ING Groep NV (ING) 2007 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the ING Q4 results 2007 and embedded value presentation conference call. 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 Miss Gemma Backs. Please go ahead.

This is Gemma Backs for ING Groep welcoming you to ING's US investor and embedded value presentation conference call. Before turning this over to John Hele, Chief Financial Officer; and Koos Timmermans, Chief Risk Officer, let me first say that any forward-looking statements in today's comments are subject to a number of variables. They include 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, John and Koos, over to you.

Good afternoon in Europe and good morning still in the Americas. I would like to welcome you to the embedded value call as well as general call with analysts here in the afternoon. In addition to Koos Timmermans with us today who is the Chief Risk Officer of ING Groep we also have Tom McInerney on the line, the executive board member responsible for the Insurance Americas.

We have a show presentation to walk through first just to give some key points and highlights on the embedded value. On Page 3 of that presentation has the key points and the first point is the embedded value is EUR32.5 billion before dividends of 17% from 2006. Our Group embedded value where we take the life insurance embedded value and make a few adjustments to move from statutory accounting to [iferes] accounting. and then add the book values for banking and asset management and (inaudible) businesses (inaudible) is EUR21.19 per share up 6% from 2006.

Our value of new business in 2007 increased 38% over 2006 which is a very significant increase and we were EUR1.1 billion in value. The VNB was up in all regions with Central Europe and the Americas showing the largest increase. Developing markets delivered 61% of the group value of new business.

The embedded value profit was up 41% and the return of that embedded value up 97%. This was of course driven by the high VNB and positive operational variances. The higher return on embedded value was driven by the EV profit and favorable impact of economic assumption and discount rate changes.

Importantly though, the assumptions that we use is tied and much more aligned to market rates and the positive return on embedded value came from all different drivers and across all regions. You can see this graphically on Slide 4 where we show from 2004 to 2007 the buildup of our value of new business. So it would come from a level of EUR600 million now to EUR1.1 billion and you can see the growth across the board in all the different business lines.

In particular, we had a large increase in the Romanian second-pillar pension fund and that has been a real addition for this year. Nevertheless even excluding that, we have had a very good increase in value of new business from 2006. At constant FX rates on Slide 5 you can see the quarterly progression and we have adjusted the Q4 number for the change in the discount rate so you can see a more comparable pattern across the board.

As you look at Slide 6, this is the developing markets, delivered the 61%. And I think importantly to point out is that the US value of new business was up 48% from 2006 thanks to much better sales in the life insurance business plans and within the statutory reserves modified and also with their new variable annuity product is doing extremely well in the second half of 2007.

The embedded value on Page 7 as I said earlier is up 17% before dividends. We have paid a large dividend of excess capital out of the insurance entities up to group. So the embedded value at year end is EUR27 billion but nevertheless this is really a dramatic increase and you can see the major components and sources of that.

On Slide 8 you can see the historical view of EV profit. EV profit is a key measure that we use across the group and is actually in the (technical difficulty) across the group. The continuation is EV profit and you can can see solid progression.

On slide 9 you can see the group embedded value and the important number I think that people need is the adjustments for embedded value. And this is -- we list the components of it to get there. And we are ending the year in quite good shape, EUR21.19 per share.

We show on the next slides just to give you a comparison and easy reference point to where these key assumptions were for interest rates and discount rates for embedded value in 2006, the 2007 calculations which we set in the middle of the year and then also the most recent implied risk-free rates at that time. So there are slight differences as the markets move around but in general we're pretty close to where we were. For your ease of reference we have given you the sensitivities across the board here for the changes in interest rates for each of the currency zones from Slide 10 and 11. So if you want to make any slight adjustments you are welcome to do so.

On Slide 12 we have the waterfall effect showing the major components of moving the total group embedded value what we consider to be an EV profit and the major changes across the board with some explanations. We then on Slide 13 give it for Insurance Europe and you can see VNB increased from 219 to EUR400 million, a very dramatic increase.

We also in the EV profit have the investment performance on equity and real estate gains that was helped by the ABN Amro Numico extraordinary capital gains we received this year. But (inaudible) positive contributors here both with lower [lapse] in maturity rates and some refinements to the economic assumptions and discount rates.

On Slide 14 in the Americas you can see the value of new business at being EUR270 million and large contributions from life and wealth management as well at EUR271 million. These have all been in the EV profit for the year of almost EUR500 million. And what has made a major impact of course in Insurance Americas taking EUR1 billion off of the embedded value was the strengthening of the euro against the Americas currencies.

So I think given this is still up quite dramatically it's really a testament to the strong results that it happened in an addition the pension fund being acquired in Latin America adding EUR497 million of embedded value. Turning to Asia-Pacific a gain of EUR442 million, one of the largest single contributors to VNB; along with some other positive points and some slight model changes in Taiwan and Korea reduced the number to EUR1.9 billion.

We show for you and highlight for you the sensitivities to embedded value and a combination of increasing interest rates. We also show 1% change in long-term assumptions for equity and real estate returns and immediate fall in the market values of equity and real estate and we have made some adjustments since year-end in this.

But this is a global change in all markets in the world. So although some markets are down they're not all down at this level. So you have to do the calculations around the world as to where you think it's going to end up. But we give the sensitivity by each major line of business. On the VNB sensitivities on Page 17 we show the various points there.

So in summary, we are quite pleased with our embedded value performance this year in our life insurance businesses. We think they're up solidly, they're contributing solid value to our overall group. Sales are very strong, we have good returns, good IRRs across the board now in all of our major lines of business and we see a solid value in new business contribution. And also our (inaudible) worldwide in addition to new sales is really focused on the growth of the entire book and you can see that being reflected in a very solid embedded value profit and a return on embedded value. With that we will be Koos, Tom and myself will be pleased to take questions.

(OPERATOR INSTRUCTIONS) Farooq Hanif, Morgan Stanley.

I had a couple of questions actually. Firstly, the Romanian pension business, when you work out the margin it's huge. It's about I think 163% or something like that on the Q4 numbers. That just seems really, really high. I was just wondering why it's so high. Is it because you are assuming that customers make extra increments in the future? Is it because your longevity assumption (inaudible) reincarnating or something? That's question number one.

Question number two is in Taiwan we've had some pretty good overall numbers for a while now, for a few quarters. You're happy (inaudible) profits. I think you made, a comment already about the reserve adequacy in Taiwan going up and you have lessened your criteria for what reserve adequacy you kind of need in Asia as a whole. When are we going to see (inaudible) profits coming to you in Taiwan?

Your first question on the Romanian business, it is recorded in annual (inaudible) business because of course we sign people up and then they'll be paying us deposits for the next 30 years or so. So the net present value of that is pretty good business. We now have EUR9 billion in assets in Poland from this type of business that we signed up many years ago.

So the ratios are, if you look at VNB over APE is quite high. If you look at it in terms of the present value of premiums which we published on Page 15 in embedded value report for Central Europe and Spain, it makes a more sensible ratio because we're locking in such a long, a very long business here.

May I just ask -- sorry to interrupt -- may I just ask what longevity you are assuming and approximately the duration of the customer?

It's around 20 -- the duration would probably be close to 20 or 15 or 20 in terms of measurement because it's -- the net present value of duration changes. It's very long. The people are young and they've all signed up for these pension programs generally (multiple speakers) it's around for a long period of time.

In terms of the Taiwan business, well the VNB is extremely attractive right now in Taiwan. The rates are set by the regulators there. So we're very pleased and we're becoming more productive with our sales force and our business there. I think that we have a policy which we have published in terms of the reserve adequacy and when we would start to see some profits there. We want the reserve adequacy to be over 70% ending the year and then could start to see some profits to be released in the next year.

We did not end about 70% at year-end so we'll not have profits in 2008. That will be an annual thing we look at year by year. This is a very long-tail business and the enforce book takes some time. So the VNB is helpful to it but it's going to take some time to recover from that.

I thought that in Asia-Pacific the adequacy was sort of 70% overall wasn't it?

It was for Asia-Pacific but not for Taiwan yet. The (inaudible) for profits in Taiwan are at a business unit level, not that an Asia-Pacific level.

What is the number for Taiwan for reserve adequacy (inaudible) basis?

Koos, do you have that number what the reserve adequacy was at the end of the year for Taiwan?

The Taiwan number -- at 50% or at the 70% (multiple speakers)

What was the number? I think it was around 60 but I can double check that.

I don't have that there but 50% adequacy (multiple speakers)

(multiple speakers) not what the percentage (multiple speakers). It's definitely not 70 because otherwise we would be doing some profit (multiple speakers)

(inaudible)

It's definitely improved but it's not near the 50 (multiple speakers)

It just seems to me that Taiwan and Japan are the two areas that have been already low or lower than we all thought in Asia but could be an upswing. I'm just wondering (multiple speakers)

Japan is highly volatile (inaudible) quarter by quarter depending upon the volatilities and the hedging. And it's been very volatile of course for the world markets. Some of the funds both currencies and interest rates and equities -- we've had all three areas really affecting Japan. And Taiwan is our long-term issue before we ever get to our profits there. So, the reserve adequacy was just below 70%.

So if we have a positive yield curve situation I would guess then there's a good chance you might see something in 2009 but that is a (inaudible)?

Well the Taiwanese market is very tricky. There's currency controls and it doesn't follow the normal markets (multiple speakers) and so you just have to wait and see how that develops with the country.

(OPERATOR INSTRUCTIONS) Chris Hitchings, KBW.

Can you take me through a little bit more on these model changes? There seems to be a very large positive in the Netherlands and negatives almost everywhere else. And you described it as sort of up (inaudible) asset mix (inaudible). It just seems a very large number for something which -- just a little bit more (inaudible) on that.

Sure, the Insurance Europe model change of EUR642 million is basically all from (inaudible) and it was an asset mix change of assumptions where we change the business for the total asset side for matching the liability. So not just for the capital surplus but blending a mix of equities, real estate and private equity which is essentially how we've been managing the business but adapting it for the entire business and for the longer-term liabilities.

And we want to put that through as a model change versus as a financial variance in the group to not have that artificially going to embedded value profit. The other ones that were negatives in particular in Asia-Pacific is a change to Greenfields where we don't penalize the VNB for Greenfield startups anymore and that got moved to the embedded value and some model changes in Korea and Taiwan.

So just again just trying (inaudible) I'm obviously terribly stupid here but 682 in Netherlands reflects the change in the asset mix i.e. the reduction in equities. Is that right?

No, it actually reflects the change in our asset mix that backs the liabilities. The equities that we dividend out from the Netherlands were all backing mainly free surplus. (multiple speakers) large free surplus starting the year and EUR5.5 billion (multiple speakers). So this is an asset change that affects the entire asset mix where we assume and we've actually changed now the asset mix after a long study of the optimal asset mix to back these liabilities which is a blend of corporate bonds, government bonds, and allocation equities, real estate and private equity.

So what is the significant asset change that you have made (inaudible)? I mean is (multiple speakers) reduction (inaudible)?

It was a slightly higher allocation to real estate and some to equities including private equities. I think we moved up probably about 5% and that kick out a net present value because we assumed higher margins (inaudible) embedded value.

I see, so it's a riskier asset mix but given your higher margins which spews out (inaudible) projected higher margins you hope.

Yes.

And it spews out as an instant profit.

That's how it works on this formula of embedded value.

Perhaps you'll do that in Taiwan?

I wish I could but (multiple speakers) assumptions of reality.

William Elderkin, Citigroup.

Three questions please. First of all could you explain in more detail what is being -- why you've been doing so well with the US variable annuity sales? You mentioned this morning you had some more wholesale (inaudible). Could you talk a bit more about the products and so on?

The second question was could you give us the EV sensitivity for Taiwan if you assume that bond yields remain at that current level as supposed to trending up I think to 3.9% or so is what is assumed? And then finally with Dutch Life business, have you taken it -- very much reduced the (inaudible) surplus. I just wonder what the impact (inaudible) was for the Dutch Life segment (inaudible) earnings?

Sure (inaudible) the first question I would like to turn over to Tom McInerney who will explain great success in a US revenue business.

I would say that we have a very good mix of products. In particular we lost a new withdrawal benefit (inaudible) that has been quite successful in the marketplace. So I think it's a combination of having a broad array of products, both living benefit products and withdrawal benefit products. And we have been adding to our wholesaler group for the last couple of years. In 2007 we added 18 wholesalers which I think brings us up to 125 wholesalers. So it's the combination of having good broad products and increased distribution capacity was the driver on the (inaudible) side. I am very pleased with both the gross sales as well as the net flows on the (inaudible) side.

Okay, your second question on the EV sensitivities. On Page 28 of the embedded value report, you can see the decrease in new money rates and it depends whether you want a discount rate as well so we give you the combination of those two as well at the bottom. And for a 100 basis points even reduction across the board it is minus EUR970 million but this would not be -- you want to flatten it out. So I suggest you interpolate between the two.

Current rates are about 2.6%, 2.55% today in Taiwan. So it's about 100 but on the long end. And the way that it's modeling it takes 20 or 30 years before you ever get to that rate. So it would probably be less than half of that amount I would estimate. We didn't run that but it's -- you're going to be in that ballpark because it takes so long to surpass the testing to get out there. Your last question on the impact of the dividends from [National Netherlander] and the impact of the Dutch Life business, there will be reduction in earnings compared to the earlier part of '07, a EUR250 million a year pretax.

Just going back on that one, I think you mentioned at the third quarter stage that the Dutch, the third quarter life profit was a more realistic run rate. Is that sort of (inaudible) in the free surplus already excluded by the time we got to the third quarter?

A piece of it was because we paid a 1.7 million dividend at the end of June out of the total of 5.5 million taken out. (inaudible) the ratio in my head here. So it's maybe another 175 lower from (inaudible) rate per year pretax.

So, it is somewhere between the third and the fourth-quarter a reasonable basis for thinking about the earnings level for '08 and beyond?

Let me just look at the third quarter for a minute (multiple speakers)

(multiple speakers) the underlying assumption is 36 in the third quarter I think and it's 192 in the fourth.

Yes, life insurance there is 129 in the third quarter and 165 in the fourth quarter. So you're definitely in that ballpark.

Bruno Paulson.

Three questions. Firstly given that we are now seemingly within a whisker of turning Taiwan (inaudible) switch what would the earnings have been in 2007? I know they were about EUR38 million in Q1.

Second question is obviously you saw this downward rebasing of the touch Dutch (inaudible) earnings as the asset gains have come out. In the US, are we at sort of normal earnings levels or how far are we from the normal earnings levels from things like private equity and unusually low (inaudible) this quarter bond losses?

Finally, (inaudible) was saying that the main risk to Q4 is to earnings was from equities moving. Can you give us some guidance as to the sensitivity of (inaudible) earnings to say 7% in equity prices? Thank you.

I had it on mute. The first questions on Taiwan regarding how much the amount was that we put away into reserves in the year, I just have to look that up before we get back to you so I will come back on that question. The assets -- (inaudible) perhaps if Tom can answer that.

You want to talk about the normal earnings flows in the US?

Yes, we have had the unpleasant surprise in the Netherlands. I was just wondering what kind of unpleasant -- whether there has been private equity or other earnings (inaudible) in the US numbers as well?

I guess what I would say first of all in terms of looking at underlying earnings I think the best gauge is probably on the US statistical supplement on Page 7 which lays out the earnings by the key businesses over a quarter. So I think obviously in the fourth quarter of '07 we had (inaudible) was down about 4%. It was up about 6% in the fourth quarter of '06. So there is sort of a 10% swing that obviously had an impact in retirement services and the variable annuity businesses.

On the fixed annuity, we have an accounting economic mismatch between our indexed annuities. And while obviously in the current environment we're not really selling a lot of those products but they do have a swing and I think that there is about quarter over quarter fourth quarter '06 to the fourth quarter '07 there was about a EUR60 million swing in terms of the accounting and the economics because of how the accounting on the hedges work versus the economics.

So I think you've got to take those noises out but I think if you look at those quarters on average, if you took the earnings and (inaudible) cumulative up for those eight quarters divided by eight that will probably give you a decent, normalized picture. I mean there are pluses and minuses obviously as the equity markets go up and down.

And then I guess the other -- just give you a rule of thumb there can be other things that can factor into this in terms of (inaudible) rates. But for a (inaudible) in the US business or a 10% drop in the equity markets that occurred at the beginning of the year down 10% and then we grew at our long-term assumption (inaudible) the index, the S&P overall at 7.5% and a 1.5% dividend yield. You have about -- in Euro about a EUR200 million reduction in earnings on the US business overall principally focused on the wealth management businesses, retirement services and variable annuity. You'd have about 30 to EUR35 million for reduction in fee income, lower assets times the fees; about EUR100 million for (inaudible) because as you know we don't do mean reversion for quarter affects like most of our competitors.

We're actually looking at that. But at this point we do (inaudible) locking. So that would be about EUR100 million of the 200 and then the balance would be so far 50 or EUR75 million would be for the collateral impact you would have in that kind of an equity market for things like alternative investments, private equity, etcetera. So that's sort of a rough rule of thumb. Obviously there can be other factors that could move that up or down but I think that gives you a pretty good sense.

Bruno, on your first question regarding the Taiwan, we put about EUR140 million of earnings into reserves last year.

Is that pretax earnings? Sorry.

Pretax and that is the (inaudible) you can think of because once we are above about 70 we would release earnings to the extent it doesn't make the reserve inadequacy more. So, it will be a piece of that. Of course as it develops and as it gets better and moving above 70 we would issue more earnings. So it would be ratio of between zero and in the range of EUR100 million.

The US guidance on the impacts of (inaudible) equity is very handy. Is there any guidance anywhere else in the (inaudible) insurance business but the insurance businesses also had the impact of the 10% equity fall?

It is a little complex because you've got various offsetting items across the board here but we do have some basic rules of thumb in terms of earnings that risk from our risk dashboard that we published last September on our investor (inaudible).

Maybe I can add like the European -- the nature of the European exposure is slightly different because there we have to direct the investments. If we look at the European portfolio there is approximately EUR8 billion of equities in there so a 10% move would have an EUR800 million value loss but not an earnings loss because then we talk about the unrealized buffer which we have in there. For the European business there we don't have a similar magnitude of the fee income exposure like in the US.

The US as I have said is the largest single sensitivity to this (technical difficulty).

(OPERATOR INSTRUCTIONS)

Are there anymore questions from anyone on the call? (technical difficulty) We still have number two in terms of market share in Japan in the fourth quarter but the overall level was down compared to the third quarter. We sold (inaudible) premiums of EUR1.2 billion in the third quarter, EUR700 million in the fourth quarter. But we believe this business will give us -- through the cycle an appropriate return. In the (inaudible) business we're quite well-positioned for the coming tax law in terms of how it's going to perform and we think we have a solid position there.

The guidance on the profits in Japan are volatile and will continue to be volatile. But they will average out over time. These contracts are 10 years in length and our guidance was in terms of assets about a 30 basis points pretax margin we expect on these variable annuities through the cycle.

Okay and (inaudible) margin what -- I think their volatility is has gone up -- spiked up to sort of a 99 percentile or something and I was wondering would it have to come back to get to your assumptions?

We actually factor in the VNB of higher hedging costs due to lower interest rates which is sensitive to it and higher volatilities. So we adjust the VNB each quarter for it. So that was a major impact in it.

And also the [coli] business selling less had some acquisition expense overruns in the quarter and so those get deducted right off the point. Those two, the lower [coli] sales and the higher hedge costs were the major change in terms of the reduction in VNB.

The second half margin basically gives you an indication (multiple speakers). Thank you.

We have no further questions at this point. Please continue.

On behalf of the entire executive board and Tom McInerney and Koos Timmermans and myself we would like to thank you for calling in and listening this afternoon. After a long day of disclosures we hope we have clarified our positions and the strength of ING Groep in these turbulent times. We will continue to execute our strategy as planned. Thank you very much.

Ladies and gentlemen, that concludes today's conference call. Thank you for participating. You may now disconnect.