ING Groep NV (ING) 2006 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the ING full-year results conference call on the 15th of February, 2007. Throughout today's recorded presentation all participants will be in a listen-only mode. After the presentation there will be an opportunity to ask questions. (OPERATOR INSTRUCTIONS). I would now like to hand the conference over to Ms. [Gemma Bux].

This is Gemma Bux for ING Groep welcoming you to ING's conference call on the figures for the full-year results of 2006. Before turning this over to Michel Tilmant, CEO of ING Groep, Cees Maas, Chief Financial Officer of the Groep and Tom McInerney, Chairman and CEO of ING U.S. financial services, let me first say that any forward-looking statements in today's comments are subject to a number of 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 of these and other variables. That said, good morning, Michel, Cees and Tom, or good afternoon. Over to you.

Good afternoon, good morning to all of you. This is Michel Tilmant speaking here. Let me first, as an introduction, say we have experienced record results in the fourth quarter of 2006, which illustrates the solid earning capacity of the Groep. And as you have seen, while interest rate environment is challenging for some of our businesses, we have benefited in other parts of the group from strong equity markets, the (indiscernible) environment and favorable underwriting experience in long life.

I have to say that what is the most satisfactory in this is that we are reaping the benefits of our strategy commenced two years ago. And first of all, you have seen through the numbers that there is a very strong momentum in the three growth engines, life insurance in developing markets posted 23.5% increase in sales; ING Direct has added $5.4 billion in mortgage only in the last quarter and retirement services accumulation product sales in the U.S. increased 21% in the fourth quarter. So all growth engines are performing according to our expectation and what we have stated in the past.

At the same time, and we are also very happy to see that a number of parts of our strategy in mature markets is showing that we have in those mature markets a number of profit boosters. In this let me speak first of a number of them. First of all, asset management you have seen that our net inflow has been $43.8 billion in 2006. Asset management is the third leg of ING and has shown strong growth in assets under management, net inflow in 2006.

Second in retail banking we have seen nice growth in mortgage and savings. And sometimes people say that the Benelux market is not very exciting but when I see over two year period an increase of 25% in the mortgage volume I can say that this market has embedded growth.

We have also been able to take advantage of our strategy started two years ago, three years ago to enhance our real estate activity and you have seen that real estate activity has benefited strongly from the globalization of that market where we are very well positioned, and finally in private banking we also have done well last year. So if you look to those profit boosters in the mature market plus the growth engine, I think you can see the diversity of ING to be able to grow over the future.

At the same time, we have also got the benefits of execution strategy. And I would like to speak first about our investment profile and strategy overall. I think that you have seen that we have benefited from equity markets, from real estate market investments, from private equity market investments. And those are choices we made in the last years. And I think although those profits are not necessarily predictable quarter by quarter, they are an integral part of our business and our portfolio has performed very well in the last year.

And second, I think that we have also reaped the benefits of managing our costs, partly recurring cost and we are proud to say that our recurring costs in our mature business, if that means ING, if you include the very, very strong growth engine is only 2.4%, which is good, and that means that we are able at the same time to give sufficient rope from the growing business to get the resource to grow. But at the same time when the market's growth is not as strong we are taking the measures to keep our costs under control.

We also think the benefit of our risk policy in the last two years or three years, we said three years ago that risk management was one of the key objectives of the group, and you have seen that has done an [improved] greater this last year, one of the two best insurance companies when it comes to risk management and you have seen also that we have very low risk loss in the bank, which is the results of a very strong approach to risk. Although we recognize that the market has been pretty benign in that area at least for us and given our portfolio.

So I think that all in all this has been a very good year for ING, a very good quarter for ING. And we basically at this point in time want to focus on the same priorities of going forward because we think that we don't want to get -- we don't want to go into those areas which don't provide us a benefit ensure their value and we want to continue to allocate our capital the same way we have done in the last three years to move capital from cash generated mature business into growth engines.

That is basically the introductory introduction that I wanted to make. Please raise any question you might want.

(OPERATOR INSTRUCTIONS) Nick Byrne.

Nick Byrne at JPMorgan. Can you hear me okay? Fantastic. Quite a specific question related to two slides of your long presentation for analysts. Starting with slide 36 where you go through some very good disclosure on costs and improving efficiency, the question I really wanted to understand is in Q4 you talk about investments in growth of just over $800 million split down ING direct to Asia-Pacific, ING real estate. Unless I am mistaken, I couldn't remember seeing this in previous quarters and I wonder if either you can point me to where it is or you can tell us what development costs if you like had been in previous quarters.

And then secondly, if we go back to slide 30, you talk about the IRR of new business. So I wanted to try and understand whether the development costs were effectively being invested at that IRR i.e. return on invested capital. And am I thinking about it in the right way? And then secondly, can you explain perhaps how those development costs might change over time, particularly in the ING direct line?

As far as the development cost is concerned, the investment in growth, we have -- but I have to check, but basically all the costs involved here are expensed, and there is none of these costs are capitalized and that means they are all in the IRR, that is almost by definition the case, so we have no capitalized cost. We have to check with a small (multiple speakers) specific are commissioned, a few, but I don't know how many; maybe how many of those costs are probably part of the 275. But it is all in the IRR.

Were there any investments in growth in previous quarters as defined by the way you have managed the segments for this particular quarter? Clearly you've got --.

There would have been an equal amount -- well, not equal amount, but similar amounts for the past while; this is trying to look at the growth piece in the ING direct or Asia-Pacific or ING real estate. We are just trying to break it out for you in this quarters so you can start to see the underlying cost structure if you take out our growth engines.

I guess the real question I am asking is will these investments in growth continue to remain the same, and will over time they gradually scale back as you've completed the investment in the business, so will we see a cost reduction? And then secondly, if that investment is creating a similar level of IRR or new business as it should be? And perhaps that is a bit more confusing but what I'm trying to understand is how the cost development will come through over time and how the IRR will change.

I think there may be a misunderstanding of this table. This table is the absolute cost of the business. So the first column represents the absolute costs of the business and the 803 that you see there are the cost of ING Direct Asia-Pacific and ING real estate that we have taken out of the group costs for the quarter to come to what we call recurring costs in excluding the cost of the [grow] business. And then you come to a number, and that number is increased only by 2.4%. So there might be a little bit of confusion in the wording of the tables.

We have said this morning, Nick, that we have as a sort of a guideline to our businesses said that as far as investment is concerned so a strain on the bottom line, except about 1% of our net earnings to invest in new initiatives in growth and so on, so in greenfields and all those sort of things. So it is around 115 million before tax, that is a cash drain so a strain on the bottom line that we invest in growth. So that is a different number here. This is just the cost (multiple speakers)

-- talking about two different concepts, and I'm probably confusing everyone so I will take this off line.

Marc Thiele, UBS.

There are three questions. Firstly, what needs to happen to make a decision on entering Japanese direct banking? There seems to be a longer internal discussion; I think we were expecting an earlier decision on this. Second question, in the press release you were talking about addressing Japan and U.S. individual lives. Can you give more detail on this and why you believe ING will be a winner in those markets in addition to what is said in the slides? And thirdly, ING Canada wants to buy back stock. That raises your stake, and I was wondering what is the strategy?

I will take the Japanese banking ING Direct. I think first of all we have prepared silently our startup in the UK for nearly three years. I would like just to say that first of all. So I think we believe that start up needs a lot of preparation, and it is not unusual that we take a long time because we have to check and recheck and make sure that we have all the writing in place. Second in Japan is a bit more complex because of the language and especially on the IP side we have to make sure that we can be ready. Third, I think in Japan you have to prepare yourself for a long time before filing for requested approval. So I think all this takes a while, and that is why we, although we are progressing well, we are not ready yet to announce a launch.

In the individual life we have at least in U.S. where Tom probably you can elaborate on that and on Canada.

The first thing I would say on individual life is you have to keep in mind that the priorities of the businesses in the U.S. are retirement services, variable annuity and then individual life. Individual life only represents about 15% of the earnings and even a lower amount of the value of new business. But we think it is an important product because our focus is really on the 78 million baby boomers, and they are going to want life insurance particularly estate planning life to be able to protect the taxes on their assets they have accumulated. So we think it is important there. UL for older Americans and particularly the baby boomers.

And then on the younger people just starting out, they buy term insurance and so our focus is there to really hopefully get them as a client when they are just starting out and using a term life product and keeping them over time. We clearly have had some challenges in the business. However, on the term side the strategy is finally kicking in. We have a number of strategic alliances with banks, and we think that we are now up to about an annual run rate of 100,000 term policies and that is up from about 15,000 a few years ago. So I think that is on track.

On the universal life, big challenges. We have the top 30 life company CEOs that are on the American Council of Life Insurance Board have all agreed that we will not write STOLI which is stranger owned life insurance or investor owned life insurance because we've gotten a lot of pushback from Congress because the whole premise of life insurance is to provide tax benefits. But if you are going to let the investment banks, Wall Street firms use the tax arbitrage the Congress is saying they will take it away. So the big companies have all agreed to no longer write it. Starting we made that agreement in early 2006. So I think you've seen for the large life companies a fall-off in STOLI or IOLI. Stranger owned life insurance or investor owned life insurance, and that has been a significant issue for us.

For the smaller life companies have still continued to be willing to write it. But my guess is over time that will probably be ruled out by Congress. So really I would say it is an important part of our business. It is certainly much smaller than the retirement services and annuity. It is important we think to the overall strategy and we think we have good plans on the term that are working, and we are launching a few products, additional products on the universal life side.

And Canada basically I think you know that the strategy there and one of the reasons we did the IPO is our strategy is to acquire smaller property casualty companies as the market consolidates. And so we are very interested in doing that right now; while the cycle has turned and is starting to come down the returns are still very high in the industry so there is not a lot of opportunities to acquire. But our ING Canada is earning a lot of excess capital so I thought for now until acquisition opportunities come up is to return excess capital to the shareholders and the intention would be to buy back equally with the public markets so that for now we retain our 70%, 30% split between the ING share versus the public share.

First of all let me say that Japan is been very profitable year for Japan, and therefore we don't have a profitability problem at all in Japan. It is going very well and the reason is that in 2005 we had a record year of selling SPVA, and therefore assets under management is at a very, very high level. That is number one.

Now you got to realize in 2005 the SPVA market was very hot in Japan. And we were able to take a very large portion in market share in that hot market behind what would be normally our natural market share. But it was very nice, but so nice and I think I would say that early last year that when came the 2006 plan we were starting to get a bit nervous of having so much economic capital embedded in one product in one country and we basically said to our management, let's make sure that we use a lot of discipline in using economic capital in Japan in 2006.

Now what happened in 2006 in effect number one is that the Japanese insurance companies, partly one Tokio Marine, have been very aggressive in getting market share, and I think Tokio Marine went from nearly zero to 30% market share, very aggressive. And the portion of the market share of the foreign companies reduced substantially. At the same time we were able to keep quite a nice market share, about 11%. But quite down compared to 2005. The reason we were also -- we did not really follow last year is because probably our people in Japan listened too much to us and they were very careful in developing a too aggressive product, selling -- exploiting too much economic capital. But that product didn't sell well because it was not aggressive enough. And so that explained that our sales performance last year were not exciting. Now we believe that the Japanese market is a very strong market for SPVA going forward given the demand of the population, the aging population. We believe we are well positioned of a foreign firm to provide a good product. And I think that we are going to introduce a new product in April. And we hope that the product and so far based on tests the product seems to be very well-received, and we hope that we can recapture the momentum of 2005 in 2007. So the reason we are speaking about Japan is because we are putting management attention to make sure that we could get back to the momentum of 2005.

Thank you. Can you let us know what sort of product you are launching in (indiscernible) Japan?

I don't think that I can tell you that at this point. No.

For competitive reasons not the smartest way to tell what we are going to do.

But I would add one thing we are doing is of course the market for variable annuities in the U.S. is quite advanced. So we are using the products that we've introduced in the U.S. over the last three or five years, tweaking them to make it fit the Japanese market and then moving them to Japan. There is a lot of knowledge sharing from our U.S. business to Japan, in addition we actually do all the hedging for both the U.S. and Japan in the U.S. in our desk there. So I think what you will see us do over time in Japan is as the market matures is launch annuities with features similar to what we do in the U.S.

But as you know, you want to be leading, getting out there with the product and then let others catch up at least for 6 months or so you get a lead. So we would like to have some success selling before you find out exactly what the feature is going to look like.

Thank you.

Paul Goodhind.

Paul Goodhind, Bear Stearns. I have three quick questions. Firstly, the banking compliance costs in the fourth quarter that you highlighted, is that a one-off cost or is that a step change in the compliance cost run rate? Secondly, you mentioned whole life provisions or reserve releases benefiting results in the fourth quarter. Could you say where they occurred geographically and quantify them if possible? And lastly on ING Direct to come back to I think Nick Byrne's question earlier, you got startup loss is $130 million in the year which I think relate to the non (indiscernible) product meaning mortgages. Can you give an idea as to how quickly you think those other products will achieve a profit? My feeling is that the mortgage growth is such that you should be getting scale now, and that product should be starting to make a profit in the next year or so. Does that make sense to you?

Let me respond to the first portion. If I understood well the question is what portion of the compliance costs of the fourth quarter of the year are going to be referenced? I think that let me say that the most of the compliance costs are one shot to adopt a number of regulations. Let me give you example. Normally we had about 7 million clients at Postbank and 2 million at ING Bank go through to be able to register their identity and sign identity approved. So only doing this and going after clients who haven't been in the branch for 30 years and asking them to sign a paper was kind of an exercise but it was then all those costs are non-recurring. So I would say that probably 20% of the overall compliance costs would be considered recurring, and I think it is probably pretty strong. So that's basically what it is over the year and that is true for the bank and the insurance company.

As far as the reserve releases are concerned in the nonlife business that was mainly (inaudible) the Netherlands; it was due to higher on-off claims provision releases, one-off mainly because of legal and changes in legal and reserving methodology, it can change. And it was 108 million this year versus the 41 because then we had releases also in Q4 2005. So the change is 68 million. As far as the mortgages is concerned the 130 million. The question was asked this morning also, how much is that and which part were mortgages, it was about 40 million. And the question is are they becoming profitable immediately? Yes.

Do you have one-off acquisition costs so to speak? They are expensed, and thereafter the profit is, of course, immediately profitable. Generally speaking the acquisition cost of a mortgage in ING Direct is higher than the acquisition cost of a savings account, but the running costs of a mortgage is lower than that of a savings account. So accelerating the sale of mortgages as we do today in the present interest rate environment increases the cost in the first year, but lowers the operational cost later on. So it is a pretty good investment.

Mark Cathcart.

Deutsche Bank, Mark Cathcart. I've got a question on ING Direct in the UK. You had these outflows. Were they purposeful? Was it like a winding down, a rebalancing of the balance sheet or was it that you are too low relative to the competition in terms of your deposit rates? I think that surreptitiously you have been increasing your rates to customers without changing the stated rate. So you been offering batches of 6% fixed, and also for the Web base save a 5.7%. So I am wondering if we might actually see some sort of dip in margins in the first quarter if this impact feeds through. So I guess it is a strategic question on the UK.

The second question is in relation to [EV] accounting. It seems that the insurance sector is valued on a cost of capital somewhere between 9 and 10%, so I wondered why your discount rate is still rather low. And particularly when we've got new business profits that on an increasing basis seem to swing all over the place with lapse ratios; you seem to have a lot of lapse items which keep feeding through.

The third point is when we see the headline results they look fantastic, and then we have to work our way through and we find effectively in the quarter there was probably something like 600 to 700 million of rather nice items which probably won't be repeated. So I just wondered if you might put some sort of table towards the front of the presentation or press release which highlights what those features are. Because I noticed the share price opened up and gradually came down as people had time to assess what the implications were for these results. Those are my three points. Thank you.

Let me start with the first question, the strategy in the UK. We deliberately did not follow the increase in the base rate in the same (indiscernible) the same time path as the bank of England did in order to protect, so to speak, the return on ING Direct in the UK. We could have done it, but we thought -- that's my first observation. The second observation we still feel that we are competitive. We know -- we read newspapers of course, so we read all the upheaval there around following the base rate increase yes or no. But you have to bear in mind, for example, that we have now I come back to the other two products that we introduced. We have three products basically now on the liability side of our balance sheet.

But we are still the financial Company in the UK which has the highest interest rate, if you look at the minimum interest rate of the banks. All other banks or whatever type of financial services companies they offer savings account or whatever account with a lower rate than our lowest rate is that we have. So that's my first remark.

My second remark, yes, we introduced deliberately two other products. One is in deposit in ING Direct because we see that that is where the competition is today. And second, yes, we offer the Web based accounts so if you only use Internet ING Direct in UK then you have a higher rate than on the traditional savings account that we have. And this will certainly improve of course, the profitability of ING Direct UK. And we do that indeed in order to service the client better. We know that the client likes to have this account and instead of just following rates because we feel that we should service the client in a different way -- quality, easiness and given the client apparently they needed in the UK the choice.

Just to come back to that but basically just to get an idea that is 100 basis points higher that you are paying on those deposits. So what proportion -- can you give us any indication because if everybody went across or if everybody took out these fixed, then you would've had 100 basis point higher cost on your liability for the UK in the first quarter versus the fourth quarter.

No, we don't give you any indication at least not today, because that could invite our competitors if it is very successful to introduce quickly the same time to market is short as you know. So for competitive reasons I will certainly not give you the composition of the traditional savings account, the Web based account or the deposit account so far (multiple speakers)

Last quarter than the fourth as a result?

You cannot -- you are not able to predict that today, Mark, I know unfortunately. Then [john] will do the cost of capital question. Let me say on your remark on the quality of earnings because that is basically what you are saying. I disagree with what you are saying there that it was because if you -- what you would call one-off items (multiple speakers)

-- quality case, it was the visibility of the initial earnings level.

Okay. I thought we were pretty clear in our press release on what the items were that were probably in your opinion not strictly necessarily recurring. I was not surprised to see that in higher stock markets being in U.S. or being in the Netherlands the (indiscernible) performed most of the [indices] in the Western world to see that we have higher realized capital gains. This is at least not a surprise to me and I don't think to anybody. If you look at the real estate markets in the markets in which we operate I am not surprised there was -- and given the IFRS rules that you have to mark to market every quarter, your real estate portfolio going through the P&L -- I was not surprised to see that we ended up in a higher re-evaluation profit of our real estate portfolio. Of course you could be surprised.

(inaudible) visible and the first or the second or the third page of our press release. So is that recurring or non-recurring. That is always difficult to say. We have a portfolio of businesses, Mark, as you know. And of course you can peel it off and indeed about every quarter or not on a quarterly basis, but about every year you see an amount where it comes from the business which is operational and you know that the probability that those type of items will return is one, but a predictability event will happen over the quarter is probably zero. This is already the case (multiple speakers).

Thanks, Cees. Thanks, thanks (multiple speakers) John's answer.

Then John for the cost of capital.

The cost of capital you said 9 to 10% for cost of capital, I think and of course there is a wide range of views in how people look at this depending upon what you view as the equity risk premium. We view your number closer to the cost of equity, and when you lever the debt structure in we get a lower cost of capital. We do extensive studies on this. We looked at it again every year and we also compare to what most of our competitors assume their numbers are. We decided to increase our margin 20 basis points from 290 to 310 to reflect very different structures in our capital structure and to be a little more precise in that. And of course that hurt us across the board but we thought it was more appropriate to follow our methodologies and really pass that through.

The way we do the value of new is business is there is a big catch up always in the fourth quarter. There is every year. Last year the discount rate change wasn't a very big change, but other things are, including lapses or expense re-assumptions and it varies by line of business. Some of our larger contributors in businesses did have some catch ups in the fourth quarter in addition to the discount rate, particularly like the COLI business in Japan due to the tax law changes there and so there is a resetting of the numbers in the quarter. And that is why particularly in the fourth quarter we think it is really easy to look at the full-year over full-year numbers which we think is what Cees highlighted in his presentation.

Thank you.

Nick Holmes.

Nick Holmes with Lehman. I had a couple of questions, please. First one is two of your main growth engines have slowed pretty considerably in '06; I am thinking of your life new business growth. And also the deposit growth at ING Direct, both of which have only grown about 4%. And my first question is are you disappointed with that? And how confident are you that this will improve this year?

Second question is on the banking side you highlighted the bank loan loss releases are starting to come down although the credit environment isn't getting worse. Does this mean that the 11 bips of provisions we saw in Q4 is a more realistic level for us to be guided upon in '07? Thank you very much.

It is difficult to predict the loan losses, but let me give you a few of the numbers. We don't -- first a qualification -- first of all we do not see any deterioration in our portfolios. Not in the wholesale portfolio and neither in the retail portfolio, nor in ING Direct and ING Direct even going down over the last couple of quarters given the increased quality of the portfolio.

The second observation I would like to make is that the expected loss for the bank as a whole that is expected losses over the cycle is 25 basis points. And of which the wholesale bank is 28, the retail bank is 26 -- you say hey, that is high but it includes countries such as Poland and India and also [velos]. And ING Direct is 15 basis points. So that is what it is. Actual numbers today were of course lower. Is the Netherland realistic one? Given the level of relatively low releases yes, it is probably a realistic one. But again we don't see any deterioration in the portfolio. We don't see fallen angels.

We did some catch ups in the last quarter. We improved, for example, provisioning for the loans that are past due longer than two years. Some of those portfolios were provisioned 90% but ours as a general rule we said 100%, just as a way of systems. Do we expect other catch ups? No, on balance I think not many in the first quarter. So but if you expect them to grow to the mean that means given the system changes, the small system changes in the last quarter, yes, probably 10, 11 is a good guidance for the income.

On the life insurance and the two growth engines, I don't understand exactly where you get your life insurance developing markets from a model of growth. I have a sales growth in the APE of 23.5% to 530 million of life insurance in developing markets, in APE. So that is (multiple speakers)

But a growth engine is pensions, isn't it, which is a broader and bigger part of your life business?

Okay.

Nick, when we talk about retirement services, particularly in the U.S., we look at both group retirement services, which is 401(k)'s, etc. as well as variable annuities and the value of new business for those two together went up about 32% over the full year with both retirement services and variable annuity both contributing pretty close to that number. So we are quite pleased with the growth in life new business and retirement services and variable annuity in the U.S. The value of new business growth, as well as the IRR's, we've been consistently raising the IRR's in both of those two businesses as well.

Perhaps I could rephrase my question about life new business growth to ask as a whole for the whole group, what is your outlook -- how confident do you feel in '07 about growing your whole life new business value?

We don't give a specific outlook for that, as you know. But if you look at our developing markets and you feel comfortable that we can continue to create value in the developing markets as we did, you've seen that in central and eastern Europe we had high IRR's, 16.9% which is strong. Asia-Pacific; so we feel comfortable that we can in the growth engines that we have that we can keep up our value creation.

As far as the deposit growth in ING Direct is concerned and we have always defined ING Direct as a growth engine in terms of earnings, in terms of commercial growth. And commercial growth I agree with you and I understand your question was long defined as the growth in deposits by the way next to the growth in clients. And as you've seen that growth in clients was almost 3 million new clients in 2006, over 500,000 in the third quarter. But as you know and as we said before, given the level of the shape of the yield curve we focused in 2006 in the sales of mortgages, it is better in the present interest rate environment to sell a mortgage today than to open a savings account from our point of view. And of course the client wants greater and we try to be as competitive as we can. Our marketing expenses were focused, the growth in marketing was focused on mortgages better so while opening up new markets. We opened in Atlanta a marketing campaign; we opened in Miami a marketing campaign; we opened in Chicago a marketing campaign also based on the deposits.

You also have to bear in mind as you look at the deposits that we sold to the Degussa Bank and the Degussa Bank had funds interest of about 2 billion. If we exclude Degussa Bank then deposits grew by 7.7% which is given the present market circumstances, not that bad, not at all I would say. The mortgages went up by in the year by 20 billion which is an increase of 41%. So here you see exactly 7.7% up deposits, 41% excluding Degussa of mortgages and that is just a matter of policy. We feel very comfortable with the growth in ING Direct, very comfortable and also not only commercially but also with the profit.

It was difficult to expect by anyone and I think nobody expected it that given the present yield curve, the shape of the yield curve inversioned in the U.S. and almost flat in Europe, that we would be able to make 183 million profit in that year and with a continued effort in marketing we have not stopped or turned down our marketing, the marketing costs were EUR500 million last year. So the growth engine ING Direct still exists, is alive and kicking.

Could I just as a very last point can I ask you in your description of ING Direct as a growth engine, what timescale would you apply to that because clearly last year it wasn't really a growth engine and this year there were a number of constraints. You are talking really pretty long-term here.

I think I missed part of your question. ING Direct has always been a growth engine, and of course don't blame us that if the market changes that we change, that we have a shift in focus from deposits to mortgages. As we, for example, also do a little bit now in other products like in the United Kingdom as we just described but also there was a shift in mutual funds, another reason by the way for a moderate increase in deposits. And then in some markets given the interest rates you move to in marketing and in sales to mutual funds because that is at that moment for the client more attractive and also for us more attractive.

So yes, we have a model, and that model is growth and simplicity and ease of access, completely fairly that is where ING Direct is based upon from the client point of view and from our point of view a low-cost producer. The 40 basis points here again we are at 43 basis points and of course we are now back at 40 basis points of costs. And given the flat yield curve environment we are on 82 basis points margin even improvement of two basis points in the fourth quarter despite all the interest rate increases. So that is because of the shift in emphasis on more mortgages, more mutual funds, different product introducing in the electronic checking account in the United Kingdom and using payment services on a payment account in Spain. And that is what we are doing in order to keep ING Direct the growth engine that it is.

Okay. Thank you very much.

Christopher Hitchings.

Chris Hitchings, KBW. Three questions. One on tax; I was pleased to hear, listening to the Dutch meeting this morning that you are now up-to-date with filing your tax returns. Very good. Does that mean there is going to be no further, as it were, oddities quarter by quarter on the tax rate? And or there still some issues that might come out, is question one.

Question two, I think we all worry about the lapse rates on the Japanese business in the third quarter. Could you update us as to what has happened on that and what provisions are necessary?

Thirdly I think you were asked this morning of your exposure to sub prime mortgages in the U.S. You answered I think entirely from ING Direct perspective but of course you have assets that are mortgages in the U.S. life company. Can you just confirm what your answer applied to all U.S. assets or give some comment on what it is in the life company? Thank you.

Okay thank you. You made a remark on tax. Indeed I shared this morning that we were now up-to-date in 2005 in filing of our tax filing until 2005. Yes, we caught up; I agree there were two reasons for that. First of all, we made a sort of -- I shouldn't say that sort of an open skies agreement with tax authorities that we are fully transparent in our books for 2005 and for all the years. And that makes the filing easier. Of course you always have to be transparent for a tax inspector but here even in a proactive way is interesting agreement that we made and that made it possible to accelerate the filings that we did. So that is why we could do the 2002, 2003, 2004 and 2005 filings in one big shot. Negotiating with the tax inspector all sort of tax assets and liabilities that we had of course taken into account. And we did it rather successfully and that led to the releases.

Also because the tax rate has been decreased in the balance from 29.5 to 25.5 and we had a net liability position, which means that we could deal with that at the higher rate and we would have waited until the rate was down. So it was in our mutual interest for the tax inspector and for ourselves to speed up our filing and to come to this agreement. Is there more to be expected? The answer is, you never know. We remain conservative in our tax provision, so to speak as we always were. I think I said before that if we have a conflict with a tax inspector that we always think immediately 100% of the provisioning from his position as a rule, because there could never then be an indication that we believe that he is right or wrong. He knows that, so he knows if we take his position, 100% provisioning that we fight against his position. So that means that there was a built-in conservatism and a built-in potential release. The amount will be lowered because we are caught up until 2005. So it can never lost that loan, so to speak, that we had the sort of provision. But that is the reason that we said that we expect that a tax rate will still be between 20 and 25% for this year. But still for 2007 at the low end of that range, with the low end of the 20 to 25% rate.

Then the question on do we have sub prime mortgages in the U.S. in ING direct. Well, we were clear on that. No, we don't, and does it apply to all the assets in the U.S.? The answer is yes, that applies to all the assets in the U.S. We have zero exposure to sub prime mortgages in the U.S. The lapse rate on the Japanese rate, this is the -- let me check.

In Q3 we updated the lapse assumptions in both COLI and SPVA business based on studies and judgments and of course with the tax law changes going on in Japan the business became more volatile. In Q4 they did another set of assumptions regarding particularly in our GAAP earnings to the deferral acquisition expenses. They are updated, but the lapses are now up-to-date fully at year end. Everyone is to verify that worldwide, and that is sort of the big year in check. That can make Q4 as I said on an earlier question a bit volatile around the world for valuing new business because it is done retroactively. But the embedded values and the value of new business worldwide reflects all the latest assumptions as well as any cost and expense gap that might happen which if your sales drop that can always flow through and we always expense that immediately to the VNB, which also have an impact.

Could you clarify was there a further deterioration in the Japanese lapse assumptions in Q4?

No, there was not.

Thank you.

Lukas Daalder.

Lukas Daalder, IMC. Basically I was wondering I had a question about the dividend policy. I've seen that the payout ratios declined this year, and I am basically looking for some sort of a guide. I know you don't have any outlook for the year or you don't have any guidance for the year but maybe you have some guidance for the payout ratio and dividends.

You probably I forgot to say that Michel left 20 minutes ago due to other obligations that he had, so you won't hear him anymore. Don't think that doesn't mean speaking about a dividend, the fact that he doesn't answer as an indication of whatever. No, the dividend as far as I know the dividend payout ratio is up compared to last year. It is now 37%, and last year it was 38%, and last year 37%. So it is up. But to give guidance on the payout ratio, no you won't get it because as you know, two years ago -- I think it was two years ago -- slightly changed amended the dividend policy. We used to have a fixed payout ratio but we changed that into a policy where we want to increase the dividend gradually, a steady increase based on underlying net profit. Why we changed that because of the introduction of IFRS first of all, we move into more volatility in the bottom line in the profit after tax and therefore we -- and second, part of this volatility or a large part of the volatility is due to unrealized profits. So on non-cash components in your earnings we thought it would not be smart to pay out to in a volatile way, dividend of a non-cash items. So I think it is more of an interest of the company and not in the interest of the shareholder as well. And we also realized that most of our shareholders are interested more interested in a stable dividend than in a fluctuating dividend. So that is why we decided to bring stability in the dividend and not focus on the payout but focus on the annual increase in the dividend.

And therefore I can't give you any indication of the payout. We have said as we have said before and we reconfirmed that, that in the unlikely event of a decrease in earnings in one year, by the way that unlikely event has become more likely since the introduction of IFRS, of course. We will do at any step that decrease is not structural then we would keep the dividend, the growth in dividend at the level that we have promised to the market and therefore we cannot predict any payout by definition. On the payout ratio by the way the exact numbers for 2006 were 35.5, and the payout ratio in 2005 and in 2006 -- over year 2006 were 37 as I tried to indicate before.

Thank you.

(OPERATOR INSTRUCTIONS) Nick Byrne.

Nicholas Byrne, JPMorgan again just a quick one. Just seen an announcement from [Acmea] commenting that they have lost around 125 million on storm (indiscernible) in January which was quite widespread across the Netherlands. I just wonder if you can give some commentary on what your exposure might be and if you can indicate or quantify for us, please.

Well, there was a storm in the Netherlands, yes certainly so, and we I think that it was disclosed roughly that we have a total damage of about 200 million in total in the market, of which we have a market share of about 10%. So make your own 10% of 200 roughly speaking.

Okay. Thank you.

Bruno Paulson.

Sanford Bernstein. Two questions. Firstly, in the U.S. market you quote an overall IRR of 10.3%. Can you confirm that that is excluding any future benefit from reinsurance? And if that is indeed the case what sort of effect for the IRR would be adding back the 30 million of value for your business from the reinsurance have on the overall IRR? And you give the IRR's elements of the U.S. business but not the individual life business. I was wondering if you give us IRR's both with or without reinsurance for that would be helpful as well.

And secondly, on ING Direct and the mortgages, just confirm that mortgage is profitable overall; I was wondering whether they would reach profitability in most or all of the markets.

Bruno, you are right the 10.3%, which is in euro basis does not take into account any benefit from the reinsurance. The way I look at IRR for the U.S. is on a U.S. basis because that's really how we compete. And on a U.S. basis excluding the life, individual life and the captive challenge that we have the IRR on a U.S. basis would have been 12.8% and if you converted that to a euro basis it would be 12%. So the EUR10.3 basis so I guess that compares to 12. But again on a U.S. basis 12.8, and then when we get the captives done in 2007 which we expect sometime in the first half, that won't help value of new business. It won't change the IRR's. It will add to embedded value for our (indiscernible). And then we do not disclose the IRR by business line, but I would tell you that the individual life business has an extremely low IRR and mostly as a result -- well, two reasons. A big part of that is probably 70% of low IRR as a result of not having the captives approved so we can't take the tax advantages given that the tax law changed in April 2006. And then we also have given up a few points of IRR because our sales -- I talked about that earlier on universal life -- because of the stranger owned life insurance, investor owned life insurance, reductions in nonrecourse premium financing UL policies, that has cost us a few points on IRR because of the lower sales.

Thank you, Tom. On the profitability of the mortgages I cannot give you a direct answer on that. It very much depends, of course, on the growth of the mortgages versus the portfolio. And that is the big trigger. We have a big portfolio; then it is profitable and if you only grow 10% on mortgages then yes by definition profitable. If you -- what I at least can tell you that UK is not profitable but certainly we just started there. And that Australia is profitable and giving you exactly what I said Australia has a big portfolio, and in fact total mortgages in Australia are higher than the funds entrusted. The mortgages in Australia are growing.

The growth was about 7% in the last quarter, about 7%; for the year as a whole Australia grew by still a decent I think 20, 25% but given the size of the portfolio Australia is of course profitable. UK started at zero so that is of course lossmaking. First is not so important, the question that you ask because we know that as I said before, if the acquisition cost of a mortgage is higher than of a savings account but the running costs or the operating costs are much lower than of a savings account. It is investing in growth and yes, if you were (indiscernible) growing the mortgages faster than the profit of ING Direct would not have been under 83, but higher; but this is exactly -- you go for future growth here in ING.

I wasn't questioning the logic of going into mortgages, it is just getting a feel for as the growth of mortgages slows down the expense to the benefits to the P&L. Just going back to the first question just to make sure I haven't got mottled, the impact of including the reinsurance in the IRR is to ad 170 basis points; isn't that correct?

The way I would say if you take out the IRR for the individual life business which is dragged down by the captive and the reinsurance it would have been 12% (multiple speakers)

Okay. Thank you very much.

Trevor Kalcic.

ABN Amro, Amsterdam. Just a quick question back on the dividend, thanks very much. It was very clear in terms of payout but I was wondering if you could perhaps talk a little bit around the kind of message you are sending with the growth. So you have two years of dividend growing by 10% and other dividend growth is up to 12%. Again, could you talk a little bit around the message you are trying to communicate for that? Should we be expecting 12% growth in dividends for the next couple of years?

Thanks, Trevor. That is a question I expected, of course. To be very clear we do not give any profit forecast neither for the short-term, nor for the long-term, so that answer is no. But the 12% gives a signal of confidence in the market, confidence of future growth that we have. And you can also see that in our press release that we will focus on growth, profitable growth in the years to come, slight difference in emphasis where we last year we said -- the last two years -- we focused on return. But we have reached a level of return which in certainly in our mature markets in certain areas is so good that we can afford to focus a little bit more on profitable growth, so that was one.

Second, it also reflects our strong capital position that we have; strong capital ratios, our Tier 1 ratio at the bank, the strong rating of the bank, the strong debt equity ratio in the group and insurance level. That is also reflected. We felt that also the excess leverage capacity that we have, all those components together made us to believe that dividend increase of 12% was the right signal to the market as far as future growth opportunities and potential is concerned.

Thanks.

Christopher Hitchings.

Chris Hitchings, KBW again. Just a quick one. Am I being slightly silly over this reinsurance of the AXXX and XXX reserves? Because you had met that you have known about this since April '06. I don't know any other U.S. life company that hasn't got its arrangements in place. You told us three months ago that it would be done in the fourth quarter or the first quarter. You are now talking about in the first half. Is there a story behind this or am I being a bit too cynical?

Secondly, just a follow-up on what Trevor was asking. If your signaling dividend means confidence in profit growth and strong balance sheet, the second would imply that you now think that there is probably less need to retain profits and therefore the appropriate normalized payout ratio should be higher than -- I mean is that a correct reading? Thank you.

It is probably a little bit difficult for particularly UK analysts to understand why it takes so long to do some of these things in the U.S. But keep in mind that we have three primary life insurance companies that happen to be all domiciled in different states. One is domiciled in the state of Colorado, one in Minnesota and one in New York, and then we formed the reinsurance company in South Carolina because that is where you get the advantages of the tax breaks. So you basically need approval from all four of those state insurance departments; then in addition, once you get the structure agreed to by the state you then have to go out and negotiate with the banks, in this case several banks. I think Wachovia is the lead bank. What we were giving you indications earlier because we have approval from two of the three states plus South Carolina early in the fourth quarter, and we only had one state and I won't name the state because the insurance commissioner would get mad at me because we are having a little bit of a cross words between the two of us. But we were basically told in the early fourth quarter by the state insurance department that they approved it by the end of the year and of course we had the banks lined up with the other three states. We got a call or I got a call the Thursday before Christmas and they said we want you to change the method of your reinsurance to your captives, which between affiliates really does not matter, but they wanted it changed. We agreed to the change at the end of the first week in January.

Unfortunately the other three states, including South Carolina that has the reinsurer, now they are questioning the change and so we are trying to get them to accept the change. And then once we get all four states to agree on the right way to do it so all four commissioners and departments line up. Then we got to go back to the banks and say, okay here's the final deal and reprice the securitization. So the problem is I wish we had federal regulation because it would be done, but we have to deal with separate states, all of whom have separate commissioners and separate insurance departments. And it makes it more difficult than you would imagine particularly if you are coming from the UK where there is one regulator.

So I am not blaming it on the regulators, but we thought we were in pretty good shape. It turned out -- and it is not a big change that they made but now we have to go back and redo it. We may get it all done in the first quarter but we are saying the first half because I don't want to give you guidance again where I may not be able to deliver because it is somewhat out of my hands and in the hands of those four states.

Sorry, I'm well aware of these difficulties. I just don't know, my colleagues that cover the U.S. life industry don't know of any other company that has had this sort of difficulty. So I just wondered.

As a matter-of-fact, you wouldn't know that about our U.S. companies because they do not publish VNB or IRR. So for them I think we would be taking our time to some degree if we didn't have to worry about VNB and IRR, but we do. And so I think what you are seeing is I think the European companies are probably pushing to get it done but the U.S. companies aren't in that, and I think there is a number of U.S. companies that are in the queue behind us with South Carolina. One was ahead of us and that was Genworth, and I think they did announce in the fourth quarter that they had gotten approval. And their primary life company is in Virginia, so I guess Virginia also approved it. If we had only one state we probably would have had it done.

All right. Thanks and the other question?

As far as the dividend is concerned, you come back on the statement that I just made, whether I think if I heard it correctly whether the capital position that we have would justify an even higher payout ratio. I've just said what I've just said I have nothing to add to that and nothing to take off; the best answer would be these conference calls are being taped to ask the operator to replay what I've just said, but I don't think that's a bit complicated. No, there are three or four components that I've mentioned which let us decide the increase would be 12%. (indiscernible) was the growth prospect that we have. The capital position that we have yes, we have spare leverage capacity. Of course the spare leverage capacity we have could make it easy for us to pay out more. But we want to have the spare leverage capacity for unexpected events like small acquisitions, add-on acquisitions and those sort of things. So we feel comfortable with the spare leverage capacity we have. We feel comfortable with the growth possibility that we have and therefore we were able to increase the dividend to 12%.

Thank you. I just love the idea that the small acquisitions are unexpected events but never mind. What I was trying to contrast it with is that Michel Tilmant answered a question this morning about whether or not there is capital to be given back to shareholders, and he said that we are not there yet. i.e. he doesn't feel confident enough with the balance sheet to feel there is excess capital so I was just trying to get the feeling that you had referred to strong balance sheet as a reason why you could increase the dividend 12%; I was just trying to get some color between that.

I don't think that he said we are not there yet. There was something -- he was misheard because I think he said the possibility of share buyback is not closed, and he was understood as is not close then you could translate that as not yet, but he said it was not closed. That means it is not excluded. (multiple speakers) shareholders to buy back shares of 10% to a maximum that mandate is given every year but he said that possibility was not closed, with a d. I (indiscernible) saying that it is not closed. That is quite different.

Clearly, yes. Absolutely. Thank you much indeed.

[Rut Steen]

My name is (indiscernible) and I have a question relating to retail banking and the Postbank. Commission income is one of the big boosters in for retail banking. It went up 10%, and my question is the Postbank is inviting its clients to exchange their free so-called [herobus] into a bus for the bank will charge you EUR11 and for every million of clients who will accept that offer the bank will generate yearly 11 million of commission income. My question is in the 10% income rise in 2006, is there already a part of this effect, or can we expect a further boost in the current year?

As far as I know it is not, but you should not overestimate the amount involved; the number of people who have such a free debit card is relatively small. We have also a policy of say a hardship policy if people really can't afford then there is a special arrangement for them. So no, you should not expect a special boost in numbers here. This is (inaudible).

Thank you very much.

(OPERATOR INSTRUCTIONS) There are no further questions at this time. Please continue with any other points you wish to raise.

If there are no further questions then I would say thank you very, very much for your attendance, your presence and the questions that you have asked. Also on behalf of Tom and of John. Thank you very much, and we all hope to see you next time. Thank you.

Ladies and gentlemen, this concludes the ING full-year results conference call. Thank you for participating. You may now disconnect.