UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 20-F
(Mark One) | ||
o
|
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
OR | ||
x
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended December 31, 2003 | ||
OR | ||
o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 1-14642
ING GROEP N.V.
The Netherlands
(Jurisdiction of incorporation or organization)
ING Groep N.V.
Amstelveenseweg 500
1081 KL Amsterdam
P.O. Box 810, 1000 AV Amsterdam
The Netherlands
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Name of each exchange on | ||
Title of each class |
which registered |
|
American Depositary Shares, each representing one ordinary share
|
New York Stock Exchange | |
Ordinary shares, nominal value EUR 0.24 per Ordinary share and Bearer
Depositary receipts in respect of Ordinary shares*
|
New York Stock Exchange | |
7.70% Noncumulative Guaranteed Trust Preferred Securities
|
New York Stock Exchange | |
9.20% Noncumulative Guaranteed Trust Preferred Securities
|
New York Stock Exchange | |
7.05% ING Perpetual Debt Securities
|
New York Stock Exchange | |
7.20% ING Perpetual Debt Securities
|
New York Stock Exchange | |
6.20% ING Perpetual Debt Securities
|
New York Stock Exchange |
* | Listed, not for trading or quotation purposes, but only in connection with the registration of American Depositary Shares pursuant to the requirements of the Securities and Exchange Commission |
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Indicate the number of outstanding shares of each of the issuers classes of capital or common stock as of the close of the period covered by the annual report.
Ordinary shares, nominal value EUR 0.24 per Ordinary share
|
2,115,901,441 | |||
Bearer Depositary receipts in respect of Ordinary shares
|
2,114,961,163 |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ o No
Indicate by check mark which financial statement item the registrant has elected to follow:
o Item 17 Item 18 þ
TABLE OF CONTENTS
2
PRESENTATION OF INFORMATION
In this Annual Report, references to ING Groep N.V., we and us refer to the ING holding company, incorporated under the laws of the Netherlands, and references to ING, ING Group, the Company and the Group, refer to ING Groep N.V. and its consolidated subsidiaries. ING Groep N.V.s primary insurance and banking subsidiaries are ING Verzekeringen N.V. (together with its consolidated subsidiaries, ING Insurance) and ING Bank N.V. (together with its consolidated subsidiaries, ING Bank), respectively.
ING presents its consolidated financial statements in euros, the currency of the Economic and Monetary Union. Unless otherwise specified or the context otherwise requires, references to $, US$, Dollars, and US Dollars are to the United States dollars and references to EUR and are to euros.
Solely for the convenience of the reader, this Annual Report contains translations of certain euro amounts into U.S. dollars at specified rates. These translations should not be construed as representations that the translated amounts actually represent such dollar or euro amounts, as the case may be, or could be converted into U.S. dollars or euros, as the case may be, at the rates indicated or at any other rate. Therefore, unless otherwise stated, the translations of euros into U.S. dollars have been made at the rate of euro 1.00 = $ 1.2088 the noon buying rate in New York City for cable transfers in euros as certified for customs purposes by the Federal Reserve Bank of New York (the Noon Buying Rate) on March 3, 2004. Except as otherwise noted, financial statement amounts set forth in this Annual Report are presented in accordance with generally accepted accounting principles in the Netherlands (Dutch GAAP), which differ in certain significant respects from U.S. GAAP. Reference is made to Note 6 to the Consolidated Financial Statements for a description of the significant differences between Dutch GAAP and U.S. GAAP and a reconciliation of certain income statement and balance sheet items to U.S. GAAP. Certain amounts set forth herein may not sum due to rounding.
Unless otherwise indicated, gross premiums, gross premiums written and gross written premiums as referred to in this Annual Report include premiums (whether or not earned) for insurance policies written during a specified period, without deduction for premiums ceded, and net premiums, net premiums written and net written premiums include premiums (whether or not earned) for insurance policies written during a specified period, after deduction for premiums ceded.
3
CAUTIONARY STATEMENT WITH RESPECT TO FORWARD-LOOKING STATEMENTS
Certain of the statements contained in this Annual Report that are not historical facts, including, without limitation, certain statements made in the sections hereof entitled Information on the Company, Dividends, Operating and Financial Review and Prospects, Selected Statistical Information on Banking Operations and Quantitative and Qualitative Disclosure of Market Risk are statements of future expectations and other forward-looking statements that are based on managements current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation,
| changes in general economic conditions, including in particular economic conditions in INGs core markets, | |||
| changes in performance of financial markets, including emerging markets, | |||
| the frequency and severity of insured loss events, | |||
| changes affecting mortality and morbidity levels and trends, | |||
| changes affecting persistency levels, | |||
| changes affecting interest rate levels, | |||
| changes affecting currency exchange rates, including the euro-U.S. dollar exchange rate, | |||
| increasing levels of competition in the Netherlands and emerging markets, | |||
| changes in laws and regulations | |||
| regulatory changes relating to the banking or insurance industries, | |||
| changes in the policies of central banks and/or foreign governments, | |||
| general competitive factors, in each case on a global, regional and/or national basis. |
ING is under no obligation to publicly update or revise any forward-looking statements, whether as a result of new information or for any other reason. See Item 3. Key Information Risk factors and Item 5. Operating and Financial Review and Prospects Factors affecting results of operations.
4
PART I
Item 1. Identity Of Directors, Senior Management And Advisors
Not Applicable.
Item 2. Offer Statistics And Expected Timetable
Not Applicable.
Item 3. Key Information
In the table below, we provide you with summary historical data of ING Group. We have prepared this information using the consolidated financial statements of ING Group for the five years ended December 31, 2003. The financial statements for the five fiscal years ended December 31, 2003 have been audited by Ernst & Young Accountants, independent auditors, except for the financial statements of ING Bank N.V., a direct wholly-owned subsidiary, which were audited by KPMG Accountants N.V. and whose report, only insofar as it relates to the 2003, 2002 and 2001 Consolidated Financial Statements, is based in part upon the reports of other auditors.
The consolidated financial statements are prepared in accordance with Dutch GAAP, which differ in certain significant respects from U.S. GAAP. You can find a description of the significant differences between Dutch GAAP and U.S. GAAP and a reconciliation of certain income statement and balance sheet items to U.S. GAAP in Note 6 to the Consolidated Financial Statements.
In 2003, no material changes in net profit existed between the Dutch GAAP accounting principles and the US GAAP accounting principles, see Notes to the Consolidated Financial Statements: Differences between Dutch and US accounting principles.
In 2002, a significant difference existed between the net profit pursuant to Dutch GAAP accounting principles, which amounted to EUR 4,500 million, and the net profit pursuant to US GAAP accounting principles which amounted to EUR (9,627) million. This difference was primarily the result of the new goodwill requirements (SFAS 142) under US GAAP. As of January 2002, goodwill is no longer amortized, but tested for impairment annually. This change resulted in a non-cash transitional impairment loss in 2002, related to the carrying value of goodwill as at December 31, 2001, of EUR 13,103 million, which was required to be recognized under US GAAP net profit 2002 as the cumulative effect of changes in accounting principles. Excluding the effects of changes in accounting principles US GAAP net profit 2002 was EUR 3,476 million compared with EUR 1,770 million in 2001. Other than the transitional impairment loss in 2002 no additional goodwill impairments were recognized in 2002, in 2003 ING Group recognized an goodwill impairment charge of EUR 101 million.
Under ING Group accounting principles goodwill paid on acquisitions including related intangible assets are charged directly to Shareholders equity.
ING Group evaluates the results of its insurance operations and banking operations using non-GAAP financial performance measures called operating profit before tax and operating net profit. Operating net profit and operating profit before tax are defined as profit before tax and net profit, excluding:
| capital gains and losses on equity securities, | |||
| the impact of the negative revaluation reserve on equity securities, and | |||
| realized gains on divestitures that are made with the purpose of using the proceeds to finance acquisitions. |
While these excluded items are significant components in understanding and assessing the Groups consolidated financial performance, ING Group believes that the presentation of operating profit enhances the understanding and comparability of its segment performance by highlighting net income attributable to ongoing operations and the underlying profitability of the segment businesses. We believe that trends in the underlying profitability of ING Groups businesses can be more clearly identified without the fluctuating effects of realized capital gains and losses on equity securities and
5
the impact of the negative revaluation reserve on equity securities. These results are largely dependent on market cycles and can vary across periods. The timing of sales that would result in gains or losses is largely at the discretion of the company. The realized gains on divestitures that are made with the purpose of using the proceeds to finance acquisitions are excluded because the timing of these gains is largely subject to the companys discretion, influenced by market opportunities and ING Group does not believe that they are indicative of future results. Operating profit before tax and operating net profit are not a substitute for profit before taxation and net profit as determined in accordance with Dutch GAAP. ING Groups definition of operating profit before tax and operating net profit may differ from those used by other companies and may change over time.
The following information should be read in conjunction with, and is qualified by reference to the Groups Consolidated Financial Statements and other financial information included elsewhere herein.
Year ended December 31, | ||||||||||||||||||||||||
2003 | 2003 | 2002 | 2001(2) | 2000(2)(3) | 1999 | |||||||||||||||||||
USD(1) | EUR | EUR | EUR | EUR | EUR | |||||||||||||||||||
(in millions, except amounts per share and ratios) | ||||||||||||||||||||||||
Dutch GAAP Consolidated Income Statement Data |
||||||||||||||||||||||||
Operating income from insurance
operations: |
||||||||||||||||||||||||
Gross
premiums written: |
||||||||||||||||||||||||
Life |
46,214 | 38,231 | 44,367 | 44,557 | 25,019 | 18,902 | ||||||||||||||||||
Non-life |
8,810 | 7,288 | 7,917 | 5,903 | 4,095 | 3,510 | ||||||||||||||||||
Total |
55,024 | 45,519 | 52,284 | 50,460 | 29,114 | 22,412 | ||||||||||||||||||
Investment income(4)(5) |
11,751 | 9,721 | 10,506 | 9,723 | 7,212 | 6,119 | ||||||||||||||||||
Commission and other income |
2,804 | 2,320 | 2,127 | 2,281 | 1,126 | 548 | ||||||||||||||||||
Total operating income from
insurance operations |
69,579 | 57,560 | 64,917 | 62,464 | 37,452 | 29,079 | ||||||||||||||||||
Operating income from banking operations: |
||||||||||||||||||||||||
Interest income |
28,772 | 23,802 | 24,088 | 24,318 | 24,285 | 18,558 | ||||||||||||||||||
Interest expense |
18,962 | 15,687 | 16,442 | 18,246 | 18,499 | 12,906 | ||||||||||||||||||
Net interest result |
9,810 | 8,115 | 7,646 | 6,072 | 5,786 | 5,652 | ||||||||||||||||||
Commission |
2,978 | 2,464 | 2,615 | 2,765 | 3,630 | 2,856 | ||||||||||||||||||
Other income |
1,331 | 1,101 | 940 | 2,274 | 1,886 | 1,368 | ||||||||||||||||||
Total operating income from banking
operations |
14,119 | 11,680 | 11,201 | 11,111 | 11,302 | 9,876 | ||||||||||||||||||
Total operating income(6) |
83,495 | 69,073 | 76,101 | 73,550 | 48,713 | 38,943 | ||||||||||||||||||
Non-operating items |
280 | 325 | 8,597 | 1,693 | ||||||||||||||||||||
Realized capital gains (losses) |
25 | 20 | 1,003 | 779 | 855 | 641 | ||||||||||||||||||
Total income |
83,520 | 69,093 | 77,384 | 74,654 | 58,165 | 41,277 | ||||||||||||||||||
Operating expenses from insurance operations: |
||||||||||||||||||||||||
Life |
56,650 | 46,865 | 53,603 | 53,615 | 30,882 | 23,584 | ||||||||||||||||||
Non-life |
8,714 | 7,209 | 8,144 | 6,057 | 4,263 | 3,736 | ||||||||||||||||||
Total operating expenses from insurance
operations |
65,364 | 54,074 | 61,747 | 59,672 | 35,145 | 27,320 | ||||||||||||||||||
Total operating expenses from banking
operations(7) |
11,253 | 9,309 | 9,733 | 8,941 | 8,697 | 7,895 | ||||||||||||||||||
Total operating expenses(6) |
76,416 | 63,216 | 71,463 | 68,588 | 43,801 | 35,203 | ||||||||||||||||||
Non-operating items |
395 | |||||||||||||||||||||||
Total expenses |
76,416 | 63,216 | 71,463 | 68,588 | 44,196 | 35,203 | ||||||||||||||||||
6
Year ended December 31, | ||||||||||||||||||||||||
2003 | 2003 | 2002 | 2001(2) | 2000(2)(3) | 1999 | |||||||||||||||||||
USD(1) | EUR | EUR | EUR | EUR | EUR | |||||||||||||||||||
(in millions, except amounts per share and ratios) | ||||||||||||||||||||||||
Operating profit before tax from
insurance operations: |
||||||||||||||||||||||||
Life |
2,996 | 2,478 | 2,603 | 2,278 | 1,945 | 1,499 | ||||||||||||||||||
Non-life |
1,218 | 1,008 | 567 | 514 | 362 | 260 | ||||||||||||||||||
Total |
4,214 | 3,486 | 3,170 | 2,792 | 2,307 | 1,759 | ||||||||||||||||||
Operating profit before tax from
banking operations |
2,866 | 2,371 | 1,468 | 2,170 | 2,605 | 1,981 | ||||||||||||||||||
Operating profit before tax |
7,080 | 5,857 | 4,638 | 4,962 | 4,912 | 3,740 | ||||||||||||||||||
Taxation |
1,765 | 1,460 | 873 | 1,099 | 1,377 | 982 | ||||||||||||||||||
Third-party interests |
416 | 344 | 332 | 324 | 147 | 93 | ||||||||||||||||||
Operating net profit |
4,899 | 4,053 | 3,433 | 3,539 | 3,388 | 2,665 | ||||||||||||||||||
Non-operating items after taxation |
247 | 325 | 7,976 | 1,693 | ||||||||||||||||||||
Realized capital gains (losses) after
taxation |
(12 | ) | (10 | ) | 820 | 713 | 620 | 564 | ||||||||||||||||
Net profit |
4,887 | 4,043 | 4,500 | 4,577 | 11,984 | 4,922 | ||||||||||||||||||
Dividend on Preference shares of
ING Groep N.V. |
25 | 21 | 21 | 21 | 21 | 21 | ||||||||||||||||||
Net profit after deducting dividend on
Preference shares of ING Groep N.V. |
4,862 | 4,022 | 4,479 | 4,556 | 11,963 | 4,901 | ||||||||||||||||||
Dividend on Ordinary shares |
2,447 | 2,024 | 1,930 | 1,914 | 2,173 | 1,573 | ||||||||||||||||||
Addition to shareholders equity |
2,414 | 1,997 | 2,549 | 2,642 | 9,790 | 3,328 | ||||||||||||||||||
Distributable net profit |
4,887 | 4,043 | 4,253 | 4,252 | 4,901 | 3,537 | ||||||||||||||||||
Operating net profit per Ordinary share (8) |
2.42 | 2.00 | 1.77 | 1.83 | 1.76 | 1.38 | ||||||||||||||||||
Distributable net profit per Ordinary share (8) |
2.42 | 2.00 | 2.20 | 2.20 | 2.56 | 1.84 | ||||||||||||||||||
Net profit per Ordinary share(8) |
2.42 | 2.00 | 2.32 | 2.37 | 6.27 | 2.56 | ||||||||||||||||||
Net profit per Ordinary share and Ordinary
share equivalent (fully diluted)(8) |
2.42 | 2.00 | 2.32 | 2.35 | 6.18 | 2.52 | ||||||||||||||||||
Dividend per Ordinary share(8) |
1.17 | 0.97 | 0.97 | 0.97 | 1.13 | 0.82 | ||||||||||||||||||
Interim Dividend |
0.58 | 0.48 | 0.48 | 0.47 | 0.41 | 0.32 | ||||||||||||||||||
Final Dividend |
0.59 | 0.49 | 0.49 | 0.50 | 0.72 | 0.50 | ||||||||||||||||||
Number of Ordinary shares outstanding
(in millions)(8) |
2,115.9 | 2,115.9 | 1,992.7 | 1,992.7 | 1,970.6 | 1,934.0 | ||||||||||||||||||
Dividend pay-out ratio(9) |
48.5 | % | 48.5 | % | 44.1 | % | 44.1 | % | 43.9 | % | 44.4 | % | ||||||||||||
U.S. GAAP Consolidated Income
Statement Data |
||||||||||||||||||||||||
Total income (operating) |
58,053 | 48,025 | 49,316 | 49,479 | 42,039 | 34,022 | ||||||||||||||||||
Net profit US GAAP, excluding
cumulative effects |
5,454 | 4,512 | 3,476 | 1,770 | 10,925 | 3,790 | ||||||||||||||||||
Cumulative effects of changes in
accounting principles |
(13,103 | ) | ||||||||||||||||||||||
Net profit US GAAP, including
cumulative effects |
5,454 | 4,512 | (9,627 | ) | 1,770 | 10,925 | 3,790 | |||||||||||||||||
Net profit per Ordinary share and
Ordinary share equivalent(8) |
2.70 | 2.23 | (5.00 | ) | 0.90 | 5.64 | 1.94 |
7
Year ended December 31, | ||||||||||||||||||||||||
2003 | 2003 | 2002 | 2001(2) | 2000(2)(3) | 1999 | |||||||||||||||||||
USD(1) | EUR | EUR | EUR | EUR | EUR | |||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Reconciliation of net profit to operating
profit before tax and operating net profit,
by segment for the consolidated Group |
||||||||||||||||||||||||
Total Group |
||||||||||||||||||||||||
Net profit |
4,887 | 4,043 | 4,500 | 4,577 | 11,984 | 4,922 | ||||||||||||||||||
Taxation |
1,801 | 1,490 | 1,089 | 1,165 | 1,838 | 1,059 | ||||||||||||||||||
Third-party interests |
416 | 344 | 332 | 324 | 147 | 93 | ||||||||||||||||||
Profit before tax |
7,104 | 5,877 | 5,921 | 6,066 | 13,969 | 6,074 | ||||||||||||||||||
Non-operating items |
280 | 325 | 8,202 | 1,693 | ||||||||||||||||||||
Realized capital gains (losses) |
24 | 20 | 1,003 | 779 | 855 | 641 | ||||||||||||||||||
Operating profit before tax |
7,080 | 5,857 | 4,638 | 4,962 | 4,912 | 3,740 | ||||||||||||||||||
Taxation |
1,765 | 1,460 | 873 | 1,099 | 1,377 | 982 | ||||||||||||||||||
Third-party interests |
416 | 344 | 332 | 324 | 147 | 93 | ||||||||||||||||||
Operating net profit |
4,899 | 4,053 | 3,433 | 3,539 | 3,388 | 2,665 | ||||||||||||||||||
Insurance operations |
||||||||||||||||||||||||
Net profit |
3,020 | 2,498 | 3,605 | 3,135 | 9,560 | 3,185 | ||||||||||||||||||
Taxation |
1,077 | 891 | 756 | 688 | 1,022 | 413 | ||||||||||||||||||
Third-party interests |
141 | 117 | 92 | 73 | 39 | 34 | ||||||||||||||||||
Profit before tax |
4,238 | 3,506 | 4,453 | 3,896 | 10,621 | 3,632 | ||||||||||||||||||
Gain on joint venture ANZ |
280 | |||||||||||||||||||||||
Result on sale of investments re financing
of acquisitions |
325 | 7,368 | ||||||||||||||||||||||
Release millennium calamity fund |
91 | |||||||||||||||||||||||
Result Libertel |
924 | |||||||||||||||||||||||
Sales result NIB |
308 | |||||||||||||||||||||||
Realized capital gains (losses) |
24 | 20 | 1,003 | 779 | 855 | 641 | ||||||||||||||||||
Operating profit before tax |
4,214 | 3,486 | 3,170 | 2,792 | 2,307 | 1,759 | ||||||||||||||||||
Taxation |
1,041 | 861 | 540 | 622 | 540 | 336 | ||||||||||||||||||
Third-party interests |
141 | 117 | 92 | 73 | 39 | 34 | ||||||||||||||||||
Operating net profit |
3,032 | 2,508 | 2,538 | 2,097 | 1,728 | 1,389 | ||||||||||||||||||
Banking operations |
||||||||||||||||||||||||
Net profit |
1,868 | 1,545 | 895 | 1,442 | 2,424 | 1,737 | ||||||||||||||||||
Taxation |
724 | 599 | 333 | 477 | 816 | 646 | ||||||||||||||||||
Third-party interests |
274 | 227 | 240 | 251 | 108 | 59 | ||||||||||||||||||
Profit before tax |
2,866 | 2,371 | 1,468 | 2,170 | 3,348 | 2,442 | ||||||||||||||||||
Result Libertel |
376 | 461 | ||||||||||||||||||||||
Sales result CCF |
853 | |||||||||||||||||||||||
Re-organization provision CIB |
(486 | ) | ||||||||||||||||||||||
Operating profit before tax |
2,866 | 2,371 | 1,468 | 2,170 | 2,605 | 1,981 | ||||||||||||||||||
Taxation |
724 | 599 | 333 | 477 | 837 | 646 | ||||||||||||||||||
Third-party interests |
274 | 227 | 240 | 251 | 108 | 59 | ||||||||||||||||||
Operating net profit |
1,868 | 1,545 | 895 | 1,442 | 1,660 | 1,276 | ||||||||||||||||||
8
Year ended December 31, | ||||||||||||||||||||||||
2003 | 2003 | 2002 | 2001(2) | 2000(2)(3) | 1999 | |||||||||||||||||||
USD(1) | EUR | EUR | EUR | EUR | EUR | |||||||||||||||||||
(in billions, except amounts per share and ratios) | ||||||||||||||||||||||||
Dutch GAAP Consolidated Balance Sheet Data |
||||||||||||||||||||||||
Total assets |
941.4 | 778.8 | 716.4 | 705.1 | 650.2 | 492.8 | ||||||||||||||||||
Investments: |
||||||||||||||||||||||||
Insurance |
261.1 | 216.0 | 214.8 | 241.0 | 219.2 | 137.5 | ||||||||||||||||||
Banking |
144.8 | 119.8 | 84.4 | 70.2 | 59.1 | 59.5 | ||||||||||||||||||
Eliminations(10) |
(1.0 | ) | (0.8 | ) | (1.6 | ) | (3.8 | ) | (1.1 | ) | (1.2 | ) | ||||||||||||
Total investments |
404.9 | 335.0 | 297.6 | 307.4 | 277.2 | 195.8 | ||||||||||||||||||
Lending |
353.7 | 292.6 | 284.4 | 254.2 | 246.8 | 201.8 | ||||||||||||||||||
Insurance provisions: |
||||||||||||||||||||||||
Life |
227.5 | 188.2 | 186.0 | 204.6 | 193.3 | 101.0 | ||||||||||||||||||
Non-life |
11.8 | 9.8 | 9.8 | 9.4 | 6.9 | 6.5 | ||||||||||||||||||
Total |
239.3 | 198.0 | 195.8 | 214.0 | 200.2 | 107.5 | ||||||||||||||||||
Funds entrusted to and debt securities of
the banking operations: |
||||||||||||||||||||||||
Savings accounts of the banking operations |
203.2 | 168.1 | 115.1 | 69.6 | 52.4 | 47.0 | ||||||||||||||||||
Other deposits and bank funds |
166.0 | 137.3 | 129.2 | 132.4 | 134.1 | 111.9 | ||||||||||||||||||
Debt securities of the banking operations |
87.5 | 72.4 | 75.5 | 74.4 | 66.3 | 65.9 | ||||||||||||||||||
Total |
456.7 | 377.8 | 319.8 | 276.4 | 252.8 | 224.8 | ||||||||||||||||||
Due to banks |
123.4 | 102.1 | 96.3 | 107.8 | 94.7 | 75.3 | ||||||||||||||||||
Capital Stock (number in millions) (11) |
2,203.0 | 2,203.0 | 2,079.8 | 2,079.8 | 2,057.7 | 2,021.1 | ||||||||||||||||||
Shareholders equity |
25.7 | 21.3 | 18.3 | 21.5 | 25.3 | 34.6 | ||||||||||||||||||
Shareholders equity per Ordinary share(8) |
12.18 | 10.08 | 9.14 | 11.03 | 13.04 | 17.90 | ||||||||||||||||||
Shareholders equity per Ordinary share and
Ordinary share equivalent(8) |
12.18 | 10.08 | 9.14 | 10.92 | 12.86 | 17.65 | ||||||||||||||||||
U.S. GAAP Consolidated Balance Sheet Data |
||||||||||||||||||||||||
Total assets |
989.8 | 818.8 | 762.5 | 752.3 | 693.4 | 509.7 | ||||||||||||||||||
Shareholders equity |
33.8 | 28.0 | 25.1 | 38.8 | 41.6 | 40.4 | ||||||||||||||||||
Shareholders equity per Ordinary share and
Ordinary share equivalent(8) |
16.04 | 13.27 | 12.61 | 19.83 | 21.27 | 20.64 |
(1) | Euro amounts have been translated into U.S. dollars at the exchange rate of $1.2088 to EUR 1.00, the noon buying rate in New York City on March 3, 2004 for cable transfers in euros as certified for customs purposes by the Federal Reserve Bank of New York. | |||
(2) | In 2001 acquisitions of ReliaStar and Aetna influenced the figures compared to earlier years. | |||
(3) | Discontinued business: we sold in 2000 Tiel Utrecht Group in the Netherlands (net profit EUR 63 million). | |||
(4) | As of 2001, the Insurance operations-General is no longer reported separately. The items previously accounted for under this heading are now included in either the life result or the non-life result. The years prior to 2001 are restated accordingly. | |||
(5) | As from 2001, investment income for risk of policyholders has been netted with the related underwriting expenditure. This results in a presentation of investment income of the insurance operations for own risk, which is in line with international practice. The comparative figures have been adjusted accordingly. | |||
(6) | After elimination of certain intercompany transactions between the insurance operations and the banking operations. See Note 1.1. to the Consolidated Financial Statements. | |||
(7) | Includes all non-interest expenses, including additions to the provision for loan losses. See Item 5, Operating and Financial Review and prospects Liquidity and capital resources. | |||
(8) | Net profit per share amounts have been calculated based on the weighted average number of ordinary shares outstanding and shareholders equity per share amounts have been calculated based on the number of ordinary shares outstanding at the end of the respective periods. For purposes of this calculation ING Groep N.V. shares held by Group companies were deducted from the applicable number of outstanding Ordinary shares. All amounts and numbers are presented after giving effect to all stock dividends and retroactive application of the Companys 2-for-1 stock split, which became effective July 2, 2001. See Note 5.2.3 to the Consolidated Financial Statements. | |||
(9) | The dividend pay-out ratio is based on distributable net profit. | |||
(10) | Consisting of investments in banking operations held by Group insurance companies, investments in insurance operations held by Group banking companies, and ING Groep N.V. shares held by Group insurance companies. | |||
(11) | Reflects the Companys 2-for-1 stock split effected July 2, 2001. |
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EXCHANGE RATES
Fluctuations in the exchange rate between the euro and the U.S. dollar will affect the U.S. dollar amounts received by owners of shares or ADSs on conversion of dividends, if any, paid in euros on the shares and will affect the U.S. dollar price of the ADSs on the New York Stock Exchange.
The following table sets forth, for the periods and dates indicated, certain information concerning the exchange rate for U.S. dollars into euros based on the Noon Buying Rate. Effective January 1, 1999, the Dutch guilder became a component of the euro.
U.S. dollars per euro | ||||||||||||||||
Period | Average | |||||||||||||||
Calendar Period | End(1) | Rate(2) | High | Low | ||||||||||||
1999 |
1.0070 | 1.0666 | 1.1812 | 1.0016 | ||||||||||||
2000 |
0.9388 | 0.9207 | 1.0335 | 0.8270 | ||||||||||||
2001 |
0.8901 | 0.8909 | 0.9535 | 0.8370 | ||||||||||||
2002 |
1.0485 | 0.9495 | 1.0485 | 0.8594 | ||||||||||||
2003 |
1.2597 | 1.2074 | 1.2597 | 1.0361 | ||||||||||||
2004 (through March 3, 2004)(2) |
1.2088 | 1.2447 | 1.2848 | 1.2088 |
(1) | The Noon Buying Rate at such dates differ from the rates used in the preparation of INGs Consolidated Financial Statements as of such date. See Note 1.6.1.4. to the Consolidated Financial Statements. | |||
(2) | The average of the Noon Buying Rates on the last business day of each full calendar month during the period. |
Recent Exchange Rates f US dollars per Euro
The table below shows the high and low exchange rate of U.S. dollars per euro for the last eight months
High | Low | |||||||
July 2003 |
1.1580 | 1.1164 | ||||||
August 2003 |
1.1390 | 1.0871 | ||||||
September 2003 |
1.1650 | 1.0845 | ||||||
October 2003 |
1.1812 | 1.1596 | ||||||
November 2003 |
1.1995 | 1.1417 | ||||||
December 2003 |
1.2597 | 1.1956 | ||||||
January 2004 |
1.2853 | 1.2389 | ||||||
February 2004 |
1.2848 | 1.2426 |
The Noon Buying Rate for euro on December 31, 2003 was EUR 1.00 = $ 1.2597 and the Noon Buying Rate for euro on March 3, 2004 was EUR 1.00 = $ 1.2088.
RISK FACTORS
RISKS RELATED TO THE FINANCIAL SERVICES INDUSTRY
Because we are an integrated financial services company conducting business on a global basis, our revenues and earnings are affected by the volatility and strength of the economic, business and capital markets environments specific to the geographic regions in which we conduct business and changes in such factors may adversely affect the profitability of our insurance, banking and asset management business.
Factors such as interest rates, exchange rates, consumer spending, business investment, government spending, the volatility and strength of the capital markets, and terrorism all impact the business and economic environment and, ultimately, the amount and profitability of business we conduct in a specific geographic region. For example, in an economic downturn characterized by higher
10
unemployment, lower family income, lower corporate earnings, lower business investment and consumer spending, the demand for banking and insurance products would be adversely affected and our reserves and provisions would likely increase, resulting in lower earnings. Similarly, a downturn in the equity markets could cause a reduction in commission income we earn from managing portfolios for third parties, as well as income generated from our own proprietary portfolios, each of which is generally tied to the performance and value of such portfolios. We also offer a number of insurance and financial products that expose us to risks associated with fluctuations in interest rates, securities prices or the value of real estate assets. In addition, a mismatch of interest-earning assets and interest-bearing liabilities in any given period may, in the event of changes in interest rates, have a material effect on the financial condition or result from operations of our banking businesses.
Because our life and non-life insurance and reinsurance businesses are subject to losses from unforeseeable and/or catastrophic events, which are inherently unpredictable, our actual claims experience may exceed our established reserves or we may experience an abrupt interruption of activities, each of which could result in lower net profits and have an adverse affect on our results of operations.
In our life and non-life insurance and reinsurance businesses, we are subject to losses from natural and man-made catastrophic events. Such events include weather and other natural catastrophes such as hurricanes, floods and earthquakes, as well as events such as the September 11, 2001 terrorist attacks on the United States. The frequency and severity of such events, and the losses associated with them, are inherently unpredictable and can not always be adequately reserved for. In accordance with industry practices, reserves are established based on estimates using actuarial projection techniques. The process of estimating is based on information available at the time that the reserves are originally established. Although we continually review the adequacy of the established claim reserves, and based on current information, we believe our claim reserves are sufficient, there can be no assurances that our actual claims experience will not exceed our estimated claim reserves. If actual claim experience exceeds the estimated claim reserves, our earnings may be reduced and our net profits may be adversely affected. In addition, because unforeseeable and/or catastrophic events can lead to abrupt interruption of activities, our banking and insurance operations may be subject to losses resulting from such disruptions. Losses can relate to property, financial assets, trading positions and also to key personnel. If our business continuity plans can not be put into action or do not take such events into account, losses may further increase.
Because we operate in highly regulated industries, changes in statutes, regulations and regulatory policies that govern activities in our various business lines could have an affect on our operations and our net profits.
Our insurance and banking operations are subject to insurance, banking and financial services statutes, regulations and regulatory policies that govern what products we sell and how we manage our business. Changes in existing statutes, regulations and regulatory policies, as well as changes in the implementation of such statutes, regulations and regulatory policies may affect the way we do business, our ability to sell new policies, products or services and our claims exposure on existing policies. In addition, changes in tax laws may affect our tax position and/or the attractiveness of certain of our products, some of which currently have favorable tax treatment.
RISKS RELATED TO THE COMPANY
Because we operate in highly competitive markets, including in our home market, we may not be able to further increase, or even maintain, our market share, which may have an adverse affect on our results of operations.
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 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
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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 South 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 sophisticated and competitive and have sought alliances, mergers or strategic relationships with our competitors. We derived approximately 52% of our operating profit in 2003 from the Netherlands. Based on geographic division of our operating profit, The Netherlands is our largest market for both our banking and insurance operations. We are the second largest bank in The Netherlands. In the retail market our market share is approximately 23% based on total assets, approximately 25% based on total deposits and 24% based on retail mortgages. Our main competitors are ABN Amro N.V. and Rabo Group B.A. In The Netherlands, we are also currently the largest insurance company, with a market share of approximately 23% in the life insurance market and approximately 9% in the non-life insurance market, each based on premium income. Our main competitors are Fortis Utrecht N.V. and Aegon N.V. We derived approximately 14% of our operating insurance profit in 2003 from the United States, which is our second largest market for the insurance operations. In the United States, we have two core operating units and own the second-largest broker-dealer network in the US with over 10,000 registered representatives. Our main competitors in the United States are insurance companies such as: Lincoln National, The Hartford, Aegon Americas, Met Life Nationwide and Principal Financial. Increasing competition in these or any of our other markets may significantly impact our results if we are unable to match the products and services offered by our competitors.
Because our reinsurance arrangements are with a limited number of reinsurers, the inability of one or more of those reinsurers to meet its financial obligations could have an adverse effect on our results of operations.
Our insurance operations have bought protection for risks that exceed certain risk tolerance levels set for both our life and non-life business. This protection is bought through reinsurance arrangements in order to reduce possible losses. Because in most cases we must pay the policyholders first, and then collect from the reinsurer, we are subject to credit risk with respect to each reinsurer for all such amounts. As of December 2003, approximately 40% of our (potential) reinsurance receivables are with our main reinsurer and approximately 30% are with six other reinsurers. The inability of any one of these reinsurers to meet its financial obligations to us could have a material adverse effect on our net profits and our financial results.
Because we also operate in markets with less developed judiciary and dispute resolution systems, proceedings could have an adverse effect on our operations and net result.
In the less developed markets in which we operate, judiciary and dispute resolution systems may be less developed. In case of a breach of contract we may have difficulties in making and enforcing claims against contractual counterparties. On the other hand, if claims are made against us, we might encounter difficulties in mounting a defense against such allegations. If we become party to legal proceedings in a market with an insufficiently developed judiciary system, it could have an adverse effect on our operations and net result.
Because we are a financial services company and we are continually developing new financial products, we might be faced with claims that could have an adverse effect on our operations and net result if clients expectations are not met.
When new financial products are brought to the market, communication and marketing is focussed on potential advantages for the customers. If the products do not generate the expected profit, or result in a loss, customers may file claims against us for not fulfilling our potential duty of care. Potential claims could have an adverse effect on our operations and net result.
Because we are a Dutch company the rights of our shareholders may differ from the rights of shareholders in other jurisdictions, which could limit your rights as a shareholder and reduce the accountability of the members of our Executive and Supervisory Boards and our management to our shareholders.
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While holders of our bearer receipts are entitled to attend and speak at the general meetings of shareholders, voting rights are not attached to the bearer depositary receipts. Stichting ING Aandelen (or the Trust) the trust which holds more than 99% of our ordinary shares, exercises the voting rights attached to the ordinary shares (for which bearer receipts have been issued). Holders of bearer receipts who attend in person or by proxy - the general meeting of shareholders must obtain voting rights by proxy from the trust. Holders of bearer receipts and holders of the ADSs representing the bearer receipts, who do not attend the general meeting of shareholders may give binding voting instructions to the Stichting ING Aandelen. See Item 7. Major Shareholders and Related Party Transactions Voting of the Ordinary Shares by holders of Bearer receipts as proxy for the Trust. The Trust is entitled to vote any ordinary shares corresponding with bearer depositary receipts for which the Trust has not granted voting proxies, or voting instructions have not been given to the Trust. In exercising its voting discretion, the Trust is required to make use of the voting rights attached to the ordinary shares in the interest of the holders of bearer depositary receipts, while having regard for
| our interests; | |||
| the interests of our affiliates; and | |||
| the interests of our other stakeholders |
in such a way that all interests are balanced and safeguarded as effectively as possible. The Trust may, but has no obligation to, consult with the holders of bearer receipts or ADSs in exercising its voting rights in respect of any ordinary shares for which it is entitled to vote. These arrangements differ to some extent from U.S. practice and accordingly may affect the rights of the holders of bearer receipts or ADSs and their power to affect the Companys business and operations and the accountability of the Companys directors and management. See Item 4. Information on the Company-Corporate Organization for more information on voting rights and our corporate structure.
The share price of our bearer receipts and ADSs has been, and may continue to be volatile, which may impact the value of our bearer receipts or ADSs you hold.
The share price of our bearer receipts and our ADSs has been volatile in the past due, in part, to the high volatility in the securities markets generally and more particular in shares of financial institutions. In addition, there are other factors, beside our financial results, that may impact our share price. These factors include, but are not limited to:
| market expectations of the performance and capital adequacy of financial institutions in general; | |||
| investor perception of the success and impact of our strategies; | |||
| a downgrade or review of our credit ratings; | |||
| potential litigation or regulatory action involving ING Group or sectors we have exposure to through our insurance and banking activities; | |||
| announcements concerning financial problems or any investigations into the accounting practices of other financial institutions; | |||
| general market volatility. |
Because we are incorporated under the laws of The Netherlands and many of the members of our Supervisory and Executive Boards and our officers reside outside of the United States, it may be difficult for you to enforce judgments against us or the members of our Supervisory and Executive Boards or our officers.
Most of the members of our Supervisory Board, our Executive Board and some of the experts named in this Annual Report, as well as many of our officers are persons who are not residents of the United States and most of our assets and most of their assets are located outside the United States. As a result, you may not be able to serve process on those persons within the United States or to enforce in the United States judgments obtained in U.S. courts against us or those persons based on the civil liability provisions of the U.S. securities laws.
You also may not be able to enforce judgments of U.S. courts under the U.S. federal securities laws in courts outside the United States, including The Netherlands. The United States and The Netherlands do not currently have a treaty providing for the reciprocal recognition and enforcement of judgments (other than arbitration awards) in civil and commercial matters. Therefore, you would not be able to enforce in The Netherlands a final judgment for the payment of money rendered by any U.S. federal or state court based on civil liability, even if the judgment is not based only on the U.S. federal securities laws, unless a competent court in The Netherlands gives binding effect to the judgment.
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Item 4. Information on the Company
GENERAL
ING was established as a Naamloze Vennootschap (public limited liability company) on March 4, 1991 through the merger of Nationale-Nederlanden, the largest insurer in the Netherlands, and NMB Postbank Group, one of the largest banks in the Netherlands. ING Groep N.V. is incorporated under the laws of the Netherlands.
The official address of ING Group is:
|
Our principal U.S. office is: | |
ING Groep N.V.
|
ING Financial Holdings Corporation | |
Amstelveenseweg 500
|
1325 Avenue of The Americas | |
1081 KL Amsterdam
|
New York, NY 10019 | |
P.O. Box 810, 1000 AV Amsterdam
|
United States of America | |
The Netherlands
|
Telephone +1 646 424 6000 | |
Telephone +31 20 541 5411 |
Mission
INGs mission is to be a leading, global, client-focused, innovative and low-cost provider of financial services through the distribution channels of the clients preference in markets where ING can create value.
Profile
ING Group is a global financial institution of Dutch origin with 115,000 employees. ING offers banking, insurance and asset management to more than 60 million clients in more than 50 countries. The clients are individuals, families, small businesses, large corporations, institutions and governments. ING comprises a broad spectrum of prominent businesses that increasingly serve their clients under the ING brand.
Key to INGs retail business is its distribution philosophy: click-call-face. This is a flexible mix of internet, call centers, intermediaries and branches that enables ING to deliver what todays clients expect: unlimited access, maximum convenience, immediate and accurate execution, personal advice, tailor-made solutions and competitive rates. INGs wholesale product offering focuses strongly on its strengths in employee benefits/pensions, financial markets, corporate banking and asset management.
INGs strategy is to achieve sustainable growth while maintaining healthy profitability. The Groups financial strength, its broad range of products and services, the wide diversity of its profit sources and the resulting spread of risks form the basis for INGs continuity and growth potential.
ING seeks a careful balance between the interests of its stakeholders, customers, employees and society at large. It expects all its employees to act in accordance with the Groups Business Principles.
Strategy and key figures
Satisfying the needs of our clients and delivering on the financial promises we make to our shareholders are our primary goals. In view of the increased stakeholder attention, the further globalization of ING and the rapid developments in the field of sustainability and corporate social responsibility, we continue to aim for a good balance between the interests of all stakeholders: clients, shareholders, employees and society as a whole.
After several years of rapid expansion through acquisition, the emphasis is now on consolidating INGs strengths and achieving synergies, operational excellence and cost control.
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In 2003, ING Groups total operating income was EUR 69,073 million and its operating net profit was EUR 4,053 million (both Dutch GAAP). ING Groups total premium income from insurance activities amounted to EUR 45,519 million and total income from banking activities was EUR 11,680 million.
The following table sets forth ING Groups total operating income by geographical area for the years indicated:
Year ended December 31, | ||||||||||||
2003 | 2002 | 2001 | ||||||||||
(EUR millions) | ||||||||||||
The Netherlands |
17,448 | 15,933 | 15,348 | |||||||||
Belgium |
4,959 | 4,684 | 4,092 | |||||||||
Rest of Europe |
4,841 | 4,804 | 5,126 | |||||||||
North America |
29,882 | 37,482 | 36,999 | |||||||||
Latin America |
3,070 | 4,255 | 3,186 | |||||||||
Asia |
6,954 | 7,059 | 5,832 | |||||||||
Australia |
2,024 | 2,275 | 2,224 | |||||||||
Other |
632 | 445 | 1,393 | |||||||||
69,810 | 76,937 | 74,200 | ||||||||||
Revenue between geographic areas |
(737 | ) | (836 | ) | (650 | ) | ||||||
Total income |
69,073 | 76,101 | 73,550 | |||||||||
CHANGES IN PRESENTATION
Beginning January 1, 2003, the regional ING Investment Management business units have been integrated into the respective regional executive centres. This step was taken in order to improve alignment with the captive distribution channels, enabling ING to respond to regional and local market opportunities more quickly and efficiently than before. A global asset management platform at Group level has been established to coordinate INGs asset management strategy. In addition, a global IIM Board has been set up to preserve the efficiency of a global manufacturing platform and to ensure global consistency of the investment strategies adopted in each region. In addition, it was decided to discontinue ING Asset Management as a separate profit reporting centre. The responsibility for ING Asset Managements other business units (Baring Asset Management, ING Real Estate, Parcom Ventures, Baring Private Equity Partners and ING Trust) continues to reside with the Executive Board member responsible for asset management. For a description of these business units please see item 4 under the heading EC Europe .
Beginning January 1, 2003 additions to the provision for investment losses are reported on a separate line within Total (operating) expenditure. Previously these additions were reported as an element of Income from investments of the insurance operations.This makes the presentation of the addition to these provisions consistent with the presentation of the addition to the provisions for loan losses of the banking operations. The comparable figures have accordingly been adjusted for all prior periods.
Beginning January 1, 2003, claims handling expenses are accounted for as part of the operating expenses. Previously, these expenses were accounted for as part of the underwriting expenditure. This new classification better represents the nature of the claims handling expenses. The comparable figures have accordingly been adjusted for all prior periods.
The Latin America region is comprised of South America, including Mexico. Prior to January 1, 2003, Mexico was included in the North America region. This new regional classification is more in line with the internal management reporting structure. The comparable figures have accordingly been adjusted for all prior periods.
Prior to January 1, 2002, amortization of deferred acquisition costs (DAC) on insurance policies was accounted for as part of operating expenses of the insurance operations. In order to have a better view on the development of manageable operating expenses, we decided to transfer the amortization of
15
DAC to underwriting expenditure. The comparable figures have accordingly been adjusted for all prior periods.
CHANGES IN THE COMPOSITION OF THE GROUP
On October 21, 2003, ING reached an agreement to sell ING Aetna Life to Manulife Indonesia. This is part of INGs strategy to refocus its insurance activities in the Asia/Pacific region to markets and products where it can reach a leading market position.
On October 21, 2003, ING reached an agreement, in principle, with Baring Private Equity Partners for a management buy out. The agreement is subject to regulatory approval.
On July 21, 2003, ING completed the sale of the Italian agent network activities of ING Sviluppo, as well as the affiliated Italian life insurance, asset management and private banking activities to UniCredito and Aviva. The profit on the sale amounted to EUR 71 million.
On July 3, 2003, ING announced that it acquired the remaining 30% stake in DiBa (Allgemeine Deutsche Direktbank) pursuant to a put option and call option entered into on February 26, 2002 between ING and BGAG (the investment company of a number of German trade unions). On February 26, 2002, ING Group increased its stake in DiBa from 49% to a 70%
On May 16, 2003, ING announced the sale of its 49% shareholding in Seguros Bital (Mexico) to Grupo Financiero Bital for USD 126 million. The profit on the sale amounted to EUR 44 million.
On April 25, 2003, ING completed the sale of 99% of Fatum, its insurance business in the Netherlands Antilles and Aruba, to Guardian Holdings Limited of Trinidad and Tobago. The value of the transaction amounted to EUR 45 million.
On July 23, 2003, ING completed the acquisition of Entrium, Germans second largest direct bank, through DiBa (Allgemeine Deutsche Direktbank) from Fineco/Capitalia of Italy, for EUR 300 million.
On September 9, 2002, ING announced it completed the purchase of an additional 24% stake in ING Vysya Bank (India) increasing its interest to 44%. The total purchase price of the additional acquisition was EUR 73 million. The goodwill amounted to EUR 55 million and is charged to Shareholders equity.
On May 13, 2002, ING completed its acquisition of a 49% stake in Sul América, a leading insurance company in Brazil, thus strengthening the existing partnership. As a result of the transaction INGs total investment in Sul America consists of approximately EUR 188 million in cash, plus its 49% stake in SulAet, as well as its asset management operations in Brazil (ING Investment Management Brazil). The goodwill amounted to Eur 245 million and is charged to Shareholders equity.
On April 12, 2002, ING Group acquired car lease company TOP Lease in the Netherlands. The total purchase price of the acquisition amounted to EUR 111 million. The goodwill amounted to EUR 70 million, which was charged to Shareholders equity.
On April 10, 2002, ING and ANZ, one of Australias major banks, formed a funds management and life insurance joint venture in Australia. The joint venture, ING Australia Ltd. is owned 51% by ING and 49% by ANZ, and has been proportionally consolidated. ING Group contributed net assets to the new joint venture, which resulted in a net book profit of EUR 469 million accounted for in 2002, of which EUR 247 million was accounted for as non-operating net profit and EUR 222 million was accounted for as operating net profit.
On December 21, 2001, ING announced that it signed an agreement with Piraeus Bank in Greece, which sets out the final terms of a strategic alliance between the two financial groups.
The strategic alliance combines the distribution power of the retail banking network of Piraeus Bank and the agency network of INGs insurance subsidiary Nationale-Nederlanden Greece (which comprises 300 branches and 2,500 agents in total).
In June 2001, ING Group announced that it had signed an agreement with Savia S.A. to acquire an
16
additional stake in Seguros Comercial América (SCA), the largest insurance company in Mexico, for approximately USD 791 million. This transaction increased INGs stake to a total of 87%. The acquisition was partly financed by the sale of shares. In September 2001, ING made a tender offer for the remaining 13% of SCA. In November 2001, ING announced that it had successfully closed the tender offer to purchase the remaining outstanding shares of SCA. The total acquisition price was approximately USD 180 million, and ING now owns 99.91% of the shares of SCA.
In March 2001, ING Group increased its shareholding in Bank Slaski to 82.8% for an amount of EUR 187 million. Effective September 1, 2001, Bank Slaski merged with ING Bank Warsaw. The combined bank, in which ING holds 88%, operates under the brand name ING Bank Slaski. Goodwill amounted to EUR 118 million and was charged to Shareholders equity.
RECENT DEVELOPMENTS
On March 11, 2004, the Supervisory Board of ING Group announced it intends to appoint Eric Bourdais de Charbonnière (1939, French) as a member of the Supervisory Board with effect from April 27, 2004. He was the former Chief Financial Officer of Michelin and is currently the chairman of Michelins Supervisory Board. Prior to his positions at Michelin he was managing director of the bank JP Morgan.
On March 8, 2004, ING Group announced it reached an agreement with Macquarie Bank Limited (Australia) on the sale of INGs Asian cash equities sales, trading, research and capital market operations in 10 countries in Asia and key locations in Europe and the United States. The transaction is expected to be completed for most Asian countries by the end of July, 2004.
On March 2, 2004, ING announced that it appointed Cees Maas as Vice Chairman of the Executive Board of ING Group effective on April 28, 2004. Cees Maas will continue in his current role as Chief Financial Officer. Furthermore the Supervisory Board of ING announced it intends to propose to the Annual Shareholders Meeting on April 27, 2004 to appoint Hans Verkoren as a member of the Executive Board of ING Group as of April 27, 2004. Hans Verkoren is currently Global Head ING Direct, member of the Executive Committee Europe and responsible for Retail Financial Services.
On November 19, 2003, ING announced that Ewald Kist will retire on June 1, 2004 having reached the retirement age of 60, as Chairman of the Executive Board of ING Group. Ewald Kist has been Chairman of the Executive Board since June 1, 2000. The Supervisory Board appointed Michel Tilmant as successor to Ewald Kist as Chairman of the Executive Board as of April 28, 2004. Michel Tilmant is currently Vice-Chairman of the Executive Board of ING Group, Chairman of the Executive Committee ING Europe and Chairman of ING Bank N.V. The Supervisory Board announced it also intends to propose to the Annual Shareholders Meeting on April 27, 2004 to appoint Eli Leenaars and Eric Boyer de la Giroday as members of the Executive Board.
GROUP STRATEGY
Market conditions have changed significantly in recent years. Looking back on 2003, although we faced a weak economic climate and unstable geo-political circumstances, we made good progress with regard to our five strategic objectives.
Strengthen our capital base for a solid financial foundation
The stock markets, which fell sharply between 2001 and early 2003, heavily impacted INGs financial position. At the end of 2002, a number of short-term and long-term measures were announced, aimed at strengthening our capital base and reducing the sensitivity of our financial position to market volatility. An important long-term measure to strengthen our capital base was the introduction of an optional stock dividend as of the final dividend 2002. Furthermore, in 2003, ING successfully issued two subordinated perpetual debt securities, one in Europe and one in the United States, raising a total amount of EUR 1.1 billion. Another measure to improve the capital base was the sale of shares and real estate during the year. The proceeds were used to reduce the core debt of ING and improve the debt/equity ratio. As a result, the debt/equity ratio of ING Group decreased from 19.9% at the end of 2002 to 14.4% at the end of 2003.
17
Apart from the sale of shares, ING protected EUR 4 billion of its Dutch equity portfolio against a sharp stock-market decline at the beginning of 2003 by means of a cost-neutral collar. This accounts for approximately 40% of INGs equity portfolio worldwide. In the course of 2003, ING decided to open up the upside potential in the equity portfolio by reducing the total amount of written call options to EUR 0.7 billion, while keeping approximately EUR 4.4 billion of the Dutch equity portfolio hedged against a potential decline.
All these measures resulted in a more favorable capital position for both the insurance company and the bank. At the end of 2003, the capital base of INGs insurance units amounted to EUR 15.8 billion, which is 180% of the legally required level (year-end 2002: 169%). The Tier-1 ratio, indicating the financial strength of our banking units, improved from 7.31% at the end of 2002 to 7.59% at the end of 2003. The revaluation reserve shares amounted to approximately EUR 900 million as of December 31, 2003.
Optimize the existing portfolio
Focus and execution were the key words in 2003. The adverse economic circumstances forced ING to increase focus in terms of activities and markets it wants to be in. We continued our policy to refrain from making large acquisitions. Furthermore, a more critical assessment of the business portfolio has resulted in a number of actions. For instance, several business units were sold in the course of 2003. Examples are ING Fatum (INGs insurance business on the Netherlands Antilles and Aruba), ING Sviluppo in Italy, ING Life Indonesia and its share of the AnShin Card Services Company (Taiwan). Furthermore, the international wholesale branch network was restructured. We also announced the management buy-out of Baring Private Equity Partners.
Create value for clients
The multi-product and multi-channel approach has been the core of INGs strategy. In all markets where ING is active, INGs business units have continued to improve services to its clients. ING in the Netherlands, for example, combined its sales forces and made further progress integrating its operations. Perfecting its click-call-face concept enabled ING to increase the quality of customer service, giving clients in the Netherlands improved access to the different distribution channels and products.
An example in Asia is the initial product launch of the China Merchant Antai Open-ended Securities Series Funds. INGs clients in China invested over EUR 500 million in the fund. In the United States, ING Bank has formed a commercial alliance with Bank of New York aimed at marketing, sales and delivery of global custody and related services to international clients. A strong brand enhances trust among customers. In 2003 ING made further progress in creating one global brand. BBL in Belgium was re-branded to ING Belgium. As a result brand awareness increased from 29% at launch date to 47% at year-end.
Develop our special skills
ING Direct continued to exceed expectations and contributed for the first time to the Group profit in 2003, well ahead of schedule. In May, ING Direct launched operations in the United Kingdom, the eighth country where it offers attractive savings products to retail clients. The launch in the UK proved to be the most successful ING Direct start-up so far. By the end of 2003, ING Direct worldwide had close to 8.5 million customers (5.0 million at year-end 2002) and approximately EUR 100 billion in funds entrusted (EUR 55 billion at year-end 2002).
The insurance operations in developing markets have been expanded as well. The organic growth in premium income was 11% in 2003. In China, we expanded our insurance business. Organic premium income in China rose by 50%. INGs joint venture with China Pacific Insurance Company (CPIC), called PALIC (Pacific Antai Life Insurance Company), received approval to establish a branch in the city of Guangzhou, the third largest city in China. This allows the many millions of potential customers in southern China to buy insurance products from PALIC.
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As a result of the global ageing of the population and pension reforms being executed in many countries, ING selected pensions as a global strategic priority. We developed business objectives for 2004 to expand current pension activities and start up many new initiatives. In addition to working on the realization of these commercial objectives, ING is stepping up its pension-advisory services to governments and institutions that can benefit from INGs pensions knowledge and experience.
Further lower the cost base
In Europe, the Americas and Asia/Pacific large cost-saving programs have been executed in 2003. In the field of Operations/IT in Europe, the alignment of IT architecture and the development of various shared service centres continued.
In the United States, ING has integrated its operations, resulting in yearly cost savings of approximately EUR 300 million. US Financial Services has signed a 7-year contract with IBM to provide information-technology infrastructure services.
As a result of strict cost control, total operating expenses decreased by 3.1%. Organic expenses increased by 3%. The principal explanatory factors for this rise in costs are continued investments in new business (ING Direct and insurance activities in developing countries), substantial investments in IT infrastructure and investments to improve service (e.g. Nationale-Nederlanden). At the insurance operations total operating expenses decreased by 5.9% (organic change: +6.5%). The efficiency ratio of the banking operations improved from 71.0% to 68.4% in 2003 (excluding ING Direct and restructuring provisions).
CORPORATE ORGANIZATION
ING Groep N.V. has a Supervisory Board and an Executive Board. The Executive Board is responsible for the day-to-day management of the Group, its three major divisions (Executive Centers Europe, Americas, Asia/Pacific) and the Asset Management platform. The function of the Supervisory Board is to supervise the policy of the Executive Board and the general course of events in the Companys business, as well as to provide advice to the Executive Board.
Corporate Governance
The year 2003 was an important year from a corporate-governance perspective. ING amended its Articles of Association, the result of which was that holders of Bearer Receipts and ADRs received increased powers. As described below, the Tabaksblat Committees report on the principles of good corporate governance and best practices was also published during the year. INGs response to the recommendations of the Tabaksblat Committee, as well as information on capital and control, the Executive Board, the Supervisory Board and the external auditors are discussed in detail below.
Tabaksblat Code
The discussions of corporate governance in the Netherlands resulted in a new corporate-governance code (the Tabaksblat Code) being published on December 9, 2003. From the 2004 financial year onwards, listed companies are required by the Code to include a section on their corporate governance and compliance with the Code in their annual report and to explain any non-compliance.
Listed companies are also being recommended to include information in their 2003 annual report on how they are planning to incorporate the Code into their business activities and to indicate any problems they anticipate in this respect. These issues are discussed below and will also be on the agenda for INGs General Meeting of Shareholders on April 27, 2004.
Changes in 2003
In many respects, ING Groups corporate governance practices were already in compliance with the principles introduced by the Code. A number of significant changes relating to corporate governance were proposed to the General Meeting of Shareholders in April 2003 and were subsequently included in new articles of association. Certain limitations on the holding of shares were abolished and holders of bearer receipts were granted full voting rights. These voting rights can be exercised unconditionally, including in the event of a hostile takeover bid. Steps were also taken to ensure that the Board of the Trust Office ING Shares and the Trust Office ING Continuity remain independent of ING Group. The
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2003 financial year also saw shareholders and holders of bearer receipts in the Netherlands being granted the right, for the first time ever, to cast votes indirectly via the Communication Channel to shareholders (Stichting Communicatiekanaal Aandeelhouders). Shareholders in the United States and the United Kingdom will also be able to vote by proxy on items included on the agenda for meetings of shareholders as of the General Meeting of Shareholders on April 27, 2004.
Changes in 2004
The Executive Board and Supervisory Board have decided to implement the Code to the extent possible. The notice convening the General Meeting of Shareholders on April 27, 2004 has, for example, been drawn up in compliance with the Code. The remuneration policy for the Executive Board will be an agenda item. Moreover, a proposal to amend the Articles of Association will be included on the agenda for the meeting. The intention in this respect is that the Articles of Association should this year be brought into line with the best practices detailed in the Code. One of the most significant amendments is the proposal to end the current requirement for a higher majority if a binding proposal for nomination to the Executive Board or Supervisory Board is to be rejected or if it is proposed to dismiss a member of either Board. The proposed amendment also reduces the number of shareholders votes required for an item to be submitted for inclusion on the agenda of the General Meeting of Shareholders (under the new rules, votes representing 0.01% of the share capital or a market value of EUR 50 million will be required). This amendment is being proposed in advance of the Company Structure Reform Bill, which is currently being considered by the Dutch Upper House of Parliament. In February 2004, the Supervisory Board appointed a Company Secretary (the General Counsel) and adopted a set of general regulations on whistleblowers, which were subsequently approved by the Dutch Central Works Council.
In accordance with the Code, the General Meeting of Shareholders will be asked to appoint new Executive Board members for a period of four years. Given that the current nominees for the Executive Board, Eric Boyer de la Giroday, Eli Leenaars and Hans Verkoren, are already employed by ING, their contracts of employment, which are for unspecified periods of time, will continue. The Supervisory Board has also taken account of their existing contractual rights when determining the level of any severance pay that may become due. The Tabaksblat Code recognizes that existing contractual agreements should continue to be respected and that Dutch employment law needs to be amended if Board appointments are to be for limited periods of time. The contracts of existing Board members will not, therefore, be changed. Their appointments for an unspecified period of time will continue, while the existing arrangements in respect of severance pay will also be respected. In other words, they will receive a maximum of three times their most recent fixed annual salary.
In line with the Code, INGs periodic meetings with analysts, such as those held after publication of the quarterly, half-year and annual figures, will now also be able to be followed simultaneously by telephone or webcast. The new procedure was introduced at the meeting following publication of the 2003 results in February 2004.
Implementation of Tabaksblat Code
We will implement the Tabaksblat Code as much as possible. Depending on how the best practices are interpreted, on any subsequent recommendations that may be made by the Tabaksblat Committee, on legislation on various aspects of the Code and on further discussions within ING, the Group is expected to diverge from the best practices of the Code in some respects:
| Code II.2.7 states: The maximum remuneration in the event of dismissal is one years salary (the fixed remuneration component). If the maximum of one years salary would be manifestly unreasonable for a management board member who is dismissed during his first term of office, such board member shall be eligible for a severance pay not exceeding twice the annual salary. ING is prepared to take this best practice into account as a reference for new Executive Board members, provided however that the severance may be higher in an individual case depending on existing rights for severance pay, market practice, competitive considerations and other reasons that may give cause to agree on higher severance if needed to attract the right qualified person. | |||
| Code III.3.4 states: The number of supervisory boards of Dutch listed companies of which an individual may be a member shall be limited to such an extent that the proper performance of his duties is assured; the maximum number is five, for which purpose the chairmanship of a supervisory board counts double. Two members of the Supervisory Board, Messrs. Jacobs and |
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Vuursteen, currently hold more supervisory directorships in Dutch listed companies than the maximum recommended in the Code. This issue will be discussed on the next occasion that these gentlemen become eligible for reappointment, which will be in 2006 in the case of Mr. Vuursteen and in 2007 in the case of Mr. Jacobs. | ||||
| Code III.5.6 states: The audit committee shall not be chaired by the chairman of the supervisory board or by a former member of the executive board of the company. | |||
Mr. Jacobs, who was previously chairman of the Executive Board, currently chairs the Audit Committee. It should, however, be noted that Mr. Jacobs resigned from the Executive Board over five years ago and so can be regarded as independent, both in respect of the Code and under the terms of the US Sarbanes-Oxley Act. | ||||
| Code III.5.11 states: The remuneration committee shall not be chaired by the chairman of the supervisory board. The chairman of the Supervisory Board, Mr. Herkströter, chairs the Remuneration and Nomination Committee. Appointments, both to the Executive Board and the Supervisory Board, and remuneration are issues of such importance that we believe it is vital for the chairman of the Supervisory Board to be substantially involved in these discussions at an early stage. |
In the General Meeting of Shareholders on April 27, 2004, the application of the Code by ING will be discussed. Subsequently, the Code will be implemented to the extent possible, taking into account the above-mentioned factors and the discussions in the General Meeting of Shareholders. The implementation will be reported on via a continuously updated corporate-governance charter on the website of ING Group, which will be published in print prior to the 2005 Shareholders Meeting. At the annual General Meeting of Shareholders in April 2005, the formal shareholders approval of INGs corporate-governance structure related to the Tabaksblat Code will be sought. Providing the various items are approved by the shareholders, ING will then be deemed to be in full compliance with the Code.
Corporate Governance Differences
Under the New York Stock Exchanges listing standards, foreign private issuers must disclose any significant ways in which their corporate governance practices differ from those followed by US domestic companies under the NYSE listing standards. We believe the following to be the significant differences between our corporate governance practices and NYSE corporate governance rules applicable to US companies:
| We have a two-tiered board, in contrast to the one-tier board used by most US companies. In the Netherlands, a Naamloze Vennootschap (public limited liability company) has an Executive Board as its management body and a Supervisory Board which advises and supervises the Executive Board. In general the members of the Executive Board are employees of the company while members of the Supervisory Board often are former captains of state or industry and sometimes former members of the Executive Board. Usually the members of the Supervisory Board are independent of the company in the sense of the NYSE listing requirements. Our Audit Committee and Remuneration and Nomination Committee are comprised of members of the Supervisory Board. | |||
| In contrast to the Sarbanes-Oxley Act of 2002, the Tabaksblat Code contains a comply-or-explain principle, offering the possibility to deviate from the Tabaksblat Code as long as any such deviations are explained. | |||
| Our Ordinary shares are held by a trust, Stichting ING Aandelen (the Trust), which issues Bearer receipts, each Bearer receipt representing financial interests in one Ordinary share held by the Trust. The Trust holds all voting rights over the Ordinary shares, and pursuant to the Trust Constitution and Trust Conditions, the Trust will grant proxies to holders of the Bearer receipts. See Item 7 Major shareholders and related party transactions. | |||
| Dutch law requires that our external auditors be appointed at the general meetings of shareholders and not by the Audit Committee. | |||
| Our Articles of Association provide that there are no quorum requirements to hold a general meeting of shareholders, although the taking of certain actions may require a quorum. |
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Executive Centers
The Executive Board (supported by various corporate staff departments) determines the Groups corporate strategy, prescribes capital base ratios and reserving levels, allocates resources, sets financial performance targets and risk profiles for the Executive Centers (ING Europe, ING Americas and ING Asia/Pacific), appoints senior management, manages the Groups corporate image, establishes information technology strategy, and monitors the realization of the objectives established for the Group. Certain actions of the Executive Board are subject to the approval of the Supervisory Board, including the issuance or cancellation of shares, significant acquisitions, the declaration of interim dividends, material capital expenditures and matters concerning substantial changes in employee relations. The Executive Committees formulate the strategic, commercial and financial policy for the Executive Centers in conformity with the group strategy and performance targets set by the Executive Board. Each Executive Committee is responsible for the preparation of the annual budget of its Executive Center. This budget is approved and monitored by the Executive Board. Each Executive Committee also approves the strategy, commercial policy and the annual budgets of the business units in its Executive Center and monitors the realization of the policies and budgets of that Executive Center and its business units.
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ING EUROPE
2003 HIGHLIGHTS
The profitability of INGs operations in Europe especially those in the Benelux remained key to the results of the Group. As in 2002, the retail businesses contributed to the strong performance. ING Direct had another strong year and showed good profitability. In the wholesale business, Financial Markets delivered excellent results as did wholesale banking in the Benelux. International Corporate Financial Services recovered from the high loan loss provisions taken in 2002. Additional restructuring measures were announced at ING BHF-Bank in order to restore the profitability. Throughout ING Europe, good progress was made during the year in increasing efficiency and improving service levels.
The following table shows income and profit before taxation (both excluding other asset management operations) by business segment:
Year ended December 31, | ||||||||||||
2003 | 2002 | 2001 | ||||||||||
(EUR millions) | ||||||||||||
Income |
||||||||||||
Retail |
8,301 | 7,801 | 7,346 | |||||||||
Wholesale |
5,963 | 5,524 | 5,865 | |||||||||
Corporate line |
848 | 1,172 | 1,165 | |||||||||
Total |
15,112 | 14,497 | 14,377 | |||||||||
Profit before taxation |
||||||||||||
Retail |
1,702 | 1,375 | 1,118 | |||||||||
Wholesale |
1,616 | 815 | 1,328 | |||||||||
Corporate line |
651 | 810 | 1,241 | |||||||||
Total |
3,969 | 3,000 | 3,688 | |||||||||
FUNCTIONAL AREAS
Retail
On the retail side, the strategy focuses on retail wealth accumulation and financial protection (i.e. retail banking, asset management, asset gathering, life insurance and pensions) and private banking, supported by the click-call-face (multi-product, multi-channel) distribution approach.
We serve three types of retail markets in Europe, each reflecting our different market positions and thus requiring a slightly different approach to the retail strategy. In the home markets of the Netherlands, Belgium and Poland, our goal is wealth accumulation supported by an efficient mix of channels appropriate to the client segments and products and focused on cost reduction. In other large mature markets, we are developing our retail banking position around ING Direct, selectively adding new activities and face channels as appropriate. In the developing markets, particularly Central Europe, we are striving to become a market leader in pensions, life and wholesale banking by leveraging our market position, including via distribution alliances, to grow our position over the long-term.
With the European organization in place, the management of Retail Europe works together with the regions to set the priorities for future growth. In particular, this includes developing a common set of retail value drivers to get a better understanding of the quality and sustainability of profits. The value drivers are: scale, cost, cross selling, value of new business and customer satisfaction.
Private Banking
The restructuring of ING Private Banking, which began in 2002, continued during 2003, with a number of unprofitable business units either being closed or transferred to lower-cost retail operations. We also began investing in a number of key developing markets where we believe there are significant growth opportunities, including India, China and Korea.
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The rationalization of our product offering also began with the appointment of pan-European product specialists and regional product managers, whose primary objective is the creation of a more simplified and coherent set of products and services, which are aligned to the specific requirements of our clients. We have also begun developing a range of products and services with a strong sustainability element and in this context we are leveraging the Groups expertise in areas such as micro-lending and charities.
More effective client segmentation has also been a core objective for our business units during the year, with much greater emphasis on the individual needs of our clients and a clear move away from a strictly product-based approach. We are also adopting a more globally consistent approach for our top-tier international clients, through the creation of a new super-high-net-worth segment.
For private banking clients, the face approach remains the most important of the ING click-call-face channels. However, we have also introduced more click and call channels for clients this year, with the introduction of trading and advisory call centres in many units, including Belgium and Asia, as well as enhanced internet banking, including execution capabilities and portfolio valuations.
We have also been successful this year in controlling our costs and in starting to maximize our operational efficiency across all five private banking regions. Many initiatives are underway to capitalize on our existing strengths, creating more synergy and coherence across all our units. Examples include portfolio management, third party funds, wealth management and credit.
The financial impact of the more integrated approach to private banking at ING has resulted in an almost trebling of our net profit compared to 2002. Asset growth, when compared to the market, has also shown significant growth. Growth in Asia has exceeded our expectations we have also made progress in key home markets, including the Netherlands and Belgium.
We believe that the outlook for ING Private Banking remains very promising. Asia is expected to continue to outperform most other units in growth, particularly as we step up our investment in the high potential Chinese and Indian markets. The home markets also offer significant growth potential for private banking, particularly in the Netherlands, where a more focused and client-centric private banking strategy is in the process of being rolled out.
ING Wholesale
The Wholesale Bank improved its profitability in 2003 while restructuring its operational cost base and the international branch network, improving risk management and, above all, unifying the client approach across regions and functions to increase value for both ING and its clients. All functional and regional commercial and support units contributed to the improved results and Wholesale Banking pre-tax profits more than doubled compared to 2002, risk costs were halved and the cost/income ratio improved substantially.
ING Wholesale will continue to focus on providing the highest level of service to its clients in its five European regions (The Netherlands, South West Europe, Germany, Central Europe and the UK), as well as its operations in the Americas and Asia, in the year ahead. It will align commercial strategy within Europe and core Emerging Markets in the three functional areas of Corporate Financial Services (CFS), Investment Banking (IB) and Financial Markets (FM), to benefit from the upturn in the local market economies and global economic sentiment.
CFS is defining its client base, that is mid-corporates in the Benelux, Poland and Germany, large international corporates globally, including local blue chip companies in Emerging Markets and Financial Institutions (banks and non-banks) worldwide, while delivering high added value to clients. This will be achieved by applying superior relationship-management skills in human capital and client information reporting, developing specific sector expertise and cross-selling capabilities. Of strategic importance are anchor products, such as, payments and cash management, general lending, structured finance (including acquisition finance) and trade banking, plus employee benefits, mergers and acquisitions advisory and asset management in specific markets. Investments will be made in syndicated finance and securitization for the benefit of INGs customers and its own capital management.
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The key Financial Markets (FM) objective is to support the overall wholesale client strategy, by providing target clients (and ING entities) with the full range of FM products and services in both the developed and emerging markets. To this end, FM will continue to put additional resources into developing a closer alignment between product specialists and client relationship managers. In the major developed market Hubs, FM is reorganizing and upgrading its sales teams to focus on servicing the broad financial market needs of defined client groups, such as corporates, financial institutions, fund managers, etc., rather than focusing team efforts on single product groupings.
From a financial perspective, 2003 was a profitable year for ING Wholesale overall but also a challenging one, due to recessions in many countries and a number of serious global events, namely the Iraq war and the SARS outbreak in Asia.
Operations and IT
During 2003, we focussed on further implementing the various programs launched in 2001 and 2002. Those steps include:
| the further roll out of a single IT application architecture, | |||
| the establishment of shared services centres, | |||
| the consolidation and standardization of IT Infrastructure & Applications. |
The implementation continues to progress well and we are on track to meet our financial target of EUR 760 million of cost reductions in the Operations and IT arena by 2005.
Considerable attention was given to improving our operational efficiency, especially in the insurance sector. An important IT investment program was launched, covering both Life and non-Life, to support our insurance operations. The first deliverable of this program became operational in 2003.
Responding to the increased potential for external risks, an EC Europe wide program was started to enhance our IT Security environment. Significant management attention was given to strengthening our IT Security Infrastructure and to improving the IT Controls.
ING INVESTMENT MANAGEMENT EUROPE
ING Investment Management Europe (ING IM), is responsible for managing the investments of the insurance companies of ING, as well as managing equity, fixed income and structured investments for institutional investors and the private label investment funds sold by various ING companies, including ING Bank, ING Belgium, Postbank, Nationale-Nederlanden and third party distributors. ING IM is also responsible for managing the treasury activities of ING Insurance.
With ING Investment Management Europe integrated into the regional Executive Centre Europe as of January 1, 2003, we set up a functional Global ING Investment Management Board to preserve the efficiency of a global manufacturing platform and to ensure global consistency of the investment strategies adopted in each region.
During 2003, ING Group sold its Italian retail operation (including its Italian mutual fund range) to Unicredito. ING IM will however remain active in Italy managing institutional mandates and selling its Luxembourg mutual fund range through third party distributors.
ING IM Europe also experienced both net inflow (EUR 2.0 billion) and positive revaluation (EUR 4.9 billion) in 2003 due to moderately improving market conditions. Both contributed to total assets under management increasing by 6.3% to EUR 110.8 billion.
The investment portfolios of ING Group companies managed by ING IM Europe increased by 11.3% to EUR 41.1 billion in 2003. Assets under management of ING IM on behalf of institutional clients increased by 7.6% to EUR 33.2 billion. The portfolios managed on behalf of institutional clients consist of fixed income securities (approximately 65.5%) and equities (approximately 34.5%). Assets in investment funds managed by ING IM amounted to EUR 36.6 billion, compared to EUR 36.5 billion as of the end of 2002.
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ING DIRECT
Financial Results
The strategy of ING Direct is to be a low-cost provider of financial services by achieving scale in large mature markets by offering the clients best value for their money and excellent service via call centres, direct mail and the internet. ING Direct uses a high-rate, no-fee, no-minimum savings account as the entry product. Upon reaching the necessary minimum scale, ING Direct complements the savings account by cross selling a focused range of other wealth accumulation products such as mortgages, mutual funds, e-brokerage, pensions and life insurance. After the savings products, mortgages are the most important product. ING Directs primary distribution channels are the call centre and the internet. The call centre is the pulse of the business for ING Direct. The internet and the Intelligent Voice Response (IVR) are two other main channels and they process an increasing number of transactions. On average, 45% of the account openings are activated via the internet and more than 70% of the incoming contacts with existing clients are fully automated (IVR or the internet). ING Direct cafés and co-operation with intermediaries and tied agents from sister companies and third parties form a third supplementary channel. ING Direct makes use of intermediary networks to sell more complex products. In the course of 2003, five business units (Canada, Australia, Spain, Germany and the United States) contributed to the Groups profit. We expect the youngest operations in France and Italy will break even in the course of 2004, although our operation in the United Kingdom, which started in May 2003, is expected to continue operating at a loss.
Growth and other developments
Due to overall commercial success in the business units, ING Direct almost doubled its size in 2003, based on total funds entrusted (deposits). In each of its markets, ING Direct has achieved a leading position in the direct banking segment. In addition, it has achieved a top-ten position based on savings balances in four of its markets.
Due in part, to the ongoing momentum and heavy usage of the internet and the shift to favorable savings market conditions, approximately 3.5 million new clients joined ING Direct in 2003 to bring the total to more than 8.5 million clients. The total of funds entrusted increased by EUR 44 billion to EUR 99 billion. Brand awareness developed strongly in all countries and acquisition costs declined from an average of EUR 140 per new account to an average of EUR 92 per new account, due in part to cost-effective marketing. In total, ING Direct reached profitability in the fourth quarter of 2002, and made a profit of EUR 151 million (before-tax) for 2003.
Total clients | Total funds entrusted | |||||||||||||||
Year-end | Year-end | Year-end | Year-end | |||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||
(in thousands) | (in billions of EUR) | |||||||||||||||
Canada |
905 | 684 | 7.0 | 5.1 | ||||||||||||
Germany |
3,735 | 1,894 | 38.1 | 20.3 | ||||||||||||
Spain |
753 | 610 | 7.9 | 6.0 | ||||||||||||
Australia |
719 | 475 | 6.9 | 4.1 | ||||||||||||
France |
339 | 270 | 7.6 | 6.3 | ||||||||||||
USA |
1,399 | 864 | 12.8 | 8.9 | ||||||||||||
UK |
305 | 11.5 | ||||||||||||||
Italy |
379 | 244 | 7.6 | 4.5 | ||||||||||||
Total |
8,534 | 5,041 | 99.4 | 55.2 | ||||||||||||
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Expanding market positions
ING Direct UK was launched in May 2003. The launch was accompanied by a strong media offensive. The growth-rate of ING Direct UK has been high. In nearly 8 months ING Direct UK has reached a level of over EUR 11 billion funds entrusted. This makes ING Direct UK the fastest growing bank in the UK ever.
In the beginning of 2003, ING announced that it signed a letter of intent with Fineco/Capitalia of Italy to acquire Entrium, Germanys second largest direct bank. The closing of this acquisition took place in July 2003. Also in July 2003, ING acquired the remaining 30% of the shares in DiBa (Germany) from BGAG. This way, ING owns all shares in DiBa In January 2003, ING Direct USA extended its market to include California.
Outlook
ING Direct will continue to focus on growing all of its business units to reach the necessary scale in savings, and bringing all of the business units to profitability. Although competition in all markets remains fierce, ING Direct expects to increase its profit in 2004, after including start-up losses of newer business units, if any.
OTHER ASSET MANAGEMENT
Beginning January 1, 2003, the activities of ING Investment Management were reorganized along regional lines and have been integrated into each of the regional Executive Centers in the Americas, Asia/Pacific and Europe. As a consequence, the financial results of ING Investment Management activities are now reported within these Executive Centers, and the Executive Center Asset Management no longer functions as a separate global profit center. The other business units of the former Executive Center ING Asset Management continue to report to the Executive Board member responsible for asset management.
In 2003, Other Asset Management comprised of the following five business units:
| ING Real Estate | |||
| Baring Asset Management | |||
| ING Trust | |||
| Parcom Ventures | |||
| Baring Private Equity Partners |
In 2003, Other Asset Management had an average of 3,022 employees, based on full-time equivalents.
ING Real Estate
ING Groups real estate activities are conducted through ING Real Estate. With a portfolio of more than EUR 42 billion at the end of 2003, ING Real Estate is ranked as one of the three largest real estate companies in the world with offices in Europe, the United States, Asia and Australia. ING Real Estate operates as an investment manager, developer and financier. Its primary aim is to make maximum use of the global expertise in the creation of valuable products. Despite the softening of the real-estate markets, the 2003 results exceeded expectations.
Investment management activities are carried out for institutional investors who want to diversify their property investments. As an investment manager ING Real Estate launched new funds in 2003, such as the ING Clarion Real Estate Income Fund and the ING Retail Property Fund France Belgium. In 2003, the Investment Management portfolio increased by 7% to EUR 26.3 billion.
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ING Real Estate Development covers the development of shopping centres, offices and residential units in response to market demand. It also continued creating value through numerous real estate projects around the world like: Liget Park Atrium (Hungary), Zloty Tarasy (Poland), New York Times Tower (USA), and the Haarlem Court House (The Netherlands). As of the end of 2003, the global real estate development portfolio amounted to EUR 2.0 billion.
Finance offers a wide range of products from mortgages, project finance, construction finance and leasing arrangements to syndicated loans. The Finance activities made a considerable contribution to ING Real Estates result with significant portfolio growth. Another remarkable milestone was the establishment of a syndication desk. This was made possible thanks to the increasing demand for large transactions to be syndicated among other players..
Baring Asset Management
Baring Asset Management (BAM) provides a diversified spectrum of investment management services to a variety of institutional and private clients. It manages equity, fixed-interest and balanced portfolios for world-wide clients. BAMs business is structured into two business lines: Investment Management Group and Financial Services Group, which accounted for 54% and 46%, respectively, of its total revenues in 2003.
In mid-2003 the investment management business of BAM implemented a new strategy and structure in response to the fundamental changes that are taking place in the industry. BAM changed from a market-driven company to an investment product-oriented company and has focussed successfully on strengthening the relationship between the investor and the client.
During 2003 the management structure of the BAM Financial Services Group was re-organized along functional lines based around the three main businesses of fund administration, offshore banking and custody, and trustee services. This has enabled the businesses to differentiate themselves, be more responsive and adaptable to client needs and create a greater focus on sales and business development.
ING Trust
ING Trust specializes in trustee services and the formation and management of offshore companies used for, among other things, tax planning, estate planning and asset protection. ING Trust is a leading player in the Dutch market for offshore trust services, serving both corporate and private clients. Throughout 2003, ING Trust focused on the implementation of new risk and compliance rules and on strengthening the relationship with the advisors of clients.
Parcom Ventures and Baring Private Equity Partners
Parcom, INGs captive private-equity unit in the Netherlands, showed good sales results in 2003 despite the difficult circumstances in the venture-capital markets. The last quarter showed a noticeable improvement. The size of the portfolio amounted to EUR 488 million. The 2003 profit contribution was quite satisfactory and Parcom comfortably meets INGs profit targets. Parcom will continue to focus on mid-corporate buy-outs in Europe.
In 2003 ING reached an agreement in principle with Baring Private Equity Partners (BPEP) for a management buy-out. While ING continues to regard private equity as an attractive asset class to invest in, this agreement is in line with INGs strategy to focus on its core business. ING will not relinquish its current investments in the existing funds of BPEP.
ING AMERICAS
The Executive Center (EC) ING Americas is comprised of business units operating in three broad geographic-based units in the United States, Canada, and Latin America (including Mexico). The primary products and services provided in ING Americas business units are various types of insurance, mutual funds, brokerage services and institutional products, including reinsurance and
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principal protection products, as well as retail and institutional asset management. In addition, we offer retail banking products and limited corporate and investment banking products and services in certain countries in the Americas through EC ING Europe.
ING Americas combined insurance operations place it among the top ten life insurers in the United States in terms of life and annuity premiums. ING Americas total assets under management at the end of 2003 amounted to EUR 167 billion. ING Americas ranks as the number one international insurer in Latin America and is the largest property and casualty writer in Canada.
The following sets forth premium income for the operations in the United States, Canada, and Latin America by product for the years indicated:
Year ended December 31 | ||||||||||||
2003 | 2002 | 2001 | ||||||||||
(EUR millions) | ||||||||||||
UNITED STATES |
||||||||||||
Individual Life Insurance |
2,109 | 2,635 | 2,593 | |||||||||
Fixed Annuity |
1,407 | 4,909 | 3,272 | |||||||||
Variable Annuity |
4,051 | 4,284 | 4,841 | |||||||||
Retirement Services |
7,591 | 8,594 | 8,571 | |||||||||
Group Insurance |
677 | 787 | 804 | |||||||||
US Financial Services (Total) |
15,835 | 21,209 | 20,081 | |||||||||
Reinsurance |
1,199 | 935 | 1,447 | |||||||||
Institutional Markets (GICs) |
4,327 | 5,468 | 7,190 | |||||||||
US Institutional Business (Total) |
5,526 | 6,403 | 8,637 | |||||||||
Other |
9 | 18 | | |||||||||
Non-life premiums |
624 | 720 | 407 | |||||||||
Total |
21,994 | 28,350 | 29,125 | |||||||||
CANADA |
||||||||||||
Non-life premiums |
2,164 | 2,094 | 1,583 | |||||||||
LATIN AMERICA |
||||||||||||
Life premiums |
466 | 746 | 739 | |||||||||
Non-life premiums |
1,872 | 2,547 | 1,562 | |||||||||
Total |
2,338 | 3,293 | 2,301 | |||||||||
A low interest environment and continued focus on sound pricing resulted in substantially lower fixed annuity premiums. The strengthening of the Euro versus other currencies substantially impacted gross written premiums. Excluding currency impact, United States premiums declined only 7% in 2003, whereas Canada increased 11% and Latin America declined 7% compared to 2002.
UNITED STATES
Through its US business operations, EC ING Americas offers a wide range of products that include traditional life, variable universal life, interest sensitive life, universal life, group life, stop loss, guaranteed investment products, variable annuities, mutual funds, fixed annuities and defined contribution products that meet the requirements of 401(k), 403(b) and 457 plans. Distribution channels include independent producers, career agents, broker dealers and financial institutions.
The ING U.S. organization is engaged in a multi-year action to rationalize its structure by reducing the numbers of legal entities to better integrate core operations. While the bulk of these consolidation activities has been accomplished, rationalization efforts are expected to continue beyond the end of 2004.
At December 31, 2003, insurance company subsidiaries doing business under ING America Insurance Holdings, Inc., our U.S. insurance holding company, include the following: ING Life
29
Insurance and Annuity Company, ING Insurance Company of America, Security Life of Denver Insurance Company, Equitable Life Insurance Company of Iowa, USG Annuity & Life Company, United Life & Annuity Insurance Company, Life Insurance Company of Georgia, Southland Life Insurance Company, Golden American Life Insurance Company, ReliaStar Life Insurance Company and ReliaStar Life Insurance Company of New York.
On January 1, 2004, Equitable Life Insurance Company of Iowa, USG Annuity & Life Company and United Life & Annuity Insurance Company merged with and into Golden American Life Insurance Company, which changed its name to ING USA Annuity and Life Insurance Company. Other non-insurance entities include ING Investment Management LLC, Investors Financial Group LLC, Lion Connecticut Holdings, Inc., ING International, Inc., and Multi-Financial Securities Corporation.
ING has a long history in the United States, and is committed to further strengthening its existing US operations and optimizing their performance. Although they are in the process of consolidating the US life and non-life markets remain highly fragmented and subject to intense competition as clients move towards investment, savings, and pure risk products. Increasing bank participation in the insurance market will also intensify competition. Retail business units in the US have been organized with either a manufacturing or distribution focus to support the offering of the entire breadth of ING products to INGs target markets, through the distribution channel of their choice.
In 2003, ING Americas operated in the United States in three business segments: US Financial Services (which includes both retail-oriented businesses and worksite financial services), US Institutional Businesses, and ING Investment Management. The activities of each segment are described below. Reorganization of the businesses will be implemented in 2004 to develop a better focus on the discrete needs of both retail and institutional customers.
United States Financial Services
ING US Financial Services (USFS), comprised of six primary lines of business (Individual Life Insurance, Annuities, Retirement Services which includes Defined Contribution Pensions and Rollover/Payout business, Group Insurance, Mutual Funds and ING Advisors Network), provides a wide variety of financial products and services to individuals both on a retail basis and through their employers. An extensive distribution network, Internet, a Voice Response Unit (VRU) and customer service representatives support products and services. The primary customer target market is the mass affluent segment.
USFS markets a complete range of individual insurance and investment products including variable universal life, universal life, and term insurance, fixed and variable annuities and mutual funds. Group insurance and employee benefit-related products and services are also offered, which include group life and disability insurance, dental and vision plans, defined contribution retirement plans, tax-sheltered annuities, voluntary employee-paid products and stop-loss coverage. Products focused on the corporate-owned insurance markets are also available. Additionally, USFS offers financial services such as financial planning, investment advisory services, pension plan administrative services and trust services primarily through the 10,000 financial professionals affiliated with the wholly owned broker-dealers in ING Advisors Network.
The focus of USFS is to market wealth accumulation, income and protection products via product-focused wholesaling forces, which in turn service distribution channels such as independent and career insurance agents, banks and broker/dealers. Approximately 280 internal and external wholesalers market individual insurance and investment products to more than 200,000 financial and investment advisors throughout the United States. Approximately 80 wholesalers market defined contribution retirement plan products in the small case corporate, health, education and government markets. Group Insurance and employee benefit-related products are sold primarily to medium-sized businesses by an 88 person wholesaling team through both major brokerage operations and via direct sales to employers.
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ING US Institutional Businesses
ING US Institutional Businesses (USIB) focus on providing products to institutional customers in two areas, reinsurance, through ING Re, and principal protection products, through ING Institutional Markets.
ING Re is the professional life reinsurance arm of ING Americas and is one of the top five life reinsurers in the United States. Its primary focus is assisting its clients by providing knowledge based individual and group life, as well as accident and health, reinsurance solutions. ING Res clients are primarily United States domestic life and health insurance companies. Risks are managed using per risk, per incident and per location exposure limits.
ING Institutional Markets offers principal protection products such as funding agreements, guaranteed investment contracts (GICs) and other stable value alternatives to defined contribution plans, fixed income money managers, financial intermediaries and other institutional buyers. The products offered by ING Institutional Markets can be traditional products, which guarantee a fixed or floating rate of interest and a return of principal to the contract holder, or alternative funding products such as synthetic and separate account GICs and GIC-backed medium term notes. The risks of the business unit are managed within very tight tolerances using sophisticated financial techniques and processes.
ING Investment Management
As of 2003, ING Investment Management Americas became part of EC ING Americas in order to better align investment manufacturing and distribution on a regional level. ING Investment Management Americas was formed in 2002 from a combination of INGs existing investment management operations in the United States, Canada, Mexico, and Chile with those of ING Aeltus Investment Management in Hartford, Connecticut, ING Furman Selz Asset Management based primarily in New York, and ING Funds investment operations in New York and Scottsdale, Arizona.
IIM Americas is comprised of five primary business lines: Proprietary Assets, Mutual Funds, Institutional Portfolios, Alternative Assets, and Managed Accounts. IIMs assets are managed in a wide range of investment styles and portfolios including: domestic and international equity funds across the value, blend and growth universes as well as the small, mid and large capitalization spectrum; domestic and international fixed income funds across the major bond sectors; balanced portfolios; real estate and private equity.
IIM manages Proprietary Assets for ING Americas insurance entities, investing in a diverse mix of public fixed income, private placements, structured products and commercial mortgages. IIMs third party products are distributed through proprietary, affiliated and outside distribution channels. Its mutual funds are distributed primarily through ING USFS products (including worksite retirement products, individual annuity products, and life insurance products), through ING and third party financial intermediaries, and through INGs internet bank, ING Direct.
IIMs institutional funds primarily serve the defined benefit market and are distributed directly to pension plans and through consultants by IIMs dedicated institutional sales force. IIM Americas institutional funds are also distributed through affiliated ING distribution channels in Europe and Asia/Pacific.
IIMs Alternative products are targeted to high net worth individuals and institutional investors. These products include single strategy hedge funds, hedge fund of funds, private equity, and structured products and are distributed primarily through proprietary distribution channels. IIMs managed account business serves almost 40,000 high net worth customers by offering individually managed portfolios through financial intermediaries.
IIM Americas business strategy is to further leverage the powerful distribution existing in INGs affiliate businesses and expand the model of maximizing the number of distribution channels for a given investment product or capability.
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CANADA
ING Americas business strategy for Canada is centered around risk management expertise delivered through strong manufacturing and distribution capabilities. In addition, a wealth management capability supports the distribution network.
ING Canada is the No. 1 insurer in the Canadian property and casualty market with a market share in excess of 10%. The total volume of direct written premiums in 2003 was EUR 2.2 billion representing an 11% increase over the prior year (all organically).
ING markets property and casualty insurance products through multiple distribution channels, including brokers, affinity programs as well as direct to the customer. This multiple-channel strategy reaches a broad cross-section of personal lines customers. In the commercial market, business is conducted through brokers, and customers are primarily small and medium size businesses. Commercial specialty lines products, such as marine, surety and other niche products are also offered.
ING Insurance Company of Canada, capitalizing on the brand strength in Canada, as well as INGs global brand positioning, serves brokers and their customers across Canada; while ING Novex offers personal lines insurance to groups throughout Canada.
ING Canada markets P&C insurance directly to customers through BELAIRdirect. Its products are marketed and sold mainly through the Internet and by phone through call-centers in Quebec and Ontario.
ING Advisor Network division operates with a mandate to further strengthen the financial services network across the country. This division is dedicated to support broker partners in building financial services capabilities within their brokerages.
In addition to insurance operations, ING Canada also has a mutual fund operation, ING Funds, and a registered mutual fund dealer, ING Wealth Management. The teams focus is to deliver packaged financial solutions to our brokers of the Advisor Network.
ING Canada has a customer base of over 3.6 million.
LATIN AMERICA
ING Americas seeks to be a leading player in emerging and other selected markets outside North America that have the potential for attractive long-term returns. Therefore, ING Americas, through subsidiaries and joint venture affiliates, sells life insurance, health insurance, pensions, property and casualty insurance, and financial services products in selected markets in strategic Latin American countries. Activities are focused on the countries of Brazil, Chile and Mexico. ING also has a presence in the AFP (privatized pension) and annuities market in Peru. The evaluation of non-strategic activities for divestment will continue throughout the Latin American operations.
Mexico
ING Americas current presence in Mexico consists of the largest insurance company, ING Comercial America (ING CA) and ING Comerical America Afore, a top five pension companies. ING CA is the market leader in the Mexican insurance industry with premium income of EUR 1.9 billion on an annual basis. ING CA has its strongest market positions in autos (#1), commercial property & casualty business (#1) and health insurance (#2). The growth focus will be on personal lines with the emphasis on life and wealth accumulation products.
ING Comercial America Afore, a privatized pension savings fund business started in 1997, has more than 2.7 million clients and AUM exceeding EUR 2.6 billion.
In 2003, ING sold its 49% interest in the Mexican bancassurance joint venture Seguros Bital to HSBC.
32
Argentina
Since 1996, ING has had a life insurance operation in Argentina that sold primarily unit-linked individual life insurance products through a sales force of tied agents. ING Argentina is experiencing an economic environment that was not envisaged when the Board approved the business plan justifying the original Argentinean investment. Through aggressive management actions the financial risks of the insurance operations have been limited. On February 17, 2004 ING announced that it made a decision to close ING Insurance in Argentina, and as a result ING Insurance Argentina is closing its branch offices throughout the country.
Chile
ING Americas has gained scale to become a leading financial services group in Chile with the #1 market ranking for life premiums and the #2 ranking for health premiums. 2003 total revenues (premium income and asset management fees) in Chile were EUR 611 million and assets under management were EUR 6.6 billion.
Brazil
ING obtained a 49% share in the health insurance subsidiary of Sul America, SulAet, with the acquisition in 2000 of Aetna International. In 2002, ING expanded this relationship and acquired 49% in Sul America, positioning ING at the forefront in the largest South American insurance market. As well as the #1 ranking health line, products now include life and personal accident, pension, auto, other P&C, and fund management activities. A co-branding project was launched in 2003.
Peru
ING has a 60% stake in AFP Integra, the leading private pension fund in Peru with EUR 1.6 billion in assets under management. ING also has a minority stake in InVita Life, which offers life, survivor and disability insurance, as well as annuities. Non-life interests were divested in 2002.
Netherlands Antilles and Aruba
ING completed the sale of its life, non-life and health operations in the Netherlands Antilles and Aruba (ING Fatum), with approval of the Central bank of the Netherlands Antilles, in early 2003.
ING ASIA/PACIFIC
Year ended December 31 | ||||||||||||
2003 | 2002 | 2001 | ||||||||||
(EUR Millions) | ||||||||||||
Total operating income |
8,511 | 8,826 | 7,501 | |||||||||
Operating result before taxation |
453 | 603 | 304 |
The Executive Centre (EC) ING Asia/Pacific is responsible for primarily retail strategies in delivering insurance and wealth management product lines in the key markets of Taiwan, Hong Kong, Australia/New Zealand, Japan, Korea and Malaysia, while further developing greenfields in China, India and Thailand.
A regional office in Hong Kong supports all business units in the region, ensures implementation of strategy and standards, encourages synergy both regionally and globally, and produces regional management reports to headquarters in Amsterdam.
With the exception of Japan and Australia, ING distribution in the region has been dominated by tied or career agents, but this is changing with the growth of independent agents, financial planners, and bancassurance, together with e-business, which is making inroads in terms of both direct customer access and supporting intermediary channels.
33
Market positioning has been strengthened in several countries through joint ventures. In Australia and New Zealand, the life insurance and funds management joint venture with ANZ is tracking according to plan. The Life Joint Venture with Beijing Capital Group started business in Dalian at the beginning of 2003 The Shanghai joint venture received approval to open a new branch in Guangzhou. Further we have begun bancassurance sales with Kookmin Bank in South Korea.
Australia and New Zealand
ING has two large joint ventures in Australia. ING Australia (the life and wealth management joint venture with ANZ) ranks No. 4 in the life business and No. 5 in the wealth management business). QBE Mercantile Mutual (the non-life joint venture with QBE) ranks No. 6 in the non-life industry. ING Australia continues to focus on leveraging its reach and scale to generate profitable growth by lowering operational cost ratios, enhancing product platforms, and growing ANZ distribution capacity and production via aligned distribution in multiple channels. QBE Mercantile Mutual distributes a range of general insurance products through professional general insurance intermediaries. In New Zealand, ING acquired the life insurer, Club Life in 2003.
Taiwan
Taiwan remains one of the most important markets for ING in the Asia Pacific region. INGs businesses in Taiwan include the No. 4 ranked life insurer, ING Antai, and a mutual fund joint venture with Chang Hwa Bank. Career life agents are the main distribution channel, although bancassurance has grown in prominence. Priorities for the life business include the introduction of innovative products with appropriate pricing, and the management of health products in order to reduce risk and improve profitability. Managing the low interest rate environment and improving investment performance within the investment mandate are also critical.
Hong Kong
INGs Hong Kong strategies focus on growing market position, besides developing alternative channels like bancassurance and financial planning to accelerate growth for the life business. In particular, ING has deepened its relationships with regional banks with sales support and training to enhance operating efficiency and quality of sales. The non-life business aims to maximize synergy and cross sell opportunities with other ING businesses operating in Hong Kong. The pension business will seek to continue to reduce costs through various initiatives.
China
The life insurance joint venture (PALIC) in Shanghai with China Pacific Insurance Company now ranks No. 7 in new business premium and fourth in terms of agency sales. It continues to focus on improving agency productivity and developing alternative distribution channels such as bancassurance. The Dalian life insurance joint venture (ICLIC) started operations in December 2002 and now ranks No. 5 in Dalian. The fund management joint venture China Merchant Funds launched Chinas first open ended fund and first money market fund during 2003, raising in total over EUR 500 million.
South Korea
ING Life Korea is one of the fastest growing international companies in the country. In 2003 ING Life Korea was ranked No. 5 by total premium. Life premium grew rapidly through the traditional tied agency distribution channel and bancassurance activities with Kookmin Bank during 2003. To further strengthen this position, INGs priorities in 2004 include deepening bancassurance distribution and broadening the agency pool. The extended strategic investment agreement with Kookmin Bank provides expanded distribution for life insurance and asset management products. INGs 20% owned investment trust joint venture with Kookmin Bank ended the year with assets under management of over EUR 6.8 billion.
34
Japan
In Japan, ING plans to maintain its leadership positions in the Corporate Owned Life Insurance (COLI) segment and the Single Premium Variable Annuity (SPVA) segment. ING ranks No. 3 in the SPVA segment. ING will continue to be a producer for independent agents and banks. Important new distribution alliances with four mega banks have been successfully launched, and the product range will be broadened. The pension joint venture with Principal Financial Group (USA), which focuses on small and medium-sized companies, markets a comprehensive range of products related to defined contribution pensions. The pensions joint venture is the No. 7 ranked corporate defined contribution pension plan provider in Japan. ING will support pensions and SPVA business by continuing to build its asset management proprietary funds capability.
Malaysia
In Malaysia, ING ranks No. 4 in terms of life new business with a 10% market share and, in 2003, became the No. 1 provider of employee benefits. In 2004 we expect to broaden our product range, improve operational efficiency and expense performance to drive profitability. Pension deregulation will permit pension products to be added. ING Malaysia has rebranded itself successfully from Aetna to ING leading to increased awareness of the ING brand.
India
In 2003, ING Vysya Life Insurance in India now is focusing on developing a large, professional tied agency force, expanded its product portfolio and bancassurance sales models for life and mutual fund products are also being developed. ING Vysya Bank, where ING owns a significant minority shareholding, continues to focus on enhancing its retail banking and distribution capabilities for third party retail products and improving its portfolio of corporate lending by leveraging on the ING Group connections
Thailand
In Thailand, INGs main focus is on growing and enhancing the productivity of the traditional tied agency force, and meeting the sales targets of the accelerated life greenfield business plan. The sales mix has been rationalized to achieve higher profitability. Bancassurance opportunities are also being actively pursued to diversify distribution.
Indonesia
The life business conducted by ING in Indonesia was divested in 2003.
35
THE FOLLOWING TABLE SETS FORTH OUR PRINCIPAL GROUP COMPANIES:
Unless otherwise stated our participating interest is 100%, or almost
100%
COMPANIES TREATED AS PART OF THE INSURANCE OPERATIONS
The Netherlands |
||||
ING Verzekeringen N.V.
|
The Hague | |||
ING Vastgoed Belegging B.V.
|
The Hague | |||
N.V. Nationale Borg-Maatschappij
|
Amsterdam | |||
Nationale-Nederlanden Levensverzekering Maatschappij N.V.
|
Rotterdam | |||
Nationale-Nederlanden Schadeverzekering Maatschappij N.V.
|
The Hague | |||
Nationale-Nederlanden Zorgverzekering N.V.
|
The Hague | |||
Parcom Ventures B.V.
|
Utrecht | |||
Postbank Levensverzekering N.V.
|
The Hague | |||
Postbank Schadeverzekering N.V.
|
The Hague | |||
RVS Levensverzekering N.V.
|
Rotterdam | |||
RVS Schadeverzekering N.V.
|
Ede | |||
Movir N.V.
|
Nieuwegein | |||
Belgium |
||||
ING Insurance N.V.
|
Antwerp | |||
Rest of Europe |
||||
Nationale-Nederlanden Poistovna A.S.
|
Bratislava, Slovakia | |||
Nationale-Nederlanden Life Insurance Company Poland
|
Warsaw, Poland | |||
NN Pension Fund Poland
|
Warsaw, Poland | |||
ING Nederlanden Asigurari de Viata S.A.
|
Bucharest, Romania | |||
NN Life Insurance Company S.A.
|
Athens, Greece | |||
NN Greek General Insurance Company S.A.
|
Athens, Greece | |||
ING Magyarországi Biztosító Rt.
|
Budapest, Hungary | |||
NN Vida, Compañia de Seguros y Reasuguros S.A.
|
Madrid, Spain | |||
NN Generales Compañia de Seguros y Reasuguros S.A.
|
Madrid, Spain | |||
North America |
||||
Belair Insurance Company Inc.
|
Montreal, Quebec, Canada | |||
ING Insurance Company of Canada
|
Toronto, Ontario, Canada | |||
ING Novex Insurance Company of Canada
|
Toronto, Ontario, Canada | |||
ING Western Union Insurance Company
|
Calgary, Alberta, Canada | |||
The Nordic Insurance Company of Canada
|
Toronto, Ontario, Canada | |||
Equitable of Iowa Life Insurance Company
|
Des Moines, Iowa, U.S.A. | |||
Golden American Life Insurance Company
|
Wilmington, Delaware, U.S.A. | |||
ING America Insurance Holdings, Inc.
|
Wilmington, Delaware, U.S.A. | |||
ING International Insurance Holdings, Inc.
|
Hartford, Connecticut, U.S.A. | |||
ING Life Insurance and Annuity Company
|
Hartford, Connecticut, U.S.A. | |||
ING North America Insurance Corporation
|
Atlanta, Georgia, U.S.A. | |||
Life Insurance Company of Georgia
|
Atlanta, Georgia, U.S.A. | |||
Lion Connecticut Holdings Inc.
|
Hartford, Connecticut, U.S.A. | |||
ReliaStar Life Insurance Company
|
Minneapolis, Minnesota, U.S.A | |||
ReliaStar Life Insurance Company of New York
|
Woodbury, New York, U.S.A | |||
Security Life of Denver Insurance Company
|
Denver, Colorado, U.S.A. | |||
Southland Life Insurance Company
|
Atlanta, Georgia, U.S.A. | |||
United Life & Annuity Insurance Company
|
Des Moines, Iowa, U.S.A. | |||
USG Annuity & Life Company
|
Oklahoma City, Oklahoma, U.S.A. | |||
Latin America |
||||
GBM Atlantico
|
Mexico City, Mexico | |||
ING Seguros, S.A. de C.V.
|
Mexico City, Mexico |
36
Pensiones Bital, S.A.
|
Mexico City, Mexico | |||
ING Seguros de Vida S.A.
|
Santiago, Chile | |||
Asia |
||||
ING Life Insurance Company Ltd.
|
Tokyo, Japan | |||
ING Life Insurance Company, Korea, Ltd. (80%)
|
Seoul, South Korea | |||
ING Antai Life Insurance Company
|
Taipei, Taiwan | |||
ING Life Insurance Malaysia
|
Kuala Lumpur, Malaysia | |||
Australia |
||||
ING Australia Limited*
|
Sydney, Australia | |||
ING Australia Pty. Ltd.
|
Sydney, Australia | |||
Reinsurance companies |
||||
ING Re (Netherlands) N.V.
|
The Hague, the Netherlands |
Branches
In addition, ING Insurance and its subsidiaries have offices in Brazil, China, Czech Republic, India, Luxembourg
* including ANZ (51%)
COMPANIES TREATED AS PART OF THE BANKING OPERATIONS
The Netherlands |
||
ING Bank N.V.
|
Amsterdam | |
Bank Mendes Gans N.V. (97.79%)
|
Amsterdam | |
CenE Bankiers N.V.
|
Utrecht | |
ING Car Lease Nederland B.V.
|
s-Hertogenbosch | |
ING Bank Corporate Investments B.V.
|
Amsterdam | |
ING Trust (Nederland) B.V.
|
Amsterdam | |
ING Vastgoed B B.V.
|
The Hague | |
ING Vastgoed Ontwikkeling B.V.
|
The Hague | |
InterAdvies N.V.
|
Amsterdam | |
Nationale-Nederlanden Financiële Diensten B.V.
|
Amsterdam | |
N.V. Nationale Volksbank (NVB)
|
Amsterdam | |
NMB-Heller Holding N.V. (50%)*
|
Amsterdam | |
Postbank N.V.
|
Amsterdam | |
Postbank Groen N.V.
|
Amsterdam | |
Postkantoren B.V. (50%)
|
Groningen | |
Stichting Regio Bank
|
Amsterdam | |
Wijkertunnel Beheer II B.V.
|
Amsterdam | |
Belgium |
||
ING België N.V.
|
Brussels | |
Rest of Europe |
||
Bank Slaski S.A. (87.8%)
|
Katowice, Poland | |
Baring Asset Management Holdings Ltd.
|
London, United Kingdom | |
ING BHF-BANK A.G.
|
Frankfurt, Germany | |
Allgemeine Deutsche Direktbank
|
Frankfurt, Germany | |
North America |
||
Furman Selz Holding LLC
|
New York, NY, U.S.A. | |
ING Financial Holdings Corporation
|
New York, NY, U.S.A. | |
ING Bank of Canada
|
Toronto, Ontario, Canada |
37
Latin America |
||
ING Sociedad De Bolsa (Argentina) S.A.
|
Buenos Aires, Argentina | |
ING Trust (Antilles) N.V.
|
Curaçao, Netherlands Antilles | |
Middenbank Curaçao N.V.
|
Curaçao, Netherlands Antilles | |
Australia |
||
ING Bank (Australia) Ltd.
|
Sydney, Australia | |
Asia |
||
ING Baring Securities (Japan) Ltd.
|
Tokyo, Japan | |
ING Capital Markets (Hong Kong) Ltd.
|
Hong Kong, China | |
ING Futures & Options (Hong Kong) Ltd.
|
Hong Kong, China | |
ING Merchant Bank (Singapore) Ltd.
|
Singapore, Singapore | |
ING Vysya Bank Ltd. (44%)
|
Bangalore, India | |
Other |
||
ING Direct N.V.
|
Canada, Germany, Spain, | |
Australia, France, USA, Italy, UK |
Branches
ING Bank N.V. has offices in most of the major financial centres, including London, Frankfurt, Hong Kong and Tokyo. In addition, ING Bank and/or ING België N.V. have offices in Asunción, Bangkok, Bratislava, Bucharest, Buenos Aires, Curaçao, Dublin, Havana, Istanbul, Lima, Madrid, Manila, Milan, Paris, Prague, São Paulo, Seoul, Shanghai, Singapore, Sofia, Taipei and Vienna among others.
* Proportionally consolidated
38
REGULATION AND SUPERVISION
The insurance, banking and asset management business of ING are subject to detailed comprehensive regulation in all the jurisdictions in which ING does business. This regulation is based in a large part on European Union (EU) directives, discussed more fully below. These directives have a significant impact on the regulation of the insurance, banking, asset management and broker dealer businesses in the EU.
A group of companies in the EU may be engaged in both insurance and banking, although direct mergers between banking and insurance companies are not permitted.
On December 16, 2002, the European Union adopted a directive on the supplementary supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerate. This directive aims to address the supervisory issues that arise from the blurring of distinctions between the activities of firms in each of the banking, securities, investment services and insurance sectors. The main objectives of the directive are to:
| ensure that a financial conglomerate has adequate capital; | |||
| introduce methods for calculating a conglomerates overall solvency position; | |||
| deal with the issues of intra-group transactions, exposure to risk and the suitability and professionalism of management at financial conglomerate level; and | |||
| prevent situations in which the same capital is used simultaneously as a buffer against risk in two or more | |||
| entities which are members of the same financial conglomerate (double gearing) and where a parent issues debt and downstreams the proceeds as equity to its regulated subsidiaries (excessive leveraging). |
Member States have to adopt the provisions of this directive to the supervision of accounts for the financial year beginning on January 1, 2005. ING does not expect this directive to have a material impact on its business or on its capital requirements or solvency position, as it already complies with comparable national legislation.
ING Groep N.V. and its subsidiaries are in compliance in all material respects with the applicable banking and insurance regulations and capitalization and capital base requirements of each applicable jurisdiction.
39
INSURANCE
ING Europe
Insurance companies in the EU are subject to supervision and regulation by insurance regulatory authorities. carrying out prudential and conduct of business supervision.
The relevant national regulation is based on the 1992 EU Insurance Directives. These are founded on the home country control principle, according to which the ongoing regulation of insurance companies, including their foreign insurance operations, is the responsibility of the home country insurance regulatory authority. The home country insurance regulatory authority monitors compliance with applicable regulations, the capital base of the insurer and its actuarial reserves, as well as the assets of the insurer, which support such reserves. As a result of the implementation of these directives, an insurance company that has been licensed to conduct insurance business in one jurisdiction of the EU may do business directly or through foreign branches in all other jurisdictions of the EU without being subject to licensing requirements under the laws of the other EU member-states.
In The Netherlands, the home country insurance regulatory authority is the Pensions and Insurance Supervisory Authority, who ensures that the insurers and pension funds that operate in the Netherlands are and remain financially sound. In Belgium, our insurance operations are supervised by the Banking, Finance and Insurance Commission, created as a result of the integration of the Insurance Supervisory Authority (ISA) and the Banking and Finance Commission (CBFA) and who since 1 January 2004 is the single supervisory authority for the Belgian financial sector. In other European Union countries our insurance operations are subject to regulation by similar regulatory authorities.
ING Insurances life and non-life subsidiaries in the EU are required to file detailed annual reports with their home country insurance regulatory authority. These reports are audited by ING Insurances independent auditors and include balance sheets, profit and loss statements, actuarial statements and other financial information. The authorization granted by the insurance regulatory authority stipulates the class or classes of business that an insurer may write, and is required for every proposed new class of business. In addition, the home country insurance regulatory authority may require an insurer to submit any other information it requests and may conduct an audit at any time.
On the basis of the EU-directives, European life insurance companies are required to maintain at least a shareholders equity level of generally 4% of insurance reserves (1% of separate account reserves) plus 0.3% of the amount at risk under insurance policies. The required shareholders equity level for Dutch non-life insurers is the greater of two calculations: one based on premiums and the other on claims. The former is based on 16% of gross premiums written for the year, the latter is based on 23% of a three-year average of gross claims. As of December 31, 2003, the capital base, being EUR 7.2 billion of ING Groups Dutch insurance subsidiaries substantially exceeded the minimum standards amounting to EUR 2.9 billion, resulting in a surplus of EUR 4.3 billion.
In 1998, the directive of the European Parliament and Council on the supplementary supervision of the insurance undertakings in an insurance group was adopted. The directive enables the insurance regulatory authorities involved to form a more sound judgement on the financial situation of insurance undertakings that are part of a group, in order to provide additional safety to policyholders. Furthermore, the directive aims to prevent distortion of competition and contribute to the safety of the financial markets. 2002 has been the first financial year in which was reported according to this directive.
The supervision of our significant insurance businesses outside the EU is described below.
ING Americas
ING Groups United States insurance subsidiaries are subject to regulation and supervision in the individual states in which they operate. Supervisory agencies in various states have broad powers to grant or revoke licenses to transact business, regulate trade practices, license agents, approve policy forms and certain premium rates, set standards of capital base and reserve requirements, determine the form and content of required financial reports, examine insurance companies and prescribe the
40
type and amount of investments permitted. Insurance companies are subject to a mandatory annual audit of their statutory basis financial statements by an independent certified public accounting firm and an insurance department examination approximately every three to five years.
Insurers, including the companies comprising ING Insurances U.S. operations are subject to Risk Based Capital (RBC) guidelines. These guidelines provide a method to measure the adjusted capital (statutory capital and surplus plus other adjustments) that insurance companies should have for regulatory purposes, taking into account the risk characteristics of the companys investments and products. The RBC ratio of an insurance company will vary over time depending upon many factors, including its earnings, the mix of assets in its investment portfolio, the nature of the products it sells and its rate of sales growth, as well as changes in the RBC formulas required by regulators. The RBC guidelines are intended to be a regulatory tool only, and are not intended as a means to rank insurers generally. Each of the companies comprising ING Insurances U.S. operations was above its target and statutory minimum RBC ratios at year-end 2003.
Insurance holding company statutes and regulations of each insurers state of domicile require periodic disclosure concerning the ultimate controlling person (i.e., the corporation or individual that controls the domiciled insurer in each state). Such statutes also impose various limitations on investments in affiliates and may require prior approval of the payment of certain dividends by the registered insurer to ING or several of its affiliates. ING is subject, by virtue of its ownership of insurance companies, to certain of these statutes and regulations.
Our insurance businesses in Canada are federal companies incorporated pursuant to the Canada Business Corporations Act. The various provincial statutes are almost identical. The law of Quebec, which is based on a Civil Code (modeled on the Napoleonic Code of France), varies in form from that of the other provinces. There are few significant differences between provinces in the administration of the insurance statutes. Ontario has case law that makes insurers absolutely liable for the actions of their agents, even if that agent is acting outside the scope of his or her appointment. The only defense available to the insurer is one of fraud. Due diligence may be pleaded; however, unless the insurer can prove that its standards of education, monitoring and auditing of agents are of the highest level, the insurer will be held responsible for the agents action. Quebec also has a statute that similarly makes the insurer responsible for the acts of its agents. As for mutual funds and other investment products, the various provincial statutes are almost identical and the rules are almost identical to the U.S. rules in this regard.
ING Asia/Pacific
Significant changes have taken place in the Japanese financial sector prompted by deregulation and the turmoil caused by the prolonged economic recession. The Financial Services Agency (FSA) was established on July 1, 2000, by the integration of the Financial Supervisory Agency and the Financial System Planning Bureau of the Ministry of Finance.
New products, revision of existing products and changes in policy provisions require approval by the FSA. Cabinet Office and FSA ordinances stipulate the types of assets in which an insurance company can invest. In addition, ordinances limit the proportion of assets that an insurance company may invest in certain categories of investments. The Insurance Business Law further requires that an insurance company set aside a liability reserve for each policyholder every business period to provide for the fulfillment of the level of expected mortality and other assumptions that are applied in calculating liability reserves for long-term contracts. An insurance company shall appoint a corporate actuary at a meeting of the board of directors and have such a corporate actuary be involved in the method of calculating premiums and other actuarial matters. An external audit is required for all insurers. The auditors must report on whether the balance sheet and income statements show fairly the status of the insurers assets and liabilities in conformity with relevant laws, Cabinet Office or FSA ordinances and the insurers articles of incorporation. In addition to the external audit, the statutory corporate auditors must be elected to examine whether there have been any serious violations of the law, relevant FSA ordinances or the insurers articles of incorporation by the insurers directors. The statutory corporate auditors are also responsible for accounting matters, depending on the results produced from the external audit and are required to draw up a report covering financial and non-financial issues, which is included in the annual report to shareholders.
41
ING Groups Korean insurance subsidiaries, are subject to regulation and supervision of the Financial Supervisory Commission (FSC) and its executive arm, the Financial Supervisory Service (FSS). A second body, the Korean Life Insurance Association advises the Ministry of Finance and Economy on policies and systems related to life insurance such as the Insurance Business Act. In August 2002, the Insurance Business Act was revised to deregulate the insurance industry and to increase competition. The FSC announced a plan also aimed at increased competition in the domestic financial sector, to be implemented in three phases as of 2003.
The financial services activities of life insurance, investments, superannuation, general insurance and banking are currently governed by separate legislation under Australian law. The two main financial services regulators are the Australian Securities and Investment Commission (ASIC) and the Australian Prudential Regulation Authority (APRA). APRA is responsible for the prudential regulation of banks and other deposit taking institutions, life and general insurance companies, superannuation funds and Retirement Savings Account Providers APRAs responsibilities include regulating capital and liquidity requirements and monitoring the management functions of product providers. ASIC is responsible for consumer protection and market integrity across the financial systems, including the areas of insurance banking and superannuation.
BANKING
ING Europe
Basel Standards
The Basel Committee on Banking Supervision of the Bank for International Settlements (BIS) develops international capital adequacy guidelines based on the relationship between a banks capital and its credit risks. In this context, on July 15, 1988, the Basel Committee adopted risk-based capital guidelines (the Basel guidelines), which have been implemented by banking regulators in the countries that have endorsed them. The Basel guidelines are intended to strengthen the soundness and stability of the international banking system. The Basel guidelines are also intended to reduce an existing source of competitive inequality among international banks by harmonizing the definition of capital and the rules for the evaluation of asset risks and by establishing a uniform target capital base ratio (capital to risk-weighted assets). Supervisory authorities in each jurisdiction have, however, some discretion in determining whether to include particular instruments as capital under the Basel guidelines and to assign different weights, within a prescribed range, to various categories of assets. The Basel guidelines were adopted by the European Community. In June 1999, the Basel Committee proposed a review of the Basel guidelines of 1988.
Since then the proposals of the consultative paper of the Basel Committee on Banking Supervision were further discussed by several international working parties. Once finalized, the implementation of the New Basel Capital Accord is expected in 2007.
The purpose of Basel II is to lay down capital requirements that are more risk-sensitive. There is also greater emphasis on internal methods of risk control by banks. For example, the Accord further refines the system of risk weightings and permits capital requirements to be calculated based upon the ratings issued by recognized rating agencies. In addition, under certain conditions, banks will be permitted to use their internal rating models to determine the amount of capital that they must hold. It also adds capital requirements for operating risk to those laid down for credit risk and market risk.
The European Union will be drawing up a directive, the Third Capital Adequacy Directive (CAD3), which will apply to both banks and investment firms. Through this European directive, Basel II will be implemented in the legislation and regulations and in supervisory practice in all EU member states.
European Union Standards
The European Community has adopted a capital adequacy regulation for credit institutions in all its member states based on the Basel guidelines. In 1989, the EC adopted the Council Directive of April 17, 1989 on the own funds of credit institutions (the Own Funds Directive), defining qualifying capital (own funds), and the Council Directive of December 18, 1989 on a capital base ratio for credit
42
institutions (the Capital base Ratio Directive and, together with the Own Funds Directive, the EC Directives), setting forth the required ratio of own funds to risk-adjusted assets and off-balance sheet items. The EC Directives required the EU member states to transform the provisions of the Capital base Ratio Directive and the provisions of the Own Funds Directive into national law directly binding on banks operating in the member states. The EC Directives permit EU member states, when transforming the EC Directives into national law, to establish more stringent requirements, but do not permit more lenient requirements.
The EC Directives are aimed at harmonizing banking regulations and supervision throughout the EU by laying down certain minimum standards in key areas, and requiring member states to give mutual recognition to each others standards of regulation. The concept of mutual recognition has also been extended to create the passport concept: the freedom to establish branches in, and to provide cross-border services into, other EU member states once a bank has been licensed in its home state. The single market program for banking was completed when the Capital Adequacy Directive, or CAD, was implemented in the Netherlands with effect from January 1, 1996. In particular, CAD introduces a new requirement for banks to provide capital for market risk.
An EU member state credit institution is not permitted to start operations through a branch in another EU member state until it has received confirmation from its home country banking regulatory authority that the information required by the Second Directive on the Coordination of Legislation to the Taking Up and Pursuit of the Business of Credit Institutions (the Second Banking Coordination EC Directive) has been submitted to that regulator and until, following this confirmation, a period of two months has elapsed or until, before the expiry of this period, it has received confirming information by that home country banking regulatory authority.
The EC Directives require a bank to have a capital base ratio of own funds to
risk-adjusted assets and certain off-balance sheet items of at least 8%. At
least one-half of the own funds in the numerator of the ratio must be original
own funds, or Tier 1 capital. The rest may be additional own funds, or
Tier 2 capital. As of January 1, 1997, Tier 1 capital consists solely of
paid-up capital plus share premium accounts, other reserves and the fund for
general banking risks less a deduction for goodwill. Tier 2 capital includes
revaluation reserves, value adjustments and certain other funds and securities
(such as fixed-term cumulative preferential shares and subordinated debt). The
aggregate of a banks subordinated loans and fixed-term cumulative preferential
shares may not exceed 50% of the banks Tier 1 capital.
To compute the denominator of the capital base ratio, the assets of a bank are
assigned to five broad categories of relative credit risk (0%, 10%, 20%, 50%
and 100%) and the balance sheet value of each asset is multiplied by the
percentage weight applicable to its risk category to arrive at the
risk-adjusted value. With respect to off-balance sheet items, such as financial
guarantees and letters of credit, first, their face value is adjusted according
to their risk classification depending on the type of instrument (0%, 20%, 50%
and 100%), then they are assigned, like on-balance sheet assets, to the credit
risk categories depending on the type of debtor and multiplied by the
applicable percentage weights. With respect to derivatives contracts, first,
their fair value is adjusted with a product specific potential future credit
exposure (0% to 15% over the notional amounts), then they are assigned, like
on-balance sheet assets, to the credit risk categories depending on the type of
debtor and multiplied by the applicable percentage weights.
In 2000, the EC Directives were brought together in the EC Directive 2000/12.
ING Bank files consolidated monthly and annual reports of its financial position and results with the Dutch Central Bank. ING Banks independent auditors audit these reports. Our banking operations in Belgium are supervised by the Banking, Finance and Insurance Commission. Banking supervision in Germany is carried out by the Federal Financial Supervisory Authority, working in co-operation with the German Central Bank (Deutsche Bundesbank). Similar authorities supervise INGs banking operations in other European Union countries, such as the Financial Services Authority in the United Kingdom.
The supervision of our significant banking businesses outside the EU is described below.
43
ING Americas
ING Bank does have a limited direct presence in the United States through the facility of the ING Bank Representative Office in New York. Although that offices activities are strictly limited, essentially to that of a marketing agent of bank products and services and a facilitator (i.e., the office may not take deposits or execute any transactions), that office is subject to the jurisdiction of the State of New York Banking Department and the Federal Reserve.
A major part of our banking activities in the United States, ING Direct USA, is regulated by the Office of Thrift Supervision, a division of the United States Department of the Treasury and, to a lesser extent, by the Federal Deposit Insurance Corporation, an independent agency of the Federal government that operates under the auspices of the Federal Deposit Insurance Act, a US federal law.
ING Bank of Canada is a federally regulated financial institution that is subject to the supervision of the Office of the Superintendent of Financial Institutions (OSFI), which is the primary regulator of federally chartered financial institutions (including banks) and federally administered pension plans. ING Bank of Canada operates a wholly owned mortgage loan company subsidiary, ING Mortgage Broker Services Inc., which is subject to provincial regulation in the provinces in which it operates. ING MBSs home province regulator is the Financial Services Commission of Ontario, which regulates insurance, pensions, credit unions, caisses populaires, cooperatives, mortgage brokers and loan & trust companies in the province of Ontario.
ING Asia/Pacific
The financial services activities of life insurance, investments, superannuation, general insurance and banking are currently governed by separate legislation under Australian law. No one piece of legislation exclusively covers all financial services. The two main financial services regulators are the Australian Securities and Investment Commission (ASIC) and the Australian Prudential Regulation Authority (APRA). APRA is responsible for the prudential regulation of banks and other deposit taking institutions, life and general insurance companies, superannuation funds and Retirement Savings Account Providers. APRAs responsibilities include regulating capital and liquidity requirements and monitoring the management functions of product providers
BROKER-DEALER AND INVESTMENT MANAGEMENT ACTIVITIES
INGs broker-dealer entities in the United States are regulated by the Securities and Exchange Commission, the states, and the self-regulatory organizations (e.g., the NASD and the NYSE) of which they individually are members. The primary governing statutes for such entities are the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, and state statutes and regulations, as applicable. Those laws, and the regulations promulgated thereunder, impose requirements (among others) regarding minimum net capital requirements, safeguarding of customer assets, protection and use of material, non-public (inside) information, record-keeping requirements, supervision of employee activities, credit to customers, suitability determinations in the context of recommending transactions to customers and clearance and settlement procedures. The rules of the self-regulatory organizations in some respects duplicate the aforementioned legal requirements, but also impose requirements specific to the marketplaces that those organizations oversee. For example, the NASD imposes requirements relating to activities by market-makers in the over-the-counter market in equity securities and the NYSE imposes requirements regarding transactions effected in its listed securities market. In addition, in December 2001, the Department of Treasury proposed new anti-money laundering standards applicable to broker-dealers.
Certain ING entities in the United States (including certain of its broker-dealers) also act in the capacity of a federally registered investment advisor (i.e. providing transactional advice to customers for a fee), and are governed in such activities by the Investment Advisers Act of 1940, as amended. Moreover, certain ING entities manage investment funds (such as mutual funds); the Investment Company Act of 1940, as amended, regulates the governance and activities of those funds. These laws impose record-keeping and disclosure requirements on ING in the context of such activities. Moreover, the laws impose restrictions on transactions or require disclosure of transactions involving advisory clients and the advisor or the advisors affiliates, as well as transactions between advisory clients. In addition, the
44
Employee Retirement Income Security Act of 1974, as amended, imposes certain obligations on investment advisors managing employee plan assets as defined in this act.
The failure of ING to comply with these various requirements could result in civil and criminal sanctions and administrative penalties imposed by the Securities and Exchange Commission, the states, or self-regulatory organizations upon those entities that have committed the violations. Moreover, employees who are found to have participated in the violative activity, and managers of such employees, also may be subject to penalties by governmental and self-regulatory agencies.
SELECTED STATISTICAL INFORMATION ON BANKING OPERATIONS
The tables below set forth selected statistical information regarding the Groups banking operations. Unless otherwise indicated, average balances, when used, are calculated from monthly data and the distinction between domestic and foreign is based on the location of the office where the assets and liabilities are booked, as opposed to the domicile of the customer. However, the Company believes that the presentation of these amounts based upon the domicile of the customer would not result in material differences in the amounts presented below.
The return on equity of the banking operations amounted to 11.0% in 2003 against 6.5% in 2002 and 10.2% in 2001, whereas the return on equity of ING Group amounted to 21.5%, 17.4% and 15.3% for the years 2003, 2002 and 2001 respectively. The dividend pay-out ratio of ING Group amounted to 48.5% in 2003, 44.1% in 2002 and 44.1% in 2001.
AVERAGE BALANCES AND INTEREST RATES
The following tables show the banking operations, average interest-earning assets and average interest-bearing liabilities, together with average rates, for the periods indicated. The interest income, interest expense and average yield figures include interest on non-accruing loans and do not reflect:
income on amortized results investments;
lending commissions;
interest income on off-balance sheet instruments;
other income not considered to be directly related to interest-earning assets;
interest expense on off-balance sheet instruments, or
other expense not considered to be directly related to interest-bearing liabilities,
all of which are reflected in the corresponding interest income, interest expense and net interest result figures in the Consolidated Financial Statements. A reconciliation of the interest income, interest expense and net interest result figures to the corresponding line items in the Consolidated Financial Statements is provided below.
45
ASSETS
Interest-earning assets | ||||||||||||||||||||||||||||||||||||
2003 | 2002 | 2001 | ||||||||||||||||||||||||||||||||||
Average | Interest | Average | Average | Interest | Average | Average | Interest | Average | ||||||||||||||||||||||||||||
balance | income | yield | balance | income | yield | balance | income | yield | ||||||||||||||||||||||||||||
(EUR millions) | % | (EUR millions) | % | (EUR millions) | % | |||||||||||||||||||||||||||||||
Time deposits with banks |
||||||||||||||||||||||||||||||||||||
domestic |
1,984 | 98 | 4.9 | 3,625 | 128 | 3.5 | 5,522 | 364 | 6.6 | |||||||||||||||||||||||||||
foreign |
24,450 | 723 | 3.0 | 21,965 | 935 | 4.3 | 24,488 | 1,261 | 5.2 | |||||||||||||||||||||||||||
Loans and advances |
||||||||||||||||||||||||||||||||||||
domestic |
154,944 | 7,800 | 5.0 | 146,277 | 7,885 | 5.4 | 132,714 | 7,805 | 5.9 | |||||||||||||||||||||||||||
foreign |
160,338 | 6,790 | 4.2 | 148,979 | 7,149 | 4.8 | 137,098 | 8,843 | 6.5 | |||||||||||||||||||||||||||
Interest-earning securities(1) |
||||||||||||||||||||||||||||||||||||
domestic |
25,384 | 682 | 2.7 | 20,472 | 692 | 3.4 | 21,165 | 589 | 2.8 | |||||||||||||||||||||||||||
foreign |
116,092 | 4,450 | 3.8 | 92,616 | 4,182 | 4.5 | 78,615 | 3,375 | 4.3 | |||||||||||||||||||||||||||
Other interest-earning assets |
||||||||||||||||||||||||||||||||||||
domestic |
3,563 | 208 | 5.8 | 4,588 | 167 | 3.6 | 4,313 | 293 | 6.8 | |||||||||||||||||||||||||||
foreign |
9,188 | 262 | 2.9 | 11,040 | 465 | 4.2 | 12,110 | 759 | 6.3 | |||||||||||||||||||||||||||
Total |
495,943 | 21,013 | 4.2 | 449,562 | 21,603 | 4.8 | 416,025 | 23,289 | 5.6 | |||||||||||||||||||||||||||
Non-interest earning assets |
24,011 | 27,216 | 30,134 | |||||||||||||||||||||||||||||||||
Total assets(1) |
519,954 | 476,778 | 446,159 | |||||||||||||||||||||||||||||||||
Percentage of assets
applicable to foreign
operations |
64.9 | % | 62.1 | % | 61.6 | % | ||||||||||||||||||||||||||||||
Other interest income
(reconciliation to Consolidated
Financial Statements): |
||||||||||||||||||||||||||||||||||||
amortized results investments(2) |
258 | 348 | 152 | |||||||||||||||||||||||||||||||||
lending commission |
96 | 102 | 167 | |||||||||||||||||||||||||||||||||
adjustment for interest on non-
performing loans(3) |
(123 | ) | (105 | ) | (122 | ) | ||||||||||||||||||||||||||||||
interest on off-balance
instruments (4) |
2,187 | 1,758 | 1,325 | |||||||||||||||||||||||||||||||||
other |
371 | 382 | (493 | ) | ||||||||||||||||||||||||||||||||
Total interest income |
23,802 | 24,088 | 24,318 | |||||||||||||||||||||||||||||||||
46
LIABILITIES
Interest-earning liabilities | ||||||||||||||||||||||||||||||||||||
2003 | 2002 | 2001 | ||||||||||||||||||||||||||||||||||
Average | Interest | Average | Average | Interest | Average | Average | Interest | Average | ||||||||||||||||||||||||||||
balance | expense | yield | balance | expense | yield | balance | expense | yield | ||||||||||||||||||||||||||||
(EUR millions) | % | (EUR millions) | % | (EUR millions) | % | |||||||||||||||||||||||||||||||
Time deposits from banks |
||||||||||||||||||||||||||||||||||||
domestic |
19,829 | 666 | 3.4 | 23,789 | 832 | 3.5 | 25,986 | 1,117 | 4.3 | |||||||||||||||||||||||||||
foreign |
36,870 | 771 | 2.1 | 43,435 | 1,238 | 2.9 | 45,995 | 2,255 | 4.9 | |||||||||||||||||||||||||||
Demand deposits(5) |
||||||||||||||||||||||||||||||||||||
domestic |
32,694 | 219 | 0,7 | 31,291 | 332 | 1.1 | 28,195 | 384 | 1.4 | |||||||||||||||||||||||||||
foreign |
23,867 | 391 | 1.6 | 20,994 | 528 | 2.5 | 17,760 | 589 | 3.3 | |||||||||||||||||||||||||||
Time deposits(5) |
||||||||||||||||||||||||||||||||||||
domestic |
13,082 | 391 | 3.0 | 17,675 | 746 | 4.2 | 19,923 | 1,165 | 5.9 | |||||||||||||||||||||||||||
foreign |
31,207 | 956 | 3.1 | 34,432 | 1,242 | 3.6 | 37,631 | 1,715 | 4.6 | |||||||||||||||||||||||||||
Savings deposits(5) |
||||||||||||||||||||||||||||||||||||
domestic |
50,051 | 1,425 | 2.9 | 43,463 | 1,300 | 3.0 | 38,194 | 1,329 | 3.5 | |||||||||||||||||||||||||||
foreign |
100,317 | 2,878 | 2.9 | 57,781 | 2,050 | 3.6 | 25,361 | 1,048 | 4.1 | |||||||||||||||||||||||||||
Short term debt |
||||||||||||||||||||||||||||||||||||
domestic |
5,664 | 180 | 3.2 | 5,082 | 193 | 3.8 | 5,090 | 253 | 5.0 | |||||||||||||||||||||||||||
foreign |
48,305 | 909 | 1.9 | 48,836 | 1,309 | 2.7 | 46,961 | 1,958 | 4.2 | |||||||||||||||||||||||||||
Long term debt |
||||||||||||||||||||||||||||||||||||
domestic |
15,586 | 895 | 5.7 | 19,278 | 865 | 4.5 | 19,029 | 1,008 | 5.3 | |||||||||||||||||||||||||||
foreign |
32,143 | 1,300 | 4.1 | 30,439 | 1,634 | 5.4 | 26,135 | 1,965 | 7.5 | |||||||||||||||||||||||||||
Subordinated liabilities |
||||||||||||||||||||||||||||||||||||
domestic |
10,915 | 647 | 5.9 | 9,109 | 589 | 6.5 | 7,266 | 467 | 6.4 | |||||||||||||||||||||||||||
foreign |
2,921 | 178 | 6.1 | 3,184 | 190 | 6.0 | 3,215 | 232 | 7.2 | |||||||||||||||||||||||||||
Other interest-bearing liabilities |
||||||||||||||||||||||||||||||||||||
domestic |
19,475 | 583 | 3.0 | 10,972 | 359 | 3.3 | 14,088 | 590 | 4.2 | |||||||||||||||||||||||||||
foreign |
25,253 | 1,063 | 4.2 | 22,890 | 1,103 | 4.8 | 35,598 | 1,435 | 4.0 | |||||||||||||||||||||||||||
Total |
468,179 | 13,452 | 2.9 | 422,650 | 14,510 | 3.4 | 396,427 | 17,510 | 4.4 | |||||||||||||||||||||||||||
Non-interest
bearing liabilities |
34,587 | 36,726 | 33,490 | |||||||||||||||||||||||||||||||||
Total Liabilities |
502,766 | 459,376 | 429,917 | |||||||||||||||||||||||||||||||||
Group Capital |
17,188 | 17,402 | 16,242 | |||||||||||||||||||||||||||||||||
Total
liabilities and capital |
519,954 | 476,778 | 446,159 | |||||||||||||||||||||||||||||||||
Percentage of liabilities
applicable to foreign
operations |
65.1 | % | 63.2 | % | 60.9 | % | ||||||||||||||||||||||||||||||
Other interest expense
(reconciliation to
Consolidated |
||||||||||||||||||||||||||||||||||||
Financial Statements): |
||||||||||||||||||||||||||||||||||||
interest on off-balance
instruments(6) |
2,027 | 1,718 | 1,364 | |||||||||||||||||||||||||||||||||
other |
208 | 214 | (628 | ) | ||||||||||||||||||||||||||||||||
Total interest expense |
15,687 | 16,442 | 18,248 | |||||||||||||||||||||||||||||||||
Total net interest result |
8,115 | 7,646 | 6,072 | |||||||||||||||||||||||||||||||||
(1) | Substantially all interest-earning securities held by the banking operations of the Company are taxable securities. |
(2) | Includes amortization of premiums and discounts and deferred realized gains and losses on sales of investments in debt securities on a straight-line basis over the estimated average remaining life of the portfolio. |
(3) | Interest on non-performing loans is included when calculating the average yield in this table but excluded from interest income reported in the consolidated profit and loss account. |
47
(4) | Includes amortization of deferred realized gains and losses on off-balance sheet hedging instruments on a straight line basis over the estimated average remaining life of the portfolio and interest accrued on hedging instruments, primarily on interest rate swaps. | |||
(5) | These captions do not include deposits from banks. | |||
(6) | Includes accrued interest expense on hedging instruments, primarily on interest rate swaps. |
ANALYSIS OF CHANGES IN NET INTEREST INCOME
The following table allocates changes in the Groups interest income and expense and net interest result between changes in average balances and rates for the periods indicated. Changes due to a combination of volume and rate have been allocated to changes in average volume. The net changes in interest income, interest expense and net interest result, as calculated in this table, have been reconciled to the changes in interest income, interest expense and net interest result in the Consolidated Financial Statements. See introduction to Average Balances and Interest Rates for a discussion of the differences between interest income, interest expense and net interest result as calculated in the following table and as set forth in the Consolidated Financial Statements.
2003 over 2002 | 2002 over 2001 | |||||||||||||||||||||||
Increase (decrease) | Increase (decrease) | |||||||||||||||||||||||
due to changes in | due to changes in | |||||||||||||||||||||||
average | average | net | average | average | net | |||||||||||||||||||
volume | rate | change | volume | rate | change | |||||||||||||||||||
(EUR millions) | (EUR millions) | |||||||||||||||||||||||
Interest-earning assets |
||||||||||||||||||||||||
Time deposits to banks |
||||||||||||||||||||||||
domestic |
(81 | ) | 51 | (30 | ) | (67 | ) | (169 | ) | (236 | ) | |||||||||||||
foreign |
73 | (285 | ) | (212 | ) | (107 | ) | (219 | ) | (326 | ) | |||||||||||||
Loans and advances |
||||||||||||||||||||||||
domestic |
436 | (521 | ) | (85 | ) | 731 | (650 | ) | 81 | |||||||||||||||
foreign |
481 | (840 | ) | (359 | ) | 570 | (2,265 | ) | (1,695 | ) | ||||||||||||||
Interest-earning securities |
||||||||||||||||||||||||
domestic |
132 | (142 | ) | (10 | ) | (23 | ) | 127 | 104 | |||||||||||||||
foreign |
900 | (632 | ) | 268 | 632 | 175 | 807 | |||||||||||||||||
Other interest-earning assets |
||||||||||||||||||||||||
domestic |
(60 | ) | 101 | 41 | 10 | (136 | ) | (126 | ) | |||||||||||||||
foreign |
(52 | ) | (151 | ) | (203 | ) | (45 | ) | (250 | ) | (295 | ) | ||||||||||||
Interest income |
||||||||||||||||||||||||
domestic |
427 | (511 | ) | (84 | ) | 651 | (828 | ) | (177 | ) | ||||||||||||||
foreign |
1,402 | (1,908 | ) | (506 | ) | 1,050 | (2,559 | ) | (1,509 | ) | ||||||||||||||
Total |
1,829 | (2,419 | ) | (590 | ) | 1,701 | (3,392 | ) | (1,686 | ) | ||||||||||||||
Other interest income
(reconciliation to Consolidated
Financial Statements) |
304 | 1,456 | ||||||||||||||||||||||
Total interest income |
(286 | ) | (230 | ) | ||||||||||||||||||||
48
2003 over 2002 | 2002 over 2001 | |||||||||||||||||||||||
Increase (decrease) | Increase (decrease) | |||||||||||||||||||||||
due to changes in | due to changes in | |||||||||||||||||||||||
average | average | net | average | average | net | |||||||||||||||||||
volume | rate | change | volume | rate | change | |||||||||||||||||||
(EUR millions) | (EUR millions) | |||||||||||||||||||||||
Interest-bearing liabilities |
||||||||||||||||||||||||
Time deposits from banks |
||||||||||||||||||||||||
domestic |
(133 | ) | (33 | ) | (166 | ) | (77 | ) | (208 | ) | (285 | ) | ||||||||||||
foreign |
(137 | ) | (330 | ) | (467 | ) | (73 | ) | (943 | ) | (1,016 | ) | ||||||||||||
Demand deposits |
||||||||||||||||||||||||
domestic |
9 | (122 | ) | (113 | ) | 33 | (84 | ) | (51 | ) | ||||||||||||||
foreign |
47 | (184 | ) | (137 | ) | 81 | (142 | ) | (61 | ) | ||||||||||||||
Time deposits |
||||||||||||||||||||||||
domestic |
(138 | ) | (217 | ) | (355 | ) | (95 | ) | (325 | ) | (420 | ) | ||||||||||||
foreign |
(99 | ) | (187 | ) | (286 | ) | (115 | ) | (359 | ) | (474 | ) | ||||||||||||
Savings deposits |
||||||||||||||||||||||||
domestic |
188 | (63 | ) | 125 | 158 | (186 | ) | (28 | ) | |||||||||||||||
foreign |
1,220 | (392 | ) | 828 | 1,150 | (148 | ) | 1,002 | ||||||||||||||||
Short term debt |
||||||||||||||||||||||||
domestic |
19 | (32 | ) | (13 | ) | (0 | ) | (59 | ) | (59 | ) | |||||||||||||
foreign |
(10 | ) | (390 | ) | (400 | ) | 50 | (701 | ) | (651 | ) | |||||||||||||
Long term debt |
||||||||||||||||||||||||
domestic |
(212 | ) | 242 | 30 | 11 | (154 | ) | (143 | ) | |||||||||||||||
foreign |
69 | (403 | ) | (334 | ) | 231 | (562 | ) | (331 | ) | ||||||||||||||
Subordinated liabilities |
||||||||||||||||||||||||
domestic |
107 | (49 | ) | 58 | 119 | 3 | 122 | |||||||||||||||||
foreign |
(16 | ) | 4 | (12 | ) | (2 | ) | (40 | ) | (42 | ) | |||||||||||||
Other interest-bearing liabilities |
||||||||||||||||||||||||
domestic |
255 | (31 | ) | 224 | (102 | ) | (129 | ) | (231 | ) | ||||||||||||||
foreign |
99 | (139 | ) | (40 | ) | (612 | ) | 279 | (333 | ) | ||||||||||||||
Interest expense |
||||||||||||||||||||||||
domestic |
95 | (305 | ) | (210 | ) | 47 | (1,142 | ) | (1,095 | ) | ||||||||||||||
foreign |
1,173 | (2,021 | ) | (848 | ) | 710 | (2,616 | ) | (1,906 | ) | ||||||||||||||
Total |
1,268 | (2,326 | ) | (1,058 | ) | 757 | (3,758 | ) | (3,001 | ) | ||||||||||||||
Other interest expense
(reconciliation to Consolidated
Financial Statements) |
303 | 1,197 | ||||||||||||||||||||||
Total interest expense |
(755 | ) | (1,804 | ) | ||||||||||||||||||||
Net interest |
||||||||||||||||||||||||
domestic |
333 | (208 | ) | 125 | 604 | 314 | 918 | |||||||||||||||||
foreign |
228 | 115 | 343 | 339 | 57 | 397 | ||||||||||||||||||
Net interest |
561 | (93 | ) | 468 | 944 | 371 | 1,315 | |||||||||||||||||
Other net interest result
(reconciliation to Consolidated
Financial Statements) |
1 | 259 | ||||||||||||||||||||||
Net interest result |
469 | 1,574 | ||||||||||||||||||||||
49
LOAN PORTFOLIO
Loans and advances to banks and customers
Loans and advances to banks include all receivables from credit institutions, except for cash, current accounts and deposits with other banks (including central banks). Lending facilities to corporate and private customers encompass among others, loans, overdrafts and finance lease receivables.
The following table sets forth the gross loans and advances to banks and customers for the last five years.
Year ended December 31, | ||||||||||||||||||||
2003 | 2002 | 2001 | 2000 | 1999 | ||||||||||||||||
(EUR millions) | ||||||||||||||||||||
By domestic offices: |
||||||||||||||||||||
Loans guaranteed by public authorities |
6,473 | 8,013 | 8,949 | 8,306 | 9,357 | |||||||||||||||
Loans secured by mortgages |
94,125 | 86,932 | 78,789 | 65,585 | 58,196 | |||||||||||||||
Loans to or guaranteed by credit institutions |
8,367 | 7,103 | 8,356 | 3,643 | 3,076 | |||||||||||||||
Other private lending |
7,009 | 8,201 | 3,775 | 3,532 | 3,281 | |||||||||||||||
Other corporate lending |
36,861 | 42,083 | 35,060 | 33,715 | 30,755 | |||||||||||||||
Total domestic offices |
152,835 | 152,332 | 134,929 | 114,781 | 104,665 | |||||||||||||||
By foreign offices: |
||||||||||||||||||||
Loans guaranteed by public authorities |
16,603 | 15,750 | 13,398 | 13,019 | 12,880 | |||||||||||||||
Loans secured by mortgages |
39,604 | 31,260 | 19,502 | 14,048 | 14,794 | |||||||||||||||
Loans to or guaranteed by credit institutions |
17,879 | 23,562 | 21,861 | 19,635 | 13,353 | |||||||||||||||
Other private lending |
7,813 | 6,810 | 3,259 | 2,790 | 2,086 | |||||||||||||||
Other corporate lending |
86,722 | 82,256 | 88,687 | 102,484 | 70,806 | |||||||||||||||
Total foreign offices |
168,621 | 159,638 | 146,707 | 151,976 | 113,919 | |||||||||||||||
Total gross loans and advances to banks
and customers |
321,456 | 311,970 | 281,636 | 266,757 | 218,584 | |||||||||||||||
The total net loans and advances to banks and customers amounted to EUR 316,785 million at December 31, 2003 and to EUR 307,100 million at December 31, 2002. The difference between total net loans and advances to banks and customers on the one hand and total gross loans and advances to banks and customers on the other, amounting to EUR 4,671 million, EUR 4,870 million and EUR 4,474 million at December 31, 2003, 2002 and 2001, respectively, represents the provisions for loan losses.
50
Maturities and sensitivity of loans to changes in interest rates
The following table analyzes loans and advances to banks and customers by time remaining until maturity as at December 31, 2003.
1 year | 1 year | After | ||||||||||||||
or less | to 5 years | 5 years | Total | |||||||||||||
(EUR millions) | ||||||||||||||||
By domestic offices: |
||||||||||||||||
Loans guaranteed by public authorities |
1,068 | 529 | 4,877 | 6,474 | ||||||||||||
Loans secured by mortgages |
7,594 | 9,288 | 77,243 | 94,125 | ||||||||||||
Loans guaranteed by credit institutions |
7,185 | 825 | 357 | 8,367 | ||||||||||||
Other private lending |
5,538 | 866 | 604 | 7,008 | ||||||||||||
Other corporate lending |
25,158 | 6,897 | 4,806 | 36,861 | ||||||||||||
Total domestic offices |
46,543 | 18,405 | 87,887 | 152,835 | ||||||||||||
By foreign offices: |
||||||||||||||||
Loans guaranteed by public authorities |
6,215 | 6,665 | 3,723 | 16,603 | ||||||||||||
Loans secured by mortgages |
3,518 | 10,626 | 25,460 | 39,604 | ||||||||||||
Loans guaranteed by credit institutions |
11,585 | 3,882 | 2,412 | 17,879 | ||||||||||||
Other private lending |
5,307 | 2,146 | 360 | 7,813 | ||||||||||||
Other corporate lending |
65,217 | 13,182 | 8,323 | 86,722 | ||||||||||||
Total foreign offices |
91,842 | 36,501 | 40,278 | 168,621 | ||||||||||||
Total gross loans and advances to
banks and customers |
138,385 | 54,906 | 128,165 | 321,456 | ||||||||||||
The following table analyzes loans and advances to banks and customers by interest rate sensitivity by maturity as at December 31, 2003.
1 year or | ||||||||||||
less | Over 1 year | Total | ||||||||||
(EUR millions) | ||||||||||||
Non-interest earning |
3,442 | 552 | 3,994 | |||||||||
Fixed interest rate |
77,385 | 49,799 | 127,184 | |||||||||
Semi-fixed interest rate(1) |
4,688 | 87,735 | 92,423 | |||||||||
Variable interest rate |
52,870 | 44,985 | 97,855 | |||||||||
Total |
138,385 | 183,071 | 321,456 | |||||||||
(1) | Loans that have an interest rate that remains fixed for more than one year and which can then be changed are classified as semi-fixed |
Risk elements
Non-accrual and past due loans
Each of the business units within the banking operations of ING Group maintains its own system for servicing and monitoring past due loans. ING Groups international banking offices and subsidiaries generally account for delinquent loans in accordance with U.S. GAAP. When a loan is in default as to payment of principal and interest for 90 days or when, in the judgment of management, the accrual of interest should cease before 90 days, such a loan is placed on non-accrual status. Any accrued but unpaid interest is reversed against current period interest revenue. Interest payments received on a cash basis during the period are recorded as interest income. Domestic banking offices follow the same policy for consumer mortgage and private loans. All of the foregoing loans are included in the table below under Non-accrual.
Under Accruing but past due 90 days, all loans are reported that are still accruing but on which
51
principal or interest payments are contractually past due 90 days or more. Domestic commercial loans combined with an overdraft facility, which make up approximately 50% of the reported amount in the domestic Accruing but past due 90 days category, were included in the 2003, 2002 and 2001 table below if the overdraft facility exceeded a specified limit for 90 days or more at December 31, 2003, 2002 and 2001, respectively. The amount of loans meeting these criteria in prior years was estimated by management based on the size of the underlying portfolio and specific risk factors.
Based on the foregoing, the following table sets forth managements estimate, without giving effect to available security or related specific provisions, of the amounts of its loan portfolio in each of the two categories indicated.
Year ended December 31, | ||||||||||||||||||||
2003 | 2002 | 2001 | 2000 | 1999 | ||||||||||||||||
(EUR millions) | ||||||||||||||||||||
Non-accrual
|
||||||||||||||||||||
domestic |
965 | 1,093 | 1,425 | 711 | 1,072 | |||||||||||||||
foreign |
2,599 | 3,044 | 2,613 | 2,745 | 2,313 | |||||||||||||||
Sub-total |
3,564 | 4,137 | 4,038 | 3,456 | 3,385 | |||||||||||||||
Accruing but past due 90 days
|
||||||||||||||||||||
domestic |
830 | 986 | 1,083 | 1,112 | 573 | |||||||||||||||
foreign |
819 | 1,048 | 957 | 756 | 952 | |||||||||||||||
Sub-total |
1,649 | 2,034 | 2,040 | 1,868 | 1,525 | |||||||||||||||
Total |
5,213 | 6,171 | 6,078 | 5,324 | 4,910 | |||||||||||||||
These loans are under constant review of the credit risk department.
Restructured loans
The following table sets forth the troubled debt restructuring loans consisting of loans that are accruing interest but at rates different from the original terms of such loans as a result of the terms of any such restructuring.
Year ended December 31, | ||||||||||||||||||||||||
2003 | 2002 | 2001 | 2000 | 1999 | ||||||||||||||||||||
(EUR millions) | ||||||||||||||||||||||||
Troubled debt restructuring domestic |
115 | 439 | 57 | 154 | 202 | |||||||||||||||||||
foreign |
516 | 461 | 1,054 | 569 | 583 | |||||||||||||||||||
Total troubled debt restructuring |
631 | 900 | 1,111 | 723 | 785 | |||||||||||||||||||
On receipt of cash, suspended interest is recovered prior to the principal outstanding, except that, where amounts are outstanding for costs and other late payment charges, the cash received is first used to recover these costs and charges. When it becomes apparent that recovery of interest is unlikely, interest ceases to be accrued and is suspended.
Interest income that would have been recognized in 2003 under the original terms of the non-accrual and restructured loans amounted to an estimated EUR 48 million from loans granted by domestic offices and an estimated EUR 137 million from loans granted by foreign offices. Interest income of approximately EUR 25 million from such domestic loans and approximately EUR 28 million from such foreign loans was recognized in the profit and loss account for 2003.
At December 31, 2003, ING Group had loans amounting to EUR 3,627 million that were not included in the risk elements schedule above. These loans are considered potential problem loans as the credit review officers obtained information that caused doubts as to the repayment of the loan by the borrower. Of this total, EUR 1,676 million relates to domestic loans and EUR 1,951 million relates to
52
foreign loans. Appropriate provisions, following ING Groups credit risk rating system, have been established for these loans.
Cross-border outstandings
Cross-border outstandings are defined as loans (including accrued interest), acceptances, interest-earning deposits with other banks, other interest-earning investments and any other monetary assets that are denominated in euro or other non-local currency. To the extent that material local currency outstandings are not hedged or are not funded by local currency borrowings, such amounts are included in cross-border outstandings.
The following tables analyze cross-border outstandings as of the end of each of the last three years, stating the name of the country and the aggregate amount of cross-border outstandings to borrowers in each foreign country where such outstandings exceed 1% of total assets, by the following categories.
Guaranteed or secured loans are deducted from gross outstandings to arrive at net outstandings provided that political and transfer risks are also covered explicitly by the agreement. Commitments such as irrevocable letters of credit are not considered as cross border outstanding. Total outstandings are in line with Dutch Central Bank requirements. At December 31, 2003, there were no outstandings exceeding 1% of total assets in any country where current conditions give rise to liquidity problems which are expected to have a material impact on the timely repayment of interest or principal.
Year ended December 31, 2003 | |||||||||||||||||||||||
Banks | |||||||||||||||||||||||
Government | & other | ||||||||||||||||||||||
& official | financial | Commercial | |||||||||||||||||||||
institutions | institutions | & industrial | Other | Total | |||||||||||||||||||
(EUR millions) | |||||||||||||||||||||||
United Kingdom |
503 | 19,403 | 16,818 | 1,034 | 37,758 | ||||||||||||||||||
Germany |
6,294 | 16,810 | 2,405 | 2,705 | 28,214 | ||||||||||||||||||
United States |
193 | 3,295 | 18,066 | 324 | 21,878 | ||||||||||||||||||
Spain |
2,157 | 9,760 | 1,490 | 221 | 13,628 | ||||||||||||||||||
France |
2,926 | 5,725 | 3,388 | 699 | 12,738 | ||||||||||||||||||
Italy |
4,141 | 4,384 | 2,440 | 409 | 11,374 |
Year ended December 31, 2002 | |||||||||||||||||||||||
Banks | |||||||||||||||||||||||
Government | & other | ||||||||||||||||||||||
& official | financial | Commercial | |||||||||||||||||||||
institutions | institutions | & industrial | Other | Total | |||||||||||||||||||
(EUR millions) | |||||||||||||||||||||||
United Kingdom |
5 | 17,782 | 20,032 | 1,280 | 39,099 | ||||||||||||||||||
United States |
2,013 | 2,491 | 19,578 | 912 | 24,994 | ||||||||||||||||||
Germany |
4,660 | 8,899 | 2,165 | 2,070 | 17,794 | ||||||||||||||||||
France |
515 | 3,941 | 2,876 | 784 | 8,116 | ||||||||||||||||||
Belgium |
2,039 | 1,940 | 2,248 | 1,256 | 7,483 |
53
Year ended December 31, 2001 | |||||||||||||||||||||||
Banks | |||||||||||||||||||||||
Government | & other | ||||||||||||||||||||||
& official | financial | Commercial | |||||||||||||||||||||
institutions | institutions | & industrial | Other | Total | |||||||||||||||||||
(EUR millions) | |||||||||||||||||||||||
United Kingdom |
15,101 | 13,547 | 785 | 29,433 | |||||||||||||||||||
United States |
1,461 | 5,194 | 15,534 | 1,406 | 23,595 | ||||||||||||||||||
Germany |
3,911 | 11,380 | 3,832 | 2,796 | 21,919 | ||||||||||||||||||
Belgium |
1,135 | 3,560 | 2,188 | 2,154 | 9,037 | ||||||||||||||||||
France |
1,155 | 3,234 | 2,262 | 562 | 7,213 | ||||||||||||||||||
Italy |
2,456 | 3,894 | 455 | 363 | 7,168 |
At December 31, 2003, 2002 and 2001, the following countries had cross-border outstandings between 0.75% and 1% of total assets:
Cross-border outstandings | ||||
Year ended December 31 | ||||
2003 |
||||
Belgium |
6,888 | |||
2002 |
||||
Italy |
7,101 | |||
Spain |
5,828 | |||
2001 |
||||
Japan |
5,571 |
Loan concentration
The following industry concentrations were in excess of 10% of total loans as at December 31, 2003:
Total outstandings | ||||
(EUR millions) | ||||
Financial institutions(1) |
60,841 | |||
Service industry |
57,012 | |||
Manufacturing |
30,503 |
(1) Excluding bank deposits given of approximately EUR 61 billion.
Bad and doubtful debts
A provision for loan losses is maintained for the banking operations that is considered adequate to absorb losses arising from the existing portfolios of loans. The provision for loan losses is made in accordance with the overall supervisory direction of the Dutch Central Bank. Each operating company makes provisions for bad and doubtful debts, based on centrally given instructions. The provisions are reviewed on a quarterly basis by management. On the face of the balance sheet, the provisions are deducted from Lending and Banks. The net additions to or subtractions from such balance sheet provisions are reflected in the Groups profit and loss account, principally under Value adjustments to receivables of the Banking operations.
In determining the amount of the provisions, corporate loans are assessed on a case-by-case basis, and the following factors are considered:
| the financial standing of the customer, including a realistic assessment of the likelihood of repayment of the loan within an acceptable period and the extent of ING Groups other commitments to the same customer; |
54
| the realizable value of any security for the loan; and |
| the costs associated with obtaining repayment and realization of any such security. |
For certain groups of small private and corporate loans with similar characteristics, provisions are also assessed using statistical techniques.
On certain foreign outstandings, a country provision is calculated for regulatory purposes based on detailed instructions given by the Dutch Central Bank. The amount is a function of the risk of the country as well as the risk of the transaction itself. For accounting purposes, adequate provisions are calculated for countries that are near default or have recently defaulted.
ING Group also maintains an unallocated provision for loan losses that is required to adequately capture various subjective and judgmental aspects of credit risk assessment that are not considered on an individual basis. Considerable judgement is exercised in determining the extent of the provision and is based on managements evaluation of the risk in the portfolio, current economic conditions, recent years loss experience, and credit and geographical concentration trends. When there is no prospect of recovering principal or interest, the outstanding debt and any suspense balances are written off.
55
Summary of loan loss experience
The following table shows the movements in allocation of the provision for loan losses on loans accounted for as loans and advances to banks and customers for the past five years.
Calendar Period | |||||||||||||||||||||||
2003 | 2002 | 2001 | 2000 | 1999 | |||||||||||||||||||
(EUR MILLIONS) | |||||||||||||||||||||||
Balance at January 1 |
4,870 | 4,474 | 4,272 | 4,522 | 3,417 | ||||||||||||||||||
Change in the composition of the Group |
104 | 93 | (171 | ) | 834 | ||||||||||||||||||
Charge-offs: |
|||||||||||||||||||||||
Domestic: |
|||||||||||||||||||||||
Loans guaranteed by public authorities |
(1 | ) | |||||||||||||||||||||
Loans secured by mortgages |
(1 | ) | (4 | ) | (4 | ) | (3 | ) | (4 | ) | |||||||||||||
Loans to or guaranteed by credit institutions |
(27 | ) | (18 | ) | (10 | ) | |||||||||||||||||
Other private lending |
(65 | ) | (31 | ) | (31 | ) | (77 | ) | (26 | ) | |||||||||||||
Other corporate lending |
(166 | ) | (211 | ) | (166 | ) | (198 | ) | (170 | ) | |||||||||||||
Foreign: |
|||||||||||||||||||||||
Loans guaranteed by public authorities |
(1 | ) | |||||||||||||||||||||
Loans secured by mortgages |
(30 | ) | (8 | ) | (1 | ) | (1 | ) | (1 | ) | |||||||||||||
Loans to or guaranteed by credit institutions |
(10 | ) | (3 | ) | (9 | ) | (91 | ) | (138 | ) | |||||||||||||
Other private lending |
(105 | ) | (32 | ) | (1 | ) | (1 | ) | (1 | ) | |||||||||||||
Other corporate lending |
(797 | ) | (530 | ) | (391 | ) | (458 | ) | (224 | ) | |||||||||||||
Total charge-offs |
(1,202 | ) | (838 | ) | (603 | ) | (829 | ) | (574 | ) | |||||||||||||
Recoveries: |
|||||||||||||||||||||||
Domestic: |
|||||||||||||||||||||||
Loans guaranteed by public authorities
|
|||||||||||||||||||||||
Loans secured by mortgages |
3 | 5 | |||||||||||||||||||||
Loans to or guaranteed by credit institutions |
7 | 4 | |||||||||||||||||||||
Other private lending |
9 | 2 | 4 | 5 | 5 | ||||||||||||||||||
Other corporate lending |
3 | 8 | 4 | 8 | |||||||||||||||||||
Foreign: |
|||||||||||||||||||||||
Loans guaranteed by public authorities
|
|||||||||||||||||||||||
Loans guaranteed by public authorities
|
|||||||||||||||||||||||
Loans secured by mortgages |
2 | 2 | |||||||||||||||||||||
Loans to or guaranteed by credit institutions |
4 | 1 | 5 | ||||||||||||||||||||
Other private lending |
10 | 7 | |||||||||||||||||||||
Other corporate lending |
19 | 15 | 23 | 34 | 1 | ||||||||||||||||||
Total recoveries |
49 | 33 | 38 | 51 | 19 | ||||||||||||||||||
Net charge-offs |
(1,153 | ) | (805 | ) | (565 | ) | (778 | ) | (555 | ) | |||||||||||||
Additions and other adjustments
(included in value Adjustments to
receivables of the Banking operations),
excluding foreign currency exchange |
850 | 1,108 | 938 | 528 | 826 | ||||||||||||||||||
Balance
at December 31 |
4,671 | 4,870 | 4,474 | 4,272 | 4,522 | ||||||||||||||||||
Ratio of net charge-offs to average loans and
advances to banks and customers |
0.37 | % | 0.27 | % | 0.22 | % | 0.31 | % | 0.32 | % |
Additions to the provision for loan losses are based on managements judgment, taking into account all available evidence, on borrower creditworthiness, contractual loan terms, available judicial and other remedies, historical patterns of losses and current economic developments.
Management regularly assesses the adequacy of the provision for loan losses by performing ongoing evaluations of the loan portfolio. A formal analysis of specifically identified loans takes place every quarter, including evaluation of economic risks associated with each loan, the current financial
56
condition of the borrower, the economic environment in which the borrower operates, the level of delinquent loans and the value of collateral. Credit ratings are assigned to the borrowers by allocating all outstanding loans into various Risk Rating categories on a regular basis.
The policy for determining the provision for loan losses is set out in more detail under the heading Bad and Doubtful debts and in Note 1.6.2.5. to the Financial Statements.
Additions to the provision for loan losses presented in the table above were influenced by developments in general economic conditions as well as certain individual exposures. Significant movements in the addition to the provision for loan losses are explained in the paragraph Addition to the provision for loan losses on page 100.
The following table shows the allocation of the provision for loan losses on loans accounted for as loans and advances to banks and customers for the past five years:
Year ended December 31, | ||||||||||||||||||||||||||||||||||||||||
2003 | 2002 | 2001 | 2000 | 1999 | ||||||||||||||||||||||||||||||||||||
EUR | %(1) | EUR | %(1) | EUR | %(1) | EUR | %(1) | EUR | %(1) | |||||||||||||||||||||||||||||||
(EUR millions) | ||||||||||||||||||||||||||||||||||||||||
Domestic: |
||||||||||||||||||||||||||||||||||||||||
Loans guaranteed by
public authorities |
2.00 | 31 | 2.56 | 3.18 | 3.11 | 4.28 | ||||||||||||||||||||||||||||||||||
Loans secured by
mortgages |
164 | 29.15 | 120 | 27.87 | 112 | 29.01 | 105 | 18.21 | 104 | 26.62 | ||||||||||||||||||||||||||||||
Loans to or guaranteed
by credit institutions |
2.59 | 2.28 | 2.96 | 1.37 | 1.41 | |||||||||||||||||||||||||||||||||||
Other private lending |
258 | 2.17 | 199 | 2.63 | 107 | 1.34 | 88 | 1.31 | 76 | 1.50 | ||||||||||||||||||||||||||||||
Other corporate lending |
728 | 11.83 | 649 | 13.49 | 742 | 11.42 | 766 | 19.03 | 828 | 14.07 | ||||||||||||||||||||||||||||||
Total domestic |
1,150 | 47.75 | 999 | 48.83 | 961 | 47.91 | 959 | 43.03 | 1,008 | 47.88 | ||||||||||||||||||||||||||||||
Foreign: |
||||||||||||||||||||||||||||||||||||||||
Loans guaranteed by
public authorities |
30 | 5.14 | 47 | 5.05 | 68 | 4.76 | 7 | 4.88 | 46 | 5.89 | ||||||||||||||||||||||||||||||
Loans secured by
mortgages |
238 | 12.27 | 73 | 10.02 | 41 | 6.92 | 103 | 5.27 | 27 | 6.78 | ||||||||||||||||||||||||||||||
Loans to or guaranteed by
credit institutions |
28 | 5.54 | 90 | 7.55 | 43 | 7.76 | 70 | 7.36 | 322 | 6.11 | ||||||||||||||||||||||||||||||
Other private lending |
385 | 2.42 | 145 | 2.18 | 181 | 1.16 | 82 | 1.05 | 72 | 0.95 | ||||||||||||||||||||||||||||||
Other corporate lending |
2,840 | 26.89 | 3,516 | 26.37 | 3,180 | 31.49 | 3,051 | 38.41 | 3,042 | 32.39 | ||||||||||||||||||||||||||||||
Total foreign |
3,521 | 52.25 | 3,871 | 51.17 | 3,513 | 52.09 | 3,313 | 56.97 | 2,514 | 52.12 | ||||||||||||||||||||||||||||||
Total |
4,671 | 100.00 | 4,870 | 100.00 | 4,474 | 100.00 | 4,272 | 100.00 | 4,522 | 100.00 | ||||||||||||||||||||||||||||||
(1) | The percentages represent the loans in each category as a percentage of the total loan portfolio for loans and advances to banks and customers. |
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The following table shows the provision for loan losses on loans accounted for as loans and advances to banks and customers as a percentage of the related loan portfolio for the past five years:
Year ended December 31, | ||||||||||||||||||||
2003 | 2002 | 2001 | 2000 | 1999 | ||||||||||||||||
(in %) | ||||||||||||||||||||
Domestic: |
||||||||||||||||||||
Loans guaranteed by public authorities |
0.01 | 0.39 | ||||||||||||||||||
Loans secured by mortgages |
0.17 | 0.14 | 0.14 | 0.16 | 0.18 | |||||||||||||||
Other private lending |
3.67 | 2.43 | 2.83 | 2.53 | 2.32 | |||||||||||||||
Other corporate lending |
1.91 | 1.54 | 2.31 | 2.27 | 2.69 | |||||||||||||||
Total domestic |
0.75 | 0.66 | 0.71 | 0.84 | 0.96 | |||||||||||||||
Foreign: |
||||||||||||||||||||
Loans guaranteed by public authorities |
0.18 | 0.30 | 0.51 | 0.06 | 0.36 | |||||||||||||||
Loans secured by mortgages |
0.60 | 0.23 | 0.21 | 0.73 | 0.18 | |||||||||||||||
Loans to or guaranteed by credit institutions |
0.15 | 0.36 | 0.20 | 0.35 | 2.41 | |||||||||||||||
Other private lending |
4.93 | 2.13 | 5.55 | 2.94 | 3.47 | |||||||||||||||
Other corporate lending |
3.27 | 4.27 | 3.59 | 2.98 | 4.30 | |||||||||||||||
Total foreign |
2.09 | 2.42 | 2.39 | 2.18 | 3.08 | |||||||||||||||
Total |
1.45 | 1.56 | 1.59 | 1.60 | 2.07 |
DEPOSITS
The aggregate average balance of all the Groups interest-bearing deposits (from banks and customer accounts) increased by 20.03% to EUR 378,347 million. Interest rates paid reflect market conditions. The effect on net interest income depends upon competitive pricing and the level of interest income that can be generated through the use of funds.
Deposits by banks are primarily time deposits, the majority of which are raised by the Groups Amsterdam-based money market operations in the worlds major financial markets.
Certificates of deposit represent 31% of the category Debt securities (47% at the end of 2002). These instruments are issued as part of liquidity management with maturities generally of less than three months.
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2003 | 2002 | 2001 | ||||||||||||||||||||||
Average | Average | Average | Average | Average | Average | |||||||||||||||||||
deposit | rate | deposit | rate | deposit | rate | |||||||||||||||||||
(EUR millions) | % | (EUR millions) | % | (EUR millions) | % | |||||||||||||||||||
Deposits by banks |
||||||||||||||||||||||||
In domestic offices: |
||||||||||||||||||||||||
Demand non-interest bearing |
10 | 899 | 1,452 | |||||||||||||||||||||
interest bearing |
2,911 | 1.8 | 1,091 | 5.0 | 1,422 | 3.4 | ||||||||||||||||||
Time |
32,104 | 2.2 | 30,504 | 3.5 | 36,707 | 3.9 | ||||||||||||||||||
Total domestic offices |
35,025 | 32,494 | 39,581 | |||||||||||||||||||||
In foreign offices: |
||||||||||||||||||||||||
Demand non-interest bearing |
2,470 | 3,011 | 1,551 | |||||||||||||||||||||
interest bearing |
20,846 | 1.7 | 12,728 | 2.6 | 12,936 | 3.1 | ||||||||||||||||||
Time |
47,733 | 2.3 | 59,562 | 3.4 | 64,082 | 4.7 | ||||||||||||||||||
Total foreign offices |
71,049 | 75,301 | 78,569 | |||||||||||||||||||||
Total deposits by banks |
106,074 | 107,795 | 118,150 | |||||||||||||||||||||
Customer accounts |
||||||||||||||||||||||||
In domestic offices: |
||||||||||||||||||||||||
Demand non-interest bearing |
12,197 | 15,572 | 10,071 | |||||||||||||||||||||
interest bearing |
46,710 | 1.9 | 17,543 | 2.8 | 36,550 | 2.5 | ||||||||||||||||||
Savings |
24,443 | 1.3 | 43,389 | 3.0 | 18,866 | 3.8 | ||||||||||||||||||
Time |
27,601 | 3.0 | 23,252 | 4.2 | 23,759 | 4.9 | ||||||||||||||||||
Total domestic offices |
110,951 | 99,756 | 89,246 | |||||||||||||||||||||
In foreign offices: |
||||||||||||||||||||||||
Demand non-interest bearing |
3,036 | 3,407 | 4,282 | |||||||||||||||||||||
interest bearing |
34,057 | 1.8 | 25,973 | 2.0 | 27,717 | 2.4 | ||||||||||||||||||
Savings |
96,055 | 2.8 | 55,553 | 3.6 | 26,018 | 3.9 | ||||||||||||||||||
Time |
45,887 | 3.1 | 45,614 | 3.2 | 49,014 | 4.1 | ||||||||||||||||||
Total foreign offices |
179,035 | 130,547 | 107,031 | |||||||||||||||||||||
Total customers accounts |
289,986 | 230,303 | 196,277 | |||||||||||||||||||||
Debt securities |
||||||||||||||||||||||||
In domestic offices: |
||||||||||||||||||||||||
Debentures |
7,871 | 4.5 | 14,636 | 3.9 | 8,269 | 5.1 | ||||||||||||||||||
Certificates of deposit |
4,084 | 3.4 | 2,967 | 4.5 | 10,532 | 4.3 | ||||||||||||||||||
Other |
3,174 | 3.6 | 2,806 | 4.0 | 1,614 | 4.6 | ||||||||||||||||||
Total domestic offices |
15,129 | 20,409 | 20,415 | |||||||||||||||||||||
In foreign offices:
|
||||||||||||||||||||||||
Debentures |
14,994 | 4.5 | 13,267 | 8.5 | 14,414 | 6.5 | ||||||||||||||||||
Certificates of deposit |
17,741 | 2.7 | 33,821 | 3.1 | 26,663 | 4.8 | ||||||||||||||||||
Other |
22,910 | 2.4 | 10,781 | 8.7 | 10,410 | 5.5 | ||||||||||||||||||
Total foreign offices |
55,645 | 57,869 | 51,487 | |||||||||||||||||||||
Total debt securities |
70,774 | 78,278 | 71,902 | |||||||||||||||||||||
For the years ended December 31, 2003, 2002 and 2001, the aggregate amount of deposits by foreign depositors in domestic offices was EUR 33,874 million, EUR 30,551 million and EUR 34,848 million, respectively.
At December 31, 2003, the maturity of domestic time certificates of deposit and other time deposits, exceeding EUR 25,000, was:
59
Time certificates of deposit | Other time deposits | |||||||||||||||
(EUR millions) | % | (EUR millions) | % | |||||||||||||
3 months or less |
5,581 | 81.9 | 73,862 | 65.7 | ||||||||||||
6 months or less but over 3 months |
318 | 4.7 | 11,187 | 9.9 | ||||||||||||
12 months or less but over 6 months |
912 | 13.4 | 13,112 | 11.7 | ||||||||||||
Over 12 months |
2 | 0.0 | 14,242 | 12.7 | ||||||||||||
Total |
6,813 | 100.0 | 112,403 | 100.0 | ||||||||||||
The following table shows the amount outstanding for time certificates of deposit and other time deposits exceeding EUR 25,000 issued by foreign offices at December 31, 2003.
Year ended | ||||
December 31, 2003 | ||||
(EUR millions) | ||||
Time certificates of deposit |
16,150 | |||
Other time deposits |
73,544 | |||
Total |
89,694 | |||
INVESTMENTS OF THE GROUPS BANKING OPERATIONS
The following table shows the balance sheet value under Dutch GAAP of the investments of the Groups banking operations:
Year ended December 31, | ||||||||||||
2003 | 2002 | 2001 | ||||||||||
(EUR millions) | ||||||||||||
Dutch government |
5,512 | 3,429 | 2,913 | |||||||||
German government |
7,211 | 2,783 | 2,892 | |||||||||
Central banks |
667 | 668 | 894 | |||||||||
Belgian government |
12,839 | 13,165 | 12,266 | |||||||||
Other governments |
21,152 | 15,200 | 10,517 | |||||||||
Corporate debt securities |
||||||||||||
Banks and financial institutions |
35,830 | 18,527 | 14,819 | |||||||||
Other corporate debt securities |
5,718 | 6,210 | 9,354 | |||||||||
U.S. Treasury and other U.S.
Government agencies |
2,834 | 5,180 | 3,818 | |||||||||
Other debt securities |
24,267 | 13,917 | 5,796 | |||||||||
Total debt securities |
116,030 | 79,079 | 63,269 | |||||||||
Shares and convertible debentures |
766 | 1,254 | 2,877 | |||||||||
Land and buildings (1) |
2,970 | 3,709 | 2,302 | |||||||||
Total |
119,766 | 84,042 | 68,448 | |||||||||
(1) | Including commuted ground rents |
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Banking investment strategy
INGs investment strategy for its investment portfolio related to the banking activities is formulated by the Asset and Liability Committee (ALCO). The exposures of the investments to market rate movements are managed by modifying the asset and liability mix, either directly or through the use of derivative financial products including interest rate swaps, futures, forwards and purchased option positions such as interest rate caps, floors and collars. See Item 11. Quantitative and Qualitative Disclosure of Market Risk.
The investment portfolio related to the banking activities primarily consists of fixed-interest securities. Approximately 38% of the land and buildings owned by ING Bank are wholly or partially in use by Group companies.
Portfolio maturity description
Between | Between | |||||||||||||||||||||||
1 year or less | 1 year and 5 years | 5 and 10 years | ||||||||||||||||||||||
Book value | Yield(1) | Book value | Yield(1) | Book value | Yield(1) | |||||||||||||||||||
(EUR millions) | % | (EUR millions) | % | (EUR millions) | % | |||||||||||||||||||
Dutch government |
4 | 4.7 | 446 | 4.4 | 5,168 | 4.3 | ||||||||||||||||||
German government |
499 | 3.4 | 1,397 | 4.1 | 5,304 | 4.2 | ||||||||||||||||||
Belgian government |
1,769 | 6.4 | 3,038 | 6.0 | 7,454 | 4.6 | ||||||||||||||||||
Central banks |
31 | 2.9 | 333 | 4.4 | 303 | 4.4 | ||||||||||||||||||
Other governments |
2,531 | 6.1 | 6,393 | 4.3 | 10,716 | 4.5 | ||||||||||||||||||
Banks and financial institutions |
3,664 | 3.2 | 17,319 | 3.5 | 14,287 | 4.3 | ||||||||||||||||||
Corporate debt securities |
668 | 4.1 | 3,248 | 4.3 | 1,584 | 4.7 | ||||||||||||||||||
U.S. Treasury and other U.S.
Government agencies |
504 | 1.9 | 659 | 3.9 | 466 | 3.7 | ||||||||||||||||||
Other debt securities |
1,440 | 3.2 | 7,662 | 3.8 | 13,383 | 4.2 | ||||||||||||||||||
TOTAL |
11,110 | 40,495 | 58,665 | |||||||||||||||||||||
Over 10 years | Without maturity | |||||||||||||||||||||||||||
Book | Book | |||||||||||||||||||||||||||
value | value | Total | Premium/ | Balance | ||||||||||||||||||||||||
(EUR | Yield(1) | (EUR | Yield(1) | Book | (discount) | sheet | ||||||||||||||||||||||
millions) | % | millions) | % | value | (EUR millions) | value | ||||||||||||||||||||||
Dutch government |
5,618 | 106 | 5,512 | |||||||||||||||||||||||||
German government |
131 | 5.6 | 7,331 | 120 | 7,211 | |||||||||||||||||||||||
Belgian government |
568 | 5.1 | 12,829 | (10 | ) | 12,839 | ||||||||||||||||||||||
Central banks |
667 | 667 | ||||||||||||||||||||||||||
Other governments |
1,773 | 5.1 | 21,413 | 261 | 21,152 | |||||||||||||||||||||||
Banks and financial institutions |
874 | 3.9 | 36,144 | 314 | 35,830 | |||||||||||||||||||||||
Corporate debt securities |
216 | 5.0 | 5,716 | (2 | ) | 5,718 | ||||||||||||||||||||||
U.S. Treasury and other U.S.
Government agencies |
1,225 | 3.3 | 2,854 | 20 | 2,834 | |||||||||||||||||||||||
Other debt securities |
1,889 | 3.0 | 18 | 24,392 | 125 | 24,267 | ||||||||||||||||||||||
TOTAL |
6,676 | 18 | 116,964 | 934 | 116,030 | |||||||||||||||||||||||
(1) | Since substantially all investment securities held by the banking operations of the Company are taxable securities, the yields are on a tax- equivalent basis. |
61
At December 31, 2003, ING Group also held the following securities for the banking operations that exceeded 10% of shareholders equity:
2003 | 2002 | |||||||||||||||
Book | Market | Book | Market | |||||||||||||
value | value | value | value | |||||||||||||
(EUR millions) | (EUR millions) | |||||||||||||||
Dutch government |
5,618 | 5,692 | 3,478 | 3,634 | ||||||||||||
Belgian government |
12,829 | 13,657 | 13,155 | 14,170 | ||||||||||||
German government |
7,331 | 7,424 | 2,789 | 2,934 |
COMPETITION
There is substantial competition in the Netherlands and the other countries in which ING Group does business for the types of insurance, retail and wholesale banking and other products and services provided by the Group. Such competition is more pronounced in the mature markets of the Netherlands, the Rest of Europe, the United States, Canada and Australia than in the developing markets. In recent years, however, competition in developing markets has increased as financial institutions from mature markets have sought to establish themselves in markets that are perceived to offer higher growth potential. Like ING, competitors have sought alliances, mergers or strategic relationships with local institutions, which have become more sophisticated and competitive.
The Netherlands, which is the largest national market for our banking operations and the second largest for our insurance operations, has historically favored open markets. The presence of large domestic competitors in both the insurance and banking sectors has resulted in fierce competition for virtually all of the Groups products and services. In addition, the Dutch market is a mature market and one in which the Group already maintains significant market shares in most lines of business. Although certain parts of the Dutch financial-services sector are growing, in recent years ING Bank has been facing increasing competition from other principal Dutch banks in the market segment of small and medium-sized enterprises, as well as in other parts of its Dutch business. Management believes, however, that notwithstanding these factors, there is still the potential for increased growth in the Dutch markets in which the Group currently is active. Changes in government policy result in government withdrawing from social security and various other programs, shifting the coverage and services provided thereunder to the private sector. In this regard, the distribution channels maintained in the Netherlands (direct marketing, the Internet, intermediaries, branches and tied agents) allow the Group to allocate resources to different sectors of the Dutch market as growth opportunities arise and, in managements view, provide the Group with significant competitive advantages. In the Netherlands, the insurance industry has been affected by many changes in legislation (i.e. new tax law). Savings for pensions continue to be tax-favored to some extent, but professional advice is needed in the labyrinth of rules and regulations. The Dutch insurance industry will be further shaped by the need to adapt to new technologies, bring down costs and increase efficiency. With our large market share, we expect that we will be able to benefit from these trends, especially by creating shared service centers.
In the United States, due to the rebounding economic climate, a shift from guaranteed products to unit-linked products, from fixed to variable annuities and from savings products to stock-market products is evident. The inflow of money into mutual funds has also rapidly increased. After several years of bear market, customers in the United States are increasing their allocation to equity products. The baby boomers are now moving closer toward retirement, which creates new opportunities. For the insurance and asset management business, we believe long-term opportunities continue to improve for INGs wealth management businesses. Several further trends in the US market are significant to our business. First, interest rates have remained at a 45-year low which puts pressure on margins for fixed products. While the low interest rates have helped to fuel the US economy, sustained low rates will challenge our profit generation. In addition, distribution is shifting from career agents to independent advisers and wholesalers, as more insurers come under pressure to turn fixed costs into variable costs. Third, there is a clear shift in power from manufacturers to distributors when it comes to the distribution of financial products. To mitigate these changes in the market, ING has made a concerted
62
effort to retain and forge strong relationships with our distribution partners. Finally, the ING Brand has grown significantly in the US. In all, we believe our US operations are well-positioned to benefit from these trends.
Competition with respect to the products and services provided by the Group in both mature and developing markets is based on many factors, including brand recognition, scope of distribution systems, customer service, products offered, financial strength, price and, in the case of investment-linked insurance products and asset management services, investment performance. Management believes its major competitors are the larger Dutch, other European, U.S. and Japanese commercial banks, insurance companies, asset management and other financial-services companies.
RATINGS
ING Groep N.V.s long term senior debt rating is rated Aa3 by Moodys Investors Service, with a stable outlook. ING Groep N.V.s long-term senior debt rating is rated A+ by Standard & Poors Ratings Service, a division of the McGraw Hill companies, Inc., or Standard & Poors, with a stable outlook.
ING Verzekeringen N.V.s long term senior debt is rated A+ by Standard & Poors (with a stable outlook) and Aa3 by Moodys .
ING Bank N.V.s long term senior debt is rated AA- (with a stable outlook) by Standard & Poors and Aa2 (with a stable outlook) by Moodys. The AA rating is the second highest of the seven ratings assigned by Standard & Poors, which range from AAA to C. Ratings from AA to B may be modified by the use of a plus or minus sign to show relative standing of the issuer within those rating categories. The Aa rating is the second highest of the nine ratings assigned by Moodys, which range from Aaa to C. Ratings from Aaa to C may be modified by the use of numerical modifiers 1, 2 and 3, to show the relative standing of the issuer within those rating categories.
ING Verzekeringen N.V.s short-term term senior debt is rated A1 by Standard & Poors and P-1 by Moodys . ING Banks N.V.s short-term debt is rated A1+ by Standard & Poors and P-1 by Moodys. The A1+ rating is the highest possible of the seven ratings assigned by Standard & Poors, which range from A1+ to D. The P-1 rating is the highest possible of the three ratings assigned by Moodys, which range from P-1 to Not Prime.
The following insurance subsidiaries all held AA (with a negative outlook) insurer financial strength ratings by Standard & Poors at December 31, 2003: Security Life of Denver Insurance Company, Southland Life Insurance Company, USG Annuity and Life Company, Golden American Life Insurance Company, Midwestern United Life Insurance Company, Equitable Life Insurance Company of Iowa, ReliaStar Life Insurance Company, ING Life Insurance & Annuity Company, ING Insurance Company of America, and ReliaStar Life Insurance Company of New York. Additionally, on January 1, 2004, Equitable Life Insurance Company of Iowa, USG Annuity and Life Company, and United Life and Annuity Insurance Company merged with and into Golden American Life Insurance Company. This entity was renamed ING USA Annuity and Life Insurance Company. Subsequently, Standard & Poors assigned an AA (with a negative outlook) insurer financial strength rating to this entity. Previously, United Life and Annuity Insurance Company was not rated by Standard & Poors. Standard & Poors states that an insurer rated AA has a very strong capacity to meet its financial commitments. It differs from the highest rated insurers only in small degree. The AA rating is the second highest of the eight claims-paying ratings assigned by Standard & Poors, which range from AAA (Superior) to R (Regulatory action). Life Insurance Company of Georgia has a A- (with a stable outlook) insurer financial strength rating by Standard and Poors. Standard and Poors states that an insurer rated A has a strong capacity to meet its financial commitments but is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than insurers in higher-rated categories.
The following insurance subsidiaries all held Aa3 (with a stable outlook) financial strength ratings by Moodys as of December 31, 2003: ING Life Insurance & Annuity Company, ING Insurance Company of America, Security Life of Denver Insurance Company, , Southland Life Insurance Company, USG Annuity and Life Company, Equitable Life Insurance Company of Iowa, ReliaStar Life Insurance Company, and ReliaStar Life Insurance Company of New York. On January 1, 2004, Equitable Life Insurance Company of Iowa, USG Annuity and Life Company, and United Life and Annuity Insurance
63
Company merged with and into Golden American Life Insurance Company. This entity was renamed ING USA Annuity and Life Insurance Company. Subsequently, Moodys assigned an Aa3 financial strength rating to this entity. Previously, United Life and Annuity Insurance Company and Golden American Life Insurance Company were not rated by Moodys. As of December 31, 2003 Life Insurance Company of Georgia held a A2 (with a negative outlook) financial strength rating by Moodys. On January 7, 2004 the financial strength rating of Life Insurance Company of Georgia was downgraded to A3 (with a stable outlook).Moodys states that the Aa3 rating is assigned to those companies that, in its opinion, offer financial security. The Aa3 rating is the second highest of the nine Financial strength ratings assigned by Moodys, which range from Aaa (Exceptional) to C (Lowest).
ING Bank N.V.s long-term debt is rated AA- by Fitch Ratings Ltd., or Fitch Ratings. The AA rating is the second highest of the nine ratings assigned by Fitch Ratings, Ltd. which range from AAA to C. Ratings from AA to B may be modified by the use of a plus or minus sign to show relative standing of the issuer within those rating categories.
The following insurance subsidiaries, held an A+ rating by A.M. Best as of December 31, 2003: Security Life of Denver Insurance Company, Southland Life Insurance Company, USG Annuity and Life Company, ING Insurance Company of America, ING Life Insurance and Annuity Company, Golden American Life Insurance Company, Equitable Life Insurance Company of Iowa, ReliaStar Life Insurance Company, and ReliaStar Life Insurance Company of NY. In addition, Midwestern United Life Insurance Company, United Life and Annuity Insurance Company, and Life Insurance Company of Georgia held an A rating by A.M. Best as of December 31, 2003. . On January 1, 2004, Equitable Life Insurance Company of Iowa, USG Annuity and Life Company, and United Life and Annuity Insurance Company merged with and into Golden American Life Insurance Company. This entity was renamed ING USA Annuity and Life Insurance Company. Subsequently, A.M. Best assigned an A+ rating to this entity. A.M. Best states that the A+ rating is assigned to companies which have, on balance, superior balance sheet strength, operating performance and business profile when compared to the standards established by A.M. Best. These companies, in their opinion, have a very strong ability to meet their ongoing obligations to policyholders. The A+ rating is the second highest of 15 ratings assigned by A.M. Best, which range from A++ (Superior) to F (In Liquidation).
None of the foregoing ratings is an indication of the historic or potential performance of the Companys stock or other securities and should not be relied upon with respect to making an investment in ING Groep N.V.s Ordinary shares, Bearer receipts, ADSs or other securities.
INFORMATION TECHNOLOGY
ING Group has an ongoing project to improve the capabilities of the Information Technology function. In a collaborative approach with the Executive Centers and businesses, ING has been working to identify and realize opportunities for IT-enabled improvements and value enhancing initiatives with lower costs.
ING is now starting to see the results of these activities. Medium Term Plan (MTP) results are showing lower IT costs as a percentage of business in the coming three years. ING has availed itself of opportunities in the area of alternative sourcing such as leveraging offshore application development and maintenance. In the business arena, ING has seen rationalization of the infrastructure and applications portfolio to focus on the core business and selective use of outsourcing with partners to gain access to scale and skills. ING has also focussed on more actively partnering with some key IT suppliers such as Microsoft, IBM, HP and Peoplesoft. The Global Infrastructure Services department has a strategic goal of providing more seamless and cost effective connectivity to INGs businesses across the globe.
Maintaining the appropriate balance between group and local ownership (responsibility, accountability) is essential to ensure an accelerated rate of more common application deployment as well as infrastructure rationalization. Shared services and data centres have emerged through consolidation at Management Committee (MC) and Executive Committee (EC) levels. A regional service provider concept provides support services across ECs within each region. For many businesses, the environment is proving challenging with a need to better understand and manage the risk they face. INGs approach to information risk and security is also evolving to reflect a changing
64
environment.
In order to continue to improve the speed of decision making and ensure tighter alignment of business and IT focus, everything thats being done in IT is working through the established corporate IT governance mechanisms. ING continuously seeks to eliminate redundancy, reduce costs and ensure optimum usage of the Groups IT assets. While keeping an eye on our customers, shareholders and employees, ING will continue to offer efficient and effective IT enabled solutions to help drive customer satisfaction and improve profitability.
DESCRIPTION OF PROPERTY
In the Netherlands, ING Group owns substantially all of the land and buildings used in the normal course of its business. Outside the Netherlands, ING Group predominantly leases all of the land and buildings used in the normal course of its business. At December 31, 2003, ING Group had more than 1,500 branch, representative and similar offices worldwide of which approximately 500, principally branch offices, were located in the Netherlands. In addition, ING Group has part of its investment portfolio invested in land and buildings. Management believes that the Groups facilities are adequate for its present needs in all material respects.
Item 5. Operating and financial review and prospects
The following review and prospects should be read in conjunction with the Consolidated Financial Statements and the related Notes thereto included elsewhere herein. The Consolidated Financial Statements have been prepared in accordance with Dutch GAAP, which differs in certain significant respects from U.S. GAAP. Reference is made to Note 6 of Notes to the Consolidated Financial Statements for a description of the significant differences between Dutch GAAPand U.S. GAAPand a reconciliation of shareholdersequity and net profit to U.S. GAAP. Unless otherwise indicated, financial information for ING Group included herein is presented on a consolidated basis under Dutch GAAP.
FACTORS AFFECTING RESULTS OF OPERATIONS
ING Groups results of operations are affected by demographics (particularly with respect to life insurance) and by a variety of market conditions, including economic cycles, insurance industry cycles (particularly with respect to non-life insurance), banking industry cycles and fluctuations in stock markets, interest and foreign exchange rates.
General Market Conditions
Demographic studies suggest that over the next decade there will be growth in INGs principal life insurance markets of the Netherlands, the rest of Europe, the United States, Asia and Australia, in the number of individuals who enter the age group that management believes is most likely to purchase retirement-oriented life insurance products. In addition, in a number of its European markets, including the Netherlands, retirement, medical and other social benefits previously provided by the government have been, or are expected to be, curtailed in the coming years, which management believes will increase opportunities for private sector providers of life insurance, health, pension and other social benefits-related insurance products. Management believes that ING Insurances distribution networks, the quality and diversity of its products and its investment management expertise in each of these markets positions ING Insurance to benefit from such developments. In addition, the emerging markets in Central and Eastern Europe, Asia and South America, in which ING Insurance has insurance operations, generally have lower gross domestic products per capita and gross insurance premiums per capita than the countries in Western Europe and North America in which ING Insurance has insurance operations. Management believes that insurance greenfield operations in such emerging markets provide ING Insurance with the market presence that will allow it to take advantage of anticipated growth in such regions. Conditions in the non-life insurance markets in which ING Insurance operates are also cyclical, and characterized by periods of price competition, fluctuations in underwriting results and the occurrence of unpredictable weather-related and other losses.
Fluctuations in equity securities markets
Our insurance and asset management operations are exposed to fluctuations in equity securities markets. Our overall investment return and fee income from equity linked products are impacted by equity markets and the fees we charge for managing portfolios are often based on performance and
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value of the portfolio. In addition, fluctuations in equity securities markets may affect sales of life and pension products, unit-linked products, including variable business and may increase the amount of withdrawals which will reduce related management fees. Our banking operations are exposed to fluctuations in equity securities markets. Given the fact that ING Banks policy is to maintain an internationally diversified and mainly client-related trading portfolio, market downturns are likely to lead to declines in securities trading and brokerage activities that we execute for customers and therefore to declines in related commissions.
Fluctuations in interest rates
Our insurance operations are exposed to fluctuations in interest rates through impacts on sales and surrenders of life insurance and annuity products. Declining interest rates may increase sales but may impact profitability as a result of a reduced spread between the guaranteed interest rates to policyholders and the investment returns on fixed interest investments. Rising interest rates may increase surrenders of policies which may require liquidation of fixed interest investments at unfavorable market prices. This could result in realized investment losses. Our banking operations are exposed to fluctuations in interest rates. Our management of interest rate sensitivity affects the results of our banking operations. Interest rate sensitivity refers to the relationship between changes in market interest rates and changes in net interest income. The composition of our banking assets and liabilities results in a structural mismatch which causes the banking operations net interest income to be affected by changes in interest rates.
Fluctuations in exchange rates
We publish our consolidated financial statements in euros. Because a substantial portion of our revenue and expenses are denominated in currencies other than euros, fluctuations in the exchange rates used to translate foreign currencies, particularly the U.S. dollar, the Australian dollar, the Canadian dollar, the Japanese yen, the British pound and the Polish zloty into euros will impact our reported results of operations and cash flows from year to year. Fluctuations in exchange rates will also impact the value (denominated in euro) of our investments in our non-Euro reporting subsidiaries. The impact of these fluctuations in exchange rates is mitigated to some extent by the fact that the revenues and related expenses, as well as assets and liabilities, of each of our non-euro reporting subsidiaries are generally denominated in the same currencies. ING Group policy is to hedge the translation risk of foreign operations in order to minimize the impact of foreign currency movements (See Note 7.11 of Notes to the Consolidated Financial Statements).
During 2003, the value of the euro strengthened against most currencies. The impact on operating net profit was a negative EUR 49 million. This figure includes the mitigating effect of the US dollar hedge result of EUR 119 million after tax versus EUR 55 million in the same period last year. ING has hedged the expected profits in US dollar and US dollar-linked currencies for 2004 and 2005. On the insurance side, profits were hedged at a EUR/USD exchange rate of 0.922 for 2004 and 1.253 for 2005. On the banking side, the EUR/USD exchange rates were 1.222 for 2004 and 1.253 for 2005.
For each of the years 2003, 2002 and 2001, the year-end exchange rates (which are the rates ING uses in the preparation of the Consolidated Financial Statements for balance sheet items not denominated in euros) and the average annual exchange rates (which are the rates ING uses in the preparation of the Consolidated Financial Statements for income statement items and cash flows not denominated in euros) were as follows:
Average | ||||||||||||
2003 | 2002 | 2001 | ||||||||||
U.S. dollar |
1.1345 | 0.9458 | 0.8950 | |||||||||
Australian dollar |
1.7484 | 1.7404 | 1.7366 | |||||||||
Canadian dollar |
1.5912 | 1.4838 | 1.3850 | |||||||||
Pound sterling |
0.6899 | 0.6279 | 0.6196 | |||||||||
Japanese yen |
131.1930 | 117.9310 | 108.6980 |
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Year-end | ||||||||||||
2003 | 2002 | 2001 | ||||||||||
U.S. dollar |
1.2616 | 1.0487 | 0.8853 | |||||||||
Australian dollar |
1.6788 | 1.8594 | 1.7338 | |||||||||
Canadian dollar |
1.6281 | 1.6548 | 1.4072 | |||||||||
Pound sterling |
0.7063 | 0.6505 | 0.6110 | |||||||||
Japanese yen |
134.8000 | 124.4000 | 116.2500 |
Off-Balance-Sheet- Arrangements
Reference is made to pages F-40-F-42: Note 2.18.2 Off-Balance-Sheet-Arrangements.
Less | More | |||||||||||
than | than | |||||||||||
Total | one | one | ||||||||||
2003 | year | year | ||||||||||
(EUR millions) | ||||||||||||
Insurance operations |
||||||||||||
Commitments concerning investments in land and buildings |
652 | 272 | 380 | |||||||||
Commitments concerning fixed-interest securities |
1,301 | 1,292 | 9 | |||||||||
Guarantees |
1,232 | 1,232 | ||||||||||
Other |
605 | 433 | 172 | |||||||||
Banking operations |
||||||||||||
Contingent liabilities in respect of: |
||||||||||||
guarantees |
17,115 | 6,648 | 10,467 | |||||||||
irrevocable letters of credit |
5,356 | 5,330 | 26 | |||||||||
other |
355 | 355 | ||||||||||
26,616 | 15,562 | 11,054 | ||||||||||
irrevocable facilities |
66,640 | 38,402 | 28,238 | |||||||||
93,256 | 53,964 | 39,292 | ||||||||||
Payments due by period | ||||||||||||||||
Total | Less than | 1-5 | More | |||||||||||||
2003 | a year | years | than 5 years | |||||||||||||
(EUR millions) | ||||||||||||||||
Contractual Obligations |
||||||||||||||||
Operating
lease obligations 1) |
658 | 149 | 336 | 173 | ||||||||||||
Subordinated Loans of Group Companies 2) |
14,511 | 673 | 4,217 | 9,621 | ||||||||||||
Debenture Loans 2) |
9,961 | 765 | 6,148 | 3,048 | ||||||||||||
Loans Contracted 2) |
5,500 | 4,403 | 794 | 303 | ||||||||||||
Loans from Credit Institutions 2) |
3,672 | 3,029 | 624 | 19 | ||||||||||||
Total |
34,302 | 9,019 | 12,119 | 13,164 | ||||||||||||
1) | The Companys operating lease obligations are described in Note 2.18.3 | |||
2) | Subordinated Loans of Group Companies, Debenture Loans, Loans Contracted and Loans from Credit Institutions are included in the Companys consolidated balance sheet; refer to Note 2.16 for additional details |
Critical Accounting Policies
Dutch GAAP
Reference is made to page to F-9: Note 1.5 Critical Accounting Policies.
Transition to IAS/IFRS
As of January 1, 2005 we will be required to prepare our financial statements and report our operating results in accordance with International Financial Reporting Standards (IFRS), previously known as International Accounting Standards (IAS). In June 2002, the Council of the European Union adopted a
67
regulation requiring listed companies in its Member States to prepare consolidated financial statements based on IFRS. The full impact on financial statements and results under IFRS is not able to be exactly predicted as certain Standards have not yet been fully finalized, especially with respect to accounting for insurance contracts and financial instruments.
Overview Group result 2003 versus 2002
Income
Total operating income decreased by 9.2% to EUR 69,073 million, due, in part, to the fact that the euro strengthened against most currencies.
Efficiency
Total operating expenses decreased 3.1% from EUR 13,501 million in 2002 to EUR 13,081 million in 2003. This is a result of ongoing cost control measures, as well as the many restructuring and integration efforts, which were partially offset by an increase in expenses. This expense growth was a result of the ongoing expansion of ING Direct and the insurance operations in developing markets, higher pension costs, accelerated depreciation of capitalized software, higher expenses to reduce backlogs and to improve the service level at INGs Dutch insurance operations, and the new collective labor agreement in the Netherlands.
Profit
The positive trend already visible in the first nine months of 2003 continued in the fourth quarter, resulting in a full-year operating net profit of EUR 4,053 million, up 18.1% from 2002. Currency-rate differences, despite the mitigating effect of the US-dollar hedge, had a negative impact of EUR 49 million. Excluding currency-rate differences and acquisitions/divestments, operating net profit increased by 20.9%.
Net profit over 2003 fell EUR 457 million, or 10.2%, to EUR 4,043 million, mainly due to the absence of net realized capital gains on shares in 2003 as a result of a policy change. In 2002, net profit included EUR 820 million of net realized capital gains on shares compared with a net realized loss of EUR 10 million in 2003. In addition, 2002 net profit included a EUR 247 million non-operating profit on the sale of 49% of INGs life and mutual-fund operations in Australia to the joint venture with ANZ.
The further recovery of the most important stock market indices in the fourth quarter of 2003 resulted in a positive balance of more than EUR 0.9 billion in the revaluation reserve shares as of 31 December 2003. This revaluation reserve includes unrealized gains and losses on shares in INGs equity portfolio. On February 17, 2004, the revaluation reserve in respect of shares amounted to approximately EUR 1.4 billion. The revaluation reserve in respect of real estate amounted to EUR 1.0 billion at year-end 2003, a decrease of EUR 0.2 billion compared with year-end 2002 as a result of sales in 2003.
Insurance operations
Operating net profit from the insurance operations decreased from EUR 2,538 million in 2002 to EUR 2,508 million in 2003 (1.2%). The strengthening of the euro against other (major) currencies had a negative impact of EUR 92 million despite the mitigating effect of the dollar hedge. Excluding the impact of the strong euro, operating net profit from insurance rose 2.7%. Operating profit before tax increased 10.0% compared with 2002.
Total premiums decreased by 12.9% to EUR 45,519 million. Excluding the impact of the strong euro, premium growth was flat as a result of continued efforts to properly balance profitability and market share. In the Netherlands, life premiums grew by 13.3%.
Despite strict cost control in all regions total operating expenses increased organically by 6.5% as a result of an increase in pension costs, higher expenses to reduce backlogs and to improve the service level in the Netherlands, one-time reorganization and IT outsourcing expenses in the US, as well as the growth of developing-market activities.
Banking operations
Operating net profit from the banking operations increased by 72.6% to EUR 1,545 million in 2003, mainly driven by a higher interest result, lower expenses and lower loan-loss provisions. One-off items
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had a small mitigating effect on the improvement (EUR (34) million in 2002 versus EUR (65) million in 2003).
Profit before tax rose by EUR 903 million or 61.5%. Total income growth of 4.3% (organically 7.2%) was caused by a EUR 469 million higher interest result thanks to increased volumes (notably at ING Direct) and a higher average interest margin in the Netherlands.
Operating expenses decreased by 1.4% (organically, +1.0%) despite higher pension expenses, the impact of the collective labor agreement in the Netherlands as well as the ongoing expansion of ING Direct. Compared to the third quarter 2003, operating expenses in the fourth quarter rose by EUR 152 million to EUR 2,192 million. This exceptionally high expense level is due to a number of non-recurrent expenses including the accelerated depreciation of capitalized software especially in the fourth quarter, a catch-up in bonus accruals and higher marketing costs. The addition to the provision for loan losses decreased by EUR 310 million to EUR 1,125 million, which is equal to 46 basis points of average credit-risk weighted assets, compared with 59 basis points in 2002.
Currency-rate fluctuations impacted operating net profit by +EUR 43 million, mainly as a result of a US dollar-denominated loss in the fourth quarter of 2002.
Return on equity
The operating net return on equity increased from 17.4% in 2002 to 21.5% in 2003. The return on equity of the insurance operations was 22.7% against 18.6% for 2002. The return on equity of the banking operations increased from 6.5% in 2002 to 11.1% in 2003.
CONSOLIDATED RESULTS OF OPERATIONS
The following table sets forth the consolidated results of operations of ING Group for the years ended December 31, 2003, 2002 and 2001:
Year ended December 31, | ||||||||||||
2003 | 2002 | 2001 | ||||||||||
(EUR millions) | ||||||||||||
Operating profit before tax: |
||||||||||||
Insurance operations |
3,486 | 3,170 | 2,792 | |||||||||
Banking operations |
2,371 | 1,468 | 2,170 | |||||||||
Operating profit before tax |
5,857 | 4,638 | 4,962 | |||||||||
Taxation |
1,460 | 873 | 1,099 | |||||||||
Third-party interests |
344 | 332 | 324 | |||||||||
Operating net profit |
4,053 | 3,433 | 3,539 | |||||||||
Non-operating profit after taxation |
247 | 325 | ||||||||||
Realized capital gains (losses) after taxation |
(10 | ) | 820 | 713 | ||||||||
Net profit |
4,043 | 4,500 | 4,577 | |||||||||
The following table sets forth the breakdown of our non-operating profits by insurance and banking operations:
Year ended December 31, | ||||||||||||||||||||||||
2002 | 2001 | 2002 | 2001 | 2002 | 2001 | |||||||||||||||||||
Insurance operations | Banking operations | Total | ||||||||||||||||||||||
(EUR millions) | ||||||||||||||||||||||||
Non-operating profit: |
||||||||||||||||||||||||
Result on joint venture ANZ |
280 | 280 | ||||||||||||||||||||||
Result on sale of investments for
financing of acquisitions |
325 | 325 | ||||||||||||||||||||||
Taxation on non-operating
results |
(33 | ) | (33 | ) | ||||||||||||||||||||
Non-operating profit after taxation |
247 | 325 | 247 | 325 | ||||||||||||||||||||
69
The following discussion is based on our consolidated financial statements (see Item 18. Financial Statements) and should be read in conjunction with those statements. ING Group evaluates the results of its insurance operations and banking operations using non-GAAP financial performance measures called operating result before taxation and operating (net) profit. Operating (net) profit is defined as (net) profit, excluding:
- capital gains and losses on equity securities,
- the impact of the negative revaluation reserve on equity securities , and
- realized gains on divestments that are made with the purpose of using the proceeds to finance acquisitions.
While these excluded items are significant components in understanding and assessing the Groups consolidated financial performance, ING Group believes that the presentation of operating results enhances the understanding and comparability of its performance by highlighting net income attributable to ongoing operations and the underlying profitability of the businesses. Trends in the underlying profitability of ING Groups businesses can be more clearly identified without the fluctuating effects of realized capital gains and losses on equity securities and the impact of the negative revaluation reserve on equity securities. These results are largely dependent on market cycles and can vary across periods. The timing of sales that would result in gains or losses is largely at the discretion of the company. The realized gains on divestments that are made with the purpose of using the proceeds related to the divestments to finance acquisitions are excluded because the timing of these gains is largely subject to the companys discretion, influenced by market opportunities and ING Group does not believe that they are indicative of future results. Operating result before taxation and operating net profit are not a substitute for profit before taxation and net profit as determined in accordance with Dutch GAAP. ING Groups definition of operating result before taxation and operating net profit may differ from those used by other companies and may change over time. See Note 3.6.6 to the Consolidated Financial Statements for a reconciliation of our segment operating results to our net profit.
The following table sets forth the operating profit before tax and after tax of the Groups consolidated operations by geographic region for the years ended December 31, 2003, 2002 and 2001:
Year ended December 31, | ||||||||||||
2003 | 2002 | 2001 | ||||||||||
(EUR millions) | ||||||||||||
The Netherlands |
3,059 | 2,901 | 3,062 | |||||||||
Belgium |
587 | 687 | 596 | |||||||||
Rest of Europe |
215 | (156 | ) | 540 | ||||||||
North America |
912 | 311 | 202 | |||||||||
Latin America |
410 | 381 | 202 | |||||||||
Asia |
318 | 283 | 419 | |||||||||
Australia |
236 | 384 | 73 | |||||||||
Other |
120 | (153 | ) | (132 | ) | |||||||
Operating profit before tax |
5,857 | 4,638 | 4,962 | |||||||||
Taxation |
1,460 | 873 | 1,099 | |||||||||
Third-party interests |
344 | 332 | 324 | |||||||||
Operating net profit |
4,053 | 3,433 | 3,539 | |||||||||
The contribution of the insurance operations to the operating net profit of ING Group, after tax and third-party interests, was 61.9%, 73.9% and 59.3% in 2003, 2002 and 2001, respectively.
Year ended December 31, 2003 compared to year ended December 31, 2002
Total operating income of ING Group decreased by EUR 7,028 million, or (9.2%) to EUR 69,073 million, from EUR 76,101 million in 2002, reflecting an decrease in income of the Groups insurance operations of (11.3%) and an increase in the banking operations of 4.3%. Total operating expenditure decreased
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EUR 8,247 million, or (11.5%), from EUR 71,463 million in 2002 to EUR 63,216 million in 2003, reflecting decreases of (12.4%) and (4.4%) respectively, in total expenditure for the Groups insurance and banking operations. The Groups operating profit before tax increased in The Netherlands, Rest of Europe, North America, Latin America and Asia, but declined in Belgium and Australia.
Consolidated operating profit before tax increased EUR 1,219 million, or 26.3%, to EUR 5,857 million in 2003 compared to EUR 4,638 million in 2002, reflecting increases of 10.0% for the insurance operations and 61.5% for the banking operations. Including non-operating results, profit before tax decreased EUR 44 million, or (0.7%), to EUR 5,877 million in 2003 compared to EUR 5,921 million in 2002. The Groups consolidated taxes (operating) of EUR 1,460 million in 2003 and EUR 873 million in 2002 represented overall effective tax rates of 24.9% and 18.8%, respectively, compared to the statutory rates for the Groups primary Dutch and other non-domestic operating subsidiaries that ranged from 16.5% to 47%, and averaged 35%. The increase was mainly due to higher tax-exempt gains as well as the release of a tax provision in the insurance operations in 2002. The difference between statutory and effective rates was due primarily to a reduction in the taxes paid by the Groups Dutch subsidiaries, for which the statutory rate was 34.5% and the effective rate was 19.1% in 2002.
Operating net profit increased EUR 620 million, or 18.1%, to EUR 4,053 million in 2003 compared to EUR 3,433 million in 2002, reflecting the increased pre-tax profits, although the effect of exchange rate movements between the euro and certain of the Groups primary operating currencies decreased operating net profit in 2003 by EUR 49 million, compared to an increase of EUR 76 million in 2002, both net of US-dollar hedging. Including non-operating profits, net profits decreased EUR 457 million, or (10.2%), to EUR 4,043 million in 2003 compared to EUR 4,500 million in 2002.
Year ended December 31, 2002 compared to year ended December 31, 2001
Total operating income of ING Group increased by EUR 2,551 million, or 3.5% to EUR 76,101 million, from EUR 73,550 million in 2001, reflecting an increase in income of the Groups insurance operations of 3.9% and an increase in the banking operations of 0.8%. Total operating expenditure increased EUR 2,875 million, or 4.2%, from EUR 68,588 million in 2001 to EUR 71,463 million in 2002, reflecting increases of 3.5% and 8.9% respectively, in total expenditure for the Groups insurance and banking operations. The Groups operating profit before tax increased in, Belgium, North America, Latin America and Australia, but declined in The Netherlands, Rest of Europe and Asia.
Consolidated operating profit before tax decreased EUR 324 million, or 6.5%, to EUR 4,638 million in 2002 compared to EUR 4,962 million in 2001, reflecting an increase of 13.5% for the insurance operations and a decrease of 32.4% for the banking operations. Including non-operating profits, profit before tax decreased EUR 145 million, or 2.4%, to EUR 5,921 million in 2002 compared to EUR 6,066 million in 2001. The Groups consolidated taxes (operating) of EUR 873 million in 2002 and EUR 1,099 million in 2001 represented overall effective tax rates of 18.8% and 22.2%, respectively, compared to the statutory rates for the Groups primary Dutch and other non-domestic operating subsidiaries that ranged from 16.5% to 47%, and averaged 35%. The difference between statutory and effective rates was due primarily to a reduction in the taxes paid by the Groups Dutch subsidiaries, for which the statutory rate was 34.5% and the effective rate was 12.1% in 2002.
Operating net profit decreased EUR 106 million, or 3.0%, to EUR 3,433 million in 2002 compared to EUR 3,539 million in 2001, reflecting the decreased pre-tax profit and lower overall tax rates described above, as well as the effect of exchange rate movements between the euro and certain of the Groups primary operating currencies, which increased operating net profit in 2002 by EUR 76 million, compared to an increase of EUR 12 million in 2001. Including non-operating profits, net profits decreased EUR 77 million, or 1.7%, to EUR 4,500 million in 2002 compared to EUR 4,577 million in 2001.
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CONSOLIDATED ASSETS AND LIABILITIES
The following table sets forth ING Groups consolidated assets and liabilities for the years ended December 31, 2003, 2002 and 2001:
Year ended December 31, | ||||||||||||
2003 | 2002 | 2001 | ||||||||||
(EUR billions, except amounts per share ) | ||||||||||||
Investments |
335.0 | 297.6 | 307.4 | |||||||||
Bank lending |
292.6 | 284.4 | 254.2 | |||||||||
Total assets |
778.8 | 716.4 | 705.1 | |||||||||
Insurance
provisions
|
||||||||||||
Life |
188.2 | 186.0 | 204.6 | |||||||||
Non-life |
9.8 | 9.8 | 9.4 | |||||||||
Total insurance provisions |
198.0 | 195.8 | 214.0 | |||||||||
Funds entrusted to and debt securities of the banking operations (1) |
377.8 | 319.8 | 276.4 | |||||||||
Due to banks |
102.1 | 96.3 | 107.8 | |||||||||
Total liabilities |
757.5 | 698.1 | 683.6 | |||||||||
Shareholders equity |
21.3 | 18.3 | 21.5 | |||||||||
Shareholders equity per Ordinary share |
10.08 | 9.14 | 11.03 |
(1) | Funds entrusted to and debt securities of the banking operations consists of savings accounts, other deposits, bank funds and debt securities privately issued by the banking operations of ING. |
Year ended December 31, 2003 compared to year ended December 31, 2002
Total assets increased by 8.7% in 2003 to EUR 778.8 billion, due to increased fixed income investments, bank lending and banks. Investments increased by EUR 37.4 billion, or 12.6%, to EUR 335.0 billion in 2003 from EUR 297.6 billion in 2002, representing a small increase of EUR 1.5 billion in insurance investments and an increase of EUR 36.0 billion in banking investments mainly attributable to ING Direct ( EUR 29.8 billion).
Bank lending grew EUR 8.2 billion, or 2.9%, rising to EUR 292.6 billion at the end of 2003 from EUR 284.4 billion at the end of 2002. Of this amount, EUR 143.7 billion related to lending in the Netherlands and EUR 148.9 billion to international lending. The total increase of EUR 8.2 billion was on balance due to decreased corporate loans mainly as a result of negative currency rate fluctuations, by EUR 5.2 billion and higher personal lending of EUR 13.4 billion.
Group shareholders equity increased by 16.9% or EUR 3,077 million to EUR 21,331 million at December 31, 2003 compared to EUR 18,254 million at December 31, 2002. On balance, net profit of EUR 4,043 million increased and exchange rate differences lowered shareholders equity by EUR (1,123) million. In addition, the portion of the 2002 final dividend and 2003 interim dividend paid caused shareholders equity to decrease by EUR 943 million offset by the issue of shares, of EUR 925 million, to fund the cash dividend.
Year ended December 31, 2002 compared to year ended December 31, 2001
Total assets increased by 1.6% in 2002 to EUR 716.4 billion, on balance due to decreased fixed income investments and an increase in bank lending volume. Investments declined by EUR 9.9 billion, or 3.2%, to EUR 297.6 billion in 2002 from EUR 307.4 billion in 2001, representing a reduction of EUR (25.7) billion in insurance investments, which was offset in part by an increase of EUR 15.8 billion in banking investments.
Bank lending grew EUR 30.2 billion, or 11.9%, rising to EUR 284.4 billion at the end of 2002 from EUR 254.2 billion at the end of 2001. Of this amount, EUR 145.4 billion related to lending in the Netherlands and EUR 139.0 billion to international lending. The consolidation of DiBa, Toplease and ING Vysya Bank added EUR 7.3 billion to bank lending. The total increase of EUR 30.2 billion was mainly due to increased loans secured by mortgages, including Dutch residential mortgages of EUR 19.9 billion,
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and higher other personal lending of EUR 8.0 billion partly caused by a reclassification from other corporate loans.
Group shareholders equity decreased by 15.2% or EUR 3,260 million to EUR 18,254 million at December 31, 2002 compared to EUR 21,514 million at December 31, 2001. Net profit of EUR 4,500 million and the changes in the value of ING Group N.V. shares held by group companies of EUR 822 million caused shareholders equity to increase. Write-offs of goodwill totaled EUR (1,176) million, which write-offs have been directly charged in full to shareholders equity. Realized revaluations released to the profit and loss account of EUR (1,051) million and unrealized revaluations after taxation amounted to EUR (3,343) million, mainly due to the revaluation of the equity portfolio due to the economic downturn. Exchange rate difference lowered shareholders equity by EUR (1,041) million. In addition, the portion of the 2001 final dividend and 2002 interim dividend paid caused shareholders equity to decrease by EUR 1,969 million.
SEGMENT REPORTING
ING Groups segments are based on the management structure of the Group, which is different from its legal structure. Each Executive Center formulates its strategic, commercial and financial policy in conformity with the strategy and performance targets set by the Executive Board. Each Executive Center is also responsible for the preparation of its annual budget and each Executive Center monitors the realization of its policies and budgets and its business units. The following table sets forth the contribution of our Executive Centers to our Total operating income and Operating profit before tax for each of the years 2001-2003:
Year ended December 31, | ||||||||||||||||||||||||
2003 | 2002 | 2001 | 2003 | 2002 | 2001 | |||||||||||||||||||
Total operational income | Operational result before taxation | |||||||||||||||||||||||
(EUR millions) | ||||||||||||||||||||||||
Europe (1) |
28,571 | 26,955 | 27,217 | 4,305 | 3,242 | 3,888 | ||||||||||||||||||
Americas |
31,973 | 40,608 | 39,388 | 1,086 | 1,043 | 884 | ||||||||||||||||||
Asia/Pacific |
8,511 | 8,826 | 7,501 | 453 | 603 | 304 | ||||||||||||||||||
Other (2) |
18 | (288 | ) | (556 | ) | 13 | (250 | ) | (114 | ) | ||||||||||||||
Total Group |
69,073 | 76,101 | 73,550 | 5,857 | 4,638 | 4,962 | ||||||||||||||||||
(1) | As of December 31, 2002, the asset management business units ING Real Estate, Baring Asset Management, ING Trust, Parcom and Baring Private Equity Partners are part of EC ING Europe. The years prior to 2003 are restated accordingly. See Item 4 Information on the Company. |
(2) | Reflects intersegment eliminations. |
See Note 3.6.6 Segment Reporting to the Consolidated Financial Statements for a reconciliation of our segment operating results to our net profits under Dutch GAAP.
Year ended December 31, 2003 compared to year ended December 31, 2002
ING Europe
Gross premiums written in the life operations increased by EUR 639 million, or 7.5%, to EUR 9,199 million. Gross premiums written in the non-life operations increased EUR 23 million, or 1.1%, to EUR 2,202 million. Total income from the banking operations increased by EUR 137 million, or 1.3%, from EUR 10,693 million in 2002 to EUR 10,830 million in 2003, mainly due to an increase in the interest result. Income from the asset management activities, being mainly real property and venture capital activities rose by 13.4%, or EUR 97 million to EUR 822 million in 2003.
The operating profit before tax increased by 32.8% to EUR 4,305 million from EUR 3,242 million in 2002. The operating profit before tax of the insurance operations grew by 8.8%, although it was negatively affected by one-off items. Pressure on investment income and higher expenses resulted in lower life results in the Netherlands. The life operations in Belgium and Poland, however, performed
73
well. The non-life results on the home markets in the Netherlands and Belgium
developed very favorably. Operating profit before tax of the banking operations
increased by 58.3% to EUR 2,253 million. Operating profit before tax from the
asset management businesses rose by 38.8% to EUR 336 million.
According to US GAAP operating profit before tax would have been EUR 359
million lower in 2003 and EUR 736 million lower in 2002. This difference is
mainly caused by the following reconciling items for 2003: the 2002 US GAAP
operating profit included a goodwill impairment charge of EUR 1,168 million
(2003: nil), accounting for derivative financial instruments held for risk
management EUR (367) million (2002: EUR 60 million) and valuation of debt
securities EUR 313 million (2002: EUR 573 million) . For an explanation of
differences between Dutch GAAP and US GAAP please refer to Notes 6.1 and 6.2 on
pages F-102 to F-106.
ING Americas
Gross premiums written in the life business decreased by EUR 6,550 million, or 23.1%, from EUR 28,380 million in 2002 to EUR 21,830 million in 2003, mainly caused by decreased fixed annuities sales, which suffered from the depressed interest rate environment. Gross non-life premiums decreased EUR 803 million, or 14.7%, to EUR 4,660 million in 2003.
The operating profit before tax increased slightly by EUR 43 million from EUR 1,043 million to EUR 1,086 million, due to the impact of lower interest rates causing margin compression and lower fixed annuity sales as well as unfavorable mortality in the reinsurance business. Growth in the property and casualty businesses and higher benefit costs combined with one-time US costs increased total expenses with 2.9% . Excluding the impact of the currency hedge gain, exchange rates and one-off items, operating profit before tax increased 28.9% over 2002 to EUR 905 million. According to US GAAP operating profit before tax would have been EUR 445 million higher in 2003 and EUR 11,559 million lower in 2002. This difference is mainly caused by the following reconciling items for 2003 impairment of goodwill of EUR (125) million (2002: EUR (10,942) million), valuation of debt securities EUR (333) million (2002: EUR (375) million), realized results on sales and amortization of premiums and discount of debt securities EUR 833 million (2002: EUR 546 million), accounting for derivative financial instruments held for risk management EUR 283 million (2002: EUR (538) million). For an explanation of differences between Dutch GAAP and US GAAP please refer to Notes 6.1 and 6.2 on pages F-102 to F-106.
ING Asia / Pacific
Gross premiums written in the life business decreased by EUR 243 million, or (3.3%), from EUR 7,436 million in 2002 to EUR 7,193 million in 2003. Gross premiums, life and non-life, of the developing markets operations (mainly Korea and Taiwan) increased 23.6% in local currencies. In Japan, premium income decreased by 1.4% in local currency due to the flat sales of single premium variable annuity product. Gross premiums of the non-life operations increased by 10.8% from EUR 362 million in 2002 to EUR 401 million in 2003.
The operating profit before tax of the insurance operations decreased by EUR 117 million, or 20.6%, primarily due to the operating gain of EUR 222 million in 2002 from the transaction with ANZ, to EUR 452 million in 2003. The operations in Australia, Japan, Hong Kong and Korea all showed improved results in local currencies. Results from Taiwan were lower, mainly because of an addition of EUR 50 million to the provision against a prolonged low interest rate environment. Excluding this provision and at constant exchange rates, profit increased.
The operating profit before tax of the banking operations decreased by EUR 33 million from EUR 34 million in 2002 to EUR 1 million in 2003, mainly because of lower dividends in 2003, EUR (18) million received on the investment in Kookmin Bank (South Korea) and lower results EUR (15) million regarding the 44% stake in Vysya Bank (India)
74
Year ended December 31, 2002 compared to year ended December 31, 2001
ING Europe
Gross premiums written in the life operations decreased by EUR 41 million, or 0.5%, to EUR 8,560 million. Gross premiums written in the non-life operations increased EUR 81 million, or 3.9%, to EUR 2,179 million. Total income from the banking operations increased by EUR 38 million, or 0.4%, from EUR 10,390 million in 2001 to EUR 10,620 million in 2002, on balance due to an increase in the interest result, which was almost fully offset by a strong decrease in commission income, reflecting overall market declines.
The operating profit before tax decreased by 16.6% to EUR 3,242 million from EUR 3,888 million in 2001. The operating profit before tax of the insurance operations grew by 7.5% due to higher realized capital gains on real property and lower operating expenses, while the operating profit before tax of the banking operations decreased by 35.3%, due to lower commissions and other income in the Belgian operations as well as substantial higher additions to the provision for loan losses, mainly in the German and American wholesale operations, partly offset by lower operating expenses. According to US GAAP operating profit before tax would have been EUR 736 million lower in 2002 and EUR 523 million lower in 2001. This difference is mainly caused by the following reconciling items for 2002: goodwill of EUR (1,168) million (2001: EUR (514) million) and mainly valuation of debt securities EUR 573 million (2001: EUR 15 million. For an explanation of differences between Dutch GAAP and US GAAP please refer to Notes 6.1 and 6.2 on pages F-102 to F-106.
ING Americas
Gross premiums written in the life business decreased by EUR 664 million, or 2.3%, from EUR 29,044 million in 2001 to EUR 28,380 million in 2002, mainly caused by increased fixed annuities sales, which were more than offset by a decrease in premium income from variable annuities, short term Guaranteed Investment Contracts and reinsurance premiums. Gross non-life premiums increased EUR 1,480 million, or 37.2%, to EUR 5,463 million in 2002, and mainly caused by the acquisition of the retail insurance portfolio from Zurich in Canada, as well as the integration of the additional 58.5% ownership of ING Commercial America acquired in the second half of 2001 in Mexico.
The operating profit before tax increased by EUR 159 million from EUR 884 million to EUR 1,043 million, caused by lower operating expenses, decreased interest expenses and higher investment income partly offset by substantially higher investment losses and increased charges due to DAC unlocking. According to US GAAP operating profit before tax would have been EUR 11,559 million lower in 2002 and EUR 1,917 million lower in 2001. This difference is mainly caused by the following reconciling items for 2002: impairment of goodwill of EUR (10,942) million (2001: EUR (1,216) million), valuation of debt securities EUR (375) million (2001: EUR (132) million), realized results on sales and amortization of premiums and discount of debt securities EUR 546 million (2001: EUR 230 million), accounting for derivative financial instruments held for risk management EUR (538) million (2001: EUR (321) million) and provision for future catastrophes and other accidental losses EUR (181) million (2001: EUR (329) million). For an explanation of differences between Dutch GAAP and US GAAP please refer to Notes 6.1 and 6.2 on pages F-102 to F-106.
ING Asia / Pacific
Gross premiums written in the life business increased by EUR 939 million, or 14.5%, from EUR 6,497 million in 2001 to EUR 7,436 million in 2002. Gross premiums of the life business in Australia decreased by 17.5% primarily due to the ING-ANZ joint venture formation, reducing INGs share of premium Gross premiums of the ex-Greenfield operations (mainly Korea and Taiwan) increased 7.4% (14.6% in local currency). In Japan, premium income grew by 102% in local currency due to the strong sales of a newly introduced single premium variable annuity product. Gross premiums of the non-life operations increased by 15.3% from EUR 314 million in 2001 to EUR 362 million in 2002.
The operating profit before tax of the insurance operations increased by EUR 268 million, or 89.0%, to EUR 569 million in 2002. The profit includes EUR 222 million profit relating to the formation of the joint
75
venture life and mutual fund operations in Australia with ANZ (ING 51% ownership). The operations in Australia, Japan, Taiwan and Korea all showed improved results.
The operating profit before tax of the banking operations increased strongly by EUR 31 million from EUR 3 million in 2001 to EUR 34 million in 2002, mainly caused by higher results of the Australian operations and the first time consolidation of ING Vysya Bank in India.
Investment portfolio impairments and unrealized losses
The carrying value of all investments in our investment portfolio is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The review includes, amongst other, an evaluation of the level and trends of interest rates, trends and level of volatility in stock markets, financial condition of the issuer or counterparty, economic developments and expectations in the business segment in which the issuer or counterparty operates, the extent to which the fair value is below the cost price, the period of time for which unrealized losses have existed and ING Groups intent and ability to hold a security until fair value will recover. For all investments for which, based on such review, the unrealized losses are expected to be other than temporary, the amount of unrealized loss is charged to the profit and loss account.
Unrealized losses
On a US GAAP basis, our consolidated investment portfolio included unrealized gains of EUR 11,245 million and unrealized losses of EUR 1,408 million as of December 31, 2003.
The table below provides a reconciliation of the net unrealized gains and losses on equity securities of EUR 919 million to the net unrealized gains and losses on a US GAAP basis as of December 31, 2003.
Dutch GAAP | Additional | U.S. GAAP | ||||||||||
U.S. GAAP | ||||||||||||
impairments | ||||||||||||
(cumulative) | ||||||||||||
(EUR millions) | ||||||||||||
Unrealized gains |
2,243 | | 2,518 | |||||||||
Unrealized losses |
1,324 | 1,435 | 164 | |||||||||
Total |
919 | 1,435 | 2,354 | |||||||||
Under US GAAP, unrealized losses on equity securities are EUR 1,435 million (2002: EUR 1,770 million) lower as set out in Note 6.1.e. on page F-103.
The table below provides the gross unrealized loss on a US GAAP basis of EUR 1,408 million as of December 31, 2003 broken down by type of security and by the period of time for which the fair value was below cost price:
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Less than | Between 6 | |||||||||||||||
6 months | and 12 | More than | ||||||||||||||
below cost | months | 12 months | ||||||||||||||
below cost | below cost | Total | ||||||||||||||
(EUR millions) | ||||||||||||||||
Debt securities: |
||||||||||||||||
Dutch Government |
61 | 2 | 63 | |||||||||||||
Foreign Governments |
152 | 124 | 83 | 359 | ||||||||||||
Corporate debt securities |
257 | 221 | 47 | 525 | ||||||||||||
Mortgage-backed securities |
123 | 80 | 49 | 252 | ||||||||||||
Other |
14 | 26 | 5 | 45 | ||||||||||||
Sub-total |
607 | 453 | 184 | 1.244 | ||||||||||||
Shares and convertible debentures |
75 | 19 | 70 | 164 | ||||||||||||
Total |
682 | 472 | 254 | 1,408 | ||||||||||||
The company does not consider the securities with unrealized losses for over 12 months of EUR 254 million to be impaired, since either:
- | the securities are only insignificantly lower than the cost price | |||
- | the unrealized loss arose due to changes in interest rates, however this has not effected the expected future cash flows. | |||
- | the securities are with counterparties who are considered not to be in financial difficulty, despite the fact that their credit rating has been lowered, reducing the market value |
The unrealized losses on a U.S. GAAP basis of EUR 1,236 million as of December 31, 2002 are provided in the table below.
Dutch GAAP | Additional | U.S. GAAP | ||||||||||
Gross | U.S. GAAP | Gross | ||||||||||
unrealized | impairments | unrealized | ||||||||||
losses | (cumulative) | losses | ||||||||||
(EUR millions) | ||||||||||||
Debt securities |
903 | | 903 | |||||||||
Equity securities |
2,103 | 1,770 | 333 | |||||||||
Total |
3,006 | 1,770 | 1,236 | |||||||||
The table below provides the gross unrealized loss on a U.S. GAAP basis of EUR 1,236 million as of December 31, 2002 broken down by type of security and by the period of time for which the fair value was below cost price:
Less than | More than | |||||||||||
6 months | 6 months | |||||||||||
below cost | below cost | Total | ||||||||||
(EUR millions) | ||||||||||||
Debt securities |
449 | 454 | 903 | |||||||||
Equity securities |
286 | 47 | 333 | |||||||||
Total |
735 | 501 | 1,236 | |||||||||
Impairments
Impairments are measured as the difference between the carrying value of a particular investment and the expected recoverable amount. Impairments are charged to the profit and loss account.
In 2003, we recorded impairments of EUR 689 million on a US GAAP basis (2002: EUR 2,248 million and 2001: EUR 1,136 million). Of such amount, EUR 474 million is related to our portfolio of debt securities (2002: EUR 716 million and 2001: EUR 451 million).
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Impairment of debt securities under Dutch GAAP
Unrealized losses on debt securities consist of two components: interest related unrealized losses and credit related unrealized losses. Interest related unrealized losses, which fully relate to fluctuations in risk free market interest rates, generally would not result in any impairments. Credit related unrealized losses may relate to impairment if it is uncertain whether future interest and principal payments will be collected.
Impairments on debt securities, recorded at redemption value under Dutch GAAP, are accounted for as a reduction of the carrying value of the debt security. This reduction is reversed in a subsequent period if the recoverable amount increases and the increase can be objectively related to an event occurring after the impairment was recognized in income. The amount of the reversal is then included in the profit and loss account for the period.
Developments in 2003
The 2003 impairment review of the debt securities in our investment portfolio produced an impairment of EUR 141 million, of which EUR 135 million is related to our portfolio in the United States.
| EUR 51 million on debt securities of issuers in the airline industry. The majority of our airline investments are comprised of Enhanced Equipment Trust Certificates (EETC). Since the events of September 11, 2001, the airline industry has suffered from reduced passenger volume due to a combination of security concerns and the slowdown in 2002 and gradual recovery in 2003 of the U.S. economy. Compounding the reduced volume are increased costs of enhanced security measures, increased fuel costs and relatively high cost structures. Over the past two years several carriers have sought bankruptcy protection and rejected a number of leases supporting debt structures similar to those held by ING resulting in our impairment. |
| EUR 31 million attributed to asset-backed securities. |
| EUR 11 million on debt securities of issuers in the cable and telecommunications industry. During 2003, the telecommunications industry remained under pressure due to a gradual recovery in the economy and an overcapacity of the industrys infrastructure. | |||
| EUR 11 million on debt securities of issuers in the healthcare industry. The most significant holdings that were impaired due to material accounting irregularities. |
Developments in 2002
Based on our review of the carrying value of the debt securities, we recorded impairments of EUR 583 million under Dutch GAAP, related to our portfolio of debt securities. The majority of the impairments related to our portfolio in the United States, of which the most significant items were the following:
| EUR 144 million on debt securities of issuers in the energy industry. During 2002, the energy sector continued to feel the fallout of Enron, accounting irregularities and over-capacity due to a slowdown in the economy. Our assessment indicated that the debt securities of several issuers were impaired. The most significant holdings that were impaired related to NRG Energy (EUR 29 million). |
| EUR 193 million on debt securities of issuers in the cable and telecommunications industry. During 2002, the telecommunications industry was under considerable pressure due to questions about industry practices and over-capacity and due to a slowdown in the economy and over-building of the industrys infrastructure. The most significant holdings that were impaired related to Worldcom (EUR 63 million). |
Impairment of debt securities under US GAAP
Under US GAAP impairments are determined similar to Dutch GAAP. In the case of impairment, the related unrealized loss (included in the revaluation reserve) is recorded through the profit and loss account. Under U.S. GAAP impairments may not be reversed in future periods. Impairments are treated as a reduction of cost price and are reversed upon sale of the asset. This difference has not resulted in any differences between the cost price of securities under Dutch GAAP and US GAAP in 2002 or 2003, as no impairments were reversed under Dutch GAAP.
The most significant item is the EUR 285 million (2002: EUR 154 million) impairment on asset-backed securities, collateralized debt obligations, mortgage-backed and mortgage-backed derivative
78
securities was recorded based on EITF 99-20 requirements related to market values being below carrying value and adverse changes in cash flows.
Impairment of equity securities under Dutch GAAP
Under Dutch GAAP, distinction is made between unrealized losses due to general market fluctuations and unrealized losses due to issuer-specific developments. Unrealized losses due to temporary fluctuations in equity markets do not lead to impairment. The impairment review focuses on issuer specific developments regarding financial condition and future prospects, taking into account the intent and ability to hold the securities under the ING Groups long term investment strategy. Issuer specific developments may include significant financial difficulty of the issuer, a high probability of bankruptcy or other financial reorganization of the issuer and the disappearance of an active market for that financial asset due to financial difficulties. If, in a subsequent period, the recoverable amount increases and the increase can be objectively related to an event occurring after the impairment was recognized in income, the loss should be reversed, with the reversal included in net result for the period.
Developments in 2003
Of the EUR 1,324 million unrealized losses on equity securities under Dutch GAAP that were in an unrealized loss position for more than six months as of December 31, 2003, EUR 887 million related to the equity security portfolio of our insurance operations in The Netherlands. The unrealized losses are concentrated in the nutrition industry (EUR 174 million), chemical industry (EUR 104 million), IT services (EUR 76 million), retail-wholesale (EUR 64 million), general industrials (EUR 57 million) and financials (EUR 25 million).
In 2003, ING Group recognized impairments of EUR 55 million under Dutch GAAP, consisting of several minor impairments, concentrated in the general industrials (EUR 16 million) and IT services (EUR 8 million).
Developments in 2002
Of the EUR 2,103 million of unrealized losses on equity securities under Dutch
GAAP that were in an unrealized loss position for more than six months as of
December 31, 2002, EUR 1,478 million related to the equity security portfolio
of our insurance operations in the Netherlands.
The most significant categories
of unrealized losses related to the nutrition industry (EUR 424 million),
retail-wholesale (EUR 310 million), chemical industry (EUR 204 million), IT
services (EUR 143 million) and temporary labor industry (EUR 108 million).
The impairment review process has resulted in EUR 292 million impairment charges on a Dutch GAAP basis, mainly relating to the investment portfolio of our insurance operations in The Netherlands, concentrated in the following industries:
| Communications |
The share prices of telecommunications companies were under considerable pressure in 2002 (see also comment on debt securities) which produced an impairment of EUR 139 million as under the long term investment strategy, ING Group did not have the intent to hold these securities.
| Retail-wholesale |
ING Groups shareholding in Laurus, a large food retail company in The Netherlands, produced an impairment of EUR 69 million in 2002. Concerns about the continuity of Laurus if the company would not be able to attract new funding dragged the share price of Laurus down to EUR 1.50 at the time of the impairment.
Impairment of equity securities under US GAAP
Under US GAAP, based on strict SEC interpretations, additional impairments are recognized for other than temporary unrealized losses on top of the impairments already recognized under Dutch GAAP.
An additional impairment may be recognized under US GAAP after giving additional consideration to the extent to which the fair value is below the cost price and the period of time for which unrealized
79
losses have existed. Under US GAAP, impairments may not be reversed in future periods. Impairments are treated as a reduction of cost price and are only reversed upon sale of the asset. This difference has not resulted in any differences between the cost price of securities under Dutch GAAP and US GAAP in 2002 as no impairments were reversed under Dutch GAAP.
Developments in 2003
In 2003, under US GAAP, impairments of equity securities were EUR 335 million lower, as the adjustment for realized losses (either sold or impaired) under Dutch GAAP, which were already recognized under US GAAP in prior years, exceeds the additional impairment on a US GAAP basis.
In 2003, we recorded an impairment of EUR 215 million related to other than temporary losses on a US GAAP basis, concentrated in the temporary labor industry (EUR 62 million), IT services (EUR 54 million), nutrition industry (EUR 40 million) and retail-wholesale (EUR 11 million).
Developments in 2002
Under US GAAP, impairments of equity securities are EUR 1,085 million higher as set out in Note 6.1.e on page F-103. We recorded an impairment of EUR 1,532 million related to other than temporary losses on a US GAAP basis. The reconciling item relates to the impairment on a U.S. GAAP basis, adjusted for equity securities for which under US GAAP an impairment was recognised in 2001 and on which under Dutch GAAP a realized loss was recorded in 2002 (either sold or impaired under Dutch GAAP).
Of the impairment of EUR 1,532 million related to our portfolio of equity securities, the majority related to the portfolio of our insurance operations in The Netherlands. The impairments were concentrated in the nutrition industry (EUR 330 million), retail-wholesale (EUR 310 million), chemical industry (EUR 204 million), IT services (EUR 84), financials (EUR 38 million) and temporary labor industry (EUR 21 million).
Impact on future earnings
Although all individual securities were reviewed to ensure that no material impairments or other than temporary losses were required to be charged to the profit and loss account in 2003, the identification of impairment and other then temporary losses and the determination of the recoverable amount are an inherently uncertain process involving various assumptions and factors, including the financial condition of the counterparty, expected future cash flows, observable market prices and expected net selling prices. Further developments after December 31, 2003 may indicate that certain unrealized losses that existed as of December 31, 2003 will need to be considered other than temporary, resulting in a negative impact on our profit and loss account.
Goodwill
In 2002, a significant difference existed between the result pursuant to Dutch GAAP, which was a profit of EUR 4,500 million, and the net loss of EUR 9,627 million pursuant to US accounting principles. This difference was primarily the result of the adoption of new goodwill requirements under US GAAP.
As of January 1, 2002 goodwill is no longer amortized but tested for impairment if any events or a change in circumstances indicate that impairment may have taken place, or at a minimum on an annual basis. See Note 7.12, Business Combinations for additional information on the accounting treatment of goodwill under US GAAP.
Under Dutch GAAP, goodwill paid on acquisitions is directly charged to shareholders equity at the time of an acquisition. This difference between Dutch and US accounting principles is explained in Note 6.1 to the financial statements.
Transitional goodwill impairment test 2002
ING Group adopted SFAS 142 as of January 1, 2002 and performed the required assessment of whether there was any indication that goodwill was impaired as of the date of adoption. As a result,
80
certain goodwill was impaired and ING Group recognized a transitional goodwill impairment charge of EUR 13.103 billion in the 2002 profit and loss account for the cumulative effects of changes in accounting principles as required by SFAS 142.
The transitional goodwill impairment charge related to the following reporting units:
2002 | ||||
Reporting unit |
||||
US |
8,077 | |||
Latin America |
2,836 | |||
Sub-total EC Americas |
10,913 | |||
Germany |
977 | |||
UK |
191 | |||
Sub-total EC Europe |
1,168 | |||
Greater China |
1,022 | |||
Sub-total EC Asia/Pacific |
1,022 | |||
Total transitional goodwill impairment charge |
13,103 | |||
In performing the transitional goodwill impairment test ING Group determined the fair value of the reporting units using valuation techniques consistent with market appraisals for insurance companies and banks. The fair value of our insurance operations, including the reporting units US, Latin America and Greater China, was determined using a discounted cash flow model, discounting the future earnings arising on the books at December 31, 2001, requiring assumptions as to a discount rate and expectations with respect to future growth rates.
Goodwill allocated to the reporting units US, Latin America and Greater China mainly relates to the goodwill paid on the acquisition of ReliaStar Financial Corp., Aetna Financial Services and Aetna International in 2000. ING Group acquired these companies in 2000 at the height of the acquisition market. At the time of the acquisition, similar models were used to estimate the fair value of these entities, using then prevailing assumptions. These assumptions were significantly affected by the ongoing weakness in the overall economic conditions. In 2001, market and business conditions deteriorated compared to 2000, which has adversely affected the assumptions used at the time of acquisition and as a result, adversely affected the fair value of the reporting units. Future earnings were discounted at the risk free rate, adjusted for the basic risk premium that differs per country, which depends on the size of the business, immature market conditions and economic and political conditions. Discount rates used in the transitional goodwill impairment test are 11% for US, 12.5% to 16% for Latin America and 13.5% for Greater China.
The fair value of our banking operations, including the reporting units Germany and UK, was determined with a price/earnings multiple model, in which the 2002 forecasted profit was multiplied by the current price/earnings multiple for similar acquisitions. Goodwill allocated to these reporting units relates mainly to the acquisition of BHF-BANK A.G. in 1998. Since then, the price/earnings multiple for similar acquisitions has decreased significantly given the overall weakness in the economy set out above, which has adversely affected the fair value of the reporting unit.
Annual goodwill impairment tests
The 2002 annual goodwill impairment test did not result in any impairment charges. In 2003, the annual goodwill impairment test was performed in the fourth quarter for all reporting units. With the exception of reporting unit Latin America discussed below, there is no indication that goodwill was impaired as of December 31, 2003.
Goodwill for reporting unit Latin America was almost fully impaired in the 2002 transitional goodwill impairment test. Remaining goodwill for reporting unit Latin America was EUR 461 million, of which
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EUR 439 million related to the 49% interest in Sul América, accounted for under the equity method in the Dutch GAAP annual accounts. Goodwill allocated to equity method investments is not tested for impairment in accordance with SFAS 142 but under APB 18, which requires that a other than temporary decline in value of an equity method investments is recognized in the profit and loss account.
As of December 31, 2003 the fair value, estimated using a discounted
cash flow model was below carrying value. Since the acquisition in 2002, the
local economic environment and business conditions deteriorated, leading to
higher interest rates and devaluation of the Real. The decline in fair value is
viewed as other than temporary and ING Group has recognized an impairment
charge of EUR 101 million for US GAAP purposes.
This impairment charge had no
impact on net income under Dutch GAAP since goodwill has not been capitalized
but charged to equity immediately at the time of the acquisition.
The following discussions are based on our consolidated financial statements (see Item 18. Financial Statements) and should be read in conjunction with those statements. ING Group evaluates the results of its insurance operations and banking operations using non-GAAP financial performance measures called operating result before taxation and operating (net) profit. See page 69, Consolidated Results of Operations.
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INSURANCE OPERATIONS
The following table sets forth selected financial information for the Groups consolidated insurance operations for the years ended December 31, 2003, 2002 and 2001:
Year ended December 31, | ||||||||||||
2003 | 2002 | 2001 | ||||||||||
(EUR millions) | ||||||||||||
Income from insurance operations: |
||||||||||||
Gross premiums written: |
||||||||||||
Life |
38,231 | 44,367 | 44,557 | |||||||||
Non-life |
7,288 | 7,917 | 5,903 | |||||||||
Total |
45,519 | 52,284 | 50,460 | |||||||||
Income from investments |
9,721 | 10,506 | 9,723 | |||||||||
Commissions and other income |
2,320 | 2,127 | 2,281 | |||||||||
Total (1) |
57,560 | 64,917 | 62,464 | |||||||||
Net premiums written: |
||||||||||||
Life |
37,129 | 43,274 | 43,157 | |||||||||
Non-life |
6,358 | 6,642 | 5,288 | |||||||||
Total |
43,487 | 49,916 | 48,445 | |||||||||
Operating profit before tax from insurance activities: |
||||||||||||
Life |
2,478 | 2,603 | 2,285 | |||||||||
Non-life |
1,008 | 567 | 507 | |||||||||
Total |
3,486 | 3,170 | 2,792 | |||||||||
Taxation |
861 | 540 | 622 | |||||||||
Third party interests |
117 | 92 | 73 | |||||||||
Operating net profit |
2,508 | 2,538 | 2,097 | |||||||||
(1) | Under US GAAP total operating income 2003 was EUR 36,676 million (2002 EUR 36,991 million, 2001: EUR 37,280 million). The difference with Dutch GAAP mainly relates to contracts that do not expose the Company to significant mortality or morbidity risks. (See note 6.4.k to the Consolidated Financial Statements). |
The following table sets forth the breakdown of gross premiums written and profits before tax by geographic area for the Groups consolidated insurance operations for each of the years indicated. The relationship between gross premiums written and profits before tax varies significantly between geographic areas and from year to year, based upon a variety of factors, including differences in regulatory requirements, product mixes and levels of competition in different countries, as well as our capital allocation and internal funding policies.
Gross premiums written | Profit before tax | |||||||||||||||||||||||
2003 | 2002 | 2001 | 2003 | 2002 | 2001 | |||||||||||||||||||
(EUR millions) | (EUR millions) | |||||||||||||||||||||||
The Netherlands |
7,429 | 6,786 | 7,164 | 1,471 | 1,391 | 1,539 | ||||||||||||||||||
Belgium |
2,568 | 2,335 | 1,878 | 109 | 74 | 75 | ||||||||||||||||||
Rest of Europe |
1,404 | 1,618 | 1,657 | 230 | 155 | 176 | ||||||||||||||||||
North America |
24,314 | 30,699 | 30,707 | 802 | 820 | 652 | ||||||||||||||||||
Latin America |
2,338 | 3,293 | 2,300 | 292 | 307 | 174 | ||||||||||||||||||
Asia |
5,950 | 6,035 | 4,782 | 280 | 245 | 226 | ||||||||||||||||||
Australia |
1,644 | 1,763 | 2,029 | 176 | 329 | 80 | ||||||||||||||||||
Other |
342 | 388 | 216 | 126 | (151 | ) | (130 | ) | ||||||||||||||||
Premiums between geographic areas (1) |
(470 | ) | (633 | ) | (273 | ) | | | | |||||||||||||||
Total |
45,519 | 52,284 | 50,460 | 3,486 | 3,170 | 2,792 | ||||||||||||||||||
(1) | Represents reinsurance premiums ceded between Group companies in different geographic areas. |
83
Year ended December 31, 2003 compared to year ended December 31, 2002.
On a consolidated basis, the Groups insurance operations contributed EUR 3,486 million and EUR 3,170 million to the Groups profits before tax in 2003 and 2002, respectively, and EUR 2,508 million and EUR 2,538 million to the Groups net profits in such years. Changes in income and profit were affected by disposals in 2003 (i.e. Seguros Bital, Sviluppo), the joint venture with ANZ (one of Australias major banks) which we entered into in 2002, and by a few smaller acquisitions and divestitures.
Total income
Total income from insurance operations in 2003 decreased by EUR 7,357 million,
or 11.3%, to EUR 57,560 million, from EUR 64,917 million in 2002. The decrease
was fully caused by exchange rate movements, as the euro strengthened against
most other currencies. Gross premiums decreased by EUR 6,765 million mainly due
to currency effects. However, gross premiums in the Netherlands and Belgium
increased by 9.5% and 10.0% respectively. Investment income decreased by 7.5%
over 2002 levels due to currency effects, and the operating part of the ANZ
gain in 2002; however, realized capital gains on real estate were higher than
in 2002. Despite the currency effect, commissions and other income increased by
EUR 193 million, or 9.1%, amongst others due to a gain from, primarily
discontinued reinsurance activities (EUR 303 million) and the release of a
catastrophe provision (EUR 88 million), both in 2003, which was, in part,
offset by the profit on the surrender of a group life contract (EUR 120
million) in 2002.
The total impact of exchange rate movements amounted to EUR (7,735) million.
Acquisitions and divestitures decreased total income by EUR 263 million. The
organic growth of total income, disregarding the influence of acquisitions,
divestitures and exchange rate movements, was EUR 642 million or 1.2%,
reflecting on balance flat gross premiums (Life (0.8%) and Non-life 4.2%) and
5.7% higher investment income, commissions and other income.
Profit before tax
The profit before tax from the Groups insurance activities increased in 2003 by EUR 316 million, or 10.0%, to EUR 3,486 million, from EUR 3,170 million in 2002, reflecting a decrease in life operations of 4.8% and a growth in non-life operations of 77.8%. The influence of exchange rate movements decreased the profit before tax by EUR 220 million, mainly due to the depreciation of most currencies against the euro, offset in part by EUR 98 million higher hedge profits. Higher profits were generated especially in the Netherlands, Belgium, rest of Europe, Asia and Other regions while North America, Latin America and Australia showed lower profits compared with 2002.
Operating expenses for 2003 decreased by 5.9% over 2002, as personnel expenses decreased by 1.0% and other operating expenses decreased by 11.4%. Excluding exchange rate differences and acquisitions and divestments, total operating expenses increased organically by 6.5%, mainly because of higher pension costs, additional expenses with regard to the improvement of the service levels of the Dutch operations, implementation costs of shared service centres, reorganization costs in the US and Poland and increased claim handling expenses in some business units. In addition, a strong expense growth in Canada and Korea.
The difference between the (adjusted) premium and (adjusted) expense growth of the life and non-life operations, excluding Australia (due to the influence of the ANZ joint venture), was (7.8) percentage points compared to 16.1% in 2002. The deterioration primarily reflects much higher expenses in the Netherlands and lower fixed annuities sales and higher expenses in North America.
Taxation
The overall effective tax rate in 2003 for the Groups insurance operations was 24.7%, compared to a 17.0% rate in 2002. The tax rate increase was mainly caused by the release of a tax provision in 2002 and lower tax-exempt gains in 2003.
Operating net profit
Operating net profit for the Groups insurance operations in 2003 amounted to EUR 2,508 million, a decrease of EUR 30 million, or 1.2% compared with 2002.
84
Embedded value of life operations
At the end of 2003, the total embedded value of INGs life insurance operations was EUR 21.7 billion compared to EUR 23.3 billion at year-end 2002. The primary reasons for the decline in embedded value are the lower assumed investment return especially in the Netherlands and Asia/Pacific and the impact of the strengthening of the euro. The value of new business written decreased from EUR 519 million in 2002 to EUR 440 million in 2003. This decrease reflects lower sales and lower returns on investment. During 2003 ING invested EUR 1,479 million to write new life insurance business. The overall rate of return expected on this investment is 10.9%. This compares to an overall return of 11.5% in 2002. The expected rate of return in developing markets is 15.3%.
Year ended December 31, 2002 compared to year ended December 31, 2001.
On a consolidated basis, the Groups insurance operations contributed EUR 3,170 million and EUR 2,792 million to the Groups profits before tax in 2002 and 2001, respectively, and EUR 2,538 million and EUR 2,097 million to the Groups net profits in such years. Changes in income and profit were affected by the increased shareholding in Seguros Comercial América (SCA) in Mexico from 41.5% in June 2001 to almost 100% at the end of 2001, the joint venture with ANZ (one of Australias major banks) and by a few smaller acquisitions and divestments. The profit of SCA for the first six months of 2001 has been consolidated on equity accounting basis; since July 1, 2001 SCA has been fully consolidated. In 2002 the name of SCA was changed to ING Comercial América (ICA). The operating part of the profit relating to the formation of the joint venture life and mutual fund operations in Australia with ANZ amounted to EUR 222 million and is included in investment income. The remaining EUR 247 million has been reported as non-operating net profit
Total income
Total income from insurance operations in 2002 increased by EUR 2,453 million, or 3.9%, to EUR 64,917 million, from EUR 62,464 million in 2001, mainly reflecting the increased shareholding in ICA. Gross premiums increased by EUR 1,824 million of which EUR 1,509 million was due to the increased shareholding in ICA in Mexico. Asia and Belgium were also higher but the Netherlands, Rest of Europe, South America and Australia showed a decrease in gross premiums written. Investment income increased by 8.1% over 2001 levels (higher realized capital gains on real estate and the operational part of the ANZ gain were partly offset by higher default losses) and commissions and other income decreased by EUR 154 million, or 6.8%, amongst others due to depressed stock markets and lower assets under management.
The total impact of exchange rate movements amounted to EUR (2,533) million. Acquisitions and divestitures and the impact of ANZ Australia increased total income by EUR 1,522 million. The organic growth of total income, disregarding the influence of acquisitions, divestitures, ANZ Australia and exchange rate movements, was EUR 3,464 million or 6.1%, reflecting increases in gross premiums (Life and Non-life) of 6.1% and increases in investment income, commissions and other income of 6.4%.
Profit before tax
The profit before tax from the Groups insurance activities increased in 2002 by EUR 378 million, or 13.5%, to EUR 3,170 million, from EUR 2,792 million in 2001, reflecting growth in life operations of 13.9% and non-life operations of 11.8%. The influence of exchange rate movements decreased the profit before taxation by EUR 62 million, mainly due to the depreciation of the US dollar versus the euro. However, this effect was fully offset by a EUR 63 million higher (USD and CAD) hedge profit. Higher profits were generated especially in North America, Latin America, Asia and Australia but the Netherlands, Belgium, rest of Europe and Other region showed lower profits compared with 2001.
Operating expenses for 2002 decreased by 6.8% over 2001. Operating expenses consist of personnel expenses, which grew by 1.2%, and other operating expenses, which decreased by 14.5%; claims handling expenses are now included in other operating expenses and rose from EUR 205 million in 2001 to EUR 391 million in 2002. The overall decline in operating expenses was mainly driven by the significant expenses reductions in the United States in 2002 and the restructuring charge relating to the integration of the Aetna/ReliaStar acquisitions in 2001.
The positive difference between the (adjusted) premium and (adjusted) expense growth of the life and non-life operations, excluding Australia (due to the influence of the ANZ joint venture), was 16.1
85
percentage points compared to 2.8% in 2001. The improvement primarily reflects increased fixed annuity sales in the United States and successful expense reduction.
Taxation |
The overall effective tax rate in 2002 for the Groups insurance operations was 17.0%, compared to a 22.3% rate in 2001. Apart from the release of a tax provision, the decrease stems from the tax-exempt gain on the formation of the joint venture with ANZ and from the tax-exempt release of contingent provisions in the United States. Tax free dividends on 5% interests decreased.
Operating net profit |
Operating net profit for the Groups insurance operations in 2002 amounted to EUR 2,538 million, an increase of EUR 441 million, or 21.0% compared with 2001.
Embedded value of life operations |
At the end of 2002, the total embedded value of INGs life insurance operations was EUR 23.3 billion compared to EUR 25.8 billion at year-end 2001. The primary reasons for the decline in embedded value relate to the poor economic environment, e.g. negative equity returns and low investment yields. The value of new business written in 2002 was EUR 519 million, a substantial increase over the 2001 level of EUR 336 million. During 2002 ING invested EUR 1,862 million to write new life insurance business. The overall rate of return expected on this investment is 11.5%. This compares to an overall return of 11.2% in 2001. The expected rate of return in developing markets is 15.0%.
Life insurance operations
The following table sets forth certain summarized financial information for the Groups life insurance operations for the years indicated.
Year ended December 31, | ||||||||||||
2003 | 2002 | 2001 | ||||||||||
(EUR millions) | ||||||||||||
Gross premiums |
38,231 | 44,367 | 44,557 | |||||||||
Net premiums (1) |
37,129 | 43,274 | 43,157 | |||||||||
Income from investments |
8,285 | 8,289 | 8,330 | |||||||||
Other income |
94 | 223 | 155 | |||||||||
Total income |
45,508 | 51,786 | 51,642 | |||||||||
Life policy benefits paid or provided for |
39,236 | 44,804 | 44,513 | |||||||||
Operating expenses |
2,459 | 2,601 | 3,159 | |||||||||
Acquisition costs and other expenses |
1,335 | 1,778 | 1,685 | |||||||||
Total expenses |
43,030 | 49,183 | 49,357 | |||||||||
Profit before taxation |
2,478 | 2,603 | 2,285 | |||||||||
(1) | Net of reinsurance premiums ceded of EUR 1,102 million, EUR 1,093 million and EUR 1,400 million, in 2003, 2002 and 2001 respectively. |
86
The following table sets forth the Groups gross life premiums by geographic area and type of product for the years indicated.
Year ended December 31, | ||||||||||||
2003 | 2002 | 2001 | ||||||||||
(EUR millions) | ||||||||||||
The Netherlands |
||||||||||||
Individual |
||||||||||||
Single premium |
1,788 | 1,517 | 1,678 | |||||||||
Periodic premium |
1,561 | 1,584 | 1,598 | |||||||||
Total |
3,349 | 3,101 | 3,276 | |||||||||
Group |
||||||||||||
Single premium |
904 | 675 | 989 | |||||||||
Periodic premium |
1,314 | 1,125 | 1,057 | |||||||||
Total |
2,218 | 1,800 | 2,046 | |||||||||
Reinsurance assumed |
15 | 26 | 31 | |||||||||
Total |
5,582 | 4,927 | 5,353 | |||||||||
Belgium |
||||||||||||
Individual |
||||||||||||
Single premium |
1,888 | 1,696 | 1,293 | |||||||||
Periodic premium |
193 | 190 | 174 | |||||||||
Total |
2,081 | 1,886 | 1,467 | |||||||||
Group |
||||||||||||
Single premium |
51 | 49 | 55 | |||||||||
Periodic premium |
124 | 117 | 103 | |||||||||
Total |
175 | 166 | 158 | |||||||||
Reinsurance assumed |
1 | 1 | ||||||||||
Total |
2,257 | 2,053 | 1,625 | |||||||||
Rest of Europe |
||||||||||||
Individual |
||||||||||||
Single premium |
85 | 240 | 164 | |||||||||
Periodic premium |
1,185 | 1,108 | 1,024 | |||||||||
Total |
1,270 | 1,348 | 1,188 | |||||||||
Group |
||||||||||||
Single premium |
49 | 177 | 311 | |||||||||
Periodic premium |
41 | 54 | 37 | |||||||||
Total |
90 | 231 | 348 | |||||||||
Reinsurance assumed |
1 | 87 | ||||||||||
Total |
1,360 | 1,580 | 1,623 | |||||||||
North America |
||||||||||||
Individual |
||||||||||||
Single premium |
597 | 4,025 | 4,436 | |||||||||
Periodic premium |
8,188 | 8,727 | 7,906 | |||||||||
Total |
8,785 | 12,752 | 12,342 | |||||||||
Group
|
||||||||||||
Single premium |
1,615 | 5,468 | 7,861 | |||||||||
Periodic premium |
9,672 | 8,142 | 7,123 | |||||||||
Total |
11,287 | 13,610 | 14,984 | |||||||||
Reinsurance assumed |
1,298 | 1,268 | 1,391 | |||||||||
Total |
21,370 | 27,630 | 28,717 |
87
Year ended December 31, | ||||||||||||
2003 | 2002 | 2001 | ||||||||||
(EUR millions) | ||||||||||||
Latin America |
||||||||||||
Individual |
||||||||||||
Single premium |
121 | 233 | 300 | |||||||||
Periodic premium |
140 | 166 | 211 | |||||||||
Total |
261 | 399 | 511 | |||||||||
Group |
||||||||||||
Single premium |
122 | 172 | 85 | |||||||||
Periodic premium |
83 | 176 | 143 | |||||||||
Total |
205 | 348 | 228 | |||||||||
Reinsurance assumed |
||||||||||||
Total |
466 | 747 | 739 | |||||||||
Asia |
||||||||||||
Individual |
||||||||||||
Single premium |
987 | 1,180 | 90 | |||||||||
Periodic premium |
4,819 | 4,679 | 4,499 | |||||||||
Total |
5,806 | 5,859 | 4,589 | |||||||||
Group |
||||||||||||
Single premium |
1 | 1 | 3 | |||||||||
Periodic premium |
98 | 109 | 125 | |||||||||
Total |
99 | 110 | 128 | |||||||||
Reinsurance assumed |
1 | |||||||||||
Total |
5,905 | 5,969 | 4,718 | |||||||||
Australia |
||||||||||||
Individual |