Report of the Executive Board 11 Financial highlights 11 Risk management 14 Insurance Europe 16 Insurance Americas 20 Insurance Asia/Pacific 24 Wholesale Banking 28 Retail Banking 32 ING Direct 36 Asset Management 40 Human Resources 42 Corporate Responsibility 44 1.3 GOVERNANCE AND COMPLIANCE
Auditors’ report 173 Proposed profit appropriation 174 Provisions concerning issue of shares 175 2.2 PARENT COMPANY ANNUAL ACCOUNTS
EXECUTIVE BOARD Michel J. Tilmant (53), chairman Cees Maas (58), vice-chairman and CFO Eric F. Boyer de la Giroday (53) Fred S. Hubbell(1) (54) Eli P. Leenaars (44) Alexander H.G. Rinnooy Kan(1) (56) Hans K. Verkoren(1) (58)
SUPERVISORY BOARD Cor A.J. Herkströter(2) (68), chairman Eric Bourdais de Charbonnière (66), vice-chairman Luella Gross Goldberg (68) Paul F. van der Heijden (56) Claus Dieter Hoffmann (63) Jan H.M. Hommen (62) Aad G. Jacobs(3) (69) Wim Kok (67) Godfried J.A. van der Lugt (65) Paul J.A. Baron de Meester(3) (70) Karel Vuursteen(2) (64)
(1) Resignation as of 25 April 2006 (2) Nominated for reappointment as of 25 April 2006 (3) Retirement as of 25 April 2006
Audit Committee Aad G. Jacobs, chairman Claus Dieter Hoffmann Jan H.M. Hommen (from November 2005) Godfried J.A. van der Lugt (from November 2005) Paul J.A. Baron de Meester (until November 2005)
Remuneration and Nomination Committee Cor A.J. Herkströter, chairman Eric Bourdais de Charbonnière (from April 2005) Luella Gross Goldberg Paul F. van der Heijden
Corporate Governance Committee Cor A.J. Herkströter, chairman Eric Bourdais de Charbonnière (from April 2005) Luella Gross Goldberg Paul F. van der Heijden
The Shareholders’ Meeting will decide on these nominations on 25 April 2006.
You can find more information on the members of the Executive Board on pages 52-53 and on the members of the Supervisory Board on pages 55-57, including the nominated members.
Assets under management (in EUR billion) 547 492 492 463 449 513
Market capitalisation (in EUR billion) 65 49 49 39 32 57
Underlying (IFRS)/operating net profit (Dutch GAAP) 6,196 4,959 5,389 4,053 3,433 3,539 Divestments and special items (IFRS)/non-operating net profit (Dutch GAAP) 1,014 796 579 -10 1,067 1,038
Conducts the life-insurance operations and asset/wealthmanagement activities in Asia/Pacific. It has well-established positions in Australia and New-Zealand, Hong Kong, Japan, South Korea, Malaysia and Taiwan. The activities in China, India and Thailand are future growth engines for ING.
Insurance Europe 23% 10,702 Insurance Americas 50% 22,744 Insurance Asia/Pacific 27% 12,286 Other 26
INSURANCE – BANKING – ASSET MANAGEMENT ING has six business lines. A clear client focus and strong business logic are the key elements in this structure.
ING is a major financial-services company in the Benelux home market. ING services its retail clients in these markets with a wide range of retail-banking, insurance and asset-management products. In our wholesale-banking activities we operate worldwide, but with a primary focus on the Benelux countries. In the United States, ING is a top-10 provider of retirement services and life insurance, based on sales and assets under management. In Canada, we are the top property and casualty insurer based on direct written premium. ING Direct is a leading direct bank with 15 million customers in nine countries. In the growth markets of Asia, Central Europe and Latin America we provide life insurance. We are also a large asset manager with assets under management of almost EUR 550 billion. ING Real Estate is the largest property company in the world based on its total business portfolio.
ING conducts its business on the basis of clearly defined business principles. In all our activities we carefully weigh the interests of our stakeholders: customers, shareholders, employees, business partners and society at large. ING strives to be a good corporate citizen.
A seperate activity is ING Real Estate, the world’s largest property company.
Offers retail-banking services in the Netherlands, Belgium, Poland, Romania, India and China. Private banking is offered in the Netherlands, Belgium, Luxembourg, Switzerland and various countries in Asia, Latin America, and Central and Eastern Europe.
Dear stakeholder, 2005 was a very good year for ING. We were able to lift our profits to a next level. Our net profit rose from EUR 5,755 billion to EUR 7,210 billion, an increase of 25.3%. Our underlying profit before tax increased by 19.4%. This illustrates that our strategy of improving execution and investing for growth and value creation is paying off. Stock markets rewarded our efforts, as evidenced by the performance of ING’s share price.
We are able to move ahead with these growth engines because our long-established businesses in the Netherlands, Belgium and the United States provide the resources and experience to do so. In 2005, these businesses again achieved solid profit and income growth. Looking ahead, our focus in the mature markets will remain on improving customer service and on working more efficiently. In 2005, we took the decision to streamline and outsource parts of our Operations and IT activities in the Netherlands and Belgium and to reduce the cost base of Nationale-Nederlanden. This will lead to a reduction in jobs, but it is a necessary step to ensure the future competitiveness of our company. We take our responsibilities towards employees seriously by making every effort to help those affected.
Our strong focus on execution has also resulted in a greater emphasis on the importance of adhering to laws and regulations in 2005. Much to our regret, we experienced some compliance incidents, mainly in the Netherlands. In each case, we took the necessary steps to address the issues, including compensating customers where appropriate, and tightening up compliance to better adhere to policies and business principles. We want to be a reliable company to deal with. That is why customer satisfaction is central in our strategy – both to retain customers and attract new ones. For we know that customers look for reliable and knowledgeable advice about their financial future.
ING continued in the strategic direction it embarked on in 2004. We managed for value and created value. Our businesses in mature markets achieved good results, helped by their constant focus on the efficient execution of business fundamentals. We also continued to focus on our growth engines, which further improved in performance.
ING has a clear financial objective. We want to make sure that, over a longer period, our shareholders receive a better total return on their investment than on most other investments in the financial sector. To achieve this, we manage for value. This means focusing on growing economic profit, which measures profit beyond the cost of capital, and emphasising return improvement and profitable organic growth. In our mature banking and life-insurance businesses in the Benelux and the United States, return improvement and profitable growth comes from the proper execution of our business fundamentals. This means managing costs, risks and reputation as well as offering exemplary customer service. We believe that excelling in these operational areas is the key to generating profitable organic growth.
Together with the enhanced strategic focus, this led to an upgrade in 2005 of ING Group’s credit ratings by Standard & Poor’s from A+ to AA-.
Customer satisfaction alone, however, is not enough to create value, especially not in mature markets. Fierce competition in these markets makes it essential to look continuously for ways to keep costs under control and improve efficiency. Cost containment and excellent customer satisfaction go hand-in-hand as operational drivers to create value in these markets. In 2005, several initiatives were taken to control underlying expenses and improve efficiency in mature markets. We announced an efficiency programme at Nationale-Nederlanden to bring efficiency in line with the industry benchmark. We also took steps to streamline our IT organisation in the Benelux, including outsourcing and reducing the number of internal and third-party staff.
Managing our risks and consequently the cost of capital is essential for stable, profitable growth. Risk management supports value creation by providing insight into the levels of risk we can absorb compared with our earnings power and capital base. Integrated risk management – combining credit, market, insurance and operational risk into one common view – has become a key ingredient in our strategy. It allows us to capture the benefits of being a diversified financial services firm and to create a clear overview of all risks.
Integrity and reputation are two of ING’s most important assets. Our strong focus on execution has resulted in a greater emphasis on the importance of adherence to laws and regulations. Regulatory compliance is essential because ING’s long-term relationships with its clients depend on integrity and fairness. In 2005, ING adopted a new groupwide compliance policy, which contained a framework to enable swift and uniform group-wide execution. Senior management has been made more accountable for compliance. Compliance will be integrated in their performance targets and remuneration structure as from 2006. Some incidents that took place in the Netherlands during the year were reported to the regulator. ING believes it took all necessary steps to address the issues in a proper way and strengthened its compliance structure.
Retirement services, life insurance in developing markets and direct banking are ING’s growth engines. Good progress was made in 2005. In the United States, profits from US Retirement Services went up by 22%. In Central Europe, pension-fund profits before tax were up 42%. In the Slovak Republic, ING acquired the pension provider VSP Tatry Sympatia, which considerably strengthens our position in this market.
In our life-insurance business in developing markets, we posted a 40% rise in the value of new business, driven by the businesses in Asia and Central Europe. To add growth potential to our life-insurance and retail-banking businesses in China, we acquired a 19.9% stake in the Bank of Beijing. This acquisition provides ING with a platform to sell a range of insurance and investment products to an increasingly affluent customer base in China.
The number of new ING Direct customers went up by 3.2 million to 14.7 million at the end of 2005. Total funds entrusted rose by EUR 42.6 billion to EUR 188 billion. ING Direct now accounts for 13% of total underlying banking profits, compared with 12% a year ago.
In 2005, ING managed for value and created value. We took initiatives to enhance customer satisfaction, contain costs and improve risk management and did so with good results. We continued to invest in our growth engines, which improved their performance. Action was taken to strengthen the compliance organisation and instil a performance culture throughout the organisation. The consistent implementation of our strategy lifted our financial results and gave our shareholders an above-average total return compared with our peer group in the financial sector. In 2006, we will continue to pursue this strategy. Supported by the proper execution of our business skills and a continued focus on our growth engines, we aim to further improve return and generate profitable organic growth. As such, ING wants to reward its shareholders with a better total return on investment than most other investments in the financial sector.
ING produced strong results in 2005, driven by double-digit underlying top-line growth, higher returns, and an improvement in the efficiency ratios for both banking and insurance. ING’s three key growth engines – ING Direct, retirement services, and life insurance in developing markets – continued their strong performance, while the banking businesses in the Benelux also made a solid contribution to growth. As a result of this strong performance and ING’s confidence in the future, ING proposes to increase the total dividend by 10.3% to EUR 1.18 per share, to be paid fully in cash.
Net profit rose 25.3% to EUR 7,210 million, due in part to a lower effective tax rate. Earnings per share rose to EUR 3.32 from EUR 2.71. Total underlying profit before tax* increased 19.4% to EUR 8,506 million in 2005, driven by strong growth from Retail Banking and ING Direct as well as the insurance activities in the Americas and Europe, supported by growth in retirement services and favourable results from non-life insurance.
Impact of IFRS The application of new accounting standards (IAS 32, 39 and IFRS 4) from 1 January 2005 had a positive impact on ING Group’s results in 2005, with more volatility on a quarterly basis, mainly due to value adjustments on non-trading derivatives. The total impact on total profit before tax of ING Group was approximately EUR 455 million, or EUR 392 million after tax.
Capital ratios The debt/equity ratio of ING Group improved to 9.3% compared with 11.9% at 1 January 2005, supported by growth in capital and reserves. The capital-coverage ratio for ING Verzekeringen N.V. increased to 259% of E.U. regulatory requirements at the end of December, compared with 200% at 1 January 2005. The Tier-1 ratio of ING Bank N.V. stood at 7.32% at the end of 2005, up from 6.92% on 1 January 2005, as growth in capital was partially offset by strong growth in risk-weighted assets. The solvency ratio (BIS ratio) for the bank improved to 10.86% at the end of December 2005 from 10.46% on 1 January 2005. Total risk-weighted assets of the banking operations increased by EUR 45.6 billion, or 16.6%, to EUR 319.7 billion at the end of December 2005, driven by growth in all three banking business lines.
Total premium income increased 4.9% to EUR 45,758 million, driven mainly by strong growth of life premiums in Asia, particularly South Korea and Japan. Premium growth was partially offset by divestments and the reclassification of some life products to investment contracts from the beginning of 2005 under IFRS 4, notably in Australia, the United States and Belgium, which had a total negative impact of EUR 2,053 million. Excluding divestments and the reclassification, life premiums rose 12.5% and total premium income increased 10.4% on a comparable basis. Non-life premiums declined 0.4%, or 0.8% on an underlying basis, as lower premiums in the Netherlands and Mexico offset higher premiums in Canada.
Embedded value and value of new business The embedded value of ING’s life insurance operations increased 22.9% to EUR 27,586 million. Embedded value profit, an important measure of value creation, increased 262.4% to EUR 2,254 million, driven by strong growth in value of new business, robust investment performance and better operational experience. The value of new business increased 27.4% to EUR 805 million, driven by improved pricing margins, higher sales and a more profitable product mix in the United States and Asia/Pacific. Central Europe and Asia/Pacific both generated particularly strong growth in 2005, indicating the strong future earnings potential of the businesses in both regions. New sales, measured in annual premium equivalent, rose 27.0% to EUR 6,312 million, while the internal rate of return increased to 13.2% from 12.1% in 2004. The internal rate of return in developing markets increased to 17.4% as business units benefited from increased scale. New sales in developing markets rose 50.8%.
ING’s banking businesses showed a strong increase in profit in 2005 driven by solid growth in income at ING Direct and Retail Banking, as well as historically low risk costs. Underlying profit before tax rose 27.2% to EUR 4,531 million. Growth was driven by higher savings and strong demand for mortgages at both Retail Banking and ING Direct, including high prepayment penalties on the refinancing of mortgages in the Netherlands. Profit was also supported by the sale of equity investments and a positive impact on balance from IFRS.
valuation result on non-trading derivatives. The proportional (50%) consolidation of Postkantoren BV in the Netherlands from 2005, which had no impact on total profit, added EUR 168 million to Other income.
Total operating expenses increased 0.6% to EUR 8,844 million, as divestments largely offset the impact of consolidations, higher labour costs and one-off expenses. On an underlying basis, excluding the impact of divestments and special items, operating expenses rose 9.6% to EUR 8,789 million, an increase of EUR 768 million. Of that increase, EUR 255 million was related to one-off costs, including EUR 47 million to restructure the Operations/IT activities in the Benelux, EUR 27 million for accelerated software depreciation, EUR 78 million in impairments on development projects at ING Real Estate, and EUR 103 million in provisions taken in Belgium. An additional EUR 168 million was related to the consolidation of 50% of Postkantoren BV. The remaining increase was driven by continued investment in growth opportunities, such as ING Direct and the expansion of retail-banking activities in Romania, Poland and India.
RAROC The after-tax risk-adjusted return on capital (RAROC) of the banking operations improved to 22.6% from 14.5% in 2004. On an underlying basis, excluding divestments and special items, the after-tax RAROC improved to 18.8% from 16.4%, driven by higher economic returns due to the sharpened focus on managing for value throughout the company, and a more stringent approach to capital allocation. All three banking business lines posted higher RAROCs, and all performed above ING’s target of 12.0% after tax.
In 2005, ING was confronted with low interest rates and a flattening yield curve, but also benefited from some favourable market conditions, including strong equity and real-estate markets, historically low credit losses for both bank lending and fixed-income investments, low claims at most non-life insurance units, and low taxes. Looking ahead, the interest-rate environment will remain challenging, while risk costs and non-life claims are expected to return gradually to more normal levels. However, ING has confidence in the growth of the underlying business and in the Group’s ability to continue creating value for shareholders.
ING’s risk profile improved during 2005 due to the continuation of the portfolio review that started in 2004. This led to the divestment and restructuring of several units and activities that contributed neither to the profitability nor to the optimal risk profile of ING. Noteworthy for the banking activities in 2005 were the historically low risk costs. Over time, we would expect a gradual return to more normalised levels. For the insurance activities, a key risk issue was the strengthening of reserves in Taiwan to cover for unexpected risks emerging from relatively high guarantees provided for life-insurance business written before 2002. In August 2005, the Standard & Poor’s rating for ING Group was upgraded to AA- confirming ING’s continuous improvement in risk performance and enhanced strategic focus.
To capture the benefits of being a large and diversified financial-services firm and to create a clear overview of all risks, ING is converging to an integrated approach in financial risk management. In 2005, integrated risk management – combining credit, market, insurance and non-financial risks of both bank and insurance into one common view – was formalised. ING’s overall risk profile is now measured and reported on a quarterly basis. This systematic risk monitoring enables ING’s CEO and CFO to review the effectiveness of ING’s risk management. The integration approach is being complemented with the introduction of centralised capital management. This will lead to enhanced strategic planning that ensures a balance between risk-taking, short-term profit incentives and long-term value objectives.
Credit Risk In tandem with initiatives to improve risk transparency and compliance with various new regulations such as the Sarbanes-Oxley Act, International Financial Reporting Standards, and the Basel II capital accord, ING has been developing a new series of credit-risk measurement models. These models are generally based on a statistical analysis of ING’s observed credit-risk experience in a given segment combined with the overall observed market developments in the same sectors. As part of the project, ING has widened its credit-data collection, improved its global data standards, and streamlined its credit-risk tools. As such, we want to ensure a broad basis of reliable information on which future enhancements to the credit-risk models can be based. Credit-risk models cover not only the way ING measures simple credit-risk positions, but they also estimate the probability of a debtor’s default, and the level of losses that can occur if a default situation were to arise. Models are periodically updated to ensure they remain in line with the latest internal and external requirements. Consistency with the latest global standards and the implementation of stateof -the-art risk-measurement methodology help secure rapid insight into portfolio developments.
Insurance Risk ING enhanced its risk management by the global implementation of the economic-capital framework for the ING insurance entities, covering all risks, including market, insurance, credit, operational and business risks. This implementation included the setting of Market Value at Risk (MVaR) limits and the introduction of market-consistent pricing. The limit structure contains an ING Group Insurance MVaR limit allocated through sub-limits to the business lines and business units. The ING Group Asset and Liability Committee (ALCO) Insurance monitors the limits and exposures under these limits. A similar structure is implemented within the business lines and business units. In 2005, ING also introduced the framework for marketconsistent pricing of its products. Embedded Value Profit for life insurance and pensions, and Economic Profit for non-life insurance were introduced into our insurance planning and reporting processes. ING was the first company to publish its 2004 annual results under the European Embedded Value Principles.
In 2006 we will continue to focus on the strengthening of risk management in both bank and insurance activities and we will further develop our company-wide integrated riskmanagement approach. Our ambition is to determine the adequate level of group risk appetite supported by scenario analyses and to fully utilise our diversification opportunities.
For further information, please see the Risk Management chapter as part of the Annual Accounts on pages 152 to 166.
The increase in underlying profit of Insurance Europe was driven by strong growth in life insurance in Central Europe and in non-life in Belgium and the Netherlands. The value of new business went up significantly on the back of improved margins in the Netherlands and robust sales elsewhere. In 2005, the improvement in customer satisfaction levels at Nationale-Nederlanden brought the company close to the industry average, confirming that sustained large-scale investments have begun to bear fruit.
Total premium income declined 5.9% to EUR 10,702 million, reflecting the reclassification of some life products to investment products under International Financial Reporting Standards, which had an impact of EUR 761 million, and a decline in non-life premiums in the Netherlands. Strong growth of life premiums in Belgium and Central Europe was offset by lower life premiums in the Netherlands after NN adjusted rates in 2005 to improve profitability.
Value of new life business (in EUR million) 226 138 Internal rate of return 14.6% 12.4% Embedded value of life business (in EUR million) 14,929 12,258 * Bulgaria, the Czech Republic, Greece, Hungary, Poland, Romania, Russia, the Slovak Republic and Spain.
• Underlying profit up 25.4%, driven by strong performance in Central Europe
The value of new business written by Insurance Europe increased 63.8% to EUR 226 million, driven by strong sales in Central Europe and improved margins in the Netherlands. The internal rate of return (IRR) for Insurance Europe rose to
The embedded value for Insurance Europe increased 21.8% to EUR 14,929 million. In addition to the contribution from new business, the increase was driven mainly by favourable experience variances due to strong investment and operating performances as well as a high return on free surplus.
Country developments Underlying profit before tax in the Netherlands increased 23.2% to EUR 1,589 million, as higher investment income more than offset growth in expenses. In May 2005, a costinitiative programme was announced at NationaleNederlanden. A total reduction of the workforce by 1,000 positions is expected over three years, with total severance costs of EUR 84 million expected over the same period, of which about one-third was taken in 2005.
In Belgium, underlying profit from insurance rose 21.7% to EUR 174 million, mainly due to a sharp increase in results from non-life insurance. Also strong sales were reported of universal life products.
ING’s insurance companies in the mature markets of the Netherlands and Belgium face two main challenges. The first is the continued growth in legislative and regulatory requirements. In 2005, a wide range of new regulations was introduced in the Netherlands, especially in the field of pensions, equal treatment, disability and intermediaries. Regulatory change has an important impact on product design and costs. The second challenge is the relatively modest growth in the mature insurance markets. This means we have to work harder to upgrade customer service – in order to retain current clients and to attract new ones – and to improve efficiency.
The Netherlands: spotlight on customer satisfaction and efficiency In 2005, Nationale-Nederlanden (NN) focused on increasing customer satisfaction, selling more profitable products and reducing costs. The progress in all these fields has been satisfactory. Concerning customer (broker) satisfaction, the results of the independent annual Dutch Insurance Performance Survey showed a significant improvement. Overall, NN showed an 8% improvement compared with 2004 and is close to the industry average. This improvement can be attributed to a variety of measures: – processing times were significantly shortened by cutting administrative backlogs, reducing errors and providing better telephone access; – backlogs were removed on all business lines, except in the Pension Departments, due entirely to the need to accommodate legal changes; – improvements were made to the website which allows brokers to process transactions online; in 2005, around 35% of all personal transactions that were available online were processed online.
As for the other insurance business units in the Netherlands, RVS strongly increased sales in an otherwise flat market. As a result, it gained market share in individual life regular premiums, one of the most profitable market segments. Life premiums at RVS increased 4.4%. Postbank Insurance saw a strong increase in mortgage-linked insurance sales.
Robust value creation and growth in Central Europe The insurance operations in Central Europe extended their track record of robust growth and value creation in 2005. Growth was evident throughout Central Europe. ING is currently the market leader in the region for pensions and ranks second in life insurance with more than 5 million clients.
After the success of a restructuring programme for tied agents in the Czech Republic, the programme is being rolled out throughout the rest of the region. It has already considerably increased the performance of the sales force. While maximising the performance of the tied-agent channel, ING is also broadening its distribution capabilities through alliances with selected brokers and banks. Moreover, the existing product offering has been modernised and new protection and accumulation products have been added to the range.
Following pension reform in the Slovak Republic, ING started a pension fund for mandatory pension accounts for Slovak employees at the beginning of 2005. In the course of the year, the fund achieved a market share of 8%. In December 2005, ING acquired the mandatory pension fund Sympatia Pohoda and merged it with its own fund; this has increased the market share to 12%. During the year, ING also made a major move on the market for voluntary corporate pensions by acquiring the pension fund Tatry Sympatia with a leading market share of 44%.
Performance enhanced at ING Investment Management Europe ING Investment Management Europe (ING IM) improved the performance of its client-driven investment services in 2005. For third parties, ING IM continued to make a meaningful contribution to mutual-fund distribution through strategic partnerships and reciprocal agreements at global level. For institutional clients, ING IM maintained its focus on profitable business and for insurance companies it introduced ALM (asset and liability management)-driven solutions.
The equity department was strengthened in 2005 by restructuring and enhancing existing processes. The fixedincome department maintained its excellent performance across all strategies.
In the Netherlands, Nationale-Nederlanden is striving to further improve customer satisfaction by increasing service and quality. We will continue to implement new IT frameworks in order to shorten processing times and to bring delivery times up to industry standard. In addition, client-contact teams and information will be introduced and investments in employee training will be increased to further improve expertise levels. These efforts are aimed at increasing customer satisfaction ratings and surpassing our main competitors in 2006 and 2007. The cost-reduction programme is well underway and the aim is to bring Nationale-Nederlanden in line with external benchmarks by the end of 2007. Compliance will remain high on NationaleNederlanden ’s agenda in 2006. The focus will be on training and learning and on monitoring capacity.
In Central Europe, ING will further enhance its strategy of improving the existing business and accelerating growth with new initiatives. Increased cross-border operational leverage should improve ING’s competitive position and its focus on the fast emerging upper middle-class segment should accelerate growth. Moreover, ING will continue to exploit its strong greenfield expertise in Central Europe.
ING IM Europe aims to increase its assets under management by generating higher net inflows and improving investment performance. Its ‘all-weather’ fund range will be further developed and its operational quality strengthened.
Premium income at Insurance Americas was virtually flat at EUR 22,744 million as higher non-life premiums were offset by lower life premiums. Non-life premium income rose 5.1% to EUR 4,552 million, driven by a 16.8% increase in Canada, primarily due to the acquisition of Allianz Canada. That growth was partially offset by lower non-life premium income in Mexico from the non-renewal of certain large property-and-casualty cases and lower sales. Life premium income declined 1.3% to EUR 18,192 million, due to the reclassification of products from life insurance to investment products under IFRS, which had a negative impact of EUR 241 million. Excluding that impact, life premiums were flat as a slight decline in individual life single-premium and lower fixed-annuity sales were compensated by higher sales in retirement services.
Latin America 9% 2,021 – of which Mexico 1,424 – of which South America* 597
Total profit before tax 1,941 1,692 14.7% Underlying profit before tax* 1,979 1,601 23.6%
• Value of new business lifted by higher margins and sales
Country developments In the United States, underlying profit before tax increased 27.4% to EUR 1,149 million, led by strong results in retirement services and annuities, supported by higher margins and continued asset growth. Premium income declined 1.3% to EUR 18,138 million as lower individual life single-premium and fixed-annuities sales were largely offset by higher sales in retirement services. Operating expenses were 8.0% higher at EUR 1,468 million on an underlying basis due to the spending on strategic initiatives such as enhancements to web capabilities, costs related to implementing Sarbanes-Oxley, and higher incentive-related benefit costs.
Canadian underlying profit before tax climbed 35.8% to EUR 671 million on continued strong underwriting results, higher investment income and the positive impact of the acquisition of Allianz in 2004. The claims ratio improved slightly to 56.3% from 56.6% in 2004. The expense ratio was higher in 2005 due to expenses related to the integration of the Allianz Canada business. The combined ratio deteriorated to 86.8% in 2005 from 85.1% in 2004. Premium income rose 16.8% to EUR 2,585 million, primarily due to the acquisition of Allianz Canada in 2004.
In Mexico, underlying profit before tax declined 13.9% to EUR 105 million. This was primarily due to claims and expenses from three major hurricanes. The hurricanes, along with related costs to extend reinsurance coverage after the storms, had a negative impact of EUR 39 million before tax in 2005. Premium income in Mexico declined 8.2% to EUR 1,424 million on lower sales and the non-renewal of some large property-and-casualty contracts as the company focuses on more profitable retail-market segments.
The United States business consists of US Financial Services and ING Investment Management. The majority of earnings in the United States comes from retirement services, annuities, life insurance and Investment Management. ING Canada’s core business is auto and homeowners insurance. ING Mexico is building a wealth-management business on the foundation of its property-and-casualty lines. South America has operations in Chile (health, life and pensions), Peru (pensions) and Brazil (a multi-line joint venture*). In 2005, there was a continued focus on improving execution and value creation across the region, through continued pricing discipline and concentrating on business with the best long-term growth potential.
Compliance and legal issues Like many other financial-services companies in the United States, ING received inquiries from several regulatory bodies, looking into a variety of issues related to a number of different business lines. Over the past several years, ING has enhanced its policies and processes on mutual-fund trading and reached a settlement in September 2005 with the National Association of Securities Dealers (NASD), the selfregulatory organisation that oversees securities trading, about past mutual-fund trading practices at ING Funds. The NASD’s review focused on inappropriate frequent trading pursuant to agreements that were entered into by Pilgrim Funds before its acquisition by ING in 2000.
In Mexico, ING Comercial América has been involved in the litigation of the commercial claims made by Grupo Fertinal. The dispute involves a determination of what amounts are due for certain hurricane-related damages sustained by a Fertinal company in 2001. ING expects that after the final outcome of this judicial procedure, the risk in the policy will be adequately covered by provisions taken as well as reinsurance coverage.
Continued portfolio-management activities Insurance Americas took a number of actions to better focus its portfolio of businesses on those where ING has a leading market position. In this context, all outstanding lifeinsurance policies and other assets of its Argentine life insurance were transferred to Zurich Financial Services. ING Chile’s property-and-casualty insurance operation was sold to Liberty Mutual Group. Life Insurance Company of Georgia was sold to Jackson National Life Insurance Company.
In the United States, ING will explore opportunities to further serve the developing needs of ageing baby boomers as they enter retirement. Investment Management will leverage its strong investment capabilities into capital markets-linked products to deliver customised client solutions. ING will continue to ensure it is meeting customer needs while driving efficiency. We will further improve risk management and continue our focus on improving the technology environment in order to improve security and increase effectiveness.
ING Canada will drive top-line growth through new distribution strategies. We will increase our market share in the direct channel, proportional with our share in the broker channel. We will also utilise our newly launched affiliated distribution networks and increase the share of ING business in these networks.
Total profit before tax 478 756 -36.8% Underlying profit before tax* 447 475 -5.9%
Value of new life business (in EUR million) 373 321 Internal rate of return 15.0% 13.6% Embedded value of life business (in EUR million) 1,799 2,076 2005 was another good year for ING’s insurance and assetmanagement activities in Asia/Pacific, with strong growth in insurance premiums and sales, particularly in Japan and South Korea. The value of new life business again increased significantly. Assets under management grew by over 40%. The financial results of Insurance Asia/Pacific were affected by a strengthening of reserves in Taiwan, necessary in light of the low interest rates. ING remains committed to invest in growth opportunities across the region, particularly in the greenfield operations and in pensions.
On the income side, premiums rose 29.7% to EUR 12,286 million, driven by sharply higher sales in Japan, South Korea and Taiwan. Strong premium growth rates were also recorded in local-currency terms in Malaysia, India, Thailand, Hong Kong and China.
The value of new business written by Insurance Asia/Pacific was EUR 373 million, up 16.2% compared with 2004, driven by strong sales and higher margins at almost all business units. South Korea made a particularly strong contribution with the robust sales volumes, favourably influencing the value of new business. The internal rate of return increased to 15.0% from 13.6% last year due to continued pricing discipline and increased scale of the business units.
• Life insurance and asset management in Asia/Pacific is a solid growth engine for ING
• ING remains committed to invest in growth opportunities in China, India and Thailand
Country developments In Australia, underlying profit before tax increased 3.7% to EUR 169 million. Results included a one-off release from reserves of EUR 29 million in 2004. Profit growth in the insurance business was driven by higher investment income and favourable claims.
In South Korea, underlying profit before tax rose 52.1% to EUR 181 million, due to strong sales. Premium income at ING Life Korea rose 42.6%, driven by sales of variable and universal life products as well as continued high persistency on existing contracts. KB Life also achieved strong results in 2005.
ING recorded a profit of nil for Taiwan in 2005 as a result of measures taken to strengthen reserves due to the continued low interest rates. A total charge of EUR 220 million was taken in 2005 to strengthen reserves, compared with EUR 100 million in 2004. At the end of 2005, reserves remained adequate at the 50% confidence level under IFRS accounting.
In the rest of Asia, underlying profit before tax declined to EUR 23 million from EUR 33 million in 2004, when results were positively influenced by the release of a EUR 30 million reserve for a wage-tax assessment.
In light of the multi-channel distribution structure in Australia, it is crucial for ING’s insurance and wealthmanagement businesses to distribute through all available channels. A key channel has been the salaried advisers of its joint-venture partner ANZ. Other major channels include ING’s own adviser networks, non-aligned adviser networks, and the multi-fund investment products of other major wealth managers. This breadth of distribution has led to above-average growth rates.
Overall, the bancassurance strategy in the region is paying off: 22% of total annualised premium equivalent (APE) came through banks and securities brokers (14% in 2004).
Across all business units, ING also focuses on improving operational efficiency by actively managing against benchmarks, by developing and implementing more efficient processes with clear objectives and key performance indicators, and by improving operational risk management.
In 2005, ING New Zealand was formed following an agreement to broaden the existing Australian joint venture between ANZ and ING. It was formed by incorporating New Zealand’s National Bank’s managed-funds and life-insurance business and transferring the existing New Zealand lifeinsurance and managed-funds businesses of ING and ANZ Group to the new entity.
Following the 2004 sale of its 50% stake in QBE Mercantile Mutual, ING sold a 90% stake in Austbrokers Holdings in 2005, a network of general insurance-brokerage agencies throughout Australia. In addition, ING and its partner Principal Financial decided to close the defined-contributions business in Japan, ING/Principal Pensions.
In India, ING’s coverage across the country has expanded quickly to include 70 cities now. In 2005, 61 new branches were opened and over 11,000 agents hired. ING Vysya Life is one of the fastest growing life insurers in the country. It benefits from importing best practices from other ING business units, such as Malaysia and South Korea.
ING Life Thailand has increased its market share despite slower market conditions in 2005. Developments were encouraging, particularly in telesales and partnerships with banks.
As for the product portfolio, there will be an increasing shift from traditional life insurance and unit-linked products to investment-linked products, as well as mutual funds, group insurance and pension products. ING is looking forward to participating in the opportunities created by pension reforms in a number of countries, especially China, India, South Korea and Taiwan.
With an even stronger client focus and by capitalising on cross-selling, ING Wholesale Banking created new business opportunities and closed several landmark deals. A redistribution of capital to more profitable products improved the business performance. Combined with increased cost control and divestments, this enabled ING’s Wholesale Banking business to reduce its economic capital and add more value for ING Group. A single global brand for Wholesale Banking was also successfully implemented.
Underlying profit before tax from Wholesale Banking rose 8.8% to EUR 2,276 million, driven by higher income from Structured Finance, Leasing and ING Real Estate, as well as a release of loan-loss provisions due to a benign credit environment and improved risk management. Gains on divestments contributed EUR 317 million to profit before tax in 2005, while divestments in 2004 resulted in a loss of EUR 166 million.
Additions to loan-loss provisions -108 192 Total profit before tax 2,599 1,945 33.6% Underlying profit before tax** 2,276 2,092 8.8%
** Underlying profit before tax is defined as profit before tax excluding divestments and special items.
Netherlands 790 Belgium 519 Rest of world 671 Asset Management* 346 Other -50 Total 2,276 * Mainly ING Real Estate
The asset-management activities of Wholesale Banking, which consist mainly of ING Real Estate, increased their portfolio by 39.5% to EUR 69.9 billion. This is discussed in the chapter on Asset Management.
ING Wholesale Banking operates in a highly competitive market. To continue to improve our market position, Wholesale Banking has three key priorities: client-focus, cross-selling and cost control. In support of these priorities ING aims for flawless execution and strong sector knowledge. These foundations underpin the implementation of a single global brand for Wholesale Banking.
Client focus through cross-selling and one brand 2005 was the year in which ING completed Wholesale Banking’s shift from a regional to a functional focus, with more attention paid to clients’ needs and cross-selling more high-value added solutions and products to them. This involved the further implementation of a process called Client Relationship Planning in which an account manager discusses with relevant product and sector specialists how to best serve the client. Senior bankers and focus-sector heads provide additional knowledge and focus to ensure we identify all opportunities we should pitch to our clients. This also strengthens ING’s overall competitiveness through closer client involvement. In 2005 the Client Relationship Planning process entered its second year and was extended to a wider range of Wholesale Banking’s clients.
To present one face to the world and improve our overall relationship with clients, ING implemented a single global brand for Wholesale Banking in 2005. A new visual identity was introduced worldwide and a home-markets advertising campaign was kicked off. Research of the client base led to the customisation for Wholesale Banking of the ING brand values. Based on this research and the brand values, action plans were developed that outline concrete steps that will be taken to further improve our relationship with our clients. The plans will be closely monitored and measured to ensure their successful implementation.
Cost control, efficiency and focused execution Cost control is essential in any competitive market. In line with the ING Group focus on managing for value, Wholesale Banking in 2005 continued the implementation of its strategic alignment programme called the Target Operating Model. It focuses on cost control as well as revenue growth, capital optimisation and improved operational efficiency. The model meant evaluating our client portfolio to ensure a stronger focus on core clients to whom we can sell more value-creating products. In 2005 these operations were completed in Asia, the Americas and the United Kingdom. Positive results are showing already by increased RAROCs compared with 2004. In Central and Eastern Europe the implementation was completed just before the end of 2005 and ING expects to see results in 2006. In the home market of the Benelux the new cost-control method is still in the implementation phase.
The Value Chain Management concept was introduced for six products: General Lending, Structured Finance, Payments & Cash Management, Securities Services, Corporate Finance & Equity Markets and Financial Markets. This concept provides new insights in direct and indirect costs per project and gives better information for business decisions and capital allocation.
Finally, the NMB Heller joint venture between ING and GE Finance was unravelled. This reorganisation and partial divestment paved the way for the subsequent creation of Commercial Finance, a new and more efficient division in Wholesale Banking.
Landmark deals In 2005, several top deals were made that illustrate the successful repositioning of Wholesale Banking. In the Netherlands, ING advised telecommunications company KPN on the EUR 980 million acquisition of mobile phone operator Telfort and facilitated a EUR 1 billion Eurobond issue. Also a very innovative EUR 450 million deal was done with Hunter Douglas. It was the first reverse bookbuilding tender offer in the Netherlands.
Finally, ING also made strong progress in Asia. In Laos, Asia’s largest (USD 1 billion) cross-border hydro-power project financing was closed. Several ING teams were involved and through cross-selling ING was able to generate considerable business from this project.
Wholesale Banking will continue in the direction that it set out on in 2004 and which has helped to focus the business on new priorities and deliver improved results in 2005. Client-focus, cross-selling and cost control remain essential in 2006. This means continuing with successful programmes and broadening their implementation.
Total income increased 14.5% to EUR 5,796 million in 2005 driven mainly by higher income from mortgages and savings in the Netherlands and growth from savings, current accounts and investment products in Belgium.
* Underlying profit before tax is defined as profit before tax excluding divestments and special items.
In Poland, underlying profit before tax from the retailbanking activities more than doubled from EUR 19 million in 2004 to EUR 41 million in 2005 due to releases from loanloss provisions following an improvement in the quality of the lending portfolio. ING Bank Slaski benefited from a release of loan-loss provisions after the credit portfolio was restructured and risk management was improved. Risk costs declined from EUR 17 million in 2004 to a net release of EUR 16 million. Adjusted for exchange-rate changes, income rose 2.0% as the growth in savings and deposits was offset by narrowed margins and lower lending volumes due to ING Bank Slaski’s policy not to participate in foreign-currency mortgage lending because of our risk policy. Operating expenses increased by 13.1% due to investments to upgrade the branch network and higher marketing costs in order to position the bank for further market growth.
The other retail-banking activities posted an underlying profit before tax of EUR 50 million compared with EUR 3 million in 2004, due to higher results from ING Vysya Bank in India, the private-banking activities in Asia and the Kookmin Bank stake in South Korea.
ING Private Banking, the figures of which are included in the regional numbers, continued to grow strongly in 2005. Assets under management grew by 20% (when adjusted for disposals) with all regions contributing, and earnings were sharply higher, particularly in Asia and Belgium. Cost and portfolio management led to a cost/income ratio of 63% compared with 76% in 2004. The business gained further market share in the Benelux home markets with increasing referrals sourced from both ING Wholesale Banking and ING Retail Banking.
In Belgium, we reported good income and profit growth in the bank branch network. In comparative research in Belgium, ING had the highest customer-satisfaction rating of large banks among primary customers. The second distribution network, Record Bank, was further strengthened by the integration of Mercator Bank and the acquisition of Eural Bank, which was completed in December 2005. Record Bank is now fourth in the savings-bank market, up from 12th position in 2001. Overall, Belgium reported strong growth in savings, investment products, mortgages and current accounts.
New compliance organisation implemented In the Netherlands, we took steps to strengthen the compliance organisation. Integrity and fairness are essential in our retail-banking operations. Following some regulatory compliance incidents, the process of setting up a new compliance structure, which was started in 2004, was accelerated after consultation with the Dutch regulator AFM.
Expanding our market share in selected emerging markets In Poland, ING Bank Slaski grew in its chosen market segments.
In Asia, ING Vysya Bank India reported asset growth and its tied-agents sales force expanded strongly during the year (from 768 to 1,927 agents) to capture future market growth. ING acquired a 19.9% stake in Bank of Beijing in 2005. Bank of Beijing is the second-largest city commercial bank in China and the third-largest bank in Beijing, employing over 3,600 staff, serving retail and corporate clients. ING aims to sell insurance and investment products through the Bank of Beijing. ING is represented on the board with two members, one for business management and one for corporate development. The Bank of Beijing offers ING good entry in the high-growth Chinese banking market and in the insurance markets.
Continued strong growth in Private Banking ING Private Banking continued its robust performance in 2005. Assets and revenue growth rates were sharply higher in both mature and emerging markets. New investments were made in Asia, Latin America and Central and Eastern Europe, regions where ING sees great potential for further profitable growth.
In 2005, we gained market share in all markets where we are present. We improved our cost/income ratio through the joint efforts of the business and Operations/IT departments and we improved our customer-satisfaction ratings in the Benelux.
In 2005, ING Direct achieved strong growth in profit, number of customers, funds entrusted and retail-mortgage lending. It maintained a high level of customer satisfaction and brand awareness and expanded its customer base – all of which are key value drivers. These results were reached in an environment of fast increasing short-term interest rates in the United States and falling long-term interest rates in various currency zones, proving the robust character of the ING Direct business.
ING Direct showed strong growth in profit before tax to EUR 617 million in 2005, an increase of 41.8% compared with EUR 435 million in 2004. These results were achieved against the backdrop of a challenging interest-rate environment, particularly in the United Kingdom and the United States. However, ING Direct managed to maintain a satisfying interest margin through client-rate adjustments while maintaining its commercial growth. Returns also increased as business units benefited from increased scale.
Total operating expenses at ING Direct increased 17.8% to EUR 1,396 million, reflecting investments to support the continued growth of the business, particularly in mortgages. Nonetheless, the cost/income ratio of ING Direct improved to 65.9% from 69.3% in 2004, while the operational cost base (excluding marketing costs) improved to a better-thanexpected 0.40% of total assets compared with 0.44% in 2004.
Additions to loan-loss provisions 106 89 19.1% Total profit before tax 617 435 41.8%
After-tax RAROC 14.9% 11.3% Economic capital (in EUR billion) 3.1 2.4
• Profit at ING Direct increased by 41.8% to EUR 617 million
The after-tax risk-adjusted return on capital (RAROC) of ING Direct improved to 14.9% from 11.3% in 2004. Total economic capital increased to EUR 3.1 billion from EUR 2.4 billion in 2004, reflecting strong growth of the business. With the exception of ING Card and ING Direct UK, all ING Direct units are performing above ING’s target for risk-adjusted return on capital.
Country developments ING Direct’s overall profit growth was driven mainly by the business units in Germany, France, Spain and Italy, reflecting the impact of client-rate reductions in most of these countries and continued strong commercial growth. In the United States, profit before tax declined from EUR 170 million to EUR 156 million due to increases of client rates, partially following increases of the Federal Reserve rate, and an unfavourable yield-curve development. Of the eight ING Direct units, only the operations in the United Kingdom, which started in May 2003, were still loss-making. However, the loss narrowed compared with 2004, and total start-up losses are lower than expected.
Strong growth ING Direct sells a limited number of banking products via the internet, telephone and direct mail to retail customers in major developed markets at very low costs. The two core products are savings and mortgages. All ING Direct business units are market leader in their local direct-banking markets.
Globally, funds entrusted continued to grow, adding EUR 42.6 billion, bringing total funds entrusted to EUR 188.0 billion at year-end. In addition, off-balance funds entrusted, which are mainly mutual funds and brokerage accounts, almost doubled to EUR 10.8 billion from EUR 5.7 billion. ING Direct France, Australia and Canada recorded a milestone of passing the EUR 10 billion mark each in funds entrusted.
Continued focus on mortgages In 2005, robust growth continued in own originated residential mortgages, the second ING Direct core product. All business units, except for France and the United Kingdom, sold mortgages in 2005. In all these business units, the mortgage portfolio grew strongly. ING DiBa became the leading mortgage provider in new production in Germany. ING Direct Australia passed the AUD 20 billion mark (EUR 14.0 billion) in its mortgages portfolio. Growth in residential mortgages in the United States was USD 4.2 billion (EUR 3.6 billion) with the portfolio standing at USD 12.8 billion (EUR 10.9 billion) at year-end. Overall, the mortgage portfolio grew by EUR 21.8 billion to EUR 54.9 billion. This amount is equal to 29.2% of funds entrusted, compared with 22.8% in 2004.
Stable and broad customer base The stability of the customer base is a key qualitative value driver for ING Direct. Throughout the past eight years, the customer base has been very stable with attrition rates lower than 5% a year. The original typical customer profile, based on initial research in Canada, was people between 20 and 45 years old with a reasonable amount of savings. People in this age range were believed to be more comfortable with direct banking through internet and telephone channels. Experience learns that people over 50 years old with high amounts of savings are also prepared to transfer savings by telephone and the internet, in order to receive higher interest rates. ING Direct’s substantial amount of customers in this age group has even more the tendency to save money for the longer term.
Stock-market movements have hardly affected savings balances in ING Direct. Customer surveys show that only about 10% of ING Direct’s clients moved money out of mutual funds and shares into savings, after the stock markets deteriorated since 2001. The other 90% of savings balances continued to come out of savings accounts at other banks or surpluses on current accounts. A good interest-rate offer, combined with excellent customer service and easy-to-use websites, interactive voice-response and call-centre systems were the main reasons for people to join ING Direct. A vast majority of ING Direct’s clients are saving for the long term. This reconfirms the stability of ING Direct’s customers’ savings balances.
Competitive advantage ING Direct’s most important sustainable competitive advantage is its low cost base. As a result, it can offer customers higher interest rates on savings and still make a sufficient margin on the funds entrusted. Because of this cost advantage, ING Direct has been able to grow its profits over the last eight years while interest rates have gone through different phases of the cycle. ING Direct can also afford to keep client rates at a higher level to maintain growth momentum, as was proven this year.
In addition to the low cost base, diversification adds to ING Direct’s growth potential. Diversification into mortgages helps our margin and the geographical diversification mitigates interest-rate movements in the five currency zones where ING Direct is active (United States, Canada, Australia, the United Kingdom and the euro zone). The benefit of this diversification was exemplified in 2005 when ING Direct only partially followed the increases in short-term interest rates in the United States and cut interest rates in the United Kingdom, Germany, Italy and France. This approach generated enough margin during the rest of the year to offset the tighter margins caused by rising American rates.
Brand awareness In 2005, brand awareness exceeded 75% in most of the countries where ING Direct is active. The combination of high brand awareness with the right brand attributes is a prerequisite for growth, which is why since the beginning of 2001, standardised brand-tracking research was conducted in each country.
(1) Mortgage portfolio at 31 December 2005 includes EUR 1.1 billion in mortgages bought from Nationale-Nederlanden in the fourth quarter. (2) Including Austria.
ING Direct showed strong organic growth in customers, funds entrusted and mortgages in 2005. Marketing campaigns continued to be focused on savings and, increasingly, on growing its mortgage portfolio (in Germany, the United States, Italy, Australia, Canada and Spain). ING Direct now operates in all major Western European markets and in Australia, Canada and the United States. On 24 January 2006, ING Direct’s (world-wide) 15-millionth customer was welcomed in Italy. For 2006, the focus remains on profitable growth in savings and mortgages in the nine countries of operation. We will promote our mutual-funds business in all the countries except the United Kingdom and Austria, which countries will follow at a later stage. Finally, ING Direct will continue to expand its marketing activities in new regions in the United States.
ING’s asset-management activities in 2005 had another good year. Considerable growth in assets under management secured ING’s position as one of the world’s leading asset managers. Performance benefited from developments in expertise, stronger distribution and greater economies of scale. Several acquisitions were made by ING Real Estate and there was the launch of two highly successful closed-end highdividend funds by ING Investment Management (ING IM).
ING Investment Management significantly improved its investment performance in 2005. On a 3-year basis 67% of ING’s assets delivered an above-median performance. Rating agencies have assigned the highest five-star rating to 14 mutual funds and 29 funds have a four-star rating. Jointly these funds represent EUR 16 billion, which is 28% of the rated portfolio.
Insurance Europe 31% 169.3 Insurance Americas 37% 201.7 Insurance Asia/Pacific 13% 71.8 Wholesale Banking 9% 49.5 Retail Banking 9% 49.3 ING Direct 1% 5.8
The excellent results were mainly based on three pillars. First, ING IM continued to develop its investment expertise by, among other things, completing the build-up of its US equity team and by restructuring its European Equity Investments Department. Second, thanks to being part of ING Group and having partnerships with many other financial institutions, ING IM was able to increase the number of bank and insurance channels it uses to cross-sell products and raise assets. The growth of cross-region networks also contributed to this distribution power. Third, ING IM increased its financial strength and scale, which resulted in a reduction of relative costs. Economies of scale were also achieved by sharing research and the treasury services throughout all three ING IM units (Europe, Americas, Asia/Pacific).
Thanks to its growing expertise and distribution power, ING IM excelled in meeting client needs across the regions with good product offerings. The development and commercial successes of the closed-end high-dividend funds are prime examples of this. In 2005 ING IM launched two global closed-end funds in the United States, raising over EUR 1.8 billion of assets in the public offerings.
In 2006, ING IM aims to increase assets under management by capitalising on our global expertise to develop products that meet client’s needs both globally and locally. By growing further we will continue to benefit from increasing economies of scale. Furthermore, initiatives will be implemented to raise the efficiency of distribution of ING IM products through ING affiliate channels and through third parties as open architecture increasingly becomes an accepted structure in the market. Another priority will be to continue to increase transparency of ING IM’s contribution to ING Group.
The key to the success of ING Real Estate continues to be its combination of global reach and local expertise. Its size brings economies of scale in many areas such as research. The mix of three divisions (Investment Management, Finance and Development) combined with a diversified global portfolio reduces its risk profile.
The Real Estate Finance division made substantial progress with the targeted international diversification of its EUR 20.3 billion credit portfolio while it reinforced its leading position in the Dutch market. Meanwhile, the Real Estate Development division started significant new projects such as Hafencity Hamburg and Centre Amsterdam North.
Furthermore, it was pre-selected for the Zuidas Dok Company project in Amsterdam. On the Zlote Tarasy project in Poland, an impairment was suffered due to construction delays.
In the coming year, ING Real Estate’s Investment Management division will concentrate on maintaining its growth momentum, capturing opportunities in Asia, such as with the China Opportunity Fund, and by launching several new funds in Europe. The Finance division will continue to focus on international diversification while maintaining its leadership position in the Netherlands. The Development division will aim for controlled growth in Europe and Australia and investigate the potential of development funds in the United States.
A number of steps were taken throughout the organisation to get it more focused on execution. HR developed a ‘change execution framework’, which will be rolled out globally in 2006. This will help steer the move to a culture in which our people are professional and accountable, focus on results and demonstrate customer-centric behaviour. Customer-centricity is included in the overall ING Business School curriculum. All business lines had to draw up a customer-centric action plan and describe how to become more customer focused as ING feels this should be embedded throughout the organisation. But above all, our workforce must preserve their integrity. Integrity is crucial to a winning company. ING will therefore continue to strengthen its compliance structure, following the implementation of its new company-wide compliance policy.
Shared direction is about creating a common understanding among employees of ING’s objectives. ‘Live ING’ is a tool to support these objectives. Introduced in 2005, this interactive learning programme explains the new strategic priorities and organisational structure. It was developed by the ING Business School and rolled out across many different regions around the world. Live ING will be continued in 2006.
ING has three ambitions: to be a reliable partner for our customers, to create value for our shareholders and to be a challenging place to work for our employees. Meeting these ambitions calls for a new mindset, a performance culture and the further building of our human capital. Success depends on creating value for our customers and shareholders – and it is our employees who make it happen.
As managers play a key role in executing this change in culture, the ING Business School organises the Managingfor -Value workshop for management and key employees. This workshop sharpens their focus on the drivers of value creation in their business and as such helps them to analyse and maximise the sustainable profit potential of their activities. Most importantly, it shows them how ING can maximise the long-term value and growth of its activities instead of the short-term profit.
Recruitment Another key issue is ensuring we attract the best people. We want the best graduates, and we want to be a preferred employer in every one of our key markets. ING laid the foundations for an improved approach to graduate recruitment around the world. In addition to the local introduction programmes in place, we will launch a global training programme for all recently hired graduates in 2006.
Talent management Talent management is about having the right people in the right place at the right time. This involves thinking globally and has led us to implement a common way of identifying and developing potential high-performers throughout ING. Our new method takes a bottom-up approach, with line managers performing a key role. They are supported in this with a variety of tools and methods, such as Personal Development Action plans. In addition, best practices, including succession planning and vacancy finding and matching, are increasingly being shared across regions and business lines. The ING Business School offers programmes to strengthen our talent, such as the new ING Leadership Pipeline programme, aimed at building better leaders at all levels.
Change is not achieved overnight. It requires constant support from management and most of all from employees. All our employees are essential to achieving our aims and ambitions. The success of ING’s strategy for value creation will therefore largely depend on the success of instilling a performance culture and enhancing the strength, depth and diversity of our workforce. Great strides were made to provide the business with the tools it needs to succeed in creating value. This will be continued in 2006 and the years beyond.
Integrity is the key source of value for a financial-services company. ING therefore aims to conduct its business activities with the highest ethical standards. Our legitimacy as an enterprise rests on the trust our customers, employees, shareholders, regulators, capital providers and business partners have in us. To earn their trust, we have to live up to a variety of commitments. The sum of these commitments is our corporate responsibility.
ING Business Principles In pursuing growth and managing for value, ING aims to earn its shareholders an above-average return on their investment, but without compromising its business principles. The ING Business Principles state the standards of behaviour required by everyone at ING as well as our main commitments toward key stakeholders. The Business Principles must be applied in a wide range of circumstances. They guide us in dealing with some of the dilemmas that can arise in business life.
Serving our customers ING wants to build long-term relationships with its 60 million customers around the globe by providing outstanding service. Customer trust is driven by many factors. It depends, among other things, on how easy we are to deal with, how responsive we are to customer needs, whether we fulfil our promises and whether we treat our customers fairly. In 2005, most business units completed so-called customer-centric action plans which describe the steps that need to be taken to improve customer focus in each business unit.
Many financial products and services, such as mortgages and life insurance, cover a long period of time. We aim to inform customers thoroughly about the financial choices they make. We also have a duty to protect customers from undue risk and ensure that our actions do not damage their interests.
A growing number of transactions take place online. We have a responsibility to protect our customers’ privacy and ensure that personal information and account data are stored safely. We have systems to ensure all online transactions are conducted securely and to ward off cybercriminals. We also regularly inform our customers how to bank online safely.
We aim to provide our customers with correct and easy-tounderstand information, and we take responsibility when we make mistakes. In 2005, for instance, NationaleNederlanden (NN) learned that, as a result of a software error, it had inadvertently provided customers with inaccurate reports of their entitlements for certain insurance products. NN informed the clients in question and reimbursed them for the difference in early 2006.
ING Investment Management (ING IM) takes into account social, environmental and ethical considerations and also focuses on good corporate governance in the companies in which it invests through its voting behaviour. For client assets, ING IM does not restrict investments on the basis of ING’s own social, ethical and environmental criteria. However, it offers clients the possibility to screen for various social and environmental issues and informs clients about serious issues.
ING also joined the Global Roundtable on Climate Change, which brings together over 150 senior executives from the private sector and leaders of international governmental bodies and non-governmental organisations (NGOs). The Roundtable provides ING with a valuable forum to learn more about the scientific, technological and economic issues connected with climate change. This will help the Group better understand the risks we and our clients face, as well as new business opportunities that may arise in the future.
• Internal environmental policy to reduce business travel and consumption of energy and paper.
General The Supervisory Board held eight meetings in 2005, while the Audit Committee met six times, the Remuneration and Nomination Committee three times and the Corporate Governance Committee twice. Attendance was very high.
An ING Knowledge Day was prepared, which will be held annually to give Supervisory Board members a deeper insight in subjects from an ING perspective, varying from technical issues to business models. The first Knowledge Day took place in January 2006. As a new Supervisory Board member, Jan Hommen followed an introduction programme in 2005.
Supervisory Board meetings Four meetings of the Supervisory Board were mainly dedicated to the annual and quarterly results. Two meetings were held to discuss the medium-term plan and strategy, while another meeting took place during a visit to Prague to learn more about ING’s position in Central Europe. On the basis of presentations, ING in Mexico, ING Bank Slaski, ING Insurance USA and ING in the Netherlands were discussed.
Remuneration and Nomination Committee meetings The Remuneration and Nomination Committee discussed a shortlist of international candidates for appointment to the Supervisory Board in 2006 and 2007 bearing in mind the Supervisory Board profile and the upcoming vacancies. Proposals were prepared for appointments to the Supervisory Board committees.
The top-management remuneration structure was also an important agenda item. The Committee prepared the Remuneration Report, which was adopted by the Supervisory Board and was inserted in the Annual Report.
Furthermore, the 2005 remuneration structure and performance targets were discussed, as well as a refinement of the performance drivers as of 2007. The pension and
Composition of the Executive Board In 2005 there were no changes to the Executive Board. At the Annual General Meeting of Shareholders on 25 April 2006 three Executive Board members will resign, while four new members will be proposed for appointment.
Dick Harryvan will succeed Hans Verkoren. Mr. Harryvan is currently Chief Financial Officer and Chief Risk Officer of ING Direct and member of the Board of ING Direct.
Hans van der Noordaa will take over Alexander Rinnooy Kan’s responsibilities for Insurance Asia/Pacific and ING Investment Management Asia/Pacific. Mr. Van der Noordaa is currently Chief Executive Officer of ING Retail Netherlands, responsible for Postbank, ING Bank and RVS Insurance. Alexander Rinnooy Kan’s responsibilities for Real Estate will be transferred to Eric Boyer who is the Executive Board member responsible for Wholesale Banking.
Fred Hubbell, Alexander Rinnooy Kan and Hans Verkoren leave ING After almost seven years on the Executive Board, Fred Hubbell will return to his native country, the United States.
Fred played a significant role in integrating the three insurance companies we acquired in the US. Thanks to this successful integration, ING is today one of the top-5 insurers in the US and enjoys strong name recognition.
Hans Verkoren will retire after serving the company for almost 30 years. During the past two years on the Board, he concentrated on maturing the ING Direct business model. Thanks to his leadership, ING Direct is today the world’s leading direct bank.
Alexander Rinnooy Kan was ten years at ING’s Executive Board. He has been a key factor in the success of the organisation’s growth strategy, due to his vast experience and excellent reputation worldwide.
We would like to thank Fred, Alexander and Hans for their teamwork and strong personal contributions. We are happy that we were able to work together to prepare ING for the future.
Christine Lagarde, at that time partner of law firm Baker & Mackenzie, was appointed as a new member as of 27 April 2005. Unfortunately, she had to resign in June 2005 after being appointed to the new French government as Minister for Foreign Trade. ING regretted Christine Lagarde’s resignation, wishing her well in her new position.
Paul de Meester was a director at BBL. He was appointed in 1998, following the acquisition of BBL. He was a member of the Audit Committee since 2002. In both the Supervisory Board and Audit Committee, Mr. De Meester had always a fresh view on the many subjects that were discussed.
Tabaksblat Code regarding reporting on internal riskmanagement and control systems, ING Group has elected to report in accordance with the regulations adopted under Section 404 of the US Sarbanes-Oxley Act (SOX), which applies to ING Group. The Executive Board will add this report for the first time to the annual accounts and/or annual report for the financial year 2006.
Under the New York Stock Exchange’s (‘NYSE’) listing standards, ING Group as a foreign private issuer must disclose any significant 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 significant differences between our corporate-governance practices and NYSE corporategovernance rules applicable to US companies, is available on the website of ING Group (www.ing.com).
Although the depositary receipts do not formally have any voting rights, holders of depositary receipts are in practice fully equated with shareholders with regard to voting. The Trust Office will, subject to certain restrictions, grant a proxy to a holder of depositary receipts for ordinary shares or preference shares, respectively, to the effect that such holder may, in the name of the Trust Office, exercise the voting rights attached to the number of its shares 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 fit. Holders of depositary receipts not attending a meeting can also issue binding voting instructions to the Trust Office. The Trust Office 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 Office 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 Office observing a term before the commencement of the General Meeting of Shareholders, which term will be determined by the Trust Office.
The Trust Office has discretion to vote in respect of shares for which it has not issued proxy votes to holders of depositary receipts and has not received any voting instructions. Under the Articles of Trust the Trust Office is required to promote the interests of all holders of depositary receipts, irrespective of whether they attend the General Meetings of Shareholders, also taking into account the interests of ING Group, the businesses of ING Group and its group companies and all other ING Group stakeholders in voting such shares, so as to ensure that all these interests are given as much consideration and protection as possible.
The board of the Trust Office comprises five members who are independent of ING Group. No ING Group employees or Supervisory Board members are on the board of the Trust Office. The board of the Trust Office appoints its own members, without any requirement for approval by ING Group.
The Executive Board and the Supervisory Board remain committed to abolish the bearer depositary receipts and the Trust Office structure once representation including proxy voting of holders of ordinary shares and depositary receipts thereof has reached at least 35% of the total number of votes that may be cast on ordinary shares during three consecutive years.
Voting rights Each share entitles the holder to cast a vote at the General Meeting of Shareholders. By Dutch law, voting rights are proportional to the nominal value of the shares. In other words, each ordinary share (nominal value: EUR 0.24) gives the right to one vote, while each preference A share (nominal value: EUR 1.20) gives the right to five votes.
Finally, it should be noted that the depositary receipts for preference A shares are freely available on the stock market. Any holders of ordinary shares or depositary receipts for ordinary shares who feel restricted by the disequilibrium can, therefore, choose to purchase additional depositary receipts for preference A shares.
Issue of shares The company’s authorised capital is the maximum amount of capital allowed to be issued under the terms of its Articles of Association. New shares in excess of this amount can only be issued after amendment of the Articles of Association. For reasons of flexibility (an amendment to the Articles of Association has to be passed by notarial deed if it is to become effective, and this in turn requires a declaration of no objection to be issued by the Minister of Justice), the authorised capital in the Articles of Association of ING Group has been set at the highest level permitted by law.
Share issues have to be approved by the General Meeting of Shareholders, which may also delegate its authority. Each year, the General Meeting is asked to delegate authority to the Executive Board to issue new shares. The powers thus delegated to the Executive Board are limited: – in time: powers are delegated for a period of 18 months; – to specific types of shares: only ordinary shares and preference B 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 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 issue shares require the approval of the Supervisory Board.
Function of Executive Board The Executive Board is responsible for the day-to-day management of the company and its business lines (Insurance Europe, Insurance Americas, Insurance Asia/Pacific, Wholesale Banking, Retail Banking and ING Direct). The organisation, powers and modus operandi of the Executive Board are detailed in the Executive Board Charter, which was approved by the Supervisory Board. The Executive Board Charter is available on the ING Group website (www.ing.com).
Profile of members of the Executive Board The Supervisory Board has drawn up a profile to be used as a basis for the composition of the Executive Board. The profile was submitted for discussion to the Annual General Meeting of Shareholders in 2005. It is available at the ING Group head office and on the ING Group website (www.ing.com).
Michel J. Tilmant, chairman (Born 1952, Belgian nationality) Michel Tilmant graduated from Louvain University with a Licence in Business Administration. He is also a graduate of Louvain School for European Affairs. He started his career with Morgan Guaranty Trust Company in New York. In 1992 he joined Bank Brussels Lambert, where he was appointed chairman of the Executive Board in 1997. After the acquisition of BBL by ING in 1998, Michel Tilmant was appointed vice-chairman as of May 2000. He was appointed chairman in April 2004. Four Group staff departments report directly to Michel Tilmant: Corporate Human Resources, Corporate Development, Corporate Communications & Affairs and Corporate Audit Services.
Fred S. Hubbell (Born 1951, American nationality) Fred Hubbell received his bachelor’s degree (B.A.) from the University of North Carolina in Chapel Hill. He also has a law degree from the University of Iowa College of Law, Iowa City and attended the Harvard Graduate School of Business in Boston. He was Chief Executive Officer and President of the US life insurance company Equitable of Iowa, which was acquired by ING in 1997. Following his responsibility for the international insurance activities, he was appointed a member of the Executive Board of ING Group in May 2000. Fred Hubbell is also chairman of ING Verzekeringen N.V. (ING Insurance). He is responsible for the insurance activities in the Americas (US, Canada, Latin America) and for Nationale-Nederlanden in the Netherlands as well as ING Investment Management in both the Americas and Europe. He is also responsible for the coordination of global activities of ING Investment Management.
Function of 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 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 (www.ing.com). A short description of the duties for the three Committees follows below.
Profile of members of the Supervisory Board The Supervisory Board has drawn up a profile to be used as a basis for its composition. The profile was submitted for discussion to the Annual General Meeting of Shareholders in 2005. It is available at the ING Group head office and on the ING Group website (www.ing.com).
After being appointed to the Supervisory Board, a former member of the Executive Board may also be appointed to one of the Supervisory Board’s committees. However, appointment to the position of chairman of a committee is only possible if the individual in question resigned from the Executive Board at least five years prior to such appointment.
Reappointment of Supervisory Board members Members of the Supervisory Board will resign from the Board at the annual General Meeting of Shareholders held in the calendar year in which they will complete the fourth year after their most recent reappointment. As a general rule, they shall also resign at the annual General Meeting of Shareholders in the year in which they attain the age of seventy and shall not be reappointed. The schedule for resignation by rotation is available on the ING Group website (www.ing.com). Members of the Supervisory Board may as a general rule be reappointed for two periods of four years, based on a proposal from the Supervisory Board to the Shareholders’ Meeting.
Ancillary positions/Conflicting interests Members of the Supervisory Board are asked to provide details of any other directorships, paid positions and ancillary positions they may hold. Such positions are not permitted to conflict with the interests of ING Group. It is the responsibility of the individual member of the Supervisory Board and the Supervisory Board’s Corporate Governance Committee to ensure that the directorship duties are performed properly and not affected by any other positions that the individual may hold outside the group.
Independence Members of the Supervisory Board to whom the dependence criteria of the Tabaksblat Code do not apply and members of the Supervisory Board to whom the criteria do apply but who can explain why this does not undermine their independence, are deemed to be independent.
Annually, the Supervisory Board members are requested to assess whether they still meet the Tabaksblat Code independence criteria and to confirm this in writing. On the basis of these criteria, all members of the Supervisory Board are to be regarded as independent as of 31 December 2005.
Remuneration and share ownership The remuneration of the members of the Supervisory Board is set by the General Meeting of Shareholders and is not dependent on the results of the company. Details of the remuneration are provided starting on page 73.
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 74. If any members of the Supervisory Board were granted ING option rights during their previous membership of the Executive Board (see page 74), these option rights will be part of the ING option scheme, which is detailed on page 142. Transactions by Supervisory Board members in ING Group shares and depositary receipts for shares and ING option rights held by Supervisory Board members are subject to the ING regulations for insiders. These regulations can be downloaded from the ING Group website (www.ing.com).
Luella Gross Goldberg (Born 1937, appointed in 2001, term expires in 2007, American nationality) Member of the Remuneration & Nomination Committee and the Corporate Governance Committee. Former member of the Board of Directors of ReliaStar Financial Corp. Other business activities: member of the Supervisory Board of each of TCF Financial Corporation, Hormel Foods Corporation, Communications Systems Inc. and Hector Communications Corporation (listed companies). Member of the Advisory Board of Carlson School of Management, University of Minnesota. Member of the Supervisory Board of the Minnesota Orchestra. Member (emerita) of the Board of Trustees, Wellesley College.
Paul F. van der Heijden (Born 1949, appointed in 1995, term expires in 2007, Dutch nationality) Appointment also on the recommendation of the Central Works Council. Member of the Remuneration & Nomination Committee and the Corporate Governance Committee. Rector Magnificus and professor of labour law and industrial relations at the University of Amsterdam.
Other business activities: Member of the Supervisory Board of NUON N.V. and Buhrmann Nederland B.V. Crownappointed member of the Social and Economic Council of the Netherlands. President of the ILO Governing Body, Committee on Freedom of Association (United Nations).
Godfried J.A. van der Lugt (Born 1940, appointed in 2001, term expires in 2009, Dutch nationality) Member of the Audit Committee (from November 2005). Former chairman of the Executive Board of ING Group (retired in May 2000). Other business activities: Chairman of the Supervisory Board of each of Siemens Nederland N.V. and Stadsherstel Amsterdam NV. Vice-chairman of the Supervisory Board of Universitair Medisch Centrum Groningen (hospital). Treasurer of Vereniging Natuurmonumenten (foundation for nature conservation).
Karel Vuursteen (Born 1941, appointed in 2002, term expires in 2006, Dutch nationality) 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., AB Electrolux and Henkel KGaA (listed companies). Chairman of the Supervisory Board of Petroplus International N.V. Member of the Board of Directors of Heineken Holding N.V.
At the 2006 Shareholders’ Meeting Piet Klaver (born 1945, Dutch nationality) will be proposed for appointment to the Supervisory Board as of 25 April 2006. Mr. Klaver is chairman of the Executive Board of SHV Holdings N.V. The proposed appointment of Piet Klaver is based on his international experience as Executive Board chairman of a multinational and his knowledge of international business.
At the General Meeting of Shareholders on 27 April 2004, Ernst & Young was appointed to audit the financial statements of ING Group for the financial years 2004 to 2007 inclusive, to report about the outcome of these audits to the Executive Board and the Supervisory Board and to give a statement about the truth and fairness of the financial statements of ING Group
In addition to the pre-approval procedure each service either will be generally pre-approved by the Audit Committee or should be individually pre-approved by the Audit Committee at a subsequent date. More details on ING’s policy regarding external auditor’s independence are available on the website of ING Group (www.ing.com).
In 2005 and 2004, the following amounts were paid to Ernst & Young and KPMG for audit services and non-audit services: FEES ERNST & YOUNG AND KPMG
Audit fees 43 40 Audit-related fees 13 7 Tax fees 3 5 All other fees 3 5
On 31 December 2005 the nominal value of administered ordinary shares amounted to EUR 528,981,126.52 for which 2,204,088,026 depositary receipts of EUR 0.24 each were issued. During the reporting year, the net number of depositary receipts issued for ordinary shares ran to 823,578.
The increase came about as follows: Add: from exercise of warrants 2,112 from conversion of shares into depositary receipts 831,308
The Board of the Trust Office currently consists of: Ton Risseeuw, chairman (former chairman of the Executive Board of Getronics NV, several supervisory directorships and additional offices); Huib Blaisse (lawyer and partner at Blaisse, several other advisory offices); Paul Frentrop (Director Deminor Nederland B.V., in that capacity advisor of Dutch and foreign institutional investors with regard to corporate-governance issues); Tom Regtuijt (former Executive Board Member of Nederlandse Spoorwegen (Netherlands Railways), several supervisory and advice offices); Jan Veraart (former Chairman of the Executive Board of HBG (Dutch construction company), several supervisory directorships and additional offices).
An overview of additional relevant offices held by Board members can be found on the website of the Trust Office: www.ingtrustoffice.com.
The annual remuneration for all Board members is EUR 7,800. The costs of proxy voting amounted to EUR 107,155.26.
The Trust Office 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.
Because of a much higher attendance of depositary-receipt holders, the Trust Office availed itself of the opportunity to communicate with them in the 2005 Annual General Meeting of Shareholders.
The contact details of Stichting ING Aandelen (ING Trust Office) are: Coco C.M. van Hulten
A call-option agreement concluded between the Stichting and ING Groep N.V. vests the Stichting with the right to acquire cumulative preference shares in the capital of ING Groep N.V. up to a maximum of 900 million cumulative preference shares. The acquisition of cumulative preference shares by the Stichting is subject to the restriction that, immediately after the issue of cumulative preference shares, the total amount of cumulative preference shares may not exceed one third of the total issued share capital of ING Groep N.V. If new shares other than cumulative preference shares are subsequently issued, the Stichting may again exercise its right, subject to the provisions of the preceding sentence. On acquisition of cumulative preference shares, at least 25% of the nominal value must be paid up on said shares.
Statement of independence The Board of Stichting Continuïteit ING and the Executive Board of ING Groep N.V. hereby declare that in their joint opinion 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.
In everything ING does, it has to maintain high ethical standards. Compliance risk is the risk of impairment of ING’s integrity, leading to damage to ING’s reputation, legal or regulatory sanctions, or financial loss as a result of a failure to comply with applicable laws, regulations and standards. Compliance is a responsibility that individual employees share, regardless of their position.
Regulatory compliance is essential because ING’s long-term relationships with its clients depend on integrity and fairness.
Governance and compliance organisation The Executive Board of ING Group has ultimate responsibility for compliance by ING business units with applicable laws, regulations and ethical standards, thereby having oversight-responsibility for the management of ING’s compliance risks. The Executive Board established an ING Group Compliance Policy on 1 July 2005 and has decided that the ING Group Compliance Policy shall be implemented throughout its business by 31 December 2006. Management of business units is responsible for the implementation and adherence to this new compliance policy supported and advised by their Compliance Officers.
The scope of the compliance function relates to compliance risk-related laws, regulations and standards which are specific to the financial-services industry and which are issued by legislative and regulatory bodies that are relevant to ING’s businesses, or by ING Corporate Compliance.
To avoid potential conflicts of interest, an ING Compliance Officer is independent from the business activities and has dual reporting lines: a direct reporting line to general business management and a functional reporting line to the next higher Compliance Officer.
Other accomplishments in compliance in 2005 The Executive Board issued a new Chinese Walls Policy. Management has to ensure that confidential and inside information is not misused or spread inadvertently. The policy also helps to manage the potentially conflicting interests of the business lines of ING.
As a result of the implementation of the EU Market Abuse Directive all relevant documentation has been reviewed and renewed to ensure compliance with the directive. The ING Insider Regulation, which regulates the private investments of ING’s employees with access to ING inside information, has been renewed to reflect the new market abuse rules. 1,500 employees were added to the group of insiders while all existing 7,000 insiders had to sign off on the renewed regulation.
The regulation on Credit Facilities to ING Officers has been renewed. Pursuant to this regulation ING Officers have to provide on a yearly basis at the request of Compliance an overview of all credit facilities granted to them by credit institutions and other companies belonging to ING Group. ING Officers are defined as members of ING Group’s Executive Board, Supervisory Board and members of the Management Council in the Netherlands and the managing directors of Dutch credit institutions belonging to ING Group and officers directly reporting to those managing directors.
As the tone at the top is instrumental to ensure that Compliance is fully embedded in ING’s organisation, the Executive Board uses every opportunity to stress the importance of Compliance to ING, not only to the outside world, but to employees at all organisational levels.
Due to the listing of ING shares on the New York Stock Exchange, ING Group is required to comply with the SEC regulations adopted pursuant to Section 404 of the Sarbanes-Oxley Act, or SOX 404. These regulations require that the CEO and CFO of ING Group report and certify on an annual basis, starting in its annual report over 2006, on the effectiveness of ING Group’s internal controls over financial reporting, and that the external auditors provide an attestation report on the management’s assessment. The management report and the external-auditors attestation will be included annually in Form 20-F, which is filed with the Securities and Exchange Commission.
Background The prime objective of the remuneration policy is to enable the company to recruit and retain qualified and expert managers. The remuneration package supports a performance-driven culture that aligns ING’s objectives with those of its stakeholders. ING rewards performance on the basis of previously determined, challenging, measurable and influenceable short-term and long-term targets.
– The remuneration package includes variable-pay components (short-term and long-term incentives) to ensure that executive remuneration is linked to ING’s short-term and long-term business performance.
In addition to the base salary and incentive plan participation, Executive Board members enjoy benefits similar to most other employees of ING Group. These include benefits such as private medical insurance, the use of company cars and, if applicable, expatriate allowances.
These financial parameters are: net profit, total operating expenses and return on economic capital.
By combining a profit, a cost and a return parameter, the overall performance of ING is properly reflected. Each element is weighted equally to determine the final award. The three performance targets are set by the Supervisory Board at the beginning of the performance period. Under the short-term incentive plan, the actual payout in any year may vary between 0% and 200% of the target level.
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 on a specific date during the first ‘open period’ after the General Meeting of Shareholders.
Performance shares are conditionally granted. The number of shares that is ultimately granted at the end of a 3-year performance period depends on ING Group’s Total Shareholder Return (TSR) over three years (return in the form of capital gains and reinvested dividends that shareholders receive in that period) relative to the TSR performance of a pre-defined peer group. The criteria used to determine the performance peer group are: a) considered comparable and relevant by the Supervisory Board, b) representing ING’s current portfolio of businesses (e.g. banking, insurance and asset management) and ING’s geographical spread, c) global players, d) listed and a substantial free float.
Deutsche Bank, HSBC (banks); – Aegon, AIG, Allianz, Aviva, AXA, Hartford Financial
ING’s TSR ranking within this group of companies determines the final number of performance shares that vest at the end of the three-year performance period. The initial number of performance shares granted at the beginning of each three-year period is based on a midposition ranking of ING. This initial grant will increase or decrease (on a linear basis) on the basis of ING’s TSR position after the three-year performance period as specified in the table below.
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 financial services companies and Dutch-based multinationals. The peer group reflects ING’s business structure and environment. ING competes with these companies for executive talent. The following companies are part of this compensation peer group: ABN Amro, Aegon, Ahold, AXA, BNP Paribas, Credit Suisse, Fortis, KPN, Royal Bank of Scotland, Société Générale.
Beginning in 2004, the amount that newly appointed Executive Board members would be entitled to in case of an involuntary exit has been set at a multiple of their Executive Board member base salary, preserving their existing rights. These rights slightly exceed the exit-arrangement provision in the Dutch Corporate Governance Code, i.e. no more than two times base salary (first appointment period) or one time base salary (all other situations). For the Executive Board members appointed before 2004, the exit clause has been set at three years base salary.
Executive Board Short-term incentive plan 2005 The target STI payout over 2005 was set at 75% of the individual Executive Board member’s base salary. The final award is based on the achievement of a set of common Group financial targets and specific individual qualitative and quantitative objectives for each Executive Board member. Specifically, 70% of the total award is based on the Group’s operating net profit, total operating expenses and return on economic capital, while the remaining 30% is based on individual objectives set at the beginning of the year by the chairman of the Executive Board and approved by the Remuneration and Nomination Committee of the Supervisory Board.
The table on page 68 gives the details of the compensation in cash of the individual members of the Executive Board. Compensation in cash of former members of the Executive Board amounted to EUR 681,000 in 2004 and EUR 1,746,000 in 2003.
Executive Board Long-term incentive plan 2005 Under the long-term incentive plan (LTIP) for the Executive Board, two instruments are used: stock options and performance shares. As mentioned earlier, an identical plan has been adopted by the Executive Board for the senior managers across ING. As a result, approximately 7,000 senior managers participate in a similar plan.
The target level for the 2005 LTIP was set at 75% of base salary for each EB member. The final grant level depends on the Group STIP performance and will vary between 50% of the target level (if Group STI would be 0%) and 150% (if Group STI would be 200%).
As the Group STIP performance outcome over 2005 was 141%, the resulting LTIP award is 120% of target. The number of options and performance shares is determined based on a reference price set at the end of 2005 (EUR 29.30) and a ‘fair value’ calculation of options and performance shares (based on an option-pricing model).
Pensions The first table on page 70 gives the details of the pension costs of the individual members of the Executive Board. Pension costs of former members of the Executive Board amounted to EUR 887,000 in 2004 and EUR 586,000 in 2003.
Short-term performance-related bonus 806 530 333 Total cash compensation 1,503 1,207 967
Short-term performance-related bonus 1,270 855 647 Total cash compensation 2,390 1,976 1,879
Base salary 634 428 Short-term performance-related bonus 705 321 Total cash compensation 1,339 749
Short-term performance related bonus 705 493 333 Total cash compensation 1,339 1,127 967
Base salary 634 428 Short-term performance-related bonus 705 335 Total cash compensation 1,339 763
(2) Eric Boyer de la Giroday, Eli Leenaars and Hans Verkoren were appointed to the Executive Board on 28 April 2004. The figures for these members reflect compensation earned in their capacity as Executive Board members. Thus, the figures for 2004 reflect the partial year as Executive Board members.
(3) Fred Hubbell gets his compensation in US dollars. For each year, the compensation in US dollars has been translated to euros at the average exchange rate for that year.
MICHEL TILMANT Number of options 108,200 82,600 41,250 Number of shares 19,300 15,000 13,750 Fair market value of long-term incentive(2) 1,160 661 481
Number of options 71,400 43,400 Number of shares 12,800 7,900 Fair market value of long-term incentive(2) 765 347
Number of options 0 84,700 41,250 Number of shares 0 15,400 13,750 Fair market value of long-term incentive(2) 1,008 678 481
Number of options 0 48,000 41,250 Number of shares 0 8,700 13,750 Fair market value of long-term incentive(2) 571 384 481
Number of options 0 32,400 Number of shares 0 5,900 Fair market value of long-term incentive(2) 571 259
(1) Long-term incentives are granted in the year following the reporting year (for example, awards shown for 2003 performance were awarded in 2004). For 2002 performance (awards granted in 2003), each Executive Board member was granted 7,000 conditional shares, the condition being an employment contract. The conditional shares vested in May 2005 and as such, 7,764 shares (7,000 plus 764 share dividends) were delivered to the Executive Board members. The total expense relating to the conditional share awards (EUR 604,000) was recognised pro rata over the vesting period. Beginning in the performance year 2003, the Executive Board member’s long-term incentive awards were made under the new LTI plan adopted by the AGM in 2004. The plan provides for a combination of share options and performance shares based on a 50/50 split in value. The ratio of options to performance shares varies each year as a result of the fair value calculation and the 50/50 split in value. The vesting period for the performance shares is 3 years. The costs of the performance shares are expensed pro-rata over the threeyear period. The fair-value calculation for the performance year 2003 resulted in a ratio of options to performance shares of 3:1. The fair-value calculation for the performance year 2004 resulted in a ratio of options to performance shares of 5.5:1. For the performance year 2005, the Company proposes to grant to the Executive Board members the combination of stock options and performance shares (based on the 50/50 split in value) as disclosed in the above table, in May 2006 (after the AGM). The fair-market-value calculations for the 2005 performance year result in a ratio of options to performance shares of 5.6:1.
Shares Executive Board members are permitted to hold ING (depositary receipts for) shares as a long-term investment. The table below shows the holdings by members of the Executive Board.
BY THE MEMBERS OF THE EXECUTIVE BOARD AS AT 31 DECEMBER 2005
Outstanding Outstanding as at Waived or as at 31 Exercise Exercise 31 December Granted Exercised expired December price in price in Expiry Number of options 2004 in 2005 in 2005 in 2005(1) 2005 in Euros US dollars date
Executive Board Long-term incentive plan 2006 The Supervisory Board intends to set the nominal LTI target value at 100% of base salary (same target percentage as the STI). The range may vary between 50% and 150% of the target level (e.g. between 50% and 150% of base salary). The structure for the 2006 long-term incentive award will remain the same as the 2003 structure (the total nominal value at grant will be split between stock options and performance shares).
As was the case in 2005, the total LTI value in stock options and performance shares to be granted to the Executive Board members will be determined by the Supervisory Board at the end of 2006, based on the achievement of the three predefined financial objectives set out in the 2006 short-term incentive plan.
Policy for 2006 With regard to the remuneration policy for 2006, the Supervisory Board continues to build upon the remuneration policy initiated in 2003, which supports the performanceoriented culture. Over the past four years, the Executive Board’s 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).
Executive Board Base salary 2006 The plan is to keep base-salary levels flat in 2006. A marketcompetitive analysis is conducted on an annual basis to ensure market competitiveness.
REMUNERATION OF THE MEMBERS AND FORMER MEMBERS OF THE SUPERVISORY BOARD
Godfried van der Lugt 39 39 29 Paul Baron de Meester(3) 58 57 52
As at 31 December 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 concerns a loan to Aad Jacobs. No loans and advances were outstanding to other members of the Supervisory Board.
Since the establishment of the ING Group Advisory Council in 1996, regional advisory boards were also created. This led increasingly to a duplicating effect. Therefore, the Executive Board and the ING Group Advisory Council jointly decided to end the activities of the ING Group Advisory Council in its current set-up as of 1 January 2006. The Executive Board would like to thank all Advisory Council members for their commitment and valuable contributions through the years.
CONSOLIDATED BALANCE SHEET OF ING GROUP AS AT 31 DECEMBER before profit appropriation amounts in millions of euros 2005 2004
EQUITY Equity attributable to equity holders of the Company 36,736 24,069 Third-party interests 1,689 3,481
CONSOLIDATED PROFIT AND LOSS ACCOUNT OF ING GROUP FOR THE YEARS ENDED 31 DECEMBER
Attribution: Net profit attributable to equity holders of the Company 7,210 5,755 Third-party interests 305 276 Profit for the period 7,515 6,031 amounts in euros 2005 2004
Earnings per ordinary share attributable to equity holders of the Company 36 3.32 2.71 Diluted earnings per ordinary share 36 3.32 2.71 Dividend per ordinary share 37 1.18 1.07
– amortisation of deferred acquisition costs and VOBA -1,141 -858 – increase in provisions for insurance and investment contracts 21,250 13,244 – additions to the provision for loan losses 109 453
– trading assets -29,925 -4,417 – non-trading derivatives 2,596 – other financial assets at fair value through profit or loss -2,193 -14 – loans and advances to customers -62,709 -34,737 – other assets -7,551 336 – amounts due to banks, not payable on demand 19,405 21,986 – customer deposits and other funds on deposit 62,089 64,555 – trading liabilities 13,442 – other financial liabilities at fair value through profit or loss 8,398 – other liabilities 3,228 4,141
Disposals and redemptions – associates and group companies 1,761 1,520 – available-for-sale investments 218,847 197,070 – held-to-maturity investments 245 – investment property 1,030 1,123 – property and equipment 483 192 – assets subject to operating leases 391 388 – investments for the risk of policyholders 34,464 29,382 – other investments 13 65
Proceeds from issuance of subordinated loans 1,901 1,000 Repayments of subordinated loans -177 -410 Borrowed funds and debt securities 7,842 26 Deposits by reinsurers 93 309 Issuance of ordinary shares 114 1,037 Dividends paid -2,461 -883 Net cash flow from financing activities 7,312 1,079
References relate to the notes starting on page 150 which form an integral part of the consolidated annual accounts.
In 2005, deferred taxes with regard to unrealised revaluations amounted to EUR 363 million (2004: EUR -48 million).
ING Group has not early adopted any new International Financial Reporting Standards. Recently issued standards that become effective after 2005 are not expected to have a material effect on equity or profit for the period.
CHANGES IN ACCOUNTING PRINCIPLES 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 with respect to financial instruments and insurance contracts is prepared under ING Group’s previous accounting policies (ING GAAP). As a result, certain comparative information relating to financial instruments and insurance contracts is not presented. The effects of implementing IFRS-EU are set out below under ‘Impact of changes in accounting principles on net profit and equity’.
Classification of equity instruments – shareholders’ equity -399 -399 IFRS-EU impact on net profit and shareholders’ equity -213 -1,991 -1,797 4,103 2,306
In finalising the transition to IFRS as adopted by the EU, certain changes were made to the transition impact disclosed earlier. These changes include the implementation of the fair value option in 2005. These changes were insignificant, both individually and in aggregate.
Net profit Group equity Group equity Impact IAS Group equity 1 January 31 December 32/39 and 1 January amounts in millions of euros 2004 2004 2004 IFRS 4 2005
EXPLANATION OF DIFFERENCES BETWEEN IFRS-EU AND ING GAAP The explanation of differences in accounting principles between IFRS-EU (applied as of 2005) and the accounting principles applied by ING Group in the 2004 annual accounts (ING GAAP) is presented below in two sections: – differences between ING GAAP and IFRS-EU excluding IAS 32/39 and IFRS 4, which were implemented in the restated 2004 comparatives as of 1 January 2004; – differences due to the impact of IAS 32/39 and IFRS 4 which were implemented as of 1 January 2005.
DIFFERENCES BETWEEN ING GAAP AND IFRS EXCLUDING IAS 32/39 AND IFRS 4 Goodwill Under ING GAAP, goodwill was charged to equity. Under IFRS-EU, all goodwill arising after 1 January 2004 is capitalised and subject to an annual impairment review. Goodwill charged to equity prior to 1 January 2004 was not restated.
Leases Under ING GAAP, operating leases where ING is the lessor were presented as Loans and advances to customers. Under IFRS-EU, these are presented as property and equipment, with depreciation recognised in the profit and loss account on a straight-line basis. All bonuses/discounts are amortised over the lease term under IFRS-EU whilst under ING GAAP they were reported in income immediately.
Where deferred acquisition costs are amortised over the lives of policies in relation to the emergence of estimated gross profits, under IFRS-EU the amortisation is adjusted through equity to reflect changes that would have been necessary if unrealised investment gains and losses had been realised.
Hedge accounting Under IFRS-EU, for derivatives qualifying as cash flow hedges and net investment hedges, the fair value movements are initially deferred in equity and subsequently released to the profit and loss account in the same period in which the hedged item affects profit and loss. For fair value hedges, the valuation of the hedged item is adjusted to reflect the hedged risk; this fair value adjustment on the hedged item is reported in the profit and loss account and (partly) offsets the fair value impact of the derivative that is also reported in the profit and loss account. Under ING GAAP, non-trading derivatives used for risk management purposes were valued similarly to the item being hedged (mainly at cost).
IMPACT OF CHANGES IN ACCOUNTING PRINCIPLES ON THE CONSOLIDATED STATEMENT OF CASH FLOWS
Cash and cash equivalents – ING GAAP 11,291 7,338 Consolidation of SPE’s 989 377 Cash and cash equivalents – IFRS-EU 12,280 7,715
Net profit for the period 7,353 7,210 -143 5,700 5,755 55
In June 2005, ING Group formed a private equity joint venture to purchase Gables Residential Trust, a U.S.-based real estate investment trust. Gables Residential Trust is a developer, builder, owner and manager of higher-end multifamily properties. ING will provide USD 400 million in equity to finance the transaction. The venture is managed by ING Clarion, a wholly-owned subsidiary of ING Group.
In June 2005, ING Group has purchased GE Commercial Finance’s 50% stake in NMB-Heller’s Dutch and Belgian factoring business. The factoring business has been transferred into a new company, which operates under the name ING Commercial Finance. GE Commercial Finance purchased ING’s 50% stake in NMB-Heller’s German unit, Heller GmbH. Both purchases took effect retroactively from 1 January 2005.
In 2004, ING Group reduced its shareholding in ING Canada Inc from 100% to 72.9% by an initial public offering of 34,880,000 common shares of ING Canada Inc. The gross proceeds amounted to EUR 552 million. In 2005, the underwriting syndicate exercised its option to buy an additional 5,232,000 common shares, reducing the shareholding of ING Group to 70%.
In 2004, ING Group acquired the Dutch real estate fund Rodamco Asia. As a result, the fund was delisted from Euronext in Amsterdam in 2004 and from the Frankfurt Stock Exchange in 2005. The goodwill amounted to EUR 22 million.
In 2004, ING Group sold its 100% subsidiary CenE Bankiers to Van Lanschot. CenE Bankiers is specialised in commercial and private banking in the Netherlands. The value of the transaction amounted to EUR 250 million.
In 2004, ING Group sold its Asian cash equities business to Macquarie Bank. The cash equities business comprises sales, trading, research and equity capital markets operations.
CRITICAL ACCOUNTING POLICIES ING Group has identified 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, provisions for loan losses and the determination of the fair values of financial assets and liabilities and employee benefits. In each case, the determination of these items is fundamental to the financial condition and results of operations, and requires management to make complex judgements based on information and financial 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 financial statements and the information below under Principles of valuation and determination of results.
INSURANCE PROVISIONS, DEFERRED ACQUISITION COSTS AND VALUE OF BUSINESS ACQUIRED The establishment of insurance provisions, DAC and VOBA is an inherently uncertain process, involving assumptions about factors such as court decisions, changes in laws, social, economic and demographic trends, inflation, investment returns, policyholder behaviour and other factors, and, in the life insurance business, assumptions concerning mortality and morbidity trends.
PROVISIONS FOR LOAN LOSSES Provisions for loan losses are recognised based on an incurred loss model. Considerable judgement is exercised in determining the extent of the loan loss provision (impairment) and is based on the management’s evaluation of the risk in the portfolio, current economic conditions, loss experience in recent years and credit, industry and geographical concentration trends. Changes in such judgements and analyses may lead to changes in the provisions for loan losses over time.
The identification of impairment and the determination of the recoverable amount are an inherently uncertain process involving various assumptions and factors, including the financial condition of the counterparty, expected future cash flows, observable market prices and expected net selling prices.
ACCOUNTING PRINCIPLES FOR THE CONSOLIDATED BALANCE SHEET AND PROFIT AND LOSS ACCOUNT OF ING GROUP (CONTINUED)
EMPLOYEE BENEFITS Group companies operate various defined benefit retirement plans covering a significant number of its domestic and international employees.
The liability recognised in the balance sheet in respect of the defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of the plan assets, together with adjustments for unrecognised actuarial gains or losses and past unrecognised service costs.
ING Group’s interests in jointly controlled entities are accounted for by proportionate consolidation. ING Group proportionately consolidates its share of the joint ventures’ individual income and expenses, assets and liabilities and cash flows on a line-by-line basis with similar items in ING Group’s financial statements. ING Group recognises the portion of gains or losses on the sale of assets to the joint venture that it is attributable to the other venturers. ING Group does not recognise its share of profits or losses from the joint venture that result from the purchase of assets by ING Group from the joint venture until it resells the assets to an independent party. However, if a loss on the transaction provides evidence of a reduction in the net realisable value of current assets or an impairment loss, the loss is recognised immediately.
USE OF ESTIMATES AND ASSUMPTIONS The preparation of the consolidated financial statements necessitates the use of estimates and assumptions. These estimates and assumptions affect the reported amounts of the assets and liabilities and the amounts of the contingent liabilities as at balance sheet date as well as reported income and expenses for the year. The actual outcome may differ from these estimates.
The process of setting assumptions is subject to internal control procedures and approvals, and takes into account internal and external studies, industry statistics, environmental factors and trends and regulatory requirements.
FOREIGN CURRENCY TRANSLATION Functional and presentation currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The consolidated financial statements are presented in Euro, which is the Company’s functional and presentation currency.
– All resulting exchange differences are recognised in a separate component of equity.
On consolidation, exchange differences arising from the translation of a monetary item that forms part of the net investment in a foreign operation, and of borrowings and other instruments designated as hedges of such investments, are taken to shareholders’ equity. When a foreign operation is sold, such exchange differences are recognised in the profit and loss account as part of the gain or loss on sale.
Goodwill and fair value adjustments arising on the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at the closing rate.
Some credit protection contracts that take the legal form of a derivative, such as certain credit default swaps, are accounted for as 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 either (1) hedges of the fair value of recognised assets or liabilities or firm commitments (fair value hedge); (2) hedges of highly probable future cash flows attributable to a recognised asset or liability or a forecasted transaction (cash flow hedge) or (3) hedges of a net investment in a foreign operation. Hedge accounting is used for derivatives designated in this way provided certain criteria are met.
The Group documents, at the inception of the transaction, the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items including the method for assessing the hedging instruments’ effectiveness in offsetting the exposure to changes in the hedged item’s fair value or cash flows attributable to the hedged risk.
Certain derivatives embedded in other contracts are measured as separate derivatives when their economic characteristics and risks are not closely related to those of the host contract, the host contract is not carried at fair value through profit and loss and if a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative. These embedded derivatives are measured at fair value with changes in fair value recognised in the profit and loss account.
Fair value hedge Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recognised in the profit and loss account, together with fair value adjustments to the hedged item attributable to the hedged risk. If the hedge relationship no longer meets the criteria for hedge accounting, the cumulative adjustment of the hedged item is, in the case of interest bearing instruments, amortised in the profit and loss account over the remaining term of the original hedge or recognised directly when the hedged item is derecognised. For non-interest bearing instruments, the cumulative adjustment of the hedged item is recognised in the profit and loss account only when the hedged instrument is derecognised.
Non-trading derivatives that do not qualify for hedge accounting Certain non-trading derivative instruments that are used by the Group as part of its risk management strategies do not qualify for hedge accounting under the Group’s accounting policies. Changes in the fair value of non-trading derivatives that do not qualify for hedge accounting are recognised immediately in the profit and loss account.
FINANCIAL ASSETS Recognition of financial assets All purchases and sales of financial assets classified as held-to-maturity, available-for-sale and trading 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 deposits are recognised at settlement date.
Available-for-sale financial assets For available-for-sale debt securities, the difference between cost and redemption value is amortised. Interest income is recognised using the effective yield method. Available-for-sale financial assets are measured at fair value. Unrealised gains and losses arising from changes in the fair value are recognised in equity. When the securities are disposed of, the related accumulated fair value adjustments are included in the profit and loss account as gains and losses from investments. For impairments on available-for-sale financial assets reference is made to the section Impairments of other financial assets.
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 by using a weighted average per portfolio. For debt securities the cost is determined by specific identification.
Objective evidence that a financial asset or group of assets is impaired includes, but is not limited to: – The borrower has sought or has been placed in bankruptcy or similar protection and this avoids or delays repayment of the financial asset.
– The borrower has failed in the repayment of principle, interest or fees and the payment failure has remained unsolved for a certain period.
If there is objective evidence that an impairment loss on assets carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the profit and loss account. If the asset has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract.
Future cash flows in a portfolio of financial assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the assets in the portfolio and historical loss experience for assets with credit risk characteristics similar to those in the portfolio. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently.
When a loan is uncollectable, it is written off against the related provision for loan impairment. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off decrease the amount of the provision for loan impairment and are recognised in the profit and loss account.
INVESTMENTS IN ASSOCIATES Associates are all entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are initially recognised at cost and subsequently accounted for by the equity method of accounting.
The Group’s investment in associates (net of any accumulated impairment loss) includes goodwill identified on acquisition. The Group’s share of its associates’ post-acquisition profits or losses is recognised in the profit and loss account, and its share of postacquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements 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 under construction Land and buildings under construction (including investment property) are stated at the directly attributable purchase and construction costs incurred up to the balance sheet date plus borrowing costs incurred during construction and the Group’s own development and supervision expenses, where necessary less impairment losses.
Assets under operating leases Assets leased out under operating leases in which ING is the lessor are stated at cost less accumulated depreciation and any impairment losses. The cost of the assets is depreciated on a straight-line basis over the lease term. Reference is made to Leases.
The Group as the lessor When assets are held subject to a finance 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 recognised as unearned finance income. Lease income is recognised over the term of the lease using the net investment method (before tax), which reflects a constant periodic rate of return. When assets are held subject to an operating lease, the assets are included under “Assets under operating leases”.
PURCHASE ACCOUNTING, GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill ING Group’s acquisitions are accounted for under the purchase method of accounting, whereby the cost of the acquisitions is allocated to the fair value of the assets, liabilities and contingent liabilities acquired. Goodwill, being the difference between the cost of the acquisition (including assumed debt) and the Group’s interest in the fair value of the acquired assets, liabilities and contingent liabilities as at the date of acquisition, is capitalised as an intangible asset. The results of the operations of the acquired companies are included in the profit and loss account from the date control is obtained.
Adjustments to the fair value as of the date of acquisition of acquired assets and liabilities that are identified within one year after acquisition are recorded as an adjustment to goodwill; any subsequent adjustment is recognised as income or expense. However, recognition of deferred tax assets after the acquisition date is recorded as an adjustment to goodwill even after the first year. On disposal of group companies, the difference between the sale proceeds and book value (including goodwill) and the amount included in the currency translation reserve in equity is included in the profit and loss account.
Other intangible assets Other intangible assets are capitalised and amortised over their expected economic lives. Intangible assets with an indefinite life are not amortised.
DEFERRED ACQUISITION COSTS Deferred acquisition costs (DAC) are an asset and represent costs of acquiring insurance and investment contracts that are deferred and amortised. The deferred costs, all of which vary with and are primarily related to the production of new and renewal business, consist principally of commissions, certain underwriting and contract issuance expenses, and certain agency expenses. DAC is amortised over the life of the underlying contracts.
DAC is adjusted for the impact of unrealised results on allocated investments through 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 financial 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.
FINANCIAL LIABILITIES Preference shares, which carry a mandatory coupon or are redeemable on a specific date or at the option of the shareholder, are classified as financial liabilities. The dividends on these preference shares are recognised in the profit and loss account as interest expense using the effective interest method.
Financial liabilities at fair value through profit and loss comprise two sub-categories: financial liabilities held for trading and other financial liabilities designated at fair value through profit 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.
INSURANCE, INVESTMENT AND REINSURANCE CONTRACTS Insurance contracts Insurance policies which bear significant insurance risk under the Group accounting policies are presented as insurance contracts. Provisions for liabilities under insurance contracts represent estimates of future payouts that will be required in respect of life and non-life insurance claims, including expenses relating to such claims.
Provision for life policy liabilities The Provision for life policy liabilities is calculated on the basis of a prudent prospective actuarial method, taking into account the conditions for current insurance contracts.
Insurance provisions on traditional life policies are calculated using various assumptions, including assumptions on mortality, morbidity, expenses, investment returns and surrenders. Assumptions for insurance provisions on traditional life insurance contracts, including traditional whole life and term life insurance contracts, are based on best estimate assumptions including margins for adverse deviations. The assumptions are set initially at the policy issue date and remain constant throughout the life of the policy, except in case of loss recognition.
Deferred profit sharing liability For insurance contracts with discretionary participation features a deferred profit sharing liability is recorded for the full amount of the unrealised revaluation on allocated investments. Furthermore, a deferred profit sharing liability is recorded for the share in realised results on allocated investments that is expected to be shared with policyholders. The deferred profit sharing liability is reduced with the actual allocation of profit sharing to individual policyholders.
Insurance provisions for policies for which the policyholder bears the investment risk The insurance provisions for policies for which the policyholders bear the investment risk are calculated on the same basis as the provision for life policy liabilities. For insurance contracts for which policyholders bear the investment risk the insurance provisions are generally shown at the balance sheet value of the associated investments.
If the provisions are not adequate using a prudent (90%) confidence 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 extent that there are no offsetting amounts within other Group business units then any shortfall at the 90% confidence level is immediately recorded in the profit and loss account.
The defined benefit obligation is calculated using the expected rate of return on plan assets. Differences between this expected return and the actual return on these plan assets and actuarial changes are not recognised in the profit and loss account, unless the accumulated differences and changes exceed 10% of the greater of the defined benefit obligation and the fair value of the plan assets. The excess is amortised and charged or credited to the profit and loss account over employees’ remaining working lives. The corridor was reset to nil at the date of transition to IFRS-EU (1 January 2004).
For defined contribution plans, the Group pays contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis. The Group has no further payment obligations once the contributions have been paid. The contributions are recognised as employee benefit expense 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.
Diluted earnings per share data are computed as if the stock options and warrants outstanding at year-end were exercised at the beginning of the period. It is also assumed that ING Group uses the cash thus received for stock options and warrants exercised to buy its own shares against the average market price in the financial year. The net increase in the number of shares resulting from the exercise of warrants and stock options is added to the average number of shares used for the calculation of diluted earnings per share.
ACCOUNTING POLICIES APPLIED IN RESPECT OF FINANCIAL INSTRUMENTS AND INSURANCE CONTRACTS FOR THE YEAR ENDED 31 DECEMBER 2004 As explained under ‘Changes in accounting principles’, the 2004 comparatives for financial instruments and insurance contracts are presented under the accounting principles applied in the 2004 financial statements (i.e. not restated for IAS 32, IAS 39 and IFRS 4). The main items involved are: – non trading derivatives – investments – loans and advances to customers – insurance, reinsurance and investment contracts
Key differences between the former ING GAAP accounting principles and IFRS-EU for these items are described in the section ‘Changes in accounting principles’.
The cash flow statement has been drawn up in accordance with the indirect method, classifying cash flows by cash flows from operating, investing and financing activities. In the net cash flow from operating activities, the profit before tax is adjusted for those items in the profit and loss account and movements in balance sheet items which do not result in actual cash flows during the year.
The difference between the net cash flow in accordance with the cash flow statement and the movement in Cash in the balance sheet is due to exchange differences and is separately accounted for as part of the reconciliation of the net cash flow and the balance sheet movement in cash.
ACCOUNTING PRINCIPLES FOR THE CONSOLIDATED STATEMENT OF CASH FLOWS OF ING GROUP
Loans and advances to banks 2,805 24,072 26,877 1,853 18,644 20,497 Cash advances, overdrafts and other balances 2,174 18,422 20,596 1,737 22,868 24,605
As at 31 December 2005, amounts due from banks included receivables with regard to securities, which have been acquired in reverse repurchase transactions amounting to EUR 7,738 million (2004: EUR 10,799 million).
As at 31 December 2005, assets held under finance lease contracts amounted to EUR 225 million (2004: EUR 158 million).
Trading assets 149,187 79,649 Investments for risk of policyholders 100,961 77,662 Non-trading derivatives 7,766 Designated as at fair value through profit or loss 10,230 Other 3,334.
Derivatives used in cash flow hedging 2,274 Derivatives used in fair value hedging 1,179 Derivatives used in hedges of net investments in foreign operations 31 Other non-trading derivatives 4,282 4 INVESTMENTS
The fair value of the securities classified as held-to-maturity amounts to EUR 19,466 million at 31 December 2005.
Loans to or guaranteed by public authorities 13,907 17,535 31,442 7,296 17,118 24,414
Loans guaranteed by credit institutions 1,448 378 1,826 414 702 1,116
LOANS AND ADVANCES TO CUSTOMERS ANALYSED BY SUBORDINATION – BANKING OPERATIONS
Maturities of net investment in finance leases Not later than 1 year 3,727 3,533 Later than 1 year and not later than 5 years 6,163 6,160 Later than 5 years 2,327 1,971
Included in Loans and advances to customers 11,992 11,506 Included in Amounts due from banks 225 158
The closing balance is included in – amounts due to banks 7 18 – loans and advances to customers 3,306 4,244 – other assets 194
Balance Interest sheet Total Total Total Total 2004 held (%) value assets liabilities income expense
ING UK Property Income Limited Partnership 45 63 369 229 6 3
ING Retail Property Fund Australia 30 56 604 417 45 21 Other investments in associates(2) 1,131
Accumulated impairments have been recognised of EUR 4 million (2004: EUR 4 million).
Changes in the composition of the group -323 96 -75 Transfer to and from investments 964 357
Share of results 412 165 Dividends received -170 -128 7 INVESTMENT PROPERTY
Exchange differences 53 -49 Other movements 94 Closing balance 5,031 7,151
Changes in the composition of the group 3 -26 Transfer to and from investment property 2 8 Transfer to and from other assets -25 -11
APPRAISAL OF PROPERTY IN OWN USE DURING THE LAST FIVE YEARS BY PROFESSIONALLY QUALIFIED VALUERS
Changes in the composition of the group -8 6 -12 -1 -20 5
Gross carrying amount as at 31 December 3,070 3,123 98 206 3,168 3,329 Accumulated depreciation as at 31 December -954 -1,057 -44 -165 -998 -1,222 Accumulated impairments as at 31 December -6 -6
As at 31 December 2005 the gross amount of goodwill amounted to EUR 173 million (2004: EUR 139 million).
As at 31 December 2004 value of business acquired was included in Deferred acquisition costs.
Reinsurance and insurance receivables 3,144 3,013 Deferred tax assets 2,118 1,028 Property held for sale 1,891 1,639 Property under development for third parties 71 47 Income tax receivable 580 232 Accrued interest and rents 13,776 8,327 Other accrued assets 1,112 2,290 Other receivables 7,468 4,821
Deferred tax liabilities (offset by deferred tax assets) relating to – insurance provisions 57
Gross carrying amount as at 31 December 1,960 1,639 Accumulated impairments as at 31 December -69 Net book value 1,891 1,639
Share capital 530 634 Share premium 8,343 8,525 Revaluation reserve 11,206 1,257 Share of associates reserve 608 613 Currency translation reserve 668 -184 Treasury shares -868 -563 Other reserves 16,249 13,787 Equity attributable to equity holders of the Company 36,736 24,069
The holder of a depositary receipt is entitled to receive from the Trust Office payment of dividends and distributions corresponding with the dividends and distributions received by the Trust Office on a share of the relevant category.
In addition, the holder of a depositary receipt is entitled to attend and to speak at the General Meeting of Shareholders of ING Groep N.V. either in person or by proxy. A holder of a depositary receipt who thus attends the General Meeting of Shareholders, is entitled to vote as a proxy of the Trust Office but entirely at his own discretion for a number of shares equal to the number of his depositary receipts of the relevant category.
In case of a split or consolidation of the shares of ING Groep N.V., a warrant holder shall remain entitled to a number of shares, the aggregate par value of which shall be equal to the aggregate par value of the number of shares to which he was entitled before the split or consolidation.
ING Group preference shares The par value of the preference shares is EUR 1.20. Preference shares are divided into two 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, of which as at 31 December 2005 87 million have been issued and 200 million ‘B’ preference shares, of which none have been issued.
EUR 1,792 million (2004: EUR 366 million) has been subsequently provided as subordinated loans by ING Groep N.V. to ING Verzekeringen N.V. under the same conditions as the original bonds.
15 DEBT SECURITIES IN ISSUE The debt securities in issue relate to debentures and other issued debt securities with either fixed interest rates or interest rates based on interest-rate levels, such as certificates of deposit and accepted bills issued by ING Group, except for subordinated items. 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: DEBT SECURITIES IN ISSUE
Fixed rate debt securities – 1 year or less 39,978 29,392 – 2 years or less but over 1 year 3,816 4,144 – 3 years or less but over 2 years 1,741 4,532 – 4 years or less but over 3 years 3,863 3,665 – 5 years or less but over 4 years 10,350 5,090
Subordinated loans of group companies 842 1,131 550 377 797 11,978 15,675
Provision for life policy liabilities 137,066 125,804 5,441 4,105 131,625 121,699 Provision for (deferred) profit sharing and rebates 4,195 803 4,195 803 Insurance provisions for policies for which the policyholders bear the investment risk 90,728 78,807 1,197 1,151 89,531 77,656
Provisions for unearned premiums and unexpired risks 3,093 2,863 258 354 2,835 2,509
Total provisions for insurance contracts 244,854 216,851 8,285 6,744 236,569 210,107
Investment contracts 7,223 7,223 Investment contracts for which the policyholders bear the investment risk 11,410 11,410 Investment contracts liabilities 18,633 18,633
Where discounting is used in the calculation of life insurance provisions, the rate is within the range of 3% to 6% (based on weighted averages).
As at 31 December 2005, the receivables from reinsurers amounted to EUR 719 million (2004: EUR 388 million), against which EUR 6 million (2004: nil) was provided for as uncollectible reinsurance.
Changes in the composition of the group -41 -333 -26 -350 -15 17
Changes in the composition of the group 853 -27 638 27 215
Estimate of cumulative claims: At the end of underwriting year 3,893 4,688 One year later 3,990 Estimate of cumulative claims 3,990 4,688 8,678
Netherlands International Total Netherlands International Total 19 CUSTOMER DEPOSITS AND OTHER FUNDS ON DEPOSIT
Saving accounts 269,389 219,468 Credit balances on customer accounts 127,469 84,996 Corporate time deposits 57,655 42,928
For the financial year 2005 the changes in fair value of financial liabilities designated as at fair value through profit or loss attributable to changes in credit risk of ING Group are insignificant.
Deferred tax liabilities 5,128 1,049 Income tax payable 1,184 1,153 Pension liabilities and other staff related liabilities 1,998 2,556 Other taxation and social security contribution 633 437 Deposits from reinsurers 642 549 Accrued interest 10,699 5,116 Costs payable 2,443 2,268 Other provisions 1,181 943
Deferred taxes are calculated on all temporary differences under the liability method using effective tax rates applicable to the jurisdictions in which the Group is liable to taxation.
Deferred tax assets (offset by deferred tax liabilities) relating to – insurance provisions 2,119 1,949 – other provisions 1,057 452 – unused tax losses carried forward 450 336 – fiscal equalisation reserve 13 33
– financial assets and liabilities at fair value through profit or loss 37 76 – deferred acquisition costs 3,999 2,965 – fiscal equalisation reserve 7
– up to five years 72 48 20 247 – five to ten years 96 5 39 – ten to twenty years 263 726 657
Changes in the composition of the group -7 -38 53 -60 46 -98
Pension liabilities and other staff-related liabilities The Group maintains defined benefit retirement plans in the major countries in which it operates. These plans generally cover all employees and provide benefits that are related to the remuneration and service of employees upon retirement. Provided that the plan assets are sufficient, the benefits from many of these plans are subject to some form of indexation.
Annual contributions are paid to the funds at a rate necessary to adequately finance the accrued liabilities of the plans calculated in accordance with local legal requirements. Plans in all countries comply with applicable local regulations concerning investments and funding levels.
Opening balance 12,925 11,196 Current service cost 477 434 Interest costs 643 699 Participant contributions 8 2 Benefits paid -416 -392 Actuarial gains and losses 1,680 1,251 Past service cost 192 Changes in the composition of the group 67 -174 Effect of curtailment or settlement -12 -1 Exchange differences 218 -90 Closing balance 15,782 12,925
As at 31 December 2005, the defined benefit obligation consisted of funded plans amounting to EUR 15,658 million (2004: EUR 12,488 million) and unfunded plans amounting to EUR 124 million (2004: EUR 437 million).
Target Percentage of long term rate allocation plan assets of return
WEIGHTED AVERAGES OF BASIC ACTUARIAL ASSUMPTIONS IN ANNUAL % AS AT 31 DECEMBER
Expected Cash Flows There are not expected to be any mininum funding requirements during 2006.
In 2005 the employer’s contributions amounted EUR 1,002 million (2004: EUR 688 million).
Expected Cash Flows There are not expected to be any minimum funding requirements during 2006.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid: POST-RETIREMENTS OTHER THAN PENSIONS
ADDITIONAL INFORMATION TO THE CONSOLIDATED BALANCE SHEET OF ING GROUP AMOUNTS IN MILLIONS OF EUROS, UNLESS STATED OTHERWISE
– designated at fair value through profit or loss 107 309 1,184 2,909 4,963 758 10,230 Investments
Less than one 1-3 3-12 1-5 Over five Maturity not 2004 month months months years years applicable Total
Financial assets at fair value through profit or loss – trading assets 79,649 79,649
Intangible assets 594 594 Deferred acquisition costs 10,428 10,428 Other assets 21,396 21,396 Remaining assets (where maturities are not applicable)(1) 93,260 93,260
(1) Included in remaining assets where maturities are not applicable are: – property and equipment – investment property – investments for risk of policyholders – investments in associates – other financial assets at fair value through profit or loss
Interest rate risk ING Group uses various derivative instruments to manage its exposure to interest rate risk. The main products used to manage interest rate risk are interest rate swaps and cross-currency interest rate swaps. Hedge accounting is applied using fair value hedge accounting or cash flow hedge accounting for positions that meet the criteria under IFRS-EU.
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 Guarantees for Other debt securities off balance contingent in issue Banks sheet items liabilities Total
ADDITIONAL INFORMATION TO THE CONSOLIDATED BALANCE SHEET OF ING GROUP (CONTINUED)
Irrevocable facilities mainly constitute unused portions of irrevocable credit facilities granted to corporate clients. Many of these facilities are for a fixed duration and bear interest at a floating rate. ING Group’s credit risk in these transactions is limited. Most of the unused portion of irrevocable credit facilities is secured by customers’ assets or counter-guarantees by the central governments and exempted bodies under the regulatory requirements. Irrevocable facilities also include commitments made to purchase securities to be issued by governments and private issuers.
SPECIAL PURPOSE ENTITIES (SPEs) AND SECURITISATION ING Group has established a number of SPEs and engages in activities with SPEs, for example as investor, administrator or provider of other financial services. SPEs which are controlled by ING Group are included in the consolidated financial statements.
Collateralised debt obligations (CDO)-transactions Within ING Group, SPEs are used for CDO transactions. In a typical CDO transaction an SPE is used to issue structured, rated securities which are backed (or collateralised) by a pool of transferable debt securities. 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 SPEs charter; – investor.
LEGAL PROCEEDINGS ING Group companies are involved in litigation and arbitration proceedings in the Netherlands and in a number of foreign jurisdictions, including the United States, involving claims by and against them which arise in the ordinary course of their businesses, including in connection with their activities as insurers, lenders, employers, investors and taxpayers. In certain of such proceedings, very large or indeterminate amounts are sought, including punitive and other damages. While it is not feasible to predict or determine the ultimate outcome of all pending or threatened legal and regulatory proceedings, management does not believe that their outcome will have a material adverse effect on the Group’s financial position or results of operations.
ING Comercial América also has been the subject of certain complaints and suits concerning the performance of certain interest sensitive life insurance products. ING Comercial América is defending these matters vigorously; however, at this time, we are unable to assess the final outcome of these matters.
In 2005, ING Comercial América management learned of an earthquake reinsurance arrangement that was inconsistent with local requirements. This arrangement was restructured and the matter was reported to the SEC and to Mexican authorities. Mexican regulators required that ING Comercial América restate certain financials and to correct a statutory margin shortfall, which required approximately EUR 74 million (USD 87 million) in additional capital. In addition, Mexican authorities fined ING Comercial América EUR 3.2 million.
DIVIDEND RESTRICTIONS In addition to the restrictions in respect of minimum capital and solvency requirements that are imposed by industry regulators in the countries in which the subsidiaries operate, other limitations exist in certain countries. The most significant restrictions for ING Group are related to the insurance operations located in the United States, which are subject to limitations on the payment of dividends to the parent company imposed by the Insurance Commissioner of the state of domicile. For life, accident and health subsidiaries, dividends are generally limited to the greater of 10% of statutory surplus or the statutory net gain from operations. For the property and casualty subsidiaries, dividends are limited to a specified percentage of the previous year’s shareholders’ equity or previous year’s net investment gains, which varies by state. Dividends paid in excess of these limitations require prior approval of the Insurance Commissioner of the state of domicile.
JOINT VENTURES Joint ventures are included proportionally in the consolidated financial statements as follows: MOST SIGNIFICANT JOINT VENTURES
RELATED PARTIES In the normal course of business, the Group enters into various transactions with related companies. Related companies comprise non-consolidated entities and the non-consolidated part of joint ventures. These transactions are not considered material to the Group, either individually or in the aggregate. Parties are considered to be related if one party has the ability to control or exercise significant influence over the other party in making financial or operating decisions. Transactions have taken place on an at arm’s length basis.
ING Verze- ING VerzeING Bank N.V. keringen N.V. ING Bank N.V. keringen N.V.
Base salary and short-term bonus 12,514 9,506 549 508 13,063 10,014
Retirement benefit 132 132 Fair market value of long-tem incentives 5,274 2,998 5,274 2,998
The total number of stock options on ING Groep N.V. shares held by the Executive Board members amounted to 1,271,640 at 31 December 2005 (2004: 1,026,240). As at 31 December 2005, members of the Executive Board held 1,125,023 ING Groep N.V. shares (2004: 1,107,717). Part of these shares are held in a trust. As at 31 December 2005, members of the Supervisory Board held 15,490 ING Groep N.V. shares (2004: 17,093).
FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES The following table presents the estimated fair values of ING Group’s financial assets and liabilities. Certain balance sheet items are not included in the table, as they do not comply with the definition of a financial 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.
Estimated Balance Estimated Balance fair value sheet value fair value sheet value
– held-to-maturity 19,466 18,937 Loans and advances to customers(1) 434,829 427,189 340,732 318,952
Investment contracts 18,633 18,633 Amounts due to banks 122,064 122,234 96,816 95,878 Customer deposits and other funds on deposit 466,982 465,712 350,131 349,241 Financial liabilities at fair value through profit or loss
(1) Amounts due from banks and Loans and advances to customers do not include finance lease receivables. (2) Other assets do not include (deferred) tax assets. (3) Other liabilities do not include (deferred) tax liabilities, pension liabilities, insurance provisions and other provisions.
The following methods and assumptions were used by ING Group to estimate the fair value of the financial instruments.
FINANCIAL ASSETS Cash and balances with central banks The carrying amount of cash approximates its fair value.
Amounts due from banks The fair values of receivables from banks are estimated based on discounting future cash flows using available market interest rates offered for receivables with similar characteristics.
Non-trading derivatives The fair values of derivatives held for non-trading purposes are based on broker/dealer valuations or on internal discounted cash flow pricing models taking into account current cash flow assumptions and the counterparties’ credit standings. The fair values of derivatives held for non-trading purposes generally reflect 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 significant 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 flows 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 flows of recoveries.
The fair values of mortgage loans are estimated by discounting future cash flows using interest rates currently being offered for similar loans to borrowers with similar credit ratings. The fair values of fixed-rate policy loans are estimated by discounting cash flows 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 fair values of variable-rate policy loans approximate their carrying values.
Other assets The carrying amount of other assets is not materially different than the fair value.
FINANCIAL LIABILITIES Preference shares and subordinated loans The fair value of the subordinated loans is estimated using discounted cash flows based on interest rates that apply to similar instruments.
Investment contracts For guaranteed investment contracts the fair values have been estimated using a discounted cash flow approach based on interest rates currently being offered for similar contracts with maturities consistent with those remaining for the contracts being valued. For other investment-type contracts, fair values are estimated based on the cash surrender values.
Debt securities in issue and other borrowed funds The fair value of debt securities in issue and other borrowed funds is estimated using discounted cash flows based on current market interest rates for these instruments.
Other liabilities The carrying amount of other liabilities are stated at their book value which is not materially different than the fair value.
ING Bank Capital adequacy and the use of regulatory required capital are based on the guidelines developed by the Basel Committee on Banking Supervision (the Basel Committee) and European Community Directives, as implemented by the Dutch Central Bank (DNB) for supervisory purposes. The minimum Tier-1 ratio is 4% and the minimum total capital ratio (known as the ‘BIS ratio’) is 8% of all risk-weighted assets, including off-balance sheet items and market risk associated with trading portfolios.
Equity attributable to the equity holders of the Company. 21,331 14,894 Third-party interests 482 508 Subordinated loans qualifying as Tier-1 capital(1) 5,764 5,026
Minority interest Record Bank 170 Revaluation reserve(2) -4,262 -385 Core capital – Tier-1 23,408 20,000
ING Group According to an agreement (‘Protocol’) between the Dutch Central Bank and the former Pension & Insurance Board regarding the supervision of financial conglomerates, ING Group is required to have an amount of capital, reserves and subordinated loans which are at least equal to the sum of: – the required capital for the banking activities; and – the required capital for the insurance activities.
For regulatory purposes certain (external) subordinated loans of ING Bank N.V. and ING Verzekeringen N.V. are included.
Equity attributable to the equity holders of the Company 36,736 24,069 Excluding: Revaluation reserves -6,304 Preference shares 296 Preference shares issued by group companies 1,269 1,283
Subordinated loans ING Bank N.V. (included in Tier-2) 10,304 9,951 Subordinated loans ING Verzekeringen N.V. 4,052 2,893 Capital base including subordinated loans 52,498 42,134
Interest income on available-for-sale securities 5,989 6,175 Interest income on held-to-maturity securities 639 Interest income on trading portfolio 15,237 883 Interest income on non-trading derivatives 5,658 Other interest income 1,764 2,628 Total interest income 48,176 25,448
Interest expense on deposits by banks 2,371 1,351 Interest expense on customer deposits and other funds on deposit 11,960 9,440 Interest expense on debt securities 2,911 2,688 Interest expense on subordinated loans 1,126 892 Interest on trading liabilities 13,369 Interest on non-trading derivatives 5,821 Other interest expense 1,551 2,336 Total interest expense 39,109 16,707
The presentation of interest income and interest expense changed in 2005 due to the implementation of IAS 32 and 39. For certain trading derivatives interest income and expense were included in Net trading income in 2004. As of 2005 these are presented as interest income and interest expense as included in Interest result banking operations. This reclassification results in an increase in 2005 in interest income and interest expense of approximately EUR 12 billion. In addition, interest income and expense related to certain non-trading derivatives that were presented net during 2004, are presented gross as of 2005. As a result of this presentation difference, interest income and interest expense in 2005 is approximately EUR 5 billion higher than in 2004.
INTEREST MARGIN, ANALYSED ON A PERCENTAGE BASIS OF THE NETHERLANDS AND INTERNATIONAL OPERATIONS
Premium income has been included before deduction of reinsurance and retrocession premiums granted. Premium income excludes premium received for investment contracts, for which deposit accounting is applied.EFFECT OF INSURANCE ON PREMIUMS WRITTEN EFFECT REINSURANCE ON PREMIUMS WRITTEN
Direct premiums earned, gross 6,712 6,492 Reinsurance assumed premiums earned, gross 57 50 Total gross premiums earned 6,769 6,542
Total single premiums includes EUR 520 million in 2005 from profit sharing.
Reinsurers’ Own Reinsurers’ Own 2004 Gross share account Gross share account
Total single premiums includes EUR 457 million in 2004 from profit sharing.
(1) including disability insurance products. (2) excluding reinsurance. (3) including other underwriting income.
Gross Gross and other reinsurance premiums premiums Gross claims Operating underwriting income/ Operational 2004 written earned(2) expenses expenses expenditure(3) (expenses) result
Income from disposal of group companies -25 480 415 -143 390 337
Insurance operations Banking operations Total 27 VALUATION RESULTS FROM NON-TRADING DERIVATIVES
Change in fair value of assets and liabilities (hedged items) -98 467 369 Valuation results on assets and liabilities designated as at fair value through profit or loss (excluding trading) -111 -111 Net valuation results -179 226 47
Results from foreign exchange transactions -87 -72 378 566 291 494
Results from foreign currency exchange transactions include gains and losses from spot and forward contracts, options, futures, and translated foreign currency assets and liabilities. Results from securities trading includes the results of making markets in instruments such as government securities, equity securities, corporate debt securities, money-market instruments, interest rate derivatives such as swaps, options, futures and forward contracts.
The portion of trading gains and losses for the years ended 31 December 2005 and 2004 that related to trading securities still held at 31 December, amounts to EUR 7 million and EUR 154 million respectively.
Share of profit from associates 401 195 140 34 541 229
EXPENDITURE FROM NON-LIFE UNDERWRITING Reinsurance and retrocession premiums 526 756 Gross claims 4,343 3,598 Reinsurance recoveries -775 -303 Movements in the provision for unearned premiums -46 73 Movements in the claims provision -49 58 Costs of acquiring insurance business 1,012 951 Other underwriting expenditure -52 -32
ING transferred part of their life insurance business to Scottish Re in 2004 by means of a co-insurance contract. ING recorded a loss amounting to EUR 160 million in Underwriting expenditure in 2004 on the transaction. This loss represented the reduction of the related deferred acquisition costs. In addition, an amount of EUR 240 million will be amortised over the life of the underlying business, starting in 2005 and gradually decreasing in subsequent years as the business runs off. The amount amortised in 2005 amounts to EUR 34 million. The cumulative amortisation recognised amounts to EUR 34 million.
The underwriting expenditure regarding investment income for risk of policyholders of EUR 5,074 million (2004: EUR 2,309 million) has not been recognised as an expense in Underwriting expenditure. Accordingly, the equal amount of related income has also not been recognised in Income from investments and Gains and losses from investments.
Pension and other staff related liability costs 143 144 256 484 399 628
Effect of curtailment or settlement -12 -3 -396 -3 -411 -3 Defined benefit post-employment plans 590 444 -314 66 47 9 323 519
Contributions to defined contribution plans are generally determined as a percentage of pay.
Stock option and share plans ING Group has granted option rights on ING Group shares and conditional rights on depositary receipts for ING shares to a number of senior executives (members of the Executive Board, general managers and other officers nominated by the Executive Board), to all ING Group staff in the Netherlands and to a considerable number of employees outside the Netherlands. The purpose of the option and share schemes, apart from promoting a lasting growth of ING Group, is to attract, retain and motivate senior executives and staff.
ING Group holds directly or indirectly its own shares in order to fulfil 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 2005, 38,722,934 (2004: 29,427,538) own shares were held in connection to the option plan compared to 85,128,950 options outstanding. 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.
Each 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.
SUMMARY OF STOCK OPTIONS OUTSTANDING AND EXERCISABLE AS AT 31 DECEMBER 2005
Range as at remaining average as at remaining average of exercise 31 December contractual exercise 31 December contractual exercise price in euros 2005 life price 2005 life price
The fair value of options granted is recorded as an expense under personnel expenses and is allocated over the vesting period of the options. The fair values of the option awards have been determined by using an option-pricing model. This model takes the risk free interest rate into account (ranging from 3.12% to 3.46%), as well as the expected life of the options granted, the exercise price, the current share price, the expected volatility of the certificates of ING Group shares and the expected dividends in the range of EUR 1.07 to EUR 1.12.
As of 31 December 2005 there was EUR 81 million (2004: EUR 51 million) of total unrecognised compensation costs related to share awards. These costs are expected to be recognised over a weighted average period of 1.9 years (2004: 2.2 years).
Other operating expenses include lease and sublease payments in respect to operating leases in which ING is the lessee.
Result before taxation 8,894 7,740 Statutory tax rate 31.5% 34.5% Statutory tax amount 2,802 2,670
Associates exemption -386 -460 Other income not subject to tax -222 -10 Expenses not deductible for tax purposes 37 1 Differences caused by different foreign tax rates 29 -120 Adjustment to prior periods -77 Change in tax rates -2 Deferred tax benefit from previously unrecognised amounts -413 Current tax benefit from previously unrecognised amounts -418 Write down and reversal of deferred tax assets 2
Weighted average number of ordinary shares Net profit outstanding during Net profit per
(in millions the period ordinary share of euros) (in millions) (in euros)
(1) The Executive Board, with the approval of the Supervisory Board, has proposed, subject to the ratification by the General Meeting of Shareholders, a dividend of EUR 1.18 per share for the year 2005. Following the decision of the General Meeting of Shareholders with regard to the profit appropriation, the final dividend will become payable on 4 May 2006.
PRIMARY REPORTING FORMAT – BUSINESS SEGMENTS ING Group’s business segments relate to the internal segmentation by business lines. These include the business lines: Retail Banking, Wholesale Banking, ING Direct, Insurance Americas, Insurance Europe and Insurance Asia-Pacific. Other mainly includes items not directly attributable to the business lines.
Each business line is headed by a member of the Executive Board. The Executive Board sets the performance targets and approves and monitors the budgets prepared by the business lines. Business lines formulate strategic, commercial and financial policy in conformity with the strategy and performance targets set by the Executive Board.
ING Group evaluates the results of its business segments using a financial performance measurs called underlying profit before taxation. Underlying profit before taxation is defined as profit before taxation excluding the impact of divestments and special items.
Insurance Insurance Insurance Wholesale Retail Total 2005 Europe Americas Asia/Pacific Banking Banking ING Direct Other segments Eliminations Total Group
Share in profit or loss of associates 147 35 10 28 -6 15 229 229
INTEREST INCOME (EXTERNAL) AND INTEREST EXPENSE (EXTERNAL) BREAKDOWN PER BUSINESS LINE
Insurance Insurance Insurance Wholesale Retail Europe Americas Asia/Pacific Banking Banking ING Direct Other Total Group
Rest of North Latin Total 2004 Netherlands Belgium Europe America America Asia Australia Other Group
Disposal of Disposal Acquisition Acquisition of Total Baring Asset of Life Total amounts in billions of euros of Eural New Zealand acquisitions Management of Georgia disposals
Cash in company acquired / disposed 0.5 0.5 Cash outflow / inflow on acquisition / disposal 0.2 -1.9 -1.7 0.4 1.0 1.4
Loans and advances to customers 0.6 0.6 Financial assets at fair value through profit or loss -4.0 -0.3 -4.3
TREASURY BILLS AND OTHER ELIGIBLE BILLS INCLUDED IN CASH AND CASH EQUIVALENTS
ING Group Credit Committee – Transaction Approval (GCCTA) GCCTA advises on transactions involving the taking of credit risk (including issuer investment risk). The GCCTA meets twice weekly. This committee was formerly known as the Central Credit Committee (CKC).
GROUP RISK MEASUREMENT Group risk management is described by risk category for ING Bank and ING Insurance in two separate sections below. For ING Bank the following risk categories apply: credit risk, market risk and operational risk. For ING Insurance the relevant risks are: actuarial and underwriting risk, market risk, credit risk and operational risk.
CREDIT RISK General ING Bank’s credit policy is to maintain an internationally diversified loan and bond portfolio, while avoiding large risk concentrations. The emphasis is on managing business developments within the business lines by means of top-down concentration limits for countries, individual borrowers and borrower groups. The aim is to expand relationship-banking activities, while maintaining stringent internal risk/return guidelines and controls.
In anticipation of the planned introduction of new global capital regulations from the Basel Committee, ING has commenced a bank-wide Basel project led by CCRM. The goal of this project is to ensure ING’s compliance with the new regulations by the required implementation date of 31 December 2007. A key element of the project is the continued development, implementation and back-testing of in-house objective risk rating and loss-given default models for use in the credit approval process, risk reporting, performance monitoring and portfolio management. Simultaneously, ING is refining its credit risk management governance and practices to conform to industry best practices and regulatory requirements.
The credit exposure of ING Bank is mainly related to traditional lending to individuals and businesses. Loans to individuals are mainly mortgage loans secured by residential property. Loans to businesses are often collateralised, but can be unsecured based on internal analysis of the borrowers’ creditworthiness. Pre-settlement credit exposure arises also from trading activities, for instance in derivatives, repurchase transactions and securities lending/borrowing. ING uses various market pricing and measurement techniques to determine the amount of credit risk on pre-settlement activities. These techniques estimate ING’s potential future exposure on individual and portfolios of trades. Master agreements and collateral agreements are frequently entered into to reduce these credit risks.
Risk classes are defined based upon the quality of the exposures in terms of creditworthiness, varying from investment grade to problem grade expressed in Moody’s and S&P equivalents.
(1) based on lending (wholesale and retail), financial markets and investment activities.
The shift from mid-grade (BB-BBB) assets to high quality (AA-AAA) assets is the result of the continuing growth of ING Direct.
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 specific provisioning levels. ING Bank identifies 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.
In 2005, ING added EUR 88 million to the provision for loan losses, compared with EUR 465 million in 2004. The addition equalled 3 basis points of average credit-risk-weighted assets in 2005, compared with 18 basis points in 2004. ING is of the opinion that its loan-loss provisions as of 31 December 2005 are adequate to absorb losses from ING Bank’s credit risk taking activities.
Country risk Country risk is the risk that ING faces which is specifically attributable to events in a specific country (or group of countries). Country risk is identified in lending (corporate and counterparty), trading and investment activities. All transactions and trading positions generated by ING include country risk. Country risk is further divided into economic and transfer risk. Economic risk is the concentration risk relating to any event in the risk country which may affect transactions and other exposure in that country, regardless of the currency. Transfer risk is the risk incurred through the inability of ING or its counterparties to meet their respective foreign currency obligations due to a specific country event.
In countries where ING is active, the relevant country’s risk profile is regularly evaluated, resulting in a country rating. Country limits are based on this rating and ING’s risk appetite. Exposures derived from lending and investment activities are then measured and reported against these country limits on a daily basis. Country-risk limits are assigned for transfer risk generally only in emerging markets.
Restructuring In some cases, ING will work with the obligor and its other creditors, if any, to restructure the company and its financial obligations in order to minimise any financial 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 (1) extending the repayment period, (2) selling assets; (3) selling business lines of the debtor, (4) forgiving part of the financial obligations, and (5) a combination of the above. The decision to enter into such a restructuring is made only after careful internal assessment and an internal approval. Once a restructuring is completed, the obligor is again subject to normal credit risk monitoring procedures.
Generally, all loans with past due financial obligations of more than 90 days past due are automatically reclassified 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 financial obligations, or the customer filing for bankruptcy or bankruptcy protection. In some cases, a material breach of financial covenants will also trigger a reclassification of a loan to the impaired category.
GENERAL Market risk arises from trading and non-trading activities within the three business lines of ING Bank: – ING Wholesale Banking: Trading market risks arise within ING Wholesale Banking primarily through market making, client facilitation and proprietary trading in the fixed income, equities and foreign exchange markets and directly related derivative markets. ING has no material commodity portfolios. Trading positions are marked to market daily. ING’s policy is to maintain an internationally diversified and mainly client-related trading portfolio, while avoiding large risk concentrations. Non-trading market risk is transferred to the asset & liability management (ALM) books; these are structural interest rate mismatch positions that result from commercial banking activities.
– ING Retail Banking: ING identifies non-trading residual market risk that results from banking products of which the future cash flows depend on client behaviour like current accounts, saving accounts and mortgages.
– ING Direct: Within ING Direct no trading positions are maintained; the market risks are characterised as a combination of ALM and market risk arising from retail products.
MEASUREMENT Trading risk ING Wholesale Banking uses the Value-at-Risk (VaR) methodology as the primary risk measure. VaR for market risk quantifies, with a one-sided confidence level of at least 99%, the maximum overnight loss 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. The impact of historical market movements on today’s portfolio is estimated, based on equally weighted observed market movements of the previous 250 business days. The VaR also serves as a basis for the calculation of the regulatory capital and economic capital that ING needs to hold to cover possible losses from trading activities.
VaR for linear portfolios is calculated using a variance – covariance approach. The market risk of all the important option portfolios within ING is measured by Monte Carlo simulation methods.
The following chart shows the development of the overnight VaR for the ING Wholesale Banking trading portfolio which was managed by trading risk management during 2004 and 2005. Several banking books are governed by the trading risk process and are therefore excluded from the non-trading risk table below and included in the trading risk graph and table below. In addition, several lesser significant banking books are included in both the trading risk and non-trading risk tables. Therefore, there is a small overlap between trading and non-trading risks as described in the paragraphs below.
During 2004 and 2005 the overnight VaR for the ING Wholesale Banking trading portfolio was continuously within the range of EUR 20 – 40 million. As of 1 April 2005 Treasury and Investment portfolios are included in the overall ING Wholesale Banking trading VaR limit structure. This resulted in an increase of the VaR figures. At the same time the ING Wholesale Banking trading limit has been adjusted from EUR 50 million to EUR 60 million.
Jan 04 Apr 04 Jul 04 Oct 04 Jan 05 Jan 06Apr 05 Jul 05 Oct 05
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 confidence level of at least 99% an occurrence is expected, on average, once in every 100 business days. In 2005, there has been no occurrence where a daily trading loss exceeded the daily consolidated VaR of ING Wholesale Banking.
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 testing 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 P&L effect caused by a potential event and its world-wide impact for ING Wholesale Banking. The event-risk policy (and its technical implementation) is specific for 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 defined stress parameters per country and per market (fixed income, equity, foreign exchange and related derivative markets). The parameters indicate historical maximum market movements within the time frame of one month. The scenarios and stress parameters are backtested against extreme market movements that actually occur in the markets.
The VaR figures represent the value impact to the banking books as result of changing market rates. For the commercial banking books the VaR 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 represenated via the replicating portfolios. For the ALM books the VaR figures capture the potential change of value due to the structural mismatch in interest rate positions.
The interest rate risk that results from the investment of the Bank’s own funds (equity) is isolated under the ING Bank Corporate line. In these calculations it is assumed that the Bank’s own funds are not sensitive to market rate changes (the duration of equity is assumed to be zero anticipating future regulatory requirements).
ING Wholesale Banking -1,023 ING Retail Banking -619 ING Direct -69 ING Bank Corporate Line -1,492 ING Bank Total -3,203
Note: Several banking books are governed by the trading risk process and are therefore excluded from the non-trading risk table and included in the above trading risk table. In addition, several lesser significant banking books are included in both the trading risk and non-trading risk tables. Therefore, there is a small overlap between trading and non-trading risks as described above. Information on interest sensitivity for internal management purposes is calculated on an adverse shock basis only. Accordingly the effects of favourable interest rate movements are not disclosed.
Non-trading risk – foreign-exchange risk ING takes on exposure to foreign-exchange fluctuations on its financial position and cash flows. Currency exposures in the nontrading books are largely transferred by way of internal transactions to Financial Markets Treasury, which performs the day-today management of all foreign-currency positions.
While results on net investment hedges are taxable under Dutch fiscal rules, ING has not chosen to adjust hedges to compensate for tax effects. As of the beginning of 2006 the majority of hedge results will no longer be taxable.
The first is the day-to-day funding. It is policy to sufficiently spread the day-to-day funding requirements. The Treasury function monitors all maturing cash flows along with expected changes in core-business funding requirements. This includes replenishment of existing funds as they mature, expected withdrawals from retail current accounts, savings and additional borrowings. Furthermore, access to the capital markets is actively managed by regularly issuing public debt in all material markets and the maintenance of investor relations.
Date Jan 04 Apr 04 Jul 04 Oct 04 Jan 05 Apr 05 Jul 05 Oct 05 Jan 06
The fourth component of ING’s liquidity strategy is to have adequate and up-to-date contingency funding plans in place throughout the organisation. The contingency funding plans are established for addressing temporary and long-term liquidity disruptions caused by a general event in the market or an ING specific event. These plans ensure that all roles and responsibilities are clearly defined and all necessary management information is in place. The main objective of ING’s contingency funding plan is to enable senior management to act effectively and efficiently at times of crisis.
The key focus of the measurement of liquidity within ING is on the periods of one week and one month. The internally used liquidity figures 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 ING-specific 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 figures. 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. The table below shows the liquidity position of ING Bank presented as at 31 December 2005 under the scenarios described above.
GENERAL The aim for the Group and local operational risk management departments is to support general management of the business lines, which is responsible for managing operational risk by raising operational risk awareness and insight, increasing operational risk and loss transparency, improving early warning information and allocating risk ownership and responsibilities. This contributes to more stable business processes and lower operational risk costs. Furthermore, implementing an appropriate operational risk management function will prepare ING for the Basel II regulations applicable from 31 December 2007. ING intends to apply for the Advance Measurement Approach, the most sophisticated risk capital charge option available under Basel II.
Each of these risks has a related function (e.g. Compliance, IT, Legal, Information Security, Finance, Human Resources, Operations) responsible for the management process and oversight of that risk.
Operational risk measurement as calculated in the economic capital model consists of two parts. The first part is a probabilistic model in which a generic capital per business unit is calculated based on an incident loss database and the relative size and inherent risk of the business units. The second part is the scorecard adjustment, which reflects the business unit specific level of Operational Risk Management, or ORM implementation.
The maturity of the ORM process is measured on an annual basis by a set of five scorecards assessing the ORM-framework activities. The Basel II progress reporting is also based on these scorecards and supporting evidence.
GENERAL ING is engaged in the business of selling life and non-life insurance products. 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 – fire, automobile, accident and health, third-party liability and disability contracts.
ING regularly monitors the solvency level for the total insurance business at a prudent level. ING believes its solvency level is adequate.
Reserve adequacy – Taiwan The adequacy of the provision for life policy liabilities (net of DAC and VOBA) is evaluated regularly. ING’s policy for reserve adequacy testing is disclosed under “Principles of valuation and determination of results”.
As at 31 December 2005, ING’s life insurance businesses as a whole are sufficiently adequate at a 90% confidence level. All business lines are, on a stand-alone basis, adequate at a 90% confidence interval, except for the business line Insurance Asia/Pacific. The inadequacy in Insurance Asia/Pacific is fully attributable to Taiwan.
At 31 December 2005, the inadequacy range for Taiwan is EUR 2.8 billion to EUR 3.3 billion based on a 90% confidence interval on a Taiwan reserve level (net of DAC and VOBA) of EUR 9 billion. The inadequacy results from a material exposure in Taiwan to a sustained low interest rate environment. This is due to long term interest rate guarantees of 6-8% embedded in the life and health contracts sold by the business until 2001. These long term guarantees and the future premiums (which have a present value of approximately EUR 20 billion) create a liability with an effective duration over 30, compared to an asset duration of approximately 9. ING stopped selling these high guarantees in its Taiwan life insurance products in 2001. The post 2001 business is adequate at a 90% confidence interval, which partially compensates inadequacy related to the pre-2001 business. Furthermore, ING has over time strengthened reserves by EUR 420 million for this exposure and increased the internal capital allocation for this business.
If the interest rates as at 31 December 2005 would have been 1% lower, Taiwan would have been inadequate at the 50% confidence interval and, consequently, an amount of approximately EUR 1.7 billion (after tax) would have been included as a charge in the profit and loss account, reflecting the amount necessary to bring reserves to a best estimate level. If the interest rates as at 31 December 2005 would have been 1% higher, Taiwan would be sufficiently adequate at the 50% confidence interval, but would still have been inadequate at the 90% confidence interval. Consequently, the charge currently included in the profit and loss would likely have been reduced.
Furthermore, the reserve adequacy test includes our expectation that the legal entity will be formally domesticated as a subsidiary of a US entity rather than a branch during 2006 and that mortality dividends will continue to be allowed to be offset versus negative interest rate experience
Measurement ING Group has established actuarial and underwriting risk tolerance levels in specific areas of its insurance operations.
In case of the existence of exposures higher than the risk tolerance levels as defined above, appropriate procedures are in place, including third-party reinsurance covers. Particularly for the property and casualty portfolio, ING purchases protection through which the exposure due to natural catastrophes is substantially mitigated. ING believes that the credit risks to which it is exposed under reinsurance contracts are minor.