Result before tax (in EUR million) Insurance result before tax –1,635 6,533 4,935 3,978 4,322
In this first phase of recovery, stabilising the company and restoring credibility are key. ING will concentrate on the basics, reducing the complexity of products and services. For the longer term, improving the fundamentals of our business and the commercial processes are high on the agenda. We will look at our business with fresh eyes to apply further focus and build a coherent set of strong businesses, and seek new ways of doing business so we can come through this crisis stronger and smarter.
(Depositary receipts for) preference shares of EUR 1.20 nominal value 16
The consequences have been far-reaching. The market expectations of capital requirements for international financial institutions have increased substantially, forcing governments around the world to support banks with large capital injections. Unfortunately, ING was no exception. Although our commercial performance kept up reasonably well, the sharp market decline in 2008 led to significant impairments and negative revaluations across almost all asset classes, also affecting our earnings and capital position. Looking forward, all indicators suggest that market conditions will remain difficult throughout 2009.
Measured over the full-year 2008, net production of client balances was EUR 93 billion, excluding currency impacts. Including the impact of currency effects, total client balances remained stable at EUR 1,455 billion compared with the previous year. Client savings and deposits accounted for EUR 21 billion of the net production (excluding currency effects), EUR 12 billion of which was attributable to retail customers. At Insurance, positive net production of client balances was generated by all business lines as inflows in life insurance and retirement services more than offset outflows in third-party assets under management.
ASSET MANAGEMENT Assets under management declined by EUR 91.4 billion, or 14.2%, to EUR 551.3 billion in 2008, as a result of the sharp deterioration of financial markets. Lower asset prices for equity and fixed income securities had a negative impact of EUR 99.1 billion. Despite the depressed financial markets, ING recorded a net inflow of EUR 17.4 billion in 2008. All lines of business contributed to this net inflow with the exception of Insurance Europe which registered a net outflow of EUR 2.2 billion. Acquisitions and divestments had a net negative impact of EUR 6.2 billion. Furthermore exchange rates negatively impacted the growth of assets under management by EUR 3.6 billion.
ING seeks to maintain a strong capital position and to allocate capital efficiently across the Group. The exceptional market conditions in 2008 had a significant negative effect on Shareholders’ equity. ING took a number of steps to strengthen its capital position. These included taking advantage of capital support facilities made available by the Dutch State.
CORE TIER-1 SECURITIES The core Tier-1 securities (‘Securities’) were structured to be as similar to equity as possible without formally diluting existing shareholders through the issuance of common equity. The Securities are pari passu with common equity (there is no claim, even in liquidation). They have a coupon of at least 8.5% (higher according to a formula if the annual dividend on common equity exceeds EUR 0.68), but this coupon will only be paid (on a non cumulative basis) if a dividend is paid on common equity and even then only with permission of the Dutch central bank (DNB). Non-cumulative means that if a coupon is passed, it will not be due or payable in the future. The Securities are perpetual. Only ING Group as Issuer, with permission of DNB, can alter the fact that these Securities are outstanding. ING Group has a number of options open to it going forward apart from leaving the Securities outstanding. ING Group has the right to repurchase the Securities at any time with a premium of 50% over issue price. After three years ING Group may also convert the Securities on a one-for-one basis into common shares. However, if ING Group were to convert, the Dutch State may ask for redemption of the Securities at an issue price of EUR 10, all this again with permission of DNB. The transaction contains a paragraph on governance that is applicable as long as more than 25% of the Securities remain outstanding.
Credit risk In January 2009, ING entered into an Illiquid Assets Back-up Facility terms sheet with the Dutch State covering ING’s Alt-A Residential Mortgage-Backed Securities (RMBS) portfolio. Through this transaction, which is expected to close in the first quarter of 2009, subject to final documentation and regulatory approval, the Dutch State will become the economic owner of 80% of the Alt-A RMBS portfolio. This transaction is expected to be concluded at 90% of the EUR 30 billion par value of the portfolio. Following the deteriorated economic outlook in the third and fourth quarter, market prices for these securities had become depressed as
Risk management Mitigating risk a top priority 2008 was a challenging year for the financial sector. The crisis that originated in the US housing market intensified in the second half of the year, with prices falling across most asset classes and the turmoil impacting the broader economy around the world. Top global banks and financial institutions worldwide were impacted. ING Group has not been immune to developments in the markets, however its approach to risk management and the steps it has taken to reduce risk have helped in limiting the impact. In this environment a robust risk management organisation is essential.
In 2008, Insurance Europe received EUR 2.3 billion in (net) capital contributions from the Corporate Line Insurance. These capital contributions were needed to meet regulatory and/or internal solvency requirements, as available solvency was adversely affected by declining market values of the investment portfolios.
BUSINESS DEVELOPMENTS Insurance Europe operates in the mature Benelux market and the emerging markets of Central Europe, with a focus on life insurance and retirement services. It is the leading life insurer and pension provider in both the Netherlands and Central Europe. In addition, Insurance Europe operates life insurance businesses in Spain, Greece, Russia and has a growing presence in Turkey. Commercial performance was resilient in 2008, especially in Central Europe, which continued to see strong net pension inflows and traditional life sales. However, like others in the industry, Insurance Europe was negatively affected by the global financial turmoil. The lower net result is mainly attributable to negative fair value changes on real estate and private equity investments.
Insurance Europe will reinforce its position as the specialist in investments and retirement services across Europe. Although economic prospects are muted due to the global economic climate, long-term growth prospects remain favourable. Insurance Europe will re-base the business to respond to market conditions, through a focus on expense reduction and capital management. In Central and Rest of Europe, ING will build on its leading position and focus on broadening the distribution base and increasing its operating efficiency.
Because of the uncertain financial outlook, Insurance Americas’ most critical priorities in 2009 are customer retention, cost containment and reducing risk to preserve capital and to improve profitability.
** These numbers include the result from ING Real Estate which reports to Wholesale Banking. ING Real Estate is discussed in detail in the section on asset management together with ING Investment Management.
The strategy includes becoming the market leader in the Benelux, a top-5 wholesale bank in Central Europe, and a global or regional leader in a number of key product areas, including Structured Finance, Financial Markets, PCM and Leasing.
In the Dutch market, ING launched several campaigns to boost recruiting and visibility. A recruitment campaign was launched at the beginning of 2008 to hire new top talent and support ING’s growth ambitions. An advertising campaign aimed at Dutch corporations was also launched to reinforce ING’s position as a leading bank in the corporate market. Central Europe, which Wholesale Banking entered in the early 1990s, is now prominent enough to be regarded as part of its home markets. Wholesale Banking is already a market leader in Poland and Romania.
ING’s PCM business experienced volume growth due to new and renewed mandates from institutional clients. Opportunities also arose from the creation of the Single Euro Payments Area (SEPA) on January 28, 2008, which removed the distinction between national and intra-European cross-border payments. With an already strong position in PCM, ING is recognised as one of the most advanced providers of PCM in SEPA, resulting in cash service mandates from institutional clients across Europe.
Portfolio and income growth in Leasing & Factoring In spite of the difficult market circumstances, Leasing & Factoring saw increases in portfolio size and income levels throughout 2008. ING also continued to seek out opportunities to cross-sell services to corporate clients. Leasing growth was driven by higher volumes in Belgium, Italy, the Netherlands, Poland, Hungary and Russia. Gradual margin increases on new lease production progressively compensated for rising funding costs. ING Car Lease income was adversely impacted by lower prices on the used vehicle market. As a result, the business actively sought new remarketing channels for used cars. In the Netherlands, where ING Car Lease is the market-leader, a new e-leasing tool was introduced, speeding up the application and credit process.
In Romania, ING continued the roll-out of its successful self-service banking concept. ING opened 7 Self’Bank outlets, bringing the total to 205 since the operation started in 2004. Customer growth continued, reaching 775,000 at the end of 2008. This means a net increase of 272,000 clients was realised in 2008 (+54% from 503,000). Full-year commercial liabilities growth was 28%, bringing its market share to 3.3% based on volumes. In savings, ING had a 5% market share by volumes. ING launched a campaign to attract new savers and increase the balances of existing savers.
ING Direct continued to show positive commercial results, despite an increasingly competitive marketplace and against the backdrop of the continuing crisis in the financial sector. Results were heavily impacted by impairments on its investment portfolio due to the financial crisis. Client retail balances production was up EUR 24.4 billion to EUR 322.7 billion at year-end.
Total client retail balances grew by EUR 12.6 billion in 2008, or EUR 24.4 billion excluding currency effects, to EUR 322.7 billion at year-end.
Customer satisfaction – meeting expectations One of ING Direct’s most valuable assets remains its high level of customer satisfaction, standing at the core of the company’s success. Research shows customers perceive ING Direct as innovative, reliable, value-for-money, easy to deal with and fair. 93% of customers state that their expectations are met. ING Direct’s aided brand awareness is now 73-95% in all markets in which it operates.
The financial sector will continue to face market volatility, limited liquidity and intensified competition for deposits. Private Banking therefore expects its margins to remain under pressure. Private Banking has been one of the most attractive businesses in the banking industry, and although an economic downturn may restrict growth in the short term, Private Banking expects its average growth rate to remain above that of retail banking businesses in general.
CONCLUSIONS AND AMBITIONS The global human resources function is focused on supporting ING’s business priorities, with employee engagement remaining high on the agenda. Global HR will continue to promote peopleoriented leadership, as business success can only be achieved through people. Global HR will also take its responsibility in helping the company deal with its shift in priorities due to the challenging market circumstances.
retirement of eric Bourdais de Charbonnière Eric Bourdais de Charbonnière joined the Supervisory Board in 2004. He became vice-chairman of the Supervisory Board in February 2005. His inspiring vision combined with his vast international experience made his input in the meeting very valuable. We are very grateful for his contribution through the years.
Supervisory Board may still decide to consider such member to be independent in order to take into account specific circumstances, such as family and employment relations, so as to allow for situations of non-independence that are not material; best-practice provisions III.2.2 and II.3.1: the legally required • second candidate on a binding nomination for appointment to the Supervisory Board does not need to meet the independence criteria of the Tabaksblat Code nor the requirements of the Supervisory Board profile, in view of the contemplated abolition of this legal requirement; best-practice provision III.3.4: Jan Hommen, who was appointed • in the 2005 annual General Meeting as a Supervisory Board member, has more than five positions as a supervisory board member with other Dutch-listed companies. This was approved by the Supervisory Board in view of Jan Hommen’s intention to give up his chairmanship of the Supervisory Board of TNT N.V. With a view to his proposed appointment to the Executive Board at the 2009 General Meeting, Jan Hommen will step down from his positions as a Supervisory Board member of Reed Elsevier N.V. and TNT N.V. by April 2009. He will also step down from his position as a Supervisory Board member of Koninklijke FrieslandCampina N.V. (non-listed); best-practice provision III.3.5: under special circumstances the • Supervisory Board may deviate from the general rule that a member of the Supervisory Board may not be reappointed for more than two subsequent four-year terms; best-practice provision III.5.1: instead of a separate remuneration • committee and a nomination committee, ING Group established a combined Remuneration and Nomination Committee; this committee however, was separated into a Nomination Committee and a Remuneration Committee on 1 January 2009; best-practice provision III.5.11: the Remuneration and • Nomination Committee was chaired by the chairman of the Supervisory Board. On 1 January 2009, the new separate Remuneration Committee will no longer be chaired by the chairman of the Supervisory Board; best-practice provision III.6.1: in the case of a transaction with • a family member that entails a conflict of interests according to the Code, the Supervisory Board may decide that no conflict of interests exists if the relationship is based on a marriage that is now over, to allow for situations where the family relationship no longer exists; best-practice provisions III.6.3 and III.6.4: transactions with • Supervisory Board members or persons holding at least 10% of the shares of ING Group in which there are significant conflicting interests will be published in the Annual Report, unless (i) this conflicts with the law, (ii) the confidential, share-price sensitive or competition-sensitive character of the transaction prevents this and/or (iii) the information is so competition-sensitive that the publication could damage the competitive position of ING Group; best-practice provision III.7.4: 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. These may include services in which the granting of credit is of a subordinate nature, e.g. credit cards and overdrafts in current accounts. These exceptions are based on a lack of materiality; best-practice provision IV.3.8: if a notarial report is drawn up of • the General Meeting, shareholders will not have the opportunity to react to the minutes of the meeting, as this would be in conflict with the laws applicable to such notarial report.
Shareholders’ structure Details of investors who have reported their interest in ING Group pursuant to the Dutch Financial Supervision Act (or the predecessor of this legislation) are shown on page 9. ING Group is not aware of investors with an interest of 10% or more in ING Group.
Reporting Resolutions adopted at a General Meeting shall also be published on ING Group’s website within one week after the meeting. The draft minutes of the General Meeting are made available to shareholders on ING Group’s website (www.ing.com) no later than three months after the meeting. Shareholders and depositary receipt holder may react to the draft minutes in the following three months, after which the final minutes will be adopted by the chairman of the meeting in question and by a shareholder or depositary receipt holder appointed by that meeting. The final minutes are made available on ING Groups’ website (www.ing.com).
Tom J. McInerney (Born 1956, American nationality, male; appointed in 2006, term expires in 2010) Tom McInerney has a bachelor’s degree from Colgate University (Hamilton, New York) and received an MBA from the Tuck School of Business, Dartmouth College (Hanover, New Hampshire). He started his career in 1978 with Aetna Financial Services, which was acquired by ING in 2000. He had been CEO of ING’s insurance activities in the United States, which position included the responsibility for ING Mexico until his appointment to the Executive Board. Tom McInerney is responsible for Insurance Americas, ING Investment Management Americas and the global coordination of ING Investment Management.
Reappointment of Supervisory Board members Members of the Supervisory Board will resign from the Supervisory Board at the annual General Meeting held in the calendar year in which they will complete the fourth year after their most recent reappointment. As a general rule, they shall also resign at the annual General Meeting in the year in which they attain the age of 70 and shall not be reappointed. The schedule for resignation by rotation is available on the ING Group website (www.ing.com). Members of the Supervisory Board may as a general rule be
Piet Hoogendoorn (Born 1945, Dutch nationality, male; appointed in 2007, term expires in 2011) Former chairman of the Board of Directors of Deloitte Touche Tohmatsu and CEO of Deloitte in the Netherlands. Former chairman of Royal NIVRA (Netherlands Institute of Chartered Accountants).
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 these replacements based on an annual evaluation of the provided services. In line with this requirement, the lead audit partner of Ernst & Young was replaced after the year-end audit 2006. The rotation of other partners involved with the audit of the financial statements of ING are subject to applicable independence legislation.
Base salary The base salaries of the Executive Board should be sufficient to attract and retain high-calibre management needed to achieve our business objectives. The Supervisory Board assesses the experience, background, responsibilities, performance and leadership competencies of the CEO and the members of the Executive Board when making decisions on base-salary levels.
We believe that by combining a profit, a cost and a return parameter, the overall performance of ING is properly reflected. Each element is weighted equally to determine the final award. The three performance targets are set by the Supervisory Board at the beginning of the performance period. Under the short-term incentive plan, the actual payout in any year may vary between 0% and 200% of the target level.
In the case of an involuntary exit, Executive Board members would be entitled to an amount which has been set at a multiple of their Executive Board member base salary, preserving their existing rights. These rights in some cases could exceed the exit-arrangement provision in the Dutch Corporate Governance Code, i.e. no more than two times base salary (first appointment period) or one-time base salary (all other situations). Under the terms of the agreement reached with the Dutch State to strengthen ING’s capital position, the exit arrangments have been limited to one-year base salary.
REMUNERATION EXECUTIVE BOARD 2008 Executive Board base salary 2008 The base salary of all Executive Board members with the exception of Tom McInerney (who is employed on a US-based compensation structure) was increased by 5% in 2008. Base salaries had been frozen in 2004, 2005, 2006 and 2007.
Compensation in cash of the individual members of the Executive Board (1)
Michel Tilmant (1) Long-term incentives are granted in the year following the reporting year. The long-term incentive plan provides for a combination of share options and provisional performance shares based on a 50/50 split in value. The ratio of options to performance shares varies each year as a result of the fair value calculation and the 50/50 split in value. The fair value calculation for the performance year 2008 resulted in a ratio of options to performance shares of 2.36 : 1 (2007: 4.22 : 1, 2006: 4.78 : 1).
Loans and advances to Executive Board members The table below presents the loans and advances provided to Executive Board members and outstanding on 31 December 2008, 2007 and 2006. These loans were concluded in the normal course of business and on terms generally applicable to company personnel as a whole and were approved by the Supervisory Board.
Dick Harryvan 2,546 2,000 John Hele 5,247 2,300 Eli Leenaars 8,288 5,628
(3) 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.
Godfried van der Lugt 70 62 56 Harish Manwani (7) 51 Aman Mehta (7) 62 Joan Spero (7) 55 Jackson Tai (7) 89
ASSETS Cash and balances with central banks 1 22,045 12,406 Amounts due from banks 2 48,447 48,875 Financial assets at fair value through profit and loss 3 – trading assets 160,378 193,213 – investments for risk of policyholders 95,366 114,827 – non-trading derivatives 16,484 7,637 – designated as at fair value through profit and loss 8,277 11,453 Investments 4 – available-for-sale 242,852 275,897 – held-to-maturity 15,440 16,753 Loans and advances to customers 5 619,791 552,964
Cash and cash equivalents as at 31 December 2008 of EUR 31,271 million (2007: EUR –16,811 million) includes cash and balances with central banks of EUR 22,045 million (2007: EUR 12,406 million). Reference is made to Note 53 ‘Cash and Cash equivalents’.
Changes in the composition of the group –745 –745 Dividends (2) –2,999 –2,999 –40 –3,039 Purchase/sale of treasury shares –2,304 –2,304 –2,304 Exercise of warrants and options 4 391 395 395 Change in minority interest shareholdings –58 –58
Certain asset backed securities in the Unites States are valued using external price sources that are obtained from third party pricing services and brokers. During 2008 the markets for these assets have become inactive and as a result, the dispersion between different prices for the same security is significant. In such cases, management applies additional processes to select the most appropriate external price, including an internally developed price validation matrix and a process to challenge the price source. The valuation of these portfolios would have been significantly different had different prices been selected.
REPURCHASE TRANSACTIONS AND REVERSE REPURCHASE TRANSACTIONS Securities sold subject to repurchase agreements (‘repos’) are retained in the consolidated financial statements. The counterparty liability is included in Amounts due to banks, Other borrowed funds or Customer deposits and other funds on deposit, as appropriate.
Property under development where there is a specifically negotiated contract is valued using the percentage of completion method (pro rata profit recognition).
Financial liabilities at fair value through profit and loss Financial liabilities at fair value through profit and loss comprise the following sub-categories: trading liabilities, non-trading derivatives and other financial liabilities designated at fair value through profit and loss by management. Trading liabilities include equity securities, debt securities, funds on deposit and derivatives. Designation by management will take place only if it eliminates a measurement inconsistency or if the related assets and liabilities are managed on a fair value basis. ING has designated an insignificant part of the issued debt, related to market-making activities, at fair value through profit and loss. This issued debt consists mainly of own bonds. The designation as fair value through profit and loss eliminates the inconsistency in the timing of the recognition of gains and losses. All other financial liabilities are measured at amortised cost.
As at 31 December 2008, the non-subordinated receivables amounted to EUR 48,443 million (2007: EUR 48,705 million) and the subordinated receivables amounted to EUR 4 million (2007: EUR 170 million).
No individual loan or advance has terms and conditions that materially affect the amount, timing or certainty of the consolidated cash flows of the Group.
Increase in loan loss provisions 38 8 1,280 125 1,318 133 Exchange rate differences –1 –1 –50 –19 –51 –20
For the above associates in which the interest held is below 20%, significant influence exists based on the combination of ING’s financial interest for own risk and its role as investment manager.
In 2008, Changes in the composition of the group related for EUR 1,164 million to the sale of ING Life Taiwan.
As of 31 December 2008, ING Group had unused lines of credit available including the payment of commercial paper borrowings relating to debt securities in issue, totalling EUR 5,649 million (2007: EUR 6,974 million). In January 2009, ING Bank issued 3 year USD 6 billion government guaranteed senior unsecured bonds. In February 2009, ING Bank issued a 5 year EUR 4 billion fixed rate government guaranteed senior unsecured bond and in March 2009 ING Bank issued a 5 year USD 2 billion fixed rate government guaranteed senior unsecured bond. All were issued under the Credit Guarantee Scheme of the State of the Netherlands and are part of ING’s regular medium-term funding operations.
Total provisions for insurance contracts 213,908 236,186 5,797 5,874 219,705 242,060
Equity securities 3,338 12,271 Debt securities 12,448 10,301 Funds on deposit 64,463 97,857
Deferred income tax assets are recognised for tax loss carry forwards and unused tax credits only to the extent that realisation of the related tax benefit is probable. Changes in circumstances in future periods may adversely impact the assessment of recoverability. The uncertainty of the recoverability of the tax losses and tax credits is taken into account in establishing the deferred tax assets.
Expected rates of salary increases (excluding promotion increases) 2.70 2.80 3.20 3.20 Medical cost trend rates 6.60 7.00
– designated as at fair value through profit and loss 1,504 610 1,894 1,999 5,043 403 11,453 Investments
Note: Due to their nature remaining assets consist mainly of assets expected to be recovered after more than 12 months.
Reinsurance contracts 5,797 5,874 Reinsurance and insurance receivables 3,683 3,664 Other receivables 8,334 10,389 Maximum credit exposure on balance sheet 1,147,882 1,111,218
28 PRINCIPAL SUBSIDIARIES The principal subsidiaries of ING Groep N.V. are as follows: Companies treated as part of the insurance operations ING Verzekeringen N.V. The Netherlands ING Verzekeringen Nederland N.V. The Netherlands ING Vastgoed Belegging B.V. The Netherlands Nationale-Nederlanden Levensverzekering Maatschappij N.V. The Netherlands Nationale-Nederlanden Schadeverzekering Maatschappij N.V. The Netherlands Parcom Ventures B.V. The Netherlands Postbank Levensverzekering N.V. The Netherlands Postbank Schadeverzekering N.V. The Netherlands RVS Levensverzekering N.V. The Netherlands RVS Schadeverzekering N.V. The Netherlands Movir N.V. The Netherlands ING Zivotna Poistovna a.s. Slovakia ING Nationale-Nederlanden Polska S.A. Poland ING Nationale-Nederlanden Polska Powszechne Towarzystwo Emerytaine S.A. Poland ING Asigurari de Viata S.A. Romania ING Greek Life Insurance Company S.A. Greece ING Greek General Insurance Company S.A. Greece ING Nationale-Nederlanden Magyarorszagi Biztosito Rt. Hungary Nationale-Nederlanden Vida, Compañia de Seguros y Reaseguros S.A. Spain Nationale-Nederlanden Generales, Compañia de Seguros y Reaseguros S.A. Spain ING Canada Inc. Canada Belair Insurance Company Inc. Canada ING Insurance Company of Canada Canada ING Novex Insurance Company of Canada Canada ING America Insurance Holdings, Inc. United States of America ING International Insurance Holdings, Inc. United States of America ING Life Insurance and Annuity Company United States of America
In December 2007, ING announced the completion of the acquisition of 100% of the shares in Oyak Bank for an amount of EUR 1,903 million. Oyak Bank is a leading bank in the Turkish market, offering a full range of banking services with a focus on retail banking. Goodwill of EUR 1,015 million was recognised on acquisition and is mainly attributable to the future business potential resulting from the acquisition, as Oyak is a major bank, also offering a platform to distribute insurance, asset management and retirement products, in one of Europe’s fastest growing economies. There was no significant difference in the carrying values of the net assets acquired immediately before the acquisition and their fair values. All significant intangibles were recognised separately from goodwill and are included in Intangible assets. The profit for the year (before amortisation of the intangibles recognised on purchase accounting) was approximately EUR 80 million, but no profit or loss was included in the ING Group net result over 2007.
Capital Life Insurance Company Ltd 50 150 117 42 36 32 RELATED PARTIES In the normal course of business, the Group enters into various transactions with related companies. Parties are considered to be related if one party has the ability to control or exercise significant influence over the other party in making financial or operating decisions. Transactions have taken place on an arm’s length basis and include rendering or receiving of services, leases, transfers under finance arrangements and provisions of guarantees or collateral.
There are no significant provisions for doubtful debts or individually significant bad debt expenses.
Income from investments in debt securities 6,535 6,857 6,359 6,535 6,857 6,359 Income from loans – personal loans 209 76 200 209 76 200
Net operating lease income comprises income of EUR 961 million (2007: EUR 803 million; 2006: EUR 691 million), depreciation of EUR 766 million (2007: EUR 724 million; 2006: EUR 626 million) and other expenses of nil (2007: nil; 2006: nil).
Expenditure from non-life underwriting Reinsurance and retrocession premiums 196 306 339
No individual principal event or circumstance has led to a material recognition or reversal of the impairment losses.
Associates exemption 69 –814 –255 Other income not subject to tax –210 –577 –336 Expenses not deductible for tax purposes 106 93 121 Impact on deferred tax from change in tax rates –25 –9 –170 Deferred tax benefit from previously unrecognised amounts –64 –30 Current tax benefit from previously unrecognised amounts –222 –447 Write down/reversal of deferred tax assets 360 8 –6 Adjustment to prior periods –279 –49 –41 Effective tax amount –721 1,535 1,907
Per ordinary share (in euros) 0.74 1.48 1.32 Per non-voting equity security (in euros) (2) 0.425 Total amount of dividend declared (in millions of euros) 1,500 3,180 2,865 (1) The Executive Board, with the approval of the Supervisory Board, has proposed, subject to the ratification by the General Meeting of Shareholders, a cash dividend of EUR 0.74 per share for the year 2008. In August 2008, an interim dividend of EUR 0.74 per ordinary share of EUR 0.24 was made payable. (2) Dividend is payable per non-voting equity security of EUR 0.425. This amount is payable on 12 May 2009 provided that ING Group’s capital adequacy position is and remains satisfactory both before and after payment in the opinion of the Dutch central bank. The full amount of EUR 425 million is recognised as a liability as at 31 December 2008.
– Risk Management in 2008 – ING Group Risk Governance ING Group Risk Profile – ING Bank ING Bank Risk Profile ING Bank – Credit risks ING Bank – Market risks ING Bank – Liquidity risk – ING Insurance ING Insurance Risk Profile ING Insurance – Market risks ING Insurance – Insurance risks ING Insurance – Credit risks – ING Group – Non-financial Risks Operational risks Compliance risk – Model Disclosures
RISK GOVERNANCE ING’s risk management framework is based on the ‘three lines of defence’ concept which ensures that risk is managed in line with the risk appetite as defined by the Executive Board and is cascaded throughout the Group. This concept provides a clear allocation of responsibilities for the ownership and management of risk, to avoid overlaps and/or gaps in risk governance. Business line management and the regional and local managers have primary responsibility for the day-to-day management of risk and form the first line of defence. The risk management function, both at corporate and regional/local level, belongs to the second line of defence and has the primary responsibility to align risk taking with strategic planning e.g. in limit setting. Risk managers in the business lines have a functional reporting line to the Corporate Risk General Managers described below. The internal audit function provides an ongoing independent (i.e. outside of the risk organisation) and objective assessment of the effectiveness of internal controls, including financial and operational risk management and forms the third line of defence.
Current net asset value based on fair values (over next year)
Total CaR for interest rate risk decreased. The large decrease in interest rate CaR for ING Insurance is primarily caused by the sale of ING Life Taiwan, which is also the main reason for the decrease in Insurance risk. The ING Bank interest rate risk increase is primarily caused by increased volatility in the market.
Backtesting Backtesting is a technique for the ongoing monitoring of the plausibility of the VaR model in use. Although VaR models estimate potential future results, estimates are based on historical market data. In a backtest, the actual daily result is compared with the 1-day VaR. In addition to using actual results for backtesting, ING also uses hypothetical results, which measure results excluding the effect of intraday trading, fees and commissions. When the actual or hypothetical loss exceeds the VaR an ‘occurrence’ has taken place. Based on ING’s one-sided confidence level of 99% an occurrence is expected once in every 100 business days. In 2008, there was no occurrence (2007: none) where a daily trading loss exceeded the daily consolidated VaR of ING Wholesale Banking. ING reports the results of this backtesting to the Dutch Central Bank on a quarterly basis.
By Currency Euro –220 –125 US dollar 80 9 Pound sterling 5 –13 Other –7 –58 Total –142 –187
To further manage risk, ING Insurance has implemented several limit structures. Examples include but are not limited to the following: Market Value at Risk (MVaR) limits that provide the fundamental framework to manage the market and credit risks resulting from • the Insurance operations’ asset/liability mismatch; Credit risk concentration limits;• Mortality concentration limits;• Catastrophe and mortality exposure retention limits for its insurance risk; and• Investment and derivative guidelines.•
The table above presents figures after diversification between insurance risks and diversification across business units of ING Insurance. The largest earnings sensitivity to P&C claims relates to health and P&C claims in the Netherlands.
Processes are in place to identify key threats, vulnerabilities and the associated risks which might cause adverse events. Event identification is performed proactively and precedes a risk assessment. Different techniques for event identification exist within ING, e.g. the Integrated Risk Assessment (IRA), scenario analysis, external events inventories, internal event analysis (e.g. based on information from incident reporting), key risk indicator events and threat scans.
The Group Compliance Risk Management function is made up of Corporate Compliance Risk Management and Business Line Compliance with the CCO and a Reporting and Analytics team overseeing both areas. Corporate Compliance Risk Management is responsible for developing and communicating ING’s Group Compliance Risk Management Charter and Framework, policies and guidance for key areas of Compliance Risk and provides advice to Business Line Compliance staff on Group policy matters.
EARNINGS AND CAPITAL RISK Earnings at Risk Earnings at Risk (EaR) measures the potential reduction in IFRS earnings over the next year relative to expected IFRS earnings. EaR is measured using a 90% confidence level (i.e. ‘1 in 10’ stress scenario). Discretionary management interventions are not explicitly modelled unless their measurement can be based on historical performance tracking (e.g. regular or planned actions). It should be noted that the 90% confidence level used for EaR is not an absolute requirement, but regarded as a general guideline. For each major risk type the earnings sensitivities are calculated based on existing best-practice e.g. 1% instantaneous shock to interest rates. To reflect bottom-line IFRS earnings as close as possible in EaR measurement, the amount is compared to the forecasted earnings to determine risk appetite levels. The ING Bank credit risk component of EaR bank is adjusted for forecasted risk costs (addition to Loan Loss Provision).
The specific accounting treatments for AFS Debt Securities that requires a write down to market value regardless of the underlying estimated credit loss are not reflected under EaR. Also potential goodwill impairments are not included in the EaR determination.
Governance of Economic Capital for Credit and Transfer Risk All PD, EAD and LGD models are approved by the Credit Risk Committee (CRC) after thorough review of documentation by the Model Development Steering Committee (MDSG) and MV. In addition, each model is validated on an annual basis by MV. Each model has both a credit risk and a front office co-sponsor. Both the MDSG and the CRC have participation from both credit risk officers as well as the front office to ensure maximum acceptance by the organisation.
For the real estate development process, in addition to price risk, the risk drivers of vacancy rate and construction delays are taken into account. Furthermore the risk model differs for each development phase (i.e., research, development, and construction) to appropriately reflect the risk taken in each phase. Using correlations, all risk drivers, and stages are used to calculate a possible market value loss representing the Economic Capital for market risk for the development portfolio.
For the direct market risks, the actual VaR (measured at a 99% confidence interval, a one day holding period and under the assumption of an expected value of zero) of the trading and non-trading portfolios is taken as a starting point for the Economic Capital calculations for market risk. To arrive at the Economic Capital for market risk, a simulation based model is used which includes scaling to the required confidence interval and holding period. In determining this scaling factor, several other factors are also taken into account like the occurrence of large market movements (events) and management interventions.
‘Bonus/Malus’ approach (principle 5) Units are assigned additional capital in case losses from internal incidents exceed the level of expected losses that have been accounted for in the LDA. When actual losses are lower than expected, the capital will be decreased. Only internal incidents above one million EUR from the last five years are used. The Bonus/Malus adjustments are capped at + and – 20% to prevent large capital fluctuations in total ING capital.
CAPITAL ADEQUACY ASSESSMENT As at 31 December 2008 and 2007, ING Group, ING Bank and ING Insurance met all key target capital ratios and metrics and regulatory requirements. As at 31 December 2008 and 2007, ING Group, ING Bank and ING Insurance were adequately capitalised in relation to their risk profile and strategic objectives.
Adjustments to equity: Revaluation reserve crediting to life policyholders –2,235 –42 –2,235 –42 Revaluation reserve cashflow hedge –1,360 –10 128 –428 –1,177 –438 Goodwill –1,889 –1,076 –1,636 –1,428 –3,275 –2,420 – Revaluation reserves fixed income & other 2,787 –289 3,677 –759 6,769 –963 – Revaluation reserves excluded from Tier-1 (3) –1,790 –2,952 – Insurance hybrid capital (4) 2,250 2,250
REGULATORY REQUIREMENTS ING Bank Capital adequacy and the use of regulatory required capital are based on the guidelines developed by the Basel Committee on Banking Supervision (The Basel Committee) and the European Union Directives, as implemented by the Dutch Central Bank (DNB) for supervisory purposes. The minimum Tier-1 ratio is 4% and the minimum total capital ratio (known as the BIS ratio) is 8% of all risk-weighted assets.
REMUNERATION OF SENIOR MANAGEMENT, EXECUTIVE BOARD AND SUPERVISORY BOARD The information on share-based payment plans and remuneration of the members of the Executive Board and the Supervisory Board is included in the remuneration paragraph in the annual report (page 73 up to and including page 82). This information is considered to be an integral part of the audited annual accounts.
agreements of ING with the Dutch State, see ‘Risks related to the Company - Our agreements with the Dutch State impose certain restrictions regarding the issuance or repurchase of our shares and the compensation of certain senior management positions.’ We cannot predict whether or when future legislative or regulatory actions may be taken, or what impact, if any, actions taken to date or in the future could have on our business, results of operations and financial condition.
Our results of operations are materially impacted by conditions in the global capital markets and the economy generally. The stress experienced in the global capital markets that started in the second half of 2007 continued and substantially increased throughout 2008 and continues in 2009. The crisis in the mortgage market in the United States, triggered by a serious deterioration of credit quality, led to a revaluation of credit risks. These conditions have resulted in greater volatility, widening of credit spreads and overall shortage of liquidity and tightening of financial markets throughout the world. In addition, prices for many types of asset-backed securities (ABS) and other structured products have significantly deteriorated. These concerns have since expanded to include a broad range of fixed income securities, including those rated investment grade, the international credit and interbank money markets generally, and a wide range of financial institutions and markets, asset classes, such as public and private equity, and real estate sectors. As a result, the market for fixed income instruments has experienced decreased liquidity, increased price volatility, credit downgrade events, and increased probability of default. Securities that are less liquid are more difficult to value and may be hard to dispose of. International equity markets have also been experiencing heightened volatility and turmoil, with issuers, including ourselves, that have exposure to the real estate, mortgage, private equity and credit markets particularly affected. These events and the continuing market upheavals, including extreme levels of volatility, have had and may continue to have an adverse effect on our revenues and results of operations, in part because we have a large investment portfolio and extensive real estate activities around the world. In addition, the confidence of customers in financial institutions is being tested. Reduced confidence could have an adverse effect on our revenues and results of operations, including through an increase of lapses or surrenders of policies and withdrawal of deposits.
There is substantial competition in the Netherlands and the other countries in which we do business for the types of insurance, commercial banking, investment banking, asset management and other products and services we provide. Customer loyalty and retention can be influenced by a number of factors, including relative service levels, the prices and attributes of products and services, and actions taken by competitors. If we are not able to match or compete with the products and services offered by our competitors, it could adversely impact our ability to maintain or further increase our market share, which would adversely affect our results of operations. Such competition is most pronounced in our more mature markets of the Netherlands, Belgium, the Rest of Europe, the United States, Canada and Australia. In recent years, however, competition in emerging markets, such as Latin America, Asia and Central and Eastern Europe, has also increased as large insurance and banking industry participants from more developed countries have sought to establish themselves in markets which are perceived to offer higher growth potential, and as local institutions have become more
The use of different assumptions about these factors could have a material effect on insurance provisions and underwriting expense. Changes in assumptions may lead to changes in the insurance provisions over time. Furthermore, some of these assumptions can be volatile.
Additional Pillar 3 information for ING Bank only amounts in millions of euros, unless stated otherwise
Basel II floor* 34,369 Additional capital requirement 6,899 * 90% of Basel I required Regulatory Capital.
RISK MEASUREMENT AND REPORTING ING distinguishes three separate information requirements from senior management related to the Advanced IRB (AIRB) approach for credit risk: Reporting on (minimum) regulatory capital requirements;• Model monitoring reports; and• Stress testing reports.•
Expected Loss (EL): • The expected loss provides a measure of the value of the credit losses that ING may reasonably expect to incur on its portfolio. ING must hold a reserve (as part of its capital base) to cover the expected losses in its credit portfolio. In its basic form, the expected loss can be represented as: EL = PD * EAD * LGD
Above presentation of the past due loans is based on country of the residence of the obligor. Countries not shown in above table have past due loans of less than EUR 140 million, and are grouped under Other.
The figures in above table are calculated using the mark-to-market plus (regulatory) add-on methodology used for calculating Basel II RWA and are shown after adjustments for compensation and legal netting. This methodology allows ING to classify virtually all of its derivatives exposures under the AIRB approach.
As part of its normal securities financing and derivatives trading activities, ING enters into master agreements such as ISDAs, GMRAs, etc. Under the terms contained in sections related to Minimum Threshold Amounts and Minimum Transfer Amounts of Collateral Support Annexes (CSAa) or other similar clauses, both ING and it counterparties may agree to pledge additional collateral to each other in the event that either party is downgraded by one of the established rating agencies. ING Bank has determined that under prevailing market conditions, a one notch downgrade would only have a limited (marginal) effect on the amount of additional collateral that ING would be required to pledge under these agreements. However, the actual amount that ING may be required to pledge in the future may vary based on ING’s portfolio composition of both derivatives and securities pledged in securities financing transactions, market circumstances, the number of downgrade notches as well as the terms and conditions of future CSAs or other similar agreements entered into.
By line of business ING Wholesale Banking –710 ING Retail Banking –100 ING Direct –232 ING Bank Corporate Line –1,388 Total –2,430