ING Groep NV (ING) 2003 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the ING First Six Months Results 2003 conference call on Friday, the 15th of August 2003. Throughout today's presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. If any participant has difficulty hearing the conference, please press the star key, followed by zero on your touch-tone for operator assistance.

I would now like to turn the conference over to Mr. Cees Moss. Please go ahead, sir.

Actually, Cees, why don't I do my small introduction?

Yes, that's fine (inaudible).

This is a holding - this is a holding for ING, welcoming you to ING's conference call on their figures for the first six month of 2003. Before turning it over to Cees Moss, CFO and Executive Board Member in Amsterdam and Bob Crispin, Chairman and CEO of ING Investment Management Americas, let me first say that any forward-looking statements in today's comments are subject to a number variables, including interest rates, foreign exchange rates, inflation rates, movements in securities markets including equity markets and underlying economic health and changes. The realization of forward-looking statements could be materially altered by unexpected movements in any or all over these and other variables.

With that said, good morning, Cees and Bob.

Good morning, Bill.

Well, ladies and gentlemen, good morning, good afternoon wherever you are in the world. Welcome indeed on behalf of myself and behalf of - on behalf Bob Crispin who's in - who's in Atlanta who joins the conference call. Welcome to all of you.

I would like to start, as usual, with a very short and brief introduction for a couple of minutes, to highlight the results of the first half year, especially the first - the second quarter. And then I will be happy, myself and Bob, to answer all the questions you have.

Let me start by saying that we, the Executive Board, is pleased with the good performance in the first half year, and of course, in the - in the second quarter of the ING as a whole. And of course, as you know, this group performance was supported by a strong stock market performance in the second quarter, and by strong and stringent cost control throughout the group.

On top of that, we successfully - that the measures that we took to strengthen our capital gains was most successfully. The ING Bank tier one ratio went up at 7.47. The ING Insurance capital ended at 171 percent of EEU regulatory required capital, and year-to-date yesterday it's figure was 174 percent.

We were able to reduce the leverage, the ING Group leverage, down to 18.2 percent. Debt equity ratio, we were able to reduce the debt equity ratio on earnings insurance and (inaudible) level to 23.3 percent, down from high numbers end of last year first quarter. But were once above 25 percent, as you know. So we successfully strengthened the capital base and the capital ratios of ING Group, ING Bank, and ING Insurance and (inaudible).

Whether we take the individual operations, of course the most striking (ph) thing is the growth in our banking operations, they increased their operating most (inaudible) increased by 15 percent to 803 million euros. And, of course, the first (inaudible) is to see is that ING Direct (ph) have a strong increase in it's performance the first six months ING estimated (inaudible) of 31 million euros, up from 73 million negative or loss in the first half year of 2002. So there was a swing in earnings of more than 100 million euros.

The result from the bank were of course supported by further improvement in the interest rat result. But also by low (ph) loan loss provisions. The loan loss provisions were down in the first half of the year to 51 basis points of first quarter assets. And as you know, I said in the previous conference call that I expected to end up at around 50 percent - 50 basis points of credits this (inaudible) assets. The recent downward trend is first (inaudible) the loan loss provisions were still 54 basis points and if you make the calculations right, you can see that in the second quarter, this basically a 40-year (ph) basis (ph) per loan loss provisions. So the downward trend is there. But for the time being, I think I feel comfortable in saying that I still expect to (inaudible) that at a level mid-higher (ph) than 50 basis points of our credit risk (inaudible).

On the (inaudible) side, operating profitably by two percent to 1.264 billion. Organically, not taking into account, the currency effect increase was one (ph) percent up. So, of course, we were hit by the depreciation of the U.S. dollars and (inaudible) organically (inaudible) one (ph) percent. That increase was probably supported also by substantial lower losses in our investment - some investment losses impairment (ph) losses. The impairment losses over the ING Group were down to 20 basis points and the United States went down to 39 basis points (inaudible) substantially lower, of course, as you know, than the previous year.

The negative re-evaluation reserve is worth mentioning. On the 24th of March, we still had a negative re-evaluation reserve on our - on our stock portfolio, stock investments, of more than 700 million. And on the 30th of June, we supposed (ph) reduce to almost (inaudible) and minus 24 million. And I can tell you that as of yesterday, we had a positive re-evaluation for ING Group consolidated of about plus 250 million euro. So that problem has been solved as well for the (inaudible) has been solved.

Then finally, at the (inaudible) deduction, of course we are faced with a few challenges, also. Lower life reserves in the Netherlands in the first - in the first quarter partly due of some measures we've taken in (inaudible) which came from the top of the base and we (inaudible). We are in the process of reducing our real restate portfolio, which (inaudible) from the capital base of ING (inaudible) United States operation in the insurance business and capital (inaudible) and of course, that resulted in an even lower investment income in the Netherlands.

On top of that, it was the most dividend income and interest income anyhow around the world, and of course, in the Netherlands, also. And we have relatively low interest rate levels, especially in the Netherlands. So that has caused the Netherlands a large result to put under pressure.

More in general, we are faced (inaudible) look into the future to a low interest rate environment, in particular, in emerging markets, and that is - might be a potential cause for concern looking for the future.

That brings me then to the financial statement and that is the outlook for 2003. As you have seen in the press release, we have said that ING (inaudible) that we are optimistic that a (inaudible) developments of a (inaudible) in 2003 towards the second half of this year. However, we have decided not to give (inaudible) expectation in terms of fewer (ph) that are still at very high level of conservative in stock markets and in particular, in the interest rate environment. So therefore, the (inaudible) comfortable and especially optimistic for the remainder part of this year as far as our present outlook is concerned.

And again, there are a lot of uncertainties in the world not only, of course, on stock markets and interest rates and political uncertainties (inaudible) et cetera that has decided us to lead ourselves to a qualitative outlook.

Having said that, I would like to give the floor to you and open for any questions that you would like to ask. Thank you.

Thank you. Ladies and gentlemen, at this time we will begin the question and answer session. If you have a question, please press star, followed by one on your push button phone. If you wish to cancel your request, please press star, followed by two. Your questions will be answered in the order that they are received. If you are using speaker equipment today, please lift the handset before making your selections.

One moment, please, for the first question.

The first question comes from Mr. Matt Pickering (ph). Please state your company name, followed by your question.

Yes, it's Matt Pickering (ph) calling from (inaudible) here in Chicago. Hope things are going well.

I had two questions to start off with. The first was if you can talk a little bit about new business margins in the life business. And in particular, what you're seeing competitively and how you are reacting in handling the competitive environment from a product and a product introduction perspective. So are you rolling out anything new product wise to help support your market share, particularly in the U.S.?

And secondly, I was hoping you could comment in a little bit more detail on the reinsurance one-off gain that was recorded in the second quarter. Excuse me, I just really (inaudible) find really what that related to, whether it was, you know, write (ph) back from a policy (ph) that was in one-off or whatever. But considering I know you dramatically reduced your reinsurance activity, I just wanted to make sure I understand economically what's that all about. Thanks.

OK. I'd like to answer the question about reinsurers and our competitor (inaudible) positioning. Then Bob (ph) can say a few words on our competitive position in the United States.

First to start with the reinsurance business, yes, this is good news of provisions. In the reinsurance business, this relates to all contracts. Contracts built (ph) in (inaudible) years ago. It has to do with all - with all sorts (ph) of business. In fact, this is a matter of say (inaudible) and accounting assumptions sometimes related to the supervisor. And it's something that we don't control ourselves. We (inaudible) have to (inaudible) we have to (inaudible). We will not disclose which companies, which part of our reinsurance business it is. And that is simply because for competitive - for competitive reasons. But it is just a release of all reinsurance contracts.

So I just want to understand you ...

(inaudible)

... there was a change in assumptions that caused the release or was it just the one-off was occurring better than your original assumptions had expected?

That (inaudible) one-off and, you know how it works. I mean, if you have claims and then there was (inaudible) and then, well, I mean, the one-off - so, actually, things have to be a little bit better than we had expected. And we release part of the (inaudible), et cetera. So that is ...

OK.

... simply how it is.

OK.

and let (inaudible) on this.

We had every - by the way, we had about two years ago, we had the same sort of - a little bit of smaller, but we had the same sort of release from (inaudible) reinsurance businesses.

Then the competitive position, as you have seen, particularly in the Netherlands, for example, we - in the first half year, and you have seen (ph) (inaudible) value, which is (inaudible) in the first - in the large part of the first half year, we have not adjusted our prices. For example, particularly in the (inaudible) business. That has caused a relatively low and (inaudible) value (ph). In the meantime, we have decided to lower our pricing. Most of our competitors have not been (ph) (inaudible), which means we're losing a little bit of market share. But we have decided to give priority here to profitability instead of short-term market share.

May be (inaudible) Netherlands, it's better to vive the floor now to Bob because United States has decided to go for profitability instead (ph) of for market share in some of the products before we decided that here in the Netherlands. Bob.

OK. Thanks, Cees.

Let me talk about three (ph) (inaudible). First off, about the life insurance area, as I believe we all know, the intergration activities of the last 18 to 24 months, have brought together a number of our companies and we've been aggressively rationalizing the product portfolio, which has been roughly halves (ph) in that 18-month period of time. And here in 2003, we are almost month by month aggressively adding new products.

You may have noticed if you look at the numbers, through the first half year, our relative position, market share-wise, in life insurance has stayed fairly flat. But we expect with these new product introductions, we may well be in a position to pick up a bit.

On the fixed annuity side, to Cees' point, this is where we've been staying away from te effects of low interest rates both in terms of single premium products and the fixed bucket within the variable. Our fixed bucket within the variable is roughly 15 percent in the limbra (ph), the comparable number was close to 45 to 50. So you need to look at overall product sales and then pull out the fixed bucket piece. And our attitude here was pricing was not just attainable in this interest rate environment.

And then finally on the retirement product sector, our defined contribution business, we've grown nicely for the first half year.

Thank you very much.

OK, thank you - thank you. Next question, please.

The next question comes from Mr. Mark Despard (ph). Please state your company name, followed by your question.

Mark Despard (ph) from Deutsche Bank.

Just wondered if you could talk about your expectations with your new business margins going forward, but typically in the Netherlands where obviously they're a negative? Also, giving us some indication as to why the reported new business margins in South East Europe were down? And also, indicating to us what countries reporting expects overruns currently within those numbers and how quickly we expect these to be eroded.

And could you also confirm that when you calculate your new business margin, you do it 150 percent of the year minimum, which correlates to a single A S&P rating, in comparison to a double A rating you're really shooting for?

OK, Mark (ph), thank you.

First of all, expectations on the margins, we - first of all, as I said, we have done the repricing, which means that margins are going down but (inaudible) going down and that's how it is. And if you - if you replace (ph) them at a higher level, then earnings (ph) are going down and (inaudible) are going up. And therefore, we expect in the Netherlands (inaudible) ...

(inaudible) more stringent (inaudible) ratios and generating much better margins amongst your Dutch colleagues and yourself? What is it about you that's made these numbers so poor?

No, I haven't seen - I haven't seen (inaudible) at least not in the gross margins. We have, in Russia (ph) (inaudible) today, we have a cost problem in the sense that we are reorganizing our business. We are upgrading the quality of our business. We have a legacy problem in a sense that we have a backlog on our system, and in particular in the pension business. So that has shown that the next profitability of our business is at least for the year 2003 and that will continue in the second half of the year (inaudible) depressed because of the higher cost base because we continue to repair our backlog system. But the gross margin is no different than our - in our company than in the other companies. (inaudible)

But again, I expect that the pricing in particular the single premium, that the margin of a single premium business will go up as (inaudible) in the next - in the next half year.

And of course, the rest of the margin, we already (ph) told you about the interest rate environment here in the Netherlands. I don't expect (inaudible) a big change in the interest rate environment here nor in the short (inaudible) more in the long (inaudible) interest rates.

Southeast Europe, that is because in Belgium, there was a change in particular from the (inaudible) products, some variable products (inaudible) it's called a variable annuities business. It's a little bit different but (inaudible) products. Very sharp change from that (inaudible) to universal life. And the margins in universal life are (inaudible) than on the high margin universal life business (ph) and that's the only reason. It has nothing to do with pricing, but it's just changing in the shift of pure (ph) contributor's (ph) preferences.

Then the expense (ph) (inaudible), well that's more in reference to (inaudible) than the people starting to spend all of a sudden. If you increase your pricing and the volumes are going down, then that leads automatically to an expensive (ph) run. That is to say provided, as we do, that you allocate your expenses completely to the new production

I mean, there are some companies in the (inaudible) probably those are the peers (ph) that you referred to just a minute ago, Mark (ph), that do not allocate all their expenses to a new production. They do it pro rata, so to speak. So it's when new production's down, then they only allocate (inaudible) expenses to that lower production. We allocate all the expenses to the new production. So the new production - so the variables (ph) for new production aren't (ph) in fact (inaudible). That's (inaudible) conservative but that's the way we do it. If not, so all the business units (ph) that we have are, on the expense (ph) side - on the expenses, we lower the budget. But again, the volume is not more than automatic (inaudible) calculations (inaudible) expensive (ph) (inaudible).

As far as the 150 percent (inaudible) the regulatory requirement, I disagree with you that that's necessarily is the same as a (inaudible) weighted (ph) company. That completely depends on the composition of your balance sheet. I can tell you that the - our capital - the capital base we have and the economic capital that we calculate is very much in line, is extremely close to what Standard & Poor's calculates.

So that, as it has been said before and of course it's been (inaudible) before, that all of 160 percent 170 percent comes (inaudible) 150 percent of what Standard & Poor's is calculating. And that is not the case in our case. There is hardly a difference and - the (inaudible) might differ. For example, a billion reserves of (inaudible) deviation that we have from our capital model and the Standard & Poor's model. So I did agree with this statement. Thanks.

(inaudible)

The next question comes from Mr. Nick Holmes (ph). Please state your company name, followed by your question.

Hello, Nick Holmes (ph) from Lehman Brothers.

I wondered if you could just give us some more color on the Dutch new business, (inaudible) discussed? I'm thinking of what is the business mix between guaranteed and unit links and pension and life? And the margin problems today overall for the different product types? Or are they for particular products? You said single premium, I think,

As far as the business is concerned, in the Netherlands, the mix - let me try to give you a quick calculation. About - in the first half year, in the new business, the value of the new business in the Netherlands, which was about 85 percent - 85 to 90 percent comes from individual life. Seven to eight percent comes - sorry. Let's do the figures again.

About 80 percent, 8-0 (ph), comes from individual life; about seven percent comes from group life - (inaudible) group life; about (inaudible) about three-and-a-half percent comes from individual life in the - bank; and then about 10 (ph) percent, roughly speaking, I hope it all adds up to 100, came from our (inaudible) business, which is in individual life also in a company called RVS (ph) and that is a completely (inaudible) agent product. That is about the composition of the value of the new - of the new (inaudible) sales on premium.

The new sales premium is roughly speaking the same. About 80 percent comes from (inaudible) this year (inaudible) 80 percent comes from individual life; about 10 percent of group life; and that's roughly about it.

I'm sorry. What's the split between unit links and guaranteed?

I - let me - I - (inaudible) yes, the unit link split is, let me see, I have it here. They vary (ph) from the business only. The - and the premiums - yes, the premium is let me see. I only have it value in good (ph) business here. I don't have the - no, I only have the value of new business. But the majority was in - do we have it here? Sorry to - do I have it here? About 70 (inaudible) about 65 percent is fixed and about percent is on - is on (inaudible).

And where is the (inaudible) margin problem for both types - about fixed and unit linked, or is it just one of them?

I mean, the contracts you're repricing, which ones are they?

The repricing (inaudible) those on the single-premium - the single-premium policies only.

The single-premium fixed (inaudible) players (ph) or ...

The single premium fixed ...

... fixed (ph).

That's the only problem we have.

And would it be true, also, that the expense - the restructuring costs are universal to all the product types?

Well, there are mainly - the restructuring problem mainly related to individual life, but mainly for the pension business - pension-related business. Group life - therefore (ph), group life.

Group life.

Yes.

OK. Thank you very much.

You're welcome. Next question, please.

The next question comes from Mr. Oakin Russell (ph). Please state your company name, followed by your question.

It's actually (inaudible) Russell (ph) from (inaudible).

I have two questions referring to - inside the (inaudible) additional information pack.

The first one's on page 48, changing the insurance situation (ph) for African liability. Does that effect the conscious (ph) change in policy, or does that (inaudible) change straight to the yield curve?

I missed your question? I see page 48, but what was your question on 48?

The change in the duration - the (inaudible) duration of the asset (ph) group as a liability. The assets are (inaudible) duration than the liability now. Does that reflect a conscious change in policy?

No.

First of all, be aware of the scale on the left-hand side. OK. I'll give, in a minute, the floor to Bob. Be aware of the scale on the left-hand side. It starts with four instead of with zero. So you'll see that the increase in the duration of the assets was - is margining (ph). I mean, it's only - and the excess over the asset versus liability is only a tenth of a percent. And so it is very limited. There's always a (inaudible) and then the -and then the (inaudible), but it's really - it drifts a lot, but it was not high.

But Bob, do you have any - because I think this is mainly the United States that have (ph) caused (ph) it (ph). And do you have any explanations why the assets are longer (ph) than the liability? Please go ahead.

Let me reinforce your comment. First case, of the scale. By policy, we manage the difference between the two to an absolute maximum of one-half of the year. And if you go back over six quarters, the absolute difference has not exceeded two-tenths of the year. And as of the most recent date there, the differences Cees pointed out, was one-tenth of the year. And it wasn't a conscious policy to change at all. It's partially due to the thrift (ph) upward of duration of the mortgage portfolio as rates have risen again.

OK, thank you.

And the second question is on 46 or page 46. The difference between a portfolio yield and fixed margin. Does this suggest that the crediting rate has remained relatively stable over the last six quarters, half of the yield, and the margin falling in tandem?

Bob, please.

Yes. In fact, the creditor (ph) rates have stayed fairly stable relative to the decline in the portfolio yield. Let me make a couple of comments.

First of all, if you look at our fixed business, which is in around 20 billion euro. Roughly half of that fixed business is a business that here in the states is called MYGA, multi-year guaranteed annuity. Those annuities were sold at single-premium deposits with maturities of three to 10 years or sold. And once the rate is set, that rate is set.

The second half of the business is an annual retest (ph) business that we set on it's anniversary date. And our block of roughly 10 billion of such business, about 70 percent of it resets in the later half of this year, whereas only 30 percent reset in the first half of the year. And a lot of it, January. And rates fell (inaudible) afterwards.

So we look at the book, in fact, that book of resettable business, and look at the margin situation there, and expect that margins will get a little better as the year progresses as we set those annual reset products to the current market.

The MYGA products, they're set. And so, we won't be able to adjust those except as when they mature. And I think if you look back to the 2002 production, MYGA sales were quite large particularly in the first half of last year.

(inaudible)

OK, thank you, Bob.

OK. Next question, please.

Our next question comes from Mr. Andrew Goodwin (ph). Please state your company name, followed by your question.

Hi, guys. It's Andrew Goodwin here from Commerce Bank. Three questions.

First, you gave a figure of a negative cash flow for the group of about 17 billion in the first half. Could you just give some sort of (inaudible) whether that implies that you're seeing a lot of (inaudible) or what's the - what's the reason for that?

Secondly, just on the reinsurance one-off - reinsurance exceptional. Is this (inaudible) to businesses that have been discontinued? Or is it - does it relate at all to ongoing businesses?

And thirdly, you've made the dividend at the - at the interim stage, what should we read into that for the full year?

Hi, Andrew. Welcome back to (inaudible).

First of all, let me start with later one, the dividend policy because it's important. Let me reiterate what a dividend policy is. I said on the last - in the three-month figures, and I will repeat it.

Our dividend policy has always been based on two (inaudible) and we haven't changed it. So there's no change in dividend policy. Now there is, first of all, there's a payoff ratio of 34 percent - around 34, that one (ph). And on top of that, of course, among the same first pillar (ph), we have paid it out in the constant cash. We've paid it out in the (inaudible) optional dividends. And what we've done in the past also that we've financed (ph) the optional dividends with entirely (inaudible) in the stocks. (inaudible) additional in 2003 in order to strengthen our capital base. That's (inaudible).

Then (inaudible) I said, is that basically in the shorter year. Earnings - net earnings are lower than the year before. And this lower (inaudible) is not structured whatever structure is, then we would do our utmost not to lower our dividend per share so to keep the dividend per share at the same a level. That's what we've said in first quarter and that's what I would like to repeat.

The results of the (inaudible) interim dividends. And the interim dividends was always set at half of the dividends of the year before in order not to give any indication of the dividend of the preference before (ph) that. That was the underlying thing behind it.

So in fact, what we see in the dividend policy is on the one hand, nothing. And of the interim dividends, because it's consistent with previous policies. And at the same time, we said (ph) the dividend policy - the interim dividend policy that it was continuity in our dividend policy.

I hope you understand ...

Yes.

... quite well.

In terms of the second question, the reinsurance does (ph) apply mainly to the one-off business, yes.

Then the first question, is basically the most difficult one, the cash flow. There are always big squeeze, of course, by quarter. There is no specific reason why the net cash flow was at, as I said and as you see here, minus 16.8, a big squeeze was in the investment and fixed interest securities as you have seen. That was a big swing of 19 billion. That is the biggest swing as such, in fact (inaudible) caused (ph) it, that there was more specific reason behind it that I (inaudible). But I will find out if there's a specific reason. I don't see (inaudible) no specific reason behind it. Thank you.

OK, thanks.

The next question comes from Mr. Tom Bennett (ph). Please state your company name, followed by your question.

Hi, it's Tom Bennett (ph) (inaudible). I've got - I (inaudible) I've got three questions.

But before that, could I just (inaudible) this cash flow, I think. Just to make it clear, I believe that the cash flow number you're talking about is cash flow after investing in, for example, a short-term (inaudible) assets?

I don't think so. No. Why do you ask that?

I'm just thinking, if you - from my point of view, if you buy a five-year bond, that is (inaudible) to cash as to the effective of new cash. But if you buy that and include that as negative cash flow, you're going to produce a strange number.

Unidentified; Yes, but that's true. Yes, you're right.

I'm just trying to put this into the context for people who think that cash flow for insurance companies, when we're talking about 17 billion, is actually an important number. (inaudible)

From my preview (ph) that, I mean, if indeed is included in this (inaudible) ING that's really (inaudible) in the first six months when you've got this sort of (inaudible). This is not a cash flow only from our one-off (ph) operations. If you (inaudible) ...

Right ...

... then it's (inaudible).

Could I possibly ask for the detailed number of ING Direct? I haven't seen that - the turn over in cost in the half year?

(inaudible)

Sorry. What was your question, Tom

The (inaudible) number on ING Direct in the half year of turn over and cost?

(inaudible)

Yes. What do you want to know? We have given you the number of clients and we've given you the number of (inaudible) on page 15.

You have some (inaudible) of how the profits are.

No, we have not given detailed. OK. I can give you - I can give you a sum of the numbers. Total income in the first half year was 407 million, compared to 262 last year. Total expenses was 356, compared to 308 last year. So the profit before (inaudible) was 51, compared to minus 46 last year. (inaudible) were 23, compared to 14 last year. By the way, this has been done on (inaudible) majority by 200 (ph) basis points (inaudible) that's the way you mainly do it in the retail (ph) portfolio. So profit before tax was 28, compared to minus 60 last year. And then some allocation of (inaudible) et cetera, leads to 31 before tax this year and minus 72 last year.

Thank you. And ...

(inaudible) allocation but (inaudible) also have different charges, et cetera, you know. But that's the (inaudible) of the results.

Can we then turn to - in terms of the (inaudible) margins in the new business?

Cost of life in new business, not exclusively, but largely commission. And we've explained the reduction in margins as being due to a reduced sales. I'm finding it hard to comprehend unless whoever's doing the calculations is just assuming that a low (ph) cost base continues (inaudible). I'm finding it hard to comprehend where the (inaudible) margins come from.

Bob, is this something for you to answer or ...

I can certainly talk about the United States, Cees.

The reduced margin here in the United States are not driven by - it's heightened expenses. In fact, my colleagues have done an excellent job in reducing overall expense. The margin pressure that we have had in our fixed business - and I'm using fixed business broadly, relate primarily to the decline in earned rates - declined in earned rates on an absolute basis and on a basis relative to the statutory minimum guaranteed rates in a number of our products.

Expenses are definitely not the issue here. Now we do have some areas where we have expense overruns, which are somewhat exhasberated (ph) by the decline in volume. But I would - I would again reinforced it here, it's not expenses that is our issue.

And one final comment, as the - as we are in perhaps a longer term lower interest rate environment, which puts pressure on margins to be sure, we have - we're doing a number of things. We're getting out of certain products, we're working closely with distribution to reduce commission rates and the overall asset liability process between investments and the business has been much more aggressive.

I see.

Can you just mention the - Mark (ph) called the (inaudible) problem. Is it possible to give us of what's going on? I believe the portfolio is pretty substantial, and what's happening to the run (ph) in yields for (inaudible) current environment?

First of all, this is Bob here, let me say that we look at a balanced risk (inaudible) in structuring the assets to support our various liabilities here. And the risks that we are willing to take are interest sensitive risks, credit risks, and less liquid assets, such as private placement and commercial mortgages. All in measured doses. We don't believe at taking any one of those risks on an outside basis as an appropriate strategy. And in fact, when you look at intra sensitive assets and their non-correlation to the credit cycle, I believe we can clearly demonstrate over time that such a strategy works very well.

Our specific mortgage back portfolio is 20 percent of our assets. The ACLI industry data is 12 percent here in the United States. So admittedly, we do have more.

We look at mortgages over a cycle and over a cycle, the duration of the portfolio is typically going to be in and around three-and-a-half to four years. Now given the environment of the last 12 months until six weeks ago, there's absolutely no doubt that the mortgage portfolio's duration shortened up dramatically, and therefore, the income was similarly impacted. Now the last few weeks, we've had a dramatic increase in rates. I'm no better procrastinator (ph) than anybody else as to what rates will do from here. But clearly, the mortgage portfolio's income is going to be enhanced relative to what you would've seen for the first six months of the year.

Yes. Well, I mean, from what's on the scale of the change (inaudible) come over?

I would, you know, rather in the prediction mode, suffice it to say - suffice it to say it could be quite substantial.

(inaudible)

Bob, let me remind you to the - to the disclaimer that further (inaudible) statements are (inaudible).

I wouldn't (ph) ask the question publicly. Thank you very much.

Thank you, Tom.

By the way, before the next question, Andrew, I'd like to come back to your point on the cash flow. Because this charge (ph) in the press release is (inaudible) charge (ph) is (inaudible) according to Dutch law, so to speak. I (inaudible) a little bit (inaudible) wise and in fact, it should read the chart much more simple. You'll see that the cash at the beginning, you know, is plus 21. And the cash at the end of the year, the 36 billion (ph). If I cluster (ph) all that individual items, then the operational cash flow is plus 22, and the out flow of our investments is minus 37. So we've reduced our - net our investments. So plus 22, minus (inaudible) that's, minus 15. And that will experienced (ph) the difference between the cash at the beginning of the year (ph), 21 billion, and the cash at the end of the year of six million - end of the half year of six billion. I hope that explains it a little bit better.

Thanks. Next question, please.

The next question comes from Mr. Nick Burn (ph). Please state your company name, followed by your question.

Hello. It's Nick Burn (ph) from JP Morgan. I just wondered if I could back to the question that was asked earlier on the guarantees in the fixed annuity business. You gave the numbers, which were at 20 billion block of multi-year guarantee annuities and a 10 billion block of (inaudible) business. But can you actually give some numbers on the average guarantees that are on each of those blocks? And where the resets actually might go down to overall as to try to give us some feel for what the average current guarantee that's being offered as and how quickly that can go downwards.

And then secondly, just on new business. Can you talk a little bit about the fixed annuity business that's being taken on, and the level of guarantees you're offering, and how that compares to the industry, please?

Nick (ph), this is Bob. Let me ...

(inaudible)

Yes, Nick (ph), this is Bob. Let me just clarify again, the total block is 20 billion of which roughly half is multi-year guarantee, and half is the annual reset. That annual reset business has between 75 and 100 basis points to it's four (ph) statutory minimum rate. So at least in theory, rates could be dropped by that 75 to 100 basis points.

Clearly, the decision that we'll make as to what specific rate to credit to the policyholder, will be a function of a variety of factors, including the competitive environment at the time. But our view is there are clearly steps that we will be taking to reduce those credited rates.

In terms of new business, as you noticed, new business flows in fixed annuities were down about 75 percent for the first half-year. We are getting our price for margins on a very dramatically limited amount of business. And we would be looking to price new annuity to earn those margins at this point without - because there's so many products, I can't give you one rate that would reflect those various products.

OK. I'm just coming back on the - you say, 75 to 100 basis points above the floor of statutory rate (ph), is that - is the floor of three percent, so that's 75 to 100 (inaudible) above the three percent?

We have a - this is Bob again, we have a combination of business that's in the three to four percent area. Much more of it is at the three percent than the four percent.

OK.

And then just on the multi-year guarantee annuities, why you can reset. What's the average crediting (ph) rate on that block, please?

It's about six percent, plus or minus a bit, Nick (ph).

Thank you very much. That's very helpful.

(inaudible) do you have the next question, please?

The next question comes from Mr. Simon Shavavili (ph). Please state your company name, followed by your question.

Mr. Shavavili (ph), please go ahead with your question.

Related (ph) questions, please. The first question is related to your (inaudible) interest (inaudible). I believe your remaining states (ph) accounts for around 20 percent of your European equity portfolio. Could you please tell us whether you intend to sell down your remaining state (ph)? And if not, are you (inaudible) with the (inaudible)?

And the second question is, could you please tell us what you consider the (inaudible) to (inaudible) within your investment portfolio?

OK, thank you.

Well, you're right. We are, relatively speaking, overexposed (inaudible) compared to the rest of our portfolio. As you know, we've always considered (inaudible) is a so-called strategic investment. Strategic not in a sense that we had or have any intention to do a merger, or an acquisition, or maybe a (inaudible) that we see it as a financially strategic investment. Whatever that means, but that's how we'll confirm (ph) it. One day (inaudible) it will have an excellent performance. And if something happens, then at least our performance will be good (inaudible) that's the way we've always defined it (inaudible) for the risk of overexposure (inaudible). As you know, we have reduced our exposure substantially at half what we - our exposure last year just (inaudible) to reduce the risk.

Then the rest of our portfolio, how do we look at that? We are in the process of recalculating our optimal mix between equities, real estate, and fixed income investments around the world. We do have a local, regional, and group level basis. Some bottom (ph) up process, because as you know, life insurance (inaudible) individual companies into the world and they all need to comply with the local (inaudible) investment problems (inaudible) as well.

With life and (inaudible) I don't know yet. However, I can say that the present composition of our portfolio, so the present composition of equities, real estate, and fixed income and (inaudible) strategic (inaudible) I do not expect really substantial changes. And of course, (inaudible) more or less is not substantial in this respect. But there have been some (inaudible) fundamental changes in the present composition of our portfolio. And we - relative (ph) to this business and the total balance sheet, our total size of our - of our (inaudible) portfolio is about 9.2 billion, of which more than a billion should take (ph) out a billion (ph) (inaudible) then we have eight billion on equity (ph) investments. Roughly speaking, we have about seven billion of real estate investments and 130 billion roughly on (inaudible) investments.

So again, we feel comfortable, roughly speaking again, with this composition (inaudible), you know (inaudible) but I don't see - do not see any fundamental change opposition (ph) of these asset (ph) (inaudible). Thank you.

Thank you.

The next question comes from Mr. David Nisbitt (ph). Please state your company name, followed by your question.

Good afternoon (inaudible) from Merrill Lynch.

I think that in the first half, new business production from each of the developing countries was down around 10 percent. I wondered why that was spread across all countries, the decline was concentrated in one or two. And also, to give some indication of the prospects going forward for the developing markets new business. Thanks.

Thank you.

Well, the decrease was, of course, for a large (ph) (inaudible) due to currency changes because not only the (inaudible) but as - not only developed (ph) but depreciated but (inaudible) appreciate it through all the, you know, through all the other currencies.

If I look at the growth on the - on the local basis, and in fact, I will see a decrease of about four percent of premium income (ph) in savings (ph). There is a decrease of about 60 to 70 percent in Mexico. And by the way, this is all shown on page 13 of your - of your - in the presentation where I can give you a more detailed figures. And a slight small decrease in Argentina (inaudible) percent. And the rest of, in particular, Asia, they showed fairly high increases on a local basis in the Asian countries, 60 percent increase in Korea, 13 percent increase in Taiwan, 34 percent increase in China, and 20 percent increase in Hong Kong (inaudible) Malaysia, 11 percent, (inaudible) 95 percent, et cetera. So overall (inaudible) it's only (inaudible) subtract (ph) the total figure. But overall (inaudible) result in developing market (inaudible).

The reason for (inaudible) was more due to the loss of some major accounts - some group accounts and a slight decrease in lower sales from (inaudible) insurance. But the most important region was (inaudible) group contracts in Mexico. And that, in fact, causes the organic decrease in Latin America from the rest of the (inaudible). Thank you.

Excuse, I think the figures you're referring to are the (inaudible). I was more interested in the new business production, clearly for the developing country had (inaudible) to devise and (inaudible) sales are declining.

Well, for Latin America, the (inaudible) rate is (inaudible) 1.8, and it was up by more than 2.4 percent, compared to the full year 2002. So that's not that bad, so to speak (inaudible) primarily due to New Mexico, to the life business in Mexico so (inaudible) America. So without the increase in Latin America (inaudible) Latin America (inaudible) rate of return with slightly decreased - but (inaudible) slightly. So roughly 30 (ph).

And Asia, if you want to know, Asia, in fact, the big ones, Korea, Taiwan and Japan (inaudible) 90 percent of the (inaudible) from new business and this is consistent with the first - with the first six months and then the full year (inaudible). Thanks.

Our next question comes from Mr. Marcus Belnaum (ph). Please state your company name, followed by your question.

Hi, good afternoon. Marcus Belnaum (ph) - I'm from HSBC (ph). I've got a question on the interest result.

It looks like a lot of the (inaudible) getting the interest result, and this is coming from ING Direct. If you strip that out, can you show (ph) what's going in the underlying businesses? Because it looks like you margins are stronger there, as quite a lot of the margins are coming from ING Direct, which has a lower margin. And is there a currency effect, and what's sort of - what's going on with volumes?

And the second question is, and (inaudible) can you just say again why you're staying away from the fixed account? Because I'm actually (inaudible) business in the fixed bucket or the fixed account on the (inaudible). Thank you.

Let me answer the interest margin question first, and then Bob can answer the variable annuity question.

It is not true that the - that a major contributor to the interest reserve is from ING Direct. In fact, you could argue it leads (ph) to (ph) contrary. The interest margin of ING Direct is relatively low, compared to the interest margin of the rest of the business (inaudible). The interest margin of ING Direct overall is roughly about 100 basis points. And the interest margin, as you see, of ING Bank as a whole is really 56 - less than 56.

So the reason of a lot of increases through basis points is due because (inaudible) faster sure (inaudible) 156 to (inaudible). And is that disappointing? No, it isn't. Because the interest margin is only (ph) 100 (ph). But as you know, this is the interest margin, and of course, (inaudible) ING Direct is extremely low (ph). The cost basis (ph) or other banking operations is, by definition, higher (inaudible) et cetera (inaudible) et cetera. So an excessive growth of ING Direct compared to the growth of assets to the rest of the bank causes the interest margin to decrease strange enough. And it seems that I'm very happy with the strong growth in ING Direct.

So the margin is again, (inaudible) the growth in the margin is not being forced by ING direct. It's (inaudible).

Bob ...

Yes, Marcus (ph), this Bob.

The same factors that drove our view of single-premium fixed product separately drove our view of the fixed bucket in the variable. It's very tough to get your margins at the very low interest rate that existed.

We started to move the fourth quarter of last year to shutdown flows into the fixed bucket in our variable product. And I think if you looked at the competition here in the first half year, many of them now realized that because their buckets were so open, they got quite enddated (ph) wit lots of sales that looked like variable annuity, but it was in the fixed bucket. And I think probably in retrospect, they wish they hadn't.

OK, thank you.

Thank you.

Ladies and gentlemen, before we proceed with the next question, I'd like to remind you that if you would like to ask a question, please press star, followed by one on your push-button phone at any time. If you are using speaker equipment, please lift the handset before making your selections.

The next question comes from Mr. Fred Nito (ph). Please state your company name, followed by your question.

Hi, this is Fred Nito at Execution Limited. I have a couple of questions with the U.S. life insurance earnings.

First off, in terms of what you reported, how much has that benefited this year so far from roughly the 100 million of annualized expense savings that you had projected last year? And then the next (inaudible) has to do with coming back to the fixed rate crediting issue in the MBS (ph) portfolio. The press release mentions 224 million euros of impact of lower investment yield. How much of that is coming from the prepayment issue on the MBS (ph) portfolio?

This is Bob, let me take the second question first.

On the 224, there are a lot of drivers. Clearly prepayment experience is a very significant contributor to that decline. Other reasons for the decline, though, are just the one-offs of the normal portfolio into a very much lower rate environment. Next, of course, product sales, new monies good investments at new rates, all are contributing - all are contributing factors.

On the expense side, to the first question, the benefit in the first half year within a million or two euros, is around $35 million - 35 million euros benefit from expense reductions, first half year this year relative to first half year last year.

OK.

As a follow up on the MBS (ph) side, you said that you're overweight, and we've had other insurance companies tell us that the MBS' (ph), they don't really like the ALM properties too much about - on those securities. Can you get hit with prepayment risk when rates on the way down? And now with rates coming back up, you might be getting hit with extension risks. Can, I guess, if we circle back to your comments earlier on the call about trying to get that margin up and having so much of the investment portfolio in those investments, could you help us understand how that's all going to play out? I mean, if you cut rates with interest rates having coming up again, I suppose now you start running into the risk of a lot of the book maybe surrendering because you said you had about 10 million in the annual reset.

Well, let me - let me come back and say that, yes, we have more than the industry, but I wouldn't consider it an outside position of mortgage backs. Over a cycle, the drifted duration is typically fairly tight. And you know, in two or three standard deviation environment, it's clearly broader. But we believe that the portfolio of roughly 20 percent overall, which helped us dramatically in previous years while credit risks deteriorated, it being offset now with much more positive of credit risk environment. We do not use mortgage backs to support the MYGA portfolios at all. They would be in supporting out other businesses, particularly annual reset businesses, where in effect, there is a more floating rate nature to the income off those mortgages, and then the ability to adjust the credited rates on the products themselves.

In terms of extension risks, again, we believe that it is a manageable risk. We don't believe that we are going to have any serious issues with it. Current last experience, by the way, on our products here at first half year is well below our pricing assumptions.

That's it. Thank you. Next question, please.

We have a follow up question from Mr. Tom Bennett (ph). Please go ahead, sir.

Firstly on the U.S., more comment about the positive (inaudible) working at 91 million euros? (inaudible) reference if that is actually accredit (ph) to losing (ph) the second quarter, well, that's (inaudible) half year.

That's correct, Tom.

Yes. I (inaudible) thought but if you stripped that out and take account of the reduced (inaudible) remaining profits from the second quarter, not frankly, exciting, on the U.S. operations.

This may be something for Bob, but I can't remember, Tom, that you stood out the (inaudible) into the first quarter on last year. Now, is (inaudible) that you stood it up, barricade (inaudible), Tom ...

I think I did actually.

I won't add to that comment, Cees. I mean, clearly, the decline of the interest environment, was a very large effect. First half year this year versus first half year last year, as was pointed out in an earlier question, was a 224 million euro consequence. The positive swing on that, was a 91 million consequence, and a positive swing on impairments was about $75 million euro consequence.

So net, net, the overall interest environment was a big more punitive than the benefits of those two other items. But, you know, to me, this is the business. And I don't - I don't look at any of these factors of isolation to conclude the business is or isn't making process.

Fair point.

Could I also ask about the - I'm sorry to bring it up again, the (inaudible) for foreign exchange (inaudible). They used to make money in (inaudible). Is that the way it's going to be going forward? Or is it just a blitz on traditional performance.

We'll (ph) discuss the (inaudible) I agree, this is not very transparent any longer how we - how it's being presented in the traditional way. Because in the past (inaudible) securities (ph) (inaudible) et cetera, creating from (inaudible) and in other. And the problem here is that the - all those - there are different lines these days are interrelated. So if you trade in euro bonds, and then you have trading from securities, you can make a profit and loss and then it shows up. But if all of a sudden, you've traded more in U.S. denominated bonds and you hedge (ph) the currency. On the one hand, you make profit. On the other hand, you might lose on the other.

So the profit on the one line is sometimes highly correlated the left other side, and you have to look on the (inaudible), looking at it, if you cannot present it better so that we have, say, the reporting on (inaudible) of businesses. Because this is - for us also, not very satisfactory.

(inaudible) accounting policy. That's - hedging losses on the P&L account. Why he got capital gains in the balance sheet?

It's (inaudible) but for management and accounting, of course, we can always - we can always differ from the official accounting. We have to find the solution to better business (ph), because this if - you should (inaudible) me, for example, the trading with profit or losses and the derivatives. And then you say, hey, what's going on? And that is the reflection of the volatility in earnings on the - either securities, or fixed income, or what have you to the next (ph) improvement.

But further, these lines are related. That's my (inaudible). In fact, you should look at the total, more than the individual lines. And (inaudible) we have to change the reporting (ph).

You changed the accounting policy (inaudible). All right. Thank you very much.

Yes. We can't help it. Thank you.

The next question comes from Mr. Paul Goodhind (ph). Please state your company name, followed by your question.

Yes, good afternoon. It's Paul Goodhind calling from Bear Stearns. Could I ask, one, on the insurance side and two, on the bank, if I may?

On the insurance side first, and I'm on the U.S. still if I may, could you give the internal rate of remain on e-business to your major product groups and fixed annuities of variable would be of interest, although if you have them. And on the bank, I think Cees, in the past, you've been kind enough to give a breakdown of loan losses in related to risk (inaudible). Could we have that perhaps for the first half? And lastly, on ING Direct, you've given the expense base of 350 for the first half. What proportion of that is acquisition cost? And what's the profile of those do you think going forward are welling of a ramp up phase or (inaudible) of? Thanks.

OK, thank you.

To be honest, I don't give the - I have the ING Direct acquisition cost. But for competitive reasons, I won't give it to you. I'm very sorry. I'd love to disclose everything I have, but for competitive reasons, I don't. Sorry. Maybe in the future when ING Direct is - becomes in a more stable environment that we do it, but not for the time being.

(inaudible) the next one I can give you for Executive (inaudible) doesn't mean very much. But let me give you for management (inaudible), but because otherwise it doesn't help.

The Netherlands, no losses. I think the most (inaudible) 30 basis points. South of Europe, so that is mainly Belgium, 18 basis points. Germany, 148 basis points. ING Direct, 21. Central Europe, that includes (inaudible 136 points). United Kingdom 27, down from 63, so that's great. The America's, 39 basis points. And Asia, small - even not release minis 49 basis points, and that's roughly - and then you have a real estate business to, 12 basis points. And then if add it all up, then you can put the 51 like you have and so, of course, on a weighted basis.

And then - I'm sorry, then the internal rate of return, I have them here. I don't know if you have them, Bob, but I have them there. Life retail, internal rate of return, 6.3; life in Georgia (ph), 7.5; (inaudible) 7.9; urban reality, 9.9; defined contribution retirement services, 9.4; roll over payout retirement services 8.1; and group insurance, 11.6. And that is the previous schedule (ph). Thank you.

Cees, if I could add just a point, one of the reasons that the life IRR is, as Cees said, in the mid 60's is that pursuant to an earlier comment he made, all the expense overruns are being charged against new production, which is the way we determine embedded values and IRR's. So it's particularly punitive in that regard.

Thank you, Bob, for this addition. Good.

Next question, is there still any?

Yes, we have a follow up question from Mr. Duncan Russell. Please go ahead, sir.

Just a quick question on the reinsurance gain and the life division. Could you (inaudible) million. Could you just expose what countries receive that (ph) P&L (ph)?

Sorry. The line is pretty bad. Could you repeat your question?

(inaudible) gains on these (inaudible) in the life division, what (inaudible) do we see that? Your P&L wrote about the life insurance profits.

(inaudible)

Is there one last question?

We have a follow up question from Mr. Fred Nito. Please go ahead sir.

OK. Just a couple of more follow up questions. One has to do with the lower earnings that your reported on the (inaudible) life operations where you'd mention that there was selling the solvency measures taken. Does that mean that the capital that's been released from the Dutch life had gone into the U.S., that we should - we should see more earnings out of the U.S. on a - on a greater capital basis going forward?

And the next question just has to do with your comments on the equity hedges where you mentioned that the long pole (ph) decisions in the short calls, you would - you would cut back on the short-calls by covering some of those calls. And I'm just wondering what was the drag on the P&L in the first half of this year, compared to last year of having that, let's just say, solvency position insurance in place in the P&L?

OK. Thank you, Fred.

Well, first of all, let's start with the later question - the last question. There was more drag on the P&L on our hedge (ph) position. You know, we started by buying - by hedging in colors (ph). So by (inaudible) and by buying (inaudible) in such a way that it was mutual to the funeral. Or the differences in valuation of these positions, including the buyback from the (inaudible) or going through the balance sheet. And basically, it means that if we have given you the (inaudible) in terms of doing a negative reevaluation results, that includes the value of the hedge (ph) position, including the buybacks, the positive buybacks, of the cost (ph). So there were no terms of the P&L. And in fact, the position of (inaudible) is included in the number that I gave you. And so that's one.

The lower earnings of the Dutch life business, because of the recapitalization, is partly due to the (inaudible) of the two billion adult (ph) (inaudible). And apparently, the reduction of the real estate is forward. Part of that money will end, on top of that, shift from one (inaudible) to the United States. Yes, of course. I mean, the earnings - the (inaudible) of earnings from that building of the United - the Netherlands has gone to the United States, that's for sure. And the other part is the U.S. to repay the debt in ING Group. And that releases the cost of financing in ING Group. And that's particularly in the sheet (inaudible) back into the so-called (inaudible) of the group.

So but yes, the reason (inaudible) shift over earnings from the Netherlands through the U.S. (inaudible0.

No. Is that - is that something that we should expect to see showing up more so in the future? Or did the U.S. in the second quarter show any affection of that or - the?

The effect is about - of the first half year is about 20 million shift (ph) from the Netherlands to the U.S. And that is structural, of course.

Great, thank you.

Excuse me, Mr. Moss, there are no further questions at this time. Please continue with any other points you wish to raise.

Well, I would like to thank everybody who spent one-and-a-half hours of time listening to the ING story. Thank you very much for joining us, and wish you a very good weekend. For those of you in the U.S., I hope that you will now be better than normal with the loss of power out there. And that your juice is cold and fresh and that you can enjoy your weekend. Thank you very much.

Oh, yes, I have one final message, you know that there is a third - a meeting on the third and fourth of September. You have our investor relations conference in the United States, in New York. And you are all cordially invited.

For those who have not received an invitation yet, please let us know or call. Know (ph) can be done the telephone company, as mentioned on the press release investor relations. It's mentioned on the first page of our press release.

Having said that, I wish you all a very good weekend. Thank you for joining this conference call. Thank you.

Ladies and gentlemen, this concludes the ING conference call. Thank you for participating. You may know disconnect.

END