ING Group evaluates the results of its businesses using a non-GAAP financial performance measure called underlying result. Underlying result is derived from the result in accordance with IFRS-EU by excluding the impact of divestments and special items. Historic results have been restated for divestments in order to create a comparable sequence (i.e. 2010, 2009 and 2008 results exclude the results of a divestment which was completed in 2010). See note 51 in the consolidated annual accounts for a reconciliation between IFRS and underlying result.
SHAPING THE FUTURE OF OUR INSURANCE BUSINESS As already mentioned, the future independence of ING Insurance/ Investment Management is to be realised through two public offerings: a Europe-led IPO with solid cash flow combined with strong growth positions in developing markets; and a US-focused IPO with a leading franchise in retirement services.
This vision can be summarised as follows: • Being a responsible financial service provider means that we provide high quality products and services that meet the needs and expectations of our customers. It also means that we do not want to use our money for illegal, harmful or unethical purposes.
We are also committed to mobilise our knowledge network to accelerate change towards a more sustainable society. Our Economics Department published a number of research papers in the field of sustainability that help our customers and ING to further develop sustainable efforts.
Performance Management Increased attention by external stakeholders confirmed the decision to embed culture, engagement, performance management and succession planning deeper in the organisation. ING focuses on the role of leadership behaviours in achieving business results by embedding financial and non-financial targets as well as behavioural targets in ING’s performance management approach for senior executives. HR further strengthened the online performance management system.
GL places great importance on the safe and profitable deployment of loan assets. It has a client-centric focus on cross-selling, leading market positions and best-in-class execution. By improving processes GL aims to reduce its cost/income ratio. The business continued to invest in the quality of processes and staff to ensure seamless execution with expert staff who see themselves as business partners to clients.
Insurance Benelux’s ability to contain expenses, increase efficiency and standardise products and operations will help it continue to grow the business. There is a further need to reduce expenses in the coming year and to capture growth opportunities, particularly in corporate pensions due to market and regulation changes, as the business prepares for a European-based IPO of ING’s insurance operations.
In Asia/Pacific, ING sells insurance and wealth management products mainly through its extensive tied agency force, but also has access to customers through a number of preferred bank partnerships. Sales are also made through direct marketing and independent agents. There are 20,371 tied agents, more than 2 Report of the Executive Board
In December, ING announced it had reached an agreement to sell its investment management activities in the Philippines to The Bank of the Philippine Islands (BPI). It is anticipated this will be completed during the first quarter of 2011.
This section discusses the application by ING Groep N.V. (‘ING Group’) of the Dutch Corporate Governance Code effective as from 1 January 2009 (‘Corporate Governance Code’) and provides information on the share capital and control, the Executive Board, the Supervisory Board and the external auditor. This section, including the parts of this Annual Report incorporated by reference, together with the separate publication ‘ING’s implementation of the Dutch Corporate Governance Code’ dated April 2010, on the website of the Company (www.ing.com), also serves as the ‘corporate governance statement’ referred to in section 2a of the Decree with respect to the contents of the annual report (Besluit tot vaststelling van nadere voorschriften omtrent de inhoud van het jaarverslag)(1).
J.V. (KOOS) TIMMERMANS, CHIEF RISK OFFICER (Born 1960, Dutch nationality, male; appointed in 2007, term expires in 2011) Koos Timmermans graduated from Erasmus University Rotterdam with a master’s degree in Economics. Until 1991 he worked at ABN AMRO in the field of derivatives and for IBM’s European treasury he was stationed in Ireland. Koos Timmermans joined ING in 1996. He performed various roles: head of Treasury ING Insurance, head of Corporate Market Risk Management and from 2006 to 2007 he was deputy chief risk officer of ING Group, until his appointment to the Executive Board. Koos Timmermans is responsible for ING’s risk departments including compliance.
These amendments to the current remuneration policy for the Executive Board will be put forward for adoption at the 2011 annual General Meeting. If adopted, it will become effective as of compensation year 2011. The general principles underlying the adjustments to the remuneration policy for the Executive Board will also be applied in the remuneration of members of the Management Boards and other senior managers throughout the organisation.
Pension costs of the individual members of the Executive Board amounts in thousands of euros 2010 2009 2008
– trading assets –14,782 47,963 32,386 – non-trading derivatives –1,590 864 –2,020 – other financial assets at fair value through profit and loss 832 2,196 3,174 – loans and advances to customers –16,926 11,552 –76,215 – other assets 2,003 6,948 –11,847 – amounts due to banks, not payable on demand –9,831 –67,410 13,210 – customer deposits and other funds on deposit 21,202 21,073 6,831 – trading liabilities 9,804 –54,366 3,501 – other financial liabilities at fair value through profit and loss 1 –5,798 13,016 – other liabilities –6,806 –10,483 –485
The following new or revised standards, interpretations and amendments to standards and interpretations became effective in 2010: • Amendment to IFRS 1 ‘First-time adoption of IFRS’; • IFRS 3 ‘Business Combinations’ (revised) and IAS 27 ‘Consolidated and Separate Financial Statements’ (amended); • Amendment to IAS 39 ‘Financial Instruments: Recognition and Measurement – Eligible Hedged Items’; • IFRIC 17 ‘Distributions of Non-cash Assets to Owners’; • 2009 Annual improvements to IFRS; • Amendment to IFRS 2 ‘Group Cash-settled Share-based Payment Transactions’; • Amendments to IFRS 1 ‘Additional Exemptions for First-time Adopters’.
Reference is made to Note 34 ‘Fair value of financial assets and liabilities’ for the basis of the determination of the fair value of financial instruments.
INSURANCE, INVESTMENT AND REINSURANCE CONTRACTS Insurance contracts Insurance policies which bear significant insurance risk and/or contain discretionary participation features are presented as insurance contracts. Provisions for liabilities under insurance contracts represent estimates of future payouts that will be required for life and non-life insurance claims, including expenses relating to such claims. For some insurance contracts the measurement reflects current market assumptions. Unless indicated otherwise below all changes in the insurance provisions are recognised in profit and loss.
In 2010, Changes in the composition of the group comprises the sale of ING Summit Industrial Fund LP. Reference is made to Note 30 ‘Companies acquired and companies disposed’.
The total amount of rental income recognised in the profit and loss account for the year ended 31 December 2010 was EUR 304 million (2009: EUR 345 million). The total amount of contingent rent recognised in the profit and loss account for the year ended 31 December 2010 was EUR 14 million (2009: EUR 8 million).
Opening balance –2,008 –1,918 –1,354 Unrealised revaluations after taxation –777 –294 388 Realised gains/losses transferred to profit and loss 148 156 Exchange rate differences 2,890 56 –1,108 Closing balance 105 –2,008 –1,918
Notes to the consolidated annual accounts of ING Group continuedNotes to the consolidated annual accounts of ING Group continued
Notes to the consolidated annual accounts of ING Group continued 24 DERIVATIVES AND HEDGE ACCOUNTING Use of derivatives and hedge accounting As described in the ‘Risk management’ section, ING Group uses derivatives (principally interest rate swaps and cross currency interest rate swaps) for economic hedging purposes in the management of its asset and liability portfolios and structural positions. The objective of economic hedging is to enter into positions with an opposite risk profile to an identified exposure to reduce that exposure. The impact of ING Group’s hedging activities is to optimise the overall cost to the Group of accessing debt capital markets and to mitigate the market risk which would otherwise arise from structural imbalances in the duration and other profiles of its assets and liabilities. In addition, hedging activities are undertaken to hedge against the interest rate risk in the mortgage offer period in relation to retail mortgages and to lock-in the interest margin in relation to interest bearing assets and the related funding.
Acquisitions effective in 2008 In December 2008, ING acquired 100% of the voluntary pension fund Oyak Emeklilik for a total consideration of EUR 110 million. Goodwill of EUR 69 million was recognised on the acquisition and is mainly attributable to the operational synergies and the future business potential resulting from the acquisition.
In 2009 as a result of the change in strategy of ING Groep N.V. the Executive Board of ING Groep N.V. was reduced from eight to three members. The effective date of this change was 1 June 2009. At the same time the Executive Board of ING Bank N.V. and ING Verzekeringen N.V. were transformed into Management Boards for ING Bank N.V. and ING Verzekeringen N.V. The former Executive Board members of ING Groep N.V. became Management Board members of ING Bank N.V or ING Verzekeringen N.V. Furthermore, the three members of the Executive Board of ING Groep N.V. are also member of both Management Boards. The Management Board members of ING Bank and ING Insurance are also considered to be key management of ING Group.
Investment contracts for risk of company 5,991 5,896 5,991 5,896 Investment contracts for risk of policyholders 5,984 5,406 5,984 5,406 Amounts due to banks 73,227 84,968 72,852 84,235 Customer deposits and other funds on deposit 508,755 466,822 511,362 469,508 Financial liabilities at fair value through profit and loss
Main changes in fair value hierarchy (2010 compared to 2009) Amounts in each of the levels of the fair value hierarchy are impacted by changes in the volume of portfolios and fluctuations in pricing levels and foreign currency rates. The amount in Level 3 is impacted by improved market-activity in this area leading to increased trading and increases in portfolio volume in financial instruments that qualify for Level 3.
Realised gains/losses on disposal of equity securities 338 24 30 194 404 685 532 428 715 Impairments of available-for-sale equity securities –32 –49 –331 –43 –360 –1,585 –75 –409 –1,916 Realised gains/losses and impairments of equity securities 306 –25 –301 151 44 –900 457 19 –1,201
On 2 June 2010 ING Groep N.V. announced that it has bought 2,080,000 (depositary receipts for) ordinary shares for its delta hedge portfolio, which was used to hedge employee options and facilitate employee share programmes. The shares were bought in the open market on 1 and 2 June 2010 at an average price of EUR 6.33 per share.
Every year, the ING Group Executive Board will decide whether the option and share schemes are to be continued and, if so, to what extent. In 2010 the Group Executive Board has decided not to continue the option scheme as from 2011. The existing option schemes up and until 2010 will be run off in the coming years.
Changes in the ABS portfolio The total ABS portfolio remained relatively stable, changing slightly from EUR 58.4 billion at year-end 2009 to EUR 58.5 billion per end of year 2010. The value of the ING Bank ABS portfolio decreased approximately 1.1 billion during 2010, while the value of the ING Insurance portfolio increased by EUR 1.2 billion, leading to the stable value for ING Group. In the 2009 presentation of the CDO/CLOs exposure, synthetic CDOs at notional value were included. As of 2010 this exposure is not included anymore, and the Balance sheet value at 31 December 2009 is adjusted correspondingly.
To accomplish this, regulations focus primarily at the following issues: • More stringently aligning risk taking with the capital position of the financial institutions (revised Basel II for Banks). The revised Basel II
ING BANK FINANCIAL RISKS ING Bank is engaged in selling a broad range of products. The Bank Management Board is responsible for managing risks associated with the activities of ING Bank. The financial risks that arise from selling these products are managed by the Corporate Credit and Market Risk departments. Operational risks are managed by the Corporate Operational Risk department.
The tables below provide ING Bank’s Economic Capital and Regulatory Capital by risk type and business line combination.
Total NPV-at-Risk increased in the course of 2010. The change was strongly influenced by the increase in long term interest rates in the 2nd half of 2010, which increased the duration of mortgages and thereby the value sensitivity to a further rate increase. Besides, the slow housing market in the Netherlands also led to an increase in the mortgage duration.
ING has carried out a rigorous review of the internal model in the context of a Solvency II gap analysis. In the review we benchmarked our models against the Solvency II Standard Formula, the CEIOPS consultation papers and commentary of expert groups like CRO Forum and Group Consultative. We consequently plan further refinements of our Economic Capital model that address improvements of our market risk calibration, in particular for spread risk; business risk, to improve our capturing of policyholder behaviour risk and to address country risk; and operational risk. These changes will result in a material increase of our EC on top of the amount shown in the tables below which we estimate to between one and two billion euro as at year end 2010. This estimate is not included in the tables below.
The interest rate sensitivity is dominated by the Dutch separate account business where interest rate derivatives are used to hedge a liability on Group life contracts that is not marked to market.
Real Estate Exposure (Insurance) not revalued through P&L (by geographic area and sector type)
Measurement For portfolio risks which are not mitigated by diversification, the risks are managed primarily through concentration and exposure limits and through reinsurance and/or securitisation. Aggregate portfolio level limits and risk tolerance levels are set in reference to potential losses stemming from adverse claims in ING’s insurance portfolios which are reviewed annually. ING Group has established actuarial and underwriting risk tolerance levels in specific areas of its insurance operations as described below. For non-life insurance, risk tolerance levels are set by line of business for catastrophic events (e.g. natural perils such as storms, earthquakes and floods) and for individual risks.
Result for the year 3,220 3,220 Unrealised revaluations after taxation –72 –72 –72 Changes in treasury shares 22 22 22 Transfer to share of associates reserve –91 –91 –91 Transfer to retained earnings –935 –935 935 Employee stock option and share plans –57 –57 –57
In addition to the adoption of these measures, regulators and lawmakers around the world are actively reviewing the causes of the financial crisis and exploring steps to avoid similar problems in the future. In many respects, this work is being led by the Financial Stability Board (‘FSB’), consisting of representatives of national financial authorities of the G20 nations. The G20 and the FSB have issued a series of papers and recommendations intended to produce significant changes in how financial companies, particularly companies that are members of large and complex financial groups, should be regulated. These proposals address such issues as financial group supervision, capital and solvency standards, systemic economic risk, corporate governance including executive compensation, and a host of related issues associated with responses to the financial crisis. The lawmakers and regulatory authorities in a number of jurisdictions in which the Group’s subsidiaries conduct business have already begun introducing legislative and regulatory changes consistent with G20 and FSB recommendations, including proposals governing consolidated regulation of insurance holdings companies by the Financial Services Agency (FSA) in Japan, proposals governing executive compensation by the financial regulators in Germany (BaFIN) and the United Kingdom (FSA).
In addition, we are subject to the risk that our rights against third parties may not be enforceable in all circumstances. The deterioration or perceived deterioration in the credit quality of third parties whose securities or obligations we hold could result in losses and/or adversely affect our ability to rehypothecate or otherwise use those securities or obligations for liquidity purposes. A significant downgrade in the credit ratings of our counterparties could also have a negative impact on our income and risk weighting, leading to increased capital requirements. While in many cases we are permitted to require additional collateral from counterparties that experience financial difficulty, disputes may arise as to the amount of collateral we are entitled to receive and the value of pledged assets. Our credit risk may also be exacerbated when the collateral we hold cannot be realised or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure that is due to us, which is most likely to occur during periods of illiquidity and depressed asset valuations, such as those currently experienced. The termination of contracts and the foreclosure on collateral may subject us to claims for the improper exercise of its rights. Bankruptcies, downgrades and disputes with counterparties as to the valuation of collateral tend to increase in times of market stress and illiquidity.
We have suffered losses from operational risk in the past and there can be no assurance that we will not suffer material losses from operational risk in the future.
Certain transactions have resulted in the cumulative change in ownership of our U.S. subsidiaries of approximately 43% for U.S. tax purposes as of 21 December 2009. Future increases of capital or other changes in ownership may adversely affect our net result and equity. Sections 382 and 383 of the U.S. Internal Revenue Code contain loss limitation rules, the general purpose of which is to prevent trafficking in tax losses (i.e. they are anti-abuse rules). The rules are triggered when the ownership of a corporation changes by more than 50% (measured by value) on a cumulative basis in any three-year period. If triggered, restrictions may be imposed on the future use of realised tax losses as well as certain losses that are built into the assets of the corporation at the time of the ownership change and that are realised within the next five years. As of 21 December 2009, the cumulative change in ownership of our U.S. subsidiaries was approximately 43% for purposes of Sections 382 and 383 (taking into account the issuance of the Core Tier 1 Securities to the Dutch State on 12 November 2008, the repurchase of some of the Core Tier 1 Securities on 21 December 2009, and the issuance of Ordinary shares on 21 December 2009). However, the calculation is subject to uncertainties and is based on various assumptions. Future increasesof capital or other changes in ownership may adversely affect our net result and equity.
Certain holders of ING shares may not be able to participate in future equity offerings with subscription rights. We may undertake future equity offerings with subscription rights. Holders of ING shares in certain jurisdictions, however, may not be entitled to exercise such rights unless the rights and the related shares are registered or qualified for sale under the relevant legislation or regulatory framework. Holders of ING shares in these jurisdictions may suffer dilution of their shareholding should they not be permitted to participate in future equity offerings with subscription rights.
CONVEXITY The non-linear relationship between changes in the interest rates and changes in bond prices and their Net Present Value. It is a very important market risk measure for portfolios containing (embedded) options.
OPERATIONAL RISK The risk of a direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events.