> ING posts 2011 underlying net profit of EUR 3,675 million > Strong funding position enabled us to increase lending to support our customers > Managing through the current crisis by building on strong capital, funding and liquidity positions > Making good progress on EC restructuring and further repayment of the Dutch State > Continued dialogue with stakeholders on fundamental review of the financial system 2 ING Group Annual Report 2011
We gather feedback from our customers via our employees but also through customer information sessions or via online social networks. In these forums we invite customers to share their views and experiences
2011 was an exceptional year for ING. We took decisive and important steps in the restructuring process we initiated in 2009. Since 1 January 2011, ING Bank has been operating as a separate business from ING Insurance/Investment Management. The focus was directed towards consolidating and developing the strengths of the banking operations and on more efficient asset and liability management. At ING Insurance/Investment Management, the US, European and Asian businesses reported good progress in their initiatives to improve operating performance and strengthen capital positions. Furthermore, a lot of work was done in 2011 to prepare for the original base case of two initial public offerings (IPO): one for our US operations and one for our European and Asian activities. Unfortunately, due to the uncertain economic outlook and volatile markets, we recently had to announce a change of plans with regard to the divestment of the insurance and investment management businesses. We have decided to review other strategic options for our Asian insurance and 4 ING Group Annual Report 2011
I would also like to thank our loyal shareholder base, a large part of which has stayed with us as we’ve gone through our restructuring. We intend to resume dividend payments when all remaining state aid has been repaid and Basel III requirements have been met.
Continuing to shape the future Our focus in 2012 will be on a further completion of the restructuring process. In spite of the volatile market conditions and very low prices in the market for financial operations, we will continue to prepare for the divestment of our insurance/investment management businesses. The most important priorities of these businesses are to improve performance and optimise returns and value. ING Bank will further develop its strategy to be primarily a Europe-oriented business with leading domestic banking positions in the home markets of the Benelux, Germany and Poland, leading commercial banking positions in the Benelux and Central and Eastern Europe. Coupled with a number of other positions inside and outside of Europe this will give ING Bank interesting growth potential in the long term. One of our objectives is to have a Return on (IFRS-EU) Equity of 10–13% under Basel III by 2015.
Chairman’s message Chairman’s message 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
OUR CORPORATE RESPONSIBILITY ING wants to build its future on sustainable profit based on sound business ethics and respect for its stakeholders and to be a good corporate citizen. It is only by acting with professionalism and integrity that we will maintain our stakeholders’ trust and preserve our reputation. Our Business Principles prescribe the corporate values we pursue and the responsibilities we have towards society and the environment: we act with integrity, we are open and clear, we respect each other and we are socially and environmentally responsible.
These activities are divided into six business lines: Insurance Benelux, Insurance Central and Rest of Europe, Insurance US (excluding US Closed Block VA), US Closed Block VA, Insurance Asia/Pacific and ING Investment Management.
Figures per ordinary share (in EUR) Basic earnings (3) 1.12 0.63 –0.60 –0.33 3.31
(2) The net result of Latin America has been transferred to ‘net result from discontinued operations’. The years 2010 and 2009 have been restated. (3) See note 49 in the Annual Accounts.
(2) The calculation of the IGD ratio was changed in the fourth quarter of 2011 to ensure consistent application throughout the Group; only the comparative 2010 ratio was adjusted.
ING Group evaluates the results of its businesses using a non-GAAP financial performance measure called underlying result. Underlying result is derived from the result in accordance with IFRS-EU by excluding the impact of divestments and special items. Historic results have been restated for divestments in order to create a comparable sequence (i.e. 2011, 2010 and 2009 results exclude the results of a divestment which was completed in 2011). See note 51 in the consolidated annual accounts for a reconciliation between IFRS and underlying result.
CORE TIER 1 SECURITIES In October 2008, to support its capital position, ING Group made use of the previously announced capital support facilities by the Dutch Government by issuing EUR 10 billion of core Tier 1 securities to the Dutch State with a coupon of 8.5%. The core Tier 1 securities are pari passu with common equity.
* 2009 prices were adjusted for the increase in the number of shares due to the rights issue.
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> Sovereign debt crisis created a highly challenging economic and financial environment > Important changes in regulation and supervision
In the eurozone, credit spreads only slightly increased in the first half of 2011, but moved up in the third quarter of 2011 towards levels not seen since the direct aftermath of the fall of Lehman Brothers in September 2008. In the US, credit spreads followed a similar pattern, but rose less sharply than in the eurozone.
The uncertain economic outlook, the turbulence on financial markets, and the fact that market values for activities to be divested are very low, have had implications for ING’s strategy. On 12 January 2012, we announced that the base case of two IPOs is replaced by one in which ING will explore other options for its Asian insurance and investment management businesses. See the ‘Strategy’ chapter in this Annual Report for further elaboration.
Special items were EUR 54 million in 2011 compared with EUR –1,065 million in 2010. The 2011 special items include a EUR 716 million net gain from the liability management transaction, i.e., the exchange or tender offers for seven tranches of subordinated debt securities totalling approximately EUR 5.8 billion, offset by costs for various restructuring programmes and separation costs. Result on divestments and discontinued operations recorded in 2010 were EUR 683 million. Net gains on divestments were EUR 388 million, mainly reflecting the result on the sale of Private Banking Switzerland and Asia. The 2010 net results from divested units and discontinued operations amounted to EUR 296 million and relate mainly to Insurance Latin America, ING Car Lease and Real Estate Investment Management.
ING’s capital position remained strong, despite the EUR 3 billion repayment to the Dutch State in May 2011. ING Bank’s core Tier 1 ratio was stable at 9.6% at the end of 2011, absorbing the EUR 9 billion higher risk-weighted assets (RWA) under the Capital Requirements Directive III (CRD III). The Insurance Group Directive Solvency I ratio decreased to 225% at the end of 2011 from 230% at the end of 2010. The Group debt/equity ratio decreased to 12.7% as a result of a successful liability management transaction in December 2011. This transaction generated EUR 716 million net profit for ING Group.
First, we are concerned that too much regulation will unnecessarily restrict banking activities needed to support the economy and will make our services more expensive. Second, because of the aggregate impact of various new rules a tendency may emerge in which risks that are normally taken by financial institutions are shifted to customers.
DUTCH LEGISLATIVE MEASURES In anticipation of EU regulation the Dutch authorities have already announced a number of related measures.
ADDITIONAL MEASURES FOR SYSTEMICALLY IMPORTANT FINANCIAL INSTITUTIONS In 2011 the Basel Committee issued a consultative document on Global Systemically Important Banks (G-SIBs) as part of a broader package of policy measures to address Systemically Important Financial Institutions (SIFIs). The Financial Stability Board (FSB) reviewed and approved the package and submitted it for approval to the G20 in November 2011. As ING has been earmarked as a Global Systemically Important Financial Institution (G-SIFI), we could be subject to an additional capital surcharge. In November 2011, the Dutch central bank (DNB) and the Dutch government announced additional capital buffers for domestic systemically relevant banks. Depending on the degree of systemic relevance, the additional requirement amounts to 1 to 3 percent of risk-weighted assets (RWA) and this includes the internationally agreed (FSB) buffer. The aim is to introduce the buffer gradually from 2016 to 2019, thereby allowing banks to generate capital from retained earnings.
State concerning a reduction of the repayment premium for the first EUR 5 billion tranche of core Tier 1 securities leads to additional state aid of EUR 2 billion; • as the Commission has subjected the approval of the state aid to the acceptance of price leadership bans; and
We were also able to make good progress on the strategic priorities of ING Group, which are strengthening the financial position, restructuring, streamlining the portfolio, repayment of state aid and building stronger banking and insurance/investment management businesses. Apart from these measures, earning trust remained at the top of our strategic agenda. The past few years have made it clear that it is of crucial importance for financial institutions such as ING to rebuild the trust and confidence of all their stakeholders, first and foremost those of their customers. We believe that trust is and remains the most important licence to operate for every financial institution.
Both ING Bank and ING Insurance/Investment Management (ING Insurance/IM) showed clear progress on their respective performance improvement programmes. Despite the far-reaching restructuring that ING Group is going through, we have continued to show solid commercial growth across our franchises, which is a testimony to the dedication and professionalism of our staff as we endeavour to maintain the loyalty of our customers.
ING Bank’s results benefited from a healthy interest margin, higher client balances, lower risk costs and focus on cost control. The capital position of the Bank remained strong, with the core Tier 1 ratio stable at 9.6% after absorbing the impact of higher capital requirements under the Capital Requirements Directive III (CRD III) which came into effect at year-end, and despite repaying EUR 3 billion to the Dutch State in 2011.
ING’s commercial finance activities and ING’s insurance/ investment management operations in the US have been unaffected by this transaction.
Going forward, ING plans to continue building on its leading position as a predominantly European bank with a strong international network focused on providing customers with consistently high-quality services.
REPAYING STATE AID AS SOON AS POSSIBLE BUT wITH PRUDENCE The total amount repaid on the core Tier 1 securities to the Dutch State by the end of 2011 was EUR 7 billion in principal, out of the total capital support provided of EUR 10 billion. Including interest and premium, the payments made to the Dutch State by the end of 2011 reached a total of EUR 9 billion. We have improved efficiency and built up strong capital buffers in the Bank to withstand potential shocks given the uncertain economic environment, while continuing to increase our lending to customers as much as possible to facilitate economic growth. As a result, ING was in a position to repay a second tranche of support from the Dutch State out of retained earnings in May 2011. This latest repayment of EUR 3 billion (including a EUR 1 billion premium) of capital support to the Dutch State was an important milestone in ING Group’s efforts to do business successfully without the financial aid of the Dutch State.
BUILDING STRONGER BANKING AND INSURANCE/ INVESTMENT MANAGEMENT BUSINESSES BANK ING Bank has delivered on its priorities to strengthen its financial position, reduce risks, meet the restructuring requirements imposed by the European Commission and to build a stronger bank. The Bank continued to make progress on meeting its Ambition 2013 targets, which are business improvement programme targets, mostly established in October 2009. These targets included boosting underlying income, lowering risk and overall costs, and lifting return on equity. Due to the changing market circumstances and new regulatory requirements as well as the fact that ING has realised to a large extent its Ambition 2013 goals, ING has set itself new performance targets as from 2012.
dditional inform ation decision-making is always based on financial as well as nonfinancial performance objectives.
Sustainability is about ensuring long-term business success while contributing towards economic development, a healthy environment and a stable society. ING’s approach to sustainability forms an integral part of the company’s overall corporate strategy. As a reflection of our Business Principles, social, ethical and environmental criteria are embedded in our financing and investment policies and our business ambitions. We make sure that our strategic decision making is always based on financial as well as non-financial performance objectives.
– Mitigating harm and promoting sustainable finance. We aim to mitigate harm and contribute to positive change by helping to create financial solutions to global challenges like energy and poverty.
– Making a difference in communities. Aligned to our business skills, we invest in tomorrow’s economy by supporting people to find their way towards a financially secure and independent future.
Extending the sustainable product portfolio at ING Investment Management In 2011, ING Investment Management (ING IM) launched the EUR 200 million ING (L) Renta Fund – Euro Credit Sustainable. The new fund invests in euro-denominated debt securities issued by companies which pursue policies of sustainable development and adhere to social and environmental norms. With the addition of this fund to its portfolio, ING IM offers a range of products to clients who are looking for investments with additional nonfinancial risk control and sustainability-linked returns.
Financing bio-gas installations in South Africa and India Millions of people in developing countries are exposed daily to toxic fumes caused by primitive cooking conditions, such as open fires and stoves. In 2011, ING Structured Finance Natural Resources found a way to help them. Initially, this is being done through a five-year loan from ING to the Dutch-based FairClimateFund (FCF) to help pre-finance projects to build bio-gas installations in India and South Africa. Households are provided with improved stoves and education on energy-efficient and environmentally friendly cooking techniques. This will not only create healthier living conditions, but the projects are also expected to lead to a 150,000-tonne reduction in CO2 emissions over a period of five years and will generate carbon credits to finance more projects.
STAKEHOLDER ENGAGEMENT To earn and maintain the trust of our customers and other stakeholders, optimal alignment of our commercial and business decisions with our responsibilities towards them is essential. This is all the more important in the light of the global debate on the future of the financial industry.
Actively participating in debates on the future of finance In 2011, ING actively participated in public discussions on the future of the financial sector. The subject has been at the forefront in the public consciousness around the world and under broad debate. For instance at the Sustainable Finance Lab at the University of Utrecht, a series of plenary debates organised by leading Dutch academics, ING executives made clear that the company supports measures leading to a more stable financial system, such as higher capital buffers and more sustainable remuneration structures. However, they also voiced concerns about the possible accrual of new regulations. Particularly in the context of major financing and investment challenges, e.g. those associated with greening the energy supply, ING argued that the role played therein by large institutions like ING needs to be taken into account while the industry’s regulatory framework is restructured.
Boosting green energy investments in the Netherlands and Germany In September, ING’s Economics Department published the report ‘Renewable energy in the Netherlands until 2020’. The study investigated the economic potential of renewable energy projects, demonstrating that wind energy and biomass are promising sources to make energy production more sustainable. Moreover, the economists concluded that, to achieve the carbon emission targets set for 2020, the volume of investments in the Netherlands is to be scaled up from the current EUR 2 billion to at least EUR 10 billion a year. Therefore ING called on the government, the business community and knowledge institutions to join forces with ING to formulate a Green Delta Plan.
ING also kick-started its involvement in the offshore wind sector in Germany with the signing of a EUR 1.047 billion Project Finance Facility for the Global Tech I Offshore Wind GmbH project. The project was selected to increase ING’s involvement in offshore wind deals. Global Tech I is the largest ever projectfinanced offshore wind farm, and in view of the distance to shore and water depth, multi-contract structure and use of wind energy converters with a limited track record, one of the most challenging offshore wind projects in the world.
MITIGATING HARM With 80 million customers worldwide, the scope of ING’s business activities has a significant impact on the economy and society. To assess whether this impact is consistent with our approach to sustainability, the sector and company profile of each new business client coming to the bank or the insurance company is screened according to our environmental and social risk (ESR) policies. These policies are a practical translation of our Business Principles and describe the rules and guidelines for specific industry sectors, human rights and environmental issues.
Ranking high in DJSI World Each year various independent research organisations investigate companies on social, environmental and ethical performance. This research is used for benchmarking and to construct leading sustainable indices, many of which ING is included in. In 2011, ING was again selected for the Dow Jones Sustainability World Index (DJSI World). Where the industry average score in the insurance sector increased to 48, ING was rated 72 out of 100. ING has been included in the DJSI World since 1999, the year in which the indices were established.
As for our direct environmental impact, ING has been a carbonneutral company since 2007. We strive to minimise carbon emissions that are a direct consequence of our operations around the globe and have a company-wide ambition of minimising our carbon footprint by 30% by 2012. We do this by more efficient use of resources, sustainable means and sources for procurement and encouraging employees to be mindful of the environmental impact of their activities. We measure our remaining emissions and compensate for them by investing in renewable energy projects.
(2) Figures for 2010 have been adjusted due to the availability of more accurate data.
SPONSORING AND ART MANAGEMENT Sponsorships offer ING the opportunity to build sustainable relationships with the communities in which we are active. They offer an opportunity to support ING’s brand and help ING connect to our main target groups. In order to make sure our sponsoring is effective and promotes a consistent image, we focus our policy on three areas: ING in society, sports, and art & culture. Through the ING in society activities, we enable employees to engage in charitable activities in their community. Sponsorship in the field of sports ranges from soccer (Dutch national team) to the New York Marathon. Our aim is to make art and culture accessible to a broad audience. That is why ING sponsors the Rijksmuseum Amsterdam and the Royal Concertgebouw Orchestra. They are our international partners and strengthen our mutual goals through art by means of events and other activities.
In addition to the sponsorship activities, the ING Collection, which is curated by ING Art Management and consists of 15,000 artworks contributes to our art & culture philosophy. Art is an essential part of ING’s corporate identity and creates a colourful daily work environment in ING offices worldwide. Art is displayed everywhere at ING offices: in corridors, meeting rooms and restaurants. Many ING employees feel proud to be surrounded by works of art, which stimulate social interaction and create an inspirational environment. Objects from the ING Collection are often found in specialised (contemporary) art museums and exhibitions as well. In 2011, while reviewing the art collection following the operational split of the banking and insurance operations, a sizeable portion of our collection was donated to hospitals and care facilities in the Netherlands.
Moreover, Capital Management is involved in securitisations executed for the corporate account with the purpose of improving ING’s capital and liquidity position. In addition, Capital Management manages the transactions with the Dutch State, such as the core Tier 1 securities and the Illiquid Assets Back-up Facility.
Our product offering has grown over the years to meet our customers’ increased demands and expectations, as a result of which it has become even more important to know them well and understand their needs. We have invested in sales suitability programmes over the last few years to ensure that customers receive the appropriate products and services.
Following the operational split on 1 January 2011 between Bank and Insurance/Investment Management, ING Group’s Human Resources (Group HR) continued to serve the two independent organisations, Bank and Insurance/IM, in a number of areas. These areas relate to key processes and specific categories of staff and include HR system support, executive remuneration, the Winning Performance Culture (WPC) survey and international mobility. The idea is that Group HR will gradually reduce its role, while both Bank and Insurance/IM HR functions will assume more responsibility.
Group HR partnered with the business and employee representation groups on how to best change the organisational structure, how to set up the governance bodies for both entities and how to organise employee representation in the future. Group HR also assisted Insurance US in setting up a new, local Executive Team, which supports the Management Board America Insurance Holdings.
The Bank, for example, employs a three-year, global talent development programme, where trainees perform one to two job roles in one of five different fields, i.e. General Management, Commercial Banking, Risk, Finance and/or IT.
At Insurance EurAsia, an all-time high number of employees (82% versus 76% in 2010) responded to the WPC survey, showing that employees are eager to participate in the corporate cultural debate and willing to share their opinion at a time the business is in transition and preparing for a stand-alone future. Employee engagement was up 2% at 68%. At Insurance US, the response was up at 78% (2010: 69%) and the overall engagement score rose from 60% to 64%. Results show improvement in leadership, strategy, accountability, and people manager effectiveness, which were significant issues in 2010.
Group HR will organise the overall WPC survey until the company has been officially split, but the results and implementation of improvements will be addressed by the individual business units.
ING Bank is a large international player with an extensive global network in over 40 countries. It has leading banking positions in its home markets of the Netherlands, Belgium, Luxembourg, Germany and Poland. Furthermore, ING has key positions in other Western, Central and Eastern European countries and Turkey. This is coupled with options outside of Europe which will give ING Bank interesting growth potential in the long-term.
Since January 2011, ING Bank has been operating as a stand-alone business under the umbrella of ING Group.
Total underlying income declined 5.7% to EUR 15,854 million in 2011 from EUR 16,816 million in 2010. The underlying net interest result was practically stable at EUR 13,562 million, despite a small increase in volumes. The total interest margin, however, declined slightly to 1.41% from 1.42% in 2010. Commission income remained flat on 2010, as increases in Commercial Banking (mainly Structured Finance) were offset by declines in Retail Banking. Total investment and other income dropped to EUR 37 million compared with EUR 1,008 million in 2010. This decline was due to EUR 588 million of impairments on Greek government bonds and EUR 181 million of losses on selective de-risking at ING Direct taken in 2011, while 2010 included EUR 275 million of capital gains on the sale of two Asian equity stakes.
The underlying return on IFRS-EU equity was 10.0% in 2011, down from 12.9% in 2010.
retail Banking is the leading bank in the Benelux; also active in Central and Eastern Europe retail Banking is active in China, India and Thailand
ING has delivered on its priorities to strengthen its financial position, reduce risks, meet the restructuring requirements as imposed by the European Commission and to build a stronger bank.
ING Bank continued to make progress on meeting its Ambition 2013 targets. These are business improvement programme targets, mostly established in October 2009 and involve boosting underlying income, lowering overall costs, reducing risk costs and lifting return on equity.
ING continued working with the Net Promoter Score (NPS), which measures customer loyalty. Feedback from customer service is used to improve ways of doing business. It is therefore a measurement tool as well as a means of changing business culture and driving growth. An example of improved customer centricity is the implementation of customer complaints procedures by ING Bank Slaski and ING Bank Turkey. The changes reduce the amount of time needed to resolve complaints and allow ING to better analyse customer feedback and thus improve its processes, products and services.
Additional IT investments will help to reduce costs while delivering faster and more accurate service. They will also enable customers to manage their financial affairs through their preferred banking channel.
In 2011, financial markets were confronted by a worsening of the sovereign debt crisis in Europe. ING maintained a prudent approach to risk, substantially reducing its government bond exposure to southern Europe and de-risking its total investment book. In addition, ING’s exposure to asset-backed securities and to real estate development projects and investments declined sharply. For more information on ING’s policies and measures for managing risks, see the chapter on ‘Risk management’.
Despite our strong funding position, we need to become even more self-reliant. To achieve this, our One Bank ambition and the further integration of our balance sheet remained a top priority during the year.
ConCLUSionS Looking ahead, ING Bank will continue to remain vigilant and focused on containing costs. This is all the more important as the bank operates in a fierce, competitive environment in difficult economic conditions and with increasing regulatory constraints.
We will invest in IT to improve service and work towards operational excellence. We will continue to simplify the business portfolio and the organisation, while taking a prudent approach to capital and funding in the current unstable market conditions.
Retail Banking maintained its strong positions in the mature markets of the Benelux, Western Europe, Canada and Australia. It is well placed to capture opportunities in the high-growth markets of Central Europe and Asia. Financial performance in 2011 was solid, but certain areas came under pressure due to the deteriorating global economic situation. The business continued to work on the ‘direct if possible, advice when needed’ model, moving towards full-service banking in some countries in order to realise the Bank’s ambition of becoming the preferred bank. Customer centricity remained a key focus, with many initiatives in mobile banking and social media. Customer feedback via the Net Promoter Score (NPS) methodology was central to product and service improvements.
The addition to the loan loss provisions declined 4.9% to EUR 1,191 million in 2011, or 67 basis points of average risk-weighted assets compared with 70 basis points in 2010. This decline was mainly caused by lower risk costs in the Benelux, especially in the midcorporate and SME segments, although the level remained elevated and started to increase again in the last quarter of 2011. Risk costs at ING Direct and Central Europe were higher compared with 2010.
RETAIL NETHERLANDS FINANCIAL DEVELOPMENTS The underlying result before tax of Retail Netherlands decreased 8.2% to EUR 1,261 million in 2011 from EUR 1,374 million in 2010, principally driven by lower income and higher expenses, partly offset by a decrease in risk costs.
Net production in residential mortgages was EUR 3.6 billion, while volumes in other lending decreased EUR 0.2 billion and margins declined. Funds entrusted increased EUR 3.1 billion, mainly driven by a successful marketing campaign for a one-year deposit in the fourth quarter.
BUSINESS DEVELOPMENTS The economic setback in 2011 in several parts of the world, and in the eurozone in particular, had its impact on the Netherlands, and therefore on the Dutch banking sector and ING. Retail Netherlands’ (Retail NL) revenues were affected by the adverse economic circumstances, with private lending volumes decreasing due to lower demand, although business lending volumes stayed at moderate levels. These trends are expected to continue into 2012.
Retail NL was faced with increased, strong competition, especially in savings, but in spite of this the savings market share of ING Netherlands (private individuals and SME/Business Banking combined) went slightly up.
Certain organisational changes were made to enhance efficiency, reduce costs even further, and increase investments in IT and processes. This was done against the background of a weakening economic environment, more stringent regulation and changing customer expectations, and to secure the long-term viability of the company. Customers expect flawless service, and technology can help deliver that, especially in internet and mobile banking. In response to these developments, Retail NL announced redundancies – approximately 2,000 internal FTEs and 700 external FTEs. These redundancies will take effect in 2012–13. ING will do its utmost to implement these measures with care.
Investments to improve client satisfaction remain key, as delivering superior customer centricity is part of the bank’s long-term ambitions between now and 2015. One of Retail NL’s aims is to contribute to the optimising of ING Bank’s balance sheet.
Stakeholder trust ING continued to enhance its reputation and regain trust among stakeholders, and as part of that, Retail NL organised another series of Financial Information Evenings for customers and several round-table discussions with various stakeholder groups on the future of the financial sector, and on the financing of healthcare and renewable energy. Retail NL also held sessions with building companies, real estate developers and public authorities on the future of the Dutch housing market, and entered into dialogues with consumer organisations on several topics.
ING Netherlands selected over 100 of its key services and processes and monitored them in real-time dashboards, resolving problems as soon as they became apparent. The next step is to provide customers with service guarantees, explaining the level and speed of service they can expect.
The Bank continued to work on transferring customers to a single IT platform following the merger of Postbank and ING Bank in 2009. By June 2011, all Private Banking customers had been transferred, while the remaining part (all the Dutch Business Banking and Financial Institutional customers as well as Corporate Clients) are expected to migrate to the single platform in 2012–13. This will further reduce IT complexity and costs and will improve the customer experience as they will be offered a consistent service concept and product range levels.
ING Netherlands is the main sponsor of the Dutch national soccer team and, in 2011, established a Young Lions Platform – a permanent, cross-media platform for 6–12-year-olds. Some 55,000 young Dutch ING customers signed up as members. The platform has a website with interactive football video games that can be played with social network friends via Hyves.
ING received international recognition for its efforts. It was awarded ‘Best Bank of the Year Netherlands 2011’ by the British magazine The Banker, owned by the Financial Times, and it was voted ‘Most Popular Website of the Year’ in the Financial Services Category by Emerce/Metrix Lab.
Retail BE continued to use NPS to gauge customer feedback and improve service. NPS, adopted in Belgium in 2009, is a widely recognised measure of customer satisfaction and loyalty. The Bank conducted nine NPS surveys in Belgium in 2011, including one on opening an ING Lion Account; the number of ING Lion Accounts increased by 16% in 2011. The Bank also began using NPS for Mid-Corporate and Private Banking customers in 2011.
ING Luxembourg ING Luxembourg is a full universal bank with three business lines: domestic retail banking, private banking and commercial banking. The Bank serves private individuals, SMEs, large companies and financial institutions. It ranks fifth in retail banking, serving around 70,000 customers, and has 16 branches. It is number four in the Mid-Corporate segment and number three in the Corporate segment.
ING Luxembourg won second place in the Great Place to Work ranking, a national award, which recognises a positive work culture and good management/staff communications. It also rolled out ‘mobile working’ for all eligible employees in the retail segment, a programme that helps them work from home, or while travelling on business. The Bank continued to reinforce its front office capabilities by employing additional staff in 2011.
In mid-June, ING Group announced the sale of ING Direct USA to Capital One Financial Corporation. The sale was part of ING’s restructuring plan filed with the European Commission in 2009 in order for the EC to approve Dutch state aid given to ING. The sale closed on 17 February 2012. Following the sale, ING Direct has 16.7 million customers worldwide.
ING Bank Romania carried out an upgrade of its internet banking site, Home’Bank. A new interface and improvements in usability resulted in a 39% growth in transactions. In September a mobile version of the Home’Bank website was introduced and led to a threefold increase in site visits from smartphones.
Dealing with customer complaints in a timely and effective manner is a priority issue for ING. During the year, ING Bank Slaski and ING Bank Turkey implemented new customer complaints processes. The changes reduced the amount of time needed to resolve complaints and also enabled ING to better analyse customer feedback, which is then used to improve ING’s management, products and service. In Romania, a project aimed at analysing customer complaints, identifying problem areas and improving resolution times helped lift the ‘first call resolution’ rate to 72%.
ING Vysya, in which ING has a 44% stake, serves over two million customers and is growing in line with the rapidly developing Indian banking market. The business transformation programme in TMB Bank in Thailand, in which ING has a 30% stake, is yielding results with many operational efficiencies achieved and increased profitability for the third year in row.
Focusing on our strengths > A robust performance focused on core areas > Client and product platforms sustained and adjusted against a challenging economic and regulatory backdrop > Balance sheet optimisation remained a top priority > Risk and cost discipline were fundamental to our success
ING Real Estate reported an underlying profit before tax of EUR 34 million, compared with a loss of EUR 109 million in 2010. Negative fair value changes on the direct and indirect real estate investments as well as impairments on real estate development projects declined to EUR 273 million in 2011, compared with EUR 434 million in 2010. Excluding revaluations and impairments, underlying result before tax decreased EUR 18 million to EUR 307 million in 2011 from EUR 325 million in 2010, mainly due to higher risk costs at Real Estate Finance.
Total underlying income of Commercial Banking declined 6.1% to EUR 5,023 million, mainly in Financial Markets, which included EUR 225 million of impairments on Greek government bonds
Commercial Banking excl. ING Real Estate 1,986 2,326 – General Lending & PCM 410 455 – Structured Finance 1,139 938 – Leasing & Factoring 75 80 – Financial Markets 499 919 – Other Products –138 –65 ING Real Estate 34 –109 Total Commercial Banking 2,020 2,217
Building the Preferred Bank Commercial Banking’s strategy supports ING’s ambition to be a preferred European bank with a global reach and an uncompromising dedication to customer centricity and operational excellence.
Customer centricity ING Bank was voted ‘Best Bank in the Netherlands’ by The Banker and named ‘Best M&A Financial Advisor of the Year’ in the Benelux region by the Financial Times and Mergermarket. These awards demonstrate the strength of ING’s relationships with its clients, as well as the importance of its international network.
Operational excellence We have continued to strengthen our operations by further integrating our activities and standardising the way in which we work. We have made significant progress towards optimising our balance sheet and legal entity structure, across regions and functions, better aligning our asset generating capabilities with our ability to raise customer deposits.
Our global Financial Markets platform continues to focus on clients and products in home markets and in emerging markets.
The Transaction Services organisation has been created to be a new pillar within Commercial Banking, in which core payments, trade and other flow products are offered to our clients.
In Germany, we completed the merger of the Commercial Banking branch with the retail subsidiary ING-DiBa AG. This combined entity, having a very strong local balance sheet, positions ING to
Major deals Despite the subdued market conditions, Commercial Banking continued to support its clients through many transformational transaction mandates.
In each instance, we worked closely with our clients to deliver highly tailored solutions. For example: • Lead advisor to Jumbo Group Holdings on its acquisition of
In the second half of the year, market conditions significantly deteriorated and cost of funding increased. Anticipated increases in capital requirements under Basel III led to a number of competitor banks withdrawing from international markets and focusing on their home country franchises. ING has sustained its presence throughout this time and our relative market positioning strengthened as a result. We are beginning to see a positive re-pricing in our portfolio with further opportunities to improve the quality of our business and our relationships.
The year also saw significant steps taken to identify and address non-core businesses, while increasing our focus on core markets and client franchises. We prioritised the allocation of resources across our business lines and streamlined our operations in response to growing regulatory demands and economic uncertainty.
ING Equity Markets was named Leading Equity Brokerage Firm in both the Benelux and Central and Eastern European markets in the annual Extel Pan European survey 2011. We scored top positions in areas such as Research, Sales and Trading, both on a company and individual level, reflecting the strength we continue to have in our home countries.
Payments and Cash Management (PCM) was ranked second by volume in Euro Banking Association’s clearing and settlement systems (Euro1/Step1).
L&F has performed well at the operating level, thanks in large part to a strong performance by ING Car Lease during the first nine months of the year under ING’s ownership. General Lease has performed well in a continuingly sluggish environment for capital investment, while our Factoring businesses have seen increased volumes. However, the overall performance has been negatively impacted by higher risk costs in the General Lease business, notably in Spain and Italy.
FM continued to be a sizeable and profitable business within Commercial Banking. Following record years in 2009 and 2010, the first half of 2011 continued in a similar vein. However, the growing intensity of the euro sovereign crisis from August 2010 led to an challenging environment in the second half. Not least of these challenges was the impairment of Greek government bonds in the available-for-sale portfolio, including those maturing after 2020, to their market valuation at the end of the third quarter. Revenue was also negatively impacted from August by increased USD funding costs which impacted Treasury profitability. Client revenues held up in line with 2010, but the facilitation trading environment was difficult, which depressed profits in the second half.
PCM completed a number of high profile and international transactions with clients, demonstrating our commitment to offering solutions across regions (e.g. ING has been appointed by GDF SUEZ as main bank for payments and cash management in the Benelux). This resulted in a further strengthening of ING’s position as a trusted banking partner.
Furthermore, our migration to the Single Euro Payments Area (SEPA) standards is underway, as our Belgian, Dutch and other international clients have begun to migrate towards our SEPA product offering.
In Trade and Commodity Finance (TCF) there were increases in both volumes and margins as a result of our consistent approach to the market over many years. TCF, with its transactional lending characteristics, is attractive to many banks. We have become the leading bank in the syndicated loan market for commodity clients. ING’s efforts in the commodity business were recognised by Global Trade Review magazine, which named ING the ‘Best Global Commodity Finance Bank’.
Commercial Banking continued 2011 was the first year in which FM implemented counterparty credit revaluations of derivative positions and issued notes – more generally referred to as CVA and DVA. These were individually very volatile through the year on a month-to-month basis, while by the end of the year there was considerable offset with only a relatively small impact on net profits.
INg rEAL ESTATE ING Real Estate includes the Finance, Development and Investment Management businesses.
In 2011, ING signed an agreement with CB Richard Ellis Group (CBRE), Inc. on the sale of ING REIM Europe, ING REIM Asia and ING Clarion Real Estate Securities (CRES). Separately, ING sold ING Clarion Partners to Clarion Partners’ management in partnership with Lightyear Capital LLC. The combined price of the two transactions was approximately USD 1.0 billion (EUR 770 million). In addition, as part of the overall transactions, ING agreed to sell approximately USD 100 million of its equity interest in existing ING REIM funds. These highly complex transactions were closed during 2011.
For ING RED, the year started with the announcement of the sale of a number of Dutch projects to a subsidiary of the largest Dutch construction company. Furthermore, two country offices were closed and the remaining country organisations have been restructured to minimal wind-down teams. In addition the restructuring or disposal of 100 development projects and positions resulted in the reduction of EUR 700 million of future commitments. Overall the real estate exposure of the Bank has decreased significantly.
In conclusion, Commercial Banking is strong and well positioned for the current and developing regulatory and economic environment. By combining robust commercial franchises and a disciplined, flexible operating model, we are confident of continued positive developments in this area.
Gilbert Van Hassel (until 3 November 2011) responsible for ING Investment Management 2011 was a year of gradual improvement in operations at ING Insurance/Investment Management (IM). Although the year was marked by difficult economic circumstances such as low interest rates and the European sovereign debt crisis, sales at Insurance/IM remained resilient. ING Insurance/IM proved that it is able to perform in a challenging economic environment by strengthening the business focusing on its customers and distributors, while also making progress on preparing the businesses for a stand-alone future.
FInanCIaL deVeLoPMentS Operating conditions were challenging in 2011, as financial markets continued to be volatile and the macroeconomic environment deteriorated. The underlying result before tax of Insurance/IM was EUR 314 million, up from a loss of EUR 1,072 million in 2010. The increase was primarily driven by an improvement in market and other impacts as a result of lower deferred acquisition costs (DAC) write downs in the US Closed Block VA business and in Japan’s Single Premium Variable Annuity (SPVA) business. This is, however, partially offset by a charge of EUR 1.1 billion due to the completion of a comprehensive policyholder behaviour assumption review for the US Closed Block VA. Capital losses, reflecting de-risking, and impairments were in line with the previous year. Further, revaluations were lower, largely related to Collateralised Mortgage Obligations (CMOs) in the US. Hence, underlying results per business line diverged, with strong recoveries in the US and Asia/ Pacific (excluding Japan variable annuities), compared with lower underlying results in the Benelux and Central and Rest of Europe.
net ProMoter SCore (nPS) One of the initiatives to improve customer service levels in the insurance business is the NPS programme which measures customer loyalty. Feedback from customer surveys is used to improve ways of doing business. It is therefore a measurement tool as well as a means of changing business culture and driving growth. NPS is currently used in Insurance Benelux, Insurance Central and Rest of Europe and Insurance Asia/Pacific. The programme has not yet been launched in Insurance US nor ING IM.
Insurance Benelux completed the first phase of the transformation of Nationale-Nederlanden (NN) to become the most efficient and most preferred insurer in the Netherlands. The integration of the Dutch insurance operations under the Nationale-Nederlanden banner was completed in 2011, one year ahead of schedule. The two-year programme has led to major cost savings and efficiency gains. The next phase of the transformation programme commenced with the introduction of new low-cost bank pension savings and annuities products, in response to the changing regulatory and economic environment and shifting customer demands. NN also received a licence to launch a low-cost defined contribution company pension product (Premium Pension Institution) in 2012, an important development in expanding the company’s presence in the growing corporate pension market in the Netherlands.
FINANCIAL DEVELOPMENTS The underlying result before tax of Insurance Benelux decreased by 4.6%, despite a 43.8% higher operating result, reflecting the change in provision for guarantees on separate account pension contracts and capital losses and impairments on debt and public equity, mainly as a result of deteriorating financial markets and de-risking.
The technical margin increased by 29.3% to EUR 315 million from EUR 243 million in the previous year, mainly due to a EUR 70 million positive impact from an early surrender of a contract with a large pension fund.
Late in 2011, NN gained approval from the Dutch Central Bank to introduce a low-cost defined contribution company pension product (Premium Pension Institution). It launched NN EssentiePensioen in early 2012 for companies with more than 100 employees in the Netherlands. The new product provides NN with more opportunities to expand its presence in the corporate pension market. NN EssentiePensioen is managed in conjunction with ING Investment Management and NN-owned pension administration and service company, AZL.
Unfavourable regulatory change in the pension businesses in some countries together with sluggish economic conditions continued to have an impact on the operating result for the region. However, Insurance Central and Rest of Europe (CRE) focused successfully on expanding life insurance sales as part of its overall plan to return to growth. The business also concentrated on improving the customer experience which included operational efficiency improvements. In the second half of the year, ING’s business growth picked up in Central European countries.
FINANCIAL DEVELOPMENTS The underlying result before tax of Insurance Central and Rest of Europe was a loss of EUR 198 million compared to a EUR 253 million profit in 2010. In addition to a lower operating result, the gains/losses and impairments were EUR –404 million compared to EUR –29 million in 2010. This increase was mainly caused by EUR 324 million impairments of Greek governments bonds, EUR 34 million capital losses on sales of Italian sovereign bonds and EUR 18 million capital losses on sales of Portuguese bonds of financial institutions.
Growth The priorities for the business are achieving growth and containing costs. To grow the portfolio, Insurance CRE concentrated on further improving the customer experience through programmes such as the Net Promoter Score (NPS) and developing long-term customer relationships. It also focused on broadening its distribution base and strengthening its main distribution channel: the tied agent sales force. Tied agents remain the dominant distribution channel, but bancassurance and brokers are increasing in number and importance. In the bancassurance channel, new distribution agreements were signed with Raiffeisen Bank and Alior Bank in Poland.
The Tied Agency Overhaul Programme, which began in 2010 to improve the performance of tied agents, continued in many countries in 2011 including Spain, Romania, Hungary and Poland. In Spain, where the programme was first introduced, there was a substantial increase in productivity among agents who were included in the overhaul initiatives. In Poland, the introduction of a new structure and distribution model resulted in a significant increase in agent productivity.
CONCLUSIONS AND AMBITIONS ING CRE expects continued growth in the region’s life insurance and savings markets, but changes to pension regulations in several countries remain a concern and could dampen growth in the short-term. The businesses in the region will continue to improve the customer experience and customer retention levels as well as developing multiple distribution channels and pursuing product innovation to meet changing consumer demands. There will be continued focus on driving policy costs lower by building more scale while keeping expenses under control. Although the economic climate and regulatory environment remain uncertain, ING’s leading positions and strong reputation in the marketplace augur well.
Administrative expenses were 17.9% lower than in 2010 due to the implementation and completion of a significant cost reduction programme and due to a one-off benefit from changes in the company’s pension plan.
In the US, ING is one of the few providers of retirement services with a major presence in all industry sectors of the employersponsored retirement plan market. The business has more than six million retirement plan (defined contribution and defined benefit) participants and a major presence in the corporate, education, government and healthcare markets, with 55,000 institutions that have an ING-administered retirement plan. ING offers the full spectrum of retirement plans from full-service plans to recordkeeping services only. It also offers retail solutions to help plan participants and individuals supplement their employer-sponsored retirement savings, consolidate their assets and later manage the transition from retirement investment to retirement incomegeneration.
A new website, RetireWithING.com, which helps people make informed decisions about retirement saving and income planning and connects them with ING retirement professionals for additional guidance, was also introduced. The site uses clear language with minimal jargon and is part of ING’s commitment to making retirement easier for people.
ING Retirement Research Institute Because successful retirement planning often begins with investment in an employer’s retirement plan, the ING Retirement Research Institute (the Institute) creates and makes publicly available (at INGRetirementResearch.com) a wide range of studies and materials that help advisers and employers better meet the needs of their clients and employees. In 2011, the Institute introduced a number of such studies, designed to help improve understanding of participant behaviour and the efficacy of employer plans, including: Public Pensions in Focus, for government employers who face increasing scrutiny of their retirement systems; Mapping the Participant Mindset, a study which covers the basics on the emotional and psychological barriers to successful retirement investing; and Shining a Brighter Light on Retirement, which examines participant and employee expectations of their employers’ retirement plans.
In 2011, ING launched Life Illustration Express Mobile, an innovative, new tool that brokers and agents can use on their tablets and mobile devices. This technology makes it easier to instantly run illustrations and compare premium quotes for multiple term and universal life insurance products. This helps their clients make informed choices on coverage. ING’s new Life Illustration Express Mobile leverages the latest advances in mobile and smartphone technology and allows agents to respond to their clients in real time with illustrations and quotes.
Employee Benefits has a strong position in the group life and stop-loss markets. A major initiative is under way to build up the online service capabilities for large group life customers as well as to continually refine the stop-loss product strategy to maintain ING’s leadership position in this market. Product development work is well under way in the voluntary product lines to improve the competitiveness of our offerings to better meet the needs of the changing voluntary market.
> EUR 1.1 billion charge against profits following assumptions review > Assumptions now reflect volatility of recent years and its impact on US policyholder behaviour > Interest rate risk reduced by hedge programmes
The operating result for the US Closed Block VA was EUR 19 million versus EUR 49 million in 2010. The investment margin was EUR 28 million compared with EUR –11 million in 2010.
Also from the first quarter, a mean reversion methodology was implemented to determine the short-term equity growth assumption in the company’s DAC calculations, reducing the sensitivity of the ‘market and other impacts’ result to movements in equity markets going forward. As of 31 December 2011, the DAC has been reduced to zero.
During the year, ING conducted an annual review of its actuarial assumptions for the business and, as stated in the Financial Developments section above, this resulted in a EUR 1.1 billion charge against profits.
Life administrative expenses increased 3.2% to support business growth. They also increased due to project expenses. The ratio of administrative expenses to operating income fell from 27.3% in 2010 to 26.3% in 2011.
CONCLUSIONS AND AMBITIONS Insurance Asia/Pacific is on track with its business ambitions and is making good progress on performance improvement initiatives. The business is pursuing its vision of creating a best-in-class company for its customers, employees, agents and distribution partners through customer-focused product innovation, expanding and improving distribution and improving operational efficiency.
FINANCIAL DEVELOPMENTS Assets under management (AuM) at ING Investment Management (ING IM) increased 3.8% to EUR 321.7 billion from EUR 309.9 billion at year-end 2010. The AuM balance excluded assets managed by ING IM Australia (EUR 22.3 billion) which was sold on 4 October 2011. Inflows in the institutional and proprietary segments were partly offset by outflows in the retail segment.
In Thailand, ING Funds Thailand’s fixed income managers have been ranked in the Top 10 Most Astute Investors in the Asian Currency Bond sector by The Asset magazine for two consecutive years.
ING IM Asia/Pacific further developed distribution relationships. It commenced fund distribution through Citibank in Japan, which is a key strategic relationship partner for the business in Asia.
ING IM US In 2011, ING IM US continued to build strong long-term investment performance across all platforms despite market volatility, the eurozone crisis and the uncertainties of the US economic recovery.
Audit Committee meetings In 2011 the Audit Committee met five times, with one absentee once, to discuss the annual and quarterly results, the annual US GAAP results and the reports from the external auditor.
Next to financial reporting, the Audit Committee also discussed topics such as internal controls over financial reporting, the implementation of a new payments control framework for commercial payments, capital management and regulatory matters.
Risk Committee meetings The Risk Committee met four times in 2011, with twice one absentee. In each Risk Committee meeting the financial risk reports for Bank, Insurance and Group and the non-financial risk reports for banking and insurance were discussed. The risk appetite statements for 2011 were discussed and approved in February. Management reported on the outcome of stress tests for banking and insurance and updated on the implementation of Solvency II regulation within Insurance. The effect of the non-financial risk mitigating measures became visible during the year. The exposure on the Southern European countries and the possible risks for ING as a result of the sovereign debt crisis in the eurozone were closely monitored by the Risk Committee. Each meeting ended with a general discussion on possible future risks.
In June, the key timelines for the Insurance EurAsia and the Insurance US IPOs were discussed. Several divestment transactions were proposed and the Supervisory Board mandated the Executive Board to execute those transactions within the terms and conditions approved. The Supervisory Board was also updated in detail on the progress of the divestment of ING Direct USA and the subsequent restructuring of the Illiquid Assets Back-up Facility (IABF) agreement with the Dutch State. The Supervisory Board approved the proposed divestment of ING Direct USA and mandated the Executive Board to finalise the transaction within the terms and conditions approved by the Supervisory Board.
TRANSACTIONS WITH THE DUTCH STATE On 12 November 2008, ING Group issued one billion core Tier 1 securities (‘Securities’) for a total consideration of EUR 10 billion to the Dutch State. Following the repurchase of 500 million Securities on 21 December 2009 and the repurchase of 200 million Securities on 13 May 2011, another 300 million of Securities representing EUR 3 billion remain outstanding. The Securities do not form part of ING Group’s share capital; accordingly they do not carry voting rights in the General Meeting. The financial entitlements of the Securities are described in note 33 to the consolidated annual accounts.
As part of these transactions, certain arrangements with respect to corporate governance and remuneration were agreed with the Dutch State which will remain in place as long as the Dutch State owns at least 250 million Securities, or as long as the IABF remains in place (whichever expires last).
ING Group believes the following to be the significant differences between its corporate governance practices and NYSE corporate governance rules applicable to US companies: • ING Group has a two-tier board structure, in contrast to the one-tier board structure used by most US companies. In the Netherlands, a public limited liability company (naamloze vennootschap) has an Executive Board as its management body and a Supervisory Board which advises and supervises the Executive Board. In general, members of the Executive Board are employees of the company while members of the Supervisory Board are often former state or business leaders and sometimes former members of the Executive Board. Members of the Executive Board and other officers and employees cannot simultaneously be a member of the Supervisory Board. The Supervisory Board must approve specified decisions of the Executive Board. Under the Corporate Governance Code, all members of the Supervisory Board with the exception of not more than one person, should be independent. All members of ING Group’s Supervisory Board, with the exception of Luc Vandewalle, are independent within the meaning of the Corporate Governance Code. The definitions of independence under the Corporate Governance Code, however, differ in their details from the definitions of independence under the NYSE listing standards. In some cases the Dutch requirements are stricter and in other cases the NYSE listing standards are the stricter of the two. The Audit Committee, Risk Committee, Remuneration Committee, Nomination Committee and Corporate Governance Committee of ING Group are comprised of members of the Supervisory Board.
• In contrast to the Sarbanes-Oxley Act of 2002, the Corporate Governance Code contains an ‘apply-or-explain’ principle, offering the possibility to deviate from the Corporate Governance Code as long as any such deviations are explained. To the extent that such deviations are approved by the General
The application of the Corporate Governance Code by ING is described in the publication ‘ING’s implementation of the Dutch Corporate Governance Code’, dated April 2010, on the website of the Company (www.ing.com), which is to be read in conjunction with this section and is deemed to be incorporated into this section.
Share issues are to be decided by the General Meeting, which may also delegate its authority. Each year, the General Meeting is asked to delegate authority to the Executive Board to issue new ordinary shares or to grant rights to subscribe for new ordinary shares, both with and without pre-emptive rights for existing shareholders. The powers delegated to the Executive Board are limited: • in time: powers are delegated for a period of 18 months; • by number: insofar as sufficient unissued ordinary shares are available in the authorised capital, ordinary shares may be issued up to a maximum of 10% of the issued share capital, or, in the event of a merger or takeover or to safeguard or conserve the capital position of the Company, up to a maximum of 20% of the issued capital; and
The purpose of this delegation of authority is to allow the Company to respond promptly to developments in the financial markets. Without such delegation, if the Company wished to issue new shares, there would be an increased risk that conditions in the financial markets may have changed during the time needed for convening a general meeting, especially as the statutory convocation period was extended to 42 days. In view of the importance of flexibility with respect to the issue of shares, the Executive Board and the Supervisory Board will periodically evaluate the delegation of authority to issue shares and, if necessary, make adjusted proposals to the General Meeting.
Meeting, the company is deemed to be in full compliance with the Corporate Governance Code.
The Board of ING Continuity Foundation currently comprises four members who are independent of ING Group. No Executive Board members or former Executive Board members, Supervisory Board members or former Supervisory Board members, ING Group employees or former ING Group employees or permanent advisors or former permanent advisors are on the Board of ING Continuity Foundation. The Board of ING Continuity Foundation appoints its own members, after consultation with the Supervisory Board of ING Group, but without any requirement for approval by ING Group.
ING Group may decide not to accommodate or accept any request or invitation for entering into a dialogue with (potential) investors, or to accommodate or accept such request or invitation under certain conditions.
ING Group strives to provide clear, accurate and timely financial information that is in strict compliance with the applicable rules and regulations, in particular those concerning selective disclosure, price sensitive information and equal treatment. In addition to the annual 64 ING Group Annual Report 2011
The geographical distribution of ING Group’s investor base is diverse – an estimated 48% of shares outstanding are held in the US, 30% in the Benelux, 18% in the UK, 1% in Switzerland and 3% in the rest of the world. Please refer to the ‘ING share’ chapter for more details.
• the authorisation of a repurchase of outstanding shares and a cancellation of shares.
Pursuant to the agreements concerning the transactions with the Dutch State mentioned above, certain resolutions of the Supervisory Board are subject to the condition that no State Nominee voted against the proposal. These rights became effective as from the 2009 annual General Meeting. These resolutions relate to the following matters: a. the issue or acquisition of its own shares by ING Group, other than related to the Securities issue (including, for the avoidance of doubt, for the purpose of conversion or financing of a repurchase of Securities), as part of regular hedging operations or in connection with employment schemes; b. the cooperation by ING Group in the issue of depositary receipts for shares; c. the application for listing on or removal from the price list of any stock exchange of the securities referred to in a. or b.; d. the entry into or termination of lasting cooperation between ING Group or a dependent company and another legal entity or partnership or as general partner in a limited partnership or general partnership where such cooperation or termination thereof has material significance for ING Group, i.e. amounting to one-quarter or more of ING Group’s issued capital and reserves as disclosed in its balance sheet and notes thereto; e. the acquisition by ING Group or a dependent company of a participating interest in the capital of another company amounting to one-quarter or more of ING Group’s issued capital and reserves as disclosed in its balance sheet and notes thereto or a material increase or decrease in the magnitude of such a participating interest; f. investments involving an amount equal to one-quarter or more of ING Group’s issued capital and reserves as disclosed in its balance sheet and notes thereto; g. a proposal to wind up ING Group; h. filing of a petition for bankruptcy or moratorium of ING Group; i. a proposal to reduce the issued capital of ING Group (other than related to the Securities issue); j. a proposal for merger, split-off or dissolution of ING Group; k. a proposal to change ING Group’s remuneration policy; and l. appointment of the chief executive officer of the Executive Board.
COMMITTEES OF THE SUPERVISORY BOARD On 31 December 2011, the Supervisory Board had five standing committees: the Audit Committee, the Risk Committee, the Remuneration Committee, the Nomination Committee and the Corporate Governance Committee.
In view of their experience and the valuable contribution that former members of the Executive Board can make to the Supervisory Board, it has been decided, taking into account the size of the Supervisory Board and ING’s wide range of activities that such individuals may become members of the Supervisory Board of ING Group. There is, however, a restriction in that only one in every five other members of the Supervisory Board may be a former member of the Executive Board. In addition, this member must wait at least one year after resigning from the Executive Board before becoming eligible for appointment to the Supervisory Board. Former members of the Executive Board are not eligible for appointment to the position of chairman or vice-chairman of the Supervisory Board.
In accordance with the Corporate Governance Code, members of the Supervisory Board are to disclose material conflicts of interest and potential conflicts of interest and to provide all information relevant thereto. Thereupon the Supervisory Board – without the member concerned taking part – decides whether a conflict of interest exists. In special circumstances, the Supervisory Board may deviate from this rule and decide that, notwithstanding the fact that the matter would entail a conflict of interest according to the Corporate Governance Code, a conflict of interest does not exist. This concerns in particular situations in which the conflict of interest 69ING Group Annual Report 2011
the Remuneration report on pages 86 and 87. Members of the Supervisory Board are permitted to hold shares and depositary receipts for shares in the share capital of ING Group for long-term investment purposes. Details are given on page 87. Transactions by members of the Supervisory Board in these shares and these depositary receipts for shares are subject to the ING regulations for insiders. These regulations are available on the website of ING Group (www.ing.com).
INFORMATION ON MEMBERS OF THE SUPERVISORY BOARD JEROEN VAN DER VEER (CHAIRMAN) (Born 1947, Dutch nationality, male; appointed in 2009, term expires in 2013) Former chief executive officer of Royal Dutch Shell plc.
Other business activities: non-executive director of Royal Dutch Shell plc and chairman of the Supervisory Board of Koninklijke Philips Electronics N.V. (listed companies). Member of the Supervisory Board of Het Concertgebouw N.V. Chairman of Platform Bètatechniek. Chairman of the Supervisory Council of Nederlands Openluchtmuseum. Member of the Board of Nationale Toneel (theatre).
The Risk Committee assists and advises the Supervisory Board in monitoring the risk profile of ING as a whole as well as the structure and operation of the internal risk management and control systems. On 31 December 2011, the members of the Risk Committee were: Piet Klaver (chairman), Tineke Bahlmann, Sjoerd van Keulen, Joost Kuiper, Luc Vandewalle and Jeroen van der Veer.
The current term of appointment of Aman Mehta will expire at the end of the 2012 annual General Meeting. At this meeting, Aman Mehta will be nominated for reappointment. In addition, the Supervisory Board has nominated three candidates for appointment: Yvonne van Rooy (born 1951, Dutch nationality, female), Jan Holsboer (born 1946, Dutch nationality, male) and Robert Reibestein (born 1956, Dutch nationality, male). The proposed appointments have been approved by the Dutch central bank (DNB).
CHANGE OF CONTROL CLAUSES IN MATERIAL AGREEMENTS ING Group is not a party to any material agreement that becomes effective or is required to be amended or terminated, in case of a change of control of ING Group following a public bid as defined in section 5:70 of the Dutch Financial Supervision Act. ING Group subsidiaries may have customary change of control arrangements included in agreements related to various business activities, such as joint venture agreements, letters of credit and other credit facilities, ISDA-agreements, hybrid capital and debt instruments, reinsurance agreements and futures and option trading
AMAN MEHTA (Born 1946, Indian nationality, male; appointed in 2008, term expires in 2012) Former chief executive officer of Hong Kong & Shanghai Banking Corporation (HSBC) in Hong Kong. Other business activities: non-executive director of each of Tata Consultancy Services, Jet Airways Ltd., PCCW Ltd., Vedanta Resources Plc, Wockhardt Ltd., Godrej Consumer Products Ltd., Cairn India Ltd. and Max India Ltd. Member of the governing board of Indian School of Business.
ACTIVITIES BOARD MEETINGS During the 2011 reporting year, the board of ING Trust Office (the ‘Board’) held eight meetings.
- The annual General Meeting of ING Group of 9 May 2011 (‘AGM’), the items on the agenda of the AGM (including, among other things, the remuneration report and the remuneration policy for members of the Executive Board of ING Group), the proxy voting results and the voting by ING Trust Office.
The Board convened a meeting of holders of depositary receipts, which was held on 23 November 2011. 0.05% of the total number of depositary receipts issued was present or represented during this meeting. During the meeting a report was made on the activities of ING Trust Office. In addition, the Board answered various questions of holders of depositary receipts attending the meeting. The minutes of the aforementioned meeting are published on the website of ING Trust Office (www.ingtrustoffice.com).
In 2010, ING evaluated the position of ING Trust Office and the depositary-receipts structure, and concluded that it would be premature to change or abolish the depositary-receipts structure in 2010 and that it would be more appropriate to reconsider this as part of a re-evaluation of ING Group’s entire governance structure following the current restructuring and the completion of the divestments approved in the extraordinary General Meeting in 2009, the outcome of which was discussed in the annual General Meeting of 27 April 2010.
ANNUAL GENERAL MEETING ING GROUP, VOTES CAST AND VOTING BEHAVIOUR ING Trust Office attended the AGM and during this meeting ING Trust Office asked the Executive Board and the Supervisory Board of ING Group various questions, answered questions of shareholders and holders of depositary receipts and made a statement on how it proposed to vote, where desired.
In accordance with the Articles of Association and the Trust Conditions, ING Trust Office voted at its own discretion on the shares for which it did not issue voting proxies and did not receive voting instructions, representing 52.9% of the total votes that might be cast at the AGM. In voting such shares, ING Trust Office was guided primarily by the interests of all holders of depositary receipts, taking into account the interests of ING Group and its affiliated enterprise. As a result, ING Trust Office voted on these shares in favour of all voting items on the agenda of the AGM.
ING Trust Office promotes the solicitation of proxies of shareholders of ING Group other than ING Trust Office itself and of specific proxies or voting instructions of holders of depositary receipts. ING Trust Office encourages the greatest possible participation of shareholders and holders of depositary receipts and promotes the execution of voting rights in a transparent way. At the same time it prevents that a minority of shareholders and holders of depositary 74 ING Group Annual Report 2011
The Executive Board assessed the effectiveness of our internal control over financial reporting as of 31 December 2011. In making this assessment, the Executive Board performed tests based on the criteria of the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework. Based on the Executive Board’s assessment and those criteria, the Executive Board concluded that the Company’s internal control over financial reporting is effective as of 31 December 2011.
In our opinion, ING Groep N.V. maintained, in all material respects, effective internal control over financial reporting as of 31 December 2011, based on the COSO criteria.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorisations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorised acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Tenure The contract of employment for Executive Board members provides for an appointment for a period of four years and allows for reappointment by the General Meeting. In the case of an involuntary exit, Executive Board members are eligible for an exit-arrangement limited to one-year base salary.
OTHER ITEMS FOR SUpERVISORY bOARd dIScRETION clAw bAck ANd AdjUSTMENTS The Supervisory Board has the authority to reclaim variable remuneration allocated to a member of the Executive Board based on inaccurate data and/or behaviour that led to significant harm to the company. The Supervisory Board also has the authority to adjust variable remuneration if application of the predetermined performance criteria results in undesired outcomes. Accordingly, the Supervisory Board has decision authority in situations not addressed in the policy.
SUpERVISORY bOARd dIScRETION TO REVIEw THE pOlIcY ANd THE REMUNERATION pAId ING as a company is expected to undergo significant changes during the coming years. Moreover, the relevant international employment market is very much in flux. In order to ensure that ING can adapt to these two uncertain factors, the Supervisory Board indicated in 2010 and 2011 that it may re-evaluate in 2012, whether the remuneration policy adopted in 2010 and amended on 9 May 2011, is in line with the long-term objectives of the Company, the relevant international context, as well as the societal perception of ING as a company. As ING’s restructuring is ongoing and the regulatory environment continues to be in flux, the Supervisory Board may determine to re-evaluate at a later stage.
2011 REMUNERATION EXECUTIVE BOARD The Executive Board remuneration for 2011 is based on the remuneration policy approved by the 2010 AGM and amended by the 2011 AGM.
For Koos Timmermans, a number of 10,411 performance shares vested in 2011 (57% of the 18,266 shares awarded). The value at vesting amounted to EUR 79,139. The number of performance shares reflects the number adjusted for the effects of the rights issue of December 2009.
2012 REMUNERATION STRUCTURE EXECUTIVE BOARD 2012 BASE SALARY EXECUTIVE BOARD In line with the Executive Board decision not to accept a base salary increase in 2011 as the repayment of core Tier 1 securities that were issued to the Dutch State has not been completed, the Supervisory Board does not propose a base salary increase with respect to the performance year 2012.
FOCUS ON LONg-TERM VALUE CREATION, RISk AND NONFINANCIAL PERFORMANCE Variable remuneration is linked to long-term value creation and risk. It is determined based on individual, business and company performance criteria. Performance measurement will increasingly account for estimated risks and costs of capital. There will be increased emphasis on long-term value creation by means of long-term incentives, deferral and claw back mechanisms.
By making the above changes, ING has taken an important step to further align its compensation philosophy and structure with its risk profile. The current structure will in most cases lead to a decrease in the cash component of variable remuneration and a decrease in the ratio between fixed and variable remuneration.
(4) In 2012 compensation will be capped at EUR 100,000 and EUR 90,000 for the chairman and vice-chairman respectively. Please see the paragraph above the table. (5) Peter Elverding was chairman of the Supervisory Board from April 2009 until May 2011. He has been vice-chairman since May 2011. (6) Tineke Bahlmann is a member of the Supervisory Board as of April 2009.
(12) Sjoerd van Keulen, Joost Kuiper and Luc Vandewalle are members of the Supervisory Board as of May 2011. The compensation figures for 2011 reflect the partial year as members of the Supervisory Board.
Compensation of former members of the Supervisory Board who are not included in the above table amounted to nil in 2011, EUR 80 thousand in 2010 and EUR 277 thousand in 2009.
INg DEPOSITARY RECEIPTS FOR SHARES AND OPTIONS HELD BY SUPERVISORY BOARD MEMBERS Supervisory Board members are permitted to hold ING depositary receipts for shares as a long-term investment. The table below shows the holdings by members of the Supervisory Board. Supervisory Board members did not hold ING options at year-end 2011.
Rob Eijt, chairman Alex Hoogendoorn, secretary Goof Bode, deputy chairman Rudie van Doorn, deputy secretary Hans de Boer, Wim Bruijnes, Arno Daams, Jeffrey Dinsbach, Erik Hoijtink, Aad Kant, Jan Krutzen, Job van Luyken, Sjaak Muller, Hennie Post, Koos Rodenburg, Nancy Snijdewind, Henk Timmer, Cindy Uit de Bulten, Gerard Veldman, Michel Vonk, Jelte Wiersinga, Bernard Wolters, Bert Woltheus.
ASSETS Cash and balances with central banks 1 31,194 13,072 Amounts due from banks 2 45,323 51,828 Financial assets at fair value through profit and loss 3 – 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 Investments 4 – available-for-sale 208,539 222,547 – held-to-maturity 8,868 11,693 Loans and advances to customers 5 602,525 613,204
References relate to the notes starting on page 117. These form an integral part of the consolidated annual accounts.
Discontinued operations Net result from discontinued operations 25 114 216 100 Net result from disposal of discontinued operations 25 995 Total net result from discontinued operations 25 1,109 216 100
Earnings per share from continuing operations 49 Basic earnings per ordinary share from continuing operations 0.83 0.57 –0.64 Diluted earnings per ordinary share from continuing operations 0.83 0.57 –0.64
Total net result from discontinued operations attributable to: Equityholders of the parent 1,104 209 93 amounts in millions of euros 2011 2010 2009 92 ING Group Annual Report 2011
– deferred acquisition costs and value of business acquired 277 1,159 223 – increase in provisions for insurance and investment contracts 4,239 4,278 2,585 – addition to loan loss provisions 1,670 1,751 2,973
Taxation paid –1,353 –503 –412 Changes in: – amounts due from banks, not available on demand 2,208 –4,333 8,611
(2) 2009 includes payments on non-voting equity securities (payment of the 2008 coupon of EUR 425 million and the coupon in the repayment of EUR 259 million).
Unrealised revaluations after taxation 11,874 11,874 –7 11,867 Realised gains/losses transferred to profit and loss 1,554 1,554 1,554 Changes in cash flow hedge reserve –805 –805 –805 Transfer to insurance liabilities/DAC –2,079 –2,079 –2,079
None of these new or revised standards and interpretations had a significant effect on the consolidated annual accounts.
In June 2011 the revised IAS 19 ‘Employee Benefits’ was issued, which will become effective as of 2013 if endorsed by the EU. At this moment, the revised standard is being analysed and the full impact is not yet known. One of the changes in the revised standard results in immediate recognition in equity of ‘unrecognised actuarial gains and losses’ as of the effective date. Unrecognised actuarial gains and losses as at 31 December 2011 are disclosed in Note 21 ‘Other liabilities’ and amount to EUR 481 million (pre-tax). The impact of the revised standard will be affected by movements in the unrecognised actuarial gains and losses until the effective date and the impact of other changes in the revised standard.
The impact on the consolidated profit and loss account can be specified as follows: Impact on profit and loss account amounts in millions of euros 2010 2009
Accounting policies for 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
The valuation of real estate involves various assumptions and techniques. The use of different assumptions and techniques could produce significantly different valuations. To illustrate the uncertainty of our real estate investments valuation, a sensitivity analysis on the changes in fair value of real estate is provided in the ‘Risk management’ section.
All debt and equity securities (other than those carried at fair value through profit and loss) are subject to impairment testing every reporting period. The carrying value is reviewed in order to determine whether an impairment loss has been incurred. Evaluation for impairment includes both quantitative and qualitative considerations. For debt securities, such considerations include actual and estimated incurred credit losses indicated by payment default, market data on (estimated) incurred losses and other current evidence that the issuer may be unlikely to pay amounts when due. Equity securities are impaired when management believes that, based on (the combination of) a significant or prolonged decline of the fair value below the acquisition price, there is sufficient reason to believe that the acquisition cost may not be recovered. ‘Significant’ and ‘prolonged’ are interpreted on a case-by-case basis for specific equity securities. Generally 25% and 6 months are used as triggers. Upon impairment, the full difference between (the acquisition) cost and fair value is removed from equity and recognised in net result. Impairments on debt securities may be reversed if there is a decrease in the amount of the impairment which can be objectively related to an observable event. Impairments on equity securities cannot be reversed.
The existence and effect of potential voting rights that are currently exercisable or convertible are considered in assessing whether the Group controls another entity. For interests in investment vehicles, the existence of control is determined taking into account both ING Group’s financial interests for own risk and its role as investment manager.
ING Group’s interests in jointly controlled entities are accounted for using proportionate consolidation. ING Group proportionately consolidates its share of the joint ventures’ individual income and expenses, assets and liabilities, and cash flows on a line-by-line basis with similar items in ING Group’s financial statements. ING Group recognises the portion of gains or losses on the sale of assets to the joint venture that is attributable to the other venturers. ING Group does not recognise its share of profits or losses from the joint venture that results from the purchase of assets by ING Group from the joint venture until it resells the assets to a third party. However, if a loss on the transaction provides evidence of a reduction in the net realisable value of current assets or an impairment loss, the loss is recognised immediately.
The process of setting assumptions is subject to internal control procedures and approvals, and takes into account internal and external studies, industry statistics, environmental factors and trends, and regulatory requirements.
Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rate prevailing at the date of the transactions. Exchange rate differences resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the profit and loss account, except when deferred in equity as part of qualifying cash flow hedges or qualifying net investment hedges.
Realised gains and losses on investments Realised gains and losses on investments are determined as the difference between the sale proceeds and (amortised) cost. For equity securities, the cost is determined using a weighted average per portfolio. For debt securities, the cost is determined by specific identification.
Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are initially recognised at fair value plus transaction costs. Subsequently, they are carried at amortised cost using the effective interest method less any impairment losses. Loans and receivables include: Cash and balances with central banks, Amounts due from banks, Loans and advances to customers and Other assets and are reflected in these balance sheet lines. Interest income from loans and receivables is recognised in Interest income and Investment income in the profit and loss account using the effective interest method.
Credit risk management classification Credit risk management disclosures are provided in the section ‘Risk management’. The relationship between credit risk classifications in that section and the consolidated balance sheet classifications above is explained below: • Lending risk arises when ING Group grants a loan to a customer, or issues guarantees on behalf of a customer and mainly relates to the balance sheet classification Loans and advances to customers and off balance sheet items e.g. obligations under financial guarantees and letters of credit; • Investment risk comprises the credit default and migration risk that is associated with ING Group’s investment portfolio and mainly relates to the balance sheet classification Investments (available-for-sale and held-to-maturity); • Money market risk arises when ING Group places short term deposits with a counterparty in order to manage excess liquidity and among others relates to the balance sheet classifications Amounts due from banks and Loans and advances to customers; • Pre-settlement risk arises when a counterparty defaults on a transaction before settlement and ING Group has to replace the contract by a trade with another counterparty at the then prevailing (possibly unfavourable) market price. The pre-settlement risk classification mainly relates to the balance sheet classification Financial assets at fair value through profit and loss (trading assets and non-trading derivatives) and to securities financing; and
• Historical experience, updated for current events where necessary, provides evidence that a proportion of a group of assets is impaired although the related events that represent impairment triggers are not yet captured by the Group’s credit risk systems.
REAL ESTATE INVESTMENTS Real estate investments are recognised at fair value at the balance sheet date. Changes in the carrying amount resulting from revaluations are recognised in the profit and loss account. On disposal the difference between the sale proceeds and carrying value is recognised in the profit and loss account.
The fair values represent the estimated amount for which the property could be exchanged on the date of valuation between a willing buyer and willing seller in an at-arm’s-length transaction after proper marketing wherein the parties each acted knowledgeably, prudently and without compulsion. Fair values are based on appraisals using valuation methods such as: comparable market transactions, capitalisation of income methods or discounted cash flow calculations. The underlying assumption used in the valuation is that the properties are let or sold to third parties based on the actual letting status. The discounted cash flow analyses and capitalisation of income method are based on calculations of the future rental income in accordance with the terms in existing leases and estimations of the rental values for new leases when leases expire and incentives like rental free periods. The cash flows are discounted using market based interest rates that reflect appropriately the risk characteristics of real estate.
ING Group owns a large real estate portfolio, widely diversified by region, by investment segment (Office, Retail and Residential) and by investment type (Core, Value Add and Opportunistic). The valuation of different investments is performed using different discount rates (‘yields’), dependent on specific characteristics of each property, including occupancy, quality of rent payments and specific local market circumstances. For ING’s main direct properties in its main locations, the yields applied in the 2011 year-end valuation generally are in the range of 5% to 8%.
PROPERTY AND EQUIPMENT Property in own use Land and buildings held for own use are stated at fair value at the balance sheet date. Increases in the carrying amount arising on revaluation of land and buildings held for own use are credited to the revaluation reserve in shareholders’ equity. Decreases in the carrying amount that offset previous increases of the same asset are charged against the revaluation reserve directly in equity; all other decreases are charged to the profit and loss account. Increases that reverse a revaluation decrease on the same asset previously recognised in net result are recognised in the profit and loss account. Depreciation is recognised based on the fair value and the estimated useful life (in general 20–50 years). Depreciation is calculated on a straight-line basis. On disposal the related revaluation reserve is transferred to retained earnings.
DAC is evaluated for recoverability at issue. Subsequently it is tested on a regular basis together with the provision for life insurance liabilities and VOBA. The test for recoverability is described in the section ‘Insurance, Investment and Reinsurance Contracts’.
Insurance contracts Insurance policies which bear significant insurance risk and/or contain discretionary participation features are presented as insurance contracts. Provisions for liabilities under insurance contracts represent estimates of future payouts that will be required for life and non-life insurance claims, including expenses relating to such claims. For some insurance contracts the measurement reflects current market assumptions. Unless indicated otherwise below all changes in the insurance provisions are recognised in the profit and loss account.
OTHER LIABILITIES Employee benefits – pension obligations Group companies operate various pension schemes. The schemes are generally funded through payments to insurance companies or trusteeadministered funds, determined by periodic actuarial calculations. The Group has both defined benefit and defined contribution plans.
GOVERNMENT GRANTS Government grants are recognised where there is reasonable assurance that the grant will be received and all attached conditions will be complied with. When the grant relates to an expense item, the grant is recognised over the period necessary to match the grant on a systematic basis to the expense that it is intended to compensate. In such case, the grant is deducted from the related expense in the profit and loss account.
EARNINGS PER ORDINARY SHARE Earnings per ordinary share is calculated on the basis of the weighted average number of ordinary shares outstanding. In calculating the weighted average number of ordinary shares outstanding: • Own shares held by group companies are deducted from the total number of ordinary shares in issue; • The computation is based on daily averages; and • In case of exercised warrants, the exercise date is taken into consideration.
As at 31 December 2011, the non-subordinated receivables amounted to EUR 45,304 million (2010: EUR 51,788 million) and the subordinated receivables amounted to EUR 19 million (2010: EUR 40 million).
Notes to the consolidated annual accounts of ING Group amounts in millions of euros, unless stated otherwise 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
Derivatives used in – fair value hedges 3,192 4,127 – cash flow hedges 6,641 4,440 – hedges of net investments in foreign operations 141 81 Other non-trading derivatives 7,185 3,074
Available-for-sale – equity securities 9,305 9,754 – debt securities 199,234 212,793
Disposals and redemptions –2,023 –2,228 –219,023 –150,569 –2,370 –2,620 –223,416 –155,417
Held-to-maturity debt securities – sale and reclassification to available-for-sale investments (2010) In the second quarter of 2010 EUR 51 million of Greek government bonds that were classified as held-to-maturity investments were sold. Furthermore, EUR 282 million of Greek government bonds were reclassified from held-to-maturity to available-for-sale investments. As the decisions to sell and reclassify were based on the significant deterioration in the issuer’s creditworthiness compared to the credit rating at initial recognition, this sale and reclassification does not impact the intent for the remainder of the held-to-maturity investment portfolio.
Carrying value as at 31 December 1,592 Fair value as at 31 December 1,565 Unrealised fair value losses recognised in shareholders’ equity (before tax) as at 31 December –79 Effect on shareholders’ equity (before tax) as at 31 December if reclassification had not been made –28 Effect on result (before tax) if reclassification had not been made nil Effect on result (before tax) after the reclassification until 31 December (mainly interest income) 9 Recognised impairments (before tax) nil Recognised provision for credit losses (before tax) nil
As at 31 December 2011, the balance sheet value included equity securities which were lent or sold in repurchase transactions amounting to nil (2010: nil) and nil (2010: nil), respectively, and debt securities which were lent or sold in repurchase transactions amounting to EUR 909 million (2010: EUR 3,302 million) and EUR 21,183 million (2010: EUR 14,617 million), respectively.
– more than 1 year but less than 5 years 9,407 9,700 – more than 5 years 5,875 6,089
– more than 1 year but less than 5 years 8,035 8,294 – more than 5 years 4,708 4,864
The allowance for uncollectible finance lease receivables included in the loan loss provisions amounted to EUR 223 million as at 31 December 2011 (2010: EUR 177 million).
No individual finance lease receivable has terms and conditions that materially affect the amount, timing or certainty of the consolidated cash flows of the Group.
The closing balance is included in – Amounts due from banks 7 21 7 21 – Loans and advances to customers 2,002 1,932 2,941 3,242 4,943 5,174
The total amount of rental income recognised in the profit and loss account for the year ended 31 December 2011 was EUR 184 million (2010: EUR 304 million). The total amount of contingent rent recognised in the profit and loss account for the year ended 31 December 2011 was nil (2010: EUR 14 million).
Furthermore, the exposure is impacted by third party interests, leverage in funds and off-balance commitments, resulting in an overall exposure of EUR 10.0 billion (2010: EUR 11.1 billion) of which EUR 4.1 billion (2010: EUR 5.2 billion) relates to banking operations and EUR 5.9 billion (2010: EUR 5.9 billion) relates to insurance operations. Reference is made to the section ‘Risk management’.
Gross carrying amount as at 31 December 2,366 2,487 Accumulated depreciation as at 31 December –674 –700 Accumulated impairments as at 31 December –157 –145 Net carrying value as at 31 December 1,535 1,642
The cost or the purchase price amounted to EUR 1,868 million (2010: EUR 1,959 million). Cost or the purchase price less accumulated depreciation and impairments would have been EUR 1,036 million (2010: EUR 1,114 million) had property in own use been valued at cost instead of at fair value.
Most recent appraisal in 2011 54 Most recent appraisal in 2010 13 Most recent appraisal in 2009 10 Most recent appraisal in 2008 15 Most recent appraisal in 2007 8
The Group leases assets to third parties under operating leases as lessor. The future minimum lease payments to be received under non-cancellable operating leases are as follows: Future minimum lease payments by maturity
Disposals –7 –9 5 –12 –9 –14 Other –47 –8 –19 –13 –12 –79 –20
Gross carrying amount as at 31 December 2,244 2,449 2,436 3,370 2,597 2,557 570 1,013 7,847 9,389 Accumulated amortisation as at 31 December –1,373 –1,129 –1,926 –1,751 –242 –426 –3,541 –3,306 Accumulated impairments as at 31 December –642 –605 –60 –52 –46 –54 –748 –711 Net carrying value as at 31 December 871 1,320 1,794 2,765 611 754 282 533 3,558 5,372
Insurance US Due to the unfavourable market circumstances for Insurance, including the low interest rate environment, there were indications in the third quarter of 2010 that the recoverable amount of the reporting unit Insurance US had fallen below carrying value. As a result, a full goodwill impairment review was performed for the reporting unit Insurance US in the third quarter of 2010. The reporting unit Insurance US equals the segment Insurance US as disclosed in Note 51 ‘Operating segments’. The 2009 impairment test for Insurance US showed that the recoverable amount based on fair value (using market multiples for Price/Book and Price/Earnings of listed peer companies) was at least equal to carrying value. The outcome of the impairment test performed in the third quarter of 2010 indicated that the fair value has become less than carrying value by an amount that exceeded the goodwill of Insurance US, indicating that the full amount of goodwill relating to Insurance US is impaired. Further analysis of the recoverable amount confirmed the impairment. As a result, the goodwill of EUR 540 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 Insurance segment.
For flexible life insurance contracts the growth rate assumption used to calculate the amortisation of the deferred acquisition costs for 2011 is 8.4% gross and 4.2% net of investment management fees (2010: 8.3% gross and 4.8% net of investment management fees).
In 2011, Amortisation and unlocking include EUR 488 million relating to the assumption review for the Insurance US Closed Block Variable Annuity (VA) business. Reference is made to Note 43 ‘Underwriting expenditure’.
Amortisation and unlocking in 2010 includes a EUR 975 million DAC write-off as explained in Note 51 ‘Operating segments’. The remaining amount includes unlocking of EUR –538 million, which mainly relates to Insurance US and amortisation of EUR –1,184 million.
In addition to the entities presented as Held for sale above, ING is considering potential divestments, including those that are listed under the European Commission Restructuring plan in Note 33 ‘Related parties’. However, none of these businesses qualify as held for sale as at 31 December 2011 as the potential divestments are not yet available for immediate sale in their present condition and/or a sale is not yet highly probable to occur.
The allowance for uncollectible reinsurance and insurance receivables amounted to EUR 66 million as at 31 December 2011 (2010: EUR 52 million). The allowance is deducted from this receivable.
Issue of shares 1,768,413 424 Issued share capital as at 31 December 2009 3,831,561 919
A total of 1,768,412,544 (depositary receipts for) ordinary shares were offered and sold, of which approximately 97% through the exercise of rights and the remainder through placements to institutional investors. As a result, ING received approximately EUR 7.3 billion in proceeds, net of fees and expenses.
On a distribution of a dividend ING Groep N.V. is in principle required to withhold an income tax on dividends at a rate of 15%.
Unrealised revaluations after taxation –12 967 955 Realised gains/losses transferred to profit and loss 723 723 Changes in cash flow hedge reserve 1,124 1,124 Transfer to insurance liabilities/DAC –2,004 –2,004
Non-voting equity securities (Core Tier 1 securities) On 12 November 2008, ING Groep N.V. issued one billion non-voting equity securities to the Dutch State at EUR 10 per non-voting equity security, resulting in an increase of ING Group’s core Tier 1 capital of EUR 10 billion. The nominal value of each security is EUR 0.24. The nonvoting equity securities do not form part of ING Group’s share capital; accordingly they do not carry voting rights in the General Meeting.
Since ING Groep N.V. had already paid an interim dividend of EUR 0.74 per ordinary share in August 2008, ING recognised a coupon payable of EUR 425 million to the Dutch State as of 31 December 2008. This coupon was paid out on 12 May 2009.
Further coupons are to be paid on 12 May of each year (the coupon date) in cash if the dividend on ordinary shares is paid in cash or to be paid in scrip securities in the event of a scrip dividend on ordinary shares. Coupons are only due and payable, on a non-cumulative basis and if a dividend is paid on ordinary shares over the financial year preceding the coupon date, either on an interim or a final dividend basis, provided that ING Group’s capital adequacy position is and remains satisfactory both before and after payment in the opinion of the Dutch central bank.
On 12 December 2011 ING announced the launch of three separate exchange offers in Europe and tender offers in the United States of America, on a total of seven series of outstanding subordinated securities of ING entities with a total nominal value of approximately EUR 5.8 billion. Of this amount, EUR 4.8 billion relates to securities issued by ING Groep N.V. and EUR 1.0 billion issued by ING Verzekeringen N.V. All tender and exchange offers announced on 12 December 2011 were successfully completed on 23 December 2011 with an average participation of approximately 60%. As part of this initiative, EUR 0.9 billion intercompany debt from ING Bank N.V. to ING Groep N.V. was repaid. In addition, ING Group issued one new senior bond with a nominal value of EUR 0.7 billion and ING Bank issued two new senior bonds with a nominal value of GBP 0.4 billion and EUR 0.4 billion respectively. The overall transaction resulted in a total gain of EUR 955 million (EUR 716 million after tax), including related hedge results and transaction costs. This gain is recognised in Other income. From this amount, EUR 767 million (EUR 574 million after tax) relates to ING Groep N.V., EUR 93 million (EUR 71 million after tax) to ING Bank N.V. and EUR 95 million (EUR 71 million after tax) to ING Verzekeringen N.V. This affects the subordinated securities as disclosed in this note and in Note 16 ‘Other borrowed funds’.
Subordinated loans of group companies 2,647 1,673 684 81 1,086 7,609 13,780 Preference shares of group companies 1,121 1,121
Subordinated loans of group companies relate to capital debentures and private loans which are subordinated to all current and future liabilities of ING Bank N.V.
Provision for non-participating life policy liabilities 88,492 80,691 5,534 5,150 94,026 85,841 Provision for participating life policy liabilities 52,753 51,191 102 173 52,855 51,364 Provision for (deferred) profit sharing and rebates 5,623 3,432 2 3 5,625 3,435 Life insurance provisions excluding provisions for risk of policyholders 146,868 135,314 5,638 5,326 152,506 140,640
Investment contracts for risk of company 6,259 5,990 6,259 5,990 Investment contracts for risk of policyholders 6,939 5,984 6,939 5,984 Total provisions for investment contracts 13,198 11,974 13,198 11,974
Changes in the composition of the group –495 –24 –267 –2 –2 –764 –26
Premiums earned during the year –1,708 –1,702 –43 –65 –1,751 –1,767
Changes in the composition of the group –7 1 –7 1
Where discounting is used in the calculation of the claims provisions, based on weighted averages, the rate is within the range of 3.0% to 4.0% (2010: 3.0% to 4.0%).
Cumulative payments –783 –742 –797 –630 –753 –787 –748 –474 –5,714
Savings accounts 291,516 324,581 Credit balances on customer accounts 114,867 127,177 Corporate deposits 49,668 55,024
Derivatives used in: – fair value hedges 9,478 8,601 – cash flow hedges 6,462 5,264 – hedges of net investments in foreign operations 159 168 Other non-trading derivatives 6,066 3,749
Financial assets and liabilities at fair value through profit and loss –527 –175 –9 6 –20 –725 Deferred acquisition costs and VOBA 3,111 –272 –194 –57 131 12 2,731
In 2011, the amounts presented in the column Other relates mainly 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’.
Financial assets and liabilities at fair value through profit and loss –312 –18 –185 –2 5 –15 –527 Deferred acquisition costs and VOBA 2,849 –368 301 326 3 3,111 Fiscal reserve 1 1
The deferred tax asset includes balances for which the utilisation is dependent on future taxable profits whilst the related entities have incurred losses in either the current year or the preceding year. The aggregate amount for the most significant entities where this applies is EUR 490 million (2010: EUR 1,102 million).
In general, Reorganisation and Other provisions are of a short-term nature.
–3,384 –2,915 –2,554 –1,172 –14 152 ING Group Annual Report 2011
The Group provides other post-employment employee benefits to certain employees and former employees. These are primarily post-employment healthcare benefits and discounts on ING products provided to employees and former employees.
Relating to: In 2011, Effect of curtailment or settlement relates mainly to a curtailment in relation to the restructuring in Retail Netherlands and a curtailment in relation to a change in one of the pension plans in the United States.
The estimated unrecognised past services cost and unrecognised actuarial gains and losses for the defined benefit plans to be amortised to pension and other staff related liability costs during 2012 are nil and EUR 40 million, respectively.
Expected rates of salary increases (excluding promotion increases) 2.20 2.70 2.70 2.70 Medical cost trend rates 6.10 6.10
An increase of 1% in the assumed medical cost trend rate for each future year would have resulted in an additional accumulated defined benefit obligation of EUR 5 million as at 31 December 2011 (2010: EUR 5 million) and EUR 1 million increase in the charge for the year (2010: EUR 1 million). A decrease of 1% in the medical cost trend rate for each future year would have resulted in lower defined benefit obligation of EUR 5 million as at 31 December 2011 (2010: EUR 5 million) and EUR 2 million decrease in the charge for the year (2010: EUR 2 million).
Expected cash flows For 2012 the expected contributions to pension plans are EUR 575 million.
The maturity is based on the classification as disposal group held for sale. (4) Included in remaining assets where maturities are not applicable are property and equipment, real estate investments and investments in associates.
Due to their nature remaining assets consist mainly of assets expected to be recovered after more than 12 months.
(1) Includes liabilities on demand. (2) This column reconciles the contractual undiscounted cash flows on financial liabilities to the balance sheet values. The adjustments mainly relate to the impact of discounting and, for derivatives, to the fact that the contractual cash flows are presented on a gross basis (unless the cash flows are actually settled net). (3) Liabilities held for sale consist of the liabilities of the disposal groups classified as held for sale as disclosed in Note 11 ‘Assets and liabilities held for sale’.
For the year ended 31 December 2011, ING Group recognised EUR 1,124 million (2010: EUR 475 million) after tax in equity as effective fair value changes on derivatives under cash flow hedge accounting. As a consequence, the balance of the cash flow hedge reserve in equity as at 31 December 2011 was EUR 2,611 million (2010: EUR 1,110 million) gross and EUR 1,971 million (2010: EUR 847 million) after deferred tax. This cash flow hedge reserve will fluctuate with the fair value changes of the underlying derivatives and will be reflected in the profit and loss account under Interest income/expense over the remaining term of the underlying hedged items. The cash flow hedge reserve relates to a large number of derivatives and hedged items with varying maturities, up to 45 years for insurance operations and 47 years for banking operations, with the largest concentrations in the range of 2 to 9 years for insurance operations and 1 to 6 years for banking operations. Accounting ineffectiveness on derivatives designated under cash flow hedge accounting resulted in a loss of EUR 17 million (2010: EUR 7 million loss) which was recognised in the profit and loss account.
As at 31 December 2011, the fair value of outstanding non-derivatives designated as hedging instruments for cash flow hedge accounting purposes was EUR –21 million (2010: nil).
Tax related to current pre-tax gross result 30 51 103 Post-tax result from discontinued operations 114 216 100
Furthermore, ING Group leases assets from third parties under operating leases as lessee. The future rental commitments to be paid under non-cancellable operating leases are as follows: Future rental commitments for operating lease contracts
The normal non-structured standby liquidity facilities and the structured facilities are reported under irrevocable facilities.
Collateralised debt obligations (CDO)-transactions Within ING Group, SPEs are used for CDO transactions. In a typical CDO transaction an SPE is used to issue structured, rated securities which are backed (or collateralised) by a pool of transferable debt securities. Besides investing in CDOs ING Group often has different roles in these transactions: • the arranger of the transaction; ING Group structures the SPE, acquires the assets for the SPE and sells the CDOs to investors; and • collateral manager of the assets in the SPE; ING Group manages the assets based on strict conditions of the SPEs charter.
29 PRINCIPAL SUBSIDIARIES The principal subsidiaries of ING Groep N.V. and their statutory place of incorporation as follows: Companies treated as part of the banking operations ING Bank N.V. The Netherlands Bank Mendes Gans N.V. The Netherlands ING Lease Holding N.V. The Netherlands ING Corporate Investments B.V. The Netherlands ING Vastgoed Management Holding B.V. The Netherlands ING Commercial Finance B.V. The Netherlands Westland Utrecht Bank N.V. The Netherlands ING België N.V. Belgium Record Bank N.V. Belgium ING Luxembourg S.A. Luxembourg ING Bank Slaski S.A. Poland ING Financial Holdings Corporation United States of America ING Vysya Bank Ltd. India
United States of America, Italy, United Kingdom ING Bank A.S. Turkey
ING Investment Management Australia In October 2011 ING completed the sale of ING Investment Management (ING IM) Australia to UBS AG. ING IM Australia’s business provided a number of investment strategies and products directly to the Australian institutional and wholesale markets. This transaction supports ING’s objective to actively manage its capital and portfolio of businesses to ensure an attractive and coherent combination for the announced divestment of its insurance and investment management activities. ING IM Australia was previously included in the segment ING Investment Management.
Latin American pensions, life insurance and investment management operations In December 2011 ING completed the sale of its Latin American pensions, life insurance and investment management operations for a total consideration of EUR 2,637 million to Grupo de Inversiones Suramericana (‘GRUPOSURA’). The sale is the first major step in the divestment of ING’s insurance and investment management activities. Under the terms of the agreement, ING received EUR 2,572 million in cash and GRUPOSURA will assume EUR 65 million in debt. The sale resulted in a net profit of EUR 995 million. Included in the transaction are the mandatory pension and voluntary savings businesses in Chile, Colombia, Mexico, Uruguay and ING’s 80% stake in AFP Integra S.A. in Peru; the life insurance businesses in Chile and Peru; As part of this transaction ING sold its 33.7% stake in Peruvian InVita Seguros de Vida S.A. to the Wiese Family, ING’s joint venture partner in InVita. The transaction also includes the local investment management capabilities in these five countries. Not included in the transaction is ING’s 36% stake in the leading Brazilian insurer Sul America SA. ING’s Commercial Banking activities in Mexico, Brazil and Argentina are not affected by the announcement. ING’s Mortgage and ING’s Leasing businesses in Mexico are also not part of the transaction.
Disposals effective in 2009 In October 2008 ING reached agreement to sell its entire Taiwanese life insurance business, ING Life Taiwan, to Fubon Financial Holding Co. Ltd. The sale was completed in February 2009 at a final sales price of EUR 466 million (USD 600 million). This differs from the proceeds reported in 2008 of EUR 447 million due to movements in the dollar/euro exchange rate between date of signing the sales agreement and the date of closing. ING was paid in a fixed number of shares with the difference between the fair value of those shares at the closing date and the sale price being paid in subordinated debt securities of the acquirer. This transaction resulted in a loss of EUR 292 million. This loss includes EUR 214 million loss on disposal (recognised in 2008 in ‘Net result on disposal of group companies’ in the profit and loss account) and EUR 78 million operating loss in the period that ING Life Taiwan was held for sale. ING Life Taiwan was previously included in the segment Insurance Asia/Pacific.
In addition, like many other companies in the insurance industry, several of our U.S. companies have received formal requests for information from various governmental and regulatory agencies regarding whether and to what extent they proactively ascertain whether customers have deceased, pay benefits even where no claim has been made, and comply with state laws pertaining to unclaimed or abandoned property. Companies may have to make additional payments to beneficiaries and escheat additional funds deemed abandoned, and regulators may seek fines, penalties and interest. It is currently not practicable to estimate the (potential) financial effect of such information requests.
32 JOINT VENTURES Joint ventures are included proportionally in the consolidated financial statements as follows: Most significant joint ventures 2011 Interest held (%) Assets Liabilities Income Expenses
Retirement benefit 1,828 1,828 Fair market value of variable compensation in stock 2,433 2,433
(3) Excluding members that are also members of the Executive Board of ING Groep N.V.
Termination benefit 980 980 Fair market value of variable compensation in stock 1,376 1,376
Executive Board members (1) 1,968 1,968 3.6% 3.6% Management Board members of ING Bank N.V., ING Verzekeringen N.V., Insurance Eurasia and Americas Insurance Holdings 2,314 13 3.4% 4.3% 388 4
(1) Includes the Executive Board member that stepped down from the Executive Board as per 1 October 2011.
On these non-voting equity securities a coupon is payable of the higher of: • EUR 0.85 per security, payable annually in arrears, with a first coupon of EUR 0.425 per security paid on 12 May 2009; • 110% of the dividend paid on each ordinary share over 2009 (payable in 2010); • 120% of the dividend paid on each ordinary share over 2010 (payable in 2011); and • 125% of the dividend paid on each ordinary share over 2011 onwards (payable in 2012 onwards).
Repayment non-voting equity shares In December 2009, ING repaid the first half of the non-voting equity securities (core Tier 1 securities) of EUR 5 billion plus a total premium of EUR 605 million. On 13 May 2011 ING exercised its option for early repayment of EUR 2 billion of the remaining non-voting equity securities (core Tier 1 securities). The total payment in May 2011 amounted to EUR 3 billion and included a 50% repurchase premium. ING funded this repayment from retained earnings. ING has indicated that it is one of its priorities to repay the remaining EUR 3 billion non-voting equity securities (core Tier 1 securities) as soon as possible, but this needs to be done very prudently in light of the current challenging and changing financial and regulatory environment.
On 28 January 2010, ING lodged an appeal against specific elements of the European Commission’s decision. By judgment of 2 March 2012, the Court partially annulled the Commission’s decision of 18 November 2009, as a result of which a new decision has to be taken 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.
Level 2 – Valuation technique supported by observable inputs This category includes financial instruments whose fair value is determined using a valuation technique (e.g. a model), where inputs in the model are taken from an active market or are observable. If certain inputs in the model are unobservable, the instrument is still classified in this category, provided that the impact of those unobservable inputs on the overall valuation is insignificant. Included in this category are items whose value is derived from quoted prices of similar instruments, but for which the prices are modified based on other market observable external data.
Sale of assets –582 –99 –76 –271 –781 –1,809 Maturity/settlement –441 –75 –100 –783 –1,399
Sale of assets –899 –143 –340 –637 –720 –2,739 Maturity/settlement –275 –2 –96 –775 –1,148
Early repayment of liabilities –876 –247 –863 –55 –2,041 Maturity/settlement –326 –1 –561 –888
Liabilities Trading liabilities 119 119 Non-trading derivatives –2 2 Financial liabilities designated as at fair value through profit and loss 85 85 Investment contracts (for contracts carried at fair value) –5 –5
Interest income on available-for-sale securities 3,463 3,532 3,923 Interest income on held-to-maturity securities 400 549 612 Interest income on trading portfolio 27,480 32,692 40,844 Interest income on non-trading derivatives 1,536 1,709 3,936 Other interest income 5,294 4,870 5,528 Interest income banking operations 64,649 68,334 79,850
In 2011, the growth in average total assets led to an increase of the interest result amounting to EUR 135 million (in 2010 the decline in average total assets led to a decrease of the interest result of EUR 90 million; in 2009 the decline in average assets led to a decrease of the interest result of EUR 929 million). The decrease of the interest margin by 2 basis points led to a decrease of the interest result with EUR 139 million (in 2010 the increase of the interest margin by 10 basis points led to an increase of the interest result with EUR 915 million; in 2009 the increase of the interest margin by 25 basis points led to an increase of the interest result with EUR 2,406 million).
In 2011, an impairment of EUR 978 million was recognised on Greek government bonds and an impairment of EUR 189 million was recognised on subordinated debt from Irish banks both are included in Impairments of available-for-sale debt securities. Reference is made to the ‘Risk management’ section for further information on these impairments.
Fee and commission expenses Banking operations Insurance operations Total 40 VALUATION RESULTS ON NON-TRADING DERIVATIVES
The Valuation results on assets and liabilities designated as at fair value through profit and loss includes fair value changes on private equity funds and certain issued debt securities. Valuation results on assets and liabilities designated as at fair value through profit and loss were mainly due to changes in the fair value of financial liabilities driven by changes in market conditions and changes in own credit risk as disclosed in Note 20 ‘Financial liabilities at fair value through profit and loss’. In 2011 market conditions includes in particular credit spread developments.
Income from real estate development projects 31 36 59 31 36 59 Income post office –7 99 –7 99
Gross underwriting expenditure – before effect of investment result for risk of policyholders 34,962 34,523 32,393 – effect of investment result risk of policyholders –1,246 10,492 17,736
The investment income and valuation results regarding investments for risk of policyholders is EUR –1,246 million (2010: EUR 10,492 million; 2009: EUR 17,742 million). This amount is not recognised in Investment income and valuation results on assets and liabilities designated at fair value through profit and loss but in Underwriting expenditure. As a result it is shown together with the equal amount of change in insurance provisions for risk of policyholders.
ING Group transferred its US group reinsurance business to Reinsurance Group of America Inc. in 2010 by means of a reinsurance agreement. The transaction resulted in EUR 70 million ceding commission which is required to be recorded as a deferred gain and amortised over the life of the underlying business, starting in 2010 and gradually decreasing in subsequent years as the business tails off. The amount amortised in 2011 was EUR 16 million (2010: EUR 52 million). The cumulative amortisation as at 31 December 2011 was EUR 69 million (2010: EUR 52 million).
Pension and other staff-related benefit costs 171 199 180 86 114 140 257 313 320
Expected return on assets –877 –886 –842 1 1 –877 –885 –841 Amortisation of unrecognised past service cost 1 –1 –5 –1 –5 –1 Amortisation of unrecognised actuarial (gains)/losses 22 62 106 –4 –9 –5 1 1 5 19 54 106 Effect of curtailment or settlement –110 –7 –96 –110 –7 –96
In 2011 no share awards (2010: nil; 2009: nil) were granted to the members of the Executive Board of ING Groep N.V., 154,440 share awards were granted to the Management Boards of ING Bank N.V., ING Verzekeringen N.V., Insurance Eurasia and Americas Insurance Holdings. To senior management and other employees 20,135,968 share awards (2010: 26,369,146; 2009: 6,273,467) were granted.
ING Group holds its own shares in order to fulfil its obligations with regard to the existing stock option plan and to hedge the position risk of the options concerned (the so-called delta hedge). As at 31 December 2011, 42,126,329 own shares (2010: 45,213,891; 2009: 35,178,086) were held in connection with the option plan compared to 108,138,551 options outstanding (2010: 124,836,694; 2009: 122,334,486). As a result the granted option rights were (delta) hedged, taking into account the following parameters: strike price, opening price, zero coupon interest rate, dividend yield, expected volatility and employee behaviour. The hedge used to be rebalanced regularly at predetermined points in time. In December 2010 ING Groep N.V. announced that it will no longer rebalance its hedge portfolio. This decision is an effort to simplify the management and administration of ING’s various employee share and option programmes. The remaining shares in the hedge portfolio will be used to fund the obligations arising from exercise and vesting. Once all shares in the hedge portfolio are used ING will fund these obligations by issuing new shares.
Interest result banking operations 35 13,449 13,323 12,375 Investment income – insurance operations 37 7,452 7,206 6,617 Other interest expenses –528 –786 –711 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
The weighted average statutory tax rate in 2011 compared to 2010 does not differ significantly.
Unrealised revaluations –873 –1,216 –4,712 Realised gains/losses transferred to profit and loss (reclassifications from equity to profit and loss) –291 8 –494 Changes in cash flow hedge reserve –373 –194 203 Transfer to insurance liabilities/DAC 847 719 1,017 Exchange rate differences –39 8 13 Total income tax related to components of other comprehensive income –729 –675 –3,973 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
The potential conversion of the non-voting equity securities has an anti-dilutive effect on the earnings per share calculation in 2011, 2010 and 2009 (the diluted earnings per share becoming higher or less negative than the basic earnings per share). Therefore, the potential conversion is not taken into account in the calculation of diluted earnings per share for these years.
Basic earnings from discontinued operations 1,104 209 93 3,783.7 3,781.5 2,686.0 0.29 0.06 0.04
Retail Netherlands Insurance Benelux Retail Belgium Insurance Central & Rest of Europe (CRE) ING Direct Insurance United States (US) * Retail Central Europe (CE) Insurance US Closed Block VA Retail Asia Insurance Asia/Pacific Commercial Banking (excluding Real Estate) ING Investment Management (IM) ING Real Estate Corporate Line Insurance Corporate Line Banking * Excluding US Closed Block VA
presented in this note is in line with the information presented to the Executive and Management Board. Underlying result is defined as result under IFRS-EU excluding the impact of divestments and special items. Disclosures on comparative years also reflect the impact of current year’s divestments.
Corporate Line Banking is a reflection of capital management activities and certain expenses that are not allocated to the banking businesses. ING Group applies a system of capital charging for its banking operations in order to create a comparable basis for the results of business units globally, irrespective of the business units’ book equity and the currency they operate in.
– Other interest expenses 910 –350 560 – Additions to loan loss provision 1,667 1,667
Reconciliation between Underlying and IFRS-EU income, expenses and net result 2011 Income Expenses Net result
Underlying income – Gross premium income 27,786 27,786 – Net interest result – banking operations 13,555 –93 13,462
– Other interest expenses 1,122 –336 786 – Additions to loan loss provision 1,742 1,742
Reconciliation between Underlying and IFRS-EU income, expenses and net result 2010 Income Expenses Net result
Divestments in 2009 mainly include the net impact of the sale of ING’s 70% stake in ING Canada, the Nationale Nederlanden Industry Pension fund portfolio, the Annuity and Mortgage businesses in Chile, three US independent retail broker-dealer units (three quarters of ING Advisors Network) and ING Australia Pty Limited as well as the operating result of the in 2009, 2010 and 2011 divested units.
Gains/losses and impairments 14 –29 –564 22 50 10 –15 –512
Market & other impacts 24 –10 –177 –2,149 8 –265 –2,569
North America Latin America Asia Australia Other Eliminations Total 208 ING Group Annual Report 2011
53 NET CASH FLOW FROM INVESTING ACTIVITIES Information on the impact of companies acquired or disposed is presented in Note 30 ‘Companies acquired and companies disposed’.
LIABILITIES Subordinated loans 10,099 10,281 Debt securities in issue 119,981 96,488 Other borrowed funds 23,151 31,198 Insurance and investment contracts 241,006 242,159 Amounts due to banks 84,235 152,265 Customer deposits and other funds on deposit 469,508 522,783 Financial liabilities at fair value through profit and loss – trading liabilities 98,245 152,616 – non-trading derivatives 20,070 21,773 – designated as at fair value through profit and loss 11,474 14,009 Liabilities held for sale 4,890 15,020 Other liabilities 41,236 45,434 Total liabilities 1,123,895 1,304,026
Investment contracts for risk of company 5,896 9,804 5,896 9,804 Investment contracts for risk of policyholders 5,406 11,281 5,406 11,281 Total provisions for investment contracts 11,302 21,085 11,302 21,085 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
Deferred tax liabilities 2,281 3,524 Income tax payable 1,225 940 Pension benefits 589 609 Post-employment benefits 175 219 Other staff-related liabilities 735 342 Other taxation and social security contributions 1,001 1,104 Deposits from reinsurers 870 909 Accrued interest 16,789 17,552 Costs payable 2,654 3,764 Amounts payable to brokers 200 89 Amounts payable to policyholders 2,182 2,231 Reorganisation provision 644 583 Other provisions 747 969 Share-based payment plan liabilities 24 11 Prepayments received under property under development 120 175 Amounts to be settled 5,167 3,753 Dividend payable 425
Changes in the composition of the group Exchange rate differences Other
MISSION AND OBJECTIVES The mission of ING Group’s risk management function is to build a sustainable competitive advantage by fully integrating risk management into daily business activities and strategic planning. This mission is fully embedded in ING Group’s business processes. The following principles support this objective: • Products and portfolios are structured, underwritten, priced, approved and managed appropriately and compliance with internal and external rules and guidelines is monitored; • ING’s risk profile is transparent, managed to avoid surprises, and is consistent with delegated authorities; • Delegated authorities are consistent with the overall Group strategy and risk appetite; and • Transparent communication to internal and external stakeholders on risk management.
GROUP RISK MANAGEMENT FUNCTION The ING Group CRO is supported by the Risk functions of ING Group and by the Group functions Corporate Legal and the Functional Controller Insurance. As a result of the decision to manage ING Bank and ING Insurance separately, ING Group Chief Risk Office has delegated day-to-day Risk Management within ING Bank, ING Insurance Eurasia and ING Insurance US to the respective (deputy) CROs. The Risk functions of ING Group have been delegated to the CRO of ING Bank.
ING Group uses an integrated risk management approach for both its banking activities and for its Insurance activities. With the operational separation of ING Bank and ING Insurance, the focus of ING’s risk management practices is now located in the bank and insurance companies. The remainder of this risk paragraph discusses these practices for ING Group, ING Bank, ING Insurance Eurasia and ING Insurance US respectively. Risk measures related to accounting are based on IFRS-EU where relevant, as IFRS-EU is the primary accounting basis, which is also the basis for statutory and regulatory reporting and risk management.
The table below provides information on ING’s risk exposure with regard to Greece, Italy, Ireland, Portugal and Spain. Unless otherwise indicated, the amounts represent risk exposure values and exposures are included based on the country of residence. CDS exposures in all countries are mostly to financial institutions.
Portugal Total Lending exposure is reported in the balance sheet at amortised cost. Cumulative provisions/impairments recognised on lending exposures amount to approximately EUR 7 million. Debt securities – RMBS are largely reported in the balance sheet at amortised cost. Other debt securities are reported in the balance sheet at fair value (available-for-sale). Cumulative provisions/impairments recognised are less than EUR 1 million.
Spain Total Lending exposure is reported in the balance sheet at amortised cost. Cumulative provisions/impairments recognised on lending exposures amount to approximately EUR 351 million, of which EUR 319 million relates to Corporate lending and EUR 32 million relates to Residential mortgages and other consumer lending. Debt securities – RMBS, Other ABS and Covered bonds are largely reported in the balance sheet at amortised cost. Other debt securities are reported in the balance sheet largely at fair value (available-for-sale). No significant provisions/impairments have been recognised. Debt securities – Covered bonds are backed by mortgage collateral. From the total exposure of EUR 16.8 billion, EUR 14.9 billion is reported in the balance sheet at amortised cost (EUR 11.0 billion Loans and EUR 3.9 billion Held-to-maturity) and EUR 1.9 billion is reported in the balance sheet at fair value (Available-for-sale). No significant provisions/impairments have been recognised. Almost the entire portfolio is investment grade.
Derivatives In these countries, ING Bank has limited derivative exposure and largely enters derivative transactions to help clients reduce exposure to interest and currency movements. Many of these transactions are covered either via CSA agreements or as part of the collateral of the underlying financing. The key credit risk ING Bank faces in these derivative transactions is movements in markets creating an uncollateralised exposure to a counterparty or that the collateral is not sufficient. ING monitors these mark to market movements on a daily basis. At December 31, 2011 ING Bank had no material, uncollateralised exposure to counterparties in these countries.
Monitoring exposures and Current developments The problems in the Eurozone have been a top priority for risk management throughout 2011, and will continue to be a top priority in 2012. ING closely monitors the exposures in debt securities, lending and credit derivatives in the involved countries, and regularly assesses whether the positions still fit with its risk appetite. This assessment is supported by internal stress tests.
Nevertheless, despite these positive signs the Eurozone is not yet out of the doldrums, as many of the fundamental problems still remain. There is no guarantee that the weaker countries will succeed in making their economies more competitive, which is a prerequisite for long-term debt sustainability. Risks and concerns about the debt crisis in Europe, as well as the possible exit from the Eurozone of one or more European states and/or the replacement of the Euro by one or more successor currencies, could have a detrimental impact on the global economic recovery, sovereign and non-sovereign debt in these European countries and the financial condition of European financial institutions, including ING.
Liquidity risk Under the volatile market circumstances in 2011, funding and liquidity risk remains an important topic on the agenda of senior management and Asset and Liability Committee Bank (ALCO), that requires 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. In 2011 the funding and liquidity risk appetite were updated. The appetite statement is set and allocated throughout ING Bank. In addition, funding and liquidity usage is steered by means of funds transfer pricing thus embedding funding and liquidity risk management in the total organisation. ING Group continued to maintain its liquidity position within conservative internal targets.
MISSION AND OBJECTIVES The mission of ING Bank’s risk management function is to build a sustainable competitive advantage by fully integrating risk management into daily business activities and strategic planning. This mission is fully embedded in ING Bank’s business processes. The following principles support this objective: • Products and portfolios are structured, underwritten, priced, approved and managed appropriately and compliance with internal and external rules and guidelines is monitored; • ING Bank’s risk profile is transparent, managed to avoid surprises, and is consistent with delegated authorities; • Delegated authorities are consistent with the overall Bank strategy and risk appetite; and • Transparent communication to internal and external stakeholders on risk management and value creation.
L ev el ti er b o ar d s tr u ct u re
ING Bank’s ‘three lines of defence’ governance framework ensures that risk is managed in line with the risk appetite as defined by the MBB and cascaded throughout the Bank, thereby safeguarding controlled risk taking. The role of the business lines is to maximise the value within established risk boundaries. Each quarter, the MBB monitors that the financial and non-financial risks are within the boundaries of the risk appetite as set in the strategic planning process.
ING Bank has expressed tolerances for its risk weighted solvency metrics (core tier 1 ratio), for non-risk weighted solvency metrics (leverage ratio) and for more value based metrics (economic capital).
Non-Financial Risks Policy implementation To ensure robust non-financial risk management, ING Bank monitors the implementation of ING Bank’s Risk Policies and Minimum Standards. Business units have to demonstrate that the appropriate steps have been taken to control their operational, compliance and legal risks. ING Bank applies scorecards to measure the quality of the internal controls within a business unit. Scoring is based on the ability to demonstrate that the required risk management processes are in place and effective within the business units.
ING BANK ECONOMIC CAPITAL Model Disclosure This model disclosure section explains the methodologies and models used to determine Economic Capital (EC) the disclosed metrics. The risk models for the EC calculations are reviewed on a periodic basis and validated by the internal Model Validation department. The Economic Capital calculation is also used as part of the Basel II Pillar 2 Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation Process (SREP) that is performed regularly by the Dutch Central Bank.
ING Bank Economic Capital and Regulatory Capital Main risk management tools for ING Bank are Economic Capital (EC) and Regulatory Capital (RC). Both of these Capital metrics are used to determine the amount of capital that a transaction or business unit requires to support the economic risks it faces. RC is driven by methodologies prescribed by regulators whereas EC is driven by internally developed models (all of which are approved by the Dutch Central Bank).
The above risk metrics and risk appetite framework do not cover liquidity risk: the risk that ING Bank or one of its subsidiaries cannot meet its financial liabilities, at reasonable cost and in a timely manner, when they come due. ING Bank has a separate liquidity management framework in place to manage this risk, which is described in the Liquidity Risk section of ING Bank. In 2011 the funding and liquidity risk statements have been updated.
Model Disclosure: ING Bank Economic Capital for Credit and Transfer Risk Economic Capital for credit risk and for transfer risk is the portion of Economic Capital held to withstand unexpected losses inherent in the credit portfolios related to (unexpected) changes in the underlying creditworthiness of debtors or the recovery value of underlying collateral (if any). Credit risk and transfer risk capital are calculated on all portfolios which contain credit or transfer risk, including investment portfolios.
Economic Capital for credit risk and for transfer risk are calculated using internally developed models with a 99.95% confidence level and a time horizon of one year, which represents ING’s desired credit rating. ING Bank uses a series of credit risk models that can be grouped into three principal categories: Probability of Default (PD) models, which measure the standalone creditworthiness of individual debtors; Exposure at Default models (EAD) which estimate the size of the financial obligation at the moment of default in the future; and Loss Given Default Models (LGD), which estimate the recovery value of the underlying collateral or guarantees received (if any) and the unsecured part. Collectively, ING Bank uses over 100 models for credit risk. The various models can be grouped into three categories: statistical, expert and hybrid.
Governance of Economic Capital for Credit and Transfer Risk All PD, EAD and LGD models are approved by the Credit Risk Committee (CRC) after thorough review of documentation by the Model Development Committee (MDC) and Model Validation (MV). In addition, each model is validated on an annual basis by MV. Each model has both a credit risk and a front office co-sponsor. Both the MDC and the CRC have participation from both credit risk officers as well as the front office to ensure maximum acceptance by the organisation.
Settlement risk Settlement risk arises when there is an exchange of value (funds, instruments or commodities) for the same or different value dates and receipt is not verified or expected until ING Bank has paid or delivered its side of the trade. The risk is that ING Bank delivers, but does not receive delivery from the counterparty. Settlement risk can most commonly be contained and reduced by entering into transactions with delivery-versus-payment (DVP) settlement methods, as is common with most clearing houses, or settlement netting agreements.
For those transactions where DVP settlement is not possible, ING Bank establishes settlement limits through the credit approval process. Settlement risk is then monitored and managed by the credit risk management units. Risk is further mitigated by operational procedures requiring trade confirmations to counterparties with all transaction details, and by entering into internationally accepted documentation, such as International Swaps and Derivatives Association (ISDA) Master Agreements for derivative transactions. Additionally, ING Bank regularly participates in projects with other financial institutions to improve and develop new clearing systems and clearing mechanisms to further reduce the level of settlement risk. Due to the very short-term nature of settlement exposure (daily or intra-day), settlement risks do not attract economic or regulatory capital and are excluded from risk reporting disclosures.
In countries where ING Bank is active, the relevant country’s risk profile is regularly evaluated, resulting in a country rating. Country limits are based on this rating and ING Bank’s risk appetite. Exposures derived from lending, investment pre-settlement and money market activities are then measured and reported against these country limits on a daily basis. Country risk limits are assigned for transfer risk mainly for emerging markets.
Compensation and master agreements ING Bank uses various market pricing and measurement techniques to determine the amount of credit risk on pre-settlement activities. These techniques estimate ING Bank’s potential future exposure on individual and portfolios of trades. Master agreements and collateral agreements are frequently entered into to reduce these credit risks.
Repossession policy It is ING Bank’s general policy not to take possession of assets of defaulted debtors. Rather, ING Bank attempts to sell the assets from within the legal entity that has pledged these assets to ING Bank, in accordance with the respective collateral or pledge agreements signed with the obligors. In those cases where ING Bank does take possession of the collateral, ING Bank generally attempts to sell the assets as quickly as possible to prospective buyers. Based on internal assessments to determine the highest and quickest return for ING Bank, the sale of repossessed assets could be the sale of the obligor’s business as a whole (or at least all of its assets), or the assets could be sold piecemeal. With regard to the various mortgage portfolios, ING Bank often has to take possession of the underlying collateral but also tries to reduce the amount of time until resale.
(2) Covered bonds are presented on the basis of the external credit rating of the issuer in question. Covered bond issues generally possess a better external credit rating than the issuer standalone, given structural features of such covered bonds.
Largest economic exposures: ING Bank lending portfolio, by geographic area (1)
For each product or category, the cover amounts are then reported for the most relevant collateral categories being Mortgages and Cash, and for the most relevant Promises category being Guarantees. The remaining collaterals and promises are included in the category Other.
The cover tables show a break down of ING Bank’s retail and commercial portfolios. The Residential Mortgages portfolio relates to private individuals. The growth in this portfolio was mainly driven by United Kingdom, Germany and Belgium. The Financial Institutions portfolio is comprised of commercial banks, central banks and non-bank financial institutions. The increase in this portfolio was mainly driven by The Netherlands. Corporates range from large enterprises to small and medium sized companies. Governments consist of all governmental layers, from local to national.
Loan-to-Value (LTV) 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. ING Bank has a team of specialists for the valuation of real estate, which is supplemented with external and desk top valuation. In some countries residential mortgages are covered by governmental or commercial insurers. For example the Nationale Hypotheek Garantie (NHG) in The Netherlands, which guarantees the repayment of a loan in case of a forced property sale. The LTV in The Netherlands is relatively high, but is partially compensated by the NHG guaranteed portfolio and other secondary covers, such as life insurance policies, savings and investment products. The average LTV in the Netherlands is 81% (2010: 80%). When available, indexation is applied to revaluate 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. The ING Bank’s total residential mortgage portfolio amounts to EUR 341 billion, making up 39% of the ING Bank’s total credit risk outstandings. The average Loan to Value (LTV) of the total residential mortgage portfolio amounts to 75% (2010: 74%).
Problem loans Past-due obligations ING Bank continually measures its portfolio in terms of payment arrears. Particularly the retail portfolios are closely monitored on a monthly basis to determine if there are any significant changes in the level of arrears. Generally, an obligation is considered ‘past-due’ if a payment of interest or principal is more than one day late. In practice, the first 5–7 days after an obligation becomes past due are considered to be operational in nature for retail loans and small businesses portfolios. After this period, letters are sent to the obligor reminding the obligor of its (past due) payment obligations. If the arrear still exists after 90 days, the obligation is transferred to one of the ‘problem loan’ units. In order to reduce the number of arrears, ING banking units encourage their obligors to set up automatic debits from their (current) accounts to ensure timely payments.
Model Disclosure: ING Bank Economic Capital for Market Risk Economic Capital for market risk is the Economic Capital necessary to withstand unexpected value movements due to changes in market variables. Economic Capital for market risk is calculated for exposures both in trading portfolios and non-trading portfolios and includes real estate risk, foreign exchange rate risk, equity price risk, interest rate risk and model risks. Economic capital for market risk is calculated using internally developed methodologies with a 99.95% confidence interval and a horizon of one year, which represents extreme events and ING’s target rating.
Economic Capital for market risk for the mortgage portfolios within ING Retail Banking (Benelux, Direct and International Banking) and ING Commercial Banking is calculated for embedded option risk (e.g. the prepayment option and offered rate option in mortgages). The embedded options are hedged using a delta-hedging methodology, leaving the mortgage portfolio exposed to convexity and volatility risk.
Model Disclosure Value at Risk MRM uses the historical simulation Value at Risk (VaR) methodology as its primary risk measure. The VaR for market risk quantifies, with a one-sided confidence level of 99%, the maximum overnight loss that could occur due to changes in risk factors (e.g. interest rates, equity prices, foreign exchange rates, credit spreads, implied volatilities) if positions remain unchanged for a time period of one day. Next to general market movements in these risk factors, VaR also takes into account market data movements for specific moves in e.g. the underlying issuer of securities. The impact of historical market movements on today’s portfolio is estimated, based on equally weighted observed market movements of the previous year. ING Bank uses VaR with a 1-day horizon for internal risk measurement, control and back testing, and VaR with a 10-day horizon for determining regulatory capital.
Back testing Back testing is a technique for the ongoing monitoring of the plausibility of the VaR model in use. Although VaR models estimate potential future results, estimates are based on historical market data. In a back test, the actual daily result is compared with the 1-day VaR. In addition to using actual results for back testing, ING Bank also uses hypothetical results, which measure results excluding the effect of intraday trading, fees and commissions. When the actual or hypothetical loss exceeds the VaR an ‘outlier’ occurs. Based on ING Bank’s one-sided confidence level of 99% an outlier is expected once in every 100 business days. In 2011, like in 2010, there was no occurrence where a daily trading loss exceeded the daily consolidated VaR of ING Commercial Banking. ING Bank reports the results of this back testing to DNB on a quarterly basis.
Basel 2.5 / CRD 3 The Basel Committee has proposed to supplement the current VaR regulatory capital framework for trading exposures with Incremental Risk Charge and Stressed VaR to cover for the shortcomings of the existing regulatory risk framework. The Basel requirements on the Incremental Risk Charge and stressed VaR have come into force in European legislation (CRD 3) as of 31 December 2011 and are included in the regulatory capital as of Q4 2011.
Incremental Risk Charge With the Incremental Risk Charge (IRC) ING Bank calculates an estimate of default and migration risk for unsecuritised credit products in the trading book over a one-year capital horizon at a 99.9% confidence level. For the calculation of IRC ING Bank performs a Monte Carlo simulation based on a Gaussian copula model. For all issuers the rating is simulated over the different liquidity horizons (time required to liquidate the position or hedge all material risks) within one year. The financial impact is then determined based on the migration to default (based on LGD), or migration to a different rating category (based on credit spread changes).
Diversification effect (2) –12 –11 –8 Total VaR Internal Model Approach (1-day, 99%) 11 28 18 15 17
(2) The total VaR for the columns Minimum and Maximum can not be calculated by taking the sum of the individual components since the observations for both the individual markets as well as total VaR may occur on different dates.
Incremental Risk Charge 437 n/a Total Internal Model Approach 1,090 227 Standardised model 34 137
Interest Rate (BPV (1)) Interest Rate (BPV (1)) United States 331 Eurozone –377 UK –163 United States 167 Mexico –120 Mexico –147 Russia –96 Japan 141 Japan –86 Russia –73
In the risk transfer process, client behavioural characteristics play an important role. The behaviour in relation to mortgages, loans, savings and demand deposits is modelled by MRM, following extensive research. Models and parameters are back-tested regularly and updated when deemed necessary. In the modelling of savings and current accounts different elements play a role: pricing strategies, outstanding and expected volumes and the level and shape of the yield curve. The analyses results in an investment rule for the various portfolios. With respect to mortgages and loans, prepayment behaviour and the interest sensitivity of the embedded offered rate options are modelled.
In line with other commercial businesses, ING Direct transfers interest rate risk out of their commercial books to a large extent. The difference being that the risks are transferred directly to the external market, instead of to the risk center (FM ALM).
The NPV-at-Risk is dominated by the interest rate sensitive long-term investments of own funds. The value of these investments is impacted significantly if interest rates move up by 1%. Convexity risk in retail portfolios as well as the strategic interest position in FM ALM also contributes significantly to the overall NPV at Risk.
The US dollar Net Exposure decreased significantly in 2011. Anticipating on the announced sale of ING Direct USA, the risk-weighted assets will decrease and therefore, a lower Net Exposure is required. This is then achieved by increasing the hedge. The decreased Net exposure in the category ‘Other currency’ is mainly caused by changed share prices of strategic equity stakes. For example, the share price of the bank’s equity stake in Bank of Beijing decreased around 20%, decreasing the Chinese renmimbi currency exposure.
Real Estate Exposure banking books not revalued through P&L (by geographic area and sector type) 2011 2010 2011 2010
Governance As with other bank market risks, liquidity risk falls under the supervision of the ALCO function within ING Bank, with ALCO Bank as the highest approval authority. ALCO Bank determines the liquidity risk (limit) framework and appetite after which this is cascaded down in the organisation under the responsibility of the regional and local ALCOs. The main objective of ING Bank’s liquidity risk framework is to ascertain – by means of proper risk appetite limits – that sufficient liquidity is maintained in order to ensure safe and sound operations under a variety of circumstances. For this purpose liquidity risk is measured, managed and controlled from three different angles, namely a structural, a tactical and a contingency point of view.
This committee which consists of key representatives from MRM, Capital Management and Financial Markets focuses on all liquidity risk aspects from a going concern perspective. The main objective of the committee is to maintain a sound liquidity profile through: • Maintaining a well diversified mix of funding sources in terms of instrument types (e.g. unsecured deposits, commercial paper, long term bonds or repurchase agreements), fund providers (e.g. professional money market players, wholesale and retail clients), geographic markets and currencies; • Actively managing access to the capital markets by regularly issuing public debt in all material markets and the maintenance of investor relations; • Holding a broad portfolio of eligible assets that can be utilised to obtain secured funding, e.g. from the repo market or (E)CB; in this respect the total marketable/(E)CB eligible collateral position amounts to EUR 194 billion (MtM); • Management of liquidity gaps, taking into account the asset mix and both the secured and unsecured funding opportunities of ING Bank; and
With respect to funding sources, ING Bank aims to fund its own originated assets (loans) by an equal amount of own originated liabilities (deposits), translated into an LtD target of below 1.2. Ultimo 2011 the LtD ratio (excluding securities at amortised costs and IABF receivable) equals 1.14. In 2011, uncertainty with regard to economic developments in both Europe and USA, led to US MM Funds being more restrictive in funding European counterparties. As ING Bank manages its balance sheet prudently, whereby short-term funding is primarily utilised for short-term assets, a decrease of these type of funding sources is manageable. The table below shows the funding mix.
Funding type Retail deposits 42% 46% Corporate & other deposits 20% 19% Interbank (incl. central bank) 9% 8% Lending/repurchase agreement 7% 7% Public debt 19% 17% Subordinated debt 3% 3%
New developments All financial institutions have been confronted with a large number of new regulatory requirements. In 2011 ING Bank updated its framework for funding and liquidity risk management so that it provides for an integral approach of liquidity risk management and complies with the changed regulatory rules (CRDII, ILAAP). The framework contains, among others, the annual setting of a funding and liquidity risk appetite related to the ING Bank strategy, a continuous cycle of identification, assessment, control, monitoring and reporting of funding and liquidity risk, a policy covering all legal and regulatory rules, crisis planning and stress testing. The framework will be implemented in 2012.
Clear and accessible policies and minimum standards are embedded in ING Bank business processes in all business lines. An infrastructure is in place to enable management to track incidents and operational risk issues. A comprehensive system of internal controls creates an environment of continuous improvement in managing operational risk. ING Bank uses this knowledge (including lessons learned from incidents) to improve the control of key risks.
Processes are in place to identify key threats, vulnerabilities and the associated risks which might cause adverse events. Event identification is performed proactively and precedes a risk assessment. Different techniques for event identification exist within ING Bank, e.g. risk & control self assessments, scenario analysis, external events inventories, internal incident analysis (e.g. lessons learned based on information from incident reporting), key risk indicator events and threat scans.
Loss Distribution approach The main objective of the LDA approach is to derive an objective Operational Risk capital amount based on the risk profile of a bank and its business units. This approach estimates the distribution of operational risk losses for each combination of business line and loss event type.
Extra-territorial regulations Financial institutions continue to be closely scrutinised by regulatory authorities, governmental bodies, shareholders, rating agencies, customers and others to ensure they comply with the relevant laws, regulations, standards and expectations. Bank regulators and other supervisory authorities in Europe, the US and elsewhere continue to oversee the activities of financial institutions to ensure that they operate with integrity and conduct business in an efficient, orderly and transparent manner. ING Bank seeks to meet the standards and expectations of regulatory authorities and other interested parties through a number of initiatives and activities, including scrutinizing account holder information, payment processing and other transactions to support compliance with regulations governing money laundering, economic and trade sanctions, bribery and other corrupt practices. The failure or alleged failure by ING Bank to meet applicable standards in these areas could result in, among other things, suspension or revocation of ING Bank’s licenses, cease and desist orders, fines, civil or criminal penalties and other disciplinary action which could materially damage ING Bank’s reputation and financial condition, and accordingly ING Bank’s primary focus is to support good business practice through its Business Principles and policies.
• Promoting Integrity Programme – Bank Compliance Risk Management, together with Human Resources and Corporate Communications & Affairs, continued with the roll-out of the Promoting Integrity Programme (PIP), a global employee education programme focusing on ING Bank’s values (including the ING Bank Business Principles) and the role they play in the business and workplace. Short e-modules were developed on Customer Trust and Anti-Fraud and were followed by manager-led dialogue sessions, where employees discussed what integrity means for them and how the Business Principles and ING Bank Policies and standards can be applied in their daily work.
• Learning – Continuous global education and awareness training was provided through face-to-face training sessions and learning tools on topics such as Ultra High Risk Countries & Export Trade, Financial Economic Crime, and Gifts, Entertainment and Anti-Bribery. Compliance Risk Management also continued its mandatory global Compliance Officer Training programme for all compliance officers new to ING Bank.
ONGOING CHANGES IN THE REGULATORY ENVIRONMENT • The most important regulatory issue for the insurance industry is the continued development by the European Union of the Solvency II
L ev el 1st line of defence 2nd line of defence 3rd line of defence ti er b o ar d s tr u ct u re Risk management continued
Board level risk oversight ING Insurance Eurasia has a two-tier board structure consisting of the Management Board Insurance Eurasia (MBI Eurasia) and the Supervisory Board Insurance Eurasia.
The MBI Eurasia is responsible for managing the risks associated with the activities of ING Insurance Eurasia. The MBI Eurasia’s responsibilities include ensuring the risk management and control systems are effective and ING Insurance Eurasia complies with legislation and regulations. The MBI Eurasia reports and discusses these topics on a regular basis with the Supervisory Board, and reports to the Risk Committee on a quarterly basis on ING Insurance Eurasia’s risk profile versus its risk appetite.
Executive Level The MBI Eurasia has delegated tasks to two committees with regards to risk: • Finance and Risk Committee The primary responsibility of the committee is to align finance and risk decisions that have an impact on internal and/or external reporting of ING Insurance Eurasia. This includes advising on, (pre-)approving, reviewing and taking actions on issues that impact the financial condition of ING Insurance Eurasia. The Finance and Risk committee has two sub-committees dealing with different risk areas: – Eurasia Model Committee – The authority that approves methodologies, models and parameters used for measuring Risk, Economic
Reserve adequacy The ING Insurance Eurasia Group Actuary instructs and supervises all ING Insurance Eurasia entities to ensure that the IFRS insurance liabilities of ING Insurance Eurasia are tested for adequacy taking into account the insurance premium rate levels and the uncertainty of future returns on investments. The reserve adequacy test is executed by evaluating insurance liabilities on current best estimate actuarial assumptions plus a risk margin, ensuring that the reserves remain adequate based on these assumptions. The assumed investment earnings are a combination of the run-off of portfolio yields on existing assets and new money and reinvestment rates. For short-term and reinvestments, new money rates are used. For other reinvestments, long-term best estimate assumptions are taken into account. For many products stochastic testing is required, taking the 90th percentile of results as the required level. In the case where deterministic testing is used, the 90% confidence level is achieved by subtracting risk margins of 20% from the best-estimate interest rates or one percent point, whichever is higher.
Financial Risk Dashboard The Financial Risk Dashboard (FRD) is a report that is discussed quarterly in the Risk Committee of MBI Eurasia and in the Financial Risk Committee. The FRD provides an overview of the main financial risk metrics compared to the limits set by management in alignment with the risk appetite.
Non-Financial Risks To ensure robust non-financial risk management, which is also reflected in the risk tolerance levels, ING Insurance Eurasia monitors the full implementation of risk policies, minimum standards and implementation guidelines. Business units have to demonstrate that the appropriate steps have been taken to control their operational and compliance risk. ING Insurance Eurasia applies scorecards to measure the quality of the internal control within a business unit. Scoring is based on the ability to demonstrate that the required risk management processes are in place and effective within the business units.
ING INSURANCE EURASIA RISK PROFILE Risk type description ING Insurance Eurasia identifies the following main types of risk that are associated with its business: • Insurance risk – risks such as mortality, morbidity, longevity and property and casualty associated with the claims under insurance policies it issues/underwrites; specifically, the risk that premium rate levels and provisions are not sufficient to cover insurance claims; • Business risk – risk driven by the possibility that experience deviates from expectations with respect to policyholder behaviour, expenses and premium re-rating. These fluctuations can occur because of internal, industry, or wider market factors. It is the risk inherent in strategy decisions and internal efficiency, and as such strategic risk is included in business risk; • Market risk – the risk of potential losses due to adverse movements in market variables. Market risks include interest rate, equity, real estate, implied volatility, credit spread including illiquidity premium, and foreign exchange risks; • Credit risk – the risk of potential losses due to default by ING Insurance Eurasia debtors (including bond issuers) or trading counterparties • Liquidity risk – the risk that ING or one of its subsidiaries cannot meet its financial liabilities when they come due, at reasonable cost and in a timely manner. Liquidity risk can materialise both through trading and non-trading positions; • Operational risk – the risk of direct or indirect losses resulting from inadequate or failed internal processes, people and systems or from external events. It includes reputational risk, as well as legal risk; • Compliance risk – 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.
For EC calculation ING Insurance Eurasia uses a one-year time horizon. In practice, the EC model calculates instantaneous quarterly shocks, which are annualised to determine the annualised EC. The quarterly shock is used as this stabilises the results and the shocks are within a range that can be more credibly valued for assets and liabilities. A quarterly shock also proves to have more consistency in how correlations between risk factors are defined and therefore align closer to actual risk processes and reporting cycles.
ING Insurance Eurasia has carried out a review of the internal model in the context of a Solvency II gap analysis. In that review we benchmarked our models against the Solvency II Standard Formula, the EIOPA consultation papers and comments of expert groups like CRO Forum and Group Consultatif. In the Annual Report 2010 it was estimated that these changes would result in a material increase of EC between EUR 1 billion and EUR 2 billion. During 2011 further refinements and analyses took place which on a comparable basis would lead to an increase in the EC of 2010 of EUR 3.0 billion. The changes are related to equity risk (EUR 0.6 billion), operational risk (EUR 0.1 billion), credit spread and illiquidity premium risk (EUR 1.3 billion), business risk (EUR 0.1 billion) and less diversification (EUR 0.9 billion). The Solvency II legislative process is still ongoing. In particular, aspects determining the valuation of the policyholder liabilities and thereby the sensitivity to market and other risk factors on the own funds are not yet settled. The Economic Capital model will continue to be updated to reflect most recent market data, developments in best practices, and Solvency II legislation.
Insurance Benelux 3,988 5,075 Insurance Central & Rest of Europe 859 1,126 Insurance Asia/Pacific 2,919 2,759 Corporate Line Insurance Eurasia (1) 2,520 2,358 Total insurance Eurasia 10,286 11,318
(1) Corporate Line Insurance Eurasia includes funding activities at ING Insurance Eurasia level, explicit internal transactions between business unit and Corporate Line Insurance Eurasia managed by Capital Management, and corporate reinsurance. The responsibility (and risk) of free assets located within the business line for which there is no explicit transfer via a Corporate Line transaction remain at the business unit level.
EC: Less surrenders of policies with in-themoney guarantees and higher surrender of policies with higher profitability in Asia
Model disclosure The table below shows the main risk categories for market risk within ING Insurance Eurasia. EC numbers are based on a 99.5% confidence interval on a one-year horizon. IFRS and AFR sensitivities measurement is described in the table below.
Interest Rate Impact of interest rate changes in assets and liabilities
IFRS Earnings, AFR & EC: Direct equity exposure and embedded options in guaranteed separate account pension business in the Netherlands and embedded options in VA business in Japan
Real Estate Price Risk Impact of the value of Real Estate assets because of a change in earnings related to Real Estate activities and/or a change in required investor yield
AFR & IFRS earnings sensitivities: – For AFR this is measured by the impact of a 15% drop in real estate prices for all real estate holdings – For IFRS Earnings this is measured by the impact of a 15% drop in real estate prices only for the minority holdings and direct for all real estate revalued through P&L. Other holdings will be included in case of a possible impairments caused by the drop in prices
Economic capital mainly reduced due to a decrease in equity risk caused by market conditions and additional hedges which were put in place for the direct equity holdings in the Benelux. In addition credit spread risk reduced as Southern European government bonds were replaced by Dutch, Japanese and German government bonds.
Interest Rate Up 746 –220 601 –170 Interest Rate Down –1,601 405 –1,462 251 Equity –823 308 –1,720 –85 FX –972 –89 –877 –113 Implied Volatility –432 –116 –463 n/a Credit Spread –180 –35 –1,912 0 Real Estate –790 –782 –798 –791
The Available Financial Resources are currently mainly sensitive to downward interest rates movements and declining equity and real estate prices. Compared to 2010 the downward interest rate sensitivity was reduced by hedges put in place in the Benelux. The sensitivity to equity prices was reduced because of hedges put in place in the Benelux to protect the direct equity exposure. Credit Spread reduced significantly compared to 2010 due to an increased offsetting effect of liquidity premium present in spreads.
The IFRS earnings are mainly sensitive to interest rate movements and a decline in real estate prices. During 2011 the sensitivities for Real Estate risk remained fairly stable. The Interest rates sensitivities compared to 2010 are mainly influenced by the additional hedges put in place in the Benelux. IFRS sensitivities for implied volatility of interest rates and of equity are disclosed since 2011.
ING Insurance Eurasia has two different categories of real estate exposure on its insurance books. First, ING Insurance Eurasia owns buildings it occupies. Second, ING Insurance Eurasia has invested capital in several real estate funds and direct real estate assets. A decrease in real estate prices will cause the value of this capital to decrease and as such ING Insurance is exposed to real estate price shocks.
As at 31 December 2011, ING Insurance Eurasia has EUR 3.6 billion of real estate related investments (excluding leverage). ING Insurance Eurasia’s real estate exposure (i.e. including leverage) is EUR 5.7 billion of which EUR 3.2 billion is recognised at fair value through P&L and EUR 2.5 billion is not revalued through P&L, but is either booked at cost or is revalued through equity (with impairments going through P&L). In total, real estate exposure increased by EUR 35 million, mainly as a result of positive fair value changes (EUR 22 million), net investments (EUR 126 million) and FX revaluation (EUR 8 million) offset by divestments (EUR 87 million) and impairments (EUR 34 million).
CREDIT RISK The main credit risk for ING Insurance Eurasia stems from the bond portfolio. This risk is largely measured through the credit spread risk economic capital that is part of the market risk methodology. The spread risk captures differences in risk (and diversification) between rating classes and regions, but does not capture idiosyncratic risk. This name-specific risk is measured in the Credit Default model, using every bond issuer’s probability of default (PD) and stressed loss given default (LGD). For corporate bonds, the idiosyncratic risk is also managed with rating based issuer & lending limits that prevent large exposures in one (group of related) single name(s). An outright loss given default limit serves as the final backstop for corporate exposures. Government exposures are separately monitored. The credit risk profile is monitored and reported in the Investment Risk Dashboard.
Given the size of the portfolio, term loans (including private placements) are a much smaller source of credit risk for ING Insurance Eurasia. These exposures are also included in the issuer & lending limit monitoring. Residential mortgages and policy loans form the retail credit risk exposures of ING Insurance Eurasia. Credit risks are contained through underwriting criteria and the availability of collateral.
Risk Concentration: ING Insurance Eurasia portfolio, by economic sector (1) (2)
Mitigation ING Insurance Eurasia uses different credit risk mitigation techniques, of which the use of ISDA Master Agreements accompanied with Collateral Agreements for all OTC derivative-transactions is an important example. Other forms of cover are mortgages and guarantees, both are important to enhance the credit quality of ING Insurance Eurasia’s mortgage portfolios.
The credit covers in the above table represent the sum of all existing covers, however excess cover amounts on specific assets cannot be put in place for other assets without covers, or with a cover amount that is smaller than the underlying exposure. The valuation methods for covers may vary per cover.
Impaired loans and provisions The credit portfolio is under constant review. Generally, all loans with past due financial obligations of more than 90 days are automatically reclassified as impaired. For the wholesale lending portfolios and securities obligations, there are generally reasons for declaring a loan impaired prior to being 90 days past due. These include, but are not limited to, ING Insurance Eurasia’s assessment of the customer’s perceived inability to meet its financial obligations, or the customer filing for bankruptcy or bankruptcy protection. In some cases, a material breach of financial covenants will also trigger a reclassification of a loan to the impaired category. ING Insurance Eurasia identifies those loans as impaired loans when it is likely that the principal and interest amounts contractually due will not be collected in accordance with the contractual terms of the loan agreements, based on current information and events. A formal analysis takes place quarterly to determine the provisions for possible bad debts, using a bottom-up approach. Conclusions are discussed in the Disclosure Committee, which advises the Management Board on specific provisioning levels.
LIQUIDITY RISK Liquidity risk refers to the risk that a company is unable to settle financial obligations when they fall due. Liquidity in this context is the availability of funds, or certainty that funds will be available without significant losses, to honour all commitments when due. ING Insurance Eurasia identifies two related liquidity risks: funding liquidity risk and market liquidity risk. Funding liquidity risk is the – primary – risk that ING Insurance Eurasia will not have the funds to meet its financial obligations when due. Market liquidity risk is the – secondary – risk that an asset cannot be sold without significant losses. The inter relation with funding liquidity stems from the fact that when payments are due, and not enough cash is available, investment positions need to be converted into cash. When Market liquidity is low, this would lead to a loss.
ING Insurance Eurasia defines three levels of Liquidity Management. Short-term liquidity, or cash management covers the day-to-day cash requirements under normal business conditions and targets funding liquidity risk. Long-term liquidity management considers business conditions, in which market liquidity risk materialises. Stress liquidity management looks at the company’s ability to respond to a potential crisis situation. Two types of crisis liquidity events can be distinguished: a market event and an ING Insurance Eurasia specific event. These events can be short-term or long-term and can both occur on a local, regional or global scale. Depending on the type of event, the policy also defines the composition of the crisis teams.
For Operational Risk ING Insurance Eurasia has developed a framework governing the process of identifying, assessing, mitigating, monitoring and reporting operational risks. The framework is based on the elements of the Enterprise Risk Management model of COSO (Committee of Sponsoring Organisations of the Treadway Commission). The Operational Risk capital calculation is described in the Economic capital section.
The Operational risk function works with the Operational Risk Management (ORM) Scorecard process to evaluate yearly the embedding level of the ORM Framework in each business. Policies and minimum standards governing the framework are kept in the policy house. During 2011 Operational Risk started with the implementation of this policy house in which the existing policies are kept in a well structured and easy to access manner.
The following principles support this objective: • A transparent communication to internal and external stakeholders on risk management and value creation; • Compliance with internal and external rules and guidelines is monitored; • Products and portfolios are structured, underwritten, priced, approved and managed appropriately; • The risk profile of ING Insurance US is transparent, managed to avoid surprises and is consistent with delegated authorities; • Delegated authorities are consistent with the overall ING Insurance US strategy and risk appetite.
The Supervisory Board is responsible for supervising the policy of the MB AIH, the general course of affairs of the Company and its businesses. For Risk Management purposes the Supervisory Board is assisted by two sub-committees: • The Audit Committee assists in reviewing and assessing ING Insurance US’s major risks and the operation of internal risk management and control systems, as well as policies and procedures regarding compliance and its applicable laws and regulations; • The Risk Committee assists in matters related to risk governance, risk policies and risk appetite setting.
ING INSURANCE US RISK FRAMEWORK In order to manage the risk on a day-to-day basis and balance value, earnings and capital decisions, ING Insurance US has implemented a risk limit framework. The risk limit framework follows a top down approach.
The potential reduction, under a moderately adverse market and credit stress scenario, of the excess of available statutory capital above the minimum required under the US regulatory Risk Based Capital (RBC) methodology. The RBC methodology is prescribed by the National Association of Insurance Commissioners (NAIC) and applies to US domiciled regulated insurance entities. The amount of excess capital targeted is also dependent on rating agency models and requirements.
• IFRS Earnings sensitivities The sensitivity of realised pre tax earnings of the insurance operations over a 12 month period to moderate shocks to underlying risk factors.
• Liquidity risk – the risk that ING or one of its subsidiaries cannot meet its financial liabilities when they come due, at reasonable cost and in a timely manner. Liquidity risk can materialise both through trading and non-trading positions.
• Operational risk – the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events. It includes reputation risk, as well as legal risk.
Mitigation In general insurance risks cannot be (easily) hedged directly at the financial markets and tend to be mitigated by diversification across large portfolios. They are therefore managed at the contract level through standard underwriting policies, product design requirements, independent product approval processes and risk limitations related to insurance policy terms and conditions agreed with the client.
Risk not mitigated by diversification is managed through concentration and exposure limits and through reinsurance and/or securitisations: • Tolerance limits for life insurance risk are set per insured life and significant mortality and morbidity events affecting multiple lives such as pandemics; • Reinsurance is used to manage tolerance levels according to the ING Insurance US reinsurance credit risk policy; • Catastrophic losses resulting from events such as terrorism are considered to be uninsurable. ING Insurance US participates in industry pools in various countries to mitigate this risk.
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: Description Key Drivers
Sensitivities of various guarantees (e.g. minimum interest rate guarantees, and guaranteed living benefits). CB-VA and GMIRs of insurance products
– For equity – measured by the impact of a relative increase in implied volatilities based on tenor – 80% for tenors less than 1 year, up 30% for tenors between 1and 3 years, up 20% for tenors between 3–7 years and up 10% for tenors of 7 years and above
FX – Impact of losses related to changes in real estates – Measured by the worst case impact of a 10% up and down movement for each currency
ING Insurance US has no significant earnings sensitivity to Foreign Exchange Rates as ING Insurance US is managed on a local currency basis and therefore there is no translation risk to the Group reporting currency included. There is no significant earnings exposure to non-US currencies. From the ING Group perspective, there may be some translation risk between USD based operations and EUR basis.
ING Insurance US earnings sensitivies are shown in the tables below. Taking into account diversification between risk factors, ING Insurance US (excluding CBVA) is exposed to a EUR 1.0 billion decrease in expected IFRS Earnings within the context of the market and non-market sensitivity analysis. The changes from 2010 to 2011 are the result of many factors including: • Reduction in interest rates increasing exposure to further declines in rates due to product guarantees; • Hedging programs, including various actions taken to reduce the risk of declining rates; • Turnover of the asset portfolio; and • Incorporation of mean reversion in DAC calculations by Retirement Services 272 ING Group Annual Report 2011
Interest Rate Up 72 13 Interest Rate Down –146 –34 Equity –293 –374 Credit-Default –355 –513 Credit-Spread –188 –269
Due to the lack of excess reserve adequacy, CBVA results may be volatile under certain economic scenarios. This volatility is shown in the table above which shows the estimated sensitivity of IFRS earnings to immediate changes in equity markets. For, example, as of 31 December, 2011 it is estimated that if equity markets were to increase 25%, CBVA would be exposed to an immediate EUR 0.9 billion decrease in IFRS Earnings and an increase in the reserve adequacy at the 50% confidence level of EUR 0.95 billion. This immediate sensitivity is not directly comparable to the 12 month sensitivities shown in the preceding table.
The credit default exposure relates to general account debt securities. Exposure to Asset Backed Securities (ABS) and Residential Mortgage Backed Securities (RMBS) contributes significantly to the earnings sensitivity.
The risk concentration per sector remains very similar to last year, with the largest decrease shown for Non-Bank Financial institutions which decreased by 2.9%. Please note that this category largely consists of special purpose vehicles that issue RMBS, ABS and CMBS securities.
Largest economic exposures: ING Insurance US portfolio, by geographic area (1)
Mitigation Credit Risk in ING Insurance US portfolio is partially mitigated by collateral it has received. • The entire block of commercial mortgages (EUR 6.7 billion) is collateralised with mortgages on real estate properties. The weighted average loan to (most recent) value of this portfolio was 55% as per 31 December 2011. • The EUR 10 billion private placement portfolio is partially collateralised with assets pledged to the consortium of lenders. • The EUR 1.7 billion policy loan portfolio is fully collateralised by the cash value of the underlying insurance policies. • The gross counterparty risk exposure to reinsurance companies (EUR 5.8 billion per 31 December 2011) is largely collateralised with assets held in trust (EUR 4.0 billion), letters of credit (EUR 1.8 billion), or funds withheld (EUR 1.1 billion). Please note however that some exposures are over collateralised and that there is a total of EUR 1.7 billion of uncollateralised reinsurance counterparty risk exposure.
Exposures related to Securities Lending, Reverse Repo, and exchange traded instruments are obviously also collateralised.
Problem Loans ING Insurance US does not have any material past-due or impaired loans. The only type of investments that fall into the loan category are commercial mortgage loans. As soon as such loans become non-performing, the collateral is typically liquidated or the loan is sold.
Impaired loans and provisions ING Insurance US mainly has bond investments. The amount of impaired loans in its portfolio is very small and limited to commercial mortgage loans.
Risk appetite is defined as the risk level management is prepared to tolerate. The operational risk appetite levels are set by ING Group in the form of a risk footprint. Via Operational Risk Committees (ORCs) it is ensured that responsible line managers mitigate the risks that are not within the risk appetite. Incidents and operational risks are tracked and on a quarterly basis reported to management in the Non-Financial Risk Dashboard.
The Scope of the Compliance function The ING Insurance US Compliance function focuses on managing the risks arising from laws, regulations and standards which are specific to the financial services industry. The Compliance function actively educates and supports the business in managing compliance risks including anti-money laundering, preventing terrorist financing, conflicts of interest, sales practices for insurance and investment products, trading conduct and protection of customer interests.
The Model Disclosure table previously shown in Market Risk section for Earnings at Risk is the same overview of the shock scenarios applied for regulatory capital sensitivities.
ING applies the following main capital definitions: • Adjusted Equity (ING Group) – This rating agency concept is defined as shareholders’ equity plus core Tier 1 securities, hybrid capital and prudential filters. See ‘Capital Base’ disclosures in this section. This capital definition is applied in comparing available capital to core debt for ING Group; • Insurance Group Directive capital (ING Insurance) – This regulatory concept is defined as shareholders’ equity plus hybrid capital, prudential filters and certain adjustments. IGD capital is calculated in accordance with method 3 ‘method based on accounting consolidation’ of the Dutch Act on Financial Supervision. In this method the solvency margin is calculated on the basis of the consolidated accounts and is the difference of (i) the assets eligible for the inclusion in the calculation of the solvency margin based on the consolidated data; and (ii) the minimum amount of the solvency margin calculated on the basis of the consolidated data. In applying this method a solvency deficit of an insurance subsidiary, if any, is taken into account, as well as regulatory adjustments of the Dutch insurance subsidiaries based on the Dutch Act on Financial Supervision. See ‘Capital Base’ disclosures in this section. This capital definition is applied in comparing IGD capital to EU required capital base. This measurement of available capital is different from previous years; • AFR (ING Insurance Eurasia) –This is a pre-tax market value concept, defined for the insurance operations of ING Insurance Eurasia as the market value of assets (MVA) less the market value of liabilities (MVL) on the balance sheet. The liabilities do not include perpetual hybrid capital which is included in AFR. The AFR valuation of ING Eurasia includes an adjustment for portfolio illiquidity. The AFR for pension funds is set equal to the statutory net equity. AFR is used as the measure of available capital in comparison with Economic Capital employed.
POLICIES The activities of Capital Management are executed on the basis of established policies, guidelines and procedures. The main documents that serve as guidelines for capital planning are the Capital Letter (comprising the approved targets and limits for capital), the Capital Planning Policy, the Dividend Policy and the Capital Request Policy. For the Corporate Treasury there are additional policies and limits that guide the management of the balance sheets and the execution of capital market transactions.
PROCESSES FOR MANAGING CAPITAL In addition to measuring capital adequacy, Capital Management also ensures that sufficient capital is available through setting targets and limits relevant to the above mentioned metrics for ING Group, ING Bank, and ING Insurance and ensuring adherence to the set limits and targets through planning and executing capital management transactions. The process is supplemented by stress testing and scenario analysis. The ongoing assessment and monitoring of capital adequacy is embedded in Capital Management’s capital planning process and results in a quarterly capital update report which is presented to both the ING Group Finance and Risk Committee and the ING Group Executive and Supervisory Boards. The main objective of the assessment is to ensure that ING Group as a whole has sufficient capital relative to its risk profile both in the short and the medium term. A key priority of Capital Management is to make sure that strong stand-alone companies are created for banking and insurance in preparation of the separation. All operating entities need to stay adequately capitalised based on local regulatory and rating agency requirements and interdependencies should be reduced to a minimum. The entities should also be able to access capital markets independently.
CAPITAL ADEQUACY ASSESSMENT During 2011, ING Group, ING Bank and ING Insurance were adequately capitalised.
of regulatory deductions. (9) An adjustment for the Dutch Financial supervision act. A ‘test-of-adequacy’ has to be included in the available capital measurement. The revaluation reserve debt securities and revaluation reserve crediting to life policyholders are not reversed out of the IGD capital definition.
(see ING’s Capital base table, footnote 5). (4) Includes eligible lower Tier 2 loans and revaluation reserves equity and real estate revaluations removed from Tier 1 capital. (5) Using 80% of Basel I Risk-Weighted Assets.
ING Insurance continues to aim that all operating entities are adequately capitalised based on local regulatory and rating agency requirements and that on a consolidated basis, the financial leverage (hybrids, sub-debt and net financial debt) of ING Insurance is appropriate relative to the capital base. The financial leverage decreased in 2011 mainly due to the divestment of the business in Latin America.
For ING Insurance Eurasia, Available Financial Resources (AFR) continues to be important, especially as an evolving proxy for the Own Funds derivation from our internal model under Solvency II. The following table presents the reconciliation from the 2010 AFR and EC for Insurance excluding US as reported in the Annual Accounts 2010, to the comparable basis for Eurasia 2011. This reflects the changes in scope and methodology.
The fee-based pension funds business in Central and Eastern Europe are regulated by local sectoral rules rather than by Solvency II regulations for insurance entities. AFR and EC of the fee-based pensions administration business were previously calculated using market consistent valuation approach. This has been replaced by using the statutory net equity and required capital of the pension funds administration companies. The impact on AFR is EUR 1.5 billion and on EC EUR 0.1 billion.
ING Groep N.V. – long-term A stable A1 stable A stable
Equity 3 Share capital 919 919 Share premium 16,034 16,034 Non-voting equity securities 3,000 5,000