Report of the Supervisory Board 55 Corporate governance 59 Report of ING Trust Office 71 Report of ING Continuity Foundation 74 Conformity statement 75 Section 404 Sarbanes-Oxley Act 76 Remuneration report 78 Works councils 86 4 Consolidated annual accounts
Shareholders’ equity (in parent) per 31 December 42 34 17 37 38 Core Tier 1 securities per 31 December 5 5 10 (1) See note 49 in the Annual Accounts.
Balance sheet total ING Bank N.V. per 31 December (in EUR billion) 933 882 6 1,035 Core Tier 1 capital ING Bank N.V. per 31 December 30,894 25,958 19 24,934 Bank core Tier 1 ratio per 31 December (1) 9.6% 7.8% 7.3% Risk-weighted assets per 31 December (in EUR billion) (1) 321 330 –3 343 Client balances per 31 December (in EUR billion) 1,168 1,108 5 1,074 Net production client balances (in EUR billion) 49 21 133 89
Income non-modelled life business 136 123 11 163 Operating income (Life/IM) 7,300 6,583 11 7,324
Underlying result before tax –519 –202 –1,355 Underlying net result –429 –220 –1,002 Shareholders’ equity ING Verzekeringen N.V. per 31 December 20,811 15,887 31 11,892 Client balances per 31 December (in EUR billion) 454 408 11 382 Net production client balances (in EUR billion) –6 –9 6 Investment spread (basis points) 93 83 116
OUR MISSION ING aims to deliver its financial products and services in the way its customers want them delivered: with exemplary service, convenience and at competitive prices. This is reflected in our mission statement: to set the standard in helping our customers manage their financial future.
OUR PROFILE ING is a global financial institution of Dutch origin, currently offering banking, investments, life insurance and retirement services to meet the needs of a broad customer base. Going forward, we will concentrate on our position as an international retail, direct and commercial bank, while creating an optimal base for an independent future for our insurance operations (including investment management).
OUR CUSTOMERS ING serves a broad customer base, comprising individuals, families, small businesses, large corporations, institutions and governments.
Risk Committee Peter Elverding, chairman Tineke Bahlmann Claus Dieter Hoffmann Piet Klaver Godfried van der Lugt Jackson Tai
INSURANCE ASIA/PACIFIC Insurance Asia/Pacific is one of the major foreign life insurance companies in the region and is present in seven countries including Japan, Malaysia, South Korea, Thailand, China, Hong Kong and India. It offers life insurance, investment and retirement services products and services to a broad range of retail, corporate and institutional clients.
COMMERCIAL BANKING Commercial Banking offers core banking services such as lending, payments and cash management in more than 40 countries. It provides clients with tailored solutions in areas including corporate finance, structured finance, commercial finance, equity markets, financial markets and leasing. Clients are corporations – ranging from medium-sized and large companies to major multinationals – as well as governments and financial institutions.
The customer is the vital axis around which all our activities revolve Jan Hommen, chairman
After three challenging years during which the global financial crisis had its impact on the company, 2010 marked a significant turning point for ING. In particular, I am very grateful for the continued trust and loyalty of our customers.
Our strong results are the outcome of the hard work and dedication of all our employees who even in the most difficult periods of the crisis continued to focus on servicing our customers. Customer satisfaction is central to everything ING does. The customer is the vital axis around which all our activities revolve and we will continue to take customer needs as the starting point for everything we do, whether it is developing new products, fine-tuning processes or anything else. Over the year we achieved a great deal in this area but much more remains to be done. We use the Net Promoter Score to measure what customers think of us and whether they would recommend ING to others, and then use the feedback to make further improvements to our processes and products.
Being a major player in the financial sector puts us constantly in the spotlight. Regaining the trust of all our stakeholders following the global financial crisis is a key priority for us. Our achievements in the past year lead us to believe that the business is on a solid footing and has excellent growth prospects. We therefore look forward to the future with confidence and optimism.
ING’s policy is to pay dividends in relation to the long-term underlying development of cash earnings. Dividends will only be paid when the Executive Board considers such a dividend appropriate. Given the uncertain financial environment, increasing regulatory requirements and ING’s priority to repurchase the remaining outstanding core Tier 1 securities, the Executive Board will not propose to pay a dividend over 2010 at the annual General Meeting.
Netherlands 25 United Kingdom 17 Switzerland 7 Belgium 5 Luxembourg 3 Other 5 Total 100 1 Who we are
In September 2010, the Basel Committee on Banking Supervision announced a substantial strengthening of existing capital requirements and the introduction of two international liquidity standards. The proposed Basel III framework covers both micro-prudential and macro-prudential elements. The framework sets out rules for higher and better-quality capital, better risk 2010 marked by continued external challenges 2 Report of the Executive Board
coverage, the introduction of a leverage ratio as a backstop to the risk-based requirements, measures to promote the build up of capital that can be drawn down in periods of stress, and the introduction of two liquidity standards. The Committee’s package of reforms will gradually increase the minimum common equity requirement from 2% to 4.5% as from 1 January 2013 (transition period from 1 January 2013 until 1 January 2017). In addition, banks will be required to hold a capital conservation buffer of 2.5% to withstand future periods of stress, bringing the total common equity requirements to a minimum of 7%.
Furthermore, to avoid periods of excess aggregate credit growth, a countercyclical buffer within a range of 0% – 2.5% of common equity or other fully loss-absorbing capital, according to national circumstances, has been proposed. These capital requirements are supplemented by a non-risk-based minimum Tier 1 leverage ratio of 3%.
The regulatory agenda for insurance companies was dominated by the further development of Solvency II, which aims to introduce a modernised risk framework for insurance companies. Solvency II adopts a broad three pillar supervisory structure similar to Basel II, but with a fundamental difference in that a full Market Value Balance Sheet (MVBS) approach and a full economic risk approach to measuring required capital (Economic Capital) have been proposed.
Moreover, it is noted that a number of relevant changes in accounting regulations are being considered by the accounting standards bodies. These include proposed changes to accounting for financial instruments, loan loss provisions, hedges, insurance contracts, leasing and others. These changes may, both individually and collectively, be very important to banking and insurance companies, including ING. ING generally supports the efforts to improve and simplify the accounting regulations as well as the objective of international convergence.
APPEAL AGAINST EC DECISION In January 2010, ING lodged an appeal with the General Court of the European Union against specific elements of the European Commission’s decision of 18 November 2009. ING has requested the Court to annul the decision of the European Commission, insofar as it qualifies the core Tier 1 amendment (i.e. the agreement between ING and the Dutch State concerning a reduction of the repayment premium for the first EUR 5 billion tranche of core Tier 1 securities) as additional state aid (of EUR 2 billion), requires price leadership bans and imposes disproportional restructuring measures. The Dutch State also lodged an appeal with the General Court to contest the EC decision insofar as it qualifies the core Tier 1 amendment as additional state aid.
ING believes it is in the interest of all its stakeholders to use the opportunities provided by law to let the General Court review these elements of the EC’s decision. However, the appeal does not alter ING’s commitment to execute its restructuring plan as announced on 26 October 2009 and stands firmly behind its strategic decision to separate its banking and insurance operations and divest the latter. A Court decision is expected in 2011.
OPERATIONAL SEPARATION OF ING BANK AND ING INSURANCE Throughout 2009 and 2010, ING worked towards a self-imposed deadline to separate its banking and insurance/investment management businesses at an operational level before the end of 2010. Project teams around the world were established to ensure an orderly separation process. The total separation costs incurred in 2010 amounted to EUR 85 million after tax. For 2011, these costs are estimated at around EUR 200 million after tax (excluding costs for rebranding).
STRONG PERFORMANCE DESPITE CHALLENGING OPERATING ENVIRONMENT Overall, the Group’s business performance in 2010 was satisfactory, thanks to a strong performance of the Bank, which more than offset the effects of impairments, write-downs and assumption changes in the Insurer. Throughout the entire organisation – i.e. in both our banking and insurance businesses – concerted efforts were made to enhance customer centricity. This included initiatives to more pro-actively and systematically measure and monitor customer satisfaction. The Group also started an evaluation of its entire product portfolio and product approval procedures based on sharpened criteria for good customer care.
DIVESTED BUSINESSES AND STRATEGIC STAKES IN 2010 Throughout 2010, ING continued along the path set out in its Back to Basics programme launched in 2009 – the aim of which was to reduce complexity and increase focus, by divesting a number of non-core activities. In the first quarter of 2010, ING closed the sale of three of its U.S. independent retail broker-dealer units, which comprised three-quarters of ING Advisors Network, to Lightyear Capital LLC.
Furthermore, we sold our 5% stake in Fubon Financial Holding to institutional investors, in line with our stated objective to reduce complexity and divest non-core assets, for an amount equal to EUR 395 million. The transaction resulted in a pre-tax profit of EUR 189 million at ING Bank. In addition, to reduce our exposure to real estate, we sold our 50% stake in ING Summit Industrial Fund LP, a Canadian light industrial property portfolio, to a joint venture between KingSett Capital Inc. and its affiliates and certain clients of Alberta Investment Management Corporation. The transaction value for 100% of Summit was approximately CAD 2.0 billion and included assumed debt.
(3) Operating result Insurance is underlying result before tax excluding market and other impacts.
ING reached an important milestone in 2010 by formalising the operational separation of its banking and insurance/investment management operations in preparation for a full split of both businesses. The Group is concentrating on creating strong stand-alone businesses and repurchasing the remainder of the core Tier 1 securities issued to the Dutch State when prudent and possible. At the heart of the strategic redirection lies a strong resolve to earn trust. ING therefore aims at building sustainable, long-lasting client relationships based on operational excellence, sound business ethics and good corporate citizenship.
ING Bank will build on its global presence and international network and capitalise on its leadership position in gathering savings, multi-channel distribution, simple propositions and marketing. It will focus on customer centricity, operational excellence, and top employment practices. Although the option of a single initial public offering (IPO) remains open, we intend to realise the divestment of our insurance and investment management operations through two IPOs. The Europe-led insurance business (including our activities in Asia) will combine the cash generation ability of the Benelux with the attractive growth markets of Central Europe and Asia. The US-focused business will build on its Retirement Services and Life Insurance franchises. We are still exploring strategic options to determine the future of the insurance business in Latin America.
In future, the bank and the insurer/investment manager will continue to work together for commercial purposes on an arm’s- length basis. Hence, on the one hand, ING Bank will continue to sell ING Insurance/Investment Management products and, on the other hand, ING Insurance will continue to use ING Bank services. The bank and the insurer/investment manager will, however, develop their own organisations, building on their own culture and strategy. The strategic direction of the individual businesses is further explained below. We are striving to ultimately complete the divestment process before the end of 2013, and sooner whenever market circumstances are appropriate, and conduct it with the utmost diligence to protect stakeholders’ interests and optimise shareholder value.
COMPLETING THE SEPARATION OF THE BANK AND THE INSURER/INVESTMENT MANAGER The operational separation of ING Bank and ING Insurance/ Investment Management under the ING Group umbrella has been finalised (see ‘ING and the financial environment’ for further details). With the operational separation in place, ING is ready to move towards the next phase, including the full preparation for one or more transactions.
Although the option of a single public offering remains on the table, we have determined the base case divestment scenario for our insurance and investment management operations as follows: • One separate public offering of our combined insurance operations in Europe and Asia, which rely on our solid cash-generation ability in the Benelux, and attractive growth opportunities in Central Europe and Asia.
SHAPING THE FUTURE OF OUR BANKING BUSINESS ING Bank aims to build a leading international retail, direct and commercial bank serving a broad customer base, comprising individuals, families, small businesses, large corporations, institutions and governments. It will build on its global presence and international network and capitalise on its leadership position in gathering savings, multi-channel distribution, simple propositions and marketing. The banking strategy has been developed with the changing regulatory environment in mind (see ‘ING and the financial environment’ for further details).
The bank will remain based in the Benelux and predominantly focused on Europe with key positions in selected growth markets in Central Europe, Turkey and Asia. The bank is starting from a good base. It is one of the largest retail savings banks in the world with a strong funding base; its direct service model is low-cost and internationally renowned and it has an extensive international network, especially for globally operating clients. In the future, ING will serve consumers, corporate clients and institutions with one balance sheet, one consistent brand, one management structure and one support organisation.
EARNING TRUST AND INCREASING CUSTOMER CENTRICITY IN BOTH BANKING AND INSURANCE The financial crisis has demonstrated that the licence to operate for any financial institution is to be trusted by its stakeholders, in particular its customers. At the heart of the strategic redirection of ING Group thus lies our strong resolve to earn trust. By separating our banking and insurance operations, we will build more agile, simple and customer-centric businesses. Obviously, earning and maintaining trust is a challenging task at any time, but this is even more difficult in the current environment. After all, the financial crisis has fuelled a demand for greater simplicity and transparency. In addition, prudential supervision and regulation are being tightened. Meanwhile, competition in financial markets continues to be strong, so efficiency remains imperative.
Therefore, our Business Principles clearly 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. In addition, we have decided to increasingly embed two-way stakeholder exchange as an integral part of the overall strategy of both our banking and our insurance businesses. This means that we actively seek a continuous dialogue with our customers and other stakeholders on their demands regarding our products, services, business performance and/or other issues. This also includes efforts to more pro-actively and systematically measure and monitor customer satisfaction, as we want our customers to recommend ING to their friends, family, colleagues and peers. Hence, we are introducing Net Promoter Score in all our businesses across the globe.
CONCLUSIONS AND AMBITIONS With the operational separation of the banking and insurance/ investment management operations completed in 2010, ING Group is now able to focus on creating more agile and customer-centric businesses and repaying the Dutch State. To earn trust, we will build the future of our businesses on sustainable profit based on sound business ethics and good corporate citizenship. We will continue along the path of intensifying our dialogue with our customers and other stakeholders on our products, services, business performance and/or other issues, as we consider it our responsibility to provide every customer with the right products and services, via the right distribution channels, and at the right prices or returns.
ING has the ambition to repay the Dutch State in full as soon as possible and intends to realise the divestment of its insurance and investment management operations through two public offerings. Looking at the future, ING Bank has a promising starting position as a leading retail, direct and commercial bank. It aims to become the preferred bank for its customers and will focus on customer centricity, operational excellence, and top employment practices. While moving towards the public offerings of a Europe-led and a US-focused business, ING Insurance will initially concentrate on further improving its operational performance.
The bank will focus on customer centricity, operational excellence, and top employment practices, while fully integrating its various banking business lines. We have developed a prudent approach for resource allocation, which will not only result in a smaller balance sheet, but also envisages boosting profit and reducing risk. To achieve this, a number of priorities have been defined. In order to ensure a stable deposit base and increase cross-sell and cross-buy opportunities, the bank will concentrate on becoming the preferred bank for its customers. This means that we want our customers and potential customers to consider ING first for all their financial requirements.
We will increasingly bring loan growth in line with deposit growth, particularly focusing on deposits with attractive liquidity characteristics (e.g. term deposits and savings accounts) and an increased weighting on long-term public debt. Mortgage growth will be managed in the context of the bank’s objectives with regard to deposit growth, and strengthening client relationships. In addition, the bank will seek to raise fee and commission income and originate higher yielding lending assets (e.g. consumer finance and mid-corporate lending), while reducing low yielding investments. This will include a diversification of asset classes in some regions, and efforts to further build commercial capabilities. Lastly, given regulatory changes and the desire to strengthen the funding base, the bank will adapt its asset-only strategies (e.g. in businesses like Structured Finance, Real Estate Finance, Lease) and mono-client businesses.
It is our conviction that our business decisions must be in line with the expectations and interests of those to whom we owe our licence to operate – our stakeholders. We also believe that an innovative sustainable strategy and sound business ethics will result in more comprehensive risk management, proud employees, a greater attraction for talented people and new business opportunities. That is why ING aspires to play a prominent role in sustainable business development. ING is committed to creating more sustainability in the value chain and we strive to help our customers with shifting to a more sustainable way of doing business. As part of our commitment to society, ING has developed community development programmes that focus on children and education, financial education and protecting the environment.
READY FOR THE OPERATIONAL SPLIT BY YEAR-END 2010 Corporate responsibility has continued to play an important role in building strong stand-alone businesses. As a result of the separation of our organisation, we will review our current sustainability strategy and, based on the foundations laid in the past, further embed sustainability in the core business of our banking and insurance operations.
We have been measuring, tracking and monitoring our performance in the social and environmental field since 1995. We have identified ten key performance indicators which directly relate to the focus areas of our strategy.
Diesel – 2 Combined-cycle gas turbine 47 67 Other 3 –
‘Luz Verde’ (Green Light), an ING partnered project in Mexico, has been awarded the Carbon finance deal of the year 2010 by Environmental Finance magazine. The pilot project of the Luz Verde programme exchanged 1 million environmentally unfriendly, incandescent light bulbs with energy-efficient CFLs for free, with families in the Puebla region of Mexico. For 40% of these families, the annual savings on their energy bills amounts to the equivalent of a week’s wages. The idea for this project originated in an Australian company – Cool nrg –, which estimated that the large reduction in CO2 emissions from millions of Mexican families switching to energy-efficient bulbs translates into money. As per the Kyoto Protocol each tonne of greenhouse gas emissions reduced by projects in developing countries can be sold as an emission reduction ‘credit’ to governments or companies in industrialised countries who can then use the credits to meet their CO2 reduction obligations under the Protocol. The success of the project was clinched by the financing that made this project possible.
ING has been a carbon neutral company since 2007. We strive to minimise carbon emissions that are a direct consequence of our operations around the globe. In addition, we have formulated the company-wide ambition to minimise our carbon footprint by 30% by 2012. We aim to realise this by using resources more efficiently, applying sustainable means and sources for procurement and encouraging employees to be mindful of the environmental impact
(4) The percentages only refer to the percentages of ING employees that have indicated that they are proud to work for ING - one of the elements surveyed - and do not reflect ING’s overall employee engagement score, which was 69% in 2010. The research was carried out by Kenexa.
** This includes brown and green energy, natural gas, fuel oil and district heating.
As part of the global ING Chances for Children programme, we organise an annual initiative featuring employee volunteering and fundraising initiatives for children and education-related projects. Called Global Challenge, it is held on or around 20 November, the day the United Nations adopted the Convention on the Rights of the Child. A record 38 countries took part in this year’s Global Challenge, up from 33 last year, and we succeeded in meeting our target of 20% staff participation – which means that a massive 20,000 ING employees were involved! A total of EUR 927,569.33 was raised for projects aimed at children’s education.
As Capital Management is organised as a Group function, it is able to bring together capital requirements from both the Bank as well as the Insurer and helps to safeguard the fungibility of capital throughout the Group. Another key objective for Capital Management is to create financial flexibility for ING in the context of forthcoming regulatory changes and the need to generate sufficient capital to repurchase the remaining core Tier 1 securities issued to the Dutch State.
DEVELOPMENTS IN 2010 In 2010, ING’s capital position improved, driven mainly by strong capital generation at ING Bank and favourable currency effects. A more detailed section in the annual accounts provides insight into the capital management practices and the development of the capital position of ING Group and its various business lines in 2010.
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 programs over the last few years to ensure that customers receive the appropriate products and services.
Diversity The focus in 2010 was on stimulating diversity throughout the organisation and strengthening a diverse workforce. ING’s ambition is for women to account for 33% of the positions at the Leadership Council (LC) and Management Council (MC) levels of the organisation by 2015. While there is still some way to go, ING made progress in 2010. At year-end, approximately 15% of the LC and MC members were female.
ING continues to build an inclusive and diverse culture and develop sustainable leadership skills. One of the many leadership courses offered by ING’s Business School (IBS) is the Inclusive Leadership Journey, targeting senior women leaders.
ING values its human capital highly and therefore ING’s Group Human Resources (HR) continued to play a key role in attracting, developing, assessing and retaining employees and new talent. HR also helped in shaping the separate Banking and Insurance/ Investment Management organisations for the future. HR continued to support the business, leaders and employees as well as local HR divisions to prepare for the operational split of the company. It provided appropriate back-up networks for employees who were made redundant. HR helped Insurance build the new stand-alone organisation and assisted business leaders with changes, redefining roles and changing responsibilities.
ING realises that its human capital is key to the business as motivated and engaged employees are essential to enhance customer satisfaction and, therefore, our success. ING wants to offer its people a stimulating working environment in which teamwork is high on the agenda. By providing ample learning opportunities, HR plays a key role in helping our employees to reach their full potential.
CONCLUSIONS AND AMBITIONS Throughout 2010, HR played a significant role in managing the complex operational unbundling of the Bank and Insurance/IM organisations with diligence and care for all employees involved. ING realises that the organisational changes can only be achieved with fully engaged employees, who are instrumental to the company’s success. Becoming a Top Employer is one of ING Bank’s ambitions for the coming years. Building the new Bank is about aligning our financial and business strategies with culture.
HR Insurance/IM continues to shape the HR 2011 strategy in support of the Insurer’s business objectives with a focus on performance management, talents, culture, engagement and diversity. It is about creating robust and coherent cultures to distinguish the uniqueness of the Bank and the Insurer as well as ensuring the strength of leadership positions. In 2011, ING will continue to focus on attracting, retaining, engaging and assessing talent and will track management performance carefully.
PREPARING FOR THE OPERATIONAL SPLIT HR continued to work closely with the business throughout the change process and is helping to build two strong, stand-alone organisations. It played a decisive role in designing various roles at head-office level for the Bank and the Insurer that are aligned with current and emerging business priorities as well as regulatory expectations. HR advised on and recruited talents for leadership positions at head office during the change process.
The operational separation resulted in substantial employee movements in the support functions and, unfortunately, also some redundancies. ING followed the Social Plan in preparing for the split. ING used Mobility Centres in the Netherlands, managed by HR, which supported employees in their search for new jobs, at ING or externally.
Underlying income rose 28.3% to EUR 17,298 million. The interest result increased 7.5%, driven by higher volumes and margins. In 2010, total client balances rose by EUR 60 billion to EUR 1,168 billion. The total interest margin improved to 1.42% from 1.32% in 2009, mainly in Retail Banking. Commission income increased 3.6% driven by higher Structured Finance fees. Investment and other income was EUR 1,218 million compared with EUR –1,561 million in 2009, as impairments on debt securities and negative revaluations on real estate diminished combined with higher capital gains.
Total underlying income 17,298 13,483 Underlying operating expenses 9,685 9,263 Underlying additions to loan loss provisions 1,751 2,859 Underlying result before tax 5,862 1,361 Underlying cost/income ratio 56.0% 68.7% Underlying cost/income ratio (excl. market impacts) 54.2% 54.3% Client balances (EUR billion) 1,168 1,108 Net production client balances (EUR billion) 49 21 Risk-weighted assets (EUR billion) 321 330 Underlying Return on Equity** 17.6% 5.0% Underlying Economic Capital (EUR billion) 27 22 * Underlying numbers are derived from IFRS-EU numbers, excluding the impact of divestments and special items.
Retail Banking 3,625 905 Commercial Banking 2,316 1,118 Corporate line banking –79 –662 2 Report of the Executive Board
BUSINESS DEVELOPMENTS ING Bank reported its best ever results in 2010 helped by improving market conditions. Risk costs began to revert to a lower level than originally envisaged as macroeconomic conditions started to improve. Competition overall was less intense than in 2009, improving returns on savings. However, volume growth remained subdued in lending to mid-corporates and SMEs.
ING actively participated in developing the new Banking Code established by the Dutch Banking Association (NVB). The Code is based on the ‘Restoring Trust’ report published by the Advisory Committee of the Future of Banks set up by the NVB (see for more information the publication ‘Application of the Dutch Banking Code by ING Bank N.V.’ on the website of ING: www.ing.com).
ING closely monitors external trends that are likely to have a high impact on its business. The new Basel III framework announced in 2010 will affect our leverage, capital, funding and liquidity. The world economy remains challenging and there are continuing concerns about the stability of the eurozone. Economic power is shifting to the East and emerging markets where growth is stronger. Liquidity is scarce, capital markets remain volatile and risk appetite is limited. Competition will be increasingly fought on price and service quality. Relationships between banks and their customers are changing, with customers wanting easier access to services and products, and more transparency.
ING Bank has assessed these trends and synthesised the implications for its business model. The external environment and constraints related to ING’s restructuring plan submitted to the European Commission, and the repayment of Dutch State aid (for more information see the chapter ‘ING and the financial
Each banking business made tangible progress in these areas during the year. For example, we introduced a Customer Suitability programme which checks whether products should be adjusted to better meet customer needs. We introduced TIM in the Netherlands, an online budgeting tool that allows customers to categorise their transactions in their online accounts and more easily keep track of their finances. We launched a service for start-up companies to open a business account, including a debit card, pin and online banking, in just 20 minutes. This was developed in response to requests to reduce red tape and time spent on non-essentials.
Significant enhancements in operational excellence have been achieved. Payments and Cash Management, for example, improved its processes, client interaction and IT set-up. All business lines shared best practices to reduce costs and accelerate projects. ING Direct USA won a top award for its mobile banking application, which provides quick and easy ways for users to transfer money and manage their investment portfolios.
AMBITION 2013 In November 2009, ING outlined ING Bank’s financial goals for 2013 under the existing regulatory and fiscal regime. They are as follows: • 5% top line growth, with balance sheet growth on average of 5% per year • Cost/income ratio of 50% • Return on equity of 13–15% (equity based on 7.5% of riskweighted assets (RWA) • Core Tier 1 ratio at a minimum level of 7.5% • Balance sheet leverage ratio of less than 30% • A loan-to-deposit ratio of less than 1.2
Retail Netherlands 4,333 3,882 Retail Belgium 2,054 2,062 ING Direct 3,782 1,762 Retail Central Europe 977 861 Retail Asia 285 197 Total Retail Banking 11,431 8,763
Retail Netherlands 1,395 883 Retail Belgium 545 578 ING Direct 1,450 –666 Retail Central Europe 155 85 Retail Asia 80 26 Total Retail Banking 3,625 905
The underlying operating expenses were up 5.5% to EUR 6,552 million due to increased staff costs, higher marketing spending across most business units, the introduction of new products and investments in IT platforms and higher deposit guarantee scheme costs. The underlying cost/income ratio improved to 57.3% from 70.9% in 2009.
Some of our operational improvements have created environmental benefits. For example, we give customers the option of receiving paper or digital bank statements. As a result, some 450,000 kilos of paper are saved in the Benelux area every year.
Some innovative products were introduced in 2010. One of these was TIM, an online budgeting tool that allows customers to categorise their transactions in their online accounts and keep track of their finances more easily. By the year-end, 125,000 customers had registered to use the tool.
In early December, ING also introduced the Spaarrente Wekker – a change in interest rate notification, which informs customers three days ahead of time by e-mail of any changes in the variable interest rate on their ING savings accounts. This service is also available to non-customers. At year-end, 170,000 consumers had registered for this new service.
BUSINESS DEVELOPMENTS Retail Netherlands (Retail NL) delivered a solid performance, recovering strongly from 2009. It has a strong Top 3 overall market position in retail banking in the country, serving nearly 8.2 million retail customers and around 600,000 business customers. It is well positioned to capture market opportunities.
Strategy Retail NL’s strategy is part of ING Bank’s overall strategy to build a leading retail and commercial bank, where all the banking business units are fully integrated. In common with the other banking units, Retail NL has been working to become the preferred bank for its customers, a goal that will be realised through operational excellence, customer centricity and being a top employer. Closely linked to this ambition is our aim to create long-term value for all our stakeholder groups: customers, employees, business relations and suppliers, society at large and shareholders.
ING also organised several Stakeholder Dialogues to get a better understanding of what stakeholders expect from us in the new financial environment. We invited policymakers, investors, regulators, journalists, non-governmental organisations, academics and private and corporate clients to participate in discussions centred on themes such as customer centricity and corporate social responsibility. The dialogues have been well received and will therefore continue into 2011.
Operational excellence All business units focus on improving timely, flawless and efficient execution of customer services. The merger of Postbank and ING Bank in 2009 has greatly improved operations and customer service. By the end of 2010, the large majority of all retail customers had been transferred to a single ING Bank platform. The process is expected to be completed by June 2011.
Business Banking/Mid-corporates Retail NL provides services to small and medium-sized businesses through relationship managers who work closely with product specialists to build a strategic partnership with our customers. A new service model was started in 2009 and was further developed in 2010. ING has a high penetration in the business banking market, helped by the fact that it has its own international network. Its ambitions are to continue lending to private individuals and businesses as it considers that as one of its core tasks.
RETAIL BELGIUM FINANCIAL DEVELOPMENTS The underlying result before tax of Retail Belgium declined 5.7% compared to 2009, as expenses increased and income remained almost flat. Underlying income slipped 0.4% to EUR 2,054 million. The interest result declined slightly, following lower margins on savings and current accounts, which were largely offset by higher margins on mortgages and other lending. Net production in mortgages was EUR 2.8 billion in 2010, while other lending increased by EUR 1.4 billion. The net production in funds entrusted was EUR 2.2 billion, driven by the success of the Orange Book savings product which compensated for outflows in current accounts. Operating expenses increased 5.1% to EUR 1,349 million, mainly driven by additional costs for the national deposit guarantee scheme in 2010. Risk costs declined 20.0% to EUR 160 million, or 83 basis points of average risk-weighted assets.
Customer feedback The Net Promoter Score (NPS) – a customer loyalty metric – was launched by Retail NL in December 2009. Both the overall customer experience and the product experience were surveyed among customers. Their feedback is used to improve our services and the product range. To this end, a programme was started in 2010, Enthousiaste Klanten (enthusiastic customers), entailing a number of new initiatives based on customer feedback.
Private Banking in Luxembourg contributed favourably to the overall results, despite an adverse economic climate.
It also continued with its branch transformation programme, which places a greater emphasis on direct banking and aims to improve operational efficiency and service quality. By the end of 2010, 381 traditional branches had been converted to ‘proximity’ outlets with self-service cash facilities and online banking access. The objective is to bring the total number of converted branches to 477 by year-end 2011. The bank has around 383 full-service branches, giving Retail Belgium around 800 points of sale.
In Spain, the new ‘Easy Mortgage’ process conducted online makes it easier for payment account customers to apply for a mortgage, as few personal details are required in addition to the ones the bank already has. The main additional information requested is a valuation on the property, but other details such as salary are not needed if the bank already has them.
ING Direct UK continued to improve the savings account opening process in 2010. The process was redesigned and reduced from seven to only five steps in 2009, and in 2010 customers were able to credit their account electronically using their debit card, thereby reducing the amount of time needed to activate the account.
Customer centricity All ING Direct units constantly look to see how how they can best meet customers’ needs. The bank encourages customer feedback which it then uses to update and improve the customer experience. In 2010, ING Direct Australia received an award for the most trusted banking brand.
ING Direct became active in social media in 2010, especially in the US, Canada and Italy. Consequently, ING was voted ‘Best Bank on Facebook’ by an Italian strategic consultancy that surveyed over 200 banks.
In Germany, ING-DiBa marked new record volumes in all five ING Direct core products. The numbers were boosted by a successful new marketing campaign, which was launched in September. Savings volume net growth was strong due to an attractive bonus rate for new customers and ING-DiBa’s leading service levels becoming more and more known. In terms of investment products ING-DiBa accelerated the growth speed despite being already No.1 in most key areas. Consumer loans were pushed strongly by changed legislation in Germany due to an EU Directive which makes interest rates for loans more comparable for customers which is in favour of ING-DiBa.
Customer centricity In 2010, ING Bank Slaski continued to modernise its branch network and optimise customer services by closer integration between its call centre, internet and branches.
The Net Promoter Score methodology was introduced in Poland (mid-November), Romania (early September) and late December in Turkey. The surveys focus on transactional levels, for example account activation, complaints and loan applications. From the customer feedback, we learn what we need to improve and the businesses act on this accordingly.
ING Direct USA The agreement signed in 2009 with the European Commission on ING’s Restructuring Plan requires that ING Direct USA be sold by 2013. ING appealed against certain elements of the EC’s decision in 2009 (see also ING and the financial environment), but in the meantime will continue to execute the agreed restructuring plan. ING is managing ING Direct USA as though it were the long-term owner, supporting the business when it is attractive and can be supported by the capital and management of the business.
Customer centricity In 2010, ING Vysya Bank launched ‘ING Online Shopping’, which allows customers to shop online for a wide choice of services and goods with various merchant/service portals including rail, bus and air tickets, electronic goods and gifts.
RETAIL ASIA FINANCIAL DEVELOPMENTS Retail Asia’s underlying result before tax tripled to EUR 80 million from EUR 26 million in 2009. The strong improvement was mainly attributable to higher results from ING Vysya Bank in India, driven by higher volumes and margins, a one-off gain on the sale of an investment and lower risk costs. This was partly offset by higher expenses due to further investments in business growth and increased staff costs, including additional pension provisions. The result in Asia was supported by the increased profit contribution from ING Bank’s share in the result of TMB in Thailand and higher dividends from Bank of Beijing and Kookmin Bank.
ING Vysya, in which ING has a 44% stake, serves over two million customers and is increasing its market share in the rapidly growing Indian banking market. TMB Bank, in which ING has a 30% stake, has strongly advanced in its turnaround process and is gaining growth momentum in both its Retail and Commercial banking businesses.
Bank of Beijing (BoB) – in which ING has the largest single shareholding (16.7%) – is continuing its rapid growth in volumes and profits. BoB is the largest city commercial bank in China. In 2010, ING decided to renew the strategic alliance with BoB for a further five years (until 2015). As an extension to its strategic partnership, ING and BoB also signed a second five-year Technical Assistance Agreement in 2010.
TMB Bank is transferring many of its operational processes back from its relationship managers to centralised control in order to allow relationship managers devote more time to serving customers and acquiring new ones. Its aim is to become the leading Thai bank, with world-class financial solutions.
CONCLUSIONS AND AMBITIONS All retail units will continue to work towards the overall ING Bank ambition of building a leading international, retail, direct and commercial bank, as well as becoming the preferred bank for its customers. Customer centricity will remain a focal point across the organisation, and the Customer Suitability programme will be further embedded in 2011.
A key priority for Retail NL was to regain stakeholder trust and this will remain a priority in 2011. Retail NL will also continue with its Financial Information Evenings, the business customer visits and the Stakeholder Dialogues.
Total underlying income 5,811 5,097 Underlying operating expenses 2,998 2,768 Underlying additions to loan loss provisions 497 1,210 Underlying result before tax 2,316 1,118 Underlying cost/income ratio 51.6% 54.3% Underlying cost/income ratio (excl. market impacts) 44.9% 38.4% Client balances (EUR billion) 278 257 Net production client balances (EUR billion) 12 –24 Risk-weighted assets (EUR billion) 142 158 Underlying Return on Equity** 15.8% 7.4%
The return on equity, based on a 7.5% core Tier 1 ratio, improved to 15.8% from 7.3% in 2009, driven by the increased results. In 2010, total RWA declined by 10.3% to EUR 142 billion at year-end as a result of model updates and reduced market RWA.
We maintained our position as Top 5 bank in our core Central and Eastern Europe markets. Illustrative of this in 2010, ING was No.1 MLA (Mandated Lead Arranger) for CEE syndicated loans by volume, No.4 ECM bookrunner in CEE and No.1 in Poland by volume. Furthermore, we ended up No.4 M&A advisor in Poland by volume. Also in the bond markets we maintained our position ending up No.5 bookrunner in CEE sovereign bonds by volume and No.8 bookrunner in CEE corporate bonds by volume.
We have a leading and highly profitable financial markets franchise both in the developed and emerging markets. It is our stated ambition to be a Top 3 Financial Markets player in the Benelux. Illustrative of this in 2010, ING was No.5 bookrunner in Benelux corporate bonds by volume.
2 emissions in Mexico. The structured metals and energy finance team was recognised as the Best Trade Bank in Metals and Mining by leading industry magazine Trade & Forfaiting Review.
GENERAL LENDING & PCM General Lending (GL) remains the anchor product for client relationships and the basis for cross-selling. Cross-selling improved in 2010 which improved market positions and increased overall return on client relationships. There was a shift in the market from lending to debt capital market finance. The need for bridge facilities with a role in debt capital market take-outs increased.
To meet the needs of clients, PCM has been expanding its international payments offering. In May 2010, ING Turkey was fully connected to the international PCM network. International clients are now able to open current accounts at ING Turkey and manage them using their existing ING electronic banking channels.
ING Real Estate Finance (REF) successfully weathered the adverse environment following prudent property financing for the last five years.
FINANCIAL MARKETS The Financial Markets (FM) business units make up the global business that manages ING’s financial markets trading and nontrading business lines. FM is managed along two business lines: ALCO & Strategic Trading Platform, the primary proprietary risktaking units, and Clients and Products, the primary customer trading and sales business line.
In February 2011, ING announced that it has reached an agreement to sell the majority of its REIM businesses in two separate transactions for a combined price of approximately USD 1.0 billion (EUR 770 million). In addition, as part of the overall transactions, ING has also agreed to sell approximately USD 100 million of its equity interest in existing ING REIM funds. With these transactions 2 Report of the Executive Board
New life sales (APE) held up well in 2010, although the increase against 2009 was mostly due to the weakening of the euro. Higher sales in the US, Latin America and Asia/Pacific were compensated by a significant sales decline in the Benelux, partly due to the low interest rate environment.
In the US, the closed block variable annuity business was reported as a separate business line as of the fourth quarter of 2010. The split of the US insurance business into two business lines, triggered a EUR 975 million write-down of deferred acquisition costs related to the closed variable annuity business, bringing the reserve adequacy on this block to well above 50%.
The decision to opt for two IPOs was taken because of differences in valuation methods of insurance companies in different markets, particularly in the US; to provide more flexibility in timing and execution of the IPOs; and to better deal with the competitive challenges that the new European Solvency II regime will pose in the US.
WHERE WE OPERATE ING Insurance/IM has a strong position as a provider of life insurance and retirement services and is well positioned to capitalise on socio-economic trends.
Insurance Benelux continued to make solid progress in the transformation of the Dutch insurance businesses. The integration of the Dutch insurance businesses into Nationale-Nederlanden and the revitalisation of the NN brand dominated business activity during the year.
In April, the key initiative that spearheaded the transformation of Nationale Nederlanden – the revitalisation of the NN brand – was successfully launched. The campaign featured a revitalised logo and website, and three new product campaigns, which resulted in a marked increase in recognition of the NN brand values.
In Luxembourg, the insurance business in conjunction with ING Bank recorded its best sales month ever in June. The business rated highly in an ING Bank distribution survey and sales volumes confirmed the strong and positive trend in sales since the inception of the new commercial support model in late 2009. There was much work done to find a new European distribution partner and new account managers were employed to help achieve this.
CONCLUSIONS AND AMBITIONS Much has been achieved in the past two years when the transformation of the Dutch insurance business began. The One programme has succeeded in significantly reducing costs and increasing efficiency. The business transformation plans are on track and earnings have improved on the core business fundamentals.
ING has leading market positions and a solid reputation in the region. This provides the company with further opportunities to broaden its distribution base. However, economic headwinds and the impact of unfavourable regulatory change in pensions in some countries continued to make business conditions challenging in 2010, following a tough year in 2009. Despite this environment, the outlook for ING’s businesses in the region remains positive. Operating profit before tax was solid given the economic circumstances and regulatory change. Headway was made in the transformation towards operating with lower costs-per-policy and more professional advice to customers.
The operating result fell by 13.1% to EUR 292 million. The result was largely driven by a EUR 26 million lower technical margin and EUR 20 million lower fees and premium-based revenues. The EUR 26 million lower technical margin was largely driven by a release in the provision for rider reserves in Poland and Hungary in 2009 of EUR 23 million and to a lesser extent by a lower realised result on surrenders. Lower fees and premium-based revenues of EUR 20 million were largely driven by lower revenues in both the pension fund in Poland and the life company in the Czech Republic.
Despite this, ING’s Polish pension fund became the country’s largest in terms of assets under management. It was already the largest in terms of number of customers. Uncertainties about mandatory savings regulations could lead to extra demand for voluntary pensions, life insurance, savings and investments. It could offer ING, with its strong retail distribution base, opportunities to further increase sales.
Awards During the year, several awards were won and there were also some special mentions. ING Insurance Poland came first in the Insurance Companies Ranking by Gazeta Bankowa monthly – a leading banking and insurance magazine in Poland. The ranking awarded the most customer-orientated insurance companies that excel in post-sales service. In Hungary ING was ranked among the country’s best life insurers at a brokers’ national conference. This was significant, given that ING Life Hungary established the broker channel relatively recently and had no long-standing broker partnerships prior to this. In Romania, ING Pensions became Company of the Year for its outstanding results achieved in a tough year. ING Life Romania won the award in the Quality Services category. ING Insurance Czech Republic and Slovakia both won several awards for their products (such as pensions and investment products). A committee of independent professionals considered them the best in the industry.
Towards a region-wide operating model In 2010, Insurance Central and Rest of Europe continued to work on creating a more region-wide operating model. The model will include, among other things, a regional general ledger, a regional product framework and a centralised, regional IT platform. Intensified regional cooperation creates more economies of scale to provide a solid foundation for future growth.
The operating result decreased slightly to EUR 559 million in 2010 from EUR 568 million in 2009. Higher operating income was more than offset by higher administrative expenses and DAC amortisation and trail commissions.
The Retirement Services unit is the third largest provider of defined contribution (DC) retirement plans in the US based on assets under management and administration, the second largest based on the number of plan participants and the largest based on the number of retirement plans managed.
CONCLUSIONS AND AMBITIONS To prepare for a successful US-focused IPO, Insurance US will continue to concentrate on three key priorities: sales growth, expense management and improving investment margins. Management is implementing a plan to reduce annual expenses by EUR 100 million a year, as it sharpens the focus on the retirement and life businesses.
Life operating income fell EUR 94 million to EUR 119 million from EUR 213 million in 2009. The investment margin decreased by EUR 32 million to EUR –11 million primarily reflecting higher balances in short-term investments and the impact of lower interest rates. Fees and premium based revenues decreased by EUR 46 million to EUR 121 million as higher fee income was more than offset by higher hedging costs. The decrease in the technical
The Rollover opportunity As part of Insurance US’s strategy to be the leader in helping individuals and institutions to grow and protect their wealth, Individual Retirement offers a variety of products, including rollover annuities that are part of broad suite of lower cost, lower risk investment vehicles.
Individual Retirement also provides Rollover IRA (Individual Retirement Accounts) products, essentially individually established defined contribution retirement funds, which are expected to be the fastest-growing segment of the US retirement market. These products are aimed at capturing the growth opportunity that lies within the rapidly expanding market for retirees and people changing jobs. This creates a need for the ‘rollover’ of plan assets into an individual retirement product or solution.
FINANCIAL DEVELOPMENTS Insurance Latin Americas posted an underlying result before tax of EUR 342 million in 2010, a 25.3% rise on the 2009 underlying result of EUR 273 million. The increase was impacted by lower revaluations (EUR 52 million in 2010 compared to EUR 59 million in 2009), which were in part mitigated by higher realised capital gains (EUR 7 million in 2010 versus EUR 3 million in 2009).
margin of EUR 16 million was mainly attributable to non-recurring negative reserve developments in the fourth quarter 2010.
BUSINESS DEVELOPMENTS The US Closed Block VA business includes ING’s Closed Block Variable Annuity business in the US, which has been closed to new business since early 2010 and which is now being managed in run-off. There are more than 500,000 contract holders and more than USD 46 billion in assets under management. Approximately two-thirds of the policies contain a guaranteed living benefit.
FINANCIAL DEVELOPMENTS Insurance Asia/Pacific posted an underlying result before tax of EUR 516 million in 2010, up 34.7% or 15.8% excluding currency effects compared to EUR 383 million in 2009. The result was achieved by improved operating results in most countries in 2010. Market-related items and other impacts contributed EUR 44 million to the result compared to EUR 18 million in 2009.
ING in Latin America continued to successfully take advantage of powerful demographic trends and strong economic tailwinds in the region, delivering solid earnings for the third consecutive year, despite the worldwide financial crisis and its lingering aftermath.
The five businesses together have 9.4 million customers and EUR 35 billion in assets under management. ING’s strong market positions in life and pension businesses across the region enabled the company to continue to post solid top- and bottom-line growth in 2010.
The businesses in the region continued to develop wealth management strategies, concentrating on mandatory and voluntary retirement savings plans.
Cross-selling voluntary savings products to existing clients is one of the major drivers that will help boost earnings to an expected 15% growth rate a year. In addition, early results from Chile show there was higher than 30% productivity from sales and lower distribution costs, as a result of the wealth management initiatives, which lifted ING to the largest provider in the tax incentive voluntary savings market with 21.7% market share.
In South Korea, Japan and Malaysia, ING holds key market positions and in 2010 worked to strengthen them further.
Life administrative expenses increased by a modest 7.8% but fell by 3.6% excluding currency effects as a result of focus on cost discipline throughout the region. The life administrative expense ratio improved to 27.3% from 30.5% in 2009. Deferred Acquisition Cost (DAC) amortisation and trail commissions grew by 24.3% or 9.7% excluding currency effects from the previous year reflecting currency impacts and business growth. Total life expenses grew by 17.4% or 4.2% excluding currency effects to EUR 1,151 million versus EUR 980 million in 2009.
ING was well-positioned to benefit as the life insurance and pensions sectors regained momentum.
Capturing growth In 2010, ING focused on capturing growth by strengthening preferred banking partnerships, enhancing tied agency productivity and diversifying its product mix through new sales campaigns and product innovation.
The operating result fell by 17.4% to EUR 166 million as a result of a EUR 174 million rise in administrative expenses and a EUR 14 million reduction in the investment margin, which was in total largely offset by EUR 153 million in higher fees and premium-based revenues.
In 2010, ING Investment Management (ING IM) continued to enhance its investment capabilities and pursued business development opportunities by operating as a globally coordinated business. There was a continued focus on cost control, but the emphasis remained on growing revenues and improving investment performance. The business moved to pool its investment expertise around the world and boost investment performance by implementing a skills-based multi-boutique structure. Performance was strong with all asset classes (equity, fixed income, multi assets) outperforming their respective aggregated benchmarks over the past 12 months.
ING IM AMERICAS In 2010 ING IM Americas saw a successful transition to arm’slength pricing for the ING Insurance General Account, along with a deepening of the partnership with Insurance clients in managing their portfolios, capital and liquidity needs.
The strong track record in investment performance in US equities and fixed income continued. In fixed income, a new investment team, put in place in 2009, achieved a strong recovery in performance, after a decline in 2008. In US equities, it was the sixth consecutive year of good investment performance.
ING IM ASIA/PACIFIC Despite ongoing global economic uncertainty, ING IM Asia/Pacific managed to book significant new and prestigious business. On the institutional side, numerous mandates were won by IM’s offices in Korea, Taiwan, Japan, Malaysia and Australia. Japan garnered an Emerging Market Debt sub-advisor mandate of more than USD 1 billion from a major financial institution. On the retail front, Taiwan successfully launched a high yield bond fund of funds as well as a Brazil fund, achieving USD 200 million and USD 150 million respectively during the initial funding period. India was very successful in growing its Portfolio Management Service (PMS) book.
Fund ratings agency Morningstar awarded the ING Global Opportunities Fund the best worldwide large cap equity fund in six countries: France, Austria, Spain, Singapore Hong Kong and the Netherlands. The fund also won ‘Best global equity fund over a three-year period’ at the Thomson Reuter Lipper 2010 awards.
ING IM EUROPE ING IM’s Institutional clients Netherlands division adjusted its sales focus in acknowledgement of the shift in the market from Defined Benefit to Defined Contribution pension funds, the consolidation of pension funds and the shift from mandate-driven to solutionsdriven business.
Over the year, ING IM has focused on enhancing its investment capabilities. A skills-based multi-boutique structure has been established and best practices in key functional areas have been strengthened. As a result, ING IM has delivered strong investment performance and made significant progress in building an investment-led winning performance culture.
The Supervisory Board visited the main ING data centre during its annual Supervisory Board Knowledge Day in January 2010. The objective was to update the Supervisory Board members on new technologies as well as the development and the future strategic direction of the ING data centres. During the Knowledge Day, the Supervisory Board was also updated on developments concerning IFRS for financial instruments. In addition to the annual Knowledge Day an Audit Committee Knowledge session took place in March 2010. The Dutch central bank gave a presentation on banking supervision during the Audit Committee Knowledge session. Furthermore, several educational presentations on specific topics were given to the Supervisory Board during the year.
The successive quarterly figures of 2010 were discussed in May, August and November, respectively. The Annual Accounts and the SOX 404 sign-off were approved in March. The 2010 General Meeting was evaluated in May. The Supervisory Board was updated on the status of the separation of the banking and insurance operations, including the most complex separation issues and the costs of separation, in almost every meeting. Various scenarios to pay back the Dutch State in the future were reviewed. In line with the regular review programme TMB Bank, Santander pension and annuity business in Latin America, Citistreet as well as Interhyp AG,
Board made several suggestions regarding strategic discussions, the earlier distribution of financial information and educational topics. The Supervisory Board also discussed the functioning of the Executive and Management Boards.
In the second half of the year, the exposure of ING in Greece and other Southern European countries, including Spain, was a topic of frequent debate. The Audit Committee was regularly updated on the capital position of the bank and insurance business as well as on the developments regarding the Solvency II and Basel III regulations. After the summer an extensive discussion took place on the development of the insurance business in the US, focusing on the Variable Annuities business and the accounting method for insurance in the US. In November a number of measures to mitigate the issues at ING Insurance US were presented to the Audit Committee. Other topics discussed in the meetings were capital management, internal control and regulatory matters.
NOMINATION COMMITTEE MEETINGS The Nomination Committee met once with one absentee in 2010, to discuss the future composition of the Supervisory Board and its committees as well as the succession planning of the Executive Board and the Management Boards. The Nomination Committee advised positively on a number of Supervisory Board candidates for appointment in the 2011 annual General Meeting. The Nomination Committee discussed various appointments in the Management Boards Banking and Insurance which were publicly announced in November.
In May, the Supervisory Board was updated on the development of the bank strategy following separation and discussed the five-year financial plan for insurance. Taking into account the uncertain outlook for the real estate market the Supervisory Board reviewed possible measures regarding ING’s real estate exposure.
With his background, Godfried van der Lugt made an important contribution to the discussions in the Supervisory Board, the Audit Committee and the Risk Committee. His extensive experience in the financial industry and his awareness of the historic perspective were of great value. The members of the Supervisory Board, the Executive Board and the Management Boards greatly valued his opinion in the decision-making and would like to thank him for his strong personal contribution.
Upon his request, Claus Dieter Hoffmann will not be nominated for reappointment taking into account that he will reach the age of 70 in 2012. Claus Dieter Hoffmann was appointed as a member of the Supervisory Board and the Audit Committee in 2003. He stepped down from the Audit Committee and joined the Corporate Governance Committee in January 2008 and became a member of the Risk Committee in August 2009.
RECENT DEVELOPMENTS LEGISLATIVE AND REGULATORY DEVELOPMENTS On 1 January 2010, the Dutch Banking Code (Code Banken) became effective. For more information, please refer to the paragraph ‘Corporate Governance Codes’ below.
On 1 July 2010, the bill on shareholders’ rights (wet aandeelhoudersrechten) came into force. The relevant provisions of this bill will apply for the first time at the 2011 annual General Meeting.
• The shareholder approval requirements for equity compensation plans under Dutch law and the Corporate Governance Code differ from those applicable to US companies which are subject to the NYSE’s listing rules. Under Dutch company law and the Corporate Governance Code, shareholder approval is only required for equity compensation plans (or changes thereto) for members of the Executive Board and Supervisory Board, and not for equity compensation plans for other groups of employees.
SHAREHOLDER PARTICIPATION AND POSITION OF ING TRUST OFFICE (STICHTING ING AANDELEN) During the years 2007–2010, participation of shareholders, excluding the ING Trust Office, and depositary-receipt holders in annual General Meetings consistently increased from 36.7% to 41.3%. Only the extraordinary General Meeting of 25 November 2009 showed a deviation from this trend with a markedly lower turnout of 31.1%.
CORPORATE GOVERNANCE CODES COMPLIANCE WITH THE CORPORATE GOVERNANCE CODE For its corporate governance structure and practices, ING Group uses the Corporate Governance Code as reference. The Corporate Governance Code can be downloaded from the website of the Monitoring Commission Dutch Corporate Governance Code (www. commissiecorporategovernance.nl/Corporate_Governance_Code). The application of the Corporate Governance Code in 2010 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.
ING Group strives to maintain an open and constructive dialogue with current and potential investors, and with industry analysts. The scope of such bilateral communication may range from single investor queries via e-mail, to more elaborate discussions with analysts or institutional investors that take place via telephone or face-to-face. These meetings are not announced in advance, nor can they be followed by webcast or any other means. ING Group’s Investor Relations department is the main point of contact for these communications. However, Executive Board members also participate in investor meetings. Information provided during such occasions is always limited to that which is already in the public domain, and any bilateral contacts do not take place shortly before publication of the regular quarterly results releases.
Details of investors, if any, who have reported their interest in ING Group pursuant to the Dutch Financial Supervision Act (Wet op het financieel toezicht) (or the predecessor of this legislation) are shown on page 10. ING Group is not aware of shareholders, potential shareholders or investors with an interest of 5% or more in ING Group other than the ING Trust Office and the ING Continuity Foundation.
INVESTOR RELATIONS AND BILATERAL CONTACTS WITH INVESTORS ING Group encourages and recognises the importance of bilateral communication with the investment community. Communications with current and potential shareholders, depositary receipt holders, bondholders, and industry analysts is actively managed by the Investor Relations department.
The following restrictions apply in respect of granting a voting proxy to holders of depositary receipts: • the relevant holder of depositary receipts must have announced his or her intention to attend the general meeting observing the provisions laid down in the Articles of Association; and
Members of the Executive Board may be suspended or dismissed at any time by a majority resolution of the General Meeting. A resolution to suspend or dismiss members of the Executive Board that has not been brought forward by the Supervisory Board may only be adopted by the General Meeting by an absolute majority of the votes cast, which majority represents more than one-third of the issued share capital.
Proxy voting forms for shareholders and voting instruction forms for holders of depositary receipts who do not participate in the Shareholder Communication Channel are made available on the website of ING Group (www.ing.com). The submission of these forms is subject to additional conditions which are specified in the forms themselves.
Moreover, the approval of the General Meeting is required for Executive Board decisions that are so far-reaching that they would greatly change the identity or nature of ING Group or its enterprise. This includes resolutions to transfer or assign otherwise all or virtually all of the enterprise of ING Group or its subsidiaries as a 3 Corporate governance
ANCILLARY POSITIONS/CONFLICTING INTERESTS No member of the Executive Board has corporate directorships at listed companies outside ING. This is in accordance with ING Group’s policy to avoid conflicts of interest.
INDEPENDENCE Annually, the members of the Supervisory Board are requested to assess whether the criteria of dependence set out in the Corporate Governance Code do not apply to them and to confirm this in writing. On the basis of these criteria, all members of the Supervisory Board are to be regarded as independent on 31 December 2010. Members of the Supervisory Board to whom the independence criteria of the Corporate Governance Code do not apply, and members of the Supervisory Board to whom the criteria do apply but who can explain why this does not undermine their independence, are deemed to be independent.
The organisation, powers and conduct of the Supervisory Board are detailed in the Supervisory Board Charter. Separate charters have been drawn up for the Audit Committee, Risk Committee, the Remuneration Committee, the Nomination Committee and the Corporate Governance Committee. These charters are available on the website of ING Group (www.ing.com). A short description of the duties for the five Committees follows below.
The Audit Committee assists the Supervisory Board in monitoring the integrity of the financial statements of ING Group, ING Verzekeringen N.V. and ING Bank N.V., in monitoring the compliance with legal and regulatory requirements and in monitoring the independence and performance of ING’s internal and external auditors. On 31 December 2010, the members of the Audit Committee were: Jackson Tai (chairman), Tineke Bahlmann, Henk Breukink, Godfried van der Lugt and Jeroen van der Veer.
TERM OF APPOINTMENT OF MEMBERS OF THE SUPERVISORY BOARD A member of the Supervisory Board retires no later than at the end of the first general meeting held four years after his or her last appointment or reappointment. In accordance with the Corporate Governance Code, members of the Supervisory Board may as a general rule be reappointed for two additional four-year terms. Under special circumstances however, the Supervisory Board may deviate from this general rule, among others in order to maintain a balanced composition of the Supervisory Board and/or to preserve valuable expertise and experience. As a general rule, members of the Supervisory Board shall also resign at the end of the annual general meeting in the year in which they attain the age of 70 and shall not be reappointed. The schedule for resignation by rotation is available on the website of ING Group (www.ing.com).
ANCILLARY POSITIONS/CONFLICTING INTERESTS Members of the Supervisory Board are asked to provide details on any other directorships, paid positions and ancillary positions they may hold. Such positions may not conflict with the interests of ING Group. It is the responsibility of the individual member of the Supervisory Board and the Corporate Governance Committee to ensure that the directorship duties are performed properly and are not affected by any other positions that the individual may hold outside the Group.
In case of a conflict of interest, the relevant member of the Supervisory Board, as the Corporate Governance Code recommends, abstains from discussions and decision-making on the topic or the transaction in relation to which he or she has a conflict of interest with ING Group.
INFORMATION ON MEMBERS OF THE SUPERVISORY BOARD PETER A.F.W. ELVERDING (CHAIRMAN) (Born 1948, Dutch nationality, male; appointed in 2007, term expires in 2011) Former chairman of the Managing Board of Directors of Koninklijke DSM N.V. Former vice-chairman of the Supervisory Board of De Nederlandsche Bank N.V. (Dutch central bank). Other business activities: chairman of the Supervisory Board of Océ N.V. (listed company). Member of the Supervisory Board of SHV Holdings N.V. Chairman of the Supervisory Board of Q-Park N.V. Member of the Supervisory Board of Koninklijke FrieslandCampina N.V. Chairman of the Supervisory Board of Oostwegel Holding BV. Member of the Board of Stichting Instituut GAK.
JEROEN VAN DER VEER (VICE-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: vice-chairman and senior independent director of Unilever N.V., non-executive director of Royal Dutch Shell plc and member 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 Remuneration Committee advises the Supervisory Board, among other things, on the terms and conditions of employment (including remuneration) of the members of the Executive Board and on the policies and general principles on which the terms and conditions of employment of the members of the Executive Board and of senior managers of ING and its subsidiaries are based. On 31 December 2010, the members of the Remuneration Committee were: Jeroen van der Veer (chairman), Peter Elverding, Piet Klaver, Joan Spero and Lodewijk de Waal. The Nomination Committee advises the Supervisory Board, among other things, on the composition of the Supervisory Board and Executive Board. On 31 December 2010, the members of the Nomination Committee were: Peter Elverding (chairman), Piet Klaver, Joan Spero, Jeroen van der Veer and Lodewijk de Waal.
PIET C. KLAVER (Born 1945, Dutch nationality, male; appointed in 2006, term expires in 2014) Former chairman of the Executive Board of SHV Holdings N.V. Other business activities: chairman of the Supervisory Board of TNT N.V. (listed company). Chairman of the Supervisory Board of each of Dekker Hout Groep B.V., Jaarbeurs Holding B.V., Dura Vermeer Groep N.V., Blokker Holding B.V., Credit Yard Group B.V. and Utrecht School of the Arts. Member of the Supervisory Board of SHV Holdings N.V. Member of the Board of the African Parks Foundation.
JOAN E. SPERO (Born 1944, American nationality, female; appointed in 2008, term expires in 2012) Former executive vice-president Corporate Affairs and Communications of American Express Company. Former Under Secretary for Economic Business & Agricultural Affairs, US State Department. Former president Doris Duke Charitable Foundation. Other business activities: non-executive director of IBM Corporation. Trustee of Council on Foreign Relations, Wisconsin Alumni Research Foundation, Morgridge Institute for Research. Trustee Emerita of Columbia University and Amherst College.
JACKSON P. TAI (Born 1950, American nationality, male; appointed in 2008, resigned on 6 January 2011) Former vice-chairman and chief executive officer of DBS Group Holdings. Former managing director in the Investment Banking Division of JP Morgan. Other business activities: non-executive director of each of NYSE Euronext, MasterCard Incorporated, CapitaLand, and Bank of China Limited (pending regulatory approval). Non-executive chairman and director of Brookstone, Inc. Trustee of Rensselaer Polytechnic Institute.
The external auditor may be questioned at the annual general meeting in relation to its audit opinion on the annual accounts. The external auditor will therefore attend and be entitled to address this meeting.
CHANGE OF CONTROL CLAUSES IN MATERIAL AGREEMENTS ING Group is not a party to any material agreement that becomes effective or is 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 agreements. Following a change of control of ING Group (as the result of a public bid or otherwise), such agreements may be amended or terminated, leading, for example, to an obligatory transfer of the interest in the joint venture, early repayment of amounts due, loss of credit facilities or reinsurance cover and liquidation of outstanding futures and option trading positions.
On 19 February 2010, the Board held a meeting to discuss the position of ING Trust Office in general. The general counsel of ING Group was invited to this meeting.
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 58.7% 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.
The Board convened a meeting of holders of depositary receipts, which was held on 24 November 2010. 0.07% 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 2009 and 2010 up to the date of the meeting. In addition, the Board answered various questions of holders of depositary receipts attending the meeting.
ING Trust Office granted proxies to holders of depositary receipts who attended the AGM in person or who were represented by a third party, to vote at their own discretion on such a number of shares equal to the number of depositary receipts held by the relevant holder of depositary receipts on the record date, with due observance of the Articles of Association and the Trust Conditions.
OUTSTANDING DEPOSITARY RECEIPTS On 31 December 2010, the nominal value of administered ordinary shares amounted to EUR 919,254,486.48 for which 3,830,227,027 depositary receipts were issued, each with a nominal value of EUR 0.24. During the reporting year, the net number of depositary receipts decreased with 386,717.
As required by section 5:25c paragraph 2(c) of the Dutch Financial Supervision Act, each of the signatories hereby confirms that to the best of his or her knowledge: • the ING Groep N.V. 2010 Annual Accounts give a true and fair view of the assets, liabilities, financial position and profit or loss of ING Groep N.V. and the entities included in the consolidation taken as a whole; • the ING Groep N.V. 2010 Annual Report gives a true and fair view of the position at the balance sheet date, the development and performance of the business during the financial year 2010 of ING Groep N.V. and the entities included in the consolidation taken as a whole, together with a description of the principal risks ING Groep N.V. is confronted with.
In our opinion, ING Groep N.V. maintained, in all material respects, effective internal control over financial reporting as of 31 December 2010, based on the COSO criteria.
The remuneration policy is leading in the international financial markets in terms of moderation of pay. The Supervisory Board and the Executive Board also have an obligation to safeguard the continuity of the company. The Supervisory Board will therefore evaluate from time to time how these two responsibilities relate to each other. If and when appropriate, it can make adjustments.
Increased emphasis on long-term value creation The remuneration policy for the Executive Board combines the short- and long-term variable components into one structure. This structure intends to support both long-term value creation and short-term company objectives. The emphasis on long-term performance indicators within the variable component of the compensation package is increased by means of deferral, a reasonableness test and claw back mechanisms.
The stock awards will vest on the third anniversary of the grant date, subject to a reasonableness test by the Supervisory Board to determine whether application of the predetermined criteria does not result in undesired outcomes. Adjustments to the number of shares will only be considered in extraordinary circumstances. Executive Board members are not allowed to sell depositary receipts obtained within a period of five years from the grant date. However, they are allowed to sell part of their depositary receipts at the date of vesting to pay tax over the vested share award.
Increased focus on risk and non-financial performance Variable compensation is increasingly linked to risk considerations and non-financial performance and will take into account both individual and company performance criteria. Performance measurement will account for estimated risks and costs of capital. In addition to financial indicators, performance will also be assessed based on non-financial drivers, by means of a number of targets regarding economic, environmental, customer satisfaction and social criteria.
Members of the Executive Board will be required to pay a contribution to their pension premium in line with the contributions under ING’s Collective Labour Agreement in the Netherlands.
The short-term component of total variable compensation will be reduced by 10% to a maximum of 40% (was: 50%) and will be equally divided between cash and stock (was: cash only) and paid in the year following the performance year. The remaining 60% of the total variable compensation (was: 50%) will be deferred. This long-term component will also be equally divided between cash and stock (was: stock only) and conditionally granted in the year following the performance year.
Executive Board members are not allowed to sell depositary receipts obtained within a period of five years from the grant date. However, they are allowed to sell part of their depositary receipts at the date the stock becomes unconditionally theirs in order to pay tax over these share awards.
Executive Board variable compensation 2011 The 2011 target variable compensation of 80% of base salary remains the same as for 2010. The actual payout may vary between 0% and 125% of the target level (i.e. between 0% and 100% of base salary). In connection herewith, the Supervisory Board performed an analysis of various scenarios which were considered relevant. Financial and non-financial performance indicators will be individually set for each Executive Board member and agreed by the Supervisory Board.
The regulatory environment is still in development and not everything has been clarified yet at this moment. The structure as set out above is based on information currently available. Should it become clear, after everything has been clarified, that amendments are necessary, ING will amend the structure as deemed appropriate.
Executive Board base salary 2010 The base salary of all Executive Board members was set at the time of the introduction of the remuneration policy in 2010.
Executive Board variable compensation 2010 The target variable compensation is set at 80% of base salary. The actual payout may vary between 0% and 125% of the target level (i.e. between 0% and 100% of base salary).
in risk management; and/or for as long as ING has not paid back the Dutch State, whether there has been a significant change in the economic or regulatory capital base.
Compensation of the individual members of the Executive Board amounts in thousands of euros 2010 2009 2008 amount number of shares (1) amount number of options/shares amount number of options/shares
Loans and advances to Executive Board members The table below presents the loans and advances provided to Executive Board members and outstanding on 31 December 2010, 2009 and 2008. These loans were concluded in the normal course of business and on terms generally applicable to Company personnel as a whole and were approved by the Supervisory Board.
ING depositary receipts for shares held by members of the Executive Board number of shares 2010 2009 2008
Peter Elverding (2) 84 79 68 (1) In 2010, 2009 and 2008 the remuneration and attendance fees for the membership of a committee have not been paid to the chairman and vicechairman of the Supervisory Board. Effective 2011, remuneration and attendance fees for the membership of a committee will be paid to the chairman and vice-chairman of the Supervisory Board.
(4) Tineke Bahlmann is a member of the Supervisory Board as of April 2009. The compensation figure for 2009 reflects the partial year as member of the Supervisory Board.
(5) Aman Mehta, Joan Spero and Jackson Tai are members of the Supervisory Board as of April 2008. The compensation figures for 2008 reflect the partial year as members of the Supervisory Board.
(6) Lodewijk de Waal is a member of the Supervisory Board as of April 2009. He has been acting as an observer in the Supervisory Board as of November 2008. The compensation figure for 2009 reflects the partial year as member of the Supervisory Board. Up to the appointment date Lodewijk de Waal has received remuneration, expense allowances and attendance fees in line with the remuneration of the Supervisory Board.
Jeroen van der Veer’s appointment to the Supervisory Board (effective as of 1 July 2009).
Piet Klaver 43,796 13,796 7,430 (1) The numbers of depositary receipt for shares reflect the shares held by the members of the Supervisory Board and their partners.
Investments in associates 6 3,925 3,699 Real estate investments 7 1,900 3,638 Property and equipment 8 6,132 6,119
References relate to the notes starting on page 112. These form an integral part of the consolidated annual accounts.
Addition to loan loss provisions 5 1,751 2,973 1,280 Intangible amortisation and other impairments 44 1,112 568 464
Basic earnings per ordinary share 49 0.73 –0.57 –0.27 Diluted earnings per ordinary share 49 0.73 –0.57 –0.27 Dividend per ordinary share 50 0.00 0.00 0.74
Taxation paid –503 –412 –49 Changes in: – amounts due from banks, not available on demand –4,333 8,611 7,162
Investments and advances: – group companies –5 –1,725 – associates –165 –181 –1,034 – available-for-sale investments –163,038 –165,771 –228,291 – held-to-maturity investments –141 –314 – real estate investments –73 –130 –905 – property and equipment –527 –640 –708 – assets subject to operating leases –1,284 –1,034 –1,401 – investments for risk of policyholders –52,370 –65,362 –64,735 – other investments –372 –338 –881
Issuance costs incurred –20 –20 –20 Employee stock option and share plans 31 31 31 Issue of non-voting equity securities 10,000 10,000 Changes in the composition of the group –455 –455 Dividends (1) –3,600 –3,600 –32 –3,632 Purchase/sale of treasury shares –44 –1,986 –2,030 –2,030 Exercise of warrants and options 5 443 448 448
(1) 2007 final dividend of EUR 0.82 per ordinary share, 2008 interim dividend of EUR 0.74 per ordinary share and final dividend of EUR 0.425 per non-voting equity security. (2) The 2009 amount of EUR 605 million includes the coupon (EUR 259 million) and repayment premium (EUR 346 million) on the repayment of EUR 5 billion non-voting equity securities.
In certain markets that have become significantly less liquid or illiquid, the range of prices for the same security from different price sources can be significant. Selecting the most appropriate price within this range requires judgement. The choice of different prices could produce significantly different estimates of fair value.
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.
A subsidiary which ING Group has agreed to sell but is still legally owned by ING Group may still be controlled by ING Group at the balance sheet date and, therefore, still be included in the consolidation. Such a subsidiary may be presented as a held for sale disposal group if certain conditions are met. Disposal groups (and Non-current assets) are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use. This is only the case when the sale is highly probable and the disposal group (or asset) is available for immediate sale in its present condition; management must be committed to the sale, which should be expected to occur within one year from the date of classification as held for sale.
FINANCIAL ASSETS Recognition of financial assets All purchases and sales of financial assets classified as fair value through profit and loss, held-to-maturity and available-for-sale that require delivery within the time frame established by regulation or market convention (‘regular way’ purchases and sales) are recognised at trade date, which is the date on which the Group commits to purchase or sell the asset. Loans and receivables are recognised at settlement date, which is the date on which the Group receives or delivers the asset.
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; • 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 Group has paid or delivered its side of the trade. Settlement risk mainly relates to the risk arising on disposal of financial instruments that are classified in the balance sheet as Financial assets at fair value through profit and loss (trading assets and non-trading derivatives) and Investments (available-for-sale and held-to-maturity).
For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics. Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors’ ability to pay all amounts due according to the contractual terms of the assets being evaluated. The collective evaluation of impairment includes the application of a ‘loss confirmation period’ to default probabilities. The loss confirmation period is a concept which recognises that there is a period of time between the emergence of impairment triggers and the point-in-time at which those events are captured by the Group’s credit risk systems. Accordingly, the application of the loss confirmation period ensures that impairments that are incurred but not yet identified are adequately reflected in the Group’s loan loss provision. Although the loss confirmation periods are inherently uncertain,
the Group applies estimates to sub-portfolios (e.g. large corporations, small and medium size enterprises and retail portfolios) that reflect factors such as the frequency with which customers in the sub-portfolio disclose credit risk sensitive information and the frequency with which they are subject to review by the Group’s account managers. Generally, the frequency increases in relation to the size of the borrower. Loss confirmation periods are based on historical experience and are validated, and revised where necessary, through regular back-testing to ensure that they reflect recent experience and current events.
Reinsurance contracts Reinsurance premiums, commissions and claim settlements, as well as the reinsurance element of technical provisions are accounted for in the same way as the original contracts for which the reinsurance was concluded. If the reinsurers are unable to meet their obligations, the Group remains liable to its policyholders for the portion reinsured. Consequently, provisions are made for receivables on reinsurance contracts which are deemed uncollectible.
Due to the rights issue in 2009, the 2008 earnings per share figures have been restated. Reference is made to Note 49 ‘Earnings per ordinary share’ for a further explanation on the nature and the effect of this restatement.
Trading assets 125,675 111,444 Investments for risk of policyholders 120,481 104,597 Non-trading derivatives 11,722 11,632 Designated as at fair value through profit and loss 6,016 5,517
The notional value of the related credit derivatives is EUR 205 million (2009: EUR 79 million). The change in fair value of the credit derivatives attributable to changes in credit risk since the loans were first designated was nil (2009: nil) and the change for the current year was nil (2009: nil).
Disposals and redemptions –2,228 –3,052 –150,569 –186,968 –2,620 –1,675 –155,417 –191,695
To/from held-to-maturity 282 –689 282 –689 To/from available-for-sale –282 689 –282 689 To/from loans and advances to customers/ amounts due from banks 10 –28,962 –28,952 To/from Investment in associates 12 9 12 9
Derecognition of Available-for-sale debt securities – Transaction with the Dutch State (2009) ING Group and the Dutch government (‘State’) reached an agreement on an Illiquid Assets Back-Up Facility (‘IABF’) on 26 January 2009; the transaction closed on 31 March 2009. Under the IABF, ING has transferred 80% of the economic ownership of its Alt-A portfolio to the Dutch State. This portfolio was included in Available-for-sale debt securities. Reference is made to Note 33 ‘Related parties’ for more details.
Debt securities by banking and insurance operations Available-for sale Held-to-maturity Total
Investments in connection with the insurance operations with a combined carrying value of EUR 6 million (2009: EUR 26 million) did not produce any income for the year ended 31 December 2010.
Trading assets 27,979 25,287 Investments for risk of policyholders 8,944 8,215 Designated as at fair value through profit and loss 3,672 3,477 Financial assets at fair value through profit and loss 40,595 36,979
– more than 1 year but less than 5 years 9,700 9,739 – more than 5 years 6,089 6,041
Included in Amounts due from banks 82 64 Included in Loans and advances to customers 17,439 17,096
The allowance for uncollectible finance lease receivables included in the loan loss provisions amounted to EUR 177 million as at 31 December 2010 (2009: EUR 161 million).
Loans to, or guaranteed by, public authorities 3 3 3 3
Increase in loan loss provisions 1,751 2,973 41 67 1,792 3,040
Notes to the consolidated annual accounts of ING Group continued 6 INVESTMENTS IN ASSOCIATES
ING Dutch Residential Master Fund II C.V. 13 63 612 143 22 18 ING Real Estate Nordic Property Fund FGR 15 61 940 543 81 59
In 2010, share of results of EUR 317 million (2009: EUR –458 million) and impairments of EUR –3 million (2009: EUR –3 million) are presented in the profit and loss account in Share of profit from associates for EUR 314 million (2009: EUR –461 million).
Revaluation surplus Opening balance 531 606 Revaluation in year –3 –3 Released in year –72 Closing balance 528 531
More than 1 year but less than 5 years 1,887 1,893 More than 5 years 13 4
Amortisation and unlocking –113 –120 –358 –342 –118 –120 –589 –582 Impairments –540 –31 –9 –571 –9 Effect of unrealised revaluations in equity –286 –482 –286 –482 Changes in the composition of the group –11 3 –94 –49 –62 –31 –143 –77 –310
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 book 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 book value. The outcome of the impairment test performed in the third quarter of 2010 indicated that the fair value has become less than book 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.
Cash and balances with central banks 28 264 Amounts due from banks 474 Financial assets at fair value through profit and loss 16 389 Available-for-sale investments 144 458 Loans and advances to customers 244 3,242 Reinsurance contracts 3 Investments in associates 43 Property and equipment 12 37 Intangible assets 15 3 Deferred acquisition costs 43 35 Other assets 136 119
Other borrowed funds 35 Insurance and investments contracts 217 191 Amounts due to banks 31 Customer deposits and other funds on deposit 4,480 Financial liabilities at fair value through profit and loss 36 Other liabilities 172 152
Cumulative other comprehensive income includes EUR 7 million (2009: EUR 13 million) related to Assets held for sale.
As at 31 December 2010, Other reserves included an amount of EUR 741 million (2009: EUR 645 million; 2008: EUR 566 million) related to the former Stichting Regio Bank.
No changes have occurred in the issued share capital in 2010.
Depositary receipts for ordinary shares held by ING Group (Treasury shares) As at 31 December 2010, 51.3 million (2009: 47.0 million; 2008: 36.5 million) depositary receipts for ordinary shares ING Groep N.V. with a par value of EUR 0.24 were held by ING Groep N.V. or its subsidiaries. These depositary receipts for ordinary shares were purchased to hedge option rights granted to the Executive Board members and other employees. 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 out of exercise and vesting. Once all shares in the hedge portfolio are used ING will fund these obligations by issuing new shares.
B warrants (2008) In 1998, ING Groep N.V. authorised the issue of a maximum of 17,317,132 B warrants, of which 17,220,200 were issued. On 5 January 2008 of the remaining 9,266,097 warrants, 259,484 warrants expired and 9,006,613 were exercised. Accordingly no B warrants were outstanding as at 31 December 2010 (2009 and 2008: nil). B warrant holders were entitled to obtain from ING Groep N.V., for a fixed price, depositary receipts for ordinary shares in the proportion of one B warrant to two depositary receipts. B warrant holders could exercise their rights at their own discretion but no later than 5 January 2008.
Result for the year –935 –935 Unrealised revaluations after taxation –273 –5 –278 Changes in treasury shares 129 129 Transfer to share of associates reserve 76 –76 Dividend and repayment premium –259 –346 –605 Employee stock options and share plans 64 64
Rights issue –64 Cancelled –4,904 –183,158,017 Share-based payments –23 –27 –22 –2,140,863 –1,058,658 –1,250,394
In December 2009, ING repurchased 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. In March 2011, ING announced that, at the next coupon reset date on 13 May 2011, ING intends to exercise its option for early repurchase of EUR 2 billion of the remaining non-voting equity securities (core Tier 1 securities). The total payment in May 2011 will amount to EUR 3 billion and includes a 50% repurchase premium. ING will fund this repurchase from retained earnings. Provided that the strong capital generation continues, ING intends to repurchase the remaining EUR 3 billion non-voting equity securities (core Tier 1 securities) ultimately by May 2012 from retained earnings. The final decision on repurchase of these non-voting equity securities (core Tier 1 securities) will be made before the envisaged repayment date and will be conditional upon there having been no material changes regarding ING’s capital requirements and/or ING’s outlook on external market circumstances. The terms for the remaining non-voting equity securities, including restrictions on remuneration and corporate governance, remained unchanged. Reference is made to Note 33 ‘Related parties’.
As of 31 December 2010, ING Group had unused lines of credit available including the payment of commercial paper borrowings relating to debt securities in issue of EUR 6,518 million (2009: EUR 7,029 million).
ING Bank issued a 5 year EUR 4 billion fixed rate government guaranteed senior unsecured bond in February 2009. The issue was priced at a fixed rate of 3.375%, 75 basis points over mid-swaps.
Provision for life insurance for risk of policyholders 114,603 99,299 359 374 114,962 99,673
Total provisions for insurance contracts 252,818 224,076 5,789 5,480 258,607 229,556
Investment contracts for risk of company 5,991 5,896 5,991 5,896 Investment contracts for risk of policyholders 5,984 5,406 5,984 5,406 Total provisions for investment contracts 11,975 11,302 11,975 11,302
Changes in life insurance provisions Provision net of reinsurance (excluding provision for life insurance for risk of policyholders)
ING transferred its U.S. group reinsurance business to Reinsurance Group America Inc. in 2010 by means of a reinsurance agreement. This business continues to be included in Life insurance provisions. The related asset from the reinsurance contract is recognised under Reinsurance contracts.
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% (2009: 3.0% to 4.0%).
Effect of discounting –17 –24 –26 –39 –43 –44 –42 –235
Liability relating to underwriting years prior to 2004 1,130 Total amount recognised in the balance sheet 3,203
Derivatives used in: – fair value hedges 8,601 8,866 – cash flow hedges 5,264 6,468 – hedges of net investments in foreign operations 168 316 Other non-trading derivatives 3,749 4,420
In 2009, the Other changes in Change through net result relates mainly to the tax effect on the additional Illiquid Assets Back-Up Facility payments as part of the overall agreement with the European Commission of EUR 1.3 billion and on tax losses of foreign branches carried forward.
More than 1 year but less than 5 years 406 510 461 381 More than 5 years but less than 10 years 243 177 3,768 3,199 More than 10 years but less than 20 years 2,093 962 1,285 3,960
As of 31 December 2010 and 31 December 2009, ING Group had no significant temporary differences associated with the parent company’s investments in subsidiaries, branches and associates and interest in joint ventures as any economic benefit from those investments will not be taxable at parent company level.
Releases –1 –3 –15 –11 –16 –14 Charges –13 –109 –59 –347 –72 –456
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 2011 are nil and EUR 24 million, respectively.
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 2010 (2009: EUR 4 million) and EUR 1 million increase in the charge for the year (2009: EUR 2 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 2010 (2009: EUR 3 million) and EUR 2 million decrease in the charge for the year (2009: EUR 1 million).
The actuarial assumption for Mortality rates decreased from 1.3% in 2009 to 1.0% in 2010, mainly as a result of more recent information on mortality rates in the Netherlands that became available in 2010. The actuarial assumption for Indexation for inflation decreased from 2.0% in 2009 to 1.8% in 2010 mainly as a result of a revised best estimate assumption for future indexation in the pension plan in the Netherlands. As a result of the current circumstances the probability of granting indexation in the short-term future decreased. These changes in the actuarial assumptions for Mortality and Indexation resulted in an increase respectively decrease of the defined benefit obligation which was accounted for as an (unrecognised) actuarial gain(loss). As a result, these changes did not directly impact shareholders’ equity and net result in 2010.
– designated as at fair value through profit and loss 140 53 917 1,291 1,902 1,713 6,016 Investments
(1) 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).
As at 31 December 2010, the fair values of outstanding derivatives designated under net investment hedge accounting was EUR –87 million (2009: EUR –278 million), presented in the balance sheet as EUR 81 million (2009: EUR 38 million) positive fair values under assets and EUR 168 million (2009: EUR 316 million) negative fair values under liabilities.
Notes to the consolidated annual accounts of ING Group continued 30 COMPANIES ACQUIRED AND COMPANIES DISPOSED Acquisitions effective in 2010 There were no significant acquisitions in 2010.
(4) After disposal of the 50% stake ING has no remaining stake in Summit.
In August 2010 ING announced that it has agreed to sell its 50% stake in ING Summit Industrial Fund LP (‘Summit’), a Canadian light industrial property portfolio to a joint venture between KingSett Capital and Alberta Investment Management Corporation (AIMCo). The sale was completed in November 2010. The transaction value for 100% of Summit is CAD 2.0 billion (EUR 1.4 billion) and includes assumed debt. In addition to its direct investment in Summit, ING has an indirect participation through its 7.8% unit holding of ING Industrial Fund (IIF), an ING-managed listed property fund in Australia which owns the remaining 50% in Summit. As part of the transaction, IIF has agreed to simultaneously sell its stake in Summit to KingSett/AIMCo. Consequently, ING’s indirect participation in Summit will end as well. Separately, ING sold ING Real Estate Canada, the manager of Summit, to KingSett/AIMCo for an undisclosed amount. The transaction had no material impact on ING Group’s 2010 results and capital ratios. The transaction resulted in a net loss of EUR 26 million in 2010. Summit was previously included in the segment ING Real Estate.
Furthermore there were some disposals that did not have a significant impact on ING’s balance sheet and profit and loss account. In November 2009 ING reached an agreement to sell three of its US independent retail broker-dealer units to Lightyear Capital LLC for a total consideration of EUR 96 million. The transaction concerns Financial Network Investment Corporation, based in El Segundo, California, Multi-Financial Securities Corporation, based in Denver, Colorado, PrimeVest Financial Services, Inc., based in St. Cloud, Minnesota, and ING Brokers Network LLC, the holding company and back-office supporting those broker dealers, which collectively do business as ING Advisors Network. The sale was completed in February 2010. The three US independent retail broker-dealer units were previously included in the segment Insurance US.
Profit since date of full consolidation –16 Income if fully consolidated as of start of year –5 Profit if fully consolidated as of start of year –19
(2) Cash outflow/inflow on group companies in the cash flow statement includes cash outflows/inflows on individually immaterial acquisitions and real estate portfolios in addition to the cash flows presented herein.
In January 2008, ING closed the final transaction to acquire 100% of Banco Santander’s Latin American pension and annuity businesses through the acquisition of the pension business in Chile.
In January 2011 the Association of Stockholders (Vereniging van Effectenbezitters, ‘VEB’) has issued a writ alleging that investors were misled by the prospectus that was issued with respect to the September 2007 rights issue of Fortis N.V. (now: Ageas N.V.) against Ageas N.V., the underwriters of such rights issue, including ING Bank, and former directors of Fortis N.V. According to the VEB the prospectus shows substantive incorrect and misleading information. The VEB states that the impact and the risks of the subprime crisis for Fortis and Fortis’ liquidity position have been reflected incorrectly in the prospectus. The VEB requests a declaratory decision stating that the summoned parties have acted wrongfully and are therefore responsible for the damages suffered by the investors in Fortis. The amount of damages of EUR 18 billion has not been substantiated yet. ING will defend itself against this claim; at this time ING is not able to assess the future outcome.
Notes to the consolidated annual accounts of ING Group continued 32 JOINT VENTURES Joint ventures are included proportionally in the consolidated financial statements as follows: Most significant joint ventures 2010 Interest held (%) Assets Liabilities Income Expenses
(1) Accounted for as joint venture because of joint control. (2) Previously ING Capital Life Insurance Company Ltd.
Termination benefit 980 980 Fair market value of bonus in shares 1,268 1,376 2,644
Since ING Groep N.V. had already paid an interim dividend of EUR 0.74 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 on 12 May 2009.
On 28 January 2010, ING lodged an appeal against specific elements of the European Commission’s decision. The outcome of ING’s appeal to the European court is anticipated at the end of 2011.
Financial assets Cash and balances with central banks 13,072 15,390 13,072 15,390 Amounts due from banks 51,651 43,506 51,828 43,397 Financial assets at fair value through profit and loss
The fair values of mortgage loans are estimated by taking into account prepayment behaviour and discounting future cash flows using interest rates currently being offered for similar loans to borrowers with similar credit ratings. The fair values of fixed-rate policy loans are estimated by discounting cash flows at the interest rates charged on policy loans of similar policies currently being issued. Loans with similar characteristics are aggregated for calculations purposes. The carrying values of variable rate policy loans approximate their fair value.
The fair values of the financial instruments carried at fair value were determined as follows: Methods applied in determining fair values of financial assets and liabilities 2010 Level 1 Level 2 Level 3 Total
Financial liabilities designated as at fair value through profit and loss 1,834 7,648 3,225 12,707 Investment contracts (for contracts carried at fair value) 2,879 3,088 17 5,984
Change in Level 3 classification (2010) ING changed the classification of certain assets and liabilities in the fair value hierarchy compared to prior years. The changes relate to Trading assets/liabilities and Financial liabilities designated as at fair value through profit and loss. These changes result from further improvements in the classification by fair value hierarchy in order to better align with common practices that have emerged within the industry. As a result, certain financial instruments that were previously classified mainly in Level 2 (Valuation technique supported by observable inputs) are now classified in Level 3 (Valuation technique supported by unobservable inputs). The comparatives for 2009 have been adjusted accordingly.
The category of financial instruments that is most impacted by this change are issued structured notes that are classified as Financial liabilities designated as at fair value through profit and loss. These structured notes are a combination of deposit-, loan- and derivative components. Certain components of the structure represent Level 1 or Level 2 in the fair value hierarchy, whereas other components represent Level 3. ING also has other positions that are not measured at fair value or are measured at fair value and are classified in various levels of the fair value hierarchy. The combination of these instruments represents no significant exposure of ING to fair value changes related to unobservable inputs and, therefore, until 2009 the overall exposure was classified mostly in Level 2. As of 2010, individual financial instruments are classified individually in the fair value hierarchy. Furthermore, if the fair value of a financial instrument is based on unobservable inputs for a component of that instrument, in most cases the entire instrument (including the components that are not impacted by unobservable inputs) is now classified in Level 3.
Valuation for these securities is inherently complex and subjective. Although each security in the portfolio is priced based on an external price, without modification by ING Group, and management is confident that it has selected the most appropriate price in the current market circumstances, the valuation of these portfolios would have been different had different prices been selected. The sensitivity analysis shows that the highest and the lowest available market prices do not materially impact the valuation of these assets as at 31 December 2010.
Reference is made to the ‘Risk management’ section with regard to the exposure of these asset backed securities as at 31 December 2010 and 31 December 2009 and the impact from these asset backed securities on net result in 2010 and 2009.
Reinsurance ceded –65 –70 –196 –2,041 –1,867 –1,802 –2,106 –1,937 –1,998
The portion of trading gains and losses for the year ended 31 December 2010 relating to trading securities still held as at 31 December amounted to EUR 19 million (2009: EUR 105 million; 2008: EUR –246 million).
Gross underwriting expenditure – before effect of investment result for risk
Expenditure from non-life underwriting Reinsurance and retrocession premiums 65 70 196
The total amount of commission paid and payable with regard to the insurance operations amounted to EUR 2,514 million (2009: EUR 2,483 million; 2008: EUR 3,804 million). This includes the commissions recognised in Cost of acquiring insurance business of EUR 1,789 million (2009: EUR 1,815 million; 2008: EUR 3,273 million) referred to above and commissions recognised in Other underwriting expenditure of EUR 725 million (2009: EUR 668 million; 2008: EUR 531 million). Other underwriting expenditure also includes reinsurance commissions received of EUR 192 million (2009: EUR 255 million; 2008: EUR 306 million).
In 2008, the Change in life insurance provisions for risk of company includes an amount of EUR 136 million in relation to reserve strengthening for Insurance Asia/Pacific as described in further detail under Segment reporting. The 2010 and 2009 amounts are nil following the disposal of ING Life Taiwan.
In 2010, a goodwill impairment of EUR 540 million is recognised. Reference is made to Note 9 ‘Intangible assets’.
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 (so-called delta hedge). As at 31 December 2010, 45,213,891 own shares (2009: 35,178,086; 2008: 32,367,870) were held in connection with the option plan compared to 124,836,694 options outstanding (2009: 122,334,486; 2008: 87,263,381). 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.
As at 31 December 2010 total unrecognised compensation costs related to stock options amounted to EUR 65 million (2009: EUR 62 million; 2008: EUR 94 million). These costs are expected to be recognised over a weighted average period of 1.9 years (2009: 1.6 years; 2008: 1.8 years). Cash received from stock option exercises for the year ended 31 December 2010 was EUR 3 million (2009: nil; 2008: EUR 22 million).
The fair value of options granted is recognised as an expense under staff expenses and is allocated over the vesting period of the options. The fair values of the option awards have been determined by using a Monte Carlo simulation. This model takes the risk free interest rate into account (2.0% to 4.6%), as well as the expected life of the options granted (5 year to 9 years), the exercise price, the current share price (EUR 2.90 – EUR 26.05), the expected volatility of the certificates of ING Group shares (25% – 84%) and the expected dividends yield (0.94% to 8.99%). The source for implied volatilities used for the valuation of the stock options is ING’s trading system. The implied volatilities in this system are determined by ING’s traders and are based on market data implied volatilities not on historical volatilities.
As at 31 December 2010 total unrecognised compensation costs related to share awards amounted to EUR 158 million (2009: EUR 41 million; 2008: EUR 56 million). These costs are expected to be recognised over a weighted average period of 2.1 years (2009: 1.8 years; 2008: 1.8 years).
Depreciation of property and equipment 382 365 353 78 84 95 460 449 448
The effective tax rate in 2009 was lower than the weighted average statutory tax rate, resulting in a lower tax benefit for the pre-tax loss. This is caused by the fact that a write-down of the carrying value of deferred tax assets and non-deductible expenses exceeded tax exempt income and releases from tax provisions.
The effective tax rate in 2008 was slightly lower than the weighted average statutory tax. Main reasons for this are tax exempt income and releases of tax provisions, partly offset by non deductible expenses and a reduction of the deferred tax assets.
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 Latin America Commercial Banking (excluding Real Estate) Insurance Asia/Pacific ING Real Estate ING Investment Management (IM) Corporate Line Banking Corporate Line Insurance * Excluding US Closed Block VA
The accounting policies of the operating segments are the same as those described under Accounting policies for the consolidated annual accounts. Transfer prices for inter-segment transactions are set at arm’s length. Corporate expenses are allocated to business lines based on time spent by head office personnel, the relative number of staff, or on the basis of income and/or assets of the segment.
ING Group evaluates the results of its operating segments using a financial performance measure called underlying result. The information 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.
As of the fourth quarter of 2010, the Legacy Variable Annuity business in the US is reported and analysed separately from the other US business in the internal management reporting. Therefore as of 1 October 2010 ING reports the Insurance US Legacy VA business as a separate business line to improve transparency and ongoing business. This segment is reported separately for the entire year 2010 and comparative years 2009 and 2008. ING Group’s accounting policy for reserve adequacy as set out in the Accounting policies for the consolidated annual accounts of ING Group requires each segment to be adequate at the 50% confidence level. The separation of the Legacy VA business into a separate segment triggered a charge in the fourth quarter of 2010 to bring reserve adequacy on the new Insurance US Closed Block VA business line to the 50% level. This charge is reflected as a DAC write-down of EUR 975 million before tax.
– Other interest expenses 1,050 1,050 –336 714 – Additions to loan loss provision 2,859 2,859 2,859
ING Direct 1,394 Commercial Banking (excluding Real Estate) 129 Insurance Benelux 360 Insurance CRE 36 Insurance US * 527 Insurance Asia/Pacific 15 –2 ING IM 3 Corporate Line Banking 17 Corporate Line Insurance 6 2,487 –2 * Excluding US Closed Block VA
– Total investment and other income –2,106 8,294 6,188 –382 5,806
Retail Belgium 4 ING Direct 1,891 Commercial Banking (excluding Real Estate) 267 Insurance Benelux 898 Insurance CRE 31 Insurance US * 966 Insurance Asia/Pacific 432 ING IM 17 Corporate Line Banking 296 Corporate Line Insurance 18 * Excluding US Closed Block VA
Belgium ING Direct Retail CE Retail Asia Commercial Banking ING Real
IFRS-EU balance sheets by segment are not reported internally to, and not managed by, the chief operating decision maker. IFRS-EU balance sheet information is prepared, and disclosed below, for the Banking operations as a whole and for the Insurance operations as a whole and by segment.
Further balance sheet related information for the banking operations is provided by segment in the section ‘Risk Management’.
Treasury bills and other eligible bills included in trading assets 1,697 2,284 2,770 Treasury bills and other eligible bills included in available-for-sale investments 2,744 898 4,239
As a result of the decision to manage ING Bank and ING Insurance separately, in preparation of the two IPOs for ING Insurance, ING has implemented two distinct risk appetite frameworks for both Bank and Insurance. The common concept however is that risk appetite is expressed as the tolerance to allow key capital ratios to deviate from their target levels under adverse scenarios. These frameworks are discussed in more detail in the specific sections of this risk management section.
The economic capital model for credit risk was updated to bring it more in line with the regulatory capital framework, and now relies less on diversification benefits.
(1) For assets classified as loans and receivables: amortised cost; otherwise: fair value. (2) Country is based on the country of residence of the obligor; Covered bonds are excluded; government only includes central government.
Changes in the bond portfolio (excluding ABS) The ING bond portfolio increased EUR 18.7 billion from EUR 217.7 billion at year-end 2009 to EUR 236.4 billion at end of year 2010. For the government bonds the revaluation changes are triggered by a loss of confidence with regards to several southern European countries and Ireland. During 2010, ING closely monitored the developments with regards to these countries and its sovereign debt exposure to these countries. Ireland and Greece are the only countries that used the European Financial Stability Fund (EFSF) during 2010, only the government and financial institution unsecured bonds for these countries are considered as pressurised assets by ING.
For ING Insurance, the bonds portfolio includes Government and Financial Institutions unsecured bond exposures in Greece and Ireland classified as available-for-sale of EUR 705 million (fair value), with a related negative revaluation reserve in equity of EUR –279 million.
• Solvency II: Following the approval of the Solvency II Framework Directive in 2009, the European Commission has continued development and consultation on the detailed implementing measures in 2010. ING has always been a firm supporter of the Solvency II initiative, being an economic, risk-based solvency system. However some of the proposed measures currently under discussion are considered unduly conservative. ING is committed to working actively together with all stakeholders to develop pragmatic solutions that would result in Solvency II meeting its original intent, and a smooth transition to the new system. The legislation is now expected to become in force by 1 January 2013. ING has launched a full implementation programme to be fully compliant before that date, and is also developing its business strategies to operate optimally under the new environment.
Group Risk Management Function The risk management function is embedded in all levels of the ING Group organisation.
Group Risk Organisation The organisation chart below illustrates the functional reporting lines within the ING Group risk organisation.
• ING Group Credit Committee – Policy (GCCP): Discusses and approves policies, methodologies and procedures related to credit, country and reputation risks within ING Group. The GCCP meets on a monthly basis.
• Asset and Liability Committee ING Insurance (ALCO Insurance): Discusses and approves all risks associated with ING’s Insurance activities. This includes volatility (affecting earnings and value), exposure (required capital and market risk) and insurance risks. ALCO Insurance meets ten times a year.
ING Group uses risk assessment and risk measurement to guide decision making. As a result, the quality of risk models is important. The governance process for approval of risk models, methods and parameters ensures business and regulatory requirements, via a clear assignment of responsibility and accountability.
Given the operational split of ING Bank and ING insurance, which became effective as of 1 January 2011, the risk organisation made preparations to reflect this new structure as of 1 January 2011. This change was most significant for departments providing risk management for both ING Bank and ING Insurance. In the new structure all risk departments have a small team for ING Group, and separate teams for ING Bank and ING Insurance.
• The Supervisory Board is responsible for supervising the policy of the Executive Board, the general course of affairs of the Company and its business (including its financial policies and corporate structure). The Supervisory Board has several sub-committees related to specific topics. Of these, two sub-committees are relevant for the risk management organisation and risk reporting, which are: • The Audit Committee, which assists the Supervisory Board in reviewing and assessing ING Group’s major risk exposures and the operation of internal risk management and control systems, as well as policies and procedures regarding compliance with applicable laws and regulations.
ING’s ‘three lines of defence’ governance framework ensures that risk is managed in line with the risk appetite as defined by the Executive Board. Risk appetite is cascaded throughout the Group, thereby safeguarding controlled risk taking. The role of the business lines is to maximise the value within established risk boundaries. Each quarter, the Executive Board monitors that the financial and non-financial risks are within the boundaries of the risk appetite as set in the strategic planning process.
Due to the way the risk departments are organised, these metrics are presented at a higher aggregation level (business line combinations) than the identified segments in Note 51 ’Operating Segments’: • Retail Banking Benelux contains Retail Netherlands, Retail Belgium (including Retail Luxemburg); • Retail Banking Direct & International contains Retail Central Europe, Retail Asia and ING Direct; • Commercial Banking corresponds to Commercial Banking and ING Real Estate; • Bank Corporate Line coincides with Corporate Line.
Closer aligning the credit risk economic capital with the regulatory capital means that the difference between economic capital and regulatory capital for credit risk decreases significantly. Given the different point of view of RC and EC, the market risk economic capital is higher than the regulatory capital primarily due to the inclusion of the banking books in EC. The EC figures include Business risk, while RC does not have any requirements for business risk. Another difference in scope is the confidence level used; a 99.95% confidence level for EC, and a 99.9% confidence level for RC. Given the increase in Credit Risk EC and the differences in scope and methodology between EC and RC the 2010 figures for EC are higher than the RC figure, while for 2009 this was exactly opposite. Correcting for the difference in confidence level will lead to an EC figure that is lower than the RC figure.
ING BANK – CREDIT RISKS Credit risk is the risk of loss from default by debtors (including bond issuers) or trading counterparties. Credit risks are split into five principal risk categories: a) lending (including guarantees and letters of credit); b) investments; c) pre-settlement (derivatives, securities financing and foreign exchange trades); d) money markets and e) settlement. Corporate Credit Risk Management (CCRM) is responsible for the measurement and management of credit risk incurred by all ING Group entities, including country-related risks. CCRM is organised along the business lines of ING Bank and ING Insurance. The CCRM General Manager is functionally responsible for the global network of credit risk staff, and the heads of the credit risk management functions for the business lines report directly to him.
Money market risk Money market risk arises when ING places short term deposits with a counterparty in order to manage excess liquidity, as such, money market deposits tend to be short term in nature (1–7 days is common). In the event of a counterparty default, ING may lose the deposit placed. Money market risk is therefore measured simply as the notional value of the deposit, excluding any accrued and unpaid interest or the effect of any impairment.
ING Bank Credit Risk Profile ING Bank’s credit exposure is mainly related to traditional lending to individuals and businesses followed by investments in bonds and other securitised assets. Loans to individuals are mainly mortgage loans secured by residential property. Loans (including guarantees issued) to businesses are often collateralised, but can be unsecured based on internal analysis of the borrowers’ creditworthiness. Bonds in the investment portfolio are generally unsecured. Securitised assets such as Mortgage Backed Securities and Asset Backed Securities are secured by the pro rata portion of the underlying diversified pool of assets (commercial or residential mortgages, car loans and/or other assets) held by the security‘s issuer. The last major credit risk source involves pre-settlement exposures which arise from trading activities, including derivatives, repurchase transactions and securities lending/borrowing and foreign exchange transactions.
The ratings reflect probabilities of default and do not take collateral into consideration. (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.
ING’s renegotiated loans that would otherwise be past due or impaired are reflected below: ING Bank renegotiated loans that would otherwise be past due or impaired (outstandings)
ING continues to take a proactive approach in working with its Business and Consumer customers which are experiencing financial difficulties to restructure their loans and help return the companies to economic viability. The category ‘restructuring status’ is not used for consumer borrowers, but only for Business customers.
ING BANK – MARKET RISKS Market risk is the risk that movements in market variables, such as interest rates, equity prices, foreign exchange rates and real estate prices, negatively impact the bank’s earnings, market value or liquidity position. Market risk either arises through positions in trading books or through the banking book positions. The trading positions are held for the purpose of benefiting from short-term price movements, while the banking book positions are intended to be held in the long term (or until maturity) or for the purpose of hedging other banking book positions.
With respect to the trading portfolios, CMRM focuses on the management of market risks of Commercial Banking (mainly Financial Markets) as this is the only business line where significant trading activities take place. Trading activities include facilitation of client business, market making and proprietary position taking in cash and derivatives markets. CMRM is responsible for the development and implementation of trading risk policies and risk measurement methodologies, the reporting and monitoring of risk exposures against approved trading limits and the validation of pricing models. CMRM also reviews trading mandates and limits, and performs the gatekeeper role in the product review process. The management of trading market risk is performed at various organisational levels, from CMRM overall down to specific business areas and trading offices.
Limitations VaR as a risk measure has some limitations. VaR uses historical data to forecast future price behaviour. Future price behaviour could differ substantially from past behaviour. Moreover, the use of a one-day holding period (or ten days for regulatory calculations) assumes that all positions in the portfolio can be liquidated or hedged in one day. In periods of illiquidity or market events, this assumption may not hold true. Also, the use of 99% confidence level means that VaR does not take into account any losses that occur beyond this confidence level.
Stress testing Stress tests are used for the monitoring of market risks under extreme market conditions. Since VaR in general does not produce an estimate of the potential losses that can occur as a result of extreme market movements, ING uses structured stress tests for monitoring the market risk under these extreme conditions. Stress scenarios are based on historical as well as hypothetical extreme events. The result of the stress testing is an event risk number, which is an estimate of the profit and loss account effect caused by a potential event and its world-wide impact for ING Commercial Banking. The event risk number for the ING Commercial Banking trading activity is generated on a weekly basis. Like VaR, event risk is limited by ALCO Bank. ING’s event risk policy basically consists of defined stress parameters per country and per market (fixed income, equity, foreign exchange, credit and related derivative markets). The scenarios and stress parameters are evaluated against extreme actual market movements. If and when necessary, ING evaluates specific stress scenarios, as an addition to its structural stress tests. These specific scenarios relate to current concerns, like political instability in certain regions, terrorist attacks or extreme movements, e.g. in credit spreads.
ING Group Annual Report 2010 217ING Group Annual Report 2010 217
Development of market risks The following chart shows the development of the overnight VaR under a 99% confidence interval and a 1-day horizon. The overnight VaR is presented for the ING Commercial Banking trading portfolio for 2009 and 2010. Several banking books are governed by the trading risk process and are therefore excluded from the non-trading risk table and included in the below trading risk graph and table.
The VaR figures in the table above relate to all books under trading governance. In general, the level of the trading VaR was lower in 2010, continuing the decreasing trend of 2009. The interest rate market, which includes both the general interest rate and credit spread exposures, provided the largest contribution to the trading VaR. The average VaR over 2010 was substantially lower than over 2009 (average VaR 2010: EUR 22 million and average VaR 2009: EUR 39 million). In line with the trend of 2009, the VaR decreased to EUR 19 million towards the end of 2010. This decrease is to a large extent related to the increased diversification of non-linear and linear risk as a result of the HVaR implementation as explained under ‘Measurement’. Another reason is the discontinuing of the strategic trading business in the United States, as part of ING’s continued balance sheet strengthening.
Most important interest rate and credit spread sensitivities (year-end 2010) amounts in thousands of euros 2010 2009
Interest Rate (BPV (1)) Interest Rate (BPV (1)) Eurozone –377 Eurozone –1,175 United States 167 United States –359 Mexico –147 Mexico –153 Japan 141 UK –109 Russia –73 Japan 107
Credit spread sensitivities per risk class and sector (year-end 2010) amounts in thousands of euros 2010 2009
Risk classes 1 (AAA) –8 –211 –18 –145 2–4 (AA) –25 –212 –18 –34 5–7 (A) –32 –257 83 –100 11–13 (BB) –11 –47 –12 –20 14–16 (B) –30 –8 –21 20 17–22 (CCC and Problem Grade) –24 –33 –47 –11 No rating 15 –16 Total –207 –870 –2 –292
ING distinguishes three types of activities: investment of own capital (by Capital Management), commercial business (ING Direct, Retail Banking and Commercial Bank) and the strategic interest rate position (Financial Markets ALM). The scheme below presents the ALM framework: Below, the three activities are described in more detail.
Capital Management is responsible for managing the investment of own funds (core capital). Capital is invested longer term, targeting to maximize return, while keeping it stable at the same time.
In the following sections, the interest rate risks in the banking books are presented. ING uses risk measures based on both an earnings and a value perspective. Earnings Sensitivity (ES) is used to provide the earnings perspective and the Net Present Value (NPV)-at-Risk and Basis Point Value (BPV) figures provide the value perspective. Several small banking books are governed by the trading risk process and are therefore excluded from the following banking book risk tables. These are included in the trading risk graph and table in the section ‘Market Risk in Trading Books’.
ING Group Annual Report 2010 221ING Group Annual Report 2010 221
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 contribute significantly to the overall NPV at Risk.
In line with NPV at Risk, the bank’s overall BPV position is dominated by the long term investment of capital, as the present value of this position is significantly impacted if interest rates move up by 1 basis point. Convexity risk plays a less important role, given that BPV only reflects small movements in interest rates.
The total BPV position increased in 2010 for the same reasons as the increase in NPV-at-Risk. The duration of mortgages increased on the back of higher interest rates (both in the United States and the Eurozone) and a slow Dutch housing market.
Polish zloty 0.01% 0.01% –15% –15% Australian dollar 0.01% 0.02% –20% –20% Turkish lira 0.01% 25% –25%
Liquidity Risk Management CMRM is responsible for liquidity risk management and bears the responsibility for the identification, measurement and monitoring of the liquidity risk position. Next to this it is responsible for performing liquidity risk stress testing. For stress testing purposes, on a monthly basis and as per Dutch Central Bank guidelines, ING Bank’s liquidity positions are stress tested under a scenario that is a mix between a market event and an ING specific event. Also on periodic and ad-hoc basis additional stress testing exercises are undertaken on consolidated and local level.
With respect to funding sources, ING Bank aims to fund its own originated assets (loans) by an equal amount of own originated liabilities (deposits), meaning a loan-to-deposit ratio of approximately 1. Ultimo 2010 the LtD ratio (excluding securities at amortised costs and IABF receivable) equals 1.05. In the table below the actual funding mix is displayed.
New developments In the aftermath of the crisis, all financial institutions have been confronted with a large number of new regulatory requirements which are being implemented or are in the course of implementation. With regard to liquidity ING Bank is well on track in the implementation of CRDII. As in respect of Basel III, and the to be implemented Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR), further alignment will take place in the upcoming observation periods, ING will keep track of what is expected and will be at required levels well in time.
The objective of the insurance risk management function is to provide the business a sustainable competitive advantage by fully integrating risk management into the tactical daily business activities as well as ING’s broader business strategy. Insurance Risk Management accomplishes this through four core activities. First, the IRM function ensures that products and portfolios are structured, underwritten, priced, approved and managed appropriately in compliance with internal and external rules and guidelines. Second, IRM ensures that the ING Insurance risk profile is transparent and well understood by management and stays within delegated authorities, with a ‘no surprises’ approach to reporting and monitoring risks. Third, IRM ensures that both risk and reward are adequately considered in the development of business strategy, for example by supporting the planning and allocation of capital and limits during the strategic planning process. Finally, IRM ensures that these steps are understood by ING’s stakeholders, including shareholders, rating agencies, regulators and policy holders.
CIRM expects this system to be the foundation of its internal fair value and solvency model, including the calculation of capital requirements following the introduction of Solvency II. Through 2010 the system has been enhanced and its functionalities expanded.
The US insurance business is managed to a risk appetite based on two key risk metrics: • US Regulatory Capital Sensitivities: the potential reduction, under a moderately 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.
During 2010 the regulatory capital sensitivities effectively replaced Economic Capital as a key risk based metric on which the US insurance business is measured. Therefore, we have excluded the US insurance business from our Economic Capital risk metrics and related AFR sensitivities in order to better align reported risk metrics with those to which the US businesses are primarily managed and which are the most common benchmarks in the regulatory and competitive environments in which the US businesses operate. To allow for reconciliation with the Economic Capital numbers shown in the Risk Management Section of the Annual Report 2009, we show US Economic Capital for 2009 split by risk type.
The ING Insurance Economic Capital model is based on a 99.5% one-year Value at Risk framework. During 2010 we changed the Value at Risk confidence interval from 99.95% to 99.5% to align with the Solvency II standard for internal models which will become the group regulatory constraint for the EurAsia and LatAm insurance business. For the total Economic Capital figures, we also provide ratios based on both confidence intervals to provide comparability between the figures reported in the risk management section of the annual report 2009 and the figures provided below. It is important to note that since industry practice relating to Economic Capital is still evolving and moreover, Solvency II standards are still under discussion, ING Insurance models are expected to evolve as a result.
The Economic Capital for ING Insurance EurAsia and LatAm is mostly related to market risks, both hedgeable and non-hedgeable. Overall, Economic Capital and risk profile of the EurAsia and LatAm insurance business increased during 2010. The primary change came from increased market risk, relating mainly to an increased equity and foreign exchange exposure and due to a partial unwinding of economic hedges in combination with a lower recognition of market risk diversification within the Economic Capital model. Lower diversification is also the main driver of the increases in the other risk categories.
While the figures above are shown by business line, the diversification of risks across ING businesses is calculated across business units. Total diversification between ING Insurance’s business units and the Corporate Line Insurance is 31% for 2010 for EurAsia and LatAm (32% for 2009 for combined ING insurance business, including US).
(1) Real Estate, Credit Spread, FX and Implied Volatility Sensitivities do not have a material impact. (2) Sensitivities are calculated at legal entity level and cover US domiciled insurance entities.
Taking into account diversification between risk factors as described in the Model Disclosure section, we are exposed to a EUR 818 million decrease in our excess capital.
AFR Sensitivities AFR Sensitivities are defined as the potential reduction of the current net asset value (based on fair values) during a moderate stress scenario. Interest rates are shocked 30% upwards and downwards relative to the ten year swaps rates. The credit sensitivity in table below is based on a new method introduced in 2010 such that there is no comparable 2009 number available. Equity and Real estate are based on a 25% and 15% downward shock respectively. The FX shock is based on a 10% up or down movement for each currency. Implied volatilities for swaptions are shocked by 30%. The shock for implied volatilities for equities is related to the underlying tenor. More details on the stress scenarios can be found in the Model Disclosure section.
Equity sensitivity has increased due to unwinding of hedging activities, relating to both direct and indirect exposure and a higher equity value due to positive equity markets in 2010. Direct exposure relates to the holding of shares and is most significant for ING in the Netherlands. Indirect exposure relates to the potential loss of fee income from unit linked, variable annuity, and pension fund business across all regions. Direct exposure represents approximately half of the equity sensitivity, after taking the hedge positions into account.
Credit Spread sensitivity relates to increases in credit spreads from investments in fixed income securities and also includes offsetting movements in the liquidity premium on the liabilities. Sensitivity is largely driven by the general account business in Benelux and to a smaller degree our Asia/Pacific business.
Real Estate sensitivity exists mostly in the Netherlands and relates in a large part to direct Real Estate investments.
ING INSURANCE – INSURANCE RISKS General Actuarial and underwriting risks are risks such as mortality, longevity, morbidity, adverse motor or claims development, etc., which result from the pricing and acceptance of insurance contracts. In general, these risks cannot be (easily) hedged directly in the financial markets and tend to be mitigated by diversification across large portfolios. They are therefore primarily managed at the contract level through standard underwriting policies, product design requirements as set by ING’s IRM function, independent product approval processes and risk limitations related to insurance policy terms and conditions agreed with the client.
With respect to life business, ING Group’s (pre-tax) risk tolerance level for 2010 was set at EUR 22 million (2009: EUR 22 million) per insured life for mortality risk. While life insurance risks are considered to be naturally diversifiable by virtue of each life being a separate risk, group contracts may result in significant exposures. For potential losses, resulting from significant mortality events (e.g. pandemics or events affecting life insurance contracts involving multiple lives), ING applies a separate risk tolerance level which equalled EUR 1,100 million in 2010 (2009: EUR 1,100 million). The potential impact of pandemics continues to be modelled by ING based on studies published by respected international organisations.
Overall exposures and concentrations are actively managed within limits and risk tolerance levels through the purchase of external reinsurance from approved reinsurers in accordance with ING’s reinsurance credit risk policy. Particularly for the property and casualty portfolio, ING purchases protection which substantially mitigates ING’s exposure due to natural catastrophes. ING believes that the credit risks to which it is exposed under reinsurance contracts are relatively minor, with exposures being monitored regularly and limited by a reinsurance credit risk policy.
For catastrophic losses arising from events such as terrorism, ING believes that it is not possible to develop models that support inclusion of such events in underwriting in a reliable manner. The very high uncertainty in both the frequency and severity of these events makes them, in ING’s opinion, uninsurable. For the non-life business, losses that result from these events are generally not covered unless required by law. In various countries industry pools have been established to mitigate the terrorism risk to which the individual insurers are nevertheless still exposed. ING participates in such pools.
The following table provides an overview of the Economic Capital for insurance risks, split into mortality risk, morbidity risk and risk related to P&C products: Economic Capital Insurance risks EurAsia and LatAm
The table above presents figures after diversification between insurance risks and diversification across business units of ING Insurance. The largest earnings sensitivity to P&C claims relates to health and P&C claims in the Netherlands. Earnings sensitivity from Mortality and Morbidity is more evenly spread over the regions.
The largest contribution to the Mortality sensitivity comes from the Retail Life business while the Morbidity exposure relates for a large part to the Employee Benefit business.
Overall portfolio credit risk limits are established and integrated into investment mandates by ALCO Insurance based on asset or investment category and risk classes. Individual issuer limits are determined based on the obligor’s rating. These limits are managed by the region where the parent company is domiciled but may be sub-allocated to regional or local portfolios. In addition, each Insurance company has one or more investment mandates (which may differ by insurance portfolio) specifying credit risk appetite by issuer type and quality.
ING Insurance risk class distribution remained fairly stable during 2010, as downgrades experienced in the securitization market were compensated by active divestment programs and other de-risking measures. The CCC and Problem Grade class mainly contains downgraded securitizations but also some unrated private equity and real estate investments.
The operational risk appetite within ING is defined as the acceptable and authorised maximum level of risk, in each of the operational risk areas that must be adhered to in order for ING to achieve its business plan within approved budgets. This risk appetite is quarterly monitored through the Non-Financial Risk Dashboard which reports the key non financial risk exposures.
Management at all levels in the organisation periodically needs information on their key operational risks (including compliance and legal risks) and mitigating actions. In order to make it easier for management to access this kind of information, business units periodically report through the Non-Financial Risk Dashboard (NFRD).
Main developments in 2010 • Cybercrime – Based on a High-Tech Crime Prevention assessment a number of potential risks has been identified. Secure Code Review was found as an area of concern and during 2010 a dedicated taskforce has taken action across ING Group. After remediation of the identified gaps, dynamic code scan and review (in order to detect vulnerabilities in websites) has been implemented.
ING believes that fully embedded Compliance Risk Management preserves and enhances the trust of its customers, staff and shareholders. Being trusted is essential to building sustainable businesses. ING’s Business Principles set the foundation for the high ethical standards ING expects of all our business activities. ING’s Business Principles require all staff at every level to conduct themselves, not only in compliance with laws and regulations, but also by acting with integrity, being open and clear, respectful, and responsible.
ING separates Compliance Risk into four conduct-related integrity risk areas: client conduct, personal conduct, organisational conduct as well as conduct required because of laws and regulations in the financial services industry. In addition to effective reporting systems, ING has a Whistleblower procedure which encourages staff to speak up if they know of or suspect a breach of external regulations or internal policies or Business Principles.
To avoid potential conflicts of interest, it is imperative that the Compliance Officers are impartial and objective when advising business management on Compliance Risk in their Business Unit, region, division or Business Line. To facilitate this, a strong functional reporting line to the next higher level Compliance Officer is in place. The functional reporting line has clear accountabilities relating to objective setting, remuneration, performance management and the appointment of new Compliance Risk Management staff as well as obligations to veto and escalate.
ING Group – non-financial risks 2. Advisory Compliance Officers proactively advise their CEO, Management, local boards and committees, the next higher level Compliance Officer, and employees on Compliance Risk, responsibilities, obligations and concerns.
Regulatory measures and law enforcement agencies investigations ING Bank N.V. has continued discussions with its Dutch bank regulator De Nederlandsche Bank (DNB) related to transactions involving persons in countries subject to sanctions by the EU, the US and other authorities and its earlier review of transactions involving sanctioned parties. In connection with that review and related discussions ING Bank has undertaken to complete the global implementation of enhanced compliance and risk management procedures, and to monitor the implementation of such procedures on an ongoing basis, as instructed by DNB.
ING Bank remains in discussions with authorities in the US and in other jurisdictions concerning these matters, including ING Bank‘s compliance with Office of Foreign Asset Control requirements. ING Bank has received requests for information from US Government agencies including the US Department of Justice and the New York County District Attorney’s Office. ING Bank is cooperating fully with the ongoing investigations. It is currently not feasible for ING Bank to determine how the ongoing investigations may be resolved or the timing of any such resolution, nor to estimate reliably the possible amount of any resulting fines and/or penalties, if any, which could be significant.
• Building Customer Trust – As part of ING’s commitment to building customer trust, Group Compliance Risk Management and the business worked closely together to consider how both products and services could be enhanced to improve the customer experience.
• Further embedding of Financial Economic Crime & Extra-Territorial Laws – ING continued its strong commitment to preventing any involvement in criminal activity. Existing activities were further strengthened by increased monitoring and internal audits as well as awareness and training programmes and an internal annual sign-off process for senior management concerning implementation of policies and procedures relating to Financial Economic Crime and business with ultra high risk countries.
Correlation factors between risk types used for diversification are based on best estimate assumptions supported by statistical analysis of historical data, ING risk expert judgement, external benchmark studies and common logic. As a foundation correlations are applied based on a 90% confidence level, i.e. they correspond to the correlations observed in the 10% largest downward movements (a ‘1 in 10’ event). As shown in the flow-chart, the correlation factors are stressed upwards where necessary to account for potential measurement inaccuracy in extreme events due to limited historic data observations. Expert opinion is used for aggregating business and operational risk.
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 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 uses over 100 models for credit risk. The various models can be grouped into three categories: statistical, expert and hybrid.
The Economic Capital formula for credit and transfer risks relies on seven different risk drivers. In addition to the PD, EAD, and LGD models mentioned above, the formula also considers the industry and the country of the debtor as well as the remaining term of the respective underlying transactions. Lastly, the formula considers correlation of different asset class types.
The underlying formulas and models that are used for determining Economic Capital for credit and transfer risk are similar to those used for determining the level of regulatory capital that is required under Basel II (Pillar 1). Despite the fact that the same underlying formulas are used, (internal) Economic Capital and regulatory capital are not the same, due to various specific rules imposed by Basel II, such as regulatory caps and floors, and the use of the standardised approach for certain portions of ING’s portfolio. These differences are permitted under the Basel II guidelines.
Vortex Risk Engine (‘VRE’) in the Central Risk Database 99.95% Basel II model outputs excluding Basel II caps and floors, maturity, repayment schedules, correlation factors, migration matrix.
Economic Capital levels for credit and transfer risk are calculated regularly for most of the Commercial Bank, ING Retail Benelux, and the Retail Direct & International banking operations. On a quarterly basis, the Economic Capital for credit risk and transfer risk figures are consolidated with the corresponding Economic Capital components from other disciplines.
Measurement 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. The Economic Capital for market risk for non trading portfolios is calculated for each risk type, while for trading portfolios it is calculated on a portfolio level. The calculations for Economic Capital market risk include real estate risk, foreign exchange rate risk, equity price risk, interest rate risk and model risks.
The economic capital for the equity investments is calculated based on the ECAPS system. Using Monte-Carlo simulation, the model generates 20,000 possible ‘states-of-the-world’, by randomly simulating all risk drivers simultaneously. For each state-of-the-world, the market value is recalculated and the 99.95% worst-case change in market value is the Economic Capital level.
1. Market Data Retrieval, Calibration and Scenario Generation • Automated retrieval and extrapolation of all current and historical market data • Generation of a comprehensive (Market and Non-Market Risks) correlation matrix • Calibration of market risk drivers for scenario generation • Generation of 500 Risk Neutral and Risk Volatile scenarios that are sent to each business unit to locally develop stochastic asset and liability cash flows • Generation of 20,000 Real World Monte-Carlo scenarios for Economic Capital calculation 2. Stochastic Cash flows Generation and Aggregation of Non-market Risk Capital • Actuarial software used to produce the stochastic cash flows based on Risk Neutral and Risk Volatile scenarios produced in step 1. • Business units upload stochastic asset and liability cash flows to determine the optimised replicating portfolio • Asset derivatives are directly processed as replicating instruments. • Non-market risk capital calculated in accordance with ING Standards of Practice
Business units can define the strikes and tenors of the instruments themselves to fit best to the risk profile of their liabilities. • Compile a replicating portfolio of standard financial instruments that matches the present value of cash flows as closely as possible for the 500 Risk Neutral and Risk Volatile scenarios.
• Non-market risks are aggregated and integrated with market risk. • The total diversified Economic Capital then results.
Further details on the Insurance Economic Capital model Market Data Retrieval, Calibration and Scenario Generation ING Insurance uses ING Bank’s Global Market Database (GMDB) as a provider of market price and risk data for financial risk drivers. All market data is obtained from reputable data providers such as Reuters and Bloomberg. The GMDB operational team then validates the market data and calculates relevant risk parameters. This validated data is then automatically delivered to the ECAPS system.
Based on the market data from GMDB, ING calibrates two economic scenario generators: • Risk Neutral Economic Scenario Generator (RN ESG): capable of generating multiple equity indices and exchange rates, consistent with a multi-currency dynamic term structure model. Scenarios are used in the cash flow projection to determine replicating portfolios. RN ESG scenarios are consistent with observed market prices of equity, FX and interest options; • Real World Economic Scenario Generator (RW ESG): capable of jointly simulating all risk types, i.e. all market risks, credit risk, business risk, operational risk, life risk, morbidity risk and P&C risk. Diversification between risks is taken into account through a Gaussian copula, allowing for different marginal probability distributions at the risk driver level. RW ESG scenarios are calibrated based on historical time series of the market risk drivers using at least 5 years of Historical data. Volatilities and correlations are calibrated to represent the distribution on a quarterly frequency.
Through the inclusion of equity options, FX options and swaptions in the set of replicating instruments, ING is able to incorporate implied volatility risk in the considered risk types. The same holds for the credit spread risk through the inclusion of credit risk bearing zero coupon bonds in the set of replicating instruments.
For the calculation of Economic Capital ING uses a one-year time horizon. In practice, the model calculates instantaneous quarterly shocks and then annualises the resulting VaR statistic to determine an annualised EC. The quarterly shock is used to stabilise the results and to ensure the shocks are within a range that can be more credibly valued for assets and liabilities. Also, it can better capture the impact of dynamic hedge strategies. It proves to have more consistency in how correlations between risk factors are defined and therefore align closer to actual risk practices and reporting cycles.
Changes in implied volatility levels mostly impact the AFR through embedded options in our liabilities. The same has no material impact for IFRS Earnings and is currently not measured.
For Earnings we apply a credit default scenario in which we multiply the probability of Default, Loss Given Default and Historical Cost. For impaired assets we apply a credit spread shock with default probabilities based on a 1-in-10 event.
Equity All equity 25% down Real Estate All real estate 15% down Foreign Exchange The worst case of a 10% up or down movement for each currency Implied Volatility Swaption volatilities up by 30%
Interest Rates Up and down parallel shock equal to 30% of the 10 year swap rate. Shock is floored at 50bps and capped at 150bps. Credit The credit risk sensitivity consistent out of two components: Firstly we apply a credit default scenario in which we multiply the probability of Default, Loss Given Default and Historical Cost. For impaired assets we apply a credit spread shock with default probabilities based on a 1-in-10 event. Secondly we apply rating migrations on the current portfolio using the rating transition matrix as observed by S&P in the year 2002 for US Corporate Bonds.
• EC, or Economic Capital (ING Insurance other than the US), is the required capital, based on a 99.5% confidence interval. This interval is aligned with the Solvency II capital requirement. The excess of AFR over EC is set based on the business strategy and resulting risk appetite defined by the Management Board Insurance.
• Risk Based Capital (ING US Insurance only). In the US, regulators have well developed capital adequacy models and stress tests that reflect the unique characteristics of the US insurance industry. During 2010, ING decided that the US regulatory frameworks better reflect the evolving capital management approach for ING Insurance’s US business. US domiciled insurance legal entities are required to hold minimum capital levels by state insurance regulators. The level of capital required by rating agencies to maintain an acceptable claims paying ability rating is well above these levels. The US Insurance business manages its statutory surplus primarily with respect to capital metrics that are aligned with the models of the various ratings agencies.
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 many policies and limits that guide the management of the balance sheets and the execution of capital market transactions.
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.
Adjustments to equity: Revaluation reserve debt securities –1,158 2,481 –19 123 Revaluation reserve crediting to life policyholders 1,488 –156 Revaluation reserve cashflow hedge –847 –372 639 472 –1,567 –926 Goodwill (3) –2,908 –3,244 –1,645 –1,636 –1,425 –1,857
(3) According to the regulatory definition. (4) Includes mainly EUR –1,727 million (2009: EUR –2,536 million) in participations (e.g. Kookmin, Bank of Beijing) and other equity investments, EUR –382 million
(2009: EUR –546 million) for Real estate for own use. The Dutch banking regulator requires this deduction to be made from Tier 1 capital. This deduction is added back to Tier 2 capital.
REGULATORY REQUIREMENTS ING BANK Capital adequacy and the use of regulatory required capital are based on the guidelines developed by the Basel Committee on Banking Supervision (The Basel Committee) and the European Union Directives, as implemented by the Dutch Central Bank (DNB) for supervisory purposes. The minimum Tier 1 ratio is 4% and the minimum total capital ratio (known as the BIS ratio) is 8% of all risk-weighted assets.
Available Tier 3 funds Deductions –1,069 –1,073 BIS capital 49,145 44,731
(see ING’s Capital base table, footnote 3). (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 in 2010 and 2009 respectively.
ING America Insurance Holdings Inc. (4) The difference between the 2009 financial debt (of EUR 4,750 million) and the core debt EUR 2,586 million reported in the 2009 Annual Report is mainly due to pension assets and deferred tax assets of the holding companies in the calculation of financial debt.
For ING Insurance (excluding the US business), 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). ING has carried out a review of the internal model (own funds and capital requirements) in the context of a Solvency II gap analysis. In the review we benchmarked our models against the Solvency II Standard Formula as presented in QIS 5, the CEIOPS consultation papers and commentary of expert groups like CRO Forum and Group Consultative. We consequently plan further refinements of our Economic Capital (EC) model that address improvements of our market risk calibration, in particular for spread risk; business risk, to improve our capturing of policyholder behaviour risk and to address country risk; and operational risk. These changes will result in a material increase of our EC, estimated to be between one and two billion euro as at year end 2010.
For the capital adequacy assessment of ING Insurance’s US domiciled regulated insurance business, available capital and required capital are measured based on the US regulatory Risk Based Capital (RBC) methodology as prescribed by the National Association of Insurance Commissioners (NAIC). For ING’s US domiciled regulated insurance business, the consolidated RBC ratio (available capital/required capital) is estimated to be approximately 426% for the period ended 31 December 2010. The actual US consolidated RBC ratio may be different from the estimate since the statutory results are not final until filed with the regulators. For ING Insurance’s US domiciled regulated insurance business, the RBC ratio was 362% at the end of 2009.
ING Group reports to the Dutch Central Bank as required under the Dutch implementation of the financial conglomerates directive. The directive mainly covers risk concentrations in the group, intra-group transactions and an assessment of the capital adequacy of the Group.
In the following table, we show the Group’s FICO ratio on the following basis: • Insurance required capital from applying European Solvency I rules to all ING Insurance entities globally (regardless of local capital requirements); • Bank required capital based on applying Basel II with the Basel I floor (80% in 2010 and 2009); • Group FICO capital using an approach similar to that used for Bank BIS capital and Insurance IGD capital whereby Group leverage is deducted.
Required capital banking operations 29,860 28,709 Required capital insurance operations 8,374 7,774 Total required capital 38,234 36,483
In 2010, ING decided to raise the Tier 1 ratio target, as a move towards the more demanding solvency requirements of Basel III. The Tier 1 ratio is a regulatory requirement. Internally ING manages on the Core Tier 1 ratio, for which the target was raised from 7.5% to 8.0% in 2010. The actual ratios were 7.81% at the end of 2009 and 9.62% at the end of 2010. ING expects the BIS ratio to lose its meaning.
ING Group – long term A stable A1 stable A stable
ING Insurance – short term A-2 P-2 F2 – long term A- negative Baa1 negative A- negative
In December 2009, ING repurchased 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. In March 2011, ING announced that, at the next coupon reset date on 13 May 2011, ING intends to exercise its option for early repurchase of EUR 2 billion of the remaining non-voting equity securities (core Tier 1 securities). The total payment in May 2011 will amount to EUR 3 billion and includes a 50% repurchase premium. ING will fund this repurchase from retained earnings. Provided that the strong capital generation continues, ING intends to repurchase the remaining EUR 3 billion non-voting equity securities (core Tier 1 securities) ultimately by May 2012 from retained earnings. The final decision on repurchase of these non-voting equity securities (core Tier 1 securities) will be made before the envisaged repayment date and will be conditional upon there having been no material changes regarding ING’s capital requirements and/or ING’s outlook on external market circumstances.
Notes to the parent company annual accounts of ING Group amounts in millions of euros, unless stated otherwise 1 INVESTMENTS IN WHOLLY OWNED SUBSIDIARIES
Result of the group companies 3,414 167 Capital contribution 1,500 700 Dividend –200 –350
Result for the year –935 –935 Unrealised revaluations after taxation –112 –112 –112 Changes in treasury shares 129 129 129 Dividend and repayment premium –346 –346 –259 –605 Transfer to share of associates reserve 76 76 76 Transfer to retained earnings –988 –988 988 Closing balance 22,814 –737 –5,262 16,815 –935 15,880
Notes to the parent company annual accounts of ING Group continued
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the annual accounts. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the annual accounts, whether due to fraud or error.
Proposed appropriation of result and Subsequent events amounts in millions of euros, except for amounts per share
Any of the risks described below could have a material adverse effect on the business activities, financial condition, results of operations and prospects of ING. The market price of ING shares could decline due to any of these risks, and investors could lose all or part of their investments. Additional risks of which the Company is not presently aware could also affect the business operations of ING and have a material adverse effect on ING’s business activities, financial condition, results of operations and prospects. In addition, the business of a multinational, broad-based financial services firm such as ING is inherently exposed to risks that only become apparent with the benefit of hindsight. The sequence in which the risk factors are presented below is not indicative of their likelihood of occurrence or the potential magnitude of their financial consequences.
Risk factors 268 ING Group Annual Report 2010 7 Additional information
Management believes that despite increased attention recently, systemic risk to the markets in which we operate continues to exist, and dislocations caused by the interdependency of financial market participants continues to be a potential source of material adverse changes to our business, results of operations and financial condition.
Furthermore, in the United States, the Dodd-Frank Wall Street Reform and Consumer Protection Act (‘Dodd-Frank’ or the ‘Dodd-Frank Act’) has imposed comprehensive changes to the regulation of financial services in the United States and has implications for non-US financial institutions with a US presence, such as ING. Dodd−Frank directs existing and newly−created government agencies and bodies to promulgate regulations implementing the law, a process anticipated to occur over the next few years. We cannot predict with any certainty the requirements of the regulations ultimately adopted or how Dodd−Frank and such regulations will affect the financial markets generally, impact the Group’s business, credit or financial strength ratings, results of operations, cash flows or financial condition or advise or require the Group to raise additional capital. Key risks associated with the Dodd-Frank Act that may have an impact on the Group include: • The newly created risk regulator – the Financial Stability Oversight Council (the ‘FSOC’) – may designate the Group as a company whose material financial distress, or whose nature, scope, size, scale, concentration, interconnectedness or mix of activities, could pose a threat to the financial stability of the United States. In such an instance, the Group will become subject to the oversight of the Federal Reserve. If the Group becomes subject to the examination, enforcement and supervisory authority of the Federal Reserve, the Federal Reserve would have authority to impose capital requirements on the Group and its subsidiaries. The Group cannot predict what capital regulations the Federal Reserve will promulgate under these authorisations, either generally or as applicable to organisations with the Group’s operations, nor can management predict how the Federal Reserve will exercise potential general supervisory authority over the Group as to its business practices or those of its subsidiaries. If designated as systemically important by the FSOC, the Group would become subject to unspecified stricter prudential standards, including stricter requirements and limitations relating to risk−based capital, leverage, liquidity and credit exposure, as well as overall risk management requirements, management interlock prohibitions and a requirement to maintain a plan for rapid and orderly dissolution in the event of severe financial distress. The Group may become subject to stress tests to be promulgated by the Federal Reserve in consultation with the newly created Federal Insurance Office (discussed below) to determine whether, on a consolidated basis, the Group has the capital necessary to absorb losses as a result of adverse economic conditions. We cannot predict how the stress tests will be designed or conducted or whether the results thereof will cause the Group to alter its business practices or affect the perceptions of regulators, rating agencies, customers, counterparties or investors about the Group’s financial strength. The FSOC may also recommend that state insurance regulators or other regulators apply new or heightened standards and safeguards for activities or practices that the Group and other insurers or other financial services companies engage in.
• Dodd−Frank creates a new framework for regulation of the over-the-counter (OTC) derivatives markets and certain market participants which could affect various activities of the Group and its subsidiaries.
On 1 March 2011, the European Court of Justice issued its judgment in the widely-followed Test Achats case. The Test Achats decision, in effect, provides that the use of gender as a factor in the pricing of or benefits under life and non-life insurance coverage is incompatible with the principles of equal treatment of men and women under the EU Charter. The Test Achat decision provides for a transition period, however, until 21 December 2012, after which the use of such gender-based factors will no longer be permissible. It is unclear whether this prohibition also applies to existing insurance contracts. While it is too early to assess the impacts of the Test Achats case on ING’s insurance business, it is expected that the industry generally will incur potentially significant compliance-related costs as policy forms, underwriting and pricing criteria, and related systems undergo required modifications. ING is unable at this stage to quantify the extent of any such costs or other impacts on its business, and intends to follow closely the implementation of the Test Achats decision during the above-referenced transition period.
occurrence of certain events or at their option. The EC has indicated that, in certain circumstances, it may require these financial institutions to defer payment. If this were to happen, we expect that such instruments may experience ratings downgrades and/or a drop in value and we may have to treat them as impaired, which could result in significant losses. There is no assurance that losses on, or impairments to the carrying value of, these assets would not materially and adversely affect our business or results of operations.
Improving market conditions observed over the last year, may not persist and increase the risk of loans being impaired. We are exposed to declining property values on the collateral supporting residential and commercial real estate lending. We are exposed to the risk that our borrowers may not repay their loans according to their contractual terms and that the collateral securing the payment of these loans may be insufficient. We may continue to see adverse changes in the credit quality of our borrowers and counterparties, for example as a result of their inability to refinance their indebtedness, with increasing delinquencies, defaults and insolvencies across a range of sectors. This may lead to impairment charges on loans and other assets, higher costs and additions to loan loss provisions. A significant increase in the size of our provision for loan losses could have a material adverse effect on our financial position and results of operations.
We may incur losses due to failures of banks falling under the scope of state compensation schemes. In the Netherlands and other jurisdictions deposit guarantee schemes and similar funds (‘Compensation Schemes’) have been implemented from which compensation may become payable to customers of financial services firms in the event the financial service firm is unable to pay, or unlikely to pay, claims against it. In many jurisdictions in which we operate, these Compensation Schemes are funded, directly or indirectly, by financial services firms which operate and/or are licensed in the relevant jurisdiction. As a result of the increased number of bank failures, in particular since the fall of 2008, we expect that levies in the industry will continue to rise as a result of the Compensation Schemes. In particular, we are a participant in the Dutch Deposit Guarantee Scheme, which guarantees an amount of EUR 100,000 per person per bank (regardless of the number of accounts held). The costs involved with making compensation payments under the Dutch Deposit Guarantee Scheme are allocated among the participating banks by the Dutch Central Bank, De Nederlandsche Bank N.V. (the ‘DNB’), based on an allocation key related to their market shares with respect to the deposits protected by the Dutch Deposit Guarantee Schemes. Given our size we may incur significant compensation payments to be made under the Dutch Deposit Guarantee Scheme, which we may be unable to recover from the bankrupt estate. The ultimate costs to the industry of payments which may become due under the Compensation Schemes, remains uncertain although they may be significant and these and the associated costs to us may have a material adverse effect on our results of operations and financial condition. Going forward the Dutch Deposit Guarantee Scheme may change from an ex-post scheme, where we contribute after the failure of a firm, to an ex-ante scheme where we pay yearly contributions to ensure the scheme holds a target level of fund regardless of whether any failures occur. The costs associated with potential future yearly contributions are today unknown, but given our size may be significant.
We may be unable to manage our risks successfully through derivatives. We employ various economic hedging strategies with the objective of mitigating the market risks that are inherent in our business and operations. These risks include currency fluctuations, changes in the fair value of our investments, the impact of interest rate, equity markets and credit spread changes and changes in mortality and longevity. We seek to control these risks by, among other things, entering into a number of derivative instruments, such as swaps, options, futures and forward contracts including from time to time macro hedges for parts of our business.
Developing an effective strategy for dealing with these risks is complex, and no strategy can completely insulate us from risks associated with those fluctuations. Our hedging strategies also rely on assumptions and projections regarding our assets, general market factors and the credit worthiness of our counterparties that may prove to be incorrect or prove to be inadequate. Accordingly, our hedging activities may not have the desired beneficial impact on our results of operations or financial condition. Poorly designed strategies or improperly executed transactions could actually increase our risks and losses. If we terminate a hedging arrangement, we may also be required to pay additional costs, such as transaction fees or breakage costs. There have been periods in the past, and it is likely that there will be periods in the future, during which we have incurred or may incur losses on transactions, perhaps significant, after taking into account our hedging strategies. Further, the nature and timing of our hedging transactions could actually increase our risk and losses. In addition, hedging strategies involve transaction costs and other costs. Our hedging strategies and the derivatives that we use and may use may not adequately mitigate or offset the risk of interest rate volatility, and our hedging transactions may result in losses.
Furthermore, ING Bank’s assets are risk weighted. Downgrades of these assets could result in a higher risk weighting which may result in higher capital requirements. This may impact net earnings and the return on capital, and may have an adverse impact on our competitive position. For ING’s insurance businesses in a number of jurisdictions, such as the US and the EU, downgrades of assets will similarly affect the capital requirements for ING Insurance in those jurisdictions.
Operational risks are inherent in our business. Our businesses depend on the ability to process a large number of transactions efficiently and accurately. Losses can result from inadequate trained or skilled personnel, IT failures, inadequate or failed internal control processes and systems, regulatory breaches, human errors, employee misconduct including fraud, or from external events that interrupt normal business operations. We depend on the secure processing, storage and transmission of confidential and other information in our computer systems and networks. The equipment and software used in our computer systems and networks may be at or near the end of their useful lives or may not be capable of processing, storing or transmitting information as expected. Certain of our computer systems and networks may also have insufficient recovery capabilities in the event of a malfunction or loss of data. In addition, such systems and networks may be vulnerable to unauthorised access, computer viruses or other malicious code and other external attacks or internal breaches that could have a security impact and jeopardise our confidential information or that of our clients or our counterparts. These events can potentially result in financial loss, harm to our reputation and hinder our operational effectiveness. We also face the risk that the design and operating effectiveness of our controls and procedures prove to be inadequate or are circumvented. Furthermore, widespread outbreaks of communicable diseases, such as the outbreak of the H1N1 influenza virus, may impact the health of our employees, increasing absenteeism, or may cause a significant increase in the utilisation of health benefits offered to our employees, either or both of which could adversely impact our business. Unforeseeable and/or catastrophic events can lead to an abrupt interruption of activities, and our operations may be subject to losses resulting from such disruptions. Losses can result from destruction or impairment of property, financial assets, trading positions, the payment of insurance and pension benefits to employees and the loss of key personnel. If our business continuity plans are not able to be implemented or do not take such events into account, losses may increase further.
In addition, we determine the appropriate level of primary insurance and reinsurance coverage based on a number of factors and from time to time decide to reduce, eliminate or decline coverage based on our assessment of the costs and benefits involved. In such cases, the uninsured risk remains with us.
In connection with the Restructuring Plan, we have also agreed to not be a price leader in certain EU markets with respect to certain retail, private and direct banking products and to refrain from (i) acquisitions of financial institutions and (ii) acquisitions of other businesses if this would delay our repurchase of the remaining Core Tier 1 Securities. Those limitations may last until 18 November 2012 and could adversely affect our ability to maintain or grow market share in key markets as well as our results of operations. See ‘Risks Related to the Group – The limitations agreed with the EC on our ability to compete and to make acquisitions or call certain debt instruments could materially impact the Group’.
‘Risks Related to the Group – The implementation of the Restructuring Plan and the divestments anticipated in connection with that plan will significantly alter the size and structure of the Group and involve significant costs and uncertainties that could materially impact the Group’; • initiatives we are contemplating may require consultation with various regulators as well as employees and labor representatives, and such consultations may influence the timing, costs and extent of expected savings; • the loss of skilled employees in connection with the initiatives; and • projected savings may fall short of targets.
While we have begun and expect to continue to implement these strategies, there can be no assurance that we will be able to do so successfully or that we will realise the projected benefits of these and other restructuring and cost saving initiatives. If we are unable to realise these anticipated cost reductions, our business may be adversely affected. Moreover, our continued implementation of restructuring and cost saving initiatives may have a material adverse effect on our business, financial condition, results of operations and cash flows. Our agreements with the Dutch State impose certain restrictions regarding the issuance or repurchase of our shares and the compensation of certain senior management positions.
CAPITAL AT RISK (CAR) The maximum negative impact on ING Group’s economic surplus over a one year forward looking horizon under normal market conditions. CaR is calculated at a 90% confidence interval.
COUNTRY RISK The risk that a government will not fulfil its obligations or obstructs the remittance of funds by debtors, either for financial reasons (transfer risk) or for other reasons (e.g. political risk).
CREDIT RISK The risk of loss from default by borrowers (including bond issuers) or counterparties. Credit risks arise in ING’s lending, presettlement and investment activities, as well as in its trading activities. Credit risk management is supported by dedicated credit risk information systems and internal rating methodologies for debtors and counterparties.
EMBEDDED VALUE PROFIT (EVP) Embedded value profit is the change in embedded value over a given period over and above the amount related to the unwinding of the discount rate.
FAIR VALUE The amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.
FINANCIAL INSTRUMENTS Contracts that give rise to both a financial asset for one company and a financial liability or equity instrument for another company.
INTEREST BEARING INSTRUMENT A financial asset or a liability for which a time-proportionate compensation is paid or received in relation to a notional amount.
MARKET VALUE AT RISK (MVAR) A calculation method which measures the decrease in the market value surplus caused by movements in financial markets, at a 99.95% confidence level over a one year horizon.
VALUE CREATION Value creation is measured by Economic Profit (regarding non life and asset management business and banking operations) and Embedded Value Profit (regarding life and long term health business).
ING PUBLICATIONS – Annual Report, in Dutch and English – Annual Report on Form 20-F, in English