ING Groep N.V. Amstelveenseweg 500 1081 KL Amsterdam P.O. Box 810, 1000 AV Amsterdam The Netherlands
Chairman’s message 4 ING at a glance 6 Boards 8 Key figures 9 ING share 10 4 Consolidated annual accounts
Financial and regulatory environment 12 Strategy 16 Sustainability 20 Capital management 24 Risk management 25 Human resources 26 Banking overview 28 –Retail Banking 32 –Commercial Banking 40 Insurance overview 45 –Insurance 48 –Investment management 55 3 Corporate governance
Contents 1 W ho w e are 2 Report of the Executive Board 3 C orporate governance 4 C onsolidated annual accounts 5 Parent com pany annual accounts 6 O ther inform ation 7 A
Trust Despite the tough economic climate, we have been working hard to regain the trust of all of our stakeholders and particularly of our customers, who are fundamental to our business; for example by offering simple and transparent products at a reasonable price, and by continuing to lend to them. We measure our performance using the Net Promoter Score, which tells us what our customers really think of us and whether we provide them with the products and services they need. The real test is whether they would recommend ING to family and friends.
Other examples include sharing knowledge by organising seminars for specific customer groups or by publishing research to inform customers about relevant developments and to alert them to opportunities. An example of this is the ‘Renewable energy in the Netherlands until 2020’ report. We also run global financial education programmes to provide customers and others with a greater understanding and control of their finances. Our ING Chances for Children programme, which we run jointly with UNICEF, helps children all over the world to access education and encourages independence. You can find out more about this in the ‘Sustainability’ chapter.
OUR STAKEHOLDERS ING conducts business on the basis of clearly-defined business principles. In all our activities, we carefully weigh the interests of our various stakeholders: customers, employees, business relations and suppliers, society at large and shareholders.
Repayment of core Tier 1 securities It is one of ING’s priorities to repay the remaining EUR 3 billion of capital support to the Dutch State as soon as possible. However, in light of the current challenging and changing financial and regulatory environment we take a cautious approach and maintain strong capital ratios as we build towards Basel III and satisfy other regulatory requirements.
Strong financial position Solid earnings and a strong capital and funding position enable ING to support its customers also in uncertain times. On the banking side the core Tier 1 ratio, a key measure of financial strength, was at 9.6% at the end of 2011. ING Insurance/Investment Management’s (IM) operating results mostly showed improvement throughout 2011.
Retail Banking provides retail and direct banking services to individuals and small and medium-sized enterprises throughout Europe, Asia and Canada, with a base in our Northern European home markets. Our ambition is to transform ING Direct into a full-service bank.
Commercial Banking offers services such as lending, payments and cash management in more than 40 countries to corporations, governments and other financial institutions.
ING Group in accordance with IFRS-EU in EUR million unless otherwise indicated 2011 2010 (1) 2009 (1) 2008 (1) 2007 (1)
Addition to loan loss provision Banking operations 1,670 1,751 2,973 1,280 125
(1) The figures of this period have been restated to reflect the change in accounting policy, i.e., the move towards fair value accounting for Guaranteed Minimum Withdrawal Benefits for life in the US Closed Block VA as of 1 January 2011.
PROFIT RETENTION AND DISTRIBUTION POLICY ING Group’s profit retention and distribution policy is determined by internal and external capital requirements and its growth opportunities on the one hand and the capital providers’ dividend expectations on the other. ING Group’s internal needs are determined by statutory solvency requirements and capital ratios, in excess of which ING Group needs to maintain healthy buffers. An important determinant are the credit ratings which are of utmost importance to ING Group, because they directly affect the company’s financing costs and hence profitability. For their part, the capital providers expect a dividend which reflects ING Group’s financial results and is relatively predictable.
ING’s policy is to pay dividends in relation to the long-term underlying development of cash earnings. Dividends will only be paid when the Executive Board considers such a dividend appropriate. Given the uncertain financial environment, increasing regulatory requirements and ING’s priority to repay the remaining outstanding core Tier 1 securities, the Executive Board will not propose to pay a dividend over 2011 at the annual General Meeting. ING intends to resume dividend payments on common shares when all remaining core Tier 1 securities have been repaid to the Dutch State and Basel III requirements have been met.
ING remains committed to repaying the Dutch State as quickly as possible on terms acceptable to all stakeholders. Ideally, ING would like to complete the state repayment as soon as possible, however, given the ongoing crisis in the eurozone and increasing regulatory capital requirements, ING needs to take a cautious approach and to maintain strong capital ratios in the Bank as it builds towards Basel III.
SHAREHOLDERS AND DEPOSITARY-RECEIPT HOLDERS WITH STAKES OF 5% OR MORE To the best of our knowledge, as at 31 December 2011, there were no shareholders or holders of depositary receipts for shares who reported to hold an interest of 5% or more as mentioned in the Dutch Financial Supervision Act, other than Stichting ING Aandelen (ING Trust Office) and Stichting Continuïteit ING (ING Continuity Foundation).
* Year-end 2011 figures, estimated on information provided by several large custodians.
Investors and fInancIal analysts may contact: ING Group Investor Relations (AMP C.03.049) P.O. Box 1800 1000 BV Amsterdam The Netherlands
We made good progress in 2011 with the European Commission’s restructuring requirements for ING Group, and with the strengthening and streamlining of our banking and insurance businesses. The result is that ING is now in a relatively good position to navigate successfully through the challenges that will undoubtedly come from further changes in the financial and regulatory environment.
CHALLENGING ECONOMIC AND FINANCIAL ENVIRONMENT The sovereign debt crisis deepened in 2011 and had a negative effect on the economy and on financial markets.
By contrast, in many emerging economies like China, India and Brazil, household spending and corporate investment stayed at elevated levels and thus fuelled job creation, but this was not enough to quell fears of a further widening of global imbalances. Major imbalances between Asia and the Western world and between North and South in Europe continue to exist and threaten economic growth, and the stability of the global financial system. Looking ahead, underlying sovereign and financial system vulnerabilities remain a significant concern. The outlook for a large part of the global economy in 2012 therefore seems to be somewhat gloomy.
Underlying net result for 2011 was EUR 3,675 million, up 15.1% from EUR 3,192 million a year earlier. Underlying net result is derived from total net result by excluding the impact from divestments and special items.
Shareholders’ equity increased EUR 5.8 billion from EUR 40.9 billion at the end of 2010 to EUR 46.7 billion at the end of 2011. This increase was caused by the EUR 5.8 billion net profit. Positive changes in reserves were offset by the EUR 1 billion repurchase premium paid to the Dutch State in May 2011. This amount is the 50% premium paid on the repurchase of EUR 2 billion core Tier 1 securities issued in November 2008. Shareholders’ equity per share was EUR 12.33 at the end of 2011 versus EUR 10.81 at the end of 2010. Underlying net return on equity, calculated as underlying net result divided by average IFRS-EU equity, improved from 8.1% in 2010 to 8.7% in 2011.
Bank levy On 1 July 2011, the Dutch Ministry of Finance announced a temporary reduction of the real estate transfer tax from 6% to 2%. In the announcement several ways of funding the reduction were identified, the introduction of a bank tax being one of them. The levy may enter into force in 2012. Dutch and non-Dutch entities with banking activities in the Netherlands will be included in its scope. The taxable base of the levy is the liability side of the (global consolidated) balance sheet with an exemption for equity, for deposits that are covered by a deposit guarantee scheme and for certain liabilities that relate to insurance business. The rate of short-term funding (less than one year) will be twice the rate of long-term funding (more than one year). Currently, total yearly tax proceeds of EUR 300 million are expected. We believe the timing and motivation for such a tax to be less opportune given the economic climate and conditions in financial markets.
Deposit Guarantee Scheme In August 2011, the Ministry of Finance and the DNB published their proposal to establish an ex-ante funded Deposit Guarantee Scheme (DGS) in the Netherlands. As was announced at an earlier stage by the Dutch finance minister, the target level of the fund will be 1% of total guaranteed deposits in the Netherlands. This equals about EUR 4 billion, to be built up, in principle, within 15 years. The main element of the proposal is that for each bank the individual target amount is defined as 1% of its guaranteed deposit base. To reach this individual target amount, every bank pays a base premium of 0.025% per quarter of the guaranteed deposits. Additionally, a risk add-on of 0%, 25%, 50% or 100% of the base premium has to be paid by every bank, depending on its risk weighting.
In order to achieve these goals it is very important that the Solvency II framework, as originally envisaged, will become market-based, avoids pro-cyclicality and should be able to withstand market volatility. The framework should therefore ensure that the measures to be implemented are robust enough throughout market cycles.
In March 2011, the European Insurance and Occupational Pensions Authority (EIOPA) published the results of its Fifth Quantitative Impact Study (QIS5) on Solvency II. ING participated in QIS5 independently as ING Insurance, and also as ING Group, which is in line with our internal preparations to become fully Solvency II-ready. Based on the results, EIOPA and the Dutch central bank confirmed that the financial positions of European and Dutch insurers remained sound. Individual results were not disclosed. The results have been fed into the European Commission’s process for fine-tuning the Solvency II framework and implementation.
• as the Commission has subjected the approval of the state aid to restructuring requirements that go beyond what is proportionate.
The Dutch State joined ING in 2010 in its appeal with the General Court to contest the EC decision insofar as it qualifies the core Tier 1 amendment as additional state aid. The Dutch central bank joined the proceedings in support of ING’s appeal. In July 2011, oral arguments of the appeal case were heard by the Court. The ruling of the Court was on 2 March 2012. ING welcomes the judgment to partially annul the EC decision. From 2 March, ING has been in the process of carefully assessing the full judgment as well as its consequences.
STRENGTHENING THE FINANCIAL POSITION ING Group’s underlying net profit rose 15% to EUR 3,675 million in 2011. This result was reached despite the impact of volatile financial markets, a weakening of the macroeconomic environment, a charge for the Insurance US Closed Block Variable Annuity and impairments on Greek sovereign debt as discussed in the ‘Financial and regulatory environment’ chapter in this Annual Report.
ING Insurance/IM’s operating results mostly showed improvement throughout 2011, reflecting higher fees and premium-based revenues, robust sales growth, an improvement in the investment margin and cost control. A significant earnings charge was taken of EUR 1.1 billion against fourth-quarter results for the Insurance US Closed Block Variable Annuity (VA), a legacy business that was closed in 2009 – primarily on revised assumptions for policyholder behaviour.
Going forward, ING Group will strive to further strengthen its financial position by improving operating performance, boosting income and lowering risk and overall costs.
SEPARATION PROCESS ON SCHEDULE We continued to work towards the full physical and organisational separation of the banking and insurance/investment management activities. In 2011 we laid the groundwork for the original base case of two IPOs (initial public offerings) of our insurance and investment management activities: one for our US operations and one for our European and Asian activities. However, on 12 January 2012 we announced an update on the restructuring of the insurance and investment management businesses. Due to the uncertain economic outlook and volatile markets, especially in Europe, ING has decided to review other strategic options for its Asian insurance and investment management businesses. For the European insurance/ investment management businesses, ING is continuing preparations for a stand-alone future, including the possibility of an IPO. And we are continuing to prepare for the base case of an IPO for the US insurance/investment management businesses. ING is committed to conducting these processes with the utmost diligence in the interests of all stakeholders, including customers, employees, distribution partners and shareholders.
The separation process of ING Bank and ING Insurance/Investment Management (IM) has been a massive undertaking, entailing more than 1,100 projects. It was set up as a four-year programme, running from early 2010 through to the end of 2013. Operational separation was achieved as of 1 January 2011; since then, approximately 90% of the planned full separation projects have been completed. The full separation of ING Insurance US and ING Insurance Eurasia was well underway in 2011. Separation costs for 2011 were about EUR 200 million, well within the budgeted amount of EUR 250 million after tax. This reflects the cost-efficient way in which the separation was handled. Only a small number of projects were carried over from 2011 to 2012 and are expected to be resolved in the first quarter of 2012. In addition, ING will finalise a couple of large longer-term IT projects.
ING America Insurance Holdings is reviewing options to optimise its funding structure independent from the Group and to repay its remaining inter-company debt. After the divestments, ING Verzekeringen N.V. will become a legacy entity and will be wound down over time in an orderly manner, using the cash proceeds from the sale of the Latin American insurance and investment management business that was completed in the fourth quarter of 2011, and other divestments.
The amendment served to delink the IABF from ING Direct USA. ING Bank became the new counterparty for the Dutch State. In return, ING Direct USA will receive on its balance sheet an amount in cash from ING Bank. Also, after the sale of ING Direct USA, ING Bank will receive the funding fee and management fee from the Dutch State and pay the guarantee fee.
Furthermore, ING Car Lease was sold to BMW’s fleet management division Alphabet for approximately EUR 696 million.
The customer is at the centre of all our activities. We strive to meet our customers’ expectations by providing the right products and services to the right customers, for the right reasons, the right price and in the right way. ING also consistently monitors market and regulatory developments, engages with customer representative groups, and tests its products to ensure their suitability for customer needs.
With a clearer focus on customer needs as the anchor of our business operations, ING is not only building businesses that are financially sound and viable, but ones that have the potential to become the supplier of choice for our customers. To monitor progress on customer loyalty we introduced the NPS methodology in 2009 and fully implemented it throughout ING in 2011. It is based on surveys sent to customers, and gauges their feedback. NPS goes beyond being a measurement tool and is also used as a means of driving growth and changing local business culture. Customer feedback is used to improve ways of doing business.
ING believes that customers, employees, shareholders and the rest of society no longer live in separate worlds that meet intermittently, but have become more integrated. This mutual interdependence of business and society means that organisations must follow the principle of shared value – the actions they take must benefit everyone.
The financial crisis of 2008/2009 and its impact on ING made it necessary for us to intensify the dialogue with and rebuild trust among all our stakeholders and society as a whole. Although this need is recognised internationally, it was, and in fact still is, especially urgent in ING’s Dutch home market. Deepening relationships with all stakeholders continued to be a key priority in 2011.
Examples of these include loans designed for environmentally friendly projects, such as renewable energy, nature development and biological agriculture. In addition, we offer socially responsible investment (SRI) opportunities, such as the ING Investment Management global sustainable equity funds. For SRI products, our fund managers combine conventional financial analysis with an assessment of environmental and social policies and performance. Within our Commercial Banking operations, the Structured Finance Emissions Products team works with clients on projects to reduce greenhouse gas emissions in line with the Kyoto Protocol.
MITIGATING HARM AND PROMOTING SUSTAINABLE FINANCE CONTRIBUTING TO POSITIVE CHANGE An essential element of good corporate citizenship is contributing to positive change, in particular by researching and promoting the business case for sustainability. We do this by sharing our knowledge and expertise with customers to help them make better informed choices about their financial decisions, but also with regard to investing in sustainable businesses, and by investing in sustainable businesses.
(3) This includes brown and green energy, natural gas, fuel oil and district heating. (4) This includes eco-labelled paper and non eco-labelled paper.
At the heart of our community investment activities lies the ambition to enable children worldwide to harvest their potential and build a better future for themselves and the community around them. And without education, their future is uncertain. Therefore, we focus our initiatives on children and (financial) education, as their formative years are of crucial importance. We support corporate philanthropic initiatives and partnerships with charitable organisations based on three components: financial contributions or cash donations, in-kind donations of goods and services, and contributions of time, skills and knowledge of our staff.
KEY PERFORMANCE INDICATORS 2011 ING has identified 10 Key Performance Indicators (KPIs) for its sustainability reporting. These KPIs relate directly to the ING sustainability strategy and are used by ING to measure sustainability performance within ING.
BALANCING DIFFERING REQUIREMENTS WHILE ENSURING SUFFICIENT CAPITALISATION ING’s capital position cannot be seen in isolation, but has to be assessed in the context of the overall balance sheet development as well as the possibilities provided by the capital markets. Hence, an important challenge for Capital Management, especially in the current environment, is to balance the differing requirements of regulators, rating agencies and shareholders.
As Capital Management is organised as a Group function, it is able to bring together capital requirements from both the Bank as well as the Insurer and helps to safeguard the fungibility of capital throughout the Group. Another key objective for Capital Management is to create financial flexibility for ING in the context of forthcoming regulatory changes and the need to generate sufficient capital to repay the remaining core Tier 1 securities issued to the Dutch State.
THREE LINES OF DEFENCE The key objective of risk management at ING is to make sure that all risks are managed in the best possible way for all relevant stakeholders. We adopt a ‘three lines of defence’ governance model for risk management, whereby ownership for risk is taken at all levels in the Group.
The commercial departments form the first line of defence. They originate loans, deposits and other products, they know our customers well and are best placed to act in both the customers’ and ING’s best interest. The second line of defence consists of the risk management organisation, headed by the chief risk officer (CRO), and the corporate legal function. The presence of the CRO on the Bank and Insurance boards ensures that risk management issues are heard and discussed at the highest level, thus establishing the appropriate tone at the top. The CRO steers a functional, independent risk organisation, which supports the commercial departments in their decision-making, but which also has sufficient countervailing power to avoid risk concentrations. The third line of defence is the corporate audit function, which independently oversees and assesses the functioning and effectiveness of the first two lines.
ADAPTING TO CHANGE The transformational role of banks and insurers is long-established, but the world in which they operate is changing rapidly. Risk management at ING is all about anticipating and adapting to this change.
ING operates in financial markets that have become increasingly interconnected as a result of globalisation. ING has a risk appetite framework that captures and restricts the impact of adverse markets on ING’s capital and liquidity position, based on a number of different risk metrics. In addition, ING increasingly conducts company-wide stress tests as a supplementary tool to assess resilience to adverse market conditions.
Financial regulation and accounting standards are in a state of flux, and ING is following the developments closely. Over the past year, ING Insurance Eurasia has continued the implementation of the requirements of the Solvency II directive. Meanwhile, the Bank has taken further steps to prepare for the improved regulatory capital and liquidity framework for banks, commonly referred to as Basel III. ING is well positioned to operate under these new regulatory frameworks once they are in force. This is also reflected in the outcome of the EU capital exercise performed by the European Banking Authority, which concluded that ING Bank is currently adequately capitalised.
TALENT AND DEVELOPMENT Group HR continued to support the businesses in identifying, developing, appraising and retaining talent for senior and executive positions. However, the process, the criteria, the development and administrative tools are now coordinated and managed separately at Bank and Insurance/IM. Succession plans are in place for all key positions within Bank and Insurance/IM. From 2012, both entities used their own talent management system.
BECOMING A TOP EMPLOYER Along with Customer Centricity and Operational Excellence, Top Employer is one of the three global strategic priorities that are key to becoming One Bank. Being a top employer is a key priority of ING because banking is a people’s business. Research shows that top employers have better engaged employees that create strong relationships with customers. Top employers are more productive and profitable, have significantly lower employee turnover and a larger talent pool to draw from. ING Bank firmly believes in this correlation and aims to be a Top Employer by 2014.
CONCLUSIONS AND AMBITIONS Throughout 2011, Group HR played a significant role in helping the businesses unravel the responsibilities and systems of the individual entities. Group HR will continue to reduce its role and shift tasks and responsibilities to the individual HR functions, both at Bank and Insurance/IM, but will continue to co-ordinate HR-related aspects on a global level.
The individual HR functions at Bank and Insurance will assume more responsibility and will continue to support their organisations. HR Bank will help drive ING Bank’s strategic priority to create One Bank. Other priorities for 2012 include becoming a top employer, talent attraction and retention as well as performance management and rewards.
The Group’s ambition for women to account for 33% of the Management Council positions by 2015 is still in place. At year-end, approximately 16% of the Management Council positions were filled by females across the Group.
Management remuneration remained a key focal area in 2011, following the introduction of the CRD III framework and its impact on compensation for identified staff and control functions. Implementation of the CRD III framework at Bank and Insurance/IM was taken care of by the entities themselves. For further information on remuneration linked to performance within the CRD III framework, please see the Financial and Regulatory Environment section, as well as the Remuneration section.
WINNING PERFORMANCE CULTURE SURVEY Group HR rolled out the annual global engagement WPC survey – an online survey that measures the level of engagement of ING employees worldwide. The results are used as a starting point for dialogue between employees and managers to help improve overall engagement. Eighty percent of employees worldwide completed the survey compared with 74% in 2010.
The overall Bank response rate was 80%, while the overall engagement score was 66% (2010: 69%). The results show that there is a strong sense of pride in working for ING and that Bank staff are very satisfied with the company as a place to work. The results also show that we need to continuously communicate our strategic direction and work on career development opportunities and work processes. HR will assist the business in driving dialogue 27ING Group Annual Report 2011
Retail Banking 2,944 3,601 Commercial Banking 2,020 2,217 Corporate Line banking –224 –80
The retail banking operations are focused on delivering simple and transparent retail products at low costs through a multi-channel distribution approach. Commercial Banking supports its global clients through an extensive international network and offers core banking solutions and provides tailored solutions.
Underlying operating expenses increased by 1.2% to EUR 9,447 million, mainly due to specific investments in the business and a modest year-on-year increase in staff costs. This was largely offset by stringent cost control and lower impairments on real estate development projects. The underlying cost/income ratio increased to 59.6% from 55.5% in 2010, mainly driven by lower income. Excluding market-related impacts, the cost/income ratio was 55.4% in 2011.
The underlying net addition to the provision for loan losses declined 4.3% to EUR 1,667 million from EUR 1,742 million in 2010. Risk costs in 2011 were 52 basis points of average risk-weighted assets compared with 53 basis points in 2010.
BUSINeSS DeVeLopMeNtS In 2011, ING Bank continued to show solid results despite the difficult macroeconomic environment and volatile financial markets. In addition to these challenging circumstances the vulnerable financial system remained a concern. The results were affected by the impairments on Greek government bonds. ING Bank withstood the market instability by carefully managing its exposure to sovereign bonds.
In 2011, ING Bank’s underlying income was EUR 15,854 million, underlying cost/income ratio was 59.6% and underlying return on equity based on IFRS-EU equity was 10.0%.
Given the changing market circumstances, new regulatory requirements and the fact that ING has realised to a large extent its Ambition 2013 goals, new performance goals have been set for 2015. These are: achieving a Return on (IFRS-EU) Equity of 10–13% under Basel III, while maintaining a core Tier 1 ratio of at least 10%, and bringing our cost/income ratio down to 50–53%.
ING comfortably passed the 2011 EU-wide stress test conducted by the European Banking Authority (EBA) confirming the solid capital position of ING Bank thanks to the actions taken to de-risk and de-leverage the balance sheet.
ING Bank continued to manage costs carefully. It is more necessary than ever to reduce expenses to adapt to the leaner environment and maintain our competitive position. Streamlining the organisation and enhancing efficiency are therefore key.
In the Netherlands, for example, ING Business Banking introduced an innovative and easy tool, based on the Bank’s in-depth knowledge of every industrial sector, to help clients assess their financial needs.
ING Direct Canada, for example, used customer feedback to develop the THRiVE Chequing Account; an online, no-fee, daily checking account that pays interest.
toP eMPLoYer Being a top employer is another key priority of ING because banking is a people’s business. Having engaged and motivated employees is essential to achieving success.
ING Bank presented its banking strategy in January 2012. This strategy takes into account recent market, regulatory, consumer and technology trends.
Total underlying income decreased by 4.4% to EUR 10,903 million. The interest result declined 1.0%, as the impact of higher volumes was more than offset by lower interest margins on most products, especially in the Netherlands. The interest results of ING Direct and Central Europe increased as volume growth outpaced the impact of lower margins. Commission income was 2.8% down as declines in the Benelux and Central Europe were only partly offset by increases in ING Direct and Asia. Investment and other income declined significantly, mainly due to the impairments on Greek government bonds and the losses from selective de-risking of exposures at ING Direct.
Retail Netherlands 4,146 4,310 Retail Belgium 2,031 2,048 ING Direct 3,423 3,782 Retail Central Europe 1,028 976 Retail Asia 275 286
Retail NL maintained its strong top two overall market position and is the number two in the Mid-Corporate segment. Retail NL serves 8.9 million retail customers, including around 600,000 business customers. It has more than 400 agents and 280 branches across the country. Furthermore, it has the ‘Best-in-Class’ cost/income ratio in the Dutch market and the most flexible cost base.
ING Netherlands continued to broaden its Duurzaam Spaarbeleid (Sustainable Savings Policy), aimed at providing consumers with simplified, transparent savings products.
Business Banking designed the innovative Conditietest (fitness test), which provides Mid-Corporate clients with insights into the key strategic and financial indicators of their organisation, up-to-date sector information and benchmarking on their competitors. It also introduced Ondernemerssupport, an online network and support initiative for mid-corporates, and the Bedrijfsscan (company scan) for SMEs, offering assistance in improving financial business practices regarding operating capital, payment transactions and liquidity management.
ING organised a conference to enhance international entrepreneurship, the idea being that setting up businesses abroad will become an increasingly viable alternative to simply exporting products and services from one’s home country. Representatives of over 1,000 internationally-oriented businesses attended ING’s International Entrepreneurship Conference in Eindhoven’s Evoluon in November.
Private Banking Retail NL also provides private banking services in the Netherlands to wealthy individual customers. Private Banking implemented an ambitious plan in 2011 to strengthen the ING Private Banking franchise. It also migrated 25,000 Private Banking clients to the new ING target platforms to give them the advantage of the new and improved ING services and products.
Private Banking registered a big improvement on its NPS, the customer loyalty measure it adopted two years ago, scoring highly compared with its peers.
WestlandUtrecht Bank WestlandUtrecht Hypotheekbank was renamed to WestlandUtrecht Bank towards the end of 2010 after which it became operationally and commercially independent from ING. WestlandUtrecht Bank (WUB) is run as a separate entity under the ING Group umbrella, following the ING/EC agreement in 2009 to divest WUB.
RETAIL BELGIUM FINANCIAL DEVELOPMENTS The underlying result before tax of Retail Belgium fell 16.4% on 2010, as a slight decline in income was accompanied by higher operating expenses. Income decreased 0.8% compared to 2010, mainly due to EUR 17 million of impairments on Greek government bonds. Interest result remained flat, as a decline in margins was compensated by higher volumes, particularly in savings and lending. Net production in mortgages totalled EUR 3.0 billion in 2011, while production in other lending was EUR 3.2 billion. The net production in funds entrusted was EUR 3.0 billion, mainly driven by the success of the Orange Book savings product in the beginning of the year.
Operational excellence Retail BE’s focus is on the ‘direct if possible, advice when needed’ business model, and specifically on timely, efficient, and flawless execution of customer services. It wants to make banking easier for customers and is, therefore, continuously improving services through its mix of distribution channels.
Retail BE also launched a new ing.be website, which makes it easier to monitor and analyse customers and adapt to their behaviour.
The Bank will continue to pursue opportunities to improve its processes and efforts are being made to implement several internal efficiency solutions, including a new core banking system, which will reduce the time to market for new products.
Customer centricity Retail BE’s domestic transformation programme, with its focus on direct banking, is on track. However, it also continued to invest in its branch network. The Bank has almost finished the transformation of its traditional branches to ‘proximity’ outlets (‘proxi’ branches) with self-service cash facilities and online banking access. At year-end, 466 branches had been converted into proxi branches. Retail BE also launched a pilot to transform its bigger branches to new full-service branches, with equal focus on direct banking and closer contact with the customer. By the end of 2011, seven new full-service branches had been opened.
Retail BE launched a mobile banking service in 2011 and its first mobile banking app, MyING.be, is available through the Apple app store. MyING.be allows customers to check their balances, see overviews of accounts and credit-card transactions, make online transfers and make branch appointments. My ING.be has about 37,000 users and received a 4-star rating, making it the best rated of all free financial apps. Mobile banking for the Android operating system will be launched in 2012.
Social networks have become an important part of the banking landscape. ING BE believes in the power of peer-to-peer advice and is now present on Facebook, with its ‘minute orange’ concept, and providing tips and information about its products. The purpose of being on Facebook is to develop a real community of ING customers. At the year-end, ING BE’s Facebook page had over 17,000 ‘fans’.
Record Bank Retail BE includes Record Bank, the third largest retail savings institution in the country, with close to 800,000 customers. Its strength is the personal approach taken by its network of 1,500 independent agents, credit brokers and vendors. This network achieved an 8.1% growth in deposit volumes in 2011 compared with 2010. In 2011, Record Bank also increased the volume of its loan book by 17.5% compared to 2010.
The retail activities (private customers and retail companies) performed well in 2011, despite adverse market conditions. Assets under management increased from EUR 1.68 billion in 2010 to EUR 1.77 billion at year-end 2011. Lending volumes also rose.
Becoming a complete bank ING Direct continued to work towards becoming a complete retail bank, but one which continues to maintain a different approach from its competitors. ING Direct remained at the cutting edge of internet and mobile banking in 2011, while broadening its product base to achieve greater income diversification. It took further initiatives to optimise its distribution mix, introduced more branches and invested more in cross-buying.
In some countries, ING Direct plans to move towards a full bank model. Implementation of this model began in 2011 with the integration of the commercial banking business in Germany with ING-DiBa, the direct retail banking business in Germany. The creation of One Bank in Germany optimises the banking businesses and their customer services by making more efficient use of capital and liquidity. ING-DiBa in Germany has been very successful in growing its business in Europe’s largest market and the integration is designed to take advantage of further opportunities in this large and attractive market.
RETAIL CENTRAL EUROPE FINANCIAL DEVELOPMENTS The underlying result before tax of Retail Central Europe rose 2.6% to EUR 158 million, driven by higher results in Poland, partly offset by lower results in Turkey due to increased risk costs. Underlying income in Central Europe increased 5.2% as higher income in Poland and Romania was partly offset by lower income in Turkey due to negative currency effects.
All Retail Central Europe banks are rapidly expanding into direct distribution, illustrating the convergence of the retail and direct business models.
The addition to loan loss provisions rose by EUR 4 million to EUR 30 million, or 32 basis points of average risk-weighted assets in 2011, mainly as a result of higher non-performing loans at ING Vysya Bank.
Operational excellence ING Vysya Bank implemented a performance measurement system MOP – Measure of Performance Scores – in its operations divisions. Performance of all operational units is now measured through a defined score card on a monthly basis.
Customer centricity ING Vysya Bank continued to expand its national reach by extending its branch network to 526 branches in 373 cities as at the end of 2011. The Net Promoter Score programme was launched and resulted in a positive score.
CONCLUSIONS AND AMBITIONS Despite challenging circumstances in a rapidly changing landscape, Retail Banking again delivered a solid contribution to the Bank’s overall performance and reinforced its commercial position. It also took a number of actions to improve efficiency, reduce costs and adapt to the new regulatory reality. Working efficiently is a constant objective in ING’s approach.
* Underlying numbers are derived from IFRS-EU numbers, excluding the impact of divestments and special items.
Our international network provides an effective platform from which to service our multinational clients, especially those from the US and Western Europe, and particularly their operations in Benelux and Central and Eastern Europe.
To further enhance our emphasis on customer centricity we launched the International Business Initiative, aimed at providing clients with excellent cross-border service. We have continued to simplify our processes (for example, for international account opening, indirect bank guarantees and standby letters of credit) and created several tools to facilitate the provision of these services in order to increase client satisfaction.
A Net Promoter Score methodology was also adopted by Commercial Banking to assess customer loyalty and requirements and to improve our products and services. Initial surveys in the Netherlands and Belgium have provided valuable insights into customer priorities and our services.
in 2011, partly compensated by higher income from Structured Finance. Underlying operating expenses were 4.4% lower at EUR 2,527 million driven by lower impairments on real estate development projects. The underlying cost/income ratio was 50.3%, slightly up from 49.4% in 2010.
We are a full-service commercial bank in our home markets in the Benelux, as well as in Germany, Central and Eastern Europe. In addition to the basic banking services of lending, payments and cash management and treasury, we provide tailored solutions in other areas, including specialised and trade finance, derivatives, corporate finance, debt and equity capital markets, leasing, factoring and supply chain finance.
Our clients include mid-sized enterprises, large corporations, major multinationals, financial institutions, governments and supranational organisations. We assist them by financing their growth, managing their day-to-day banking needs and by providing a full range of banking solutions to help them manage their risks and achieve their business goals.
• Full-scope financing solution for VimpelCom to support its merger with Wind Telecom and transforming it into a top-five global telecommunications player. This multi-faceted transaction incorporated the largest ever eurobond offering placed by a non-sovereign Russian issuer.
All of these steps have enabled us to sharpen our focus on our core business and reallocate the capital required to achieve our future ambitions.
MArkET LEADErShIP In addition to recognition by the industry experts previously mentioned, Greenwich Associates client research states that among large corporations we maintained our strong position as number 1 bank in the Netherlands both in terms of penetration and lead relationships.
Global Finance named ING the Best Investment Bank in the Netherlands and ‘Best Trade Finance Bank in the Netherlands’. ING has also retained its number 1 position as book runner for syndicated loans in the Benelux by volume and value and number 2 position as Merger & Acquisition adviser in the Benelux by volume and value.
STrUCTUrED FINANCE Structured Finance (SF) is a specialist commercial lending business, providing loans to support capital intensive investments and working capital. It is managed in three groups: the Energy, Transport and Infrastructure Group; the Specialised Financing Group; and International Trade and Export Finance.
The cash flow lending business in Structured Acquisition Finance and Telecom and Media Finance was affected in previous years by the slowdown during the financial crisis. However, these sectors have since stabilised and the year saw an increase in new transaction flows in our core markets of the Benelux and Central and Eastern Europe.
We believe the regulatory environment will continue to be challenging, with many further initiatives under way that will impact all financial markets participants.
Real Estate Development (ING RED) and Real Estate Investment Management (ING REIM) continued with a controlled wind down of activities.
Also, in early 2011 ING finalised the strategic review of ING REIM Australia and its five listed real estate funds. Four funds have since been divested with strategic options being considered for the remaining business.
Although the real estate markets are expected to remain difficult, we will continue to serve real estate investors around the world while retaining our network of highly skilled real estate experts and our knowledge base.
CONCLUSIONS AND AMBITIONS ING Commercial Banking performed well in 2011 and proved that in difficult circumstances its underlying business is robust thanks to its strong commercial franchises, solid risk management, strict cost discipline and prudent management of capital and lending asset growth. It has also benefited from a well-diversified portfolio.
Benelux and Central and Eastern Europe, in Structured Finance and in Financial Markets.
The Life/IM administrative expenses ratio improved from 43.7% in 2010 to 39.8% in 2011 as a result of 6.9% higher Life/IM income and 2.6% lower administrative expenses. Expenses especially in the US were lower as a result of cost savings and pension plan changes.
In July 2011, ING announced an agreement to sell its Latin American pension, life insurance and investment management businesses to Grupo de Inversiones Suramericana (GrupoSura). The transaction was closed in December 2011. ING has retained its 36% stake in Brazilian insurer SulAmérica SA, which was not part of the transaction.
The Management Board ING America Insurance Holdings Inc consists of the following members: Jan Hommen, Patrick Flynn, Wilfred Nagel, Rodney Martin, Alain Karaoglan, Robert Leary and Ewout Steenbergen.
BUSIneSS LIneS For Insurance Benelux, the first phase of the transformation of the Dutch insurance operations (the One programme) was completed a year ahead of schedule. The programme has resulted in major cost savings and efficiencies.
ING Insurance Asia/Pacific continued to perform very well in 2011. Double-digit sales growth was recorded, driven by improved tied agency productivity and strong bank distribution partners.
Insurance US concentrated on refining its business strategy, containing expenses and developing products and services to help individual and institutional customers accumulate and protect their wealth.
US Closed Block VA revised its assumptions to reflect newly emerging policyholder behaviour, evident in volatile markets. As a result of this assumptions review, ING took a EUR 1.1 billion charge against profits.
> Integration of Dutch insurance businesses complete > New bank pension savings and annuity products launched > Customer-driven strategy unveiled which focuses on simpler products and improved systems
The 45.9% higher investment margin was mainly driven by lower interest rebates, lower profit sharing and higher non-recurring separate account pension contract results. In addition, the investment margin continued to benefit from the impact of reinvestments in the first half of 2011, and higher dividends on public equity and real estate funds.
Non-life operating results increased 14.7% due to lower claims and a non-recurring positive effect in the expense provisions, resulting from unifying provision methodologies in the Dutch non-life entities.
BUSINESS DEVELOPMENTS Business activity in 2011 was marked by an ongoing focus on cost containment, efficiency and new initiatives to lift growth in premiums. NN became the largest insurer in all segments of the Dutch small and medium-sized enterprises market (SME) in 2011 as defined by market research bureau GfK in its report on important developments in the business market, TOF Zakelijk 2007 – 2011.
In 2008, ING’s Dutch insurance subsidiaries (ING Verzekeringen Retail, NN and RVS) reached an outline agreement to offer compensation to customers who purchased certain unit-linked policies in the past. Other companies operating in the Dutch insurance market have made similar agreements. In 2011, ING announced additional measures that are aligned with the ‘Best-ofclass ’ criteria formulated by the Dutch Ministry of Finance. Implementation has started; our plan is to inform all unit-linked policyholders about compensation by the end of 2012.
Distribution As part of the operational separation of banking and insurance, NN secured a ten-year exclusive distribution contract with ING Bank which came into effect on 1 January 2011. During the year, ING Bank transferred Mandema & Partners, a company of independent 48 ING Group Annual Report 2011
dditional inform ation insurance brokers to Insurance Netherlands, and in addition, transferred its insurance sales force for SME clients to Mandema & Partners.
New products NN continued to be active in the corporate market in 2011. This new pension product allows customers web-based access to their pension arrangements. This new pension product allows customers web-based access to their pension arrangements.
ING Life Luxembourg launched a new pension product called Clear Future in Denmark, supported by easy-to-access online marketing. In Belgium, a new Universal Life savings product was brought to the market, which gives customers tax benefits and offers shortterm interest rate guarantees.
There will also be continued effort in capturing growth opportunities, particularly in corporate pensions due to market and regulatory changes. These market and regulation changes are reflected in the continuing trend away from company-based pension funds to insurance and industry pension funds.
BUSINESS DEVELOPMENTS Insurance CRE operates in a market of approximately 220 million people with relatively low penetration rates for life insurance and pensions. It has businesses in Poland, Hungary, the Czech Republic, Slovakia, Romania, Bulgaria, Greece, Turkey and Spain. In 2011, market conditions in the region improved in some countries, but in other countries such as Greece and Spain, the macroeconomic environment remained very challenging.
Business activity in 2011 was affected by regulatory changes in the region’s major pension markets such as Hungary and Poland. As a result Insurance CRE concentrated on increasing life insurance sales in the region, and pension business in specific markets.
Sales via the broker channel grew by double digits in the Czech Republic following the successful introduction of the Smart product, a unit-linked life insurance product. In Slovakia, ING launched a similar product. In Turkey, new business from the broker channel accounted for half of all new business.
Operational refinement Insurance Central and Rest of Europe has put in place a regional IT organisation. The goal of the organisation is to deliver cost-effective and high-quality regional IT services mainly for IT infrastructure and for cross-border programmes such as Solvency II. The regional IT hub is based in Prague and will expand gradually, providing IT services to all insurance businesses in CRE.
Awards ING CRE continually strives to improve customer satisfaction by incorporating customer feedback from the NPS programme in new products and services. In 2011, many businesses in the region were awarded prizes and special mentions in recognition of their customer-centric focus. ING’s Smart life insurance product was considered to be the most transparent as well as the most innovative product in Slovakia in a study by market research company Market Vision, which specialises in competitive market intelligence in the region. In the Czech Republic, the Smart product won the Best Insurance Product of the Year 2011 in the Fincentrum Bank of the Year awards. Fincentrum is one of the Czech Republic’s largest financial advice companies. In Poland, ING was awarded the “Friendly Life Insurance Company” title for the second year in a row by leading financial publication Gazeta Bankowa. The award recognises excellence in quality of service including claims handling and payouts.
The technical margin decreased by 63.1% compared with 2010, in part due to lower amortisation of a gain related to the transfer of the US group reinsurance business as well as a non-recurring life insurance reserve reduction in the prior year.
ING offers fixed and indexed annuities as well as tax-qualified Individual Retirement Accounts (IRAs). These products can be tailored to meet individual retirement needs. ING’s annuities appeal to a broad range of consumers seeking asset accumulation and income, including those rolling from defined contribution plans provided by ING as well as individuals seeking retirement income options through financial advisors.
In 2011, Insurance US also developed a new in-plan retirement income solution, which was launched in January 2012 as part of workplace retirement plans for companies in the corporate sector. It helps participants incorporate income planning into their overall retirement plan investment strategy – and ultimately helps them generate a stream of guaranteed income at retirement.
ING will continue to develop and sell products that make sense for customers and distribution partners, but also make sense for the company. Insurance US intends to prudently invest capital in initiatives that help it grow while delivering an appropriate riskadjusted return.
In general, Insurance US intends to focus on profitable sales growth, disciplined pricing, prudent expense management, efficient capital usage, and preparation for the future as a standalone company.
BUSINESS DEVELOPMENTS The Closed Block Variable Annuity business in the US is closed to new business and is now being managed in run-off. There are more than 500,000 contract holders and more than USD 42 billion in assets under management. From October 2010, ING began to report the US Closed Block VA business as a separate business line to improve transparency for both the Closed Block and ongoing businesses.
On 1 January 2011, ING moved towards fair value accounting on reserves for the Guaranteed Minimum Withdrawal Benefit (GMWB) and consequently implemented changes to the hedging programme. These hedging changes substantially reduced exposure to movements in interest rates. The impact of the change in accounting policy is disclosed in the Annual Accounts section at the back of this Annual Report.
FINANCIAL DEVELOPMENTS The underlying result before tax of Insurance Asia/Pacific increased by 14.0% to EUR 588 million compared with EUR 517 million in 2010.
The investment margin rose by 37.7%, supported by an improved spread between interest earned on general account assets and interest credited to reserves in Japan and Hong Kong. This was partly offset by lower dividend income.
The technical margin increased by 13.5% to EUR 178 million from EUR 157 million in the previous year, mainly driven by South Korea and Malaysia.
New sales (APE) increased by 11.8% driven by growth in Japan, Malaysia, Hong Kong and China.
customer behaviour, was first launched in the region in Malaysia. The programme aims to provide better service, improve crossselling and retain existing customers.
In terms of bank relationships, IAP’s preferred banking partners give access to more than 50 million customers and provide differentiated bancassurance products and services based on the banks’ customers’ needs. During 2011, IAP made further progress in strengthening key relationships, including ING Life Hong Kong’s renewal of a distribution agreement with China Construction Bank (CCB) for another 10 years.
On 23 June 2011, IAP completed the sale of its 50% stake in its second life insurance joint venture in China, the Pacific Antai Life Insurance Company (PALIC) to focus on strengthening the partnership with Bank of Beijing.
A new initiative called ‘First! Think Customer’, which introduced tools to the business units to assist them in better understanding 54 ING Group Annual Report 2011
Administrative expenses were 0.8% lower than the previous year mainly due to staff reduction and a non-recurring expense reduction from a change to the IM US pension plan.
In preparation for the divestment of ING Insurance/IM, ING IM Europe & Asia and ING IM US have been operating on an arm’slength basis from 2011, sharing fees and leveraging global client relationships. These cross-selling relationships will continue and develop into preferred provider relationships to service clients with a full range of global solutions.
ING IM provides a wide variety of actively-managed strategies, investment vehicles and advisory services in all major asset classes and investment styles. It delivers a wide range of investment strategies and services to ING’s global network of businesses and third-party clients.
The Emerging Market Asian Debt team, which has been based in Hong Kong for the past few years, was consolidated with the existing fixed income team based in Singapore in October 2011 to pool expertise and strengthen operations.
ING IM Asia/Pacific pitched for new business in the increasingly attractive market for government pension and sovereign wealth funds, and won, among others, an on-shore equity mandate from one of the largest government pension funds in Taiwan.
ING IM continues to invest in best-in-class IT systems so that it can continue to operate effectively in dynamic and increasingly complex financial markets. In Europe, the business signed a contract to implement the BlackRock Aladdin IT platform system. The Aladdin platform combines different functional areas in one integrated platform, covering among other things, portfolio management, position keeping, risk management tooling, static data management, compliance set up, and trading. This system will further improve ING IM’s capabilities to service new and existing clients, and it will enhance data quality of the data used. It will enable portfolio managers to concentrate more on delivering excellent investment performance.
The group also continued to deliver strong investment income results to the US General Account and added over USD 6 billion in net new assets in 2011 exclusive of market performance.
During this period of change, ING’s investment management business will remain focused on delivering excellent service, generating superior returns and providing a broad range of products and investment solutions in a wide variety of asset classes for its clients.
The Corporate governance section starting on page 61 and the paragraphs of the Remuneration report ‘Remuneration policy for senior management’ and ‘2012 remuneration structure senior management’ on page 85 are incorporated by reference in this Report of the Executive Board.
In August, the Supervisory Board was informed that the preparation for the Insurance EurAsia and the Insurance US IPOs and the expected divestments were on track. The Supervisory Board was informed on the hearing of ING before the European Court regarding the EC restructuring agreement case. An update of the transformation plan ING Belgium was presented.
During the internal meetings of the Supervisory Board – which the CEO joined, except when the annual evaluation of the Supervisory Board was tabled or the performance of the CEO was discussed – the Executive Board 2010 performance assessments and the CEO performance objectives for 2011 were approved. The main topic during the year was succession planning as well as the possible changes to the ING remuneration policy following the Capital Requirements Directive III (CRD III) regulation and the Regeling beheerst beloningsbeleid (Rbb, regulation on controlled remuneration policy). In May, the Supervisory Board reviewed the discussions on the Executive Board remuneration in Dutch society. In September, the Dutch central bank (DNB) requirements to implement a global remuneration framework were discussed and approved, with some issues still under discussion. In September, the implementation of a new joint rule of the AFM (the Netherlands Authority for the Financial Markets) and DNB on expertise requirements for Supervisory Board members was discussed followed by approval of a Supervisory Board nomination procedure in November. The Supervisory Board decided on the nomination of 59ING Group Annual Report 2011
Currently, only one Supervisory Board member, Luc Vandewalle qualifies as ‘non-independent’ as defined in best practice provision III.2.1 of the Dutch Corporate Governance Code. Mr. Vandewalle is considered to be not independent, because of his previous position at ING Bank Belgium.
ANNUAL ACCOUNTS AND DIVIDEND The Executive Board has prepared the Annual Accounts and discussed these with the Supervisory Board. The Annual Accounts will be submitted for adoption at the 2012 General Meeting as part of the Annual Report. ING will not propose to pay a dividend over 2011 at the 2012 annual General Meeting.
COMPOSITION OF THE SUPERVISORY BOARD AND ITS COMMITTEES Claus Dieter Hoffmann retired from the Supervisory Board at the end of the annual General Meeting in May 2011. Joan Spero stepped down from the Supervisory Board for personal reasons on 27 May 2011. Sjoerd van Keulen, Joost Kuiper and Luc Vandewalle were appointed to the Supervisory Board on 9 May 2011.
RECENT DEVELOPMENTS LEGISLATIVE AND REGULATORY DEVELOPMENTS On 6 June 2011, the bill on management and supervision (wet aanpassing regels bestuur en toezicht in naamloze en besloten vennootschappen) was enacted. In anticipation of that bill coming into force, a proposal to align the articles of association of ING Group will be submitted to the 2012 annual General Meeting. Also, the Governance Principles (Insurers’ Code), adopted by the Dutch Association of Insurers became effective on 1 January 2011. For more information, please refer to the paragraph ‘Corporate Governance Codes’ starting on page 62.
On 26 January 2009, ING Group reached an agreement with the Dutch State regarding the Illiquid Assets Back-up Facility (‘IABF’), as further described in note 33 to the consolidated annual accounts. During 2009, ING Bank N.V. issued various series of debt instruments under the 2008 Credit Guarantee Scheme of the Dutch State, for the first time on 30 January 2009.
These arrangements entail, among other things, that the Dutch State may recommend two candidates (‘State Nominees’) for appointment to the Supervisory Board. Certain decisions of the Supervisory Board require approval of the State Nominees (these decisions are specified in the section on the Supervisory Board on page 68).
Furthermore, in line with these arrangements a sustainable remuneration policy for the Executive Board and Senior Management was introduced in 2010, which contains certain specific arrangements in relation to the remuneration of members of the Executive Board.
DUTCH BANKING CODE The Banking Code is applicable to ING Bank N.V. and not to ING Group. The Banking Code can be downloaded from the website of the Dutch Banking Association (www.nvb.nl). The principles of the Banking Code as a whole are considered as a reference by ING Bank N.V. and their application is described in the publication ‘Application of the Dutch Banking Code by ING Bank N.V.’ available on the website of the Company (www.ing.com). ING Group voluntarily applies the principles of the Banking Code regarding remuneration with respect to the members of its Executive Board, and considers these principles as a reference for its own corporate governance. ING Group’s remuneration policy for the Executive Board and Senior Management is in agreement with these principles.
The Board of ING Trust Office reports on its activities through an annual report, which has been included on pages 73–75.
• Dutch law requires that the company’s external auditors be appointed at the general meeting and not by the Audit Committee.
DEPOSITARY RECEIPTS More than 99.9% of the issued ordinary shares are held by ING Trust Office. In exchange for these shares, ING Trust Office has issued depositary receipts in bearer form for these shares. The depositary receipts are listed on various stock exchanges (see page 10 for an overview of the listings). Depositary receipts can be exchanged upon request of the holders of depositary receipts for non-listed ordinary shares, without any restriction, other than payment of an administrative fee of one eurocent (EUR 0.01) per depositary receipt with a minimum of twenty-five euros (EUR 25.00) per exchange transaction.
ING Group publishes a comprehensive quarterly disclosure package which includes extensive and detailed financial figures with relevant explanatory remarks. This information is discussed thoroughly during press and analyst and investor conference calls on the day of the earnings release, which are broadly accessible to interested parties. The publication dates of quarterly earnings releases are announced in advance on ING Group’s corporate website (www.ing.com).
ING Group participates in several industry conferences and generally hosts one or two Investor Relations Days each year. These events are announced in advance on the company website, and presentation materials are made available in real time on the website. This is in accordance with the requirement to ensure that all shareholders and other market participants may have equal and simultaneous access to information that could potentially influence the price of the company’s securities. ING Group’s Investor Relations Days can be accessed by means of live webcasts or telephone conferencing. All Investor Relations Days and conferences in which ING Group participates do not take place shortly before the publication of quarterly financial information.
ING Group is actively covered by approximately 25 analysts who frequently issue reports on the company. A list of these analysts can be found within the Investor Relations section of the company website. During 2011, ING Group did not provide any form of compensation to parties that are directly or indirectly involved with the production or publication of analysts’ reports, with the exception of credit-rating agencies.
Details of investors, if any, who have reported their interest in ING Group pursuant to the Dutch Financial Supervision Act (or the predecessor of this legislation) are shown on page 10. ING Group is not aware of shareholders, potential shareholders or investors with an interest of 5% or more in ING Group other than the ING Trust Office and the ING Continuity Foundation.
General meetings are webcasted via the Company’s website (www.ing.com), so that shareholders and holders of depositary receipts who do not attend the general meeting in person, may nevertheless follow the course of affairs in the meeting by internet webcast.
This information includes the notice for the general meeting, the agenda, the place and time of the meeting, the address of the website of ING Group, the verbatim text of the proposals with an explanation and instructions on how to participate in the meeting (either in person or by proxy), as well as the reports of the Executive Board and the Supervisory Board. More complex proposals such as amendments to the Articles of Association are normally not included in the notice but are made available separately on the website of ING Group and at the ING Group head office.
REPORTING Resolutions adopted at a general meeting are generally published on the website of ING Group (www.ing.com) within one week after the meeting. The draft minutes of the general meeting are, in accordance with the Corporate Governance Code, made available to shareholders and holders of depositary receipts on the website of ING Group (www.ing.com) no later than three months after the meeting. Shareholders and holders of depositary receipts may react to the draft minutes in the following three months, after which the final minutes will be adopted by the chairman of the meeting in question and by a shareholder or holder of depositary receipts appointed by that meeting. The final minutes are made available on the website of ING Group (www.ing.com). In a deviation from the default provisions of the Corporate Governance Code shareholders and holders of depositary receipts will not have the opportunity to react to the minutes of a general meeting if a notarial report of the meeting is made, as this would be in conflict with the laws applicable to such notarial report.
INFORMATION ON MEMBERS OF THE EXECUTIVE BOARD JAN H.M. HOMMEN, CHIEF EXECUTIVE OFFICER (Born 1943, Dutch nationality, male; appointed in 2009, term expires in 2013) Jan Hommen graduated with a master’s degree in Business Economics from Tilburg University. He was appointed a member of the Executive Board on 27 April 2009. He is also CEO of ING Bank N.V. and CEO of ING Verzekeringen N.V. Jan Hommen was a member of the Supervisory Board of ING Group as of 1 June 2005 and became chairman of the Supervisory Board of ING Group in January 2008. Until 1 May 2005, he was vice-chairman and chief financial officer of Koninklijke Philips Electronics N.V. From 1975 to 1997, he worked for Alcoa Inc. From 1978, he worked at the Alcoa head office in the US, becoming chief financial officer in 1991. Jan Hommen is a member of the board of Royal Concertgebouw Orchestra. Eight Group staff departments report directly to Jan Hommen: Investor Relations, Corporate Legal Department, Corporate Human Resources, Corporate Development, Corporate Communications & Affairs, Public & Government Affairs, Sustainability and Corporate Audit Services.
CHANGES IN THE COMPOSITION Koos Timmermans was appointed vice-chairman of the Management Board Banking as of 1 October 2011. Considering his new role, he stepped down as chief risk officer and member of the Executive Board of ING Group as per the same date. The Supervisory Board intends to propose that Wilfred F. Nagel (born 1956, Dutch nationality, male) be appointed as a member of the Executive Board and chief risk officer of ING Group at the annual General Meeting on 14 May 2012. From 1 October 2011 until the appointment of Wilfred Nagel, Patrick Flynn has assumed the responsibility for Risk at ING Group level.
In connection with the issue of the Securities to the Dutch State, ING Group and the Dutch State agreed that the Dutch State may recommend candidates for appointment to the Supervisory Board in such a way that upon appointment of all recommended candidates by the General Meeting, the Supervisory Board would comprise two State Nominees among its members. The Dutch State may recommend a Supervisory Board member already in office.
Candidates recommended by the Dutch State will be nominated for appointment by way of a binding nomination, unless one or more specified situations occur. These include that: • the candidate is not fit and proper to discharge his duties as a
dditional inform ation is based on a marriage that exists no longer, to allow for situations where there is no material family relation.
The organisation, powers and conduct of the Supervisory Board are detailed in the Supervisory Board Charter. Separate charters have been drawn up for the Audit Committee, the Risk Committee, the Remuneration Committee, the Nomination Committee and the Corporate Governance Committee. These charters are available on the website of ING Group (www.ing.com). A short description of the duties for the five Committees follows below.
HENK W. BREUKINK (Born 1950, Dutch nationality, male; appointed in 2007, term expires in 2015) Former managing director of F&C and country head for F&C Netherlands (asset management firm). Other business activities: member of the Supervisory Board of NSI N.V. (real estate fund) and non-executive director of F&C Sapphire hedge fund, Ireland (listed companies). Non-executive director of Brink Groep BV. Non-executive chairman of Heembouw Holding B.V. Chairman of the Supervisory Board of Omring (health care institution). Member of the Supervisory Board of HaagWonen (housing corporation). Chairman of the Supervisory Board of Inholland University.
The Audit Committee assists the Supervisory Board in monitoring the integrity of the financial statements of ING Group, ING Verzekeringen N.V. and ING Bank N.V., in monitoring the compliance with legal and regulatory requirements and in monitoring the independence and performance of ING’s internal and external auditors. On 31 December 2011, the members of the Audit Committee were: Joost Kuiper (chairman), Tineke Bahlmann, Henk Breukink, Aman Mehta and Luc Vandewalle.
The Remuneration Committee advises the Supervisory Board, among other things, on the terms and conditions of employment (including remuneration) of the members of the Executive Board and on the policies and general principles on which the terms and conditions of employment of the members of the Executive Board and of senior managers of ING and its subsidiaries are based. On 31 December 2011, the members of the Remuneration Committee were: Peter Elverding (chairman), Sjoerd van Keulen, Piet Klaver, Jeroen van der Veer and Lodewijk de Waal.
The Nomination Committee advises the Supervisory Board, among other things, on the composition of the Supervisory Board and Executive Board. On 31 December 2011, the members of the Nomination Committee were: Jeroen van der Veer (chairman), Peter Elverding, Sjoerd van Keulen, Piet Klaver and Lodewijk de Waal.
The Corporate Governance Committee assists the Supervisory Board in monitoring and evaluating the corporate governance of ING as a whole and the reporting thereon in the Annual Report and to the General Meeting and advises the Supervisory Board on improvements. On 31 December 2011, the members of the Corporate Governance Committee were: Henk Breukink (chairman), Aman Mehta, Jeroen van der Veer and Lodewijk de Waal.
SJOERD VAN KEULEN (Born 1946, Dutch nationality, male; appointed in 2011, term expires in 2015) Former chairman of the Executive Board of SNS Reaal N.V. Chairman of Holland Financial Centre. Other business activities: member of the Supervisory Board of Heijmans N.V. and chairman of the Supervisory Board of Mediq N.V. (listed companies). Member of the Supervisory Board of APG Groep N.V. and Vado Beheer B.V. Member of the Supervisory Committee of World Wildlife Fund. Chairman of the Board of Investment Fund for Health in Africa. Member of the Supervisory Board of Stichting PharmAccess International. Chairman of the Supervisory Board of Access to Medicine Foundation. Board member of Stichting Health Insurance Fund.
In the 2012 annual General Meeting it will be proposed to extend the appointment of Ernst & Young by two more years, i.e. for the financial years 2012 and 2013. This proposal is based on an evaluation of the performance of the external auditor by the Audit Committee over the past four years. In addition to its own observations, the Audit Committee took into account feedback given by Senior Management and Internal Auditors on themes including quality of services, costs, business understanding, team composition, integrity, objectivity and independence. A large majority of respondents expressed its satisfaction with the performance of the external auditor. The Audit Committee has also taken notice of the press release of the AFM of 26 January 2012 by which the AFM announced that a fine was imposed on Ernst & Young for not exercising its duty of care. The Audit Committee has discussed the findings of the AFM and the measures taken by Ernst & Young to prevent shortcomings in the future.
In these meetings, among other things, the following topics were discussed: - The evaluation of the meeting of holders of depositary receipts of 24 November 2010 and the preparation of the meeting of holders of depositary receipts of 23 November 2011.
MEETINGS WITH ING GROUP During the 2011 reporting year, the Board had four meetings with the chairmen of the Executive Board and the Supervisory Board of ING Group.
- The appeal with the General Court of the European Union against specific elements of the European Commission’s decision regarding ING’s restructuring plan.
Holders of depositary receipts who did not attend the AGM in person or who were not represented by a third party, were entitled to give binding voting instructions to ING Trust Office for a number of shares equal to the number of depositary receipts held by the relevant holder of depositary receipts on the record date. During the AGM, ING Trust Office voted on these shares in accordance with the voting instructions given. A more detailed overview of these voting results can be found on de website of ING Group (www.ing.com).
All members of the Board stated that they meet the conditions regarding independence as referred to in the Articles of Association and in the Dutch Corporate Governance Code.
OTHER In 2011, ING Trust Office obtained external advice on how ING Trust Office could promote the solicitation of proxies and/or voting instructions.
REMUNERATION POLICY The primary objective of the remuneration structure is to enable ING to retain and recruit qualified and expert leaders, senior staff and other highly qualified employees, who have a drive for excellence in serving the interests of the Company’s various stakeholders.
ING endeavours to match compensation of the Company’s leadership appropriately against a variety of factors, such as the complexity of functions, the scope of responsibilities, the alignment of risks and rewards, and the long-term objectives of the Company and its stakeholders, which is all the more important given the changing international standards regarding responsible remuneration. These factors differ for each role, line of business and country. This is especially the case for ING with its operations in over 40 countries and over 97,000 employees of whom around 71,000 are based outside the Netherlands (over 54% of senior management is non-Dutch). As much as possible for a global financial institution of this size, ING aims to take account of all these differences and also of the standards applied within similar financial institutions in the various countries in which it operates.
Total direct compensation: moderation and reduced emphasis on variable remuneration Total direct compensation levels are based on market data that include peers both inside and outside the financial sector in the international context in which ING operates. Total direct compensation is benchmarked against a peer group of companies that, in the opinion of the Supervisory Board, are comparable with ING in terms of size and scope. In line with the foregoing, the Supervisory Board has determined that the peer group consists of the companies in the Dow Jones EURO STOXX 50 index. These are 50 companies, in a range of financial and non-financial industries, which are based in countries within the Economic and Monetary Union of the European Union. In accordance with the Dutch Banking Code, ING’s new remuneration policy for the Executive Board aims for total direct compensation levels slightly below market median levels for comparable positions in the relevant markets.
In addition, the remuneration policy provides for a balanced mix between fixed and variable remuneration. Variable remuneration will not exceed 100% of fixed salary at the time of allocation. Fixed remuneration (i.e. the base salary levels) will be determined in line with the relevant market environment as an integral part of total direct compensation, and will be reviewed from time to time by the Supervisory Board. The policy provides for an at target variable remuneration of 40% in cash and 40% in stock (in total 80%) of base salary if performance criteria are met. If performance criteria (as predetermined by the Supervisory Board) are exceeded, the variable component can be increased from target to maximum, not exceeding 100% of base salary at the time of allocation.
The allocation of variable remuneration is conditional on the achievement of a number of performance objectives. The shortterm component, at maximum 40% of total variable remuneration, is equally divided between cash and stock and awarded in the year following the performance year. The other 60% of the total variable remuneration is deferred and also equally divided between cash and stock. This long-term component is intended to serve the objective of retaining the members of the Executive Board for a longer period of time. The value of the stock award is set such that total variable remuneration at the time that the maximum number of shares to be granted is determined stays within the 100% limit.
2011 REMUNERATION ONgOINg pUblIc dEbATE REgARdINg REMUNERATION Remuneration at ING is a topic of heated debate, particularly in the Netherlands. In 2011, following public discussion in the Netherlands after the Remuneration Committee had awarded the Executive Board of ING Group variable remuneration in relation to their 2010 performance, the members of the Executive Board decided not to accept this variable portion of their total direct compensation. Furthermore, they announced not to accept the proposed 2011 salary increase and any variable remuneration until the core Tier 1 securities that were issued to the Dutch State have been fully repaid even though the proposed salary increase and variable remuneration were in line with the remuneration policy as approved by the AGM in 2010.
It is the Remuneration Committee’s responsibility to take the interests of all stakeholders, including shareholders and the global employee population into account, as well as business continuity when overseeing a company-wide remuneration policy and executing the Executive Board remuneration policy.
SpEcIAl EMplOYMENT cONdITIONS Special employment conditions, such as commitments made to secure the recruitment of new executives, may be used in exceptional circumstances subject to strict control by the Supervisory Board.
amounts in thousands of euros amount number of shares amount number of options/
Remuneration of former members of the Executive Board amounted to nil for 2011, nil for 2010 and EUR 2,842 thousand for 2009.
The 2009 pension costs for this member reflect the partial year as an Executive Board member.
Pension costs of former members of the Executive Board amounted to nil for 2011, nil for 2010, and EUR 742 thousand for 2009.
ING’s TSR ranking within this group of companies determines the final number of performance shares that vest at the end of the three-year performance period. The performance shares granted in 2008 had a three-year performance period of 2008-2010 and vested in 2011. The actual results of 57% are based upon ING’s TSR ranking of 14th within the designated peer group. The results were determined by an independent third party. ING’s external auditor has reviewed the calculations performed.
Patrick Flynn received a conditional grant of restricted stock in 2009 to a maximum of 130,230 shares. The cumulative value of the conditional share award is capped at EUR 1.3 million. The first vesting in the amount of 39,069 shares occurred at the 2010 AGM. The value at vesting amounted to EUR 288,329. A second vesting of 39,069 shares occurred at the 2011 AGM, the value at vesting amounted to EUR 347,323, and the remaining 52,092 shares will vest at the 2012 AGM, subject to satisfactory performance and the aforementioned cumulative value cap of EUR 1.3 million. The number of shares reflects the number adjusted for the effects of the rights issue of December 2009.
2012 VARIABLE REMUNERATION EXECUTIVE BOARD The payment of variable remuneration to the Executive Board will be suspended for as long as the repayment of all outstanding core Tier 1 securities that were issued to the Dutch State has not been completed.
Executive compensation legislation Currently a legislative proposal is under discussion in the Dutch Parliament relating to variable remuneration at financial institutions that have received state support for reasons of financial stability such as ING. If and when entered into force, the legislation is expected to prevent these financial institutions from granting variable remuneration (in cash or otherwise) to their Executive Board members. In addition, the legislation contains certain restrictions with respect to the possibility of increasing the fixed salaries of Executive Board members.
Furthermore, and in addition to financial indicators, performance is also assessed based on non-financial drivers. The incorporation of non-financial indicators in the overall assessment is particularly aimed at further improving sustainable business practices within ING. Therefore, a number of action targets have been formulated regarding ING’s performance in the area of, for example, workforce diversity, customer satisfaction, stakeholder engagement and sustainable business practices.
Moreover, in light of the Capital Requirements Directive III compensation packages related to control functions (such as risk management functions) are structured so that they provide for a reduced emphasis on variable remuneration. To ensure the autonomy of the individual, financial performance metrics are dependent on objectives determined at the divisional level (i.e. not at the level of the relevant business unit). In addition, performance assessments are not only determined by business unit management, but also by the functional line.
The regulatory environment governing remuneration is still in development. The structure as set out above is based on information currently available. Should it become clear that adjustments are necessary, ING will amend the structure as deemed appropriate.
REMUNERATION SUPERVISORY BOARD The annual remuneration of the Supervisory Board members as adopted by the General Meetings in 2006 and 2008 amounts to: chairman EUR 75,000, vice-chairman EUR 65,000, other members EUR 45,000. In addition to the remuneration each member receives an expense allowance. For the chairman and vice-chairman the annual amount is EUR 6,810. For the other members the amount is EUR 2,270.
The remuneration for the membership of committees is as follows: chairman of the Audit Committee EUR 8,000, members of the Audit Committee EUR 6,000, chairmen of other Supervisory Board committees EUR 7,500 and members of other Supervisory Board committees EUR 5,000. In addition to the fixed remuneration, committee members receive a fee for each meeting they attend. For the Audit Committee chairman this fee is EUR 2,000 per meeting and for its members EUR 1,500. For the chairman and members of other committees the attendance fee amounts to EUR 450 per meeting.
2011 REMUNERATION SUPERVISORY BOARD In 2009 and 2010 the chairman and vice-chairman of the Supervisory Board did not receive remuneration and attendance fees associated with committee membership. As announced in the 2010 Annual Report, effective 2011, the chairman and vicechairman of the Supervisory Board did receive compensation for committee attendance. In 2011 more meetings were called than scheduled.
Jeroen van der Veer and Peter Elverding have voluntarily requested a lower level of compensation than their annual remuneration as adopted by the AGM and to cap the annual remuneration relating to 2011 at EUR 100,000 and EUR 90,000 respectively, inclusive attendance fees. At their request, the excess amounts of EUR 14,000 and EUR 13,000 respectively will be deducted from their compensation relating to 2012. In 2012 their compensation will also be capped at the aforementioned levels.
The compensation figure for 2009 reflects the partial year as a member of the Supervisory Board.
(9) Joan Spero retired in June 2011. The compensation figure for 2011 reflects the partial year as a member of the Supervisory Board.
He acted as an observer in the Supervisory Board as of November 2008 until his appointment to the Board in April 2009. The compensation figure for 2009 reflects the partial year as a member of the Supervisory Board. Up to the appointment date Lodewijk de Waal has received remuneration, expense allowances and attendance fees in line with the remuneration of the Supervisory Board.
(1) The amount reflects a housing mortgage loan granted in 1992, well before Jeroen van der Veer’s appointment to the Supervisory Board (effective as of 1 July 2009).
INg depositary receipts for shares held by members of the Supervisory Board (1)
Jeroen van der Veer 119,469 99,469 99,469 Sjoerd van Keulen (2) 1,703
EQUITY Shareholders’ equity (parent) 13 46,663 40,904 Non-voting equity securities 13 3,000 5,000
Consolidated balance sheet of ING Group as at 31 December 90 ING Group Annual Report 2011
Continuing operations Interest income banking operations 64,649 68,334 79,850 Interest expense banking operations –51,200 –55,011 –67,475 Interest result banking operations 35 13,449 13,323 12,375
Amounts for 2010 and 2009 are restated for the change in accounting policy as disclosed in the section ‘Changes in accounting policies’ on page 99.
Net result attributable to: Equityholders of the parent 5,766 2,810 –1,006 Minority interests 87 106 –118
Unrealised revaluations after taxation (1) 1,139 2,603 11,867 Realised gains/losses transferred to profit and loss (1) 723 86 1,554 Changes in cash flow hedge reserve 1,124 475 –805 Transfer to insurance liabilities/DAC –2,004 –1,644 –2,079 Exchange rate differences –156 2,859 56 Other revaluations –2 –1 –10 Total amount recognised directly in equity (other comprehensive income) 824 4,378 10,583
Comprehensive income attributable to: Equityholders of the parent 6,594 7,203 9,590 Minority interests 83 91 –131
The Exchange rate differences comprises EUR –35 million (2010: EUR 251 million; 2009: EUR 131 million) related to the share of other comprehensive income of associates.
Consolidated statement of comprehensive income of ING Group for the years ended 31 December 1 W ho w e are 2 Report of the Executive Board 3 C orporate governance 4 C onsolidated annual accounts 5 Parent com pany annual accounts 6 O ther inform ation 7 A
Result before tax 7,248 4,196 –1,634 Adjusted for: – depreciation 1,514 1,723 1,701
Investments and advances: – group companies –5 – associates –140 –165 –181 – available-for-sale investments –223,544 –163,038 –165,771 – held-to-maturity investments –141 – real estate investments –32 –73 –130 – property and equipment –499 –527 –639 – assets subject to operating leases –1,188 –1,284 –1,034 – investments for risk of policyholders –57,130 –52,370 –65,362 – other investments –340 –372 –338
Cash and cash equivalents at beginning of year 20,740 20,959 31,271 Effect of exchange rate changes on cash and cash equivalents –200 265 –4 Cash and cash equivalents at end of year 55 29,300 20,740 20,959
Consolidated statement of changes in equity of ING Group for the years ended 31 December amounts in millions of euros Share capital Share premium Reserves
Net result –1,006 –1,006 –118 –1,124 Total comprehensive income 9,590 9,590 –131 9,459
Issuance costs incurred –222 –222 –222 Employee stock option and share plans 64 64 64 Repayment of non-voting equity securities –5,000 –5,000 Changes in the composition of the group –546 –546 Dividend and repurchase premium (2) –605 –605 –2 –607 Proceeds from rights issue 424 7,074 7,498 7,498 Purchase/sale of treasury shares 129 129 129
Employee stock option and share plans 36 36 36 Changes in the composition of the group –271 –271 Dividend –6 –6 Purchase/sale of treasury shares 22 22 22
Employee stock option and share plans 115 115 115 Repayment of non-voting equity securities –2,000 –2,000 Repurchase premium –1,000 –1,000 –1,000 Changes in the composition of the group –1 –1 Dividend –34 –34 Purchase/sale of treasury shares 50 50 50
Accounting policies for the consolidated annual accounts of ING Group 98 ING Group Annual Report 2011
The comparison of balance sheet items between 31 December 2011 and 31 December 2010 is impacted by the disposed companies as disclosed in Note 30 ‘Companies acquired and companies disposed’ and by the held for sale classification as disclosed in Note 11 ‘Assets and liabilities held for sale’.
CHANGES IN ACCOUNTING POLICIES ING Group changed its accounting policy for the insurance provisions for Guaranteed Minimum Withdrawal Benefits for Life (GMWBL) on the Insurance US Closed Block VA book as of 1 January 2011. The revised accounting better reflects the economic value of these guarantees and more closely aligns accounting practice with peers in the United States. Under the revised accounting policy, the insurance provisions reflect current market interest rates and current estimates for other assumptions, except for volatility and correlation (which remain unchanged). ING Group substantially increased hedging of interest rate risk in the Insurance US Closed Block VA book; the results from these hedging derivatives are expected to largely mirror the effect of interest changes on the guarantees in future periods. Implementation of the revised accounting for GMWBL represents a change in accounting policy under IFRS, with a transitional impact being reflected in shareholders’ equity. Comparative years’ results have been restated. Reference is made to Note 56 ‘Impact of change in accounting policy’ for more information on comparative years. The combined impact on shareholders’ equity as at 1 January 2011 is EUR 651 million (lower equity).
Diluted earnings (before change in accounting policy) 2,779 –1,540 3,788.1 2,691.7 0.73 –0.57 Impact on the profit and loss account –409 –71
In addition, the adequacy of insurance provisions, net of DAC and VOBA, is evaluated regularly. The test involves comparing the established insurance provision with current best estimate assumptions about factors such as court decisions, changes in laws, social, economic and demographic trends, inflation, investment returns, policyholder behaviour, mortality and morbidity trends and other factors. The use of different assumptions in this test could lead to a different outcome.
are applied to arrive at the best estimate of the recoverable amount. A reporting unit is the lowest level at which goodwill is monitored. Intangible assets are tested for impairment by comparing the carrying value with the best estimate of the recoverable amount.
ING Groep N.V. and its Dutch group companies are subject to legal restrictions regarding the amount of dividends they can pay to their shareholders. The Dutch Civil Code contains the restriction that dividends can only be paid up to an amount equal to the excess of the company’s own funds over the sum of the paid-up capital and reserves required by law. Additionally, certain Group companies are subject to restrictions on the amount of funds they may transfer in the form of dividends, or otherwise, to the parent company.
SEGMENT REPORTING An operating segment is a distinguishable component of the Group, engaged in providing products or services, subject to risks and returns that are different from those of other operating segments. A geographical area is a distinguishable component of the Group engaged in providing products or services within a particular economic environment that is subject to risks and returns that are different from those of segments operating in other economic environments. The geographical analyses are based on the location of the office from which the transactions are originated.
Investments for risk of policyholders are investments against insurance liabilities for which all changes in fair value of invested assets are offset by similar changes in insurance liabilities.
Net investment hedges Hedges of net investments in foreign operations are accounted for in a similar way to cash flow hedges. Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognised in equity and the gain or loss relating to the ineffective portion is recognised immediately in the profit and loss account. Gains and losses accumulated in equity are included in the profit and loss account when the foreign operation is disposed.
REPURCHASE TRANSACTIONS AND REVERSE REPURCHASE TRANSACTIONS Securities sold subject to repurchase agreements (‘repos’) are retained in the consolidated financial statements. The counterparty liability is included in Amounts due to banks, Other borrowed funds, Customer deposits and other funds on deposit, or Trading as appropriate.
Deferred tax related to fair value remeasurement of available-for-sale investments and cash flow hedges, which are recognised directly in equity, is also recognised directly in equity and is subsequently recognised in the profit and loss account together with the deferred gain or loss.
Insurance provisions on traditional life policies are calculated using various assumptions, including assumptions on mortality, morbidity, expenses, investment returns and surrenders. Assumptions for insurance provisions on traditional life insurance contracts, including traditional whole life and term life insurance contracts, are based on best estimate assumptions including margins for adverse deviations. The assumptions are set initially at the policy issue date and remain constant throughout the life of the policy.
As at 31 December 2009, the Closed Block Variable Annuity business in the United States was inadequate at the 90% confidence level. As there were offsetting amounts within other Group business units, the Group remained adequate at the 90% confidence level. In line with the above policy, specific measures were defined to mitigate the inadequacy in the Closed Block Variable Annuity business in the United States. These specific measures are effective as of 2010 and result in a limitation of additions to DAC that would otherwise result from negative amortisation and unlocking. This limitation of DAC is applied on a quarterly basis and in any year if and when a reserve inadequacy existed at the start of the year. The impact on 2010 was EUR 610 million lower DAC and consequently lower result before tax. Net result in 2011 includes a charge to restore the adequacy of the Insurance US Closed Block VA segment to the 50% confidence level. Reference is made to Note 43 ‘Underwriting expenditure’.
Accounting policies for the consolidated annual accounts of ING Group continued 114 ING Group Annual Report 2011
The non-voting equity securities are not ordinary shares, because their terms and conditions (especially with regard to coupons and voting rights) are significantly different. Therefore, the weighted average number of ordinary shares outstanding during the period is not impacted by the non-voting equity securities.
Loans and advances to banks 13,752 14,416 29,556 34,640 43,308 49,056 Cash advances, overdrafts and other balances 1,322 1,754 700 1,039 2,022 2,793
Trading assets 123,688 125,675 Investments for risk of policyholders 116,438 120,481 Non-trading derivatives 17,159 11,722 Designated as at fair value through profit and loss 5,437 6,016
As at 31 December 2011, Trading assets included receivables of EUR 40,904 million (2010: EUR 47,894 million) with regard to reverse repurchase transactions.
The changes in fair value of the (designated) loans attributable to changes in credit risk have been calculated by determining the changes in credit spread implicit in the fair value of bonds issued by entities with similar credit characteristics.
The fair value of the securities classified as held to maturity amounts to EUR 8,835 million as at 31 December 2011 (2010: EUR 11,854 million).
ING Group’s total exposure to debt securities included in available-for-sale investments and assets at amortised cost of EUR 244,540 million (2010: EUR 266,859 million) is specified as follows by type of exposure and by banking and insurance operations: Notes to the consolidated annual accounts of ING Group continued 1 W ho w e are 2 Report of the Executive Board 3 C orporate governance 4 C onsolidated annual accounts 5 Parent com pany annual accounts 6 O ther inform ation 7 A
Notes to the consolidated annual accounts of ING Group continued 120 ING Group Annual Report 2011
Asset backed security portfolio The table below shows certain ABS (US Subprime RMBS, Alt-A RMBS, CMBS and CDO/CLOs) that were considered pressurised asset classes. It includes exposures in all relevant balance sheet lines, including not only loans and advances and investments available-for-sale as disclosed above, but also financial assets designated as at fair value through profit and loss.
(1) For assets classified as loans and receivables: amortised cost; otherwise: fair value.
Greece, Italy, Ireland, Portugal and Spain In the first half of 2010 concerns arose regarding the creditworthiness of several southern European countries, which later spread to a few other European countries. As a result of these concerns the value of sovereign debt decreased and exposures in those countries are being monitored closely. With regard to troubled European countries, ING Group’s main focus is on Greece, Italy, Ireland, Portugal and Spain as these countries have either applied for support from the European Financial Stability Facility (‘EFSF’) or receive support from the ECB via government bond purchases in the secondary market. Within these countries, ING Group’s main focus is on exposure to Government bonds and Unsecured Financial institutions’ bonds. The following disclosure focuses in particular on ING Group’s balance sheet exposure with regard to Government bonds and Unsecured Financial institutions’ bonds in Greece, Italy, Ireland, Portugal and Spain. At 31 December 2011, ING Group’s balance sheet value of ‘Government bonds’ and Unsecured Financial institutions’ bonds to Greece, Italy, Ireland, Portugal and Spain and the related pre-tax revaluation reserve in equity was as follows: Notes to the consolidated annual accounts of ING Group continued 1 W ho w e are 2 Report of the Executive Board 3 C orporate governance 4 C onsolidated annual accounts 5 Parent com pany annual accounts 6 O ther inform ation 7 A
Greece Government bonds available-for-sale 255 0 –940 1,195 Italy Government bonds available-for-sale 2,033 –443 0 2,476 Government bonds at amortised cost (loans) 97 97 Financial institutions available-for-sale 684 –88 772 Financial institutions at amortised cost (held-to-maturity) 30 30 28 Financial institutions at amortised cost (loans) 131 131 Ireland Government bonds available-for-sale 43 –10 53 Financial institutions available-for-sale 44 –1 45 Financial institutions at amortised cost (held-to-maturity) 34 34 35 Financial institutions at amortised cost (loans) 122 122 Portugal Government bonds available-for-sale 533 –299 832 Financial institutions available-for-sale 125 –32 157 Spain Government bonds available–for-sale 1,190 –203 1,393 Government bonds at amortised cost (held-to-maturity) 170 170 170 Financial institutions available-for-sale 277 –37 314 Financial institutions at amortised cost (loans) 85 –1 86
(1) Exposures are included based on the parent country of the issuer. (2) Pre-tax impairments relate to bonds held at 31 December 2011. In addition, EUR 38 million and EUR 189 million impairments were recognised in 2011 on
Further information on ING Group’s risk exposure with regard to Greece, Italy, Ireland, Portugal and Spain is provided in the ‘Risk management’ section.
Reference is made to Note 37 ‘Investment income’ for details on Impairments.
In 2011, To/from investment in associates in relation to available-for-sale equity securities relates mainly to the real estate funds for which significant influence ceased to exist due to the sale of ING Real Estate Investment Management.
Reclassifications to Loans and advances to customers and Amounts due from banks (2009 and 2008) Reclassifications out of available-for-sale investments to loans and receivables are allowed under IFRS-EU as of the third quarter of 2008. In the second and first quarter of 2009 and in the fourth quarter of 2008 ING Group reclassified certain financial assets from Investments available-forsale to Loans and advances to customers and Amounts due from banks. The Group identified assets, eligible for reclassification, for which at the reclassification date it had the intention to hold for the foreseeable future. The table below provides information on the three reclassifications made in the fourth quarter of 2008 and the first and second quarter of 2009. Information is provided for each of the three reclassifications (see columns) as at the date of reclassification and as at the end of the subsequent reporting periods (see rows). This information is disclosed under IFRS-EU as long as the reclassified assets continue to be recognised in the balance sheet.
Notes to the consolidated annual accounts of ING Group continued 1 W ho w e are 2 Report of the Executive Board 3 C orporate governance 4 C onsolidated annual accounts 5 Parent com pany annual accounts 6 O ther inform ation 7 A
Range of effective interest rates (weighted average) 1.4%–24.8% 2.1%–11.7% 4.1%–21% Expected recoverable cash flows 7,118 24,052 1,646 Unrealised fair value losses in shareholders’ equity (before tax) –896 –1,224 –69 Recognised fair value gains (losses) in shareholders’ equity (before tax) between the beginning of the year in which the reclassification took place and the reclassification date 173 nil –79 Recognised fair value gains (losses) in shareholders’ equity (before tax) in the year prior to reclassification –971 –192 –20 Recognised impairment (before tax) between the beginning of the year in which the reclassification took place and the reclassification date nil nil nil Recognised impairment (before tax) in the year prior to reclassification nil nil nil
As at 31 December 2011, the balance sheet value included debt securities which were lent or sold in repurchase transactions amounting to nil (2010: nil) and EUR 1,778 million (2010: EUR 727 million), respectively.
Loans and advances to customers by type – insurance operations Netherlands International Total
No individual loan or advance has terms and conditions that materially affect the amount, timing or certainty of the consolidated cash flows of the Group. For details on significant concentrations see ‘Risk management’ section.
Loans and advances to customers and Amounts due from banks include finance lease receivables, are detailed as follows: Finance lease receivables
Included in Amounts due from banks 76 82 Included in Loans and advances to customers 17,364 17,439
Loan loss provisions analysed by type – banking operations Netherlands International Total
Changes in the composition of the group –3 –2 –5 Write-offs –1,304 –1,166 –24 –42 –1,328 –1,208
The increase in loan loss provisions relating to insurance operations is presented under Investment income. The increase in the loan loss provisions relating to banking operations is presented under Addition to loan loss provisions on the face of the profit and loss account.
In 2011, Other changes relates for EUR 565 million to the classification of ING Direct USA as a disposal group held for sale. Reference is made to Note 11 ‘Assets and liabilities held for sale’.
Accumulated impairments of EUR 38 million (2010: EUR 71 million) have been recognised.
Notes to the consolidated annual accounts of ING Group continued 128 ING Group Annual Report 2011
CBRE Property Fund Central Europe LP (1) 25 74 806 510 66 37 Steadfast Capital Fund II LP 68 74 145 3 2 CBRE Retail Property Fund France. Belgium C.V. (1) 15 70 1,382 916 102 56
In 2011, Transfers to and from Investments relates mainly to the real estate funds for which significant influence ceased to exist due to the sale of ING Real Estate Investment Management.
The total amount of direct operating expenses (including repairs and maintenance) in relation to Real estate investments that generated rental income for the year ended 31 December 2011 was EUR 101 million (2010: EUR 113 million). The total amount of direct operating expenses (including repairs and maintenance) incurred on Real estate investments that did not generate rental income for the year ended 31 December 2011 was EUR 3 million (2010: EUR 6 million).
Real estate investments by year of most recent appraisal by independent qualified valuers in percentages 2011
Real estate investments 1,670 1,900 Investments in associates 1,193 2,568 Other assets – property development and obtained from foreclosures 1,584 2,153 Property and equipment – property in own use 1,535 1,642 Investments – available-for-sale 1,773 633
Property in own use by year of most recent appraisal by independent qualified valuers in percentages 2011
More than 1 year but less than 5 years 4 1,887 More than 5 years 1 13
Goodwill Changes in Goodwill A goodwill impairment of EUR 32 million was recognised in 2011. The impairment relates to the reporting unit ING Real Estate. A goodwill impairment of EUR 540 million was recognised in 2010. The impairment relates to the reporting unit Insurance US. In 2011, Changes in composition of the group relates mainly to the disposal of ING Car Lease and the disposal of the Latin American pensions, life insurance and investment management operations. Other changes includes EUR 97 million related to the classification of ING Direct USA as a disposal group held for sale. Reference is made to Note 11 ‘Assets and liabilities held for sale’.
ING Real Estate During 2011 the ING Real Estate business changed significantly. The Real Estate Development business was reduced by selling/closing development projects and ING sold REIM (the ING Real Estate Investment Management business). As a consequence, there were indications in the fourth quarter of 2011 that the recoverable amount of the reporting unit ING Real Estate had fallen below book value. A full goodwill impairment review was performed for the reporting unit ING Real Estate in the fourth quarter of 2011. The reporting unit Real Estate equals the segment ING Real Estate as disclosed in Note 51 ‘Operating segments’. The 2010 impairment test for ING Real Estate showed that the recoverable amount based on fair value using market multiples for Price/Book was at least equal to book value. The outcome of the impairment test performed in the fourth quarter of 2011 indicated that the fair value has become less than book value by an amount that exceeded the goodwill of ING Real Estate, indicating that the full amount of goodwill relating to ING Real Estate is impaired. As a result, the goodwill of EUR 32 million (pre-tax) was written down. The related charge is included in the profit and loss account in the line Intangibles amortisation and other impairments. Goodwill is recognised in the Corporate Line segment and, therefore, this charge is included in the segment reporting in the Corporate Line Bank segment.
Notes to the consolidated annual accounts of ING Group continued 134 ING Group Annual Report 2011
11 ASSETS AND LIABILITIES HELD FOR SALE Assets and liabilities held for sale include disposal groups whose carrying amount will be recovered principally through a sale transaction rather than through continuing operations. This relates to businesses for which a sale is agreed upon or a sale is highly probable at the balance sheet date but for which the transaction has not yet fully closed. For 31 December 2011 this relates to ING Direct USA. For 31 December 2010 this relates mainly to Pacific Antai Life Insurance Company Ltd., ING Arrendadora S.A. de C.V., ING Real Estate Investment Management (ING REIM) and Clarion Real Estate Securities. Reference is made to Note 30 ‘Companies acquired and companies disposed’ for more details on occurred and expected significant disposals.
Other borrowed funds 35 Insurance and investments contracts 217 Customer deposits and other funds on deposit 64,103 Other liabilities 162 172
Reinsurance and insurance receivables 1,971 2,201 Deferred tax assets 2,801 3,425 Property development and obtained from foreclosures 1,584 2,153 Income tax receivable 542 527 Accrued interest and rents 14,387 16,194 Other accrued assets 2,200 2,888 Pension assets 3,762 3,458
As at 31 December 2011, Other reserves included an amount of EUR 836 million (2010: EUR 741 million; 2009: EUR 645 million) related to the former Stichting Regio Bank and the former Stichting Vakbondsspaarbank SPN.
Rights issue (2009) On 27 November 2009 existing holders of (depositary receipts for) ordinary shares were offered rights entitling to subscribe for new (depositary receipts for) ordinary shares subject to applicable securities laws. Eligible rights holders could subscribe for six new (depositary receipts for) ordinary shares in relation to every seven subscription rights that they hold. The issue price was set at EUR 4.24 per share. This represented a discount of 37.3% to the Theoretical Ex-Rights Price (TERP), based on the closing price of EUR 8.92 of ING Groep N.V.’s, (depositary receipts for) shares on Euronext Amsterdam and on Euronext Brussels on 26 November 2009.
A holder of depositary receipts who does not attend the General Meeting of Shareholders in person or by proxy is entitled to give a binding voting instruction to the Trust Office for a number of shares equal to the number of his depositary receipts.
Notes to the consolidated annual accounts of ING Group continued 138 ING Group Annual Report 2011
Opening balance 79 –2,011 –1,918 Unrealised revaluations after taxation 167 –777 –294 Realised gains/losses transferred to profit and loss 148 Exchange rate differences –153 2,867 53 Closing balance 93 79 –2,011
The unrealised revaluations after taxation relate to changes in the value of hedging instruments that are designated as net investment hedges.
Notes to the consolidated annual accounts of ING Group continued 140 ING Group Annual Report 2011
Without prejudice to the fact that the cumulative preference shares, when issued, will be junior securities of ING Groep N.V., no specific dividend payment restrictions with respect to the cumulative preference shares exist.
Provision for unearned premiums and unexpired risks 297 345 4 4 301 349
Claims incurred but not reported (IBNR) 493 497 3 3 496 500
Where discounting is used in the calculation of life insurance provisions, the rate is within the range 2.8% to 5.5% (2010: 2.3% to 4.7%) based on weighted averages.
As at 31 December 2011, the total Reinsurance exposure, including Reinsurance contracts and Receivables from reinsurers (presented in Other assets) amounted to EUR 6,536 million (2010: EUR 6,610 million) after the provision for uncollectible reinsurance of nil (2010: nil).
Changes in claims provisions Provision net of reinsurance Reinsurance contracts Claims provisions
Notes to the consolidated annual accounts of ING Group continued 146 ING Group Annual Report 2011
Exchange rate differences 380 593 Other changes 702 239 Closing balance 13,198 11,974
Estimate of cumulative claims: At the end of underwriting year 1,230 1,122 1,115 1,035 1,091 1,214 1,180 1,210 1 year later 1,077 1,053 1,071 936 1,072 1,226 1,208 2 years later 925 952 992 873 1,042 1,166 3 years later 903 922 978 870 1,041 4 years later 904 907 981 850 5 years later 895 900 966 6 years later 898 881 7 years later 892 Estimate of cumulative claims 892 881 966 850 1,041 1,166 1,208 1,210 8,214
Effect of discounting –15 –20 –22 –33 –38 –41 –45 –32 –246
Equity securities 3,332 4,811 Debt securities 9,607 16,707 Funds on deposit 38,696 44,767
Debt securities 11,271 10,533 Funds entrusted 632 934 Subordinated liabilities 1,118 1,240
Comprising: – deferred tax liabilities 2,618 3,679 – deferred tax assets –3,425 –2,801
Opening balance 434 644 Changes in the composition of the group –1 38
Target allocation Percentage of plan assets Weighted average expected long-term rate of return
Equity securities include ING Group ordinary shares of nil (0.00% of total plan assets) as at 31 December 2011 (2010: EUR 2 million, 0.02% of total plan assets). Debt securities include investments in ING Group of EUR 42 million (0.30% of total plan assets) as at 31 December 2011 (2010: EUR 57 million, 0.4% of total plan assets). Other includes mainly real estate. Real estate occupied by ING Group as at 31 December 2011 which is included in Other includes nil (0.00% of total plan assets) (2010: EUR 5 million, 0.04% of total plan assets).
The actuarial assumption for Indexation for inflation decreased to 1.8% in 2010 mainly as a result of a revised best estimate assumption for future indexation in the pension plan in the Netherlands. As a result of the uncertain circumstances the probability of granting indexation in the short-term future decreased. In 2011, this assumption remained at 1.8% reflecting the uncertainty of granting indexation in the short-term future.
Less than 1–3 months 3–12 months 1–5 years years Maturity not applicable Total
Coupon interest due on financial liabilities 2,813 1,599 3,891 12,277 51,920 72,500
The maturity is based on the classification as disposal group held for sale.
As at 31 December 2011, the fair value of outstanding derivatives designated under cash flow hedge accounting was EUR 179 million (2010: EUR –824 million), presented in the balance sheet as EUR 6,641 million (2010: EUR 4,440 million) positive fair values under assets and EUR 6,462 million (2010: EUR 5,264 million) negative fair values under liabilities.
25 DISCONTINUED OPERATIONS The majority of the Latin American pensions, life insurance and investment management operations were disposed of in December 2011. This transaction qualifies under IFRS as a discontinued operation. The results of the Latin American pensions, life insurance and investment management operations that were divested for the year (and comparative years) and the result recognised on disposal are presented below: Results from discontinued operations
Total net result from discontinued operations 1,109 216 100 (1) The tax effect on the result on disposal of discontinued operations is nil.
The net cash flow incurred by the Latin American pensions, life insurance and investment management operations are as follows: Net cash flow from discontinued operations
Years after 2016 285 28 SPECIAL PURPOSE ENTITIES AND SECURITISATION Securitisation ING Group as originator ING Group enters into synthetic securitisation programmes in order to reduce credit risk on certain assets. In synthetic securitisations, ING Group enters into a credit default swap with securitisation Special Purpose Entities (SPEs), in relation to which ING Group purchases credit protection in respect of residential mortgage loans and loans to small and medium-sized enterprises. The SPEs have in turn hedged their exposure with investors through the issue of credit linked notes or credit linked commercial paper. As a result of these transactions, ING Group has transferred a substantial part of the credit risk related to these loan portfolios to third-party investors. In general, the third-party investors in securities issued by the SPE have recourse only to the assets of the SPE and not to ING Group.
30 COMPANIES ACQUIRED AND COMPANIES DISPOSED Acquisitions effective in 2011 There were no significant acquisitions in 2011.
In 2011 ING Direct USA is still included in the segment ING Direct. After this sale ING Direct USA will no longer be consolidated.
(3) As per 31 December 2009 recognised as a disposal group held for sale. (4) After disposal of the 50% stake ING has no remaining stake in Summit.
defended vigorously; however, at this time, ING is unable to assess their final outcome. Therefore at this moment it is not practicable to provide an estimate of the (potential) financial effect.
In January 2010 ING lodged an appeal with the General Court of the European Union against specific elements of the European Commission’s decision regarding ING’s restructuring plan. In its appeal, ING contests the way the Commission has calculated the amount of state aid ING received and the disproportionality of the price leadership restrictions specifically and the disproportionality of restructuring requirements in general. In July 2011 the appeal case was heard orally by the General Court of the European Union. On 2 March 2012, the Court partially annulled the Commission’s decision of 18 November 2009 and as a result a new decision must be issued by the Commission. Interested parties can file an appeal against the General Court’s judgment before the Court of Justice of the European Union within two months and ten days after the date of the General Court’s judgment.
In addition to the foregoing procedures, ING Bank remains in discussions with authorities in the US concerning ING Bank‘s compliance with Office of Foreign Asset Control requirements. ING Bank has received requests for information from US Government agencies including the US Department of Justice and the New York County District Attorney’s Office. ING Bank is cooperating fully with the ongoing investigations and is engaged in discussions to resolve these matters with the US authorities; however, it is not yet possible to reliably estimate the timing or amount of any potential settlement, which could be significant. At this moment it is not practicable to provide an estimate of the (potential) financial effect.
The two members of the Executive Board of ING Groep N.V. are also members of the Management Boards of ING Bank N.V., ING Verzekeringen N.V., Insurance Eurasia and Americas Insurance Holdings. The Management Board members of ING Bank N.V., ING Verzekeringen N.V., Insurance Eurasia and Americas Insurance Holdings are also considered to be key management.
The Executive Board members decided to forego the variable remuneration in relation to performance year 2010. The above table outlines the actual situation.
The total number of stock options on ING Groep N.V. shares held by the Executive Board members, including the Executive Board member that stepped down from the Executive Board as per 1 October 2011, of ING Group N.V. amounted to 164,689 as at 31 December 2011 (2010: 164,689) and total number of stock options on ING Groep N.V. shares held by Management Board members of ING Bank N.V., ING Verzekeringen N.V., Insurance Eurasia and Americas Insurance Holdings amounted to 1,913,631 as at 31 December 2011 (2010: 2,676,675). As at 31 December 2011, members of the Executive Board, including the Executive Board member that stepped down from the Executive Board as per 1 October 2011, held 149,400 ING Groep N.V. shares (2010: 118,723) and members of the Management Boards of ING Bank N.V., ING Verzekeringen N.V., Insurance Eurasia and Americas Insurance Holdings held 84,173 ING Groep N.V. shares (2010: 284,995). As at 31 December 2011, members of the Supervisory Board held 244,968 ING Groep N.V. shares (2010: 167,407).
The difference between the total sales proceeds of EUR 21.1 billion (EUR 22.4 billion -/- adjustment of EUR 1.3 billion) and the fair value under IFRS-EU of EUR 15.2 billion represents a ‘Government grant’ under IAS 20. This government grant is considered to be an integral part of the transaction and is therefore accounted for as part of the result on the transaction.
The transaction resulted in a reduction of the negative revaluation – and therefore an increase in equity – of EUR 4.6 billion (after tax).
In connection with the sale of ING Direct USA as disclosed in Note 30 ‘Companies acquired and companies disposed’, ING has reached an agreement with the Dutch State to adjust the structure of the Illiquid Assets Back-up Facility (IABF). This adjustment served to de-link the IABF from ING Direct USA by putting ING Bank in its place as counterparty for the Dutch State and became effective at the closing of the sale in February 2012. Under the terms of the original transaction ING Direct USA held on its balance the remaining 20% of the Alt-A portfolio, ensuring an alignment of interests between ING and the Dutch state regarding the performance of the portfolio.
These non-voting equity securities are deeply subordinated and rank pari-passu with ordinary shares in a winding up of ING Group.
The spreads are expressed in basis points and reflect the current market characteristics for credit and liquidity.
Level 3 – Valuation technique supported by unobservable inputs This category includes financial instruments whose fair value is determined using a valuation technique (e.g. a model) for which more than an insignificant part of the inputs in terms of the overall valuation are not market observable. This category also includes financial assets and liabilities whose fair value is determined by reference to price quotes but for which the market is considered inactive. Level 3 Availablefor -sale investments include mainly asset backed securities in the United States as described above under ‘Debt securities’. Level 3 Trading assets, Non-trading derivatives and Assets designated at fair value through profit and loss and Level 3 Financial liabilities at fair value through profit and loss include financial instruments with different characteristics and nature, which are valued on the basis of valuation techniques that feature one or more significant inputs that are unobservable. An instrument in its entirety is classified as valued using significant unobservable inputs if a significant portion of the instrument’s fair value is driven by unobservable inputs. Unobservable in this context means that there is little or no current market data available from which the price at which an arm’s length transaction would be likely to occur can be derived. More details on the determination of the fair value of these instruments is included above under ‘Derivatives’, ‘Debt securities’ and ‘Loans and advances to customers’.
Changes in the composition of the group and other changes 8 1,343 1,351
Main changes in fair value hierarchy (2011 compared to 2010) The classification was impacted in 2011 by a transfer of available-for-sale investments of EUR 2.0 billion from Level 3 to Level 2, relating to mortgage backed securities in the United States. Previously these were classified in Level 3 because of the dispersion between prices obtained for the same security from different price sources. In 2011 prices supported by market observable inputs became available and were used in determining the fair value.
Changes in the composition of the group and other changes includes the decrease of the Level 3 assets in relation to the classification of ING Direct USA as a disposal group held for sale. Reference is made to Note 11 ‘Assets and liabilities held for sale’. Furthermore Changes in the composition of the group and other changes includes the increase of the Level 3 assets in relation to shares in real estate investment funds; this increase includes mainly the reclassification of associates to investments available-for sale as disclosed in Note 6 ‘Investments in associates’, as well as the reclassification of equity securities in certain real estate companies into Level 3.
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.
Sensitivities of fair values in Level 3 Reasonably likely changes in the non-observable assumptions used in the valuation of Level 3 assets and liabilities would not have a significant impact on equity and net result, other than explained below for investments in asset backed securities in the United States.
During 2008, the trading volumes in the relevant markets reduced significantly and the market became inactive. The dispersion between prices for the same security from different price sources increased significantly. In order to ensure that the most accurate and relevant sources available are used in determining the fair value of these securities, the valuation process was further enhanced during 2008 by using information from additional pricing sources and enhancing the process of selecting the most appropriate price.
US Subprime RMBS 763 11 774 US Alt-A RMBS 495 7 502
US Subprime RMBS 17 1,630 1,647 US Alt-A RMBS 2,209 638 2,847
Interest income on loans 26,415 24,942 24,983 Interest income on impaired loans 61 40 24 Total interest income on loans 26,476 24,982 25,007
Impairments and reversals of impairments on investments are presented within Investment income, which is part of Total income. This can be specified for each segment as follows: Impairments/ reversals of impairments on investments per operating segment Impairments Reversal of impairments
(ineffective portion) –1 2 –2 –16 –9 –8 –17 –7 –10 – hedges of net investment in foreign entities (ineffective portion) 1 1
The positive impact of the Valuation results on non-trading derivatives during 2011 includes the effect of negative developments in the stock markets giving rise to positive valuation results on related derivatives. Furthermore as a result of decreasing long-term interest rates, values of interest related derivatives have increased. Valuation results on non-trading derivatives related to insurance provisions are mainly offset by an opposite amount in Underwriting expenditure (reference is made to Note 43 ‘Underwriting expenditure’).
Reinsurance recoveries –1,866 –1,712 –1,694 Change in life insurance provisions for risk of company 1,606 1,875 2,078 Costs of acquiring insurance business 1,727 2,557 1,646 Other underwriting expenditure 576 560 462 Profit sharing and rebates 443 538 438
Distributions on account of interest or underwriting results 21 9 91 Bonuses added to policies 287 328 289 Deferred profit sharing expense 135 201 58
In 2011, ING has conducted a comprehensive review of its assumptions for the Insurance US Closed Block Variable Annuity (VA) business. The review showed that current US policyholder behaviour for Closed Block VA policies sold predominantly between 2003 and 2009 diverges from earlier assumptions made by ING, particularly given the ongoing volatility and challenging market circumstances. The assumptions for the US Closed Block VA were updated for lapses, mortality, annuitisation, and utilisation rates, with the most significant revision coming from the adjustments of lapse assumptions. The revisions bring the assumptions more in line with US policyholder experience and reflect to a much greater degree the market volatility of recent years. In conjunction, hedging is adjusted to reflect the revised assumptions. The assumption changes resulted in a charge of EUR 1,099 million, which is reflected in Underwriting expenditure and in the segment Insurance US Closed Block VA. This charge affects the deferred acquisition costs (amortisation and unlocking) for EUR 488 million and the insurance provision (effect of changes in other assumptions) for EUR 611 million. Reference is made to Note 10 ‘Deferred acquisition costs’ and Note 17 ‘Insurance and Investment contracts, reinsurance contracts’. The impact of the assumption adjustments includes a charge to restore the reserve adequacy to the 50% confidence level for the Insurance US Closed Block VA segment. Reference is made to Note 51 ‘Segment reporting’.
In 2010, the Change in life insurance provisions for risk of company includes an amount related to variable annuity assumption changes in the United States and Japan of approximately EUR 356 million (2009: EUR 343 million). These assumptions were updated to reflect lower-thanexpected surrenders on policies where the value of the benefit guarantees is significant.
In 2010, impairments on Property development are recognised on a large number of Real Estate development projects in The Netherlands, Spain and the United States. The unfavourable economic circumstances in all regions resulted in lower expected sales prices.
In 2009, impairments on Property development are recognised on a large number of Real Estate development projects in Europe, Australia and the United States. Circumstances that have led to these impairments are unfavourable economic circumstances in all regions that have resulted into lower expected sales prices, changes in strategy of ING Real Estate Development whereby certain projects are not developed further and operational inefficiencies in a limited number of projects.
Continuing operations - average number of employees at full time equivalent basis 26,332 27,750 27,912 71,711 71,621 75,794 98,043 99,371 103,706 Discontinued operations - average number of employees at full time equivalent basis 6,376 6,769 6,571 6,376 6,769 6,571 Total average number of employees at full time equivalent basis 26,332 27,750 27,912 78,087 78,390 82,365 104,419 106,140 110,277
Share-based compensation arrangements includes EUR 153 million (2010: EUR 90 million; 2009: EUR 65 million) relating to equity-settled share-based payment arrangements and EUR 24 million (2010: EUR 29 million; 2009: EUR 31 million) relating to cash-settled share-based payment arrangements.
Remuneration of senior management, Executive Board and Supervisory Board Reference is made to Note 33 ‘Related parties’.
As per 31 December 2011 total options outstanding consists of 90,620,708 options (2010: 105,036,931; 2009: 103,523,988) relating to equity-settled share-based payment arrangements and 17,517,843 options (2010: 19,799,763; 2009: 18,810,498) relating to cash-settled share-based payment arrangements.
The weighted average share price at the date of exercise for options exercised during 2011 is EUR 8.09 (2010: EUR 7.46; 2009: 8.57).
As at 31 December 2011, the aggregate intrinsic values of options outstanding and exercisable were EUR 39 million and nil, respectively.
As at 31 December 2011, total unrecognised compensation costs related to stock options amounted to EUR 24 million (2010: EUR 65 million; 2009: EUR 62 million). These costs are expected to be recognised over a weighted average period of 1.1 years (2010: 1.9 years; 2009: 1.6 years). Cash received from stock option exercises for the year ended 31 December 2011 was EUR 4 million (2010: EUR 3 million; 2009: nil).
The fair value of options granted is recognised as an expense under staff expenses and is allocated over the vesting period of the options. The fair values of the option awards have been determined using a Monte Carlo simulation. This model takes the risk free interest rate into account (2.0% to 4.6%), as well as the expected life of the options granted (5 to 9 years), the exercise price, the current share price (EUR 2.90 – EUR 26.05), the expected volatility of the certificates of ING Group shares (25% – 84%) and the expected dividends yield (0.94% to 8.99%). The source for implied volatilities used for the valuation of the stock options is ING’s trading system. The implied volatilities in this system are determined by ING’s traders and are based on market data implied volatilities not on historical volatilities.
Other interest expenses include nil and nil dividends paid on preference shares and trust preferred securities (2010: nil and nil; 2009: nil and EUR 86 million).
Addition/(releases) of provision for reorganisations and relocations 387 109 339 130 99 258 517 208 597
Result before tax from continuing operations 6,109 3,928 –1,837 Weighted average statutory tax rate 26.1% 24.4% 35.5% Weighted average statutory tax amount 1,594 958 –652
Associates exemption –329 –403 –166 Other income not subject to tax –263 –125 –227 Expenses not deductible for tax purposes 122 102 47 Impact on deferred tax from change in tax rates –56 8 Deferred tax benefit from previously unrecognised amounts –32 Current tax benefit from previously unrecognised amounts 4 Write down/reversal of deferred tax assets 284 740 535 Adjustment to prior periods 9 –52 –118 Effective tax amount 1,365 1,228 –613
Attribution to non-voting equity securities –1,520 –441 –605 Impact of rights issue 583.1
Effect of dilutive instruments: Stock option and share plans 5.4 6.6 5.7
Diluted earnings from continuing operations 3,142 2,160 –1,704 3,789.1 3,788.1 2,691.7 0.83 0.57 –0.64 198 ING Group Annual Report 2011
51 OPERATING SEGMENTS a. General ING Group’s operating segments relate to the internal segmentation by business lines. As at 31 December 2011, ING Group identifies the following operating segments: Operating segments of ING Group Banking Insurance
Underlying net result 3,384 291 3,675 200 ING Group Annual Report 2011
– Total investment and other income 1,008 7,388 –243 8,153 Total underlying income 16,816 36,646 –336 53,126
Divestments in 2010 mainly relate to the sale of the three US independent retail broker-dealer units, the sale of the Private Banking businesses in Asia and Switzerland and to the sale of ING’s 50% stake in Summit Industrial Fund LP as well as the operating result of the in 2010 and 2011 divested units.
– Additions to loan * Analysed as a part of operating expenses.
(excluding market impacts but including dividends and coupons); • Fees and premium-based revenues which includes the portion of life insurance premiums available to cover expenses and profit, fees on deposits and fee income on assets under management (net of guaranteed benefit costs in the United States); • Technical margin which includes the margin between costs charged for benefits and incurred benefit costs and it includes mortality, morbidity and surrender results; and • Non-modelled which is not significant and includes parts of the business for which no margins are provided.
The adequacy of the reserves held for the Insurance US Closed Block VA segment is evaluated on a quarterly basis. The test considers current estimates of all contractual and related cash flows (including projected performance of the hedge program). The test is conducted by comparing the present value of the cash flows to the reserves for the business line. If it is determined, using a best estimate (50%) confidence level, that reserves are insufficient to support the projected cash outflows, the shortfall is established as an additional reserve, which is in turn recognised immediately in the profit and loss account. There are no offsets considered by any other business line.
A net reserve inadequacy exists using a prudent (90%) confidence level for the segment Insurance US Closed Block VA. This inadequacy existed in 2011, 2010 and 2009. This inadequacy was offset by reserve adequacies in other segments, such that at the Group level there is a net adequacy at the prudent (90%) confidence level.
Income non-modelled life business 36 9 44 89 Life & ING IM operating income 1,602 712 2,028 224 1,737 872 7,175
Fees and premium based revenues 578 501 1,060 121 1,329 826 4,415
DAC amortisation and trail commissions 230 197 619 –7 710 3 1,752
Fees and premium based revenues 569 522 967 167 1,083 704 4,012
Income non-modelled life business 23 14 86 123 Life & ING IM operating income 1,246 788 1,848 214 1,341 721 6,158
DAC amortisation and trail commissions 235 197 489 104 570 3 1,598
52 INFORMATION ON GEOGRAPHICAL AREAS ING Group’s business lines operate in seven main geographical areas: the Netherlands, Belgium, Rest of Europe, North America, Latin America, Asia and Australia. The Netherlands is ING Group’s country of domicile. Geographical distribution of income is based on the origin of revenue. A geographical area is a distinguishable component of the Group engaged in providing products or services within a particular economic environment that is subject to risks and returns that are different from those of segments operating in other economic environments. The geographical analyses are based on the location of the office from which the transactions are originated.
Included in cash and cash equivalents: – amounts due to banks –19,122 –12,898 –12,334 – amounts due from banks 14,617 16,125 14,721
Total as included in balance sheet: – amounts due to banks –72,233 –72,852 –84,235 – amounts due from banks 45,323 51,828 43,397
56 IMPACT OF CHANGE IN ACCOUNTING POLICY This note provides more information on the impact of the change in accounting policy for insurance provisions for Guaranteed Minimum Benefits for Life and how this change affects the financial information of the comparative years as included in previously published annual accounts. Reference is made to ‘Changes in Accounting Policies’ for more details on the impact of the change in accounting policy.
The change in accounting policy for insurance provisions for Guaranteed Minimum Benefits for Life affects the following balance sheet line items: Deferred acquisition costs, Other liabilities, Insurance and investment contracts and Shareholders’ equity (reference is made to Note 13 ‘Shareholders’ equity (parent)/non-voting equity securities’). In addition to the comparative information on 2010 as disclosed in the relevant notes the following tables also disclose on the balance sheet items as per 31 December 2009 and 1 January 2009.
Changes in deferred acquisition costs Investment contracts Life insurance Non-life insurance Total
Provision for unearned premiums and unexpired risks 361 1,756 4 13 365 1,769
Financial assets and liabilities at fair value through profit and loss 29 –1 –324 –21 10 –6 –311 Deferred acquisition costs and VOBA 3,402 –567 136 –12 –180 71 2,850 Fiscal reserve –48 48
ING GROUP RISK MANAGEMENT Taking measured risks is part of ING Group’s business. As a financial services company active in banking, investments, life and non-life insurance and retirement services, ING Group is naturally exposed to a variety of risks. To ensure measured risk-taking throughout the organisation, ING Group operates through a comprehensive risk management framework, integrated risk management in its daily business activities and strategic planning. This ensures the identification, measurement and control of risks at all levels of the organisation so that ING Group’s financial strength is safeguarded.
Risk Management assists the various management boards with the formulation of risk appetite, strategies, policies and limits and provides a review, oversight and support function throughout ING Group on risk-related issues. The main financial risks ING Group is exposed to are credit risk (including transfer risk), market risk (including interest rate, equity, real estate, implied volatility, and foreign exchange risks), insurance risk, liquidity risk and business risk. In addition, ING Group is exposed to non-financial risks, e.g. operational and compliance risks. The way ING Group manages these risks on a day-to-day basis is described in this risk management section.
As a result of the decision to manage ING Bank and ING Insurance separately, ING has implemented two distinct risk appetite frameworks for both Bank and Insurance. The common concept however is that risk appetite is expressed as the tolerance to allow key capital ratios to deviate from their target levels under adverse scenarios. These frameworks are discussed in more detail in the specific sections of this risk management section.
Both ING Bank and ING Insurance need to prepare for significant changes in the regulatory requirements. For ING Bank the most important one is the implementation of Basel III, while ING Insurance runs an extensive program to allow the implementation of Solvency II (which is the fundamental reform of European insurance solvency and risk governance legislation; announced to be effective as of 1 January 2013 but delays in legislation imply that it will not be effective before 1 January 2014). Additionally, both in Bank and Insurance, ING continued its stress testing efforts, with stress testing becoming more important and more embedded in the risk culture.
The debt securities revaluation reserve after tax, excluding ING Direct USA, improved in 2011 to EUR 5,743 million compared to EUR 1,620 million in 2010, due to interest rates developments and the spread widening that took place during 2011 as a result of the debt crisis in Europe. More details on the Investments can be found in Note 4 ‘Investments’ of the Annual Accounts.
(1) The exposures reported are credit, market and real estate exposures based on source systems and measurement criteria that can differ from those of similar exposures reported in Note 4 ‘Investments’ of the Annual Accounts.
(2) More information on the risk management definitions and practices can be found in the remainder of this section (3) rading exposure also includes netted CDS exposure, of which details are provided at the bottom of this table. (4) Real Estate includes Real Estate Development, Real Estate Investments and Property in Own Use; it does not include (indirect) exposure through Real Estate Finance, which is reflected in Total Lending and Total Debt Securities. (5) These are Group risk exposures of which the Insurance component is netted for impairments, as well as Bank Greek Government exposure.
Greece Total Lending exposure is reported in the Balance sheet at amortised cost. Cumulative provisions/impairments recognised on lending exposures amount to approximately EUR 1 million. Debt securities – RMBS are reported in the balance sheet at amortised cost. Debt securities – Government bonds are reported in the balance sheet at fair value (available-for-sale). Cumulative provisions/impairments recognised on debt securities amount to EUR 978 million and fully relate to government bonds. ING Bank does not have a bank operation in Greece but does serve a limited number of mostly international companies which have their domicile in Greece. Many of these companies are dependant on cash flows that are based outside Greece. ING Insurance Eurasia has direct Greek exposure given the presence of the Greek based insurance entity.
Ireland Total Lending exposure is reported in the balance sheet at amortised cost. No provisions/impairments have been recognised. Approximately 80% of Total Debt securities is reported in the balance sheet at amortised cost. Approximately 20% is reported in the balance sheet at fair value (available-for-sale). Cumulative provisions/impairments recognised on debt securities amount to EUR 270 million and relate to subordinated debt from Irish banks (EUR 189 million), RMBS (EUR 2 million) and Other ABS (EUR 88 million). In addition to the above exposures on Ireland, ING Insurance has Irish reinsurance exposure of EUR 1,345 million. This mainly includes reinsurance through an Irish subsidiary of a large European Reinsurance group.
On 21 February 2012 a new common understanding on key terms of a voluntary exchange of privately held Greek government bonds was reached. The programme is expected to be implemented in March 2012 and did not have an impact on the 2011 results.
ING Insurance defines different levels of Liquidity Management; short-term liquidity or cash management, long-term liquidity management, and stress liquidity management. Liquidity risk is measured through several metrics including ratios and cash flow scenario analysis, in the base case and under several stressed scenarios.
Risk Management benefits ING Bank and its shareholders directly by providing more efficient capitalisation and lower costs of risk and funding. The cost of capital is reduced by working closely with rating agencies and regulators to align capital requirements to risks. Risk Management helps business units to lower funding costs, make use of the latest risk management tools and skills, and lower strategic risk, allowing them to focus on their core expertise with the goal of making ING Bank’s businesses more competitive in their markets.
The risk management function, both at bank and regional/local level, belongs to the second line of defence and has the primary responsibility to align risk taking with strategic planning e.g. in limit setting.
– The Risk Committee, which assists the Supervisory Board on matters related to risk governance, risk policies and risk appetite setting. • The Management Board Bank (MBB) is responsible for managing risks associated with the activities of ING Bank. The MBB’s responsibilities include ensuring that internal risk management and control systems are effective and that ING Bank complies with relevant legislation and regulations. On a regular basis, the MBB reports on these issues and discusses the internal risk management and control systems with the Supervisory Board. On a quarterly basis, the MBB reports on the Bank’s risk profile versus its risk appetite to the Audit Committee, explaining changes in the risk profile.
The heads of these departments (Risk General Managers) report to the CRO and bear direct responsibility for risk (mitigating) decisions at the Bank level. The Risk General Managers and the CRO are responsible for the harmonisation and standardisation of risk management practices.
In addition two staff departments report to the CRO: • Risk Integration and Analytics (RI&A), which is responsible for inter-risk aggregation processes and for providing bank-wide risk information to the CRO and Management Board Bank; and • Model Validation (MV), which carries out periodic validations of all material risk models used by ING Bank. To ensure independence from the business and other risk departments, the department head reports directly to the CRO.
Risk policies ING Bank has a framework of risk management policies, procedures and standards in place to create consistency throughout the organisation, and to define minimum requirements that are binding to all business units. The governance framework of the business units aligns with the Bank’s level framework and meets local (regulatory) requirements. Senior Management is responsible to ensure policies, procedures and standards are implemented and adhered to. Policies, procedures and standards are regularly reviewed and updated via the relevant risk committees to reflect changes in markets, products and emerging best practices.
Nevertheless, users of the information in the risk management section should bear in mind that the analyses provided are forward looking measures that rely on assumptions and estimates of future events, some of which are considered extreme and therefore unlikely to occur. In the normal course of business ING Bank continues to develop, recalibrate and refine the various models that support risk metrics, which may result in changes to the risk metrics as disclosed.
The overall risk appetite is translated into specific limits which are cascaded down into the organisation, e.g: • Credit risk limits; • ALM/Value at Risk limits; and • Liquidity risk limits.
The metrics that are presented in the following sections relate to each of these metrics and present earnings sensitivity, economic and regulatory capital.
Non-financial Risk Dashboard The Non-Financial Risk Dashboard (NFRD) is a report that is a fixed item on the agenda for the meetings of the MBB and the Risk Committee. NFRD provides management at all organisational levels with information on their key operational, compliance and legal Risks. NFRD is based on their risk tolerance within their business and a clear description of the risks and responses enabling management to prioritise and to manage operational, compliance and legal risks.
Aggregation model The main processes executed in ING Bank Economic Capital aggregation model are depicted in the flowchart below. The white boxes show the processes performed by the model while the shaded box indicates inputs from other risk departments.
Economic Capital (Bank diversified only) by business line combination Economic Capital Regulatory Capital
Excluding ING Direct USA, the total EC would be EUR 25 billion and the total RC would be EUR 24.2 billion.
Credit risk management is supported by dedicated credit risk information systems and internal credit risk measurement methodologies for debtors, issuers and counterparties. CRM creates consistency throughout the credit risk organisation by providing common credit risk policies, methodologies, manuals and tools across the Bank.
Credit analysis is risk/reward-oriented in that the level of credit analysis is a function of the risk amount, tenor, structure (e.g. covers received) of the facility, and the risks entered into. For credit risk management purposes, financial obligations are classified into lending, investments, pre-settlement, money market and settlement. Sophisticated RAROC-based tools are used internally to ensure a proper balance of risk and reward within the portfolio and concentration parameters. ING Bank’s credit analysts make use of publicly available information in combination with in-house analysis based on information provided by the customer, peer group comparisons, industry comparisons and other quantitative techniques.
Credit Risk Measurement and Reporting Figures associated with Money Market and Lending activities are generally the nominal amounts, while amounts associated with Investment activities are based on the original amount invested less repayments. Off-Balance Sheet exposures include the letters of credits and guarantees, which are associated with the Lending Risk Category. Additionally, Off-Balance Sheet exposures include a portion of the unused limits, associated with the statistically expected use of the unused portion of the limit between the moment of measurement and the theoretical moment of statistical default. Collectively, these amounts are called ‘credit risk outstandings’.
The underlying formulas and models that are used for determining Economic Capital for credit and transfer risk are similar to those used for determining the level of regulatory capital that is required under Basel II (Pillar 1). Despite the fact that the same underlying formulas are used, (internal) Economic Capital and regulatory capital are not the same, due to various specific rules imposed by Basel II, such as regulatory caps and floors, and the use of the standardised approach for certain portions of ING Bank’s portfolio. These differences are permitted under the Basel II guidelines.
Regulatory Capital Basel II Formula Vortex Basel Engine (‘VBE’) in the Central Risk Database 99.90% Basel II model outputs RWA
Economic and Regulatory Capital (Bank diversified only) by risk type Economic Capital Regulatory Capital 224 ING Group Annual Report 2011
ING Bank Risk categories for credit risk Lending risk Lending risk arises when ING Bank grants a loan to a customer, or issues guarantees on behalf of a customer. This is the most common risk category, and includes term loans, mortgages, revolving credits, overdrafts, guarantees, letters of credit, etc. The risk is measured at the notional amount of the financial obligation that the customer has to repay to ING Bank, excluding any accrued and unpaid interest, discount/premium amortisations or impairments.
Money market risk Money market risk arises when ING Bank places short-term deposits with a counterparty in order to manage excess liquidity, as such, money market deposits tend to be short-term in nature (1–7 days is common). In the event of a counterparty default, ING Bank may lose the deposit placed. Money market risk is therefore measured simply as the notional value of the deposit, excluding any accrued and unpaid interest or the effect of any impairment.
Country risk Country risk is the risk specifically attributable to events in a specific country (or group of countries). It can occur within each of the five above described risk categories. All transactions and trading positions generated by ING Bank include country risk which is further divided into economic and transfer risk. Economic risk is the concentration risk relating to any event in the risk country which may affect transactions and any other exposure in that country, regardless of the currency. Transfer risk is the risk incurred through the inability of ING Bank or its counterparties to meet their respective foreign currency obligations due to a specific country event.
Credit Risk Mitigation As with all financial institutions and banks in particular, ING Bank is in the business of taking credit risks in an informed and measured fashion. As such, the creditworthiness of our customers, trading partners and investments is continually evaluated for their ability to meet their financial obligations to ING Bank. ING Bank uses different credit risk mitigation techniques, of which entering into Master Agreements, Collateral Agreements and CDS contracts are the main techniques used.
Within the Lending portfolio, there was an upward shift from the highest end investment grade in 2011 as a result of increased outstandings to local German governments. In the Investment portfolio we saw a reversed trend, from AAA to AA, mainly the result of downgraded exposures linked to sovereigns and also driven by the US dollar appreciation. The investment grade counterparty risks (pre-settlement) did not materially change. Related to these counterparties risks are increasing applications of collateral and netting agreements with these counterparties. Where such agreements are in place the credit risks are lowered due to the benefit of collateral and netting agreements. The increase in the AA bucket for Money Market is directly related to deposits given to central banks.
Risk concentration As part of the focus on core clients, ING Bank further reduced its relative exposure to governments and the financial sector while growing the private individual and corporate portfolios. The industry Central Banks was above the threshold of 2.0% in 2011, as a result of the deposits given to various central banks.
ING Bank Lending portfolio The largest relative geographic area of growth was Belgium, especially in the residential mortgage portfolio. The Americas was the second region in terms of growth which corresponds with the region’s economic recovery in 2011. Exchange rate effects had further impact on the regional division.
In the table below the residential mortgage portfolio and the mortgage collateral amount are shown. Please note that the figures shown are based on credit collateral amounts, meaning the market values of these properties after haircuts.
The table below represents the economic sector breakdown of credit risk outstandings (including impaired amounts) for loans and positions that have been classified as problem loans and for which provisions have been made.
Governments 1 * Excluding intercompany positions ** Guarantees received can be additional to pledges and not necessarily replace collaterals *** The used valuations methods for the underlying collaterals may vary per collateral **** Credit covers are the sum of all existing covers. Excess cover amounts on specific loans cannot be put in place for loans without covers. Therefore, the figures shown in the table should not be used for netting calculation purposes
Governance Within ING Bank, market risk (including liquidity risk) falls under the supervision of the ALCO function with ALCO Bank as the highest approval authority. ALCO Bank determines the overall risk appetite for market risk. The ALCO function is regionally organised with the exception of ING Direct, which has a separate ALCO. The business lines Retail Banking and Commercial Banking are represented within the respective regional and local ALCO’s. The ALCO structure within ING Bank facilitates top-down risk management, limit setting and the monitoring and control of market risk. This ensures a correct implementation of the ING Bank risk appetite.
For the trading and most of the non-trading portfolios (including equity investments), the actual VaR (measured at a 99% confidence interval, a one day holding period and under the assumption of an expected value of zero) is taken as a starting point for the Economic Capital calculations for market risk. To arrive at the Economic Capital for market risk, a simulation based model is used which includes scaling to the required confidence interval and holding period. In determining this scaling factor, several other factors are also taken into account like the occurrence of large market movements (events) and management interventions.
While aggregating the different Economic Capital market risk figures for the different portfolios, diversification benefits (based on stressed correlations) are taken into account as it is not expected that all extreme market movements will appear at the same moment.
Stress testing Stress tests are used for the monitoring of market risks under extreme market conditions. Since VaR in general does not produce an estimate of the potential losses that can occur as a result of extreme market movements, ING Bank uses structured stress tests for monitoring the market risk under these extreme conditions. Stress scenarios are based on historical as well as hypothetical extreme events. The result of the stress testing is an event risk number, which is an estimate of the profit and loss account effect caused by a potential event and its world-wide impact for ING Commercial Banking. The event risk number for the ING Commercial Banking trading activity is generated on a weekly basis. Like VaR, event risk is limited by ALCO Bank. ING Bank’s event risk policy basically consists of defined stress parameters per country and per market (fixed income, equity, foreign exchange, credit and related derivative markets). The scenarios and stress parameters are evaluated against extreme actual market movements. If and when necessary, ING Bank evaluates specific stress scenarios, as an addition to its structural stress tests. These specific scenarios relate to current concerns, like political instability in certain regions, terrorist attacks or extreme movements, e.g. in credit spreads. Furthermore, ING participates in bank-wide stress testing as well as in ad hoc stress testing exercises as requested by the DNB or EBA.
Consolidated VaR trading books: ING Commercial Bank Minimum Maximum Average Year end
Credit Spread (BPV (1)) Credit Spread (BPV (1)) Eurozone –287 Eurozone –596 UK –50 Sweden –67 United States –31 Hong Kong –47 Mexico –31 UK –47 Norway –25 United States –42
Risk classes 1 (AAA) –5 –16 –8 –211 2–4 (AA) –12 –49 –25 –212 5–7 (A) 15 –256 –32 –257 8–10 (BBB) –49 –42 –77 –102 11–13 (BB) –14 –24 –11 –47 14–16 (B) –18 –8 –30 –8 17–22 (CCC and Problem Grade) 2 –21 –24 –33 Not rated –1 0 Total –82 –416 –207 –870
ING Bank distinguishes three types of activities: investment of own capital (by Capital Management), commercial business (ING Direct, Retail Banking and Commercial Bank) and the strategic interest rate position (Financial Markets ALM). The scheme below presents the ALM framework: Below, the three activities are described in more detail.
Commercial activities lead to interest rate risk, as repricing tenors of assets differ from those of liabilities. Linear interest rate risk is transferred out of the commercial business into the risk center (FM ALM), leaving convexity risk and model risk with the commercial business. The convexity risk is a result of hedging products that contain embedded options, like mortgages, by using linear hedge instruments. Model risk reflects the potential imperfect modelling of client behaviour. The risk transfer process takes place on a monthly basis, but more often if deemed necessary, for instance in volatile markets.
Risk Profile Earnings Sensitivity (ES) ES measures the impact of changing interest rates on (pre tax) IFRS-EU earnings. The ES figures in the table below reflect an instantaneous shock up of 1% and a time horizon of one year. Management interventions are not incorporated in these calculations but balance sheet dynamics (e.g. new business) are significant.
In line with NPV-at-Risk, the bank’s overall BPV position is dominated by the long-term investment of capital, as the present value of this position is significantly impacted if interest rates move up by 1 basis point.
The total BPV excluding ING Direct USA is –EUR 16 million. The total BPV decreased substantially mainly on the back of a lower expected duration of mortgages leading as more prepayments are expected due to the low interest rate environment in the US and the Eurozone. Next to that the bank’s strategic interest rate position turned to more neutral.
ING Bank Foreign exchange (FX) risk in banking books FX exposures in banking books result from core banking business activities (business units doing business in other currencies than their base currency), foreign currency investments in subsidiaries (including realised net profit and loss) and strategic equity stakes in foreign currencies. The policy regarding these exposures is briefly explained below.
ING Bank Real Estate price risk in banking books Real estate price risk arises from the possibility that real estate prices fluctuate. This affects both the value of real estate assets and earnings related to real estate activities.
ING Bank’s real estate exposure revaluing through P&L decreased significantly mainly caused by sales of American and Australian funds (EUR –0.7 billion) and assets being revalued through equity instead (EUR –0.4 billion); the latter is a result of the fact that ING REIM is not the manager of the real estate funds anymore.
For risk management purposes, the total real estate exposure amounts to EUR 4.0 billion since property from foreclosures and third party interests is excluded. A split up on the real estate exposures per continent and sector is seen below.
Real Estate Exposure banking books recorded as fair value through P&L (by geographic area and sector type)
Risk profile Structural liquidity risk Structural liquidity risk is the risk that the structural, long-term balance sheet cannot be financed timely or at a reasonable cost. For the purpose of managing structural liquidity risk, a specific advisory committee to ALCO Bank has been established.
ING BANK OPERATIONAL RISK Operational risk is the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events. It includes the related risk of reputation loss, as well as legal risk whereas strategic risks are not included. Effective operational risk management leads to more stable business processes (including IT systems) and lower costs. Generic mandatory controls are described in the ORM policy house.
Governance At all levels in the organisation Non-Financial Risk Committees (NFRC’s) are established that identify, measure and monitor the operational, compliance and legal risks of the region or business unit with appropriate quality of coverage (granularity) and to ensure that appropriate management action is taken by the responsible line managers at the appropriate level of granularity. NFRC’s, chaired by the CEO of the entity, steer the risk management activities of the first and second line of defence in their entities.
Operational risk framework ING Bank has developed a comprehensive framework supporting and governing the process of identifying, mitigating, measuring and monitoring operational risks thus reflecting the stages described in the Enterprise Risk Management model of COSO (Committee of Sponsoring Organisations of the Treadway Commission).
Risk profile The AMA capital for the fourth quarter of 2011 amounts EUR 2,836 million. This is slightly below the capital estimate of previous year. This is explained by a capital reduction resulting from the divestments of ING Car Lease and REIM Fee Business, which is partially offset by a capital increase resulting from the regular external incident data update.
The NFR Awareness Program is designed with the objective that all ING Bank employees are aware of the relevant risks, the potential impact, the appropriate mitigating measures and their personal role in applying those measures. The new approach significantly improves risk awareness by putting ING Bank’s businesses in the lead, working closely with risk professionals. A tailored approach per target group, embedded activities in regular business planning and target setting and focus on desired behaviours and realistic ways of apply rules are the basic elements of the new approach. It also gives an overall structure to the many risk awareness activities carried out by ORM, Compliance and Legal and ensures that ING Bank’s risk awareness activities are better focused on the key risks we face as a business.
Governance The Compliance Risk Management function The Chief Compliance Officer (CCO) is the General Manager of Compliance Risk Management and is responsible for developing and establishing the Bank-wide Compliance Risk Management Charter & Framework, establishes the Minimum Standards for managing Compliance Risks and assists and supports the Management Board Bank in managing ING Bank’s Compliance Risks.
ING Bank supervisory role over all functional activities of the Compliance Officers in the respective region or Universal Bank. The CCO and the Bank Compliance Risk Management team provide overall direction to the Regional or Universal Bank Compliance Officers.
Scope The Compliance Risk Management function focuses on managing the risks arising from laws, regulations and standards which are specific to the financial services industry. The Compliance Risk Management function actively educates and supports the business in managing compliance risks including anti-money laundering, preventing terrorist financing, conflicts of interest, proper sales and trading conduct and protection of customer interest.
Main developments in 2011 • Regulator relationships – Bank Compliance Risk Management continued to invest in pro-active relationships with regulators in the jurisdictions where ING Bank operates, striving for an open approach and cooperation in identifying and mitigating compliance risks for ING Bank.
In anticipation of the intended divestment of the insurance activities, to a large extent risk management has been delegated to ING Insurance Eurasia and ING Insurance US with an oversight role at Group level.
• The insurance business is sensitive to regulatory action, for instance regulations affecting taxes, pension regulation and customer protection. In the first quarter, the European Court of Justice ruled that price differentiation based on gender for any insurance products sold in the European Union from 21 December 2012 onwards. This will only impact new business and exclude repricing and extensions. Pension fund law changes in Poland were approved and signed at the end of March 2011. These changes are expected to negatively impact future earnings.
The following principles support this objective: • Transparent communication to internal and external stakeholders on risk management and value creation; • Compliance with internal and external rules and guidelines ; • Products and portfolios are structured, underwritten, priced, approved and managed according to the guidelines; • The risk profile of ING Insurance Eurasia is transparent, and is consistent with delegated authorities and the overall Insurance Eurasia strategy and risk appetite.
To the extent that the committees do not determine otherwise, the Chief Risk Officer (CRO) attends the meetings of both committees.
As part of the integration of risk management into the strategic planning process, the MBI Eurasia annually issues a Planning Letter which provides the organisation with the corporate strategic planning, and addresses key risk issues. Based on this letter the business lines develop their own business plans, including qualitative and quantitative assessment of the risks involved. Risk appetite, risk tolerance levels and risk limits are explicitly discussed as part of the process. Based on the business plans the MBI Eurasia formulates the Strategic plan which is submitted to the Supervisory Board for approval.
Risk Management Function The CRO bears primary and overall responsibility for the risk management function within ING Insurance Eurasia, which identifies, measures, monitors and reports risk within ING Insurance Eurasia. The risk function maintains and updates the policy framework, develops risk methodologies and advises on the risk tolerance and risk profile. The CRO assures that both the Supervisory Board and MBI Eurasia are well informed and understand the material risks within ING Insurance Eurasia at all times.
Regional level and business unit level have separate risk committees. The Regional CROs report functionally to the Deputy CRO, while the Business Units CROs in turn functionally report to the Regional CROs. Within ING Insurance Eurasia Compliance Risk Management is part of the Legal and Compliance function.
The risk appetite is managed by Available Financial Resources over Economic Capital Ratio (AFR/EC). This ratio is defined as the Available Financial Resources (AFR) over the amount of capital required for the current net asset value to absorb unexpected losses in a scenario based on a 99.5% confidence level with a one year time horizon. The confidence interval and horizon are aligned to Solvency II.
Financial Risks For financial risks, the risk tolerance is translated into risk limits on several sensitivities assuming a moderate stress scenario. These limits are set on a regional and business unit level.
Other than the above mentioned sensitivities, several limit structures are put in place on corporate, regional and business unit level. Examples include, but are not limited to, the following: • Regulatory capital sensitivities; • Issuer concentration limits; • Mortality concentration limits; • Catastrophe and mortality exposure retention limits; • Investment and derivatives guidelines and limits.
Actuarial Opinion The Actuarial Opinion is a quarterly report to the Supervisory Board which highlights significant developments with respect to the adequacy of insurance liabilities, based on IFRS reserving principles. Developments that (could) have a significant impact on the IFRS P&L are also mentioned in the Actuarial Opinion. The Actuarial Opinion of the last quarter of the year is accompanied by an overview of the IFRS reserve adequacy test.
Investment Risk Dashboard On a quarterly basis the Investment Risk Dashboard (IRD) is prepared for the general account of ING Insurance Eurasia. The IRD is reported to the Risk Committee and provides actionable management information on the portfolios. The IRD analyses how the portfolios developed over the quarter. It summarises market developments and provides several breakdowns of the portfolios to highlight (potential) risk concentrations in asset classes, industries, rating classes and individual names. Also given the crisis, the IRD was further adapted to reflect more details and new views on some of the risks in ING Insurance Eurasia’s investment portfolios.
• Business Risk – Calculated by the business unit for Persistency, Expense and Premium-rerating Risk; • Operational Risk – Calculated by a corporate risk model for all business units, in alignment with Solvency II Standard Formula.
EC Calculation and aggregation For the EC calculation the risk system (ECAPS) uses 20,000 simulated scenarios of market risks, credit risk, business risk, operational risk, life risk, morbidity risks and P&C risk. Diversification between risks is taken into account by a Gaussian Copula, allowing for different marginal probability distributions at the risk driver level. To be more in line with Solvency II operational risk capital is treated as an add-on, it is not part of the diversification between risk types. The 20,000 scenarios are calibrated based on the historical time series of the market risk drivers using at least 5 years of historical data. Volatilities and correlations are calibrated to represent the distribution on a quarterly frequency. For each of the 20,000 scenarios the market value of assets and liabilities and the change in value of the Market Value Surplus (MVS) is recalculated. Sorting the results and selecting the 99.5% worst change in MVS result provides the Economic Capital for the given level of aggregation.
The exclusion of non-ING Insurance Eurasia entities mainly relates to the business in Latin America and the financial leverage of ING Insurance excluding US that was considered in last year’s EC.
While the figures above are shown by business line, the diversification across ING Insurance Eurasia businesses is calculated across business units. Total diversification between ING Insurance Eurasia’s business units and the Corporate Line Insurance is 34% (2010: 28%).
Mortality Mortality risk can be subdivided into: – Positive mortality risk occurs when claims are higher due to higher mortality experience e.g. term insurances – Negative mortality risk occurs when insured persons live longer than expected, for instance pension products. Longevity risk hits earnings gradually over time.
IFRS Earnings & EC: Storms and third party liabilities in Benelux 256 ING Group Annual Report 2011
Mitigation In general, insurance risk cannot be (easily) hedged directly via the financial markets and are partially mitigated by diversification across large portfolios. They are therefore managed at the contract level through underwriting policies, product designs requirements, independent product approval processes and risk limitations related to insurance policy terms and conditions agreed with the client.
BUSINESS RISK Business risk for insurance is essentially the risk that insurance operations accept as a consequence of participating in the insurance business. In practice this can be defined as the exposure to the possibility that experience differs from expectations with respect to expenses, the run-off of existing business (persistency/renewals), future premium rerating, etc.
Expense The risk that actual expenses in the future exceed the expected expenses EC: Expense overruns in the Benelux Premium re-rating The risk that actual premium rate adjustments in the future are less than the expected premium adjustment EC: Related to renewable heath riders in Malaysia 1 W ho w e are 2 Report of the Executive Board 3 C orporate governance 4 C onsolidated annual accounts 5 Parent com pany annual accounts 6 O ther inform ation 7 A
MARKET RISK ING Insurance Eurasia is exposed to market risk to the extent the market value of surpluses can be adversely impacted due to movements in financial markets. Changes in financial market prices impact the market value of ING Insurance Eurasia’s asset portfolio and hedging derivatives directly as well as through the calculated market value of the insurance liabilities.
AFR & IFRS earnings sensitivities: – Measured by the impact of a 25% drop in equity prices
AFR & IFRS earnings sensitivities: – Measured by the impact of a 10% up and down movement of currencies compared to the euro
– AAA and AA rated government bonds and home government bonds in local currency (for example KRW government bonds in Korea) are excluded, exception only applicable to Greek bonds.
IFRS Earnings, AFR & EC: Real estate holdings in the Benelux 258 ING Group Annual Report 2011
REAL ESTATE Real estate price risk arises from the possibility that the value of real estate assets fluctuates because of a change in earnings related to real estate activities and/or a change in required investor yield. Real estate exposure is mainly present in Europe, more specifically Benelux.
• Money market lending is only done with banks of good credit standing. ING Insurance Eurasia maintains money market limits for each of these banks. The counterparties are continuously monitored for developments that could warrant lowering the limit.
Risk Profile ING Insurance Eurasia’s goal is to maintain a low-risk, well diversified investment grade portfolio while avoiding large risk concentrations. To limit and diversify spread risk, ING Insurance Eurasia manages the credit portfolio’s distribution over rating classes and industries. Both profiles also include the non-traded fixed income and money market products whose risks are risk measured with the Credit Default model. The specific risks are contained through the combined issuer and lending concentration limit framework and the separate money market and reinsurance limit frameworks. Please note that for all of the following tables, the figures exclude all ING intercompany exposures.
ING Insurance Eurasia rating class distribution remained fairly stable during 2011. The increase in the AAA class is mainly due to an increase in AAA government bonds. The CCC, Unrated and Problem Grade class which mainly contains bonds from unrated counterparties, private equity and real estate investments.
(1) Country is based on the country of residence of the ultimate parent.
Credit Covers The table below shows the cover values per credit risk category. At ING Insurance Eurasia, cover is a term which is defined as any security, lien, mortgage, or collateral interest in an asset or guarantee, indemnification or undertaking received (either by contract and/or by law) that is intended to reduce the losses incurred subsequent to an event of default on an obligation (usually financial in nature) a customer may have towards ING Insurance Eurasia. Within ING Insurance Eurasia, covers are subdivided into two distinct groups, called collateral and promises. Reference is made to credit risk management classification as included in the accounting policies for the consolidated annual accounts for a reconciliation between credit risk outstandings categories and financial assets.
Collateral Collateral is a security interest in assets. If the customer defaults on its promised performance, the asset is given as collateral or security for that obligation is liquidated, such that the proceeds can be applied towards full or partial compensation of the pledgor’s (financial) obligation to ING Insurance Eurasia. Assets have monetary value and are generally owned by the person or organisation, who gives them as collateral to ING Insurance Eurasia. Examples of collateral are insurance policies or investment accounts of clients pledged to ING Insurance Eurasia as collateral for mortgage loans, or payables or funds withheld for reinsurance exposures.
In the tables below the residential mortgage portfolio and the mortgage collateral amount are shown. Please note that the figures shown are based on credit collateral amounts, meaning the market values of these properties after haircuts.
Loan-to-Value The LTV ratio relates the total loan amount to the market value of the collateral. The market value is the registered value as adopted from the valuation report of a qualified appraiser or valuer. For example, the LTV of portfolio invested in The Netherlands is based on foreclosure value. When available, indexation is applied to revalue the collateral to the present value. In the LTV calculation the following property covers are included: residential and industrial/commercial properties, land and applicable other fixed assets. All other covers are excluded. In some countries residential mortgages are covered by governmental or commercial sponsors. For example the NHG (see previous section) in the Netherlands guarantees the repayment of a loan in case of a forced property sale. These covered mortgages are included in the calculation of the weighted average LTV. The ING Insurance Eurasia residential mortgage portfolio amounts to EUR 5.6 billion, making up 5% of the total ING Insurance Eurasia outstandings. The residential mortgage portfolio is for 97% concentrated in the Netherlands (Nationale-Nederlanden). The average LTV of the Dutch residential mortgage portfolio amounts to 86%.
(1) Based on residential mortgages only. (2) The amount of past due but not impaired financial assets in respect of non-lending activities was not material.
During 2010 and 2011 there were no impairments for loans within ING Insurance Eurasia. Provisions reported here relate to personal loans and mortgages, and are mainly present in Benelux.
Risk appetite is defined as the risk level management is prepared to tolerate. The operational risk appetite levels are set by the management team of ING Insurance Eurasia. Via Non-Financial Risk Committees (NFRC’s) it is ensured that responsible line managers mitigate the risks that are not within the risk appetite. Incidents and operational risks are tracked and reported on a quarterly basis to management in the Non-Financial Risk Dashboard.
To ensure an independent Operational risk function and the possibility for the Operational risk officers to be impartial and objective when advising business management on Operational Risk in their Business Unit and Region, a dual reporting line, directly to Chief Risk Officer of their business and functionally to the next higher level Operational risk Officer, is in place. The head of Operational risk ultimately reports directly to the Deputy Chief Risk Officer.
COMPLIANCE RISK Compliance Risk is defined as the risk of damage to ING Insurance Eurasia’s integrity as a result of failure (or perceived failure) to comply with relevant laws, regulations, internal policies, procedures and ethical standards. In addition to reputational damage, failure to effectively manage Compliance Risk could expose ING Insurance Eurasia to fines, civil and criminal penalties, and payment of damages, court orders and suspension or revocation of licenses, which would adversely impact customers, staff and shareholders of ING Insurance Eurasia.
As a result of frequent evaluation of all businesses from economic, strategic and risk perspectives, ING Insurance Eurasia continues to believe that doing businesses in Myanmar, North Korea, Sudan, Syria, Iran and Cuba should be discontinued. ING Insurance Eurasia has a policy not to enter into new relationships with clients from these countries and processes remain in place to discontinue existing relationships involving these countries.
ING Insurance Eurasia performs a due diligence process when developing products and invests considerably in the maintenance of risk management, legal and compliance procedures to monitor current sales practices. Customer protection regulations as well as changes in interpretation and perception by both the public at large and governmental authorities of acceptable market practices might influence client expectations. The risk of potential reputational and financial impact from products and sales practices exists because of the market situation, customer expectations, reported incidents and regulatory activity. As part of ING Insurance Eurasia’s customer centric commitment, Compliance Risk Management and the business work closely together to optimise both products and services to meet the customers’ needs.
ING Insurance Eurasia Compliance Risk Management has developed a framework governing the process of identifying, assessing, mitigating, monitoring and reporting compliance risks. The Compliance function works with the ORM Scorecard process to evaluate yearly the level in which the Compliance Risk Management Framework is embedded in each business.
To ensure an independent compliance function and the possibility for the Compliance Officers to be impartial and objective when advising business management on Compliance Risk in their Business Unit and Region, a dual reporting line, directly to General Management of their business and functionally to the next higher level Compliance Officer, is in place.
Board level risk oversight ING Insurance US has a two-tier board structure consisting of the Management Board AIH (MB AIH) and the Supervisory Board.
As part of the integration of risk management into the annual strategic planning process, the MB AIH issues a Planning Letter which provides the organisation with the corporate strategic planning, and addresses key risk issues. Based on this letter the business units develop their business plans, including qualitative and quantitative assessment of the risks involved. As part of the process strategic limits and risk appetite levels are explicitly discussed. Based on the business plans the Management Board formulates the Strategic Plan which is submitted to the Supervisory Board for approval.
– Operational Risk Committee Oversees all non-financial risk issues across ING Insurance US. This includes operational, compliance, legal and reputation risk. Responsible for preparation/pre-approval of non-financial risk items, oversight on non-financial risk issues, and deciding on reported risks and proposed accepted risk.
– Asset Liability Committee Reviews methods and techniques for calculating Asset Liability Management risk, advice about limits and check for breaches in the investment mandates. Addresses balance sheet management, Statutory Capital requirements, and liquidity needs and recommend to the Executive Committee. Oversees activities and initiatives related to ING Insurance US debt ratings and relationships with ratings agencies. Recommends capital and liquidity requirements to the Risk Committee.
Risk Appetite A qualitative measure defining the playing field ING Insurance US wants to act in. Driven by ING Insurance US’s capital rating targets and local capital restrictions, and business strategy.
The risk appetite is managed by the following risk tolerance metrics: • US Regulatory Capital Requirements- Defined as a multiple of the minimum capital required by the National Association of Insurance
Commissioners (NAIC) with consideration of the capital requirements deemed appropriate to maintain the ratings level issued to the operating companies by various rating agencies, excluding entities that are not US domiciled; • IFRS Earnings; • Targets are set on the current ratio values, limits are set on these ratios after considering a moderate stress scenario; and • ING Insurance US is considering the implementation of additional risk tolerance metrics, potentially including US GAAP Earnings, capital sensitivities that include non-US domiciled entities and a US management version of Economic Capital (which may not fully align with Solvency II).
Financial Risk Dashboard The Financial Risk Dashboard (FRD) is a quarterly report that is a quarterly report that is discussed at the Risk Committee of the MB AIH and the Financial Risk Committee. The FRD provides a quarterly overview of the main financial risk metrics (IFRS earnings and Regulatory Capital sensitivities) compared to the limits set by management in alignment with the risk appetite.
• Compliance risk – the risk of damage to ING Insurance US’s integrity as a result of failure (or perceived failure) to comply with relevant laws, regulations, internal policies, procedures and ethical standards.
The table below shows the main risk categories for insurance risks within ING Insurance US. IFRS Earnings sensitivities are defined on a shock scenario at the 90% confidence level.
– Impact that credit default risk can have on credit impairment levels in a “1 in 10” scenario (using “1 in 10” 1-year default rates by rating category, combined with stressed “Loss Given Default” assumptions); plus impact that a “1-in-10” increase in credit spreads levels can have on previously impaired structured assets (re-impairment risk) and on CDS transactions that are carried at market value
Sensitivities The stress events are described above. The ING Insurance US earnings sensitivities are dominated by credit, equity and interest rate exposure.
(1) Implied Volatility, FX and Real Estate sensitivities do not have a material impact. (2) Sensitivities are calculated at business unit level.
Estimated CBVA Immediate Earlings Sensitivities at 31 December 2011 Immediate Change In Equity Market (EUR Millions)
CREDIT RISK ING Insurance US credit exposure arises from the investment of insurance premiums in assets subject to credit risk, largely in the form of unsecured bond investments, investments in private placements and commercial mortgages, as well as in structured finance products. In addition, ING Insurance US is exposed to credit counterparty risk exposure in derivatives transactions, sell/repurchase transactions, securities lending/borrowing and in reinsurance contracts.
Pre Settlement Risk – Risk of a counterparty defaulting on a transaction before settlement and ING Insurance US having to replace the contract by a trade with another counterparty at the then prevailing (possibly unfavourable) market price.
Risk Classes: ING Insurance Eurasia portfolio, as % of total outstandings (1)
(1) Country is based on the country of residence of the obligor.
Securities Lending Business As part of its securities financing business, ING Insurance US entities actively enter into agreements to sell and buy back marketable securities. These transactions can take many legal forms. Repurchase and reverse repurchase agreements, buy/sellback and sell/buyback agreements, and securities borrowing and lending agreements are the most common. The amount of marketable securities that ING Insurance US held as collateral under these types of agreements was EUR 0.8 billion in 2011 and EUR 2 billion in 2010. The change is largely due to a decrease in repurchase agreements and the elimination of the Cash Release securities lending program. These amounts exclude the cash leg of the respective transactions, as well as any pledges of securities under Tri-Party agreements (as the underlying is not directly pledged to or owned by ING Insurance US). As a general rule, the marketable securities that have been received under these transactions are eligible to be resold or pledged in other (similar) transactions. ING is obliged to return equivalent securities in such cases.
• Exposure to financial institutions related to OTC derivative-transactions is largely collateralised, in line with ISDA Master Agreements accompanied by Collateral Support Agreements that have been signed with these counterparties. As per 31 December 2011, ING Insurance US was holding net collateral of EUR 0.35 billion supporting a net market value exposure of EUR 0.5 billion.
LIQUIDITY RISK Liquidity risk refers to the risk that a company is unable to settle financial obligations when they come due, at reasonable cost and in a timely manner. Liquidity risk can materialise both through trading and non-trading positions. As with other market risks, liquidity risk falls under the supervision of the Risk Committee function. Under the volatile market circumstances in 2011, funding and liquidity risk remains an important topic on the agenda of senior management and the Risk Committee, that needs continuous monitoring and management. External market and regulatory developments and internal financial developments are closely monitored. Regular stress testing and measurement of early warning indicators are, among others, used to provide additional management information.
To ensure an independent Operational risk function and the possibility for the Operational risk officers to be impartial and objective when advising business management on Operational Risk, a dual reporting line, directly to ING Insurance US Chief Risk Officer and functionally to the next higher level ING Group Operational Risk Officer, is in place. The head of Operational risk ultimately reports directly to the ING Insurance US Chief Risk Officer.
Main Compliance developments in 2011 • Policies & Procedures: ING Insurance US Compliance reviewed and prepared drafts of an updated Code of Business Conduct and
Ethics, along with new or refreshed Corporate Compliance Policies tailored to the US business and regulatory regime. These will be issued and implemented in 2012.
The asset target for variable annuity (VA) business within SLDI is based on Actuarial Guideline 43 (AG 43), a reserve standard written by the US National Association of Insurance Commissioners. AG 43 prescribes reserves based on applying standardised economic scenarios under the Conditional Tail Expectation (CTE) approach, a scenario testing methodology. For rating agency purposes, ING US targets assets satisfying the CTE requirement in excess of the 95% confidence level.
Since Regulatory filings still need to be completed, the actual targets are not available yet, but the total US target is estimated at EUR 7.0 billion.
Regulatory Capital Sensitivities The ING Insurance US calculates regulatory capital sensitivities on the Risk-Based Capital model in order to provide insight into how the amount of available capital in excess of regulatory required capital is sensitive to an increase or decrease in different market and credit risk factors under a moderate stress scenario which corresponds approximately with a 1-in-10 event. Regulatory capital sensitivities are calculated in aggregate for the US domiciled regulated insurance entities, and exclude any effects of the sensitivities on the capital of non-US domiciled entities.
The sensitivities shown are calculated at business unit level and cover US domiciled insurance entities. The sensitivities are based on moderate and simple to explain shocks to underlying risk factors. The following risk factors are taken into account: • Interest rates; • Equity; • Credit (credit default and credit spread risk); • Implied volatility (equity & interest rates); • Foreign exchange; • Real Estate.
Interest Rate Up 2 –132 24 –6 Interest Rate Down –50 49 –226 27 Equity –149 –55 –17 –168 Credit – Default –272 –366 –8 –12 Credit – Spread –410 –355 –21 –20
The largest asset is the Brazilian SulAmerica joint venture with a balance sheet value of EUR 394 million. Insurance Investments is primarily the responsibility of the ING CFO. Winding down financing activities is delegated to ING Capital Management. Other Insurance Investments businesses are managed by the newly appointed General Manager Insurance Investments. Insurance Investments is supported by the Finance and Risk functions of ING Group. From a risk perspective a key element of this structure is support from Group functions such as Credit Risk, Market Risk, Operational Risk and Legal & Compliance and Internal Audit and from the Functional Controller Insurance.
• Risk Based Capital (Domestic ING US Insurance only). In the US, regulators have well developed capital adequacy models and stress tests that reflect the unique characteristics of the US insurance industry. US domiciled insurance legal entities are required to hold minimum capital levels by state insurance regulators. The level of capital required by rating agencies to maintain an acceptable claims paying ability rating is well above these levels. The Domestic US Insurance business manages its statutory surplus primarily with respect to capital metrics that are aligned with the models of the various ratings agencies.
• Financial Leverage (ING Insurance). Financial Leverage is the sum of hybrid capital, sub-debt and net financial debt and is used to measure the debt ratio of ING Insurance starting 2010.
Deductions Tier 1 –1,014 –1,069 Tier 1 capital for Bank 38,622 39,333
(4) According to the regulatory definition (5) Includes mainly EUR –1,247 million (2010: EUR –1,727 million) in participations (e.g. Kookmin, Bank of Beijing) and other equity investments, EUR –355 million
Subordinated loans qualifying as Tier 1 capital (2) 6,850 8,438 Goodwill and intangibles deductible from Tier 1 (1) –1,390 –1,645 Deductions Tier 1 –1,014 –1,069 Revaluation reserve (3) –1,008 –1,592 Available capital – Tier 1 38,622 39,332
(1) These numbers have been restated to reflect the move towards fair value accounting for Guaranteed Minimum Withdrawal Benefits for life in the US closed block VA as of 1 January 2011. Further details on the restatement are available in the Accounting Policies for the consolidated annual accounts of ING Group under ‘Changes in accounting policies’.
Shareholders’ equity (parent) 23,475 20,159 Revaluation reserve debt securities –4,379 –1,164 Revaluation reserve crediting to life policyholders 3,492 1,488 Revaluation reserve cash flow hedge –2,883 –1,567 Goodwill –786 –1,425 Minority interests 62 111 Capital base 18,981 17,602
External debt issued by ING Verzekeringen N.V. 2,855 3,347 External debt issued by US Holding companies 930 1,384 Other net financial debt (4) 1,686 2,273 Total financial debt 5,471 7,004
2010 AFR and EC reconciliation amounts in billions of euros AFR EC