Financial developments
Underlying profit before tax rose 3.4% to EUR 2,059 million during a period of difficult financial market conditions in the US and an adverse currency trend. The result was also impacted by lower non-life profits in Canada and Mexico following lower underwriting results. Excluding currency effects, underlying profit before tax rose 11% led by strong results in the US and Latin America.
Premium income at Insurance Americas fell 2.4% to EUR 23,537 million, although excluding currency effects, premium income grew 6.0% through higher life and non-life sales across all countries.
Premiums from life insurance increased 6.6%, whereas non-life premium income increased 3.0%, both excluding currency impacts. In the United States premiums grew by 6.7%, driven by higher variable annuity and retirement services sales, partially offset by lower premiums from fixed annuities. Record variable annuity production in the United States was led by strong sales of LifePay Plus, a withdrawal benefit rider introduced in August 2007. Life premiums in Latin America grew 3.8%, following higher group life business in Mexico as well as higher annuity sales in Chile, which more than offset lower sales in Mexico’s annuity business due to weaker market conditions. In Canada, non-life premiums advanced 2.7% on an increase in the number of insured risks, partially offset by lower average premium rates. Non-life premiums in Latin America grew 3.4% through higher health premiums in Chile and Mexico, offsetting lower sales in Mexico’s property and casualty business.
Operating expenses in the Americas increased 1.2% to EUR 2,519 million, or 9.2% excluding currencies. This expense growth was related to the acquisition of the pension and annuity businesses in Latin America, higher sales, strategic investments in technology and distribution as well as organic business growth, especially in the United States.
Life insurance
Life underlying profit before tax rose 19.1% to EUR 1,572 million or 29.9% excluding currency impacts. In the United States, underlying profit before tax increased 12.7%, to EUR 1,356 million, or 23.2% excluding currencies. Net investment gains, including the EUR 21 million gain on the disposition of a minority equity investment, contributed EUR 83 million to the profit growth in the United States. Interest related gains more than offset credit related losses and impairments related to the credit crisis. Results also included EUR 3 million in positive equity-related deferred acquisition cost (DAC) and reserve unlocking, a EUR 52 million decrease from the favourable unlocking in 2006. Excluding investment gains, underlying life profit before tax increased 5.5% to EUR 1,316 million, or 15.0% before currency impacts. Fee income growth driven by higher assets under management related to core retirement services and variable annuities as well as higher investment returns from alternative assets, were partly offset by increased operating expenses. Operating expenses in the United States grew 10.4% excluding currency impacts, driven by higher sales, the expansion of distribution capacity, growth of the business in-force, technology investments as well as higher reorganisation and benefits charges.
In Latin America life insurance, underlying profit before tax increased 84.6% to EUR 216 million, following higher underwriting results across the region and investment gains in Mexico. Latin America’s operating expenses rose 19.0%, or 28.2% excluding currency impacts, primarily due to the integration of the new pension businesses and operating costs and business growth in Mexico.
The embedded value of the life insurance business in the Americas increased 3.5% to EUR 10,633 million, due to strong sales and favourable operational variances, despite unfavourable currency movements and negative financial variances reflecting adverse equity market performance in the second half of 2007. The value of new business increased 61.7 % to EUR 270 million, due to positive developments in both the United States and Latin America. Last year’s value of new business was depressed by an increase in the discount rate, the impact of redundant reserves in the US individual life insurance business and assumption changes in Mexico. In the United States the value of new business increased 48.3 % to EUR 215 million, following product introductions and distribution initiatives related to the individual life and variable annuity segments as well as strong institutional sales in the second half of 2007. The value of new business in Latin America increased 154.5% to EUR 56 million, mainly due to higher volumes and returns in Mexico pensions, including EUR 10 million from acquired pension operations.
Insurance Americas’ internal rate of return (IRR) climbed 150 basis points to 11.8%, representing solid improvements across the region. In the United States, individual life IRR improved significantly, benefiting from higher sales that enhanced the per unit cost efficiency as well as from the implementation of solutions that addressed the non-economic regulatory reserves.
Non-life insurance
Non-life underlying profit before tax in the Americas fell 27.4% to EUR 487 million, or 24.5% excluding currency impacts in 2007, with lower results in both Canada and Latin America. While organic business growth in Canada remained solid during 2007, profitability was down significantly against 2006. Lower underwriting results, reflecting the continuing softening of the underwriting cycle, and losses on investments contributed to the profit decline. Underwriting results decreased in 2007 because of deterioration in the automobile insurance business and higher property insurance losses. While investment activities generated higher interest and dividend income, disappointing capital market conditions resulted in investment losses on debt securities. ING Canada continues to outperform the property/casualty industry on combined ratios, top-line growth and Return on Equity (ROE). The business is the country’s largest property/casualty insurer and has a strong reputation for effectively managing its business through the insurance cycle.
Underlying profit before tax in Latin America decreased 74.2% to EUR 17 million, due to lower underwriting results in Chile and Mexico. Mexico posted EUR 39 million in pre-tax losses, mainly caused by higher fire- and weather-related claims and provision strengthening in automobile insurance. Unfavourable non-life results in Chile and Mexico were partly offset by strong results from the health business in Brazil.
As part of its wealth management transformation in Latin America, ING made two strategic divestments in early 2008. In January, ING announced the sale of its health insurance business in Chile to Said Group and Linzor partners, and in February 2008, ING announced the sale of its Mexican insurance operations to AXA.
Non-life operating expenses were EUR 790 million, representing a 2.6% increase excluding currency impacts, with increases in Canada partially offset by lower operating expenses in Mexico.
