Future rental commitments for operating lease contracts years after 2011 332 27 SPECIAL PURPOSE ENTITIES (SPE’S) AND SECURITISATION Securitisation ING as originator ING Group enters into synthetic securitisation programmes in order to reduce credit risk on certain assets. In synthetic securitisations ING enters into a credit default swap with securitisation Special Purpose Entities (SPE’s), in relation to which ING purchases credit protection in respect of residential mortgage loans and loans to small and medium-sized enterprises. The SPE’s have in turn hedged their exposure with investors through the issue of credit linked notes or credit linked commercial paper. As a result of these transactions, ING Group has transferred a substantial part of the credit risk related to these loan portfolios to third-party investors. In general, the third-party investors in securities issued by the SPE have recourse only to the assets of the SPE and not to ING Group.
Loans to small and medium-sized enterprises 8,859 4,491 Asset backed securities 7,126 7,433 Corporate loans 4,851 5,594
Collateralised debt obligations (CDO)-transactions Within ING Group, SPE’s are used for CDO transactions. In a typical CDO transaction an SPE is used to issue structured, rated securities which are backed (or collateralised) by a pool of transferable debt securities. In these transactions ING often has different roles: – the arranger of the transaction; ING structures the SPE, acquires the assets for the SPE and sells the CDOs to investors; – collateral manager of the assets in the SPE; ING manages the assets based on strict conditions of the SPE’s charter; – investor.
ING Group receives market-rate fees for structuring, (asset) managing and distributing CDO-securities to investors.
ING as investor As part of its investment activities ING invests in securitisations by purchasing notes from securitisation SPE’s. For certain own asset securitisation programs ING acts as a market maker and holds limited positions in this capacity.
Other entities ING Group is also a party in other SPE’s used, for example, in structured fi nance and leasing transactions.
ING as fund manager ING acts as fund manager for several funds. Fees related to these management activities are charged on an arm’s-length basis. In general, ING as fund manager will hold these funds in a fi duciary capacity. Therefore, these funds are generally not included in the consolidated fi nancial statement of the Group.
ReliaStar Life Insurance Company U.S.A. ReliaStar Life Insurance Company of New York U.S.A. Security Life of Denver Insurance Company U.S.A. ING USA Annuity and Life Insurance Company U.S.A. ING Seguros de Vida S.A. Chile ING Afore S.A. de C.V. Mexico Seguros Comercial America S.A. de C.V. Mexico ING Life Insurance Company (Japan) Limited Japan ING Life Insurance Company (Korea) Limited South Korea ING Life Insurance Company of America U.S.A. ING Australia Holdings Limited Australia ING Australia Pty Limited Australia ING Re (Netherlands) N.V. The Netherlands
Companies treated as part of the banking operations ING Bank N.V. The Netherlands ING Bank Nederland N.V. The Netherlands Bank Mendes Gans N.V. The Netherlands ING Lease Top Holding B.V. The Netherlands ING Corporate Investments B.V. The Netherlands ING Trust (Nederland) B.V. The Netherlands ING Vastgoed Management Holding B.V. The Netherlands InterAdvies N.V. The Netherlands Nationale-Nederlanden Financiële Diensten B.V. The Netherlands ING Commercial Finance B.V. The Netherlands Postbank N.V. The Netherlands Postbank Groen N.V. The Netherlands Stichting Regio Bank The Netherlands Westland Utrecht Hypotheekbank N.V. The Netherlands ING België N.V. Belgium ING Bank Slaski S.A. Katowicach Poland ING Bank Deutschland A.G. Germany ING Financial Holdings Corporation U.S.A. ING Trust (Antilles) N.V. Netherlands Antilles ING Middenbank Curaçao N.V. Netherlands Antilles ING Vysya Bank Ltd. India ING Direct N.V. Canada, Germany, Spain, Australia, France, USA, Italy, UK
ABN AMRO Asset Management Total amounts in millions of euros Taiwan, Ltd Appleyard Summit REIT acquisitions
Deutsche Williams Hypotheken- Degussa Total amounts in millions of euros de Broë bank AG Bank disposals
Cash in company disposed 11 27 38 Cash outflow / inflow on disposal 19 264 168 451
General Life Life Primary line of business Bank Insurance Bank Insurance
Cash in company acquired / disposed 118 118 Cash outflow / inflow on acquisition / disposal 83 98 181 663 353 1,016
Liabilities Insurance and investment contracts 1,503 1,503 Amounts due to banks 7 7 68 68 Customer deposits and other funds on deposit 1,384 1,384 2,470 2,470
In October 2005, ING Group acquired Eural NV from Dexia Bank Belgium. In the course of 2006, Eural is expected to be merged with ING Belgium’s unit Record Bank.
Cash in company acquired / disposed 532 532 Cash outflow / inflow on acquisition / disposal –249 1,896 1,647 362 970 1,332
Liabilities Amounts due to banks 5,041 274 5,315 Customer deposits and other funds on deposit 3,759 3,759 8,228 2,748 10,976
Minority interest Net assets acquired –62 3,792 3,730 934 2,352 3,286
In 2004, ING Group acquired Allianz’s property and casualty insurance operations in Canada. The goodwill amounted to EUR 48 million.
In 2004, ING Group acquired Mercator Bank, a Belgium medium-sized savings bank. The negative goodwill amounted to EUR 26 million and was recognised as income in the profi t and loss account.
These legal proceedings include a dispute over certain hurricane damages claimed by a Mexican fertilizer producer Grupo Fertinal (‘Fertinal’) against ING Comercial América (now known as Seguros ING S.A. de C.V. and referred to hereinafter as ‘Seguros’), a wholly owned subsidiary of ING Group. Fertinal claims EUR 228 million (USD 300 million), the maximum coverage under the insurance policy of their mining operations. A judge in Mexico ruled in favour of Fertinal. This decision was appealed to a Mexican Court of Appeal, which reduced the judgment to EUR 71 million (USD 94 million), plus interest. This decision has been appealed by all parties involved. Fertinal has also made criminal complaints alleging fraud against certain Seguros current and former employees. In addition to the claim by Fertinal, Seguros also has been the subject of complaints and suits concerning the performance of certain interest sensitive life insurance products. Both the claim by Fertinal and these matters are being defended vigorously; however, at this time, we are unable to assess their fi nal outcome.
Recently, the issue of amongst others the costs charged by the insurance industry to customers in respect of universal life insurance products (commonly referred to as beleggingsverzekeringen, beleggingspolissen or beleggingshypotheken) has received attention both in the Dutch public media and from the Dutch regulator for the insurance industry and consumer protection organisations. The Dutch insurance industry (including subsidiaries of ING Groep N.V., primarily Nationale-Nederlanden) sold these products to customers either directly or through intermediaries. The concern being publicly voiced in respect of these products is that the Dutch insurance industry has not been suffi ciently transparent towards its customers as to the costs charged to the customers, and that costs in respect of certain of these products may have been unfairly high. If, in the future, legal proceedings would be lodged, individually or collectively, against Dutch insurance companies in relation to these products, such legal proceedings could also be lodged against Nationale-Nederlanden or other subsidiaries of ING Groep N.V. involved. No legal proceedings have as yet been lodged against any subsidiary of ING Groep N.V. Discussions are ongoing between the insurance industry and consumer organisations.
Like many other companies in the mutual funds, suppliers of brokerage and investment products and insurance industries, several of our companies have received informal and formal requests for information from various governmental and self-regulatory agencies or have otherwise identifi ed issues arising in connection with fund trading, compensation, confl icts of interest, anti-competitive practices, insurance risk transfer and sales practices. ING is responding to the requests and working to resolve issues with regulators. We believe that any issues that have been identifi ed thus far do not represent a systemic problem in the ING businesses involved and in addition that the outcome of the investigations will not have a material effect on ING Group.
31 JOINT VENTURES Joint ventures are included proportionally in the consolidated fi nancial statements as follows: Most signifi cant joint ventures
Executive Board Supervisory Board Total amounts in thousands of euros 2006 2005 2006 2005 2006 2005
The total number of stock options on ING Groep N.V. shares held by the Executive Board members amounted to 2,176,641 at 31 December 2006 (2005: 1,271,640). As at 31 December 2006, members of the Executive Board held 80,055 ING Groep N.V. shares (2005: 1,125,023). Part of these shares are held in a trust. As at 31 December 2006, members of the Supervisory Board held 15,370 ING Groep N.V. shares (2005: 15,490).
33 FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES The following table presents the estimated fair values of ING Group’s fi nancial assets and liabilities. Certain balance sheet items are not included in the table, as they do not meet the defi nition of a fi nancial asset or liability. The aggregation of the fair values presented hereunder does not represent, and should not be construed as representing, the underlying value of ING Group.
Financial assets at fair value through profit and loss – trading assets 193,977 149,187 193,977 149,187 – investments for risk of policyholders 110,547 100,961 110,547 100,961
– designated as at fair value through profit and loss 6,425 10,230 6,425 10,230 Investments
– designated as at fair value through profit and loss 13,702 11,562 13,702 11,562
If the estimated fair value is lower than the balance sheet value a review has been performed to determine that the carrying amount is recoverable.
Additional information to the consolidated balance sheet of ING Group continued
Non-trading derivatives The fair values of derivatives held for non-trading purposes are based on broker/dealer valuations or on internal discounted cash fl ow pricing models taking into account current cash fl ow assumptions and the counterparties’ credit standings. The fair values of derivatives held for non-trading purposes generally refl ect the estimated amounts that the Group would receive or pay to terminate the contracts at the balance sheet date.
Loans and advances to customers For loans and advances that are repriced frequently and have had no signifi cant changes in credit risk, carrying amounts represent a reasonable estimate of fair values. The fair values of other loans are estimated by discounting expected future cash fl ows using interest rates offered for similar loans to borrowers with similar credit ratings. The fair values of non-performing loans are estimated by discounting the expected cash fl ows of recoveries.
The fair values of mortgage loans are estimated by discounting future cash fl ows using interest rates currently being offered for similar loans to borrowers with similar credit ratings. The fair values of fi xed-rate policy loans are estimated by discounting cash fl ows at the interest rates charged on policy loans of similar policies currently being issued. Loans with similar characteristics are aggregated for purposes of the calculations. The carrying values of variable rate policy loans approximate their fair value.
Subordinated loans The fair value of the subordinated loans is estimated using discounted cash fl ows based on interest rates that apply to similar instruments.
Other liabilities The carrying amount of other liabilities are stated at their book value which is not materially different to their fair value.
Valuation Valuation Published technique technique not price supported by supported by 2006 quotations market inputs market inputs Total
Financial liabilities designated at fair value through profit and loss 10,914 2,788 13,702 Investment contracts (for contracts carried at fair value) 13,235 10 13,245
The total amount of changes in fair value estimated using a valuation technique recognised in net profi t in 2006 was EUR 307 million for techniques supported by market inputs and EUR 19 million for techniques not supported by market inputs.
Shareholders’ equity (parent) 21,298 21,331 Minority interests 1,204 482 Subordinated loans qualifying as Tier-1 capital (1) 5,726 5,764 Goodwill –136 –77 Minority interest Record Bank 162 170 Revaluation reserve (2) –2,470 –4,262 Core capital – Tier-1 25,784 23,408
For regulatory purposes certain (external) subordinated loans of ING Bank N.V. and ING Verzekeringen N.V. are included. The protocol was refl ected in Dutch law as of 1 January 2007, without signifi cant modifi cations.
Subordinated loans ING Bank N.V. (included in Tier-2) 11,110 10,304 Subordinated loans ING Verzekeringen N.V. 2,250 4,052 Capital base including subordinated loans 55,880 52,498
Interest income on available-for-sale securities 6,989 5,989 6,175 Interest income on held-to-maturity securities 755 639 Interest income on trading portfolio 21,414 15,237 883 Interest income on non-trading derivatives 5,231 5,658 Other interest income 2,798 1,764 2,628 Interest income banking operations 59,170 48,176 25,448
Reinsurance assumed premiums written gross 54 57 50 1,664 1,501 1,443 1,718 1,558 1,493
Direct premiums earned, gross 6,248 6,712 6,492 Reinsurance assumed premiums earned, gross 58 57 50 Total gross premiums earned 6,306 6,769 6,542
Insurance contracts for risk of company 19,563 19,086 18,336 944 808 783 20,507 19,894 19,119 Insurance contracts for risk of policyholders 18,180 17,691 16,360 151 59 53 18,331 17,750 16,413
Periodic premiums Individual policies – without profit sharing 7,231 1,747 8,978 4,804 11 4,815
Total single premiums includes EUR 313 million in 2006 (2005: EUR 520 million; 2004: EUR 457 million) from profi t sharing.
Insurance contracts Insurance contracts for risk of company for risk of policyholders Own Reinsurers’ Own Reinsurers’ 2005 account share Gross account share Gross
Insurance contracts Insurance contracts for risk of company for risk of policyholders Own Reinsurers’ Own Reinsurers’ 2004 account share Gross account share Gross
Fire and other property losses 1,589 1,580 830 155 445 –51 155
Acquisition costs Net Gross Gross Gross and other reinsurance premiums premiums claims Operating underwriting income/ Operational 2005 written earned (2) expenses expenses expenditure (3) (expenses) result
Legal assistance 40 40 22 13 6 Miscellaneous financial losses 134 188 158 25 24 1 17
Fire and other property losses 1,489 1,495 681 228 306 –135 156
Income from real estate investments 184 206 287 134 194 248 318 400 535
Realised gains/losses on disposal of equity securities 772 511 604 149 171 921 682 604 Reversals/Impairments of availablefor -sale equity securities –25 –46 –17 –45 45 –42 –91 45 Realised gains/losses and impairments of equity securities 747 465 604 132 126 45 879 591 649
Change in fair value of real estate investments 108 143 137 67 59 62 175 202 199 38 COMMISSION INCOME
Change in fair value of derivatives relating to: – fair value hedges –162 87 203 –425 41 –338 – cash-flow hedges (ineffective portion) –7 –1 –7 –1 – hedges of net investment in foreign entities (ineffective portion) –12 –16 –12 –16 – other non-trading derivatives –85 –152 391 296 306 144 Net result on non-trading derivatives –259 –81 587 –130 328 –211
Change in fair value of assets and liabilities (hedged items) 211 –98 –203 467 8 369 Valuation results on assets and liabilities designated as at fair value through profit and loss (excluding trading) –247 –111 –247 –111 Net valuation results –48 –179 137 226 89 47
No fi gures are presented for 2004 as IAS 39 was adopted from 1 January 2005.
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
Reinsurance recoveries –1,705 –1,625 –929 Change in life insurance provisions for risk of company 13,420 14,650 11,098 Costs of acquiring insurance business 1,083 1,060 1,324 Other underwriting expenditure 439 364 713 Profit sharing and rebates 801 2,214 684
Expenditure from non-life underwriting Reinsurance and retrocession premiums 339 526 756
Reinsurance recoveries –470 –775 –303 Change in provision for unearned premiums 65 –46 73 Change in claims provision –209 –49 58 Costs of acquiring insurance business 1,043 1,012 951 Other underwriting expenditure –71 –52 –32
Expenditure from investment contracts Costs of acquiring investment contracts 31 53 Profit sharing and rebates 64 17 Other changes in investment contract liabilities 1,272 1,268 1,367 1,338
Underwriting expenditure includes an amount of EUR 4,141 million in 2006 (2005: EUR 3,956 million; 2004: EUR 4,258 million) in respect of commission paid and payable with regard to the insurance operations. Amortisation of deferred acquisition costs amounted to EUR 1,444 million in 2006 (2005: EUR 1,475 million; 2004: EUR 2,031 million).
ING transferred part of their life insurance business to Scottish Re in 2004 by means of a co-insurance contract. A loss amounting to EUR 160 million was recognised in Underwriting expenditure in 2004 on this transaction. This loss represented the reduction of the related deferred acquisition costs. In addition, an amount of EUR 240 million is being amortised over the life of the underlying business, starting in 2005 and gradually decreasing in subsequent years as the business tails off. The amount amortised in 2006 was EUR 32 million (2005: EUR 34 million). The cumulative amortisation as at 31 December 2006 was EUR 66 million (2005: EUR 34 million).
Past service cost 18 192 –1 1 5 18 197 Interest cost 703 643 699 11 40 35 7 35 14 721 718 748 Expected return on assets –820 –710 –686 –22 –11 –820 –732 –697 Amortisation of unrecognised past service cost –5 –5 Amortisation of unrecognised actuarial (gains)/losses 22 22 Effect of curtailment or settlement –6 –12 –3 –147 –396 4 –3 –149 –411 –3 Defined benefit post-employment plans 334 590 444 –129 –314 66 35 47 9 240 323 519
ING Group holds its own shares in order to fulfi l the obligations with regard to the existing stock option plan and to hedge the position risk of the options concerned (so-called delta hedge). As at 31 December 2006, 52,722,755 own shares (2005: 38,722,934; 2004: 29,427,538) were held in connection with the option plan compared to 74,175,909 options outstanding (2005: 85,128,950, 2004: 81,010,410). As a result the granted option rights were (delta) hedged, taking into account the following parameters: strike price, opening price, zero coupon interest rate, dividend yield, expected volatility and employee behaviour. The hedge is rebalanced regularly at predetermined points in time.
Exposure arising out of the share plan is not hedged. The obligations with regard to these plans will be funded by issuing own shares. On 15 March 2007 6.5 million own shares were issued in relation to the vesting of share plans.
Every year, the ING Group Executive Board will take a decision as to whether the option and share schemes are to be continued and, if so, to what extent.
Notes to the consolidated profi t and loss account of ING Group continued
Summary of stock options outstanding and exercisable 2006 Options Options outstanding Weighted Weighted exercisable Weighted Weighted as at average average as at average average 31 December remaining exercise 31 December remaining exercise Range of exercise price in euros 2006 contractual life price 2006 contractual life price
Summary of stock options outstanding and exercisable 2005 Options Options outstanding Weighted Weighted exercisable Weighted Weighted as at average average as at average average 31 December remaining exercise 31 December remaining exercise Range of exercise price in euros 2005 contractual life price 2005 contractual life price
As of 31 December 2006 there was EUR 90 million of total unrecognised compensation costs related to stock options (2005: EUR 50 million; 2004: EUR 24 million). These costs are expected to be recognised over a weighted average period of 1.9 years (2005: 2.0 years; 2004: 1.8 years). Cash received from stock option exercises for the year ended 31 December 2006 was EUR 355 million (2005: nil; 2004: nil).
Due to timing differences in granting option rights and buying shares to hedge them, an equity difference can occur if shares are purchased at a different price than the exercise price of the options. However, ING Group does not intentionally create a position and occurring positions are closed as soon as possible. If option rights expire, the results on the (sale of) shares which were bought to hedge these option rights are recorded Shareholders’ equity.
45 OTHER INTEREST EXPENSES Other interest expenses mainly consist of interest in connection with the insurance operations, including interest on the perpetual subordinated loans.
Other interest expenses includes EUR 10 million and EUR 101 million dividends paid on preference shares and trust preferred securities (2005: EUR 14 million and EUR 111 million; 2004: nil and EUR 136 million).
Total interest income and total interest expense for items not valued at fair value through profi t and loss for 2006 were EUR 41,281 million (2005: EUR 35,632 million) and EUR 27,014 million (2005: EUR 20,888 million) respectively. Net interest income of EUR 16,932 million is presented in the following profi t and loss captions.
Interest result bank 35 9,192 9,067 8,741 Investment income – insurance 37 8,756 8,340 8,095 Interest expense 1,016 969 1,019
Depreciation of property and equipment 102 113 114 361 376 311 463 489 425
Reconciliation of the statutory income tax rate to ING Group’s effective income tax rate
The effect of the change in tax rates is mainly attributable to a reduction in the tax rate in the Netherlands from 29.6% to 25.5%.
In 2006 Current tax benefi t from previously unrecognised amounts consists of releases of tax provisions resulting from settlements with tax authorities.
Weighted average number of ordinary shares Net profit per Net profit outstanding during the period ordinary share (in millions of euros) (in millions) (in euros)
Share in profit or loss of associates 447 8 176 11 –4 638 638
Insurance Insurance Insurance Wholesale Retail ING Total 2005 Europe Americas Asia/Pacific Banking Banking Direct Other segments Eliminations Total
Share in profit or loss of associates 147 35 10 28 –6 15 229 229
Cost incurred in 2004 to acquire property, equipment, and intangibles 1,065 68 45 167 178 135 18 1,676 1,676
Special items in 2004 comprise results from foreign currency hedges, restructuring provisions for Wholesale Banking and a gain on old insurance business.
Interest income (external) and interest expense (external) breakdown per business line
Rest of North Latin 2005 Netherlands Belgium Europe America America Asia Australia Other Eliminations Total
Income between geographical areas (1) –1,144 –878 –499 217 99 121 –1,361 –977 –620
Profi t before taxation from the insurance operations by geographical area
The claims ratio is the claims, including claims handling expenses, expressed as a percentage of net earned premiums. The cost ratio is the costs expressed as a percentage of net premiums written. The claims ratio and the cost ratio together form the combined ratio. A combined ratio of more than 100% does not necessarily mean that there is a loss on non-life insurance policies, because the result also includes the allocated investment income.
Treasury bills and other eligible bills 4,333 11,572 12,382 Amounts due from/to banks –20,454 –21,321 –9,907 Cash and cash equivalents with central banks 14,326 13,084 9,113 Cash and cash equivalents at end of year –1,795 3,335 11,588
Treasury bills and other eligible bills included in trading assets 1,286 8,878 8,730 Treasury bills and other eligible bills included in available-for-sale investments 3,047 2,694 3,652
The objective of ING Group’s risk management function is to build a sustainable competitive advantage by fully integrating risk management into daily business activities and strategic planning.
Taking risk is inherent to ING Group’s business activities. To ensure prudent risk taking throughout the organisation, ING Group operates through a comprehensive risk governance framework. We believe this ensures the proper identifi cation, measurement and control of risks in all levels of the organisation so that fi nancial strength is safeguarded, ING Group continues to have a strong focus on Enterprise Wide Risk Management to obtain clear insight into the Group risk profi le and to enable risk appetite setting at the Executive Board level.
– The Executive Board is responsible for managing risks associated with the activities of ING Group. Its responsibilities include ensuring that internal risk management and control systems are effective and that ING Group complies with relevant legislation and regulations. On a regular basis the Executive Board reports on these issues and discusses the internal risk management and control systems with the Supervisory Board. On a quarterly basis the Executive Board reports on the Group’s risk profi le to the Audit Committee, explaining changes in the risk profi le.
– The Audit Committee is a sub-committee of the Supervisory Board. It assists the Supervisory Board in reviewing and assessing ING Group’s major risk exposures and the operation of internal risk management and control systems. The Audit Committee is composed in such a way so as to ensure that specifi c business know-how and expertise relating to the activities of ING are available. In principle the Chief Financial Offi cer (CFO) and/or Deputy Chief Risk Offi cer attends the Audit Committee meetings.
Group risk management function Functional Reporting Lines The risk management function is embedded in all levels of the ING Group organisation. In line with the commitment to implement best practice Enterprise Wide Risk Management, ING Group restructured its risk management organisation in 2006, strengthening the cohesion between the risk related functions. To emphasise the role and importance of risk management, a Deputy CRO was appointed who is responsible for the management and control of risk on a consolidated level. The Deputy CRO reports directly to the CFO who is a member of the Executive Board and bears primary overall responsibility for the Group Risk Function. (It is the intention that the CRO function will be a full Executive Board function in 2007).
(i.e. 1 in 2000: economic capital) stress scenarios. These risk metrics are currently in a development stage and will be disclosed publicly when fully implemented.
Within the banking operations, implementation of all relevant credit rating and loss given default models was completed in anticipation of new global capital regulations from the Basel Committee for banks (Basel II). Additionally credit risk monitoring capabilities and governance have been enhanced to comply with Basel II and new, more stringent SOX 404 regulations and compliance standards.
For those transactions where DVP settlement is not possible, ING establishes settlement limits through the credit approval process. Settlement risk is then monitored and managed through the credit risk management units. Risk is further mitigated by operational procedures requiring trade confi rmations to counterparties with all transaction details, and entering into internationally accepted documentation, such as International Swaps and Derivatives Association (ISDA) Master Agreements for derivative transactions. Additionally, ING regularly participates in projects with other banks to improve and develop new clearing systems and clearing mechanisms to further reduce the level of settlement risk.
Problem Loans Restructuring In some cases, ING will work with an obligor and its other creditors, if any, to restructure the obligor’s business and its fi nancial obligations in order to minimise any fi nancial losses to the creditors as a whole, and ING in particular. This can be accomplished through many means available to the creditors, the most common of which are (a) extending the repayment period, (b) selling assets, (c) selling business lines of the obligor, (d) forgiving part of the fi nancial obligations, and (e) a combination of the above. The decision to enter into such a restructuring is done only after careful internal assessment and approval by the appropriate (internal) delegated authorities. Once a restructuring is completed, the obligor is again subject to normal credit risk monitoring procedures.
There is no signifi cant concentration of a particular type of loan structure in the watch-list, past due or the impaired loan portfolio.
Generally, all loans with past due fi nancial obligations of more than 90 days are automatically reclassifi ed as impaired. However, there can also be other reasons for declaring a loan impaired prior to being 90 days past due. These include, but are not limited to, ING’s assessment of the customer’s perceived inability to meet its fi nancial obligations, or the customer fi ling for bankruptcy or bankruptcy protection. In some cases, a material breach of fi nancial covenants will also trigger a reclassifi cation of a loan to the impaired category.
Wholesale Retail Total ING Total ING Banking Banking ING Direct Bank Bank
Increase/(decrease) in loan loss provision –118 140 81 103 88 Exchange differences –55 –7 –5 –67 115 Other changes –60 75 –16 –1 31
The credit portfolio is under constant review. A formal analysis takes place quarterly to determine the provisions for possible bad debts, using a bottom-up approach. Conclusions are discussed by the IPC, which advises the Executive Board on specifi c provisioning levels. ING Bank identifi es as impaired loans those loans for which it is probable, based on current information and events that the principal and interest amounts contractually due will not be collected in accordance with the contractual terms of the loan agreements.
There were no signifi cant changes in risk concentrations by economic sector in 2006, at the ING Bank level. Within ING Direct there was a shift towards more private individuals refl ecting growth in the ING Direct retail portfolio, at the expense of slower growth in the (bond) investment portfolios. This was offset by a decline in the private individuals concentration within Retail Banking as a result of growth in the Small Business and SME sectors.
Wholesale Banking Retail Banking ING Direct Total ING Bank amounts in billions of euros 2006 2005 2006 2005 2006 2005 2006 2005
ING Insurance’s credit exposure arises from the investment of insurance premiums into credit risk assets, largely in the form of bond investment activities on an unsecured basis. While ING Insurance has a policy of maintaining a high quality investment grade portfolio, a certain portion of the portfolio is invested in residential mortgages and structured fi nance products. Credit exposure also arises from derivatives, sell/repurchase transactions, securities lending/borrowing and reinsurance contracts used to hedge the portfolio. Derivative transactions are generally entered into in relation to hedging activities.
The table refl ects probabilities of default and does not take collateral into consideration.
The downward shift in risk ratings within Insurance Europe is the result of a re-rating exercise performed on the Dutch mortgage portfolios to bring them in line with the rating methodology that is used for similar assets within the Dutch banking operations. Under the new methodology, the ratings are distributed over rating classes 8–17. A similar shift is seen in the Americas and Asia/Pacifi c, as a result of the inclusion of residential mortgages for the fi rst time in 2006. Hence the movement mainly represents a reclassifi cation between risk rating classes and not a deterioration of underlying credit risk profi le.
The industry coding methodology for the insurance company was aligned with the methodology used within the banking operations in 2006. Under the new methodology, investments in structured bond instruments, such as securitisations, are included in the Financial Institutions industry.
The Financial Markets Risk Committee (FMRC) is a market risk committee that, within the guidelines set by the Executive Board, sets market risk limits both on an aggregated level and on a desk level, and approves new products. CMRM advises the Executive Board on the market risk appetite of Wholesale Banking activities.
The market risk for the fi xed income and equity markets is split into two components: general market risk and specifi c market risk. The general market risk component estimates the VaR resulting from general market value movements (e.g. interest rate movements). The specifi c market risk component estimates the VaR resulting from market value movements that relate to the underlying issuer of securities in the portfolios.
Limitations VaR as a risk measure has some limitations. VaR quantifi es the potential loss under the assumption of normal market conditions only. This assumption may not always hold true in reality, especially when market events occur, and therefore could lead to an underestimation of the potential loss. VaR also uses historical data to forecast future price behaviour. Future price behaviour could differ substantially from past behaviour. Moreover, the use of a one day holding period (or ten days for regulatory calculations) assumes that all positions in the portfolio can be liquidated or hedged in one day. In periods of illiquidity or market events, this assumption may not hold true. Also, the use of 99% confi dence interval means that VaR does not take into account any losses that occur beyond this confi dence level.
Backtesting Although VaR models estimate potential future results, estimates are based on historical market data. ING continuously monitors the plausibility and effectiveness of the VaR model in use. The technique for this purpose is generally known as backtesting in which the actual daily result is compared with the daily VaR. In addition to using actual results for backtesting, ING also uses hypothetical results, which measures results excluding the effect of intraday trading, fees and commissions. When the actual or hypothetical loss exceeds the VaR an ’occurrence’ has taken place. Based on ING Bank’s one-sided confi dence level of at least 99% an occurrence is expected once in every 100 business days at maximum. In 2006, there was no occurrence (2005: none) where a daily trading loss exceeded the daily consolidated VaR of ING Wholesale Banking.
Stress Testing Since VaR in general does not produce an estimate of the potential losses that can occur as a result of extreme market movements, ING uses structured stress tests for monitoring the market risk under these extreme conditions. Stress scenarios are based on historical and hypothetical extreme events. The result of the stress testing is an event risk number, which is an estimate of the profi t and loss effect caused by a potential event and its world-wide impact for ING Wholesale Banking. The event risk number for the ING Wholesale Banking trading activity is generated on a weekly basis. The event-risk policy (and its technical implementation) is specifi c to ING as there is no event risk calculation method that is generally accepted by other banks and regulators (like the Value-at-Risk model). ING’s event risk policy basically consists of defi ned stress parameters per country and per market (fi xed income, equity, foreign exchange and related derivative markets). The scenarios and stress parameters are back-tested against extreme market movements that actually occurred in the markets.
Consolidated Trading VaR ING Wholesale Banking 2005 – 2006 in millions of euros
The average exposure over 2006 was higher than 2005 (average VaR 2006: EUR 31 million and average VaR 2005: EUR 28 million). The VaR remained well within the ING Wholesale Banking trading limit. Trading positions with interest rate exposures provided the largest contribution to the trading VaR.
(1) The total VaR for the columns Minimum and Maximum can not be calculated by taking the sum of the individual components since the observations for both the individual markets as well as total VaR may occur on different dates.
MARKET RISK IN NON-TRADING PORTFOLIOS Organisation Within ING Bank, positions are labelled as either trading or non-trading positions. The banking books are defi ned as the non-trading books. The most important aspect in segregating the banking from the trading books is the intent of the positions held in these books. It is of crucial relevance that the banking book positions are intended to be held in the long term (or until maturity) or for the purpose of hedging other banking book positions.
Within ING Bank, interest rate risk management of the banking books is the responsibility of the ALCO function with ALCO Bank as the highest approval authority. ALCO Bank determines the overall risk appetite for interest rate risk in the banking books. The ALCO function is regionally organised with the exception of ING Direct, which has a separate ALCO. The business lines Retail Banking and Wholesale Banking are represented within the respective regional and local ALCO’s. The ALCO structure within ING Bank facilitates top-down risk management, limit setting and the monitoring and control of interest rate risk in all the banking books. This ensures a correct implementation of the ING Bank risk appetite. CMRM is the designated independent department that is responsible for the design and execution of the bank’s interest rate risk management functions in support of the ALCO function. CMRM is therefore responsible for determining adequate policies and procedures for managing the interest rate risk in the banking books and for monitoring the compliance with these guidelines. CMRM maintains an adequate limit framework in line with the bank’s risk appetite. The CMRM structure recognises that risk management to a large extent occurs at the regional/local level. Bottom-up reporting allows each management level to fully assess the interest rate risk relevant at the respective levels. The businesses are responsible for adhering to the limits that are approved by ALCO Bank. Limit breaches are reported to senior management on a timely basis and the business is required to take the appropriate actions to reduce the risk position.
Interest rate risk in banking books To enable clear assignment of responsibilities for risk and return within the banking book structure, a split into two types of activities is made: Asset & Liability Management (ALM) and commercial business. Within ING Bank the risk transfer principle is used. This refers to the principle whereby the outright interest rate risk present in the banking books is centralised in the ALM books. Outright interest rate risk in the banking books arises due to (i) investment of the bank’s own funds (core equity) and (ii) the fact that the assets and liabilities originated by the bank typically do not reprice simultaneously and therefore have a different duration.
Within CMRM, continuous research is being done in order to optimise the modelling of client behaviour. For this purpose, several methods are in place to replicate the interest rate risk, taking into account both the contractual and behavioural characteristics of demand deposits, saving accounts and mortgages. All models and assumptions are back-tested regularly and presented to the designated ALCO.
For the determination of the interest rate sensitivity of savings accounts and current accounts, several methods have been developed, e.g. historical simulation, Earnings-at-Risk analysis and valuation models. Pricing strategies, outstanding volumes and the level and shape of the yield curve are taken into account in these models. Based on these analyses the investment rules are determined for the various portfolios.
EaR measures the impact on IFRS earnings resulting from changes of market rates over a time period of one year. Changes in balance sheet dynamics and management interventions are not incorporated in these calculations. The EaR fi gures in the table below are determined on the basis of an instantaneous upward 1% parallel shock of the market rates. For the ALM books EaR measures the potential loss of earnings due to the structural mismatch in interest rate positions. The calculations for the ALM books capture the EaR resulting from the current positions. For the commercial banking books the EaR captures the basis risks resulting from savings, demand deposits and the main mortgage portfolios. The impact of new business is included in the EaR calculations for the savings and demand deposits portfolios, as it is most relevant for these portfolios.
By Currency Euro –232 US dollar –80 Pound sterling –4 Other –48 Total –364
The NPV-at-Risk fi gures represent the full value impact (i.e. including convexity) to the banking books resulting from changing interest rates. This full value impact cannot be linked directly to the balance sheet or profi t and loss account as the value mutations in the banking books only for a small part are fed directly through the profi t and loss account or through equity. The largest part, namely the value mutations of the amortised cost balances, is not recognised in the balance sheet or directly in the profi t and loss account. The NPV-atRisk fi gures in the table below are determined on the basis of an instantaneous upward 1% parallel shock of the market rates in line with the EaR calculations. For the ALM books the NPV-at-Risk fi gures again capture the potential change of value due to the structural mismatch in interest rate positions. For the commercial banking books the NPV-at-Risk calculations capture the convexity resulting from the optionality in the main mortgage portfolios. In these calculations it is assumed that savings and other demand deposits are perfectly represented via the replicating methods and therefore fully hedged.
By Business Line ING Wholesale Banking –559 ING Retail Banking –134 ING Direct –377 ING Bank Corporate Line –818 ING Bank Total –1,888
By Currency Euro –1,465 US dollar –402 Pound sterling –58 Other 37 Total –1,888
The table above shows that compared to 2005 larger net foreign exchange positions are held in the non-trading books. These net positions are held to protect the Tier 1 ratio against currency movements.
The same metric applied for the trading books (Value-at-Risk) is used to quantify and monitor the FX risk in the banking book.
LIQUIDITY RISK Liquidity risk is the risk that ING Bank or one of its subsidiaries cannot meet its fi nancial liabilities when they come due, at reasonable costs and in a timely manner. Within ING Bank, ALCO Bank bears overall responsibility for the liquidity risk strategy. ALCO Bank has delegated day-to-day liquidity management to the Treasury Amsterdam, which is responsible for managing the overall liquidity risk position of ING Bank, while regional and local treasuries are responsible for managing liquidity in their respective regions and locations.
The main objective of ING’s liquidity strategy is to maintain suffi cient liquidity in order to ensure safe and sound operations. The liquidity strategy of ING Bank has four primary components.
The third component of ING’s liquidity strategy is to maintain a broad portfolio of highly marketable assets that can be easily used to bear disruptions in the cash fl ow profi le. ING has relatively large portfolios of unencumbered marketable assets. These marketable assets can provide liquidity through repurchase agreements or through sale. The majority of ING’s marketable assets are located in the euro zone.
The key focus of the measurement of liquidity within ING is on the periods of one week and one month. The internally used liquidity fi gures are calculated in line with the regulatory reporting requirements for liquidity risk of the Dutch Central Bank. For this purpose, the positions are split by type of product and counterparty. All positions with a known maturity date are included in the maturity calendar based on their contractual maturity date. Positions with an unknown maturity date and marketable assets are included as items with a direct liquidity value. Standby facilities, undrawn irrevocable credit facilities, guarantees and other contingent liabilities are also included. The positions in the week and the month categories are weighted under a scenario that is a mix between a market event and an INGspecifi c event. The total available liquidity values are corrected for liquidity surpluses in inconvertible currencies and in locations with restrictions on capital transfer. Most of these inconvertible and non-transferable positions are located outside the euro zone. Under the regulatory guidelines, banks should at a minimum report positive liquidity fi gures. In addition to this a framework is implemented within ING Bank that sets limits on the overall weekly and monthly liquidity risk positions to ensure adequate buffers of liquidity.
General ING is engaged in selling life and non-life insurance products. For Risk management purposes life products include a broad range of traditional life, unit-linked, annuities, universal life, group life, pension, and (guaranteed) investment contracts. Non-life insurance products include all lines of insurance products that do not fall under the life insurance business – fi re, automobile, accident and health, third-party liability and disability contracts, referred to as Property and Casualty (P&C), Health and Morbidity. In the remainder of the consolidated annual accounts, health and disability insurance is included in ‘Life’.
As at 31 December 2006 (and 31 December 2005), ING’s life insurance businesses as a whole are suffi ciently adequate at a 90% confi dence level. All business lines are, on a stand alone basis, adequate at a 90% confi dence level, except for the business line Insurance Asia/Pacifi c. The inadequacy in Insurance Asia/Pacifi c is fully attributable to Taiwan.
The outcome of the reserve adequacy test for Taiwan is inherently uncertain given the use of various assumptions and the long term nature of the liability. The outcome can only be reliably estimated within broad ranges which are bound to vary signifi cantly from period to period. The outcome of the test for Taiwan is especially sensitive to (changes in) interest rate assumptions. The reserve adequacy test at 31 December 2006 is based on the current 10-year swap rate in Taiwan at 31 December 2006 of 2.21% (2005: 2.35%), with the assumption that, in the long term, this swap rate will move to 5.75% (2005: 5.75%).
General 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 approval processes and risk limitations related to insurance policy terms and conditions with the client. Actuarial risks are managed through pricing procedures and included in the overall adequacy of provisions for insurance contract and investment contract liabilities. Underwriting risks are managed in the process whereby applications submitted for insurance coverage are reviewed. The maximum underwriting exposure is limited through exclusions, cover limits, and reinsurance.
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). For the main non-life units (in The Netherlands, Belgium, Canada, Mexico) the risk tolerance is generally set at 2.5% of the Group’s after tax earnings. For 2006, this translated into a (pre-tax) risk tolerance level of EUR 190 million (2005: EUR 170 million) for Mexico and The Netherlands-Belgium combined. For Canada the pre-tax risk tolerance level is set at EUR 169 million (derived from the above EUR 190 million but allowing for outside interests) (2005: EUR 149 million). The risk tolerance refers to the maximum allowable loss for catastrophic events. The probable maximum loss risk tolerance levels are set at a 1 in 250 return period for Canada, Mexico and The Netherlands-Belgium combined which is in line with industry practice. With respect to the Fire line of business this assessment is based on risk assessment models that are widely accepted in the industry. For the smaller non-life units, the (pre-tax) risk tolerance level for catastrophe related events for 2006 was set at EUR 5 million (2005: EUR 5 million) per event per business unit. For motor business the (pre-tax) risk tolerance level for 2006 was set at EUR 7.5 million (2005: EUR 5 million) per unit.
Corporate Insurance Risk Management (CIRM) consolidates and monitors the MVaR exposures of the business lines including diversifi cation effects on a quarterly basis. In 2006 there were no breaches (2005: none) of the overall ING Insurance MVaR limit.
The market risk of ING Insurance is primarily related to interest rate risk and equity risk although it also includes real estate and foreign currency risks. The following text provides an analysis of the exposures of the different types of market risks.
ALM risk – interest rate risk ING’s insurance operations are exposed to changes in interest rates with respect to guaranteed interest rates on insurance and investment contract liabilities. ING’s insurance operations are also exposed to changes in interest rates with respect to investment income. The current product portfolio also includes products where interest rate risks are entirely or partially passed on to the policyholder, thereby reducing ING’s exposure to interest rate movements.
Through scenario analyses, ING Insurance measured the potential changes in earnings of the insurance operations from an instantaneous increase/decrease in interest rates of 100 basis points. These changes to net profi t can relate to assets as well as liabilities such as investment income, interest paid to policyholders, adequacy of provision for liabilities, market value adjustments, amortisation of Deferred Acquisition Costs (DAC) or any other net profi t item that would be affected by interest rate changes. The effect of interest rate changes is different by business line and by product. In addition, ING has estimated the impact on the 31 December 2006 shareholders’ equity of ING Insurance from such an instantaneous change in interest rates.
Shareholders’ equity impacts also relate directly to use of market values for available for sale securities offset by deferred profi t sharing and shadow accounting of reserves and DAC/VOBA where possible.
Effect on ING Insurance Effect on ING Insurance Net Shareholders’ Net Shareholders’ profit equity profit equity
Increase of equity by 10% 120 1,325 59 1,072 Decrease of equity by 10% –150 –1,347 –80 –1,094
Another type of foreign exchange risk exists in relation to translation risk. Locally required capital levels are invested in local currencies in order to satisfy regulatory requirements and to support local insurance business regardless of currency movements. These capital levels may affect the consolidated balance sheet when translated to euros. Depending on hedging costs and the capital exposure, ING may hedge the capital over locally required margins.
Through scenario analysis ING Insurance measured the potential changes in the reported earnings of the insurance operations resulting from an instantaneous increase/decrease on 31 December 2006 in foreign exchange markets of 10%. In addition, ING has estimated the impact on the 31 December 2006 shareholders’ equity of ING Insurance from such a change in foreign exchange markets.
The main foreign exchange risks of ING Insurance relate to the translation risk from net profi t and equity from business units in United States, Canada and certain Latin American countries. For net profi t the impact is mitigated through the usage of average yearly exchange rates. During 2006 the euro has increased in value compared to most other currencies of countries where ING has business.
ALM risk – Real estate risk Real estate risk exists in some of the investment portfolios of ING Insurance, most signifi cantly in the Netherlands. ING Insurance is exposed to the risk of decreasing real estate prices to the extent these cannot be shared with contract holders in participating insurance plans.
The sensitivities represent an instantaneous increase/decrease in real estate markets as of 31 December 2006. The net profi t sensitivity refl ects the related immediate effect on net profi t after tax for the year 2006 if the real estate markets remain 10% higher (or lower) for at least 12 months.
The most signifi cant real estate risk of ING Insurance exists within the ING Real Estate investment portfolio in The Netherlands.
Risk Measurement • Incidents Reporting and Analysis • RAROC • Quality of Control Scorecards
Risk Monitoring • Operational Risk Committee • Audit Findings Action Tracking • Key Risk Indicator Reporting • Operational Risk Dashboard
Risk Mitigation • New Product Approval Process • (Information) Security plans & implementation • Crisis management & Business Continuity Planning
Measurement Operational risk (OR) is expressed as the amount of operational risk capital required for a business line as calculated using the OR capital model. This risk measurement model uses both external and internal loss data (exceeding EUR 1 million) within an actuarial model. The model is adjusted for the scorecard results, taking into account the specifi c quality of internal control in a business line. This provides an incentive to business unit management to better manage operational risk. The outcome is periodically challenged and benchmarked. The capital calculation model meets industry standards. ING is member of the Operational Risk data eXchange Association (ORX), the world’s leading operational risk loss data consortium for the fi nancial services industry. In order to protect ING against fi nancial consequences of uncertain operational events ING has acquired insurance policies issued by third party insurers, with world wide cover for (Computer) Crime, Professional Liability, Directors & Offi cers Liability, Employment Practices Liability and Fiduciary Liability. ING retains a portion of these risks that matches industry practice.
Developments in 2006 ORM has piloted the COSO (a control framework on Enterprise Risk Management (ERM) issued by the Committee of Sponsoring Organisations of the Treasury Commission in the United States) ERM model in its Intermediaries Division in the Netherlands. Further, ING has now completed the embedding of its product approval process for new and amended products in all business units. Also during 2006, ING reached full coverage of the risk management systems for action tracking, incident management and scorecard evidencing within all ING entities.
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.
Within the Retail Banking segment compliance-related costs were EUR 85 million. In order to comply with legal requirements the Dutch Retail Banking entities alone spent approximately EUR 50 million of the total amount on the identifi cation of (existing) customers, improving the customer identifi cation process and establishing risk profi les of existing and new customers. As well as operational changes training programs were developed and ongoing implementation programmes commenced.
EQUITY 3 Share capital 530 530 Share premium 8,348 8,343 Share of associates reserve 11,528 14,143 Currency translation reserve –950 –692 Other reserves 11,118 7,202 Net profit 7,692 7,210
Financial liabilities at fair value through profit and loss 120 92
References relate to the notes starting on page 214 which form an integral part of the parent company annual accounts.
Parent company balance sheet of ING Group as at 31 December before profi t appropriation
Share of Currency Share Share associates translation Other amounts in millions of euros capital premium reserve reserve reserves (1) Total
Implementation IAS 32/39 and IFRS 4 –104 –191 7,538 –556 –2,584 4,103
Unrealised revaluations after taxation 2,269 489 61 2,819 Realised gains/losses transferred to profit and loss –663 –663 Transfer to insurance liabilities/DAC –89 –89 Change in cash flow hedge reserve revaluations 764 764 Employee stock option and share plans 63 63
Dividend –2,461 –2,461 Purchase/sale of treasury shares –305 –305 Exercise of warrants and options 9 9
Unrealised revaluations after taxation –1,631 428 –1,203 Realised gains/losses transferred to profit and loss –798 –798 Transfer to insurance liabilities/DAC 820 820 Change in cash flow hedge reserve revaluations –696 –696 Unrealised revaluations from net investment hedges 194 194 Employee stock option and share plans 100 100 Exchange rate differences –883 –452 –1,335 Other –48 –48 Total amount recognised directly in equity –3,188 –258 480 –2,966
Parent company statement of changes in equity of ING Group for the years ended 31 December
The parent company accounts of ING Group are prepared in accordance with the fi nancial reporting requirements included in Part 9 of Book 2, of the Dutch Civil Code. The accounting policies with regard to presentation and disclosures are in accordance with the fi nancial reporting requirements included in Part 9 of Book 2, of the Dutch Civil Code. The principles of valuation and determination of results stated in connection with the consolidated balance sheet and profi t and loss account are also applicable to the parent company balance sheet and profi t and loss account with the exception of Investments in group companies and investments in associates which are initially recognised at cost and subsequently accounted for using the equity method of accounting.
A statutory reserve is carried at an amount equal to the share in the results of associates since their fi rst inclusion at net asset value less the amount of profi t distributions to which rights have accrued in the interim. Profi t distributions which can be repatriated to the Netherlands without restriction are likewise deducted from the Share of associates reserve.
Changes in ING Groep N.V. shares held by group companies 422 –187 2 OTHER ASSETS
Receivables from group companies 8,827 8,094 Other receivables, prepayments and accruals 71 37 3 EQUITY
Opening balance 15,293 –868 –13 14,412 Profit for the year 7,692 7,692 Unrealised revaluations 552 –124 428 Change in treasury shares –520 –520 Dividend –2,681 –2,681 Transfer to share of associates reserve –573 –573
Opening balance 12,944 –563 12,381 Implementation IAS 32/39 and IFRS 4 –2,584 –2,584 Profit for the year 7,210 7,210 Unrealised revaluations 108 108 Shares bought back –305 –305 Dividend –2,461 –2,461 Other 76 –13 63
See Note 12 Shareholders’ equity (parent) in the consolidated annual accounts for additional information.
Notes to the parent company balance sheet of ING Group continued
Within 1 year 33 956 More than 1 year but less than 5 years 2 35
Cor A.J. Herkströter, Chairman Michel J. Tilmant, Chairman Eric Bourdais de Charbonnière, Vice-Chairman Cees Maas, Vice-Chairman and CFO Luella Gross Goldberg Eric F. Boyer de la Giroday Paul F. van der Heijden Dick H. Harryvan Claus Dieter Hoffmann Eli P. Leenaars Jan H.M. Hommen Tom J. McInerney Piet C. Klaver Hans van der Noordaa Wim Kok Jacques M. de Vaucleroy Godfried J.A. van der Lugt Karel Vuursteen
Opinion with respect to the parent company annual accounts In our opinion, the parent company annual accounts give a true and fair view of the fi nancial position of ING Groep N.V. as at 31 December 2006, and of its result for the year then ended in accordance with Part 9 of Book 2 of the Dutch Civil Code.
Pursuant to the legal requirement under 2:393 sub 5 part e of the Dutch Civil Code, we report, to the extent of our competence, that the report of the Executive Board is consistent with the annual accounts as required by 2:391 sub 4 of the Dutch Civil Code.
Amsterdam, 12 March 2007 for Ernst & Young Accountants signed by Jan J. Nooitgedagt
Net profit 7,692 Addition to reserves pursuant to Article 38 (5) of the Articles of Association 4,844 Non-distributable loss of Stichting Regio Bank 17 At the disposal of the General Meeting of Shareholders pursuant to Article 38 (6) of the Articles of Association 2,865
Pursuant to Article 13 of the Articles of Association, the authority to issue shares, grant the right to take up shares and restrict or exclude the preferential rights of shareholders has been conferred on the Executive Board, upon approval of the Supervisory Board. This authority applies to the period ending on 25 October 2007 (subject to extension by the General Meeting of Shareholders): 1. i) for a total of 220,000,000 ordinary shares; plus ii) for a total of 220,000,000 ordinary shares, only if these shares are issued in connection with the take over of a business or company; 2. for 10,000,000 preference shares B.
Reconciliation of the shareholders’ equity and net profi t on the basis of IFRS-EU to US GAAP
Amounts in accordance with US GAAP (excluding effects of changes in accounting policies) 42,450 41,619 6,827 6,976 6,688 Cumulative effect of changes in accounting policies –1,803 –91 Amounts in accordance with US GAAP 40,647 41,619 6,827 6,976 6,597
Diluted per share (in euros) in accordance with US GAAP 18.86 19.21 3.17 3.22 3.10
ING Group adopted IFRS-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 with respect to fi nancial instruments and insurance contracts is prepared under ING Group’s previous accounting policies.
An explanation of differences between IFRS-EU (applied 2005) and IFRS-EU excluding IAS 32, IAS 39 and IFRS 4 (applied in 2004) is provided in section ‘Changes in accounting policies’ on page 105.
VALUATION AND INCOME RECOGNITION DIFFERENCES BETWEEN IFRS-EU AND US GAAP Goodwill Under IFRS-EU, goodwill is capitalised on acquisitions after 1 January 2004; goodwill on acquisitions prior to 1 January 2004 was charged directly to equity. Under US GAAP, goodwill is capitalised on all acquisitions. When a reporting unit or a business is to be disposed of, goodwill associated with that reporting unit or business is included in the carrying amount of the reporting unit or business in determining the gain or loss on disposal. The transition difference as at 1 January 2004 may therefore result in differences in results on disposal in subsequent periods. In addition, the transition difference may result in differences in impairments in future years. The amount of transition difference changes due to foreign currency translation effect.
The timing of the recognition of certain aspects of goodwill may be different under IFRS-EU and US GAAP since IFRS-EU requires that contingent consideration be recorded at the date of acquisition, with subsequent adjustments to contingent consideration refl ected in goodwill. Under US GAAP, contingent consideration is only recorded when the contingency is resolved and the consideration is issued or becomes issuable.
Real estate Investment property Under IFRS-EU, investment property is measured at fair value, with changes in fair value recognised in the profi t and loss account. No depreciation is recorded. Under US GAAP, investment property is measured at cost less depreciation and impairment. Depreciation is charged to the profi t and loss account. Realised results on disposal are reported in the profi t and loss account.
Property in own use Under IFRS-EU, property in own use is measured at fair value with changes in fair value recognised in equity. Negative revaluation reserves on a property-by-property basis are charged to the profi t and loss account. Subsequent recoveries are recognised as income up to the original cost. Depreciation over the fair value is charged to the profi t and loss account. On disposal any revaluation reserve remains in equity and any difference between the carrying amount of the property and the sales price is reported in the profi t and loss account. Under US GAAP, property in own use is measured at cost less depreciation and impairment. Depreciation over the cost basis is charged to the profi t and loss account. Realised results on disposal are reported in the profi t and loss account. Impairments are an adjustment to the cost basis and are not reversed on subsequent recovery.
Debt securities Held to maturity investments Under IFRS-EU, assets designated as held-to-maturity at the date of implementing IFRS-EU (1 January 2005) were recorded at the amortised cost value as at that date. Under US GAAP, these assets were transferred to held-to-maturity from available-for-sale at the 1 January 2005 fair value. The difference between fair value and amortised cost at 1 January 2005 is amortised over the remaining life. For assets designated as held-to-maturity after 1 January 2005 there is no difference between IFRS-EU and US GAAP.
Effective interest on prepayment sensitive assets Under IFRS-EU, in applying the effective yield method to determine amortised cost of prepayment sensitive assets, the original effective yield is maintained and any recognised adjustment, based on changes in future cash fl ow estimates, is made to the carrying amount of the asset (cumulative catch-up method). Under US GAAP, for investments in highly-leveraged benefi cial interests, the prospective method is used to calculate a new yield. The prospective method discounts projected cashfl ows to the current carrying amount and utilizes the new yield in future periods. For other prepayment sensitive assets the new yield is calculated using the retrospective method. Under the retrospective method, actual plus projected cashfl ows are discounted to the original purchase price and the new yield is used to calculate a revised current carrying amount of the asset, with any difference recorded in current period earnings.
Debt securities (2004) Valuation of fi xed-interest securities Under IFRS-EU excluding IAS 39 (2004), investments in fi xed-interest securities are carried at redemption value. Differences between redemption value and cost are amortised to the profi t and loss account over the remaining term of the investments concerned. Under US GAAP, securities which are available for sale are stated at fair value. Unrealised movements in the fair value are recognised in shareholders’ equity. Realised results on disposal are recognised immediately in the profi t and loss account.
Valuation of equity securities (2004) Under IFRS-EU excluding IAS 39 (2004) and US GAAP, unrealised losses on equity securities are recorded in the revaluation reserve, unless the securities are considered to be impaired. Impairments are charged to the profi t and loss account. The determination of impairment involves various assumptions and factors, including the period of time and the extent to which the unrealised loss has existed and general market conditions, but is primarily based on the fi nancial condition of the issuer in the long-term; ING has the intention and ability to hold securities with unrealised losses to full recovery. Under US GAAP, unrealised losses that are considered ’other than temporary’ are charged to the profi t and loss account. The determination of ’other than temporary’ is primarily based on the duration and extent to which the market value has been below cost.
Deferred acquisition costs Under IFRS-EU, acquisition costs of certain life insurance business involving the receipt of regular premiums are recognised and amortised to the profi t and loss account in proportion to future premiums. Under US GAAP, deferred acquisition costs of traditional insurance contracts are likewise amortised in proportion to future premiums. For universal-life type contracts, investment contracts and for participating individual life insurance contracts, deferred acquisition costs are amortised at a constant rate based on the present value of the estimated gross profi t margins expected to be realised over the life of the book of contracts. Changes in estimated gross profi ts result in a retroactive adjustment recorded in the period the estimate of future gross profi ts change. Both under IFRS-EU and US GAAP deferred acquisition costs are adjusted, where applicable, (through equity) to refl ect changes that would have been necessary if unrealised investment gains and losses related to available-for-sale securities had been realised. However, the amounts may be different due to differences in underlying accounting principles.
Investment contracts Under IFRS-EU, contracts that do not contain signifi cant insurance risk are measured and presented as fi nancial instruments and not as insurance contracts. Under US GAAP, these contracts are measured and presented as insurance contracts.
Deferred profi t sharing Under IFRS-EU, a deferred policyholder profi t sharing liability is established for the realised and unrealised investment results allocated to insurance contracts with discretionary participation or with a legal/constructive obligation to share investment results with policyholders. Under US GAAP, such deferred liability is only recognised for legal obligations.
Employee benefi ts (2006) Unrecognised actuarial gains and losses Under IFRS-EU, all previously unrecognised actuarial gains and losses were charged to equity at 1 January 2004. Under US GAAP, no reset of actuarial gains and losses was applied at 1 January 2004. However, as from 31 December 2006 all previously unrecognised actuarial gains and losses have been recognised on the balance sheet as explained below.
Funded status Under US GAAP, the funded status of defi ned pension plans is fully recognised in the balance sheet. That amount is measured as the difference between the fair value of plan assets and the projected benefi t obligation. Actuarial gains and losses and prior service cost or credits that have not yet been recognised through earnings as net periodic pension cost are recognised in shareholders’ equity until they are amortised. IFRS-EU does not require that all gains or losses are recognised in the balance sheet.
Employee benefi ts (2004 and 2005) Unrecognised actuarial gains and losses Under IFRS-EU, all previously unrecognised actuarial gains and losses were charged to equity at 1 January 2004. Under US GAAP, no reset of actuarial gains and losses was applied at 1 January 2004.
Accumulated benefi t obligation in excess of the fair value of the plan assets Under US GAAP, an additional liability is recognised immediately in a situation where the accumulated benefi t obligation exceeds the fair value of the plan assets and that exceeds the amount of the recorded unfunded accrued pension cost. The accumulated benefi t obligation differs from the projected benefi t obligation in that it does not take into account future salary increases. Under IFRS-EU, such additional liability is not recognised.
Under IFRS-EU excluding IAS 39 (2004), equity participations are carried at either the lower of cost or market value or at net asset value. Dividends received and realised gains and losses on the sale of these shareholdings are charged to the profi t and loss account. Under US GAAP, these shareholdings are accounted for at either fair value with changes in fair value recorded in shareholders’ equity, or, in cases where signifi cant infl uence can be exercised by ING, by the equity method.
Taxation The impact of changes in tax rates result from fl uctuations in certain tax jurisdictions’ tax rates, as well as from changes in organisational structure, which result in changes in tax regimes with different tax rates. Under IFRS-EU, the impact of changes in tax rates which are applied to temporary differences which were initially established through the revaluation reserve are also refl ected through the revaluation reserve. Under US GAAP, the effect of changes in tax rates is reported in net income.
A tax difference arises between IFRS-EU and US GAAP from the tax effect of the IFRS-EU and US GAAP reconciling adjustments.
Other Other includes the effect of certain other differences between IFRS-EU and US GAAP, which both individually and in aggregate have no signifi cant effect on shareholders’ equity and net profi t for the period.
Cumulative effect of changes in accounting policies In 2006 ING implemented FAS 158, which requires recognition of the funded status of employee benefi t plans in the balance sheet (through equity). Adoption of FAS 158 as at 31 December 2006 resulted in the recognition of an additional charge of EUR 1,803 million (net of deferred tax) in equity.
As part of its continuous review activities on fi lings of companies listed in the US, the Securities and Exchange Commission (SEC) has reviewed ING Group’s 2005 Form 20-F, which includes ING Group’s 2005 Annual Accounts. ING is fully cooperating with this review. As of the date of this Annual Report, the review is not yet fi nalised.
Rest of the World 16.7% 14.5% 2.3 2.5 Other Wholesale –17.6% –26.7% 0.2 0.2
The European Embedded Value (EEV) Policies were published in May 2004 by the CFO Forum, a group representing the Chief Financial Offi cers of major European insurers. The Policies and associated guidance provide a framework for calculating and reporting supplementary embedded value information. ING has adopted the EEV Principles in respect of the year-end 2006, 2005 and 2004 results. This Report also takes account of the Additional Guidance on EEV Disclosures effective for 31 December 2006 reporting.
The value of new business fully refl ects acquisition expense overruns, which represent the excess of the costs of acquiring new business over the expense allowances provided in product pricing. Such overruns may exist while new operations are achieving scale, while several businesses are integrating into one, or during a year when sales are lower than anticipated. During 2006, after-tax acquisition expense and commission overruns were EUR 87 million, compared to EUR 103 million in 2005.
United States 9,376 9,911 Latin America 896 947 Insurance Americas 10,272 10,858
Addition of business/(divested business) 407 Currency effects –1,164 Model changes 92 Revised starting embedded value 26,921
Value of new business 807 Financial variances 1,240 Operational variances –33 Operating assumption changes –33 Embedded value profit 1,981
Required return 1,716 Investment return on free surplus 968 Discount rate changes –338 Economic assumption changes –1,534 Embedded value of business acquired (Cash dividends and) capital injections –1,995 Ending embedded value 2006 27,718
In each sensitivity calculation, all other assumptions remain unchanged except – where they are directly affected by the revised economic conditions; for example, future bonus crediting rates are automatically adjusted to refl ect sensitivity changes to future investment returns; and – when indicated above that the risk discount rate is adjusted accordingly; in this case the risk margin remains unchanged.
(1) Net impact shown here is the sum of the individual sensitivities presented above. Note that this may differ from an exact calculation of changing both parameters together.
Developing markets new business value of EUR 429 million, increased by 14.4% from 2005 primarily due to Central Europe and Asia/Pacifi c.
Watson Wyatt Limited (‘Watson Wyatt’), an international fi rm of consulting actuaries, has reviewed the Embedded Value methodologies and assumptions of ING as at 31 December 2006 and the Value of its New Business written during 2006. All material business units were included in the review. The covered business included all life insurance and other material long-term business lines.
In addition to a review of the methodology and assumptions used, Watson Wyatt was also requested to perform a limited high level review of the results of the calculations but was not asked to perform any detailed checks on the models and processes used.
(1) the Standard & Poor’s ratings, the Moody’s ratings and the Fitch ratings all have a stable outlook.
Other qualifying capital (6) 11,445 11,318 DAC/ViF adjustments (50%) (7) 3,618 4,503 Group leverage (core debt) –4,210 –3,969
(2) Investments in subsidiaries minus equity (incl. hybrids) of the Group holding company. This net debt position is injected as equity in Insurance and Bank. (3) Includes EUR 1,709 million (2005: EUR 4,116 million) of the revaluation reserve fi xed income securities (offset by shadow accounting), EUR 1,357 million (2005: EUR 2,188 million) cash fl ow hedge and EUR 286 million (2005: EUR 173 million) goodwill. The Dutch banking regulator requires this deduction to be made from Tier-1 capital. ING applies this prudent method to Bank, Insurance and Group.
(4) Mainly includes EUR 579 million (2005: EUR 507 million) in participations (e.g. Kookmin, Bank of Beijing), EUR 386 million (2005: EUR 361 million) in Real Estate for own use and EUR 116 million (2005: EUR 149 million) of ING Bank’s investment portfolio. The Dutch banking regulator requires this deduction to be made from Tier-1 capital. This deduction is added back to Tier-2.
(5) Tier-1 instruments issued by the ING Insurance e.g. perpetual debt securities, at nominal value. (6) Includes EUR 12,362 million (2005: EUR 11,605 million) Tier-2 and EUR 330 million (2005: EUR 363 million) Tier-3, offset by EUR 1,251 million (2005: EUR 650 million)
AMORTISED COST The amount at which the fi nancial asset or liability is measured at initial recognition minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between that initial amount and the maturity amount, and minus any reduction for impairment or uncollectibility.
ASSOCIATE An entity over which the Group has signifi cant infl uence, generally accompanying a shareholding of between 20% and 50% of the voting rights, and that is not a subsidiary not a joint venture.
AVAILABLE-FOR-SALE FINANCIAL ASSETS Those non-derivative fi nancial assets that are designated as available for sale or are not classifi ed as (a) loans and receivables, (b) held-to-maturity investments, or (c) fi nancial assets at fair value through profi t and loss.
BIS An international organisation which fosters international monetary and fi nancial co-operation and serves as a bank for central banks. BIS has set a minimum for the solvency ratio refl ecting the relationship between capital and risk weighted assets. The ratio should at least be 8%.
COUNTRY RISK The risk that a foreign government will not fulfi l its obligations or obstructs the remittance of funds by debtors, either for fi nancial reasons (transfer risk) or for other reasons (e.g. political risk).
CREDIT INSTITUTIONS All institutions which are subject to banking supervision by public authorities, including mortgage banks, capital market institutions, multilateral development banks and the International Monetary Fund (IMF).
CREDIT RISK The risk of loss from the default by borrowers (including bond issuers) or counterparties. Credit risks arise in ING’s lending, pre-settlement and investment activities, as well as in its trading activities. Credit risk management is supported by dedicated credit risk information systems and internal rating methodologies for debtors and counterparties.
DEFERRED TAX LIABILITIES The amounts of income tax payable in future periods in respect of taxable temporary differences between carrying amounts of assets or liabilities in the balance sheet and tax base, based on tax rates that are expected to apply in the period when the assets are realised or the liabilities are settled.
ECONOMIC CAPITAL The minimum amount of capital that is required to absorb unexpected losses in times of severe stress. Given ING Group’s AA target rating, ING calculates economic capital requirements at a 99.95% level of confi dence. This confi dence level is derived from the historical default frequency of AA-rated companies (probability of default in 2000 years or 0.05%).
FUTURE CONTRACTS Commitments to exchange currencies or to buy or sell other fi nancial instruments at specifi ed future dates. Exchanges act as intermediaries and require daily cash settlement and collateral deposits.
HELD-TO-MATURITY INVESTMENTS Non-derivative fi nancial assets with fi xed or determinable payments and fi xed maturity that ING Group has the positive intention and ability to hold to maturity other than: a. those that ING Group upon initial recognition designates as at fair value through profi t and loss; b. those that ING Group designates as available for sale; and c. those that meet the defi nition of loans and receivables.
INVESTMENT PORTFOLIO Comprises those assets which are intended for use on a continuing basis, and have been identifi ed as such. These investments are held in order to cover the insurance provisions and to manage interest rate, capital and liquidity risks.
IRREVOCABLE LETTERS OF CREDIT Concerns an obligation on behalf of a client to, within certain conditions, pay an amount of money under submission of a specifi c document or to accept a bill of exchange. An irrevocable letter of credit cannot be cancelled or adjusted by the bank that has granted it during the duration of the agreement unless all those concerned agree.
LIQUIDITY RISK The risk that ING Group or one of its subsidiaries cannot meet its fi nancial liabilities when they fall due, at reasonable costs and in a timely manner.
(even in bankruptcy) and cannot be paid to the reporting enterprise, unless either the proceeds represent surplus assets that are not needed for the policy to meet all the related employee benefi t obligations or the proceeds are returned to the reporting enterprise to reimburse it for employee benefi ts already paid.
RISK ADJUSTED RETURN ON CAPITAL (RAROC) An advanced business performance measurement tool that enables management to view its revenues in the perspective of the risks that had to be taken to obtain that revenue. RAROC is calculated by dividing the risk-adjusted-return by economic capital.
SIGNIFICANT INFLUENCE The power to participate in the fi nancial and operating policy decisions of an entity, but not control over these policies. Signifi cant infl uence may be gained by share ownership, statute or agreement.
VALUE AT RISK (VAR) Quantifi es, with a one-sided confi dence level of at least 99%, the maximum overnight loss in Net Present Value that could occur due to changes in risk factors (e.g. interest rates, foreign exchange rates, equity prices, credit spreads, implied volatilities) if positions remain unchanged for a time interval of one day.
ING Publications – Annual Review, in Dutch and English – Annual Report, in Dutch and English – Corporate Responsibility Report, in Dutch and English – Annual Report on Form 20-F, in English (in accordance with SEC guidelines)
These publications are available on www.ing.com. The publications can be ordered on the internet: www.ing.com, button Order ING Publications, by fax: +31 411 652 125, or by mail: P.O. Box 258, 5280 AG Boxtel, the Netherlands.
This Annual Report contains the Reports of the Executive Board and Supervisory Board as well as the Annual Accounts and Other information for the fi nancial year 2006 in their original language (English).
Disclaimer Certain of the statements contained in this Annual Report are statements of future expectations and other forward-looking statements. These expectations are based on management’s current views and assumptions and involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those in such statements due to, among other things, (i) general economic conditions, in particular economic conditions in ING’s core markets, (ii) performance of fi nancial markets, including developing markets, (iii) the frequency and severity of insured loss events, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi) interest rate levels, (vii) currency exchange rates, (viii) general competitive factors, (ix) changes in laws and regulations, and (x) changes in the policies of governments and/or regulatory authorities. ING assumes no obligation to update any forward-looking information contained in this document.