Report of the Executive Board 13 Financial highlights 13 Capital management 16 Risk management 18 Insurance Europe 22 Insurance Americas 26 Insurance Asia/Pacifi c 30 Wholesale Banking 34 Retail Banking 38 ING Direct 42 Asset management 46 Human resources 50 Branding 52 Corporate responsibility 53 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 92 Accounting policies for the consolidated statement of cash fl ows 108 Notes to the consolidated balance sheet 109 Additional information to the consolidated balance sheet 140 Notes to the consolidated profi t and loss account 162 Segment reporting 177 Notes to the consolidated statement of cash fl ows 184 Risk management 185 2.2 Parent company annual accounts
Auditor’s report 218 Proposed profi t appropriation 219 Provisions concerning issues of shares 220 2.4 Additional fi nancial information
EXECUTIVE BOARD Michel J. Tilmant (54), chairman Cees Maas(1) (59), vice-chairman and CFO Eric F. Boyer de la Giroday (54) Dick H. Harryvan (53) Eli P. Leenaars (45) Tom J. McInerney (50) Hans van der Noordaa (45) Jacques M. de Vaucleroy (45)
Remuneration and Nomination Committee Cor A.J. Herkströter, chairman Eric Bourdais de Charbonnière Luella Gross Goldberg Paul F. van der Heijden
You can fi nd more information on the members of the Executive Board on pages 63–64 and on the members of the Supervisory Board on pages 66–67, including the nominated members.
• Strong business momentum continues in growth engines, supported by good growth in several mature markets
• Execution remains paramount with strong focus on cost effi ciency and risk management
Our mission 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 provides a broad range of insurance, banking and asset management services and is a top-15 global fi nancial institution (based on market capitalisation). We serve more than 60 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, small businesses, large corporations, institutions and governments.
Our strategy ING’s overall ambition is to create value for its shareholders: to give them a higher total return than the average of that of our peers over the longer term. To achieve that, we steer our business towards value creation through growth and return and aim to keep improving the execution of our business fundamentals. We want to excel at what we do and focus on delivering outstanding service to our customers and on fi rmly managing costs, risks and reputation. We invest in growth, and to this end ensure we are in businesses and markets with good long-
Our stakeholders ING conducts business on the basis of clearly defi ned business principles. In all our activities, we carefully weigh the interests of our various stakeholders: customers, shareholders, employees, business partners and society at large. ING strives to be a good corporate citizen.
Our corporate responsibility ING wants to pursue profi t on the basis of sound business ethics and respect for its stakeholders. Corporate responsibility is therefore a fundamental part of ING’s strategy: ethical, social and environmental factors play an integral role in our business decisions.
During the Shareholders’ Meeting on 24 April 2007 we will say goodbye to Cees Maas, vice-chairman and CFO of the Executive Board. It will be proposed to the Shareholders’ Meeting that he will be succeeded by John Hele as Chief Financial Offi cer and Koos Timmermans as Chief Risk Offi cer. Paul van der Heijden will retire from the Supervisory Board. Also on behalf of my Executive Board colleagues, I would like to thank Cees Maas for his tremendous contribution to ING and Paul van der Heijden for his commitment as Supervisory Board member. We are pleased that Cees Maas will continue to serve ING as advisor to the Executive Board.
Being successful throughout the economic cycle requires sound business fundamentals. Over the past few years we have taken diffi cult but necessary steps to rebalance our business portfolio, better allocate capital and improve on execution. One of ING’s distinguishing features is our ability to reallocate the capital that we generate in our mature businesses to the most value-adding areas within the company, including our growth engines. In line with ING’s entrepreneurial tradition, we continue to invest in new initiatives that expand growth organically, in both the mature and developing markets in which we operate.
DIVIDEND On 15 February 2007, ING Group proposed a total dividend for 2006 of EUR 1.32 per (depositary receipt for an) ordinary share. The dividend, to be approved at the Annual General Meeting of Shareholders on 24 April 2007, represents an increase of 12% from EUR 1.18 over 2005. Taking into account the interim dividend of EUR 0.59 made payable in August 2006, the proposed fi nal dividend amounts to EUR 0.73 per (depositary receipt for an) ordinary share, to be paid fully in cash. The ING share will be quoted ex-dividend as of 26 April 2007 and the fi nal dividend will be made payable on 3 May 2007 on Euronext Amsterdam. On the NYSE these dates are 23 April 2007 and 10 May 2007, respectively.
TOTAL SHAREHOLDER RETURN ING’s fi nancial objective is to offer our shareholders a higher total return than the average of that of our peers over the longer term. Amongst our peer group of 20 global fi nancial organisations, ING ranks second with a Total Shareholder Return of 109% over the three-year period since 2004.
RATINGS Credit ratings are indicators for the likelihood of timely and complete repayment of interest and instalments of fi xed-income securities as assigned by rating agencies.
ING GROUP AA– Aa2 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 Aaa AA – fi nancial strength B (1) The Standard & Poor’s, Moody’s and Fitch ratings all have a stable outlook.
ING Group’s profi t retention and distribution policy is dictated by its internal fi nancing requirements and its growth opportunities on the one hand and the capital providers’ dividend expectations on the other. ING Group’s internal funding needs are determined partly by statutory solvency requirements and capital ratios, compliance with which is essential to its existence. No less important to ING Group are its credit ratings, which directly affect its fi nancing costs and hence its profi tability. For their part, the capital providers expect a dividend which refl ects ING Group’s fi nancial results and is relatively predictable.
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 its dividend policy to a full cash dividend starting with the 2004 fi nal dividend (paid in May 2005). This change was very much welcomed by investors and analysts. ING has no intention to change its dividend policy.
(Depositary receipts for) ordinary 2,205.1 2,204.7 shares of EUR 0.24 nominal value (Depositary receipts for) preference shares of EUR 1.20 nominal value 63.0 87.1
(Depositary receipts for) own ordinary shares held by ING Group and its subsidiaries 53.8 38.7
ING share quotation ex fi nal dividend 2006 Monday, 23 April 2007 (NYSE)
Payment date fi nal dividend 2006 Thursday, 3 May 2007 (Euronext) Thursday, 10 May 2007 (NYSE)
ING share quotation ex interim dividend 2007 Thursday, 9 August 2007 (Euronext and NYSE)
Under the Dutch Act on the Disclosure of Signifi cant Interests, two holders of depositary receipts with an interest or potential interest of between 5% and 10% in ING Group were known as at 31 December 2006. These were ABN AMRO and Fortis.
In addition to fi nancial press releases, 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.
To create shareholder value, ING focuses on increasing economic profi t by managing our business in such a way that we generate returns higher than the cost of capital. To achieve this, we implemented a ‘Managing for Value’ framework company-wide. This means that we keep investing in the skills of our managers at all levels in the company to identify and improve those drivers that have the biggest impact on value creation. Based on our strong fi nancial position – thanks to focused portfolio management over the past three years – this enables us to allocate our capital across businesses and client segments in such a way that it generates the highest growth and return.
In 2006, increasing brand awareness was a key priority. After thorough research and based on a sound business case, ING signed a three-year sponsorship agreement with Renault Formula One. We have chosen Renault for its track record as a top, highperforming team. We believe that teaming up with them fosters our objectives of instilling a performance culture, encouraging teamwork and achieving permanent progress. This sponsorship and the fi rst-ever global marketing campaign is expected to increase ING’s visibility and thus to raise our brand awareness.
We want to position ourselves as a company that sets the standard in helping our customers manage their fi nancial future. When customers consider doing business with ING, they should know exactly what they will get. They should know that ING is easy to deal with, that we treat our customers fairly and that we deliver on our promises.
Cost control, particularly in mature markets, is an important means of maintaining a competitive position over the long run. In 2006, we improved the cost/income ratio of our banking operations and maintained the solid effi ciency ratios of our life insurance business. Our effi ciency programmes in the Netherlands and Belgium are on track: three major agreements to outsource part of our Operations & IT organisation were fi nalised.
We believe ING’s fi nancial results demonstrate that our underlying performance in all business lines remains strong. We were able to build on the momentum of profi table growth in 2006, both in mature and in developing markets. Examples of good performance in mature markets are our retail banking businesses in the Netherlands, with healthy growth in savings and mortgages. Also the Wholesale banking businesses performed well in areas such as structured fi nance and lease, and ING Real Estate experienced another year of strong growth, both in profi ts and assets under management.
On top of the above, increased returns and profi table growth are also very much related to the proper execution of business fundamentals. This means offering exemplary customer service, as well as focusing on managing costs, risks and reputation, and on embedding a performance culture within ING.
ING strengthened the risk management organisation and centralised the risk function by means of creating the position of (deputy) Chief Risk Offi cer (CRO) who is responsible for managing and controlling risk on a consolidated level. These improvements further enhance the full integration of risk management in our daily business activities and strategic planning (a number of other changes are explained in the separate chapter on Risk Management).
Underlying net profit* in EUR million * Underlying net profit is defined as net profit excluding divestments and special items. ** Dutch GAAP
Growth ING’s three key growth engines continued to show strong business momentum, supported by profi table growth segments in mature markets. The life insurance business in developing markets showed strong sales, refl ected in a rise of 14.4% in the value of new business and of 31.5% in underlying pre-tax profi t, compared with 2005. Sales of US retirement services accumulation products rose 35.2% and variable annuities were up 9.8% as the US business continues to focus on meeting the needs of baby boomers as they reach retirement. ING Direct increased its underlying profi t before tax by 16.2% to EUR 717 million and showed a good operational performance in 2006. It attracted almost three million new customers and total own originated mortgages and funds entrusted rose with EUR 20 billion and EUR 14 billion, respectively. Both fi gures exclude currency effects and the divestment of Degussa Bank. Growth in mature markets is shown in our retail banking businesses, where underlying profi t before tax rose by 6.4%, especially in the Netherlands and Belgium, as well as at ING Real Estate, where profi t before tax rose by 81%.
Dividend At the Annual General Meeting of Shareholders on 24 April 2007, ING will propose a total dividend for 2006 of EUR 1.32 per (depositary receipt for an) ordinary share, up 12% from EUR 1.18 per (depositary receipt for an) ordinary share in 2005. Taking into account the interim dividend of EUR 0.59 made payable in August 2006, the fi nal dividend will amount to EUR 0.73 per (depositary receipt for an) ordinary share to be paid fully in cash. ING’s shares on Euronext will be quoted ex-dividend as of 26 April 2007 and the dividend will be made payable on 3 May 2007 (on the NYSE these dates are 23 April 2007 and 10 May 2007, respectively).
Capital ratios The debt/equity ratio of ING Group improved to 9.0% compared with 9.4% at 1 January 2006, supported by growth in capital and reserves. The capital-coverage ratio for ING Verzekeringen N.V. increased to 274% of EU regulatory requirements at the end of December, compared with 255% at 1 January 2006. The Tier-1 ratio of ING Bank N.V. stood at 7.63% at the end of 2006, up from 7.32% at 1 January 2006, as growth in capital was only partially offset by growth in risk-weighted assets. The solvency ratio (BIS ratio) for the bank improved to 11.02% at the end of December 2006 from 10.86% at 1 January 2006. Total risk-weighted assets of the banking operations increased by EUR 18.3 billion, or 5.7%, to EUR 337.9 billion at the end of December 2006. More detailed information is available in the chapter on Capital management.
CONTRIBUTION BUSINESS LINE TO 2006 UNDERLYING PROFIT BEFORE TAX* Percentage * Excludes component ‘Other’ in Banking and Insurance.
Divestments and special items Divestments resulted in a loss after tax of EUR 85 million in 2006 compared with a gain of EUR 414 million in 2005. Divested units contributed EUR 27 million to profi t after tax in 2006, up from a loss of EUR 21 million a year earlier. Special items 2005 of EUR 583 million consisted of tax provision releases and the establishment of deferred tax assets. Excluding the impact of divestments and special items, underlying net profi t increased 24.3% to EUR 7,750 million.
ING’s insurance operations continued to benefi t from strong growth in retirement services and life insurance in developing markets, higher investment results and a favourable claims environment for the non-life insurance businesses. Underlying profi t before tax from insurance rose 22.9% to EUR 4,886 million.
Our strong profi t growth in 2006 demonstrates the solid earnings capacity of ING’s well-balanced portfolio of businesses. While the interest rate environment in 2006 was challenging, particularly for our banking business, we have benefi ted from rallying equity and real estate markets, a benign credit environment, a favourable underwriting cycle in non-life insurance and lower taxes. Looking forward, risk costs and non life claims will trend gradually to more normalised levels, however we do not anticipate a signifi cant shift in the market environment over the coming period.
Embedded value and value of new business The embedded value of ING’s life insurance businesses increased 7.7% to EUR 29,714 million in 2006. Taking into account EUR 1,996 million in net dividends that were paid to ING Group, the year-end embedded value was EUR 27,718 million. Embedded value profi t, an important measure of value creation, decreased 12.1% to EUR 1,981 million as improved fi nancial performance was more than offset by lower operational performance variances and negative assumption changes. The value of new business increased slightly with 0.2% to EUR 807 million as it was negatively impacted by an increase of the discount rate to refl ect higher interest rates.
The insurance activities in Central and Rest of Europe and in Asia/ Pacifi c both generated particularly strong growth in 2006, indicating the strong future earnings potential of the businesses in both regions. New sales, measured in annual premium equivalent, rose 2.9% to EUR 6,495 million, while the internal rate of return increased to 13.3% from 13.2% in 2005. The internal rate of return in developing markets increased to 17.7% up from 17.4% as business units benefi ted from increased scale. New sales in developing markets rose 11.7%.
ING’s banking activities continued to show strong growth in savings and mortgages, which helped offset the impact of fl attening yield curves. Operating expenses were under control, while risk costs remained very low, although the fourth quarter of 2006 showed an increase as releases from old provisions diminish. Underlying profi t before tax rose 11.4% to EUR 5,072 million, driven by a 7.3% increase in income, notably from ING Real Estate and ING Direct. Interest income rose 2.6% as strong volume growth was largely offset by the impact of fl attening yield curves. Loans and advances to customers increased by EUR 34.7 billion, or 8.6%, to EUR 437.8 billion, despite the divestments of Deutsche Hypothekenbank and Degussa Bank in 2006. Growth was driven mainly by residential mortgage lending at ING Direct and the retail banking activities in the Netherlands. The total interest margin narrowed to 1.06% from 1.17% in 2005. Commission income rose 15.5%, driven by higher management fees, mainly from the investment management activities at ING Real Estate, and increased fees from the securities business, brokerage & advisory and insurance broking. Investment income was up 4.1%, while other income rose 26.8%, mainly caused by a strong increase in net trading income.
The main task of the capital management function is to monitor and manage capital adequacy for ING Bank, ING Insurance and ING Group and to execute all related capital markets transactions. The benefi ts of a centralised capital management function for ING Group are that it balances the different requirements of regulators, rating agencies and shareholders and that at the same time maximum fi nancial fl exibility is created to meet strategic objectives and to withstand stress in fi nancial markets. It contributes to an effi cient allocation and distribution of capital within the Group.
The capital position of ING was further enhanced during 2006, thanks to continued strong profi tability of the business. Also, fi nancings in the market throughout the year raised further hybrid Tier-1 and core debt for ING Group, lower Tier-2 for ING Bank and core debt for ING Insurance. Hybrid Tier-1 debt raised for ING Group is on-lent to either ING Bank or ING Insurance under the same conditions as the original instruments. Core debt is debt that is on-lent as equity to subsidiaries. ING stayed well within its key target capital ratios: a maximum of 10% core debt for ING Group, a maximum of 15% core debt Insurance and at least a 7.2% Tier-1 ratio for Bank. For ING Bank we have also set a maximum hybrid Tier-1 ratio of 25% of total Tier-1 capital. ING’s objective is to have AA ratings for ING Group, ING Bank and ING Insurance (for ING’s current ratings see the chapter Information for shareholders).
rating agencies or regulators, stress tests and developments at peers. It describes the available fi nancial instruments for capital management. Also included are a contingency plan (for good and bad circumstances) and a best estimate forecast.
In 2006, Capital Management has executed the following funding transactions: For ING Groep N.V. – GBP 600 million hybrid Tier-1 capital in the U.K.
For ING Bank N.V. – EUR 1 billion lower Tier-2 capital – USD 1.25 billion fl oating rate lower Tier-2 capital into the eurodollar market – CAD 320 million lower Tier-2 capital – EUR 1 billion in 5-year fl oating rate senior bonds due 2011
For ING Verzekeringen N.V. – EUR 2 billion in 10-year fi xed rate and fl oating rate senior bonds due 2016 – USD 1 billion in 5-year and 1-month extendible fl oating rate notes.
Adjusted equity (e) 29,123 27,044 Core debt (d) 4,802 4,170 Debt/equity ratio (d/(d+e)) 14.15% 13.36% Available regulatory capital (a) 25,505 22,541 E.U. required regulatory capital (b) 9,296 8,851 Capital coverage ratio (a/b) 274% 255% Buffer for equities & real estate (c) 7,101 5,304 Internal capital coverage ratio (a/b+c) 156% 159%
The overall Group risk profi le is measured and reported to the Executive Board and Supervisory Board by means of a quarterly ‘risk dashboard’. The dashboard includes the risks in all bank and insurance lines of business and provides insights into earnings at risk (EaR) and capital at risk (CaR) measuring the potential impact on our IFRS earnings and economic value for a one-in-ten-year event. This integrated approach has been embedded into the strategic planning process and enables the Executive Board to better balance risk with short-term profi t incentives and long-term value objectives. The overall Group EaR profi le is dominated by banking activities and is mainly interest rate risk and credit risk. The Group CaR profi le is balanced between insurance and banking activities and is characterised by interest rate risk and equity risk. Of equal importance is improving awareness of compliance with legal, regulatory and other requirements to ensure that ING and its clients meet the highest standards of compliance and business ethics.
ING Bank N.V. has been in discussions with its Dutch bank regulator De Nederlandsche Bank (DNB) related to transactions involving persons in countries subject to sanctions by the EU, the United States and other authorities. These discussions prompted
as % of total outstandings Bank Insurance Bank Insurance * The table refl ects probabilities of default and does not take collateral into consideration.
Increase interest rates by 1% 8 –3,185 –68 –2,814 Decrease interest rates by 1% –1,600 1,880 –1,743 1,255
ING Bank N.V. to engage in a review regarding transactions involving sanctioned parties. In connection with this review, which is ongoing, ING Bank N.V. has been reporting to DNB and it is not possible to predict at this time the outcome thereof. ING Bank N.V. is committed to proactively addressing any issues raised by the review.
On 28 July 2006, The Offi ce of Foreign Asset Controls (OFAC) of the U.S. Department of Treasury added the Netherlands Caribbean Bank (NCB), a bank chartered in the Netherlands Antilles that is jointly owned by ING and by two entities that are Cuban nationals, to its list of Specially Designated Nationals as a Cuban national. Such designation prohibits US persons and non-US subsidiaries of US companies from dealing with NCB.
These expenses are related to investments in and improvements to compliance and customer identifi cation process and systems, including the ongoing review ING has undertaken following the discussions with DNB concerning transactions involving countries subject to sanctions.
During 2006 we continued refi ning our capital models by means of an enhancement and integration programme. The implementation of Basel II (Advanced Internal Rating Based approach), and at a later stage Solvency II support our internal models. Economic capital models have been updated with advanced concentration modelling, independent model validation and dynamics of client behaviour. The implementation of these refi nements is expected to increase economic capital for the bank. Preliminary impact calculations showed a potential increase up to 10%. It should be noted that the difference between available bank Tier-1 capital (EUR 25.8 billion) and required bank economic capital (EUR 15.9 billion) is more than suffi cient to cover this expected increase. The completion of the full enhancement and integration programme, including insurance metrics and ensuring reporting processes are effi cient, controllable and auditable, is planned for 2007.
The increase of economic capital in 2006 versus 2005 was mainly driven by an increase in Credit and Market risk. This was for the most due to the expansion of activities at ING Direct and Retail Banking. In addition, part of the risk related to real estate activities has been shifted from Business Risk to Market Risk (functional reporting line has been established).
During 2006, ING banking units have continued to implement and improve risk rating models in preparation for new regulatory requirements. This has generally led to reported improvements in the average credit quality in all lines of business in 2006. However, within Retail Banking there was a small shift downward from BBB to BB related to the introduction of improved rating models in the Benelux. The downward shift in risk ratings within Insurance Europe is the result of a re-rating exercise performed on the Dutch mortgage portfolios aligning them with the rating methodology within the Dutch banking operations. Hence, the movement in both the banking and insurance risk classes mainly represent a reclassifi cation between risk rating classes and not a deterioration of the underlying credit risk profi le.
Trading positions with interest rate exposures provided the largest contribution to the trading VaR and were the main driver of the EUR 3 million increase.
To quantify the foreign exchange (FX) risk in the non-trading book ING Bank applies FX VaR. The average consolidated FX VaR for 2006 was EUR 17 million (2005: EUR 7 million). This VaR is mainly caused by open FX positions that are deliberately taken to protect the Tier-1 ratio by aligning non-EUR denominated capital with riskweighted assets in these currencies. The increased average FX VaR was due to the increased activities of ING Direct in Australia and Canada. Consequently, open FX positions were held in the Australian and Canadian dollar to protect the Tier-1 ratio against movements in these currencies.
Signifi cant progress has been made in improving systems and reporting processes to assess the risk profi le on a market consistent basis, as well as to align credit risk methods and processes with the bank.
Actuarial and underwriting risk ING Insurance is engaged in selling life and non-life insurance products. Actuarial and underwriting risks are the risks resulting from the pricing and acceptance of insurance contracts. These risks are primarily managed through standard underwriting policies, product design requirements as set by ING’s Insurance Risk Management function, independent Product Review Processes and risk limitation related to insurance policy terms and conditions with the client. Profi t and loss volatility stemming from adverse claims in ING’s insurance portfolios is managed by setting insurance risk tolerance levels, which are reviewed annually by the Executive Board. In the case of life insurance products, these include maximum sums assured per life for mortality risk. For non-life insurance, risk tolerance levels are set by line of business (in terms of maximum sums insured per individual risk) and for fi re business also in terms of probable maximum loss limits. The losses considered to measure this probable maximum loss are those which are attributable to specifi c events (e.g. natural perils such as storms, earthquakes and fl oods). The probable maximum loss risk tolerance levels are set at a 1-in-250 return period for Canada, Mexico and the Netherlands-Belgium combined. Overall exposures and concentrations are actively managed through the purchase of external reinsurance from high creditworthy reinsurers within the credit risk policy of ING.
ING has developed a sophisticated framework for assessing, monitoring and managing operational, information and security risk. This framework was improved in 2006 with the further implementation of ING Group operational, information and security risk management policies.
The quality of risk management activities is measured by a scorecard method. The scorecards indicate the level of control within the business lines. Overall scorecard outcome showed good progress in 2006. The operational, information and security risk as well as compliance requirements were integrated in the scorecard.
• Insurance Europe is a solid profi t contributor to ING Group • Effi ciency programmes in the Netherlands are progressing • Strong value creation in Central Europe • Investing in growth through product development and setting up of new greenfi eld operations
GEOGRAPHICAL BREAKDOWN OF PREMIUM INCOME in EUR million * Bulgaria, the Czech Republic, Greece, Hungary, Poland, Romania, Russia, the Slovak Republic and Spain.
Underlying profi t before tax increased by 15.2% to EUR 2,328 million in 2006, mainly due to favourable life and non-life results in the Netherlands, favourable non-life results in Belgium and continued strong growth in Central and Rest of Europe. Underlying profi t before tax from life insurance increased by 7.1% to EUR 1,710 million, while non-life results increased by 45.8% to EUR 618 million. Total profi t before tax increased by 16.3% to EUR 2,362 million.
The value of new business (VNB) decreased by 3.1% to EUR 219 million, caused by declines in the Netherlands (–21%) and Belgium (–47%), as a result of margin pressure, higher discount rates and the new commission agreement with ING Bank Belgium. This decline was largely offset by strong value creation in Central and Rest of Europe (+32%) due to higher sales, especially in Poland, Hungary and Spain. The internal rate of return (IRR) increased to 14.9% from 14.6%, entirely driven by Central and Rest of Europe after strong sales at signifi cantly higher IRRs.
The embedded value of the life insurance activities of Insurance Europe increased 7.9% to EUR 16,103 million, driven by EUR 219 million in new business production as well as favourable equity returns and pension performance.
Country developments Underlying profi t before tax in the Netherlands increased by 20% to EUR 1,911 million, due to lower expenses and favourable investment results combined with a favourable non-life claims experience as well as higher provision releases.
Within this general strategic direction, the specifi c strategies of individual insurance companies have been tailored to the maturity of the markets in which they operate. So in the mature markets of for instance the Netherlands, with moderate growth, the emphasis lies on improving effi ciency and optimising distribution channels. Whereas in the fast-growing markets of Central Europe, the focus is on accelerating growth, primarily by growing the existing business while simultaneously investing in future growth by setting up new greenfi eld operations.
As for the other insurance businesses in the Netherlands, RVS managed to create value in a mature and competitive market, refl ected in an increase in VNB and in IRR. Strong sales in both insurance and mortgages resulted in growing market shares. These results were underpinned by the introduction of a restyled RVS logo, a new advertising campaign and continued commercial cooperation with Postbank and ING Bank. RVS also started ‘employers’ distribution’ in 2006. Offering personal fi nancial advice to employees of corporate clients of NN and ING Bank, the concept shows high sales potential. Postbank Insurance had a solid fi nancial performance, and is preparing for further growth in the years to come through an extension of its non-life product range.
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 154.
Belgium: focusing on execution In 2006, profi ts, premiums and value creation at ING Insurance Belgium decreased, mainly due to one-off factors, as mentioned earlier in this chapter. ING Insurance Belgium performed well in the pension market, also compared with competitors, refl ected in double-digit growth in sales of retirement products through brokers and direct distribution. ING Insurance Belgium continued its focus on execution. Recurring costs have remained almost fl at for three years in a row. Meanwhile, the quality of customer service increased, evidenced by continued increased client satisfaction ratings for all key processes.
In Belgium, ING aims to further strengthen its distribution capacity through bancassurance. After a strategic review of the insurance business in Belgium, in January 2007 ING decided to concentrate its life and non-life insurance activities in two new entities which will exclusively distribute through the retail banking channels of ING in Belgium. As a result, ING intends to divest its non-strategic insurance activities.
Accelerating growth in Central Europe is the central theme for the years ahead. Key to this will be optimising the tied agency channel, while moving to multi-channel distribution and focusing more on the mid-income market segment. ING has applied for a licence for a life insurance company in Russia and expects to sell its fi rst products by mid-2007. It will also enter the voluntary pension market in Romania in 2007, when the market is expected to open. In Central Europe, ING will remain alert to opportunities to participate in pension reforms, to start more greenfi eld operations and to the possibilities for new add-on acquisitions and partnerships.
Latin America 9% 2,182 – Mexico 1,503 – South America* 679
Premium income at Insurance Americas showed continued growth in 2006, as life premium increased 6.2% to EUR 19,816 million whilst non-life premium increased 6.5% to EUR 4,302 million. Premium income in the United States grew by 5.8%, driven by fi xed and variable annuities and retirement services but partially offset by lower premium income from individual life. Life premium in Latin America grew 21.0%, following strong production in group contracts in Mexico and Chile, partly offset by lower annuity sales in Chile. Premium income in Canada grew 8.5% primarily due to the strengthening of the Canadian dollar and an increase in the number of insured risks, partially offset by lower average premium rates. Non-life premium in Latin America grew 2.9% through higher auto and health sales in Mexico and higher health premium in Chile.
Life insurance Life underlying profi t before tax rose 5.9% to EUR 1,322 million or 6.5% excluding currency impacts. In the United States, underlying profi t before tax increased EUR 57 million, or 5.0%, to EUR 1,204 million despite investment-related losses resulting largely from the rising interest rate environment. Excluding investment-related losses, underlying profi t before tax increased 12.6% to EUR 1,252 million, due to higher fee income from growth in assets under management, higher interest margins and favourable equityrelated deferred acquisition cost unlocking in 2006. Sales of annuities rose, as did retirement services products, partially helped by the sale of a number of large cases. Premium income grew by 5.8% to EUR 19,130 million. Operating expenses were virtually fl at despite the sales and portfolio growth.
• Underlying profi t stronger in the United States and Latin America but Canadian profi t impacted by weaker underwriting results
• Meeting needs of ageing baby boomers key to long-term growth in the US
Underlying profi t before tax 1,992 1,979 0.7% Total profi t before tax* 1,992 1,941 2.6% * Total profi t before tax is defi ned as profi t before tax including divestments and special items.
Value of new life business (in EUR million) 167 207 Internal rate of return 10.3% 11.1% Embedded value of life business (in EUR million) 10,272 10,858
Life underlying profi t before tax in Latin America increased 16.8% to EUR 118 million as higher results in Chile were partly offset by lower results in Mexico as the transfer war in the pension market continued in 2006. Premium income rose 21.0% to EUR 686 million. Latin America operating expenses rose 16.7% to EUR 196 million, stemming in part from an increase in sales agents and higher acquisition costs in the competitive pension business in Mexico.
The embedded value of the life insurance business in the Americas declined 5.4%, to EUR 10,272 million in 2006. Embedded value profi t tripled to EUR 546 million, substantially aided by a strong investment performance as equity markets continued to rally. The value of new business declined by 19.3% to EUR 167 million refl ecting the impact of an increase in the discount rate and assumption changes, mainly in Mexico, refl ecting the pension transfer war in 2006. It was also impacted by the requirement to hold non-economic regulatory reserves in the United States individual life business.
Non-life insurance Non-life underlying profi t before tax fell 8.3% to EUR 670 million or 13.4% excluding currency impacts in 2006, as the decline in the Canadian results more than offset higher results in Mexico and Chile. In Canada, underlying profi t before tax was EUR 604 million, 10.0% lower than record 2005 levels, due to a less favourable development in prior-year reserves and lower investment-related gains. Underlying profi t before tax in Latin America rose 10.0% to EUR 66 million compared to EUR 60 million in 2005, when earnings were affected by three hurricanes in Mexico. Premium income rose 6.5% to EUR 4,302 million or 2.3% excluding currency impacts, largely on the back of a strengthening Canadian dollar and an increase in the number of insured risks that was partially offset by lower average premium rates in Canada. Operating expenses were EUR 812 million or 9% higher, largely because of higher brokerage, premium taxes, advertising and salary and benefi ts costs in Canada.
Insurance Americas remained focused on value creation by delivering top-line growth and higher profi ts as competitive conditions prevailed. The businesses continued to pursue the growth opportunities arising from the growing number of ageing baby boomers requiring products and services that meet their retirement needs. In order to maximise this opportunity, Insurance Americas announced a major strategic realignment of its US Financial Services businesses into two major divisions of complementary businesses: US Wealth Management and US Insurance. US Wealth Management includes ING’s Retirement Services and Annuity businesses and the Advisors Network, one of the country’s largest independent broker dealers. US Insurance combines the Individual Life, Group Insurance and Reinsurance businesses, opening opportunities for collaboration in areas such as product development and risk management.
The Retirement Services and Annuity businesses, the core of US Wealth Management, continued to record strong growth, by serving the retirement savings and income needs of Americans, particularly the 77 million baby boomers. Underlying profi t before tax for these two businesses, excluding investment-related gains and currency impacts, rose 23.8% to EUR 744 million. However, it has been a challenging year for some of Insurance Americas’ other businesses. Fierce competition in Mexico’s pension business continued. The Canadian operations experienced lower profi ts compared to a strong 2005, because of a less favourable development in prior-year reserves and signifi cantly lower investment-related gains. In the United States, lower sales of individual life and the continued requirement to hold noneconomic regulatory reserves had a negative impact on overall earnings and the value of new business. Increased regulation in the United States has and will continue to have an effect on the US businesses. However, the push towards enhanced transparency brings opportunities to make ING a forerunner in improved disclosure and an easier fi nancial services company to deal with, a key brand attribute of the company. Insurance Americas will continue to build its businesses by seeking out sound long-term growth opportunities to meet customers’ fi nancial needs.
ING Canada remains the number one property & casualty insurer in Canada, and its scale and core competencies in pricing, underwriting and claims management have enabled it to continue delivering solid underwriting results, despite lower average premium rates and modest industry growth. During 2006, the number of risks insured by ING Canada continued to increase as the company’s broad distribution model allowed it to access more customers across all channels. The company also introduced a number of new products including a new accident forgiveness product, a zero deductible product as well as a customer loyalty programme offering airline reward points.
ING Investment Management Americas ING Investment Management continued to deliver strong relative investment returns across core United States fi xed-income strategies, such as Core and Core Plus and Stable Value strategies. This performance in fi xed-income strategies resulted in EUR 8.8 billion of sales to institutional and retail clients for the year. Several new products were successfully launched in 2006 including the Diversifi ed International Fund. This retail fund, which utilises ING IM’s global investment and asset allocation capabilities, had solid fi rst year sales of EUR 214 million. The ING Risk Managed Natural Resources Fund, a well-received closed-end fund raised EUR 400 million from retail investors. This unique energy and materials fund was designed by ING Investment Management to seek total return in the sector with reduced volatility and an attractive distribution yield. Over the past 18 months, ING has developed a signifi cant and differentiated brand in Senior Bank Loan products resulting in EUR 2.7 billion sales in 2006. This high quality/low volatility investment style has been successfully packaged in United States retail funds, European funds for retail and institutional clients, and in the Collateralized Loan Obligation (CLO) marketplace in the United States. ING IM is discussed in more detail in the Asset Management chapter on page 46.
The Annuity business continued to streamline its product portfolio to make its products easier to understand. Improved customer service in the administration of US Mutual Funds has dramatically improved distributor satisfaction.
Execution/operational effi ciency The US completed its fi rst full year using Six Sigma methodology to better meet customer needs and improve effi ciency. During the year, projects were completed that streamlined work processes, substantially reduced turnaround times and lifted performance levels. In the US, client account statements were redesigned and there has been further focus on improving disclosure and transparency. Mexico began its Six Sigma efforts in 2006 and has already seen improvement in its claims processing.
The passage in the United States of the Pension Protection Act of 2006 will encourage increased retirement savings and provides critical guidance to retirement services providers, employers and employees. We believe that over the long term, this legislation provides a great opportunity for ING to help people achieve secure fi nancial futures in retirement. ING’s strength in wealth management, risk management and asset management products and services, positions us well to provide the products and services people need to manage their fi nancial futures. As a result, United States Retirement Services and Retail Annuity businesses will continue to produce the greatest growth and value creation.
Insurance Asia/Pacifi c once again delivered strong results in 2006 as profi ts and assets under management grew. ING continues to pursue profi table growth in its existing markets in the region by strengthening multiple distribution channels, introducing more profi table new product offerings, expanding organisational capabilities, increasing operational effi ciency, enhancing brand awareness and achieving scale in asset management operations.
Underlying operating expenses increased 11.7% to EUR 965 million, refl ecting the increase of business volumes, the focus on building organisational capabilities, and the investments in greenfi eld operations.
Despite mostly favourable VNB developments and positive fi nancial variances, the embedded value of the life business decreased to EUR 1,343 million at the end of 2006 from EUR 1,799 million in 2005. A change in the economic assumptions of Taiwan, where interest rate forecasts have been adjusted downwards, was the main cause for this deterioration.
• Accounts for almost half of the Group’s total value of new business
• Present in the right markets to secure profi table long-term growth • Focus on strategic priorities will continue, leading to growth acceleration
Underlying profi t before tax 621 447 38.9% Total profi t before tax* 636 478 33.0% * 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) 421 372 Internal rate of return 16.8% 15.0% Embedded value of life business (EUR million) 1,343 1,799
GEOGRAPHICAL BREAKDOWN OF PREMIUM INCOME in EUR million * India, China, Hong Kong, Thailand and Malaysia
Insurance Asia/Pacifi c is one of ING’s key growth engines. At present, it has life insurance operations in 10 markets and asset management activities in 12 markets in the region. ING commands leading positions in the mature and larger markets of Australia and New Zealand, Japan, Hong Kong, South Korea and Taiwan, and is well positioned for future growth in the large and medium-sized developing markets of China, India, Malaysia and Thailand. As a sign of ING’s commitment to the Asia/Pacifi c region, capital generated from the region is reinvested into further growth opportunities there.
Country developments In Australia and New Zealand, underlying profi t before tax decreased 5.8% to EUR 161 million, mainly due to repatriated capital causing lower investment earnings on loans. Premium income growth was driven by the success of the ‘OneCare’ product launched in the fourth quarter of 2005. Operating expenses decreased 4.0%.
In South Korea, underlying profi t before tax increased 44.5% to EUR 263 million refl ecting continued strong sales. Premium income rose 41.5%, driven by sales of variable and universal life products as well as continued high persistency on existing contracts.
As in 2005, ING recorded zero profi t for Taiwan in 2006 due to further measures taken to strengthen reserves in what continues to be a low interest rate environment. A total charge of EUR 182 million was taken in 2006 to strengthen reserves, compared with EUR 220 million in 2005. VNB increased by 44.9% to EUR 155 million from EUR 107 million in the previous year due to sales of higher-margin products in 2006.
Strengthening multiple distribution channels ING sells its life insurance products in the Asia/Pacifi c region via tied agents, banks, securities houses and alternative channels. Tied agents contribute the majority of the life insurance sales. ING continually works on broadening its distribution methods and increasing the effi ciency of existing channels.
Alongside bank distribution and tied agents, ING continues to explore innovative alternative channels. In South Korea, for example, selling insurance via a television programme on a home shopping channel has proved to be successful and in Australia, direct online sales of simple life insurance products has also shown positive results.
In line with customers’ preferences, the design of products is also shifting towards simpler and channel-specifi c products. For example, in 2006, ING Australia became number one in new retail life risk sales because of the popular ‘OneCare’ risk product. ‘OneCare’ is a simple and fl exible retail risk product which allows clients to tailor insurance for all family members and businesses under a single policy. The product’s success led to a 70% increase in sales compared with 2005.
Expanding organisational capabilities Building and improving organisational capabilities has been an absolute priority in 2006, with a particular focus on recruitment, management development and training. Along with the tremendous economic growth in Asia, the demand for talent is huge. Human resources is another priority, and ING is investing in developing a pool of talented managers and improving and broadening long-term incentive programmes to retain talent.
Enhancing brand awareness As a major international brand, ING is well established in several Asia/Pacifi c markets, especially Australia, Hong Kong, South Korea, Malaysia, New Zealand and Taiwan. Elsewhere, more marketing and branding activities are needed to increase brand awareness. ING has developed a more consistent branding strategy in this region with more aligned brand spending to support sales. The sponsorships of the Asian Football Confederation’s Asian Cup 2007 and the ING Renault Formula One team, with accompanying on-track hoardings for the races in the region, are expected to enhance brand awareness for ING.
In 2006, Wholesale Banking did well in a challenging business climate by focusing on clients’ interests, capitalising on cross-selling opportunities and managing for greater value. The organisation continued to invest selectively to ensure future growth through expansion of its existing capabilities in higher value-added products. Wholesale Banking was able to focus on its core businesses by optimising the allocation of capital and through the sale of Williams de Broë and Deutsche Hypothekenbank. ING also sought out opportunities for profi table growth and closed landmark deals that met the Group’s overall risk appetite.
Wholesale Banking achieved good results in 2006 with valueadded businesses delivering profi table growth despite a diffi cult business climate. Underlying profi t grew, as strong income growth more than offset higher expenses. The organisation services its mid-corporate, corporate and fi nancial institution clients through six units: General Lending and Payments and Cash Management; Structured Finance; Leasing and Factoring; Financial Markets; Other Wholesale Products, such as Corporate Finance and Equity Markets; and ING Real Estate.
Underlying profi t before tax from Wholesale Banking increased 9.8% to EUR 2,525 million, driven by higher profi ts in General Lending and Payments and Cash Management, Leasing and Factoring, as well as in ING Real Estate. Structured Finance continued to perform strongly. Underlying profi t before tax from Financial Markets declined to EUR 509 million from a very strong EUR 665 million in 2005. Despite the decline in profi t, Financial Markets remains one of the biggest generators of profi t within the Wholesale Banking line of business.
Additions to loan-loss provisions –121 –127 Underlying profi t before tax 2,525 2,299 9.8% Total profi t before tax** 2,481 2,599 –4.5% * These numbers include the result from ING Real Estate which reports to Wholesale Banking. ING Real Estate is discussed in detail in the chapter on Asset management together with ING Investment Management.
Underlying after-tax RAROC 20.6% 17.3% Underlying economic capital (EUR billion) 8.1 8.3
In 2006, ING sold Williams de Broë and Deutsche Hypothekenbank in order to focus on its core business. Including the impact of divestments in both years, total profi t before tax declined 4.5% to EUR 2,481 million.
Total underlying income rose 7.4% to EUR 5,804 million driven by a 40.2% increase at ING Real Estate. Underlying operating expenses remained under control, rising 5.1% to EUR 3,400 million, due to non-recurring costs items such as compliance. The underlying cost/income ratio improved to 58.6% from 59.8% in 2005.
The underlying after-tax Risk-Adjusted Return On Capital (RAROC) from Wholesale Banking improved to 20.6% from 17.3% in 2005, supported by higher returns from ING Real Estate and a EUR 184 million reduction in economic capital to EUR 8.1 billion. The underlying pre-tax RAROC of wholesale-banking activities in the Netherlands declined to 17.7% due to lower Financial Markets returns, while the return in Belgium improved to 28.0%. The pretax RAROC in Rest of the World improved to 16.7% from 14.5%.
The value of the portfolio of ING Real Estate, the world’s largest real estate investment manager by assets under management, increased by 29.8% to EUR 90.7 billion, driven by strong investor demand for property funds as well as the takeover of Summit Real Estate Investment Trust in Canada. Underlying profi t before tax from ING Real Estate rose 81% to EUR 631 million. Development turned to a profi t of EUR 112 million from a loss of EUR 124 million in the previous year, in part due to gains on the sale of development projects in the Netherlands, US and Spain. Profi t before tax of the Investment Management activities rose by 57.5% to EUR 137 million. The pre-tax RAROC of ING Real Estate rose sharply to 58.6% from 27.5% in 2005. ING Real Estate activities are discussed in greater detail in the chapter on Asset management on page 46.
ING offers wholesale banking services through an international network spanning more than 40 countries. In the Netherlands and Belgium, ING makes available a full range of products, from cash management to acquisition fi nance for companies and institutions. There is also a strong client base in other countries across Europe, especially in Poland and Romania. ING has a more selective and focused client and product approach in the other countries in which it operates.
Regulation and compliance ING capitalises on changes in the regulatory environment. Wholesale Banking made good progress in implementing the Group compliance policy in all regions.
Investing for growth ING has been reallocating capital and investing selectively in order to secure and grow the revenue base. Capital was freed up from a number of underperforming business units.
Priorities have been further identifi ed that will help the development and growth of ING to retain and gain competitive edges in an increasingly competitive market. The focus on client relationships will be further increased to ensure that our resources and attention are dedicated to the most relevant products, services and deals that will generate the best returns. We will also seek to invest for profi table growth, to continually improve our business support functions, especially compliance and risk management, and to strive to fi nd new ways to maximise value creation.
Total income 6,002 5,734 4.7% Operating expenses 3,930 3,829 2.6% Additions to loan-loss provisions 140 90 Underlying profi t before tax 1,932 1,815 6.4% Total profi t before tax* 1,932 1,877 2.9% * Total profi t before tax is defi ned as profi t before tax including divestments and special items.
Underlying after-tax RAROC 32.5% 34.1% Underlying economic capital (EUR billion) 4.1 3.4
Netherlands 1,410 Belgium 478 Poland 49 Business units in other countries* –5 Total 1,932 * Mainly ING Vysya Bank, Private Banking rest of the world, and the Kookmin Bank and Bank of Beijing.
Underlying profi t before tax from Retail Banking rose 6.4% to EUR 1,932 million, driven by strong growth in most products, though partly offset by the impact of fl attening yield curves. The increase in total profi t before tax was 2.9%, as total profi t in 2005 included EUR 62 million from the gain on the sale of a 12.8% stake in ING Bank Slaski in Poland.
Expenses were well under control in 2006. Underlying operating expenses increased 2.6% to EUR 3,930 million in spite of EUR 85 million in compliance related costs and continued investments in Poland, India and Romania. The underlying cost/income ratio improved from 66.8% to 65.5%.
In Belgium, underlying profi t before tax rose 41.8% to EUR 478 million, driven by 9.7% higher income and 2.6% lower expenses, partly offset by EUR 26 million higher risk costs due to lower releases. The increase in income was – next to a EUR 44 million capital gain on Banksys – mainly driven by higher volumes and increased fees from securities brokerage, insurance broking and asset management, mitigated by a fl attening of the yield curve and higher client rates on savings. Operating expenses declined 2.6%, due to the reclassifi cation of payment expenses and some small divestments in 2005. Risk costs increased from a net release of eight basis points of average credit-risk-weighted assets in 2005 to a net addition of eight basis points in 2006.
In 2006, ING Bank Slaski achieved growth in local-currency mortgages, savings and current accounts. There was also strong growth in mutual funds sales. Total underlying income rose 20.4%, partly offset by 12.7% higher expenses, including investments in the branch network, and lower releases from the loan-loss provisions.
ING Private Banking continued to grow rapidly in 2006, benefi ting from continued private wealth creation worldwide and the consequent increase in demand for private banking services. Assets under management increased 16.8% to EUR 59.2 billion, while underlying profi t before tax, which is included in the regional results, grew by 15.8% to EUR 242 million. The strong growth in 2006 came mainly from Belgium and Asia.
The Netherlands In the Netherlands, Postbank exemplifi es a drive to simplifying processes and meeting customer needs. Underpinning this approach is the internet. With 2.7 million online customers and almost one million page views a day, Postbank is the country’s leading internet bank and fourth most visited site in the Netherlands. In 2006, internet sales increased by 30%. Internet accounted for nearly 50% of Postbank sales (excluding mortgages).
A real customer-centric initiative is the introduction of Loyalty Points – a savings programme that gives discounts on articles in its online shop. This initiative helped to increase Postbank’s market share in the savings market. Postbank also launched a legal valuation and estate agency service, which offers customers one-stop shopping when buying a house, helping them to get the best price. In December 2006, Postbank introduced Samen Beleggen, an innovative investment product which offers monthly online professional investment advice.
All these efforts paid off: Postbank has, yet again, the highest customer satisfaction levels in the Dutch market and another major survey of TNS NIPO, a market research company in the Benelux, found Postbank the best Dutch bank in terms of trustworthiness and delivering quality. Among Postbank’s many awards were the Nationale Thuiswinkel (best homeshop) Award for the second year running and an award for its original advertising campaigns.
ING Bank has also been focusing on improving customer satisfaction. Examples include the launch of a call centre for private banking customers that offers personal fi nancial assistance. In 2006, ING Bank further expanded its branch network with new franchise offi ces where specialists give customers personal advice and can also visit clients at home. We also improved customer centricity in the small and medium-sized enterprise (SME) segment with services such as Startersscan, which offers tailored advice and products to small and medium-sized enterprises based on their stage of development.
Sales effectiveness has been improved by introducing Small Business Facilities (SBF). This simplifi ed credit approval process – a model Postbank also uses and which is to be launched in Belgium – speeds up approvals and thus improves sales effectiveness. Thanks to SBF, Postbank credit balances for small businesses increased six-fold in three years to EUR 765 million at the end of 2006. ING Bank has succeeded in strengthening customer loyalty with the Plusprogramme – a programme that rewards customers when they buy more ING Bank products.
Belgium In Belgium, ING is amongst the key players with ING Belgium and Record Bank. In 2006, Record Bank further integrated Eural Bank, which was acquired in 2005. Record Bank now is the third largest savings bank in Belgium. ING has once again been very successful in attracting new customers in Belgium, with more than 50,000 new private clients and professional customers added to the client base of ING Belgium.
The users of on-line Home’Bank, continued to increase substantially. Currently, 50% of the customers in Belgium use the internet banking service. The automated branch network, Self’Bank, continued its gradual installation of cash-in/cash-out machines, allowing euro banknotes to be deposited, counted and immediately credited to the account.
Improving cost effi ciency and quality In 2006, ING signed three key outsourcing agreements with a number of different companies to outsource several activities in the Netherlands, Belgium and Poland. The contracts have a combined value of EUR 1.3 billion and there are around 1,500 employees involved. The outsourcing activities concern delivering IT maintenance and testing activities, processing of banking and insurance documents and the provision, maintenance and support of employee PCs and telephones.
By the end of 2006, 85% of ING Bank’s and 80% of Postbank’s private customers had registered. Proxies and legal representatives and an important part of commercial clients will be registered in 2007.
In Poland, ING Bank Slaski is investing in growth by increasing its marketing efforts and expanding and modernising its distribution network. For instance, in 2006 Self’Bank franchise outlets were opened, which are self-service units where customers can carry out all their day-to-day banking.
In 2006, ING Bank Slaski had a market share of 8.9% in household deposits (making it number three in the Polish market), 1.9% in retail credits and 5.7% in funds and 10.6% in securities. The low market share in retail credits is a consequence of our very prudent approach towards hard-currency mortgages. ING Bank Slaski’s customer-centric approach has been recognised with various awards. Forbes Magazine in Poland has declared ING Bank Slaski ‘Best bank for individual clients’. The daily newspaper Gazeta Wyborcza rated the ING Bank Slaski’s Gold VISA card Poland’s best prestige credit card. In addition, ING Bank Slaski won prestigious advertising and marketing awards for both creative ideas and promotional campaigns.
The concept of self-service banking introduced in Romania in 2004 is increasingly successful and by the end of 2006 ING Romania had a 5% market share for retail deposits and a retail banking branch network of 110 Self’Bank outlets serving 274,000 clients.
ING Private Banking continued to grow rapidly in 2006, benefi ting from continued private wealth creation worldwide and the consequent increase in demand for private banking services.
Private Banking in Asia has been growing its assets under management by 34% year on year over the last fi ve years. ING Private Banking has a strong track record in advisory services in Asia and the business is well positioned to benefi t from further opportunities in the region. A wealth management survey conducted by Asiamoney in 2006 rated ING Asia Private Banking a top-fi ve player in the USD 5–10 million range.
Our strategy has been successful in 2006 and we will continue focusing on simplicity, customer centricity and cost leadership in our mature home markets, and leveraging value from our successful business models in mature markets by applying them to developing markets.
The ambition for 2007 is to continue with sustainable and profi table growth in mature markets, and to expand market share and profi t in developing markets. A lot of attention was paid to compliance, but further efforts to embed the new compliance policy fully into the organisation will be needed in 2007.
The private banking network is growing strongly. ING Private Banking plans to increase capacity over the next three years by recruiting up to 250 new client advisers around the world, with the focus on new and developing markets. In India and China, ING Private Banking will build onshore private banking operations in co-operation with ING Vysya Bank and Bank of Beijing.
The addition to the provision for loan losses declined to EUR 81 million, 23.6% less than in 2005, equivalent to 10 basis points of average credit-risk-weighted assets, down from 17 basis points in 2005.
Total income 2,396 2,119 13.1% Operating expenses 1,598 1,396 14.5% Additions to loan-loss provisions 81 106 Underlying profi t before tax 717 617 16.2% Total profi t before tax** 694 617 12.5% * Including ING Card ** Total profi t before tax is defi ned as profi t before tax including divestments and special items.
Underlying after-tax RAROC 11.6% 14.9% Underlying economic capital (EUR billion) 3.4 3.1
In its 10 years of business, ING Direct has been leading the growth of direct banking into a mass market business of substantial scale. Each consecutive year since its establishment in 1997, ING Direct has shown exemplary growth through the delivery of its effective formula: selling a limited number of simple banking products at very low costs – primarily via the internet, telephone and direct mail – to retail customers in nine major developed markets. Total funds entrusted grew to EUR 195.9 billion from EUR 188 billion a year earlier. Two core products are savings and mortgages. The strong growth in the mortgage business in 2006 further strengthened the business. At year-end 2006, 35% of savings were used to fund residential mortgages, and the ambition of 40% of savings entrusted to be used for residential mortgage lending by the end of 2008 remains well on track.
The ING Direct brand and brand attributes are guiding principles. Signifi cant marketing efforts were made to strengthen the brand position, which has also contributed to increased brand recognition of ING Group. Brand awareness remained strong in all countries.
Simplicity and transparency This principle applies across the range of products offered. The focus is on developing transparent products designed to work very simply for consumers. After savings and mortgages, this principle is now being applied to more products in order to gradually meet a broader range of customer needs. An example is the introduction of payment accounts in Spain in 2005 and the US in 2006.
Fleet of companies concept This fi nal principle allows ING Direct to ‘think global’ and ‘act local’. Each company is free to determine the order of product introduction based on its own particular market circumstances. The role of the lean head offi ce is mainly to keep strategic focus, to ensure risk is managed and to stimulate synergies between business units. Also in 2006, staff was exchanged at all levels between the business units.
Insurance policy holders 21% 127.1 Institutional clients 20% 118.3 Retail clients 17% 99.9 Private banking clients 10% 59.2
• Total assets under management grew 9.6% to EUR 600 billion • ING Investment Management benefi ted from increased cooperation between the regions • Rapid expansion for ING Real Estate • ING Private Banking profi ted from increased demand for private banking services
The asset management industry is changing, leading to new sources of growth. The restructuring of pension systems, the ageing population and new client needs are driving the demand for outcome-oriented products – products specifi cally tailored to client needs. Investments in marketing, client service and brand are expected to have considerable infl uence on net infl ows. ING’s asset managers are responding well to these trends. ING Investment Management increased the quality of its product range and captured retirement opportunities with its Life Cycle Funds. ING Real Estate attracted more investors thanks to higher investor appetite for property and ING Private Banking profi ted from increased demand for private banking services.
ING Investment Management (ING IM) is the principal asset manager of ING Group and with EUR 369 billion in assets under management at the end of 2006, one of the world’s top-25 asset managers. ING IM delivered a sound investment performance in 2006. 67% of the mutual funds assets performed above the benchmark on a three-year horizon. Compared with peer groups, 63% of ranked assets under management ended up in the fi rst or second quartile on a three-year basis. Rating agencies have assigned the highest fi ve-star rating to 13 funds and 28 funds have four stars, representing EUR 18.4 billion or 31% of rated assets. In addition, several benchmarking studies have shown ING IM to be cost-effi cient in its operations.
ING Solution Portfolios, a suite of lifecycle funds, has grown to EUR 953 million, an increase of 218% since 2005. Approximately 70% of new plan sponsors in ING’s US Retirement Services 401K business are adopting lifecycle funds as an investment option for their plan participants. As a result, 30% of their total plan assets are held in lifecycle funds indicating solid participant utilisation.
ING IM Asia/Pacifi c showed strong local fund performance across all asset classes. Global and regional strategies and products were leveraged for multi-country roll-out and distribution. Examples were the Asia High Dividend strategy in Taiwan, generating infl ows of EUR 381 million, the setting up of the Cayman-based ING China A-Share Fund distributed through Asian private banks, taking in over EUR 200 million, and the launch of ING’s Global Real Estate Fund in Malaysia which has raised over EUR 50 million.
ING IM also profi ted from its strong global proprietary business, which provides scale and growth opportunities to leverage into third-party business. The trend towards open architectures has created more opportunities and has resulted in ING IM entering into a growing number of strategic partnerships with other fi nancial institutions for the distribution of products around the world.
ING IM continues to develop its Alternative Assets business. It is being recognised for its capabilities in private equity and continues to build its hedge funds and funds of hedge funds businesses organically, which recently exceeded EUR 1.1 billion in assets under management. In addition, ING IM has partnered with ING Real Estate to include real-estate products as part of a full alternative product offering. ING is leveraging ING IM’s alternative assetmanagement capabilities in the US for general account investment programmes, which include private equity and funds of hedge funds. ING IM’s private equity capabilities, through Pomona Capital, manages almost EUR 3.0 billion in commitments. Pomona’s primary funds of funds business continued to grow in 2006 with the addition of investment programmes for ING IM US and ING IM Asia Pacifi c.
Europe ING IM Europe’s strategy is three-fold: to continue being an assetmanagement portal for our affi liate clients; to increase our mutual fund sales through third-party distribution channels; and to continue to show our strength in institutional business. To succeed, we focus on investment performance, broader distribution beyond affi liated channels, best-in-class products and services, and increased visibility worldwide. This focus and our increased thirdparty efforts resulted in solid growth in our international fund range, based in Luxembourg, in 2006. In Europe, our strength in equities is particularly noticeable in our speciality product offerings, with the global distribution of our high-dividend strategies being a clear example. Specifi cally, our enhanced ties with ING Direct Italy resulted in clear sales successes of these products in Italy.
The performance in fi xed income was good, particularly in products such as Emerging Market Debt strategies which delivered strong infl ows of EUR 1.5 billion. Our distribution network was further expanded by opening an offi ce in Frankfurt to bring ING IM’s investment solutions to the German market. ING IM is very committed to our Central Europe presence with offi ces in Warsaw, Prague and Budapest. This extensive cooperation resulted in good sales growth in the region with Poland accounting for sales of EUR 1.2 billion of ING IM product, with the bulk coming from the distribution of retail funds by our affi liated channels (like ING Bank Slaski). Besides strong results from our offi ces in Central Europe we also increased our sales in the region through third parties. In the Dutch institutional market, ING IM launched the Fiducional Investments and Services offering: a one-stop shop with a customised full-service offering to institutional clients. Mijnpensioen.ingim.nl, a user-friendly fl exible Dutch internet platform incorporating our lifecycle fund proposition, was successfully launched to capture the opportunities in the retirement market.
Ambitions Our global ambition is to be a top-tier global asset manager, leveraging our regional investment manufacturing strengths across our global distribution channels. Initiatives in 2007 will be focused on delivering sustainable continued investment performance, enhancing distribution power and introducing innovative products and service concepts to meet client needs.
The global real estate securities business doubled from EUR 7.5 billion to EUR 15 billion assets under management.
ING Real Estate Investment Management and the corporate fi nance business of ING Wholesale Banking formed a joint venture called ING Real Estate Capital Advisors to capitalise on the growing demand for specialised real estate investment banking services.
ING Real Estate Finance The objective of the Finance division is to grow steadily and further diversify, both product-wise and geographically.
ING Real Estate Development The Development division prioritises controlled expansion in Europe as a multi-disciplinary developer with strong capabilities in area redevelopment.
The Development division returned to profi t on the back of a string of project sales, of which the 52-storey New York Times Tower project in New York was the largest. Several shopping centres in Spain, Germany and the UK were completed. The division received several prestigious industry awards, including the ‘European Retail Developer of the Year’ award.
ING Private Banking continued to grow rapidly in 2006 despite fi erce competition, benefi ting from continued private wealth creation worldwide and the consequent increased demand for private banking services. Assets under management increased 16.8% to EUR 59.2 billion, while profi t before tax grew by 15.8% to EUR 242 million.
ING set out a new strategy in 2004, since when many human resources initiatives have been launched across the organisation. These initiatives have taken root and results so far have been positive. We continue to invest in human capital to realise fully the potential of employees and to enhance corporate performance. If we want to remain successful as a business we have to continue creating value for customers and shareholders. It is our employees who make this happen. They are our single most valuable commodity driving the business forward.
ING continued with its strategy of enabling staff to drive business performance. We also synchronised the human resources agenda with the business agenda and business lines take responsibility for implementing human resources practices that directly contribute to achieving business goals. Human Resources plays a key role in measuring performance and engagement levels throughout the company and is helping the different business units follow up with several change and improvement programmes.
Practices for distinguishing between high and low performers are spreading rapidly throughout the different businesses and regions. Based on best practices from several business lines, global performance management principles have been developed. Those principles are aimed to raise the bar on how we set and measure our performance objectives and provide feedback. Moreover they increase the emphasis on variable compensation for senior executives, through long and short-term incentives. While our compensation package remains in line with the market, these principles allow us to be more fl exible and transparent in how we link performance to compensation.
2005) and outsourcing (1,480 employees in 2006). The overall number of employees rose to 119,801 owing to the increasing growth of our business. ING does its utmost to support those affected by effi ciency programmes. In said cases either severance pay schemes or collective labour agreements apply and we observe local laws and regulations. In the case of outsourcing, for example in the Benelux countries, ING ensures a smooth transfer for staff changing employment from ING to the outsourcing company.
Recruitment We introduced and rolled out the ING Global Employer Brand. This aims to give the company a stronger brand image in the international talent market and explains what leaders we need in the future and the benefi ts of working for ING. We also enhanced our graduate recruitment strategies, intensifying contacts with universities and graduates worldwide; our short-term focus here is on India, the US, Poland, Belgium and the Netherlands.
Talent management Reinforcing ING’s management and building strong leaders at all business levels is a focal area of ING. We enhanced our leadership by raising the bar on compliance and the ability to energise, decide and execute; criteria against which we screen and evaluate senior leaders.
ING launched its fi rst International Graduate Programme – a talent development programme for young, recently hired graduates with leadership potential. The aim is to build a network and pool of future leaders. This network will be monitored, coached and supported by the ING Leadership Pipeline programme, a series of programmes from the ING Business School (IBS) to build better leaders at all levels across the globe. Moreover, they are included in Action Learning Groups, in which they form task teams to focus on concrete business projects and come up with meaningful business solutions.
Talent management is one of the drivers of ‘right person, right job, right time’. We continued our annual talent review cycle and implemented succession planning for our top-200 positions. This involves regular reviews of our leaders by the Executive Board. Throughout the company leaders are increasingly moving across regions and business lines, accelerating the sharing and distribution of best practices.
The Diversity Mentoring Programme, which will be extended to 100 mentors in 2007, is a cross-business-line programme that supports the mentoring of talented staff by Executive Board and top-200 members with a different background from the person they mentor. Different internal staff minority networks are increasingly active and effective in promoting the recruitment and development of people from diverse backgrounds. ING is also involved in employee exchange programmes with other companies. Graduates from top Indian universities will also participate in a special talent programme at ING.
ING’s efforts on diversity are paying off: ING has won the 2006 Diversity Award in the Netherlands because of its pioneering role, persistence and consistency in policy.
We aim to enhance international mobility among our staff. We now have an assignment policy in place to better match the needs of the business and employees and reduce related cost, for example by increasing the number of short-term assignments. This has proven especially effective in Insurance Asia/Pacifi c and Central Europe.
ING has continued to roll out initiatives to enhance employee performance and the results have been very positive. We will continue to strengthen our human resources initiatives and focus even more sharply on performance. All initiatives must closely align to business needs and all short-term achievements contribute to long-term strategy. Improving our performance culture is very much the focus in managing our human resources.
A process of streamlining the brand architecture, so that all ING businesses around the world increasingly come under the single ING brand, has been underway for some years. Marketing and advertising campaigns will continue to be developed by individual business lines at the local level. As well, ING will commence rolling out a global branding campaign, a fi rst for the company.
This streamlining process will also involve business units adopting a more consistent visual identity that features the ING lion logo.
Furthermore, the objective of campaigns is to not simply raise brand awareness, but to increase people’s understanding of what ING does and what the ING brand stands for.
Extensive research showed F1 to be ING’s best platform for a global brand campaign. F1 has huge reach, with high quality, year-long global viewing fi gures exceeding 850 million live viewers. Grand Prix races take place in 17 countries, of which ING is active in 15. The sponsorship will strengthen ING’s presence in key markets, and help the company reach new ones.
• Performance against brand attributes embedded in business planning cycle • Process of streamlining brand architecture continues • ING launches fi rst-ever global brand campaign with Formula One sponsorship
As a follow-up to this stakeholder dialogue, ING has adopted the requirements of the core conventions of the International Labour Organisation (ILO). The support of the 1948 Universal Declaration of Human Rights (UDHR) was already implemented in one of our core Business Principles. Following that, ING issued a Human Rights Statement which is an elaboration of our existing Principle on the labour rights of our employees. The ING Business Principles guide us in all we do.
‘Pick Ur Advisor’ – a web site that allows customers in India to choose their preferred adviser – is an example of how we provide user-friendly information. Customers can also communicate with their adviser by setting up their own private blog (web log). This initiative is part of our efforts to enhance fi nancial literacy, particularly important with increased access to our products in developing countries.
ING wants to improve access to fi nancial products and services for small businesses and private individuals. And we feel a special responsibility towards people in developing countries. Microfi nance enables people to build up a business and provide better care for their families. ING has a great deal of expertise in the development and marketing of fi nancial and insurance services and is happy to share this expertise. Through our partners, microfi nance institutions can turn to us for technical and management support. Microfi nance also offers new market opportunities with respect to investment, wholesale and retail banking. ING Green Finance issues loans to microfi nance institutions. In India, ING Vysya’s rural offi ces issue credit and savings products to women and provide wholesale credit to microfi nance institutions. At year-end 2006, some 112,000 customers had received loans with a total value of EUR 56,6 million.
ING’s global voting policy governs how ING exercises all its voting rights at shareholders’ meetings for third-party and proprietary assets worldwide. The policy outlines key principles and is intended to provide a framework for ING’s individual asset management units to draw up more detailed voting procedures that conform with the regulations and standards of the countries in which they operate.
Following ING Investment Management’s 2005 policy regarding the defence industry, the annual screening was carried out again in 2006 of companies directly involved in controversial weapons, resulting in several companies being removed from ING IM’s proprietary portfolio.
ING Chances for Children is a company-wide programme aimed at giving children in Brazil, Ethiopia and India access to primary education. In 2006, we raised enough funds for some 52,000 children’s education for one year. As a result of this success,
RVS, a Dutch-based ING insurance label, organises pension meetings for women in the comfort of their home. Many Dutch women lack proper pensions. They depend on their partner and misjudge the impact of part-time work or divorce on their fi nancial future. During the meeting the RVS advisor gives a crash course on pensions.
ING is also committed to sustainable retirement solutions, an issue increasingly important worldwide. We advise several governments on pension reform and help them develop their pension systems. We also seek co-operation within the fi nancial industry to share expertise and promote initiatives that increase private pension provision, such as our research partnership with the World Bank and OECD on privatised pension systems in developing and transitional economies. The results of the partnership’s fi rst project, ‘Financial performance of private pension funds’, are expected to be published late 2007.
Financial services providers are increasingly held accountable for the actions of their corporate clients. We use Environmental and Social Risk Policies (formerly known as CSR Statements) in wholesale banking to ensure that companies that request fi nancing are not involved in areas incompatible with ING’s environmental, social or ethical values.
ING screens, for example, credit proposals to ensure fi nancing is compatible with our Business Principles. A key part of our policies is the revised Equator Principles, a fi nancial industry benchmark for managing environmental and social risk in project fi nance. The Equator Principles now apply to all project fi nancings over USD 10 million (previous threshold USD 50 million).
ING will continue to further strengthen the corporate responsibility strategy, for example, through presentations about CR at the ING Business School and the Wholesale Banking induction programme for new recruits, and in 2007 internal communications will also be enhanced. We will seek to expand an international network of colleagues involved in CR or community development. We remain focused on responsible business practices, facilitating the further embedding of CR within business units, and the environmental impact of our business operations. We will promote the roll-out of advanced community development programmes and further strengthening of stakeholder engagement.
The Supervisory Board met eight times during the year. All members attended at least seven of the eight meetings, most of them attended all meetings. Attendance at the committee meetings was at the same high level. The Audit Committee held six meetings, while the Remuneration and Nomination Committee met three times and the Corporate Governance Committee twice.
In January, the fi rst ING Knowledge Day was held, a full day of presentations and discussions around important ING subjects. The aim is to give Supervisory Board members in-depth knowledge about the business lines and regulatory, risk, compliance and other issues. Risk Management gave an extensive presentation, managing for value was discussed and ING Direct presented its business model in detail.
In February, the annual fi gures were discussed, including the related audit reports of the external auditors. ING Wholesale Banking gave a presentation on its positioning and activities in the fi nancial markets. The draft agenda of the Annual General Meeting of Shareholders was discussed and approved.
In May, the fi gures for the fi rst quarter were discussed. Leadership development was discussed on the basis of a report by Group Human Resources. There is a strong focus on leadership development, from young talents to potential candidates for the Executive Board. ING Real Estate gave a presentation on its successful business model, also addressing its main challenges. The AGM was evaluated. The Supervisory Board wants to improve the level of the discussions, focusing on important themes for ING, such as its strategy, business performance, risk management, corporate governance and corporate responsibility.
The six-month results were discussed in the August meeting, also based on the verbal report on the discussions in the preceding Audit Committee meeting, as in every meeting. The management team of United States Financial Services gave a presentation about developments in life insurance and retirement services in the US, one of the most important markets for ING. Also several regulatory developments and matters in the US were discussed. The October meeting was used for presentations and discussions
Given the retirement of Mr. Maas as vice-chairman and CFO of the Executive Board after the AGM of 2007 at the age of 60, a proposal for his succession was discussed. Early in 2006 the candidacy of four new Executive Board members was confi rmed. Their compensation packages were discussed and submitted to the Supervisory Board for approval.
Corporate Governance Committee meetings The Corporate Governance Committee discussed the agenda for the Annual General Meeting of Shareholders. It reviewed an updated version of the ING Insider Regulation and discussed the updated versions of the Executive Board Charter and the Supervisory Board Charter, including updated charters for the Supervisory Board committees. There were only small changes to keep the charters aligned with international legislation and regulations. The updated charters have been published on ING’s website. The committee also discussed a report of the Dutch Authority Financial Markets (AFM) about ING’s compliance culture in the Netherlands. The Committee endorsed the conclusions of the Executive Board regarding further improvement.
Composition of the Executive Board In April 2006, Fred Hubbell, Alexander Rinnooy Kan and Hans Verkoren retired from the Executive Board. The newly appointed members were Dick Harryvan, Tom McInerney, Hans van der Noordaa and Jacques de Vaucleroy. These changes in the Executive Board were reported in the 2005 Annual Report. In 2007, Mr. Maas – vice-chairman and Chief Financial Offi cer – will reach the contractual retirement age of 60. His role as CFO includes responsibility for the fi nance and risk management functions. In the light of the strong developments in these fi elds, it will be proposed to the 2007 AGM to appoint a new CFO, responsible for the fi nance function, and a CRO, chief risk offi cer, responsible for risk management. John Hele (Canadian, 1958) and Koos Timmermans (Dutch, 1960) will be proposed for appointment to CFO and CRO, respectively. Mr. Hele was appointed deputy CFO on 1 May 2006. He joined ING in 2003. Mr. Timmermans has been working for ING since 1996. He was appointed deputy CRO also on 1 May 2006.
Information on the members of the Executive Board and the nominated members is provided on page 63–64.
on Operations/IT and Private Banking, while in November the nine-month fi gures were discussed and further discussions took place on the strategy. The charters of the Executive Board and Supervisory Board and its committees were reviewed and updated where necessary. In October, the Supervisory Board visited India to learn more about ING’s position in this rapidly developing market.
In all meetings during the year, the Executive Board updated the Supervisory Board on topical issues, such as acquisitions and new business initiatives. During internal meetings of the Supervisory Board, the Supervisory Board decided on candidates for the Executive Board and the Supervisory Board as well as on remuneration topics and the new retirement policy for the Executive Board members.
The independence and the quality of service of the external auditors were evaluated. The Audit Committee came to the conclusion that it would be more effi cient to assign the fi nancial audit of ING Groep N.V. and its subsidiaries to one single audit fi rm, instead of being shared between two fi rms. Accordingly, both Ernst & Young and KPMG will be invited to tender for the fi nancial auditing of ING Groep N.V. and all of its subsidiaries in 2007. It is the intention to shift to one external auditor in 2008, to be appointed by the Annual General Meeting of Shareholders in 2008.
Remuneration and Nomination Committee meetings The Remuneration and Nomination Committee discussed the future composition of the Supervisory Board, given the upcoming vacancies. On the basis of a shortlist of candidates, three new candidates for appointment to the Supervisory Board were selected.
There are currently no Supervisory Board members who qualify as ‘non-independent’ as defi ned in best-practice provision III.2.2 of the Dutch Corporate Governance Code. From the candidates for appointment, Mr. Hoogendoorn is considered to be not independent, because of his position with Deloitte Touche Tohmatsu until 1 June 2007 and considering the important relationship of Deloitte Touche Tohmatsu with ING. After the appointment of Mr. Hoogenboom ING is still in compliance with best-practice provision III.2.1.
Retirement of Cees Maas Following the General Meeting of Shareholders, Cees Maas will retire from the Executive Board, reaching the age of 60 in 2007. Cees Maas joined the ING Group Executive Board in 1992, one year after the merger of Nationale-Nederlanden and NMB Postbank Group. He was already involved in the merger process as a very committed member of the Supervisory Board of NMB Postbank Group. He was appointed Chief Financial Offi cer in 1996 and became vice-chairman in 2004. During his 15 years on the Board, Cees Maas paid a tremendous contribution to the development of ING, playing a key role in the large acquisitions through the years. As being responsible for the fi nance and risk functions and as the fi rst ING CFO, he brought ING’s fi nancial reporting as well as ING’s risk management to a much higher level, which are now considered as among the best in the industry. Cees Maas is a very energetic personality with a strong drive to get the ING story told, both from a fi nancial perspective and in the light of ING’s strategy. Through the years and during his previous position as Treasurer-General of the Dutch Ministry of Finance he built a truly global network of business contacts. ING benefi ted strongly from his communication and network talent. Given his experience and knowledge of both the insurance and banking business, we are very happy that he will stay connected to ING as an advisor to the Executive Board
The Supervisory Board nominates three candidates for appointment: Mr. Henk Breukink (1950, Dutch nationality, as per 24 April 2007), Mr. Peter Elverding (1948, Dutch nationality, as per 1 August 2007) and Mr. Piet Hoogendoorn (1945, Dutch nationality, as per 1 June 2007) The proposed appointments were approved by the Dutch Central Bank.
In compliance with the Dutch Corporate Governance Code In its corporate governance structure and its corporate governance practices, ING Group uses the Dutch Corporate Governance Code (Tabaksblat Code) as reference. The ING Group corporate governance structure described in the document, entitled ‘The Dutch Corporate Governance Code – ING’s implementation of the Tabaksblat Code for good corporate governance’ was approved by the General Meeting of Shareholders on 26 April 2005. As a result, ING Group is considered to be in full compliance with the Tabaksblat Code, although it does not apply all best-practice provisions of the Code in full. The document is available on the website of ING Group (www.ing.com) and has been extended with an update of ING’s implementation of the Tabaksblat Code since 2005.
– the two Executive Board members appointed before 1 January 2004 remain appointed for an indefi nite period of time and retain their agreed exit arrangements, which exceed one year’s salary (best-practice provisions II.1.1. and II.2.7), as existing contractual arrangements cannot be changed unilaterally; – existing rights for severance payments with respect to Executive Board members who are already employed by ING prior to their appointment to the Executive Board, are taken into account. As a result thereof, their exit arrangement as Executive Board member may exceed the maximum of the Code (best-practice provision II.2.7); – Executive Board members may sell shares awarded to them without fi nancial consideration within the fi ve-year retention period in order to cover the wage tax which is to be withheld over the vested award (best-practice provision II.2.3), in order to avoid that the total wage tax to be withheld in the month of vesting exceeds the gross salary payment of that month; – performance criteria for variable remuneration are being disclosed only to the extent that this information is not stockprice sensitive or competition-sensitive (best-practice provisions II.2.3, II.2.10 and II.2.11); – Executive Board members may obtain banking and insurance services from ING Group subsidiaries in the ordinary course of their business and on terms that apply to all employees. These may include services in which the granting of credit is of a subordinate nature, e.g. credit cards and overdrafts in current accounts (best-practice provisions II.2.8, II.3.2. and II.3.3). These exceptions are based on a lack of materiality; – if a Supervisory Board member would not meet the independence criteria of the Code, the Supervisory Board can make a reasoned decision that such member is still considered to be independent in order to take into account specifi c circumstances, such as the differences in duration, intensity and geographical distance in family and employment relations (best-practice provision III.2.2), in order to allow for situations of non-independence that are not material; – the legally required second candidate on a binding nomination for appointment to the Supervisory Board does not need to meet the independence criteria of the Tabaksblat Code nor the requirements of the Supervisory Board profi le (best-practice provisions III.2.2. and II.3.1), in view of the contemplated abolition of this legal requirement.; – Jan Hommen, who was appointed in the 2005 General Meeting of Shareholders as a Supervisory Board member, has more than fi ve positions as a supervisory board member with other Dutch-listed companies (best-practice provision III.3.4). He will meet the Tabaksblat requirement as of May 2007, when he will retire from the Supervisory Board of Ahold N.V.; – under special circumstances the Supervisory Board may deviate from the general rule that a member of the Supervisory Board cannot be re-appointed for more than two subsequent 4-year terms (best-practice provision III.3.5); – ING Group installed a combined Remuneration and Nomination Committee instead of a separate remuneration committee and a nomination committee (best-practice provision III.5.1); – the Remuneration and Nomination Committee is being chaired by the Chairman of the Supervisory Board (best-practice provision III.5.11) so that he can be involved in this important subject directly and in an early stage; – in case of a transaction with a family member that entails a confl ict of interests according to the Code, the Supervisory Board may decide that no confl ict of interests exists, if the relationship is based on marriage, especially if that marriage ended in confl ict (best-practice provision III.6.1), in order to allow for situations in which the family relationship is not material (anymore); – transactions with Supervisory Board members or persons holding at least 10% of the shares of ING Group in which there are signifi cant confl icting interests, will be published in the annual report, unless (i) this confl icts with the law, (ii) the confi dential, stock-price sensitive or competition-sensitive character of the transaction prevents this and/or (iii) the information is so competition-sensitive that the publication could damage the competitive position of ING Group (bestpractice provision III.6.3 and III.6.4); – Supervisory Board members may obtain banking and insurance services from ING Group subsidiaries in the ordinary course of their business and on terms that are customary in the sector. These may include services in which the granting of credit is of a subordinate nature, e.g. credit cards and overdrafts in current accounts (best-practice provisions III.7.4). These exceptions are based on a lack of materiality; – the voting rights of the Preference A shares are based on their nominal value (best-practice provision IV.1.2) as these voting rights cannot be changed unilaterally; – if a notarial report is drawn up of the General Meeting of Shareholders, shareholders will not have the opportunity to react to the minutes of the meeting (best-practice provision IV.3.8), as this would be in confl ict with the laws applicable to such notarial report.
Deviations from the Tabaksblat Code by the ING Trust Offi ce are reported in its own annual report (see page 69–70).
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).
Capital structure, shares The authorised capital of ING Group consists of ordinary shares, preference A shares, fi ve series of preference B shares and cumulative preference shares. When we refer to shares, we mean both our ordinary shares and our preference shares, unless otherwise specifi ed. Currently, only ordinary and preference A shares are issued, while a right to acquire cumulative preference shares has been granted to the ING Continuity Foundation (see page 71). Of the issued share capital 97% consists of ordinary shares and 3% of preference A shares. The purpose of the cumulative preference shares is to protect the independence, the continuity and the identity of the company
There are no restrictions for the transfer of depositary receipts pursuant to the articles of association or the conditions of administration.
ING Group is not aware of the existence of any agreement under which transfer of ordinary shares or preference A shares, or depositary receipts for such shares is restricted.
Shareholders’ structure Details of investors who have reported their interest in ING Group pursuant to the Dutch Financial Supervision Act (or the predecessor of this legislation) are shown on page 8. As at 31 December 2006, ING Group subsidiaries held an interest of 11.55% in the capital of ABN AMRO, mainly in preference shares. The interest held in the capital of Fortis was below 1%. These interests are held as investments. There are no shareholders’ or other agreements between ING Group and ABN AMRO or Fortis on the exercising of voting rights. ING Group is not aware of investors with an interest of 10% or more in ING Group.
Depositary receipts Over 99% of the issued ordinary and preference A shares are held by the ING Trust Offi ce or ‘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 board of the Trust Offi ce reports on its activities through an annual report, which has been included on pages 69–70 of this annual report.
shares may be issued; – by number: (1) 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; (2) preference B shares may be issued up to a maximum which is equal to the total number of preference B shares that is necessary to convert all outstanding ING Perpetual Securities III issued in 2004 in the amount of EUR 1 billion euros (and similar instruments that are or may be issued) into preference shares if and when required pursuant to the conditions thereof; – as regards the issue price of the preference B shares: the issue price must at least be equal to the stock price of the ordinary shares at the Amsterdam Stock Exchange; – in terms of control: resolutions by the Executive Board to
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: – 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.
The depositary receipts and the Trust Offi ce structure outlined above would prevent a small minority of shareholders, which coincidentally may form the majority in the meeting, from taking decisions purely to suit themselves in the absence of other parties at the General Meeting of Shareholders.
Candidates for appointment to the Executive Board must comply with the expertise and reliability requirements set out in the Wet fi nancieel toezicht (Dutch Financial Supervision Act).
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).
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 82). In all these cases, the company complies with the best-practice provisions of the Tabaksblat Code.
Cees Maas, vice-chairman and CFO (Born 1947, Dutch nationality, male; appointed in 1992, retirement following the 2007 General Meeting of Shareholders) After completing his degree in engineering physics and economics at the Erasmus University of Rotterdam in 1976, Cees Maas joined the Ministry of Finance of the Netherlands. From 1986 to 1992 he was Treasurer-General. In July 1992, he joined ING Group and became a member of the Executive Board. In July 1996, he was appointed Chief Financial Offi cer. He was appointed vice-chairman of the Executive Board in April 2004. The following departments directly or indirectly report to Cees Maas: Corporate Control & Finance, Capital Management, Corporate Tax, Investor Relations, Risk Management and Corporate Legal. After the 2007 General Meeting of Shareholders, he will retire from the Executive Board in accordance with the contractual retirement age of 60 years.
Eric F. Boyer de la Giroday (Born 1952, Belgian nationality, male; appointed in 2004, term expires in 2008) After completing his degree in commercial engineering at the Free University of Brussels and a Master in Business Administration at the Wharton School, University of Pennsylvania, Eric Boyer started his career with Citibank in 1978. In 1984 he joined Bank Brussels Lambert, which was acquired by ING Group in 1998, where he held various management positions in the fi elds of capital markets, treasury and corporate and investment banking. He was appointed a member of the Executive Board of ING Group in April 2004. He is responsible for Wholesale Banking and ING Real Estate.
The Supervisory Board will propose appointing two new members to the Executive Board as of the Annual General Meeting of Shareholders on 24 April 2007: John C.R. Hele (born 1958, Canadian nationality) joined ING in 2003. He has been Deputy Chief Financial Offi cer of ING Group since 2006. Prior to assuming this role, he was the General Manager and Chief Insurance Risk Offi cer responsible for global insurance risk management and also functioned as the Group Actuary.
Koos (J.V.) Timmermans (born 1960, Dutch nationality) joined ING in 1996. Since March 2006 he has been Deputy Chief Risk Offi cer of ING Group, responsible for Risk Management including credit, insurance, market and operational risks. Prior to this he was Head of Corporate Market Risk Management in ING and responsible for market risk management of the banking activities.
Function of the Supervisory Board and its committees The function of the Supervisory Board is to supervise the policy of the Executive Board and the general course of events in the company and its business, as well as to provide advice to the Executive Board. The Supervisory Board has three standing committees: the Audit Committee, the Remuneration and Nomination Committee and the Corporate Governance Committee. The organisation, powers and modus operandi of the Supervisory Board are detailed in the Supervisory Board Charter. Separate charters have been drawn up for the Audit Committee, the Remuneration and Nomination Committee and the Corporate Governance Committee. These charters are available on the ING Group website
The Audit Committee assists the Supervisory Board in monitoring the integrity of the fi nancial statements of ING Group, ING Verzekeringen N.V. and ING Bank N.V., in monitoring the compliance with legal and regulatory requirements, and in monitoring the independence and performance of ING’s internal and external auditors.
The Corporate Governance Committee assists the Supervisory Board in monitoring and evaluating the corporate governance of ING as a whole and the reporting thereon in the Annual Report and to the Annual General Meeting of Shareholders, and advises the Supervisory Board on improvements.
Profi le of members of the Supervisory Board The Supervisory Board has drawn up a profi le to be used as a basis for its composition. The 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).
Members of the Supervisory Board are permitted to hold shares and depositary receipts for shares in the company for long-term investment purposes. Details are given on page 86. Transactions by Supervisory Board members in ING Group shares and depositary receipts for shares are subject to the ING regulations for insiders. These regulations are available on the ING Group website (www. ing.com).
Cor A.J. Herkströter, chairman (Born 1937, Dutch nationality, male; appointed in 1998, term expires in 2009) Chairman of the Remuneration and Nomination Committee and the Corporate Governance Committee. Former president of Royal Dutch Petroleum Company and chairman of the Committee of Managing Directors, Royal Dutch/Shell Group. Other business activities: chairman of the Supervisory Board of Koninklijke DSM N.V. (listed company). Member of the Advisory Committee, Robert Bosch GmbH. Chairman of the Social Advisory Council, Tinbergen Institute. Emeritus Professor of International Management, University of Amsterdam. Chairman of the Advisory Committee Royal NIVRA (Netherlands Institute of Chartered Accountants). Member Committee Capital Market, Authority Financial Markets, Amsterdam.
Paul F. van der Heijden (Born 1949, Dutch nationality, male; appointed in 1995, last term expires in 2007) Appointment also on the recommendation of the Central Works Council. Member of the Remuneration & Nomination Committee and the Corporate Governance Committee. Rector Magnifi cus and President of the Executive Board of Leiden University, the Netherlands. Professor of International Law. Other business activities: Member of the Supervisory Board of NUON N.V. and Buhrmann Nederland B.V. Crown-appointed member of the Social and Economic Council of the Netherlands. President of the ILO Governing Body, Committee on Freedom of Association (United Nations).
Claus Dieter Hoffmann (Born 1942, German nationality, male; appointed in 2003, term expires in 2007) Member of the Audit Committee. Former Chief Financial 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 each of Bauerfeind AG and Jowat AG. Chairman of the Charlottenklinik Foundation (hospital). Chairman of the Board of Trustees (Vereinigung der Freunde) of Stuttgart University.
Karel Vuursteen (Born 1941, Dutch nationality, male; appointed in 2002, term expires in 2010) Former chairman of the Executive Board of Heineken N.V. Other business activities: Member of the Supervisory Board of each of Akzo Nobel 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.
Changes in the composition Paul van der Heijden will retire after the 2007 Shareholders’ Meeting as he reached the end of the third and last term of four years. Claus Dieter Hoffmann and Wim Kok will be nominated for reappointment to the Supervisory Board in the Shareholders’ meeting on 24 April 2007 after their fi rst term of four years. Mr. Kok will reach the age of 70 in 2008.
At the 2007 Shareholders’ meeting three new candidates will be proposed for appointment: Henk W. Breukink (born 1950, Dutch nationality, male), Peter A.F.W. Elverding (born 1948, Dutch nationality, male) and Piet Hoogendoorn (born 1945, Dutch nationality, male).
The proposed appointment of Henk Breukink per 24 April 2007 is based on his broad international experience in both fi nance and human resources.
From the candidates for appointment, Mr. Hoogendoorn is considered to be not independent, because of his position with Deloitte Touche Tohmatsu until 1 June 2007 and considering the important relationship of Deloitte Touche Tohmatsu with ING.
Cor Herkströter and Luella Gross Goldberg would retire from the Supervisory Board reaching the age of 70 in 2007. Both agreed to stay one more year to ensure a balanced composition of the Board.
Legal provisions Under the terms of the Dutch Act on Financial Supervision a declaration of no objection from the Dutch Minister of Finance is to be obtained by anyone wishing to obtain or hold a participating interest of at least 10% respectively in ING Group or to exercise control to this extent via a participating interest in ING Group. Similarly, on the basis of indirect change of control statutes in the various jurisdictions where subsidiaries of ING Group are operating, permission from or notifi cation to local regulatory authorities may be required for the acquisition of a substantial interest in ING Group.
Severance payments to Executive Board members The employment contracts with the members of the Executive Board provide for severance payments, which are to become due in case of termination of the contract in connection with a public bid defi ned in section 5:70 of the Dutch Financial Supervision Act. With respect to the amounts due, there is no difference whether termination of the contract would be in connection with a public bid or not.
The articles of association of ING Group may be amended pursuant to a resolution of the General Meeting of Shareholders, adopted with a majority of two thirds of the votes cast in a meeting in which two thirds of the issued share capital is present or represented. The resolution of the General Meeting of Shareholders is to be made on a proposal of the Executive Board to that effect, which proposal needs approval from the Supervisory Board.
Ernst & Young Accountants (Ernst & Young) and KPMG Accountants N.V. (KPMG) are the appointed auditors of ING Group. Ernst & Young is responsible for auditing the fi nancial statements of ING Groep N.V. and ING Verzekeringen N.V., while KPMG is responsible for the audit of the fi nancial statements of ING Bank N.V. The external auditors, Ernst & Young and KPMG, both attend the meetings of the Audit Committee.
The Supervisory Board evaluates the performance of the external auditors on an annual basis, in particular, their independence based on the fi ndings of the Executive Board and the Audit Committee. In addition to the annual evaluation, the Audit Committee and Supervisory Board will review the auditors’ performance in 2007, prior to a proposal to the General Meeting of Shareholders in 2008 for the next auditor’s appointment. The proposal will include the main conclusions of the assessment of the functioning of the external auditor.
After a maximum period of 5 years of performing audit services to ING Groep N.V. or ING Verzekeringen N.V. or ING Bank N.V., the lead audit partners of the external audit fi rms and the audit partners responsible for reviewing the audits, have to be replaced by other partners of the respective external audit fi rms. The Audit Committee makes recommendations to the Supervisory Board regarding these replacements, among others, based on an annual evaluation of the provided services. In line with this agreement, the lead audit partner of KPMG has been succeeded in 2005. The lead audit partner of Ernst & Young will be succeeded after the yearend audit 2006. The rotation of other partners of Ernst & Young and KPMG involved with the audit of the fi nancial statements of ING are subject to applicable independence legislation.
The external auditors may be questioned at the Annual General Meeting of Shareholders in relation to their statements on the truth and fairness of the annual accounts. The external auditors will therefore attend and be entitled to address this meeting.
Both Ernst & Young and KPMG may only provide audit and nonaudit services to ING Group and its subsidiaries with permission of the Audit Committee. The Audit Committee has generally preapproved certain types of audit, audit-related and non-audit services to be provided by ING’s external audit fi rms on an annual basis. Services that have not been generally pre-approved by the Audit Committee should not be provided by the external auditor or should be specifi cally pre-approved by the Audit Committee after recommendation of local management. The Audit Committee also sets the maximum annual amount that may be spent for such pre-approved services. Throughout the year the external audit fi rms and Corporate Audit Services monitor the amounts paid versus the pre-approved amounts. The external auditors provide the Audit Committee with a full overview of all services provided to ING, including related fees, supported by suffi ciently detailed information. This overview is periodically evaluated by the Audit Committee during the year.
More details on ING’s policy regarding external auditor’s independence are available on the website of ING Group (www.ing.com).
Pursuant to its Constitution, the object of the Stichting ING Aandelen (ING 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., while having regard for the interests of (i) the company itself, (ii) the enterprises carried on by the company and companies associated with it in a group and (iii) all other stakeholders in the company, such that all those interests are balanced and safeguarded as effectively as possible; b. to acquire and administer registered ordinary and preference shares for which bearer depositary receipts have been issued; c. to foster the exchange of information between the company on the one hand and the depositary receipt holders and shareholders in the company on the other; d. to promote and organise the solicitation of proxies of shareholders other than the Stichting itself and of specifi c proxies and/or voting instructions of depositary receipt holders.
The last meeting was on 4 December 2006. In this meeting attention was paid again to the composition of the Board and the current state of affairs regarding proxy voting, this included ING’s proxy solicitation efforts. Furthermore new developments in the area of corporate governance were discussed and ING’s Annual General Meeting was reviewed.
Prior to its meeting on 4 December 2006 the Executive Board and Supervisory Board of ING discussed with the Trust Offi ce the company’s activities and performance over the fi rst nine months of 2006 on the basis of the press release as published on 9 November 2006.
According to its Constitution the Trust Offi ce has to vote in the interest of all depositary receipt holders, including the majority of depositary receipt holders that has not given voting instructions, while taking into account the interests of ING and other stakeholders. By doing so the Trust Offi ce promotes the execution of voting rights in a transparent way and prevents at the same time that a minority of shareholders could use a chance majority of votes to the disadvantage of those investors not present or not represented. The Board, as is customary, attended the Annual General Meeting and answered various questions. The Trust Offi ce voted in favour of all agenda items for the shares for which it had received no voting instructions.
On 31 December 2006, preference A shares representing a nominal amount of EUR 75,632,449.20 were entered into the administration, for which 63.027.041 depositary receipts with a nominal value of EUR 1.20 were issued. The preference A shares initially held by Aegon were withdrawn in July 2006.
The Trust Offi ce may consult depositary receipt holders in a separate meeting. This possibility was not made use of, also given the fact that holders of depositary receipts can attend the General Meeting of Shareholders and look after their own interests.
The contact details of Stichting ING Aandelen (ING Trust Offi ce) are: Coco C.M. van Hulten
In 2006 the Board of the Stichting met three times, namely on 30 January, 3 April and 4 December. The composition of the Board is currently as follows: Ad Timmermans (Chairman), Allard Metzelaar, Sebastian Kortmann and Wim van Vonno, who was reappointed as of 1 July 2006.
Statement of independence The Board of Stichting Continuïteit ING is of the opinion, just as the Executive Board of ING Groep N.V., that the requirements concerning the independence of the members of the Board of Stichting Continuïteit ING contained in Book II (04) of the Listing and Issuing Rules of Euronext Amsterdam N.V., Amsterdam, have been complied with.
The Executive Board is responsible for establishing and maintaining adequate internal control over fi nancial reporting. ING’s internal control over fi nancial reporting is a process designed under the supervision of our principal executive and principal fi nancial offi cers to provide reasonable assurance regarding the reliability of fi nancial reporting and the preparation of fi nancial statements for external purposes in accordance with generally accepted accounting principles.
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
The Executive Board assessed the effectiveness of our internal control over fi nancial reporting as of 31 December 2006. In making this assessment, the Executive Board performed tests based on the criteria of the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework. Based on the Executive Board’s assessment and those criteria, the Executive Board concluded that the company’s internal control over fi nancial reporting is effective as of 31 December 2006.
Our independent registered public accounting fi rm has audited and issued their report on the Executive Board’s assessment of ING’s internal control over fi nancial reporting, which appears below and which expresses an unqualifi ed opinion on the Executive Board’s assessment and on the effectiveness of our internal control over fi nancial reporting as of 31 December 2006.
Internal controls over fi nancial reporting already existed before the adoption of SOX 404. However, SOX 404 regulations require management to demonstrate the effectiveness of such controls. This implies a more formalised approach in executing our tasks. ING Group has long-established Business Principles and a strong internal-control culture, which all staff must adhere to. SOX 404 activities are organised along the lines of the governance structure, and involve the participation of senior management across ING.
In our opinion, management’s assessment that ING Groep N.V. maintained effective internal control over fi nancial reporting as of 31 December 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, ING Groep N.V. maintained, in all material respects, effective internal control over fi nancial reporting as of 31 December 2006, based on the COSO criteria.
This chapter sets out the remuneration for the Executive Board and the Supervisory Board. The remuneration policy was adopted by the Annual General Meeting of Shareholders (AGM) on 27 April 2004. In 2006, the Executive Board pension scheme was revised in alignment with the approved AGM amendment to the remuneration policy. The revised Executive Board pension scheme is described further on page 76. There were no other changes to this policy in 2006 and therefore, the approval of the AGM still applies for 2006. The chapter starts with the general policy for seniormanagement remuneration, followed by the Executive Board compensation for 2006 and the compensation structure for 2007. In addition, information is included on loans and advances to the Executive and Supervisory Board members as well as ING depositary receipts for shares held by members of both boards.
ING’s remuneration policy is based on fi ve key principles that apply across ING. These principles are: – Total compensation levels are benchmarked against relevant markets in which ING competes for talent.
Long-term incentive plan The long-term incentive plan (LTIP) at ING includes both stock options and performance shares. LTIP awards are granted to ensure alignment of senior management with the interests of shareholders, and to retain top management over a longer period of time. The LTIP awards will be granted with a total “fair value” split between stock options and performance shares. The LTI plan was tabled and approved during the General Meeting of Shareholders on 27 April 2004.
The ING stock options have a total term of ten years and a vesting period of three years. After three years, the options will only vest if the option holder is still employed by ING (or retired). The exercise price of the stock options is equal to the Euronext Amsterdam opening price of the ING depository receipts on a specifi c date during the fi rst “open period” after the General Meeting of Shareholders.
On the basis of these criteria the performance peer group is composed as follows: – Citigroup, Fortis, Lloyds TSB (bank/insurance companies); – ABN Amro, Bank of America, BNP Paribas, BSCH, Credit Suisse,
The Supervisory Board reviews the peer group before each new three-year performance period. The performance test itself will be carried out at the end of every three-year performance period by an independent third party.
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.
In line with ING’s overall remuneration policy, the Supervisory Board has focused on increasing variable (performance-driven) pay components which has resulted in a gradual convergence of the Executive Board total compensation to the European/Dutch median benchmark over a period of four years. This has been achieved by raising the target levels of both the short-term and long-term incentives. This ensures that future payouts more directly refl ect short-term and long-term performance. As a result, the mix of total target compensation (in case of at-target performance) is divided equally between each component (i.e. 1/3rd base salary, 1/3rd short-term incentives, and 1/3rd long-term incentives). This balance of variable remuneration provides the right amount of focus on both the short and long term.
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 Cees Maas and Tom McInerney. The revised pension plan does not apply to Cees Maas, who was born before 1 January 1950, thus he continues to participate in the previous Executive Board defi ned-benefi t pension scheme and Tom McInerney as he participates 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 are 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 June 1 of the year that the individual has reached or will reach the age of 65. The retirement age has been changed from previous years (age 60) as a result of the change in the Dutch tax reform.
Early in 2007, the Remuneration and Nomination Committee reviewed the actual results of ING against the 2006 targets. Over 2006, ING exceeded on average the three Group fi nancial targets set, resulting in a score of 169% of target on this component. The individual performance of the Executive Board members was on average 171%. ING’s external auditor has reviewed to which extent the objectives, both the group and the individual, have been met. The Audit Committee was involved in the review of the underlying fi nancial data.
As the Group STIP performance outcome over 2006 was 169%, the resulting LTIP award is 134.5% of target. The number of options and performance shares is determined based on a reference price set at the end of 2006 (EUR 33.83) and a ‘fair value’ calculation of options and performance shares (based on an option-pricing model).
The grant is subject to shareholder approval of the number of stock options, the maximum number of performance shares and the number of conditional shares to be granted to the Executive Board members pursuant to the 2006 LTIP. The LTIP grant table on page 80/81 shows the award amounts for each Executive Board member.
The exercise price of the options will be fi xed at the Euronext Amsterdam Stock Market opening price of the ING share on 17 May 2007. The performance shares are granted provisionally at the beginning of 2007; the fi nal number will depend on the ranking within the performance peer group after the three-year period (2007 – 2009) based on the performance/payout scale as indicated above.
Short-term performance-related bonus 1,477 945 445 Total cash compensation 2,327 1,795 1,019
Short-term performance-related bonus 1,102 705 321 Total cash compensation 1,736 1,339 749
Short-term performance-related bonus 908 1,270 855 Total cash compensation 1,464 2,390 1,976
Short-term performance-related bonus 604 705 493 Total cash compensation 974 1,339 1,127
(1) The increase in base salary for Michel Tilmant and Cees Maas refl ect a 10% increase effective April 2004, related to their promotion to chairman and vice-chairman, respectively.
(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. Thus, the fi gures for 2006 refl ect the partial year as Executive Board members.
Number of options 87,138 71,400 43,400 Number of performance shares 18,230 12,800 7,900 Fair market value of long-term incentive (2) 1,143 765 347
Number of options 0 84,700 Number of performance shares 0 15,400 Fair market value of long-term incentive (2) 1,008 678
(4) Eric Boyer de la Giroday, Eli Leenaars and Hans Verkoren were appointed to the Executive Board on 28 April 2004. The fi gures for these members refl ect compensation earned in their capacity as Executive Board members.
(5) 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.
Tom McInerney (3) (5) 297 Hans van der Noordaa (3) 170 Jacques de Vaucleroy (3) 170 Fred Hubbell (4) (5) (6) 2,282 395 462
(1) For reasons of comparison, the company pension expenses are recalculated under IAS 19 with general assumption setting for 2004 to 2006. (2) Eric Boyer de la Giroday, Eli Leenaars and Hans Verkoren were appointed to the Executive Board on 28 April 2004. The fi gures for these members refl ect pension costs in their capacity as Executive Board members. (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 pension costs in their capacity as Executive Board members.
(5) Tom McInerney’s and Fred Hubbell’s pension costs have been translated from US dollars to euros at the average exchange rate for that year. (6) Fred Hubbell’s historical annual pension valuation used the standard assumption of retirement age of 65. The US pension plan allows for early retirement beginning at age 55 with fi ve years of service. The pension cost shown is the additional IFRS cost related to the funding of US early retirement pension rights, which must be fully realised by the company in the same year he has retired.
(7) The early retirement pension benefi t is paid up until age 65 and during the early retirement benefi t period the plan provides for additional pension rights earned towards the old-age pension plan, which begins at age 65. The pension cost shown is the additional IFRS impact and cost related to the funding of Alexander Rinnooy Kan’s old-age pension rights earned during the early retirement pension period, which must be fully realised by the company in the same year he has resigned.
Pension costs of former members of the Executive Board amounted to nil in 2006 and 2005 and EUR 887 thousand in 2004.
Amount Average Amount Average Amount Average outstanding interest outstanding interest outstanding Interest 31 December rate Repayments 31 December rate Repayments 31 December rate Repayments Amounts in thousands of euros 2006 2005 2004
Eric Boyer de la Giroday 28 4.3% 3 31 4.3% 3 34 4.3% 3 Dick Harryvan 427 3.9% Hans van der Noordaa 930 4.4% Jacques de Vaucleroy 192 5.5% 17 2,023 4.3% 20 477 4.0% 3 480 4.0% 3
The table on the next page gives information on the outstanding options held by the Executive Board members.
Outstanding Waived or Outstanding as at 31 Granted Exercised expired as at 31 Exercise price Exercise price Expiry Number of options December 2005 in 2006 in 2006 in 2006 (1) December 2006 in euros in US dollars date
Policy for 2007 With regard to the remuneration policy for 2007, the Supervisory Board continues to build upon the remuneration policy initiated in 2003, which supports the performance-oriented culture. Over the past fi ve years, the Executive Boards’ total remuneration package has gradually converged to the European benchmark through increases in the short-term and long-term incentive target levels (as a percentage of base salary). The results of the market-competitive analysis indicate overall increases in the market that may put pressure on compensation levels.
Executive Board Base salary 2007 The plan is to keep base-salary levels fl at in 2007. A market-competitive analysis is conducted on an annual basis to ensure market competitiveness.
As was the case in 2006, the total LTI value in stock options and provisional performance shares to be granted to the Executive Board members will be determined by the Supervisory Board at the end of 2007, based on the achievement of the three pre-defi ned fi nancial objectives set out in the 2007 short-term incentive plan.
For the committees the remuneration was increased as follows: chairman of the Audit Committee EUR 8,000 (was EUR 1,360), members of the Audit Committee EUR 6,000 (was EUR 1,360), chairman of other Supervisory Board committees EUR 7,500 (was EUR 1,360), members of other Supervisory Board committees EUR 5,000 (was EUR 1,360). In addition to the fi xed 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.
Compensation of the members and former members of the Supervisory Board
FORMER MEMBERS OF THE SUPERVISORY BOARD Aad Jacobs(4) 17 51 49 Paul Baron de Meester (5) 16 58 57
(1) Member as of April 2004; vice-chairman as of February 2005. (2) Member since June 2005. (3) Member since April 2006. (4) Retired in April 2006. (5) Retired in April 2006. Compensation includes payment to match his former remuneration as a member of the BBL Supervisory Board.
Loans and advances to Supervisory Board members As at 31 December 2006, there were no loans and advances outstanding to members of the Supervisory Board. As at 31 December 2005 and 2004, 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 Aad Jacobs.
Cor Herkströter 1,616 1,616 1,616 Luella Gross Goldberg 6,814 6,814 6,701 Paul van der Heijden 0 0 1,716
(1) ING depositary receipt for shares of direct family included; members of the Supervisory Board (including direct family) not mentioned in this table did not hold ING shares. (2) Piet Klaver also holds 20 call options (exercise price: EUR 15.00, expiry month: December 2008).
2.1 Consolidated annual accounts amounts in millions of euros 2006 2005
Investments in associates 6 4,343 3,622 Real estate investments 7 6,974 5,031 Property and equipment 8 6,031 5,757
EQUITY Shareholders’ equity (parent) 12 38,266 36,736 Minority interests 2,949 1,689 Total equity 41,215 38,425
Consolidated balance sheet of ING Group as at 31 December before profi t appropriation
Gross underwriting expenditure 53,065 54,594 48,925 Investment income for risk of policyholders –2,702 –5,074 –2,309 Reinsurance recoveries –2,175 –2,400 –1,232 Underwriting expenditure 42 48,188 47,120 45,384 Addition to loan loss provision 5 103 88 465
References relate to the notes starting on page 162 which form an integral part of the consolidated annual accounts.
2.1 Consolidated annual accounts amounts in millions of euros 2006 2005 2004
Investments and advances – group companies –2,358 –250 –2,643 – associates –449 –858 – available-for-sale investments –295,086 –260,769 –262,293 – held-to-maturity investments –1,030 – real estate investments –1,588 –1,156 –1,169 – property and equipment –568 –540 –380 – assets subject to operating leases –1,164 –991 –950 – investments for risk of policyholders –44,116 –41,781 –34,467 – other investments –250 –164 –103 Disposals and redemptions – group companies 490 703 1,520 – associates 459 1,058 – available-for-sale investments 271,983 218,847 197,070 – held-to-maturity investments 1,343 245 – real estate investments 1,294 1,030 1,123 – property and equipment 292 483 192 – assets subject to operating leases 402 391 388 – investments for risk of policyholders 37,945 34,464 29,382
Proceeds from issuance of subordinated loans 865 1,901 1,000 Repayments of subordinated loans –600 –177 –410 Borrowed funds and debt securities 53 20,500 7,842 26 Deposits by reinsurers –180 93 309 Issuance of ordinary shares 5 114 1,037 Payments to acquire treasury shares –1,422 –303 Sales of treasury shares 373 55 Dividends paid –2,716 –2,461 –883 Net cash flow from financing activities 16,825 7,064 1,079
Cash and cash equivalents at beginning of year 3,335 11,588 7,715 Implementation IAS 32/39 692 Effect of exchange rate changes on cash and cash equivalents –385 300 –43 Cash and cash equivalents at end of year 55 –1,795 3,335 11,588
Total Share Share shareholders’ Minority Total amounts in millions of euros capital premium Reserves equity (parent) interests equity
Unrealised revaluations after taxation 717 717 29 746 Realised gains/losses transferred to profit and loss –587 –587 –587 Exchange rate differences –756 –756 –103 –859 Total amount recognised directly in equity –626 –626 –74 –700
In 2006, deferred taxes for the year with regard to unrealised revaluations amounted to EUR 1,339 million (2005: EUR 363 million). For details on deferred tax see Note 21 Other liabilities.
Reserves include Revaluation reserve of EUR 9,453 million (2005: EUR 11,206 million), Currency translation reserve of EUR –473 million (2005: EUR 668 million) and Other reserves of EUR 20,408 million (2005: EUR 15,989 million). Changes in individual components are presented in Note 12 Shareholders’ equity (parent).
For details on Implementation IAS 32/39 and IFRS 4 refer to section ‘Changes in accounting policies’.
The consolidated annual accounts of ING Groep N.V. (‘ING Group’) for the year ended 31 December 2006 were authorised for issue in accordance with a resolution of the Executive Board on 12 March 2007. 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.
ING Group applies International Financial Reporting Standards as adopted by the European Union (‘EU’).
In this document the term ‘IFRS-EU’ is used to refer to International Financial Reporting Standards as adopted by the EU including the decisions ING Group made with regard to the options available under International Financial Reporting Standards as adopted by the EU.
As permitted by IFRS-EU ING Group adopted IAS 32 and 39 and IFRS 4 for the accounting period beginning on 1 January 2005. As a result the profi t and loss account for 2004 is not directly comparable. For the accounting policies used in 2004 see section ‘Changes in accounting policies’ at the end of the ‘Accounting policies’ section.
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 in 2006 to provide additional and more relevant information. Certain comparative amounts have been reclassifi ed to conform with the current period presentation. None of the changes are signifi cant in nature.
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’.
Accounting policies for the consolidated balance sheet and profi t and loss account of ING Group
FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES Fair values of fi nancial assets and liabilities are determined using quoted market prices. Market prices are obtained from traders, brokers and independent market vendors. 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.
See Note 33 Fair value of fi nancial assets and liabilities for the basis of the determination of the fair value of the fi nancial instruments.
CONSOLIDATION ING Group (‘the Group’) comprises ING Groep N.V. (‘the Company’), ING Verzekeringen N.V., ING Bank N.V. and all other subsidiaries. The consolidated fi nancial statements of ING Group comprise the accounts of ING Groep N.V. and each of those entities in which it either owns, directly or indirectly, more than half of the voting power or over which it has control of their operating and fi nancial policies through situations including, but not limited to: – Ability to appoint or remove the majority of the board of directors; – Power to govern such policies under statute or agreement; and – Power over more than half of the voting rights through an agreement with other investors.
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 the parent company.
ANALYSIS OF INSURANCE BUSINESS Where amounts in respect of insurance business are analysed into ‘life’ and ‘non-life’, health and disability insurance business which is similar in nature to life insurance business included in ‘life’.
FOREIGN CURRENCY TRANSLATION Functional and presentation currency Items included in the fi nancial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The consolidated fi nancial statements are presented in euro, which is the Company’s functional and presentation currency.
Group companies The results and fi nancial position of all group companies that have a functional currency different from the presentation currency are translated into the presentation currency as follows: – Assets and liabilities included in each balance sheet are translated at the closing rate at the date of that balance sheet; – Income and expenses included in each profi t and loss account are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and
FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES The fair values of fi nancial instruments traded in active markets (such as publicly traded derivatives and trading and available-for-sale securities) are based on quoted market prices at the balance sheet date. The quoted market price used for fi nancial assets held by the Group is the current bid price; the quoted market price used for fi nancial liabilities is the current ask price.
The fair values of fi nancial instruments that are not traded in an active market (for example OTC derivatives) are determined using valuation techniques. The Group uses a variety of methods and makes assumptions that are based on market conditions existing at each balance sheet date.
Some credit protection contracts that take the legal form of a derivative, such as certain credit default swaps, are accounted for as fi nancial guarantees.
The method of recognising the resulting fair value gain or loss depends on whether the derivative is designated as a hedging instrument and, if so, the nature of the item being hedged. The Group designates certain derivatives as hedges of the fair value of recognised assets or liabilities or fi rm commitments (fair value hedge), hedges of highly probable future cash fl ows attributable to a recognised asset or liability or a forecast transaction (cash fl ow hedge), or hedges of a net investment in a foreign operation. Hedge accounting is used for derivatives designated in this way provided certain criteria are met.
Non-trading derivatives that do not qualify for hedge accounting Derivative instruments that are used by the Group as part of its risk management strategies but do not qualify for hedge accounting under the Group’s accounting policies are presented as non-trading derivatives. Non-trading derivatives are measured at fair value with changes in the fair value taken to the profi t and loss account.
FINANCIAL ASSETS Recognition of fi nancial assets All purchases and sales of fi nancial assets classifi ed as fair value through profi t and loss, held-to-maturity and available-for-sale that require delivery within the time frame established by regulation or market convention (‘regular way’ purchases and sales) are recognised at trade date, which is the date that the Group commits to purchase or sell the asset. Loans and receivables are recognised at settlement date, which is the date the Group receives or delivers the asset.
Derecognition of fi nancial assets Financial assets are derecognised when the rights to receive cash fl ows from the fi nancial assets have expired or where the Group has transferred substantially all risks and rewards of ownership. If the Group neither transfers nor retains substantially all the risks and rewards of ownership of a fi nancial asset, it derecognises the fi nancial asset if it no longer has control over the asset. In transfers where control over the asset is retained, the Group continues to recognise the asset to the extent of its continuing involvement. The extent of continuing involvement is determined by the extent to which the Group is exposed to changes in the value of the asset.
Realised gains and losses on investments Realised gains and losses on investments are determined as the difference between the sale proceeds and (amortised) cost. For equity securities the cost is determined using a weighted average per portfolio. For debt securities the cost is determined by specifi c identifi cation.
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.
INVESTMENTS IN ASSOCIATES Associates are all entities over which the Group has signifi cant infl uence but not control. Signifi cant infl uence generally results from a shareholding of between 20% and 50% of the voting rights, but also is the ability to participate in the fi nancial and operating policies through situations including, but not limited to the following: – Representation on the board of directors; – Participation in the policy making process; and – Interchange of managerial personnel.
The Group’s investment in associates (net of any accumulated impairment loss) includes goodwill identifi ed on acquisition. The Group’s share of its associates’ post-acquisition profi ts or losses is recognised in the profi t and loss account, and its share of post-acquisition changes in reserves is recognised in equity. The cumulative post-acquisition changes are adjusted against the carrying amount of the investment. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate.
PROPERTY AND EQUIPMENT Property in own use Land and buildings held for own use are stated at fair value at the balance sheet date. Increases in the carrying amount arising on revaluation of land and buildings held for own use are credited to the revaluation reserve in shareholders’ equity. Decreases that offset previous increases of the same asset are charged against the revaluation reserve directly in equity; all other decreases are charged to the profi t and loss account. Increases that reverse a revaluation decrease on the same asset previously recognised in net profi t are recognised in the profi t and loss account. Depreciation is recognised based on the fair value and the estimated useful life (in general 20–50 years). Depreciation is calculated on a straight-line basis. On disposal the related revaluation reserve is transferred to retained earnings.
The fair values of land and buildings are based on regular appraisals by independent qualifi ed valuers. Subsequent expenditure is included in the assets carrying amount when it is probable that future economic benefi ts associated with the item will fl ow to the Group and the cost of the item can be measured reliably.
Property held for sale Property held for sale comprises properties obtained from foreclosures and property developed for sale for which there is no specifi cally negotiated contract. These properties are stated at the lower of cost and net realisable value. Cost includes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses. Where the net realisable value is lower than the carrying amount, the impairment is recorded in the profi t and loss account.
Property under development for third parties Property under development for third parties is measured at direct construction cost incurred up to the balance sheet date, including borrowing costs incurred during construction and the Group’s own directly attributable development and supervision expenses less any impairment losses. Profi t is recognised using the completed contract method (on completion date of the property).
The Group as the lessor When assets are held subject to a fi nance lease, the present value of the lease payments is recognised as a receivable under Loans and advances to customers or Amounts due from banks. The difference between the gross receivable and the present value of the receivable is unearned lease fi nance income. Lease income is recognised over the term of the lease using the net investment method (before tax), which refl ects a constant periodic rate of return. When assets are held subject to an operating lease, the assets are included under Assets under operating leases.
Goodwill is only capitalised on acquisitions after the date of implementing IFRS-EU (1 January 2004). Accounting for acquisitions before that date has not been restated; goodwill and internally generated intangibles on those acquisitions were charged directly to shareholders’ equity. Goodwill is allocated to cash-generating units for the purpose of impairment testing. These cash-generating units represent the lowest level at which goodwill is monitored for internal management purposes. This test is performed annually or more frequently if there are indicators of impairment. Under the impairment tests, the carrying value of the cash generating units (including goodwill) is compared to its recoverable amount which is the higher of its fair value less costs to sell and its value in use.
Computer software Computer software that has been purchased or generated internally for own use is stated at cost less amortisation and any impairment losses. Amortisation is calculated on a straight-line basis over its useful life. This period will generally not exceed three years. Amortisation is included in Operating expenses.
For other types of fl exible life insurance contracts DAC is amortised over the lives of the policies in relation to the emergence of estimated gross profi ts. Amortisation is adjusted retrospectively when estimates of current or future gross profi ts, to be realised from a group of products, are revised. The estimates and the assumptions are reassessed at the end of each reporting period. For DAC on fl exible insurance contracts the approach is that in determining the estimate of future gross profi ts ING assumes the short-term and long-term separate account growth rate assumption to be the same. Higher/lower expected profi ts (e.g. refl ecting stock market performance or a change in the level of assets under management) may cause a lower/higher amortisation of DAC due to the catch-up of amortisation in previous and future years. This process is known as DAC unlocking. The impact of the DAC unlocking is recorded in the profi t and loss account of the period in which the unlocking occurs.
TAXATION Income tax on the net profi t for the year comprises current and deferred tax. Income tax is recognised in the profi t and loss account but it shall be charged or credited directly to equity if the tax relates to items that are credited or charged directly to equity.
Deferred income tax Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated fi nancial statements. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred tax assets and liabilities are not discounted.
Borrowings are recognised initially at their issue proceeds (fair value of consideration received) net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between proceeds, net of transaction costs, and the redemption value is recognised in the profi t and loss account over the period of the borrowings using the effective interest method.
Financial liabilities at fair value through profi t and loss comprise two sub-categories: fi nancial liabilities held for trading, and other fi nancial liabilities designated at fair value through profi t and loss 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.
Financial guarantee contracts are contracts that require the issuer to make specifi ed payments to reimburse the holder for a loss it incurs because a specifi ed debtor fails to make payments when due, in accordance with the terms of a debt instrument. Such fi nancial guarantees are initially recognised at fair value and subsequently measured at the higher of the discounted best estimate of the obligation under the guarantee and the amount initially recognised less cumulative amortisation to refl ect revenue recognition principles.
The as yet unamortised interest rate rebates on periodic and single premium contracts are deducted from the Provision for life insurance. Interest rate rebates granted during the year are capitalised and amortised in conformity with the anticipated recovery pattern and are recognised in the profi t and loss account.
Reinsurance contracts Reinsurance premiums, commissions and claim settlements, as well as the reinsurance element of technical provisions are accounted for in the same way as the original contracts for which the reinsurance was concluded. To the extent that the assuming reinsurers are unable to meet their obligations, the Group remains liable to its policyholders for the portion reinsured. Consequently, provisions are made for receivables on reinsurance contracts which are deemed uncollectible.
If, for any business unit, the provisions 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 provisions 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.
If the reserves are determined to be adequate at above the 90% confi dence level, no reduction in the provision is recorded.
Investment contracts Insurance policies without discretionary participation features which do not bear signifi cant insurance risk are presented as Investment contracts. Provisions for liabilities under investment contracts are determined either at amortised cost, using the effective interest method (including certain initial acquisition expenses) or at fair value.
A defi ned benefi t plan is a pension plan that defi nes an amount of pension benefi t that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation. The liability recognised in the balance sheet in respect of defi ned benefi t pension plans is the present value of the defi ned benefi t obligation at the balance sheet date less the fair value of plan assets, together with adjustments for unrecognised actuarial gains and losses, and unrecognised past service costs. The defi ned benefi t obligation is calculated annually by internal and external actuaries using the projected unit credit method.
For defi ned contribution plans, the Group pays contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis. The Group has no further payment obligations once the contributions have been paid. The contributions are recognised as staff expenses when they are due. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in the future payments is available.
Other post-retirement obligations Some group companies provide post-retirement healthcare and other benefi ts to their retirees. 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.
Reorganisation provisions include employee termination benefi ts when the Group is demonstrably committed to either terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal, or providing termination benefi ts as a result of an offer made to encourage voluntary redundancy.
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 nontrading derivatives.
EXPENSE RECOGNITION Expenses are recognised in the profi t and loss account as incurred or when a decrease in future economic benefi ts related to a decrease in an asset or an increase in a liability has arisen that can be measured reliably.
Share-based payments Share-based payment expenses are recognised as the employees provide the service. A corresponding increase in equity is recognised if the services are received in an equity-settled share-based payment transaction. A liability is recognised if the services are acquired in a cash-settled share-based payment transaction. The cost of acquiring the services is expensed as a staff expense. ING Group generally provides equity-settled share-based payment transactions. The fair value of equity-settled share-based payment transactions is measured at the grant date and the fair value of cash-settled share-based payment transactions is measured at each balance sheet date.
CHANGES IN ACCOUNTING POLICIES ING Group applies IFRS as adopted by the EU as of 2005. The 2004 comparatives have been restated to comply with IFRS-EU. However, as permitted by IFRS 1, ING Group has not restated the 2004 comparatives for the impact of IAS 32, IAS 39 and IFRS 4. Accordingly, comparative information for 2004 with respect to fi nancial instruments and insurance contracts is prepared under ING Group’s previous accounting policies (Dutch GAAP).
The key differences between the former accounting policies under Dutch GAAP and IFRS-EU as applied as from 1 January 2005 for fi nancial instruments and insurance contracts and their transitional impact on equity as at 1 January 2005 are summarised below.
Impact of IAS32/39 and IFRS 4 amounts in millions of euros
Where deferred acquisition costs are amortised over the lives of policies in relation to the emergence of estimated gross profi ts, under IFRS-EU the amortisation is adjusted through equity to refl ect changes that would have been necessary if unrealised investment gains and losses had been realised.
Loans and advances to customers Under both Dutch GAAP and IFRS-EU loans are measured at amortised cost. Under IFRS-EU, certain fees/costs are capitalised and amortised whilst under Dutch GAAP they were expensed immediately (e.g. mortgage broker fees). The amortisation of premiums, discounts and fees under IFRS-EU is based on effective yield whereas under Dutch GAAP these were amortised on a straight-line basis. Under IFRS-EU, realised results are reported in net profi t. Under Dutch GAAP these were amortised over the remaining term (e.g. certain prepayment penalties on mortgages).
Loan loss provisions Under IFRS-EU loan loss provisions are determined under a revised methodology based on a narrow interpretation of an incurred loss model. The application of the IFRS-EU methodology has reduced the amount of the unallocated provision for loan losses that ING Group provided in prior years to adequately capture various subjective and judgemental aspects of credit risk assessment which were not considered on an individual basis.
Venture capital investments Under Dutch GAAP, venture capital investments were reported at the lower of cost or fair value. Under IFRS-EU, venture capital investments are reported at fair value.
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 for the profi t before tax and is shown separately in the cash fl ow statement.
Accounting policies for the consolidated statement of cash fl ows of ING Group
Amounts held at central banks 10,511 9,479 Cash and bank balances 3,563 3,498 Short term deposits insurance operations 252 107 2 AMOUNTS DUE FROM BANKS
Amounts due from banks, at 31 December 2006, included receivables with regard to securities which have been acquired in reverse repurchase transactions amounting to EUR 2,249 million (2005: EUR 7,738 million).
The cost of investments for risk of policyholders as at 31 December 2006 was EUR 98,863 million (2005: EUR 88,748 million).
Investments in investment funds (with underlying investments in debt, equity securities and real estate and derivatives) are included under equity securities.
Available-for-sale – equity securities 18,225 16,466 – debt securities 275,696 289,241
The fair value of the securities classifi ed as held-to-maturity amounts to EUR 17,494 million at 31 December 2006 (2005: EUR 19,466 million).
Borrowed equity securities and convertible bonds are not recognised in the balance sheet and amounted to nil as at 31 December 2006 (2005: nil).
Investments in connection with the insurance operations with a combined carrying value of EUR 43 million (2005: EUR 3 million) were non-income-producing for the year ended 31 December 2006.
As at 31 December 2006, 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 1,554 million (2005: EUR 6,684 million).
Maturities of gross investment in finance lease receivables – within 1 year 4,641 4,230 – more than 1 year but less than 5 years 8,061 7,355 – more than 5 years 3,346 2,654
Maturities of net investment in finance lease receivables – within 1 year 3,943 3,727 – more than 1 year but less than 5 years 6,813 6,163 – more than 5 years 2,608 2,327
Included in Amounts due from banks 277 225 Included in Loans and advances to customers 13,087 11,992
The allowance for uncollectible fi nance lease receivables included in the loan loss provision amounted to EUR 47 million at 31 December 2006 (2005: EUR 45 million).
No individual fi nance lease receivable has terms and conditions that materially affect the amount, timing or certainty of the consolidated cash fl ows of the Group.
Increase in loan loss provision 103 88 Exchange rate differences –67 115 Other changes –1 31 Closing balance 2,642 3,313
The closing balance is included in – amounts due from banks 4 7 – loans and advances to customers 2,638 3,306 6 INVESTMENTS IN ASSOCIATES
Gables RE Trust – Permanent/Bridge equity 6 45 1,646 805 279 147 ING Retail Property Fund Australia 29 124 744 321 66 21
Fair value Balance Interest of listed sheet Total Total Total Total 2005 held (%) investment value assets liabilities income expenses
Retail Property Fund France Belgium (RPFFB) 15 52 863 520 101 48
Changes in the composition of the group 1,497 –2,619 Transfers to and from Property in own use 44 –2 Fair value gains/(losses) 175 171 Disposals –1,293 –879 Exchange rate differences –68 53 Closing balance 6,974 5,031
The total amount of rental income recognised in the profi t and loss account for the year ended 31 December 2006 was EUR 434 million (2005: EUR 372 million). The total amount of contingent rent recognised in the profi t and loss account for the year ended 31 December 2006 was EUR 14 million (2005: EUR 6 million).
The total amount of direct operating expenses (including repairs and maintenance) arising from Real estate investments that generated rental income for the year ended 31 December 2006 was EUR 168 million (2005: EUR 105 million). The total amount of direct operating expenses (including repairs and maintenance) arising from Real estate investments that did not generate rental income for the year ended 31 December 2006 was EUR 32 million (2005: EUR 38 million).
Changes in the composition of the group –14 3 Transfers to and from real estate investments –44 2 Transfers to and from other assets –4 –25 Depreciation –64 –68
Impairments –13 Reversal of impairments 4 27 Disposals –221 –421 Exchange rate differences –38 62 Other changes 6 Closing balance 2,034 2,271
Gross carrying amount as at 31 December 2,883 3,095 Accumulated depreciation as at 31 December –669 –635 Accumulated impairments as at 31 December –180 –189 Net book value 2,034 2,271
Revaluation surplus Opening balance 612 361 Revaluation in year 82 251 Released in year –1 Closing balance 693 612
Cost less accumulated depreciation is EUR 1,341 million (2005: EUR 1,659 million).
Gross carrying amount as at 31 December 1,499 1,454 2,729 2,523 4,228 3,977 Accumulated depreciation as at 31 December –1,216 –1,140 –1,699 –1,521 –2,915 –2,661 Accumulated impairments as at 31 December –1 –1 Net book value 283 314 1,029 1,002 1,312 1,316
More than 1 year but less than 5 years 1,754 1,505 More than 5 years 5 1
For fl exible life insurance contracts the growth rate assumption used for calculating the amortisation of the deferred acquisition costs for 2006 is 7.6% gross and 6.1% net of investment management fees (2005: 7.9% gross and 6.9% net of investment management fees).
Reinsurance and insurance receivables 4,105 3,144 Deferred tax assets 1,872 2,118 Property held for sale 2,243 1,891 Property under development for third parties 96 71 Income tax receivable 1,222 580 Accrued interest and rents 14,535 13,776 Other accrued assets 1,167 1,112 Pension assets 251 Other receivables 5,572 7,468
Disclosures in respect of deferred tax assets and pension assets are provided in Note 21 Other liabilities.
Property held for sale 367 482 Other: – property obtained from foreclosures 58 50 – property developed for sale 1,818 1,359
Gross carrying amount as at 31 December 2,328 1,960 Accumulated impairments as at 31 December –85 –69 Net book value 2,243 1,891
Issued share capital as at 1 January 2004 2,115,901 508 From 2003 final stockdividend 31,731 8 From 2004 interim stockdividend 31,699 8 Issue of shares 25,389 6 Issued share capital as at 31 December 2004 2,204,720 530
The current exercise price of B warrants is EUR 49.92 for 2 depository receipts. The exercise price of B warrants will be adjusted by ING Group if one or more of the following circumstances occur: 1. ING Groep N.V. issues ordinary shares with pre-emptive rights for existing holders thereof at a price lower than the average price over the 20 business days preceding the relevant announcement of the median price between the highest and lowest prices of the depository receipts of EUR 0.24 par value as stated in the Offi cial Price List of Euronext Amsterdam N.V.; 2. ING Groep N.V. issues ordinary shares to existing holders thereof, such shares being paid from a reserve of the company at a price lower than the average price over the 20 business days preceding the relevant announcement of the median price between the highest and lowest prices of the depository receipts of EUR 0.24 par value as stated in the Offi cial Price List of Euronext Amsterdam N.V.; 3. ING Groep N.V. issues ordinary shares to existing holders thereof by way of paying a dividend at a price lower than the average price over the 20 business days preceding the relevant announcement of the median price between the highest and lowest prices of the depository receipts of EUR 0.24 par value as stated in the Offi cial Price List of Euronext Amsterdam N.V.; 4. ING Groep N.V. grants to existing holders of ordinary shares pre-emptive rights to obtain securities other than ordinary shares; 5. Any company grants to existing holders of ordinary shares of ING Groep N.V. a right of subscription for securities which may be converted into or exchanged for ordinary shares of ING Groep N.V., provided that the price for which such ordinary shares of ING Groep N.V. may (initially) be obtained is lower than the then applicable exercise price; 6. ING Groep N.V. makes a distribution in cash out of its share premium reserve(s) to holders of ordinary shares.
Opening balance 382 875 1,257 1,199 Implementation IAS 32/39 and IFRS 4 6,256 1,282 7,538 Unrealised revaluations 53 2,006 764 2,823 795 Realised gains/losses transferred to profit and loss –663 –663 –737 Other changes 25 226 251 Closing balance 460 8,700 2,046 11,206 1,257
Opening balance 668 –184 Implementation IAS 32/39 and IFRS 4 –556 Unrealised revaluations 194 489 Exchange rate differences –1,335 919 –184 Closing balance –473 668 –184
Share of Retained associates Treasury Other earnings reserve shares reserves Total
Profit for the year 6,972 720 7,692 Unrealised revaluations –124 –124 Change in treasury shares –520 –520 Dividend –2,534 –147 –2,681
13 PREFERENCE SHARES ING Group preference shares Preference shares are divided into 2 categories: ‘A’ preference shares and ‘B’ preference shares. The authorised preference share capital of ING Groep N.V. consists of 100 million ‘A’ preference shares with a par value of EUR 1.20, of which as at 31 December 2006 63,028,961 million have been issued and 1,000 million ‘B’ preference shares with a par value of EUR 0.24, of which none have been issued. The only movement in preference shares outstanding is explained under Buy back of preference shares.
Preference shares rank before ordinary shares in entitlement to dividends and distributions upon liquidation of ING Groep N.V., but are subordinated to cumulative preference shares. Holders of ‘A’ and ‘B’ preference shares rank pari passu among themselves. If the profi t or amount available for distribution to the holders of preference shares is not suffi cient to make such distribution in full, the holders will receive a distribution in proportion to the amount they would have received if the distribution could have been made in full. The ‘A’ preference shares and ‘B’ preference shares are not cumulative and their holders will not be compensated in subsequent years for a shortfall in a prior year.
‘A’ preference shares The dividend on the ‘A’ preference shares is equal to a percentage of the amount (including share premium) for which the ‘A’ preference shares were originally issued.
These loans have been subsequently provided as subordinated loans by ING Groep N.V. to ING Verzekeringen N.V. and ING Bank N.V. under the same conditions as the original bonds.
The number of loans held by group companies as at 31 December 2006 was nil with a balance sheet value of nil (2005: nil with a balance sheet value of nil).
15 DEBT SECURITIES IN ISSUE Debt securities in issue relate to debentures and other issued debt securities with either fi xed interest rates or interest rates based on interest rate levels, such as certifi cates of deposit and accepted bills issued by ING Group, except for subordinated items. Debt securities in issue do not include debt securities presented as Financial liabilities at fair value through profi t and loss. ING Group does not have debt securities that are issued on terms other than those available in the normal course of business. The maturities of the debt securities are as follows:
Floating rate debt securities Within 1 year 4,637 5,074 More than 1 year but less than 2 years 238 872 More than 2 years but less than 3 years 413 144 More than 3 years but less than 4 years 1,086 494 More than 4 years but less than 5 years 2,611 1,064 More than 5 years 4,948 4,148 Total floating rate debt securities 13,933 11,796
As of 31 December 2006, ING Group had unused lines of credit available including the payment of commercial paper borrowings relating to debt securities in issue, totalling EUR 29,335 million (2005: EUR 22,588 million).
Subordinated loans of group companies relate to capital debentures and private loans which are subordinated to all current and future liabilities of ING Bank N.V. or Postbank N.V.
Provision for unearned premiums and unexpired risks 2,631 2,835 156 258 2,787 3,093
Total provisions for insurance contracts 241,404 236,569 6,529 8,285 247,933 244,854
Investment contracts for risk of company 7,505 7,223 7,505 7,223 Investment contracts for risk of policyholders 13,245 11,410 13,245 11,410
Implementation IFRS 4 –14,308 –7 –14,315 Changes in the composition of the group 83 44 23 –44 106 225,434 185,894 6,661 5,205 232,095 191,099
Prior year provisions: – benefit payments to policyholders –13,166 –10,498 –366 –431 –13,532 –10,929
Changes in the composition of the group –9 –15 –26 –9 –41
Additions – for the current year 3,261 3,797 124 891 3,385 4,688 – for prior years –525 –592 –18 –22 –543 –614
Claim settlements and claim settlement costs – for the current year 1,569 1,747 33 295 1,602 2,042
Other changes mainly relate to the reclassifi cation of certain health and disability from non-life to life as described in the section ‘Changes in presentation’.
Liability relating to prior underwriting years 3,602 Total amount recognised in the balance sheet 7,251
Saving accounts 283,147 269,389 Credit balances on customer accounts 147,695 127,469 Corporate time deposits 62,628 57,655
No funds have been entrusted to the Group by customers on terms other than those prevailing in the normal course of business. As at 31 December 2006, Customer deposits and other funds on deposit included liabilities with regard to securities sold in repurchase transactions amounting to EUR 870 million (2005: EUR 2,104 million).
The nominal amounts of liabilities designated as at fair value through profi t and loss approximate the fair value.
For the fi nancial year 2006 the changes in fair value of fi nancial liabilities designated as at fair value through profi t and loss attributable to changes in credit risk of ING Group are insignifi cant.
Equity securities 20,732 10,206 Debt securities 9,045 7,264 Funds on deposit 77,245 54,264
Derivatives used in: – cash flow hedges 1,696 992 – fair value hedges 606 1,336 – hedges of net investments in foreign operations 7 91 Other non-trading derivatives 2,625 3,829
Comprising: – deferred tax liabilities 4,042 5,128 – deferred tax assets 1,872 2,118
Opening balance 3,010 2,583 Changes in composition of the group 68 25 Changes through profit and loss 468 136 Changes through equity –1,339 –363 Exchange rate differences –36 88 Other –1 541 Closing balance 2,170 3,010
Total unused tax losses carried forward 3,977 5,340 Unused tax losses carried forward not recognised as a deferred tax asset 953 1,304 Unused tax losses carried forward recognised as a deferred tax asset 3,024 4,036
Changes in the composition of the group –6 –7 4 53 –2 46
Charges –174 –81 –238 –291 –412 –372 Exchange rate differences –1 6 –15 35 –16 41
The additions to the provision for reorganisations and relocations include EUR 89 million (2005: EUR 109 million) related to the costinitiative program of the Dutch Insurance operations and the effi ciency program of ING’s Operations & IT division in the Benelux, primarily related to ING’s banking operations.
In general, the reorganisations and relocations provisions are of a short-term nature.
Certain group companies sponsor defi ned contribution pension plans. The assets of all ING Group’s defi ned contribution plans are held in independently administered funds. Contributions are generally determined as a percentage of pay. These plans do not give rise to balance sheet provisions, other than relating to short-term timing differences included in current liabilities. The amount incurred in 2006 was EUR 45 million (2005: EUR 76 million).
Unrecognised past service costs 10 –6 10 –6 Unrecognised actuarial gains/(losses) –687 –1,778 –2 –27 1 –688 –1,805
Opening balance 15,782 12,925 441 726 Current service cost 417 477 13 42 Interest cost 703 643 11 40 Employer’s contribution 1 70 Participants contributions –22 8 5 6 Benefits paid –493 –416 –44 –28 Actuarial gains and losses –1,199 1,680 –25 143 Past service cost 18 192 –5 Changes in the composition of the group and other changes 727 67 4 –1 Effect of curtailment or settlement –6 –12 –147 –569 Exchange rate differences –169 218 –15 12
Relating to: – funded plans 15,675 15,658 – unfunded plans 83 124 239 441
Opening balance 12,937 10,498 Expected return on plan assets 820 710 Employer’s contribution 776 1,002 Participants contributions 5 7 Benefits paid –476 –416 Actuarial gains and losses –180 873 Changes in the composition of the group 597 98 Exchange rate differences –118 165
Pension Investment Strategy The primary fi nancial objective of the ING Employee Benefi t Plan (the Plan) is to secure participant retirement benefi ts. As such, the key objective in the Plan’s fi nancial management is to promote stability and, to the extent appropriate, growth in funded status (i.e. the ratio of market value of assets to liabilities). The investment strategy for the Plan’s portfolio of assets (the Fund) balances the requirement to generate returns with the need to control risk. The asset mix is recognised as the primary mechanism to infl uence the reward and risk structure of the Fund in an effort to accomplish the Plan’s funding objectives. Desirable target allocations amongst identifi ed asset classes are set and within each asset class, careful consideration is given to balancing the portfolio among industry sectors, geographical areas, interest rate sensitivity, dependence on economic growth, currency and other factors affecting investment returns. The assets are managed by professional investment fi rms. They are bound by precise mandates and are measured against specifi c benchmarks. Factors considered by the fund managers include balancing security concentration, investment style, and reliance on particular active investment strategies. ING will review its asset mix of the fund on a regular basis. Generally, ING will rebalance the fund’s asset mix to the target mix as individual portfolios approach their minimum or maximum levels.
Determination of Expected Return on Assets An important element for fi nancial reporting is the assumption for return on assets (ROA). The ROA is updated at least annually, taking into consideration the Plan’s asset allocation, historical returns on the types of assets held in the Fund, and the current economic environment. Based on these factors, it is expected that the Fund’s assets will earn an average percentage per year over the long term. This estimation takes into account a reduction for administrative expenses and non-ING investment manager fees paid from the Fund. For estimation purposes, it is assumed the long term asset mix will be consistent with the current mix. Changes in the asset mix could impact the amount of recorded pension income or expense, the funded status of the Plan, and the need for future cash contributions.
Weighted averages of basic actuarial assumptions in annual % at 31 December
Discount rates 4.80 4.25 5.40 4.25 Expected rates of salary increases (excluding promotion increases) 2.75 2.50 3.50 2.50 Medical cost trend rates 6.10 4.25 Consumer price inflation 2.00 1.75 2.25 1.75
Expected Cash Flows During 2007 the expected contributions to pension plans are EUR 904 million.
Financial assets at fair value through profit and loss – trading assets (2) 149,187 149,187
– designated as at fair value through profit and loss 107 309 1,184 2,909 4,963 758 10,230
Customer deposits and other funds on deposit 394,141 47,310 9,446 5,752 9,063 465,712 Financial liabilities at fair value through profit and loss – trading liabilities (2) 92,058 92,058
To qualify for hedge accounting under IFRS-EU, strict criteria must be met. Certain hedges that are economically effective from a risk management perspective do not qualify for hedge accounting under IFRS-EU. The fair value changes of derivatives relating to such non qualifying hedges are taken to the profi t and loss account. However, in certain cases, the Group mitigates the resultant profi t and loss account volatility by designating hedged assets and liabilities at fair value through profi t and loss. If hedge accounting is applied under IFRS-EU, it is possible that during the hedge a hedge relationship no longer qualifi es for hedge accounting and hedge accounting cannot be continued, even if the hedge remains economically effective. As a result, the volatility arising from undertaking economic hedging in the profi t and loss account may be higher than would be expected from an economic point of view.
ING Group uses credit derivatives in managing its exposure to credit risk, including total return swaps and credit default swaps, to sell or buy protection for credit risk exposures in the loan, investment and trading portfolios. No material level of hedge accounting is applied in relation to credit derivatives. These credit derivatives did not result in a signifi cant reduction in ING Group’s exposure to credit risk as at 31 December 2006 or 31 December 2005.
Gains and losses on derivatives designated under fair value hedge accounting are recognised in the profi t and loss account. The effective portion of the fair value change on the hedged item is also recognised in the profi t and loss account. As a result, on the net accounting ineffectiveness impacts the net profi t.
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 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.
Cash fl ow hedge accounting ING Group’s cash fl ow hedges principally consist of (forward) interest rate swaps and cross-currency interest rate swaps that are used to protect against its exposure to variability in future interest cash fl ows on non-trading assets and liabilities that bear interest at variable rates or are expected to be refunded or reinvested in the future. The amounts and timing of future cash fl ows, representing both principal and interest fl ows, are projected for each portfolio of fi nancial assets and liabilities, based on contractual terms and other relevant factors including estimates of prepayments and defaults. The aggregate principal balances and interest cash fl ows across for the respective portfolios form the basis for identifying the notional amount subject to interest rate risk that is designated under cash fl ow hedge accounting.
At 31 December 2006, the fair values of outstanding derivatives designated under cash fl ow hedge accounting was EUR 1,921 million (2005: EUR 2,737 million), presented in the balance sheet as EUR 3,617 million (2005: EUR 3,729 million) positive fair values under assets and EUR 1,696 million (2005: EUR 992 million) negative fair values under liabilities.
Gains and losses on the effective portions of derivatives designated under net investment hedge accounting are recorded in Shareholders’ equity. The balance in equity is recognised in the profi t and loss account when the related foreign subsidiary is disposed. The gains and losses on ineffective portions are recognised immediately in the profi t and loss account.
At 31 December 2006, the fair values of outstanding derivatives designated under net investment hedge accounting was EUR –4 million (2005: EUR –59 million), presented in the balance sheet as EUR 3 million (2005: EUR 32 million) positive fair values under assets and EUR 7 million (2005: EUR 91 million) negative fair values under liabilities.
Accounting ineffectiveness recognised in the profi t and loss account for the year ended 31 December 2006 on derivatives designated under net investment hedge accounting was EUR –12 million (2005: EUR –16 million).
Non-trading derivatives 6,521 7,766 Designated as at fair value through profit and loss 6,425 10,230 Available-for-sale debt securities 275,696 289,241 Held-to-maturity debt securities 17,660 18,937 Loans and advances to customers – policy loans 3,566 3,536 – public authorities 25,951 31,442 – secured by mortgages 235,812 209,188 – guaranteed by credit institutions 2,402 1,826 – personal loans 4,649 5,961 – other personal lending 22,141 25,142 – other corporate lending 181,939 168,295
Off-balance sheet credit commitments – commitments – Insurance 4,636 4,049 – guarantees – Insurance 319 237 – discounted bills – Bank 3 5 – guarantees – Bank 17,297 15,933 – irrevocable letters of credit – Bank 8,456 7,436 – other – Bank 623 396 – irrevocable facilities 90,384 85,098 Maximum credit exposure off balance sheet 121,718 113,154
25 ASSETS NOT FREELY DISPOSABLE The assets not freely disposable primarily consist of interest bearing securities pledged to secure deposits from the Dutch Central Bank and other banks, serve to secure margin accounts or are used for other purposes required by law.
Customer deposits and other funds on deposit and debt Guarantees for Other securities in issue Banks off-balance sheet items contingent liabilities Total
There are no material terms and conditions relating to the collateral represented in the above table.
26 CONTINGENT LIABILITIES AND COMMITMENTS In the normal course of business the Group is a party to activities whose risks are not refl ected in whole or part in the consolidated fi nancial statements. In response to the needs of its customers, the Group offers fi nancial products related to loans. These products include traditional off-balance sheet credit-related fi nancial instruments.
Banking operations Contingent liabilities in respect of – discounted bills 3 5 – guarantees 17,297 15,933 – irrevocable letters of credit 8,456 7,436 – other 623 396
Guarantees relate both to credit and non-credit substitute guarantees. Credit substitute guarantees are guarantees given by ING Group in respect of credit granted to customers by a third party. Many of them are expected to expire without being drawn on and therefore do not necessarily represent future cash outfl ows. The guarantees are generally of a short-term nature. In addition to the items included in contingent liabilities, ING Group has issued guarantees as a participant in collective arrangements of national industry bodies and as a participant in government required collective guarantee schemes which apply in different countries.