Risk factors 267 RAROC performance 280 Additional Pillar 3 information for ING Bank only 281 Financial glossary 301 General information 308
In this report > ING returns to underlying net profit of EUR 748 million in 2009 > Back to Basics implemented: reduced costs, reduced balance sheet, customer focus > Rights issue facilitates early repayment to the Dutch State > Separation of banking, insurance and investment management charts clear course for the future > ING to further improve performance, disentangle the businesses and decide on transaction scenario in 2010 1.1 Who we are
Other data Underlying net result (in EUR million) 748 –304 8,816 Shareholders' equity per ordinary share per 31 December (in EUR) 8.95 8.55 4.7% 17.73 Dividend per ordinary share (in EUR) – 0.74 1.48 Debt/equity ratio per 31 December 12.4% 13.5% 9.5% Market capitalisation per 31 December (in EUR billion) 26 15 73.3% 60
ING Group evaluates the results of its businesses using a non-GAAP financial performance measure called underlying result. Underlying result is derived from the result in accordance with IFRS-EU by excluding the impact of divestments and special items. Historic results have been restated for divestments in order to create a comparable sequence (i.e. 2009, 2008 and 2007 results exclude the results of a divestment which has been completed in 2009). See table on page 13 and note 51 Operating segments in the consolidated Annual Accounts for a reconciliation between IFRS and underlying result.
Underlying gross premium income (in EUR million) 30,179 37,760 –20.1% 38,803 Underlying operating expenses (in EUR million) 3,849 4,273 –9.9% 4,228 Underlying net result (in EUR million) –214 –1,026 4,834 Shareholders’ equity ING Verzekeringen N.V. per 31 December (in EUR million) 15,887 11,892 33.6% 17,911 Client balances per 31 December (in EUR billion) 408 382 6.8% 442 Net production client balances (in EUR billion) –9.4 6.3 (3)
Debt/equity ratio per 31 December, adjusted for divestments 9.7% 8.8% 13.6% FTEs per 31 December, adjusted for divestments 36,085 41,236 –12.5% 46,197
(1) See note 49 in the Annual Accounts. (2) Risk-Weighted Assets and (core) Tier 1 ratios as from 2008 based on Basel II; before 2008 based on Basel I. (3) Not available.
* For the 5-year key figures overview in accordance with IFRS-EU, please turn to page 89.
OUR PROFIlE ING is a global financial institution of Dutch origin, currently offering banking, investments, life insurance and retirement services to meet the needs of a broad customer base. Going forward, we will concentrate on our position as an international retail, direct and commercial bank, while creating an optimal base for an independent future for our insurance operations (including investment management).
OUR StRAtEGy To serve the interests of our stakeholders, increase management focus and create value for our shareholders, ING is moving towards separation of its banking and insurance operations. We believe the widespread demand for greater simplicity, reliability and transparency makes this the best course of action. In the future, ING Bank will build on its global presence and international network and capitalise on its leadership position in gathering savings, multi-channel distribution, simple propositions and marketing. ING Insurance has a strong position as a global provider of life insurance and retirement services and is very well-positioned to capitalise on socio-economic trends.
OUR StAKEhOldERS ING conducts business on the basis of clearly defined business principles. In all our activities, we carefully weigh the interests of our various stakeholders: customers, employees, business relations and suppliers, society at large and shareholders. ING strives to be a good corporate citizen.
OUR CORPORAtE RESPONSIBIlIty ING wants to build its future on sustainable profit based on sound business ethics and respect for its stakeholders and be a good corporate citizen. For only by acting with professionalism and integrity, will we be able to maintain our stakeholders’ trust and preserve our reputation. Our Business Principles prescribe the corporate values we pursue and the responsibilities we have towards society and the environment: we act with integrity, we are open and clear, we respect each other and we are socially and environmentally responsible.
SUPERvISORy BOARd Peter A.F.W. Elverding (61), chairman Jeroen van der veer (62), vice-chairman tineke (J.) P. Bahlmann (59) henk W. Breukink (60) Claus dieter hoffmann (67) Piet hoogendoorn (1) (64) Piet C. Klaver (2) (64) Godfried J.A. van der lugt (69) harish Manwani (1) (56) Aman Mehta (63) Joan E. Spero (65) Jackson P. tai (59) Karel vuursteen (1) (68) lodewijk J. de Waal (59)
(1) Retirement as of 27 April 2010. (2) Nominated for reappointment as of 27 April 2010.
Audit Committee Jackson Tai, chairman Tineke Bahlmann Henk Breukink Piet Hoogendoorn Godfried van der Lugt Jeroen van der Veer
Risk Committee Peter Elverding, chairman Tineke Bahlmann Claus Dieter Hoffmann Piet Klaver Godfried van der Lugt
Corporate Governance Committee Peter Elverding, chairman Henk Breukink Claus Dieter Hoffmann Harish Manwani Aman Mehta Lodewijk de Waal * You can find more information on the members of the Executive Board on page 62 and on the members of the Supervisory Board on pages 65-67.
INSURANCE AMERICAS Operates in the US and Latin America. In the US, ING is the third-largest provider of defined contribution retirement plans in terms of assets under management and administration. In Latin America, ING is the second-largest provider of pensions. ING offers a comprehensive range of financial services to retail and institutional clients in retirement services, life insurance and investments.
COMMERCIAl BANKING Primarily targets large corporations in the Netherlands, Belgium, Poland and Romania, where we offer a full range of products, from cash management to corporate finance. Our international network has a more selective approach. We are building leading positions in a number of key product areas, including Structured Finance, Financial Markets, Payments and Cash Management, and Leasing. Commercial Banking also manages ING Real Estate.
ING dIRECt Offers direct banking services in Canada, Spain, Australia, France, the US, Italy, Germany, the UK and Austria. Our focus is on offering five simple and transparent retail banking products at very low cost: savings, mortgages, payment accounts, investment products and consumer lending.
Adapting to the changed financial landscape required bold steps and landmark decisions. Our first priority in 2009 was to strengthen our financial position and navigate through the crisis. We introduced the Back to Basics programme, setting high targets which were adjusted upwards throughout the year. We have reduced the size of our bank balance sheet by 18% (target was 10%), reduced our operating expenses by EUR 1.5 billion (target was EUR 1 billion) and returned ING to profitability on an underlying basis.
One of the key goals of Back to Basics was to reduce the complexity of the Group. An operational split of the Group’s corporate governance has been in effect since 1 June 2009 when a separate Management Board Banking and Management Board Insurance were created. At the same time, the Executive Board was limited to the chief executive officer, chief financial officer and chief risk officer positions. Throughout the Group, our governance model has been adapted to our strategy, with rigorous business performance reviews, better accountability and increased focus.
Back to Basics culminated in the decision to separate our banking and insurance and investment management activities. The need for simplicity, in combination with the negative impact of the financial crisis on ING, outweighs former benefits of the bancassurance model. On 25 November 2009 our decision to split the Company was approved by our shareholders.
The split of the Company is part of the Restructuring Plan to which we have agreed with the European Commission (EC) in order to obtain retroactive EC approval of state aid received. The plan
constitutes a significant extension of measures beyond the restructuring we initiated under the Back to Basics umbrella. We accepted these far-reaching terms on the assumption that the EC would treat all state-supported financial institutions equally and safeguard the level playing field in the EU internal market. However, following the announcements of restructuring agreements the EC has entered into with other state-supported financial institutions, we have strong concerns that the level playing field in the EU internal market is at risk. Hence, we are appealing the proportionality of the decision, including restrictions on price leadership imposed in certain markets, in addition to contesting the way the Commission has calculated the amount of State aid ING received. We believe it is in the interest of all our stakeholders to use the opportunities provided by law to let the General Court assess these elements of the European Commission’s decision.
Financial institutions have a responsibility for financial education, informing clients about the characteristics of their product selection and empowering clients to make informed decisions about their financial future. Helping consumers understand finance forms a central part of our Business Principles and many of the initiatives taken are featured in this Annual Report. We want to be a company that takes its responsibilities towards society seriously, is easier to deal with for customers, motivational for employees and predictable for shareholders.
Tineke Bahlmann, Jeroen van der Veer and Lodewijk de Waal joined the Supervisory Board in 2009. Following my own appointment as a member of the Executive Board by the shareholders in April 2009, Peter Elverding has taken on the role of chairman of the Supervisory Board. In 2010, Karel Vuursteen, Piet Hoogendoorn and Harish Manwani will leave the Supervisory
ING Group has returned to profit on an underlying basis. We have made structural improvements in our operating performance, while reducing risks and leverage on our balance sheet. Our businesses are adjusting to the new economic reality and even in this challenging environment we have made great strides to improve our commercial results.
Moving forward, our attention will be focused on creating strong and independent banking and insurance companies. 2010 will be a year of transition as we work towards the operational separation of these individual businesses, and prepare them for forging their own futures.
PROFIt REtENtION ANd dIStRIBUtION POlICy ING Group’s profit retention and distribution policy is determined by its internal financing requirements and its growth opportunities on the one hand and the capital providers’ dividend expectations on the other. ING Group’s internal funding needs are determined partly by statutory solvency requirements and capital ratios, compliance with which is essential to its existence. Credit ratings are just as important to ING Group, because they directly affect the Company’s financing costs and hence profitability. For their part, the capital providers expect a dividend which reflects ING Group’s financial results and is relatively predictable.
CORE tIER 1 SECURItIES In October 2008, ING Group made use of the previously announced capital support facilities by the Dutch Government by issuing EUR 10 billion of core Tier 1 securities (‘Securities’) to the Dutch State with a coupon of 8.5%. This capital injection significantly enhanced the capital position of ING Group. The Securities are pari passu with common equity.
lIStINGS Depositary receipts for ING Group ordinary shares are listed on the stock exchanges of Amsterdam, Brussels and New York (NYSE). Options on ING Group ordinary shares (or the depositary receipts therefor) are traded on the NYSE Euronext Amsterdam Derivative Markets and the Chicago Board Options Exchange.
ShAREhOldERS ANd dEPOSItARy-RECEIPt hOldERS WIth StAKES OF 5% OR MORE To the best of our knowledge, as at 31 December 2009, there were no shareholders or holders of depositary receipts for shares who reported to hold an interest or potential interest of 5% or more as mentioned in the Dutch Financial Supervision Act, other than Stichting ING Aandelen (ING Trust Office) and Stichting Continuïteit ING (ING Continuity Foundation).
Shares in issue and shares outstanding in the market in millions year-end
(Depositary receipts for) ordinary shares of EUR 0.24 nominal value 3,831.6 2,063.1 (Depositary receipts for) own ordinary shares held by ING Group and its subsidiaries 47.1 36.5 (Depositary receipts for) ordinary shares outstanding in the market 3,784.5 2,026.6
Price – high 9.64 26.21 34.69 Price – low 1.92 5.33 24.38 Price – year end 6.90 7.33 26.75 Price/earnings ratio** n.a.*** n.a.*** 6.2 * 2009 prices adjusted for increase in number of shares due to rights issue, while 2008 and 2007 are not adjusted.
INvEStORS ANd FINANCIAl ANAlyStS MAy CONtACt: ING Group Investor Relations (IH 07.430) P.O. Box 810 1000 AV Amsterdam The Netherlands
ING GROUP** A A1 A ING BANK – short term A-1 P-1 F1+ – long term A+ Aa3 A+ – financial strength C+ ING INSURANCE – short term A-2 P-2 – long term A– Baa1 A–
ING’s long-term credit ratings are shown in the table above. Each of these ratings reflects only the view of the applicable rating agency at the time the rating was issued, and any explanation of the significance of a rating may be obtained only from the rating agency. A security rating is not a recommendation to buy, sell or hold securities and each rating should be evaluated independently of any other rating. There is no assurance that any credit rating will remain in effect for any given period of time or that a rating will not be lowered, suspended or withdrawn entirely by the rating agency if, in the rating agency’s judgement, circumstances so warrant. ING accepts no responsibility for the accuracy or reliability of the ratings.
Meanwhile, we managed to turn around our commercial performance. Above anything, however, 2009 will be remembered as the year in which we took the most far-reaching decisions in the history of the Company. First of all, we set a clear course for the future by announcing an independent future for our Bank and our Insurer. In addition, we closed an early repayment agreement with the Dutch State on 50% of the capital provided in October 2008.
GlOBAl ECONOMy ShOWING SIGNS OF RECOvERy AFtER StEEP dOWNtURN From September 2008 onwards, especially after the collapse of Lehman Brothers, market conditions rapidly worsened. Due to the impact of the financial crisis, macro-economic prospects at the beginning of 2009 were very bleak. The steep economic downturn was reflected in a sharp decline in world trade, asset prices and industrial production and a tightening availability of credit. As a consequence, even a repetition of the Great Depression was considered a plausible scenario. In contrast to the 1930s, however, policy makers around the world acted swiftly and firmly, by providing significant economic stimuli and loosening monetary conditions. Governments took exceptional measures to reinvigorate financial institutions and stabilise the financial system. As a result, an increasing number of countries were able to report positive economic growth in the second half of the year.
World trade seems to have picked up firmly and in many countries the rise in unemployment seems to have a less adverse impact on the economy than expected. Nevertheless, the recovery of the global economy remains fragile. Companies have rebuilt inventories despite a strengthening consumer and investor demand. However, as a result of the market interventions to cushion the impact of the crisis, public finances have been thrown off-balance. Our Economics Department’s forecasts for 2010 and 2011 indicate that the global economy will return to growth, albeit at a slower pace than before the crisis.
In the fourth quarter of 2008 market conditions deteriorated even further, making it the worst quarter for equity and credit markets in over half a century. Market prices for residential mortgage-backed securities (RMBS, including Alt-A classified RMBS), collateralised debt obligations (CDOs) and collateralised loan obligations (CLOs) fell sharply as liquidity dried up. This eventually affected ING’s results and equity more than expected, in particular due to ING’s portfolio of Alt-A RMBS. We therefore entered into an agreement with the Dutch State on an Illiquid Assets Back-up Facility (IABF) covering 80% of our Alt-A RMBS.
BACK tO BASICS FIRSt PhASES In April 2009 we introduced our Back to Basics programme: a strategic change programme to stabilise the Company, restore credibility and regain trust, with the ultimate objective of sharpening focus and creating a more coherent set of activities.
Secondly, we announced a strategic review of our portfolio with the objective of identifying measures to simplify the Group, increase our strategic focus and create a more coherent set of activities. In order to simplify the organisation, we decided to operationally separate the management of our businesses, into one Bank aiming for an integrated balance sheet and one Insurer/ Investment Manager under the umbrella of the Group. In addition, the portfolio review made clear that a group of smaller businesses within ING Group consumed a disproportionate amount of capital, given the fact that they did not have a clear outlook for market leadership. To address this over-extension, we made a number of portfolio choices based on market leadership, capital intensity, return on capital, funding needs, earnings contribution and the overall coherence of the Group.
We decided to reduce our geographic and business scope by concentrating on positions in markets with the strongest franchises. As a consequence, we announced and completed a number of significant divestments over the course of 2009. These included our Annuities business in Argentina, ING Canada, our life insurance and wealth management venture in Australia and New Zealand, Private Banking Switzerland, Private Banking Asia, ING Reinsurance US, three of our US independent retail broker-dealer units, and our Annuity and Mortgage businesses in Chile. The proceeds of these divestments amounted to EUR 3.8 billion and freed up EUR 2.7 billion of capital.
In July, we announced that the formerly separate organisations of Nationale-Nederlanden, RVS and ING Verzekeren Retail (formerly Postbank Verzekeren) in the Netherlands were to be combined into one customer-oriented organisation under the Nationale-Nederlanden brand. The new insurance organisation will have dedicated business units for retail customers, small and medium-sized enterprises, and corporate clients.
Meanwhile, we managed to turn around our commercial performance. While implementing the first phases of the Back to Basics programme and redefining the strategic direction of the
Company, we also worked closely with the Dutch authorities and the European Commission (EC) to identify steps which would enable ING to get the EC’s approval for the support received from the Dutch State. This process was finalised in the second half of 2009 and is further explained below.
REStRUCtURING PlAN SUBMIttEd tO thE EUROPEAN COMMISSION Under European rules, state-supported companies need to demonstrate their long-term viability and take actions to prevent undue distortions of competition. As a result, parallel to the introduction and implementation of the first phases of the Back to Basics programme, we were required to develop and submit a restructuring plan to the EC. Against this backdrop we had to devise a plan that would not only enable us to pay back the Dutch State and address the EC’s requirements, but also return our focus to the business and our customers. This was a challenging exercise, especially since the relevant EC guidelines were only published in July 2009, which postdated ING’s transactions with the Dutch State.
Our negotiations with the EC were finalised in October 2009. On 18 November, the EC formally approved the restructuring plan, which ING had submitted. With this decision the EC also gave final clearance for the issuance of the core Tier 1 securities to the Dutch State and for the IABF. On 25 November 2009, the extraordinary General Meeting approved the resulting strategic shift of the Company, as well as the proposed rights issue of EUR 7.5 billion to facilitate an early repayment of the Dutch State. The Restructuring Plan’s strategic implications for ING are explained below.
As already explained, a key goal of the Back to Basics programme was to reduce ING’s complexity by operating the Bank and Insurer separately under the one Group umbrella. The negotiations with the EC on the Restructuring Plan have thus acted as a catalyst to accelerate this process, by completely separating our banking and insurance operations, and ultimately eliminating our double leverage. The backgrounds and objectives of this strategic shift are further explained in the Strategy section (page 15).
Furthermore, ING must refrain from being a price leader within the EU for certain retail and SME banking products, and must refrain from acquisitions of financial institutions that might slow down the repayment of the core Tier 1 securities. These restrictions will apply for the shorter period of three years or until the core Tier 1 securities have been repaid in full to the Dutch State.
RIGhtS ISSUE ANd AddItIONAl AGREEMENtS WIth thE dUtCh StAtE In conjunction with the Restructuring Plan submitted to the EC, we also reached an agreement with the Dutch State to modify the repayment terms of the core Tier 1 securities in order to facilitate early repayment, bringing the terms in line with Dutch peers. We thereby made use of an early repayment option to repurchase half of the core Tier 1 securities before the end of January 2010. As a
FINANCIAl hIGhlIGhtS ING GROUP 2009 Notwithstanding the challenging environment in 2009, ING significantly improved its operating performance, successfully reduced expenses and returned to profit on an underlying basis.
The full-year 2009 pre-tax adverse market impact was EUR 4,742 million. Impairments and fair value changes on debt securities had an impact on the result of EUR –1,963 million, compared with EUR –3,399 million in 2008. Impairments on Alt-A RMBS were substantially lower at EUR 1,405 million in 2009, down from a peak of EUR 2,063 million in 2008. Impairments on other debt securities, including financial institutions’ debt, decreased from EUR 809 million in 2008 to EUR 174 million in 2009. The equity securities related impact was EUR –957 million, an improvement of EUR 404 million compared with full-year 2008. The negative impact from real estate and private equity increased to EUR 2,100 million compared with EUR 1,587 million in 2008. Real estate revaluations and impairments remain substantial at EUR –2,156 million in 2009 versus EUR –1,173 million in 2008, despite a reduction of ING’s direct real estate exposure in 2009. Private equity revaluations were EUR 56 million, compared with EUR –413 million in 2008. Other market impact was positive despite a contribution to the deposit guarantee scheme in the Netherlands following the bankruptcy of DSB Bank in the fourth quarter of 2009.
Total client balances increased by EUR 62 billion in 2009 to EUR 1,517 billion at year-end 2009. The net production of client balances, excluding the impact from divestments, market performance and currency effects, was EUR 12.1 billion.
CONClUSION 2009 was an unprecedented year for ING. The financial crisis and the second use of State facilities in the form of the IABF necessitated decisive action to stabilise the Company, restore credibility and regain trust. This prompted us to introduce the Back to Basics programme. In the first phase of its implementation, we successfully strengthened the Company’s financial position by a number of actions to contain costs, reduce risk and capital exposures, and deleverage the balance sheet.
On approval of ING’s restructuring proposals, which were submitted to the EC on the condition that the EC guarantees equal treatment of all state-supported financial institutions and safeguards the level playing field in the EU internal market, the EC also gave final clearance for the capital injection and IABF received from the Dutch State, albeit that ING also had to make additional payments for the latter. By the end of 2009 we announced that we had successfully raised the EUR 7.5 billion of capital needed to facilitate early repayment of the Dutch State. Thus, we have set a clear course for the future and been able to leave a difficult period behind us, closing 2009 on a positive note.
Our ambition is to become a leading international retail, direct and commercial bank, while creating a bright future for our insurance operations. We will focus on superior customer satisfaction, a strong financial performance, leading operating efficiency and a solid capital position. We want to build our future on sustainable profit based on sound business ethics and respect for our stakeholders. We aim to be a good corporate citizen and earn our customers’ trust by delivering financial products and services in the way they want them delivered: with exemplary service and convenience provided at attractive prices.
continue to build our brand around a universal ideal of delivering an easier customer experience.
A lEAdER IN INtERNAtIONAl REtAIl, dIRECt ANd COMMERCIAl BANKING The bank of tomorrow should be effective at attracting customer savings, especially as there is expected to be a revival of traditional savings banks with lower risk appetites in response to the unprecedented events of the past two years. ING’s product offering therefore needs to become less complicated. At the same time it remains our ambition to provide high quality banking products that meet the expectations of our customers without doing harm to people or the environment and that are easy to access and understand. We will strive for strong and defendable market positions, a trusted brand and a strong marketing organisation.
REPAyING thE dUtCh StAtE In October 2008 and January 2009 we entered into transactions with the Dutch State: the first time to strengthen our capital position and the second time to mitigate risk. In the fourth quarter of 2009 we took action to start repaying this support. Through our rights issue we have successfully raised EUR 7.5 billion of new capital, which enabled us to repay EUR 5 billion of the core Tier 1 securities, representing half of the core Tier 1 securities, plus accrued coupon from 12 May 2009 to 20 December 2009 of EUR 259 million and a repayment premium of EUR 346 million. In addition, the capital raised provided us with sufficient buffer to offset the negative capital impact of the additional payments to be made for the Illiquid Assets Back-up Facility (for more information please refer to the section ‘ING and the financial environment’).
ShAPING OUR FUtURE Over the coming years ING will focus on its position as a leading international retail, direct and commercial bank, while ensuring a bright future for our insurance businesses. We will focus on superior customer satisfaction, a strong financial performance, leading operating efficiency and a solid capital position. The entire restructuring process, including the divestments, is scheduled to be completed by the end of 2013.
ING always aims to earn its customers’ trust by delivering financial products and services in the way they want them delivered: with exemplary service and convenience provided at attractive prices. Our customers expect us to be available when they need us, to provide them with a clear overview of their financial situation, to respond to their queries in a fast and efficient way, to be open and transparent about our products and services and to provide them with objective and professional advice. We strive to meet these expectations by providing the right products and services to the right customers for the right returns. Consequently, we will
insurance operations that serve the interests of our customers, employees and shareholders. During this period the market conditions in public as well as private markets will of course be closely monitored.
As a consequence of EC requirements, ING also plans to divest certain banking activities before the end of 2013. This particularly involves ING Direct US and a combination of activities from ING’s Dutch retail operations. For more information on the backgrounds of these divestments please refer to the section ‘ING and the financial environment’.
To take advantage of local trends and opportunities we will implement our insurance strategy on a regional basis. The planned actions for each region are: The Netherlands: We plan to migrate to a single brand by • combining all our activities under the revitalised NationaleNederlanden (NN) name. This will help increase our customer focus, streamline our distribution and reduce expenses.
During the separation process, we will focus on generating sufficient income and capital to fully repay the Dutch State and strengthen the capital base of both the Bank and the Insurer. The divestment of Insurance is scheduled to be completed by the end of 2013. We will develop attractive exit strategies for our
Key points > Key performance indicators for 2009 demonstrate the success of the Corporate Responsibility strategy > Progress in 2009 included revised Business Principles, several financial education initiatives, a tougher Defence Policy, an intensified stakeholder dialogue and more environmentally friendly products > Climate change appeals made to world leaders and Dutch government
ING wants to build its future on sustainable profit based on sound business ethics and respect for our stakeholders, and to be a good corporate citizen. As a result of the financial crisis, our responsibilities towards society have come to the forefront of public attention. This not only illustrates that our past efforts and ongoing commitment to corporate responsibility were justified, but also that the time has come to intensify our commitment even further. That is why our aspiration to be a responsible financial services provider and a good corporate citizen is embedded in our corporate strategy.
ClEAR CORPORAtE RESPONSIBIlIty StRAtEGy The essence of ING’s Corporate Responsibility (CR) strategy is that we pursue profit on the basis of sound business ethics and respect for its stakeholders. We therefore have a clear vision on ethical, social and environmental issues, for both our banking and insurance operations. This vision can be summarised as follows: Being a responsible financial service provider means that we • provide high quality products and services that meet the needs and expectations of our customers. It also means that we do not want to use our money for illegal, harmful or unethical purposes. Being a good corporate citizen means that we want to • contribute to positive change in society. We therefore focus on developing products and services that have sustainability at their core and which take into account, among other things, our community development programmes on children and education, financial education and protecting the environment.
The Business Principles are now defined as follows: we act with integrity, we are open and clear, we respect each other and we are socially and environmentally responsible. Besides setting up
dEvElOPING GREEN PROdUCtS We strive to meet the growing demand from customers for products and services that are environmentally friendly and socially responsible as well as generate a good return. To meet these demands, ING offers several funds and products. Examples are sustainable investment funds, such as so-called thematic funds which enable clients to invest their money in microfinance projects, renewable energy or in projects contributing to a sustainable use of water.
GlOBAl ChAllENGE As part of the ING Chances for Children programme, we organise an annual initiative featuring employee volunteering and fundraising initiatives for children and education-related projects. Called Global Challenge, it is held on or around 20 November, the day the United Nations adopted the Convention on the Rights of the Child. The 2009 challenge was a resounding success, with employees once again using their creativity and drive to come up with a wide array of successful fundraising plans.
For example, ING Direct Canada has developed Planet Orange, an educational website for children in grades one to six and designed to broaden their understanding of financial issues in a playful and interactive way. The site invites children to ‘blast off’ on a journey to Planet Orange, where they can create an ‘astronaut’ profile and play games that teach them the basics of earning, saving, spending and investing money.
In the Netherlands we organised a series of financial information evenings to enable retail and private banking customers and entrepreneurs to discuss the current economic climate and its impact on their personal finances with our senior management. More than 150 of these sessions were organised, which were attended by more than 4,000 customers. For customers who were unable to attend the financial information evenings, we added a number of animated videos on the ing.nl website and a financial education section, eZonomics, on our corporate website ing.com. These online platforms explain the very basics of saving, investing, life insurance, retirement planning and home loans.
(1) The audit firm Ernst & Young has audited the KPIs for reasonable assurance. (2) For a detailed overview, see the 2009 Corporate Responsibility Performance
(ACSI) methodology, adapted for the financial services market and based on a combination of questions related to overall satisfaction, customer delight and ideal provider. This score is not weighted by market. The selection of countries changes every year mainly due to strategic decisions of ING (e.g. investments and divestments). However, this does not have a significant impact on the overall customer satisfaction index score. The customer satisfaction scores of ING Direct are not included. ING Direct has a different way of measuring customer satisfaction.
REPURChASE CORE tIER 1 SECURItIES In conjunction with the restructuring plan, ING reached an agreement with the Dutch State to facilitate early repayment of half of the core Tier 1 securities issued in 2008. ING used the opportunity to repurchase EUR 5 billion of core Tier 1 securities in December 2009, financed by the successful executions of a fully underwritten rights issue of EUR 7.5 billion.
dIvIdENd POlICy It is ING’s policy to pay dividends in relation to the long-term underlying development of cash earnings. Dividends can only be declared by shareholders when the Executive Board considers such dividends appropriate, taking into consideration the financial conditions then prevailing and the longer-term outlook. Given the uncertain financial environment, ING will not pay a dividend over 2009.
Shareholders’ equity improved due to the proceeds from the rights issue of EUR 7.5 billion, net of EUR 0.9 billion of fees, expenses and accrued interest on the core Tier 1 securities. Furthermore, the increase is largely driven by higher fixed income revaluation reserves and higher equity securities revaluation reserves.
Shareholders’ equity 33,863 17,334 + Core Tier 1 securities 5,000 10,000 + Group hybrid capital 11,478 11,655 + Group leverage (core debt) 6,913 7,170 Total capitalisation (Bank + Insurance) 57,254 46,159 –/– Revaluation reserves fixed income and other –1,291 6,769 –/– Group leverage (core debt) (d) –6,913 –7,170 Adjusted equity (e) 49,050 45,758 Debt/equity ratio (d/(d+e)) 12.4% 13.5%
Core Tier 1 25,958 24,934 Hybrid Tier 1 8,057 7,085 Available capital Tier 1 34,015 32,019 Other capital 10,716 11,870 BIS capital 44,731 43,889 Risk-weighted assets (1) 332,375 343,388 Required capital Basel II 26,590 27,471 Required capital floor based on Basel I (2) 28,709 34,369 Core Tier 1 ratio (1) 7.81% 7.26% Tier 1 ratio (1) 10.23% 9.32%
(1) Based on Basel II (2) Using 80% and 90% of Basel I Risk-weighted assets in 2009 and 2008 respectively. In case a 80% floor would have been used, the required capital would have been EUR 30,550 million at year-end 2008
Adjusted equity (e) 23,954 23,903 Core debt (d) 2,586 2,301 Debt/equity ratio (d/(d+e)) 9.7% 8.8% Available capital (a) 21,022 22,010 EU required regulatory capital (b) 7,774 8,582 Capital coverage ratio (a/b) 270% 256%
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Among other announced transactions was an agreement to transfer ING’s US group reinsurance business, ING Reinsurance US to Reinsurance Group of America, Inc. This will have a limited positive impact on ING’s 2010 earnings. It is expected to release approximately EUR 100 million in capital and improve ING Insurance’s debt/equity ratio by around 60 basis points. The transfer was closed on 1 January 2010. Also announced was the agreement to sell three of ING’s US independent retail brokerdealer businesses Financial Network Investment Corporation, Multi-Financial Securities Corporation, PrimeVest Financial Services, Inc. to Lightyear Capital LLC. This transaction was completed on 31 January and is not expected to have a material impact on ING’s earnings.
ING also announced an agreement to sell its 50% stake in Pacific Antai Life Insurance Company (PALIC) to China Construction Bank (CCB). The transaction is expected to close in the second half of 2010, subject to regulatory approvals.
ING Platform Services (IPS), a wealth management platform in Hong Kong and Singapore was sold to iFAST, a Singaporean-based platform provider.
KEy CAPItAl ANd lEvERAGE RAtIOS Group leverage, defined as the Group’s equity investments in Banking and Insurance less Group adjusted equity, declined from EUR 7.2 billion to EUR 6.9 billion. As a result the Group debt/equity ratio reduced from 13.5% to 12.4%. Group injected EUR 0.15 billion into Bank and net injected EUR 0.2 billion into Insurance during the year. The Group raised EUR 7.5 billion of capital through a rights issue. EUR 5.6 billion was used to make an early repurchase of EUR 5 billion of the core Tier 1 securities from the Dutch State and EUR 1.3 billion (pre-tax) was used to account for the one-time provision for the Illiquid Assets Back-up Facility as agreed with the European Commission.
CAPItAl MARKEt OPERAtIONS In 2009, the following issues were executed: For ING Bank N.V.
EUR 4,000 million 5-year Government Guaranteed Bonds• USD 6,000 million 3-year Government Guaranteed Bonds• USD 2,000 million 5-year Government Guaranteed Bonds• EUR 2,000 million 5-year Covered Bonds• EUR 1,250 million 10-year Covered Bonds•
ING sold its Taiwanese life insurance business to Fubon Financial Holding Co. Ltd. for a final sales price of EUR 466 million resulting in a loss of EUR 292 million. The sale was completed in February 2009 and differs from the proceeds reported in 2008 of EUR 447 million due to movements in the dollar/euro exchange rate between the date of signing the sales agreement and the date of closing. ING was paid in shares and subordinated debt securities of Fubon, and as such took a 5% shareholding in the company, which had risen 71% in terms of EUR by year end 2009. ING sold its 70% stake in ING Canada for net proceeeds of EUR 1,316 million via a private placement to a group of institutional investors and the sale of the remaining shares to a syndicate of underwriters. As a result, 1.2 Report of the Executive Board
The recent market turmoil underscores the importance of living by this risk mission statement.
dEtERMINING thE RISK APPEtItE The risk appetite for ING is set by the Executive Board and ratified by the Risk Committee of the Supervisory Board. This Risk Committee was established in 2009 to enhance the ING Risk Governance, and to allow a more forward-looking discussion on risk among Supervisory Board members. Owing to this structure the audit committee and risk committee each cover a singular topic, and it ensures an increased focus on both financial reporting and risk related topics.
ING’s risk governance framework ensures that the risk appetite is communicated and enforced throughout the Group. The framework contains three lines of defence: the business lines themselves, which have the primary responsibility for day-to-day
US subprime RMBS, Alt-A RMBS, CdO/ClO and CMBS exposures and revaluations at year-end 2009 in EUR million Market value
The improvements in the markets were also visible through the decrease in volatility during 2009, as well as the decrease in credit spreads. Short-term interest rates continued to decrease, both in the US and Europe. At the same time long-term interest rates in Europe decreased slightly from their 2008 level, and in the US the long-term interest rates increased during 2009.
RISK MItIGAtING ACtIONS Anticipating a further downturn in the markets in 2009, ING took additional actions to reduce risk across major asset classes. First, the derisking activities that started in 2008, were continued and increased during 2009. Second, deleveraging helped reduce risk via reduction of the bank balance sheet. Finally, the Back to Basics initiative further reduced risk through the sale of businesses in order to focus more on ING’s core activities and markets.
The activities for the bank balance sheet reduction were already started in 2008, but during 2009 the bank balance sheet was further reduced by EUR 153 billion, and as such the reduction target of EUR 108 billion was reached.
Balance sheet reduction was also notable in the Availablefor -Sale (AFS) portfolio which reduced by EUR 45 billion in 2009. The reduction was realised through maturing bonds and prepayments, but also due to reclassifications out of this category to loans and advances. In ING Direct the investment portfolio was reduced and more emphasis was placed on own originated assets. Next to the fact that ING’s revaluation reserve improved significantly during 2009, ING is now also less sensitive to revaluation reserve changes. The combination of a reduced balance sheet and improved IFRS equity made the Bank asset leverage ratio improve from 35.3 at 31 December 2008 to 27.8 at 31 December 2009.
Focus during the year was also on containment of risk-weighted assets. Credit migration due to downgrades of counterparties resulted in higher risk weights for assets, leading to higher required capital. In order to mitigate the RWA increase, several derisking steps were taken. The first major step was taken at the start of the year when ING and the Dutch State entered into the Illiquid Assets Back-up Facility (IABF). See the section ‘ING and the financial environment’ for more information on the IABF term sheet. Additional mitigation of the RWA migration was done by further reducing the Residential Mortgage Backed Securities (RMBS) portfolio, for example via the sale of US Prime RMBS securities during the fourth quarter. These and other management actions resulted in a RWA reduction during 2009 of EUR 11 billion, going from EUR 343 billion at year-end 2008 to EUR 332 billion at year-end 2009.
ING continued to derisk its product offering in 2009. This was accomplished through the redesign of products (mainly the US variable annuity products), and by removing products from our product range in line with the Back to Basic programme.
management; Risk Management and Finance, which provide high-level policies, limits and risk oversight, as well as day-to-day transaction approval; and Corporate Audit Services, the internal audit department within ING Group, which provides an independent assessment of the design and effectiveness of internal controls at all levels of ING Group.
FINANCIAl RISK dAShBOARd The risk appetite, or the willingness of the Group to take risks, is measured through three key metrics: Earnings at Risk and Capital at Risk which are measured in the Financial Risk Dashboard, and Economic Capital. Business line managers aim to maximise value relative to these measures, while Risk Management monitors and controls the risk profile against the Group’s risk appetite. The metrics enable the Executive Board to identify risk concentrations and potential risk-mitigating actions. They provide an overview of risks inherent in all the banking and insurance businesses and facilitate monitoring the adherence of risk-taking with respect to the Group’s risk appetite. It thereby allows ING to take strategic decisions using comparable risk measures and to maximise efficient capital allocation. The crisis demonstrated the importance and value of the metrics since they were used as a tool to inform the Executive Board of the impact of potential risk-mitigating actions on the Group-wide risk profile, however the crisis also highlighted some of the shortcomings of the methodology. Effort was put into aligning Earnings at Risk more with accounting principles.
NON-FINANCIAl RISK dAShBOARd Since 2008 the Non-Financial Risk Dashboard (NFRD) is a standard report on the agenda for both the Executive Board and the Audit Committee and (as of 2009) the Risk Committee meetings. The NFRD was introduced to keep focus on the key risk exposures when looking at the risk faced by business units. NFRD delivers comprehensive and integrated risk information on Operational, Compliance and Legal Risks, using a consistent approach and risk language at all levels in the organisation.
MARKEt dEvElOPMENtS IN 2009 2009 was the year in which some markets rebounded from the 2007-2008 crisis, while other markets stabilised or even further deteriorated. Equity markets improved but the US housing market further deteriorated in the first half of 2009, though improved slightly in the second half of the year. Overall, the US housing prices declined slightly compared to year-end 2008, which meant that prices for real estate and prices for asset classes with real estate underlying remain impacted by the continued turmoil.
ING’s credit exposure is mainly related to traditional lending to individuals and businesses followed by investments in bonds and other securitised assets. Loans to individuals are mainly mortgage loans secured by residential property. Loans (including guarantees issued) to businesses are often collateralised, but can be unsecured based on internal analysis of the borrowers’ creditworthiness. Bonds in the investment portfolio are generally unsecured. Securitised assets such as Mortgage Backed Securities (MBS) and Asset Backed Securities (ABS) are secured by the pro rata portion of the underlying diversified pool of assets (commercial or residential mortgages, car loans and other assets) held by the issuer of the security.
MARKEt RISK MANAGEMENt At ING BANK Market risk is the risk that movements in market variables, such as interest rates, equity prices, foreign exchange rates and real estate prices, negatively impact the bank’s earnings, market value or liquidity position. Market risk either arises through positions in trading books or through the banking book positions. The trading positions are held for the purpose of benefiting from short-term price movements, while the banking book positions are intended to be held in the long term (or until maturity) or for the purpose of hedging other banking book positions.
Within ING Bank, market risk (including liquidity risk) falls under the supervision of the Asset and Liability Committee (ALCO) function with ALCO Bank as the highest approval authority. ALCO Bank determines the overall risk appetite for market risk. The ALCO function is regionally organised with the exception of ING Direct, which has a separate ALCO. The business lines Retail Banking and Commercial Banking are represented within the respective regional and local ALCO’s. The ALCO structure within ING Bank facilitates top-down risk management, limit setting and the monitoring and control of market risk. This ensures a correct implementation of the ING Bank risk appetite.
CMRM is responsible for determining adequate policies and procedures for managing market risk and for monitoring the compliance with these guidelines. An important element of the market risk management function is the assessment of market risk in new products and businesses. Furthermore CMRM maintains an adequate limit framework in line with ING Bank’s risk appetite. The businesses are responsible for adhering to the limits that ultimately are approved by ALCO Bank. Limit breaches are reported to senior management on a timely basis and the business is required to take the appropriate actions to reduce the risk position.
Corporate Credit Risk Management (CCRM) is responsible for the measurement and management of credit risk incurred by all ING Group entities, including country-related risks. CCRM is organised along the three business lines of ING Bank (e.g. Retail Banking, Commercial Banking and ING Direct) and ING Insurance. The CCRM General Manager is functionally responsible for the global network of credit risk staff, while the heads of the credit risk management functions for the business lines report directly to him.
ING has developed a comprehensive framework supporting and governing the process of identifying, mitigating, measuring and monitoring operational risks. Generic mandatory controls are described in the ORM policy house. The policies were refined in 2009.
The Executive Board, Management Boards, and senior management share a clear vision of reputation management that goes well beyond the compliance and operational risk functions. They expect the highest levels of personal conduct and integrity from all employees and managers to safeguard the Group’s reputation. In 2009, the Non-Financial Risk Dashboard, providing management with an overview of key risks in their jurisdiction, became the standard for reporting to the Executive Board. At the same time, next steps were taken in the realisation of an IT-related NFRD enabling tool.
INSURANCE RISK MANAGEMENt ING is engaged in selling a broad range of life and non-life insurance products. Risks from these products arise with respect to the adequacy of insurance premium rate levels and provisions for insurance liabilities and capital position, as well as uncertainty as to the future returns on investments of the insurance premiums. Risks are classified as insurance risk (actuarial and underwriting), market risk, liquidity risk, credit risk, business risk and operational risk.
In order to determine how much reinsurance protection is required, the risk tolerance levels are compared to the estimated maximum probable loss resulting from catastrophic events with a 1 in 250 probability of occurrence, which is in line with industry practice. Overall exposures and concentrations are actively managed within limits and risk tolerance levels through the purchase of external reinsurance. Particularly for the property and casualty portfolio, ING purchases protection which substantially mitigates ING’s exposure due to natural catastrophes. ING believes that the credit risks to which it is exposed under reinsurance contracts are minor, with exposures being monitored regularly.
In 2009, ING Bank was comprised of Retail Banking, ING Direct and Commercial Banking. It has a strong European footprint, especially in its home markets in the Benelux, and promising positions in the largest Central European countries: Poland, Romania and Turkey. Beyond Europe, ING Bank has growth options in Canada, Australia, India, China and Thailand.
ING Bank has a home market position in the Benelux markets: ING is the number two retail bank in the Netherlands and ranks fourth in Belgium. It has a strong Benelux Commercial Bank with an international network. ING is the world’s leading direct bank. It is the number three retail bank in Germany with ING-DiBa.
Underlying result before tax (excluding the impact of divestments and special items) improved by 100.4% to EUR 900 million, despite the continuing weakness in the US housing and real estate market. This was supported by a strong improvement of the underlying results before market impacts and risk costs in all three business lines. Risk costs, however, increased significantly, as the credit crisis affected the real economy. Retail Banking and Commercial Banking remained profitable, while ING Direct reduced its loss to EUR 666 million.
The total result before tax from banking operations declined to a loss of EUR 826 million in 2009 from a profit of EUR 148 million in 2008. The loss was driven by EUR 1,726 million of special items. This was mainly related to additional payments on the Illiquid Assets Back-up Facility and charges for the merger of the retail banking activities in the Netherlands.
Underlying income rose 13.5% to EUR 13,312 million. The interest result increased 13.1%, driven by higher margins at ING Direct and Commercial Banking. In 2009, client balances rose by EUR 35 billion to EUR 1,108 billion. The total interest margin improved to 1.32% from 1.07% in 2008, supported by the deleveraging of the balance sheet. Commission income decreased 7.5% driven by lower management fees. Investment and other income was EUR –1,905 million compared with EUR –2,250 million in 2008, mainly due to continued high impairments on debt securities and negative revaluations on real estate.
ING’s ambition is to be a leader in international retail, direct and commercial banking with attractive growth options in Central Europe, Turkey and selected markets throughout the Asia/Pacific region.
Back to Basics programme > Short-term focus on cost reduction, derisking and deleveraging > New service models in the Benelux well under way > Commitment to long-term growth in Asia > Divestment of Asian and Swiss private banking activities
FINANCIAl dEvElOPMENtS Retail Banking’s result still suffered from the intense competition for savings which started in 2008, although a gradual improvement in margins was visible in the course of 2009. In 2009, demand for lending was moderate, but risk costs increased. Net production in client balances was EUR 10.9 billion, bringing the total to EUR 497.9 billion at year-end 2009.
Underlying operating expenses declined 11.3% to EUR 4,708 million driven by the cost containment measures, the benefits from the transformation programmes in the Benelux and favourable currency impacts. In the Benelux, expenses were 10.6% lower. Outside the Benelux, the decline was 14.2%. As part of the Back to Basics programme, internal staffing was reduced by 2,266 FTEs in 2009. In addition, staffing was reduced by another 907 FTEs due to the merger of the retail banking activities in the Netherlands. On top of this, Retail Banking reduced its external FTEs by almost 3,800. The underlying cost/income ratio improved to 65.0% from 71.7% in 2008.
The addition to the loan loss provisions more than doubled to EUR 997 million in 2009. This was mainly caused by higher risk costs in the mid-corporate and SME segments. At Private Banking, risk costs were up as underlying collateral for loans decreased. Risk costs on the mortgage portfolio remained relatively low.
The underlying risk-adjusted return on capital (RAROC) after tax from Retail Banking improved to 22.7% in 2009 from 21.7% in 2008.
Total underlying* income 7,239 7,399 Underlying* operating expenses 4,708 5,307 Underlying* additions to loan loss provisions 997 401 Underlying* result before tax 1,534 1,691 Total result before tax 1,164 1,420 Underlying* cost/income ratio 65.0% 71.7% Client balances (EUR billion) 497.9 478.3 Net production client balances (EUR billion) 10.9 34.2 Risk-weighted assets (EUR billion) 98.8 95.0 Underlying* after-tax RAROC 22.7% 21.7% Underlying* economic capital (EUR billion) 6.6 5.9 * Underlying numbers are derived from IFRS-EU numbers, excluding the impact of divestments and special items.
Netherlands 3,885 Belgium 2,184 Central Europe* 864 Asia* 306 total 7,239 * Mainly the retail banking operations in Poland, Turkey, Romania, India (ING Vysya Bank), Private Banking Asia, the ING participations in Bank of Beijing, TMB and Kookmin Bank.
Enhancing its reputation and regaining customer confidence became ING Retail Netherlands’ priorities in light of the credit crisis. To this end, a programme was launched to improve products, services, processes, pricing, customer contact and satisfaction, and brand image. For example, a ‘Mortgage Help’ package was introduced to offer information, advice and payment alternatives to mortgage customers affected by the economic downturn. ING also organised financial information sessions to update customers on the economic crisis and its impact on their daily expenditure, home finances, pensions and savings.
The market for savings and deposits remained highly competitive and put pressure on margins. In the Netherlands, ING gave preference to margins over volumes. Average margins decreased but started to recover in the second half of the year. ING was successful in maintaining and even slightly increasing customer savings and deposits, resulting in net production of EUR 3.8 billion in 2009.
Average economic capital increased EUR 0.7 billion to EUR 6.6 billion in 2009, mainly in the Benelux and Turkey. In 2009, total risk-weighted assets rose 4.0% to EUR 98.8 billion at year-end, mainly due to increases in Central Europe.
ING will stay committed to these partnerships and continue to support their growth.
The transformation programmes in the Netherlands and Belgium will be continued to enhance customer centricity, streamline the business, reduce costs, expand distribution capabilities and enhance cross-selling. Accordingly, ING will further simplify its product lines in the rest of Europe and Asia and will continue innovation of distribution based on direct experience.
In Romania, Self’Bank has continued to grow since the operation started in 2004. The bank increased its focus on internet and new client segments. Customer growth continued, reaching over 900,000 customers at the end of 2009. There were 209 outlets and the bank became profitable in December 2009.
The rebranding of Oyak Bank into ING Bank Turkey has been successful. ING Bank Turkey is using ING’s expertise in internet banking, mass marketing and risk management. A distribution expansion programme was launched in which online banking and customer relationship management play important roles, and the programme is expected to be finalised in 2012. The new website, created in 2009, received ´best-in-class awards’. During the year, ING Bank Turkey strongly outperformed the mortgage sector, and in the small and medium-sized enterprise sector it improved the quality of its portfolio and achieved a healthy growth in market share. The number of active clients is some 1.2 million. ING Bank Turkey has also been actively involved in syndicated and club loans in Turkey. In long-term lending, ING was number one in 2009 in terms of number of deals (according to Reuters Thomson).
Competition for savings was also strong in Central Europe and here, too, ING put margins before volumes. Its comfortable liquidity position meant that ING Bank Slaski did not need to participate in the savings price war. In Romania, rates were further reduced in line with the market, while in Turkey interest rates decreased rapidly following central bank rate cuts.
In India, ING has a 44% stake in ING Vysya Bank and is the single largest shareholder. At year-end, ING Vysya Bank had 460 branches. ING Vysya Bank provides retail and commercial banking services to two million customers.
In China, ING has a 16.7% stake in Bank of Beijing, the largest city commercial bank in China.
ING Direct’s commercial performance was positive despite tough competition, the challenging market circumstances and high market volatility. However, impairments on the investment portfolio and an increase in loan loss provisions in the US had a negative impact, contributing to an underlying pre-tax loss of EUR 666 million. Commercial performance remained solid with a client balances net production of EUR 34.2 billion, reaching EUR 353.8 billion at year-end.
FINANCIAl dEvElOPMENtS ING Direct posted an underlying loss before tax of EUR 666 million compared with a loss of EUR 1,125 million in 2008. The losses were driven by the continued weak US housing market resulting in additional impairments, albeit at a lower level than in 2008, and increased risk costs, while interest results showed a strong increase.
In 2009, ING Direct actively reduced risks to preserve capital. The Illiquid Assets Back-up Facility with the Dutch State reduced the impact of losses on the Alt-A RMBS portfolio by 80%. Furthermore, ING Direct sold part of its US prime RMBS portfolio in the fourth quarter of 2009 to reduce risk-weighted assets. These management actions largely offset the impact of credit rating migration and model updates. In 2009, total risk-weighted assets rose by 2.2% to EUR 69.3 billion.
Total underlying income rose by 100.7% to EUR 1,762 million, driven by lower impairments on debt securities combined with a strong increase in interest results. Impairments, primarily on the Alt-A RMBS portfolio in the US, were EUR 1,395 million compared to EUR 1,891 million in 2008. Excluding impairments, underlying income increased 14.0% to EUR 3,156 million. The interest margin of ING Direct increased to 1.10% in 2009 from 0.94% in 2008, supported by lower central bank rates across the globe.
Breakdown of underlying result before tax in EUR million 2009 2008 change
dEvElOPING thE MAJOR PROdUCt CAtEGORIES Savings – continued strong competition Despite continuing tough competition, ING Direct experienced strong savings inflows. In each of the nine countries the bank continued to refine its savings products, pricing strategy and retention activities in order to win both new customers and more funds from existing customers.
In the UK, ING Direct is on track with its repositioning programme: the savings base stabilised and the mortgage product line was reactivated to become a more complete bank. In 2009, UK consumers ranked ING Direct the country’s second most-trusted savings provider in the annual Moneywise Awards.
In the US, rising unemployment and the continued weakness of the housing market resulted in significant impairments, mainly on the retained Alt-A RMBS portfolio, and increased risk costs related to the US mortgage portfolio. ING Direct USA introduced a loan modification programme to help US borrowers stay in their homes and mitigate risk costs associated with mortgages that roll into foreclosure. ING Direct’s non-performing loans (90 Days Past Due) in the US stood at 4.7% at year-end. This was better than the US industry average of 18.3% non- performing loans for prime adjustable-rate mortgages as at the end of November 2009. Overall, the ING Direct USA portfolio consists of quality customers with an average loan-to-value ratio of 77% (indexed for changes in property values) with 96% of mortgages owner-occupied.
ING Direct’s own-originated residential mortgage portfolio across all countries of operation rose by EUR 10.2 billion (excluding currency effects) in 2009, to reach EUR 124.2 billion, 57% of funds entrusted.
Payment accounts – expanding geographic footprint Payment accounts performed well in 2009. 278,000 accounts were opened, bringing the total number of payment accounts to 1.6 million globally at year-end. Six out of nine countries now offer payment accounts.
ING Direct France and ING Direct Australia launched payment accounts, both of which were enthusiastically received by customers and media. ING Direct Australia won the 2010 Money Magazine ‘Best New Innovative Banking Product’ for this fee-free payment account.
COUNtRy dEvElOPMENtS Excluding impairments, ING Direct’s underlying result before tax declined 4.8% to EUR 729 million. In the US, the result before tax excluding impairments decreased to EUR 7 million from EUR 343 million in 2008, driven by higher risk costs, increased deposit insurance premiums and a realised loss on the sale of part of its prime RMBS portfolio to derisk the business. In Germany, the result before tax declined to EUR 217 million from EUR 297 million in 2008, mainly due to interest margin pressure in a highly competitive savings market. In Italy, the result before tax declined to EUR 22 million from EUR 34 million in 2008, due to lower income. All other countries reported higher results. In the UK, the result improved from a loss of EUR 72 million in 2008 to a profit of EUR 66 million, due to improved interest margins as the strong decrease of the central bank rate was fully tracked in client rates. Excluding impairments, results in Canada and Australia more than doubled, while results in France and Spain were both up 74%, driven by improved interest margins and lower expenses.
In 2009, ING Direct invested EUR 267 million in developing the business. It continued rigorously to manage its risks, capital and expense base, in line with the economic circumstances and ING’s current priority of preserving its capital position.
Part of the agreement signed with the European Commission on ING’s Restructuring Plan (see the section ‘ING and the financial environment’ for further details), is the sale of ING Direct USA by 2013. ING only decided to meet the EC’s requirements on the condition that the EC guarantees equal treatment of all Statesupported financial institutions and safeguards the level playing field in the EU internal market. ING regards ING Direct USA as a very strong franchise and will continue to grow the value of the business. The agreement with the EC has no impact on other ING Direct countries and we will continue to manage ING Direct USA as a long-term shareholder. ING remains committed to the ING Direct franchise as a strong contributor to future growth.
ING Direct aims to increase the number of payment accounts among its savings customers in the next three years. This will contribute to higher income diversification and a broadening of customer relationships.
Investments – source of income diversification ING Direct reported net inflows of customers and funds in investment products, with the US being a big contributor through its online brokerage platform, ShareBuilder. Assets under management worldwide increased by EUR 3.0 billion to EUR 9.3 billion.
Canada 1,648 1,562 17.2 13.4 16.9 13.5 0.3 0.2 Spain 1,996 1,836 14.9 12.5 7.4 7.1 1.6 0.9 Australia 1,395 1,363 13.2 9.2 22.2 16.9 – – France 762 751 11.3 10.3 0.0 – 1.5 1.0 United States 7,633 7,546 52.1 51.5 23.4 21.8 0.3 0.2 Italy 1,164 1,103 15.6 14.6 5.8 5.1 0.4 0.3 Germany/Austria 6,873 6,646 74.9 63.2 47.1 42.5 5.3 3.8 United Kingdom 1,442 1,330 17.8 16.2 1.3 1.3 0.0 – total 22,913 22,172 217.1 191.0 124.2 108.3 9.3 6.4
FINANCIAl dEvElOPMENtS Underlying result before tax rose 14.0% to EUR 694 million. ING Real Estate recorded a loss of EUR 1,389 million compared with a loss of EUR 297 million in 2008. Excluding ING Real Estate, the underlying profit of Commercial Banking more than doubled to EUR 2,083 million. Underlying profit before tax from Financial Markets more than tripled to EUR 1,289 million thanks to a strong commercial performance coupled with lower negative market impacts. The results of General Lending & Payments and Cash Management (PCM) increased by 40.6%, as higher margins in General Lending coupled with lower expenses more than compensated for increased risk costs. Structured Finance’s result declined by 11.1% due to higher risk costs; excluding risk costs, result before tax was up 38.7% driven by higher margins. Profit before tax in Leasing & Commercial Finance declined 43.7% to EUR 67 million.
Total underlying income increased 14.1% to EUR 4,687 million driven mainly by Financial Markets, General Lending & PCM and Structured Finance. This more than offset the decline at ING Real Estate. Underlying operating expenses remained under control, dropping 4.1% to EUR 2,783 million despite EUR 451 million of impairments on real estate development projects. The underlying cost/income ratio improved to 59.4% from 70.7% in 2008. Excluding ING Real Estate, the cost/income ratio was 38.2% compared with 61.4% in 2008.
Risk costs increased significantly to EUR 1,210 million compared with EUR 596 million in 2008. The risk costs included provisions that were driven by large files, amongst others in Structured Finance, reflecting the economic recession. In the second half of 2009, risk costs came down partly due to releases from prior provisions. The underlying risk-adjusted return on capital (RAROC) after tax rose to 9.5% from 4.9% in 2008. Average economic capital increased 2.0% to EUR 9.5 billion mainly caused by the fact that increased credit risk migration was not fully offset by the lower volumes. In 2009, total risk-weighted assets declined 9.5% to EUR 160.3 billion at year-end, driven by the reduction of the balance sheet combined with lower risks in the trading books.
Total underlying* income 4,687 4,107 Underlying* operating expenses 2,783 2,902 Underlying* additions to loan loss provisions 1,210 596 Underlying* result before tax 694 609 Total result before tax 422 609 Underlying* cost/income ratio 59.4% 70.7% Client balances (EUR billion) 256.5 286.9 Net production client balances (EUR billion) –23.7 31.8 Risk-weighted assets (EUR billion) 160.3 177.2 Underlying* after-tax RAROC 9.5% 4.9% Underlying* economic capital (EUR billion) 9.5 9.3 * Underlying numbers are derived from IFRS-EU numbers, excluding the impact of divestments and special items.
Strong performance except in Real Estate 1.2 Report of the Executive Board
In May ING acted as a joint bookrunner of a syndicated facility for Mobile TeleSystems, the largest mobile operator in Russia and neighbouring countries, to refinance a USD 630 million tranche of its USD 1.33 billion syndicated loan facility, and in August ING acted as joint adviser on the acquisition of a 50.91% stake in Comstar-UTS by Mobile TeleSystems. Both are landmark transactions carried out in Russia in 2009. In September, ING acted as joint bookrunner for a EUR 1.5 billion bond issue for General Electric. In October, ING was bookrunner for A.P. Moller Maersk’s EUR 750 million Euro bond issue.
Income at ING’s PCM business was affected by lower interest rates and competition for liabilities, especially in the Netherlands and Central and Eastern Europe where volumes in transactions increased and fees were under pressure. In July, ING was chosen by AkzoNobel as prime payments and cash management service provider for Europe. ING is committed to further enhancing the capacity of its PCM business in the coming period.
SOlId FINANCIAl MARKEtS PERFORMANCE Financial Markets delivers a broad range of products to ING’s corporate and institutional client base as well as to other ING businesses including the retail network. ING aims to be a leading player with superior profitability in selected markets or products by taking advantage of its geographic footprint, strong brand recognition and commercial expertise and reputation.
In 2009, Financial Markets enjoyed a very strong year due to the steep yield curve, increased spreads and favourable trading conditions. Margins on standardised flow products (including foreign exchange forwards, interest rate swaps and foreign exchange options) remained at elevated levels, as counterparty and credit risks were increasingly priced in. Financial Markets did well seeking out cross-selling opportunities across product areas and client groups, as part of its renewed focus on emerging markets, home markets, strategic clients and global clients.
New sales, measured in annual premium equivalent (APE) for the life insurance business decreased 25.0% to EUR 4,456 million in 2009 from EUR 5,944 million in 2008. New sales declined in Central and Rest of Europe, US, Korea and Japan due to continued pressure on investment-linked product sales and the decision to limit variable annuity sales in the United States. In the Netherlands, sales increased by EUR 102 million to EUR 450 million, mainly driven by group life. The value of new business (VNB) decreased 37.6% to EUR 502 million.
Insurance Europe reacted to the weak economic environment and volatile financial markets in 2009 by derisking its balance sheet, strict expense control and a strategic focus on core products and markets. The derisking initiatives were completed in 2009, whereas cost containment and Back to Basics efforts will continue in 2010 to consolidate ING’s position in the European insurance markets. In the Netherlands this will be achieved through integrating the existing insurance businesses, whereas in Central and Rest of Europe the focus is on simplification and streamlining the operations in core markets.
The underlying operating expenses of Insurance Europe decreased by EUR 261 million or 14.8% in 2009 against 2008. EUR 25 million of this decline was due to the depreciation of Central European
Underlying* premium income 9,750 10,194 Underlying* operating expenses 1,503 1,764 Underlying* result before tax 650 651 Total result before tax 261 651 Value of new life business 185 397 Internal rate of return 14.6% 17.1%
Opportunities still available despite economic downturn 1.2 Report of the Executive Board
Underlying profit before tax in Belgium and Luxembourg decreased by EUR 53 million to EUR 27 million in 2009, due to EUR 18 million higher operating expenses and EUR 76 million losses and impairments on fixed income securities, partly offset by EUR 46 million higher commission income. The increase in commissions and expenses was completely due to the legal transfer of ING’s Investment Management activities in Belgium and Luxembourg from Bank to Insurance in the fourth quarter of 2008. Underlying profit before tax decreased by EUR 10 million to EUR 319 million, as EUR 63 million lower operating expenses were more than offset by losses and impairments on fixed income securities that were EUR 35 million higher and EUR 50 million lower revaluations of non-trading derivatives.
BUSINESS dEvElOPMENtS The economic environment in 2009 had a clear impact on Insurance Europe’s performance and will leave a long-lasting impression on the insurance sector. The new market reality gave rise to risk-averse consumer behaviour, leading to shifts in product uptake and, consequently, product design. Real gross domestic product (GDP) is expected to have fallen by around 4% in the eurozone in 2009. Prospects for Europe’s economy brightened, however, in the second half of the year, not least due to the impact of the exceptional measures taken by national governments and monetary authorities. In most European countries economic activity picked up in the third quarter, marking the official end of the recession.
Integration of the dutch insurance operations In 2009 it was announced that Nationale-Nederlanden, RVS and ING Verzekeren Retail (formerly Postbank Verzekeren) will be combined into one customer-oriented organisation under the Nationale-Nederlanden brand. This strategic decision is driven by the desire to respond to customer needs for convenience, personal advice, transparency and security. By using all current distribution channels, customers will be able to choose how and where they want to purchase products. The network of independent brokers will continue to play an important role, as will the banking channels and ING’s own advisers in the Netherlands.
Life sales Annual Premium Equivalent (APE) decreased EUR 28 million to EUR 982 million in 2009, a decline which was predominantly caused by developments in Central and Rest of Europe. In the Netherlands, sales increased by EUR 101 million to EUR 450 million, mainly driven by higher contract renewals in group life and pensions, and EUR 31 million APE related to a change in premium recognition within group life. In Belgium and Luxembourg, APE increased EUR 29 million to EUR 139 million driven by the introduction of variable annuity products in Belgium and in Italy sold by ING Life Luxembourg through the private banking arm of UniCredit. APE declined in Central and Rest of Europe by EUR 159 million, with all countries contributing to the decline except Turkey, where a pension fund was acquired in late 2008. The EUR 56 million APE decline in Romania was largely due to the launch of second- and third-pillar pension funds in late 2007, contributing EUR 57 million sales in 2008 compared with EUR 10 million in 2009. The depreciation of Central European currencies against the euro caused EUR 48 million of the sales decline.
Value of New Business (VNB) in Insurance Europe declined to EUR 185 million in 2009 from EUR 397 million in 2008. The Netherlands contributed EUR 53 million to this decline and Central and Rest of Europe another EUR 162 million. VNB in the Netherlands was lower despite higher sales and lower operating expenses, due to higher risk margins as well as a shift in the business mix to group unit-linked contracts from more profitable retail annuities. Lower VNB in Central and Rest of Europe was caused by lower expected asset returns and higher risk margins in the assumed discount rates as well as lower single premium sales and a EUR 28 million negative currency impact in Central and Rest of Europe. Margins in the Central and Rest of Europe pension business continued to be under pressure due to changes in the fee structure, partly triggered by legislative changes. The second- and third-pillar pension funds in Romania contributed EUR 12 million in VNB in 2009 against EUR 80 million in 2008.
COUNtRy dEvElOPMENtS Underlying profit before tax in the Netherlands increased by EUR 62 million to EUR 305 million in 2009. The main reasons for this increase were EUR 420 million in higher revaluations on private equity, EUR 217 million in lower operating expenses and an improvement of EUR 190 million in the change in the provision for guarantees on separate account pension contracts (net of hedging). These positive items were largely offset by EUR 452 million lower public equity income following the divestment of equity investments due to derisking. In addition, the impairments on fixed income investments increased by EUR 43 million, and profit sharing for policyholders increased by EUR 89 million. The result on equity index options that hedge equity investments fell by EUR 56 million, and the Non-life underwriting result decreased by EUR 97 million.
Initiatives have been taken to improve agent productivity and further professionalise ING’s sales forces. To achieve this ING will implement centralised recruitment, increase training and development efforts, and use needs-based selling and segment propositions for different markets.
Demand for variable annuity products increased, while their risk profile and design were adapted for the new market reality. An example of product redesign was seen in Belgium, where a new lifetime income guarantee product was introduced. This simplified variable annuity product generated about EUR 144 million in sales during 2009. New accumulation products were also launched successfully in Italy and Hungary. Derisked products continued to be sold in Spain, Luxembourg, Hungary and the Netherlands during 2009. These countries contributed almost EUR 100 million in variable annuity sales. Total new sales of variable annuities in Insurance Europe amounted to EUR 280 million in 2009, providing a stable and profitable base for future business.
BACK tO BASICS Insurance Europe focused on derisking, capital preservation, and improving efficiency in 2009 as part of the Group’s Back to Basics programme announced last April. Reduced credit spreads and balance sheet derisking measures contributed to an improvement in Insurance Europe’s capital position, leading to a EUR 630 million capital upstream to ING Insurance.
Insurance Europe also rebased its cost structure to fit the new economic circumstances. At the end of 2009, a headcount reduction was realised. All cost reduction programmes are on track.
Key points > Insurance Americas improved profitability > Latin America continued to record solid results > Insurance in the US began strategic business transformation > Expense reductions well ahead of target 2009 was a year of progress and significant change in Insurance Americas. The US businesses embraced ING Group’s Back to Basics strategy by substantially derisking the business, exiting two non-core operations and reducing costs. Latin America intensified its focus on mandatory and voluntary pensions and delivered substantial profits. ING Canada was sold. Insurance Americas improved profitability in the second quarter as economic and market conditions improved and finished the year well ahead of target on expense reductions.
The weak economy had a negative impact on underlying premium income in the Americas, especially in the US. The underlying premium income decreased 26.2% to EUR 13,973 million, primarily due to a decision to limit variable annuity sales in the US. Investment and other income decreased 62.2%, or EUR 1,807 million, to EUR 1,096 million due to a combination of lower investment yields from derisking actions and unfavourable results from non-trading derivatives, including the funding capital hedge entered into in late 2008.
Underlying expenses declined 8.1% to EUR 1,611 million in 2009. In the US, expenses declined due to lower staff cost and lower sales-related expenses, primarily as a result of restructuring efforts. The expenses for the integration of CitiStreet in the US, the costs related to the IABF with the Dutch State, and the expenses related to the restructuring activities are not included in underlying operating expenses, but were presented as special items and amounted to EUR 77 million in total.
Value of New Business (VNB) in the Americas declined 17.0%, or 14.8% excluding currency impacts to EUR 190 million in 2009.
At year-end 2009, IFRS reserve inadequacy for Insurance Americas deteriorated compared with year-end 2008. The net liability provisions for Insurance Americas became insufficient by EUR 1.6 billion at the 90% confidence level, which is significantly more conservative than using the best estimate reserve adequacy approach commonly employed, particularly among US companies.
ING in Latin America continued to successfully reposition its business to take advantage of powerful demographic and economic trends in the region, delivering solid earnings for the second consecutive year, despite the worldwide financial crisis.
US REtIREMENt SERvICES ING continued to build on its strong market positions in retirement services in the US, despite challenging markets. The ageing of the US population creates significant long-term growth opportunities. Those aged 45 or older control more than two-thirds of the approximately USD 30 trillion of financial assets in the US and the impending retirement of baby boomers and the recent financial crisis are increasing their focus on retirement. The addition of the CitiStreet business in July 2008, with its advanced, streamlined technology platform and web capabilities has provided scale and capacity to better serve the retirement needs of both plan participants and the companies or organisations that sponsor the plans. ING now serves the full spectrum of the retirement services market from providing full service retirement savings plans to offering only record-keeping services. The business is now uniquely positioned to serve all sizes and segments of the market – corporate, education, government, healthcare and not-for-profit.
Despite lingering uncertainty following the financial crisis, most Americans continue to support their employer-sponsored retirement savings plans. A survey by the ING Institute for Retirement Research found that the majority (84%) believed their employer’s plan was a very important part of their retirement strategy and 92% said the best way to save was by having their investments automatically deducted from their pay each month.
US ANNUItIES The US annuity business was restructured in 2009 to enable ING to better meet the needs of retiring baby boomers. The business was divided into two separate businesses: Individual Financial Solutions and Legacy Annuity. Beginning in 2010, ING will offer a number of lower cost rollover annuity products targeted primarily at people retiring from companies, which have ING-provided retirement plans. These rollover annuities will be part of a broad suite of simple, lower cost, lower risk investment vehicles, which will be introduced during the year. Their development is in line with ING’s strategy of providing customers with more transparent, less risky, less expensive and easier to understand products. Rollover IRA (Individual Retirement Accounts) products, which are essentially funds that provide retirement income, are expected to be the fastest-growing segment of the US retirement market. By 2013, almost USD 400 billion per year of retirement assets are projected to roll out of retirement plans into IRAs or other retirement vehicles, as the bulk of the 78 million baby boomer generation retires. ING is well-positioned to capture the unprecedented opportunity in this market because of the size of the current retirement business – both in terms of assets and number of plan participants. ING estimates that annual sales in the rollover market could rise to at least USD 6 billion within five years.
lAtIN AMERICA Premium income decreased 19.1% to EUR 161 million as ING Chile exited the disability and survivorship market during 2009 due to regulatory change. Operating expenses declined 16.2%, or 10.1% excluding currency impacts, mainly due to lower staff-related costs, including incentive compensation, and professional fees. Underlying profit before tax improved EUR 121 million to EUR 280 million, as a recovery in equity markets throughout the region led to an improvement in the legally-required investment in the pension business. Additionally, higher pension fee income and lower operating expenses also contributed to the profit improvement.
BUSINESS dEvElOPMENtS Insurance Americas is a market leader in providing retirement services and pension products in both the US and Latin America. As such, the company is well-positioned to take advantage of the long-term demographic opportunities that arise from a combined market of 700 million people in the seven countries in which ING operates. In the US, ING operates three core businesses: Retirement Services, Individual Life and Individual Financial Solutions (rollover annuities). ING is the third largest provider of defined contribution (DC) retirement plans in the US in terms of assets under management and administration, the second largest in terms of plan participants, and the largest in terms of retirement plans provided. In Latin America, ING is the second largest provider of mandatory pensions.
Since ING Group’s Back to Basics programme was announced in April, Insurance Americas has made strong progress towards creating a simpler, less complex organisation. During the year, Insurance Americas divested non-core businesses including annuities and mortgages in Chile, ING’s 70% shareholding in ING Canada and the Argentine annuity business. In addition, it announced an agreement to transfer the US reinsurance business to RGA Incorporated and the divestment of the majority of the ING Advisors Network (IAN) in the US. The US reinsurance transfer closed on 1 January 2010 and the IAN sale was completed 31 January 2010.
In the US, ING focused on building its capital position and taking risk out of the business by reducing costs and risky assets in the portfolio, as well as executing hedge transactions to protect the business from further reductions in the stock market. In addition, the businesses focused on providing simpler products, competitive returns and easier service.
EASIER! ING launched several online tools during the year aimed at making retirement savings, life insurance and investments easier for customers to understand and purchase. In March, INGCompareMe.com was launched, which enables people to gauge where they stand in relation to others on a wide range of saving, spending, retirement savings and other personal finance matters. Business Week magazine included the website on a short list of ‘useful retirement calculators’ and its developer at ING was listed as one of the ‘Top 10’ innovators of 2009 by Bank Technology News. In individual life, INGforLife.com was launched to provide education for individuals and lead generation for agents. In Retirement Services, My Retirement Outlook went live, which allows people to determine whether they are on track to meeting their retirement financial objectives. It is available on www.ingretirementplans.com.
CONClUSIONS ANd AMBItIONS In 2009, Insurance Americas played a key part in ING Group’s Back to Basics strategy by derisking its business, divesting non-core businesses and reducing costs. This was done while also improving customer satisfaction scores relative to peers.
In light of the decision to split ING Group and separate the insurance and investment management business from the banking activities, the Group’s short-term goal is to strengthen the profitability and returns of the insurance and investment management businesses by continuing to reduce costs, investing in top-line growth, focusing on higher margin products and making the best use of our talent. ING’s long-term goal is to strengthen the insurance and investment management businesses further as world-class players.
Success in the rollover annuity market requires new distribution channels to complement ING’s existing distribution strength. ING will continue to distribute annuity products to customers through traditional distribution channels such as wirehouses (major financial services organisations), independent financial advisers and banks, but will also focus on developing direct channels such as the internet or telephone, which will be important for the growth of this new business.
ING now ranks number 10 in the US in total individual life sales, led by a strong position in term insurance sales.
lAtIN AMERICA ING operates the second largest pension business in Latin America. In Peru, ING is ranked number one with a 32% market share, in Uruguay, the second largest; in Mexico and Chile, the third largest; and in Colombia, the company ranks among the top-five providers. The five businesses together have 9.4 million customers and EUR 35 billion in Assets under Management. Despite challenging conditions, ING held its market share in all countries. ING’s strong market positions in life and pension businesses across the region enabled the Company to continue to post solid top- and bottomline growth in 2009, despite the financial crisis.
A new wealth management platform was successfully established in Chile as a means of capturing a larger share of the affluent market. As a result of this success, ING plans to roll out the platform in other countries in the region, as part of Latin America’s strategy to target affluent markets.
Key points > Strong presence in key Asian economies > Diversified distribution reach, large tied agency network complemented by bank distribution partnerships > Well-positioned to benefit from economic upturn and recovery of life insurance sector
ING is a leading international life insurer with significant operations in Asia. Insurance Asia/Pacific retains a strong footprint in Asia, with nine insurance operations in seven countries, following the sale of the insurance and wealth management venture in Australia, New Zealand and all our operations in Taiwan. ING holds top-5 insurance market positions in South Korea, Malaysia and the Japanese Corporate Owned Life Insurance (COLI) market. Furthermore ING has a growing presence in Hong Kong, Thailand, India and China. ING is also the fourth largest regional investment manager, based on assets under management, operating in 11 markets.
The value of new business fell by 28.2% to EUR 127 million in 2009 from EUR 177 million in 2008. Excluding the discontinued SPVA business in Japan, the value of new business declined by 19% to EUR 145 million from EUR 179 million in 2008. The decline was primarily due to a 13.0% decline in the value of new business in South Korea due to lower sales, partly offset by Malaysia, where the value of new business rose 23.5%. The internal rate of return (IRR) remained stable at 13.3%.
Operating expenses decreased 14.7% or EUR 103 million to EUR 599 million from a year earlier driven by ongoing cost containment initiatives and efforts. In particular, operating expenses in South Korea and Japan declined 25.3% and 19.2%, respectively, as structural, i.e. administrative expenses, shrank, due to lower fixed personnel costs due to ongoing staff rationalisation and business and organisational restructuring.
South Korea 43% 2,731 Rest of Asia* 20% 1,308 * India, China, Hong Kong, Thailand and Malaysia.
Poised to benefit from renewed demand 1.2 Report of the Executive Board
China’s shift to expansionary monetary and fiscal policy in response to the collapse in export demand re-directed demand to the domestic market. China’s GDP growth in 2009 is likely to have exceeded the authorities’ 8% target, something deemed almost impossible by most analysts at the beginning of the year. The recovery in China stabilised economies in the rest of Asia with the strongest recoveries experienced by the countries whose exports were most exposed to Chinese demand. As a result, economic performance in Asia outpaced growth in other regions around the world. Equity indices in major markets across Asia recorded double-digit growth in 2009 and ING is well-positioned to benefit from the long-term growth in the region given the recovery in the real economy and with the life insurance sector regaining momentum.
ING’s life insurance sales in Asia recovered slightly in 2009 following the sharp decline in the second half of 2008, but overall growth in sales remained soft. Sales of investment-linked products remained under pressure as consumer demand shifted towards protection products. In response, ING repositioned its product portfolio by developing more traditional savings and capital guaranteed products. Sales across all products are expected to pick up in 2010 in what promises to be a year of solid economic growth in Asia.
PROdUCtS ANd dIStRIBUtION ChANNElS In Asia/Pacific, ING sells insurance and wealth management products mainly through its extensive tied agency force, but sales through bank distribution partners is growing rapidly and ING is exploring other channels. Faced with a challenging market environment, Insurance Asia/Pacific’s two main strategic priorities for 2009 were repositioning its product portfolio and strengthening its distribution channels.
ING’s Malaysian operations performed well, with its growing employee benefits product line maintaining its market leadership position, its individual life business continuing to grow steadily and the business reaping the fruits of the first full year of its bancassurance partnership with Public Bank. New products under the ‘Easi’ label were launched, offering comprehensive packages specifically aimed at those looking to ensure that their retirement income can support their future financial needs.
The underlying result before tax was EUR 220 million in 2009 compared with EUR –1 million in 2008. Excluding the discontinued SPVA business In Japan, the underlying result before tax was EUR 374 million in 2009 compared with EUR 237 million in 2008 resulting from improved investment income as the pressure on earnings due to volatile market conditions subsided, and cost containment efforts were continued throughout the year.
In Malaysia, the underlying result before tax rose 10.3% to EUR 64 million in 2009 compared with EUR 58 million in 2008. The increase in profits was driven by an improvement of investment results, as well as a higher premium income, which rose 6.5% to EUR 586 million in 2009 compared with EUR 550 in 2008 on continued new business growth, particularly through its bank distribution partner Public Bank. Operating expenses declined 2.0% despite strong new sales growth, on strict cost control.
ING made substantial progress in managing costs and capital. Expenses were down EUR 103 million in 2009 compared with 2008, exceeding the full-year 2009 targeted reduction of EUR 75 million. All countries contributed to the cost reduction, with the largest contributions coming from South Korea and Japan. ING also reduced over 1,000 full-time positions (FTEs), more than the planned reduction of 900 FTEs for 2009, including 200 FTEs from the cessation of the SPVA business in Japan.
Insurance Asia/Pacific took action to minimise capital consumption and improve efficiency through active balance sheet derisking and monitoring statutory solvency margins.
In Hong Kong, the business regained momentum in the fourth quarter fo 2009 and has seen growth both through the tied agency force and the bancassurance channel.
GREENFIEldS IN RESt OF ASIA In Thailand, ING introduced new bancassurance products for distribution via TMB in which ING has a 30% share. The business made a contribution to the region’s profit and also improved the productivity of its agency and bancassurance channels in order to reach scale.
India remains one of the most attractive countries in terms of economic fundamentals. ING sees potential to grow its Life business, particularly as the insurance market, which in 2009 underwent a period of rationalisation, regains momentum.
BACK tO BASICS In May 2009, market volatility led to ING’s decision to withdraw from the SPVA market in Japan as of 31 July 2009. The in-force book of SPVA products will continue to be serviced and actively supported.
Key points > Investor confidence and risk appetite returned, resulting in strong rallies in equity and credit markets > Morningstar awarded three stars or higher to 74% of ING’s mutual funds in Europe and the Americas > ING IM recorded assets under management of EUR 343.2 billion > Work commenced on the global co-ordination of ING IM
Rising markets and improved economic conditions in the second half of 2009 helped the asset management industry begin its recovery from one of the worst periods on record in 2008. Industry sales, assets under management and fee income all rose as equity markets, in particular, bounced back from their lows in March 2009. ING Investment Management recorded improved business activity from both retail and institutional clients.
ING INvEStMENt MANAGEMENt ING Investment Management (ING IM) is the principal investment manager of ING Group, excluding Real Estate. It helps ING deliver on its strategy of helping customers to manage their financial future. In 2009, ING’s investment management business continued to pursue its goal of becoming a top-tier investment manager. ING IM’s global distribution reach and strong emerging markets presence, together with its scale in fixed income, strong brand recognition and access to a global network of ING channels continued to position ING IM well in gaining new business as markets recovered. All three regions – Europe, Americas and Asia/ Pacific – continued to focus on the core strategy of delivering a wide range of investment strategies and services to ING’s global network of businesses and third-party clients. This was achieved by all three regions working closely together to leverage scale, investment expertise and best practices, in order to maximise cross-selling opportunities.
Investment Management Europe 41.1% 141.0 Investment Management Americas 41.6% 142.9 Investment Management Asia/Pacific 17.3% 59.3 in EUR billion
In Latin America, ING Investment Management continued to gain momentum. ING now has a 32% share of the market in Peru in terms of assets under management, 22% in Chile, 18% in Uruguay and 12% in Mexico and Colombia. These sizeable market positions are a result of ING being the second largest pension provider in Latin America.
On the retail front, major fund launches included a US Bond fund in Taiwan, which, pre-launch, raised over EUR 113 million. In Hong Kong, the number of locally registered funds rose by 12, in Taiwan by five and in Singapore up by 24, as a result of expansion into local retail markets. Wholesale AuM in the region grew by 9.2% over 2009.
In 2010, ING’s investment management businesses will begin to be managed under a global leadership team, recognising the importance of a strong local presence in regions and markets in Europe, the Americas and Asia/Pacific.
In 2010, as a result of ING’s plans to split its banking and insurance operations, ING IM will form part of ING Insurance (see Strategy Chapter). During this period of change, ING’s investment management businesses will remain, as ever, focused on meeting client needs and on generating alpha (above market returns).
ING remains committed to managing its people with respect and will support those affected by the reorganisation. The reduction of the workforce was coordinated centrally by Group HR in close collaboration with HR in the business including involvement and advice by the Works Council. ING’s mobility centres played a major role in helping affected employees finding new roles within ING or outside the Company. Divestments and reorganisations due to decreased business volume resulted in a higher number of employees leaving the Company than originally forecasted.
PERFORMANCE MANAGEMENt FOR SENIOR ExECUtIvES ING introduced a new performance management approach for its senior leadership – a significant step forward in our existing performance management practices and is part of building a stronger performance culture at ING. It balances financial and non-financial objectives (‘what’) against leadership behaviours (‘how’), and includes an increased emphasis on risk management and leadership integrity in how we achieve our business results and lead our people. As we work to separate our operations, it is critical that we continue to deliver superior performance in both our banking and insurance businesses. The new performance management approach will help us achieve our short-term goals as well as build our businesses for the long-term, recognising our high standards for integrity and accountability. It also provides increased transparency and reporting capabilities for both internal and external stakeholders, in line with increasing stringent regulatory requirements.
INtERNAtIONAl COMPENSAtION StANdARdS ING conducted a thorough review of our remuneration policy as part of the agreements with the Dutch State. We revised our remuneration policy accordingly, taking into account new international standards and recommendations, as well as the Dutch Banking Code. We carefully and diligently managed a complex set of external and internal factors that helped define this policy.
Given the globally changing views on remuneration policies and the increased call upon financial institutions to develop more moderate remuneration policies, we considered it our responsibility to reduce focus on variable compensation, further enhance long-term value creation and the alignment of risk and reward and put a higher weight on non-financial performance indicators.
EMPlOyEE ENGAGEMENt SURvEy ING continues to measure employee engagement across the organisation. Since 2008 all ING employees are invited to participate in the annual survey. This year more than 78,000 employees (74% of all those invited) completed the survey in September 2009 – a record response rate. Overall employee engagement decreased by 6% over the last year to 65%, above industry trends and in line with internal expectations as employees dealt with the impact of the transformation programme and the challenging market circumstances. Engagement levels in financial services companies that experienced layoffs this past year, versus those that did not, were 10% lower on average.
Despite the challenges employees faced, some of the positive findings were that ING provides a stimulating work environment, and employees retain pride in the Company. Reported areas for improvement included leadership engagement and opportunities for career development. All eligible managers received the WPC Survey results for their own business unit and are supported by HR to interpret the results, relate them to their own business challenges and develop an action plan against the backdrop of ING’s new organisational reality. Again this year, diversity was comprehensively integrated into the WPC survey to measure employee perceptions around diversity, confirming WPC results from 2008 as well as external benchmark studies which show that diverse employee segments experience engagement differently.
Enhanced focus on strengthening our diverse and inclusive culture was highlighted at the successful Diversity Conference hosted by CEO Jan Hommen with participation of business and HR leaders from across ING. ING’s Global Diversity Office supported the Executive Board and the Management Boards Banking and Insurance by setting the tone for diversity across the Company. ING established targets for the number of women in senior leadership positions, and is implementing customised business plans Company-wide. These plans help businesses set targets for diverse groups of employees, e.g. those of different ethnic background or sexual orientation, while helping leaders measure and meet their progress in placing women in leadership positions. A global leadership programme with focus on accelerating the development track for our high-potential senior women executives is being developed and will be run by our Business School. The Global Diversity Council, chaired by Jan Hommen with business leaders as members, continued to support and coordinate the strategic direction of our diversity objectives.
GENERAl The Supervisory Board met 15 times in 2009. Seven meetings were scheduled. On average, 95% of the Supervisory Board members were present at the scheduled meetings. Due to the fact that the ad hoc meetings were called at very short notice, attendance in these meetings was somewhat lower: 86% of the Supervisory Board members were present on average. The Audit Committee had seven meetings. One Audit Committee member was absent once at an Audit Committee meeting. A new Risk Committee, fully devoted to risk management, started off in August and had two meetings. The Remuneration Committee met eight times and the Nomination Committee met three times. One member was absent twice and one member was absent once at the Remuneration Committee meeting. Nobody was absent at the Nomination Committee meetings. The Corporate Governance Committee met once with no absentees.
SUPERvISORy BOARd MEEtINGS The implications of the financial crisis for ING continued to be a very important topic on the agenda of the Supervisory Board meetings in 2009. The ad hoc meetings focused mainly on the development of the financial markets crisis and the strategy for ING going forward, as well as on the Illiquid Assets Back-up Facility (IABF) with the Dutch State and the discussions with the European Commission about the restructuring plan for ING.
The annual Supervisory Board Knowledge Day, a full day of presentations and discussions on several important ING subjects, was held in January 2009. Representatives of DNB, the Dutch central bank, visited the Knowledge Day and gave a presentation on banking supervision. The Supervisory Board was also extensively informed about developments regarding variable annuities and discussed the status of the Group’s IT systems.
AUdIt COMMIttEE MEEtINGS In 2009, the Audit Committee met five times to discuss the annual and the quarterly results. In two additional meetings at the beginning of the year conclusions were drawn from the assessment of the effects of the financial crisis on ING and follow-up actions were discussed, among which were the strengthening of the risk governance structure, adjustment of the risk scenarios and establishing a separate Supervisory Board Risk Committee. The Audit Committee was frequently updated on the effect of the derisking measures. Other topics discussed in the meetings were risk, governance, capital management and regulatory matters and, more specifically, the financial position of the ING pension fund and the capital position of ING Insurance US as well as the derisking of the variable annuity products.
NOMINAtION COMMIttEE MEEtINGS In 2009, a separate Nomination Committee started and met three times. The Nomination Committee discussed the future composition of the Supervisory Board and its committees as
Following the decision to split the Company, the Supervisory Board approved the ING Restructuring Plan that was negotiated with the EC, under the assumption that the level playing field in the EU internal market and equal treatment of all state-supported financial institutions would be safeguarded by the EC. The Supervisory Board also approved an adjustment of the terms of the core Tier 1 securities agreement with the Dutch State to facilitate an earlier repayment of EUR 5 billion. The proposal to organise an extraordinary General Meeting, held on 25 November 2009 in order to get approval for the strategic decision to split the Company and to raise EUR 7.5 billion of capital through a rights issue to facilitate the earlier repayment and the additional fee to the Dutch State, was also approved.
COMPOSItION OF thE SUPERvISORy BOARd Eric Bourdais de Charbonnière and Wim Kok retired from the Supervisory Board and Godfried van der Lugt was reappointed as a member of the Supervisory Board at the annual General Meeting in April 2009. Tineke Bahlmann and Lodewijk de Waal were appointed as new members of the Supervisory Board upon nomination by the Dutch State, following the agreement with the Dutch State to strengthen the capital position of ING in November 2008. Jeroen van der Veer was also appointed as a new member of the Supervisory Board as of 1 July 2009.
REMUNERAtION COMMIttEE MEEtINGS The Remuneration Committee met eight times in 2009. The report of the Adviescommissie Toekomst Banken (Advisory Committee Future of Banks), various international standards (G20, FSB, FSA, IIF) and the remuneration standards laid down in the Code Banken (Dutch Banking Code) were extensively discussed. Subsequently, the scope and the details of the new remuneration policy for the Executive Board and senior management were developed in the Remuneration Committee as well as a governance structure for remuneration. An independent external adviser assisted the Remuneration Committee during this process. In February, the 2008 performance of the Executive Board members was discussed on the basis of the Group performance criteria and the individual targets as well as the proposed 2009 objectives for the Executive Board. A reduction of the discretionary 2008 bonus pool was discussed in several meetings. The implications of the Illiquid Assets Back-up Facility with the government for the Executive Board remuneration were also discussed.
COMPOSItION OF thE ExECUtIvE BOARd On 26 January 2009, Michel Tilmant, chief executive officer, stepped down from the Executive Board. The annual General Meeting in April 2009 appointed Jan Hommen as a member of the Executive Board and Patrick Flynn as the new CFO of ING Group. Subsequently the Supervisory Board appointed Jan Hommen as the new CEO of ING Group.
In May 2009, separate Management Boards Banking and Insurance were introduced to simplify the governance structure and further increase business focus. Jan Hommen, Patrick Flynn and Koos Timmermans remained members of the Executive Board while also becoming members of the Management Boards Banking and Insurance. Eric Boyer de la Giroday, Eli Leenaars and Dick Harryvan stepped down from the Executive Board and became members of the Management Board Banking. Jacques de Vaucleroy, Hans van der Noordaa and Tom McInerney stepped down from the Executive Board and became members of the Management Board Insurance. The composition of the Management Boards Banking and Insurance has changed as of 1 January 2010 (see pages 27 and 37). More information on the members of the Executive Board is provided on page 62.
APPRECIAtION FOR thE ExECUtIvE BOARd ANd ING EMPlOyEES The Supervisory Board would like to thank the members of the Executive Board and two Management Boards for their work and commitment to ING in a very challenging political and economic environment. In 2009 the work of the Executive Board and the two Management Boards focused on getting ING back on track and designing the future strategy. The Supervisory Board would also like to express its appreciation to the 107,000 employees of ING who have served the interests of the customers, the shareholders and other stakeholders of ING, and have shown great commitment in the past challenging year.
As part of these transactions, certain arrangements with respect to corporate governance and executive remuneration were agreed with the Dutch State which will remain in place as long as the Dutch State owns at least 250 million Securities, as long as the IABF continues or any of the Bonds is outstanding (whichever expires last).
These arrangements entail that: the Dutch State may recommend two candidates (‘State • Nominees’) for appointment to the Supervisory Board. Certain decisions of the Supervisory Board require approval of the State Nominees (these decisions are specified in the section on the Supervisory Board on page 63); ING Group will develop a sustainable remuneration policy for • the Executive Board and Senior Management that is aligned to new international standards and submit this to its General Meeting for adoption. This remuneration policy shall include incentive schemes which are linked to long-term value creation, thereby taking account of risk and restricting the potential for ‘rewards for failure’. The new remuneration policy will include objectives relating to corporate and social responsibility; This section discusses the application by ING Groep N.V. (‘ING Group’) of the Dutch Corporate Governance Code and provides information on the share capital and control, the Executive Board, the Supervisory Board and the external auditor. This section, including the parts of this Annual Report incorporated by reference, also serves as the ‘corporate governance statement’ referred to in section 2a of the Decree with respect to the contents of the annual report (Besluit tot vaststelling van nadere voorschriften omtrent de inhoud van het jaarverslag) (1).
In 2006, 28% of the total votes were thus cast, in 2007, the figure was 36.7%, in 2008, the figure was 38.7% and in 2009, the figures were 35.6% (annual General Meeting) and 31.1% (extraordinary General Meeting), so that in the 2009 annual General Meeting, the 35% threshold was exceeded for the third time in succession.
In addition, ING Group proceeded to a radical change of strategy and structure as a consequence of the financial crisis. This will be brought to completion in the future by means of the divestment of the insurance operations (including investment management).
The depositary-receipt structure also ensures consistency in ING Group’s decision making as it prevents that the General Meeting will be unduly influenced by a minority. This consistency is indispensable, in particular in times of fundamental changes.
In view of the importance of the balance between the long-term interests and the short-term interests and between the interests of shareholders and other stakeholders, as well as the importance of members of the Executive Board will not receive any • performance-related payment – either in cash, options, shares or depositary receipts for shares – for the years 2008, 2009 and subsequent years until the adoption of the new remuneration policy mentioned above; severance payments to members of the Executive Board will • be limited to a maximum of one year’s fixed salary, in line with the Corporate Governance Code; and appointment of the chief executive officer of the Executive • Board requires approval of the State Nominees.
For more information on the State Nominees, reference is made to the section on the Supervisory Board; for more information on the other arrangements, reference is made to the Remuneration report, starting on page 76.
On 25 November 2009, the General Meeting approved the strategic decision of the Executive Board to divest all insurance operations (including investment management) and authorised the Executive Board to issue ordinary shares of such number as would be necessary to raise an amount of capital up to EUR 7.5 billion, to enable ING Group to repurchase half of the outstanding Securities from the Dutch State and to strengthen ING Group’s capital base. To that effect, on 27 November 2009 ING Group launched a public offering of ordinary shares which was successfully settled on 21 December 2009.
ShAREhOldER PARtICIPAtION ANd POSItION OF ING tRUSt OFFICE ING Group indicated earlier that the Executive Board and the Supervisory Board would consider the position of Stichting ING Aandelen (‘ING Trust Office’) and depositary receipts once the number of votes cast on ordinary shares and depositary receipts for ordinary shares at a general meeting, including proxies and excluding the votes which are at the discretion of ING Trust Office, was at least 35% of the total votes that may be cast for three consecutive years.
consistency in ING Group’s decision making, within the current legal framework, the depositary-receipt structure, in the opinion of the Executive Board and the Supervisory Board, is still the most appropriate means to achieve this.
CORPORAtE GOvERNANCE COdES COMPlIANCE WIth thE CORPORAtE GOvERNANCE COdE For its corporate governance structure and practices, ING Group uses the Corporate Governance Code as reference. During 2009 ING Group considered the Corporate Governance Code and to what extent it could be implemented. ING Group’s implementation of the Corporate Governance Code will be submitted for approval at the 2010 General Meeting. The Corporate Governance Code can be downloaded from the website of the Monitoring Commission Dutch Corporate Governance Code (www. commissiecorporategovernance.nl/Corporate_Governance_Code). Any deviations from the Corporate Governance Code which are to be reported for 2009 are addressed in this section. However, deviations from the Corporate Governance Code with respect to the remuneration of the Executive Board and the Supervisory Board are addressed in the Remuneration report (see page 76) whereas any deviations from the Corporate Governance Code by ING Trust Office are reported in ING Trust Office’s own report (see page 69).
Share issues are to be decided by the General Meeting, which may also delegate its authority. Each year, the General Meeting is asked to delegate authority to the Executive Board to issue new ordinary shares or to grant rights to subscribe for new ordinary shares, both with and without pre-emptive rights for existing shareholders. The powers delegated to the Executive Board are limited: in time: powers are delegated for a period of 18 months;• by number: ordinary shares may be issued up to a maximum • of 10% of the issued capital, or 20% in the event of a merger or takeover; and in terms of control: resolutions by the Executive Board to issue • shares require the approval of the Supervisory Board.
tRANSFER OF ShARES ANd dEPOSItARy RECEIPtS ANd tRANSFER REStRICtIONS Shares are transferred by means of a deed of transfer between the transferor and the transferee. To become effective, ING Group has to acknowledge the transfer, unless ING Group itself is a party to the transfer. The Articles of Association do not restrict the transfer of ordinary shares, whereas the transfer of cumulative preference shares is subject to prior approval of the Executive Board.
REPURChASE OF ShARES ING Group may repurchase outstanding shares and depositary receipts for such shares. Although the power to repurchase shares and depositary receipts for shares is vested in the Executive Board subject to the approval of the Supervisory Board, prior authorisation from the General Meeting is required for these repurchases. Under Dutch law, this authorisation lapses after 18 months. Each year, the General Meeting is asked to approve the Executive Board’s authority to repurchase shares.
SPECIAl RIGhtS OF CONtROl No special rights of control referred to in Article 10 of the EU Directive on takeover bids are attached to any share.
CAPItAl ANd ShARES CAPItAl StRUCtURE, ShARES The authorised capital of ING Group consists of ordinary shares and cumulative preference shares. Currently, only ordinary shares are issued, while a call option to acquire cumulative preference shares has been granted to Stichting Continuïteit ING (‘ING Continuity Foundation’). The acquisition of cumulative preference shares pursuant to the call option is subject to the restriction that, immediately after the issue of cumulative preference shares, the total amount of cumulative preference shares outstanding may not exceed one-third of the total issued share capital of ING Group (see page 72). The purpose of the call option is to protect the independence, the continuity and the identity of ING Group against influences which are contrary to the interests of ING Group, its enterprise and the enterprises of its subsidiaries and all stakeholders (including, but not limited to, hostile takeovers). The ordinary shares are used solely for funding purposes. The ordinary shares, which are all registered shares, are not listed on a stock exchange.
The Board of ING Trust Office comprises five members who are independent of ING Group. No Executive Board members or former Executive Board members, Supervisory Board members or former Supervisory Board members, ING Group employees or former ING Group employees or permanent advisors or former permanent advisors are on the board of ING Trust Office. The Board of ING Trust Office appoints its own members, without any requirement for approval by ING Group.
for the American Depositary Shares (‘ADSs’), which date determines which ADSs are entitled to give voting instructions. This record date can differ from the record date set by ING Group for shareholders and holders of depositary receipts.
GENERAl MEEtING FREQUENCy, NOtICE ANd AGENdA OF GENERAl MEEtINGS General meetings are normally held each year in April or May, to discuss the course of business in the preceding financial year on the basis of the reports prepared by the Executive Board and the Supervisory Board, and to decide on the distribution of dividends or other distributions, the appointment and/or reappointment of members of the Executive Board and the Supervisory Board (if any), other items requiring shareholder approval under Dutch law, and any other matters proposed by the Supervisory Board, the Executive Board or shareholders or holders of depositary receipts in accordance with the Articles of Association.
Meetings are convened by public notice. As of the date of convening a general meeting, all information relevant for shareholders and holders of depositary receipts, is made available to them on the website of ING Group (www.ing.com) and at the ING Group head office, mentioned in the notice.
PROPOSAlS By ShAREhOldERS ANd hOldERS OF dEPOSItARy RECEIPtS Proposals to include items on the agenda for a general meeting can be made by shareholders and holders of depositary receipts representing a joint total of 0.1% of the share capital or representing together, on the basis of the stock prices on Euronext Amsterdam by NYSE Euronext, a share value of at least EUR 50 million. Given the periods of notice required for proxy voting, proposals have to be submitted in writing al least 50 days before the date of the meeting. Properly submitted proposals will be included on the agenda for the general meeting.
RECORd dAtE It is standard practice with ING Group to set a record date for attending a general meeting and voting on the proposals in that general meeting. Shareholders and holders of depositary receipts who hold shares and/or depositary receipts for shares at the record date are entitled to attend the general meeting and to exercise other rights related to the general meeting in question on the basis of their holding at the record date, notwithstanding a subsequent sale or purchase of shares or depositary receipts for shares. The record date is published in the notice to the general meeting. In accordance with US requirements the depositary sets a record date
FUNCtION OF thE ExECUtIvE BOARd The Executive Board is charged with the management of ING Group, which means, among other things, that it is responsible for the setting and achieving of the company’s objectives, strategy and policies, as well as the ensuing delivery of results. It also includes the day-to-day management of ING Group. The Executive Board is accountable for the performance of these duties to the Supervisory vOtING ON thE ORdINARy ShARES By ING tRUSt OFFICE ING Trust Office has discretion to vote in respect of shares for which it has not issued voting proxies to holders of depositary receipts and has not received any voting instructions. According to its articles of association and the Trust Conditions, ING Trust Office is required to promote the interests of all holders of depositary receipts, irrespective of whether they attend the general meeting, also taking into account the interests of ING Group, the businesses of ING Group and its group companies and all other ING Group stakeholders when voting such shares, so as to ensure that all these interests are given as much consideration and protection as possible.
PROxy vOtING FACIlItIES ING Group is a participant of the Shareholder Communication Channel (Stichting Communicatiekanaal Aandeelhouders), through which participating holders of depositary receipts can give voting instructions to ING Trust Office. ING Group provides a similar proxy voting facility to international institutional investors. In addition, ING Group solicits proxies from its ADS holders in line with common practice in the US.
Proxy voting forms for shareholders and voting instruction forms for holders of depositary receipts who do not participate in the Shareholder Communication Chanel are made available on the website of ING Group (www.ing.com). The submission of these forms is subject to additional conditions which are specified in the forms themselves.
MAIN POWERS OF thE GENERAl MEEtING The main powers of the General Meeting are to decide on: the appointment, suspension and dismissal of members of the • Executive Board and members of the Supervisory Board, subject to a binding nomination or a proposal of the Supervisory Board; the adoption of the annual accounts;• the declaration of dividends, subject to the power of the • Executive Board to appropriate part of or all of the profits to the reserves – with approval of the Supervisory Board – and the declaration of other distributions, subject to a proposal by the Executive Board which was approved by the Supervisory Board; the appointment of the external auditor;• an amendment of the Articles of Association, a legal merger or • division of ING Group, and winding up ING Group, all subject to a proposal by the Executive Board which was approved by the Supervisory Board; the issue of shares or rights to subscribe for shares, the • restriction or exclusion of pre-emptive rights of shareholders, and delegation of these powers to the Executive Board, subject to a proposal by the Executive Board which was approved by the Supervisory Board; and to authorise the repurchase of outstanding shares and to • cancel shares.
Moreover, the approval of the General Meeting is required for Executive Board decisions that are so far-reaching that they would
of ING Verzekeringen N.V. Jan Hommen was a member of the Supervisory Board of ING Group as of 1 June 2005 and became chairman of the Supervisory Board of ING Group in January 2008. Until 1 May 2005, he was vice-chairman and chief financial officer of Koninklijke Philips Electronics N.V. From 1975 to 1997, he worked for Alcoa Inc. From 1978, he worked at the Alcoa head office in the US, becoming chief financial officer in 1991. Jan Hommen is a member of the board of Royal Concertgebouw Orchestra. Six Group staff departments report directly to Jan Hommen: Corporate Legal Department, Corporate Human Resources, Corporate Development, Corporate Communications & Affairs, Public & Government Affairs and Corporate Audit Services.
KOOS (J.) v. tIMMERMANS, ChIEF RISK OFFICER (Born 1960, Dutch nationality, male; appointed in 2007, term expires in 2011) Koos Timmermans graduated from Erasmus University Rotterdam with a master’s degree in economics. Until 1991 he worked at ABN AMRO in the field of derivatives and for IBM’s European treasury he was stationed in Ireland. Koos Timmermans joined ING in 1996. He performed various roles: head of Treasury ING Insurance, head of Corporate Market Risk Management and from 2006 to 2007 he was deputy chief risk officer of ING Group, until his appointment to the Executive Board. Koos Timmermans is responsible for ING’s risk departments including compliance.
Board and the General Meeting. The responsibility for the management of ING Group is vested in the Executive Board collectively. 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 website of ING Group (www.ing.com).
tRANSACtIONS INvOlvING ACtUAl OR POtENtIAl CONFlICtS OF INtERESt In accordance with the Corporate Governance Code, transactions with members of the Executive Board in which there are significant conflicting interests will be disclosed in the Annual Report. In deviation of the Corporate Governance Code however, this does not apply if (i) disclosure would be against the law; (ii) the confidential, share-price sensitive or competition-sensitive character of the transaction prevents disclosure; and/or (iii) the information is so competition-sensitive that the disclosure could damage the competitive position of ING Group.
INFORMAtION ON MEMBERS OF thE ExECUtIvE BOARd JAN h.M. hOMMEN, ChAIRMAN (FROM 27 APRIl 2009) (Born 1943, Dutch nationality, male; appointed in 2009, term expires in 2013) Jan Hommen graduated with a master’s degree in Business Economics from Tilburg University. He was appointed a member of the Executive Board on 27 April 2009. He is also chairman of the Management Board of ING Bank N.V. and the Management Board
generally accepted corporate governance practice or requirement which is applicable to ING Group as an internationally listed company; the relevant candidate has a structural conflict of interest • with ING Group; and the Dutch central bank refuses to issue a statement of ‘no • objection’ against the appointment of the relevant candidate.
SUPERvISORy BOARd APPOINtMENt ANd dISMISSAl Members of the Supervisory Board are appointed by the General Meeting from a binding list to be drawn up by the Supervisory Board. Pursuant to the Dutch Civil Code, this list is to contain at least two candidates for each vacancy, and if not, the list will be non-binding. With respect to the second candidate, ING Group’s policy is to propose retired senior managers or other high-ranking officers who, in view of the forthcoming abolition of this requirement, do not have to meet the independency requirements of the Corporate Governance Code or the requirements of the Supervisory Board Profile. The list will also be non-binding pursuant to a resolution to that effect of the General Meeting adopted by an absolute majority of the votes cast which majority represents more than one-third of the issued share capital. Candidates for appointment to the Supervisory Board must comply with the reliability requirements set out in the Dutch Financial Supervision Act.
Members of the Supervisory Board may be suspended or dismissed at any time by a majority resolution of the General Meeting. A resolution to suspend or dismiss members of the Supervisory Board which has not been brought forward by the Supervisory Board may only be adopted by the General Meeting by an absolute majority of the votes cast which majority represents more than one-third of the issued share capital.
In connection with the issue of the Securities to the Dutch State, ING Group and the Dutch State agreed that the Dutch State may recommend candidates for appointment to the Supervisory Board in such a way that upon appointment of all recommended candidates by the General Meeting, the Supervisory Board would comprise two State Nominees among its members. The Dutch State may recommend a Supervisory Board member already in office. The recommendation right of the Dutch State is subject to applicable law and to corporate governance practices, generally accepted under stock listing regimes applicable to ING Group and continues as long as the Dutch State holds at least 250 million Securities, as long as the IABF continues or any of the Bonds is outstanding. Should the holding of the Dutch State decrease below 250 million Securities, and both the IABF and the Bonds have expired, the State Nominees will remain in office and complete their term of appointment.
In case of a conflict of interest, the relevant member of the Supervisory Board is, as the Corporate Governance Code recommends, to abstain from discussions and decision-making on the topic or the transaction in relation to which he or she has a conflict of interest with ING Group.
tRANSACtIONS INvOlvING ACtUAl OR POtENtIAl CONFlICtS OF INtERESt In accordance with the Corporate Governance Code, transactions with members of the Supervisory Board in which there are significant conflicting interests will be disclosed in the Annual Report. In deviation of the Corporate Governance Code however, this does not apply if (i) disclosure would be against the law; (ii) the confidential, share-price sensitive or competition-sensitive character of the transaction prevents disclosure; and/or (iii) the information is so competition-sensitive that disclosure could damage the competitive position of ING Group.
INdEPENdENCE Annually, the members of the Supervisory Board are requested to assess whether the criteria of dependence set out in the Corporate Governance Code do not apply to them and to confirm this in writing. On the basis of these criteria, all members of the Supervisory Board are to be regarded as independent on 31 December 2009, except Piet Hoogendoorn because of his position with Deloitte Touch Tohmatsu until 1 June 2007 and considering the important business relationship of Deloitte Touche Tohmatsu with ING at that time. Members of the Supervisory Board to whom the independence criteria of the Corporate Governance 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.
g. a proposal to wind up ING Group; h. filing of a petition for bankruptcy or moratorium of ING Group; i. a proposal to reduce the issued capital of ING Group (other than related to the Securities issue); j. a proposal for merger, split-off or dissolution of ING Group; k. a proposal to change ING Group’s remuneration policy; and l. appointment of the chief executive officer of the Executive
The Corporate Governance Committee assists the Supervisory Board in monitoring and evaluating the corporate governance of ING as a whole and the reporting thereon in the Annual Report and to the General Meeting, and advises the Supervisory Board on improvements. On 31 December 2009, the members of the Corporate Governance Committee were: Peter Elverding (chairman), Henk Breukink, Claus Dieter Hoffmann, Harish Manwani, Aman Mehta and Lodewijk de Waal.
JEROEN vAN dER vEER (vICE-ChAIRMAN FROM 1 OCtOBER 2009) (Born 1947, Dutch nationality, male; appointed in 2009, term expires in 2013) Former chief executive officer of Royal Dutch Shell plc. Other business activities: vice-chairman and senior independent director of Unilever N.V., non-executive director of Royal Dutch Shell plc and member of the Supervisory Board of Koninklijke Philips Electronics N.V. (listed companies). Vice-chairman of a NATO Expert Group to work on NATO’s new strategic concept. Member of the Supervisory Board of Het Concertgebouw N.V.
tINEKE (J.) P. BAhlMANN (Born 1950, Dutch nationality, female; appointed in 2009, term expires in 2013) Professor in Business Economics, University of Utrecht. Chairman of the Dutch Media Authority. Other business activities: vice-chairman of the Supervisory Board
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, Risk Committee, the Remuneration Committee, the Nomination Committee and the Corporate Governance Committee. These charters are available on the website of ING Group (www.ing.com). A short description of the duties for the five Committees follows below.
The Supervisory Board has determined that the following members of the Audit Committee are financial experts as referred to in the Corporate Governance Code: Piet Hoogendoorn, Godfried van der Lugt and Jackson Tai. Piet Hoogendoorn has gathered his expertise in the auditing profession, whereas Godfried van der Lugt and Jackson Tai have gathered their experience by serving as executive officers and on the boards of international conglomerates: Piet Hoogendoorn serving as chairman of the Board of Directors of Deloitte Touche Tohmatsu, Godfried van der Lugt serving as CEO of ING Group and Jackson Tai serving as CEO of DBS Bank (Development Bank of Singapore) and managing director in the Investment Banking Division of JP Morgan.
JACKSON P. tAI (Born 1950, American nationality, male; appointed in 2008, term expires in 2012) Former vice-chairman and chief executive officer of DBS Group Holdings. Former managing director in the Investment Banking Division of JP Morgan. Other business activities: non-executive director of each of MasterCard Incorporated, CapitaLand and Cassis International. Non-executive chairman of the Board of Directors of Brookstone, Inc. Member of the Bloomberg Asia Pacific Advisory Board. Trustee of Rensselaer Polytechnic Institute.
KAREl vUURStEEN (UNtIl 27 APRIl 2010) (Born 1941, Dutch nationality, male; appointed in 2002, retirement in 2010) Former chairman of the Executive Board of Heineken N.V.
Other business activities: chairman of the Supervisory Board of of N.V. Nederlandsche Apparatenfabriek ‘Nedap’ (listed company). Member of the Board of Maatschappelijk Verantwoord Ondernemen Nederland (CSR). Chairman of Stichting Max Havelaar. Member of the Board of De Baak Management Centre VNO-NCW. Member of the Board of Trustees of Canisius-Wilhelmina Ziekenhuis (hospital). Member of the Board of Toneelgroep Amsterdam (theatre).
hENK W. BREUKINK (Born 1950, Dutch nationality, male; appointed in 2007, term expires in 2011) Former managing director of F&C and country head for F&C Netherlands (asset management firm). Other business activities: non-executive/vice-chairman of VastNed Offices/Industrial (real estate fund) and non-executive director of F&C hedge funds, Ireland (listed companies). Non-executive director of Heembouw Holding B.V. Chairman of the Supervisory Board of Modulus VastGoed Ontwikkelingen. Member of the Supervisory Board of Omring (health care institution) and HaagWonen (housing corporation). Associated as coach with TEC (Top Executive Coaching).
PIEt C. KlAvER (Born 1945, Dutch nationality, male; appointed in 2006, term expires in 2010) Former chairman of the Executive Board of SHV Holdings N.V. Other business activities: chairman of the Supervisory Board of TNT N.V. (listed company). Chairman of the Supervisory Board of each of Dekker Hout Groep B.V., Jaarbeurs Holding B.V. and Credit Yard Financial Services B.V. Member of the Supervisory Board of SHV Holdings N.V. and of Dura Vermeer Groep N.V. Member of the African Parks Foundation. Chairman of the Supervisory Board of Utrecht School of the Arts.
ChANGE OF CONtROl ClAUSES IN MAtERIAl AGREEMENtS ING Group is not a party to any material agreement that becomes effective or is to be amended or terminated, subject to the condition of a change of control of ING Group following a public bid as defined in section 5:70 of the Dutch Financial Supervision Act. ING Group subsidiaries may have customary change of control arrangements included in agreements related to various business activities, such as joint venture agreements, letters of credit and other credit facilities, reinsurance agreements and futures and option trading agreements. Following a change of control of ING Group (as the result of a public bid or otherwise), such agreements may be amended or terminated, leading, for example, to an obligatory transfer of the interest in the joint venture, early repayment of amounts due, loss of credit facilities or reinsurance cover and liquidation of outstanding futures and option trading positions.
AMENdMENt OF thE ARtIClES OF ASSOCIAtION The General Meeting may resolve to amend the Articles of Association, provided the resolution is adopted on a proposal of the Executive Board which has been approved by the Supervisory Board. Such a resolution of the General Meeting requires a majority of at least two-thirds of the votes cast at a general meeting at which at least two-thirds of the issued share capital is represented. An amendment has to be passed by notarial deed, and this in turn requires a declaration of no objection to be issued by the Minister of Justice.
ExtERNAl AUdItOR At the General Meeting on 22 April 2008, Ernst & Young was appointed to audit the financial statements of ING Group for the financial years 2008 to 2011 inclusive, to report on the outcome of these audits to the Executive Board and the Supervisory Board and to provide an audit opinion on the financial statements of ING Group. Furthermore, Ernst & Young also audited and reported on the effectiveness of internal control over financial reporting on 31 December 2009.
After a maximum period of five years of performing the financial audit of ING Group or ING Verzekeringen N.V. or ING Bank N.V., the lead audit partners of the external audit firm and the audit partners responsible for reviewing the audits, have to be replaced by other partners of the external audit firm. The Audit Committee provides recommendations to the Supervisory Board regarding
Akzo Nobel N.V. and of TomTom N.V. and member of the Supervisory Board of Henkel KGaA (listed companies). Member of the Board of Directors of Heineken Holding N.V. Chairman of the Concertgebouw Fund Foundation. Member of the Supervisory Board of Nyenrode Foundation.
ChANGES IN thE COMPOSItION In April 2009 the General Meeting appointed Tineke Bahlmann, Jeroen van der Veer and Lodewijk de Waal to the Supervisory Board. Tineke Bahlmann and Lodewijk de Waal were recommended as State Nominees. Their appointments became effective on 27 April 2009. The appointment of Jeroen van der Veer became effective as of 1 July 2009. As a State Nominee, Tineke Bahlmann replaced Peter Elverding who succeeded Jan Hommen as chairman of the Supervisory Board.
Piet Hoogendoorn, Harish Manwani and Karel Vuursteen have decided to retire from the Supervisory Board at the end of the 2010 annual General Meeting. At the same meeting, Piet Klaver will be nominated for reappointment.
The external auditor may be questioned at the annual general meeting in relation to their audit opinion on the annual accounts. The external auditor will therefore attend and be entitled to address this meeting.
During the 2009 reporting year, the board of ING Trust Office (the ‘Board’) held eight meetings.
On 9 April 2009, the Board held a meeting to discuss, among other things, the composition of the Board and the agreement regarding reimbursement of costs between ING Trust Office and ING Group. During this meeting, the Board also adopted the 2008 balance sheet and statement of income and expenditure of ING Trust Office and prepared for the AGM.
The following report is issued in compliance with the provisions of article 15 of the Trust Conditions for registered shares in the share capital of ING Groep N.V. and best practice provision IV.2.6 of the Dutch Corporate Governance Code.
and made a statement on how it proposed to vote, where desired. ING Trust Office granted proxies to holders of depositary receipts who attended the AGM and/or the EGM in person or who were represented by a third party, to vote at their own discretion on a number of shares equal to the number of depositary receipts held by the relevant holder of depositary receipts on the record date, with due observance of the Articles of Association and the Trust Conditions for registered shares in the share capital of ING Group (the ‘Trust Conditions’).
Holders of depositary receipts who did not attend the AGM and/or the EGM in person or who were not represented by a third party, were entitled to give binding voting instructions to ING Trust Office for a number of shares equal to the number of depositary receipts held by the relevant holder of depositary receipts on the record date.
ING Trust Office indicated earlier that abolishing depositary receipts would be considered when the turnout at the general meeting of ING Group reached a level of at least 35% of the votes that may be cast on ordinary shares for three consecutive years. The threshold of 35% was exceeded at the annual General Meeting in 2007 (36.7%), 2008 (38.7%) and 2009 (35.6%). At the EGM, the level was 31.1%.
On 27 April 2009, the Board convened before the AGM to discuss the proxy voting results and to decide on the initial position of the Board vis-à-vis the items on the agenda of the AGM.
On 30 September 2009, the Board held a meeting to discuss, among other things, the position of ING Trust Office in general and developments in respect of the Class Litigation.
On 26 October 2009, the Board met to discuss the agreement in principle between ING Group and the European Commission, the restructuring plan of ING Group (the ‘Restructuring Plan’) and the rights issue of ING Group (the ‘Rights Issue’), as presented by ING Group on that same date. The general counsel of ING Group was invited to the meeting to give an explanation of these subjects and to answer various questions of the Board. During this same meeting, without the presence of the general counsel, the Board also prepared for the extraordinary General Meeting of ING Group on 25 November 2009 (the ‘EGM’).
On 25 November 2009, the Board convened before the EGM to discuss the proxy voting results and to decide on the initial position of the Board vis-à-vis the items on the agenda of the EGM.
Furthermore, the Board met with the chairman of the Executive Board and the chairman of the Supervisory Board of ING Group on 7 December 2009 to discuss the position of ING Trust Office in general.
The increase came about as follows: Add: conversion of shares into depositary receipts 40,920 issued as a result of the Rights Issue 1,768,412,544 Less: conversion of depositary receipts into shares 19,983
The Board currently consists of: Jan Veraart, chairman, former chairman of the Executive • Board of Hollandsche Beton Groep N.V.; Huib Blaisse, lawyer and partner at Blaisse Advocaten;• Paul Frentrop, head Corporate Governance APG Groep N.V.;• Carel van den Driest, former chairman of the Executive Board • of Koninklijke Vopak N.V.; Herman Hazewinkel, former chairman of the Executive Board • of Koninklijke Volker Wessels Stevin N.V.
A profile and an overview of additional relevant positions held by the members of the Board can be found on the website of ING Trust Office (www.ingtrustoffice.com).
In 2009, the costs of the activities of ING Trust Office amounted to EUR 530,204.84.
According to the Trust Conditions, ING Trust Office may consult holders of depositary receipts in a separate meeting if and when it considers this necessary or desirable. This possibility has not been used. Where appropriate, the Board will consider whether a meeting of holders of depositary receipts will have added value next to the general meetings of ING Group.
In 2009 the Board of ING Continuity Foundation (the ‘Board’) held three meetings, namely on 9 April, 29 October and 2 December.
The composition of the Board is currently as follows: Bas Kortmann, chairman of the Board, Allard Metzelaar and Wim van Vonno, who was reappointed as of 1 July 2009. Peter Wakkie stepped down as a member of the Board as of 31 March 2009.
Stichting Continuïteit ING, a foundation organised under the laws of the Netherlands, established in Amsterdam, was founded on 22 January 1991. By amendment of the Articles of Association on 23 June 2003, the former name ‘Stichting Cumulatief Preferente Aandelen ING Groep’ was changed into Stichting Continuïteit ING (‘ING Continuity Foundation’).
CONFORMIty StAtEMENt PURSUANt tO SECtION 5:25C PARAGRAPh 2(C) OF thE dUtCh FINANCIAl SUPERvISION ACt (Wet op het financieel toezicht)
Our internal control over financial reporting includes those policies and procedures that: pertain to the maintenance of records that, in reasonable detail, • accurately and fairly reflect the transactions and dispositions of the assets of ING; provide reasonable assurance that transactions are recorded as • necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorisations of our management and directors; and provide reasonable assurance regarding prevention or timely • detection of unauthorised acquisition, use or disposition of our assets that could have a material effect on our financial statements.
The Executive Board assessed the effectiveness of our internal control over financial reporting as of 31 December 2009. In making this assessment, the Executive Board performed tests based on the criteria of the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework. Based on the Executive Board’s assessment and those criteria, the Executive Board concluded that the Company’s internal control over financial reporting is effective as of 31 December 2009.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of ING Groep N.V. as of 31 December 2009, the consolidated profit and loss account, consolidated statement of comprehensive income, consolidated statement of cash flows and consolidated statement of changes in equity for the year then ended. Our report dated 15 March 2010 expressed an unqualified opinion thereon.
tO thE ShAREhOldERS, thE SUPERvISORy BOARd ANd thE ExECUtIvE BOARd OF ING GROEP N.v.
We have audited ING Groep N.V.’s internal control over financial reporting as of 31 December 2009, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). ING Groep N.V.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of the Executive Board on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
PROPOSEd NEW REMUNERAtION In the public debate on the causes of the financial crisis, a lot of attention is given to remuneration practices in the financial sector. Regulators and financial authorities worldwide responded by issuing a significant number of guidelines on remuneration. In the Netherlands, the banking sector itself, including ING, played a proactive role in this respect by developing the new Dutch Banking Code. The Dutch Banking Code contains, amongst other things, principles on remuneration.
It is of utmost importance that the remuneration policy of ING strikes a balance between interests of its customers, employees, shareholders and society at large, and supports the long-term objectives of the company. This is all the more true in the presentday environment, as the financial crisis has shifted the focus on these interests, drawing even more focus to the public utility function of financial institutions and their responsibilities towards their stakeholders. ING is well aware of the pivotal role that banks and insurance companies play in society.
The globally changing views on remuneration policies have amplified the call upon financial institutions to develop more moderate remuneration policies with an increased emphasis on long-term value creation and performance measurement based on non-financial indicators. Against this backdrop, we considered it our responsibility to evaluate our remuneration policy. Based on this evaluation and taking into account the principles of the Dutch Banking Code, we have developed a new remuneration policy for the Executive Board and senior management. Along this process, both national and international standards with respect to remuneration were taken into account and various relevant stakeholders, including the Central Works Council, Dutch trade unions and the Dutch government, were consulted.
General principles of new remuneration structure Even though ING traditionally has had a conservative approach with regard to the remuneration of its management and employees, as evidenced by the fact that it has always aimed for compensation levels at the median level in the relevant markets, the new remuneration structure provides for a number amendments. The general principles which underlie the proposed amendments are as follows: Create a more balanced compensation mix; • Reduce emphasis on variable compensation;• Further enhance long-term value creation; • Further improve the alignment of risk and reward; • Place a more significant weighting on non-financial, • sustainable performance indicators; and Include claw-back arrangements.•
This section sets out the remuneration for the Executive Board and the Supervisory Board. In 2009, the Remuneration Committee of the Supervisory Board undertook a comprehensive review of the remuneration policy for the Executive Board. The Remuneration Committee proposed a new remuneration policy, which was adopted by the full Supervisory Board. The first part of this Remuneration report explains the proposed new remuneration policy to be effective from 1 January 2010, which will be submitted for shareholder approval at the annual General Meeting on 27 April 2010. The Remuneration report also provides an outline of how the Remuneration Committee is applying the new policy in 2010. The final part of the Remuneration report provides information on the remuneration paid for 2009. In addition, information is included on loans and advances to the Executive Board and Supervisory Board members as well as ING depositary receipts for shares held by members of both Boards.
The primary objective of the remuneration structure is to enable ING to retain and recruit qualified and expert leaders who have a drive for excellence in serving the interests of the company’s various stakeholders. ING endeavours to match compensation of the company’s leadership appropriately against a variety of factors, such as the complexity of functions, the scope of responsibilities, the alignment of risks and rewards, and the long-term objectives of the company and its stakeholders, which is all the more important given the changing international standards regarding responsible remuneration. These factors differ for each role, line of business and country. This is especially the case for ING with its operations in over 40 countries and 107,000 employees of which around 80,000 are based outside the Netherlands (60% of senior management is non-Dutch). As much as possible for a global financial institution of this size, ING aims to take account of all these differences and also of the standards applied within similar financial institutions in the various countries in which it operates.
In addition, the new remuneration policy provides for a more balanced mix between fixed and variable compensation. Variable compensation will not exceed 100% of fixed salary at the time of allocation. Fixed compensation (i.e. the base salary levels) will be determined in line with the relevant market environment as an integral part of total direct compensation, and will be reviewed from time to time by the Supervisory Board. The new policy provides for an at target variable compensation of 40% in cash and 40% in stock (in total 80%) of base salary if performance criteria are met. If performance criteria (as pre-determined by the Supervisory Board) are exceeded, the variable component can be increased from target to maximum, not exceeding 100% of base salary at the time of allocation.
Increased emphasis on long-term value creation The new remuneration policy for the Executive Board simplifies the variable compensation element by combining the short and long-term variable components into one structure. This structure intends to support both long-term value creation and short-term company objectives. The emphasis on long-term performance indicators within the variable component of the compensation package will be increased by means of deferral, a reasonableness test and claw-back mechanisms.
The stock awards will vest on the third anniversary of the grant date, subject to a reasonableness test by the Supervisory Board to determine whether application of the predetermined criteria results in undesired outcomes. Adjustments to the number of shares will only be considered in extraordinary circumstances. Executive Board members are not allowed to sell depositary receipts obtained within a period of five years from the grant date. However, they are allowed to sell part of their depositary receipts at the date of vesting to pay tax over the vested share award.
Any person who will be appointed as a member of the Executive Board of ING after 1 January 2010 and who is working on a Dutch employment contract, will be given the choice to participate in one of the two new pension plans. Individual board members participating in the existing pension plan will be given the choice to keep their existing pension arrangement. The existing pension arrangement, approved by the 2006 General Meeting, is based on a defined contribution plan. Alternatively, they can also switch to one of the two new arrangements.
Employment contracts The contract of employment for Executive Board members provides for an appointment for a period of four years and allows for reappointment by the General Meeting. In the case of an involuntary exit, Executive Board members are entitled to an exit arrangement limited to one-year base salary.
Supervisory Board discretion to review the policy and the remuneration paid ING as a company is expected to undergo significant changes during the next two years. Moreover, the relevant international employment market is very much in flux. In order to ensure that ING can adapt to these two uncertain factors, the Supervisory Board will evaluate in 2012 whether the new remuneration policy (adopted in 2010) is in line with the long term objectives of the company, the relevant international context, as well as the societal perception of ING as a company. Should it become clear, after such evaluation, that the new remuneration policy has led to an unintended or inequitable outcome, the Supervisory Board, including its state-nominated members, will have the discretion to correct the previously allocated variable remuneration. However, it is understood that any such correction could not lead to a deviation from the requirement that variable compensation cannot exceed 100% of base salary during any year, as required under the Dutch Banking Code.
The proposed remuneration policy is leading in the international financial markets in terms of moderation of pay. The Supervisory Board and the Executive Board also have an obligation to safeguard the continuity of the company. The Supervisory Board will therefore evaluate from time to time how these two responsibilities relate to each other. If and when appropriate, it can make adjustments.
Under the current circumstances, the Supervisory Board does not deem such an increase of the base salary appropriate. It has thus determined that for the year 2010 the increase of base salary levels should be limited to 13% for the members of the Executive Board with the exception of the CEO position. This 13% increase is in accordance with the cumulative increases received by employees subject to ING’s Collective Labour Agreement in the Netherlands over the last seven years minus the modest rate of increase that has applied to the base salaries of ING’s Executive Board members over the same period (only 5%). For the CEO position it was decided not to increase the base salary at all. The 2010 base salary for members of the Executive Board amounts to EUR 750,000 and for the CEO EUR 1,353,500.
Comparison of current and new 2010 remuneration chief executive officer (CEO) in EUR Current New policy Change
Variable remuneration – at target 200% 2,707,000 80% 1,082,800 –60% Variable remuneration – at maximum 350% 4,737,250 100% 1,353,500 –71% Total remuneration – at target 4,060,500 2,436,300 –40% Total remuneration – at maximum 6,090,750 2,707,000 –56%
Type of variable compensation cash + shares/options cash + shares Allows for discretionary adjustment of variable remuneration no yes Allows for ‘claw back’ of variable remuneration no yes Maximum severance payment one-year base salary one-year base salary
Variable remuneration – at maximum 1,353,500 4,455,000 –70% total remuneration – at maximum 2,707,000 5,555,000 –51% Other Executive Board members
Variable remuneration – at maximum 750,000 2,060,250 –63% total remuneration – at maximum 1,500,000 2,730,250 –45%
The remuneration policy for the Executive Board will apply in full to members of the Management Board Banking. For senior management in Banking, there will be a gradual shift over the next three years to a more balanced mix between fixed salary and variable pay in line with the remuneration policy for the Executive Board. Exceptions may exist for high value specialists and senior management working in certain divisions and/or geographical areas. For the Management Board Insurance and senior management in our insurance operations, adjustments will be made in line with the general principles of the new remuneration policy for the Executive Board. However, changes in the mix between fixed salary and variable pay will need to be weighted in light of the different regulatory requirements for insurance and the upcoming separation of ING’s banking and insurance activities.
Moreover, compensation packages related to control functions (such as risk management functions) will be structured such that they provide for a reduced emphasis on variable compensation. To ensure the autonomy of the individual, financial performance metrics will depend on objectives determined at the divisional level (i.e. not at the level of the relevant business unit). In addition, performance assessments will not only be determined by business unit management, but also by the functional line.
2009 REMUNERAtION CURRENt GENERAl POlICy SENIOR MANAGEMENt REMUNERAtION Background The prime objective of the remuneration policy is to enable the Company to recruit and retain qualified and expert leaders. The remuneration package supports a performance-driven culture for excellence 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.
Remuneration structure Total compensation throughout ING consists of three basic components: Fixed or base salary which represents the total guaranteed • annual income. Short-term incentive (STI) in cash, which compensates for • past performance measured over one year. Long-term incentive (LTI) in stock options and/or performance • shares, which compensates for performance measured over multiple years and is forward-looking.
as of 1 June 2009. However, their current employment contracts with ING Groep N.V. continued to remain in effect in 2009.
Executive Board base salary 2009 The base salary of all Executive Board members has been frozen for 2009.
Executive Board short-term incentive plan 2009 Under the terms of the agreement reached with the Dutch State on an Illiquid Assets Back-up Facility, the individual Executive Board members will not receive a 2009 STI payout.
Executive Board long-term incentive plan 2009 Under the terms of the agreement reached with the Dutch State on an Illiquid Assets Back-up Facility, the individual Executive Board members will not receive a 2009 LTI grant.
Tom McInerney is entitled to receive a conditional share award on the same grant date as the other long-term incentive awards. The conditional share award would 100% vest four years after the grant date with the condition being an active employment contract at the date of vesting. This award is part of Tom McInerney’s employment contract to align his total remuneration with the market practice of senior executives in the US. Tom McInerney will not be awarded a conditional share award in 2010 for the 2009 performance year.
Patrick Flynn received a ‘buyout’ for the loss of compensation which he would have received at his previous employer had he not resigned. This buyout consists of a conditional grant of restricted stock to a maximum of 100,000 shares. A number of 30,000 shares will vest at the annual General Meeting in 2010, another 30,000 shares will vest at the annual General Meeting in 2011 and the remaining 40,000 shares will vest at the annual General Meeting in 2012, subject to satisfactory performance. The cumulative value of the conditional share award is capped at EUR 1.3 million. ING has amended the number of shares to adjust for the effects of the rights issue, while maintaining the cumulative value cap at EUR 1.3 million. The first vesting in the amount of 39,069 shares (30,000 adjusted for the effects of the rights issue) will occur on 27 April 2010.
long-term incentives awarded in previous years The long-term incentive plan (LTIP) at ING includes both stock options and performance shares. The ING stock options have a total term of ten years and a vesting period of three years after which they can be exercised for the remaining seven years.
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 performance shares granted in 2007 had a three-year performance period of 2007–2009 and will
Jan hommen (1) Jan Hommen was appointed to the Executive Board on 27 April 2009. Jan Hommen shall be remunerated as of 27 April 2009 in accordance with the ‘new’ remuneration policy to be adopted by the General Meeting in 2010. The annual fixed salary will be determined in accordance with this policy. An amount, based on an annual base salary of EUR 1,353,500, has been accrued in 2009 in anticipation of adoption of the ‘new’ remuneration policy by the General Meeting. Jan Hommen will not receive a short-term cash bonus or long-term incentive for 2009.
(3) Koos Timmermans and John Hele were appointed to the Executive Board on 24 April 2007. The figures for these members reflect compensation earned in their capacity as Executive Board members. Thus, the figures for 2007 reflect the partial year as Executive Board members.
(6) Michel Tilmant stepped down from his position on the Executive Board on 26 January 2009 and retired on 1 August 2009. The figures for this member reflect compensation earned until 1 August 2009. In addition to his base salary, Michel Tilmant received early retirement benefits calculated on the basis of one year’s base salary.
(7) John Hele stepped down from his position on the Executive Board on 31 March 2009. The figures for this member reflect compensation earned until the last day of employment. Thus, the figures for 2009 reflect the partial year.
Base salary 454 Short-term performance related bonus 0 Total cash compensation 454
Koos timmermans(3) Base salary 665 665 423 Short-term performance related bonus 0 0 637 Total cash compensation 665 665 1,060
Short-term performance related bonus 0 0 1,319 Total cash compensation 372 892 2,169 dick harryvan(4)
Short-term performance related bonus 0 0 842 Total cash compensation 277 665 1,476
The Executive Board members are not allowed to sell depositary receipts obtained through performance shares under the plan within a period of five years from the grant date. They are only allowed to sell part of their depositary receipts at the date of vesting to pay tax over the vested performance-share award. Depositary receipts obtained from exercised stock options may only be sold within a period of five years from the grant date of the options to pay tax over the exercised award.
Short-term performance related bonus 0 0 2,001 Total cash compensation 789 1,353 3,290
The following tables reflect the number of options (and adjusted strike prices of these options) and the number of performance shares, adjusted for the effects of the rights issue.
(4) Patrick Flynn received a ‘buyout’ for the loss of compensation which he would have received at his previous employer had he not resigned. This buyout consists of a conditional grant of restricted stock to a maximum of 100,000 shares. A number of 30,000 shares will vest at the annual General Meeting in 2010, another 30,000 shares will vest at the annual General Meeting in 2011 and the remaining 40,000 shares will vest at the annual General Meeting in 2012, subject to satisfactory performance. The cumulative value of the conditional share award is capped at EUR 1.3 million. ING has amended the number of shares to adjust for the effects of the rights offering, while maintaining the cumulative value cap at EUR 1.3 million.
Number of options 0 Number of performance shares 0 Fair market value of long-term incentive (3) 0
Eli leenaars Number of options 0 0 84,606 Number of performance shares 0 0 20,050 Fair market value of long-term incentive (3) 0 0 748 tom McInerney (6)
Number of options 0 0 126,159 Number of performance shares 0 0 29,897 Number of conditional shares 0 0 70,730 Fair market value of long-term incentive (3) 0 0 2,571 hans van der Noordaa Number of options 0 0 84,606 Number of performance shares 0 0 20,050 Fair market value of long-term incentive (3) 0 0 748
Jacques de vaucleroy Number of options 0 0 84,606 Number of perf ormance shares 0 0 20,050 Fair market value of long-term incentive (3) 0 0 748
Michel tilmant Number of options 0 0 171,973 Number of performance shares 0 0 40,753 Fair market value of long-term incentive (3) 0 0 1,521
The fair market value of long-term incentive awards of former members of the Executive Board who are not included in the above table amounted to nil 2009, 2008 and 2007.
(2) Jan Hommen does not participate in the pension plan. (3) Patrick Flynn was appointed to the Executive Board on 27 April 2009. The 2009 pension costs for this member reflect the partial year as Executive Board member.
(5) Eric Boyer de la Giroday, Dick Harryvan, Eli Leenaars, Tom McInerney, Hans van der Noordaa and Jacques de Vaucleroy no longer serve on the Executive Board of ING Groep N.V. as of 1 June 2009. The figures for these members reflect pension costs in their capacity as Executive Board members. Thus, the figures for 2009 reflect the partial year as Executive Board members.
(7) Michel Tilmant stepped down from his position on the Executive Board on 26 January 2009 and retired on 1 August 2009. The figure for this member reflects pension costs until 31 July 2009.
(8) John Hele stepped down from his position on the Executive Board on 31 March 2009. The figure for this member reflects pension costs until the last day of employment. Thus, the figure for 2009 reflects the partial year.
ING depositary receipts for shares held by members of the Executive Board number of shares 2009 2008 2007
REMUNERAtION SUPERvISORy BOARd Remuneration The annual remuneration of the Supervisory Board members amounts to: chairman EUR 75,000, vice-chairman EUR 65,000, other members EUR 45,000. In addition to the remuneration each member receives an expense allowance. For the chairman and vice-chairman the annual amount is EUR 6,810. For the other members the amount is EUR 2,270.
Compensation of the members of the Supervisory Board amounts in thousands of euros 2009 2008 2007
(2) Jeroen van der Veer is a member of the Supervisory Board as of July 2009. The compensation figure for 2009 reflects the partial year as member of the Supervisory Board. Jeroen van der Veer has been vice-chairman of the Supervisory Board since October 2009.
(4) Henk Breukink is a member of the Supervisory Board as of April 2007. The compensation figure for 2007 reflects the partial year as member of the Supervisory Board.
(6) Harish Manwani, Aman Mehta, Joan Spero and Jackson Tai are members of the Supervisory Board as of April 2008. The compensation figures for 2008 reflect the partial year as members of the Supervisory Board.
(8) Jan Hommen was a member of the Supervisory Board as of June 2005 and chairman as of January 2008. He stepped down from the Supervisory Board as of April 2009. The compensation figure for 2009 reflects the partial year as member of the Supervisory Board.
(10) Wim Kok retired in April 2009. The compensation figure for 2009 reflects the partial year as member of the Supervisory Board.
meeting and for its members EUR 1,500. For the chairman and members of other committees the attendance fee amounts to EUR 450 per meeting. The remuneration and the attendance fee for the membership of a committee are not applicable to the chairman and vice-chairman of the Supervisory Board if they are on one of the committees.
The table below shows the remuneration, expense allowances and attendance fees per Supervisory Board member for 2009 and previous years.
loans and advances to Supervisory Board members Supervisory Board members may obtain banking and insurance services from ING Group subsidiaries in the ordinary course of their business and on terms that are customary in the sector. The table below presents the loans and advances to Supervisory Board members outstanding on 31 December 2009, 2008 and 2007.
loans and advances to members of the Supervisory Board Amount outstanding 31 December
Jeroen van der Veer (1) 282 8.6% (1) The amount reflects a housing mortgage loan granted in 1992, well before
ING depositary receipts for shares and options held by members of the Supervisory Board (1)
Mathieu Blondeel, chairman, Belgium Marcel Koopman, secretary, the Netherlands Norbert Lucas, deputy chairman, Germany Gerlinde Korterink, deputy secretary, the Netherlands Werner Fözö, Austria Jean-Claude Van Den Abeele, Leo D Antuono, Jean Pierre Lambert, Belgium Kaloyan Marinov, Bulgaria Vladimir Koudela, Czech Republic Mourad Benzaaza, France Carolin Simonis, Germany Nikolaos Ploumis, Greece Csilla Dobos, Hungary Anna Adinolfi, Italy Arsène Kihm, Luxembourg Bernard Bodt, Ron Brands, Jeffrey Dinsbach, Thea van der Heide, Maarten Kramer, Robert Milewski, Gerrit Riphagen, Bernard Wempe, Jelte Wiersinga, the Netherlands Mieczyslaw Bielawski, Mariusz Cieslik, Jakub Dzianowicz, Poland Mihai Ailincai, Roxana Florescu, Romania Miguel Angel Hernandez, Araceli Rodriguez, Spain Sam Chaudhuri, Rina Goldenberg, UK.
EQUIty Shareholders’ equity (parent) 13 33,863 17,334 Non-voting equity securities 13 5,000 10,000
Debt securities in issue 15 119,981 96,488 Other borrowed funds 16 23,151 31,198 Insurance and investment contracts 17 240,858 240,790 Amounts due to banks 18 84,235 152,265 Customer deposits and other funds on deposit 19 469,508 522,783 Financial liabilities at fair value through profit and loss 20 – trading liabilities 98,245 152,616 – non-trading derivatives 20,070 21,773 – designated as at fair value through profit and loss 11,474 14,009 Liabilities held for sale 11 4,890 15,020
References relate to the notes starting on page 113. These form an integral part of the consolidated annual accounts.
Interest income banking operations 79,850 97,011 76,749 Interest expense banking operations –67,475 –85,969 –67,773 Interest result banking operations 35 12,375 11,042 8,976
Valuation results on non-trading derivatives 40 –4,676 2,300 –561 Net trading income 41 1,125 –749 1,119 Share of profit from associates 6 –461 –404 740
Addition to loan loss provisions 5 2,973 1,280 125 Intangible amortisation and other impairments 44 568 464 15
References relate to the notes starting on page 177. These form an integral part of the consolidated annual accounts.
Comprehensive income attributable to: Equity-holders of the parent 9,665 –14,703 3,746 Minority interests –131 –242 217
The Unrealised revaluations after taxation comprises EUR 15 million (2008: EUR 218 million; 2007: EUR –183 million) related to the share of other comprehensive income of associates.
Reference is made to Note 21 ‘Other liabilities’ for the disclosure on the income tax effects on each component of the comprehensive income except for the component Net result which is disclosed in the Consolidated profit and loss account.
Consolidated statement of comprehensive income of ING Group for the years ended 31 December
Result before tax –1,525 –1,487 11,043 Adjusted for: – depreciation 1,701 1,492 1,382 – deferred acquisition costs and value of business acquired –1,131 –444 –1,338 – increase in provisions for insurance and investment contracts 3,829 16,363 26,494 – addition to loan loss provisions 2,973 1,280 125
Taxation paid –412 –49 –1,347 Changes in: – amounts due from banks, not available on demand 8,611 7,162 –8,690
– available-for-sale investments 167,075 225,539 281,198 – held-to-maturity investments 1,675 1,640 822 – real estate investments 656 415 309 – property and equipment 82 137 151 – assets subject to operating leases 93 428 417 – investments for risk of policyholders 64,158 59,251 47,136
(1) 2007 and 2008 include dividends paid on ordinary shares. 2009 includes payments on non-voting equity securities (payment of the 2008 coupon of EUR 425 million, the repayment premium of EUR 346 million and the coupon in the repayment of EUR 259 million).
References relate to the notes starting on page 194. These form an integral part of the consolidated annual accounts.
Consolidated statement of changes in equity of ING Group for the years ended 31 December
Issuance costs incurred –222 –222 –222 Employee stock option and share plans 64 64 64 Repayment of non-voting equity securities –5,000 –5,000 Changes in the composition of the group –546 –546 Dividend and repayment premium (4) –605 –605 –2 –607 Proceeds from rights issue 424 7,074 7,498 7,498 Purchase/sale of treasury shares 129 129 129
(4) The 2009 amount of EUR 605 million includes the coupon (EUR 259 million) and repayment premium (EUR 346 million) on the repayment of EUR 5 billion non-voting equity securities.
BASIS OF PRESENtAtION ING Group applies International Financial Reporting Standards as adopted by the European Union (‘EU’).
None of these recently issued or amended standards and interpretations has had a material effect on equity or result for the year. The implementation of the Amendment to IFRS 7 ‘Improving Disclosures about Financial Instruments’ had a significant impact on the disclosure of ‘Methods applied in determining fair values of financial assets and liabilities’ (the three-level fair value hierarchy). Further information is provided in Note 34 ‘Fair value of financial assets and liabilities’.
Furthermore, in 2009 IFRS 9 ‘Financial Instruments’ was issued, which is effective as of 2013. However, this standard was not yet endorsed by the EU and, therefore, is not yet part of IFRS-EU. Implementation of IFRS 9 – if and when endorsed by the EU – may have a significant impact on equity and/or result of ING Group.
International Financial Reporting Standards as adopted by the EU provide several options in accounting policies. ING Group’s accounting policies under these standards and its decision on the options available, are set out in the section ‘Principles of valuation and determination of results’ below.
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, the loan loss provision, the determination of the fair values of real estate and financial assets and liabilities, impairments 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 (dAC) ANd vAlUE OF BUSINESS ACQUIREd (vOBA) The establishment of insurance provisions, DAC and VOBA is an inherently uncertain process, involving assumptions about factors such as court decisions, changes in laws, social, economic and demographic trends, inflation, investment returns, policyholder behaviour and other factors, and, in the life insurance business, assumptions concerning mortality and morbidity trends. Specifically, significant assumptions related to these items that could have a material impact on financial results include interest rates, mortality, morbidity, property and casualty claims, investment yields on equity and real estate, foreign currency exchange rates and reserve adequacy assumptions.
FAIR vAlUES OF FINANCIAl ASSEtS ANd lIABIlItIES Fair values of financial assets and liabilities are determined using quoted market prices where available. Such quoted market prices are primarily obtained from exchange prices for listed instruments. Where an exchange price is not available, market prices may be obtained from independent market vendors, brokers or market makers. In general, positions are valued taking the bid price for a long position and the offer price for a short position. In some cases where positions are marked at mid-market prices, a fair value adjustment is calculated.
Reference is made to Note 34 ‘Fair value of financial assets and liabilities’ for the basis of the determination of the fair value of financial instruments and related sensitivities.
Impairments on other debt instruments (Loans and held-to-maturity investments) are part of the loan loss provision as described above. Impairment reviews with respect to goodwill and intangible assets are performed at least annually and more frequently if events indicate that impairment may have occurred. Goodwill is tested for impairment by comparing the book value (including goodwill) to the best estimate of the fair value less cost to sell of the reporting unit to which the goodwill has been allocated. A reporting unit is the lowest level at which goodwill is monitored. Intangible assets are tested for impairment by comparing its book value with the best estimate of its recoverable amount.
EMPlOyEE BENEFItS Group companies operate various defined benefit retirement plans covering a significant number of ING’s 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 and losses, and unrecognised past service costs.
The existence and effect of potential voting rights that are currently exercisable or convertible are considered in assessing whether the Group controls another entity. For interests in investment vehicles the existence of control is determined taking into account both ING Group’s financial interests for own risk and its role as investment manager.
ING Group’s interests in jointly controlled entities are accounted for using 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 is attributable to the other venturers. ING Group does not recognise its share of profits or losses from the joint venture that results 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 at the balance sheet date, as well as reported income and expenses for the year. The actual outcome may differ from these estimates.
ANAlySIS OF INSURANCE BUSINESS Where amounts in respect of insurance business are analysed into ‘life’ and ‘non-life’, health and disability insurance business which is similar in nature to life insurance business is included in ‘life’.
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 euros, which is ING Group’s functional and presentation currency.
transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Exchange rate differences resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the profit and loss account, except when deferred in equity as part of qualifying cash flow hedges or qualifying net investment hedges.
Exchange rate differences in the profit and loss account are generally included in Net trading income. Reference is made to Note 41 ‘Net trading income’, which discloses the amounts included in the profit and loss account. Exchange rate differences relating to the disposal of Available-for-sale debt and equity securities are considered to be an inherent part of the capital gains and losses recognised in Investment income. As mentioned in Group companies below any exchange rate differences deferred in equity are recognised in the profit and loss account in Net result on disposals of group companies. Reference is also made to Note 13 ‘Shareholders’ equity (parent)/non-voting equity securities’, which discloses the amounts included in the profit and loss account.
Group companies The results and financial position of all group companies that have a functional currency different from the presentation currency are translated into the presentation currency as follows: Assets and liabilities included in each balance sheet are translated at the closing rate at the date of that balance sheet;• Income and expenses included in each profit and loss account are translated at average exchange rates (unless this average is not a • reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and All resulting exchange rate differences are recognised in a separate component of equity.•
FAIR vAlUES OF FINANCIAl ASSEtS ANd lIABIlItIES The fair values of financial instruments are based on quoted market prices at the balance sheet date where available. The quoted market price used for financial assets held by the Group is the current bid price; the quoted market price used for financial liabilities is the current ask price.
FINANCIAl ASSEtS Recognition of financial assets All purchases and sales of financial assets classified as fair value through profit and loss, held-to-maturity and available-for-sale that require delivery within the time frame established by regulation or market convention (‘regular way’ purchases and sales) are recognised at trade date, which is the date on which the Group commits to purchase or sell the asset. Loans and receivables are recognised at settlement date, which is the date on which the Group receives or delivers the asset.
derecognition of financial assets Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or where the Group has transferred substantially all risks and rewards of ownership. If the Group neither transfers nor retains substantially all the risks and rewards of ownership of a financial asset, it derecognises the financial asset if it no longer has control over the asset. In transfers where control over the asset is retained, the Group continues to recognise the asset to the extent of its continuing involvement. The extent of continuing involvement is determined by the extent to which the Group is exposed to changes in the value of the asset.
ClASSIFICAtION OF FINANCIAl INStRUMENtS Financial assets at fair value through profit and loss Financial assets at fair value through profit and loss include equity securities, debt securities, derivatives, loans and receivables and other, and comprise the following sub-categories: trading assets, non-trading derivatives, financial assets designated at fair value through profit and loss by management and investments for risk of policyholders.
loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are initially recognised at fair value plus transaction costs. Subsequently, they are carried at amortised cost using the effective interest method less any impairment losses. Loans and receivables include: Cash and balances with central banks, Amounts due from banks, Loans and advances to customers and Other assets and are reflected in these balance sheet lines. Interest income from loans and receivables is recognised in Interest income and Investment income in the profit and loss account using the effective interest method.
Credit risk management classification Credit risk management disclosures are provided in the section ‘Risk management’. The relationship between credit risk classifications in that section and the consolidated balance sheet classifications above is explained below: Lending risk arises when ING Group grants a loan to a customer, or issues guarantees on behalf of a customer and mainly relates to the • balance sheet classification Loans and advances to customers and off balance sheet items e.g. obligations under financial guarantees and letters of credit; Investment risk comprises the credit default and migration risk that is associated with ING Group’s investment portfolio and mainly • relates to the balance sheet classification Investments (available-for-sale and held-to-maturity); Money market risk arises when ING Group places short term deposits with a counterparty in order to manage excess liquidity and • among others relates to the balance sheet classifications Amounts due from banks and Loans and advances to customers; Pre-settlement risk arises when a counterparty defaults on a transaction before settlement and ING Group has to replace the contract • by a trade with another counterparty at the then prevailing (possibly unfavourable) market price. The pre-settlement risk classification mainly relates to the balance sheet classification Financial assets at fair value through profit and loss (trading assets and non-trading derivatives) and to securities financing; Settlement risk arises when there is an exchange of value (funds, instruments or commodities) for the same or different value dates and • receipt is not verified or expected until ING Group has paid or delivered its side of the trade. Settlement risk mainly relates to the risk arising on disposal of financial instruments that are classified in the balance sheet as Financial assets at fair value through profit and loss (trading assets and non-trading derivatives) and Investments (available-for-sale and held-to-maturity).
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. An assessment is carried out when the Group first becomes party to the contract. A subsequent reassessment is carried out only when there is a change in the terms of the contract that significantly modifies the expected cash flows.
The method of recognising the resulting fair value gain or loss depends on whether the derivative is designated as a hedging instrument and, if so, the nature of the item being hedged. The Group designates certain derivatives as hedges of the fair value of recognised assets 2.1 Consolidated annual accounts
or liabilities or firm commitments (fair value hedge), hedges of highly probable future cash flows attributable to a recognised asset or liability or a forecast transaction (cash flow hedge), or hedges of a net investment in a foreign operation. Hedge accounting is used for derivatives designated in this way provided certain criteria are met.
IMPAIRMENtS OF lOANS ANd AdvANCES tO CUStOMERS (lOAN lOSS PROvISIONS) ING Group assesses periodically and at each balance sheet date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset, but before the balance sheet date, (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. The following circumstances, among others, are considered objective evidence that a financial asset or group of assets is impaired: The borrower has sought or has been placed in bankruptcy or similar protection and this leads to the avoidance of or delays in • repayment of the financial asset; The borrower has failed in the repayment of principal, interest or fees and the payment failure has remained unsolved for a certain period;• The borrower has demonstrated significant financial difficulty, to the extent that it will have a negative impact on the expected future • cash flows of the financial asset; The credit obligation has been restructured for non-commercial reasons. ING Group has granted concessions, for economic or legal • reasons relating to the borrower’s financial difficulty, the effect of which is a reduction in the expected future cash flows of the financial asset; and Historical experience, updated for current events where necessary, provides evidence that a proportion of a group of assets is impaired • although the related events that represent impairment triggers are not yet captured by the Group’s credit risk systems.
For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics. Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors’ ability to pay all amounts due according to the contractual terms of the assets being evaluated. The collective evaluation of impairment includes the application of a ‘loss confirmation period’ to default probabilities. The loss confirmation period is a concept which recognises that there is a period of time between the emergence of impairment triggers and the point-in-time at which those events are captured by the Group’s credit risk systems. Accordingly, the application of the loss confirmation period ensures that impairments that are incurred but not yet identified are adequately reflected in the Group’s loan loss provision. Although the loss confirmation periods are inherently uncertain, the Group applies estimates to sub-portfolios (e.g. large corporations, small and medium size enterprises and retail portfolios) that reflect factors such as the frequency with which customers in the sub-portfolio disclose credit risk sensitive information and the frequency with which they are subject to review by the Group’s account managers. Generally, the frequency increases in relation to the size of the borrower. Loss confirmation periods are based on historical experience and are validated, and revised where necessary, through regular back-testing to ensure that they reflect recent experience and current events.
Accounting policies for the consolidated balance sheet and profit and loss account of ING Group (continued)