IT’s Contribution to Sustainable Value Creation within ING

A joint study by ING Corporate IT and IBM

carried out in 2002

2

‘Another way to restore trust in corporations is to increase transparency in the way we do business and in how we report on our business’

Ewald Kist

CEO of ING Group

Yale University 14 November 2002

3

Is IT Delivering Value?

‘IT investment did not improve productivity in 53 out of 59 industry sectors’

McKinsey 2001

‘High IT spending does not translate into better company results’

Forrester Research 2002

‘20% of spending on IT is wasted’

Gartner 2002

4

“Our single corporate measure of success is Total Returns to Shareholders (TRS).”

ABN AMRO, Annual Report 2001

“For stockholders the emphasis must be on achieving attractive shareholder returns.”

Aegon Annual Report 2001

“Our total return for shareholders has outperformed both our sector and the FTSE 100 over one, five and ten years. This reflects the soundness of our business model.”

Headline of Chairman’s Statement

Legal & General, Annual Report 2001

“Our commitment to the shareholders who own Prudential is to maximise the value over time of their investment. …Our aim is to deliver top quartile performance among our international Peer Group in terms of Total Shareholder Returns.”

Cover of Prudential PLC Annual Report 2001

“The scorecard is our performance, based on total shareholder return in relation to the best in our sector.”

Ahold President & CEO Cees van der Hoeven. Press Conference, November 19, 2002

The Importance of Total Shareholder Return

Total shareholder return represents the increase in value of the share price plus the re-investment of shareholder dividends

5

“Our single corporate measure of success is Total Returns to Shareholders (TRS).”

ABN AMRO, Annual Report 2001

“For stockholders the emphasis must be on achieving attractive shareholder returns.”

Aegon Annual Report 2001

“Our total return for shareholders has outperformed both our sector and the FTSE 100 over one, five and ten years. This reflects the soundness of our business model.”

Headline of Chairman’s Statement

Legal & General, Annual Report 2001

“Our commitment to the shareholders who own Prudential is to maximise the value over time of their investment. …Our aim is to deliver top quartile performance among our international Peer Group in terms of Total Shareholder Returns.”

Cover of Prudential PLC Annual Report 2001

“The scorecard is our performance, based on total shareholder return in relation to the best in our sector.”

Ahold President & CEO Cees van der Hoeven. Press Conference, November 19, 2002

The Importance of Total Shareholder Return

Total shareholder return represents the increase in value of the share price plus the re-investment of shareholder dividends

6

The

Intelligent Growth Study

7

8

80 largest insurers worldwide Insurers with net premiums over $1.5

billion and 40% cumulative share Total net premiums of $1.5 trillion Average asset size of $110 billion

Screening approach based on key operating and financial performance metrics

Select set of intelligent growth companies

Winning strategies and tactics for achieving and sustaining intelligent growth

5 years of performance – 1996 to 2000 Public filings and secondary data Private equity and analyst reports Executive interviews

IBM’s Intelligent Growth Study analysed the 80 largest insurers worldwide over a five year period.

9

Study of shareholder return in the insurance industry (1996-2000)

Total Insurers(80 insurers,

100%)

Total Insurers(80 insurers,

100%) 7%

Above Average(35 insurers, 44%)Above Average

(35 insurers, 44%)

Below Average(45 insurers, 56%)Below Average

(45 insurers, 56%)

15%

Above Average(12 insurers, 15%)Above Average

(12 insurers, 15%)

Below Average(23 insurers, 29%)Below Average

(23 insurers, 29%)

Above Average(7 insurers, 9%)Above Average(7 insurers, 9%)

3%

Below Average(5 insurers, 6%)Below Average(5 insurers, 6%)

19%

30%

4%

PREMIUM GROWTHCAGR in Net Premiums Written (NPW)

PROFITABILITYOp. Cash Flow as % of NPW

CAPITAL EFFICIENCYOp. Cash Flow as % of Assets

10

Best in class companies outperform major financial indices

CAGR

DAX +21.1%

IG +29.0%

S&P +15.7%

FTSE +10.6%

NIKKEI -7.9% 2001

Total Shareholder Return

-60

-20

20

60

100

140

180

220

260

300

% T

ota

l S

ha

reh

old

er

Re

turn

1997 1998 1999 2000

1996 – 2000

11

ING identified as best in class companyHowever, intelligent growth due largely to M&A rather than operational

excellence

S&P+15.7%

NIKKEI-7.9%

FTSE+10.6%

DAX+21.1%0%

0%-10% +10% +20% +30% +40%

30.3%

28.1%

22.3%

31.1%

31.3%

29.5%

N/A

12

2002

-60

-20

20

60

100

140

180

220

260

300

% T

ota

l Sh

areh

old

er R

etu

rn

1997 1999 2000 2001

DAX +6.4%

IG +15.0%

S&P +5.7%

FTSE +1.9%

NIKKEI-10.7%

CAGR1996 – August 2002

Total Shareholder Return

1998

Even when adding in the more volatile years of 2001 and 2002 (up to August) the shareholder returns for the intelligent growers continued to outperform these indices.

13

IT Peer Group40 financial services providers for which ING gathers data on IT investments, IT expenditure and financial key ratios

Intelligent Growth Study analysis of Total Shareholder Return (TSR) for 80 largest insurers worldwide divided into four categories.

16 insurers evenly spread over four

categories

POOR PERFORMERS

INTELLIGENT GROWTHPOTENTIAL

EFFICIENTLY OPERATEDSLOW GROWERS

INTELLIGENTGROWERS

Combining Metrics from IBM and ING

14

0%

5%

10%

15%

20%

25%

30%

0% 5% 10% 15% 20% 25% 30% 35%

Poor performers

Intelligent growers

Average performers

Note: Average performers are slow growers or potential intelligent growers

Total Shareholder Return

HighLow

Co

st

to P

rem

ium

s r

ati

o

Fa

vo

ura

ble

Un

fav

ou

rab

le

Total Shareholder Return related to better cost management

An additional financial performance metric was identified which was to be used in further analysis – the operating cost to premium ratio. It was clear from the work already done that the higher performers had a significantly lower cost to premium income ratio, the high performers averaging around 12% with the low performers averaging around 25 %. This means that intelligent growth companies were better at managing their Total Operational Costs.

15

Intelligent Growers invest differently – partly due to focus on core IT activities. They are also innovative in their use of IT

TOC as % of Premium Income

Out-sourcing as % of IT Cost

IT Cost as % of TOC

New Develop-ment. as % of IT Cost

Mainten-ance as % of IT Cost

Lower cost structure and a greater degree of IT Outsourcing

Higher spending on IT and more emphasis on new development as opposed to maintenance

Poor Performers

Slow Growers

Potential Intelligent Growers

Intelligent Growers

16

-15

-10

-5

0

5

10

15

20

25

30

12 17 22 27 32 37

% New Development Cost related to Revenue CAGR

High performers tend to have a higher ratio of New Development Cost ING combines high Revenue CAGR with a lower ratio of New Development Cost

HighLow% New Development Cost

Re

ve

nu

e C

AG

R

Lo

wH

igh

R2 = 0.85Corr. = 0.92

Note: Only for 8 of the 15 competitors IT metrics could be related directly to individual competitors Total Shareholder value ranking is based on ranking points for Revenue CAGR, Operational Cash / Revenue and Operational Cash / Assets

High performers

Low performers

New Development cost as % of IT Cost

ING

17

0

5

10

15

20

25

30

35

40

45

5 7 9 11 13 15 17 19

% Maintenance related to Cost to premiums ratio

High performers tend to have a lower ratio of IT maintenance cost

Maintenance cost as % of IT CostHighLow

Co

st

to p

rem

ium

s r

ati

o

Hig

h p

erf

orm

ers

Lo

w p

erf

orm

ers

R2 = 0.46Corr. = 0.68

ING

18

% Outsourcing related to Shareholder Return High performers tend to have a higher ratio of outsourcing cost

Note: Only for 8 of the 15 competitors IT metrics could be related directly to individual competitors Total Shareholder value ranking is based on ranking points for Revenue CAGR, Operational Cash / Revenue and Operational Cash / Assets

0

5

10

15

20

25

30

0 5 10 15 20

HighLow% Outsourcing cost

To

tal

Sh

are

ho

lde

r R

etu

rn R

an

kin

g

Lo

wH

igh

R2 = 0.54Corr. = 0.83

High performers

Low performers

19

ING group compared to best practice ING insurance is a high performer in terms of cost to premiums ratio

ING insurance has IT intensity comparable with high performers of peer group

13%

8%

32%

16%

25%

14%

15%

15%

0% 5% 10% 15% 20% 25% 30% 35%

External labour cost as %of total IT cost

% IT Maintenance Cost

% IT New DevelopmentCost

IT Intensity (% of TotalOperational Cost)

High performers peer group: Cost to premiums ratio = 12% ING group: Cost to premiums ratio = 11%

20

IT intensity

IT Cost drivers related to Shareholder Return High Shareholder return is related to favourable Cost to premiums

ratio

Total Shareholder

Return

- Cost to Premiums

Ratio

%New Development

% Maintenance

% Outsourcing

+

++

-

++

Legend:+: positive influence-: negative influence0: No influence

%Strategic

%Transactional

%InfrastructureIT I

nve

stm

ent

Mix

IT C

ost

Str

uct

ure

Financial Performance

+

+

+

Eco

no

me

tric

al A

nal

ysis

Po

rtfo

lio

an

alys

is

+

-

21

Conclusions from Econometric Analysis

• Continued cost management focus needed on enhancing cost to premium ratio by replacing labour with capital projects in IT

• Shift of expenditure from legacy maintenance to new developments must be continuously encouraged

• Continue to actively seek favourable outsourcing opportunities (including offshore)

22

Conclusions and Actions• Continued cost management focus needed on enhancing cost to premium ratio by replacing

labour with capital projects in IT

• Shift of expenditure from legacy maintenance to new developments must be continuously encouraged

• Continue to actively seek favourable outsourcing opportunities (including offshore)

• Keep active watch on investment portfolio balance. Encourage optimum mix of strategic, transactional, infrastructure, and informational investments

• Use outputs from current MTP/IT dashboard process to provide further intelligence and actions

• Encourage greater entrepreneurial culture amongst CIOs to strike an appropriate balance between the taking of calculated risks and undue risk aversion in their approach to IT investments. Incorporate such evaluations in CIO performance appraisals and rewards

• Bear in mind the Ewald Kist requirement to provide greater transparency to shareholders and other stakeholders on how we govern and manage critical and expensive resources such as IT

• Develop article for Shareholder Bulletin and presentation for Executive Board

IT’s Contribution to Sustainable Value Creation within ING

A joint study by ING Corporate IT and IBM

11 December 2002

DISCUSSION