Administrative expenses/operating income 43.9% 44.3% 44.2% Underlying Return on Equity based on IFRS-EU equity –1.8% –0.9% –6.3% Insurance Group Directive Solvency ratio 250% 247% n.a. Employees (FTEs, per 31 December, adjusted for divestments) 34,763 35,445 –2 40,460 1Who we are
(1) Nominated for reappointment as of 9 May 2011. (2) Retirement as of 9 May 2011. (3) Resigned on 24 January 2011. (4) Resigned on 6 January 2011.
Remuneration Committee Jeroen van der Veer, chairman Peter Elverding Piet Klaver Joan Spero Lodewijk de Waal
Corporate Governance Committee Peter Elverding, chairman Henk Breukink Claus Dieter Hoffmann Aman Mehta Lodewijk de Waal * You can find more information on the members of the Executive Board on page 65 and on the members of the Supervisory Board on pages 68–69. The names of the nominated candidates for appointment at the General Meeting on 9 May 2011 can be found on page 57.
INSURANCE BENELUX Insurance Benelux includes ING’s life and non-life insurance, investment and pension businesses in the Netherlands, Belgium and Luxembourg. Insurance Benelux, already a leading player in the industry, aims to become the most efficient large insurer in the region.
INSURANCE CENTRAL & REST OF EUROPE Insurance Central & Rest of Europe consists of ING’s life insurance and pensions operations in nine countries which include Poland, the Czech Republic, Slovakia, Hungary, Romania, Greece and Spain as well as greenfield operations in Bulgaria and Turkey.
INSURANCE US (EXCLUDING US CLOSED BLOCK VA) Insurance US includes ING’s retirement services and life insurance operations in the US. In the US, ING is the third-largest provider of defined contribution retirement plans in terms of assets under management and administration.
A number of achievements and key priorities stood out in 2010. First of all, the Group’s business performance in 2010 was strong. Although the economic recovery remains fragile, and financial markets continue to be volatile, ING posted an underlying net profit of EUR 3,893 million in 2010, up from EUR 974 million a year earlier.
The operational separation of the bank and insurer was effectuated at year-end, with arm’s-length agreements in place between the two businesses for all commercial cooperation and shared infrastructure. The focus for 2011 will be on preparing the insurance company for two IPOs so we will be ready to move forward when market conditions are favourable.
The measures taken under the Back to Basics programme, which was completed in 2010, to reduce risks, decrease costs, deleverage and reduce the size of the balance sheet, enabled us to quickly restore a healthy profitability profile. We substantially reduced our leverage and risk, actively managed our sovereign portfolio and set clear future performance targets for our banking and insurance businesses. A number of divestments were carried out. ING also comfortably passed the stress test conducted by the Committee of European Banking Supervisors. In addition, we repaid 50% of the Dutch State aid in December 2009. In May 2011, we intend to repay another 20%. Provided that the strong capital generation continues, we intend to repay the final 30% by May 2012.
Improving financial and other types of education is an important part of our CR strategy. We are proud of our Chances for Children programme through which we provide underprivileged children with quality education to give them a real chance of a better future. I was especially pleased with the 2010 Chances for Children Global Challenge. Staff and management throughout the company rolled up their sleeves to volunteer and raise funds for children and education-related projects in what has become a great annual tradition at ING. 38 countries took part in 2010’s Global Challenge and over 20,000 ING employees were involved. We raised EUR 927,000. You can read more about this and many other initiatives in the chapter on Corporate responsibility.
In December 2009, ING repurchased the first half of the core Tier 1 securities of EUR 5 billion plus a total premium of EUR 605 million. Furthermore, 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 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 of the core Tier 1 securities ultimately by May 2012 from retained earnings. The final decision on repurchase of these 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.
LISTINGS Depositary receipts for ING Group ordinary shares are listed on the stock exchanges of Amsterdam, Brussels and New York (NYSE). Options on ING Group ordinary shares (or the depositary receipts therefor) are traded on the NYSE Euronext Amsterdam Derivative Markets and the Chicago Board Options Exchange.
SHAREHOLDERS AND DEPOSITARY-RECEIPT HOLDERS WITH STAKES OF 5% OR MORE To the best of our knowledge, as at 31 December 2010, there were no shareholders or holders of depositary receipts for shares who reported to hold an interest of 5% or more as mentioned in the Dutch Financial Supervision Act, other than Stichting ING Aandelen (ING Trust Office) and Stichting Continuïteit ING (ING Continuity Foundation).
(Depositary receipts for) ordinary shares of EUR 0.24 nominal value 3,831.6 3,831.6 (Depositary receipts for) own ordinary shares held by ING Group and its subsidiaries 51.3 47.1 (Depositary receipts for) ordinary shares outstanding in the market 3,780.3 3,784.5
INVESTORS AND FINANCIAL ANALYSTS MAY CONTACT: ING Group Investor Relations (IH 07.362) P.O. Box 810 1000 AV Amsterdam The Netherlands
Furthermore, in parallel to the workstream at international level, the European Commission is proposing a European Crisis Management Framework. In this framework different issues will be addressed, such as prevention tools and early intervention and final resolution mechanisms.
By the end of 2010 a solution was created for most of the disentanglement projects. Consequently, from 1 January 2011, ING’s bank and insurance/investment management businesses became operationally separate under the ING umbrella. Where an interim solution has been put in place, such as critical IT or HR services, a degree of interrelationship remains, which is mitigated through (signed) contracts and ring-fencing measures. In a limited number of instances, where these measures were not feasible due to high costs or time constraints, a documented exception was formalised. By the end of 2011, most interim solutions and documented exceptions that enabled operational separation will be replaced by permanent solutions; thus turning the operational separation into a full separation.
Where the resolution of a specific disentanglement project is expected after 2011 a long-term service agreement will be put in place. The outcome of a small number of projects depends on the details of the actual transaction(s). Hence, the implementation of these projects will be delayed until such details are available. The implementation of local end-state solutions as well as both the local temporary and long-term service agreements will be managed by the respective business units. Throughout ING, a new governance structure has been inaugurated to ensure that the to-be separated units operate at arm’s-length.
ING Bank and Insurance/Investment Management will continue to work together for commercial purposes. The bank will continue to sell insurance/investment management products, and the insurer/ investment manager will continue to use bank services. Terms and conditions of this cooperation have been formalised and brought at arm’s length.
With the operational separation thus formalised, our attention has shifted to the next step: how to actually separate our businesses and execute the divestment process. Building on an analysis of market and regulatory conditions, we formulated a base case scenario. While the option of one initial public offering (IPO) remains open, ING will prepare itself for a base case of two IPOs: one Europe-led IPO (including our activities in Asia) and one separate US-focused IPO. Hence, ING will in 2011 proceed with the operational disentanglement of its US and European/Asian Insurance/Investment Management operations.
More information on this matter and the envisaged end-state of the businesses after completion of the divestment process is included in the Strategy section.
More information on the business developments within the bank and the insurer/investment manager and on the business performance of the Group and its various business lines is given in the Banking and Insurance sections of this Annual Report.
Also in the first quarter of 2010, ING completed the sale of its Asian Private Banking business to Oversea-Chinese Banking Corporation Limited (OCBC Bank). This transaction was in line with the objective to focus on fewer franchises and reduce the complexity of the Group. It generated a net profit for ING of a 2 Report of the Executive Board
Lastly, in December 2010, we announced the sale of ING Investment Management Philippines to the Bank of the Philippine Islands (BPI). This decision resulted from the strategic decision to split the bank and the insurer/investment manager. For in the Philippines, trust and investment management businesses must operate under a trust licence. As a consequence of the strategic split, ING can no longer conduct investment management activities in the Philippines through ING Bank Manila, as it did in the past. The Philippine investment management activities were therefore divested to another licensed bank (BPI).
Minority interests 98 95 Underlying net result 3,893 974 Divestments 394 –150 Special items after tax –1,067 –1,759 Net result 3,220 –935
(1) Numbers may not add up due to rounding. (2) Commercial performance Banking is underlying result before tax excluding market impacts and risk costs.
(4) Market and other impacts Insurance include gains/losses and impairments, revaluations, and market and other impacts.
FINANCIAL DEVELOPMENTS The operating environment continued to improve gradually during the year, although the global economic recovery remained fragile and market volatility persisted. Nevertheless, ING Group’s results showed a strong improvement compared with the previous year.
ING’s capital position remained strong, supported by the EUR 5.9 billion of core Tier 1 capital surplus generation from the bank in 2010. ING Bank’s core Tier 1 ratio increased to 9.6% at year-end 2010 from 7.8% at year-end 2009.
At ING Insurance, the 2010 underlying loss before tax of EUR 519 million was heavily impacted by adverse market and other impacts totalling EUR 2,262 million in 2010, an increase of EUR 626 million from EUR 1,636 million in 2009. The operating profit of Insurance, i.e. underlying result before tax excluding market and other impacts, improved 22% from EUR 1,434 million in 2009 to EUR 1,743 million in 2010. This improvement was driven by a significant improvement of the investment margin as well as higher fee and premium-based revenues. These factors were in part offset by rising administrative expenses.
• One separate public offering of our leading US franchise in life insurance and retirement services.
> 20% employee participation in ING Global Challenge 2Report of the Executive Board
worldwide. Training customer-facing colleagues helps us ensure such risks are considered alongside more traditional business risks when lending decisions are made.
CONTRIBUTING TO POSITIVE CHANGE We team up with our clients to truly understand their business. This enables us to create products that take into account both business and sustainability objectives. In close cooperation with our clients we continue to create new and meaningful sustainable products and services. Examples are sustainable investment funds, such as so-called thematic funds which enable clients to invest their money in microfinance projects, renewable energy or in projects contributing to a sustainable use of water. ING’s sustainable assets under management increased by 5% from EUR 2,028 million in 2009 to EUR 2,120 million in 2010.
That’s why ING launched ‘Be Good at Money’ (internet access required), an online area that allows consumers to access easy-to-understand financial information and regain control over their finances.
LOOKING FORWARD In 2011, both ING Bank and ING Insurance will further build their CR strategy on the foundations established in previous years.
Equator Principles Number of projects reviewed 74 77 Sustainable assets under management (2)
(6) ING company score in the underlying SAM’s corporate sustainability assessment (1-100).
Energy use in kWh per FTE** 7.79 7.73 Business travel by air in km per FTE 2,536 2,030 Paper consumption in kg per FTE*** 48.79 53.77 * More details including coverage of data can be found in the ING Corporate Responsibility Report 2010, available on www.ing.com. We report on energy and paper use and business travel as this contributes to 99% of ING’s direct environmental footprint.
MAINTAINING A WELL-DIVERSIFIED FUNDING BASE Capital Management is also responsible for ING’s strategy towards long-term funding and other capital markets transactions. In order to achieve a well-diversified funding base, these transactions can take place in several currencies, jurisdictions, maturities and formats (subordinated, senior unsecured, etc.) with either fixed or floating interest rates. Other transactions include hybrid capital and, if expedient, the issuance of contingent capital.
Furthermore, Capital Management manages the different corporate lines of Bank and Insurance. Within these corporate lines, shareholders’ expenses are recorded that cannot be directly allocated to ING’s different businesses. Capital Management takes an active role in investing ING’s capital prudently and managing foreign exchange risks in such a way that the solvency impact of currency movements is limited as much as possible, without causing volatility on the profit and loss account. The main objective in managing the corporate lines is to reduce expenses as much as possible, without increasing ING’s overall risk profile.
Distribution and communication channels are becoming more direct and internet based. This is increasing the speed at which funds can be deposited and withdrawn and this can have meaningful consequences for liquidity management. Also, ING is committed to delivering this customer convenience through e-services without sacrificing security standards.
Leadership development & training Increasing the visibility of talented male and female leaders, enhancing peer-to-peer knowledge exchange, and further embedding innovative thinking, continues to drive IBS’s programmes. Added to this, the IBS expanded its regular development and training opportunities to 3,242 employees worldwide by offering online programmes.
HR supports ING in shaping the organisation and developing socially responsible leaders, as illustrated by ING’s Corporate Responsibility’s ‘Leadership Development Programme in India’. In addition, ING launched the Promoting Integrity Programme (PIP) – a global change programme to help all ING employees understand how their behaviour can earn and strengthen the trust of all stakeholders. HR Insurance/Investment Management (IM) worked closely with the business to strengthen the new organisation and assess and develop leaders. Insurance/IM senior leadership teams implemented a comprehensive talent review to benchmark against external standards.
Underlying operating expenses increased by 4.6% to EUR 9,685 million, reflecting higher staff costs, increased marketing expenses and deposit guarantee scheme costs as well as higher IT project costs. The underlying cost/income ratio improved to 56.0% from 68.7% in 2009, driven by higher income. Excluding market-related impacts, the cost/income ratio was 54.2% in 2010.
The underlying net addition to the provision for loan losses declined to EUR 1,751 million from EUR 2,859 million in 2009. Risk costs in 2010 were 53 basis points of average risk-weighted assets compared with 85 basis points in 2009.
Throughout 2009 and 2010 ING worked towards a separation of its banking and insurance/investment management businesses in preparation for the eventual divestment of the latter in 2013 at the latest (see the chapters ‘ING and the financial environment’ and ‘Strategy’).
Now that the bank has been operationally separated it will concentrate on building a more agile and customer-centric business. ING Bank will serve consumers, corporate clients and institutions with one balance sheet, one consistent brand, one management structure and one support organisation. It will follow a selective approach to growth by bringing loan growth in line with deposit growth.
Retail Banking is #2 bank in the Netherlands and #4 bank in Belgium; also active in Central and Eastern Europe
Commercial Banking has an international network in 40 countries, with key positions in Structured Finance and Financial Markets 2Report of the Executive Board
ING Bank’s ambition is ‘to be the preferred bank for our customers’. This means that we want our customers to consider ING first for all their financial requirements. To achieve that we will concentrate on three shared priorities: customer centricity, operational excellence and be a top employer.
CONCLUSIONS ING Bank aims to be a leading retail, direct and commercial bank, based in the Benelux and predominantly focused on Europe, with key positions in attractive growth markets in Central Europe, Turkey and selected markets throughout Asia.
ING has not only improved its retail banking systems and products, but has also enhanced value for money. A survey by the Dutch consumers’ association Consumentenbond showed that ING offers better value for money with its basic payment package than any other Dutch bank.
It also centralised its advice services, so that investment decisions are now taken at a central level and then implemented by local investment advisers.
Like all other banking business units, Retail Belgium’s goal is to build the preferred bank for its customers, which will be realised by concentrating on three priorities: operational excellence, customer centricity and being a top employer.
year named the best provider of online savings products in the Netherlands by research company WUA.
In 2010, for example, ING introduced a service for start-up companies to open a business account, including a debit card, pin and online banking, in just 20 minutes. This product was developed following customer feedback on account activation time and in response to their needs to reduce red tape and to spend as much time as possible focusing on their businesses.
Top employer The third and final priority in ING’s banking strategy is to become a top employer. Motivated and engaged employees are essential for enhancing customer satisfaction and, therefore, our success. Retail NL is developing a new human resources strategy, which includes redefining our Employee Value Proposition to clarify to staff what the bank stands for and what staff can expect from the bank and vice versa. In 2011, action plans will be rolled out globally and local business units and countries will be assisted in setting local objectives.
Much energy has been devoted to developing local business in Luxembourg, an approach which has proved successful and will be continued in the coming years.
ING Luxembourg embraced the Net Promoter Score metric in early November 2010.
Private Banking has a top 3 position (16% market share) in Belgium. It serves over 18,000 individual customers with more than EUR 1,000,000 in assets with ING. Assets under management amounted to EUR 15.7 billion (Belgium) and EUR 7.5 billion (Luxembourg) at year-end, totalling EUR 23.2 billion
ING DIRECT FINANCIAL DEVELOPMENTS ING Direct delivered strong results in 2010 with an underlying profit before tax of EUR 1,450 million, compared with a loss of EUR 666 million in 2009. This major improvement was driven by lower impairments on the investment portfolio, a higher interest result and lower additions to the loan loss provisions. Underlying income more than doubled, as impairments (mainly on the Alt-A RMBS portfolio in the US) declined to EUR 107 million compared to EUR 1,394 million in 2009. The interest result was up 20.3%, or EUR 638 million, driven by higher volumes and increased margins on savings and mortgages. The interest result in the US benefited from the IFRS treatment on previously impaired bonds, which had a positive impact of EUR 230 million in 2010 up from EUR 99 million in 2009. Operating expenses increased 13.4%, primarily reflecting higher marketing costs, the roll-out of payment accounts and increased staff costs. The addition to the loan loss provisioning decreased to EUR 446 million, or 59 basis points of average risk-weighted assets from EUR 765 million in 2009 (or 112 basis points), supported by signs of stabilisation in the US housing market and US unemployment rate as well as diminishing delinquencies.
Customer centricity Retail Belgium continued to improve customer centricity in 2010. It launched an Online Consumer Loans tool to provide customers with quick decisions on loan requests, without increasing the bank’s exposure to credit risk.
Plans for 2011 include further developing the internet channel and the product offering and continuing with the branch transformation programme, which will be extended across the whole bank. Another task will be to upgrade IT and Operations to enhance the customer experience.
Human resources (HR) departments across the organisation are working on ‘Top Employer’ initiatives, including programmes on management development, Workplace Dynamics Surveys (US), talent programmes for early and mid-career high potentials (UK), innovative health management programmes (Germany) and using
In 2010, ING Direct moved further towards becoming a more complete retail bank, while maintaining a different approach from its competitors. This requires, among other things, widening the product base to achieve greater income diversification, developing its distribution channels and more investment in cross-selling.
In Canada, payment accounts were introduced to expand ING Direct’s product line. ING Direct now offers payment accounts in all countries except the UK. There were initiatives in several countries to increase the number of savings account customers who also hold a payment account, which has proven to increase customer loyalty. As a result, the number of payment account clients increased significantly in 2010.
ING Direct’s ambition is to become the customer’s preferred bank, through operational excellence, customer centricity and being a top employer. In 2010, ING Direct again ranked first (meaning ‘most recommended’) or second in all nine countries on the Net Promoter Score. NPS is a recognised measure for customer satisfaction in the financial services industry.
In Turkey we built on the success of our Performance Evaluation Process, and in Poland and Romania we moved closer to the One Bank ideal by integrating HR activities for the universal bank. HR processes such as talent management and compensation & benefits management were made more efficient, contributing towards ING’s top employer goal.
RETAIL CENTRAL EUROPE FINANCIAL DEVELOPMENTS The underlying result before tax of Retail Central Europe rose 82.4% to EUR 155 million, driven by higher results in Poland and Romania, while results in Turkey declined from the strong performance in 2009. Underlying income in Central Europe rose 13.5% supported by higher volumes in all countries and improved interest margins in Poland and Romania. In Turkey, margins declined due to increased competition, while income was impacted by negative fair value changes on derivatives (not eligible for hedge accounting). Operating expenses were up 15.5% reflecting business growth and increased staff costs. Risk costs declined to EUR 61 million, or 28 basis points of average risk-weighted assets, from EUR 116 million (or 61 basis points) in 2009. The decline in risk costs was mainly in Turkey and Romania supported by releases of specific provisions and improved data quality.
BUSINESS DEVELOPMENTS Retail Central Europe has a leading presence in Poland and strong positions in Romania and Turkey. It operates full-service banks in all three, combining retail and commercial banking products and services for its customers.
Operational excellence Amongst banks that operate branches in Poland, ING Bank Slaski is the most internet-oriented, serving almost three million customers. A Newsweek survey in September 2010 showed that ING Bank Slaski was voted second best in the ‘Bank for Internet users’ category. It was also voted best full-service bank in 2010 for its solid profitability and solvency levels by Rzeczpospolita, a financial newspaper.
Thailand-based TMB Bank launched several online, low-cost, innovative financial products, which were all market ‘firsts’ and all well received as they made banking easier for customers. They included the TMB No Fee Deposit, UP & UP Term Deposit and the No Limit Debit Card.
ING Vysya Bank introduced the Net Promoter Score methodology early in October, with a number of transactional areas surveyed, including mortgage loan disbursals, online financial transactions and exiting a savings account. First results show that many customers are extremely likely to recommend ING to family or friends, but that they are still very critical about us in the open comment questions. The bank acts promptly on feedback received.
HR Asia will continue to work on a new human capital approach. Focal points of improvement in 2011 include to provide career opportunities to staff to advance their careers and to create a ‘good-place-to-work’ environment.
place in ‘Pracodawca Roku 2009’ (Employer of the Year, 2009) and was the only bank among the top 10 ‘Most Desired Employers’ listing.
Continued focus on customer centricity in all activities > Strong commercial performance > Significant decrease in risk costs > Collaboration across units for benefit of clients > Landmark deals for clients > League tables underline strong market positions > Real Estate exposure steadily reduced 2010 was an excellent year for Commercial Banking despite the challenging environment. Although critical investment expenses were up, risk costs dropped significantly. Commercial Banking made good progress in realising its goals and achieving leading market positions in selected geographies and products. It continued on its course to become a leading European commercial bank with selective growth options in other regions.
In 2010, net production of client balances was EUR 12 billion bringing the total to EUR 278 billion at year-end. The net production was largely realised in funds entrusted. The net production in lending was EUR 3 billion driven by the increased demand for Structured Finance loans in the last quarter of 2010.
Total underlying income increased 14.0% to EUR 5,811 million driven mainly by ING Real Estate and Structured Finance as well as Leasing & Factoring. This more than offset the decline at Financial Markets and General Lending & PCM. Underlying operating expenses increased 8.3% to EUR 2,998 million partly caused by an accrual adjustment related to the deferral of incentive compensation in 2009 and despite lower impairments on real estate development projects. The underlying cost/income ratio improved to 51.6% from 54.3% in 2009. Excluding ING Real Estate, the cost/income ratio was 44.0% compared with 37.9% in 2009.
** Underlying after tax return divided by average equity based on 7.5% core Tier 1 ratio.
Commercial Banking excl. ING Real Estate 2,379 2,107 – General Lending & PCM 455 426 – Structured Finance 938 287 – Leasing & Factoring 133 67 – Financial Markets 919 1,289 – Other Products –65 37 ING Real Estate –63 –988 Total Commercial Banking 2,316 1,118 2Report of the Executive Board
Commercial Banking took steps to becoming more client centric during the year. For example, PCM set policy guidelines for a global payments mandate and the client organisation was strengthened by introducing a stronger European sector approach. ING board members are linking up more regularly with board members of clients. The second wave of the Balance Sheet Optimisation campaign was rolled out in the Netherlands and Belgium, the aim being to help clients balance short-term financial needs with long-term goals. A campaign was launched to optimise clients’ international financial management, based on a detailed understanding of clients’ businesses and what they need to support their operations outside their home countries. An International Business Support Centre was set up to streamline processes to ensure consistently excellent service to clients.
Operational excellence was another key priority. PCM, for instance, improved its processes, client communications and IT set-up and governance. Financial Markets established a new centre in Singapore for its front office system which provides foreign exchange and money market services to clients globally.
Finally, the Fitter, Focused, Further strategy feeds into the development of the concept of a total banking approach. In 2010, ING Retail Banking Benelux, ING Retail Banking Direct & International and Commercial Banking worked together to align themselves more closely with each other and leverage their strengths across all banking operations (see chapter on ‘Strategy’).
Managing risk and costs remained key priorities for Commercial Banking. Risk costs fell significantly as a result of a resilient quality portfolio and better risk management. We continued to manage exposure and concentration in our portfolio to achieve the right risk-reward balance. Our exposure to real estate was also steadily reduced.
Risk costs decreased significantly to EUR 497 million compared with EUR 1,210 million in 2009. As the economic environment started to stabilise, the number of significant files declined, particularly within Structured Finance, but also in ING Real Estate and General Lending. Risk costs in basis points of average risk-weighted assets (RWA) declined to 33 basis points in 2010 from 71 basis points in 2009.
BUSINESS DEVELOPMENTS Commercial Banking plays an integral role within ING Bank. The essence of ING’s business is to collect deposits and redeploy them in various forms and types of financial investments in the economy. Commercial Banking plays an important part in this by being an important originator of assets and a source of skills and expertise for our clients.
We maintained our position as No.1 bank in the Benelux. Illustrative of this is the fact that ING was No.1 ECM (Equity Capital Market) bookrunner in the Benelux by volume, No.1 bookrunner for syndicated loans in the Benelux by volume and No.2 M&A advisor in the Benelux by volume, in 2010. Also in the corporate bond market we made good progress ending No.5 bookrunner in Benelux by volume.
We aim to become the preferred bank for European customers regarding PCM business. In 2010, PCM ranked at a Top 2 position by volume in EBA Clearing (Euro Banking Association Clearing).
In the oil and gas offshore business there is demand for increasingly large and sophisticated equipment; our infrastructure business is seeing new proposals around the world as the public sector turns to public-private partnerships to finance necessary expenditure. In the power sector we have provided long-term finance to support the development of wind and solar power projects across Europe and in North America. The cash flow lending business in Structured Acquisition Finance and Telecom and Media Finance was affected in previous years by the slowdown of business activity during the economic crisis, but in nearly all cases the businesses have recovered to a sounder footing, and the year saw a rise in new transaction flow in our core markets of the Benelux and Central and Eastern Europe.
An example was ING’s joint bookrunner role in Deutsche Bank’s EUR 10.2 billion rights issue, the largest German financials’ rights issue ever and the largest European equity issue to date. Its success was the result of close cooperation between several banking businesses, including Equity Capital Markets, Financial Institutions, Event Finance and ING-DiBa, all forming an integral part of the transaction team.
Commercial Banking also acted as mandated lead arranger and bookrunner on a EUR 1.2 billion syndicated facility for French mobile phone company SFR; Commercial Banking and ING Direct joined forces to share the final take of EUR 135 million. The Deutsche Bank and SFR deals illustrate what the total bank approach can achieve.
REF has set up a new account management system for its global clients to better serve its clients and to enhance cross-border relationship. It continued optimising its portfolio and clients in order to take advantage of opportunities for future profit growth.
Within the overall banking organisation Commercial Banking intends to develop its winning formula to help ING Bank realise its ambition to become the preferred bank for customers. It will do this by taking a number of operational and strategic measures, including enhancing its international network and increasing its focus on customers, employees and operational excellence.
Flow trading was significantly down, due to lower volatility and the negative impact of the sovereign debt crisis. Sales commissions declined due to lower volumes and narrowed spreads.
ALCO had a strong performance in 2010 helped by capital gains. There was a strong proprietary trading performance in Brussels and New York.
2010 was a year of steady improvement in operations at ING Insurance/Investment Management (IM). The economic environment remained challenging throughout the year and was marked by continued low interest rates and market volatility. Insurance/IM worked on improving performance in preparation for future IPOs while working simultaneously to separate the business from Banking before the end of the year. Solid progress was made on both fronts.
FINANCIAL DEVELOPMENTS Although business fundamentals improved, the underlying loss before tax of Insurance/IM was EUR 519 million compared with a loss of EUR 202 million in 2009. Market conditions continued to improve in 2010, although at a relatively slow pace given the depth of the financial crisis in 2008 and 2009. The operating result of Insurance/IM increased to EUR 1,743 million from EUR 1,434 million in 2009, mostly driven by higher investment margins and increased fees and premium-based revenues in life insurance and the investment management business. The investment spread on life general account assets increased 10 basis points to 93 basis points in 2010, after cautious re-risking of the investment portfolios. The increase in operating income was partly offset by higher expenses. Operating results improved in nearly every business line, with the exception of Central and Rest of Europe given the harsh economic conditions; and in Investment Management following higher expenses related to the build-up of its global investment capabilities.
Despite the 7.8% increase in administrative expenses, partly driven by the weakening of the euro against most major international currencies, the life/IM administrative expense ratio improved slightly to 43.9% for the full year. Especially in the Benelux, significant progress was made in containing expenses through the integration of the Dutch businesses.
In the Asia/Pacific region, new product initiatives, particularly in Japan and Hong Kong, and a strong focus on bancassurance delivered strong sales growth.
CONCLUSIONS AND AMBITIONS The twin priorities for Insurance/IM in 2010 were to improve operating performance and to achieve the separation of Insurance/IM from Banking at the operational level so they could function as stand-alone companies within ING Group by the beginning of 2011.
Throughout most of 2010, the Insurance/IM businesses worked towards a base case scenario of either one or two IPOs. Towards the end of the year, ING Group decided that Insurance/IM would opt for two IPOs, one Europe-led IPO and one US-focused IPO, while keeping the option of one IPO open. The Europe-led company will have solid cash flow and strong growth positions in developing markets, while the US-focused company will have a leading franchise in retirement services and life insurance.
In the Benelux, which is the largest cash generator for ING Insurance/IM, costs have been successfully reduced by 25% over the past two years through restructuring and cost reduction initiatives. Nationale-Nederlanden regained its position as market leader in the group life market (which includes business and corporate pensions) in the Netherlands.
New sales were 20.1% lower than in 2009. The company continues to prioritise value creation over volume growth. In addition, a change was made in the recognition of premiums in the Netherlands which had a favourable impact of EUR 55 million on APE in 2009.
Sales of insurance products to retail customers were under pressure during the year due to the low interest rate environment and fierce competition from bank annuity products. Corporate sales maintained their momentum.
In addition to the integration of the insurance businesses and the creation of new client-focused business units, the Dutch insurance businesses prepared a roadmap with a view to optimising its existing distribution channels so that customers can better choose how (Click-Call-Face) and where they buy products. The network of independent brokers continued to play an important role.
FINANCIAL DEVELOPMENTS The underlying result before tax of Insurance US in 2010 decreased to EUR 308 million from EUR 356 million in 2009. The impact of non-operating items in 2010 of EUR –251 million was greater than the impact in 2009 of EUR –212 million as the higher favourable result from revaluations was more than offset by lower results from deferred acquisition costs (DAC) and reserve adjustments, primarily related to Fixed Annuities.
BUSINESS DEVELOPMENTS Insurance US is a market leader in providing retirement services and pension products. It currently operates three core businesses: Retirement Services, Individual Retirement and Individual Life.
Insurance US concentrated its efforts in 2010 on preparing the business for a US-focused IPO by strengthening the operating performance of its businesses through cost reduction, top-line growth, margin improvement and leveraging the company’s talent.
Retirement Readiness strategy Insurance US continued to build on its strong market positions and reputation in retirement services, despite a sluggish US economy. The Retirement Readiness strategy, which intends to establish ING as the best provider of retirement products and services in the minds of retirement customers, became the key initiative for Insurance US. The ageing of the US population creates significant long-term growth opportunities as those aged 45 or more control more than two-thirds of the approximately USD 30 trillion of financial assets in the country. The impending retirement of ‘baby boomers’ and the recent financial turmoil have increased attention on being financially prepared for retirement.
Insurance US has leading franchises in retirement services and life insurance, and remains strongly committed to its Retirement Readiness strategy to become the premier franchise in the US industry and to expand its rollover strategy. The business will remain focused on customers’ needs and providing retirement and life insurance products through a broad set of distribution channels.
> Became a separate business line within ING Insurance > Resulted in a DAC write-down of EUR 975 million > This improved reserve adequacy > Moved towards fair value accounting on GMWB reserves
Individual Life Individual Life continued to focus on competitive product manufacturing, effective distribution and efficient operations. It has one of the broadest market reaches in the industry and one of the most complete product portfolios. Individual Life insurance manufactures a range of products from low-cost term in the middle market up through high-end universal life (UL) sales in the affluent markets. The business has a strong multi-channel sales team with the capacity to reach every licensed life insurance agent in the US. It has over 80,000 independent producers and more than 1,500 intermediaries under contract or appointment. Its distribution organisation has a best-in-class sales support and illustration system. This model has allowed Individual Life to create significant scale, to become a Top 5 writer of individual term life insurance, and develop into a major writer of permanent life insurance.
Overall sales in the Individual Life industry remained under pressure in 2010 as a result of the challenging economic environment. However, in the first half of the year the business undertook a series of initiatives to spur growth. These included making revisions to the term product portfolio, as well as introducing a new global indexed product and re-pricing of the guaranteed death-benefit universal-life market.
In October, Individual Life also re-priced its term product suite with the goal of further strengthening its market position while maintaining profitability. ING ranked as a Top 5 player in the term life insurance market in the US in 2010.
> Leading position as the second largest pension provider in the region > Wealth Management business launched in several countries 2010 marked the third consecutive year of profit growth for Insurance Latin America. The business used its position as the region’s second largest pensions provider to develop its wealth management business in major markets as part of a strategy to broaden and strengthen its operations in the region.
The increase in fees and premium-based revenues (EUR 419 million in 2010 compared to EUR 311 million in 2009) included a currency impact of EUR 46 million. The remaining EUR 62 million of the increase was due to higher fee income in Mexico associated with positive pension fund growth, which more than offset a decrease in fee levels which were agreed with the regulator. Higher fee income in Chile and Peru as a result of economic growth and wage inflation also contributed to the increase.
The region has very attractive macroeconomic and demographic fundamentals. The population is large and relatively young compared to the US and Europe, inflation is largely under control and country credit ratings are positive and stable.
Total life expenses decreased to EUR 70 million in 2010 from EUR 191 million in 2009 mainly due to lower DAC amortisation, resulting from lower operating income. Administrative expenses in 2010 were lower compared with 2009 as product distribution and support teams were reduced or redeployed following the strategic decision to cease sales of variable annuity products effective 31 March, 2010. This decision was a part of the overall global strategy and risk reduction plan.
As stated above, from 1 October, ING began to report the US Closed Block VA business as a separate business line to improve transparency for both the Closed Block and ongoing businesses.
The combined effect of these actions is to strengthen reserves, reduce earnings volatility, increase future profitability and to decrease risk.
Although actions in relation to the US Closed Block VA business had a negative impact on underlying earnings in 2010, ING believes that the right steps are being taken to effectively manage this business going forward.
CONCLUSIONS AND AMBITIONS Insurance Latin America is committed to building on its position as the second largest pensions provider in the region by developing a significant position in the voluntary savings market. The wealth management strategy, designed to achieve this, will continue to be geared to capturing a larger share of the affluent market.
Although growth in the mandatory pensions market has been positive, the market is maturing, and so the business will focus, in particular, on sharpening its customer retention strategies for this business.
The business commands a substantial presence in the region and has very attractive business fundamentals. ING is exploring strategic options to determine the future of the insurance business in Latin America.
> A year of strong growth across the region > Distribution boosted through bancassurance and tied agents > Success with joint ventures
Wealth Management The Wealth Management platform successfully established in Chile in 2009 as a means of capturing a larger share of the affluent market continued to perform well, making a significant contribution to net inflows. During 2010, ING rolled out the platform in other countries in the region such as Peru, Colombia and Mexico.
The new wealth management business includes a variety of savings and investment products such as mutual funds and life insurance, personalised financial advisory services, and an ‘easy-service’ administration platform, which are all geared towards helping customers reach their medium and long-term financial goals.
5,000 independent agencies and, on the bancassurance front, ING’s products and services are sold through 1,802 branches.
South Korea remains a key ING stronghold in Asia. ING Life Korea is the fourth largest insurer and the largest foreign insurer in the country. It retained a AAA credit rating from Korea Ratings for the fourth year in a row. In 2010, initial steps were taken to improve tied agent productivity through new recruitment campaigns, enhanced training and more active management of agents, after sales had been under pressure for some time. In other business developments, ING’s insurance joint venture with KB Financial Group, KB Life, continued to grow strongly in 2010 and bancassurance partnerships were strengthened.
ING’s Malaysian operations continued to perform well, where it leads the market in the employee benefits product line and is the third largest insurer in the individual life insurance segment. The business recorded strong growth in the number of tied agents, and the bancassurance partnership with Public Bank continued to reap many benefits. New products were launched and bank distribution was strengthened which helped boost sales. ING also successfully partnered with Public Bank to gain a Takaful licence. Takaful achieves similar objectives to those of conventional life insurance, but does so in a manner that is compliant with Islamic law. The Takaful business is expected to begin operations in the first half of 2011, and is expected to have bright growth prospects. Asia is home to 1.2 billion Muslims (68% of the global Muslim population) and in Malaysia, there are 15 million Muslims who make up 60% of the population.
Strong performance in Hong Kong was driven by robust new sales of endowment products Easy Grow and Easy Builder, both launched during the first half of 2010, coupled with success in the bancassurance channel. New sales were up 51% year on year, excluding FX, and the bank distribution channel contributed 41% of new sales compared with 23% in the previous year.
ING Life in India continued to strengthen its partnership with ING Vysya Bank to benefit from the bank’s rapid branch expansion. ING is most active in the four southern states of India.
In China, ING focused on its insurance joint venture with Beijing Capital Group, ING Capital Life, after a strategic review of its
2010 was a year of robust commercial momentum for Insurance Asia/Pacific driven by brisk sales in Japan, Hong Kong, Malaysia, and from KB Life in Korea and ING-BoB Life in China. This was driven by the introduction of new products and successful bancassurance partnerships.
ING concentrates on markets expected to show strong growth. Growth in the region is based on higher levels of income and greater demand for wealth protection. Changing demographics is also a major growth driver where the rising number of middle age and retired people are expected to boost demand for savings, retirement and health products and services.
CONCLUSIONS AND AMBITIONS Insurance Asia/Pacific has an extensive presence in life insurance and retirement services in the region. The company is committed to maintaining commercial momentum with a view to being a part of a successful European-led IPO of ING’s insurance businesses by 2013.
The partnership with ING’s US Retirement business was further strengthened, highlighted by a tripling of Stable Value product sales to USD 3.6 billion through the third quarter of the year. There was also improved performance and growth in the ING IM managed Target Date funds.
ING IM’s performance was very strong in all client categories: general account (ING Insurance), affiliated distribution (business sold via ING channels) and third-party retail and institutional. For ING Insurance, ING IM contributed to an investment spread of 93 basis points based on a four-quarter rolling average compared to 83 basis points for the previous year.
FOCUS ON PERFORMANCE 2010 marked the first year that the ING IM business was managed as a separate business within ING Insurance/IM, recognising the importance of a strong local presence in regions and markets in Europe, the Americas and Asia/Pacific.
Various funds were launched for global sales. These funds included the ING (L) Invest Renta Fund Europe High Yield (produced by the Global Credit boutique), the ING (L) Invest Commodity Enhanced Fund and the ING (L) Invest Brazil Focus Fund.
In November 2010, ING Group announced a revised base case of two IPOs for separating its Insurance/Investment Management and Banking businesses. This entails a US-focused IPO and a Europe-led IPO for its Insurance/IM business, while keeping other options open. In the two IPOs scenario, the Investment Management businesses in the US and elsewhere will continue to operate in partnership to ensure continued commercial collaboration and cross -selling arrangements among the regional ING IM businesses. This will also ensure continuity in terms of product development, distribution, investment expertise and performance.
During this period of change, ING’s investment businesses will remain focused on exceeding client expectations and on generating superior returns for its clients.
Report of the Executive Board The Corporate governance section starting on page 78 and the paragraphs of the Remuneration report ‘Remuneration policy for senior management’ and ‘Senior management remuneration structure 2011’ on page 81 are incorporated by reference in this Report of the Executive Board.
During the internal meetings of the Supervisory Board (Supervisory Board meetings in most cases with the CEO present), the Supervisory Board approved the proposed new remuneration policy on the basis of the Dutch Banking Code. The Executive Board 2009 performance assessments and performance objectives for 2010 were also approved. The possible consequences of the new EU Capital Requirements Directive (CRD III) for the new ING compensation policy were a topic of discussion later in the year. The succession planning for the Executive Board positions was also discussed in a number of internal Supervisory Board meetings. In November, the Supervisory Board discussed the proposed candidates for the Management Board Insurance and the Management Board Banking as well as the compensation proposals for these candidates. The outcome of the annual Supervisory Board self-assessment through a questionnaire was reviewed by the Supervisory Board in a meeting with only the Supervisory Board members present. To improve its functioning, the Supervisory 3 Corporate governance
the new EU Capital Requirements Directive for the ING Executive Board remuneration policy which was approved in the 2010 annual General Meeting.
CORPORATE GOVERNANCE COMMITTEE MEETINGS The Corporate Governance Committee met three times and one member was absent once. The Corporate Governance Committee discussed the implementation of the Dutch Banking Code in January and the agenda for the 2010 annual General Meeting, including the request for approval of the implementation of the revised Dutch Corporate Governance Code in February. The Committee continued its discussions on the position of the ING Trust Office. In November, the governance of to-be-divested units, in the context of the Restructuring Plan of the European Commission and the implementation of the Dutch Banking Code were tabled for discussion.
COMPOSITION OF THE EXECUTIVE BOARD AND THE MANAGEMENT BOARDS In mid-2009, separate Banking and Insurance Boards were introduced to simplify the governance structure and to further increase business focus. Jan Hommen, Patrick Flynn and Koos Timmermans remained members of the Executive Board while also becoming members of the Management Boards Banking and Insurance. Eric Boyer de la Giroday, Eli Leenaars and Hans van der Noordaa became members of the Management Board Banking. Tom McInerney and Matthew Rider (as of 1 January 2010) became members of the Management Board Insurance. As of 1 January 2011, William Connelly was appointed as CEO of Commercial Banking and member of the Management Board Banking, succeeding Eric Boyer who continued in his role as vice-chairman of the Management Board Banking. As of 1 January 2011, Lard Friese was appointed to the Management Board Insurance with responsibility for the Benelux, Central and Rest of Europe and Asia/Pacific. Gilbert Van Hassel was appointed to the Management Board Insurance as of 1 January 2011 with responsibility for ING Investment Management. In light of the developments described above, Tom McInerney stepped down from his positions as chief operating officer Insurance and member of the Management Board Insurance as of 1 January 2011.
Information on the members of the Supervisory Board is provided on page 68–69.
Jackson’s chairmanship of the Audit Committee has been a big benefit to ING. His extensive experience in the financial industry as well as his international perspective was of great importance during his chairmanship. His financial expertise is outstanding and the members of the Supervisory Board and the Management Boards valued his opinion very much. They would like to thank him for his large commitment and contribution to ING during the past years.
Godfried van der Lugt joined the Supervisory Board in 2001. He became a member of the Audit Committee in November 2005 and a member of the Risk Committee in August 2009. He was scheduled to retire from the Supervisory Board after the annual General Meeting in May, having agreed to stay on for one more year at the request of ING, considering his banking experience and ING background as well as the requirements of the Dutch Banking Code. For personal reasons Godfried van der Lugt resigned from the Supervisory Board as of 24 January 2011.
APPRECIATION FOR THE EXECUTIVE BOARD AND ING EMPLOYEES The Supervisory Board would like to thank the members of the Executive Board and the two Management Boards for their continuing hard work in 2010. Next to improving the results for the banking and the insurance businesses, the work of the Executive Board and the two Management Boards also focused on improving the image of ING within society, improving the services to clients, developing the new strategy and preparation of the operational separation of the banking and insurance organisation. The Supervisory Board would also like to thank all employees of ING who have continued to serve the interests of the customers, the shareholders and other stakeholders of ING, and have shown continued commitment in the past year.
ADDITIONAL INFORMATION For additional information, see the section on Corporate governance (pages 59–70) and the Remuneration report (pages 78–85), which are deemed to be incorporated by reference here.
In addition, several legislative proposals are under discussion in or were adopted in 2010 by the Lower House of the Dutch Parliament, or are under discussion in the Upper House of the Dutch Parliament. It concerns, among other things, the bill on revision and claw back of executive bonuses and profit-sharing of directors (wetsvoorstel aanpassing en terugvordering van bonussen en winstdelingen van bestuurders en dagelijks beleidsbepalers en deskundigheidstoetsing van commissarissen) and the bill on management and supervision (wetsvoorstel aanpassing regels over bestuur en toezicht in naamloze en besloten vennootschappen). If enacted, these legislative proposals may affect ING Group.
As part of these transactions, certain arrangements with respect to corporate governance and remuneration were agreed with the Dutch State which will remain in place as long as the Dutch State owns at least 250 million Securities, as long as the IABF remains in place or any of the Bonds is outstanding (whichever expires last).
ING Group believes the following to be the significant differences between its corporate governance practices and NYSE corporate governance rules applicable to US companies: • ING Group has a two-tier board structure, in contrast to the one-tier board structure used by most US companies. In the Netherlands, a public limited liability company (naamloze vennootschap) has an Executive Board as its management body and a Supervisory Board which advises and supervises the Executive Board. In general, members of the Executive Board are employees of the company while members of the Supervisory Board are often former state or business leaders and sometimes former members of the Executive Board. Members of the Executive Board and other officers and employees cannot simultaneously be a member of the Supervisory Board. The Supervisory Board must approve specified decisions of the Executive Board. Under the Corporate Governance Code, all members of the Supervisory Board with the exception of not more than one person, must be independent. All members of ING Group’s Supervisory Board are independent within the meaning of the Corporate Governance Code. The definitions of independence under the Corporate Governance Code, however, differ in their details from the definitions of independence under the NYSE listing standards. In some cases the Dutch requirements are stricter and in other cases the NYSE listing standards are the stricter of the two. The Audit Committee, Risk Committee, Remuneration Committee, Nomination Committee and Corporate Governance Committee of ING Group are comprised of members of the Supervisory Board.
In view of the above, the Executive Board and the Supervisory Board evaluated the position of the ING Trust Office and ING Group’s depositary-receipts structure, the outcome of which was discussed in the 2010 annual General Meeting. On the basis of this evaluation, the Executive Board and the Supervisory Board concluded that it would be premature to change or abolish ING Group’s depositary-receipts structure in 2010 and that it would be more appropriate to reconsider this as part of a re-evaluation of ING Group’s entire governance structure following the current restructuring of ING Group and the completion of the divestments approved in the 2009 extraordinary General Meeting.
The purpose of this delegation of authority is to allow the Company to respond promptly to developments in the financial markets. If the Company wishes to issue new shares, conditions in the financial markets may have changed during the time needed for convening a general meeting, especially as the statutory convocation period was recently extended to 42 days. As a result hereof the Company may not be in a position to take advantage of optimal conditions. Therefore, it is preferable to delegate the power to issue shares to the Executive Board, subject to the approval of the Supervisory Board, as it can respond more rapidly to market developments. In view of the importance of flexibility with respect to the issue of shares, the Executive Board and the Supervisory Board will periodically evaluate the delegation of authority to issue shares and, if necessary, make adjusted proposals to the General Meeting. Following such an evaluation, it will be proposed to the 2011 annual General Meeting to authorise also the issue of ordinary shares up to 20% of the issued share capital if this is necessary to protect or to conserve the capital position of the Company.
CAPITAL AND SHARES CAPITAL STRUCTURE, SHARES The authorised capital of ING Group consists of ordinary shares and cumulative preference shares. Currently, only ordinary shares are issued, while a call option to acquire cumulative preference shares has been granted to ING Continuity Foundation (Stichting Continuïteit ING). The acquisition of cumulative preference shares pursuant to the call option is subject to the restriction that, immediately after the issue of cumulative preference shares, the total amount of cumulative preference shares outstanding may not exceed one-third of the total issued share capital of ING Group (see page 74). The purpose of the call option is to protect the independence, the continuity and the identity of ING Group against influences which are contrary to the interests of ING Group, its enterprise and the enterprises of its subsidiaries and all stakeholders (including, but not limited to, hostile takeovers). The ordinary shares are used solely for funding purposes. The ordinary shares, which are all registered shares, are not listed on a stock exchange.
DEPOSITARY RECEIPTS More than 99.9% of the issued ordinary shares are held by ING Trust Office. In exchange for these shares, ING Trust Office has issued depositary receipts in bearer form for these shares. The depositary receipts are listed on various stock exchanges (see page 10 for an overview of the listings). Depositary receipts can be exchanged upon request of the holders of depositary receipts for non-listed ordinary shares, without any restriction, other than payment of an administrative fee of one eurocent (EUR 0.01) per depositary receipt with a minimum of twenty-five euro (EUR 25.00) per exchange transaction.
ING Group hosts one or two Investor Relations Days each year and participates in several industry conferences. These events are announced in advance on the company website, and presentation materials are made available in real time on the website. This is in accordance with the requirement to ensure that all shareholders and other market participants may have equal and simultaneous access to information that could potentially influence the price of the company’s securities. ING Group’s Investor Relations Days can be accessed by means of live webcasts or telephone conferencing. All Investor Relations Days and conferences in which ING Group participates do not take place shortly before the publication of quarterly financial information.
ING Group is actively covered by approximately 25 analysts who frequently issue reports on the company. A list of these analysts can be found within the Investor Relations section of the company website.
to attend the general meeting and to exercise other rights related to the general meeting in question on the basis of their holding at the record date, notwithstanding a subsequent sale or purchase of shares or depositary receipts for shares. The record date is published in the notice for the general meeting. In accordance with US requirements, the depositary sets a record date for the American Depositary Shares (‘ADSs’), which date determines which ADSs are entitled to give voting instructions. This record date can differ from the record date set by ING Group for shareholders and holders of depositary receipts.
PROPOSALS BY SHAREHOLDERS AND HOLDERS OF DEPOSITARY RECEIPTS Proposals to include items on the agenda for a general meeting can be made by shareholders and holders of depositary receipts representing a joint total of at least 0.1% of the share capital or representing together, on the basis of the stock prices on Euronext Amsterdam by NYSE Euronext, a share value of at least EUR 50 million. Given the periods of notice required for proxy voting, proposals have to be submitted in writing at least 50 days before the date of the meeting. Properly submitted proposals will be included on the agenda for the general meeting.
DIALOGUE WITH SHAREHOLDERS AND HOLDERS OF DEPOSITARY RECEIPTS In 2010, shareholders and holders of depositary receipts were allowed to ask questions about items on the agenda for the annual General Meeting and they will be allowed to do so in 2011. Shareholders and holders of depositary receipts can visit the website of ING Group (www.ing.com) to submit their questions.
Candidates for appointment to the Executive Board must comply with the expertise and reliability requirements set out in the Dutch Financial Supervision Act.
FUNCTION OF THE EXECUTIVE BOARD The Executive Board is charged with the management of ING Group, which means, among other things, that it is responsible for the setting and achieving of the company’s objectives, strategy and policies, as well as the ensuing delivery of results. It also includes the day-to-day management of ING Group. The Executive Board is accountable for the performance of these duties to the Supervisory Board and the General Meeting. The responsibility for the management of ING Group is vested in the Executive Board collectively. The organisation, powers and modus operandi of the Executive Board are detailed in the Executive Board Charter, which was approved by the Supervisory Board. The Executive Board Charter is available on the website of ING Group (www.ing.com).
Executive Board to allocate part of or all of the profits to the reserves – with approval of the Supervisory Board – and the declaration of other distributions, subject to a proposal by the Executive Board which was approved by the Supervisory Board; • the appointment of the external auditor; • an amendment of the Articles of Association, a legal merger or division of ING Group, and winding up ING Group, all subject to a proposal by the Executive Board which was approved by the Supervisory Board; • the issue of shares or rights to subscribe for shares, the restriction or exclusion of pre-emptive rights of shareholders, and delegation of these powers to the Executive Board, subject to a proposal by the Executive Board which was approved by the Supervisory Board; and
CHANGES IN THE COMPOSITION In 2010 there were no changes in the composition of the Executive Board.
SUPERVISORY BOARD APPOINTMENT AND DISMISSAL Members of the Supervisory Board are appointed by the General Meeting from a binding list to be drawn up by the Supervisory Board. Pursuant to Dutch law, this list is to contain at least two candidates for each vacancy, and if not, the list will be non-binding. With respect to the second candidate, ING Group’s policy is to propose retired senior managers or other high-ranking officers who, in view of the forthcoming abolition of this requirement, do not have to meet the independency requirements of the Corporate Governance Code or the requirements of the Supervisory Board Profile. The list will also be non-binding pursuant to a resolution to that effect of the General Meeting adopted by an absolute majority of the votes cast which majority represents more than one-third of the issued share capital. Candidates for appointment to the Supervisory Board must comply with the expertise and reliability requirements set out in the Dutch Financial Supervision Act.
PROFILE OF MEMBERS OF THE EXECUTIVE BOARD The Supervisory Board has drawn up a profile to be used as a basis for selecting members of the Executive Board. This Executive Board profile was submitted for discussion to the General Meeting in 2010. It is available on the website of ING Group (www.ing.com) and at the ING Group head office.
REMUNERATION AND SHARE OWNERSHIP Details of the remuneration of members of the Executive Board, including shares and/or option rights granted to them, together with additional information thereto, are provided in the Remuneration report, starting on page 78. Members of the Executive Board are permitted to hold shares and depositary receipts for shares in the share capital of ING Group for long-term investment purposes. Transactions by members of the Executive Board in these shares and these depositary receipts for shares are subject to the ING regulations for insiders. These regulations are available on the website of ING Group (www.ing.com).
In view of their experience and the valuable contribution that former members of the Executive Board can make to the Supervisory Board, it has been decided, taking into account the size of the Supervisory Board and ING’s wide range of activities that such individuals may become members of the Supervisory Board of ING Group. There is, however, a restriction in that only one in every five other members of the Supervisory Board may be a former member of the Executive Board. In addition, this member must wait at least one year after resigning from the Executive Board before becoming eligible for appointment to the Supervisory Board. Former members of the Executive Board are not eligible for appointment to the position of chairman of the Supervisory Board.
After being appointed to the Supervisory Board, a former member of the Executive Board may also be appointed to one of the
In connection with the issue of the Securities to the Dutch State, ING Group and the Dutch State agreed that the Dutch State may recommend candidates for appointment to the Supervisory Board in such a way that upon appointment of all recommended candidates by the General Meeting, the Supervisory Board would comprise two State Nominees among its members. The Dutch State may recommend a Supervisory Board member already in office. The recommendation right of the Dutch State is subject to applicable law and to corporate governance practices, generally accepted under stock exchange listing regimes applicable to ING Group and continues as long as the Dutch State holds at least 250 million Securities, as long as the IABF continues or any of the Bonds is outstanding (whichever occurs last). Should the holding of the Dutch State decrease below 250 million Securities, and both the IABF and the Bonds have expired, the State Nominees will remain in office and complete their term of appointment.
Candidates recommended by the Dutch State will be nominated for appointment by way of a binding nomination, unless one or more specified situations would occur. These include that: • the candidate is not fit and proper to discharge his duties as a Supervisory Board member; • upon appointment the composition of the Supervisory Board would not be appropriate and/or not be in accordance with the Supervisory Board Profile; • appointment would be incompatible with any provision of the Articles of Association, the Supervisory Board Charter, any principle or best-practice provision of the Corporate Governance Code as applied by ING Group and/or any other generally accepted corporate governance practice or requirement which is applicable to ING Group as an internationally listed company; • the relevant candidate has a structural conflict of interest with ING Group; and
• the Dutch central bank refuses to issue a statement of ‘no objection’ for the appointment of the relevant candidate.
Significant conflicting interests are considered to be absent in case of a relationship that a member of the Supervisory Board may have with ING Group subsidiaries as an ordinary, private individual, with the exception of any loans that may have been granted (for an overview of loans granted to members of the Supervisory Board see page 85).
The Supervisory Board has determined that Aman Mehta, appointed to the Audit Committee per 14 February 2011, is a financial expert as referred to in the Corporate Governance Code. He has gathered his experience by serving as chief executive officer of Hong Kong & Shanghai Banking Corporation (HSBC) in Hong Kong.
CLAUS DIETER HOFFMANN (Born 1942, German nationality, male; appointed in 2003, term expires in 2011) Former chief financial officer of Robert Bosch GmbH. Managing partner of H+H Senior Advisors, Stuttgart. Other business activities: chairman of the Supervisory Board of EnBW AG (listed company). Member of the Supervisory Board of de Boer Structures Holding B.V. Member of the Supervisory Board of C.A. Leuze GmbH & Co. KG. Chairman of the Charlottenklinik Foundation (hospital).
LODEWIJK J. DE WAAL (Born 1950, Dutch nationality, male; appointed in 2009, term expires in 2013) Former general manager of Humanitas.
In view of his proposed appointment as a non-executive director of the Bank of China, Jackson Tai resigned as a Supervisory Board member, effective 6 January 2011. Godfried van der Lugt resigned for personal reasons as a Supervisory Board member, effective 24 January 2011.
EXTERNAL AUDITOR At the annual General Meeting held on 22 April 2008, Ernst & Young was appointed to audit the financial statements of ING Group for the financial years 2008 to 2011 inclusive, to report on the outcome of these audits to the Executive Board and the Supervisory Board and to provide an audit opinion on the financial statements of ING Group. Furthermore, Ernst & Young also audited and reported on the effectiveness of internal control over financial reporting on 31 December 2010. In the 2012 annual General Meeting it will be proposed to extend the appointment of Ernst & Young by two more years, i.e. for the financial years 2012 and 2013.
The external auditor attended the meetings of the Audit Committee and the 2010 annual General Meeting.
After a maximum period of five years of performing the financial audit of ING Group or ING Verzekeringen N.V. or ING Bank N.V., the lead audit partners of the external audit firm and the audit partners responsible for reviewing the audits, have to be replaced by other partners of the external audit firm. The Audit Committee provides recommendations to the Supervisory Board regarding these replacements based, among other things, on an annual evaluation of the provided services. In line with this requirement, the lead audit partner of Ernst & Young was succeeded after the year-end audit 2006. The rotation of other partners involved with the audit of the financial statements of ING is subject to applicable independence legislation.
AMENDMENT OF THE ARTICLES OF ASSOCIATION The General Meeting may resolve to amend the Articles of Association, provided the resolution is adopted on a proposal of the Executive Board which has been approved by the Supervisory Board. Such a resolution of the General Meeting requires a majority of at least two-thirds of the votes cast in a general meeting at which at least two-thirds of the issued share capital is represented. An amendment has to be passed by notarial deed, and this in turn requires a declaration of no objection to be issued by the Minister of Justice.
ACTIVITIES BOARD MEETINGS AND MEETINGS WITH ING GROUP During the 2010 reporting year, the board of ING Trust Office (the ‘Board’) held nine meetings.
On 2 February 2010, the Board met to discuss the appeal with the General Court of the European Union against specific elements of the European Commission’s decision regarding ING’s restructuring plan. The general counsel of ING Group was invited to the meeting to give an explanation on this subject. During the same meeting, without presence of the general counsel, the Board discussed, among other things, the purported class litigation filed in the US alleging violations of the federal securities laws with respect to disclosures made in connection with the 2007 and 2008 offerings of ING’s Perpetual Hybrid Capital Securities, the composition of the Board and prepared for the annual General Meeting of ING Group of 27 April 2010 (the ‘AGM’).
On 14 April 2010 the Board held a meeting to adopt the balance sheet and statement of income and expenses of ING Trust Office.
On 28 October 2010 the Board met with the chairmen of the Executive Board and the Supervisory Board of ING Group and asked for an explanation of, among other things, the activities and performance of ING Group over the first six months of 2010 on the basis of the press release of 11 August 2010.
On 8 December 2010 the Board met to discuss, among other things, the proceedings at the meeting of holders of depositary receipts and the composition of the Board. On that same day the Board had a meeting with the chairmen of the Executive Board and the Supervisory Board of ING Group. During this meeting the Board asked for an explanation of, among other things, the activities and performance of ING Group over the first nine months of 2010 on the basis of the press release of 10 November 2010.
COSTS In 2010, the costs of the activities of ING Trust Office amounted to EUR 503,871.36.
A call-option agreement concluded between ING Continuity Foundation and ING Groep N.V. (‘ING Group’) vests ING Continuity Foundation with the right to acquire cumulative preference shares in the share capital of ING Group up to a maximum of 4.5 billion cumulative preference shares. The acquisition of cumulative preference shares by ING Continuity Foundation is subject to the restriction that, immediately after the issue of cumulative preference shares, the total amount of cumulative preference shares may not exceed one third of the total issued share capital of ING Group. If new shares other than cumulative preference shares are subsequently issued, ING Continuity Foundation may again exercise its right, subject to the provisions of the preceding sentence. On acquisition of cumulative preference shares, at least 25% of the nominal value must be paid on said shares.
The Executive Board is required to prepare the Annual Accounts and the Annual Report of ING Groep N.V. for each financial year in accordance with applicable Dutch law and International Financial Reporting Standards (IFRS) as adopted by the European Union.
EXECUTIVE BOARD REMUNERATION STRUCTURE 2011 With regard to the remuneration for 2011, the Supervisory Board continues to build upon the remuneration policy adopted in 2010. However, the policy will now include the proposed amendments to the allocation of variable compensation effective 2011, as outlined above.
Executive Board base salary 2011 A market competitive analysis is conducted from time to time to ensure market competitiveness. As outlined in the 2009 Annual Report, the total remuneration levels are significantly below the market median of the Dow Jones EURO STOXX 50. In light of the concerns of the competitiveness of the executive compensation levels as well as internal and external developments, for 2011 the Supervisory Board has concluded to increase the base salary levels by 2% for the Executive Board members. The 2011 base salary for members of the Executive Board amounts to EUR 765,000 and for the CEO to EUR 1,380,500. Total remuneration levels in 2011 will continue to be significantly below the relevant market median.
Variable compensation for members of the Executive Board will only be awarded as long as ING Group has a positive net underlying profit in 2011. The Supervisory Board will review the remuneration paid over time, in line with the policy.
2010 REMUNERATION REMUNERATION EXECUTIVE BOARD 2010 The Executive Board remuneration for 2010 is based on the remuneration policy approved by the 2010 annual General Meeting.
The short-term component, 50% of total variable compensation, is paid in cash the year following the performance year. The other 50% of the total variable compensation will be deferred. This long-term component is allocated in stock.
Total direct compensation Total direct compensation levels will be based on benchmark data in the international context in which ING operates. ING aims for compensation levels to be set at market median levels. Total compensation levels will be determined in line with the relevant market.
Increased focus on long-term value creation, risk and non-financial performance Variable compensation is increasingly linked to long-term value creation and risk. It is determined based on individual, business and company performance criteria. Performance measurement will increasingly account for estimated risks and costs of capital. There will be increased emphasis on long-term value creation by means of long-term incentives, deferral and claw back mechanisms.
Furthermore, and in addition to financial indicators, performance is also assessed based on non-financial drivers. The incorporation of non-financial indicators in the overall assessment is particularly aimed at further improving sustainable business practices within ING. Therefore, a number of action targets have been formulated regarding ING’s performance in the area of, for example, workforce diversity, customer satisfaction, stakeholder engagement and sustainable product development.
The remuneration policy for the Executive Board will apply in full to members of the Management Board Banking. For senior management in Banking, a gradual shift to a more balanced mix of fixed and variable remuneration, in line with the remuneration policy for the Executive Board, was initiated in 2010 and will continue during the coming two years. Exceptions may exist for high value specialists and senior management working in certain divisions and/or geographical areas.
Base salary 750 454 Variable compensation in cash 300 0 Variable compensation in stock 300(3) 33,671 0
Koos Timmermans Base salary 750 665 665 Variable compensation in cash 345 0 0 Variable compensation in stock 345(3) 38,721 0 0
(3) This amount of variable compensation is deferred. This long-term component is allocated in stock. These 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.
Jan Hommen (1) 0 0 (1) Jan Hommen does not participate in the pension plan. (2) Patrick Flynn was appointed to the Executive Board on 27 April 2009. The 2009 pension costs for this member reflect the partial year as Executive Board member.
Pension costs of former members of the Executive Board amounted to nil in 2010, EUR 742 thousand in 2009 and EUR 3,333 thousand in 2008.
ING’s TSR ranking within this group of companies determines the final number of performance shares that vest at the end of the three-year performance period. The performance shares granted in 2007 had a three-year performance period of 2007–2009 and vested in 2010. The actual results of 43% are based upon ING’s TSR ranking of 15th within the designated peer group. The performance shares granted in 2008 have a three-year performance period of 2008–2010 and will vest in 2011. The actual results of 57% are based upon ING’s TSR ranking of 14th within the designated peer group. The results were determined by an independent third party. ING’s external auditor has reviewed the calculations performed.
For Koos Timmermans, a number of 4,152 performance shares vested in 2010 (43% of the 9,656 shares awarded). The value at vesting amounted to EUR 29,894. In 2011 a number of 10,411 performance shares will vest (57% of the 18,266 shares awarded). The number of performance shares reflects the number adjusted for the effects of the rights issue of December 2009.
(2) Peter Elverding has been chairman of the Supervisory Board since April 2009. (3) Jeroen van der Veer is a member of the Supervisory Board as of July 2009. The compensation figure for 2009 reflects the partial year as member of the Supervisory Board. Jeroen van der Veer has been vice-chairman of the Supervisory Board since October 2009.
(8) Harish Manwani retired in April 2010. The compensation figure for 2010 reflects the partial year as member of the Supervisory Board.
(9) Karel Vuursteen retired in April 2010. The compensation figure for 2010 reflects the partial year as member of the Supervisory Board.
Loans and advances to Supervisory Board members Supervisory Board members may obtain banking and insurance services from ING Group subsidiaries in the ordinary course of their business and on terms that are customary in the sector. The table below presents the loans and advances to Supervisory Board members outstanding on 31 December 2010, 2009 and 2008.
ING depositary receipts for shares held by members of the Supervisory Board (1)
(2) Jeroen van der Veer is a member of the Supervisory Board as of July 2009. Godfried van der Lugt 24,142 24,142 Jeroen van der Veer (2) 99,469 99,469 3Corporate governance
Consolidated balance sheet 88 Consolidated profit and loss account 89 Consolidated statement of comprehensive income 90 Consolidated statement of cash flows 91 Consolidated statement of changes in equity 92 Accounting policies for the consolidated annual accounts 94 Notes to the consolidated annual accounts 112 Risk management 203 Capital management 249 Subsequent events 255 5 Parent company annual accounts
ASSETS Cash and balances with central banks 1 13,072 15,390 Amounts due from banks 2 51,828 43,397 Financial assets at fair value through profit and loss 3 – 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 Investments 4 – available-for-sale 222,547 197,703 – held-to-maturity 11,693 14,409 Loans and advances to customers 5 613,204 578,946
Interest income banking operations 68,334 79,850 97,011 Interest expense banking operations –55,011 –67,475 –85,969 Interest result banking operations 35 13,323 12,375 11,042
Net result on disposals of group companies 38 310 264 17 Gross commission income 6,303 6,790 7,504 Commission expense –1,725 –2,177 –2,539
Attributable to: Equityholders of the parent 3,220 –935 –729 Minority interests 105 –118 –37 3,325 –1,053 –766 amounts in euros 2010 2009 2008
Consolidated statement of comprehensive income of ING Group for the years ended 31 December amounts in millions of euros 2010 2009 2008
Reference is made to Note 48 ‘Taxation’ for the disclosure on the income tax effects on each component of the other comprehensive income.
Result before tax 4,477 –1,525 –1,487 Adjusted for: – depreciation 1,723 1,701 1,492
– available-for-sale investments 154,640 167,075 225,539 – held-to-maturity investments 2,620 1,675 1,640 – real estate investments 295 656 415 – property and equipment 96 82 137 – assets subject to operating leases 53 93 428 – investments for risk of policyholders 54,817 64,158 59,251
Issuance costs incurred –222 –222 –222 Employee stock option and share plans 64 64 64 Repayment of non-voting equity securities –5,000 –5,000 Changes in the composition of the group –546 –546 Dividend and repayment premium (2) –605 –605 –2 –607 Proceeds from rights issue 424 7,074 7,498 7,498 Purchase/sale of treasury shares 129 129 129
Employee stock option and share plans 36 36 36 Changes in the composition of the group –272 –272 Dividend –6 –6 Purchase/sale of treasury shares 22 22 22
The following new or revised standards and interpretations were issued by the IASB, which become effective for ING Group as of 2011 (unless otherwise indicated) if and when endorsed by the EU: • Classification of Rights Issues (Amendment to IAS 32); • Amendment to IAS 24 ‘Related Party Disclosures’; • Amendment to IFRIC 14 ’Prepayments of a Minimum Funding Requirement’; • IFRIC 19 ‘Extinguishing Financial Liabilities with Equity Instruments’; • Amendment to IFRS 1 ‘Limited Exemption from Comparative IFRS 7 Disclosure for First-time Adopters’; • 2010 Annual Improvements to IFRS; • Amendments to IFRS 7 ‘Disclosures – Transfers of Financial Assets’, effective as of 2012.
The presentation of, and certain terms used in, the consolidated balance sheet, the consolidated profit and loss account, consolidated statement of cash flows, consolidated statement of changes in equity and certain notes has been changed to provide additional and more relevant information or (for changes in comparative information) to better align with the current period presentation. Operating segments have changed in 2010 to reflect changes in internal management reporting. The impact of these changes is explained in the relevant notes when significant.
FAIR VALUES OF REAL ESTATE Real estate investments are reported at fair value; all changes in fair value are recognised directly in the profit and loss account. The fair value of real estate investments is based on regular appraisals by independent qualified valuers. The fair values represent the estimated amount for which the property could be exchanged on the date of valuation between a willing buyer and willing seller in an at-arm’slength transaction after proper marketing wherein the parties each acted knowledgeably, prudently and without compulsion. The valuations are based on the assumption that the properties are let and sold to third parties based on the actual letting status. The valuations are based on a discounted cash flow analysis of each property. The discounted cash flow analyses are based on calculations of the future rental income in accordance with the terms in existing leases and estimations of the rental values when leases expire.
Impairments on other debt instruments (Loans and held-to-maturity investments) are part of the loan loss provision as described on the previous page.
A list of principal subsidiaries is included in Note 29 ‘Principal subsidiaries’.
FOREIGN CURRENCY TRANSLATION Functional and presentation currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The consolidated financial statements are presented in euros, which is ING Group’s functional and presentation currency.
IMPAIRMENT OF OTHER FINANCIAL ASSETS At each balance sheet date, the Group assesses whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the specific case of equity investments classified as available-for-sale, (the combination of) a significant or prolonged decline in the fair value of the security below its cost is considered in determining whether the assets are impaired. ‘Significant’ and ‘prolonged’ are interpreted on a case-by-case basis for specific equity securities; generally 25% and 6 months are used as triggers. If any objective evidence exists for available-for-sale debt and equity investments, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in net result – is removed from equity and recognised in the profit and loss account. Impairment losses recognised on equity instruments can never be reversed. If, in a subsequent period, the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in the profit and loss account, the impairment loss is reversed through the profit and loss account.
Property developed and under development for which ING Group has the intention to sell the property under development after its completion and where there is not yet a specifically negotiated contract is measured at direct construction cost incurred up to the balance sheet date, including borrowing costs incurred during construction and ING Group’s own directly attributable development and supervision expenses less any impairment losses. Profit is recognised using the completed contract method (on sale date of the property). Impairment is recognised if the estimated selling price in the ordinary course of business, less applicable variable selling expenses is lower than bookvalue.
Disposals The difference between the proceeds on disposal and net book value is recognised in the profit and loss account under Other income.
Goodwill is only capitalised on acquisitions after the implementation date of IFRS-EU (1 January 2004). Accounting for acquisitions before that date has not been restated; goodwill and internally generated intangibles on these acquisitions were charged directly to shareholders’ equity. Goodwill is allocated to reporting units for the purpose of impairment testing. These reporting units represent the lowest level at which goodwill is monitored for internal management purposes. This test is performed annually or more frequently if there are indicators of impairment. Under the impairment tests, the carrying value of the reporting units (including goodwill) is compared to its recoverable amount which is the higher of its fair value less costs to sell and its value in use.
Adequacy test The adequacy of the Provision for life insurance, net of unamortised interest rate rebates, DAC and VOBA (the net insurance liabilities), is evaluated regularly by each business unit for the business originated in that business unit. The test considers current estimates of all contractual and related cash flows, and future developments. It includes investment income on the same basis as it is included in the profit and loss account.
The expected value of the assets is calculated using the expected rate of return on plan assets. Differences between the expected return and the actual return on these plan assets and actuarial changes in the deferred benefit obligation are not recognised in the profit and loss account, unless the accumulated differences and changes exceed 10% of the greater of the defined benefit obligation and the fair value of the plan assets. The excess is charged or credited to the profit and loss account over employees’ remaining working lives. The corridor was reset to nil at the date of transition to IFRS-EU.
Share-based payments Share-based payment expenses are recognised as the employees provide the service. A corresponding increase in equity is recognised if the services are received in an equity-settled share-based payment transaction. A liability is recognised if the services are acquired in a cash-settled share-based payment transaction. The cost of acquiring the services is expensed as a staff expense. The fair value of equity-settled share-based payment transactions is measured at the grant date and the fair value of cash-settled share-based payment transactions is measured at each balance sheet date.
STATEMENT OF CASH FLOWS The statement of cash flows has been drawn up in accordance with the indirect method, classifying cash flows as cash flows from operating, investing and financing activities. In the net cash flow from operating activities, the result before tax is adjusted for those items in the profit and loss account, and changes in balance sheet items, which do not result in actual cash flows during the year.
Loans and advances to banks 14,416 9,101 34,640 30,641 49,056 39,742 Cash advances, overdrafts and other balances 1,754 2,550 1,039 1,151 2,793 3,701
As at 31 December 2010, Trading assets included receivables of EUR 47,894 million (2009: EUR 40,940 million) with regard to reverse repurchase transactions.
Equity securities 109,191 93,268 Debt securities 8,944 8,215 Loans and receivables 2,346 3,114
The cost of investments for risk of policyholders as at 31 December 2010 was EUR 113,879 million (2009: EUR 106,904 million).
Investments in investment funds (with underlying investments in debt, equity securities, real estate and derivatives) are included under equity securities.
Included in the Financial assets designated as at fair value through profit and loss is a portfolio of loans and receivables which is economically hedged by credit derivatives. The hedges do not meet the criteria for hedge accounting and the loans are recorded at fair value to avoid an accounting mismatch. The maximum credit exposure of the loans and receivables included in Financial assets designated as at fair value through profit and loss approximates its carrying value. The cumulative change in fair value of the loans attributable to changes in credit risk amounts to a gain of EUR 29 million (2009: EUR 24 million) and the change for the current year is EUR 5 million (2009: nil).
Changes in the composition of the group and other changes –5 –1,354 –23 –4,223 –28 –5,577
Included in transfers and reclassifications of available-for-sale and held-to-maturity investments Available-for-sale equity securities
reclassifications made in the fourth quarter of 2008 and the first and second quarter of 2009. Information is provided for each of the three reclassifications (see columns) as at the date of reclassification and as at the end of the subsequent reporting periods (see rows). This information is disclosed under IFRS-EU as long as the reclassified assets continue to be recognised in the balance sheet.
Carrying value as at 31 December 6,418 16,906 857 Fair value as at 31 December 6,546 16,099 889 Unrealised fair value losses recognised in shareholders’ equity (before tax) as at 31 December –491 –633 –65 Effect on shareholders’ equity (before tax) if reclassification had not been made 128 –807 32 Effect on result (before tax) if reclassification had not been made nil nil nil Effect on result (before tax) for the year (mainly interest income) 78 467 34 Recognised impairments (before tax) nil nil nil Recognised provision for credit losses (before tax) nil nil nil
Unrealised fair value losses recognised in shareholders’ equity (before tax) as at 31 December –20 Recognised impairments (before tax) nil
Further comments on the ABS portfolio and the Bond portfolio (excluding ABS), including pressurised ABS and pressurised Greek and Irish Government and Financial Institution bonds, is provided in the Risk management section under ‘Impact on pressurised asset classes’.
As at 31 December 2010, Loans and advances to customers included receivables with regard to securities which have been acquired in reverse repurchase transactions related to the banking operations amounting to EUR 1,609 million (2009: EUR 2,409 million).
Unearned future finance income on finance leases –3,328 –3,783 Net investment in finance leases 17,521 17,160
ING Retail Property Fund France Belgium C.V. 15 71 1,381 909 2 87 ING Real Estate French Residential Fund C.V. 45 67 233 83 –1 8 ING Property Fund Central Europe LP 25 67 806 540 –25 52
ING Dutch Residential Master Fund II C.V. 13 65 626 141 –25 26
Changes in the composition of the group –29 –96 Transfers to and from Investments –12 –9 Revaluations –2 19 Share of results 317 –458 Dividends received –229 –126 Disposals –232 –294 Impairments –3 –3 Exchange rate differences 251 131 Closing balance 3,925 3,699
Changes in the composition of the group –1,632 –54 Transfers to and from Property in own use 58 Transfers to and from Other assets –23 322 Fair value gains/(losses) –98 –713 Disposals –295 –656 Exchange rate differences 237 251 Closing balance 1,900 3,638
Furthermore, the exposure is impacted by third party interests, leverage in funds and off-balance commitments, resulting in an overall exposure of EUR 11.1 billion (2009: EUR 13.1 billion) of which EUR 5.2 billion (2009: EUR 7.0 billion) relates to banking operations and EUR 5.9 billion (2009: EUR 6.1 billion) relates to insurance operations. Reference is made to the section ‘Risk management’.
Changes in the composition of the group –2 Transfers to and from Real estate investments –58 Transfers to and from Other assets –4 –24 Depreciation –31 –33 Revaluations –20 –51 Impairments –27 –8 Reversal of impairments 5 12 Disposals –43 –37 Exchange rate differences 25 –1 Other changes 1 Closing balance 1,642 1,686
The cost or the purchase price amounted to EUR 1,959 million (2009: EUR 2,043 million). Cost less accumulated depreciation and impairments would have been EUR 1,114 million (2009: EUR 1,155 million).
Changes in the composition of the group –3 –3 Disposals –53 –93 –53 –93 Depreciation –784 –789 –3 –3 –787 –792
More details on this additional analysis and the outcome thereof are presented below for each of the relevant reporting units. For other reporting units, the goodwill allocated to these reporting units was fully supported in the first step.
For flexible life insurance contracts the growth rate assumption used to calculate the amortisation of the deferred acquisition costs for 2010 is 8.3% gross and 4.8% net of investment management fees (2009: 8.2% gross and 5.6% net of investment management fees).
In addition to the entities presented as Held for sale above, ING is considering potential divestments, including those that are listed under the European Commission Restructuring plan in Note 33 ‘Related parties’. However, none of these businesses qualify as held for sale as at 31 December 2010 as the potential divestments are not yet available for immediate sale in their present condition and/or a sale is not yet highly probable to occur.
Accrued interest and rents includes EUR 7,113 million (2009: EUR 6,956 million) accrued interest on assets measured at amortised cost under the IAS 39 classification Loans and receivables.
Gross carrying amount as at 31 December 3,240 3,228 Accumulated impairments as at 31 December –1,087 –713 Net book value 2,153 2,515
Rights issue (2009) On 27 November 2009 existing holders of (depositary receipts for) ordinary shares were offered rights entitling to subscribe for new (depositary receipts for) ordinary shares subject to applicable securities laws. Eligible rights holders could subscribe for 6 new (depositary receipts for) ordinary shares in relation to every 7 subscription rights that they hold. The issue price was set at EUR 4.24 per share. This represented a discount of 37.3% to the Theoretical Ex-Rights Price (TERP), based on the closing price of EUR 8.92 of ING Groep N.V.’s, (depositary receipts for) shares on Euronext Amsterdam and on Euronext Brussels on 26 November 2009.
These ordinary shares repurchased, were cancelled in two blocks, effective on 25 June 2008 and 7 October 2008 respectively. These now form part of the unissued share capital.
Depositary receipts for ordinary shares More than 99.9% of the ordinary shares issued by ING Groep N.V. are held by Stichting ING Aandelen (ING Trust Office). In exchange for these shares, ING Trust Office has issued depositary receipts in bearer form for these shares. The depositary receipts are listed on various stock exchanges. Depositary receipts can be exchanged upon request of the holders of depositary receipts for (non-listed) ordinary shares without any restriction, other than payment of an administrative fee of EUR 0.01 per depositary receipt with a minimum of EUR 25 per exchange transaction.
Unrealised revaluations after taxation 22 –18,876 –18,854 Realised gains/losses transferred to profit and loss 2,476 2,476 Changes in cash flow hedge reserve 746 746 Transfer to insurance liabilities/DAC 2,193 2,193 Closing balance 461 –10,140 1,177 –8,502
Result for the year 3,220 3,220 Unrealised revaluations after taxation –156 171 15 Changes in treasury shares 22 22 Transfer to share of associates reserve –91 91 Employee stock options and share plans 36 36
Moreover, ING Groep N.V.’s ability to pay dividends is dependent on the dividend payment ability of its subsidiaries. ING Groep N.V. is legally required to create a non-distributable reserve insofar profits of its subsidiaries are subject to dividend payment restrictions which apply to those subsidiaries themselves. Such restrictions may among others be of a similar nature as the restrictions which apply to ING
Except for the 9% 2008 perpetual of EUR 10 million (a private placement), EUR 750 million of the 8% 2008 perpetual and USD 1,000 million of the 5.775% 2005 perpetual (2009: the 9% 2008 perpetual of EUR 10 million), these loans have been subsequently provided as subordinated loans by ING Groep N.V. to ING Verzekeringen N.V. and ING Bank N.V. under the same conditions as the original bonds as follows: Subordinated loans provided by ING Groep N.V. to ING Bank N.V. and ING Verzekeringen N.V.
More than 1 year but less than 2 years 7,518 2,376 More than 2 years but less than 3 years 7,925 6,551 More than 3 years but less than 4 years 9,580 4,938 More than 4 years but less than 5 years 5,648 9,542 More than 5 years 10,987 8,151 Total fixed rate debt securities 105,176 96,552
ING Bank issued 3 year government guaranteed senior unsecured bonds amounting to USD 6 billion in January 2009. USD 5 billion of the issue was priced at a fixed rate of 80 basis points over mid-swaps. USD 1 billion was priced at a variable rate of 80 basis points over 3 month LIBOR.
ING Bank issued a 5 year USD 2 billion fixed rate government guaranteed senior unsecured bond in March 2009. The issue was priced at a fixed coupon of 3.90%, 145 basis points over USD mid-swaps.
Provision for non-participating life policy liabilities 80,144 69,641 5,150 4,798 85,294 74,439 Provision for participating life policy liabilities 51,191 50,102 173 200 51,364 50,302 Provision for (deferred) profit sharing and rebates 3,432 1,600 3 3 3,435 1,603 Life insurance provisions excluding provisions for risk of policyholders 134,767 121,343 5,326 5,001 140,093 126,344
Provision for unearned premiums and unexpired risks 345 361 4 4 349 365
Claims incurred but not reported (IBNR) 497 493 3 5 500 498
The deferred profit sharing amount on unrealised revaluation is included in Provision for (deferred) profit sharing and rebates and amounts to EUR 1,706 million as at 31 December 2010 (2009: EUR 313 million).
Provision for life insurance for risk of policyholders (net of reinsurance) Reinsurance contracts
Prior year provisions – benefit payments to policyholders –11,938 –13,207 –10,681 –7,984 –557 –452 –23,176 –21,643
Where discounting is used in the calculation of life insurance provisions, the rate is within the range 2.3% to 4.7% (2009: 2.8% to 5.8%) based on weighted averages.
As at 31 December 2010, the total Reinsurance exposure, including Reinsurance contracts and Receivables from reinsurers (presented in Other assets) amounted to EUR 6,610 million (2009: EUR 6,049 million) after the provision for uncollectible reinsurance of nil (2009: EUR 1 million).
Prior year provisions – payments to contract holders –5,184 –9,711 – interest accrual 81 122 – valuation changes investments 24 1,089
Estimate of cumulative claims: At the end of underwriting year 1,234 1,125 1,117 1,040 1,095 1,185 1,183 1 year later 1,096 1,056 1,073 939 1,076 1,193 2 years later 942 933 994 875 1,042 3 years later 920 925 981 870 4 years later 919 910 981 5 years later 910 900 6 years later 898 Estimate of cumulative claims 898 900 981 870 1,042 1,193 1,183 7,067
No funds have been entrusted to the Group by customers on terms other than those prevailing in the normal course of business. As at 31 December 2010, Customer deposits and other funds on deposit included liabilities with regard to securities sold in repurchase transactions amounting to EUR 5,272 million (2009: EUR 7,326 million).
Debt securities 10,533 9,396 Funds entrusted 934 560 Subordinated liabilities 1,240 1,518
The amount that ING Group is contractually required to pay at maturity to the holders of financial liabilities designated as at fair value through profit and loss is EUR 12,438 million (2009: EUR 11,444 million).
Insurance provisions –1,446 –389 109 –135 –5 –1,866 Cash flow hedges 69 210 –14 –2 263 Pension and post-employment benefits 700 –183 7 –21 503
Comprising: – deferred tax liabilities 2,399 2,618 – deferred tax assets –3,969 –3,425
As a result of the partial write-off the deferred tax asset for tax loss carry forwards for Insurance in the US (as disclosed in Note 48 ‘Taxation‘ in the line ‘Write down/reversal of deferred tax assets’) the loss carry forward amount for Insurance in the US is, in 2010, less dependent on future taxable profits compared to 2009.
Opening balance 644 583 Changes in the composition of the group 38 Additions 285 686
The amounts included in other provisions are based on best estimates with regard to amounts and timing of cash flows required to settle the obligation.
Unrecognised past service costs –3 –3 –5 –3 Unrecognised actuarial gains/(losses) –1,731 –1,450 –2,072 198 –687
The Group maintains defined benefit retirement plans in its major countries of operation. These plans generally cover all employees and provide benefits that are related to the remuneration and service of employees upon retirement. The benefits in some of these plans are subject to various forms of indexation. The indexation is, in some cases, at the discretion of management; in other cases it is dependent upon the sufficiency of plan assets.
No plan assets are expected to be returned to ING Group during 2011.
Equity securities include ING Group ordinary shares of EUR 2 million (0.02% of total plan assets) as at 31 December 2010 (2009: EUR 3 million, 0.02% of total plan assets). Debt securities include investments in ING Group of EUR 57 million (0.4% of total plan assets) as at 31 December 2010 (2009: nil, 0% of total plan assets). Other includes mainly real estate. Real estate occupied by ING Group as at 31 December 2010 which is included in Other includes EUR 5 million (0.04% of total plan assets) (2009: nil, 0.0% of total plan assets).
The following benefit payments, which reflect expected future service as appropriate, are expected to be paid by the plan: Benefit payments
(1) Investments for risk of policyholders are managed on behalf of policyholders on a fair value basis. Although individual instruments may (or may not) have a maturity depending on their nature, this does not impact the liquidity position of ING.
With respect to exchange rate and interest rate derivative contracts, the notional or contractual amounts of these instruments is indicative of the nominal value of transactions outstanding at the balance sheet date; however they do not represent amounts at risk. ING Group uses credit derivatives to manage its exposure to credit risk, including total return swaps and credit default swaps, to sell or buy protection for credit risk exposures in the loan, investment and trading portfolios. Hedge accounting is not applied in relation to credit derivatives.
The maximum credit exposure for items on the balance sheet that are exposed to credit risk is generally the balance sheet carrying value for the relevant financial assets. For the off-balance sheet items the maximum credit exposure is the maximum amount that could be required to be paid. Collateral received is not taken into account.
Notes to the consolidated annual accounts of ING Group continued 26 ASSETS NOT FREELY DISPOSABLE The assets not freely disposable consist primarily of interest bearing securities pledged to secure deposits from De Nederlandsche Bank (the Dutch central bank) and other banks and serve to secure margin accounts or are used for other purposes required by law. The assets not freely disposable are as follows: Assets not freely disposable
Loans and advances to customers, not freely disposable, includes the loan to the Dutch State in connection with the Illiquid Assets Back-Up Facility agreement as disclosed in Note 33 ‘Related parties’ and loans that for liquidity purposes have been pledged as collateral in the United States of EUR 7 billion (2009: EUR 7 billion), Germany of EUR 5 billion (2009: EUR 5 billion) and Canada of EUR 5 billion (2009: nil).
There are no material terms and conditions relating to the collateral represented in the above table which are individually significant.
ING Group supports the commercial paper programmes by providing the SPE with short-term standby liquidity facilities. These liquidity facilities are intended primarily to cover temporarily disruptions in the commercial paper market. Once drawn these facilities bear normal credit risk. A number of programmes are supported by granting structured liquidity facilities to the SPE, in which ING Group covers at least some of the credit risk incorporated in these programmes itself (in addition to normal liquidity facilities), and might suffer credit losses as a consequence. Furthermore, under a Programme Wide Credit Enhancement ING Group guarantees to a limited amount all remaining losses incorporated in the SPE to the commercial paper investors. All facilities, which vary in risk profile, are granted to the SPE subject to normal ING Group credit and liquidity risk analysis procedures. The fees received for services provided and for facilities are charged subject to market conditions. The SPE is included in the consolidation of ING Group. These transactions are therefore not off-balance sheet arrangements.
ING Group as investor As part of its investment activities, ING Group invests in securitisations by purchasing notes or by selling credit protection in the market using credit default swaps from securitisation SPEs. For certain own asset securitisation programmes ING Group acts as a market maker and holds limited positions in this capacity.
Notes to the consolidated annual accounts of ING Group continued 29 PRINCIPAL SUBSIDIARIES The principal subsidiaries of ING Groep N.V. and their statutory seat are as follows: Companies treated as part of the banking operations ING Bank N.V. The Netherlands Bank Mendes Gans N.V. The Netherlands ING Lease Holding B.V. The Netherlands ING Corporate Investments B.V. The Netherlands ING Vastgoed Management Holding B.V. The Netherlands ING Commercial Finance B.V. The Netherlands Westland Utrecht Bank N.V. The Netherlands ING België N.V. Belgium ING Bank Slaski S.A. Poland ING Bank Deutschland A.G. Germany ING Financial Holdings Corporation United States of America ING Middenbank Curaçao N.V. Netherlands Antilles ING Vysya Bank Ltd. India ING Direct N.V. Canada, Germany, Spain, Australia, France,
Companies treated as part of the insurance operations ING Verzekeringen N.V. The Netherlands Nationale-Nederlanden Levensverzekering Maatschappij N.V. The Netherlands Nationale-Nederlanden Schadeverzekering Maatschappij N.V. The Netherlands Parcom Capital B.V. The Netherlands ING Levensverzekering Retail N.V. The Netherlands ING Schadeverzekering Retail N.V. The Netherlands RVS Levensverzekering N.V. The Netherlands RVS Schadeverzekering N.V. The Netherlands Movir N.V. The Netherlands ING Re (Netherlands) N.V. The Netherlands ING Fund Management B.V. The Netherlands ING Vastgoed Belegging B.V. The Netherlands ING Zivotna Poistovna a.s. Slovakia ING Nationale-Nederlanden Polska S.A. Poland ING Nationale-Nederlanden Polska Powszechne Towarzystwo Emerytaine S.A. Poland ING Asigurari de Viata S.A. Romania ING Greek Life Insurance Company S.A. Greece ING Nationale-Nederlanden Magyarorszagi Biztosito Rt. Hungary Nationale-Nederlanden Vida, Compañia de Seguros y Reaseguros S.A. Spain Nationale-Nederlanden Generales, Compañia de Seguros y Reaseguros S.A. Spain ING America Insurance Holdings, Inc. United States of America ING International Insurance Holdings, Inc. United States of America ING Life Insurance and Annuity Company United States of America ING North America Insurance Corporation United States of America Lion Connecticut Holdings Inc. United States of America ReliaStar Life Insurance Company United States of America ReliaStar Life Insurance Company of New York United States of America Security Life of Denver Insurance Company United States of America ING USA Annuity and Life Insurance Company United States of America ING Investment Management Co United States of America Security Life of Denver International Limited Cayman Islands ING Afore S.A. de C.V. Mexico ING Seguros de Vida S.A. Chile AFP Capital S.A. Chile ING Insurance Berhad Malaysia ING Life Insurance Company (Japan) Limited Japan ING Life Insurance Company (Korea) Limited South Korea ING Life Insurance Company (Bermuda) Limited Hong Kong
(2) The gain/loss on disposal comprises the sales proceed, the net assets disposed, the expenses directly related to the disposal and the realisation of unrealised reserves. (3) As per 31 December 2009 recognised as a disposal group held for sale.
Disposals effective in 2010 In October 2009 ING reached an agreement to sell its Asian Private Banking business for a consideration of USD 1,463 million (EUR 985 million). The Asia franchise offers private banking services in 11 markets, including Hong Kong, the Philippines and Singapore. The transaction generated a net profit for ING of EUR 332 million. The sale was completed in the first half of 2010. The Asian Private Banking business was previously included in the segment Retail Asia.
In December 2009 ING announced the sale of its entire stake in China’s Pacific Antai Life Insurance Company Ltd. (PALIC) to China Construction Bank. This is the outcome of a strategic review announced in April 2009 as part of ING’s Back to Basics program. The stake in PALIC is included in the segment Insurance Asia/Pacific. The transaction is expected to be closed in 2011. The closing is subject to regulatory approval.
(4) After disposal of the 70% stake ING has no remaining stake in ING Canada. (5) Assets and liabilities included in this column were presented as assets/liabilities held for sale as at 31 December 2008.
Profit since date of acquisition –7 3 –7 –11 Income if acquisition effected at start of year 61 42 17 275 12 407 Profit if acquisition effected at start of year –20 –1 1 8 –12
In July 2008, ING acquired 100% of CitiStreet, a leading retirement plan and benefit service and administration organisation in the US defined contribution marketplace for a total consideration of EUR 578 million. Goodwill of EUR 462 million was recognised on the acquisition and is mainly attributable to the operational synergies and the future business potential resulting from the acquisition, making ING one of the largest defined contribution businesses in the US.
Loans and advances to customers 137 65 202 Financial assets at fair value through profit and loss 41 41 Miscellaneous other assets 26 1,261 1,287
Disposals effective in 2008 In December 2007, ING reached an agreement with Berkshire Hathaway Group to sell its reinsurance unit NRG N.V. for EUR 272 million. The sale resulted in a net loss of EUR 144 million. A loss on disposal of EUR 129 million was reported in 2007. In 2008 EUR 15 million additional losses, predominantly relating to currency exchange rate changes were recognised.
In March 2011, ING Groep N.V. was informed of the decision of the board of Stichting Pensioenfonds ING (the Dutch ING Pension Fund) to institute arbitration against ING’s decision not to provide funding for indexing pensions. While it is not feasible to predict the ultimate outcome of these arbitration proceedings, the Company’s management is of the opinion that these will not have a significant effect on the financial position or profitability of the Company.
ING-BOB Life Insurance Company Ltd (2) 50 333 289 87 85 ING Vysya Life Insurance Company Ltd (1) 26 495 466 127 136
Transactions with the Dutch State Illiquid Assets Back-up Facility ING Group and the Dutch State reached an agreement on an Illiquid Assets Back-up Facility (‘IABF’) on 26 January 2009. The transaction closed on 31 March 2009. The IABF covers the Alt-A portfolios of both ING Direct US and ING Insurance US, with a par value of approximately EUR 30 billion. Under the IABF, ING transferred 80% of the economic ownership of its Alt-A portfolio to the Dutch State. As a result, an undivided 80% interest in the risk and rewards on the portfolio was transferred to the Dutch State. ING retained 100% of the legal ownership of its Alt-A portfolio. The transaction price was 90% of the par value with respect to the 80% proportion of the portfolio of which the Dutch State had become the economic owner. The transaction price remains payable by the Dutch State to ING and will be redeemed over the remaining life. Furthermore, under the IABF ING pays a guarantee fee to the State and receives a funding fee and a management fee. As a result of the transaction ING derecognised 80% of the Alt-A portfolio from its balance sheet and recognised a receivable from the Dutch State. The transferred Alt-A portfolio was previously included in Available-for-sale debt securities. The Dutch State also acquired certain consent rights with respect to the sale or transfer of the 20% proportion of the Alt-A portfolio that is retained by ING.
In order to finance the repayment, in December 2009, of the non-voting equity securities and the associated expenses as well as to mitigate the capital impact of the additional Illiquid Assets Back-up Facility payments as part of the overall agreement with the European Commission, ING launched a capital increase with preferential subscription rights for holders of (depositary receipts for) ordinary shares of up to EUR 7.5 billion. The rights issue, as disclosed in Note 13 ‘Shareholders’ equity (parent)/non-voting equity securities’ was authorised by the Extraordinary General Meeting of Shareholders on 25 November 2009. Proceeds of the issue in excess of the above amounts were used to strengthen ING’s capital position.
Fair value of financial assets and liabilities Estimated fair value Balance sheet value
The following methods and assumptions were used by ING Group to estimate the fair value of the financial instruments: Financial assets Cash and balances with central banks The carrying amount of cash approximates its fair value.
Financial assets designated as at fair value through profit and loss 1,143 3,027 1,846 6,016 Available-for-sale investments 113,994 102,449 6,104 222,547
Financial assets designated as at fair value through profit and loss 832 2,855 1,830 5,517 Available-for-sale investments 113,913 76,547 7,243 197,703
Amounts recognised in profit and loss during the year 193 –5 –275 3 –232 –316 Revaluation recognised in equity during the year 1,047 1,047
• Decrease in Level 3 – reclassification of asset backed securities in the US and certain private equities to Level 2: During 2009, the pricing transparency and the level of trading activity in the secondary markets for asset backed securities in the United
States increased and the price of the securities as provided by the external pricing services converged . Accordingly, in the fourth quarter of 2009, investments in asset backed securities in the United States of approximately EUR 2.8 billion were transferred from Level 3 to Level 2. These assets were transferred into Level 3 during 2008, when the market became inactive and the dispersion between prices for the same security from different prices sources increased significantly; • Other: Amounts in each of the levels are impacted by changes in the amount and composition of the relevant balance sheet items during the year.
Amounts recognised in profit and loss during the year 119 85 –4 200 Revaluation recognised in equity during the year 9 9
Early repayment of liabilities –110 –26 –155 –72 –363 Maturity/settlement –173 –121 –294
Assets Trading assets –55 72 17 Investments for risk of policyholders 2 2 Non-trading derivatives –133 –133 Financial assets designated as at fair value through profit and loss –104 14 –90 Available-for-sale investments –1,534 9 –1,525
Interest income on loans 24,942 24,983 31,174 Interest income on impaired loans 40 24 –24 Total interest income on loans 24,982 25,007 31,150
Interest expense on deposits by banks 652 1,266 4,856 Interest expense on customer deposits and other funds on deposit 8,324 10,976 19,594 Interest expense on debt securities 2,761 2,657 4,109 Interest expense on subordinated loans 1,856 1,784 1,784 Interest on trading liabilities 32,847 40,023 44,093 Interest on non-trading derivatives 2,166 4,483 7,391 Other interest expense 6,405 6,286 4,142 Interest expense banking operations 55,011 67,475 85,969
In 2009, Gross premium income decreased as a result of the divestments as disclosed in Note 30 ‘Companies acquired and companies disposed’, including the divestment of ING Life Taiwan, ING Canada, Annuity and Mortgage business of Chile and Australia/New Zealand. Furthermore, gross premium income declined due to ING’s decision to limit variable annuity sales in the United States and to cease variable annuity sales in Japan, as well as a lower appetite for investment-linked products.
Realised gains/losses on disposal of debt securities 150 –945 40 25 –168 48 175 –1,113 88 Impairments of available-for-sale debt securities –146 –1,491 –2,127 –589 –586 –777 –735 –2,077 –2,904 Reversal of impairments of available-for-sale debt securities 10 2 10 2 Realised gains/losses and impairments of debt securities 4 –2,436 –2,087 –554 –752 –729 –550 –3,188 –2,816
Reference is made to the ‘Risk management’ section for further information on impairments.
ING Salud, Chile 55 Seguros ING, Mexico 182 NRG –15 ING Life Taiwan –214 Other 9
Change in fair value of derivatives relating to – fair value hedges –679 –1,321 –5,299 –69 191 –193 –748 –1,130 –5,492 – cash-flow hedges
Change in fair value of assets and liabilities (hedged items) 686 1,201 5,533 66 –226 164 752 975 5,697 Valuation results on assets and liabilities designated as at fair value through profit and loss (excluding trading) 69 –557 127 150 4 –432 219 –553 –305
In 2009, the Valuation results on non-trading derivatives was mainly a result of negative fair value changes on derivatives used to hedge direct and indirect equity exposures without applying hedge accounting. Indirect equity exposures related to certain guaranteed benefits in insurance liabilities in the US, Japan, and the Netherlands. In 2009 the fair value changes on these derivatives were negative, as stock market returns became positive. The fair value changes on the derivatives related to the indirect equity exposures were generally offset by an opposite amount in underwriting expenditure (reference is made to Note 43 ‘Underwriting expenditure’).
Income from real estate development projects 36 59 124 36 59 124
The investment income and valuation results regarding investment result for risk of policyholders of EUR 10,492 million (2009: EUR 17,742 million; 2008: EUR –32,408 million) have not been recognised in Investment income and valuation results on assets and liabilities designated at fair value through profit and loss but are recognised in Underwriting expenditure together with the equal amount of change in insurance provisions for risk of policyholders.
Reinsurance recoveries –1,732 –1,708 –1,662 Change in life insurance provisions for risk of company 1,416 3,283 16,633 Costs of acquiring insurance business 2,775 350 1,877 Other underwriting expenditure 558 460 462 Profit sharing and rebates 538 438 358
Reinsurance recoveries –9 –6 –92 Change in provision for unearned premiums –26 –2 28 Change in claims provision 44 –23 54 Costs of acquiring insurance business 281 290 742 Other underwriting expenditure –2 –4 –22
The Change in life insurance provisions for risk of company includes an amount related to variable annuity assumption changes in the United States and Japan of approximately EUR 356 million (2009: EUR 343 million). These assumptions were updated to reflect lower-than-expected surrenders on policies where the value of the benefit guarantees is significant.
Pension and other staff-related benefit costs 199 178 104 118 142 140 317 320 244
On 6 April 2010 ING Groep N.V. announced that it has bought 13,670,000 (depositary receipts for) ordinary shares for its delta hedge portfolio, which was used to hedge employee options and facilitate employee share programmes. The shares were bought in the open market between 23 March and 6 April 2010 at an average price of EUR 7.47 per share.
The entitlement to the share awards is granted conditionally. If the participant remains in employment for an uninterrupted period of three years from the grant date, the entitlement becomes unconditional. In 2010, no shares (2009: nil; 2008: 211,049) have been granted to the members of the Executive Board of ING Group, Management Boards of ING Bank and ING Insurance and 26,369,146 shares (2009: 6,273,467; 2008: 3,380,706) have been granted to senior management and other employees remaining in the service of ING Group.
The weighted average share price at the date of exercise for options exercised during 2010 is EUR 7.46 (2009: EUR 8.57; 2008: 24.07).
The aggregate intrinsic value of options outstanding and exercisable as at 31 December 2010 was EUR 72 million and nil, respectively.
As per 31 December 2010 the share awards consists of 28,592,210 share awards (2009: 10,810,687) relating to equity-settled share-based payment arrangements and 6,447,896 share awards (2009: 3,842,986) relating to cash-settled share-based payment arrangements.
Total interest income and total interest expense for items not valued at fair value through profit and loss for 2010 were EUR 41,217 million (2009: EUR 41,856 million; 2008: EUR 52,505 million) and EUR 19,206 million (2009: EUR 22,253 million; 2008: EUR 33,507 million) respectively. Net interest income of EUR 19,815 million is presented in the following lines in the profit and loss account.
Other operating expenses include lease and sublease payments in respect of operating leases of EUR 200 million (2009: EUR 169 million; 2008: EUR 172 million) in which ING Group is the lessee. In 2009 Other operating expenses also includes the expenses related to the industry-wide deposit guarantee scheme in the Netherlands due to the bankruptcy of DSB Bank and premiums for deposit guarantee schemes in other countries.
Notes to the consolidated annual accounts of ING Group continued 48 TAXATION Profit and loss account
Result before tax 4,477 –1,525 –1,487 Weighted average statutory tax rate 25.1% 36.3% 49.9% Weighted average statutory tax amount 1,124 –554 –742
Associates exemption –447 –135 69 Other income not subject to tax –125 –227 –210 Expenses not deductible for tax purposes 102 47 106 Impact on deferred tax from change in tax rates 8 –25 Deferred tax benefit from previously unrecognised amounts –32 Write down/reversal of deferred tax assets 544 546 360 Adjustment to prior periods –54 –117 –279 Effective tax amount 1,152 –472 –721
(1) As a net profit is reported in 2010 an attribution to non-voting equity securities is included. This attribution represents the amount that would be payable to the holders of the non-voting equity securities if and when the entire net profit of 2010 would be distributed as dividend. This amount is only included for the purpose of determining earnings per share under IFRS-EU and does not represent a payment (neither actual nor proposed) to the holders of the non-voting equity securities. 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. The 2008 coupon of EUR 425 million paid on the non-voting securities did not impact basic earnings.
(2) The rights issue, which was finalised on 15 December 2009 has an effect on the basic earnings per share and the diluted earnings per share, as defined in IFRS-EU. All weighted average number of shares outstanding before the rights issue are restated with an adjustment factor of approximately 1.3 that reflects the fact that the exercise price of the rights issue was less than the fair value of the shares. The effect of dilutive securities is adjusted as well.
Per ordinary share (in euros) 0.00 0.00 0.74 Total amount of dividend declared (in millions of euros) 0 0 1,500
(1) The Executive Board, with the approval of the Supervisory Board, has proposed, subject to the ratification by the General Meeting of Shareholders, not to pay a cash dividend for the year 2010.
In 2009 ING Group identified the following operating segments: Retail Banking, ING Direct, Commercial Banking, Insurance Europe, Insurance Americas and Insurance Asia/Pacific.
All information by segment for 2010 and comparative years presented below reflect the operating segments as at 31 December 2010.
ING IM Income from investment management activities. Corporate Line Banking Corporate Line Banking is a reflection of capital management activities and certain expenses that are not allocated to the banking businesses. ING Group applies a system of capital charging for its banking operations in order to create a comparable basis for the results of business units globally, irrespective of the business units’ book equity and the currency they operate in.
While the reserves for the segment Insurance US Closed Block VA are adequate at the 50% confidence level, a net reserve inadequacy exists using a prudent (90%) confidence level. In line with Group Policy, Insurance US Closed Block VA is taking measures to improve adequacy in that region. This inadequacy was offset by reserve adequacies in other segments, such that at the Group level there is a net adequacy at the prudent (90%) confidence level.
Impairments and reversals of impairments on investments per operating segment 2010 Impairments Reversals of impairments
ING Direct 107 Commercial Banking (excluding Real Estate) 70 Insurance Benelux 53 Insurance CRE 18 Insurance US * 553 Insurance Asia/Pacific 8 –2 ING IM –8 Corporate Line Banking 1 810 –10 * Excluding US Closed Block VA
– Additions to loan loss provision 529 200 765 116 39 971 239 2,859 2,859 * Analysed as a part of operating expenses.
Operating segments Total 2009 Total Banking Total Insurance Total Segments Eliminations Total
Underlying income – Gross premium income 30,170 30,170 30,170 – Net interest result – banking operations 12,507 12,507 –165 12,342
Divestments in 2009 mainly include the net impact of the sale of ING’s 70% stake in ING Canada, the Nationale Nederlanden Industry Pension fund portfolio, the Annuity and Mortgage businesses in Chile, three US independent retail broker-dealer units (three quarters of ING Advisors Network) and ING Australia Pty Limited. Divestments in 2009 also relates to the operational result from the in 2010 divested units Private Banking business Asia and Switzerland and Summit.
Special items in 2009 reflects mainly the net impact of transaction result on the Illiquid Asset Back-up Facility, including the additional Illiquid Assets Back-up Facility payments as part of the overall agreement with the European Commission of EUR 1.3 billion (EUR 930 million after tax), and restructuring costs.
Operating segments Total 2008 Total Banking Total Insurance Total Segments Eliminations Total
Impairments and reversals of impairments on investments per operating segment 2008 Impairments
Included in cash and cash equivalents: – amounts due to banks –12,898 –12,334 –13,738 – amounts due from banks 16,125 14,721 15,955
Included in balance sheet: – amounts due to banks –72,852 –84,235 –152,265 – amounts due from banks 51,828 43,397 48,447
A second commonality between ING Bank and ING Insurance is that both need to prepare for significant changes in the regulatory requirements. ING Bank needs to prepare for the implementation of Basel III (which is the Basel II reform packages on risk and liquidity), while ING Insurance runs an extensive program to allow the implementation of Solvency II (which is the fundamental reform of European insurance solvency and risk governance legislation; which is effective as of 1 January 2013). Additionally, both in Bank and Insurance, ING continued its stress testing efforts, with stress testing becoming more important and more embedded in the risk culture.
In the first half of 2010 concerns arose regarding the creditworthiness of several southern European countries, which later spread to a few other European countries. As a result of these concerns the value of sovereign debt decreased. The impact on ING’s revaluation reserve in relation to sovereign debt is limited per 31 December 2010: the negative impact on troubled countries is offset by opposite positive movements in bonds of financially stronger European countries and by the positive impact from lower interest rates in general. Furthermore, in the course of 2010, ING reduced its sovereign debt exposure to these troubled countries.
ING maintained its policy to restrict reinvestment of maturing debt securities as much as possible and any reinvestments were mainly in government guaranteed paper. During the year ING Insurance reduced the exposure to CMBS through sales of part of the portfolio (approximately EUR 1.6 billion). The remaining CMBS portfolio increased in value as a result of revaluations and currency effects. Similar effects in revaluation reserve improvements are visible for the other pressurised ABS classes, and the total revaluation reserve for US Alt-A RMBS changed from negative to positive. Despite the improved market values, ING still took impairments on the ABS portfolio. These impairments mainly relate to the ING Insurance part of the ABS portfolio, as EUR 481 million of the total EUR 541 million in impairments are for the ING Insurance portfolio. The credit quality of the ING ABS portfolio did not materially change, with 88% of the portfolio rated A or better at year-end 2010 (88% in 2009).
Of the exposure on pressurised ABS EUR 10.1 billion is measured at fair value (with the revaluation recognised in equity, except impairments on these trades going through P&L). The table shows how the total fair values are determined through the following Level 1, 2, 3 hierarchy: Level 1 – Quoted prices in active markets; Level 2 – Valuation technique supported by observable inputs; Level 3 – Valuation technique supported by unobservable inputs.
An analysis of the method applied in determining the fair values of financial assets and liabilities is provided in Note 34 ‘Fair value of financial assets and liabilities’.
US Subprime RMBS 16 1,412 1,428 US Alt-A RMBS 2,308 656 2,964
The Greek and Irish Government and Financial Institution bonds measured at fair value are in the fair value hierarchy levels 1 and 2.
ONGOING CHANGES IN THE REGULATORY ENVIRONMENT After the turmoil in the financial markets over the last couple of years and the need for governments to provide aid to financial institutions, financial institutions have been under more scrutiny from the public, supervisors and regulators. The resulting revised regulations are intended to make sure that a crisis in the financial system can be avoided in the future.
• Separate from but in line with the Basel III proposal, on a country level local regulators are becoming more stringent on the maximum credit risk bank subsidiaries and branches are allowed to run on their parents. In the absence of a supranational harmonization this leads to so-called trapped pools of liquidity, i.e. excess liquidity in a country that can not merely be transferred (unsecured) to a central treasury in another country.
ING GROUP RISK GOVERNANCE To ensure measured risk-taking throughout the organisation, ING Group operates through a comprehensive risk management framework. This ensures the identification, measurement and control of risks at all levels of the organisation so that ING Group’s financial strength is safeguarded.
In addition two staff departments report to the CRO: • Risk Integration and Analytics, which is responsible for inter-risk aggregation processes and for providing group-wide risk information to the CRO and Executive Board; • Model Validation, which carries out periodic validations of all material risk models used by ING. To ensure independence from the business and other risk departments, the department head reports directly to the CRO.
Due to the implementation of the operational separation for ING Bank and ING Insurance the process was started to change Group level risk committees into a separate Bank committee and a separate Insurance committee. As a result of these governance changes the ORRC was disbanded towards the end of 2010, and the topics for this committee were transferred to other committees, like the newly created Operational Risk Committee Bank (ORC Bank).
In addition, the Finance and Risk Committee (F&RC) is a platform for the CRO and the CFO, along with their respective direct reports, to discuss and decide on issues that relate to both the finance and risk domains. Given the decision to manage ING Bank and ING Insurance separately, there is a separate F&RC Bank and a separate F&RC Insurance. To cover specific Group issues there is also a F&RC Group meeting, which meets at least on a quarterly basis.
• The Executive Board is responsible for managing risks associated with the ING Group activities. Its responsibilities include ensuring that internal risk management and control systems are effective and that ING Group complies with relevant legislation and regulations. The Executive Board reports on these issues and discusses the internal risk management and control systems with the Supervisory Board. On a quarterly basis, the Executive Board reports on the Group’s risk profile versus its risk appetite to the Audit Committee, explaining changes in the risk profile.
Committee membership is organised such that specific business know-how, expertise relating to the activities of ING and the subject matter of the committees is available. The CRO attends the Audit Committee and the Risk Committee meetings.
The CRO makes sure that the boards are well informed and understand ING Group’s risk position at all times. Every quarter, the CRO reports to the board committees on ING’s risk appetite levels and on ING Group’s risk profile. In addition the CRO briefs the board committees on developments in internal and external risk related issues and makes sure the board committees understand specific risk concepts.
ING has integrated its risk management into the annual strategic planning process. This process aligns strategic goals, business strategies and resources throughout ING Group. The Executive Board issues a Planning Letter which provides the organisation with the corporate strategic direction, and addresses key risk issues. Based on the Planning Letter, the business lines and business units develop their business plans which align with the Group’s strategic direction. The process includes a qualitative and quantitative assessment of the risks involved. It is part of the process to explicitly discuss strategic limits and group risk appetite levels. At each level, strategies and metrics are identified to measure success in achieving objectives and to assure adherence to the strategic plan. Based on the business plans, the Executive Board formulates the Group Strategic Plan which is submitted to the Supervisory Board for approval.
Risk types ING measures the following main types of risks that are associated with its business activities: • Credit risk: the risk of potential loss due to default by ING’s debtors (including bond issuers) or trading counterparties; • Market risk: the risk of potential loss due to adverse movements in market variables. Market risks include interest rate, equity, real estate, implied volatility, credit spread, and foreign exchange risks; • Liquidity risk: the risk that ING or one of its subsidiaries cannot meet its financial liabilities when they come due, at reasonable cost and in a timely manner. Liquidity risk can materialise both through trading and non-trading positions; • Insurance risk: risks such as mortality, morbidity and property and casualty associated with the claims under insurance policies it issues/underwrites; specifically, the risk that premium rate levels and provisions are not sufficient to cover insurance claims; • Operational risk is the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events. It includes reputational risk, as well as legal risk; • Business risk: the exposure to value loss due to fluctuations in volumes, margins and costs, as well as client behaviour risk.
Risk measures related to accounting are based on IFRS-EU where relevant, as IFRS-EU is the primary accounting basis, which is also the basis for statutory and regulatory reporting and risk management.
In 2010 ING has been recalibrating the underlying assumptions for credit, transfer and operational risk. As the economic capital model for credit risk was updated to bring closer alignment with the regulatory capital framework there was a material increase in the economic capital.
In countries where ING is active, the relevant country’s risk profile is regularly evaluated, resulting in a country rating. Country limits are based on this rating and ING’s risk appetite. Exposures derived from lending, investment pre-settlement and money market activities are then measured and reported against these country limits on a daily basis. Country risk limits are assigned for transfer risk mainly for emerging markets.
Credit Risk Mitigation As with all financial institutions and banks in particular, ING is in the business of taking credit risks in an informed and measured fashion. As such, the creditworthiness of our customers, trading partners and investments is continually evaluated for their ability to meet their financial obligations to ING. ING uses different credit risk mitigation techniques, of which entering into Master Agreements, Collateral Agreements and CDS contracts are the main techniques used.
Repossession policy It is ING’s general policy not to take possession of assets of defaulted debtors. Rather, ING attempts to sell the assets from within the legal entity that has pledged these assets to ING, in accordance with the respective collateral or pledge agreements signed with the obligors. In those cases where ING does take possession of the collateral, ING generally attempts to sell the assets as quickly as possible to prospective buyers. Based on internal assessments to determine the highest and quickest return for ING, the sale of repossessed assets could be the sale of the obligor’s business as a whole (or at least all of its assets), or the assets could be sold piecemeal. With regard to the various mortgage portfolios, ING often has to take possession of the underlying collateral but also tries to reduce the amount of time until resale.
Within the Investment and Pre-Settlement portfolios, there was a slight downward shift from the high end investment grade, to the midlevel investment grade in 2010. The Lending portfolios remained fairly stable. A large portion of the reduction in investment grade counterparty risks (pre-settlement) is related to the increasing application of collateral and netting agreements with these counterparties. Where such agreements are in place, ING generally has higher absolute volumes, while the credit risks are actually lowered due to the benefit of collateral and netting agreements.
The largest relative geographic area of growth was Asia/Pacific which corresponds with the region’s economic recovery in 2010. Exchange rate effects had further impact on the regional division.
ING holds specific and collective provisions of EUR 2,697 million and EUR 1,404 million, respectively (2009: EUR 2,115 million and EUR 1,246 million respectively), representing the difference between the amortised cost of the portfolio and the estimated recoverable amount discounted at the effective rate of interest. In addition, there is EUR 1,051 million in provisions against the performing portfolio and EUR 43 million of Net Present Value forgone for re-modified loans.
During 2010 we saw a slow reduction to more normalised risk costs. The lower risk costs level was largely the result of an improving portfolio within Commercial Banking, which was partly offset due to the continuing elevated levels of the risk costs in Retail Benelux.
CMRM has implemented a historical simulation Value at Risk (HVaR) model for consolidated risk reporting for the trading books that has replaced the Variance Covariance method used previously. ING has chosen to use a phased rollout approach. As of 1 January 2009, ING implemented the first phase after approval from DNB. During 2010, further steps were made with the migration of a large part of the non-linear risks from Monte Carlo simulation to historical simulation. The remaining non-linear risks and specific risk will migrate to historical simulation in 2011.
The VaR figures in the table above only relate to the CAD2 trading books for which the internal model approach is applied. The VaR figures reported under Consolidated VaR trading books relate to all books under trading governance.
Credit Spread (BPV (1)) Credit Spread (BPV (1)) Eurozone –596 United States –115 Sweden –67 Eurozone –86 Hong Kong –47 Mexico –57 UK –47 Japan –17 United States –42 Russia –13
Market risk in banking books Organisation ING makes a distinction between trading and banking (non-trading) books. Positions in trading books can change swiftly, whereas positions in banking books are intended to be held until maturity, or at least for the long term. Books that contain positions to hedge exposures resulting from commercial activities are also classified as banking books.
By currency Euro –2,446 –1,811 US dollar –205 –39 Pound sterling –19 –53
By currency Euro –21,760 –15,340 US dollar –548 757 Pound sterling –284 –684
Foreign exchange (FX) risk in banking books FX exposures in banking books result from commercial banking business (business units doing business in other currencies than their base currency), foreign currency investments in subsidiaries (including realised net profit and loss) and strategic equity stakes in foreign currencies. The policy regarding these exposures is briefly explained below.
Commercial banking business Every business unit hedges the FX risk resulting from commercial results into its base currency. Consequently, assets and liabilities are matched in terms of currency.
In order to measure the remaining sensitivity of the target core Tier 1 ratio against FX rate fluctuations, the core Tier 1 ratio at Risk (cTaR) measure is used. It measures the drop in the core Tier 1 ratio from the target when stressing a certain FX rate. The stress scenarios for the FX rates that are used for calculating the cTaR, are presented in the last two columns. Only the scenarios are presented that negatively impact the target core Tier 1 ratio: depending on whether the actual foreign currency position is above or below the target position, the worst case scenario is either negative or positive. A positive stress scenario means that the foreign currency appreciates against the Euro. For the Pound sterling this means that at the end of 2010 the target core Tier 1 ratio would only decrease by 0.02% in absolute terms (e.g. from 9.02% to 9.00%) if the Pound Sterling appreciates by 15%. Backtesting shows that the strategy was effective in 2010; the core Tier 1 ratio was hardly affected by changing FX rates.
Equity price risk in banking books Equity price risk arises from the possibility that equity security prices will fluctuate, affecting the value of equity securities and other instruments whose value reacts similarly to a particular security, a defined basket of securities, or a securities index. ING Bank maintains a strategic portfolio with substantial equity exposure in its banking books. This equity exposure mainly consists of the investments in associates of EUR 1,494 million (2009: EUR 1,396 million) and equity securities held in the Available-for-Sale (AFS) portfolio of EUR 2,741 million (2009: EUR 3,682 million). The value of equity securities held in the AFS portfolio is directly linked to equity security prices with increases/decreases being recognised (except in the case of impairment) in the revaluation reserve. During the year ended 31 December 2010 the revaluation reserve relating to equity securities held in the Available-for-Sale portfolio fluctuated between a month-end low amount of EUR 1,723 million (2009: EUR 1,198 million) and a high amount of EUR 2,370 million (2009: EUR 2,536 million). Investments in associates are measured in accordance with the equity method of accounting and the balance sheet value is therefore not directly linked to equity security prices.
Real Estate price risk in banking books Real estate price risk arises from the possibility that real estate prices fluctuate. This affects both the value of real estate assets and earnings related to real estate activities. The crisis in the financial markets could lead to a further slowdown of the world economy in general. These global economic factors could have future negative consequences for the value of and earnings related to real estate assets.
For the third category mentioned above, real estate price shocks will have a direct impact on reported net profit and loss. ING Bank’s real estate exposure (i.e. including leverage and committed purchases) is EUR 5.2 billion of which EUR 2.0 billion is recorded as fair value through P&L. The remaining EUR 3.1 billion is booked at cost or is revalued through equity (with impairments going through P&L).
In total, Real Estate exposure decreased by EUR 1.8 billion mainly as a result of divestments (EUR –1.5 billion). Other important changes are: negative fair value changes (EUR –0.1 billion), impairments (EUR –0.4 billion) and FX appreciation (EUR +0.2 billion).
ING Bank’s real estate exposure not revaluing through P&L has decreased, which is mainly driven by impairments in Real Estate Development.
ALCO Bank determines the liquidity risk framework after which this is cascaded down in the organisation under the responsibility of the regional and local ALCOs.
The main objective of ING’s liquidity risk framework is to ascertain – by means of proper risk appetite limits – that sufficient liquidity is maintained in order to ensure safe and sound operations under a variety of circumstances.
For this purpose liquidity risk is measured, managed and controlled from three different angles, namely a structural, a tactical and a contingency point of view.
Structural liquidity risk Structural liquidity risk is the risk that the structural, long term balance sheet cannot be financed timely or at a reasonable cost. For the purpose of managing structural liquidity risk, a specific advisory committee to ALCO Bank has been established.
The funding mix remained well diversified and according to targets set. Deposits accounted for 65% of the total funding mix.
Contingency liquidity risk Contingency liquidity risk specifically relates to the organisation and planning for liquidity management in time of stress. Within ING, for contingency purposes, a specific crisis team – consisting of key Board Members, representatives from Corporate Departments (e.g. Risk and Capital Management) and Treasuries – is responsible for liquidity management in times of crisis. Throughout the organisation adequate and up-to-date contingency funding plans are in place to enable senior management to act effectively and efficiently in times of crisis.
ING INSURANCE FINANCIAL RISKS ING is engaged in selling a broad range of life and non-life insurance products. Risks from these products arise with respect to the adequacy of insurance premium rate levels and provisions for insurance liabilities, earnings and capital position, as well as uncertainty as to the future returns on investments of the insurance premiums. Financial Risks are classified as insurance risk (actuarial and underwriting), market risk, liquidity risk, credit risk, and business risk. Compliance risk, legal risk and operational risk are classified as Non-Financial Risks.
Risk management policies and tools To ensure appropriate risk management, CIRM in close co-operation with the business line CROs/CIROs, has developed Standards of Practice guidelines and tools to manage risks. While these standards are principle based, they include mandatory requirements to which the business unit CROs/CIROs must adhere.
ING Insurance has developed an Economic Capital approach similar to that used within ING Bank. This is used as one of its core risk measurement tools. An exception is the US Insurance business which is managed based on Regulatory Capital. More details on the Economic Capital model are described in the Model Disclosure section. The ECAPS system provides a well controlled and automated basis for Economic Capital and risk measurement. Beyond measurement and reporting, the ECAPS system also provides greatly enhanced portfolio and capital analysis tools for management purposes.
Reserve adequacy CIRM instructs and supervises all ING Insurance entities to ensure that the total insurance liabilities of ING Insurance (both reserves and capital) are tested for adequacy taking into account the insurance premium rate levels and the uncertainty of future returns on investments. This is done by evaluating insurance liabilities on current best estimate actuarial assumptions plus a risk margin, ensuring that the reserves remain adequate based on current assumptions. The assumed investment earnings are a combination of the run-off of portfolio yields on existing assets and new money and reinvestment rates. For new money and reinvestments long-term best estimate assumptions are taken into account, although current new money rates are used for the short-term reinvestments. For most products stochastic testing is required, taking the 90% point as the testing outcome. In the case where deterministic testing is used the 90% confidence level is achieved by subtracting risk margins off 20% of the best-estimate interest rates or one percent point, whichever is higher.
As of the fourth quarter of 2010, the Closed Block 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 US Closed Block VA business as a separate business line to improve transparency and ongoing business. 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 business line to be adequate at the 50% confidence level. The separation of the Closed Block 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.
ING Insurance risk metrics in 2010 For the EurAsia and LatAm insurance business the insurance risk appetite is managed based on the metrics disclosed below: • Economic Capital: the amount of capital that is required for the current net asset value (based on fair value) to absorb unexpected losses in a severe stress scenario based on a 99.5% confidence level. This metric is only applicable for the EurAsia and LatAm insurance business as this metric is aligned with Solvency II; • AFR Sensitivities: the potential reduction of the current net asset value (based on fair values) during a moderate stress scenario. This metric drives the ratio of Available Financial Resources over Economic Capital; • Earnings Sensitivities: the potential reduction in IFRS earnings during a moderate stress scenario. Maintaining a high quality of earnings helps ING to safeguard against being downgraded by the rating agencies.
Credit risk (including Transfer risk) 510 Market risk (including credit spread risk) 4,528 Insurance risk 214 Other risks (2) 1,215 Total insurance operations 6,467
The change in confidence interval reduced our US 2009 Economic Capital number by 27% across risk types. Allowing for excluding the change in confidence interval for both US 2009 figures and EurAsia and LatAm 2009 figures, and then adding these figures will allow for reconciliation with the Economic Capital numbers shown in the Risk Management Section of the Annual Report 2009.
The following table provides the Economic Capital breakdown by business line with diversification benefits proportionally allocated to the business lines.
Insurance Latin America 611 670 Insurance Asia/Pacific 1,750 1,688 Insurance Benelux 3,604 2,205 Insurance Central & Rest of Europe 783 765 Corporate Line Insurance (1) 3,614 1,626 Total insurance operations EurAsia and LatAm 10,362 6,954
The US Insurance business calculates regulatory capital sensitivities on the Risk-Based Capital model of the National Association of Insurance Commissioners (NAIC) in order to provide insight into how the amount of available capital in excess of regulatory required capital is sensitive to an increase or decrease in different market and credit risk factors under a moderate stress scenario which corresponds approximately with a 1-in-10 event. Our regulatory capital sensitivities are calculated in aggregate for the US domiciled regulated insurance entities.
Interest Rate Up –138 Interest Rate Down 76 Equity –298 Credit –466
In 2010 ING moved away from managing the market risk purely on an AFR basis (Market Value at Risk limits based on a 99.95% confidence interval) and moved to a new risk limit framework based on limits set on market risk sensitivities for AFR, IFRS Earnings and Regulatory Capital. On at least an annual basis, the Asset Liability Committee (ALCO) Insurance sets market risk limits at business line level, which are ultimately allocated to the business units. The market risk limits are managed by ALCO Insurance at the relevant organisational level. The Group Insurance ALCO determines the aggregate limit and ensures that the Group stays within its risk tolerance limits and allocates the sub-limits to business lines, with similar roles for the business line and business unit ALCOs. Limit breaches by business lines are reported to ALCO Insurance and resolved in accordance with the policy within the next quarter.
The market risk limit framework is based on moderate stress scenarios for market risk drivers. The section below shows the impact of these stress scenarios on AFR and IFRS Earnings. These stress scenarios are described in more detail in the Model Disclosure section.
AFR sensitivities for insurance market risks – EurAsia and LatAm Insurance Business
Interest rate sensitivities are mainly related to the Benelux and Asia/Pacific business. In 2010 the AFR has become significantly more sensitive to downward interest rate movements. Lower interest rate levels have contributed to this increase. Furthermore economic hedges have been unwound in the Benelux.
Implied volatility sensitivity relates to the risk that market values of assets or liabilities change due to movements in the volatility implied from market option prices. In general, ING is exposed to increases in implied volatility as the guarantees provided to customers become more expensive.
Earnings sensitivities Complementing Economic Capital, which is based on a market value analysis, ING Insurance also measures risk based on IFRS earnings. More specifically, using scenario analysis, ING Insurance measures the potential sensitivity of realised pre tax earnings of the insurance operations to a change in different risk factors over a full year.
The table above shows that Real Estate fluctuations can have a relatively large impact on earnings since most price volatility is reflected in earnings for Real Estate investments. The impact on earnings of interest rates and equity price changes are normally lower than the economic and shareholder’s equity impact given the fact that current accounting rules are not fully market value based. The sensitivity results reflect the impacts of asymmetric accounting, whereby the hedges must be marked to market through earnings while the liability value is not marked-to-market through earnings.
Interest Rate Up 17 76 Interest Rate Down –68 –44 Equity –934 –1,084 Real Estate –2 –2 Credit Default –795 –737
The US earnings sensitivities are dominated by credit and equity exposure. The credit default exposure relates to general account debt securities. Exposure to Asset Backed Securities (ABS) and Residential Mortgage Backed Securities (RMBS) contributes significantly to the earnings sensitivity. Equity exposure relates mostly to the US Closed block VA where an equity stress scenario results in DAC unlocking. As earnings sensitivities are forward looking, the US Closed Block VA business line sensitivities are based on the situation on 1 January 2011, which reflects the DAC write-down as well as change to apply current market interest rates and current estimates for other assumptions in valuation of insurance liabilities and hedging of the interest rate exposure for the Guaranteed Minimum Withdrawal Benefit (GMWB).
ING Insurance – Liquidity risk As with other ING Insurance market risks, liquidity risk falls under the supervision of the ALCO function. Liquidity risk is the risk that ING Insurance or one of its subsidiaries cannot meet its financial liabilities when they come due, at reasonable cost and in a timely manner. ING Insurance defines three levels of Liquidity Management. Short term liquidity, or cash management covers the day-to-day cash requirements under normally expected or likely business conditions. Long term liquidity management takes into consideration of various expected and adverse business conditions, which will result in the inability of realizing the current market values of the assets. The assets may only be sold at a further distressed price simply due to the lack of liquidity. Stress liquidity management looks at the company’s ability to respond to a potential crisis situation. The day-to-day and ongoing cash management allows for a more proactive response to potential liquidity problems in distressed markets.
For the smaller non-life units, the (pre-tax) risk tolerance level for catastrophe related events for 2010 was set at EUR 5 million (2009: EUR 5 million) per event per business unit.
Through scenario analyses, ING Insurance measures the sensitivity of pre-tax earnings of the insurance operations to a change of the insurance risk factors over a one year period. These changes to earnings can relate to realised claims or any other profit item that would be affected by these factors. ING assumes that not all the shifts presented below will happen at the same time.
(1) Based on credit risk measurement contained in lending, pre-settlement, money market and investment activities.
The ratings reflect probabilities of default and do not take collateral into consideration.
Clear and accessible policies and minimum standards are embedded in ING business processes in all business lines. An infrastructure is in place to enable management to track incidents and operational risk issues. A comprehensive system of internal controls creates an environment of continuous improvement in managing operational risk. ING uses this knowledge (including lessons learned from incidents) to improve the control of key risks.
Organisation of Operational Risk Management The General Manager Corporate Operational Risk Management (CORM) reports directly to the CRO and is responsible for monitoring operational risks and developing and establishing the Operational Risk Framework within ING Group, ING Bank and ING Insurance. The General Manager Corporate ORM also establishes and approves the policies and minimum standards, and assists and supports the Executive Board in managing ING’s operational risks.
At all levels in the organisation Operational Risk Committees (ORC’s) are established that identify, measure and monitor the operational risks of the region or business unit with appropriate quality of coverage (granularity) and to ensure that appropriate management action is taken by the responsible line managers at the appropriate level of granularity. ORC’s, chaired by the business management, steer the risk management activities of the first and second line of defence in their entities. On a group level the Operational & Residual Risk Committee approves the operational risk capital model.
• IT security monitoring – To ensure that the approved enterprise’s information security baseline is maintained, ING installed monitoring agents on almost all platforms. This improved monitoring capabilities contributed to the reduction of the IT-risk profile.
The Scope of the Compliance Risk Management function The Compliance Risk Management function focuses on managing the risks arising from laws, regulations and standards which are specific to the financial services industry. The Compliance Risk Management function actively educates and supports the business in managing compliance risks including anti-money laundering, preventing terrorist financing, conflicts of interest, proper sales and trading conduct and protection of customer interest.
ING uses a functional approach within Business Lines to ensure systematic and consistent implementation of the company-wide Charter & Framework, policies, Minimum Standards and related procedures. The Local Compliance Officer has the responsibility to assist local management in managing Compliance Risk within that business unit. The regional or division Compliance Officer has a management and supervisory role over all functional activities of the Compliance Officers in the respective region or division. Reporting functionally into the CCO, the Business Line Compliance Officers perform this task for their Business Line and also provide leadership and overall direction to the regional or divisional Compliance Officers.
Extra-territorial regulations Financial institutions continue to be closely scrutinized by regulatory authorities, governmental bodies, shareholders, rating agencies, customers and others to ensure they comply with the relevant laws, regulations, standards and expectations. Bank and insurance regulators and other supervisory authorities in Europe, the US and elsewhere continue to oversee the activities of financial institutions to ensure that they operate with integrity and conduct business in an efficient, orderly and transparent manner. ING seeks to meet the standards and expectations of regulatory authorities and other interested parties through a number of initiatives and activities, including scrutinizing account holder information, payment processing and other transactions to support compliance with regulations governing money laundering, economic and trade sanctions, bribery and other corrupt practices. The failure or alleged failure by ING to meet applicable standards in these areas could result in, among other things, suspension or revocation of ING’s licenses, cease and desist orders, fines, civil or criminal penalties and other disciplinary action which could materially damage ING’s reputation and financial condition, and accordingly ING’s primary focus is to support good business practice through its Business Principles and group policies.
Over the past years ING has significantly increased its Compliance efforts, including a major staff increase, amendment of key policies and guidelines and the international rollout of several programmes for education, awareness and monitoring of compliance issues.
MODEL DISCLOSURES Users of the information in the risk management section should bear in mind that the analyses provided are forward looking measures that rely on assumptions and estimates of future events, some of which are considered extreme and therefore unlikely to occur. In the normal course of business ING Group continues to develop, recalibrate and refine the various models that support risk metrics, which may result in changes to the risk metrics as disclosed.
The Economic Capital for ING Bank involves the aggregation of the underlying Economic Capital of five risk types, namely credit, transfer, market, operational and business risks (latter two also referred to as other risks). These risk types are aggregated to provide a total diversified ING Bank Economic Capital by applying the variance-covariance approach with a 5 x 5 inter-risk correlation matrix.
CREDIT AND TRANSFER RISK (ING BANK) Economic Capital for credit risk and for transfer risk is the portion of Economic Capital held to withstand unexpected losses inherent in the credit portfolios related to (unexpected) changes in the underlying creditworthiness of debtors or the recovery value of underlying collateral (if any). Credit risk and transfer risk capital are calculated on all portfolios which contain credit or transfer risk, including investment portfolios. The same methodology is used for both the banking and the insurance operations.
MARKET RISK (ING BANK) General Economic Capital for market risk is the Economic Capital necessary to withstand unexpected value movements due to changes in market variables, such as interest rates, equity prices, foreign exchange rates and real estate prices. Economic Capital for market risk is calculated for exposures both in trading portfolios and non-trading portfolios.
Non-market risk Economic Capital is calculated by business units, CCRM and CORM and inputted into ECAPS at the sub risk level. ECAPS then aggregates 21 sub-risk types (e.g. mortality and trend risk) to 9 non-market risk types using a bottom-up Economic Capital diversification approach based on a matrix of correlations. The inputs are used to calibrate marginal distributions for these risk types. These distributions, in combination with the Gaussian copula, are then used in the Economic Capital calculation to measure diversification between market and non-market risks.
4. Economic Capital calculation • For each Real World Scenario the market value of assets and liabilities is recalculated and the change in value of the Market Value
Surplus (MVS) is stored. The changes in MVS are sorted and the 99.5% worst case is identified to provide the market risk Economic Capital level for the given level of aggregation.
Stochastic Cash Flows Generation and Aggregation of Non-Market Risk Capital The market risks in assets and liabilities are captured in and represented by stochastic cash flows in 500 scenarios. Business units are responsible for generating these cash flows, the modelling of embedded options and guarantees and a proper mapping of risk drivers in the scenario set to cash flow determinants such as policyholder behaviour and management actions restricted to dynamic hedge programs and setting of crediting rates/profit sharing. To better capture the behaviour in the tails of the distribution, the set of scenarios consist of 300 Risk Neutral scenarios and 200 ‘Risk Volatile’ scenarios with double volatilities. The average of the 300 Risk Neutral scenarios provides a check on the market value of the replicating portfolio. It should be noted that this serves only as a check, and that the simulated market value of liabilities is derived directly from the replicating portfolio. The 200 Risk Volatile scenarios ensure that the replicating portfolio is calibrated against enough extreme scenarios such that it can be used safely in Economic Capital calculations.
REGULATORY CAPITAL SENSITIVITIES – US INSURANCE BUSINESS The sensitivities shown are calculated at legal entity level and cover US domiciled insurance entities. The sensitivities are based on simple to explain shocks to underlying risk factors. The following risk factors are taken into account: • Interest rates; • Credit; • Equity; • Real Estate; • Foreign exchange; • Implied volatility.
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
CAPITAL ADEQUACY ASSESSMENT During 2010, ING Group, ING Bank and ING Insurance were adequately capitalised in relation to their risk profile and strategic objectives.
Required capital based on Basel I floor (5) 29,860 28,709 BIS ratio based on Basel I floor (5) 13.17% 12.46%
ING INSURANCE The table below shows the Insurance Group Directive which represent the consolidated regulatory Solvency I position of ING Insurance business. The Insurance companies comply with their respective local regulatory requirement.
Shareholders’ equity (parent) 20,811 15,887 Hybrids issued by ING Group 2,094 3,410 Hybrids issued by ING Insurance 2,094 1,944 Required regulatory adjustments –4,094 –2,052 IGD capital 20,906 19,189
Group hybrid capital (1) 2,094 3,405 Insurance hybrid capital (2) 2,313 2,337 Total hybrids 4,407 5,742
External debt issued by ING Verzekeringen NV 3,347 3,508 External debt issued by US Holding companies 1,384 1,408 Other net financial debt (3) 2,273 –166 Total financial debt (4) 7,004 4,750
Tier 1 ratio (Bank) Year-end actual Tier 1 ratio 12.25% 10.23% Regulatory minimum Tier 1 ratio 4.00% 4.00% Target minimum Tier 1 ratio 10.00% 9.00%
ING Bank – short term A-1 P-1 F1+ – long term A+ stable Aa3 stable A+ stable – financial strength C+
Parent company balance sheet of ING Group as at 31 December before appropriation of result amounts in millions of euros 2010 2009
(1) Legal reserves includes Share of associates reserve of EUR 6,639 million (2009: EUR 1,985 million) and Currency translation reserve of EUR –939 million (2009: EUR –955 million).
References relate to the notes starting on page 260. These form an integral part of the parent company annual accounts.
Parent company statement of changes in equity of ING Group for the years ended 31 December amounts in millions of euros Share capital Share premium Non-voting equity securities
Unrealised revaluations after taxation 3,549 –72 3,477 Realised gains/losses transferred to profit and loss 86 86 Transfer to insurance liabilities/DAC –1,644 –1,644 Change in cash flow hedge reserve revaluations 475 475 Unrealised revaluations from net investment hedges –777 –777 Exchange rate differences 2,874 16 2,890 Total amount recognised directly in equity 4,563 16 –72 4,507
The profit and loss account has been drawn up in accordance with Section 402, Book 2, of the Dutch Civil Code.
ING Bank N.V. 34,451 30,211 ING Verzekeringen N.V. 20,785 15,880 Other 9 –85
Receivables from group companies 11,502 12,566 Other receivables, prepayments and accruals 463 558
Share capital 919 919 Share premium 16,034 16,034 Non-voting equity securities 5,000 5,000 Share of associates reserve 6,639 1,985 Currency translation reserve –939 –955 Other reserves 18,902 15,880
Share premium Changes in Share premium are disclosed in the Parent company statement of changes in equity of ING Group.
Notes to the parent company annual accounts of ING Group continued 262 ING Group Annual Report 2010 5 Parent company annual accounts
Debenture loans 6,571 6,545 Amounts owed to group companies 501 532 Other amounts owed and accrued liabilities 1,581 1,783 Derivatives from group companies 236 268
Within 1 year 25 More than 1 year but less than 5 years 30 More than 5 years 211 238
6 OTHER RESULTS AFTER TAXATION 2009 In order to obtain approval from the European Commission on ING Group’s Restructuring Plan, ING Group agreed in October 2009 to make additional Illiquid Assets Back-up Facility payments as part of the overall agreement with the European Commission to the Dutch State corresponding to an adjustment of the fees for the Illiquid Assets Back-up Facility. In total, these additional Illiquid Assets Back-up Facility payments as part of the overall agreement with the European Commission amounted to a net present value of EUR 1.3 billion pre-tax (EUR 930 million after tax), which was recognised as a one-off charge in the fourth quarter of 2009 for ING Groep N.V.(parent company). Reference is made to Note 33 ‘Related parties’ in the consolidated annual accounts.
Opinion with respect to the consolidated annual accounts In our opinion, the consolidated annual accounts give a true and fair view of the financial position of ING Groep N.V. as at 31 December 2010 and of its result and its cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union and with Part 9 of Book 2 of the Dutch Civil Code.
SUBSEQUENT EVENTS ING changed its accounting policy for the insurance provisions for Guaranteed Minimum Withdrawal Benefits for Life (GMWBL) in the Insurance US Closed Block VA book as of 1 January 2011 in order to better reflect the economic value of guarantees. Reference is made to section ‘Subsequent events’ in the consolidated annual accounts.
On 11 March 2011 a severe earthquake and tsunami struck Japan. While ING does not have any non-life operations in Japan, ING has life insurance, asset management and banking businesses in Japan. The life insurance business sold primarily two product types: Single Premium Variable Annuities (SPVA, closed for new business in 2009) and Corporate Owned Life Insurance (COLI). ING’s financial position may be impacted by these events and any related developments, including through (but not limited to) death and health-related claims, policyholder behaviour, re-insurance coverage, investment losses and impact from general market developments. As of the date of this Annual Report, the full impact of these catastrophic events was not yet known and, therefore, it is too early to determine the impact of these events on ING.
Factors such as interest rates, securities prices, credit spreads, liquidity spreads, exchange rates, consumer spending, business investment, real estate and private equity valuations, government spending, inflation, the volatility and strength of the capital markets, political events and trends, and terrorism all impact the business and economic environment and, ultimately, the amount and profitability of business we conduct in a specific geographic region. In an economic downturn characterised by higher unemployment, lower family income, lower corporate earnings, higher corporate and private debt defaults, lower business investments, and lower consumer spending, the demand for banking and insurance products is usually adversely affected and ING’s reserves and provisions typically would increase, resulting in overall lower earnings. Securities prices, real estate values and private equity valuations may also be adversely impacted, and any such losses would be realised through profit and loss and shareholders’ equity. Some insurance products contain minimum return or accumulation guarantees. If returns do not meet or exceed the guarantee levels we may need to set up additional reserves to fund these future guaranteed benefits. In addition, we may experience an elevated incidence of claims and lapses or surrenders of policies. Our policyholders may choose to defer paying insurance premiums or stop paying insurance premiums altogether. Similarly, a downturn in the equity markets causes a reduction in commission income we earn from managing portfolios for third parties, income generated from our own proprietary portfolios, asset-based fee income on certain insurance products, and our capital base. We also offer a number of insurance and financial products that expose us to risks associated with fluctuations in interest rates, securities prices, corporate and private default rates, the value of real estate assets, exchange rates and credit spreads. See also ‘– Interest rate volatility may adversely affect our profitability’, ‘–Turbulence and volatility in the financial markets have adversely affected us, and may continue to do so’, and ‘–Current market conditions have increased the risk of loans being impaired. We are exposed to declining property values on the collateral supporting residential and commercial real estate lending’ below.
In case one or more of the factors mentioned above adversely affects the profitability of our business this might also result, among others, in the following: • the unlocking of deferred acquisition costs impacting earnings; and/or • reserve inadequacies which could ultimately be realised through profit and loss and shareholders’ equity; and/or • the write down of tax assets impacting net results; and/or • impairment expenses related to goodwill and other intangible assets, impacting net results; and/or • movements in Risk Weighted Assets for the determination of required capital.
Shareholders’ equity and our net result may significantly be impacted by turmoil and volatility in the worldwide financial markets. Negative developments in financial markets and/or economies may have a material adverse impact on shareholders’ equity and net result in future periods, including as a result of the potential consequences listed above. The recalibration we have conducted of our economic capital models to reflect difficult market conditions experienced over recent years may have a material impact on our economic capital for credit risk. See ‘Risks Related to the Group – Turbulence and volatility in the financial markets have adversely affected us, and may continue to do so’.
Disruptions, uncertainty or volatility in the capital and credit markets, such as that experienced over the past few years and in the second half of 2008 in particular, may also limit our access to capital required to operate our business. Such market conditions may in the future limit our ability to raise additional capital to support business growth, or to counter-balance the consequences of losses or increased regulatory capital requirements. This could force us to (1) delay raising capital, (2) reduce, cancel or postpone payment of dividends on our shares, (3) reduce, cancel or postpone interest payments on other securities, (4) issue capital of different types or under different terms than we would otherwise, or (5) incur a higher cost of capital than in a more stable market environment. This would have the potential to decrease both our profitability and our financial flexibility. Our results of operations, financial condition, cash flows and regulatory capital position could be materially adversely affected by disruptions in the financial markets.
The default of a major market participant could disrupt the markets. Within the financial services industry the default of any one institution could lead to defaults by other institutions. The failure of a sufficiently large and influential institution could disrupt securities markets or clearance and settlement systems in our markets. This could cause market declines or volatility. Such a failure could lead to a chain of defaults that could adversely affect us and our contract counterparties. Concerns about, or a default by, one institution could lead to significant liquidity problems, losses or defaults by other institutions, because the commercial and financial soundness of many financial institutions may be closely related as a result of their credit, trading, clearing or other relationships. Even the perceived lack of creditworthiness of, or questions about, a counterparty may lead to market-wide liquidity problems and losses or defaults by us or by other institutions. This risk is sometimes referred to as ‘systemic risk’ and may adversely affect financial intermediaries, such as clearing agencies, clearing houses, banks, securities firms and exchanges with whom we interact on a daily basis. Systemic risk could have a material adverse effect on our ability to raise new funding and on our business, financial condition, results of operations, liquidity and/or prospects. In addition, such a failure could impact future product sales as a potential result of reduced confidence in the financial services industry.
Because our life and non-life insurance and reinsurance businesses are subject to losses from unforeseeable and/or catastrophic events, which are inherently unpredictable, our actual claims amount may exceed our established reserves or we may experience an abrupt interruption of activities, each of which could result in lower net results and have an adverse effect on our results of operations. In our life and non-life insurance and reinsurance businesses, we are subject to losses from natural and man-made catastrophic events. Such events include, without limitation, weather and other natural catastrophes such as hurricanes, floods, earthquakes and epidemics that may be more severe or difficult to predict as a result of increasingly variable climate conditions, as well as events such as terrorist attacks and political and social unrest.
In addition, the Basel Committee on Banking Supervision has announced higher global minimum capital standards for banks, introduced a new global liquidity standard and called for a new leverage ratio. The Committee’s package of reforms, collectively referred to as the ‘Basel III’ rules, will, among other requirements, increase amount of common equity required to be held by subject banking institutions, prescribe the amount of liquid assets a subject banking institution must hold at a given moment, and limit leverage. Banks will be required to hold a ‘capital conservation buffer’ to withstand future periods of stress such that the total Tier 1 common equity ratio, when fully phased in on 1 January 2019, will rise to 7%. Further, Basel III calls for stricter definitions of capital that will have the effect of disqualifying many hybrid securities, potentially including those issued by the Group, from inclusion in regulatory capital, as well as the higher capital requirements for trading, derivative and securitisation activities to be introduced at the end of 2011 as part of a number of reforms to the Basel II framework. In addition, the Basel Committee and Financial Stability Board (FSB) are currently considering measures that may have the effect of requiring higher loss absorbency capacity, liquidity surcharges, exposure limits and special resolution regimes for ‘systemically important financial institutions’ (SIFIs) and so-called ‘Global’ SIFIs (G-SIFI), in addition to the Basel III requirements otherwise applicable to most financial institutions. While the full impact of the new Basel III rules, and any additional requirements for SIFIs or G-SIFIs if and as applicable to the Group, will depend on how they are implemented by national regulators, including the extent to which regulators and supervisors can set more stringent limits and additional capital requirements or surcharges, as well as on the economic and financial environment at the time of implementation and beyond, we expect these rules can have a material impact on ING’s operations and financial condition and may require the Group to seek additional capital. Further, the International Accounting Standards Board (‘IASB’) is considering changes to several IFRS standards, which changes could also have a material impact on our reported results and financial condition.
• Title II of Dodd−Frank provides that a financial company may be subject to a special orderly liquidation process outside the federal bankruptcy code, administered by the Federal Deposit Insurance Corporation as receiver, upon a determination that the company is in default or in danger of default and presents a systemic risk to US financial stability.
We cannot predict whether or when future legislative or regulatory actions may be taken, or what impact, if any, actions taken to date or in the future could have on our business, results of operations and financial condition.
Risk factors continued 272 ING Group Annual Report 2010 7 Additional information
Because we do business with many counterparties, the inability of these counterparties to meet their financial obligations could have a material adverse effect on our results of operations. General Third-parties that owe us money, securities or other assets may not pay or perform under their obligations. These parties include the issuers whose securities we hold, borrowers under loans originated, customers, trading counterparties, counterparties under swaps, credit default and other derivative contracts, clearing agents, exchanges, clearing houses and other financial intermediaries. Defaults by one or more of these parties on their obligations to us due to bankruptcy, lack of liquidity, downturns in the economy or real estate values, operational failure, etc., or even rumours about potential defaults by one or more of these parties or regarding the financial services industry generally, could lead to losses for us, and defaults by other institutions. In light of experiences with significant constraints on liquidity and high cost of funds in the interbank lending market, and given the high level of interdependence between financial institutions, we are and will continue to be subject to the risk of deterioration of the commercial and financial soundness, or perceived soundness, of other financial services institutions. This is particularly relevant to our franchise as an important and large counterparty in equity, fixed-income and foreign exchange markets, including related derivatives, which exposes it to concentration risk.
With respect to secured transactions, our credit risk may be exacerbated when the collateral held by us cannot be realised, or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure due us. We also have exposure to a number of financial institutions in the form of unsecured debt instruments, derivative transactions and equity investments. For example, we hold certain hybrid regulatory capital instruments issued by financial institutions which permit the issuer to defer coupon payments on the
Interest rate volatility may adversely affect our profitability. Changes in prevailing interest rates may negatively affect our business including the level of net interest revenue we earn, and for our banking business the levels of deposits and the demand for loans. In a period of changing interest rates, interest expense may increase at different rates than the interest earned on assets. Accordingly, changes in interest rates could decrease net interest revenue. Changes in the interest rates may negatively affect the value of our assets and our ability to realise gains or avoid losses from the sale of those assets, all of which also ultimately affect earnings. In addition, an increase in interest rates may decrease the demand for loans.
Conversely, in periods of rapidly increasing interest rates, policy loans, and withdrawals and surrenders of life insurance policies and fixed annuity contracts may increase as policyholders choose to forego insurance protection and seek higher investment returns. Obtaining cash
to satisfy these obligations may require us to liquidate fixed maturity investments at a time when market prices for those assets are depressed because of increases in interest rates. This may result in realised investment losses. Regardless of whether we realise an investment loss, these cash payments would result in a decrease in total invested assets, and may decrease our net income. Premature withdrawals may also cause us to accelerate amortisation of deferred policy acquisition costs, which would also reduce our net income.
Risk factors continued 276 ING Group Annual Report 2010 7 Additional information
In addition, in the context of certain property & casualty risks underwritten by our insurance subsidiaries (particularly ‘long-tail’ risks), a sustained increase in inflation with a resulting increase in market interest rates may result in (1) claims inflation (i.e., an increase in the amount ultimately paid to settle claims several years after the policy coverage period or event giving rise to the claim), coupled with (2) an underestimation of corresponding claims reserves at the time of establishment due to a failure to fully anticipate increased inflation and its effect on the amounts ultimately payable to policyholders, and, consequently, (3) actual claims payments significantly exceeding associated insurance reserves which would negatively impact our results of operations. In addition, a failure to accurately anticipate higher inflation and factor it into our product pricing assumptions may result in a systemic mispricing of our products resulting in underwriting losses which would negatively impact our results of operations.
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. In November 2008 the Dutch State purchased the Core Tier 1 Securities, and in the first quarter of 2009 we entered into the Illiquid Asset Back-up Facility (IABF) with the Dutch State. As a result of having received state aid through the Dutch State Transactions, we were required to submit a restructuring plan (the ‘Restructuring Plan’) to the EC in connection with obtaining final approval for the Dutch State Transactions under the EC state aid rules. On 26 October 2009, we announced our Restructuring Plan, pursuant to which we are required to divest by the end of 2013 all of our insurance business, including the investment management business, as well as ING Direct US, which operates our direct banking business in the United States, and certain portions of our retail banking business in the Netherlands. The EC’s approval of the Restructuring Plan was issued on 18 November 2009. On 28 January 2010 ING lodged an appeal with the General Court of the European Union (the ‘General Court’) against specific elements of the EC’s decision regarding the Restructuring Plan. Although we believe in the merit of our appeal lodged with the General Court of the European Union, there can be no assurance as to its success or as to any consequences resulting from its rejection. Notwithstanding this appeal, we are committed executing the Restructuring Plan as announced on 26 October 2009.
Risk factors continued 278 ING Group Annual Report 2010 7 Additional information