The brand name ING stands for quality in fi nancial services. ING is in the Interbrand top-100 global brands for the third consecutive year, rising to 85 in 2006 from 87 in 2005. In order to raise our brand profi le and bring our brand awareness more in line with our global client reach, we decided to further invest in our brand. For the next three years ING will be the offi cial title sponsor of the ING Renault Formula One team, giving us the strongest platform for increasing our brand awareness globally.
ING continues to offer a solid increase in shareholder return. Amongst our peer group of 20 global fi nancial organisations, we rank second in terms of Total Shareholder Return over the three-year period since 2004. This exceeds our fi nancial objective to offer our shareholders a higher total return than the average of that of our peers over the longer term.
Underlying operating expenses were up 4.9% to EUR 9,032 million, including EUR 164 million in additional compliance-related costs in 2006. ING Direct contributed 2.3%-points to the expense growth of the bank activities. Although the underlying addition to the provision for loan losses increased to EUR 100 million from EUR 69 million in 2005, risk costs were only three basis points of average credit-risk-weighted assets, which is well below the normalised level of 25–30 basis points.
Capital management invested signifi cant effort during 2006 to enhance the management of the free surplus of ING Insurance. Free surplus is a concept in the economic capital context. Free surplus is that part of available fi nancial resources (capital) that exceeds the economic capital employed. Many insurance entities need to hold more capital than economic capital due to regulatory and/or rating agency constraints. However, to the extent free surplus is not constrained, it is free to be employed elsewhere to further organic growth. One of the guiding principles of Capital management is that capital should fl ow up (as internal dividends) as well as down (as capital contributions to growing businesses).
institutional market – EUR 1.75 billion in 10-year fi xed rate and fl oating rate senior bonds due 2016 – EUR 750 million in 5-year fl oating rate senior bonds due 2011
Economic capital break-down by risk category ING Bank in EUR billions 2006 2005
Interest rate and equity sensitivity ING Insurance in EUR millions Impact on ING Insurance Impact on ING Insurance
Underlying operating expenses declined by 3.4%, caused by a 7% drop in the Netherlands due to higher one-off releases of employee benefi t and pension provisions, lower restructuring expenses and staff reductions. Expenses in Belgium and Central and Rest of Europe increased, in the former case due to a release of provisions in 2005 and in the latter case due to investments to support new business initiatives.
On the income side, total underlying premiums decreased slightly to EUR 12,136 million, as higher income in Australia, South Korea and Taiwan was offset by lower single-premium variable annuity (SPVA) sales in Japan. Double-digit growth rates in premium income were recorded in local currency terms in most of Insurance Asia/Pacifi c’s other markets. Assets under management increased by 21.2%, reaching EUR 84.2 billion by year-end 2006. In December 2006, ING completed the acquisition of ABN AMRO’s local asset management business in Taiwan, adding EUR 2.6 billion to total assets under management and making ING the number one asset manager in the local mutual funds industry.
Insurance Asia/Pacifi c provides a good source of growth. Key points
ING is currently the second-largest foreign life insurer in Asia/ Pacifi c, based on annual premium equivalent (APE), which is the sum of regular annual premiums from new business plus 10% of single premiums on new business written during the year. Based on assets under management, ING is the third-largest retail asset manager in Asia excluding Japan. Over the past few years, Insurance Asia/Pacifi c has gained market share in most markets and the region has been ING’s key contributor in terms of VNB, confi rming that our strategy of being in the right markets is paying off.
ING has sizeable equity interests in two banks – Bank of Beijing in China and ING Vysya Bank in India – and has developed joint ventures and partnerships with a large number of other banks and securities houses in the region. For example, the joint venture with Kookmin Bank in South Korea and the partnership with ANZ in Australia and New Zealand have both been very successful. In Japan, the second-largest life insurance market in the world, ING works together with over 30 banks and securities houses. The current number of ING’s bank partners in the region has increased to over 125, with a total distribution network of over 11,400 branches.
Netherlands 760 Belgium 553 Rest of world 607 Other Wholesale Banking –26 ING Real Estate 631 Total 2,525
ING Real Estate ING Real Estate has had another good year of rapid expansion, in large part due to infl ows of third-party money and a sharp improvement in the development business. The organisation topped global rankings for real estate investment managers for the third year in a row. The biggest deal was the acquisition of Summit Real Estate Investment Trust in Canada, adding EUR 2.4 billion to the assets under management. Wholesale Banking and ING Real Estate also formed ING Real Estate Capital Advisors to offer our institutional and corporate clients a range of banking services related to real estate. Please turn to the chapter on Asset management on page 46 for more details and further developments.
Wholesale Banking has also continued to invest in existing core products and in new products that meet the needs of our clients and will contribute to future growth. In the area of Structured Finance, a number of initiatives were introduced to better position our most value-creating businesses. Wholesale Banking has brought together under one global organisation, Trade Financial Services, all of the activities in documentary payments, credit, collections and trade facilities.
Country developments ING Direct’s overall profi t growth was driven mainly by the business units in Germany, UK (which posted profi ts for the fi rst time in the fi rst quarter of 2006), France, Italy and Spain. This refl ects the impact of client rate adjustments in most of these countries and continued strong commercial growth. In the UK, ING Direct saw a slow down of growth in savings after its rate fell below the offi cial interest rate of the Bank of England. ING Direct’s German business unit, ING-DiBa, sold Degussa Bank at the end of 2006, in line with its strategy to focus on its core direct banking activities. Excluding the net loss of EUR 23 million resulting from the divestment of Degussa Bank, ING DiBa’s underlying profi t before tax increased to EUR 339 million from EUR 254 million in 2005. In the US, underlying profi t before tax declined to EUR 85 million from EUR 156 million in 2005, and in Canada to EUR 62 million from EUR 73 million last year, in both cases due to an environment of strong increases in the interest rates for our clients, inverse yield-curve developments and increased competition.
Achievements ING Direct celebrated several key achievements in 2006. The UK added mortgages to its product offering and in the US, Chicago and Atlanta were added to the ING Direct footprint. In the US, a new payment account was successfully launched. ING-DiBa became Germany’s biggest new mortgage provider. In November, Spain expanded its product offering with the launch of fi ve new pension plans.
ING Real Estate Investment Management The objective of the Investment Management division is to maintain superior investment performance and to continue the growth of assets under management while capturing growth opportunities in Asia and Europe.
The ING Real Estate Finance Division made substantial progress in its international diversifi cation strategy, while maintaining market leadership in its home market of the Netherlands. The share of non-Dutch lending rose from 30% to 35%. The division made a strong debut in the securitisation market and increased its activity in the syndication market, in association with ING Wholesale Banking. The Finance division also closed its fi rst lending transactions in Asia.
Ambitions We can look to the future with confi dence. The real estate investment market is globalising, evidenced by the high level of cross-border investment. Just as local investor clients, cross-border investors are served by strong and experienced teams in all key markets. We develop investment products in partnership with our clients as well as build and manage their portfolios.
ING has EUR 600 billion in assets under management that it invests around the globe, of which EUR 195.5 billion are proprietary assets. We have a duty to invest these assets in a responsible manner. We want to ensure that we are able to meet our promises to policyholders in the future, but we also want to avoid investing proprietary assets in companies that engage in activities incompatible with our defence policy or Business Principles.
Composition of the Supervisory Board Aad Jacobs and Paul de Meester retired after the General Meeting of Shareholders in April 2006. In the same meeting Cor Herkströter and Karel Vuursteen were reappointed as members of the Supervisory Board. Piet Klaver was appointed as a new member. All these changes were already reported in the 2005 Annual Report. Aad Jacobs was chairman of the Audit Committee. He was succeeded by Jan Hommen, who was already a member of the Audit Committee. Wim Kok was appointed as a new member of the Audit Committee. Godfried van der Lugt already succeeded Paul de Meester as a member of the Audit Committee in November 2005.
New legislation During 2006, ING worked on new provisions arising from legislative changes, which will give investors a greater opportunity to participate in shareholders’ meetings. Under the new legislation, it will now be possible to set the record date for shareholders’ meetings thirty days (rather than seven days as used to be the case) before the meeting. This enables companies to be better prepared for the meeting and clarifi es for shareholders at an earlier date the number of shares they can vote with. ING will apply the new ruling for the 2007 General Meeting of Shareholders.
Voting rights on shares Each share entitles the holder to cast a vote at the General Meeting of Shareholders. By Dutch law, voting rights are proportional to the nominal value of the shares. This means that by law, each ordinary share (and, when issued, each preference B), having a nominal value of EUR 0.24, gives the right to one vote, while each preference A share (and, when issued, each cumulative preference share), having a nominal value of EUR 1.20, gives the right to fi ve votes. On the other hand, the Tabaksblat Code (section IV.1.4) seems to imply that, if such shares are issued, the voting rights on preference shares issued for fi nancing purposes should be proportional to their stock price. At year-end 2006, the market prices for the ordinary shares and the preference A shares were EUR 33.59 and EUR 3.26, respectively.
Candidates for appointment to the Supervisory Board must comply with the reliability requirements set out in the Wet fi nancieel toezicht (Dutch Financial Supervision Act).
Members of the Supervisory Board may be suspended or dismissed at any time by the General Meeting of Shareholders. A resolution to suspend or dismiss members of the Supervisory Board which has not been brought forward by the Supervisory Board may only be adopted by the General Meeting of Shareholders by an absolute majority of the votes cast that together represent at least one-third of the issued capital.
Independence Annually, the Supervisory Board members are requested to assess whether the criteria of dependence of the Tabaksblat Code do not apply to them and to confi rm this in writing. On the basis of these criteria, all members of the Supervisory Board are to be regarded as independent as of 31 December 2006. Members of the Supervisory Board to whom the dependence criteria of the Tabaksblat Code do not apply and members of the Supervisory Board to whom the criteria do apply but who can explain why this does not undermine their independence, are deemed to be independent.
Audit fees 63 43 Audit-related fees 4 13 Tax fees 4 3 All other fees 3 3
The Board will publish this proposed appointment in accordance with its Constitution and invites depositary receipt holders to provide the board with their comments.
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 2006, the consolidated profi t and loss account, consolidated statement of cash fl ows and consolidated statement of changes in equity for the year then ended. Our report dated 12 March 2007 expressed an unqualifi ed opinion thereon.
In addition to the base salary and incentive plan participation, Executive Board members enjoy benefi ts similar to most other employees of ING Group. These include benefi ts such as private medical insurance, the use of company cars and, if applicable, expatriate allowances.
By combining a profi t, a cost and a return parameter, the overall performance of ING is properly refl ected. Each element is weighted equally to determine the fi nal award. The three performance targets are set by the Supervisory Board at the beginning of the performance period. Under the short-term incentive plan, the actual payout in any year may vary between 0% and 200% of the target level.
(4) Tom McInerney and Fred Hubbell get their compensation in US dollars. For each year the compensation in US dollars has been translated to euros at the average exchange rate for that year.
(3) As a result of Mr. Maas’ retirement from the Executive Board in 2007, he will receive the fair market value of his 2006 long-term incentive award in cash instead of options and performance shares
MEMBERS OF THE SUPERVISORY BOARD Cor Herkströter 75 68 68 Eric Bourdais de Charbonnière(1) 70 65 29 Luella Gross Goldberg 52 44 44 Paul van der Heijden 52 43 44 Claus Dieter Hoffmann 56 49 46
Mathieu Blondeel, chairman, Belgium Mirjam Busse, secretary, the Netherlands Adriana Dumitrescu, deputy chairman, Romania Marcel Koopman, deputy secretary, the Netherlands Jean-Claude Van Den Abeele, Freddy Dekerf, Jean Pierre Lambert, Dirk Verstrepen, Belgium Evetta Mircheva, Bulgaria Marie Martinkova, Czech Republic Sebastien Barthe, Hervé Laurent, France Norbert Lucas, Thomas Meder, Germany Maria Tapini Orianou, Greece Laszlo Szabo, Hungary Alan Maher, Ireland Nicola Cerruti, Salvatore Pecoraro, Italy Arsène Kihm, Denis Richard, Luxembourg Hans van den Brink, Wim Evers, Bas Hofstee, Gerlinde Korterink, Maarten Kramer, André Schat, Michel Tromp, Paul Zoet, the Netherlands Mieczyslaw Bielawski, Mariusz Cieslik, Jaroslaw Szczesny, Poland Miriam Rosenbergová, Slovakia Gregorio Tejedor Mingo, Spain Thomas Wipf, Switzerland Courtney Ruesch, Mike Sharman, United Kingdom
References relate to the notes starting on page 109 which form an integral part of the consolidated annual accounts.
Interest income banking operations 59,170 48,176 25,448 Interest expense banking operations –49,978 –39,109 –16,707 Interest result banking operations 35 9,192 9,067 8,741
(1) 2003 fi nal dividend of EUR 0.49 per ordinary share and 2004 interim dividend of EUR 0.49 per ordinary share. (2) 2004 fi nal dividend of EUR 0.58 per ordinary share and 2005 interim dividend of EUR 0.54 per ordinary share. (3) 2005 fi nal dividend of EUR 0.64 per ordinary share and 2006 interim dividend of EUR 0.59 per ordinary share.
The liability recognised in the balance sheet in respect of the defi ned benefi t pension plans is the present value of the defi ned benefi t obligation at the balance sheet date less the fair value of the plan assets, together with adjustments for unrecognised actuarial gains and losses, and unrecognised past service costs.
A list of principal subsidiaries is included in Note 28 Principal subsidiaries and companies acquired/disposed.
Fair value hedges Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recognised in the profi t and loss account, together with fair value adjustments to the hedged item attributable to the hedged risk. If the hedge relationship no longer meets the criteria for hedge accounting, the cumulative adjustment of the hedged item is, in the case of interest bearing instruments, amortised in the profi t and loss account over the remaining term of the original hedge or recognised directly when the hedged item is derecognised. For non-interest bearing instruments, the cumulative adjustment of the hedged item is recognised in the profi t and loss account only when the hedged item is derecognised.
Financial assets at fair value through profi t and loss Financial assets at fair value through profi t and loss comprise two sub-categories: fi nancial assets held for trading and other fi nancial assets designated at fair value through profi t and loss by management, including investments for risk of policyholders. A fi nancial asset is classifi ed as at fair value through profi t and loss if acquired principally for the purpose of selling in the short term or if so designated by management. Designation by management will only take place if this eliminates a measurement inconsistency or if the related assets and liabilities are managed on a fair value basis. Investments for risk of policyholders are investments against insurance liabilities for which all changes in fair value of invested assets are offset by similar changes in insurance liabilities. Transaction costs on initial recognition are expensed as incurred.
Fair value of real estate investments is based on regular appraisals by independent qualifi ed valuers. Each year a valuation is made, either by an independent valuer or internally, of every property. Indexation is used when a property is valued internally. The index is based on the results of the independent valuations carried out in that period. Market transactions, and disposals made by the Group, are monitored as part of the procedures to back test the indexation methodology. All properties are valued independently at least every 5 years.
DEFERRED ACQUISITION COSTS Deferred acquisition costs (DAC) are an asset and represent costs of acquiring insurance and investment contracts that are deferred and amortised. The deferred costs, all of which vary with (and are primarily related to) the production of new and renewal business, consist principally of commissions, certain underwriting and contract issuance expenses, and certain agency expenses. DAC is amortised over the life of the underlying contracts.
Loans to, or guaranteed by, public authorities 16,450 13,907 9,503 17,535 25,953 31,442
Depreciation of assets under operating leases is included in the profi t and loss account in other income as a deduction from operating lease income.
Effect of unrealised revaluations in equity 43 239 43 239 Transfer to VOBA –119 –2,574 –2,693 Changes in the composition of the group –138 –2 –140
Property Available Cash flow revaluation for sale hedge reserve reserve reserve Total Total 2005 2004
Implementation IAS 32/39 and IFRS 4 –2,584 –2,584 Profit for the year 7,210 7,210 5,755 Unrealised revaluations –78 Realised gains/losses transferred to profit and loss 150 Change in treasury shares –305 –305 Dividend –2,461 –2,461 –883
Buy-back of preference shares During 2006, ING Group bought back 24,051,039 (depository receipts for) ‘A’ preference shares in ING at a price of EUR 3.72 per share or EUR 89.5 million in total. All purchased ‘A’ preference shares have been cancelled.
Notes to the consolidated balance sheet of ING Group continued 18 AMOUNTS DUE TO BANKS Amounts due to banks include non-subordinated debt due to banks, other than amounts in the form of debt securities. As at 31 December 2006, liabilities concerning securities sold in repurchase transactions amounted to EUR 23,627 million (2005: EUR 23,857 million).
Deferred tax liabilities 4,042 5,128 Income tax payable 923 1,184 Pension liabilities and other staff-related liabilities 1,455 1,998 Other taxation and social security contributions 1,147 633 Deposits from reinsurers 462 642 Accrued interest 10,556 10,699 Costs payable 2,353 2,443 Amounts payable to brokers 238 100 Amounts payable to policyholders 3,105 3,260 Other provisions 1,055 1,181 Other 12,942 11,739 38,278 39,007
Pension liabilities and other staff-related liabilities The Group maintains defi ned benefi t retirement plans in the major countries in which it operates. These plans generally cover all employees and provide benefi ts that are related to the remuneration and service of employees upon retirement. The benefi ts in some of these plans are subject to various forms of indexation. The indexation is, in some cases, at the discretion of management; in other cases it is dependent upon the suffi ciency of plan assets.
Profit since date of acquisition –1 1 8 8 Revenue if acquisition effected at start of year 2 33 131 166
Loans and advances to customers 596 596 Financial assets at fair value through profit and loss 4,000 313 4,313
ING and ANZ, one of Australia’s major banks, formed a funds management and life insurance joint venture in Australia. The joint venture, ING Australia Ltd, is owned 51% by ING and 49% by ANZ.
Receivables 2,604 1,908 6,190 6,257 Liabilities 35 35 121 496 Guarantees issued in favour of 3
The estimated fair values correspond with the amounts at which the fi nancial instruments could have been traded at the balance sheet date between knowledgeable, willing parties in arm’s-length transactions. The fair value of fi nancial assets and liabilities is based on quoted market prices, where available. Because substantial trading markets do not exist for all of these fi nancial instruments various techniques have been developed to estimate their approximate fair values. These techniques are subjective in nature and involve various assumptions about the discount rate and the estimates of the amount and timing of the anticipated future cash fl ows. Changes in these assumptions could signifi cantly affect the estimated fair values. Consequently, the fair values presented may not be indicative of the net realisable value. In addition, the calculation of the estimated fair value is based on market conditions at a specifi c point in time and may not be indicative of future fair values.
Investment contracts For investment contracts the fair values have been estimated using a discounted cash fl ow approach based on interest rates currently being offered for similar contracts with maturities consistent with those remaining for the contracts being valued.
Notes to the consolidated profi t and loss account of ING Group amounts in millions of euros, unless stated otherwise
Fire and other property losses 1,503 1,551 1,287 242 324 365 101
Expenditure from life underwriting Reinsurance and retrocession premiums 2,004 2,031 1,619
Pension and other staff related liability costs 79 143 144 206 256 484 285 399 628
Addition/(releases) of provision for reorganisation and relocation –16 38 29 63 86 82 47 124 111
Operating expenses include lease and sublease payments in respect to operating leases, of EUR 3 million (2005: nil; 2004: nil) in which ING is the lessee.
Included in balance sheet – amounts due to banks –120,839 –122,234 –95,878 – amounts due from banks 39,868 47,466 45,084 –80,971 –74,768 –50,794
GROUP RISK MEASUREMENT The major risk categories associated with the extensive volume and variety of fi nancial instruments that ING Group uses are credit risk, market risk (including liquidity risk), insurance risk, operational, information and security risk and compliance risk. In the sections below ING Group’s risk management activities are described respective to the various risk departments. Each risk department describes the types of risk it manages and the applicable risk measurement method that ING practices, including a quantifi cation of the risks. ING Insurance manages its own market and liquidity risks (along with insurance risks) which are accordingly discussed in the Insurance risk section below.
With respect to life business, ING Group’s (pre-tax) risk tolerance level is set at EUR 22 million (2005: EUR 22 million) per insured life for mortality risk. While life insurance risks are considered to be naturally diversifi able by virtue of each life being a separate risk, group contracts may result in signifi cant exposures. For life insurance contracts involving multiple lives, ING has made its own assessment and believes that the potential loss from a signifi cant mortality event occurring in the normal course of business will not exceed an amount higher than the (pre-tax) risk tolerance level for 2006 of EUR 750 million (2005: EUR 750 million). Such an amount could result from a pandemic as observed during the Spanish fl u pandemic in 1918, without taking into account medical improvements since that time. ING continues to model the possible impact of pandemics based on studies published by respected international organisations.
The sensitivities represent an instantaneous increase/decrease of interest rates as of 31 December 2006. The net profi t sensitivity refl ects the related effect on net profi t after tax for the year 2006 if interest rates remain 100 basis points higher (or lower) for at least 12 months. Sensitivity disclosures include the effect of embedded derivatives contained in insurance contracts.
LIQUIDITY RISK Liquidity problems arise if an insurance business does not have enough cash or liquid assets to meet its cash obligations. Demands for funds can usually be met through ongoing normal operations, premiums received and the sale of assets or borrowing. Unexpected demands for liquidity may be triggered by a credit rating downgrade, negative publicity, deterioration of the economy, reports of problems of other companies in the same or similar lines of business, signifi cant unanticipated policy claims, or other unexpected cash demands from policyholders.
Lapses in the course of normal business conditions, including lapses triggered by fundamental market movements are included in the market risk factor sensitivities. ING Group specifi c liquidity stress scenarios are not reported.
Risk Identification • Risk and Control Self Assessments • Risk Awareness Programs • Fraud detection
Issue of shares 96 Exercise of B warrants 63 Issued share capital as at 31 December 2006 2,205,093 530
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the annual accounts. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the annual accounts, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the annual accounts in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the annual accounts.
Adjustment in respect of Goodwill 3,641 3,837 –62 –445 –189 Real Estate –2,004 –1,899 –12 –76 316 Debt securities 328 397 208 –405 206 Valuation of equity securities 148 Derivatives and hedge accounting 237 590 –1,074 794 425 Fair value option 107 155 –37 29 Deferred acquisition costs 272 –687 454 –329 –79 Provision for life insurance liabilities 81 277 –161 151 282 Deferred profit sharing 1,427 2,691 –29 11 Employee benefits 1,711 593 –153 –120 –64 Equity instruments 215 296 9 14 Provision for restructuring 93 119 –19 60 60 Associates and other equity instruments –1,717 –1,115 –447 –424 5 Loan loss provision 623 Other –6 7 –28 1
Impairments Under IFRS-EU interest related unrealised losses on available-for-sale debt securities, which are fully related to fl uctuations in risk free market interest rates, do not result in an impairment loss. Under US GAAP, interest related impairment losses are recognised based on certain factors including the intent and ability to hold the security to recovery.
Derivatives and hedge accounting Under IFRS-EU, hedge accounting is applied where possible. Accordingly, under IFRS-EU gains and losses on derivatives are deferred in equity when hedging relationships are designated as cash fl ow hedges. Adjustments are made to hedged items when hedging relationships are designated as fair value hedges. Under US GAAP, the Group has opted to not apply hedge accounting subject to items specifi cally designated as a hedge under US GAAP (including certain hedges of net investments in foreign operations). Accordingly, under US GAAP all derivatives other than those designated as hedges are marked-to-market through the income statement and no adjustments to hedged items are recognised.
a best estimate investment yield less a provision for adverse deviation is used; and – some business units defer a lower or higher amount of initial expenses to future periods under IFRS-EU compared to US GAAP; which also produces a partially offsetting reconciling item for DAC.
MINORITY INTERESTS That part of the profi t or loss and net assets of a subsidiary attributable to an interest which is not owned, directly or indirectly, by the parent.
MORTGAGE BACKED SECURITIES (MBS) A security whose cash fl ows are backed by typically the principal and/ or interest payments of a pool of mortgages.
NOTIONAL AMOUNTS Represent units of account which, in respect of derivatives, refl ect the relationship with the underlying assets. They do not refl ect, however, the credit risks assumed by entering into derivative transactions.