NN Group determines economic capital as the amount of additional assets it must hold above the market value of its liabilities in order to withstand adverse movements in one year, based on a 99.5% level of confidence and before any adjustment for tax impact. A 99.5% level of confidence means that NN Group would be able to fulfil its obligations to its policyholders without requiring additional capital in 199 out of 200 annual scenarios. NN Group’s economic capital is calculated in three steps.  In the first step, NN Group models the market and credit risks to which NN Group’s balance sheet is exposed using 50,000 stochastic real-world scenarios over a one-year time horizon, which are calibrated to historically observed market data. The model then quantifies the extent to which NN Group’s assets must exceed its liabilities to ensure it is able to fulfil its policyholder obligations at a 99.5% level of confidence. This constitutes the economic capital for market and credit risk.
 In the second step, NN Group models insurance and business risk by defining stress scenarios at a 99.5% confidence interval using empirical data, when available, and expert judgement on the characteristics of NN Group’s portfolio. With regards to longevity and expense risk, these stress scenarios are measured over a multi-year horizon. Mortality, morbidity, and property and casualty (P&C) risks are measured over a one-year horizon. These measurements are made at the individual business unit level and are modelled to capture the offsetting of certain risks, which occurs where certain risk events preclude the possibility of others. For example, if risk capital is based on the risk event that people will live longer (longevity risk), then the risk event that the same people will die earlier (mortality risk) is precluded. These risks are also aggregated with each other, as well as with the market and credit risk calculated in step one, using correlations based on expert judgement. As a result of this aggregation, the economic capital for the aggregate risk is less than the sum of the economic capital for the individual risks because the probability of all of the various risks materialising concurrently is less than 0.5%. This difference is the diversification benefit, reflecting the benefits of NN Group’s risk pooling.
 NN Group’s internal model uses, among others, statistics, observed historical market data, insurance policy terms and conditions, and NN Group’s own judgment, expertise and experience, and includes assumptions as to the levels and timing of payment of premiums, benefits, claims, expenses, interest rates, credit spreads, investment portfolio performance (including equity market and debt market returns), longevity, mortality, morbidity and product persistency, and customer behaviour (including with respect to surrenders or extensions). NN Group follows strict governance, periodically revisiting these assumptions and regularly challenging them. NN Group also models risk to regulatory capital and IFRS results using models. As such, NN Group’s economic capital calculations and risk sensitivities should be considered as estimates.
The table below sets out NN Group’s economic capital by risk category as at 31 December 2013 and 2012, respectively.
The following sections will explain the risk profile, risk mitigation and risk measurement of all the categories above except for the diversification benefits between the different risk categories. Diversification benefits are recognised both on the risk category level (reflecting, for instance, diversification benefits between different countries, and diversification benefits between different risks within a particular risk category), as well as diversification benefits between risk categories. The diversification benefit between insurance risk, business risk, and market and credit risk of both the separate and general account decreased from 2012 to 2013. Insurance and business risks diversify well with each other and also with the market and credit risks, and in 2013 the reduced exposure to insurance and business risk resulted in an overall lower diversification benefit for NN Group.
The overall economic capital for NN Group decreased by over EUR 1.7 billion from 2012 to 2013 primarily because NN Group sold most of the Asian business units. This is further explained in the “Economic capital for entities outside NN Group’s internal model” section.
Impact of scope change on economic capital for 2012 The 2012 economic capital numbers have been updated to reflect the change in scope from Insurance Europe as reported in the 2012 Annual Report to numbers comparable to those reported for 2013.
In 2013, NN Group continued to refine and update the internal model to prepare for the Solvency II Directive, increasing economic capital by EUR 438 million. Modelling changes included updates to the correlation matrix and a more granular modelling of asset risk.
Solvency II In 2013 NN Group continued the internal model pre-application process with regulators in order to ensure the model is approved as an internal model under the Solvency II regulations and is fit for local use in all of its regulated entities. Over the course of 2014, NN Group intends to move its economic capital calculations to full Solvency Capital Requirements (SCR), in accordance with the current draft of the Solvency II Directive. Differences in the calculation of SCR compared to current calculations of economic capital can arise from Omnibus II Directives, in particular related to long term guaranteed business. NN Group’s economic capital ratio, calculated as available financial resources/economic capital will be adjusted to own funds/SCR.
The table below provides a summary of the largest expected differences in the calculation methodology of available and required capital from the current internal methodology to Solvency II, as interpreted by NN Group. Several of the Solvency II items have not yet been defined well enough to provide a reliable estimate of the impact, but each one could potentially be material.
Last liquid point (1) 20 years 20 years 30 years 20 years
Volatility balancer / matching adjustment After-tax No Yes No Yes Credit risk adjustment No Yes No Yes
Risk profile Mortality risk occurs when claims are higher due to higher mortality experience (for instance in relation to term insurance). Longevity risk is the risk that insured persons live longer than expected due to mortality improvements. While NN Group is exposed to both longevity and mortality risks, these risks do not fully offset one another as the impact of the longevity risks in the pension business in the Netherlands is significantly larger than the mortality risk in the other businesses, not only due to the size of the business but also due to the current low interest rate environment. Changes in mortality tables impact the future expected benefits to be paid and the present value of these future impacts is reflected directly in measures like available financial resources and available regulatory capital in the Netherlands. Longevity risk exposes NN Group primarily to mortality improvements and the present value impact is larger when interest rates are low.
By expanding insurance liabilities to cover multiple geographies, product benefits, lengths of contract, and both life and non-life risk, NN Group reduces the likelihood that a single risk event will have a material impact on NN Group’s financial condition.
The economic capital for insurance risks is dominated by mortality risk, in particular by longevity risk in the Netherlands pension business. The economic capital amount related to longevity risk is also highly sensitive to the level of interest rates. The decrease in the mortality risk capital was mainly caused by a decrease in longevity risk capital because of the increase of the discount curve in 2013 and by surrenders and contract changes of defined benefit pension contracts. The morbidity risk is primarily due to Netherlands Non-Life illness and disability contracts, as well as Netherlands Life and Japan Life.
Risk profile Policyholder behaviour risk Policyholder behaviour risk is the risk that policyholders use options available in the insurance contracts in a way that is different from that expected by NN Group. Depending on the terms and conditions of the insurance policy and the laws and regulations applicable to the policy, policyholders could have the option to surrender, change premiums, change investment fund selections, extend their contracts, take out policy loans, make choices about how to continue their annuity and pension savings contracts after the accumulation phase, or even change contract details. As a result, over the life of an insurance policy, a policyholder may seek to change the terms of that policy, and NN Group may consult with the relevant customer with a view to verifying that the relevant policy remains suitable for the policyholder, sometimes resulting in changes to the relevant insurance policy. Policyholder behaviour therefore affects the profitability of the insurance contracts. The risk that policyholders maintain their contracts longer than NN Group has assumed is specific to the variable annuity business when guarantees are higher than the value of the underlying policyholder funds, the pension business in the Netherlands, and the older higher interest rate guaranteed savings business in Europe. The risk that policyholders hold their contracts for a shorter period than NN Group has assumed relates to the life business in Japan and the unit linked businesses in the Central and Eastern European businesses.
As part of its strategy, NN Group has put several programs in place to own and improve the customer experience. These programs seek to improve the match between customer needs and the benefits and options provided by NN Group’s products and, over time, to improve NN Group’s understanding and anticipation of the choices policyholders are likely to make, thereby decreasing the risk of a mismatch between actual and assumed policyholder behaviour.
Expense risk Several initiatives have been put in place to manage expenses, such as the restructuring of Netherlands Life and NN Group’s head office in the Netherlands. These initiatives also seek to convert fixed expenses into variable expenses so that expenses vary in accordance with the size of the in-force portfolio. This is particularly relevant for the closed blocks of business, the Dutch individual life and the Japan Closed Block VA businesses.
Risk measurement The table below sets out NN Group’s economic capital for business risk as at 31 December 2013 and 2012, respectively.
MARKET AND CREDIT RISK: GENERAL ACCOUNT Market and credit risks are the risks related to the impact of financial markets on NN Group’s balance sheet. In relation to market and credit risk, NN Group distinguishes between its general account and its separate account. The table below sets out NN Group’s asset class market values for the general account as at 31 December 2013 and 2012 (in this table derivatives are excluded and specific risk management asset classifications and valuations are applied). 2012 figures are on a comparable basis to 2013.
The table below sets out NN Group’s economic capital for the general account as at 31 December 2013 and 2012, respectively.
Market and credit risk of the general account is dominated by credit spread and equity risk. Whilst there were significant movements in the underlying risks, overall the economic capital for market and credit risk remained fairly stable. The inflation risk relates to the disability business of Netherlands non-life.
The equity investments held in the Netherlands are part of the so-called “5% holdings”, in which investors who hold 5% or more of the outstanding shares of a stock receive favourable tax treatment in the Netherlands. About EUR 2.3 billion is invested in these 5% holdings. For these equity investments, NN Group may not be able to liquidate its position quickly because of the size of these holdings.
Price changes in equity holdings and equity-related derivatives are directly reflected in Available Financial Resources, the IFRS balance sheet and in the regulatory available capital in the jurisdictions in which NN Group has general account equity holdings. Only value movements of derivatives and impairments of equity holdings are reflected in the IFRS result before tax.
The table below sets out NN Group’s real estate exposure by sector type excluding leverage as at 31 December 2013 and 2012, respectively. Real estate is valued at fair value in the economic capital model and the available regulatory capital calculations in the Netherlands. Fair value revaluations of 53% of the real estate portfolio directly affect the IFRS result before tax.
2013 2013 2012 2012 Residential 3% 17% 2% 17% Office 10% 9% 14% 10% Retail 30% 9% 28% 7% Industrial 9% 0% 8% 0% Other 2% 12% 3% 11% Total 54% 47% 55% 45%
Risk mitigation Real estate exposures belong to a well-diversified asset portfolio of an insurance company holding long term illiquid liabilities. The concentration risk on individual issuers is mitigated under relevant investment mandates.
Risk profile The table below provides an overview of NN Group’s general account undiscounted policyholder liability cash flows (net of expenses and commissions) by maturity.
General account liabilities’ annual undiscounted cash flows (net of expenses and commissions) (1)
(1) The “minus” sign in the table mean cash outflow from NN Group to the policyholders (2) Japan and Other liabilities are presented at constant FX of 31December 2013. Other includes CZK, HUF, PLN, RON and USD.
 IFRS result before tax. Under IFRS-EU, NN Group values its general account policyholder liabilities using a discount rate that is set when the policies are sold, and subjects them to a reserve adequacy test using current interest rates. As a result, changes in interest rates do not affect IFRS earnings through liability valuations, unless the adequacy of the reserves of a segment falls below the 50th percentile level. As of 1 January 2014, NN Group’s reserves for all segments are adequate at the 90th percentile. Apart from a few exceptions, interest rate movements do not impact IFRS result before tax as investment income for fixed income assets is recorded as amortised cost value. A few derivative instruments not subject to hedge accounting could cause volatility in IFRS result before tax due to interest rates. See “-IFRS result before tax sensitivities”.
 IFRS result before tax. Market value movements of general account fixed income assets do not impact the IFRS result before tax, as the assets are classified as available-for-sale. Therefore, there is no sensitivity to credit spread risk in IFRS result before tax. However fixed income securities might be subject to impairments under IFRS, affecting the IFRS result before tax.
 Available regulatory capital (outside the Netherlands). For the purposes of available regulatory capital in all jurisdictions outside the Netherlands in which NN Group operates, general account fixed income assets are typically held at the same value as is reported on the IFRS balance sheet, although in several jurisdictions such as Japan, Belgium, Spain and Greece, certain assets can be held at amortised cost on the regulatory balance sheet. In those cases where assets are held at fair, value credit spreads affect available regulatory capital through fixed income asset valuations, whereas the liability valuations are insensitive to credit spread movements.
 Economic capital. To determine economic capital, general account fixed income assets are held at market value, thereby creating credit spread sensitivities. Just as in the available regulatory capital (Netherlands), the long duration of NN Group’s fixed income assets amplifies the impact of credit spread sensitivities for economic capital. The discount rate to value the insurance liabilities consists of the swap rate plus an illiquidity premium. NN Group uses the spreads of a covered bond index to determine the illiquidity premium at a given point in time. The fact that the bonds are fully collateralised means that there is limited credit risk in relation to these bonds. Any spread movements in the covered bond index therefore represent illiquidity related to demand and supply characteristics and/or market sentiment at any point in time. As NN Group does not invest in the covered bond index to back the general account liabilities, there can be mismatches between illiquidity experienced on NN Group’s own assets and the illiquidity depicted by the covered bond index.
AAA 158 90 280 691 1,514 972 1,299 1,977 6,981 6,732 AA 238 140 300 323 620 549 320 2,490 3,615 A 348 472 700 880 1,344 465 410 95 4,714 6,053 BBB 321 248 291 411 692 405 149 648 3,165 3,209 BB 87 8 34 97 155 9 183 573 616 B 19 15 18 23 26 57 158 226 CCC 6 6 161 Other 1 12 2 15 2 Total 1,172 973 1,623 2,425 4,363 2,402 2,235 2,909 18,101 20,614
Market value % of total Market value % of total 2013 2013 2012 2012 RMBS 3,822 53% 4,356 60% Car loans 1,848 26% 1,415 19% Credit cards 463 6% 382 5% CMBS 358 5% 343 5% Student loans 251 3% 318 4% SME loans 233 3% 227 3% Consumer loans 117 2% 134 2% Other 106 1% 91 1% Total 7,198 100% 7,266 100%
General accounts economic capital for credit spread risk 2013 2012 Credit spread risk assets 5,617 5,718 Illiquidity premium offset –3,383 –3,197 Total Credit Spread risk net of illiquidity premium offset 2,234 2,521
NN Group has notably increased its exposure to Dutch residential mortgages during the course of 2013, both at NN Bank as well as Netherlands Life. In the third quarter, EUR 4.7 billion of Dutch residential mortgage loans were transferred from Westland Utrecht Bank (WUB) to NN Bank’s mortgage loan portfolio. In the fourth quarter of 2013, Netherlands Life’s exposure to residential mortgages also increased, with the transfer of EUR 2.6 billion residential mortgages from ING Bank to Netherlands Life. As of 31 December 2013, the total general account risk exposure to mortgages is EUR 6.23 billion for NN Bank and EUR 7.99 billion for Netherlands Life.
The Loan-to-Value (LTV) for residential mortgages, which is based on the net average indexed loan to value, at NN Bank and Netherlands Life stands at 92% and 96% respectively. The perceived high LTV is due to the high proportion of interest-only mortgages. With the change in the Dutch tax regime in 2013 with regards to mortgage interest deductibility, a shift from essentially interest-only mortgages to annuity and linear payment type mortgages is being observed. The inherent credit risk is compensated primarily by means of the underlying property, but also through the inclusion of mortgages guaranteed by the Nationale Hypotheek Garantie (NHG) and other secondary covers like savings, investments and life insurance policies. Mortgages with NHG accounted for 26% and 20% at NN Bank and Netherlands Life respectively at 31 December 2013.
The credit portfolio is under constant review to ensure troubled assets are identified early and managed properly. With regards to (mortgage) loans, all loans with past due financial obligations of 90 days or more are classified as nonperforming loans (NPLs). All loans not classified at initial recognition as being either (1) assets at market value through profit-and-loss, (2) assets held for trading, or (3) assets available-for-sale are measured against amortised cost value and are subject to impairment review. For bonds and other fixed income securities, criteria for impairment include (but are not limited to) expected and actual credit losses resulting from e.g. failure to pay, market information regarding expected and actual credit losses, as well as other evidence that the issuer/borrower will be unable to meet its financial obligations. Material breaches in financial covenants can also trigger the reclassification of a loan as being impaired.
If a payment of interest or principal is more than one day late, the loan is considered “past-due”. If the arrear still exists after 90 days, the loan is categorised as non-performing loan. It keeps this status until the arrear is resolved. Of the mortgage loans that are past-due, 68% have been past-due for 1-30 days.
Aging analysis (past due but not impaired): NN Group mortgage portfolio, outstanding
Risk measurement The economic capital backing NN Bank’s portion of the mortgage exposure is accounted for in non-modelled business because NN Bank applies Basel II for capital purposes (see “-Economic capital for entities outside NN Group’s internal model”). The economic capital backing the Netherlands Life’s portion of the mortgages is calculated in the counterparty default risk. The total mortgage exposure is managed at company level and included in the tables above.
Risk profile FX transaction risk can occur on a local entity level, while FX translation risk can occur when items included in the financial statements of each of NN Group’s entities are measured using the country’s functional currency instead of NN Group’s reporting currency, the Euro.
Risk measurement Economic capital for foreign exchange risk decreased from EUR 377 million at year-end 2012 to EUR 213 million at yearend 2013 primarily due to the weakening of the yen in 2013.
(1) The Account value is the value of the underlying funds which belong to the policyholder. (2) The net amount at risk is the difference between the guaranteed minimum value and the account value, for those policies where the guaranteed value exceeds the account value. (3) The Additional IFRS reserve for the guarantees backing the GMDB block as of 1 January 2014 is EUR219 million higher (total EUR 276 million) due to the application of fair value accounting.
Risk mitigation NN has hedging programs in place for the Japan Closed Block VA business and the European variable annuity business. These hedging programs target equity, interest rate, and FX risks. The market risks that remain for the Japan Closed Block VA business are increases to market volatility, both implied and realised, and basis risk. Basis risk is the difference in market movements between the benchmarks used for hedging and the actively managed funds in the separate account. The table below sets out the estimated changes in the value of these options and guarantees, and the corresponding estimated changes in the value of the assets hedging this portfolio for the years ended 31 December 2009 through 2013 with regard to the Japan Closed Block VA.
Separate account guaranteed group pension business in the Netherlands Risk profile
LIQUIDITY RISK Liquidity risk is the risk that one of NN Group’s entities does not have sufficient liquid assets to meet its financial obligations when they become due and payable, at reasonable cost and in a timely manner. 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.
RISK PROFILE NN identifies two related liquidity risks: funding liquidity risks and market liquidity risks. Funding liquidity risk is risk that a company will have the funds to meet its financial obligations when due. This risk is in particular relevant for NN Bank. Market liquidity risk is the risk that an asset cannot be sold without significant losses. The connection between market and 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.
RISK MITIGATION NN Liquidity Management Principles include the following:  Interbank funding markets should be used to provide liquidity for day-to-day cash management purposes;  A portion of assets must be invested in unencumbered marketable securities that can be used for collateralised borrowing or asset sales;  Strategic asset allocation should reflect the expected and contingent liquidity needs of liabilities; and  Adequate and up-to-date contingency liquidity plans should be in place to enable management to act effectively and efficiently in times of crisis.
OPERATIONAL RISK RISK PROFILE Operational risk is a non-financial risk that includes direct or indirect losses resulting from inadequate or failed internal processes (including as a result of fraud and other misconduct), systems failure (including information technology and communications systems), human error, and certain external events.
The business process owners are responsible for the actual execution of the controls and for assessing the adequacy of their internal controls. Operational risk management, as part of the second line of defence, is responsible for providing management with an objective assessment of the effectiveness and efficiency of NN Group risks and controls.
Risk measurement NN Group’s economic capital for operational risk was EUR 531 million and EUR 566 million as at 31 December 2013 and 2012, respectively. The economic capital is calculated based on the standard formula for Solvency II. As it is additive to the total economic capital, then it should be considered as net of diversification with other NN Group risks.
COMPLIANCE RISK RISK PROFILE Compliance risk is the risk of impairment of NN Group’s integrity. It is a failure (or perceived failure) to comply with NN Group’s Business Principles and the Compliance Risk-related laws, regulations and standards that are relevant to the specific financial services offered by a business or its ensuing activities, which could damage NN Group’s reputation and lead to legal or regulatory sanctions and financial loss.
NN Group separates compliance risk into four risk areas: client conduct, personal conduct, organisational conduct, and financial services conduct. In addition to effective reporting systems, NN Group has a whistle blower procedure which protects and encourages staff to speak up if they know of or suspect a breach of external regulations, internal policies or business principles. NN Group also has policies and procedures regarding anti-money laundering, sanctions and antiterrorist financing, gifts and entertainment, anti-bribery, customer suitability, Chinese walls and confidential and inside information, as well as a code of conduct for its personnel.
NN Group performs a due diligence process when developing products and invests considerably in the maintenance of risk management, legal and compliance procedures to monitor current sales practices. Customer protection regulations as well as changes in interpretation and perception by both the public at large and governmental authorities of acceptable market practices might influence customer expectations. The risk of potential reputational and financial impact from products and sales practices exists because of the market situation, customer expectations, and regulatory activity. For more information on the status of the unit linked legal proceedings in the Netherlands, see “Legal Proceedings” of the Annual Account.
The compliance function and the business work closely together to optimise both products and services to meet the customers’ needs. NN Group’s compliance function has developed a framework governing the process of identifying, assessing, mitigating, monitoring and reporting compliance risks.
Interest rate risk Measured by the impact of a 30% upward and downward movement in interest rates (parallel shift based on 30% of the 10 year rate)
Equity risk Measured by the impact of a 25% upward and downward movement in equity prices
FX risk Measured by the impact of the worse of a 10% upward or downward movement in all currencies compared to the euro
(1) In 2012, NN Group did not report regulatory capital sensitivities Therefore, the 2012 regulatory capital sensitivities are high level estimates based on internal risk management reports.
FX primarily reflects open positions in investments held by Japan Life and Netherlands Life. This does not include any translation risk.
Apart from the estimated sensitivities set out above, NN Group is exposed to volatility and basis risk with regards to the separate account guaranteed group pension business in Netherlands Life. Netherlands Life is also exposed to changes in assumptions with regards to longevity, expenses and policyholder behaviour as the present value impact on the policyholder liabilities of such assumption changes will be immediately reflected in the available regulatory capital.
SENSITIVITIES OF IFRS RESULT BEFORE TAX The table below sets out various market and insurance risk shocks for IFRS result before tax sensitivities.
Equity –25% –362 –437 Equity +25% 273 367 Market risk and credit risk Real estate –10% –485 –508 FX –10% –58 –53 Counterparty default –96 –85
The reported market risk sensitivities for 2013 reflect the refinement of the accounting for the separate account pension business in the Netherlands. This change significantly reduced the sensitivity of NN Group’s result before tax to interest rates as both the interest rate hedges and the technical provisions for this book move the same way with interest rates.
In 2013, result before tax sensitivities to P&C risk increased primarily due to increased retention levels for windstorm catastrophe risk.
OTHER RISK INFORMATION Greece, Italy, Ireland, Portugal, Spain and Cyprus (GIIPSC) Since 2010 concerns arose regarding the creditworthiness of certain European countries. As a result of these concerns the fair value of sovereign debt decreased and those exposures are being monitored more closely. With regard to the sovereign debt crisis, ING’s main focus is on Greece, Italy, Ireland, Portugal and Spain as these countries have either applied for support from the European Financial Stability Facility (“EFSF”) or receive support from the ECB via government bond purchases in the secondary market. Further details on exposure to Government bonds and Unsecured Financial institutions’ bonds are included in Note 3 “A -for-sale Investments”.
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 of the direct Obligor to which ING has primary recourse of repayment of the obligations, except most RMBS, which exposures are based on country of risk. Cyprus is not included in the table below as NN Group had no exposure linked to this country.
Greece, Italy, Ireland, Portugal and Spain – Total risk exposures (1)
(1) The exposures reported in these tables are outstanding amounts, different valuation method from previous tables in the Risk Section where exposures are reported as Market Value.
RMBS 30 330 100 208 351 1,019 CMBS Other ABS 24 8 32 Corporate Bonds 316 258 27 156 757 Covered Bonds 18 15 507 540 Financial Institutions’ bonds (unsecured) 52 36 38 109 235 Government Bonds 36 1,345 53 5 967 2,406 Total Debt Securities 66 2,085 462 278 2,098 4,989
Capital management amounts in millions of euros, unless stated otherwise 178 NN Group Annual Report 2013
OBJECTIVE ING Group Capital Management (Capital Management) is responsible for the sufficient capitalisation of ING Group entities at all times in order to manage the risk associated with ING’s business activities, which involves the management, planning and allocation of capital within ING Group, as well as the treasury function, which is key to manage and execute the necessary capital market transactions, term (capital) funding and risk management transactions. Capital Management monitors and plans capital adequacy on a consolidated basis at three levels: ING Group, NN Group and ING Bank. In 2013, NN Group set up separate Corporate Finance department to manage the capital planning and treasury activities for the Insurance operations in the context of its preparations to separate from ING Group. Capital Management takes into account the metrics and requirements of regulators (Insurance Group Directive (IGD) Solvency I, Tier 1 and BIS ratios and limits for hybrid capital), rating agencies (leverage ratios, Adjusted Equity and fixed coverage ratio) and internal metrics such as Available Financial Resources (AFR) and Economic Capital (EC).
 AFR (NN Group excluding US Insurance business) –This is a pre-tax market value concept, defined for the insurance operations in scope of the IPO as the market value of assets (MVA) less the market value of liabilities (MVL) on the balance sheet. The liabilities valuation includes an adjustment for liquidity premium. For other businesses a proxy is used for AFR, i.e. statutory net equity for third party pension funds and NN Bank, and IFRS Equity adjusted for Goodwill for Asian divestments and Investment Management companies. The qualifying perpetual hybrid capital is considered equity and included in AFR. AFR is used as the measure of available capital in comparison with EC employed.
 EC (NN Group excluding US Insurance business) – This is the pre-tax required capital for the insurance operations in scope of the IPO, based on a 99.5% confidence interval on a one-year horizon. This is considered an interim step to the Solvency II capital framework. The EC for other businesses is based on a proxy, i.e. sectoral rules for third party pension funds and NN Bank, 150% EU required capital for Asian divestments, and IFRS Equity adjusted for Goodwill for Investment Management companies.
DEVELOPMENTS 2013 In 2013 Capital Management’s main focus remained the strengthening of the capital position of ING Group, ING Bank and NN Group. ING’s capital is well placed to deal with the uncertain financial environment, increasing regulatory requirements and the ambition to repay the remaining outstanding Core Tier 1 securities. ING Group repaid another EUR 0.75 billion of Core Tier one securities and at yearend 2013 EUR 1.5 billion was outstanding of the original amount of EUR 10 billion.
The proceeds from the Initial Public Offering of the US Insurance business and from the partial divestment of Sul América S.A. in Brazil to GrupoSura and to the Larragoiti family were fully paid up to ING Group and used to reduces core debt at ING Group.
REGULATORY On 1 January 2014, an interim solvency regulation (commonly referred to as Solvency 1.5) has come into force in the Netherlands, in addition to the existing Solvency I framework. This new regulation fits within DNB’s approach to make the supervision of insurance companies more risk sensitive and forward looking. Solvency 1.5 places additional requirements on management of capital. The legislation also introduces the Theoretical Solvability Criterion (theoretisch solvabiliteitscriterium; TSC), which applies to large and medium-sized life insurance companies in the Netherlands. The aim of the TSC is to ensure that, after the realisation of some pre-defined stress scenarios, insurance companies still comply with their solvency requirements. In case the solvency position of an insurer is below the TSC, the DNB could require the insurance company to submit a recovery plan. Additionally, if the solvency position is below the TSC, DNB could require a declaration of no objection for dividend payments and other withdrawals from own funds.
POLICIES The activities of Capital Management are executed on the basis of established policies, guidelines and procedures. 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 Capital Management manages its capital on a pro-active basis and ensures that sufficient capital is available through setting targets and limits relevant to the above mentioned metrics for ING Group, ING Bank, and NN Group and ensuring adherence to the set limits and targets through planning and executing capital management transactions. The ongoing assessment and monitoring of capital adequacy is embedded in Capital Management’s capital planning process. Following the annual budgeting process, each year a capital plan is prepared for the Group as a whole and each of its material businesses. This plan is updated on a quarterly basis and it is assessed to what extent additional management actions are required. At all times maintaining sufficient financial flexibility should be preserved to meet its financial objectives. At the foundation of the capital plan are ING’s risk appetite statements that determine target setting. These constraints are being cascaded to the different businesses in line with our risk management strategy.
Important inputs to the capital planning and management process are provided by stress testing that is performed on a regular basis. These stress tests focus on topical issues and the sensitivity of NN Group’s capital position to certain risks. These analyses provide input that help to steer strategic direction. Setting policies for recovery planning and resolution are a natural extension of ING’s capital management policies and follow ING’s risk management framework seamlessly.
Capital position of NN Group 2013 2012 (4) Shareholder’s equity (parent) 14,227 26,423 Hybrids issued by NN Group to ING Group (1) 2,394 2,438 Hybrids issued by NN Group (2) 476 Required regulatory adjustments –5,368 –6,891 IGD capital 11,253 22,446
During 2013, the IGD ratio of NN Group increased from 236% at the end of 2012 to 257% at the end of 2013. This improvement reflects a decrease of Shareholders’ equity and a release of required capital following the various divestments that closed during 2013, the IPO of ING U.S. and the transfer of the remaining interest in ING U.S. to ING Group. In addition, the improvement was supported by favourable market developments, net operating results and the EUR 1 billion capital injection from ING Group to redeem debt. This was only partially offset by the impact of the downgrade of France by Fitch on the NN Life solvency ratio, the exclusion of a EUR 0.5 billion hybrid loan that no longer qualifies as capital and the write down of the DAC for the Japan Closed Block VA business.
NN Group 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 financial debt) of NN Group is appropriate relative to the capital base.
Capital base and financial leverage of NN Group 2013 2012 (4) Shareholder’s equity (parent) 14,227 26,423 Revaluation reserve debt securities –2,804 –9,282 Revaluation reserve crediting to life policyholders 2,579 5,673 Revaluation reserve cash flow hedge –2,726 –3,548 Goodwill –264 –351 Minority interests 68 217 Capital base for financial leverage (a) 11,080 19,132
(1) Hybrids issued by ING Group at amortised cost value consistent with IFRS carrying value. (2) Hybrids issued by NN Group at amortised cost value consistent with IFRS carrying value. (3) Includes net internal borrowings from the operating subsidiaries, offset by net current assets of the holding companies in excess of a cash capital requirement. (4) The Capital base for financial leverage as reported in the 2012 Annual Report of EUR 20,007 million is restated due to the change in accounting policy for employee benefits as disclosed in the section “Changes in accounting policies in 2013” on page 33.
Reconciliation between IGD capital and Capital base for financial leverage 2013 2012 IGD capital 11,253 22,446 Hybrids issued by NN Group to ING Group –2,394 –2,438 Hybrids issued by NN Group –476 Revaluation reserve debt securities –2,804 –9,282 Revaluation reserve crediting to life policyholders 2,579 5,673 Revaluation reserve adjustments 2,446 3,209 Capital base for financial leverage 11,080 19,132
The table below provides the capital ratios for the larger Insurance subsidiaries according to local regulatory capital frameworks: Local Capital ratios for the larger Insurance operations 2013 (1) 2012 (2) NN Life 222% 191% ING Re Netherlands 1,253% 320% ING Life Japan 1,366% 989%
(1) The 2013 capital ratios are not final until filed with the regulators. (2) Comparable capital ratio for ING Life Japan is at 31 March 2013, as the financial year for ING Life Japan runs from 1 April until 31 March.
For NN Group, 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 SII regulations are not final and material deviations from our proxy could materialise; see the risk management section for more details. AFR in the 2012 Annual Report of ING Verzekeringen N.V. was derived for ING Insurance EurAsia excluding Asian Insurance and Investment Management businesses and the reinsured Japan VA guarantees to ING Re (Netherlands) N.V. that were classified as held-for-sale operations. ING announced in 2013 that NN Group N.V. will be divested instead of ING Insurance Eurasia N.V., and after carefully exploring and evaluating the options available for the divestment of ING Life Japan, it was concluded that ING Life Japan will be included with NN Group’s insurance and investment management businesses in the base case IPO of NN Group in 2014, subject to market and other conditions. As a result, ING Life Japan and the Japanese Closed Block VA guarantees reinsured to ING Re (“NN Group’s business in Japan”) are no longer classified as held-for-sale operations. All references to Asia in this disclosure therefore, refer to the insurance and investment management businesses in Asia other than NN Group’s business in Japan.
The following table presents the reconciliation from the 2012 AFR for Insurance EurAsia excluding Asian held-for-sale operations as reported in the Annual Report 2012, to the comparable basis for NN Group excluding US Insurance business. The impact of the change in scope on EC is explained in detail in the Risk paragraph.
The AFR-EC ratio for NN Group excluding US Insurance business increased in 2013 as a result of higher AFR and lower EC. AFR increased from EUR 11.4 billion at the end 2012 to EUR 13.6 billion at the end of 2013. AFR increased mainly due to a capital injection from ING of EUR 1.3 billion (EUR 1.0 billion to redeem ING Group loan and EUR 0.3 billion to acquire parts of WestlandUtrecht Bank) and the inclusion of the “Ultimate Forward Rate” (UFR) in the valuation curve of EUR 1.6 billion. This increase was partially offset by the change of treatment of the pension asset (included in 2012 figures but excluded in 2013) of EUR 0.7 billion and the change in treatment of the external hybrid of EUR 0.5 billion, which is not considered AFR as from 1 January 2013 (consistent with IGD ratio). The change in EC during 2013 is explained in detail in the Risk paragraph.
of NN Group N.V. as at 31 December before appropriation of result 184 NN Group Annual Report 2013 amounts in millions of euros 2013 2012 Assets Investments in group companies 1 18,558 31,198 Other assets 2 1,893 4,480 Total assets 20,451 35,678
Equity 3 Share capital Share premium 11,605 17,750 Share of associates reserve 3,502 7,252 Other reserves –890 383 Unappropriated result 10 1,038 Shareholder’s equity 14,227 26,423
Liabilities Subordinated loans 4 2,892 2,947 Other liabilities 5 3,332 6,308 Total liabilities 6,224 9,255
References relate to the notes starting on page 188. These form an integral part of the parent company annual accounts.
186 NN Group Annual Report 2013 amounts in millions of euros Share capital Share premium
Changes in cash flow hedge reserve 665 665 Transfer to insurance liabilities/DAC –2,181 –2,181 Other revaluations 75 75 Exchange rate difference –369 –369 Total amount recognised directly in equity (Other comprehensive income)
Unrealised revaluations property in own use –1 –1 Unrealised revaluations available-for-sale investments and other
Transfer from to associates 118 –118 Capital contribution 1,330 1,330 Employee stock option and share plans 37 37 Changes in composition of the group and other changes
Impact of IPO ING U.S. –1,958 –1,958 Dividend –649 –233 –882 Balance as at 31 December 2013 0 11,605 3,502 0 –880 14,227
On 28 February 2014, before the finalisation of the 2013 consolidated financial statements, ING Insurance and ING Topholding legally merged. Through this merger, the legal entity ING Insurance ceased to exist. The legal merger became effective on 1 March 2014 and on that date the merged entity was renamed NN Group N.V. (“NN Group”).
BASIS OF PRESENTATION The parent company accounts of NN Group N.V. are prepared in accordance with the financial reporting requirements included in Part 9 of Book 2 of the Dutch Civil Code. The accounting policies applicable to presentation and disclosures are in accordance with the financial reporting requirements included in Part 9 of Book 2 of the Dutch Civil Code. The principles of valuation and determination of results stated in connection with the Consolidated balance sheet and profit and loss account are also applicable to the parent company balance sheet and profit and loss account with the exception of investments in group companies and investments in associates which are recognised at net asset value with goodwill, if any, recorded under intangible assets.
The amounts for 2012 have been restated to reflect the change in accounting policy as disclosed in the section “Change in accounting policies” in the Note 1 “Accounting policies” of the consolidated annual accounts.
Balance sheet value 2013 2013 2012 2012 ING Insurance Eurasia N.V. 100% 16,371 100% 18,759 ING U.S., Inc. 100% 10,165 ING Insurance International B.V. 100% 2,171 100% 2,258 Other 100% 16 100% 16 18,558 31,198
Changes in investments in group companies 2013 2012 Opening balance 31,198 27,794 Repayments-capital contribution –2,507 –134 Disposals of group companies –7,451 –2 Revaluations –5,877 2,024 Result of group companies 47 1,092 Capital contribution 3,150 424 Dividend –2 Closing balance 18,558 31,198
In 2013, Disposal of group companies includes the transfer of ING U.S.
As at 31 December 2013, an amount of EUR 488 million (2012: EUR 4,433 million) is expected to be settled after more than one year from the balance sheet date.
Notes to the parent company annual accounts of NN Group N.V. continued
The Share of associates reserve includes the following components: Reserve for non-distributable retained earnings of associates of EUR 458 million (2012: EUR 340 million) and Revaluation reserve of associates of EUR 3,044 million (2012: EUR 8,397 million).
Share capital Ordinary shares (par value EUR 1.00) Number x 1,000 Amount 2013 2012 2013 2012 Authorised share capital 225 225 Unissued share capital 180 180 Issued share capital 45 45 0 0
NN Group has an issued share capital of EUR 45,000. For details on the changes in 2013, in share premium, reference is made to Note 13: “Equity” of the Consolidated annual accounts.
Unappro– priated result Total Opening balance 382 1,038 1,420 Net result 10 10 Unrealised revaluations –45 –45 Transfer to Share of associates’ reserve –118 –118 Transfer to retained earnings 805 –805 0 Changes in the composition of the group and other changes
Impact of IPO ING U.S. –1,958 –1,958 Dividend –233 –233 Closing balance –890 10 –880
Positive components of the Share of associates reserve and Currency translation reserve cannot be freely distributed. The reserve for cash flow hedges is included in the Share of associates reserve on a net basis.
Retained earnings can be freely distributed, except for an amount equal to the negative balance in each of the components in the Currency translation reserve and Share of associates reserve. Unrealised gains and losses on derivatives, other than those used in cash flow hedges, are presented in the profit and loss account and are therefore part of Retained earnings.
Notes to the parent company annual accounts of NN Group N.V. continued 190 NN Group Annual Report 2013
Retained earnings in the consolidated accounts, are presented in the Share of associates reserve in the parent company accounts.
The subordinated loans rank subordinated to the other liabilities in a winding-up of NN Group.
REPORT ON THE ANNUAL ACCOUNTS We have audited the accompanying annual accounts 2013 of NN Group N.V., Amsterdam (as set out on pages 26 to 192). The annual accounts include the consolidated annual accounts and the parent company annual accounts. The consolidated annual accounts comprise the consolidated balance sheet as at 31 December 2013, the profit and loss account, statement of comprehensive income, statement of cash flows and statement of changes in equity for the year then ended, and a summary of significant accounting policies and other explanatory notes. The parent company annual accounts comprise the parent company balance sheet as at 31 December 2013, the parent company profit and loss account for the year then ended and the notes, comprising a summary of significant accounting policies and other explanatory notes.
REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS Pursuant to the legal requirement under Section 2:393 sub 5 at e and f of the Dutch Civil Code, we have no deficiencies to report as a result of our examination of whether the report of the Management Board, to the extent we can assess, has been prepared in accordance with Part 9 of Book 2 of this Code, and whether the information as required under Section 2:392 sub 1 at b-h has been annexed. Further we report that the Report of the Management Board, to the extent we can assess, is consistent with the annual accounts as required by Section 2:391 sub 4 of the Dutch Civil Code.
Proposed appropriation of result and Subsequent events amounts in millions of euros 194 NN Group Annual Report 2013
PROPOSED APPROPRIATION OF RESULT The result is appropriated pursuant to Article 21 of the Articles of Association of NN Group N.V., the relevant stipulations of which state that the appropriation of result shall be determined by the General Meeting, having heard the advice of the Management Board.
Net result 10 Proposed to be added to the Other Reserves pursuant to Articles 21(2) and 21(3) of the Articles of Association
SUBSEQUENT EVENTS Defined Benefits Pension Fund in The Netherlands In February 2014 ING reached an agreement with the trade unions, the ING Pension Fund, the Central Works Council and the Association of Retired ING Employees (VSI) to transfer all future funding and indexation obligations of ING’s current closed defined benefit plan in the Netherlands to the Dutch ING Pension Fund. The agreement has made the ING Pension Fund financially independent from ING.
Pension Fund are terminated;  ING paid EUR 549 million (before tax) to the Dutch ING Pension Fund for the removal of these obligations; and  ING will reduce the employees’ own contribution to the pension premium under the new defined contribution plan by approximately EUR 80 million over a 6 year period.