since 2002.
ING INSURANCE RISK PROFILE Economic Capital ING Insurance The objective of the Economic Capital framework is to achieve an advanced risk and capital measurement and management structure that: Covers all the risks in the business units and is applied consistently across all risks and business units; Facilitates and encourages adequate risk and capital management, including the proper pricing of products and sound capital allocation decisions.
The ING Insurance Economic Capital model is described in more detail in the Model Disclosure section and is based on a 99.95% one year Value at Risk framework. It is important to note that since industry practice relating to Economic Capital is still evolving and moreover Solvency II standards are still under discussion ING Insurance models are expected to evolve as a result. Solvency II currently contemplates a 99.5% Value at Risk standard for internal models which is a lower risk threshold than used in ING’s model.
Economic Capital disclosures relating to ING Insurance include diversifi cation benefi ts that arise within ING Insurance. The following table provides an Economic Capital break down by risk category with diversifi cation benefi ts proportionally allocated to the risk types: Economic capital break-down ING Insurance by risk category (1)
The overall Economic Capital and risk profi le remained stable during 2007. The primary increase came from model corrections/ refi nements and the acquisition of pension business in Latin America. There were offsetting changes to the risk profi le in various businesses, but the overall impact to the ING Insurance risk profi le was not large. Credit risk decreased during 2007 primarily due to refi nements to the credit risk Economic Capital model. The Economic Capital for ING Insurance is mostly related to market risks, both hedgeable and non-hedgeable.
The following table provides the Economic Capital breakdown by business line with diversifi cation benefi ts proportionally allocated to the business lines.
Insurance Americas 6,541 5,987 Insurance Asia/Pacifi c 7,033 7,463 Insurance Europe 5,890 5,942 Corporate Line Insurance (1) 3,735 3,018 Total insurance operations 23,199 22,410 (1) Corporate Line includes funding activities at ING Insurance level, explicit internal transactions between business unit and Corporate Line, managed by Capital
While the fi gures above are shown by business line, the diversifi cation of risks across ING businesses is calculated across business units. Total diversifi cation between ING Insurance’s business units and the Corporate Line Insurance is 33% for 2007 (36% in 2006).
The overall split of Economic Capital is roughly similar across all three business lines. Asia/Pacifi c has the largest Economic Capital due to the signifi cant non-hedgeable interest rate and morbidity risks in Taiwan. Taiwan Economic Capital was in the range 65-75% of the Asia/ Pacifi c total. The Economic Capital in the Americas and Europe is driven primarily by interest rate, credit spread, and equity risk. The corporate line risk relates mostly to foreign exchange translation risk related to the potential loss of market value surplus in non-Euro denominated business units and an internal-only transaction with Taiwan relating to interest rate and foreign exchange risks.
ING INSURANCE – MARKET RISKS ING Insurance is exposed to market risk to the extent to which the market value of surplus can be adversely impacted due to movements in fi nancial markets; these include interest rates, equity prices, implied volatilities of options, foreign exchange rates and real estate prices. Changes in fi nancial market prices impact the market value of ING’s current asset portfolio and hedging derivatives directly as well as the calculated market value of ING’s insurance liabilities. The following table provides information on Economic Capital split by risk category: ING Group Annual Report 2007
These limits are managed by ALCO Insurance at the relevant organisational level. The Group Insurance ALCO determines the aggregate limit and ensures that the Group stays within the limit and allocates the sub-limits to business lines, with similar roles for the business line and business unit ALCOs. Limit breaches by business lines are reported to ALCO Insurance and resolved in accordance with policy within the next quarter.
Earnings sensitivities are defi ned based on a shock scenario at the 90% confi dence level on pre tax accounting earnings, projected one year forward from the calculation date. Therefore the table below provides earnings sensitivities to an instantaneous shock at the 90% confi dence level projected through to 31 December 2008.
Interest rate (1% up) –161 –166 Interest rate (1% down) 125 172 Equity (15% down) –613 –262 Real Estate (8% down) –570 –553 Foreign Exchange (10% worst case) –338 –359
Earnings sensitivities are defi ned based on a shock scenario at the 90% confi dence level on pre-tax accounting earnings, projected one year forward from the calculation. Therefore the table below provides earnings sensitivities to an instantaneous shock at the 90% confi dence level projected through to 31 December 2008.
The table above presents fi gures after diversifi cation between insurance risks and diversifi cation across business units of ING Insurance. The largest earnings sensitivity relates to health claims in The Netherlands, Greece, and Asia and P&C claims in the Benelux, Canada, and Mexico. The increase in P&C earnings sensitivities in 2007 is mostly due to an improvement in the correlation model between P&C risks within Canada.
ING Insurance’s credit exposure arises from the investment of insurance premiums into assets subject to credit risk, largely in the form of unsecured bond investments, and smaller amounts of residential mortgages and structured fi nance products. In addition, credit exposure also arises from derivatives, sell/repurchase transactions, securities lending/borrowing and reinsurance contracts used to hedge the portfolio. ING Insurance has a policy of maintaining a high quality investment grade portfolio.
The increase in Problem Grade assets and investments at the Insurance operations is a direct result of the change in treatment of investments which have not been internally or externally rated, which is often the case for equity investments, mutual fund investments and reinsurance contracts. Previously, these assets received a rating of 13 (BB-). However, in line with the ING Group policy to treat unrated assets similar to ING Bank, they now receive a rating of 17. As a result of the sale of the Nationale Nederlanden Hypotheek Bedrijf (NNHB, residential mortgages) to ING Bank and parts of the Belgian insurance business, there was a corresponding improvement in the rating quality of Insurance Europe investments away from BBB and BB.
Construction, infrastructure and Real Estate 9.3% 9.9% 2.3% 2.4% 2.5% 2.2% 5.7% 5.6%
The sale of the Nationale Nederlanden Hypotheek Bedrijf (NNHB residential mortgages) to ING Bank is the reason for the reduction in the concentration to Private Individuals in Europe. There were no other signifi cant shifts in the portfolio concentration. All other industries not shown in the table above have less than 2.0% concentrations.
Acting with integrity and preserving ING’s reputation is of paramount importance. Complying with relevant laws, regulations and ethical and internal standards, in both letter and spirit, is a prerequisite for this. Reputation risk is defi ned as the current and prospective impact on earnings and capital arising from negative public opinion. This may affect the ability to establish new relationships or services or continue servicing existing relationships. This risk may also expose an institution to litigation, fi nancial loss, or a decline in its customer base. Managing reputation risk is therefore an essential part of ING’s business strategy, taking into account all stakeholders, whose perception of ING determines its reputation. Risks or uncertainties, both positive and negative, are carefully managed, as reputation risk does not exist in isolation – rather, all risks may impact on reputation.
Within ING everything centres on people and trust. ING’s Executive Board and Senior Management share a clear vision of reputation management that goes well beyond the compliance and operational risk functions itself and drives the process of delivering on that vision. ING therefore expects the highest levels of personal conduct and integrity from all its employees and managers in order to safeguard its reputation.
Clear and accessible policies and procedures are embedded in ING business processes in all business lines. An infrastructure is in place to enable management to track current and emerging compliance issues and to communicate these to internal and external stakeholders. A comprehensive system of internal controls and audit creates an environment of continuous improvement in managing compliance risk. ING understands that good compliance involves understanding and delivering on the expectations of customers and other stakeholders, thereby improving the quality of key relationships based on honesty, integrity and fairness.
The Scope of the Compliance function The Compliance function focuses on managing the risks arising from laws, regulations and standards which are specifi c to the fi nancial services industry and which are issued by legislative and regulatory bodies relevant to ING’s businesses, or by ING Group Compliance. The Compliance function actively educates and supports the business in managing areas such as anti-money laundering, counter-terrorist fi nancing, confl icts of interest management, sales and trading conduct and Customer interest and protection.
ING’s global operations include business activities throughout the world, with subsidiaries and branches in many countries. Compliance activities in ING’s businesses consequently embrace or relate to various legal and regulatory requirements, as well as a variety of business and commercial needs.
The organisation of Compliance The Chief Compliance Offi cer (Group Compliance) reports directly to the CRO and is responsible for developing and establishing the company-wide Compliance Policy. The Chief Compliance Offi cer also establishes and approves the minimum standards for Compliance and assists and supports the Executive Board in managing ING’s Compliance risks. The Compliance function is organised along functional reporting lines.
The Group Compliance function comprises Corporate Compliance and Business Line Compliance. Corporate Compliance is responsible for developing and communicating ING’s global compliance framework, policies and guidance for key areas of Compliance risk and provides advice to Business Line Compliance staff on Group policy matters.
ING uses a layered functional approach within Business Line Compliance to ensure systematic and consistent implementation of the company-wide Compliance Policy, minimum standards and the Compliance Framework. The local Compliance Offi cer has the responsibility to assist local management in managing compliance risk within that business unit. The regional or division Compliance Offi cer has a supervisory role in the compliance risk management process and manages and supervises all functional activities of the Compliance Offi cers in the respective region or division. The business line Compliance Offi cers perform this task for each respective business line and also provide leadership and overall direction to the regional or division Compliance Offi cers.
To ensure robust compliance risk management, Corporate Compliance, in close cooperation with business line Compliance and the business operations, has developed policies, processes and tools to assist with management of compliance risks. This set of compliance risk management processes and tools consists of the following components: Compliance chart (outlining the local scope of compliance in terms of laws, regulations and standards); Compliance risk identifi cation and assessment; Compliance risk mitigation, (including implementation of standards, procedures and guidelines); Compliance risk monitoring (adherence to the Compliance Policy, its minimum standards and applicable legal and regulatory standards; quarterly reporting); Incident management; Training and education; Action tracking; Provision of compliance advice; Compliance governance.
Developments in 2007 Financial institutions continue to experience close scrutiny by regulatory authorities, governmental bodies, shareholders, rating agencies, customers and others to ensure they comply with the relevant laws, regulations, standards and expectations. Bank and Insurance regulators and other supervisory authorities in Europe, the US and elsewhere continue to oversee the activities of fi nancial institutions to ensure that they operate with integrity and conduct business in an effi cient, orderly and transparent manner. ING seeks to meet the standards and expectations of regulatory authorities and other interested parties through a number of initiatives and activities, including scrutinising account holder information, payment processing and other transactions to support compliance with regulations governing money-laundering, economic and trade sanctions, bribery and other corrupt practices. The failure or perceived failure by ING to meet applicable standards in these areas could result in, among other things, suspension or revocation of ING’s licenses, cease and desist orders, fi nes, civil or criminal penalties and other disciplinary action which could materially damage ING’s reputation and fi nancial condition. However, ING’s primary focus is to support these objectives as good business practice through Business Principles and group policies.
One of the key priorities in 2007 was to work closely with business management to further embed the company-wide Financial Economic Crime policy. An enhanced Financial Economic Crime policy has been rolled out globally, requiring the implementation of strict Know Your Customer and Customer Due Diligence programs as well as the use of technology for the screening of customers and transactions.
Also in 2007 ING continued to increase knowledge and understanding of compliance among its employees. The Executive Board stressed that ING’s strategy of sustainable, profi table growth can only be achieved along with effective compliance management. Compliance support teams have been established to help business lines embed compliance within their activities and extensive programs have been initiated to increase compliance knowledge and understanding. These teams serve as a channel for education, coaching, communication and sharing good compliance practices.
OPERATIONAL RISKS Effective operational risk management leads to more stable business processes and lower operational risk costs. The operational risk management function comprises operational, information and security risks.
This is done by raising operational risk awareness, increasing transparency, improving early warning information and allocating risk ownership and responsibilities. It is the responsibility of group and local Operational Information and Security Risk Management (OISRM) to support general management in managing operational information and security risk (hereafter referred to as operational risk).
During 2007 ING introduced internally the non-fi nancial risk dashboard to provide integrated risk information on compliance, operational, information and security risk using a consistent approach and risk language. Besides the above mentioned risk categories the nonfi nancial risk dashboard distinguishes compliance risk; i.e. the risk that ING does not comply with laws, regulations, standards and expectations, which can result in suspension or revocation of its licenses, cease and desist orders, fi nes civil penalties or other disciplinary action which could materially harm ING’s results of operations and fi nancial condition.
Risk Management Processes Examples of risk management tools Risk Governance – Operational Risk Committee
Risk Identifi cation – Risk and Control Self Assessments – Risk Awareness Programs – Fraud detection
Risk Monitoring – Audit Findings Action Tracking – Key Risk Indicator Reporting – Operational risk dashboard
The overall scorecard outcome showed that ING Group satisfi es the Basel II requirements in embedding the risk management framework.
The policy has prescribed requirements around planning and testing of crisis management organisation, crisis communication, building evacuation, emergency actions and business continuity and disaster recovery. Information security The OISRM function operates with the mission of ensuring the confi dentiality, integrity and availability of information and associated information processing assets through the disciplined used of risk management practices. The OISRM function is comprised of information security specialists within all Business Units and Business Lines, and is coordinated overall at the ING Group level.
The OISRM function has defi ned a comprehensive suite of policies, standards and guidelines, and compliance is measured and monitored on a regular basis.
The ING Bank Economic Capital calculation is also used as part of the Basel II pillar 2 Supervisory Review and Evaluation Process (SREP)
EARNINGS AND CAPITAL RISK Earnings at Risk Earnings at Risk (EaR) measures the potential reduction in accounting earnings over the next year relative to expected accounting earnings. EaR is measured using a 90% confi dence level (i.e. ‘1 in 10’ stress scenario). Discretionary Management interventions are not explicitly modelled unless their measurement can be based on historical performance tracking (e.g. regular or planned actions). It should be noted that the 90% confi dence level used for EaR is not an absolute requirement, but regarded as a general guideline. For each major risk types the earnings sensitivities are calculated based on existing best-practice e.g. 1% instantaneous shock to interest rates. To refl ect bottom-line accounting earnings as close as possible in EaR measurement the amount is compared to the forecast earnings to determine risk appetite levels, e.g. The ING Bank credit risk component of EaR bank is adjusted for forecast risk costs (addition to Loan Loss Provision).
Aggregation model risk dashboard To derive the Earnings at Risk and Capital at Risk fi gures at an ING Group level, the underlying risk inputs from the ING Bank and ING Insurance business units are aggregated bottom-up, using a combination of the ‘variance-covariance’ method and Monte Carlo simulation. For aggregation up to Group level, two sets of correlation assumptions are required, namely the Bank-Insurance correlations per risk type and inter-risk correlations.
(Note numbers in parentheses indicates the number of risk types distinguished (total of 13)).
A second aggregation step exists between these major risk types at an ING Group level. The Group diversifi ed EaR and CaR fi gure for each major risk type are aggregated using a Monte Carlo simulation in combination with an inter-risk correlation matrix to obtain the overall EaR and CaR fi gures for ING Group. The outcomes of the simulation represent the potential losses arising from the major risk types, which are summed together to derive the aggregate potential losses. The diversifi ed Group EaR or CaR is then calculated as the
The following fundamental principles and defi nitions have been established for the model: ING Bank uses a one-sided confi dence level of 99.95% - consistent with ING’s target debt rating (AA) - and a one-year time horizon to calculate Economic Capital; It is assumed that all currently known measurable sources of risk are included; The best estimate risk assumptions are as objective as possible and based on proper analysis of statistical data. There is one set of best-estimate assumptions for each risk type to be used at ING Bank; The Economic Capital calculation is based on fair value principles. Where complete and effi cient markets exist, fair value is equal to market value; The Economic Capital calculations refl ect known embedded options and the infl uence of client behaviour in banking products; The Economic Capital calculations are on a pre-tax basis and do not consider the effect of regulatory accounting and solvency requirements on capital levels; The framework does not include any franchise value of the business, discretionary management intervention or future business volumes and margins.
The Economic Capital for ING Bank involves the aggregation of the underlying Economic Capitals of fi ve distinct risk types, namely credit, transfer, market, operational and business risks. These risk types are aggregated to provide a total diversifi ed ING Bank Economic Capital by applying the variance-covariance approach with a 5 x 5 inter-risk correlation matrix.
For allocation of Economic Capital to units and products, diversifi cation factors are calculated for each risk type. These factors are applied consistently throughout ING Bank. The level of diversifi cation benefi t is dependent on both the inter-risk correlations as well as the relative size of the undiversifi ed Economic Capital exposure for each risk type.
CREDIT AND TRANSFER RISK Economic Capital for credit risk and for transfer risk is the portion of Economic Capital held to withstand unexpected losses inherent in the credit portfolios related to (unexpected) changes in the underlying creditworthiness of debtors, or the recovery value of underlying collateral (if any). Credit risk and transfer risk capital are calculated on all portfolios which contain credit or transfer risk, including investment portfolios. The same methodology is used for both the banking and the insurance operations.
Economic Capital for credit risk and for transfer risk are calculated using internally developed models with a 99.95% confi dence level and a time horizon of one year, which represents ING’s desired credit rating.
The Economic Capital formula for credit and transfer risks relies on seven different risk drivers. In addition to the PD, EAD, and LGD models mentioned above, the formula also considers the industry and the country of the debtor as well as the remaining term of the respective underlying transactions. Lastly, the formula considers the correlation of the individual transactions to the portfolio as a whole. ING uses Monte Carlo simulation tools to determine certain parameters which are then applied to individual transactions in determining the level of Economic Capital related to credit and transfer risk in a bottom up approach. The correlations, which are updated quarterly, are determined at a Business Line level, and diversifi cation effects are applied at the transactional level.
With regard to methodology, the EC-MC Portfolio calculator provides a sophisticated and consistent framework to measure capital numbers for credit risk. Because of its complexity and required calculation time the EC-MC Portfolio calculator is more suited for portfolio calculation, rather than to be implemented in an environment requiring real time reporting at a transactional level for day-to-day management, pricing of new transactions and limit setting. As a result, Economic Capital fi gures are based on RAC fi gures that are derived from the EC-MC Portfolio calculator but are not fully equivalent. The main characteristics are: RAC is calculated at facility level with closed algebraic formulas rather than from a Monte Carlo Simulation. The RAC algebraic formula includes parameters which incorporate the impact of portfolio dynamics, such as correlations and diversifi cation effects. These parameters are derived through a regression of the outputs of the EC-MC portfolio calculator; Due to its proprietary nature the inputs in the EC-MC Portfolio calculator are subject to certain technical caps and fl oors (LGD/EaD is constant and PD migration matrix is capped) which are not applicable in RAC. Also, due to the implemented mathematical routines the EC-MC portfolio calculator is subject to a minimum PD and maximum tenor, which are not applicable in RAC.
For the direct market risks, the actual VaR (measured at a 99% confi dence interval, a one day holding period and under the assumption of an expected value of zero) of the trading and non-trading portfolios is taken as a starting point for the Economic Capital calculations for market risk. To arrive at the Economic Capital for market risk, a simulation based model is used which includes scaling to the required confi dence interval and holding period. In determining this scaling factor, several other factors are also taken into account like the occurrence of large market movements (events) and management interventions.
Economic Capital for market risk for the large non-trading portfolios within ING Retail Banking and ING Wholesale Banking is calculated for embedded option risk (e.g. the prepayment option in mortgages) and model risk. The model risk is calculated by stressing the underlying assumptions in the models for behavioural assets and liabilities. For example, the hedge for savings portfolios is based on assumptions with respect to developments of volumes and client rates. Deviations in these assumptions can lead to (ex-post) incorrect estimation of the interest rate typical maturity of saving deposits. If there is more outfl ow than initially modelled, the duration of the savings money may be lower than the duration of the investments, which leads to losses if interest rates go up. The Economic Capital model for market risk is based on estimations of the 99% confi dence savings duration error, combined with the 99% adverse interest rate movement. The combined probability represents a 99.95% confi dence level. The economic capital fi gures of ING Direct capture the model risk of the behavioural liabilities in line with the model described above. The Economic Capital fi gure for ING Direct currently does not capture the embedded option risk and the model risk resulting from the mortgages maintained within this line of business. This will be implemented in 2008.
The capital calculated according above principles is ‘generic’: if two business units operate in the same markets and have the same size, the resulting capital will be the same. The specifi c capital adjustments mentioned below adjust the generic capital of a specifi c institution to its specifi c operational risk capital.
Scorecard approach The scorecard adjustment refl ects the level of quality of control in a specifi c institution. Scorecards aim to measure the quality of key operational risk management processes. The scorecard procedure concerns questions that require quantitative data, qualitative judgements or simple yes/no questions (e.g. indicating compliance with certain group policies). The scorecards are completed by all business units using self-assessment and reviewed by an expert panel who determines the fi nal score. The set of scorecards then leads to an increase or decrease of the capital of the specifi c institution.
‘Bonus/Malus’ approach Units are assigned additional capital in case losses from internal incidents exceed the level of expected losses that have been accounted for in the LDA. When actual losses are lower than expected, the capital will be decreased. Only internal incidents above one million EUR from the last fi ve years are used. The Bonus/Malus adjustments are capped at + and – 20% to prevent large capital fl uctuations in total ING capital.
ING BANK BUSINESS RISK CAPITAL The current calculation method applied within ING Bank defi nes business risk as the ‘residual risk category‘ that includes all risks that are not covered by the explicitly defi ned (and managed/measured) credit/transfer, market and operational risk categories. In accordance with the residual risk defi nition, the measurement of business risk capital is based on a single risk factor; i.e. the volatility of the ‘residual’ profi t and loss fi gures (for each BU) that are cleansed for the effects of other risk types. As a consequence there is no further gain in insight regarding sub business risks.
The level of the business risk capital is linked to the volatility of (cleansed historical) profi t and loss data taking into account observed trends. In practice, this means that more stable earnings over time generally lead to less capital.
Using a T–distribution and the level of confi dence, the volatility is then ‘capitalised’ to obtain a business risk capital. The T−distribution is a theoretical probability distribution, is symmetrical, bell-shaped and similar to the standard normal curve. However, the T-distribution has relatively more scores in its tails than the normal distribution.
As relatively short data series are available, a capital fl oor and cap are included in order to prevent that the business risk capital is under- or overestimated. The minimum (fl oor: 20%) and maximum (cap: 80%) are specifi ed as a percentage of the operating costs and as such link business risk capital for units that operate at the fl oor to cost effi ciency.
ING INSURANCE ECONOMIC CAPITAL Economic Capital, ‘EC’, is defi ned by ING as the amount of assets that needs to be held in addition to the market value of liabilities to assure a non-negative surplus at a 99.95% level of confi dence on a 1 year time horizon. ING measures Economic Capital by quantifying the impact on the market value surplus (MVS) as a result of adverse events that occur with a specifi ed probability related to the AA rating. Therefore ING’s Economic Capital model is based on a ‘Surplus-at-Risk’ concept. The confi dence level consistent with an AA rating has been defi ned as the 99.95% one-sided confi dence level over a one-year horizon. The change in market value surplus (MVS) is the combined effect of changes in market value of assets (MVA) minus market value of liabilities (MVL).
The following fundamental principles have been established for the model: Economic Capital requirements are calculated to achieve a target AA rating for policyholder liabilities; All sources of risk should be considered; The best estimate actuarial assumptions should be as objective as possible and based on a proper analysis of economic, industry, and company-specifi c statistical data. There is one set of best-estimate assumptions per product to be used for all purposes at ING; Valuation of assets and liabilities is based on fair value principles. Where complete and effi cient markets exist, fair value is equal to market value; The Economic Capital and valuation calculations should refl ect the embedded options in insurance contracts; The Economic Capital and valuation calculations do not consider the effect of local regulatory accounting and solvency requirements on capital levels. Capital is assumed to be fully transferable between legal entities; The framework does not include any franchise value of the business. It does, however, include the expense risk associated with the possibility of reduced sales volume in the coming year.
ING quantifi es the impact of the following types of risk in its Economic Capital model: Market risk for ING Insurance is the change in value based on changes in interest rates, equity prices, real estate prices, credit spreads, implied volatilities (interest rate and equity), and foreign exchange rates. It occurs when there is less than perfect matching between assets and liabilities. Market risk may exist in the insurance activities as a result of selling products with guarantees or options (guaranteed crediting rates, surrender options, profi t sharing, etc.) that cannot be hedged given the assets available in a certain market. Market risk may also occur when there is an intentional mismatch between asset and liability cash fl ows even when it is possible to match or hedge the cash fl ows; Credit risk is the risk of changes in the credit quality of issuers due to defaults or credit migration of securities (in the investment portfolio), counter parties (e.g. on reinsurance contracts, derivative contracts or deposits given) and intermediaries to whom ING has an exposure. In addition to credit risk, ING includes a calculation of transfer risk for the risk of being unable to repatriate funds when required due to government restrictions; Business risk is defi ned as the exposure to the possibility that experience differs from expectations with respect to expenses, the runoff of existing business (persistency) and future premium re-rating; Operational risk is defi ned as the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events. Operational risk capital is diffi cult to quantify, since it is driven by infrequent events of high severity, and can be signifi cantly mitigated or exacerbated by the quality of internal controls and guidelines. It may be partially managed through the purchase of insurance; Life risk relates to deviations in timing and amount of the cash fl ows (premium payments and benefi ts) due to the incidence or nonincidence of death. The risk of non-incidence of death is also referred to as longevity risk to distinguish it from the risk associated with death protection products. ING notes risks due to uncertainty of best estimate assumptions concerning level and trend of mortality rates, volatility around best estimates, and potential calamities and recognizes external reinsurance; Morbidity risk is the risk of variations in claims levels and timing due to fl uctuations in policyholder morbidity (sickness or disability) recognizing external reinsurance. A wide variety of policy classes are subject to morbidity risk, including disability, accidental death and disability, accelerated death benefi ts, workers compensation, medical insurance, and long-term care insurance; P&C risk comprises the risk of variability of size, frequency and time to payment of future claims, development of outstanding claims and allocated loss adjustment expenses for P&C product lines recognizing external reinsurance.
Economic Capital Model The ING Economic Capital calculation is calculated based on a ‘Surplus-at-Risk’ concept. ‘Surplus-at-Risk’ is calculated based on the steps: Calculate the complete balance sheet (all assets and liabilities) on a Market Value basis; Generate Monte-Carlo shock scenarios for all of the relevant risk factors (market and non-market); Recalculate the complete balance sheet (all assets and liabilities) on a Market Value basis for each shock scenario. For practical purposes, the MVM is not recalculated under shock scenarios; Calculate the 99.95% worst case decrease in the Market Value Surplus over all the shock scenarios. This value will be the EC. Note that the shock scenario causing the Economic Capital will differ by business unit, business line, and at an ING Insurance level.
In 2007, ING Insurance has introduced ECAPS as an intranet-based Economic Capital reporting system utilising replicating portfolio techniques. The ECAPS system provides a well controlled and automated basis for Economic Capital and risk measurement. Each business unit enters the risk characteristics of its assets and liabilities into the ECAPS system on a regular basis. These risk characteristics are then translated to a uniform basis in the form of replicating portfolios of standardised fi nancial instruments. Based on the constellation of replicating portfolios (including representations of non-market risks), the ECAPS system then is capable of calculating Economic Capitals at every level of aggregation. The following is a brief description of the model.
Automated retrieval of all current and historical market data 500 Risk scenarios sent to each business unit to locally develop stochastic asset and liability cash fl ows 20,000 Real World Monte-Carlo scenarios for Economic Capital calculation
Actuarial software used to produce the stochastic cash fl ows by scenario Business units upload stochastic asset and liability cash fl ows for optimized replicating portfolio Non-market risk capitals calculated in accordance with ING Standards of Practice submitted to ECAPS for risk aggregation
Capture the risk profi le of the fi nancial component of insurance liabilities by mapping onto a small set of standard fi nancial instruments Standard instruments contain discount bond, swaption, equity forward/option and FX option Find a replicating portfolio that matches the cash fl ows as closely as possible for the 500 paths
1. Market Data and Scenario Generation 2. Stochastic Cash fl ows and Non-market Risk Capital 3. Replicating Portfolio 4. Economic Capital Calculation
Based on the market data from GMDB, ING calibrates two economic scenario generators: Risk Neutral Economic Scenario Generator (RN ESG): capable of generating multiple equity indices and exchange rates, consistent with a multi-currency dynamic term structure model. Scenarios are used in the cash fl ow projection to determine replicating portfolios. RN ESG scenarios are consistent with observed market prices of equity, FX and interest options; Real World Economic Scenario Generator (RW ESG): capable of jointly simulating all risk types, i.e. all market risks, credit risk, business risk, operational risk, life risk, morbidity risk and P&C risk. Diversifi cation between risks is taken into account through a Gaussian copula, allowing for different marginal probability distributions at the risk driver level. RW ESG scenarios are consistent with historical time series of the market risk drivers using 5 years of weekly data observations. The volatilities are scaled from weekly to quarterly and the weekly correlations are used directly as estimates of quarterly correlations.
Stochastic Cash Flows and Non-Market Risk Capital The market risks in assets and liabilities are captured in and represented by stochastic cash fl ows in 500 scenarios. Business Units are responsible for generating these cash fl ows, the modelling of embedded options and guarantees and a proper mapping of risk drivers in the scenario set to cash fl ow determinants such as policyholder behaviour and management actions restricted to dynamic hedge programs and setting of crediting rates/profi t sharing. To better capture the behaviour in the tails of the distribution, the set of scenarios consist of 300 Risk Neutral scenarios and 200 ‘Risk Volatile’ scenarios with double volatilities. The average of the 300 Risk Neutral scenarios provides a check on the market value of the replicating portfolio. It should be noted that this serves only as a check, and that the actual market value of liabilities is derived directly from the replicating portfolio. The 200 Risk Volatile scenarios ensure that the replicating portfolio is calibrated against enough extreme scenarios such that it can be used safely in Economic Capital calculations.
The inputs are used to calibrate marginal distributions for these risk types. These distributions, in combination with the Gaussian copula, are then used in the Economic Capital Calculation to measure diversifi cation between market and non-market risks.
Economic Capital Calculation ECAPS uses Monte-Carlo simulation to determine diversifi cation benefi ts for the complete ‘portfolio hierarchy’, from Business Unit level up to an ING Group level. All diversifi cation calculations are done within ECAPS and are driven by the Gaussian copula of all risk drivers using the underlying distributions applicable for each risk type.
Using Monte-Carlo simulation, ING’s Economic Capital model generates 20,000 possible ‘states-of-the-world’, by randomly simulating all risk drivers - simultaneously. For each state-of-the-world, the market value of assets and liabilities are recalculated and the change in value of the Market Value Surplus (MVS) is stored. All these changes in MVS are then sorted, and the 99.95% worst-case change in MVS is identifi ed, to provide the Economic Capital level for the given level of aggregation.
The group diversifi cation benefi t is calculated by applying a ‘Gaussian-copula’ simulation approach. Due to the inherent uncertainties around correlation assumptions and changes in risk exposures the results are subjected to extensive sensitivity tests.
OBJECTIVES ING Group Capital Management (Capital Management) is responsible for the suffi cient capitalisation of ING Group entities at all times in order to manage the risk associated with ING’s business activities. This involves the management, planning and allocation of capital within ING Group. ING’s Corporate Treasury is part of Capital Management. It executes the necessary capital market transactions, term (capital) funding and risk management transactions. Capital Management monitors and plans capital adequacy on a consolidated basis at three levels: ING Group, ING Insurance and ING Bank. The rating objective for these three entities is currently AA/Aa2. Capital Management takes into account the metrics and requirements of regulators (EU Solvency, Tier 1 and BIS ratios and limits for hybrid capital), rating agencies (leverage ratios, Adjusted Equity) and internal risk management models and market value balance sheets (economic capital (EC) and available fi nancial resources (AFR)).
CAPITAL ADEQUACY ASSESSMENT As at 31 December 2007 and 2006, ING Group, ING Bank and ING Insurance met all major target capital ratios and metrics. As at 31 December 2007 and 2006, ING Group, ING Bank and ING Insurance were adequately capitalised in relation to their risk profi le and strategic objectives.
BASEL II As of 1 January 2008, ING Bank calculates its capital ratios under Basel II. In 2008, ING Bank will publish risk weighted assets (RWA), Tier 1 and BIS capital and the accompanying capital ratios based on Basel II data only. In addition, ING will publish the minimum required capital level according to Basel II and according to the Basel I fl oor. The Basel I fl oor is a temporary minimum capital requirement based on 90% of Basel I RWA for 2008 and 80% of Basel I RWA for 2009. The minimum requirements according to Basel II and Basel I will both be compared to total BIS capital according to Basel II.
ING Group Available Financial Resources (1) 49,715 48,774 less Group EC (2) 35,000 34,500 less EC Group (3) 1,000 1,000 Surplus/(defi cit) 13,715 13,274 (1) AFR ING Bank, amounting to EUR 31,733 million (2006: EUR 25,784 million) plus AFR ING Insurance, amounting to EUR 22,710 million (2006: EUR 27,200 million) less core debt ING Group, amounting to EUR 4,728 million (2006: EUR 4,210 million). (2) EC Insurance plus EC Bank less 15% diversifi cation effect (10% in 2006). (3) EC of the ING Group parent company mainly includes market risk on share based payment plans and market risk on the assets backing ING Bank equity.
(1) Tier-1 instruments issued by ING Group (e.g. perpetual debt securities and preference shares), at nominal value. Group hybrid Tier-1 instruments other than preference shares are provided as hybrid capital to ING Insurance or ING Bank. (2) Investments in subsidiaries less equity (including hybrid capital) of the Group holding company. This net debt position is provided as equity to ING Insurance and ING Bank. (3) Includes for ING Group EUR 1,895 million (2006: EUR –1,709 million) of the revaluation reserve relating to fi xed income securities (net of the effect of shadow accounting),
EUR –438 million (2006: EUR –1,357 million) cash fl ow hedge and EUR –2,420 million (2006: EUR –286 million) relating to goodwill. The Dutch banking regulator requires this deduction to be made from Tier-1 capital. ING applies this prudent method to ING Bank, ING Insurance and ING Group.
(4) Includes EUR –2,138 million (2006: EUR –579 million) in participations (e.g. Kookmin, Bank of Beijing), EUR –595 million (2006: EUR –386 million) for Real Estate for own use and EUR –220 million (2006: EUR –116 million) relating to ING Bank’s investment portfolio. The Dutch banking regulator requires this deduction to be made from Tier1 capital. This deduction is added back to Tier-2 capital.
The capitalisation of ING Group remained strong throughout 2007. All leverage ratios were within their targets. The debt/equity ratio of ING Group as at year-end 2007 was at 9.53% (2006: 9.01%). The debt/equity ratio of ING Insurance as at year-end 2007 was at 13.63% (2006: 14.15%). The ING Bank Tier-1 ratio ended at 7.39% a slight decrease from 7.63% at December 2006.
Shareholders’ equity (parent) 25,511 21,298 Minority interests 1,514 1,204 Subordinated loans qualifying as Tier-1 capital (1) 6,397 5,726 Goodwill and intangibles deductible from Tier-1 –1,428 –136 Minority interest Record Bank 154 162 Deductions Tier-1 (as of 2007) –93 Revaluation reserve (2) –2,283 –2,470 Core capital – Tier-1 29,772 25,784
Available capital 22,965 25,505 Required capital 9,405 9,296 Surplus capital 13,560 16,209
Certain subordinated loans of ING Bank N.V. and ING Verzekeringen N.V. qualifying as capital for regulatory purposes are included in the capital base of ING Group. The fi nancial conglomerates agreement (‘protocol’) is applicable as from 1 January 2007.
Required capital banking operations 32,218 27,034 Required capital insurance operations 9,405 9,296 Surplus capital 16,646 19,550
EU Solvency ratio (Insurance) Year-end actual EU Solvency ratio 244 274 Regulatory minimum EU Solvency ratio 100 100 Target EU Solvency ratio 150 150
ING Bank – short term A-1+ P-1 F1+ – long term AA Aa1 AA – fi nancial strength B (1) The Standard & Poor’s, Moody’s and Fitch ratings all have a stable outlook.
Parent company balance sheet of ING Group as at 31 December before profi t appropriation amounts in millions of euros 2007 2006
Financial liabilities at fair value through profi t and loss 98 120
Results of group companies after taxation 9,299 7,704 Other results after taxation –58 –12 Net profi t 9,241 7,692
2.2 Parent company annual accounts amounts in millions of euros Share capital Share premium
Dividend –147 –2,534 –2,681 Purchase/sale of treasury shares –520 –520 Exercise of warrants and options 5 5
Unrealised revaluations after taxation –1,636 1 –1,635 Realised gains/losses transferred to profi t and loss –3,414 –3,414 Transfer to insurance liabilities/DAC 1,132 1,132 Change in cash fl ow hedge reserve revaluations –925 –925 Unrealised revaluations from net investment hedges 500 500 Employee stock option and share plans 104 104 Exchange rate differences –1,153 –1,153 Other 21 –21 Total amount recognised directly in equity –5,475 84 –5,391
Dividend –2,999 –2,999 Purchases/sales of treasury shares –2,304 –2,304 Exercise of warrants and options 4 391 395
The profi t and loss account has been drawn up in accordance with Section 402, Book 2, of the Dutch Civil Code.
A list containing the information referred to in section 379 (1), Book 2, of the Dutch Civil Code has been fi led with the offi ce of the Commercial Register of Amsterdam, in accordance with Section 379 (5), Book 2, of the Dutch Civil Code.
Name of investee: ING Bank N.V. 24,038 20,868 ING Verzekeringen N.V. 17,900 21,902 Other –74 –163
Issued share capital as at 31 December 2005 2,204,934 530 Issue of shares 96 Exercise of B warrants 63 Issued share capital as at 31 December 2006 2,205,093 530
Profi t for the year 7,692 7,692 Unrealised revaluations after taxation 552 –124 428 428 Change in treasury shares –520 –520 –520 Dividend –2,681 –2,681 Transfer to share of associates reserve –573 –573 –573 Transfer to retained earnings 4,529 4,529 –4,529
As at 31 December 2007, Share of associates reserve included an amount of EUR 566 million (2006: EUR 566 million) related to Regio Bank NV (formerly Stichting Regio Bank) that cannot be freely distributed.
The Share of associates reserve and Currency translation reserve cannot be freely distributed. The reserve for cash fl ow hedges is included in the Share of associates reserve on a net basis. Retained earnings can be freely distributed. Unrealised gains and losses on derivatives, other than those used in cash fl ow hedges, are presented in the profi t and loss and are thus part of Retained earnings and are not included in Share of associates reserve.
Share based payments –201 –462 –6,751,515 –15,722,126 4 PREFERENCE SHARES See Note 13 ‘Preference shares’ to the consolidated fi nancial statements.
Jan H.M. Hommen, chairman Eric Bourdais de Charbonnière, vice-chairman Henk W. Breukink Peter A.F.W. Elverding Luella Gross Goldberg Claus Dieter Hoffmann Piet Hoogendoorn Piet C. Klaver Wim Kok Godfried J.A. van der Lugt Karel Vuursteen
REPORT ON THE ANNUAL ACCOUNTS We have audited the annual accounts 2007 of ING Groep N.V., Amsterdam (as set out on pages 88 to 239). The annual accounts consist of the consolidated annual accounts and the parent company annual accounts. The consolidated annual accounts comprise the consolidated balance sheet as at 31 December 2007, the profi t and loss account, statement of changes in equity and statement of cash fl ows for the year then ended, and a summary of signifi cant accounting policies and other explanatory notes. The parent company annual accounts comprise the parent company balance sheet as at 31 December 2007, the parent company profi t and loss account for the year then ended and the notes.
Opinion with respect to the parent company annual accounts In our opinion, the parent company annual accounts give a true and fair view of the fi nancial position of ING Groep N.V. as at 31 December 2007, and of its result for the year then ended in accordance with Part 9 of Book 2 of the Dutch Civil Code.
REPORT ON OTHER LEGAL REQUIREMENTS Pursuant to the legal requirement under 2:393 sub 5 part e of the Dutch Civil Code, we report, to the extent of our competence, that the report of the Executive Board is consistent with the annual accounts as required by 2:391 sub 4 of the Dutch Civil Code.
PROPOSED PROFIT APPROPRIATION The profi t is appropriated pursuant to Article 38 of the Articles of Association of ING Groep N.V., the relevant stipulations of which state that the part of the profi t remaining after the Executive Board, with the approval of the Supervisory Board, has determined the appropriation to reserves, shall be at the disposal of the General Meeting of Shareholders.
ING Bank applies the Risk Adjusted Return on Capital framework (RAROC). This method consistently measures the performance of different activities and has a clear link to shareholder-value creation. The use of RAROC increases focus on risks versus return in the decision-making process, and consequently stimulates the use of scarce capital in the most effi cient way. Risk-adjusted pricing tools are also used as a basis for the pricing of certain transactions and as an important determinant in the credit-approval procedures.
Rest of the world 13.8% 16.8% 12.3% 16.7% Other Wholesale –35.5% –3.6% –66.5% –17.6%
Total banking operations including divestments and special items 19.9% 19.7% 23.1% 25.5%
Before dividends less capital injections, the Embedded Value of ING’s life insurance operations increased to EUR 32,460 million compared to EUR 27,718 million at year-end 2006. After cash dividends less capital injections from the business covered in the Embedded Value results, the embedded value decreased to EUR 26,993 million, primarily due to dividends from Nationale-Nederlanden. Both the 2006 and 2007 fi gures are before deduction for the life insurance pension defi cit. The pension defi cit was EUR 513 million in 2006 and is EUR – 154 million in 2007.
Except for the divestment of business and currency effects, all components of the Embedded Value movement contributed to the increase in the embedded value result.
(1) IRR = internal rate of return adjusted for expected currency movements relative to the euro. (2) VNB/PV premiums = value of new business divided by the present value of new business premiums. (3) Belgium fi gures for 2006 were adjusted to exclude the business divested in 2007.
Acquisition expense overruns decreased from EUR 87 million in 2006 to EUR 44 million in 2007, a decrease of 49.4%. This is explained by a combination of 13.3% higher sales, the reallocation of expenses in the US from acquisition to maintenance expenses, and the removal of Greenfi eld start-up costs from acquisition expenses.
Free surplus 1,128 3,781 Required capital 13,498 13,873 Adjusted net worth 14,626 17,654
Present value of future (statutory) book profi ts 17,102 15,382 Cost of holding required capital –4,734 –5,318 Value of in force covered business 12,367 10,064
Value of new business 1,113 Financial variances 1,172 Operational variances 394 Operating assumption changes 123 Embedded value profi t 2,802
Major drivers of change in EV 2007 are: Value of New Business, EUR 1,113 million is a large increase over the 2006 fi gure of EUR 807 million. The VNB of the Americas and Europe increased by 61.7% and 82.6%, respectively. Asia/Pacifi c increased by 5.0% and remains the largest contributor to VNB of the three regions. Financial variances of EUR 1,172 million are down slightly from 2006 and are attributed to realised equity gains in the Netherlands. Operational variances of EUR 394 million compare to EUR –33 million in 2006. Better than anticipated reserve development, implementation of US Life reinsurance transaction for redundant reserves and improved general account asset strategies in USFS were the largest contributors to the increase. Operational assumption changes of EUR 123 million are primarily due to a better refl ection of the US variable annuity fees in the actuarial projection models. Total impact of economic assumption changes (EUR 261 million) and corresponding discount rate adjustments (EUR 210 million) was EUR 471 million. Economic assumption changes include interest rates, equity & real estate, and other asset return assumptions, as well as expense and wage infl ation. Required return on beginning in-force (unwind of discount rate) increased the embedded value EUR 1,770 million. The addition of business/(divested business) of EUR –431 million primarily refl ects a divestment in Belgium and the increase in ING’s ownership percentage of ING Life Korea. Note that the acquisition of Santander’s Latin America pension business is refl ected in a separate category – Embedded Value of business acquired. Currency effects of EUR –996 million refl ect the weakening of currencies in the Americas vs. the Euro. Model changes refl ect the true-up of year-end 2006 inforce to the actual fi gures to re-establish the starting point for 2007 reporting, changes to Embedded Value that result from asset mix changes, a change in expense policy to include the start-up expenses for Greenfi elds, and changes to the models used to project distributable earnings. Asset mix changes in the Netherlands account for the large contribution in Europe. Model changes and the Greenfi eld expenses account for the reduction in Asia/Pacifi c. Dividends, net of capital injection reduced the Embedded Value by EUR 5,468 million, primarily due to dividends paid by NationaleNederlanden.
In each sensitivity calculation, all other assumptions remain unchanged except where they are directly affected by the revised economic conditions; for example, future bonus crediting rates are automatically adjusted to refl ect sensitivity changes to future investment returns; and when indicated above that the risk discount rate is adjusted accordingly; in this case the risk margin remains unchanged.
Watson Wyatt has concluded that the methodology and assumptions used comply with the European Embedded Value Policies and Guidance.
BASEL II Basel II is the second Basel Accord. Basel II is an international standard for how much capital banks need to put aside for the fi nancial and operational risks they face. Basel II introduced the possibility for banks to measure those risks based on their own internal models.
BASIS POINT VALUE (BPV) The change in the Net Present Value of a cash fl ow or a pool of cash fl ows due to a one basis point change of the yield curve.
CAPITAL AT RISK (CAR) The maximum negative impact on ING Group’s economic surplus over a one year forward looking horizon under normal market conditions. CaR is calculated at a 90% confi dence interval.
CLAIM A demand for payment of a policy benefi t because of the occurrence of an insured event, such as the death or disability of the insured or the maturity of an endowment, the incurrence of hospital or medical bills, the destruction or damage of property and related deaths or injuries, defects in, liens on, or challenges to the title to real estate, or the occurrence of a surety loss.
COLLATERALIZED DEBT OBLIGATION (CDO) A type of asset-backed security which provide investors exposure to the credit risk of a pool of fi xed income assets.
COLLATERALISED LOAN OBLIGATION A type of CDO which are backed primarily by leveraged bank loans.
BASEL I Basel I is the fi rst Basel Accord, which includes recommendations on banking regulations issued by the Basel Committee on Banking Supervision. These are, for ING, superseded by Basel II from 2008 onwards.
activities. Credit risk management is supported by dedicated credit risk information systems and internal rating methodologies for debtors and counterparties.
CREDIT RISK The risk of loss from the default by borrowers (including bond issuers) or counterparties. Credit risks arise in ING’s lending, presettlement and investment activities, as well as in its trading
GROSS PREMIUMS WRITTEN Total premiums (whether or not earned) for insurance contracts written or assumed (including deposits for investment contracts with limited or no life contingencies written) during a specifi c period, without deduction for premiums ceded.
HISTORICAL SIMULATION A model to calculate Value at Risk, assuming that future changes in risk factors will have the same distribution as they had in the past taking into account the non-linear behaviour of fi nancial products.
INTEREST-RATE REBATES Profi t sharing for group life insurance business. A rebate granted to policyholders based on the discounted value of the difference between the interest rate used for calculating the premiums and the expected yield on investment. The profi t sharing is granted by means of a premium discount related to the yield on government bonds.
ELIMINATION A process by which intercompany transactions are matched with each other and deducted, so that the assets, liabilities, income and expenses are not infl ated.
FINANCIAL ASSET Any asset that is: cash; an equity instrument of another company; a contractual right to; receive cash or another fi nancial asset from another company; or exchange fi nancial instruments with another company under conditions that are potentially favourable; or certain contract that will or may be settled in ING’s own equity instruments.
OPTION CONTRACTS Give the purchaser, for a premium, the right, but not the obligation, to buy or sell within a limited period of time a fi nancial instrument or currency at a contracted price that may also be settled in cash. Written options are subject to market risk, but not to credit risk since the counterparties have already performed in accordance with the terms of the contract by paying a cash premium up front.
ORDINARY SHARE An equity instrument that is subordinate to all other classes of equity instruments. Ordinary shares participate in the net profi t for the fi nancial year after other types of shares such as preference shares.
OVER-THE-COUNTER INSTRUMENT Non-standardised fi nancial instrument not traded on a stock exchange but directly between market participants.
A qualifying insurance policy is an insurance policy issued by an insurer that is not a related party of the reporting enterprise, if the proceeds of the policy: can be used only to pay or fund employee benefi ts under a defi ned benefi t plan; and are not available to the reporting enterprise’s own creditors (even in bankruptcy) and cannot be paid to the reporting
MONTE CARLO SIMULATION A model to calculate Value at Risk, assuming that changes in risk factors are (jointly) normally distributed taking into account nonlinear behaviour of fi nancial products.
NET PRESENT VALUE AT RISK (NPV-AT-RISK) Establishes what the value of future cash fl ows is in terms of today’s monetary value. NPV-at-Risk establishes the change in value of future cash fl ows as a result of interest rate changes in terms of today’s monetary value.
POST-EMPLOYMENT BENEFIT PLANS Formal or informal arrangements under which a company provides post-employment benefi ts for one or more employees. Postemployment benefi ts are employee benefi ts other than termination benefi ts and equity compensation benefi ts, which are payable after the completion of employment.
PRIVATE PLACEMENT A placement where newly issued shares or debentures come into possession of a limited group of subscribers who are prepared to buy the new securities.
QUALIFYING ASSET (WITHIN THE MEANING OF BORROWING COSTS) An asset that necessarily takes a substantial period of time to get ready for its intended use or sale.
VALUE AT RISK (VaR) Quantifi es, with a one-sided confi dence level of at least 99%, the maximum overnight loss in Net Present Value that could occur due to changes in risk factors (e.g. interest rates, foreign exchange rates, equity prices, credit spreads, implied volatilities) if positions remain unchanged for a time interval of one day.
Disclaimer Certain of the statements contained in this Annual Report are statements of future expectations and other forward-looking statements. These expectations are based on management’s current views and assumptions and involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those in such statements due to, among other things, (i) general economic conditions, in particular economic conditions in ING’s core markets, (ii) changes in the availability of, and costs associated with, sources of liquidity such as interbank funding, as well as conditions in the credit markets generally, including changes in borrower and counterparty creditworthiness, (iii) the frequency and severity of insured loss events, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi) interest rate levels, (vii) currency exchange rates, (viii) general competitive factors, (ix) changes in laws and regulations, and (x) changes in the policies of governments and/or regulatory authorities. ING assumes no obligation to update any forwardlooking information contained in this document.