Stress Testing ING Insurance EurAsia complements its regular risk reporting process for financial and non-financial risks with (ad hoc) stress tests. Stress testing examines the effect of exceptional but plausible scenarios on the capital position of ING Insurance EurAsia. Stress testing can be initiated internally or by external parties such as the Dutch Central Bank (De Nederlandsche Bank - DNB) and the European Insurance and Occupational Pensions Authority (EIOPA).
As reported for ING Insurance EurAsia in 2011 10.3 Exclude ING Insurance Asia Pacific discontinued operation –3.8 ING Insurance EurAsia excluding discontinued operation 6.5 Change in models and methodology –0.9 ING Insurance EurAsia 2011 excluding discontinued operation, on a basis comparable to 2012 5.6
(1) Corporate Line Insurance EurAsia includes funding activities at ING Insurance EurAsia level, Capital Management transactions and corporate reinsurance.
Economic Capital for ING Insurance EurAsia increased from 2011 to 2012 primarily due to increases in insurance and business risk, partly offset by significant de-risking activities in the Benelux and overall lower market valuations leading to a lower market risk. The decrease in credit default risk due to a methodology change was offset by a lower diversification of this risk with other risk categories. The Economic Capital assigned to Corporate Line Insurance EurAsia primarily relates to foreign exchange translation risk of the market value surplus of the business units in non-euro countries to the euro.
Morbidity Morbidity or Health insurance covers insurance indemnifying or reimbursing losses (e.g. loss of income) caused by illness or disability, or for expenses of medical treatment necessitated by illness or disability.
Mitigation In general, insurance risks cannot be (easily) hedged directly via the financial markets and are partially mitigated by diversification across large portfolios. They are therefore managed at the contract level through underwriting policies, product design requirements, independent product approval processes and risk limitations related to insurance policy terms and conditions agreed with the client.
Economic Capital increased mainly due to an increase in persistency risk and to a lesser degree a higher expense risk, as a result of further alignment to the Solvency II regulatory framework.
Model disclosure The following table shows the main risk categories for market risk within ING Insurance EurAsia. The EC number is based on a 99.5% confidence interval on a one-year horizon. IFRS and AFR sensitivities measurement is described in the table below.
IFRS Earnings, AFR & EC: Direct equity exposure and embedded options in guaranteed separate account pension business in the Netherlands.
IFRS Earnings, AFR & EC: Translation risk of IFRS Earnings and AFR from non-euro businesses.
Impact of losses on assets and liabilities due to movements in the volatility implied from market option prices.
AFR & IFRS earnings sensitivities: – For interest rate measured by the impact of a relative increase of 30%
Credit Spread Impact of an increase in credit spreads on investments in fixed income securities offset by movements in the liquidity premium on the liabilities.
AFR & IFRS earnings sensitivities: – Measured by the impact of a relative increase based on multiplying duration by a rating based shock (e.g. single A shock is 110 basis points).
– Liquidity premium is shocked by 50 basis points up to a certain tenor depending on the currency (e.g. EURO 15 years, USD 30 years).
– For IFRS Earnings this is measured by the impact of a 15% drop in real estate prices only for the minority holdings and direct for all real estate revalued through P&L. Other holdings will be included in case of possible impairments caused by the drop in prices.
IFRS Earnings, AFR & EC: Real estate holdings in the Benelux.
ING Insurance EurAsia has two different categories of real estate exposure on its insurance books. First, ING Insurance EurAsia owns buildings it occupies. Second, ING Insurance EurAsia has invested capital in several real estate funds and direct real estate assets. A decrease in real estate prices will cause the value of this capital to decrease and as such ING Insurance is exposed to real estate price shocks.
The third source of credit risk is the claims on counterparties from OTC derivatives, money market lending and reinsurance.
IFRS earnings sensitivities (1): – Measured by the impact of multiplying the Historical Cost, the
(1) Based on lending, pre-settlement, money market and investment activities. The ratings reflect probabilities of default and are based on ultimate parent. Collateral is not taken into consideration.
The changes in the ING Insurance EurAsia rating class distribution over 2012, as reflected in the table above, were mainly caused by the following events: in January 2012, S&P downgraded 9 European sovereigns, among which France and Austria (from AAA to AA+), Spain (from AA– to A) and Italy (from A to BBB+). Spain was later further downgraded to BBB+ (in April) and in October, to BBB–. In addition, EUR 750 million (historical cost value) of equities was sold in 2012 as an active derisking measure by Insurance Benelux and reinvested in high-quality (mainly sovereign) bonds. The above-mentioned changes explain the decreases in the AAA and A buckets, and the significant increases in the AA and BBB buckets. Part of the decrease in the AAA bucket by the above-mentioned downgrades was offset by derisking measures (such as the above-mentioned reduction of equity exposure) which led to (re)investments in highly-rated sovereigns such as Germany, the Netherlands, Finland (all AAA).
The main changes in 2012 are the increase in central governments exposure as a result of derisking into higher-rated governments, and the decrease of exposure on non-bank financial institutions.
(1) Country is based on the country of incorporation of the ultimate parents of issuers/borrowers, all types of issuers/borrowers are included. (2) Other GIIPS countries (31 December 2012 compared to 31 December 2011): Ireland (1.1%, from 1.7%), Portugal (0.2%, from 0.5%), Greece (0.3%, from
From a geographic perspective the main changes are driven by derisking activities through sales and redemptions (GIIPS countries, Netherlands) and re-allocating to low-risk investments (Germany, Austria, Finland). For the Netherlands this contains swapping credit into sovereign exposure. New investments were done in Americas.
Credit and Counterparty Risk Mitigation ING Insurance EurAsia uses different credit risk mitigation techniques. For OTC derivatives, the use of ISDA Master Agreements accompanied with Credit Support Annexes is an important example. For retail lending portfolio’s – mortgages on the house and pledges of insurance policies or investment accounts of clients are important elements of credit risk mitigation. Other forms of credit risk mitigation include reinsurance collateral.
Total outstanding amount Mortgages (2) Other covers Total covers Asset categories
Retail mortgage loan portfolio’s: past-due obligations and problem loans The following table illustrates the amount of loans in (payment) arrears for the retail mortgage loan portfolio.
In 2012, EUR 66 million of the total retail mortgage loan portfolios was classified as a problem loan (Q4 2011: EUR 60 million) which is a combination of rating and past dues.
To ensure an independent Operational Risk function and the possibility for the Operational Risk officers to be impartial and objective when advising business management on Operational Risk in their Business Unit and Region, a dual reporting line, directly to Chief Risk Officer of their business and functionally to the next higher level Operational Risk Officer, is in place. The head of Operational Risk ultimately reports directly to the Deputy Chief Risk Officer.
ING Insurance EurAsia separates Compliance Risk into four conduct-related integrity risk areas: client conduct, personal conduct, organisational conduct as well as conduct required because of laws and regulations in the financial services industry. In addition to effective reporting systems, ING Insurance EurAsia has a Whistleblower procedure which encourages staff to speak up if they know of or suspect a breach of external regulations or internal policies or Business Principles.
ING Insurance EurAsia has a policy not to enter into new relationships with clients from internationally sanctioned countries and processes remain in place to discontinue existing relationships involving these countries.
ING Insurance EurAsia performs a due diligence process when developing products and invests considerably in the maintenance of risk management, legal and compliance procedures to monitor current sales practices. Customer protection regulations as well as changes in interpretation and perception by both the public at large and governmental authorities of acceptable market practices might influence client expectations. The risk of potential reputational and financial impact from products and sales practices exists because of the market situation, customer expectations, reported incidents and regulatory activity. As part of ING Insurance EurAsia’s customer centric commitment, Compliance Risk Management and the business work closely together to optimise both products and services to meet the customers’ needs.
 Addresses balance sheet management, statutory capital requirements, and liquidity needs and recommends to the US Risk Committee.
– Product Committee  Oversees insurance product risk issues across ING US.  Provides guidance and best practices through the product development and approval process.
The ING US CRO’s department consists of corporate and business unit risk functions that support the ING US’s risk management activities. The business unit CROs report to the ING US CRO. The Corporate Enterprise Risk Management (ERM) function addresses all risks facing ING US It is an independent function that enables a clear separation of duties between Risk, Finance and Investment. ERM facilitates information flow across the enterprise by providing formal checkpoints and forums where risk issues are discussed and informed decisions made. ERM enables risk measurement and analysis into corporate decision-making.
Model governance Model governance is achieved through the ING US Model Committee. This committee provides oversight for models and assumptions owned or managed within the corporate functions and acts as an escalation point for models or related changes that have a financial impact over a set materiality threshold.
Risk Appetite A qualitative measure defining the playing field ING US wants to act in. Driven by ING US’s financial and rating targets, local capital requirements, and business strategy.
Risk exposures are managed by ING US according to the following risk metrics, and limits are set on these metrics that are consistent with the organisation’s risk tolerance. These risk metrics are computed on the basis of market and non-market sensitivities of two primary financial quantities: • US Regulatory Capital Requirements - Defined as a multiple of the minimum capital required by the National Association of Insurance
The table below shows the main risk categories for insurance risks within ING US. IFRS Earnings sensitivities are defined on a shock scenario at the 90% confidence level.
Morbidity Morbidity or Health insurance covers insurance indemnifying or reimbursing losses (e.g. loss of income) caused by illness or disability, or for expenses of medical treatment necessitated by illness or disability. Morbidity risk comprises the risk of variability of size, frequency and time to payment of future claims, development of outstanding claims and allocated loss adjustment expenses (ALAE) for morbidity product lines over the remaining contract period.
The sensitivities shown are calculated at the business unit level and cover US domiciled insurance entities. The sensitivities are based on moderately adverse shocks to underlying risk factors as described in the following table: Description Key Drivers
ING US has no significant earnings sensitivity to Foreign Exchange Rates as ING US is managed on a local currency basis and therefore there is no translation risk to the Group reporting currency included in the sensitivities. ING US also has no significant earnings exposure to non-US currencies. From the ING Group perspective, there may be translation risk between ING US USD based operations and ING Group EUR basis.
(1) FX and real estate sensitivities do not have a material impact. (2) Sensitivities are calculated at business unit level.
Mitigation ING US manages its risk exposure through contractual adjustment mechanisms such as changes to credited rates, the contractual terms related to new business, adjusting its capital structure within regulatory constraints, and, where deemed appropriate, hedging various exposures.
Risk Profile Risk classes The exposure to the investment grade rating qualities increased in 2012 and the exposure to the below investment grade rating qualities decreased, pointing at an improvement in the overall quality of the credit risk portfolio. The 17–22 category largely consists of unrated exposures. The exposure to assets actually rated CCC or below has further reduced in 2012 and is only 2% of the portfolio per 31 December 2012.
Risk appetite is defined as the risk level management is prepared to tolerate. The operational risk appetite levels are set by ING Group in the form of a risk footprint. Via Operational Risk Committees (ORCs) it is ensured that responsible line managers mitigate the risks that are not within the risk appetite. Incidents and operational risks are tracked and on a quarterly basis reported to management in the NonFinancial Risk Dashboard.
Integrated risk assessments are performed on an ongoing basis across the organisation. Mitigating actions are taken for those risks that are identified as risks beyond the risk appetite level. Status of the mitigating actions is formally tracked.
COMPLIANCE RISK The ING US Compliance program and function are aligned with ING Group’s Compliance Risk Management Charter and Framework and the related processes described elsewhere in this Report.
The sensitivities shown are calculated at the business unit level and cover US domiciled insurance entities. The sensitivities are based on moderate shocks to the following underlying risk factors: • Interest rates; • Equity; • Credit (credit default and credit spread risk); • Foreign exchange; • Real estate.
Interest Rate Up –23 2 258 24 Interest Rate Down –24 –50 –246 –226 Equity –82 –149 –129 –17 Credit – Default –240 –272 –6 –8 Credit – Spread (3) –462 –475 –19 –21 Mortality (4) –19 –15 –1 –4 Morbidity (4) –32 –32
• AFR (ING Insurance EurAsia excluding discontinued operations) –This is a pre-tax market value concept, defined for the insurance operations of ING Insurance EurAsia as the market value of assets (MVA) less the market value of liabilities (MVL) on the balance sheet. The liabilities do not include perpetual hybrid capital which is included in AFR. The AFR valuation of ING Insurance EurAsia includes an adjustment for liquidity premium. The AFR for third party pension funds is set equal to the statutory net equity. AFR is used as the measure of available capital in comparison with Economic Capital employed.
• Financial Leverage (ING Insurance). Financial Leverage is the sum of hybrid capital, sub-debt and net financial debt.
DEVELOPMENTS In 2012 Capital Management’s main focus remained the strengthening of the capital position of ING Group, ING Bank and ING Insurance. ING’s capital is well placed to deal with the uncertain financial environment, increasing regulatory requirements and the ambition to repay the remaining outstanding Core Tier 1 securities.
In November 2012, ING repaid EUR 750 million of the Core Tier 1 securities issued in November 2008 at a 50% premium. Nevertheless ING maintained a strong capital position, driven mainly by strong capital generation at ING Bank.
In December 2012, ING Verzekeringen N.V. redeemed a EUR 1.25 billion hybrid security. This security had a Change of Control clause that would be triggered by the divestment of Insurance Asia.
In 2012 ING Bank issued a total of EUR 33 billion of debt with an original tenor of more than one year, compared with EUR 18 billion of long-term debt maturing in the whole of 2012, successfully covering its 2012 funding needs and prefunding its 2013 requirements. ING Bank (including subsidiaries) has EUR 21 billion of debt with an original tenor of more than one year maturing in 2013.
CAPITAL ADEQUACY ASSESSMENT During 2012, ING Group, ING Bank and ING Insurance were adequately capitalised.
Adjustments to equity: Revaluation reserve debt securities –10,516 –4,142 –1,265 213 Revaluation reserve crediting to life policyholders 5,673 3,492 Revaluation reserve cash flow hedge –2,689 –1,970 761 822 –3,548 –2,883 Goodwill (3) –1,431 –2,006 –1,242 –1,390 –351 –786
(5) Qualifying dated subordinated debt issued by ING Insurance at nominal value. (6) Consists of EUR 8,132 million (2011: EUR 9,516 million) Tier 2 capital and no Tier 3 (2011: nil), offset by EUR 991 million (2011: EUR 1,014 million) of regulatory deductions.
REGULATORY REQUIREMENTS ING BANk Capital adequacy and the use of regulatory required capital are based on the guidelines developed by the Basel Committee on Banking Supervision (The Basel Committee) and the European Union Directives, as implemented by the Dutch Central Bank (DNB) for supervisory purposes. The minimum Tier 1 ratio is 4% and the minimum total capital ratio (known as the BIS ratio) is 8% of all risk-weighted assets.
Subordinated loans qualifying as Tier 1 capital (2) 6,774 6,850 Goodwill and intangibles deductible from Tier 1 (1) –1,242 –1,390 Deductions Tier 1 (3) –991 –1,014 Revaluation reserve (4) –2,195 –1,008 Available capital – Tier 1 39,975 38,622
Required capital based on Basel I floor (6) 28,767 31,107 BIS ratio based on Basel I floor (6) 13.10% 12.12%
(5) Includes eligible lower Tier 2 loans and revaluation reserves equity and real estate revaluations removed from Tier 1 capital. (6) Using 80% of Basel I Risk-Weighted Assets.
- Tax on shortfall –250 –300 Net shortfall provisions 1,085 1,145 Insurance entities >10% 28 24 Financial institutions >10% 868 854 Securitisation first loss 0 6 Total deductions Basel II 1,981 2,029 50% deductions Basel II 991 1,014
Shareholders’ equity (parent) 27,299 23,475 Hybrids issued by ING Group (1) 2,438 2,604 Hybrids issued by ING Insurance (2) 476 1,726 Required regulatory adjustments –6,891 –6,399 IGD capital 23,322 21,406
For ING Insurance EurAsia, Available Financial Resources (AFR) continues to be important, especially as an evolving proxy for the Own Funds derivation from our internal model under Solvency II. The following table presents the reconciliation from the 2011 AFR and EC for ING Insurance EurAsia as reported in the Annual Report 2011, to the comparable basis for ING Insurance EurAsia 2012. This reflects changes in scope and methodology. For the remainder of this paragraph AFR and EC on a comparable basis to 2012 are used.
As reported for ING Insurance EurAsia in 2011 (1) 17.3 10.3 Difference compared to the 2011 risk paragraph – –0.2 Exclude ING Insurance Asia Pacific discontinued business –6.9 –3.8 ING Insurance EurAsia excluding discontinued business 10.4 6.5 Change in models and methodology – –0.9 ING Insurance EurAsia 2011 excluding discontinued business, on a basis comparable to 2012 10.4 5.6
The exclusion of ING Insurance Asia Pacific entities relates to all business units in Asia Pacific, ING’s Insurance and investment management businesses and the reinsured Japan VA guarantees to ING Re (Netherlands) N.V. that have been classified as discontinued operations and that were considered in last year’s AFR and EC amounts. Reference is made to Note 26 ‘Discontinued operations’.
BIS capital 47,116 47,123 IGD capital 23,322 21,406 Group leverage (core debt) –7,100 –7,917 Regulatory capital 63,339 60,612
Core Tier 1 ratio (Bank) Year-end actual Tier 1 ratio 11.91% 9.62% Regulatory minimum Tier 1 ratio 2.00% 2.00% Target minimum Tier 1 ratio 10.00% 10.00%
Tier 1 ratio (Bank) Year-end actual Tier 1 ratio 14.35% 11.69% Regulatory minimum Tier 1 ratio 4.00% 4.00% Target minimum Tier 1 ratio 10.00% 10.00%
Insurance Groups Directive Year-end actual Capital coverage ratio 245% 225% Required capital 100% 100% Target ratio 150% 150%
(1) Legal reserves includes Share of associates reserve of EUR 12,377 million (2011: EUR 8,100 million) and Currency translation reserve of EUR –963 million (2011: EUR –942 million).
Parent company profit and loss account of ING Groep N.V. for the years ended 31 December 313ING Group Annual Report 2012 1 W h o w e are 2 R
Unrealised revaluations after taxation 921 224 1,145 Realised gains/losses transferred to profit and loss 723 723 Transfer to insurance liabilities/DAC –2,004 –2,004 Change in cash flow hedge reserve 1,124 1,124 Unrealised revaluations from net investment hedges 167 167 Exchange rate differences –150 –3 –153 Total amount recognised directly in equity 781 –3 224 1,002
BASIS OF PRESENTATION The parent company accounts of ING Groep N.V. are prepared in accordance with the financial reporting requirements included in Part 9 of Book 2, of the Dutch Civil Code. The accounting policies applicable to presentation and disclosures are in accordance with the financial reporting requirements included in Part 9 of Book 2, of the Dutch Civil Code. The principles of valuation and determination of results stated in connection with the consolidated balance sheet and profit and loss account are also applicable to the parent company balance sheet and profit and loss account with the exception of Investments in group companies and investments in associates which are recognised at net asset value with goodwill, if any, recorded under intangible assets.
A list containing the information referred to in Section 379 (1), Book 2, of the Dutch Civil Code has been filed with the office of the Commercial Register of Amsterdam, in accordance with Section 379 (5), Book 2, of the Dutch Civil Code.
Changes in ING Groep N.V. shares held by group companies 5 –4 Closing balance 64,117 57,949 2 OTHER ASSETS
The Share of associates reserve includes the following components: Reserve for non-distributable retained earnings of associates of EUR 1,866 million (2011: EUR 1,573 million) and Revaluation reserve of associates of EUR 10,511 million (2011: EUR 6,527 million).
Notes to the parent company annual accounts of ING Groep N.V. amounts in millions of euros, unless stated otherwise 316 ING Group Annual Report 2012
No changes occurred in the issued share capital and share premium in 2012 and 2011.
Result for the year 5,766 5,766 Unrealised revaluations after taxation 224 224 224 Changes in treasury shares 50 50 50 Transfer to share of associates reserve –1,000 –1,000 –1,000 Transfer to retained earnings –706 –706 –706 Employee stock option and share plans 2,810 2,810 –2,810 Other –59 –59 –59
Notes to the parent company annual accounts of ING Groep N.V. continued 317ING Group Annual Report 2012 1 W h o w e are 2 R
The Subordinated loans rank subordinated to the Other liabilities in a winding-up of ING Group.
Debenture loans 6,837 5,500 Amounts owed to group companies 2,250 2,716 Other amounts owed and accrued liabilities 1,001 1,103 Derivatives from group companies 122 153
The number of debentures held by group companies as at 31 December 2012 is 57,860 with a balance sheet value of EUR 8 million (2011: 369,160 with a balance sheet value of EUR 35 million).
The interest rate on the Amounts owed to group companies as at 31 December 2012 is 1.282% (2011: 1.896%).
THE SUPERVISORY BOARD THE EXECUTIVE BOARD J. van der Veer, chairman J.H.M. Hommen, CEO and chairman P.A.F.W. Elverding, vice-chairman P.G. Flynn, CFO J.P. Bahlmann W.F. Nagel, CRO H.W. Breukink J.H. Holsboer S. van Keulen P.C. Klaver J.Ch.L. Kuiper R.W.P. Reibestein Y.C.M.T. van Rooy L.A.C.P. Vandewalle L.J. de Waal
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 2012 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.
In case one or more of the factors mentioned above adversely affects the profitability of our business, this might also result, among other things, in the following: • the unlocking of deferred acquisition costs (‘DAC’) impacting earnings; • reserve inadequacies which could ultimately be realised through profit and loss and shareholders’ equity; • the write-down of tax assets impacting net results; • impairment expenses related to goodwill and other intangible assets, impacting net results; • movements in risk weighted assets for the determination of required capital; • changes in credit valuation adjustments and debt valuation adjustments; and/or • additional costs related to maintenance of higher liquidity buffers.
We need liquidity in our day-to-day business activities to pay our operating expenses, interest on our debt and dividends on our capital stock, maintain our securities lending activities and replace certain maturing liabilities. Without sufficient liquidity, we will be forced to curtail our operations and our business will suffer. The principal sources of our funding are deposit funds, insurance premiums, annuity considerations and cash flow from our investment portfolio and assets, consisting mainly of cash or assets that are readily convertible into cash. Sources of funding in normal markets may also include a variety of short- and long-term instruments, including repurchase agreements, commercial paper, medium-and long-term debt, subordinated debt securities, capital securities and stockholders’ equity.
In the event current resources do not satisfy our needs, we may need to seek additional financing. The availability of additional financing will depend on a variety of factors such as market conditions, the general availability of credit, the volume of trading activities, the overall availability of credit to the financial services industry, our credit ratings and credit capacity, as well as the possibility that customers or
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 variable climate conditions, as well as man-made disasters and core infrastructure failures such as acts of terrorism, military actions, power grid and telephone/internet infrastructure failures and political and social unrest.
We operate in highly regulated industries. There could be an adverse change or increase in the financial services laws and/or regulations governing our business. We are subject to detailed banking, insurance, asset management and other financial services laws and government regulation in the jurisdictions in which we conduct business. Regulatory agencies have broad administrative power over many aspects of the financial services business, which may include liquidity, capital adequacy and permitted investments, ethical issues, anti-money laundering, anti-terrorism measures, privacy, recordkeeping, product and sale suitability, and marketing and sales practices, remuneration policies and our own internal governance practices. Banking, insurance and other financial services laws, regulations and policies currently governing us and our subsidiaries may also change at any time and in ways which have an adverse effect on our business, and it is difficult to predict the timing or form of any future regulatory or enforcement initiatives in respect thereof. Also, regulators and other supervisory authorities in the EU, the U.S. and elsewhere continue to scrutinise payment processing and other transactions and activities of the financial services industry under regulations governing such matters as money-laundering, prohibited transactions with countries subject to sanctions, and bribery or other anti-corruption measures. Regulation is becoming increasingly more extensive and complex and regulators are focusing increased scrutiny on the industries in which we operate, often requiring additional Company resources. These regulations can serve to limit our activities, including through our net capital, customer protection and market conduct requirements, and restrictions on businesses in which we can operate or invest. If we fail to address, or appear to fail to address, appropriately any of these matters, our reputation could be harmed and we could be subject to additional legal risk, which could, in turn, increase the size and number of claims and damages asserted against us or subject us to enforcement actions, fines and penalties.
In light of current conditions in the global financial markets and the global economy, regulators have increased their focus on the regulation of the financial services industry. Most of the principal markets where we conduct our business have adopted, or are currently considering, major legislative and/or regulatory initiatives in response to the financial crisis. Governmental and regulatory authorities in the Netherlands, the United Kingdom, the United States and elsewhere are implementing measures to increase regulatory control in their respective financial markets and financial services sectors, including in the areas of prudential rules, capital requirements, executive compensation, crisis and contingency management, bank levies and financial reporting, among others. Additionally, governmental and regulatory authorities in the Netherlands as well as in a multitude of jurisdictions continue to consider new mechanisms to limit the occurrence and/or severity of future economic crises (including proposals to restrict the size of financial institutions operating in their jurisdictions and/or the scope of operations of such institutions). In December 2012, EU leaders agreed on setting up a Single Supervisory Mechanism (‘SSM’), a mechanism composed of national competent authorities and the European Central Bank (‘ECB’), as part of the prospective EU banking union. In the SSM, it is expected that the ECB will assume direct responsibility for a significant part of the prudential supervision of ING Bank and its holding company ING Group. The SSM is envisaged to take effect by 1 March 2014 or one year after the Regulation has entered into force and is designed for countries within the Eurozone, with the possibility of non-Eurozone member states to participate by means of close cooperation. While it is at this stage difficult to identify what the exact impact will be on ING Bank and ING Group, it is expected that the SSM will have a significant impact on the way ING’s banking operations are supervised in Europe.
Furthermore, we are subject to different tax regulations in each of the jurisdictions where we conduct business. Changes in tax laws could increase our taxes and our effective tax rates. Furthermore, legislative changes could materially impact our tax receivables and liabilities as well as deferred tax assets and deferred tax liabilities which could have a material adverse effect on our business, results of operations and financial condition. One such change relates to the current debate in the U.S. over corporate tax reform and corporate tax rates.
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. Compliance with applicable laws and regulations is time-consuming and personnel-intensive, and changes in laws and regulations may materially increase the cost of compliance and other expenses of doing business.
Solvency II The European Council has agreed upon a full scale revision of the solvency framework and prudential regime applicable to insurance and reinsurance companies known as ‘Solvency II’, which was adopted on 25 November 2009 (Directive 2009/138/EG). A key aspect of Solvency II is the closer alignment of the assessment of risks and capital requirements with economic capital methodologies. Under the Solvency II regime, insurance companies may be permitted to make use of an internal economic capital model as a basis for calculation of their capital needs and solvency position (in the Netherlands, such a model (including ING’s model) has to be approved by the DNB).
Solvency II, if implemented, will effect a full revision of the insurance industry’s solvency framework and prudential regime and will impose group level supervision mechanisms. Representatives from the European Parliament, the European Commission and the Council of the European Union are currently discussing the ‘Omnibus II Directive’ proposal, which, once approved, will amend certain aspects of the original Solvency II Directive. In addition, the European Commission is continuing to develop the detailed rules that will complement the high-level principles of the Solvency II Directive, referred to as ‘implementing measures’. The implementing measures are not currently expected to be finalised until the Omnibus II Directive has entered into force and the implementation date of Solvency II by member states of the European Economic Area (‘EEA’) has been postponed from 31 October 2012 to 30 June 2013, and the application date by
companies to 1 January 2014. There is significant uncertainty regarding the timeline and final outcome of this process and we are unable to predict precisely how the regulations resulting from such initiatives and proposals could affect the insurance industry generally or our results of operations, financial condition and liquidity in particular.
Significant efforts towards establishing a more cohesive and streamlined European supervisory framework, including the establishment of the European Systemic Risk Board and the EIOPA, may also affect the Group’s operations.
Dodd-Frank Act On 21 July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (‘Dodd-Frank’ or ‘Dodd-Frank Act’) was signed into law in the United States. The Dodd-Frank Act has imposed comprehensive changes to the regulation of financial services in the United States and has implications for non-U.S. financial institutions with a U.S. presence, such as ING. Dodd-Frank directs existing and newlycreated government agencies and bodies to promulgate regulations implementing the law, a process that is underway and is expected to continue over the next few years. While some studies have already been completed and the rulemaking process is well underway, there continues to be significant uncertainty regarding the results of ongoing studies and the ultimate requirements of regulations that have not yet been adopted. We cannot predict with certainty how Dodd-Frank and such regulations will affect the financial markets generally, impact the Group’s business, credit or financial strength ratings, results of operations, cash flows or financial condition or advise or require the Group to raise additional capital. Key aspects of Dodd-Frank that we have identified to date as possibly having an impact on the Group include: • The Financial Stability Oversight Council (‘FSOC’) may designate the Group as a nonbank financial company whose material financial distress, or whose nature, scope, size, scale, concentration, interconnectedness or mix of activities, could pose a threat to the financial stability of the United States. In such an instance, the Group would become subject to the oversight of the Board of Governors of the Federal Reserve System (‘Federal Reserve’). If the Group becomes subject to such examination, enforcement and supervisory authority of the Federal Reserve, the Federal Reserve would have authority to impose capital requirements on the Group and its subsidiaries. The Group cannot predict what capital regulations the Federal Reserve will promulgate under these authorisations, either generally or as applicable to organisations with the Group’s operations, nor can management predict how the Federal Reserve will exercise potential general supervisory authority over the Group as to its business practices or those of its subsidiaries. If designated as systemically important by the FSOC, the Group would become subject to a comprehensive system of stricter prudential standards, including stricter requirements and limitations relating to risk-based capital, leverage, liquidity and credit exposure, as well as overall risk management requirements, management interlock prohibitions and a requirement to maintain a plan for rapid and orderly dissolution in the event of severe financial distress. The Group may become subject to stress tests to be promulgated by the Federal Reserve in consultation with the Federal Insurance Office (discussed below) to determine whether, on a consolidated basis, the Group has the capital necessary to absorb losses as a result of adverse economic conditions. We cannot predict how the stress tests will be designed or conducted or whether the results thereof will cause the Group to alter its business practices or affect the perceptions of regulators, rating agencies, customers, counterparties or investors about the Group’s financial strength. The FSOC may also recommend that state insurance regulators or other regulators apply new or heightened standards and safeguards for activities or practices that the Group and other insurers or other financial services companies engage in.
• Title VII of Dodd-Frank creates a new framework for regulation of the over−the−counter derivatives markets and certain market participants which could affect various activities of the Group and its subsidiaries. New margin and capital requirements on market participants contained in final regulations adopted by the U.S. Commodity Futures Trading Commission (‘CFTC’) could substantially increase the cost of hedging and related operations, affect the profitability of our products or their attractiveness to our customers, or cause us to alter our hedging strategy or change the composition of risks we do not hedge.
• Dodd−Frank also includes various securities law reforms that may affect the Group’s business practices and the liabilities and/or exposures associated therewith, including a provision intended to authorise the SEC to impose on broker-dealers fiduciary duties to their customers, as applies to investment advisers under existing law, which new standard could potentially expose certain of ING’s U.S. broker-dealers to increased risk of SEC enforcement actions and liability. The SEC staff released a study on this issue.
• Dodd-Frank could result in various ex-post assessments being imposed on us, the costs of which we are unable to estimate at this time.
certain of the Group’s products. In addition, entering into agreements with the IRS compliance with the terms of such agreements and with FATCA any regulations or other guidance promulgated thereunder or any legislation promulgated under an IGA may substantially increase the Group’s compliance costs. Because legislation and regulations implementing FATCA and the IGAs remain under development, the future impact of this law on the Group is uncertain.
On 14 February 2013, the European Commission adopted a proposal setting out the details of the financial transaction tax, which mirrors the scope of its original proposal of September 2011, to be levied on transactions in financial instruments by financial institutions if at least one of the parties to the transaction is located in the ‘FTT-zone’, currently limited to 11 participating member states (Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal, Slovakia, Slovenia and Spain). The adopted proposal foresees the financial transaction tax for the 11 participating member states entering into effect on 1 January 2014, which would then require us to pay a tax on transactions in financial instruments with parties (including Group affiliates) located in such FTT-zone. The actual implementation date would depend on the future approval by the European Council and consultation of other EU institutions, and the subsequent transposition into local law. Furthermore, the Dutch Parliament passed a bill on bank tax, which went into effect as of 1 October 2012. This tax results in increased taxes on ING’s Banking operations, which could negatively impact our operations, financial condition and liquidity. [In addition, it is possible that the United States Congress may adopt a form of ‘financial crisis responsibility’ fee and tax on banks and other financial firms to mitigate costs to taxpayers of various government programs established to address the financial crisis and to offset the costs of potential future crises. The Obama Administration’s 2013 revenue proposals include such a fee. Any regulations resulting from these financial transaction tax initiatives and proposals could affect our operational results, financial condition and liquidity, and could negatively impact the costs and scope of our transactions, including transactions with other financial institutions.
While certain of such conditions have improved over 2011 and 2012, these conditions have generally resulted in greater volatility, widening of credit spreads and overall shortage of liquidity and tightening of financial markets throughout the world. In addition, prices for many types of asset-backed securities (‘ABS’) and other structured products have significantly deteriorated. These concerns have since expanded to include a broad range of fixed income securities, including those rated investment grade and especially the sovereign debt of some EEA countries and the United States, the international credit and interbank money markets generally, and a wide range of financial institutions and markets, asset classes, such as public and private equity, and real estate sectors. As a result of these and other factors, sovereign governments across the globe, including in regions where the Group operates, have also experienced budgetary and other financial difficulties, which have resulted in austerity measures, downgrades in credit rating by credit agencies, planned or implemented bail-out measures and, on occasion, civil unrest (for further details regarding sovereign debt concerns, see ‘ – U.S. Sovereign Credit Rating’ and ‘ – European Sovereign Debt Crisis’ below). As a result, the market for fixed income instruments has experienced decreased liquidity, increased price volatility, credit downgrade events, and increased probability of default. In addition, the confluence of these and other factors has resulted in volatile foreign exchange markets. Securities that are less liquid are more difficult to value and may be hard to dispose of.
Risks and ongoing concerns about the debt crisis in Europe, as well as the possible default by, or exit from the Eurozone of one or more European states and/or the replacement of the Euro by one or more successor currencies, could have a detrimental impact on the global economic recovery, sovereign and non-sovereign debt in these European countries and the financial condition of European and other financial institutions, including us. Additionally, the possibility of capital market volatility spreading through a highly integrated and interdependent banking system remains elevated. In the event of any default or similar event with respect to a sovereign issuer, some financial institutions may suffer significant losses for which they would require additional capital, which may not be available. Market and economic disruptions stemming from the crisis in Europe have affected, and may continue to affect, consumer confidence levels and spending, bankruptcy rates, levels of incurrence of and default on consumer debt and home prices, among other factors. There can be no assurance that the market disruptions in Europe, including the increased cost of funding for certain government and financial institutions, will not spread, nor can there be any assurance that future assistance packages will be available or, even if provided, will be sufficient to stabilise the affected countries and markets in Europe or elsewhere. To the extent uncertainty regarding the economic recovery continues to negatively impact consumer confidence and consumer credit factors, our business and results of operations could be significantly and adversely impacted. In addition, the possible exit from the Eurozone of one or more European states and/or the replacement of the Euro by one or more successor currencies could create significant uncertainties regarding the enforceability and valuation of Euro denominated contracts to which we (or our counterparties) are a party and thereby materially and adversely affect our and/or our counterparties’ liquidity, financial condition and operations. Such uncertainties may include the risk that (i) an obligation that was expected to be paid in Euros is redenominated into a new currency (which may not be easily converted into other currencies without significant cost), (ii) currencies in some European Union member states may devalue relative to others, (iii) former Eurozone member states may impose capital controls that would make it complicated or illegal to move capital out of such countries, and/or (iv) some courts (in particular, courts in countries that have left the Eurozone) may not recognise and/or enforce claims denominated in Euros (and/or in any replacement currency). The possible exit from the Eurozone of one or more European states and/or the replacement of the Euro by one or more successor currencies could also cause other significant market dislocations and lead to other adverse economic and operational impacts that are inherently difficult to predict or evaluate, and otherwise have potentially materially adverse impacts on us and our counterparties, including our depositors, lenders, borrowers and other customers. These factors, combined with volatile oil prices, reduced business and consumer confidence and continued high unemployment, have negatively affected the economy of main geographic regions where we conduct our business. Our results of operations, investment portfolio and AUM are exposed to these risks and may be adversely affected as a result. In addition, in the event of extreme prolonged market events, such as the recent global credit crisis, we could incur significant losses.
Because we operate in highly competitive markets, including our home market, we may not be able to increase or maintain our market share, which may have an adverse effect on our results of operations. There is substantial competition in the Netherlands and the other countries in which we do business for the types of insurance, commercial banking, investment banking, asset management and other products and services we provide. Customer loyalty and retention can be influenced by a number of factors, including brand recognition, reputation, relative service levels, investment performance of our products, the prices and attributes of products and services, scope of distribution, perceived financial strength, credit ratings and actions taken by competitors. A decline in our competitive position as to one or more of these factors could adversely impact our ability to maintain or further increase our market share, which would adversely affect our results of operations. Such competition is most pronounced in our more mature markets of the Netherlands, Belgium, the rest of Western Europe, the United States and Australia. In recent years, however, competition in emerging markets, such as Latin America, Asia and Central and Eastern Europe, has also increased as large financial services companies from more developed countries have sought to establish themselves in markets which are perceived to offer higher growth potential, and as local institutions have become more sophisticated and competitive and have sought alliances, mergers or strategic relationships with our competitors. The Netherlands and the United States are our largest markets. Our main competitors in the banking sector in the Netherlands are ABN AMRO Bank and Rabobank. Our main competitors in the insurance sector in the Netherlands are Achmea, ASR, Delta Lloyd and Aegon. Our main competitors in the United States are insurance companies such as Lincoln National, Hartford, Aegon Americas, AXA, Met Life, Prudential, Nationwide and Principal Financial. Competition could also increase due to new
Reinsurers Our insurance operations have bought protection for risks that exceed certain risk tolerance levels set for both our life and non-life businesses. This protection is bought through reinsurance arrangements in order to reduce possible losses. However, we remain liable to the underlying policyholders, even if the reinsurer defaults on its obligations. Because in most cases we must pay the policyholders first, and then collect from the reinsurer, we are subject to credit risk with respect to each reinsurer for all such amounts. As a percentage of our net reinsurance exposure as of 31 December 2012, the greatest exposure after collateral to an individual external reinsurer was approximately 19%, approximately 46% related to four other external reinsurers and the remainder of the reinsurance exposure related to various other reinsurers. The inability or unwillingness of any one of these reinsurers to meet its financial obligations to us, or the insolvency of our reinsurers, could have a material adverse effect on our net results and our financial results.
Accordingly, during periods of declining interest rates, our profitability may suffer as the result of a decrease in the spread between interest rates credited to insurance policyholders and annuity contract owners. An extended period of declining interest rates may also cause us to change our long-term view of the interest rates that we can earn on our investments. In addition, certain statutory capital and reserve requirements are based on formulas and models that consider interest rates, and an extended period of low interest rates may increase the statutory capital we are required to hold and the amount of assets we must maintain to support statutory reserves.
Rapidly increasing interest rates may result in: • decrease the demand for loans; • increase in policy loans, and withdrawals from and/or surrenders of life insurance policies and fixed annuity contracts 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; • prepayment losses if prepayment rates are lower than expected or if interest rates increase to rapidly to adjust the accompanying hedges; • higher interest rates to be paid on debt securities we have issued or may issue on the financial markets from time to time to finance our operations, which would increase our interest expenses and reduce our results of operations; • a material adverse effect on the value of our investment portfolio by, for example, decreasing the estimated fair values of the fixed income securities within our investment portfolio; • a significant collateral posting requirement associated with our interest rate hedge programs, which could materially and adversely affect liquidity; and/or
RISKS RELATED TO THE GROUP’S BUSINESS, OPERATIONS, AND REGULATORY ENVIRONMENT We may be unable to manage our risks successfully through derivatives. We employ various economic hedging strategies with the objective of mitigating the market risks that are inherent in our business and operations. These risks include currency fluctuations, changes in the fair value of our investments, the impact of interest rates, equity markets and credit spread changes, the occurrence of credit defaults and changes in mortality and longevity. We seek to control these risks by, among other things, entering into a number of derivative instruments, such as swaps, options, futures and forward contracts including from time to time macro hedges for parts of our business, either directly as a counterparty or as a credit support provider to affiliate counterparties.
ING Group may be unable to retain key personnel. As a financial services enterprise with a decentralised management structure, ING Group relies to a considerable extent on the quality of local management in the various countries in which ING Group operates. The success of ING Group’s operations is dependent, among other things, on ING Group’s ability to attract and retain highly qualified professional personnel. Competition for key personnel in most countries in which ING Group operates is intense. ING Group’s ability to attract and retain key personnel, in particular senior officers, experienced portfolio managers, mutual fund managers and sales executives, is dependent on a number of factors, including prevailing market conditions and compensation packages offered by companies competing for the same talent.
In addition, as a result of our operations in certain countries, we are subject to risks of possible nationalisation, expropriation, price controls, exchange controls and other restrictive government actions, as well as the outbreak of hostilities, in these markets. In addition, the current economic environment in certain of these countries in which we operate may increase the likelihood for regulatory initiatives to enhance consumer protection or to protect homeowners from foreclosures. Any such, regulatory initiative could have an adverse impact on our ability to protect our economic interest in the event of defaults on residential mortgages.
Because we are continually developing new financial products, we might be faced with claims that could have an adverse effect on our operations and net result if clients’ expectations are not met. When new financial products are brought to the market, communication and marketing aims to present a balanced view of such products. Whilst we engage in a due diligence process when we develop products, if the products do not generate the expected profit, or result in a loss, or otherwise do not meet expectations, customers may file mis-selling claims against us. Mis-selling claims are claims from customers who allege that they have received misleading advice or other information from either ING internal or external advisors (even though ING does not always have full control over the external advisors). Complaints may also arise if customers feel that they have not been treated reasonably or fairly, or that the duty of care has not been complied with. While a considerable amount of time and money has been invested in reviewing and assessing historic sales practices, and in the maintenance of risk management, legal and compliance procedures to monitor current sales practices, there can be no assurance that all of the issues associated with current and historic sales practices have 337ING Group Annual Report 2012 1 W h o w e are 2 R
been or will be identified, nor that any issues already identified will not be more widespread than presently estimated. The negative publicity associated with any sales practices, any compensation payable in respect of any such issues and/or regulatory changes resulting from such issues could have a material adverse effect on our reputation, operations and net result. Customer protection regulations, as well as changes in interpretation and perception by both the public at large and governmental authorities of acceptable market practices, might influence client expectations.
Ratings are important to our business for a number of reasons. A downgrade or a potential downgrade in our financial strength or our credit ratings could have an adverse impact on our operations and net results. Credit ratings represent the opinions of rating agencies regarding an entity’s ability to repay its indebtedness. Our credit ratings are important to our ability to raise capital through the issuance of debt and to the cost of such financing. In the event of a downgrade the cost of issuing debt will increase, having an adverse effect on net results. Certain institutional investors may also be obliged to withdraw their deposits from ING following a downgrade, which could have an adverse effect on our liquidity. We have credit ratings from Standard & Poor’s Ratings Service, Moody’s Investor Service and Fitch Ratings. Each of the rating agencies reviews its ratings and rating methodologies on a recurring basis and may decide on a downgrade at any time. For example, on 15 June 2012, Moody’s downgraded the long-term debt ratings of ING Groep N.V. from A1 to A3 with negative outlook and ING Bank from Aa3 to A2 with negative outlook. At the same time, Moody’s took negative ratings actions with respect to a number of European-based banking organisations.
Our business may be negatively affected by a sustained increase in inflation. A sustained increase in the inflation rate in our principal markets would have multiple impacts on us and may negatively affect our business, solvency position and results of operations. For example, a sustained increase in the inflation rate may result in an increase in market interest rates, which may: (1) decrease the estimated fair value of certain fixed income securities we hold in our investment portfolios resulting in: • reduced levels of unrealised capital gains available to us which could negatively impact our solvency position and net income, and/or • a decrease of collateral values,
Our business may be negatively affected by adverse publicity, regulatory actions or litigation with respect to us, other well-known companies or the financial services industry in general. Adverse publicity and damage to our reputation arising from our failure or perceived failure to comply with legal and regulatory requirements, financial reporting irregularities involving other large and well-known companies, possible findings of government authorities in various jurisdictions which are investigating several rate setting processes, increasing regulatory and law enforcement scrutiny of ‘know your customer’ anti-money laundering, prohibited transactions with countries subject to sanctions, and bribery or other anticorruption measures and anti-terrorist-financing procedures and their effectiveness, regulatory investigations of the mutual fund, banking and insurance industries, and litigation that arises from the failure or perceived failure by us to comply with legal, regulatory and compliance requirements, could result in adverse publicity and reputation harm, lead to increased regulatory supervision, affect our ability to attract and retain customers, maintain access to the capital markets, result in cease and desist orders, suits, enforcement actions, fines and civil and criminal penalties, other disciplinary action or have other material adverse effects on us in ways that are not predictable for our employees. Some of the legal proceedings may be brought on behalf of a class and plaintiffs may seek large or indeterminate amounts of damage, including compensatory, liquidated, treble and/or punitive damages. Our reserves for litigation may prove to be inadequate. It is possible that our results of operations or cash flow in a particular quarterly or annual period could be materially affected by an ultimate unfavourable resolution of pending litigation depending, in part, upon the results of operations or cash flow for such period. Given the large or indeterminate amounts sometimes sought, and the inherent unpredictability of litigation, it is also possible that in certain cases an ultimate unfavourable resolution of one or more pending litigation matters could have a material adverse effect on our financial condition.
As a result of the Amended Restructuring Plan, the EC has closed its formal investigations as announced on 11 May 2012, and ING has withdrawn its appeal with the General Court filed in July 2012. Although EC’s appeal against the March 2012 ruling of the General Court is expected to continue, ING, the Dutch State and the EC have agreed that any outcome of this procedure will not affect the approval of the Amended Restructuring Plan. See Note 34 of the Notes to the consolidated annual accounts of ING Group in the 2012 Annual Report of ING Groep N.V for more information on and implications of the Amended Restructuring Plan.
There can be no assurance that we will be able to implement the Restructuring Plan successfully or complete the announced divestments on favorable terms or at all, particularly in light of the market developments in general as well as the fact that other financial institutions may place similar assets for sale during the same time period and may seek to dispose of assets in the same manner. Any failure to successfully implement the Restructuring Plan may result in EC enforcement actions or EC procedures and may have a material adverse impact on the assets, profitability, capital adequacy and business operations of the Group. Moreover, in connection with the implementation of the Restructuring Plan, including any proposed divestments, we or potential buyers may need to obtain various approvals, including of shareholders, works councils and regulatory and competition authorities, and we and potential buyers may face difficulties in obtaining these approvals in a timely manner or at all. In addition, the implementation of the Restructuring Plan may strain relations with our employees, and specific proposals in connection with the implementation may be opposed by labor unions or works councils. Furthermore, following the announcement of the Initial Restructuring Plan, for example, several of our subsidiaries were downgraded or put on credit watch by rating agencies. See ‘Risks Related to the Group’s Business, Operations, and Regulatory Environment — Ratings are important to our business for a number of reasons. A downgrade or a potential downgrade in our financial strength or our credit ratings could have an adverse impact on our operations and net results’.
While we have begun and expect to continue to implement these strategies, there can be no assurance that we will be able to do so successfully or that we will realise the projected benefits of these and other restructuring and cost-saving initiatives. If we are unable to realise these anticipated cost reductions, our business may be adversely affected. Moreover, our continued implementation of restructuring and cost saving initiatives may have a material adverse effect on our business, financial condition, results of operations and cash flows.
If ING is unable to repay the remaining Core Tier 1 Securities according to the above-mentioned deadlines and other terms agreed with the European Commission, this could result in the European Commission imposing additional (behavioural) constraints on us or taking any enforcement action against us.
The Trust may, but has no obligation to, consult with the holders of bearer depositary receipts in exercising its voting rights in respect of any Ordinary Shares for which it is entitled to vote. These arrangements differ from practices in other jurisdictions, and accordingly may affect the rights of the holders of bearer depositary receipts and their power to affect ING’s business and operations.
Implemented in the Risk Management section: Stress Testing and the corresponding descriptions in the Credit Risk, Market Risk and Liquidity Risk sections 9 Provide minimum Pillar 1 capital requirements, including surcharges and buffers, or the minimum internal ratio
Implemented in the Capital Management section and in the Ongoing Changes in the Regulatory environment section of the Risk Management section 10 Summarise composition of capital based on Basel Committee templates
Flow statement of movements are incorporated in the Credit Risk and Market Risk section of the Risk Management section. Changes in available capital are disclosed in Pillar 3.
Implemented in the Capital Management section and in the Ongoing Changes in the Regulatory environment section of the Risk Management section 13 Provide granular information to explain how risk-weighted assets (RWAs) relate to business activities and related risks.
Templates 3, 12, 13 and 14 of the EDTF added in the AIRB section of Pillar 3 16 Present a flow statement that reconciles movements in RWAs for the period for each RWA risk type
For Credit Risk this is implemented in Pillar 3 in the RWA migration table. The Market Risk flow statement is included in the Risk Management section.
Implemented in the maturity tables in Notes 22 and 23 of the Annual Accounts 21 Discuss the bank’s funding strategy, including key sources and any funding concentrations, to enable effective insight into available funding sources, reliance on wholesale funding, any geographical or currency risks and changes in those sources over time.
22 Link balance sheet items and income statement with positions included in the traded and non-traded market risk disclosures such as risk factor sensitivities, economic value and earnings scenarios and/or sensitivities.
Risk factor sensitivities are presented in the Market Risk section of the Risk Management Section. Exact linkage with balance sheet items is to be addressed in future disclosures.
23 Provide further qualitative and quantitative breakdowns of significant trading and non-trading market risk factors
Implemented in the Market Risk section of the Risk Management Section.
24 Provide qualitative and quantitative disclosures that describe significant market risk measurement model limitations through time and descriptions of the reasons for back-testing exceptions.
Implemented in Pillar 3 by adding the recommended EDTF template to the Loan Loss Provisions section 29 Provide a quantitative and qualitative analysis of the bank’s counterparty credit risk that arises from its derivatives transactions
Implemented in the Risk Management paragraph 32 Discuss publicly known risk events related to other risks, including operational, regulatory compliance and legal risks, where material or potentially material loss events have occurred
Implemented in the Risk Management Section 345ING Group Annual Report 2012 1 W h o w e are 2 R
This section relates to Pillar 3, market discipline, and as such provides information on several topics. Some of the required information has already been given elsewhere in the annual report, e.g. in the Risk Management section and in the capital management section. This section provides additional information, as well as references to the relevant sections.
Market risk Standardised approach 28 34 Internal models approach - trading book 744 1,091 Total Market risk 772 1,125
This table includes securitisation benefits of the SA, AIRB and securitisation portfolios, amounting to EUR 21 million for 2012. * The floor is 80% of Basel I required Regulatory Capital.
Adjustment prudential filters own credit risk 468 –334 Change in goodwill 130 226 Dividend –2,125 –3,000 Change in revaluation reserves –471 –290 Change in third party interest 148 77 Change in deductions from tier 1 25 54
Tier 2 capital Opening amount 8,502 9,813 Change in Tier 2 capital instruments –1,384 –1,364 Change in deductions 24 53 Closing amount 7,142 8,502
Institutions portfolio and in the Dutch mortgages portfolio due to higher LGD’s as a result of the deteriorated market circumstances, which led to a decline in the cover values. Several smaller movements, both positive and negative, occurred in various portfolios throughout the year.
• There were several model updates through the year but their impacts on capital were relatively insignificant. A key change was the LGD model for Financial Institutions which was revised to reflect the current deteriorating market circumstances, causing RWA to increase. As part of the Financial Institution model refinement, several changes were made to maturities including removing the 1 year floor for certain exposures, in line with the regulatory exemption. In addition, ING shifted from limit maturity to outstanding maturity per trade as a calculation method. These changes shortened the maturities in the capital calculations causing an RWA decrease. Although the individual impacts from these changes were significant, they almost completely offset each other. Combined, all these changes and multiple smaller movements resulted in an increase in RWA of EUR 0.3 billion over the year.
• The decrease caused by methodology and policy changes was mainly due to a more granular classification for ING Turkey’s credit replacement portfolio which lowers the risk weight under the SA approach as ING Turkey largely uses the SA Approach. Next to that, a regulatory maturity floor exemption for trade related products have been refined and the Commercial Finance NL portfolio migrated from SA to AIRB. These RWA decreases were partly offset by the implementation of an allocated calculation method that ensures that no guaranteed facility has less RWA allocated than if this facility would be granted to the guarantor directly, on an unsecured base. Previously this calculation was done centrally and added in ONCOA. An additional methodology change was a shift from a rating hierarchy to the second best rating methodology for securitisations which increased RWA as well. The combined impact of the above mentioned items, together with other smaller changes with relatively insignificant impacts, decreased RWA by EUR 3.3 billion.
Overall, RWA management has a very high priority throughout ING in all aspects of our business. From product design, to pricing, to divestment decisions, RWA management is extensively monitored, reported, and managed at all levels of the organisation.
Insurance Companies, as well as local and regional government entities not classified as governments; • Corporates include all legal entities, that are not considered to be Governments, Institutions or Retail; • Retail includes the following classes: • Residential Mortgages include all mortgage loans for residential properties that are not part of a securitisation; and • Retail Other includes all other credit obligations related to Retail SMEs, such as partnerships, one-man businesses and private individuals, such as consumer loans, car loans and credit cards.
Next to the large divestments, the de-risking in the investment portfolio over 2012 contributed to an improved risk profile of the Bank. More than EUR 10 billion of investments were sold which reduced RWA significantly. Other areas of de-risking came from run-off portfolios like Real Estate and Lease which declined in absolute amounts but showed deterioration in risk metrics. Part of this deterioration is a function of cyclicality and geographic markets and a portion is the natural decline expected as better quality clients leave the run-off portfolio quicker than weaker ones. Although not a large impact on the risk profile, significant reductions especially at year-end occurred
Sovereigns - credit risk disclosure in READ 2012 2011 Delta %
Money Market 10,445 27,278 –61.7% Term Loans 4,743 13,276 –64.3% Lending 2,500 –
The bond investments decreased slightly, as the increase in bond investments due to the restructuring of the IABF is offset by the decrease in sovereign exposure in the USA and Canada due to the sales of ING Direct US and ING Direct Canada. A significant reduction in France also contributes to this effect.
The rise of EUR 2.5 billion in Lending was mainly due to increased exposure to the Central Bank of Belgium.
Additional Pillar 3 information continued 351ING Group Annual Report 2012 1 W h o w e are 2 R
Institutions Product Type 88,015 102,422 –14.0% Bond Investments 30,892 43,068 –28.3%
Overall, there was a shift to better risk categories across the Institutions portfolio. Bond investments especially in Southern Europe were actively de-risked. Growth was experienced in Money-Market exposure which tends to have a shorter tenor.
Additional Pillar 3 information continued 352 ING Group Annual Report 2012
Real Estate decline of EUR 2.5 billion was mainly spread over Australia (EUR 0.9 billion), US (EUR 0.8 billion). Since the industry classifications are based on NAICS codes, the real estate definition is much broader than the Commercial Real Estate exposure which accounts for approximately two-thirds of the portfolio. The remainder consists of real estate development and real estate related exposure primarily from our retail business (SMEs, Private Banking and Lease).
Additional Pillar 3 information continued 354 ING Group Annual Report 2012
Includes both AIRB and SA portfolios; excludes equities and ONCOA. (1) Netherlands includes Domestic Bank NL and Westland Utrecht. (2) The LTV for Poland in 2011 was restated for consistency purpose.
Additional Pillar 3 information continued 355ING Group Annual Report 2012 1 W h o w e are 2 R
STANDARDISED APPROACH The SA approach applies fixed risk weights to each exposure class, split into credit quality steps (based on external ratings) as dictated by the Capital Requirement Directive (CRD). Because the underlying obligors are relatively small, the underlying obligors tend not to have external ratings. As such, the SA Approach is the least sophisticated of the Basel II methodologies and is not as risk sensitive as the risk-based AIRB Approach.
The relatively low RWA density for Sovereigns and central banks is because of sovereign entities, which are rated between 1-4 and whose exposures are denominated in local currencies, and therefore receive a regulatory risk weight of 0%.
Changes in risk parameters since last reporting date In line with the EDTF recommendations the table below shows the changes in risk parameters since last reporting date in percentages. This should be read in conjunction with the table ‘disclosure of model outcomes’.
(1) Unadjusted for exchange rate fluctuations. (2) Sale of ING Direct US and ING Direct Canada. (3) Based on start and end date of the outstanding positions, unadjusted for inflow and outflow.
The level of provisions is a function of many elements including the default definition, the amount and quality of collateral and the legal structure per jurisdiction. For instance, mortgages in Germany have a relatively higher proportion of provisions than in the Netherlands due largely to the level of (secondary) collateral and enforcement regime, which has an impact on the recovery rate and in turn drives the LGDs higher. The Corporate segment is largely influenced by real estate companies, larger SME companies, and several run-off portfolios which are experiencing economic stress.
Other Retail Total Total * Includes both AIRB and SA portfolios; excludes securitisations, equities and ONCOA. * Excludes revaluations made directly through the equity account.
Sovereigns Institutions Corporate Residential mortgages Other retail Total Total * Includes both AIRB and SA portfolios; excludes securitisations, equities and ONCOA. * Excludes revaluations made directly through the equity account.
Additional Pillar 3 information continued 362 ING Group Annual Report 2012
Credit Derivatives 8 404 395 808 801 Derivatives 30 211 241 240 Equity Derivatives 1,190 670 7 1,867 2,197 Foreign Exchange Derivatives 398 2,346 1,464 12 4,219 5,155 Interest Rate Derivatives 1,413 14,508 10,137 64 26,121 25,024 Commodity derivative 48 206 254 272 Exchange Traded Products 194 194 2,852 Total 1,819 18,526 13,278 83 33,705 36,541 * Includes both AIRB and SA portfolios; excludes securitisations, equities and ONCOA. * Excludes revaluations made directly through the equity account.
Over the counter and exchange traded derivatives In line with the EDTF recommendations this section provides a quantitative and qualitative analysis of ING’s Credit Risk that arises from its derivatives transactions. This quantifies notional derivatives exposure, including whether derivatives are over-the-counter (OTC) or traded on recognised exchanges (ETD). Where the derivatives are OTC, the table shows how much is settled by central counterparties and how much is not, and provides a description of the collateral agreements in place.
FX derivatives and for 4% to Credit, Equity and Commodity Derivatives. • Unilateral CSA agreements relate mainly to agreements that are unilateral against ING and mainly consist of Interest Rate Derivatives.
Securities financing by product type The table below is based on the mark-to-market plus (regulatory) add-on methodology used for calculating Basel II RWA for determining the gross exposures. The methodology to calculate the READ is called the Current Exposure Method (CEM) and together with the other building blocks (PD, LGD and Maturity) it allows ING Bank to classify virtually all of its Securities Financing exposures under the AIRB approach.
AIRB Portfolio of which Pre Settlement 4,406 1,138 1,130 1,138 Institutions 85,995 82 92 13,533 569 of which Pre Settlement 140,132 36,213 24,967 32,532 Corporates 252,650 84,085 16,870 38,049 73,070 of which Pre Settlement 10,032 9,030 8,868 9,041 Residential Mortgages 292,650 416,874 n.a 32,917 169 of which Pre Settlement Other Retail 36,424 15,527 794 8,193 9,010 of which Pre Settlement 327 327 327 327 Securitisations 12,101 of which Pre Settlement of which Pre Settlement 154,897 46,708 35,291 43,038
The ING Bank portfolio is characterised by significant amounts of secured lending especially in the key areas of residential and commercial mortgages, structured finance and leasing. Amount of collateral often has a significant impact on provisioning and LGD which directly affects risk density.
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Sovereigns Institutions Corporate Residential mortgages Other retail Total Total * Includes AIRB portfolio only; excludes securitisations, equities and ONCOA. * Excludes revaluations made directly through the equity account.
MATURITY PROFILE Outstandings by tenor bucket The table below shows the outstanding of ING Bank by tenor. The figures assume that no new credit risks are introduced into the portfolio and that there are no delays in repayments associated with non-performing loans, nor are there write offs associated with provisions. The portfolio runoff is implied by the difference in the figures between two periods.
The assumption is that loans, money market and investments in fixed income securities are fully repaid at their maturity dates and that limits are reduced in conjunction with repayment schedules contained in the associated loan documentation, without regard for potential renewal or extension, or portfolio sales or acquisitions. Pre-Settlement risks are assumed to reduce over the legal maturity of the underlying transactions. However, under mark-to-market plus add-on methodology, it is possible for exposures to increase in time, rather than decrease. This is a function of ING Bank’s estimates of future interest rates and foreign exchange rates, as well as potential changes in future obligations that may be triggered by such events. Generally, credit risk outstandings are lower than READ.
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The first transactions (Moon and Memphis 2003) were repaid in 2008 with no loss for the investors. The following transactions were also repaid, still with no loss for the investors: Mars 2004 in 2009, Memphis 2005 and Mars 2006 in 2012. As of 31 December 2012, two transactions totalling approximately EUR 4.6 billion (BEL SME 2006 on SME exposures and Memphis 2006 on Residential Mortgages) remain outstanding, as further detailed below. Memphis 2006 transfers risk on high Loan to Value (LTV) Dutch mortgages.
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CONTINGENT LIABILITIES Possible obligations that arises from past events and whose existence will be confirmed only by the occurrence or nonoccurrence of one or more uncertain future events not wholly within the control of the entity; or a present obligation that arises from past events but is not recognised because: • it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or • the amount of the obligation cannot be measured with sufficient reliability.
DISCRETIONARY PARTICIPATION FEATURE A contractual right to receive, as a supplement to guaranteed benefits, additional benefits that: are likely to be a significant portion of the total contractual benefits, whose amount or timing is contractually at the discretion of the insurer, that are contractually based on the performance of a specified pool or type of contract, (un)realised investment returns on a specified pool of assets held by the insurer, or the profit of the company, fund, or other entity that issues the contract.
ELIMINATION A process by which intercompany transactions are matched with each other and deducted, so that the assets, liabilities, income and expenses are not inflated.
NON-VOTING EQUITY SECURITIES Core Tier 1 securities issued to the Dutch State in November 2008 for a total consideration of EUR 10 billion. In December 2009 EUR 5 billion, in May 2011 EUR 2 billion and in November 2012 EUR 750 million was paid back to the Dutch State. This capital injection qualifies as core Tier 1 capital for regulatory purposes.
OPERATING RESULT Operating result is a measure to analyse the Insurance Underlying result. It is the underlying result before tax excluding realised gains/ losses and impairments on debt and equity securities, revaluations and market and other impacts.
• are available to be used only to pay or fund employee benefits, are not available to the reporting enterprise’s own creditors (even in bankruptcy), and cannot be returned to the reporting enterprise, unless either the remaining assets of the fund are sufficient to meet all the related employee benefit obligations of the plan or the reporting enterprise or the assets are returned to the reporting enterprise to reimburse it for employee benefits already paid.
A qualifying insurance policy is an insurance policy issued by an insurer that is not a related party of the reporting enterprise, if the proceeds of the policy: • can be used only to pay or fund employee benefits under a defined benefit plan; and • are not available to the reporting enterprise’s own creditors
SWAP CONTRACTS Commitments to settle in cash at a specified future date, based on differentials between specified financial indices as applied to a notional principal amount. Generally, no cash is exchanged at the outset of the contract and no principal payments are made by either party.
ING PUBLICATIONS • Annual Report in English • Annual Report on Form 20-F, in English