ING Direct 2008 Annual Report Download - page 16

ING Group Annual Report 2008
1.2 Report of the Executive Board
14
Financial Highlights (continued)
Across the organisation, cost-cutting initiatives have been
implemented to adapt to the negative economic climate,
amounting to a targeted overall cost reduction of EUR 1 billion
in 2009.
Divestments and special items
Divestments resulted in a gain after tax of EUR 7 million in 2008
compared with a gain of EUR 407 million in 2007. The impact from
operations of divested units on total net result was EUR -50 million,
versus EUR -4 million a year earlier. Special items in 2008 of
EUR -515 million after tax were related to integration costs (mainly
CitiStreet), the loss for the nationalisation of the pension business
and provisioning for annuities in Argentina, the combination
of ING Bank and Postbank in the Netherlands, the costs for the
cancelled launch of ING Direct Japan, and the provisioning for
the unwinding of the joint venture with Postkantoren BV in the
Netherlands. The impact from divestments and special items is
excluded in the underlying result.
Measures to strengthen capital and reduce risk
ING has taken several measures to strengthen the company.
In October 2008, ING Group received a capital support
facility, issuing core Tier-1 securities to the Dutch State for the
consideration of EUR 10 billion. The facility significantly enhanced
the capital position of ING Group (for more information, please
refer to the Capital Management section).
In addition to the capital support facility provided by the Dutch
State in 2008, ING received an Illiquid Assets Back-up Facility for
80% of our portfolio of Alt-A residential mortgage-backed
securities (RMBS) in early 2009. This transaction will result in the
reversal of 80% of the negative revaluation reserve held against
the shareholders’ equity in relation to the Alt-A RMBS portfolio.
As a result, ING Group’s shareholders’ equity will increase by
EUR 4.6 billion. In addition, risk-weighted assets will decline by
approximately EUR 13 billion, subject to discussions with
regulators, increasing ING Bank’s Tier-1 ratio by 37 basis points
to 9.7%, on a pro-forma basis. ING aims to close this transaction
in the first quarter of 2009, but is dependent on the approval of
various regulators.
The sale of the Taiwan life business substantially reduced our
economic capital requirements, releasing EUR 5.7 billion in
economic capital. The sale of the Canadian property and casualty
business will further reduce leverage in the insurance business, and
resulted in gross proceeds of CAD 2.2 billion (EUR 1.35 billion).
At year-end, all key capital and leverage ratios were within market
norms. The debt/equity ratio of ING Group was 13.5%, while the
debt/equity ratio of Insurance ended the year at 8.8%. The Tier-1
ratio of ING Bank under Basel II stood at 9.32%. The solvency ratio
(BIS ratio for the bank) under Basel II was 12.78%. ING Group’s
Available Financial Resources (AFR) at year-end 2008 was EUR 42.1
billion, compared to economic capital of EUR 30.7 billion after
diversification, resulting in an AFR/EC Group ratio of 137%.
One of ING’s top priorities is to further reduce asset exposures
and rationalise the cost base. We aim to shrink the balance sheet
of ING Bank by 10% compared with the end of September 2008,
while continuing to lend to key customers in our home markets.
Also, we are reallocating investments towards less risky assets.
Dividend
ING Group has announced that it will not pay a final dividend in
May 2009, leaving the total dividend over the year 2008 at
EUR 0.74 per share, which was paid as an interim dividend in
August 2008. The first short coupon on the core Tier-1 securities
will be paid to the Dutch State in May 2009, pending approval
from DNB (the Dutch central bank). Given the intensity of the crisis,
it is difficult to foresee whether ING Group will be in a position to
pay a dividend in 2009. The payment of dividends is in relation
to underlying cash earnings. In case a dividend is paid, the coupon
on the Securities is also payable, subject to approval of DNB
(the Dutch Central Bank).
INSURANCE OPERATIONS
Total result before tax from Insurance operations fell by EUR 8,168
million to a loss of EUR 1,635 million in 2008 from a profit of
EUR 6,533 million in 2007. The underlying result before tax
(excluding the impact of divestments and special items) decreased
to a loss of EUR 1,235 million in 2008 from a profit of EUR 6,113
million in 2007. The sharp decline in results was mainly due to the
deterioration of the financial markets in the second half of 2008,
as well as EUR 2,087 million of gains on the sale of ING’s stakes in
ABN AMRO and Numico in 2007.
Underlying result from life insurance fell to a loss of EUR 1,744
million from a profit of EUR 4,831 million last year. Investment
income was negatively impacted by capital losses and impairments
on equity and debt securities, as well as negative fair value changes
on real estate and private equity investments. Furthermore, the
result was negatively impacted by DAC unlocking in the US as well
as losses on the SPVA business in Japan due to hedge losses.
Underlying result before tax from non-life insurance declined
60.3% to EUR 509 million from EUR 1,282 million last year, due
primarily to capital losses and impairments on equities, as well as
unfavourable underwriting results in Canada.
Underlying gross premium income from life insurance decreased
3.7%, but was up 3.3% excluding ING Life Taiwan and currency
impact, to EUR 38,748 million, mainly driven by the US, Australia,
and most countries in Asia. Underlying gross premium income
from non-life insurance decreased 8.1%, or 4.1% excluding
currency impact, to EUR 4,402 million, largely caused by the sale
of the health business in Chile.
Underlying operating expenses from the Insurance operations
decreased 0.6%, but were up 0.7% excluding ING Life Taiwan to
EUR 5,188 million as cost containment helped to offset most of
the investments to support growth of the business in Asia/Pacific
and Central Europe. Furthermore, the 2007 operating expenses
contained a EUR 89 million one-off net release of employee
benefits provisions in the Netherlands.