Management 2 Key fi gures 3 ING at a glance 4 Chairman’s statement 6 Information for shareholders 7 1.2 Report of the Executive Board
Remuneration and Nomination Committee* Cor A.J. Herkströter, chairman (until 1 January 2008) Jan H.M. Hommen (chairman as of 1 January 2008) Eric Bourdais de Charbonnière Luella Gross Goldberg Karel Vuursteen
Corporate Governance Committee* Cor A.J. Herkströter, chairman (until 1 January 2008) Jan H.M. Hommen (chairman as of 1 January 2008) Eric Bourdais de Charbonnière Luella Gross Goldberg Karel Vuursteen * The composition of the Committees was changed in January 2008. Please turn to pages 67-69 for more information.
• Offers retail banking services in the mature markets of the Netherlands and Belgium, and in the growth markets of Poland, Romania, Turkey, India and China. Private banking is offered in the Netherlands, Belgium, Luxembourg, Switzerland and various countries in Asia, Latin America and Central and Eastern Europe.
This creates strong growth opportunities and I am convinced that ING is well positioned to capture these. We have a large customer base, strong product skills, and a good position in high-growth markets. And we have a track record for building innovative distribution platforms illustrated best by the creation of the world’s leading direct bank. We also established one of the world’s leading retail fi nancial brands, enhanced in 2007 with the successful sponsorship of the ING Renault Formula One team.
RATINGS Credit ratings are indicators for the likelihood of timely and complete repayment of interest and instalments of fi xed-income securities as assigned by rating agencies. For an overview of the main credit ratings of ING, please see page 9.
Ordinary shares – authorised 720 720 – issued 534 530 Preference shares
Investors and fi nancial analysts may contact: ING Group, Investor Relations (IH 07.430) P.O. Box 810 1000 AV Amsterdam The Netherlands
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any credit rating will remain in effect for any given period of time or that a rating will not be lowered, suspended or withdrawn entirely by the rating agency if, in the rating agency’s judgement, circumstances so warrant.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.
ING has created one of the world’s leading retail fi nancial services brands. Increasing awareness for the ING brand, across the globe has again been a key priority over the last years. In 2007, the global sponsorship of the ING Renault Formula One team along with its fi rst-ever global branding campaign was very successful. As a result of the F1 sponsorship, ING’s brand awareness has increased signifi cantly across the globe. And the activation of the sponsorship has generated business leads and new business.
ING endeavours to employ its capital in the most optimal way. It is therefore important that business units receive the right incentives to only hold capital necessary to support the risks in their business and to upstream the remainder to ING Group. In turn they should be able to count on a capital injection if their business can grow profi tably.
USD 1,045 million hybrid Tier-1 capital in the US retail market, fi xed rate USD 1,500 million hybrid Tier-1 capital in the US retail market, fi xed rate EUR 1,750 million 10-year senior bond in the European institutional market, fi xed rate
ING has a risk governance framework in place to ensure its 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 management; Risk Management, which provides high-level policies, limits and risk oversight; and Corporate Audit Services, the internal audit department within ING Group, which provides an independent assessment of the design and effectiveness of internal controls over the risks to ING’s business performance.
As a result of our frequent evaluation of all businesses from economic, strategic and risk perspectives, ING Bank N.V. has closed its representative offi ce in Cuba and the Netherlands Caribbean Bank, which is now a 100% subsidiary, is being liquidated. In addition, ING has concluded that for business reasons doing business involving certain specifi ed countries should be discontinued, which includes that ING will not enter into new relationships with clients from these countries while a process has started to discontinue existing relationships involving these countries. At present these countries include Myanmar, North Korea, Sudan, Syria, Iran and Cuba.
Finally, ING Insurance Central Europe started a large-scale Lean Six Sigma programme, comprising 40 projects to improve operational effi ciency and client service.
CONCLUSIONS AND AMBITIONS In 2007, ING achieved solid results in the US and established a strong foundation for growth in Latin America through the acquisition of the Latin American pension businesses.
US Insurance improves signifi cantly US Insurance also recorded sharply higher sales and profi ts led by Individual Life which successfully launched several new universal and term life products. As a consequence, premium increased as did policies written. In 2007, the US Retail Life business wrote 83,344 policies, up from 30,930 policies in 2006. Higher policy count drives down average cost per policy, improving value for customers, and profi tability for ING.
On the income side, gross premium income increased 4.1% to EUR 12,632 million, as higher premiums in Australia, South Korea and Taiwan were partly offset by lower premiums 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.
The shift in the market from fi xed income products to investmentoriented products and the signifi cant increase in distribution via banks present opportunities which ING can leverage on. In line with these developments, ING’s strategic priorities remain geared towards strengthening its distribution channels, focusing on profi table new product offerings, expanding organisational capabilities, increasing operational effi ciency, enhancing brand awareness and achieving scale in the asset management operations.
ING has sizeable equity interests in three banks – Bank of Beijing in China, ING Vysya Bank in India and TMB in Thailand – and has developed joint ventures and partnerships with a large number of other banks and securities houses in the region. The partnership with ANZ in Australia and New Zealand continues to be successful. In addition, new alliances have been forged with the China Construction Bank (Asia) in Hong Kong and Public Bank in Malaysia and Hong Kong. In South Korea, ING signed bank distribution agreements with the country’s second and thirdlargest banks, Shinhan and Woori. In Japan, the second- largest life insurance market in the world, ING works together with over 40 banks and securities houses. The current number of ING’s partnership banks in the region has increased to over 200 banks, with a total distribution network of over 16,000 branches. In 2007, we also completed the purchase of an additional 5.1% stake in ING Life Korea from our partner Kookmin Bank.
** These numbers include the result from ING Real Estate which reports to Wholesale Banking. ING Real Estate is discussed in detail in the chapter on asset management together with ING Investment Management.
ING decided to transfer mid-corporate clients in its home markets from Wholesale Banking to Retail Banking with effect from 1 January 2008. The transfer will allow ING’s domestic banking organisations in The Netherlands, Belgium, Poland and Romania to operate under a single management and a single brand. Wholesale Banking initiated a new corporate client coverage model to improve the quality of account management and to prioritise high value-adding products.
New growth initiatives In 2007, ING took some important growth initiatives. One was the acquisition of Oyak Bank in Turkey, which will be re-branded under the ING brand. ING acquired 100% of the shares for an amount of EUR 1.9 billion and a price-to-book ratio of 2.75 on shareholders’ equity as at year-end 2007. Turkey is the 17th largest economy in the world by GDP and economic growth is expected to continue. Oyak Bank has a market share of approximately 3%. It offers a full range of banking services with a focus on retail banking. The bank has 1.3 million retail customers, serves 13,500 small-to-medium sized businesses and has 365 branches throughout Turkey. Oyak Bank will provide ING with a platform to distribute insurance, asset management and retirement products. ING plans to expand the network to 450 branches and to invest in other distribution channels.
ING Private Banking aims to grow rapidly its assets in the next fi ve years. The objective is to become one of the top-20 players globally by continuing to expand through increasing brand awareness, improving customer loyalty and promoting new innovative investments platforms.
United Kingdom (2003) –120 19 n.a. Austria (2004) –9 –22 n.a. Japan –22 – n.a.
ING continued to have success with its strategy of leveraging its strong global investment capabilities to provide regional opportunities for both retail and institutional customers. Client demand for yield has increased as rates dropped around the world. In Europe, ING IM experienced infl ows of EUR 172 million into its Total Return Bond strategies. Close cooperation between ING IM Europe and ING IM Asia/Pacifi c created net infl ows of about EUR 2.2 billion in several fi xed income related mandates in Japan. The global manufacturing of some of ING IM’s fi xed income fl agship investment strategies has generated regional and crossregional sales of EUR 4.3 billion. In every region, ING IM has benefi ted from a strong global product offering combined with a good local customer-centric focus.
ING IM’s Institutional Markets business saw business volume increase as spreads widened and market conditions turned more favourable during the second half of the year.
Steps to improve staff employability in the Netherlands Measures to improve the personal development and employability of ING staff working in the Netherlands were added to the collective labour agreement in the middle of 2007. ING is the fi rst Dutch employer to do this. This agreement with the trade unions entailed a special budget being assigned by ING to help staff improve their employability.
Most of our business units have started to implement or improve energy effi ciency programmes. Furthermore, in the US, the Netherlands and several other countries, ING switched to green electricity for all its offi ces. This means that a substantial part of the energy used by ING in 2007 came from renewable sources, such as wind and water power. The remaining CO2 emissions were compensated for by the planting and rehabilitation of 600 hectares of degraded tropical rainforest in Malaysia.
Sustainable products ING is fully aware of the social and environmental impact of its products and services. However, certain trends, such as climate change and ageing populations, not only present risks, but also opportunities for ING. Therefore, ING has developed a wide range of sustainable products and services which in 2007 included new offerings from ING Car Lease, ING Real Estate, ING Investment Management and other business units, all of which have realised that sustainability can lead to new business. Specifi c examples of such offerings are socially responsible investment (SRI) funds and services, microfi nance and Ecolease for car leasing. ING’s portfolio of sustainable assets under management increased to EUR 2,792 million.
Retirement of Luella Gross Goldberg Luella Gross Goldberg joined the Supervisory Board in 2001. At that time she was a member of the Board of Directors of ReliaStar, a US insurance company that had been acquired by ING. Luella Goldberg was the fi rst Supervisory Board member from the United States and brought with her a valuable insight into the American markets. She also contributed substantially to the Remuneration and Nomination Committee knowing the reality in the US in the fi eld because of her knowledge of US compensation structures and levels and understanding of European sensitivities. Both the Supervisory Board and the Executive Board would like to thank Luella Goldberg for her commitment and contribution to ING during the past years and the way she performed her role on the Supervisory Board.
The Trust Offi ce has discretion to vote in respect of shares for which it has not issued proxy votes to holders of depositary receipts and has not received any voting instructions. Under the Conditions of Trust the Trust Offi ce is required to promote the interests of all holders of depositary receipts, irrespective of whether they attend the General Meeting of Shareholders, also taking into account the interests of ING Group, the businesses of ING Group and its group companies and all other ING Group stakeholders in voting such shares, so as to ensure that all these interests are given as much consideration and protection as possible.
Koos (J.V.) Timmermans, CRO (Born 1960, Dutch nationality, male; appointed in 2007, term expires in 2011) Koos Timmermans graduated from Erasmus University in Rotterdam in 1986 with a master’s degree in Economics. Until 1991 he worked at ABN AMRO in the fi eld of derivatives and before joining ING in 1996 he was stationed in Ireland for IBM’s European treasury. He has been deputy chief risk offi cer of ING Group since March 2006. Prior to this he was head of Corporate Market Risk Management. Koos Timmermans is responsible for ING’s risk departments including compliance.
Profi le of members of the Supervisory Board The Supervisory Board has drawn up a profi le to be used as a basis for its composition. The profi le was submitted for discussion to the annual General Meeting of Shareholders in 2005. It is available at the ING Group head offi ce and on the ING Group website (www.ing.com).
Eric Bourdais de Charbonnière, vice-chairman (Born 1939, French nationality, male; appointed in 2004, term expires in 2008) Member of the Remuneration and Nomination Committee and the Corporate Governance Committee. Former managing director of JP Morgan France and chief fi nancial offi cer of Michelin. Other business activities: chairman of the Supervisory Board of Michelin and member of the Supervisory Board of Thomson (listed companies). Member of the Supervisory Board of each of Oddo et Cie, American Hospital of Paris and Associés en Finance.
Changes in the composition Cor Herkströter retired from the Supervisory Board on 1 January 2008. Luella Gross Goldberg will retire after the 2008 annual General Meeting of Shareholders. Wim Kok will reach the age of 70 in 2008 but, having been appointed chairman of the Audit Committee, will remain in offi ce one extra year to ensure a balanced composition of the Supervisory Board. He will retire after the 2009 annual General Meeting of Shareholders.
Legal provisions Under the terms of the Dutch Act on Financial Supervision a declaration of no objection from the Dutch Minister of Finance must be obtained by anyone wishing to obtain or hold a participating interest of at least 10% respectively in ING Group or to exercise control to this extent via a participating interest in ING Group. Similarly, on the basis of indirect change of control statutes in the various jurisdictions where subsidiaries of ING Group are operating, permission from or notifi cation to local regulatory authorities may be required for the acquisition of a substantial interest in ING Group.
Holders of depositary receipts in the Netherlands, the United Kingdom and the United States are able to vote by proxy. For the 2007 annual General Meeting of Shareholders votes were cast for 36.7% of the total number of outstanding ordinary shares and depositary receipts (excluding the voting rights on preference shares). The Board voted for the remaining depositary receipts.
According to its by-laws the Trust Offi ce has to vote in the interest of all depositary-receipt holders, including the majority of depositary-receipt holders that has not given voting instructions, while taking into account the interests of ING and other stakeholders.
ING’s remuneration policy is based on fi ve key principles that apply throughout ING. These principles are: Total compensation levels are benchmarked against relevant markets in which ING competes for talent. ING aims for total compensation at the median level in the relevant market, allowing only for above-median compensation in the event of outstanding performance. The remuneration package includes variable-pay components (short-term and long-term incentives) to ensure that executive remuneration is linked to ING’s short-term and long-term business performance. To enhance the effectiveness of the short-term incentive plan, clear, measurable and challenging targets are set at the beginning of each year. Long-term incentives ensure a focus on longer-term strategic targets and create alignment of management with the interests of shareholders. A broad selection of ING’s senior leaders participate in the plan to ensure a common focus on ING’s overall performance.
The term of notice for Executive Board members is three months for the employee and six months for the employer.
The target level for the 2007 LTIP was set at 100% of base salary for each Executive Board member. The fi nal grant level depends on the Group STIP performance and will vary between 50% of the target level (if Group STI would be 0%) and 150% (if Group STI would be 200%).
Number of options 42,228 Number of performance shares 10,007 Fair market value of long-term incentive (2) 486
(7) Paul van der Heijden retired in April 2007. The compensation fi gure for 2007 refl ects the partial year as member of the Supervisory Board.
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 Sebastien Barthe, Hervé Laurent, France Norbert Lucas, Thomas Meder, Germany Maria Tapini Orianou, Greece Laszlo Szabo, Hungary Alan Maher, Ireland Arsène Kihm, Denis Richard, Luxembourg Hans van den Brink, Jeffrey Dinsbach, Thea van der Heide, Ben van Kessel, Gerlinde Korterink, Maarten Kramer, Michel Tromp, Paul Zoet, the Netherlands Mieczyslaw Bielawski, Mariusz Cieslik, Jaroslaw Szczesny, Poland Gregorio Tejedor Mingo, Araceli Rodriguez, Spain Thomas Wipf, Switzerland Mike Sharman, United Kingdom
Debt securities in issue 15 66,995 78,133 Other borrowed funds 16 27,058 29,639 Insurance and investment contracts 17 265,712 268,683 Amounts due to banks 18 166,972 120,839 Customer deposits and other funds on deposit 19 525,216 496,680 Financial liabilities at fair value through profi t and loss 20 – trading liabilities 148,988 127,975 – non-trading derivatives 6,951 4,934 – designated as at fair value through profi t and loss 13,882 13,702
References relate to the notes starting on page 180 which form an integral part of the consolidated annual accounts.
Implementation IAS 32/39 and IFRS 4 –104 –191 4,398 4,103 –1,386 2,717
Previously, if it was determined using a best estimate (50%) confi dence level that a shortfall existed in a business unit, then this shortfall was immediately recorded in the profi t and loss account. Under the new policy, if it is determined using a best estimate (50%) confi dence level that a shortfall exists in a business unit, and there are no offsetting amounts within other business units in the Business Line, then this shortfall is immediately recorded in the profi t and loss account. This change in accounting policy has no effect on the equity or profi t for any of the years presented in these annual accounts.
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’s fi nancial interests for own risk and its role as investment manager.
FOREIGN CURRENCY TRANSLATION Functional and presentation currency Items included in the fi nancial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The consolidated fi nancial statements are presented in euros, which is the Company’s functional and presentation currency.
Investments Investments (including loans quoted in active markets) are classifi ed either as held-to-maturity or available-for-sale and are initially recognised at fair value plus transaction costs. Investment securities and loans quoted in active markets with fi xed maturity where management has both the intent and the ability to hold to maturity are classifi ed as held-to-maturity. Investment securities and actively traded loans intended to be held for an indefi nite period of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices, are classifi ed as available-for-sale.
Available-for-sale fi nancial assets Available-for-sale fi nancial assets are initially recognised at fair value plus transaction costs. For available-for-sale debt securities, the difference between cost and redemption value is amortised. Interest income is recognised using the effective interest method. Availablefor -sale fi nancial assets are measured at fair value. Interest income from debt securities classifi ed as Available-for-sale is recognised in Interest income and Investment income in the profi t and loss account using the effective interest method. Dividend income from equity instruments classifi ed as Available-for-sale is recognised in Investment income in the profi t and loss account generally when the dividend has been declared. Unrealised gains and losses arising from changes in the fair value are recognised in equity. When the securities are disposed of, the related accumulated fair value adjustments are included in the profi t and loss account as investment income. For impairments of available-for-sale fi nancial assets reference is made to the section ‘Impairments of other fi nancial assets’. Investments in prepayment sensitive securities such as Interest-Only and Principal-Only strips are generally classifi ed as available-for-sale.
The Group fi rst assesses whether objective evidence of impairment exists individually for fi nancial assets that are individually signifi cant, and then individually or collectively for fi nancial assets that are not individually signifi cant. If the Group determines that no objective evidence of impairment exists for an individually assessed fi nancial asset, whether signifi cant or not, it includes the asset in a group of fi nancial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment.
Property under construction Land and buildings under construction (including real estate investments) are stated at the directly attributable purchase and construction costs incurred up to the balance sheet date plus borrowing costs incurred during construction and the Group’s own development and supervision expenses, where necessary, less impairment losses.
Borrowing costs Borrowing costs incurred for the construction of any qualifying asset are capitalised during the period of time that is required to complete and prepare the asset for its intended use.
Deferred profi t sharing liability For insurance contracts with discretionary participation features a deferred profi t sharing liability is recorded for the full amount of the unrealised revaluation on allocated investments. Upon realisation, the profi t sharing on unrealised revaluation is reversed and a deferred profi t sharing liability is recorded for the share in realised results on allocated investments that is expected to be shared with policyholders. The deferred profi t sharing liability is reduced with the actual allocation of profi t sharing to individual policyholders.
Share-based payments Share-based payment expenses are recognised as the employees provide the service. A corresponding increase in equity is recognised if the services are received in an equity-settled share-based payment transaction. A liability is recognised if the services are acquired in a cash-settled share-based payment transaction. The cost of acquiring the services is expensed as a staff expense. Prior to 2007 ING Group generally provided equity-settled share-based payment transactions. However, from 2007 ING Group generally provides cash-settled share-based payment transactions. The fair value of equity-settled share-based payment transactions is measured at the grant date and the fair value of cash-settled share-based payment transactions is measured at each balance sheet date.
Changes in the composition of the group –3 98 –101 95 –101 Write-offs –11 –4 –952 –691 –963 –695
ING Offi ce Fund Australia 6 62 60 1,548 627 272 69
Changes in the composition of the group 417 –46 371 Disposals –417 –400 –2 –417 –402 Depreciation –720 –617 –4 –10 –724 –627 Exchange rate differences –44 9 –44 9
More than 1 year but less than 5 years 1,844 1,754 More than 5 years 6 5
In addition, the holder of a depository receipt is entitled to attend and to speak at the General Meeting of Shareholders of ING Groep N.V. either in person or by proxy. A holder of a depository receipt, who thus attends the General Meeting of Shareholders, is entitled to vote as a proxy of the Trust Offi ce but entirely at his own discretion for a number of shares equal to the number of his depository receipts of the relevant category.
If and to the extent that the profi t available for distribution is not suffi cient to pay the dividend referred to above in full, the shortfall will be made up from the reserves insofar as possible. If, and to the extent that, the dividend distribution cannot be made from the reserves, the profi ts earned in subsequent years shall fi rst be used to make up the shortfall before any distribution may be made on shares of any other category.
Exchange rate differences 84 –381 –14 –93 70 –474 Other changes 88 –929 –76 –381 12 –1,310
Exchange rate differences –1,147 –1,021 Other changes 149 123 Closing balance 23,652 20,750
Equity securities 12,271 20,732 Debt securities 10,301 9,045 Funds on deposit 97,857 77,245
Other staff-related liabilities include vacation leave provisions, jubilee provisions and disability/illness provisions.
Annual contributions are paid to the funds at a rate necessary to adequately fi nance the accrued liabilities of the plans calculated in accordance with local legal requirements. Plans in all countries comply with applicable local regulations concerning investments and funding levels. The Group provides other post-employment employee benefi ts to certain employees and former employees. These are primarily post-
Fair value of plan assets 14,708 14,361 12,937 14,708 14,361 12,937
Pension Investment Strategy The primary fi nancial objective of ING Employee Benefi t Plans (the Plans) is to secure participant retirement benefi ts. As such, the key objective in the Plans fi nancial management is to promote stability and, to the extent appropriate, growth in funded status (i.e. the ratio of market value of assets to liabilities). The investment strategy for the Plans portfolios of assets (the Funds) balances the requirement to generate returns with the need to control risk. The asset mix is recognised as the primary mechanism to infl uence the reward and risk structure of the Funds in an effort to accomplish the Plans funding objectives. Desirable target allocations amongst identifi ed asset classes are set and within each asset class, careful consideration is given to balancing the portfolios among industry sectors, geographical areas, interest rate sensitivity, dependence on economic growth, currency and other factors affecting investment returns. The assets are managed by professional investment fi rms. They are bound by precise mandates and are measured against specifi c benchmarks. Factors considered by the fund managers include balancing security concentration, investment style, and reliance on particular active investment strategies. The asset mixes of the funds are reviewed on a regular basis. Generally, the funds asset mixes will be rebalanced to the target mixes as individual portfolios approach their minimum or maximum levels.
At 31 December 2007 and 31 December 2006, there were no non-derivatives designated as hedging instruments for cash fl ow hedge accounting purposes.
Reinsurance contracts 5,874 6,529 Reinsurance and insurance receivables 3,664 4,105 Other receivables 10,389 5,572 Maximum credit exposure on balance sheet 1,111,218 1,033,943
ING Group receives market-rate fees for structuring, (asset) managing and distributing CDO-securities to investors. The total amount of these fees is not signifi cant.
Pacifi c-Antai Life Insurance Company Ltd 50 150 117 42 36
The estimated fair values correspond with the amounts at which the fi nancial instruments at our best estimate 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 relevant pricing factors. 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.
Reference to published price quotations This category includes fi nancial instruments whose fair value is determined directly by reference to published quotes in an active market. A fi nancial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis.
In 2007, the growth of the average total assets caused an increase of the interest result amounting to EUR 753 million (2006: EUR 1,040 million; 2005: EUR 1,214 million). The decrease of the interest margin by 12 basis points caused a decrease of the interest result with EUR 1,051 million (in 2006 the decrease of the interest margin by 10 basis points caused a decrease of the interest result with EUR 867 million; in 2005 the decrease of the interest margin by 6 basis points caused a decrease of the interest result with EUR 345 million).
Gross premium income from life insurance policies 40,732 40,502 39,145 Gross premium income from non-life insurance policies 6,086 6,333 6,613
Net operating lease income comprises income of EUR 803 million (2006: EUR 691 million; 2005: EUR 627 million), depreciation of EUR 724 million (2006: EUR 626 million; 2005: EUR 555 million) and other expenses of nil (2006: nil; 2005: nil).
Pension and other staff-related benefi t costs 48 79 143 159 206 256 207 285 399
As of 31 December 2007 there were EUR 53 million (2006: EUR 88 million; 2005: EUR 81 million) of total unrecognised compensation costs related to share awards. These costs are expected to be recognised over a weighted average period of 1.7 years (2006: 1.8 years; 2005: 1.9 years).
Total interest income and total interest expense for items not valued at fair value through profi t and loss for 2007 were EUR 46,900 million (2006: EUR 41,281 million; 2005: EUR 35,632 million) and EUR 31,173 million (2006: EUR 27,014 million; 2005: EUR 20,888 million) respectively. Net interest income of EUR 16,658 million is presented in the following profi t and loss captions.
Segment reporting amounts in millions of euros, unless stated otherwise 49 PRIMARY REPORTING FORMAT – BUSINESS SEGMENTS ING Group’s business segments relate to the internal segmentation by business lines. These include the business lines: Insurance Europe, Insurance Americas, Insurance Asia/Pacifi c, Wholesale Banking, Retail Banking and ING Direct.
ING Group evaluates the results of its business segments using a fi nancial performance measure called underlying profi t before taxation. Underlying profi t before taxation is defi ned as profi t before taxation excluding the impact of divestments and special items.
The following principles support this objective: Products and portfolios are structured, underwritten, priced, approved and managed appropriately and compliance with internal and external rules and guidelines is monitored; ING Group’s risk profi le is transparent, ’no surprises’, and consistent with delegated authorities; Delegated authorities are consistent with the overall Group strategy and risk appetite; Transparent communication to internal and external stakeholders on risk management and value creation.
Group risk policies ING has a framework of risk management policies, procedures and standards in place to create consistency throughout the organisation, and to defi ne minimum requirements that are binding on all business units. The governance framework of the business units aligns with the Group level framework and, meets local (regulatory) requirements. Senior Management is responsible to ensure policies, procedures and standards are implemented and adhered to. Employees globally have access to the Group’s governance framework through an internal website. Policies, procedures and standards are regularly reviewed and updated via the relevant risk committees to refl ect changes in markets, products and emerging best practice.
Earnings at Risk The level of Earnings at Risk (EaR) provides insight into the level of risk ING can absorb relative to its earnings power. The risk appetite set by the Executive Board defi nes the maximum potential reduction in accounting earnings over the next year during a (moderate, i.e. ‘1 in 10’) stress scenario as a percentage of forecast (pre tax) earnings over the next 12 months. Since ING does not disclose forecast earnings, the table below provides the Earnings at Risk per risk type compared to actual full year underlying earnings; i.e. underlying profi t before tax. Under ING’s accounting policy, accounting results in the Taiwan Insurance business are currently used to strengthen the provision for life insurance. Future earnings may therefore be (partly) offset by increases/decreases to the cumulative reserve strengthening balance. The offsetting effect of increases/decreases to the cumulative reserve strengthening balance is not refl ected in the earnings sensitivities below.
Credit risk (including Transfer risk) 7,503 7,557 Market risk 7,407 4,816 Non-fi nancial risk* 3,017 3,503 Total banking operations 17,927 15,876 * Non-fi nancial risk includes operational risk as well as business risk.
The following table provides the Economic Capital break down by business line including diversifi cation benefi ts proportionally allocated to the risk types: Economic Capital (Bank diversifi ed only) by Line of Business
Past-due obligations ING continually measures its portfolio in terms of payment arrears. Particularly the retail portfolios are closely monitored on a monthly basis to determine if there are any signifi cant changes in the level of arrears. Generally, an obligation is considered ‘past-due’ if a payment of interest or principal is more than one day late. In practice, the fi rst 5-7 days after an obligation becomes past due are considered to be operational in nature for the retail loans and small businesses. After this period, letters will be sent to the obligor reminding the obligor of its (past due) payment obligations. If the arrear still exists after 90 days, the obligation is transferred to one of the ‘problem loan’ units. In order to reduce the number of arrears, ING banking units encourage their obligors to set up automatic debits from their (current) accounts to ensure timely payments.
Limitations VaR as a risk measure has some limitations. VaR quantifi es the potential loss under the assumption of normal market conditions only. This assumption may not always hold true in reality, especially when market events occur, and therefore could lead to an underestimation of the potential loss. VaR also uses historical data to forecast future price behaviour. Future price behaviour could differ substantially from past behaviour. Moreover, the use of a one-day holding period (or ten days for regulatory calculations) assumes that all positions in the portfolio can be liquidated or hedged in one day. In periods of illiquidity or market events, this assumption may not hold true. Also, the use of 99% confi dence level means that VaR does not take into account any losses that occur beyond this confi dence level.
Within ING Bank’s ALM framework, the risk transfer principle is used. This refers to the principle whereby the outright interest rate risk resulting from the commercial business is transferred to the ALM books. The interest rate risk from the commercial business arises from the fact that own originated assets and liabilities do not reprice simultaneously. The transfer of the outright interest rate risk is to a large degree based on modelling client behaviour. Within CMRM, continuous research is being done in order to optimise this modelling. For this purpose, several methods are in place to replicate the interest rate risk, taking into account both the contractual and behavioural characteristics of demand deposits, saving accounts and mortgages. All models and assumptions are back-tested regularly and presented to the designated ALCO.
By Business Line ING Wholesale Banking –87 –19 ING Retail Banking –121 –107 ING Direct –5 –260 ING Bank Corporate Line 26 22 ING Bank Total –187 –364
The total EaR fi gure as result of an upwards shock of the market rates of 1%, decreased over the course of this year. This was mainly caused by a sharp reduction of the ING Direct EaR fi gure. ING Direct reduced during 2007 its earnings sensitivity profi le in order to increase fl exibility in price setting. The EaR fi gure of ING Wholesale Banking was rather small last year and returned to more normal levels this year mainly due to the strategic interest rate positions maintained in the ALM books.
Tactical liquidity risk From a tactical, short-term perspective the liquidity risk resulting from the short term cash and collateral positions is managed. ALCO Bank has delegated day-to-day liquidity management to Financial Markets Amsterdam, which is responsible for managing the overall liquidity risk position of ING Bank, while regional and local Financial Markets departments are responsible for managing liquidity in their respective regions and locations.
The Taiwan regulator currently allows mortality profi ts to be offset against losses from negative interest rate experience, thus eliminating the need to pay mortality dividends, and this practice is refl ected in the reserve adequacy test.
In order to determine how much reinsurance protection is required in each of the regions, these risk tolerance limits are compared to the estimated maximum probable loss resulting from catastrophic events with a 1 in 250 return period which is in line with industry practice. The maximum probable loss estimates for Fire business are based on risk assessment models that are widely accepted in the industry.
The credit risk classifi cation of issuers, debtors and counterparties within the Insurance companies’ credit risk portfolios continues its transition for aligning the methodology to that which is used by the banking operations. Similar to ING Bank, ING Insurance uses risk classes which are calibrated to the probability of default of the underlying issuer, debtor or counterparty. These ratings are defi ned based upon the quality of the issuer in terms of creditworthiness, varying from investment grade to problem grade expressed in S&P equivalents.
Explanation of risk types ING has defi ned operational risk as the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events. It includes the risk of reputation loss as well as legal risk; whereas strategic risks are not included. The following eight risk categories are recognised: Control risk is the risk on loss due to non-compliance with business policies or guidelines; Unauthorised activity risk is the risk on loss caused by unauthorised employee trading, approvals or overstepping of authority; Processing risk is the risk on loss due to unintentional human error during (transaction) processing; Employment practice and workplace safety risk is the risk of loss due to acts inconsistent with employment, health or safety laws, or agreements, from payment of personal injury claims, or from diversity /discrimination events; Personal and physical security risk is the risk of criminal and environmental threats that might endanger the safety of ING personnel within ING locations and ING assets or might have an impact on the ING organisation; IT risk is the risk of loss due to inadequate data or information security of systems; Crisis management and Business Continuity Planning/Disaster Recovery Planning risk is the risk of loss due to external events (e.g. natural disasters, criminal activity and terrorist attacks) leading to a situation that threatens the safety of people within ING or the continuity of business conducted; Internal and external fraud risk is the risk of losses due to acts of a type intended to defraud, misappropriate property or circumvent
MODEL DISCLOSURES The risk profi le of ING Group, as described in the Risk management section is captured by three key risk metrics: Earning at Risk; Capital at Risk; Economic Capital.
Replicating portfolio used to capture the risk profi le of Insurance assets and liabilities EC market shocks and diversifi cation benefi ts from MonteCarlo Scenarios Non-market risk aggregation Total diversifi ed EC
BIS ratio 10.32% 11.02% (1) Subordinated loans qualifying as Tier-1 capital have been placed by ING Groep N.V. with ING Bank N.V. (2) Revaluation reserve is deducted as it is not part of Tier-1 capital (included in Tier-2) and includes the cumulative revaluations on real estate investments.
Changes in ING Groep N.V. shares held by group companies –1,005 422 Closing balance 41,864 42,607 2 OTHER ASSETS
Share capital 534 530 Share premium 8,739 8,348 Share of associates reserve 6,053 11,528 Currency translation reserve –950 –950 Other reserves 22,832 18,810
We make the following observations to above results: The net impact of 1% decrease in new money rate (1% downward parallel shift) and discount rates is EUR –317 million, whereas these two effects are somewhat offsetting the 1% increase sensitivity (EUR 239 million). This is due to interest guarantees, which reduce margins when interest rates fall. The impact of using local regulatory minimum capital instead of ING capital model is positive EUR 2,621 million and primarily due to Taiwan for which ING allocates capital at a signifi cantly higher level than local regulatory level.
enterprise, unless either the proceeds represent surplus assets that are not needed for the policy to meet all the related employee benefi t obligations or the proceeds are returned to the reporting enterprise to reimburse it for employee benefi ts already paid.