Strategy 10 Financial highlights 13 Capital management 16 Risk management 19 Insurance Europe 24 Insurance Americas 28 Insurance Asia/Pacifi c 32 Wholesale Banking 36 Retail Banking 40 ING Direct 44 Asset management 48 Human resources 52 Branding 54 Corporate responsibility 55 1.3 Our governance
Consolidated balance sheet 88 Consolidated profi t and loss account 89 Consolidated statement of cash fl ows 90 Consolidated statement of changes in equity 91 Accounting policies for the consolidated balance sheet and profi t and loss account 93 Accounting policies for the consolidated statement of cash fl ows 109 Notes to the consolidated balance sheet 110 Additional information to the consolidated balance sheet 140 Notes to the consolidated profi t and loss account 163 Segment reporting 174 Notes to the consolidated statement of cash fl ows 180 Risk management 181 Capital management 226 2.2 Parent company annual accounts
Auditor’s report 240 Proposed profi t appropriation 241 Provisions concerning issue of shares 242 2.4 Additional fi nancial information
You can fi nd more information on the members of the Executive Board on pages 65-66 and on the members of the Supervisory Board on pages 67-69, including the Board nominees.
Figures per ordinary share (in EUR) Net profi t 4.32 3.57 3.32 2.71 2.00
Key performance indicators Net return on equity (ROE) 24.2% 23.5% 26.6% 25.4% 21.5% Net profi t growth 20% 7% 25% n.a. –10%
We want to deliver our fi nancial products and services in the way our customers want them delivered: with exemplary service, maximum convenience and at competitive prices. This is refl ected in our mission statement: to set the standard in helping our customers manage their fi nancial future.
Our profi le ING is a global fi nancial services company providing banking, investments, life insurance and retirement services. We serve more than 75 million customers in Europe, the United States, Canada, Latin America, Asia and Australia. We draw on our experience and expertise, our commitment to excellent service and our global scale to meet the needs of a broad customer base, comprising individuals, families, small businesses, large corporations, institutions and governments. Based on market capitalisation (31 December 2007), ING is one of the 20 largest fi nancial institutions worldwide.
• Operates the insurance and asset management activities in Europe. Main insurance activities are in the Netherlands, Belgium, Spain, Greece and Central Europe. Here we offer life insurance with a particular focus on pensions. In the Netherlands and Belgium we also offer non-life insurance.
• Provides insurance, investment, retirement and asset management products and services in the region. In the United States, ING is a top-10 provider of retirement services, based on sales. In Canada, we are the leading property and casualty insurer, based on gross premiums. We are also a leading pension and life insurance company in a number of Latin American countries, including Argentina, Mexico, Chile, Peru and Brazil.
• Conducts global wholesale banking operations. The primary focus is on the Netherlands and Belgium, where we offer a full range of products to companies and other institutions. Elsewhere we take a more selective approach with regard to our clients and products. Wholesale Banking also manages ING Real Estate, the world’s largest real estate investment manager based on the value of its assets under management.
• Operates direct retail banking activities for customers in Australia, Canada, France, Germany and Austria, Italy, Spain, the United Kingdom and the United States. The main products offered are savings accounts and mortgages, and increasingly also mutual funds and payment accounts.
In line with our sharpened strategic focus, we have already stepped up our investment efforts in 2007 and started a major acquisition programme that strengthens our positions in important growth markets, including Turkey, South Korea, Thailand, and Latin America. We also sold several non-core businesses, such as our non-life insurance business in Mexico in early 2008.
We also continued to invest in organic growth. We further improved the effi ciency and growth potential of our businesses. In the Netherlands we are bringing together ING Bank and Postbank under one single brand, while we are also optimising the service and retail distribution model in the Belgian market. We set up life insurance and retail banking greenfi elds in Central Europe. Moreover, we signed important bank distribution agreements in Greece and Malaysia. And we invested signifi cantly in further growing ING Direct.
ING has proven its commitment to enhance shareholder returns through an attractive increase in dividends and a EUR 5 billion share buy-back, which is well under way. Our Total Shareholder Return (TSR) development over the last four years was 74%, well above the average of our peers. Recent developments have been less favourable, also due to the fi nancial markets. Given the strong fundamentals of our company and our sharpened strategic direction, I am confi dent of ING’s growth prospects going forward.
We report a raise in net profi t by 20.1% to EUR 9,241 million. Our underlying net profi t – total profi t without the impact of divestments and special items – increased by 19.4%.
Capitalising on changing customer preferences and building on our solid business capabilities, we have decided to sharpen our strategic focus to banking, investments, life insurance and retirement services. We want to provide retail customers with the products they need during their lives to grow savings, manage investments and prepare for retirement with confi dence. We will build and invest more in bank distribution platforms, reinforce our product capabilities in asset management and asset gathering and increasingly allocate our capital to high-growth markets.
DIVIDEND On 20 February 2008, ING Group proposed a total dividend for 2007 of EUR 1.48 per (depositary receipt for an) ordinary share. The dividend, to be approved by the annual General Meeting of Shareholders on 22 April 2008, represents an increase of 12% from EUR 1.32 over 2006. Taking into account the interim dividend of EUR 0.66 paid in August 2007, the proposed fi nal dividend amounts to EUR 0.82 per (depositary receipt for an) ordinary share, to be paid fully in cash. The ING share will be quoted ex dividend as of 24 April 2008. The fi nal dividend will be paid on 5 May 2008 on Euronext Amsterdam by NYSE Euronext and on 12 May 2008 on the NYSE.
ANNUAL GENERAL MEETING OF SHAREHOLDERS On 22 April 2008 the annual General Meeting of Shareholders will take place in the ‘Muziekgebouw aan ‘t IJ’, Piet Heinkade 1, in Amsterdam. The meeting will be webcast. The meeting documents are available on the ING Group website www.ing.com. Printed versions of the meeting documents can be obtained free of charge at ING Group, Amstelveenseweg 500, 1081 KL Amsterdam as of 26 March 2008.
07/04 10/04 04/05 07/05 04/06 07/06 01/0701/05 01/06 10/06 04/07 07/07 01/0810/0710/0501/04 1.1 Who we are
Each year, after publication of the fi nancial results for the fi rst six months of the year, an interim dividend is distributed by way of an advance against the fi nal dividend, being half of the total dividend over the preceding year.
In February 2005, ING defi ned its dividend policy as follows: ING intends to pay dividends in relation to the longer-term underlying development of cash earnings following the introduction of International Financial Reporting Standards (IFRS), which are expected to increase volatility in net profi t. Furthermore, it was decided in the beginning of 2005 to change the dividend policy to a full cash dividend. This change was very much welcomed by investors and analysts. ING has no intention to change its dividend policy.
Share buy-back programme On 16 May 2007 ING announced a share buy-back programme to purchase ordinary shares (or depositary receipts for such shares), with a total value of EUR 5 billion over a period of 12 months, beginning in June 2007. At the end of 2007 the number of (depositary receipts for) ordinary shares repurchased under this programme was 91.7 million for a total consideration of EUR 2,793 million. At yearend 2007, 55.9% of the repurchase programme was completed. The repurchase programme is expected to run until June 2008.
Price – year end 26.75 33.59 29.30 Price/earnings ratio* 6.2 9.4 8.8 * Based on the share price at year-end and underlying net profi t per preference share for the fi nancial year.
Record date for dividend entitlement Wednesday, 23 April 2008 (NYSE) Monday, 28 April 2008 (NYSE Euronext)
ING share quotation ex fi nal dividend 2007 Thursday, 24 April 2008 (NYSE Euronext and NYSE)
Payment date interim dividend 2008 Thursday, 21 August 2008 (NYSE Euronext) Thursday, 28 August 2008 (NYSE)
ING share quotation ex fi nal dividend 2008 Thursday, 30 April 2009
GEOGRAPHICAL DISTRIBUTION OF ING SHARES* in percentages * 2007 fi gures, based on information provided by several large custodians.
SHAREHOLDERS WITH STAKES OF 5% OR MORE Under the Dutch Financial Supervision Act, one holder of depositary receipts with an interest or potential interest of between 5% and 10% in ING Group was known as at 31 December 2007. This was AllianceBernstein Corporation.
INVESTOR RELATIONS In addition to fi nancial press releases and quarterly fi nancial publications, ING also publishes the magazine ING Shareholder. You can subscribe to the magazine through our Investor Relations section at www.ing.com. To be kept informed of press releases and other ING news, you can subscribe to the email service through our Investor Relations section at www.ing.com.
ING GROUP AA– Aa2 AA– ING INSURANCE – short term A-1+ P-1 – long term AA– Aa3 AA– 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.
ING’s long-term credit ratings are shown in the table above. Each of these ratings refl ects only the view of the applicable rating agency at the time the rating was issued, and any explanation of the signifi cance of a rating may be obtained only from the rating agency.
In a very challenging environment in 2007, ING performed strongly, both on the commercial front and in the areas of risk management and capital allocation. We believe this illustrates the strength of our strategy which is to capitalise on changing customer preferences that are transforming the fi nancial industry. We are accelerating the allocation of capital to high-growth areas by focusing on banking, investments, life insurance and retirement services. In 2007, we also returned capital to our shareholders through an attractive dividend and a signifi cant share buy-back programme.
STRONG PERFORMANCE CONFIRMS SOUND BUSINESS FUNDAMENTALS In 2007, ING performed strongly in what has been a very diffi cult year for the fi nancial sector. The environment was characterised by a weak dollar, a fl at yield curve and notably the problems in the US subprime mortgage market which spread to the larger fi nancial markets in the second half of the year. In this challenging environment, ING enjoyed good commercial performance. We achieved solid volume growth in banking, illustrated by an increase in client balances at ING Direct and Retail Banking. In our life insurance business, we witnessed strong growth in sales and value of new business across the board.
The turbulence in the fi nancial markets has put a spotlight on risk management across the fi nancial sector. ING has weathered the turmoil in credit markets with limited direct impact. All in all, we believe that our performance in 2007 demonstrates that the fundamentals underpinning our business are sound.
FOCUSED STRATEGY GOING FORWARD We believe customer preferences are changing and these changes are reshaping the fi nancial industry. We have chosen to focus on where we believe our greatest opportunities lie as a fi nancial services provider, given our strengths. Therefore, we narrow our strategic focus to banking, investments, life insurance and retirement services, thus providing retail customers with the products they need to grow savings, manage investments and prepare for retirement with confi dence.
Capitalising on changing customer preferences Customer preferences are changing and reshaping the industry. As more customers live longer they know they need to increasingly save enough to enjoy retirement comfortably. And across the globe, especially in emerging markets, people are becoming wealthier. As customers accumulate more wealth, this drives strong growth in total client balances. In particular, there is a growing demand for savings and investment products, irrespective of whether these products are provided by a bank or insurer. And with many products and services to choose from, customers expect strong investment performance from their fi nancial services providers.
Key points > Focus on banking, investments, life insurance and retirement services > Provide retail customers with the products they need to grow savings, manage investments, and prepare for retirement > Invest in bank distribution and high-growth markets > Continue to improve business fundamentals and maintain strength in capital and risk management
Building on our solid business capabilities ING has three important strengths driving our business. These are (1) high-performance product capabilities; (2) a strong distribution reach; (3) a leading retail fi nancial brand.
Our high-performance product capabilities include vast experience in building savings products, mortgages, variable annuities, pensions and other investment products. With our full suite of products, we can accompany customers throughout their life cycle. We also have scale in each product category, and are one of the largest savings banks in the world when the balances from different business units – including those in Retail Banking and ING Direct – are aggregated. Our product manufacturing is supported by vast expertise and investment skills in our Investment Management businesses, and asset generation and transformation in our Wholesale Banking businesses.
We have a strong retail customer franchise and an extensive distribution reach, including a broad presence in developing markets. We are able to serve our 75 million customers through different distribution channels – our own online and banking channels, through tied agents, and via distribution agreements with other parties. We adapt our distribution model to the market and have a track record for building innovative bank distribution models in mature and developing markets. In certain markets, we have built a strong agent and broker distribution network.
New strategic focus Capitalising on changing customer preferences and building on our solid business capabilities, we have chosen to sharpen our strategic focus to banking, investments, life insurance and retirement services: We want to provide retail customers with the products they need during their lives to grow savings, manage investments and prepare for retirement with confi dence. We will build and invest more in bank distribution platforms. We will increasingly invest in high-growth markets.
As a result, ING will focus its product offerings on certain key products and business areas, including current accounts, savings, mortgages, mutual funds, pensions, life insurance, investmentlinked insurance and variable annuities.
We want to further strengthen our product manufacturing capabilities, including in the fi eld of asset management. Excellent asset management skills are crucial to the success of our strategy. We will further invest in strengthening our global capabilities and investment expertise to deliver fi rst-class investment performance for our clients and to increasingly develop products which blend asset management, insurance and capital markets features. Our Wholesale Banking expertise is also fundamentally important. The essence of our business is to collect consumer deposits and redeploy them as investments in the economy. Wholesale Banking generates high-quality assets where we can invest retail deposits. Also, it provides us with many relevant skills in risk management as well as access to fi nancial markets around the world. Furthermore, developments in recent months have again strengthened our belief that it is essential to be able to generate a good portion of our own assets to maintain a healthy profi le of the company.
We will put more emphasis on developing markets in order to capture their fundamental long-term growth, supported by a strong home market to fuel that expansion. Starting from strong footprints in Asia, Central Europe and Latin America, we will accelerate our investments in these growth markets.
Business initiatives in 2007 We have already stepped up the pace of our investment efforts in 2007 and started a major acquisition programme that gives us strategic positions in important growth markets, such as Turkey, South Korea, Thailand and Latin America. We acquired Oyak Bank in Turkey, for example, adding 1.2 million customers to our client base. We also acquired a signifi cant stake in TMB, a retail bank in Thailand. In addition, we continued to invest in strengthening product manufacturing capabilities. We bought Latin American pension businesses, which gives us access to over 5 million customers in fi ve attractive high-growth markets in that region. In South Korea, we built scale by acquiring full ownership of Landmark Investment Management, the 12th largest asset manager in that country. We also introduced new variable annuity products in Japan, the United States and Europe. And in the US, ING Direct’s acquisition of NetBank added USD 1.4 billion in customer deposits.
In mature markets, we increased effi ciency and optimised our competitive position. In the Netherlands, we are bringing together ING Bank and Postbank under a single brand to better and more effectively meet the needs of our retail customers there. This is a major investment and demonstrates a strong commitment to the Dutch banking market. To respond to changing customer preferences in Belgium, we are also optimising the service and retail distribution model in that market. ING Belgium has developed a programme that will allow the bank to accelerate its growth by leveraging its direct channels with its branch network. And at Wholesale Banking, after having successfully sharpened the strategic focus and improved capital effi ciency and returns, new initiatives for growth are geared towards the Benelux and Central Europe, and global franchises in Structured Finance, Financial Markets and Real Estate.
CONTINUED EFFICIENT ALLOCATION OF CAPITAL Successful execution of the strategy is underpinned by continued effi cient reallocation of capital through redeploying the capital we generate in mature markets to high-growth business, or returning it to our shareholders. This process is supported by actively managing our portfolio of businesses.
With this sharpened strategy, ING remains focused on creating value for its shareholders and rewarding them with a better total return on investment than the average of our peers in the fi nancial sector over the longer term.
In 2007, ING results showed resilience in turbulent markets with limited direct impact of the credit and liquidity crisis. Profi ts were boosted by capital gains on equities and low risk costs, mitigated by lower revaluations of real estate and private equity. ING delivered robust commercial growth and improved returns. Costs remained under control while we invested in new growth opportunities. ING proposes to increase total dividend by 12% to EUR 1.48 per share, to be paid fully in cash.
Expenses under control Investing in profi table and sustainable future growth is a priority for ING. Operating expenses remained under control, with continued investments in new growth initiatives. Total operating expenses increased by 7.8% and underlying operating expenses (i.e. excluding the impact of divestments and special items) grew by 5.9%. The underlying cost/income ratio within the bank deteriorated to 65.2% from 63.5% in 2006, as a result of the investments in growth businesses. On the insurance side, expenses related to traditional life products increased to 14.3% from 13.3% in 2006, measured as a percentage of gross premiums, mainly due to investments in growth in Central Europe and Asia/Pacifi c. Expenses related to asset driven insurance products rose to 0.76% from 0.75%, as a percentage of assets under management.
Attractive increase in dividend At the annual General Meeting of Shareholders on 22 April 2008, ING will propose a total dividend for 2007 of EUR 1.48 per (depositary receipt for an) ordinary share, up from EUR 1.32 in 2006. Taking into account the interim dividend of EUR 0.66 made payable in August 2007, the fi nal dividend will amount to EUR 0.82 to be paid fully in cash. ING’s shares will be quoted ex-dividend as of 24 April 2008 and the dividend will be paid on 5 May 2008 (NYSE Euronext) and 12 May, 2008 (NYSE) respectively.
INSURANCE: VALUE OF NEW BUSINESS in EUR million * Opening balance sheet under IFRS, 1 January 2005.
Underlying gross premium income from life insurance policies increased 1.1%, or 8.1% excluding currency effects, mainly driven by the US, Asia and Central and Rest of Europe. Underlying gross premium income from non-life insurance policies decreased 2.1%, or 1.2% excluding currency effects, as lower premiums in Europe were only partly offset by higher premiums in Canada and Latin America.
Underlying operating expenses from the Insurance operations increased 5.7% to EUR 5,467 million, mainly caused by costs to support the ongoing growth of the business in US Wealth Management, Asia/Pacifi c and Central Europe.
Underlying income increased 3.5% to EUR 14,614 million. The interest result declined 2.0% as volume growth was offset by the impact of fl attening and inverse yield curves and by intensifi ed competition for savings and deposits. Loans and advances to customers increased by EUR 88.5 billion, or 20.2%, to EUR 526.3 billion (balance sheet ING Bank NV). Customer deposits and other funds on deposits rose EUR 31.4 billion, or 6.3%, to EUR 528.2 billion. The total interest margin narrowed to 0.94% from 1.06% in 2006. Commission income rose 10.5%, driven by higher management fees, mainly from the investment management activities at ING Real Estate. Investment income was up 58.8% driven by higher capital gains on equities and higher rental income. Other income rose 4.0%.
Strong capital position The capital position of ING Group remained robust during 2007. All major capital ratios met their target as at year-end 2007. The debt/equity ratio of ING Group increased to 9.53% compared with 9.01% at the end of 2006. The debt/equity ratio of Insurance ended the year at 13.63% slightly down from 14.15% at year-end 2006. The Tier-1 ratio of ING Bank stood at 7.39% at the end of 2007, down from 7.63%. The solvency ratio (BIS ratio for the bank) decreased from 11.02% to 10.32%. The Tier-1 ratio under Basel II as of 1 January 2008 is approximately 9.9% and the BIS ratio is approximately 13.8%. These numbers are preliminary as ING Bank will only report under Basel II as of the fi rst quarter of 2008. The target Tier-1 ratio for ING Bank will remain unchanged at 7.20% under Basel II. ING looks increasingly at available fi nancial resources (AFR) and economic capital (EC) employed when managing capital. The target is that ING Group AFR should be at least 120% of ING Group EC. AFR Group at year-end was EUR 49.7 billion compared to EC Group of EUR 36.0 billion after diversifi cation, resulting in an AFR/EC Group ratio of 138%.
Divestments and special items Divestments resulted in a gain after tax of EUR 407 million in 2007 compared with a loss of EUR 85 million in 2006. The impact from operations from divested units on total profi t after tax in 2007 was EUR 32 million, versus EUR 96 million a year earlier. Special items in 2007 of EUR 369 million were related to restructuring provisions in Wholesale and Retail Banking, the provision for combining ING Bank and Postbank and the hedge on the purchase price of Oyak Bank. The impact from divestments and special items is excluded in the underlying profi t.
INSURANCE OPERATIONS Total profi t before tax from Insurance operations increased 32.9%. Underlying profi t before tax (excluding the impact of divestments and special items) from insurance rose 27.1% to EUR 6,110 million due primarily to EUR 2,087 million gains on the sale of ING’s stakes in ABN AMRO and Numico. Underlying profi t before tax from life insurance increased by 48.3%. The life-insurance activities in the US, Central and Rest of Europe and Latin America showed strong profi t growth, supported by increased sales, growth in assets under management and investment gains. The underlying profi t before tax from non-life insurance declined 22.5%. In the Netherlands, the deterioration was mainly caused by pressure on premium levels as well as high one-off claims provision releases last year. Canada’s result declined due to lower underwriting results and a decrease in investment gains.
Underlying operating expenses were up 6.1% to EUR 9,522 million due primarily to investments to support the growth of the business, notably at ING Direct, ING Real Estate and the Retail Banking activities in developing markets. Recurring underlying operating expenses in the mature businesses increased 2.6%. The underlying cost/income ratio deteriorated to 65.2% from 63.5% in 2006 as a result of the investments in growth businesses. The underlying net addition to the provision for loan losses increased to EUR 125 million from EUR 97 million in 2006. Risk costs were 4 basis points of average credit-risk-weighted assets, as gross additions to loan loss provisions of 23 basis points, were offset by 19 basis points in releases. Overall the loan portfolio remained healthy with limited infl ow of new impaired fi les.
Returns remained high with the underlying risk-adjusted return on capital (RAROC) after tax at 22.3%, up from 20.5% in 2006, refl ecting lower tax charges. The pre-tax RAROC was stable at 26.2%. In the RAROC calculations, actual risk costs of 4 basis points are replaced by 25 basis points in expected losses refl ecting average credit losses over the economic cycle.
LOOKING AHEAD ING’s capital position is strong, particularly after the introduction of Basel II, and ING is entering 2008 in a position of strength with strong business fundamentals driving commercial growth. The operating environment is likely to remain challenging going forward, as the economic uncertainty and market volatility has not come to an end yet. Creating value for shareholders remains paramount, and ING has proven its commitment to enhance shareholder returns through an attractive increase in dividends and the ongoing EUR 5.0 billion share buy-back.
This increase was made possible due to net profi t contributions from ING Insurance and ING Bank of EUR 5.6 billion and EUR 3.6 billion. Also, the ING Insurance target hybrid ratio has been increased from 15% to 25%. Spare leverage decreased due to dividends to shareholders, the share buy-back programme and the net balance of acquisitions and divestments.
Access to the international capital markets was hampered during the second half of the year because of the turmoil caused by the troubled mortgage market in the United States. In spite of this turmoil ING Group executed a very successful hybrid Tier-1 transaction in the US retail domestic market in October 2007, albeit at wider spreads than were available earlier in the year.
BENEFITING FROM BASEL II Much work was done during 2007 to fi nalise the preparations for Basel II, which creates guidelines that banks have to use to determine the minimum amount of capital they need to put aside to offset unexpected losses associated with fi nancial and operational risks that they may face.
Core Tier-1 23,374 20,058 Hybrid Tier-1 6,397 5,726 Total Tier-1 capital 29,772 25,784 Other capital 11,792 11,445 BIS capital 41,564 37,229 Risk-weighted assets 402,727 337,926 Tier-1 ratio 7.39% 7.63% BIS ratio 10.32% 11.02% Economic Capital and Available Financial Resources EC ING Bank 17,927 15,876 AFR ING Bank 31,733 25,784
During 2007 ING Bank submitted to the Dutch bank regulator, de Nederlandsche Bank (DNB) the pillar 2 internal capital adequacy assessment process fi ling, which contains an overview of the most important capital management policies, procedures and reports. This fi ling is the basis for the supervisory review of the capital adequacy of ING Bank.
THE CAPITAL LETTER The cornerstone of the capital adequacy assessment process at ING is the yearly Capital Letter, which contains an analysis of the capital position of ING, a review of the justifi cation for the target capital ratios and an economic and business development forecast. It also assesses the capital needed to support the business going forward versus the expected availability of capital given profi tability and the fi nancial instruments at the disposal of capital management. The capital position of ING Group, ING Bank and ING Insurance is discussed according to the viewpoint of the various stakeholders: regulators, shareholders, rating agencies and according to the internal risk assessment. The Capital Letter also includes the results of recent stress tests and a contingency plan (for both good and bad developments). It gives an overview of the available ‘toolkit’ to manage capital at ING. The Capital Letter is produced annually in June to coincide with the start of the planning cycle for subsequent years. The document is not public information, but is approved by the Executive Board and shared subsequently with the Supervisory Board and the regulators.
At ING Bank the proxy for AFR is Tier-1 capital, in the absence of a full market value balance sheet for ING Bank plus the revaluation reserve equities. AFR should exceed EC for both ING Bank and ING Insurance. EC for ING Group is defi ned as EC ING Bank plus EC ING Insurance minus the diversifi cation benefi t (10% in the past and 15% going forward) plus any EC specifi cally allocated to ING Group. AFR Group equals AFR ING Bank plus AFR ING Insurance minus core debt ING Group. The target is that ING Group AFR should be at least 120% of ING Group EC. It is policy that any buffer should be able to be deployed with maximum fl exibility and therefore be kept centrally.
can be properly balanced. At the beginning of each year, a funding plan and a securitisation plan are prepared describing all intended fi nancings and other capital market transactions.
Free surplus is that part of available fi nancial resources (capital) that exceeds economic capital employed. Many ING Insurance business entities need to hold more capital than economic capital due to regulatory and/or rating agency constraints. However, to the extent free surplus is not constrained, it is free to be employed elsewhere in the interest of furthering profi table growth. During 2007 in total EUR 5.8 billion of dividends were paid by ING Insurance Netherlands to the holding company of ING Insurance. As of 31 December, there remained tied-free surplus of EUR 3.5 billion and EU Solvency at 150% in ING Insurance Netherlands.
Signifi cant work was put into the management of the corporate line Insurance during 2007. The corporate line contains capital management and general management items that are beyond the management control of the business units, such as capital funding, top-down hedges and special expenses not directly related to the business. A new foreign exchange translation risk policy was approved and also the new interest rate risk management policy was implemented. Capital Management executed in total EUR 6 billion of equity index option transactions during 2007 to protect the value of the ING Insurance equity stakes (also some of the equity positions of ING Bank were hedged on the corporate line of ING Bank).
CAPITAL MARKET TRANSACTIONS In order to obtain regulatory capital relief under Basel I, ING Bank had two conduits, with own originated assets and also the senior positions of own originated asset securitisations, called Mane and Simba. These conduits funded these positions with short dated asset-backed commercial paper. The advent of Basel II made these conduits largely obsolete. As a result of the widening of spreads for this paper after the summer and of the fact that alternative sources of funding for ING Bank became much more competitive, ING unwound these conduits in the third quarter of 2007. With the unwind approximately EUR 6 billion of Basel I risk-weighted assets (RWAs) were added to ING Bank as of the end of the third quarter.
ACQUISITIONS AND DIVESTMENTS For the fi rst time in a number of years 2007 was a year with signifi cant acquisition activity. Two major transactions were concluded: the acquisition of Oyak Bank in Turkey and the acquisition of the Latin American pension fund business of Santander. Total consideration for these two purchases was approximately EUR 2.5 billion.
ING Insurance bought the asset management entity Landmark in Korea, a further 5% of ING Life Korea from Kookmin Bank and the pension administrator AZL in the Netherlands. Further acquisitions at ING Bank included the internet broker Sharebuilder in the United States, lease operations in Eastern Europe and a stake in TMB in Thailand.
2007 was also a very active year for divestments: the broker business of ING Insurance Belgium was sold, as was the remaining stake that ING Insurance held in Goudse Verzekeringen. At ING Bank most of the trust activities were sold, and next to that also RegioBank and Nationale Borg in the Netherlands, as well as a factoring joint venture in Belgium. The stakes in both SulAmérica in Brazil and Bank of Beijing in China were partially diluted through an IPO.
2007 was characterised by a great deal of turbulence in the fi nancial markets, beginning with concerns over US subprime mortgages in early 2007 and then widening into a general banking liquidity crisis. The turmoil put a spotlight on risk management across the fi nancial sector. The crisis had only limited impact on the profi t and loss account through ING’s investments in pressurised assets classes.
Economic Capital break-down by risk category ING Bank in EUR billions 2007 2006
A robust risk management organisation and a strong liquidity position helped ING manage the problems that occurred in the credit and other fi nancial markets in 2007. It has been ING’s policy to maintain a high quality and well diversifi ed portfolio. To that effect ING has strict limits and investment policies in place which are defi ned in mandates for every portfolio. Investment and trading decisions are based on extensive internal research, and not only on published ratings. Some limits were at more stringent levels since early 2007, anticipating a potential downturn of the market.
ING applies conservative standards in mortgage underwriting and has not originated US subprime mortgages. Moreover, ING is not in the business of manufacturing subprime Residential Mortgage Backed Securities (RMBS) or Collateralized Debt Obligations (CDOs) nor has it purchased a material amount of US subprime backed CDOs/ Collateralized Loan Obligations (CLOs). ING’s exposure to the US housing market is predominantly via highly rated RMBS investments.
As a result, ING’s exposure to pressurised asset classes, e.g. subprime and Alt-A (RMBS) (those with a risk profi le between prime and subprime), CDOs and CLOs, is of high quality and has not led to material impairments.
The ABS portfolio comprises mainly AAA rated securities (89%) and AA rated securities (10%). Unrealised gains/(losses) relating to available for sale (fi xed income) securities, including Mortgage Backed Securities (MBS), are taken to the revaluation reserve in shareholders’ equity, unless there is evidence of impairment, in which case the negative revaluation reserve is recognised in profi t or loss account. In addition, Loans and advances to customers, valued at amortised costs, contained EUR 13 billion European asset-backed products with market value around 100% and an average credit rating of AAA.
High quality Alt-A portfolio Alt-A mortgage loans are regular residential mortgage loans in the US market which are frequently packaged into RMBS. Notwithstanding the widespread existence of Alt-A RMBS a single standardised defi nition does not exist.
At times, ING has generally applied a ‘broad’ defi nition to Alt-A RMBS. Under the broad defi nition of Alt-A RMBS, the applicable RMBS contains at least one of the following three characteristics: on average a Loan-to-Value ratio between 70%-100%, a FICO credit score between 640-730, and ‘low documentation’ (referring to reduced requirements regarding personal income and/or asset verifi cation) of 50% of the debt holders in the portfolio or more.
ING’s exposure under the broad defi nition amounted to EUR 27.5 billion at 31 December 2007, representing 2.1% of total assets. ING Direct’s share of this exposure was EUR 23.6 billion. Note that ING Direct reports Alt-A RMBS under a so-called ‘narrow defi nition’. In this instance a security qualifi es as Alt-A RMBS if it meets all three criteria simultaneously. Hence, average FICO scores higher than 730, LTVs of less than 70% and ‘low documentation’ less than 50% are excluded from Alt-A. In accordance with the narrow defi nition, ING Direct’s exposure amounted to EUR 9.7 billion at 31 December 2007.
CDOs and CLOs At the year end, the Group’s net exposure to CDOs and CLOs was EUR 1.9 billion, or 0.1% of assets. Net impairments and trading losses combined taken on CDOs/CLOs totalled EUR 51 million (EUR 15 million in the third quarter and EUR 36 million in the fourth quarter). At the end of the year, the portfolio was valued at 93.4% of cost, with a negative pre-tax revaluation of EUR 134 million. The revaluation refl ects limited investments in CDOs backed by US subprime mortgages (EUR 15 million at year-end).
A small markdown of EUR 29 million was taken at the Wholesale Bank in the third quarter to refl ect the decrease in fair value during the underwriting period.
Monoline insurers ING Group 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 EUR 3.5 billion, or 0.3%, of assets with several monoline insurers, either through embedded 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 equity (unrealised losses) for wrapped bonds. 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. The rating of the monoline insurers impacted ING’s profi t and loss account in the fourth quarter by EUR 66 million, due to the downgrading of a monoline insurer, which resulted in EUR 630 million of underlying assets on the trading book of Wholesale Banking no longer being protected.
The risk appetite, or the willingness of the Group to take risks, is defi ned by the Executive Board and measured through three key measures: Earnings at Risk and Capital at Risk, which are measured in the ‘Risk Dashboard’, and Economic Capital. Business line managers try to maximise value relative to these measures, while Risk Management monitors and controls the actual risk profi le against the Group’s risk appetite.
Risk appetite measures ING defi nes its risk appetite through three different measures: Earnings at Risk, Capital at Risk and Economic Capital.
Earnings at Risk (EaR) is a measure of the potential reduction in IFRS earnings from expectations, assuming no mitigating management actions, during a moderate (i.e. ‘1 in 10’) stress scenario. Internally this is compared to the next year’s forecast IFRS earnings and as such provides an indication of the quality of earnings. The overall risk appetite level for ING, decreased to 31% (from 32% in 2006). This is 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. For further details on Earnings at Risk see the Risk section of the Annual Accounts.
Ongoing volatility in the fi nancial markets As a result of ongoing and unprecedented volatility in the global fi nancial markets in recent quarters, we have incurred negative revaluations on our investment portfolio, which have impacted our shareholders’ equity. Furthermore, we have incurred certain impairments and other losses, which have impacted our profi t and loss accounts. Such impacts have arisen primarily as a result of valuation issues arising in connection with our exposures to US mortgage-related structured investment products, including sub-prime and Alt-A Residential Mortgage-Backed Securities (RMBS), Collateralized Debt Obligations (CDOs) and Collateralized Loan Obligations (CLOs), monoline insurer guarantees, Structured Investment Vehicles (SIVs) and other investments. In many cases, the markets for such instruments have become highly illiquid, and issues relating to counterparty credit ratings and other factors have exacerbated pricing and valuation uncertainties. Valuation of such instruments is a complex process involving the consideration of market transactions, pricing models, management judgment and other factors, and is also impacted by external factors such as underlying mortgage default rates, interest rates, rating agency actions and property valuations. While we continue to monitor our exposures in this area, in light of the ongoing market environment and the resulting uncertainties concerning valuations, there can be no assurances that we will not experience further negative impacts to our shareholders’ equity or profi t and loss accounts from such assets in future periods.
In recent years ING has systematically invested to improve its risk management capabilities. This has become necessary as investor demands have increased, regulation has become more sophisticated, technology has grown more complex and as secondary markets have continued to evolve. After years of targeted investments in people and technology, ING ended 2007 with around 4,500 employees dedicated to risk management.
for ING Group increased to 21% (17% in 2006) as CaR increased while AFR decreased. For further details on Capital at Risk see the Risk section of the Annual Accounts.
Economic Capital (EC) is the amount of capital required to absorb unexpected losses in times of severe stress given ING’s AA target rating. ING Group Economic Capital increased to EUR 36.0 billion in 2007 (2006: EUR 35.5 billion) taking into account the BankInsurance diversifi cation benefi t and a risk capital estimate allocated to the group on top of the reported bank and insurance Economic Capitals. ING Bank stand-alone Economic Capital rose 13% to EUR 17.9 billion due to business growth and the inclusion of Oyak Bank, while at ING Insurance stand-alone Economic Capital remained remained stable at EUR 23.2 billion (2006: EUR 22.4 billion). The slight increase was mainly the result of model refi nements and the acquisition of pension business in Latin America.
ING TAKES MEASURED RISKS Taking measured risks is part of ING’s business. Like other fi nancial services companies, ING faces a number of risks in the areas of credit, interest rates, real estate, equity, insurance and liquidity. Beyond that, there are also operational, information and security risks associated with doing business.
Credit risk is the risk of loss from default by debtors (including bond issuers) or counterparties. ING seeks to maintain an internationally diversifi ed loan and bond portfolio.
ING’s Insurance and Banking operations are exposed to real estate risk in the event of a market downturn. But this exposure is mitigated due to the highly diversifi ed portfolio of real estate assets. Concentrations within specifi c geographies are monitored and actively managed.
Equity risk is mitigated from time to time by hedging processes, while insurance risk, which combines actuarial and underwriting risks (risks such as mortality, longevity, morbidity, adverse motor or home claims development, etc.) is managed by removing concentrations through reinsurance. The insurance businesses also exclude or limit business in some areas such as terrorism and health reimbursement.
Liquidity risk is the risk that ING or one of its subsidiaries cannot meet its fi nancial liabilities when they fall due, at reasonable costs and in a timely manner. ING’s balance sheet inherently supplies liquidity as a signifi cant proportion of assets are held in cash or liquid market instruments and are capable of providing liquidity as required. ING has developed a liquidity management framework with a preferred order of generating liquidity.
ING is exposed to operational, information and security risks on a daily basis through its client relationships, product offerings, IT infrastructures and daily operations. Operational, information and security risks are managed through a common ING framework that identifi es measures and monitors the risks and its mitigating controls in the ING businesses. In 2007 this framework has further matured and the responsible risk functions have been integrated into one functional line throughout ING.
The cost of capital is reduced by working closely with rating agencies and regulators to align capital requirements to risks, thereby reducing capital. Funding costs are kept low by ensuring that the debt market gives ING benefi t for our conservative risk profi le. Risk costs are mitigated by minimising losses and encouraging the diversifi cation of risk. Being spread out across different areas contributes to lower risk and capital requirements.
Individual business units benefi t from being part of a globally diversifi ed group. Risk Management helps them lower funding costs, make use of the latest risk management tools and skills, and lower strategic risk, allowing business units to focus on their core expertise. This ultimately makes our businesses more competitive in their markets.
Sound risk management also supports growth. Risk measurement allows ING to identify portfolios generating economic value. Risk management can help identify the most economically profi table areas as well those businesses that are underperforming and in some cases need to be sold.
A PARTNER TO THE BUSINESS The turbulence in the fi nancial markets in 2007 underscored the need for sound risk management during times of diffi culty. Risk management has evolved signifi cantly since ING started in 2006 to strengthen the risk function. The change emphasises the role of Risk Management not only as a watchdog, but as an enabler and partner in generating value for shareholders. Risk Management works with the business to identify and execute business opportunities, lower the cost of funding and support strategic decisions.
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.
GEOGRAPHICAL BREAKDOWN OF PREMIUM INCOME in percentages * Bulgaria, the Czech Republic, Greece, Hungary, Poland, Romania, Russia, the Slovak Republic and Spain.
Insurance Europe is an important profi t and value contributor to ING Group. It showed a solid fi nancial performance in 2007, by improving effi ciency and optimising distribution channels in the Benelux, by accelerating growth in Central Europe and by reinforcing ING’s position as a specialist provider of investments and retirement services across Europe.
FINANCIAL DEVELOPMENTS Insurance Europe’s underlying profi t before tax declined 18.2% to EUR 1,840 million in 2007 (life 15.7%, non-life 25.4%). Stronger life insurance results in Belgium and Central & Rest of Europe did not fully offset lower results in the Netherlands, which were impacted by lower gains and revaluations on real estate and private equity investments. Total profi t before tax (including divestments) in 2007 slightly declined by 2.6% to EUR 2,300 million, due to the EUR 418 million divestment gain related to the sale of the Belgian broker and employee benefi t business in September 2007.
Underlying premium income increased by 4.0% to EUR 10,253 million, mainly due to higher life premiums in Belgium and Central & Rest of Europe. Central Europe continued its strong growth in life premiums, even though in some markets the growth was slower than in 2006 due to volatile equity markets in the second half of 2007. In Belgium, life premium growth was driven by the success of investment products with high profi t participation potential. Premiums in the Netherlands decreased slightly following re-pricing of immediate annuities as well as rate pressure in the non-life market.
The value of new business (VNB) increased strongly by 82.6% to EUR 400 million and new sales (APE) increased by 21.3% to EUR 969 million, particularly due to higher sales in Central & Rest of Europe. The successful launch of the Romanian second-pillar pension fund contributed EUR 150 million in VNB and EUR 108 million in new sales in 2007; excluding the new pension fund, VNB for the Central Europe region was up 31.5%.
Excluding a capital upstream from the Dutch insurance companies to the holding of ING Insurance, the embedded value of the life insurance activities in Europe increased by 21.3% to EUR 19,533 million because of the strong VNB growth and favourable equity returns that more than offset the divested business in Belgium. Including the capital upstream, the embedded value decreased by 12.1% to EUR 14,156 million.
Country developments Underlying profi t before tax in the Netherlands decreased by 24.4% to EUR 1,445 million, mainly due to lower gains and revaluations on real estate and private equity investments in 2007 as well as the material release of disability provisions in 2006, after the introduction of new long-term disability legislation.
In Belgium, underlying profi t before tax increased by 8.5% to EUR 64 million, as a decline in the non-life business caused by weather related claims in early 2007 and strengthening of the claims provisions for disability, was more than offset by higher life results.
The Dutch life insurance sector is faced with complaints of policy holders concerning the cost and transparency of unit-linked life insurance products. Further details are included in the annual accounts on page 156.
Insurance Europe is addressing these trends by tailoring the specifi c strategies of its individual insurance companies to the maturity of the markets in which they operate. In the mature markets of the Benelux where there is moderate growth, ING focuses on improving effi ciency and optimising distribution, whereas in the fast-growing markets of Central Europe, the focus is on accelerating growth. Across all regions, ING Insurance Europe is taking advantage of the opportunities created by ageing populations and is reinforcing its position.
These tailored strategies are raising Insurance Europe’s growth profi le. This is underpinned by active capital management within ING Group, where capital is being redeployed to those regions (high-growth markets), products (retirement services) and distribution channels (especially bank and direct) which offer the highest growth potential.
…by improving cost effi ciency… Nationale-Nederlanden (NN) made substantial progress to improve its cost effi ciency. It has reduced internal staff by 1,200 FTEs over the last three years. Important changes in regulations (such as the Dutch pension act) temporarily increased the number of external staff needed to meet expectations from customers and regulators, slightly mitigating the overall impact of the cost effi ciency programme. In the coming years, large cost reductions can be further realised by standardising and rationalising the current IT applications, as a major part of the cost reductions are IT related.
…by improving capital effi ciency… To improve capital effi ciency, the Dutch insurance companies paid EUR 5.8 billion of dividends to the holding company of ING Insurance in the course of 2007, of which EUR 5.0 billion was surplus capital. It is expected that these capital transactions will structurally reduce the pre-tax profi t capacity of Insurance Netherlands by approximately EUR 250 million per year going forward. The surplus capital dividend was a direct consequence of an asset and liability management study which was conducted in the course of 2007. The study also resulted in a recommendation to change the strategic asset allocation by reducing the exposure to equities and Dutch residential mortgages, and increasing the share of long-term fi xed income investments. In May 2007, NN started to cede its mortgages to ING Bank. The cessions of residential mortgages of NN and RVS to ING Bank will be fi nalised during 2008.
Accelerating growth in Central Europe... Central Europe is enjoying sustained high economic growth, which together with the low life insurance penetration and favourable demographics, make it a growth market for life insurance and pensions. Insurance Central Europe achieved strong increases in the value of new business and new sales and continued to show steady growth in premiums, pension fund infl ows and profi t. Building on its fi rst-mover advantage, at yearend 2007 ING had organically created an embedded value of EUR 3.9 billion since the start of its operations in Central Europe in the early 1990s. ING’s continued strong performance in the region is based on the successful implementation of an accelerated growth strategy, based on four pillars: broadening the distribution base, extending the product range, establishing new greenfi elds, and increasing operational effi ciency.
Tied agents are currently the main distribution channel in Central Europe. ING continued its programme to enhance the effectiveness of its tied sales agents, which is refl ected in an increase in their productivity of over 20% in 2007. The sales force is primarily assessed on its value creation, persistency and retention of clients. At the same time, ING is broadening its distribution through partnerships with local brokers and banks. ING Hungary, for instance, showed successful sales of insurance-linked mortgages in cooperation with two local banks. In Greece, ING fi nalised an exclusive 10-year distribution partnership with Piraeus Bank, one of the country’s leading banks. Direct distribution of simple, standardised products is developed selectively as a lead generator for more advicesensitive products.
In 2007, further progress was made with extending the product range. In Romania, Hungary, Poland and Slovakia, basic protection products have been developed that also give ING access to lower income segments.
Specialist provider of investments and retirement solutions across Europe ING Investment Management Europe has shown a strong increase in profi t during the last few years. Despite outfl ows in the Netherlands, growth in 2007 came from organic sources in third- party distribution and proprietary business, especially by strong sales of Bank Slaski in Poland. Net results were positively infl uenced by the profi table top line growth. ING Investment Management is discussed in more detail in the Asset Management chapter on page 49.
ING also launched single premium variable annuities in Spain (end of March) and Hungary (July), which contributed EUR 173 million to the premium growth. These products are long-term savings products that combine the opportunity to benefi t from the upside potential of equity investments with the security of an investment guarantee. This guarantee makes these products an attractive instrument for clients saving for their retirement.
In Central Europe, ING aims to expand its leading position by executing its four-pillar accelerated growth strategy. The efforts to establish partnerships with banks and brokers will be intensifi ed in 2008 and the tied agents sales force will be further professionalised. Products for the emerging middle class will be developed, as well as products to retain the assets of customers whose policies were written in the early 1990s. ING will closely look at the opportunities to sell life insurance and pension products in the large Turkish market leveraging on the recent acquisition of Oyak Bank in that country. In order to establish scale and benefi t from the growing economies in Central Europe, ING will remain alert for opportunities to start more greenfi eld operations in the region and to possibilities for new distribution partnerships and add-on acquisitions.
Finally, in line with ING’s focus on providing investments and retirement solutions across Europe, the roll-out of variable annuities will continue in both existing and new markets.
Key points > Pre-tax profi t up for fi fth consecutive year > US records solid results under challenging conditions > Leading positions established in Latin America > Growth to be driven organically but also supported through acquisitions
Underlying profi t before tax 2,059 1,992 3.4% Total profi t before tax* 2,152 1,992 8.0%
* Total profi t before tax is defi ned as profi t before tax including divestments and special items.
Value of new life business (EUR million) 270 167 Internal rate of return 11.8% 10.3% Embedded value of life business (EUR million) 10,633 10,272 Economic capital (EUR billion) 6.5 6.0
Operating expenses in the Americas increased 1.2% to EUR 2,519 million, or 9.2% excluding currencies. This expense growth was related to the acquisition of the pension and annuity businesses in Latin America, higher sales, strategic investments in technology and distribution as well as organic business growth, especially in the United States.
Life insurance Life underlying profi t before tax rose 19.1% to EUR 1,572 million or 29.9% excluding currency impacts. In the United States, underlying profi t before tax increased 12.7%, to EUR 1,356 million, or 23.2% excluding currencies. Net investment gains, including the EUR 21 million gain on the disposition of a minority equity investment, contributed EUR 83 million to the profi t growth in the United States. Interest related gains more than offset credit related losses and impairments related to the credit crisis. Results also included EUR 3 million in positive equity-related deferred acquisition cost (DAC) and reserve unlocking, a EUR 52 million decrease from the favourable unlocking in 2006. Excluding investment gains, underlying life profi t before tax increased 5.5% to EUR 1,316 million, or 15.0% before currency impacts. Fee income growth driven by higher assets under management related to core retirement services and variable annuities as well as higher investment returns from alternative assets, were partly offset by increased operating expenses. Operating expenses in the United States grew 10.4% excluding currency impacts, driven by higher sales, the expansion of distribution capacity, growth of the business in-force, technology investments as well as higher reorganisation and benefi ts charges.
Insurance Americas’ internal rate of return (IRR) climbed 150 basis points to 11.8%, representing solid improvements across the region. In the United States, individual life IRR improved signifi cantly, benefi ting from higher sales that enhanced the per unit cost effi ciency as well as from the implementation of solutions that addressed the non-economic regulatory reserves.
US Wealth Management moves from strength to strength In the US, ING has achieved solid growth from strong positions in retirement services and variable annuity businesses and its broad distribution capacity.
In corporate markets, ING focuses on providing defi ned contribution retirement savings plans to companies with 500 or fewer employees, as this is the sector where most of the employment growth is likely to occur in the future. Also, this sector is under-penetrated with only 30% of employers in the sector having 401(k) retirement savings plans in place for employees.
The education market also offers ING excellent growth opportunities. Recent changes to regulations governing the marketing of retirement savings plans to teachers and other education staff, the fi rst for almost 40 years, are likely to benefi t ING. The new legislation, which becomes effective in late 2008, will put fi duciary responsibilities on educational institutions to ensure the retirement savings plans being offered to staff are the most competitive. It will mean that educational institutions are likely to require assistance in fulfi lling their obligations to fi nd the best plans, and the fi nancial institutions that can help them with this will be the ones most likely to win business. ING has a strong reputation for retirement plan administration, infrastructure and capability.
Also, about 2.4 million teachers aged 50-plus will retire in the next 10 to 15 years and they will require products and advice to help them make the best use of their retirement savings. These teachers will be replaced with roughly the same number of younger teachers entering the education system who will need to set up retirement savings plans. These younger teachers are more likely to want access to investment products online, and ING is building the capability to serve both the aged 50+ retirees, and the 20-something new teachers.
Finally, auto-enrolment which was authorised by the Pension Protection Act of 2006 and which means employees are automatically put into a company pension scheme unless they opt out, will assist ING as well as other fi nancial services companies in attracting new business.
As part of its wealth management transformation in Latin America, ING made two strategic divestments in early 2008. In January, ING announced the sale of its health insurance business in Chile to Said Group and Linzor partners, and in February 2008, ING announced the sale of its Mexican insurance operations to AXA.
Non-life operating expenses were EUR 790 million, representing a 2.6% increase excluding currency impacts, with increases in Canada partially offset by lower operating expenses in Mexico.
In 2007, ING’s leading market position in retirement services and variable annuities resulted in both business lines contributing to 46% of US earnings. US Retirement Services is a market leader in earnings, number of retirement plans and participants. In US Variable Annuity, strong sales of new products and good retention rates together with enhanced distribution fuelled solid asset growth. Variable Annuity assets now stand at almost USD 50 billion. The Asset Management and Insurance businesses in the US both experienced a very strong 2007, with strong growth in mutual fund and institutional asset management sales, and a more than 49% increase in new life insurance sales from the launch of new universal life and term life products.
The results were achieved despite challenging credit and equity markets, the market turbulence caused by the fallout from subprime mortgages, and tough competitive conditions overall.
In the second half of the year, ING announced the acquisition of Banco Santander’s pension businesses in Argentina, Chile, Colombia, Mexico and Uruguay for EUR 1.15 billion. These businesses, together with ING’s existing Latin American pension operations, make ING the second-largest pension fund manager in Latin America. With this signifi cant investment, ING has become a major player in the pension and wealth management markets of Latin America. ING will have EUR 40 billion in pension assets under management in the region, more than double the pre-acquisition assets.
Awards for excellence In early 2008, ING in the US won a Process Excellence Award for the start up of its Six Sigma programme by the International Quality & Productivity Centre. ING’s Six Sigma programme, designed to achieve greater operational effi ciency, delivered USD 44 million in fi nancial benefi ts from 100 projects completed during the year. These projects focused on capacity improvement, revenue generation and expense reduction.
ING will continue to focus on investing for growth in investments, life insurance and retirement services in the Americas. ING’s market strength in key businesses puts it in a good position to achieve this goal.
In the US, the impending retirement of baby boomers is dramatically increasing their focus on saving for retirement. By 2020, two-thirds of the investable assets in the US will be controlled by baby boomers. The inter-generational transfer of wealth estimated to exceed USD 40 trillion creates major opportunities for fi nancial service companies with scale.
Both top-line and bottom-line growth in the Americas will be driven organically, but with increasing emphasis on growth through acquisitions.
Key areas for acquisition are US retirement services, variable annuities and asset management, along with pensions and life insurance in Latin America.
ING will continue to focus on the needs of the customer, whether it’s the end-customer, distributor, plan sponsor or partner. This will mean creating innovative product solutions on an accelerated timetable, and initiating and executing improvements to customer service and technology capabilities. In this way, we plan to deliver on our promise of making it easier for our customers and distributors to do business with ING.
Insurance Asia/Pacifi c Well-placed to benefi t from the region’s growth
Assets under management increased by 17.9%, reaching EUR 99 billion by year-end 2007, driven by Japan, China, India and Taiwan. In Japan, ING Funds Japan secured a EUR 1.5 billion mandate on selected funds from Nomura securities. In Taiwan, assets under management for the investment-linked business more than doubled to EUR 1.4 billion from a year earlier due to the acquisition of ABN AMRO asset management business in the fourth quarter 2006.
Underlying operating expenses increased 15.5% to EUR 1,115 million, refl ecting the increase of business volumes and the focus on building organisational capabilities and infrastructure, and investing in greenfi eld operations.
Country developments In Australia and New Zealand, underlying profi t before tax increased 33.5%, or EUR 54 million to EUR 215 million in 2007 from EUR 161 million in 2006 driven by growth of funds under management, investment earnings and one-off gains of EUR 11 million. Life premium income rose by 19.6%, or EUR 45 million to EUR 275 million in 2007 from EUR 230 million in 2006, driven by new sales in life risk and personal investment products, along with favourable in-force business retention. ING Australia’s innovative best-selling product OneCare, a yearly renewable term product offering lump sum and disability income benefi ts continues to command a leading market share. Operating expenses increased 14.4% due to higher volume-driven expenses such as investment management, a direct campaign and stamp duty costs.
ING has a strong fi nancial services franchise in the Asia/Pacifi c region. It is currently the second-largest international life insurer there, based on annual premium equivalent (APE), which is the sum of regular and annual premiums from new business plus 10% of single premiums on new business written during the year. At present ING has 12 life operations in 10 markets and commands leading positions in the larger, established markets of Australia, New Zealand, Japan, South Korea and Taiwan. ING is well-placed for growth in the large and medium-sized rapidly expanding markets of India, China, Malaysia and Thailand.
Strengthening multiple distribution channels ING sells its life insurance products in the Asia/Pacifi c region via tied agents, banks, direct channels and several innovative alternative channels. The tied agency channel has been the strongest, but distribution through banks is growing fast. ING continually works to broaden its distribution methods and increase the effi ciency of existing channels.
In Australia, ING further strengthened its distribution network and added 139 new aligned advisers through the successful acquisition of Financial Services Partner Group (FSP Group). FSP Group is the third largest dealer group in Australia with over 250,000 client relationships. This acquisition positions ING Australia as the second-largest aligned adviser network in the country with just under 1,500 aligned advisers and yielding signifi cant growth opportunities and cost and operational synergies.
Introducing new products Most markets are showing a shift to investment-oriented life insurance products. In Japan, the introduction of a new SPVA product, Smart Design 1-2-3, in September 2007 has been very successful and has enabled us to maintain market share despite the negative impact of the FIEL regulation. South Korea and
Looking forward, the focus on investment-oriented insurance products continues to sharpen, as customer demand increases. Through customer segmentation, we will offer customers a growing suite of products geared towards their particular fi nancial needs. The tied agency model remains important and we will continue to improve it. In addition, more initiatives will be taken to strengthen multi-channel distribution capabilities, through bank distribution, and direct and new alternative channels.
General Lending & PCM 29% 696 Structured Finance 17% 409 Leasing & Factoring 9% 220
FINANCIAL DEVELOPMENTS Underlying profi t before tax declined 5.0% to EUR 2,399 million. Higher profi ts were recorded in General Lending & Payments and Cash Management, Leasing & Factoring, ING Real Estate and Other Wholesale Products. Underlying profi t from Structured Finance decreased 20.6% to EUR 409 million, including a markdown of EUR 29 million on the Leveraged Finance book in the third quarter of 2007. Financial Market profi t declined 30.5% to EUR 354 million. The subprime crisis and related issues had a negative pre-tax impact on Financial Market profi t of EUR 106 million in the fourth quarter of 2007.
Risk costs were again negative in 2007. The net release from the provision for loan losses was EUR 115 million compared with a net release of EUR 121 million in 2006. Gross additions remained low, refl ecting the strong quality of the credit portfolio. The net release in 2007 equalled seven basis points of average credit-risk-weighted assets, unchanged compared to the net release in 2006.
The underlying risk-adjusted return on capital (RAROC) after tax from Wholesale Banking declined to 20.3% from 20.6% in 2006. Average economic capital decreased 4.6% to EUR 7.8 billion due to model refi nements. All product groups are performing above ING’s 12% return hurdle, with the exception of General Lending & Payment and Cash Management. The after-tax RAROC of this product group increased to 9.7% from 7.3% in 2006.
Efforts to increase effi ciency will also continue, with an aim to reduce the cost/income ratio to 55% by 2010 while further increasing the risk-adjusted return on capital. A number of initiatives were started in 2007 to stimulate growth and reduce operating expenses. Provisions totalling EUR 139 million before tax were booked as special items which are excluded from the underlying results.
General Lending is used as an entry product across all regions to attract customers and to cross-sell high-value products. It continues to focus on capital optimisation activities to increase value creation, including an ‘originate-to-distribute’ strategy, where originated loans are sold before reaching maturity.
Volumes in PCM rose due to bigger transactions and the renewal of key contracts. European companies have been directing increasing amounts of cash management business to just a few fi nancial institutions, including ING, as scale becomes more important. Wholesale Banking is focusing on certain client segments such as large pension funds, health insurance companies, fi nancial institutions and mid-corporates. ING won a number of sizeable cash services mandates in 2007 from large
institutional clients. Preparations were made for the creation of the Single Euro Payments Area (SEPA), which has taken effect from 28 January 2008, and ING has signed agreements with various clients to provide SEPA services for sizeable volumes. Consequently, the high level of investment in Payments & Cash Management will continue over the coming years.
In leveraged fi nance, ING tightened its limits early in the year in anticipation of a slowdown. When credit markets became disrupted in August, ING had an underwriting pipeline of EUR 2.3 billion spread over 14 transactions. Since then, some of the deals have been syndicated out. The loan syndication market was also slow with a bigger tendency towards club deals that spread the risk, and the income, over a larger group of partners. There was also downward pressure on underwriting fees.
The General Leasing portfolio increased 18.3% to EUR 15.3 billion, thanks to expansion in the Netherlands, Italy, the UK and Central Europe. ING Car Lease’s fl eet grew, supported by growth in the Benelux and Central & Eastern Europe where efforts to target corporate clients are paying off. ING Lease is the market leader in the Netherlands and has intensifi ed its cooperation with ING Bank’s Dutch network. In the second quarter, Wholesale Banking sold its 50% stake in International Factors Belgium to KBC and transferred its clients to ING Commercial Finance Benelux NV, a newly formed company wholly owned by ING. Volumes in Factoring grew due to growth in the Netherlands and Belgium as ING focused on strengthening its position in its home markets.
In Central Europe, ING is active in leasing and factoring in six countries and achieved double-digit volume growth. The strongest growth was in Romania and Poland. ING Lease Ukraine was launched in early December and is fully operational from 1 January 2008. ING Lease reached an agreement to buy Citileasing in Hungary, adding EUR 150 million to the portfolio and making ING a top-10 player in that country.
Boosting Financial Markets strengths Clients and products business held up well, in line with our aim to diversify away from proprietary risk businesses, including proprietary trading. Financial Markets continues to seek crossselling opportunities across product areas and clients groups, including a new strategy to target emerging markets.
Financial Markets saw a drop in income due to much lower trading income in diffi cult trading conditions. Trading losses occurred in proprietary trading and in credit market activities due to concerns about sub-prime mortgages.
ING Real Estate the global leader ING Real Estate had another year of solid growth, with assets under management increasing by 10% over the year, its loan portfolio growing by 42% and a development portfolio growing to EUR 3 billion. At the year-end, ING Real Estate’s total portfolio was EUR 107.2 billion, up 18.2 % on 2006, and profi t before tax increased by 5.2% to EUR 664 million.
The rolling out of a single ING brand globally is an important differentiator for Wholesale Banking which will help to build and maintain strong client relations. New opportunities have been created in the home market after the takeover of ABN AMRO by a consortium of Fortis, Royal Bank of Scotland and Banco Santander. Our creation of a full-service bank in the Netherlands, operating under one brand, gives ING a strong position to gain market share.
Prioritising regulation and compliance Wholesale Banking continued to invest in compliance to ensure we remain competitive and demonstrate to our clients that we have the highest possible compliance standards. We have focused on preparation for Basel II (the Revised International Capital Framework) and MiFID (the Markets in Financial Instruments Directive), and continue to ensure we apply the highest standards across all of our businesses and that we maintain an excellent reputation.
Key points > Investment in integration of Postbank and ING Bank underlines commitment to Dutch market > Acquisition of Oyak Bank gives ING solid platform in Turkey > Continued strong growth in Poland, Romania and India > Private Banking benefi ts from increasing wealth worldwide
Additions to loan-loss provisions 172 161 Underlying profi t before tax 2,062 1,935 6.6% Total profi t before tax* 1,783 1,935 –7.9%
Breakdown of underlying profi t before tax in EUR million 2007
Retail Banking performed well in 2007, especially in key product areas of mortgages and savings. Important steps were taken to improve effi ciency in the mature markets and to enter high-growth markets in Central and Eastern Europe and Asia. In a fi nancial services environment characterised by consumer power, rapid technological change and globalisation, Retail Banking aims to set the standard in convenience banking around the world.
FINANCIAL DEVELOPMENTS Underlying profi t before tax from Retail Banking rose 6.6% to EUR 2,062 million as strong growth in most products helped offset the impact of challenging market conditions as inverse yield curves persisted and competition intensifi ed for retail savings. Total profi t before tax decreased 7.9% as 2007 included EUR 310 million in restructuring provisions, of which EUR 299 million for combining Postbank and ING Bank in the Netherlands. This was in part offset by a gain of EUR 32 million on the sale of RegioBank.
Underlying income increased 5.1% to EUR 6,396 million as a result of strong growth in almost all products. The impact of composition changes, like the mortgage portfolios that were transferred from ING Insurance, the sale of RegioBank as well as the transfer from a SME portfolio in Poland from Wholesale Banking to Retail Banking was limited. Excluding these composition changes and the EUR 44 million gain on Banksys in Belgium in 2006, the increase was 4.7%.
HIGHLIGHTS Retail Banking operates in the mature markets of the Benelux and in the fast developing countries of Central and Eastern Europe and Asia. A number of trends are evident, the fi rst of which is how technology is transforming the distribution of retail fi nancial services in all markets. The internet, for example, is becoming, or already has become, the primary distribution channel for simple, commoditised products. Secondly, ageing populations, especially in mature markets, are creating a need for products suited to people in the later stages of their lives. Thirdly, the middle classes are growing rapidly in emerging economies which is stimulating demand for fi nancial services.
ING is responding to these trends. In mature markets ING is consolidating businesses to improve cost effi ciency and is optimising its distribution channels. In high-growth markets ING is leveraging the strengths of its products, services and distribution expertise. All these efforts contributed to an expansion of our business franchise as we have been able to broaden our customer base, number of branches and profi t. This is especially the case in high-growth markets like Romania, Poland and India.
Effi ciency key in mature markets In the Benelux, ING is concentrating on becoming more effi cient and moving towards an ‘internet fi rst, advice when needed’ model. Improved customer service by delivering simple and fairpriced products, creating better prospects for further growth and enhanced effi ciency are the key objectives of the new Dutch and Belgian retail strategies. By doing this, ING is better equipped to respond to the challenges of the competitive and economic environment.
Access to Mijn Postbank.nl suffered occasional disruption in 2007 but substantial investments are made to improve access and functionality in 2008 and 2009.
After the introduction of Postbank shops in Nijmegen and Rotterdam, a third was opened in The Hague. The easy accessibility and the advanced self-service equipment that enables all kinds of transactions are the key characteristics. People can obtain face-toface advice or do their banking online in these shops, and research shows that customer satisfaction is high. The shops, which attract an average of 300 customers a day, are intended to meet the growing demand for advice on complex products and sensitive fi nancial issues. The shops won a prestigious international retail design prize.
Optimising retail distribution in Belgium In line with the new Dutch retail strategy, ING Belgium is to implement a new branch service concept that focuses more on internet banking and automated cash services. The network of 794 branches will be transformed into 242 full-service branches and 552 smaller outlets with automated self-service cash functions and online banking access. It is expected that this will improve operational effi ciency, enhance customer advice and increase profi t by more than EUR 100 million in 2012. The number of FTEs will be reduced by 850 through natural attrition over a fi ve-year period. An example of how ING Belgium is capitalising on the popularity of direct banking was the launch of the ING Lion Account, an internet-only current account and the fi rst free-of-charge offer from a large bank in Belgium. By the end of 2007, 18% of all new accounts opened were Lion Accounts.
Another example is the introduction of the car insurance website www.ingauto.be. Clients can calculate their premium and take out their car insurance online within a few minutes. The number of people using the online Home’Bank increased substantially (up by about 20% in 2007 compared with 2006). About 50% of Belgian customers now bank online.
In China, ING had a stake of 19.9% in Bank of Beijing until September when Bank of Beijing made a spectacular debut on the Shanghai stock exchange. ING did not participate in this listing. Nonetheless, with a diluted stake of 16.07%, ING still remains the largest single shareholder. As a result of the listing the market value of ING’s investment increased ten-fold to approximately EUR 2 billion. Bank of Beijing will use the capital to fund nationwide expansion. In 2007, branches were established in Tianjin and Shanghai. Other achievements were the launch of a credit card in close cooperation with ING Card and enhanced distribution of ING Insurance products.
Europe The Benelux business benefi ted from the European savings directive which prolonged the effect of Belgian fi scal amnesty in 2006. In Belgium, ING has been able to capitalise on both its retail and wholesale distribution models. The Swiss business is performing well. The private banking activities are a platform for expanding in Central and Eastern Europe.
Asia Asia has become the largest profi t growth contributor for Private Banking. Population growth and wealth per capita is growing faster than in Europe. In India and China onshore private banking operations are built on the existing retail and wholesale operation of ING Vysya Bank and Bank of Beijing. ING will continue to redeploy capital to accelerate organic growth.
CONCLUSIONS AND AMBITIONS Retail Banking performed well in 2007, especially in its key product areas of mortgages and savings. It undertook important initiatives to enhance effi ciency and to drive growth. The new Dutch and Belgian strategies are focused on increasing effi ciency and reducing costs to secure long term profi t growth and executing these strategies will be an important focus for 2008.
Key points > Milestone reached of more than 20 million customers worldwide > Total client retail balances production up EUR 35 billion to EUR 310 billion > Continued investments to support geographical growth and expand product offering > Mortgages fi rmly embedded as second core product
Additions to loan-loss provisions 68 57 Underlying profi t before tax 530 694 –23.6% Total profi t before tax* 530 691 –23.3%
FINANCIAL DEVELOPMENTS ING Direct continued to invest to enhance commercial growth through geographical expansion and the roll-out of new products, despite challenging market conditions. Yield curves remained fl at or inverted in all currency zones, while competition for deposits intensifi ed as many banks faced tighter liquidity and increased funding costs on the wholesale markets. In this environment underlying profi t before tax declined 23.6% to EUR 530 million, compared with EUR 694 million in 2006. Including the impact of the divestment of Degussa Bank, which was sold at year-end 2006, total profi t before tax decreased 23.3%.
Country developments ING Direct’s overall profi t was driven by the business units in Germany, Australia, US, Spain, Italy and France. In Germany, profi t before tax increased 11% to EUR 367 million from EUR 332 million in 2006. France and Italy posted increases of 35% and 14% to EUR 46 million and EUR 49 million, respectively. Profi t before tax in Spain remained unchanged at EUR 55 million, while profi t before tax in Australia declined slightly by 2% to EUR 84 million. In the US, profi t before tax was EUR 78 million, a decline of 8% compared with 2006. In the UK, ING Direct posted a pre-tax loss of EUR 120 million compared with a profi t of EUR 19 million in 2006, mainly caused by a 39% net outfl ow of funds entrusted from rate-sensitive customers. Profi t before tax in ING Direct Canada declined partly due to lower interest results caused by an impairment of EUR 29 million on ABCP investments in the fourth quarter of 2007.
HIGHLIGHTS Launched as an innovative fi nancial-services company in 1997, ING Direct celebrated its tenth anniversary in 2007 as the world’s leading direct bank. It is the leading direct bank in each of the nine countries in which it operates. The aim is to become the world’s most preferred consumer bank.
Value creation ING Direct continued to invest in long-term value creation in 2007, with growth being generated in three ways: an increase in customers at existing operations, geographical expansion and serving a broader range of customer needs. ING Direct developed the business in four major product categories: savings (the entry product), mortgages (a stable product line providing healthy margins), payment accounts (which serve to ‘deepen’ the customer relationship) and investment products (a good complement to savings).
In what was a challenging interest rate environment, ING Direct focused more on mortgages and less on savings growth, but savings will remain the main customer acquisition product.
Preparations are being made for ING Direct to launch in the EUR 4.9 trillion Japanese savings market. ING Direct obtained a preliminary banking licence from the Japanese regulatory authorities in 2007 and is in the process of obtaining a banking licence.
Add-on acquisitions in US and Germany Organic growth was complemented by the purchase in September of NetBank, the US’s oldest internet bank, for USD 14 million, which gave ING Direct an additional 104,000 customers with USD 1.4 billion in deposits. NetBank offers attractive prospects and cost synergies to our US business unit. The purchase in November of the online brokerage business of the US ShareBuilder Corporation for USD 220 million added 744,000 customers and USD 2 billion in assets under management.
Mortgages The own-originated mortgages production reached a record high, with a net growth of EUR 29 billion (excluding currency effects), bringing the total residential mortgages portfolio – including bought pools – to EUR 97 billion at the year-end. ING Direct reached more than 50% of all funds entrusted outstanding in residential mortgages issued by ourselves directly or through intermediaries in 2007. Own-originated mortgages yield a better margin than bonds or mortgage pools purchased from other fi nancial institutions.
For the third consecutive year, the leading German fi nancial magazine Focus-Money named ING-DiBa ‘Best Investment Fund Bank’, for its market-leading discounts on investment fund fees.
ING Direct UK UK savers are more rate-sensitive than in other countries due to the wide availability of rate comparison tables and an active consumer press. The Bank of England’s interest rate increases as from August 2006 were not immediately fully translated into ING Direct UK’s customer rates, which meant they became less attractive to people with high balances. Consequently, ING Direct UK suffered savings outfl ows of EUR 11 billion, excluding currency effects. It took several management, pricing and marketing actions to reverse the trend and reposition the business. The customer rate on the ING Direct Savings Account was increased closer to the Bank of England rate and direct marketing initiatives were intensifi ed to retain balances and win back and acquire new customers. As a result, outfl ows were reduced from EUR 5.1 billion in the third quarter to EUR 0.6 billion in the fourth quarter. These measures created short-term losses which will continue at decreasing amounts in 2008 as the fi nancial assets will reprice over time. A new chief executive offi cer was appointed on 1 January 2008.
Making banking simple At ING Direct, being simple and straightforward is important. Customers appreciate ‘simplicity’, as well as competitive rates. The aim is to always take the customer’s perspective to ensure simplicity in all of our products, processes, services and systems. Our ambition to become the world’s most preferred consumer bank will increase our size and complexity. To ensure that we continue to see the customer’s point of view, it was decided to introduce ‘Customer Advocate’ roles, one in each business unit. The Customer Advocate’s job is to act in favour of customers, make it easier for them to interact with us, fi nd out what they want and how we can best continue to meet their needs.
International mobility Giving staff the opportunity to work in different countries is part of ING Direct’s human resources strategy. We offer short-term assignments (maximum three months) and long-term (one to three years) assignments. Both long- and short-term assignments have been steadily increasing in number and are expected to rise further in 2008.
Industry recognition Our efforts have been recognised by the market: ING-DiBa Germany was voted ‘Best Bank in Germany’ by the business magazine Euro; ING-DiBa Austria’s customer service was ranked in the top three in a major Austrian survey; and ING Direct Australia was rated number one in the national Global Customer Satisfaction survey.
Number of clients, total funds entrusted, residential mortgage portfolio, off balance sheet funds
Clients in thousands funds entrusted residential mortgage portfolio and off balance sheet funds in EUR billion and market rankings at end of November 2007
Clients Funds entrusted Residential mortgage portfolio Off balance sheet funds Market rankings*
CONCLUSIONS AND AMBITIONS ING Direct has been operating for ten years with continued strong commercial growth. It faced a challenging year in 2007. The fl at yield curve environment, strong competition and required repositioning of ING Direct UK affected its profi t. Excluding the UK and growth investments, profi t rose by 7%.
Growth remains the underlying theme of our vision to become the world’s most preferred consumer bank. In this respect, good progress was made. In 2007, 2.8 million new customers were welcomed, bringing the total to more than 20 million worldwide.
Payment accounts will be rolled out in three more countries in 2008, with continued growth in Germany, Spain and the US.
The competitive environment for savings is expected to continue, as other banks intensify their efforts to compete for retail deposits to fund their lending business, so we will make sure that adequate savings rates and proper asset and liability management, closely aligned with our pricing strategy, will be maintained going forward.
ING Direct will continue to take a customer-centric approach as this will give us the best possible chance of achieving our vision of becoming the world’s most-preferred consumer bank.
Key points > Total assets under management, which include ING Investment Management, ING Real Estate and ING Private Banking, grew 6.1% to EUR 637 billion > One of the world’s top 20 asset managers on a total AuM basis > Another year of solid growth for ING Real Estate > Rapid expansion of ING Private Banking
Insurance Europe 24% 154.5 Insurance Americas 33% 213.2 Insurance Asia/Pacific 16% 98.7 Wholesale Banking 11% 67.4 Retail Banking 15% 93.8 ING Direct 1% 9.3
FINANCIAL DEVELOPMENTS Assets under management increased EUR 36.9 billion (6.1%) to EUR 636.9 billion in 2007. Growth was driven by a net infl ow of EUR 40.4 billion, mainly through Insurance Asia/Pacifi c, which contributed EUR 14.2 billion, Retail Banking EUR 8.6 billion, Insurance Americas EUR 8.5 billion and ING Real Estate EUR 6.6 billion. Furthermore, changed asset prices of equity and fi xed income securities contributed EUR 16.2 billion and the positive impact of acquisitions and divestments amounted to EUR 12.7 billion. Growth was offset by the negative impact of exchange rates (mainly US dollar) of EUR 32.5 billion. Growth was achieved for the greater part in third-party assets, which increased by 13.8% to EUR 460.1 billion by year-end 2007. Proprietary assets decreased 9.6% to EUR 176.8 billion.
ING IM’s key priorities are to achieve above market growth in our assets under management by further strengthening partnerships with ING businesses and developing third party business opportunities. The business also strives to increase investment performance for our clients and to maximise the use of ING’s risk management skills. We are expanding our IT infrastructure capabilities. We will focus both on organic growth and acquisition opportunities.
ING IM also stands to gain from the expanding global wealth management activities of ING. In addition to scale and cost benefi ts from having a large proprietary portfolio, strategies that have been developed from effective pension risk management, such as asset liability management and liability driven investing, and with variable annuities, expertise can be translated for use within the institutional and retail third party product and distribution channels.
As for products, we saw continued interest in our higher yielding strategies with good infl ows driven by a strong three-year track record. There was also renewed interest in our Money Market offering. Also in 2007, ING IM Europe created the Multi-Asset Group. The objective of this group is to enhance investment opportunities across asset classes. The Multi-Asset Group launched the ING Opportunity Aandelen Fonds, which successfully generated sales of EUR 147.9 million. The objective of this fund is to increase yield through superior allocation of assets within asset classes using several different strategies (style, size, regions).
To enhance our scale and market strength in the European pension business, ING IM and Nationale-Nederlanden completed their acquisition of AZL, an independent Dutch provider of pension fund management services.
Americas ING IM Americas continued to grow through existing areas as well as in targeting new opportunities with signifi cant growth potential. ING IM Americas maintained strong asset management sales fi gures and launched new funds despite market challenges, particularly in the second half of 2007.
With the Santander pension deal, ING in Latin America gained EUR 3.3 billion in assets under management.
Prizes and awards ING IM Americas again received the Best Shareholder Relations award for a non-US closed-end fund family, from a panel of leading Wall Street closed-end fund analysts. ING IM was also voted third most reputable international fund manager in the US for the emerging mass affl uent in the Financial Reporting Council’s 2007 International Investment Manager Report.
In Europe, the ING (L) Renta Funds Emerging Markets Debt HC was awarded the Best Fund Five Years – Sector Fixed Income Global Emerging Markets in the S&P Switzerland 2007 awards. The ING (L) Invest European Food & Beverages was named the Best Fund over past Five Years Equity – Sector Non-Cyclical Consumer Goods and Services in the Lipper Awards Luxembourg and Switzerland, and Best Fund in 1 Year – Sector Consumer Goods in the S&P Switzerland 2007 Awards.
Goals and ambitions ING IM is a core competency of ING and has strong growth opportunities throughout the world. We will continue to use our global capabilities and investment talent to service both our internal and external clients with world-class investment performance. The partnership with other parts of the organisation means ING will be in an excellent position to increasingly develop products which blend asset management, insurance and capital markets to meet the demands of both institutional and retail clients. This will put ING at the forefront of a signifi cant growth trend.
ING Real Estate Development ING Real Estate Development maintained its focus on Europe while strengthening its position as an area developer. Major regeneration and inner city projects in Amsterdam, Hamburg and Hull were progressed, projects that require strong relationships and a shared vision across a wide group of stakeholders. It also concentrated on building sustainability and enhancing its research capabilities. It continued to expand its activities, opening a Romanian offi ce in 2007 and acquiring Geo-de, a Lyon-based small French developer, in January 2008.
ING PRIVATE BANKING ING Private Banking is well positioned to capitalise on the global growth in personal wealth. ING Private Banking is growing rapidly. In 2007, growth came from all regions. Private Banking posted a 8.7% increase in underlying profi t before tax to EUR 263 million. The increase was driven by strong growth in assets under management, especially in Asia.
Additionally, ING’s profi le has been enhanced by empowering our graduate recruits around the world, through initiatives such as the ING International Graduate Programme (IIGP). In 2007, the IIGP centred on the theme ‘Unleash your talents’ and involved 173 talents from more than 30 countries. Many of the participants were involved in projects across borders to share knowledge within the company in support of the international staff mobility policies introduced in early 2007. Such initiatives have helped attract and retain key talents in the company and improve the brand awareness that has been extended considerably by the Formula One (F1) sponsorship.
Global Human Resources (HR) is moving towards a globally shared method of identifying and developing talents. An Enhanced Talent Defi nition was introduced in 2007 to assess individuals’ performance, potential and ambition. This was supported by the ING Business School, which continued to focus on ING’s strategic themes and is in the process of shifting its focus from individual skills training to optimising team and business performance.
International mobility As the need for international mobility within ING increases, so does the need for current and potential senior leaders to take on more fl exible assignments. From 1 January 2007, three international mobility policies came into effect, covering various types of assignments. Internal assignments have increased by 50% in the past three years.
Key points > Top leaders’ performance evaluated on both business and leadership objectives > Increased international mobility > Enhanced profi le in international recruitment market > Young talents are catalysts in building international bridges across businesses
Involvement in acquisitions and divestments In 2007, a number of acquisitions and divestments took place. HR was closely involved in these processes. ING welcomes new colleagues and believes it is very important when merging companies to ensure that company cultures are also merged to create a shared direction. HR intends to further develop its capabilities in this area.
Diversity in practice Diversity is another key element in our talent development. ING wants its staff to refl ect its broad customer base – in terms of ethnic, cultural, and other make-ups – to better understand customer needs. Various programmes were established in 2007, including HR diversity goals. ING’s Diversity Council has developed new mentoring programmes and supports different diversity networks.
In 2007, three diversity teams were given the task of achieving specifi c high-impact goals within 100 days to help ING strengthen its global leadership ranks. The three teams created initiatives to stimulate diversity at higher levels and to exchange people between headquarters and regions.
CONCLUSIONS AND AMBITIONS Global HR is focused on supporting ING’s business targets, with leadership development and employee engagement remaining high on the agenda. To maintain our profi le as an employer of choice for talented people, ING is working to enhance its Employer Brand. Global HR will continue to promote people-oriented leadership, as business success can only be achieved through people, and to drive for excellence through constant process evaluation and improvement.
ING is building one of the strongest retail fi nancial services brands in the world, with 75 million clients in over 50 countries. Fundamental to our branding approach is increasing awareness for the ING brand across the globe. In 2007, ING’s fi rst year as title sponsor of the ING Renault Formula One (F1) Team has helped propel the company’s visibility around the world, increase awareness and generate business.
BUILDING A LEADING FINANCIAL SERVICES BRAND Consumer trends indicate that consumers are getting older, wealthier, and increasingly becoming more responsible for fi nancing their own retirement. At the same time, the current environment has made clear what consumers do want from a fi nancial services company: a partner they can trust, expertise, and an easy experience overall.
These initiatives have been instrumental in helping ING build customer loyalty. It enables us to distinguish ourselves from our competitors, attract the best employees and create one common culture.
F1 SPONSORSHIP: FLAGSHIP BRANDING INITIATIVE ING’s inaugural year in Formula One in 2007 inspired the company’s fi rst-ever global advertising campaign. Strong TV, print, and on-line advertising, the title sponsorship of the ING Renault F1 Team, and on-track branding helped increase brand awareness among the target audience, which rose from 69% to 74% in selected ING markets. The most signifi cant awareness growth occurred in Central and Eastern Europe and in Asia – key regions for ING’s growth strategy. Additionally, the data also indicate a 25% increase in positive perceptions of ING and that, among non-customers, 29% expressed an intention to take up fi nancial services from ING within one year.
GLOBAL BRAND AMBITION It is our ongoing ambition to make it easier for our customers to manage their fi nances, further building on 2007 customer ratings showing that ING outperforms competitors on ‘easy to deal with’. We aim to further improve accessibility, increase the speed of our processes and make the information we share with our customers as clear and transparent as possible.
Corporate responsibility (CR) is an integral part of ING’s business. We want to pursue profi t on the basis of sound business ethics, respect for key stakeholders and in full compliance with laws, regulations and ethical standards. As a global provider of fi nancial products and services, ING plays an important role in society and strives to meet the fi nancial and social expectations of its stakeholders. We have an impact on society and the environment both directly through our operations and indirectly through the provision of fi nancial services. In 2007, another step forward was taken to achieve our objectives in the four areas to which our CR strategy applies: the social and environmental impact of our products and services, our people, community benefi ts and direct environmental impact.
CLIMATE CHANGE Climate change is widely considered to be one of the greatest threats facing the planet. ING believes that it has a role to play in dealing with this challenge. In February 2007, ING signed the ‘Joint statement by the Global Roundtable on Climate Change; the Path to Climate Sustainability’. This Global Roundtable was an initiative of the Earth Institute at Columbia University in the US and convened more than 100 high-level stakeholders and experts to explore areas of potential consensus on the core scientifi c, technological and economic issues critical to shaping public policies on climate change. ING has been a member since its launch in 2004.
‘ING Plant a Tree’ A global environmental awareness programme called ‘ING Plant a Tree’ was implemented to involve employees in the promotion of a cleaner environment. This was a result of the growing interest from ING staff around the world in environmental issues. The campaign makes the joint commitment of staff to environmental care even more tangible. On 18 March 2007, the Global ING Plant a Tree campaign was launched in Malaysia by the CEO. Selecting Malaysia for the kick-off was a logical step: ING already supports a treeplanting programme in one of the country’s tropical rainforests to compensate for the company’s global CO2 emissions. A toolkit was developed to help business units to set up their own ING Plant a Tree campaign.
Australian Green Team In line with the ING Plant a Tree campaign, various business units have started initiatives to raise awareness about environmental care and to reduce ING’s environmental footprint. In March 2007, ING’s Green Team in Australia, a group of volunteers that represent the Australian business units, participated in The Australian Conservation Foundation’s Earth Hour by turning off all the lights in ING’s Sydney building for an hour. This was followed up by a learning session on climate change, presented by one of Al Gore’s Climate Project teams.
Best in class In 2007, ING was honoured ‘Best in class’ for addressing climate change in a report released by the Carbon Disclosure project (CDP). ING was again included in the Climate Leadership Index (CLI), which comprises 68 of the FTSE-500 companies that lead in their responses to climate change.
ING Real Estate in Australia has shown a profound commitment to sustainability, employing strategies and participating in activities and programmes to reduce the environmental footprint of the assets owned and managed by the Funds of ING Real Estate. An example of this commitment is the ING Offi ce Fund (IOF) in Australia. The IOF continued to be rated using the Australian Building Greenhouse Rating scheme (ABGR); it implemented action plans for energy, water and waste, such as installed water fl ow restrictors, dual-fl ush toilet systems and low fl ow tap-ware in a number of buildings, resulting in a water saving equivalent to 500 backyard pools. Furthermore, a waste minimisation and recycling programme saw 1,300 mature trees saved through diversion of paper waste from landfi ll and installed reduced energy consumption by approximately 20%.
Examples of ESR policies are the Forestry & Plantations Sector Policy, the policy on Human Rights and Environmental Compliance and the Animal Testing Policy. The Equator Principles form a prominent part of the ESR policies and are a benchmark for the fi nancial industry to manage environmental and social risk in project fi nancing. These principles were introduced in June 2003 and revised in 2006. About 50 banks and fi nancial institutions adopted the Equator Principles. Any project that falls within the scope of the principles undergoes a risk assessment on its possible socio-environmental risks. Our internal guidelines for lending products were made public in 2007 and are accessible through the ING website.
The ING Chances for Children programme (CfC) is company-wide and is aimed at providing funds for elementary education in Brazil, Ethiopia and India for a year through UNICEF. Its aim is to improve children’s prospects by providing them with an education. At the beginning of 2007, the target was set to send 115,000 children to school. This fi gure equals the number of staff employed by ING worldwide, as we encourage each employee to sponsor one child fi nancially. This initiative was received with enthusiasm and at the end of 2007 around 125,000 children could be sent to school for a year. ING supports the initiatives of its staff by doubling their donations and by giving them time off to work as volunteers.
Many employees like to contribute to society as volunteers. In addition to the CfC programme, ING has various programmes which involve staff in community initiatives. These initiatives go beyond providing time and expertise: they show commitment and support. Some examples of voluntary work are the building of houses in the Philippines, the cooperation with schools in the Netherlands, delivering meals to elderly people in the US and the collection of toys for orphans in Mexico.
ING’s microfi nance activities form another example: in India, for instance, ING Vysya Bank provides credit to poor people who cannot get a loan through ordinary fi nancial institutions. This enables people to support their families and it has positive effects on the local economy. We cooperate with Oikocredit, one of the world’s largest non-commercial microfi nance institutions, and ING specialists are encouraged to provide their expertise and to work for local projects for a number of weeks.
Finally, ING cooperates closely with authorities and fi nancial institutions to share knowledge in the fi nancial fi eld with countries that can make good use of our expertise; donations are given to various charities worldwide; in the Netherlands, ING is the main sponsor of the Rijksmuseum, the Royal Concertgebouw Orchestra and the Society for the Preservation of Nature; and business units throughout the company have started initiatives for their own communities.
CONCLUSIONS AND AMBITIONS ING will continue to develop its corporate responsibility strategy and to embed it even more within ING and in the behaviour of its employees. We aim at developing more sustainable products. New initiatives and developments in the area of CR will be updated regularly on our corporate website (www.ing.com/cr).
MEASURING PERFORMANCE ING has identifi ed eight Key Performance Indicators (KPIs) for its CR reporting. These KPIs relate directly to the ING CR Strategy and are used by ING to measure CR performance within ING.
Equator Principles Number of projects reviewed 85 46 Sustainable assets under management (in EUR million) 2,792 2,206 Customer satisfaction index (2) 71,2% n/a*
(2) Satisfaction scores are based on the American Customer Satisfaction Index (ACSI)
The Supervisory Board and the Executive Board met through regular and additional meetings in 2007 and discussed various important issues including strategy. Committees of the Supervisory Board discussed a range of subjects on which the Supervisory Board received advice, the main ones being the quarterly results, risk management, the external auditors tender, IT, corporate governance and human resources.
In January 2007, the Supervisory Board held its annual full-day meeting on ING’s strategy and medium-term plan including the related risks. The medium-term plan addresses the plans of the business lines and the fi nancial targets for each of them and for the Group as a whole. The Supervisory Board discussed ING’s ambition to concentrate on value creation and growth, and to improve the performance culture from good to excellent, realising that the external environment might be less favourable than in 2006. The medium-term plan was discussed in detail and approved by the Supervisory Board. In this meeting, the feedback of investors on ING’s performance over 2006 was also discussed.
At the annual internal meeting of the Supervisory Board in November the functioning of the Supervisory Board, its committees and its individual members and the conclusions to be drawn therefrom were discussed. This was done in the light of the Supervisory Board Profi le and the composition of the Supervisory Board. Furthermore, the functioning of the Executive Board and the performance of the individual Executive Board members were discussed.
Audit Committee meetings The Audit Committee met six times to discuss the annual and quarterly results (four meetings) and the annual and semi-annual US GAAP results (two meetings). Management letters of the internal and external auditors on internal control were discussed. Ernst & Young and KPMG both prepared a tender proposal for the fi nancial auditing of ING Groep N.V. and all of its subsidiaries on the basis of selection criteria approved by the Audit Committee.
Both external auditors gave a presentation to the Audit Committee in September. In October the Audit Committee provided its advice to the Supervisory Board. Other important subjects in 2007 were Compliance and IT risk. Presentations were given on these topics, as well as on the EU Directive on markets in fi nancial instruments (MiFID) and on the fi nancial markets crisis. Other topics discussed in the meetings were risk, governance, capital management and the share buy-back programme. The volatility of the results in Japan and the adequacy of reserve levels in Taiwan were frequently discussed during the meetings.
Remuneration and Nomination Committee meetings In January, new candidates were nominated for appointment to the Executive Board and the Supervisory Board by the annual General Meeting of Shareholders in 2007. The Remuneration and Nomination Committee discussed the future composition of the Supervisory Board and its committees in its meetings. The search for new Supervisory Board candidates continued.
Corporate Governance Committee meetings The Corporate Governance Committee discussed the agenda for the 2007 annual General Meeting of Shareholders, which included a proposal for amendment of the Articles of Association. It reviewed an updated version of the Executive Board Charter and the Supervisory Board Charter, including updated charters for the Supervisory Board committees. The main change was the introduction of special rules for ad-hoc committees. The updated charters have been published on ING’s website. The committee also discussed the possibility of introducing electronic voting during the General Meeting of Shareholders for shareholders not attending the meeting. It concluded that electronic voting cannot be introduced at the 2008 annual General Meeting of Shareholders. The Committee endorsed the recommendations to closely monitor the developments regarding electronic voting.
Currently, only one Supervisory Board member (Piet Hoogendoorn) qualifi es as ‘non-independent’ as defi ned in best-practice provision III.2.1 of the Dutch Corporate Governance Code. Mr. Hoogendoorn is considered to be not independent because of his position with Deloitte Touche Tohmatsu until 1 June 2007, considering the important relationship between Deloitte Touche Thomatsu and ING.
Annual accounts and dividend The Executive Board has prepared the annual accounts and discussed these with the Supervisory Board. The annual accounts will be submitted for adoption to the annual General Meeting of Shareholders as part of the Annual Report. The proposed dividend for 2007 is EUR 1.48 per (depositary receipt for an) ordinary share. Taking into account the interim dividend of EUR 0.66, the proposed fi nal dividend amounts to EUR 0.82, payable in cash.
ADDITIONAL INFORMATION For additional information, reference is made to the section on corporate governance (pages 61 – 70) and the Remuneration Report (pages 76 – 86), which are deemed to be incorporated by reference here.
Retirement of Cor Herkströter Cor Herkströter was appointed a member of the Supervisory Board in 1998 and became chairman in 1999. He was an important sparring partner for the chairmen of the Executive Board during a period of strong growth which included several major acquisitions. His own experience as a CEO was of great value in the Supervisory Board’s decision-making process and in developing ING’s growth strategy. He was very committed to the company’s interests and contributed strongly to its successful development in a changing environment. He built the Supervisory Board into a strong team that could both challenge and support the Executive Board. Both the Supervisory Board and the Executive Board are grateful to Cor Herkströter for his signifi cant and valuable contribution to ING over the years and for the way he chaired the Supervisory Board for more than eight years.
ING Group already has an anti-takeover device: the right of the ING Continuity Foundation to acquire cumulative preference shares. This has been in place since 1991 and there is currently no reason to consider changing this device.
Shareholder participation The 2007 annual General Meeting of Shareholders produced a turnout of 36.7% of the (depositary receipts of) ordinary shares, which was the fi rst time the 35% threshold for reconsidering the position of the Stichting ING Aandelen (the ‘Trust Offi ce’) was passed. A major reason for this high turnout was a change in the law which permitted the record date for a General Meeting of Shareholders to be set at 30 days (rather than seven days as used to be the case) before the meeting. The record date is the date on which a shareholder must own shares or depositary receipts in order to vote at the General Meeting of Shareholders. For the 2008 annual General Meeting of Shareholders, ING Group will again set the record date at 30 days (the maximum allowed) before the meeting.
Electronic voting Following a resolution adopted at the 2007 annual General Meeting of Shareholders, the Articles of Association were amended to allow shareholders and depositary receipt holders who do not attend a General Meeting of Shareholders in person to participate nevertheless in the decision making by means of real-time electronic voting by internet (‘E-voting’). An investigation was made into whether an internet application to enable E-voting would be available. Such an application would require multi-layer security measures for access control, identifi cation and validation, as well as a solid technology against hostile activities. Regrettably, it turned out that there is no such internet application available. Furthermore, it was discovered that an internet application meeting these technical requirements would still not enable an effi cient cross-border E-voting process considering the lack of cross-border legislation on E-voting and the fact that shares or depositary receipts are currently held through securities custodians in various jurisdictions.
Dialogue with shareholders In 2007, investors were allowed to ask questions about items on the agenda for the annual General Meeting of Shareholders, and they will be allowed to do so in 2008. Shareholders and holders of depositary receipts can visit the website of ING Group (www.ing.com) to submit their questions and they will be answered on the same website.
ING Group intends to eliminate the remaining six million preference A shares by either repurchasing or redeeming such shares or the depositary receipts thereof, and this will be discussed at the 2008 annual General Meeting of Shareholders (agenda item 15). If approved, this will result in the cancellation of all preference A shares. All ING Group shares then outstanding will have voting rights proportional to their economic value as recommended under section IV.1.2 of the Dutch Corporate Governance Code.
The board of the Trust Offi ce reports on its activities through an annual report, which has been included on pages 71 – 72 of this annual report.
Issue of shares ING Group’s authorised capital is the maximum amount of capital allowed to be issued under the terms of its Articles of Association. New shares in excess of this amount can only be issued if the Articles are amended. An amendment has to be passed by notarial deed, and this in turn requires a declaration of no objection to be issued by the Minister of Justice. For reasons of fl exibility, the authorised capital in the Articles of Association of ING Group has been set at the highest level permitted by law.
Share issues are to be decided by the General Meeting of Shareholders, which may also delegate its authority. Each year, the General Meeting of Shareholders is asked to delegate authority to the Executive Board to issue new ordinary shares or to grant rights to take up new ordinary shares, both with and without a right of fi rst refusal for existing shareholders. The powers delegated to the Executive Board are limited: in time: powers are delegated for a period of 18 months; by number: ordinary shares may be issued up to a maximum of 10% of the issued capital, or 20% in the event of a merger or takeover; in terms of control: resolutions by the Executive Board to issue shares require the approval of the Supervisory Board.
Transfer of shares and depositary receipts and transfer restrictions Shares are transferred by means of a deed of transfer between the transferor and the transferee. To become effective, ING Group has to acknowledge the transfer, unless ING Group itself is a party to the transfer. Pursuant to the Articles of Association, there are no restrictions for the transfer of ordinary shares, preference A shares and preference B shares, whereas transfer of cumulative preference shares is subject to prior approval of the Executive Board.
Repurchase of shares ING Group may repurchase shares outstanding and depositary receipts for such shares. Although the power to repurchase shares and depositary receipts is vested in the Executive Board subject to Supervisory Board approval, prior authorisation from the General Meeting of Shareholders is required for these repurchases. Under Dutch law, this authorisation lapses after 18 months. Each year, the General Meeting of Shareholders is asked to approve the Executive Board’s authority to repurchase shares. When repurchasing shares the Executive Board is to observe the price ranges prescribed in the authorisation: – –
NYSE Requirements Under the New York Stock Exchange’s (‘NYSE’) listing standards, ING Group as a foreign private issuer must disclose any signifi cant ways in which its corporate governance practices differ from those followed by US domestic companies under the NYSE listing standards. An overview of what we believe to be the signifi cant differences between our corporate governance practices and NYSE corporate governance rules applicable to US companies is available on the website of ING Group (www.ing.com).
Depositary receipts Over 99% of the issued ordinary and preference A shares are held by the Trust Offi ce. The Trust Offi ce issues bearer depositary receipts in exchange for these shares. The depositary receipts are listed (see page 8 for an overview of the listings). The depositary receipts can be exchanged, without any restrictions, for the underlying shares. An administrative fee may be charged for this.
the relevant holder of depositary receipts must have announced his or her intention to attend the General Meeting of Shareholders observing the provisions laid down in the Articles of Association of ING Group; the relevant holder of depositary receipts may delegate the powers conferred upon him by means of the voting proxy, provided that the relevant holder of depositary receipts has announced his intention to do so to the Trust Offi ce observing a term before the commencement of the General Meeting of Shareholders, which term will be determined by the Trust Offi ce.
Intention to abolish ING Trust Offi ce It is the intention of the Executive Board and the Supervisory Board to abolish the Trust Offi ce and depositary receipts once the number of votes on ordinary shares and depositary receipts of ordinary shares, including proxies and excluding the votes which are at the discretion of the Trust Offi ce at a General Meeting of Shareholders is at least 35% of the total votes that may be cast for three consecutive years. In 2005, 26% of total votes were cast, which increased to 28% in 2006 and to 36.7% in 2007. The Executive Board is committed to achieving the 35% requirement and will encourage depositary receipt holders, particularly institutional investors, to participate in voting at the General Meeting of Shareholders.
Special rights of control No special rights of control referred to in article 10 of the EU Directive on takeover bids are attached to any share.
Voting rights on shares Each share entitles the holder to cast a vote at the General Meeting of Shareholders. By Dutch law, voting rights are proportional to the nominal value of the shares. This means that by law, each ordinary share (and, when issued, each preference B share), having a nominal value of EUR 0.24, gives the right to one vote, while each preference A share (and, when issued, each cumulative preference share), having a nominal value of EUR 1.20, gives the right to fi ve votes. On the other hand, the Tabaksblat Code (section IV.1.4) seems to imply that, if such shares are issued, the voting rights on preference shares issued for fi nancing purposes should be proportional to their stock price.
At 31 December 2007, the market prices for the ordinary shares and the preference A shares were EUR 26.75 and EUR 2.94, respectively. Following the elimination of the A preference shares intended by ING Group, section IV.1.4. of the Tabaksblat Code will be applied. Pursuant to the Articles of Association, no restrictions with respect to voting rights on any class of shares of ING Group exist. ING Group is not aware of any contract under which voting rights on any class of its shares is restricted.
Voting on depositary receipts Although the depositary receipts do not formally have any voting rights, holders of depositary receipts, in practice, rank equally with shareholders with regard to voting. The Trust Offi ce will, subject to certain restrictions, grant a proxy to a holder of depositary receipts for ordinary shares or preference shares, respectively, to the effect that such holder may, in the name of the Trust Offi ce, exercise the voting rights attached to the number of its shares of the relevant category that corresponds to the number of depositary receipts of the relevant category held by such holder of depositary receipts. Holders of depositary receipts may vote as they see fi t. Holders of depositary receipts not attending a meeting can also issue binding voting instructions to the Trust Offi ce. The Trust Offi ce has made it easier for votes to be cast in this way by putting arrangements in place for proxy voting and E-voting. The restrictions under which the Trust Offi ce will grant a voting proxy to holders of bearer receipts are: –
Transactions involving actual or potential confl icts of interest Details of relationships that members of the Executive Board have with ING Group subsidiaries as ordinary, private individuals are not reported, with the exception of information on any loans that may have been granted to them (see page 84). In all these cases, the company complies with the best-practice provisions of the Tabaksblat Code.
Appointment and dismissal Members of the Executive Board are appointed by the General Meeting of Shareholders from a binding list to be drawn up by the Supervisory Board. This list shall mention at least two candidates for each vacancy, and if not the list will be non-binding. The General Meeting of Shareholders may declare the list non-binding by a majority resolution supported by at least one-third of the issued capital.
Profi le of members of the Executive Board The Supervisory Board has drawn up a profi le to be used as a basis for selecting members of the Executive Board. This Executive Board Profi le was submitted for discussion to the annual General Meeting of Shareholders in 2005. It is available at the ING Group head offi ce and on the ING Group website (www.ing.com).
Remuneration and share ownership Details of the remuneration of members of the Executive Board, including shares and/or option rights granted to them, together with information pertaining to such decisions, are provided in the Remuneration report, starting on page 76. Members of the Executive Board are permitted to hold shares and depositary receipts for shares in the company for long-term investment purposes. Transactions in these shares are subject to the ING regulations for insiders. These regulations are available on the ING Group website (www.ing.com).
Executive Board composition The Supervisory Board will propose reappointing Eric Boyer de la Giroday and Eli Leenaars to the Executive Board at the annual General Meeting of Shareholders on 22 April 2008.
Appointment and dismissal Members of the Supervisory Board are appointed by the General Meeting of Shareholders from a binding list to be drawn up by the Supervisory Board. This list shall mention at least two candidates for each vacancy, failing which the list will be non-binding. The list will also be non-binding pursuant to a resolution to that effect of the General Meeting of Shareholders adopted by an absolute majority of the votes cast which majority represents more than one-third of the issued capital.
Members of the Supervisory Board may be suspended or dismissed at any time by the General Meeting of Shareholders. A resolution to suspend or dismiss members of the Supervisory Board which has not been brought forward by the Supervisory Board may only be adopted by the General Meeting of Shareholders by an absolute majority of the votes cast which majority represents at least onethird of the issued capital.
Before joining ING, John Hele held various positions at Crown Life in Canada, Merrill Lynch in the United States and at Worldinsure, Bermuda. He is responsible for Group Capital Management, Group Tax, Group Finance and Control, Group Finance Bank and Group Finance Insurance.
Details of transactions involving actual or potential confl icts of interest Details of any relationships that members of the Supervisory Board may have with ING Group subsidiaries as ordinary, private individuals are not reported, with the exception of any loans that may have been granted to them (see page 86).
Independence Annually, the Supervisory Board members are requested to assess whether the criteria of dependence of the Tabaksblat Code do not apply to them and to confi rm this in writing. On the basis of these criteria, all members of the Supervisory Board, except Piet Hoogendoorn, are to be regarded as independent as of 31 December 2007. Members of the Supervisory Board to whom the dependence criteria of the Tabaksblat Code do not apply and members of the Supervisory Board to whom the criteria do apply but who can explain why this does not undermine their independence, are deemed to be independent.
Jan H.M. Hommen (chairman from 1 January 2008) (Born 1943, Dutch nationality, male; appointed in 2005, term expires in 2009) Chairman of the Audit Committee until 1 January 2008; member of the Audit Committee until 24 January 2008. Chairman of the Remuneration and Nomination Committee and the Corporate Governance Committee (from 1 January 2008). Former vicechairman and CFO of the Board of Management of Royal Philips Electronics.
The Corporate Governance Committee assists the Supervisory Board in monitoring and evaluating the corporate governance of ING as a whole and the reporting of this in the Annual Report and to the General Meeting of Shareholders, and advises the Supervisory Board on improvements.
In view of their experience and the valuable contribution that former members of the Executive Board can make to the Supervisory Board, it has been decided, taking into account the size of the Supervisory Board and ING’s wide range of activities, that such individuals may become members of the Supervisory Board of ING Group. There is, however, a restriction in that only one in every fi ve other members of the Supervisory Board may be a former member of the Executive Board. In addition, this member must wait at least one year after resigning from the Executive Board before becoming eligible for appointment to the Supervisory Board. Former members of the Executive Board are not eligible for appointment to the position of chairman of the Supervisory Board. After being appointed to the Supervisory Board, a former member of the Executive Board may also be appointed to one of the Supervisory Board’s committees. However, appointment to the position of chairman of a committee is only possible if the individual in question resigned from the Executive Board at least four years prior to such appointment.
Reappointment of Supervisory Board members Members of the Supervisory Board will resign from the Supervisory Board at the annual General Meeting of Shareholders held in the calendar year in which they will complete the fourth year after their most recent reappointment. As a general rule, they shall also resign at the annual General Meeting of Shareholders in the year in which they attain the age of 70 and shall not be reappointed. The schedule for resignation by rotation is available on the ING Group website (www.ing.com). Members of the Supervisory Board may as a general rule be reappointed for two four-year terms, based on a proposal from the Supervisory Board to the General Meeting of Shareholders.
Claus Dieter Hoffmann (Born 1942, German nationality, male; appointed in 2003, term expires in 2011) Member of the Audit Committee (until 24 January 2008). Member of the Corporate Governance Committee (from 24 January 2008). Former chief fi nancial offi cer of Robert Bosch GmbH. Other business activities: managing partner of H+H Senior Advisors, Stuttgart. Chairman of the Supervisory Board of EnBW AG (listed company). Member of the Supervisory Board of Bauerfeind AG and de Boer Structures Holding B.V. Chairman of the Charlottenklinik Foundation (hospital). Chairman of the Board of Trustees (Vereinigung der Freunde) of Stuttgart University.
Piet C. Klaver (Born 1945, Dutch nationality, male; appointed in 2006, term expires in 2010) Member of the Remuneration and Nomination Committee (from 24 January 2008). Former chairman of the Executive Board of SHV Holdings N.V. Other business activities: member of the Supervisory Board of SHV Holdings N.V., Jaarbeurs Holding B.V. and Dura Vermeer Groep N.V. Chairman of the Supervisory Board of Dekker Hout Groep B.V. Chairman of the Board of African Parks Foundation. Chairman of the Supervisory Board of Utrecht School of the Arts.
Other business activities: chairman of the Supervisory Board of each of Reed Elsevier and TNT N.V. (listed companies). Chairman of the Supervisory Board of each of Academisch Ziekenhuis Maastricht (hospital) and TiasNimbas Business School. Member of the Supervisory Board of Campina BV.
Luella Gross Goldberg (Born 1937, American nationality, female; appointed in 2001, retirement in 2008) Member of the Remuneration and Nomination Committee and the Corporate Governance Committee (until 24 January 2008). Former member of the Board of Directors of ReliaStar Financial Corp. Other business activities: member of the Supervisory Board of each of TCF Financial Corporation, Hormel Foods Corporation and Communications Systems Inc. (listed companies). Member of the Advisory Board of Carlson School of Management, University of Minnesota. Member of the Supervisory Board of the Minnesota Orchestra. Member (emerita) of the Board of Trustees, Wellesley College. Member of the Board of Trustees, University of Minnesota Foundation.
EXTERNAL AUDITORS Ernst & Young Accountants (Ernst & Young) and KPMG Accountants N.V. (KPMG) were the appointed auditors of ING. Ernst & Young was responsible for auditing the fi nancial statements of ING Group and ING Verzekeringen N.V., while KPMG was responsible for the audit of the fi nancial statements of ING Bank N.V. The external auditors, Ernst & Young and KPMG, both attended the meetings of the Audit Committee.
Godfried J.A. van der Lugt (Born 1940, Dutch nationality, male; appointed in 2001, term expires in 2009) Member of the Audit Committee. Former chairman of the Executive Board of ING Group (retired in May 2000). Other business activities: chairman of the Supervisory Board of each of Siemens Nederland N.V. and Stadsherstel Amsterdam NV. Vice-chairman of the Supervisory Board of Universitair Medisch Centrum Groningen (hospital). Treasurer of Vereniging Natuurmonumenten (Dutch foundation for nature conservation). Member Siemens Group Pension Advisory Board München.
Karel Vuursteen (Born 1941, Dutch nationality, male; appointed in 2002, term expires in 2010) Member of the Remuneration and Nomination Committee (from 24 January 2008). Former chairman of the Executive Board of Heineken N.V. Other business activities: member of the Supervisory Board of each of Akzo Nobel N.V., TomTom N.V. and Henkel KGaA (listed companies). Member of the Board of Directors of Heineken Holding N.V. Member of the Advisory Board of CVC Capital Partners. Chairman of World Wild Life Fund Netherlands and The Concertgebouw Fund Foundation. Member of the Supervisory Board of Nyenrode Foundation.
At the 2008 annual General Meeting of Shareholders four new candidates will be proposed for appointment: Joan Spero (born 1944, American nationality, female), Harish Manwani (born 1953, Indian nationality, male), Aman Mehta (born 1946, Indian nationality, male) and Jackson Tai (born 1950, American nationality, male). More information can be found in the convocation for the 2008 annual General Meeting of Shareholders, available on the ING Group website (www. ing.com).
Change of control clauses in important contracts ING Group is not a party to any material agreement, which becomes effective, or is being amended or terminated subject
1.3 Our governance service that KPMG has provided as an auditor of ING Bank N.V. over many years.
The external auditors may be questioned at the annual General Meeting of Shareholders in relation to their audit opinion on the annual accounts. The external auditors will therefore attend and be entitled to address this meeting.
The Audit Committee also sets the maximum annual amount that may be spent for pre-approved services. Throughout the year the external audit fi rms and ING monitor the amounts paid versus the pre-approved amounts. The external auditor provides the Audit Committee with a full overview of all services provided to ING, including related fees, supported by suffi ciently detailed information. This overview is periodically evaluated by the Audit Committee during the year.
Pursuant to its Constitution, the object of Stichting ING Aandelen (the Trust Offi ce) is: a. to foster the interests of the holders of depositary receipts for shares in the capital of ING Groep N.V. (the company), while having regard for the interests of (i) the company itself, (ii) the enterprises carried on by the company and companies associated with it in a group and (iii) all other stakeholders in the company, such that all those interests are balanced and safeguarded as effectively as possible; b. to acquire and administer registered ordinary and preference shares for which bearer depositary receipts have been issued; c. to foster the exchange of information between the company on the one hand and the depositary-receipt holders and shareholders in the company on the other; d. to promote and organise the solicitation of proxies of shareholders other than the Trust Offi ce itself and of specifi c proxies and/or voting instructions of depositary-receipt holders.
On 4 April 2007 the Board held a meeting to discuss the 2006 annual report and to prepare the annual General Meeting of Shareholders on 24 April 2007. Prior to this Board meeting the Executive Board and Supervisory Board of the company discussed with the Trust Offi ce the company’s activities and performance over 2006 on the basis of the press release of 15 February 2007 on the 2006 fi gures.
The Trust Offi ce organises the solicitation of proxies of shareholders other than the Trust Offi ce itself and of specifi c proxies and/or voting instructions of depositary-receipt holders. The Board encourages the greatest possible participation of depositary-receipt holders and shareholders.
The following report is issued in compliance with article 15 of the Conditions of Trust for registered shares in ING Groep N.V.
The Trust Offi ce takes the position that abandoning depositary receipts will be considered when the turnout at the shareholders’ meeting reaches a level of at least 35% of the votes that can be cast on ordinary shares (excluding the multiple voting rights of preference shares) during three consecutive years. This level was reached for the fi rst time in 2007.
Carel van den Driest has been appointed to the Board from 4 April 2007 and Herman Hazewinkel from 3 December 2007. Jan Veraart and Paul Frentrop were reappointed as Board members from 13 May 2007 and 1 July 2007 respectively. In accordance with the provisions of article 7, section 8 of the Constitution, the Trust Offi ce disclosed the proposed (re)appointments by publication in NRC Handelsblad and the Offi ciële Prijscourant (AEX Offi cial List).
A profi le and an overview of additional relevant offi ces held by Board members can be found on the website of the Trust Offi ce: www.ingtrustoffi ce.com.
The annual remuneration is EUR 25,000 for the chairman and EUR 20,000 for other members.
The activities involved in the administration of shares are performed by Algemeen Administratie- en Trustkantoor B.V., Amsterdam.
The contact details of Stichting ING Aandelen (the Trust Offi ce) are: Coco C.M. van Hulten
Due to the listing of ING shares on the New York Stock Exchange, ING Group is required to comply with the SEC regulations adopted pursuant to Section 404 of the Sarbanes-Oxley Act, or SOX 404. These regulations require that the CEO (the chairman of the Executive Board) and the CFO of ING Group report and certify on an annual basis on the effectiveness of ING Group’s internal controls over fi nancial reporting. Furthermore, the external auditors are required to provide an opinion on the effectiveness of ING Group’s internal controls over fi nancial reporting.
Our internal control over fi nancial reporting includes those policies and procedures that: pertain to the maintenance of records that, in reasonable detail, accurately and fairly refl ect the transactions and dispositions of the assets of ING; provide reasonable assurance that transactions are recorded as necessary to permit preparation of fi nancial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorisations of our management and directors; and provide reasonable assurance regarding prevention or timely detection of unauthorised acquisition, use or disposition of our assets that could have a material effect on our fi nancial statements.
Section 404 Sarbanes-Oxley Act Effective internal control over fi nancial reporting
We have audited ING Groep N.V.’s internal control over fi nancial reporting as of 31 December 2007, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). ING Groep N.V.’s management is responsible for maintaining effective internal control over fi nancial reporting, and for its assessment of the effectiveness of internal control over fi nancial reporting included in the accompanying Report of the Executive Board on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over fi nancial reporting based on our audit.
In our opinion, ING Groep N.V. maintained, in all material respects, effective internal control over fi nancial reporting as of 31 December 2007, based on the COSO criteria.
Remuneration structure Total compensation throughout ING consists of three basic components: Fixed or base salary, which represents the total guaranteed annual income. Short-term incentive (STI) in cash, which compensates for past performance measured over one year. Long-term incentive (LTI) in stock options and/or performance shares, which compensates for performance measured over multiple years and is forward-looking.
In addition to the base salary and incentive plan participation, senior management and Executive Board members enjoy benefi ts similar to most other comparable employees of ING Group. These include benefi ts such as the use of company cars, contributions to company savings plans and, if applicable, expatriate allowances.
Base salary The base salaries of the Executive Board should be suffi cient to attract and retain high calibre management needed to achieve our business objectives. The Supervisory Board assesses the experience, background, responsibilities, performance and leadership competencies of the CEO and the members of the Executive Board when making decisions on base-salary levels.
Short-term incentive plan The short-term incentive plan (STIP) is a key component of ING’s performance-driven culture. The short-term incentive is paid in cash. The ‘at target’ bonus opportunity is expressed as a percentage of base salary. The target levels are based on benchmarks refl ecting external market competitiveness as well as internal objectives. Three fi nancial parameters were used in the 2007 STIP for the members of the Executive Board and top senior management across the organisation (the top-200 executives) to measure performance at Group level. These fi nancial parameters are: underlying net profi t, underlying operating expenses and economic profi t/embedded value profi t (excluding fi nancial variances). The quantitative elements of the targets are considered stock price sensitive and competition sensitive; accordingly these are not disclosed.
On the basis of these criteria the performance peer group established in 2004 is composed as follows: Citigroup, Fortis, Lloyds TSB (bank/insurance companies); ABN AMRO, Bank of America, BNP Paribas, Banco Santander, Credit Suisse, Deutsche Bank, HSBC (banks); Aegon, AIG, Allianz, Aviva, AXA, Prudential UK, Hartford Financial Services, Munich Re (insurance companies); Invesco (asset manager).
The Executive Board members are not allowed to sell depositary receipts obtained either through the stock-option or the performance-shares plan within a period of fi ve years from the grant date. They are only allowed to sell part of their depositary receipts at the date of vesting to pay tax over the vested performance share award. Depositary receipts obtained from exercised stock options may only be sold within a period of fi ve years from the grant date of the options to pay tax over the exercised award.
In the case of an involuntary exit, Executive Board members will be entitled to an amount which has been set at a multiple of their Executive Board member base salary, preserving their existing rights. These rights slightly exceed the exit-arrangement provision in the Dutch Corporate Governance Code, i.e. no more than two times base salary (fi rst appointment period) or one time base salary (all other situations).
Executive Board base salary 2007 The base salary of the Executive Board members has been frozen for 2007, as was the case in 2004, 2005 and 2006.
Early in 2008, the Remuneration and Nomination Committee reviewed the actual results of ING against the 2007 targets. Over 2007, ING exceeded on average the three Group fi nancial targets set, resulting in a score of 136% of target on this component. The individual performance of the Executive Board members was on average 182%. ING’s external auditor has reviewed the extent to which the objectives of both the Group and the individual have been met. The Audit Committee was involved in the review of the underlying fi nancial data.
Remuneration levels Every year a compensation benchmark analysis is performed based upon a peer group of companies. This peer group, established in 2003, is a mix of European fi nancial services companies and Dutch-based multinationals. The peer group refl ects ING’s business structure and environment. ING competes with these companies for executive talent. The following companies are part of this compensation peer group: ABN AMRO, Aegon, Ahold, AXA, BNP Paribas, Credit Suisse, Fortis, KPN, Royal Bank of Scotland, Société Générale.
Considering the disappearance of ABN AMRO and the natural evolvement of the companies in the compensation peer group, the Supervisory Board has undertaken a review of this group. The composition of the adjusted peer group is based upon a thorough review process using objective criteria and refl ects the evolved environment and ING’s business structure. The Supervisory Board has decided to adjust to a European fi nancial industry peer group effective as of compensation year 2009. This fi nancial industry peer group will comprise of the following companies: Aegon, Allianz, AXA, Banco Santander, Barclays, BNP Paribas, Credit Suisse, Deutsche Bank, Fortis, HSBC, Royal Bank of Scotland, Société Générale, Unicredito Italiano, Zurich Financial Services.
Pensions Executive Board members At the General Meeting of Shareholders on 25 April 2006, it was agreed to amend the Executive Board remuneration policy with respect to pensions. This revised pension plan applies to all members of the Executive Board regardless of the time of appointment to the Executive Board except for John Hele, Tom McInerney and Cees Maas (retired 1 June 2007). The revised pension plan does not apply to a) Cees Maas, who was born before 1 January 1950 and who therefore continued to participate in the previous Executive Board defi ned-benefi t pension scheme, and b) John Hele and Tom McInerney as they participate in the US pension plans. The pensions of the Executive Board are now based on a defi ned-contribution plan, which are insured through a contract with Nationale-Nederlanden Levensverzekering Maatschappij N.V. Starting in 2006, members of the Executive Board have been required to pay a portion of their pension premium. The Employment Contract will terminate by operation of law in case of retirement (‘Standard Retirement’), which will take place on the fi rst day of the month that the individual reaches the age of 65. The retirement age has been changed from previous years (age 60) as a result of the Dutch tax reform.
Michel Tilmant (1) Dick Harryvan, Tom McInerney, Hans van der Noordaa and Jacques de Vaucleroy were appointed to the Executive Board on 25 April 2006. The fi gures for these members refl ect compensation earned in their capacity as Executive Board members. Thus, the fi gures for 2006 refl ect the partial year as Executive Board members.
(2) John Hele and Koos Timmermans were appointed to the Executive Board on 24 April 2007. The fi gures for these members refl ect compensation earned in their capacity as Executive Board members. Thus, the fi gures for 2007 refl ect the partial year as Executive Board members.
Short-term performance-related bonus 2,001 2,299 1,520 Total cash compensation 3,290 3,588 2,809
Base salary 634 423 Short-term performance-related bonus 842 710 Total cash compensation 1,476 1,133
Short-term performance-related bonus 956 1,102 705 Total cash compensation 1,590 1,736 1,339
Base salary 946 690 Short-term performance-related bonus 1,425 1,157 Total cash compensation 2,371 1,847
Base salary 423 Short-term performance-related bonus 637 Total cash compensation 1,060
Base salary 634 423 Short-term performance-related bonus 956 710 Total cash compensation 1,590 1,133
The exercise price of the options will be fi xed at the Euronext Amsterdam by NYSE Euronext opening price of the ING share on 15 May 2008. The performance shares are granted provisionally at the beginning of 2008; the fi nal number will depend on the ranking within the performance peer group after the three-year period (2008 – 2010) based on the performance/payout scale as indicated above.
The performance shares granted in 2005 had a three-year performance period of 2005 – 2007 and will vest in 2008. The actual results of 71% are based upon ING’s TSR ranking of 13 within the designated peer group. The results were determined by an independent third party. ING’s external auditor has reviewed the calculations performed. For members of the Executive Board who received an award as an Executive Board member in 2005, such award will vest in the fi nal number of performance shares in May 2008. For the other senior leaders who participated in the 2005 – 2008 performance share award, such award vested in March 2008.
(3) Dick Harryvan, Tom McInerney, Hans van der Noordaa and Jacques de Vaucleroy were appointed to the Executive Board on 25 April 2006. The fi gures for these members refl ect compensation earned in their capacity as Executive Board members.
(4) John Hele and Koos Timmermans were appointed to the Executive Board on 24 April 2007. The fi gures for these members refl ect compensation earned in their capacity as Executive Board members.
(5) Tom McInerney will receive conditional shares on the same grant date as the other long-term incentive awards. The conditional shares will be 100% vested four years after the grant date with the condition being an active employment contract. The conditional shares are provided to align Tom McInerney’s total remuneration with US market practice.
(6) As a result of his retirement from the Executive Board in 2007, Cees Maas received the fair market value of his 2006 long-term incentive award in cash instead of options and performance shares.
Eli Leenaars Number of options 64,967 65,021 53,200 Number of performance shares 15,396 13,603 9,500 Fair market value of long-term incentive (2) 748 853 571
Number of options 96,875 70,695 Number of performance shares 22,957 14,790 Number of conditional shares 54,312 37,633 Fair market value of long-term incentive (2) 2,571 2,201
Number of options 43,312 Number of performance shares 10,264 Fair market value of long-term incentive (2) 499
Number of options 0 58,600 Number of performance shares 0 10,500 Fair market value of long-term incentive 938 628
The fair market value of long-term incentive awards of former members of the Executive Board who are not included in the above table amounted to nil in 2007 and 2006, and EUR 2,150 thousand in 2005.
Michel Tilmant 874 689 685 (1) For reasons of comparison, the company pension expenses are recalculated under IAS 19 with general assumption setting for 2005 to 2007.
(3) John Hele and Koos Timmermans were appointed to the Executive Board on 24 April 2007. The fi gures for these members refl ect pension costs in their capacity as Executive Board members.
(5) Cees Maas stepped down from his position in the Executive Board on 24 April 2007 and retired on 1 June 2007. The 2007 fi gures for him refl ect pension costs for the partial year until the last day of employment.
Amount outstanding 31 December Average interest rate Repayments amounts in thousands of euros 2007 2006 2005
Eric Boyer de la Giroday 24 4.3% 4 28 4.3% 3 31 4.3% 3
John Hele 635 5.6% Hans van der Noordaa 930 4.4% 930 4.4% Koos Timmermans 380 4.6%
EXECUTIVE BOARD REMUNERATION STRUCTURE 2008 The Supervisory Board has taken notice of the recommendations by the Frijns corporate governance monitoring committee and will consider these recommendations in their evaluation in 2008.
Executive Board base salary 2008 A market-competitive analysis is conducted on an annual basis to ensure market competitiveness. For 2008 the Supervisory Board has concluded to increase the base-salary levels by 5% for all Executive Board members with the exception of Tom McInerney (who is employed on a US-based compensation structure).
Executive Board short-term incentive plan 2008 The 2008 short-term incentive target at 100% of base salary will remain the same as 2007. The actual payout may vary between 0% and 200% of the target level (e.g. between 0% and 200% of base salary).
The mix for the 2008 short-term incentive award will remain the same as in 2007: 70% will be determined by pre-defined ING Group financial performance measures and 30% will be based on individual performance objectives set for each Executive Board member and agreed by the Supervisory Board.
The remuneration for the membership of committees is as follows: chairman of the Audit Committee EUR 8,000, members of the Audit Committee EUR 6,000, chairmen of other Supervisory Board committees EUR 7,500 and members of other Supervisory Board committees EUR 5,000. In addition to the fixed remuneration, committee members receive a fee for each meeting they attend. For the Audit Committee chairman this fee is EUR 2,000 per meeting and for its members EUR 1,500. For the chairman and members of other committees the attendance fee amounts to EUR 450 per meeting. The remuneration and the attendance fee for the membership of a committee are not applicable to the chairman and vice-chairman of the Supervisory Board if they are on one of the committees.
The table below shows the remuneration, expense allowances and attendance fees per Supervisory Board member for 2007 and previous years.
Compensation of the members of the Supervisory Board amounts in thousands of euros 2007 2006 2005
Cor Herkströter 82 75 68 (1) Eric Bourdais de Charbonnière is a member of the Supervisory Board as of April 2004 and vice-chairman as of February 2005. The compensation fi gure for 2005 refl ects the partial year as vicechairman.
(2) Henk Breukink is a member of the Supervisory Board as of April 2007. The compensation fi gure for 2007 refl ects the partial year as member of the Supervisory Board.
(3) Peter Elverding is a member of the Supervisory Board as of August 2007. The compensation fi gure for 2007 refl ects the partial year as member of the Supervisory Board.
(5) Piet Hoogendoorn is a member of the Supervisory Board as of June 2007. The compensation fi gure for 2007 refl ects the partial year as member of the Supervisory Board.
Compensation of former members of the Supervisory Board who are not included in the above table amounted to nil in 2007, EUR 33 thousand in 2006 and EUR 138 thousand in 2005.
Proposal to amend the Supervisory Board remuneration On the agenda of the 2008 General Meeting of Shareholders a proposal has been tabled to amend the remuneration of the Supervisory Board by providing a supplementary allowance for additional time requirements in cases where international travel is required for attending meetings, given that the current structure does not compensate at a competitive level in cases where individual Supervisory Board member’s time commitments are substantially in excess of the time required for attending domestic meetings.
The amendment to the Supervisory Board remuneration would be as follows as of 1 May 2008: an additional fee of EUR 2,000 per attended Supervisory Board or Committee meeting in the event the meeting is held outside the country of residence of the Supervisory Board member, or an additional amount of EUR 7,500 per attended Supervisory Board or Committee meeting if intercontinental travel is required for attending the meeting.
ING depositary receipts for shares and options held by members of the Supervisory Board number of shares 2007 2006 2005
Cor Herkströter 1,616 1,616 1,616 (1) The shares held by Luella Gross Goldberg are American Depositary Receipts.Luella Gross Goldberg (1) 6,814 6,814 6,814
Loans and advances to Supervisory Board members As at 31 December 2007 and 2006, there were no loans and advances outstanding to members of the Supervisory Board. As at 31 December 2005, the amount of loans and advances outstanding to the Supervisory Board was EUR 1.6 million at an average rate of 4.7%. This amount concerned a loan to a former Supervisory Board member.
ING depositary receipts for shares and options held by Supervisory Board members Supervisory Board members are permitted to hold ING depositary receipts for shares as a long-term investment. The table below shows the holdings by members of the Supervisory Board. Supervisory Board members did not hold ING options at year-end 2007.
Rob Eijt, chairman Paul de Widt, secretary Bernard Wempe, deputy chairman René van der Linden, deputy secretary Goof Bode, Bernardt Bodt, Hans de Boer, Ron Brands, Hans van den Brink, Anneke Dalger, Petra Delhez, Rudi van Doorn, Winie den Hartog, Thea van der Heide, Piet Hoekstra, Alex Hoogendoorn, Hans de Jong, Aad Kant, Ben van Kessel, Maarten Kramer, Rinus Koster, Jan Kuijper, Frans Rose, Rob de Winter, Paul Zoet
ASSETS Cash and balances with central banks 1 12,406 14,326 Amounts due from banks 2 48,875 39,868 Financial assets at fair value through profi t and loss 3 – trading assets 193,213 193,977 – investments for risk of policyholders 114,827 110,547 – non-trading derivatives 7,637 6,521 – designated as at fair value through profi t and loss 11,453 6,425 Investments 4 – available-for-sale 275,897 293,921 – held-to-maturity 16,753 17,660 Loans and advances to customers 5 552,964 474,437
Investments in associates 6 5,014 4,343 Real estate investments 7 4,829 6,974 Property and equipment 8 6,237 6,031
Interest income banking operations 76,749 59,170 48,176 Income expense banking operations –67,773 –49,978 –39,109 Interest result banking operations 34 8,976 9,192 9,067
Attributable to: Shareholders of the parent 9,241 7,692 7,210 amounts in euros 2007 2006 2005
References relate to the notes starting on page 163 which form an integral part of the consolidated annual accounts.
2.1 Consolidated annual accounts amounts in millions of euros 2007 2006 2005
– other fi nancial liabilities at fair value through profi t and loss 44 2,405 8,398 – other liabilities 6,577 –2,416 3,568
– available-for-sale investments 281,198 271,983 218,847 – held-to-maturity investments 822 1,343 245 – real estate investments 309 1,294 1,030 – property and equipment 151 292 483 – assets subject to operating leases 417 402 391 – investments for risk of policyholders 47,136 37,945 34,464
Net cash fl ow from investing activities 51 –13,933 –31,320 –50,305
Proceeds from issuance of subordinated loans 1,764 865 1,901 Repayments of subordinated loans –600 –177 Proceeds from borrowed funds and debt securities 455,629 304,228 237,340 Repayments of borrowed funds and debt securities –464,982 –283,728 –229,498 Issuance of ordinary shares 397 5 114 Payments to acquire treasury shares –3,446 –1,422 –303 Sales of treasury shares 846 373 55 Dividends paid –3,039 –2,716 –2,461 Net cash fl ow from fi nancing activities –12,831 17,005 6,971
Cash and cash equivalents at 31 December 2007 of EUR –16,811 million includes cash and balances with central banks of EUR 12,406 million. Reference is made to Note 53 ‘Cash and cash equivalents’.
Consolidated statement of cash fl ows of ING Group for the years ended 31 December
Unrealised revaluations after taxation 2,514 2,514 –32 2,482 Realised gains/losses transferred to profi t and loss –663 –663 –663 Changes in cash fl ow hedge reserve 764 764 764 Transfer to insurance liabilities/DAC –89 –89 17 –72 Employee stock option and share plans 63 63 63
Unrealised revaluations after taxation –1,096 –1,096 –8 –1,104 Realised gains/losses transferred to profi t and loss –759 –759 –1 –760 Changes in cash fl ow hedge reserve –696 –696 –696 Transfer to insurance liabilities/DAC 820 820 –3 817 Employee stock option and share plans 100 100 2 102 Exchange rate differences –1,335 –1,335 –70 –1,405 Total amount recognised directly in equity –2,966 –2,966 –80 –3,046
Changes in composition of the group 1,034 1,034 Dividends (2) –2,681 –2,681 –35 –2,716 Purchase/sale of treasury shares –520 –520 –520 Exercise of warrants and options 5 5 5
In 2007, deferred taxes for the year with regard to unrealised revaluations amounted to EUR 1,451 million (2006: EUR 1,339 million). For details on deferred tax see Note 21 ‘Other liabilities’.
AUTHORISATION OF ANNUAL ACCOUNTS The consolidated annual accounts of ING Groep N.V. (‘ING Group’) for the year ended 31 December 2007 were authorised for issue in accordance with a resolution of the Executive Board on 17 March 2008. ING Groep N.V. is incorporated and domiciled in Amsterdam, the Netherlands. The principle activities of ING Group are described in the section ‘ING at a glance’ in section 1.1.
BASIS OF PRESENTATION ING Group applies International Financial Reporting Standards as adopted by the European Union (‘EU’).
IFRS 7 ‘Financial Instruments: Disclosure’ became effective as of 1 January 2007. Also during the year IFRIC 11 ‘Group and treasury share transactions’ became effective. Neither of these recent standards and interpretations has had a material effect on equity nor profi t for the period. Recently issued standards and interpretations that became effective after 1 January 2007 are not expected to have a material effect on equity or profi t for the period. ING Group has not early adopted any new International Financial Reporting Standard or interpretation.
As permitted by IFRS-EU ING Group adopted IAS 32 and IAS 39 and IFRS 4 for the accounting period beginning on 1 January 2005. For the resulting changes in policies made as at 1 January 2005 see section ‘Implementation of IAS 32, IAS 39 and IFRS 4’ at the end of the ‘Accounting policies’ section.
As explained in the section ‘Principles of valuation and determination of results’ and in Note 23 ‘Derivatives and hedge accounting’ ING Group applies fair value hedge accounting for portfolio hedges of interest rate risk (macro hedging) under the EU ‘carve out’ of IFRS-EU.
The presentation of, and certain terms used in, the balance sheet, the profi t and loss account, cash fl ow statement, statement of changes in equity and certain notes has been changed to provide additional and more relevant information. Certain comparative amounts have been reclassifi ed to conform with the current period presentation.
CRITICAL ACCOUNTING POLICIES ING Group has identifi ed the accounting policies that are most critical to its business operations and to the understanding of its results. These critical accounting policies are those which involve the most complex or subjective decisions or assessments, and relate to insurance provisions and deferred acquisition costs, the loan loss provision, the determination of the fair values of fi nancial assets and liabilities and employee benefi ts. In each case, the determination of these items is fundamental to the fi nancial condition and results of operations, and requires management to make complex judgements based on information and fi nancial data that may change in future periods. As a result, determinations regarding these items necessarily involve the use of assumptions and subjective judgements as to future events and are subject to change, as the use of different assumptions or data could produce materially different results. For a further discussion of the application of these accounting policies, reference is made to the applicable notes to the consolidated fi nancial statements and the information below under ‘Principles of valuation and determination of results’.
INSURANCE PROVISIONS, DEFERRED ACQUISITION COSTS (DAC) AND VALUE OF BUSINESS ACQUIRED (VOBA) The establishment of insurance provisions, DAC and VOBA is an inherently uncertain process, involving assumptions about factors such as court decisions, changes in laws, social, economic and demographic trends, infl ation, investment returns, policyholder behaviour and other factors, and, in the life insurance business, assumptions concerning mortality and morbidity trends. Specifi cally, signifi cant assumptions related to these items that could have a material impact on fi nancial results include interest rates, mortality, morbidity, property and casualty claims, investment yields on equity and real estate, foreign currency exchange rates and reserve adequacy assumptions.
Insurance provisions also include the impact of minimum guarantees which are contained within certain variable annuity products. This impact is dependant upon the difference between the potential minimum benefi ts payable and the total account balance, expected mortality and surrender rates. The determination of the potential minimum benefi ts payable also involves the use of assumptions about factors such as infl ation, investment returns, policyholder behaviour, and mortality and morbidity trends. The use of different assumptions about these factors could have a material effect on insurance provisions and underwriting expense.
See section ’Risk management’ for a sensitivity analysis of net profi t and shareholders’ equity to insurance, interest rate, equity, foreign currency and real estate risks. These sensitivities are based on changes in assumptions that management considers reasonably likely at the balance sheet date.
LOAN LOSS PROVISIONS Loan loss provisions are recognised based on an incurred loss model. Considerable judgement is exercised in determining the extent of the loan loss provision (impairment) and is based on the management’s evaluation of the risk in the portfolio, current economic conditions, loss experience in recent years and credit, industry and geographical concentration trends. Changes in such judgements and analyses may lead to changes in the loan loss provisions over time.
FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES Fair values of fi nancial assets and liabilities are determined using quoted market prices where available. Market prices are obtained from independent market vendors, brokers, or market makers. In general, positions are valued taking the bid price for a long position and the offer price for a short position. In some cases where positions are marked at mid-market prices, a fair value adjustment is calculated. Furthermore, additional fair value adjustments may be necessary for liquidity or outdated data because transactions in a particular fi nancial instrument do not take place on a regular basis.
Valuation techniques are subjective in nature and signifi cant judgement is involved in establishing fair values for certain fi nancial assets and liabilities. Valuation techniques involve various assumptions regarding the pricing factors. The use of different valuation techniques and assumptions could produce materially different estimates of fair value.
Price testing is done to assess whether the process of valuation has led to an appropriate fair value of the position and to an appropriate refl ection of these valuations in the profi t and loss account. Price testing is performed to minimise the potential risks for economic losses due to materially incorrect or misused models.
Accounting policies for the consolidated balance sheet and profi t and loss account of ING Group (continued)
EMPLOYEE BENEFITS Group companies operate various defi ned benefi t retirement plans covering a signifi cant number of its domestic and international employees.
A list of principal subsidiaries is included in Note 28 ‘Principal subsidiaries’.
All intercompany transactions, balances and unrealised surpluses and defi cits on transactions between group companies have been eliminated. Where necessary, the accounting policies used by subsidiaries have been changed to ensure consistency with group policies. In general, the reporting dates of subsidiaries are the same as the reporting date of ING Groep N.V. There are no material restrictions on subsidiaries to transfer funds to ING Groep N.V.
Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the profi t and loss account, except when deferred in equity as part of qualifying cash fl ow hedges or qualifying net investment hedges.
Translation differences in the profi t and loss account are generally included in Net trading income. Refer to Note 39 ‘Net trading income’, which discloses the amounts included in profi t and loss. Translation differences relating to the disposal of Available-for-sale debt and equity securities are considered to be an inherent part of the capital gains and losses recognised in Investment income. As mentioned in Group companies below any translation differences deferred in equity are recognised in the profi t and loss account in Net gains and losses on disposals of group companies. Refer also to Note 12 ‘Shareholders equity (parent)’, which discloses the amounts included in profi t and loss.
See Note 33 ‘Fair value of fi nancial assets and liabilities’ for the basis of the determination of the fair value of fi nancial instruments.
ING Group applies fair value hedge accounting for portfolio hedges of interest rate risk (macro hedging) under the EU ‘carve out’ of IFRSEU. The EU ‘carve-out’ macro hedging enables a group of derivatives (or proportions) to be viewed in combination and jointly designated as the hedging instrument and removes some of the limitations in fair value hedge accounting relating to hedging core deposits and under-hedging strategies. Under the IFRS-EU ‘carve-out’, hedge accounting may be applied to core deposits and ineffectiveness only arises when the revised estimate of the amount of cash fl ows in scheduled time buckets falls below the designated amount of that bucket.
Certain derivatives embedded in other contracts are measured as separate derivatives when their economic characteristics and risks are not closely related to those of the host contract, the host contract is not carried at fair value through profi t and loss, and if a separate instrument with the same terms as the embedded derivative would meet the defi nition of a derivative. These embedded derivatives are measured at fair value with changes in fair value recognised in the profi t and loss account. Assessment is made when the Group fi rst becomes party to the contract. Subsequent reassessment is made only when there is a change in the terms of the contract that signifi cantly modifi es the expected cash fl ows.
Cash fl ow hedges The effective portion of changes in the fair value of derivatives that are designated and qualify as cash fl ow hedges are recognised in equity. The gain or loss relating to the ineffective portion is recognised immediately in the profi t and loss account. Amounts accumulated in equity are recycled to the profi t and loss account in the periods in which the hedged item will affect net profi t. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in the profi t and loss account. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the profi t and loss account.
Net investment hedges Hedges of net investments in foreign operations are accounted for similarly to cash fl ow hedges. Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognised in equity and the gain or loss relating to the ineffective portion is recognised immediately in the profi t and loss account. Gains and losses accumulated in equity are included in the profi t and loss account when the foreign operation is disposed of.
CLASSIFICATION OF FINANCIAL INSTRUMENTS Financial assets at fair value through profi t and loss Financial assets at fair value through profi t and loss comprise two sub-categories: fi nancial assets held for trading and other fi nancial assets designated at fair value through profi t and loss by management, including investments for risk of policyholders. A fi nancial asset is classifi ed as at fair value through profi t and loss if acquired principally for the purpose of selling in the short term or if so designated by management. Designation by management will only take place if this eliminates a measurement inconsistency or if the related assets and liabilities are managed on a fair value basis. Investments for risk of policyholders are investments against insurance liabilities for which all changes in fair value of invested assets are offset by similar changes in insurance liabilities. Transaction costs on initial recognition are expensed as incurred. Interest income from debt securities and loans and receivables classifi ed as at fair value through profi t and loss is recognised in Interest income and Investment income in the profi t and loss account using the effective interest method. Dividend income from equity instruments classifi ed as at fair value through profi t and loss is recognised in Investment income in the profi t and loss account generally when the dividend has been declared. For all fi nancial assets classifi ed as at fair value through profi t and loss changes in fair value are recognised in Net trading income.
Held-to-maturity investments Non-derivative fi nancial assets with fi xed or determinable payments and fi xed maturity for which the Group has the positive intent and ability to hold to maturity and which are designated as held-to-maturity assets are initially recognised at fair value plus transaction costs. Subsequently they are carried at amortised cost using the effective interest method less any impairment losses. Interest income from debt securities classifi ed as Held-to-maturity is recognised in Interest income in the profi t and loss account using the effective interest method.
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 classifi cation mainly relates to the balance sheet classifi cation Financial assets at fair value through profi t and loss (trading assets and non-trading derivatives). Settlement risk arises when there is an exchange of value (funds, instruments or commodities) for the same or different value dates and receipt is not verifi ed or expected until ING has paid or delivered its side of the trade. Settlement risk mainly relates to the balance sheet classifi cation Financial assets at fair value through profi t and loss (trading assets and non-trading derivatives) and Investments (available-for-sale and held-to-maturity).
LOAN LOSS PROVISIONS The Group assesses periodically and at each balance sheet date whether there is objective evidence that a fi nancial asset or group of fi nancial assets is impaired. A fi nancial asset or a group of fi nancial assets is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset, but before the balance sheet date, (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash fl ows of the fi nancial asset or group of fi nancial assets that can be reliably estimated. The following circumstances, among others, are considered objective evidence that a fi nancial asset or group of assets is impaired: The borrower has sought or has been placed in bankruptcy or similar protection and this leads to the avoidance or delays repayment of the fi nancial asset; The borrower has failed in the repayment of principal, interest or fees and the payment failure has remained unsolved for a certain period; The borrower has demonstrated signifi cant fi nancial diffi culty, to the extent that it will have a negative impact on the expected future cash fl ows of the fi nancial asset; The credit obligation has been restructured for non-commercial reasons. ING has granted concessions, for economic or legal reasons relating to the borrower’s fi nancial diffi culty, the effect of which is a reduction in the expected future cash fl ows of the fi nancial asset; Historical experience, updated for current events where necessary, provides evidence that a proportion of a group of assets is impaired although the related events that represent impairment triggers are not yet captured by the Group’s credit risk systems.
The Group does not consider events that may be expected to occur in the future as objective evidence, and consequently they are not used as a basis for concluding that a fi nancial asset or group of assets is impaired. In determining the impairment, expected future cash fl ows are estimated on the basis of the contractual cash fl ows of the assets in the portfolio and historical loss experience for assets with credit risk characteristics similar to those in the portfolio. Historical loss experience is adjusted on the basis of current observable data to refl ect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. Losses expected as a result of future events, no matter how likely, are not recognised.
If there is objective evidence that an impairment loss on an asset carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash fl ows (excluding future credit losses that have not been incurred) discounted at the fi nancial asset’s original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account (‘Loan loss provision’) and the amount of the loss is recognised in the profi t and loss account under ‘Addition to loan loss provision’. If the asset has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract.
For the purposes of a collective evaluation of impairment, fi nancial assets are grouped on the basis of similar credit risk characteristics. Those characteristics are relevant to the estimation of future cash fl ows for groups of such assets by being indicative of the debtors’ ability to pay all amounts due according to the contractual terms of the assets being evaluated. The collective evaluation of impairment includes the application of a ‘loss confi rmation period’ to default probabilities. The loss confi rmation period is a concept which recognises that there is a period of time between the emergence of impairment triggers and the point-in-time at which those events are captured by the Group’s credit risk systems. Accordingly, the application of the loss confi rmation period ensures that impairments that are incurred but not yet identifi ed are adequately refl ected in the Group’s loan loss provision. Though the loss confi rmation periods are inherently uncertain, the Group applies estimates to sub-portfolios (e.g. large corporations, small and medium size enterprises and retail portfolios) that refl ect factors such as the frequency with which customers in the sub-portfolio disclose credit risk sensitive information and the frequency with which they are subject to review by the Group’s account managers. Generally, the frequency increases in relation to the size of the borrower. Loss confi rmation periods are based on historical experience and are validated, and revised where necessary, through regular back-testing to ensure that they refl ect recent experience and current events.
When a loan is uncollectible, it is written off against the related loan loss provision. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off decrease the amount of the loan loss provision and are recognised in the profi t and loss account.
Property under development for third parties Property under development where there is not yet a specifi cally negotiated contract is measured at direct construction cost incurred up to the balance sheet date, including borrowing costs incurred during construction and the Group’s own directly attributable development and supervision expenses less any impairment losses. Profi t is recognised using the completed contract method (on completion date of the property).
Equipment Equipment is stated at cost less accumulated depreciation and any impairment losses. The cost of the assets is depreciated on a straightline basis over their estimated useful lives, which are generally as follows: for data processing equipment 2 to 5 years, and 4 to 10 years for fi xtures and fi ttings. Expenditures for maintenance and repairs are charged to the profi t and loss account as incurred. Expenditure incurred on major improvements is capitalised and depreciated.
Adjustments to the fair value as of the date of acquisition of acquired assets and liabilities that are identifi ed within one year after acquisition are recorded as an adjustment to goodwill; any subsequent adjustment is recognised as income or expense. However, recognition of deferred tax assets after the acquisition date is recorded as an adjustment to goodwill even after the fi rst year. On disposal of group companies, the difference between the sale proceeds and book value (including goodwill) and the unrealised results (including the currency translation reserve in equity) is included in the profi t and loss account.
Value of business acquired (VOBA) VOBA is an asset that refl ects the present value of estimated net cash fl ows embedded in the insurance contracts of an acquired company, which existed at the time the company was acquired. It represents the difference between the fair value of Insurance liabilities
FINANCIAL LIABILITIES Preference shares, which carry a mandatory coupon or are redeemable on a specifi c date or at the option of the shareholder, are classifi ed as fi nancial liabilities. The dividends on these preference shares are recognised in the profi t and loss account as interest expense using the effective interest method.
If the Group purchases its own debt, it is removed from the balance sheet, and the difference between the carrying amount of the liability and the consideration paid is included in the profi t and loss account.
INSURANCE, INVESTMENT AND REINSURANCE CONTRACTS Insurance contracts Insurance policies which bear signifi cant insurance risk are presented as insurance contracts. Provisions for liabilities under insurance contracts represent estimates of future payouts that will be required in respect of life and non-life insurance claims, including expenses relating to such claims. For some insurance contracts the measurement refl ects current market assumptions.
Provision for life insurance The Provision for life insurance is calculated on the basis of a prudent prospective actuarial method, taking into account the conditions for current insurance contracts. Specifi c methodologies may differ between business units as they may refl ect local regulatory requirements and local practices.
Claims provision The Claims provision is calculated either on a case-by-case basis or by approximation on the basis of experience. Provisions have also been made for claims incurred but not reported (IBNR) and for future claims handling expenses. The adequacy of the Claims provision is evaluated each year using standard actuarial techniques. In addition, ‘IBNR’ reserves are set to recognise the estimated cost of losses that have occurred but which have not yet been notifi ed to the Group.
Adequacy test The adequacy of the Provision for life insurance, net of unamortised interest rate rebates, DAC and VOBA (the net insurance liabilities), is evaluated regularly by each business unit. The test considers current estimates of all contractual and related cash fl ows, and future developments. It includes investment income on the same basis as it is included in the profi t and loss account.
If, for any business unit, the net insurance liabilities are not adequate using a prudent (90%) confi dence level, but there are offsetting amounts within other Group business units, then the business unit is allowed to take measures to strengthen the net insurance liabilities over a period no longer than the expected life of the policies. To the extent that there are no offsetting amounts within other Group business units then any shortfall at the 90% confi dence level is immediately recorded in the profi t and loss account.
Other post-employment obligations Some group companies provide post-employment healthcare and other benefi ts to certain employees and former employees. The entitlement to these benefi ts is usually conditional on the employee remaining in service up to retirement age and the completion of a minimum service period. The expected costs of these benefi ts are accrued over the period of employment using an accounting methodology similar to that for defi ned benefi t pension plans.
Other provisions A provision involves a present obligation arising from past events, the settlement of which is expected to result in an outfl ow from the company of resources embodying economic benefi ts, however the timing or the amount is uncertain. Provisions are discounted when the effect of the time value of money is material using a pre-tax discount rate. The determination of provisions is an inherently uncertain process involving estimates regarding amounts and timing of cash fl ows.
Interest Interest income and expense are recognised in the profi t and loss account using the effective interest method. The effective interest method is a method of calculating the amortised cost of a fi nancial asset or a fi nancial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the fi nancial instrument or, when appropriate, a shorter period to the net carrying amount of the fi nancial asset or fi nancial liability. When calculating the effective interest rate, the Group estimates cash fl ows considering all contractual terms of the fi nancial instrument (for example, prepayment options) but does not consider future credit losses. The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. Once a fi nancial asset or a group of similar fi nancial assets has been written down as a result of an impairment loss, interest income is recognised using the rate of interest used to discount the future cash fl ows for the purpose of measuring the impairment.
All interest income and expenses from trading positions and non-trading derivatives are classifi ed as interest income and interest expenses in the profi t and loss account. Changes in the ‘clean fair value’ are included in Valuation results on non-trading derivatives.
Diluted earnings per share data are computed as if the stock options and warrants outstanding at year-end were exercised at the beginning of the period. It is also assumed that ING Group uses the assumed proceeds thus received for stock options and warrants exercised to buy its own shares against the average market price in the fi nancial year. The net increase in the number of shares resulting
from the exercise of warrants and stock options is added to the average number of shares used for the calculation of diluted earnings per share.
Share options with fi xed or determinable terms are treated as options in the calculation of diluted earnings per share, even though they may be contingent on vesting. They are treated as outstanding on the grant date. Performance-based employee share options are treated as contingently issuable shares because their issue is contingent upon satisfying specifi ed conditions in addition to the passage of time.
Impact of IAS 32/39 and IFRS 4 amounts in millions of euros As at
Available-for-sale debt securities 9,922 Insurance provisions –3,126 Derivatives/hedge accounting/fair value option –977 Loans and advances to customers 465 Loan loss provisions 623 Venture capital investments 90 Other –35 Taxation –2,460 Classifi cation of equity instruments – shareholders’ equity –399 IFRS-EU impact on net profi t and shareholders’ equity 4,103
Classifi cation of equity instruments – minority interests –1,442 Minority interests in equity 56 Total impact 2,717
Available-for-sale debt securities Under IFRS-EU, quoted debt securities (non-trading) other than those designated as being held-to-maturity are reported at fair value, with changes in fair value recognised in a revaluation reserve in equity; realised results are recognised directly in the profi t and loss account. Under Dutch GAAP, debt securities were reported at amortised cost; realised results were deferred and amortised over the remaining term.
Fair value option As an alternative to hedge accounting under IFRS-EU, fi nancial assets and liabilities may be designated at fair value through profi t and loss, which results in these being presented at fair value, with all changes in fair value recognised directly in the profi t and loss account. Furthermore, the fair value option is applied to certain fi nancial liabilities that are subject to market-making activities.
Equity securities Under Dutch GAAP, negative revaluations on equity securities were only charged to the profi t and loss account as an impairment when triggered by the fi nancial condition of the issuer. Under IFRS-EU, an impairment is also triggered by a signifi cant or prolonged decline of the market value below cost. This did not affect Group equity at the date of transition to IFRS-EU.
Taxation Deferred taxation was adjusted for the (deferred) tax effect of the above differences between Dutch GAAP and IFRS-EU.
The net cash fl ow shown in respect of Loans and advances to customers only relates to transactions involving actual payments or receipts. The Addition to loan loss provision which is deducted from the item Loans and advances to customers in the balance sheet has been adjusted accordingly from the profi t before tax and is shown separately in the cash fl ow statement.
Amounts due from banks, at 31 December 2007, included receivables with regard to securities which have been acquired in reverse repurchase transactions amounting to EUR 2,472 million (2006: EUR 2,249 million) and assets held under fi nance lease contracts amounting to EUR 232 million (2006: EUR 277 million).
Trading assets 193,213 193,977 Investments for risk of policyholders 114,827 110,547 Non-trading derivatives 7,637 6,521 Designated as at fair value through profi t and loss 11,453 6,425
As at 31 December 2007, the balance sheet value included equity securities which were lent or sold in repurchase transactions amounting to EUR 4 million (2006: EUR 13 million) and nil (2006: nil), respectively. As at 31 December 2007, the balance sheet value included debt securities which were lent or sold in repurchase transactions amounting to EUR 386 million (2006: EUR 42 million) and EUR 629 million (2006: EUR 4,303 million), respectively.
Notes to the consolidated balance sheet of ING Group amounts in millions of euros, unless stated otherwise
In 2007 none of the changes in the fair value of the loans and receivables included in Investments for risk of policyholders are attributable to changes in the credit risk of the fi nancial assets (2006: nil), or cumulatively (2006: nil).
The fair value of credit derivatives included in trading assets and held to mitigate exposure to credit risk was EUR –7 million (2006: nil), and the change in their fair value in the period was EUR –7 million (2006: nil).
Designated as at fair value through profi t and loss by type
Equity securities 306 193 Debt securities 8,774 4,744 Loans and receivables 428 306
The fair value of credit derivatives included in non-trading derivatives and held to mitigate exposure to credit risk on debt securities was EUR –10 million (2006: EUR –2 million), and the change in their fair value in the period was nil (2006: nil).
As at 31 December 2007, trading assets include receivables of EUR 114,897 million (2006: EUR 118,053 million) with regard to reverse repurchase transactions.
Available-for-sale – equity securities 19,947 18,225 – debt securities 255,950 275,696
To/from loans and advances –1 –6 –122 –7 –122 To/from fair value through profi t and loss 52 –118 –1,386 –164 –1,334 –282 To/from Investment in associates 438 –197 438 –197
Borrowed debt securities are not recognised in the balance sheet and amounted to EUR 170 million as at 31 December 2007 (2006: EUR 460 million).
Investments in connection with the insurance operations with a combined carrying value of EUR 69 million (2006: EUR 43 million) were non-income-producing for the year ended 31 December 2007.
Loans to, or guaranteed by, public authorities 14,678 16,450 8,961 9,503 23,639 25,953
Loans guaranteed by credit institutions 1,951 2,088 591 320 2,542 2,408
As at 31 December 2007, Loans and advances to customers included receivables with regard to securities which have been acquired in reverse repurchase transactions related to the banking operations amounting to EUR 4,569 million (2006: EUR 1,554 million).
No individual loan or advance has terms and conditions that materially affect the amount, timing or certainty of the consolidated cash fl ows of the Group.
Loans and advances to customers and Amounts due from banks include fi nance lease receivables, analysed as follows: Finance lease receivables
Included in Amounts due from banks 232 277 Included in Loans and advances to customers 15,333 13,087
The allowance for uncollectible fi nance lease receivables included in the loan loss provisions amounted to EUR 33 million at 31 December 2007 (2006: EUR 47 million).
Changes in loan loss provisions relating to insurance operations are presented under Investment income. Changes in the loan loss provision relating to banking operations are presented on the face of the profi t and loss account.
Accumulated impairments have been recognised of EUR 29 million (2006: EUR 4 million).
In 2007, share of results of EUR 765 million and impairments of EUR –25 million are presented in the profi t and loss account in Share of profi t from associates (EUR 740 million).