ING also continues to invest in business areas that have clear growth potential. Three growth engines have been identified: direct banking, retirement services and life insurance in emerging markets. ING has strong positions in these businesses and intends to raise further their profit potential by using the experience and capital gained in ING’s mature businesses.
In 2005, we continued to execute our strategy with good results. ING benefited from the strategic decisions taken in 2004, when the management structure was simplified and the business portfolio actively managed. This portfolio management resulted in the divestments of underperforming and non-core activities and an improved capital position.
Divestments and special items Divestments resulted in a pre-tax gain of EUR 366 million in 2005 compared with EUR 55 million in 2004. Divested units contributed EUR 22 million to profit before tax in 2005, down from EUR 218 million a year earlier. Special items refer to a gain of EUR 287 million on the U.S. dollar hedge, a EUR 96 million gain on old reinsurance business and restructuring provisions of EUR 41 million at Wholesale Banking, all in 2004. Including the impact of divestments and special items, total profit before tax increased 14.9% to EUR 8,894 million.
Assets under management increased 23.5% to EUR 547.4 billion in 2005, excluding the impact of several divestments and restatements including Baring Asset Management and parts of ING BHF-Bank. The growth in assets was driven by a net inflow of EUR 33.8 billion, plus EUR 34.9 billion attributable to higher currencies and EUR 35.5 billion from higher stock markets. Including divestments and restatements, total assets under management increased 11.3%.
Also noteworthy was the successful introduction of a number of new funds, such as the Premium Dividend Fund for the Dutch and European market, which attracted around EUR 500 million in new assets, and the Multi-Manager fund for the Dutch institutional market (EUR 400 million).
In 2005, underlying profit before tax of Insurance Americas increased 23.6%, led by strong results in Canada and the United States. Premium income development was virtually flat, as higher non-life premiums were offset by lower life premiums. In 2005, there was a strong focus on improving execution and value creation across the region, through continued pricing discipline and by concentrating on business with the best long-term growth potential. Mexican results declined primarily due to claims and expenses from hurricanes.
• Underlying profit before tax soared on strong results in the United States and Canada
* With the exception of the proportional share of its results, ING’s 49% minority interest is not consolidated in the ING Annual Accounts.
Excellent performance by ING Investment Management ING Investment Management, with some newly recruited top managers, delivered strong and improved investment performance across core United States asset classes. Its enhanced research and portfolio-management teams in its equity and asset-allocation areas produced competitive results, while its fixed-income strategies continued to maintain top rankings over one, three, five and ten-year time periods.
In 2005, the United States operations also completed the first phase of a significant Fund Optimisation Project. This project was designed to streamline and upgrade the menu of funds offered within ING products to provide better performing funds for customers and increased efficiency for ING.
Insurance Americas will continue to balance growth with strong value creation, by leveraging its leading market positions for sales and top-line growth and driving unit costs down. Insurance Americas will focus on execution, increase margins on new business (where market conditions permit) and aggressively manage risks to ensure value creation.
Expenses were well under control in 2005. Operating expenses increased 3.4% to EUR 3,829 million. Underlying operating expenses rose 5.7%, mainly due to the consolidation of Postkantoren BV, as well as EUR 33 million in one-off costs related to the efficiency programme for the Operations/IT activities in the Benelux, and EUR 27 million in accelerated software depreciation in the Netherlands. Excluding those items, operating expenses decreased slightly as the impact of the new labour agreement in the Netherlands was offset by a release of EUR 83 million from provisions related to healthcare and pensions in the Netherlands. Excluding all non-recurring items and adjusted for exchange-rate differences, recurring operating expenses increased 0.5%, even including investments to expand in Romania, Poland, India and Private Banking. The cost/income ratio improved
The after-tax risk-adjusted return on capital (RAROC) from Retail Banking improved to 36.0% from 26.2% in 2004. In the Netherlands pre-tax RAROC was 70.4% and in Belgium 51.1%, both well above ING’s target of 18.5% pre-tax.
The bank gained market share in deposits (from 6% in 2004 to 8% in 2005). Successful campaigns for credit cards and internet banking further strengthened ING Bank Slaski’s position in the market. Due to our decision not to participate in the more risky foreign-currency mortgage market, our market share in mortgages increased slowly. In the local-currency mortgage market however, our market share increased faster.
ING Card’s market share in the Netherlands in 2005 was approximately 25%, which makes it number two in the market. At year-end, ING Card had a portfolio of 1.7 million cards and EUR 581 million of total credit exposure. In its operations, ING Card focuses and applies its best practices on marketing, business intelligence, client behaviour, revolving credit levels and risk management. It aims at continuously cross-selling its card products to the extensive retail-customer databases within ING as well as selling to non-ING customers. In the first quarter of 2006, ING cards will be launched in Germany as part of its European expansion plans.
Insurance Europe 14% 16,100 Insurance Americas 23% 27,100 Insurance Asia/Pacific 7% 8,400 Wholesale Banking 18% 20,800 Retail Banking 32% 36,400 ING Direct 6% 6,500
CORPORATE RESPONSIBILITY Striving to meet our commitments in all we do
ING Chances for Children In 2005, ING Group launched a global communitydevelopment programme called Chances for Children. The aim of the programme is to improve children’s access to primary education in developing countries. Working with UNICEF, ING’s target is to send 50,000 children in India, Brazil and Ethiopia to school by the end of 2007. At yearend 2005, ING had already raised enough money to send 34,000 children to school.
Eric F. Boyer de la Giroday (Born 1952, Belgian nationality) After completing his degree in commercial engineering at the Free University of Brussels and a Master in Business Administration at the Wharton School, University of Pennsylvania, Eric Boyer started his career with Citibank in 1978. In 1984 he joined Bank Brussels Lambert, which was acquired by ING Group in 1998, where he held various management positions in the fields of capital markets, treasury and corporate and investment banking. He was appointed a member of the Executive Board of ING Group in April 2004. He is responsible for Wholesale Banking.
The Audit Committee assists the Supervisory Board in monitoring the integrity of the financial statements of ING Group, ING Verzekeringen N.V. and ING Bank N.V., in monitoring the compliance with legal and regulatory requirements, and in monitoring the independence and performance of ING’s internal and external auditors.
The Corporate Governance Committee assists the Supervisory Board in monitoring and evaluating the corporate governance of ING as a whole and the reporting thereon in the Annual Report and to the Annual General Meeting of Shareholders, and advises the Supervisory Board on improvements in respect of the foregoing.
The following report is issued in compliance with the provisions in article 15 of the Conditions of Trust for registered shares in ING Groep N.V.
Furthermore, the Markets in Financial Instruments Directive (MiFID) will have a significant impact on ING and on the European markets in which ING operates. The implementation of MiFID is a vast project that started in 2005 and is scheduled to be completed by November 2007 (the EU deadline). Project teams have been set up to ensure timely implementation of MiFID in the implementation within the relevant business lines.
(bank/insurance companies); – ABN Amro, Bank of America, BNP Paribas, BSCH,
Executive Board Base salary 2005 The base salary of the Executive Board members has been frozen for 2005, as was the case in 2004. The Executive Board received a 7.5% increase in their base salary in 2003.
The exercise price of the options will be fixed at the Euronext Amsterdam Stock Market opening price of the ING Group share on 12 May 2006. The performance shares are granted at the beginning of 2006; the final number will depend on the ranking within the performance peer group after the three-year period (2006 – 2008) based on the performance/payout scale on page 65.
(2) Fair Market Value of long-term incentive reflects the estimated fair market value of the long-term incentive award on the date of grant based on a fair value calculation. The valuation is calculated annually for grants made to the Executive Board members for performance over the year specified.
INCOME Interest income banking operations 48,176 25,448 Interest expense banking operations 39,109 16,707 Interest result banking operations 22 9,067 8,741
International Financial Reporting Standards as adopted by the EU provide several options in accounting principles. ING Group’s accounting principles under International Financial Reporting Standards as adopted by the EU and its decision on the options available are set out in the section ‘Principles of valuation and determination of results’ below.
Property under development for third parties Both under IFRS-EU and ING GAAP, property in the course of construction is reported at cost and profit is recognised on completion date. However, IFRS-EU is more restrictive on the overhead expenses that may be capitalised and the definition of the completion date is different under IFRS-EU.
Foreign currency translation Under ING GAAP, translation differences on insurance liabilities and related investments were recorded in equity. Under IFRS-EU, both are recognised in the profit and loss account. Both under IFRS-EU and ING GAAP translation differences on foreign operations are reported in a translation reserve in equity; however, at transition to IFRS-EU the translation differences reserve was reset to nil.
FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES Fair value of financial assets and liabilities are determined using quoted market prices. Market prices are obtained from traders, brokers and independent market vendors. In general, positions are valued taking the bid price for a long position and the offer price for a short position. In some cases where positions are marked at mid-market prices, a fair value adjustment is calculated. Furthermore, additional fair value adjustments may be necessary for liquidity or outdated data because transactions in a particular financial instrument do not take place on a regular basis.
Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the profit and loss account, except when deferred in equity as part of qualifying cash flow hedges and qualifying net investment hedges.
The fair values of financial instruments that are not traded in an active market (for example over-the-counter derivatives) are determined by using valuation techniques. The Group uses a variety of methods and makes assumptions that are based on market conditions existing at each balance sheet date.
Investments Investment securities (including loans quoted in active markets) are classified either as held-to-maturity or available-for-sale assets and are initially recognised at fair value, net of transaction costs. Investment securities and loans quoted in active markets with fixed maturity where management has both the intent and the ability to hold to maturity are classified as held-to-maturity. Investment securities and actively traded loans intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices are classified as available-for-sale.
Adequacy test The adequacy of the Provision for life policy liabilities net of DAC and VOBA is evaluated regularly by each business unit. The test considers current estimates of all contractual and related cash flows. It takes into account future developments. It allows for remaining unamortised interest-rate rebates, DAC and VOBA. It includes investment income on the same basis as it is included in the profit and loss.
INCOME RECOGNITION Premium income Premiums from life insurance policies are recognised as revenue when due from the policyholder. For non-life insurance policies, premium income is recognised on a pro-rata basis over the term of the related policy coverage. Receipts under investment contracts are not recognised as premium income.
Lease income The proceeds from leasing out assets under operating leases are recognised on a straight-line basis over the life of the lease agreement. Lease payments received in respect of finance leases when ING is the lessor are divided into an interest component (recognised as interest income) and a repayment component.
As at 31 December 2005, Loans and advances to customers included receivables with regard to securities which have been acquired in reverse repurchase transactions related to the banking operations amounting to EUR 6,684 million (2004: EUR 24,110 million).
Maturities of gross investment in financial leases receivable Not later than 1 year 4,230 4,067 Later than 1 year and not later than 5 years 7,355 7,111 Later than 5 years 2,654 2,269
Exchange differences 62 -7 Other movements 6 -189 Closing balance 2,271 2,409
Not later than 1 year 664 663 Later than 1 year and not later than 5 years 1,505 1,419 Later than 5 years 1 19 106 ING Group Annual Report 2005
– deferred acquisition costs and VOBA 76 51 – other provisions 15 15
Issued share capital as at 31 December 2003 87,080 104 2,115,901 508 From 2003 final stockdividend 31,731 8 From 2004 interim stockdividend 31,699 8 Issue of shares 25,389 6 Issued share capital as at 31 December 2004 87,080 104 2,204,720 530
Preference shares of group companies comprise non-cumulative guaranteed Trust Preference Securities which are issued by wholly owned subsidiaries of ING Groep N.V. These securities have a liquidation preference of a certain amount plus any accrued interest and unpaid dividend. Dividends with regard to these preference securities are presented as an interest expense in the profit and loss account. These trust preference securities generally have no voting rights.
ING Group had an outstanding balance of EUR 68 million at 31 December 2005 (2004: EUR 96 million) relating to environmental and asbestos claims of the insurance operations. In establishing the liability for unpaid claims and claims adjustment expenses related to asbestos related illness and toxic waste clean up, the management of ING Group considers facts currently known and the current state of the law and coverage litigation. Liabilities are recognised for IBNR claims and for known claims (including the costs of related litigation) when sufficient information has been developed to indicate the involvement of a specific insurance policy, and management can reasonably estimate its liability. In addition, liabilities are reviewed and updated regularly.
The nominal amounts of liabilities designated as at fair value through profit or loss approximates the fair value.
DEFERRED TAX ASSET (OFFSET BY DEFERRED TAX LIABILITIES) IN CONNECTION WITH UNUSED TAX LOSSES CARRIED FORWARD
Amount included in Other liabilities 1,067 1,392 408 656 523 517 1,998 2,565
Amount Amount outstanding Average outstanding Average 31 December Interest Rate Repayments 31 December Interest Rate Repayments amounts in thousands of euros 2005 2004
FINANCIAL ASSETS Cash and balances with central banks 13,084 13,084 9,113 9,113 Amounts due from banks(1) 48,250 47,466 46,951 45,084 Financial assets at fair value through profit or loss
Financial assets at fair value through profit or loss The fair values of securities in the trading portfolio and other assets at fair value through profit and loss are based on quoted market prices, where available. For those securities not actively traded, fair values are estimated based on internal discounted cash flow pricing models taking into account current cash flow assumptions and the counterparties’ credit standings.
OTHER IMPAIRMENT LOSSES AND REVERSALS OF IMPAIRMENTS RECOGNISED IN THE PROFIT AND LOSS ACCOUNT
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 report in the annual report (page 64 up to and including page 74). This information is considered to be an integral part of the audited annual accounts.
The option rights are valid for a period of five or ten years. Option rights, that are not exercised within this period, lapse. Option rights granted will remain valid until expiry date, even if the option scheme is discontinued. The option rights are subject to certain conditions, including a certain continuous period of service. The exercise prices of the options are the same as the quoted prices of ING Group shares at the date on which the options are granted.
The aggregate intrinsic value of options outstanding and exercisable at 31 December 2005 was EUR 4.88 and EUR 10.72, respectively.
(1) only covers exposures in excess of EUR 10 billion, including intercompany exposures with ING Insurance.
There is no significant concentration of a particular type of loan structure in the watch-list or the impaired loan portfolio. As such, the make up of the collateral received generally mirrors that of the portfolio as a whole.
Liquidity risk Liquidity risk is the risk that ING Bank or one of its subsidiaries cannot meet its financial liabilities when they come due, at reasonable costs and in a timely manner. Within ING Bank, ALCO Bank bears overall responsibility for the liquidity risk strategy. ALCO Bank has delegated day-to-day liquidity management to the Treasury Amsterdam, which is responsible for managing the overall liquidity-risk position of ING Bank, while regional and local treasuries are responsible for managing liquidity in their respective regions and locations.
The main objective of ING’s liquidity strategy is to maintain sufficient liquidity in order to ensure safe and sound operations. The liquidity strategy of ING Bank has four primary components.
Increase of real estate of 10% 509 525 Decrease of real estate of 10% -513 -525
Liquidity risk decreases as the time frame allowed for generating cash increases. Longer time frames increase the probability of finding a buyer for some of the company’s non-maturing or less liquid assets or securing external financing. Expected liquidity demands within ING Insurance are managed through a combination of treasury, investment and asset-liability management guidelines, which are monitored on an ongoing basis. Unexpected liquidity demands are managed through a combination of product design, diversification limits on liabilities, investment strategy, systematic monitoring and advance contingency planning. CIRM has issued formal guidelines requiring all insurance businesses to regularly assess, monitor and report on their liquidity risk profile. The guidelines require an analysis of liabilities that increase liquidity risk, a review of the investment portfolio to ensure adequate liquidity, and analysis of the expected asset-and-liability cash flows in regards to the ability of the business to meet cash demands.
In the table below a summary is shown of the outstandings in the general account fixed-income portfolios per credit rating expressed in Standard & Poor’s ratings at 31 December 2005.
PARENT COMPANY PROFIT AND LOSS ACCOUNT OF ING GROUP FOR THE YEARS ENDED 31 DECEMBER
Changes in balance sheet values due to changes in the revaluation reserve of the associates are reflected in the Revaluation reserve, which forms part of Shareholders’ equity. Changes in balance sheet values due to the results of these associates, accounted for in accordance with ING Group accounting policies, are included in the profit and loss account. Other changes in the balance sheet value of these associates, other than those due to changes in share capital, are included in Other reserves, which forms part of Shareholders’ equity.
Opening balance 28,062 28,651 Change in accounting principles 4,510 -1,991 Repayments to group companies -2,303 Divestures of group companies 152
INTRODUCTION We have audited the annual accounts of ING Groep N.V., Amsterdam, for the year 2005 (as set out on pages 76 to 172). These annual accounts consist of the consolidated annual accounts and the parent company annual accounts. These annual accounts are the responsibility of the company’s management. Our responsibility is to express an opinion on these annual accounts based on our audit.
PROVISIONS CONCERNING ISSUE OF SHARES Pursuant to Article 13 of the Articles of Association, the authority to issue shares, grant the right to take up shares and restrict or exclude the preferential rights of shareholders has been conferred on the Executive Board, upon approval of the Supervisory Board. This authority applies to the period ending on 26 October 2006 (subject to extension by the General Meeting of Shareholders): 1. i) for a total of 220,000,000 ordinary shares; plus ii) for a total of 220,000,000 ordinary shares, only if these shares are issued in connection with the take over of a business or company; 2. for 10,000,000 preference shares B.
SHAREHOLDERS’ EQUITY AND NET PROFIT ON THE BASIS OF US GAAP AMOUNTS IN MILLIONS OF EUROS, EXCEPT FOR AMOUNTS PER SHARE
This item includes intangible assets and related amortisation related to acquisitions before 1 January 2004, which under IFRS-EU were charged directly to equity as part of goodwill.
Furthermore, a shadow premium deficiency may arise under US GAAP when unrealised investment gains related to availablefor -sale securities are included in the US GAAP adequacy testing as if the gains had been realised. This results in an adjustment to equity for any shadow premium deficiency calculated and an adjustment to the current year’s value of business acquired, deferred acquisition costs, or provision for life policy liabilities as above. This adjustment is recorded under US GAAP but is not recorded for IFRS-EU purposes.
Under IFRS-EU excluding IAS 39 (2004), equity participations are carried at either the lower of cost or market value or at net asset value. Dividends received and realised gains and losses on the sale of these shareholdings are charged to the profit and loss account. Under US GAAP, these shareholdings are accounted for at either fair value with changes in fair value recorded in equity attributable to equity holders of the company, or, in cases where significant influence can be exercised by ING, by the equity method.
ING continuously develops and refines its internal capital models that may lead to changes and restatements. E.g. for 2005 (and 2004) market model risk has been included for retail banking. In 2006 credit risk capital calculation methods and data collection will be evaluated also in the light of the Basel II preparations.
Credit risk (including Transfer risk) 7.0 7.3 Market risk 3.9 4.3 Operational risk 1.8 1.8 Business Risk 2.3 1.8
GENERAL ING assesses internal capital requirements by using its own risk based methodologies. The capital model is developed to measure the amount of capital ING believes is necessary to be considered a AA rated insurance business.
Free surplus 2,274 599 Required capital 13,691 11,509 Adjusted net worth 15,964 12,108
Value of new business 805 Financial variances 1,105 Operational variances 294 Operating assumption changes 50 Embedded value profit 2,254
(1) Note that in comparison with 2004 results of the equity sensitivity may differ as in 2004 this sensitivity was applied to unit-linked and variable products only. (2) Net impact shown here is the sum of the individual sensitivities presented above. Note that this may differ from an exact calculation of changing both parameters together.
Annual General Meeting of Shareholders Tuesday, 25 April 2006 Muziekgebouw aan ‘t IJ, Amsterdam
EMPLOYEE BENEFITS All forms of consideration given by a company in exchange for service rendered by (former) employees.
OVER-THE-COUNTER INSTRUMENT Non-standardised financial instrument not traded on a stock exchange but directly between market participants.
PLAN ASSETS Plan assets comprise assets held by a long-term employee benefit fund and qualifying insurance policies. Assets held by a long-term employee benefit fund are assets (other than non-transferable financial instruments issued by the reporting enterprise) that: – are held by an entity (a fund) that is legally separate from the reporting enterprise and exists solely to pay or fund employee benefits; and
SHARE PREMIUM (RESERVE) Paid-in capital in addition to the nominal value and paid-up on issued share capital.
TRADING PORTFOLIO The trading portfolio comprises those financial instruments which are held to obtain short-term transaction results, to facilitate transactions on behalf of clients or to hedge other positions in the trading portfolio.